TONTADARYA COLEGE OF ENGINEERING

GADAG

ONLINE LECTURE SERIES

ON
OPERATIONS MANAGEMENT (18ME56)
 Module-IV
Aggregate Planning & Master Scheduling
Meaning

•Aggregate planning is the process of developing, analyzing,

and maintaining a preliminary, approximate schedule of the
overall operations of an organization.

•The aggregate plan generally contains targeted sales

forecasts, production levels, inventory levels, and customer
backlogs. This schedule is intended to satisfy the demand
forecast at a minimum cost.
 Defined as …

•The process of determining output levels of product groups over

the coming 6 to 18 months on a weekly or monthly basis ; the plan
identifies the overall level of outputs in support of the business plan.

•Aggregate planning involves translating long-term forecasted

demand into specific production rates and the corresponding
labor requirements for the intermediate term.
 Objectives

•Minimize cost / maximize profits

•Maximize customer service
•Minimize inventory investment
•Minimize changes in production rates
•Minimize changes in workforce levels
•Maximize utilization of plant and equipment
Aggregate Planning Process

•Determine demand for each period .

•Determine capacities for each period .
• Identify policies that are pertinent Determine units costs for
units produced .
•Develop alternative plans and compute costs for each.
•Select the best plan that satisfies objectives
 There are two pure planning strategies available to
the aggregate planner:

Level
strategy Chase
strategy

 Firms may choose to utilize one of the pure

strategies in isolation, or they may opt for a strategy
that combines the two.
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 Level strategy
 A level strategy seeks to produce an aggregate
plan that maintains a steady production rate and
a steady employment level.

 In order to satisfy changes in customer demand,

the firm must raise or lower inventory levels in
anticipation of increased or decreased levels of
forecast demand.

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 Level strategy
 The firm maintains a level workforce and a steady
rate of output when demand is low. This allows the
firm to establish higher inventory levels than are
currently needed.

 As demand increases, the firm is able to continue a

steady production rate/steady employment level,
while allowing the inventory surplus to absorb the
increased demand

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 Chase strategy
 A chase strategy implies matching demand and
capacity period by period.

 This could result in a considerable amount of hiring,

firing or laying off of employees; insecure and
unhappy employees; increased inventory carrying
costs; problems with labor unions; and erratic
utilization of plant and equipment.

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 Aggregate Planning Strategies
 Varying the work force.
 Using OT or accepting IT
 Varying inventory level.
 Accepting back orders.
 Subcontracting work to others
 Changing the use of existing capacity
 Illustrated Example
Paris candy company has estimated its quarterly demand
(cases) as shown in table below. It expects the next
demand cycle to be similar to this one and wishes to
restore ending inventory, employment, etc., to beginning
levels accordingly.

Quarter Demand
1st 500
2nd 900
3rd 700
4th 300
 Histogram of Demand
Demand
1000
900
900
800
700
700
600
500 Demand
500
400
300
300
200
100
1st 2nd 3rd 4th
0
 Strategy 1- Vary workforce
Lets take incremental cost of Rs. 2000 for every change in
200 units per quarter.

Quarter Demand Change Cost

1st 500 0

2nd 900 400 4000

3rd 700 200 2000

4th 300 400 4000

+200 (for +2000
next Cycle)

Total Cost = Rs.12,000

Strategy 2- Over Time (OT) & Idle Time (IT)
Maintain a stable workforce capable of producing 600 units
per quarter and use OT(at Rs.5 per unit) and IT (at Rs. 20
per unit).
Quarter Demand Change Cost
1st 500 -100 2000

2nd 900 +300 1500

3rd 700 +100 500

4th 300 -300 6000

Total Cost = Rs.10,000

 Strategy 3- Vary Inventories
Lets take average production of 600 units per quarter and
carrying cost Rs. 32/Year on average inventory and
annual storage cost is Rs.5 per unit on max inventory.
Quarter Demand ROP Change in Preliminary End Balance
inventory End Balance (Initial Inventory 300)
1st 500 600 100 100 400
2nd 900 600 -300 -200 100
3rd 700 600 -100 -300 0
4th 300 600 300 0 300
 Strategy 3- Vary Inventories

