Back to "Search By Author"

Abstract Number: 002-0259

Title of the Paper: Excel Model for Aggregate Planning

Name of the Conference: Second World Conference on POM and 15th Annual POM

Conference, Cancun, Mexico, April 30-May 3, 2004

Francisco Aguado Correa

Departamento de Economía Financiera, Contabilidad y Dirección de Operaciones

Facultad de Ciencias Empresariales

Universidad de Huelva

Plaza de la Merced, 11 — 21002 Huelva (Spain)

agucor@uhu.es

Tel: +34 959017881

Nuria Padilla Garrido

Departamento de Economía General y Estadística

Facultad de Ciencias Empresariales

Universidad de Huelva

Plaza de la Merced, 11 — 21002 Huelva (Spain)

padilla@uhu.es

Tel: +34 959017837

 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

Abstract

Spreadsheets are the most common software tool managers use to analyze data and model

quantitative problems. They have also become one of the preferred tools for teaching quantitative

methods to business school students. In this paper we introduce an Excel model for aggregate

planning, characterized by its great flexibility and for the use of Excel Solver, which in many

cases allow us to find the optimal solution for a given set of conditions.
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

Introduction

It is a fact that spreadsheets are the preferred tool for teaching quantitative methods to

undergraduate and graduate business students (Jordan et al., 1997). This has led to the

publication of an increasing number of textbooks dealing with modeling and decision analysis

using spreadsheets (Hesse, 1997, Eppen et al., 1998, Savage, 1998, Barlow, 1999, Monahan,

2000, Winston and Albright, 2000, Lapin and Whisler, 2001, Weida, Richardson and Vazsonyi,

2001, Render, Stair and Balakrishnan, 2002, Hillier, Hillier and Reagan, 2003, Ragsdale, 2003).

The reasons for the popularity of spreadsheets are many, but we could highlight the

following: they are widespread (Mason and Keane, 1989), user-friendly, flexible, and allow the

analysis of multiple scenarios. Therefore, many companies and education centers have found

spreadsheets to be an easy method for business modeling as they offer a wide set of tools ranging

from formulas —whether easy ones or more complex ones— to simulation of different scenarios,

macros, charts, etc.

Perhaps the most remarkable fact is that spreadsheets have become an excellent delivery

vehicle for teaching optimization (Evans, 1986), which in many cases allow us to find the

optimal solution for a given set of conditions.

Microsoft Excel Solver has greatly helped in this, as it is the most widely distributed and

almost surely the most widely used general-purpose optimization modeling system (Fylstra et al.,

1998).

In fact, we use Microsoft Excel to teach our undergraduates aggregate planning. First, it

is necessary to introduce them to basic spreadsheet concepts and later proceed to the modeling of

problems, trying to include the greatest number of possibilities in order to analyze all the results

generated and use the tools previously mentioned.

1
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

Aggregate Planning

Aggregate planning involves translating business plans into broad labor and output plans

for the intermediate term. Its objective is to minimize the cost of resources required to meet

demand over that period.

To achieve this, it is necessary for the planner to consider various decision alternatives.

The two basic types of decision alternatives are reactive and aggressive (Krajewski and Ritzman,

2001).

Reactive alternatives admit forecasted demand as a given and try to fulfill it by

introducing modifications in the work force levels, overtime, vacation schedules, inventory

levels, subcontracting, undertime, and planned backlogs.

On the other hand, aggressive alternatives try to modify the demand in order to adapt it to

the firm's resources by means of promotional campaigns, price incentives, complementary

products, etc. This kind of alternative tends to be the responsibility of the marketing manager.

Assuming that the effect of aggressive alternatives has already been incorporated into the

demand forecasts, the planner will have to focus on reactive alternatives. Therefore, he/she will

have to establish a planning strategy which selects the best options. A possible way to achieve

this is by starting up with both chase and level strategies and then moving later on into a mixed

strategy.

Chase strategy

This strategy adjusts production rates to match the demand requirements period by

period. In order to achieve this objective, the planner cannot make use of the anticipation

2
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

inventory, or undertime. Therefore, he/she has to use other options such as hiring and laying off

workers, overtime, and subcontracting. This approach has the advantage of low inventory

investment and backlogs, although it has some disadvantages, such as the potential alienation of

the work force and the loss of productivity and lower quality because of the constant churn in the

work force.

Level strategy

This strategy either keeps a constant output rate or work force level over the planning

horizon. To achieve this, and contrary to the previous strategy, it can use the anticipation

inventory and/or undertime. The main advantages are level output rates and a stable work force

at the expense of increased inventory investment, undertime, overtime, and backlogs.

