Aggregate Planning

Objectives of
normally are :

aggregate

planning

To minimize total cost over the planning horizon.

To maximize customer service.

To minimize inventory investment.

To minimize changes in workforce levels

To minimize changes in production in rates

To maximize utilization of plant and equipment

Aggregate Planning
Characteristics
of
planning are as under :

aggregate

Consider a planning horizon from about 3 to 18

months, with periodic updating.

Look a aggregate product demand, stated a common

terms.

Look at aggregate resource quantities, stated in

common terms.

Influence both supply and demand by adjusting

production rates, workforce levels, inventory levels,
etc, but facilities cannot be expanded.

Aggregate Planning Strategies

1. Active Strategy

Attempts to handle fluctuations in demand by

focusing on demand management.

Use pricing strategies and / or advertising and

promotion.

Develop counter-cyclical products.

Request customers to back orders or adbvance-order.

Do not meet demand.

Aggregate Planning Strategies

2. Passive Strategy (Reactive Strategy)

Attempts to handle fluctuations in demand by

focusing on supply and capacity management

Vary size work force size by hiring or layoffs.

Vary utilization of labour and equipment through

overtime or idle time.

Build or draw from inventory.

Subcontract production.

Negotiate cooperative arrangement with other firms

Allow backlogs, back orders, and/or stockouts.

Aggregate Planning Strategies

3. Mixed Strategy

Combines elements of both an active strategy

and a passive (reactive) strategy.

Firms will usually use some combination of the

two.

Passive (Reactive) Strategies in

Aggregate Planning

1. Chase Strategy A chase strategy implies matching demand and capacity

period by period. Capacities (workforce levels, production
schedules, output rates, etc.) are adjusted to match
demand requirements over the planning horizon.
This could result in a considerable amount of hiring, firing
or laying off of employees; insecure and unhappy
employees; increased inventory carrying costs; problems
with labour unions; and erratic utilization of plant and
equipment. It also implies a great deal of flexibility on the
firms part. The major advantage of a chase strategy is that
it allows inventory to be held to the lowest level possible,
and for some firms this is a considerable savings. Most
firm embracing the just-in-time production concept utilize
strategy approach to aggregate planning

Passive (Reactive) Strategies in

Aggregate Planning
Advantages of Chase Strategy

Anticipation inventory is not required, and

investment in inventory is low.
Labour utilization is kept high.

Disadvantages of Chase Strategy

Expense of adjusting output rates and/ or

workforce levels.
Alienation of workforce.

Passive (Reactive) Strategies in

Aggregate Planning

2. Level Strategy A level strategy seeks to produce an aggregate plan

that maintains a steady production rate / or a steady
employment level. In order to satisfy changes in
customer demand, the firm must raise or lower
inventory levels in anticipation of increased or
decreased levels of forecast demand. The firm
maintains a level workforce and a steady rate of
output when demand is somewhat low. This allows
the firm to establish higher inventory levels than are
currently needed. Ad demand increases, the firm is
able to continue a steady production rate/steady
employment level, while allowing the inventory
surplus to absorb the increased demand.

Passive (Reactive) Strategies in

Aggregate Planning

Advantages of Level Strategy

Stable output rates.

Stable workforce levels.

Disadvantages of Levelvv Strategy

Greater inventory investment is required.

Increased overtime and idle time.
Resource utilizations vary over time.

An informal but useful trial-and-error

process
for
aggregatge
planning
presented in outline form. This general
procedure consists of the following
steps

Determine demand for each period.

Determine capacity for each period. This

capacity should match demand, which means it
may require the inclusion of overtime or
subcontracting.

3.

Identify

company,

departmental,

policies

that

pertinent.

maintaining

are
a

certain

safety

For

or

union

example,

stock

level,

maintaining a reasonably stable workforce,

backorder policies, overtime policies, inventory
level policies, and other less explicit rules such
as the nature of employment with the individual
industry, the possibility of a bad image, and the
loss of goodwill.

