ON THE DESIGN OF HIERARCHICAL PRODUCTION

PLANNING SYSTEMS
Gabriel R. Bitran, Massachusetts Institute of Technology
Arnold C . Ha,Massachusetts Institute of Technology

ABSTRACT
To provide effective managerial support for decisions related t o production
planning and scheduling processes, it is useful to partition the set of decisions into a
hierarchical framework. In the resulting system, higher level decisions impose con-
straints on lower level actions, and lower level decisions provide the necessary feed-
back to reevaluate higher level actions. The purpose of this paper is to suggest
optimum procedures to deal with the resulting subproblems and to analyze the
interaction mechanisms among the different hierarchical levels. Computational results
are given.

INTRODUCTION
The optimal planning and scheduling of multiproduct seasonal systems has re-
ceived much attention in the operations research literature. Several attempts [5] [6]
[16] [17] have been made to formulate the overall problem as a single mixed-integer
mathematical progamming model to be solved on a rolling horizon basis. However,
these approaches require data such as the forecasted demand of every item for a
complete seasonal cycle (usually a full year). When the systems involve the scheduling
of several thousand items, the data requirements become overwhelming, and the result-
ing planning process becomes unrealistic due to the magnitude of the forecast errors
inherent in detailed long-term forecasts.
Most researchers have realized the difficulties imposed by a detailed formulation
of the problem and have advocated an aggregate approach to production planning [2]
[3] [8] [I41 [I51 [21]. Unfortunately, the process of disaggregation of aggregate
solutions has received little attention. Exceptions are the works of Holt, Modigliani,
Muth, and Simon [14], Winters [22], and, more recently, Hax and Meal [13], Shwi-
mer [ 191 ,Newson [ 1 81 , and Zoller [24] .
In this paper the authors adopt the hierarchical structure recommended by Hax
and Meal [ 131, interpret their heuristics in terms of optimization subproblems, suggest
iterative procedures to optimize the subproblems, and comment on the linking mecha-
nisms that relate the subproblems with one another,

HIERARCHICAL STRUCTURE OF THE PRODUCTION PLANNING PROCESS

To avoid some of the pitfalls of a detailed formulation, a hierarchical approach
for production planning and scheduling has been suggested. In a hierarchical planning
system, decisions are made in sequence. Aggregate decisions are made first and impose

28
19771 DESIGN OF PLANNING SYSTEMS 29

constraints within which more detailed decisions are made. In turn, detailed decisions
provide the feedback to evaluate the quality of aggregate decision-making. Each hierar-
chcal level has its own characteristics, including length of the planning horizon, level
of detail of the required information and forecasts, scope of the planning activity, and
type of manager in charge of executing the plan.
The basic design of a hierarchical planning system includes partitioning of the
overall planning problem and the linkage of the resulting subproblems. An important
input is the number of levels recognized in the product structure. Hax and Meal [I31
identify three different levels.
1. Items are the final products to be delivered to the customers. They repre-
sent the highest degree of specificity regarding the manufactured products.
A given product may generate a large number of items differing in charac-
teristics such as color, packaging, labels, accessories, size, etc.
2. Families are groups of items which share a common manufacturing set-up
cost. Economies of scale are accomplished by jointly replenishing items
belonging to the same family.
3. Types are groups of families whose production quantities are to be deter-
mined by an aggregate production plan. Families belonging to a type nor-
mally have similar costs per unit of production time and similar seasonal
demand patterns.

These three levels are required to characterize the product structure in inany
batch processing manufacturing environments. In practical applications, more or fewer
levels might be needed. The authors will propose a hierarchical planning system based
on these three levels of item aggregation. The system can be extended to different
numbers of aggregation levels by defining adequate subproblems.
The first step in a hierarchical planning system is to allocate production capacity
among product types by means of an aggregate planning model. The planning horizon
of this model normally covers a full year in order to take into proper consideration
the fluctuation demand requirements for the products. The authors advocate the use
of a linear programming model a t this level. The advantages of using such a model will
be discussed in the next section. The major drawback is that a linear programming
model does not take set-up costs into consideration. The implications of this limitation
will be examined in a later section.
The second step in the planning process is to allocate the production quantities
for each product type among the families belonging to that type by disaggregating the
results of the aggregate planning model only for the first period of the planning
horizon. Thus, the required amount of data collection and data processing is reduced
substantially. The disaggregation assures consistency and feasibility among the type
and family production decisions and, at the same time, attempts to minimize the total
set-up costs incurred in the production of families. I t is only a t this stage that set-up
costs explicitly are considered.
Finally, the family production allocation is divided among the items belonging
to each family. The objective of this decision to the maintain all items with inventory
30 DECISION SCIENCES [Vol. 8

levels that maximize the time between family setups. Again, consistency and feasibility
are the driving constraints of the disaggregation process.
An extensive justification of this approach is provided by Hax [9] [lo] and by
Hax and Meal [13]. Figure 1 shows the overall conceptualization of the hierarchical
planning effort. A computer based system has been developed to facilitate its imple-
mentation. The details of such a system are reported elsewhere [ 121. This paper will
concentrate on the methodological issues associated with the system design.

