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Aggregate Planning
Chapter 12
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Learning Objectives

Review of forecasting

Forecast errors

Aggregate planning
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Phases of Decisions

Strategy or design: Forecast

Planning: Forecast

Operation Actual demand

Since actual demands differs from forecasts so does

the execution from the plans.

!.g. Supply "hain concentration plans #$ students per year

%hereas the actual is &&.
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"haracteristics of forecasts

Forecasts are al%ays %rong. Should include expected 'alue and

measure of error.

(ong)term forecasts are less accurate than short)term forecasts. *oo

long term forecasts are useless: Forecast hori+on

Forecasting to determine
,
-a% material purchases for the next %ee.
, Annual electricity generation capacity in */ for the next 3$ years

Aggregate forecasts are more accurate than disaggregate forecasts

0ariance of aggregate is smaller 1ecause extremes cancel out

,
*%o samples: 23345 and 22365. A'erages of samples: # and #.
,
0ariance of sample a'erages7$
, 0ariance of 2334323657482

Se'eral %ays to aggregate

Products into product groups

Demand 1y location

Demand 1y time
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Forecast 0aria1ility implies time +ones
Fro+en and Flexi1le +ones
Volume
Time
Firm Orders
Forecasts
Frozen Zone
Flexible Zone
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Time Fences in MPS
Time Fences in MPS
Period
frozen
(firm or
fixed)
slushy
somewhat
firm
liquid
(open)
1 2 3 # 4 6 9 : ;
Time Fences divide a scheduling time horizon into three
sections or phases referred as frozen slush! and liquid"
#trict adherence to time fence policies and rules"
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Planning <ori+on
Aggregate planning: =ntermediate)range capacity planning3
usually co'ering 2 to 12 months. =n other %ords3 it is matching the
capacity and the demand.
Short
range
Intermediate
range
Long range
Now 2 months 1 Year
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Short)range plans >Detailed plans?

@achine loading

Ao1 assignments

=ntermediate plans >Beneral le'els?

!mployment

Output

(ong)range plans

(ong term capacity

(ocation 8 layout

Product8Process design
O'er'ie% of Planning (e'els
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(isten to *om *hum1Cs manager
)
Deed more space in 2$$4 to expand the store
)
Allocate 24E of the floor space to fresh produce
)
During the %inter months employ 6 cashiers during rush hours
)
On Fed 1efore *han.sgi'ing3 employ 12 cashiers throughout the
day
)
=n the next t%o %ee.s3 no =talian parsley %ill 1e deli'ered.
Shel'e Dill instead of parsley
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Fhy aggregate planning

Details are hard to gather for longer hori+ons

Demand for "hristmas tur.eys at *om *hum1Cs 's *han.sgi'ing tur.eys

Details carry a lot of uncertainty: aggregation reduces 'aria1ility

Demand for meat during "hristmas has less 'aria1ility than the total
'aria1ility in the demand for chic.en3 tur.ey3 1eef3 etc.

=f there is 'aria1ility %hy 1other ma.ing detailed plans3 inputs %ill

change any%ay

=nstead ma.e plans that carry a lot of flexi1ility

Flexi1ility and aggregation go hand in hand

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Aggregate Planning

Aggregate planning: Beneral plan

"om1ined products 7 aggregate product

,
Short and long slee'e shirts 7 shirt

Single product

Pooled capacities 7 aggregated capacity

,
Dedicated machine and general machine 7 machine

Single capacity

*ime periods 7 time 1uc.ets

,
"onsider all the demand and production of a gi'en month together

Guite a fe% time 1uc.ets

Fhen does the demand or production ta.e place in a time 1uc.et&

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Planning SeHuence
Corporate
strategies
and policies
conomic!
competiti"e!
and political
conditions
#ggregate
demand
forecasts
$usiness Plan
Production plan
%aster schedule
sta&lishes production
and capacity strategies
sta&lishes production
and capacity strategies
sta&lishes
production capacity
sta&lishes
production capacity
sta&lishes schedules
for specific products
sta&lishes schedules
for specific products
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-esources

