Aggregate Planning

Operations managementOperations management

Sales and Aggregate Planning Sales and Aggregate Planning

Krishna Murari

Sales and Aggregate Planning Sales and Aggregate Planning

The first step in translating long range strategic plans down to operational level is the development of aggregate plan.

Aggregate planning is an intermediate or medium range planning tool addressing the requirements of product lines including labour.

Goal of aggregate plan is to match demand with firm’s ability to supply the product at minimum cost.

SALES AND OPERATIONS PLANNINGSALES AND OPERATIONS PLANNING

Sales and Operations Planning in OMSales and Operations Planning in OM

Operations As a Competitive

WeaponOperations StrategyProject Management

Process StrategyProcess Analysis

Process Performance and QualityConstraint

ManagementProcess LayoutLean Systems

Supply Chain StrategyLocationInventory

ManagementForecastingSales and

Operations PlanningResource Planning

Scheduling

Planning at WhirlpoolPlanning at Whirlpool• Whirlpool begins production of room air conditioners Whirlpool begins production of room air conditioners

in the fall and holds them as inventory until they are in the fall and holds them as inventory until they are shipped in the spring.shipped in the spring.

• Building inventory in the slack season allows the Building inventory in the slack season allows the company to even out production rates over much of company to even out production rates over much of the year and still satisfy demand in the peak the year and still satisfy demand in the peak periods.periods.

• However, when summers are hotter than usual, However, when summers are hotter than usual, demand increases dramatically and stockouts can demand increases dramatically and stockouts can occur.occur.

• If Whirlpool increases its output and the summer is If Whirlpool increases its output and the summer is hot, it stands to increase its sales and market share. hot, it stands to increase its sales and market share. But if the summer is cool, the company is stuck with But if the summer is cool, the company is stuck with expensive inventories.expensive inventories.

• Whirlpool prefers to make its production plans Whirlpool prefers to make its production plans based on the average year, taking into account based on the average year, taking into account industry forecasts for total sales and traditional industry forecasts for total sales and traditional seasonality.seasonality.

Time Dimensions of Planning Time Dimensions of Planning

• Long range planning – Long range planning – time horizon 5 time horizon 5 to 10 years for industries requires many to 10 years for industries requires many years to plan and construct (refineries), years to plan and construct (refineries), 2 to 5 years for others who can expand 2 to 5 years for others who can expand capacity fast. Yearly review.capacity fast. Yearly review.

• Medium range planning – Medium range planning – 6 to 18 6 to 18 months. Reviewed and updated months. Reviewed and updated quarterly. Aggregate planning is part of quarterly. Aggregate planning is part of this planning this planning

• Short range planning – one day to Short range planning – one day to six month with weekly review.six month with weekly review.

Aggregation Plan Aggregation Plan

• Organsiations estimate resource Organsiations estimate resource requirements to satisfy the market demand. requirements to satisfy the market demand. It is easy to plan single product but for It is easy to plan single product but for multiple product it becomes difficult and multiple product it becomes difficult and requires common measure for identifying requires common measure for identifying the requirements by making product group.the requirements by making product group.

• The aggregate plan defines the best The aggregate plan defines the best combination of workforce level, inventory on combination of workforce level, inventory on hand and production rate that matches the hand and production rate that matches the company’s resources to market demand. company’s resources to market demand.

• Once aggregate plans are finalized, they are Once aggregate plans are finalized, they are disaggregated into small tasks. disaggregated into small tasks.

• Master production schedules are made by Master production schedules are made by disaggregating the operations.disaggregating the operations.

Aggregate Sales and Operations PlanningAggregate Sales and Operations Planning

• Sales and operations planning Sales and operations planning (S&OP):(S&OP): The process of planning future The process of planning future aggregate resource levels so that supply aggregate resource levels so that supply is in balance with demand.is in balance with demand.

• Staffing planStaffing plan: A sales and operations : A sales and operations plan of a service firm, which centers on plan of a service firm, which centers on staffing and other human resource–staffing and other human resource–related factors.related factors.

