Chapter 3: On Aggregate Planning

Mher Karizze Anne R. Narciso

Jericho Joseph R. Pea
Khloei Elinna S. Rosales
Justin Ivan Kyle J. Sanchez
Andrea Nicole A. Tolentino
Ryan O. Vinluan
Abstract

greatly benefits many organizations, especially the

manufacturing organizations.

This chapter talks about making decisions about the

companys activities by using aggregate planning. It
incorporates the concept of demand and the capacity
of the company. Aggregate planning strategies and
methods are also tackled in order to know the correct
decision to implement in a given situation in the
company. In services, aggregate planning is also used
by introducing the concept of yield management.

Significance to the Industry and To Your Everyday

Life
Since the goal of every organization is to obtain profit
and reduce costs, aggregate planning is to be used in
order to obtain that goal. There are different strategies
used in aggregate planning. One of it consists of
varying different factors in order to meet the demand.
Another strategy is levelling the different factors
because of the varying demand (1). To everyday
people, planning is also important. One example is
allocating the allowance given to a student by his/her
parents in order for him/her to increase his/her
savings. This involves planning expenses such as
transportation fee and also food expense. Hence,
aggregate planning is important in everyday life.

Introduction
The company have different activities and operations
throughout the year. Each operation has its own
weight; it might be a regular operation or a very
important operation. In every activity that a company
does, what the company must do it to plan for the
different activities. Planning is essential for the
company to be ready to accomplish its goal. Planning
also reduces failures or errors.

Objectives of the Chapter

Planning for financial matters is the heart of every

meeting in the company. The ultimate goal of any
organization is to gain profit. To operate the company
by planning what to be done in order to reduce costs
is one way to improve the status of the company.

The main objective of this chapter is to discuss

principles of aggregate demand in order to help the
company achieve its goals with less cost. Specifically,
the chapter aims to:
Determine the significance of planning in the
company
Discuss the importance of aggregate planning
Enumerate and discuss the three key
strategies in aggregate planning
Use graphical and charting techniques as a
method to solve aggregate planning problems
Use mathematical approaches as a method to
solve aggregate planning problems
Discuss aggregate planning in the service
perspective
Introduce the concept of yield management

Companys resources are scarce. The company must

develop a goal in order for the different resources to
be allocated in a way that minimum cost for doing the
said process is achieved (1). This is where aggregate
planning plays its role.
Significance of the Chapter
The chapter strongly emphasizes the need for the
company to use aggregate planning in order to
achieve its goals efficiently. The use of aggregate
planning in the industry is that it helps know how
many to produce over a specific period of time. This

Main Discussion

Planning is one basic requirement in order to achieve

goals for the company. Planning, generally, is a tool
used in management in order to balance out the
resources of the company to meet the demand (2). It
generally integrates different functions of the company
in order to make decisions for appropriate method to
be used in order to obtain the specific goal.

intermediate range plans are used in order to

solve those problems (5).
Long range planning this covers the time
frame greater than a year (1). Most large
companies use this type of planning (5). This
type of planning reveals the competitive side
of the company due to adaptation to the
changing environment with respect to social,
economic and political factors (4).

How Planning Works

These three time frames are for every specific
operation/activity done by the company (1). It does
not need to use long range planning to every activity
done by the company; it still depends on the weight of
the activity or operation that the company will
implement.

Planning is done in every organization, from smallscale businesses to large-scale businesses. Planning
works in a specific process. The process, in
chronological order, is stated below (2):
1. Setting the goal of the company
2. Making different strategies to achieve the said
goal
3. Create the means required to achieve the
goal
4. Setting the start and completion date of the
project and the corresponding schedule of
completion for the sub-activities incorporated
along the planning process
5. Assigning persons of authority to supervise
the project

Aggregate Planning
Since planning involves decisions in order to achieve
a certain goal, aggregate planning takes into account
the different resources of the company, or what is
called capacities, in order to meet the demand of
customers at the lowest cost possible (1).
The time frame used in aggregate planning is the
intermediate range (with the range of 3 to 18 months).
This is because during the long-term period, there
may come a time that problems might fall within the
year with a range of three months or more. These
problems generally are due to the scarce resource of
the company. This is where aggregate demand makes
its position. Aggregate demand will help know the
number of units to be produced in a certain time
frame. For example, in the next five months, 4400
units should be produced to meet the 5000 unitdemand.

