IES 371

Engineering Management
Chapter 14: Aggregate Planning
Week 13
August 31, 2005
Learning Objectives:
Understand the concepts and methods of aggregate planning
Formulate and solve capacity planning problem

Aggregate Plan
Aggregate Plan: A statement of a companys production
rates, workforce levels, and inventory holding based
on estimates of customer requirements and capacity
limitations

Service Industry

Staffing Plan
Regarding staffs and
labor related factors

Manufacturing Industry

Production Plan
Regarding production
rates and inventory
2

Aggregate Production Planning (APP)

Determines resource capacity to meet

demand

For intermediate time horizon, 6-12 months

Not feasible to build new facility

May be feasible to hire/lay off workers,

overtime, or subcontract
Adjusting capacity OR managing demand

How should an aggregate plan fit with other plans?

Business
or annual
plan
Production
or staffing
Plan (Aggregate Plan)
MPS or
workforce
schedule
Figure 14.1

Aggregate Plan Managerial Inputs

Distribution and marketing
Customer needs
Demand forecasts
Competition behavior

Operations
Current machine capacities
Plans for future capacities
Workforce capacities
Current staffing level

Materials
Supplier capabilities
Storage capacity
Materials availability

Aggregate
plan

Engineering
New products
Product design changes
Machine standards

Accounting and finance

Cost data
Financial condition
of firm

Human resources
Labor-market conditions
Training capacity
5

Aggregate Plan Outputs

Aggressive Alternatives
Complementary
Products

Competitive
Pricing

Reactive Alternatives
Size of
Workforce and
Workforce Adjustment

Inventory
Levels

Aggregate
plan

Production
per month
(in units or $)

Units or dollars
Of Backlogs,
backorders , or
stockout

Units or
dollars
subcontracted

Aggregate Planning Objectives

Minimize Costs/Maximize Profits

Maximize Customer Service

Minimize Inventory Investment

Minimize Changes in Production Rates

Minimize Changes in Workforce Levels

Maximize Utilization of Plant and Equipment

Demand
Units

Examples of Capacity
Adjustment to Meet
Demand

Time
1.

Producing at a constant rate and using inventory to absorb

fluctuations in demand

2.

Hiring and firing workers to match demand

3.

Maintaining resources for high demand levels

4.

Increase or decrease working hours (overtime and undertime)

Subcontracting work to other firms
Using part-time workers
Providing the service or product at a later time period
(backordering)

5.
6.
7.

Planning Strategies

Chase Strategies

PURE
STRATEGIES

Level Strategies

Match demand during the planning horizon by

either
Vary workforce or vary output rate

Maintain a constant workforce level or

constant output rate during the planning
horizon
Constant workforce or constant output rate

Mixed Strategies

Combined several strategies

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Pure Strategy
Level Production

Chase Demand

Demand

Demand
Production
Units

Units

Production

Time

Time

What are pros / cons of these strategies?

10

TABLE 14.1

PLANNING STRATEGIES FOR AGGREGATE PLANS

Possible Alternatives
during Slack Season

Possible Alternatives
during Peak Season

1. Chase #1: vary workforce

level to match demand

Layoffs

Hiring

2. Chase #2: vary output

rate to match demand

Layoffs, undertime,
vacations

Hiring, overtime,
subcontracting

3. Level #1: constant

workforce level

No layoffs, building
anticipation inventory,
undertime, vacations

No hiring, depleting
anticipation inventory,
overtime, subcontracting,
backorders, stockouts

4. Level #2: constant

output rate

Layoffs, building anticipation inventory,

undertime, vacations

Hiring, depleting anticipation inventory, overtime, subcontracting,

backorders, stockouts

Strategy

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Aggregate Planning Costs

Regular-Time Costs
Overtime Costs
Hiring and
Layoff Costs
Inventory
Holding Costs
Backorder and Stockout Costs

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Ex 1 Candy Company
Given the following costs and quarterly sales forecasts of a candy
company, compare the two strategies:
Strategy 1: Level production with constant workforce level
Strategy 2: Chase production by varying workforce level
Quarter
Spring
Summer
Fall
Winter

Sale Forecast
(LB)
80,000
50,000
120,000
150,000

Hiring cost
Firing cost
Inventory carrying cost

Production rate per

employee
Beginning workforce

$100 per worker

$500 per worker
$0.50 per pound per
quarter
1000 pounds per
quarter
100 workers
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A method of LP
Gather all cost info
into one matrix
Try to obtain the
lowest cost alternative

Quarter

Transportation
Method

Alternatives

Quarter
1

Beginning
inventory

Regular
time

Regular
time
Overtime

Subcontract
Regular
time
3

Overtime

Subcontract
Regular
time

3h

4h

r+h

r+2h

r+3h

R1
c+h

c+2h

c+3h

O1
s

s+h

s+2h

s+3h

S1
r+b

r+h

r+2h

R2
c+b

c+h

c+2h

O2
s+b

s+h

s+2h

S2
r+2b

r+b

r+h

R3
c+2b

c+b

c+h

O3
s+2b

s+b

s+h

S3
r+3b

r+2b

r+b

R4
c+3b

2h

Overtime

Subcontract

I0

c
1

Unused
Total
Capacity Capacity

c+2b

c+b

Overtime

O4
s+3b

s+2b

s+b

Subcontract

S4

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Requirements

D1

D2

D3

D4 + I4

Notations
It = inventory at the end of period t (I0 = beginning inventory)
h = holding cost per unit per period,
r = regular production cost per unit,
o = overtime cost per unit,
u = undertime cost per unit
s = subcontracting cost per unit,
b = backordering cost per unit per period
Rt = regular-time capacity in period t
Ot = overtime capacity in period t
St = subcontracting capacity in period t
Dt = forecasted demand for period t
U = total unused capacities
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Tableau Method

Step 1: Put all capacities from the total capacity column

into the unused capacity column. Next, put unit costs in
each of the small boxes
Step 2: In column 1 (period 1), allocate as much
production as you can to the cell with the lowest cost but
do not exceed the unused capacity in that row or the
demand in that column.
Step 3: Subtract your allocation from the unused capacity
for the row. This quantity must never be negative.

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Tableau Method

(Contd)

Step 4: If there is still some demand left, repeat step 2,

allocating as much production as possible to the cell with the
next-to-lowest cost. Repeat until the demand is satisfied.
Step 5: Repeat steps 2 through 4 for periods 2 and beyond. Take
each column separately before proceeding to the next. Be sure to
check all cells with unused capacity for the cell with the lowest
cost in a column.

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Ex 2: Transportation Method
Given the following costs and quarterly sales forecasts, use
the transportation method to design a production plan.
What is the total cost of the plan?

Quarter

Sale Forecast
(unit)

1
2
3
4

50,000
150,000
200,000
52,000

Inventory carrying cost = $3 per unit per quarter

Production/worker = 1000 units/quarter
Regular workforce = 50 workers
Overtime capacity = 50,000 units
Subcontracting capacity = 40,000 units
Regular production cost = $50/unit
Overtime production cost = $75/unit
Subcontracting cost = $85/unit
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Linear Programming Model (LP)

Pure/Mixed Strategy: not guarantee optimal solution

LP: can get optimal solution
LP: Excel, LINGO, CPLEX,
LP Formulation**

Objective function
Constraints

Ex 2: Formulate LP model for Ex 1 Candy Company and Ex 2

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