12-1 Aggregate Planning

Chapter Eight

Aggregate planning & Master

Scheduling

By:
Terefe Z. (PhD)

Rift Valley University

12-2 Aggregate Planning

8.1. Aggregate Planning

Aggregate planning:
 The goal of aggregate planning is to achieve a
production plan that will effectively utilize the
organization’s resources to satisfy expected
demand.
 Intermediate-range capacity planning, usually covering
2 to 12 months.
Long range

Intermediate
range
Short
range

Now 2 months 1 Year

12-3 Aggregate Planning

Overview of aggregate Planning Levels

Organizations make capacity decisions on three levels:

 Short-range plans (Detailed plans)
 Machine loading
 Job assignments
 Intermediate plans (General levels)
 Employment
 Output, and inventories
 Long-range plans
 Long term capacity
 Location / layout
12-4 Aggregate Planning

Planning Sequence
Figure 12.1

Economic,
Corporate competitive, Aggregate
strategies and political demand
and policies conditions forecasts

Establishes operations
Business Plan
and capacity strategies

Establishes
Aggregate plan
operations capacity

Master schedule Establishes schedules

for specific products
12-5 Aggregate Planning

Overview of aggregate planning

 Aggregate planning begins with a forecast of aggregate
demand for the intermediate range.
 This is followed by a general plan to meet demand
requirements by setting output, employment, and
finished-goods inventory or service capacities.
 Managers must consider a number of plans, each of
which must be examined in light of feasibility and cost.
 If a plan is reasonably good but has minor difficulties, it
may be reworked.
 Aggregate plans are updated periodically, often monthly,
to take into account updated forecast and other changes.
12-6 Aggregate Planning

Aggregate Planning Inputs

 Resources  Costs
 Workforce/production rate  Inventory carrying
 Facilities and equipment  Back orders

 Demand forecast  Hiring/firing

 Policies  Overtime

 Inventory changes
 Subcontracting
 Overtime  Subcontracting

 Inventory levels

 Back orders
12-7 Aggregate Planning

Aggregate Planning Outputs

 Total cost of a plan

 Projected levels of:
 Inventory
 Output

 Employment

 Subcontracting

 Backordering
12-8 Aggregate Planning

8.2. Aggregate Planning Strategies

 Proactive
 Involve demand options: Attempt to alter
demand to match capacity
 Reactive
 Involve capacity options: attempt to alter
capacity to match demand
 Mixed
 Some of each
12-9 Aggregate Planning

Demand Options

 Pricing

 Promotion

 Back orders

 New demand
12-10 Aggregate Planning

Pricing
 Pricing differential are commonly used to shift demand
from peak periods to off-peak periods, for example:
 Some hotels offer lower rates for weekend stays
 Some airlines offer lower fares for night travel
 Movie theaters offer reduced rates for matinees/afternoon
showing
 Some restaurant offer early special menus to shift some of
the heavier dinner demand to an earlier time that
traditionally has less traffic.
 An important factor to consider is the degree of price
elasticity of demand; the more the elasticity, the more
effective pricing will be in influencing demand patterns.
12-11 Aggregate Planning

Promotion
 Advertising and any other forms of promotion,
such as displays and direct marketing, can
sometimes be very effective in shifting demand
so that it conforms more closely to capacity.
 Timing of promotion and knowledge of
response rates and response patterns will be
needed to achieve the desired result.
 There is a risk that promotion can worsen the
condition it was intended to improve, by
bringing in demand at the wrong time.
12-12 Aggregate Planning

Back order
 An organization can shift demand to other periods
by allowing back orders. That is , orders are taken
in one period and deliveries promised for a later
period.
 The success of this approach depends on how
willing the customers are to wait for delivery.
 The cost associated with back orders can be
difficult to pin down since it would include lost
sales, annoyed or disappointed customers, and
perhaps additional paperwork.
12-13 Aggregate Planning

New demand
 Manufacturing firms that experience
seasonal demand are sometimes able
to develop a demand for a
complementary product that makes
use of the same production process.
For example, the firms that produce
water ski in the summer, produce
snow ski in the winter.
12-14 Aggregate Planning

8.3. Mixed Strategies of Aggregate Planning

 Level capacity strategy:

 Maintaining a steady rate of regular-time output
while meeting variations in demand by a
combination of options such as: 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.
12-15 Aggregate Planning

8.4. Techniques for Aggregate Planning

 Techniques for aggregate planning are classified
into two categories:
 Trial and error technique (frequently used)
 Mathematical techniques
12-16 Aggregate Planning

1. Trial and error techniques

 Trial and error approaches consist of developing
simple tables or graphs that enable planners to
visually compare projected demand requirements
with existing capacity.
 Different plans are conducted and evaluated in
terms of their overall costs. The one with the
minimum cost will be chosen.
 The disadvantage of such techniques is that they
do not necessarily result in the optimal aggregate
plan.
12-17 Aggregate Planning

