Operations Management and Strategic Management · Operations Planning

Aggregate Planning and Master Production Schedule Explained

Updated 10 October 2026 · Fact-checked

Aggregate planning fixes monthly output, workforce and inventory levels for the medium term (usually 3 to 18 months) for product groups, not single items. Chase, level and mixed strategies are the main options. The master production schedule then breaks the plan into weekly quantities of specific end items. Compare costs, then pick the cheapest feasible plan.

Understand Aggregate Planning and Master Production Schedule

Aggregate planning is medium-range planning. It decides how much to produce in each period, how many workers to employ, how much overtime to use and how much stock to carry. It works with a product family expressed in one common unit, such as tonnes or standard hours, not with individual models.

The reason is simple. Demand changes from month to month, but capacity does not change easily. Hiring, firing, overtime, subcontracting and stocking all cost money. Aggregate planning looks for the mix of these that meets demand at the lowest total cost.

There are three basic strategies. In the chase strategy, output in each period matches demand. You change the workforce or use overtime, so closing inventory stays near zero. In the level strategy, output stays constant across periods. Inventory builds up in low-demand periods and is used up in high-demand periods. A mixed strategy combines both, for example a steady workforce plus overtime and subcontracting in peak months.

Chase suits perishable goods, services and cases where stocking is costly. It carries hiring, training and layoff costs. Level suits stable workforces and storable goods. It carries inventory holding costs and the risk of stock-outs or obsolescence. Backlogs (late delivery) are a further option, with their own cost.

The master production schedule (MPS) turns the aggregate plan into a detailed statement of what end items will be made and when, usually in weekly buckets. It uses customer orders and forecasts, and checks them against available stock. The MPS then drives material requirements planning (MRP), which works out the components and purchases needed.

Key rules to remember

Closing inventory: Closing inventory = Opening inventory + Production − Demand; Use for each period under any strategy. If it goes negative, you have a shortage or backlog, unless the question allows it.
Level production per period: Level production = Total demand for the plan ÷ Number of periods; Adjust for opening and required closing stock: (Total demand + Closing stock − Opening stock) ÷ Periods.
Chase production per period: Production in period = Demand in period (adjusted for opening and target closing stock); Workforce or overtime changes to follow demand.
Total plan cost: Total cost = Production cost + Hiring and layoff cost + Overtime cost + Inventory holding cost + Shortage or subcontracting cost; Include only cost heads the question gives. Compare totals across strategies.
Average inventory carried: Inventory cost = Σ (closing inventory of each period × holding cost per unit per period); Charge holding cost on closing stock unless the question says to use average stock.
Projected available balance (MPS): Projected available balance = Previous balance + MPS quantity − Higher of forecast and customer orders; Schedule an MPS lot when the balance would fall below zero (or below safety stock).
Available to promise (ATP): ATP = Opening stock + MPS quantity − Customer orders until the next MPS receipt; Shows how much can still be promised to new orders.

How to solve Aggregate Planning and Master Production Schedule questions

Use this order for any aggregate planning or MPS question, numerical or theory.

1Read the data and note the planning horizon, demand per period, opening stock, required closing stock and all cost rates.
2Compute total demand and check units: are all figures in the same unit (units, tonnes, hours)?
3Write the plan for each strategy asked: chase (production = demand), level (equal production), or the mixed plan given.
4Build a table for each plan with columns: period, demand, production, closing inventory, and any hire, layoff, overtime or shortage figures.
5Cost each plan head by head, then add to get the total. Show each multiplication.
6Compare totals and name the cheaper plan. Add one line on non-cost factors such as morale, stock-out risk and flexibility.
7For an MPS question, list forecast and orders by week, compute the projected balance, place a lot where the balance would go negative, and state ATP if asked.

Quickest way: Table-first method for chase vs level questions

When to use it: Use it for numerical questions comparing strategies under time pressure.

Total the demand and divide by periods to get level output. Check that the answer is a whole number.
Run closing inventory in a single row: add production, subtract demand, carry forward.
For chase, the only costs are the changes in workforce or production between periods. List the increase or decrease for each period.
Multiply each cost head once and write it in a cost row. Do not recompute.
Add the totals, compare and state the conclusion in one line.

