intematlonal joumal of

Int. J. Production Economics 41 (1995) 127-133

ELSEVIER

productton
econom1cs

A managerial perspective on aggregate planning

Geoff Buxey
Facul v of Management, Deakin University, Geelong, Victoria, 3217, Australia
Accepted for publication 1 August 1994

Abstract
Aggregate Planning first appeared in the literature nearly 40 years ago and has proven a popular topic for research
ever since. However, industry seems to have ignored repeated claims that there are algorithms available which would
yield significant cost savings. This paper explores the divergence between theory and practice, va an emprica! study
covering 30 firms.
Most authors have blamed weaknesses in particular methods for the lack of applications. The evidence presented here
indicates that the Aggregate Planning model itself is at fault, and that the broad characteristics of real production plans
follow from other business, tactical, or operational considerations. Furthermore, a chase option is generally preferred at
the outset.
Keywords: Aggregate planning

l. Aggregate planning

The Aggregate Planning model was developed

as a vehicle for minimising the total marginal
costs of manufacturing a range of products with
a strong seasonal sales pattern [1]. Over a
calendar year cycle a factory can maintain a
constant monthly output, equal to the average
demand rate, and stockpile finished goods during
slack sales periods. They are then used up as
supplements whenever sales outstrips production.
Such a level plan incurs substantial (smoothing)
inventory holding charges.
Another possibility is to adjust the output each
month in line with its sales forecast. This chase
plan involves increasing scheduled labour hours
in the peak season, in order to run equipment more
inten sively or for longer hours, or, subcontracting
sorne work out. The principal discretionary costs
are overtime (and undertime), shift, and
subcontract
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premiums, and, payments related to hiring and

then firing any additional staff.
Aggregate Planning techniques find the best cost
compromise between these two extremes, and in
elude severa! forms of mathematical
programming, [2, 3], regression analysis [4],
simulation [5,6], and heuristic rules [7, 8]. The
problem is made (math ematically) tractable by
using aggregate measures of products, labour and
inventory and their asso ciated costs. In addition,
monthly time buckets are specified over the one
year horizon, and it is simply assumed that the
disaggregation of any given plan (faithfully) into a
batched, weekly Master Produc tion Schedule
(MPS) will be a straightforward task.
There are severa! reports of favourable results
when these methods were applied retrospectively to
actual company data [9, 10]. However, aggregate
figures are always supplied despite the fact that
a fair test should be based on the MPS. Production

128

G. Buxey/Int. J. Production Economics 41 (1995) 127-133

Table 1
The Industrial Sample
Products

Variety

Production mode

Major schedule characteristics

Bulk/bagged cement

None

For stock
Large contracts to order

Chase, but level for intermediate

(bottleneck) stage

Petrol and oils

Ten related products

For stock

Chase. Exports to maintain full

plant utilization

Motor vehicle batteries

Four sizes

For stock

Level

Paints/varnishes (industrial)

Approximately 400 types

To customer order

Chase

Processed foods

300 items, including

dilferent container sizes

For stock

Chase-modified by
seasonal raw materials

Lawn bowls

650 models combined with

2000 decorative patterns

Domestic models for

stock, plus "specials"
to order. Export models
to meet order commitments

Exports

Electric wall heaters

30 models

For stock

Chase. Subcontracts to keep

engineering workshops busy

Ladies footwear

Winter range: 287 styles;

Summer range: 110 styles;
compounded by 60 colours,
8 materials and dilferent sizes

To customer order

Chase. Seasonally dilferentiated

product range

50 models in 12 sizes

Approximately 50% stock and

50% customer order

Five types, 40 fabrics and

20 sizes

To customer order

(modified) chase. Exports.

Counter seasonal products

417 items, from 28 types,

5 can sizes, and colour range

For stock

Chase

Eight models

For stock

Chase

500 styles, compounded by

fabrics and sizes

To customer order

Chase Seasonally dilferentiated

prod uct range

Ammunition

260 products, belonging to a

smaller number of families

Approximately 40% to meet

order commitments.
Low-volume industrial range
to customer order. Remainder
for stock

Chase volatile market segment.