4.

Determine unit costs for units produced. These

costs typically include the basic production
costs (fixed and variable costs as well as direct
and indirect labour costs) Also included are the
costs associated with making changes in
capacity. Inventory holding costs must also be
considered, as should storage, insurance,
taxes, spoilage, and obsolescence costs.
Finally, backorder costs must be computed.
While difficult to measure, this generally
includes expediting costs, loss of customer
goodwill, and revenue loss from cancelled
orders.

5.

Develop alternative plans and compute the cost

for each.

6.

If satisfactory plans emerge, select the one that

best satisfies objectives. Frequently, this is the
plan with the least cost. Otherwise return to
step 5.

Use of QT in Aggregate Planning

The following are some of the better known mathematical
techniques that can be used in more complex aggregate
planning applications.
Linear Programming Linear programming is an optimization technique that
allows the user to find a maximum profit or revenue or a
minimum cost based on the availability of limited
resources and certain limitations known as constraints. A
special type of linear programming known as the
Transportation Model can be used to obtain aggregate
plans that would allow balanced capacity and demand
and the minimization of costs. However, few real-world
aggregate planning decisions are compatible with the
linear assumptions of linear programming. Supply Chain
Management : Strategy, Planning and Operation, by Sunil
Chopra and Peter Meindle, provides an excellent example
of the use of linear programming in aggregate planning.

Mixed Inter Programming For aggregate plans that are prepared on a

product family basis, where the plan is essentially
the summation of the plans for individual product
lines, mixed-integer programming may prove to
be useful. Mixed-integer programming can provide
a method for determining the number of units to
be produced in each product family.

Linear Decision RuleLinear decision rule is another optimizing technique. It

seeks to minimize total production costs (labour,
overtime, hiring / lay off, inventory carrying cost) using a
set of cost approximating functions (three of which are
quadratic) to obtain a single quadratic equation. Then, by
using calculus, two linear equations can be derived from
the quadratic equation, one to be used to plan the output
for each period and the other for planning the workforce
for each period.

Management Coefficient Model The management coefficients model, formulated by E.H.

Bowman, is based on the suggestion that the production
rate for any period would be set by this general decision
rule.
P1

= a W t-1 BI t-1 + cF t+1 + K, where

P1

= the production rate set for period t

W t-1 = the work force in the previous period

I t-1 = the ending inventory for the previous period
F t+1 = the forecast of demand for the next period
a,b,c, and K are constants.

Search Decision Rule The search decision rule methodology overcomes some
of the limitations of the linear cost assumptions of linear
programming. The search decision rule allows the user
to state cost data inputs in very general terms. It requires
that a computer program be constructed that will
unambiguously evaluate any production plans cost. It
then searches among alternative plans for the one with
the minimum cost. However, unlike linear programming,
there is no assurance of optimality.

Simulation A number of simulation models can be used for

aggregate planning. By developing an aggregate plan
within the environment of a simulation model, it can be
tested under a variety of conditions to find acceptable
plans for consideration. These models can also be
incorporated into a decision support system, which can
aid in planning and evaluating alternative control
policies. These models can integrate the multiple
conflicting objectives inherent in manufacturing strategy
by using different quantitative measures of productivity,
customer service, and flexibility.

Functional Objective Search Approach The functional objective search (FOS) system is
a computerized aggregate planning system that
incorporates a broad range of actual planning
conditions. It is capable of realistic, low-cost
operating schedules that provide options for
attaining different planning goals.

Functional Objective Search Approach The system works by comparing the planning
load with available capacity. After management
has chosen its desired actions and associated
planning objectives for specific load conditions,
the system weights each planning goal to reflect
the functional emphasis behind its achievement
at a certain load conditions. The computer then
uses a computer search to output a plan that
minimizes costs and meets delivery dead lines.

Areas of Application -

Restaurants

Hospital

Miscellaneous Services

Airline Industry.