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# 3-1

Chapter 3
Aggregate Planning

McGraw-Hill/Irwin

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## Introduction to Aggregate Planning

Goal: To plan gross work force levels and set firmwide production plans.

## Concept is predicated on the idea of an aggregate unit

of production. May be actual units, or may be
measured in weight (tons of steel), volume (gallons of
gasoline), time (worker-hours), or dollars of sales. Can
even be a fictitious quantity. (Refer to example in text
and in slide below.)

The Hierarchy of
Production Planning Decisions

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## Overview of the Problem

Suppose that D1, D2, . . . , DT are the
forecasts of demand for aggregate units
over the planning horizon (T periods.) The
problem is to determine both work force
levels (Wt) and production levels (Pt ) to
minimize total costs over the T period
planning horizon.

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Important Issues

## Smoothing. Refers to the costs and disruptions that result

from making changes from one period to the next.
Bottleneck Planning. Problem of meeting peak demand
because of capacity restrictions.
Planning Horizon. Assumed given (T), but what is
right value? Rolling horizons and end of horizon effect
are both important issues.
Treatment of Demand. Assume demand is known. Ignores
uncertainty to focus on the predictable/systematic
variations in demand, such as seasonality.

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Relevant Costs

Smoothing Costs
changing size of the work force
changing number of units produced
Holding Costs
primary component: opportunity cost of investment
Shortage Costs
Cost of demand exceeding stock on hand. Why should
shortages be an issue if demand is known?
Other Costs: payroll, overtime, subcontracting.

Cost of Changing
the Size of the Workforce

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\$ Cost

## Holding and Back-Order Costs

Slope =
Ci

Slope =
CP
Back-orders
inventory

Positive
Inventory

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Aggregate Units
The method is based on notion of aggregate
units. They may be
Actual units of production
Weight (tons of steel)
Volume (gallons of gasoline)
Dollars (Value of sales)
Fictitious aggregate units

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## Example of fictitious aggregate units.

(Example 3.1)
One plant produced 6 models of washing machines:
Model
# hrs.
Price
% sales
A 5532
4.2 285 32
K 4242
4.9 345 21
L 9898
5.1 395 17
L 3800
5.2 425 14
M 2624
5.4 525 10
M 3880
5.8 725 06

## Question: How do we define an aggregate unit here?

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Example continued

## Notice: Price is not necessarily proportional to

worker hours (i.e., cost): why?

## One method for defining an aggregate unit:

requires: .32(4.2) + .21(4.9) + . . . + .06(5.8) =
4.8644 worker hours. Forecasts for demand for
aggregate units can be obtained by taking a
weighted average (using the same weights) of
individual item forecasts.

## Prototype Aggregate Planning Example

(this example is not in the text)

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## The washing machine plant is interested in

determining work force and production levels
for the next 8 months. Forecasted demands for
Jan-Aug. are: 420, 280, 460, 190, 310, 145,
110, 125. Starting inventory at the end of
December is 200 and the firm would like to
have 100 units on hand at the end of August.
Find monthly production levels.

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## Step 1: Determine net demand.

(subtract starting inv. from per. 1 forecast and add ending inv.
to per. 8 forecast.)

Month

1(Jan)
2(Feb)
3(Mar)
4(Apr)
5(May)
6(June)
7(July)
8(Aug)

Net Predicted
Demand
220 220 22
280 500 16
460 960 23
190
1150
310
1460
145
1605
110
1715
225
1940

Demand

20
21
17
18
10

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## Step 2. Graph Cumulative Net Demand

to Find Plans Graphically

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2000
1800
1600
1400
1200

1000
800
600
400
200
0
1

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## Constant Work Force Plan

Suppose that we are interested in determining a
production plan that doesnt 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 1940 units in month 8: The
slope of the line is the number of units to produce
each month.

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2000
1500
1000
500
0
1

243/month.

