Supply Chain Management

By
Dr. Asif Mahmood
drasif@uet.edu.pk

Chapter 9: Aggregate Planning

 Role of Aggregate Planning
in a Supply Chain
• Capacity has a cost, lead times are greater than
zero
• Aggregate planning:
– process by which a company determines levels of
capacity, production, subcontracting, inventory,
stockouts, and pricing over a specified time horizon
– goal is to maximize profit
– decisions made at a product family (not SKU) level
– time frame of 3 to 18 months
– how can a firm best use the facilities it has?
 Aggregate Planning through
Linear Programming
• Linear programming (LP) techniques
consist of a sequence of steps that will lead
to an optimal solution to problems, in cases
where an optimum exists
– Used to obtain optimal solutions to problems
that involve restrictions or limitations, such as:
• Materials, Budgets, Labor, Machine time
– Graphical linear programming Vs Simplex
method Limited to two
decision variables
 Linear Programming Model
(Components)
• Objective Function: mathematical statement
of profit or cost for a given solution
• Decision variables: amounts of either inputs
or outputs
• Feasible solution space: the set of all
feasible combinations of decision variables as
defined by the constraints
• Constraints: limitations that restrict the
available alternatives
• Parameters: numerical values
 Linear Programming Model
(Assumptions)
• Linearity: the impact of decision variables is
linear in constraints and objective function
• Divisibility: noninteger values of decision
variables are acceptable
• Certainty: values of parameters are known and
constant
• Nonnegativity: negative values of decision
variables are unacceptable
 Model Formulation—Example
X1=Quantity of product 1 to produce
Decision variables X2=Quantity of product 2 to produce
X3=Quantity of product 3 to produce
Maximize Z=5X1+8X2+4X3 (profit) (Objective function)
Subject to
Labor 2X1 + 4X2 +8X3 ≤ 250 hours
Material 7X1 + 6X2 +5X3 ≤ 100 pounds
Product 1 X1 ≥ 10 units (Constraints)

X1, X2 , X2 ≥ 0 (Non-negativity Constraints)

 Graphical Linear Programming

Graphical method for finding optimal

solutions to two-variable problems
1.Set up objective function and
constraints in mathematical format
2.Plot the constraints by replacing
inequality sign with an equal sign
3.Identify the feasible solution space
4.Plot the objective function
5.Determine the optimum solution
 Graphical Linear Programming
Example
A firm that assembles computers and computer
equipment is about to start production of two
new types of microcomputers. Each type will
require assembly time, inspection time and
storage space. The amounts of each of these
resources that can be devoted to the production
of the microcomputers is limited. The manager
of the firm would like to determine the quantity
of each microcomputers to produce in order to
maximize the profit generated by sales of these
microcomputers.
 Graphical Linear Programming
Example
Additional Information

Type 1 Type 2
Profit per unit $60 $50
Assembly time per unit 4 hours 10 hours
Inspection time per unit 2 hours 1 hours
Storage space per unit 3 cubic feet 3 cubic feet

Resource Amount Available

Assembly time 100 hours
Inspection time 22 hours
Storage space 39 cubic feet
 Example—Mathematical
Model
Let
X1 = quantity of type 1 to produce
X2 = quantity of type 2 to produce
• Objective - profit
Maximize Z=60X1 + 50X2
• Subject to
Assembly 4X1 + 10X2 ≤ 100 hours
Inspection 2X1 + 1X2 ≤ 22 hours
Storage 3X1 + 3X2 ≤ 39 cubic feet
X1, X2 ≥ 0
Example—Plotting Constraints
• Begin by placing the nonnegativity constraints on a graph
Example—Plotting Constraints
Example—Plotting Constraints
Example—Plotting Constraints

Inspection

Storage
Assembly

Feasible solution space

 Example—Plotting Objective
Function Line

Z=900

Z=300 Z=600

• As we increase the value for the objective function:

• The isoprofit line moves further away from the origin
• The isoprofit lines are parallel
 Solution

• The optimal solution is at the intersection of

the inspection boundary and the storage
boundary
• Solve two equations in two unknowns
2X1 + 1X2 = 22
3X1 + 3X2 = 39

X1 = 9
X2 = 4
Z = $740
 Constraints

• Redundant constraint: a constraint that does not

form a unique boundary of the feasible solution space
• Binding constraint: a constraint that forms the optimal
corner point of the feasible solution space

Binding constraints
from previous
example?
 Solutions and Corner Points
• Feasible solution space is usually a polygon
• Solution will be at one of the corner points

• Enumeration approach: Substituting the

coordinates of each corner point into the
objective function to determine which corner
point is optimal.
 Enumeration Approach
• Thus, in the microcomputer problem, the corner
points are (0,10), (11, 0), (9, 4) and (5, 8)
• Substituting into the objective function, the
values are
– $500 for (0,10);
– $740 for (9,4);
– $660 for (11,0);
– $700 for (5,8).
• Because (9,4) yields the highest value, that
corner point is the optimal solution.
 Important
• Some LP problems have multiple optimal
solutions, as shown
 Slack and Surplus

• Surplus: (in >constraint) when the optimal

values of decision variables are substituted into a
greater than or equal to constraint and the
resulting value exceeds the right side value
• Slack: (in <constraint) when the optimal values of
decision variables are substituted into a less than
or equal to constraint and the resulting value is
less than the right side value

Note: Binding constraints have zero slack. Calculate

from previous example
 Exercise
Solve the following problem using graphical
linear programming.
Minimize Z=8x1+12x2
Subject to 5x1+2x2 ≥ 20
4x1+3x2 ≥ 24
x2 ≥ 2
x 1, x 2 ≥ 0
 More Exercises (Ex 1)
Solve these problems using graphical linear programming and answer
the questions that follow. Use simultaneous equations to determine the
optimal values of the decision variables.
1. What are the optimal values of the
decision variables and Z?
2. Do any constraints have (nonzero) slack?
If yes, which one(s) and how much slack
does each have?
3. Do any constraints have (nonzero)
surplus? If yes, which one(s) and how
much surplus does each have?
4. Are any constraints redundant? If yes,
which one(s)? Explain briefly.
 More Exercises (Ex 2)
Solve these problems using graphical linear programming and then
answer the questions that follow.
Use simultaneous equations to determine the optimal values of the
decision variables.
1. What are the optimal values of the
decision variables and Z?
2. Do any constraints have (nonzero) slack?
If yes, which one(s) and how much slack
does each have?
3. Do any constraints have (nonzero)
surplus? If yes, which one(s) and how
much surplus does each have?
4. Are any constraints redundant? If yes,
which one(s)? Explain briefly.
More Exercises
 Simplex Method

• Simplex: a linear-programming
algorithm that can solve problems
having more than two decision
variables
MS Excel Worksheet for
Microcomputer Problem
MS Excel Worksheet Solution
Loading the Solver Add-in
Step 1
Step 2
Step 3

Step 4
 Exercise
• Solve each of these problems by computer and
obtain the optimal values of the decision
variables and the objective function.