AGGREGATE PLANNING

Aggregate Production Planning

Aggregate production planning is planning the number of units of the product to be produced on a weekly or monthly basis for the coming 6-18 months. This plan should be in line with the overall business plan of the company. Aggregate means complete or total or sum of parts. Hence, this plan includes all the various models of the product and gives the complete picture of the future production requirements. The aggregate production plan is based on the demand forecasts provided by the marketing department.

 Aggregate planning is needed to minimize the various types of costs related to unplanned production. Unplanned production leads not only to high costs such as hiring and laying off costs of workers, overtime costs, inventory costs, etc., but also the shortages of the product. A shortage or stock-out is most harmful to the company, as it results in loss of good will on the part of customers. Let us take up an example to understand the relationship between the aggregate production plan and the costs involved as the time horizon of the demand forecasts provided by the marketing department is broadened.

Problem Rajastan Saris is a 100% export oriented, 5,000 million turnover company based in Jaipur. It exports its typical Rajastani saris to the European countries through a sales agency based at Zurich. In the last week of October, the sales agency provides a forecast of 2,000 saris for the month of November. In the last week of November, the agency provides the forecast for December as 3000 saris. A worker produces 100 saris per month. In October, there are 25 workers in the factory. A salary of Rs.4000 per month is paid to the worker. The company has estimated that the cost of hiring a worker (which includes training) is Rs.500. The company has to give 20% of the salary as laying-off cost to a worker (when a worker is discontinued from work in the next month). The inventory carrying cost (CC) is Rs.10 per sari per month. Prepare the aggregate production plan for the company.

Production Plan
when forecast is available only one month in advance
Month Salary No. of units to be produced No. of workers required Salary @ Rs.4000 per worker Hiring Cost Number of workers hired Hiring cost @ Rs.500 per worker Laying-off Cost No. of workers laid-off Laying-off cost @ Rs.800 per worker Inventory Cost No. of units in inventory Cost @ Rs.10 per unit Grand Total of Costs excluding Salary November December Total Cost 2000 20 80000 3000 30 120000

200000

0 0
5 4000 0 0

10 5000
0 0 0 0

5000

4000

9000

Production Plan
when forecast is available two months in advance

Month November December Total Cost Salary No. of units to be produced 2500 2500 No. of workers required 25 25 Salary @ Rs.4000 per worker 100000 100000 200000 Hiring Cost Number of workers hired 0 0 Hiring cost @ Rs.500 per worker 0 0 0 Laying-off Cost No. of workers laid-off 0 0 Laying-off cost @ Rs.800 per worker 0 0 0 Inventory Cost No. of units in inventory 500 0 5000 Cost @ Rs.10 per unit 5000 0 Grand Total of Costs excluding Salary 5000

 The inference is that as the planning horizon is broadened from one month to two months, the total costs tend to fall. Thus, we can expect reduction in costs upon extending the planning horizon to three months, four months, and so on. There is a limit to increasing the planning horizon, beyond which the demand forecasts tend to be more and more inaccurate and the advantages of extending the time horizon fade away. It has been established that the time horizon for production planning should range between 6-18 months for almost all types of industries.

 Steps in Effective Aggregate Planning

The aggregate planning process starts with the demand forecast information provided by the marketing department, and the overall business plan provided by the top management. The overall business plan is important for planning the future production. For example, the business plan can inform the production manager that the top management wants a huge inventory of finished goods to be accumulated before the coming festive season, despite the demand forecasts for this product not being very good presently. The top management may have some strategies such as aggressive advertising promotion of the product before the festive season, because of which the demand could pick up. Therefore, the production plan prepared by the manager should be in line with this business plan of the company.

