The Graphical Method to

Aggregate Planning

ADM 3301 ~ Rim Jaber 1

 Aggregate Planning -- RECAP
 Aggregate Planning: Intermediate-range capacity
planning, usually covering 3 to 18 months.
 The Goal of aggregate planning is to achieve a
production plan that will effectively utilize the
organization’s resources to satisfy the expected
demand and Inventory requirements, while
minimizing the sum of costs related to regular
labor time, overtime, subcontracting, inventory
holding costs, and costs associated with changing
the size of the workforce.
 Constraints involve the maximums of the number
of workforce, inventories, overtime, and
subcontracting. ADM 3301 ~ Rim Jaber
2
 The Graphical Approach to
Aggregate Planning
 Forecast the demand for each period
 Determine the capacity for regular time,
overtime, and subcontracting
 Determine labor costs, hiring and firing
costs, and inventory holding costs
 Consider company policies that may apply
to the worker or the stock levels
 Develop alternative plans, and examine
their total costsADM 3301 ~ Rim Jaber 3
Determining the Aggregate
Plan: Example 1

 Step #1: Collect relevant data:

– Forecasts, inventory levels, desired final
inventory levels, current and future
resource availability, production times and
costs.

ADM 3301 ~ Rim Jaber 4

 Example 1-Relevant Data: collect of
the forecasts and capacity
Month Forecasted Demand
January 1100
February 1500
March 1800
April 1600
May 900
June 1100
Total 8000

Capacity: 27 employees @ 21 days/month @ 8 hours/day 5

ADM 3301 ~ Rim Jaber
 Example 1: Beginning inventory levels,
Production time and relevant costs
• Relevant costs:
– Raw materials $100/unit
– Inventory $12/unit/month
– Backlogs $20/unit/month
– Sub-contracting $45/unit
– Hiring $200
– Firing $250
– Regular cost $12/hr (8 hrs/day)
– OT cost $18/hr
• Production hours 3hrs/unit
• Inventory:
– beg. inventory 400 units
– safety stock 25% of demand 6
Example 1-Relevant Data: Production Requirements and Inventory
levels
(3)=0.25*(2) (5)=(1)+(4)-(2)
(1) (2) (4)=(2)+(3)-(1)
Month Beg Safety Quantity End
Inv Dem. Stock produced Inventory
January 400 1100 275 975 275
February 275 1500 375 1600 375
March 375 1800 450 1875 450
April 450 1600 400 1550 400
May 400 900 225 725 225
June 225 1100 275 1150 275
8000 7875 2000
P.S.: The Quantity Produced to meet the monthly requirement
includes the forecasted demand and Safety Stock.
Total Production Quantity= 7875 units 7
 Determining the Aggregate Plan for
Example1-- Next Step

 Step # 2: Analyze per unit costs for each of the

strategies:
– Determine the preference thresholds
Estimates the cost of each option on a homogeneous
unit of measure (e.g. $/hr, $/month, $/unit)
 Compare between options using this unit cost to
determine at what moment an option becomes
preferable over another (refer to Example 2 and
Example 4 on how to compute Preference Thresholds)
8
ADM 3301 ~ Rim Jaber
Determining the Aggregate Plan for
Example1-- Next Step
Example:
- Overtime (unit cost $6/hr {$18/hr – $12/hr})
Versus hire/fire ($450 = Cost of Hiring + Cost of
Firing = $200 + $250 )
- Overtime (unit cost $54/unit{ $18/hr*3hr/unit}
Versus Sub-Contracting (unit cost $45/unit)
- Idle time (unit cost $12/hr) Versus fire/hire
($450)
- Sub-contracting (unit cost $45/unit) versus
Backlogs ($56/unit {$20/unit + ($12/hr*3hr)} 9
 Determining the Aggregate Plan for
Example1-- Next Step
 Step # 3: Develop and evaluate alternative plans:
– Development of plans corresponding to dominant
strategies and evaluation of total cost
For Example 1:
– The dominant strategies are: Chase Strategy and
Level Strategy
– The Graphical method is used for the evaluation of
total cost of the aggregate plan 1 using the Chase
strategy and the aggregate plan 2 using Level Strategy
10
 Example 1: Chase Strategy

