MAN,*,GEMEN'T SCIENCE Vol, 23. No, 2. October. !9''6 Fnnled ir. V.SA.

AGGREGATE PLANNING WITH LEARNING CURVE PRODUCTIVITY*

RONALD J. EBERT+
Research reports of others mdicate that many manufacturmg organizations experience (a) the probiem of aggregate plannmg, and (b) experience systematic productivity changes throughout the "Ufe" of a product. Methods for resolving (a) and for quaritifymg (b) have been developed and applied mdependentiy m the ope.'-ations management literature. Ail current aggregate pianning models are suitable only for constant productivity situations The current research integ.'-ates (a) and (b) into a single computer-based mode: which per.mits the development of aggregate-output plans '.n the face of changing productivity. The mode] requires reformulation of traditionai aggregate planning methods to incorporate changes in productivity and thereafter solves the reformulated planning probieni using direct-computer search. The potential significance of the mode! is demonstrated by generating a series of aggregate plans for various learning rates. These plans are then used to develop manpower schedules, for cash flow analysis, and for making: product pricing decisions.

Background The aggregate planning probiem is one of determining production rates and work force sizes for a succession of future time periods (i.e., months) such that the organization's operating costs are minimized. The aggregate plan (and associated future operating costs) must respond to anticipated demand fluctuations by (a) modifying the work force size (hiring and layoff from month to month), (b) modifying work force utilization (i.e., allowing idle time or by working overtime), (c) allowing inventory levels to vary, or (d) adopting some "mix" or combination of (a), (b), and (c). A variety of methods has been proposed for resolving the aggregate planning problem (see [3], [S], [llj). The approach of Holt, et al. [8], is one of the more widely publicized frameworks for aggregate planning. Their linear decision rules specify the output and work force levels which minimize long-run costs of overtime , . idle time, inventory-connected costs, and hiring and layoff costs. This p'ianning model (and most other current quantitative models for the aggregate planning problem) utilizes a constant work force productivity factor: the e,xpected rate of output capabilit>' per employee is unchanging over time. Occasionally situations arise in which the assumption of constant productivity is unrealistic. Producti^'ity rates in many organizations are known to change with additional manufacturing e.xperience (see [1], [5], [7]). Significant productivity changes may occur over relatively small or large quantities of output. The sources of productivity changes are numerous, some specific examples being; (a) changes in work m^ethods, (b) product engineering modifications, (c) facilities relocation, (d) facilities layout, (e) equipment redesign, (f) changes in employee skills (training), and others. "Learning curve," as used throughou! this study, is intended to subsume the effects of all these sources of productivity progress in a summary measure. This assumption is consistent with the view presented by Conway and Schultz [5]. .A, large number of em^pirical studies (summ^arized in [5]) have demonstrated that increases in productivity can be systematically related to cumulative output (total number of units produced) of the organization. This "learning"' phenomenon is quantifiable m the form of a learning curve, or manufacturing progress function (see
* Accepted by Samuei Eilon; received September 9, 1975. This paper has been with the author I month, for I revision. '* University of Missouri-Columbia. 171
Copyngh! ^^ !976. The Institute of Managemer.; Sciences

