Chapter 03

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Chapter 03

© All Rights Reserved

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Chapter 3

Aggregate Planning

McGraw-Hill/Irwin

3-2

Goal: To plan gross work force levels and set firmwide production plans.

of production. May be actual units, or may be

measured in weight (tons of steel), volume (gallons of

gasoline), time (worker-hours), or dollars of sales. Can

even be a fictitious quantity. (Refer to example in text

and in slide below.)

The Hierarchy of

Production Planning Decisions

3-3

3-4

Suppose that D1, D2, . . . , DT are the

forecasts of demand for aggregate units

over the planning horizon (T periods.) The

problem is to determine both work force

levels (Wt) and production levels (Pt ) to

minimize total costs over the T period

planning horizon.

3-5

Important Issues

from making changes from one period to the next.

Bottleneck Planning. Problem of meeting peak demand

because of capacity restrictions.

Planning Horizon. Assumed given (T), but what is

right value? Rolling horizons and end of horizon effect

are both important issues.

Treatment of Demand. Assume demand is known. Ignores

uncertainty to focus on the predictable/systematic

variations in demand, such as seasonality.

3-6

Relevant Costs

Smoothing Costs

changing size of the work force

changing number of units produced

Holding Costs

primary component: opportunity cost of investment

Shortage Costs

Cost of demand exceeding stock on hand. Why should

shortages be an issue if demand is known?

Other Costs: payroll, overtime, subcontracting.

Cost of Changing

the Size of the Workforce

3-7

3-8

$ Cost

Slope =

Ci

Slope =

CP

Back-orders

inventory

Positive

Inventory

3-9

Aggregate Units

The method is based on notion of aggregate

units. They may be

Actual units of production

Weight (tons of steel)

Volume (gallons of gasoline)

Dollars (Value of sales)

Fictitious aggregate units

3-10

(Example 3.1)

One plant produced 6 models of washing machines:

Model

# hrs.

Price

% sales

A 5532

4.2 285 32

K 4242

4.9 345 21

L 9898

5.1 395 17

L 3800

5.2 425 14

M 2624

5.4 525 10

M 3880

5.8 725 06

3-11

Example continued

worker hours (i.e., cost): why?

requires: .32(4.2) + .21(4.9) + . . . + .06(5.8) =

4.8644 worker hours. Forecasts for demand for

aggregate units can be obtained by taking a

weighted average (using the same weights) of

individual item forecasts.

(this example is not in the text)

3-12

determining work force and production levels

for the next 8 months. Forecasted demands for

Jan-Aug. are: 420, 280, 460, 190, 310, 145,

110, 125. Starting inventory at the end of

December is 200 and the firm would like to

have 100 units on hand at the end of August.

Find monthly production levels.

3-13

(subtract starting inv. from per. 1 forecast and add ending inv.

to per. 8 forecast.)

Month

1(Jan)

2(Feb)

3(Mar)

4(Apr)

5(May)

6(June)

7(July)

8(Aug)

Net Predicted

Demand

220 220 22

280 500 16

460 960 23

190

1150

310

1460

145

1605

110

1715

225

1940

Demand

20

21

17

18

10

3-14

to Find Plans Graphically

3-15

2000

1800

1600

1400

1200

1000

800

600

400

200

0

1

3-16

Suppose that we are interested in determining a

production plan that doesnt change the size of the

workforce over the planning horizon. How would

we do that?

One method: In previous picture, draw a straight

line from origin to 1940 units in month 8: The

slope of the line is the number of units to produce

each month.

3-17

2000

1500

1000

500

0

1

243/month.

with no stockouts?

Answer: using the graph, find the straight line that goes

through the origin and lies completely above the

cumulative net demand curve:

Constant Work Force Plan With No Stockouts

3000

2500

2000

1500

1000

500

0

1

3-18

3-19

From the previous graph, we see that cum. net demand curve

is crossed at period 3, so that monthly production is 960/3 =

320. Ending inventory each month is found from:

Month

Cum. Net. Dem. Cum. Prod.

Invent.

1(Jan)

220

320 100

2(Feb)

500

640

140

3(Mar) 960

960

0

4(Apr.)

1150

1280

130

5(May)

1460

1600

140

6(June)

1605

1920

315

7(July)

1715

2240

525

8(Aug)

1940

2560

620

reasons:

3-20

production level of 320 unit/month with an

integer number of workers

number of workdays, a constant production

level may not translate to the same number of

workers each month.

3-21

Assume number of workdays per month is

given

K factor given (or computed) where

worker in one day

3-22

Finding K

of 40 days, the plant had 38 workers who

produced 520 units. It follows that:

K= 520/(38*40) = 0.3421

= average number of units produced by

one worker in one day.

3-23

Assume we are given the following # of

working days per month: 22, 16, 23, 20, 21,

17, 18, 10. March is still critical month.

Cum. net demand thru March = 960. Cum #

of working days = 22+16+23 = 61. Find

960/61 = 15.7377 units/day implies

15.7377/.3421 = 46 workers required.

3-24

Mo

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

# wk days

22

16

23

20

21

22

21

22

Level Prod Dem

346

346

220

126

252

598

500

98

362

960

960

0

315

1275 1150

125

330

1605 1460

145

346

1951 1605

346

330

2281 1715

566

346

2627 1940

687

3-25

Addition of Costs

Holding Cost (per unit per month): $8.50

Hiring Cost per worker: $800

Firing Cost per worker: $1,250

Payroll Cost: $75/worker/day

Shortage Cost: $50 unit short/month

3-26

Assume that the work force at end of Dec was 40.

Cost to hire 6 workers: 6*800 = $4800

Inventory Cost: accumulate ending inventory:

(126+98+0+. . .+687) = 2093. Add in 100 units netted out

in Aug = 2193. Hence Inv. Cost = 2193*8.5=$18,640.50

Payroll cost:

($75/worker/day)(46 workers )(167days) = $576,150

Cost of plan: $576,150 + $18,640.50 + $4800 =

$599,590.50 ~ $600K

3-27

In the original cum net demand curve, consider making

reductions in the work force one or more times over the

planning horizon to decrease inventory investment.

Plan Modified With Lay Offs in March and May

2000

1500

1000

500

0

1

3-28

modified plan calls for reducing the

workforce to 36 at start of April and making

another reduction to 22 at start of June. The

additional cost of layoffs is $30,000, but

holding costs are reduced to only $4,250.

The total cost of the modified plan is

$467,450.

3-29

in order to reduce ending inventory to nearly zero

by matching the workforce with monthly demand as

closely as possible. This is accomplished by

computing the # units produced by one worker each

month (by multiplying K by #days per month) and

then taking net demand each month and dividing by

this quantity. The resulting ratio is rounded up and

possibly adjusted downward.

3-30

Period

1

2

3

4

5

6

7

8

# hired

#fired

10

20

9

31

15

24

4

15

Cost of this

plan:

$555,704.50

3-31

Problems Via Linear Programming

Linear Programming provides a means of solving

aggregate planning problems optimally. The LP

formulation is fairly complex requiring 8T variables

and 3T constraints, where T is the length of the

planning horizon. Clearly, this can be a formidable

linear program. The LP formulation shows that the

modified plan we considered with two months of

layoffs is in fact optimal for the prototype problem.

Refer to the latter part of Chapter 3 and the

Appendix following the chapter for details.

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