Aggregate Planning Chapter 11. Aggregate Planning Aggregate planning – Intermediate-range capacity...

Aggregate Planning

Chapter 11

Aggregate Planning

• Aggregate planning– Intermediate-range capacity planning that typically covers a

time horizon of 2 to 18 months.– Useful for organizations that experience seasonal, or other

variations in demand.– “Big-picture” approach. Groups together similar products

(services) and deals with them as though they were a single products (service).

– Goal:• Achieve a production plan that will effectively utilize the

organization’s resources to satisfy overall demand

The Planning Sequence

Long-term planning

Intermediate-term planning

Short-term detailed planning

Aggregate Planning

• The main idea behind aggregate planning:

Aggregate planning translates business plans into rough labor schedules and production plans

• Issues to consider for aggregate planning– Production rate: “aggregate units” per worker per unit time– Workforce level: available workforce in terms of hours– Actual production: Production rate x Workforce level– Inventory: Units carried over from previous periods– Costs: production, changing workforce, inventory

What does aggregate planning do?

• Given an aggregate demand forecast, determine production levels, inventory levels, and workforce levels, in order to minimize total relevant costs over the planning horizon

Why do organizations need to do aggregate planning?

• Planning– It takes time to implement plans (e.g. hiring).

• Aggregation– It is not possible to predict with accuracy the timing and volume of

demand for individual items.

• Planning is connected to the budgeting process which is usually done annually on an aggregate (e.g., departmental) level.

• It can help synchronize flow throughout the supply chain; it affects costs, equipment utilization; employment levels; and customer satisfaction

Aggregate Planning Strategies

• Proactive– Alter demand to match supply (capacity)– Among other approaches, we can alter demand by

simply changing the price.• Reactive

– Alter supply (capacity) to match demand– Through capacity planning and aggregate planning

• Mixed– Some of each

Demand Options• Pricing

– Used to shift demand from peak to off-peak periods.• Airline: night/weekend• Restaurants: happy hour/early bird

– Price elasticity is important– Yield (Revenue) Management

• Maximizing revenue by using a variable pricing strategy. Prices are set relative to capacity availability.

• Promotion– Advertising and other forms of promotion– Issue: response rate and response patterns. Less control over timing of demand (may

worsen the problem by bringing demand at the wrong time).

• Back orders (delaying order filling)– Orders are taken in one period and deliveries promised for a later period– Possible loss of sales, increased record keeping, lowered customer service level

• New demand– Very uneven situation– Offer different products/services during off-peak periods to make use of excess capacity:

fastfood stores offer breakfast.

Supply Options• Hire and layoff workers

– May have upper or lower limit– Unions/internal policies may prohibit layoffs– Skill levels, recruiting costs– Associated costs (e.g., recruiting, training, severance-pay, morale)

• Overtime– Maintain skilled workforce; Seasonal peaks– Unions/Overtime may result in lower productivity, poorer quality, more accidents,

increased payroll costs• Part-time workers

– Usually low-to-moderate job skills; Seasonal– Independent-contractors

• Inventories– Produce in one period and sell in another– Costs: holding and carrying cost, money tied up in inventory, insurance, obsolescence,

deterioration, spoilage, breakage etc.• SubcontractingNew Demand

– Less control over output. Quality problems. – Higher costs

MIS 373: Basic Operations Management

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Aggregate Planning Supply Strategies

• Level capacity strategy: – Maintaining a steady rate of regular-time output;

variations in demand are met by using inventories or other options such as overtime, part-time workers, subcontracting, and backorders

• Chase demand strategy: – Matching capacity to demand; the planned output for a

period is set at the expected demand for that period.


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Level strategy

• Capacities are kept constant over the planning horizon– Advantages

• Stable output rates and workforce

– Disadvantages• Greater inventory (or other) costs


13

Chase strategy

• Capacities are adjusted to match demand requirements over the planning horizon– Advantages

• Investment in inventory is low• Labor utilization in high

– Disadvantages• The cost of adjusting output rates and/or workforce levels

Uneven Demand and Two Strategies:

11-14

Demand = Supply Demand < Supply Demand > Supply

Supply (output) level


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Choosing a Strategy

• Important factors:– Company policy

• Constraints on the available options– e.g., discourage layoffs, no subcontracting to protects secrets, union

policies regarding over time

– Flexibility• Chase flexibility may not be present for companies designed for

high steady output (e.g., refineries, auto assembly)

– Cost• Alternatives are evaluated in term of cost (while matching demand

within the constraints).

