03 Aggregate Planning

Aggregate Planning
Sasadhar Bera, IIM Ranchi
Outline
Production Planning Framework
Understanding Aggregate Planning
Demand Management and Capacity Options
Aggregate Planning Strategies
Aggregate Planning Input and Output
Different Solution Approaches to Aggregate
Planning Problems
Production Planning System

A production plan requires both external and internal
inputs. It cannot be determined by only manufacturing
person alone.
Production plan includes external inputs such as
competitors behavior (new product introduction,
promotional price and special offers), raw material
availability, market demand, subcontracting capacity and
economic conditions of regions or country.
The internal inputs are workforce size and skills, available
machine capacity, and anticipated inventory level.
3
Inputs in Production Planning

Competitors
behavior
External
capacity
Current
physical
capacity
Raw material
availability
Planning
for
production
Current
workforce
Inventory
levels
Market
demand
External
to firm
Economic
conditions
Activities
required
for
production
Internal
to firm
4
What is Manufacturing Requirement Planning ?

Manufacturing Requirement Planning (MRP II) involves a
hierarchy of decisions. Its planning framework provides both
production and capacity decisions in different levels as
described below.
Sales and operations planning (S&OP) translates corporate
strategic and capacity plans to meet the demand in plant level.
The second level is master production schedule (MPS), in
which production plans are specified by individual product.
Third level material requirement plan (MRP) determines
subparts and material needed to produce a product. It
provides a procurement schedule.
Shop floor scheduling schedules the manufacturing operations
required to make each component.
Manufacturing Requirement Planning MRP II

Production
Planning
Capacity
Planning
Resource
Level
Product lines or
families
Sales and
operation
planning
(S&OP)
Resource
requirements
plan
Plants
Individual
product
Master
production
schedule
(MPS)
Rough-cut
capacity plan
(RCCP)
Critical
work
centers
Components
Material
requirements
plan (MRP)
Capacity
requirements
plan (CRP)
All work
centers
Manufacturing
operations
Shop
floor
schedule
Input/ output
control
Individual
machine
Items
6
Capacity Planning
In capacity planning, a resource requirement plan is
developed to verify that sales and operations plan can be
performed or achieved.
Rough-cut-capacity plan (RCCP) is quick check to see if the
master production schedule is feasible in terms of resource
requirements.
Capacity requirement plan (CRP) provides more details plan
that matches and adjusts the factorys machine and labour
resources to the material requirements plan.
Finally, input/output control monitors the production that
takes place at individual machine or work center.
7
Overview of Planning Levels

Long-range planning: Planning is done annually and
focusing on a horizon of a year or more. Adjustments are
made usually quarterly or monthly. Long range planning are
product selection, determining facility size and location,
equipment decisions, and layout of facilities.
Intermediate-range planning: Covers a period of 6 to 12
months with weekly or monthly adjustments. Examples:
Material
requirement
planning
(MRP),
Capacity
requirement planning (CRP).
Short-range planning: Covers less than 6 months with
either daily or weekly monitoring activities. Examples:
machine loading, job assignment.
8
What is Aggregate Planning ?

In operations and supply chain management, sales and
operations planning is called Aggregate Planning. An
aggregate planning is process for coordinating supply and
demand. The new terminology, aggregate planning,
captures both the cross functional activities viz. sales and
operations plan, and resource requirements plan in MRP II
framework. It is an intermediate-range planning, usually
covering 6 to 12 months.
The term aggregate refers to groups of product or product
families. The plans are developed for groups of product
rather than individual product. Choosing meaningful groups
require a thorough knowledge of the products as well as
manufacturing processes.
9
What is Aggregate Planning ? (Contd.)