AGGREGATE PRODUCTION PLANNING FOR TYPES

Aggregate production planning is the highest level of planning in the production
system, addressed at the product type level. Any aggregate production planning model
can be used as long as it adequately represents the practical problem under considera-
tion. (For extensive discussions of possible aggregate models, see [4] [ 1 I ] [20] .)
Consider the following simplified linear program at this level.
Problem P
I T T
Minimize Z 2 (citXit + hitlit) t Z (rtRt t otOt),
i=l t = l t= 1
subject to: Xit - Ii,ttL + li,ttL-l = di,ttL , i = l , . . . ,I; t = l , . . . ,T;
I
i= 1
mixit < 0, t Rt , t = l , . . . ,T;

Rt < (rm), , t = l , . . . ,T;

0, (om)t , t = l , . . . ,T;
Xit, lit 2 0 , +I,. . . ,I; t = l , . . . ,T;
Rt,Ot 2 0 , t=l,. . . ,T.
The decision variables of the model are: Xit, the number of units to be produced
of type i during t ; Ii,ttL, the number of units of inventory of type i left over at the
end of period t t L ; and Rt and Ot, the regular hours and the overtime hours used
during period t, respectively.
The parameters of the model are: T, the length of the planning horizon; L, the
length of the production lead time; cit, the unit production cost (excluding labor);
hit, the inventory carrying cost per unit per period; rt and ot, the cost per manhour of
regular labor and of overtime labor; (rm)t and (om)t, the total availability of regular
hours and of overtime hours in period t, respectively; and, mi, the inverse of the
productivity rate for type i in hours/unit. di,t+L is the effective demand for type i
during period t t L . (A definition of effective demand will be presented in a later
section of this paper.)
Whenever seasonal variations are present in the demand pattern of product
types, the planning horizon has to cover a full seasonal cycle. Normally, aggregate
+
.
19771

L
DESIGN OF PLANNING SYSTEMS

stocks, overstock l i m i t s , and

run out times
FIGURE 1
Conceptual Overview of Hierarchical Planning System

Read i n l a s t p e r i o d ' s u s a g e
.
Update Inventory S t a t u s
(Physical Inventory, Amount on
Order, Backorders,
Avai l a b l e I n v e n t o r y )

U pdate demand f o r e c a s t s , s a f e t y

Determine e f f e c t i v e demands
f o r each product t y p e

Aggregate P l a n f o r Types
(Aggregate Planning Reports 1

11

I tem Disaggregation

Deta i l e d S t a t u s Reports
-
* ?

A
31
32 DECISION SCIENCES [Vol. 8

planning models have planning horizons of one year divided into equally spaced time
intervals. If there is a significant production lead time, there should be a frozen
planning horizon equal to the production lead time. Changes in production schedules
normally cannot be made during the length of the frozen horizon since it takes a full
production lead time t o implement the changes. Thus, the decision regarding the
amount to be produced during period t, Xit, has as primary input the effective demand
during period t+L, di,t+L. Figure 2 illustrates the timing implications.

FIGURE 2
Timing Implications in Aggregate Planning

Current Beginning o f
Time Planning
Period Horizon
I I I 1 1 I TIME
I ' 2 ' . . . . . . I L 'L+I1 'L+T' *P€RIOOS
I
r--L+T------cf
LEAD TIME

(Length o f Frozen Horizon) (Length of Planning H o r i z o n )

Whenever the production costs, cit, are invariable with time and whenever the
payroll of regular work force is a futed commitment, then terms citXit and rtRt are
deleted from the objective function. The model simply seeks an optimum aggregate
plan considering inventory holding costs and overtime costs as the basic trade-offs. It is
simple to include in the model other cost factors, such as hiring and firing, backorders,
subcontracting, lost sales, etc. Also, the constraints can represent any number of
technological, financial, marketing, and other considerations.
Linear programming is a convenient type of model t o use at this aggregate level
because of its computational efficiency and the wide availability of linear program-
ming codes. Linear programming also permits sensitivity and parametric analysis to be
performed quite easily. The shadow price information that becomes available when
solving linear programming models can help to identify opportunities for capacity
expansions, market penetrations, introduction of new products, etc.
There are some advantages to an aggregate approach as opposed to a detailed
approach. First, aggregate demands can be forecast more accurately than their
disaggregate components. Second, there is a reduction in computational and data
gathering time because at a given period it is not necessary to forecast detailed demand
for the complete seasonal cycle.
Notice that manufacturing set-up costs purposely are ignored in this aggregate
model formulation. Normally, set-up costs have a secondary impact on determining
19771 DESIGN OF PLANNING SYSTEMS 33

the total production cost. Moreover, the inclusion of set-up costs would force the
model to be defined at a family level and would imply a high level of detail which
would invalidate all the advantages of aggregate planning by generating high computa-
tional costs, forecast inaccuracies, and difficult managerial interactions. Consequently,
set-up costs are considered only at the second level of the hierarchical planning pro-
cess.
Because of the uncertainties present in the planning process, only the first time
period results of the aggregate model are implemented. At the end of every time
period, new information becomes available that is used to update the model with a
rolling planning horizon of length T. Therefore, the data transmitted from the type
level to the family level are the resulting production and inventory quantities for the
first period of the aggregate model. These quantities will be disaggregated among the
families belonging to each corresponding type.

