Aggregate Planning

Production Planning and Control

Forecast of aggregate
demand

WE ARE HERE NOW

Aggregate production plan

Master production schedule

Materials requirements
planning

Scheduling

Inventory Control

Aggregate Planning
Goal:
To plan gross workforce levels and set firm-wide
production plans
Aggregate (macro) planning begins with a forecast of the
demand
It is usually a high-level plan, for managing groups of
items or the whole line of products
Single-item control involves different strategies

Will be discussed in subsequent topics on inventory

The task is to adapt the workforce and production plans to

the forecast
We will assume what is forecasted will actually happen

Not a strong assumption, but will make analysis easier

Aggregate Production Planning

(APP)
Matches market demand to company
resources
Plans production 6 months to 12 months in
advance
Expresses demand, resources, and capacity
in general terms
Develops a strategy for economically
meeting demand
Establishes a company-wide game plan for
allocating resources

APP: BASIC OBJECTIVE

TO DETERMINE THE OPTIMAL COMBINATION OF
PRODUCTION RATE, WORK FORCE LEVEL AND ON-HAND
INVENTORY.
PRODUCTION RATE
Number of (aggregate) product units generated in a time
period within the planning horizon.
WORK FORCE LEVEL
Number of workers used for production in a time period
within the planning horizon.
INVENTORY LEVEL
Number of units not used in a time period that are carried
over the next period.

APP: FORMAL STATEMENT

given forecasts for net demand (requeriments),
dt,
for each of the time periods, t within a planning
horizon
(t = 1, 2,, t),
DETERMINE LEVELS OF:
Production rate, pt,
INVENTORIES, it,
WORK FORCE, wt.
For t = 1, 2, , t such that relevant total costs
over the planning horizon are minimized.

APP: FORMAL STATEMENT

GRAPHICAL DISPLAY
SIX MONTHS
PLANNING HORIZON:

PERIODS:

MONTH 1 MONTH 2

PROBLEM:
TO DETERMINE
LEVELS FOR

MONTH 3 MONTH 4 MONTH 5 MONTH 6

PRODUCTION RATE, Pt,

INVENTORIES, It,
WORK FORCE, Wt.
MINIMIZING TOTAL (RELEVANT) COSTS

Inputs

and

Outputs to APP

Determine demand for each period.

Determine capacities for each period.
Determine pertinent company policies.
Determine unit cost based on all relevant
sources.
Develop alternative plans and calculate
the cost for each.
Choose the best overall plan based on
company objectives and cost.

Inputs and Outputs to APP

Capacity
Constraints

Demand
Forecasts

Size of
Workforce

Strategic
Objectives

Aggregate
Production
Planning

Production
per month
(in units or $)

Inventory
Levels

Company
Policies

Financial
Constraints

Units or dollars
subcontracted,
backordered, or lost

Level Production
Demand

Units

Production

Time

Level Production
Cost of strategy holding items in
inventory.
Tends to be the preferred strategy of
many organizations, including labor
unions.

Level Production
(+) Worker levels and production output
are 'stable'.
(-) High inventory costs.

Chase Demand
Demand

Units

Production

Time

Chase Strategy
Cost of strategy hiring and firing workers
This strategy would not be feasible for
industries which require highly skilled labor
or where competition for labor is fierce.
This strategy would be cost effective during
periods of high unemployment or when lowskilled labor is acceptable.

Chase Strategy
(-) Cost of fluctuating workforce levels.
Potential damage to employee morale.
(+) Reduced inventory costs.

