Aggregate Planning

• It is about translating demand forecasts

into production and capacity levels over
a fixed planning horizon
• Assumes the demand forecast is fairly
accurate.
• It generally uses an aggregate unit of
production
 Conflicting Objectives in AP
• Objective 1 : React quickly to anticipated changes
in demand
– Called “chase” strategy
– Involves frequent and large changes in the size of the
labor force
– May not be the best strategy in the long-run
– Cost of firing and hiring
• Objective 2 : Retaining a stable workforce
– Leads in to inventory build-ups during low demand
periods or to idle time increases.
• Objective 3: Plan that maximize profit s.t
constraints on capacity
 Aggregate Unit of Production
• Aggregate planning is usually based on an
aggregate unit of production
• If the products are similar, an “average” item can
represent the aggregate unit
• If there are variety of products then the aggregate
unit may be
– Weights (tons of steel)
– Volume (gallons of gasoline)
– Amount of work required (hours of labor)
– Dollar value (value of the inventory in dollar)
Aggregate Unit of Production : Example
• Two products made of steel
Production Price ($) Price/Prod.
Time time
Product A 1000 min 500 ½
Product B 2500 min 1250 ½
• It takes the same amount of time to produce a one
$ worth of product.
• Aggregate unit  1 $ worth of output
• Forecasted demand in aggregate unit = (forecast
for prod. A*500 + Forecast for prod. B*1250)
• Example; (200 units*500 + 150
units*1250)=287500 $ worth of product is needed.
287500*2=575000 min. of production time is
needed
 Aggregate Unit of Production :
Example
• Replace the price by volume in the above
example. Now what is aggregate unit?
Produc. Time Volume(cm3) Volume/Prod.
time
Product A 1000 min 500 ½
Product B 2500 min 1250 ½
 Aggregate Unit of Production :
Example
• A plant produces six models of washing machines
Total Selling
Model
Production Price
Number
Time (hours) ($)
A55 4.2 285
K42 4.9 345
L98 5.1 395
L38 5.2 425
M26 5.4 525
M38 5.8 725

• What aggregate unit the plant manager can use for

planning? S. Nahmias, Production and Operatio
 Aggregate Unit of Production :
Example
• Can we use one dollar of output as aggregate unit?
– Selling values are not consistent with the worker hours
required
– The ratio of selling price to total worker hours required
differs from one model to the other
• Say that we have an almost constant percentage of
sales in total sales across the models (32%, 21%,
17%, 14%, 10%, 6% respectively)

S. Nahmias, Production and Operatio

 Aggregate Unit of Production :
Example
• A valid aggregate unit is a weighed average of hours
required, weighted by percent sales
– Fictitious machine = .
32(4.2)+.21(4.9)+.17(5.1)+.14(5.2)+.10(5.4)+ .
06(5.8) = 4.856 hours of labor
• An aggregate forecast can be obtained in the same
way.
• # of fictitious machines demanded = .32*fore. for
A55+.21*fore. for (K42) +…. + .06* fore. for M38
• If variety of products, sales dollars is good
approximation as an aggregate unit
S. Nahmias, Production and Operatio
 Planning Steps hierarchy
Forecast of aggregate demand for t period
Planning horizon

Aggregate production Plan : Production and

Workforce levels for each period

Master Production Schedule : Production

levels by item by period

Material Requirements Planning : Detailed

Time table for production and assembly of
Components and subassemblies
S. Nahmias, Production and Operatio
 Aggregate Production Plan
• D1, D2, …, DT demand forecasts for next T
planning periods
• A period is usually a month
• Demands are known constants
• Goal of APP: determine aggregate production
quantities and the levels of resources required
to achieve these production goals
 Issues in Aggregate Planning
• Smoothing ; refers to the cost of changing production
and workforce level between periods
– Firing and hiring costs
• Hard to find the real costs
– Trade-off between cost of changing workforce and saving in inventory
costs
• Bottleneck problems ; Inability to respond to sudden
changes in demand as a result of capacity restrictions
– High demand in one period
– Breakdown of a vital piece of equipment

S. Nahmias, Production and Operatio

 Issues in Aggregate Planning
• Planning Horizon ; number of periods for which
the demand forecast and aggregate planning are
done
– If it is too small ; current aggregate plan may lead into
not meeting the demand beyond planning horizon
– If it is too large ; forecasts into far future will be less
accurate
– End-of-horizon effect
– Rolling schedules are used in practice

