Aggregate Planning• Aggregate planning is an intermediate

planning method used to determine the necessary resource capacity a firm will need in order to meet its expected demand.

Master scheduling

Material requirements planning

Order schedulingWeekly workforce andcustomer scheduling

Daily workforce and customer scheduling

Process planning

Strategic capacity planning

Sales and operations (aggregate) planning

Longrange

Intermediaterange

Shortrange

ManufacturingServices

Sales plan Aggregate operations plan

Forecasting & demand management

Sales and Operations Planning Activities

• Long-range planning– Greater than one year planning horizon– Usually performed in annual increments

• Medium-range planning– Six to eighteen months – Usually with monthly or quarterly increments

• Short-range planning– One day to less than six months– Usually with weekly increments

Goal of Aggregate Planning

• To develop a realistic production plan on an aggregate level that will satisfy organizational goals and customer demand needs at the lowest total cost.

The Aggregate Operations Plan

• Main purpose: Specify the optimal combination of– production rate (units completed per unit of

time)– workforce level (number of workers)– inventory on hand (inventory carried from

previous period)• Product group or broad category (Aggregation)• This planning is done over an intermediate-

range planning period of 6 to18 months

Capacity and Demand• If capacity and demand are nearly equal

emphasis should be placed on meeting demand as efficiently as possible.

• If capacity is greater than demand the firm might chose promotion and advertising in order to increase demand.

• If capacity is less than demand the firm might consider subcontracting a portion of the work load.

Balancing Aggregate Demandand Aggregate Production Capacity

0

2000

4000

6000

8000

10000

Jan Feb Mar Apr May Jun

45005500

7000

10000

8000

6000

0

2000

4000

6000

8000

10000

Jan Feb Mar Apr May Jun

4500 4000

90008000

4000

6000

Suppose the figure to the right represents forecast demand in units

Suppose the figure to the right represents forecast demand in units

Now suppose this lower figure represents the aggregate capacity of the company to meet demand

Now suppose this lower figure represents the aggregate capacity of the company to meet demand

What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up

What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up

Required Inputs to the Production Planning System

Planning for

production

External capacity

Competitors’behavior

Raw material availability

Market demand

Economic conditions

Currentphysical capacity

Current workforce

Inventory levels

Activities required for production

External to firm

Internal to firm

Inputs to Aggregate Planning

• Determine demand for each period.• Determine capacities for each period.• Determine unit cost based on all relevant sources.• Develop alternative plans and calculate the cost for

each.• Chose the best overall plan based on company

objectives and cost.

Available Strategies for Meeting Demand

• Chase demand

• Level production

• Subcontracting

• Overtime/Undertime

• Employing temporary workers

• Backordering

Principles of the Chase Method

• The chase method helps firms match production and demand by hiring and firing workers as necessary to control output

Principles of a Level Production Method

• The level method allows for a constant rate of production and uses inventory levels to absorb fluctuations in demand.

Graph of Level vs. Chase Strategy

Chase Demand Strategy• Cost of strategy – hiring and firing workers• This strategy would not be feasible for industries

which require highly skilled labor or where competition for labor is fierce.

• This strategy would be cost effective during periods of high unemployment or when low-skilled labor is acceptable.

Level Production Strategy

• Cost of strategy – holding items in inventory.

• Tends to be the preferred strategy of many organizations, including labor unions.

Advantages of Chase Strategy

• Reduced inventory costs.

• High levels of worker utilization.

Disadvantages of Chase Method

• Cost of fluctuating workforce levels.

• Potential damage to employee morale.

Advantage of Level Strategy

• Worker levels and production output are stable.

Disadvantages of Level Strategy

• High inventory costs.

• Increased labor costs.

Summary• Aggregate production planning is a vital tool to

aid firms in balancing supply and demand.• All possible strategies should be considered

initially and then eliminated based on cost and organizational policy.

• While pure strategies such as chase demand and level production may work for some firms, most tend to use a mixed strategy.