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Importance in Operations management Definition :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. Organizations make capacity decisions on three levels: 1) Short-range plans (Detailed plans) Machine loading Job assignments 2) Intermediate plans (General levels) Employment Output, and inventories 3) Long-range plans Long term capacity Location / layout

Aggregate Planning

Planning Sequence
Corporate strategies and policies Economic, competitive, and political conditions Aggregat e demand forecasts Establishes operations and capacity strategies Establishes operations capacity Establishes schedules for specific products

Business Plan Aggregate plan Master schedule

Operations Current machine capacities Plans for future capacities Workforce capacities Capacity and Demand If capacity and demand are nearly equal emphasis should be placed on meeting demand Current staffing level 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. Aggregate planning begins with a forecast of aggregate demand for the intermediate range. This is followed by a general plan to meet demand requirements by setting output, employment, and finished-goods inventory or service capacities. Managers must consider a number of plans, each of which must be examined in light of feasibility and cost. If a plan is reasonably good but has minor difficulties, it may be reworked. Aggregate plans are updated periodically, often monthly, to take into account updated forecast and other changes

Materials Supplier capabilities Storage capacity Materials availability

Goal of Aggregate Planning

Engineering New products

To develop a realistic production plan on an aggregate level that will satisfy organizational goals and customer demand needs at the lowest total cost. Available Strategies for Meeting Demand Chase demand Level production Subcontracting Overtime/Under time Employing temporary workers Backordering Operational parameters of AP Specify operational parameters over the time horizon: 1. production rate 2. workforce 3. Overtime/under time 4. machine capacity level 5. subcontracting 6. backlog 7. inventory on hand

Aggregate Planning Strategies Proactive Involve demand options: Attempt to alter demand to match capacity Reactive Involve capacity options: attempt to alter capacity to match demand (Chase strategy: using capacity as the lever Level strategy: using inventory as the lever Time flexibility Strategy: using utilization as the lever) Mixed Some of each

Aggregate Plan
TABLE 14.1
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.



Possibl during

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.

1. Chase #1: vary workforce level to match demand 2. Chase #2: vary output rate to match demand 3. Level #1: constant workforce level

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.

Layoffs, vacatio

Disadvantages of Chase Method Cost of fluctuating workforce levels.

No layof anticipa underti

4. Level #2: constant


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. Hersheys use of Chase Strategy Demand for chocolate is high during the winter months. Facilitated by the location of Hersheys manufacturing facility, the company hires farmers from the surrounding areas to aid in meeting demand. When demand drops in the spring and summer months the farmers are let go and thus able to return the their fields. Back Order Strategy. An organization can shift demand to other periods by allowing back orders. That is , orders are taken in one period and deliveries promised for a later period. The success of this approach depends on how willing the customers are to wait for delivery. The cost associated with back orders can be difficult to pin down since it would include lost sales, annoyed or disappointed customers, and perhaps additional paperwork. Time Flexibility Strategy Can be used if there is excess machine capacity Workforce is kept stable, but the number of hours worked is varied over time to synchronize production and demand Can use overtime or a flexible work schedule Requires flexible workforce, but avoids morale problems of the chase strategy Low levels of inventory, lower utilization Should be used when inventory holding costs are high and capacity is relatively inexpensive

Aggregate Pla
A General method for aggregate planning.

Determine Identify requirements for Step 1 constra 1. Determine demand for each period planning horizon 2. Determine capacities (regular time, over time, and subcontracting) for each period
3. Identify policies that are pertinent 4. Determine units costs for regular time, overtime, subcontracting, holding inventories, back orders, layoffs, and other relevant costs Step 2 5. Develop alternative plans and compute the costs for each Step 3 6. Prepare prospective plan for planning horizon. Step 4 7. Determine whether the plan is acceptable.if not go back to step 2. If yes go to step no 5 Step 5 8. Implement & update the plan. Step 6 9. Move ahead to the next planning session. Aggregate Planning in Services Aggregate planning for services takes into account projected customer demands, equipment, capacities, and labor capabilities. The resulting plan is a time-phased projection of service staff requirements.

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Impl upda

Aggregate planning for manufacturing and aggregate planning for services share similarities in some respect, but there are some important differences which are: 1. Services occur when they are rendered 2. Demand for service can be difficult to predict 3. Capacity availability can be difficult to predict 4. Labor flexibility can be an advantage in services 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.