Aggregate Planning

Aggregate Planning
Aggregate planning
Intermediate-range capacity planning that
typically covers a time horizon of 2 to 18 months
Useful for organizations that experience
seasonal, or other variations in demand
Goal:
Achieve a production plan that will effectively utilize
the organizations resources to satisfy demand

The McGraw-Hill Companies, Inc.,

Sales and Operations Planning

Some organizations use the term sales
operations and planning rather than aggregate
planning
Sales and operation planning
Intermediate-range planning decisions to balance supply
and demand, integrating financial and operations planning
Since the plan affects functions throughout the
organization, it is typically prepared with inputs from
sales, finance, and operations

The McGraw-Hill Companies, Inc.,

Planning Levels

The McGraw-Hill Companies, Inc.,

Planning Tasks and Responsibilities

The McGraw-Hill Companies, Inc.,

Planning Horizon

Long range

Short
range
Now

Intermediate
range

6 months

18 months

Process planning

Long
range

Strategic capacity planning

Intermediate Forecasting
& demand
range
management
Manufacturing

Sales and operations (aggregate) planning

Sales plan

Aggregate operations plan

Services

Master scheduling
Material requirements planning

Short
range

Order scheduling

Weekly workforce and

customer scheduling
Daily workforce and customer scheduling

The Planning Sequence

Corporate
strategies
and policies

Economic,
competitive
and political
conditions

Aggregate
demand
forecasts

Business Plan

Establishes operations
and capacity strategies

Aggregate Plan

Establishes
operations capacity

Master Schedule

Establishes schedules
for specific products

The McGraw-Hill Companies, Inc.,

Operations Planning Activities

Long-range planning

Greater than one year planning horizon

Usually performed in annual increments

Medium-range planning

Six to eighteen months

Usually with monthly or quarterly increments

Short-range planning

One day to less than six months

Usually with weekly increments

10

Aggregation
The plan must be in units of measurement that can
be understood by the firms 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

The McGraw-Hill Companies, Inc.,

11

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

The McGraw-Hill Companies, Inc.,

12

Dealing with Variation

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
The McGraw-Hill Companies, Inc.,

13

Overview of Aggregate Planning

The McGraw-Hill Companies, Inc.,

14

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

The McGraw-Hill Companies, Inc.,

Aggregate Production Planning

(APP)
Matches market demand to company resources
Plans production 6 months to 18 months in
advance
Expresses demand, resources, and capacity in
general terms
Develops a strategy for economically meeting
demand
Establishes a company-wide game plan for
allocating resources

Balancing Aggregate Demand

and Aggregate Production Capacity
Suppose
Supposethe
thefigure
figureto
to
the
theright
rightrepresents
represents
forecast
forecastdemand
demandin
in
units
units
Now
Nowsuppose
supposethis
this
lower
lowerfigure
figurerepresents
represents
the
theaggregate
aggregatecapacity
capacity
of
ofthe
thecompany
companyto
to
meet
meetdemand
demand

10000

10000

8000

8000
6000

7000
6000

5500
4500

4000
2000
0

10000

Jan

Feb

9000

9000

Jan

Feb

Mar
9900

Apr

8800

May

Jun

9500

9500

May

Jun

8000

What
Whatwe
wewant
wantto
todo
doisis
balance
balanceout
outthe
the
production
productionrate,
rate,
workforce
workforcelevels,
levels,and
and
inventory
inventoryto
tomake
make
these
figures
these figuresmatch
matchup
up

6000
4000
2000
0
Mar

Apr

Aggregate Plan: Relationships

Marketplace
and Demand

Demand
Forecasts,
orders

Product
Decisions

Process
Planning & Capacity
Decisions

Aggregate
Plan for
Production

Master
Production
Schedule, and MRP systems

Detailed Work
Schedules

Research and
Technology

Work Force
Raw Materials
Available
Inventory On
Hand
External
Capacity
Subcontractors

Inputs and Outputs to APP

Capacity
Constraints

Demand
Forecasts

Size of
Workforce

Strategic
Objectives

Aggregate
Production
Planning

Production
per month
(in units or $)

