Aggregate production planning is a planning in which general levels of employment and output are planned to balance supply and demand typically for periods of one year or less. The term
‘aggregate’ implies for groups of products, or product types (i.e., product ‘families’) rather than for specific or individual products. It is intermediate-range capacity planning, used to establish employment levels, output rates, inventory levels, subcontracting and backorders for products that are aggregated, i.e. grouped or brought together. It is not specifically focused on individual products, but deals with the products in the aggregate.
Aggregate planning is essentially a broader approach to planning. Planners generally try to avoid focusing on individual products or services unless, of course, the organization has only one major product or service. Instead, they focus on overall, or aggregate, capacity. Aggregate planning is closely related to other corporate decisions involving, for example, budgeting, personnel and marketing. Most budgets are based on assumptions about aggregate output, personnel levels, inventory levels, purchasing levels, etc. An aggregate plan should thus be the basis for initial budget development and for budget revisions as conditions warrant (Pan and Kleiner 1995).
Aggregate planning identifies the best way to utilize the limited resources of a firm to meet the fluctuating demand. It simultaneously establishes optimal production, inventory and release levels over a given finite planning horizon to meet the total demand (Buffa and Taubert 1972;
Hax and Candea 1984). The first production planning research was conducted by Hax and Meal (1975) and aimed to find feasible solutions to planning. Axsater (1985) divided the planning into two parts: aggregate planning and detailed planning. Unlike detailed planning, aggregate planning is performed at higher level. Aggregate planning does not create restrictions for detailed planning while at the same time considers long-term constraints.
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
Aggregate Planning
4.2 AggregAte PlAnnIng StrAtegIeS
The aggregate planning problem can be clarified by a discussion of the various decision options available. These will be divided into two types:
1. The options, influencing demand; and 2. The options, influencing supply.
Demand can be modified or influenced in several ways as mentioned below:
• Pricing: Price reduction leads to an increase in the demand and increase in price leads to a decrease in the demand subject to type of goods.
• Advertising and promotion: Advertising may increase the demand by offering discounts, additional offer, free post-sales service, etc.
• Back orders: It can be achieved by short selling, sell now and deliver later.
• New demand: New demand can be created by alternative use of the product.
There are also a large number of variables available to modify supply through aggregate planning (Stevenson 1986). These include: hiring and layoff of employees, using overtime and undertime, using part-time or temporary labour, carrying inventory, subcontracting, and making cooperative arrangements.
On the basis of the above discussion, we observe that there are two strategies to meet the fluctuating demand in the market. These strategies are: level strategies and chase strategies. In the case of level strategy, production is uniform whereas in case of chase strategy, production chases the demand by fluctuating the workforce utilization. Organizations must compare workforce fluctuation costs with inventory costs to decide which strategy to use. Level strategy is used when inventory costs are low as compared to the costs of fluctuating the workforce and when efficient production is the primary goal. When inventory costs are high as compared to workforce fluctuation costs, chase strategy is used, although it is less efficient for production. Apart from the production strategies such as level and chase strategies, we also have planning strategies. There are three major strategies associated with aggregate planning (Chase and Aquilano 1985):
• Production variations due to hiring, firing, overtime or undertime,
• Permitting inventory levels to vary, and
• Subcontracting
The demand of a product may continuously fluctuate with the market. The management has to respond to the changes in demand by absorbing the demand fluctuations by carrying or allowing inventory, adjusting the workforce through hiring and firing, and adjusting the production rate through overtime and undertime, combining these alternatives. Each of these alternatives is associated with some costs. The main purpose of aggregate planning is to minimize the all costs over the planning horizon.
For example, forecasts of the expected demand of a product for the next six months and the production days available during these months of planning horizon are given in Table 4.1. Also, the costs associated with various production factors are shown in Table 4.2. Now, we want to find the total production costs if we select different strategies of aggregate planning.
Table 4-1: Expected demands and the production days for the next six months Month Expected demands Production days Demand per day
(computed)
Jan 1200 22 54
Feb 1000 15 67
Mar 1100 21 53
Apr 1400 25 56
May 1200 22 54
June 1600 20 80
Total 7500 125
Table 4-2: Costs associated with various production factors Cost information
Inventory carrying cost Rs 4 per unit per month
Subcontracting cost per unit Rs 8 per unit
Average pay rate Rs 5 per hour (Rs 40 per day)
Overtime pay rate Rs 8 per hour (above 8 hours per day)
Labour-hours to produce a unit 1.8 hours per unit Cost of increasing daily production rate
(hiring and training)
Rs 320 per unit Cost of decreasing daily production rate (layoffs) Rs 540 per unit
A. Constant Workforce Level and Carrying the Inventory Average total production Total expected demand during plan
= nning horizon
Toal number of working days available during pplanning horizon 7500
125 60 units per day
= =
In this case, we maintain the constant production level equal to average production required per day. In Figure 4.1, it can be observed that the constant production level is 60 units per day, while the expected demand is continuously fluctuating from one month to another. Finally, at the end of the planning horizon, the cumulative inventory becomes zero.
Table 4.3 shows the status of changes in inventory in each month and ending inventory, i.e. cumulative inventory at the end of each month. We observe that at the end of the sixth month, the total inventory becomes zero that means the demand in peak period is adjusted by the inventory of the slack period. But, the total inventory carried over one month to another is equal to 1000 units and in this case, total production costs will be equal to the normal production cost plus inventory carrying cost of 1000 units in a month.
