AGGREGATE PLANNING & MASTER SCHEDULING

Introduction: Aggregate planning is defined as the process of planning the quantity and timing of output over the intermediate time horizon (i.e., over a time period of 3 months to one year). Within that time frame, the maximum capacity of the plant or a production facility is relatively fixed. Given the forecast, the production planners must make best possible use of the organizations labour, materials, capital and other resources so as to respond to the expected demand, which might be either higher or lower than the expected. Production planners must balance the demand against capacity to determine the extent to which the peaks and valleys of customer demand can be accommodated. Since production system is an intricate and interdependent mix of labour, material and equipment, when the rate of output is changed, the previous balance is lost, and usage rate of the resources must be readjusted. If some equipment or human resources are idle or overworked new costs will arise. Also some firms recognize a moral or a contractual obligation to provide a secure and stable employment for their employees while others do not. Considering all these factors the main focus in aggregate planning will be to respond to irregular market demands by managing the controllable variables that affect the supply. Master scheduling follows aggregate planning and expresses the overall plan in terms of specific end items or models. It is the major control over production activities. The difference between a Aggregate plan and a Master Schedule is illustrated in the following example.

Aggregate Plan Month No. of Motors Master Schedule Month AC Motors 5 HP 10 HP DC Motors 5 HP 10 HP J 15 20 5 F 25 M 30 20 A 15 15 M 15 15 J 30 15 5 J 20 10 A 20 10 10 S 10 20 10 J 40 F 25 M 50 A 30 M 30 J 50 J 30 A 40 S 40

It can be seen from the above chart that while the Aggregate Plan simply expresses the end product as Motors the Master Schedule specifies precisely how many of which type of motors will be produced, and when. This detail is necessary to plan for the Material and Capacity requirements.

Aggregate Planning Strategies: Many aggregate planning strategies are available to the production manager. These strategies involve the manipulation different variables such as inventory level, production rate, employment level, capacity and other controllable variables. The production manager may use a pure strategy in which he may vary any one of the variables at a time to cope with the changes in product output rate or he may use a mixed strategy in which he may vary more than one variables or use two or more pure strategies to arrive at a feasible production plan. Some of the pure strategies or variables are given below: 1. Changing the employment or workforce level. 2. Overtime, Idle time and Part time strategy. 3. Changing the inventory level. 4. Back order strategy. 5. Subcontracting. 6. Changing plant capacity. 1. Changing the Employment or Workforce level: This strategy suggests that the firm might vary the size of the workforce by hiring the laying off the production employees to match the production rate so as to meet the demand exactly. In many instances the new employees may require training and the average productivity

may get affected. A layoff frequently results in lower worker morale and lowers productivity as the remaining employees may retard output to protect themselves against a similar fate. 2. Overtime, Idle time and Part time: The second pure strategy would be to maintain a stable workforce but permit Idle time (IT) when the demand is slack and go for over time when the demand is strong. This increases the cost, as the overtime rate is higher than the regular time rate and also because of underutilization of the workers. The service industries use of Part time workers also falls under this category of pure strategy. 3. Changing the Inventory Levels: This strategy involves maintaining a constant workforce and production level, but carry sufficiently large amounts of inventory to absorb all demand fluctuations. This strategy is not available to service industries. However in this strategy due to accumulation of inventories, during slack periods of demand, working capital and costs associated with obsolescence, storage, insurance and handling of inventories will increase. Conversely during periods of increasing demand, changes in inventory levels or backlogs might lead to poorer customer service, longer lead times, possible lost sales & customer goodwill and potential entry of new competitors in the market. 4. Back Order strategy: This strategy assumes that the customers are willing to wait for delivery and this effectively smoothes out production too. In essence it is the strategy of negative inventory wherein future production will be used to meet past demand. This strategy results in stock out costs of lost or dissatisfied customers. 5. Subcontracting: In this strategy the firm subcontracts some work to some other firm during the periods of peak demand to satisfy it. This strategy results in increased cost, decreased quality control and sometimes it opens doors to competition. 6. Changing Plant Capacity: In this strategy plant capacity may be adjusted by adding or setting aside machines, equipment and other long term assets. In this strategy some changes may require lead times longer than the normal aggregate planning horizon. Mixed Strategies: Since every pure strategy has a countervailing cost associated with it, sometimes these strategies are infeasible. Therefore a combination of strategies or a mixed strategy is often used for aggregate planning. Mixed strategies involve the use of two or more controllable variables or pure strategies to arrive at a feasible production plan. For example a combination of subcontracting and overtime or overtime and inventory could be a mixed strategy.

