Aggregate Planning

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Aggregate Planning

• Ash SoniODT Department Kelley School of Business

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What is Aggregate Planning

• Aggregate planning is a process by which a
  company determines levels of capacity,
  production, subcontracting, inventory, stock-outs
  and pricing over a specified time horizon. The
  objective is to satisfy demand in a way that
  maximizes profit or minimizes costs for the firm

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Process Planning
Long-range
Strategic Capacity Planning
Intermediate- range
Aggregate Planning
Manufacturing
Master Production Scheduling
Services
Material Requirements Planning
Order Scheduling
Short-range
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Variables to be Determined Over the Planning
Horizon

• Production Rate No of units completed per time
  unit (such as week or per month)
• Workforce No of workers/units needed for
  production
• Overtime The amount of overtime production
  planned
• Machine Capacity Level
• Subcontracting The subcontracted capacity
  required
• Backlog Demand not satisfied but carried over
  to future periods beyond the planning horizon
• Inventory on Hand Inventory carried over the
  various periods in the planning horizon

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Formal Definition

• Given the demand forecasts for each period in the
  planning horizon, determine the production level,
  inventory level, and the capacity level for each
  period that maximizes the firms profit over the
  planning horizon

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Information Required for an Aggregate Plan

• Demand Forecasts for each period in the planning
  period
• Production Costs
• Labor costs Regular Time and Overtime (/Hr)
• Cost of subcontracting production (/Unit or
  /Hr)
• Cost of changing production cost of
  hiring/laying off workforce (/Worker) and cost
  of adding or reducing machine capacity
  (/Machine)
• Labor/Machine Hours required per unit

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Information Required for an Aggregate Plan Contd

• Inventory holding cost (/Unit/Period)
• Stockout or Backlog Cost (/Unit/Period)
• Constraints
• Limits on Overtime
• Limits on Layoffs
• Limits on Capital Available
• Limits on Stockouts and Backlogs

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Some Key Determinations from Aggregate Planning

• Production quantity from regular time, overtime,
  and subcontracted time allows determination of
  number of workers and supplier purchase levels
• Inventory Held Used to determine warehouse
  space required
• Backlogs/Stock-outs Used to determine customer
  service levels
• Workers Hired/Laid Off Used to determine labor
  issues
• Machine Capacity increase/decrease Used to
  determine if new production equipment needs to be
  purchased

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Aggregate Planning Strategies

• Trade-offs between three costs capacity,
  inventory and backlogs
• Decrease in one cost usually results in an
  increase in the other two costs
• For example, to lower inventory costs, a planner
  must increase either capacity or backlogs or both
• This leads to trade-offs between capacity,
  inventory and backlogs.

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Aggregate Planning Strategies

• Chase Strategy Uses capacity as a lever.
  Production rate is synchronized with the demand
  rate by varying machine capacity or hiring and
  laying off workers. It can be used when the
  carrying cost of inventory is very high and costs
  to change levels of capacity and workforce are
  low.

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Aggregate Planning Strategies

• Level Strategy Using Inventory as a Lever. A
  stable machine capacity and workforce are used to
  maintain a constant output. Inventories or
  backlogs play a big role. It can used when
  inventory carrying costs and backlog costs are
  low.

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Aggregate Planning Strategies

• Time Flexibility from Workforce or Capacity
  Strategy Using utilization as a lever. May be
  used if there is excess machine capacity. Then
  workforce capacity can be kept stable but no. of
  hours worked is varied to synchronize production
  with demand. Results in lower inventory levels
  but the average utilization is lower

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Example

• Redwood Furniture Weekly Production

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Mathematical Formulation

• XT - Number Of Tables
• XC - Number of Chairs
• Objective Max 6 XT 9 XC
• Subject to (Constraints)
• 30 XT 20 XC lt 300 (Wood)
• 5 XT 10 XC lt 110 (Labor)
• XT, XC gt 0 (Non-Negativity)

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Red Tomato Inc.
Month Demand Forecast
January 1,600
February 3,000
March 3,200
April 3,800
May 2,200
June 2,200
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Red Tomato Inc.
Item Cost
Material Cost 10/Unit
Inventory Holding Cost 2/Unit/Month
Marginal Cost of Stock-out/Backlog 5/Unit/Month
Hiring and Training Costs 300/Worker
Layoff Cost 500/Worker
Labor hours Required 4 Hours/Unit
Regular Time Cost 4/Hour
Overtime Cost 6/Hour
Cost of Subcontracting 30/Hour
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Red Tomato LP Formulation

• WtWorkforce size for month t, t1,2 ..6
• HtNo of employees hired at the beginning of
  month t, t1,2 ..6
• LtNo of employees laid off at the beginning of
  month t, t1,2 ..6
• PtNo of units produced in month t, t1,2 ..6
• ItInventory at the end of month t, t1,2 ..6
• StNo of units stocked out/backlogged at the end
  of month t, t1,2 ..6
• Ct No of units subcontracted for month t, t1,2
  ..6
• Ot No of overtime worked in month t, t1,2 ..6

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Red Tomato LP Formulation Objective Function

• Regular time labor cost
• Overtime labor cost
• Cost of hiring and layoffs
• Cost of holding inventory
• Cost of stocking out
• Cost of subcontracting
• Material cost