Chapter 13 aggregate planning
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Chapter 13 Aggregate Planning. Seasonal variation in demand E.g. Ice Cream Factories Agora on employment and departmental space allocation. Long range. Intermediate range. Short range. Now. 2-3 months. 18 Months. Planning Horizon/Levels.

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Chapter 13 Aggregate Planning

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Chapter 13Aggregate Planning

Seasonal variation in demand

E.g. Ice Cream Factories

Agora on employment and departmental space allocation

Long range

Intermediate range




2-3 months

18 Months

Planning Horizon/Levels

Aggregate planning: Intermediate-range capacity planning, usually covering 2 to 12 months. (Also called Macro planning)

Aggregation- what is?

To develop a feasible production plan on an aggregate level that achieves a balance of expected demand and supply

usually demand and supply are converted to aggregate units such as labour-hours, working days, general product units, etc.

Why do it?

Objective of Aggregate Planning

Planning Sequence

Maintain a level workforce

Maintain a steady output rate

Match demand period by period

Use a combination of decision variables

Aggregate Planning Approaches




Level and Chase Strategies




Level Output Strategy

Output less

than demand



Output exceeds


Chase Demand Strategy

Output above




Output below












Cumulative Graph

Cumulative output/demand





An NSU UG student

One year expenses

tuition 40,000

transportation1000 x 12 = 12000

food and meal2000 x 10 = 20000

summer5000 x 2 = 10000

others 500 x 12 = 6000


Example - a personal plan

A NSU UG student

plan income

Bank loan, etc40000

private tutoring2000 x 12 = 24000

part time job2000 x 10 = 20000

summer job6500 x 2 = 13000

family money1000 x 10 = 10000


saving107000 - 88000 = 19000

Objective: income meets expenses; maximize saving; etc. (What do you call this?)

Example - a personal plan

1.Forecast demand in the period

2.Develop plan(s) to meet the demand by setting levels on output, employment, inventory, etc.

3. The plans are refined or reworked until a feasible and satisfactory plan is uncovered.

General steps in AP


e.g., shift demands from peak periods to off-peak periods. The more the elasticity, the more effective pricing will be on the demand pattern.


Backorders (depend on customers’ willingness)

Develop new demand (market) during off-peak period

Options to affect demand level

Hire and fire workers - depends on the intensity of labour used, the strength of the union, corporate culture, labour laws, etc.

Overtime/slack time - to keep a skilled workforce and allows employee to increase earnings

Partime workers - depend on nature of work

Inventories - smooth production and buffer against demand surge; could be costly

Subcontracting - capacity increase in a short time without heavy investment; less control

Options to affect capacity

Linear programming: Methods for obtaining optimal solutions to problems involving allocation of scarce resources in terms of cost minimization.

Linear decision rule: Optimizing technique that seeks to minimize combined costs, using a set of cost-approximating functions to obtain a single quadratic equation.

Mathematical Techniques

Summary of Planning Techniques


The VP of Operations is about to prepare the aggregate plan that will cover six periods in the horizon. The company has forecasted the following demand:

The output cost is $2 per unit at regular time; $3 per unit at overtime; $6 per unit if subcontracted. Average inventory cost is $1 per unit per period. Back orders are possible, however, the Company estimated the cost to be $5 per unit per period. The initial inventory is zero. There are 15 workers and each worker is able to produce 20 units of the product per period. Can you help the VP to develop an aggregate plan?



Beginning Inventory + Ending Inventory



Example - solution

  • Suppose the VP wants to use a leveling (capacity) approach, I.e., maintaining a steady rate of output. The total output by the workers at the regular time is 20 x 15 x 6 = 1800 which equals to the forecast demand.

The VP learned that a regular worker is retiring. Rather than hiring new worker, the VP decides to use overtime. However, the maximum amount of overtime output is 40 units per period. Suggest an aggregate plan for the VP

Regular worker produce 14 x 20 units = 280 units per period. The total deficiency is 120 units. These 120 units can be satisfied in 3 periods by overtime and can be produced during the periods of high demand (for cost consideration. Of course, you can put them in other periods too.)

