BUAD306
Aggregate Planning
Aggregate Planning
Determines the resource capacity
needed to meet demand over an
intermediate time horizon
 Typically 2 - 12 months in duration

Objectives

To establish a company-wide game
plan for allocating resources


Example: Avoid battles between
Marketing and Production
To develop an economic strategy for
meeting demand

Demand can be met by adjusting
capacity or by managing the demand
Managing Demand
Pricing – raise prices during highdemand times
 Promotion – to increase demand
during low-demand seasons
 Backorders – taking orders before
production and shipping at a later date
 New Demand – developing new
products

Managing Capacity
Hire and lay off workers
 Use overtime and slack time
 Use part-time workers
 Use inventory to absorb fluctuations in
demand
 Subcontract work to other firms

Capacity
Constraints
Demand
Forecasts
Size of
workforce
Strategic
Objectives
Company
Policies
Aggregate
Production
Planning
Production Inventory
per month
levels
(in units or $)
Outputs
Inputs
Financial
Constraints
Units or dollars
subcontracted,
backordered, or
lost
Planning Sequence
Business Plan
Aggregate
Planning
Production Plan
Master Schedule
Service Considerations
Services occur when they are
rendered
 Demand for service can be difficult to
predict
 Capacity availability can be difficult to
predict
 Labor flexibility can be an advantage
in services

Level Production
Strategy for meeting uneven demand
Demand
Production
Units
Time
Chase Demand
Strategy for meeting uneven demand
Demand
Units
Production
Time
Aggregate Planning Schedule
Period
Forecast
Output
Regular
Overtime
Subcontract
Output - Forecast
Inventory
Beginning
Ending
Average
Backlog
Costs:
Output
Regular
Overtime
Subcontract
Hire/Lay off
Inventory
Back orders
Total
1
2
3
4
5
6
TOTAL
Read on your own
Mathematical Calculations
Number of
workers in
a period
=
Inventory
at the end of
a period
Number of workers
at the end of
+
the previous period
Inventory
= at the end of
+
the previous period
Number of new
Number of
workers at the start - laid-off workers
of the period
at the start of period
Production
in the current
period
-
Amount used to
satisfy demand in
the current period
Average Beginning Inventory + Ending Inventory
=
inventory
2
Cost for
a period
=
Output cost
+
(Reg.+OT+Subcontract)
Hire/lay-off +
cost
Inventory + Back-order
cost
cost
Read on your own
Calculating Costs
Type of Cost
Output
Hire/lay off
Inventory
Back order
How to calculate
Regular
Regular cost per unit * Quantity of
regular output
Overtime
Overtime cost per unit * Overtime
quantity
Subcontract Subcontracting cost per unit *
Subcontract quantity
Hire
Cost per hire * Number hired
Lay off
Cost per layoff * Number laid off
Carrying cost per unit * Average
inventory
Back order cost per unit * Number of
back-ordered units
Example - Develop a plan for this scenario: LEVEL
Bright Lamps, Inc. is preparing an aggregate plan that will cover 6 months.
They have assembled the following and want a plan for steady output.
Period
Forecast
Costs
Output
Regular time =
Overtime =
Subcontract =
Inventory =
Back orders =
1
2
3
4
5
6
Total
200 200 600 200 400 200 1800
$4 per lamp
$6 per lamp
$8 per lamp
$5 per lamp
$10 per lamp
•Zero inventory on hand to start
•10 employees, each person produces 30 units per period max regular
and 10 units per period overtime. There is no limit to subcontracting.
Example - Develop a plan for this scenario: CHASE
Bright Lamps, Inc. is preparing an aggregate plan that will cover 6 months.
They have assembled the following and want a plan for steady output.
Period
Forecast
Costs
Output
Regular time =
Overtime =
Subcontract =
Inventory =
Back orders =
1
2
3
4
5
6
Total
200 200 600 200 400 200 1800
$4 per lamp
$6 per lamp
$8 per lamp
$5 per lamp
$10 per lamp
•Zero inventory on hand to start
•10 employees, each person produces 30 units per period max regular
and 10 units per period overtime. There is no limit to subcontracting.
Example - Develop a plan for this scenario: COMBO
Bright Lamps has learned that one of their employees will be
out of commission for 6 months due to an injury. Rather than
replace the person, the company would like to work with a
smaller workforce and use overtime to make up for the lost
output.
The reduced regular time output is now 270 units per period
(9 employees @ 30 units). The maximum amount of overtime
output per period is 10 units. They want to develop an
aggregate plan for this scenario and compare it to the other
one to confirm that costs will be reduced.
NO SUBCONTRACTING IS ALLOWED!!!
Example – Compare costs from both scenarios
Cost of Steady Production with 10 workers – $
Cost of Overtime Production with 9 workers - $
Their decision would be to continue without their injured
employee and assume overtime/backorder costs.
Why wouldn’t this be a
good permanent plan?