• Production planProduction plan: A sales and : A sales and operations plan of a manufacturing firm, operations plan of a manufacturing firm, which centers on production rates and which centers on production rates and inventory holdings.inventory holdings.

Relationship between Sales and Operations Relationship between Sales and Operations Plans and Other plansPlans and Other plans

• A financial assessment of an A financial assessment of an organization’s near future (1 or 2 organization’s near future (1 or 2 years ahead) is called either a years ahead) is called either a business plan (in profit firms) or an business plan (in profit firms) or an annual plan (in nonprofit services).annual plan (in nonprofit services).

• Business planBusiness plan: A projected : A projected statement of income, costs, and statement of income, costs, and profits.profits.

• Annual plan or financial planAnnual plan or financial plan: A : A plan for financial assessment used by plan for financial assessment used by a nonprofit service organization.a nonprofit service organization.

Relationship between Sales and Operations Relationship between Sales and Operations Plans and Other plansPlans and Other plans

The Decision ContextThe Decision Context

• Information inputs to aggregate Information inputs to aggregate Sales and Operations plansSales and Operations plans

– Business or Annual planBusiness or Annual plan

– Operations StrategyOperations Strategy

– Capacity ConstraintsCapacity Constraints

– Demand ForecastDemand Forecast

Objectives of Aggregate PlanObjectives of Aggregate Plan

Six objectives usually are considered Six objectives usually are considered during development of a plan:during development of a plan:

1.1. Minimize Costs/Maximize ProfitsMinimize Costs/Maximize Profits

2.2. Maximize Customer ServiceMaximize Customer Service

3.3. Minimize Inventory InvestmentMinimize Inventory Investment

4.4. Minimize Changes in Production RatesMinimize Changes in Production Rates

5.5. Minimize Changes in Workforce LevelsMinimize Changes in Workforce Levels

6.6. Maximize Utilization of Plant and Maximize Utilization of Plant and

EquipmentEquipment

Considerations for Aggregate planning Considerations for Aggregate planning

ProcessProcess Aggregate planning provides primary Aggregate planning provides primary

link between long range and short link between long range and short range planning activities. It specifies range planning activities. It specifies monthly or quarterly output monthly or quarterly output requirements by major product groups requirements by major product groups in labour hours or units of production in labour hours or units of production for up to 18 months. for up to 18 months.

It seeks to find out the combination of It seeks to find out the combination of monthly and quarterly work force and monthly and quarterly work force and inventory level to reduce the total inventory level to reduce the total production related cost while meeting production related cost while meeting the forecasted demand.the forecasted demand.

Basic consideration for developing Basic consideration for developing aggregate plan areaggregate plan are

Concept of aggregationConcept of aggregationGoals of aggregate planningGoals of aggregate planningForecast of aggregate demandForecast of aggregate demand Interrelationship among decisions Interrelationship among decisions

Considerations for Aggregate planning Considerations for Aggregate planning

ProcessProcess

Identifying meaningful measure of Identifying meaningful measure of output is first step in developing the output is first step in developing the aggregate plan.aggregate plan.

It is easy to measure if a firm produces It is easy to measure if a firm produces on product but in case of multiple on product but in case of multiple product it is difficult to find common product it is difficult to find common measure to define complete product measure to define complete product portfolio.portfolio.

Meaningful measure is found out by Meaningful measure is found out by identifying groups or families of identifying groups or families of individual product. Product may be individual product. Product may be different but follow similar process. Exp: different but follow similar process. Exp: various models of TV made by a factory various models of TV made by a factory

Concept of Aggregation Concept of Aggregation

It should contain the information on It should contain the information on the required level of output, the required level of output, inventory level and backlogs based inventory level and backlogs based on business plan.on business plan.

It should utilise the capacity of the It should utilise the capacity of the facilities efficiently and usage should facilities efficiently and usage should be inline with organisation’s strategy.be inline with organisation’s strategy.

