CHAPTER 3: AGGREGATE PLANNING

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Outline

Introduction
Aggregate planning strategies
Aggregate planning through linear programming
Updating the aggregate plan
Discussion of model assumptions

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1. Introduction: Now that we have a forecast…

It is time to plan for the future… It would be useful to

have rough-cut plans for the following:
 Production level
• Regular, overtime, subcontracting
 Inventory to be held
 Backlogs
 Machine capacity
• Increase/decrease
 Workforce
• Hire/Lay off

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1. Introduction: A definition of aggregate planning

Given the demand forecast for each period in the planning

horizon, determine the production level, inventory level, and
capacity level (internal and outsourced) for each period that
maximizes the firm’s profit over the planning horizon.
INPUTS OUTPUTS
• Demand forecast: for • Production level:
an aggregate output overtime / regular time
• Choice of planning • Inventory level: on-hand
horizon: anywhere from inventory / backlog
3 months to 18 months
• Capacity level: in-house
/ subcontracted
• Workforce level: hiring /
layoff decisions
Aggregate
Planning
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1. Introduction: Information needed for aggregate planning

 Demand forecast
 Production cost
• Labor cost: regular and overtime ($/hour)
• Cost of subcontracting production ($/unit or $/hour)
• Cost of changing capacity
 Labor/machine hours required per unit of demand
 Inventory holding cost ($/unit/period)
 Stock-out or backlog cost ($/unit/period)
 Constraints
• Limits on overtime
• Limits on layoffs
• Limits on capital available
• Limits on backlog
• … 5
1. Introduction: examples of aggregate planning decisions

“Layoff” in this context can mean actions other than simply firing
an employee. For example, “job banks” were a form of lay-off that
persisted in the auto industry for more than 20 years.

Source:
http://www.npr.org/templates/story/
story.php?storyId=5185887
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1. Introduction: examples of aggregate planning decisions

Hiring and layoff may also refer to adjusting the level of temporary
/ seasonal workers as opposed to permanent hiring or firing.

Source:
http://detnews.com/article/20090124/AUTO01
/901240355/Toyota-looks-into-layoffs

Source: http://www.govexec.com/dailyfed/0810/080910mag1.htm
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1. Introduction: examples of aggregate planning decisions

Companies frequently adjust output in response to changes in

demand forecast. This would translate into changes in production
and inventory levels.

Source:
http://economictimes.indiatimes.com/articleshow/3994494.cms

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1. Introduction: examples of aggregate planning decisions

Companies frequently adjust output in response to changes in

demand forecast. This would translate into changes in production
and inventory levels.

Source:
http://www.nytimes.com/2010/06
/18/business/businessspecial4/18t
oyota.html

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2. Aggregate planning strategies – Chase

Chase Strategy
Every period, adjust capacity so that it is equal to demand and produce an
amount equal to capacity.

Demand

Time

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2. Aggregate planning strategies – Flexible utilization

Flexible Utilization Strategy

Invest in the highest capacity that will be ever needed and, in every
period, produce an amount equal to demand.

Demand

Time

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2. Aggregate planning strategies – Level

Level Strategy
Invest in moderate capacity level at the beginning, and keep production
level at capacity.

Demand

Time

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2. Aggregate planning strategies – comparison

Capacity Capacity Inventory / Production

Investment Change Backlog Cost
Cost Cost Cost

Chase

Flexible
Utilization

Level

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3. Aggregate planning through linear programming Example 1

Red Tomato Tools: Create a plan for the next six months.
Actions Available (combinations can be used):
• Add workers during peak period,
• Layoff workers during slow months,
• Subcontract some work,
• Build up inventory during slow months,
• Build up backlog during the fast months.

Status Quo:
• At the beginning of January, there are 1000 tools in inventory.
• At the beginning of January, Red Tomato employs 80 workers.
• Management requires 500 tools to be in inventory at the end of June.

