AGGREGATE PLANNING

(Graphical Methods)
Nguyễn Thị Hoàng Mai
[email protected]

POM for Engineers – Aggregate planning

  Level scheduling: Maintaining a constant output rate,
production rate, or workforce level over the planning
horizon.
Aggregate
 Chase strategy: A planning strategy that sets
Planning production equal to forecast demand.
Strategies  Mixed strategy: A planning strategy that uses two or
more controllable variables to set a feasible production
plan.

POM for Engineers – Aggregate planning 2

 Example 1:
A Juarez, Mexico, manufacturer of roofing supplies has developed monthly forecasts for a family of
products. Data for the 6-month period January to June are presented in the Table 1. The firm would like
to begin development of an aggregate plan.

Table 1. Monthly Forecasts

Month Expected demand Production days Demand per day (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
Jun 1,100 20 55
6,200 124

POM for Engineers – Aggregate planning 3

 Example 1:
Table 2 provides the cost information necessary for analyzing these three alternatives. Calculating the
cost for each plan.
Table 2. Cost Information
Inventory carrying cost $5 per unit per month
Subcontracting cost per unit $20 per unit
Average pay rate $ 10 per hour ($80 per day)
Overtime pay rate $ 17 per hour (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate (hiring and training) $300 per unit
Cost of decreasing daily production rate (layoffs) $600 per unit

Plan 1: maintain a constant workforce throughout the 6-month period.

Plan 2: maintain a constant workforce at a level necessary to meet the lowest demand month (March)
and to meet all demand above this level by subcontracting.
Plan 3: hire and lay off workers as needed to produce exact monthly requirements
POM for Engineers – Aggregate planning 4
Plan 1: maintain a constant workforce throughout the 6-month period → level strategies
Total expected demand 6200
Average requirement = = = 50 units per day
Number of production days 124
Month Production Production Demand Monthly Ending
days at 50 units per day forecast inventory change inventory
Jan 22 1,100 (=50*22) 900 +200 200
Feb 18 900 700 +200 400
Mar 21 1,050 800 +250 650
Apr 21 1,050 1,200 -150 500
May 22 1,100 1,500 -400 100
Jun 20 1,000 1,100 -100 0
1850

The workforce required to produce 50 units per day = 10 workers (each unit requires 1.6 labor-hours to produce,
each worker can make 5 units in an 8-hour day)
Cost Calculations
Inventory carrying $ 9,250 (= 1,850 units carried * $5 per unit)
Regular-time labor $ 99,200 (= 10 workers * $80 per day * 124 days)
Other costs (overtime, hiring, layoffs, subcontracting) 0
5
Total cost $108,450
Plan 2: maintain a constant workforce at a level necessary to meet the lowest demand
month (March) and to meet all demand above this level by subcontracting → level
strategies
38
Number of needed workers = = 7.6 workers (7 full-time workers and 1 part-timer.)
5

In-house production = 38 units per day * 124 production days= 4,712 units
Subcontract units = 6,200 - 4,712 = 1,488 units

Cost Calculations
Regular-time labor $ 75,392 (= 7.6 workers * $80 per day * 124 days)
Subcontracting $ 29,760 (= 1,488 units * $20 per unit)
Total cost $105,152

6
Plan 3: hire and lay off workers as needed to produce exact monthly requirements
→ chase strategies
Assumption: There is no change in production from the previous month, December.

Month Demand per day Increasing Decreasing

Demand Regular-time
(computed) production cost production cost
forecast production
(hiring) (layoff )
Jan 900 900 41
Feb 700 700 39 $1,200 (= 2*$600)
Mar 800 800 38 $ 600 (= 1*$600)
Apr 1,200 1,200 57 $5,700 (= 19*$300)
May 1,500 1,500 68 $3,300 (= 11*$300)
Jun 1,100 1,100 55 $7,800 (= 13*$600)
Total 6200 $9,000 $9,600

Cost Calculations
Regular-time labor $99,200 (= 6200 units* $1.6 hr per unit * $10 per hour)
Hiring cost $9,000
Layoffs cost $9,600
7
Total cost $117,800
 Example 2:
The Good and Rich Candy Company makes a variety of candies in three factories worldwide. Its line of
chocolate candies exhibits a highly seasonal demand pattern, with peaks during the winter months (for
the holiday season and Valentine’s Day) and valleys during the summer months (when chocolate tends
to melt and customers are watching their weight). Given the following costs and quarterly sales
forecasts, determine whether (a) level production, or (b) chase demand would more economically meet
the demand for chocolate candies:

Spring Summer Fall Winter

80,000 50,000 120,000 150,000

Hiring cost $100 per worker

Firing cost $500 per worker
Inventory carrying cost $0.50 per pound per quarter
Regular production cost per pound $2.00
Production per employee 1000 pounds per quarter
Beginning workforce 100 workers
POM for Engineers – Aggregate planning 8
(a) Level production