Demand forecasts provided by the marketing department

Business plan provided by the management

Strategies for pure aggregate planning considered by the production manager

Level of output rate plan

Chase Plan

Varying utilization rate plan

A combination of the pure planning strategies called the intermediate plan is prepared by the production manager

Disaggregation of the aggregate production plan (intermediate plan) is done in order to arrive at a master schedule

Disaggregation of the aggregate production plan (intermediate plan) is done in order to arrive at a master schedule

Beginning inventory status

Master scheduling process

Customer orders committed

Projected on-hand inventory

Tentative master production schedule (MPS) Tentative MPS is run through the materials requirement planning (MRP) processing logic to test for feasibility

Available-to-promise inventory

Rough-cut Capacity planning

Revised master production schedule is fixed using time fences

 The next step is considering pure planning strategies such as the level output rate plan, chase plan, and varying utilization rate plan. A combination of these pure plans is made, which is called an intermediate plan. The intermediate plan is then disaggregated, i.e., broken down into smaller time periods, and made to include information on different models of the product. This process of disaggregation gives the master schedule. The next step is the master scheduling process, which requires three inputs the master schedule, the beginning inventory status, and the customer orders committed so far.

 Three outputs are generated by this process, namely, the tentative master production schedule (MPS), the projected on-hand inventory (inventory available for the next planning period) and the available-to-promise inventory (the number of units the sales personnel can still commit to the customers). The tentative MPS is run through the materials requirement planning (MRP) software to check the feasibility of the MPS with respect to the available capacities of production in the company as well as those of the suppliers. This process of checking the feasibility of the master schedule with respect to the available capacity is called rough-cut capacity planning.

 The MPS may require some modifications according to the available capacities and the revised MPS is fixed using time fences. The MPS cannot be changed near the actual production time. If changes are made at this stage, the whole exercise of production planning will become useless. Therefore, the production managers set various time intervals called time fences to regulate changes in the MPS.

 Production Planning Strategies

The basic production planning strategies are based upon three variables:
1. 2. 3. Workforce size Utilization of workers Inventory size

In each of these strategies, one variable is varied and the other two are kept constant. The following are the three basic production planning strategies:
1. 2. 3. Level output rate plan Chase plan Varying utilization plan

 Level Output Rate Plan

The inventory size is varied keeping the workforce size and utilization of workers constant. The number of workers (workforce size) is kept constant throughout the time period under consideration. During months of low demand, the excess units produced over demand are accumulated as inventory. During months of high demand, the units required over the units produced are taken from the inventory. The advantage of this plan is that the cost of hiring and training new workers is zero. Also, the cost of laying off workers is zero, as the workforce size is constant. The employee morale is high due to a sense of job security. During periods of low demand, there is high inventory cost due to its large size.

 Chase Plan
The workforce size is varied according to demand, keeping the utilization of workers and inventory size constant. During months of low demand, the workforce size is decreased and the extra workers laid off. Similarly, during months of high demand, more workers are hired. The hiring and laying off are substantial in this plan. Then workers morale is also low due to a sense of insecurity. The production of items is in tune with the demand requirements, thus inventory is almost nil. Therefore, the inventory cost is also negligible. During months of heavy demand, over-time may be required on the part of workers, for which the company incurs overtime cost.

 Varying Utilization Plan The utilization of workers is varied keeping the workforce size and inventory size constant. The number of workers is constant in this plan. During months of low demand, the workers produce less so as to match the demand and they have a lot of idle time. On the other hand, during the months of high demand, the excess units required over regular production are produced by overtime on the part of workers. The idle time on the part of workers during months of low demand is a loss to the company, which pays full to its employees. On the other hand, the company incurs overtime costs during periods of high demand. Overtime is usually expensive compared to the regular wages given to workers. In addition, excessive overtime leads to less efficiency on the part of workers and more accidents due to lack of concentration. Company saves on inventory cost, which is negligible, in this plan.

 These basic planning strategies should preferably not be used in isolation from each other, as each one has its typical drawbacks. A combination of these strategies is used in preparing the aggregate production plan. Let us understand how to use a combination of these strategies.

 Example
PC Mark (P) Ltd is a personal computer assembling company based in Hyderabad. Its marketing department has given the demand forecast shown in the table given for its PCs throughout the country in the coming six months from January to June. Every worker assembles two computers a day. The overtime cost is Rs.30 per day per unit in excess of the maximum capacity of the factory, i.e., 200 units. The company wants to find the total cost involved in the following plans: a) Level output rate plan b) Chase plan c) An intermediate plan (a combination of level out rate and chase plans)

Demand Forecast
Month Demand forecast (units) Cumulative demand January February 1000 1000 3000 4000 March 1000 5000 April 5000 10000 May 7000 17000 June 2000 19000

No. of working days

Cumulative number of working days Units to be produced per day to meet demand Units to be produced per day to meet demand (approx.) No. of units to be produced per day (Level output rate)

24

25

20

22

20

24

24

49

69

91

111

135

41.7

120

50

227.27

350

83.33

42

120

50

228

350

84

153.15

Approx.

