Aggregate

Planning
Chapter 13

13 1

Learning Objectives
When you complete this chapter you
should be able to:
1. Define aggregate planning
2. Identify optional strategies for
developing an aggregate plan
3. Prepare a graphical aggregate plan

13 2

Learning Objectives
When you complete this chapter you
should be able to:
4. Solve an aggregate plan via the
transportation method of linear
programming
5. Understand and solve a yield
management problem

13 3

Definition
Aggregate planning is the process of developing, analyzing,
and maintaining a preliminary, approximate schedule of the
overall operations of an organization.
The aggregate plan generally contains targeted sales forecasts,
production levels, inventory levels, and customer backlogs.
The term aggregate implies that the planning is done for a
single overall measure of output or, at the most, a few
aggregated product categories.
The aim of aggregate planning is to set overall output levels in
the near to medium future in the face of fluctuating or uncertain
demands.
Aggregate planning might seek to influence demand as well as
supply.

13 4

Aggregate Planning
Determine the quantity and timing of
production for the immediate future
Objective is to minimize cost over the
planning period by adjusting
Production rates
Labor levels
Inventory levels
Overtime work
Subcontracting rates
Other controllable variables
13 5

Aggregate Planning
Required for aggregate planning
A logical overall unit for measuring sales
and output
A forecast of demand for an intermediate
planning period in these aggregate terms
A method for determining costs
A model that combines forecasts and
costs so that scheduling decisions can
be made for the planning period
13 6

The Planning Process

Long-range plans
(over one year)

Research and Development

New product plans
Capital investments
Facility location/expansion
Top
executives

Operations
managers

Intermediate-range plans
(3 to 18 months)

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

Short-range plans
(up to 3 months)
Operations
managers,
supervisors,
foremen
Responsibility

Job assignments
Ordering
Job scheduling
Dispatching
Overtime
Part-time help

Planning tasks and horizon

Figure 13.1
13 7

Aggregate Planning
Jan
150,000

Quarter 1
Feb
120,000

Mar
110,000

Apr
100,000

Quarter 2
May
130,000

Jun
150,000

Jul
180,000

Quarter 3
Aug
150,000

Sep
140,000
13 8

Aggregate
Planning

Figure 13.2
13 9

Aggregate Planning
Combines appropriate resources
into general terms
Part of a larger production planning
system
Disaggregation breaks the plan
down into greater detail
Disaggregation results in a master
production schedule
13 10

Aggregate Planning
Strategies
1. Use inventories to absorb changes in
demand
2. Accommodate changes by varying
workforce size
3. Use part-timers, overtime, or idle time to
absorb changes
4. Use subcontractors and maintain a stable
workforce
5. Change prices or other factors to
influence demand
13 11

Demand Options
Influencing demand
Use advertising or promotion to
increase demand in low periods
Attempt to shift
demand to slow
periods
May not be
sufficient to
balance demand
and capacity
13 12

Demand Options
Back ordering during highdemand periods
Requires customers to wait for an
order without loss of goodwill or
the order
Most effective when there are few
if any substitutes for the product
or service
Often results in lost sales
13 13

Demand Options
Counterseasonal product and
service mixing
Develop a product mix of
counterseasonal items
May lead to products or services
outside the companys areas of
expertise

13 14

Aggregate Planning Options

Option

Advantages

Disadvantages

Some Comments

Changing
inventory
levels

Changes in
Inventory
human
holding cost
resources are
may increase.
gradual or
Shortages may
none; no abrupt result in lost
production
sales.
changes.

Applies mainly to
production, not
service,
operations.

Varying
workforce
size by
hiring or
layoffs

Avoids the costs Hiring, layoff,

of other
and training
alternatives.
costs may be
significant.

Used where size

of labor pool is
large.

Table 13.1
13 15

Aggregate Planning Options

Option

Advantages

Disadvantages

Some Comments
Allows flexibility
within the
aggregate plan.

Varying
production
rates
through
overtime or
idle time

Matches
seasonal
fluctuations
without hiring/
training costs.

Overtime
premiums; tired
workers; may
not meet
demand.

Subcontracting

Permits
flexibility and
smoothing of
the firms
output.

Loss of quality
Applies mainly in
control;
production
reduced profits; settings.
loss of future
business.

