Aggregate Planning

Production and Operations Planning

Production Process
Design

Long Term
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

Demand Forecast
Working Days

JAN

FEB

MAR APR

MAY

JUN

Total

1,800

1,500

1,100

900

1,100

1,600

8,000

22

19

21

21

22

20

125

Costs

Inventory

Inventory holding

$1.50/unit/month

Backorders

$5.00/unit/month

Hiring and training

$200.00/worker

Layoff

$250.00/worker

Labor time required

0.20 units/hour

Straight time cost (8 hours)

$4.00/hour

Outsourcing

$20.00/unit

Beginning Inventory 400 units

Labor
Beginning Labor

40 workers

First step: Analyze the requirements

JAN
Beginning Inventory

Demand Forecast

FEB

MAR

APR

MAY

JUN

1,500

1,100

900

1,100

1,600

400

1,800

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

400

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

Beginning Inventory

Ending Inventory

Plan 1: Chase strategy (variable workforce)

Production requirement

JAN

FEB

MAR

APR

MAY

JUN

1,400

1,500

1,100

900

1,100

1,600

22

19

21

21

22

20

Production hours required

Days per month
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

19

Hiring cost

1800

800

3,800

Workers laid off

16

Layoff cost

4,000

1,500

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

1,800

1,500

1,100

900

1,100

1,600

Production hours available

Monthly production level
Demand Forecast
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

Shortage Cost

310

2035

1150

Inventory cost

220.5

577.5

1.5

26752

23104

25536

25536

26752

24320

Labor cost

Plan 2: Level strategy

Layoff cost

500

Shortage
cost

3,495

Inventory
cost

798

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

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
Cost

44,160

Labor Cost

108,000

Total Cost

155,410

Comparison
Layoff cost

500

Hiring cost

6,400

Shortage
cost

3,495

Layoff Cost

3,250

Layoff cost

5,500

Inventory
cost

798

Outsourcing
Cost

44,160

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