AGGREGATE PLANNING

I. Introduction
A. Intermediate Planning
B. The Concept of Aggregation

II. The Purpose and Scope of Aggregate

Planning
A. Demand and Capacity
B. Inputs of Aggregate Planning
C. Demand and Capacity Options
 AGGREGATE PLANNING
I. Basic Strategies for Meeting Uneven
Demand
II. Techniques for Aggregate Planning
A. Informal Techniques
B. Mathematical Techniques
V. Aggregate Planning in Services
VI. Disaggregating the Aggregate Plan
VII. Master Scheduling
A. Inputs
B. Outputs
 AGGREGATE PLANNING

DEFINITION:
•  Aggregate planning is intermediate-range capacity
planning that typically covers a time horizon of 2 to 12
months.
•  It deals with translating annual business and
marketing plans into a production plan for all products.
•  It is particularly useful for organizations that
experience seasonal or other fluctuations in demand or
capacity.
 
 GOAL:
  The goal of aggregate planning is to achieve a
production plan that will effectively utilize the
organization’s resources to satisfy expected demand.
 3 LEVELS WHICH ORGANIZATIONS MAKE
CAPACITY DECISIONS:

• Long-term decisions - relate to product

and service selection, facility size and
location, equipment decisions, and layout of
facilities.
• Intermediate decisions - relate to
general levels of employment, output and
inventories, which in turn define the
boundaries within which short-range
capacity decisions must be made.
• Short-term decisions - consists of
deciding the best way to achieve desired
results within the constraints resulting from
long-term and intermediate-term decisions.
 OVERVIEW OF PLANNING LEVELS

Short-range Intermediate Long-range

plans Plans plans

Detailed Plans: General levels of: Long-term capacity

Machine Loading Employment Location
Job assignments Output Layout
Job sequencing Finished-goods Product design
Production lot size Inventories Work system design
Order quantities Subcontracting
Work Schedules Backorders

Long-range

Intermediat
e
Short-
range

New 2 1 year Planning Horizon

MANUFACTURING PLANNING
ACTIVITIES
Long-Range Planning -- begins with a statement of
organization objectives and goals to be achieved over the next
two to ten years.
 Corporate Strategic Planning -- articulates how these
objectives and goals are to be achieved in light of
the company’s capabilities and its economic and
political environment.
 Product and Market Planning -- translates these into
individual market and product line objectives.
 Financial Planning -- analyzes the financial feasibility
of these objectives relative to capital requirements
and return on investment goals.
 Resource planning -- identifies the equipment,
facilities, and personnel needs to accomplish long-
range production plan.
Medium-Range Planning

 Aggregate Production Planning -- specifies

output requirements by major product
groups either in labor hours required or in
units of production for monthly periods up
to 18 months in the future.
 Item Forecasting -- provides an estimate of
specific products, which when integrated
with aggregate production plan, become the
output requirement for the m,aster
production schedule.
 Master Production Scheduling -- (MPS),
generates the amounts and need dates for
the manufacture of specific end products.
 Rough-cut Capacity Planning -- reviews the
Short-range Planning
–Materials Planning -- (MRP), takes the end product
requirements from MPS and breaks it into component parts
or subassemblies.
– Capacity Requirements Planning -- (CRP), provides detailed
schedule of when each operation is to be run on each work
center.
–Final Assembly Scheduling -- provides operations required
to put the product in its final form.
–Input/Output Planning and Control – refers to a variety of
reports and procedures focusing on schedule demands and
capacity constraints deriving from the materials plan.
–Production Activity Control – (PAC), describes scheduling
and shop floor control activities.
–Purchase Planning and Control – deals with the acquisition
and control of purchased items specified by the materials
plan.
.
 BUSINESS PLAN
·        The Business Plan establishes guidelines for the
organization, taking into account the organization’s
strategies and policies; forecasts of demand for the
organization’s products or services, and economic,
competitive and political conditions.
 

BJECTIVE OF THE BUSINESS

PLAN

        To coordinate the intermediate plans of various

organizational functions, such as marketing, operations,
and finance.
 PLANNING SEQUENCE

Corporat Economic
Aggregat
e competitive, e
strategie & political demand
s and conditions forecasts
policies

BUSINESS PLAN

PRODUCTION PLAN

MASTER SCHEDULE
THE CONCEPT OF
AGGREGATION

• Aggregate planning is
essentially a “big picture”
approach to planning

• For purposes of Aggregate

planning, it is often convenient
to think of capacity in terms of
labor hours or machine hours
per period, or output rates,
without worrying about how
much of a particular item will
actually be involved.
 
WHY DO ORGANIZATIONS
NEED TO DO AGGREGATE
PLANNING?

• Planning - it takes time to

implement plans.