172

RON.^LD J. HBERT

[1] and '"]). It is m these organizational settings that e.xisting aggregate plannmg models have limited applicability since the changing nature of productivity conflicts with the constant-productivity assumption of the planning models. Instead, heuristic or intuiti'^'e planning methods must be used. The cost effectiveness of these intuitive plans cannot be evaluated, accurately because procedures for specifying optimal production plans under these circumstances do not exist. The need for a more systematic planning procedure becomes potentially critical when the learning phenomenon is expected to persist over extended periods in the planning horizon. While learning curve analysis and aggregate pianning have been largely treated as separate areas of research, the two are inherently interrelated. The idea of combining learning curve phenomena with aggregate planning and scheduling has been suggested by Greene [6, p, IS31 and by Niland [12, p. 222], although the methods for doing it have not been presented. Certain advantages res'dt from considering the two problems jointly. For example, three of the purported uses of learning curve analysis are: (1) cash flow pianning, (2) assisting m product-pricing decisions, and (3) manpower planning. Learning curve analysis recognizes the existence of systematic productivity changes over the life of a product. Such analysis, however, typically ignores scheduling costs that result from changing work force size, work force utilization, and inventory fluctuations. The purpose of aggregate planning, on the other hand, is to develop a time-phased program for meeting anticipated demand while incurring minimum overall costs of operation. Clearly, elements of the aggregate pianning problem, are directly related to the three uses of learning curve analysis. First, many of the cost elements in aggregate planning formulations involve cash outlays and hence should be part of cash flow analysis. Second, aggregate planning and scheduling formulations reflect operating costs which m addition to other costs should consider not oniy the learning phenomenon, but also the operating costs associated with alternative strategies of employing and utilizing a variable work force. The principal objective of the current research is to demonstrate a method for aggregate pianning under conditions of changing productivity, a method which merges learning curve analysis and aggregate pianning.
Research Procedure

The proposed planning method is com^puter-based and uses the Hooke-Jeeves direct com^puter search approach [91 for approximating optimal work force and output decisions. The direct-search approach offers the advantage of applicability to a broader range of operating constraints and cost structures than do mathem;aticai formulations (see [4]). The direct-search planning solution has the disadvantage of being "approximate" rather than mathematically optimal. This limitation is not believed to be serious m practice when the previously mentioned advantages are considered. The research procedure for developing the model is outlined as follows: 1, The basic cost structure and, dem^and-forecast data for the company studied by Holt et al, [8] are adapted for demonstration purposes. 2, A variety of mxanufacturing-progress-function pa,-ameters reported m [5] are used as exam^pies of feasible changing productivity patte,rns. 3, The constant productivity factor in 1, above, is replaced successively by each of the manufacturing progress functions selected in 2, above. 4, A Hooke-Jeeves direct-search computer program Js used to develop aggregate plans for the various conditions specified by 1,2 and 3, above. 5, The implications (in, terms of operating costs) of this planning method are evaluated and discussed relative to traditional aggregate planning approaches (which assume constant productivity).

AGGREGATE PL./^NNTNG WITH i.EARNING CURVF PRODI'CTIVIT^'

!73

The integration of aggregate planning and learning canes in this research is a development that has not been presented in the planning and scheduling literature to date. The development of the pianning method makes it feasible to systemiatically consider scheduling costs when financial and manpower plans are being created m the face of changing prodtictivity.
Replacement of Constant Productivity with Changing Productivity

The incorporation of changing productivity m aggregate planning occurs in the scheduling cost function. In the Holt model [8, p. 58], for examiple, the cost function to be minimized is:

(1)

subject to the restraints /, = /,_._ + P, - S,: t = I, . . . . n. The decision variables are work force (WD,) and production rate (/*,). Numerical values for the coefficients, Cj . . , Cg, are statistically estimated from, accounting data. C^ is the constant productivity factor (units of output per man-month). In situations where the leai"ning curve applies (changing productivity). C,, m (1) will change systematically with the cumulative output of the manufacturing facility. The learning ctirve is usually expressed in terms of man-months per unit of output, the inverse of C^. For proposed levels of output across several future time periods (the tentative production plan), cumulative output will increase and average productivity will var> from period to period. The expected productivity for each of these time periods can be obtained from the manufacturing progress function and subsequently used as Q in (1), The degree of productivity improvement, by convention,, is denoted as a percentage. A 70 percent learning curve, for example, applies when the manufacture of cumulative unit 2?! of output requi,'-es only 70 percent of the manpower that was needed to produce cumulative unit n. To determine the expected productivity loi a range of proposed output m a future time period we consider the general form of the manufacturing p,'ogress function: }- =Ki \ (2) where: }'.. = man-months required to produce the f'th cumulative unit of output, K = man-months required to produce the first unit of output (initial productivity), and b = the absolute value of the slope of the progress function, and i vanes continuously. The average productivity over a range of cumulative output (from the ..-^th through the Bi\i units) proposed for a future month is obtained by first integrating (2) to obtam (3).
Kt
'A

'^di = X[''''~^'> - /{''''^-"j/(l,0 - b).

