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MD 021 - Operations Management

Aggregate Planning
Outline

• Aggregate planning - definitions and strategies

• Linear programming (LP)

• Aggregate planning LP problem

• Chase and level strategy problems

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Definitions of Aggregate Planning

Aggregate planning is the “big picture” approach to planning for the intermediate
term (2 to 12 months). The goal of aggregate planning is to achieve a production
plan that will effectively utilize the organization’s resources to satisfy expected
demand.

Planners must make decisions on:


• Output rates
• Employment levels and changes
• Inventory levels and changes
• Backorders
• Subcontracting/outsourcing

In a manufacturing firm, the aggregate plan links the strategic goals with plans for
the individual products (i.e., the master production schedule).

In a service firm, the aggregate plan links the strategic goals with detailed work-
force schedules.

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Aggregation

Reason for aggregation - A planner can devise a course of action, consistent


with strategic goals and objectives, without having to deal with a lot of detail.

Three dimensions of aggregation:

Product families - Based on similar demand requirements and common


processing, labor, and materials requirements.

Labor - Considerations include work-force flexibility, physical and


geographic locations.

Timing - The planning horizon is the length of time covered by the aggregate
plan.

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Planning Strategies

Chase strategy – Matching capacity to demand; the planned output for a period is set at
the expected demand of the period.

Level strategy – Maintaining a steady rate of regular time output while meeting the
variations in demand by a combination of inventories, overtime, part-time workers,
subcontracting, and back-orders.
Pros Cons
• Low inventory • Expense of adjusting output
investment and backlogs rates and/or work-force
Chase strategy • Alienation of work-force
• Loss of productivity
• Lower quality
• Level output rates • Increased inventory
• Stable work-force investment
Level strategy • Increased undertime and
overtime expense
• Increased backlogs

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A. Uneven demand pattern
Demand
Forecasted
< Normal capacity
demand
Normal
capacity Time

Demand Demand
= Normal capacity > Normal capacity

B. Chase strategy
Normal capacity
Output >Output
level = Demand
Normal
capacity
Time

Normal capacity Normal capacity


= Output < Output
= Demand Inventory = Demand

C. Level Strategy
Output > Demand
Inventory builds up
Output
level

Output = Demand Output < Demand


Inventory is reduced
Source: Figure 13.2 on Page 620 from Stevenson
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Issues to Consider in Aggregate Planning

Production Workforce Inventory


Capacity Minimum level Minimum level
Demand Maximum level Maximum level
Material cost Overtime Holding cost
Labor cost Subcontracting Obsolescence
Overhead cost Hiring cost
Service level Firing/layoff costs
Training costs

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Aggregate Planning Example

The Specific Motors Company (SMC), which manufactures only one model of car, wants
to plan its production and inventory levels for the next 4 months. The following table
provides the relevant data for each month, where the inventory levels in the last two
columns refer to the levels at the end of the month:
Maximum Minimum Maximum Minimum
Production production production inventory inventory
Month Demand cost/unit level level level level

1 10,000 $10,800 25,000 3,000 15,000 2,000


2 15,000 11,000 35,000 3,000 15,000 2,000
3 25,000 11,000 30,000 3,000 15,000 2,000
4 20,000 11,300 10,000 3,000 15,000 2,000

SMC estimates that the cost to hold one car in inventory for one month is $150. To
estimate a month's inventory costs, SMC multiplies the average of the month's starting
and ending inventory levels by $150. SMC currently has an inventory level of 3000 cars.
SMC wants to meet its demand with no backlogging; that is, all demand must be met in
the month it occurs. Formulate an LP model for SMC.