 A possible option:
Hire and layoff workers as needed to
produce exact quantity to meet the
monthly requirement (forecasted demand
and Safety Stock). Inventory is not used to
absorb demand fluctuations.
 Prepare an aggregate Production plan using
this option and determine its cost using the
graphical method ADM 3301 ~ Rim Jaber
11
 Example 1: Development and evaluation of
aggregate plan 1 using the Chase Strategy
January February March April May June Total
Production required
(1) 975 1600 1875 1550 725 1150
Hours of Prod. required
(2)=(1)*3/hr/units 2925 4800 5625 4650 2175 3450
Employee available
(3) 27 18 29 34 28 13
Hours/month/empl
(4)=21day*8hr/day 168 168 168 168 168 168
Employee required
(5)=(2)/(4) 17.42 28.6 33.5 27.7 12.95 20.54
Employee required (Int.) 18 29 34 28 13 21
Employees Hired (7) 0 11 5 0 0 8
Cost of Hiring
(8)=(7)*$200 $ - $ 2200- $ 1000- $ - $ - $ 1600 $ 4,800
Employees Fired
(9) 9 0 0 6 15 0
Cost of Firing
(10)=(9)*$250 $ 2250
- $ - $ - $ 1,500 $3750
- $- $ 7,500
Cost of Salaries
(11)=(6)*(4)* $12/hr $ 36,288 $ 58,464 $ 68,544 $ 56,448 $ 26,208 $ 42,336 $ 288,288
$
Total inventory Cost: 2000 units* 12 = $24,000
Total Cost: 324,588
ADM 3301 ~ Rim Jaber
 Level Strategy
 Maintain a constant production rate and workforce level
throughout the six month period. Inventory is build up
during periods of less than average demand;
alternatively, delivery lead time, Backlogs, may be
allowed to grow during periods of high demand.
 Maintain a Monthly production rate of 1313 units/month
(Total Quantity Produced/6 = 7875/6 = 1312.5).
 Maintain a constant workforce of 24 employees/month
{(1313units * 3hr)/168 = 23.4 employees/month }
 Prepare an aggregate plan using this option and
determine its cost.
ADM 3301 ~ Rim Jaber 13
 Example 1: Development and evaluation of
aggregate plan 2 using the Level Strategy
January February March April May June Total

Demand 1100 1500 1800 1600 900 1100

Production 1313 1313 1313 1313 1313 1310
Ending Inventory 613 426 -61 -348 65 275
Beginning Inventory 400 613 426 -61 -348 65
Inventory 613 426 0 0 65 275
Backlog 0 0 61 348 0 0
Firing 3 0 0 0 0 0
Cost Salaries $48,384 $48,384 $48,384 $48,384 $48,384 $48,384 $290,304
Cost Firing $750 $0 $0 $0 $0 $0 $750
Cost Inventory $7,356 $5,112 $0 $0 $780 $3,300 $16,548
Cost Backlog $0 $0 $1,220 $6,960 $0 $0 $8,180

Total $315,782
ADM 3301 ~ Rim Jaber 14
 Comments on Aggregate Plan 2
using the Level Strategy

 In the “Production” Row- June “Column” you can

have the following 2 options:
1. The quantity produced to be 1310 units
(7875units – (1313units*5month))
Then there is no need to compute the Cost of Raw
Materials, which is $787,500( 7875 units * $100/units),
cause it is a fixed cost for both plan 1 and plan 2
2. The quantity produced is similar to other months, and
thus 1313 units.
Then you have to include the Cost of Raw materials in
plan 1, which is $787,500; and the Cost of Raw material
in plan 2, which is $787,800; cause the total number of
units produced in each plan is variable. 15
Comments on Aggregate Plan 2 using the
Level Strategy

 Notice the following

January February March April May June

Final Inventory
(1) 613 426 -61 -348 65 275
Safety Stock 275 375 450 400 225 275
(2)

Excess units in 338 51 0 0 0 0

Safety Stock
(3)=max{ (1)-(2), 0}

ADM 3301 ~ Rim Jaber 16

 Determining the Aggregate Plan for
Example 1- Last Step
• Choose the aggregate plan:
– The best plan is chosen and implemented.

The Total Cost of aggregate plan 1 (Chase Strategy) = $324,588

The Total Cost of aggregate plan 2 (Level Strategy) = $315,782

Given these two options the plan to be implemented is the one with
them minimum cost  Aggregate plan 2 using the Level
Strategy.
ADM 3301 ~ Rim Jaber 17
Example 2
Consider a company that experiences seasonal
demand for its product family.
The company estimates that the typical unit of its
product requires 20 hours to produce. Each
employee is estimated to contribute 162 hours per
month, so each employee can produce about
162 / 20 = 8.1 units per month on average.
Estimates indicate that it costs $300 to hire an
employee and $400 to lay off an employee.
At least 1000 units should be available as work-in-
process inventory and safety stock, and this amount
will be on hand at the start of the planning horizon.
It costs $6 per month to hold a unit in inventory.
The demand for the next twelve months is given in
the following table. ADM 3301 ~ Rim Jaber 18
Example 2: Demand
Month Forecast
1 1,600
2 1,400
3 1,200
4 1,000
5 1,500
6 2,000
7 2,500
8 2,500
9 3,000
0 3,000
11 2,500
12 2,100
ADM 3301 ~ Rim Jaber 19
Forecasted Demand

