Chapter 12

Aggregate Planning

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Learning Objectives

Review of forecasting
Forecast errors

Aggregate planning

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Phases of Decisions

Strategy or design:
Planning:
Operation

Forecast
Forecast
Actual demand

Since actual demands differs from forecasts so does

the execution from the plans.
E.g. Supply Chain concentration plans 40 students per year
whereas the actual is ??.

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Characteristics of forecasts

Forecasts are always wrong. Should include expected value and

measure of error.
Long-term forecasts are less accurate than short-term forecasts. Too
long term forecasts are useless: Forecast horizon
Forecasting to determine
Raw material purchases for the next week
Annual electricity generation capacity in TX for the next 30 years

Aggregate forecasts are more accurate than disaggregate forecasts

Variance of aggregate is smaller because extremes cancel out
Two samples: {3,5} and {2,6}. Averages of samples: 4 and 4.
Variance of sample averages=0
Variance of {3,5,2,6}=5/2

Several ways to aggregate

Products into product groups
Demand by location
Demand by time

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Forecast Variability implies time zones

Frozen and Flexible zones
Volume

Firm Orders

Frozen Zone

Forecasts

Flexible Zone

Time

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Time Fences in MPS

frozen
(firm or
fixed)

Period
5
6

slushy
somewhat
firm

liquid
(open)

Time Fences divide a scheduling time horizon into three

sections or phases, referred as frozen, slushy, and liquid.
Strict adherence to time fence policies and rules.
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Planning Horizon
Aggregate planning: Intermediate-range capacity planning,
usually covering 2 to 12 months. In other words, it is matching the
capacity and the demand.
Long range

Short
range
Now

Intermediate
range

2 months

1 Year

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Overview of Planning Levels

Short-range plans (Detailed plans)

Machine loading
Job assignments

Intermediate plans (General levels)

Employment
Output

Long-range plans
Long term capacity
Location / layout
Product/Process design

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Listen to Tom Thumbs manager

-

Need more space in 2005 to expand the store

Allocate 25% of the floor space to fresh produce
During the winter months employ 6 cashiers during rush hours
On Wed before Thanksgiving, employ 12 cashiers throughout the
day
In the next two weeks, no Italian parsley will be delivered.
Shelve Dill instead of parsley

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Why aggregate planning

Details are hard to gather for longer horizons

Demand for Christmas turkeys at Tom Thumbs vs Thanksgiving turkeys

Details carry a lot of uncertainty: aggregation reduces variability

Demand for meat during Christmas has less variability than the total
variability in the demand for chicken, turkey, beef, etc.

If there is variability why bother making detailed plans, inputs will

change anyway
Instead make plans that carry a lot of flexibility
Flexibility and aggregation go hand in hand

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Aggregate Planning

Aggregate planning: General plan

Combined products = aggregate product
Short and long sleeve shirts = shirt

Single product

Pooled capacities = aggregated capacity

Dedicated machine and general machine = machine

Single capacity

Time periods = time buckets

Consider all the demand and production of a given month together

Quite a few time buckets

When does the demand or production take place in a time bucket?

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Planning Sequence
Corporate
strategies
and policies

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Economic,
competitive,
and political
conditions

Aggregate
demand
forecasts

Business Plan

Establishes production
and capacity strategies

Production plan

Establishes
production capacity

Master schedule

Establishes schedules
for specific products

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Aggregate Planning Inputs

Resources
Workforce
Facilities

Demand forecast
Policy statements

Subcontracting
Overtime
Inventory levels
Back orders

Costs

Inventory carrying
Back orders
Hiring/firing
Overtime
Inventory changes
subcontracting

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Aggregate Planning Outputs

Total cost of a plan

Projected levels of inventory

Inventory
Output
Employment
Subcontracting
Backordering

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Strategies

Proactive
Alter demand to match capacity

Reactive
Alter capacity to match demand

Mixed
Some of each

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Demand Options
to Match Demand and Capacity

Pricing
Price reduction leads to higher demand

Promotion
Not necessarily via pricing
Free delivery, free after sale service
Some Puerto Rico hotels pay for your flight

Back orders
Short selling: Sell now, deliver later

New demand
Finding alternative uses for the product
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Capacity Options
to Match demand and Capacity

Hire and layoff workers, unions are pivotal

Layoff: Emotional stress
Fired Moulinex (appliances producer in France) workers start fire at the plant

Hire: Availability of qualified work force

Operators at semiconductor plants

Overtime/slack time
How too use slack time constructively? Training.
Overtime is expensive, low quality, prone to accidents
Part-time workers
35 hour work week of Europe
Inventories, To smooth demands
Subcontracting. Low quality. Reveals technological secrets

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Fundamental tradeoffs in Aggregate Planning

Capacity (regular time, over time, subcontract)

Inventory

Backlog / lost sales: Customer patience?