Use long lead time export orders
to maintain high plan! utilization

Surfer's wetsuits
Boardshorts
Paints/finishes (domestic)
Lawnmowers, edgers,
outdoor vacuum cleaners
Ladies' wear

(modified) chase. Seasonally

dilferentiated product range

Beer

Two types

For stock

Chase

Gas barbecues

70 types, expanding to 200

when finishes and optional
modules added

For stock

Counter-seasonal products.
Exports

Solid fuel heaters

Ten models

For stock

Reinforced hoses

50 types

Small orders supplied ex stock. Chase

Major customers supplied to
"order'" with 30-40 days
lead time

Colour television receivers

Toys

12 models

For stock

Level

Typically, 25-30 items

made locally

For stock, but subcontracted

Subcontracting

G. Buxeyjlnt. J. Production Economics 4/ (/995) 127-/33

129

Ice cream

102 items, including

flavours and pack sizes

For stock

Chase

Crumpets, scones

1 type of each (sorne

customised wrappers)

To customer order

Chase

Cooling fans
Electric (strip) heaters

6 models each

For stock, but > 60% presold

to major customers

Counter-seasonal products

Wood heaters

12 models in 2 colours

For stock

Stable workforce

Marine distress fiares

Fireworks

2 types
< 20% of total sales

For stock

Stable (core) workforce

Tumble dryers

10 Australian models
10 (low volume)
export 'specials'

For stock
To fill orders (3 weeks
lead time)

Chase

35 mm photographic films

21 family groups, 150

packages

To (internal) customer order

Chase

Greetings cards:
everyday (birthdays, etc.)
seasonal (Xmas, Easter, etc.)
specials and promotions

2500 designs:
1000 designs for Xmas alone

For stock.
For stock, but 95% presold.
To order

Nail plate products (for

building industry)

60 family groups, 800 items,

plus speicals

For stock.
Exports and specials to
customer order

Chase

Pine landscaping products

(borders, pa vers)

4 types, 9 prod ucts

For stock

(modified) chase, subcontracting

Meat pies and pasties

(seasonal)
Cakes and slices (stable)

30 items

To customer order

Chase

Chase

50 items

managers have to take batch sizes and scheduling

constraints into consideration, and, they must react
to impending shortages for individual products.
Aggregate forecasts are much more reliable, so for
example, overtime might be necessary on occasion
even with ample aggregate stocks on hand.
Gilgeous [11] makes the point that the objectives
of production planning are multi-faceted, and that
other functional areas often have an input. For
instance, Personnel will want to avoid sharp
changes in the size of the workforce and Finance
restrict the amount of money tied up in stocks.
Whilst he recommends Goal Programming as
a way to resolve potential confticts ofinterest [12],
the validity of the generic Aggregate Planning
model is not questioned.
The impact of fixed costs may have been dis
missed too readily, as all plants have a mnimum
average utilisation factor which they must reach in
order to be viable. Thus, many highly capitalinten sive processes operate more or less around
the clock which leaves little scope for altering
monthly

output rates. On the other hand, it is quite

common to run just a single regular shift, and
keep sorne inexpensive facilities in reserve for
most of the year, but in these circumstances
labour rates and pro ductivity have to be tightly
controlled. Neverthe less, it is necessary to plan
ahead if demand suffers seasonal swings, to
ensure that resources (labour, raw materials,
finished inventory) will be available if required.
2. Industrial practice
A study was conducted, involving 30 manufac
turers, to find out exactly how production planning
occurs in practice. The sample included both large
and small companies, capital and labour intensive
processes, anda range of different industries across
three states, but all hada recognised seasonal prob
lem. Brief details are provided in Table 1, from
which it can be deduced that only 20% have a
pronounced Winter sales peak, partly because in