3000
FORECAST

2025

0
1 2 3 4 5 6 7 8 9 10 11 12
MONTH
ADM 3301 ~ Rim Jaber 20
Example 2

Assume that the company begins the

planning year with a work-force of
250, and that employees are paid $18
per hour

ADM 3301 ~ Rim Jaber 21

Step # 2: Preference Thresholds
 If the demand is more than what you can satisfy
with your present work-force, is it more economical
to use:
– Overtime?
– Part-time employees?
– Subcontracting?
– Increased inventory levels?
– Stockouts or backlogs?
 How long should you be able to use a new
employee so that the cost of hiring is offset?
 If your work-force is larger than what the demand
requires, how much idle time can you tolerate
before it is more economical to fire part of it?
22
Step # 2: Preference Thresholds
 At the beginning of month 1, our work-force is
larger than needed. We can:
– Tolerate idle time (at a cost of $18 per employee
per hour or $2,916 per employee per month);
– Fire some employees (and hire more later);
– Build inventory for later use.
 For idle time to be preferable over firing then
Hiring, the number of hours we keep an
employee idle has to be less than:

cost of hiring + cost of firing 700

  39.
idle cost per employee per hour 18 23
 Idle Time Versus Inventory Building
Idle cost: $2,916/month per employee
Inventory cost: $48.6/month’s production
per employee
– The cost of one employee building inventory for one
month is $6  8.1 = $48.6;
– The cost of one employee building inventory for two
months is $6 8.1 2) = $48.6 2);
– The cost of one employee building inventory for n months
is $6 8.1 2 + ... + n) = $48.6 2 + ... + n) =
$48.6 x [(n+1)*n]/2;
– For idle time to be preferable, the number n of months
we have one employee working to build it has to be such
that $2,916n  $48.6 2 + ... + n) 24
 Idle Time Versus Inventory Building
# months Idle cost Inventory cost
1 $ 2,916 $ 48.6*
2 $ 5,832 $ 145.8*
3 $ 8,748 $ 291.6*
4 $ 11,664 $ 486*
5 $ 14,580 $ 729*
6 $ 17,496 $ 1,020.6*
etc. etc. etc.
119 $347,004* $347,004*
120 $349,920* $352,836
Idle time is preferable if an employee has to build up
inventory for more than 120 months (10 years)!!
Thus Inventory building is always better during the
planning period.
25
ADM 3301 ~ Rim Jaber
Inventory building versus firing and hiring

 Inventory cost =$6/unit =$48.6/month’s

production per employee
 Firing and hiring cost = $700
# months Inventory cost
1 $ 48.6*
2 $ 145.8*
3 $ 291.6*
4 $ 486*
5 $ 729
it is better to fire an employee if he has to be kept
building inventory for 5 months or more. 26
Step # 2: Preference Thresholds

 Similarly, at the beginning of month 5, the

demand begins to rise, and we can:
– Use overtime or subcontracting;
– Hire some new employees (and fire more later);
– Accept shortages or backlogs.
 The cost of any two options can be
compared to come up quickly with an
economical (maybe not optimal) aggregate
plan.
ADM 3301 ~ Rim Jaber 27
Example 2: Step # 3

We consider the three strategies:

– A chase strategy;
– A level strategy with a work-force level of
250;
– A mixed strategy with a work-force level
of 201 employees for the first five
months, and 285 employees afterwards.

ADM 3301 ~ Rim Jaber 28

 Example 2: Chase Strategy
Month Prod. WF WF Ending Inv. HR
Req. Req. Change Inv. Cost Cost
1 1,600 198 -52 1,003.8 $6,022.8 $20,800
2 1,400 173 -25 1,005.1 $6,030.6 $10,000
3 1,200 148 -25 1,003.9 $6,023.4 $10,000
4 1,000 123 -25 1,000.2 $6,001.2 $10,000
5 1,500 186 63 1,006.8 $6,040.8 $18,900
6 2,000 247 61 1,007.5 $6,045.0 $18,300
7 2,500 308 61 1,002.3 $6,013.8 $18,300
8 2,500 309 1 1,005.2 $6,031.2 $300
9 3,000 370 61 1,002.2 $6,013.2 $18,300
10 3,000 371 1 1,007.3 $6,043.8 $300
11 2,500 308 -63 1,002.1 $6,012.6 $25,200
12 2,100 259 -49 1,000.0 $6,000.0 $19,600
-9 $3,600
24,300 3,000 12,046.4 $72,278.4 $173,600
Example 2: Level Strategy
Ending Holding
Month Demand Production Inventory Cost
1 1,600 2,025 1,425 $8,550
2 1,400 2,025 2,050 $12,300
3 1,200 2,025 2,875 $17,250
4 1,000 2,025 3,900 $23,400
5 1,500 2,025 4,425 $26,550
6 2,000 2,025 4,450 $26,700
7 2,500 2,025 3,975 $23,850
8 2,500 2,025 3,500 $21,000
9 3,000 2,025 2,525 $15,150
10 3,000 2,025 1,550 $9,300
11 2,500 2,025 1,075 $6,450
12 2,100 2,025 1,000 $6,000
24,300 24,300 32,750 $196,500 30
 Example 2: Mixed Strategy
Ending Inventory Cost of
Monthly Inventory Holding Changing
Month Employees Production Demand Cost Workforce
1 201 1,628.1 1,600 1,028.1 $6,168.6 $19,600
2 201 1,628.1 1,400 1,256.2 $7,537.2
3 201 1,628.1 1,200 1,684.3 $10,105.8
4 201 1,628.1 1,000 2,312.4 $13,874.4
5 201 1,628.1 1,500 2,440.5 $14,643.0
6 285 2,308.5 2,000 2,749.0 $16,494.0 $25,200
7 285 2,308.5 2,500 2,557.5 $15,345.0
8 285 2,308.5 2,500 2,366.0 $14,196.0
9 285 2,308.5 3,000 1,674.5 $10,047.0
10 285 2,308.5 3,000 983.0 $5,898.0
11 285 2,308.5 2,500 791.5 $4,749.0
12 285 2,308.5 2,100 1,000.0 $6,000.0
$14,000
3,000 24,300 24,300 19,814.9 $125,058 $58,800
31
 Example 2: Summary