(3)

We then divide (3) by {B - A), thus y^.B = ^[5^-'"-*> - /!''-*>]/[(l,0 - b){B - A)]. (4)

The value for C,. is then given by C\ 1.0/ F^ g. Thus, the cost of any proposed production plan can be approximated, once the parameters in (4) are specified. The proposed mode!, by incorporating changing productivity, is only one of a

174

RONALD J. EBERT

number of possible generalizations of the Holt, et al. form'alation. For example, Lippman, Roife, Wagner, and Yuan [10] offer a generalization of (1), except that smoothing costs are V-shaped, holding costs are increasing, and production costs are dynamic. Their work refers to an appropriate solution algorithm (optimal), a relative advantage over the approximation model proposed here. At the same time, the curi'ent procedure offers the relative advantage of less restrictive assumptions.
Separation of Cash Fiow/CosJ Elements

An important task facing the analyst is to distinguish cash flow elements from cost elements. For example, the scheduling formulation of Holt, et al,, includes cost components for hiring/firing, overtime/idie time and inventories, some of which do not involve actual cash flows. If one wishes to combine aggregate planning and learning curve analysis for purposes of cash flow analysis then care must be taken to identify which elements of the proposed cost structure represent actual cash outlays. Subsequently, the cash flows associated with production scheduling can be combined with the other cash flow elements to estimate total cash flows during the life of the product. While labor inefficiencies due to work force fluctuations, for example, may not result in cash flows, they may truly result in operating costs which shouid be considered m product-pricing decisions. Hence, formulation of the cost st,-uct,ure and separation of cost and cash flow elements is a problem that must be considered before using the proposed methodology.
Structure of the Planning Model

The decision variables of the model are work force and production rate for each time period. Using a decision horizon of n periods, an initial vector of proposed work force and production values {WD.,. . . . . WD^,; P,., . . . , P^) is selected. This initial pian is then evaluated within the scheduling cost function. Thereafter, each of the In decision elem;ents is modified in an attempt to find im,proved soiutions. The search for improved solutions continues until some prespecified stopping criterion is reached. The search model consists of the following three major subcomponents: 1, A Main Program makes major changes in the decision vector values (work force and production decisions) based on favorable change directions indicated by the Explore Subroutine (see 3 below). 2, ,A.n Evaluation Routine incorporates Xht objective function and evaluates the cost of any proposed change in the production plan (a proposed change miay result from either the Mam Program or from the Explore Subroutine), 3, An Exploratory Subroutine modifies the existing decision vector values by small increments to obtain an indication of promising directions for major changes to be made by the M,ain Program. The Evaluation Routine is the subcomponent of the program which incorporates the manufacturing progress function. For any proposed change m /*, (miade by the Main Program or by the Exploratory Subroutine) the productivity factor (C4) in the objective function of the Evaluation Routine changes in accordance with the location of the proposed plan on the manufacturing progress function. The expected productivity (C4) for the modified range of cumulative production output is used to evaluate the cost for each new plan. It should, be noted that this planning method is not restricted to the Holt cost structure shown m expression (1). This cost structure was selected to provide a convenient initial basis for evaluating the planning model. The model can be applied to a wide variety of cost structures such as those discussed in [4],

A G G R E G A T t P L A N N I N G W i T E t L E A R N I N G CURN'E P R O D l C T I V n T

i .'.".