The company’s objectives and policies The company’s objectives and policies regarding its employees should be in regarding its employees should be in line with its aggregate plan. E.g. hire line with its aggregate plan. E.g. hire and fire policy can not be adopted in and fire policy can not be adopted in case of skilled jobs.case of skilled jobs.

Aggregate Planning Goals Aggregate Planning Goals

Accurate forecasting helps aggregate Accurate forecasting helps aggregate planning in delivering better results. planning in delivering better results.

Forecasts of Aggregate Demand Forecasts of Aggregate Demand

Inter relation ship among the decisions Inter relation ship among the decisions

All the activities in an organisation are interrelated and dependent on each other. Hence future consequences of present decisions should be considered.

Managerial Inputs from FunctionalManagerial Inputs from FunctionalAreas to Sales and Operations PlansAreas to Sales and Operations Plans

Basic Activities for Aggregate planningBasic Activities for Aggregate planning a)a) Item forecasting - this provides an estimate of Item forecasting - this provides an estimate of

specific products which on integrating with specific products which on integrating with aggregate plan become output requirements. aggregate plan become output requirements.

b)b) Master production schedule (MPS) – it generates the Master production schedule (MPS) – it generates the amounts and dates of specific end products. It is amounts and dates of specific end products. It is fixed for short run (six to eight weeks). It depends fixed for short run (six to eight weeks). It depends on product , market and resource plans. on product , market and resource plans.

c)c) Rough cut capacity planning - includes verifying Rough cut capacity planning - includes verifying that’s sufficient production and warehouse facilities, that’s sufficient production and warehouse facilities, equipment and labour are available. And key equipment and labour are available. And key vendors are allocated adequate capacity to provide vendors are allocated adequate capacity to provide materials whenever required. materials whenever required.

A A Sequential Production Planning Sequential Production Planning ProcessProcess

Long-termcapacity planning

Demandforecasts

Aggregateproduction planning

Masterproduction scheduling

Resourcerequirements planning

Detailed planning andScheduling (MRP)

Implementation

Necessarymodifications

Necessarymodifications

Planning StrategiesPlanning Strategies• Chase strategyChase strategy: : A strategy that involves A strategy that involves

hiring and laying off employees to match hiring and laying off employees to match the demand forecast.the demand forecast.

• Level-utilization strategyLevel-utilization strategy: : A strategy that A strategy that keeps the workforce constant, but varies keeps the workforce constant, but varies its utilization to match the demand its utilization to match the demand forecast.forecast.

• Level-inventory strategyLevel-inventory strategy: : A strategy that A strategy that relies on anticipation inventories, relies on anticipation inventories, backorders, and stockouts to keep both the backorders, and stockouts to keep both the output rate and the workforceoutput rate and the workforce constant.constant.

• Mixed strategyMixed strategy: : A strategy that considers A strategy that considers and implements a fuller range of reactive and implements a fuller range of reactive alternatives than any one “purealternatives than any one “pure” ” strategy.strategy.

Reactive AlternativesReactive Alternatives

• Reactive alternatives are actions that Reactive alternatives are actions that can be taken to cope with demand can be taken to cope with demand requirements.requirements.

• Anticipation inventory is inventory that Anticipation inventory is inventory that can be used to absorb uneven rates of can be used to absorb uneven rates of demand or supply.demand or supply.

• Workforce adjustment: Hiring and Workforce adjustment: Hiring and laying off to match demand.laying off to match demand.

• Workforce utilization: Use of overtime Workforce utilization: Use of overtime and under time.and under time.

• Vacation schedules: Use of plant-wide Vacation schedules: Use of plant-wide vacation period, vacation “blackout” vacation period, vacation “blackout” periods.periods.

• Subcontracting: Outsourcing to Subcontracting: Outsourcing to overcome short-term capacity overcome short-term capacity shortages.shortages.

