Aggregate Planning

Asni Mustika Rani

Aggregate Planning

The objective of aggregate planning is to meet

forecasted demand while minimizing cost over
the planning period

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 The Planning Process
Determine the quantity and timing of
production for the intermediate 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
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 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
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 Planning Horizons
Long-range plans
(over one year)
Research and Development
New product plans
Capital investments
Facility location/expansion

Top
executives Intermediate-range plans
(3 to 18 months)
Sales planning
Production planning and budgeting
Operations Setting employment, inventory,
managers subcontracting levels
Analyzing operating plans

Short-range plans
(up to 3 months)
Job assignments
Operations Ordering
managers, Job scheduling
supervisors, Dispatching
foremen Overtime
Part-time help

Responsibility Planning tasks and horizon Figure 13.1

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 Aggregate Planning
Quarter 1
Jan Feb Mar
150,000 120,000 110,000

Quarter 2
Apr May Jun
100,000 130,000 150,000

Quarter 3
Jul Aug Sep
180,000 150,000 140,000

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 Aggregate
Planning

Figure 13.2
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 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
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 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
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 Capacity Options
◆ Changing inventory levels
◆ Increase inventory in low demand
periods to meet high demand in
the future
◆ Increases costs associated with
storage, insurance, handling,
obsolescence, and capital
investment
◆ Shortages may mean lost sales
due to long lead times and poor
customer service
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 Capacity Options
◆ Varying workforce size by hiring
or layoffs
◆ Match production rate to demand
◆ Training and separation costs for
hiring and laying off workers
◆ New workers may have lower
productivity
◆ Laying off workers may lower
morale and productivity
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Prentice Hall
 Capacity Options
◆ Varying production rate through
overtime or idle time
◆ Allows constant workforce
◆ May be difficult to meet large
increases in demand
◆ Overtime can be costly and may
drive down productivity
◆ Absorbing idle time may be
difficult
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 Capacity Options
◆ Subcontracting
◆ Temporary measure during
periods of peak demand
◆ May be costly
◆ Assuring quality and timely
delivery may be difficult
◆ Exposes your customers to a
possible competitor

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 Capacity Options
◆ Using part-time workers
◆ Useful for filling unskilled or low
skilled positions, especially in
services

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Prentice Hall
BACK ORDERS
• Back orders result when your company does not have enough
production and/or inventory on hand to cover current demand, so it
promises to deliver the product to the customer at a later date.
Customers may wait or they may take their business elsewhere.
When a customer is unwilling to wait, the back order turns into a lost
sale.
• Your company must understand its customers and its marketplace to
judge whether or not back orders are a viable option. If alternative
products or sources are readily available, customers probably will not
wait. They are more likely to wait for unique products.
SUBCONRACTING
Subcontracting means letting another company do some of the work
for you. Subcontracting provides additional output capacity during
periods of high demand. Unlike strategic outsourcing decisions that
have components, subassemblies, or final products previously done in-
house instead produced by another company, subcontracting is a
tactical decision as to how to increase output in periods of high
demand
 Option Advantages
Changes in human resources
Changing inventory levels are gradual or none; no abrupt
production changes.
Varying workforce size by Avoids the costs of other
hiring or layoffs alternatives.
Varying production rates Matches seasonal fluctuations
through overtime or idle without
time hiring/training costs.
Is less costly and more flexible
Using part time workers than
full time workers.
Tries to use excess capacity.
Influencing demand Discounts
draw new customers.
Back ordering during high- May avoid overtime. Keeps
demand periods capacity constant.
Counterseasonal product Fully utilizes resources; allows
and service mixing stable workforce.
Disadvantages Comments
Inventory holding costs may
Applies mainly to production,
increase. Shortages may result
not service, operations.
in lost sales.
Hiring, layoff, and training Used where size of labor pool
costs may be significant. is large.
Overtime premiums; tired
Allows flexibility within the
workers; may not meet
aggregate plan.
demand.
High turnover/training costs; Good for unskilled jobs in
quality areas with large temporary
suffers; scheduling difficult. labor pools.
Uncertainty in demand. Hard
Creates marketing ideas.
to
Overbooking
match demand to supply
used in some businesses.
exactly.
Customer must be willing to
wait, but Many companies back order.
goodwill is lost.
May require skills or Risky finding products or
equipment outside firm’s areas services with opposite demand
of expertise. patterns.
Comparison of Chase versus Level Strategy
Chase Demand Level Capacity

Level of labor skill required Low High

Job discretion Low High
Compensation rate Low High
Working conditions Sweatshop Pleasant
Training required per employee Low High
Labor turnover High Low
Hire layoff costs Low High
Amount of supervision required High Low
Type of budgeting and
Short run Long run
forecasting required
CONTOH SOAL
• Asusmsi pekerja awal yang dimiliki adalah 40 orang, setiap orang dapat
memproduksi 10.000 botol minuman/bulan tanpa lembur. Dalam 1 tahun
perusahaan hanya mengizinkan lembur selam 3 bulan ketika permintaan tinggi,
dan rata-rata produksinya sama.
• Setiap pekerja dibayar $4,000 per per bulan tanpa lembur. Ketika lembur pekerja
dibayar 150% dari waktu normal. Maksimum 20% lembur dapat digunakan.
• Biaya rekrutmen pekerja baru $5,000, biaya pemecatan pekerja $4,000.
• Harga produksi setiap botol minuman adalah $4. Biaya penyimpanan adalah 3%
per bulan
• Perushaan memiliki persediaan awal sebesar 50,000 botol minuman. Perusahaan
ingin memiliki persediaan di akhir periode sebesar 50,000 botol minuman.
Peramalan permintaan harus dipenuhi dan tidak boleh terjadi stockout.
Data dalam (000)
MONTH FORECAST DEMAND MONTH FORECAST DEMAND
JANUARY 300 JULY 650
FEBRUARY 300 AUGUST 600
MARCH 350 SEPTEMBER 475
APRIL 400 OCTOBER 475
MAY 450 NOVEMBER 450
JUNE 500 DECEMBER 450

• Hitunglah biaya yang akan dikeluarkan perusahaan dengan menggunakan strategi aggregate planning:
1. Level Workforce
2. Lever Workforce + Overtime
3. Chase
 Aggregate Planning
Strategy Level …………………
1 2 3 4 5 6 7 8 9 10 11 12 TOTAL
RESOURCES
Regular Workers
Overtime
Unit Produced
Sales Forecasting 300 300 350 400 450 500 650 600 475 475 450 450 5400
Inventory (50)

COST
Regular Time
Overtime
Hire / Layoff
Inventory Carry
Total Cost
 Aggregate Planning Strategy
Level Workfoce
1 2 3 4 5 6 7 8 9 10 11 12 TOTAL
RESOURCES
Regular Workers 45 45 45 45 45 45 45 45 45 45 45 45
Overtime
Unit Produced 450 450 450 450 450 450 450 450 450 450 450 450 5400
Sales Forecasting 300 300 350 400 450 500 650 600 475 475 450 450 5400
Inventory (50) 200 350 450 500 500 450 250 100 75 50 50 50

COST
Regular Time 180 180 180 180 180 180 180 180 180 180 180 180 2160
Overtime
Hire / Layoff 25 25
Inventory Carry 24 42 54 60 60 54 30 12 9 6 6 6 363
Total Cost 229 222 234 240 240 234 210 192 189 186 186 186 2548
 Aggregate Planning
Strategy Level Workfoce+Inventory
1 2 3 4 5 6 7 8 9 10 11 12 TOTAL
RESOURCES
Regular Workers 43 43 43 43 43 43 43 43 43 43 43 43
Overtime 86 86 86 258
Unit Produced 430 430 430 430 430 430 430 430 430 430 430 430 5160
Sales Forecasting 300 300 350 400 450 500 650 600 475 475 450 450 5400
Inventory (50) 180 310 390 420 400 416 282 198 153 108 88 68

COST \
Regular Time 172 172 172 172 172 172 172 172 172 172 172 172 2064
Overtime 51,6 51,6 51,6 154,8
Hire / Layoff 15 15
Inventory Carry 21,6 37,2 46,8 50,4 48,0 49,9 33,8 23,8 18,4 13 1,6 8,2 361,6
Total Cost 208, 209, 218, 222, 220, 273, 257,4 247,4 190,4 185,0 182,6 186,2 2595,4
6 2 8 4 0 5
 Aggregate Planning
Strategy Chase
1 2 3 4 5 6 7 8 9 10 11 12 TOTAL
RESOURCES
Regular Workers 43 43 43 43 43 43 43 43 43 43 43 43
Overtime
Unit Produced 300 300 350 400 450 500 650 600 475 475 450 450 5400
Sales Forecasting 300 300 350 400 450 500 650 600 475 475 450 450 5400
Inventory (50) 180 310 390 420 400 416 282 198 153 108 88 68

