Aggregate Planning-

Sales & Operations

Planning
ISQA 459 Class 2
Sales & Operations Planning
• Planning production to meet the
firms strategic objectives
– Demand vs. Supply
– Volume
– Mix
• How is sales plan different from
operations plan?
– Demand > Supply
– Demand < Supply
Balance Supply & Demand
• Intermediate Term (3-18 months)
• APP = Competitive Advantage:
Anheuser-Busch- 40% of US beer
– Production of certain brands in specific
plants
• High volume & low variety/plant
– Labor requirements
– Meticulous cleaning between batches
– Inventory Capacity
• Goal:
– High facility utilization
– Why?
Production Stages
• Raw Material Selection
– QA
– Delivery
• Brewing: (Milling to Aging)
• Packaging
• Distribution
– Temp-controlled delivery
– Storage
• Resource limitations at each stage
• Scheduling Challenges????
Hierarchical Planning
Decision Level Decision Process Forecasts needed
Allocates
Annual demand by
production
Corporate item and by region
among plants

Determines Monthly demand

Plant manager seasonal plan by for 15 months by
product family product family

Determines monthly Monthly demand

Shop item production for quarter by
superintendent schedules item
At this stage
• Generally Planning for a product line or
family (AGGREGATE) not individual SKUs
– How much beer at each plant of each type
• Not container types, etc.
• Inputs
– Strategic objectives, demand forecasts,
company policy, financial constraints,
capacity constraints.
• Outputs
– Size of workforce, production per month
(units or $), inventory levels, and units
subcontracted, back ordered, or lost.
Aggregate Planning
• Goal: Specify the optimal combination of
the following variables to minimize cost
– production rate (units completed per unit of
time)
– workforce level (number of workers)
– inventory on hand (inventory carried from
previous period)
and Aggregate Production
Capacity
10000
Suppose the figure to the 10000
8000
right represents forecast 8000 7000
demand in units. 5500
6000
6000
4500
4000
Now suppose this lower
figure represents the 2000

aggregate capacity of the 0

company to meet demand. Jan Feb Mar Apr May Jun

10000 9000
What we want to do is 8000
8000
balance out the production
6000
rate, workforce levels, and 6000
4500 4000 4000
inventory to make these 4000
figures match up.
2000

0
Jan Feb Mar Apr May Jun
Key Strategies for Meeting
Demand

• Chase

• Level

• Some combination of the two

Aggregate Planning Examples:
Unit Demand and Cost Data
Suppose we have the following unit demand and cost information:
Demand/mo Jan Feb Mar Apr May Jun
4500 5500 7000 10000 8000 6000

Materials $5/unit
Holding costs $1/unit per mo.
Marginal cost of stock-out $1.25/unit per mo.
Hiring and training cost $200/worker
Layoff costs $250/worker
Labor hours required .15 hrs/unit
Straight time labor cost $8/hour
Beginning inventory 250 units
Productive hours/worker/day 7.25
Paid straight hrs/day 8
Determining Straight Labor
Costs and Output
Given the demand and cost information below, what are the
aggregate hours/worker/month, units/worker, and dollars/worker?

Demand/mo Jan Feb Mar Apr May Jun

4500 5500 7000 10000 8000 6000
Productive hours/worker/day 7.25
Paid straight hrs/day 8
Jan Feb Mar Apr May Jun
Days/mo 22 19 21 21 22 20
Hrs/worker/mo
Units/worker
$/worker
 Determining Straight Labor
Costs and Output
Given the demand and cost information below, what are the
aggregate hours/worker/month, units/worker, and dollars/worker?

Demand/mo Jan Feb Mar Apr May Jun 7.25x22

4500 5500 7000 10000 8000 6000
Productive hours/worker/day 7.25
Paid straight hrs/day 8 7.25/0.15=48.33 &
22x8hrsx$8=$1408 48.33x22=1063.33
J an Feb M ar Apr M ay Jun
D ays /m o 22 19 21 21 22 20
H r s / w o r k e r / m o 1 5 9 .5 1 3 7 .7 5 1 5 2 .2 5 1 5 2 .2 5 1 5 9 .5 145
U n i t s / w o r k e r 1 0 6 3 .3 3 9 1 8 .3 3 1015 1 0 1 5 1 0 6 3 .3 3 9 6 6 .6 7
$ /w o rke r $ 1 ,4 0 8 1 ,2 1 6 1 ,3 4 4 1 ,3 4 4 1 ,4 0 8 1 ,2 8 0
(Hiring & Firing to meet
demand)
Jan Lets assume our current workforce is 7 workers.
Days/mo 22
Hrs/worker/mo 159.5
Units/worker 1,063.33
First, calculate net requirements for
$/worker $1,408 production, or Demand-Begin Inv.

