Operations Management

Dr. Inderdeep Singh

Department of Mechanical & Industrial Engineering
Indian Institute of Technology, Roorkee

Lecture - 28
Aggregate Production Planning

Namaskar friends. Welcome to session 28 in our course on operations management. As

you are aware, we are discussing the production planning and control and we have
already finished the discussion for the previous 5 weeks in this course. In the last session,
if you remember, we discussed the process planning part which is an important aspect of
production planning and control and we have seen that what are the factors that we need
to be considered for process planning and one aspect that is how to select the number of
machines required that we have covered with the help of a numerical problem.

So, this topic is more or less based on certain mathematical calculations and today also,
we will try to understand the concept of aggregate production planning with the help of a
numerical problem, but first we go to the numerical; first of all let us see that; what do
we mean by production planning or aggregate production planning.

As we have seen in session one of this week that was related to production planning and
control; basic fundamentals, we have seen that usually, we do planning activity at
different time horizons. We make a long term plans which we call as the strategic plans,
then we do the intermediate planning and then finally, we do the operational or the short
time planning or the short term planning.

So, our aggregate production plans usually fall in between. So, it is intermediate
planning where we plan our production for the next maybe a year or maybe 2 years. So,
our plan which is intermediate production plan falls under the aggregate production
planning horizon.

So, basically we are going to see today that how we are going to optimally utilize our
resources in order to meet the demand. Now basically in production planning if you
remember, if we have to sum up the definition of production planning in 2-3 sentences,
we will definitely use the same words again that it establishes a planning activity to
ensure the maximum possible utilization of the resources available at our disposal in
order to achieve the targets of quantity quality time and cost.

So, basically we are focusing on optimal utilization of our resources to meet our intended
targets in terms of quantity, quality, time and cost. So, that is the overall summary of
production planning activity and today, we are going to see that once we have to meet a
target of a particular volume of production, how we are going to use the resources
available at our disposal in order to meet that demand which we have already forecasted
in our week 3 of discussion.

If you remember, in week 1, we have covered the basic aspects of operations

management. In week 2, we have covered product design and development. In week 3,
we have covered sales or demand forecasting. In week 4, we have covered plant location.
In week 5, we have covered plant layout and week 6, we are covering production
planning and control.

And in week 6, today is our third session; in first session, we have covered the basic
aspects of production planning and control; in the second session, we have covered
process planning, we have seen; what are the factors influencing the process selection
and equipment selection and finally, today we are going to cover the aggregate
production planning and I have told you that aggregate production planning is a planning
horizon of maybe a year or 2 years and we see that what are our production alternatives,
how we can make use of this production alternatives in order to satisfy the demand in
terms of number of products required in a particular quarter or in a particular month or in
a particular year.

So, let us start our discussion related to this very important part of production planning
and control that we call as the aggregate production planning. Now aggregate planning
determines the resource capacity needed to meet the demand over an intermediate time
horizon.
(Refer Slide Time: 05:00)

So, intermediate time horizon means as I have already explained, there is a strategic time
horizon or maybe a long term planning activity may be focussing on next 5 or 10 years
of the organisation, then the intermediate activity or planning activity focussing on the
one or 2 years planning horizon and finally, a short term planning activity or the
operational planning activity may be focussing on 3 to 6 months of the time horizon.

So, the aggregate planning as we can see here it focus on the intermediate time horizon,
aggregate refers to product lines or families. So, we can see that aggregate word may be
focus on the product lines or families aggregate planning matches the supply and
demand. So, supply means, we have to see that how we can meet the demand using the
production alternatives that are available at our disposal. So, next, we will try to cover
that what are the major objectives of aggregate production planning.
(Refer Slide Time: 06:17)

So, the major objectives, we can see are to establish a companywide game plan for
allocating the resources.