Inventory
Levels

Company
Policies

Financial
Constraints

Units or dollars
subcontracted,
backordered, or lost

Aggregate Planning Inputs

Resources
Workforce/production rates
Facilities and equipment

Demand forecast
Policies

Workforce changes
Subcontracting
Overtime
Inventory levels/changes
Back orders

Common unit for

measuring outputs
Costs

Inventory carrying
Back orders
Hiring/firing
Overtime
Inventory changes
Subcontracting

20

Aggregate Planning Outputs

Total cost of a plan
Projected levels of
Inventory
Output (units completed per unit time)
Employment (workforce level-no.of workers)
Subcontracting levels (if any)
Backordering levels (if any)

The McGraw-Hill Companies, Inc.,

Aggregate Planning Goals

Meet demand
Use capacity efficiently
Meet inventory policy
Minimize total cost

Aggregate Planning Strategies

Proactive
Alter demand to match capacity
Reactive
Alter capacity to match demand
Mixed
Some of each

Demand Management Options

Shifting demand from peak to off-peak periods by
incentives, promotions, advertising campaigns,
pricing (price elasticity important) etc.
Offering product or services with
counterseasonal demand
patterns
(counterseasonal product mixing)
Backordering (orders are taken in one period and
deliveries promised for a later period
Creation of new demand
Partnering with suppliers to reduce information
distortion along the supply chain

Adjusting Capacity to Meet Demand

(Supply Options) (1 of 2)
Producing at a constant rate and using inventories
to absorb fluctuations in demand ie. changing
inventory levels
Varying work force size (hiring and firing workers)
so that production matches demand
Varying production capacity by increasing or
decreasing working hours (overtime or idle time)

Options of Adjusting Capacity to Meet

Demand (2 of 2)
Using part-time workers to change production rate
Subcontracting work to other firms
Providing the service or product at a later time
period (backordering)

Strategy Details
Overtime & undertime - common when
demand fluctuations are not extreme
Subcontracting - useful if supplier meets
quality & time requirements
Part-time workers - feasible for unskilled
jobs or if labor pool exists
Backordering - only works if customer is
willing to wait for product/services

Capacity Options - Advantages and

Disadvantages (1 of 4)
Option

Advantage

Disadvantage

Some
Comments

Changing
inventory levels

Changes in
human resources
are gradual, not
abrupt
production
changes

Inventory
holding costs;
Shortages may
result in lost
sales

Applies mainly
to production,
not service,
operations

Varying
workforce size
by hiring or
layoffs

Avoids use of
other alternatives

Hiring, layoff,
and training
costs

Used where size

of labor pool is
large

Advantages/Disadvantages (2 of 4)
Option

Advantage

Disadvantage

Some
Comments

Varying
production rates
through overtime
or idle time

Matches seasonal
fluctuations
without
hiring/training
costs
Permits
flexibility and
smoothing of the
firm's output

Overtime
premiums, tired
workers, may not
meet demand

Allows
flexibility within
the aggregate
plan

Loss of quality
control; reduced
profits; loss of
future business

Applies mainly
in production
settings

Subcontracting

Advantages/Disadvantages (3 of 4)
Option

Advantage

Disadvantage

Some
Comments

Using part-time
workers

Less costly and

more flexible
than full-time
workers

Good for
unskilled jobs in
areas with large
temporary labor
pools

Influencing
demand

Tries to use
excess capacity.
Discounts draw
new customers.

High
turnover/training
costs; quality
suffers;
scheduling
difficult
Uncertainty in
demand. Hard to
match demand to
supply exactly.

Creates
marketing ideas.
Overbooking
used in some
businesses.

Advantages/Disadvantages
(4 of 4)
Option

Advantage

Disadvantage

Some
Comments

Back ordering
during highdemand periods

May avoid
Customer must
overtime. Keeps be willing to
capacity constant wait, but
goodwill is lost.

Many companies
backorder.

Counterseasonal Fully utilizes

May require
products and
resources; allows skills or
service mixing
stable workforce. equipment
outside a firm's
areas of
expertise.

Risky finding
products or
services with
opposite demand
patterns.

The Extremes
Level
Strategy

Chase
Strategy

Production rate
is constant

Production
equals
demand

Basic Aggregate Planning Strategies

for Meeting Demand
Level capacity strategy:
Keeping work force constant and maintaining a steady rate
of regular-time output while meeting variations in demand
by a combination of options (such as using inventories
+overtime+part-time workers+backorders subcontracting)

Chase demand strategy:

Changing workforce levels so that production matches
demand (the planned output for a period is set at the
expected demand for that period.)

