Aggregate Planning

Aggregate Planning
By: Dr Aatma Maharajh

Outline
• What is Aggregate Planning?
• Relationships of the Aggregate Plan
• Aggregate Planning Strategies
• Categories of Aggregate Plan
• Capacity-Based Options Vs Demand-Based Options
• Methods for Aggregate Planning
• Examples of Level vs Chase Aggregate Planning.
• Aggregate Planning for Services
• Problems addressed by Revenue Management
What is Aggregate Planning?
• As known as aggregate scheduling, is an approach to determine the quantity and
timing of production for the intermediate future (usually 3 to 18 months ahead).
(Heizer and Render, 2004)
• Includes the budgeted levels of finished products, inventory, backlogs,

workforce, size, and aggregate production rate needed to support the marketing
plan
(Reid and Sanders, 2011)
What is Aggregate Planning?
• Ties the firm’s strategic goals to production plan for manufacturer’s
• Ties the firm’s strategic goals to workforce schedules for service companies.
• Developed based on a composite product that represents the expected product

mix.
Developing an Aggregate Plan
• Four (4) things are needed for aggregate planning:
– A logical overall unit for measuring sales and output
– A forecast of demand for a reasonable intermediate planning period
– A method for determining the cost
– A model that combines forecasts and costs, so that scheduling decisions can be made
for planning period
Relationships of the Aggregate Plan
Marketplace and Research and
Product Decisions
Demand Technology
Process Planning
Demand Forecasts, Raw Material
and Capacity Workforce
orders Available
Decisions
Aggregate Plans for

Inventory on Hand
Production
Master Production External Compacity
Detailed work
Schedules
Aggregate Planning Strategies
• Five (5) questions are asked when generating an aggregate plan:
1. Should inventory be used to absorb changes in demand during the planning period?
2. Should changes be accommodated by varying the size of the workforce?
3. Should part-timers be used, or should overtime and idle time absorb fluctuations?
4. Should subcontractors be used on fluctuating orders so a stable workforce can be

maintained?
5. Should prices or other factors be changed to influence demand?

Categories of Aggregate Plan
1. Level Aggregate Plan: A planning approach that produces the same quantity
each time period. Inventory and back orders are used toabsorb demand
fluctuations.
2. Chase Aggregate Plan: A planning approach that varies production to meet

demand each period.
3. Hybrid Aggregate Plan: A planning approach that uses a combination of level

and chase approaches while developing the aggregate plan.
Level vs Chase Aggregate Plan

Capacity-Based Options Vs Demand-Based Options
• Capacity based options: A group of options that allow the firm to change its
current operating capacity
• Demand-based options: A group of options that respond to demand fluctuations

through the use of inventory or back orders, or by shifting the demand pattern.

Capacity Options Vs Demand Options
Capacity Options Demand Options
• Changing inventory levels • Influencing demand though

advertising, promotion, price cuts,
• Varying workforce size by hiring or etc…
layoffs
• Back ordering during high demand
• Varying production rates through periods
overtime or idle time.
• Counter-seasonal product and
• Use of subcontracting service mixing
• Using part-time labour force
(Heizer and Render, 2004)

Option Advantages Disadvantages
Changing inventory levels Changing in human resource are Inventory holding costs; shortages
gradual or non; no abrupt production may result in low sales
changes
Varying workforce size by hiring or Avoids the cost of other alternatives Costs associated with hiring, layoff
layoffs and training
Varying production rates through Matches seasonal fluctuations without Overtime premium; tired workers,
overtime or idle time. hiring/training cost may not meet demand
Use of subcontracting Permits flexibility and smoothing of Loss of quality control, reduced
the firm’s output profits, loss of future business
Using part-time labour force Is less costly and more flexible than High turnover/training costs, quality,
full-time workers scheduling difficult.
Option Advantages Disadvantages
Influencing demand Tries to use excess inventory, new Uncertainty in demand
customers
Back ordering during high demand May avoid overtime; keeps capacity Customers must be willing to wait
periods constant
Counterseasonal product and service Fully utilises resources; allows stable May require skills or equipment
mixing workforce outside firm’s area of expertise
Methods for Aggregate Planning
Techniques Solution Approaches Important Aspects
Graphical/charting methods Trial and Error Simple to understand and easy to
use. Many solutions; one chosen
may not be optimal.
Transportation method of Optimization LP software available; permits
linear programming sensitivity analysis and new
constraints; linear functions may
not be realistic.
Management coefficient Heuristic Simple, easy to implement; tries to
model minimise manager’s decision
process; uses regression.
Graphical/Charting Methods
• Five (5) step process:
1. Determine the demand in each period.
2. Determine capacity for regular time, overtime and subcontracting each period.
3. Find labour cost, hiring and layoff cost and inventory and holding costs.
4. Consider company policy that may apply to the workers or to stock level.
5. Develop alternative plans and examine their total costs.

Examples
Level vs Chase
Aggregate Plan
Example 1
Example 2
Example 3
Example 4
Planning in E-business Environment
• Collaborative Planning: sharing information and synchronizing production
across the supply chain.
• Available-to-promise (ATP): sharing information and synchronizing production

across the supply chain.
– Capable-to-promise: the quantity of items that can be produced and made available at a
later date
Rules Based ATP
Aggregate Planning for
Services
Characteristics of Aggregate Planning for Service
1. Most services cannot be inventoried.
2. Demand for services is difficult to predict.
3. Capacity is also difficult to predict.
4. Service capacity must be provided at the appropriate place and time.
5. Labor is usually the most constraining resource for services.

Revenue Management
• Revenue management: also called yield management seeks to maximize profit or
yield from time-sensitive products and services.
– Used in industries with inflexible and expensive capacity, perishable products or

services, segmented markets, advanced sales, and uncertain demand.
Problems addressed by Revenue Management
• Overbooking: to cater for “no-show” customers. Used in restaurants, airlines and
hotels, etc…
• Fare Classes: Type of pricing strategy used to differentiate between the value to
similar product types, e.g. seats in Stadium or seating on a plane (business class
vs first class)
• Single Order Quantities: Used when the useful life for products is so short that in
many instances only one order for production can take place, e.g. Baked goods

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Aggregate Planning

By: Dr Aatma Maharajh

• Includes the budgeted levels of finished products, inventory, backlogs,

• Developed based on a composite product that represents the expected product

– A forecast of demand for a reasonable intermediate planning period

– A method for determining the cost

Aggregate Plans for

Master Production External Compacity

2. Should changes be accommodated by varying the size of the workforce?

4. Should subcontractors be used on fluctuating orders so a stable workforce can be

5. Should prices or other factors be changed to influence demand?

2. Chase Aggregate Plan: A planning approach that varies production to meet

3. Hybrid Aggregate Plan: A planning approach that uses a combination of level

(Reid and Sanders, 2011)

• Demand-based options: A group of options that respond to demand fluctuations

(Reid and Sanders, 2011)

• Changing inventory levels • Influencing demand though

(Heizer and Render, 2004)

5. Develop alternative plans and examine their total costs.

• Available-to-promise (ATP): sharing information and synchronizing production

2. Demand for services is difficult to predict.

3. Capacity is also difficult to predict.

4. Service capacity must be provided at the appropriate place and time.

5. Labor is usually the most constraining resource for services.

– Used in industries with inflexible and expensive capacity, perishable products or

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