 Carrying cost = 200 X 32 = 6,400

 Storage cost = 400 X 5 = 2,000

 Total Cost = 8,400

 Strategy -4 Back Order
 Produce at a constant rate of 500 units per period and
accept a limited number of back orders when demand
exceeds 500. the stockout cost of lost sales is Rs.20 per
unit.
 Histogram of Demand
Demand
1000
900
900
800
700
700
600
500 Demand
500
400
300
300
200
100
1st 2nd 3rd 4th
0
 Total stockout Cost = (200+200) (Rs.20/unit)
 = Rs.8,000
 Strategy -5 Subcontract
 Produce at a constant rate of 300 units per period and
subcontract for excess requirements at a marginal cost of
Rs.8 per unit.
 Ans:
Quarter Demand ROP Units Cost of Subcontracting
Subcontracted (Rs. 8/unit)
1st 500 300 200 1600
2nd 900 300 600 4800
3rd 700 300 400 3200
4th 300 300 0 0

TOTAL COST = Rs.9,600.00

 Focused aggregate planning strategies

1. Vary production rate

2. Produce at a constant rate

3. Produce with stable workforce.

 Problem on Pure Strategies
Month Jan Feb Mar April May June July Aug Sept Tot
Forecast 40 25 55 30 30 50 30 60 40 360

Production information :
Current no. of. workers: 10
Worker time / month: 160 Hrs.
Time to produce one unit: 40Hr/ unit
Individual worker output:
(160 hr/month / 40 Hr per unit): 4 units / month
Safety stock of inventory Reqd :10 Units
Cost information:
Hiring cost: Rs. 600/ employee
Layoff cost: Rs. 500 / employee
Regular-time cost: Rs. 30 / hr
Overtime cost: Rs. 45 / hr
Subcontract labor cost: Rs. 50 / hr
Inventory carrying cost. Rs. 35 / period
 Cost calculation for varying workforce
Period 1 2 3 4 5 6 7 8 9
forecast 40 25 55 30 30 50 30 60 40
No of Workforce Reqd 10 7 14 8 8 13 8 15 10

No. hired 0 0 7 0 0 5 0 7 0

No. Laid off 0 3 0 6 0 0 5 0 5

COSTS

RT Cost 48,000 33,600 67,200 38,400 38,400 62,400 38,400 72,000 48,000

Hiring cost 0 0 4200 0 0 3000 0 4200 0

Lay off costs 0 1500 0 3000 0 0 2500 0 2500

Inventory carrying cost 350 350 350 350 350 350 350 350 350

Total Cost: 4,46,400+20,900+3,150

= Rs.4,70,450.00
Cost calculation for using inventories
Period 1 2 3 4 5 6 7 8 9
forecast 40 25 55 30 30 50 30 60 40
Prod. Data: RT: 40 40 40 40 40 40 40 40 40
SC: - - - - - - - - -
Forecast: 0 15 -15 10 10 -10 10 -20 0
Beginning Inv 0 0 15 0 10 20 10 20 0
Ending Inv 0 15 0 10 20 10 20 0 0
Avg Inv 0 7.5 7.5 5 15 15 15 10 0
COSTS
RT Cost 48,000 48,000 48,000 48,000 48,000 48,00 48,00 48,00 48,00
SC cost
Inv Carrying 0 262.5 262.5 175 525 525 525 350 0
Cost
Total cost : 4,32,000+2826
= Rs. 4,34,826.00
Mathematical Planning Model
Linear Programming Matrix
 Transportation Method