Maintaining resources for high demand levels

Ensures high levels of customer service

33

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

The McGraw-Hill Companies, Inc.,

34

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
The McGraw-Hill Companies, Inc.,

Level Production
Demand

Units

Production

Time

Chase Demand
Demand

Units

Production

Time

P r o d u c tio n r a te p e r w o r k in g d a y

Level Strategy: Forecast and

Average Forecast Demand
70
60
50

Forecast
Demand

Level production using

average monthly
forecast demand

40
30
20
10
0
Jan

Feb

Mar

Apr

May

22
20

18

21

21

22

Jun

Level Strategy: Cumulative

Demand Graph
Cumulative Demand (Units)

7,000
6,000
5,000
4,000
3,000
2,000
1,000

Reduction of
inventory

Cumulative level
production using
average monthly
forecast
requirements

Cumulative forecast
requirements
Excess inventory

Jan Feb Mar Apr May Jun

Aggregate Planning Methods

Graphical & charting techniques
Popular & easy-to-understand
Trial & error approach
Mathematical approaches
Linear programming
Transportation method
Linear decision rule (LDR)
Search decision rule (SDR)
Management coefficients model
Simulation models (Computerized models that can be tested under different scenarios
to identify acceptable solutions to problems

Summary of Planning Techniques

Technique

Solution

Characteristics

Graphical/charting

Trial and
error

Linear
programming
Linear
decision rule

Optimizing

Simulation

Trial and
error

Intuitively appealing, easy to

understand; solution not
necessarily optimal.
Computerized; linear
assumptions not always valid.
Complex, requires considerable
effort to obtain pertinent cost
information and to construct
model; cost assumptions not
always valid.
Computerized models can be
examined under a variety of
conditions.

Optimizing

41

Trial-and-Error Techniques
Trial-and-error approaches consist of developing
simple table 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

The McGraw-Hill Companies, Inc.,

Steps of Trial & Error Method

1. Forecast demand for each period
2. Determine capacities (for regular time, overtime,
subcontracting) for each period
3. Identify policies that are pertinent
4. Determine costs (labor, hiring/firing, holding etc.)
5. Develop alternative plans and costs
6. Select the best plan that satisfies objectives.
Otherwise return to step 5.

43

Trial-and-Error Technique
Assumptions

The regular output capacity is the same in all periods

Cost is a linear function composed of unit cost and number of units
Plans are feasible
All costs are associated with a decision option can be represented
by a lump sum
Cost figures can be reasonably estimated and are constant for the
planning period
Inventories are built up and drawn down at a uniform rate
throughout each period
Backlogs are treated as if they exist the entire period

The McGraw-Hill Companies, Inc.,

44

Cumulative output/demand

Cumulative Graph
Inventory Shortage

Inventory Build Up
Cumulative
production
Cumulative
demand
Period

The McGraw-Hill Companies, Inc.,

Aggregate Planning Using Pure

Strategies- Example 1
(1 of 4)
QUARTER
Spring
Summer
Fall
Winter
Hiring cost
Firing cost
Inventory carrying cost
Production per employee
Beginning work force

SALES FORECAST (LB)

80,000
50,000
120,000
150,000
= $100 per worker
= $500 per worker
= $0.50 pound per quarter
= 1,000 pounds per quarter
= 100 workers

Example 1:
Level Production Strategy (2 of 4)
QUARTER

SALES FORECAST (LB)

Spring
Summer
Fall
Winter

80,000
50,000
120,000
150,000

Level production
(50,000 + 120,000 + 150,000 + 80,000)
4
= 100,000 pounds

Example 1:
Level Production Strategy (3 of 4)
QUARTER
Spring
Summer
Fall
Winter

SALES
FORECAST
80,000
50,000
120,000
150,000
Total

PRODUCTION
PLAN
INVENTORY
100,000
100,000
100,000
100,000
400,000

20,000
70,000
50,000
0
140,000

Cost = 140,000 pounds x 0.50 per pound = $70,000

Example 1:
Chase Demand Strategy (4 of 4)
QUARTER

SALES PRODUCTION
FORECAST
PLAN

Spring
Summer
Fall
Winter

80,000
50,000
120,000
150,000

80,000
50,000
120,000
150,000

WORKERS
NEEDED

80
50
120
150

WORKERS WORKERS
HIRED
FIRED

0
0
70
30

20
30
0
0

100

50

Cost = (100 workers hired x $100) + (50 workers fired x $500)

