Aggregate

Planning
 Learning Objectives
• Explain business planning
• Explain sales and operations planning
• Identify different aggregate planning strategies and options for
changing demand and/or capacity in aggregate plans
• Develop aggregate plans, calculate associated costs, and evaluate
the plan in terms of operations, marketing, finance, and human
resources
• Describe differences between aggregate plans for service and
manufacturing companies
 Learning Objectives (continued)
• Explain role and objectives of the master production
schedule (MPS) and describe the objectives of master
production scheduling
• Develop a MPS and project the capacity needed using
rough-cut capacity planning
• Calculate available-to-promise quantities (ATP)
• Describe time fence policies
 The Role of Aggregate Planning
• Integral to part of the business planning process
• Supports the strategic plan
• Also known as the production plan
• Identifies resources required for operations for the next 6
-18 months
• Details the aggregate production rate and size of work
force required
The Role of the Aggregate Plan
 Types of Aggregate Plans

• Level Aggregate Plans

– Maintains a constant workforce
– Sets capacity to accommodate average demand
– Often used for make-to-stock products like appliances
– Disadvantage- builds inventory and/or uses back orders
• Chase Aggregate Plans
– Produces exactly what is needed each period
– Sets labor/equipment capacity to satisfy period demands
– Disadvantage- constantly changing short term capacity
 Level Plan Example

• Level production rate= 28,000 units/7 periods= 4000 units

• Level workforce= (4000 units x .64 std.)/160 = 16 people
 Chase Plan Example

• Chase hires and fires staff to exactly meet each periods demand
• Period 1 = (500 units x .64 std.)/160 = 2 people, need to fire 16
people
 Types of Aggregate Plans (Cont.)

• Hybrid Aggregate Plans

– Uses a combination of options
– Options should be limited to facilitate execution
– May use a level workforce with overtime & temps
– May allow inventory buildup and some backordering
– May use short term sourcing
 Aggregate Planning Options

• Demand based options

– Reactive: uses finished goods inventories and
backorders for fluctuations
– Proactive: shifts the demand patterns to minimize
fluctuations e.g. early bird dinner prices at a restaurant
• Capacity based options
– Changes output capacity to meet demand
– Uses overtime, under time, subcontracting, hiring, firing,
and part-timers – cost and operational implications
 Evaluating the Current Situation

• Important to evaluate current situation in

terms of;
– Point of Departure
• Current % of normal capacity
• Options are different depending on present situation

– Magnitude of change
• Larger changes need more dramatic measures

– Duration of change
• Is the length of time a brief seasonal change?
• Is a permanent change in capacity needed?
 Developing the Aggregate Plan

• Step 1- Choose strategy: level, chase, or Hybrid

• Step 2- Determine the aggregate production rate
• Step 3- Calculate the size of the workforce
• Step 4- Test the plan as follows:
» Calculate Inventory, expected hiring/firing, overtime needs
» Calculate total cost of plan

• Step 5- Evaluate performance: cost, service,

human resources, and
operations
 Plan for Companies with Tangible
Products – Plans A, B, C, D
• Plan A: Level aggregate plan using
inventories and back orders
• Plan B: Level plan using inventories but no
back orders
• Plan C: Chase aggregate plan using hiring
and firing
• Plan D: Hybrid plan using initial workforce
and overtime as needed
Problem Data for Plans A & B
(Table 13-4)
 Plan A - Level Using Inventory &
Backorders (Table 13-5)
• First calculate the level production rate (14400/8=1800)
 Plan A Evaluation
• Fill rate is 83.9%
• Fill rate is likely to low
• Inventory levels seem to be okay
• Human resources fires two employees
Plan B – Chase Aggregate Plan
Using Hiring and Firing (Table 13-6)
 Plan B Evaluation

• Plan B costs slightly less than the level plan.

• Hiring demands ranges from two in November to
thirty-four in February
• Utilization is highest, 70.6%, in December and
even lower in the other months
• Space and equipment are underutilized in every
other month of the plan
 Aggregate Plans for Service Companies
with Non-Tangible Products- Plans E, F, G

• Options remain the same – level, chase, and

hybrid plans
– Overtime and under time can be used
– Staff can be hired and fired

• Inventory cannot be used to level the service plan

• All demand must be satisfied or lose business to

a competing service provider
 Problem Data for Plans C, D, and E
(Table 13-7)