Chase Level Mixed

Strategy Strategy Strategy
Inventory Cost $72,278.4 $196,500.0 $125,058.0
WF Change Cost $173,600.0 $58,800.0
Labour Cost $8,748,000.0 $8,748,000.0 $8,748,000.0
Total Cost $8,993,878.4 $8,944,500.0 $8,931,858.0

ADM 3301 ~ Rim Jaber 32

The Transportation
Method

ADM 3301 ~ Rim Jaber 33

The Transportation
Method
 The transportation problems involve finding
the lowest-cost plan for distributing goods and
services from a number of sources (supply
points) to a number of destinations (demand
points).
 We can use the transportation method as a
way to obtain aggregate plans that would
match capacity with demand and ending
inventory requirements at minimum costs.
ADM 3301 ~ Rim Jaber 34
 The Transportation Method
–Cont’d
 The transportation method starts with the
development of a feasible solution, which is
then sequentially tested and improved until an
optimal solution is obtained. The major steps in
the process are:
1. Obtaining an initial solution/plan
2. Testing for optimality (Stepping stone Method, MODI
Method…)
3. Improving sub-optimal solutions
 We will discuss step 1 that is often optimal or
near optimal, as for the last two steps they will
not be discussed.
35
ADM 3301 ~ Rim Jaber
Obtaining an Initial Plan
 Different methods are available for
obtaining such a plan
 Focus on the intuitive lowest-cost
approach
– Heuristic approach that yields an initial solution
that is often optimal.
 The method requires that the total supply is
equal to the total demand
– Balanced transportation problem
– Total supply > total demand
 We need to add an extra column entitled “Excess” or
“Unused Capacity” to the Transportation table.
ADM 3301 ~ Rim Jaber 36
Intuitive Lowest-cost
Approach
1. Identify the cell with the lowest cost.
2. Allocate as many units as possible to that
cell, and cross out the row or column (or
both) that is exhausted by this. Reduce
the uncrossed row or column’s supply or
demand by this amount.
3. Find the cells with the next lowest cost
from among the not crossed out cells.
4. Repeat steps (2) and (3) until all units
have been allocated. 37
 Example 3
Demand for pencils for the next four months is 560,000, 960,000,
1,140,000 and 700,000, respectively.
The production capacity at regular time is 600 boxes (of 1,000
pencils each) for the first month, and 800 boxes for each of the
other months.
Overtime costs $25 per box more than the regular production
cost. The cost of raw materials is $50 per box.
The overtime capacity is 150 boxes during the first month and
200 boxes per month for the other months.
The cost of holding inventory is $5 per unit per month, and no
backlogs are accepted (Demand must be satisfied in the period it
occurs; that is, no backordering is allowed.)
The inventory at the beginning of month 1 is 200 boxes, and the
required final inventory at the end of month 4 is 225 boxes.
38
ADM 3301 ~ Rim Jaber
Transportation Table
Production Sales Periods End Unu Tot
Periods Inv Cap Cap
1 2 3 4
Beginning
Inventory
1 Regular
Overtime
2 Regular
Overtime
3 Regular
Overtime
4 Regular
Overtime
Total Req 39
 . . . . . . . . . . . . . .
Month 1 Month 2 Month 3 Month 4 Final Excess Capacity
Inventory