An Ilfustrative Forniuiation A hypothetical cost structure and supporting data were created to illustrate the proposed method. The cost structure for production planning in each time period (?) is as follows: TC. = (direct labor) C; WD. .0! (5 .1)

(overtime)

+ C.{P, - C^,WD^)/C^^ + Cj|(P, - C^, WD,):C.,J if P,. > C , WD,

(5
i'5 .3?

(variable labor overhead) (hiring) (firing)

+ C^WD^ + C^^C.^ WD. if WD, > WD,^., if W-i). < H'/>,_. if /, > /.*

-f C-,{ WD, - WD,,_ J +C^{WD^^^WD,)

(5 .4) (5.5) (5.6) (5.7)

(inventory carrying) (inventory shortage)

-f Cc){I, ~ I.*)

-f C.Jl, - / , * ) ' if /, < /,*

where WD^ = direct work force size, P, = production quantity, I, = ending inventory, C4, = average production/worker, /,'* = desired ending inventory. Cj=S800,00 C, =S!,710,00 C 3 = S 50.00 C;=S233.( C6 = S0,20 C7 Q =8800.00 Cs = S5.00 C,o = SO.6O /,* =8250,00

The cost components and coefficient values were selected to obtain a cost structure that includes elements commonly considered in aggregate pianning and learnms curve analyses. Aithough this formulation uses linear and quadratic terms, higher order terms such as those presented by Buffa and Taubert [4] may be included. Component (5,1) reflects direct work force wage payments of S800 per month per employee. The first component of overtime cost (5,2) reflects estim.ated variable cost (cash outlays) necessary to support each man-month of overtime operations. The second component of overtime represents costs due to labor inefficiencies, which are not cash flows, for increasing levels of overtime. Variable labor overhead costs (5.3) which in\'Oive cash flows are related to the size of the direct work force. It is estimated that one indirect worker is required for every three direct workers. In addition io indirect work force wages, additional indirect supplies and materials are included in the second component of variable labor overhead. Hiring costs (5.4) do not involve cash outlays. whereas it is estim.ated that two-thirds of the monthly firmg cost (5.5) involves cash outlays such as severance pay. Costs of carrying excessive inventories (5.6) and costs of inventory shortages (5.7) do not result in cash outlays. The scheduling cost structure includes a variable productivity coefficient C4, which changes systematically as cumulative output increases. Under this formulation, the productive system's preparedness, at the end of time t. for meeting future demand is defined by H ,, /., and C4J. Both i,, and C^.^ a,re functions of the previous production decisions P... . . . . P,.

Mb

RON,4LD .T. EBERT

Use of the Program The user must supply the foiJowing scheduling, search, and iearnimg curve inputs to the mi ode!: Scheduling inputs: desired ending inventory (/*), cost coefficients (C; , . . C:Q), beginning inventory (Tj), beginning direct work force {WD^., monthly sales forecasts (S, , , , Sn), number of decision periods (A'), search horizon (//), initial production change increment (PDEL), minimum production change increment (MPDEL), initial work force change increment (WDEL), minimum work force change increment (MWDEL), reduction factor for change-increment {R). number of learning curve.s (i or 2), iearning curve rate (70%, 80%, etc), productivity rate for first unit (AT), cumulative output at which learning rate changes (BF).

Search inputs:

Learning curve inputs:

Validation The user of computer search approximiations has no assurance that optimum decisions have been found, Attem^pts must be miade to estimate one's confidence in the validity and rehability of the search results. This was done in two stages. First, the cost structure and sales demand data of HMMS were used with the Hooke-Jeeves search procedure under a wide variety of search conditions to assure that the results closely approximated the HMMS results. Next, the cost structure was modified to that shown in expression (5,0), the learning curve subcomponent was added to the m.odel, and a series of test runs was then conducted. These runs all used the FIMMS sales demand data. Hand calculations were used to verify productivity rates for 40 successive months of scheduling decisions for various learning curves. For each learning curve, a variety of search step sizes and initial decision vectors was tested. Although these variations affected computer run time, they had little effect on the decision behavior of the model over a wide ,range of running conditions. Total cost (40 months) varied by 0,27%' at the extremie. Although no model exists to validate the optimality of the results, the tests do indicate a high degree of reliability. Demonstration Runs A series of runs was made to illustrate the use of the model. These runs used the cost structure of expression (5.0) and the HM.MS demand data. The hypothetical com^pany, DYNAPR,O Corp,, is assumed to be undertaking the production of a newproduct similar to one produced in the past. The expected volume over the life of the product is about 20,000 units, DYNAPRO is assumed to have initial outlays for engineering and design amounting to 8250,000, Fixed administrative and marketing overhead amounts to Si0,000 monthly. Direct materials are estimated at S8O per unit while variable materials overhead is 20% of direct m,ateriais cost (S16 per unit). The company is interested m estimating cash flow requirements, manpower requirements, and wishes to determine a price for the product such that a return of l,O%j on selling price is realized. For the sake of simplicity the time value of money is ignored, DYN.A.PRO expects that five months of buildup time will be required prior to full-scale production. During these months sales demand, 5,, is zero. Beginning in month six, they will 'oegin shipping to meet sales demand. During the production buildup phase the target ending inventorj; levels (/*) for months one through five are

AGC-REC;ATE Pt.ANXfNG WITEi LEARNING CURVE PRODL'CTIVrTT

I ,.' ;'

30, 80, 160, 270, and 420 units, respectively. Thereafter, the desired aggregate ending inventory level /,* (r > 5) = 250 units. Prior to the buildup phase WD^ = 0 and IQ = 0, The productivity rate for the initia; unit of output is estimated to be C^ = 5.67. Manpower Planning Representative output of the model is shown in Table 1 for 80 percent and 90 percent learning curves, Thie general pattern of manpower requirements discloses some similarities for these two curves. During the initial five-month buildup period, work force size increases as do cumulative inventories. Manpower reaches a "loca-'" peak near month eight, then stabilizes or diminishes until month 22 when it again increases. The maximum- work force size occurs in period 25: for the 80 percent curve this maximumi is roughly equal to that of the "local" mianpow-er peak of period seven, but for the 90 percent curve, this maximum is substantially larger than thai of penod eight. O\^eralL demand fluctuations are absorbed mainly by inventory and work force size changes and only slightly by overtime. Toward the end of the product life, more overtime is used as the work, force declines toward shutdown while at the samie time, a large upsurge in demand occurs in period 41, Idle time throughout the 43 months is negligible. Table I aiso reveals some important differences between the plans for the two learning rates. During the initial five-month buildup period, production, inventories, work force size, and the use of overtime are greater for the 90 percent curve. This is reasonable because the model "looks ahead" to future demand requirements. Since output per employee is lower under 90 percent than for 80 percent, work force and inventories must be "built up'" in anticipation of this future demand. In general, the ending inventory pattern shows that deviations from the desired level (/* = 250) are greater for the 90 percent than for the 80 percent cui-ve throughout the 43 months. In effect, the 80 percent curve permits den:iand fluctuations to be absorbed by larger changes in productivity, more than is possible with the 90 percent curve. This added option results in more latitude for changing output without resorting to the use of hiring/firing, idle time/overtime, and inventory fluctuations to the extent needed for tbe 90 percent curve. .A summa,ry of direct work fo,rce requirements for various learning rates is presented in Table 2, Product Pricing The model was used to develop production plans foi various rates of learning. Summary cost data are presented in Table 3. The costs are subdivided into "scheduling" costs and "nonscheduling" costs. For product pricing purposes all anticipated costs should be conside,'ed. In general, scheduling costs per unit of output are greater for higher percent learning curves. This is to be expected since more employees must be hired (greater hiring costs) to meet forecasted demand and subsequently laid off (greater layoff costs). This illustrates a primary advantage of this mode! over traditional learning curve analysis; the miodel approxim^ates an optimal pian for hiring and layoffs. Ove,-aH, the scheduling costs are a sm.all percentage of the total costs in the example presented here. This !S 'largely an artifact of the hypothetica' cost structure which features high m.atenals and overhead costs which may not be so dominant m som.e organizations. Even so, these data illustrate that one's estimate of the learning rate can have significant implications for product pricing. The costs of labor and the minim,um-attainable costs of scheduling rise as the productivity improvement rate diminishes. Two important implications are evident for meeting price setting objec-

