College of Business Administration and Accountancy

Alabang–Zapote Road, Pamplona 3, Las Piñas City, 1740

SUBJECT: OPERATIONS MANAGEMENT

TOPIC/S: AGGREGATE PLANNING
NO. OF HOURS: 3 HOURS
REFERENCE: Operations Management 7th Ed., William Stevenson

LECTURE NOTES

AGGREGATE PLANNING – otherwise known as sales and operations planning, it is the process of making
intermediate-range decisions to balance supply and demand, integrating financial and operations planning.
• It is an intermediate-range capacity planning that typically covers a time horizon of 2 to 12 months, although
in some companies it may extend to as much as 18 months.

3 LEVELS OF CAPACITY DECISIONS:

1. Long-term decisions - relate to product and service selection, facility size and location, equipment
decisions, and layout of facilities.

2. Intermediate decisions - relate to general levels of employment, output, and inventories, which in turn
establish boundaries within which short-range capacity decisions must be made.

3. Short-term decisions – consist of deciding the best way to achieve desired results within the constraints
resulting from long-term and intermediate-term decisions.

BUSINESS PLAN – encompasses both long-term and intermediate-term planning. It establishes guidelines for the
organization, taking into account the organization’s strategies and policies; forecasts of demand for the
organization’s products or services; and economic, competitive, and political conditions.

WHY DO ORGANIZATIONS NEED TO DO AGGREGATE PLANNING?

1. It takes time to implement plans.
2. It is not possible to predict with any degree of accuracy the timing and volume of demand for individual
items.
3. It is connected to the budgeting process.
4. It can help synchronize flow throughout the supply chain; it affects costs, equipment utilization,
employment levels, and customer satisfaction.

DEMAND AND SUPPLY

• Aggregate planners are concerned with the quantity and the timing of expected demand.

• If total expected demand for the planning period is much different from available capacity over that same
period, the major approach of planners will be to try to achieve a balance by altering capacity, demand, or
both.

• On the other hand, even if capacity and demand are approximately equal for the planning horizon as a
whole, planners may still be faced with the problem of dealing with uneven demand within the planning
interval.
 • The task of aggregate planners is to achieve rough equality of demand and capacity over the entire
planning horizon.

INPUTS TO AGGREGATE PLANNING

• Effective aggregate planning requires good information:
o First, the available resources over the planning period must be known,
o Then, a forecast of expected demand must be available,
o Finally, planners must take into account any policies regarding changes in employment levels.

AGGREGATE PLANNING STRATEGIES

1. Proactive strategies - involve demand options. They attempt to alter demand so that it matches capacity.
2. Reactive strategies - involve capacity options. They attempt to alter capacity so that it matches demand.
3. Mixed strategies - involve an element of each of these approaches.

DEMAND AND SUPPLY OPTIONS

1. Demand options - include pricing, promotions, using back orders (delaying order filling), and creating
new demand.
a. Pricing - Pricing differentials are commonly used to shift demand from peak periods to off-peak
periods. An important factor to consider is the degree of price elasticity for the product or service:
The more the elasticity, the more effective pricing will be in influencing demand patterns.
b. Promotion - Advertising and other forms of promotion, such as displays and direct marketing, can
sometimes be very effective in shifting demand so that it conforms more closely to capacity.
c. Back orders - orders are taken in one period and deliveries promised for a later period. The
success of this approach depends on how willing customers are to wait for delivery.
d. New demand - Many organizations are faced with the problem of having to provide products or
services for peak demand in situations where demand is very uneven.
2. Supply options - include hiring/laying off workers, overtime/slack time, part-time or temporary workers,
inventories, and subcontractors.
a. Hire and lay off workers - The extent to which operations are labor intensive determines the
impact that changes in the workforce level will have on capacity.
b. Overtime/slack time - Use of overtime or slack time is a less severe method for changing capacity
than hiring and laying off workers, and it can be used across the board or selectively as needed.
c. Part-time workers - In certain instances, the use of part-time workers is a viable option—much
depends on the nature of the work, training and skills needed, and union agreements.
d. Inventories - The use of finished-goods inventories allows firms to produce goods in one period
and sell or ship them in another period, although this involves holding or carrying those goods as
inventory until they are needed.
e. Subcontracting - enables planners to acquire temporary capacity, although it affords less control
over the output and may lead to higher costs and quality problems.

AGGREGATE PLANNERS’ STRATEGIES

1. Maintain a level workforce.
2. Maintain a steady output rate.
3. Match demand period by period.
4. Use a combination of decision variables.