154

 We have to first determine the optimum size of the workforce. For this first we have to determine the level output rate. For this we have to first plot the cumulative production/demand over cumulative number of working days. We plot a curve between cumulative demand (in units) (plotted along the y-axis) and the cumulative number of working days (plotted along the x-axis). These points are joined to form the cumulative demand curve.

20000 18000 16000

Demand forecast

14000

Cumulative production curve

12000 10000 8000 6000 4000 2000 0 24 49 69 91 111 135

Accumulated inventory

Cumulative demand curve

 Next, draw a straight line starting from the origin and touching the cumulative demand curve such that the whole of this curve remains under this line. This line is a tangent to the cumulative demand curve. We call this line the cumulative production line. The cumulative production curve is always above the cumulative demand curve, because at any point of time the production will always be more than demand, ensuring no shortages at all. The vertical distance between the two curves represents the inventory accumulation at that point in time.

 Notice that at 111 cumulative days, the inventory accumulated is zero, i.e., whatever inventory was accumulated earlier has become zero. After 111 cumulative days, the inventory again starts to build up. Now, let us find the slope of the cumulative production curve. This slope represents the rate of production (in units per day). Slope = change in y-direction change in x-direction From the figure we find this slope as 153.1532, which is rounded off as 154 (units).

 Every worker assembles two units of PCs every day. Therefore, if 154 units are to be produced per day every day from January to June, 77 workers (154/2) are required per day (constant workforce size). Cost involved in the level output rate plan. At the fixed workforce size of 77, the output rate is constant through the period at 154 units per day for every month. The beginning inventory in January is assumed to be zero. The net addition during the month is the units produced during the month minus the units consumed. The ending inventory is the beginning inventory in the month plus the net addition during the month.
Average inventory = (Beginning inventory + Ending inventory)/2

Costs Involved in Level Output Rate Plan

Month Demand forecast (units) No. of working days Output Rate (Units/day) Output (units) Beginning inventory Net Addition (or Subtraction) Ending inventory Average inventory January February March April May June Total

1000 24 154 3696 0 2696 2696 1348

3000 25 154 3850 2696 850 3546 3121

1000 20 154 3080 3546 2080 5626 4586

5000 22 154 3388 5626 -1612 4014 4820

7000 20 154 3080 4014 -3920 94 2054

2000 24 154 3696 94 1696 1790 942

16871

 The inventory carrying cost (CC) is given as Rs.2 per unit per year. Therefore, for six months the CC will be Rs.1 per unit. In the level output rate plan, the total average inventory is 16,871 units. The total CC will be Rs.16,781 for this plan. There is no other type of cost associated with this plan. Hence the total cost of the level output rate plan is Rs.16,781.

 Chase Plan
In this plan, the production output is planned so as to follow (chase) demand forecasts in every period. In every period (say, month), the number of units planned for production are in accordance with the number of units demanded according to forecasts. It is why this plan is called the chase plan. Since the demand forecast and the number of working days in a month are known, we can determine the workforce requirement for each month. Note that this change in output rate in each month will result in hiring and laying off workers, leading to extra costs.

Costs Involved in the Chase Plan

Month Demand forecast (units) No. of working days Output Rate (Units/day) Output (units) Beginning inventory Net Addition (or Subtraction) Ending inventory Average inventory Change in output rate Cost of change in output rate No. of units above max. cpacity Overtime Cost @ Rs.3 per unit/day

January February March 1000 3000 1000 24 25 20 42 120 50 1008 3000 1000 0 8 8 8 0 0 8 8 8 4 8 8 42 78 -70 0 2000 2000

April 5000 22 228 5016 8 16 24 16 178 5000 28 1848

May 7000 20 350 7000 24 0 24 24 122 5000 150 9000

June 2000 24 84 2016 24 16 40 32 -266 8000

Total

92 22000 10848 32940

Number of units change in output rate (positive or negative) compared to previous month Range (Units) Cost (Rs.) 1-100 2000 101-200 5000 201-300 8000

 The output (no. of units produced) in each month varies according to the demand forecast. The table shows the change in output rate in a given month compared to the previous month. The change in output implies hiring/firing of workers. The hiring/firing charges remains constant for different slabs of output changes, which are provided in the table. The per day maximum capacity of the plant is 200 units. The limited number of machines, equipment, and , manpower does not allow production beyond the maximum capacity of the plant.

