Aggregate Production Planning

Aggregate Production Planning (APP)
Why aggregate planning

w Details are hard to gather for longer horizons
n
Demand for Christmas turkeys at Tom Thumbs vs Thanksgiving

turkeys
w Details carry a lot of uncertainty: aggregation reduces

variability
n
Demand for meat during Christmas has less variability than the
total variability in the demand for chicken, turkey, beef, etc.
w If there is variability why bother making detailed plans,

inputs will change anyway
n
Instead make plans that carry a lot of flexibility
Flexibility and aggregation go hand in hand
Aggregate Planning
w Aggregate planning: General plan
n
Combined products = aggregate product

l
Short and long sleeve shirts = shirt

w Single product
Pooled capacities = aggregated capacity

l
Dedicated machine and general machine = machine

w Single capacity
Time periods = time buckets

l
Consider all the demand and production of a given month

together
w Quite a few time buckets [Jan/Feb or IQ/IIQ/]
refers to intermediate range

planning covering 2 to 24 months
a big picture look at planning
aimed at balancing capacity and
demand
Forecast, Production Plan and Inventory

Recall from the forecasting presentation, future demand is forecasted,
1
10
Forecast Demand
6 Month Forecast
2
3
4
5
8
12
14
10
6
8
then a manufacturing production plan is developed,

Production Plan
10
10
10
12
12
10
10
12
10
10
12
resulting in an inventory plan

Inventory
10
which can be evaluated against financial objectives.
Aggregate Production Planning Horizon

Now
2 months - 2 years
Short Range
Intermediate Range
Group level forecast
Decision Areas
Staff Planning
Production planning
APP
Master production
scheduling
Purchasing (material and
equipment)
Distribution
Long Range
Planning Sequence
Corporate
strategies
and policies
Economic,
competitive,
and political
conditions
Business Plan
Aggregate Production Plan
Master schedule
Aggregate
demand
forecasts
Establishes long range

production and capacity
strategies
Establishes intermediate
range production capacity
for product groups
Establishes short range
schedules for specific
products
Overview of
Manufacturing
Planning
Activities
Aggregate Plan
Example
Month
# motors
40
25
50
30
30
50
30
40
40
Note: Aggregate plan expresses the end product as motors
Master Schedule
Month
# AC Motors
5 hp
15
30
30
10
25 hp
20
25
20
15
15
15
20
20
20
10
10
10
10
# DC Motors
20 hp
# WR motors
10 hp
15
15
Note: Master schedule specifies precisely how many of which type (or size) of motors will be
produced, and when to plan for the material and capacity requirements
Aggregate Production Planning

Aggregate Production Planning is a planning process which establishes a
company-wide game plan for allocating resources (people, equipment,
etc.) and economically meeting demand. APP
. Matches market demand to company resources
. Expresses intermediate range demand, resources, and
capacity in general terms product groups or families of
products rather than at the detail product level (e.g. televisions
vs 21, 27, 32, etc.)
. Allows planners more time to deal with short range and day-today issues
. Provides information to allow for flexibility because of
forecast inaccuracy intermediate plans do not have to be
locked in too soon
Managerial Inputs to APP

Operations
Current machine capacities
Plans for future capacities
Work-force capacities
Current staffing level
Materials
Supplier capabilities
Storage capacity
Materials availability
Engineering
New products
Product design changes
Machine standards
Distribution & Marketing

Customer needs
Demand forecasts
Competition behavior
APP
Accounting & Finance

Cost data
Financial condition of firm
Human Resources
Labor-market conditions
Training capacity
Aggregate Production Planning Process

The Process of APP:
. Use the company forecast to determine demand for each
period
. Determine capacities (regular time, overtime, subcontracting,
etc) for each period
. Identify company or departmental policies that are pertinent
(employment policies, safety stock policies, etc.)
. Determine unit costs for regular time, overtime, subcontracting,
holding inventories, layoffs, and other relevant costs
. Develop alternatives with cost for each
. If satisfactory plans emerge select the one that best satisfies
objectives; otherwise, continue with the previous step.
Aggregate Planning Process

Production Planning Environment
EXTERNAL
COMPETITION
RAW MATERIAL
SUPPLY
DEMAND
EXTERNAL
CAPACITY
ECONOMIC
CONDITIONS
PRODUCTION
PLANNING
CAPACITY
PRODUCTION
WORK FORCE
INVENTORY
INTERNAL
APP Process
Determine
requirements for
planning horizon
Identify alternatives,
constraints and costs
Prepare prospective
plan for planning
horizon
No
Is the plan
acceptable?
Yes
Move ahead to the
next planning session
Implement and update

the plan
Aggregate Planning Objectives

The overriding objective of Aggregate Production Planning is to
consider company policies and management inputs related to
operations, distribution & marketing, materials, accounting & finance,
engineering and human resources to
. Minimize costs & maximize profits
. Maximize customer service
. Minimize inventory investment
. Minimize changes in production rates
. Minimize changes in work-force levels
. Maximize utilization of plant and equipment
Operations Managers try to determine the best

way to meet forecasted demand by adjusting
various capacity.
Aggregate Planning balancing demand/capacity

