OM-Chapter 4
OM-Chapter 4
OM-Chapter 4
AGGREGATE PLANNING
Dr. Mulugeta K.
Department of Management
Aggregate Planning Defined
• The term aggregate indicates that the plans are developed for
product lines or product families, rather than individual
products.
• There are two objectives to aggregate planning:
1. To establish a company-wide game plan for allocating
resources
the long-standing battle between the sales and
operations functions within a firm.
2. To develop an economic strategy for meeting demand.
matching forecasted demand with available capacity.
Inputs and Outputs of Aggregate Planning
Aggregate
Planning
Meeting Demand Strategies
Disadvantages
• the premium paid for overtime work,
• a tired and potentially less efficient workforce, and
• the possibility that overtime alone may be insufficient to
meet peak demand periods.
Undertime
– It can be achieved by working fewer hours during the day
or fewer days per week.
– Vacation time scheduled during months of slow demand.
5. Subcontracting/Outsourcing
Example 1:
The Good and Rich Candy Company makes a variety of candies
in three factories worldwide. Its line of chocolate candies
exhibits a highly seasonal demand pattern, with peaks during
the winter months (for the holiday season and Valentine’s Day)
and valleys during the summer months (when chocolate tends
to melt and customers are watching their weight). Given the
following costs and quarterly sales forecasts, determine whether
(a) level production, or
(b) chase demand
would more economically meet the demand for the candies.
Cont…
Quarterly sales forecast and cost data for Rich and Good Company
Solution
Cont…
• The production plan and resulting hiring and firing costs are
given below.
Period 1 2 3 4 5 6 Total
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1800
Output
Regular time 300 300 300 300 300 300 1800
Overtime -- -- -- -- -- --
Subcontract -- -- -- -- -- --
Output-Forecast 100 100 0 (100) (200) 100 0
Inventory
Beginning 0 100 200 200 100 0
Ending 100 200 200 100 0 0
Average 50 150 200 150 50 0 600
Backlog 0 0 0 0 100 0 100
Costs
Output
Regular time $600 600 600 600 600 600 $3600
Overtime -- -- -- -- -- -- --
Subcontract -- -- -- -- -- -- --
Hire/Fire -- -- -- -- -- -- --
Inventory $50 150 200 150 50 0 $600
Backorders $0 0 0 0 500 0 $500
Total $650 $750 $800 $750 $1150 $600 $4700
Example (1b)
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1800
Output
Regular time 280 280 280 280 280 280 1680
Overtime -- -- 40 40 40 -- 120
Subcontract -- -- -- -- -- --
Output-Forecast 80 80 20 (80) (180) 80 0
Inventory
Beginning 0 80 160 180 100 0
Ending 80 160 180 100 0 0
Average 40 120 170 140 50 0 520
Backlog 0 0 0 0 80 0 80
Costs
Output
Regular time $560 560 560 560 560 560 $3360
Overtime -- -- 120 120 120 -- 360
Subcontract -- -- -- -- -- -- --
Hire/Fire -- -- -- -- -- -- --
Inventory $40 120 170 140 50 0 $520
Backorders $0 0 0 0 400 0 $400
Total $600 $680 $850 $820 $1130 $560 $4640
Comparison
• The total cost for the first plan (example 1a) is $4700.
• Whereas, the total cost for the second plan (example 1b) is
$4640, which is $60 less than the previous plan.
– In the second plan, regular time production and inventory
costs are down, but there is overtime cost.
– However, this plan achieves savings in backorder cost,
making it somewhat less costly overall than the plan in
example 1a.
Total cost saving = $60
Example (1c) [Exercise]