## How can we have a constant work force plan

with no stockouts?
Answer: using the graph, find the straight line that goes
through the origin and lies completely above the
cumulative net demand curve:
Constant Work Force Plan With No Stockouts
3000
2500
2000
1500
1000
500
0
1

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From the previous graph, we see that cum. net demand curve
is crossed at period 3, so that monthly production is 960/3 =
320. Ending inventory each month is found from:

Month
Cum. Net. Dem. Cum. Prod.
Invent.
1(Jan)
220
320 100
2(Feb)
500
640
140
3(Mar) 960
960
0
4(Apr.)
1150
1280
130
5(May)
1460
1600
140
6(June)
1605
1920
315
7(July)
1715
2240
525
8(Aug)
1940
2560
620

reasons:

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## It may not be possible to achieve the

production level of 320 unit/month with an
integer number of workers

## Since all months do not have the same

number of workdays, a constant production
level may not translate to the same number of
workers each month.

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## To overcome these shortcomings:

Assume number of workdays per month is
given
K factor given (or computed) where

## K = # of aggregate units produced by one

worker in one day

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Finding K

## Suppose that we are told that over a period

of 40 days, the plant had 38 workers who
produced 520 units. It follows that:

K= 520/(38*40) = 0.3421
= average number of units produced by
one worker in one day.

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## Computing Constant Work Force

Assume we are given the following # of
working days per month: 22, 16, 23, 20, 21,
17, 18, 10. March is still critical month.
Cum. net demand thru March = 960. Cum #
of working days = 22+16+23 = 61. Find
960/61 = 15.7377 units/day implies
15.7377/.3421 = 46 workers required.

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Mo
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug

# wk days
22
16
23
20
21
22
21
22

## Prod. Cum Cum Net End Inv

Level Prod Dem
346
346
220
126
252
598
500
98
362
960
960
0
315
1275 1150
125
330
1605 1460
145
346
1951 1605
346
330
2281 1715
566
346
2627 1940
687

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Holding Cost (per unit per month): \$8.50
Hiring Cost per worker: \$800
Firing Cost per worker: \$1,250
Payroll Cost: \$75/worker/day
Shortage Cost: \$50 unit short/month

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## Cost Evaluation of Constant Work Force Plan

Assume that the work force at end of Dec was 40.
Cost to hire 6 workers: 6*800 = \$4800
Inventory Cost: accumulate ending inventory:
(126+98+0+. . .+687) = 2093. Add in 100 units netted out
in Aug = 2193. Hence Inv. Cost = 2193*8.5=\$18,640.50
Payroll cost:
(\$75/worker/day)(46 workers )(167days) = \$576,150
Cost of plan: \$576,150 + \$18,640.50 + \$4800 =
\$599,590.50 ~ \$600K

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## Cost Reduction in Constant Work Force Plan

In the original cum net demand curve, consider making
reductions in the work force one or more times over the
planning horizon to decrease inventory investment.
Plan Modified With Lay Offs in March and May
2000
1500
1000
500
0
1

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## I will not present all the details here. The

modified plan calls for reducing the
workforce to 36 at start of April and making
another reduction to 22 at start of June. The
additional cost of layoffs is \$30,000, but
holding costs are reduced to only \$4,250.
The total cost of the modified plan is
\$467,450.

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## Here the idea is to change the workforce each month

in order to reduce ending inventory to nearly zero
by matching the workforce with monthly demand as
closely as possible. This is accomplished by
computing the # units produced by one worker each
month (by multiplying K by #days per month) and
then taking net demand each month and dividing by
this quantity. The resulting ratio is rounded up and

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Period
1
2
3
4
5
6
7
8

# hired

#fired
10

20
9
31
15
24
4
15

Cost of this
plan:
\$555,704.50

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## Optimal Solutions to Aggregate Planning

Problems Via Linear Programming
Linear Programming provides a means of solving
aggregate planning problems optimally. The LP
formulation is fairly complex requiring 8T variables
and 3T constraints, where T is the length of the
planning horizon. Clearly, this can be a formidable
linear program. The LP formulation shows that the
modified plan we considered with two months of
layoffs is in fact optimal for the prototype problem.
Refer to the latter part of Chapter 3 and the
Appendix following the chapter for details.