Strategies for meeting uneven supply & demand
Level capacity - maintain a level (steady rate) of production output
while meeting variations in demand [that is, use inventory to absorb
fluctuations in demand]
Demand
Level
Units
production
capacity
Time
Effect Of Level Output Strategy

Planning Period
Forecasted Demand
1
10
6 Month Forecast
2
3
4
5
8
12
14
10
6
8
a level output strategy make the same amount each period

Production Plan
10
10
10
10
10
10
inventory is used to buffer the difference in capacity and demand

Inventory Position
10
10
12
10
Leveling strategies try to keep output (production levels) constant and use other
methods for dealing with the fluctuating demand. These strategies may be either
aggressive or reactive, or a combination of both.
One popular way is to build inventory in low demand times and draw it down in
high demand times.
Extreme AP Strategies- Constant

Output and Constant Capacity
Extreme AP Strategy- Variable

Output and Constant Capacity
Overtime
Inventory
Idle Time
Demand
Output Capacity
Capacity =
Output
Demand
Cost
Increased
Inventory Holding Cost/ BackOrder Cost
Cost
Increase
Overtime and Idle Time Cost

Subcontracting Cost
Costs
Minimized
Hiring & Firing Cost/

Subcontracting Cost
Overtime- Idle Time Cost
Costs
Minimized
Inventory Holding Cost

Hiring/ Firing Cost
Use
Use
When Inventory Holding Cost is

Low
For High Capital Intensive
Operations
When Inventory is
Impossible or Expensive
For High Skilled Labor
Intensive Operations
Examples
Examples
Water Purification Plant
Law Firms, Accounting

Service

Units
Chase demand - match production capacity to demand by adjusting

capacity to the demand for the period
Demand
Production
chases
demand
Time
Effect Of Chase Demand Strategy
Planning Period
Forecasted Demand
1
10
6 Month Forecast
2
3
4
5
8
12
14
10
6
8
a chase demand strategy production is adjusted to meet demand

Production Plan
10
12
14
10
10
10
10
10
10
10
inventory remains constant

Inventory Position
10
Chase demand (Ideal Case)- change workforce levels so that

production matches demand
Cost
Increase
Hiring & Firing Cost/ Idle Capacity Cost
Costs
Minimized
Inventory Holding Cost/ Subcontracting Cost

Overtime and Idle Time Cost
Use
Inventory is Impossible or Expensive

Low Skilled Labor Operations
There is a match between Labor Availability and
the Need for Labor
Examples
Entertainment Center (Disney World), Farm

Workers

Demand Options when capacity and demand are not the same
. Pricing can be adjusted to affect demand (e.g. lower rates in off season)
. Promotions (e.g. advertising, consumer marketing campaigns)
. Back Orders - shift demand to another period by taking orders in one period
and promising deliver in a future period when capacity is available (may not
create a satisfied customer)
. New demand - create a new need for capacity by producing a product
during slack times to utilize resources (e.g. snow blower company
produces leaf blowers in off season) .

Capacity Options when capacity and demand are not the same
. Hire or lay-off workers (may create morale and employment problems
. Use overtime or under-time
. Part-time workers
. Manage capacity with inventory (e.g. let inventories build during periods of
low demand or deplete during periods of high demand)
. Subcontract temporary capacity
Strategy Details
Level
Strategy
Chase
Strategy
Production rate
is constant
Production
equals
demand
APP Strategies - Pure Strategies

Capacity Options Change Capacity [Reactive
Strategies]
1)
changing inventory levels
2)
varying work force size by hiring or layoffs
3)
varying production capacity through overtime or

idle time
4)
subcontracting
5)
using part-time workers
The above five pure strategies are called passive

strategies because they do not try to change demand but
attempt to absorb the fluctuations in it.
Reactive Strategy Examples

w Anticipation inventory is a reactive strategy. It
can absorb uneven rates of demand or
supply. Thus it is also a leveling strategy .
w Workforce adjustment (use of overtime,
under-time or subcontracting) is reactive.
n
If you are varying your workforce it is also chase. If

you subcontract, it is leveling.
w Scheduling employee vacations for low

demand times is a reactive strategy.
w Using backorders in high-demand times is a
leveling and a reactive strategy.
APP Strategies - Pure Strategies

Demand Options change demand [Proactive
Strategies]
6)
influencing demand
7)
backordering during high demand periods
8)
Counter seasonal product mixing
The above three pure strategies are called active

strategies through which firms try to influence the demand
pattern to smooth out its changes over the planning period.
Aggressive Strategies
w The purpose of aggressive strategies is to influence
demand in order to smooth out (level
(level)) production or
service flow. (All aggressive strategies are leveling
leveling.)
.)
w Product Promotions are designed to increase sales using
creative pricing. Doing so in a low demand period is a
leveling strategy.
n
Off-season rates: (January retail sales) (slowOff(slow-season

resort rates)
w Complementary products:
products: Services or products that have
similar resource requirements but different demand cycles
allow leveling of output.
n
EG: countercounter-seasonal products or services such as

seasonal clothing.
Planning Strategies Summarized

Reactive Strategies
Aggressive Strategies
w Hiring & Layoffs (Chase)
w Pricing (Leveling)
w Overtime & Idle time (Chase)
w Promotion (Leveling)
w Subcontracting (Leveling)
w Complementary (counterseasonal) Products

