IE3120 Manufacturing Logistics

Department of Industrial and Systems Engineering

National University of Singapore

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The Hierarchy of
Production Planning Decisions

2
Aggregate Planning
 Intermediate range planning usually
covering 2 to 12 months

Short-range Intermediate Long-range

Aggregate production plan:

MPS Employment levels Capacity/location planning
MRP Production quantities Facility layout

0 2 12

3
 Example of Product Aggregation

= iPod

= Mac

Source: Apple website 4

Example of Resource Aggregation

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 Aggregate Planning
 Inputs:Demand forecasts and resource
availabilities (equipment,manpower,raw
materials)
 The goal is to determine aggregate production
quantities and the levels of resources required to
achieve production goal.

 Tries tostrike a balance between DEM A N D

and C APACITY

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Importance of Aggregate Planning

 Details are hard to gather for longer horizons

 Details carry a lot of uncertainty:aggregation reduces
variability
◦ Demand for mooncakes during the mid-autumn festival has less
variability than the total variability in the demand for snow skin,
double yolk, etc.
 If there is variability why bother making detailed plans, inputs will
change anyway?
◦ Instead make plans that carry a lot of flexibility
◦ Flexibility and aggregation go hand in hand

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Primary Issues in Aggregate Planning
 Smoothing
 The cost of changing production and/or workforce levels from one
period to the next
 Bottleneck
 Inability of the system to respond to sudden changes in demand with
respect to capacity
 Treatment of demand
 Assumption that demand is known
 No buffer against forecast errors
 Planning horizon
 Number of periods to which aggregate plan is to be determined

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Planning Options
 Varying workforce size by hiring orlayoffs
 Varying productions rates through overtime or
idle time
 Subcontracting
 Using part-time workers
 Changing inventory level requirements

9
Costs in Aggregate Planning

• Labor costs
• Direct labor costs on regular time, overtime
• Holding costs
• The opportunity cost of dollars invested in
inventory
• Shortage costs
• The costs associated with back-ordered or
lost demand
• Subcontracting costs, and Idle time costs
Aggregate Planning Strategies
 Level strategy (constant workforce)
 maintain a constant output rate,or workforce
level over the planning horizon
 Chase strategy (zero inventory)
 set production equal to forecasted demand
 Mixed strategy
 use two or more controllable variables to set a
feasible production plan.

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Aggregate Planning Strategies
Advantages Disadvantages

Level strategy • Stable output • Overtime/Idle time

• Lower • Higher
hiring/firing inventory costs
costs

Chase strategy • Lower inventory • Frequent changes

cost in workforce
• Higher utilization levels

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Aggregate Planning Problem
Month Forecast Demand # Production Days
Jan 1,800 20
Feb 1,800 24
Mar 1,600 18
Apr 1,200 26
May 1,400 22
June 700 15

 There are currently 400 workers employed.

 Initial inventory level is 500.
 300 units of on hand inventory is desired at the end of June.
 Idle times are not allowed.

CH = Cost of hiring one worker = $500

CF = Cost of firing one worker = $1,000
CI = Cost of holding one unit of inventory for one month = $80

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Aggregate Planning Problem
K = N umber of aggregate units produced by one
worker in one day
Example:

In the past,the plant manager observed that over 22

working days, with the workforce level constant at 76
workers, the firm produced 245 units of items

K = # of aggregate units/time period /(# of workers) (Days/time period)

= 245/(22x76) = 0.14653

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Determine “net” demand.

Month Net Demand Net Cumulative # Production Days Cumulative #

Demand Days
Jan 1300 1300 20 20
Feb 1800 3100 24 44
Mar 1600 4700 18 62
Apr 1200 5900 26 88
May 1400 7300 22 110
June 1000 8300 15 125

9000
8000
Cumulative Demands

7000
6000
5000
4000
3000
2000
1000
0
0 20 40 60 80 100 120 140
Cumulative Days
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Level strategy: Constant work
force plan

 Suppose that we are interested in determining a

production plan that does not 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 8300 units in day
125.

