1. Ardavan Asef-Vaziri Systems and Operations Management
Chapter 13
Aggregate Planning
Ardavan Asef-Vaziri Systems and Operations Management

2. Intermediate-range capacity planning
Aggregate Planning
Intermediate-range capacity planning
Usually covers a period of 12 months.
Short
range
Intermediate range
Long range
Now
2 months
1 Year

3. Overview of Planning Levels
Long-range plans
Long term capacity
Location / Layout
Intermediate plans (Aggregate Planning)
Manpower Utilization regular time, overtime
Outsourcing Buying from a third party
Inventory carrying product for latter periods
Backlog satisfying the demand of the earlier periods
Hiring and layoff
Short-range plans (Scheduling)
Job assignments
Machine loading

4. Aggregate Planning
Aggregate planning is a big picture approach to production planning.
It is a production plan to meet the demand throughout the year.
It is not concerned with individual products, but with a single aggregate product representing all products.
For example, in a TV manufacturing plant, the aggregate planning does not go into all models and sizes. It only deals with a single representative aggregate TV. Such an aggregate TV may even does not exist in reality.
All models are lumped together and represent a single product; hence the term aggregate planning.

5. Aggregate Planning
Aggregate approach permits planners to develop intermediate-range capacity planning without being involved in too much details.
In aggregate planning we are concerned with the quantity and also timing of demand. Demand is uneven through the year.
Two basic characteristics of aggregate planning
1-Aggregate Product
2-Uneven Demand
It begins with a forecast of aggregate demand for one year. Then a one year plan is prepared for each month. It includes volume of output, working hours, overtime, outsourcing, inventories, back orders, and hiring and layoffs.

6. Aggregate Planning 1-Demand 2-Regular time production
3-Overtime production
4-Outsourcing; buying from a third party
5-Inventory; production in one period and sale in one or more later periods.
6-Backlog; production in one period to satisfy the demand of one or more earlier periods.
7-Hiring and layoffs
A number of aggregate plans are examined in terms of feasibility and their costs. The best one is selected.

7. Aggregate Planning : Summary
The question is how to produce to meet the demand. How many
employees, how much overtime, outsourcing, inventories, back orders?
Basic aggregate planning strategies are:
Level Capacity
Chase Demand
Demand
Time period (year)

8. Level Capacity
Maintaining a steady rate of output while meeting variations in demand by a combination of options
Demand
Production
Production
Time period (one year)

9. Interesting Observation in Cumulative Graph
Cumulative output/demand
Cumulative
production
Cumulative
demand

10. Interesting Observation in Cumulative Graph
Give the following demand and production.
Using a line segment show the maximum inventory?
Cumulative output/demand
Cumulative
production
Cumulative
demand

11. Chase Demand
Matching capacity to demand; production in each period is equal to the expected demand for that period.
Demand
Time period (year)
and
Production

12. General Procedure for Aggregate Planning
Determine demand for each period.
Determine capacities (regular time, over time, subcontracting) for each period.
Identify company’s policies regarding inventories and work force. How much inventory is allowed? What rate of overtime and outsourcing is allowed?
Determine cost of working regular time and over time work, subcontracting, inventories, back orders.
Develop alternative plans, compare them and select.

13. Back order (backlog)
Back order cost is the cost of satisfying the demand of one period in one or more periods later.
It is the cost of loss of goodwill, potential discounts, backtracking, extra paperwork for transactions, etc.
Back order cost is stated as cost / unit / period
(the same as inventory cost).
Total back order cost per period is
(cost / unit / period) × (total back order in the period).

14. Problem 1
Demand
Total
There are 20 full time employees, each can produce 10 units per period at the cost of $6 per unit. Therefore the supply of full time workers is as follows
Total
Overtime cost is $13 per unit.
Inventory carrying cost $5 per unit per period
Backlog cost $10 per unit per period
Maximum over time production is 20 units per period
Formulated the problem as a Linear Programming model. Using excel and solver find the optimal solution.