AGGREGATE SALES

AND OPERATIONS
PLANNING
WHY AGGREGATE
PLANNING?
Two reasons:
1. Planning: It takes time to implement plans (say, hiring or
firing of employees, subcontracting)
2. Strategic: Aggregation is important because it is not
possible to predict with any degree of accuracy the
timing and volume of demand for individual items.
Moreover, over intermediate time horizon, aggregate
forecast is more accurate than individual forecast.
Therefore, if an organization were to “lock in” on
individual items, it would lose the flexibility to respond to
market.
WHY AGGREGATE
PLANNING?
Provides for fully loaded facilities, thus minimizing
• Overloading and under loading
• Minimizing cost over the planning period although
cost is not always the only consideration

Adequate production capacity to meet expected

aggregate demand
• Optimize balance between demand and supply
AGGREGATE
PLANNING - GOAL
The overall goal of aggregate planning
is to use various sources of
capacity so that supply meet
demand over the intermediate time
horizon in the most efficient way
possible
 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.
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
AGGREGATION
It is often convenient to think capacity in
terms of labour hours or machine hours
per period, or output rates (barrels per
period, units per period) without worrying
about how much of a particular item will
actually be involved
Textile manufacturer: metres of cloth
Bank: number of accounts
Insurance firm: number of policies
PCB manufacturer: square metres of board
 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
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 strategy (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
INPUTS AND COSTS IN
AGGREGATE PLANNING

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
• Individual costs
• Amount of inventory held and costs
• Regular production costs
• Employment (hiring and firing costs)
• Overtime costs
• Subcontracting costs
APPROACHES TO AP
1. Graphical
2. Spread Sheet
3. General method of linear programming
4. Transportation method
5. Simulation
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
STRATEGIES
Two pure forms of aggregate planning strategies
• Level Production
• Maintain constant workforce
and adjust inventory

• Chase Demand
• Hiring and Firing people
AGGREGATE PLANNING
STRATEGIES
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 strategy 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

• Works when demand is stable

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
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, and holding inventory
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
(AN EXAMPLE)
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

• Simulations are 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
MANAGERIAL
IMPORTANCE OF AP
• Has an effect on
• Costs
• Equipment utilization
• Customer satisfaction
• Employment levels
• Synchronization of flow throughout the
supply chain