For example, an aggregate operation plan regarding motor
bikes manufacturng might specify how many bikes are to be
produced in each quarter in a year but not segregated by
colour, engine cylinder, and tires. In this case, product
families can be divided into two groups such as mountain
bikes, and road bikes.
Resource capacity is also expressed in aggregate terms,
typically as labour or machine hours. Labour hours would
not be specified by types of labour (full time or part time),
nor machine hours by types of machine.
10
Dimension of Aggregation
Product families: Families are defined considering process
operations, workforce requirements and material
requirements. Sometimes product families is related to
market groupings such as location and customer segments.
Resource availability: Workforce skills and types, types of
machine.
Time: The planning horizon covered by aggregate planning
typically is one year, although it can differ in various
situations. Adjustments are made usually quarterly or
monthly. Hence company looks in aggregation in terms of
month, or quarter, or season.
11
Why Aggregate Planning is Necessary?

Aggregate level forecasts are generally more accurate
than individual item forecast. Hence to cope up with
demand fluctuation, production should be planned in
aggregate to obtain effective resource utilization.
It is easy to incorporate corporate level strategy
considering aggregate level capacity and resources.
12
Objective of Aggregate Planning

The main purpose of the aggregate plan is to specify the
optimal combination of production levels, workforce levels
and inventory levels in a time horizon. The objective
function is to minimize the total cost over a multi-period
planning horizon.
Given a demand forecast Ft for each period t in the
planning horizon that extends over T periods, determine
the production level Pt, workforce level Wt , and inventory
level It for periods t = 1, 2, . . ., T that minimizes total cost
over the planning horizon.
13
Demand Management
The process of changing demand pattern using one or more
demand options is known as demand management. The
demand options to manage uneven demand are:
Pricing: Differentials pricing is commonly used to shift demand
from peak periods to the off-peak periods.
Promotion: Promotional campaigns such as advertising,
displays, and direct marketing, discount coupons.
Complementary product: Products that have similar resource
requirements but different demand cycles make demand
even.
Backorder: Taken customer order that is temporarily out of
stock and cannot be filled immediately but is filled as soon as
possible.
14
Capacity Options
Anticipation inventory: The finished goods inventory in one
period can be used to absorb fluctuation of demand in
another period.
Workforce adjustment: Hire or layoff of workers to match
demand by producing more or less.
Overtime and under time: Increase or decrease working
hours during the day or fewer days per week in case of high or
low demand situation.
Subcontracting: Outsource from another firm to get supply of
components, subassemblies, or even an entire product in case
of high demand.
Part time workers: Hire part-time employees when they are
needed.
15
Aggregate Planning Strategies

Aggregate planning evaluates alternative capacity sources
to find an economic strategy for satisfying demand. There
are two major strategies as described below:
Pure strategy: When one of the capacity options is used to
absorb demand fluctuation is known as pure strategy.
Mixed strategy: Two or more capacity options are used in
combination to constitute a mixed strategy. It may consider
combinations of all capacity options such as anticipation
inventory, workforce adjustments, part-time worker,
subcontract, and backorder to determine a feasible
production plan.
16
Aggregate Planning Strategies (Contd.)

Level strategy: It is come under pure strategy. The
production rate kept constant and uses inventory to absorb
variations in demand. During period of low demand,
overproduction is stored as inventory. This inventory is to
be depleted in high demand period.
Units
Demand
Average Production
Time
17
Aggregate Planning Strategies (Contd.)

Chase strategy: It is come under pure strategy. The chase
strategy involves in hiring and laying off workforce size to
match the demand over the planning horizon. Additional
workers are hired during high demand period and workers
are laid off in low demand period. This strategy is applicable
for low skill jobs.
Demand
Units
Production
Time
18
Advantages and Disadvantages

Level strategy:
Workforce levels and production output are stable
Involve high inventory and labour costs
Chase strategy:
Reduce inventory costs
High level of workforce utilization
Cost involves in fluctuating workforce levels
Potential damage to employee morale
19
Example: Toy Production Planning

Demand for Quantum Corporations action toy series
follows a seasonal pattern growing through the fall
months and culminating in December, with smaller peaks
in January.
MONTH
January
DEMAND
(CASES)
1000
February
March
April
May
June
400
400
400
400
400
MONTH
July
August
September
October
November
December
DEMAND
(CASES)
500
500
1000
1500
2500
3000
20
Example: Toy Production Planning (contd.)