Basic Strategies

Chase (the demand) strategy; Matching capacity to demand; the planned output

for a period is the expected demand for that period

fast food restaurants

Time flexibility from high levels of workforce or capacity;

machining shops, army

Level strategy; Maintaining a steady rate of regular-time output while meeting

variations in demand by a combination of options.

swim wear

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Use inventory

Matching the Demand with

Level or Time flexibility strategies
Demand

Demand

U
se

ca

pa
c

ity

Use delivery time

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Demand
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Chase vs. Level

Chase Approach

Advantages

Level Approach

Stable output rates and

workforce

Investment in inventory is low

Labor utilization in high

Disadvantages
The cost of adjusting output rates
and/or workforce levels

Advantages

Disadvantages
Greater inventory costs
Increased overtime and idle
time
Resource utilizations vary over
time

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Techniques for Aggregate Planning

Inputs:

Determine demand for each period

Determine capacities for each period
Identify policies that are pertinent
Determine units costs

Analysis
Develop alternative plans and costs
Select the best plan that satisfies objectives

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Cumulative output/demand

Technique 1: Cumulative Graph

Cumulative
production
Cumulative
demand
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Technique 2: Mathematical Techniques

Linear programming: Methods for obtaining optimal
solutions to problems involving allocation of scarce
resources in terms of cost minimization.

Minimize Costs
Subject to: Demand, capacity, initial inventory
requirements

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Summary of Planning Techniques

Technique

Solution

Characteristics

Graphical/
charting

Trial and
error

Linear
programming
Simulation

Optimizing

Intuitively appealing, easy to

understand; solution not
necessarily optimal.
Computerized; linear assumptions
not always valid.
Computerized models can be
examined under a variety of
conditions.

Trial and
error

Linear decision rule???

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Basic Relationships

Example - Relationships

Workforce

Number of
workers in a
period

Number of
workers at end of
previous period

Number of
new workers
at start of the
period

Number of
laid off
workers at
start of the period

Amount used to
satisfy
demand in
current
period

Inventory

Inventory at
the end of
a period

Inventory at end
of the
previous
period

Output Cost
(Reg+OT+Sub)

Production in
current
period

Hire/Lay Off
Cost

Cost
Cost for a
period

Inventory Cost

Back-order
Cost

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Technique 3: Simulation Example

Level Output
Period
Forecast

Policy:

200

200

300

400

500

200

Total
1800

Level Output Rate of 300 per period

Output

Cost
Regular

300

300

300

300

300

300

1800

$2

Overtime

$3

Subcontract

$6

Output-Forecast

100

100

-100

-200

100

Beginning

100

200

200

100

Ending

100

200

200

100

Average

50

150

200

150

50

600

$1

100

100

$5

Regular

$600

$600

$600

$600

$600

$600

$3,600

Inventory

$50

$150

$200

$150

$50

$0

$600

Back Orders

$0

$0

$0

$0

$500

$0

$500

Total Cost of Plan

$650

$750

$800

$750

$1,150

$600

$4,700

Inventory

Backlog
Costs

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Average Inventory= (Beginning Inventory + Ending Inventory)/2

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Technique 3: Simulation Example

Level Output + Overtime
Period
Forecast

Policy:

200

200

300

400

500

200

Total
1800

Level Output Rate+Overtime

Output

Cost
Regular

280

280

Overtime

280

280

280

280

1680

$2

40

40

40

120

$3

Subcontract
Output-Forecast

$6
80

80

20

-80

-200

-180

Beginning

80

160

180

100

Ending

80

160

180

100

Average

40

120

170

140

50

520

$1

80

80

$5

Regular

$560

$560

$560

$560

$560

$560

$3,360

Overtime

$0

$0

$120

$120

$120

$0

$360

Inventory

$40

$120

$170

$50

$0

$0

$520

Back Orders

$0

$0

$0

$0

$400

$0

$400

Total Cost of Plan

$600

$680

$850

$730

$1,080

$560

$4,640

Inventory

Backlog
Costs

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Aggregate Planning in Services

