Course : Production & Operation Analysis

Effective Period : September 2015

Aggregate Planning
Session 2
 Introduction to Aggregate Planning
• Aggregate planning which might also be called macro
production planning, addresses the problem of deciding how
many employees the firm should retain and, for a
manufacturing firm, the quantity and the mix of products to be
produced
• Macro planning is not limited to manufacturing firms
• Service organizations must determine employee staffing needs
as well
• For example: airlines must plan staffing levels for flight
attendants and pilots, and hospitals must plan staffing levels for
nurses
 Aggregate Units of Production
A plan manager working for a large national appliance firm is consideri
implementing an aggregate planning system to determine the workforc
and production levels in his plant. This particular plan produces six
models of washing machines. The characteristics of the machines are:

Model # Hours Selling % sales Price/

Price # hours
A 5532 4.2 $285 32 67.86
K 4242 4.9 $345 21 70.41
L 9898 5.1 $395 17 77.45
L 3800 5.2 $425 14 81.73
M 26245.4 $525 10 97.22
M 38805.8 $725 6 125
• He decides to define an aggregate unit of production as a fictitious
washing machine requiring:
0.32(4.2) + 0.21(4.9) + 0.17(5.1) + 0.14(5.2) + 0.10(5.4) + 0.06(5.8) =
4.856 hours of labor time
• Aggregate planning is closely related to hierarchical production
planning (HPP) championed by Hax and Meal
• For aggregate planning purposes, Hax and Meal recommend the
following hierarchy:
1. Items. These are the final products to be delivered to the
customer. An item is often referred to as an SKU (stock keeping unit)
and represents the finest level of detail in the product structure
2. Families. These are defined as a group of items that share a
common manufacturing setup cost
3. Types. Types are groups of families with production quantities
that are determined by a single aggregate production plan
 Overview of The Aggregate Planning Problem
• The goal of aggregate planning is to determine aggregate production
quantities and the levels of resources required to achieve these
production goals
• The primary issues related to the aggregate planning problem include:
1. Smoothing. Costs that arise from changing production and
workforce levels
2. Bottlenecks. Planning in anticipation of peak demand periods
3. Planning horizon. One must choose the number of periods
considered carefully
4. Treatment of demand. All the mathematical models consider
demand to be known
 Costs in Aggregate Planning
• Smoothing costs
The costs of changing production and or workforce levels
• Holding costs
The opportunity cost of dollars invested in inventory
• Shortage costs
The costs associated with back ordered or lost demand
• Regular time costs
The cost of producing one unit of output during regular working hours
• Overtime and subcontracting costs
The costs of production of units not produced on regular time
• Idle time costs
A cost for underutilization of the workforce
 A Prototype Problem

• Densepack is to plan workforce and production levels for the six

month period January to June. The firm produces a line of disk
drives for mainframe computers that are plug compatible with
several computers produced by major manufacturers. Forecast
demands over the next six months for a particular line of drives
produced in the Milpitas, California, plant are 1280, 640, 900,
1200, 2000 and 1400. There are currently (end of December) 300
workers employed in the Milpitas plant. Ending inventory in
December is expected to be 500 units, and the firm would like to
have 600 units on hand at the end of June.
• Returning to our example, we define the net predicted demand
for January as 780 (1280-500) and the net predicted demand for
June as 2000 (1400+600)
• The net predicted demand and the net cumulative demand for
the six months January to June are as follows:

Month Net predicted Net cumulative

demand demand
January780 780
February 640 1420
March 900 2320
April 1200 3520
May 2000 5520
June 2000 7520
• In order to illustrate the cost trade-offs of various production plans, we will
assume in the example that there are only three costs to be considered:
cost of hiring workers, cost of firing workers and cost of holding inventory
• Define:
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
• We require a means of translating aggregate production in units to
workforce levels
• Because not all months have an equal number of working days, we will use
a day as an indivisible unit of measure and define
K = number of aggregate units produced by one worker in one day
• In the past, the plant manager observed that over 22 working days, with the
workforce level constant at 76 workers, the firm produced 245 disk drives
• That means that on average the problem rate was 245/22 = 11.1364 drives
per day when there were 76 workers employed at the plant
• It follows that one worker produced an average of 11.1364/76 = 0.14653
drive in one day. Hence, K = 0.14653 for this example
• We will evaluate two alternative plans for managing
the workforce that represent two essentially opposite
management strategies
• Plan 1 is to change the workforce each month in order
to produce enough units to most closely match the
demand pattern. This is known as a zero inventory plan
• Plan 2 is to maintain the minimum constant workforce
necessary to satisfy the net demand. This is known as
the constant workforce plan
 Evaluation of A Chase Strategy (Zero Inventory Plan)
Here, we will develop a production plan for Densepack that
minimizes the levels of inventory the firm must hold during
the six month planning horizon
A B C D E
Month Number of Number of Forecast Minimum
Working Days Units Produced Net Demand Number of
per Worker Workers Required
(B x 0.14653) (D/C rounded up)
Jan 20 2.931 780 267
Feb 24 3.517 640 182
Mar 18 2.638 900 342
Apr 26 3.810 1,200 315
May 22 3.224 2,000 621
June 15 2.198 2,000 910
A B C D E F G H I
Month Number Number Number number Number Cum Cum End
of Workers Hired Fired of Units of Units Prod Demand Inv
per worker Produced (G – H)
(B x E)
Jan 267 33 2.931 783 783 780 3
Feb 182 85 3.517 640 1,423 1,420 3
Mar 342 160 2.638 902 2,325 2,320 5
Apr 315 27 3.810 1,200 3,525 3,520 5
May 621 306 3.224 2,002 5,527 5,520 7
June 910 289 2.198 2,000 7,527 7,520 7
Total 755 145 30
• For this example, the total cost of hiring, firing and holding is (755)
(500) + (145)(1,000) + (30)(80)= $524,900
• This cost must now be adjusted to include the cost of holding for the
ending inventory of 600, which was netted out of the demand for June
• Hence, the total cost of this plan is 524,900 + (600)(80) = $572,900
• Note that the initial inventory of 500 units does not enter into the
calculations because it will be netted out during the month of January
• It is possible that ending inventory in one or more periods could build
up to a point where the size of the workforce could be reduced by
one or more workers
• In this example there is sufficient inventory on hand to reduce the
workforce by one worker in the months of both March and May
• Check that the resulting plan hires a total of 753 workers and fires a
total of 144 workers and has a total of only 13 units of inventory. The
cost of this modified plan comes to $569,540
 Evaluation of The Constant
Workforce Plan
Now assume that the goal is to eliminate completely the need for hiring and
firing during the planning horizon
A B C D
Month Cum Net Demand Cum Number of Ratio B/C
Units Produced (rounded up)
per Worker
Jan 780 2.931 267
Feb 1420 6.448 221
Mar 2320 9.086 256
Apr 3520 12.896 273
May 5520 16.120 343
June 7520 18.318 411
A B C D E F
Month Number of Monthly Cum Cum End
Units Produced Production Production Net Demand Inv

per Worker (B x 411) (D – E)

Jan 2.931 1,205 1,205 780 425
Feb 3.517 1,445 2,650 1,420 1,230
Mar 2.638 1,084 3,734 2,320 1,414
Apr 3.810 1,566 5,300 3,520 1,780
May 3.224 1,325 6,625 5,520 1,105
June 2.198 903 7,528 7,520 8
Total 5,962
• Because there are 300 workers employed at the end of December, the
constant workforce plan requires hiring 111 workers at the beginning
of January
• The total of the ending inventory level is 5,962 + 600 = 6,562 (recall the
600 units that were netted out of the demand for June)
• Hence the total inventory cost of this plan is (6,562)(80) = $524,960
• To this we add the cost of increasing the workforce from 300 to 411 in
January, which is (111)(500) = $55,500, giving a total cost of this plan of
$580,460
• This is somewhat higher than the cost of the zero inventory plan,
which was $572,900
• However, because costs of the two plans are close, it is likely that the
company would prefer the constant workforce plan in order to avoid
any unaccounted for costs of making frequent changes in the
workforce
 Mixed Strategies and Additional
Constraints
• The zero inventory plan and • With more flexibility, small
constant workforce modifications can result in
strategies just treated are dramatically lower costs
pure strategies: they are
designed to achieve 1
objective
Figure below shows the constant workforce strategy for Densepack. The
hatched area represents the inventory carried in each month. Can you
identify a strategy from the figure that substantially reduces inventory
without permitting shortages?
 Suppose that we may use 2 production rates (2
straight lines)

