2

Module

AGGREGATE PLANNING
I. Objectives
The objectives of the practicum are:
1. Explain principle of aggregate planning.
2. Explain types of aggregate production planning.
3. Identify advantages and disadvantages of each type of aggregate production
planning.
II. Literature Review
The aggregate planning approach is predicated on the existence of an
aggregate unit of production. When the types of items produced are similar, an
aggregate production unit can correspond to an “average” item, but if many
different types of item are produced, it would be more appropriate to consider
aggregate units in terms of weight, volume, amount of work required, or dollar
value (Nahmias & Olsen, 2015).
Aggregate Planning methodology is designed to translate demand
forecast into a blueprint for planning staffing and production levels for the firm
over a predetermined planning horizon (Nahmias & Olsen, 2015).
Aggregate planning becomes more of a challenge when demand
fluctuates over the planning horizon. There are three alternative plans for
managing the workforce: Evaluation of Chase Strategy (Zero Inventory Plan),
Evaluation of the Constant Workforce Plan, and Mixed Strategies and
Additional Constraints.
1. Evaluation of a Chase Strategy (Zero Inventory Plan)
Chase strategy is an alternative to minimize the level of inventory the
company must hold. This strategy will be done by adjusting between the
demand and the worker in this particular period. Under the zero inventory
plan the workforce is changed each month in order to produce enough units
to most closely match the demand pattern. Capacity is adjusted up and down
(i.e., workers are hired and fired) to achieve this matching. A competent
staff is maintained, and demand is met temporarily without investing in
permanent resources. Disadvantages include the shortages may result in lost
sales, and cost of fluctuating workforce levels.
2. Evaluation of the Constant Workforce Plan
Constant Workforce Plan is an alternative plan to completely
eliminate the need for hiring and firing during the planning horizon. This
strategy will be done with hiring the maximum workforce during the
planning horizon. Disadvantage of this alternative plan is having ending
inventory.

Industrial Engineering Laboratory

BINUS University 30 Revision:
Practicum module
ISYE 6101 – P ro du cti on & op era ti on an alys is

3. Mixed Strategies and Additional Constraints

Mixed Strategies and Additional Constraints is an alternative plan that
divided into three ways. First, use the maximum capacity of the production
to meet the demand. Second, if the production cannot meet the demand, use
overtime or backordering. Third, if overtime cannot meet the demand, use
subcontracting. Disadvantages of this alternative plan include reduced
profits, loss of control over production, long lead times, and the potential
that the subcontractor may become a future competitor.
In aggregate planning, in making production planning decisions it is
very important to measure and identify specific costs in production planning.
The purpose of identifying costs in aggregate planning is a consideration in
choosing an aggregate plan that minimizes costs (Nahmias & Olsen, 2015).
1. Smoothing Costs
Smoothing costs are costs that arise as a result of changes in the level
of production from one period to the next. In aggregate planning, the most
prominent cost of smoothing is the cost of changing the number of workers.
Just like increasing the number of workers takes time and money to
advertise positions, interview prospective employees, and train new
employees. However, there are other costs associated with firing workers
that may be more difficult to quantify.
2. Holding Costs
Holding costs are costs that arise as a result of capital tied up in
inventory. If a firm can lower its inventory, the money saved can be
invested elsewhere with returns that will vary with industry and with
particular firms. Holding costs are almost always assumed to be linear in the
number of units being held at a particular point in time. In the analysis of
aggregate planning. Holding costs is expressed in dollars per unit owned per
planning period.
3. Shortage Costs
Shortage costs, namely the costs generated at a negative inventory
level if the holding costs are charged to the aggregate inventory as long as
the value is positive. In some situations, there may be a need for a shortage,
which is represented by a negative level of supply. Shortages can occur
when the expected demand exceeds the capacity of the production facility or
when the demand is higher than anticipated.
4. Regular time Costs
Regular time costs are costs resulting from the production process of
each unit of product during regular working hours. This regular time cost
includes the cost of producing one unit of output during regular working
hours. Included in this category are actual payroll costs of permanent
employees who work on a regular basis, direct and indirect material costs,
and other production costs.
5. Overtime and subcontracting costs
Overtime and subcontract costs are unit production costs that are not
produced on a regular basis. Overtime refers to production by fixed-time
employees outside of the normal working day, and subcontracting refers to
the production of goods by outside suppliers. Again, it is generally assumed
that these costs are linear.

