CHAPTER 14

AGGREGATE PLANNING

Outline

• Aggregate Planning
– Issues
– Costs
• Two Strategies
– Chase Strategy
– Level Strategy
• Optimization
Hierarchy of Production Decisions
F o re c a s t o f D e m a n d

A g g r e g a te P la n n in g

M a s t e r P r o d u c t io n S c h e d u le

M a t e r ia l R e q u ir e m e n t s P la n n in g

O p e r a t io n s S c h e d u lin g

V e h ic le R o u t in g
 Master Production Schedule
April May

1 2 3 4 5 6 7 8

Ladder-back chair 150 150

Kitchen chair 120 120

Desk chair 200 200 200 200

Aggregate
production plan 550 790
for chair family
Materials Requirement Planning

Back slats Seat cushion

Leg supports Seat-frame

boards

Back Front
legs legs
 Issues in Aggregate Planning
• Smoothing
– Hiring, firing workers
• Bottleneck problems
– Sharp change in demand
• Planning horizon
– Inaccurate forecasts are associated with too large
horizon and planning may be ineffective with too
small horizon
• Nature of Demand
– Forecasts are usually wrong!
 Aggregate Production Planning
• Input
– Demand forecast
– Level of resources
– Relevant cost information
• Output
– Aggregate production quantities
• production, inventory, backorder
– Level of resources needed
• Workforce, overtime, machine capacity level,
subcontracting
 Costs in Aggregate Planning
• Smoothing costs
– Hiring and firing costs
• Inventory holding costs
– Cost of capital, storage, insurance, losses
• Shortage costs
– Backorder, lost sales
 Costs in Aggregate Planning
• Production costs
– Straight time costs
• Labor costs, regular time ($/hour)
– Overtime and subcontracting costs
• Labor costs, overtime costs ($/hour)
• Cost of subcontracting ($/unit or $/hour)
Smoothing
Costs

C ost
Sl t
op s
e c o
=
un ng
it ih r i
f ir in t
in u
g =
co e
st o p
Sl

N u m b e r o f f ir e s N u m b e r o f h ir e s
Inventory
Holding
and
Shortage Sl

C ost
op s t
e o
Costs =
un i ng
c
it d
ba h ol
ck t
or u ni
de =
rc p e
os o
t Sl

B a c k o rd e r P o s it iv e in v e n t o r y
A Feasible Aggregate Plan
C u m u la t iv e N u m b e r o f U n it s

A f e a s ib le p r o d u c t io n
s c h e d u le

C u m u la t iv e
N et
D em and
In v e n to ry
P e r io d
 Constraints
• Limits on overtime
• Limits on layoffs
• Limits on capital available
• Limits on stockouts and backorders
 Two Simple Strategies
Demand