EXPECTED REGULAR OVERTIME SUBCONTRACT

QUARTER DEMAND CAPACITY CAPACITY CAPACITY
1 900 1000 100 500
2 1500 1200 150 500
3 1600 1300 200 500
4 3000 1300 200 500

Regular production cost per unit $20

Overtime production cost per unit $25
Subcontracting cost per unit $28
Inventory holding cost per unit per period $3
Beginning inventory 300 units
 Transportation Table
PERIOD OF USE

Unused
PERIOD OF PRODUCTION 1 2 3 4 Capacity Capacity

Beginning 0 3 6 9
Inventory 300 — — — 300
20 23 26 29
1 Regular 600 300 100 — 1000
25 28 31 34
Overtime 100 100
28 31 34 37
Subcontract 500
20 23 26
2 Regular 1200 — — 1200
25 28 31
Overtime 150 150
28 31 34
Subcontract 250 250 500
20 23
3 Regular 1300 — 1300
25 28
Overtime 200 — 200
28 31
Subcontract 500 500
20
4 Regular 1300 1300
25
Overtime 200 200
28
Subcontract 500 500

Demand 900 1500 1600 3000 250

Master Production Scheduling (MPS)

•The master production schedule formalizes the production plan and translate it in to
specific end-item requirements over a short to intermediate planning horizon.The end
items are then exploded in to specific material and capacity requirements by the
Material Requirement Planning (MRP) and Capacity Requirement Planning (CRP)
systems. Thus the MPS essentially drives the entire production and inventory system.
 Importance of MPS
A production plan is an aggregate plan that schedules product families in relatively long time
intervals. Master production schedule is used for individual end products and in shorter time
intervals.
MPS is important in the following aspects:
• It is the link between what is expected (production planning) and what is actually to be built,
i.e., material requirement planning and final assembly schedule (FAS, to be discussed).
• It develops data to drive the detailed planning, MRP. MPS is a priority plan for manufacturing. It
keeps priorities valid.
• It is the basis for calculating the resources available (capacity) and the resources needed
(load). It provides devices to reconcile the customers’ demand and the plant’s capability
 Importance of MPS
•It makes possible reliable delivery promises.
•It provides salespeople information on available-to-promise (ATP) indicating when
end products are available.
•It is a tool that can be used to evaluate the effects of schedule changes. It is a
device for communication and a basis to make changes consistent with the
demands of the marketplace and manufacturing capacity.
•It is a contract between marketing and manufacturing departments.
•It provides management with the means to authorize and control all resources
needed to support integrated plans.
•In the short horizon, MPS serve as the basis for planning material requirement,
production of components, order priorities, and short-term capacity requirements.
•In the long horizon, MPS serves as the basis for estimating long-term demands on
the company resources such as people, equipment, warehousing, and capital.
 Major inputs to MPS

•Forecasts of demand (e.g., of end items and service parts)

•Customer orders (Including any warehouse and interplant needs)

•Inventory status (On hand from the previous period)

Master Production Scheduling (MPS)
 Data sources for MPS

The data needed to develop an MPS include:

• Customer orders.
• Dealer orders.
• Inventory replenishment orders.
• Forecast for individual end products.
• Interplant requirements.
• Distribution center requirements.
• Inventory levels for end products.
• Safety stock.
• Released production orders for end products.
• Capacity constraints
Supply demand options
 MPS and ATP Calculation
Question:
For given sales forecast and customer details calculate Master Production Schedule and ATP (Available to Promise)
Note: Opening inventory is: 23 Units
Production lot size: 25 Units
Planning time fence : 9 weeks
Week: 01 02 03 04 05 06 07 08 09
Forecast: 10 10 10 10 20 20 20 20 10
Customer orders (booked) 13 5 3 1 5 6 7
Projected Available Balance (PAB) 10 0 15 5 10 15 20 0 15
Master Production Schedule(MPS) 25 25 25 25 25
Available to promise (ATP) 05 * 21 * 25 25 14 * 18

ATP(Week1): (On-hand-inv)-orders in week 1&2= 23-13-5=5

ATP(Week3): MPS(week3)-orders in week3&4=25-3-1=21
ATP(Week5): MPS(week5)-orders in week5=25-0=25
ATP(Week6): MPS(week6)-orders in week6=25-0=25
 MPS and ATP Calculation