178

RONALD J. EBERT

tives: (I) Errors in estimiation of the improvement rate can result in radical departures from the pi-icmg objective; (2) scheduling costs are potentially significant in meeting price objectives. Bear in mind that the scheduling costs reported here are minimum. expected costs which are not explicitly considered in the typical learning curve analysis. If the cost structure used m this model is valid, and if the organization does

T.A.ELE ! Manpower arid Output Pian for 80% and 90% Learning Curves I Direct W irk Force 80% 90% 0 9.0 ' "^]5.0 2i.O 27.0 26.7 28.8 28.7 2.4.3 2.16 24.3 2!.4 2i.5 20.9 20,9 20.4 20.4 2!.7 2!.8 21-g 21.7 23.3 26.S 28.3 28.9 28.8 24.2 21 1 27.3 28.0 27.9 24.8 24.0 23.6 ;5.5 12,4 J2.0
1} 7

Month

Demand

.Average Productivity 90% 80%;

Production 80%. 90%,

Ending Inventory 80%. 90% 0 28.5 S5.5 186.5 351.0 587.5 449.0 332,0 2,42.0 267.5 236.5 242.0 338.0 275.0 275.0 318.5 406.5 388.5 346.5 304.0 282.5 288.0 309.0 2S3.0 250.5 248.0 234.0 249.0 443.5 494.0 351.5 309.5 244.5 24i.O 377.0 249.5 244.0 264.0 284.0 332.0 404.0 264.0 i40.0 0.0

Over time (Man-M onths) 80% 90%^ _ 0.027 0.000 0.062 0.052 0.003 0.036 0.000 0.356 0.000 0.14^1 0.025 0.026 0.369 0.002 0.020 0.005 0.0 ;0 0.000 0.011 0.175 0.095 0.010 0.004 0.807 0.169 0.298 0.005
O.OCX) '"OiO 0.000 0.004 0.017 0.008 0.000 0.003 0.CX>0 0.007

0 1 2 3 4 5 6
7

8 9 JO 11 12 '!3 S4 15 16 i7 18 19 20 21 22 21 24 25 26 27 28 29 30 3i 32 33 34 35 36 37 38 39 40 41 42 '13 44

0 0 0 0 0 430 <U7 440 316 397 375 292 458 400 350 284 400 483 509 500 475 500 600 700 700 725 600 432 615 S33 750 787 717 533 793 467 347 370 360 403 700 600 573 0

0 7.0 11.0 i7.0 25.0 33,0 38.0 40.6 41.0 39,1 40.7 40.9 4i.l 41.1 40.9 39.6 36.9 37-4 42.7 44.5 45.1
M.8

4g,0 52.3 60.1 62.1 62.1 53.6 54.1 58.6 59.3 59.5 59, i 55.0 ,54.3 29.7 31.4 32.6 37.9 39.9 37.5 34,4 0

15.0 17,6 17.4 .'2.5 0

2.33 4.27 5.8: 7.39 9.04 10.56 il.91 13.15 14.20 K5.08 15.92 16.66 17.32 17.95 18.55 19.11 19.66 20.20 20.74 21.27 21.79 22.3 i 22.87 23.48 24.10 24.70 25.23 25.68 26 i 1 26.59 27.10 27.60 28.08 28.50 28.9 i 29.24 29.48 29.6S 29.88 30.10 ,30.39 30.70 30.94