THE FAMILY DISAGGREGATION MODEL

The central condition to be satisfied at this level for a coherent disaggregation is
the equality between the sum of the productions of the families in a product type and
the amount dictated by the higher level for this type. This equality will assure consis-
tency between the aggregate production plan and the family disaggregation process.
This consistency is achieved by determining run quantities for each family that mini-
mize the total set-up cost among families.
The authors propose the following model for family disaggregation, that has to
be solved for every product type i:
Problem Pi
Sjdj
Minimize C - ,
jcJo yj

subject to:
C Yj = x i
* '

jeJo
Qbj Q Yj 6 Ubj , jeJo, (1)
where Y, is.the number of units of family j to be produced; s* is the set-up cost for
J
family j ; d. is the forecast demand (usually annual) for family J; Qbj and ubj are lower
J
and upper bounds for the quantity Yj; and, Xy is the total amount to be allocated
among all the families belonging to type I. X: has been determined by the aggregate
planning model and corresponds to the optimum value of the variable Xi1 since only
the first period result of the aggregate model is implemented.
The lower bound Qbj, which defines the minimum production quantity for fam-
ily j is given by
Qbj=max[O,(dj,l t d j , 2 + . . . t d j , L t l ) - A l j t S S j ] ,
34 DECISION SCIENCES [Vol. 8

where d j J t . . .+ d,,Ltl is the total forecast demand for family j during the production
lead time plus the review period (assumed equal to one); AIj is the current available
inventory for family j (equal to the sum of the physical inventory and the amount on
order minus the backorders); and SS. is the required safety stock, The lower bound Qbj
1
guarantees that any backorders wil be caused by forecast errors beyond those ab-
sorbed by the safety stock SS.
J' .
The upper bound ubj is given by

ubj = OSj - AIj,

where OSj is the overstock limit of family j. When family j has a terminal demand at
the end of its season, OS, can be calculated by means of a newsboy model [23, page
3701.
The objective function of Problem Pi assumes that the family run quantities are
proportional to the set-up cost and the annual demand for a given family. T h s assump-
tion (which is the basis of the economic order quantity formulation) tends to mini-
mize the average annual set-up cost. Notice that the total inventory carrying cost
already has been established in the aggregate planning model; therefore, it does not
enter in the current formulation.
The first constraint of Problem Pi,

c Y. = x;,
jeJo
assures the equality between the aggregate model input XTand the sum of the family
run quantities. It can be shown [ 11 that this condition can be substituted by

c Y. 6 x;
jeJo
without changing the optimum solution to Problem Pi. In what follows the equality
constraint will be relaxed into inequality.
Initially, Jo contains only those families which trigger during the current plan-
ning period. A family is said to trigger whenever its current available inventory cannot
absorb the expected demand for the family during the production lead time plus the
review period, i.e., those families whose current available inventory is such that

AIj<(dj,l + d j , 2 + . . . + d j , L + 1 ) + S S j .

Equivalently, one can define J o as containing all those families whose run-out times
are less than one time period, i.e.,

AIj - SSj
ROTj = < I.
Lt1
dj,t
t= 1
I9771 DESIGN OF PLANNING SYSTEMS 35

I t is necessary to start production for these families in order to avoid future

backorders. All other families are put on a secondary list and will be scheduled only if
extra capacity is available.
The authors will present an efficient algorithm to solve problem Pi through a
relaxation procedure. Optimality and convergence proofs are given in [ 11 . The algo-
rithm consists of initially ignoring the bounding constraints (1) and of solving the
objective function subject to the knapsack restriction (2). Then, a check is made to
verify that the optimum values Yy satisfy the bounds (1). If they d o satisfy the
bounds, the Y ~ constitute
s the optimal solution for Problem Pi. If they do not satisfy
the bounds, at least some of the Yys are shown to be optimal and a new iteration
takes place.

The algorithm (for each product type)

Let s.d. = a,; p = 1,2,. , . . be the counter of iterations; and Jp be the set of
J J
families whose run quantities have not been determined up to the beginning of itera-
tion 0.
In case C ub. < XT, the optimal solution is YT = ub,,jeJo. This case could
jeJo
happen only if (even by scheduling at their upper bounds all those families which
trigger in the current planning period) one could not fill all the production amount
assigned to the corresponding type by the aggregate planning model. In this case, the
remaining capacity is filled by producing families in the secondary list (up to their
upper bounds) ordered iGincreasing run-out time.
When C Qbj> X i Problem Pi is infeasible. This case can happen only when the
jeJo
aggregate production planning model is infeasible since there is not enough capacity to
satisfy the minimum demand requirements of a given product tupe. In this case, one
has backorders. To distribute the possible backorders among the families in product
type i, the following disaggregation is adopted.
(XT - C Qbj)Qbj
jeJo
Y. = Qb. t , jeJ0
J J C Qb:
jeJo-J

This formulation allocates the backorders in proportion to the lower bound Qbj of
each family.
The authors will describe the algorithm assuming C Qbj< XT < C ub,.
jeJo jeJo
Initialization
h t p = 1,P' = X 7 , a n d J ' = Jo.

Step 1: Compute for all jeJb

J a,
YP =
J x G @ , and go to step 2.
jeJfl
36 DECISION SCIENCES [Vol. 8

Step 2: Check, for all jeJP, if !2b, 4 $ < ubj.

