0. Aggregate Planning in Supply Chain
Spring, 2014
Supply Chain Management: Strategy, Planning, and Operation
Chapter 8
Byung-Hyun Ha

1. Contents Introduction Aggregate planning problem
Aggregate planning strategy
Aggregate planning using LP
Further discussion

2. Introduction Ideal supply chain Aggregate planning
Infinite capacity and zero lead time  impossible
We need plans with different levels
Strategic plans -- aggregate plans -- operational plans
Aggregate planning
“A process by which a company determines planned levels of capacity, production, subcontracting, inventory, stockouts, and even pricing over a specified time horizon”
Key question
How can a firm best use the facilities it has?
Decisions made at a product family (aggregates, not SKU) level
Planning horizon of 3 to 18 months

3. Aggregate Planning Problem
Aggregate planning as optimization problem (typical)
Objective
Profit maximization
Input
Forecasted demand
Unit cost of each resource
Cost of inventory, stockout, backlog
Constraints
Capacity, supply chain network configuration
Output
Production rate, machine capacity level
Workforce, overtime, subcontracting
Inventory on hand, stockout (backlog or lost sales)
 Supply chain coordination (global optimization)?

4. Aggregate Planning Problem
Identifying aggregate units of production
Examples of aggregate units
Number of final production items
Weight or length of output
Hours of lobar
Dollars of sales
Simple approach to aggregating product mix
Weighted average, bottleneck process, ...
Effective capacity consideration
Identifying input for planning
Example (Table 8-1)
Family
Material Cost/Unit
Revenue/ Unit
Setup Time/Batch
Average Batch Size
Production Time/Unit
Net Production Time/Unit
% Share of Units Sold A B
... 15 7 54 30 8 6 50
150
5.60
3.00
5.76
3.04 10 25

5. Aggregate Planning Strategy
Tradeoff
max. profit  min. (cost  capacity + inventory + stockout)
Heuristics
Chase strategy
using capacity as the lever
Flexibility strategy
using utilization as the lever
Level strategy
using inventory as the lever
Mixed strategy
Optimal approach?

6. Aggregate Planning Using LP
Example: Red Tomato Tools
Demand forecast (T = 6)
Costs
Others
Initial inventory: 1,000, final inventory: 500, initial workforce: 80
20 working days per month, $4 per hour regular time, 8 hours per day
At most 10 hours of overtime per month
Decision variables
Wt, Ht, Lt, Pt, It, St, Ct, Ot
 Is it linear?
Jan
Feb
Mar
Apr
May
Jun
1,600
3,000
3,200
3,800
2,200
Materials
$10/unit
Hiring
$300/worker
Regular time
$4/hour
Inventory
$2/unit/month
Layoff
$500/worker
Over time
$6/hour
Stockout
$5/unit/month
Labor required
4 hours/unit
Subcontracting
$30/unit

7. Aggregate Planning Using LP
Analysis
Revenue over planning horizon
Average inventory = ((I0 + IT)/2 + t=1..(T–1) It)/T
Average time in inventory = (average inventory) / (total demand)
Impact of higher demand variability
Revised demand forecast
Impact of lower costs of hiring and layoff
Revised costs of hiring and layoff: 50$ each
Coping with forecast error
Maintaining buffers of safety inventor and/or safety capacity
Jan
Feb
Mar
Apr
May
Jun
1,000
3,000
3,800
4,800
2,000
1,400

8. Further Discussion
Building a rough master production planning schedule
Role of IT in aggregate planning
Implementing aggregate planning in practice