Zhi-Hai Zhang

Department of Industrial Engineering,

Tsinghua University
 Learning Objectives

Understand requirements of aggregate planning

Know cost issues in aggregate planning

Understand strategies of aggregate planning

Study and use aggregate planning methods

Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4-2
Tasks and Objectives of Aggregate Planning
Tasks Competing objectives
React
◼ Decide how many quickly
employees to
changes

◼ Decide the quantity

and the mix of
products

Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4-3
Aggregate Planning Methodology
◼ Translate demand forecasts into a
blueprint
⚫ Planning staffing and production levels
⚫ Over a planning horizon

◼ Not limited to top-level planning

◼ Heuristic (approximate) and optimal

approaches
Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4-4
Aggregate Units of Production

◼ Types of items
“Average” produced are A natural aggregate unit:
item similar Sales Dollars
◼ Consider in terms of
⚫ Weight
◼ Many different ⚫ Volume
Aggregate types of items
⚫ Amount of work required
Dollar value
unit are produced
⚫

Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4-5
Example of Number of Selling
Selling Percentage
Aggregate Units Model
number
worker-hours
required to
price
price
per hour
in total
($) sales
produce (WH) ($)

◼ A large national A5532 4.2 285 67.9 32%

appliance firm K4242 4.9 345 70.4 21%

⚫ Produces six L9898 5.1 395 77.5 17%
models of L3800 5.2 425 81.7 14%
washing
M2624 5.4 525 97.2 10%
machines
M3880 5.8 725 125.0 6%

4.2×32% + 4.9×21% + 5.1×17% + 5.2×14% + 5.4×10% + 5.8×6%

Aggregate Unit = 4.856 WH

Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4-6
Hierarchical Production Planning (HPP)
◼ Consider workforce sizes Forecast of ⚫ For t period planning
and production rates at a Aggregate Demand horizon

variety of levels of the ⚫ Determination of

firm (Hax and Meal, 1975) Aggregate aggregate production and

⚫ Items Production Plan workforce levels for t

period planning horizon
➢ SKU (Stock-keeping unit)
⚫ Families
Master Production ⚫ Production levels by item

➢ A group of items Schedule by time period

⚫ Types ⚫ Detailed timetable for

Material Requirement production and assembly
➢ Groups of families by a single
aggregate plan Planning System of components and
subassemblies
Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4-7
Overview of the Aggregate Planning Problem

◼ D1, D2, ……DT ◼ Find the number of

be the demand workers to be employed
Known forecasts for the Goal ◼ Find the number of
next T planning aggregate units to be
periods produced

Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4-8
Issues on Aggregate Planning Problem
Smoothing Planning horizon
◼ Hiring and firing workers ◼ The choice of T
⚫ Cost for changing production level ◼ Avoid end-of-horizon effect
◼ Rolling schedules
Dynamic rather than static
Bottleneck problems ⚫

◼ Inability to respond to sudden Treatment of demand

changes in demand
⚫ Capacity restrictions
Zhi-Hai Zhang, Dept. of IE, Tsinghua University
◼ Assume that demand is known
⚫ Ignore forecast error
PPC Lecture 4 Aggregate Planning 4-9
Costs in Aggregate Planning (1/3)
Smoothing costs Cost ($)

◼ Hiring cost
⚫ Advertising
⚫ Interview
⚫ Training
◼ Firing cost Slope = cF Slope = cH
⚫ Severance pay
⚫ Costs of a decline in worker morale
⚫ Potential decreasing labor pool size
in future Ht = Number of hires
Ft = Number of fires
Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 10
Costs in Aggregate Planning (2/3)
Holding costs Cost ($)

◼ Costs of capital tied up

⚫ For inventory at the end of period

Shortage costs
Slope = cP Slope = cI
◼ Forecasted demand exceeds
capacity
⚫ Backlogged and filled in future period
Back orders Positive inventory
Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 11
Costs in Aggregate Planning (3/3)

Regular time costs Subcontracting cost

◼ Unit cost of production during
regular working hours Idle time cost
⚫ “Sunk cost”
◼ Cost for underutilization of the
workforce
Overtime cost ⚫ Zero?

Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 12
A Prototype Problem for Aggregate Planning
◼ Densepack produces a line of disk drives

◼ Planning horizon ⚫ Six-months: January to June

◼ Forecast
⚫ 1280, 640, 900, 1200, 2000, 1400
demands

◼ Current number of workers ⚫ 300

◼ Current inventory ⚫ 500

◼ Wished inventory at the end of June ⚫ 600

Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 13
Net Predicted Demand
Month Net predicted demand Net cumulative demand

January 780 1280 - 500 780

February 640 1420

March 900 2320

April 1200 3520

May 2000 5520

June 2000 1400 + 600 7520

Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 14
A Feasible Aggregate Plan for Densepack
Cumulative
8000
number of units
7000 7520
6000 Feasible
production
5000 schedule 5520

4000
3520 Cumulative net
3000
demand
Inventory
2000 2320

1000 1420
0
780 Month
0
0 1 2 3 4 5 6
Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 15
Costs and Production Rate