S. Nahmias, Production and Operatio

 Costs in Aggregate Planning
• Smoothing cost
– Hiring cost ; advertising, interviewing, training
– Firing cost ; severance penalty, decline in worker
morale, lack of labor force in future
– Mostly assumed to be a linear function of the number
of workers
• Holding cost
– Major part is the opportunity cost of tied up money in
inventories
– Assumed to be linear in the level of inventory (end-of
period or average inventory
– It is in $/item/planning period
S. Nahmias, Production and Operatio
 Costs in Aggregate Planning
• Shortage costs
– Cost of not meeting demand on time (from inventory).
Backlogging or lost sale
– Usually assumed to be linear in number of items
• Regular time costs
– Cost of producing one unit in regular time
• Overtime or subcontracting costs
– Cost of producing one unit item in over time or through
subcontracting production to an outside supplier
• Idle time costs
S. Nahmias, Production and Operatio
 Aggregate Planning: Example
• Example 3.2 (Nahmias’ Book) Densepack ; a disk
drive producer
• Has 300 workers employed at the moment
• Ending inventory in December 500 units
• Would like to have 600 unit at the end of June
• Inventory requirements and on-hand inventories
are dealt with by adding/ subtracting them to
expected demand

S. Nahmias, Production and Operatio

 Aggregate Planning: Example
• Demand data
Net Net
Predicted
predicted cumulative
demand
demand demand
January 1280 780 780
February 640 640 1420
March 900 900 2320
April 1200 1200 3520
May 2000 2000 5520
June 1400 2000 7520
S. Nahmias, Production and Operatio
 Aggregate Planning: Example
A feasible aggregate plan

8000
Cumulative number

6000
of units

4000 Inventory
2000
0
1 2 3 4 5 6
Month

Cumulative Net Dem. Cumulative prod.

 Aggregate Planning: Example
• Cost data
– C : cost of hiring one worker = $ 500
H

– C : cost of firing one worker = $ 1000

F

– C : cost of holding one unit of inventory one month = $ 80

I

• K ; Number of aggregate units produced by one

worker in one day
– It was observed that 76 workers produced 245 disk drives in
22 days
– K = 245/(76x22) = .14653
S. Nahmias, Production and Operatio
Aggregate Planning: Example
Strategy 1 : Chase the demand by changing
work force levels
Initial Calculations Table
Number of
Number of Units produced Min. # of
Working Per worker Forecast Worker required
Month
days (Bx.14653) Net demand (D/C)
January 20 2.931 780 267
February 24 3.517 640 182
March 18 2.638 900 342
April 26 3.810 1200 316
May 22 3.224 2000 621
June 15 2.198 2000 910
A B C
S. Nahmias, Product ionandOperatio
D
 Aggregate Planning: Example
Aggregate Production/capacity plan
# of units Produc
# of # # per Tion Cum. Cum. Inven
Month Workers hired fired workers (BxE) Product. Demand. tory.
January 267 33 2.931 783 783 780 3
February 183 85 3.517 640 1423 1420 3
March 342 160 2.638 902 2325 2320 5
April 316 27 3.810 1200 3525 3520 5
May 621 306 3.224 2002 5527 5520 7
June 910 289 2.198 2000 7527 7520 7

Totals 755 145 30

A B C D E F G H I
Total cost = 755(500)+145(1000)+30(80) = 524,900
Aggregate Planning: Example
Strategy 2: Constant work force : Keep the work
force level constant throughout the planning horizon

Required workforce for strategy 2

Cumulative
Cumulative # of units
net produced Ratio
Month demand per worker (B/C) Min.
January 780 2.931 267 Number
February 1420 6.448 221 Of
March 2320 9.086 256 Workers
April 3520 12.896 274 required
May 5520 16.120 343 411
June 7520 18.318 411
A B C D
S. Nahmias, Production and Operatio
 Aggregate Planning: Example
Aggregate Production/capacity plan
Production Monthly Cumulative
Per Production Net Cumulative Inven
Month worker (Bx411) demand production tory
January 2.931 1205 1205 780 425
February 3.517 1445 2650 1420 1230
March 2.638 1084 3734 2320 1414
April 3.810 1566 5300 3520 1780
May 3.224 1325 6625 5520 1105
June 2.198 903 7528 7520 8
Total 5963
A B C D E F

Total cost = (411-300)(500)+5963(80) = 532,540

Are we missing anything?? :P
 Aggregate Planning: Example
• What are the total cost of salary paid to
workers in each strategy (assuming 2500
per month for each worker)
– 6,598,924 for strategy 1 + 524,900 = 7,124,824
– 6,165,000 for strategy 2 + 532,540 = 6,697,540
• Strategy 2 costs about 425,000 less and also
avoids some hard-to-determine costs of
changing workforce levels frequently
 Aggregate Planning: Example
Mixed Strategies
• Instead of pure strategies (chase and constant
workforce), we can have mixed strategies.
• Any mixed strategy can be represented by
combination of lines on the plot.
• Lines represent constant work force
• Any line combination not going below the
cumulative demand curve is a feasible aggregate
plan

S. Nahmias, Production and Operatio

 Aggregate Planning: Example
Feasibleaggregateplans Feasibleaggregateplans

8000 8000
6000 6000
Cumulativenumber

Cumulativenumber
ofunits

4000

ofunits
4000
2000 2000
0 0
1 2 3 4 5 6 1 2 3 4 5 6
Month Month

CumulativeNetDem. CumulativeNetDem.
Red strategy Blue strategy
Aggregate Planning: Assignment
• Figure out the costs of blue and red mixed
strategies. What strategy should be used?