Aggregate planning determines production levels, inventory, capacity, and other factors over a time horizon of 1-18 months. The goal is to maximize profit by effectively using existing resources to meet forecasted demand. Key inputs include demand forecasts and production costs. The process specifies operational parameters for each period and identifies the plan that maximizes profit given constraints like capacity limits. Common strategies include chasing demand by varying capacity, using inventory to level production, or utilizing time flexibility through overtime.

1. Aggregate Planning By Dr. Debadyuti Das

2. Aggregate Planning: An overview Intermediate range capacity planning that usually covering 2 to 24 months (or 1 to 18 months) Goal is to achieve a production plan that will effectively utilize the organization’s resources to satisfy expected demand.

3. Types of production plan Corporate strategies & policies, Demand forecasts, Economic, technological & political scenario, Available capital etc. Planning inputs 5-10 years Planning horizon Plans for capacity expansion (or contraction) Plans for - new products, -new technologies, -new markets, -new plants and their location. Planning outputs Long-term capacity resource allocation for: products, Processes and markets Decision variables To achieve specific organization-al objectives To enhance long-term viability and development Long-term plan Planning objectives Type of plans

4. Types of production plan Aggregate production plans specifying how demand will be met from existing productive resources Levels of use for available production alternatives: Work-force size, Production rate, Inventory, Sub-contracting 1-18 months Long-term plans Limits on present capacity Period by period annual demand forecast Feasible production alternatives and costs To make the most effective use of available capacity through existing resources Medium term plan (or Aggregate plan) Planning outputs Decision variables Planning horizon Planning inputs Planning objectives Type of plans

5. Types of production plan Production schedule Assigning orders to specific Departments, Shifts, Personnel, Equipments etc. Size of work-force Production rate Sequencing of orders 1-30 days Aggregate production plan Orders received Desired delivery times To ensure customer satisfaction through prompt delivery times To achieve maximum effectiveness from the use of production factors Short-term plan Planning outputs Decision variables Planning horizon Planning inputs Planning objectives Type of plans

6. Planning Sequence Business Plan Establishes operations and capacity strategies Aggregate plan Establishes operations capacity Master schedule Establishes schedules for specific products Corporate strategies and policies Economic, competitive, and political conditions Aggregate demand forecasts

7. Aggregate planning Aggregate planning: process by which a company determines levels of capacity, production, subcontracting, inventory, stock outs, and pricing over a specified time horizon goal is to maximize profit decisions made at a product family (not SKU) level time frame of 1 to 18 months how can a firm best use the facilities it has?

8. Operational parameters of AP Specify operational parameters over the time horizon: production rate workforce Overtime/under time machine capacity level subcontracting backlog inventory on hand

9. The Aggregate Planning Problem Given the demand forecast for each period in the planning horizon, determine the production level, inventory level, and the capacity level for each period that maximizes the firm’s profit over the planning horizon Specify the planning horizon (typically 1-18 months) Specify the duration of each period Specify key information required to develop an aggregate plan

10. Information Needed for an Aggregate Plan Demand forecast in each period Production costs labor costs, regular time ($/hr) and overtime ($/hr) subcontracting costs ($/hr or $/unit) cost of changing capacity: hiring or layoff ($/worker) and cost of adding or reducing machine capacity ($/machine) Labor/machine hours required per unit Inventory holding cost ($/unit/period) Stock out or backlog cost ($/unit/period) Constraints: limits on overtime, layoffs, capital available, stockouts and backlogs

11. Outputs of Aggregate Plan Production quantity from regular time, overtime, and subcontracted time: used to determine number of workers and supplier purchase levels Inventory held: used to determine how much warehouse space and working capital is needed Backlog/stockout quantity: used to determine what customer service levels will be Machine capacity increase/decrease: used to determine if new production equipment needs to be purchased A poor aggregate plan can result in lost sales, lost profits, excess inventory, or excess capacity

12. Aggregate Planning Strategies Proactive Alter demand to match capacity Reactive Alter capacity to match demand (Chase strategy: using capacity as the lever Level strategy: using inventory as the lever Time flexibility Strategy: using utilization as the lever) Mixed Some of each

