AGGREGATE PLANNING

IE314 - Operations Management 2

By Abdulrahman Alomar
ALOMARAB@KSU.EDU.SA
IE314 - Operations Management 2 - Aggregate Planning - Abdulrahman Alomar

Q13.3) A firm projects its aggregate demand Jan 1,400 May 2,200
requirements over the next 8 months as follows: Feb 1,600 June 2,200
Mar 1,800 July 1,800
Apr 1,800 Aug 1,800

Their operations manager is considering a new plan, which begins in January with
200 units on hand. Stockout cost of lost sales is $100/unit. Inventory holding cost
is $20/unit/month.

• Plan A) Vary the workforce level to produce the quantity demanded in the
prior month. The December demand and rate of production are both 1,600
units/month. The cost of hiring additional workers is $5,000/100 units. The
cost of laying off workers is $7,500/100 units. Evaluate this plan.
Note: Both hiring and layoff costs are incurred in the month of the change. For example, going from 1,600 in
January to 1,400 in February incurs a cost of layoff for 200 units in February.
IE314 - Operations Management 2 - Aggregate Planning - Abdulrahman Alomar

A13.3) Plan A
Inventory Stockout Hire Layoff
Period Demand Production ($5,000/100units) ($7,500/100units)
($20/m) ($100/unit)
OR $50/unit OR $75/unit

(Dec) 1,600 1,600 200

Jan 1,400

Feb 1,600

Mar 1,800

Apr 1,800

May 2,200

June 2,200

July 1,800
Aug 1,800

Total in units
Total in $
IE314 - Operations Management 2 - Aggregate Planning - Abdulrahman Alomar

A13.3) Plan A
Period Demand Production Inventory Stockout Hire Layoff
($20/m) ($100/unit) ($50/unit) ($75/unit)

(Dec) 1,600 1,600 200 (not added to total)

Jan 1,400 1,600 400 0 0 0
Feb 1,600 1,400 200 0 0 200
Mar 1,800 1,600 0 0 200 0
Apr 1,800 1,800 0 0 200 0
May 2,200 1,800 0 400 0 0
June 2,200 2,200 0 0 400 0
July 1,800 2,200 400 0 0 0
Aug 1,800 1,800 400 0 0 400
Total in units 1,400 400 800 600
Total in $ 1,400(20)=$28,000 400(100)=$40,000 800(50)=$40,000 600(75)=$45,000

Total cost = $28k + $40k + $40k + $45k = $153,000

IE314 - Operations Management 2 - Aggregate Planning - Abdulrahman Alomar

Q13.3) A firm project its aggregate demand Jan 1,400 May 2,200
requirements over the next 8 months as follows: Feb 1,600 June 2,200
Mar 1,800 July 1,800
Apr 1,800 Aug 1,800

Their operations manager is considering a new plan, which begins in January with
200 units on hand. Stockout cost of lost sales is $100/unit. Inventory holding cost
is $20/unit/month.

• Plan B) Produce at a constant rate of 1,400 units/month, which will meet

minimum demand. Then use subcontracting, with additional units at a
premium price of $75/unit. Evaluate this plan.
IE314 - Operations Management 2 - Aggregate Planning - Abdulrahman Alomar

A13.3) Plan B

Period Demand Production Inventory Subcontract

($20/m) ($75/unit)

Jan 1,400

Feb 1,600

Mar 1,800

Apr 1,800

May 2,200

June 2,200

July 1,800
Aug 1,800

Total in units
Total in $
IE314 - Operations Management 2 - Aggregate Planning - Abdulrahman Alomar

A13.3) Plan B

Period Demand Production Inventory Subcontract

($20/m) ($75/unit)

Jan 1,400 1,400 200 0

Feb 1,600 1,400 0 0

Mar 1,800 1,400 0 400

Apr 1,800 1,400 0 400

May 2,200 1,400 0 800

June 2,200 1,400 0 800

July 1,800 1,400 0 400

Aug 1,800 1,400 0 400

Total in units 200 3200

Total in $ US$4,000 US$240,000

Total cost = $4k + $240k = $244,000

IE314 - Operations Management 2 - Aggregate Planning - Abdulrahman Alomar

Q13.3) A firm project its aggregate demand Jan 1,400 May 2,200
requirements over the next 8 months as follows: Feb 1,600 June 2,200
Mar 1,800 July 1,800
Apr 1,800 Aug 1,800

Their operations manager is considering a new plan, which begins in January with
200 units on hand. Stockout cost of lost sales is $100/unit. Inventory holding cost
is $20/unit/month.

