AGGREGATE PLANNING AND ITS TECHNIQUES AGGREGATE PLANNING Aggregate planning is the process of planning the quantity and

timing of output over the immediate range (generally three to eighteen months) by adjusting the production rate, employment, inventory and other controllable variables. The decisions of how, what, when and how much to actually produce lie at the heart of organisational activity and send repercussions throughout the firm the personnel, finance and marketing departments and to other areas. As aggregate planning reflects corporate strategy with respect to customer service, inventory, investment, levels of employment, etc., it deserves regular attention of the top management. Aggregate planning involves translating annual and quarterly business plans into broad labour and output plans for the intermediate term. Its objective is to minimise the cost of resources required to meet demand over that period. The aggregate plan precedes the master schedule. The main purpose of the aggregate plan is to specify the optimal combination of production rate, the workforce level, and inventory on hand. Actually, demands cannot always be met, and all orders cannot be accepted. Planners and schedulers must balance the demand against capacity to determine the extent to which the peaks and valleys of customer demand can be accommodated. Changing the volume of a production operation is not simple because of various reasons. First, each system is composed of an intricate and inter-dependent mix of labour, materials and equipment. When the rate of output is changed, the previous balance is lost, and a new optimal mix must be sought by re-adjusting the usage rate of various resources. Second, the problem is further complicated by the fact that the plant, inventories and human resources are investments to be maintained even if they are idle. Third, where intangible constraints apply, goals are not always velar and firms have a moral obligation to provide the security of reasonably stable employment to their workers. The variables subject to control are fundamentally the labour, material and capital inputs. More from labour efforts are usually needed to generate more volume of output. So the employment level and use of overtime are highly relevant variables. Materials can also be used to regulate the flows of output from manufacturing firms by storing and depleting inventories, back-ordering and subcontracting items to other firms. Finally, in addition to funding employment and inventory levels, the capital invested in plant and machinery represents a variable controlling the overall plant capacity. These controllable variables constitute pure strategies by which fluctuations in demand and uncertainties in production activities can be accommodated as shown below: Pure Aggregate Planning Strategies:

1. Employment (vary workforce size)

Aggregate Planning Production and Operations Management MBA 212 Page 1 of 9

2. (Use) Overtime and Idle time 3. (Carry large) Inventories 4. Back Orders (incur stock-out costs) 5. (Use) Subcontracting 6. (Adjust) Plant Capacity
The first strategy suggests that a firm might vary the size of its workforce by hiring and laying off in direct proportion to demand. The second strategy would be to maintain a stable workforce by permitting idle time, when the demand is low and by asking the workers to work overtime, when the demand is high. The third strategy would be to have a constant workforce and level of production but by carrying large amount of inventory to absorb the demand fluctuations. The fourth strategy assumes that customers are willing to wait for delivery, otherwise the strategy results in stock-out costs. The subcontracting strategy permits level production by pushing the fluctuations off onto subcontractors. Lastly, plant capacity can be adjusted both in the short term (by varying tooling and equipment capacities) and in the long term. The appropriate strategy to follow depends upon the time frame over which the decisions prevail and the costs/benefits that result. The primary concern is with capacity decisions that have a relatively long range impact. In the medium and short range of capacity requirements planning, additional tooling may be considered. Other alternatives to capacity planning, that is, buying components instead of making or reallocating workforce also exist. Every aggregate planning strategy has countervailing costs and benefits. The costs are largely a function of adjusting to demand fluctuations, as depicted in the following table: Cost of adjusting to Increased Demand Hiring & training Using less efficient or less Employment via Decreased Demand Compensation Decreased morale Loss of skilled workers Adverse affect on

skilled workers

relations Overtime premium Overtime & Idle time Fixed cost of under-

utilised workers

Aggregate Planning

Production and Operations Management MBA 212

Page 2 of 9

Cost of adjusting to Increased Demand Carrying, storage Increased purchasing, Inventories via Decreased Demand Carrying, storage Obsolescence Increased stock may take

expediting and transport Reduced service level if

up working space

safety stock is used up Stock-out cost of lost or Back Orders Negligible

dissatisfied customers Cost premium

Subcontracting Decreased quality control Overloaded facilities Use of less efficient

