Chapter 9

Production-Planning Systems:
Aggregate Planning and
Master Production Scheduling

Slide 1 of 48
 Overview

● Production-Planning Hierarchy
● Aggregate Planning
● Master Production Scheduling
● Types of Production-Planning and Control Systems
● Wrap-Up: What World-Class Producers Do

Slide 2 of 48
 Capacity Planning, Aggregate Planning, Master Schedule, and Short-Term
Scheduling

Capacity Planning
1. Facility Size Long-term
2. Equipment Procurement

Aggregate Planning
1. Facility Utilization Intermediate-term
2. Personnel needs
3. Subcontracting

Master Schedule
1. MRP Intermediate-term
2. Disaggregation of master plan

Short-term Scheduling
1. Work center loading Short-term
2. Job sequencing
Slide 3 of 48
 Overview
Process Planning
Long
Range Strategic Capacity Planning

Medium Aggregate Planning

Range Manufacturing
Services
Master Production Scheduling

Material Requirements Planning

Order Scheduling Weekly Workforce &

Customer Scheduling
Short
Range Daily Workforce &
Customer Scheduling 4

Slide 4 of 48
 Production Planning Hierarchy

Long-Range Capacity Planning Chapter 7

Aggregate Planning

Master Production Scheduling Chapter 9

Production Planning and Control Systems

Pond Draining Push Pull Focusing on

Systems Systems Systems Bottlenecks
Chapter 10 Chapter 11 Chapter 14 Chapter 9,12
Slide 5 of 48
 Production Planning Horizons

Long-Range
Long-Range Capacity Planning
(years)

Medium-Range
Aggregate Planning
(6-18 months)
Short-Range
Master Production Scheduling
(weeks)

Production Planning and Control Systems Very-Short-Range

(hours - days)

Pond Draining Push Pull Focusing on

Systems Systems Systems Bottlenecks

Slide 6 of 48
 Production Planning: Units of Measure

Entire
Long-Range Capacity Planning
Product Line

Product
Aggregate Planning
Family
Specific
Master Production Scheduling
Product Model

Production Planning and Control Systems Labor, Materials,

Machines

Pond Draining Push Pull Focusing on

Systems Systems Systems Bottlenecks

Slide 7 of 48
 Hierarchical Production Planning

Decision Level Decision Process Forecasts needed

Allocates Annual demand by
production
Corporate item and by region
among plants

Determines Monthly demand

Plant manager seasonal plan by for 15 months by
product type product type

Determines monthly Monthly demand

Shop item production for 5 months by
superintendent schedules item
Slide 8 of 48 5
 Relationships of the Aggregate Plan

Marketplace Research and

and Demand Technology Work Force

Product
Decisions Raw Materials
Available

Process
Planning & Inventory
Decisions On Hand

External
Demand Aggregate Capacity
Forecasts Plan for
, Production
orders Plant
Master Capacity
Detailed Work
Production Schedules Priority
Schedule Planning &
Scheduling

Slide 9 of 48
 Aggregate Planning Strategies Pure Strategies
● Capacity Options --change capacity:
●
changing inventory levels
●
varying work force size by hiring or layoffs
●
varying production capacity through overtime or idle
time
●
subcontracting
●
using part-time workers
● Demand Options --change demand:
●
Influencing demand
●
backordering during high demand periods
●
counterseasonal product mixing

Slide 10 of 48
 Comparison of Aggregate Planning Methods

Advantages Limitations
● Graphical Methods: ● Graphical Methods:

- Simple, easy to use and understand - Many solutions; solution need not be
● Linear Programming: optimal
● Linear Programming:
- Provides optimal solution
- Popular in some industries - Mathematical functions must be
linear, and deterministic -- not
- Sensitivity & dual analysis provide
necessarily realistic
useful information
● Linear Decision Rule:
- Constraints readily added.
● Linear Decision Rule
- Incorporates some non-standard costs.
Skilled personal required. Quadratic
- Provides optimal solution model not always realistic. Value of
- Handles non-deterministic demand variables unconstrained. Feasible
solution is optimal if it exists - not
guaranteed.