 Therefore, workers are required to work overtime, for which they charge overtime cost from the company. The overtime cost is Rs.3 per units short per day in a given month. The grand total of costs for the chase plan is calculated. It is noted that the costs under the chase plan of Rs.32,940, is much higher than the total cost of Rs.16,871 under the level output rate plan.

 Intermediate Plan
We have seen that in the chase plan, despite negligible inventory cost, the cost of change in the output rate led to a high overtime cost. On the other hand, in the level output rate plan, the inventory cost is very high despite there being no overtime cost and cost of change in output rate. Now we try an intermediate plan, which is a combination of the earlier two plans.

 We know that frequent changes in the output rate result in high costs, therefore we will change the output rate in the new plan only once. We also know that producing more than the maximum capacity (of 200 units) is costly in the form of overtime cost. Hence in the new plan we will ensure that the output rate is always within this limit. In the chase plan, notice that in the first three months the output rate required to meet the demand is much less compared to the next three months.

Costs Involved in the Intermediate Plan

Month Demand forecast (units) No. of working days Output Rate (Units/day) Output (units) Beginning inventory Net Addition (or Subtraction) Ending inventory Average inventory Change in output rate Cost of change in output rate No. of units above max. cpacity Overtime Cost @ Rs.3 per unit/day January February March 1000 3000 1000 24 25 20 100 100 100 2400 2500 2000 0 1400 900 1400 -500 1000 1400 900 1900 700 1150 1400 100 0 0 0 0 0 April 5000 22 200 4400 1900 -600 1300 1600 100 2000 0
0

May 7000 20 200 4000 1300 -3000 -1700 -200 0 0 0

0

June 2000 24 200 4800 -1700 2800 1100 -300 0 0

Total

4350 2000

0 6350

Number of units change in output rate (positive or negative) compared to previous month Cost Range (Units) (Rs.) 1-100 2000 101-200 5000 201-300 8000

 We shall limit the output rate during the latter three months at maximum capacity (200 units), and then increase the output rate in the first three months, to say, 100 units per day. The total inventory cost involved is only Rs.4350. Thus, the output rate changes only once during the considered time horizon in the month of April, resulting in a cost of Rs.2000. The total cost of the intermediate plan is Rs.6350. Note that the ending inventory in May is negative at Rs.-1700. This represents a shortage or backlog of orders by customers, which are highly undesirable as these lead to not only loss of potential profit but also loss of goodwill on the part of customers.

 Therefore, we need to make slight changes in the output rate. We cannot increase the output rate in April, May and June, as they are already at the maximum capacity of the plant and any increase here will lead to overtime costs, which we want to avoid. Therefore, increase the output rate in the months of January, February, and March to 125 units per day; the new intermediate plan is shown in the next page. Note that there is no ending inventory with a negative value.

Costs Involved in Intermediate Plan 2

Month Demand forecast (units) No. of working days Output Rate (Units/day) Output (units) Beginning inventory Net Addition (or Subtraction) Ending inventory Average inventory Change in output rate Cost of change in output rate No. of units above max. cpacity Overtime Cost @ Rs.3 per unit/day
January February March 1000 3000 1000 24 25 20 125 125 125 3000 3125 2500 0 2000 2125 2000 125 1500 2000 2125 3625 1000 2062.5 2875 125 0 0 0 0 0 April 5000 22 200 4400 3625 -600 3025 3325 75 2000 0 0 May 7000 20 200 4000 3025 -3000 25 1525 0 0 0 0 June 2000 24 200 4800 25 2800 2825 1425 0 0 Total

