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Aggregate Planning

Aggregate planning is an intermediate planning method used to determine the necessary resource capacity a firm will need in order to meet its expected demand.

Process planning

Long range Intermediate Forecasting & demand range management Manufacturing


Master scheduling

Strategic capacity planning

Sales and operations (aggregate) planning Sales plan Aggregate operations plan

Services

Material requirements planning Weekly workforce and customer scheduling Daily workforce and customer scheduling

Short range

Order scheduling

Sales and Operations Planning Activities


Long-range planning

Greater than one year planning horizon Usually performed in annual increments

Medium-range planning

Six to eighteen months Usually with monthly or quarterly increments

Short-range planning

One day to less than six months Usually with weekly increments

Goal of Aggregate Planning


To develop a realistic production plan on an aggregate level that will satisfy organizational goals and customer demand needs at the lowest total cost.

The Aggregate Operations Plan


Main purpose: Specify the optimal combination of production rate (units completed per unit of time) workforce level (number of workers) inventory on hand (inventory carried from previous period) Product group or broad category (Aggregation) This planning is done over an intermediaterange planning period of 6 to18 months

Capacity and Demand


If capacity and demand are nearly equal emphasis should be placed on meeting demand as efficiently as possible. If capacity is greater than demand the firm might chose promotion and advertising in order to increase demand. If capacity is less than demand the firm might consider subcontracting a portion of the work load.

Balancing Aggregate Demand and Aggregate Production Capacity


10000

Suppose the figure to the right represents forecast demand in units Now suppose this lower figure represents the aggregate capacity of the company to meet demand What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up

10000 8000 8000 6000 4000 5500 4500 7000 6000

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0 Jan Feb Mar 9000 8000 6000 Apr May Jun

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Required Inputs to the Production Planning System


Competitors behavior External capacity Raw material availability Market demand Economic conditions

External to firm

Planning for production

Current physical capacity

Current workforce

Inventory levels

Activities required for production

Internal to firm

Inputs to Aggregate Planning


Determine demand for each period. Determine capacities for each period. Determine unit cost based on all relevant sources. Develop alternative plans and calculate the cost for each. Chose the best overall plan based on company objectives and cost.

Available Strategies for Meeting Demand


Chase demand Level production Subcontracting Overtime/Undertime Employing temporary workers Backordering

Principles of the Chase Method


The chase method helps firms match production and demand by hiring and firing workers as necessary to control output

Principles of a Level Production Method


The level method allows for a constant rate of production and uses inventory levels to absorb fluctuations in demand.

Graph of Level vs. Chase Strategy

Chase Demand Strategy


Cost of strategy hiring and firing workers This strategy would not be feasible for industries which require highly skilled labor or where competition for labor is fierce. This strategy would be cost effective during periods of high unemployment or when lowskilled labor is acceptable.

Level Production Strategy


Cost of strategy holding items in inventory. Tends to be the preferred strategy of many organizations, including labor unions.

Advantages of Chase Strategy


Reduced inventory costs. High levels of worker utilization.

Disadvantages of Chase Method


Cost of fluctuating workforce levels. Potential damage to employee morale.

Advantage of Level Strategy


Worker levels and production output are stable.

Disadvantages of Level Strategy


High inventory costs. Increased labor costs.

Summary
Aggregate production planning is a vital tool to aid firms in balancing supply and demand. All possible strategies should be considered initially and then eliminated based on cost and organizational policy. While pure strategies such as chase demand and level production may work for some firms, most tend to use a mixed strategy.

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