• Plan C) Keep a stable workforce by maintaining a constant production rate

equal to the average requirements and allow varying inventory levels. Evaluate
this plan.
IE314 - Operations Management 2 - Aggregate Planning - Abdulrahman Alomar

A13.3) Plan C

Period Demand Production Inventory Stockout

($20/m) ($100/unit)

Jan 1,400

Feb 1,600

Mar 1,800

Apr 1,800

May 2,200

June 2,200

July 1,800
Aug 1,800

Total in units
Total in $
IE314 - Operations Management 2 - Aggregate Planning - Abdulrahman Alomar

A13.3) Plan C

Period Demand Production Inventory Stockout

($20/m) ($100/unit)

Jan (INV=200) 1,400 1,825 625 0

Feb 1,600 1,825 850 0

Mar 1,800 1,825 875 0

Apr 1,800 1,825 900 0

May 2,200 1,825 525 0

June 2,200 1,825 150 0

July 1,800 1,825 175 0

Aug 1,800 1,825 200 0

Total in units 4,300 0

Total in $ US$86,000

Total cost = $86,000

IE314 - Operations Management 2 - Aggregate Planning - Abdulrahman Alomar

A13.3) Comparing the plans on the basis of extra costs:

Plan Cost
A US$153,000
B US$244,000
C US$86,000

Plan C appears to be the most suitable for this case given the total cost of $86k.
IE314 - Operations Management 2 - Aggregate Planning - Abdulrahman Alomar

Q13.18 José Martinez has developed an appliance to be used in restaurants. He

needs to develop a 5-month aggregate plan. His forecast of capacity and
demand are as follows:
Month 1 2 3 4 5 Costs
Regular time ($/unit) 100
Demand 150 160 130 200 210
Overtime ($/unit) 125
Regular Capacity 150 150 150 150 150
Subcontract ($/unit) 135
Overtime Capacity 20 20 10 10 10 Inventory ($/unit/month) 3

Subcontracting 100 units available over the 5 month period

Beginning Inventory 0 units
Ending Inventory Required 20 units

Assume that backorders are not permitted. Using the transportation method,
what is the total cost of the optimal plan?
A13.18
To Demand Demand Demand Demand Demand End Excess
Supply
From 1 2 3 4 5 Inv (Dummy)
Subcon

Reg. Time
1
Overtime
1
Reg. Time
2
Overtime
2
Reg. Time
3
Overtime
3
Reg. Time
4
Overtime
4
Reg. Time
5
Overtime
5
Demand
A13.18
To Demand Demand Demand Demand Demand End Excess
Supply
From 1 2 3 4 5 Inv (Dummy)
Subcon

