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Aggregate production
planning
Essence of OM
Product design
Process Design
Long-term Layout design
Capacity planning
Facility location
Production planning
Inventory Intermediate-term
Sourcing
Quality
Scheduling
Short-term
Maintenance
Workforce planning
Management of activities related to production of goods/services to sustain an org’s performance
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Capacity planning in perspective
• Three levels : long term (> 1 year), intermediate term(3 – 18 months) , short term (upto 3
months)
• Long-term decisions : impose constraints within which intermediate planning must
function
• Product and service selection, Facility size, location and layout, Equipment decisions
• Intermediate-term : establish the boundaries within which short-term decisions are
made
• Levels of employment, output, finished goods inventories, subcontracting, backorders, production
planning
• Short-term:
• Scheduling jobs, workers, machine loading, job assignment
Capacity planning in perspective
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Concept of Aggregation
• Aggregate planning is a “big-picture” of planning
• Aggregate planning helps when plans take time to implement and arrange for
financial resources
• Ex: Hiring and training of a worker
• Focus is on group of products or product family, not individual products or
services
• Ex: In a clothing retail store, of the available space 30 percent might be allocated for women’s
sportswear, 20 percent for men’s sportswear, 10 percent for juniors and so on
• Aggregation also has a strategic dimension as pooling the requirements helps to
reduce the overall variability
Aggregate planning scenarios
Forecast Forecast
250 350
300
200
250
150 200
100
Vs. 150
100
50
50
0 0
Ja n Feb Mar Apr May Jun Ja n Feb Mar Apr May Jun
Scenario 1 Scenario 2
Total forecasted demand = 1200 units
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Aggregate planning scenarios and options
Option 1 : Hire workforce to meet April’s target (max capacity)
Forecast
350
Option 2 : Hire workforce to meet Jan’s target + hire contract 300
labour based on monthly requirements 250
200
150
Option 3 : Hire workforce to meet May’s target + excess 100
demand in April satisfied later 50
0
Ja n Feb Mar Apr May Jun
Option 4 : Hire workforce to meet average demand, excess
demand through overtime
Option 5: produce as per the requirement
and so on ..
Aggregate An example from Shirt Manufacturing
Production Procurement: 10,000 meters of cloth of every month on an average [Raw
material inventory]
Planning - Equipment : One pattern making machine, one fabric cutting machine, three
sewing machine, one finishing machine, two packaging machines
Illustration Production rate: Jan to June: Produce at the rate of 11000 metres of cloth, July
to Sep : 10,000 meters; Oct to Dec : 8,000 metres during Aug to Dec
Inventory: Carry 10% of monthly production as inventory during the first 9
months of production
Work on a one-shift basis (8 hours) with 20 workers throughout the year with
20% over time during July to October [Workforce]
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Aggregate production planning - options
• Supply options
• Hire or lay-off workers
• Overtime or undertime
• Part-time workers
• Build inventories during lean period
• Subcontracting
• Demand options
• Pricing
• Promotions
• Backorders
• New demand
Aggregate prod planning- Generic strategies
Forecast
350
300
250
Level strategy Chase strategy
200
150
100
50
0
Ja n Feb Mar Apr May Jun
Mixed strategy
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Aggregate planning – Generic strategies
• Level strategy
• An aggregate plan in which production is uniform from period-to-period
• Inventory as a critical link between periods
• Stable workforce leads to a better quality product, less turnover, and higher
levels of commitment from employees
• Chase strategy
• It attempts to achieve output rates that match the demand forecast for that
period
• Vary workforce levels, overtime/undertime, subcontracting
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Aggregate Production Planning - Generic
Strategies
APP Strategy APP alternatives applicable Key features
Inventory based alternatives
Inventory as the critical link between the
Level Strategy (a) Build Inventory periods; Made-to-stock environments;
Products with low risks of obsolescence
(b) Backlog/Backorder/Shortage
Capacity adjustment alternatives
(a) Over Time/Under Time
(b) Vary no. of shifts
No inventory carried from one period to
Chase Strategy (c) Hire/Lay-off workers another; Made-to-order and project
environments; Several service systems
Capacity augmentation alternatives
(a) Sub-contract/Outsource
(b) De-bottleneck
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Alternatives for managing supply