Industrial Engineering Laboratory

BINUS University 31 Revision:
Practicum module
ISYE 6101 – P ro du cti on & op era ti on an alys is

III. Tables
1. Zero Inventory Plan
Table 2.1 Initial Calculations for Zero Inventory Plan
Number of Number of
Forecast Minimum Number of
Period Working Units Produced
Net Demand Workers Required
(1) Days per Worker
(4) (5) = (4)/(3) rounded up
(2) (3) = (2) x K

Source: (Nahmias, 2009)

K = Number of aggregate units produced by one worker in one day

Average of the production rate
K=
Number of workers
Number of production
Average of the production rate =
Number of working days

Table 2.2 Zero Inventory Aggregate Plan

Source: (Nahmias, 2009)

2. Constant Workforce Plan

Table 2.3 Computation of the Minimum Workforce Required
Cumulative Cumulative Number of
Period Ratio
Net Demand Units Produced per Worker
(1) (4) = (2) / (3)
(2) (3)

Source: (Nahmias, 2009)

Industrial Engineering Laboratory

BINUS University 32 Revision:
Practicum module
ISYE 6101 – P ro du cti on & op era ti on an alys is

Table 2.4 Inventory Levels for Constant Workforce Schedule

Source: (Nahmias, 2009)

IV. Procedures
Your company is producing toy train. Polycarbonate as the main material
of toy train's body supplied from company’s suppliers. The polycarbonate cut
into the properly size of normal toy train. The polycarbonate is left the press
for a predetermined amount of time to allow to dry. Once the polycarbonate
has dried, these blank bodies are removed and sent to the factory to be shaped
and sanded smooth. Next, the holes for the polycarbonate bodies are drilled and
the body is sent to the paint shop where the graphics are applied on the toy
train’s body. After the body is finished, it ready to be assemblied with the other
parts. The components of the other parts bought from company’s supplier.
By using the forecast demand for the next 12 months for a particular line
of drives produced using that you have count before, find out which
aggregate planning method is the best to make your company pay least
cost (Zero Inventory, Constant Workforce Plan, Overtime + Subcontract
and Overtime + Back Order) while there are currently (end of December
2018) 55 workers employed in your company, one workers can make toy
train’s body in one day shift of 8 hours a day with maximum 3 hours of
overtime. With 23, 21, 22, 21, 24, 23, 26, 22, 23, 24, 25 and 22 working days
for January 2019, February 2019, March 2019, April 2019, et seq. Ending
inventory at December 2018 is 170 units and expected ending inventory at
December 2019 is to be 80 units.
cost of hiring one worker = $ 300
cost of firing one worker = $ 380
cost of holding one unit of inventory per year = $ 12
cost of subcontract = $ 55
cost of backorder = $ 46
wage/month = $ 2020
overtime cost/hour = $ 18
number of working days per worker = 20 days
number of unit production = 1650 units
number of workers = 55 people
In this case we want to choose one of four aggregate planning method
with the least cost for planning the production in one year period. There are
zero inventory planning, constant workforce, and mixed strategies (overtime +
back order and overtime + subcontract). Before we calculate, we need the
demand forecast data.

Industrial Engineering Laboratory

BINUS University 33 Revision:
Practicum module
ISYE 6101 – P ro du cti on & op era ti on an alys is

First, we need to break down the case and extract needed information.
Table 2.5 Data Information
Number
Number of workers on last period of
55 workers Period
(Dec-17) working
days
Work Hours/Day 8 hours Jan-19 23
Max overtime per worker 3 hours Feb-19 21
Ending inventory at December 2018 170 units Mar-19 22
Expected ending inventory at
80 units Apr-19 21
December 2019
number of working days per worker 20 days May-19 24
number of unit production 1650 units Jun-19 23
cost of hiring one worker $300 Jul-19 26
cost of firing one worker $380 Aug-19 22
cost of holding one unit of
$12 Sep-19 23
inventory for one month
cost of subcontract $55 Oct-19 24
cost of backorder $46 Nov-19 25
wage/month $2,020 Dec-19 22
overtime cost/hour $18

STEP 2:
Zero inventory Planning (ZIP)
number of production 1650
number of working days 20
number of worker last period 55
K 1.5
Number of workers on last period (Dec-18) 55
Ending inventory at December 2018 170
Expected ending inventory at December 2019 80

K is the amount of goods that a worker can produce in one working day.
number of production
number of working days
The formula for K is
number of worker

