Supply Chain Management

INDE 6641
Aggregate Planning

Dr. Narjes Sadeghiamirshahidi

Department of Mechanical and Industrial Engineering

1 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved
Production System Decision Hierarchy
Strategic Planning (Strategic Level)

Aggregate Production Planning (Tactical Level)

Disaggregation

Production Scheduling (Operational Level)

Shop Floor Control

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What is Aggregate Planning (AP)?
Aggregate Planning (AP), is a process by which a Company determines levels of
Capacity, Production, Subcontracting, Inventory, Stockouts, Pricing over a
specified Time Horizon to maximize Profits (minimize Costs).
AP enables Companies to identify Operational Parameters over specified Time Horizon
including:
• Production Rate
• Number of Workforce
• Overtime Hours
• Machine Capacity Level
• Subcontracting
• Backlog (unmet demand)
• Inventory on hand
Note: For AP to be effective, all Supply Chain Stages should work together on one
Aggregate Plan that will optimize Supply Chain Performance.
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Basics of Aggregate Planning
Aggregate Planning: Projects Products Production over a specified Planning Horizon.
 Aggregate Planning Strategies:
• Level Strategy
• Chase Strategy
• Mixed Strategy
• Linear Programming
 Aggregate Planning Inputs:
• Demand Forecast (over Planning horizon)
• Capacity Constraints
• Unit Profit
• Costs
 Aggregate Planning Outputs:
• Production Quantity: during Regular Time, Overtime, and Subcontracted Time
• Inventory Level: are used to determine Warehouse Space and Working Capital required
• Backlog/Stockout Quantity: are used to determine Customer Satisfaction
• Workforce Hired/Laid Off
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Basics of Aggregate Planning
 Aggregate Planning helps Companies to decide:
• How many Employees they should retain
• The Quantity and Mix of Products to be produced

 It designed to translate Demand Forecasts into a blueprint for planning Staff and
Production Levels over a specified Planning Horizon.
• Typical Time Period: Months

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Aggregate Planning Strategies
Aggregate Planning Strategies:
 Pure Level Strategy: Constant Workforce Plan
Goal: is to maintain Workforce Level or Production Rates constant over time
 Pure Chase Strategy:
Goal: is to chase Demands by minimizing Ending Inventory.

 Hybrid or Mixed Strategy: Combination of Level & Chase Strategies

• It may include keeping additional Inventory ahead of time to match Demands or use
Backorders to keep up.
• Organizations may hire temporary Workers in case of high Demand or lay off Workers
temporarily in case of low Demand.
• Job Rotations may be a part of Mixed Strategies to make sure that Workers’ skills are being
fully-applied.

Note: These Strategies are designed to achieve one objective which is Higher Profit/lower Cost.
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Aggregate Planning Strategies – Level Strategy
Pure Level Strategy (Constant Workforce Plan):
• Stable Workforce Levels, constant Production Rate
• Inventory Levels fluctuate over time
• Inventories carried over from high to low Demand Periods
• Better for Worker Morale
• Large Inventories and Backlogs may accumulate
• Used when Inventory Holding & Backlog Costs are relatively low

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Aggregate Planning Strategies – Chase Strategy
Pure Chase Strategy:
• Change Machine Capacity or hire & lay off Workers as Demand varies
• Often difficult to change Capacity & Workforce on short notice
• Expensive if Cost of changing Capacity is high
• Negative effect on Workforce Morale
• Results in low Levels of Inventory
• Used when Inventory Holding Costs are high and Costs of changing Capacity are low

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Search for an Optimal Aggregate Planning Strategy
Question: Which Aggregate Planning Strategy should we use?
Example: Candies Production
Sale Forecast for Candies are as shown in table below:
Sales Forecast
Quarter
(pounds)
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000

• Initial Workforce: 100 Workers

• Production per Employee: 1000 Pounds per Quarter
• Initial Inventory: 0
• Inventory Carrying Cost: $0.5 per Pound per Quarter
• Hiring Cost: $500 per Worker
• Firing Cost: $100 per Worker

What is cost of each Aggregate Planning Strategy?

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Search for an Optimal Aggregate Planning Strategy
Solution 1: Level Strategy (Level Production: Constant Workforce Plan)
Initial Workforce: 100 Quarter Demand Production Inventory
Spring 80,000 100,000 20,000
Units/Worker: 1000
Summer 50,000 100,000 70,000
Initial Inventory: 0 Fall 120,000 100,000 50,000
Inventory Carrying Cost: $0.5 Winter 150,000 100,000 0
Hiring Cost: $500 Total 400,000 400,000 140,000
Total Inventory Cost $70,000
Firing Cost: $100
Total Demand = 400,000

In Level Strategy: we produce based on number of Workers we have

Production = number of Workforce * number of Units can be produced by each Worker
Production = 100 * 1000 = 100,000