Common mistakes in Aggregate Planning and Master Production Schedule

Treating aggregate planning as item-wise scheduling.
Students confuse it with the MPS.
Fix: Remember: aggregate plan is for product families over months; the MPS is for specific end items over weeks.
Showing inventory in a chase plan.
Students carry over the level-plan table layout.
Fix: In a pure chase plan, production equals demand, so inventory change is zero unless opening or target stock is given.
Forgetting opening or closing stock when finding level production.
Students divide total demand by periods without reading the data.
Fix: Use (Total demand + Closing stock − Opening stock) ÷ Periods.
Charging hiring or layoff cost on the full workforce instead of the change.
Students rush through the cost step.
Fix: Cost only the increase (hiring) or decrease (layoff) from the previous period.
Declaring the cheaper plan best without comment.
Students stop once the numbers are done.
Fix: Add a short line on practical factors such as morale, stock-out risk, product shelf life and flexibility.
Placing MPS lots without checking the projected balance.
Students schedule production equal to forecast each week.
Fix: Compute the balance week by week and schedule a lot only when it would fall below zero or below safety stock.

Worked examples

Example 1

Sundaram Fans Ltd. forecasts demand of 300, 500, 400 and 600 units for four months. Opening stock is nil and closing stock at the end of month 4 must be nil. Holding cost is ₹20 per unit per month on closing stock. Compare a level plan (equal output) and a chase plan on inventory cost, and state which is cheaper on this cost alone.

Show the solution

Total demand = 300 + 500 + 400 + 600 = 1,800 units.
Level production = 1,800 ÷ 4 = 450 units per month.
Closing stock under level: Month 1 = 0 + 450 − 300 = 150. Month 2 = 150 + 450 − 500 = 100. Month 3 = 100 + 450 − 400 = 150. Month 4 = 150 + 450 − 600 = 0.
Inventory units carried = 150 + 100 + 150 + 0 = 400 unit-months.
Level holding cost = 400 × ₹20 = ₹8,000.
Chase plan: production equals demand each month, so closing stock is nil every month and holding cost = ₹0.
Chase plan changes output by +200, −100 and +200 in months 2, 3 and 4. Any cost of those changes is not given, so it cannot be priced.

Answer: Level plan: 450 units a month, holding cost ₹8,000. Chase plan: holding cost nil. On holding cost alone chase is cheaper, but the plan must also bear the cost of changing output, which would need to be compared if given.

Example 2

A firm makes one product. Weekly forecast demand is 40 units each for weeks 1 to 4. Customer orders booked are 45, 38, 20 and 10. Opening stock is 50 units. The MPS lot size is 80 units. Prepare the MPS for 4 weeks, using the higher of forecast and orders as demand.

Show the solution

Demand used = higher of forecast and orders: Week 1 = 45, Week 2 = 40, Week 3 = 40, Week 4 = 40.
Week 1: 50 − 45 = 5. Balance is not negative, so no MPS lot.
Week 2: 5 − 40 = −35. Balance would be negative, so schedule 80. Balance = 5 + 80 − 40 = 45.
Week 3: 45 − 40 = 5. No lot needed.
Week 4: 5 − 40 = −35. Schedule 80. Balance = 5 + 80 − 40 = 45.

Answer: MPS: Week 1 = 0, Week 2 = 80, Week 3 = 0, Week 4 = 80. Projected balances: 5, 45, 5, 45 units.

Exam tips

For a compare-the-strategies question, always draw the table first. Step marks come from correct closing stock and cost rows.
In theory answers, give a definition, the features of each strategy, one advantage and one limitation, and one suitable business example.
For MCQs, link terms to time scale: aggregate plan means months and product families; MPS means weeks and end items.
State your assumptions, such as holding cost on closing stock, when the question is silent.
End numerical answers with a one-line recommendation that also mentions a non-cost factor.

Practice questions from Operations Planning

Aggregate Planning and Master Production Schedule: frequently asked questions

What is the difference between chase strategy and level strategy?

In a chase strategy, output follows demand each period and inventory stays low, but workforce or overtime keeps changing. In a level strategy, output is constant, so inventory builds in slow periods and is used in peak periods.

What is the master production schedule in simple words?

It is a time-phased statement of how many units of each end item you will make in each period, usually each week. It comes from the aggregate plan, orders and forecasts, and it feeds MRP.

What are the steps in preparing an MPS?

Start with the aggregate plan and forecasts, add booked customer orders, and take the higher of the two as demand. Compute the projected balance after opening stock, schedule lots where the balance would turn negative, and check capacity before you confirm.

What is a mixed strategy in aggregate planning?

A mixed strategy blends options. For example, you keep a steady workforce, use overtime or subcontracting in peak months and build some stock in lean months. Its aim is to get the lowest total cost within the limits of capacity.