ZERO INVENTORY PLAN (ZIP)

Table 2.6 Demand Forecast

Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
2003 2148 2286 2534 2686 2141 2294 2439 2702 2861 2280 2440

Industrial Engineering Laboratory

BINUS University 34 Revision:
Practicum module
ISYE 6101 – P ro du cti on & op era ti on an alys is

Forecast Minimum
Number Of Number of Number Cumulative Cumulative Ending
Net Number of Number Number
No Period Working Unit Produced of Units Production Demand Inventory
Demand Workers Hired Fired
Days per Worker Produced (unit) (unit) (unit)
(unit) Required
1 Jan-19 23 34.5 1833 54 0 1 1863 1863 1833 30
2 Feb-19 21 31.5 2148 69 15 0 2173 4036 3981 55
3 Mar-19 22 33 2286 70 1 0 2310 6346 6267 79
4 Apr-19 21 31.5 2534 81 11 0 2551 8897 8801 96
5 May-19 24 36 2686 75 0 6 2700 11597 11487 110
6 Jun-19 23 34.5 2141 63 0 12 2173 13770 13628 142
7 Jul-19 26 39 2294 59 0 4 2301 16071 15922 149
8 Aug-19 22 33 2439 74 15 0 2442 18513 18361 152
9 Sep-19 23 34.5 2702 79 5 0 2725 21238 21063 175
10 Oct-19 24 36 2861 80 1 0 2880 24118 23924 194
11 Nov-19 25 37.5 2280 61 0 19 2287 26405 26204 201
12 Dec-19 22 33 2520 77 16 0 2541 28946 28724 222
Safety Stock 80
TOTAL 842 64 42 1685
COST $1,700,840 $19,200 $15,960 $20,220
TOTAL COST OF
ZERO INVENTORY $1,756,220
PLAN METHOD
Minimum Num of
Demand forecast Jan 19 Forecast net demand / worker Req × Num of Cumulative Prod
Demand forecast
Numbers of – Ending inventory at Dec 19 + Expected
Number of unit unit produced per – Cumulative
work days × K Dec 2018 produced per worker worker Demand
ending inventory
(round up the result) (round down the result)

Industrial Engineering Laboratory

BINUS University 35 Revision:
Practicum module
ISYE 6101 – P ro du cti on & op era ti on an alys is

Number Hired: (for Jan) IF minimum number of worker required (W1) >
number of worker on LAST PERIOD (Dec 18) (W2), then
W1 – W2. Otherwise 0
Number Hired: (for Feb-Dec) IF minimum number of worker required (W1) >
number of worker A MONTH BEFORE (W2), then W1 –
W2. Otherwise 0
Number Fired: (for Jan) IF Number of workers on last period (Dec-18) (F1) >
Minimum Number of Workers Required on Jan (F2), then F1
– F2 otherwise 0
(For Feb-Dec) IF Minimum Number of Workers Required (F1) <
Minimum Number of Workers Required A MONTH BEFORE (F2), then F1-
F2 otherwise 0
Total wage cost : total minimum number of
worker required × wage/month
= $1,700,840
Total hiring cost : total number hired × hiring
cost = $19,200
Total firing cost : total number fired × firing cost
= $15,960
Total inventory cost : total ending inventory unit ×
inventory cost per unit per year
= $20,220
Total Cost of Zero Inventory Plan Method : Total wage cost + total hiring
cost + total firing cost + total
inventory cost = $1,756,220
CONSTANT WORKFORCE PLAN
This method is a part of strategic level, where the company wants to
align all production capacity without increasing or reducing workers.
number of production 1650
number of working days 20
number of worker last period 55
K 1.5
Number of workers on last period (Dec-18) 55
Ending inventory at December 2018 170
Expected ending inventory at December 2019 80

The following is the calculation of constant workforce method:

The cumulative net demand and number of unit produced per worker
value are the same as in ZIP table.