Inventory Level = (Production + Inventory from previous Period) – Demand

Total Inventory Cost = Total number of Inventory * Inventory Carrying Cost (per Unit per Quarter)
Total Inventory Cost = 140,000 * ($0.5) = $70,000
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Search for an Optimal Aggregate Planning Strategy
Solution 2: Chase Strategy (Chase Demand)
Initial workforce: 100 Quarter Demand Production Workers Workers Workers
Workers
Quarter Demand
Quarter Demand Production
Production needed
Spring 80,000 80,000 hired
needed fired
Units/Worker: 1000 Spring
Spring 80,000
80,000 80,000
80,000 80 80 0 20
Summer 50,000 50,000
Initial Inventory: 0 Summer
Summer
Fall 50,000
50,000
120,000 50,000
50,000
120,000 50 50 0 30
Inventory Carrying Cost: $0.5
Fall
Fall
Winter 120,000
120,000
150,000 120,000
120,000
150,000 120 12070 0
Winter
Winter
Total 150,000
150,000
400,000 150,000
150,000
400,000 150 15030 0
Hiring Cost: $500 Total
Total 400,000
400,000 400,000
400,000 400 400100 50
100 50
Firing
Total Cost: = 400,000 $100
Demand Total Cost of Hiring & Firing $55,000 $50,000 $5,000
In Chase Strategy: We produce based on amount of Demand for each Period
Production = Demand
Number of Workers needed = (Production)/(number of Units can be produced by each Worker )
# Workers hired or fired = Difference between (# Workers needed in each Period) & (# Workers in previous Period)
Total number Workers hired = 70 + 30 = 100 Total number of Workers fired = 20 + 30 = 50

Total Cost of Hiring = (Total # of Workers hired) * (Hiring Cost) = (100) * ($500)= $50,000
Total Cost of Firing = (Total # of Workers fired) * (Firing Cost)= (50) * ($100) = $5,000
Total Cost of Hiring & Firing = Total Cost of Hiring + Total Cost of Firing = $50,000 + $5,000 = $55,000
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Search for an Optimal Aggregate Planning Strategy
Comparing Level Strategy & Chase Strategy:
Level Strategy (Level Production: Constant Workforce Plan)
Total Inventory Cost= 140,000 * ($0.5) = $70,000

Chase Strategy (Chase Demand)

Total Cost of Hiring & Firing = Total Cost of Hiring + Total Cost of Firing = $50,000 + $5,000 = $55,000

So, for this particular Example, Chase Strategy is better, because it has lower Total Cost

Note: this is not always the case.

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Developing Aggregate Production & Workforce Plan
Aggregate Planning Assumptions:
 Demand is deterministic (i.e., known & constant)
 Shortage are not permitted
 We seek to develop an Aggregate Plan that minimizes Total Cost
 We consider only three Costs:
• Hiring Cost
• Firing Cost
• Inventory holding Cost

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Developing Aggregate Production & Workforce Plan – Example
Example: Fremont Brewing Company produces a popular Beer called “Summer Ale”.
Sales of Summer Ale tend to be Seasonal. Demand Forecasts are as follow.
Company wants to develop its Aggregate Production & Workforce Plan on March 31 for next Six Months
(Using Level & Chase Strategies).

Month Production Days Forecasted Demand (Beer)

1 April 11 8500
2 May 22 9300
3 June 20 12200
4 July 23 17600
5 August 16 14000
6 September 20 6300

 Over a Period of 26 Working Days, when there were 100 Workers on payroll, Company produced 12,000 Beers.
 As of March 31, Fremont Brewing had 86 Workers on payroll.
 Cost of hiring each Worker is $125, and Cost of laying off each Worker is $300.
 Inventory Holding Cost is $0.75 per Beer per Month.
 As of March 31, there are 4500 Beers of Summer Ale in stock.
 Company wants to end Production in September with 3000 Beers on hand.

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Developing Aggregate Production & Workforce Plan – Example
Month Production Days Forecasted Demand (Beers)
1 April 11 8500
2 May 22 9300
3 June 20 12200
4 July 23 17600
5 August 16 14000
6 September 20 6300

Information from Problem Statement:

1. Over a period of 26 Working Days, Company produced 12,000 Beer when there were 100 Workers on
payroll.
2. Initial Workforce in April: 86 Workers (As of March 31, Fremont Brewing had 86 Workers on payroll.)
3. Hiring Cost: $125 (per Worker)
4. Laying Off Cost: $300 (per Worker)
5. Inventory Holding Cost: $0.75 (per Beer per Month)
6. Initial Inventory: 4500 Beers (As of March 31, there are 4500 Beers of Summer Ale in stock.)
7. Desired Ending Inventory: 3000 Beers (Company wants to end Production in September with 3000 Beers on hand.)

