Supply Chain Management

Aggregate Planning

MBA 611

Deepak Iyengar
 Roadmap of Future Topics

 Now that we know the forecasts for customer

demand, we will focus on
– Matching our organization’s resources and supply
(which include labor, raw materials, finished
products etc.) with our customer’s demand
– Planning for production of our primary goods
and/or services so that we satisfy our customers’
demand
 Roadmap of Future Topics

Forecast
Supplier Manufacturer Customer
demand

Match supply with demand:

Aggregate planning
Plan for production: Master
Production Scheduling Assure that products are
Order raw material of acceptable quality:
Arrive at raw materials requirements: Quality Control
Materials requirements planning
Decide on how many items to order
and inventory: Inventory PRODUCTION
Quality Control management
 Operations Management

Operations Management (OM) may be defined as

the design, operation and improvement of the
systems that create and deliver the firm’s primary
products and services
 Aggregate planning: Introduction

Forecasting

Short Intermediate Long

term term term

What should we What should we What machines

produce today, purchase for next should be bought,
tomorrow month’s production, what should be the
what should be our capacity of the
workforce level plant
 Process Planning
Long-
range Strategic Capacity Planning

Intermediate- Aggregate Planning

range
Manufacturing Services
Master Production Scheduling

Material Requirements Planning

Weekly Workforce &
Order Scheduling Customer Scheduling

Short- Daily Workforce &

range Customer Scheduling
 The Term
“Aggregate”

 Because planning is done at an aggregate, for

example

• Number of “TV sets” vs. specific figures for different

models of TV sets such as 21-inch, 27-inch etc.

• Allocating space in a department store in terms of

categories such as men’s, women’s, children instead of the
specific categories within them
 Tactical level of Aggregate Planning

 Given that aggregate planning is a tactical

planning function, long term aspects (such as
facility location, manufacturing process, available
machines/equipments, maximum plant capacity
etc) are assumed to be fixed

 Other aspects (such as workforce levels, inventory

levels, use of outside subcontractors etc.) may be
adjusted
Connection Between Aggregate Planning, MPS
and MRP

 The production schedule of aggregate units from

the aggregate plan is later broken into plan for
specific units. The detailed production plan for
specific products is Master Production Schedule
(MPS)

 We will use the MPS to arrive at our requirements

for raw materials which should be ordered from
our suppliers. This process is Materials
Requirements Planning (MRP)
Aggregate planning: Balancing demand and supply

• Another way of looking at aggregate planning is the

balancing of demand and supply. If demand and
supply are not balanced, additional costs are incurred
to adjust the system.

• Aggregate planning attempts to minimize these costs

 Matching Supply with given Demand

 Supply adjustments  Demand adjustments

– Workforce adjustment – Promotions, price
– Inventory adjustments etc.
– Workforce utilization
– Backlogs, backorders
and stock-outs
 Inputs to Aggregate Planning

 Forecast of future demand

 Workforce levels
 Policies on backorders and inventory
 Level of available sub-contracting
 Beginning and ending inventory
Relevant Costs for Aggregate Planning

 Regular-Time costs
 Overtime costs
 Part time cost
 Hiring and Layoff costs
 Subcontracting cost
 Inventory holding costs
 Backorder cost
 Stock-out cost
 Objectives of Aggregate Planning

 Minimize Costs/Maximize Profits

 Maximize Customer Service
 Minimize Inventory Investment
 Minimize Changes in Production Rates
 Minimize Changes in Workforce Levels
 Maximize Utilization of Plant and Equipment
 Aggregate Planning Strategies

TABLE 14.1 PLANNING STRATEGIES FOR AGGREGATE PLANS

Possible Alternatives Possible Alternatives

Strategy during Slack Season during Peak Season

1. Chase #1: vary workforce Layoffs Hiring

level to match demand
2. Chase #2: vary output Layoffs, undertime, Hiring, overtime,
rate to match demand vacations subcontracting
3. Level #1: constant No layoffs, building No hiring, depleting
workforce level anticipation inventory, anticipation inventory,
undertime, vacations overtime, subcontracting,
backorders, stockouts
4. Level #2: constant Layoffs, building antici- Hiring, depleting antici-
output rate pation inventory, pation inventory, over-
undertime, vacations time, subcontracting,
backorders, stockouts
Aggregate
planning
input table
 r= regular production cost per unit
 t= overtime cost per unit
 s= subcontracting cost per unit
 h=holding cost per unit
 b=backorder cost per unit
 n=number of periods in planning horizon

– See Agg Table#2 .doc in your Blackboard

 Quarter
Alternatives
1
Quarter
2 3 4
Unused Total
Capacity Capacity

1 2 3 4 Total

Quarter
0 h 2h 3h 4h

Problem
Beginning
inventory I 0

Data Demand 300

Regular
time
r
850 1500 350 3000
r+h r+2h
Rr+3h u
1

Capacities 1 Overtime
c c+h c+2h c+3h 0 O1

Regular time 450

Subcontract
s 450s+h 750 s+2h s+3h 450 0 2100
S1

Overtime Regular
90 r+b 90 r 150 r+h 90
r+2h u 420
R2

Subcontracting time
200 c+b
200 c
200 c+h c+2h
200 0
800
O2

2 Overtime S2

Current inventory = 250,000

Subcontract
s+b s s+h s+2h 0 R3

Ending inventory = 300,000

Regular
time
r+2b r+b r r+h u O3

Regular time = $1.00/unit

3 Overtime
c+2b c+b c c+h 0
S3

Overtime = $1.50/unit s+2b s+b s s+h 0

R4
Subcontract
Subcontracting = $1.90/unit r+3b r+2b r+b r u
O4
Regular
Inventory holding cost = $0.30/gallon/quarter
time
S4