J
If yes, Y i = Y., P jeJP ,is optimal; stop.
J
If no, go to step 3.
1
Step 3: Determine !J = { jeJP: Y.P 2 ub, -{set of families which have exceeded
J their upper bounds\;
P = { jeJP: Y
J- 1
! 4 Qbj - (set of families which have run
J quantities lower than their lower
bounds}.
Compute
A = Zp(Y!-ubj) ;V = P
(Qb.-Y.).
jeJ+ J JEJ! J J
(total excess) (total deficit)
Go to step 4.
* P
Step 4: If A 2 V ,define Y = ubj,jeJt.
j
If A < V ,define Y* = Qb,, jeJ-.P
j
Let ptl = JP -- { indices of families defined at their upper or lower
bound at iteration 0).

pP+' = pp_1sum of run quantities of the families deleted from

JP}.
*
If JPtl = @, stop; Y . is optimal. Otherwise, go to step 1.
J
The algorithm is finite because at each iteration the run quantity of at
least one family is determined.

THE ITEM DISAGGREGATION MODEL

For the period in consideration all the costs already have been determined in the
former two levels, and any feasible disaggregation of a family run quantity has the
same total cost. However, the feasible solution chosen will establish initial conditions
for the next period and will affect future costs. In order to save set-ups in future
periods, one could distribute the family run quantity among its items in such a way
that the run-out times of the items coincide with the run-out time of the family. A
direct consequence is that all items of a family will trigger simultaneously. To attain
this objective, the authors propose the following strictly convex knapsack problem for
each family j.
19771 DESlGN OF PLANNING SYSTEMS 37

Problem Pj

7' keKo (A1k-SSk) zk+~lk-ssk

Minimize $5 Z Lt1 - Lt1
keKo dk,t dk,t
keKo t= 1 t= 1

subject to
x z k = Yy
keKo

where Zk is the number of units to be produced of item k; AIk, Ssk, and Osk are
respectively, the available inventory, the safety stock, and the overstock limit of item
k; dk,t is the forecast demand for item k in period t; KO = {1,2,. . .)is the set of indices
of all the items belonging to family j; and, Yy is the total amount to be allocated for
all items belonging to family j. Yy was determined by the family disaggregation model.
The first constraint of problem P, requires consistency in the disaggregation
from family to items. The last two constraints are the upper and lower bounds for the
item run quantities. These bounds are similar to those defined for the family disaggre-
gation model in the previous section.
The two terms inside the square bracket of the objective function represent,
respectively, the run-out time for family j and the run-out time for an item k belonging
to family j (assuming perfect forecast). The minimization of the square of the differ-
ences of the run-out times will make those quantities as close as possible. (The term %
in front of the objective function is just a computational convenience.)
The following transformations are made:
38 DECISION SCIENCES [Vol. 8

The problem Pj is equivalent to the following problem.

Problem Pj

h hk
Minimize !4 X (- - -)',
keKo Dk
subject to

The following algorithm can be proved to be optimal to solve Problem P,. (See Bitran
andHax [ I ] . )

Initialization
0 Dkh
Let h = -, keKO;
k D

A0 = Co (ho - ubk); and, vo = C (Pbk - ho).

k
keKt keK -

Case I) Ao 2 VO.
* 0
I t can be shown that h = ubk, keK+ together with the solution to (PI)below
k
will solve Problem Pj.

h hk
(PI) Minimize !h C (---)',
keK' Dk
subject to hk = h'
keK

where K' = KO - KY ;Q b i = !?bk , keKO

Dkh
Pb; = -, ke(Ko - KY - KO)
D
h' = h- CoUbk.
keKt
19771 DESIGN OF P1,ANNING S YSTEMS 39

A n algoritlini to solve (PI)

0 t w ke(K'
-
Let Q b i = Qbk,keK -; QbI<= - and h*, keK' be the optimal
- KO);
k
D
solution to (Pl).

Case 2 ) Vo > Ao.

* 0
I t can be shown that h = Qbk,keK - together with the solution of (P2) below
k
will solve Problem Pj.

h hk 9
(P2) Minimize % C (-- -)-,
keK1 Dk
40 DECISION SCIENCES [Vol. 8

subject to

where K 1 = KO -KO; u b i = Ubk, keKt0

D h 0
1
Ubk = k ,ke(K' - Kt)
S

An algorithm to solve (P2)

I
Solve in thelsame way as the flow chart (PI),but use Ubk instead of Ubk and use
Qbkinstead of tbk.

ISSUES OF INFEASIBILITY AND DEMAND FORECASTS

The rolling horizon aggregate planning procedure combined with disaggregation
may lead to infeasibilities. This section will illustrate how the infeasibilities can occur
and will suggest a way to eliminate them. To simplify the explanation one may assume
that a perfect forecast exists and that every family is composed of a unique item, i.e.,
the disaggregation consists as passing directly from the aggregate solution to detail
schedules.
A simple problem consisting of 1 product type (i=l), 2 items (k=l,2), a planning
horizon of 3 time periods (t=1,2,3), and zero production lead time, will be considered.
The aggregate constraints are
10 -I XI - I 1 = dl;

12 -I X3 - l3 = d3.

(Nonnegativity constraints)
The detailed constraints are

Ik,O zk,l - Ik,l -- dk, j , k=1,2;

19771 DESIGN OF PLA NNING SYSTEMS 41

DEMAND
Initial
Item Period t = l Period t=2 Period t=3 Inventory

k= 1 d l 1=5 d12=17 d 1 3'30 1 10'9

k=2 d2 ]=3 d22'12 d23=30 120=20
Total d 1=8 d2=29 d3=6O Ip29

EFFECTIVE DEMAND
Initial
Item Period t = l Period t=2 Period t=3 Inventory

k= 1 d l 1=0 d12=13 d 13=30 0

k=2 d2 1=0 d22=0 d23=25 0
Total d 1=0 d2=13 d3=5 5 0
42 DECISION SCIENCES [Vol. 8

The effective demand for a type i is given by the sum of the effective demands of all
items belonging to a given type, i.e.,

The hierarchical planning system operates as follows.

