Chapter 11

Aggregate Planning
and
Master Scheduling
 Aggregate Planning
 Aggregate planning
 Intermediate-range capacity planning that
typically covers a time horizon of 2 to 18
months
 Useful for organizations that experience
seasonal, or other variations in demand
 Goal:
Achieve a production plan that will
effectively utilize the organization’s
resources to satisfy demand
The Planning levels (Sequence)

11-3
 Why Use Aggregate Planning
Why do organizations need to do aggregate planning?
 Planning
 It takes time to set & implement plans.
 Strategic
 Aggregation is important because it is not
possible to predict with accuracy the timing and
volume of demand for individual items.
 It is connected to the budgeting process.
 It can help synchronize flow throughout the supply
chain; it affects costs, equipment utilization;
employment levels; and customer satisfaction.
 Aggregation
 The plan must be in units of measurement that
can be understood by the firm’s non-operations
personnel
•Aggregate units of output per month
•Dollar value of total monthly output
•Total output by factory
•Measures that relate to capacity such as labor
hours
 Dealing with Variation
 Most organizations use rolling 3, 6, 9 and 12
month forecasts
 Forecasts are updated periodically, rather than
relying on a once-a-year forecast
 This allows planners to take into account any
changes in either expected demand or expected
supply and to develop revised plans
11-6
 Dealing with Variation
Strategies to counter variation:
 Maintain a certain amount of excess capacity to
handle increases in demand
 Maintain a degree of flexibility in dealing with
changes
 Hiring temporary workers
 Using overtime
 Wait as long as possible before committing to a certain
level of supply capacity.. (timing)
 Schedule products / services with known demands
first
 Wait to schedule other products until their demands
become less uncertain (more certain)
 Demand and Supply
 Aggregate planners are concerned with the …
 Demand quantity
If demand exceeds capacity, attempt to ..
achieve balance by altering capacity,
demand, or both
 Timing of demand
Even if demand and capacity are
approximately equal, planners still often
have to deal with uneven demand within
the planning period 11-8
 Aggregate Planning Inputs
Resources Costs
 Workforce/production  Inventory carrying
rates
 Back orders
 Facilities and equipment
 Hiring/firing
Demand forecast
 Overtime
Policies
 Inventory changes
 Workforce changes
 subcontracting
 Subcontracting
 Overtime
 Inventory levels/changes
 Back orders
 Aggregate Planning Outputs

 Total cost of a plan

 Projected levels of
 Output
 Employment
 Inventory
 Subcontracting
 Backordering
 Aggregate Planning Strategies
 Proactive
 Alter demand to match capacity

 Reactive
 Alter capacity to match demand

 Mixed
 Some of each
 Demand Options
 Pricing
 Used to shift demand from peak to off-peak
periods
 Price elasticity is important
 Promotion
 Advertising and other forms of promotion
 Back orders
 Orders are taken in one period and deliveries
promised for a later period
 New demand
 Supply Options
 Hire and layoff workers
 Overtime/slack time
 Part-time workers
 Inventories
 Subcontracting

11-13
Aggregate Planning Pure Strategies
 Level capacity strategy:
 Maintaining a steady rate of regular-time output.
 Meeting variations in demand by inventories.

 Chase demand strategy:

 Matching capacity to demand; the planned output
for a period is set at the expected demand for that
period.
 Meeting variations in demand by a combination of
options:
 overtime, part-time workers, subcontracting, and back
orders
 Chase Approach
 Capacities are adjusted to match demand
requirements over the planning horizon
 Advantages

 Investment in inventory is low

 Labor utilization is high

 Disadvantages

 The cost of adjusting output rates and/or workforce

levels
11-15
 Level Approach
 Capacities are kept constant over the planning
horizon
 Advantages
 Stable output rates and workforce

 Disadvantages
 Greater inventory costs
 Increased overtime and idle time
 Resource utilizations vary over time
 Techniques for Aggregate Planning
 General procedure:
1. Determine demand for each period
2. Determine capacities for each period
3. Identify
company or departmental policies that are
pertinent
4. Determine unit costs
5. Develop alternative plans and costs
6. Select
the plan that best satisfies objectives.
Otherwise return to step 5.
 Trial-and-Error Techniques
 Trial-and-error approaches consist of developing
simple table or graphs that enable planners to
visually compare projected demand
requirements with existing capacity
 Alternatives are compared based on their total
costs
 Disadvantage of such an approach is that it
does not necessarily result in an optimal
aggregate plan
11-18
AGGREGATE
PLANNING
 PLANNING HORIZON

long range
Intermediate
Short range
range

12 2
now years
months
 Long & short – term planning
Long-term planning short-term
planning

Product design Machine loading

capacity Job assignment

process Job sequencing

location Work scheduling

layout Production lot size

 AGGREGATE PLANNING
Aggregate planning relates between

 Long-term planning
(system design)
&
 short-term planning
(system operating & controlling)
 AGGREGATE PLANNING

 It is an intermediate – range capacity

planning.. Usually covers around 12
months.
 The goal of aggregate planning

 Is to:
establish a plan that will effectively
utilize the organization’s resources…
to satisfy the expected changing
demand.
DEMAND PROD. PLAN RESOURCES
 Decisions of aggregate planning

 output rates
 employment & inventory
 backorders & subcontracting
 The relationship between
Demand & Capacity

IF CAPACITY < DEMAND

 Use different long –term strategies to

modify capacity to absorb the extra
required demand.
 The relationship between
Demand & Capacity

IF CAPACITY > DEMAND

 Use intermediate range aggregate
planning for production to utilize the
extra available capacity efficiently &
effectively.
 AGGREGATE PLANNING

 AGGREGATION

Viewing the whole picture .. Focusing on

a group of similar products or services.

(for example TV sets regardless of the

model).
AGGREGATE PLANNING

demand supply

forecast capacity

Aggregate plan
 PLANNING SEQUENCE
Economic,
Corporate Aggregate
Competitive,
Strategies & political Demand
And policies conditions forecasts

Establishes production
Business Plan
& capacity strategies

Establishes production
Production Plan
capacity

Establishes schedules
Master Schedule
for specific products
 THE PURPOSE & SCOPE 0F
AGGREGATE PLANNING

 The main problem is how to balance ..

SUPPLY & DEMAND
through using the available capacity…

 This is why planners are concerned with :

QUANTITY & TIMING …
of expected demand.
 If the total expected demand for the
planning period is much different
from the available capacity …
(over the same period)..

 Alter capacity, or
 Demand, or
 Both of them.
 DEMAND OPTIONS

Demand can be changed through:

 Creating new demand
 Pricing
 Promotion
 backordering
 CAPACITY OPTIONS
 Hiring & firing (laying off) workers.
 Overtime & slack time.
 Part-time workers.
 Inventories.
 Subcontracting.
 BASIC STRATEGIES
FOR MEETING UNEVEN DEMAND

 Maintain a level workforce.

 Maintain a steady output rate.
(INV, BL (BO) , SC)
 Match demand period by period.
(dancing to demand’s tune)
(Hiring & firing, OT , SC)
 Use a combination of decision variables.
 CHANGING OUTPUT
Demand
demand
production

Normal t
Capacity
 STABLE OUTPUT
Demand
demand
production

Normal t
Capacity
 CHOOSING A STRATEGY

 Choosing a strategy must consider …

both of :
The policy &
the cost of applying it.
 AS A RULE:

Aggregate planning seeks to match …

SUPPLY & DEMAND
within the constraints
imposed by policies/ agreements
& at minimum cost.
 TECHNIQUES FOR
AGGREGATE PLANNING

 Informal techniques (trial & error)

