LESSON 9: AGGREGATE PLANNING

EXAMPLES
Outline
Examples
Chase Strategy
Level Strategy
Optimization

Two Simple Strategies

Chase strategy
Produce as much as needed
Zero inventory, no holding cost, no shortages
Zero inventory is difficult to achieve because work
hours may not be flexible
Low inventory costs, high smoothing costs
Level strategy
Produce a constant amount each period
Stable workforce, no hiring/firing, no overtime,
no subcontract
Low smoothing costs, high inventory costs

14000
12000
10000
8000
6000
4000
2000
0

Period

m
er
Su
m

Sp
rin
g

W
in
te
r

ll

Demand
Production

Fa

Number of Units

Chase Strategy

Cumulative Number of Units

Chase Strategy
40000
35000
30000
Cumulative
Demand
Cumulative
Production

25000
20000
15000
10000
5000
0
Fall

Winter

Spring

Periods

Summer

14000
12000
10000
8000
6000
4000
2000
0

Period

m
er
Su
m

Sp
rin
g

W
in
te
r

ll

Demand
Production

Fa

Number of Units

Level Strategy

Cumulative Number of Units

Level Strategy
45000
40000
35000
30000
25000
20000
15000
10000
5000
0

Cumulative
Demand
Cumulative
Production

Fall

Winter

Spring

Periods

Summer

Optimization
The chase and level strategies are two extreme
strategies. Chase strategy minimizes inventory costs
and level strategy minimizes smoothing costs. The
goal of optimization is to identify a production plan
that minimizes the total inventory and smoothing
costs.This can be done using linear programming.
Lesson 10 discusses the application of linear
programming using Excel Solver.

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

Fall
Winter
Spring
Summer

Fall
Winter
Spring
Summer

10000
8000
7000
12000
Overtime
Hours

Beginning Production Production Production

Inventory Required
Hours
Hours
Required Available
500

Workers
Hired

Workers
Fired

Actual
Production

Ending
Inventory

Example
Problem 1 sample computation:
Production required in fall = forecast in fall - beginning
inventory in fall = 10,000 - 500 = 9,500
Production hours required in fall = production required in
fall / productivity in units per worker = 9,500 / 0.50 = 19,000
hours
Production hours available in fall = 30 workers 60 days
per season 8 hours per day = 14,400 hours
Overtime and temporary workers are not available in fall
Actual production in fall = production hours available in fall
productivity in units per worker = 14,400 0.50 = 7,200
units

Example
Problem 1 sample computation (continued):
Ending inventory in fall = actual production in fall
- production required in fall = 7,200 - 9,500 = -2,300 units
Beginning inventory in winter = ending inventory in fall
= -2,300 units
Overtime hours required in winter = production hours
required - production hours available = 20,600 - 14,400 =
6,200 hours
Actual production in winter = (production hours available in
winter + overtime hours in winter) productivity in units per
worker = (14,400+6,200) 0.50 = 10,300 units

Example
Problem 1 sample computation (continued):
Workers hired in summer = (production hours required in
summer - production hours available in summer) / number
of working hours per worker in summer [Note: the result
should be rounded up, the number of workers is an integer
and enough workers should be hired to avoid shortages]
= (23,600-14,400)/(60 days per season 8 hours per day)
= 19.167 rounded up to 20
Note: Actual production in summer is 11,800 units, as
much as required. The assumption is that temporary
workers will not work for full 480 hours, but only as much
as needed. So, they can be stopped after producing 11,800
units.

Example
Problem 1: The original problem
Backorder
Cost

Overtime
Cost

Hiring
Cost

Fall
Winter
Spring
Summer
Inventory Straighttime
H. Cost
Cost
Fall
Winter
Spring
Summer

Total cost

Total
Cost

Firing
Cost

Example
Problem 1 sample computation:
Straighttime cost in summer = actual production hours
$5 per hour = 23,600 hour 5 per hour = $118,000
Note: the actual production hour in summer is the same as
production hours required in summer because sufficient
number of temporary worker are hired and the temporary
workers can be stopped after producing the required
amount of products.

