AGGREGATE SALES

AND OPERATIONS
PLANNING

PLANNING LEVEL AND

ACTIVITIES

PLANNING STAGES IN
OPERATION

Aggregate Planning
Aggregate planning is a big picture approach to
production plan to meet the demand throughout the year
or so.
It is not concerned with individual products, but with a
single aggregate product representing all products.
For example, in a TV manufacturing plant, the aggregate
planning does not go into all models and sizes. It only
deals with a single representative aggregate TV.
All models are lumped together and represent a single
product; hence the term aggregate planning.

WHAT DOES
AGGREGATE MEAN?
Overall terms

Product families or product lines rather than

individual products, thus the term aggregate
In other words, one collapses a multi-product firm
to a single-product firm, the product being
aggregate units of production
Big picture approach to planning
Aggregate, for example # bicycles to be produced,
but would not identify bicycles by colour, size, type
etc.

HOW DOES MPS DIFFER FROM

AP

AGGREGATION
(EXAMPLE)
Suppose a bicycle manufacturer makes three models
(Standard, Deluxe, Sports)
Time: Standard: 30 m/c hours, Deluxe: 60 m/c hours, Sports:
90 m/c hours
Thus manufacturing 1 deluxe model is equivalent to
manufacturing 2 standard models. 1 sports model is
equivalent to manufacturing 3 standard models from
resource consumption perspective
Thus a monthly demand of 1000 standard cycles, 500 deluxe,
and 250 sports can be aggregated as 2750 standard models
on the basis of machine hours

IDENTIFYING AGGREGATE
UNITS OF PRODUCTION
Product
Family

Material cost/ Revenue /

Unit (Rs)
unit (Rs)

Prodn. Time
/unit
(includes
setup time)

% share of
units sold

15

54

5.76

10

30

3.04

25

39

3.88

20

12

49

5.00

10

36

3.66

20

13

48

4.37

15

Material cost / aggregate unit = 15*0.10+7*0.25+9*0.20+12*0.10+9*0.20+13*0.15 = Rs 10

Revenue / aggregate unit = 54*0.10+30*0.25+39*0.20+49*0.10+36*0.20+48*0.15 = Rs 40
Production time / agg. unit = 5.76*0.1+3.04*.25+3.88*0.20+5*0.1+3.66*0.20+4.37*0.15 = 4 hrs

WHY AGGREGATE
PLANNING?
Provides for fully loaded facilities, thus minimizing
Overloading and under loading
Minimizing cost over the planning period
Adequate production capacity to meet expected
aggregate demand

Optimize balance between demand and supply

WHY AGGREGATE
PLANNING?
A plan for orderly and systematic change of
production capacity to meet peaks and valleys
of expected customer demand
Getting the most output for the amount of
resources available, which is important in times
of scarce production resources

STEPS IN AGGREGATE
PLANNING
1. Begin with sales forecast for each
product that indicates the quantities to
be sold in each time period (usually
months, or quarters) over the planning
horizon (3-18 months)
2. Total all the individual product or
service forecast into one aggregate
demand.

STEPS IN AGGREGATE
PLANNING
3. Determine capacities (regular time, OT,
subcontracting) for each period
4. Determine unit costs for regular time,
OT, subcontracting, holding inventories,
back orders, layoffs etc.
5. Identify company policy (chase, level,
mixed)

STEPS IN AGGREGATE
PLANNING
6. Develop alternative plans and compute
cost for each
7. Select the best alternative that satisfies
companys objectives

STRATEGIES FOR MEETING

DEMAND
Proactive

Alter demand to match capacity

Reactive
Alter capacity to match demand
Mixed
Some of each

STRATEGIES FOR
MEETING DEMAND
Proactive strategies
Influencing Demand
Offer discounts and promotions
Increase advertising in slack periods

Counter seasonal products

Lawnmowers (summer) and snow-blowers

(winter)

STRATEGIES FOR
MEETING DEMAND
Reactive Strategies
Changing inventory levels
Vary workforce size (hiring and lay-off)
Varying production through overtime or idle
time
Subcontracting
Varying shifts
Varying working hours