(Leveling)
w Back Orders (Leveling)

w Inventory Levels (Leveling)
(Creating more inventory in
slow periods and using it to
meet excess demand in high
demand periods.)
Most planning strategies are not Pure (one kind). They are usually Hybrid
Strategies with a combination of techniques, often using leveling and chase.
Aggregate Scheduling Options/Strategies :

Advantages & Disadvantages
Option
Advantage
Disadvantage
Changing
inventory levels
Changes in
human resources
are gradual, not
abrupt
production
changes
Inventory
holding costs;
Shortages may
result in lost
sales
Varying
workforce size
by hiring or
layoffs
Avoids use of
Hiring, layoff,
other alternatives and training
costs
Some
Comments
Applies mainly
to production,
not service,
operations
Used where size

of labor pool is
large

Option
Advantage
Disadvantage
Some
Comments
Varying
production rates
through overtime
or idle time
Matches seasonal
fluctuations
without
hiring/training
costs
Permits
flexibility and
smoothing of the
firm's output
Overtime
premiums, tired
workers, may not
meet demand
Allows
flexibility within
the aggregate
plan
Loss of quality
control; reduced
profits; loss of
future business
Applies mainly
in production
settings
Subcontracting

Option
Advantage
Disadvantage
Some
Comments
Using part-time
workers
Less costly and

more flexible
than full-time
workers
Good for
unskilled jobs in
areas with large
temporary labor
pools
Influencing
demand
Tries to use
excess capacity.
Discounts draw
new customers.
High
turnover/training
costs; quality
suffers;
scheduling
difficult
Uncertainty in
demand. Hard to
match demand to
supply exactly.
Creates
marketing ideas.
Overbooking
used in some
businesses.

Option
Advantage
Disadvantage
Some
Comments
Back ordering
during highdemand periods
May avoid
overtime. Keeps
capacity constant
Customer must
be willing to
wait, but
goodwill is lost.
Many companies
backorder.
Counterseasonal
products and
service mixing
Fully utilizes
resources; allows
stable workforce.
May require
skills or
equipment
outside a firm's
areas of
expertise.
Risky finding
products or
services with
opposite demand
patterns.
The Reality of Planning Strategy

w Most Aggregate Planning (Production and Staffing) is
Trial and Error planning.
w Process-Focused firms are more apt to use Chase
strategies. (Chasing/reacting to demand)
n
Process-focused firms are smaller and more

adaptable to changing demand and more flexible in
making capacity change. (Wait-and-see capacity
planning)
w Product-Focused Firms are more apt to use Leveling

strategies. (Keeping output level)
n
High volume, lower inventories, lower margins and

higher equipment-utilization needs make it more
difficult and costly to vary production rates.
Aggregate Planning assumptions

No allowances are made for holidays, different number of workdays
Cost is a linear function composed of unit cost & number of units
Plans are feasible (e.g. sufficient inventory storage space is available,
subcontractors are available to produce quantity and quality of
products, changes in output can be made as needed)
Cost figures can be reasonably estimated and are constant for the
planning horizon
Inventories are built and drawn down at a uniform rate and output
occurs at a uniform rate though out
Techniques for Aggregate Production Planning

1. Informal, trial and error methods. In practice, these techniques are more
commonly used.
2. Mathematical techniques - such as linear programming, linear decision rules
or simulation. Although not widely used, they serve as a basis for
comparing the effectiveness of alternative techniques for aggregate
planning.
General Procedure for Aggregate Planning
1. Determine demand and production requirements for each period.
2. Determine production capacity (regular time, overtime, subcontracting) for
each period.
3. Determine company or departmental policies that are pertinent.
For example, maintain a safety stock of 5 percent of demand, or maintain a
reasonably stable work force.
4. Determine unit costs for regular time, overtime, subcontracting, holding
inventories, back orders and other relevant costs.
5. Develop alternative plans and compute the cost of each.
6. If satisfactory plans emerge, select the one that best satisfies objectives
(such as cost minimization). Otherwise, return to step 5.
Aggregate Planning Informal Techniques

Simple tables or worksheets can be developed to evaluate demand, aggregate group
level production plans and inventory. We will look at some examples to illustrate the
concept of aggregate planning. The assumptions for these examples simplify the
computations but can be easily modified to real situations.
Aggregate Planning Informal Techniques

Aggregate Planning - formulas
Number of workers in period = Number of workers at end of the
previous period + Number of new workers at the start of a period - Number
of laid-off workers at the start of a period
Inventory at the end of a period = Inventory at the end of the previous period
+ Production in the current period - Amount used to satisfy demand in the
current period
Average Inventory for a period = (Beginning Inventory + Ending Inventory) / 2
Cost for a period = Output Cost + Hire/Lay-off Cost + Inventory Cost +
Backorder Cost where Output Cost = Regular Time Cost + Overtime Cost +
Subcontractor Cost
How To Calculate Costs