Example- Chase demand

Solved Problems: Problem 1

Quantitative approach

Suppose the VP wants to use a more quantitative approach that use overtime only and have in mind that the cost be minimized. Can you help him?

Let us define the following notation:

Pt = No. of units produced via regular time at period t, t=1, …, 6

Dt= Demand (in No. of units) at period t, t=1, …, 6

Ot= No. of units produced at period t in overtime, t=1, …, 6

It = Inventory level (in No. of units) at the end of period t, t=1, …, 6

For ease of handling, we introduce the concept of back order Bt at period t. The following is a kind of “conservation law”

It = It-1 + Pt - Dt , t = 1, …, 6.

The Objective function is given by:

Notice that I0 = 0 and B0 = 0, (D1, …, D6) = (200,200,300,400,500,200)

The aggregate plan gives the

level of demand and supply

in aggregate units

at the macro level

In order for the company to execute the plan, it needs to disaggregate the plan into appropriate units for implementation and monitoring. The output of this process is a master schedule and a master production schedule.

Disaggregating the aggregate plan

Master Scheduling Process

A master schedule is a schedule (usually in the form of a table) indicating the quantity and timing (I.e., delivery times) for individual products or a group of individual products.




Another MPS problem

Another MPS problem solution

Another MPS problem solution …

Beginning Inventory

Forecast is larger than Customer orders in week 3

Customer orders are larger than forecast in week 1

Forecast is larger than Customer orders in week 2

Projected On-hand Inventory

Figure 13.8


Relevant important ideas

AP and Master scheduling

Aggregate Planning Inputs

Services generally have variable processing requirements that make it difficult to establish a suitable measure of capacity.

Capacity availability can be difficult to predict

Services occur when they are rendered. Services cannot be stockpiled or inventoried so they do not have this option. It is considered "perishable,“

An empty hotel room cannot be held and sold later

Demand for service can be difficult to predict

Labor flexibility can be an advantage in services

Aggregate Planning in Services

Time Fences in MPS

  • Time Fences – points in time that separate phases of a master schedule planning horizon.


“frozen”(firm orfixed)



Calculated only in current week and any week with MPS>0

Current period: on-hand plus any current period MPS, minus all orders in that and subsequent periods until next MPS

Later periods: MPS – all orders until next MPS

Calculating ATP

level production plan

Different sales forecast - Same total: 120 units, starts lower, goes higher

“Chase” production strategy

Production adjusts to meet demand

Lot size of 30 units

Produce if projected balance falls below 5 units

Extra on-hand inventory is “cycle stock”

5 unit “trigger” is safety stock


Indented BOM


Frame Assembly



Wheel Assembly


Hubs & Rims



BOM formats

  • Single-level BOM only shows one layer down.

Wheel Assembly



Low-Level Code Numbers

  • Lowest level in structure item occurs

  • Top level is 0; next level is 1 etc.

  • Process 0s first, then 1s

  • Know all demand for an item

  • Where should blue be?







The low-level code controls the sequence in which the materialis planned in an MRP run: First the materials with low-level code 0 areplanned, then the materials with low-level code 1, and so on. The lowerthe low-level code, the higher the number that is assigned to thematerial.

LLC Drawing

  • Item only appears in one level of LLC drawing

  • Easier to understand

  • Simplifies calculations







Master Production schedule is anticipated build schedule

FAS is actual build schedule

Exact end-item configurations

Final Assembly Schedule

Stable schedule means stable component schedules, more efficient

No changes means lost sales

Frozen zone- no changes at all

Time fences

>24 wks, all changes allowed (water)

16-23 wks substitutions, if parts there (slush)

8-16 minor changes only (slush)

< 8 no changes (ice)

Schedule Stability

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