Chapter 13: Aggregate Planning

Overview
This chapter explains business, sales and operations planning. The different types of
aggregate planning strategies are introduced and discussed. Next, the options for
changing demand and capacity are presented. The various strategies are then evaluated in
terms of costs and impacts on the various business functions. The differences in
aggregate planning for services and manufacturing are discussed.
Next, the chapter explains the role and organizational linkages of master production
scheduling. The objectives of master production scheduling are presented. The
procedure for developing a master production schedule (MPS) is explained. The MPS is
then used to perform rough-cut capacity planning in order to find an authorized MPS.
Finally, we learn about available-to-promise quantities and how to deal with changes in
the MPS later in the process.
Answers to Discussion Questions in Textbook
1. Explain the importance of the strategic business plan.
The strategic business plan is the long-term strategy in terms of revenue, cost and
profit objectives. It is important because it is the input into the sales and operations
plans.
2. Describe sales and operations planning in terms of its purpose, components, and
frequency.
Sales planning involves decisions concerning the markets served, customer service
levels, competitive priorities, profit margins and market share in order to achieve the
objectives of the business plan. Sales planning is conducted every 6 to 18 months
depending on the firms choice of planning period.
Operations planning involves decisions concerning the aggregate production rate,
staffing levels, inventory levels, backorders and use of overtime, undertime,
subcontracting, hiring and firing that is authorized to support the sales or marketing
plan. Operations planning is conducted every 6 to 18 months depending on the firms
choice of planning period, but may be updated more frequently.
3. Define the aggregate plan.
The aggregate or production plan identifies resources needed. The resource decisions
are the aggregate production rate, staffing plan and inventory policies.
4. Explain why we use an aggregate or composite product when developing the
aggregate plan.

A composite product is used when developing the aggregate plan in order to minimize
the level of detail in the plan. In addition, aggregate plans are usually more accurate
than individual product plans since aggregate forecasts of demand are more accurate
than forecasts of individual product demands.
5. Compare and contrast the level and chase aggregate plans.
These plans are similar since both plans ensure that demand is met. However, they
meet demand in different ways. A level plan maintains the same workforce size and
equipment, thus producing the same amount of product each time period. This causes
inventory to increase when demand is below average and decrease when demand is
above average. A chase plan adjusts the size of the workforce and equipment
capacities in order to meet the demand rate for each time period. In this plan,
inventory is not used to support the plan. Instead, people are hired and fired as
needed to deal with changes in demand.
6. Describe the different demand-based options used in aggregate planning and their
implications for your company.
Reactive demand-based options use inventories and backorders to deal with changes
in demand. This option causes our inventory costs to increase and our customer
service levels to decrease because some orders may be shipped late. The proactive or
capacity-based option attempts to shift the demand patterns in order to minimize
changes in demand. This option can increase expenses, such as overtime and
subcontracting.
7. Describe the different capacity-based options used in aggregate planning and their
implications for your company.
The different options are overtime, undertime, subcontracting, hiring and firing.
Overtime causes labor expenses to increase since we typically pay time and a half for
each overtime hour. Undertime increases the labor cost per unit since we have idle
time. Subcontracting costs money since we have to send our product for outside
manufacturing. This is usually more costly than the expense of making the product in
house. Hiring causes us to incur expenses related to position advertising,
interviewing steps and training.
Firing expenses may include increased
unemployment compensation premiums and severance packages for those fired.
8. Explain what the hybrid aggregate plan is and why it is used.
A hybrid aggregate plan uses options from both the level and chase aggregate plans.
It is used because we may not prefer to use a level or aggregate plan. We can
combine our preferred decisions from each plan.
9. Explain the procedure for developing an aggregate plan.

