Chapter 11

Aggregate Planning
and Master
Scheduling

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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 Discuss aggregate planning in services
LO 11.7 Disaggregate an aggregate plan
LO 11.8 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 up 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

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The Planning Sequence

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Why Use Aggregate Planning
 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

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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 (cont.)
 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

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Overview of Aggregate Planning

Forecast of
Develop a Update the
aggregate
general plan to aggregate plan
demand for the
meet demand periodically
intermediate
requirements (e.g., monthly)
range

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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

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Aggregate Planning Inputs
 Resources  Costs
 Workforce/production rates  Inventory carrying
 Facilities and equipment  Back orders
 Demand forecast  Hiring/firing
 Overtime
 Policies
 Inventory changes
 Workforce changes
 Subcontracting
 Subcontracting
 Overtime
 Inventory levels/changes
 Back orders

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Aggregate Planning Outputs
Total cost of a plan
Projected levels of
 Inventory
 Output
 Employment
 Subcontracting
 Backordering

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Aggregate Planning Strategies
Proactive
 Alter demand to match capacity
Reactive
 Alter capacity to match demand
Mixed
 Some of each

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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
 Create new demand to absorb excess capacity
generated due to peak time demands

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Supply Options
Hire and layoff workers
Overtime/slack time
Part-time workers
Inventories
Subcontracting

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Prominent Aggregate Planning Strategies
1. Maintain a level workforce
2. Maintain a steady output rate
3. Match demand period by period
4. Use a combination of decision variables

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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:
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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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

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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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Techniques for Aggregate Planning
General procedure:
1. Determine demand for each period
2. Determine capacities for each period
3. Identify pertinent company or departmental policies

4. Determine unit costs

5. Develop alternative plans and costs
6. 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
tables 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 Techniques (cont.)
Period 1 2 3 4 5 Total
Forecast
Output
Regular time
Overtime
Subcontract
Output – Forecast
Inventory
Beginning
Ending
Average
Backlog

Costs
Output
Regular

Overtime
Subcontract
Hire/Lay of
Inventory

Back orders
Total

TABLE 11.4 Worksheet/spreadsheet

LO 11.4 11-22
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Cumulative Graph

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Mathematical Techniques
Linear programming models
 Methods for obtaining optimal solutions to problems
involving the allocation of scarce resources in terms of
cost minimization or profit maximization.
Simulation models
 Computerized models that can be tested under different
scenarios to identify acceptable solutions to problems

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Linear programming models

LO 11.5 11-25
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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.

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Aggregate Planning Example (2 of 3)
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

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Aggregate Planning Example (3 of 3)
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

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 Mathematical Techniques

Technique Solution Approach Characteristics

Spreadsheet Heuristic (trial and Intuitively appealing, easy to understand;

error) solution not necessarily optimal

Linear programming Optimizing Computerized; linear assumptions not

always valid

Simulation Heuristic (trial

and error) Computerized model can be examined
under a variety of conditions

TABLE 11.7 Summary of mathematical planning techniques

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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 (cont.)
 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:
1. Demand for service can be difficult to predict
2. Capacity availability can be difficult to predict
3. Labor flexibility can be an advantage in services
4. Services occur when they are rendered

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Yield Management
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

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Disaggregation
Aggregate
Plan

Disaggregation

Master
Schedule

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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
 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

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Time Fences
Period
1 2 3 4 5 6 7 8 9

“frozen” “slushy” “liquid”

(firm or somewhat (open)
fixed) firm

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The Master Scheduling Process

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

Uncommitted inventory
Customer orders

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The Master Scheduling Process (cont.)
 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
Inventory
from
Previous Inventory (70) Projected
Week Week Requirements before MPS MPS 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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