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Supply Chain Management

Chapter 8
Aggregate Planning
in the Supply Chain

8-1
Production System
 In a broader sense, a production system is anything that takes inputs
and transforms them into outputs.

 Production system is the collection of people, equipment, and


procedures organized to accomplish the operations of a company (or
other organization).
– Manufacturing
– Service

8-2
Production Planning
 Production Planning is the analysis, design and management of
production systems.
Objective: Transform a variety of inputs (such as raw material, labor,
capital, etc.) into outputs (goods and services) in a manner that is
both efficient in using resources and effective in achieving high
customer satisfaction.
 In today’s competitive business environment it is important to know
methods and specific analysis tools for operational decisions to
effectively manage these systems.

8-3
Production Planning Decisions
 Long-term (Strategic) Decisions:
– Top Management Decisions
– 3-10 years
– Decisions: Capacity, Product, Supplier needs, Quality Policy

 Intermediate-term (Tactical) Decisions:


– Middle Management Decisions
– 6 months - 3 years
– Decisions: Work-force levels, processes, production rates, inventory
levels, contracts with suppliers, quality level, quality costs

 Short-term (Operational) Decisions:


– Operational Management Decisions
– 1 week - 6 months
– Decisions: Allocation of jobs to machines, overtime, undertime,
subcontracting, delivery dates for suppliers, product quality

8-4
Production Planning and Control
General Framework

Resources Aggregate Demand


Planning Planning Management

Rough-cut Master Production


Capacity Scheduling
Planning

Detailed Detailed Material


Capacity Planning
Planning

Material and
Capacity Plans

Shop Floor Purchasing


Systems

8-5
Role of Aggregate Planning
in a Supply Chain
Aggregate planning:
– process by which a company determines levels of capacity,
production, subcontracting, inventory, stockouts, and pricing
over a specified time horizon
– goal is to maximize profit
– decisions made at a product family level
– time frame of 3 to 18 months
– how can a firm best use the facilities it has?

8-6
Role of Aggregate Planning
in a Supply Chain
Specify operational parameters over the time horizon:
– production rate
– workforce
– overtime
– machine capacity level
– subcontracting
– backlog
– inventory on hand
All supply chain stages should work together on an
aggregate plan that will optimize supply chain
performance
8-7
The Aggregate Planning Problem
Given the demand forecast for each period in the
planning horizon, determine the production level,
inventory level, and the capacity level for each period
that maximizes the firm’s (supply chain’s) profit over
the planning horizon
Specify the planning horizon (typically 3-18 months)
Specify the duration of each period
Specify key information required to develop an
aggregate plan

8-8
Information Needed for
an Aggregate Plan
Demand forecast in each period
Production costs
– labor costs, regular time ($/hr) and overtime ($/hr)
– subcontracting costs ($/hr or $/unit)
– cost of changing capacity: hiring or layoff ($/worker) and
cost of adding or reducing machine capacity ($/machine)
Labor/machine hours required per unit
Inventory holding cost ($/unit/period)
Stockout or backlog cost ($/unit/period)
Constraints: limits on overtime, layoffs, capital
available, stockouts and backlogs
8-9
Outputs of Aggregate Plan
Production quantity from regular time, overtime, and
subcontracted time: used to determine number of
workers and supplier purchase levels
Inventory held: used to determine how much warehouse
space and working capital is needed
Backlog/stockout quantity: used to determine what
customer service levels will be
Machine capacity increase/decrease: used to determine
if new production equipment needs to be purchased
A poor aggregate plan can result in lost sales, lost
profits, excess inventory, or excess capacity
8-10
Fundamental Tradeoffs in
Aggregate Planning
Capacity (regular time, overtime, subcontract)
Inventory
Backlog / lost sales
Basic Strategies
Chase strategy
Time flexibility from workforce or capacity
Level strategy

8-11
Aggregate Planning Strategies
Trade-off between capacity, inventory,
backlog/lost sales
Chase strategy – using capacity as the lever
Time flexibility from workforce or capacity
strategy – using utilization as the lever
Level strategy – using inventory as the lever
Mixed strategy – a combination of one or more of
the first three strategies

