Aggregate Planning Techniques
Companies still use simple trial-and-error charting and graphic methods to develop their aggregate plans. Computer spreadsheets and graphics packages are now available to facilitate the process. A trial-and-error approach involves costing out various production planning alternatives and selecting the one with the lowest cost. In addition to the trial-and-error method, there are more sophisticated approaches, including linear programming, the Linear DecisionRule, and various heuristic methods. Of these, only linear programming has seen broad application. To properly develop and evaluate an aggregate plan, we need to first divide it into two stages. The first stage is the development of a feasible plan that provides the required Turner of products under the conditions stated. After this aggregate plan has been eveloped, . he next step is to determine the costs associated with the plan. Some of the costs included in an aggregate plan are presented in a form that is typically not found in the accounting records of a firm. For example. there is usually no cost of carrying inventory. Instead. the individual component costs associated with carrying inventory are listed in separate categories (e.g., the cost of storage is rent, insurance. taxes. etc.; the cost of obsolescence is reflected in higher material and labor costs. etc.).
Full Costs versus Marginal Costs
Before we can begin to solve the aggregate planning problem, we need to first recognize the difference between full costs and marginal or incremental costs. Full co ts are. all of the actual. out-of-pocket costs associated with a particular aggregate plan. Included in full costs are the costs of material. labor, and other direct, variable costs. Full costs are often used for developing a projected labor and material budget that will be needed to support an aggregate plan. Marginal or incremental costs are only those unique costs that are attributable to a particular rebate plan. With this approach. we assume that the total number of products forecasted over the time horizon need to be built, regardless of the alternative selected. The incremental costs are. therefore. only those costs that are above and beyond those required to build the product by its most economical means (which is usually on the first shift inhouse). Included in marginal costs are hiring and firing costs. inventory can: ing costs, and overtime and/or second- and third-shift premium costs. To demonstrate the difference, we will use both the full-cost and marginal-cost methods to solve the aggregate planning problem for the C&A Company. You will note that both methods result n selecting the same alternative plan. based on lowest cost. The different alternatives also are ranked in the same
order with both methods of costing. The advantage in using the marginal-cost approach is that we do not have to include a lot of numerical figures that have no impact on the final decision.
A Simple Example of Aggregate Planning
Matt Koslow is the operations manager for the. ew England Shin Company. In this capacity e is required to develop an aggregate plan for the next six months with the goal of meeting demand during the period while minimizing cost: Av a first step in developing this plan. he obtained from the marketing department the ing forecast for shirts.