Aggregate Production Planning

7 - 1
Section Objectives

After completing this section, you should be able to:

1. Explain what aggregate production planning is and how it can be
useful.
2. Identify the variables that decision makers have to work with in
aggregate planning and some of the possible strategies they can
use.
3. Describe some of the trial and error and quantitative techniques
planners use.
4. Prepare aggregate plans and compute their costs.
Aggregate Production Planning
7 - 2
PRODUCTION
PLANNING
CAPACITY
WORK FORCE
PRODUCTION
INVENTORY
I NTERNAL
EXTERNAL
EXTERNAL
CAPACITY
COMPETITION
RAW MATERIAL
SUPPLY
DEMAND
ECONOMIC
CONDITIONS
Production Planning Environment
Aggregate Production Planning
7 - 3
PLANNING HORIZON
1. LONG RANGE
- Business Forecasting
- Product & Market Planning
- Capacity Planning
- Location & Layout
- Financial Planning
5 YEARS
2. MEDIUM RANGE
- Aggregate Production Planning
- Product Forecasting
- Master Production Scheduling
- Employment / Output / Inventory

1 YEAR
3. SHORT RANGE
- Materials & Purchasing Control
- Scheduling
- Machine Loading
- Job Assignments

2 - 3 MONTHS
Production Planning Horizon
Aggregate Production Planning
7 - 4
Aggregate Production Planning
Objective: To develop a plan that will satisfy or meet demand within the
limits of available resources, at least cost to the organization.
Includes: Optimal combination of production rate, work force level and
inventory.
Time Frame: six to eighteen months.

Strategies for Adjusting the Output (Production) Rate
1. Vary the work force level.
2. Vary the inventory level.
3. Vary the production level.
4. Vary the level of customer service (back orders).
5. Sub-contract some of the production requirements.
6. Alter the peak output capacity.
Aggregate Production Planning
7 - 5
STRATEGY INCREASE DECREASE
1. Work Force
(WF)
2. Production Rate
(PR)
3. Inventory Level
(INV)
4. Back Order
(BO)
5. Subcontracting
(SUB)
Interview
Hiring
Training
Overtime & Shift Differentials
Lower Productivity
Decreased Quality
Warehousing Costs
Obsolescence / Shrinkage
Opportunity Cost
Lost Sales
Reduced Level of Service
Decreased Quality
Loss of Control
Higher Unit Costs
Severance Payments
Loss of Morale
Labour Market & Public Image
Idle Manpower
Lower Output
Worker Attrition
Stockouts
Lost Sales
Idle Warehouse Space
Higher Carrying Costs
Increased Investment
Reduced Flexibility
6. Design for Peak Demand Rate:
- Large Capital Investment
- Underutilization of Resources
- Opportunity Costs
Relevant Costs for Aggregate Production Planning
Aggregate Production Planning
7 - 6
Forecast / Known
Demand in T+1
Decision Process
1. Output Rate
2. Resource Mix
State of
System (T)
WF
t

PR
t

INV
t

BO
t
SUB
t
State of
System (T+1)
WF
t+1

PR
t+1

INV
t+1

BO
t+1
SUB
t+1
Incremental Costs
Payroll
Hire / Fire
Shift Premium
Overtime / Undertime
Inventory Holding
Stockout
Backorder
Subcontract
Minimize
Single-Stage Aggregate Production Planning
Aggregate Production Planning
7 - 7
Given: WF
t
= 20 assemblers (1 assembler produces 10 units per period)
INV
t
= 100 units of finished goods
F
t
= 200 units demand forecast for t + 1
C
w
= $800 wage cost per assembler per period
C
f
= $400 fire (layoff) cost per assembler
C
h
= $300 hire cost per assembler

Forecast: F
t
= 200 units demand forecast for period t + 1, then DEC
t+1
= fire 10
assemblers and build 100 units
F
t+1
= 300 units demand forecast for period t + 2, then DEC
t+2
= hire 20
assemblers and build 300 units.
Units of
Output
Wage
Cost
Fire
Cost
Hire
Cost
Total
Cost
Beginning
Inventory
Number of
Assemblers
10
30
100
0
100
300
$ 8000
24000
4000


6000
$12000
30000
$42000
T + 1
T + 2
Single-Stage Aggregate Production Planning
Aggregate Production Planning
7 - 8
Forecast / Known
Demand in T+1
Decision Process
1. Output Rate
2. Resource Mix
State of
System (T)
WF
t