22 Jan.
0 10 20
Demands
30 40 50 60 70 80 90
15 Feb.
21 Mar.
Months and Working days Working days
Months
25 Apr.
22 May
20 June
Figure 4-1: Constant production level equal to average expected demand per day
Table 4-3: Monthly change in inventory and cumulative or ending inventory Month Production
days
Production at 60 units per day
Demand forecast
Monthly inventory change
Ending inventory (Cumulative)
Jan 22 1320 1200 +120 120
Feb 15 900 1000 −100 20
Mar 21 1260 1100 +160 180
Apr 25 1500 1400 +100 280
May 22 1320 1200 +120 400
June 20 1200 1600 −420 0
Total inventory for one month = 1000
Labour-hours required to produce 60 units per day 60 1.8 1= × = 008 Number of labours required per day 108
8 13.5 Labour cost pe
= =
rr day 13.5 5 8 Rs 540 Total labour cost for 125 working da
= × × =
yys 125 540 Rs 67,500 Inventory carrying cost 1000 4 Rs 400
= × =
= × = 00
Total production cost=Regular-time labour cost Inventory+ carrying cost Rs 67,500 Rs 4000 Rs 71,500
= + =
Figure 4.2 shows the cumulative production and cumulative demand and how they become zero at the end of the planning horizon.
Jan. Feb. Mar. Apr.
Months
Cumulative production
Cumulative demand
0 1000 2000 3000
Cumulative production/demands 4000 5000 6000 7000 8000
May June
Figure 4-2: Cumulative production and cumulative demand
B. Subcontracting as a Strategy to Meet the Fluctuating Demand
In the case of adopting subcontracting as a strategy to meet the fluctuating demand, the production level remains constant equal to the minimum production level required, and any extra demand occurs during the planning horizon is fulfilled by subcontracting. Figure 4.3 shows the constant production level at minimum level equal to 53 units per day and the extra demands that are fulfilled by subcontracting.
22 Jan.
0 10 20
Demands
30 40 50 60 70 80 90
15 Feb.
21 Mar.
Months and Working days Working days
Months
25 Apr.
22 May
20 June
Figure 4-3: Meeting fluctuating demand by subcontracting Regular-time labour cost for 125 working days 53 1.8
8 40 R
= × × = ss 59,625
Subcontracting units 7500 53 125 875 units= − × =
Subcontracting cost 875 8 Rs 7000 Total production cost Reg
= × =
= uular time labour cost Subcontracting cost Rs 59,625 Rs 70
+
= + 000 Rs 66,625=
C. Overtime as a Strategy to Meet the Fluctuating Demand
In the case of overtime production strategy, we maintain the production level at the minimum rate required per day or the initial workforce available and the extra unit requirement is fulfilled by overtime production. Here, we maintain the production rate of 53 units per day and if the demand increases that amount is fulfilled by overtime production.
Regular-time labour cost for 125 working days 53 1.8
8 40 R
= × × = ss 59,625
Overtime units 7500 53 125 875 units Overtime cost
= − × =
== × × =
=
875 1.8 8 Rs 12,600
Total production cost Regular time labbour cost Overtime cost Rs 59,625 Rs 12,600 Rs 72,225
+
= + =
D. Hiring and Firing as a Strategy to Meet the Fluctuating Demand
In the case of hiring and firing, we have to produce the products as per the demand of the market.
Daily production rate fluctuates continuously. The cost of hiring and firing depends on the increase and decrease in the daily production rate in the specific month, respectively. The total cost of production will be equal to the regular time production cost plus hiring and firing costs of the labour (Rs 89,580) as given in Table 4.4.
Table 4-4: Hiring and firing costs with regular-time labour cost Month Forecast
(units)
Daily production
rate
Basic production cost (demand ×
1.8 hrs/unit × Rs 5/hr)
Extra cost of increasing production (hiring cost)
Extra cost of decreasing production (layoff cost)
Total cost
Jan 1200 54 Rs 10,800 — — Rs 10,800
Feb 1000 67 Rs 9000 Rs 4160
(= 13 × Rs 320)
— Rs 13,160
Mar 1100 53 Rs 9900 — Rs 7560
(= 14 × Rs 540)
Rs 17,460
Apr 1400 56 Rs 12,600 Rs 960
(= 3 × Rs 320) — Rs 13,560
May 1200 54 Rs 10,800 — Rs 1080
(= 2 × Rs 540)
Rs 11,880
June 1600 80 Rs 14,400 Rs 8320
(= 26 × Rs 320)
— Rs 22,720
Total Rs 67,500 Rs 13,440 Rs 8640 Rs 89,580
Table 4.4 shows the hiring and firing costs of labours with regular-time production cost, and Figure 4.4 shows the aggregate planning with hiring and firing of labour. The total cost of production using hiring and firing of labours as a strategy will be Rs 89,580.
22 Jan.
0 10 20
Demands
30 40 50 60 70 80 90
15 Feb.
21 Mar.
Months and Working days Working days
Months
25 Apr.
22 May
20 June
Figure 4-4: Aggregate planning with hiring and firing
If we compare all the three strategies of aggregate planning, we find that with the given data, subcontracting option with a total production cost of Rs 66,625 is the most suitable option.