◼ Cost of hiring workers: CH = $500

Cost ◼ Cost of firing workers: CF = $1,000

◼ Cost of holding inventory: CI = $80

◼ K = 0.14653
Production ⚫ Number of aggregate units produced
rate by one worker in one day

Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 16
Evaluation of a Chase Strategy (Zero Inventory Plan) (1/2)
A B C D E
Number of Number of units produced Forecast net Minimum number of workers
Month
working days per worker (B×0.14653) demand required (D/C, rounded up)

Jan. 20 2.931 780 267

Feb. 24 3.517 640 182

Mar. 18 2.638 900 342

Apr. 26 3.810 1200 315

May 22 3.224 2000 621

Jun. 15 2.198 2000 910

Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 17
Evaluation of a Chase Strategy (Zero Inventory Plan) (2/2)
A B C D E F G H I
Number Number of Number of Cumu- Cumu- Ending
Number Number
Month of units per units produced lative lative inventory
hired fired
workers worker （B×E） production demand (G – H)
Jan. 267 33 2.931 783 783 780 3
Feb. 182 85 3.517 640 1423 1420 3
Mar. 342 160 2.638 902 2325 2320 5
Apr. 315 27 3.810 1200 3525 3520 5
May 621 306 3.224 2002 5527 5520 7
Jun. 910 289 2.198 2000 7527 7520 7
Total 755 145 30
Round
◼ Total cost: hiring, firing, holding and end inventory up?down?
(755)(500) + (145)(1000) + (30)(80) + (600)(80) = $572,900 4 - 18
Evaluation of the Constant Workforce Plan (1/2)
A B C D
Cumulative net Cumulative number of units Ratio D/C
Month
demand produced per worker (rounded up)

Jan. 780 2.931 267

Feb. 1420 6.448 221
Mar. 2320 9.086 256
Apr. 3520 12.896 273
May 5520 16.120 343
Jun. 7520 18.318 411
Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 19
Evaluation of the Constant Workforce Plan (2/2)
A B C D E F
Number of units Monthly production Cumulative Cumulative net Ending inventory
Month
produced per worker （B×411） production demand (D – E)
1 2.931 1205 1205 780 425
2 3.517 1445 2650 1420 1230
3 2.638 1084 3734 2320 1414
4 3.810 1566 5300 3520 1780
5 3.224 1325 6625 5520 1105
6 2.198 903 7528 7520 8
Total 5962

◼ Total cost: hiring, holding and end inventory

(111)(500) + (5962)(80) + (600)(80) = $580,460 > $ 572,900
4 - 20
Mixed Strategy
8000
Cumulative
7000 number of units
7520
6000 Mixed
5000
strategy 5520

4000

3000 3520

2000 2320
Cumulative net
1000 1420 demand
0 Inventory
780
Month
0
0 1 2 3 4 5 6
Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 21
 Programming (1/3)
Problems by Linear
Solve Aggregate Planning ◼ Cost parameters and given information
Parameters Definition
CH Cost of hiring one worker
CF Cost of firing one worker
CI Cost of holding one unit of stock for one period (inventory)
CR Cost of producing one unit on regular time
CO Incremental cost of producing one unit on overtime
CU Idle cost per unit of production (under-utilization)
CS Cost to subcontract one unit of production
nt Number of production days in period t
K Number of aggregate units produced by one worker in one day
I0 Initial inventory on hand at the start of the planning horizon
W0 Initial workforce at the start of the planning horizon
Dt Forecast of demand in period t

Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 22
 Programming (1/3)
Problems by Linear
Solve Aggregate Planning ◼ Decision Variables

Variables Definition
Wt Workforce level in period t
Ht Number of workers hired in period t
Ft Number of workers fired in period t
It Inventory level in period t
Pt Production level in period t
Ot Overtime production in units in period t
Ut Number of units of idle production in period t
St Number of units subcontracted in period t

Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 23
Solve Aggregate Planning Problems
by Linear Programming (2/3)
◼ Problem constraints
𝑾𝒕 = 𝑾𝒕−𝟏 + 𝑯𝒕 - 𝑭𝒕 , 𝟏≤ 𝒕≤𝑻
Number Number Number Number
of workers of workers hired fired
in t in t -1 in t in t

𝑰𝒕 = 𝑰𝒕−𝟏 + 𝑷𝒕 + 𝑺𝒕 - 𝑫𝒕 , 𝟏≤ 𝒕≤𝑻
Inventory Inventory in Number Number Demand
in t t-1 of units of units in t
produced subcontracted
in t in t

𝑷𝒕 = 𝑲 ∙ 𝒏 𝒕 ∙ 𝑾 𝒕 + 𝑶𝒕 - 𝑼𝒕 , 𝟏≤ 𝒕≤𝑻
Number Number of units Number of Number of
of units produced by units produced units of idle
produced regular on overtime production
in t workforce in t in t in t
Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 24
 The objective function