PR
t

INV
t

BO
t
SUB
t
State of
System (T+1)
WF
t+1

PR
t+1

INV
t+1

BO
t+1
SUB
t+1
Incremental Costs
Payroll
Hire / Fire
Shift Premium
Overtime / Undertime
Inventory Holding
Stockout
Backorder
Subcontract
Minimize
Decision Process
1. Output Rate
2. Resource Mix
State of
System (T+2)
WF
t+2

PR
t+2

INV
t+2

BO
t+2
SUB
t+2
Incremental Costs
Payroll
Hire / Fire
Shift Premium
Overtime / Undertime
Inventory Holding
Stockout
Backorder
Subcontract
Forecast / Known
Demand in T+2
+
Multi-Stage Aggregate Production Planning
Aggregate Production Planning
7 - 9

Given: WF
t
= 20 assemblers (1 assembler produces 10 units per period)
INV
t
= 100 units of finished goods
F
t
= 200 units demand forecast for t + 1 / 300 units for t +2
C
w
= $800 wage cost per assembler per period
C
f
= $400 fire (layoff) cost per assembler
C
h
= $300 hire cost per assembler

Forecast: F
t
= 200 units demand forecast for period t + 1, then DEC
t+1
= build
200 units
F
t+1
= 300 units demand forecast for period t + 2, then DEC
t+2
= build
200 units.
Units of
Output
Wage
Cost
Fire
Cost
Hire
Cost
Total
Cost
Beginning
Inventory
Number of
Assemblers
20
20
100
100
200
200
$16000
16000
---


---
$16000
16000
$32000
T + 1
T + 2
Multi-Stage Aggregate Production Planning
Aggregate Production Planning
7 - 10
Techniques for Aggregate Production Planning
1. Informal, trial and error methods. In practice, these techniques are more
commonly used.
2. Mathematical techniques - such as linear programming, linear decision
rules or simulation. Although not widely used, they serve as a basis for
comparing the effectiveness of alternative techniques for aggregate
planning.

General Procedure for Aggregate Planning
1. Determine demand and production requirements for each period.
2. Determine production capacity (regular time, overtime, subcontracting)
for each period.
3. Determine company or departmental policies that are pertinent.
For example, maintain a safety stock of 5 percent of demand, or maintain
a reasonably stable work force.
4. Determine unit costs for regular time, overtime, subcontracting, holding
inventories, back orders and other relevant costs.
5. Develop alternative plans and compute the cost of each.
6. If satisfactory plans emerge, select the one that best satisfies objectives
(such as cost minimization). Otherwise, return to step 5.
Aggregate Production Planning
7 - 11
Aggregate Production Planning Illustration - Montreal Manufacturing
Given the following information:
6 month production planning period
10 labour-hours per unit required
Labour cost = $10/hour regular
= $15/hour overtime
Total unit cost = $200 / unit
= $228/unit subcontract
Current workforce = 20 employees
Hiring cost = $500 / employee
Layoff cost = $800 / employee
Safety stock = 20% of monthly forecast
Beginning inventory = 50 units
Inventory carrying cost = $10/unit/month
Stockout cost = $50/unit/month



Additional information available:

Sales Work Work Hours
Month Forecast Days at 8 Hrs. / Day
Jan. 300 22 176
Feb. 500 19 152
Mar. 400 21 168
Apr. 100 21 168
May. 200 22 176
June 300 20 160
First Step: Calculate Production Requirement
Sales Safety Production
Month Forecast Stock Required
Jan. 300 60 300+60-50 = 310
Feb. 500 100 500+100-60 = 540
Mar. 400 80 400+80-100 = 380
Apr. 100 20 100+20-80 = 40
May. 200 40 200+40-20 = 220
June 300 60 300+60-40 = 320
Aggregate Production Planning
7 - 12
Production
Required
310
540
380
40
220
320
Hours
Required
3100
5400
3800
400
2200
3200
Hrs. Avail.
per Worker
176
152
168
168
176
160
Workers
Required
18
36
23
3
13
20
Workers
Hired

18


10
7
Workers
Fired
2

13
20


Hire/Fire
Costs
$1600
9000
10400
16000
5000
3500
Total Cost = $45,500
Production
Required
310
540
380
40
220
320
Hours
Required
3100
5400
3800
400
2200
3200
Total Hrs.
Available
3520
3040
3360
3360
3520
3200
Overtime
Hours