 Mathematical techniques. (L.P.)
A general procedure for aggregate planning
 Determine demand (for each period).
 Determine capacities for each period.
( RT, OT, SC)
 Identify the organizational policies..
( 5% safety stock, stable labor).
 Determine the unit cost.
(RT, OT, SC, Inv., H & F).
 Develop alternative plans & their costs.
 Select the one that satisfies the objectives
 DISAGGREGATION
(MASTER SCHEDULE)

 The result of disaggregating an aggregate

plan shows the QUANTITY & TIMING of
specific end items for a schedule horizon.
 (1) STRATEGY OF CHANGING
THE SIZE OF WORKFORCE
EXAMPLE:

Given the following data:

Month Jan. Feb. Mar. Apr. May Jun.
Forecast 920 960 880 920 800 920
 Beginning inventory = 120 units.
 The size of workforce= 160 workers.
 Each worker is working for 50 hours /
month.
 Each unit requires 10 working hours.
 The hiring cost = $ 200 / worker.
 The firing cost = $ 400 / worker.
 The regular time production cost = $
500/ unit.

 Calculate the costs of applying the

strategy of changing the size of
workforce.
OR
CALCULATE THE COSTS OF SATISFYING
DEMAND
 The solution procedures

DEMAND

PRODUCTION

CAPACITY
 The solution procedures
1. Determine the (forecast) demand.
2. Determine the production strategy…
constant or changing????…
i.e… the relationship between
demand (forecast) and
supply ( production )
changing production strategy
3. Determine the production rates or
quantities , for each period we have to
produce the same quantity demanded…
i.e….
4. Determine the relationship between the
production and the capacity…
the required capacity
i.e…. Transform the planned (required)
units or production into the planned or
required number of workers through
using the required (planned) hours.
required units

required hours

required workers
4. Compare between the required workers
and the available workers for each
period & decide whether to hire or fire
workers.

If required > available ….. Hire

If required < available ….. Fire
month Jan. Feb. Mar. Apr. May Jun. Total
Demand 920 960 880 920 800 920
month Jan. Feb. Mar. Apr. May Jun. Total
Demand 920 960 880 920 800 920
Beg. Inv. 120 - - - - -
month Jan. Feb. Mar. Apr. May Jun. Total
Demand 920 960 880 920 800 920
Beg. Inv. 120 - - - - -
Req. units 800 960 880 920 800 920
month Jan. Feb. Mar. Apr. May Jun. Total
Demand 920 960 880 920 800 920
Beg. Inv. 120 - - - - -
Req. units 800 960 880 920 800 920
Req. hours 8000 9600 8800 9200 8000 9200
month Jan. Feb. Mar. Apr. May Jun. ∑
Demand 920 960 880 920 800 920
Beg. Inv. 120 - - - - -
Req. units 800 960 880 920 800 920
Req. hours 8000 9600 8800 9200 8000 9200
(800X 10)

Req. 8000÷50 =
160
9600
÷50
8800÷
50
9200 8000
÷50= ÷50=
9200
÷50=
workers =192 =176 184 160 184
month Jan. Feb. Mar. Apr. May Jun. Total
Demand 920 960 880 920 800 920
Beg. Inv. 120 - - - - -
Req. units 800 960 880 920 800 920
Req. hours 8000 9600 8800 9200 8000 9200

Req. workers 8000

÷50
9600
÷50
8800
÷50
9200
÷50=
8000
÷50=
9200
÷50=
= 160 =192 =176 184 160 184
Avl. workers 160 160 192 176 184 160
month Jan. Feb. Mar. Apr. May Jun. Tot
al
Demand 920 960 880 920 800 920
Beg. Inv. 120 - - - - -
Req. units 800 960 880 920 800 920
Req. hours 8000 9600 8800 9200 8000 9200