8-12
Chase Strategy
Production rate is synchronized with demand by
varying machine capacity or hiring and laying off
workers as the demand rate varies
However, in practice, it is often difficult to vary
capacity and workforce on short notice
Expensive if cost of varying capacity is high
Negative effect on workforce morale
Results in low levels of inventory
Should be used when inventory holding costs are high
and costs of changing capacity are low
8-13
Level Strategy
Maintain stable machine capacity and workforce
levels with a constant output rate
Shortages and surpluses result in fluctuations in
inventory levels over time
Inventories that are built up in anticipation of future
demand or backlogs are carried over from high to low
demand periods
Better for worker morale
Large inventories and backlogs may accumulate
Should be used when inventory holding and backlog
costs are relatively low
8-14
Time Flexibility Strategy
Can be used if there is excess machine capacity
Workforce is kept stable, but the number of hours
worked is varied over time to synchronize production
and demand
Can use overtime or a flexible work schedule
Requires flexible workforce, but avoids morale
problems of the chase strategy
Low levels of inventory, lower utilization
Should be used when inventory holding costs are
high and capacity is relatively inexpensive
8-15
Comparison of production planning
strategies
Item Chase Demand Level Capacity

Labor skill required Low High

Job discretion Low High

Working conditions Sweatshop Pleasant

Training required Low High

Labor turnover High Low

Supervision required High Low

8-16
Aggregate Planning Problem

Costs in Aggregate Planning:

•Material Cost
•Inventory Holding Cost
•Shortage cost
•Regular Time Costs
•Overtime and Subcontracting Costs
•Hiring and Firing Costs
•Idle Time Costs
•Backlogging costs
•Costs associated with lost sales
•Control system cost.
8-17
Data for the aggregate planning
problem
Item January February March April May June Totals
Demand Forecast 2250 1425 1000 850 1150 1725 8400
Number of Working Days 22 19 21 21 22 20 125
Costs:
Materials 100
Inventory holding cost 1.5
Marginal cost of stockout 5
Marginal cost of subcontracting 20
Hiring and training cost 200
Layoff cost 250
Labor hours required 5
Straight-line cost (first eight hours each day) 4
Overtime cost (time and a half) 6
Beginning Inventory 400
Production Requirement (Demand
1,850 1,425 1,000 850 1,150 1,725
Forecast - Beginning Inventory)

8-18
Production Plan 1: Exact Production;
Vary Workforce
Item January February March April May June Total

Production Requirement 1,850 1,425 1,000 850 1,150 1,725


Production Hours Required
(Production Requirement x 5 9,250 7,125 5,000 4,250 5,750 8,625
Hr./Unit)
Working Days per Month 22 19 21 21 22 20
Hours per Month per Worker (Working
176 152 168 168 176 160
Days x 8 Hrs/Day)
Workers Required (Production Hours
Required/Hours per Month per
53 47 30 25 33 54
Worker, must round this number
up)
New Workers Hired (Assuming opening
workforce equal to first month's 0 0 0 0 8 21
requirement of 53 workers.)
Hiring Cost (new Workers Hired x $200) $0 $0 $0 $0 $1,600 $4,200 $5,800
Workers Laid Off 0 6 17 5 0 0
Layoff Cost (Workers Laid Off x $250) $0 $1,500 $4,250 $1,250 $0 $0 $7,000
Straight Time Cost (Production Hours
$37,000 $28,500 $20,000 $17,000 $23,000 $34,500 $160,000
Required x $4)
Total Cost $172,800

8-19
8-20
Production Plan 3: Constant Low
Workforce; Subcontract
January February March April May June Total