Trial-and-Error Techniques

• Trial-and-error approaches consist of developingsimple table or graphs that enable planners to visually compare projected demand requirements with existing capacity

• Alternatives are compared based on their total costs

• Disadvantage:– it does not necessarily result in an optimal aggregate plan


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Example #1: Chase demand

• Beginning Inventory: 0 units• Beginning Workforce: 5 workers• Production Rate: 10 units/worker/period• Regular Production Costs: $10/unit• Inventory Costs: $5/unit/period• Hiring Cost: $200/worker• Firing Cost: $100/worker

Period 1 2 3 4 5Demand 40 30 20 50 60


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0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production

End Inventory

# Hired

# Fired

Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker

Beginning Inventory Time Periods

# Hired in the beginning of a period

# Fired in the beginning of a period


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0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

# Hired

# Fired


Recall the chase strategy: Capacities are adjusted to match demand requirements over the planning horizon


20


0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0

# Hired 0

# Fired 1



21


0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0 0

# Hired 0 0

# Fired 1 1



22


0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0 0 0

# Hired 0 0 0

# Fired 1 1 1



23


0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0 0 0 0

# Hired 0 0 0 3

# Fired 1 1 1 0



24


0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0 0 0 0 0

# Hired 0 0 0 3 1

# Fired 1 1 1 0 0



25


0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0 0 0 0 0 0

# Hired 0 0 0 3 1 4

# Fired 1 1 1 0 0 3



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0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0 0 0 0 0 0

# Hired 0 0 0 3 1 4

# Fired 1 1 1 0 0 3


One defining characteristics of the chase strategy is that we don’t have end inventory. All we produced are/were sold. No holding cost


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0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0 0 0 0 0 0

# Hired 0 0 0 3 1 4

# Fired 1 1 1 0 0 3


TC=Production + Holding + Hiring + Firing = 200*10 + 0 + 4*200 + 3*100 = $3,100

Exercise

• Perform aggregate planning using the chase strategy:– Beginning Inventory: 10 units– Beginning Workforce: 5 workers– Production Rate: 10 units/worker/period– Regular Production Costs: $10/unit– Inventory Costs: $10/unit/period– Hiring Cost: $100/worker– Firing Cost: $200/workerPeriod 1 2 3 4 5Demand 50 40 30 30 40

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production

End Inventory

# Hired

# Fired


Beginning InventorySolution

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 40 40 30 30 40 180

End Inventory

# Hired

# Fired


Beginning Inventory

We only produce 40 units because there are 10 units beginning inventory that we can use.So, we can still meet the demand of 50 units.

Solution

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 40 40 30 30 40 180

End Inventory

0

# Hired 0

# Fired 1


Beginning Inventory

The beginning workforce is 5 workers. Since we only produce 40 units in this period and each worker can handle 10 units in a period, we only need 4 works here. We hence fire 1 at the beginning of this period.

Solution

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 40 40 30 30 40 180

End Inventory

0 0

# Hired 0 0

# Fired 1 0


Solution

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 40 40 30 30 40 180

End Inventory

0 0 0

# Hired 0 0 0

# Fired 1 0 1


Solution

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 40 40 30 30 40 180

End Inventory

0 0 0 0

# Hired 0 0 0 0

# Fired 1 0 1 0


Solution

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 40 40 30 30 40 180

End Inventory

0 0 0 0 0 0

# Hired 0 0 0 0 1 1

# Fired 1 0 1 0 0 2


Solution

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 40 40 30 30 40 180

End Inventory

0 0 0 0 0 0

# Hired 0 0 0 0 1 1

# Fired 1 0 1 0 0 2


TC=Production + Holding + Hiring + Firing = 180*10 + 5*10 + 1*100 + 2*200

Solution


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Example #2: Level Capacity

0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production

End Inventory

# Hired

# Fired

Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Holding Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker


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0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

# Hired

# Fired

Total demand=40+30+20+50+60=200Production per period=200/5=40


Recall the level strategy: Capacities are kept constant over the planning horizon. So,


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0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0

# Hired 0

# Fired 1



40


0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0

# Hired 0

# Fired 1


Fire 1 worker in this period because 4 workers are sufficient to produce 40 units in a period.