So, we have seen in the previous slide that it matches the supply as the demand. So,
basically, we have a demand data available with us, we know that what is going to be the
demand or we have forecasted the demand for the next year or may be it can be on the
quarterly basis, it can be on a monthly basis, it can be on a bi monthly basis. So, time
horizon may vary for which the demand has be forecasted. So, we may have forecasted
the demand on quarterly basis that for quarter 1 of the financial year 2018-19, this is
going to be the demand for the next quarter; this is going to be the demand.

So, we have forecasted the demand. Now we have to plan our production in such a way
that we are able to meet that demand that we have covered in the previous slide that our
aggregate production planning matches the supply and the demand. So, the demand has
been forecasted that we are assuming that their data is already available with us. We may
have forecasted the demand using any method, qualitative method, quantitative method;
within quantitative, we have seen there are number of method; averaging methods are
there, time series models are there, then maybe exponential smoothing methods are there.

So, any method; we may have used for forecasting the demand, but we assume in
aggregate production planning that the demand for the next year is available with us. So,
it will establish; we can say our strategy to meet that demand on a quarterly basis or on a
yearly basis and develop an economic strategy for meeting the demand. So, only one
word is very important here that is economic. So, we will take a decision which is going
to save the money of the organization.

Now, let us see if we have to meet a demand of suppose 1000 products in quarter 1, 2000
products in quarter 2, again 1000 products in quarter 3 and 2000 products in quarter 4.
So, we have 1000, 2000, 1000 and 2000. So, it is 6000 products in a year. So, these 6000
products; we must be able to produce using the available production alternatives
available with us in the most economical manner.

Now, most economical manner means that we have to utilize our resources in such a way
that we are able to meet this demand of 6000 products in a most cost efficient and
effective manner. Now some of you may be wondering or maybe thinking; what are
these production alternatives. Now production alternatives may be our regular time
production, sometime we may have to go for an overtime production, sometimes
depending upon the demand, it may be overshooting our capacity, we may have to hire
some more people many times because of less demand, we may have to fire some
workers many times, we may have to subcontract a portion of the demand to some other
sister concern.

So, these are the production alternatives that are available with us, we have to distribute
our demand among these production alternatives in such a way that we overall the total
production cost for a particular year for which we are making this aggregate production
plan is maximized or minimized is it cost. So, we have to see that it is minimized, we
have to find out the strategy in such a way that the overall cost of production is
minimized and we will try to understand this with the help of a problem and I think the
problem will make the things very clear to all of you.

But the overall maybe the summary of aggregate production planning is the first thing
that we must remember that it is an intermediate time horizon plan that is we are
planning for the next one year or at the maximum 2 years, then the inputs can be we can
say the company policies, we can have an economic policy of the company, then maybe
the material policy for the company, we will try to see that with the help of a diagram.

There will be some input and the aggregate production plan will give us some output the
output that the production plan will give us is the workforce required the normal time
production required, the overtime production required the number of people required
maybe to be hired, to be fired, how much amount we must subcontract to a particular
sister concern in a particular quarter, how much back ordering can be done, backordering
means we enter into a contract agreement with our customer that we may not be able to
supply all the amounts of products required in one quarter, it must be distributed in the
next 2 quarters.

So, that is kind of backordering a contract agreement between the customer and our
company. So, the output of this aggregate production plan will be an optimal distribution
of the demand into these production alternatives. So, we may have different production
alternatives available with us and we will distribute the demand among these production
alternatives in such a way that our overall cost of production for the complete year is
minimized.

So, we may have as you can see that there can be so many permutations and
combinations possible to meet the demand, but which alternative is going to give us the
best result that we have to find out and there are scientific mathematical models methods
that can be used to find out the optimal combination of production alternatives that are
going to give us the minimum total production cost.

That is our target and we will see a list of methods that can be used to optimize this
problem of minimizing or maybe I should not use the word optimize to solve the
problem of minimization of the total production cost now this diagram few things I have
already explained.
(Refer Slide Time: 13:15)

So, let us quickly go to the focus area here aggregate planning is what we are doing and
these are we can see the basis or the inputs based on which we are going to make our
aggregate production plan. Now company policies strategic objectives financial
constraints capacity constraints demand forecast, all these are kind of inputs that we
require to make our aggregate production plan.

