MD 021 - Management and Operations Aggregate Planning Outline

Aggregate planning - definitions and strategies Linear programming (LP) Aggregate planning LP problem Chase and level strategy problems

Definitions of Aggregate Planning

Aggregate planning is the big picture approach to planning for the intermediate term ( 1 year). The goal of aggregate planning is to achieve a production plan that will effectively utilize the organizations resources to satisfy expected demand. Planners must make decisions on: Output rates Employment levels and changes Inventory levels and changes Backorders Subcontracting/outsourcing In a manufacturing firm, the aggregate plan links the strategic goals with plans for the individual products (i.e., the master production schedule). In a service firm, the aggregate plan links the strategic goals with detailed workforce schedules.

Aggregation Reason for aggregation - A planner can devise a course of action, consistent with strategic goals and objectives, without having to deal with a lot of detail. Three dimensions of aggregation: Product families - Based on similar demand requirements and common processing, labor, and materials requirements. Labor - Considerations include work-force flexibility, physical and geographic locations. Timing - The planning horizon is the length of time covered by the aggregate plan.

Planning Strategies Chase strategy Matching capacity to demand; the planned output for a period is set at the expected demand of the period. Level strategy Maintaining a steady rate of regular time output while meeting the variations in demand by a combination of inventories, overtime, part-time workers, subcontracting, and back-orders. Pros Low inventory investment and backlogs Cons Expense of adjusting output rates and/or workforce Alienation of work-force Loss of productivity Lower quality Increased inventory investment Increased undertime and overtime expense Increased backlogs

Chase strategy

Level strategy

Level output rates Stable work-force

Issues to Consider in Aggregate Planning

Production Capacity Demand Material cost Labor cost Overhead cost Service level Workforce Minimum level Maximum level Overtime Subcontracting Hiring cost Firing/layoff costs Inventory Minimum level Maximum level Holding cost

The Specific Motors Company (SMC), which manufactures only one model of car, wants to plan its production and inventory levels for the next 4 months. The following table provides the relevant data for each month, where the inventory levels in the last two columns refer to the levels at the end of the month: Production Month Demand cost/unit 1 2 3 4 10,000 15,000 25,000 20,000 $10,800 11,000 11,000 11,300 Maximum production level 25,000 35,000 30,000 10,000 Minimum production level 3,000 3,000 3,000 3,000 Maximum inventory level 15,000 15,000 15,000 15,000 Minimum inventory level 2,000 2,000 2,000 2,000

SMC estimates that the cost to hold one car in inventory for one month is $150. To estimate a month's inventory costs, SMC multiplies the average of the month's starting and ending inventory levels by $150. SMC currently has an inventory level of 3000 cars. SMC wants to meet its demand with no backlogging; that is, all demand must be met in the month it occurs. Formulate an LP model for SMC.

Let X1 = Number of cars to be produced in month 1 X2 = Number of cars to be produced in month 2 X3 = Number of cars to be produced in month 3 X4 = Number of cars to be produced in month 4 I1 = Inventory at the end of month 1 I2 = Inventory at the end of month 2 I3 = Inventory at the end of month 3 I4 = Inventory at the end of month 4 Min Z = 10800X1+11000X2+11000X3+11300X4 + 75I0 + 150I1+ 150I2 + 150I3 + 75I4 Subject to: I0 = 3000 I0+X1- I1 = 10000 I1 + X2 - I2 = 15000 I2 + X3 - I3 = 25000 I3 + X4 - I4 = 20000 X1 X2 X3 X4 I1 I2 I3 I4 25000 35000 30000 10000

X1 X2 X3 X4 I1 I2 I3 I4

3000 3000 3000 3000

15000 15000 15000 15000

2000 2000 2000 2000

X1, X2, X3, X4, I1, I2, I3, I4 0

Microsoft Excel 7.0 Answer Report Target Cell (Min) Cell Name Original Value $K$4 Total cost 0 Adjustable Cell $B$2 $C$2 $D$2 $E$2 $F$2 $G$2 $H$2 $I$2 $J$2 Cells Name Original Value Cars produced in month 1 0 Cars produced in month 2 0 Cars produced in month 3 0 Cars produced in month 4 0 Initial ending inventory 0 Inventory end of month 1 0 Inventory end of month 2 0 Inventory end of month 3 0 Inventory end of month 4 0

Final Value 763075000

Final Value 22000 10000 30000 7000 3000 15000 10000 15000 2000

Constraints Cell Name $K$6 Demand1 LHS $K$7 Demand2 LHS $K$8 Demand3 LHS $K$9 Demand4 LHS $K$10 MaxProd1 LHS $K$11 MaxProd2 LHS $K$12 MaxProd3 LHS $K$13 MaxProd4 LHS $K$14 MinProd1 LHS $K$15 MinProd2 LHS $K$16 MinProd3 LHS $K$17 MinProd4 LHS $K$18 MaxInv1 LHS $K$19 MaxInv2 LHS $K$20 MaxInv3 LHS $K$21 MaxInv4 LHS $K$22 MinInv1 LHS $K$23 MinInv2 LHS $K$24 MinInv3 LHS $K$25 MinInv4 LHS $K$26 Inv0 LHS $B$2 Cars produced in month 1 $C$2 Cars produced in month 2 $D$2 Cars produced in month 3 $E$2 Cars produced in month 4 $F$2 Initial ending inventory $G$2 Inventory end of month 1 $H$2 Inventory end of month 2 $I$2 Inventory end of month 3 $J$2 Inventory end of month 4