3.97 5.16 5.92 6.57 7.16 7.67 8.-09 8-45 8.74 8.99 9.22 9.43 9.62 9.79 9.94 10.08 !0.2i 10-34 1047 i0.60 10.72 10.84 10.96 H.09il.23 11.36 11,47 S1.58

n 68
78 1-.88 Si, .98 12.07
2.S6 2.24'

i,2.30 12.35 12.39 12.43 12.48 12.53 !2.59 12.63

21.0 47.0 87,5 155,5 244.0 282.5 342.5 38'i .5 345.0 373.5 386.5 356.5 379.0 376.0 388.5 389.5 400.5 437.5 452.0 468.0 475.5 5:9.0 6;3.0 684.0 700-5 718.0 609.5 556.0 59? 5 125.Q 75S.0 77 i.5 697.5 683-0 681.0 454.0 366.5 357.5 351.0 455.0 648.0 536.0 389.0

0 2L0 28.5 68.0 57.0 iOI.O i55.5 164,5 311.0 236.5 555.0 291.5 407.5 330.0 ,303.0 35-0.0 244.5 34'K5 273.5 366.0 \ 250.0 380.5 .261.5 388.0 326,0 395.0 247.0 400.0 223.0 393.5, 261.5 372.0 367.0 82.0 367.5 '!4i.O 322.0 466.5 265.0 478.5 233.0 480.5 233.5 521.0 252.5 574.0 265.5 667.5 249.5 697.5 250.0 711.0 243.0 615.0 252.5 626.5 376.5 665 '^ 360.0 690.5 252.0 70S.0 260.0 722.0 244.5 713.5 225.0 669.0 375.0 665.5 263.0 461.5 250.0 367.0 269.5 390.0 257.0 408.0 248-0 475.0 300.0 560.0 248.0 476.0 184.0 0.0 Ai^Xi

_ 0.174 0.037 0.07 i 0.035 0.038 0.028 0.L52 0.466 0.000 0.03! 0.400 0.024 0.000 0.004 0.014 0.-028 0.02; 0.002 0.028 0.018 0.000 0.027 0.026 0.076 0.000 0.454 0.009 0.014 0,0 i 2 0.014 0.274 -0.782 0.028 0.002 0.063 0.04'i 0.011 0.080 0.218 0.160 4.768 0.320 0.000

O.ooe
0.026 0.098 3.706 0.-067 0.054

AGGRtG.4.Tfc P L . ^ L N M N G WITH LE.4RN;NG CURVfc PRODUCT!\IT1

179

not explicitlv consider these scheduling costs, then the expected costs of their acfaai scheduimg (by whatever scheduling procedure they use) will be higher than those determined wuh this mode:. To the extent that such costs are not exphciUy considered, the organization will depart from its pricing objective.
Cash Flcrtv .4 nalvsis

For purposes of cash flow analysis it ss assumed that materials costs are incurred during the month -hose materials are used m production. Cash inflows are received m the month following the sale of the product. Units are sold ai the price determined m the preceding section. A\] other cash outflows are as pre\'iousiy described. In Table 4. cumulative cash outflows are compared wuh inflows on a monthly basss for SU
TABLE 2 Direc: Wofk force Requirements for 4i .Months Learning C-jr\-e Characteristics Total reguiar tirriie man-months. Tota! m.an-months of ldie tune Total man-months of overtime 70%
75% 80'^ i