= $10,000 + 25,000 = $35,000

MONTH
January
February
March
April
May
June

Aggregate Planning:
Example 2

DEMAND (CASES)
1000
400
400
400
400
400

MONTH

July
August
September
October
November
December

DEMAND (CASES)
500
500
1000
1500
2500
3000

Production per employee = 100 cases per month

Wage rate = $10 per case for regular production
= $15 per case for overtime
= $25 for subcontracting
Hiring cost = $1000 per worker
Firing cost = $500 per worker
Inventory carrying cost = $1.00 case per month
Beginning work force = 10 workers

Aggregate Planning:Example 3
(1 of 8)
Suppose
Supposewe
wehave
havethe
thefollowing
followingunit
unit
demand
demandand
andcost
costinformation:
information:
Demand/mo

Jan

Feb

Mar

Apr

May

Jun

4500

5500

7000

10000

8000

6000

Materials
Holding costs
Marginal cost of stockout
Hiring and training cost
Layoff costs
Labor hours required
Straight time labor cost
Beginning inventory
Productive hours/worker/day
Paid straight hrs/day

$5/unit
$1/unit per mo.
$1.25/unit per mo.
$200/worker
$250/worker
0.15 hrs/unit
$8/hour
250 units
7.25
8

Example 3:Determining Output and Straight

Labor Costs(2 of 8)
Given
Giventhe
thedemand
demandand
andcost
costinformation
informationbelow,
below,what
what
are
arethe
theaggregate
aggregatehours/worker/month,
hours/worker/month,units/worker,
units/worker,and
and
dollars/worker?
dollars/worker?
Demand/mo

Jun

Jan

Feb

Mar

Apr

May

4500

5500

7000

10000

8000 6000

7.25x22

7.25/0.15=48.33 &
22x8hrsx$8=$1408

Days/mo
Hrs/worker/mo
Units/worker
$/worker

Jan
22
159.5
1063.33
$1,408

Feb
19
137.75
918.33
1,216

Mar
21
152.25
1015
1,344

48.33x22=1063.33
Apr
May
Jun
21
22
20
152.25
159.5
145
1015 1063.33 966.67
1,344
1,408
1,280

Example 3: Chase Strategy

(Hiring & Firing to meet demand)(3 of 8)
Days/mo
Hrs/worker/mo
Units/worker
$/worker

Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory

J an
22
159.5
1,063.33
$1,408

J an
4,500
250
4,250
3.997
3
4
0

Lets
Letsassume
assumeour
ourcurrent
currentworkforce
workforceisis77
workers.
workers.

First, calculate net requirements for

production, or 4500-250=4250 units
Then, calculate number of workers
needed to produce the net
requirements, or
4250/1063.33=3.997 or 4 workers
Finally, determine the number of
workers to hire/fire. In this case we
only need 4 workers, we have 7, so
3 can be fired.

Example 3 (4 of 8)

Below
Beloware
arethe
thecomplete
completecalculations
calculationsfor
forthe
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
monthplanning
planninghorizon
horizon
Days/mo
Hrs/worker/mo
Units/worker
$/worker

Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory

J an
22
159.5
1,063
$1,408

Feb
19
137.75
918
1,216

Mar
21
152.25
1,015
1,344

Apr
21
152.25
1,015
1,344

May
22
159.5
1,063
1,408

J un
20
145
967
1,280

J an
4,500
250
4,250
3.997

Feb
5,500

Mar
7,000

Apr
10,000

May
8,000

J un
6,000

5,500
5.989
2

7,000
6.897
1

10,000
9.852
3

8,000
7.524

6,000
6.207

2
8
0

1
7
0

3
4
0

6
0

7
0

10
0

Example 3 (5 of 8)
Below are the complete calculations for the remaining months in
the six month planning horizon with the other costs included
Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory

Material
Labor
Hiring cost
Firing cost

J an
4,500
250
4,250
3.997
3
4
0

Feb
5,500

Mar
7,000

Apr
10,000

May
8,000

Jun
6,000

5,500
5.989
2

7,000
6.897
1

10,000
9.852
3

8,000
7.524

6,000
6.207

2
8
0

1
7
0

6
0

7
0

10
0

J an
Feb
Mar
Apr
May
Jun
$21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00
5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83
400.00
200.00
600.00
750.00
500.00
250.00