Regular Costs
. Output cost = Regular cost per unit * Quantity of regular output
. Overtime cost = Overtime cost per unit * Overtime quantity
. Subcontract cost = Subcontract cost per unit * Subcontract quantity
Hire-Layoff Costs
. Hire cost = Cost per hire * Number hired
. Lay-off cost = Cost per lay-off * Number laid off
Inventory Costs
. Carrying cost per unit * Average inventory
Back Order Costs

. Back order cost per unit * Backorder quantity
Aggregate Production Planning Illustration
Given the following information:
Additional information available:

Sales
Work
Month
Forecast
Days
Jan.
300
22
Feb.
500
19
Mar.
400
21
Apr.
100
21
May.
200
22
June
300
20
6 month production planning period

10 labour-hours per unit required
Labour cost = $10/hour regular
= $15/hour overtime
Total unit cost = $200 / unit
= $228/unit subcontract
Current workforce = 20 employees
Work Hours
at 8 Hrs. / Day
176
152
168
168
176
160
Hiring cost = $500 / employee

Layoff cost = $800 / employee
First Step: Calculate Production Requirement
Safety stock = 20% of monthly forecast

Beginning inventory = 50 units
Month
Jan.
Feb.
Mar.
Apr.
May.
June
Inventory carrying cost = $10/unit/month

Stockout cost = $50/unit/month
Sales
Forecast
300
500
400
100
200
300
Safety
Stock
60
100
80
20
40
60
Production
Required
300+60-50 = 310
500+100-60 = 540
400+80-100 = 380
100+20-80 = 40
200+40-20 = 220
300+60-40 = 320
Safety Stock of the period t will be an Beginni9ng Inventory of the period (t+1)
Aggregate Production Planning Illustration Contd.

Plan # 1 - Exact Production; Vary Work Force
Production
Required
310
540
380
40
220
320
Month
Jan.
Feb.
Mar.
Apr.
May
June
Hours
Required
3100
5400
3800
400
2200
3200
Hrs. Avail.
per Worker
176
152
168
168
176
160
Workers
Required
18
36
23
3
13
20
Workers
Hired
Workers
Fired
2
18
13
20
10
7
Hire/Fire
Costs
$1600
9000
10400
16000
5000
3500
Total Cost = $45,500
Plan # 2 - Exact Production; Vary Production Rate

Month
Jan.
Feb.
Mar.
Apr.
May
June
Production
Required
310
540
380
40
220
320
Hours
Required
3100
5400
3800
400
2200
3200
Total Hrs.
Available
3520
3040
3360
3360
3520
3200
Overtime
Hours
Undertime
Hours
420
2360
440
2960
1320
OT/ UT
Costs
$4200
11800
2200
14800
6600
0
Aggregate Production Planning Illustration Contd.

Plan # 3 - Exact Production; Vary Inventory Level With 20 Employees
Month
Jan.
Feb.
Mar.
Apr.
May
June
Cum. Prod.
Required
310
850
1230
1270
1490
1810
Hours
Available
3520
3040
3360
3360
3520
3200
Total
Production
352
304
336
336
352
320
Cumulative
Production
352
656
992
1328
1680
2000
Inventory
Level
42
Stockout
Level
Inv. / SO
Costs
$420
9700
11900
580
1900
1900
194
238
58
190
190
Plan # 4 - Exact Production; Vary Workforce Level; Vary Inventory Level

Month
Jan.
Feb.
Mar.
Apr.
May
June
Cum. Prod.
Required
310
850
1230
1270
1490
1810
Hours
Available
3520(20)
4560(30)
5040(30)
1680(10)
1760(10)
1600(10)
Total
Production
352
456
504
168
176
160
Cumulative
Production
352
808
1312
1480
1656
1816
Inv. / (SO)
Level
42
(42)
82
210
166
6
Total Cost = $7,160 + $ 21,000 = $28,160
Inv. / SO
Costs
$420
2100
820
2100
1660
60
$7,160
Hire/Fire
Costs
5000
16000
$21,000
Aggregate Production Planning Illustration - Contd.

Final Cost Analysis:
Plan
1
2
3
4
Units
Produced
1810
1810
2000
1816
Plan
Costs
45,500
61,000
26,400
28,160
Production
Costs
362,000
362,000
400,000
363,200
Total
Costs
407,500
446,500
426,400
391,360
Cost
per Unit
$225.14
$233.70
$213.20
$215.51
Decision: Go with Plan # 3 on the basis of lowest cost per unit.
Aggregate Planning Example 2

Example 2: Planners for a company that makes several models of tractors are
about to prepare an aggregate plan that will cover 6 periods. The have
assembled the following cost information ($):
Output Costs
Regular time
2 per tractor
Overtime
3 per tractor
Subcontract
6 per tractor
Inventory Costs
1 per tractor on average inventory
Back Order Costs 5 per tractor per period
The forecasted demand by period is:
Planning Period
Forecasted Demand
1
200
2
200
3
300
4
400
5
500
6 Total
200 1800