Level capacity strategy - Maintaining a steady rate of regular-time output while meeting variations in demand by
a combination of options.
Chase demand strategy - Matching capacity to demand; the planned output for a period is set at the expected
demand for that period.
• To maintain a constant level of output and still satisfy varying demand, an organization must resort to some
combination of subcontracting, backlogging, and use of inventories to absorb fluctuations.

3 FACTORS IN CHOOSING A STRATEGY

1. Company policy - may set constraints on the available options or the extent to which they can be used.
2. Flexibility - The degree of flexibility needed to use the chase approach may not be present for companies
designed for high, steady output, such as refineries and auto assembly plants.
 3. Cost - As a rule, aggregate planners seek to match supply and demand within the constraint imposed on
them by policies or agreements and at minimum cost. They usually evaluate alternatives in terms of their
overall costs.

COMPARISON OF REACTIVE STRATEGIES

Chase approach
Capacities (workforce levels, output rates, etc.) are adjusted to match demand requirements over the
planning horizon. A chase strategy works best when inventory carrying costs are high and costs of changing
capacity are low.

Advantages:
Investment in inventory is low.
Labor utilization is kept high.
Disadvantage:
The cost of adjusting output rates and/or workforce levels.

Level approach
Capacities (workforce levels, output rates, etc.) are kept constant over the planning horizon. A level
strategy works best when inventory carrying costs and backlog costs are relatively low.

Advantage:
Stable output rates and workforce levels.
Disadvantages:
Greater inventory costs.
Increased overtime and idle time.
Resource utilizations that vary over time.

GENERAL PROCEDURE FOR AGGREGATE PLANNING

1. Determine demand for each period.
2. Determine capacities (regular time, overtime, subcontracting) for each period.
3. Identify company or departmental policies that are pertinent (e.g., maintain a safety stock of 5 percent of
demand, maintain a reasonably stable workforce).
4. Determine unit costs for regular time, overtime, subcontracting, holding inventories, back orders, layoffs,
and other relevant costs.
5. Develop alternative plans and compute the cost for each.
6. If satisfactory plans emerge, select the one that best satisfies objectives. Otherwise, return to step 5.

TECHNIQUES FOR AGGREGATE PLANNING:

TRIAL AND ERROR TECHNIQUES USING GRAPHS AND SPREADSHEETS

• It consist of developing simple tables or graphs that enable planners to visually compare projected demand
requirements with existing capacity.
• Alternatives are usually evaluated in terms of their overall costs.
• Sometimes they do not necessarily result in the optimal aggregate plan.

The appropriate costs are calculated as follows:

SAMPLE PROBLEM:

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:

PERIOD 1 2 3 4 5 6 TOTAL
Forecast 200 200 300 400 500 200 1800
Costs
Output
Regular time $2 per skateboard
Overtime $3 per skateboard
Subcontract $6 per skateboard
Inventory $1 per skateboard
Back Orders $5 per skateboard

They now want to evaluate a plan that calls for a steady rate of regular-time output, mainly using inventory
to absorb the uneven demand but allowing some backlog. Overtime and subcontracting are not used because they
want steady output. They intend to start with zero inventory on hand in the first period.

Prepare an aggregate plan and determine its cost using the preceding information. Assume a level output
rate of 300 units (skateboards) per period with regular time. Note that the planned ending inventory is zero. There
are 15 workers, and each can produce 20 skateboards per period.

PERIOD 1 2 3 4 5 6 TOTAL
Forecast 200 200 300 400 500 200 1800
Output
Regular
time
Overtime

Subcontract
Output -
Forecast
Inventory
Beginning
 Ending
Average
Backlog

PERIOD 1 2 3 4 5 6 TOTAL
COST
Output
Regular
time
Overtime

Subcontract
Hire / Lay-
off
Inventory
Back Orders

After reviewing the plan developed in the preceding example, planners have decided to develop an
alternative plan. They have learned that one person is about to retire from the company. Rather than replace that
person, they would like to stay with the smaller workforce and use overtime to make up for the lost output. The
reduced regular-time output is 280 units per period. The maximum amount of overtime output per period is 40
units. Develop a plan and compare it to the previous one.