Costs
203,750.00
53,958.62
1,200.00
1,500.00
$260,408.62

Example 3: Level Workforce Strategy

(Surplus and Shortage Allowed)(6 of 8)
Lets
Letstake
takethe
thesame
sameproblem
problemas
as
before
beforebut
butthis
thistime
timeuse
usethe
the
Level
LevelWorkforce
Workforcestrategy
strategy
This
Thistime
timewe
wewill
willseek
seekto
touse
use
aaworkforce
workforcelevel
levelof
of66workers
workers

Demand
Beg. inv.
Net req.
Workers
Production
Ending inventory
Surplus
Shortage

J an
4,500
250
4,250
6
6,380
2,130
2,130

Example 3 (7 of 8)
Below
Below are
arethe
thecomplete
completecalculations
calculations for
for the
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
monthplanning
planninghorizon
horizon
Demand
Beg. inv.
Net req.
Workers
Production
Ending inventory
Surplus
Shortage

Jan
4,500
250
4,250
6
6,380
2,130
2,130

Feb
5,500
2,130
3,370
6
5,510
2,140
2,140

Mar
7,000
2,140
4,860
6
6,090
1,230
1,230

Apr
10,000
1,230
8,770
6
6,090
-2,680

May
8,000
-2,680
10,680
6
6,380
-1,300

Jun
6,000
-1,300
7,300
6
5,800
-1,500

2,680

1,300

1,500

Note,
Note, ifif we
we recalculate
recalculate this
this sheet
sheet with
with 77 workers
workers
we
we would
would have
have aa surplus
surplus

Example 3 (8 of 8)
Below
Beloware
are the
thecomplete
complete calculations
calculations for
for the
the remaining
remaining months
months
in
in the
the six
six month
month planning
planning horizon
horizon with
with the
the other
other costs
costs
included
included
Jan
4,500
250
4,250
6
6,380
2,130
2,130

Jan
$8,448
31,900
2,130

Feb
5,500
2,130
3,370
6
5,510
2,140
2,140

Feb
$7,296
27,550
2,140

Mar
7,000
10
4,860
6
6,090
1,230
1,230

Mar
$8,064
30,450
1,230

Apr
10,000
-910
8,770
6
6,090
-2,680

May
8,000
-3,910
10,680
6
6,380
-1,300

Jun
6,000
-1,620
7,300
6
5,800
-1,500

2,680

1,300

1,500

Apr
$8,064
30,450

May
$8,448
31,900

Jun
$7,680
29,000

3,350

1,625

1,875

Note,
Note,total
total
costs
costs under
under
this
thisstrategy
strategy
are
areless
lessthan
than
Chase
Chaseat
at
$260.408.62
$260.408.62
Labor
$48,000.00 Material
181,250.00 Storage
Stockout
5,500.00
6,850.00

$241,600.00

APP by Linear Programming

Minimize Z = $100 (H1 + H2 + H3 + H4)
+ $500 (F1 + F2 + F3 + F4)
+ $0.50 (I1 + I2 + I3 + I4)
Subject to

where
Ht = # hired for period t
Ft = # fired for period t
It = inventory at end
of period t
Pt = units produced
in period t
Wt = workforce size
for period t

P1 - I1 = 80,000

(1)

Demand

I1 + P2 - I2 = 50,000

(2)

constraints

I2 + P3 - I3 = 120,000

(3)

I3 + P4 - I4 = 150,000

(4)

Production

1000 W1 = P1

(5)

constraints

1000 W2 = P2

(6)

1000 W3 = P3

(7)

1000 W4 = P4

(8)

100 + H1 - F1 = W1

(9)

Work force

W 1 + H2 - F 2 = W 2

(10)

constraints

W 2 + H3 - F 3 = W 3

(11)

APP by the Transportation

Method
QUARTER

EXPECTED
DEMAND

REGULAR
CAPACITY

OVERTIME
CAPACITY

SUBCONTRACT
CAPACITY

1
2
3
4

900
1500
1600
3000

1000
1200
1300
1300

100
150
200
200

500
500
500
500

Regular production cost per unit

Overtime production cost per unit
Subcontracting cost per unit
Inventory holding cost per unit per period
Beginning inventory

