This document provides an overview of aggregate planning. It begins by listing the key learning objectives which are to define aggregate planning, identify strategies for developing an aggregate plan, prepare a graphical aggregate plan, solve an aggregate plan using linear programming, and understand yield management problems. It then defines aggregate planning and its goal of determining production quantities and timing to minimize costs over the planning period. Important aspects discussed include aggregate units, demand forecasting, relevant costs like holding and shortage costs, and strategies for adjusting capacity and managing demand. Quantitative techniques for aggregate planning including linear programming and transportation models are also introduced. Specific examples are provided to illustrate aggregate planning concepts and challenges for services are outlined.

1. Aggregate Planning
Saroj Kanta Jena

2. Learning Objectives
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1.
2.
3.
4.
5.
When you complete this chapter you
should be able to:
Define aggregate planning
Identify optional strategies for developing an aggregate
plan
Prepare a graphical aggregate plan
Solve an aggregate plan via the transportation method
of linear programming
Understand and solve a yield management problem

3. Aggregate Planning
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Determine the quantity and timing of production for the
immediate future
Objective is to minimize cost over the planning period
by adjusting
Production rates
Labor levels
Inventory levels
Overtime work
Subcontracting rates
Other controllable variables

4. 
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Required for aggregate planning
A logical overall unit for measuring sales and
output
A forecast of demand for an intermediate
planning period in these aggregate terms
A method for determining costs
A model that combines forecasts and costs so
that scheduling decisions can be made for the
planning period
Aggregate Planning

5. Aggregate Planning Process

6. The Planning Process
Long-range plans
(over one year)
Research and Development
New product plans
Capital investments
Facility location/expansion
Intermediate-range plans
(3 to 18 months)
Sales planning
Production planning and budgeting
Setting employment, inventory,
subcontracting levels
Analyzing operating plans
Short-range plans
(up to 3 months)
Job assignments
Ordering
Job scheduling
Dispatching
Overtime
Part-time help
Top
executives
Operations
managers
Operations
managers,
supervisors,
foremen
Responsibility Planning tasks and horizon

7. Aggregate Planning

8. Aggregate Planning
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Combines appropriate resources into
general terms
Part of a larger production planning
system
Disaggregation breaks the plan down into
greater detail
Disaggregation results in a master
production schedule
Aggregate Planning

9. Hierarchical Nature of Planning
Items
Product lines or
families
Individual
products
Components
Manufacturing
operations
Resource
Level
Plants
Individual
machines
Critical work
centers
Production
Planning
Capacity
Planning
Resource
requirements
plan
Rough-cut
capacity
plan
Capacity
requirements plan
Input/
output
control
Aggregate
production
plan
Master
production
schedule
Material
requirements
plan
Shop floor
schedule
All work
centers

10. 1.
2.
3.
4.
5.
Use inventories to absorb changes in demand
Accommodate changes by varying workforce
size
Use part-timers, overtime, or idle time to absorb
changes
Use subcontractors and maintain a stable
workforce
Change prices or other factors to influence
demand
Aggregate Planning Strategies

11. Aggregate Planning Strategies
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•
•
•
•
Should inventories be used to absorb changes in
demand during planning period?
Should demand changes be accommodated by
varying the size of the workforce?
Should part-timers be used, or should overtime
and/or machine idle time be used to absorb
fluctuations?
Should subcontractors be used on fluctuating
orders so a stable workforce can be maintained?
Should prices or other factors be changed to
influence demand?

12. Capacity Options
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Changing inventory levels
Increase inventory in low demand periods to
meet high demand in the future
Increases costs associated with storage,
insurance, handling, obsolescence, and
capital investment 15% to 40%
Shortages can mean lost sales due to long
lead times and poor customer service

13. 
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Varying workforce size by hiring or layoffs
Match production rate to demand
Training and separation costs for hiring and
laying off workers
New workers may have lower productivity
Laying off workers may lower morale and
productivity
Capacity Options

14. 
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Varying production rate through overtime
or idle time
Allows constant workforce
May be difficult to meet large increases in
demand
Overtime can be costly and may drive down
productivity
Absorbing idle time may be difficult
Capacity Options

15. 
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Subcontracting
Temporary measure during periods of peak
demand
May be costly
Assuring quality and timely delivery may be
difficult
Exposes your customers to a possible competitor
Using part-time workers
Useful for filling unskilled or low skilled positions,
especially in services
Capacity Options

16. Demand Options
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Influencing demand
Use advertising or promotion to
increase demand in low periods
Attempt to shift
demand to slow
periods
May not be
sufficient to
balance demand
and capacity

17. 
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Back ordering during high- demand periods
Requires customers to wait for an order without
loss of goodwill or the order
Most effective when there are few if any
substitutes for the product or service
Often results in lost sales
Counterseasonal product and service mixing
Develop a product mix of counterseasonal items
May lead to products or services outside the
company’s areas of expertise
Demand Options

18. • Aggregate Planning Options
Aggregate Planning Options
Option Advantages Disadvantages Some Comments
Changing
inventory
levels
Changes in
human
resources are
gradual or none;
no abrupt
production
changes.
Inventory holding
cost may
increase.
Shortages may
result in lost
sales.
Applies mainly to
production, not
service,
operations.
Varying
workforce
size by
hiring or
layoffs
Avoids the costs
of other
alternatives.
Hiring, layoff, and
training costs
may be
significant.
Used where size
of labor pool is
large.