Beginning
Inventory

Month 1 Reg

Month 1 O-T

Month 2 Reg

Month 2 O-T

Month 3 Reg

Month 3 O-T

Month 4 Reg

Month 4 O-T

40
Demand
 . . . . . . . . . . . . . .
Month 1 Month 2 Month 3 Month 4 Final Excess Capacity
Inventory

Beginning 0 5 10 15 20 200
Inventory 200 0

Month 1 Reg 50 55 60 65 70 600

360 160 80 240 80 0

Month 1 O-T 75 80 85 90 95 150

150

Month 2 Reg 50 55 60 65 800

800 0

Month 2 O-T 75 80 85 90 200

60 140 140

Month 3 Reg 50 55 60 800

800 0

Month 3 O-T 75 80 85 200

200 0

Month 4 Reg 50 55 800

700 100 100 0

Month 4 O-T 75 80 200

125 75 75
41
360 0 160 0 340 260 60 0 125 0
Demand 560 960 1140 700 225 365 3950
0
 Optimal Production Plan
• Regular time production:
– 600 boxes in the first month, and 800 boxes in each of
the following months
• Overtime production:
– 60 boxes in month 2, 200 in month 3 and 125 in month 4
• Optimal cost:
– Sum of the products of the quantities produced by the
unit costs (cost Reg.+ cost of O-T) plus cost of regular
time production
– Optimal cost = $152,100 + $29,800 + cost of regular
time
– Optimal cost = $181 900 + cost of regular time 42
ADM 3301 ~ Rim Jaber
 Transportation Method
• Variables and assumptions:
 Let xijk be the number of units produced in period i to
meet the requirements of period j using production
type k (e.g. k = regular or overtime production or
subcontracting );
 Variable costs are linear;
 Demand is deterministic;
 Work-force levels are known for each period.
• The "transportation" costs cijk:
– Production and inventory holding costs associated
with producing one unit in period i to meet demand
of period j using production type k
43
ADM 3301 ~ Rim Jaber
 Transportation Method
 The sources (which have a certain
“capacity”):
– Initial inventory level;
– Regular time production for each period;
– Overtime production for each period;
– Quantity subcontracted for each period.
 The sinks (which have a certain
“demand”):
– Periods for which there is a demand;
– Final inventory level. 44
 Possible Generalizations
• Production of n different products: create n
columns per demand period in tableau.
• Backlogging accepted: adjust cijk by adding
backlog cost for i > j.
• Stockouts (insufficient capacity): add "lost sales"
row to transportation tableau.
• Perishability of length t periods: xijk = 0 if j-i > t
(non-feasible boxes).
• Subcontracting: add "subcontracting" row to
transportation tableau.
• Learning effects: adjust production capacity
accordingly. ADM 3301 ~ Rim Jaber 45
 Example 4

• Collect relevant data:

– Forecasts, inventory levels, desired final
inventory levels, current and future resource
availability, production times and costs.

ADM 3301 ~ Rim Jaber 46

Example 4 – Relevant Data
Demand for product A for the next four months is
255, 294, 321 and 301 units.
The company has 30 employees who work an
average of 20 days per month, 8 hours a day, at a
rate of $20 per hour. However, due to a 1-week lead
time in the production process, there are only 15
production days left in Month 1. It is possible to hire
more, or to lay off some workers, and these decisions
are implemented at the beginning of each month.
Each unit requires 20 hours of labour, and overtime
is limited to no more than 40 hours per employee
per month (30 hours for Month 1) and costs $30
per hour. Initial inventory is 85 units and the
company wishes to have a final inventory of 50 units47
at the end of the fourth month.
Subcontracting (the work only: the company will
provide the raw materials) is possible, but external
capacity is limited to 12, 15, 15 and 17 units for the
next four months respectively.
Costs for this problem are:
 Subcontracting: $650 per unit
 Inventory holding: $125 per unit per month
 Backlog: $250 per unit per month
(one month maximum)
 Hiring: $500 per worker
 Laying off: $750 per worker

ADM 3301 ~ Rim Jaber 48

 Example 4: The Transportation
Method

 Develop and evaluate alternative

plans:
– The Transportation method is used for
the evaluation of total cost of the aggregate
production plan (Note that hiring and firing
is not an option in this plan)

ADM 3301 ~ Rim Jaber 49

 . . . . . . . . . . . . . .
Month 1 Month 2 Month 3 Month 4 Ending Excess Capacity
Inventory

0 125 250 375 500

Begin. Inv. 85

REG. 0 125 250 375 500

180
Month 1 O-T 600 725 850 975 1100
45
Sub-C 650 775 900 1025 1150
12
REG. 250 0 125 250 375
240
Month 2 O -T 850 600 725 850 975
60
Sub-C 900 650 775 900 1025
15
REG. 250 0 125 250
240
Month 3 O-T 850 600 725 850
60
Sub-C 900 650 775 900
15
REG. 250 0 125
240
Month 4 O -T 850 600 725
60
Sub-C 900 650 775
17
255 294 321 301 50 50
DEMAND 1269
 . . . . . . . . . . . . . .
Month 1 Month 2 Month 3 Month 4 Ending Excess Capacity
Inventory

0 125 250 375 500

Begin. Inv. 85
85 0

REG. 0 125 250 375 500 0

170 10 10 180
Month 1 O-T 600 725 850 975 1100
9 36 36 45
Sub-C 650 775 900 1025 1150
12 12
REG. 250 0 125 250 375
240 0 240
Month 2 O-T 850 600 725 850 975 10 0
44 6 10 16 60
Sub-C 900 650 775 900 1025
15 0 15
REG. 250 0 125 250
240 0 240
Month 3 O-T 850 600 725 850
60 0 60
Sub-C 900 650 775 900
15 0 15
REG. 250 0 125
240 0 240
Month 4 O-T 850 600 725
60 0 60
Sub-C 900 650 775 0
1 16 17
16
255 294 321 301 34 50 48 51
DEMAND 54 81 21 6 61 1 0 1269
170 0 44 0 0 24 9 0
Optimal Production Plan
(30 employees)
 Regular time:
– Produce to full capacity each month
 Overtime:
– Produce 9 units in month 1 and 60 units each
subsequent month.
 Subcontracting:
– Do not subcontract in month 1, but use the
whole allowance in months 2 to 4.
 Backlogs:
– Do not backlog. 52
ADM 3301 ~ Rim Jaber
The Cost of the Production Plan