1 . An aggregate forecast is generated for each product type for each time
period in the planning horizon. Since the number of types normally is
reasonably small, these forecasts can be produced by using fairly sophisti-
cated forecasting models (such as regression analysis) which would be pro-
hibitively expensive to employ at the item level due to the extensive num-
ber of items present in most manufacturing environments. In addition,
these forecasts can be reviewed by experienced managers in order to intro-
duce judgemental inputs which the models cannot capture.
2. The type forecasts are disaggregated into item forecasts by forecasting the
proportion of the total type demand corresponding to each item. These
proportions can be updated by using exponential smoothing techniques
which are appropriate to apply at a detailed level. Item and family forecasts
only are required for a single time period in the models presented.
3 . After updating the available inventory for each item, the effective item
demand is obtained by applying expression ( 3 ) above. Whenever the initial
inventory exceeds the first period demand, expression (3) requires item
forecasts for successive periods in the planning horizon. Using exponential
smoothing techniques, one can obtain these by making trend and/or season-
ality adjustments to the initial period forecast.
4. The effective demand for types is obtained from expression (4).
Computer programs that carry out the necessary calculations are discussed in reference
1121.

COMPUTATIONALRESULTS
The authors conducted a series of experiments to examine the performance of
the hierarchical system to determine the size of forecast errors, capactiy availability,
magnitude of setup costs, and nature of the planning horizon.
The data used for these tests were taken from a manufacturer of rubber tires.
The product structure characteristics and other information are given in Figure 3 .
Figure 4 exhibits the demand pattern for both product types. Product type 1 has a
terminal demand season (corresponding to the requirements of snow tires) and consists
of two families and five items. Demand for product type 2 is highly fluctuating
throughout the year. Product type 2 has three families and six items. Families are
groups of items sharing the same molds in the curing presses and, therefore, sharing a
common set-up cost. The items are, for instance, white wall and regular wall tires of a
given class. Families and items have the same cost characteristics and the same produc-
tivity rates as their corresponding types.
19771 DEStGN OF PLANNING SYSTEMS 43

FIGURE 3
Product Structure and Other Relevant Information

PRODUCT S T RUC TURE

/ P2F I
/T\ P2F2 P2F3

ri 12 i3 I1 12

Family setup cost = S 9 0 Fomily setup cost $120

H o l d i n g cost = S . 3 I l m i t a month H o l d i n g cost = S .4Wuni t o month
Overtime cost = S9 5/hour Overtime cost = 59.5lhour
P r o d u c t i v i t y f a c t o r = .I h r l u n i t P r o d u c t i v i t y f a c t o r = .2 h r s l u n i t
P r o d u c t i o n l e a d time = I month Production l e o d t i m e = I month

Regular Workforce Costs and Unit P r o d u c t i o n Costs a r e considered f i x e d costs

T o t a l Regular Workforce = 2000 hrslmonth

T o t a l O v e r t i m e Workforce = 1200 h r s l m o n t h

The experiments consisted of applying the production planning system to a full

year of simulated plant operations. Production decisions were made every four weeks
at which time a report was generated identifying aggregate as well as detailed decisions.
The model was then updated using normally a one year rolling planning horizon. The
process was repeated thirteen times. At the end of the simulation, total set-up costs,
inventory holding costs, overtime costs, and backorders were accounted for. A sum-
mary of eleven different simulation runs is provided in Figure 5 . The simulations were
implemented in the Computer Based Operations Management System (COMS) devel-
oped at M.I.T. [12]. Appendix I gives a sample of the computer output for Run 1.
Run 1 can be regarded as the base cuse. It has n o forecast errors, a planning
horizon of one year divided into thirteen periods of four week durations each, a
normal capacity (defined as 2000 hours of regular time and 1200 hours of overtime
per period), on a normal setup costs ($90 per family belonging to product type 1 and
$120 per family belonging to product type 2). All other runs include some variation of
the characteristics of Run 1 .
44 DECISION SCIENCES [Vol. 8

FIGURE 4
Demand Patterns of Product Types

TIME PERIOD PRODUCT TYPE I PRODUCT TYPE 2

t PI P2

I 12,736 6 , I74
2 7,813 2,855
3 0 4,023
4 0 4,860
5 0 7,131
6 0 9,665
7 1,545 17,603
8 7;895 14,276
9 10,982 11,706
10 15,782 15,056
II 16,810 8,232
12 I5,870 7,880
13 9,878 10,762