They now want to evaluate a plan that calls for a steady rate of regular-time
output.
They intend to start with 0 inventory on hand in the first period.
Prepare an aggregate plan and determine its cost for a level output rate of
300 units per period with 15 workers.
Aggregate Planning
Production Schedule
Inventory
Backorder
Costs
Total cost of plan is
$4,700
Cumulative
Forecast &
Production
Cost
Components
Notice the backorder

cost in period 5

Example 2: After reviewing the plan the planners need to develop an
alternative based on the news that one of the regular time workers has decided
to retire.
Rather than replace that person they would rather stay with a smaller work
force and use overtime to make up for the lost output.
The maximum overtime output is 40 units.
First the regular time output of 300 units per 15 people must be adjusted for 14
people. Therefore 300/15*14 = 280 = adjusted regular time output for 14
people.
Aggregate Planning
We are 120 tractors

short.
Where do we
manufacture them?
Aggregate Planning
Why did we put
manufacture them
here?
Does manufacturing
them in other
periods produce a
lower cost?
$4,640

cost in period 5

Example 3: A third option is to use temporary workers rather than overtime to
fill in for the retiring worker.
Suppose that it costs an additional $100 to hire and train a temporary worker
and that a temporary worker can produce 15 tractors per period.
First of all 120 units are needed to replace the retired workers output (see
output from Example 2).
Therefore 120/15 = 8 means that 8 temporary worker periods are needed to
create the 120 units.
Noting that periods 4 and 5 have the heaviest demand, using 4 temporary
workers during those periods seems reasonable. This means that we only
have to hire 4 temporary workers for two months.
Aggregate Planning
Why is the hire/train

cost only $400?
$4,860
Notice the
Hire/Layoff cost in
period 4
cost in period 5
Pure Strategies
Example:
QUARTER
SALES FORECAST (LB)
Spring
Summer
Fall
Winter
80,000
50,000
120,000
150,000
Hiring cost
Firing cost
Regular production cost per pound = $2.00
Inventory carrying cost
Production per employee
Beginning work force
= $100 per worker

= $500 per worker
= $0.50 pound per quarter
= 1,000 pounds per quarter
= 100 workers
Level Production Strategy

Level production
(80,000 + 50,000 + 120,000 + 150,000)
4
QUARTER
Spring
Summer
Fall
Winter
SALES
FORECAST
80,000
50,000
120,000
150,000
PRODUCTION
PLAN
100,000
100,000
100,000
100,000
400,000
Cost of Level Production Strategy:

(400,000 X $2.00) + (140,00 X $.50) = $870,000
= 100,000 pounds
INVENTORY
20,000
70,000
50,000
0
140,000
Chase Demand Strategy
QUARTER
SALES
FORECAST
Spring
Summer
Fall
Winter
80,000
50,000
120,000
150,000
PRODUCTION
PLAN
WORKERS
NEEDED
WORKERS
HIRED
WORKERS
FIRED
80,000
50,000
120,000
150,000
80
50
120
150
0
0
70
30
100
20
30
0
0
50
Cost of Chase Demand Strategy

(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000
Mixed Strategy
Previous
Beginning Inventory
Demand Forecast
Production Plan
Ending Inventory
Work-force Size
0
100
Spring
0
80,000
90,000
10,000
90
Total Demand Forecast=

Total Production Plan=
400,000
400,000
Inventory Cost (.50/lb)

Work-force Cost
Total Cost
$5,000
$5,000
$54,000
Initial Inv (t) = End Inv (t-1)
Quarter
Summer
Fall
10,000
40,000
50,000 120,000
80,000 110,000
40,000
30,000
80
110
$20,000
$5,000
$15,000
$3,000
Winter
30,000
150,000
120,000
0
120
$0
$1,000
Mixed Strategy
Combination of Level Production and Chase
Demand strategies
Examples of management policies
no more than x% of the workforce can be laid
off in one quarter
inventory levels cannot exceed x dollars
Many industries may simply shut down
manufacturing during the low demand season
and schedule employee vacations during that
time
APP Using Mixed Strategies - Exercise

MONTH
DEMAND (CASES)
January
February
March
April
May
June
1000
400
400
400
400
400
MONTH
July
August
September
October
November
December
DEMAND (CASES)
500
500
1000
1500
2500
3000
Production per employee= 100 cases per month

Wage rate = $10 per case for regular production
= $15 per case for overtime
= $25 for subcontracting
Hiring cost = $1000 per worker
Firing cost = $500 per worker
Inventory carrying cost = $1.00 case per month
Beginning work force = 10 workers
Mathematical Model
u
Data:
Starting inventory in January: 1,000 units
Selling price to the retailer: Rs.40/unit
Workforce at the beginning of January: 80
# of working days per month: 20
Regular work per day per employee: 8 hours
Maximum overtime allowed per employee per month: 10 hours
Ending inventory required (at end of June): Minimum 500 units
Demand forecast:
Month
January
February
March
April
May
June
Demand
1,600
3,000
3,200
3,800
2,200
2,200
Numerical Example
(cont)
u
Cost Data:
Item
Materials
Inventory holding cost
Marginal cost of a stockout
Hiring and training costs
Layoff cost
Labor hours required
Regular time cost
Over time cost
Cost of subcontracting
Cost
Rs.10/unit
Rs.2/unit/month
Rs.5/unit/month
Rs.300/worker
Rs.500/worker
4/unit
Rs.4/hour
Rs.6/hour
Rs.30/unit
Numerical Example
(Define Decision Variables)
The decision variables are as follows:

Wt = Workforce size for month t
Ht = Number of employees hired at the beginning of month t
Lt = Number of employees laid off at the beginning of month t
Pt = Production in month t
It = Inventory at the end of month t
St = Number of units stocked out at the end of month t
Ct = Number of units subcontracted for month t
Ot = Number of overtime hours worked in month t
(combined for all employees)
Note: For all the above variables, t = 1, 2, , 6 giving a total of
48 decision variables.
Numerical Example
(Components of Objective Function)
Regular time labor cost

Rs. 4/hour * 8 hr/day * 20 day/month = Rs.640/month
6
640 W
Therefore, regular time labor cost per month:
t =1
Overtime labor cost
Overtime labor cost is Rs.6/hour and Ot represents the number of overtime

hours worked in month t (combined for all employees)
6
Therefore, overtime time labor cost per month:
t =1
Cost of hiring and layoff
t =1
t =1
Cost of holding inventory and stocking out

6
This cost is calculated as:
300 H + 500 L
This cost is calculated as:
6O
2 I + 5S
t
t =1
t =1
Cost of materials and subcontracting out

6
10 P + 30 C
This cost is calculated as: 15
t =1
t =1
Numerical Example
(Objective Function)
u
The objective function is:

Minimize Z =
6
640W t + 6 Ot + 300 H t
t =1
t =1
t =1
+ 500 Lt + 2 I t
t =1
t =1
t =1
t =1
t =1
+ 5 S t + 10 Pt + 30 C t
Numerical Example
(Define Constraints Linking Variables)
Workforce size, hiring and layoff constraints:
Wt = Wt -1 + H t - L t
or
Wt - Wt -1 + H t + L t = 0
where t = 1, 2, , 6 and W0 = 80
Capacity constraints:
P t 40 W t + (1 / 4 ) O t
or
40 W t + (1 / 4 ) O t - P t 0
where t = 1, 2, , 6
Numerical Example
(Define Constraints Linking Variables) (cont)
Inventory balance constraints:
I t -1 + Pt + C t = D t + S t -1 + I t - S t
or
I t -1 + Pt + C t - D t - St -1 - I t + St = 0
where t = 1, 2, , 6 and I0 = 1,000, I6 >= 500, and S0 = 0,
Overtime limit constraints:
O t 10 Wt
or
O t - 10 Wt 0
where t = 1, 2, , 6
Average Inventory and

Average Flow Time
Average inventory for a period t:
1
(I t - 1 + I t )
2
Average inventory over the planning horizon:
1 T 1
(I t -1 + I t )
T t =1 2
i.e.
T -1
1 1
(I t -1 + I t ) + I t
T 2
t =1
Average flow time: (Average inventory)/(Throughput)
1
T
T -1
1
(I
+
I
)
+
It
t -1
t
t =1
2
T
1
Dt
T t =1
Various Scenarios
Some of the possible scenarios are:

Increase in holding cost (from Rs.2 to Rs.6)
Overtime cost drops to Rs.5 per hour
Increased demand fluctuation
Month
January
Demand 1,000
February
March
April
May
June
3,000
3,800
4,800
2,000
1,400
Your plan will change with the change in scenarios
Transportation Tableau for