An example is Johnson & Johnsons company, which

is a health care company. They research new health
care solution and provide it to the industry (3). They
organize their company in a decentralized manner (3).
The Senior Management creates strategic plans and
they meet up with the employees though a formal
meeting in order to discuss the plans (3).
Time frames for Planning
Planning can be classified according to time frame.
This means that the perspective taken into account is
the range of days/months/years that the said plan
should take place. There are three time frames to be
discussed, namely short range plans, intermediate
range plans and long range plans. They are to be
discussed in detail below (1):
Short range planning this type of planning
covers from 1 day to 3 months (1). This takes
the perspective of the current status of the
company, identifies problems and creates
solutions that can quickly fix them (4).
Intermediate range planning this type of
planning covers from 3 to 18 months (1). Due
to the uncertainties of the long term period,

Demand and Capacity

The two main concepts needed to be understood in
aggregate planning are demand and the capacity of
the company. Figure 3.1 shows the demand forecast
for the 1st quarter (which is from January to April) and
Figure 3.2 shows the aggregate capacity to meet
demand. In aggregate demand, capacity should be
balanced with the demand (1). For example, the
5000-unit capacity in March (as shown in Figure 3.2)
should meet the 6600-unit demand also in the same
month (as shown in Figure 3.1). In this example,
capacity is adjusted to have balance with the demand.

2.

Figure 3.1. A sample demand forecast in the 1st quarter of the year
(from January to April).

3.

4.

Figure 3.2. A sample aggregate capacity to meet demenad in the 1 st

quarter of the year (from January to April).

Since aggregate planning is an intermediate range

planning
method,
different
techniques
or
mathematical models should be used in order to
implement this method. The three main goals of
aggregate planning are (1):
Using company capacity (resources) wisely
Meeting customer demand
Reduce cost of operation

5.

Advantage: Production change is not

altered (1).
Disadvantage: May be costly due to
different factors such as holding,
insurance,
deterioration,
etc.
Reduction of sales may also be
witnessed (6).
Hire or lay off workers
Advantage: Resources may be
increased due to many workers (6).
Disadvantage: Hiring costs, together
with training requires a huge amount
of money for the company, and
quality may suffer (6).
Overtime or idle time
Advantage: Constant workforce can
be applied (1).
Disadvantage: Costly; overtime may
result to decrease in productivity and
quality (6).
Subcontracting
Advantage:
Planners
can
get
temporary
capacity
with
great
flexibility.
An
alternative
to
subcontracting is also introduced,
which is called outsourcing (meeting
with other firms in order to supply
resources for the said company) (6).
Disadvantage: Costly; Poor quality
may be witnessed (6).
Use of part-time workers
Advantage: Lesser cost than the
regular workers wage (6).
Disadvantage: Costly; Poor quality
may be witnessed (1).

The proactive strategies, together with its advantages

and disadvantages are as follows:
1. Promotion
Advantage: Lesser influence on
demand; products with promos attract
customers (6).
Disadvantage: The said advantage of
promotion may be witnessed in the
opposite side (6).
2. Pricing
Advantage: Good pricing strategy has
a good effect in demand patterns (6).
Disadvantage: Reduction of profit due
to the resources of the company
lesser than the demand (6).
3. Back-orders

Strategies in Aggregate Planning

There are three main strategies in aggregate planning
namely Reactive Strategy, Proactive Strategy and
Mixed Strategy. These are to be discussed in detail
below:
1. Reactive Strategy the capacity (firms
resources) are adjusted to meet demand (1).
2. Proactive Strategy the demand is adjusted
in order to balance out with the firms
resources (1).
3. Mixed Strategy incorporated both reactive
and proactive strategy (1).
The reactive strategies, together with its advantages
and disadvantages are as follows:
1. Build or draw from inventory

Graphical techniques uses limited computations

which do not guarantee an optimal production plan in
a company. This technique uses few variables at a
time to allow planners to compare projected demand
with existing capacity. These steps are followed in
using the graphical method (1):
1 Forecast the demand for each period.
2 Know the capacity for regular time, overtime
and subcontracting in each period.
3 Compute the labor cost, hiring and layoff cost
and inventory holding cost.
4 Consider the policies of the company with
relation to the stock levels or the workers.
5 Develop alternative plans and know their total
cost.

Advantage: Customers can order in

this specific period and wait for it
without altering the order (6).
Disadvantage: Reduction of sales;
costly (6).
4. Demand for a complementary product
Advantage: Constant use of labor,
equipment and facilities (6).
Disadvantage: products or services
which are beyond the companys skill
limitations are considered (1).
Reactive Strategy Approaches

Example (9):
Planners for a company that makes several models of
skateboards are about to prepare the aggregate plan
that will cover six periods. They have assembled the
following information:

There are two reactive strategy approaches, the level

approach and the chase approach. Both are
discussed in detail below:
A. Chase Strategy
- This strategy matches the demand with
production (7). Different factors may be
varied, one example is the workforce
levels (1). An advantage of chase
strategy is a decrease in inventory levels
and backlogs (7). Disadvantages include
decrease in productivity and decrease in
quality (7).

