Unit-III

Aggregate planning in the supply chain

Role of aggregate planning in a supply chain

How should a firm best utilize the facilities that it currently has:
Aggregate planning is the process by which a company
determines levels of capacity, production, subcontracting,
inventory, stock-outs and pricing over a specified time horizon:
Goal is to maximize profit
Goal is also to optimize of resources
Decisions made at a product family (not SKU) level
Time frame of 3 to 18 months
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Continued..
Operational parameters over the time horizon:
machine capacity level
production rate
workforce
overtime
subcontracting
backlog
inventory on hand
All supply chain stages should work together on an aggregate plan that will optimize
the performance
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The aggregate planning problem

Considering the demand forecast and profit maximization for each period:
Determine the production level
Determine the inventory level
Determine the capacity level

Specify the planning horizon (typically 3-18 months)

Specify the duration of each period (so a planning horizon can have a few
periods)

Specify key information required to develop an aggregate plan

Aggregate unit of production

Aggregate unit of production depends on:
Bottleneck
Capacity of the plant/machine
Production time
Setup time
Maintenance/down time

Calculating aggregate-unit parameters

Product
family*

Material
cost/
unit ($)

Revenue/
unit ($)

Set up
time/batch
(hour)

Average
batch size
(no of
units)

Production
time/unit
(hour)

Net
production
time/unit
(hour)

Percentage
share of
units sold

15

54

50

5.60

5.76

10

30

150

3.00

3.04

25

39

100

3.80

3.88

20

12

49

10

50

4.80

5.00

10

36

100

3.60

3.66

20

13

48

75

4.30

4.37

15

Average

10

40

6.85

99

3.92

4.00

NA

*Not to be confused with SKU

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Information needed for aggregate plans

Demand forecast in each period
Production costs:

labour costs, regular time ($/hr) and overtime ($/hr)

subcontracting costs ($/hr or $/unit)

cost of changing capacity (hiring or layoff ($/worker); cost of adding or reducing

machine capacity ($/machine))

Labour/machine hours required per unit

Inventory holding cost ($/unit/period)
Stockout or backlog cost ($/unit/period)
Constraints (limits on overtime, layoffs, capital available, stockouts and backlogs)
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Outputs of aggregate plan

Production quantity from regular time, overtime and subcontracted time:

used to determine number of workers and supplier purchase levels

Inventory held: used to determine how much warehouse space and

working capital is needed

Backlog/stockout quantity: used to determine what customer service levels

will be

Machine capacity increase/decrease: used to determine if new production

equipment needs to be purchased

Important: a poor aggregate plan can result in lost sales, lost/sub-optimal

profits, excess inventory or excess capacity
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Aggregate planning strategies

Chase strategy using capacity as the lever
Time flexibility from workforce or capacity strategy
using utilization as the lever
Level strategy using inventory as the lever
Mixed strategy a combination of one or more of the
first three strategies

Chase strategy
Production rate is synchronized with demand by varying machine
capacity or hiring and laying off workers as the demand rate varies:
It is often difficult to vary capacity and workforce in a short notice
Expensive if cost of varying capacity is high
Negative effect on workforce morale
Results in low levels of inventory
Should be used when inventory holding costs are high and costs of
changing capacity are low
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Time flexibility strategy

Workforce is kept stable, but the number of hours worked is varied over
time to synchronize production and demand:
Can be used if there is excess machine capacity
Can use overtime or a flexible work schedule
Requires flexible workforce, but avoids morale problems of the
chase strategy
Low levels of inventory, lower utilization
Should be used when inventory holding costs are high and capacity
is relatively inexpensive
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Level strategy
Maintain stable machine capacity and workforce levels with a constant output
rate:
Shortages and surpluses result in fluctuations in inventory levels over time
Inventories that are built up in anticipation of future demand or backlogs are
carried over from high to low demand periods
Better for worker morale
Large inventories and backlogs may accumulate
Should be used when inventory holding and backlog costs are relatively low

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Aggregate planning example

Item
Materials
Inventory holding cost
Marginal cost of a stockout
Hiring and training costs
Layoff cost
Labor hours required
Regular time cost
Over time cost
Cost of subcontracting

Cost
$10/unit
$2/unit/month
$5/unit/month
$300/worker
$500/worker
4/unit
$4/hour
$6/hour
$30/unit

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Aggregate planning and IT

Enterprise resource planning (ERP) software (may vary from
industry to industry) is integrating various functional modules like
planning, sourcing etc.:
Can handle large problems
Can handle complex problems (like non-linear approximations)
The ability to interact with core IT systems such as inventory
management

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Aggregate planning in practice

Think beyond the enterprise to the entire supply chain
Make plans flexible because forecasts are always
inaccurate
Rerun the aggregate plan as new information emerges
Use aggregate planning as capacity utilization
increases

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