13. Pricing Promotion Back orders New demand Demand Options

14. Hire and layoff workers Overtime/under time Part-time workers Inventories Subcontracting Capacity Options

15. Chase Strategy Production rate is synchronized with demand by varying machine capacity or hiring and laying off workers as the demand rate varies However, in practice, it is often difficult to vary capacity and workforce on short notice Expensive if cost of varying capacity is high Negative effect on workforce morale Results in low levels of inventory Should be used when inventory holding costs are high and costs of changing capacity are low

16. Time Flexibility Strategy Can be used if there is excess machine capacity Workforce is kept stable, but the number of hours worked is varied over time to synchronize production and demand Can use overtime or a flexible work schedule Requires flexible workforce, but avoids morale problems of the chase strategy Low levels of inventory, lower utilization Should be used when inventory holding costs are high and capacity is relatively inexpensive

17. Level Strategy Maintain stable machine capacity and workforce levels with a constant output rate Shortages and surpluses result in fluctuations in inventory levels over time Inventories are built up in anticipation of future demand or backlogs are carried over from high to low demand periods Better for worker morale Large inventories and backlogs may accumulate Should be used when inventory holding and backlog costs are relatively low

18. Fundamental Tradeoffs in Aggregate Planning Capacity (regular time, overtime, subcontract) Inventory Backlog / lost sales

19. Techniques and general procedure for APP Techniques: Trial and error method Linear programming Procedure: Determine demand for each period. Determine capacities (regular time, O/T, Subcontracting) for each period. Identify company policies Determine unit costs for regular time, O/T, subcontracting, inventories, back orders, layoffs and other relevant costs. Develop alternative plans and compute the costs for each. Select the one that best satisfies the objectives.

20. Example 1: Trial & Error method Planners of a company have obtained information regarding the forecasted demand of a product as follows: Period 1 2 3 4 5 6 Total Forecast 200 200 300 400 500 200 1800 Costs Regular time: $2/unit Overtime: $3/unit Subcontract: $6/unit Inventory: $1/unit Backorder: $5/unit They now want to evaluate a plan that calls for a steady rate of regular-time output, mainly using inventory to absorb the uneven demand but allowing some backlog. Overtime and subcontracting are not used because they want steady output. They intend to start with zero inventory on hand in the first period. Prepare an aggregate plan and determine its cost using the preceding information. Assume a level output rate of 300 units per period with regular time. Note that the planned inventory is zero. There are 15 workers, each can produce 20 units per period.

21. Example 2: Trial & Error method Suppose that the regular output rate will drop to 290 units per period due to an expected change in production requirements. Costs will not change. Prepare an aggregate plan and compute its total cost for each of these alternatives: Use overtime at a fixed rate of 20 units per period as needed. Plan an ending inventory of zero for period 6. Backlogs cannot exceed 90 units per period. Use subcontracting at a maximum rate of 50 units per period; the usage need not be the same in every period. Have an ending inventory of zero in the last period. Again backlogs cannot exceed 90 units in any period. Compare these two plans.

22. Example 3: LP

23. Example 3: Aggregate Planning

24. Aggregate Planning (Define Decision Variables) W t = Workforce size for month t , t = 1, ..., 6 H t = Number of employees hired at the beginning of month t , t = 1, ..., 6 L t = Number of employees laid off at the beginning of month t , t = 1, ..., 6 P t = Production in month t , t = 1, ..., 6 I t = Inventory at the end of month t , t = 1, ..., 6 S t = Number of units stocked out at the end of month t , t = 1, ..., 6 C t = Number of units subcontracted for month t , t = 1, ..., 6 O t = Number of overtime hours worked in month t , t = 1, ..., 6

25. Aggregate Planning (Define Objective Function)

26. Aggregate Planning (Define Constraints Linking Variables) Workforce size for each month is based on hiring and layoffs

27. Aggregate Planning (Constraints) Production for each month cannot exceed capacity

28. Aggregate Planning (Constraints) Inventory balance for each month

29. Aggregate Planning (Constraints) Over time for each month