Jan Then, calculate number of workers

Demand 4,500 needed to produce the net
Beg. inv. 250 requirements, or Net req/Units per
Net req.
Req. workers worker or # workers
Hired
Fired Finally, determine the number of
Workforce workers to hire/fire. Current Workers-
Ending inventory 0
Required = (-) hire or (+) fire
(Hiring & Firing to meet
demand)
Jan Lets assume our current workforce is 7 workers.
Days/mo 22
Hrs/worker/mo 159.5 First, calculate net requirements for
Units/worker 1,063.33 production, or 4500-250=4250 units
$/worker $1,408

Then, calculate number of workers

Jan
needed to produce the net
Demand 4,500 requirements, or 4250/1063.33=3.997
Beg. inv. 250 or 4 workers **Round-up
Net req. 4,250
Req. workers 3.997 Finally, determine the number of
Hired workers to hire/fire. In this case we
Fired 3 only need 4 workers, we have 7, so 3
Workforce 4 can be fired.
Ending inventory 0
 Below are the complete calculations for the remaining months
in the six month planning horizon.
Jan Fe b M ar Apr M ay Jun
D ays/m o 22 19 21 21 22 20
H rs /wo rke r/m o 1 5 9 .5 1 3 7 .7 5 1 5 2 .2 5 1 5 2 .2 5 1 5 9 .5 145
U nits/wo rke r 1 ,0 6 3 918 1 ,0 1 5 1 ,0 1 5 1 ,0 6 3 967
$ /wo rke r $ 1 ,4 0 8 1 ,2 1 6 1 ,3 4 4 1 ,3 4 4 1 ,4 0 8 1 ,2 8 0

Jan Fe b M ar Apr M ay Jun

D e m and 4 ,5 0 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8 ,0 0 0 6 ,0 0 0
Be g. inv. 250
N e t re q. 4 ,2 5 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8 ,0 0 0 6 ,0 0 0
Re q. wo rke rs 3 .9 9 7 5 .9 8 9 6 .8 9 7 9 .8 5 2 7 .5 2 4 6 .2 0 7
H ire d 2 1 3
Fire d 3 2 1
W o rkfo rc e 4 6 7 10 8 7
Ending inve nto ry 0 0 0 0 0 0
 Below are the complete calculations for the remaining months in the
six month planning horizon with the other costs included.
J an Fe b M ar Apr M ay Jun
D e m an d 4 ,5 0 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8 ,0 0 0 6 ,0 0 0
B e g . in v. 250
N e t re q. 4 ,2 5 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8 ,0 0 0 6 ,0 0 0
R e q. wo rke rs 3 .9 9 7 5 .9 8 9 6 .8 9 7 9 .8 5 2 7 .5 2 4 6 .2 0 7
H ire d 2 1 3
Fire d 3 2 1
W o rkfo rc e 4 6 7 10 8 7
E n d in g i n ve n to r y 0 0 0 0 0 0

J an Fe b M ar Apr M ay Jun C o s ts
M ate r i al $ 2 1 ,2 5 0 .0 0$ 2 7 ,5 0 0 .0 0$ 3 5 ,0 0 0 .0 0$ 5 0 ,0 0 0 .0 0$ 4 0 ,0 0 0 .0 0$ 3 0 ,0 0 0 .0 0 2 0 3 ,7 5 0 .0 0
L ab o r 5 ,6 2 7 .5 9 7 ,2 8 2 .7 6 9 ,2 6 8 .9 7 1 3 ,2 4 1 .3 8 1 0 ,5 9 3 .1 0 7 ,9 4 4 .8 3 5 3 ,9 5 8 .6 2
H i r in g c o s t 4 0 0 .0 0 2 0 0 .0 0 6 0 0 .0 0 1 ,2 0 0 .0 0
F i r in g c o s t 7 5 0 .0 0 5 0 0 .0 0 2 5 0 .0 0 1 ,5 0 0 .0 0