One of the foremost is the demand forecast we must know that what is going to be the
demand in the next year if we want to make a forecast on planning activity on quarterly
basis, we must know that what is the quarterly forecast for the next year, then the
capacity constraints is also very important, we must know that what is the regular time
production that we can do, we have maybe 100 machines; each machine has a capability
of making 100 parts. So, that will define our capacity capability to do the normal time
production we can use it for overtime production also.

Then, if we have a demand which is still higher than the capacity that we have, we may
have to subcontract, we may have to give a portion of the demand or a portion of the
number of products to any sister concern and get the products from them and then
complete the maybe consignment and hand it over to the customer some portion or some
part of the demand, we are satisfying some part of the demand we are getting it satisfied
or getting it made by our sister concern or any other company that we may feel fit deem
to make this product.
So, basically these are the 2 important things or the inputs that are going to play a very
important role in our aggregate production planning activities the other things are also
very important, but may not be playing a direct role in the aggregate production planning
calculations. So, company policies, strategic objectives and financial constraints are
other important inputs and we can see when you understand the problem, you will be
able to appreciate these 3 inputs also when we are doing the aggregate production
planning. Now, what will be the output? What we will get out of the aggregate
production?

Once we solved this problem, but we will get, we will get a output that what is the size of
the workforce required; must we have same number of workers working throughout the
year or should we ration the employment of workers that is for a particular quarter when
the demand is very high, we may have a larger workforce for a particular quarter on the
opposite side, if we have a very low demand or there is no demand, can we fire these
workers or can we put them to rest; can we give them holidays. So, that we are not
paying them; maybe extra amount of money when they are not required in the
organization or sometimes the companies may even like to fire these employees.

That is one output, we will get another output will be; what are the inventory levels that
we must maintain. Now inventory is we can set the materials are the finished products
that we are keeping in the organization or in our warehouse. So, what is the inventory
levels that we must maintain how much regular time production we must do how much
overtime production we must do then backlogs back orders or lost sales this is also one
of the outputs that we will get from aggregate production planning lost sales maybe the
demand is so huge that using all our alternative we are not able to meet the demand
maybe some portion of the demand may go to the competitor.

So, we will say; this is last sale from our part, then subcontracted production is another
output. So, basically we have numbers that we get from the demand we have constraints
on our production alternative that we can make this many products only using regular
time production we can make this many number of products only using the overtime
production we can hire only this many number of employees because of the financial
constraints of the organization.
So, we have certain constraints we have the numbers in terms of demand now we have to
solve this problem how to allocate these resources to a particular number of demand. So,
that the demand is satisfied and the cost remains minimum.

(Refer Slide Time: 18:23)

Now, meeting the demand strategies we can now we have a target that is our demand we
have to meet this demand now how we can meet this demand by using the production
alternatives now let us see how we can meet the demand adjusting capacity resources
necessary to meet demand are acquired and maintained over the time horizon of the plan
now resources can be terms of machines this can be in terms of manpower.

So, adjusting the capacity; so, first thing is we need to adjust the capacity that is required
to meet the demand very simple example we can take that suppose we have to meet
demand of 1000 products and our regular and overtime production is not able to meet
that 1000. So, what we can do we can take 2 more machines for a period of maybe 2
years and then we can just sell of those machines we are only acquiring the capacity to
meet that demand.

So, first is adjusting the capacity resources necessary to meet the demand are acquired
and maintained. Maintained means we have to meet that demand regularly for next 2
years. So, we have to maintain those 2 additional machines with us minor variations in
demand are handled with overtime or under time. So, if there is little variation we can go
for overtime operations then we have to manage the demand and then we have to finally,
be very proactive demand management that is an another maybe strategy to meet the
demands I am a little bit quick in the discussion because it is easier to understand the
maybe philosophy of aggregate production plan with the help of an example.

