AGGREGATE

PLANNING AND
MASTER
SCHEDULING
TOPICS FOR TODAY
Aggregate Planning and Master Scheduling

Aggregate Planning Strategies Capacity Option

Demand Options

Mixing Option to Develop a Plan

Method of Aggregate Planning and
Mathematics Approaches

Aggregate Planning in Services

INTRODUCTION
The capacity of an operation is the
maximum level of value-added activity over
a period of time that the process can
achieve under normal operating conditions.
Critically, this definition reflects the scale of
capacity but, more importantly, its
processing capabilities.
 AGGREGATE
PLANNING AND
MASTER
SCHEDULING
 Aggregate Planning and Master Scheduling T
Aggregate planning is the process of planning the Master scheduling follows aggregate planning
quantity and timing of output over the and expresses the overall plan in terms of the
intermediate range (often 3 to 18 months) by amounts of specific end items to produce and
adjusting the production rate, employment, dates to produce them. It uses information
inventory, and other controllable variables. from both forecasts and orders on hand, and it
Aggregate planning links long-range and short- is the major control (driver) of all production
range planning activities. It is “aggregate” in the activities.
sense that the planning activities at this early
stage are concerned with homogeneous
categories (families) such as gross volumes of
products or number of customers serve.
 AGGREGATE
PLANNING
STRATEGIES
AND CAPACITY
OPTIONS
E Aggregate Planning Strategies TO
When generating an aggregate plan, the operations manager must answer
several questions:
1. Should inventories be used to absorb changes in demand during the
planning period?
2. Should changes be accommodated by varying the size of the workforce?
3. Should part-timers be used, or should overtime and idle time absorb
fluctuations?
4. Should subcontractors be used on fluctuating orders so a stable workforce
can be maintained?
5. Should prices or other factors be changed to influence demand?
E Capacity Option T

A firm can choose from the following basic capacity (production) options:

1. Changing inventory levels: Managers can increase inventory during

periods of low demand to meet high demand in future periods. If this
strategy is selected, costs associated with storage, insurance, handling,
obsolescence, pilferage, and capital invested will increase. On the other
hand, with low inventory on hand and increasing demand, shortages
can occur, resulting in longer lead times and poor customer service.
E Capacity Option

2. Varying workforce size by hiring or layoffs: One way to

meet demand is to hire or lay off production workers to
match production rates. However, new employees need to
be trained, and productivity drops temporarily as they are
absorbed into the workforce. Layoffs or terminations, of
course, lower the morale of all workers and also lead to
lower productivity.
E Capacity Options T

3. Varying production rates through overtime or idle time: Keeping a

constant workforce while varying working hours may be possible. Yet
when demand is on a large upswing, there is a limit on how much
overtime is realistic. Overtime pay increases costs, and too much
overtime can result in worker fatigue and a drop in productivity.
Overtime also implies added overhead costs to keep a facility open. On
the other hand, when there is a period of decreased demand, the
company must somehow absorb workers’ idle time— often a difficult
and expensive process.
E Capacity Option

4. Subcontracting: A firm can acquire temporary capacity

by subcontracting work during peak demand periods.
Subcontracting, however, has several pitfalls. First, it may
be costly; second, it risks opening the door to a
competitor. Third, developing the perfect subcontract
supplier can be a challenge.
E Capacity Options T

5. Using part-time workers: Especially in the service sector, part-time

workers can fill labor needs. This practice is common in restaurants,
retail stores, and supermarkets.
DEMAND
OPTION
E Demand Options T

1. Influencing demand: When demand is low, a company can try to

increase demand through advertising, promotion, personal selling, and
price cuts. Airlines and hotels have long offered weekend discounts and
off-season rates; theaters cut prices for matinees; some colleges give
discounts to senior citizens; and air conditioners are least expensive in
winter. However, even special advertising, promotions, selling, and
pricing are not always able to balance demand with production
capacity.
E Demand Option

2. Back ordering during high-demand periods: Back

orders are orders for goods or services that a firm accepts
but is unable (either on purpose or by chance) to fill at the
moment. If customers are willing to wait without loss of
their goodwill or order, back ordering is a possible strategy.
Many firms back order, but the approach often results in
lost sales.
E Demand Options T