Table 13.1
13 16

Aggregate Planning Options

Option

Advantages

Disadvantages

Some Comments

High turnover/
training costs;
quality suffers;
scheduling
difficult.

Good for
unskilled jobs in
areas with large
temporary labor
pools.

Using parttime
workers

Is less costly
and more
flexible than
full-time
workers.

Influencing
demand

Tries to use
Uncertainty in
excess
demand. Hard
capacity.
to match
Discounts draw demand to
new customers. supply exactly.

Creates
marketing
ideas.
Overbooking
used in some
businesses.

Table 13.1
13 17

Aggregate Planning Options

Option
Back
ordering
during
highdemand
periods

Advantages

Disadvantages

Some Comments

May avoid
overtime.
Keeps capacity
constant.

Customer must
be willing to
wait, but
goodwill is lost.

Many companies
back order.

May require
skills or
equipment
outside the
firms areas of
expertise.

Risky finding
products or
services with
opposite
demand
patterns.

CounterFully utilizes
seasonal
resources;
product
allows stable
and service workforce.
mixing

Table 13.1
13 18

Methods for Aggregate

Planning
A mixed strategy may be the best
way to achieve minimum costs
There are many possible mixed
strategies
Finding the optimal plan is not
always possible

13 19

Mixing Options to
Develop a Plan
Chase strategy
Match output rates to demand
forecast for each period
Vary workforce levels or vary
production rate
Favored by many service
organizations

13 20

Mixing Options to
Develop a Plan
Level strategy
Daily production is uniform
Use inventory or idle time as buffer
Stable production leads to better
quality and productivity

Some combination of capacity

options, a mixed strategy, might be
the best solution
13 21

Graphical Methods
Popular techniques
Easy to understand and use
Trial-and-error approaches that do
not guarantee an optimal solution
Require only limited computations

13 22

Graphical Methods
1. Determine the demand for each period
2. Determine the capacity for regular time,
overtime, and subcontracting each period
3. Find labor costs, hiring and layoff costs,
and inventory holding costs
4. Consider company policy on workers and
stock levels
5. Develop alternative plans and examine
their total costs
13 23

Roofing Supplier Example 1

Production
Days

Demand Per Day

(computed)

Month

Expected Demand

Jan

900

22

41

Feb

700

18

39

Mar

800

21

38

Apr

1,200

21

57

May

1,500

22

68

June

1,100

20

55

6,200

124

Total expected demand

Average
=
Number of production days
requirement

Table 13.2

6,200
=
= 50 units per day
124
13 24

Production rate per working day

Roofing Supplier Example 1

Forecast demand

70
60

Level production using average

monthly forecast demand

50
40
30

0
Jan

Feb

Mar

Apr

May

June

22

18

21

21

22

20

Figure 13.3

= Month
= Number of
working days
13 25

Roofing Supplier Example 2

Cost Information
Inventory carrying cost

$ 5 per unit per month

Subcontracting cost per unit

$10 per unit

Average pay rate

$ 5 per hour ($40 per day)

Overtime pay rate

$ 7 per hour
(above 8 hours per day)

Labor-hours to produce a unit

1.6 hours per unit

Cost of increasing daily production rate

(hiring and training)

$300 per unit

Cost of decreasing daily production rate

(layoffs)

$600 per unit

Table 13.3

orce
f
k
r
o
w
tant
s
n
o
c

Plan 1

13 26

Roofing Supplier Example 2

Cost Information
Production at
Inventory
cost per Day
Month carry
50 Units

Monthly
Demand Inventory
Ending
per unit per Inventory
month
Forecast $ 5Change
$10 +200
per unit

Average
Feb pay rate 900

900
700

Mar pay rate1,050

Overtime

800

$ 7 per
hour
+250
650
(above 8 hours per day)

Subcontracting
cost
per unit
Jan
1,100

Apr

1,050

Labor-hours to produce a unit

1,200

May
1,100
1,500
Cost
of increasing
daily production
rate
(hiring and training)
June
1,000
1,100
Cost of decreasing daily production rate
(layoffs)

200
$ 5 per
hour ($40 per
day)
+200
400
-150

500

$300-400
per unit

100

1.6 hours per unit

-100

$600 per unit

1,850
Total units of inventory carried over from one nt workforce
nsta = 1,850 units
onext
Table 13.3
c
month
to
the