TOTAL 99,371 120,223

1. Sensitivity to Forecast Errors.

Runs 1, 2, and 3 show the impact of forecast errors in production planning
decisions. Forecast errors are uniformly distributed in intervals of the type [-a, +a]
and are introduced in all three levels. Moreover, the demands of families in a same
product type and the demands of items in a family add to the demand of the product
type and the demands of items in a family add to the demand of the product type and
of the family, respectively. Increasing forecast errors causes the quality of the deci-
sions to deteriorate. Both cost and size of backorders increase when forecast errors
begin to escalate. However, the system performs reasonably well even under forecast
errors of up to 30%. (The 6243 units backordered in Run 3 represent a 97% service
level.) These results show that aggregate forecasts can be more accurate than detailed
forecasts and thus provide an important justification for the hierarchical approach.
2 . Sensitivity to Changes in Set-up Costs.
The values imputed to the set-up costs in the base case (Run 1) were realistic
measures of actual set-up costs incurred in normal manufacturing operations. They
included direct set-up costs (manpower and materials) as well as opportunity costs for
having the machines idle while performing the changeover. The authors wanted to test
 FIGURE 5
Summary of Computational Results with Proposed Hierarchical Planning System

I 2 3 4 5 6
H i g h Setup Cost High Setup Cost
CASE I CASE II TIGHT CAPACITY
BASE CASE Forecast 30% Forecast P I : 5000, Jo P I : 6000 4500 1600Reg. Hrs
No Forecast P2: 400,!bOO,jooo
Errors Errors Errors NL21&:f%lS%i NO FORECAST ERROR No FORECAST

SETUP 5,360 5,360 5,250 67,050 104,800 4,480

HOL DING 73,61 I 7 6,577 72,374 72,597 I 15,072
OVER TIME 187::?1? 1 81,425 82,365 81, I I I 8 I , 102 I I 7 , 4 39 0
11
164, 192 220,535 2 58 , 4 9 9 236,99 I
I BACKORDERS I ,51 3 6,243 10 4 I44

7 e 9 10 II

6- MONTH 6-MONTH 6-MONTH 1-1-1-1 -3-6

CAPACITY
PLANNING HORIZON PLANNING HORIZON PLANNING HORIZON PLANNING H O R I Z O N
2500 Reg. H r s
NORMAL CAPACITY TIGHT C A P A C I T Y NORMAL CAPACITY NORMAL CAPACITY
COMPONENTS No FORECAST "'OR
NO FORECAST ERROR NO FORECAST ERROR K)OkFORECAST ERROR NO FORECAST ERROR

5,910 5,690 5,030 5,690 5,250

1Ez:YNG I 56,002 6 7 , 2 12 83,983 64,971 78,052
OVERTIME 48,507 88,597 103, 332 90,773 75,440

TOTAL COST 110,419 16 I , 4 9 9 192,345 161,434 158 ,7 4 2

BACKORDERS 0 0 I6 , 6 5 8 2,951 73
46 DECISION SCIENCES [Vol. 8

the system’s performance under extreme set-up cost conditions. Thus, Runs 4 and 5
were made with the following set-up cost characteristics.

Type 1 Type 2

Family 1 Family 2 Family 1 Family 2 Family 3

Run 4 5000 50 400 400 1000

Run 5 6000 4500 400 5000 3000
Base Case-
Run 1 90 90 120 120 120

Naturally, the total cost associated with Runs 4 and 5 increases significantly.
Runs 1, 4,and 5 are almost identical in terms of inventory holding costs and overtime
costs, and thus indicate that the overall production strategies for these runs do not
change much. This situation suggests a limitation of the hierarchical approach when
applied to situations with extremely high setup costs, for one expects a high inventory
accumulation to obtain a better balance between inventory and set-up costs.
3 . Sensitivity to Gzpacity Availability
Runs 6 and 7 evaluate the performance of the system under different capacity
conditions. Run 6 uses only 1600 hours of regular capactiy per period; Run 7 expands
the regular capacity to 2500 hours. As indicated in the results in Figure 5 , the system’s
performance is quite sensitive to capacity changes. Under tight capacity there is a
significant increase in both costs and backorders; the opposite is true under loose
capacity. Clearly, the system can be useful in evaluating proposals for capacity expan-
sion.
4.Sensitivity to Changes in Planning Horizon Characteristics.
Runs 8 , 9 , 10, and 11 experiment with various lengths of the planning horizon
under different conditions. Shortening the planning horizon from 13 periods to 6
periods does not affect the system’s performance under normal capacity conditions.
(Compare Runs 1 and 8 and Runs 2 and 10.) However, the size of backorders begins to
increase significantly when the planning horizon is shorter and under tight capacity
conditions (Run 9).
Run 11 deals with an aggregation of time periods in the planning horizon. The
length of the planning horizon is a full year divided into six time periods of uneven
lengths. Each of the first four periods has a four-week duration; the fifth period covers
twelve weeks (an aggregation of three four-week periods); and, the sixth period covers
twenty-four weeks (an aggregation of six four-week periods). Run 11 shows a perform-
ance similar to that of the base case. This result indicates that this type of aggregation
of the planning horizon could be useful in many situations since it improves the
forecasting accuracy in more distant time periods and reduces the computational
effort of processing the system without experiencing a decline in performance.
19771 DESIGN OF PLANNING SYSTEMS 47