Slide 11 of 48
 Comparison of Aggregate Planning Methods

Advantages (continued) Limitations (continued)

● Management coefficients Model: ● Managment coefficients Model:
- Attempts to duplicate manager’s - Solution need not be optimal.
decision-making process. Simplest, last - Assumes past decisions are good.
disruptive, easiest to implement - Built on individual’s invalidate model.
● Simulation: ● Simulation
- Places no restrictions on mathematical - No optimal solution guaranteed.
structure or cost functions. Can test
many relationships. - Often a long, costly, process.

Slide 12 of 48
Aggregate Planning

Slide 13 of 48
 Why Aggregate Planning Is Necessary

● Fully load facilities and minimize overloading and

underloading
● Make sure enough capacity available to satisfy
expected demand
● Plan for the orderly and systematic change of
production capacity to meet the peaks and valleys of
expected customer demand
● Get the most output for the amount of resources
available

Slide 14 of 48
 Aggregate Planning
● Goal: Specify the optimal combination of
●
production rate
●
workforce level
●
inventory on hand

● Product group or broad category (Aggregation)

● Medium-Range: 6-18 months

Slide 15 of 48 6
 Aggregate Planning
Terminology
● Production Rate

● Workforce Level

● Inventory on Hand

Slide 16 of 48 7
 Inputs

● A forecast of aggregate demand covering the selected

planning horizon (6-18 months)
● The alternative means available to adjust short- to
medium-term capacity, to what extent each
alternative could impact capacity and the related costs
● The current status of the system in terms of workforce
level, inventory level and production rate

Slide 17 of 48
 Outputs

● A production plan: aggregate decisions for each

period in the planning horizon about
●
workforce level
●
inventory level
●
production rate
● Projected costs if the production plan was
implemented

Slide 18 of 48
 Medium-Term Capacity Adjustments

● Workforce level
●
Hire or layoff full-time workers
●
Hire or layoff part-time workers
●
Hire or layoff contract workers
● Utilization of the work force
●
Overtime
●
Idle time (undertime)
●
Reduce hours worked
● . . . more

Slide 19 of 48
 Medium-Term Capacity Adjustments

● Inventory level
●
Finished goods inventory
●
Backorders/lost sales
● Subcontract

Slide 20 of 48
 Approaches

● Informal or Trial-and-Error Approach

● Mathematically Optimal Approaches
●
Linear Programming
●
Linear Decision Rules
● Computer Search
● Heuristics

Slide 21 of 48
 Pure Strategies for the Informal Approach

● Matching Demand
● Level Capacity
●
Buffering with inventory
●
Buffering with backlog
●
Buffering with overtime or subcontracting
● Hybrid strategies

Slide 22 of 48
 Matching Demand Strategy

● Capacity (Production) in each time period is varied to

exactly match the forecasted aggregate demand in
that time period
● Capacity is varied by changing the workforce level
● Finished-goods inventories are minimal
● Labor and materials costs tend to be high due to the
frequent changes
● . . . more

Slide 23 of 48
 Matching Capacity & Demand
● Demand Management
●
Vary prices
●
change lead time
●
encourage/discourage business
● Capacity Management
●
adjust staffing
●
adjust equipment and processes
●
change methods to facilitate production
●
redesign the product to facilitate production

Slide 24 of 48
 Developing and Evaluating
the Matching Production Plan
● Production rate is dictated by the forecasted
aggregate demand
● Convert the forecasted aggregate demand into the
required workforce level using production time
information
● The primary costs of this strategy are the costs of
changing workforce levels from period to period, i.e.,
hirings and layoffs

Slide 25 of 48
 Level Capacity Strategy

● Capacity (production rate) is held level (constant)

over the planning horizon
● The difference between the constant production rate
and the demand rate is made up (buffered) by
inventory, backlog, overtime, part-time labor and/or
subcontracting

Slide 26 of 48
 Developing and Evaluating
the Level Production Plan
● Assume that the amount produced each period is
constant, no hirings or layoffs
● The gap between the amount planned to be produced
and the forecasted demand is filled with either
inventory or backorders, i.e., no overtime, no idle
time, no subcontracting
● . . . more