Industrial Engineering Laboratory

BINUS University 36 Revision:
Practicum module
ISYE 6101 – P ro du cti on & op era ti on an alys is

Number of Cumulative
Cumulative Monthly Cumulative Ending
Unit Number of
No Period Net Demand Ratio Production Production Inventory
Produced / Units Produced
(unit) (unit) (unit) (unit)
Worker / Worker
1 Jan-19 1833 34.5 34.5 54 2415 2415 582
2 Feb-19 3981 31.5 66 61 2205 4620 639
3 Mar-19 6267 33 99 64 2310 6930 663
4 Apr-19 8801 31.5 130.5 68 2205 9135 334
5 May-19 11487 36 166.5 69 2520 11655 168
6 Jun-19 13628 34.5 201 68 2415 14070 442
7 Jul-19 15922 39 240 67 2730 16800 878
8 Aug-19 18361 33 273 68 2310 19110 749
9 Sep-19 21063 34.5 307.5 69 2415 21525 462
10 Oct-19 23924 36 343.5 70 2520 24045 121
11 Nov-19 26204 37.5 381 69 2625 26670 466
12 Dec-19 28724 33 414 70 2310 28980 256
Safety Stock 80
TOTAL 5840

Cumulative net demand / Mark the highest value Number of unit produced
Cummulative number of in ratio table to be the per worker × highest value Cumulative production –
unit produced per worker multiplier in ratio table cumulative net demand
(round up the result) (round downs the result)

Industrial Engineering Laboratory

BINUS University 37 Revision:
Practicum module
ISYE 6101 – P ro du cti on & op era ti on an alys is

Total Hiring 15 Total hiring cost $4,500

Total firing 0 Total wage $1,696,800
Total worker `19 840 Total inventory cost $70,080
Total inventory 5840 Total cost Method CWP $1,771,380

Total firing : IF (number of workers on last period `18(W1)) –

(highest ratio (R)) ≤ 0 then 0, otherwise W1 - R
Total hiring : IF (highest ratio (R)) - (number of workers on last
period `18(W1)) ≤ 0 then 0, otherwise R – W1
Total Worker `19 : n month × highest ratio
Total hiring cost : total hiring × hiring cost
Total Wage : total worker (in the highest value in ratio table) ×
wage per worker per month = 70 x $2,020 x 12
(month in one year)
Total inventory cost : total inventory × inventory cost per unit per year

MIX STRATEGIES: OVERTIME + BACK ORDER

In this strategies, company wanted to focus on overtime and back order
to fulfill their production target
number of production 1650
number of working days 20
number of worker last period 55
K 1.5
Number of workers on last period (Dec-18) 55
Ending inventory at December 2018 170
Expected ending inventory at December 2019 80

In this method, we don’t need to subtract the forecast demand of Jan-18

with the ending inventory-18.

Industrial Engineering Laboratory

BINUS University 38 Revision:
Practicum module
ISYE 6101 – P ro du cti on & op era ti on an alys is

Number of
Overtime
Number of Unit
Number of per Production Back End
Forecast Unit Production Produce
No Period Working Worker per Month Order Inventory
Demand Produced / (unit) per
Days per Month (Overtime) (unit) (unit)
Worker Worker
(hour)
(Overtime)
A B C D E F H I J
0 0 170
1 Jan-19 2003 23 34.5 1897 3,45 0,00 0 64 0
2 Feb-19 2148 21 31.5 1732 3,15 3,00 0 167 63
3 Mar-19 2286 22 33 1815 3,30 2,00 0 59 44
4 Apr-19 2534 21 31.5 1732 3,15 3,00 224 0 63
5 May-19 2686 24 36 1980 3,60 3,00 336 0 72
6 Jun-19 2141 23 34.5 1897 3,45 3,00 11 0 69
7 Jul-19 2294 26 39 2145 3,90 1,00 0 54 26
8 Aug-19 2439 22 33 1815 3,30 3,00 26 0 66
9 Sep-19 2702 23 34.5 1897 3,45 3,00 262 0 69
10 Oct-19 2861 24 36 1980 3,60 3,00 549 0 72
11 Nov-19 2280 25 37.5 2062 3,75 3,00 149 0 75
12 Dec-19 2520 22 33 1815 3,30 3,00 310 0 66
Safety Stock 80
TOTAL 30,00 1.867 424

C × number of worker last E × F × Number of

period 2018 worker last period
(round down the result) 0,8 × (C / 8) (round down the result)

Industrial Engineering Laboratory

BINUS University 39 Revision:
Practicum module
ISYE 6101 – P ro du cti on & op era ti on an alys is

Overtime per worker per month (hour) : IF [(Production + end inventoryt-1) –

(Forecast demand + back ordert-1)] > 0
so 0, IF (the result)< 0, use IF
The result of:
|(Production + end inventoryt-1) – (Forecast demand + back ordert-1)|
number of unit produced per worker in overtime x number of worker last period