So, I am trying to jump to the example as quickly as possible now strategies for adjusting
the capacity can be level production, we try to understand this level production with the
help of an example now producing at a constant rate and using inventory to absorb the
fluctuations in demand, we will try to understand this with the help of an example now
level production means that all round the year we will make the products maybe uniform
number of products per month or per quarter and for one quarter we may have less
demand for other quarter we may have more demands.

So, we will be making a level production only every quarter or every month same
production. So, whenever there is more demand we will be using the material or the
products stored in the inventory. Chase demand chase demand means whatever is the
fluctuation in the demand over a period of time maybe if we are taking yearly demand.
So, how the demand is varying over one year from January to December or if we talk of
a financial year from April to March, we will chase the demand, whenever the demand is
more, we will hire more people, we will subcontract, we will use all production
alternative or combination of production alternatives to meet that demand.

But wherever the demand is less, we will fire certain people; we will stop production for
maybe 3 days or 5 days in a week to meet that demand. So, when the demand is less, we
will adjust ourselves accordingly when the demand is more we will gear up accordingly.
So, we will be chasing the demand. So, we will try to understand this with the help of a
diagram. Peak demand maintaining resources for high demand level.
(Refer Slide Time: 21:59)

(Refer Slide Time: 22:10)

So, we may keep some reserves; in case of the peak demand, we can have overtime and
under time increasing or decreasing the working hours. We can usually in most of the
organizations, we have the provision of overtime subcontracting, let an outside company
complete the work part time workers, we can hire part time workers to complete the
work backordering providing the service of the product at a later time period, I think I
have already highlighted backordering in today’s session only.
So, these are all the alternatives that are available with us to satisfy the demand or to
meet the demand targets. So, you can see, we can focus on regular time production, we
can focus on overtime production, we can focus on hiring more number of people, we
can focus on firing the extra or the excessive baggage that we have in terms of worker.
So, we can go for subcontracting we can go for backordering.

So, as a production manager I am a rich man because I have so many production

alternatives available with us, but if I do not reduce or if I do not maybe minimize the
total production cost for meeting the specific demand for a particular year I can be the
poorest man in the organization now I have to use as a production manager my skills in
order to minimize the total production cost for the company.

Now, I have so many alternatives available with me based on the information in terms of
the capacity constraints for each alternative because each alternative will have a capacity
constraint, we have our regular time production there is a capacity that we can produce
overtime also we have a capacity.

So, based on the capacity constraint and the cost of production for each production
alternative as we can take an example; for example, regular time production when we are
using our production facility for making the regular time production, cost will be maybe
just as compared to if we subcontract the same thing to any other organization because
their profit will also be added in the cost or maybe the price of the product that we are
buying from any subcontractor. So, the cost will be different.

So, as a production manager, I have to see 3 important things; what are the production
alternatives available with me or the strategies available with me, then what is the cost of
each particular production alternatives; that is regular time production, what is the cost
per unit for overtime production, what is the cost per unit for hiring up people, what is
the cost for firing the people, what is the cost. So, I must have the number of production
alternative, what are available with me that is one thing, second is the cost involved with
each production alternative and third thing that I must know is the capacity constraints
on each alternative.

So, these are the 3 things that I must know the type or number of production alternatives
available the cost involved in each production alternative and the capacity for each
production alternative. So, if this data in simple mathematical numbers is available with
me, I can very easily calculate the total production cost for the complete year based on
the demand which is the forecast for the next year based on the forecasted demand, I
have another number that this is the number of products that have to be made in the next
year.

So, that demand is available with me and all other things are also available in terms of
mathematical numbers very easily I can calculate and how to do the calculation that we
will try to see in our example. So, this is level production, this is the variation of the
demand over a period of time.

(Refer Slide Time: 26:07)

And in level production, we will do uniform production all round the year. So, we can
see that wherever the demand is more we are producing less, but wherever the demand
was less the demand is less here, but we are producing more. So, this is the extra
production that we will utilize here some extra production, we are doing here because the
demand is less.