• Driving the net

inventory to zero at the
end of April
• We need to produce
enough in each of the
months Jan through Apr
to meet the cumulative
net demand each
month. That means we
need to produce 3,520/4
= 880 units in each of
the first 4 months
• In figure above, the line • The may and June production
connecting the origin to is then set to 2,000, exactly
the cumulative net matching the net demand in
demand in April lies these months
wholly above the • With this policy we obtain
cumulative net demand Month Cum net Cum
curve for the prior months demand production
January 780 880
• If the graph is accurate, February 1,420 1,760
that means that there March 2,320 2,640
should be no shortages
April 3,520 3,520
occurring in these months
May 5,520 5,520
June 7,520 7,520
 Solution of Aggregate Planning Problems by
Linear Programming
• Linear programming is a term used to describe a general class of
optimization problems.
• The objective is to determine values of n nonnegative real variables in
order to maximize or minimize a linear function of these variables that
is subject to m linear constraints of these variables.
• The primary advantage in formulating a problem as a linear program
is that optimal solutions can be found very efficiently by the simplex
method.

Source : Production and Operations Analysis 4th Edition, Steven Nahmias

Bina Nusantara University McGraw Hill International Edition 21
 Cost Parameters and Given
Information
• The following values are assumed to be known
– cH = cost of hiring one worker
– cF = cost of firing one worker
– cI = cost of holding one unit of stock for one period
– cR = cost of producing one unit on regular time
– cO = Incremental cost of producing one unit on overtime
– cU = Idle cost per unit of production
– cS = cost to subcontract one unit of production
– nt = number of production days in period t
– 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
Source : Production and Operations Analysis 4th Edition, Steven Nahmias
– D = t
Bina Nusantara University
Forecast of demand
McGraw in period
Hill International Editiont 22
 Problem Variables

• Wt = workforce level in period t

• Pt = production level in periode t
• It = inventory level in period t
• Ht = number of workers hired in period t
• Ft = number of workers hired in period t
• Ot = overtime production in units
• Ut = worker idle time in units (“undertime”)
• St = number of units subcontracted from outside

Source : Production and Operations Analysis 4th Edition, Steven Nahmias

Bina Nusantara University McGraw Hill International Edition 23
 Problem Constraints
1. Conservation of workforce constraints (for 1 ≤ t ≤ T)
Wt = Wt-1 + Ht - Ft
Number of Number of Number Number
Workers Workers Hired Fired
in t in t-1 in t in t

2. Conservation of units constraints

It = It-1 + Pt + St - Dt
Inventory Inventory Number of Number of Demand
in t in t-1 units producedunits subcontracted in t
in t in t

3. Constraints relating production levels to workforce levels

Pt = KntWt-1 + Ot - Ut
Number of Number of Number of Numberof
units produced units produced units produced units of
in t by regular workforce on overtime idle in t in t production
in t
 Disaggregating Aggregate Plans
• While aggregate planning is useful for providing
approximate solutions for macro planning at the firm
level, the question is whether these aggregate plans
provide any guidance for planning at the lower levels
of the firm
• A disaggregation scheme is a means of taking an
aggregate plan and breaking it down to get more
detailed plans at the lower levels of the firm
Reference

• Steven Nahmias. (2009). Production and Operations

Analysis. 06. MGH. New York. ISBN: 978-007-126370-
2
D1316
Production and Operations Analysis