Maximum overtime = 20% of regular time

c+3b c+2b c+b c 0
4 Overtime

Maximum subcontract = 200,000

Subcontract
s+3b s+2b s+b s 0

No back orders or stockouts

Requirements D D D D +I U
1 2 3 4 4

Example 14.3
 Period Unused Total
Period 1 2 3 4 5 6 Capacity Capacity
Beginning $0.00 $0.30 $0.60 $0.90
Inventory - - - - - - 250
Regular $1.00 $1.30 $1.60 $1.90
Time - - - - - - 450
Aggregate 1 Overtime $1.50
-
$1.80
-
$2.10
-
$2.40
- - - 90
planning Subcontract $1.90
-
$2.20
-
$2.50
-
$2.80
- - - 200
Regular
input table
$999 $1.00 $1.30 $1.60
Time - - - - - - 450
2 Overtime $999 $1.50 $1.80 $2.10

with data Subcontract

-
$999
-
$1.90
-
$2.20
-
$2.50
- - 90

- - - - - - 200
Regular $999 $999 $1.00 $1.30
Time - - - - - - 750
3 Overtime $999 $999 $1.50 $1.80
- - - - - - 150
Subcontract $999 $999 $1.90 $2.20
- - - - - - 200
Regular $999 $999 $999 $1.00
Time - - - - - - 450
4 Overtime $999 $999 $999 $1.50
- - - - - - 90
Subcontract $999 $999 $999 $1.90
- - - - - - 200
Regular
Time - - - - - - -
5 Overtime
- - - - - - -
Subcontract
- - - - - - -
Regular
Time - - - - - - -
6 Overtime
- - - - - - -
Subcontract
- - - - - - -

Requirements 300 850 1,500 650 0 3,570

 Period Unused Total
Period 1 2 3 4 5 6 Capacity Capacity
Beginning $0.00 $0.30 $0.60 $0.90
Inventory - - 250 - - - - 250
Regular $1.00 $1.30 $1.60 $1.90

Solution 1
Time
Overtime
280
$1.50
170
$1.80
-
$2.10
-
$2.40
- - - 450

Table Subcontract
-
$1.90
90
$2.20
-
$2.50
-
$2.80
- - - 90

20 - - - - - 180 200
Regular $999 $1.00 $1.30 $1.60
Time - 300 150 - - - - 450
2 Overtime $999 $1.50 $1.80 $2.10
- 90 - - - - - 90
Subcontract $999 $1.90 $2.20 $2.50
- 200 - - - - - 200
Regular $999 $999 $1.00 $1.30
Time - - 750 - - - - 750
3 Overtime $999 $999 $1.50 $1.80
- - 150 - - - - 150
Subcontract $999 $999 $1.90 $2.20
- - 200 - - - - 200
Regular $999 $999 $999 $1.00
Time - - - 450 - - - 450
4 Overtime $999 $999 $999 $1.50
- - - 90 - - - 90
Subcontract $999 $999 $999 $1.90
- - - 110 - - 90 200
Regular
Time - - - - - - -
5 Overtime
- - - - - - -
Subcontract
- - - - - - -
Regular
Time - - - - - - -
6 Overtime
- - - - - - -
Subcontract
- - - - - - -

Requirements 300 850 1,500 650 270 3,570

From Aggregate plan to MPS
Regular-Time Overtime Subcon-
Quarter Production Production tracting Total
1 450 90 20 560
2 450 90 200 740
3 750 150 200 1,100
4 450 90 110 650
Totals 2,100 420 530 3,050

Anticipation Inventory
Quarter Quantity
1 250 + 560 – 300 = 510
2 510 + 740 – 850 = 400
3 400 + 1,100 – 1,500 = 0
4 0 + 650 – 350 = 300
 Template for summary of results
Results
Solver - Transportation Method of Production Planning

Period 1 Period 2 Period 3 Period 4 Period 5 Period 6 Total

Demand
Initial Inventory

Production
Regular
Overtime
Subcontract
Total Production
Shipments
On-Time
Backorders
Total

Ending Inventory

Costs
Regular
Overtime
Subcontract
Total Production
Backorders
Holding
Total Cost

Total Cost Excludes holding cost of desired ending inventory in last period
Total Demand Includes desired ending inventory in last period
Total Capacity
Unused Capacity
Average Inventory Average beginning and ending inventories over all periods
 Results
Solver - Transportation Method of Production Planning

Interpretation of Demand
Period 1
300
Period 2
850
Period 3
1,500
Period 4
350
Period 5
0
Period 6
0
Total
3,000

results Initial Inventory 250 510 400 0 0 0 1,160

Production
Regular 450 450 750 450 0 0 2,100
Overtime 90 90 150 90 0 0 420
Subcontract 20 200 200 110 0 0 530
Total Production 560 740 1,100 650 0 0 3,050
Shipments
On-Time 300 850 1,500 350 0 0 3,000
Backorders 0 0 0 0 0 0 0
Total 300 850 1,500 350 0 0 3,000

Ending Inventory 510 400 0 300 0 0 1,210

Costs
Regular $450 $450 $750 $450 $0 $0 $2,100
Overtime $135 $135 $225 $135 $0 $0 $630
Subcontract $38 $380 $380 $209 $0 $0 $1,007
Total Production $623 $965 $1,355 $794 $0 $0 $3,737
Backorders $0 $0 $0 $0 $0 $0 $0
Holding $153 $120 $0 $0 $0 $0 $273
Total Cost $776 $1,085 $1,355 $794 $0 $0 $4,010

Total Cost $4,010 Excludes holding cost of desired ending inventory in last period
Total Demand 3,300 Includes desired ending inventory in last period
Total Capacity 3,570
Unused Capacity 270
Average Inventory 296.25 Average beginning and ending inventories over all periods