We want to develop an Aggregate Production & Workforce Plan on March 31 for next Six Months
(Using Level & Chase Strategies)
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Developing Aggregate Production & Workforce Plan – Example
Before an Aggregate Plan can be developed, we need to translate Aggregate Production (in terms
of number of Beers) to Workforce level.
Step 1: Calculate average number of Products can be produced by one Worker in one Day (based on
previous Observation) as:
𝒌=¿ number of Products Produced/ Working Days/ number of Workers
Based on Problem Statement #1, over a Period of 26 Working Days, Company produced 12,000 Beers when
there were 100 Workers on payroll. Therefore,
= Beers/Worker/Day

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Developing Aggregate Production & Workforce Plan – Example
Step 2: Calculate number of Products produced by one Worker for each Period by:

* (number Working Days for each given Period)

From Step 1: 𝒌=𝟒.𝟔𝟏𝟓𝟑𝟖 Beer/Worker/Day

# of products (cases)
Production
Month produced by
Days
one worker
(0) (1) (2) = K * (1)
1 April 11 50.769 ( 𝟏𝟏 ) ×𝟒 .𝟔𝟏𝟓𝟑𝟖=50.769
2 May 22 101.538 ( 𝟐𝟐 ) ×𝟒 .𝟔𝟏𝟓𝟑𝟖=101.538
3 June 20 92.308
4 July 23 106.154
5 August 16 73.846
6 September 20 92.308

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Developing Aggregate Production & Workforce Plan – Example
Step 3: Calculate Net Forecasted Demand
# of products (cases) Forecasted Net
Production
Month produced by Demand Forecasted
Days
one worker (Cases) Demand (Cases)
(0) (1) (2) = K * (1) (3) (4)
1 April 11 50.769 8500 4000 8500 – Initial Inventory =
8500 – 4500 = 4000
2 May 22 101.538 9300 9300
3 June 20 92.308 12200 12200
4 July 23 106.154 17600 17600
5 August 16 73.846 14000 14000 6300 + Desired Ending Inventory =
6 September 20 92.308 6300 9300 6300 + 3000 = 9300

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Developing Aggregate Production & Workforce Plan – Example
Step 4: Calculate minimum number of Workers required:

Min number of Workers required = (Net Forecasted Demand)/(# of Products produced by one Worker)

# of products (cases) Forecasted Net

Production Min # of workers
Month produced by Demand Forecasted
Days required
one worker (Cases) Demand (Cases)
(0) (1) (2) = K * (1) (3) (4) (5) = (4) / (2)
1 April 11 50.769 8500 4000 79
2 May 22 101.538 9300 9300 92
3 June 20 92.308 12200 12200 133
4 July 23 106.154 17600 17600 166
5 August 16 73.846 14000 14000 190
6 September 20 92.308 6300 9300 101

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Developing Aggregate Production & Workforce Plan – Example
Level Strategy (Level Production: Constant Workforce Plan)
Step 1: Calculate Cumulative Net Forecasted Demand

Cumulative
Net
Forecasted Net
Forecasted
Month Demand Forecasted
Demand
(Cases) Demand
(Cases)
(Cases)
(0) (1) (2) (3)
1 April 8500 4000 4000
2 May 9300 9300 13300
3 June 12200 12200 25500
4 July 17600 17600 43100
5 August 14000 14000 57100
6 September 6300 9300 66400

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Developing Aggregate Production & Workforce Plan – Example
Level Strategy (Level Production: Constant Workforce Plan)
Step 2: Calculate Cumulative # of
products produced by one Worker

Note: # of Products produced by one

Worker has been calculated in Step 2,
slide 18

Net Cumulative Net # of products (cases) Cumulative

Forecasted
Month Forecasted Forecasted produced by # of products (cases)
Demand (Cases)
Demand (Cases) Demand (Cases) one worker produced by one worker
(0) (1) (2) (3) (4) (5)
1 April 8500 4000 4000 50.769 50.769
2 May 9300 9300 13300 101.538 152.308
3 June 12200 12200 25500 92.308 244.615
4 July 17600 17600 43100 106.154 350.769
5 August 14000 14000 57100 73.846 424.615
6 September 6300 9300 66400 92.308 516.923

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Developing Aggregate Production & Workforce Plan – Example
Level Strategy (Level Production: Constant Workforce Plan)
Step 3: Calculate Ratio of Cumulative Net Forecasted Demand & Cumulative # of Products produced by one Worker &
find the Maximum Ratio. (Note: if the Maximum Ratio is a float number, round it up)
Ratio =

Note: Maximum Ratio: is # of Workers required for Level Strategy

Cumulative Cumulative
Net # of products
Forecasted Net # of products
Forecasted (cases)
Month Demand Forecasted (cases) Ratio
Demand produced by
(Cases) Demand produced by
(Cases) one worker
(Cases) one worker
(0) (1) (2) (3) (4) (5) (6) = (3)/(5)
1 April 8500 4000 4000 50.769 50.769 78.79
2 May 9300 9300 13300 101.538 152.308 87.32
3 June 12200 12200 25500 92.308 244.615 104.25
4 July 17600 17600 43100 106.154 350.769 122.87
5 August 14000 14000 57100 73.846 424.615 134.47 Max Ratio
6 September 6300 9300 66400 92.308 516.923 128.45
Max Ratio

