Aggregate Planning

Chapter 13: Aggregate Planning

Overview

This chapter explains business, sales and operations planning.  The different types of aggregate planning strategies are introduced and discussed.  Next, the options for changing demand and capacity are presented.  The various strategies are then evaluated in terms of costs and impacts on the various business functions.  The differences in aggregate planning for services and manufacturing are discussed.

Next, the chapter explains the role and organizational linkages of master production scheduling.  The objectives of master production scheduling are presented.  The procedure for developing a master production schedule (MPS) is explained.  The MPS is then used to perform rough-cut capacity planning in order to find an authorized MPS.  Finally, we learn about available-to-promise quantities and how to deal with changes in the MPS later in the process.

Answers to Discussion Questions in Textbook

• Explain the importance of the strategic business plan.

 

The strategic business plan is the long-term strategy in terms of revenue, cost and profit objectives.  It is important because it is the input into the sales and operations plans.

• Describe sales and operations planning in terms of its purpose, components, and frequency.

 

Sales planning involves decisions concerning the markets served, customer service levels, competitive priorities, profit margins and market share in order to achieve the objectives of the business plan.   Sales planning is conducted every 6 to 18 months depending on the firm’s choice of planning period.

Operations planning involves decisions concerning the aggregate production rate, staffing levels, inventory levels, backorders and use of overtime, undertime, subcontracting, hiring and firing that is authorized to support the sales or marketing plan.  Operations planning is conducted every 6 to 18 months depending on the firm’s choice of planning period, but may be updated more frequently.

• Define the aggregate plan.

 

The aggregate or production plan identifies resources needed.  The resource decisions are the aggregate production rate, staffing plan and inventory policies. 

• Explain why we use an aggregate or composite product when developing the aggregate plan.

 

A composite product is used when developing the aggregate plan in order to minimize the level of detail in the plan.  In addition, aggregate plans are usually more accurate than individual product plans since aggregate forecasts of demand are more accurate than forecasts of individual product demands.

• Compare and contrast the level and chase aggregate plans.

 

These plans are similar since both plans ensure that demand is met.  However, they meet demand in different ways.  A level plan maintains the same workforce size and equipment, thus producing the same amount of product each time period.  This causes inventory to increase when demand is below average and decrease when demand is above average.  A chase plan adjusts the size of the workforce and equipment capacities in order to meet the demand rate for each time period.  In this plan, inventory is not used to support the plan.  Instead, people are hired and fired as needed to deal with changes in demand.

• Describe the different demand-based options used in aggregate planning and their implications for your company.

 

Reactive demand-based options use inventories and backorders to deal with changes in demand.  This option causes our inventory costs to increase and our customer service levels to decrease because some orders may be shipped late.  The proactive or capacity-based option attempts to shift the demand patterns in order to minimize changes in demand.  This option can increase expenses, such as overtime and subcontracting.

• Describe the different capacity-based options used in aggregate planning and their implications for your company.

 

The different options are overtime, undertime, subcontracting, hiring and firing.  Overtime causes labor expenses to increase since we typically pay time and a half for each overtime hour.  Undertime increases the labor cost per unit since we have idle time.  Subcontracting costs money since we have to send our product for outside manufacturing.  This is usually more costly than the expense of making the product in house.  Hiring causes us to incur expenses related to position advertising, interviewing steps and training.  Firing expenses may include increased unemployment compensation premiums and severance packages for those fired.

• Explain what the hybrid aggregate plan is and why it is used.

 

A hybrid aggregate plan uses options from both the level and chase aggregate plans.  It is used because we may not prefer to use a level or aggregate plan.  We can combine our preferred decisions from each plan.

• Explain the procedure for developing an aggregate plan.

 

First, we choose the type of aggregate plan to use.  Next, we determine the aggregate production rate based on our choice of aggregate plan.  The size of the workforce is calculated based on the type of aggregate plan used.  Then we test the aggregate plan to determine its total cost.  Finally, we evaluate the plan in terms its impacts on cost, customer service, operations and human resources.