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Constant Work Force Plan
9000

8000

Cumulative Demands 7000

6000

5000

4000

3000

2000

1000

0
0 20 40 60 80 100 120 140

Cumulative Days

 Daily Production = 8300/125 = 66.4 units,which

translates to 66.4/K = 454 workers.

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How can we have a constant work force
plan with no stockouts?
Net Net Cum.
Net Cumulative # Production Cumulative # Demand /
Month Demand Cum days
Demand Days Days

Jan 1,300 1,300 20 20 65

Feb 1,800 3,100 24 44 70.45
Mar 1,600 4,700 18 62 75.81
Apr 1,200 5,900 26 88 67.05
May 1,400 7,300 22 110 66.36
June 1,000 8,300 15 125 66.4

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How can we have a constant work force
plan with no stockouts?
 Using the graph,find the straight line that goes
through the origin and lies completely above the
cumulative net demand curve:
10000

9000
Cumulative Demands

8000

7000

6000

5000

4000

3000

2000

1000

0
0 20 40 60 80 100 120 140

Cumulative Days

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  From the previous graph,we see that cumulative net demand
curve is crossed at day 62,so that daily production is 4700/62
= 75.8064.
 How many workers needed?
◦ 75.8/.1465=517.34 or 518 workers

 Assume that workers are not allowed to be idle.Ending

inventory each month is found from:
M onthly Cum. End.
Month Cum. Demand
Production Production Inventory
Jan (20) 1518 1518 1,300 218
Feb (24) 1821 3339 3,100 239
Mar (18) 1366 4705 4,700 5

Apr (26) 1973 6678 5,900 778

May (22) 1669 8347 7,300 1047

Jun (15) 1138 9485 8,300 1185

3472

Total cost = (500)(118) + (80)(3472+300) = $360,760

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Chase Strategy (Zero Inventory Plan)
Month Expected Number of # Workers Number Number
Demand Prod. Days Required Hired Fired
Jan 1,300 20 444 44
Feb 1,800 24 512 68
Mar 1,600 18 607 95
Apr 1,200 26 315 292
May 1,400 22 435 120
Jun 1,000 15 455 20

347 292

Month Cum. Demand Cum. End. Inventory

Production
Total cost
Jan (20) 1,300 1301 1
= (500)(347)
Feb(24) 3,100 3101 1
4701 1
+(1000)(292)
Mar(18) 4,700
Apr(26) 5,900 5901 1
+ (80)(10+300)
May(22) 7,300 7303 3
Jun(15) 8,300 8303 3 = $490,300
10

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Mixed Strategy
 Suppose the modified plan calls for increasing the workforce to 518 at start
of January and reducing the workforce to 390 at start ofApril.

Month # Workers # Hired # Fired Cum. Cum. Ending

Demand Prod. Inv.
Jan(20) 518 118 1,300 1518 218
Feb(24) 518 3,100 3339 239
Mar(18) 518 4,700 4705 5
Apr(26) 390 128 5,900 6190 290
May(22) 390 7,300 7447 147
Jun(15) 390 8,300 8304 4

118 128 903

Total cost = (500)(118) + (1000)(128) + (80)(903+300) = $283,240

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 Advantages:

 Capable of optimizing some cost

performance automatically
 Able to deal with multiple
constraints/requirements simultaneously
 Notation
Parameters Decision Variables
CH =Cost of hiring one worker. Wt =Workforce level in period t.

CF =Cost of firing one worker. Pt =Production level in period t.

CI =Cost of holding one unit of stock for one It =Inventory level in period t.
period.
CR =Cost of producing one unit on regular time. Ht =Number of workers hired in period t.
CO =Incremental cost of producing one unit on Ft =Number of workers fired in period t.
overtime.
CU =Idle cost per unit of production. Ot =Overtime production in units in
period t.
CS =Cost to subcontract one unit of production. Ut =Worker idle time in units in period t.
nt =Number of production days in period t. St =Number of units subcontracted from
outside.
K =Number of aggregate units produced by
one worker in one day.
I0 =Initial inventory on hand at the start of the
planning horizon.
W0 =Initial workforce at the start of the planning
horizon.
Dt =Forecast of demand in period t.
nt = production days in period t.

