Aggregate Planning Created by Dianne H. Rivera Email: email@example.com
Definition:Aggregate planning is concerned with matching supplyand demand of output over the medium time range, upto approximately 12 months into the future.The term “aggregate” implies that the planning is donefor a single overall measure of output.It determines not only the output levels planned butalso the appropriate resource input mix to be used.Combines appropriate resources into general terms.
Role of Aggregate PlanningIntegral to part of the business planningprocessSupports the strategic planAlso known as the production planIdentifies resources required for operations forthe next 6 -18 monthsDetails the aggregate production rate and sizeof work force required
Aggregate planning has certain pre-requisiteinputs which are inevitable.They include: 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.
Aggregate Planning Inputs and Outputs Input Output Resources Total cost of plan -Workforce/production rates -Facilities and equipment Cost Projected levels of: -Inventory carrying cost Inventory -Backorders Output -Hiring/firing Employment -Overtime Subcontracting -Inventory changes Backordering -Subcontracting Demand forecast Policies on workforce changes Subcontracting Overtime Inventory levels/changes Backorders
Economic, Corporate competitive, Aggregate strategies and political demandand policies conditions forecasts Establishes operations Business Plan and capacity strategies Establishes Aggregate plan operations capacity Master schedule Establishes schedules for specific products Planning Sequence
Aggregate Operations PlanIs concerned with setting production rates by product group or other broadcategories for the intermediate term (2 to 18 months).The main purpose of the aggregate operations plan is to specify theoptimal combination of production rate, work-force level and inventory onhand. 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 previousperiod.
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
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 peakdemand 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 isinfluenced by asking customers to wait for their orders(backlog) or by reserving capacity in advance (reservations).Development of complementary products – Firms withhighly seasonal demands may try to develop products thathave counter cyclic seasonal trends.
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 notonly affect costs but also labor relations, productivity, and workermorale.Using overtime and undertime – Overtime is sometimes usedfor short or medium-range labor adjustments in lieu of hiring andlayoffs, especially if the change in demand is consideredtemporary. Undertime refers to planned utilization of theworkforce rather than layoffs or shortened workweek.Using part-time or temporary labor – In some cases, it ispossible to hire part-time or temporary employees to meet peakor seasonal demand.
Capacity OptionsCarrying inventory – In manufacturing companies, inventory canbe used as a buffer between supply and demand. Inventories forlater use can be built up during periods of slack demand.Subcontracting – This option, which involves the use of otherfirms, is sometimes an effective way to increase or decreasesupply. The subcontractor may supply the entire product or onlysome of the components.Making Cooperative Arrangements – These arrangements arevery similar to subcontracting in that other sources of supply areused.
Strategies for Meeting Uneven DemandAggregate planners might adopt a number ofstrategies. Some of the more prominent onesare the following:Maintain a level of workforceMaintain a steady output rateMatch demand period by periodUse combination of decision variables
Basic Strategies for AggregatePlanning1.Level capacity strategy:Maintaining a steady rate of regular-time output whilemeeting variations in demand by a combination of options. Advantages Disadvantages Stable output rates Greater inventory and workforce costs Increased overtime and idle time Resource utilizations vary over time
Level Production Demand Production Units TimeCopyright 2006 John Wiley & Sons, Inc. 13-7
2. Chase demand strategy:Matching capacity to demand; the planned output for aperiod is set at the expected demand for that period. Advantages Disadvantages Investment in inventory is The cost of adjusting low output rates and/or Labor utilization in high workforce levels
Chase Demand Demand Production Units TimeCopyright 2006 John Wiley & Sons, Inc. 13-8
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 Low High employee Labor turnover High Low Hire-layoff costs Low High Amount of supervision High Low required Type of budgeting and Short-run Long - run forecasting
Relevant Costs Four costs are relevant to aggregateplanning. These relate to production costs aswell as the costs to hold inventory.Basic production costs. These are the production costs incurred in producing a givenproduct 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 frombackordering.
Developing the Aggregate PlanStep 1- Choose strategy: level, chase, or Hybrid (combination)Step 2- Determine the aggregate production rateStep 3- Calculate the size of the workforceStep 4- Test the plan as follows: Calculate Inventory, expected hiring/firing, overtime needs Calculate total cost of planStep 5- Evaluate performance: cost, service, human resources, and operations
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
Techniques for Aggregate PlanningA Cut-and-Try ApproachLinear ProgrammingSimulation Approach
A general procedure for aggregate planningconsists 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.
Numerous techniques are available to helpwith the task of aggregate planning.Generally, they fall into three categories:1.A Cut-and-Try ApproachInvolves costing out various productions planning alternatives and selectingthe one that is best. Elaborate spreadsheets are developed to facilitate thedecision process. Sophisticated approaches involving linear programmingand simulation are often incorporated into these spreadsheets.2.Linear Programming ApproachThis makes it possible to evaluate an infinite number of production strategies andfind the minimum-cost alternative. It provides a powerful methodology for not onlysolving the problem but evaluating other solutions that might be suggested,relative to the best one.3.Simulation ApproachThis technique can be used to rapidly evaluate a large number of differentdecision rules or production choices.
Summary of Planning TechniquesTechnique Solution CharacteristicsGraphical/charting Heuristic (trial Intuitively appealing, easy to and error) understand; solution not necessarily optimal.Linear Optimizing Computerized; linear assumptionsprogramming not always valid.Simulation Heuristic (trial Computerized models can be and error) examined under a variety of conditions.
Aggregate Planning in ServicesServices occur when they are rendered.Demand for service can be difficult to predict.Capacity availability can be difficult to predictLabor flexibility can be an advantage in services.Most services can’t be inventoriedService capacity must be provided at the appropriate placeand time.
Aggregate Yield ManagementIt is defined as the process of allocating the right type ofcapacity, to the right type of customer, at the right price and timeto maximize revenue.It can be a powerful approach to make demand morepredictable, which is important to aggregate planning.It is the process of understanding, anticipating andinfluencing consumer behaviour in order tomaximize yield or profits from a fixed, perishable resource (suchas airline seats or hotel room reservations).The application of pricing strategies to allocate capacity amongvarious categories of demand.
Aggregate Yield ManagementFrom an operational perspective, yield management ismost effective when:In a hotel setting:Demand can be segmented by customersFixed costs are high and variable costs are lowProducts can be sold in advance
Disaggregating the Aggregate PlanThis means breaking down the aggregate plan intospecific product requirements in order to determinelabor requirements, materials, and inventoryrequirements.The result of disaggregating the aggregate plan is amaster budget.
Disaggregating the Aggregate Plan Aggregate Planning Disaggregation Master Schedule
Master ScheduleIt shows the planned output for individual products rather thanthe entire product group, along timing of production.It is the result of disaggregating the aggregate planIt contains important information for marketing as well as forproduction.Master Production Schedule (MPS) indicates the quantity andtiming of planned production, taking into account desireddelivery quantity and timing as well s on-hand inventory
Master SchedulerEvaluates impact of new ordersProvides delivery dates for ordersDeals with problems Production delay Revising master schedule Insufficient capacity
Master Scheduling Process Inputs OutputsBeginning inventory Projected inventory MasterForecast Scheduling Master production scheduleCustomer orders Uncommitted inventory
Projected on-hand InventoryProjected on-hand Inventory from Current week’s inventory = previous week - requirements
Available-to-Promise (ATP)•Quantity of items that can be promised to thecustomerDifference between planned production andcustomer orders already received