AGGREGATE PLANNING

(SCM)

Bijay Lal Pradhan, Ph.D.

DEFINITION

What is Aggregate Planning?

WHAT IS AGGREGATE PLAN

The aggregate production plan (APP) is a long-range materials

plan. Since capacity expansion involves the construction of a new

facility and major equipment purchases, the aggregate production

plan’s capacity is usually considered fixed during the planning horizon.

The aggregate production plan sets the aggregate output rate,

workforce size, utilization and inventory and/or backlog levels for an

entire facility.

COCA COLA COMPANY

Coca-Cola produces nearly 55% of the beverages consumed in the

Nepal.

Matches fluctuating demand by brand to specific plant, labor, and

inventory capacity

High facility utilization requires –meticulous cleaning between

batches –effective maintenance –efficient employees –efficient facility

scheduling

AG G R E G AT E P RO D U C T I O N P L A N N I N G

R E Q U I R E S

Logical overall unit for measuring sales and outputs

Forecast of demand for intermediate planning period in these

aggregate units

Methods for determining costs

Model that combines forecasts, and costs so that planning can be

made

PLANNING

Setting goals & objectives – Example: Meet demand within the

limits of available resources at the least cost

Determining steps to achieve goals – Example: Hire more workers

Setting start & completion dates – Example: Begin hiring in Jan.;

finish, Mar.

Assigning responsibility

AGGREGATE PLANNING GOAL

Meet Demand

Use capacity efficiently

Meet inventory policy

Minimize cost

• Labor

• Inventory

• Plant and equipment

• subcontract

PLANNING STRATEGY

The different strategy will be used according to the tradeoff of

workforce size and type, working hours, inventory and backlogs

associating the cost

Chase Strategy

Level Strategy

Mixed Strategy

CHASE STRATEGY

The utility of work-force increases or decreases with an organization’s

work load. During “peak” period, organization requires more and more

work force. However, the large pool of work force remains underutilized

in “slack” period. In order to keep tight control over expenses,

organizations should employ matching number of workers in “peak” as

well as in “slack” periods. This implies that large work force should be

employed (“hired”) in peak period and, excess work force should be laid-

off (“fired”) in “slack period”.

S T A B L E W O R K F O R C E – VA R I A B L E W O R K

H O U R S

If frequent hiring/firing is not feasible, then organizations will

have a constant pool of work force of adequate size. In “slack

periods”, some of the work force will remain under-utilized.

However, some portion of the work force will be engaged in over

time as well during “peak” period. This strategy is far better than

frequent hiring and firing of the work force.

LEVEL STRATEGY

Maintain a stable workforce working at a constant output rate.

Shortages and surpluses are absorbed by fluctuating inventory levels,

order backlogs. Remains stable working hours, but may increase

inventory costs.

Produce same amount of products every day

Keep work force level constant

Vary demand options

MIXED STRATEGY

Combines 2 or more aggregate scheduling options

uses alternatives mixing inventory, back order, capacity change,

work force change, etc.

SUBCONTRACTING

If some portion of the work order is technically complex and,

requires special expertise. Also, this work is not of repetitive nature,

then organization can award the work to some 3rd party

(subcontracting

AGGREGATE P L ANNING M ETHODS

Graphical & charting techniques

• Popular & easy-to-understand

• Trial & error approach

Mathematical approaches

• Transportation method

• Linear decision rule

• Management coefficients model

• Linear Programming

• Simulation

GRAPHICAL APPROACH

Develop alternative plans, and examine their total costs

Forecast the demand for each period

Determine the capacity for regular time, overtime, and subcontracting, for

each period

Determine the labor costs, hiring and firing costs, and inventory holding costs

Consider company policies which may apply to the workers or to stock levels

Develop alternative plans, and examine their total costs

Copyright 2006 John Wiley & Sons,

Inc. 13-17

CHASE STRATEGY Demand

Un

it

s

Time

Production

Copyright 2006 John Wiley & Sons,

Inc. 13-18

LEVEL STRATEGY

Demand

Un

its

Time

Production

Copyright 2006 John Wiley & Sons,

Inc. 13-19

PURE STRATEGIES

Beginning inventory = 200

Maintain at least = 200

Each Period is 2 months

Hours Required per unit = 20

Employee hours per period = 352

Starting Employment = 30

Example: Bi month 1 2 3 4 5 6

Demand 400 380 470 530 610 500

Regulatory wage =$ 15 per hour

Inventory cost = $ 10 per period

Hire cost = $ 400

Fire cost = $ 500

Copyright 2006 John Wiley & Sons,

Inc. 13-20

CHASE STRATEGY

PERIOD 1 2 3 4 5 6

DEMAND 400 380 470 530 610 500

EMPL. 30 23 22 27 30 35 28

HIRE 5 3 5

FIRE 7 1 7

PRODUCTION 400 380 470 530 610 500

E. INV. 200 200 200 200 200 200 200

COST OF CHASE STRATEGY

REG. TIME $121,440 $116,160 $142,560 $158,400 $184,800 $147,840

INV. CARRY $2,000 $2,000 $2,000 $2,000 $2,000 $2,000

HIRING

COST $0 $0 $2,000 $1,200 $2,000 $0

FIRING

COST $3,500 $500 $0 $0 $0 $3,500

TOTAL

COST $126,940 $118,660 $146,560 $161,600 $188,800 $153,340

Total cost of chase strategy = $ 8,95.900

Copyright 2006 John Wiley & Sons,

Inc. 13-22

LEVEL STRATEGY

= 482

(400+380+470+530+610+500)

6

PLAN 2 LEVEL STRATEGY

PERIOD 1 2 3 4 5 6

DEMAND 400 380 470 530 610 500

EMPL. 30 28 28 28 28 28 28

FIRE 2

PRODUCTION 493 493 493 493 493 493

E. INV. 200 293 406 428 391 274 267

LEVEL STRATEGY

REG. TIME $147,840 $147,840 $147,840 $147,840 $147,840 $147,840

INV. CARRY $2,928 $4,056 $4,284 $3,912 $2,740 $2,668

HIRING COST

FIRING COST $1,000 $0 $0 $0 $0 $0

TOTAL COST $151,768 $151,896 $152,124 $151,752 $150,580 $150,508

Total cost of level strategy = $ 9,08,628

MIXED STRATEGY

PERIOD 1 2 3 4 5 6

DEMAND 400 380 470 530 610 500

EMPL. 30 24 24 24 32 32 32

HIRE 8

FIRE 6

PRODUCTION 422 422 422 563 563 563

E. INV. 200 222 265 217 250 204 267

MIXED STRATEGY

REG. TIME $126,720 $126,720 $126,720 $168,960 $168,960 $168,960

INV. CARRY $2,224 $2,648 $2,172 $2,504 $2,036 $2,668

HIRING COST $0 $0 $0 $3,200 $0 $0

FIRING COST $3,000 $0 $0 $0 $0 $0

TOTAL COST $131,944 $129,368 $128,892 $174,664 $170,996 $171,628

Total cost of mixed strategy = $ 9,07,492

MIXED STRATEGY

Combination of Level Production and Chase Demand strategies

Examples of management policies • no more than x% of the workforce can be laid

off in one quarter

• inventory levels cannot exceed x dollars

Many industries may simply shut down manufacturing during the low demand season and schedule employee vacations during that time