Unit 3

Scheduling Operations
Chapter 12: Aggregate Planning
Lesson 37 - THE AGGREGATE PLANNING PROCESS

Learning Objectives

After reading this lesson you will be able to understand

Concept of aggregation
Goals of aggregate planning
Strategies for aggregate planning
Capacity planning

My dear friends, let us straight away focus on the issue at hand:-

AGGREGATE PLANNING PROCESS
The process consists of four basic considerations as follows:

1. Concept of Aggregation starts with a meaningful measure of output. In a

single product output organization there is no problem with the output measure.
Many organizations have multiple products and it is difficult to find a common
factor of measure of output.

For e.g. steel producer can plan in terms of tons of steel, gallons of paint in case
of paint industry. Service organizations such as transport system may use
passenger miles as a common measure, health care facilities may use patient
visits, and educational institutes may use student to faculty contact ratio in terms
of hours as a reasonable measure.

You may recall that a group of products or services that have similar demand
requirements and common processing, labour and materials requirements is called
a Product Family. Therefore a firm can aggregate its products or services into a
set of relatively broad families, avoiding too much detail at the planning stage.
For example consider the Bicycle manufacture that has aggregated all products
into two families: mountain bikes and road bikes. This approach aids production
planning for the assembly lines in the plants.

Let us now turn our attention to:-

2. Goals for aggregate planning there are number of goals to be satisfied

• It has to provide the overall levels of output, inventory and backlogs
 dictated by the business plan
• Proper utilization of the plant capacity. It should not be under utilized
because it is waste of resources.. It is better to operate at a near full
capacity.
• The aggregate plan should be consistent with the company’s goals and
policies regarding its employees.. A firm may like to have employee
stability or hire and layoff strategy. Other firms change employees freely
as the output level is varied throughout the aggregate planning horizon.

Moving over to:-

3. Aggregate Demand Forecasts The benefits of aggregate planning depends on

the accurate forecasting. The forecasting models presented in Chapter 3 can be
used to forecast demand for product groups as well as individual products.

4. Interrelationships among decisions Here the managers must consider the future
consequences of current decisions. This is important mainly due to the fact that
output plans are developed for a long period of time.

My dear students, let us now concentrate on:-

STRATEGIES FOR AGGREGATE PLANNING

Let us consider the strategies with the help of an example:

Table 1
Quarter
1 2 3 4
Forecast sales 1,080,000 2,640,000 1,960,000 1,160,000
for all product
group ( in $ )
Wagons in units 27,000 66,000 49,000 29,000
Labor in hours 21,600 52,800 39,200 23,200

Table 2
Month Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
Units / day 182 527 619 1000 1143 952 682 1454 857 637 499 286
Productive 22 19 21 22 21 21 22 11 21 22 18 21
Days
Forecast (in 4 10 13 22 24 20 15 16 18 14 9 6
000 units

The first step in the analysis is to determine the production requirements the forecasted
demand places on the facility. At first glance May , appears to be the peak month with
24,000 units demanded. The number of Productive days actually available must also be
considered for e.g. August has 11 productive days only Because of annual vacation.
Shutdown. The output rates, output per available productive day, are shown in figure.
Let’s examine three “ pure strategies” that the planner could use to cope with these wide
swings in monthly demands.

Strategy 1.Vary the number of Productive employees in Response to

Varying output Requirements ( also known as Chase 1 plan).
Here, first the average productivity per employee is first calculated which determines the
number of employees needed to meet the monthly required output demand. The
employees are laid off when the output demand falls. As a result there is always Hiring
and laying of employees. In our example, productivity per employee is 10 wagons / day.
Therefore about 16 employees are needed in January, 53 in February, 62 in March and so
on.

This strategy has disadvantages. The hiring and layoff costs are going to be high, indirect
costs of training new employees are going to be there, employee morale low, required
work skills may not be readily available when they are needed, lead times necessary to
hire and train the new employees must be accounted for in the planning process, society
reaction negative. Finally this strategy is not feasible for the companies constrained by
guaranteed wage and also hiring and layoff agreements.