• Backlogs, Backorders, and Stock outs:Backlogs, Backorders, and Stock outs:

– Backlog:Backlog: An accumulation of customer An accumulation of customer orders that have been promised for orders that have been promised for delivery at some future date.delivery at some future date.

– Backorder:Backorder: A customer order that A customer order that cannot be filled immediately but is cannot be filled immediately but is filled as soon as possible.filled as soon as possible.

– Stockout:Stockout: An order that is lost and An order that is lost and causes the customer to go elsewhere.causes the customer to go elsewhere.

Reactive AlternativesReactive Alternatives

Aggressive AlternativesAggressive Alternatives

• Aggressive alternativesAggressive alternatives are actions that are actions that attempt to modify demand and, attempt to modify demand and, consequently, resource requirements.consequently, resource requirements.

• Complementary productsComplementary products: Services or : Services or products that have similar resource products that have similar resource requirements but different demand cycles.requirements but different demand cycles.

• Creative PricingCreative Pricing:: Promotional campaigns Promotional campaigns designed to increase sales withdesigned to increase sales with creative creative pricing.pricing.

Constraints and CostsConstraints and Costs

The planner usually considers several types of The planner usually considers several types of costs when preparing sales and operations plans.costs when preparing sales and operations plans.

1.1. Regular-Time Costs: These costs include Regular-Time Costs: These costs include regular-time wages plus contributions to regular-time wages plus contributions to benefits, Social Security, retirement funds, benefits, Social Security, retirement funds, and pay for vacations and holidays.and pay for vacations and holidays.

2.2. Overtime Costs: Overtime wages typically Overtime Costs: Overtime wages typically are 150 percent of regular-time wages.are 150 percent of regular-time wages.

3.3. Hiring and Layoff Costs: Include the costs of Hiring and Layoff Costs: Include the costs of advertising jobs, interviews,training advertising jobs, interviews,training programs, exit interviews, severance pay, programs, exit interviews, severance pay, and lost productivity.and lost productivity.

4.4. Inventory Holding CostsInventory Holding Costs

5.5. Backorder and Stockout CostsBackorder and Stockout Costs

Aggregate Planning Techniques Aggregate Planning Techniques

Graphical method for Aggregate output Graphical method for Aggregate output planningplanningOptimal Models for aggregate planningOptimal Models for aggregate planning

*Linear programming – *Linear programming –

simplex and transportation method simplex and transportation method

*Linear decision rules*Linear decision rules

*Heuristic model *Heuristic model Computer Search models Computer Search models Computer Simulation in capacity Computer Simulation in capacity evaluationevaluationDecision tree analysis used in long term Decision tree analysis used in long term capacity evaluation. capacity evaluation.


Graphical method for Aggregate output Graphical method for Aggregate output planning :planning :

This is two dimensional model relating This is two dimensional model relating cumulative demand to cumulative output cumulative demand to cumulative output capacity. It is used to develop and evaluate capacity. It is used to develop and evaluate various alternative plans and identify the various alternative plans and identify the best plan through trial and error.best plan through trial and error.

The steps are : The steps are :

i) Draw a graph by taking cumulative i) Draw a graph by taking cumulative production days for the planning period on production days for the planning period on x-axis and cumulative output on y-axis. x-axis and cumulative output on y-axis.

ii) Plot cumulative demand forecast for the ii) Plot cumulative demand forecast for the entire planning time period.entire planning time period.



iii) Select a planning strategy based on the iii) Select a planning strategy based on the aggregate planning goals. aggregate planning goals.

iv) Compute proposed output for each period iv) Compute proposed output for each period in the planning horizon. Plot on the same in the planning horizon. Plot on the same axis used to plot the demand. axis used to plot the demand.

v) Compare the planned output with expected v) Compare the planned output with expected demand and identify the excess inventory demand and identify the excess inventory and shortages.and shortages.

vi) Calculate the cost involved in vi) Calculate the cost involved in implementation.implementation.

vii) Modify the plan to meet aggregate vii) Modify the plan to meet aggregate planning goals by following above steps planning goals by following above steps from step iii to vi.from step iii to vi.