$20
$25
$28
$3
300 units

The Transportation Tableau

PERIOD OF USE
PERIOD OF PRODUCTION

Beginning

2
0

Inventory

300

Regular

600

3
3

20

300

23

100

29

1000

100

34

100

37

500

31

Subcontract

28

31

34

23

26

1200
150

Overtime

25

28

150

31

Subcontract

28

31

250

34

Regular

1300

Overtime

200

Regular

25

500
1300

Overtime

200

Subcontract
Demand

20

28

Subcontract
4

28

20

300

26

25

1200

500
900

1500

1600

Capacity

Overtime

Regular

Unused
Capacity

3000

250

23

500
1300

28

200

31

500

20

1300

25

200

28

500
250

61

Burruss Production Plan

REGULAR
SUBENDING
PERIOD DEMAND PRODUCTION OVERTIME CONTRACT INVENTORY

1
2
3
4
Total

900
1500
1600
3000
7000

1000
1200
1300
1300
4800

100
150
200
200
650

0
250
500
500
1250

500
600
1000
0
2100

The McGraw-Hill Companies, Inc.,

62

Other Quantitative Techniques

Linear decision rule (LDR)
Search decision rule (SDR)
Management coefficients model

The McGraw-Hill Companies, Inc.,

Hierarchical Planning Process

Production
Planning

Capacity
Planning

Resource
Level

Product lines
or families

Aggregate
production
plan

Resource
requirements
plan

Plants

Individual
products

Master
production
schedule

Rough-cut
capacity
plan

Critical
work
centers

Components

Material
requirements
plan

Capacity
requirements
plan

All
work
centers

Manufacturing
operations

Shop
floor
schedule

Input/
output
control

Individual
machines

Items

Aggregate Plan to Master Schedule

(Disaggregation)
Aggregate
Planning

Disaggregation

Master
Schedule

Disaggregating the Aggregate Plan

Master schedule:
The result of disaggregating an aggregate plan
shows quantity and timing of specific end items
needed to meet demand for a scheduled horizon.

Rough-cut capacity planning:

Approximate balancing of capacity and demand to
test the feasibility of a master schedule.

66

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
The McGraw-Hill Companies, Inc.,

67

The Master Scheduler

The master schedulers duties:
Evaluating the impact of new orders
Providing delivery dates for orders
Deals with problems
Evaluating the impact of production or delivery delays
Revising master schedule when necessary because of
insufficient supplies or capacity
Bring instances of insufficient capacity to the attention of
relevant personnel so they can participate in resolving
conflicts
The McGraw-Hill Companies, Inc.,

68

The Master Scheduling Process

Inputs

Outputs

Beginning inventory
Forecast

Customer orders

Projected inventory
Master
Production
Schedule

Master production schedule

Uncommitted inventory

The McGraw-Hill Companies, Inc.,

69

Master Scheduling Process

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

The McGraw-Hill Companies, Inc.,

70

MPS Forecasts and Customer

Orders

The McGraw-Hill Companies, Inc.,

71

Projected On-hand Inventory

Projected on-hand
=
inventory

Inventory from
previous week

Current weeks
requirements

The McGraw-Hill Companies, Inc.,

72

MPS - Projected On-hand Inventory

Beginning
Inventory

64
Forecast
Customer Orders
(committed)
Projected on-hand
inventory
Customer orders are
larger than forecast in
week. Projected on hand
inventory is 64-33=31

1
30

JUNE
2
3
30 30

4
30

5
40

33

20

31

10

JULY
6
7
40 40

8
40

Forecast is larger than

Customer orders in week
3. Projected on hand
inventory
is 1-30=-29
Forecast is larger
than
Customer orders in week
2. Projected on hand
inventory is 31-30=1

-29

The McGraw-Hill Companies, Inc.,

73

Determining MPS and Projected On

Hand

The McGraw-Hill Companies, Inc.,

74

Adding MPS and Projected On Hand to

the MPS

The McGraw-Hill Companies, Inc.,

75

Available to Promise

The McGraw-Hill Companies, Inc.,

76

Available-to-Promise
ON-HAND = 50
Forecast
Customer orders
Master production schedule
Available to promise

ON-HAND = 50
Forecast
Customer orders
Master production schedule
Available to promise

100

100

200

PERIOD
3
4
100

100

200

100
90
200
40

100
120

100

100

200

PERIOD
3
4
100
130
200
0

100
70

100
20
200
170

100
10

ATP in period 1 = (50 + 200) - (90 + 120) = 40

ATP in period 3 = 200 - (130 + 70) = 0
ATP in period 5 = 200 - (20 + 10) = 170

The McGraw-Hill Companies, Inc.,

77

Available-to-Promise
Product
Request

Yes

Is the product
available at
this location?
No

Availableto-promise

Yes

Is an alternative
product available
at this location?

