Chapter 11
Aggregate Planning and master scheduling

Teaching Notes

In the earlier chapters, we have looked at certain problems that involve long range planning such as facility location, layout and major equipment purchase decisions. Aggregate planning involves medium range planning. The planning horizon for medium range plans varies from a couple of months to 18 months. A major component of aggregate planning is to plan aggregate production and inventory levels to achieve a desired level of customer service. In preparing the aggregate plan, a major consideration is to check the desired production plan against the estimated capacity. On the other hand, in determining the estimated capacity, we must take into account the expected demand and the resulting medium range production plan. 
We use the term aggregate plan in lieu of medium range production plan for two reasons: 
1.         It generally involves the production plan for a group or a family of products (aggregation of products).
2.         It aggregates daily or weekly (short-range) demand and the resulting production plan (aggregation of time periods). 
Even though the aggregate plan is a function of many different factors, the key factor is the forecasted demand over the length of the medium-range planning horizon. After developing an aggregate plan consistent with the forecasted demand and capacity, it is disaggregated into shorter time periods.  The process of disaggregation is the beginning of short range planning using master scheduling and operations scheduling. Both master scheduling and operations scheduling are designed to implement the medium range plan on the shop floor.
In determining the aggregate plan, integration and communication between various functions of the firm are vital. Expected changes in the work force levels need to be communicated to the human resources department, while any major equipment purchases, layout changes and capacity additions must involve the approval of the finance department. On the other hand, changes in anticipated inventory levels and especially, expected stockouts must be discussed with the marketing department.           

Answers to Discussion and Review Questions

1. 1.         Three levels of planning that involve operations managers are:
2. Business plan: It establishes production and capacity strategies.
3. Production plan: It establishes production capacity and intermediate term aggregate production schedule.
4. Master schedule: It establishes schedules for specific products (disaggregation of production plan).
5. 2.         The three phases are forecasting demand, aggregate planning, and disaggregating the overall plan.

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2. 3.         Aggregate planning involves developing a general plan for employment, output, and inventory levels. The goal is to develop a plan which makes efficient use of the resources of an organization. Planners attempt to determine the best way to meet forecasting demand requirements within the constraints imposed by long-term decisions.
3. 4.         The need for aggregate planning is to begin to translate long-term decisions into short-term operating plans. Aggregate planning constitutes the intermediate step in this process.
4. 5.         In both manufacturing and service, managers can vary the size of the workforce and subcontract work. Manufacturers have the additional option of varying the size of inventories.
5. 6.         The difficulty relates to finding a common unit on which to base aggregate plans when there are a variety of products or services to contend with.
6. 7.         a.   Maintaining a constant workforce has the advantage of making estimation of labor costs relatively easy, is good for morale, and minimizes hiring and layoff costs. However, inventory carrying costs tend to be high.
7.  b.  Since labor force has to be continually adjusted, hiring and layoff costs tend to be high. Due to the instability of the labor force, employee morale is low. However, the inventory carrying costs are very low because production is matched with demand, resulting in little or no inventory.
8.  c.  Varying the workforce can cause morale problems. Moreover, working overtime generally is less productive, increases quality problems, and increases the risk of accidents.
9. 8.         Informal techniques are visual, easy to comprehend, and enable planners to compare alternatives. Their chief limitation is that they do not necessarily produce optimum solutions.

9.         a.   Spreadsheets are intuitively appealing and easy to understand, but solutions are not  necessarily optimal.

1.             b.   Linear Programming (LP): LP approach is a method of obtaining optimal solutions to problems involving allocation of limited resources. The objective of linear programming is either maximization of profit or minimization of cost. In Aggregate Planning, the objective is usually the minimization of costs related to labor time (regular and overtime), inventory carrying, hiring and layoffs. LP is a valid approach if the cost and variable relationships and assumptions are linear and demand can be treated as deterministic. Even for fairly small problems, LP approach requires computerization due to massive data manipulation and calculations.
2. c.   Simulation: It is a highly flexible computerized trial-and-error approach that provides testing of the model under different conditions, assumptions or scenarios. It provides a “what-if” capability to identify possible options to a given aggregate planning problem based on trial-and-error. Simulation requires the use of the computer. Therefore, computer programming and customization of different conditions and scenarios may be time consuming.
3. 10.       The master schedule has three inputs: the beginning inventory, forecasts for each period of the schedule, and customer outputs. Its outputs are projected inventory, production requirements, and uncommitted (available-to-promise) inventory.

