Chapter 9

Production-Planning Systems:
Aggregate Planning and
Master Production Scheduling

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 Overview

Production-Planning Hierarchy
Aggregate Planning
Master Production Scheduling
Types of Production-Planning and Control Systems
Wrap-Up: What World-Class Producers Do

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 Capacity Planning, Aggregate Planning, Master Schedule, and Short-Term
Scheduling

Capacity Planning
1. Facility Size Long-term
2. Equipment Procurement

Aggregate Planning
1. Facility Utilization Intermediate-term
2. Personnel needs
3. Subcontracting

Master Schedule
1. MRP Intermediate-term
2. Disaggregation of master plan

Short-term Scheduling
1. Work center loading Short-term
2. Job sequencing
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 Overview
Process Planning
Long
Range Strategic Capacity Planning

Medium Aggregate Planning

Range Manufacturing
Services
Master Production Scheduling

Material Requirements Planning

Order Scheduling Weekly Workforce &

Customer Scheduling
Short
Range Daily Workforce &
Customer Scheduling 4

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 Production Planning Hierarchy

Long-Range Capacity Planning Chapter 7

Aggregate Planning

Master Production Scheduling Chapter 9

Production Planning and Control Systems

Pond Draining Push Pull Focusing on

Systems Systems Systems Bottlenecks
Chapter 10 Chapter 11 Chapter 14 Chapter 9,12
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 Production Planning Horizons

Long-Range
Long-Range Capacity Planning
(years)

Medium-Range
Aggregate Planning
(6-18 months)
Short-Range
Master Production Scheduling
(weeks)

Production Planning and Control Systems Very-Short-Range

(hours - days)

Pond Draining Push Pull Focusing on

Systems Systems Systems Bottlenecks

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 Production Planning: Units of Measure

Entire
Long-Range Capacity Planning
Product Line

Product
Aggregate Planning
Family
Specific
Master Production Scheduling
Product Model

Production Planning and Control Systems Labor, Materials,

Machines

Pond Draining Push Pull Focusing on

Systems Systems Systems Bottlenecks

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 Hierarchical Production Planning

Decision Level Decision Process Forecasts needed

Allocates Annual demand by
production
Corporate item and by region
among plants

Determines Monthly demand

Plant manager seasonal plan by for 15 months by
product type product type

Determines monthly Monthly demand

Shop item production for 5 months by
superintendent schedules item
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 Relationships of the Aggregate Plan

Marketplace Research and

and Demand Technology Work Force

Product
Decisions Raw Materials
Available

Process
Planning & Inventory
Decisions On Hand

External
Demand Aggregate Capacity
Forecasts Plan for
, Production
orders Plant
Master Capacity
Detailed Work
Production Schedules Priority
Schedule Planning &
Scheduling

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 Aggregate Planning Strategies Pure Strategies
Capacity Options --change capacity:
changing inventory levels
varying work force size by hiring or layoffs
varying production capacity through overtime or idle
time
subcontracting
using part-time workers
Demand Options --change demand:
Influencing demand
backordering during high demand periods
counterseasonal product mixing

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 Comparison of Aggregate Planning Methods

Advantages
Graphical Methods:
- Simple, easy to use and understand - Many solutions; solution need not be
Linear Programming:
- Provides optimal solution
- Popular in some industries
- Sensitivity & dual analysis provide
useful information
- Constraints readily added.
Linear Decision Rule
- Provides optimal solution
- Handles non-deterministic demand
Limitations
Graphical Methods:
optimal
Linear Programming:
- Mathematical functions must be
linear, and deterministic -- not
necessarily realistic
Linear Decision Rule:
- Incorporates some non-standard costs.
Skilled personal required. Quadratic
model not always realistic. Value of
variables unconstrained. Feasible
solution is optimal if it exists - not
guaranteed.

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 Comparison of Aggregate Planning Methods

Advantages (continued) Limitations (continued)

Management coefficients Model: Managment coefficients Model:
- Attempts to duplicate managers - Solution need not be optimal.
decision-making process. Simplest, last - Assumes past decisions are good.
disruptive, easiest to implement - Built on individuals invalidate model.
Simulation: Simulation
- Places no restrictions on mathematical - No optimal solution guaranteed.
structure or cost functions. Can test
many relationships. - Often a long, costly, process.

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Aggregate Planning

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 Why Aggregate Planning Is Necessary

Fully load facilities and minimize overloading and

underloading
Make sure enough capacity available to satisfy
expected demand
Plan for the orderly and systematic change of
production capacity to meet the peaks and valleys of
expected customer demand
Get the most output for the amount of resources
available

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 Aggregate Planning
Goal: Specify the optimal combination of
production rate
workforce level
inventory on hand

Product group or broad category (Aggregation)

Medium-Range: 6-18 months

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 Aggregate Planning
Terminology
Production Rate

Workforce Level

Inventory on Hand

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 Inputs

A forecast of aggregate demand covering the selected

planning horizon (6-18 months)
The alternative means available to adjust short- to
medium-term capacity, to what extent each alternative
could impact capacity and the related costs
The current status of the system in terms of
workforce level, inventory level and production rate