PERIOD 1 2 3 4 5 6 TOTAL
Forecast 200 200 300 400 500 200 1800
Output
Regular time
Overtime
Subcontract
Output - Forecast
Inventory
Beginning
Ending
Average
Backlog

COST
Output
Regular time
Overtime
Subcontract
Hire / Lay-
off
Inventory
Back Orders
Total
MATHEMATICAL TECHNIQUES

TRANSPORTATION MODEL

DEMAND FOR
TOTAL
UNUSED CAPACITY
SUPPLY FROM PERIOD
CAPACITY AVAILABLE
(DUMMY) (SUPPLY)
1 2 3

Beginning Inventory
PERIOD

Regular Time
1
Overtime

Subcontract

Regular Time
2
Overtime
 Subcontract

Regular Time
3

Overtime

Subcontract

Demand

SIMULATION MODELS
The essence of simulation is the development of computerized models that can be tested under a variety of
conditions in an attempt to identify reasonably acceptable (although not always optimal) solutions to problems.

• Aggregate planning techniques other than trial and error do not appear to be widely used. Instead, in the
majority of organizations, aggregate planning seems to be accomplished more on the basis of experience
along with trial-and-error methods.

• It is difficult to say exactly why some of the mathematical techniques mentioned are not used to any great
extent. Perhaps the level of mathematical sophistication discourages greater use, or the assumptions
required in certain models appear unrealistic, or the models may be too narrow in scope.

MASTER SCHEDULE
The master schedule is the heart of production planning and control. It determines the quantities needed to
meet demand from all sources, and that governs key decisions and activities throughout the organization.

FUNCTIONS OF MASTER SCHEDULE:

1. It enables marketing to make valid delivery commitments to warehouses and final customers;
2. It enables production to evaluate capacity requirements;
3. It provides the necessary information for production and marketing to negotiate when customer
requests cannot be met by normal capacity; and
4. It provides senior management with the opportunity to determine whether the business plan and
its strategic objectives will be achieved.

DUTIES OF MASTER SCHEDULER:

1. Evaluating the impact of new orders.
2. Providing delivery dates for orders.
3. Dealing with problems:
a. Evaluating the impact of production delays or late deliveries of purchased goods.
b. Revising the master schedule when necessary because of insufficient supplies or capacity.
c. Bringing instances of insufficient capacity to the attention of production and marketing personnel
so that they can participate in resolving conflicts.

INFORMATION NEEDED BY MASTER PRODUCTION SYSTEM:

• The production plan.
• Forecasts for individual end items.
• Actual orders received from customers and for stock replenishment.
• Inventory levels for individual end items.
• Capacity restraints.
SAMPLE PROBLEM:
The Hotshot Lightning Rod Company makes a family of two lightning rods, Models H and I. It bases its
production planning on weeks. For the present month, production is leveled at 1000 units. Opening inventory is
500 units, and the plan is to reduce that to 300 units by the end of the month. The MPS is made using weekly
periods. There are 4 weeks in this month, and production is to be leveled at 250 units per week. The forecast and
projected available for the two lightning rods follows. Calculate an MPS for each item.

PRODUCTION PLAN
WEEK 1 2 3 4 TOTAL
FORECAST
PROJECTED
AVAILABLE
PRODUCTION PLAN

MASTER SCHEDULE:
PRODUCT H
WEEK 1 2 3 4 TOTAL
FORECAST
PROJECTED
AVAILABLE
MPS

MASTER SCHEDULE:
PRODUCT I
WEEK 1 2 3 4 TOTAL
FORECAST
PROJECTED
AVAILABLE
MPS

PRELIMINARY MASTER SCHEDULE

A particular item is made in lots of 100, and the expected opening inventory is 80 units. Complete the preliminary
master production schedules given the following:

WEEK 1 2 3 4 5 6
FORECAST 60 60 60 60 60 60
PROJECTED AVAILABLE
MPS

SAMPLE PROBLEM:

Amalgamated Nut Crackers, Inc., makes a family of nut crackers. The most popular model is the walnut,
and the sales department has prepared a 6-week forecast. The opening inventory is 50 dozen (dozen is the unit
used for planning). As master planner, you must prepare an MPS. The nutcrackers are made in lots of 100 dozen.

WEEK 1 2 3 4 5 6
FORECAST
PROJECTED AVAILABLE
MPS

MASTER SCHEDULE DECISIONS:

• Make to Stock Products - a limited number of standard items are assembled from many components. The
MPS is usually a schedule of finished-goods items.
• Make to Order Products - many different end items are made from a small number of components. The
MPS is usually a schedule of the actual customer orders.
• Assemble to Order Products - many end items can be made from combinations of basic components and
subassemblies.