Obviously, between these two strategies there is a range of possible strategies and the

planner should find the best mixed strategy to improve the solution obtained by the two previous

strategies.

To do so, the planner will have to answer certain questions:

1. Should inventories be used to absorb changes in demand?

2. Should changes in demand be accommodated by varying the size of the work force?

3. Should overtime and undertime be used to absorb changes in demand?

4. Should subcontracting be used?

Despite the many possibilities this approach offers, it makes aggregate planning much

more complicated due to the large number of alternative plans.

3
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

To analyze aggregate planning in the classroom we use the trial-and-error approach using

graphs and charts that can easily be developed with a spreadsheet.

Defining the problem

The planning department of a company is faced with determining the aggregate plan for a

product family over the next twelve months. In this plan, the company wants to determine the

number of workers needed each month, the number of regular and overtime hours required, the

number of units to be produced and subcontracted, and the total cost associated with the plan.

Table 1 presents the demand forecast and other relevant parameters.

TABLE 1: Forecasted Demand and Other Relevant Parameters

Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
Demand Forecast 6,000 6,000 6,000 8,000 14,000 18,000 24,000 12,000 7,000 6,000 4,000 10,000
Working days 20 20 22 20 22 21 20 22 22 20 21 20
Initial Inventory 1,000
Safety Stock 500
Cost ($)
Labor Hours/Unit 0.5 Labor Cost/Hour—Regular Time 6
Regular Labor Hours/Day 7.1 Labor Cost/Hour—Overtime 8
Maximum Overtime Hours/Day 1 Labor Cost/Hour—Undertime 7
Maximum Subcontracting Units/Month 5,000 Subcontracting Cost/Unit 20
Beginning Work Force 40 Holding Cost (unit/month) 1.5
Minimum Work Force 15 Stockout Cost (unit/month) 3
Maximum Work Force 60 Hiring and Training Cost/Worker 200
Layoff Cost/Worker 250

The size of the work force is set at the beginning of each month. Workers may be hired or

fired to change the available amount of production. We do not try to plan for vacations, sickness,

relocation, or death of employees during the year.

Hourly rates are associated with regular and overtime labor and it is assumed that all

workers are paid to work an entire month, even if they are not productive. The company uses a

maximum subcontracted production of 5,000 units per month.

4
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

Inventory at the beginning of the first month is 1,000 units. Because the demand forecast

is imperfect, the company has determined that a safety stock of 500 units should be established.

In addition, inventory holding cost is calculated on ending inventory.

The company policies establish that unsatisfied demand can be backordered and filled in

a future period. Additionally, according to policies, the minimum number of employees must be

15 at all times, and the maximum number 60, which corresponds to the maximum capacity of the

facility. A final policy establishes that overtime on a daily basis cannot exceed one hour per

worker.

Finally, the total cost is made up of the sum of costs derived from the wages of regular

work and overtime, undertime (this cost is only computed if the number of workers needed in a

given month is lower than the minimum number of employees), subcontracting, carrying

inventory, backorders, and hires and fires.

The goal is to create a feasible low-cost production plan.

The trial-and-error charting and graphic technique

This approach is easy to understand and convenient to use, and involves costing out

various aggregate planning alternatives and selecting the one that is best on a trial-and-error

basis.

The main problem is that the vast amount of calculations required makes it difficult to

apply the process manually, and so a spreadsheet is required. In our case, we use Microsoft

Excel, which allows the students to simulate different alternatives within a few seconds.

However, before investigating alternative aggregate plans, it is often useful to convert

demand forecasts into production requirements (Chase, Aquilano and Jacobs, 1998), which take

5
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

into account the amount of inventory on hand at the beginning of the forecast period and the

safety stock estimates. Note that these requirements implicitly assume that the safety stock is

never actually used, so that the ending inventory each month equals the safety stock for that

month.

The three aggregate plans included in the spreadsheet are a chase (i.e., variable

production rate model), a level (i.e., constant work force model), and a manual aggregate plan.

The first two plans are automatically calculated, while the third plan, the manual, is user inputted

based upon the information provided in the other two plans. In this latter case, the student has the

button Set Workers Required which, after establishing the strategy offering fewer costs, equates

the number of workers needed in the mixed strategy with those in the lower-cost strategy (see

table 2 and figures 1 and 2). From this moment on, the student can modify the number of

workers on a trial-and-error basis to look for the best solutions. Changes in this row have an

influence on all the other spreadsheet numbers, and therefore on the final total cost. For further

details, Appendix 1 shows the formulas required in each cell, based on Excel protocols.

