Aggregate planning is intermediate-range production and capacity planning that covers 6 to 18 months. It matches market demand to company resources by developing a strategy to economically meet demand through establishing production rates and workforce levels. Aggregate planning uses composite products to simplify calculations and considers trade-offs between inventory levels and short-term capacity. It can take proactive or reactive approaches to coordinate marketing and production plans.

1. AGGREGATE PLANNING (Ch. 14) Intermediate-range production and capacity planning, usually covering 6 to 18 months. Part of a Hierarchical Planning System Planning Horizon Long range Short range Intermediate range Now 2 months 1 Year

2. Hierarchical Planning System Business Plan Sales Plan Marketing Finance Operations Master Production Schedule (M PS) Aggregate Plan Material Requirement Planning (M RP) Resource Plan

3. Marketing, Financial and Operations Planning Medium to long term functional plans designed to operationalize the long-term strategic (business) plan: Marketing plan: defines the target customers – demand side Financial plan: identifies the source of funds, cash flows, & sets budgets – resource side Operations plan: identifies the desired production, outsourcing, inventory levels & staffing – balancing between demand and resource side

4. Aggregate Production Planning Matches market demand to company resources (sales and resource plans) Plans production 6 months to 18 months in advance Expresses demand, resources, and capacity in general, aggregate terms Develops a strategy for economically meeting demand Establishes a companywide game plan for allocating resources

5. Aggregate Planning Based on composite (representative) products: Simplifies calculations Forecasts for grouped items are more accurate Considers trade-offs between holding inventory & short-term capacity based on workforce

6. Planning Approaches Proactive approach: Coordinate Marketing & Production plans to level demand using advertising & price incentives Reactive approach: Allow volume forecasts based on Marketing plan to drive production planning

7. Strategies for Managing Demand Proactive Strategies Create demand for idle resources advertising, pricing, promotions. Shift demand into other periods backorder (lost case), appointments

8. Basic (Pure) Reactive Strategies Level capacity: Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options. Chase demand: Matching capacity to demand; the planned output for a period is the expected demand for that period.

9. Pure Strategies for Meeting Demand (a) Level Production - inventory, backorder/lost sales Units Time Production Demand (Sales Plan) Production Demand

10. Time Units Demand Production (b) Chase Demand: hire/fire, overtime, part-time, subcontract

11. Evaluating Alternative Plans Level strategy plan Chase strategy plan

12. Level Strategy

13. Chase Strategy

14. Basic Reactive Strategies Level plans: Use a constant workforce & produce similar quantities each time period. Use inventories & backorders to absorb demand peaks & valleys Chase plans: Minimize finished good inventories by trying to keep pace with demand fluctuations

15. Hybrid Reactive Strategies Use a combination of options: Build-up inventory ahead of rising demand & use backorders to level extreme peaks Layoff or furlough workers during lulls Subcontract production or hire temporary workers to cover short-term peaks Reassign workers to preventive maintenance during lulls

16. Mixed Strategies for Meeting Demand Overtime/Undertime Hiring/Firing Inventory/Backordering Subcontracting Out/In Part-time/Full-Time

17. Inputs and Outputs to Aggregate Production Planning Aggregate Production Planning Demand Forecasts Company Policies Financial Constraints Strategic Objectives Capacity Constraints Size of Workforce Production per month (in units or $) Inventory Levels Units or dollars subcontracted, back ordered, or lost

18. Demand-based Options Finished goods inventories: Anticipate demand Back orders & lost sales: Delay delivery or allow demand to go unfilled Shift demand to off-peak times: Proactive marketing

19. Capacity-based Options Overtime: Short-term option Pay workers a premium to work longer hours Undertime: Short-term option Slow the production rate or send workers home early (lowers labor productivity, but doesn’t tie up capital in finished good inventories) Subcontracting: Medium-term option Hire & fire workers: Long-term option Change the size of the workforce

20. Developing Aggregate Plan Choose the basic strategy: Level, chase, or hybrid Determine the production rate: Level plan with back orders: rate = average demand over the planning horizon Level plan without back orders: rate is set to meet all demand on time Chase plan: assign regular production, amount of overtime & subcontracted work to meet demand

21. Developing the Aggregate Plan Calculate the size of the workforce needed Calculate period-to-period inventory levels, shortages, expected hiring & firings, and overtime Calculate period-by-period costs, then sum for total costs of the plan Evaluate the plan’s impact on customer service and human resource issues

22. Summary of Planning Techniques

23. Service Planning Issues Intangible products can’t be inventoried Possible approaches: Try to proactively shift demand away from peaks Use overtime or subcontracting to handle peaks Allow lost sales

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

25. Master Scheduling Process Master Scheduling Beginning inventory Forecast Customer orders Inputs Outputs Projected inventory Master production schedule Uncommitted inventory