Aggregate Planning Methods: Several methods exist for solving aggregate planning problems, both quantitative and qualitative. However, quantitative methods are widely used for this exercise. Two of the widely used quantitative methods are (1) Trial & Error method (2) Linear Programming Method. (1) Trial and Error Method: These methods are easy to understand and convenient to use. These methods basically work with a few variables at a time on a trial and error basis. They require only a minor computational effort. The essence of an aggregate planning problem is best illustrated by means of production requirements charts and cumulative workload projections. Linear Programming Method: If an aggregate planning problem is viewed as the one of allocating capacity (supply) to meet forecast (demand) requirements, it can be structured and solved in a linear programming format by using Transportation Model. In this case the supply consists of the inventory on hand and units that can be produced on Regular Time (RT), Overtime (OT) and by Subcontracting (SC). Demand consists of the individual month or period requirements plus any desired ending inventory. Costs associated with producing units through RT, OT or SC in the given period or producing them and carrying them in inventory for a later period are entered in small boxes inside the cells in the matrix. Using the transportation Algorithm the optimum allocation may be obtained.

(2)

Master Scheduling: The Master Schedule also known as Master Production Schedule (MPS), formalizes the production plan and converts it into specific material and capacity requirements. Labour, Material and Equipments needs for each job must then be assessed. Thus the MPS drives the entire production and inventory system by setting specific production goals and responding to feedback from all downstream operations. The key functions of a Master Production Schedule are: (1) Translate aggregate plans into specific end items. (2) Evaluate alternative schedules (3) Generate material requirements. (4) Generate capacity requirements (5) Facilitate information processing. (6) Maintain valid priorities (7) Effectively utilize capacity. (1) Translate aggregate Plans: The aggregate plan sets a level of operations that roughly balances market demands with the materials, labour and equipment capabilities of the firm. The master schedule translates this plan into specific number of end items or modules to be produced in specific time periods. Products are grouped into lot sizes that are economical to produce and realistically easier to load to the firms facilities. Thus master schedule is a manufacturing plan of what the firm actually intends to produce and not a forecast of what it hopes to sell. (2) Evaluate alternative schedules: Master scheduling is a trial and error or a work and rework activity. Using computerized system having simulation capabilities the planners can evaluate alternative master schedules. Detailed material and capacity requirements are derived and planners can then see exactly what lead times and delivery schedules would result. When a special promotional campaign is planned a simulation suggests how increased demand of one product affects the production of others. (3) Generate Material Requirements: The Master schedule is the prime input for the material requirements planning (MRP) system. It signals the MRP system to determine the quantity and timing for the acquisition or production of necessary components so as to meet its requirements. (4) Generate capacity requirements: Capacity needs originate from the material and job requirements which in turn are established by the Master Schedule. Master Scheduling is thus a prerequisite of capacity planning. It enables in determining what personnel and equipment capacities are needed so as to meet the production objectives specified in the Master Schedule and Material Requirements Plan. (5) Facilitate Information Processing: By controlling the load (and backlog) on the plant, the master schedule determines when deliveries will be made both for make to-stock and make to-order items. It is also an important entry point for coordinating other management information such as marketing capabilities, financial resources, personnel policies etc. (6) Maintain valid priorities: Priorities can be absolute i.e. relating to how far a job is behind or ahead of schedule or they can be relative i.e. a rank in comparison with other jobs. This means the due date or the rank should correspond with the time the order is actually needed. Customers may change their orders, and materials are sometimes scrapped. When components are not actually needed or end items cannot be produced because of a shortage of materials, the master schedule should be adjusted to reflect this change. (7) Effectively utilize capacity: By specifying end item requirements, the master schedule establishes the load and utilization parameters for labour and equipment. To utilize the capacity most effectively the master schedule may call for delaying some orders or building others ahead of demand. Question 3 Solution: Demand Period A I II III 960 600 900 240 = (660) 1240 180 = 1060 Regular time production @ 14 units/day B 60 x 14 = 840 840 840 Inv. Charge B-A - 120 240 180 Inv carried forward -240 180 Regular time production 840 600 660 Demand met by Carrying Sub the contracting inventory -120 --240 --