TABLE 2: Summary of Costs for Alternative Aggregate Plans

Cost Category Pure Chase Strategy Pure Level Strategy Mixed Strategy
(Mixed Strategy Work Force =
Chase Strategy Work Force)
Regular Production $340,296 $361,500 $347,147
Overtime Production $10,032 — $9,600
Subcontracted Production $91,200 — $73,960
Undertime $1,656 — —
Inventory Holding/Shortage — $197,439 $11,401
Hiring/Firing $29,350 $1,514 $29,350
Total Cost $472,534 $560,453 $471,459

6
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

FIGURE 1: Mixed Strategy

However, in spite of its relative simplicity, finding a minimum cost solution is not guaranteed. In

other words, given that we are dealing with an iterative process, the “quality” of the solution for

the mixed or manual plan will depend on the actual skills of the planner. Therefore, it is

reasonable to try to find a method that could lead to an optimal or satisfactory solution,

independently of the skills of the planner. The Solver tool bundled with Microsoft Excel can help

to achieve this.

7
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

FIGURE 2: Graphic representation of the aggregate plan

Optimizing with Microsoft Excel Solver

Optimizing with Excel Solver takes as a starting point the model developed in the

spreadsheet. Later on, and using the Solver Parameters dialog box (see figure 3), the planner

specifies the objective function (in our case, total cost), variables (the number of workers

required each month), and constraints. After entering all the appropriate parameters and choosing

any necessary options for our model, Excel Solver extracts the optimization problem from the

spreadsheet formulas and builds a representation of the problem adapted to the corresponding

optimizer: Simplex, Generalized-Reduced-Gradient (GRG), and Branch-and-Bound (B&B)

methods. Finally, Excel Solver obtains an optimal solution and updates the model developed in

the spreadsheet.

8
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

FIGURE 3: Excel Solver Parameters

In our model, the decision variables are the number of workers required from January to

December, and so the optimization problem involves integers variables with three constraints,

which are actually 36 because of the ranges under consideration:

1. The number of workers needed each month has to be less than or equal to the maximum

number of employees.

2. The number of workers required each month has to be an integer.

3. The number of workers required each month has to be greater than or equal to minimum

number of employees.

In addition, and due to the inclusion in the spreadsheet of discontinuous functions such as

IF or AND, related to the target cell, the model becomes nonlinear, which means we will be

dealing with a nonlinear integer problem.

Although it is possible to solve nonlinear integer problems with the Excel Solver, users

should be aware of the intrinsic limitations of this process (Eppen et al., 1998):

9
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

• The use of an IF function or related functions that introduce discontinuities in the

spreadsheet cell(s) will be very likely invalidate responsible use of Solver if the objective

function cell formula or any constraint formulas depend directly or indirectly upon the

cell(s) containing those functions. Not only does the IF function void linearity, but it is

likely introduces discontinuities into the feasible region or the set of possible objective

function values. This in turn affects the partial derivative estimates computed internally

by Solver that guide it toward optimality. Neither Solver nor any known optimization

procedure can be guaranteed to handle such discontinuities reliably for all models.

• For nonlinear models, the Changing Cell values from a previous Solver run, if any,

become the initial Changing Cell values used if Solver is run again; that is, if it is

feasible, Solver starts from where a previous Solver run left off.

• Linear and especially nonlinear model optimizations by Solver are very sensitive to the

scaling of numbers in the model. Avoid units of measure in models that produce numbers

whose differences span more than about 6 or 7 orders of magnitude. If the difference is

greater, it will lead to cumulating roundoff and/or truncation errors as Solver optimizes

the model that may result in wrong Changing Cell solutions or bogus error messages. For

some nonlinear models the internal re-scaling generated by Use Automatic Scaling may

not be enough to avoid this problem in unusual circumstances.

• Because the arithmetic accuracy of calculations is finite, the constraints cannot always be

satisfied exactly. The Precision value in Solver Options is used to assess whether a

constraint is adequately satisfied. In any event, its value should not exceed 0.001 nor be

below 0.00000001.

10
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

• Solver optimization of a model having integer constraints is computationally very

intensive, and hence convergence is slow. To speed up solution time, Solver uses a

Tolerance value permitting a "slightly" less than optimal objective function value. For

example, the default setting of Tolerance = 5% means that an approximate solution with

objective function value within 5% of the true optimum while satisfying the constraint is

acceptable. Overriding this default by setting Tolerance = 0% forces Solver to continue

optimizing the model until an optimal integer solution is found.