41


0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10

# Hired 0 0

# Fired 1 0



42


0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30

# Hired 0 0 0

# Fired 1 0 0



43


0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30 20

# Hired 0 0 0 0

# Fired 1 0 0 0



44


0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30 20 0

# Hired 0 0 0 0 0

# Fired 1 0 0 0 0



45


0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30 20 0 60

# Hired 0 0 0 0 0 0

# Fired 1 0 0 0 0 1



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0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30 20 0 60

# Hired 0 0 0 0 0 0

# Fired 1 0 0 0 0 1


One defining characteristics of the level strategy is that we don’t need to adjust capacity (here, labor force), except for the initial period.


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0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30 20 0 60

# Hired 0 0 0 0 0 0

# Fired 1 0 0 0 0 1


TC=Production + Holding + Hiring + Firing

But, how to calculate the holding cost? Average inventory in a period


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0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30 20 0 60

Average Inventory

0 5 20 25 10 60

# Hired 0 0 0 0 0 0

# Fired 1 0 0 0 0 1

We can estimate the holding cost by considering the average inventory in each period.

Regular Production Costs: $10/unit

Inventory Holding Costs: $5/unit/period

Hiring Cost: $200/worker

Firing Cost: $100/worker

=(0+10)/2 =(10+30)/2


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0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30 20 0 60

Average Inventory

0 5 20 25 10 60

# Hired 0 0 0 0 0 0

# Fired 1 0 0 0 0 1

TC= 200*10 + 60*5 + 0*200 + 1*100 = $2,400TC=Production + Holding + Hiring + Firing





=(0+10)/2 =(10+30)/2


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0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30 20 0 60

Average Inventory

0 5 20 25 10 60

# Hired 0 0 0 0 0 0

# Fired 1 0 0 0 0 1

TC= 200*10 + 60*5 + 0*200 + 1*100 = $2,400TC=Production + Holding + Hiring + Firing





=(0+10)/2 =(10+30)/2

• Perform aggregate planning using the level strategy:• Beginning Inventory: 10 units• Beginning Workforce: 5 workers• Production Rate: 10 units/worker/period• Regular Production Costs: $10/unit• Inventory Costs: $10/unit/period• Hiring Cost: $100/worker• Firing Cost: $200/worker

Period 1 2 3 4 5Demand 50 40 30 30 40

Two additional assumptions: 1. Unmet demands in a period can be held and fulfilled in a future period.2. There is no cost associated with unmet demands.

Exercise


Beginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production

End Inventory

Avg. Inventory

# Hired

# Fired

Solution


Beginning Inventory

Total demand=190Total demand=190 – 10 = 180Production per period=180/5=36

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 36 36 36 36 36 180

End Inventory

Avg. Inventory

# Hired

# Fired

Solution


Beginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 36 36 36 36 36 180

End Inventory -4

Avg. Inventory 3

# Hired 0

# Fired 1

By assumption #1, unmet demands in a period can be held and fulfilled in a future period. So, we keep track on the unmet demands, and try to fulfill them in a future period.

