7.4 Aggregate Planning, Capacity Balancing & Master Scheduling

Aggregate Planning, Capacity Balancing & Master Scheduling

Demand planning produces an unconstrained view of what the market wants. Aggregate planning decides what the organization will actually produce, given the capacity it has or can acquire. It is the supply-side half of the S&OP balance, and it converts a demand number into commitments that supply management must execute — labour, capacity, subcontracting, and supplier volume.

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What Aggregate Planning Does

It operates at the family level for the reason established by the aggregation principle: family-level forecasts are far more accurate than SKU-level forecasts, and capacity decisions do not require SKU detail.

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The Three Aggregate Planning Strategies

The Supply Management Consequence

Each strategy places a different demand on suppliers, and the choice must be negotiated into supply agreements before it is executed:

• A level strategy gives suppliers smooth, predictable releases — the most valuable thing a buyer can offer, and legitimate leverage in negotiation.
• A chase strategy pushes the entire swing onto suppliers, and that flexibility must be paid for through tolerance bands, surge capacity commitments, or premium pricing.
• A hybrid strategy requires suppliers who can hold a firm base and flex an agreed increment on defined notice.

Exam anchor: adopting a chase strategy internally while holding suppliers to fixed volumes simply relocates the bullwhip effect to the supply base. Supply management's role in aggregate planning is to make the supply-side cost of each strategy visible before it is chosen.

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Capacity Definitions and Utilization Arithmetic

$\text{Utilization} = \frac{\text{Actual output}}{\text{Design capacity}} \qquad \text{Efficiency} = \frac{\text{Actual output}}{\text{Effective capacity}}$

Worked example. Design capacity 12,000 units per week; effective capacity 10,200 units per week; actual output 9,180 units.

• Utilization = $9{,}180 / 12{,}000 = \mathbf{76.5%}$
• Efficiency = $9{,}180 / 10{,}200 = \mathbf{90.0%}$

Exam trap: utilization and efficiency use different denominators. A plant can show high efficiency (working well against its realistic capability) and low utilization (much of the theoretical capacity is consumed by planned losses) at the same time. Items reporting a single "capacity percentage" without naming the denominator are ambiguous by design.

Capacity cushion is the reserve deliberately held above expected demand: $\text{cushion} = 100% - \text{utilization}$. High-variability, high-stockout-cost environments justify a larger cushion; capital-intensive, stable environments run leaner.

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From Aggregate Plan to Master Production Schedule

The MPS disaggregates the family-level aggregate plan into specific end items. Its total must reconcile back to the aggregate plan, or the two are planning different businesses.

Rough-Cut Capacity Planning (RCCP)

RCCP validates a proposed MPS against a small number of critical resources — bottleneck work centres, skilled labour pools, key suppliers, and constrained warehouse space — before the far more computationally expensive MRP run. Its purpose is to catch an infeasible MPS early. Running MRP against an infeasible master schedule generates thousands of purchase and production orders that cannot be executed, which is how planning systems lose credibility with their users.

Capacity Requirements Planning (CRP) is the detailed counterpart, run after MRP against every work centre using planned and released orders.

Available-to-Promise (ATP)

ATP is the uncommitted portion of the master schedule available to promise to new customer orders:

$\text{ATP} = \text{On hand} + \text{Scheduled MPS receipts} - \text{Customer orders already committed before the next MPS receipt}$

ATP is what allows sales to make a reliable delivery promise instead of guessing — and unreliable promising is a documented root cause of the bullwhip effect, because customers who distrust promises inflate and duplicate orders.

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Time Fences

Time fences define how much of the schedule may change, and by whom.

The supply management link: the frozen zone must be at least as long as the cumulative lead time of the longest-lead purchased component. A four-week frozen zone with a sixteen-week component means the plan is being changed after the material has already been committed — the schedule looks flexible while the supply chain has already paid for the old plan. Aligning time fences with actual supplier lead times, and shortening those lead times so the fences can shrink, is a direct supply management contribution to schedule stability.

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Closing the Capacity Gap

When the aggregate plan reveals demand above available capacity, the options — in ascending cost and lead time — are:

1. Overtime and additional shifts — fast, expensive per unit, limited by labour availability and fatigue.
2. Inventory pre-build — build ahead in low periods. Requires forecast confidence and working capital.
3. Subcontracting and contract manufacturing — supply management's lever. Requires qualification lead time and carries quality and IP exposure.
4. Supplier capacity reservation — pay an option fee to secure a block of supplier capacity.
5. Backlog and lead-time extension — quote a longer lead time. Acceptable in industrial make-to-order markets, damaging in competitive make-to-stock markets.
6. Demand shaping — pricing, promotion timing, and incentives to move demand from peaks into troughs. The cheapest option and the most frequently overlooked.
7. Capital capacity addition — longest lead time and largest commitment; justified only by a durable structural demand increase, not by a peak.

A supply review that presents a capacity gap without presenting these options ranked by cost and lead time has not completed the S&OP supply step.