Chapter 11

Aggregate Planning and Master Scheduling

Chapter 11: 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 and some of the possible strategies they can use

Describe some of the graphical and quantitative techniques planners use

Prepare aggregate plans and compute their costs Describe the master scheduling process and explain its

importance

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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:

o Achieve a production plan that will effectively utilize the organization’s resources to satisfy demand

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Sales and Operations Planning

Some organizations use the term sales operations and planning rather than aggregate planning Sales and operation planning

o Intermediate-range planning decisions to balance supply and demand, integrating financial and operations planning

o Since the plan affects functions throughout the organization, it is typically prepared with inputs from sales, finance, and operations

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Overview of Planning Levels

Long-Range Plans

Long-term capacity} 5Location} 8Layout} 6Product design} 4Work system design} 7

Intermediate Plans

(This Chapter)General levels of:• Employment• Output•Finished-goods inventories•Subcontracting•Backorders

Short-Range Plans

Detailed plans:• Production lot size}

13• Order quantities} 13• Machine loading} 16• Job assignments} 16• Job sequencing} 16• Work schedules} 16

Overview of Planning Levels (chapter numbers shown)

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The Planning Sequence

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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

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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

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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

o Hiring temporary workerso Using overtime

Wait as long as possible before committing to a certain level of supply capacityo Schedule products or services with known demands firsto Wait to schedule other products until their demands

become less uncertain

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Overview of Aggregate Planning

Forecast of aggregate

demand for the intermediate

range

Develop a general plan to meet demand requirements

Update the aggregate plan

periodically (e.g., monthly)

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Aggregate Planning Inputs

Resources Workforce/production rates Facilities and equipment

Demand forecast Policies

Workforce changes Subcontracting Overtime Inventory levels/changes Back orders

Costs Inventory carryingBack ordersHiring/firingOvertime Inventory changessubcontracting

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Aggregate Planning Outputs

Total cost of a plan Projected levels of

Inventory Output Employment Subcontracting Backordering

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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 period11-13

Supply 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: o 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.

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Uneven Demand and Two Strategies:

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Chase Approach

Capacities are adjusted to match demand requirements over the planning horizon Advantages

o Investment in inventory is lowo Labor utilization in high

Disadvantageso The cost of adjusting output rates and/or workforce

levels

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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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Workers and inventory

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Estimating Cost

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Techniques for Aggregate Planning

General procedure: Determine demand for each period Determine capacities for each period Identify company or departmental policies that

are pertinent Determine unit costs Develop alternative plans and costs 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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Trial-and-Error Technique Assumptions

The regular output capacity is the same in all periods Cost is a linear function composed of unit cost and number

of units Plans are feasible All costs are associated with a decision option can be

represented by a lump sum Cost figures can be reasonably estimated and are constant

for the planning period Inventories are built up and drawn down at a uniform rate

throughout each period Backlogs are treated as if they exist the entire period

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Cumulative Graph

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Mathematical Techniques

Linear programming models Simulation models

Computerized models that can be tested under different scenarios to identify acceptable solutions to problems

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Aggregate Planning in Services Hospitals:

Aggregate planning used to allocate funds, staff, and supplies to meet the demands of patients for their medical services

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

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Aggregate Planning in Services

The resulting plan in services is a time-phased projection of service staff requirements

Aggregate planning in manufacturing and services is similar, but there are some key differences related to: Demand for service can be difficult to predict Capacity availability can be difficult to predict Labor flexibility can be an advantage in services Services occur when they are rendered

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Disaggregation

AggregatePlan

Disaggregation

MasterSchedule

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Disaggregating the Aggregate Plan

Master schedule: The result of disaggregating an aggregate plan Shows quantity and timing of specific end items

for a scheduled horizon

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Master Scheduling

The heart of production planning and control It determines the quantity needed to meet demand

from all sources It interfaces with

o Marketingo Capacity planningo Production planningo Distribution planning

Provides senior management with the ability to determine whether the business plan and its strategic objectives will be achieved

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The Master Scheduler

The master scheduler’s duties: Evaluating the impact of new orders Providing delivery dates for orders Deals with problems

o Evaluating the impact of production or delivery delayso Revising master schedule when necessary because of

insufficient supplies or capacityo Bring instances of insufficient capacity to the attention

of relevant personnel so they can participate in resolving conflicts

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Time Fences

Period

“frozen”(firm orfixed)

“slushy”somewhat

firm

“liquid”(open)

1 2 3 4 5 6 7 8 9

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The Master Scheduling Process

Beginning inventory

Forecast

Customer orders

Inputs Outputs

Projected inventory

Master production schedule

Uncommitted inventory

MasterProductionSchedule

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Master Scheduling Process

The master production schedule (MPS) is one of the primary outputs of the master scheduling process 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 master schedule Involves checking the capacities of production and

warehouse facilities, labor, and vendors to ensure no gross deficiencies exist that will render the MPS unworkable

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MPS – Forecasts and Customer Orders

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MPS – Projected On Hand

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Determining MPS and Projected On Hand

Week

Inventory from

Previous Week Requirements

Inventory before MPS

(70)MPS

Projected 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

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Adding MPS and Projected On Hand to the MPS

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Available-to-Promise

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