Solution


Beginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 36 36 36 36 36 180

End Inventory -4

Avg. Inventory 3

# Hired 0

# Fired 1

Avg. inventory = [10 + (-4)]/2 = 3

Solution


Beginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 36 36 36 36 36 180

End Inventory -4 -8

Avg. Inventory 3 -6

# Hired 0 0

# Fired 1 0

-8 = (-4) + (-4)Unmet demand from period #1 and from period #2

Solution


Beginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 36 36 36 36 36 180

End Inventory -4 -8 -2

Avg. Inventory 3 -6 -5

# Hired 0 0 0

# Fired 1 0 0

Solution


Beginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 36 36 36 36 36 180

End Inventory -4 -8 -2 4

Avg. Inventory 3 -6 -5 1

# Hired 0 0 0 0

# Fired 1 0 0 0

Solution

Beginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 36 36 36 36 36 180

End Inventory -4 -8 -2 4 0

Avg. Inventory 3 -6 -5 1 2

# Hired 0 0 0 0 0 0

# Fired 1 0 0 0 0 1


Solution


Beginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 36 36 36 36 36 180

End Inventory -4 -8 -2 4 0

Avg. Inventory 3 -6 -5 1 2

# Hired 0 0 0 0 0 0

# Fired 1 0 0 0 0 1

By assumption #2, there is no cost associated with unmet demand (i.e., negative inventory has no costs).

TC=Production + Holding + Hiring + Firing = 180*10 + 10*(3+1+2) + 0 + 1*200 = $2,030

Solution

Negative Inventory has no meaning!


10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production 36 36 36 36 36 180

End Inventory

Avg. Inventory

# Hired

# Fired

Another way to solve this problem. Pushing unmet demands to its next period

Solution


10 1 2 3 4 5 Total

Demand 50 40 44 30 30 40 190

Production 36 36 36 36 36 180

End Inventory 0

Avg. Inventory 5

# Hired 0

# Fired 1

Another way to solve this problem. Pushing unmet demands to its next period Instead of -4 end inventory, here we have 0. See that the demand for period #2 increase from 40 to

44.

Solution


10 1 2 3 4 5 Total

Demand 50 40 44 30 38 30 40 190

Production 36 36 36 36 36 180

End Inventory 0 0

Avg. Inventory 5 0

# Hired 0 0

# Fired 1 0

Solution


10 1 2 3 4 5 Total

Demand 50 40 44 30 38 30 32 40 190

Production 36 36 36 36 36 180

End Inventory 0 0 0

Avg. Inventory 5 0 0

# Hired 0 0 0

# Fired 1 0 0

Solution


10 1 2 3 4 5 Total

Demand 50 40 44 30 38 30 32 40 190

Production 36 36 36 36 36 180

End Inventory 0 0 0 4

Avg. Inventory 5 0 0 2

# Hired 0 0 0 0

# Fired 1 0 0 0

Solution


10 1 2 3 4 5 Total

Demand 50 40 44 30 38 30 32 40 190

Production 36 36 36 36 36 180

End Inventory 0 0 0 4 0 4

Avg. Inventory 5 0 0 2 2 9

# Hired 0 0 0 0 0 0

# Fired 1 0 0 0 0 1

Solution


10 1 2 3 4 5 Total

Demand 50 40 44 30 38 30 32 40 190

Production 36 36 36 36 36 180

End Inventory 0 0 0 4 0 4

Avg. Inventory 5 0 0 2 2 9

# Hired 0 0 0 0 0 0

# Fired 1 0 0 0 0 1

TC=Production + Holding + Hiring + Firing = 180*10 + 10*9 + 0 + 1*200 = $2,090

While the TC number is different, this approach seems more intuitive than the previous approach, especially on the parts about inventory.

Solution


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Aggregate Planning in Services

• The aggregate planning process is different for services in the following ways: – Most services cannot be inventoried– Demand for services is difficult to predict– Capacity is also difficult to predict– Service capacity must be provided at the

appropriate place and time– Labor is usually the most constraining resource for

services


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Aggregate Planning in Services

• Hospitals:– allocate funds, staff, and supplies to meet the demands of patients

for their medical services• Restaurants:

– smoothing the service rate, determining workforce size, and managing demand to match a fixed capacity

– Perishable inventory• Airlines:

– complex due to the large number of factors involved (planes, flight & group personnel, multiple routes, airports etc.)

– Capacity decisions must also take into account the percentage of seats to be allocated to various fare classes in order to maximize profit or yield (Revenue Management)

Aggregate Planning Chapter 11. Aggregate Planning Aggregate planning – Intermediate-range capacity...

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