IV Total

62 x 14 = 868 3388

-192

-420

868

180

192 312

Total Cost

= R T Production Cost + S.C. Cost + Inv. Carrying Cost = 3388 x 100 + 312 x 110 + 420 x 5 = Rs.3,75,220

Question 4 Solution Demand (units) A 600 1300 120 = 1180 960 890 3750 R.T. Production @ 12 units/day 60 x 12 =720 65 x 12 =780 64 x 12 =768 61 x 12 =732 3000 Inv. charge B -A 120 -400 -192 -158 Inv. Carried forward 120 ---120 Demand met by Carrying R. T. O.T. the production Production inventory 600 780 768 732 -120 ---400 192 158 750

Period

Working days 60 65 64 61 250

I II III IV Total

Total cost of the production = R.T. Production Cost + O.T. Production Cost + Inv. Carrying cost = 3000 x 100 +750 x 120 + 120 x 6 = 3,90,720 Question 5 Solution Alt 1 Average Production per day = (Total Demand/ Total Production Days) = 4800/240 Demand Quarter A I II III IV Total 1150 1350 1250 1050 4800 60 60 60 60 Days Production @ 20 units/day B 60 x 20 =1200 1200 1200 1200 Inv. Charge B-A +50 -150 -50 +150 Cum Inv. or Ending Inv. Balance +50 +50-150= -100 -100-50 = -150 +150-150 = 0 Ending Bal with an Inv. of +150 at the beginning of Qtr.1 +50+150 = 200 -100+150 = +50 - 150 + 150= 0 0 + 150 = 150 400

Total Cost = R.T. Production cost + Inv. Carrying Cost = 4800 x 100 +(200+50+150) x 4 = Rs.4,81,600. Alt 2. Quarte r I II III IV Deman d (Units) A 1150 1350 1250 1050 4800 Workin g Days 60 60 60 60 R.T.Productio n @ 18 units/day B 1080 1080 1080 1080 4320 Inv. Charg e B-A -70 -270 -170 +30 Inv. carried forwar d ---30 Demand Met by R.T.Productio n 1080 1080 1080 1050 Carryin g Inv. ----O.T.Productio n 70 270 170 -510

R.T. Production cost = 1080 x 4 x 100 = 4,32,000 O.T. Production cost = (70+270+170)x120=61200 Inv. carrying Cost = 30 x 4 = 120 Total Cost =Rs.4,93,320

Question 9 solution
Demand Month A B R.T. Production Inventory change after R.T. Production B A=C O.T. Production Inventory change after O.T. Production C+D Inventory carried forward R.T. O.T. Demand met by Carrying Hiring the Inventory Lay off

1 2

220 170 30 = 140 400 60 = 340 600

200 200

-20 60

50 --

30 60

30 60

200 140

20 --

-30

---

---

200

-140

50

-90

--

200

50

60

90 35090= 260 ----350

--

200

-400

50

-350

--

200

50

--

-350130 =220 1300=130 --350

5 6 7 8 Total

380 200 130 300 70 = 230

200 200 200 200

-180 0 70 -30

50 --50 250

-130 -70 20

--70 20 180

200 200 130 200

50 --30

---70

Total Cost: Cost of O.T. Hiring cost Lay off cost Inventory carrying cost

= = = =

250 x 20 350 x 100 350 x 150 180 x 50

= = = =

5,000 35,000 52,500 9,000 1,01,500