Services occur when they are rendered

Limited time-wise aggregation

Services occur where they are rendered

Limited location-wise aggregation

Demand for service can be difficult to predict

Personalization of service

Capacity availability can be difficult to predict

Labor flexibility can be an advantage in services
Human is more flexible than a machine, well at the expense of low
efficiency.

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Aggregate Plan to Master Schedule

Aggregate
Planning

Disaggregation

Master
Schedule

For a short planning range 2-4 months:

Master schedule: The result of
disaggregating an aggregate plan;
shows quantity and timing of specific
end items for a scheduled horizon.
Rough-cut capacity planning:
Approximate balancing of capacity
and demand to test the feasibility of a
master schedule.
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Master Scheduling
Master schedule
Determines quantities
needed to meet demand
Interfaces with

Marketing
Capacity planning
Production planning
Distribution planning

Master Scheduler
Evaluates impact of
new orders
Provides delivery dates for
orders
Deals with problems
Production delays
Revising master schedule
Insufficient capacity

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Master Scheduling Process

Inputs

Outputs

Beginning inventory
Forecast
Committed
Customer orders

Projected inventory

Master
Scheduling

Master production schedule

ATP: Uncommitted inventory

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Preview of Materials Requirement Planning Terminology

Net Inventory After Production

Requirements=Forecast
Assuming that the forecasts include committed orders
Net inventory before production=
Projected on hand inventory in the previous period
- Requirements
Produce in lots if Net inventory is less than zero
Net inventory after production=
Net inventory before production+ Production

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Projected On-hand Inventory

Beginning
Inventory

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Example: Find ATP with lot size of 70

June
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July

Forecast

30

30

30

30

40

40

40

40

Customer Orders
(Committed)

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20

10

Projected on Hand Inventory

MPS: Production

70

Projected on Hand Inventory

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Available to promise
Inventory until next
production
(uncommitted)

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57

+
70

11

41

79

70

70

31

61

71

???

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Summary
Aggregate planning:
conception, demand and capacity option
Basic strategy:
level capacity strategy, chase demand strategy
Techniques:
Trial and Error, mathematical techniques
Master scheduling

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Practice Questions
1. The goal of aggregate planning is to achieve a production plan that
attempts to balance the organization's resources and meet expected
demand.
Answer: True Page: 541
2. A chase strategy in aggregate planning would attempt to match
capacity and demand.
Answer: True Page: 548
3. Ultimately the overriding factor in choosing a strategy in aggregate
planning is overall cost.
Answer: True Page: 550

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Practice Questions
1. Which of the following best describes aggregate planning?
A) the link between intermediate term planning and short term
operating decisions
B) a collection of objective planning tools
C) make or buy decisions
D) an attempt to respond to predicted demand within the
constraints set by product, process and location decisions
E) manpower planning
Answer: D Page: 541

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Practice Questions
2.Which of the following is an input to aggregate planning?
A) beginning inventory
B) forecasts for each period of the schedule
C) customer orders
D) all of the above
E) none of the above
Answer: D Page: 561

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Practice Questions
3.Which of the following is not an input to the aggregate
planning process:
A) resources
B) demand forecast
C) policies on work force changes
D) master production schedules
E) cost information
Answer: D Page: 545
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Practice Questions
4. Which one of the following is not a basic option for
altering demand?
A) promotion
B) backordering
C) pricing
D) subcontracting
E) All are demand options.
Answer: D Page: 545
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Practice Questions
5. Which of the following would not be a strategy associated with
adjusting aggregate capacity to meet expected demand?
A) subcontract
B) vary the size of the workforce
C) vary the intensity of workforce utilization
D) allow inventory levels to vary
E) use backorders
Answer: E Page: 546-547

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Practice Questions
6. Moving from the aggregate plan to a master
production schedule requires:
A) rough cut capacity planning
B) disaggregation
C) sub-optimization
D) strategy formulation
E) chase strategies
Answer: B Page: 559
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