Supply Chain Management: Strategy,
Planning, and Operation
Seventh Edition, Global Edition
Chapter 8
Aggregate Planning in a
Supply Chain
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Learning Objectives
8.1 Describe aggregate planning and its
importance as a supply chain activity.
8.2 Explain the basic trade-offs to consider when
creating an aggregate plan.
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Aggregate Planning and Its Role in a
Supply Chain
• Capacity has a cost and lead times are often long
• Aggregate planning:
– Given the demand forecast for each period in
the planning horizon, determine the production
level, inventory level, capacity level (internal
and outsourced), and any backlogs (unmet
demand) for each period that maximize the
firm’s profit over the planning horizon.
– How can a firm best use the facilities it has?
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Role of Aggregate Planning in a Supply
Chain
• Identify operational parameters over the specified time
horizon
– Production rate
– Workforce
– Overtime
– Machine capacity level
– Subcontracting
– Backlog
– Inventory on hand
• All supply chain stages should work together on an
aggregate plan that will optimize supply chain
performance
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The Aggregate Planning Problem
• Given the demand forecast for each period in the
planning horizon, determine the production level,
inventory level, and the capacity level for each
period that maximizes the firm’s (supply chain’s)
profit over the planning horizon
• Specify the planning horizon (typically 3-18
months)
• Specify the duration of each period
• Specify key information required to develop an
aggregate plan
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Information Needed for An Aggregate Plan
• Aggregate demand forecast Ft for each Period t over T periods
• Production costs
– Labor costs, regular time ($/hr) and overtime ($/hr)
– Subcontracting costs ($/hr or $/unit)
– Cost of changing capacity – hiring or layoff ($/worker), adding or
reducing machine capacity ($/machine)
• Labor/machine hours required per unit
• Inventory holding cost ($/unit/period)
• Stockout or backlog cost ($/unit/period)
• Constraints – overtime, layoffs, capital available, stockouts,
backlogs, from suppliers
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Outputs of Aggregate Plan
• Production quantity from regular time, overtime,
and subcontracted time
• Inventory held
• Backlog/stockout quantity
• Workforce hired/laid off
• Machine capacity increase/decrease
• A poor aggregate plan can result in lost sales, lost
profits, excess inventory, or excess capacity
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Basic Tradeoffs in Aggregate Planning
• Trade-off between capacity, inventory,
backlog/lost sales
• Chase strategy – using capacity as the lever
• Flexibility strategy – using utilization as the lever
• Level strategy – using inventory as the lever
• Tailored or hybrid strategy – a combination of
strategies
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Chase Strategy
• Vary machine capacity or hire and lay off workers
as demand varies
• Often difficult to vary capacity and workforce on
short notice
• Expensive if cost of varying capacity is high
• Negative effect on workforce morale
• Results in low levels of inventory
• Used when inventory holding costs are high and
costs of changing capacity are low
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Utilization Flexibility Strategy
• Use excess machine capacity
• Workforce stable, number of hours worked varies
• Use overtime or a flexible work schedule
• Flexible workforce, avoids morale problems
• Low levels of inventory, lower utilization
• Used when inventory holding costs are high and
capacity is relatively inexpensive
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Level Strategy
• Stable machine capacity and workforce levels,
constant output rate
• Inventory levels fluctuate over time
• Inventories carried over from high to low demand
periods
• Better for worker morale
• Large inventories and backlogs may accumulate
• Used when inventory holding and backlog costs
are relatively low
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Demand and Costs (1 of 3)
• Highly seasonal demand
• Options
– Adding workers during peak times
– Subcontract
– Build up inventory
• Develop a forecast
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Forecast Error in Aggregate Plans (1 of 2)
• Forecast errors must be considered, flexibility
must be built in
• Safety inventory
– Build and carry extra inventories to satisfy
higher than forecasted demand
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Forecast Error in Aggregate Plans (2 of 2)
• Safety capacity
– Capacity used to satisfy higher than forecast
demand
Use overtime as a form of safety capacity
Carry extra workforce permanently as a form
of safety capacity
Use subcontractors as a form of safety
capacity
Build and carry extra inventories as a form
of safety inventory
Purchase capacity or product from an open
or spot market as a form of safety capacity
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For mathematical models
• https://www.youtube.com/watch?v=KrDXxVzlxQ4
• https://www.youtube.com/watch?v=WsIK_TkJV2w
• https://www.youtube.com/watch?v=Sx_QuvQ0OgI
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