Example -

APP Using Pure Strategies

QUARTER

SALES FORECAST (LB)

Spring
Summer
Fall
Winter
Hiring cost
Firing cost
Inventory carrying cost
Production per employee
Beginning work force
Example 9.1

80,000
50,000
120,000
150,000
= $100 per worker
= $500 per worker
= $0.50 pound per quarter
= 1,000 pounds per quarter
= 100 workers

no safety stock

(1) APP Using Level Production

QUARTER
Spring
Summer
Fall
Winter

SALES FORECAST (LB)

80,000
50,000
120,000
150,000

Level production
Hiring cost = $100 per worker
Firing cost = $500 per worker
(50,000 + 120,000 + 150,000 + 80,000)
Inventory carrying cost = $0.50 pound per quarter
4
Production per employee = 1,000 pounds per quarter
Beginning work
force = pounds
100 workers
= 100,000
Example 9.1

Level Production Strategy

QUARTER
Spring
Summer
Fall
Winter

SALES
FORECAST
80,000
50,000
120,000
150,000

PRODUCTION
PLAN
INVENTORY
100,000
20,000
100,000
70,000
100,000
50,000
100,000
0
400,000
140,000

Cost = 140,000 pounds x 0.50 per pound = $70,000

Example 9.1

Level Production
160000
140000

units

120000
100000
80000
60000
40000

demand

20000

production

0
Q1

Q2

Q3

quarter

Q4

Level Production
cumulative
5.00E+05
4.00E+05
3.00E+05
2.00E+05

Demand
1.00E+05

Production-level

0.00E+00

Q1

Q2

Q3

Q4

(2) Chase Demand Strategy

QUARTER

SALES PRODUCTION
FORECAST
PLAN

Spring
Summer
Fall
Winter

80,000
50,000
120,000
150,000

80,000
50,000
120,000
150,000

WORKERS WORKERS WORKERS

NEEDED
HIRED
FIRED

80
50
120
150

0
0
70
30

20
30
0
0

100

50

Cost = (100 workers hired x $100) + (50 workers fired x $500)

= $10,000 + 25,000 = $35,000

Example 9.1

APP by Linear Programming

Minimize Z = $100 (H1 + H2 + H3 + H4)
+ $500 (F1 + F2 + F3 + F4)
+ $0.50 (I1 + I2 + I3 + I4)
Subject to

where
Ht = # hired for period t
Ft = # fired for period t
It = inventory at end
of period t
Pt = units produced
in period t
Wt = workforce size
for period t
Example 9.3

P1 - I1 = 80,000

(1)

Demand

I1 + P2 - I2 = 50,000

(2)

constraints

I2 + P3 - I3 = 120,000

(3)

I3 + P4 - I4 = 150,000

(4)

Production

1000 W1 = P1

(5)

constraints

1000 W2 = P2

(6)

1000 W3 = P3

(7)

1000 W4 = P4

(8)

100 + H1 - F1 = W1

(9)

Work force

W 1 + H2 - F 2 = W 2

(10)

constraints

W 2 + H3 - F 3 = W 3

(11)

Example #2
The washing machine plant is interested in
determining work force and production levels for
the next 8 months
Forecasted aggregate unit demands for January August are: 420, 280, 460, 190, 310, 145, 110, 125
Starting inventory at the end of December is 200
and the firm would like to have 100 units on hand
at the end of August

example#2

Setup
Calculate net requirements, plot the cumulative
demand
Net Cumulati
ve

Jan

420200=220

220

Feb

280

500

Mar

460

960

Apr

190

1150

May

310

1460

Jun

145

1605

Jul

110

1715

Aug

125+100=
225

1940

example#2

Level Production
Suppose that we are interested in determining
a production plan that doesnt change the
size of the workforce over the planning
horizon
One method:

In previous picture, draw a straight line from origin

to 1940 units in month 8
The slope of the line is the number of units to
produce each month.

example#2

Level Production
Zero Ending Inventory

Corresponds to 242.5 243 units per month

But

example#2

Level Production
No Stockouts

How can we have a constant workforce plan with no

stockouts?
Draw a straight line from origin that is always above
cumulative demand Corresponds to 320 units per
month
But

example#2

Level Production
No Stockouts

From the previous graph, we see that cumulative net demand

curve is crossed at period 3, so that monthly production is
960/3 = 320
Ending inventory each month is found from:
Cumulative
Demand

Cumulative
Production

Inventory

Jan

220

320

100

Feb

500

640

140

Mar

960

960

Apr

1150

1280

130

May

1460

1600

140

Jun

1605

1920

315

Jul

1715

2240

525

Aug

1940

2560

620

example#2

Working Days
The previous solutions may not be reasonable,
since all months do not have the same number of
workdays
A constant production level may not translate
to the same number of workers each month
To overcome this

