Aggregate Planning
Hemant Jog
Chetana’s Institute/s of Management & Research
PHONE 9503040028/9834150970
EMAIL: hemantjog45@[Link]
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Aggregate Production Planning
a) It is planning the number of units of the product to be produced on
a weekly or monthly basis for the coming 6 to 18 months.
b) This plan should be in line with the overall business plan of the
company.
c) ‘Aggregate’ means
• complete or the total (collective / combined / cumulative)
d) Hence, this plan includes all the various models of the product &
gives the complete picture of the future production requirement.
e) This plan is based upon the demand forecasting provided by the
marketing department.
f) Aggregate planning is needed to minimize the various types of
costs related to unplanned production.
g) Unplanned production leads not only to high costs such as hiring &
laying off cost of workers, overtime costs, inventory costs, etc.
• But also to shortages of the products.
h) …
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Aggregate Production Planning
h) A shortage or stock out is most harmful to the company, as it
results in loss of goodwill on the part of customers.
i) Let us consider an example to understand the relationship between
the aggregate production plan & cost involved as
the time horizon of the demand forecasts provided by
the marketing department is broadened
Example
o Rajasthan Saris is a 100% export oriented unit 5,000 million
turnover company at Jaipur.
o It exports its typical Rajasthani Saris to the through a sales agency
based at Zurich.
o Remaining details given are tabulated in next slide.
o Prepare Aggregate Production plan for the company.
o …
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Aggregate Production Planning
Month October November December Total Cost
# of units to be produced 2000 3000
Example
Production per worker p.m. 100 100
Salary per worker 4000
# workers available 25
Hiring Cost per worker 500 500
Laying of cost as %age salary 20% 20%
Inventory carrying cost per sari 10 10
Solution
# of workers required 20 30
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Aggregate Production Planning
Solution
Production plan when forecast is available only one month in advance
Forecast of each month is available just before that month
Hence, no possibility of adjusting Qty with next month’s production
Month October November December Total Cost
# of units to be produced 2000 3000
# of workers required 20 30
Total Salary @4000 per worker 80,000 120,000 200,000
# of workers hired 0 10
Total Hiring Cost @500/worker 0 5,000 5,000
# of workers laid off 5 0
Laying of cost per worker 800 800
Total Laying of cost 4,000 0 4,000
Inventory 0 0
Inventory carrying cost 0 0 0
Total Cost 209,000 5
Aggregate Production Planning
Solution
Production plan when forecast is available two months in advance
Forecasts of November & December are available before November
Month October November December Total Cost
# of units to be produced 2500 2500
# of workers required 25 25
Total Salary 100,000 100,000 200,000
# of workers hired 0 0
Total Hiring Cost 0 0 0
# of workers laid off 0 0
Laying of cost per worker 800 800
Total Laying of cost 0 0 0
Inventory 500 0
Inventory carrying cost @10/saree 5,000 0 5,000
Total Cost 205,000
So, total cost decreases as time horizon increases (but with a limit) 6
Steps in Effective Aggregate Production Planning
Demand forecasts Strategies for pure aggregate Business Plan
provided by the planning considered by the provided by the
marketing department production manager management
Level Output rate plan Chase Plan Varying Utilization Plan
A combination of the pure planning
strategies called the intermediate plan is
prepared by the production manager
Disaggregation into smaller periods & different models of
products of the aggregate production plan (intermediate
plan) is done in to arrive at a master schedule
Beginning inventory Master scheduling Customer orders
status process committed
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Steps in Effective Aggregate Production Planning
Beginning inventory Master scheduling Customer orders
status process committed
Projected (next period) Tentative MPS (master Available-to-promise
on-hand inventory production schedule) inventory
Tentative MPS is run through the
Rough-cut
MRP (material requirement
capacity
planning) processing logic to test
planning
for feasibility
MPS can not be changed The process of checking
near the actual the feasibility of the
production time. Revised MPS is fixed master schedule w.r.t.
Otherwise whole exercise using time fences the available capacity
of production planning is rough cut planning
becomes useless
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Production Planning Strategies
a) Basic production planning strategies are based upon 3 variables:
• Workforce size,
• Utilization of workers
• Inventory size
b) In each of these strategies,
• one variable is varied & the other two are kept constant.
c) The following are 3 basic production planning strategies
1) Level Output Rate Plan
• Inventory size is varied keeping the workforce size & utilization of
workers constant.
• The # of workers (workforce size) is kept constant throughout the
time period under consideration.
• During the months of low demand, the excess units produced over
demand are accumulated as inventory.
• During the months of high demand, the units required over the
units produced are taken from the inventory. …
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Production Planning Strategies
Level Output Rate Plan
• The advantage of this plan is that the cost of hiring & training new
workers is zero as workforce size is constant.
• The employee morale is high due to a sense of job security.
• During the periods of low demand, there is a high inventory cost
due to its large size.