 Optimal cost=Variable Costs+ workforce cost

 Workforce Cost = 30*($20*8*20)*4 =
= $384,000
 Variable Costs is determined directly from the
transportation table
= 10*125 +Overtime cost + Subcontracting cost
= $1250 + $122,400 + $38,175 = $161,825
 Optimal Cost = $161,825 + $384,000 = $545 825
ADM 3301 ~ Rim Jaber 53
Example 4: Graphical Method-
Preference Thresholds
 Analyze per unit costs for each of
the strategies
 determine the preference
thresholds
– Estimates the cost of each option on
a homogeneous unit of measure
(e.g. $/hr, $/month, $/unit)
– Compare between options using this
unit cost to determine at what moment
an option becomes preferable over 54

another ADM 3301 ~ Rim Jaber

 Preference Thresholds: Costs
of Different Options
 Idle cost:$3,200/month, $20/hour, or
$400/unit
– One employee idle for a month  Cost is one
month salary: $20/hr  8hr/day  20day/month =
$3200/month
– One employee idle for an hour $20/hour
– One employee idle for the production of one unit
 Cost is: 20hr/unit  $20/hr = $400/unit
 Inventory cost: $125/unit/month, or
$1,000/month’s production/employee
– Each employee produces 8 units per month
(8hr/day20day/month)/20 hr/unit = 55

8 unit/month/employee  125 8 = $1000

 Firing and hiring:
($1,250-$3,200/month)/employee
– Cost of Firing+Cost of Hiring= $500/employee
+$750/employee = $1250/employee
– One month Salary is $3200/month/employee
– Firing means saving one month salary, thus
one way to look at Firing and hiring Cost is:
($1,250-$3,200/month)/employee
 Hiring and firing:
($1,250+$3,200/month)/employee
– Hiring means paying one month salary as well,
which is an additional $3200/month
56
Preference Thresholds: Costs
of Different Options – Cont’d
 Overtime cost: $600/unit
– 20hr/unit  $30/hr = $600/unit
 Sub-contracting cost: $650/unit
 Backlog cost: $250/unit/month, or
$2,000/month’s production/employee
– Each employee produces 8 units per
month  8 unit/employee 
$250/unit/month =
$2000/month’s production/employee 57
 Preferences Thresholds:
Comparing Between Two Options
 Idle Time Versus Inventory Building
Idle cost: $3,200/month
Inventory cost: $1,000/month’s production
– The cost of one employee building inventory for one
month is $125 8 = $1000
– The cost of one employee building inventory for two
months is $12582) = $10002);
– The cost of one employee building inventory for n months
is $10002+...+ n) = $1000 x [(n+1)*n]/2;
– For idle time to be preferable, the number n of months we
have one employee working to build it has to be such that
$3200n  $1000 2 + ... + n) 58
Idle Time Versus
Inventory Building
# months Idle cost Inventory cost
1 $3,200 $ 1,000*
2 $6,400 $ 3,000*
3 $9,600 $ 6,000*
4 $12,800 $10,000*
5 $16,000 $15,000*
6 $19,200* $21,000
Idle time is preferable if an employee has to
build up inventory for more than 5 months
59
ADM 3301 ~ Rim Jaber
Preferences Thresholds:
Comparing Between Two Options
 Idle time versus firing and hiring:
– Idle cost: $20/hour
– Firing and hiring cost: $1,250
1,250/20 = 62.5 hours
Firing and hiring is better if an employee
has to stay idle for more than 62.5
hours.
For idle time to be preferable, the number
of hours we keep an employee idle has
to be less than 62.5 hours
60
Inventory building versus
firing and hiring
 Inventory cost =$125/unit
=$1,000/month’s prod
 Firing and hiring cost = $1,250
# months Inventory cost
1 $1,000
2 $3,000
 It is better to fire and then hire an
employee when needed, if he has to be
kept building inventory for more than 1
month. ADM 3301 ~ Rim Jaber 61
Preferences Thresholds:
Comparing Between Two Options
 Overtime versus sub-contracting
– Overtime cost = $600/unit
– Sub-contracting cost = $650/unit
Overtime is always better.
 Overtime versus backlogs
– Overtime cost = $600/unit
– Backlog cost = $250 + $400 = $650/unit
Overtime is always better.
ADM 3301 ~ Rim Jaber 62
Overtime versus hiring and firing