5. Degree of Suboptimization
Although the proposed hierarchical planning system provides optimum solutions
to the subproblems that deal with individual decisions at each level, it is not an overall
optimum procedure. Set-up costs are ignored at the aggregate planning level and thus,
suboptimization possibilities are introduced. To determine how serious this suboptimi-
zation problem can be, the authors developed a detailed mixed iteger programming
(MIP) model at a detailed item level to identify the true optimal solution to the test
problem. The MIP model was implemented by means of IBM’s MPSXlMIP code, which
is a general purpose branch and bound algorithm.
Due to the expensive computational cost of solving MIP models, the authors
limited the comparisons between the hierarchical planning system and the MIP model
to situations which contained no forecast errors and for which the optimum yearly
cost could be obtained by solving the MIP model only once. (If forecast errors had
been introduced, each run would have required solving the MIP model 13 times.)
MIP solutions were computed for three of the previous runs: the base case (Run
I f ) , the first high setup cost run (Run 4’), and the tight capacity run (Run 6’). The
MIP results are given in Figure 6 . The existing limits on the node tables of the branch
and bound code used did not allow one to determine the true optimum in the MIP
runs. Therefore, the solutions reported in Figure 6 might be improved. Figure 6 also
provides the continuous lower bounds obtained when the computations were inter-
rupted. For all practical purposes, one could consider the solutions corresponding to
Runs 1’ and 6’ to be optimal. Run 4’ possibly could be improved.

FIGURE 6
Summary of Computational Results with Mixed Integer Programming Models

7
COMPONENT

SETUP
BASE CASE

4,590
CASE I

P2: 400,400,1000

48,050
6’

TIGHT CAPXITY
1600 Reg. Hrs.

3,930
HOLDING 75 ,9 5 3 79,880 115,872
OVERTIME 7 7 ,7 9 6 75,430 Il7,430

TOTAL COST
( B e s t known 158,339 203,360 237,232
solution)

LOWER BOUND 153,926

I 162,783 233 ,665
48 DECISION SCIENCES [Vol. 8

By comparing the total costs of the three runs, one can see that the hierarchical
planning system is extremely efficient. Only under abnormally high set-up costs might
the system’s performance begin to depart significantly from the overall optimal solu-
tion.

Best known
Hierarchical Svstem MIP solution
Base Case 158,981 158,339
High Setup Cost 220,535 203,360
Tight Capacity 236,99 1 237,232

In summary, the proposed hierarchical system seems to perform quite near the
optimum when moderate set-up costs are present. The base case cost, which reflected
the operating data of the tire industry,, is only 0.4 percent higher than the best know
optimum solution obtained by the MIP formulation. However, each run of the hierar-
chical system cost about $5, while the corresponding MIP run cost about $50. The
MIP approach would be computationally impossible to carry out for large problems.
Moreover, the hierarchical system appears to offer coherent solutions for reasonable
changes in forecast errors, for capacity availabilities, and for planning horizon lengths.
Extremely high set-up costs could affect the performance of the system. In
practice, families with very high set-ups are candidates for continuous production (as
opposed to batch production) if they have a high level of demand. In such cases,
families can be handled independently of the prescribed system. In situations in which
there are few high set-up families with low demand, special constraints can be imposed
on the family disaggregation model to produce those families in large enough quanti-
ties by setting the lower bound of the family to its unconstrained economic order
quantity. When all of the families in the product structure have high set-up costs and
low demand levels, it may not be desirable to eliminate set-up costs at the aggregate
level. In such a situation, one could eliminate the aggregate planning model for prod-
uct types, allocate production quantities at the family level by using an approach
similar to that proposed by Lasdon and Terjung [ 161, and apply the item disaggrega-
tion model to allocate the family production quantities among items.

INTERACTIONS AMONG HIERARCHICAL LEVELS

In this discussion the hierarchical planning process has not allowed any feedback
from the lower to the upper levels. Such feedback might be needed to modify some of
the higher level decisions in view of the observed performance at the lower levels. This
section explores some mechanisms of interaction among the different levels. These
mechanisms change high level optimal solutions by incorporating conditions not in-
cluded initially in the models.
One situation in which modifications of the intitial production decisions might
be desirable presents itself when, after solving the item disaggregation model (Problem
19771 DESIGN OF PLANNING SYSTEMS 49

P.), the optimal value of the objective function is positive. This result means that all
t i e items belonging to a specific family j will not be expected to trigger exactly at the
same time, i.e., it is not possible to obtain a complete equalization of run-out times for
all the items belonging to family j. This situation could occur because the main
knapsack constraint in Problem Pj is an equality which forces the full allocation of the
family run quantity Y, among its items. Meanwhile, for another family j' none of its
items may have reached the upper bound; one could increase the production quantity
Y,' allocated to that family without destroying the simultaneous trigger of its items.
One possible modification is to solve Problem P. with inequality instead of
1
equality in the knapsack constraint. The new formulation IS
Problem Pj Q.
h hk
Minimize '/r L: (- --)2,
keKo Dk

subject to L: h k 6 h
keKo

The solution to this problem is similar to the solution proposed to Problem

Pj[lI:

Let

Ao = L:
keK,
($ - ubk);
0
v0 = z (Qbk - hk).
keK-

Case 1) If Ao 2 Vo,the following solution is optimal:

Case 2) If V o > Ao, the problem is equivalent to Problem P2.

Use the algorithm described for (Chse 2) in the earlier section entitled The Item
Disaggregation Model.
50 DECISION SCIENCES [Vol. 8

For a futed period t the following definitions are introduced.

