MPD412 - Ind Org - Lecture-04-AP - Part A

MECHANICAL ENGINEERING
DEPARTMENT Industrial Organization – MPD412
Lecture #4
Aggregate
Planning
(AP)
Prepared by : Dr. Sayed Ali Zayan 1st Term 2023/2024
Aggregate Planning
 Aggregate planning is intermediate-range capacity
planning useful in particular for organizations that
experience seasonal or other fluctuation in demand.
 Determine the resource capacity needed to meet
demand over an intermediate time horizon (Usually 3 to
18 months) .
 The aggregate plan specifies how the company will use
their existing facilities and equipment most efficiently to
reach their goals and satisfy demand.
 Aggregate planning is a “big picture” approach that
does not focus on individual products or services.
Instead, the focus is on groups of similar products of an
entire product line.
Aggregate Planning Goals
• Meet demand
• Use capacity efficiently
• Meet inventory policy
• Minimize cost
– Labor
– Inventory
– Plant & equipment
– Subcontract
Objectives of aggregate planning are to
(a) minimize costs of production/maximize profits
(b) maximize customer service
(c) minimize inventory investments
(d) minimize changes in production rates
(e) minimize changes in workforce levels
(f) maximize utilization of plant and equipment
Relationships of the Aggregate Plan
Marketplace
And
Demand
Aggregate Scheduling Options
Aggregate Planning Process
Aggregate Planning Strategies
Pure Strategy 1: Level Strategy

 Maintain a constant (minimal) production rate
over the entire horizon
 Main objective: Minimize smoothing costs
 Smooth production, but lots of inventory each
month
Level Strategy
Pure Strategy 2: Chase Strategy

– Change production rate to “chase” the demand
– Main objective: Minimize inventory costs
– No Inventory, but choppy production that changes every month
Chase Strategy
• Mixed strategy
➢ Combines 2 or more aggregate scheduling options
➢ uses alternatives mixing inventory, back order, capacity
change, work force change, etc.
Use a combination of options:

➢ Build-up inventory ahead of rising demand & use
backorders to level extreme peaks
➢ Layoff or furlough workers during lulls
➢ Subcontract production or hire temporary
workers to cover short-term peaks
➢ Reassign workers to preventive maintenance
during lulls
Developing Aggregate Plan
❑ Choose the basic strategy:
➢ Level, chase, or hybrid
❑ Determine the production rate:
➢ Level plan with back orders: rate = average demand over the planning
horizon
➢ Level plan without back orders: rate is set to meet all demand on time
➢ Chase plan: assign regular production, amount of overtime &
subcontracted work to meet demand
❑ Calculate the size of the workforce needed
❑ Calculate period-to-period inventory levels, shortages, expected
hiring & firings, and overtime
❑ Calculate period-by-period costs, then sum for total costs of the
plan
❑ Evaluate the plan’s impact on customer service and human
resource issues
Aggregate Planning Methods
• Graphical & charting techniques
– Popular & easy-to-understand
– Trial & error approach
• Mathematical approaches
– Transportation method
– Linear decision rule
– Management coefficients model
– Linear Programming
– Simulation
The Graphical Approach to Aggregate Planning
Forecast the demand for each period
Determine the capacity for regular time,
overtime, and subcontracting, for each period
Determine the labor costs, hiring and firing costs,
and inventory holding costs
Consider company policies which may apply to
the workers or to stock levels
Develop alternative plans, and examine their
total costs
Trial-and-Error Techniques Using Graphs
Trial-and-error approaches consist
of developing simple tables or
graphs that enable planners to
visually compare projected
demand requirements with
existing capacity. Alternatives are
usually evaluated in terms of their
overall costs.
 The chief disadvantage of such
techniques is that they do not
necessarily result in the optimal
aggregate plan.
the following relationships to determine the number of workers, the
amount of inventory, and the cost of a particular plan:
The number of workers available in any period is calculated as follows:
Note: An organization would not hire and lay off simultaneously, so at

least one of the last two terms will equal zero.
The amount of inventory at the end of a given period is calculated as
follows:
The average inventory for a period is equal to
The cost of a particular plan for a given period can be determined by

summing the appropriate costs:
The appropriate costs are calculated as follows:

Example: Aggregate Planning Using Pure Strategies
The Good and Rich Candy Company makes a variety of candies in three
factories worldwide. Its line of chocolate candies exhibits a highly
seasonal demand pattern, with peaks during the winter months (for the
holiday season and Valentine’s Day) and valleys during the summer
months (when chocolate tends to melt and customers are watching their
weight). Given the following costs and quarterly sales forecasts, determine
whether (a) level production or (b) chase demand would more
economically meet the demand for chocolate candies:
Solution:
a) For the level production strategy, we first need to calculate average
quarterly demand.
This becomes our planned production for each quarter. Since each worker
can produce 1000 pounds a quarter, 100 workers will be needed each
quarter to meet the production requirements of 100,000 pounds.
The production plan and resulting inventory costs are as follows:
Solution:
b) For the chase demand strategy, production each quarter matches demand. To
accomplish this, workers are hired at a cost of $100 each and fired at a cost of $500
each. Since each worker can produce 1000 pounds per quarter, we divide the
quarterly sales forecast by 1000 to determine the required workforce size each quarter.
We begin with 100 workers and hire and fire as needed. The production plan and
resulting hiring and firing costs are given here:
Comparing the cost of level production with chase demand, we find that chase
demand is the best strategy for the Good and Rich line of candies.

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MECHANICAL ENGINEERING

DEPARTMENT Industrial Organization – MPD412

Pure Strategy 1: Level Strategy

Pure Strategy 2: Chase Strategy

Use a combination of options:

Note: An organization would not hire and lay off simultaneously, so at

The cost of a particular plan for a given period can be determined by

The appropriate costs are calculated as follows:

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