Cell Value Formula 10000 $K$6=$L$6 15000 $K$7=$L$7 25000 $K$8=$L$8 20000 $K$9=$L$9 22000 $K$10<=$L$10 10000 $K$11<=$L$11 30000 $K$12<=$L$12 7000 $K$13<=$L$13 22000 $K$14>=$L$14 10000 $K$15>=$L$15 30000 $K$16>=$L$16 7000 $K$17>=$L$17 15000 $K$18<=$L$18 10000 $K$19<=$L$19 15000 $K$20<=$L$20 2000 $K$21<=$L$21 15000 $K$22>=$L$22 10000 $K$23>=$L$23 15000 $K$24>=$L$24 2000 $K$25>=$L$25 3000 $K$26=$L$26 22000 $B$2>=0 10000 $C$2>=0 30000 $D$2>=0 7000 $E$2>=0 3000 $F$2>=0 15000 $G$2>=0 10000 $H$2>=0 15000 $I$2>=0 2000 $J$2>=0

Status Binding Binding Binding Binding Not Binding Not Binding Binding Not Binding Not Binding Not Binding Not Binding Not Binding Binding Not Binding Binding Not Binding Not Binding Not Binding Not Binding Binding Binding Not Binding Not Binding Not Binding Not Binding Not Binding Not Binding Not Binding Not Binding Not Binding

Slack 0 0 0 0 3000 25000 0 3000 19000 7000 27000 4000 0 5000 0 13000 13000 8000 13000 0 0 22000 10000 30000 7000 3000 15000 10000 15000 2000

Sensitivity Analysis
1. Objective function coefficients Holding all else the same, what is the range that each objective function coefficient can change without changing the optimal solution? 2. Right-hand-side parameters Holding all else the same, what is the change in the value of the objective function if we add one more unit of each constrained resource? In other words, what is the shadow price? What is the range over which the right-hand-side can vary while its shadow price remains valid?

Microsoft Excel 7.0 Sensitivity Report Changing Cells Cell $B$2 $C$2 $D$2 $E$2 $F$2 $G$2 $H$2 $I$2 $J$2 Name Cars produced in month 1 Cars produced in month 2 Cars produced in month 3 Cars produced in month 4 Initial ending inventory Inventory end of month 1 Inventory end of month 2 Inventory end of month 3 Inventory end of month 4 Final Reduced Objective Allowable Allowable Value Cost Coefficient Increase Decrease 22000 0 10800 50 1E+30 10000 0 11000 0 50 30000 0 11000 150 1E+30 7000 0 11300 1E+30 0 3000 0 75 1E+30 1E+30 15000 0 150 50 1E+30 10000 0 150 0 150 15000 0 150 0 1E+30 2000 0 75 1E+30 11375

Constraints Cell $K$6 $K$7 $K$8 $K$9 $K$10 $K$11 $K$12 $K$13 $K$14 $K$15 $K$16 $K$17 $K$18 $K$19 $K$20 $K$21 $K$22 $K$23 $K$24 $K$25 $K$26 Name Demand1 LHS Demand2 LHS Demand3 LHS Demand4 LHS MaxProd1 LHS MaxProd2 LHS MaxProd3 LHS MaxProd4 LHS MinProd1 LHS MinProd2 LHS MinProd3 LHS MinProd4 LHS MaxInv1 LHS MaxInv2 LHS MaxInv3 LHS MaxInv4 LHS MinInv1 LHS MinInv2 LHS MinInv3 LHS MinInv4 LHS Inv0 LHS Final Shadow Constraint Allowable Allowable Value Price R.H. Side Increase Decrease 10000 10800 10000 3000 19000 15000 11000 15000 25000 7000 25000 11150 25000 5000 7000 20000 11300 20000 3000 4000 22000 0 25000 1E+30 3000 10000 0 35000 1E+30 25000 30000 -150 30000 7000 5000 7000 0 10000 1E+30 3000 22000 0 3000 19000 1E+30 10000 0 3000 7000 1E+30 30000 0 3000 27000 1E+30 7000 0 3000 4000 1E+30 15000 -50 15000 3000 13000 10000 0 15000 1E+30 5000 15000 0 15000 4000 3000 2000 0 15000 1E+30 13000 15000 0 2000 13000 1E+30 10000 0 2000 8000 1E+30 15000 0 2000 13000 1E+30 2000 11375 2000 3000 2000 3000 -10725 3000 19000 3000

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Sensitivity Analysis Aggregate Planning Problem 1. What changes in the aggregate plan would cause costs to go down?

2. Why does an increase in the minimum inventory level at the end of month 4 cause costs to go up? Why is this deceptive?

3. According to the sensitivity report, increasing the initial inventory by 1 results in costs going down by $10,725. Why is this deceptive?

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Level and Chase Strategies Example Bob Carltons golf camp estimates the following workforce requirements for its services over the next two years. Quarter Demand Quarter Demand 1 4200 5 4400 2 6400 6 6240 3 3000 7 3600 4 4800 8 4800

Each certified instructor puts in 480 hours per quarter regular time and can work an additional 120 hours overtime. Regular-time wages and benefits cost Carlton $7200 per employee per quarter for regular time worked up to 480 hours, with an overtime cost of $20 per hour. Unused regular time for certified instructors is paid at $15 per hour. There is no cost for unused overtime capacity. The cost of hiring, training, and certifying a new employee is $10,000. Layoff costs are $4000 per employee. Currently, eight employees work in this capacity.

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Level Strategy Find a level work-force plan that allows for no delay in service and minimizes undertime. What is the total cost of this plan?

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Chase Strategy Use a chase strategy that varies the work-force level without using overtime or undertime. What is the total cost of this plan?

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