Definition 1: A family is said to be a receiver if for all its items k, Pbk < hk < pbk (in
which the h i s are obtained by solving the corresponding Problem Pj
a.
Definition 2: A family is said to be a donator if Problem Pj 4 solves with strict
inequality.
Note that definitions 1 and 2 are mutually exclusive.
The amount that can be donated by a family (A$,) is the difference between the
resources assigned by the higher level and those obtained when solving (Pj 9).When-
ever resources are transferred among product types, it is necessary to resolve the
aggregate linear programming problem (P) with extra constraints to establish upper
bounds (lower bounds) for the resources assigned to a product type donator (receiver)
to be sure that this redistribution will not create backorders in a future period.
The reallocation of A$, depends upon the priorities established by a manager. In
the case of an interactive computer package, he may try several redistributions and
choose the most adequate; he may also change the priorities. An example is given of
how one can transfer resources A$ from a family donator to a family receiver, jo, that
belongs to the same product type.
Suppose that all items in family jo have run quantities
Pbk < hk <Ubk;
the problem is to allocate to family jo the maximum possible amount of resources
without destroying the property of simultaneous trigger of its items.
Suppose hjo is the resource previously assigned to family j,.

The maximum amount that can be assigned to the family is tj obtained in the
0
following way:
J&(hjo + tjo)
9 Ubk, or equivalently
D
DoUbk
tjo = min (min (- - hj0), &j0).
i Dk
After this operation, one is left with an amount of resources equal to aQtj
0
> 0.
If this amount is still positive, one could distribute it among the family donators
by solving Problem P. (instead of Pj a.
This methodofogy provides some basis for an interactive procedure that would
allow for some feedback mechanism to be explored.
Acknowledgement
This paper was partially supported by the Office of Naval Research under con-
tract N00014-75-C-0556.
19771 DESIGN OF PLANNING SYSTEMS 51

APPENDIX I

SAMPLE OF COMPUTER OUTPUTS

This appendix provides a sample of the computer outputs for Run 1.
Figure 111.1 gives the aggregate planning model results for time period 8. Figure 111.2
provides the corresponding disaggregation for family and item levels for time period 8. The follow-
ing notation is applicable to that output.

Field

Item-no Name of the item.

cost Unit cost of the item
si Seasonal index (y means the items is seasonal,n means
the item is not seasonal).
abc ABC classification.
dem-1 Actual last periods demand.
forc-1 Forecast of last periods demand.
avgi Average inventory last period ((beginning inventory +
ending inventory)/2).
bo-1 Backorders for the last period.
Is-1 Lost sales, last period.
Pi Physical inventory, beginning of this period.
aoo Amount on order, beginning of this period.
bo Backorders, beginning of this period.
ai Available inventory, beginning of this period.
forc Forecast of demand for this period.
OP Order Point.
feoq Family Order Quantity.
0sl Overstock Limit.
rot Run-out Time.
order Order amount to be placed at the beginning of this period.

Finally, Figure 111.3 gives the summary performance for the simulation covering a full year
of operations.
52 DECISION SCIENCES [Vol. 8

FIGURE III.1
Aggregate Planning Model Results:Time Period 8
* * a *aggregate production plan over a 13 month planning horizon boginning perlod 8. ****
** product type p l **
system unadjusted effrctive planned ending
period demands demands production lnvrntory backordrrs
8. 10982. 109 34. I 0 9 34. 0. 0.
9. 15782. 15782. I5 7 8 2 . 0. 0.
10. 16870. 16870. 16870. 0. 0.
I I. 15870. 15870. 15870, 0. 0.
12. 9878. 9878. 9878. 0. 0.
13. 12736. 12736. 12136. 0. 0.
I. 78 13. 7 8 13. 7 8 13. 0. 0.
2. 0. 0. 0. 0. 0.
3. 0. 0. 0. 0. 0.
4. 0. 0. 0. 0. 0.
5. 0. 0. 0. 0. 0.
6. 1545. I545. I 5 4 5. 0. 0.
7. 7895. 7895. 7895. 0. 0.

'*product type p 2 **
system unadjusted e f f a c t ive planned ending
period demands demands produ c t i o n Inventory bac k o r d e r s
8. I 1706. 5463. 10412. 4949. 0.
9. 15056. 12391. 8 109. 667. 0.
10. 8232. 8232. 7565. 0. 0.
I I. 7880. 7880. 7 880. 0. 0.
12. 10762. 10762. 10762. 0. 0.
13. 6174. 6 174. 6 174. 0. 0.
I. 2 85 5. 2855. 2 8 55. 0. 0.
2. 4 0 2 3. 4 0 23. 6278. 2255. 0.
3. 4860. 4860. I 0000. 7395. 0.
4. 7131. 7131. IOOOO. 10264. 0.
5. 9665. 9665. IOOOO. 10599. 0.
6. 17603. 17603. S 2 28. 2223. 0.
7. 14276. I 4 2 76. 12 0 5 3 . 0. 0.
"""*anticipated resource u t i l i z a t i o n over the plonning h o r i z o n ****
period regular hours overtime hours
8. 2000. I 176.
9. 2 000. I 2 00.
10. 2000. 12 00.
I I. 2 000. 1163.
12. 2000. 1140.
13. 2000. 508.
1. 2000. 0.
2. 2000. 0.
3. 2 000. 0.
4. 2000. 0.
5. 2000. 0.
6. 2000. 0.
7. 2000. 1200.

over t i m e cost i n i t i a l p e r i o d 11170.021

19771 DESIGN OF PLANNING SYSTEMS 53
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19771 DESIGN OF PLANNING SYSTEMS 55

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