A B
4 Cost Data
5 Regular time labor cost per hour $8.00
6 Overtime labor cost per hour $12.00
7 Subcontracting cost per unit (labor only) $60.00
8 Hiring cost per employee $250.00
9 Firing cost per employee $150.00
10
11 Capacity Data
12 Beginning workforce (employees) 60
13 Serv ice standard per call (hours) 4
14 Regular time av ailable per period (hours) 160
15 Overtime available per period (hours) 24
16
17 Demand Data (calls)
18 Period 1 2400
19 Period 2 1560
20 Period 3 1200
21 Period 4 2040
22 Period 5 2760
23 Period 6 1680
24 Period 7 1320
25 Period 8 2400
26
27 Total Number of Periods 8
28
 Plan C – Level Aggregate Plan with No
Back Orders, No Tangible Product
(Table 13-8)
D E F G H I J K L M
3 Plan E: Level Aggregate Plan with No Backorders, No Tangible Product
4
5 Compute Workforce Needed
6 Maximum Demand 2760 <-- Need to staff to meet the maximum number of calls
7 Calls per Worker per Period (Reg Time) 40
8 Workers Needed 69
9 Number to Hire 9
10 Number to Fire 0
11
12 Detailed Plan Computations Period
13 1 2 3 4 5 6 7 8 Total
14 Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400 15360
15 Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600 61440
16 Regular time hours available 11040 11040 11040 11040 11040 11040 11040 11040
17 Undertime hours 1440 4800 6240 2880 0 4320 5760 1440 26880
18
19 Cost Calculations for Plan E
20 Regular time labor cost $706,560
21 Hiring cost $2,250
22 Firing cost $0
23 Total Cost $708,810
24

• Staff of 69 people creates excessive UT (averages 30% UT)

• Cost per service call is $46.15 ($708,000 Divided by 15360 calls)
 Plan D – Hybrid Aggregate Plan Using Initial
Workforce and OT as Needed
(Table 13-9)

D E F G H I J K L M
26 Plan F: Hybrid Aggregate Plan Using Initial Workforce and Overtime as Needed
27
28 Detailed Plan Computations Period
29 1 2 3 4 5 6 7 8 Total
30 Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400 15360
31 Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600 61440
32 Regular time hours of capacity 9600 9600 9600 9600 9600 9600 9600 9600 76800
33 Overtime hours needed 0 0 0 0 1440 0 0 0 1440
34 Undertime hours 0 3360 4800 1440 0 2880 4320 0 16800
35
36 Cost Calculations for Plan F
37 Regular time labor cost $614,400
38 Overtime labor cost $17,280
39 Total Cost $631,680
• Costs reduced by $77K and under time to an average of 20%
• Cost per service call reduced to $41.13 (-$5.02)
 Plan E – Chase Aggregate Plan for
Nontangible Products Using Hiring and
Firing (Table 13-10)
D E F G H I J K L
42 Plan G: Chase Aggregate Plan Using Hiring and Firing
43
44 Beginning Number of Employees 60
45
46 Detailed Plan Computations Period
47 1 2 3 4 5 6 7 8
48 Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400
49 Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600
50 Number of employees needed 60 39 30 51 69 42 33 60
51 Number of hires 0 0 0 21 18 0 0 27
52 Number of fires 0 21 9 0 0 27 9 0
53
54 Cost Calculations for Plan G
55 Regular time labor cost $491,520
56 Hiring cost $16,500
57 Firing cost $9,900
58 Total Cost $517,920

• Total cost reduced by $114K over Plan F, utilization improved to 100%,

and cost per service call now $33.72 (-$7.41)
• Workforce fluctuates from 30-69 people- morale problems
• Solution?? Compare smaller permanent workforce, more OT??
 Aggregate Planning Bottom Line

• The Aggregate plan must balance several

perspectives
• Costs are important but so are:
– Customer service
– Operational effectiveness
– Workforce morale
• A successful AP considers each of these factors
 Master Production Scheduling
• Master production schedule (MPS) is the
anticipated build schedule
• MPS is often stated in produce or service
specifications rather than dollars
• MPS is often built, managed, reviewed
and maintained by the master scheduler
Planning Links to MPS
 Role of the MPS

• Aggregate plan:
– Specifies the resources available (e.g.: regular
workforce, overtime, subcontracting, allowable
inventory levels & shortages)
• Master production schedule:
– Specifies the number & when to produce each
end item (the anticipated build schedule)
– Disaggregates the aggregate plan
 Objectives of Master Schedule
• The Master Scheduler must:
– Maintain the desired customer service level
– Utilize resources efficiently
– Maintain desired inventory levels
• The Master Schedule must:
– Satisfy customer demand
– Not exceed Operation’s capacity
– Work within the constraints of the Aggregate Plan
 MPS as a Basis of
Communication
• MPS is a basis for communication between
operations and other functional areas
• Demand management and master scheduler is
communication is ongoing to incorporate
– Forecasts, order-entry, order-promising, and physical
distribution activities
• Authorized MPS is critical input to the material
requirements planning (MRP)
 Developing an MPS

• The Master Scheduler:

– Develops a proposed MPS
– Checks the schedule for feasibility with available capacity
– Modifies as needed
– Authorizes the MPS
• Consider the following example:
– Make-to-stock environment with fixed orders of 125 units
– There are 110 in inventory to start
– When are new order quantities needed to satisfy the
forecasted demand?
 The MPS Record
Week BI 1 2 3 4 5 6 7 8 9 10 11 12

Forecast 50 50 50 50 75 75 75 75 50 50 50 50

Projected available 110 60 10 -40

MPS

Week BI 1 2 3 4 5 6 7 8 9 10 11 12

Forecast 50 50 50 50 75 75 75 75 50 50 50 50

Projected available 110 60 10 85 35 -40

MPS 125

• Projected Available = beginning inventory + MPS shipments - forecasted

demand
• The MPS row shows when replenishment shipments need to arrive to avoid a
stock out (negative projected available)
 Revised and Completed MPS Record