Negligible

Fixed

cost

of

under-

utilised facilities Plant Capacity Obsolescence &

machines Increased maintenance &

deterioration

scrap Decreased quality Cost of new facilities

The top management should provide guidance for the aggregate planning activity as the planning decisions often reflect the basic company policy. Some selected policy guidelines may be: determine corporate policy regarding controllable variables; use a good forecast as a basis for planning; plan in appropriate units of capacity; maintain as stable a workforce as is practical; maintain needed control over inventories; maintain flexibility to change; respond to demand in a controlled manner; evaluate planning on a regular basis.

However, as the inter-dependency and intangible nature of the variables are involved, no aggregate planning methods yield truly optimal rate of production, level of personnel, etc., in all respects. To overcome this limitation, a mix or combination of more than one strategy may
Aggregate Planning Production and Operations Management MBA 212 Page 3 of 9

be used. For the purpose of deciding the optimum combination of aggregate planning strategies to be used in different situations, several mathematical tools and techniques are available, such as graphic and charting techniques, linear programming, etc. Aggregate planners may employ any combination of the above-mentioned pure strategies to meet expected customer demand. For instance, in a level production strategy, demand is met by altering only the inventory. In a chase demand strategy, demand is met by matching planned monthly production with forecasted demand, while the inventory is kept constant. In a peak demand strategy, particularly useful in service settings, capacity is varied to meet the highest level of demand at particular times. Planners can also use a mixed strategy based on any combination of these three strategies. The strategy that planners select should depend on the companys competitive priorities and the ways in which its product-service bundles add value for customers. The following table summarises these four aggregate planning strategies: AGGREGATE PLANNING STRATEGIES Strategy Variables used Compatible Competitive Priorities Peak Demand Strategy Environments where most common Emergency

Under-time or

Delivery

excess capacity* Subcontracting

speed Conformance

services Easily

quality Flexibility

obtainable substitutes Cost of back

orders high Level Production Strategy Inventory/Backlog Low cost Design quality Delivery Repetitive

manufacturing Continuous

speed**

processes Highly skilled

professionals Cost of

capacity changes high

Aggregate Planning

Production and Operations Management MBA 212

Page 4 of 9

AGGREGATE PLANNING STRATEGIES Strategy Variables used Compatible Competitive Priorities Chase Demand Strategy Workforce size Overtime/under Flexibility Design quality Delivery Environments where most common Pure service Job shops Batch

time Subcontracting

speed

manufacturing Cost of

inventory high Mixed Strategy Inventory/backlog Workforce size Overtime/under Any Somewhat

balance cost tradeoffs

time Subcontracting Excess capacity

*Planned buffers of resources other than labour **Based upon the use of accumulated inventory The Level Production Strategy. In the level production strategy, changes in the inventory account are used to balance mismatches between monthly demand and output. Workforce size, production rates and subcontracting are held constant. This strategy boosts worker morale, because it eliminates the disruption in employment associated with changing production rates. From the employers viewpoint, it also eliminates the cost and paperwork associated with the hiring and laying off of workers, while providing a low-cost, high-quality production system. But other benefits are lost in a level production strategy, including flexibility, the ability to provide a high level of customisation, and the ability to always satisfy all the customers requirements. The level production strategy is especially desirable in businesses that can afford to hold inventory or carry backlogs. Capital-intensive businesses, such as steel manufacturers and other basic materials producers, are often forced by the nature of their processes to use this strategy. The strategy is also compatible with make-to-stock planning and control systems. However, many service businesses cannot employ a level production strategy, because most of the value they add cannot be held in inventory or back ordered. The Chase Demand Strategy. In the chase demand strategy, changes in the use of overtime and the size of the workforce are used to adjust monthly output to match changes in
Aggregate Planning Production and Operations Management MBA 212 Page 5 of 9