Un

it o

f o

utp

ut

Productive days in planning horizon

Excess demand

Inventory Accumulation

Cumulative

Demand

Cumulative output


Linear Programming :Linear Programming : This is one of the optimal models used to This is one of the optimal models used to

formulate aggregate plans. formulate aggregate plans. The optimal plan for minimizing costs is The optimal plan for minimizing costs is identified by linear programming identified by linear programming procedure. procedure. The number of units to be produced, the The number of units to be produced, the total number of shifts for plan and total number of shifts for plan and amount of inventory are specified. amount of inventory are specified. It is used to allocate scare resources to It is used to allocate scare resources to strategic alternatives when the costs are strategic alternatives when the costs are linear functions of their quantities.linear functions of their quantities.Optimal solutions are derived using Optimal solutions are derived using simplex and transportation methods.simplex and transportation methods.


Linear Decision Rules (LDRs):Linear Decision Rules (LDRs):

These are set of equations for calculating These are set of equations for calculating the optimal workforce, aggregate output the optimal workforce, aggregate output rate and inventory level. Non-linear rate and inventory level. Non-linear relationships are also considered. relationships are also considered.

The equations are tailored to fit each The equations are tailored to fit each organisation's specific requirements.organisation's specific requirements.

To derive proper LDRs for a particular To derive proper LDRs for a particular company, extensive mathematical company, extensive mathematical analysis is carried out.analysis is carried out.

In case of any change in the cost In case of any change in the cost relationship, whole exercise is to be relationship, whole exercise is to be repeated. repeated.


Heuristic ModelsHeuristic Models

These are based on historical aggregate These are based on historical aggregate planning data available with the planning data available with the organisationorganisation. .

Computer Search ModelsComputer Search Models

When organisation has large quantity of When organisation has large quantity of information on different production information on different production variable, computer search methods are variable, computer search methods are used. A computer program simulating used. A computer program simulating conditions under all possible combinations conditions under all possible combinations is used to identify most cost effective is used to identify most cost effective combination satisfying the production combination satisfying the production requirements.requirements.

Aggregate Planning For Service Aggregate Planning For Service Organisations Organisations

Customer is a part of the production Customer is a part of the production process and individual customer process and individual customer response and reaction cannot be response and reaction cannot be estimated before handestimated before handServices can not be stored.Services can not be stored.In general, labour hours are used to In general, labour hours are used to aggregate all available factors in aggregate all available factors in service organsiations. service organsiations.

Aggregate Planning For Service Aggregate Planning For Service Organisations Organisations

Aspects of Aggregate Planning For Aspects of Aggregate Planning For services:services:Unutilized service capacity at a Unutilized service capacity at a particular time is waste and can not be particular time is waste and can not be carried forward.carried forward.Demand and capacity of a service Demand and capacity of a service organisation are difficult to estimateorganisation are difficult to estimateLabour flexibility is a useful factor in Labour flexibility is a useful factor in service activities as employee can service activities as employee can handle many tasks. handle many tasks.

Hallmark StrategyHallmark Strategy• Hallmark spends considerable resources to Hallmark spends considerable resources to

effectively produce and distribute more than effectively produce and distribute more than 40,000 different products through 43,000 retail 40,000 different products through 43,000 retail outlets in the United States alone.outlets in the United States alone.

• Hallmark has never used layoffs to adjust Hallmark has never used layoffs to adjust production rates. Employee flexibility is the key to production rates. Employee flexibility is the key to this strategy.this strategy.

• Hallmark follows a philosophy of retraining its Hallmark follows a philosophy of retraining its employees continually to make them more employees continually to make them more flexible.flexible.

• To keep workers busy, Hallmark shifts production To keep workers busy, Hallmark shifts production from its Kansas City plant to branch plants in from its Kansas City plant to branch plants in Topeka, Leavenworth, and Lawrence, Kansas, to Topeka, Leavenworth, and Lawrence, Kansas, to keep those plants fully utilized. keep those plants fully utilized.

