Aggregate planning involves matching supply and demand over the medium term of 12 months. It determines output levels and appropriate resource mixes. The key goals are to minimize costs associated with production rate changes, inventory holding, and backorders. Common strategies include maintaining a level output rate or chasing demand period to period. Linear programming and simulation techniques can be used to evaluate alternative aggregate plans.

1. Created by Dianne H. Rivera
Email: spunkyneadi62@yahoo.com.ph
Aggregate Planning

2. Definition:
Aggregate planning is concerned with matching supply
and demand of output over the medium time range, up
to approximately 12 months into the future.
The term “aggregate” implies that the planning is done
for a single overall measure of output.
It determines not only the output levels planned but
also the appropriate resource input mix to be used.
Combines appropriate resources into general terms.

3. Role of Aggregate Planning
Integral to part of the business planning
process
Supports the strategic plan
Also known as the production plan
Identifies resources required for operations for
the next 6 -18 months
Details the aggregate production rate and size
of work force required

4. © 2008 Prentice Hall, Inc. 13 – 11
The Planning Process
Figure 13.1
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

5. Overview of Planning Levels
•Short-range plans (Detailed plans)
Machine loading
Job assignments
Job sequencing
Order quantities
Work Schedule
•Intermediate plans (General levels)
General levels of:
Employment
Output
Finished-goods inventories
Subcontracting
Backorders
•Long-range plans
Long term capacity
Location / layout
Product Design

6. Aggregate planning has certain pre-requisite
inputs which are inevitable.
Information about the resources and the facilities available.
Demand forecast for the period for which the planning has
to be done.
Cost of various alternatives and resources. This includes
cost of holding inventory, ordering cost, cost of production
through various production alternatives like subcontracting,
backordering and overtime.
Organizational policies regarding the usage of above
alternatives.
They include:

7. Input Output
Resources
-Workforce/production rates
-Facilities and equipment
Total cost of plan
Cost
-Inventory carrying cost
-Backorders
-Hiring/firing
-Overtime
-Inventory changes
-Subcontracting
Projected levels of:
Inventory
Output
Employment
Subcontracting
Backordering
Demand forecast
Policies on workforce changes
Subcontracting
Overtime
Inventory levels/changes
Backorders
Aggregate Planning Inputs and Outputs

8. 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

9. Aggregate Planning

10. Aggregate Operations Plan

11. Aggregate Operations Plan
Is concerned with setting production rates by product group or other broad
categories for the intermediate term (2 to 18 months).
The main purpose of the aggregate operations plan is to specify the
optimal combination of production rate, work-force level and inventory on
hand.
Production rate – refers to the number of units completed per unit of time.
Workforce level – is the number of workers needed for production.
Inventory on hand – is unused inventory carried over from the previous
period.

12. Demand and Capacity Options
Aggregate planning strategies can be described as:
Proactive – it involves demand options. It attempts to
alter demand so that it matches capacity.
Reactive – it involves capacity options. It attempts to alter
capacity so that it matches demand.
Mixed – involves an element of each of the above
approaches

13. Demand Options
Options for situations in which demand needs to be
increased in order to match capacity include:
Pricing – Differential pricing is often used to reduce peak
demand or to build up demand in off-peak periods.
Advertising and Promotion – Advertising, direct marketing,
and other forms of promotion are used to shift demand.
Backlog and Reservations – In some cases, demand is
influenced by asking customers to wait for their orders
(backlog) or by reserving capacity in advance (reservations).
Development of complementary products – Firms with
highly seasonal demands may try to develop products that
have counter cyclic seasonal trends.

14. Capacity Options
Options which can be used to increase or decrease
capacity to match current demand include:
Hiring and Layoff of employees – The use of this variable not
only affect costs but also labor relations, productivity, and worker
morale.
Using overtime and undertime – Overtime is sometimes used
for short or medium-range labor adjustments in lieu of hiring and
layoffs, especially if the change in demand is considered
temporary. Undertime refers to planned utilization of the
workforce rather than layoffs or shortened workweek.
Using part-time or temporary labor – In some cases, it is
possible to hire part-time or temporary employees to meet peak
or seasonal demand.

15. Capacity Options
Carrying inventory – In manufacturing companies, inventory can
be used as a buffer between supply and demand. Inventories for
later use can be built up during periods of slack demand.
Subcontracting – This option, which involves the use of other
firms, is sometimes an effective way to increase or decrease
supply. The subcontractor may supply the entire product or only
some of the components.
Making Cooperative Arrangements – These arrangements are
very similar to subcontracting in that other sources of supply are
used.

16. Strategies for Meeting Uneven Demand
Aggregate planners might adopt a number of
strategies. Some of the more prominent ones
are the following:
Maintain a level of workforce
Maintain a steady output rate
Match demand period by period
Use combination of decision variables

17. Basic Strategies for Aggregate
Planning
1.Level capacity strategy:
Maintaining a steady rate of regular-time output while
meeting variations in demand by a combination of options.
 Advantages
Stable output rates
and workforce
 Disadvantages
Greater inventory
costs
Increased overtime
and idle time
Resource utilizations
vary over time

18. Copyright 2006 John Wiley & Sons, Inc. 13-7
Level Production
Demand
Units
Time
Production

19. 2. Chase demand strategy:
Matching capacity to demand; the planned output for a
period is set at the expected demand for that period.
 Advantages
 Investment in inventory is
low
 Labor utilization in high
 Disadvantages
 The cost of adjusting
output rates and/or
workforce levels

