1. Chapter 13 – Aggregate Planning
Operations Management by
R. Dan Reid & Nada R. Sanders
3rd Edition © Wiley 2007
PowerPoint Presentation by R.B. Clough – UNH
M. E. Henrie - UAA
© Wiley 2007

2. 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
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3. 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
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4. 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 months
Details the aggregate production rate and size of work force required
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5. The Role of the Aggregate Plan
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6. 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
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7. Level Plan Example
Level production rate= 28,000 units/7 periods= 4000 units
Level workforce= (4000 units x .64 std.)/160 = 16 people
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8. 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
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9. 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
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10. 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
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11. 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?
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12. 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
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13. 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
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14. Problem Data for Plans A & B (Table 13-4)
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15. Plan A - Level Using Inventory & Backorders (Table 13-5)
First calculate the level production rate (14400/8=1800)
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16. 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
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17. Plan B – Chase Aggregate Plan Using Hiring and Firing (Table 13-6)
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18. 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
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19. 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
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20. Problem Data for Plans C, D, and E (Table 13-7)
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21. Plan C – Level Aggregate Plan with No Back Orders, No Tangible Product (Table 13-8)
Staff of 69 people creates excessive UT (averages 30% UT)
Cost per service call is $46.15 ($708,000 Divided by calls)
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22. Plan D – Hybrid Aggregate Plan Using Initial Workforce and OT as Needed (Table 13-9)
Costs reduced by $77K and under time to an average of 20%
Cost per service call reduced to $41.13 (-$5.02)
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23. Plan E – Chase Aggregate Plan for Nontangible Products Using Hiring and Firing (Table 13-10)
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 people- morale problems
Solution?? Compare smaller permanent workforce, more OT??
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24. 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
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25. 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
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26. Planning Links to MPS
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27. Role of the MPS Aggregate plan: Master production schedule:
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
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28. 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
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29. 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)
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30. 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?
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31. The MPS Record
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)
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32. Revised and Completed MPS Record
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33. 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?
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34. Step 1: Determine the Planning factors:
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
Machine Factors
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35. Step 2:Calculate the Workload Generated by This Schedule
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36. Step 3: Calculate the Capacity Needs for Each Resource for Each Time Period
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37. Step 4: Calculate Individual Workcenter Capacity Needs Based on Historical Percentage Allocation
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38. 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
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39. 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.
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40. Stabilizing the MPS
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41. 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
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42. Chapter 13 Highlights
Planning begins with the development of the strategic business plan that provides your company’s direction and objectives for the next two to ten years.
Sales and operations planning integrates plans from the other functional areas and regularly evaluates company performance.
The level aggregate plan maintains the same size workforce and produces the same output each period. Inventories and backorders absorb fluctuations in demand. The chase aggregate plan changes the capacity each period to match the demand
Demand patterns can be smoothed through pricing incentives, reduced prices for out-of-season purchases, or nonprime service times.
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43. Chapter 13 Highlights (continued)
The difference in aggregate planning for companies that do not provide a tangible product is that the option to use inventories is not available
The MPS shows how the resources authorized by the AP will be used to satisfy the organizational objectives. The MPS specifies the products to be built in each time period. MPS is checked for feasibility using a rough-cut capacity planning technique.
The objectives of master scheduling are to satisfy customer service objectives, use resources effectively, and minimize costs. An MPS is developed by looking at individual MPS records and calculating when replenishment quantities are needed. The MPS records are summed together to show the total proposed workload.
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44. Chapter 13 Highlights (continued)
Available-to-promise logic is used when promising order delivery dates to customers, ATP logic allows the company to make viable delivery promises
Time fence policies stabilize the MPS. The demand time fence and the planning time fence divide the MPS into three portions: frozen, slushy, and liquid.
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45. The End
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