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AGGREGATE PLANNING IN PRODUCTION MANAGEMENT
Dr.T.Sivakami
Assistant Professor
Department of Management Studies
Bon Secours college for Women
Thanjavur
Introduction
■ An organization can finalize its business plans on the recommendation of
demand forecast. Once business plans are ready, an organization can do
backward working from the final sales unit to raw materials required.
Thus annual and quarterly plans are broken down into labor, raw
material, working capital, etc. requirements over a medium-range period
(6 months to 18 months). This process of working out production
requirements for a medium range is called aggregate planning.
Factors Affecting Aggregate Planning
Aggregate planning is an operational activity critical to the organization as it looks to
balance long-term strategic planning with short term production success.
■ A complete information is required about available production facility and raw
materials.
■ A solid demand forecast covering the medium-range period
■ Financial planning surrounding the production cost which includes raw material, labor,
inventory planning, etc.
■ Organization policy around labor management, quality management, etc.
Inputs required for Aggregate planning
■ An aggregate demand forecast for the relevant period
■ Evaluation of all the available means to manage capacity planning like sub-contracting,
outsourcing, etc.
■ Existing operational status of workforce (number, skill set, etc.), inventory level and
production efficiency
■ Aggregate planning will ensure that organization can plan for workforce level, inventory
level and production rate in line with its strategic goal and objective.
Aggregate planning as an Operational
Tool
■ Aggregate planning helps achieve balance between operation goal, financial goal
and overall strategic objective of the organization. It serves as a platform to
manage capacity and demand planning.
■ In a scenario where demand is not matching the capacity, an organization can try
to balance both by pricing, promotion, order management and new demand
creation.
■ In scenario where capacity is not matching demand, an organization can try to
balance the both by various alternatives such as.
1. Laying off/hiring excess/inadequate excess/inadequate excess/inadequate workforce
until demand decrease/increase.
2. Including overtime as part of scheduling there by creating additional capacity.
3. Hiring a temporary workforce for a fix period or outsourcing activity to a sub-
contrator.
Importance of Aggregate Planning
Aggregate planning plays an important part in achieving long-term objectives of the
organization. Aggregate planning helps in:
■ Achieving financial goals by reducing overall variable cost and improving the bottom
line
■ Maximum utilization of the available production facility
■ Provide customer delight by matching demand and reducing wait time for customers
■ Reduce investment in inventory stocking
■ Able to meet scheduling goals there by creating a happy and satisfied work force
Aggregate Planning Strategies
There are three types of aggregate planning strategies available for organization
to choose from. They are as follows:
1. Level Strategy
2. Chase Strategy
3. Hybrid Strategy
Level Strategy
■ As the name suggests, level strategy looks to maintain a
steady production rate and workforce level. In this strategy,
organization requires a robust forecast demand as to
increase or decrease production in anticipation of lower or
higher customer demand. Advantage of level strategy is
steady workforce. Disadvantage of level strategy is high
inventory and increase back logs.
CHASE STRATEGY
■ As the name suggests, chase strategy looks to dynamically match demand with production.
Advantage of chase strategy is lower inventory levels and back logs. Disadvantage is lower
productivity, quality and depressed work force.
HYBRID STRATEGY
 As the name suggests, hybrid strategy looks to balance between level strategy and chase
strategy.
TECHNIQUES FOR AGGREGATE PLANNING
■ Determine demand for each period.
■ Determine capacity for each period. This capacity should match demand, which means it may
require the inclusion of overtime or subcontracting.
■ Identify company, departmental, or union policies that are pertinent. For example,
maintaining a certain safety stock level, maintaining a reasonably stable workforce,
backorder policies, overtime policies, inventory level policies, and other less explicit rules
such as the nature of employment with the individual industry, the possibility of a bad image,
and the loss of goodwill.
■ Determine unit costs for units produced. These costs typically include the basic production
costs (fixed and variable costs as well as direct and indirect labor costs). Also included are
the costs associated with making changes in capacity. Inventory holding costs must also be
considered, as should storage, insurance, taxes, spoilage, and obsolescence costs. Finally,
backorder costs must be computed. While difficult to measure, this generally includes
expediting costs, loss of customer goodwill, and revenue loss from cancelled orders.
■ Develop alternative plans and compute the cost for each.
■ If satisfactory plans emerge, select the one that best satisfies objectives. Frequently, this is the
plan with the least cost. Otherwise, return to step 5.