Req. workers 8000

÷50 =
9600
÷50
8800
÷50
9200
÷50
8000
÷50
9200
÷50
160 =192 =176 =184 =160 =184
Avl. workers 160 160 192 176 184 160
Changes 160 192 176 184 160 184
- - - - - -
160 160 192 176 184 160
= = = = = =
0 32 )16( 8 (24( 24
month Jan. Feb. Mar. Apr. May Jun. Total
Demand 920 960 880 920 800 920
Beg. Inv. 120 - - - - -
Req. units 800 960 880 920 800 920
Req. hours 8000 9600 8800 9200 8000 9200

Req. workers 8000

÷50
9600
÷50
8800
÷50
9200
÷50=
8000
÷50=
9200
÷50=
= 160 =192 =176 184 160 184
Avl. workers 160 160 192 176 184 160
Changes 160 -
160 =
192 -
160 =
176 -
192 =
184 -
176 =
160 -
184 =
184 -
160 =
- 32 (16) 8 (24( 24
Hiring - 32 - 8 - 24
Firing - - 16 - 24 -
The costs of applying the strategy of
changing the size of work force:
R.T. 800
X
960
X
880
X
920
X
800
X
920
X
(regular time ) 500= 500= 500 500 500 500=
($500 / U)
The costs of applying the strategy of
changing the size of work force:
R.T. COST 800
X
960
X
880
X
920
X
800
X
920
X
(regular time ) 500= 500= 500 500 500 500=
($500 / U)

H.C. 32
X
8
X
24
X
(hiring cost) 200 = 200 = 200 =
($200 / W
The costs of applying the strategy of
changing the size of work force:
R.T. COST 800
X 50=
960
X
880X
50
920
X
800
X
920
X
(regular time ) 50= 50 50 50=
($50/ U)

H.C. 32
X
8
X
24
X
(hiring cost) 200 = 200 = 200 =
($200 / W)
F.C. 16
X
24
X
(firing cost) 400 = 400 =
)$ 400 / W)
The costs of applying the strategy of
changing the size of work force:
R.T. 800
X
960
X
880
X
920
X
800
X
920
X
(regular time ) 500= 500= 500 500 500 500=
($500 / U)

H.C. 32
X
8
X
24
X
(hiring cost) 200 = 200 = 200 =
($200 / U)
F.C. 16
X
24
X
(firing cost) 400 = 400 =
)$ 400 / U)
Total costs
 STRATEGY OF USING

OVERTIME & SUBCONTRACTING

 STRATEGY OF USING
OVERTIME & SUBCONTRACTING
EXAMPLE (2)

Given the following data:

Month Jan. Feb. Mar. Apr. May Jun.
Forecast 920 960 880 920 800 920
 Beginning inventory = 120 units.
 The size of workforce= 160 workers.
 Each worker works for 50 hours /month.
 Each unit requires 10 working hours.
 The maximum overtime allowed to be used
= 10% of the regular production hours.
 The overtime cost = $ 7/hr.
 Subcontracting cost = $ 90 / unit.
 Calculate …..
Calculate …..
the costs of satisfying demand.
or
Calculate the cost of applying this strategy.
( OT & SC )
 Regular time (in hours) =

160 workers
X
50 hours
(monthly working hrs. per worker(
=

8000 working hours

 Since … The overtime
= 10 % of the regular time

The maximum allowed overtime

=
8000 X 10 %
=
800 hours / month
Demand

Req. units
Req. hours
Regular time

O.T.