• It uses the Kansas City plant as its “swing It uses the Kansas City plant as its “swing facility.” When demand is down, Kansas City facility.” When demand is down, Kansas City employees may take jobs in clerical positions, all employees may take jobs in clerical positions, all at factory pay rates. They might also be in at factory pay rates. They might also be in classrooms learning new skills.classrooms learning new skills.

Example : Aggregate Planning Example : Aggregate Planning • Shiva Garments, Bangalore has export unit Shiva Garments, Bangalore has export unit

situated in Doddanakundi Industrial Area, situated in Doddanakundi Industrial Area, Bangalore It is planning next year’s production. Bangalore It is planning next year’s production. The estimated demands are as follows : The estimated demands are as follows :

Quarter Quarter I I II II III III IV IV Demand 10000Demand 10000 13,00013,000 10,00010,000 12,00012,000Units Units

The present production rate in single shift is 100 The present production rate in single shift is 100 units. Company hires extra workers to run second units. Company hires extra workers to run second shift whenever needed and the rate of production shift whenever needed and the rate of production in such situation in second shift is 80 units. Each in such situation in second shift is 80 units. Each shift has 25 workers. Extra hired workers are kept shift has 25 workers. Extra hired workers are kept for a quarter or multiple of the quarter. There is a for a quarter or multiple of the quarter. There is a provision of overtime to the order of 50 percent of provision of overtime to the order of 50 percent of the regular hours for the quarters when the regular hours for the quarters when production is carried out in single shift basis. production is carried out in single shift basis.

Example : Aggregate Planning Example : Aggregate Planning • During OT, the rate of production is 25 percent During OT, the rate of production is 25 percent

more than that in regular time. OT payment is 2 more than that in regular time. OT payment is 2 times the regular pay of Rs. 200. times the regular pay of Rs. 200.

• The cost of change over from single shift to The cost of change over from single shift to double shift is Rs. 50,000 and from double shift double shift is Rs. 50,000 and from double shift to single shift is Rs 30,000. The inventory to single shift is Rs 30,000. The inventory holding cost is Rs 25 per unit per month. Back holding cost is Rs 25 per unit per month. Back order cost is Rs. 100 per unit per month. An order cost is Rs. 100 per unit per month. An order once delayed can only be accepted in next order once delayed can only be accepted in next quarter or multiple of quarters. There is an quarter or multiple of quarters. There is an initial inventory of 2000 units and it is a safety initial inventory of 2000 units and it is a safety stock and required to be kept at all times. stock and required to be kept at all times.

• A quarter is of 3 months and every month has A quarter is of 3 months and every month has average 25 days. average 25 days.

i) Compute the aggregate production plan at a i) Compute the aggregate production plan at a continuous rate of 13,000 units per quarter. continuous rate of 13,000 units per quarter.

ii) Running single shift for the first half of the year ii) Running single shift for the first half of the year and double shift for the second half of the year.and double shift for the second half of the year.

(use OT to maximum wherever possible(use OT to maximum wherever possible))

Example : Aggregate Planning Example : Aggregate Planning Solution :Solution :i)i) Aggregate plan I (constant rate of production 13000 per Aggregate plan I (constant rate of production 13000 per

quarter) quarter) The regular- time production possible in single shift basis :The regular- time production possible in single shift basis :Given Given a) rate of production – 100 unitsa) rate of production – 100 unitsb) No. of working days in a month – 25b) No. of working days in a month – 25Hence , no. of units / quarter = 100 x 25 x 3 = 7500 Hence , no. of units / quarter = 100 x 25 x 3 = 7500

Which is less than 10000 as required in I quarter. So Which is less than 10000 as required in I quarter. So overtime is required. overtime is required. Quantity produced in overtime = OT time / quarter x Quantity produced in overtime = OT time / quarter x production ratio x rate of production/ day production ratio x rate of production/ day = 50 % of 75 working days x 125% productivity x 100 units = 50 % of 75 working days x 125% productivity x 100 units per day per day

= 0.5 x 75 x 1.25 x 100 = 4687.5 = 4686= 0.5 x 75 x 1.25 x 100 = 4687.5 = 4686Total units produced in single shift basis in a quarter = 7500 Total units produced in single shift basis in a quarter = 7500 + 4686 = 121 86+ 4686 = 121 86Which is less than the required rate of production 13,000 Which is less than the required rate of production 13,000 units. units. Hence second shift is to be run. Hence second shift is to be run.

