Chapter 5
Aggregate
Planning
Operations
Analysis Using
MS Excel
BIS APPLICATION 2002-2003
MANAGEMENT INFORMATION SYSTEM
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Chapter Outline
1.
The Nature of Aggregate Planning
2.
Tradeoffs between Production and Inventory
3.
Nonlinear cost and demand functions
•
Introducing Overtime
•
Introducing Double or Premium Time
•
Tradeoffs between Level and Chase Strategies
BIS APPLICATION 2002-2003
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Aggregate Planning
Aggregate planning is an intermediate planning
method used to determine the necessary
resource capacity a firm will need in order to
meet its expected demand.
Units
Demand
Time
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Overview of Planning Levels
Short-range plans (Detailed plans)
– Machine loading
– Job assignments
Intermediate plans (General levels)
– Employment
– Output
Long-range plans
– Long term capacity
– Location / layout
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Key Points
In the intermediate level of planning, there is not a lot of
detail. Individual end product identity is typically not
present. Instead, planning is performed for a
composite, or average unit of product in a particular
family of similar products.
For example, we may plan for units of hair dryers,
without regard for whether they are 1500 watt dryers,
1600 watt dryers, 1875 watt dryers, travel dryers, etc.
BIS APPLICATION 2002-2003
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Key Points
With the aggregate planning:
 Decisions are typically aggregated into monthly time
periods.
 The planning horizon is usually stated as 6 to 18 or 212 months, however, if there is seasonality in the
demand for the output of the system, the plan should
normally cover at least 12 months so that it can react
to all the seasonal swings in the demand.
 Weekly or daily detail is not needed at intermediate
level of decision making.
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Goal of Aggregate Planning
To develop a realistic production plan on an aggregate
level that will satisfy organizational goals and
customer demand needs at the lowest total cost.
Other objectives should be considered:
 maximize customer service
 minimize inventory investment
 minimize changes in workforce levels
 minimize changes in production rates
 maximize utilization of plant and equipment
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Inputs to Aggregate Planning
1.
2.
3.
Resources
– Workforce
– Facilities
Demand forecast
Policies
– Subcontracting
– Overtime/slack-time
– Inventory levels
– Back orders
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4.
Costs
– Inventory carrying
– Back orders
– Hiring/firing
– Overtime
– Inventory changes
– Subcontracting
8
Aggregate Planning Outputs
 Total
cost of a plan
 Projected levels of inventory
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Capacity and Demand in the aggregate
planning
If capacity and demand are nearly equal, emphasis
should be placed on meeting demand as efficiently as
possible.
 If capacity is greater than demand the firm might chose
promotion and advertising in order to increase demand.
 If capacity is less than demand the firm might consider
subcontracting a portion of the work load.

Uni
ts
Demand
Time
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Techniques for Aggregate Planning
1.
Determine demand for each period
2.
Determine capacities for each period
3.
Identify policies that are relevant
4.
Determine units costs
5.
Develop alternative plans and costs (by using
different strategies)
6.
Select the best plan that satisfies objectives.
Otherwise return to step 5.
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Aggregate Planning Strategies

Maintain a level workforce

Maintain a steady output rate

Match demand period by period

Use a combination of decision
variables
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Aggregate Planning Strategies

Level capacity (production)
strategy

Chase demand strategy
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Aggregate Planning Strategies
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Chase Approach



Maintaining a steady rate of regular-time
output while meeting variations in demand by a
combination of options.
The chase method helps firms match
production and demand by hiring and firing
workers as necessary to control output
Cost of strategy – hiring and firing workers
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Chase Approach

Advantages
• Investment in inventory is low
• Labor utilization is high

Disadvantages
• The cost of adjusting output rates and/or workforce levels
• Cost of fluctuating workforce levels.
• Potential damage to employee morale
•
This strategy would not be feasible for industries which require highly
skilled labor or where competition for labor is fierce.
•
This strategy would be cost effective during periods of high
unemployment or when low-skilled labor is acceptable.
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Level Strategy



The level method allows for a constant rate of
production and uses inventory levels to absorb
fluctuations in demand.
Matching capacity to demand; the planned output for
a period is set at the expected demand for that period.
Cost of strategy – holding items in inventory
– When demand is lower than production, inventory
increases
– When demand exceeds production, inventory
decreases
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Level Strategy

Advantages
• Stable output rates and workforce levels
• Worker levels and production output are stable
• Tends to be the preferred strategy of many organizations, including
labor unions.