$260,408.62
Level Workforce Strategy
(Surplus and Shortage
Allowed)
Lets take the same problem as
before but this time use the
Level Workforce strategy. Jan
Demand 4 ,500
This time we will seek to use a
workforce level of 6 workers. Beg. inv. 250
Net req. 4 ,250
W orkers 6
P ro duction 6 ,380
Ending invento ry 2 ,130
Surplus 2 ,130
Shortage
 Below are the complete calculations for the remaining
months in the six month planning horizon.
Jan Feb Mar Apr M
Demand 4,500 5,500 7,000 10,000 8,
Beg. inv. 250 2,130 2,140 1,230 -2,
Net req. 4,250 3,370 4,860 8,770 10,
Workers 6 6 6 6
Production 6,380 5,510 6,090 6,090 6,
Ending inventory 2,130 2,140 1,230 -2,680 -1,
Surplus 2,130 2,140 1,230
Shortage 2,680
Note, if we recalculate this sheet with 7 workers 1,
we would have a surplus.
Below are the complete calculations for the remaining months
in the six month planning horizon with the other costs included.
Jan Feb Mar Apr May Jun
4,500 5,500 7,000 10,000 8,000 6,000
250 2,130 10 -910 -3,910 -1,620
4,250 3,370 4,860 8,770 10,680 7,300
6 6 6 6 6 6
6,380 5,510 6,090 6,090 6,380 5,800
2,130 2,140 1,230 -2,680 -1,300 -1,500
2,130 2,140 1,230
2,680 1,300 1,500
Labor
Material
Jan Feb Mar Apr May Jun Storage
$8,448 $7,296 $8,064 $8,064 $8,448 $7,680 Stock-out
$48,0
31,900 27,550 30,450 30,450 31,900 29,000 181,2
2,130 2,140 1,230 5,5
Note, the total costs under this strategy
3,350are less than under
1,625 Chase.
1,875 6,8
Graphical Methods
Month Expected Production Demand per
Demand Days Day
Jan 900 22 41

Feb 700 18 39

Mar 800 21 38

Apr 1200 21 58

May 1500 22 68

June 1100 20 55

6200 124
Level = 6200/124= 50 units/day
Month Estimated Level Difference
Demand/ Production Build vs.
Month Deplete Inv
Jan 900 1100 +200

Feb 700 900 +200

Mar 800 1050 +250

Apr 1200 1050 -150

May 1500 1100 -400

June 1100 1000 -100

Level demand: plotted cumulatively
7000

6000

5000

4000
Level
Estimate
3000
Deplete Inv
2000

1000

0
Jan Feb Mar April May June
Build Inv.
Determining the Optimal Mix Strategy
• Try multiple attempts with different
scenarios
OR
• Use Linear Programming (LP)
– You will need to install Solver on your laptop
– In Excel:
• Click Tools
• Click Add-ins
• Click Solver Add-in
• We can use LP to address many
production planning & distribution
problems.
 What is Linear Programming?
• A sequence of steps that will lead to
an optimal solution.
• Used to
– allocate scarce resources
– assign workers
– determine transportation schemes
– solve blending problems
– solve many other types of problems
Five essential conditions:
• Explicit Objective: What are we
maximizing or minimizing? Usually profit,
units, costs, labor hours, etc.
• Limiting resources create constraints:
workers, equipment, parts, budgets,etc.
• Linearity (2 is twice as good as 1, if it
takes 3 hours to make 1 part then it takes
6 hours to make 2 parts)
• Homogeneity (machines make identical
parts)
Farm Resource Allocation
• A farmer owns 45 acres of land. The
farmer is gong to plant each acre
with wheat (W) or corn (C). Each
acre planted with wheat yields $200
profit while corn yields $300 profit.
– An acre of wheat requires 3 workers
and 2 tons fertilizer
– An acre of corn requires 2 workers and
4 tons of fertilizer.
– 100 workers and 120 tons of fertilizer
are available
• How many acres of Wheat or Corn should
be planted?
Graphical Approach (2 variables)
• Formulate the problem in
mathematical equations
• Plot all the Equations
• Determine the area of feasibility
– Maximizing problem: feasible area is on
or below the lines
– Minimization: feasible area is on or
above the lines
– Plot a few Profit line (Iso-profit) by
setting profit equation = different
values.
– Answer point will be one of the corner
points (most extreme)
Equations
• Maximize Profit : $200 C + $300 W
• Constrained Resources
– 2 C + 3 W < 100 (Worker resource)
– 4 C + 2 W < 120 (Fertilizer resource)
– C + W < 45 (available land resource)

– W>0; C>0 (non-negative)

– C = acres of planted corn ?
– W =acres of planted wheat ?
 Wheat & Corn

50

40

30 Wheat = 20, Corn = 20 Labor

Profit = 10000 Fert
20
Corn

Land
10

0
0 50 100

Wheat
Solver Set-up on Excel

Wheat Corn LSE RSE

VARIABLES 0 0
=SUMPRODUCT(C2:D2,C3:D3)
Profit 200 300 0
=SUMPRODUCT(C2:D2,C5:D5)
Labor 3 2 0 100
Fertilizer 2 4 0 120
Land 1 1 0 45
Report Created: 1/17/2006 3:04:11 PM

Target Cell (Max)

Cell Name Original Value Final Value
$E$3 Profit LSE 10000 10000

Adjustable Cells
Cell Name Original Value Final Value
$C$2 VARIABLES Wheat 0 20
$D$2 Corn 0 20

Constraints
Cell Name Cell Value Formula Status Slack
$E$5 Labor LSE 100 $E$5<=$F$5 Binding 0
$E$6 Fertilizer LSE 120 $E$6<=$F$6 Binding 0
$E$7 Land LSE 40 $E$7<=$F$7 Not Binding 5