Max Ratio = 135  # of Workers required for Level Strategy = 135

# of Workers required = 135 – 86 = 49 Initial Workforce

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Developing Aggregate Production & Workforce Plan – Example
Level Strategy (Level Production: Constant Workforce Plan)
Step 4: Calculate # of Products produced in each Period:

# of Products produced in each Period = (Maximum Ratio) * (# of Products produced by one Worker)

Cumulative Cumulative
Net # of products # of products
Forecasted Net # of products
Forecasted (cases) (cases)
Month Demand Forecasted (cases) Ratio
Demand produced by produced in
(Cases) Demand produced by
(Cases) one worker each period
(Cases) one worker
(0) (1) (2) (3) (4) (5) (6) = (3)/(5) (7)=Max Ratio*(4)
1 April 8500 4000 4000 50.769 50.769 78.79 6854
2 May 9300 9300 13300 101.538 152.308 87.32 13708
3 June 12200 12200 25500 92.308 244.615 104.25 12462
4 July 17600 17600 43100 106.154 350.769 122.87 14331
5 August 14000 14000 57100 73.846 424.615 134.47 9970
6 September 6300 9300 66400 92.308 516.923 128.45 12462
Max Ratio

Note: for # of Products (cases) produced in each Period, round up Values

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Developing Aggregate Production & Workforce Plan – Example
Level Strategy (Level Production: Constant Workforce Plan)

Step 5: Calculate Cumulative # of Products produced in each Period:

Cumulative Cumulative Cumulative

Net # of products # of products # of products
Forecasted Net # of products
Forecasted (cases) (cases)
Month Demand
Demand
Forecasted
produced by
(cases) Ratio
produced in
(cases)
(Cases) Demand produced by produced in
(Cases) one worker each period
(Cases) one worker each period
(0) (1) (2) (3) (4) (5) (6) = (3)/(5) (7)=Max Ratio*(4) (8)
1 April 8500 4000 4000 50.769 50.769 78.79 6854 6854
2 May 9300 9300 13300 101.538 152.308 87.32 13708 20562
3 June 12200 12200 25500 92.308 244.615 104.25 12462 33024
4 July 17600 17600 43100 106.154 350.769 122.87 14331 47355
5 August 14000 14000 57100 73.846 424.615 134.47 9970 57325
6 September 6300 9300 66400 92.308 516.923 128.45 12462 69787
Max Ratio

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Developing Aggregate Production & Workforce Plan – Example
Level Strategy (Level Production: Constant Workforce Plan)
Step 6: Calculate Inventory Level for each Period & Calculate Total Inventory Level

Inventory level for each Period = (Cumulative # of Products produced in each Period) – (Cumulative Net Forecasted Demand)

Total Inventory Level = sum of all Inventory in each Period

Cumulative # of Cumulative Cumulative

Net # of products
Forecaste Net products # of products # of products Inventory
Forecasted (cases)
Month d Demand Forecasted (cases) (cases) Ratio (cases) Level in
Demand produced in
(Cases) Demand produced by produced by produced in each period
(Cases) each period
(Cases) one worker one worker each period
(0) (1) (2) (3) (4) (5) (6) = (3)/(5) (7)=Max Ratio*(4) (8) (9)=(8)-(3)
1 April 8500 4000 4000 50.769 50.769 78.79 6854 6854 2854
2 May 9300 9300 13300 101.538 152.308 87.32 13708 20562 7262
3 June 12200 12200 25500 92.308 244.615 104.25 12462 33024 7524
4 July 17600 17600 43100 106.154 350.769 122.87 14331 47355 4255
5 August 14000 14000 57100 73.846 424.615 134.47 9970 57325 225
6 September 6300 9300 66400 92.308 516.923 128.45 12462 69787 3387
Max Ratio Total Inventory 25507
(sum of all inventory in each period)

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Developing Aggregate Production & Workforce Plan – Example
Level Strategy (Level Production: Constant Workforce Plan)
Step 7: Calculate Total Cost Total Cost = Total Cost of Holding Inventory + Total Cost of Hiring or Firing Workers
(Total Inventory)* (# of workers Hired or Fired)*
=
(Inventory Holding Cost)
+
(Hiring or Firing Cost)
Cumulative # of Cumulative Cumulative
Net # of products
Forecaste Net products # of products # of products Inventory
Forecasted (cases)
Month d Demand Forecasted (cases) (cases) Ratio (cases) Level in
Demand produced in
(Cases) Demand produced by produced by produced in each period
(Cases) each period
(Cases) one worker one worker each period
(0) (1) (2) (3) (4) (5) (6) = (3)/(5) (7)=Max Ratio*(4) (8) (9)=(8)-(3)
1 April 8500 4000 4000 50.769 50.769 78.79 6854 6854 2854
2 May 9300 9300 13300 101.538 152.308 87.32 13708 20562 7262
3 June 12200 12200 25500 92.308 244.615 104.25 12462 33024 7524
4 July 17600 17600 43100 106.154 350.769 122.87 14331 47355 4255
5 August 14000 14000 57100 73.846 424.615 134.47 9970 57325 225
6 September 6300 9300 66400 92.308 516.923 128.45 12462 69787 3387
Max Ratio Total Inventory 25507
(sum of all inventory in each period)