2) Chase Plan
• The workforce size is varied according to demand, keeping the
utilization of workers & inventory size constant.
• During the months of low demand, the workforce size is decreased
& the extra workers are laid off.
• Similarly, during the months of high demand, more workers are
hired.
• Hiring & laying off costs substantial in this plan.
• Workers morale is also low due to a sense of insecurity. …
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Production Planning Strategies
Chase Plan
• The production of items is in tune with demand requirements.
• Thus, inventory is almost negligible.
• During the months of heavy demand, overtime may be required on
the part of workers, for which the company incurs overtime cost.
3) Varying utilization Plan
• The utilization of workers is varied keeping the workforce size &
inventory size constant.
• The # of workers is kept constant in this plan.
• During the months of low demand, the workers produce less so as
to match the demand, & they have lot of idle time.
• This idle time is loss to the company which pays full wages.
• During the months of high demand, the excess units required over
regular production are produced by overtime on the part of
workers. …
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Production Planning Strategies
Varying utilization Plan
• Overtime is usually expensive compared to the regular wages.
• Further, excess overtime leads to less efficiency of workers & more
accidents due to lack of concentration.
• Company saves on inventory costs, which are almost negligible, in
this plan.
d) These basic planning strategies should preferably not to be used in
isolation with each other, as each one of these has typical
drawbacks.
** **
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Disaggregating Aggregate Plan
a) Aggregate plan does not give specific information about how many
units of different models of the products are to be produced.
b) Different models of product may require some specific processes /
parts to the models in addition to the common parts/processes
c) So, for material & labour planning of different models, information
is needed about quantities of the different models to be produced.
d) So, aggregate plan is disaggregated (broken down into parts) to
include information about various models of products to be made.
Master Schedule
a) It is a result of disaggregation in phases/parts of an aggregate plan.
b) It shows the quantity & timing of specific end items for a time
horizon often spanning 6 to 8 or 12 weeks.
c) In a MS, time horizon is divided into many time periods usually
expressed in weeks.
d) ...
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Disaggregating Aggregate Plan: Master Schedule (MS)
d) Time periods in MS called time buckets may not be equal through
out the time horizon considered.
e.g. Weeks in near future & months & quarters in distant future.
e) So, MS is more & more tentative for the distant future.
f) There is no upper limit on the duration of the time horizon for MS.
g) But, there is a lower limit. The duration of the time horizon has to
cover at least the cumulative lead time of production end items.
e.g. if the production of an end items requires 3 days for procurement
of raw materials, 4 days for manufacturing components, 2 days for sub-
assemblies, & 1 day for final assembly, the cumulative lead time will be
3 + 4 + 2 + 1 = 10 days. Thus, the MS shall cover time horizon 10 days.
h) The MS may be revised on a monthly basis in order to
accommodate any changes in the actual demand being
experienced in comparison to the demand forecast.
e.g. if demand in a particular month is far less than the demand
forecast leading to accumulation of inventory, MS for the next months
is updated/revised to incorporate changes in its planned output. … 14
Disaggregating Aggregate Plan: Rough Cut Capacity Planning
a) The initial MS is tentative in nature, as in reality the capacity of the
capacity of the production system may not be able to support its
practical implementation.
b) So, initial MS may be run through the MRP system as a trial to
check the sufficiency of production capacities such as machines,
equipment, labour, warehouses, capacities at suppliers’ end, etc.
c) If the available capacities are not adequate to support MS, either
the MS can be revised to match production capacities or
• the production capacities are expanded e.g. by overtime work, or
by increasing # of shifts , or by sub-contracting to outside vendors.
d) This process of checking the feasibility of the MS with respect to
available capacity is called rough-cut capacity planning.
***
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Disaggregating Aggregate Plan: Master Production Schedule
a) The MS provides details about the quantities & delivery timings of
a product, but not production plan.
e.g. if according to the MS, 1200 cars of a particular model are to be
delivered to the customer in a week 1 & 1000 cars of the are already in
inventory, then only 200 units have to be produced in this week.
• But, if there are 1500 units of this model of the car in the inventory
there may be no requirement of any production in this week.
b) The master production schedule (MPS) gives details about
quantities & timing of the planned production of a product.
c) MPS is derived from MS by taking into account the inventory status
of the product in given period.
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Disaggregating Aggregate Plan: Time Fences
a) MPS can not be changed near production time.
b) Otherwise whole exercise of production planning becomes useless.
c) various time intervals, called time fences, are set to regulate
changes in the MPS.
e.g. 3 fences may be fixed at time intervals of 1, 2, & 3 months.
• Before 3 months of the actual production time any changes in the
MPS may be made.
• Between 2 & 3 months (time fences), product models may be
substituted, provided the required components are available.
• Between 1 & 2 months (time fences), changes are avoided, but
minor ones may still be permitted.
• The last fence of 1 month before actual production takes place is
strictly frozen i.e. no changes allowed during this time.
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