Aggregate production planning

(Chapter 11)

Alok Raj
PODS Area
Office: Room No 14, 2nd Floor, Library Building, Tel. 3439
Email: alokraj@xlri.ac.in
Aggregate production planning
Aggregate Planning
Month 1 2 Aggregate Production Plan
Car Production 1000 1050

Week 1 2 3 4 5 6 7
8
Model X 200 100 200 100 100 Master Production Plan

Model Y 200 300 200 100 200

Model Z 50 50 100 150
Aggregate Planning

Forecasting

Workforce
Supply Chain support

Aggregate
Planning

Master
production
Inventory on hand
External Capacity

Scheduling
Aggregate production planning
❖ Given the demand forecast for each period in the planning
horizon, determine the production level, inventory level,
capacity level and any backlogs for each period that
maximizes the firm’s profit over the planning horizon

❖ Aggregate planning is intermediate range planning covers

a time horizon of 6-18 months
The Concept of Aggregation
 A “big picture” approach planning
The Concept of Aggregation
Why do organization need to
do aggregate planning?

❖ Flexibility
Dealing with Variations

Supply Demand

❖ Overtime
❖ Undertime ❖ Reactive options: Back orders
❖ Subcontracting ❖ The proactive option:Pricing
❖ Hiring and firing
Which industries are good candidates for aggregate planning?

❖ Those that display some form of seasonality

❖ Relatively long lead times, finite amounts of capacity

Kinds of aggregate plans
Aggregate
plans

Level Chase Hybrid

aggregate plan aggregate plan aggregate plan
Level aggregate plan
 Level aggregate plan: A planning approach that produces the same quantity each time period.
Inventory and back orders are used to absorb demand fluctuations.

 Example : Wavetop, Inc., a producer of water ski equipment, anticipates the following demand
for its water skis. Demand for January is 12,000 units; for February, 9000; March, 12,000;
April, 15,000; May, 18,000; and June, 24,000. The company has 6000 units in beginning
inventory. Calculate the average monthly net demand for the company. If each employee can
build 25 units per normal workday and the company operates 20 days per month, then each
employee builds 500 units per month then how many employees needed?
 Chase aggregate plan
 Chase aggregate plan :It produces exactly what is needed to satisfy demand during each
period..
 Example : Wavetop, Inc., a producer of water ski equipment, anticipates the following demand
for its water skis. Demand for January is 12,000 units; for February, 9000; March, 12,000;
April, 15,000; May, 18,000; and June, 24,000. The company has 6000 units in beginning
inventory. Calculate the average monthly net demand for the company. If each employee can
build 25 units per normal workday and the company operates 20 days per month, then each
employee builds 500 units per month then how many employees needed?
Kinds of aggregate plans
 Hybrid aggregate plan: A planning approach that uses a combination of level and chase
approaches while developing the aggregate plan.
Steps in developing an aggregate plan
❖ Step 1: Identify the aggregate plan that matches your company’s objectives: level,

chase, or hybrid.

❖ Step 2: Based on the aggregate plan, determine the aggregate production rate.

❖ Step 3: Calculate the size of the workforce.

❖ Step 4: Test the aggregate plan.

❖ Step 5: Evaluate the plan’s performance in terms of cost, customer service, human

resources, and operations.

Aggregate production plan

• Given the demand forecast for each period in the planning horizon, determine the
production level, inventory level, and the capacity level for each period that maximizes
the firm’s (supply chain’s) profit over the planning horizon
• Planning horizon (typically 6-18 months)
Information Needed for An Aggregate Plan
▪ Aggregate demand forecast Ft for each Period t over T periods
▪ Production costs
❖ Labor costs, regular time ($/hr) and overtime ($/hr)
❖ Subcontracting costs ($/hr or $/unit)
❖ Cost of changing capacity – hiring or layoff ($/worker), adding or
reducing machine capacity ($/machine)
▪ Labor/machine hours required per unit
▪ Inventory holding cost ($/unit/period)
▪ Stockout or backlog cost ($/unit/period)
▪ Constraints – overtime, layoffs, capital available, stockouts, backlogs, from
suppliers
Outputs of Aggregate Plan
▪ Production quantity from regular time, overtime, and subcontracted time

▪ Inventory held

▪ Backlog/stockout quantity

▪ Workforce hired/laid off

▪ Machine capacity increase/decrease

Basic Tradeoffs in Aggregate Planning
• Trade-off between capacity, inventory, backlog/lost sales
• Level strategy – using inventory as the lever
• Chase strategy – using capacity as the lever
• Tailored or hybrid strategy – a combination of strategies
Aggregate Planning Using Linear Programming
• Maximize profits while respecting supply chain constraints
• Red Tomato Tools
Capacity determined mainly by workforce size
Red Tomato Tools
Highly seasonal demand