1
3

G. Buxey/lnt. J. Production Economics 41 (1995) 127-133

Australia this does not include Xmas. Each case

was based on a site visit to interview a relevant
manager(s) and make observations. The main
areas of discussion were the general business
environ ment and objectives, resources and
production planning, shopfloor processes and
constraints, and, flexibility. There was no instance
where production plans attempted to trade off
finished goods stock holding costs against
marginal labour costs. Nor did any of these firms
spend significant sums hiring seasonal workers
and then dismissing them with sorne form of
compensation. Finally, 24(80%) fol lowed a
"chase" strategy, as far as they were able to,
2(7%) plumped for a pure "leve!" option, and the
remaining 4(13%) had sorne other overriding
consideration such as a leve! workforce. An ex
planation for these striking results can be found
by categorising management decisions as either
strategic, tactical or operational, and noting that
traditional Aggregate Planning concerns itself
exclusively with the second of these stages.

3. Business strategy

From a business perspective the ideal situation is

"level" aggregate production in conjunction with
a "chase" plan by model. The former is not a prior
ity because it avoids changing the workforce level,
but in order to maximise sales revenue and to
spread fixed costs thinly va high utilisation of plant
and equipment. The latter maximises cash flow and
minimises financia! risk (unsold production). Thus,
companies seek to increase sales in slack periods,
rather than deciding long in advance to minimise
a set of marginal costs. The ways that they have
gone about this are:
develop complementary products (3),
redesign models according to the season (7),
export to the northern hemisphere (7),
market engineering skills and become subcon
tractors ( 1).
In fact, only the second alternative is easy.
Launching a new product range seems to work best
if an established brand name is acquired through
licensing or a takeover, and exports fare better
when the product can be promoted by the Australian

image (e.g. barbecues and surfing gear). Production

planning is focused on specific short seasons and it
is not justified to aggregate the different items.
Moreover, the reduced magnitude of the seasonal
demand fluctuations means that smoothing stocks
are unnecessary.
Table 1 reveals that many companies offer their
customers a high variety of products so as to be
competitive. This makes forecasting for the MPS
extremely difficult, so to avoid keeping excessive
safety stocks production is based on firm orders. It
should be remembered that if peak (individual)
demand is overestimated this may lead to obsol
escence or no opportunity to cut stocks for at least
six months. Of course, this form of MPS maximises
cash flow and minimises financia! risk, so it is not
surprising that more than half of the sample (13)
prefer to use it. The justification is not always
high-variety though as exports and very large or
ders are necessarily placed well in advance and
sorne items have a very limited shelf-life. Obviously,
manufacture to order is tantamount to a chase
strategy.
There are four capital intensive plants which
operate for 24 hours per day on the following
number of regular days per week:
petrol and oils,
7 days;
cement,
7 days;
automotive batteries,
6 days;
35 mm photographic films,
5 days.
This is to dilute fixed costs, not to mtmmise
marginal production-inventory costs, and indeed
only one plant keeps finished goods stocks at all
while the others chase demand. The product mix
of petrol and oils is adjusted in line with monthly
sales and "spot" export orders are arranged to
soak up any spare capacity. As cement is difficult
to store and handle, this factory chases demand
too, but scheduling revolves around the most
expensive (middle) stage. These kilos are heavily
utilised apart from taking turns shutdown for
maintenance, al ways leaving a sufficient workin-progress (clinker) stockpile to feed the less
critica! milis. The films have customised
packaging and are made to order on a just-in-time
(JIT) basis. However, the domestic and various
overseas market peaks almost cancel each other
out, and then the possibility of ad hoc weekend
overtime, and on occasion asking the