19. Meeting Demand Strategies
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Adjusting capacity
Resources necessary to meet demand are acquired
and maintained over the time horizon of the plan
Minor variations in demand are handled with
overtime or under-time
Managing demand
Proactive demand management

20. Strategies for Adjusting Capacity
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Level production
Producing at a constant rate
and using inventory to absorb
fluctuations in demand
Chase demand
Hiring and firing workers to
match demand
Peak demand
Maintaining resources for
high-demand levels
•
–
•
–
•
–
•
–
Overtime and under-time
Increasing or decreasing
working hours
Subcontracting
Let outside companies
complete the work
Part-time workers
Hiring part time workers to
complete the work
Backordering
Providing the service or
product at a later time period

21. Level Production
Demand
Units
Time
Production

22. Chase Demand
Demand
Units
Time
Production

23. Strategies for Managing Demand
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•
Shifting demand into other
time periods
Incentives
Sales promotions
Advertising campaigns
Offering products or
services with counter-
cyclical demand patterns
Partnering with suppliers to
reduce information
distortion along the supply
chain

24. Quantitative Techniques For APP
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•
•
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Pure Strategies
Mixed Strategies
Linear Programming
Transportation Method
Other Quantitative
Techniques

25. Other Quantitative Techniques
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Linear decision rule (LDR)
Search decision rule (SDR)
Management coefficients model

26. Introduction to Aggregate Planning
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Goal: To plan gross work force levels
and set firm-wide production plans
Concept is predicated on the idea of
an “aggregate unit ” of production as
we will see later

27. Overview of the Aggregation
Problem
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
Suppose that D1, D2, . . . , DT are the
forecasts of demand for aggregate units
over the planning horizon (T periods.)
The problem is to determine both work
force levels (Wt) and production levels (Pt )
to minimize total costs over the T period
planning horizon.

28. Important Issues
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Smoothing. Refers to the costs and disruptions that
result from making changes from one period to the
next
Bottleneck Planning . Problem of meeting peak
demand in the face of capacity restrictions
Planning Horizon . Assumed given (T), but what is
“right” value? Rolling horizons and end of horizon
effect are both important issues
Treatment of Demand . Assume demand is known.
Ignores uncertainty to focus on the predictable or
systematic variations in demand, such as seasonality

29. Relevant Costs
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Smoothing Costs
changing size of the work force
changing number of units produced
Holding Costs
primary component: opportunity cost of investment
$’s tied up in inventory
Shortage Costs
Cost of demand exceeding stock on hand. Why
should shortages be an issue if demand is known?
Other Costs: payroll, overtime, subcontracting

30. Aggregate Units
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The method is (fundamentally) based on notion of
aggregate units. They may be:
Actual units of production
Weight (tons of steel)
Volume (gallons of gasoline)
Dollars (Value of sales)
Fictitious aggregated units
they are a composite that estimates a tangible ‘input
constant’

31. Developing aggregate units
One plant produced 6 models of washing
machines:
Model # hrs. Price % sales
A 5532 4.2 285 32
K 4242 4.9 345 21
L 9898 5.1 395 17
L 3800 5.2 425 14
M 26245.4 525 10
M 3880 5.8 725 06
Question: How do we define an aggregate unit here?

32. 

Notice: Price is not necessarily
proportional to worker hours (i.e., cost):
why?
For aggregating, we can use individual
product demand forecasts modified with a
weighted average (sales weights) of
individual item forecasts to develop a
aggregate production forecast
Developing aggregate units

33. This Aggregate Units needs a
measurable Labor Input:
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Thus, Agg. Demand = .32*(DA5532) + .21(DK4242) +
… + .06(DM3880)
This method for defining an aggregate unit
points to an aggregate labor requirement (/Agg.
Unit) of:
.32(4.2) + .21(4.9) + . . . + .06(5.8) = 4.8644
worker hours

34. Prototype Aggregate Planning
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The washing machine plant is interested in
determining work force and production levels for
the next 8 months. Forecasted aggregate
demands for Jan-Aug. are: 420, 280, 460, 190,
310, 145, 110, 125.
Starting inventory at the end of December is 200
and the firm would like to have 100 units on
hand at the end of August.
Find monthly production levels.

35. Constant Work Force Plan
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
Suppose that we are interested in determining a
production plan that doesn’t change the size of
the workforce over the planning horizon. How
would we do that?
One method: In previous picture, draw a straight
line from origin to 1940 units in month 8: The
slope of the line is the number of units to
produce each month.

36. 1.
2.
3.
4.
5.
Most services can’t be inventoried
Demand for services is difficult to predict
Capacity is also difficult to predict
Service capacity must be provided at the
appropriate place and time
Labor is usually the most constraining resource
for services
Aggregate Planning for Services

37. Thank You