MODULE 4

AGGREGATE PLANNING & MASTER SCHEDULING

AGGREGATE PLANNING
Seasonal variations in demand are quite common in many industries and public services, such as
air-conditioning, fuel, public utilities, police and fire protection, and travel. And these are just a few
examples of industries and public services that have to deal with uneven demands. Generally
speaking, organizations cannot predict exactly the quantity and timing of demands for specific
products or services months in advance under these conditions. Even so, they typically must assess
their capacity needs (e.g., labor, inventories) and costs months in advance in order to be able to
handle demand. How do they do it? They use a process often referred to as aggregate planning.

In the spectrum of production planning, aggregate planning is intermediate-range capacity planning

that typically covers a time horizon of 2 to 12 months, although in some companies it may extend to
as much as 18 months.

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

Organizations make capacity decisions on three levels: long term, intermediate term, and
short term.
Long-term decisions relate to product and service selection facility size and location, equipment
decisions, and layout of facilities. These long-term decisions essentially establish the capacity
constraints within which intermediate planning must function.
Intermediate decisions, as noted above, relate to general levels of employment, output, and
inventories, which in turn establish boundaries within which short-range capacity decisions must be
made.
Thus, short-term decisions essentially consist of deciding the best way to achieve desired results
within the constraints resulting from long-term and intermediate-term decisions. Short-term
decisions involve scheduling jobs, workers and equipment.

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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, and
• 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 Subcontracting
Overtime Backordering
Inventory levels
Back orders
Costs
Inventory carrying
Back orders
Hiring/firing
Overtime
Inventory changes
Subcontracting

AGGREAGTE 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
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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.
For instance, demand for bus transportation tends to be more intense during the morning and late
afternoon rush hours but much lighter at other times. Creating new demand for buses at other times
(e.g., trips by schools, clubs, and senior citizen groups) would make use of the excess capacity
during those slack times. Similarly, many fast-food restaurants are open for breakfast to use their
capacities more fully.

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. An increasing number of organizations view workers as assets rather than as variable
costs, and would not consider this approach.
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 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 workforce which gives 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: Many organizations regard a level workforce as very appealing as
changes in workforce size can be very costly, which involve hiring and laying-off costs, and there is
always the risk that there will not be a sufficient pool of workers with the appropriate skills when
needed. Such organization must resort to some combination of subcontracting, backlogging, and use
of inventories to absorb fluctuations in demand.

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Subcontracting will result in increased costs, less control over output, and perhaps quality
considerations.
Backlogs can lead to lost sales, increased record keeping, and lower levels of customer service.
Allowing inventories to absorb fluctuations can lead to storage facilities cost, and other costs related
to inventories.

Chase Demand Strategy: A chase demand strategy presupposes a great deal of ability and
willingness on the part of managers to be flexible in adjusting to demand. A major advantage of this
approach is that inventories can be kept relatively low, which can yield substantial savings for an
organization. A major disadvantage is the lack of stability in operations—the atmosphere is one of
dancing to demand’s tune. Also, when forecast and reality differ, morale can suffer, since it quickly
becomes obvious to workers and managers that efforts have been wasted.

Techniques for Aggregate Planning

1. Spreadsheet technique
2. Linear – Transportation Model technique

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 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.

AGGREGATE MASTER
PLANING DISSAGREGATION 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 and distribution.
• Evaluates impact of new orders
• Provides delivery dates for orders
• Deals with problems such as production delays, revising master schedule and 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)