S.C. (U.)
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Beg. Inv.
Req. units
Req. hours
Regular time
Extra req. t.
O.T.
S.C. (hr.)
S.C. (U.)
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Beg. Inv. 120 - - - - -
Req. units
Req. hours
Regular time
Extra req. t.
O.T.
S.C. (hr.)
S.C. (U.)
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Beg. Inv. 120 - - - - -
Req. units 800 960 880 920 800 920
Req. hours
Regular time
Extra req. t.
O.T.
S.C. (hr.)
S.C. (U.)
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Beg. Inv. 120 - - - - -
Req. units 800 960 880 920 800 920
Req. hours 8000 9600 8800 9200 8000 9200

R.T.
Extra time
O.T.
S.C. (hr.)
S.C. (U.)
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Beg. Inv. 120 - - - - -
Req. units 800 960 880 920 800 920
Req. hours 8000 9600 8800 9200 8000 9200

R.T. 8000 8000 8000 8000 8000 8000

Extra time
O.T.
S.C. (hr.)
S.C. (U.)
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Beg. Inv. 120 - - - - -
Req. units 800 960 880 920 800 920
Req. hours 8000 9600 8800 9200 8000 9200

R.T. 8000 8000 8000 8000 8000 8000

Extra time - 1600 800 1200 - 1200

O.T.
S.C. (hr.)
S.C. (U.)
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Beg. Inv. 120 - - - - -
Req. units 800 960 880 920 800 920
Req. hours 8000 9600 8800 9200 8000 9200

R.T. (available) 8000 8000 8000 8000 8000 8000

Extra time - 1600 800 1200 - 1200

O.T. - 800 800 800 800

S.C. (hr.)
S.C. (U.)
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Beg. Inv. 120 - - - - -
Req. units 800 960 880 920 800 920
Req. hours 8000 9600 8800 9200 8000 9200

R.T. 8000 8000 8000 8000 8000 8000

Extra time - 1600 800 1200 - 1200

O.T. - 800 800 800 800

S.C. (hr.) - 800 - 400 - 400

S.C. (U.)
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Beg. Inv. 120 - - - - -
Req. units 800 960 880 920 800 920
Req. hours 8000 9600 8800 9200 8000 9200

R.T. 8000 8000 8000 8000 8000 8000

Extra time - 1600 800 1200 - 1200

O.T. - 800 800 800 800

S.C. (hr.) - 800 - 400 - 400

S.C. (U.) - 80 - 40 - 40
THE COST OF APPLYING THE STRATEGY OF
OVERTIME & SUBCONTRACTING
R.T. 8000 X 8000 8000 8000 8000 8000
3= X3= X3= X3= X3= X3=
($ 3 / hr.) 24000 24000 24000 24000 24000 24000

O.T. 800 800 800 800

X5= X5= X 5= X5=
($ 5/ hr 4000 4000 4000 4000

S.C. 80X 40 X 40 X
90= 90 = 90 =
($ 90 / U) 3600 3600

Total costs
 STRATEGY OF USING
INVENTORY & BACKORDERING
(3) STRATEGY OF INVENTORY
& BACKORDERING
EXAMPLE (3)

Given the following data:

Month Jan. Feb. Mar. Apr. May Jun.
Forecast 920 960 880 920 800 920
 Beginning inventory = 120 units.
 The size of workforce= 160 workers.
 Each worker works for 50 hours /month.
 Each unit requires 10 working hours.
 The inventory holding cost = $ 2 /unit/
month.
 Backordering cost = $ 7 / unit.

 Calculate the costs of satisfying demand

OR
Calculate the cost of applying this strategy.
( inv. & BO )
 The solution

 The production strategy :

constant or changing?
Constant production rate
 The monthly production quantity = ???
the average demand rate
Σ demand ÷ no. of periods
TAKING INTO CONSIDERATION …
THE BEGINNING INVENTORY
 The constant monthly production rate =
NET AVERAGE DEMAND

(Σ demand - Beg. Inv.) ÷ no. of periods

(920 + 800 + 920+ 880 + 960 + 920) - 120

÷ 6 = 880
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Planned
prod.
Beg. Inv.
End. Inv.
Avg. Inv.
Backordering
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Planned 880 880 880 880 880 880
prod.
Beg. Inv. 120
End. Inv.
Avg. Inv.
Backordering
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Planned 880 880 880 880 880 880
prod.
Beg. Inv. 120
End. Inv. 880+120
-920= 80