2360
440



Undertime
Hours
420


2960
1320

OT/ UT
Costs
$4200
11800
2200
14800
6600
0
Plan # 2 - Exact Production; Vary Production Rate
Total Cost = $61,000

Month
Jan.
Feb.
Mar.
Apr.
May
June

Month
Jan.
Feb.
Mar.
Apr.
May
June
Plan # 1 - Exact Production; Vary Work Force
Aggregate Production Planning Illustration - Montreal Manufacturing
Aggregate Production Planning
7 - 13
Cum. Prod.
Required
310
850
1230
1270
1490
1810
Total
Production
352
304
336
336
352
320
Cumulative
Production
352
656
992
1328
1680
2000
Inventory
Level
42


58
190
190
Stockout
Level

194
238



Inv. / SO
Costs
$420
9700
11900
580
1900
1900
Total Cost = $26,400
Hours
Available
3520
3040
3360
3360
3520
3200
Total Cost = $7,160 + $ 21,000 = $28,160
Cum. Prod.
Required
310
850
1230
1270
1490
1810
Hours
Available
3520(20)
4560(30)
5040(30)
1680(10)
1760(10)
1600(10)
Total
Production
352
456
504
168
176
160
Cumulative
Production
352
808
1312
1480
1656
1816
Inv. / (SO)
Level
42
(42)
82
210
166
6
Inv. / SO
Costs
$420
2100
820
2100
1660
60
Hire/Fire
Costs

5000

16000


$7,160 $21,000

Month
Jan.
Feb.
Mar.
Apr.
May
June

Month
Jan.
Feb.
Mar.
Apr.
May
June
Plan # 3 - Exact Production; Vary Inventory Level With 20 Employees
Aggregate Production Planning Illustration - Montreal Manufacturing
Plan # 4 - Exact Production; Vary Workforce Level; Vary Inventory Level
Aggregate Production Planning
7 - 14

Plan
Costs
45,500
61,000
26,400
28,160

Plan
1
2
3
4
Production
Costs
362,000
362,000
400,000
363,200

Total
Costs
407,500
446,500
426,400
391,360

Units
Produced
1810
1810
2000
1816

Cost
per Unit
$225.14
$233.70
$213.20
$215.51

Final Cost Analysis:
Decision: Go with Plan # 3 on the basis of lowest cost per unit.
Aggregate Production Planning Illustration - Montreal Manufacturing
Aggregate Production Planning
7 - 15
Aggregate Production Planning - Additional Illustration # 1
The item demand forecasts for a product for October, November, and December are 2000, 3000, and 2500
units, respectively. Safety stock policy, as determined by management, is 25 percent of the forecast for
that month. There is no beginning inventory. Additional information for this product is as follows:

Manufacturing cost $250/unit
Storage costs $100/unit/month
Standard pay rate $8.00/hr., 8 hr./day
Overtime rate $12.00/hr.
Cost of stockout $10.00/unit/month
Cost of subcontracting $10.00/unit
Hiring and training cost $200/worker
Lay-off costs $200/worker
Production man-hours required per unit 12 hours
Number of working days in each month 20

a) Develop a production schedule to produce the exact production requirements by varying the
work force size.
b) Calculate total hiring and lay-off costs.
Aggregate Production Planning
7 - 16
Aggregate Production Planning - Additional Illustration # 2
The production manager of the Marabell Manufacturing Corporation wants to determine an production
strategy for the first quarter of the year. Beginning inventory for the first month of the quarter period is
200 units, and, for each subsequent month, the beginning inventory for that month is equal to the safety
stock of the preceding month. The company's safety stock policy is 25 percent of the month's demand
forecast.
The demand forecast for each month of the quarter period is 700, 900, and 875 units, respectively. The
number of working days in each month is 21, 22, and 20.
The following additional information was also made available:
Manufacturing cost $100/unit
Storage costs $1.00/unit/month
Standard pay rate $5.00/hr., 8 hr./day
Overtime pay 150% of standard
Marginal cost of stockout $4.00/unit/month
Hiring and training cost $150/man
Lay-off costs $200/man
Man-hours required per unit 4
Number of workers currently employed 15
Determine the production costs if the company wants to carry out the strategy of:
a) Producing to exact production requirements by varying the work force size on regular hours.
b) Maintaining a constant work force level based on a quarterly (3-month) average. Inventory is
allowed to accumulate, while shortages may be filled from next month's production.