Assume number of working days for each month is given

Also assume we know (or can calculate)
K = number of aggregate units produced by one worker in one day

example#2

Finding K
Suppose that we are told (based on company's
history) that over a period of 40 days, the plant had 38
workers who produced 520 units. It follows that:
K

= 520/(38*40) = .3421
= average number of units produced per worker
per day
Assume we are given the following number of working
days per month: 22, 16, 23, 20, 21, 17, 18, 10

example#2

Constant Workforce Plan

No Stockouts, factoring K

Remember, March is the critical month

Cumulativ
e Demand

#
Working
Days

Cumulativ
e # Days

Monthly
Productio
n

Cumulativ
e
Productio
n

Inventory

(960/61)*22
=

Jan

220

22

22

346

346

126

Feb

500

16

38

252

598

98

Mar

960

23

61

362

960

Apr

1150

20

81

315

1275

125

May

1460

21

102

330

1605

145

Jun

1605

22

124

346

1951

346

Jul

1715

21

145

330

2281

566

Aug

1940

22

167

346

2627

687

example#2

Back to example #2
Holding Cost (per unit per month): $8.50
Hiring Cost per worker: $800
Firing Cost per worker: $1,250
Payroll Cost: $75/worker/day
Shortage Cost: $50/unit short/month
Assume that the workforce at the end of December
was 40

example#2

Modified Constant Workforce Plan

No Stockouts
In the original cumulative net demand curve, consider
making reductions in the workforce one or more times
over the planning horizon to decrease inventory
investment

Total cost of
this plan =
$467,450

example#2

Zero Inventory Plan

(Chase Strategy)
Idea is to change the workforce each month in order to
reduce ending inventory to nearly zero by matching the
workforce with monthly demand as closely as possible

Total cost of this

plan =
$555,704.50

LP Approach to Aggregate Planning

Aggregate Planning is an optimization
problem
One can find heuristic solutions (as we did)
When all costs are linear, there is an LP
formulation of the problem
Optimal solutions can be obtained for
relatively large problems

LP Approach: Parameters
Given
cH

= Cost of hiring one worker

cF = Cost of firing one worker

cI = Cost of holding one unit of stock for one period
cR = Cost of producing one unit on regular time
cO

= Incremental cost of producing one unit on overtime

cU

= Idle cost per unit of production

Can also be
timedependent

cS = Cost to subcontract one unit of production

nt = Number of production days in period t
K = Number of aggregate units produced by one worker in one day
I0 = Initial inventory on hand at the start of the planning horizon
W0 = Initial workforce at the start of the planning horizon
Dt

= Forecast of demand in period t

LP Approach: Variables
For each time period t, find the optimal
levels of
Wt = Workforce level
Pt = Production level
It = Inventory level
Ht

= Number of workers hired

Ft = Number of workers fired

Ot

= Overtime production in units

Ut

= Worker idle time in units (undertime)

St = Number of units subcontracted from outside

LP Approach: Constraints
Three sets of constraints required:
Conservation of workforce

Conservation of units

Relate production to workforce

LP Approach: Complete
Model
Objective function: Minimize cost

Subject to

Supplement
Linear Programming

Linear Programming
Applications
Given machine and labor hours, find
product mix to maximize profit
Given demand, schedule production to
minimize costs
Given limited patrol cars, allocate police
to minimize response time
Given minimum daily diet requirements,
plan menus to minimize cost

Examples of Successful LP
Applications
Development of a production schedule that
will satisfy future demands for a firms
products and at the same time minimize
total production and inventory costs
Selection of the product mix in a factory to
make best use of machinehours and labor
hours available while maximizing the firms
profit
Determination of grades of petroleum
products to yield the maximum profit

Requirements of a Linear
Programming Problem
1 Must seek to maximize or minimize
some quantity (the objective function)
2 Presence of restrictions or constraints
- limits ability to achieve objective
3 Must be alternative courses of
action to choose from
4 Objectives and constraints must be
expressible as linear equations or
inequalities