12212.5 2000 0 14212.5

Number of units change in output rate (positive or negative) compared to previous month Cost Range (Units) (Rs.) 1-100 2000 101-200 5000 201-300 8000

 The cost of this plan is Rs.14,212.5, which is less than that of the level output rate plan (Rs.16,871) and also that of the chase plan (Rs.32,940). Thus the intermediate plan is the best among the three plans considered here. The output rates in the various months of the intermediate plan are to be subjectively decided by trial and error. Therefore, there is lot of variation possible in the total cost of the plan. The planner should try to find the plan with the least total cost, but one that does not lead to any further significant reduction in cost is also appropriate.

Disaggregating the Aggregate Plan

The aggregate plan gives information about production requirements in general terms, as it includes the total quantity of all the different models of the product in the number of units to be produced. The aggregate plan provides no specific information as to how many units of each model of the product is to be produced. Different models of the product may, in general, require common parts and components, but some parts may be specific to the models. Some models may also require specific labor skills for their processing.

 Thus, for materials and labor planning of different models, information about what quantity of different models is to be produced is required. The aggregate plan is an intermediate planning stage, and in the next stage the aggregate plan is to be disaggregated (broken down into parts) to include information about the different models of the product to be produced.

Master Schedule
A master schedule is the result of the disaggregation of an aggregate plan. The master schedule shows the quantity (how much?) and timing (when?) of specific end-items (which item?) for a time horizon (during what time period?) often spanning 6 to 8 weeks. In a master schedule, the time horizon is divided into many time periods usually expressed in weeks. The time periods in master schedule called time buckets may not be equal throughout the time horizon considered. The time buckets in the near future may be smaller than the time buckets in the distant future.

 The master schedule is more and more tentative for the distant future than that for the near future. There is no upper limit on the duration of the time horizon (bucket size) for a master schedule, but there is a lower limit. The time horizon has to cover at least the cumulative lead time of production of end-items.
For example, if the production of an end-item require 3 days for procurement of raw materials, 4 days for manufacturing components, 2 days for putting together sub-assembly, the cumulative lead time will be 10 days. Thus the master schedule must cover a time horizon of 10 days.

The aggregate plan covers a duration between 6-18 months, while the master schedule covers a few weeks to 2-3 months.

 Thus, the aggregate plan is disaggregated in phases or parts into the master schedule. The master schedule may be revised on a monthly basis in order to accommodate any changes in the actual demand being experienced in comparison to the demand forecast.
For example, if the actual demand in January for an end-item turns out to be less than the demand forecast for January, leading to accumulation of inventory, the master schedule for February and March may be updated or revised to incorporate changes in the planned output.

Rough-cut Capacity Planning

The initial master schedule is tentative in nature, as in reality the capacity of the production system may not be able to support its practical implementation. Thus, the initial master schedule must be run through the MRP system as a trial to check whether sufficient production capacities, such as machines, equipment, labor, warehouses, capacities at the suppliers end exist or not. If the available capacities are not sufficient to support the master schedule, either the master schedule can be revised to match the production capacities, or the production capacities expanded.

 For example, the workers may be required to do overtime, or the number of production shifts may be increased. Subcontracting some of the work to outside vendors is another means of temporarily satisfying the master schedule requirements.

This process of checking the feasibility of the master schedule with respect to the available capacity is called rough-cut capacity planning.

Master Production Schedule

The master schedule provides details about the quantities and delivery timings of a product, but not the production plan.
For example, if according to the master schedule, 1,200 cars of a particular model are to be delivered to the customer in week 1 and 1,000 cars of the model are already available in the inventory, then only 200 units have to be produced in this week. On the other hand, if there are 1,500 units of this model of the car in the inventory, there may be no requirement of any production in this week.

 The MPS gives details about the quantities and timing of the planned production of a product. It is derived from the master schedule by taking into account the inventory status of the product in a given time period.
Refer to the Rajastani sari production example. Let us assume that the master schedule for saris for the 8 weeks during the 2-month period is as shown in the given below. Note that the sum of the master schedule values in the first 4 weeks (in January) is 1,100 units and in the next four weeks (in February) is 3,000 units, according to a new aggregate plan made by the operations manager.