Production Requirement 1,850 1,425 1,000 850 1,150 1,725

Working Day per Month 22 19 21 21 22 20

Production Hours Available (Working


4,400 3,800 4,200 4,200 4,400 4,000
Day x 8 Hrs./Day x 25 Workers)*
Actual Production (Production Hours
880 760 840 840 880 800
Available/5 hr.per Unit)
Units Subcontracted (Production
970 665 160 10 270 925
Requirement - Actual Production)
Subcontracting Cost (Units
$19,400 $13,300 $3,200 $200 $5,400 $18,500 $60,000
Subcontracted x $20)
Straight Time Cost (Production Hours
$17,600 $15,200 $16,800 $16,800 $17,600 $16,000 $100,000
Available x $4)
*Minimum production requirement. In
this example, April is minimum of 850
Total Cost $160,000
units. Number of workers required for
April is (850 x 5)/(21 x 8) = 25

8-21
Production Plan 4: Constant Low
Workforce; Overtime
January February March April May June Total

Production Requirement 1,850 1,425 1,000 850 1,150 1,725

Working Day per Month 22 19 21 21 22 20

Production Hours Available (Working


4,400 3,800 4,200 4,200 4,400 4,000
Day x 8 Hrs./Day x 25 Workers)*
Regular Production (Production Hours
880 760 840 840 880 800
Available/5 hr.per Unit)
Units Produced with Overtime
(Production Requirement - Actual 970 665 160 10 270 925
Production)
Overtime Cost (Overtime Units
$29,100 $19,950 $4,800 $300 $8,100 $27,750 $90,000
x5hr/unit x $6)
Straight Time Cost (Production Hours
$17,600 $15,200 $16,800 $16,800 $17,600 $16,000 $100,000
Available x $4)
*Minimum production requirement. In
this example, April is minimum of 850
Total Cost $190,000
units. Number of workers required for
April is (850 x 5)/(21 x 8) = 25

8-22
Aggregate Planning at
Red Tomato Tools

Month Demand Forecast


January 1,600
February 3,000
March 3,200
April 3,800
May 2,200
June 2,200

8-23
Aggregate Planning
Item Cost
Materials $10/unit
Inventory holding cost $2/unit/month
Marginal cost of a stockout $5/unit/month
Hiring and training costs $300/worker
Layoff cost $500/worker
Labor hours required 4/unit
Regular time cost $4/hour
Over time cost $6/hour
Cost of subcontracting $30/unit

8-24
Aggregate Planning
(Define Decision Variables)
Wt = Workforce size for month t, t = 1, ..., 6
Ht = Number of employees hired at the beginning of month t,
t = 1, ..., 6
Lt = Number of employees laid off at the beginning of month t,
t = 1, ..., 6
Pt = Production in month t, t = 1, ..., 6
It = Inventory at the end of month t, t = 1, ..., 6
St = Number of units stocked out at the end of month t,
t = 1, ..., 6
Ct = Number of units subcontracted for month t, t = 1, ..., 6
Ot = Number of overtime hours worked in month t, t = 1, ..., 6
8-25
Aggregate Planning
(Define Objective Function)
6 6
Min 640 W t   300 H t
t 1 t 1
6 6 6
  500 Lt   6 Ot   2 I t
t 1 t 1 t 1
6 6 6
  5 S t  10 Pt   30 C t
t 1 t 1 t 1

8-26
Aggregate Planning (Define
Constraints Linking Variables)
Workforce size for each month is based on hiring
and layoffs

W t  W t 1  H t  Lt, or
W t  W t 1  H t  Lt  0
for t  1,...,6, where W 0  80.
8-27
Aggregate Planning (Constraints)

Production for each month cannot exceed capacity

 40 
P t W t Ot 4 ,
40W t  Ot 4  Pt  0,
for t  1,...,6.
8-28
Aggregate Planning (Constraints)
Inventory balance for each month

I t 1  Pt  C t  Dt  S t 1  I t  S t ,
I t 1  Pt  C t  Dt  S t 1  I t  S t  0,
for t  1,...,6,where I 0  1,000 ,
S 0  0,and I 6  500 .
8-29
Aggregate Planning (Constraints)
Over time for each month

Ot  10 W t,
10 W t  Ot  0,
for t  1,...,6.