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3. Aggregate planning through linear programming Example 1

Additional Information:
• Each employee works 8 hours per day and 20 days per month.
• Unmet demand backlogged and met from the subsequent months’
production.
• All demand must be met eventually.
• Inventory costs are charged monthly on the basis of inventory at the end of a
month.
• An employee cannot work more than 10 hours of overtime per month.

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3. Aggregate planning through linear programming Example 1

Material cost $10/unit Month Demand Forecast

Inventory holding cost $2/unit/month January 1600
Backlog cost $5/unit/month February 3000
Hiring and training cost $300/worker March 3200
Layoff cost $500/worker April 3800
Labor hours required 4/unit May 2200
Regular time cost $4/hour June 2200
Overtime cost $6/cost
Subcontracting cost $30/unit
Selling price $40/unit

What is an appropriate objective?

Profit = Revenue - Cost

= Unit Price × Total Demand 16
3. Aggregate planning through linear programming Example 1

Decision Variables / Notation:

Wt = workforce size for month t, t=1, ..., 6
Ht = # employees hired at the beginning of month t, t=1, …, 6
Lt = # employees laid off at the beginning of month t, t=1, …, 6
Pt = # units produced in month t, t=1, …, 6
It = inventory at the end of month t, t=1, …, 6
St = # units backlogged at the end of month t, t=1, …, 6
Ct = # units subcontracted for month t, t=1, …, 6
Ot = # overtime hours worked in month t, t=1, …, 6

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3. Aggregate planning through linear programming Example 1

Objective function:

Regular time labor cost:

Overtime labor cost:

Cost of hiring & layoff:

Cost of inventory and backlog:

Cost of material and subcontracting:

+
= Total cost over six months
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3. Aggregate planning through linear programming Example 1

Constraints:
Workforce balance constraints:

Capacity constraints:

Inventory balance constraints:

Overtime limit constraints:

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3. Aggregate planning through linear programming Example 1

We will write the constraints in a slightly different form in

preparation for the spreadsheet model we will utilize:

Workforce balance constraints:

Capacity constraints:

Inventory balance constraints:

Overtime limit constraints:

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3. Aggregate planning through linear programming Example 1

Use Excel Solver to find the optimal solution. Our work is in

“Chapter 3 Example 1.xls.” See below for what we enter in the
Excel Solver dialog box.

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3. Aggregate planning through linear programming Example 1

Here is the optimal solution we find using Excel Solver:

Period # Hired # Laid off Workforce Overtime Inventory Backlog Subcontract Total
t Ht Lt Size Ot It St Ct Prod’n
Wt Pt
0 0 0 80 0 1000 0 0 2583
1 0 15 65 0 1983 0 0 2583
2 0 0 65 0 1567 0 0 2583
3 0 0 65 0 950 0 0 2583
4 0 0 65 0 0 267 0 2583
5 0 0 65 0 117 0 0 2583
6 0 0 65 0 500 0 0 2583

Total cost over six months = $422,275

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3. Aggregate planning through linear programming Example 2

Suppose now the demand forecast is modified as follows.

Month Old Demand New Demand
Forecast Forecast
January 1600 1000
February 3000 3000
March 3200 3800
April 3800 4800
May 2200 2000
June 2200 1400

How is the new forecast different from the previous one?

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3. Aggregate planning through linear programming Example 2

We again use Excel Solver to find the optimal solution. See

Chapter 3 Example 2.xls.

Total cost over six months = $432,858

The cost increased. Why?

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4. Updating the aggregate plan

How do we update the aggregate plan over time?

Jan Feb Mar Apr May Jun Jul

Create an aggregate plan for these six months with the

demand forecast that exists at the beginning of January.

Jan Feb Mar Apr May Jun Jul

At the end of January, update the demand forecast for

Feb thru Jun and generate a new forecast for Jul. Create
an aggregate plan for Feb thru Jul.
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5. Discussion: model assumptions

What are some assumptions that you would like to modify?

How would you modify them?

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