Disadvantages
• Greater inventory costs
• Increased labor costs in term of overtime and idle time
• Resource utilizations change over time
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The Nature of Aggregate Planning
 The CHASE and the LEVEL strategies are
rarely used in their pure form.
 Hybrid of the two is usually more cost-effective
and efficient
 What-if scenario management is ideal for
analyzing tradeoffs and determining the best
aggregate plan
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Tradeoffs between Production and
Inventory
Bricks and Tiles Corporation is making plans for the production of bricks for the coming year.
The total requirements are 3000 bricks, and the corporation has enough facilities and labor to
make 250 bricks a month
The corporation currently following the level strategy and makes bricks at a steady rate of 250
per month
Bricks and Tiles Corporation
Level Production, No Overtime
Hours per Brick
Labor Cost per Hour
Maximum Straight Labor per Month
Unit Inventory Cost per Month
Demand
Make
Labor required
Cost of labor
Start inventory
End inventory
Inventory cost
Total cost
1
50
250
500
$12,500
0
200
$1,000
2
100
250
500
$12,500
200
350
$2,750
2
$25
500
$10
3
150
250
500
$12,500
350
450
$4,000
Yesterday End Inventory
(Unit Make+Start inventory)- Demand
4
200
250
500
$12,500
450
500
$4,750
5
400
250
500
$12,500
500
350
$4,250
6
600
250
500
$12,500
350
0
$1,750
7
250
250
500
$12,500
0
0
$0
8
250
250
500
$12,500
0
0
$0
9
100
250
500
$12,500
0
150
$750
10
300
250
500
$12,500
150
100
$1,250
11
350
250
500
$12,500
100
0
$500
12
Total
250
3000
250
3000
500
6000
$12,500 $150,000
0
0
$0 $21,000
$171,000
(Start inventory+End inventory) /2 * inventory cost
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Introducing Overtime
According to Chase Strategy:
When demand forecast goes up ---------------------- production must be increase ( working overtime)
To meet the large demand, The bricks and Tiles Corporation will not build
up inventories in advance, but rather it will produce the extra bricks using
overtime.
Bricks and Tiles Corporation
Overtime, No Inventory
Hours per Brick
Labor Cost per Hour
Overtime Labor Cost per Hour
Maximum Straight Labor per Month
Unit Inventory Cost per Month
Demand
Make
Labor required
Cost of labor
Start inventory
End inventory
Inventory cost
Total cost
1
50
50
100
$2,500
0
0
$0
BIS APPLICATION 2002-2003
2
100
100
200
$5,000
0
0
$0
2
$25.0
$37.5
500
$10
3
150
150
300
$7,500
0
0
$0
If labor required <= 500, labor required * 25, else (500 * 25)+ (labor required –500) * 37.3
4
200
200
400
$10,000
0
0
$0
5
400
400
800
$23,750
0
0
$0
6
600
600
1200
$38,750
0
0
$0
MANAGEMENT INFORMATION SYSTEM
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250
250
500
$12,500
0
0
$0
8
250
250
500
$12,500
0
0
$0
9
100
100
200
$5,000
0
0
$0
10
300
300
600
$16,250
0
0
$0
11
350
350
700
$20,000
0
0
$0
12
Total
250
3000
250
3000
500
6000
$12,500 $166,250
0
0
$0
$0
$166,250
21
Introducing Overtime
using a nonlinear function
 The effect of using Chase strategy based on introducing
overtime
 Nonlinear function of overtime
if (labor required <= max. labor/month, labor required*labor cost,
max. labor/month*labor cost + (labor required - max.
labor/month)*overtime labor cost)
 Using solver to optimize the plan’s output of the Chase
strategy
BIS APPLICATION 2002-2003
MANAGEMENT INFORMATION SYSTEM
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Introducing Overtime
using a nonlinear function
Find the optimum solution (minimum cost) using Solver with a
constraint in the value of the inventory which must be nonnegative
Bricks and Tiles Corporation