Table 3.1. The forecast on the demand of skateboards at different

periods (9).
PERIOD
FORECAST
1
200
2
200
3
300
4
400
5
500
6
200
TOTAL
1800
Table 3.2. The cost information in making the skateboard (9).
DESCRIPTION
AMOUNT
REGULAR TIME
$2 per skateboard
OVERTIME
$3 per skateboard
SUBCONTRACT
$6 per skateboard
INVENTORY
$1 per skateboard per
period on average
inventory
BACKORDERS
$5 per skateboard per
period

B. Level Strategy
- The production and workforce level is
constant in this strategy (7). As the name
implies, production does no change from
one period to another (1). An advantage
of level strategy is a steady workforce (7).
Disadvantages include increase in
inventory levels and backlogs (7).

The graph of the forecast of demands is shown in

Figure 3.3.

Aggregate Planning Methods

These aggregate planning methods are used as tools
in order to adequately plan for the demand in a
specific time frame. There are two method used (1):
A. Graphical and charting techniques
B. Mathematical approaches
Both are to be discussed in detail with examples for
each method.
Figure 3.3. The graphical representation of the forecasted demand
for the six periods.

The Graphical Approach to Aggregate Planning

Figure 3.3 provides an easier representation of the

demands in each period and the average forecasted
demand for the six periods.
Case 1: Use a constant workforce. Assume that there
are 15 workers and each is capable of producing at a
rate of 20 units per period. Also the inventory starts at
0.
The solution is presented in Figure 3.4.

Figure 3.5. The tabular representation of getting the total cost

considering Case 2 (9).

Figure 3.5 shows the computation of the total cost

incurred considering Case 2. It shows that when the
workforce is changed (from 15 workers to 14 workers)
and the capacity of overtime is used to meet the
forecasted demand per period, the company will incur
a total cost of $4 640.
Case 3 (Chase Strategy: Hiring and firing to meet
demand): Another option for Case 2 is to use
temporary workers to fill in during months of high
demand. Suppose that it costs an additional $100 to
hire and train a temporary worker, and that a
temporary worker can produce at the rate of 15 units
per period (compared to 20 units per period for
regular workers).

Figure 3.4. The tabular representation of getting the total cost

considering Case 1 (9).

Figure 3.4 shows the computation of the total cost

incurred considering Case 1. It shows that when the
constant workforce of 15 regular time workers in the
company produced a constant production rate of 20
units per period, the company will incur a total cost of
$4 700.

The solution is presented in Figure 3.6.

Case 2: Planners learned that one worker is about to

retire from the company. Rather than replacing that
person, they would like to stay with the smaller
workforce and use overtime to make up for the lost
output. With the maximum amount of overtime output
per period to be 40 units.
The solution is presented in Figure 3.5.

Figure 3.6. The tabular representation of getting the total cost

considering Case 3 (9).

Figure 3.6 shows the computation of the total cost

incurred considering Case 3. It shows that when the
company hired temporary workers to fill in during
months of high demand which has an additional cost
of $100 and the worker has a production rate of 15
units per period, the company will incur a total cost of
$4 860.

Yield Management an aggregate planning

process which helps allocate the limited
resources of a company into products that will
yield a higher revenue (1)

Formula Review:
Average Requirement
=

Comparing the three cases stated above, Case 2

(lower workforce and using overtime at high demand
periods) which incurred a total cost of $4 640 is the
most recommended alternative to be used by the
company. However, there are more alternatives that
can be developed. The solution in Case 2 does not
guarantee that the company has optimized minimizing
the total cost in producing skateboards in six periods
but it is already a step closer in helping the company
meet the demand at lower cost.

Total expected demand

Number of productiondays
(Equation 2.1)(1)

Manpower Requirement
=

Average requirement x labor hours

produce a unit
Labor hours per day per man
(Equation 2.2)(1)

Key Terms to Remember and Formula Review

References

Key Terms to Remember:

Aggregate Planning process of knowing the
demand and time of production for the future
and help minimize the total cost (1)
Bowmans Management Coefficient Models
builds a formal decision model around a
managers Experience and performance (1)
Chase Strategy Approach attempts to make
output rate equal to the total demand (1)
Disaggregation process of breaking the
aggregate plan down into greater detail (1)
Graphical and Charting Techniques a
technique that uses few variables at a time to
allow planners to compare projected demand
with existing capacity (1)
Level Strategy Approach maintaining
production uniform from period to period (1)
Long-range planning performed in annual
increments (8)
Mathematical Approaches
Master Production Schedule result of
disaggregation which provides input to
material requirements planning (MRP) (1)
Mixed Strategy strategy that uses two or
more controllable variables to set a feasible
production plan (1)
Medium-range planning performed in
monthly or quarterly increments (8)
Short range planning performed in daily or
weekly increments (8)
Transportation
Method
of
Linear
Programming a method of getting an
optimal plan for minimizing cost in an
aggregate planning problem (1)

(1)
(2)

(3)

(4)

(5)
(6)

(7)

(8)
(9)

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