Regular Inventory Ending

Demand
production change inventory
Spring 80,000 100,000 + 20,000 20,000

Summer 50,000 100,000 + 50,000 70,000

Fall 120,000 100,000 -20,000 50,000

Winter 150,000 100,000 -50,000 0

Total 400,000 400,000 140,000

Regular –time labor cost = 400,000*2 = 800,000

Inventory cost = 140,000*0.5 = 70,000
Total cost = 800,000 + 70,000 = 870,000
POM for Engineers – Aggregate planning 9
(b) Chase demand

Regular Increasing Decreasing

Demand
production production production
Spring 80,000 80,000 20,000

Summer 50,000 50,000 30,000

Fall 120,000 120,000 70,000

Winter 150,000 150,000 30,000

Total 400,000 100,000 50,000

Regular – time labor cost = 400,000*2 = 800,000

Workforce changing cost = 100*100 + 50*500 = 35,000
Total cost = 835,000
POM for Engineers – Aggregate planning 10
 Exercise 1
Bioway, Inc., a manufacturer of medical supplies, uses aggregate planning to set labor and inventory
levels for the year. While a variety of items are produced, a standard kit composed of basic supplies is
used for planning purposes. Demand varies with seasonal illnesses and the quarterly ordering policies
of hospitals. The average worker at Bioway can produce 1000 kits a month at a cost of $9 per kit during
regular production hours and $10 a kit during overtime production. Completed kits can also be
purchased from outside suppliers at $12 each. Inventory carrying costs are $2 per kit per month.
Overtime is limited to regular production, but subcontracting is unlimited. Due to high quality standards
and extensive training, hiring and firing costs are $1500 per worker. Bioway currently employs 25
workers. Given the demand forecast below, develop a six-month aggregate production plan for Bioway
using (a) chase demand and (b) a mixed strategy where the current workforce is kept for April through
August, and supplemented with overtime and subcontracting as needed.
Apr May June July Aug Sep
60,000 22,000 15,000 46,000 80,000 15,000
Number of products a worker can produce per month = 1000 Subcontracting cost per unit = $12
Regular production cost per unit = $9 Inventory carrying costs = $2
Overtime production cost per unit = $10 Hiring/ Firing costs per worker = $1500
11
Overtime is limited to regular production, but subcontracting is Currently employs 25 workers.
(a) Chase demand
Demand Regular production Increasing production Decreasing production
Apr 60,000
May 22,000
June 15,000
Jul 46,000
Aug 80,000
Sep 15,000
Total

Regular-time labor cost =

Workforce changing cost =
Total cost =
POM for Engineers – Aggregate planning 12
(b) Mixed strategy where the current workforce is kept for April through August,
and supplemented with overtime and subcontracting as needed
Regular Overtime Workforce
Demand Subcontruct Inventory change Ending inventory
production production change

Apr 60,000

May 22,000

June 15,000

Jul 46,000

Aug 80,000

Sep 15,000

Total

Regular-time production cost =

Overtime production cost =
Subcontracting cost =
Inventory carrying cost =
Workforce changing cost = POM for Engineers – Aggregate planning 13
Total cost =
 Exercise 2
Southeast Soda Pop, Inc., has a new fruit drink for which it has high hopes. John
Mittenthal, the production planner, has assembled the following cost data and demand
forecast as the table below.
John’s job is to develop an aggregate plan. The three initial options he wants to
evaluate are:
Plan A: a strategy that hires and fires personnel as necessary to meet the forecast.
Plan B: a level strategy.
Plan C: a level strategy that produces 1,200 cases per quarter and meets the forecast
demand with inventory and subcontracting.
Which strategy is the lowest-cost plan?

POM for Engineers – Aggregate planning 14

 QUARTER FORECAST
Exercise 2 1 1,800
2 1,100
3 1,600
4 900

Previous quarter’s output 1,300 cases

Beginning inventory 0 cases
Stockout cost $150 per case
Inventory holding cost $40 per case at end of quarter
Hiring employees $40 per case
Terminating employees $80 per case
Subcontracting cost $60 per case
Unit cost on regular time $30 per case
Overtime cost $15 extra per case
Capacity on regular time 1,800 cases per quarter
POM for Engineers – Aggregate planning 15
Plan A: Hires and fires personnel as necessary to meet the forecast.
Quar
Forecast Regular production Increasing production Decreasing production
ter
1
2
3
4
Total

Regular-time production cost =

Hiring cost =
Firing cost =
Total cost =

POM for Engineers – Aggregate planning 16

Plan B: a level strategy
Quart Fore Regular Inventory Ending Workforce
Stockout
er cast production change inventory change
1
2
3
4
Total