• Inventory Based Alternatives – use inventory to meet the demand
• build inventory during lean demand periods and consume them during periods of high demand; cost of
carrying inventory
• Backordering – pushing the order to a future period on account of insufficient supply; cost of backordering
• Stock out – deliberately leaving a demand unfulfilled; cost of unfulfilled demand
- suitable when required to produce at a uniform rate
• Capacity Adjustment Alternatives – adjust capacity to meet the demand
• Hiring/Lay-off of workers – hire in high demand periods, layoff excess workers in low demand periods, cost of
hiring and layoff
• Varying shifts – adjust the number of shifts
• Varying Working Hours (OT,UT) –cost of overtime, cost of undertime
• Capacity Augmentation Alternatives
• Sub-contracting/Outsourcing
• De-bottlenecking
• addition of new capacity
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APP Illustration
Average requirement per month = 6200 / 124 = 50 units per day
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APP Illustration – possible strategies
• Plan 1 : Maintain a constant workforce throughout the six month
period (Level production)
• Plan2 : Maintain a constant workforce to meet the lowest demand
(March) and use subcontracting (level production)
• Plan 3: Hire and layoff workers as required (chase)
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APP Illustration – Plan 1 (level production at
50 units/mon)
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APP Illustration – Plan 1 (level production at
50 units/mon)
Total cost = inventory cost + labour cost = 9250 + 99200 = 108450
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APP Illustration – Plan 1 (level production at
50 units/mon)
For the month of Jan
No. of workers => 50 units/day * 1.6 labour-hrs/unit = 80 labour-hrs/day => 10 workers (assuming each worker works for 8 h/day)
Capacity (hrs) = 10 workers* 22 days/mon *8h/day = 1760 hrs
Total cost = inventory cost + labour cost
Capacity(units) = 1760 hrs/ 1.6h/unit = 1100 units = 9250 + 99200 = 108450
Opening Inventory = 0
Closing inventory = Opening inv + (suuply-demand) = 0 + 200 = 200 units
Average inv = (0 + 200)/2 = 100
Labour cost = 124 days * 8h/day * 10 workers * $10/h = 99200
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APP Illustration – Plan 2 (level production at
38 units/mon) + Subcontracting
Total cost = SC cost + labour cost = 29760+ 75392 = $1,05,152
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APP Illustration – Plan 2 (level production at
38 units/mon) + Subcontracting
For the month of Jan
No. of workers = (38 units/day * 1.6 labour-hrs/unit)/(8 hrs/day/worker) = 7.6 workers
Capacity (hrs) = 7.6 workers* 22 days/mon *8h/day = 1337.6 hrs
Total cost = SC cost + labour cost
Capacity(units) = 1337.6 hrs/ 1.6h/unit = 836 units = 29760+ 75392 = $1,05,152
Opening Inventory = 0
Closing inventory = Opening inv + (supply-demand) = 64 units shortage
Average inv = 0
Labour cost = 124 days * 8h/day * 7.6 workers * $10/h = 75,392
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APP Illustration – Plan 3 (Hiring and Layoffs)
Total cost = labour cost + hiring cost + layoff cost = 99200+6*1500+4*3000 = $ 1,20,200
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APP Illustration – Plan 3 (Hiring and Layoffs)
NO OF SUPPLY - HRS/MONTH
DEMAND DEMAND WORKING NO OF CAPACITY CAPACITY DEMAND WORKED BY NO OF LABOUR
MONTH (UNITS) (hrs) DAYS WORKERS (hrs) (units) (hrs) ONE HIRE NO OF HIRES LAYOFFS UNDERTIME OVERTIME COST
Jan 900 1440 22 9 1584 990 144 176 0 0 144 0 14400
Feb 700 1120 18 9 1296 810 176 144 0 1 32 0 11200
Mar 800 1280 21 8 1344 840 64 168 0 0 64 0 12800
Apr 1200 1920 21 8 1344 840 -576 168 4 0 96 0 19200
May 1500 2400 22 12 2112 1320 -288 176 2 0 64 0 24000
June 1100 1760 20 14 2240 1400 480 160 0 3 0 0 17600
6 4 99200
Total cost 120200
For the month of Jan
No. of workers = (1440)/(22*8) = 9 workers undertime = Max(capacity +no of hires*hrs per month-demand,0)
= 1584+0-1440 = 144h
Capacity (hrs) = 9 workers* 22 days/mon *8h/day = 1584 hrs
Assume hiring cost=1500/worker, layoff cost= 3000/worker
Capacity(units) = 1584 hrs/ 1.6h/unit = 990 units
Hrs per month = 22*8 = 176h
Total cost = labour cost + hiring cost + layoff cost
No of hires = (demand-supply)/ hrs per month = 0 (rounded up) = 99200+6*1500+4*3000 = $ 1,20,200
No of layoffs= (supply-demand)/ hrs per month = 144/176 = 0 (rounded down)
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Practice problems
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References
• Textbook readings
• Chapter 13 (570 - 588)
• Solution to Practice problems uploaded in LMS
• Case readings
• Gupta Furniture: Demand Fulfillment And Cost Efficiency Through Aggregate Planning
(uploaded in LMS)
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