Operations Management

Chapter 8
Aggregate Planning

Outline

The planning process

The nature of aggregate planning
Aggregate planning strategies
Methods for aggregate planning
Aggregate planning in services
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Learning Objectives
When you complete this chapter, you should be
able to :
Identify or Define:
Aggregate planning
Tactical scheduling
Graphic technique for aggregate planning
Mathematical techniques for aggregate
planning
Describe or Explain:
How to do aggregate planning
How service firms develop aggregate
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plans

Aggregate Planning Requires

Logical overall unit for measuring sales
and outputs
Forecast of demand for intermediate
planning period in these aggregate units
Method for determining costs
Model that combines forecasts and
costs so that planning decisions can be
made
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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
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Planning Tasks and Responsibilities

Planning Horizons
Short-range plans
Job assignments
Ordering
Job scheduling
Dispatching

Responsible:
Operations
managers,
supervisors,
foremen

Today

3 Months

Responsible:
Operations
managers

Intermediate-range plans
Sales planning
Production planning and
budgeting
Setting employment, inventory,
subcontracting levels
Analyzing operating plans

1 year

Responsible: Top
executives

Long-range plans
R&D
New product plans
Capital expenses
Facility location, expansion

5 years

Planning Horizon
7

Relationships of the Aggregate

Plan
Marketplace
and Demand

Demand
Forecasts,
orders

Product
Decisions

Process
Planning & Capacity
Decisions
Aggregate
Plan for
Production

Master
Production
Schedule, and MRP systems

Research and
Technology

Work Force

Raw Materials
Available
Inventory On
Hand
External
Capacity
Subcontractors

Detailed Work
Schedules
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Whats Needed for Aggregate Planning

A mathematically based aggregate planning model
requires considerable:
time

problem definition
model development
model verification
model application

expertise

people who understand the problem

people who understand both the modeling
process, and the specific model

money

money to pay for all of the above

often requires funding for several people for
several months!

Aggregate Planning
Provides the quantity and timing of production
for intermediate future
Usually 3 to 18 months into future

Combines (aggregates) production

Often expressed in common units
Example: Hours, dollars, equivalents

Involves capacity and demand variables

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Aggregate Planning Goals

Meet demand
Use capacity efficiently
Meet inventory policy
Minimize cost

Labor
Inventory
Plant & equipment
Subcontract

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Aggregate Planning Strategies

Pure Strategies
Capacity Options change capacity:
changing inventory levels
varying work force size by hiring or layoffs
varying production capacity through overtime or
idle time
subcontracting
using part-time workers

Demand Options change demand:

influencing demand
backordering during high demand periods
Counter seasonal product mixing
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Aggregate Scheduling Options Advantages and Disadvantages

Option

Advantage

Disadvantage

Some
Comments

Changing
inventory levels

Changes in
human resources
are gradual, not
abrupt
production
changes

Inventory
holding costs;
Shortages may
result in lost
sales

Applies mainly
to production,
not service,
operations

Varying
workforce size
by hiring or
layoffs

Avoids use of
other alternatives

Hiring, layoff,
and training
costs

Used where size

of labor pool is
large

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Advantages/Disadvantages - Continued
Option

Advantage

Disadvantage

Some
Comments

Varying

Matches seasonal

Overtime

Allows

production rates

fluctuations

premiums, tired

flexibility within

through overtime

without

workers, may not

the aggregate

or idle time

hiring/training

meet demand

plan

Permits

Loss of quality

Applies mainly

flexibility and

control; reduced

in production

smoothing of the

profits; loss of

settings

firm's output

future business

costs
Subcontracting

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Advantages/Disadvantages - Continued
Option

Advantage

Disadvantage

Some
Comments

Using part-time
workers

Less costly and

more flexible
than full-time
workers

Good for
unskilled jobs in
areas with large
temporary labor
pools

Influencing
demand

Tries to use
excess capacity.
Discounts draw
new customers.

High
turnover/training
costs; quality
suffers;
scheduling
difficult
Uncertainty in
demand. Hard to
match demand to
supply exactly.

Creates
marketing ideas.
Overbooking
used in some
businesses.

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Advantage/Disadvantage - Continued
Option

Advantage

Disadvantage

Some
Comments

Back ordering
during highdemand periods

May avoid
Customer must
overtime. Keeps be willing to
capacity constant wait, but
goodwill is lost.

Many companies
backorder.

Counterseasonal
products and
service mixing

Fully utilizes
May require
resources; allows skills or
stable workforce. equipment
outside a firm's
areas of
expertise.

Risky finding
products or
services with
opposite demand
patterns.

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The Extremes
Level
Strategy

Chase
Strategy

Production rate
is constant

Production
equals
demand

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Aggregate Planning Strategies

Mixed strategy
Combines 2 or more aggregate scheduling
options

Level scheduling strategy

Produce same amount every day

Keep work force level constant
Vary non-work force capacity or demand options
Often results in lowest production costs

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Aggregate Planning Methods

Graphical & charting techniques
Popular & easy-to-understand
Trial & error approach

Mathematical approaches

Transportation method
Linear decision rule
Management coefficients model
Simulation
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The Graphical Approach to

Aggregate Planning
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
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Forecast and Average Forecast

Demand
Production rate per working day

70
60
50

Forecast
Demand

Level production using

average monthly forecast
demand

40
30
20
10
0
Jan

Feb

Mar

Apr

May

Jun

22

18

21

21

22

20
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Cumulative Demand Graph for Plan 1

Cumulative Demand (Units)

7,000
6,000

Reduction of
inventory

Cumulative level

5,000 production using

4,000 average monthly

3,000
2,000
1,000

forecast
requirements

Cumulative forecast
requirements

Excess inventory

Jan Feb Mar Apr May Jun

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Comparison of Three Major Aggregate

Planning Methods
Techniques

Approaches

Aspects

Charting/graphi Trial and error

cal methods

Simple to understand, easy to

use. Many solutions; one
chosen may not be optimal

Transportation
method

LP software available;permits
sensitivity analysis and
constraints. Linear function
may not be realistic

Management
coefficient
model

Optimization

Heuristic

Simple, easy to implement;

tries to mimic managers
decision process; uses
regression
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Controlling the Cost of

Labor in Service Firms
Seek:
Close control of labor hours to ensure
quick response to customer demand
On-call labor resource that can be added
or deleted to meet unexpected demand
Flexibility of individual worker skills to
permit reallocation of available labor
Flexibility of individual worker in rate of
output or hours of work to meet demand
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