Regular-time production cost =

Stockout cost =
Inventory carrying cost =
Hiring cost =
Total cost =

POM for Engineers – Aggregate planning 17

Plan C: a level strategy that produces 1,200 cases per quarter and meets the
forecast demand with inventory and subcontracting.
Quar
ter
1
2
3
4
Total

POM for Engineers – Aggregate planning 18

 Exercise 3
The president of Hill Enterprises, Terri Hill, projects the firm’s aggregate demand
requirements over the next 8 months as table below. Her operations manager is
considering a new plan, which begins in January with 200 units on hand. Stockout cost
of lost sales is $100 per unit. Inventory holding cost is $20 per unit per month. Ignore
any idle-time costs. Regular-time labor cost per unit is $50.

Jan 1,400 May 2,200

Feb 1,600 June 2,200
Mar 1,800 July 1,800
Apr 1,800 Aug 1,800

POM for Engineers – Aggregate planning 19

 Exercise 3
Calculate the total cost for each plan below
Plan A: Vary the workforce level to execute a strategy that produces the quantity demanded in the prior
month. The December demand and rate of production are both 1,600 units per month. The cost of hiring
additional workers is $5,000 per 100 units. The cost of laying off workers is $7,500 per 100 units.
Plan B: Produce at a constant rate of 1,400 units per month, which will meet minimum demands. Then
use subcontracting, with additional units at a premium price of $75 per unit. Evaluate this plan by
computing the costs for January through August
Plan C: Keep a stable workforce by maintaining a constant production rate equal to the average
requirements and allow varying inventory levels
Plan D: Keep the current workforce stable at producing 1,600 units per month. Permit a maximum of
20% overtime at an additional cost of $50 per unit. A warehouse now constrains the maximum allowable
inventory on hand to 400 units or less.
Plan E: Keep the current workforce, which is producing 1,600 units per month, and subcontract to meet
the rest of the demand.

POM for Engineers – Aggregate planning 20

 Exercise 4
The S&OP team at Kansas Furniture, has received the following estimates of demand requirements:

July Aug Sep Oct Nov Dec

1,000 1,200 1,400 1,800 1,800 1,800
Assuming one-time stockout costs for lost sales of $100 per unit, inventory carrying costs of $25 per unit per month,
and zero beginning and ending inventory, evaluate these plans
Plan A: Produce at a steady rate (equal to minimum requirements) of 1,000 units per month and subcontract
additional units at a $60 per unit premium cost.
Plan B: Vary the workforce, to produce the prior month’s demand. The fi rm produced 1,300 units in June. The cost
of hiring additional workers is $3,000 per 100 units produced. The cost of layoff s is $6,000 per 100 units cut back.
Plan C: Keep the current workforce steady at a level producing 1,300 units per month. Subcontract the remainder
to meet demand. Assume that 300 units remaining from June are available in July.
Plan D: Keep the current workforce at a level capable of producing 1,300 units per month. Permit a maximum of
20% overtime at a premium of $40 per unit. Assume that warehouse limitations permit no more than a 180-unit
carryover from month to month. This plan means that any time inventories reach 180, the plant is kept idle. Idle time
per unit is $60. Any additional needs are subcontracted at a cost of $60 per incremental unit.
POM for Engineers – Aggregate planning 21
AGGREGATE PLANNING
(Transportation Methods)
Nguyễn Thị Hoàng Mai
[email protected]

POM for Engineers – Aggregate planning

 Example 1
Burruss Manufacturing Company uses overtime, inventory, and subcontracting to absorb
fluctuations in demand. An aggregate production plan is devised annually and updated
quarterly. Cost data, expected demand, and available capacities in units for the next four
quarters are given here. Demand must be satisfied in the period it occurs; that is, no
backordering is allowed. Design a production plan that will satisfy demand at minimum cost.
Quarter Expected Regular Capacity Overtime Subcontract
demand Capacity Capacity
1 900 1000 100 500
2 1500 1200 150 500
3 1600 1300 200 500
4 3000 1300 200 500
Regular production cost per unit $20
Overtime production cost per unit $25
Subcontracting cost per unit $28
Inventory holding cost per unit per period $3
POM for Engineers – Aggregate planning 23
Beginning inventory 300 units
 Supply from Demand for
Unused Total capacity
P1 P2 P3 P4
Capacity available
Beginning inventory 300 0 3 6 9 300
P1 Regular time 600 20 300 23 100 26 29 1000
Overtime 25 28 31 100 34 100
Subcontract 28 31 34 37 500 500
P2 Regular time 1200 20 23 26 1200
Overtime 25 28 150 31 150
Subcontract 28 31 250 34 250 500
P3 Regular time 1300 20 23 1300
Overtime 200 25 28 200
Subcontract 28 500 31 500
P4 Regular time 1300 20 1300
Overtime 200 25 200
Subcontract 500 28 500
Total demad 900 1500 1600 3000 700 24
Period Demand Regular Overtime Subcontract Ending
production Inventory

