Chapter 12

Aggregate Planning

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 Learning Objectives
Review of forecasting
Forecast errors

Aggregate planning

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 Phases of Decisions
Strategyor design: Forecast
Planning: Forecast
Operation 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 4
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 Forecast Variability implies time zones
Frozen and Flexible zones

Volume

Firm Orders Forecasts

Frozen Zone Flexible Zone Time

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 Time Fences in MPS

Period
1 2 3 4 5 6 7 8 9

frozen slushy liquid

(firm or somewhat (open)
fixed) firm

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

Intermediate
range
Short
range

Now 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

Economic,
Corporate competitive, Aggregate
strategies and political demand
and policies conditions forecasts

Establishes production
Business Plan
and capacity strategies

Establishes
Production plan
production capacity

Master schedule Establishes schedules

for specific products
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 Aggregate Planning Inputs

Resources Costs
Workforce Inventory carrying
Facilities Back orders
Demand forecast Hiring/firing
Policy statements Overtime
Subcontracting Inventory changes
Overtime
subcontracting
Inventory levels
Back orders

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 Aggregate Planning Outputs

Totalcost 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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 Matching the Demand with
Level or Time flexibility strategies

Use inventory Demand

Use delivery time Demand

Demand
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 Chase vs. Level

Chase Approach Level Approach

Advantages
Advantages
Stable output rates and
Investment in inventory is low
workforce
Labor utilization in high
Disadvantages
Disadvantages
Greater inventory costs
The cost of adjusting output rates
Increased overtime and idle
and/or workforce levels
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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 Technique 1: Cumulative Graph
Cumulative output/demand

Cumulative
production

Cumulative
demand

1 2 3 4 5 6 7 8 9 10
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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/ Trial and Intuitively appealing, easy to
charting error understand; solution not
necessarily optimal.
Linear Optimizing Computerized; linear assumptions
programming not always valid.
Simulation Trial and Computerized models can be
error examined under a variety of
conditions.

Linear decision rule???

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 Basic Relationships
Example - Relationships
Workforce
Number of Number of
Number of Number of new workers laid off
workers in a workers at end of at start of the workers at
period = previous period + period - start of the period

Inventory
Amount used to
Inventory at end satisfy
Inventory at of the Production in demand in
the end of previous current current
a period = period + period - period
Cost

Cost for a Output Cost Hire/Lay Off Back-order

period = (Reg+OT+Sub) + Cost + Inventory Cost + Cost

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 Technique 3: Simulation Example
Level Output
Period 1 2 3 4 5 6 Total

Forecast 200 200 300 400 500 200 1800

Policy: 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 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 $1

Backlog 0 0 0 0 100 0 100 $5

Costs

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

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Average Inventory= (Beginning Inventory + Ending Inventory)/2
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 Technique 3: Simulation Example
Level Output + Overtime
Period 1 2 3 4 5 6 Total

Forecast 200 200 300 400 500 200 1800

Policy: Level Output Rate+Overtime

Output Cost

Regular 280 280 280 280 280 280 1680 $2

Overtime 40 40 40 0 120 $3

Subcontract $6

Output-Forecast 80 80 20 -80 -200 -180 0

Inventory

Beginning 0 80 160 180 100 0

Ending 80 160 180 100 0 0

Average 40 120 170 140 50 0 520 $1

Backlog 0 0 0 0 80 0 80 $5

Costs

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

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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 For a short planning range 2-4 months:

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

Master schedule Master Scheduler

Determines quantities Evaluates impact of
needed to meet demand new orders
Interfaces with Provides delivery dates for
Marketing orders
Capacity planning Deals with problems
Production planning Production delays
Distribution planning Revising master schedule
Insufficient capacity

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 Master Scheduling Process

Inputs Outputs
Beginning inventory Projected inventory
Master
Forecast Master production schedule
Scheduling

Committed ATP: Uncommitted inventory

Customer orders

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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

JUNE JULY
64 1 2 3 4 5 6 7 8
Customer Orders
(committed) 33 30 30 30 40
Projected on-hand
inventory 31 1 -29

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 Example: Find ATP with lot size of 70
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 + + - + - + - -

MPS: Production 70 70 70 70

Projected on Hand Inventory 31 1 41 11 41 1 31 61

Available to promise
Inventory until next
production
(uncommitted) 11 57 79 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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