AGGREGATE PLANNING

Aggregate planning is intermediate-range capacity planning used to establish employment

levels, output rates, inventory levels, subcontracting, and backorders for products that are
aggregated, i.e., grouped or brought together. It does not specifically focus on individual products
but deals with the products in the aggregate.
For example, imagine a paint company that produces blue, brown, and pink paints; the
aggregate plan in this case would be expressed as the total amount of the paint without specifying
how much of it would be blue, brown or pink. uch an aggregate plan may dictate, for example, the
production of !"",""" gallons of paint during an intermediate-range planning hori#on, say during
the whole year. $he plan can later be disaggregated as to how much blue, brown, or pink paint to
produce every specific time period, say every month.
Achieving a balance of expected supply and demand is the goal of aggregate planning.
Informal graphical techni%ues, as well as mathematical techni%ues are used by decision makers to
handle aggregate planning.
Informal Techniques
&lanners often use graphs or tables to compare current capacity with pro'ected demand
re%uirements. $he informal techni%ues provide some general information and insight but not the
specific aggregate production details. $he graphs below depict aggregate planning using (evel and
)hase trategies.
(*+*( $,A$*-.
/uantity
)umulative production
)umulative demand
$ime

)0A* $,A$*-.

/uantity
)umulative production
)umulative demand
$ime
In case of (evel trategy, production is uniform whereas in case of )hase trategy,
production chases the demand by fluctuating the work-force or work-force utili#ation.
1rgani#ations must compare work-force fluctuation costs with inventory costs to decide which
strategy to use. (evel trategy is used when inventory costs are low as compared to the costs of
fluctuating the work force and when efficient production is the primary goal. 2hen inventory costs
are high as compared to work force fluctuation costs, )hase trategy is used, although it is less
efficient for production.
Aggregate Planning Strategies
Apart form the production strategies such as (evel and )hase trategies, we also have
planning strategies.
$here are three ma'or strategies associated with aggregate planning3
!4 product variations due to hiring, firing, overtime, or
undertime,
54 permitting inventory levels to vary, and
64 subcontracting
An example depicting these strategies is presented below along with some sample
computations of the costs associated with these strategies3
(evel production is 6"". 7ackorders are permitted. Initial Inventory is 8" units. 5"" units are to be
subcontracted for &eriod 9. )osts are as follows3
&roduct +ariations Inventory ubcontracting hortage
:5" ;unit :6 ;unit;period :5< ;unit :8 ;unit;period
&,1=>)$I1? I?+*?$1,.
&*,I1= =*@A?= ,*->(A, 1+*, >?=*, 7*-. *?=. A+-.
>7-
)1?$,A)$
01,$A-*
! 6<" 5"" - !"" 8" " 6< - A"
5 6"" 5<" - <" " " " - !6"
6 5<" 5<" - <" " " " - !6"
B 5<" B"" !"" - " 5" !" - "
< 6<" !<" - !<" 5" " !" - !A"
9 6"" 6<" <" - " 8" 6< 5"" "
<"" C" 5"" <5"
Costs For The Above Plan:
&roduct +ariations . . . . . . . <"" x :5" D :!","""
Inventory. . . . . . . . . . . EE C" x : 6 D : 58"
ubcontracting . . . . . . . . . . 5"" x :5< D : <,"""
hortage . . . . . . . . . . . . EE<5" x : 8 D : 6,9B"
$otal . . . . . . . . . . EEEE.. :!A,C!"
Rough-cut Capacity Planning
Aggregate planning is based on a general production plan that deals with how much
capacity will be available and how it will be allocated. A rough-cut capacity plan can be developed
to evaluate the work load that a production plan imposes on work centers.
Although a trial production plan is often used for rough-cut capacity planning, a trial master
production schedule can be used too. $he example below shows the application of rough-cut
capacity planning based on a trial master schedule.
@A$*, &,1=>)$I1? )0*=>(*
@1?$0
&,1=>)$ ! 5 6 B < 9
A !A" 5B" 6"" B5" 6<" 59"
7 5!" 55" 5B" 56" 55" 5""
) <"" BA" B<" BB" B5" B""
= 6!" 66" 6A" B!" BA" <""

7elow is a bill of labor which lists the hours re%uired in each department to make
one unit of product.
&,1=>)$
=*&A,@*?$ A 7 ) =
!! ".B ".5 ".8 ".<
55 ".! ".9 ".B ".C
66 !.! ".6 ".8 ".9
BB ".6 ".A ".5 ".<
<< ".< "." ".B ".9