Example : Aggregate Planning Example : Aggregate Planning Solution (contd..):Solution (contd..):

The production in second shift = 80 The production in second shift = 80 units/ day x 75 days per quarter = 6000 units/ day x 75 days per quarter = 6000 units units Since we are running second shift, no Since we are running second shift, no overtime is permitted. overtime is permitted. Thus the total production in double Thus the total production in double shift = 7500 + 6000 shift = 7500 + 6000 = 13,500 units / quarter = 13,500 units / quarter

the relevant cost of production for the relevant cost of production for producing 13000 units per quarter are producing 13000 units per quarter are Regular wages = 25 workers / shift x 2 Regular wages = 25 workers / shift x 2 shifts x Rs 200 per worker per day x shifts x Rs 200 per worker per day x 75 days per quarter 75 days per quarter = Rs. 7,50,000 = Rs. 7,50,000

Example : Aggregate Planning Example : Aggregate Planning Solution :Solution :i)i) Aggregate plan I (constant rate of production Aggregate plan I (constant rate of production

13000/q) 13000/q) Cost of change in shift = Rs. 50,000Cost of change in shift = Rs. 50,000Cost of inventory to be carried out is as Cost of inventory to be carried out is as computed below :computed below :

Quarter Quarter I I II II III III IVIVProductionProduction 13,000 13,000 13,00013,000 13,000 13,000 13,000 13,000Demand Demand 10,000 13,000 10,000 12,000 10,000 13,000 10,000 12,000BeginningBeginning 2,000 5,000 5,000 8,000 2,000 5,000 5,000 8,000 inventory inventory End inventory End inventory 5,000 5,000 8,000 5,000 5,000 8,000

9,000 9,000

Average inventory 3,500 5,000 6,500 Average inventory 3,500 5,000 6,500 8,500 8,500

Example : Aggregate Planning Example : Aggregate Planning Solution (contd..:Solution (contd..:

Cost of change in shift = Rs. 50,000Cost of change in shift = Rs. 50,000Cost of inventory to be carried out is as computed Cost of inventory to be carried out is as computed below :below :

Quarter Quarter I I II II III III IV IVProductionProduction 13,000 13,000 13,00013,000 13,000 13,000

13,00013,000Demand Demand 10,000 13000 10000 10,000 13000 10000 12000 12000BeginningBeginning 2,000 5,000 5,000 2,000 5,000 5,000

8,0008,000 inventory inventory End inventory End inventory 5,000 5,000 8,000 9,000 5,000 5,000 8,000 9,000 Average inventory 3,500 5,000 6,500 8,500 Average inventory 3,500 5,000 6,500 8,500

Cost ofCost of 3500 x 5000 x 6,500 x 8,500 x3500 x 5000 x 6,500 x 8,500 xCarrying Carrying 25x25x 25 x 3 25 x3 25 x 3 25 x 3 25 x3 25 x 3inventory 3 monthsinventory 3 months

= 2,62,500= 2,62,500 3,75,000 4,87,500 3,75,000 4,87,500 6,37,5006,37,500


The total relevant cost =The total relevant cost =

regular wages for 4 quarters+ O.T regular wages for 4 quarters+ O.T wages + cost for change in shifts + wages + cost for change in shifts + inventory cost + backlog cost inventory cost + backlog cost

= (200 x 50 workers x 25 days x 3 = (200 x 50 workers x 25 days x 3 months x 4 quarters) + 0 + 50,000 +months x 4 quarters) + 0 + 50,000 +