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 Objective Function
To choose values for the problem variables:

H t , Ft , I t , Pt , Ot ,U t , S t

T
Minimize  c H H t  c F Ft  c I I t  c R Pt  co Ot  cU U t  c S S t 
t 1
 Constraints

Production-workforce balance

Pt  KntWt  Ot U t t

Production-inventory balance

I t  I t 1  Pt  S t  Dt  t
 Constraints

Workforce balance

Wt  Wt-1  Ht F t t

Nonnegativity Constraints

H t , Ft , I t , Pt , Ot ,U t , S t  0
 Extensions
 Buffer inventory requirements
I t  Bt t

 Capacity constraints

Pt  Ct t
 Extensions
 Backlogs allowed
 
It  It  It
 
It , It  0 t

Cost translation:
I t   c+I I t  Holding Cost
 
I c I -
Backlog Cost
t I t
 Extensions
 Presence of convex piecewise-linear cost
functions
◦ Convex function:increasing slope
◦ Piecewise-linear function:straight line segments
Incorporation to LP model

*
cH 2

*
cH 1

H*
Slope = cost per unit
The steeper the slope,the higher
marginal cost
 Incorporation to LP model
Total number of hires for period t
Ht  H1t  H2t

Cost equivalent
T

c H1t cH 2 H2t

H1
t1

Additional constraints
Ht  H1t  H2t
0  H1t  H *
0  H2t
 Things to note:
 Mutually exclusive events in
each period:
◦ Hiring vs firing
◦ Excess inventory vs backlogs
 Not possiblethat: H 1t  H *
H 2t  0

 W hy?
Example (from earlier)
Month Forecast Demand # Production Days
Jan 1,800 20
Feb 1,800 24
Mar 1,600 18
Apr 1,200 26
May 1,400 22
June 700 15

 There are currently 400 workers employed.

 Initial inventory level is 500.
 300 units of on hand inventory is desired at the end of June.
 Idle times are not allowed.

CH = Cost of hiring one worker = $500

CF = Cost of firing one worker = $1,000
CI = Cost of holding one unit of inventory for one month = $80

K = 0.14653 (from previous calculation)

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 Objective Function
6
Minimize  500H t  1000Ft  80I t 
t 1

Constraints
 Boundary Conditions:

W0  400
I 0  500
I 6  300
Workforce Balance
W1 W 0H 1  F1  0
W2 W 1H 2  F2  0
W3 W 2H 3  F3  0
W4 W 3H 4  F4  0
W5 W 4H 5  F5  0
W6 W 5H 6  F6  0
Production balance
P1  I1  I 0  1800
P2  I 2  I1  1800
P3  I 3  I 2  1600
P4  I 4  I 3  1200
P5  I 5  I 4  1400
P6  I 6  I 5  700
Production-workforce balance

P1  2.931W1  0
P2  3.517W2  0
P3  2.683W3  0
P4  3.810W4  0
P5  3.224W5  0
P6  2.198W6  0
 LP Results

Cum. Cum. Ending

Month # Workers # Hired # Fired
Demand Prod. Inv.
Jan 517.34 117.34 1,300 1516.13 216.13
Feb 517.34 3,100 3335.48 235.48
Mar 517.34 4,700 4700.00 0.00
Apr 389.97 127.37 5,900 6185.71 285.71
May 389.97 7,300 7442.86 142.86
Jun 389.97 8,000 8300.00 300.00
117.34 127.37 1180.18

Total cost = (500)(117.34) + (1000)(127.37) + (80)(1180.18) = $280,454.44

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 LP Results- with rounding off

Cum. Cum. Ending

Month # Workers # Hired # Fired
Demand Prod. Inv.
Jan 518 118 1,300 1518 218
Feb 518 3,100 3339 239
Mar 518 4,700 4705 5
Apr 390 128 5,900 6190 290
May 390 7,300 7447 147
Jun 390 8,000 8304 304
118 128 1203

Total cost = (500)(118) + (1000)(128) + (80)(1203) = $283,240

Round off with respect to W t

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