Strategy 2: Maintain a Constant Work Force Size but Vary the Utilization of the Work
Force ( also known as Level # 1)
Suppose, for example, we chose the strategy of employing 70 workers per month
throughout the year. On an average, this work force would be capable of producing 700
wagons each day. During the lean months (January, February, March, July, October,
November, December), the work force would be scheduled to produce only the amount
forecasted, resulting in some idle working hours. During high-demand months (April,
May, June, August, September), overtime operations would be needed to meet demand.
The work force would therefore be intensely utilized during some months and
underutilized in other months.
A big advantage of this strategy is that it avoids the hiring and layoff costs
associated with strategy 1. But other costs are incurred instead. Overtime, for example,
can be very expensive, commonly at least 50 percent higher than regular-time wages.
Furthermore, there are both legal and behavioral limits on overtime. When employees
work a lot of overtime, they tend to become inefficient, and job-related accidents happen
more often.
Idle time also has some subtle drawbacks. During slack periods, employee morale
can diminish, especially if the idle time is perceived to be a precursor of layoffs.
Opportunity costs also result from idle time. When employees are forced to be idle, the
company foregoes the opportunity of additional output. While wages are still paid, some
potential output has been lost forever.

Strategy 3: Vary the Size of Inventory in Response to Varying Demand (

also known as Chase #2 plan )

Finished goods inventories in make-to-stock companies can be used as a cushion against

fluctuating demand. A fixed number of employees, selected so that little or no overtime
or idle time is incurred, can be maintained throughout the planning horizon. Producing at
a constant rate, output will exceed demand during slack demand periods, and finished
goods inventories will accumulate. During peak periods, when demand is greater than
capacity, the demand can be supplied from inventory. This planning strategy results in
fluctuating inventory levels throughout the planning horizon.
The comparative advantages of this strategy are obvious: stable employment, no
idle time, and no overtime. What about disadvantages? First, inventories of finished
goods (and other supporting inventories) are not cost-free. Inventories tie up working
capital that could otherwise be earning a return on investment. Materials handling
costs, storage space requirements, risk of damage and obsolescence, clerical efforts,
and taxes all increase with larger inventories. Backorders can also be costly. Customers
may not be willing to tolerate backordering, particularly if alternative sources of supply
are available; sales may be lost, and lingering customer will may decrease future sales
as well. In short, there are costs for carrying too much or too little inventory.

A GRAPHICAL METHOD FOR AGGREGATE OUTPUT PLANNING

Usually, no pure strategy is best by itself; a mixture of two or three is better. The various
alternative plans or "mixtures" involve tradeoffs. One way to develop and evaluate these
alternatives is by using a graphical planning procedure. The graphical method is
convenient, relatively simple to understand, and requires only minimal computational
effort. To use the graphical method, follow these steps:

1. Draw a graph showing cumulative productive days for the entire planning horizon
on the horizontal axis, and cumulative units of output on the vertical axis. Plot the
cumulative demand data (forecasts) for the entire planning horizon.
2. Select a planning strategy, taking into account aggregate planning goals. Calculate
and plot the proposed output for each period in the planning horizon on the same
set of axes used to plot the demand.
3. Compare expected demand and proposed output. Identify periods of excess
inventory and inventory shortages.
4. Calculate the costs for this plan.
5. Modify the plan, attempting to meet aggregate planning goals by repeating steps 2
through 4 until a satisfactory plan is established.

We will demonstrate steps 1 through 4 for three different aggregate plans. The fifth
step, additional modification, is left for you to do as an exercise.

A PLAN FOR LEVEL OUTPUT RATE ( also known as Level # 2 plan )

The first plan we demonstrate is a plan that calls for a constant rate of output throughout
the planning horizon. Often such a plan is chosen when the costs of changing the rate of
output, on a monthly basis, say, are deemed too high.
Step 1 of the graphical planning procedure draw a graph of the demand data shown in
Figure. This graph is the black curve in Figure.

For step 2, we consider the fact that business plan, and hence the goals of the aggregate
plan, calls for output that meets forecasted demand throughout the planning horizon:
Relying on backordering has been deemed too costly. We consider, too, that costs will be
incurred if we change the output rate during the planning horizon: When the output rate is
increased, additional employees must be hired and trained. When the output rate is
decreased, some employees must be laid off and/or idle time occurs. The larger the
increase or decrease in output rate, the greater the cost incurred. Table 3 shows the costs
of changing output rates by different amounts. Output rates are expressed in terms of
units (wagons) per day. The facility's maximum capacity is 100 employees (1,000
wagons/day) on a single shift. Using overtime with additional costs of $4/unit can
temporarily increase capacity.
Thus, we select a planning strategy consisting of a constant output rate for each day
throughout the planning horizon, one that
allows cumulative output at least to meet
forecasted demand throughout the planning
horizon. To plot the curve of output, then on the
same set of axes we plotted forecasted demand, we
must recognize that the curve should be a straight
line-that is, a curve whose slope is constant, since
we want the output rate to be constant. What slope
should it have? What constant rate of output should
we specify? The cumulative output line should
be steep enough always to meet or exceed
cumulative demand. But if the output line is too
steep, excessive inventories are accumulated.
Moreover, output rate cannot exceed the facility's
maximum capacity: 1000 wagons/day, or 10
wagons/day for each of 100 employees. The desired
line passes through Inventory
the origin where output and
days are both 0 (point Accumulation A), and the outlining point B,
on the cumulative demand curve.
0 20 40 60 80 100 120 140 160 180 200 220

Aggregate output plan and forecasted demand for

level production

---------------
Units/output in
000.
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0

TABLE 3 Estimated Cost for changing output rates.