No

Allocate
inventory
Yes

Is this product
available at a
different
location?
No

Is an alternative
product available
at an alternate
location?

Yes

No

Allocate
inventory

Capable-topromise date

Is the customer
willing to wait for
the product?

No

Availableto-promise

Yes

Revise master
schedule

Trigger production

Lose sale
The McGraw-Hill Companies, Inc.,

78

Time Fences
Time Fences points in time that separate
phases of a master schedule planning
horizon.

The McGraw-Hill Companies, Inc.,

79

Time Fences in MPS

Period

frozen
(firm or
fixed)

slushy
somewhat
firm

liquid
(open)

The McGraw-Hill Companies, Inc.,

Aggregate Planning for Services

1.
2.
3.
4.

Most services cant be inventoried

Demand for services is difficult to predict
Capacity availability is also difficult to predict
Service capacity must be provided at the
appropriate place and time
5. Labor is usually the most constraining resource
for services
6. Labor flexibility can be an advantage in services

81

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
The McGraw-Hill Companies, Inc.,

82

Aggregate Planning in Services

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

The McGraw-Hill Companies, Inc.,

83

Aggregate Planning in Services

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
related to:
1.
2.
3.
4.

Demand for service can be difficult to predict

Capacity availability can be difficult to predict
Labor flexibility can be an advantage in services
Services occur when they are rendered
The McGraw-Hill Companies, Inc.,

84

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

The McGraw-Hill Companies, Inc.,

Characteristics That Make Yield

Management Work
Service or product can be sold in advance
of consumption
Demand fluctuates
Capacity is relatively fixed
Demand can be segmented
Variable costs are low and fixed costs are
high

Hotel: Single Price Level

Sales

Demand Curve

$sales = Net price

* 50 rooms
=150*50
=$7500

Potential customers exist who are willing

to pay more than the $15 variable cost
Passed up
Some customers who
profit
paid $150 for the room
contributions
were actually willing to
pay more
Money left
on the table
$15 variable cost
of room

$150 Price
charged for room

$ Sales = $ 6,750

Price

Hotel: Two Price Levels

Sales

Net prices are:

Price #1 => $85
Price #2 => $175

Demand
Total sales =
1st net price *30 +
2nd net price *30
= $8100

$15 variable
cost of room

$100
Price #1

$Sales = $ 8,100

$200
Price #2

Yield Management
P(n < x)

Cu
Cu + Co

where
n = number of no-shows
x = number of rooms or seats overbooked
Cu = cost of underbooking; i.e., lost sale
Co = cost of overbooking; i.e., replacement cost
P = probability

Yield Management

NO-SHOWS

PROBABILITY

0
.25
2
3

.15
.30
.30

Yield Management
NO-SHOWS

PROBABILITY

P(N < X)

0
1
2
3

.15
.25
.30
.30

.00
.15
.40
.70

Expected number of no shows

0(.15) + 1(.25) + 2(.30) + 3(.30) = 1.75
Optimal probability of no-shows
Cu
75
P(n < x)
=
= .517
75 + 70
Cu + Co

.517

Yield Management
NO-SHOWS
PROBABILITY
P(N < X)
Cost of overbooking
0
.15
.00
[2(.15) + 1(.25)]$70
1
= $38.50 Cost
.25 of bumping customers
.15
2(.30)$75 = $22.50 Lost
.30 revenue from no-shows
.40
.517
3
.30 cost of overbooking
.70
$61.00 Total
by
2 rooms
Expected number of no shows
Expected savings = ($131.225 - $61) = $70.25 a night
0(.15) + 1(.25) + 2(.30) + 3(.30) = 1.75
Optimal probability of no-shows
Cu
75
P(n < x)
=
= .517
75 + 70
Cu + Co