1
Plan
Workforce required to produce 50 units per day = 10 workers
13 27

Roofing Supplier Example 2

Monthly
Cost Information
Costs
Calculations
Production at
Demand Inventory
Ending
$ 5Change
perunits
unit per
monthx $5
Inventory
cost per Day $9,250
Month carry
50
Units
Forecast
Inventory
Inventory
carrying
(= 1,850
carried
unit)
$10
per unit
Subcontracting
cost
per unit
Jan
1,100
900 per
+200
200
Regular-time
labor
Average
Feb pay rate
900
Mar pay rate1,050
Overtime

49,600
x $40
per
$ 5 workers
per
hour ($40
per
day)
700 (= 10
+200
400
day
xper
124
days)
$
7
hour
800
+250
650

Other costs (overtime,

Apr layoffs,1,050
1,200
hiring,
Labor-hours
to produce a unit
subcontracting)
0
May
1,100
1,500
Cost
of increasing
daily production
rate
(hiring
and training)
Total
cost
$58,850
June
1,000
1,100

Cost of decreasing daily production rate

(layoffs)

(above 8 hours per day)

-150

500

$300-400
per unit

100

1.6 hours per unit

-100
$600 per unit

0
1,850

Total units of inventory carried over from one

Table 13.3
month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
13 28

Roofing Supplier Example 2

7,000

Cumulative demand units

6,000

Reduction
of inventory

5,000
4,000
3,000

6,200 units

Cumulative level
production using
average monthly
forecast
requirements

2,000
1,000

Cumulative forecast
requirements

Excess inventory
Jan

Feb

Mar

Apr

May

June

Figure 13.4
13 29

Roofing Supplier Example 3

Production
Days

Demand Per Day

(computed)

Month

Expected Demand

Jan

900

22

41

Feb

700

18

39

Mar

800

21

38

Apr

1,200

21

57

May

1,500

22

68

June

1,100

20

55

6,200

124

tin g
c
a
r
t
n
u b co
s

2
Plan

Table 13.2

Minimum requirement = 38 units per day

13 30

Production rate per working day

Roofing Supplier Example 3

Forecast demand

70
60

Level production
using lowest
monthly forecast
demand

50
40
30

0
Jan

Feb

Mar

Apr

May

June

22

18

21

21

22

20

= Month
= Number of
working days
13 31

Roofing Supplier Example 3

Cost Information
Inventory carrying cost

$ 5 per unit per month

Subcontracting cost per unit

$10 per unit

Average pay rate

$ 5 per hour ($40 per day)

Overtime pay rate

$ 7 per hour
(above 8 hours per day)

Labor-hours to produce a unit

1.6 hours per unit

Cost of increasing daily production rate

(hiring and training)

$300 per unit

Cost of decreasing daily production rate

(layoffs)

$600 per unit

Table 13.3

13 32

Roofing Supplier Example 3

Cost Information
Inventory carry cost

In-housecost
production
Subcontracting
per unit
Average pay rate
Overtime pay rate

$ 5 per unit per month

= 38$10units
per day
per unit
x $124
5 perdays
hour ($40 per day)
$ 7 perunits
hour
= 4,712
(above 8 hours per day)

Labor-hours
to produce a unit
Subcontract
units

1.6 hours
per unit
= 6,200
- 4,712
$300 per unit
Cost of increasing daily production rate
=
1,488
units
(hiring and training)
Cost of decreasing daily production rate
(layoffs)

$600 per unit

Table 13.3

13 33

Roofing Supplier Example 3

Cost Information
Inventory carry cost

In-housecost
production
Subcontracting
per unit
Average pay rate
Overtime pay rate

$ 5 per unit per month

= 38$10units
per day
per unit
x $124
5 perdays
hour ($40 per day)
$ 7 perunits
hour
= 4,712
(above 8 hours per day)

Labor-hours
to produce a unit
Costs Subcontract
units

1.6 hours
per unit
= Calculations
6,200
- 4,712
$300
per unit x $40 per
Cost
of increasing
daily production
rate
Regular-time
labor
$37,696
(=
7.6 workers
=
1,488
units
(hiring and training)

day x 124 days)

unitx $10 per

Cost
of decreasing daily production
Subcontracting
14,880rate (= $600
1,488per
units
(layoffs)
unit)
Table 13.3