 Overtime at $30/hr versus Hiring an employee

at $20/hr when needed than fire him later on.
– Incremental overtime cost: $30/hour -
$20/hour = $10/hour
– Hiring and firing cost: $1,250
– 1,250/10 = 125 hours
 It is better to hire and fire if more than 125
hours of overtime are needed
For overtime to be preferable, the number of
hours of overtime has to be less than 125 63

hours ADM 3301 ~ Rim Jaber

Sub-contracting versus backlogs

 Sub-contracting to produce one unit

versus backlogs by allowing back
orders (orders are taken in one period
and deliveries in the next month)
Sub-contracting cost: $650/unit
Backlog cost: $250 + $400 = $650/unit
 Neither is better than the other
ADM 3301 ~ Rim Jaber 64
Sub-contracting versus hiring and firing
 Sub-contracting to produce one unit
versus hiring an employee to produce that
unit and firing him later
– Hiring and firing cost = $1,250
– The cost to produce one unit using regular time
is $400/unit, thus
– Incremental cost of sub-contracting =
$650-$400 = $250/unit
– 1,250/250 = 5 units
 It is better to hire and fire if more than
5 units have to be sub-contracted. 65
ADM 3301 ~ Rim Jaber
Backlog versus hiring and firing
 Backlog to meet unsatisfied demand by
allowing back orders for a given month
versus hiring someone during that month
and firing him later on
– Backlog cost=$250/unit=$2,000/month’s prod
– Hiring and firing cost = $1,250
 It is better to hire and fire
ADM 3301 ~ Rim Jaber 66
 Example 4: Graphical Method

 Develop and evaluate alternative

plans
– Development of plans corresponding to
dominant strategies and mixed strategies.
 Use the preferences thresholds as guidelines for
mixed strategies.
– Evaluate the total cost of each plan.
– Choose the plan with the lowest cost option.

ADM 3301 ~ Rim Jaber 67

 Linear Programming

 xi: # of items to produce in regular time in period i,

 yi: # of items to produce in overtime in period i,
 zi: # of items supplied by subcontractors in period i,
 si: # of items in stock at the end of period i,
 ri: # of items produced late in period i + 1 for
demand of period i (i = 1, 2, 3),
 vi: # of workers to hire at the beginning of period i,
 wi: # of workers to fire at the beginning of period i.

ADM 3301 ~ Rim Jaber 68

 Linear Programming
Minimize:
600 (y1 + y2 + y3 + y4) + 650 (z1 + z2 + z3 + z4) +
125 (s1 + s2 + s3 + s4) + 250 (r1 + r2 + r3) +
500 (v1 + v2 + v3 + v4) + 750 (w1 + w2 + w3 + w4) +
12,800(v1-w1)+9,600(v2-w2)+6,400(v3-w3)+3,200(v4-w4)
Subject to:
Capacity constraints (regular time):
x1  180+6v1-6w1
x2  240+8v1+8v2-8w1-8w2
x3  240+8v1+8v2+8v3-8w1-8w2-8w3
x4  240+8v1+8v2+8v3+8v4-8w1-8w2-8w3-8w4
ADM 3301 ~ Rim Jaber 69
 Linear Programming

Capacity constraints (overtime):

y1  45+1.5v1-1.5w1
y2  60+2v1+2v2-2w1-2w2
y3  60+2v1+2v2+2v3-2w1-2w2-2w3
y4  60+2v1+2v2+2v3+2v4-2w1-2w2-2w3-2w4
Sub-contracting limit constraints:
z1  12, z2  15, z3  15, z4  17

ADM 3301 ~ Rim Jaber 70

 Constraints
Do not fire more employees than you have:
w1  30
w2  30 + v1 - w1
w3  30 + v1 + v2 - w1 - w2
w4  30 + v1 + v2 + v3 - w1 - w2 - w3
Demand constraints (with inventories and
backlogs):
x1 + y1 + z1 + 85 + r1 = 255 + s1
x2 + y2 + z2 + s1 + r2 = 294 + r1 + s2
x3 + y3 + z3 + s2 + r3 = 321 + r2 + s3
x4 + y4 + z4 + s3 = 301 + r3 + s4
s4 = 50 ADM 3301 ~ Rim Jaber 71
 Optimal Solution
 x1 = 180, x2 = 280, x3 = 320, x4 = 352, y2 = 4,
s1 = 10, s4 = 50, r3 = 1, v2 = 5, v3 = 5, v4 = 4.
 Manufacture at regular time 180, 280, 320 and 352
units in months 1, 2, 3, and 4, respectively, as well as
4 units at over-time in month 2.
 Keep in inventory 10 units at the end of month 1 and
50 units at the end of month 4.
 Backorder 1 unit in month 3.
 Hire 5 workers in month 2, 5 in month 3 and 4 in
month 4.
 Minimal variable cost = $109,950,
 Total cost = $109,950 + $384,000 = $493 950 72
 Aggregate Planning in
Services
Most services use combination strategies
and mixed plans
Controlling the cost of labor is critical
1. Accurate scheduling of labor-hours to
assure quick response to customer demand
2. An on-call labor resource to cover
unexpected demand
3. Flexibility of individual worker skills
4. Flexibility in rate of output or hours of work 73
ADM 3301 ~ Rim Jaber
Five Service Scenarios

