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