RMIT Classification: Trusted

Operations Management

Week 8
Aggregate Planning and Master
Schedule

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Learning Objectives
You should be able to:
 Explain what aggregate planning is and how it is
useful
 Identify the variables decision makers have to work
with in aggregate planning
 Describe some of the strategies that can be used for
meeting uneven demand
 Describe some of the graphical and quantitative
techniques planners use
 Prepare aggregate plans and compute their costs

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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 utilise the
organisation’s resources to satisfy demand

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Overview of planning levels

Short Range Plan

Production lot size (Week 6)

Long Range Plan
Intermediate Plan
Order quantities (Week 6)
Product Design (Week 3)
Aggregate Planning
Machine loading (Week 10)
Process Design (Week 3) (Week 7)
Job assignments (Week 10)
Long term capacity (Chapter
5) Job sequencing (Week 10)

Work schedules (Week 10)

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The Planning Sequence

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Why Use Aggregate Planning

 Why do organizations need to do aggregate planning?
 Planning
 It takes time to implement plans
 Strategic
 Aggregation is important because it is not possible to predict
with accuracy the timing and volume of demand for individual
items
 Budgeting process
 Supply chain

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Demand and Supply

 Aggregate planners are concerned with
 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

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Aggregate Planning Strategies

Capacity = Demand
Proactive
 Alter demand to match capacity
Reactive
 Alter capacity to match demand
Mixed
 Some of each

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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

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Capacity Options
Hire and layoff workers
Overtime/slack time
Part-time workers
Inventories
Subcontracting

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Aggregate Planning Pure Strategies

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.
Use a combination of decision variables

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A typical demand pattern

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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

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Chase Approach
Capacities are adjusted to match demand
requirements over the planning horizon
 Advantages: Investment in inventory is low; Labor
utilization in high
 Disadvantages: The cost of adjusting output rates
and/or workforce levels

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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.

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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

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Some formula in Trial-and-Error Techniques

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Aggregate Planning Example 1

Planners for a company that makes several models of skateboards are about to
prepare an aggregate plan that will cover six periods using the following
information. 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. Prepare
an aggregate plan and determine its cost using the preceding information. Assume
a level output rate of 300 units (skateboards) per period with regular time (i.e.,
1,800/6=300). Note that the planned ending inventory is zero. There are 15
workers, and each can produce 20 skateboards per period.
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 per period
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Aggregate Planning Example

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

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Aggregate Planning Example

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

Total cost of aggregate plan: $4,700

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Aggregate Planning Example 2

After reviewing the plan developed in the preceding
example 1, planners have decided to develop an
alternative plan. They have learned that one person is
about to retire from the company. Rather than replace
that person, they would like to stay with the smaller
workforce and use overtime to make up for the lost
output. The reduced regular-time output is 280 units per
period. The maximum amount of overtime output per
period is 40 units. Develop a plan and compare it to the
previous one.

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Aggregate Planning Example

Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Output
Regular time 280 280 280 280 280 280 1680
Overtime --- --- 40 40 40 --- 120
Subcontract --- --- --- --- --- ---
Inventory
Output 2 Forecast 80 80 20 (80) (180) 80 0
Inventory
Beginning 0 80 160 180 100 0
Ending 80 160 180 100 0 0
Average 40 120 170 140 50 0 520
Backlog 0 0 0 0 80 0 80

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Aggregate Planning Example

Period 1 2 3 4 5 6 Total
Costs
Output
Regular time $560 $560 $560 $560 $560 $560 $3360
Overtime --- --- $120 $120 $120 --- $360
Subcontract --- --- --- --- --- ---
Hire/Layoff --- --- --- --- --- ---
Inventory $40 $120 $170 $140 $50 0 $520
Backlog $0 $0 $0 $0 $400 $0 $400
Total $600 $680 $850 $820 $1,130 $560 $4640

Total cost of aggregate plan: $4,640

Which plan should be chosen? Why?

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Disaggregation
Aggregate
Plan

Disaggregation

Master
Schedule

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Question

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