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Let X1 = Number of cars to be produced in month 1
X2 = Number of cars to be produced in month 2
X3 = Number of cars to be produced in month 3
X4 = Number of cars to be produced in month 4

I1 = Inventory at the end of month 1


I2 = Inventory at the end of month 2
I3 = Inventory at the end of month 3
I4 = Inventory at the end of month 4

Min Z = 10800X1+11000X2+11000X3+11300X4 + 75I0 +


150I1+ 150I2 + 150I3 + 75I4

Subject to:

I0 = 3000
I0+X1- I1 = 10000
I1 + X2 - I2 = 15000
I2 + X3 - I3 = 25000
I3 + X4 - I4 = 20000

X1 ≤ 25000 X1 ≥ 3000
X2 ≤ 35000 X2 ≥ 3000
X3 ≤ 30000 X3 ≥ 3000
X4 ≤ 10000 X4 ≥ 3000

I1 ≤ 15000 I1 ≥ 2000
I2 ≤ 15000 I2 ≥ 2000
I3 ≤ 15000 I3 ≥ 2000
I4 ≤ 15000 I4 ≥ 2000

X 1 , X 2 , X 3 , X 4 , I1 , I2 , I3 , I4 ≥ 0

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Microsoft Excel 7.0 Answer Report
Target Cell (Min)
Cell Name Original Value Final Value
$K$4 Total cost 0 763075000

Adjustable Cells
Cell Name Original Value Final Value
$B$2 Cars produced in month 1 0 22000
$C$2 Cars produced in month 2 0 10000
$D$2 Cars produced in month 3 0 30000
$E$2 Cars produced in month 4 0 7000
$F$2 Initial ending inventory 0 3000
$G$2 Inventory end of month 1 0 15000
$H$2 Inventory end of month 2 0 10000
$I$2 Inventory end of month 3 0 15000
$J$2 Inventory end of month 4 0 2000

Constraints
Cell Name Cell Value Formula Status Slack
$K$6 Demand1 LHS 10000 $K$6=$L$6 Binding 0
$K$7 Demand2 LHS 15000 $K$7=$L$7 Binding 0
$K$8 Demand3 LHS 25000 $K$8=$L$8 Binding 0
$K$9 Demand4 LHS 20000 $K$9=$L$9 Binding 0
$K$10 MaxProd1 LHS 22000 $K$10<=$L$10 Not Binding 3000
$K$11 MaxProd2 LHS 10000 $K$11<=$L$11 Not Binding 25000
$K$12 MaxProd3 LHS 30000 $K$12<=$L$12 Binding 0
$K$13 MaxProd4 LHS 7000 $K$13<=$L$13 Not Binding 3000
$K$14 MinProd1 LHS 22000 $K$14>=$L$14 Not Binding 19000
$K$15 MinProd2 LHS 10000 $K$15>=$L$15 Not Binding 7000
$K$16 MinProd3 LHS 30000 $K$16>=$L$16 Not Binding 27000
$K$17 MinProd4 LHS 7000 $K$17>=$L$17 Not Binding 4000
$K$18 MaxInv1 LHS 15000 $K$18<=$L$18 Binding 0
$K$19 MaxInv2 LHS 10000 $K$19<=$L$19 Not Binding 5000
$K$20 MaxInv3 LHS 15000 $K$20<=$L$20 Binding 0
$K$21 MaxInv4 LHS 2000 $K$21<=$L$21 Not Binding 13000
$K$22 MinInv1 LHS 15000 $K$22>=$L$22 Not Binding 13000
$K$23 MinInv2 LHS 10000 $K$23>=$L$23 Not Binding 8000
$K$24 MinInv3 LHS 15000 $K$24>=$L$24 Not Binding 13000
$K$25 MinInv4 LHS 2000 $K$25>=$L$25 Binding 0
$K$26 Inv0 LHS 3000 $K$26=$L$26 Binding 0
$B$2 Cars produced in month 1 22000 $B$2>=0 Not Binding 22000
$C$2 Cars produced in month 2 10000 $C$2>=0 Not Binding 10000
$D$2 Cars produced in month 3 30000 $D$2>=0 Not Binding 30000
$E$2 Cars produced in month 4 7000 $E$2>=0 Not Binding 7000
$F$2 Initial ending inventory 3000 $F$2>=0 Not Binding 3000
$G$2 Inventory end of month 1 15000 $G$2>=0 Not Binding 15000
$H$2 Inventory end of month 2 10000 $H$2>=0 Not Binding 10000
$I$2 Inventory end of month 3 15000 $I$2>=0 Not Binding 15000
$J$2 Inventory end of month 4 2000 $J$2>=0 Not Binding 2000

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Sensitivity Analysis

1. Objective function coefficients

• Holding all else the same, what is the range that each objective function coefficient can
change without changing the optimal solution?

