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Data Analytics

Red Tomato Tools is facing seasonal demand for its gardening tools. To maximize profits, it is considering aggregate planning options like adjusting workforce, subcontracting, inventory levels, and backlogs. It analyzes demand forecasts and costs to formulate a linear program to determine the optimal aggregate plan. The plan aims to end June with at least 500 units of inventory while meeting all demand at minimum total cost over six months. Decision variables include workforce, production, inventory, backlogs and subcontracting each month. The objective is to minimize costs subject to capacity, inventory balance, workforce and overtime constraints.

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194 views10 pages

Data Analytics

Red Tomato Tools is facing seasonal demand for its gardening tools. To maximize profits, it is considering aggregate planning options like adjusting workforce, subcontracting, inventory levels, and backlogs. It analyzes demand forecasts and costs to formulate a linear program to determine the optimal aggregate plan. The plan aims to end June with at least 500 units of inventory while meeting all demand at minimum total cost over six months. Decision variables include workforce, production, inventory, backlogs and subcontracting each month. The objective is to minimize costs subject to capacity, inventory balance, workforce and overtime constraints.

Uploaded by

PANKAJ
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Case Question

The demand for Red Tomato Tools gardening tools is highly seasonal, peaking in the
summer when people plant their gardens. Red Tomato has decided to use aggregate
planning to overcome this obstacle of seasonal demand and maximize their profits. The
options Red Tomato has for handling the seasonality are adding workers during the peak
season, subcontracting out some of the work, building up inventory during the slow
months and building up backlog of orders that will be delivered late to customers.

To determine how to best use these options through an aggregate plan, Red Tomato’s VP
for Supply Chain Operations starts with demand forecasts for its tools over the next six
months. These are shown in Table 1.
Table 1: Demand
Month Forecast
Demand January 1,600
Forecasts February 3,000
March 3,200
April 3,800
May 2,200
June 2,200
Case Question Contd..
Red Tomato sells each tool to retailers for $40. The company has a starting inventory in
January of 1,000 tools. At the beginning of January, the company has a work-force of 80
employees. The plant has a total of 20 working days each month, and each employee
earns $4.00 per hour regular time. Each employee works a total of eight hours a day on
straight time and the rest on overtime. The capacity of the production operation is
determined primarily by the total labor hours worked. Due to labor rules, no employee
works more than 10 hours of overtime per month.

Other costs are shown in Table 2. Currently, Red Tomato has no limits on subcontracting,
inventories and stock-outs/backlogs. All stock-outs are backlogged and supplied from the
following month’s production. Inventory costs are incurred on the ending inventory in the
month. The supply chain planner’s goal is to obtain the optimal aggregate plan that allows
Red Tomato to end June with at least 500 units which means no stock-outs at the end of
June and at least 500 units of inventory.
Item Cost
Material Cost $10/Unit
Inventory Holding Cost $2/Unit/Month
Marginal Cost of Stock-out/Backlog $5/Unit/Month
Hiring and Training Costs $300/Worker
Layoff Cost $500/Worker
Case Labor hours Required 4/Unit
Question Regular Time Cost $4/Hour
Contd.. Overtime Cost $6/Hour
Cost of Subcontracting $30/Unit

The optimal aggregate plan is one that results in the highest


profit over the six-month planning horizon. Given Red
Tomato’s desire for a very high level of customer service, we
will assume all demand is met. Therefore, revenues earned
over the planning horizon are fixed given the fixed price. In
this case, minimizing cost over the planning horizon is the
same as maximizing profit.
Formulate this problem as a Linear Programming model.
Then, using Solver on Excel, determine its optimal solution
Decision Variables
For t = 1, ..., 6
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
Objective Function

6 6 6 6
Min TC   640W
t 1
t   6O
t 1
t   300 H t   500 Lt
t 1 t 1
 
      
Regular Time Labor Cost Overtime Labor Cost Cost of Hiring Cost of Layoff
6 6 6 6
  2I
t 1
t   5S
t 1
t  10 P
t 1
t   30C
t 1
t
       
Inventory Holding Cost Stockout Cost Production Cost Subcontraction Cost
Constraint 1
Workforce Balance Equations
Workforce size for each month is based on hiring and layoffs

Wt W t –1 H t  Lt  0 for t  1,...,6, where W  80.


0

Ht

Wt-1 Wt
Period t

Lt
Constraint 2
Capacity Constraints:
Production for each month cannot exceed
regular time + overtime working capacity

Ot
40Wt   Pt  0 for t  1,...,6
 4
Regular time 
capacity Overtime
capacity
Constraint 3
Inventory balance constraints
Pt Ct

It-1 It
Period t

St-1 Dt St

I t –1  Pt  Ct  Dt  St –1  I t  St  0 for t  1,...,6

I 0  1,000 S 0  0 and I 6  500.


Constraint 4
Overtime limit constraints
No employee works more than 10 hrs of overtime each month

10Wt  Ot  0 for t  1,...,6

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