forecasted demand. Inventory levels are held constant. This strategy is suitable for both manufacturing and service operations in which holding inventory or keeping a backlog is costly or impossible. It is particularly appropriate in operations that produce highly customised product-service bundles, as well as in make-to-order environments in general. The Peak Demand Strategy. In the peak demand strategy, changes in overtime and in the size of the workforce are used to match monthly capacity to the anticipated maximum monthly demand. This strategy is generally used in service operations in which the immediate availability of customised services is critical. Many services are useless unless they are available on demand. In most cases, emergency services, such as fire fighting, policing, or the emergency ward of a hospital have to employ this strategy. Because these types of services cannot be inventoried, the peak demand strategy may be thought of as a special case of the chase demand strategy. (If there is no inventory, then obviously there can be no variation in its size.) The peak demand strategy is particularly appropriate in operations in which the product-service bundle is highly customised. Mixed Strategy. In mixed strategy, changes in subcontracting, the production rate, and the size of both inventory and the workforce are used to adjust the monthly output. By manipulating all these variables, planners can often significantly reduce costs, minimise the disruption of operations, enhance customer service, or otherwise improve on an aggregate plan based on a pure strategy. For example, the hiring costs associated with a chase demand strategy might be significantly reduced by holding a small quantity of inventory for a month or two. Or the well-timed use of temporary personnel could offset a significant amount of the inventory holding cost or back-ordering cost associated with a level production plan, with no reduction in quality or customer service. Mixed strategies may be used in both manufacturing and service operations in which some form of inventory (perhaps only partially complete) can be held. Aggregate Planning Techniques

1. Cut-and-Try Method. A cut-and-try approach involves costing out various production

planning alternatives and selecting the one that is best. Elaborate spreadsheets are developed to facilitate the decision process. Sophisticated approaches involving linear programming and simulation are often incorporated into these spreadsheets.

2. Level Scheduling. The just-in-time (JIT) approach concentrates on keeping a level

production schedule. A level schedule holds production constant over a period of time. It is something of a combination of the four primary strategies for production planning: vary workforce size to meet demand, work overtime and under-time, vary inventory through excesses and shortages, and subcontracting. For each period, it keeps the workforce constant and inventory low, and depends on demand to pull products through. Level production has a number of advantages: (i) process.
Aggregate Planning Production and Operations Management MBA 212 Page 6 of 9

The entire system can be planned to minimise inventory and work-in-

(ii) in-process. (iii) (iv)

Product modifications are up-to-date because of the low amount of work-

There is a smooth flow throughout the production system. Purchased items from vendors can be delivered when needed, and, in fact, often directly to the production line.

3. Mathematical Techniques. Linear Programming (LP) has seen wide usage in the
area of aggregate planning. LP is appropriate to aggregate planning if the cost and variable relationships are linear and demand can be treated as deterministic. For the general case, the simplex method can be used. For the special case where hiring and firing are not considerations, the more easily formulated transportation method can be applied. Relevant Costs in Aggregate Planning There are four costs relevant to aggregate production planning. These relate to the production cost itself as well as the cost to hold the inventory and to have unfilled orders. More specifically, these are:

1. Basic Production Costs. These are the fixed and variable costs incurred in
producing a given product type in a given time period. Included are direct and indirect labour costs and regular as well as overtime compensation.

2. Costs Associated with Changes in the Production Rate. Typical costs in this
category are those involved in hiring, training, and laying off personnel. Hiring temporary help is a way of avoiding these costs.