≥ 3 so 3 otherwise round up result

Back order : IF (Production + overtime production per

month + end inventoryt-1) – (forecast demand +
back ordert-1) < 0 so |result|, otherwise 0

End inventory : IF (Production + overtime production per

month + end inventoryt-1) – (forecast demand +
back ordert-1) < 0 so 0, otherwise write result

Total wage cost $1,333,200

Total overtime cost $29,700 wage / worker / month $2,020
Total back order cost $85,882 overtime cost / hour $18
Total inventory cost $5,088 back order cost / unit $46
Total cost metode Inventory cost/unit/month $12
OT+BO $1,453,870

Total wage cost : wage per worker per month × number of

worker last period × n period

Total overtime cost : overtime cost per hour × total overtime per
month × number of worker last period

Total back order : back order cost per unit × total back order

Total inventory cost : inventory cost per unit per year × total end
inventor

MIX STRATEGY: OVERTIME + SUBCONTRACT

Another variety of mix strategy method is overtime with subcontract method
number of production 1650
number of working days 20
number of worker last period 55
K 1.5
Number of workers on last period (Dec-18) 55
Ending inventory at December 2018 170
Expected ending inventory at December 2019 80

Industrial Engineering Laboratory

BINUS University 40 Revision:
Practicum module
ISYE 6101 – P ro du cti on & op era ti on an alys is

Number of Overtime
Number Number of
Forecast Unit per Production End
of Unit Production Subcontract
No Period Demand Produce / Worker per Day Inventory
Working Produced / (unit) (unit)
(unit) Worker per Month (Overtime) (unit)
Days Worker
(Overtime) (hour)
A B C D E F G H I
0 0 170
1 Jan-19 2003 23 34,50 1.897 3,45 0,00 0 0 64
2 Feb-19 2148 21 31,50 1.732 3,15 3,00 519 0 167
3 Mar-19 2286 22 33,00 1.815 3,30 2,00 363 0 59
4 Apr-19 2534 21 31,50 1.732 3,15 3,00 519 224 0
5 May-19 2686 24 36,00 1.980 3,60 3,00 594 112 0
6 Jun-19 2141 23 34,50 1.897 3,45 2,00 379 0 135
7 Jul-19 2294 26 39,00 2.145 3,90 1,00 214 0 200
8 Aug-19 2439 22 33,00 1.815 3,30 3,00 544 0 120
9 Sep-19 2702 23 34,50 1.897 3,45 3,00 569 116 0
10 Oct-19 2861 24 36,00 1.980 3,60 3,00 594 287 0
11 Nov-19 2280 25 37,50 2.062 3,75 2,00 412 0 194
12 Dec-19 2520 22 33,00 1.815 3,30 3,00 544 0 33
Safety Stock 80
TOTAL 28,00 739 1.052

In this method, we also don’t need to subtract the forecast demand of Jan-19 with the ending inventory-18.

Industrial Engineering Laboratory

BINUS University 41 Revision:
Practicum module
ISYE 6101 – P ro du cti on & op era ti on an alys is

Overtime per worker per month (hour): IF (production + end inventoryt-1 –

forecast demand) > 0 so 0 if result <
0 use IF

|(production + end inventoryt-1 – forecast demand)|

number of unit produce per worker in overtime x number of worker last period

≥ 3 so 3 otherwise round up result

Subcontract : IF (production + production per month in overtime +

end inventoryt-1) > forecast demand so 0, if result < 0
use IF [forecast demand – (production + production per
month in overtime + end inventoryt-1)] < 0 so 0
otherwise write result

End inventory : IF (production + production per month in overtime +

end inventoryt-1 + subcontract) = forecast demand so 0
if result differ, use IF (production + production per
month in overtime + end inventoryt-1 – forecast
demand) < 0 so 0 otherwise write the result

wage / worker / month $2,020 Total wage cost $1,333,200

overtime cost / hour $18 Total overtime cost $27,700
subcontract cost / unit $55 Total subcontract $40,645
Inventory cost/unit/month $12 cost
Total inventory cost $12,624
Total cost metode
OT+S $1,414,189

Total wage cost : wage per worker per month × number of worker last
period × n period

Total overtime cost : overtime cost per hour × total overtime per month ×
number of worker last period

Total subcontract cost : subcontract cost × total subcontract

Total inventory cost : inventory cost per unit per year × end inventory

Industrial Engineering Laboratory

BINUS University 42 Revision: