Aggregate Planning

 

1.0 INTRODUCTION

 This note introduces the concept of aggregate planning, which is the  intermediate range of capacity planning that typically covers a time horizon of  2 to 12 month. In some organisations, this time

horizon might be extended to as  much as 18 months. It is particularly useful for organisations that experience  seasonal or other fluctuations in demand or capacity. The goal of aggregate  planning is to achieve a production plan that will effectively utilize the  organisations resources to satisfy expected demand. 

2.0 OBJECTIVES 

By the end of this note, you should be able to:

 i. Explain what aggregate planning is and how it is useful   

ii. Identify the variables decision makers have to work with in aggregate  planning

 iii. Identify some of the possible strategies decision makers use 

iv Describe some of the techniques planners use. 

3.0 MAIN CONTENT 

3.1 Production – Planning Hierarchy 

Generally, organisations become involved with capacity decisions on three  levels: Long-term, intermediate term, and short-term. Long term decisions  usually relate to: 

(i) Product and service selection i.e. determining which predicts or services  to offer; 

(ii) Facilities i.e. plan locations, layout, size send capacities 

(iii) Processing plans i.e., new production technology, new production  processes, new systems of automation etc; and 

(iv) Major supplier plans and amount of vertical integration. 

These long-term decisions essentially define the capacity decisions naturally  set the capacity constraints within which intermediate planning must function. 

Aggregate planning develops medium-range production plans concerning  employment level and changes, inventory levels and changes, utilities, facility  modifications, back orders, and subcontracting. These aggregate plans in turn  impose constraints on the short range production plans that follow. Short term  decisions, therefore, essentially relate to taking decisions on the best way to  achieve desired results within the constraints resulting from long-term and  intermediate decisions. These involve scheduling jobs, machine loading, job  sequencing etc. the three levels of capacity

It is usual to find many business organisations developing a business plan that  comprises both long-term and intermediate-term planning. This business plan  sets guidelines for the organisations, taking into account the organisations  strategies and policies; forecasts of demand for the organisation’s products or  services; and economic, competitive, and political conditions. A major  objective in business planning is to coordinate the intermediate plans of various  organisations functions, such as marketing, operations, and finance. In the case  of manufacturing firms elements of engineering and materials management  also form part of the coordination. 

The business plan guides the planning processes of each functional area. For  example, in operations functions, a production plan (or operations plan in the  services organisation) is usually developed to guide the more detailed planing  that eventually leads to a master schedule. The illustration of the planning  sequence is given in Figure 10.2. 

3.2 The Concept of Aggregation 

Aggregate planning can be looked at as a “big picture” approach to planning. It  is the usual practice for planners to try to avoid focussing on individual  products or services, unless the organisation deals in only product or service.  Rather, they focus on a group of similar products or sometimes an entire  product line.  

Let’s look at some examples: 

(a) For purposes of aggregate planning, planners in a television  manufacturing firm would not concern themselves with 21 –inch sets  versus 18-inch or 14-inch. Instead, they would lump all models together  and deal with them as a simple product. Hence, the term aggregate  planning. 

(b) Again, for the purposes of aggregate planning, a refrigerator  manufacturing firm might lump all different sizes and styles of  refrigerators it produces into a single category of “frigdes”. 

(c) In the same vein, when fast-food outfit such as Mr. Biggs, sweet  sensation, and Tasty Fried Chicken plan employment and output levels,  they would not try to determine how demand will be broken down into  the various options they offer. Instead, they focus generally on overall  demands and the overall capacity they want to provide. 

In each of the examples cited above, it can be seen that an aggregate approach  permits planners to make general decisions about intermediate – range capacity  without having to deal with highly specific details. Instead, they often concern  themselves with overall decision on levels of output, employment and  inventories. This is done by lumping demand for all products into one or a few  categories, and then planning on that basis.  For purposes of aggregate, it is better to think of capacity in terms of labour  hours or machine hours per period, or output rates (e.g. barrels per period, notes  per period), without necessarily worrying about how much of a particular item  will actually be involved .    The advantage in this approach is that it frees planners to make general  decision about the use of resources without having to get into the complexities  of individual product or service requirements. 

3.3 The Purpose and Scope of aggregate Planning 

We shall briefly examine the basic problem addressed by aggregate planning  (i.e the balancing of supply and demand) along with the purpose of aggregate  planning, the primary decision variable available to planners and associated  costs. 

3.3.1 Demand and Capacity  Aggregate planners are usually pre-occupied with the quantity and timing of  expected demand. For instance, it total expected demand for the planning  period is much different from available capacity over the particular planning  period, the major approach of planners is either to try to increase demand (in  case demand is less than capacity) or increase capacity (if demand exceeds  capacity). It could happen that capacity and demand are approximately equal  for the planning horizon as a whole. Even here, planners may still be faced with  the problem of dealing with uneven demand within the planning interval.

For  example, in some periods, expect demand may exceed projected capacity; in  others, expected demand may be less than projected capacity, and in some  periods, the two may be equal, thus, the task of aggregate demand is to achieve  rough equality of demand and capacity over the entire planning horizon. 

3.3.2 The Purpose of Aggregate Planning.

 The major purpose of aggregate planning is to develop a feasible production  plan on an aggregate level that achieves a balance of expected demand and  supply. Furthermore, planners are usually concerned with minimising the cost  of the production plan. However, cost is not the only consideration.  Generally, aggregate planning is necessary in Production and Operations  Management because it provides for: 

(i) Fully loaded facilities and minimisies over-loading and under-loading,  thereby reducing production costs.  (ii) Adequate production capacity to meet expected aggregate demand 

(iii) A plan for the orderly and systematic change of production capacity to  meet the peaks and valleys of expected customer demand. 

(iv) Getting the most output for the amount of resources available, which is  important in time of scarce production resources.  

 3.3.3 Inputs to Aggregate Planning 

For an effective aggregate planning to take place, at least three important  informational needs must be met. First, the available resources over the  planning period must be known. Second, a forecast of expected demand must  also be available. Thirdly, planners much take into account any policies  regarding changes in employment levels. For example, some organizations  view layoffs as extremely undesirable, so they would exclude that option from  consideration, or use it only as a last resort). Added to these inputs are the costs  of activities, such as inventory carrying costs, general costs of backorders,  hiring/firing, overtime, inventory changes and subcontracting. 

3.3.4 Demand and Capacity Options 

For the purposes of aggregate planning, management has a wide range of  decision options at its disposal. Among these are changing prices, promotion,  backlogging orders, using overtime, using part-time workers, subcontracting,  adding or deleting extra shifts, and stockpiling inventories. Some of these  options are for the purposes of altering the pattern of demand. Examples here  include pricing and promotion. Others, such as using part-time workers,  overtime, and subcontracting represent options that are being used to alter  capacity or supply we shall examine these options in the section that follow: 

3.3.4.1 Demand Options 

There are four basic demand options: pricing, promotion, back-orders and new  demand.

1. Pricing: Differential pricing is often used to shift demand from peak  periods to off-peak periods. For example, some air-lines offer lower  fares for mid-week travel and change higher fares other times. Similarly,  some restaurants offer “early bird specials” in an attempt to shift some  of the heavier dinner demand to an earlier time that traditionally has less  traffic. Another example is to be found in the telephone service sector,  where there are different rates for peak and off-peak periods. If the  pricing is effective, demand will be shifted so that it corresponds closely  to capacity, except for an opportunity cost that represents the lost profit  stemming from capacity insufficient to meet demand during certain  period. The major analytical factors to consider is the degree of price  elasticity for the product or service: the more the elasticity, the more  effective pricing will be in influencing demand patterns. 

2. Promotion: Promotional tools such as advertising, displays, direct  marketing etc., can sometimes be effective in shifting demand so that it  conforms more closely to capacity. The timing of these efforts and  knowledge of response rates and response patterns will needed to    achieve the desired results. However, unlike pricing policy, there is  much less control over the timing of demand. 

3. Back orders: Back orders involves taking orders in one period, and  promising deliveries for a later period. This approach can be used by an  organisation to shift demand to other periods. The success of back  orders however depends on the willingness of customers to want for  later delivery. In addition, the hidden costs associated with back orders  can be difficult to pin down, since it would include lost sales, annoyed  or disappointed customers, and additional paperwork. 

4. New Demand: In situations where demand is very uneven,  organizations often face the problem of having to provide products or  services for peak demand, for instance, demand for public transportation  tends to be more intense during the moving and late afternoon rush  hours; ironically, the demand is much lighter at other times. By creating  new demand for buses at these other times, (e.g. excursions by school,  clubs etc) there would be an opportunity to make use of the excess  capacity during such slack periods. This way, organisations can achieve  a more consistent use of labour, equipment and facilities. 

3.3.4.2 Capacity Options 

There are five basic options available for altering the capacity (or supply) or  production. These are discussed below: 

1. Hire and Fire Workers: The main determinant of the impact changes  in the workforce level will have on capacity is the labour – intensiveness  of operations. Another factor is the
 resource requirements of each  worker. For instance, if a transport service firm has 15 drivers for its  fleet of 22 buses, an additional seven drivers could be hired. Thus, the  ability to add workers is constrained at some point by other resources  needed to support the workers. On the other hand, there may be a lower  limit on the number of workers needed to maintain a viable operation  (e..g a skeleton crew). 

At times, union contracts may restrict the amount of hiring and firing an  organisation can do. Furthermore, since the issue of firing and laying-off  can give workers serious problems, some organisations have policies  that either disallowed or limit downward adjustments to a workforce. On  the other hand, hiring presumes an available supply of workers. There  are times when labour may be in short supply, and hence have an impact  on the ability of an organisation to pursue this approach.  It is necessary to know that hiring and firing entails certain costs. For  instance, hiring costs include recruitment, screening, and training to    bring new workers “up to speed”. And quality may suffer.

However,  some savings may occur if previously laid off workers are re-hired.  Firing costs include payment of terminal benefits, the cost of realigning  the remaining workforce, potential bad feelings toward the firm on the  part of fired workers, and some loss of morale for workers who are  retained. 

2. Overtime/Slack time: The use of overtime or slack time is a less severe  method for changing capacity than hiring and firing workers. It can  generally be used across the board or selectively as needed. In addition,  it can also be implemented more quickly than hiring and firing, and  allows the firm to maintain a steady base of employers.

In particular,  overtime can be very attractive in dealing with seasonal demand peaks  by reducing the need to hire and train people who will eventually be laid  off during the off-season. Overtime also allows the firm to maintain a  skilled workforce and employees to increase earnings. However,  overtime often results in lower productivity, poorer quality, more  accidents, and increased payroll costs, whereas idle time results in less  efficient use of machines, and other fixed assets. 

3. Part-time workers: The use of part-time workers has been found to be  a viable option in particular situations. It usually depends on the nature  of the work, training and skills needed, and union agreements. Seasonal  work that require low-to-moderate job skills lends itself to part-time  workers, who generally cost less than regular workers in hourly wages  and fringe benefits. 

4. Inventories: The use of finished – goods inventories allows forms to  produce goods in one period and sell them in another period. This  normally involves holding or carrying such goods as inventory until they  are needed. In essence, inventories can be built up during periods when  production capacity exceeds demand and drawn down in periods when  demand exceeds production capacity. The use of inventories is not  without its costs, such as storage costs, cost of money tied up, costs of  insurance, obsolescence, deterioration, spoilage, breakage etc. 

5. Subcontracting: Subcontracting allows organizations to acquire  temporary capacity. However, organisations often have less control over  the output; hence this approach may lead to higher costs and quality  problems. The decision of whether to make or buy (i.e., in  manufacturing) or to perform a service or hire someone else to do the  work generally depends on such factors as available capacity, relative  expertise, quality considerations, costs and the amount and stability of  demand.    It is possible for a firm to choose to perform part of the work itself, and  let others handle the remaining so as to maintain flexibility and as a  hedge against loss of a subcontractor. In addition, this approach gives  the firm a bargaining power in negotiations with contractor and a head  start, if it decides at a later date to take over the production entirely.

 3.4 Basic strategies for Meeting Uneven Demand  From our discussions in section 3.3.34 and its subsections, it should be clear to  you that manages have a wide range of decision options they can consider for  achieving a balance of demand and capacity in aggregate planning. The options  that are most suited to influencing demand fall more in the area of marketing  than in Operations (with the exception of backlogging). Hence we will be  concentrating on the capacity options here, within the ambit of operations  (With the inclusion of back orders).  There are a number of strategies open to aggregate planners. Some of the  notable ones include: 

1. Maintaining a level workforce 

2. Maintaining a steady output rate 

3. Matching demand period by period 

4. Using a combination of decision variables. 

The first three strategies can be regarded as “pure” strategies since each of  them has a single focal point. The fourth strategy is however “mixed” because  it lacks the single focus. With respect to the level capacity strategy, variations  in demand are met by using some combination of inventories, overtime, parttime  workers, subcontracting and back orders. The purpose here is to maintain  a steady rate of regular-time output, although total output could vary. 

Maintaining a steady rate of output means absorbing demand variations with  inventories, subcontracting, or backlogging. In the case of Chain demand  strategy, capacity is match to demand, whereby the planned output for a period  is set at the expected demand for that period.  Maintaining a level workforce has been found to have strong appeals in some  organisations. And as earlier mentioned, workforce changes through hiring and  firing often have a major impact on the lives and morale of employees hence  can be disruptive for managers. Consequently, organisations usually prefer to  handle uneven demand in other ways. Again, as already mentioned, changes in  workforce size can be very costly and there is always the risk that a sufficient  pool of workers with the appropriate skills may not be forthcoming when  needed. Furthermore, such changes can involve a significant amount of  administrative work.   

In order to maintain a constant level of output and still meet demand  requirements, an organisation necessarily needs to resort to some combination  of subcontracting, backlogging, and use of inventories to absorb fluctuations:  subcontracting requires an investment in evaluating sources of supply as well  as possible increased costs, less control over output, and quality considerations.  Backlogs may lead to lost dales, increased record keeping and lower levels of  customer services.

With regard to the issue of allowing inventories to absorb  fluctuations, it has been realized that such an alternative also has substantial  costs. These including having money tied up in inventories, having to maintain  relatively large storage facilities, and incurring other costs related to  inventories. Actually, inventories are not usually an alternative for service –  oriented organisations, however, there are certain advantages inherent in the  strategy: minimum costs of recruitment and training, minimum overtime and  idle-time costs, fewer morale problems and stable use of equipment and  facilities.  It is assumed in the chase demand strategy, that there is a great deal of ability  and willingness on the part of managers to be flexible in adjusting to demand.  One important advantage of this approach is that inventories can be kept  relatively low, and this can yield substantial savings for an organisation.

 A  major limitation is the lack of stability in operations i.e the organisation has to  dance to demand’s tune.  In addition, where there are gaps between forecasts and reality, morale may  suffer since it quickly dawns on workers and managers that lot of efforts have  been wasted.  Another alternative approach for organisations is to opt for a strategy that  involves some combination of the pure strategy. This often permits managers  greater flexibility in dealing with uneven demand, as well as in experimenting  with a wide choice of alternatives. The major problem inherent in this mixed  strategy is the absence of a clear focus, which may lead to an erratic approach  and confusion on the part of employees. 

3.4.1 How to choose a strategy  All the four strategies discussed above have their merits as well as limitations.  Organisations are free to choose anyone. Whatever strategy an organisation is  considering however depends on two important factors: company policy and  costs. Company policy may set constraints on the available options or the  extent to which they can be used. For instance, company policy may discourage  firing and layoffs, except under unavoidable conditions. Similarly, subcontracting  may not be a viable option due to the desire to maintain secrecy  about some aspects of the manufacturing of the product.   

3.5 Analytical Techniques For aggregate Planning  There are many techniques which can assist planners with the task of aggregate  planning. These are broadly placed into one of two categories; informal trialan-  error techniques and mathematical techniques. The informal techniques are  more widely used.

1. Determine demand for each product 

2. Determine capacities (regular time, overtime, subcontracting) for each  period

3. Identify company or departmental policies that are pertinent. (e.g.  maintain a safety stock of 5 percent of demand, maintain a reasonably  stable workforce).

4. Determine note costs for regular time, overtime, subcontracting, holding  inventories, back orders, and other relevant costs. 

5. Develop alternative plans and compute the costs for each 

6. If satisfactory plans emerge, select the one that best satisfies objectives.  Otherwise, return to step 5. 

It may be helpful to use a worksheet that summarises demand, capacity, and  cost for each plan. This is shown in Figure – 3. Graphs can also be used to  guide the development of alternatives. 

3.5.1 Informal Techniques  These usually consist of developing simple tables or graphs that allow planners  to virtually compare projected demand requirements with existing capacity.  The various alternatives are then evaluated on the basis of their overall costs.  The major limitation of these techniques is that they do not necessarily result in  the optional aggregate plan.  Let us make use of an examples provided by Stevenson (1996). It is based on  the following assumptions: 

1. The regular output capacity is the same in all periods. No allowance is  made for holidays, different numbers of workdays in different months.  Etc. this has been done for simplicity and ease of computation. 

2. Cost (back order, inventory, subcontracting etc) is a linear function  composed of note cost and number of notes, this often has a reasonable  approximation to reality, although there maybe only narrow ranges over  which this is true. Cost is sometimes more of a step function. 

3. Plans are feasible: i.e. sufficient inventory capacity exists to  accommodate a plan, sub-contractors with appropriate quality and  capacity are standing by and changes in output can be made as needed. 

4. All costs associated with a decision option can be represented by a lump  sum or by note costs that are independent of the quantity involved.  Again, a step function may be more realistic; but for purposes of  illustration and simplicity, this assumption is appropriate. 

5. Cost of figures can be reasonably estimated and are constant for the  planning horizon. 

6. Inventories are built up and drawn down at a uniform rate and output  occurs at a uniform rate throughout each period. However, backlogs are  treated as if they exist for an entire period, even though in periods where  they initially appear, they would tend to build up toward the end of the  period. Hence, this assumption is a bit unrealistic for some periods, but  it simplifies computations.  In addition to the assumptions above, the following relationships are  used in the determination of the number of workers, the amount of  inventory, and the cost of a particular plan. 

(a) the number of workers available in any period is: 

(b) The amount of inventory at the end of a given period   

(c) The average inventory for a period is equal to:  Beginning Inventory + Ending Inventory 

(d) The cost of a particular plan for a given period can be determined by  summing the appropriate costs:  Cost for a period  Output cost Hire / Fire Inventory Back - order  = + + +  (Regular + Overtime + SubcontraCcto s cost Cost 

The appropriate costs are calculated as follows: 

Let us make use of an example to illustrate the process of developing and  evaluating an aggregate plan; with the trial and error techniques. Note that the  intention here is not to find the lowest cost plan. With trial and error, one can  never be completely sure that the lowest cost alliterative has been found, unless  all possible alternatives are evaluated. 

 3.5.2 Mathematical Techniques  Some mathematical techniques are available to handle aggregate planning. The  notable one include linear programming techniques, linear decision rule and  simulation models. We shall briefly describe these techniques. 

3.5.2.1 Linear Programming  These are methods for obtaining optimal solutions involving the allocation of  scarce resources in terms of cost minimisation or profit maximisation. With  aggregate planning, the goal is usually to minimise the sum of costs related to  regular labour time, overtime, subcontracting, inventory, holding costs, and  costs associated with changing the size of the workforce. The capacities of the  workforce, inventories, and subcontracting constitute the constraints. 

3.5.2.2 Linear Decision Rule  The Linear decision rule is another optimising technique. It was developed in  the 1950s, by Charles Holt, Franco Modigliand, John Mush, and Herbert  Simon. Its objectives are to minimize the combined costs of regular payroll,  hiring and layoffs, overtime, and inventory by using a set of costapproximation  function.

Three at these functions are quadratic in order to  obtain a single quadratic equation. With the use of calculus, two linear  equations can be derived from the quadratic equation. One of the equations can  be used to plan the output for each period in the planning horizon, and the other  can be used to plan the workforce for each period. The model has been found to  suffer from three limitations. In the first place, a specific type of cost function  is assumed.

Secondly, considerable efforts must usually be expended in  obtaining relevant cost data and developing cost functions for each  organisation. Finally, the method can produce solutions that are unfeasible or  impractical. 

3.5.2.3 Simulation Models 

In addition to the first two techniques, some simulation models have been  developed for aggregate planning. The essence of simulation is the  development of computerized models that can be tested under a variety of  conditions in an attempt to identify reasonably acceptable solutions to  problems. 

3.6 Disaggregating the Aggregate Plan. 

There is the need to disaggregate the aggregate plan so that the production plan  might be translated into meaning terms for production. This generally involves  breaking down the aggregate plan into specific product requirements in order to    determine labour requirements (skill, size of work force), materials and  inventory requirements.  It is a fact that working with aggregate notes often facilitates intermediate  planning. However, for the production plan to be put into operation, those  aggregate notes must be decomposed into notes of actual products or services  that are to be produced or offered. 

The result of disaggregate the aggregate plan is a master schedule, showing the  quantity and timing of specific and items for a schedule horizon (Which often  covers about six to eight weeks ahead). The master schedule shows demand for  individual products rather than an entire product group, along with the timing  of production. The master schedule usually contains important information for  marketing as well as for production. It reveals when orders are scheduled for  production and when completed orders are to be shipped. 

4.0 CONCLUSION 

This note has taken you though a number of important issues involved in  aggregate planning. You have learned that the essence of aggregate planning is  the aggregation of products or services into one “products” or “service” 

5.0 SUMMARY 

Aggregate planning establishes general levels of employment, output, and  inventories for periods of two to twelve months. In the spectrum of planning, it  falls between the broad design decisions of long-range planning and the very  specific and detailed short-range planning decisions. It begins with overall  forecasts for the planning horizon and ends with preparations for applying the  plans to specific products and services.  

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