2. Mathematical Techniques

Linear programming: Methods for obtaining optimal

solutions to problems involving allocation of scarce
resources in terms of cost minimization.
Linear decision rule: Optimizing technique that seeks to
minimize combined costs, using a set of cost-
approximating functions to obtain a single quadratic
equation.
Simulation models: Developing a computerized models that
can be tested under a variety of conditions in an attempt
to identify reasonably acceptable (although not always
optimal) solutions to problem.
12-18 Aggregate Planning

Summary of Planning Techniques

Technique Solution Characteristics

Graphical/charting Trial and Intuitively appealing, easy to
error understand; solution not
necessarily optimal.
Linear Optimizing Computerized; linear
programming assumptions not always valid.
Linear Optimizing Complex, requires considerable
decision rule effort to obtain pertinent cost
information and to construct
model; cost assumptions not
always valid.
Simulation Trial and Computerized models can be
error examined under a variety of
conditions.
12-19 Aggregate Planning

Linear programming
 Linear programming models are methods for obtaining
optimal solutions to problems involving the allocation
of scarce resources in terms of cost minimization or
profit maximization.
 With aggregate planning, the goal is usually to
minimize the sum of costs related to regular labor time,
overtime, subcontracting, carrying inventory, and cost
associated with changing the size of the workforce.
Constraints involve the capacities of the workforce,
inventories, and subcontracting.
 The aggregate planning problem can be formulated as
a transportation problem (special case of linear
programming.
12-20 Aggregate Planning

Aggregate planning notation

r = regular production cost per unit
t = overtime cost per unit
s = subcontracting cost per unit
h = holding cost per unit
b = backorder cost per unit per period
n = number of periods in planning horizon
12-21 Aggregate Planning

notes
 Regular cost, overtime cost, and subcontracting cost are at
their lowest level when output is consumed in the same
period it is produced.
 If goods are made available in one period but carried over
to later period, holding costs are incurred at the rate of (h)
per period.
 Conversely, with back orders, the unit cost increases as
you move across a row from right to left, beginning at the
intersection of a row and column for the same period.
 Beginning inventory is given a unit cost of 0 if it is used
to satisfy demand in period 1. however, if it is held over
for use in later periods, a holding cost of per unit is added
for each period.
12-22 Aggregate Planning

Example
 Given the following information set up the problem in a transportation table and
solve for the minimum cost plan.
period
1 2 3
demand 550 700 750
Capacity
Regular 500 500 500
Overtime 50 50 50
subcontract 120 120 100
Beginning inventory 100
Costs
Regular time $60 per unit
Overtime 80 per unit
Subcontract 90 per unit
Inventory carrying cost $1 per unit per month
$3 per unit per month
Back order cost
12-23 Aggregate Planning

Solution
 The transportation table and solution are shown in the next slide.
Some entries require additional explanation:
a. Inventory carrying cost, h = $1 per unit per period. Hence,
units produced in one period and carried over to a later period
will incur a holding cost that is a linear function of the length
of time held.
b. Linear programming models of this type require that supply
(capacity) and demand be equal. A dummy column has been
added (nonexistent capacity) to satisfy that requirement.
Since it does not “cost” anything extra to not use capacity in
this case, cell costs of $0 have been assigned.
c. No backlogs were needed in this example
d. The quantities (e.g., 100, 450 in column 1) are the amounts of
output or inventory that will be used to meet demand
requirements. Thus, the demand of 550 units in period 1 will
be met using 100 units from inventory and 450 obtained from
regular time output.
12-24 Aggregate Planning

Initial solution using northwest corner

Period Period Period Unused capacity

1 2 3 capacity
Period Beginning 0 1 2 0 100
inventory 100

1 Regular 450 60 50 61 62 0 500

Total
Overtime 80 50
81 82 0 50 cost is
120
subcontract 90 91 92 0 120 $124910
2 Regular 63 480 60 20 61 0 500
Overtime 83 80 50 81 0 50
subcontract 93 90 120 91 0 120
3 Regular 66 63 500 60 0 500
50
Overtime 86 83 80 0 50
subcontract 96 93 10 90 90 0 100
demand 550 700 750 90 2090
12-25 Aggregate Planning

Optimal solution
Period Period Period Unused capacity
1 2 3 capacity
Period Beginning 0 1 2 0 100
inventory 100

1 Regular 450 60 50 61 62 0 500 Total

cost is
Overtime 80 50
81 82 0 50
30 $124730
subcontract 90 91 92 90 0 120
2 Regular 63 500 60 61 0 500
Overtime 83 50 80 81 0 50
subcontract 93 20 90 100 91 0 120
3 Regular 66 63 500 60 0 500
50
Overtime 86 83 80 0 50
subcontract 96 93 100 90 0 100
demand 550 700 750 90 2090
12-26 Aggregate Planning