Total Cost of Hiring= (# of Workers Hired )*(Hiring Cost) = (49)*($125)= $6,125

Total Cost of Holding Inventory= (Total Inventory)*(Inventory Holding Cost) = (25507 + 3000)*($0.75)= $21,380
Total Cost = Total Cost of Holding Inventory + Total Cost of Hiring or Firing Workers = $21,380 + $6,125 = $27,505
Note: We should add “Desired Ending Inventory” to Total Inventory. Because we will keep this Inventory for next Period
26
Developing Aggregate Production & Workforce Plan – Example
Chase Strategy (Chase Demand)
Step 1: Calculate # of Workers Hired or Fired based on Minimum # of Workers required for each Period

Note: Min # of Workers required for each Period

has been calculated in Step 4, slide 20

Min # of workers # of workers # of workers

Month
required hired fired
(0) (1) (2) (3)
1 April 79 0 7
2 May 92 13 0
3 June 133 41 0
4 July 166 33 0
5 August 190 24 0
6 September 101 0 89
Total  Total hired: 111 Total fired: 96
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Developing Aggregate Production & Workforce Plan – Example
Chase Strategy (Chase Demand)
Step 2: Calculate # of Products produced in each Period
# of Products produced in each Period = (Min # of Workers required)*(# of Products produced by one Worker)

Note: # of Products produced by one Worker has been

calculated in Step 2, slide 18

Min # of workers # of workers # of workers # of products (cases) # of products produced in each

Month
required hired fired produced by one worker period
(0) (1) (2) (3) (4) (5) = (1) * (4)
1 April 79 0 7 50.769 4011
2 May 92 13 0 101.538 9342
3 June 133 41 0 92.308 12277
4 July 166 33 0 106.154 17622
5 August 190 24 0 73.846 14031
6 September 101 0 89 92.308 9324
Total  Total hired: 111 Total fired: 96
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Developing Aggregate Production & Workforce Plan – Example
Chase Strategy (Chase Demand)

Step 3: Calculate Cumulative # of Products produced in each Period

# of products Cumulative
Min # of # of products
# of workers # of workers (cases) # of products
Month workers produced in
hired fired produced by produced in
required each period
one worker each period
(0) (1) (2) (3) (4) (5) = (1) * (4) (6)
1 April 79 0 7 50.769 4011 4011
2 May 92 13 0 101.538 9342 13353
3 June 133 41 0 92.308 12277 25630
4 July 166 33 0 106.154 17622 43252
5 August 190 24 0 73.846 14031 57283
6 September 101 0 89 92.308 9324 66607
Total  Total hired: 111 Total fired: 96

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Developing Aggregate Production & Workforce Plan – Example
Chase Strategy (Chase Demand)
Step 4: Calculate Cumulative Net Forecasted Demand

Note: Net Forecasted Demand has been calculated

in Step 3, slide 19

# of Cumulative Cumulative
# of Net
Min # of products # of Net
# of workers # of workers products Forecasted
Month workers (cases) products Forecasted
hired fired produced in Demand
required produced by produced in Demand
each period (Cases)
one worker each period (Cases)
(0) (1) (2) (3) (4) (5) = (1) * (4) (6) (7) (8)
1 April 79 0 7 50.769 4011 4011 4000 4000
2 May 92 13 0 101.538 9342 13353 9300 13300
3 June 133 41 0 92.308 12277 25630 12200 25500
4 July 166 33 0 106.154 17622 43252 17600 43100
5 August 190 24 0 73.846 14031 57283 14000 57100
6 September 101 0 89 92.308 9324 66607 9300 66400
Total  Total hired: 111 Total fired: 96
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Developing Aggregate Production & Workforce Plan – Example
Chase Strategy (Chase Demand)
Step 5: Calculate Inventory Level for each Period & Calculate Total Inventory Level
Inventory Level for each Period = (Cumulative # of Products produced in each Period) – (Cumulative Net Forecasted Demand)

Total Inventory Level = sum of all Inventory in each Period

# of Cumulative Cumulative
# of Net Inventory
Min # of products # of Net
# of workers # of workers products Forecaste Level in
Month workers (cases) products Forecasted
hired fired produced in d Demand each
required produced by produced in Demand
each period (Cases) period
one worker each period (Cases)
(0) (1) (2) (3) (4) (5) = (1) * (4) (6) (7) (8) (9) =(6)-(8)
1 April 79 0 7 50.769 4011 4011 4000 4000 11
2 May 92 13 0 101.538 9342 13353 9300 13300 53
3 June 133 41 0 92.308 12277 25630 12200 25500 130
4 July 166 33 0 106.154 17622 43252 17600 43100 152
5 August 190 24 0 73.846 14031 57283 14000 57100 183
6 September 101 0 89 92.308 9324 66607 9300 66400 207
Total Inventory
Total  Total hired: 111 Total fired: 96
(sum of all inventory in each period)
736

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Developing Aggregate Production & Workforce Plan – Example
Chase Strategy (Chase Demand)
Step 6: Calculate Total Cost Total Cost = Total Cost of Holding Inventory + Total Cost of Hiring + Total Cost of Firing
(Total Inventory)* (# of Workers Fired)*
= (Inventory Holding Cost)
+ (# of Workers Hired)* +
(Hiring Cost) (Firing Cost)
Cumulative
# of products Cumulative Net
Min # of # of products Net Inventory
# of workers # of workers (cases) # of products Forecasted
Month workers
hired fired produced by
produced in
produced in Demand
Forecasted Level in
required each period Demand each period
one worker each period (Cases)
(Cases)
(0) (1) (2) (3) (4) (5) = (1) * (4) (6) (7) (8) (9) =(6)-(8)
1 April 79 0 7 50.769 4011 4011 4000 4000 11
2 May 92 13 0 101.538 9342 13353 9300 13300 53
3 June 133 41 0 92.308 12277 25630 12200 25500 130
4 July 166 33 0 106.154 17622 43252 17600 43100 152
5 August 190 24 0 73.846 14031 57283 14000 57100 183
6 September 101 0 89 92.308 9324 66607 9300 66400 207
Total Inventory
Total  Total hired: 111 Total fired: 96 (sum of all inventory in each period)
736
Total Cost of Hiring= (# of Workers hired )*(Hiring Cost) = (111)*($125)= $13,875
Total Cost of Firing= (# of Workers fired )*(Firing Cost) = (96)*($300)= $28,800
Total Cost of holding Inventory= (Total Inventory)*(Inventory Holding Cost) = (736 + 3000)*($0.75)= $2,802
Total Cost = Total Cost of Holding Inventory + Total Cost of Hiring + Total Cost of Firing = $2,802 + $13,875 + $28,800 = $45,477
Note: We should add “Desired Ending Inventory” to Total Inventory. Because we will keep this Inventory for next Period

32
Developing Aggregate Production & Workforce Plan – Example
Comparing Level Strategy & Chase Strategy:
Level Strategy (Level Production: Constant Workforce Plan):
Total Cost of Hiring = (# of Workers hired )*(Hiring Cost) = (49)*($125)= $6,125
Total Cost of Holding Inventory = (Total Inventory)*(Inventory Holding Cost) = (22507 + 3000)*($0.75)= $21,380
Total Cost = Total Cost of Holding Inventory + Total Cost of Hiring or Firing Workers = $21,380 + $6,125 = $27,505

Chase Strategy (Chase Demand):

Total Cost of Hiring = (# of Workers Hired )*(Hiring Cost) = (111)*($125)= $13,875
Total Cost of Firing = (# of Workers Fired )*(Firing Cost) = (96)*($300)= $28,800
Total Cost of holding Inventory= (Total Inventory)*(Inventory Holding Cost) = (736 + 3000)*($0.75)= $2,802

Total Cost = Total Cost of Holding Inventory + Total Cost of Hiring + Total Cost of Firing
= $2,802 + $13,875 + $28,800 = $45,477

So, for this particular example, Level Strategy is better, because it has lower Total Cost.
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Solving Aggregate Planning Problems by Linear Programming (LP)
Linear Programming (LP): a class of Optimization Problems where Objective is to:
Determine Values of n non-negative Variables that maximize/minimize a Linear
Function of these Variables, subject to m Linear Constraints of these Variables

 Components of a Linear Program include:

• Parameters
• Given Information
• Decision Variables
• Constraints
• Objective Function

34
Solving Aggregate Planning Problems by Linear Programming (LP)
Parameters include:
 Costs:
• Inventory holding Cost (Cost of holding one unit of Inventory for one Period),
• Cost of Hiring one Worker,
• Cost of Firing one Worker,
• Cost of Producing one Unit in Regular Time,
• Cost of Producing one Unit on Over-Time,
• Cost of Subcontracting one Unit of Production,

35
Solving Aggregate Planning Problems by Linear Programming (LP)
Given Information include:
 Forecast Demand per Time Period,
 Number of Production Days in each Time Period,
 Number of aggregate units produced by one Worker in one Day,
 Initial Inventory on hand at the beginning of Planning Horizon,
 Initial number of Workforce at the beginning of Planning Horizon,
 Final Inventory on hand at the end of Planning Horizon,
 Final number of Workforce at the end of Planning Horizon,