8-30
Scenarios
Increase in holding cost (from $2 to $6)
Overtime cost drops to $4.1 per hour
Increased demand fluctuation

8-31
Increased Demand Fluctuation

Month Demand Forecast


January 1,000
February 3,000
March 3,800
April 4,800
May 2,000
June 1,400

8-32
Aggregate Planning in Practice
Think beyond the enterprise to the entire supply chain
Make plans flexible because forecasts are always
wrong
Rerun the aggregate plan as new information emerges
Use aggregate planning as capacity utilization
increases

8-33
Production Planning and Control
General Framework

Resources Aggregate Demand


Planning Planning Management

Rough-cut Master Production


Capacity Scheduling
Planning

Detailed Detailed Material


Capacity Planning
Planning

Material and
Capacity Plans

Shop Floor Purchasing


Systems

8-34
Aggregate Production Plan and
Master Production Schedule

Actual production plan should consider individual


products, smaller time units, production sequence etc.

Aggregate production plan is disaggregated to form


the master production schedule(MPS).

8-35
Aggregate Production Plan and
Master Production Schedule

Production Plan
Months
1 2
Marker Family 100000 120000

Master Production Schedule


Products Weeks
1 2 3 4 1 2 3 4
Red 10 10 10 10 15 15 15 15
Blue 10 10 10 10 10 10 10 10
Green 5 5 5 5 5 5 5 5

8-36
Capacity Planning and
Material Requirements Planning
 Rough-cut Capacity Planning: To check feasibility of MPS.
– Quick check on capacity of key resources
– Use Bill of Resource (BOR) for each item in MPS
– Infeasibilities addressed by altering MPS or adding capacity (e.g., overtime)

 Material Requirements Planning(MRP): Breaking the MPS into a


production schedule for each component of an end-item. Determines the
material requirements and timings for each phase of production.

 Detailed Capacity Planning: To check feasibility of MRP. Supplements the


process of checking material shortage.

– Uses routing data (work centers and times) for all items
– Generates usage profile of all work centers
– Identifies overload conditions
– More detailed than RCCP

8-37
Materials Requirements Planning
(MRP)

 Materials Requirements Planning (MRP) determines time-phased


requirements (period-by-period) for all purchased and manufactured
parts such as raw materials, components, parts, subassemblies, etc.

 Three major inputs are MPS, Inventory Status and Bill of Materials
(BOM), also called the Product Structure.

 The major output of MRP is planned-order releases: Purchase orders


and work orders(production plan).

8-38
Product Structure Example

8-39
Product and Part Complexity
Product Approximate number of
components
Mechanical pencil (modern) 10
Ball bearing (modern) 20
Rifle (1800) 50
Sewing machine (1875) 150
Bicycle chain 300
Bicycle (modern) 750
Early automobile (1910) 2000
Automobile (modern) 20000
Commercial airplane (1930) 100000
Commercial airplane (modern) 1000000
Space shuttle (modern) 10000000

8-40
Steps in MRP

 Explosion: Evaluating the gross requirements of each component

 Netting: Adjusting gross requirements to account for on-hand


inventory or quantity on order.

 Offsetting:Determining the timing of order releases

 Lot Sizing: Determining the batch size to be purchased or produced

8-41
MRP Example

Trumpet

Bell Assembly (1) Valve Casing Assembly (1)


Lead Time=2 wks Lead Time=4 wks

Slide Assemblies (3) Valves (3)


Lead Time=2 wks Lead Time=3 wks

Total Lead Time= 7 wks


Week 8 9 10 11 12 13 14 15 16 17
Trumpet Demand 42 42 32 12 26 112 45 14 76 38
8-42
Product Structure Example

Valve Casing Assembly:


Week 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Gross Requirement 42 42 32 12 26 112 45 14 76 38
Net Requirement 42 42 32 12 26 112 45 14 76 38
Time-Phased Net Requirement 42 42 32 12 26 112 45 14 76 38

Valves: (Assume an inventory of 282 at hand at week 3)


Week 3 4 5 6 7 8 9 10 11 12 13
Gross Requirements 126 126 96 36 78 336 135 42 228 114
On Hand Inventory 282 156 30
Net Requirement 66 36 78 336 135 42 228 114
Time-Phased Net Requirement 66 36 78 336 135 42 228 114

8-43
Lot Sizing

Setup/Ordering Costs: Every time a new production is started, a


setup of machines/labor is required and there is an associated cost
with it.