3. Inventory Handling Costs. A major component is the cost of capital tied up in

inventory. Other components obsolescence. are storing, insurance, taxes, spoilage, and

4. Backordering Costs. Usually these are very hard to measure and include costs of
expediting, loss of customer goodwill, and loss of sales revenues resulting from backordering. AGGREGATE PLANNING FOR SERVICE ORGANISATIONS Service organisations can also use aggregate planning. The typical service operation, however, is to make-to-order rather than make to stock. Aggregate planning in service environments is especially challenging because services typically cannot be inventoried in anticipation of future demand. Consequently, finished goods are not available for responding to demand fluctuations. Instead, backlogs of customer requests can be increased or decreased to utilise capacity at desired levels. Consider a city municipal corporation that is responsible for repairing existing streets and roads and drainage systems and building new roads. Providing these services would require raw materials such as gravel, asphalt, concrete, etc. However, the municipal corporation
Aggregate Planning Production and Operations Management MBA 212 Page 7 of 9

cannot build up inventories of any of these finished products. But it can use the proper mixture of skilled and unskilled labour, equipment, supplies and subcontractors that will meet the demand for various products (services). Planning sufficient service capacity is the main approach to satisfying customer demand. The benefits of satisfied customers, however, must be weighed against the risks and costs of excess capacity. Some strategies that help service operations managers keep demand and supply in balance are: Strategies for managing Service Demand:

1. Segmenting customers into various groups as per their requirements, and dealing
with them separately. For example, a medical practitioner may have different visiting hours for different age groups of patients, depending upon their convenience.

2. Differential pricing, for example offering discounts at non-peak times. Such a

strategy may be useful for telephone service providers, internet service providers, restaurants, etc.

3. Counter-seasonal products and services may be offered in case of services that

suffer from demand seasonality. For example, summer resorts, water parks, etc.

4. Complementary products and services as in case of hotels offering facilities of

restaurants, bars, casinos, etc.

5. Reservation system. Airlines, hotels, restaurants, hair saloons, and numerous other
services use reservation to match future service capacity with future demand. Customers who request reservations that are already filled often can adjust to other options, thereby smoothing demand across a broader range of service capacity. Strategies for managing Service Supply:

1. Schedule employees to match demand patterns. Sufficient number of employees

can be scheduled to meet demand peaks that occur in some services. For example, in at the time of breakfast, lunch and dinner at a restaurant. Also, in order to control labour costs, some of these workers should also finish their shifts at the end of these peak demand periods.

2. Customer participation. The self service option is also available, as in case of some
restaurants, departmental stores, etc. However, problems may occur if customers lack sufficient training in procedures or equipment operation.

3. Contingent employees. Part-time and temporary full-time workers benefit the

company by quickly filling supply gaps that occur when demand picks up. Contingent employees are used in both service and manufacturing environments. Retail stores may hire contingent workers during busy festival seasons; universities and colleges may hire visiting or guest faculty as per their requirement.

Aggregate Planning

Production and Operations Management MBA 212

Page 8 of 9

4. Adjustable capacity, as in case of college/university classrooms that may be

separated by floor-to-ceiling partitions, that can be removed to create large lecture rooms, then easily repositioned fro smaller classes. In restaurants, during slack periods the employees can conduct supportive tasks such as cleaning, replenishing napkin, arranging tables, etc. Sports stadiums may be designed to accommodate multiple sporting and entertainment events in a variety of configurations.

5. Shared capacity. Capacity may be shared with competitors or other similar service
providers. Airlines that overbook can move extra passengers to flights on competing airlines. Hotels sometimes have similar arrangements with one another to handle overbooking problems. Accounting firms may outsource work during the busy tax season. During periods of excess capacity, an airline may lease its aircraft to other airlines or freight shipping businesses. Universities and colleges may lease classroom space to other institutions that conduct special workshops, programmes and classes. Finally it can be said that aggregate planning translates the corporate strategic and capacity plans into broad categories of workforce size, inventory quantity, and production levels. The following practical considerations must be seriously thought of in aggregate planning: First, demand variations are a fact of life so the planning system must include sufficient flexibility to cope with such variations. Flexibility can be achieved by developing alternative sources of supply, cross-training workers to handle a wide variety of orders, and engaging in more frequent re-planning during high-demand periods. Second, decision rules for production planning should be adhered to once they have been selected. However, they should be carefully analysed prior to implementation by such checks as simulation of historical data to see what really would have happened if they had been in operation in the past.

Aggregate Planning

Production and Operations Management MBA 212

Page 9 of 9