Question:
For given sales forecast and customer details calculate Master Production Schedule and ATP (Available to Promise)
Note: Opening inventory is: 100 Units
Production lot size: 70 Units
Minimum inventory level allowed: 0 Units

Week: 01 02 03 04 05 06 07 08
Forecast: 50 50 50 50 50 50 50 50
Actual order 52 40 20 10 5
Opening inventory (Initial Inventory) 100 48 68 18 38 58 8 28
Requirement 52 50 50 50 50 50 50 50
Net inventory before production 48 -2 18 -32 -12 8 -42 -22
Planned production volume (MPS) 0 70 0 70 70 0 70 70
Projected inventory (PAB or ending inventory) 48 68 18 38 58 8 28 48
Available to promise (ATP) 48 10 * 60 65 * 70 70
 Complete the MPS and ATP
Question: Complete the following MPS

Lot size: 50 units

Lead time: 1 Week
Quantity on hand: 05 units
Week: 01 02 03 04 05 06 07 08 09 10
Forecast: 20 10 40 10 30 20 40 20
Actual order 30 20 5 8 2
Opening inventory (Initial Inventory)
Requirement
Net inventory before production
Planned production volume (MPS)
Projected inventory (PAB or ending
inventory)
Available to promise (ATP)
 Complete the MPS and ATP
Question: Complete the following MPS

Lot size: 50 units

Lead time: 1 Week
Quantity on hand: 05 units
Week: 01 02 03 04 05 06 07 08 09 10
Forecast: 20 10 40 10 30 20 40 20
Actual order or customer order 30 20 5 8 2
Opening inventory (Initial Inventory) 5 25 05 15 5 5 3 23 3 13
Requirement 30 20 40 10 0 2 30 20 40 20
Net inventory before production 05 05 -35 5 5 3 -27 3 -37 -7
Planned production volume (MPS) 50 50 50 50 50
MPS Start 50 50 50 50
Projected inventory (PAB or ending 25 05 15 5 5 3 23 3 13 43
inventory)
Available to promise (ATP) 0 35 50 50 50
Given the company supply, demand, cost, and inventory data for a firm has a constant work force and wishes to meet all
demand (that is with no back orders) allocate production capacity to satisfy demand at minimum cost. Labor cost is 50% of
regular time production.

Supply capacity (units)

Period Regular time (RT) Overtime (OT) Subcontract (SC)

Rs.100/unit Rs.125 / unit Rs.130 / unit
1 60 18 1,000
2 50 15 1,000
3 60 18 1,000
4 65 20 1,000
Demand and inventory

Demand period: 1 2 3 4
Units: 100 50 70 80
Inventory:
Initial: 20 units, Final: 25 units
Carrying cost: Rs. 2 / unit-period

Supply Demand, units Capacity

units Total
Period 1 Period 2 Period 3 Period 4 Unused
available
Initial 0 2 4 6 8
20
inventory 20 0
RT 100 102 104 106 50 60
60 0
Period 1

OT 125 127 129 131 0 18

18 0
SC 130 0 1,000
02 998
RT 100 102 104 50 50
50 0
OT 125 127 129 0 15
Period 2

12 3
130 0 1,000
SC 1,000

RT 100 102 50 60
60 0
Period 3

OT 125 127 0 18
10 8 0
SC 130 0 1,000
1,000
RT 100 50 65
65 0
Period 4

OT 125 0 20
20
SC 130 0 1,000
0 1,000
Demand 100 50 70 105 4,001 4,326
Total cost=
(20X0+60X100+18X125+2X130)+(50X100)+(60X100+10X125)+(65X100+20X125+8X127+12X129)

TOTAL MINIMUM COST= (6000+2250+160)+(5000)+(6000+1250)+(6500+2500+1016+1548)

= 8410+5000+7250+11564 =Rs. 32,224.00