Each worker can produce on an average 100 cases of action toys
each month. Overtime is limited to 300 cases, and
subcontracting is unlimited. No action toys are currently in
inventory. The wage rate is $10 per case for regular production,
$15 for overtime production, and $25 for subcontracting. No
stock outs are allowed. Holding cost is $1 per case per month.
Increasing the workforce costs approximately $1,000 per worker.
Decreasing the workforce costs $500 per worker.
Management wishes to test the following scenarios for planning
production
i.
Level production over the 12 months
ii.
Produce to meet demand each month
21
Example: Level Strategy

Input:
Beg. Wkrs 10
Regular
$10
Hiring
$1,000
Units/Wkr 100
Overtime
$15
Firing
$500
Beg. Inv.
Subk
$25
Inventory
Cost:
$146,000
$1
Month
Demand
Reg
OT
Subk
Inv
#Wkrs
#Hired
#Fired
Reg
Prod Cost
Inv
Cost
Jan
1000
1,000
10
10,000
Feb
400
1,000
600
10
10,000
600
Mar
400
1,000
1,200
10
10,000
1,200
Apr
400
1,000
1,800
10
10,000
1,800
May
400
1,000
2,400
10
10,000
2,400
Jun
400
1,000
3,000
10
10,000
3,000
Jul
500
1,000
3,500
10
10,000
3,500
Aug
500
1,000
4,000
10
10,000
4,000
Sept
1000
1,000
4,000
10
10,000
4,000
Oct
1500
1,000
3,500
10
10,000
3,500
Nov
2500
1,000
2,000
10
10,000
2,000
Dec
3000
1,000
10
10,000
Total
12,000
12,000
26,000
120,000
26,000
22
Example: Chase Strategy

Input:
Beg. Wkrs 10
Regular
$10
Hiring
$1,000
Units/Wkr 100
Overtime
$15
Firing
$500
Beg. Inv.
Subk
$25
Inventory
Cost:
$149,000
$1
Month
Demand
Reg
OT
Subk
Inv
#Wkrs
#Hired
#Fired
Reg
Prod
Cost
Hiring/
Firing
Cost
Jan
1000
1000
10
10,000
Feb
400
400
4,000
3,000
Mar
400
400
4,000
Apr
400
400
4,000
May
400
400
4,000
Jun
400
400
4,000
Jul
500
500
5,000
1,000
Aug
500
500
5,000
Sept
1000
1000
10
10,000
5,000
Oct
1500
1500
15
15,000
5,000
Nov
2500
2500
25
10
25,000
10,000
Dec
3000
3000
30
Total
12,000
12,000
26
30,000
120,000
5,000
29,000
23
Example: Subcontracting
Suppose that Quantum Corporation has decided to produce
600 units per month and meet rest of the demand by
subcontracting. It is also decided no overtime to the workers
and hiring/firing of workers.
What should be the total cost in such situation?
24
Example: Subcontracting (Contd.)

Input:
Beg. Wkrs 10
Regular
$10
Hiring
$1,000
Units/Wkr 100
Overtime
$15
Firing
$500
Beg. Inv.
Subk
$25
Inventory
Month
Demand
Reg
OT
Subk
Inv
#Wkrs
Reg
Prod Cost
Inv
Cost
Subk
Cost
Jan
1000
600
400
6,000
10,000
Feb
400
600
200
6,000
200
Mar
400
600
400
6,000
400
Apr
400
600
600
6,000
600
May
400
600
800
6,000
800
Jun
400
600
1,000
6,000
1,000
July
500
600
1,100
6,000
1,100
Aug
500
600
1,200
6,000
1,200
Sept
1000
600
800
6,000
800
Oct
1500
600
100
6,000
2,500
Nov
2500
600
1,900
6,000
47,500
Dec
3000
600
2,400
6,000
60,000
Total
12,000
7,200
4,800
6,100
72,000
6,100
1,20,000
Cost:
$1,98,100
$1
25
Aggregate Planning Input

Demand forecast
Resources
Workforce
Facilities
Policy statements
Overtime
Subcontracting
Inventory levels
Back orders
Costs
Regular time cost
Overtime cost
Hiring cost
layoff cost
Under-time cost
Subcontracting cost
Inventory carrying cost
Shortage cost/Back
order cost
Set-up cost
26
Aggregate Planning Output

