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Sales & Operation Planning SOP  (Aggregate Planning)

Balancing Aggregate* market Demand (product family) with the Factory Aggregated Capacities over the aggregate planning horizon (EFFECTIVENESS)  with a minimum Production Cost . (EFFICIENCY)

Other objectives should be considered such as:

  • maximize customer service

  • minimize inventory investment

  • minimize changes in workforce levels

  • minimize changes in production rates

  • maximize utilization of plant and equipment

*Aggregation in Planning


  • Proactive Strategy: (Demand Management)

Coordinate Marketing & Production plans to Level Demand using the following:

  • Pricing differentiation to shift demand from Peak Periods to off-peak periods  

  • Promotion for shifting demand more closely to capacity level

  • Allowing Back Orders or Advance Order in peak periods  

  • Creating New Demand at  off-peak periods  (counter-cyclical products )

  • Reactive strategy: Capacity Options:

Allow volume forecasts based on Marketing plan to drive production planning using the following:

  • Hire / Fire Option (Many Organizations view workers as assets rather than variable cost)

  • Overtime / Slack Time

  • Part-time workers

  • Finished goods Inventories to cover Peak periods

  •  Subcontracting

  • Back Orders and/or stock outs

  • Mixed strategy:

  • Combines elements of both an active strategy and a passive (reactive) strategy 

  • Firms will usually use some combination of the two

Basic Approaches (Chase / Level Alternatives)

According to Production Capacity and optimizing cost

  • Chasing Demand

The chase method helps firms match production and demand by hiring and firing workers as necessary to control output.

  • Level Production

The level method allows for a constant rate of production variations in demand  are by  using some combination of inventories, overtime, part time workers, subcontracting & Back orders.

  • Mixed strategy

Comparison of Chase versus Level Strategy

Comparison Aspects

Chase Demand

Level Capacity

Level of labor skill required



Worker levels and production output



Job discretion



Compensation rate



Working conditions

Low Morale

High Morale

Training required per employee



Labor turnover



Labor Utilization



Hire-fire cost



Labor Cost



Inventory cost



Error rate



Amount of supervision required



Type of budgeting and forecasting required






1. Resources

  • Max Regular Man hours / period

  • Max. Equipment Capacities/ period

  • Max Overtime Hours

  • Max Subcontracting Capacities

  • 2.Demand forecast/ period

  • 3.Starting Inventory Level or Backorders

4. Costs:

  • Regular Production cost per unit

  • Inventory Carrying cost  per unit per period

  • Back Orders cost per unit per period

  • Overtime cost  per unit

  • Hiring / Firing Cost

  • Subcontracting Cost  per unit

  • Total Cost of a Plan

  • Production Plan PP – for manufactured product groups

  • Purchase & Subcontracting Plan – for purchased product groups

  • Part-time, Over-time & employment  plan

  • Inventory Plan – for MTS Make-To-Stock groups

  • Backlog Plan – for MTO Make-To-Order groups


  • Phase 1: Choosing Strategy

  • Choose the basic strategy: (Level, chase, or hybrid)

  • Determine the production rate:

    • Level plan with back orders: rate = average demand over the planning horizon

    • Level plan without back orders: rate is set to meet all demand on time

    • Chase plan: assign regular production, amount of overtime & subcontracted work to meet demand

  • Phase 2: Defining requirements, capacities and costs

  •  Forecast Demand for each period

  •  Determine Capacities (regular time, overtime, subcontracting) for each period

  • Determine unit Costs (regular time, overtime, subcontracting, holding Inventories, back orders, lay off )

  • Identify pertaining policies (safety stock level, min. workforce level …)

  • Phase 3: Develop alternatives plans and compute cost of each alternative

  • Calculate the size of the workforce needed

  • Calculate period-to-period inventory levels, shortages, expected hiring & firings, and overtime

  • Calculate period-by-period costs, then sum for total costs of the plan

  • Select the one with that satisfies objective balancing demand with demand) with the least total cost.

  • Evaluate the plan’s impact on customer service and human resource issues


  • Develop a graph that shows numbers of units on the vertical axis and time throughout the planning horizon on the horizontal axis.

  • Graph cumulative expected demand from the beginning of the planning horizon to its end.

  • Develop a production plan, and use the graph developed in the preceding steps to graph cumulative production throughout the planning horizon.

  • Compare cumulative demand to cumulative production. Areas where cumulative production exceeds cumulative demand indicate an inventory buildup. Whenever cumulative demand exceeds cumulative production, demand will not be met at that time.

  • Perform the above steps until a satisfactory production plan is developed.

  • Target: minimize cost or maximize profit

  • Constraints: Demand, Production Capabilities, Material or Manpower Availability

8. Solved Example by Solver

A firm faces a firm schedule of delivery commitments for a product over the next six months. The production cost varies by month due to anticipated changes in material costs. The company's production capacity is 100 units per month on regular time and an additional 15 units per month on overtime.

The following table contains delivery requirements and production costs by month.

  1 2 3 4 5 6
commitment (units)
95 85 110 115 90 105
Cost per unit in
regular time
30 30 32 32 31 32
Cost per unit in
35 35 37 37 36 37

The cost of carrying an unsold unit in stock is $2 per month. The problem for the company is to determine the number of units to produce in regular time and overtime each month to meet requirements at minimum cost. The firm has no units on hand at the beginning of month 1 and wishes to have no units on hand at the end of month 6.

Download Solution by excel solver .