(2,62,500+ 3,75,000 + 4,87,500 + (2,62,500+ 3,75,000 + 4,87,500 + 6,37,500)6,37,500)

+ 0+ 0

= Rs. 30,00,000 +50,000+17,62,500= Rs. 30,00,000 +50,000+17,62,500

= Rs. 48,12,500= Rs. 48,12,500


ii)ii) Aggregate plan 2 : (single shift for Aggregate plan 2 : (single shift for quarters I and II and double shift for quarters I and II and double shift for quarters III and IV). According to plan, quarters III and IV). According to plan, the production quantities are as the production quantities are as follows follows QuarterQuarter II IIII IIIIII IVIV

Regular Regular time time

productionproduction

75007500 75007500 1350013500 1350013500

OT OT productionproduction

46864686 46864686 - - --

We place the demand figures next to production figures, we get inventory or backlog


QuarterQuarter II IIII IIIIII IVIV

Regular time Regular time productionproduction

75007500 75007500 1350013500 1350013500

OT productionOT production 46864686 46864686 - - --

Demand Demand 1000010000 13,00013,000 10,00010,000 12,00012,000

Beginning Beginning inventoryinventory

20002000 41864186 33723372 68726872

Inventory at Inventory at the end the end

41864186 33723372 68726872 83728372

Average Average inventory inventory

30933093 37793779 51225122 76227622

If beginning inventory is less than safety stock 2000, production requirements to be increased to take care of safety stock


Relevant cost for aggregate plan 2 are Relevant cost for aggregate plan 2 are Regular time wages = 2 quarters single shifts + Regular time wages = 2 quarters single shifts + 2 quarters double shifts = 2 x ( 25 workers x Rs 2 quarters double shifts = 2 x ( 25 workers x Rs 200 per day x 25 days in a month x 3 month in a 200 per day x 25 days in a month x 3 month in a quarter) + 2( 50 x 200 x 25 x 3 ) = 7,50,000 + quarter) + 2( 50 x 200 x 25 x 3 ) = 7,50,000 + 15,00,00015,00,000= Rs. 22,50,000= Rs. 22,50,000

Overtime wages : these are for the first 2 Overtime wages : these are for the first 2 quarters quarters

Single shift wages for a quarter x (time) 50% OT Single shift wages for a quarter x (time) 50% OT allowed x 2 (ratio of OT wages to regular wages allowed x 2 (ratio of OT wages to regular wages x 2 ( no. of quarters) x 2 ( no. of quarters) = (25 x 200 x 25 x 3) x 0.5 x 2x 2 = Rs. 7,50,000.= (25 x 200 x 25 x 3) x 0.5 x 2x 2 = Rs. 7,50,000.


Inventory carrying cost :Inventory carrying cost :Rs 25 per month x 3 months in a quarter x Rs 25 per month x 3 months in a quarter x

(average inventory (average inventory 30933093 +3779+3779 +5122+5122 +7622+7622))= Rs. 14,70,150= Rs. 14,70,150

Change over cost : Change over cost : single shift to double shift only oncesingle shift to double shift only once= Rs. 50,000= Rs. 50,000

Total relevant cost = Rs. 22,50,000 + 7,50,000+ Total relevant cost = Rs. 22,50,000 + 7,50,000+ 14,70,150+14,70,150+

50,00050,000= Rs 45,20,150= Rs 45,20,150

Thus the plan 2 is less costly . If these costs Thus the plan 2 is less costly . If these costs satisfactorily cover all the relevant decision making satisfactorily cover all the relevant decision making factors the we choose this plan.factors the we choose this plan.

Note that change over cost is not significant. Working double Note that change over cost is not significant. Working double shift through out the year causes more regular time shift through out the year causes more regular time wages. wages.

Aggregate Planning

Documents

operations planning

aggregate sales

planning short range

development of aggregate

goal of aggregate plan

financial plan

business plan

staffing plan