Total cost of a plan
Projected level of
Workforce
Inventory
Subcontracting
Back orders
27
Solution Approaches to Aggregate Planning

Problems
The below mentioned solution approaches use
combinations of all capacity options (i. e. mixed strategy) to
determine optimal production plan.
I.
II.
III.
IV.
Linear programming approach

Transportation model based approach
Dynamic programming approach
Quadratic model HMMS Rule
28
LP approach: Candy Production Planning

The Good and Rich candy company makes a variety of candies
in three factories worldwide. Given the quarterly sales
forecasts and costs, determine optimum production level,
workforce level, and inventory level.
Quarter
Spring
Summer
Fall
Winter
Sales forecast (lbs)

80,000
50,000
120,000
150,000
Hiring cost = $100 per worker , Layoff cost = $500 per worker
Inventory carrying cost = $0.50 per pound per quarter
Regular production cost per pound = $2
Production per employee = 1000 pound per quarter
Beginning workforce = 100 workers
29
Problem Formulation: Candy Production Planning

Dt : demand at time t, where t = 1, 2, 3, 4 (four quarters)
Wt : workforce size at time t
Rt : regular quarterly production
Ht : Number of workers hired for time t
Ft : Number of workers layoff/fired for time t
It : Inventory (in units) at the end of time t
Zmin = 100 (H1 + H2 + H3 + H4)
+ 500 (F1 + F2 + F3 + F4)
+ 0.50 (I1 + I2 + I3 + I4)
+ 2 (R1 + R2 + R3 + R4)
30
Problem Formulation: Candy Production Planning

Subject to
Demand constraint:
It-1 + Rt - Dt = It => It-1 + Rt - It = Dt

R1 - I1 = 80,000
(1)
I1 + R2 - I2 = 50,000
(2)
I2 + R3 - I3 = 120,000
(3)
I3 + R4 - I4 = 150,000
(4)
Production constraint: k Wt = Rt
1000 W1 = R1
(5)
1000 W2 = R2
(6)
1000 W3 = R3
(7)
1000 W4 = R4
(8)
Workforce constraint: Wt-1 + Ht Ft = Wt
100 + H1 - F1 = W1
(9)
Work force
W1 + H2 - F2 = W2
(10)
constraints
W2 + H3 - F3 = W3
(11)
W3 + H4 - F4 = W4
(12)
31
Solution: Candy Production Planning

Beg Wkforce
Units/wker
Beg Inv.
Quarter
Spring
Summer
Fall
Winter
Total
100
1000
0
Prod. Cost
Inv. Cost
$2.00
$0.50
Demand Production Inventory

80,000 80,000
0
50,000 80,000
30,000
1,20,000 90,000
0
1,50,000 1,50,000
0
4,00,000 4,00,000
30,000
Firing cost
Hiring cost
$500
$100
Worker Worker Worker

Needed Hired Fired
80
0
20
80
0
0
90
10
0
150
60
0
70
20
Total cost = 4,00,000*2 + 30,000*0.5 + 70*100 + 20*500

= $8,32,000
Note: Overtime and subcontracting is not considered in this
formulation
32
Transportation model based Approach

This approach is restricted version of linear programming
approach. Transportation model based approach considers
six different cost components viz. regular time, and
overtime cost, subcontracting, and under-time cost,
inventory and shortage cost.
This approach does not consider variable workforce costs

(hiring/layoff). Another cost component, set-up cost,
cannot be incorporated in this model. But linear
programming approach can consider set-up cost
component. Computation time is less in case of
transportation model due to the special structure of the
model.
33
Transportation Model based Approach (Contd.)

r, o, and c regular, overtime, and subcontracting cost. i is
inventory holding cost /period. M indicates very large value,
no allocation is possible in this cell.
34
Transportation Model based Approach (Contd.)