Graphical Solution Method

Draw graph with vertical & horizontal axes
(1st quadrant only)
Plot constraints as lines, then as planes

Use (X1,0), (0,X2) for line

Find feasible region

Find optimal solution

Corner point method

Iso-profit line method

Shader Electronic
Problem

Company

Hours Required to
Produce 1 Unit
Department
X1
X2
Available Hours
Walkmans Watch-TVs
This Week
Electronic
4
3
240
Assembly

Profit/unit

$7

$5

100

Constraints: 4x1 + 3x2 240 (Hours of Electronic Time)

2x1 + 1x2 100 (Hours of Assembly Time)
Objective: Maximize: 7x1 + 5x2

Number of Watch-TVs (X2)

Shader Electronic Company

Constraints
Electronics

120

(Constraint A)

100

Assembly
(Constraint B)

80
60
40
20
0
0

10

20

30

40

50

60

Number of Walkmans (X1)

70

80

Number of Watch-TVs (X2)

Shader Electronic Company

Feasible Region
Electronics
(Constraint A)

120
100

Assembly
(Constraint B)

80
60
40

Feasible
Region

20
0
0

10

20

30

40

50

60

Number of Walkmans (X1)

70

80

Number of Watch-TVs (X2)

Shader Electronic Company

Iso-Profit Lines
Electronics
(Constraint A)
Assembly
(Constraint B)

120
100
80

7*X1 + 5*X2 = 420

60

7*X

40

20

+ 5*
X =
2
210

0
0

10

20

30

40

50

60

Number of Walkmans (X1)

70

80

Number of Watch-TVs (X2)

Shader Electronic Company

Solution
120
ISO-Profit Line

100
80

Electronics
(Constraint A)
Assembly
(Constraint B)

Solution Point
(X1=30, X2=40)

60
40
20
0
0

10

20

30

40

50

60

Number of Walkmans (X1)

70

80

Formulation of Solution
Decision variables

X1 = tons of BW chemical produced

X2 = tons of color chemical produced

Objective

Minimize Z = 2500X1 + 3000X2

Constraints

X1 30 (BW); X2 20 (Color)

X1 + X2 60 (Total tonnage)
X1 0; X2 0 (Non-negativity)

Simplex Steps for

Maximization

1 Choose the variable with the greatest positive C jZj to enter the solution

2 Determine the row to be replaced by selecting

that one with the smallest (non-negative) quantityto-pivot column ratio
3 Calculate the new values for the pivot row
4 Calculate the new values for the other row(s)
5 Calculate the Cj and Cj-Zj values for this tableau.
If there are any Cj-Zj numbers greater than
zero, return to step 1.

Sensitivity Analysis
Projects how much a solution might
change if there were changes in
variables or input data.
Shadow price (dual) - value of one
additional unit of a resource

Minimization Example
Youre an analyst for a division
BW: $2,500 mfg.
of Kodak, which makes BW &
cost per month
color chemicals. At least 30
tons of BW and at least 20
tons of color must be made
each month. The total
chemicals made must be at
least 60 tons. How many of
each chemical should be made
to minimize costs?
Color: $ 3,000 mfg.

1995 Corel Corp.

cost per month

B-18

Graphical Solution
80

BW

60

Total

Tons, Color
Chemical 40
(X2)
20

Find
Find values
values for
for
XX11++ XX22 60.
60.

Feasible
Region

Color

0
0

20
40
60
80
Tons, BW Chemical (X1)

Optimal Solution:
Corner Point Method
80

Find
Find corner
corner
points.
points.

BW

60

Total

Tons, Color
Chemical 40

Feasible
Region
B

20

Color

0
0

20
40
60
Tons, BW Chemical

80

Simplex Steps for Minimization

1 Choose the variable with the greatest negative
Cj- Zj to enter the solution

2 Determine the row to be replaced by selecting

that one with the smallest (non-negative)
quantity-to-pivot column ratio
3 Calculate the new values for the pivot row
4 Calculate the new values for the other row(s)
5 Calculate the Cj and Cj-Zj values for this
tableau.
If there are any Cj-Zj numbers less
than zero, return to step 1.