Similarly, every time an order is given for a product, there is an


ordering cost for transportation, managerial issues etc. Thus, every
time we start a new production or give a new order, we want it to be
for high quantities.

However, if we order for high quantities, we have to carry high levels


of inventory. Thus, there is a tradeoff between inventory costs and
setup costs.

Question: What is the optimal time and amount to order?

8-44
Lot Sizing

Parameters:
h(t):unit inventory holding cost in period t.
A(t): setup/ordering cost in period t.
Decision variables:
X(t): Amount ordered in period t.
O(t) = 1 if an order is given in period t
= 0 otherwise
I(t): Inventory level at the end of period t.

Min ∑(h(t)I(t) + A(t)O(t))


s.t. I(t) = I(t-1)+X(t)-D(t)
X(t) ≤ O(t).M
I(t), X(t)≥0, O(t) = 0 or 1
8-45
Lot Sizing

Ex: Over the next 5 weeks, the net requirement of our company for a
product is 18, 30, 20, 5, 20. The holding cost is $2 per unit per week and
the ordering cost is $80. What are the optimal times and amounts to
order?

•Simple Rules
•Lot for Lot (L4L): Order 1 period of future demand
•Fixed period demand: Order m periods of future demand
•Fixed Order Quantity: Order fixed amounts
•Heuristic Methods
•Silver-Meal Method: Decision based on average cost per period
•Least unit cost: Decision based on average cost per unit
•Part-Period Balancing: Decision based on total variable cost per order
•Exact Methods:
•Wagner-Whitin Algorithm
•Integer Programming
8-46
Lot Sizing Example

Ex: Over the next 5 weeks, the net requirement of our company for a
product is 18, 30, 20, 5, 20. The holding cost is $2 per unit per week
and the ordering cost is $80. What are the optimal times and amounts to
order?

Silver-Meal Heuristic:
C(T)=Average cost per period if the current order is for the next T
periods.
Evaluate C(T) for T=1,2… and stop when C(T)>C(T-1).
C(1)=80/1=80
C(2)=(80+2*30)/2=70
C(3)=(80+2*30+2*2*20)/3=73.33 Stop
Order 48 units at week 1.

8-47
Lot Sizing Example

Now go to week 3 and start over.


C(1)=80/1=80
C(2)=(80+2*5)/2=45
C(3)=(80+2*5+2*2*20)/3=56.67 Stop
Order 25 units at week 3.
Go to week 5. Since week 5 is the final week, order
20 units at week 5.
Total Cost=80+2*30+80+2*5+80=310

Is it optimal? No, because


If we consider ordering 18 at week 1, 55 at week 2 and
20 at week 5. Then,
Total Cost=80+80+2*20+2*2*5+80=300<310

8-48
Lot Sizing Example

Least Unit Cost Heuristic:


C(T)=Average cost per unit if the current order is for the next T periods.
Evaluate C(T) for T=1,2… and stop when C(T)>C(T-1).

C(1)=80/18=4.4
C(2)=(80+2*30)/48=2.9
C(3)=(80+2*30+2*2*20)/68=3.23 Stop
Order 48 units at week 1.

Now go to week 3 and start over.


C(1)=80/20=4
C(2)=(80+2*5)/25=3.6
C(3)=(80+2*5+2*2*20)/45=3.77 Stop
Order 25 units at week 3.

Go to week 5. Since week 5 is the final week, order 20 units at week 5.