For.force

Facilities

Demand forecast

Policy statements

Su1contracting

O'ertime

=n'entory le'els

Iac. orders

"osts

=n'entory carrying

Iac. orders

<iring8firing

O'ertime

=n'entory changes

su1contracting
Aggregate Planning =nputs
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*otal cost of a plan

ProJected le'els of in'entory

=n'entory

Output

!mployment

Su1contracting

Iac.ordering
Aggregate Planning Outputs
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Strategies

Proacti'e

Alter demand to match capacity

-eacti'e

Alter capacity to match demand

@ixed

Some of each
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Pricing

Price reduction leads to higher demand

Promotion

Dot necessarily 'ia pricing

Free deli'ery3 free after sale ser'ice

,
Some Puerto -ico hotels pay for your flight

Iac. orders

Short selling: Sell no%3 deli'er later

De% demand

Finding alternati'e uses for the product

Demand Options
to @atch Demand and "apacity
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<ire and layoff %or.ers3 unions are pi'otal

(ayoff: !motional stress

,
Fired @oulinex >appliances producer in France? %or.ers start fire at the plant

<ire: A'aila1ility of Hualified %or. force

,
Operators at semiconductor plants

O'ertime8slac. time

<o% too use slac. time constructi'ely& *raining.

O'ertime is expensi'e3 lo% Huality3 prone to accidents

Part)time %or.ers

34 hour %or. %ee. of !urope

=n'entories3 *o smooth demands

Su1contracting. (o% Huality. -e'eals technological secrets

"apacity Options
to @atch demand and "apacity
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Fundamental tradeoffs in Aggregate Planning

Capacity (regular time, over time, subcontract

!nventory

"ac#log $ lost sales% Customer patience&

"asic 'trategies

C(ase (t(e demand strategy) @atching capacity to demandK the planned output
for a period is the expected demand for that period
fast food restaurants

*ime fle+ibility from (ig( levels of wor#force or capacity)

mac(ining s(ops, army

Level strategy) @aintaining a steady rate of regular)time output %hile meeting

'ariations in demand 1y a com1ination of options.
swim wear
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@atching the Demand %ith
(e'el or *ime flexi1ility strategies
L
s
e

i
n
'
e
n
t
o
r
y
Lse deli'ery time
L
s
e

c
a
p
a
c
i
t
y
Demand
Demand
Demand
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"hase 's. (e'el
"hase Approach

Ad'antages

=n'estment in in'entory is lo%

(a1or utili+ation in high

Disad'antages

*he cost of adJusting output rates

and8or %or.force le'els
(e'el Approach

Ad'antages

Sta1le output rates and

%or.force

Disad'antages

Breater in'entory costs

=ncreased o'ertime and idle

time

-esource utili+ations 'ary o'er

time
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=nputs:

Determine demand for each period

Determine capacities for each period

=dentify policies that are pertinent

Determine units costs

Analysis

De'elop alternati'e plans and costs

Select the 1est plan that satisfies o1Jecti'es

*echniHues for Aggregate Planning
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*echniHue 1: "umulati'e Braph
1 2 ' ( )
* +
, - 1.
Cumulati"e
production
Cumulati"e
demand
C
u
m
u
l
a
t
i
"
e

o
u
t
p
u
t
/
d
e
m
a
n
d
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*echniHue 2: @athematical *echniHues
Linear programming: @ethods for o1taining optimal
solutions to pro1lems in'ol'ing allocation of scarce
resources in terms of cost minimi+ation.
@inimi+e "osts
Su1Ject to: Demand3 capacity3 initial in'entory
reHuirements
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Summary of Planning *echniHues
0echni1ue Solution Characteristics
2raphical/
charting
0rial and
error
Intuiti"ely appealing! easy to
understand3 solution not
necessarily optimal4
Linear
programming
5ptimi6ing Computeri6ed3 linear assumptions
not always "alid4
Simulation 0rial and
error
Computeri6ed models can &e
e7amined under a "ariety of
conditions4

(inear decision rule&&&
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!xample ) -elationships
"asic Relations(ips
,or#force

Dum1er of
%or.ers in a
period 7
Dum1er of
%or.ers at end of
pre'ious period M
Dum1er of
ne% %or.ers
at start of the
period )
Dum1er of
laid off
%or.ers at
start of the period
!nventory

=n'entory at
the end of
a period 7
=n'entory at end
of the
pre'ious
period M
Production in
current
period )
Amount used to
satisfy
demand in
current
period
Cost

"ost for a
period 7
Output "ost
>-egMO*MSu1? M
<ire8(ay Off
"ost M =n'entory "ost M
Iac.)order
"ost

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*echniHue 3: Simulation !xample
(e'el Output
Period - . / 0 1 2 *otal
Forecast 2$$ 2$$ 3$$ #$$ 4$$ 2$$ 1:$$

Policy% Level Output Rate of /33 per period
Output Cost
-egular 3$$ 3$$ 3$$ 3$$ 3$$ 3$$ 1:$$ 4.
O'ertime 4/
Su1contract 42
Output)Forecast 1$$ 1$$ $ )1$$ )2$$ 1$$ $
=n'entory
Ieginning $ 1$$ 2$$ 2$$ 1$$ $
!nding 1$$ 2$$ 2$$ 1$$ $ $
A'erage 4$ 14$ 2$$ 14$ 4$ $ 6$$ 4-
Iac.log $ $ $ $ 1$$ $ 1$$ 41
Costs
-egular N6$$ N6$$ N6$$ N6$$ N6$$ N6$$ N336$$
=n'entory N4$ N14$ N2$$ N14$ N4$ N$ N6$$
Iac. Orders N$ N$ N$ N$ N4$$ N$ N4$$
*otal Cost of Plan N64$ N94$ N:$$ N94$ N1314$ N6$$ 40,533
A'erage =n'entory7 >Ieginning =n'entory M !nding =n'entory?82
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*echniHue 3: Simulation !xample
(e'el Output M O'ertime
Period - . / 0 1 2 *otal
Forecast 2$$ 2$$ 3$$ #$$ 4$$ 2$$ 1:$$

Policy% Level Output Rate6Overtime
Output Cost
-egular 2:$ 2:$ 2:$ 2:$ 2:$ 2:$ 16:$ 4.
O'ertime #$ #$ #$ $ 12$ 4/
Su1contract 42
Output)Forecast :$ :$ 2$ ):$ )2$$ )1:$ $
=n'entory
Ieginning $ :$ 16$ 1:$ 1$$ $
!nding :$ 16$ 1:$ 1$$ $ $
A'erage #$ 12$ 19$ 1#$ 4$ $ 42$ 4-
Iac.log $ $ $ $ :$ $ :$ 41
Costs
-egular N46$ N46$ N46$ N46$ N46$ N46$ N3336$
O'ertime N$ N$ N12$ N12$ N12$ N$ N36$
=n'entory N#$ N12$ N19$ N4$ N$ N$ N42$
Iac. Orders N$ N$ N$ N$ N#$$ N$ N#$$
*otal Cost of Plan N6$$ N6:$ N:4$ N93$ N13$:$ N46$ 40,203
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Ser'ices occur %hen they are rendered

(imited time)%ise aggregation

Ser'ices occur %here they are rendered

(imited location)%ise aggregation

Demand for ser'ice can 1e difficult to predict

Personali+ation of ser'ice

"apacity a'aila1ility can 1e difficult to predict

(a1or flexi1ility can 1e an ad'antage in ser'ices

<uman is more flexi1le than a machine3 %ell at the expense of lo%

efficiency.
Aggregate Planning in Ser'ices
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Aggregate Plan to @aster Schedule
Aggregate
Planning
7isaggregation
8aster
'c(edule
For a short planning range 2-4 months:

Master schedule: *he result of

disaggregating an aggregate planK
sho%s Huantity and timing of specific
end items for a scheduled hori+on.