Avg. Inv.
Backordering
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Planned 880 880 880 880 880 880
prod.
Beg. Inv. 120
End. Inv. 880+120
-920= 80

Avg. Inv. 120+80

÷2 = 100

Backordering -
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Planned 880 880 880 880 880 880
prod.
Beg. Inv. 120 80
End. Inv. 880+120
-920= 80
880+80
-960=0

Avg. Inv. 120+80

÷2 = 100
80+0
÷2 = 40

Backordering - -
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Planned 880 880 880 880 880 880
prod.
Beg. Inv. 120 80 0
End. Inv. 880+120
-920= 80
880+80
-960=0
880+ 0
-880=0

Avg. Inv. 120+80

÷2 = 100
80+0
÷2 = 40
0+0
÷2 = 0

Backordering - - -
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Planned 880 880 880 880 880 880
prod.
Beg. Inv. 120 80 0 0
End. Inv. 880+120
-920= 80
880+80
-960=0
880+ 0
-880=0
880+ 0-
-920=
-40

Avg. Inv. 120+80

÷2 = 100
80+0
÷2 = 40
0+0
÷2 = 0
0+0
÷2 = 0

Backordering - - - 40
month Jan. Feb. Mar. Apr. May Jun. Total

Demand 920 960 880 920 800 920

Planned 880 880 880 880 880 880
prod.
Beg. Inv. 120 80 0 0 - 40 40
End. Inv. 880+120
-920= 80
880+80
-960=0
880+ 0
-880=0
880+ 0-
-920=
880-40
-800=
880+40
-920=
-40 40 0

Avg. Inv. 120+80

÷2 = 100
80+0
÷2 = 40
0+0
÷2 = 0
0+0
÷2 = 0
0+40
÷2 = 20
40+0
÷2 = 20

Backordering - - - 40 - -
 (3) The cost of applying
INVENTORY & BACKORDERING
R.T. 8800 8800 8800 8800 8800 8800 Total
($ 3 / hr.) X3= X3= X3= X3= X3= X3=
26400 26400 26400 26400 26400 26400

Inv, cost 100 40 0 0 20 20

( $ 2 / u.) X2= X2= X2= X2
=
B.O. cost 40
X
($ 7 / U.) 7=

TOTAL
COSTS
Example: Solved Problem
PERIOD 1 2 3 4 5 6 7 8 9 TOTAL
FORE 190 230 260 280 210 170 160 260 180 1940
OUTPUT
Regular 210 210 210 210 210 210 210 210 210 1890
Overtime 0
Output-Fore=Reg+OT+Sub-Fore
Subcontract. 20 20 10 50
Output-Fore. 40 0 -40 -70 0 40 50 -50 30
BegInv(t)=EngInv(t-1)
INVENTORY
Beg. Inventory 0 40 EndInv(t)=BegInv(t)+(Output-Fore)-BO(t-1)
40 0 0 0 0 20 if 0positive, or
End. Inventory 40 40 0 0 0 0 20 0 0 0
AvgInv(t)=[BegInv(t)+EndInv(t)]
Avg. Inventory 20 40 20 0 0 0 10
÷ 2 10 0 100
Backorder 0 0 0 70 70 30 0 30 0 200
BO(t)=-BegInv(t)-(Output-Fore)+BO(t-1) if positive, or 0
UNIT COSTS: TOTAL COSTS:
Regular = $6.00 /unit Regular = 11,340 TOTAL = 14,240
Overtime = $9.00 /unit Overtime = 0
Subcon. = $8.00 /unit Subcon. = 400
Holding = Total
$5.00 Holding
/unit/period Cost = Holding = 500
Backorder = Total AvgInv *
$10.00 /unit/period Backorder = 2,000
94
Holding/unit/period by Cheng Li for use with
Stevenson 9th ed.