Week BI 1 2 3 4 5 6 7 8 9 10 11 12

Forecast 50 50 50 50 75 75 75 75 50 50 50 50

Projected available 110 60 10 85 35 85 10 -65

MPS 125 125

Week BI 1 2 3 4 5 6 7 8 9 10 11 12

Forecast 50 50 50 50 75 75 75 75 50 50 50 50

Projected available 110 60 10 85 35 85 10 60 110 60 10 85 35

MPS 125 125 125 125 125

 Evaluating the MPS
• Rough-cut capacity planning:
– An estimate of the plan’s feasibility
– Given the demonstrated capacity of critical resources
(e.g.: direct labor & machine time), have we
overloaded the system?
• Customer service issues:
– Does “available-to-promise” inventory satisfy
customer orders? If not, can future MPS quantities be
pulled in to satisfy new orders?
 Rough Cut Capacity Problem: a shoe company produces two models of
dance shoes. Over the past 3 years 72,000 pairs of Model M have been
produced using 21,600 direct labor hours and 5760 machine hours, and
108,000 pairs of Model W using 43,200 hours of labor and 12,960 hours of
machine time.

• Step 1: Determine the Planning factors:

– Labor Factors
Total DL hours building model
Direct Labor Planning Factor 
number of units built
21,6000 hours 43,200 hours
DL PFM   0.30 hour ; DL PFW   0.40 hour
72,000 pairs 108,000 pairs

– Machine Factors
Total machine hours building model
Machine Planning Factor 
number of units built
5760 hours 12,960
Machine PF M   0.08hour ; MachinePF W   0.12hour
72,000 pairs 108,000
 Step 2:Calculate the Workload Generated
by This Schedule
A B C D E F
4 Planning Factors (hours per pair)
5 Direct Machine
6 Labor Time
7 Model M 0.30 0.08
8 Model W 0.40 0.12
9
10 Quarterly Master Production Schedule (MPS) (pairs)
11 Q1 Q2 Q3 Q4 Totals
12 Model M 6000 5500 9500 6500 27500
13 Model W 10000 12000 7500 10100 39600
Step 3: Calculate the Capacity Needs for
Each Resource for Each Time Period

A B C D E F
15 Direct Labor Hours Required
16 Q1 Q2 Q3 Q4 Totals
17 Model M 1800 1650 2850 1950 8250
18 Model W 4000 4800 3000 4040 15840
19 Totals 5800 6450 5850 5990 24090
20
21 Machine Time (Hours) Required
22 Q1 Q2 Q3 Q4 Totals
23 Model M 480 440 760 520 2200
24 Model W 1200 1440 900 1212 4752
25 Totals 1680 1880 1660 1732 6952
 Step 4: Calculate Individual Workcenter
Capacity Needs Based on Historical
Percentage Allocation
A B C D E F
27 Work Center Historical Breakdown
28 Direct Machine
29 Labor Time
30 Center 101 60% 60%
31 Center 102 40% 40%
32
33 Direct Labor Hours Required by Work Center
34 Q1 Q2 Q3 Q4 Totals
35 Center 101 3480 3870 3510 3594 14454
36 Center 102 2320 2580 2340 2396 9636
37 Totals 5800 6450 5850 5990 24090
38
39 Machine Time Hours Required by Work Center
40 Q1 Q2 Q3 Q4 Totals
41 Center 101 1008 1128 996 1039.2 4171.2
42 Center 102 672 752 664 692.8 2780.8
43 Totals 1680 1880 1660 1732 6952
 Using the MPS to “Order Promise”

• The authorized MPS is used to promise orders to customers

• The MPS table is expanded to add customer orders and available-
to-promise rows (inventory to satisfy new orders)
• ATPAction Bucket = (beginning inventory + MPS shipment) less
(customer orders before next replenishment). Available in period 1
• ATP=MPS shipment – Customer orders between current MPS
shipment and next scheduled replenishment in periods 3,5,7,8, & 11

Week BI 1 2 3 4 5 6 7 8 9 10 11 12

Forecast 50 50 50 50 75 75 75 75 50 50 50 50

Customer orders 35 25 25 20 0 15 0 0 10 0 0 10

Projected available 110 60 10 85 35 85 10 60 110 60 10 85 35

Available-to-promise 50 80 110 125 115 115

MPS 125 125 125 125 125

 Example of Revising the ATP MPS Record: A customer calls
marketing willing to purchase 200 units if they can be delivered in
period 5. The two tables below show how the system logic would first
slot the 200 into period 5 and then how the order would be allocated
across periods 1, 3, and 5 and adjusting the ATP row.
Stabilizing the MPS
 Aggregate Planning Across the
Organization
• Aggregate planning, MPS, and rough-cut
capacity affection functional areas throughout
the organization
– Accounting is affected because aggregate plan details
the resources needed by operations
– Marketing as the aggregate plan supports the
marketing plan
– Information systems maintains the databases that
support demand forecasts and other such information