Optimum Solution
Hours per Brick
Labor Cost per Hour
Overtime Labor Cost per Hour
Maximum Straight Labor per Month
Unit Inventory Cost per Month
1
2
Demand
50
100
Make
50
100
Labor required
100
200
Cost of labor
$2,500 $5,000
Start inventory
0
0
End inventory
0
0
Inventory cost
$0
$0
Total cost
BIS APPLICATION 2002-2003
If labor required < 500, labor required * 25, else (500 * 25)+ (labor required –500) * 37.3
2
$25.0
$37.5
500
$10
3
4
5
6
7
8
9
10
11
12
Total
150
200
400
600
250
250
100
300
350
250
3000
150
250
350
600
250
250
150
250
350
250
3000
300
500
700
1200
500
500
300
500
700
500
6000
$7,500 $12,500 $20,000 $38,750 $12,500 $12,500 $7,500 $12,500 $20,000 $12,500 $163,750
0
0
50
0
0
0
0
50
0
0
0
50
0
0
0
0
50
0
0
0
$0
$250
$250
$0
$0
$0
$250
$250
$0
$0
$1,000
$164,750
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Introducing Double or Premium Time
•
The method of solution for nonlinear problems is not as
reliable as that for linear problems.
•
Linear programming is a mathematical procedure for
finding the best solution to a problem described by a
linear equation and subject to linear constraints.
•
Not all overtime is treated the same. Often, overtime
worked on the weekend, holidays, or on third shift has an
extra cost. This overtime is called double time or premium
time.
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Introducing Double or Premium Time
How the Bricks and Tiles corporation will responsd to the
increasing in demand?
Building inventories -- following level strategy
When inventory cost are low
Introducing overtime and premium ---- following Chase strategy
When inventory costs are high
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Introducing Double or Premium Time
Bricks and Tiles Corporation
Current Solution For Flower Pots
Cost Maximum
$25.0
250
$37.5
150
$50.0
$5
3
Straight Labor
Overtime Labor
Premium Labor
Unit Inventory Cost per Month
Hours per Unit
Demand
Production
Regular
Overtime
Premium
Slack Capacity
Regular
Overtime
Start inventory
End inventory
Cost
Regular
Overtime
Premium
Inventory cost
Total Cost
1
50
2
50
3
150
4
2,000
5
900
6
100
7
300
8
100
9
300
10
500
11
400
12
200
Total
5,050
250
150
0
250
150
0
250
150
0
250
150
1,093
250
150
57
250
0
0
250
0
0
250
0
0
250
0
0
250
71
0
250
129
0
200
0
0
2,950
950
1,150
0
0
0
350
0
0
350
700
0
0
700
950
0
0
950
443
0
0
443
0
0
150
0
150
0
150
150
100
0
150
100
250
0
150
250
200
0
79
200
21
0
21
21
0
50
150
0
0
50
850
$18,750
$16,875
$0
$875
$36,500
$18,750
$16,875
$0
$2,625
$38,250
$18,750 $18,750
$16,875 $16,875
$0 $163,931
$4,125
$3,482
$39,750 $203,038
$18,750
$16,875
$8,569
$1,107
$45,302
$18,750
$0
$0
$375
$19,125
$18,750
$0
$0
$625
$19,375
$18,750
$0
$0
$875
$19,625
$18,750
$0
$0
$1,125
$19,875
$18,750
$8,036
$0
$554
$27,340
$18,750
$14,464
$0
$54
$33,267
$15,000
$0
$0
$0
$15,000
$221,250
$106,875
$172,500
$15,822
$516,447
BIS APPLICATION 2002-2003
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Tradeoffs between Level and Chase
Strategies
The Bricks and Tiles Corporation is currently producing at a Level rate to meet
current demand, but production has been well automated and workers do not
need much training to run the machines.
Management is considering a reduction in capacity when the demand is low,
and an expansion when demand is high; that is, management is considering a
strategy to chase demand.
Such a strategy will reduce inventory cost, but introduces the the issue of
hiring and firing workers
Chase strategy can has a bad effect on the morale of the worker
The corporation want to base their decision on a cost analysis