Reg. Time 150

1
Overtime 20
1
Reg. Time 150
Month 1 2 3 4 5
2
Overtime Demand 150 160 130 200 210 20
2
Reg. Time Regular Capacity 150 150 150 150 150
150
3 Overtime Capacity 20 20 10 10 10
Overtime 10
3
Reg. Time 150
4
Overtime 10
4
Reg. Time 150
5
Overtime 10
5
Demand 150 160 130 200 210
A13.18
To Demand Demand Demand Demand Demand End Excess
Supply
From 1 2 3 4 5 Inv (Dummy)
Subcon
100
100
Reg. Time 150
1 150
Overtime 20
1 20
Reg. Time 150
2 150
Overtime Subcontracting 100 units available over the 5 month 20
2 period 20
Reg. Time Beginning Inventory 0 units
150
3 Ending Inventory Required 20 units 150
Overtime 10
3 10
Reg. Time 150
4 150
Overtime 10
4 10
Reg. Time 150
5 150
Overtime 10
5 10
Demand 150 160 130 200 210 20
 Costs
A13.18 Regular time $100/unit Overtime $125/unit Subcon $135/unit Inventory $3/unit/m
To Demand Demand Demand Demand Demand End Excess
Supply
From 1 2 3 4 5 Inv (Dummy)
Subcon 135 135 135 135 135 135 0
100
100
Reg. Time 100 0 150
1 150
Overtime 125 0 20
1 20
Reg. Time ∞ 100 0 150
2 150
Overtime ∞ 125 0 20
2 20
Reg. Time ∞ ∞ 100 0 150
3 150
Overtime ∞ ∞ 125 0 10
3 10
Reg. Time ∞ ∞ ∞ 100 0 150
4 150
Overtime ∞ ∞ ∞ 125 0 10
4 10
Reg. Time ∞ ∞ ∞ ∞ 100 0 150
5 150
Overtime ∞ ∞ ∞ ∞ 125 0 10
5 10
Demand 150 160 130 200 210 20
 Costs
A13.18 Regular time $100/unit Overtime $125/unit Subcon $135/unit Inventory $3/unit/m
To Demand Demand Demand Demand Demand End Excess
Supply
From 1 2 3 4 5 Inv (Dummy)
Subcon 135 135 135 135 135 135 0
100
100
Reg. Time 100 103 106 109 112 115 0 150
1 150
Overtime 125 128 131 134 137 140 0 20
1 20
Reg. Time ∞ 100 103 106 109 112 0 150
2 150
Overtime ∞ 125 128 131 134 137 0 20
2 20
Reg. Time ∞ ∞ 100 103 106 109 0 150
3 150
Overtime ∞ ∞ 125 128 131 134 0 10
3 10
Reg. Time ∞ ∞ ∞ 100 103 106 0 150
4 150
Overtime ∞ ∞ ∞ 125 128 131 0 10
4 10
Reg. Time ∞ ∞ ∞ ∞ 100 103 0 150
5 150
Overtime ∞ ∞ ∞ ∞ 125 128 0 10
5 10
Demand 150 160 130 200 210 20
A13.18
To Demand Demand Demand Demand Demand End Excess
Supply
From 1 2 3 4 5 Inv (Dummy)
Subcon 135 135 135 135 135 135 0
100
100
Reg. Time 100 103 106 109 112 115 0 150
1 150
Overtime 125 128 131 134 137 140 0 20
1 20
Reg. Time ∞ 100 103 106 109 112 0 150
2 150
Overtime ∞ 125 128 131 134 137 0 20
2 20
Reg. Time ∞ ∞ 100 103 106 109 0 150
3 150
Overtime ∞ ∞ 125 128 131 134 0 10
3 10
Reg. Time ∞ ∞ ∞ 100 103 106 0 150
4 150
Overtime ∞ ∞ ∞ 125 128 131 0 10
4 10
Reg. Time ∞ ∞ ∞ ∞ 100 103 0 150
5 150
Overtime ∞ ∞ ∞ ∞ 125 128 0 10
5 10
Demand 150 160 130 200 210 20
A13.18
To Demand Demand Demand Demand Demand End Excess Supply
From 1 2 3 4 5 Inv (Dummy)
Subcon 135 135 135 135 135 135 0
100
100
Reg. Time 100 103 106 109 112 115 0 150
1 150
Overtime 125 128 131 134 137 140 0 20
1 20
Reg. Time ∞ 100 103 106 109 112 0 150
2 150
Overtime ∞ 125 128 131 134 137 0 20
2 20
Reg. Time ∞ ∞ 100 103 106 109 0 150
3 150
Overtime ∞ ∞ 125 128 131 134 0 10
3 10
Reg. Time ∞ ∞ ∞ 100 103 106 0 150
4 150
Overtime ∞ ∞ ∞ 125 128 131 0 10
4 10
Reg. Time ∞ ∞ ∞ ∞ 100 103 0 150
5 150
Overtime ∞ ∞ ∞ ∞ 125 128 0 10
5 10
Demand 150 160 130 200 210 20
A13.18
To Demand Demand Demand Demand Demand End Excess Supply
From 1 2 3 4 5 Inv (Dummy)
Subcon 135 135 135 135 135 135 0
100
100
Reg. Time 100 103 106 109 112 115 0 150
1 150 0
Overtime 125 128 131 134 137 140 0 20
1 20
Reg. Time ∞ 100 103 106 109 112 0 150
