IE 3265 Production &

Operations
Planning

Ch. 3 Aggregate Planning

R. Lindeke
UMD

1
Aggregate Planning Strategies
Should inventories be used to absorb changes
in demand during planning period?
Should demand changes be accommodated
by varying the size of the workforce?
Should part-timers be used, or should
overtime and/or machine idle time be used to
absorb fluctuations?
Should subcontractors be used on fluctuating
orders so a stable workforce can be
maintained?
Should prices or other factors be changed to
influence demand?
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Introduction to Aggregate
Planning
Goal: To plan gross work force levels
and set firm-wide production plans
Concept is predicated on the idea of
an aggregate unit of production as
we will see later

3
Overview of the Aggregation
Problem
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.

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Important Issues
Smoothing. Refers to the costs and disruptions
that result from making changes from one period
to the next
Bottleneck Planning. Problem of meeting peak
demand in the face 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 or
systematic variations in demand, such as
seasonality 5
 Relevant Costs
Smoothing Costs
changing size of the work force
changing number of units produced
Holding Costs
primary component: opportunity cost of investment
$s tied up in inventory
Shortage Costs
Cost of demand exceeding stock on hand. Why
should shortages be an issue if demand is known?
Other Costs: payroll, overtime, subcontracting
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 Aggregate Units

The method is (fundamentally) 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 aggregated units
they are a composite that estimates a tangible input
constant
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Developing aggregate units
(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
Question: How do we define an aggregate unit
here? 8
Example (continued)
Notice: Price is not necessarily
proportional to worker hours (i.e., cost):
why?

For aggregating, we can use individual

product demand forecasts modified with
a weighted average (sales weights) of
individual item forecasts to develop a
aggregate production forecast 9
This Aggregate Units needs a
measurable Labor Input:
Thus, Agg. Demand = .32*(DA5532) +
.21(DK4242) + + .06(DM3880)

This method for defining an aggregate unit

points to an aggregate labor requirement
(/Agg. Unit) of:
.32(4.2) + .21(4.9) + . . . + .06(5.8) =
4.8644 worker hours

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Prototype Aggregate Planning
Example
The washing machine plant is interested in
determining work force and production levels
for the next 8 months. Forecasted aggregate
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.
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Step 1: Determine net demand.
(subtract starting inv. from period. 1 forecast and add
ending inv. to per. 8 forecast.)
Month Net Predicted Cum. Net
Demand Demand
1(Jan) 220 220
2(Feb) 280 500
3(Mar) 460 960
4(Apr) 190 1150
5(May) 310 1460
6(June) 145 1605
7(July) 110 1715
8(Aug) 225 1940 12
Step 2. Graph Cumulative Net
Demand to Find Plans Graphically
2000
1800
1600
1400
1200
1000 Cum Ne
800 Cum. Net Demand
600
400
200
0
1 2 3 4 5 6 7 8
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Constant Work Force Plan
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.
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 2000

1500

1000

500

0
1 2 3 4 5 6 7 8
Monthly Production = 1940/8 = 242.2 or rounded to
243/month.
But notice: there are stockouts!
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 Constant Work Force Plan With No Stockou
How Can We Have A Constant Work Force
Plan With No Stockouts?
3000
2500
2000
1500
Answer: using the graph, find
1000 the straight line that goes
through the origin and lies
completely above the
500 cumulative net demand curve!

0
1 2 3 4 5 6 7 8 16
 From The Previous Graph, We See That Cum.
Net Demand Curve Is Crossed At Period 3:

Use monthly production of 960/3 = 320.

Ending inventory each month is found from:
C. Prod C.N. Dem.

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
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But - This Solution May Not Be
Realistic For Several Reasons:

It may not be possible to achieve the

production level of 320 unit/mo with an
integer number of workers
Since all months do not have the same
number of workdays, a constant
production level may not translate to
the same number of workers each
month!
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 To Overcome These Shortcomings:

Assume number of workdays per

month is given (reasonable!)
Compute a K factor given by:
K = number of aggregate units produced by
one worker in one day

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Finding K
Suppose that we are told that over a
period of 40 days, the plant had 38
workers who produced 520 units. It
follows then that:
K= 520/(38*40) = .3421 average
number of units produced by one
worker in one day.

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Computing Constant Work Force --
Realistically
Assume we are given the following # working days
per month: 22, 16, 23, 20, 21, 22, 21, 22.
March is still the critical month.
Cum. net demand thru March = 960.
Cum # working days = 22+16+23 = 61.
We find that:
960/61 = 15.7377 units/day
15.7377/.3421 = 46 workers required
Actually 46.003 here we truncate because we are set to
build inventory so the low number should work (check for
March stock out) however we must use care and typically
round up any fractional worker calculations thus building
more inventory
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Why again did we pick on March?
Examining the graph we see that that
was the Trigger point where our
constant production line intersected the
cumulative demand line assuring NO
STOCKOUTS!
Can we prove this is best?

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 Tabulate Days/Production Per Worker Vs.
Demand To Find Minimum Numbers
Min #
Month # Work Days #Units/worker Forecast Demand net Min # Workers C. Net Demand C.Units/Worker Workers

Jan 22.00 7.53 220.00 29.23 220.00 7.53 29.23

Feb 16.00 5.47 280.00 51.15 500.00 13.00 38.46

Mar 23.00 7.87 460.00 58.46 960.00 20.87 46.00

Apr 20.00 6.84 190.00 27.77 1150.00 27.71 41.50

May 21.00 7.18 310.00 43.15 1460.00 34.89 41.84

Jun 22.00 7.53 145.00 19.27 1605.00 42.42 37.84

Jul 21.00 7.18 110.00 15.31 1715.00 49.60 34.57

Aug 22.00 7.53 225.00 29.90 1940.00 57.13 33.96

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What Should We Look At?
Cumulative Demand says March needs
most workers but will mean building
inventories in Jan + Feb to fulfill the
greater March demand
If we keep this number of workers we
will continue to build inventory through
the rest of the plan!