• Aggregation - is
important because it is
not possible to predict
with any degree of
accuracy, the timing and
volume of demand for
individual items.
THE PURPOSE AND SCOPE OF
AGGREGATE PLANNING

1. Demand and Capacity

2. Inputs to Aggregate Planning

3. Demand and Capacity Options

 Demand Options

The basic demand options are the following:

a. Pricing
b. Promotion
c. Back Orders
d. New demand
CAPACITY OPTIONS
The basic capacity options are the following:

a. Hire and lay off workers

b. Overtime/Slack time
c. Part-time workers
d. Inventories
e. Subcontracting
 INFORMAL
TECHNIQUE
Informal approaches consist of
developing simple tables or graphs that
enable planners to visually compare
projected demand requirements with
existing capacity.

Commonly used

They do not necessarily result in the

optimum aggregate plan
 ASSUMPTIONS IN
AGGREGATE PLANNING
1. The regular output capacity is the same in all
periods.
2. Cost is a linear function composed of unit cost
and number of units.
3. Plans are feasible; that is’ sufficient inventory
capacity exists to accommodate a plan,
subcontractors with appropriate quality and
capacity are standing by, and changes in output
can be made as needed.
4. All costs associated with a decision
option can be represented by a lump sum
or by unit cost that are independent of
the quantity involved.
5. Cost figures can be reasonably
estimated and are constant for the
planning horizon.
6. Inventories are built up and drawn
down at a uniform rate and output occurs
at a uniform rate throughout each period
 APPROPRIATE COSTS
CALCULATION
TYPE OF COST HOW TO CALCULATE
 

Output
Regular Regular cost/unit X Quantity regular output
Overtime Overtime cost/unit X Quantity overtime
Subcontract Subcontract cost/unit X Subcontract quantity
Hire/lay off
Hire Cost per hire X Number Hired
Lay off Cost per fire X Number Fired
Inventory Carrying cost per unit X Average inventory
Back order Back order cost / unit X Number of backorder
units
 EXAMPLE
Planners for a company are about to prepare the aggregate plan that will cover six
periods. They have assembled the following information

Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1800
Costs
Output
Regular time = $ 2/unit
Overtime = $ 3/ unit
Subcontract = $ 6/ unit
Inventory = $ 1 per unit per period on average inventory
Back orders = $ 5 per unit per period

They now want to evaluate a plan that calls for a steady rate of regular-time output,
mainly using inventory to absorb the uneven demand but allowing some backlog.
They intend to start with zero inventory on hand in the 1st period. Assume a level
output rate of 300 units /period with regular time. Note that the planned ending
inventory is zero. There are 15 workers
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Output
Regular 300 300 300 300 300 300 1,800
Overtime - - - - - -
Subcontract - - - - - -
Output - Forecast 100 100 0 (100) (200) 100 0
Inventory
Beginning 0 100 200 200 100 0
Ending 100 200 200 100 0 0
Average 50 150 200 150 50 0 600
Backlog 0 0 0 0 100 0 100
Costs
Output
Regular $600 600 600 600 600 600 $3,600
Overtime - - - - - -
Subcontract - - - - - -
Hire/ lay off - - - - - -
Inventory $50 150 200 150 50 0 $600
Back orders $0 0 0 0 500 0 $500
Total $650 750 800 750 1,150 600 $4,700
After reviewing the plan developed in the preceding example, planners
have decided to develop an alternative plan. They have learned that one
person is about to retire from the company. Rather than replace that
person, they would like to stay with the smaller workforce and use
overtime to make up for lost output. The reduced regular- time output is
280 units per period. The maximum amount of overtime output per period
is 40 units. Develop a plan and compare it to the previous one.
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Output
Regular 280 280 280 280 280 280 1,680
Overtime 0 0 40 40 40 0 120
Subcontract - - - - - -
Output - Forecast 80 80 20 (80) (180) 80 0
Inventory
Beginning 0 80 160 180 100 0
Ending 80 160 180 100 0 0
Average 40 120 170 140 50 0 520
Backlog 0 0 0 0 80 0 80
Costs
Output
Regular $560 560 560 560 560 560 $3,360
Overtime $0 0 120 120 120 0 $360
Subcontract - - - - - -
Hire/ lay off - - - - - -
Inventory $40 120 170 140 50 0 $520
Back orders $0 0 0 0 400 0 $400
Total $600 $680 $850 $820 $1,130 $560 $4,640
 MATHEMATICAL TECHNIQUES

LINEAR PROGRAMMING
LP models are methods for obtaining optimal solutions to
problems involving the allocation of of scarce resources in
terms of cost minimization or profit maximization.
With AGGREGATE PLANNING, the goal is usually to minimize
the sum of costs related to regular labor time, over time,
subcontracting, inventory holding costs, and costs associated
with changing size of the work force. Contstraints involve the
capacities of the workforce, inventories and subcontracting.
E.H. BOWMAN - proposed formulating the problem in terms
of transportation type programming model as a way to obtain
aggregate plans that would match capacities with demand
requirements and minimize cost. In order to use this approach,
planners must identify capacity (supply) of regular time, over
time, subcontracting and inventory on a period by period basis
as well as related costs of each variable.
LINEAR DECISION RULE

It was developed by Charles Holt, Franco Modigliani, John

Muth, and Herbert Simon.
It is an optimizing technique that seeks to minimize combined
cost using a set of cost approximating functions to obtain single
quadratic equation

SIMULATION MODELS

Computerized models that can be tested under different

scenarios to identify acceptable solutions to problems.
AGGREGATE PLANNING

IN SERVICES
- It is an overall forecast for the
planning horizon and ends with the
preparation for applying the plans to
specific products and services.
 IMPORTANT DIFFERENCES RELATED IN
GENERAL TO THE DIFFERENCES BETWEEN
MANUFACTURING AND SERVICES
> Services occurred when they
are rendered.