Options(4)

Develop a forecast
Demand Forecast

Month Demand Forecast

January 1,600
February 3,000
March 3,200
April 3,800
May 2,200
June 2,200
Information -Red Tomato Tools
• Starting inventory in January = 1,000
• 20 working days each month
• Employees earn $4/hour regular time
• Regular time = 8 hours/day, then overtime
• Maximum 10 hours overtime/employee/month
• End June with 500 units in inventory
Information -Red Tomato Tools
Item Cost
Material cost $10/unit
Inventory holding cost $2/unit/month
Marginal cost of stockout/backlog $5/unit/month
Hiring and training costs $300/worker
Layoff cost $500/worker
Labor hours required 4/unit
Regular time cost $4/hour
Overtime cost $6/hour
Cost of subcontracting $30/unit
Red Tomato Tools Decision Variables
Red Tomato Tools 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
Red Tomato Tools Objective Function
Red Tomato Tools Objective Function

Minimize
(Regular-time labor cost) + (Overtime labor cost) + (Cost of
hiring and layoffs) + (Cost of holding inventory) + (Cost of
stocking out) + (Cost of subcontracting) + (Material cost)

6 6 6 6
Min  640Wt +  6Ot +  300Ht +  500Lt
t =1 t =1 t =1 t =1
6 6 6 6
+  2It +  5St +  10Pt +  30Ct
t =1 t =1 t =1 t =1
Red Tomato Tools Constraints
Red Tomato Tools Constraints
All for t = 1,..., 6
1. Workforce, hiring, and layoff constraints

Wt = Wt −1 + Ht − Lt

2. Capacity constraints
Ot
Pt  40Wt +
4
3. Inventory balance constraints
It −1 + Pt + Ct = Dt + St −1 + It − St

4. Overtime limit constraints

Ot  10Wt
Red Tomato Tools
Total cost over planning horizon = $422,660
Aggregate Plan for Red Tomato
No.
No. Laid Total
Period Hire Off, Workforc Overtim Inventory, Stockout Subcontract Production, Demand,
,t d, Ht Lt e Size, Wt e, Ot It , St , Ct Pt Dt
0 0 0 80 0 1,000 0 0 Blank Blank
1 0 16 64 0 1,960 0 0 2,583 1,600
2 0 0 64 0 1,520 0 0 2,583 3,000
3 0 0 64 0 880 0 0 2,583 3,200
4 0 0 64 0 0 220 140 2,583 3,800
5 0 0 64 0 140 0 0 2,583 2,200
6 0 0 64 0 500 0 0 2,583 2,200
Red Tomato Tools
Higher demand variability
Demand Forecast with Higher Seasonal Fluctuation

Month Demand Forecast

January 1,000
February 3,000
March 3,800
April 4,800
May 2,000
June 1,400
Red Tomato Tools
 Total cost over planning horizon = $433,080

No.
No. Laid Total
Period, Hired Off, Workforce Overtim Inventory, Stockout, Subcontract, Production, Demand,
t , Ht Lt Size, Wt e, Ot It St Ct Pt Dt
0 0 0 80 0 1,000 0 0 Blank Blank
1 0 16 64 0 2,560 0 0 2,560 1,000
2 0 0 64 0 2,120 0 0 2,560 3,000
3 0 0 64 0 880 0 0 2,560 3,800
4 0 0 64 0 0 1,220 140 2,560 4,800
5 0 0 64 0 0 660 0 2,560 2,000
6 0 0 64 0 500 0 0 2,560 1,400
Red Tomato Tools
 Lower hiring and layoff costs – $50
Total cost over planning horizon = $412,770
Optimal Aggregate Plan for Hiring and Layoff Cost of $50/Worker

No.
No. Laid Total
Hired, Off, Workforc Overtim Inventory, Stockout, Subcontract, Production, Demand,
Period, t Ht Lt e Size, Wt e, Ot It St Ct Pt Dt
0 0 0 80 0 1,000 0 0 Blank Blank
1 0 35 45 0 1,200 0 0 1,800 1,600
2 0 0 45 0 0 0 0 1,800 3,000
3 42 0 87 0 280 0 0 3,480 3,200
4 1 0 88 0 0 0 0 3,520 3,800
5 0 27 61 0 240 0 0 2,440 2,200
6 0 0 61 0 500 0 20 2,440 2,200
Aggregate Planning in Excel