Aggregate Planning
Suppose we have the following information

Periods
Demand
D1
D2
D3
Regular Capacity
R1
R2
R3
Overtime Capacity
O1
O2
O3
Subcontract Capacity
S1
S2
S3
Beginning Inventory: I0
Regular time production cost per unit: r
Overtime production cost per unit: v
Subcontract production cost per unit: s
Holding cost per unit per period: h
Backorder cost per unit per period: b
Shortage (unsatisfied order) cost per unit per period: c
Undertime cost per unit: u
Desired inventory level at the end of period 3: Ie
Total unused capacities: U
Total unsatisfied orders: C
LINEAR PROGRAMMING
(no backorders, supply > demand)
Demand for
Supply from
Period 1
0
Beg. Inventory
Period 2
Unused
Capacity
Period 3
h
Total
Capacity
(supply)
2h
I0
R1
Regular
r+h
r + 2h
Overtime
v+h
v + 2h
O1
Subcontract
s+h
s + 2h
S1
R2
Regular
r+h
Overtime
v+h
O2
Subcontract
s+h
S2
Regular
R3
Overtime
O3
Subcontract
S3
Demand
D1
D2
D3 + le
Grand Total
LINEAR PROGRAMMING
(backorders, supply > demand)
Demand for
Supply from
Period 1
Period 2
Total
Capacity
(supply)
Unused
Capacity
Period 3
Beg. Inventory
2h
I0
Regular
r+h
r + 2h
R1
Overtime
v+h
v + 2h
O1
S1
s+h
s + 2h
Regular
r+b
r+h
R2
Overtime
v+b
v+h
O2
Subcontract
s+b
s+h
S2
Regular
r + 2b
r+b
R3
Overtime
v + 2b
v+b
O3
S3
Subcontract
Subcontract
Demand
s + 2b
D1
s+b
D2
D3 + le
Grand Total
LINEAR PROGRAMMING
(no backorders, demand > supply)
Demand for
Supply from
Period 1
Period 3
h
2h
Regular
r+h
r + 2h
R1
Overtime
v+h
v + 2h
O1
Subcontract
s+h
s + 2h
S1
Regular
r+h
R2
Overtime
v+h
O2
Subcontract
s+h
S2
Regular
I0
Beg. Inventory
Period 2
Total
Capacity
(supply)
Overtime
Subcontract
Unsatisfied Demand
Demand
D1
c
D2
c
D3 + le
R3
O3
S3
C
Grand Total
Exercise
Demand
1
190
2
230
3
260
4
280
5
210
6
170
7
160
8
260
9
180
Total
1940
There are 20 full time employees, each can produce 10 units per period at the cost of $6 per unit. Therefore the supply of full time
workers is as follows
1
2
3
4
5
6
7
8
9
Total
200
200
200
200
200
200
200
200
200
1800
Overtime cost is $13 per unit.
Inventory carrying cost $5 per unit per period
Backlog cost $10 per unit per period
Maximum over time production is 20 units per period
Formulated the problem as a Linear Programming model.
APP by the Transportation Method
QUARTER
1
2
3
4
EXPECTED
DEMAND
REGULAR
CAPACITY
OVERTIME
CAPACITY
SUBCONTRACT
CAPACITY
900
1500
1600
3000
1000
1200
1300
1300
100
150
200
200
500
500
500
500
Regular production cost per unit

Overtime production cost per unit
Subcontracting cost per unit
Inventory holding cost per unit per period
Beginning inventory
$20
$25
$28
$3
300 units
Production Plan for the Example using TP
PERIOD
DEMAND
1
2
3
4
Total
900
1500
1600
3000
7000
REGULAR
PRODUCTION
1000
1200
1300
1300
4800
OVERTIME
SUBCONTRACT
ENDING
INVENTORY
100
150
200
200
650
0
250
500
500
1250
500
600
1000
0
2100
The Production Plan

The aggregate plan can not be used for production because it
is at the group level rather than the individual product level.
The aggregate plan must be broken down into specific product
requirements so that specific labor skills, materials, and inventory
plans can be determined. (e.g. 21 TVs take different parts than 27
TVs)
We will discuss this more in MPS, but first lets take a look at
some general concepts.
The Production Plan

Because different products require different materials, skills, etc. we must manufacture
at the item level rather than the group level. The master schedule (item level) is
similar to the aggregate plan (group level).
. Master Schedule - is a detailed plan usually done for weekly periods
(sometimes daily) showing the quantity and timing of specific items (e.g.
21 TVs) for a scheduled horizon and can be used by other functional areas
of the organization.
. Rough-Cut Capacity Planning - is an approximate balancing of the
detailed master production schedule with capacity to test the feasibility of
the master production schedule. It resembles the aggregate planning
process; but, at a detailed product level.
Master Scheduling Process

Inputs
Outputs
Projected
Inventory
Beginning
Inventory
Forecast
Master
scheduling
Customer
Orders
3 inputs and 3 outputs
Master
Production
Schedule
Available To
Promise
(uncommitted
inventory)
Inputs To Master Scheduling

Planning Period
Forecast
Customer Orders
Projected Demand
Projected On Hand Inventory
1
30
33
33
2
30
20
30
3
30
10
30
4
30
4
30
5
40
2
40
6
40
7
40
8
40
40
40
40
64
Projected demand is calculated based on the customer orders

and forecast.
Projected Demand = max (forecast, orders)
How can customer orders be more than forecast?
Outputs Of Master Scheduling

Therefore, the Projected Inventory Position (previous inventory position - projected
demand) without any production can be calculated and is shown below:
Planning Period
Forecast
Customer Orders
Projected Demand
1
30
33
33
64 31
2
30
20
30
1
3
30
10
30
-29
4
30
4
30
-59
5 6 7 8
40 40 40 40
2
40 40 40 40
-99 -139 -179 -219

If the lot size for this item is 70 units, we can now build the Master Production
Schedule. We add our first lot in week/day 3 because this is the first negative
inventory position. We then update our Projected Inventory Position.
Planning Period
Forecast
Customer Orders
Projected Demand
Master Production Schedule (MPS)
1
30
33
33
64 31
2
30
20
30
1
3
30
10
30
41
70
4
30
4
30
11
5
40
2
40
-29
6
40
7
40
8
40
40 40 40
-69 -109 -149