 Note that the sum of the master schedule values in the first 4 weeks (in January) is 1,100 units and in the next four weeks (in February) is 3,000 units, according to a new aggregate plan made by the operations manager. The table also shows the orders already committed to the customers in the coming few weeks. The beginning inventory (week-0) is given as 500 units. This inventory will be available at the beginning of week 1. Let us assume the lot size of manufacture is 1000 units, i.e., in each production run, 1000 units of saris are produced. We now calculate the net inventory before the MPS.
For example, in week-1 the inventory on hand is 500 units, while the maximum demand is 350 units (the higher one out of the demand forecast and the customer order committed to).

Thus, the net inventory before the MPS is the difference between the two.

 Thus, the net inventory before the MPS is the difference between the two. Projected on-hand inventory is the inventory available for the next period (week).
In week-1, the projected on-hand inventory is the sane as the net inventory before MPS, i.e. 150 units. In wek-2, the available inventory is 150 units. The demand forecast of 200 units is greater than the 100 units of customer orders committed. Thus the net inventory before MPS is -50 units (150200). To avoid this shortfall, a new lot of 1,000 units will be produced in week-2 so that the projected on-hand inventory is 950 units. The thumb rule is that whenever the net inventory before the MPS becomes negative, a new lot of items is scheduled for production in the MPS of that time-period.
(Note: Net inventory negative means that there is a backlog or stock-outage)

Master Production Schedule (MPS)

January February

Week 1 Week 2 Week 3 Week 4 Week 1 Week 2 Week 3 Week 4

Demand forecast (nits) Customer orders (committed) Initial inventory in period week-0 = 500 units Net inventory before MPS

300 350

200 100

100 50

500 300

800 400

900

600

700

500

150

-50

850

350

-450

-350

50

-650

Master Production Schedule (MPS)

Projected on-hand inventory

1000
950 850 350

1000
550

1000
650 50

1000
350

 Available-to-promise inventory
It is necessary for sales personnel to know how many units of the product at maximum they can commit to customers in a given time period. Available-to-promise inventory (uncommitted inventory) gives them this information. The table below shows the calculation of available-to-promise inventory.
In week-1, the inventory available from the previous period is 500 units. The customer orders booked for this week are 350 units. Thus, 150 units is the availableto-promise inventory.

Master Production Schedule (MPS)

With Available-to-Promise Inventory
January February

Week 1 Week 2 Week 3 Week 4 Week 1 Week 2 Week 3 Week 4

Demand forecast (nits)

Customer orders (committed) Initial inventory in period week-0 = 500 units Net inventory before MPS Master Production Schedule (MPS) Projected on-hand inventory Available-to-promise (uncommitted) inventory

300
350 500 150

200
100

100
50

500
300

800
400

900

600

700

-50 1000

850

350

-450

-350

50

-650 1000

1000 1000 850 350 550 600 650 1000 50

150 150

950 550

350

 Apart from the first period initial inventory is available from the previous week, available-topromise inventory is found for only those periods in which an MPS value is scheduled.
In wek-2, the MPS is 1000 units. There is no MPS for the next two periods (weeks 3 and 4). The customer orders in weeks 2, 3, and 4 are 100, 50, and 300 units, respectively, totaling to 450 units. The available-to-promise inventory for week-2 is 55o units (1000450). In week-5, the committed orders are 400 units and the MPS is 1000 units. Therefore, the available-to-promise inventory in week-5 is 600 units (1000-400). Similarly, the available-to-promise inventory in week 8 is also 1000 units (1000-0), as the MPS in week-8 is 1000 units and no customer orders are committed.

 Time Fences
The MPS should not be changed near the actual production time. If changes are made at this stage, the whole exercise of production planning will become useless. Therefore, production managers set various time intervals called time fences to regulate changes in the MPS.
For example, three time fences may be fixed at time intervals of one, two, and three months.

 Before three months of the actual production time, any changes in the MPS may be made. Between two and three months (time fences), product models may be substituted, provided the required components are available. Between the time fences of one month and two months, changes are avoided, but minor ones may still be permitted. The last fence of one month before actual production takes place is strictly frozen, i.e., no changes are allowed during this time.