Change in output rate from previous month ( in units Estimated cost
/day increase or decrease.
1-200 $ 4,000
201-400 10,000
401-600 18,000
601-800 28.000

The cumulative output described by this line meets our planning requirements: Beginning
on the first day production commences at a constant daily rate and total output exceeds
total demand until the end of September (point B). At the end of September, units
produced to date equal the total demanded to date. Thereafter, output exceeds expected
demand for the remainder of the planning horizon. What is the constant output rate? Point
B represents 180 productive days and 142,000 cumulative units of output (from Table.2)
1,42,000 units
= 790 units /day approx
180 days
.
Comparing the data in table form, as part of Step 3, the resulting monthly plans are
shown in Table 4. Since 790 units are produced each day, and since each employee can
average 10 units/day, 79 employees are needed. Step 4 requires that we calculate the
costs for this plan. Since the daily output rate is unchanged from month to month, there
are no change of output rate costs. The cumulative average monthly inventory is 120,405
units for the year. Inventory carrying cost is $l/unit/month, based on the average monthly
inventory. Therefore inventory costs are about $120,405.

A Plan for Output Closely Following Demand (Chase Plan)

An alternative to producing at a constant _rate is a plan in which monthly output is
geared to meeting expected monthly demand. This is sometimes called a chase plan
because the output rate is chasing (closely following) the demand rate. When graphed,
the cumulative output curve coincides with the cumulative demand curve. Therefore the
daily output rates are those shown earlier in Table.2. The resulting plan is shown in
Table 5
. Since monthly inventories are trivial, inventory costs for this plan are very low and
backorders or stock outs are not permitted. The daily output rate is changed each month.
February's output is 345 units per day greater than January's. From Table 3, we know
that the cost of this increase is approximately $10,000. Similarly, we can calculate the
cost of changing output rates for all the months in the planning horizon. Further costs
are incurred for overtime work in May and August when output exceeds' the fixed
capacity of 1000 units/day. Overtime costs $4 per unit produced.

TABLE .4 Monthly plan for level output rate

Average
Net Additions
Inventory
Output Beginning (subtraction Ending [(beginning +
Rate Output Demand Inventory to Inventory Inventory ending) 12]
Month Days (in units/day) (in units) (in units) (in units) (in units) (in units) (in units)
Jan 22 790 17,380 4,000 0 13,380 13,380 6,690
Feb 19 790 15,010 10,000 13,380 5,010 18,390 15,885
Mar 21 790 16,590 13,000 18,390 3,590 21,980 20,185
Apr 22 790 17,380 22,000 21,980 (4,620) 17,360 19,670
May 21 790 J6,590 24,000 17,360 (7,410) 9,950 13,655
June 21 790 16,590 20,000 9,950 (3,410) 6,540 8,245
July 22 790 17,380 15,000 6,540 2,380 8,920 7,730
Aug 11 790 8,690 16,000 8,920 (7,310) 1,610 5,265
Sept 21 790 16,590 18,000 1,610 (1,410) 200 905
Oct 22 790 17,380 14,000 200 3,380 3,580 1,890
Nov 18 790 14,220 9,000 3,580 5,220 8,800 6,190
Dec 21 790 16,590 6,000 8,800 10,590 19,390 14,095
Cumulative average 120,405
 TABLE .5 Monthly plan for variable output rate (chase plan)
Net
Change in
Additions
Beginnin (subtraction
Output Output Ending Average
g s)
Inventor Inventor Inventory
Rate Rate Output Demand to inventory
y y '
(in (in (in (in
Month Days (in units) (in units) (in units) (in units)
units/day) units/day) units) unit,5)
Jan 22 182 4,004 4,000 0 4 4 2
Feb 19 +345 527 10,013 10,000 4 13 17 11
Mar 21 + 92 619 12,999 13,000 17 (1) 16 17
Apr 22 +381 1,000 22,000 22,000 16 0 16 16
May 21 +143 1,143 24,003 24,000 16 3 19 18
June 21 -191 952 19,992 20,000 19 (8) 11 15
July 22 -270 682 15,004 15,000 11 4 15 13
Aug 11 +772 1,454 15,994 16,000 15 (6) 9 12
Sept 21 -597 857 17,997 18,000 9 (3) 6 8
Oct 22 -220 637 14,014 14,000 6 14 20 13
Nov 18 -138 499 8,982 9,000 20 (18) 2 11
Dee 21 -213 286 6,000 2 6 8 5
6,006
-
Cumulative average 140
'Rounded to nearest
whole number