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 Outputs

A production plan: aggregate decisions for each

period in the planning horizon about
workforce level
inventory level
production rate
Projected costs if the production plan was
implemented

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 Medium-Term Capacity Adjustments

Workforce level
Hire or layoff full-time workers
Hire or layoff part-time workers
Hire or layoff contract workers
Utilization of the work force
Overtime
Idle time (undertime)
Reduce hours worked
. . . more

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 Medium-Term Capacity Adjustments

Inventory level
Finished goods inventory
Backorders/lost sales
Subcontract

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 Approaches

Informal or Trial-and-Error Approach

Mathematically Optimal Approaches
Linear Programming
Linear Decision Rules
Computer Search
Heuristics

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 Pure Strategies for the Informal Approach

Matching Demand
Level Capacity
Buffering with inventory
Buffering with backlog
Buffering with overtime or subcontracting
Hybrid strategies

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 Matching Demand Strategy

Capacity (Production) in each time period is varied to

exactly match the forecasted aggregate demand in
that time period
Capacity is varied by changing the workforce level
Finished-goods inventories are minimal
Labor and materials costs tend to be high due to the
frequent changes
. . . more

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 Matching Capacity & Demand
Demand Management
Vary prices
change lead time
encourage/discourage business
Capacity Management
adjust staffing
adjust equipment and processes
change methods to facilitate production
redesign the product to facilitate production

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 Developing and Evaluating
the Matching Production Plan
Production rate is dictated by the forecasted aggregate
demand
Convert the forecasted aggregate demand into the
required workforce level using production time
information
The primary costs of this strategy are the costs of
changing workforce levels from period to period, i.e.,
hirings and layoffs

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 Level Capacity Strategy

Capacity (production rate) is held level (constant)

over the planning horizon
The difference between the constant production rate
and the demand rate is made up (buffered) by
inventory, backlog, overtime, part-time labor and/or
subcontracting

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 Developing and Evaluating
the Level Production Plan
Assume that the amount produced each period is
constant, no hirings or layoffs
The gap between the amount planned to be produced
and the forecasted demand is filled with either
inventory or backorders, i.e., no overtime, no idle
time, no subcontracting
. . . more

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 Developing and Evaluating
the Level Production Plan
The primary costs of this strategy are inventory
carrying and backlogging costs
Period-ending inventories or backlogs are determined
using the inventory balance equation:

EIt = EIt-1 + (Pt - Dt )

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 Aggregate Plans for Services

For standardized services, aggregate planning may be

simpler than in systems that produce products
For customized services,
there may be difficulty in specifying the nature and
extent of services to be performed for each
customer
customer may be an integral part of the production
system
Absence of finished-goods inventories as a buffer
between system capacity and customer demand

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 Preemptive Tactics

There may be ways to manage the extremes of

demand:
Discount prices during the valleys.... have a sale
Peak-load pricing during the highs .... electric
utilities, Nucor

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Aggregate Planning Example

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Aggregate Planning Example

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Aggregate Planning Example

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 Aggregate Planning Example

Keepdry, a small manufacturing company (200 employees),

produces umbrellas. The company, founded in 1991 produces the
following three product lines: 1) the Executive Line, 2) the Durable
Line and 3) the Compact line shown in the following figure.

Compact
Line
Executive Durable
Line Line
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Aggregate Demand
(Executive Line)

Number of working days:

Jan 22
Feb 19
Mar 21
Apr 21
May 22
Jun 20

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 Examples
Cost Information

Materials $5/unit
Holding costs $1/unit per mo.
Marginal cost of stockout $1.25/unit per mo.
Hiring and training cost $200/worker
Layoff costs $250/worker
Labor hours required .15 hrs/unit
Straight time labor cost $8/hour
Beginning inventory 250 units
Productive hours/worker/day 7.25
Paid straight hrs/day 8

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 Determining Straight Labor Costs and Output

Jan Feb M ar Apr M ay Jun

Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1063.33 918.33 1015 1015 1063.33 966.67
$/worker $1,408 1,216 1,344 1,344 1,408 1,280

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 Chase Strategy
(Hiring & Firing--meet demand)

Jan
Days/mo 22
Hrs/worker/mo 159.5
Units/worker 1,063.33
$/worker $1,408 Beginning workforce level: 7 employees

Jan
Demand 4,500
Beg. inv. 250
Net req. 4,250
Req. workers 3.997
Hired
Fired 3
W orkforce 4
Ending inventory 0
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 Jan Feb Mar Apr May Jun
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1,063 918 1,015 1,015 1,063 967
$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Jan Feb Mar Apr May Jun

Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
Workforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 14

 Jan Feb M ar Apr M ay Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
W orkforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0

Jan Feb M ar Apr M ay Jun Costs

M aterial $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00
Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62
Hiring cost 400.00 200.00 600.00 1,200.00
Firing cost 750.00 500.00 250.00 1,500.00

$260,408.62

15
Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 1998
 Level Workforce
(Surplus and Shortage Allowed)

