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Aggregate Planning and Master Scheduling

Chapter 11

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Chapter 11: Learning Objectives

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 aggregate plan

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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

Aggregate Planning

LO 11.1

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The Planning Sequence

LO 11.1

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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

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

Why Use Aggregate Planning

LO 11.1

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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

Aggregation

LO 11.1

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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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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

Schedule products or services with known demands first

Wait to schedule other products until their demands become less uncertain

Dealing with Variation (cont.)

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Overview of Aggregate Planning

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Forecast of aggregate demand for the intermediate range

Develop a general plan to meet demand requirements

Update the aggregate plan periodically (e.g., monthly)

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

LO 11.2

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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 carrying

Back orders

Hiring/firing

Overtime

Inventory changes

Subcontracting

LO 11.2

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Total cost of a plan

Projected levels of

Inventory

Output

Employment

Subcontracting

Backordering

Aggregate Planning Outputs

LO 11.2

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Proactive

Alter demand to match capacity

Reactive

Alter capacity to match demand

Mixed

Some of each

Aggregate Planning Strategies

LO 11.2

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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

LO 11.2

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Supply Options

Hire and layoff workers

Overtime/slack time

Part-time workers

Inventories

Subcontracting

LO 11.2

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Prominent Aggregate Planning Strategies

Maintain a level workforce

Maintain a steady output rate

Match demand period by period

Use a combination of decision variables

LO 11.3

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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

Aggregate Planning Pure Strategies

LO 11.3

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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

LO 11.3

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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

Level Approach

LO 11.3

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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.

Techniques for Aggregate Planning

LO 11.4

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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

LO 11.4

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Cumulative Graph

LO 11.4

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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

LO 11.4

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Aggregate Planning Example

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

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

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Aggregate Planning Example (cont.)

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

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Aggregate Planning Example (cont.)

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

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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

LO 11.6

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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

Aggregate Planning in Services (cont.)

LO 11.6

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Yield management

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 discounts are offered

During periods of peak demand, higher prices are charged

Users of yield management include

Airlines, restaurants, hotels, restaurants

Yield Management

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Disaggregation

Aggregate

Plan

Disaggregation

Master

Schedule

LO 11.7

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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

LO 11.7

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The heart of production planning and control

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

Master Scheduling

LO 11.7

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Time Fences

Period

“frozen” (firm or fixed)

“slushy” somewhat firm

“liquid” (open)

1	2	3	4	5	6	7	8	9

LO 11.7

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The Master Scheduling Process

Beginning inventory

Forecast

Customer orders

Inputs

Outputs

Projected inventory

Master production schedule

Uncommitted inventory

Master

Scheduling

LO 11.7

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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

The Master Scheduling Process (cont)

LO 11.7

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MPS – Forecasts and Customer Orders

LO 11.8

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MPS – Projected On Hand

LO 11.8

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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

LO 11.8

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Adding MPS and Projected On Hand to the MPS

LO 11.8

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Available-to-Promise

LO 11.8

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