Therefore, given the intrinsic limitations of this process, the branch-and-bound algorithm

that uses GRG to solve subproblems may fail to find a feasible solution for a subproblem, even

though one exists, or it may return a local optimum that is not global. Because of this, the

branch-and-bound algorithm is not guaranteed to find the integer true optimum for nonlinear

problems, although it will often succeed in finding a "good" integer solution (Fylstra et al.,

1998).

In other words, Solver will lead different planners —starting up from the same model—

to an improved solution, should this exist, which might not match the global optimum.

Considering this, the options selected for our problem are those shown in figure 4. Note

the option Use Automatic Scaling is selected and the value in the Tolerance edit box.

11
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

FIGURE 4: Excel Solver Options

After running Excel Solver for the first time, the total cost drops from $471,459 to

$408,088. As we pointed earlier, this solution might not necessarily be the optimum one.

Therefore, we run Excel Solver again taking as a starting point the solution obtained and we

repeat the process until no further improvement is obtained in total cost (to simplify the process

we have programmed a macro, we have called Solver, that runs Excel Solver repeatedly until it

cannot improve the solution. See Appendix 2). In our problem, the final total cost is $406,465,

which involves an improvement over the original model of $64,994. Despite the limitations, we

think this saving justifies the use of Excel Solver to optimize models and find satisfactory

solutions. In this way, the planner will not have to develop the trial-and-error method manually.

Conclusions

Spreadsheets motivate students to experiment with and learn more about production

planning and control systems, and particularly about aggregate planning. In addition, using

spreadsheets and add-ins develops student’s skills within a familiar context that will carry over to

12
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

the workplace, especially in small firms where they, probably, will have to develop their own

applications models adapted to their needs.

References

Barlow, J. F. Excel Models for Business and Operations Management. Chichester: John Wiley &

Sons, 1999.

Chase, R. B., N. J. Aquilano, and F. R. Jacobs. Production and Operations Management:

Manufacturing and Services. Boston: Irwin/McGraw-Hill, 1998.

Eppen, G. D., F. J. Gould, C. P. Schmidt, J. H. Moore, and L. R. Weatherford. Introductory

Management Science: Decision Modeling with Spreadsheets. Upper Saddle River, New

Jersey: Prentice Hall, 1998.

Evans, J. R. “Spreadsheets and Optimization: Complementary Tools for Decision Making.”

Production and Inventory Management 27, nº 1 (1986): 36 -46.

Fylstra, D., L. Lasdon, J. Watson, and A. Waren. “Design and Use of the Microsoft Excel

Solver.” Interfaces 28, no. 5 (1998): 29-55.

Hesse, R. Managerial Spreadsheet Modeling and Analysis. Chicago: Irwin, 1997.

Hillier, F. S. , M. S. Hillier, and P. D.Reagan. Introduction to Management Science: A Modeling

and Case Studies Approach With Spreadsheets. Boston: McGraw-Hill/Irwin, 2003.

Jordan, E., L. Lasdon, M. Lenard, J. Moore, S. Powell, and T. Willemain. “OR/MS and

MBA’s—Mediating the Mismatches.” OR/MS Today, February (1997): 36-41.

Krajewski, L. J., and L. P. Ritzman. Operations Management: Strategy and Analysis. Upper

Saddle River, New Jersey: Prentice Hall, 2001.

13
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

Lapin, L. L., and W. D.Whisler. Quantitative Decision Making with Spreadsheet Applications.

Belmont, CA: Duxbury/Thomson Learning, 2002.

Mason, D., and D. Keane. “Spreadsheets: Solution or Problem?” Interface New Zealand, October

(1989): 82-84.

Monahan, G. E. Management Decision Making: Spreadsheet Modeling, Analysis, and

Applications. New York: Cambridge University Press, 2000.

Ragsdale, C. T. Spreadsheet Modeling and Decision Analysis: A Practical Introduction to

Management Science. Cincinnati, Ohio: South-Western College Pub., 2003.

Render, B., R. M. Stair, and N. Balakrishnan. Managerial Decision Modeling with Spreadsheets

and Student CD-ROM. Upper Saddle River, N.J.: Prentice Hall, 2002.

Savage, S. L. Insight.xla: business analysis software for Microsoft Excel. Pacific Grove,

California: Brooks/Cole, 1998.