3. Counter seasonal product and service mixing: A widely used active

smoothing technique among manufacturers is to develop a product mix
of counter seasonal items. Examples include companies that make both
furnaces and air conditioners or lawn mowers and snowblowers.
However, companies that follow this approach may find themselves
involved in products or services beyond their area of expertise or
beyond their target market.
MIXING OPTION
TO DEVELOP A
PLAN
Although each of the five capacity options and
three demand options discussed above may
produce an effective aggregate schedule, some
combination of capacity options and demand
options may be better. Many manufacturers
assume that the use of the demand options has
been fully explored by the marketing
department and those reasonable options
incorporated into the demand forecast. The
operations manager then builds the aggregate
plan based on that forecast. However, using the
five capacity options at his command, the
operations manager still has a multitude of
possible plans. These plans can embody, at one
extreme, a chase strategy and, at the other, a
level-scheduling strategy. They may, of course,
fall somewhere in between.
CHASE STRATEGY
A chase strategy typically attempts to
achieve output rates for each period that
match the demand forecast for that
period. This strategy can be accomplished
in a variety of ways. For example, the
operations manager can vary workforce
levels by hiring or laying off or can vary
output by means of overtime, idle time,
part-time employees, or subcontracting.
Many service organizations favor the chase
strategy because the changing inventory
levels option is difficult or impossible to
adopt. Industries that have moved toward
a chase strategy include education,
hospitality, and construction.
LEVEL STRATEGY
A level strategy (or level scheduling) is an
aggregate plan in which production is uniform
from period to period. Firms like Toyota and
Nissan attempt to keep production at uniform
levels and may (1) let the finished-goods
inventory vary to buffer the difference
between demand and production or (2) find
alternative work for employees. Their
philosophy is that a stable workforce leads to a
better-quality product, less turnover and
absenteeism, and more employee
commitment to corporate goals. Other hidden
savings include more experienced employees,
easier scheduling and supervision, and fewer
dramatic startups and shutdowns. Level
scheduling works well when demand is
reasonably stable.
METHOD OF
AGGREGATE
PLANNING
 GRAPHICAL METHOD

Graphical techniques are popular because they are easy to

understand and use. These plans work with a few variables
at a time to allow planners to compare projected demand
with existing capacity. They are trial-and-error approaches
that do not guarantee an optimal production plan, but they
require only limited computations and can be performed by
clerical staff.

Following are the five steps in the graphical method:

1. Determine the demand in each period.
2. Determine capacity for regular time, overtime, and
subcontracting each period.
3. Find labor costs, hiring and layoff costs, and inventory holding
costs.
4. Consider company policy that may apply to the workers or to
stock levels.
5. Develop alternative plans and examine their total costs.
MATHEMATHICAL APPOACHES

The Transportation Method of Linear Programming

When an aggregate planning problem is viewed as one
of allocating operating capacity to meet forecast
demand, it can be formulated in a linear programming
format. The transportation method of linear
programming is not a trial-and-error approach like
graphing but rather produces an optimal plan for
minimizing costs. It is also flexible in that it can specify
regular and overtime production in each time period,
the number of units omtqm.m4 Page | 10 to be
subcontracted, extra shifts, and the inventory carryover
from period to period.
AGGREGATE
PLANNING IN
SERVICES
 Most services pursue combinations of the eight capacity
and demand options discussed earlier, they usually
formulate mixed aggregate planning strategies. In
industries such as banking, trucking, and fast foods,
aggregate planning may be easier than in manufacturing.

Controlling the cost of labor in service firms is critical. Successful

techniques include:
1. Accurate scheduling of labor-hours to ensure quick response to
customer demand.
2. An on-call labor resource that can be added or deleted to meet
unexpected demand.
3. Flexibility of individual worker skills that permits reallocation of
available labor.
4. Flexibility in rate of output or hours of work to meet changing demand
RESTAURANT
HOSPITALS
NATIONAL CHAINS OF SMALL
SERVICE FIRM
MISCELLANEOUS SERVICES
AIRLINE INDUSTRY