An. Intermediate Plan

As we have seen, excessive inventory and changes in output rates can be costly. We now
develop a plan that changes output rates only occasionally instead of every month. The
plan in Table 10.6 calls for a constant output rate of 548 units/day during January,
February, and March.
 TABLE .6 Intermediate plan
Net
Change in
Additions
Beginnin (subtractions
Output Rate Output Ending Average
g )
(in Outpu Inventor
Month Days Rate Demand Inventory to inventory Inventory
units/day) t y
12,05
Jan 22 548 4,000 0 8,056 8,056 4,028
6
10,41
Feb 19 548 0 10,000 8,056 412 8,468 8,268
2
11,50
Mar 21 548 0 13,000 8,468 (1,492) 6,976 7,722
8
22,00
Apr 22 1,000 +452 22,000 6,976 0 6,976 6,976
0
21,00
May 21 1,000 0 24,000 6,976 (3,000) 3,976 5,476
0
21,00
June 21 1,000 0 20,000 3,976 1,000 4,976 4,476
0
22,00
July 22 1,000 0 15,000 4,976 7,000 1,976 8,476
0
Aug 11 689 -311 7,579 16,000 11,976 (8,421) 3,555 7,776
14,46
Sept 21 689 0 18,000 3,555 (3,531) 24 1,790
9
15,15
Oct 22 689 0 14,000 24 1,158 1,182 603
8
12,40
Nov 18 689 0 9,000 1,182 3,402 4,584 2,883
2
14,46
Dec 21 689 0 6,000 4,584 8,469 13,053 8,818
9
Cumulative average 67,276

This rate is boosted to 1000 units/day from April through July. Output is then decreased
to 689 units/day for the remainder of the year. The inventory cost of this plan is $1/unit
stored, or $67,276. Output rate changes cost $18,000 for the March-April change and
$10,000 for the July-August change, for a total of $28,000.
Comparing the Plans
The three plans are evaluated on the basis of total cost for the planning horizon. We have
done this in Table 7. The level output plan has high inventory costs and no overtime or
rate-change costs. The variable output plan has negligible inventory costs, high rate-
change costs, and some overtime costs. These plans exemplify two of the pure strategies
discussed earlier. The third (intermediate) plan incurs substantial costs of inventories and
rate changes but has the lowest total cost. This plan reflects a mixed strategy, using
 moderate (not extreme) amounts of inventory and output rate changes to absorb demand
fluctuations.
Our example shows why the aggregate planning process is sometimes called
production smoothing. As demand decreases to lower levels, it is cheaper to decrease
output rates (occasionally) than to continue to build up excessive inventories. If there is
anyone generalization that can be made about aggregate planning, it is this: When
planning production, smooth out the peaks and valleys to meet uneven demand because
extreme
.fluctuations in production are generally very costly.
Table 7 Operating Costs ( in $ ) for three plans
Plan
*May: 143 units/day x 21 days x $4/unit = $12,012. August: 454
units/day x 11 days x $4/unit = $19,976. $12,012 + $19,976 =
$31,988
#From data in Table .3.
Type of cost Level Variable Intermediate
output rate output rate
(Chase
Plan )
Overtime 0 31,988* 0
Inventory 120,000 139 67,276
Output rate
change# 0 112,000 28,000
Total Cost in 120,405 144,127 95,276.
dollars

CAPACITY PLANNING
In terms of capacity utilization, the level plan consistently uses 79 percent of maximum
capacity. The chase plan's utilization, in contrast, varies from only 18 percent up to 145
percent during the year. The intermediate plan uses 55 to 100 percent of maximum
capacity. If these levels of utilization are unsuitable, either the demand for its products
must be stimulated (to gain higher capacity utilization) or the capacity must be adjusted,
by hiring more employees, for example.
We give a comparative chart of all the plans at a glance:

With that, we have come to the end of today’s discussions. I hope it has
been an enriching and satisfying experience. See you around in the next
lecture. Take care. Bye.