But we are producing more; we are producing at the level production here. So, we are
able to satisfy this additional demand with the inventory generated here during the lean
period of the demand.
(Refer Slide Time: 26:52)

Now, chase demand as I have already told we will chase the demand like this. So, this is
the demand curve and we will see wherever the demand is less we will produce also less
wherever the demand is more we will produce more.

So, we will manage that demand as per the time. So, if in any particular quarter or any
particular month the demand is more we will produce we will use our alternatives in such
a way that we are able to satisfy the demand there. So, we are not maintaining maybe
inventory. So, the focus on inventory is less in case of chase demand. Now, how we can
optimize this problem. Now we see that there is some mathematical data available with
us cost for each production alternative per unit is available with us capacity constraints
are also available with us the demand that has to be satisfied is also available with us.

How we can solve this problem of minimization of the total production cost, we can use
pure strategies, mixed strategies, pure strategies in terms of level production.
(Refer Slide Time: 27:58)

Or chase demand strategy mixed strategies combination of both linear programming

transportation method and there are other quantitative techniques available. So, we will
use any of these methods to solve the problem of minimization of the total production
cost for the year.

Now, let us quickly take 1 or 2 examples. So, here we can see quarterly demand is there
sales forecast in pounds. So, spring 80,000 pounds, summer 50,000 pounds, fall 120,000.

(Refer Slide Time: 28:37)

So, we have a quarterly demand data hiring cost is dollar hundred per worker firing cost
is dollar 500 per worker, regular time production cost per pound is dollar 2, inventory
carrying cost is dollar 0 point, we can say 50 cents or half a dollar per pound, per quarter
production per employee is 1000 pounds per quarter and beginning workforce is 100
workers.

So, this is we can say available information with us for solving this problem. So, 2 things
you can see here which I have already highlighted; we must have a demand. So, here we
have a sales forecast on quarterly basis we must have the cost data also. So, hiring cost
for worker firing cost for worker regular time production cost per pound of the product
produced because the forecast is in terms of pounds 8000 pounds.

So, regular production cost per pound is available with us inventory carrying cost is also
available in maybe 50 cents per pound per quarter production per employee is also given
1000 ponds. So, this is capacity constraints are also given that production per employee
every employee can make 1000 pounds per quarter only and beginning workforce is also
given that we have a workforce of hundred people available with us.

Now, what is the problem the problem is that we have to satisfy this demand; we have to
plan our production in such a way that this demand is satisfied over a period of time or
enough for a one year period of time. Now we one strategy can be level production.

(Refer Slide Time: 30:25)

So, we can see the level production strategy, we will produce uniformly all round the
year. So, what is the total requirement? 50,000 is the forecast for maybe we can see,
there are 4 forecasts available with us. So, if we add this 4 forecast our level production
average production comes out to be 1000 pounds.

= 100,000 pounds

So, we are going to make 1000, sorry not 1000, 100,000 pounds per quarter. So, we are
level production; how we are calculating we have the spring summer fall and winter for 4
quarters we have the demand data available with us. So, for each quarter we are adding
this and dividing it by 4. So, it comes out to be 100,000 pounds per quarter, we must
produce. So, for spring, the sales forecast is 80,000 pounds, but our production plan says
100,000 because we are leveling our production on quarterly basis; for every quarter, we
will produce 100,000 pounds of product only.

So, we are producing 100,000, 100,000, 100,000, 100,000 that is the 400,000 pound that
is the overall yearly demand for the next year, but we are managing the inventory in
spring the forecast was 80,000, but we have produced 100,000. So, 20,000 goes to
inventory. Similarly, in summer the forecast or the second quarter the forecast was
50,000, but we have produced using level production 100,000.

So, 70,000 is the inventory, 20,000 produced here and 50,000 extra produced here. So,
we have an inventory of 70,000 and in fall we see our production is only 100,000 as per
our level production strategy, but the demand is more. So, 20,000 is used from inventory
and then in winter also we had 100,000 regular time production, but 50,000, we used
from inventory. So, there is no inventory at the end of the year. So, we have used our
inventory in a judicious manner and solved the problem of 400,000; producing 400,000
pounds of a product in a year.