AGGREGATE PLANNING IN SERVICES
■ For manufacturing firms the luxury of building up inventories during periods of slack
demand allows coverage of an anticipated time when demand will exceed capacity.
Services cannot be stockpiled or inventoried so they do not have this option. Also, since
services are considered "perishable," any capacity that goes unused is essentially wasted.
An empty hotel room or an empty seat on a flight cannot be held and sold later, as can a
manufactured item held in inventory.
■ Service capacity can also be very difficult to measure. When capacity is dictated
somewhat by machine capability, reasonably accurate measures of capacity are not
extremely difficult to develop. However, services generally have variable processing
requirements that make it difficult to establish a suitable measure of capacity.
■ Historically, services are much more labor intensive than manufacturing, where labor
averages 10 percent (or less) of total cost. This labor intensity can actually be an
advantage because of the variety of service requirements an individual can handle. This
can provide quite a degree of flexibility that can make aggregate planning easier for
services than manufacturing.
WHAT'S NEW IN AGGREGATE PLANNING?
■ Rudy Hung, in his Production and Inventory Management Journal article entitled
"Annualized Hours and Aggregate Planning," presents a new, useful idea for aggregate
planning called Annualized Hours (AH). Under AH, employees are contracted to work
for a certain number of hours (say 1,800 hours) per year, for a certain sum of money.
Employees can be asked to put in more hours during busy periods and fewer hours in
slow periods. Typically, employees receive equal monthly or weekly payments so that
hourly workers in effect have gained salaried status. Overtime is paid only when
employees have worked beyond their annual hours.
■ AH gives employers much flexibility. AH serves to cut labor costs by offering
employees an annual sum less than their previous annual earnings with overtime. Even
though their total earnings may fall, their average earnings per hour would remain the
same or even rise. Effective earnings could rise even more so if the employer is unable
to consume all contracted hours. Employees have greater income security with no
worries about layoffs. There is also increased morale because blue-collar workers are
now salaried.
■ Another development affecting aggregate planning is postponement. This refers to
delaying the "finish" of a product until the moment of sale. Firms that rely on the
postponement strategy, such as PC-maker Dell Inc. or clothing franchise Benetton
Group Sp.A., depend upon the availability of aggregate inventories of components that
can be assembled to order shortly after, or even immediately, as an order is taken.
THANK YOU

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Aggregate Planning.pptx

  • 1. AGGREGATE PLANNING IN PRODUCTION MANAGEMENT Dr.T.Sivakami Assistant Professor Department of Management Studies Bon Secours college for Women Thanjavur
  • 2. Introduction ■ An organization can finalize its business plans on the recommendation of demand forecast. Once business plans are ready, an organization can do backward working from the final sales unit to raw materials required. Thus annual and quarterly plans are broken down into labor, raw material, working capital, etc. requirements over a medium-range period (6 months to 18 months). This process of working out production requirements for a medium range is called aggregate planning.
  • 3. Factors Affecting Aggregate Planning Aggregate planning is an operational activity critical to the organization as it looks to balance long-term strategic planning with short term production success. ■ A complete information is required about available production facility and raw materials. ■ A solid demand forecast covering the medium-range period ■ Financial planning surrounding the production cost which includes raw material, labor, inventory planning, etc. ■ Organization policy around labor management, quality management, etc.
  • 4. Inputs required for Aggregate planning ■ An aggregate demand forecast for the relevant period ■ Evaluation of all the available means to manage capacity planning like sub-contracting, outsourcing, etc. ■ Existing operational status of workforce (number, skill set, etc.), inventory level and production efficiency ■ Aggregate planning will ensure that organization can plan for workforce level, inventory level and production rate in line with its strategic goal and objective.
  • 5. Aggregate planning as an Operational Tool ■ Aggregate planning helps achieve balance between operation goal, financial goal and overall strategic objective of the organization. It serves as a platform to manage capacity and demand planning. ■ In a scenario where demand is not matching the capacity, an organization can try to balance both by pricing, promotion, order management and new demand creation. ■ In scenario where capacity is not matching demand, an organization can try to balance the both by various alternatives such as. 1. Laying off/hiring excess/inadequate excess/inadequate excess/inadequate workforce until demand decrease/increase. 2. Including overtime as part of scheduling there by creating additional capacity. 3. Hiring a temporary workforce for a fix period or outsourcing activity to a sub- contrator.