2. Right-hand-side parameters

• Holding all else the same, what is the change in the value of the objective function if we
add one more unit of each constrained resource? In other words, what is the shadow
price?

• What is the range over which the right-hand-side can vary while its shadow price
remains valid?

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Microsoft Excel 7.0 Sensitivity Report

Changing Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$B$2 Cars produced in month 1 22000 0 10800 50 1E+30
$C$2 Cars produced in month 2 10000 0 11000 0 50
$D$2 Cars produced in month 3 30000 0 11000 150 1E+30
$E$2 Cars produced in month 4 7000 0 11300 1E+30 0
$F$2 Initial ending inventory 3000 0 75 1E+30 1E+30
$G$2 Inventory end of month 1 15000 0 150 50 1E+30
$H$2 Inventory end of month 2 10000 0 150 0 150
$I$2 Inventory end of month 3 15000 0 150 0 1E+30
$J$2 Inventory end of month 4 2000 0 75 1E+30 11375

Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$K$6 Demand1 LHS 10000 10800 10000 3000 19000
$K$7 Demand2 LHS 15000 11000 15000 25000 7000
$K$8 Demand3 LHS 25000 11150 25000 5000 7000
$K$9 Demand4 LHS 20000 11300 20000 3000 4000
$K$10 MaxProd1 LHS 22000 0 25000 1E+30 3000
$K$11 MaxProd2 LHS 10000 0 35000 1E+30 25000
$K$12 MaxProd3 LHS 30000 -150 30000 7000 5000
$K$13 MaxProd4 LHS 7000 0 10000 1E+30 3000
$K$14 MinProd1 LHS 22000 0 3000 19000 1E+30
$K$15 MinProd2 LHS 10000 0 3000 7000 1E+30
$K$16 MinProd3 LHS 30000 0 3000 27000 1E+30
$K$17 MinProd4 LHS 7000 0 3000 4000 1E+30
$K$18 MaxInv1 LHS 15000 -50 15000 3000 13000
$K$19 MaxInv2 LHS 10000 0 15000 1E+30 5000
$K$20 MaxInv3 LHS 15000 0 15000 4000 3000
$K$21 MaxInv4 LHS 2000 0 15000 1E+30 13000
$K$22 MinInv1 LHS 15000 0 2000 13000 1E+30
$K$23 MinInv2 LHS 10000 0 2000 8000 1E+30
$K$24 MinInv3 LHS 15000 0 2000 13000 1E+30
$K$25 MinInv4 LHS 2000 11375 2000 3000 2000
$K$26 Inv0 LHS 3000 -10725 3000 19000 3000

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Sensitivity Analysis
Aggregate Planning Problem

1. What changes in the aggregate plan would cause costs to go down?

2. Why does an increase in the minimum inventory level at the end of month 4 cause
costs to go up? Why is this deceptive?

3. According to the sensitivity report, increasing the initial inventory by 1 results in


costs going down by $10,725. Why is this deceptive?

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Level and Chase Strategies Example

Bob Carlton’s golf camp estimates the following workforce requirements for its services over
the next two years.

Quarter 1 2 3 4
Demand 4200 6400 3000 4800

Quarter 5 6 7 8
Demand 4400 6240 3600 4800

Each certified instructor puts in 480 hours per quarter regular time and can work an
additional 120 hours overtime. Regular-time wages and benefits cost Carlton $7200 per
employee per quarter for regular time worked up to 480 hours, with an overtime cost of $20
per hour. Unused regular time for certified instructors is paid at $15 per hour. There is no
cost for unused overtime capacity. The cost of hiring, training, and certifying a new
employee is $10,000. Layoff costs are $4000 per employee. Currently, eight employees
work in this capacity.

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Level Strategy

Find a level work-force plan that allows for no delay in service and minimizes
undertime. What is the total cost of this plan?

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Chase Strategy

Use a chase strategy that varies the work-force level without using overtime and
minimizing undertime. What is the total cost of this plan?

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