COST \
Regular Time 172 172 172 172 172 172 172 172 172 172 172 172 2064
Overtime 51,6 51,6 51,6 154,8
Hire / Layoff 15 15
Inventory Carry 21,6 37,2 46,8 50,4 48,0 49,9 33,8 23,8 18,4 13 1,6 8,2 361,6
Total Cost 208, 209, 218, 222, 220, 273, 257,4 247,4 190,4 185,0 182,6 186,2 2595,4
6 2 8 4 0 5
Exercise 1
Tornado Skates Inc. produces a variety of inline roller skates. Management wants
you to develop an aggregate plan that covers the next seven months.
Month Nov Dec Jan Feb Mar Apr May
Forecast 3000 6000 2000 8500 4000 5500 1500
Demand

Develop an aggregate plan using:

1. Stable workforce throughout the plan
2. Level production strategy (Level Workforce Using Inventories and Back
Orders)
3. Level production strategy (Level Workforce Using Overtime and Back Orders)
4. Chase strategy (hire/layoff)
5. Tornado Skates Inc. wants to take into account if there is no back order
policy, so the company will use subcontracting
*if the company has initial inventory, the company will use the inventory to meet
consumer demand in that period.
The labor costs are given as the hourly wage cost of one employee. If you are
working regular time, you are paid $15.00 per hour. For overtime, you receive
$22.50 per hour. Employees are hired or fired at the beginning of the plan. For level
plans you can adjust your workforce at the beginning of the plan, and then it
remains constant throughout the plan. The hiring and firing costs are $500.00 and
$750.00 per person. The inventory holding cost is assessed to the ending inventory
for each period. In this case, there is a $5 holding cost per unit per period. The
shortage or back-order cost is given as $7.50 per unit per period. The material cost
used to build each unit is $30.00. In terms of capacity, the company currently has
18 employees. There is a beginning inventory of 2500 units. Every unit produced
takes 0.64 labor-hours, and each period of the plan has 160 regular-time hours
available for production from each employee. Company can work up to 20 hours of
overtime each period.
 1 2 3 4 5 6 7 8 9 10 11 12 TOTAL
RESOURCES
Regular Workers
Overtime
Unit Produced
Sales Forecasting
Subcontracting
Inventory
Back orders/Lost sales
COST
Regular Time
Overtime
Production
Hire/Layoff
Subcontracting
Inventory
Back orders/Lost sales
STABLE WORKFORCE THROUGHOUT THE
PLAN
LEVEL WORKFORCE USING INVENTORIES AND
BACK ORDERS
LEVEL WORKFORCE USING OVERTIME AND
BACK ORDERS
CHASE STRATEGY
LEVEL WORKFORCE USING INVENTORIES AND
SUBCONTRACTING
Exercise 2
• W. C. Sanders, owner of Fort Engines, a producer of heavyduty snow blower engines,
needs to develop an aggregate plan for the coming year. The company currently uses 20
individuals working 160 regular-time hours each month. Each worker is capable of
producing 10 heavy-duty snow blowers per month. Employees are paid $12 per hour.
Overtime is limited to a maximum of 40 hours per month. Holding costs are $5 per unit
per period. Back-order cost is $10 per unit per period. Hiring and firing cost are $400
and $600. The beginning inventory is 40 units. Monthly demand projections are:
1. Develop a hybrid aggregate plan using the initial workforce
supplemented by overtime. If demand in any period exceeds
regular-time production plus overtime production plus any
beginning inventory, the company will use back orders. Calculate
the cost of this plan.
2. Another alternative is to try a level plan that uses inventory and
back orders to absorb fluctuation. Calculate the cost of this plan.
3. A third alternative being considered is to use hiring or firing
employees. Calculate the cost of this plan.
4. Compare the three plans in terms of cost, customer service,
operations, and human resources.