Now, what is the cost we know that dollar 2 per pound is a regular time production cost.
So, we have produced 400,000 pounds multiplied by dollar 2 plus we have to add the
cost of managing the inventory here. So, averaged out inventory cost is 140,000 if you
see here the overall inventory 70 plus 20; 90 plus 50; 140. So, 140,000 pounds was
stored in the inventory. So, per quarter cost is 50 cents here; 0.5 dollars. So, we add this
overall cost and it comes out to be dollar 870,000 is the cost for one year of production
of 400,000 pounds of the product. Now this is one strategy that is level production
strategy.

Cost of Level Production Strategy

(400,000 X $2.00) + (140,000 X $.50) = $870,000

Now, other strategy if you remember can be a chase strategy in chase demand strategy
we are not going to do the level production we are going to chase the demand.

(Refer Slide Time: 33:46)

So, if 80,000 dollars; if 80,000 pounds is required, we will go for 80,000 pounds only;
Now you can see sales forecast is 80,000 production plan is also planned for 80,000
only. So, we know that each worker can produce 1000 pounds per quarter. So, we need
80 workers only, but you if you remember, we have a starting work force of 100
workers. So, we will hire only 8 workers for the first quarter. So, 20 are additional. So,
we will fire 20 workers here, in the summers the demand is only 50,000 pounds and we
will plan for 50,000 pounds only.

Each worker can produce 1000 pounds per quarter. So, we require 50 workers, we will
fire 30 workers here because in first quarter we had 80. So, we will fire 30 more to
maintain a workforce of 50 workers, but in fall third quarter we have a demand of
120,000 pound. So, we require 120 workers here, but currently, we are having only 50
workers. So, we will hire 70 more workers and similarly for winter, we have a
requirement of 150 workers and we have 120 workers in quarter 3. So, we will hire
additional 30 to make it 150.

So, we are chasing the demand if you see our production plan is focusing on the exact
demand requirement for that particular quarter where as in level production we have
averaged out 100,000 pounds per quarter and here we are producing as per the demand.
So, we can calculate the cause of chase demand strategy 400,000 pounds, we are
producing in regular time production the cost is dollar 2 per pound. So, this gave us the
regular time production cost plus we are firing if you see here we are hiring hundred
workers 70, we are hiring in third quarter and 30 we are hiring in fourth quarter. So, 100
workers, we are hiring and the cost of hiring for worker is dollar 100.

So, this is giving us the hiring cost and then we have to calculate the firing cost also we
are firing 50 workers and 50 multiplied by the firing cost for each worker that is dollar
500. So, this is giving us the total production cost for the next year where we have the
demand available to us on quarterly basis. So, this is giving dollar 835,000.

Cost of Chase Demand Strategy

(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

So, we can compare among the various strategies to meet the demand and see that which
strategy is giving us the minimum overall production cost and this way we can save lot
of money for the organization there can be mixed strategies also which is a combination
of level production and chase demand strategy.
(Refer Slide Time: 36:38)

The examples can be no more than x percent of the workforce can be laid off in one
quarter that is one capacity constraint inventory levels cannot exceed x dollars. So, that is
also maybe another constraint when we are using a mixed kind of strategy to meet the
demand.

So, many industries may simply shutdown manufacturing during the low demand season
and schedule employee vacations during that time this is also one of the mixed strategy
that whenever the demand is less you just tell workers to go on a vacation. So, that you
are not producing and managing the products in the inventory. So, we can have a purely
level production strategy we can have a chase demand strategy we can have a mixed
strategy. So, different types of strategies can be adopted to satisfy the demand.

So, with this, I can conclude the today’s session, I think with the help of an example all
learners might have understood 2 different type of strategies which fall under the
aggregate production planning and the overall summary of today’s session is that we
have to optimally utilize the production alternatives available with us in order to satisfy
the demand with the overall objective of minimizing the total production cost.

Thank you.