2 150
Overtime ∞ 125 128 131 134 137 0 20
2 20
Reg. Time ∞ ∞ 100 103 106 109 0 150
3 150
Overtime ∞ ∞ 125 128 131 134 0 10
3 10
Reg. Time ∞ ∞ ∞ 100 103 106 0 150
4 150
Overtime ∞ ∞ ∞ 125 128 131 0 10
4 10
Reg. Time ∞ ∞ ∞ ∞ 100 103 0 150
5 150
Overtime ∞ ∞ ∞ ∞ 125 128 0 10
5 10
Demand 150 160 130 200 210 20
A13.18
To Demand Demand Demand Demand Demand End Excess Supply
From 1 2 3 4 5 Inv (Dummy)
Subcon 135 135 135 135 135 135 0 100
100
Reg. Time 100 103 106 109 112 115 0 150
1 150 0
Overtime 125 128 131 134 137 140 0 20
1 20
Reg. Time ∞ 100 103 106 109 112 0 150
2 150 0
Overtime ∞ 125 128 131 134 137 0 20
2 10 10
Reg. Time ∞ ∞ 100 103 106 109 0 150
3 150
Overtime ∞ ∞ 125 128 131 134 0 10
3 10
Reg. Time ∞ ∞ ∞ 100 103 106 0 150
4 150
Overtime ∞ ∞ ∞ 125 128 131 0 10
4 10
Reg. Time ∞ ∞ ∞ ∞ 100 103 0 150
5 150
Overtime ∞ ∞ ∞ ∞ 125 128 0 10
5 10
Demand 150 160 130 200 210 20
A13.18
To Demand Demand Demand Demand Demand End Excess
Supply
From 1 2 3 4 5 Inv (Dummy)
Subcon 135 135 135 135 135 135 0
100
100
Reg. Time 100 103 106 109 112 115 0 150
1 150 0
Overtime 125 128 131 134 137 140 0 20
1 20
Reg. Time ∞ 100 103 106 109 112 0 150
2 150 0
Overtime ∞ 125 128 131 134 137 0 20
2 10 10 0
Reg. Time ∞ ∞ 100 103 106 109 0 150
3 130 20 0
Overtime ∞ ∞ 125 128 131 134 0 10
3 10 0
Reg. Time ∞ ∞ ∞ 100 103 106 0 150
4 150 0
Overtime ∞ ∞ ∞ 125 128 131 0 10
4 10 0
Reg. Time ∞ ∞ ∞ ∞ 100 103 0 150
5 150
Overtime ∞ ∞ ∞ ∞ 125 128 0 10
5 10
Demand 150 160 130 200 210 20
A13.18
To Demand Demand Demand Demand Demand End Excess
Supply
From 1 2 3 4 5 Inv (Dummy)
Subcon 135 135 135 135 135 135 0
100
50 20 30
Reg. Time 100 103 106 109 112 115 0 150
1 150 0
Overtime 125 128 131 134 137 140 0 20
1 20
Reg. Time ∞ 100 103 106 109 112 0 150
2 150 0
Overtime ∞ 125 128 131 134 137 0 20
2 10 10 0
Reg. Time ∞ ∞ 100 103 106 109 0 150
3 130 20 0
Overtime ∞ ∞ 125 128 131 134 0 10
3 10 0
Reg. Time ∞ ∞ ∞ 100 103 106 0 150
4 150 0
Overtime ∞ ∞ ∞ 125 128 131 0 10
4 10 0
Reg. Time ∞ ∞ ∞ ∞ 100 103 0 150
5 150 0
Overtime ∞ ∞ ∞ ∞ 125 128 0 10
5 10 0
Demand 150 160 130 200 210 20
A13.18
To Demand Demand Demand Demand Demand End Excess
Supply
From 1 2 3 4 5 Inv (Dummy)
Subcon 135 135 135 135 135 135 0
100
50 20 30
Reg. Time 100 103 106 109 112 115 0 150
1 150 0
Overtime 125 128 131 134 137 140 0 20
1 20
Reg. Time ∞ 100 103 106 109 112 0 150
2 150 0
Overtime ∞ 125 128 131 134 137 0 20
2 10 10 0
Reg. Time ∞ ∞ 100 103 106 109 0 150
3 130 20 0
Overtime ∞ ∞ 125 128 131 134 0 10
3 10 0
Reg. Time ∞ ∞ ∞ 100 103 106 0 150
4 150 0
Overtime ∞ ∞ ∞ 125 128 131 0 10
4 10 0
Reg. Time ∞ ∞ ∞ ∞ 100 103 0 150
5 150 0
Overtime ∞ ∞ ∞ ∞ 125 128 0 10
5 10 0
Demand 150 160 130 200 210 20
A13.18
To Demand Demand Demand Demand Demand End Excess
Supply Total Cost
From 1 2 3 4 5 Inv (Dummy)
Subco 135 135 135 135 135 135 0
100 US$90,850
50 20 30
Reg. 100 103 106 109 112 115 0 150
1 150 0
Overti 125 128 131 134 137 140 0 20
1 20
Reg. ∞ 100 103 106 109 112 0 150
2 150 0
Overti ∞ 125 128 131 134 137 0 20
2 10 10 0
Reg. ∞ ∞ 100 103 106 109 0 150
3 130 20 0
Overti ∞ ∞ 125 128 131 134 0 10
3 10 0
Reg. ∞ ∞ ∞ 100 103 106 0 150
4 150 0
Overti ∞ ∞ ∞ 125 128 131 0 10
4 10 0
Reg. ∞ ∞ ∞ ∞ 100 103 0 150
5 150 0
Overti ∞ ∞ ∞ ∞ 125 128 0 10
5 10 0
Dema 150 160 130 200 210 20
nd
IE314 - Operations Management 2 - Aggregate Planning - Abdulrahman Alomar

