Aggregate Sales and

Operations Planning
Planning Level and Activities
Planning Stages in Operation
 Aggregate Planning
Aggregate planning is a big picture approach to production
plan to meet the demand throughout the year or so.

It is not concerned with individual products, but with a single

aggregate product representing all products.

For example, in a TV manufacturing plant, the aggregate

planning does not go into all models and sizes. It only
deals with a single representative aggregate TV.
All models are lumped together and represent a single
product; hence the term aggregate planning.
What does Aggregate Mean?
 Overall terms
 Product families or product lines rather than individual
products, thus the term aggregate
 In other words, one “collapses” a multi-product firm to
a single-product firm, the “product” being aggregate
units of production
 Big picture approach to planning
 Aggregate, for example # bicycles to be produced,
but would not identify bicycles by colour, size, type
etc.
How does MPS differ from AP
Aggregation (Example)
 Suppose a bicycle manufacturer makes three models (Standard,
Deluxe, Sports)
 Time: Standard: 30 m/c hours, Deluxe: 60 m/c hours, Sports: 90 m/c
hours
 Thus manufacturing 1 deluxe model is equivalent to manufacturing 2
standard models. 1 sports model is equivalent to manufacturing 3
standard models from resource consumption perspective
 Thus a monthly demand of 1000 standard cycles, 500 deluxe, and
250 sports can be aggregated as 2750 standard models on the
basis of machine hours
 Identifying Aggregate Units of
Production
Product Material cost/ Revenue / Prodn. Time % share of
Family Unit (Rs) unit (Rs) /unit units sold
(includes
setup time)
A 15 54 5.76 10
B 7 30 3.04 25
C 9 39 3.88 20
D 12 49 5.00 10
E 9 36 3.66 20
F 13 48 4.37 15

Material cost / aggregate unit = 15*0.10+7*0.25+9*0.20+12*0.10+9*0.20+13*0.15 = Rs 10

Revenue / aggregate unit = 54*0.10+30*0.25+39*0.20+49*0.10+36*0.20+48*0.15 = Rs 40
Production time / agg. unit = 5.76*0.1+3.04*.25+3.88*0.20+5*0.1+3.66*0.20+4.37*0.15 = 4 hrs
Why Aggregate Planning?
 A plan for orderly and systematic change
of production capacity to meet peaks and
valleys of expected customer demand

 Getting the most output for the amount of

resources available, which is important in
times of scarce production resources
Why Aggregate Planning?
 Provides for fully loaded facilities, thus
minimizing
 Overloading and under loading
 Minimizing cost over the planning period

 Adequate production capacity to meet

expected aggregate demand
 Optimize balance between demand and
supply
Steps in Aggregate Planning
1. Begin with sales forecast for each product that
indicates the quantities to be sold in each time
period (usually months, or quarters) over the
planning horizon (3-18 months)

2. Total all the individual product or service

forecast into one aggregate demand.
Steps in Aggregate Planning
3. Determine capacities (regular time, OT,
subcontracting) for each period
4. Determine unit costs for regular time, OT,
subcontracting, holding inventories, back
orders, layoffs etc.

5. Identify company policy (chase, level, mixed)

Steps in Aggregate Planning
6. Develop alternative plans and compute
cost for each
7. Select the best alternative that satisfies
company’s objectives
Strategies for Meeting Demand
 Proactive
 Alter demand to match capacity
 Reactive
 Alter capacity to match demand
 Mixed
 Some of each
Strategies for Meeting Demand
 Proactive strategies
 Influencing Demand
 Offer discounts and promotions

 Increase advertising in slack periods

 Counter seasonal products

 Lawnmowers (summer) and snow-blowers (winter)
Strategies for Meeting Demand
 Reactive Strategies
 Changing inventory levels
 Vary workforce size (hiring and lay-off)
 Varying shifts
 Varying working hours
 Varying production through overtime or idle
time
 Subcontracting
Inputs and Costs in AP
Decision Variable Costs
Varying work force size Hiring, training, firing costs

Using Overtime Overtime costs

Varying inventory levels Holding costs

Accepting back orders Back order costs

Subcontracting others Subcontracting costs

Outputs of Aggregate Planning
 Total cost of a plan
 Regular production cost
 Inventory cost
 Hiring and firing cost
 Subcontracting and overtime costs
 Projected levels of
 Inventory held
 Output from
 Regular time, overtime, subcontracting