In this tableau back order is allowed. Cell having cost (r +2b)
indicates that cost at period 3 for demand of period 1. b is
back order cost/period.
35
Example: Transportation Model based Approach
36
37
It is to be noted that Northwest corner rule is used to get

initial solution with minimum cost allocation. It may not be
optimal solution. The optimal solution is generated by using
stepping stone method or modified distribution method.
38
Dynamic Programming Solution Approach

In this approach, generally three costs are considered viz.
set-up cost, regular production cost and inventory carrying
cost.
Decision variable is the amount of quantity that should be
produced in each time period in a planning horizon. The
state variable is the amount of inventory available at the
beginning of each period.
Objective function is total cost (set-up + production +
inventory).
Wagner and Whitin algorithm (1958) used to get optimal
solution.
39
Quadratic Model HMMS Rule

Quadratic model was developed by Holt, Modigliani, Muth,
and Simon (1960) is known as HMMS rule. The decision
variables considered in this model are production levels,
workforce size, and inventory levels.
The objective function is quadratic, not linear but
constraints are linear. The cost components considered in
objective function are regular production cost, hiring and
layoff cost, overtime and under-time cost, inventory and
shortage cost. All cost components are in quadratic form.
The optimization technique is similar to quadratic

optimization problem. This model gives closer results
towards actual situation because in actual practice cost
component are not linear.
40
References
i.
Production Planning and Inventory Control, Narasimhan,

McLeavey, Billington, 2th edition, Prentice Hall India.
ii.
Operations Management: Processes and Supply Chains,

Krajewski, Ritzman, Malhotra, and Srivastava, 9th edition,
Pearson publication.
iii. Operations Management, Russell and Taylor, 7th edition,

International student edition.
iv. Operations Management: Concepts, Techniques, and
Applications, Evans and Collier, Cengage learning India
edition.
v.
Introduction to Material Management, Arnold, Chapman,

and Clive, 6th edition, Pearson publication.
41

03 Aggregate Planning

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03 Aggregate Planning

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Verfügbare Formate

Aggregate Planning

Sasadhar Bera, IIM Ranchi

Production Planning System

Inputs in Production Planning

What is Manufacturing Requirement Planning ?

Manufacturing Requirement Planning MRP II

Overview of Planning Levels

What is Aggregate Planning ?

What is Aggregate Planning ? (Contd.)

Why Aggregate Planning is Necessary?

Objective of Aggregate Planning

Aggregate Planning Strategies

Aggregate Planning Strategies (Contd.)

Aggregate Planning Strategies (Contd.)

Advantages and Disadvantages

Example: Toy Production Planning

Example: Toy Production Planning (contd.)

Level production over the 12 months

Produce to meet demand each month

Example: Level Strategy

Sasadhar Bera, IIM Ranchi

Example: Chase Strategy

Sasadhar Bera, IIM Ranchi

Example: Subcontracting (Contd.)

Sasadhar Bera, IIM Ranchi

Aggregate Planning Input

Aggregate Planning Output

Solution Approaches to Aggregate Planning

Linear programming approach

LP approach: Candy Production Planning

Sales forecast (lbs)

Problem Formulation: Candy Production Planning

Problem Formulation: Candy Production Planning

It-1 + Rt - Dt = It => It-1 + Rt - It = Dt

Solution: Candy Production Planning

Demand Production Inventory

Worker Worker Worker

Total cost = 4,00,000*2 + 30,000*0.5 + 70*100 + 20*500

Transportation model based Approach

This approach does not consider variable workforce costs

Transportation Model based Approach (Contd.)

Transportation Model based Approach (Contd.)

Sasadhar Bera, IIM Ranchi

Example: Transportation Model based Approach

Example: Transportation Model based Approach

Example: Transportation Model based Approach

It is to be noted that Northwest corner rule is used to get

Dynamic Programming Solution Approach

Quadratic Model HMMS Rule

The optimization technique is similar to quadratic

Production Planning and Inventory Control, Narasimhan,

Operations Management: Processes and Supply Chains,

iii. Operations Management, Russell and Taylor, 7th edition,

Introduction to Material Management, Arnold, Chapman,

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Total cost = 4,00,0002 + 30,0000.5 + 70100 + 20500