Slide 27 of 48
 Developing and Evaluating
the Level Production Plan
● The primary costs of this strategy are inventory
carrying and backlogging costs
● Period-ending inventories or backlogs are determined
using the inventory balance equation:

EIt = EIt-1 + (Pt - Dt )

Slide 28 of 48
 Aggregate Plans for Services

● For standardized services, aggregate planning may be

simpler than in systems that produce products
● For customized services,
●
there may be difficulty in specifying the nature and
extent of services to be performed for each
customer
●
customer may be an integral part of the production
system
● Absence of finished-goods inventories as a buffer
between system capacity and customer demand

Slide 29 of 48
 Preemptive Tactics

● There may be ways to manage the extremes of

demand:
●
Discount prices during the valleys.... have a sale
●
Peak-load pricing during the highs .... electric
utilities, Nucor

Slide 30 of 48
Aggregate Planning Example

Slide 31 of 48
Aggregate Planning Example

Slide 32 of 48
Aggregate Planning Example

Slide 33 of 48
 Aggregate Planning Example

Keepdry, a small manufacturing company (200 employees),

produces umbrellas. The company, founded in 1991 produces the
following three product lines: 1) the Executive Line, 2) the Durable
Line and 3) the Compact line shown in the following figure.

Compact
Line
Executive Durable
Line Line
Slide 34 of 48 8
 Aggregate Demand
(Executive Line)

10000
10000
8000 Number of working days:
8000 7000 Jan 22
6000
6000 5500 Feb 19
4500 Mar 21
4000 Apr 21
May 22
2000
Jun 20
0
Jan Fe b Ma r Apr Ma y J un

Slide 35 of 48 9
 Examples
Cost Information

Materials $5/unit
Holding costs $1/unit per mo.
Marginal cost of stockout $1.25/unit per mo.
Hiring and training cost $200/worker
Layoff costs $250/worker
Labor hours required .15 hrs/unit
Straight time labor cost $8/hour
Beginning inventory 250 units
Productive hours/worker/day 7.25
Paid straight hrs/day 8

Slide 36 of 48 11
 Determining Straight Labor Costs and Output

Jan Feb M ar Apr M ay Jun

Days/mo 22 19 21 21 22 20
Hrs/worker/mo 1 5 9 .5 1 3 7.75 1 52 .2 5 1 5 2 .2 5 15 9 .5 145
Units/worker 1 0 6 3.33 9 1 8.33 1 01 5 1015 10 6 3 .3 3 9 6 6 .6 7
$ /wo rker $ 1 ,4 08 1 ,2 16 1,34 4 1 ,3 4 4 1,40 8 1 ,2 8 0

Slide 37 of 48 12
 Chase Strategy
(Hiring & Firing--meet demand)

Jan
Days/mo 22
Hrs/wo rker/mo 1 5 9 .5
Units/worker 1 ,0 6 3.3 3
$ /wo rker $1 ,4 0 8 Beginning workforce level: 7 employees

Jan
Demand 4 ,5 00
Beg. inv. 250
Net req. 4 ,2 50
Req. wo rkers 3 .9 97
Hired
Fired 3
W o rkfo rce 4
Ending inventory 0
Slide 38 of 48 13
 Jan Feb M ar Apr M ay Jun
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1,063 918 1,015 1,015 1,063 967
$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Jan Feb M ar Apr M ay Jun

Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
W orkforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 14

 Jan Feb M ar Apr M ay Jun
Demand 4 ,5 0 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8 ,0 0 0 6 ,0 0 0
Beg. inv. 250
Net req. 4 ,2 5 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8 ,0 0 0 6 ,0 0 0
Req. wo rkers 3 .9 9 7 5 .9 8 9 6 .8 9 7 9 .8 5 2 7 .5 2 4 6 .2 0 7
Hired 2 1 3
Fired 3 2 1
W o rkfo rce 4 6 7 10 8 7
Ending invento ry 0 0 0 0 0 0