  • 6. Importance of Aggregate Planning Aggregate planning plays an important part in achieving long-term objectives of the organization. Aggregate planning helps in: ■ Achieving financial goals by reducing overall variable cost and improving the bottom line ■ Maximum utilization of the available production facility ■ Provide customer delight by matching demand and reducing wait time for customers ■ Reduce investment in inventory stocking ■ Able to meet scheduling goals there by creating a happy and satisfied work force
  • 7. Aggregate Planning Strategies There are three types of aggregate planning strategies available for organization to choose from. They are as follows: 1. Level Strategy 2. Chase Strategy 3. Hybrid Strategy
  • 8. Level Strategy ■ As the name suggests, level strategy looks to maintain a steady production rate and workforce level. In this strategy, organization requires a robust forecast demand as to increase or decrease production in anticipation of lower or higher customer demand. Advantage of level strategy is steady workforce. Disadvantage of level strategy is high inventory and increase back logs.
  • 9. CHASE STRATEGY ■ As the name suggests, chase strategy looks to dynamically match demand with production. Advantage of chase strategy is lower inventory levels and back logs. Disadvantage is lower productivity, quality and depressed work force. HYBRID STRATEGY  As the name suggests, hybrid strategy looks to balance between level strategy and chase strategy.
  • 10. TECHNIQUES FOR AGGREGATE PLANNING ■ Determine demand for each period. ■ Determine capacity for each period. This capacity should match demand, which means it may require the inclusion of overtime or subcontracting. ■ Identify company, departmental, or union policies that are pertinent. For example, maintaining a certain safety stock level, maintaining a reasonably stable workforce, backorder policies, overtime policies, inventory level policies, and other less explicit rules such as the nature of employment with the individual industry, the possibility of a bad image, and the loss of goodwill. ■ Determine unit costs for units produced. These costs typically include the basic production costs (fixed and variable costs as well as direct and indirect labor costs). Also included are the costs associated with making changes in capacity. Inventory holding costs must also be considered, as should storage, insurance, taxes, spoilage, and obsolescence costs. Finally, backorder costs must be computed. While difficult to measure, this generally includes expediting costs, loss of customer goodwill, and revenue loss from cancelled orders. ■ Develop alternative plans and compute the cost for each. ■ If satisfactory plans emerge, select the one that best satisfies objectives. Frequently, this is the plan with the least cost. Otherwise, return to step 5.
  • 11. AGGREGATE PLANNING IN SERVICES ■ For manufacturing firms the luxury of building up inventories during periods of slack demand allows coverage of an anticipated time when demand will exceed capacity. Services cannot be stockpiled or inventoried so they do not have this option. Also, since services are considered "perishable," any capacity that goes unused is essentially wasted. An empty hotel room or an empty seat on a flight cannot be held and sold later, as can a manufactured item held in inventory. ■ Service capacity can also be very difficult to measure. When capacity is dictated somewhat by machine capability, reasonably accurate measures of capacity are not extremely difficult to develop. However, services generally have variable processing requirements that make it difficult to establish a suitable measure of capacity. ■ Historically, services are much more labor intensive than manufacturing, where labor averages 10 percent (or less) of total cost. This labor intensity can actually be an advantage because of the variety of service requirements an individual can handle. This can provide quite a degree of flexibility that can make aggregate planning easier for services than manufacturing.
  • 12. WHAT'S NEW IN AGGREGATE PLANNING? ■ Rudy Hung, in his Production and Inventory Management Journal article entitled "Annualized Hours and Aggregate Planning," presents a new, useful idea for aggregate planning called Annualized Hours (AH). Under AH, employees are contracted to work for a certain number of hours (say 1,800 hours) per year, for a certain sum of money. Employees can be asked to put in more hours during busy periods and fewer hours in slow periods. Typically, employees receive equal monthly or weekly payments so that hourly workers in effect have gained salaried status. Overtime is paid only when employees have worked beyond their annual hours. ■ AH gives employers much flexibility. AH serves to cut labor costs by offering employees an annual sum less than their previous annual earnings with overtime. Even though their total earnings may fall, their average earnings per hour would remain the same or even rise. Effective earnings could rise even more so if the employer is unable to consume all contracted hours. Employees have greater income security with no worries about layoffs. There is also increased morale because blue-collar workers are now salaried. ■ Another development affecting aggregate planning is postponement. This refers to delaying the "finish" of a product until the moment of sale. Firms that rely on the postponement strategy, such as PC-maker Dell Inc. or clothing franchise Benetton Group Sp.A., depend upon the availability of aggregate inventories of components that can be assembled to order shortly after, or even immediately, as an order is taken.