Rough-cut capacity planning:

Approximate 1alancing of capacity
and demand to test the feasi1ility of a
master schedule.
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@aster Scheduling
@aster schedule

Determines Huantities
needed to meet demand

=nterfaces %ith
,
@ar.eting
,
"apacity planning
,
Production planning
,
Distri1ution planning
@aster Scheduler

!'aluates impact of
ne% orders

Pro'ides deli'ery dates for

orders

Deals %ith pro1lems

,
Production delays
,
-e'ising master schedule
,
=nsufficient capacity
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@aster Scheduling Process
%aster
Scheduling
$eginning in"entory
8orecast
Committed
Customer orders
Inputs
5utputs
Pro9ected in"entory
%aster production schedule
#0P: ;ncommitted in"entory
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Pre'ie% of @aterials -eHuirement Planning *erminology
Det =n'entory After Production
-eHuirements7Forecast
Assuming that the forecasts include committed orders
Det in'entory 1efore production7
ProJected on hand in'entory in the pre'ious period
) -eHuirements
Produce in lots if Det in'entory is less than +ero
Det in'entory after production7
Det in'entory 1efore productionM Production
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$ro%ected &n'hand (nventor!
"eginning
!nventory
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!xample: Find A*P %ith lot si+e of 9$
9une 9uly
6# - . / 0 1 2 5 :
Forecast 3$ 3$ 3$ 3$ #$ #$ #$ #$
"ustomer Orders
>"ommitted? 33 2$ 1$ # 2
ProJected on <and =n'entory M M ) M ) M ) )
@PS: Production 9$ 9$ 9$ 9$
ProJected on <and =n'entory 31 1 #1 11 #1 1 31 61
A'aila1le to promise
=n'entory until next
production
>uncommitted? 11 49 9; 91 &&&
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Summary

Aggregate planning:
conception3 demand and capacity option

Iasic strategy:
le'el capacity strategy3 chase demand strategy

*echniHues:
*rial and !rror3 mathematical techniHues

@aster scheduling
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Practice Guestions

1. *he goal of aggregate planning is to achie'e a production plan that

attempts to 1alance the organi+ationOs resources and meet expected
demand.
Ans%er: *rue Page: 4#1

2. A PchaseQ strategy in aggregate planning %ould attempt to match

capacity and demand.
Ans%er: *rue Page: 4#:

3. Lltimately the o'erriding factor in choosing a strategy in aggregate

planning is o'erall cost.
Ans%er: *rue Page: 44$
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Practice Guestions
1. Fhich of the follo%ing 1est descri1es aggregate planning&
A? the lin. 1et%een intermediate term planning and short term
operating decisions
I? a collection of o1Jecti'e planning tools
"? ma.e or 1uy decisions
D? an attempt to respond to predicted demand %ithin the
constraints set 1y product3 process and location decisions
!? manpo%er planning
Ans%er: D Page: 4#1
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Practice Guestions
2.Fhich of the follo%ing is an input to aggregate planning&
A? 1eginning in'entory
I? forecasts for each period of the schedule
"? customer orders
D? all of the a1o'e
!? none of the a1o'e
Ans%er: D Page: 461
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Practice Guestions
3.Fhich of the follo%ing is not an input to the aggregate
planning process:
A? resources
I? demand forecast
"? policies on %or. force changes
D? master production schedules
!? cost information
Ans%er: D Page: 4#4
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Practice Guestions
#. Fhich one of the follo%ing is not a 1asic option for
altering demand&
A? promotion
I? 1ac.ordering
"? pricing
D? su1contracting
!? All are demand options.
Ans%er: D Page: 4#4
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Practice Guestions
4. Fhich of the follo%ing %ould not 1e a strategy associated %ith
adJusting aggregate capacity to meet expected demand&
A? su1contract
I? 'ary the si+e of the %or.force
"? 'ary the intensity of %or.force utili+ation
D? allo% in'entory le'els to 'ary
!? use 1ac.orders
Ans%er: ! Page: 4#6)4#9
#2
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Practice Guestions
6. @o'ing from the aggregate plan to a master
production schedule reHuires:
A? rough cut capacity planning
I? disaggregation
"? su1)optimi+ation
D? strategy formulation
!? chase strategies
Ans%er: I Page: 44;