Weida, N. C., R. Richardson, and A. Vazsonyi. Operations Analysis Using Microsoft Excel.

Pacific Grove, California: Duxbury, 2001.

Winston, W. L., and S. C. Albright. Practical Management Science: Spreadsheet Modeling and

Applications. Belmont, California: Duxbury Press, 2000.

14
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

APPENDIX 1: CELL FORMULAS

In this model (see figure 1), the decision variables are indicated by cells with dashed

borders (cells B17 through M17), constraint cells are indicated by cells with solid borders

(B37:M40; B40:B41), and the cell representing the objective function is indicated with a double

border (cell N33).

Cell Formulas (Mixed Strategy)

Cell: Formula: Copied to:
Working Days
B8 ='Available Data'!B3 C8:M18
Demand Forecast
B10 ='Available Data'!B6 C10:M10
Initial Inventory
B11 ='Available Data'!B7 —
Safety Stock
B12 ='Available Data'!B8 —
Production Requirements
B13 =B10-(B11-B12) —
C13 =C10 D13:M13
Production Hours Needed
B16 =B13*LaborHours_Unit C16:M16
Production Hours Available
B18 =B17*B8*Regular_Labor_Day C18:M18
Workers Hired/Fired
B19 =B17-Beggining_Work_Force —
C19 =C17-B17 D19:M19
Units Produced—Regular
B22 =B18/LaborHours_Unit C22:M22
Units Produced—Overtime
B23 =IF(B22<B13,IF(B13-B22<B37,B13-B22,B37),0) —
C23 =IF(C22+B25<C13,IF(C13-C22-B25<C37,C13-C22-B25,C37),0) D23:M23
Units Subcontracted
B24 =IF(B22+B23<B13,IF(AND(B13-B22- —
B23>B38,B38>0),B38,B13-B22-B23),0)
C24 =IF(B25+C22+C23<C13,IF(AND(C13-C22-C23- D24:M24
B25>C38,C38>0),C38,C13-C22-C23-B25),0)
Monthly Inventory
B25 =SUM(B22:B24)-B13 —
C25 =B25+SUM(C22:C24)-C13 D25:M25
Regular Production (Cost)
B28 =B22*LaborHours_Unit*Labor_Cost_Hour_Regular_Time C28:M28
Overtime Production (Cost)
B29 =B23*LaborHours_Unit*Labor_Cost_Hour_Overtime C29:M29
Subcontracted Production (Cost)
B30 =B24*Subcontracting_Cost_Unit C30:M30
Inventory Holding/Shortage
(Cost)
B31 =IF(B25>=0,B25*Holding_Cost__unit_month,ABS(B25)*Stockou C31:M31
t_Cost__unit_month)
Hiring/Firing (Cost)
B32 =IF(B19>0,B19*Hiring_and_Training_Cost_Worker,ABS(B19)*L C32:M32
ayoff_Cost_Worker)
Total Costs
B33 =SUM(B28:B32) C33:M33

15
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

Cell Formulas (Mixed Strategy)

Cell: Formula: Copied to:
Maximum permissible overtime
hours
B36 =B8*Maximum_Overtime_Day*B17 C36:M36
Maximum overtime production
B37 =ROUNDDOWN(B36/LaborHours_Unit,0) C37:M37
Maximum subcontracted
production
B38 =Maximum_Subcontracting C38:M38

APPENDIX 2: SOLVER MACRO

This macro is associated with the Solver button (see figure 1), and its source code is as

follows:

Sub Solver()

' Solver Macro

Dim val As Variant

' Run the macro Set_Workers_Required to establish the initial number of workers

Set_Workers_Required

' It makes the value of variable val equal to the value that appears in cell N33

val = Range("N33").Value

' Set up the parameters for the model

SolverOk SetCell:="$N$33", MaxMinVal:=2, ValueOf:="0", ByChange:="$B$17:$M$17"

' Solve the model but do not display the Solver Results dialog box

SolverSolve UserFinish:=True

' Run Solver until it cannot improve the solution

Do While Range("N33").Value < val

val = Range("N33").Value

SolverOk SetCell:="$N$33", MaxMinVal:=2, ValueOf:="0",

ByChange:="$B$17:$M$17"

16
 Back to "Search By Author"

EXCEL MODEL FOR AGGREGATE PLANNING

SolverSolve UserFinish:=True

Loop

' Select cell N33

Range("N33").Select

' Show the result in a message box

MsgBox "Optimization Finished", vbInformation

End Sub

17