11.       Aggregate planning helps managers establish plans for inputs and outputs and employment level and budgets for the intermediate term.  The plans involve collaboration among finance, operations, marketing, sales, and human resources personnel.  It helps to get everyone “on the same page.”  And, it establishes a basic framework for the intermediate term, which is particularly important when changes are called for because changes typically take time to implement.

Taking Stock

1. When we freeze a portion of the master schedule, we make the schedule more stable and reduce the “nervousness” of the schedule. However, freezing the schedule also leads to inflexibility and reduced customer service because we will not be able to respond to the demands of the customers in a timely fashion.
2. Purchasing agents, production planning and control manager, planners, schedulers, and marketing personnel need to interface with the master schedule. Purchasing agents, planners and schedulers need direct information from the MPS to order the parts, manage the inventories of the parts and schedule the machines in producing the parts going into the end items master scheduled. The production planning and control manager needs the MPS information to determine capacity needs of the labor, machinery and equipment. Marketing personnel need this information so that they could let their customers know if there is a delay in the completion of an order. In the case of capacity constrained manufacturing, marketing personnel also need to provide the master scheduler with key information as to which orders to delay and which orders are crucial to try to complete on time.
3. The new communication tools made it easier to communicate changes in the master schedule. Therefore, when a change is necessary in the master schedule (addition or a deletion of an order, change in the due date or the quantity of an order), it can be communicated to the master scheduler faster through new communication tools (e-mail, fax, etc.). The master scheduler can take this information, and through the utilization of a computerized production planning and control system, incorporate the changes to the schedule (assuming the changes are feasible). After incorporating the changes and making sure that the MPS is feasible he/she can disseminate the information to the appropriate parties and to the shop floor very quickly so that the manufacturing system can respond to the changes in a timely fashion.                    

Critical Thinking Exercise

1. Compared to manufacturing environments, service environments often experience more pronounced variations in demand over shorter time intervals. Moreover, employing inventory as a cushion is not always an option for a service organization. However, services often have a higher degree of flexibility than manufacturing operations, which allows more ability to respond to demand fluctuations with relatively quick changes in capacity. Services are able to make quick adjustments to capacity relatively easily, while changing capacity for a  manufacturing firm can be a difficult and more time consuming proposition.
2. Student answers will vary.

   
Memo Writing Exercise

1.         Aggregate Planning is the planning of the overall, general use of resources based on expected demand. It involves determining the levels of production or service for one quarter to 1.5 years into the future. Based on the forecasted demand, capacity levels, current inventory level, size of the workforce, production and service requirements are aggregated into one “product” or “service.”

1. Aggregate Planning determines the level of output for a given service or product by managing the capacity using different production strategies. After it is developed, Aggregate Planning is disaggregated into separate products and shorter time periods. An important feature of Aggregate Planning is that the Master Schedule is formed by disaggregating it. In other words, it serves as the basis of the Master Schedule (MRP) and the resulting detailed shop floor schedule. The absence of a clear aggregate plan can cause serious problems in capacity planning, workforce scheduling, customer service and production efficiency.
2. 2.       Chase strategy matches production with varying demand rates. This strategy involves either varying the workforce levels or varying the capacity by using either overtime or subcontracting. The primary advantage of using Chase strategy is that inventory carrying cost is minimized. The main disadvantage is the additional cost of changing the workforce level (hiring, layoffs and employee morale) or the cost of overtime/subcontracting.
3. Level strategy maintains a constant workforce and constant production. It has the advantage of minimizing hiring and layoff costs and keeping employee morale high. However, inventory carrying costs tend to be high.