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 Constant Work Force Production
Plan:

Mon # wk days Pr. Cum Cum N. End

Level Prod Dem Inv
Jan 22 346 346 220 126
Feb 16 252 598 500 98
Mar 23 362 960 960 0
Apr 20 315 1275 1150 125
May 21 330 1605 1460 145
Jun 22 346 1951 1605 346
Jul 21 330 2281 1715 566
Aug 22 346 2627 1940 687

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Lets Add some 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

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Cost Evaluation for Constant Work Force
Plan

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
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An Alternative is called the
Chase Plan
Here, we hire and fire (layoff) workers
to keep inventory low!
We would employ only the number of
workers needed each month to meet
demand
Examining our chart (earlier) we need:
Jan: 30; Feb: 51; Mar: 59; Apr: 27; May: 43
Jun: 20; Jul: 15; Aug: 30
Found by: (monthly demand) (monthly pr.
/worker)
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An Alternative is called the
Chase Plan
So we hire or Fire (lay-off) monthly
Jan (starts with 40 workers): Fire 10 (cost $8000)
Feb: Hire 21 (cost $16800)
Mar: Hire 8 (cost $6400)
Apr: Fire 31 (cost $38750)
May: Hire 15 (cost $12000)
Jun: Fire 23 (cost $28750)
Jul: Fire 5 (cost $6250)
Aug: Hire 15 (cost $12000)
Total Personnel Costs: $128950

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An Alternative is called the
Chase Plan
Inventory cost is essentially 165*8.5 =
$1402.50
Employment costs: $428325
Chase Plan Total: $558677.50
Betters the Constant Workforce Plan
by:
599590.50 558677.50 = 40913
But will this be good for your image?
Can we find a better plan?
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Before We seek an Optimal
Lets try this approach
In your engineering teams, do:
Problem 31, page 147

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 CostPlan ModifiedinWith
Reduction Lay Offs
Constant Workin March
Force and M
Plan & Chase Plan
2000

1500

1000 In the original C. N. demand

curve, consider making
reductions in the work force
one (or more times) over the
500 planning horizon to decrease
inventory investment.

0
1 2 3 4 5 6 7 832
Cost Evaluation of Modified
Plan
The modified plan calls for reducing the
workforce to 36 at the start of April and
making another reduction to 22 at the start of
June.
The additional cost of layoffs is $30,000
But, here the holding costs are reduced to
only $4,250
Here then the total cost of the modified plan
is (only) $467,450.

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Optimal Solutions to Aggregate Planning
Problems Via Linear Programming
Linear Programming provides a means of
solving aggregate planning problems
optimally.
The LP formulation is fairly complex requiring
8*T variables and (at least) 3*T 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 using layoffs at
two points is in fact optimal for the prototype
problem.
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 Exploring the Optimal (L.P.) Approach

We need an Objective Function for cost of the aggregate

plan (target is to minimize costs):
T

c
t 1
H N H cF N F cI IT cR PR co OT cu U T cS ST

Here the cis are cost for hiring, firing, inventory, production, etc
HT and FT are number of workers hired and fired
IT, PT, OT, ST AND UT are numbers units inventoried, produced on
regular time, on overtime, by sub-contract or the number of
units that could be produced on idled worker hours respectively
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 Exploring the Optimal (L.P.) Approach

This objective Function would be subject to a series of

constraints (one of each type for each period)
Number of Workers Constraints: Wt Wt 1 H t Ft

Inventory Constraints: I t I t 1 Pt St Dt

Production Constraints:

Pt k nt Wt Ot U t
Where: nt * k is the number of units produced
by a worker in a given period of nt days
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 Exploring the Optimal (L.P.) Approach

Assuming we allow no idle time and will produce

only on regular time
No overtime or subcontracting values
We would have:
9 worker variables (W0 to Waug)
8 Hire Variable
8 Fire Variables
9 Inventory Variables (I0 to Iaug)
8 Production Variables
8 Demands
And 1 complicated Objective function
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Exploring the Optimal (L.P.) Approach

This is a toughee!
Lets try Excel!
Lots of variables and
lots of constraints
but work is straight
forward!

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Real Constraint Equation (rewritten
for L.P.):
Employee Wt Wt 1 H t Ft 0
Constraints:
Specifically:

W1 W0 H1 F1 0

Pt I t I t 1 St Dt
Inventory
Constraints: specifically:

P1 I1 I 0 S1 D1
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Real Constraint Equations (rewritten
for L.P.):

Production Constraints:

Pt k nt Wt Ot U t 0
specifically:

P1 k n1 W1 O1 U1 0

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Real Constraint Equations (rewritten
for L.P.):

Finally, we need constraints defining:

Initial Workforce size
Starting Inventory
Final Desired Inventory
And, of course, the general constraint
forcing all variables to be 0

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Stepping in Excel

We will build the L.P. and use the

solver in Excel!

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Disaggregation
Aggregate plans were built to optimal staffing
levels for families or groups of products
Disaggregation is a means to build specific
Master Production Schedules
Typically by breaking down the aggregating
weights to individual parts or working on
schedules of these families as optimal
Later leads to values similar to EOQ which we
will explore in Chapter 4!

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