UNIT 5

AGGREGATE PLANNING & MASTER SCHEDULING

• Seasonal variations in demand are quite common in many
industries.

• Hence, organizations have to be prepared in dealing with

such uneven demand.

• Also organizations cannot predict exactly the quantity and

timing of demands in advance.

• Even so, they must be prepared in advance in order to be

able to handle demand.

• They use a process often referred to as aggregate planning.

 Capacity Decisions

Long range

Intermediate
range
Short
range

Now 2 months 1 Year

Aggregate
Planning
The goal of aggregate planning is to achieve a production
plan that will effectively utilize the organization’s resources
to match expected demand.

Aggregate planning decisions are strategic decisions that

define the framework within which operating decisions will
be made.
• They are the starting point for scheduling and production
control systems.
• They provide input for financial plans;
• They involve forecasting input and demand management
• They may require changes in employment levels.
An Overview of Aggregate Planning

Inputs Outputs
Demand forecast Total cost of a plan
Resources Projected levels of
Workforce Inventory
Facilities
Output
Policies
Employment
Subcontracting
Overtime
Subcontracting
Inventory levels Backordering
Back orders
Costs
Inventory carrying
Back orders
Hiring/firing
Overtime
Inventory changes
Subcontracting
Aggregate Planning Strategies
Aggregate planning strategies can be described as proactive,
reactive, or mixed.

Proactive strategies involve demand options: They attempt to

alter demand so that it matches capacity.

Reactive strategies involve capacity options: They attempt to

alter capacity so that it matches demand.

Mixed strategies involve an element of each of these

approaches.
Proactive – Demand Options: Alter demand to match
capacity.
• Pricing
• Promotion
• Back orders
• New demand

Pricing: Pricing differentials are commonly used to shift

demand from peak periods to off-peak periods.
• Some hotels, offer lower rates for weekend stays.
• Some airlines offer lower fares for night travel.
• Movie theaters may offer reduced rates for matinees
Promotion: Advertising and other forms of promotion, such as
displays and direct marketing, can sometimes be very
effective in shifting demand.

Back orders: An organization can shift demand fulfillment to

other periods by allowing back orders. That is, orders are
taken in one period and deliveries promised for a later
period.

New demand: Develop new demand when capacity is under

used.
Example - bus transportation, “insourcing”.
Reactive – Capacity Options: Alter capacity to match
demand.
• Hire and layoff workers
• Overtime
• Part-time workers
• Inventories
• Subcontracting

Hire and layoff workers: When demand exceeds hire

workers and during off season layoff workers. Hiring costs
include recruitment, and training to bring new workers “up to
speed.” Quality may suffer.
Overtime: The use of overtime can be attractive in dealing
with seasonal demand peaks by reducing the need to
hire and train people who will have to be laid off during
the off-season.
Overtime also permits the company to maintain a skilled
workforce and employees to increase earnings.

Part-time workers: Seasonal work requiring low-to-

moderate job skills lends itself to part-time workers, who
generally cost less than regular workers.
Department stores, restaurants, and supermarkets make
use of part-time workers.
Inventories: Goods produced in one period is sold or shipped
them in another period. It includes storage costs, cost of
insurance, deterioration, spoilage, breakage, and so on.

Subcontracting: Subcontracting enables planners to acquire

temporary capacity, although it affords less control over the
output and may lead to higher costs and quality problems.
Conversely, in periods of excess capacity, an organization
may subcontract in, that is, conduct work for another
organization.
Basic Strategies:

Level Capacity Strategy: Maintaining a steady rate of output

while meeting variations in demand by using a combination
of inventories, overtime, subcontracting and back orders.

Chase Demand Strategy: Matching capacity to demand i.e,

operations would be planned to meet expected demand for
that period.
Level Capacity Strategy:
- Maintain steady output
- maintain a steady work force as hiring and layoffs can
have a major impact on the morale of employees
- Inventory can take up large storage area and costs.