G. Buxey/1nt. J. Production Economics 41 (1995) 127-133

(in-house) customers to accept their orders a

month early, allows the system to cope.
The size of the battery facility represents the
most favourable "economy of scale", and market
ing will discount prices in order to achieve their
annual sales targets. Thus, production planning
merely entails sticking to the most popular model
mix.
4. Scheduling tactics
Aggregate Planning is aimed at this stage of the
production planning hierarchy where the most
cost-effective schedule is defined in broad terms.
However, we have already seen that 80% of the
sample firms opted to chase demand. Sorne did so
because their business or manufacturing strategy
dictated it, but others were simply convinced that
these tactics bring superior results. Six companies
have formal JIT programs (electric wall heaters,
domestic paints, lawnmowers, cooling fans,
tumble dryers, films), and severa! more have
equally rapid throughput of materials but their coordination problems are not complex enough to
warrant this nomenclature.
The fact that a chase/JIT schedule maximises
liquidity and minimises financia! exposure has al
ready been mentioned. Nowadays, most organisa
tions are aware that it also underpins continuous
improvement of operations procedures and practi
ces, with corresponding increases in productivity
of labour, materials, and fioorspace. lt focuses on
eliminating all forms of waste and non-value
adding work and has a much greater impact than
trying to "optimise" a static production model. The
second major reason for choosing chase tactics is
to build in fiexibility. Sales forecasts always
include sorne percentage of error and it is
necessary to be able to adjust output, either up or
down, at short notice. This is the principal role of
overtime, not as a least cost option in medium
term planning. Flex ibility implies good customer
service without sacri ficing high productivity.
Frozen plans should be of mnimum length and
beyond that only the mecha nisms should be in
place to acquire the correct resources, once they
are known. This aspect is cru cial when sales are
volatile because they depend

131

upon unpredictable elements of the weather. Exam

ples present in Table 1 are ice cream (temperature),
beer (temperature), ammunition (rainfall), lawn
mowers (rainfall), garden hoses (rainfall), and meat
pies (temperature).
5. Operational factors
Strategic and tactical decisions largely
determine the nature of production planning at
23(78%) of the 30 companies surveyed. The
remainder are each infiuenced by special
characteristics generally re lated to either the
product or the processes, which can be
categorised as follows: short product shelf life (crumpets, beer, meat
pies);
bulky or awkward products (beer, petrol,
cement, hoses, pine landscaping products);
seasonal raw materials (convenience foods);
long training times (marine distress fiares, wood
heaters, colour television sets);
ownership of retail outlets (gas barbecues).
The first two factors make a chase plan manda
tory and for crumpets and meat pies so is
manufac ture to order. For petrol and cement a
level (aggregate) strategy is also in force, so the
monthly chase schedule has no significant
resources impli cations. A long training time
appears to mean anything greater than three
weeks, whence hiring additional workers during
peak periods is not considered a viable option. In
the fiares case there is sorne recruitment for less
skilled positions, and along with the wood
heaters firm it uses planned overtime to chase
demand as closely as possible under the
constraints of a (semi) level workforce. For the
manufacture of colour television sets, this labour
constraint does enforce a level output plan, since
the predominantly female operatives are averse
to regular overtime. However, it is feasible before
Xmas when annual sales forecast errors become
apparent and emergencies arise.
The vertical integration of a factory and a chain
of stores, combined with complementary products
(barbecues and solid fuel heaters), presents an
opportunity to infiuence sales, and a level output
can be achieved plus a chase model mix. This
leaves processed foods as the sole example where

G. Buxey/lnt. J. Production
1
3
a computer-based algorithm seeks a minimum
marginal cost solution to the production schedul
ing problem. lt functions according to the
following restrictions: no stockouts;
crop-dependent items produced at regular nter
vals throughout the particular supply season;
items with a seasonal sales pattern not produced
during a trough;
rostered days off, holidays, and preventative
maintenance shutdowns taken into account;
aggregate labour limits obeyed;
tries to avoid setting up equipment to accom
modate a different sized container (can, jar).
The objective is to balance the costs of holding
inventory against the costs of batch changeovers
(mainly waste materials). N o labour charges are
involved so the chase philosophy dominates. The
actual size of the flexible workforce is determined
by running the model in experimental mode every
quarter, adjusting its provisional numbers for the
last nine months of the one year horizon by trial
and error.