20. Copyright 2006 John Wiley & Sons, Inc. 13-8
Chase Demand
Demand
Units
Time
Production

21. Comparison of Chase and Level Strategy
Chase Demand Level Capacity
Level of labor skill required Low High
Job discretion Low High
Compensation rate Low High
Working conditions Sweatshop Pleasant
Training required per
employee
Low High
Labor turnover High Low
Hire-layoff costs Low High
Amount of supervision
required
High Low
Type of budgeting and
forecasting
Short-run Long - run

22. Relevant Costs
Four costs are relevant to aggregate
planning. These relate to production costs as
well as the costs to hold inventory.
Basic production costs.
These are the production costs incurred in producing a given
product type in a given period.
Costs associated with changes in the production rate.
Typical costs in this category are those involved in hiring, training,
and layoff personnel.
Inventory holding costs.
A major component is the cost of capital tied up to inventory.
Backordering costs.
Usually these are hard to measure and include costs of expediting,
loss of customer goodwill, and loss of sales revenues resulting from
backordering.

23. Developing the Aggregate Plan
Step 1- Choose strategy:
level, chase, or Hybrid (combination)
Step 2- Determine the aggregate production rate
Step 3- Calculate the size of the workforce
Step 4- Test the plan as follows:
Calculate Inventory, expected hiring/firing, overtime needs
Calculate total cost of plan
Step 5- Evaluate performance:
cost, service, human resources, and operations

24. Key Consideration for Aggregate Planning
The Aggregate plan must balance several perspectives
Costs are important but so are:
Customer service
Operational effectiveness
Workforce morale
A successful AP considers each of these factors

25. A Cut-and-Try Approach
Linear Programming
Simulation Approach
Techniques for Aggregate Planning

26. A general procedure for aggregate planning
consists of the following steps:
1.Determine demand for each period
2.Determine capacities for each period
3.Identify policies that are pertinent
4.Determine units costs
5.Develop alternative plans and costs
6.Select the best plan that satisfies objectives.
Otherwise return to step 5.

27. Numerous techniques are available to help
with the task of aggregate planning.
Generally, they fall into three categories:
1.A Cut-and-Try Approach
Involves costing out various productions planning alternatives and selecting
the one that is best. Elaborate spreadsheets are developed to facilitate the
decision process. Sophisticated approaches involving linear programming
and simulation are often incorporated into these spreadsheets.
2.Linear Programming Approach
This makes it possible to evaluate an infinite number of production strategies and
find the minimum-cost alternative. It provides a powerful methodology for not only
solving the problem but evaluating other solutions that might be suggested,
relative to the best one.
3.Simulation Approach
This technique can be used to rapidly evaluate a large number of different
decision rules or production choices.

28. Summary of Planning Techniques
Technique Solution Characteristics
Graphical/charting Heuristic (trial
and error)
Intuitively appealing, easy to
understand; solution not
necessarily optimal.
Linear
programming
Optimizing Computerized; linear assumptions
not always valid.
Simulation Heuristic (trial
and error)
Computerized models can be
examined under a variety of
conditions.

29. Aggregate Planning in Services
Services occur when they are rendered.
Demand for service can be difficult to predict.
Capacity availability can be difficult to predict
Labor flexibility can be an advantage in services.
Most services can’t be inventoried
Service capacity must be provided at the appropriate place
and time.

30. Aggregate Yield Management
It is defined as the process of allocating the right type of
capacity, to the right type of customer, at the right price and time
to maximize revenue.
It can be a powerful approach to make demand more
predictable, which is important to aggregate planning.
It is the process of understanding, anticipating and
influencing consumer behaviour in order to
maximize yield or profits from a fixed, perishable resource (such
as airline seats or hotel room reservations).
The application of pricing strategies to allocate capacity among
various categories of demand.

31. Aggregate Yield Management
From an operational perspective, yield management is
most effective when:
In a hotel setting:
Demand can be segmented by customers
Fixed costs are high and variable costs are low
Products can be sold in advance

32. Disaggregating the Aggregate
Plan
This means breaking down the aggregate plan into
specific product requirements in order to determine
labor requirements, materials, and inventory
requirements.
The result of disaggregating the aggregate plan is a
master budget.

33. Disaggregating the Aggregate Plan
Aggregate
Planning
Disaggregation
Master
Schedule

34. Master Schedule
It shows the planned output for individual products rather than
the entire product group, along timing of production.
It is the result of disaggregating the aggregate plan
It contains important information for marketing as well as for
production.
Master Production Schedule (MPS) indicates the quantity and
timing of planned production, taking into account desired
delivery quantity and timing as well s on-hand inventory

35. Master Scheduler
Evaluates impact of new orders
Provides delivery dates for orders
Deals with problems
Production delay
Revising master schedule
Insufficient capacity

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

37. Projected on-hand Inventory
Projected on-hand
inventory
Inventory from
previous week
Current week’s
requirements
-
=

38. Available-to-Promise (ATP)
•Quantity of items that can be promised to the
customer
Difference between planned production and
customer orders already received

39. References:
 Operations Management,
5th Edition
Roberta Russell &
Bernard W. Taylor, III
Copyright 2006 John
Wiley & Sons, Inc.
 Operations Management
R. Dan Reid & Nada R.
Sanders
4th Edition © Wiley 2010
 Operations Management
9th Edition, 2007
William J. Stevenson
 Chase, R.B.,Jacobs, R.,
Aquilano, N.J.
Operations Management
for Competitive
Advantages with Global
Cases, 11th Edition, 2007
 Schoeder, R.G.,
Operations Management,
Contemporary Concepts
and Cases. 3rd Edition,
2007