Chase Demand Strategy:

- Vary output to demand needs
- Inventories can be kept relatively low
- Lack of stability in operations
- Also when actual demand doesn’t meet forecast, morale
of employees can suffer.
Techniques for Aggregate Planning

1. Spreadsheet technique
2. Linear – Transportation Model technique

1. Spreadsheet technique
a) Prepare the ideal plan.
b) Calculate the costs such as regular time, overtime, subcontracts,
hire/layoff, inventory, back orders.
c) Compute total cost of plan.
1. A leading sparkplug manufacturer has the forecast for the
next six periods.
Period 1 2 3 4 5 6
Forecast 200 200 300 400 500 200

There are 14 workers and each produce 20 units per period.

Overtime per period is 40 units.
Costs
Regular time – Rs 200/unit
Overtime - Rs 300/unit
Inventory - Rs 100/unit
Back orders - Rs 500/unit

Prepare an aggregate plan and its cost.

2.
MONTH 1 2 3 4 5 6 7 8
FORECAST 120 135 140 120 125 125 140 135

Normal capacity is 130 units, its cost is Rs 60/unit. Overtime has a cost of
Rs 90/unit. Inventory cost is Rs 2/unit. Backlog cost is Rs 90/unit.

a. Develop a chase plan that matches the forecast.

b. Develop a level plan that uses inventory to absorb fluctuations.
2. Prepare a aggregate plan

Period 1 2 3 4 5 6 7 8 9

Forecast 190 230 260 280 210 170 160 260 180

The firm has 21 employees who can produce 10 units per period.
To meet the demand the firm will hire 1 person from period 1 to period 5
at an addition cost of Rs 500.

Regular time cost is Rs 600 per unit

Inventory carrying cost is Rs 500 per unit per period.
Backorder cost Rs 1000 per unit

Prepare an aggregate plan and its cost.

Period 1 2 3 4 5 6

Forecast 200 200 300 400 500 200

 MONTH 1 2 3 4 5 6 7 8
FORECAST 120 135 140 120 125 125 140 135
Period 1 2 3 4 5 6 7 8 9

Forecast 190 230 260 280 210 170 160 260 180
2. Linear – Transportation Model technique
This method is used to obtain optimal solutions by allocating
scarce resources in terms of cost minimization or profit
maximization.
The goal is to minimize the sum of costs related to regular
labour time, overtime, subcontracting, carrying inventory etc.
Method
a) Prepare a table allocating cost for each period.
b) Meet demand with the lowest possible alternative.
c) Compute the cost of operations.

Various costs –
rt – regular time cost per unit
ot – overtime cost per unit
s – subcontracting cost per unit
b – backorder cost per unit
1. Given the following information set up the transportation table
and solve for minimum cost plan-
 1 2 3
Period

Beginning
Inventory
Regular

1 Overtime

Subcontract

Regular

2 Overtime

Subcontract

Regular

3 Overtime

Subcontract

Demand 550 700 750

2. Using Transportation model, allocate production capacity to
satisfy demand at minimum cost.
1 2 3 4
Demand 100 50 70 80
Capacity
Regular 60 50 60 65
Overtime 18 15 18 20
Subcontracting 20 20 20 20

Initial inventory = 20
Final inventory = 25
Cost per Unit (Rs)
Regular time -100; Overtime -125
Subcontract -130 Carrying cost per period - 4
PERIOD 1 2 3 4

Beginning Inventory

Regular

1 Overtime

Subcontract

Regular

2 Overtime

Subcontract

Regular

3 Overtime

Subcontract

Regular

4 Overtime

Subcontract

Demand 100 50 70 80
2. The supply, demand, cost, inventory for a company which has constant
workforce is given below. Using transportation model format, allocate
production capacity to satisfy demand at minimum cost.
1 2 3 4
Demand 160 150 160 180
Capacity
Regular 150 150 150 150
Overtime 10 10 0 10
Subcontracting 10 10 10 10