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Tradeoffs between Level and Chase
Strategies
•
The yearly demand is 2,400 million tiles, and 200 million are produced each month.
•
The current approach does not allow for hiring and firing
•
As a result, inventories balloon during the year, and inventory costs are more than
twice the actual cost of production
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Tradeoffs between Level and Chase
Strategies
The problem is to minimize the total cost under the constraints, including the constraint of
hiring and firing
Bricks and Tiles Corporation
Unlimited Hiring and Firing
Cost per Tile
Starting Production Level
Hiring Cost per Tile
Firing Cost per Tile
Inventory Cost per Tile
Production
Demand
Increase Production
Decrease Production
Start Inventory
End Inventory
Cost of Production
Cost of Hiring/Firing
Inventory Cost
Monthly Cost
Total Cost
1
50
50
0
150
0
0
$2,500
$1,500
$0
$4,000
$151,250
50
200
$25
$10
$100
2
100
100
50
0
0
0
$5,000
$1,250
$0
$6,250
3
200
200
100
0
0
0
$10,000
$2,500
$0
$12,500
4
300
300
100
0
0
0
$15,000
$2,500
$0
$17,500
5
350
350
50
0
0
0
$17,500
$1,250
$0
$18,750
6
50
50
0
300
0
0
$2,500
$3,000
$0
$5,500
7
100
100
50
0
0
0
$5,000
$1,250
$0
$6,250
8
50
50
0
50
0
0
$2,500
$500
$0
$3,000
9
50
50
0
0
0
0
$2,500
$0
$0
$2,500
10
500
500
450
0
0
0
$25,000
$11,250
$0
$36,250
11
250
250
0
250
0
0
$12,500
$2,500
$0
$15,000
12
Totals
400
2,400
400
2,400
150
0
0
0
$20,000 $120,000
$3,750 $31,250
$0
$0
$23,750 $151,250
Since production exactly matches demand, there is no inventory cost.
Modification on the model involve lumps hiring and firing into one categories
This solution allows for too many firings in any one period, so the model has to modify
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Tradeoffs between Level and Chase
Strategies
Modification on the the following model involve place a limit on firings only
because the management do not desire to limit hiring.
Bricks and Tiles Corporation
Limited Firing
Cost per Tile
Starting Production Level
Hiring Cost per Tile
Firing Cost per Tile
Inventory Cost per Tile
Production
Demand
Increase Production
Decrease Production
Start Inventory
End Inventory
Cost of Production
Cost of Firing
Cost of Hiring
Inventory Cost
Monthly Cost
Total Cost
1
150
50
0
50
0
100
$7,500
$500
$0
$5,000
$13,000
$243,625
2
250
100
100
0
100
250
$12,500
$0
$2,500
$17,500
$32,500
50
200
$25
$10
$100
3
250
200
0
0
250
300
$12,500
$0
$0
$27,500
$40,000
4
200
300
0
50
300
200
$10,000
$500
$0
$25,000
$35,500
5
150
350
0
50
200
0
$7,500
$500
$0
$10,000
$18,000
6
100
50
0
50
0
50
$5,000
$500
$0
$2,500
$8,000
7
50
100
0
50
50
0
$2,500
$500
$0
$2,500
$5,500
8
50
50
0
0
0
0
$2,500
$0
$0
$0
$2,500
9
175
50
125
0
0
125
$8,750
$0
$3,125
$6,250
$18,125
10
375
500
200
0
125
0
$18,750
$0
$5,000
$6,250
$30,000
11
325
250
0
50
0
75
$16,250
$500
$0
$3,750
$20,500
12
Totals
325
2,400
400
2,400
0
0
75
0
$16,250 $120,000
$0
$3,000
$0 $10,625
$3,750 $110,000
$20,000 $243,625
Here, cost of firing is limited to $500, which corresponds to ten firings.
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MANAGEMENT INFORMATION SYSTEM
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Tradeoffs between Level and Chase
Strategies
Here, cost of firing is limited to $500, which corresponds to ten firings. The
results can be summarized as follows:
Aggregate Plan
Cost
Steady Production
$380,000
Unlimited Firing
$151,250
Limited Firing
$243,625
___________________________________________________________________
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MANAGEMENT INFORMATION SYSTEM
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