Aggregate Planning
and Master
Scheduling
You should be able to:
LO 11.1 Explain what aggregate planning is and how it is useful
LO 11.2 Identify the variables decision makers have to work with in
aggregate planning
LO 11.3 Describe some of the strategies that can be used for meeting
uneven demand
LO 11.4 Describe some of the graphical and quantitative techniques
planners use
LO 11.5 Prepare aggregate plans and compute their costs
LO 11.6 Describe the master scheduling process and explain its
importance
LO 11.7 Disaggregate an aggregateplan
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
Sales and operations planning (S&OP) is an integrated
business management process through which the
executive/leadership team continually achieves focus, alignment
and synchronization among all functions of the organization.
LO 11.1
LO 11.1
Why do organizations need to do aggregate planning?
Planning
It takes time to implementplans
Strategic
Aggregation is important because it is not possible to predict
with accuracy the timing and volume of demand for individual
items
It isconnected to the budgeting process
It can help synchronize flow throughout the supply chain; it affects
costs, equipment utilization; employment levels; and customer
satisfaction
LO 11.1
The plan must be in units of measurement that can be
understood by the firm’s non-operations personnel
• Aggregate units of outputper month
• Dollar value of total monthlyoutput
• Total output by factory
• Measures that relate to capacity such as labor hours
LO 11.1
Most organizations use rolling 3, 6, 9 and 12
month forecasts
Forecasts are updated periodically, rather thanrelying
on a once-a-yearforecast
This allows planners to take into account any changes in
either expected demand or expected supply and to
develop revised plans
Strategies to countervariation:
Maintain a certain amount of excess (buffer) capacity to handle
increases in demand
Maintain a degree of flexibility in dealing with changes
Hiring temporary / retired workers
Using overtime / under (idle)time
Wait as long as possible before committing to a certain level of
supply capacity
Schedule products or services with known demands first
Wait to schedule other products until their demands become
less uncertain
Forecast of
Develop a Update the
aggregate
general plan to aggregate plan
demand for the
meet demand periodically
intermediate
requirements (e.g., monthly)
range
11-9
Aggregate planners are concerned with the
Demand quantity
If demand exceeds capacity, attempt to achieve balance by
altering capacity, demand, orboth
Timing of demand
Even if demand and capacity are approximately equal, planners
still often have to deal with uneven demand within the planning
period
LO 11.2
Resources Costs
Workforce/production rates Inventorycarrying
Facilities and equipment Back orders
Demand forecast Hiring/firing
Overtime
Policies
Inventory changes
Workforce changes
subcontracting
Subcontracting
Overtime
Inventory levels/changes
Back orders
LO 11.2 11-11
Total cost of a plan
Projected levels of
Inventory
Output
Employment
Subcontracting
Backordering
LO 11.2
Proactive
Alter demand to matchcapacity
Reactive
Alter capacity to matchdemand
Mixed
Some of each
LO 11.2
Pricing
Used to shiftdemand 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 laterperiod
New demand
Complimentary products / services forlevel
/ better utilizations of resources
LO 11.2 11-14
Hire and layoff workers
Overtime/slack time
Part-time workers
Inventories
Subcontracting
LO 11.2
1. Maintain a level workforce (Levelcapacity)
2. Maintain a steady output rate (Level capacity)
3. Match demand period by period (Chasedemand)
4. Use a combination of decision variables (Mixed)
LO 11.3
Level capacity strategy:
Maintaining a steady rate of regular-time output while
meeting variations in demand by a combination of
options:
inventories, overtime, part-time workers, subcontracting,and
back orders
Chase demand strategy:
Matching capacity to demand; the planned output for a
period is set at the expected demand for that period.
LO 11.3
Capacitiesare adjusted to match demand
requirements over the planninghorizon
Advantages
Investment in inventory is low
Labor utilization in high
Disadvantages
The cost of adjusting output rates and/or workforce levels
LO 11.3
Capacities are kept constant over the planning
horizon
Advantages
Stable output rates andworkforce
Disadvantages
Greater inventory costs
Increased overtime and idletime
Resource utilizations vary overtime
LO 11.3
11-20
General procedure:
1. Determine demand for eachperiod
2. Determine capacities for eachperiod
3. Identify company or departmental policies that are pertinent
4. Determine unit costs that are relevant
5. Develop alternative plans and calculate cost for each plan
6. Select the plan that best satisfies objectives (say minimum cost).
Otherwise return to step5.
LO 11.4
Trial-and-error approaches consist of developing simple
table or graphs that enable planners to visually compare
projected demand requirements with existingcapacity
Alternatives are compared based on theirtotal costs
Disadvantage of such an approach is that it does not
necessarily result in an / THE optimal aggregate plan
A heuristic technique, often called simply a heuristic, is any
approach to problem solving, learning, or discovery that
employs a practical method not guaranteed to be optimal
or perfect, but sufficient for the immediate goals.
LO 11.4
LO 11.4 11-23
Linear programming models
Simulation models
Computerized models that can be tested underdifferent
scenarios to identify acceptable solutions to problems
LO 11.4
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Costs
Output
Regular time = $2 per skateboard
Overtime = $3 per skateboard
Subcontract = $6 per skateboard
Inventory = $1 per skateboard per period on average inventory
Back orders = $5 per skateboard perperiod
Planners for a company that makes several models of skateboards are about to
prepare an aggregate plan that will cover six periods.