6. Operations management

The multiple objectives of production planning

can be summarised:
maximise sales revenue,
spread fixed costs,
provide a high level of customer service,
good labour and materials productivity,
minimise obsolescence,
maximise liquidity,
maintain scheduling flexibility,
establish good employee relations.
As we have seen, these are inter-related, and have
often been more or less taken care of after the
business strategy or scheduling tactics have been
settled. The result is usually to try and chase de
mand via a model-based MPS. However, managers
still have to contain costs, and they must ensure
that labour and materials will be available when
needed and that last minute adjustments to these
resources are possible. At the same time the number
of ongoing management activities needs to be kept

Economics 41 (1995) 127-133

in check. All this is achieved by developing sound

practices which circumvent major problems, rather
than resorting to the compromises inherent in the
Aggregate Planning paradigm.
There is no "hiring and firing" of temporary staff.
The most common arrangement is to employ cas
ual workers for severa! months on mutually agreed
terms. These may be ex-employees, housewives,
students etc., who are often on a register and return
year after year. In one case (nail plate products) an
employment agency supplies staff at an hour's no
tice for as little as one day. Other sites are large
complexes and can simply redeploy surplus labour
to departments which do not suffer from seasonal
ity but have significant voluntary turnover (hoses,
lawnmowers, tumble dryers). In fact, such sever
ance assists planned manpower reductions for
many of the companies and so do agreements
to move part of the annual holidays away from
Summer.
The greetings cards firm is able to justify having
sufficient equipment and permanent staff to meet
peak requirements in certain areas because it can
then accommodate special orders and subcontract
jobs. Outside work is also accepted in the fans'
components production department, but others
subcontract work out, although not to minimise
marginal workforce-inventory costs. The landscap
ing products and wood heaters factories keep their
capital equipment heavily utilised and avoid mak
ing further investments. In addition, the former
saves transport costs by using enterprises located in
distant states to augment supplies to those particu
lar distributors. For toys all production work is
done by subcontractors using tooling and parts
which are supplied to them. This allows the manu
facturer to negotiate favourable labour rates, either
at home or abroad, and to make radical changes
from year to year to the product range. The ladies
shoes company sends out sorne machining to
accommodate workload spikes during peak sales
periods, but occasionally jobs are given to
subcon tractors who need them even when it is not
strictly necessary. In essence, this buys flexibility.
Solid fuel heaters are one of the few products to
be stockpiled since a level workforce is decreed at
the tactical decision-making stage. Otherwise qual
ity and productivity on the welding line drops.

G. Buxeyjlnt. J Production Econvmics 41 (1995) 127-133

They do not include an expensive fan, which is

purchased and inserted on a chase basis.
7. Conclusions
The investigation reveals that Aggregate Plan
ning is never undertaken in the way promoted by
the literature. There is no product aggregationjdis
aggregation, although the initial forecasts and
schedules may be simplified by using family
groups to which minor finish or packaging
details are added later. Most significantly,
marginal work force-inventory cost balancing is
not attempted at all.
Resources and production planning is, nonethe
less, very important when sales are seasonal. The
problem is tackled at three levels, strategic, tactical,
and operational. These are loosely linked to
provide enough scope to handle the inevitable
modifications to the MPS as they arise, and many
potential expenses or difficulties are nullified by
cultivating good management practices. There is
indeed one case (convenience foods) where a com
puterised model, based on heuristic rules, generates
the MPS, but management sets the overall tactical
framework and individual tem stock levels are
determined by Economic Batch Quantity (EBQ)
logic rather than using the (aggregate smoothing
stock) concepts of Aggregate Planning.
Two examples from the literature [13, 14] show
that linear programming can also be applied suc
cessfully to formulate an MPS. One company
makes convenience foods too and the other (beer)
has a similar production environment, but again
the models proposed by management have a
differ-

133

ent format to Aggregate Planning. In fact, both

involve minimising the combined costs of produc
tion, inventory and distribution in a multi-plant
situation with given (constant) workforces. They
stillleave a lot of details to be worked out by other
means before a feasible shift-based plan becomes
available to cover the short term activities. The
literature believes that greater sophistication, via
integration to avoid sub-optimisation, is the key to
advances in production planning, although it can
not as yet come up with a comprehensive model.
This research shows that in real life good guide
lines, prudence, and flexibility are more important,
although there may be room for computerised
deci sion support systems in developing the
former.

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