Total cost

$52,576
13 34

Roofing Supplier Example 4

Production
Days

Demand Per Day

(computed)

Month

Expected Demand

Jan

900

22

41

Feb

700

18

39

Mar

800

21

38

Apr

1,200

21

57

May

1,500

22

68

June

1,100

20

55

6,200

124

Plan

firing
d
n
a
ng
3 hiri

Table 13.2

Production = Expected Demand

13 35

Production rate per working day

Roofing Supplier Example 4

Forecast demand and
monthly production

70
60
50
40
30

0
Jan

Feb

Mar

Apr

May

June

22

18

21

21

22

20

= Month
= Number of
working days
13 36

Roofing Supplier Example 4

Cost Information
Inventory carrying cost

$ 5 per unit per month

Subcontracting cost per unit

$10 per unit

Average pay rate

$ 5 per hour ($40 per day)

Overtime pay rate

$ 7 per hour
(above 8 hours per day)

Labor-hours to produce a unit

1.6 hours per unit

Cost of increasing daily production rate

(hiring and training)

$300 per unit

Cost of decreasing daily production rate

(layoffs)

$600 per unit

Table 13.3

13 37

Roofing Supplier Example 4

Basic
Production
Cost
Inventory carrying
cost (demand
Daily
x
Forecast
Prod
1.6 hrs/unit x
Subcontracting
cost
Month
(units)
Rate per unit
$5/hr)

Cost Information

Extra Cost$of
5 perExtra
unitCost
perofmonth
Increasing
Decreasing
Production
Production
$10 per(layoff
unitcost) Total Cost
(hiring cost)

41

$ 7,200

$ 5 per hour
day)
($40 per$ 7,200

Feb
700
Overtime
pay rate39

5,600

$ 7 per hour
$1,200
6,800
(= 28x hours
$600) per day)
(above

Mar
800 to produce
38
6,400
Labor-hours
a unit

$600
1.6 hours
per
unit
(= 1 x
$600)

Average
pay
Jan
900 rate

7,000

Cost
of increasing
daily production
rate
$5,700 $300 per unit
Apr
1,200
57
9,600

(= 19 x $300)
(hiring and training)

15,300

$3,300 $600 per unit

May of decreasing
1,500
68daily production
12,000

Cost
rate
(= 11 x $300)
(layoffs)

15,300

June

1,100

Table 13.3

55

8,800
$49,600

$7,800
(= 13 x $600)

16,600

$9,000

$9,600

$68,200

Table 13.4
13 38

Comparison of Three Plans

Cost

Plan 1

Plan 2

Inventory carrying

$ 9,250

Regular labor

49,600

37,696

49,600

Overtime labor

Hiring

9,000

Layoffs

9,600

Subcontracting

14,880

$58,850

$52,576

$68,200

Total cost

Plan 2 is the lowest cost option

Plan 3
$

Table 13.5
13 39

Mathematical Approaches
Useful for generating strategies
Transportation Method of Linear
Programming
Produces an optimal plan

Management Coefficients Model

Model built around managers
experience and performance

Other Models
Linear Decision Rule
Simulation
13 40

Transportation Method
Demand
Capacity:
Regular
Overtime
Subcontracting
Beginning inventory
Regular time
Overtime
Subcontracting
Carrying

Sales Period
Mar
Apr
May
800
1,000
750
700
700
50
50
150
150
100 tires

Costs
$40 per tire
$50 per tire
$70 per tire
$ 2 per tire per month

700
50
130

Table 13.6
13 41

Transportation Example
Important points
1. Carrying costs are $2/tire/month. If
goods are made in one period and held
over to the next, holding costs are
incurred
2. Supply must equal demand, so a
dummy column called unused
capacity is added
3. Because back ordering is not viable in
this example, cells that might be used to
satisfy earlier demand are not available
13 42

Transportation Example
Important points
4. Quantities in each column designate the
levels of inventory needed to meet
demand requirements
5. In general, production should be
allocated to the lowest cost cell
available without exceeding unused
capacity in the row or demand in the
column

13 43

Transportation
Example

Table 13.7
13 44

Management Coefficients
Model
Builds a model based on managers
experience and performance
A regression model is constructed
to define the relationships between
decision variables
Objective is to remove
inconsistencies in decision making
13 45