36
Solving Aggregate Planning Problems by Linear Programming (LP)
Decision Variables include:
 Workforce Level in each Time Period,
 Production Level in each Time Period,
 Inventory carried at the end of each Time Period,
 Number of Workers hired in each Time Period,
 Number of Workers fired in each Time Period,
 Overtime Production in each Time Period,
 Number of Units subcontracted in each Time Period,
• : index of Time Period,

37
Solving Aggregate Planning Problems by Linear Programming (LP)
Constraints include:
 Conservation of Workforce Constraints
 Conservation of Units (Inventory) Constraints
 Constraints relating Production Levels to Workforce Levels
(Production Productivity Constraints or Workforce Productivity Constraints)
 Non-Negativity Constraints
 Initial Parameter Values

38
Solving Aggregate Planning Problems by Linear Programming (LP)
Conservation of Workforce Constraints:

# of Workers in t = # of Workers in t-1 + # of Workers hired in t # of

Workers fired in t

39
Solving Aggregate Planning Problems by Linear Programming (LP)

Conservation of Units (Inventory) Constraints:

All things All things

coming into = going out of
the system the system

# of Units produced in t + # of Units subcontracted in t Inventory in t

+Inventory in t-1 =
# of Demand in t

40
Solving Aggregate Planning Problems by Linear Programming (LP)
Constraints relating Production Levels to Workforce Levels:
(Production Productivity Constraints or Workforce Productivity Constraints)

Number of Number of Units Number of Units

Units = produced in + produced on
produced in t Regular Time in t Over Time in t

41
Solving Aggregate Planning Problems by Linear Programming (LP)

Objective Function:

Regular time
Production cost

Hiring Firing Holding

Overtime Cost of
cost cost cost
Production cost subcontracting

42
Solving Aggregate Planning Problems by Linear Programming (LP)

Mathematical Formulation:
𝑻
𝑴𝒊𝒏𝒊𝒎𝒊𝒛𝒆 ∑ (𝑪 𝑯 𝑯 𝒕 +𝑪 𝑭 𝑭 𝒕 +𝑪 𝑰 𝑰 𝒕 +𝑪 𝑹 𝑷 𝒕 +𝑪 𝑶 𝑶 𝒕 +𝑪 𝒔 𝑺𝒕 )
𝒕=𝟏

Subject to:

𝑾 𝒕 −𝑾 𝒕− 𝟏 − 𝑯 𝒕 + 𝑭 𝒕 =𝟎1 ≤𝑡 ≤ 𝑇 Workforce Constraints

𝑷 𝒕 +𝑺 𝒕 − 𝑰 𝒕 + 𝑰 𝒕 −𝟏 =𝑫 𝒕 1 ≤𝑡 ≤ 𝑇 Unit (Inventory) Constraints

𝑷 𝒕 − 𝒌 𝒏𝒕 𝑾 𝒕 − 𝑶 𝒕 =𝟎 1 ≤𝑡 ≤ 𝑇 Production Levels to Workforce Levels Constraints

𝑯 𝒕 , 𝑭 𝒕 , 𝑰 𝒕 , 𝑶 𝒕 , 𝑺𝒕 , 𝑾 𝒕 , 𝑷 𝒕 ≥ 𝟎 Non-Negativity Constraints

43
Solving Aggregate Planning Problems by Linear Programming (LP) – Example
Example: Fremont Brewing Company produces a popular beer called “Summer Ale”.
Sales of Summer Ale tend to be Seasonal. Demand Forecasts are as follow.
The Company wants to develop its Aggregate Production & Workforce Plan on March 31 for next Six Months
(Using Linear Programming Strategy).
Forecasted Demand
Month Production Days
(Cases)
1 April 11 8500
2 May 22 9300
3 June 20 12200
4 July 23 17600
5 August 16 14000
6 September 20 6300

 Over a period of 26 Working Days when there were 100 Workers on payroll, Company produced 12,000 Beers.
 As of March 31, Fremont Brewing had 86 Workers on payroll.
 Cost of hiring each Worker is $125, and Cost of laying off each Worker is $300.
 Inventory Holding Cost is $0.75 per Beer per Month.
 As of March 31, there are 4500 Cases of Summer Ale in stock.
 Company wants to end Production in September with 3000 Beers on hand.