=evelop capacity re%uirements for the following combinations3
@1?$0 =*&A,$@*?$
5 66
B !!
9 <<
6 55
$he solution is outlined below3
a. 5B"F!.!4 G 55"F".64 G BA"F".84 G 66"F".94 D A9B hours
b. B5"F".B4 G 56"F".54 G BB"F".84 G B!"F".<4 D 858 hours
c. 59"F".<4 G 5""F"."4 G B""F".B4 G <""F".94 D <C" hours
d. 6""F".!4 G 5B"F".94 G B<"F".B4 G 6A"F".C4 D 9C9 hours
For example, we must have at least A9B hours available in =epartment 66 for @onth 5 to
meet capacity re%uirements. uppose that we only have 9B" man hours available in =epartment 66
in @onth 5. $hen, we can use aggregate planning strategies such as hiring, overtime, etc. to bring
the capacity up to the re%uired amount of A9B man or machine hours in order to comply with master
production schedule. ?ote that this A9B hours is greater than the actual number of hours in a
monthF5B hours ;day x 6" days ; month D 85" hours ; month4. 2e may encounter this situation
often because we are talking about the man or machine hours. For example, in case of a one A-hour
shift, 5" working days per month, and !" workers, the man hours D A x 5" x !" D !,9"".
or! "orce Si#e Planning
In aggregate planning the ma'or ob'ective is to determine feasible and possibly
optimal production %uantities and the corresponding capacity Fwork force si#e4 to
accommodate such production re%uirements. An example of determining the appropriate
work force si#e follows.
$he table below gives forecasted demand in four %uarterly
F6-month4 periods3
Forecast =emand
/uarter Fstandard units of work4
! 9,"""
5 B,<""
6 B,5""
B <,<""
! year 5",5""
a. Assume employees contribute !A" regular working hours each month, and each unit
re%uires 5 hours to produce. 0ow many employees will be needed during /uarter !
and /uarter 5H
b. 2hat will be the average labor cost for each unit if the company pays employees
:!";hour and maintains for the entire year a sufficient staff to meet the peak
demandH
c. 2hat percentage above the standard-hour cost is the companyIs average labor cost
per unit in this year due to excess staffing for all but the peak %uarterly periodH
$he solution is as follows3
a. /uarter !3 9""" x 5 D !5,""" hours
!5,""" ; J F!A" x 6 months4 D 55.55 ---K 56 employees
/uarter 53 B,<"" x 5 D C,"""
C,""" J ; F!A" x 6 months4 D !9.99 ---K !8 employees
b. !A" hours;employ.-month x !5 months x 56 employ. x :!";hour D BC9,A""
5",5"" total units 5",5""
D :5B.<C;unit
c. 5 hours x :!";hour D :5";unit Fstandard cost4
:5B.<C -:5" D ".56 or 56L higher
:5"
$ther %athematical Techniques
$he mathematical techni%ues used for aggregate planning vary from computer
search models to heuristic and mathematical programming models. ix techni%ues are
discussed below.
1. Linear Programming -- (& models can be used to minimi#e the sum of costs related
to aggregate planning such as regular labor time, overtime, subcontracting, inventory, and
backorder costs. $he solution generated by (& models are optimal under the assumptions of
linear programming. A linear programming application is shown below3
uppose that the costs associated with various capacity options are as shown in the table
below3
)A&A)I$. &*,I1= ! &*,I1= 5 )1$
,*->(A, 5"" !A" :5" ;unit
1+*,$I@* A" 9" :5< ;unit
>7)1?$,A)$ !"" !"" :6" ;unit
=*@*?= 6B" 6""
I?+*?$1,.
01(=I?- )1$ :6 ;unit;period
7ackorders are not permitted in this case.
$hen, the linear programming formulation could be obtained as follows3

&*,I1= ! &*,I1= 5 >&&(.

&
*
,
I
1
=

!,*->(A, M!!!
5"
M!!5
56
5""
1+*,$I@* M5!!
5<
M5!5
5A
A"
>7)1?$,A)$ M6!!
6"
M6!5
66
!""

&
*
,
I
1
=

5,*->(A, M!55
5"
!A"
1+*,$I@* M555
5<
9"
>7)1?$,A)$ M655
6"
!""
=*@A?= 6B" 6""

For example, for x6!5 the first subscript F64 stands for the type of capacity Fi.e.
subcontract4. $he middle subscript F!4 stands for the supplying period or production period
Fi.e. period !4. $he last subscript F54 stands for the receiving period or consumption period
Fi.e. period 54.
LP formulation for the problem above:
@in 5"M!!! G 56M!!5 G 5<M5!! G 5AM5!5 G 6"M6!! G 66M6!5 G 5"M!55 G 5<M555 G 6"M655
st
M!!! G M!!5 N 5""
M5!! G M5!5 N A"
M6!! G M6!5 N !""
M!55 N !A"
M555 N 9"
M655 N !""
M!!! G M5!! G M6!! D 6B"
M!!5 G M5!5 G M6!5 G M!55 G M555 G M655 D 6""
$he solution to this (& could be obtained by a software like (I?=1 F(inear
Interactive =iscrete 1ptimi#er4. $he optimal values of the variables such as x!!!, x!!5, x5!!,
etc. would show how much regular capacity, overtime capacity, etc. to use in each time
period in order to minimi#e the cost of the planned aggregate production.
2. Goal Programming -- is a special form of linear programming. 1rdinary (& has
only one ob'ective or goal; it is to minimi#e the cost or maximi#e the profit. 1n the
other hand, goal programming is used to optimi#e multiple goals; it is also possible
to attach a certain priority to each goal. (ike (&, goal programming is also an
optimi#ation techni%ue.
3. Linear Decision Rule -- calculus based approach that derives two linear e%uations
from a %uadratic e%uation which is nonlinear. 1ne of the linear e%uations is used to
plan the production levels and the other linear e%uation is used to plan the work
force si#e.
4. Management Coefficients -- this heuristic model attempts to improve planning
performance using multiple regression. &ast managerial performance is used as a
base to improve performance.
5. Parametric Production Planning -- this techni%ue helps planning the production
levels and work force levels by using a heuristic search routine.
6. Simulation Models -- @any real life situations are simulated. $he computeri#ed
simulation models are tested under these simulated conditions to determine the
aggregate planning parameters such as production levels and work force si#es.