Q13.26) An airline company has a daily flight that uses a plane with all-coach
seating for 120 people.
The airline prices every seat at $140 for the one-way flight. An average of 80
passengers are on each flight. The variable cost of a filled seat is $25.
The new operations manager has decided to try a yield revenue approach, with
seats priced at $80 for early bookings and at $190 for bookings within 1 week
of the flight.
He estimates that the airline will sell 65 seats at the lower price and 35 at the
higher price. Variable cost will not change.
Which approach is preferable?
IE314 - Operations Management 2 - Aggregate Planning - Abdulrahman Alomar

• Current model: Single price of $140. Variable cost of $25. 80 Passengers.

• Proposed model: Two price points of $80 and $190 for early and late
bookings. Variable cost of $25. 65 early bookers and 35 late bookers.
IE314 - Operations Management 2 - Aggregate Planning - Abdulrahman Alomar

• Current model: Single price of $140. Variable cost of $25. 80 Passengers.

80 x ($140 - $25) = $9,200

• Proposed model: Two price points of $80 and $190 for early and late
bookings. Variable cost of $25. 65 early bookers and 35 late bookers.
65 x ($80 - $25) + 35 x ($190 - $25) = $9,350

• The new approach is slightly better in terms of sales but provides a more
complicated ticketing system. Also, the issue of fairness is always paramount.