Cost per Unit (Rs)

Regular time 50
Overtime 75
Subcontract 80
Inventory per period 4
Beginning inventory is zero.
No Back orders are allowed.
PERIOD 1 2 3 4

Beginning Inventory

Regular

1 Overtime

Subcontract

Regular

2 Overtime

Subcontract

Regular

3 Overtime

Subcontract

Regular

4 Overtime

Subcontract

Demand 160 150 160 180

MASTER SCHEDULE
Disaggregating the Aggregate Plan
• Breaking down the aggregate plan into specific product
requirements in order to determine labor requirement,
materials and inventory requirements.
• Translating the production plan into meaningful terms for
production.
• The result of the disaggregating the aggregate planning is
the Master schedule.
MASTER SCHEDULING
• The result of disaggregating an aggregate plan.
• It shows the quantity and timing of specific end items for a
scheduled time (6 to 8 weeks ahead).
• It shows planned output for individual products along with
time of production.
• Shows when completed orders are to be shipped.
Functions of Master Scheduling:
• Interfaces with
– Marketing
– Capacity planning
– Production planning
– Distribution planning
• Evaluates impact of new orders
• Provides delivery dates for orders
• Deals with problems
– Production delays
– Revising master schedule
– Insufficient capacity
MASTER SCHEDULING PROCESS

The master production schedule (MPS) indicates the quantity and timing of
planned production, taking into account on-hand inventory and customer orders.
Inputs
Beginning Inventory – Quantity on hand.
Forecast – Demand for that time period.
Customer orders – Guaranteed quantities already committed to customers.

Outputs
Projected Inventory – Quantities on hand after orders are fulfilled.
= Inventory from previous period – Current period requirements

MPS – Time period when actual production should take place.

Uncommitted Inventory or Available-to-promise (ATP) – Quantities available

after fulfilling customer orders.
*calculated for the first period and MPS periods.
= (Beginning Inv + MPS) – (sum of customer orders until next MPS)
Master Scheduling Process
Example –
Forecast for 4 weeks of June is 30 units each and 4 weeks of July is 40
units each.
Customer orders – 33, 20, 10, 4, 2
Beginning Inventory – 64 units
Assume production size is 70 units
Testing of Master schedule
Once a tentative master schedule is prepared, it must be
validated. This validation is known as rough-cut capacity
planning (RCCP).

Rough-cut capacity : Approximate balancing of capacity and

demand to test the feasibility of the master schedule.
• It involves testing the feasibility of proposed master
schedule to available capacity and capacity constraints.
• It means checking capacities of production and warehouse
facilities, labor, and vendors to assure that no gross
deficiencies exist.
1. Prepare a master schedule for the following situation.
The forecast for each period is 70 units.
The starting inventory is zero.
The MPS rule is to schedule production if the projected inventory on
hand is negative.
The production lot size is 100 units.

Period Customer Orders

1 80
2 50
3 30
4 10
Starting Inv
1 2 3 4

Forecast

Customer
orders

Projected on-
hand inventory

MPS

ATP
(uncommitted)
2. Prepare a master schedule for the following situation.
The forecast for next eight week is 50 units.
The MPS rule is to schedule production if the projected inventory on
hand is negative.
The production lot size is 75 units and no beginning inventory.

Week Customer Orders

1 52
2 35
3 20
4 12
Starting Inv
1 2 3 4 5 6 7 8

Forecast

Customer
orders
Projected on-
hand inventory
MPS

ATP
(uncommitted)
 Numericals
• Utilization and Efficiency.

• Capacity planning – Break-even volume, Total cost,

Profit, concept of indifference.

• Location planning – Alternatives draw graph, range,

Factor rating.

• Aggregate planning – Prepare an aggregate plan and its

cost, Minimum cost plan