Trial and error techniques

 Trial and error approaches consist of developing
simple tables or graphs that enable planners to
visually compare projected demand requirements
with existing capacity.
 Different plans are conducted and evaluated in
terms of their overall costs. The one with the
minimum cost will be chosen.
 The disadvantage of such techniques is that they
do not necessarily result in the optimal aggregate
plan.
12-27 Aggregate Planning

Assumptions
1. The regular output capacity is the same in all periods.
2. Cost ( back order, inventory, subcontracting, etc) is a linear
function composed of unit cost and number of units.
3. Plans are feasible; that is, sufficient inventory capacity exists to
accommodate a plan, subcontractors with appropriate quality and
capacity are standing by, and changes in output can be made as
needed.
4. All costs associated with a decision option can be represented by a
lump sum or by unit costs that are independent of the quantity
involved.
5. Cost figures can be reasonably estimated and are constant for the
planning horizon.
6. Inventories are built up and drawn down at a uniform rate and
output occurs at a uniform rate throughout each period.
12-28 Aggregate Planning

Some important relationships

Number of number of number of new number of laid-off
Workers in = workers at end of + workers at start - workers at start of
A period the previous period of the period the period

Inventory inventory production amount used to

At the end of = at the end of + in the - satisfy demand in
A period previous period current period current period

Cost for output cost hire/layoff inventory back order

= + + +
a period (Reg + OT + subcontract) cost cost cost

Average
= Beginning Inventory + Ending Inventory
inventory 2
12-29 Aggregate Planning

Cost calculation
Type of cost How to calculate

Output

Regular Regular cost per unit × Quantity of regular output

Overtime Overtime cost per unit × Overtime quantity

Subcontract Subcontract cost per unit × subcontract quantity

Hire/layoff

Hire Cost per hire × number hired

Layoff Cost per layoff × number laid off

Inventory Carrying cost per unit × average inventory

Back order Back-order cost per unit × number of back order unit
12-30 Aggregate Planning

8.5. Master scheduling

 The result of disaggregating the aggregate plan is a master schedule
showing the quantity and timing of specific end items for a
scheduled horizon, which often covers about six to eight weeks
ahead.
 The master schedule shows the planned output for individual
products rather than an entire product group, along with the timing
of production.
 It should be noted that whereas the aggregate plan covers an interval
of, say, 12 months, the master schedule covers only a portion of
this. In other words, the aggregate plan is disaggregated in stages, or
phases, that may cover a few weeks to two or three months.
 The master schedule contains important information for marketing
as well as for production. It reveals when orders are scheduled for
production and when completed orders are to be shipped.
12-31 Aggregate Planning

Aggregate Plan to Master Schedule

Jan Feb Mar.
Aggregate
Planning Aggregate
plan 200 300 400

Disaggregation Type Jan. Feb. Mar

21 100 100 100
Master
inch
schedule 26 75 150 200
Master inch
Schedule 29 25 50 100
inch
total 200 300 400
12-32 Aggregate Planning

Master Scheduling

 Master schedule
 Determines quantities needed to meet demand
 Interfaces with
 Marketing: it enables marketing to make valid
delivery commitments to warehouse and final
customers.
 Capacity planning: it enables production to evaluate
capacity requirements
 Production planning
 Distribution planning
12-33 Aggregate Planning

Master Scheduler

The duties of the master scheduler generally

include:
 Evaluates impact of new orders
 Provides delivery dates for orders

 Deals with problems such as:

 Production delays
 Revising master schedule
 Insufficient capacity
12-34 Aggregate Planning

8.5.1. Master Scheduling Process

Inputs Outputs
Beginning inventory Projected inventory
Master
Forecast Master production schedule
Scheduling

Customer orders Uncommitted inventory

12-35 Aggregate Planning

Master scheduling process Cont’d

 Master production schedule (MPS): indicates the quantity
and timing of planned production, taking into account
desired delivery quantity and timing as well as on-hand
inventory. The MPS is one of the primary outputs of the
master scheduling process.
 Rough-cut capacity Planning (RCCP): it involves testing
the feasibility of a proposed master relative to available
capacities, to assure that no obvious capacity constraints
exist. This means checking capacities of production,
warehouse facilities, labor, and vendors to ensure that no
gross deficiencies exist that will render the master
schedule unworkable.
12-36 Aggregate Planning

Master schedule
 Inputs:
 Beginning inventory; which is the actual inventory
on hand from the preceding period of the schedule
 Forecasts for each period demand
 Customer orders; which are quantities already
committed to customers.
 Outputs
 Projected inventory
 Production requirements
 The resulting uncommitted inventory which is
referred to as available-to-promise (ATP) inventory
12-37 Aggregate Planning

8.5.2. Master Scheduling Format

 Projected On-hand Inventory

Projected on-hand Inventory from Current week’s

inventory
=
previous week
- requirements
12-38 Aggregate Planning

Example: Master Schedule

 A company that makes industrial pumps wants to prepare a
master production schedule for June and July. Marketing has
forecasted demand of 120 pumps for June and 160 pumps for
July. These have been evenly distributed over the four weeks in
each month: 30 per week in June and 40 per week in July.