Jan Feb M ar Apr M ay Jun Co sts

M aterial $ 2 1 ,2 5 0 .0 0 $ 2 7 ,5 0 0 .0 0 $ 3 5 ,0 0 0 .0 0 $ 5 0 ,0 0 0 .0 0 $ 4 0 ,0 0 0 .0 0 $ 3 0 ,0 0 0 .0 0 2 0 3 ,7 5 0 .0 0
Labo r 5 ,6 2 7 .5 9 7 ,2 8 2 .7 6 9 ,2 6 8 .9 7 1 3 ,2 4 1 .3 8 1 0 ,5 9 3 .1 0 7 ,9 4 4 .8 3 5 3 ,9 5 8 .6 2
Hiring co st 4 0 0 .0 0 2 0 0 .0 0 6 0 0 .0 0 1 ,2 0 0 .0 0
Firing co st 7 5 0 .0 0 5 0 0 .0 0 2 5 0 .0 0 1 ,5 0 0 .0 0

$260,408.62

15
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998
 Level Workforce
(Surplus and Shortage Allowed)

Workforce level: 6 employees

Jan
Demand 4,5 00
Beg. inv. 2 50
Net req. 4,2 50
W o rkers 6
P ro ductio n 6,3 80
Ending inventory 2,1 30
Surplus 2,1 30
Shortage
Slide 41 of 48 16
 Jan Feb M ar Apr M ay Jun
Demand 4 ,5 0 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8 ,0 0 0 6 ,0 0 0
Beg. inv. 250 2 ,1 3 0 10 -9 1 0 -3 ,9 1 0 -1 ,6 2 0
Net req. 4 ,2 5 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8 ,0 0 0 6 ,0 0 0
W o rkers 6 6 6 6 6 6
P ro ductio n 6 ,3 8 0 5 ,5 1 0 6 ,0 9 0 6 ,0 9 0 6 ,3 8 0 5 ,8 0 0
Ending invento ry 2 ,1 3 0 10 -9 1 0 -3 ,9 1 0 -1 ,6 2 0 -2 0 0
Surplus 2 ,1 3 0 10
Sho rtage 910 3 ,9 1 0 1 ,6 2 0 200

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998

17
 Jan Feb M ar Apr M ay Jun
Demand 4 ,50 0 5,50 0 7 ,00 0 10 ,00 0 8,0 00 6 ,00 0
Beg. inv. 25 0 2,13 0 10 -91 0 -3 ,9 1 0 -1 ,62 0
Net req. 4 ,25 0 5,50 0 7 ,00 0 10 ,00 0 8,0 00 6 ,00 0
W orkers 6 6 6 6 6 6
P ro ductio n 6 ,38 0 5,51 0 6 ,09 0 6 ,09 0 6,3 80 5 ,80 0
Ending inventory 2 ,13 0 10 -91 0 -3 ,91 0 -1 ,6 2 0 -20 0
Surplus 2 ,13 0 10
Sho rtage 91 0 3 ,91 0 1,6 20 20 0

Jan Feb M ar Apr M ay Jun

Labor $8 ,44 8 $ 7 ,2 9 6 $8 ,06 4 $8 ,06 4 $ 8,4 48 $7 ,68 0 $ 48 ,00 0 .0 0
M aterial 31 ,90 0 2 7 ,5 5 0 30 ,45 0 30 ,45 0 3 1,9 00 29 ,00 0 1 81 ,25 0 .0 0
Carrying 2 ,13 0 10 2 ,14 0 .0 0
Sto cko ut 1 ,13 8 4 ,88 8 2,0 25 25 0 8 ,30 0 .0 0

$239,690.00

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998

18
Master Production Scheduling (MPS)

Slide 44 of 48
 Objectives of MPS

● Determine the quantity and timing of completion of

end items over a short-range planning horizon.
● Schedule end items (finished goods and parts shipped
as end items) to be completed promptly and when
promised to the customer.
● Avoid overloading or underloading the production
facility so that production capacity is efficiently
utilized and low production costs result.