Building the Basic Aggregate Planning Spreadsheet

Copied to
Output Cells Relationship to inputs Formula in Row 5 Calls
Workforce D5:D10 Wt = Wt _ 1 + Ht – Lt
W sub t = W sub t minus 1 + H sub t minus L sub t.
= D4 + B5 – C5 D6:D10

sub = 40 times D 5 + left parenthesis E 5 over 4 right

Production I5:I10 P sub t = 40 times W sub t plus start fraction O
O parenthesis  E5  I6:I10
P = 40  W +
t over
t 4 end fraction.
t
t
= 40 * D5 +  
4  4 
I sub t = max of left parenthesis I sub t minus 1 plus P = max left parenthesis F 4 + I 5 + H 5 minus G 4
Inventory F5:F10 I = max (I – 1 + P + C
subt t + C sub t minust D sub t minust S sub t tminus 1, 0 = max (F 4 + I 5 + H 5
minus J 5, 0 right parenthesis F6:F10
right parenthesis
– Dt – St – 1, 0) – G 4 – J 5, 0)
S sub t minus max left parenthesis 0, S, sub t minus 1 Equals max of left parenthesis 0, J 5 + G 4 minus I
Stockout G5:G10 S = max (0, S – 1 + D
+ D tsub t + I sub t minus 1 tminus P sub ttminus c sub = max ( 0,J 5 + G − I
5, minus H 5 minus F 4 4 5
G6:G10
t
–It – 1– Pt – Ct − H5 − F4
Aggregate Planning Using Solver
Aggregate Planning Using Solver
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
Aggregate Planning Using Solver

Spreadsheet Area for Decision Variables

Aggregate Planning Using Solver

Spreadsheet Area for Constraints

Aggregate Planning Using Solver

Spreadsheet Area for Cost Calculations

Aggregate Planning Using Solver

• Set Target Cell: C22

• Equal to: Select Min
• By Changing Cells: B5:I10
• Subject to the constraints:
• B5:C10 = integer {Number of workers hired or laid off is
integer}

B5:I10  0 {All decision variables are non negative}

Aggregate Planning Using Solver

• F10  500 {Inventory at end of Period 6 is at least 500}

 G10 = 0 {Stockout at end of Period 6 equals 0}

 M5:M10 = 0{W1 – Wt – 1– Ht + Lt = 0 for t = 1, ,6}

Ot
 N5:N10  0{40Wt + – Pt  0 for t = 1, ,6}
4
 O5:O10 = 0{It − 1 − St − 1 + Pt + Ct − Dt − It + St = 0 for t = 1, ,6}

 P5 : P10  0{10Wt − Ot  0 for t = 1,,6}

Aggregate Planning Using Solver

Solver Parameters Dialog Box

Promotion
 Are they in a better position if they offer the price
promotion during they peak period of demand or during a
low-demand period?
Promotion in January

Total cost over planning horizon = $422,080

Revenue over planning horizon = $643,400
Profit over planning horizon = $221,320

• Lower seasonal inventory

• A somewhat lower total cost
• A higher total profit
Promotion in April

Optimal Aggregate Plan When Discounting Price in April to $39

Promotion in April

Total cost over planning horizon = $438,920

Revenue over planning horizon = $650,140
Profit over planning horizon = $211,220

• Higher seasonal inventory

• A somewhat higher total cost
• A slightly smaller total profit
Discount Leads to Large Increase in Consumption

• Promotion in January

Optimal Aggregate Plan When Discounting Price in January to $39 with Large
Increase in Demand
Discount Leads to Large Increase in Consumption

Total cost over planning horizon = $456,880

Revenue over planning horizon = $699,560
Profit over planning horizon = $242,680

• Higher total profit than base case

Discount Leads to Large Increase in Consumption

• Promotion in April

Optimal Aggregate Plan When Discounting Price in April to $39 with Large
Increase in Demand
Discount Leads to Large Increase in Consumption

Total cost over planning horizon = $536,200

Revenue over planning horizon = $783,520
Profit over planning horizon = $247,320

• Much higher level of seasonal inventory

• Uses more stockouts and subcontracting
• Revenues increase
• Overall profits higher
Supply Chain Performance

Supply Chain Performance Under Different Scenarios

Percentage of Percentage
Regular Promotion Promotion Increase in of Forward Average
Price Price Period Demand Buy Profit Inventory
$40 $40 NA NA NA $217,340 875
$40 $39 January 10% 20% $221,320 515
$40 $39 April 10% 20% $211,220 932
$40 $39 January 100% 20% $242,680 232
$40 $39 April 100% 20% $247,320 1,492
$31 $31 NA NA NA $73,340 875
$31 $30 January 100% 20% $84,280 232
$31 $30 April 100% 20% $69,120 1,492