They want to evaluate a plan that calls for a steady rate of regular-time output,
mainly using inventory to absorb the uneven demand but allowing some backlog.
Overtime and subcontracting are not used because they want steady output.
They intend to start with zero inventory on hand in the first period.
LO 11.5
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Output
Regular time 300 300 300 300 300 300 1,800
Overtime --- --- --- --- --- ---
Subcontract --- --- --- --- --- ---
Inventory
Output 2 Forecast 100 100 0 (100) (200) 100 0
Inventory
Beginning 0 100 200 200 100 0
Ending 100 200 200 100 0 0
Average 50 150 200 150 50 0 600
Backlog 0 0 0 0 100 0 100
LO 11.5
Period 1 2 3 4 5 6 Total
Costs
Output
Regular time $600 $600 $600 $600 $600 $600 $3,600
Overtime --- --- --- --- --- ---
Subcontract --- --- --- --- --- ---
Hire/Layoff --- --- --- --- --- ---
Inventory $50 $150 $200 $150 $50 $0 $600
Backlog $0 $0 $0 $0 $500 $0 $500
Total $650 $750 $800 $750 $1,150 $600 $4,700
LO 11.5
Hospitals:
Aggregate planning used to allocate funds, staff, and supplies to meet the
demands of patients for their medicalservices
Airlines:
Aggregate planning in this environment is complex due to the number of
factors involved
Capacity decisions must take into account the percentage of seats to be
allocated to various fare classes in order to maximize profit or yield
Restaurants:
Aggregate planning in high-volume businesses is directed toward
smoothing the service rate, determining workforce size, and managing
demand to match a fixed capacity
Can use inventory; however, it is perishable
LO 11.6
The resulting plan in services is a time-phased projection
of service staff requirements
Aggregate planning in manufacturing and servicesis
similar, but there are some key differences related to:
1. Demand for service can be difficult to predict
2. Capacity availability can be difficult to predict
3. Labor flexibility can be an advantage in services
4. Services occur when they are rendered
LO 11.6
An approach to maximizing revenue by using a strategy of
variable pricing; prices are set relative to capacity availability
During periods of low demand, price discountsare
offered
During periods of peak demand, higher prices are
charged
Users of yield management include
Airlines, restaurants, hotels, restaurants
Aggregate
Plan
Disaggregation
Master
Schedule
LO 11.7 11-31
Master schedule:
The result of disaggregating an aggregate plan
Shows quantity and timing of specific end items for a
scheduled horizon
A master production schedule (MPS) is a plan for
individual commodities to be produced in each time
period such as production, staffing, inventory, etc. It is
usually linked to manufacturing where the planindicates
when and how much of each product will be demanded.
LO 11.7
Disaggregating the aggregate plan.
For example, a lawn mower manufacturer may have an aggregate plan that calls for 200
riding mowers in January, 300 in February, and 400 in March.
The heart of production planning andcontrol
It determines the quantity needed to meet demand from all sources
It interfaces with
Marketing
Capacity planning
Production planning
Distribution planning
Provides senior management with the ability to determine whether
the business plan and its strategic objectives will be achieved
LO 11.7
Master Scheduler
The duties of the master scheduler generally include:
• Evaluating the impact of new orders.
• Providing delivery dates for orders.
• Dealing with the problems
LO 11.7
The master production schedule (MPS) is one of the
primary outputs of the master schedulingprocess
Once a tentative MPS has been developed, it must be validated
Rough cut capacity planning (RCCP) is a tool used in
the validation process
Approximate balancing of capacity and demand to test the
feasibility of a masterschedule
Involves checking the capacities of production and warehouse
facilities, labor, and vendors to ensure no gross deficiencies exist
that will render the MPSunworkable
LO 11.7
Period
1 2 3 4 5 6 7 8 9
“frozen” “slushy” “liquid”
(firm or somewhat (open)
fixed) firm
LO 11.7
Inputs Outputs
Beginning inventory
Projected inventory
Master
Forecast Scheduling Master production schedule
Uncommitted inventory
Customer orders
LO 11.7
A company that makes industrial pumps wants to prepare a master
production schedule for June and July. Marketing has forecasted
demand of 120 pumps for June and 160 pumps for July. These have
been evenly distributed over the four weeks in each month: 30 per
week in June and 40 per week in July
LO 11.8
LO 11.8
When the projected on-hand inventory becomes negative, this is a
signal that production will be needed to replenish inventory.
Suppose that a production lot size of 70 pumps is used, so that
whenever production is called for, 70 pumps will be produced.
Inventory
from
Previous Inventory (70) Projected
Week Week Requirements before MPS MPS Inventory
1 64 33 31 31
2 31 30 1 1
3 1 30 -29 + 70 = 41
4 41 30 11 11
5 11 40 -29 + 70 = 41
6 41 40 1 1
7 1 40 -39 + 70 = 31
8 31 40 -9 + 70 = 61
LO 11.8
LO 11.8
LO 11.8