INPUTS AND COSTS

IN AP
Decision Variable

Costs

Varying work force size

Hiring, training, firing costs

Using Overtime

Overtime costs

Varying inventory levels

Holding costs

Accepting back orders

Back order costs

Subcontracting others

Subcontracting costs

OUTPUTS OF
AGGREGATE PLANNING
Total cost of a plan
Projected levels of
Inventory held
Output from
Regular time, overtime
Employment
Subcontracting

GRAPHICAL METHOD
Popular technique

Easy to understand and use

Trial-and-error approaches that do
not guarantee an optimal solution
Require only limited computations

GRAPHICAL METHOD
Month

Expected
Demand

Production Demand /
Days
day

Avg. daily
demand

Jan

900

22

41

50

Feb

700

18

39

50

March

800

21

38

50

April

1200

21

57

50

May

1500

22

68

50

June

1100

20

55

50

6,200

124

GRAPHICAL METHOD

Note: Forecast differs from average demand

AGGREGATE PLANNING
TECHNIQUES
Two pure forms of aggregate planning strategies

Level Production
Maintain constant workforce
and adjust inventory
Chase Demand
Hiring and Firing people

AGGREGATE PLANNING
TECHNIQUES
Mixed Strategy
Combination of

Overtime, under time, & subcontracting

Part Time employees
Hiring and firing
Inventory
Backordering
Note: When one alternative: Pure Strategy
When two or more are selected: Mixed
strategies

LEVEL PRODUCTION
STRATEGY
It is an aggregate planning in which monthly
production is uniform
Requires no overtime, no change in work force
levels, and no subcontracting
Toyota and Nissan follow this strategy
Finished goods inventory go up or down to buffer
the difference between demand and production
Works when demand is stable

LEVEL PRODUCTION
STRATEGY

LEVEL PRODUCTION STRATEGY

Assume begin inventory: 2000

CHASE PRODUCTION
STRATEGY
It attempts to achieve output rates that match
demand forecast for that period.
This strategy can be accomplished by:
Vary workforce levels (hiring and firing)
Service businesses use because they dont have
the option to build inventory of their product

CHASE PRODUCTION
STRATEGY

CHASE DEMAND STRATEGY

MIXED STRATEGY
For most firms, neither a chase strategy
nor a level strategy is likely to prove
ideal, so a combination of options must
be achieved to meet demand and
minimize cost
More complex than pure ones but
typically yield a better strategy

OVERTIME & SUBCONTRACTING

LINEAR PROGRAMMING
APPROACHES TO AP
Finds minimum cost solution related to
regular labour time, overtime,
subcontracting, caring inventory, and costs
associated with changing the size of
workforce

MATHEMATICAL TECHNIQUES
TO AGGREGATE PLANNING
Linear Programming
Optimal solutions
Cost minimization
Profit maximization
Appropriate when cost and variable relationships
are linear
Application in industry limited

TRANSPORTATION
METHOD IN AP

TRANSPORTATION METHOD IN AP

TRANSPORTATION
METHOD
(AN EXAMPLE)

TOTAL COSTS

Period

Demand

Regular
Production

Overtime

Subcontract

End
Inventory

1
2
3
4
Total

900
1500
1600
3000
7000

1000
1200
1300
1300
4800

100
150
200
200
650

0
250
500
500
1250

500
600
1000
0
2100

Total Cost: 4800$20+650$25+1250$28+2100$3 = $153,550

SIMULATION MODELS
IN AP
Development of computerized model under
variety of conditions to find reasonably
acceptable solutions
Advantages
Lends itself to problems that are difficult to solve
mathematically
Experimenting system behaviour without any risk
Compresses time to understand system
Understand system behaviour under wide range of
conditions

SIMULATION MODELS
IN AP
Limitations
Simulation does not produce optimal solutions, it merely
indicates approximate behaviour for a set of inputs
Simulations are based on models, and models are only
approximation of reality

SUMMARY OF AGGREGATE
PLANNING TECHNIQUES
Technique

Solution
Approach

Characteristics

Spreadsheet

Heuristic (trial and

error)

Intuitively appealing,
easy to understand,
solution not optimal

Linear Programming

Optimizing

Computerized

Simulation

Heuristic (trial and

error)

Computerized
models can be
examined under
various scenarios