We add our next lot in week/day 5 because this is the next negative inventory position.
We then update our Projected Inventory Position.
Planning Period
Forecast
Customer Orders
Projected Demand
1
30
33
33
64 31
2
30
20
30
1
3
30
10
30
41
70
4
30
4
30
11
5
40
2
40
41
70
6
40
7
40
8
40
40
1
40
-39
40
-79

We then update our Projected Inventory Position.
Planning Period
Forecast
Customer Orders
Projected Demand
1
30
33
33
64 31
2
30
20
30
1
3
30
10
30
41
70
4
30
4
30
11
5
40
2
40
41
70
6
40
7
40
8
40
40
1
40
31
70
40
-9

We then update our Projected Inventory Position, and have completed the second
output of the master scheduling process, the Master Production Schedule.
Planning Period
Forecast
Customer Orders
Projected Demand
1
30
33
33
64 31
2
30
20
30
1
3
30
10
30
41
70
4
30
4
30
11
5
40
2
40
41
70
6
40
7
40
8
40
40
1
40
31
70
40
61
70

We are now ready to compute our final output of the master scheduling process, the
Available to Promise (ATP) or uncommitted inventory. This is inventory which is
available to sell and is extremely important to customer service. The ATP is
calculated for week/day 1, 3, 6, 7 and 8.
Think about how Lands End may use the ATP!
Planning Period
Forecast
Customer Orders
Projected Demand
Available To Promise (ATP)
1
30
33
33
64 31
2
30
20
30
1
3
30
10
30
41
70
4
30
4
30
11
5
40
2
40
41
70
6
40
7
40
8
40
40
1
40
31
70
40
61
70

The ATP is calculated for week/day 1 by the following:
Week 1 ATP
= Beginning inventory - sum of committed
inventory (customer orders) until the first master
scheduled lot
= 64 - (33 + 20) = 11
Planning Period
Forecast
Customer Orders
Projected Demand
1
30
33
33
64 31
11
2
30
20
30
1
3
30
10
30
41
70
4
30
4
30
11
5
40
2
40
41
70
6
40
7
40
8
40
40
1
40
31
70
40
61
70

Week 3 ATP
= MPS for week/day 3 - sum of committed
inventory (customer orders)until the next master
scheduled lot
= 70 - (10 + 4) = 56
Planning Period
Forecast
Customer Orders
Projected Demand
1
30
33
33
64 31
2
30
20
30
1
11
3
30
10
30
41
70
56
4
30
4
30
11
5
40
2
40
41
70
6
40
7
40
8
40
40
1
40
31
70
40
61
70

Week 5 ATP
scheduled lot
= 70 - 2 = 68
Planning Period
Forecast
Customer Orders
Projected Demand
1
30
33
33
64 31
11
2
30
20
30
1
3
30
10
30
41
70
56
4
30
4
30
11
5
40
2
40
41
70
68
6
40
7
40
8
40
40
1
40
31
70
40
61
70

Week 7 ATP
scheduled lot
= 70 - 0 = 70
Planning Period
Forecast
Customer Orders
Projected Demand
1
30
33
33
64 31
2
30
20
30
1
11
3
30
10
30
41
70
56
4
30
4
30
11
5
40
2
40
41
70
68
6
40
7
40
8
40
40
1
40
31
70
70
40
61
70

Week 8 ATP
scheduled lot
= 70 - 0 = 70
Planning Period
Forecast
Customer Orders
Projected Demand
1
30
33
33
64 31
11
2
30
20
30
1
3
30
10
30
41
70
56
4
30
4
30
11
5
40
2
40
41
70
68
6
40
7
40
8
40
40
1
40
31
70
70
40
61
70
70
Master Scheduling
Stabilizing The Master Schedule

You can see by these calculations that changes to a Master Schedule can be
disruptive, particularly those in the first few weeks/days of a schedule.
It is difficult to rearrange schedules, materials plans, and labor plans on a short notice.
For these reasons, many schedules have varying degrees of changes that are
allowed. Time fences are created to indicate the level of change if any that will be
considered .
Frozen
Planning Period
6
7
Firm
Full
10
11
Open
12
Hierarchical Planning Process

Items
Product lines
or families
Production Planning
Capacity Planning
Aggregate
Production Plan
Resource
Requirements Plan
Individual
products
Master Production
Schedule
Rough-Cut
Capacity Plan
Components
Material
Requirements Plan
Capacity
Requirements Plan
Shop Floor
Schedule
Input/Output
Control
Manufacturing
operations
Resource level
Plants
Critical work
centers
All work
centers
Individual
machines

Aggregate Production Planning

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Aggregate Production Planning (APP)

Why aggregate planning

Demand for Christmas turkeys at Tom Thumbs vs Thanksgiving

w Details carry a lot of uncertainty: aggregation reduces

w If there is variability why bother making detailed plans,

Instead make plans that carry a lot of flexibility

Flexibility and aggregation go hand in hand

Combined products = aggregate product

Short and long sleeve shirts = shirt

Pooled capacities = aggregated capacity

Dedicated machine and general machine = machine

Time periods = time buckets

Consider all the demand and production of a given month