Total Cost=80+2*30+80+2*5+80=310

8-49
Lot Sizing Example

Part Period Balancing


C(T)=Total inventory cost for the current order if the order is for the next T periods.
Evaluate C(T) for T=1,2… and stop when C(T)>A=80.

C(1)=0
C(2)=2*30<80
C(3)=(2*30+2*2*20)>80 Stop
Order 48 units at week 1.

Now go to week 3 and start over.


C(1)=0
C(2)=2*5<80
C(3)=(2*5+2*2*20)>80 Stop
Order 25 units at week 3.

Go to week 5. Since week 5 is the final week, order 20 units at week 5.


Total Cost=80+2*30+80+2*5+80=310
8-50
Dynamic Lot Sizing Notation
t a period (e.g., day, week, month); we will consider t = 1, … ,T, where T
represents the planning horizon.

Dt demand in period t (in units)

ct unit production cost (in dollars per unit), not counting setup or inventory
costs in period t

At fixed or setup cost (in dollars) to place an order in period t

ht holding cost (in dollars) to carry a unit of inventory from period t to period t
+1

Qt the unknown size of the order or lot size in period t

decision variables
8-51
Wagner-Whitin Example
Data
t 1 2 3 4 5 6 7 8 9 10
Dt 20 50 10 50 50 10 20 40 20 30
ct 10 10 10 10 10 10 10 10 10 10
At 100 100 100 100 100 100 100 100 100 100
ht 1 1 1 1 1 1 1 1 1 1

Lot-for-Lot Solution
t 1 2 3 4 5 6 7 8 9 10 Total
Dt 20 50 10 50 50 10 20 40 20 30 300
Qt 20 50 10 50 50 10 20 40 20 30 300
It 0 0 0 0 0 0 0 0 0 0 0
Setup cost 100 100 100 100 100 100 100 100 100 100 1000
Holding cost 0 0 0 0 0 0 0 0 0 0 0
Total cost 100 100 100 100 100 100 100 100 100 100 1000

Since production cost c is constant, it can be ignored.


8-52
Wagner-Whitin Example (cont.)
Data
t 1 2 3 4 5 6 7 8 9 10
Dt 20 50 10 50 50 10 20 40 20 30
ct 10 10 10 10 10 10 10 10 10 10
At 100 100 100 100 100 100 100 100 100 100
ht 1 1 1 1 1 1 1 1 1 1

Fixed Order Quantity Solution


t 1 2 3 4 5 6 7 8 9 10 Total
Dt 20 50 10 50 50 10 20 40 20 30 300
Qt 100 0 0 100 0 0 100 0 0 0 300
It 80 30 20 70 20 10 90 50 30 0 0
Setup cost 100 0 0 100 0 0 100 0 0 0 300
Holding cost 80 30 20 70 20 10 90 50 30 0 400
Total cost 180 30 20 170 20 10 190 50 30 0 700
8-53
Wagner-Whitin Property
A key observation
If we produce items in t (incur a setup cost) for use to satisfy demand in t+1,
then it cannot possibly be economical to produce in t+1 (incur another setup
cost) .
Either it is cheaper to produce all of period t+1’s demand in period t, or all
of it in t+1; it is never cheaper to produce some in each.

Under an optimal lot-sizing policy


(1) either the inventory carried to period t+1 from a previous period will
be zero (there is a production in t+1)
(2) or the production quantity in period t+1 will be zero (there is no
production in t+1)

Does fixed order quantity solution violate this property? Why?


8-54
Basic Idea of Wagner-Whitin
Algorithm
By WW Property, either Qt=0 or Qt=D1+…+Dk for some k.

If jk* = last period of production in a k period problem,


then we will produce exactly Dk+…DT in period jk*. Why?

We can then consider periods 1, … , jk*-1 as if they are an


independent jk*-1 period problem.