Workforce level: 6 employees

Jan
Demand 4,500
Beg. inv. 250
Net req. 4,250
W orkers 6
P roduction 6,380
Ending inventory 2,130
Surplus 2,130
Shortage
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 Jan Feb M ar Apr M ay Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250 2,130 10 -910 -3,910 -1,620
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
W orkers 6 6 6 6 6 6
P roduction 6,380 5,510 6,090 6,090 6,380 5,800
Ending inventory 2,130 10 -910 -3,910 -1,620 -200
Surplus 2,130 10
Shortage 910 3,910 1,620 200

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 1998

17
 Jan Feb M ar Apr M ay Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250 2,130 10 -910 -3,910 -1,620
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
W orkers 6 6 6 6 6 6
P roduction 6,380 5,510 6,090 6,090 6,380 5,800
Ending inventory 2,130 10 -910 -3,910 -1,620 -200
Surplus 2,130 10
Shortage 910 3,910 1,620 200

Jan Feb M ar Apr M ay Jun

Labor $8,448 $7,296 $8,064 $8,064 $8,448 $7,680 $48,000.00
M aterial 31,900 27,550 30,450 30,450 31,900 29,000 181,250.00
Carrying 2,130 10 2,140.00
Stockout 1,138 4,888 2,025 250 8,300.00

$239,690.00

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 1998

18
Master Production Scheduling (MPS)

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 Objectives of MPS

Determine the quantity and timing of completion of

end items over a short-range planning horizon.
Schedule end items (finished goods and parts shipped
as end items) to be completed promptly and when
promised to the customer.
Avoid overloading or underloading the production
facility so that production capacity is efficiently
utilized and low production costs result.

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 Time Fences

The rules for scheduling 6+

weeks
4-6
2-4 weeks
1-2 weeks
weeks
+/- 5% +/- 10% +/- 20%
No Change
Change Change Change
Frozen
Firm
Full
Open
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 Time Fences

The rules for scheduling:

Do not change orders in the frozen zone
Do not exceed the agreed upon percentage changes
when modifying orders in the other zones
Try to level load as much as possible
Do not exceed the capacity of the system when
promising orders.
If an order must be pulled in to level load, pull it
into the earliest possible week without missing the
promise.

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 Developing an MPS

Using input information

Customer orders (end items quantity, due dates)
Forecasts (end items quantity, due dates)
Inventory status (balances, planned receipts)
Production capacity (output rates, planned
downtime)
Schedulers place orders in the earliest available open
slot of the MPS
. . . more

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 Developing an MPS

Schedulers must:
estimate the total demand for products from all
sources
assign orders to production slots
make delivery promises to customers, and
make the detailed calculations for the MPS
As orders are slotted in the MPS, the effects on the
production work centers are checked
Rough cut planning - identify underloading or
overloading of capacity

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 Demand Management

Review customer orders and promise shipment of

orders as close to request date as possible
Update MPS at least weekly.... work with Marketing
to understand shifts in demand patterns
Produce to order..... focus on incoming customer
orders
Produce to stock ..... focus on maintaining finished
goods levels
Planning horizon must be as long as the longest lead
time item

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 Types of
Production-Planning
and Control Systems

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 Types of Production-Planning
and Control Systems
Pond-Draining Systems
Push Systems
Pull Systems
Focusing on Bottlenecks

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 Pond-Draining Systems [Chapter 10]

Emphasis on holding inventories (reservoirs) of

materials to support production
Little information passes through the system
As the level of inventory is drawn down, orders are
placed with the supplying operation to replenish
inventory
May lead to excessive inventories and is rather
inflexible in its ability to respond to customer needs

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 Push Systems [Chapter 11]

Use information about customers, suppliers, and

production to manage material flows
Flows of materials are planned and controlled by a
series of production schedules that state when batches
of each particular item should come out of each stage
of production
Can result in great reductions of raw-materials
inventories and in greater worker and process
utilization than pond-draining systems

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 Pull Systems [Chapter 14]

Look only at the next stage of production and

determine what is needed there, and produce only that
Raw materials and parts are pulled from the back of
the system toward the front where they become
finished goods
Raw-material and in-process inventories approach
zero
Successful implementation requires much preparation

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 Focusing on Bottlenecks

Bottleneck Operations
Impede production because they have less capacity
than upstream or downstream stages
Work arrives faster than it can be completed
Binding capacity constraints that control the
capacity of the system
Optimized Production Technology (OPT)
Synchronous Manufacturing

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 Synchronous Manufacturing

Operations performance measured by

throughput (the rate cash is generated by sales)
inventory (money invested in inventory), and
operating expenses (money spent in converting
inventory into throughput)
. . . more

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 Synchronous Manufacturing

System of control based on:

drum (bottleneck establishes beat or pace for other
operations)
buffer (inventory kept before a bottleneck so it is
never idle), and
rope (information sent upstream of the bottleneck
to prevent inventory buildup and to synchronize
activities)

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 Wrap-Up: World-Class Practice

Push systems dominate and can be applied to almost

any type of production
Pull systems are growing in use. Most often applied
in repetitive manufacturing
Few companies focusing on bottlenecks to plan and
control production.

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