> Demand for service can be

difficult to predict.

> Capacity availability can be

difficult to predict.

> Labor flexibility can be

advantage in services.
 DISAGGREGATING THE
AGGREGATE PLAN

- Involves breaking down the aggregate plan into

specific product requirements in order to
determine labor requirements such as skills
and size of workforce, materials, and
inventory requirements. This process is
described in Materials Requirements Planning
(MRP).
 AN OVERVIEW OF MRP
Materials Requirements
Planning (MRP) is a computer
Dependent Demand
based information system
designed to handle ordering and
scheduling of dependent demand
inventories (e.g. raw materials, Amount
componentparts,and subassembles) on Hand

Involves planning periods (e.g.,

weeks) so that ordering,
fabrication and assembly can be
scheduled for timely completion
of end items.

Time
RESULTS OF DISAGGREGATING
THE AGGREGATE PLAN
 MASTER SCHEDULE

 ROUGH-CUT CAPACITY PLANNING

 MASTER SCHEDULING
It indicates the quantity and timing for a product,
or a group of products, but it does not show
planned production.

For example:

AGGREGATE PLAN
Month Planned Output (Aggregate Units)

NOKIA CELLPHONES

Month January February March

Planned Output 500,000units 700,000units 800,000units
 MASTER SCHEDULE ( Disaggregate Plan )

Month Planned Output (Actual Units)

NOKIA CELLPHONES

Month January February March

M-3210 200,000 300,000 250,000
M-3310 200,000 350,000 500,000
M-8210 100,000 50,000 50,000
TOTAL 500,000 units 700,000 units 800,000 units
ROUGH-CUT CAPACITY
PLANNING
This is done to test the
feasibility of a proposed master
schedule relative to available
capacities to assure that no
obvious capacity constraints
exist. This means checking
capacities of production and
warehouse facilities, labor, and
vendors to ensure that no gross
deficiencies exist that will render
the master schedule unworkable
 Master Schedule
 Indicates the
quantity and timing
for a product, or a
group of products
 Master Scheduling
Process

Inputs Outputs

Beginning inventory Projected inventory

Master
Forecast Master production schedule
Scheduling
Customer order Uncommitted inventory
 INPUTS
Beginning inventory
- actual quantity on hand from the preceding period.
Forecast
- statement about the future.
Customer Orders
- quantities already committed to customer.

OUTPUTS

Projected inventory on hand

- Inventory from previous week – Current
weeks requirement.
Master Production Schedule
- indicates the quantity and timing of
planned production.
Uncommitted Inventory
- also known as Available to promise
inventory.
Weekly forecast requirements for industrial pumps

June July
1 2 3 4 5 6 7 8

Forecast 30 30 30 30 40 40 40 40
 Eight Week schedule showing forecast,
customer orders, and beginning inventory

Beginning
Inventory
June July
64 1 2 3 4 5 6 7 8

Forecast 30 30 30 30 40 40 40 40
Customers
orders 33 20 10 4 2
( committed)
 Projected on – hand inventory is computed
week by week until it becomes negative

Beginning
Inventory June July
64 1 2 3 4 5 6 7 8

Forecast 30 30 30 30 40 40 40 40
Customer
orders
(committed) 33 20 10 4 2
Projected on –
hand Inventory
31 1 -29
 Determining the MPS
and projected on – hand inventory
Inventory Net
from Require Inventor (70) Projected
Week
previous ments y before MPS Inventory
week MPS
1 64 33 31 31
2 31 30 1 1
3 1 30 -29 + 70 = 41
4 41 30 11 11
5 11 40 -29 + 70 = 41
6 41 40 1 1
7 1 40 -39 + 70 = 31
8 31 40 -9 + 70 = 61
Projected on – hand inventory and MPS
are added to the master schedule

June July

64 1 2 3 4 5 6 7 8

Forecast 30 30 30 30 40 40 40 40
Customer
orders 33 20 10 4 2
(committed)
Projected on
– hand
inventory
31 1 41 11 41 1 31 61
MPS 70 70 70 70
The available – to – promise inventory
quantities have been added to the master schedule

June July
64 1 2 3 4 5 6 7 8

Forecast 30 30 30 30 40 40 40 40
Customer
orders 33 20 10 4 2
(committed)
Projected on
– hand
inventory
31 1 41 11 41 1 31 61
MPS 70 70 70 70
Available to
promise
inventory 11 56 68 70 70
(uncommitted)