Units

Production

• Chase strategy Time

– Zero inventory, no holding cost, no shortages

– Zero inventory is difficult to achieve
 Two Simple Strategies
Demand

Production
Units

Time
• Level strategy
– Stable workforce, no hiring/firing, no overtime,
– no subcontract
 Optimization
• Linear Programming
– Excel Solver
• Difficulty
– Integer variables: number of workers
 Example
• Develop a production plan and calculate the annual cost
for a firm whose demand forecast is fall, 10, 000; winter,
8,000; spring 7,000; summer, 12,000. Inventory at the
beginning of fall is 500 units. At the beginning of fall you
currently have 30 workers, but you plan to hire temporary
workers at the beginning of summer and lay them off at the
end of summer. In addition, you have negotiated with the
union an option to use the regular workforce on overtime
during winter or spring if the overtime is necessary to
prevent stock-outs at the end of those quarters. Overtime is
not available during fall. (Continued...)
 Example
Relevant costs are: hiring, $100 for each temp; layoff,
$200 for each worker laid off; inventory holding, $5 per
unit-quarter; backorder, $10 per unit; straight time, $5 per
hour; overtime $8 per hour. Assume that the productivity is
0.5 units per worker hour, with eight hours per day and 60
days per season.
• Develop a production plan using
(1) all the constraints as stated
(2) chase strategy, no overtime, work hours not flexible
(3) chase strategy, no overtime, flexible hours (self study)
 Example
(4) Suppose that a level strategy will be used without any
overtime. What is the minimum number of workers required
to avoid shortages? Develop a production plan using the
minimum number of workers required to avoid shortages.
(5) Assuming that the shortages are allowed and that 6 new
workers will be hired in the beginning of the fall term develop
a production plan using level strategy and no overtime (self
study)
(6) Assuming that the overtime will be used in fall and winter to
prevent shortages and that 7 new workers will be hired in the
beginning of the fall term, develop a production plan using
level strategy with overtime (self study)
 Example
Problem 1: The original problem
Forecast Beginning Production Production Production
Inventory Required Hours Hours
Required Available
Fall 10000 500
Winter 8000
Spring 7000
Summer 12000
Overtime Workers Workers Actual Ending
Hours Hired Fired Production Inventory
Fall
Winter
Spring
Summer
 Example
Problem 1: The original problem
Bakorder Overtime Hiring Firing
Cost Cost Cost Cost
Fall
Winter
Spring
Summer
Inventory Straighttime Total Cost
Holding Cost
Cost
Fall
Winter
Spring
Summer
Tota
 Example (Chase)
Problem 2: Chase, no overtime, work hours not flexible
Forecast Beginning Net Production Workers
Inventory Production Hours Required
Required Required
Fall 10000 500
Winter 8000
Spring 7000
Summer 12000
Workers Workers Actual Ending
Hired Fired Production Inventory
Fall
Winter
Spring
Summer
 Example (Chase)
Problem 2: Chase, no overtime, work hours not flexible
Bakorder Overtime Hiring Firing
Cost Cost Cost Cost
Fall
Winter
Spring
Summer
Inventory Straighttime Total Cost
Holding Cost
Cost
Fall
Winter
Spring
Summer
Tota
 Example (Chase)
Problem 3: Chase, no overtime, flexible hours
Net Production Workers Workers Workers
Production Hours Required Hired Fired
Requirement Required
Fall 9500 19000 40 10 0
Winter 8000 16000 34 0 6
Spring 7000 14000 30 0 4
Summer 12000 24000 51 21 0

Hiring Firing Straight Total

Cost Cost time Cost
Cost
Fall 1000 0 95000 96000
Winter 0 1200 80000 81200
Spring 0 800 70000 70800
Summer 2100 0 120000 122100
Total 370100
 Example (Level)
Problem 4: Constant workforce, no overtime, no shortages
Computation of the workforce to avoid shortages

Production Cumulative Cumulative Workers

Requirement Production units Required
Requirement produced
per worker
Fall 9500
Winter 8000
Spring 7000
Summer 12000
Workers hired Initial hiring cost
Workers fired Initial firing cost
Total workers Initial recruitment cost
Straighttime cost
 Example (Level)
Problem 4: Constant workforce, no overtime, no shortages
Forecast Beginning Actual Ending
Inventory Production Inventory

Fall 10000 500

Winter 8000
Spring 7000
Summer 12000
Inventory Backorder Total cost
Holding Cost
Cost
Fall
Winter
Spring
Summer
Tota
 Example (Level)

Problem 5: Constant 36 workers, no overtime, shortages allowed

Workers hired 6 Initial hiring cost 600

Workers fired 0 Initial firing cost 0
Total workers 36 Initial recruitment cost 600
Straighttime cost 345600
 Example (Level)
Problem 5: Constant 36 workers, no overtime, shortages allowed
Forecast Beginning Actual Ending
Inventory Production Inventory

Fall 10000 500 8640 -860

Winter 8000 -860 8640 -220
Spring 7000 -220 8640 1420
Summer 12000 1420 8640 -1940

Inventory Backorder Total

Holding Cost Cost
Cost
Fall 0 8600 8600
Winter 0 2200 2200
Spring 7100 0 7100
Summer 0 19400 19400
Total 383500
 Example (Level)

Problem 6: Constant 37 workers, overtime to prevent shortages

Workers hired 7 Initial hiring cost 700

Workers fired 0 Initial firing cost 0
Total workers 37 Initial recruitment cost 700
Straighttime cost 355200
 Example (Level)
Problem 6: Constant 37 workers, overtime to prevent shortages
Forecast Beginning Regular Units Units
Inventory Production Available Overtime
Before OT
Fall 10000 500 8880 -620 620
Winter 8000 0 8880 880 0
Spring 7000 880 8880 2760 0
Summer 12000 2760 8880 -360 360

Ending Inventory Overtime Total

Inventory Holding Cost Cost
Cost
Fall 0 0 9920 9920
Winter 880 4400 0 4400
Spring 2760 13800 0 13800
Summer 0 0 5760 5760
Total 389780
 Reading and Exercises
• Chapter 14 Pages 558-571
• Problems 4,5