Slide 45 of 48
 Time Fences

● The rules for scheduling 6+

weeks
4-6
2-4 weeks
1-2 weeks
weeks
+/- 5% +/- 10% +/- 20%
No Change
Change Change Change
Frozen
Firm
Full
Open
Slide 46 of 48
 Time Fences

● The rules for scheduling:

●
Do not change orders in the frozen zone
●
Do not exceed the agreed upon percentage changes
when modifying orders in the other zones
●
Try to level load as much as possible
●
Do not exceed the capacity of the system when
promising orders.
●
If an order must be pulled in to level load, pull it
into the earliest possible week without missing the
promise.

Slide 47 of 48
 Developing an MPS

● Using input information

●
Customer orders (end items quantity, due dates)
●
Forecasts (end items quantity, due dates)
●
Inventory status (balances, planned receipts)
●
Production capacity (output rates, planned
downtime)
● Schedulers place orders in the earliest available open
slot of the MPS
● . . . more

Slide 48 of 48
 Developing an MPS

● Schedulers must:
●
estimate the total demand for products from all
sources
●
assign orders to production slots
●
make delivery promises to customers, and
●
make the detailed calculations for the MPS
● As orders are slotted in the MPS, the effects on the
production work centers are checked
●
Rough cut planning - identify underloading or
overloading of capacity
Slide 49 of 48
 Demand Management

● Review customer orders and promise shipment of

orders as close to request date as possible
● Update MPS at least weekly.... work with Marketing
to understand shifts in demand patterns
● Produce to order..... focus on incoming customer
orders
● Produce to stock ..... focus on maintaining finished
goods levels
● Planning horizon must be as long as the longest lead
time item

Slide 50 of 48
 Types of
Production-Planning
and Control Systems

Slide 51 of 48
 Types of Production-Planning
and Control Systems
● Pond-Draining Systems
● Push Systems
● Pull Systems
● Focusing on Bottlenecks

Slide 52 of 48
 Pond-Draining Systems [Chapter 10]

● Emphasis on holding inventories (reservoirs) of

materials to support production
● Little information passes through the system
● As the level of inventory is drawn down, orders are
placed with the supplying operation to replenish
inventory
● May lead to excessive inventories and is rather
inflexible in its ability to respond to customer needs

Slide 53 of 48
 Push Systems [Chapter 11]

● Use information about customers, suppliers, and

production to manage material flows
● Flows of materials are planned and controlled by a
series of production schedules that state when batches
of each particular item should come out of each stage
of production
● Can result in great reductions of raw-materials
inventories and in greater worker and process
utilization than pond-draining systems

Slide 54 of 48
 Pull Systems [Chapter 14]

● Look only at the next stage of production and

determine what is needed there, and produce only that
● Raw materials and parts are pulled from the back of
the system toward the front where they become
finished goods
● Raw-material and in-process inventories approach
zero
● Successful implementation requires much preparation

Slide 55 of 48
 Focusing on Bottlenecks

● Bottleneck Operations
●
Impede production because they have less capacity
than upstream or downstream stages
●
Work arrives faster than it can be completed
●
Binding capacity constraints that control the
capacity of the system
● Optimized Production Technology (OPT)
● Synchronous Manufacturing

Slide 56 of 48
 Synchronous Manufacturing

● Operations performance measured by

●
throughput (the rate cash is generated by sales)
●
inventory (money invested in inventory), and
●
operating expenses (money spent in converting
inventory into throughput)
● . . . more

Slide 57 of 48
 Synchronous Manufacturing

● System of control based on:

●
drum (bottleneck establishes beat or pace for other
operations)
●
buffer (inventory kept before a bottleneck so it is
never idle), and
●
rope (information sent upstream of the bottleneck
to prevent inventory buildup and to synchronize
activities)

Slide 58 of 48
 Wrap-Up: World-Class Practice

● Push systems dominate and can be applied to almost

any type of production
● Pull systems are growing in use. Most often applied
in repetitive manufacturing
● Few companies focusing on bottlenecks to plan and
control production.

Slide 59 of 48