8-55
Wagner-Whitin Example
t 1 2 3 4 5 6 7 8 9 10
Dt 20 50 10 50 50 10 20 40 20 30
ct 10 10 10 10 10 10 10 10 10 10
At 100 100 100 100 100 100 100 100 100 100
ht 1 1 1 1 1 1 1 1 1 1

 Step 1: Obviously, just satisfy D1 (note we are neglecting production


cost, since it is fixed). Z1*  A1  100
j1*  1
 Step 2: Two choices, either j2* = 1 or j2* = 2.

 A1  h1 D2 , produce in 1
Z 2*  min  *
Z1  A2 , produce in 2
100  1(50)  150
 min 
 100  100  200
 150
j2*  1
8-56
Wagner-Whitin Example (cont.)

 Step3: Three choices, j3* = 1, 2, 3.

 A1  h1 D2  (h1  h2 ) D3 , produce in 1

Z 3*  min Z1*  A2  h2 D3 , produce in 2
 Z*2  A3 , produce in 3
100  1(50 )  (1  1)10  170

 min 100  100  (1)10  210
150  100  250
 170

j3*  1

8-57
Wagner-Whitin Example (cont.)
 Step 4: Four choices, j4* = 1, 2, 3, 4.

 A1  h1 D2  (h1  h2 ) D3  (h1  h2  h3 ) D4 , produce in 1


 Z*  A  h D  ( h  h ) D ,
 produce in 2
Z 4  min  1*
* 2 2 3 2 3 4

 Z 2  A3  h3 D4 , produce in 3
 Z*3  A4 , produce in 4
100  1(50)  (1  1)10  (1  1  1)50  320
100  100  (1)10  (1  1)50  310

 min 
150  100  (1)50  300
170  100  270
 270

j4*  4
8-58
Planning Horizon Property
 In the Example:
– Given fact: we produce in period 4 for period 4 of a 4 period
problem.
– Question: will we produce in period 3 for period 5 in a 5 period
problem?
– Answer: We would never produce in period 3 for period 5 in a 5
period problem.

If jt*=t, then the last period in which production occurs in


an optimal t+1 period policy must be in the set t, t+1,…t+1.
(this means that it CANNOT be t-1, t-2……)

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Wagner-Whitin Example (cont.)
 Step 5: Only two choices, j5* = 4, 5.
 Z 3  A4  h4 D5 , produce in 4
*
Z 5  min  *
*

 Z 4  A5 , produce in 5
170  100  1(50)  320
 min 
270  100  370
 320

j5*  4

 Step 6: Three choices, j6* = 4, 5, 6.

– And so on.
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Wagner-Whitin Example Solution
Last Period Planning Horizon (t)
with Production 1 2 3 4 5 6 7 8 9 10
1 100 150 170 320
2 200 210 310
3 250 300
4 270 320 340 400 560
5 370 380 420 540
6 420 440 520
7 440 480 520 610
8 500 520 580
9 580 610
10 620
Zt 100 150 170 270 320 340 400 480 520 580
jt 1 1 1 4 4 4 4 7 7 or 8 8
Produce in period 1 Produce in period 4 Produce in period 8
for 1, 2, 3 (20 + 50 + for 4, 5, 6, 7 (50 + 50 + for 8, 9, 10 (40 + 20 +
10 = 80 units) 10 + 20 = 130 units) 30 = 90 units
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Wagner-Whitin Example Solution
(cont.)
 Optimal Policy:
– Produce in period 8 for 8, 9, 10 (40 + 20 + 30 = 90 units)
– Produce in period 4 for 4, 5, 6, 7 (50 + 50 + 10 + 20 = 130 units)
– Produce in period 1 for 1, 2, 3 (20 + 50 + 10 = 80 units)

t 1 2 3 4 5 6 7 8 9 10 Total
Dt 20 50 10 50 50 10 20 40 20 30 300
Qt 80 0 0 130 0 0 0 90 0 0 300
It 60 10 0 80 30 20 0 50 30 0 0
Setup cost 100 0 0 100 0 0 0 100 0 0 300
Holding cost 60 10 0 80 30 20 0 50 30 0 280
Total cost 160 10 0 180 30 20 0 150 30 0 580

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