Programming (3/3)
Problems by Linear
Solve Aggregate Planning ◼
T
Minimize  (cH H t + cF Ft + cI I t + cR Pt + cO Ot + cUU t + cS St )
t =1

subject to 𝑾𝒕 = 𝑾𝒕−𝟏 + 𝑯𝒕 - 𝑭𝒕 𝟏≤ 𝒕≤𝑻

⚫ Conservation of workforce

𝑷𝒕 = 𝑲 ∙ 𝒏𝒕 ∙ 𝑾𝒕 + 𝑶𝒕 - 𝑼𝒕 𝟏≤ 𝒕≤𝑻
⚫ Production and workforce

𝑰𝒕 = 𝑰𝒕−𝟏 + 𝑷𝒕 + 𝑺𝒕 - 𝑫𝒕 𝟏≤ 𝒕≤𝑻
⚫ Inventory balance

H t ,Ft ,I t , Ot ,U t , St ,Wt , Pt  0
⚫ Non-negativity
Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 25
 Find the optimal solution for Densepack
by Linear Programming (1/3)
Example of Aggregate Planning ◼
 6 6 6

⚫ The objective function min  500 H t + 1000 Ft + 80 I t 
 t =1 t =1 t =1 

⚫ Constraints P1 − 2.931W1 = 0,
W1 − W0 − H1 + F1 = 0, P1 − I1 + I 0 = 1280, P2 − 3.517W2 = 0,
W2 − W1 − H 2 + F2 = 0, P2 − I 2 + I1 = 640, P3 − 2.638W3 = 0,
W3 − W2 − H 3 + F3 = 0, P3 − I 3 + I 2 = 900, P4 − 3.810W4 = 0,
W4 − W3 − H 4 + F4 = 0, P4 − I 4 + I 3 = 1200, P5 − 3.224W5 = 0,
W5 − W4 − H 5 + F5 = 0, P5 − I 5 + I 4 = 2000, P6 − 2.198W6 = 0；
W6 − W5 − H 5 + F5 = 0; P6 − I 6 + I 5 = 1400;
W0 = 300,
W1 ,..., W6 , P1 ,..., P6 , I1 ,..., I 6 , F1 ,..., F6 , H1 ,..., H 6  0; I 0 = 500,
I 6 = 600.
Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 26
Example of Aggregate Planning by Linear Programming (2/3)
LP OPTIMUM FOUND AT STEP 24 VARIABLE VALUE REDUCED COST VARIABLE VALUE REDUCED COST
F1 27.047150 .000000 ◼ IO 500.000000 .000000
OBJECTIVE FUNCTION VALUE F2 .000000 708.621900 ◼ I1 20.024820 .000000
1) 379320.900 F3 .000000 1277.560000 ◼ I2 340.000000 .000000
F4 .000000 1493.264000 ◼ I3 160.049800 .000000
F5 .000000 1500.000000 ◼ I4 .000000 18.445950
VARIABLE VALUE REDUCED COST F6 .000000 1307.250000 ◼ I5 378.458200 .000000
◼ I6 600.000000 .000000
WO 300.000000 .000000
H1 .000000 1500.000000
W1 272.952900 .000000 ◼ P1 800.024800 .000000
H2 .000000 791.378100
W2 272.952900 .000000 ◼ P2 959.975200 .000000
H3 .000000 222.439900
W3 272.952900 .000000 ◼ P3 720.049600 .000000
H4 .000000 6.736023
W4 272.952900 .000000 ◼ P4 1039.950000 000000
H5 464.782300 .000000
W5 737.735200 .000000 ◼ P5 2378.458000 .000000
H6 .000000 192.750300
W6 737.735200 .000000 ◼ P6 1621.542000 .000000
Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 27
Example of Aggregate Planning by Linear Programming (3/3)
A B C D E F G H I
Number Number of Number of Cumu- Cumu- Ending
Number Number
Month of units per units produced lative lative inventory
hired fired
workers worker （B×E） production demand (G – H)
Jan. 273 27 2.931 800 800 780 20
Feb. 273 3.517 960 1760 1420 340
Mar. 273 2.638 720 2480 2320 160
Apr. 273 3.810 1040 3520 3520 0
May 738 465 3.224 2379 5899 5520 379
Jun. 738 2.198 1622 7521 7520 1
Total 465 27 900

◼ Total cost: hiring, firing, holding and end inventory

(465)(500) + (27)(1000) + (900)(80) + (600)(80)= $379,500 4 - 28
 Summary
◼ Tasks and objectives of Methods
aggregate planning ◼ Chase strategy
◼ Aggregate units ⚫ Zero inventory plan

◼ Constant workforce plan

Costs in aggregate planning ◼ Mixed strategy
◼ Smoothing costs
⚫ Hiring cost, firing cost
◼ Aggregate planning by linear
programming
◼ Holding costs
Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 29
Zhi-Hai Zhang, Dept. of IE, Tsinghua University PPC Lecture 4 Aggregate Planning 4 - 30