Aggregate Planning

Production and Operations Planning

Production Process Long Term
Design Capacity Planning

Aggregate Planning

Forecast
Master Production
Schedule
Demand
Material Requirements
Planning

Individual Order
Scheduling
The main idea behind aggregate planning

Aggregate planning
Translates business
plans into rough labor
schedules and
production plans
Issues to Consider for Aggregate Planning

Production rate: aggregate units per worker per unit time

Workforce level: available workforce in terms of hours

Actual Production: Production rate x Workforce level

Inventory: Units carried over from previous periods

Costs: production, changing workforce, inventory

What does aggregate planning do?

Given an aggregate demand forecast , determine production

levels, inventory levels, and workforce levels, in order to
minimize total relevant costs over the planning horizon

Given the number

of variables, there is
not a single optimal
solution!
Aggregate Planning Strategies

1. Chase strategy: match production rate to production

requirements by varying the workforce (no inventory
buildup or shortage allowed)
2. Level strategy: keep a constant workforce who work at
maximum capacity (inventory will vary from period to
period); workforce level chosen such that the total
requirement over the planning horizon can be exactly met
3. Stable workforce: keep a constant workforce who work at
maximum capacity; outsource in order to match production
and requirements (no inventory buildup or shortage
allowed); workforce level chosen such that they can
exactly satisfy the requirements in the period with the
minimum requirement level
Example: CA&J Company
JAN FEB MAR APR MAY JUN Total
Demand Forecast 1,800 1,500 1,100 900 1,100 1,600 8,000

Working Days 22 19 21 21 22 20 125

Costs Inventory
Inventory holding $1.50/unit/month Beginning Inventory 400 units
Backorders $5.00/unit/month
Hiring and training $200.00/worker
Labor
Layoff $250.00/worker
Beginning Labor 40 workers
Labor time required 0.20 units/hour
Straight time cost (8 hours) $4.00/hour
Outsourcing $20.00/unit
First step: Analyze the requirements

JAN FEB MAR APR MAY JUN

Beginning Inventory 400

Demand Forecast 1,800 1,500 1,100 900 1,100 1,600

Production requirement
Ending Inventory

Production requirement = Forecast Beginning Inventory

Ending Inventory = Beginning Inventory + Production Requirement Forecast

First step: Analyze the requirements

JAN FEB MAR APR MAY JUN

Beginning Inventory 400 0 0 0 0 0

Demand Forecast 1,800 1,500 1,100 900 1,100 1,600

Production requirement 1,400 1,500 1,100 900 1,100 1,600

Ending Inventory 0 0 0 0 0 0
Plan 1: Chase strategy (variable workforce)
JAN FEB MAR APR MAY JUN

Production requirement 1,400 1,500 1,100 900 1,100 1,600

Production hours required

Days per month 22 19 21 21 22 20

Worker hours per month

Workers required

Workers hired

Hiring cost

Workers laid off

Layoff cost
Labor cost
Plan 1: Chase strategy
JAN FEB MAR APR MAY JUN

Production requirement 1,400 1,500 1,100 900 1,100 1,600

Production hours required 7,000 7,500 5,500 4,500 5,500 8,000

Days per month 22 19 21 21 22 20

Worker hours per month 176 152 168 168 176 160

Workers required 40 49 33 27 31 50

Workers hired 0 9 0 0 4 19

Hiring cost 0 1800 0 0 800 3,800

Workers laid off 0 0 16 6 0 0

Layoff cost 0 0 4,000 1,500 0 0

Labor cost 28,000 30,000 22,000 18,000 22,000 32,000

Plan 1: Chase strategy

Hiring cost 6,400

Layoff cost 5,500

Labor cost 152,000

Total Cost 163,900

Plan 2: Level strategy
JAN FEB MAR APR MAY JUN
Beginning inventory 400
Working days per month 22 19 21 21 22 20
Production hours available
Monthly production level
Demand Forecast 1,800 1,500 1,100 900 1,100 1,600
Ending Inventory
Shortage Cost
Inventory cost
Labor cost
Plan 2: Level strategy
Number of workers required
= Total hours required over planning horizon/(8*total days)
= 38,000/(8*125) = 38. This is the no. of workers for each month

JAN FEB MAR APR MAY JUN

Beginning inventory 400 -62 -407 -230 147 385
Working days per month 22 19 21 21 22 20
Production hours available 6688 5776 6384 6,384 6,688 6,080
Monthly production level 1,338 1,155 1,277 1,277 1,338 1,216
Demand Forecast 1,800 1,500 1,100 900 1,100 1,600
Ending Inventory -62 -407 -230 147 385 1
Shortage Cost 310 2035 1150 0 0 0
Inventory cost 0 0 0 220.5 577.5 1.5
Labor cost 26752 23104 25536 25536 26752 24320
Plan 2: Level strategy

Layoff cost 500

Shortage
3,495
cost
Inventory
798
cost

Labor cost 152,000

Total Cost 156,793

Plan 3: Stable strategy with outsourcing

JAN FEB MAR APR MAY JUN

Production requirement 1,400 1,500 1,100 900 1,100 1,600

Working days per month 22 19 21 21 22 20

Monthly production hours

Monthly production level

Monthly outsourcing level

Monthly outsourcing cost

Monthly labor cost

Plan 3: Stable strategy with outsourcing
Number of workers
= enough workers to cover requirements in April
= 900*5/(21*8)
= 27 workers (this is the no. of workers for each month)
JAN FEB MAR APR MAY JUN

Production requirement 1,400 1,500 1,100 900 1,100 1,600

Working days per month 22 19 21 21 22 20

Monthly production hours 4,752 4,104 4,536 4,536 4,752 4,320

Monthly production level 950 821 907 907 950 864

Monthly outsourcing level 450 679 193 - 150 736

Monthly outsourcing cost 9,000 13,580 3,860 0 3,000 14,720

Monthly labor cost 19,008 16 416 18,144 18,144 19,008 17,280

Plan 3: Stable strategy with outsourcing

Layoff Cost 3,250

Outsourcing
44,160
Cost

Labor Cost 108,000

Total Cost 155,410

 Comparison

Layoff cost 500

Shortage
Hiring cost 6,400 3,495 Layoff Cost 3,250
cost
Inventory Outsourcing
Layoff cost 5,500 798 44,160
cost Cost

Labor cost 152,000 Labor cost 152,000 Labor cost 108,000

Total Cost 163,900 Total Cost 156,793 Total Cost 155,410

Chase Level Stable

Sensitivity Analysis

WHAT IF

outsourcing costs increase or decrease?

the holding costs are higher?
the hiring costs are lower?
the firing costs are higher?

We can always plug the data in and re-calculate the costs