1 900 1000 100 0 500

2 1500 1200 150 250 600

3 1600 1300 200 500 1000

4 3000 1300 200 500 0

Total 7000 4800 650 1250 2100

Total Cost = 4800*20 + 650*25 + 1250*28 + 2100*3 = 153,550

POM for Engineers – Aggregate planning 25

 Exercise 1
Fabulous Fit Fibers produces a line of sweatclothes that exhibits a varying demand pattern.
Given the following demand forecasts, production costs, and constraints, design a production
plan for Fabulous Fit using the transportation method of LP. Also, calculate the cost of the
production plan.

Maximum regular production 100 units/month

Period Demand
Maximum overtime production 50 units/month
September 100
Maximum subcontracting 50 units/month
Octorber 130
Regular production costs $10/unit
November 200
Overtime production costs $25/unit
December 300
Subcontracting costs $35/unit
Inventory holding costs $5/unit/month
Beginning inventory 0

POM for Engineers – Aggregate planning 26

 Supply from Demand for
Unused Total capacity
P1 P2 P3 P4
Capacity available
Beginning inventory
P1 Regular time
Overtime
Subcontract
P2 Regular time
Overtime
Subcontract
P3 Regular time
Overtime
Subcontract
P4 Regular time
Overtime
Subcontract
Total demad 27
Exercise 1

Period Demand Regular Overtime Subcontract Ending

production Inventory
1
2
3
4

POM for Engineers – Aggregate planning 28

 Exercise 2
Jerusalem Medical Ltd., an Israeli producer of portable kidney dialysis units and other
medical products, develops a 4-month aggregate plan. Demand and capacity (in units) are
forecast as follows:

Capacity Source 1 2 3 4
Labor: Regular time 235 255 290 300
Labor: Overtime 20 24 26 24
Subcontract 12 15 15 17
Demand 255 294 321 301

The cost of producing each dialysis unit is $985 on regular time, $1,310 on overtime, and
$1,500 on a subcontract. Inventory carrying cost is $100 per unit per month. There is to be
no beginning or ending inventory in stock and backorders are not permitted. Set up a
production plan that minimizes cost using the transportation method

POM for Engineers – Aggregate planning 29

 Supply from Demand for
Unused Total capacity
P1 P2 P3 P4
Capacity available
Beginning inventory
P1 Regular time
Overtime
Subcontract
P2 Regular time
Overtime
Subcontract
P3 Regular time
Overtime
Subcontract
P4 Regular time
Overtime
Subcontract
Total demad 30
 Exercise 3
MTI, a global telecommunications company, manufactures cable boxes and DVRs for its
customers. Demand varies considerably from quarter to quarter. Using the demand,
capacities, and cost figures given below, devise an aggregate production plan for MTI that
minimizes costs.

Period Expected Regular Capacity Overtime Subcontract

demand Capacity Capacity
1 500 1000 200 500
2 1200 1000 200 500
3 2500 1000 200 500
4 1900 1000 200 500

Regular production cost per unit $20

Overtime production cost per unit $25
Subcontracting cost per unit $30
Inventory holding cost per unit per period $3
POM for Engineers – Aggregate planning 31
 Supply from Demand for
Unused Total capacity
P1 P2 P3 P4
Capacity available
Beginning inventory
P1 Regular time
Overtime
Subcontract
P2 Regular time
Overtime
Subcontract
P3 Regular time
Overtime
Subcontract
P4 Regular time
Overtime
Subcontract
Total demad 32
 Exercise 4
GF Incorporated, a manufacturer of power systems, uses overtime, inventory, and
subcontracting to absorb fluctuations in demand. An annual production plan is devised and
updated quarterly. The expected demand and available capacities for the next four quarters
are as following table. Design a production plan that will satisfy demand at minimum cost.

Period Expected Regular Capacity Overtime Subcontract

demand Capacity Capacity
1 2000 1000 1000 5000
2 4500 1000 1000 5000
3 7500 1000 1000 5000
4 3000 1000 1000 5000

Regular production cost per unit $20

Overtime production cost per unit $25
Subcontracting cost per unit $30
Inventory holding cost per unit per period $3
Beginning inventory POM for Engineers – Aggregate planning
0 33
 Supply from Demand for
Unused Total capacity
P1 P2 P3 P4
Capacity available
Beginning inventory
P1 Regular time
Overtime
Subcontract
P2 Regular time
Overtime
Subcontract
P3 Regular time
Overtime
Subcontract
P4 Regular time
Overtime
Subcontract
Total demad 34
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