44
Solving Aggregate Planning Problems by Linear Programming (LP) – Example
Month Production Days Forecasted Demand (Cases)
1 April 11 8500
2 May 22 9300
3 June 20 12200
4 July 23 17600
5 August 16 14000
6 September 20 6300

Information from Problem Statement:

1. Over a period of 26 Working Days, Company produced 12,000 Beers when there were 100 Workers
on payroll.
2. Initial Workforce in April: 86 Workers (As of March 31, Fremont Brewing had 86 Workers on payroll.)
3. Hiring Cost: $125 (per Worker)
4. Laying Off Cost: $300 (per Worker)
5. Inventory Holding Cost: $0.75 (per Case per Month)
6. Initial Inventory: 4500 Cases (As of March 31, there are 4500 Cases of Summer Ale in stock.)
7. Desired Ending Inventory: 3000 Cases (Company wants to end production in September with 3000 Cases on hand.)
We want to develop an Aggregate Production & Workforce Plan on March 31 for next Six Months
(Using Linear Programming)
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Solving Aggregate Planning Problems by Linear Programming (LP) – Example
Using Linear Programming to develop an Aggregate Production & Workforce Plan on March 31
for next Six Months:
Step 1: Based on previous Observation, calculate average number of Products can be produced by one
Worker in one Day as follow:
𝒌=¿ number of Products Produced/ Working Days/ number of Workers
Based on Problem Statement #1, over a period of 26 Working Days, Company produced 12,000 Beers when
there were 100 Workers on payroll. Therefore,
= Cases/Worker/Day

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Solving Aggregate Planning Problems by Linear Programming (LP) – Example
Using Linear Programming to develop an Aggregate Production & Workforce Plan on March 31
for the next six months:

Step 2: Calculate number of Products can be produced in each Period as follow:

𝒌 𝒕 =¿ ()* (# of Working Days (Production Days) in each Period) 𝒌 𝒕 = 𝒌× 𝒏 𝒕

𝒏𝒕

Based on Step 1: = Cases/Worker/Day

Production Days
Month
(0) (1) (2) = k*(1)
1 April 11 50.769 𝒌 𝟏=𝟒 . 𝟔𝟏𝟓𝟑𝟖 × 𝟏𝟏=𝟓𝟎 .𝟕𝟔𝟗
2 May 22 101.538
3 June 20 92.308
4 July 23 106.154
5 August 16 73.846
6 September 20 92.308
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Solving Aggregate Planning Problems by Linear Programming (LP) – Example
Using Linear Programming to develop an Aggregate Production & Workforce Plan on March 31 for next Six
Months:
Step 3: Write Linear Programming Mathematical Formula (Objective Function & Constraints)

( )
6 6 6
𝑀𝑖𝑛𝑖𝑚𝑖𝑧𝑒 $ 125 ∑ 𝐻 𝑡 +$ 300 ∑ 𝐹 𝑡 +$ 0 .75 ∑ 𝐼 𝑡
𝑡=1 𝑡 =1 𝑡=1
𝑠 .𝑡 .

𝑊1−𝑊0−𝐻1+𝐹1=0,𝑃1−𝐼1+𝐼0=850 , 𝑃1−(50.769)𝑊1=0,
Workforce Constraints Units (Inventory) Constraints Production(Workforce) Productivity Constraints

𝐻 𝑡 , 𝐹 𝑡 , 𝐼 𝑡 ,𝑊 𝑡 , 𝑃 𝑡 ≥ 0 Non-Negativity Constraints

𝑊 0=86 , 𝐼 0 =4500 , 𝐼 6 =3000

48
Solving Aggregate Planning Problems by Linear Programming (LP) – Example
Using Linear Programming to develop an Aggregate Production & Workforce Plan on March 31 for next Six
Months:
Step 4: Solve Linear Programming (using Excel Solver)

49
Comparing Different Aggregate Planning Methods Results
Comparing Level Strategy, Chase Strategy & Linear Programming for Fremont Brewing Example
Level Strategy (Level Production: Constant Workforce Plan)
Total Cost of Hiring = (# of Workers hired )*(Hiring Cost) = (49)*($125)= $6,125
Total Cost of Holding Inventory = (Total Inventory)*(Inventory Holding Cost) = (22507 + 3000)*($0.75)= $21,380
Total Cost = Total Cost of Holding Inventory + Total Cost of Hiring or Firing Workers = $21,380 + $6,125 = $27,505

Chase Strategy (Chase Demand)

Total Cost of Hiring = (# of Workers hired )*(Hiring Cost) = (111)*($125)= $13,875
Total Cost of Firing = (# of Workers fired )*(Firing Cost) = (96)*($300)= $28,800
Total Cost of Holding Inventory= (Total Inventory)*(Inventory Holding Cost) = (736 + 3000)*($0.75)= $2,802
Total Cost = Total Cost of Holding Inventory + Total Cost of Hiring + Total Cost of Firing = $2,802 + $13,875 + $28,800 = $45,477

Linear Programming:
Total Cost of Hiring= $6,883.79
Total Cost of Firing= $12,093.58
Total Cost of Holding Inventory= $13,910.45
Total Cost = Total Cost of Holding Inventory + Total Cost of Hiring + Total Cost of Firing = $32,887.83
So, Level Strategy is better, because it has lower Total Cost.
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