First, we choose the type of aggregate plan to use. Next, we determine the aggregate
production rate based on our choice of aggregate plan. The size of the workforce is
calculated based on the type of aggregate plan used. Then we test the aggregate plan
to determine its total cost. Finally, we evaluate the plan in terms its impacts on cost,
customer service, operations and human resources.
10. Describe the factors to consider before developing your aggregate plan.
We would want to consider the availability of workers based on the unemployment
rate. We would also consider the time and expense involved in hiring and firing
workers. The cost of holding inventory should be determined. We should also
determine the impact of backorders on customer satisfaction, which can negatively
affect future demand.
11. Explain how aggregate planning is different when the company does not provide a
tangible product.
In services, we can not use inventory buildup as a way of dealing with peaks in
demand.
12. Visit a local manufacturer and determine how it uses aggregate planning.
This answer will depend on the area in which the university is located.
13. Visit a local service provider and determine how it uses aggregate planning.
This answer will depend on the area in which the university is located.
14. What two items must you calculate when developing your aggregate plan?
You must calculate the production rate and workforce size when developing the
aggregate plan.
15. Visit a local business and learn how it calculates its resources.
The answer to this question depends on the location of the university.
16. Describe the inputs needed to do master production scheduling.
To create the MPS, we need the aggregate production plan, beginning inventory
levels, and the capacity required for each of our products on each resource.
17. Describe the different sources of demand.

The different sources of demand are customer orders, a forecast of demand, interplant
requirements, service part requirements and distribution requirements.
18. Discuss the objectives of the master scheduler and how they influence master
scheduling decisions.
The objectives of the master scheduler are as follows:

Achieve the desired level of customer service.

Effectively utilize the resources of materials, labor and equipment.
Ensure that inventory is at an appropriate level in terms of investment.

These objectives influence the master scheduling decisions in terms of how the
demand is satisfied and how capacity is dealt with.
19. Explain the process of developing an authorized MPS.
First, we develop a proposed MPS. Then, we use rough-cut capacity planning to
determine if we have enough capacity to meet the MPS. If there is not enough
capacity, we create an MPS that is feasible in terms of capacity. If there is enough
capacity, then the MPS is evaluated in terms of its impact on customer service, its use
of resources and inventory investment. If it meets our criteria, then it becomes an
authorized MPS.
20. Explain the importance of rough-cut capacity planning in the MPS process.
Rough-cut capacity planning is important because if we do not ensure there is enough
capacity for the MPS, then we may have an infeasible MPS. If the MPS were
infeasible, we would start experiencing problems on the plant floor. Specifically,
items would be finished late, which could cause us to start expediting.
21. Describe the role of time fence policies.
Time fence policies stabilize the MPS. The MPS is divided by the two time fences of
demand and planning that cause the MPS to consist of frozen, slushy and liquid
zones. The demand time fence separates the frozen and slushy times zones, while the
planning fence separates the slushy and liquid time zones. These zones have varying
rules regarding the frequency and authorization for making changes.
22. Explain the changes you can make in the frozen portion of the MPS and who must
authorize such changes.
In the frozen portion of the MPS, you can make infrequent changes that must be
authorized by a manager who is responsible for the release of resources to operations.
Changes made in this portion could jeopardize existing customer orders.

23. Explain the changes you can make in the slushy portion of the MPS and who
authorizes such changes.
In the slushy portion of the MPS, we can make changes in the product mix, but not
changes that need additional resources. The master scheduler authorizes such
changes.
24. Discuss how the MPS might be used in a service organization.
First we need to identify our resources in terms of people of various skill levels and
equipment. Next, we decide how to use our resources. To do so, we analyze the
demands of our various services and then allocate resources to them. Finally, we
make sure that we have developed a schedule that uses our available resources to
meet our objectives.
For example, a hospital knows how many surgeries are scheduled (demand) and how
many of each type of medical staff are available (resources). We also know how
many operating rooms are available and how much of each type of surgical
equipment is available. Then, we schedule the operating rooms and staff accordingly.
We would also leave some time available in the schedule for emergency surgeries.