 Restaurants
1. Smoothing the production process
2. Determining the optimal workforce size

 Hospitals
– Responding to patient demand

 National Chains of Small Service Firms

– Planning done at national level and at
local level
Five Service Scenarios

 Miscellaneous Services
– Plan human resource requirements
– Manage demand
 Airline industry
– Extremely complex planning problem
– Involves number of flights, number of
passengers, air and ground personnel,
allocation of seats to fare classes
– Resources spread through the entire system
 Law Firm Example
Labor-Hours Required Capacity Constraints
(2) (3) (4) (5) (6)
(1) Forecasts Maximum Number of
Category of Best Likely Worst Demand in Qualified
Legal Business (hours) (hours) (hours) People Personnel
Trial work 1,800 1,500 1,200 3.6 4
Legal research 4,500 4,000 3,500 9.0 32
Corporate law 8,000 7,000 6,500 16.0 15
Real estate law 1,700 1,500 1,300 3.4 6
Criminal law 3,500 3,000 2,500 7.0 12
Total hours 19,500 17,000 15,000
Lawyers needed 39 34 30

Table 13.9
76
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Revenue (Yield) Management
Allocating resources to customers at
prices that will maximize yield or
revenue
1. Service or product can be sold in
advance of consumption
2. Demand fluctuates
3. Capacity is relatively fixed
4. Demand can be segmented
5. Variable costs are low and fixed costs
are high
 Revenue (Yield) Management Example
Room sales Demand
Curve
Potential customers exist who
100 are willing to pay more than the
$15 variable cost of the room,
but not $150

Passed-up Some customers who paid

contribution $150 were actually willing
Total 50 to pay more for the room
$ contribution
= (Price) x (50
rooms)
= ($150 - $15)
x (50) Money left
= $6750 on the table

$15 $150 Price

Variable cost Price charged
of room for room Figure 13.5
 Revenue (Yield) Management Example
Room sales Demand
Curve
Total $ contribution =
100 (1st price) x 30 rooms + (2nd price) x 30 rooms =
($100 - $15) x 30 + ($200 - $15) x 30 =
$2550 + $5550 = $8100

60

30

$15 $100 $200 Price

Variable cost Price 1 Price 2
of room for room for room Figure 13.6
 Revenue (Yield) Management
Matrix
Price
Tend to be fixed Tend to be variable
Quadrant 1: Quadrant 2:
Predictable

Movies Hotels
Stadiums/arenas Airlines
Convention centers Rental cars
Duration of use

Hotel meeting space Cruise lines

Quadrant 3: Quadrant 4:
Unpredictable

Restaurants Continuing care

Golf courses hospitals
Internet service
providers

Figure 13.7 80
© 2011 Pearson Education, Inc. publishing as Prentice Hall
Revenue (Yield)
Management Approaches
▶ Airlines, hotels, rental cars, etc.
▶ Tend to have predictable duration of
service and use variable pricing to
control availability and revenue
▶ Movies, stadiums, performing arts
centers
▶ Tend to have predicable duration and
fixed prices but use seating locations and
times to manage revenue
Revenue (Yield) Management
Approaches
▶ Restaurants, golf courses, ISPs
▶ Generally have unpredictable duration of
customer use and fixed prices, may use
“off-peak” rates to shift demand and
manage revenue
▶ Health care businesses, etc.
▶ Tend to have unpredictable duration of
service and variable pricing, often
attempt to control duration of service
Making Revenue (Yield)
Management Work
1. Multiple pricing structures must
be feasible and appear logical to
the customer
2. Forecasts of the use and
duration of use
3. Changes in demand
What’s Needed for
Aggregate Planning
The development and application of
any mathematically based aggregate
planning model requires considerable
- Time:
 Problem definition,
 Model development,
 Model verification,
 Model application;

ADM 3301 ~ Rim Jaber 84

What’s Needed for
Aggregate Planning
– Expertise:
 People who understand the problem,

 People who understand both the

modeling process, and the specific
model;
– Money:
 Money to pay for all of the above,

 Often requires funding for several

people for several months.
ADM 3301 ~ Rim Jaber 85
 Summary of Aggregate
Planning Methods

Solution
Techniques Approaches Important Aspects
Graphical Trial and Simple to understand and
methods error easy to use. Many
solutions; one chosen
may not be optimal.
Transportation Optimization LP software available;
method of linear permits sensitivity
programming analysis and new
constraints; linear
functions may not be
realistic.

Table 13.8 86
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 Summary of Aggregate
Planning Methods

Solution
Techniques Approaches Important Aspects
Management Heuristic Simple, easy to implement;
coefficients tries to mimic manager’s
model decision process; uses
regression.
Simulation Change Complex; may be difficult
parameters to build and for managers
to understand.

Table 13.8 87
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