 Now suppose that there are currently 64 pumps in inventory

(i.e., beginning inventory is 64 pumps), and that there are
customer orders that have been committed for the first five
weeks (booked) and must be filled which are 33, 20, 10, 4, and
2 respectively. The following figure (see next slide) shows the
three primary inputs to the master scheduling process:
beginning inventory, the forecast, and the customer orders that
have been committed. This information is necessary to
determine three quantities: the projected on-hand inventory, the
master production schedule (MPS) and the uncommitted (ATP)
inventory. Suppose a production lot size of 70 pumps is used.
Prepare the master Schedule
12-39 Aggregate Planning

Solution: Master schedule

Figure 12.8 The master schedule before MPS
Beginning
Inventory
JUNE JULY
64 1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Customer Orders
(committed) 33 20 10 4 2
Projected on-hand
inventory 31 1 -29 Forecast is larger than
Customer orders in week 3

Customer orders are Forecast is larger than

larger than forecast in Customer orders in week 2
week 1
12-40 Aggregate Planning

Solution: The master schedule

 The first step you have to calculate the on hand inventory
Week Inventory Requirements Net MPS Projected
from previous inventory inventory
week before MPS
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
12-41 Aggregate Planning

Solution: Master Schedule

 The projected on-hand inventory and MPS are added to the
master schedule
Initial inventory June July
1 2 3 4 5 6 7 8
64

Forecast 30 30 30 30 40 40 40 40
Customer orders 33 20 10 4 2
(committed)
Projected on hand 31 1 41 11 41 1 31 61
inventory
MPS 70 70 70 70
Available to 11 56 68 70 70
promise inventory
(uncommitted)
12-42 Aggregate Planning

Notes
 The requirements equals the maximum of the
forecast and the customer orders.
 The net inventory before MPS equals the
inventory from previous week minus the
requirements.
 The MPS = run size, will be added when the
net inventory before MPS is negative ( weeks
3, 5, 7, and 8).
 The projected inventory equals the net
inventory before MPS plus the MPS (70).
12-43 Aggregate Planning
8.5.3. Available-to-Promise quantity
 Available-to-Promise (ATP) or uncommitted inventory: is that
portion of the on-hand inventory plus scheduled that is not
already committed to customer orders.
 The amount of inventory that is uncommitted, and, hence,
available to promise is calculated as follows:
 For the first (current) period, the ATP = the beginning
inventory plus any MPS amount in that period, minus the total
of booked orders up to the time when the next MPS amount is
available.
 For example: in the first week, this procedure results in
summing customer orders of 33 (week 1) and 20 (week 2) to
obtain 53. In the first week, this amount is subtracted from the
beginning inventory of 64 plus the MPS (zero in this case) to
obtain the amount that is available to promise [(64 + 0 – (33 +
20)] = 11
12-44 Aggregate Planning

Solution: Master Schedule

 In subsequent periods, the ATP inventory consists of the
MPS amount in that period, minus the actual customer
orders already received for that period and all other
periods until the next MPS amount is available.
 Example: Find the ATP inventory values for the master
schedule shown in the following table:
On hand = 23 units Lot size = 25 Planning time fence 6

Period 1 2 3 4 5 6 7 8
Forecast 10 10 10 10 20 20
Customer orders (booked) 13 5 3 1
Projected available balance 10 0 15 5 10 15
Master production schedule 25 25 25
Available-to-promise
12-45 Aggregate Planning

Solution: Master Schedule

 Available-to-Promise values are computed for the current period (1)
and for other periods when the MPS shows that a lot will be
produced.
 For period:
 1. ATP1 = (On-hand Inv.) – (orders in periods 1 and 2) = 23 – (13 + 5) = 5
 2. ATP3 = (MPS amount in 3) – (orders in periods 3 and 4) = 25 – (3 + 1) = 21
 3. ATP5 = (MPS amount in 5) – (orders in period 5) = 25 – 0 = 25
 4. ATP6 = (MPS amount in 6) – (orders in period 6) = 25 – 0 = 25
 The last row of the table should have values of 5, 21, 25 and 25 in
the columns for periods 1, 3, 5 and 6 respectively.