 Employment
Graphical Method
 Popular technique
 Easy to understand and use
 Trial-and-error approaches that do
not guarantee an optimal solution
 Require only limited computations
Graphical Method
Month Expected Production Demand / Avg. daily
Demand Days day demand
Jan 900 22 41 50
Feb 700 18 39 50
March 800 21 38 50
April 1200 21 57 50
May 1500 22 68 50
June 1100 20 55 50

6,200 124
Graphical Method

Note: Forecast differs from average demand

Aggregate Planning Techniques
 Two pure forms of aggregate planning
strategies
 Level Production
Maintain constant workforce and
adjust inventory

 Chase Demand
Hiring and Firing people
Aggregate Planning Techniques
 Mixed Strategy
 Combination of
 Overtime, under time, & subcontracting
 Part Time employees
 Hiring and firing
 Inventory
 Backordering
Note: When one alternative: Pure Strategy
When two or more are selected: Mixed strategies
Level Production Strategy
 It is an aggregate planning in which monthly
production is uniform
 Requires no overtime, no change in work force
levels, and no subcontracting
 Toyota and Nissan follow this strategy
 Finished goods inventory go up or down to
buffer the difference between demand and
production
Level Production Strategy
 LEVEL PRODUCTION STRATEGY

Assume begin inventory: 2000

Chase Production Strategy
 It attempts to achieve output rates that match demand
forecast for that period.

 This strategy can be accomplished by:

 Vary workforce levels (hiring and firing)

 Service businesses use because they don’t have the

option to build inventory of their product
Chase Production Strategy
CHASE DEMAND STRATEGY
Chase vs. Level

Chase Approach Level Approach

 Advantages  Advantages
 Investment in inventory  Stable output rates and
workforce
is low
 Labor utilization in high  Disadvantages
 Greater inventory costs
 Disadvantages
 Increased overtime and
 Thecost of adjusting
output rates and/or idle time
workforce levels  Resource utilizations vary
over time
Mixed Strategy
 For most firms, neither a chase strategy
nor a level strategy is likely to prove ideal,
so a combination of options must be
achieved to meet demand and minimize
cost

 More complex than pure ones but typically

yield a better strategy
OVERTIME & SUBCONTRACTING
Linear Programming
Approaches to AP
 Finds minimum cost solution related to
regular labour time, overtime,
subcontracting, caring inventory, and costs
associated with changing the size of
workforce
Mathematical Techniques to
Aggregate Planning
 Linear Programming
 Optimal solutions
 Cost minimization
 Profit maximization

 Appropriate when cost and variable

relationships are linear

 Application in industry limited

Transportation Method in AP
Transportation Method in AP
Transportation Method
(An Example)
 Total Costs

Period Demand Regular Overtime Subcontract End

Production Inventory

1 900 1000 100 0 500

2 1500 1200 150 250 600
3 1600 1300 200 500 1000
4 3000 1300 200 500 0
Total 7000 4800 650 1250 2100
Total Cost: 4800×$20+650×$25+1250×$28+2100×$3 = $153,550
Transportation Method
(Second Example – Prob 7)
Transportation Method: Cost of
Plan
 Period 1: 50($0)+300($50)+50($65)+50($80)=$22,250
 Period 2: 400($50)+50($65)+100($80)=$31,250
 Period 3: 50($81)+450($50)+50($65)+200($80)=$45,800

 Total Cost: $99,300

Simulation Models in AP
 Development of computerized model under
variety of conditions to find reasonably
acceptable solutions
 Advantages
 Lends itself to problems that are difficult to solve
mathematically
 Experimenting system behaviour without any risk
 Compresses time to understand system
 Understand system behaviour under wide range of
conditions
Simulation Models in AP
 Limitations
 Simulation does not produce optimal
solutions, it merely indicates approximate
behaviour for a set of inputs

 Simulationsare based on models, and

models are only approximation of reality
Summary of Aggregate
Planning Techniques
Technique Solution Characteristics
Approach
Spreadsheet Heuristic (trial and Intuitively appealing,
error) easy to understand,
solution not optimal

Linear Programming Optimizing Computerized

Simulation Heuristic (trial and Computerized

error) models can be
examined under
various scenarios