Other Models
Linear Decision Rule
Minimizes costs using quadratic cost curves
Operates over a particular time period

Simulation
Uses a search procedure to try different
combinations of variables
Develops feasible but not necessarily optimal
solutions

13 46

Summary of Aggregate
Planning Methods
Techniques
Graphical
methods

Solution
Approaches
Trial and
error

Transportation
Optimization
method of linear
programming

Important Aspects
Simple to understand and
easy to use. Many
solutions; one chosen
may not be optimal.
LP software available;
permits sensitivity
analysis and new
constraints; linear
functions may not be
realistic.
Table 13.8
13 47

Summary of Aggregate
Planning Methods
Techniques

Solution
Approaches

Important Aspects

Management
coefficients
model

Heuristic

Simple, easy to implement;

tries to mimic managers
decision process; uses
regression.

Simulation

Change
parameters

Complex; may be difficult

to build and for managers
to understand.

Table 13.8
13 48

Aggregate Planning in
Services
Controlling the cost of labor is critical
1. Accurate scheduling of labor-hours to
assure quick response to customer
demand
2. An on-call labor resource to cover
unexpected demand
3. Flexibility of individual worker skills
4. Flexibility in rate of output or hours of
work
13 49

Five Service Scenarios

Restaurants
Smoothing the production
process
Determining the optimal
workforce size

Hospitals
Responding to patient demand
13 50

Five Service Scenarios

National Chains of Small Service
Firms
Planning done at national level
and at local level

Miscellaneous Services
Plan human resource
requirements
Manage demand
13 51

Law Firm Example

(1)
Category of
Legal Business
Trial work
Legal research
Corporate law
Real estate law
Criminal law
Total hours
Lawyers needed

Labor-Hours Required
(2)
(3)
(4)
Forecasts
Best
Likely
Worst
(hours)
(hours)
(hours)
1,800
4,500
8,000
1,700
3,500

1,500
4,000
7,000
1,500
3,000

1,200
3,500
6,500
1,300
2,500

19,500
39

17,000
34

15,000
30

Capacity Constraints
(5)
(6)
Maximum
Number of
Demand in
Qualified
People
Personnel
3.6
9.0
16.0
3.4
7.0

4
32
15
6
12

Table 13.9

13 52

Five Service Scenarios

Airline industry
Extremely complex planning
problem
Involves number of flights,
number of passengers, air and
ground personnel, allocation of
seats to fare classes
Resources spread through the
entire system
13 53

Yield Management
Allocating resources to customers at
prices that will maximize yield or
revenue
1. Service or product can be sold in
advance of consumption
2. Demand fluctuates
3. Capacity is relatively fixed
4. Demand can be segmented
5. Variable costs are low and fixed costs
are high
13 54

Yield Management Example

Room sales

Demand
Curve
Potential customers exist who
are willing to pay more than the
$15 variable cost of the room

100

Passed-up
contribution
50
Total
$ contribution
= (Price) x
(50
rooms)
= ($150 $15)
x (50)
= $6,750
$15
Variable cost
of room

Some customers who paid

$150 were actually willing
to pay more for the room

Money left
on the table
$150
Price charged
for room

Price
Figure 13.5
13 55

Yield Management Example

Demand
Curve

Room sales
100

Total $ contribution =
(1st price) x 30 rooms + (2nd price) x 30 rooms =
($100 - $15) x 30 + ($200 - $15) x 30 =
$2,550 + $5,550 = $8,100

60

30

$15
Variable cost
of room

$100
Price 1
for room

$200
Price 2
for room

Price
Figure 13.6
13 56

Yield Management Matrix

Predictable
Unpredictable

Duration of use

Price
Tend to be fixed

Tend to be variable

Quadrant 1:

Quadrant 2:

Movies
Stadiums/arenas
Convention centers
Hotel meeting space

Hotels
Airlines
Rental cars
Cruise lines

Quadrant 3:

Quadrant 4:

Restaurants
Golf courses
Internet service
providers

Continuing care
hospitals

Figure 13.7
13 57

Making Yield Management

Work
1. Multiple pricing structures must
be feasible and appear logical to
the customer
2. Forecasts of the use and duration
of use
3. Changes in demand

13 58

Thank You

13 59