Example (Chase Strategy)

Problem 2: Chase, no overtime, work hours not flexible
Forecast Beginning
Net
Production Workers
Inventory Production
Hours Required
Fall
Winter
Spring
Summer

Fall
Winter
Spring
Summer

10000
8000
7000
12000
Workers
Hired

500

Workers
Fired

Actual
Production

Ending
Inventory

Example
Problem 2 sample computation:
Workers required in fall = production hours required in fall /
number of working hours per worker in fall [Note: the result
should be rounded up, the number of workers is an integer
and enough workers should be hired to avoid shortages]
= 19,000/ (60 days per season 8 hours per day)
= 39.583 rounded up to 40
Number of workers hired in fall = Number of workers
required in fall - number of workers available in the
beginning of fall = 40 - 30 = 10

Example
Problem 2 sample computation (continued):
Actual production in fall = Number of workers available in
fall 60 days per season 8 hours per day 0.5 units per
worker per hour = 40 60 8 0.50 = 9,600 units
Ending inventory in fall = actual production in fall production required in fall = 9,600--9,500 = 100 units
Beginning inventory in winter = ending inventory in fall = 10
units
Number of workers fired in winter = Number of workers
available in the beginning of winter - number of workers
required in winter = 40 - 33 = 7.

Example (Chase Strategy)

Problem 2: Chase, no overtime, work hours not flexible
Hiring
Cost
Fall
Winter
Spring
Summer
Total

Firing
Cost

Straight
time
Cost

Inventory
Holding
Cost

Total
Cost

Self Study

Example (Chase Strategy)

Problem 3: Chase, no overtime, flexible hours

Net Production
Production
Hours
Requirement Required
Fall
9500
19000
Winter
8000
16000
Spring
7000
14000
Summer
12000
24000

Fall
Winter
Spring
Summer
Total

Hiring
Cost

Firing
Cost

1000
0
0
2100

0
1200
800
0

Workers
Required

Workers
Hired

Workers
Fired

40
34
30
51

10
0
0
21

0
6
4
0

Straight
time
Cost
95000
80000
70000
120000

Total
Cost
96000
81200
70800
122100
370100

Example (Level Strategy)

Problem 4: Constant workforce, no overtime, no shortages
Computation of the workforce required for avoiding shortages
Net
Cumulative Cumulative Workers
Production
Net
units
Required
Requirement Production produced
Requirement per worker
Fall
9500
Winter
8000
Spring
7000
Summer
12000

Workers hired
Workers fired
Total workers

Initial hiring cost

Initial firing cost
Straighttime cost

Example (Level Strategy)

Problem 4 computation of number of workers required:
Step1:
For each period compute the cumulative net production
requirement
Step2:
For each period compute the cumulative units produced
per worker
Step 3:
For each period compute the number of workers required
to meet the cumulative demand upto that period by dividing
the cumulative net production by the cumulative units
produced and rounding up.

Example (Level Strategy)

Problem 4 computation of number of workers required:
Number of workers required to meet the cumulative demand upto
9500 / 240 39 .583 40
Fall
Winter
Spring
Summer
Step 4:
The number of workers required is the maximum of all the
numbers obtained in Step 3
Number of workers required = max (

)=

Example (Level Strategy)

Problem 4: Constant workforce, no overtime, no shortages
Forecast Beginning Actual
Ending
Inventory Production Inventory
Fall
Winter
Spring
Summer

10000
500
8000
7000
12000
Inventory Backorder
Cost
Cost

Fall
Winter
Spring
Summer
Total cost

Total
Cost

Example (Level Strategy)

Self Study

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

Workers hired
Workers fired
Total workers

6
0
36

Initial hiring cost

Initial firing cost
Initial recruitment cost
Straighttime cost

600
0
600
345600

Example (Level Strategy)

Self Study

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

Forecast Beginning
Inventory
Fall
Winter
Spring
Summer

Fall
Winter
Spring
Summer

10000
8000
7000
12000

Actual Ending
Production Inventory

500
-860
-220
1420

8640
8640
8640
8640

Inventory Backorder
Holding
Cost
Cost
0
8600
0
2200
7100
0
0
19400
Total

Total
Cost
8600
2200
7100
19400
383500

-860
-220
1420
-1940

Example (Level Strategy)

Self Study

Problem 6: Constant 37 workers, overtime to prevent shortages

Workers hired
Workers fired
Total workers

7
0
37

Initial hiring cost

Initial firing cost
Initial recruitment cost
Straighttime cost

700
0
700
355200

Example (Level Strategy)

Self Study

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
Fall
Winter
Spring
Summer

0
880
2760
0

Inventory
Holding
Cost
0
4400
13800
0

Overtime
Cost

Total
Cost

9920
0
0
5760

9920
4400
13800
5760
389780

Total

READING AND EXERCISES

Lesson 9
Reading: Section 3.4, pp. 121-127 (4th Ed.), pp. 117-125
(5th Ed.)
Exercises: 9, 13 and 14, pp. 127-129 (4th Ed.), pp. 123124 (5th Ed.)
Lesson 10
Reading: Section 3.5-3.6, pp. 129-138 (4th Ed.), pp.
125-135 (5th Ed.)
Exercises: 17, 19 and 20, pp. 138-139 (4th Ed.), pp.
133-134 (5th Ed.)