• Describe the factors to consider before developing your aggregate plan.

 

We would want to consider the availability of workers based on the unemployment rate.  We would also consider the time and expense involved in hiring and firing workers.  The cost of holding inventory should be determined.  We should also determine the impact of backorders on customer satisfaction, which can negatively affect future demand.

• Explain how aggregate planning is different when the company does not provide a tangible product.

 

In services, we can not use inventory buildup as a way of dealing with peaks in demand.

• Visit a local manufacturer and determine how it uses aggregate planning.

 

This answer will depend on the area in which the university is located.

• Visit a local service provider and determine how it uses aggregate planning.

 

This answer will depend on the area in which the university is located.

• What two items must you calculate when developing your aggregate plan?

 

You must calculate the production rate and workforce size when developing the aggregate plan.

• Visit a local business and learn how it calculates its resources.

 

The answer to this question depends on the location of the university.

• Describe the inputs needed to do master production scheduling.

 

To create the MPS, we need the aggregate production plan, beginning inventory levels, and the capacity required for each of our products on each resource.

• Describe the different sources of demand.

 

The different sources of demand are customer orders, a forecast of demand, interplant requirements, service part requirements and distribution requirements.

• Discuss the objectives of the master scheduler and how they influence master scheduling decisions.

 

The objectives of the master scheduler are as follows:

• Achieve the desired level of customer service.
• Effectively utilize the resources of materials, labor and equipment.
• Ensure that inventory is at an appropriate level in terms of investment.

 

These objectives influence the master scheduling decisions in terms of how the demand is satisfied and how capacity is dealt with.

• Explain the process of developing an authorized MPS.

 

First, we develop a proposed MPS.  Then, we use rough-cut capacity planning to determine if we have enough capacity to meet the MPS.  If there is not enough capacity, we create an MPS that is feasible in terms of capacity.  If there is enough capacity, then the MPS is evaluated in terms of its impact on customer service, its use of resources and inventory investment.  If it meets our criteria, then it becomes an authorized MPS. 

• Explain the importance of rough-cut capacity planning in the MPS process.

 

Rough-cut capacity planning is important because if we do not ensure there is enough capacity for the MPS, then we may have an infeasible MPS.  If the MPS were infeasible, we would start experiencing problems on the plant floor.  Specifically, items would be finished late, which could cause us to start expediting.

• Describe the role of time fence policies.

 

Time fence policies stabilize the MPS.  The MPS is divided by the two time fences of demand and planning that cause the MPS to consist of frozen, slushy and liquid zones.  The demand time fence separates the frozen and slushy times zones, while the planning fence separates the slushy and liquid time zones.  These zones have varying rules regarding the frequency and authorization for making changes.

• Explain the changes you can make in the frozen portion of the MPS and who must authorize such changes.

 

In the frozen portion of the MPS, you can make infrequent changes that must be authorized by a manager who is responsible for the release of resources to operations.  Changes made in this portion could jeopardize existing customer orders.

• Explain the changes you can make in the slushy portion of the MPS and who authorizes such changes.

 

In the slushy portion of the MPS, we can make changes in the product mix, but not changes that need additional resources.  The master scheduler authorizes such changes.

• Discuss how the MPS might be used in a service organization.

 

First we need to identify our resources in terms of people of various skill levels and equipment.  Next, we decide how to use our resources.  To do so, we analyze the demands of our various services and then allocate resources to them.  Finally, we make sure that we have developed a schedule that uses our available resources to meet our objectives.

For example, a hospital knows how many surgeries are scheduled (demand) and how many of each type of medical staff are available (resources).  We also know how many operating rooms are available and how much of each type of surgical equipment is available.  Then, we schedule the operating rooms and staff accordingly.  We would also leave some time available in the schedule for emergency surgeries.