85%

\
i

90%

95%

)00%

461,7 0.013 10.062

652.2 0.594 10,600

927,4

1299.4 0.006 ;3.65S

i823.5 0,123 8.952

2523.2
0,i47
fy 2 i ^

3456.5

0.028.034

O.n9
,1,123

T.'s.BLF. 3 Cast Estimates for Product Pricing

' Cost Category 70% Scheduling Costs: overtime

hir.v.g 7*>%

Learning Curve 80% 5%

Constant Prod-jctivitv 90% 95%

100%

layoff inventory carrying inventory shortage

TOT.ALL

Cost/unit NonscheduUr;g Costs; de-i'elopment direct materials variable tncite'iais. overhead administrative direct iabor variabie labor o\'erheac TOT,AL TOTAL COST
SeliiRg P r i c e

s s s

17.790.9 6.326.9 25.074.7 3,532.5 806.5 53.531.5 2.723

18.82-1.9 7.409,7

12,221.8 9.410.3
40,248,0 6,570.0 3,985.9 72 4^6.0 3,684

32,,34i.7 4,960,0 830.5

64,366.2 3.274

25.458,; 12.052,! 5 i, 702.2 8.787.5 953.1 98.952.0 5,033

;6.516.5 P.569.3 67,799.6 12,087.5 7.692,6

121.565.5 6,183

;9.1 i7,7

21.433.2 3 7 , ; 78,-* 1-03,97".7

26.595,:
79.990.6 14,030.0 4.983.6 ]d4.'^l'!.6 7,361

17.085.0
5.5'^74 ;85.25;,7 9,422

25O.'XK). 1.572.880.
3 i 4 '^76 43O.OOG. 369.322

250.'aOC). 1.572.880.
3 i 4 ^76

250,0OC<. ;.572.880, '^ 14 ^76 43O.OOC':. 741.890-, 364.762. 3.6"4.t0g

3,746.544.

250.000. i.572.880, 3!4 ^.76

430.00t:: 1.0-39.53:, 511.102. 4.-1,8.089

250.CKX), ;.572,880, 354 ^76 43G.0CK), 1.458.758, 7:7,224. 4.743 ,,438,

4,S65.0'0-3,

250.00'D, i.572.8803'i4 ^.76 430.CKX;:.

liO.OOi'. 1.572.880. "^14 ~76 !-30.OC!C, 2.765.225. i.359.5(->6. 6.692.247

430.(,>X!. 521.72';. 256.512. 3.345.689 3,410,055.

2.018.561,
992,462. 5.578,479,

s s
ii

181.583. 3.;i8.36; 3,171.893.

4.217,04!.

5,,723,f9^.

6.8:^7.498.7

(per unit)

179.254

92,713

211,730

238.3i9

274,938

323,43^

349,802

180

RONALD J. EBERT

percent and 90 percent curves. The maximum net difference between inflows and outflows occurs in month six of the project. Thereafter, cash inflows from sales are realized and the net differences gradually diminish. Outflows are fuily covered by inflows beginning in month 32 for the 90 percent curve and in month 34 for the 80 percent curve. Errors in Estimating Initial Productivity The preceding results assume an initial productivity (C4) of 5.67 units per employee per month. As discussed by Baloff [2] there are difficulties in estimating startup parameters in learning curve applications. To what extent would our pricing decision be modified if C4 differed from tbe original estimate? To answer this question, Q was

TABLE 4
.!\ei Cumulative Cash Flows for Two Learning Curves End of Period Net Cumulative Flow (outfiow inflow) 90% B0% S 272,802 300,440 336.846 3S6,924 452,572 521.776 507,980 494,872 476,176 484,728 476,976 468,930 479.,776 454,164 441.743 439,648 452,326 445,530 442,690 396,162 372,057 359,131 S27!,387 3O0,C)48 340,153 395,838 467,987 551,366 523,532 493,958 463,442 470,319 457,188 450,42! 467,106 438,506 424,279 419,286 432,543 425,862 401,003 370,846 343,128 329,905 End of Period Net Cumu iative Flow (outflow i riflow) 80% 90%,$ 354, i 03 377,882 301,696 267,345 213,694 177,262 180,595 162,560 102,378 61,022 2,612 - 44,563 -53,657 -145.157 - ;S2,3Sg - 197,0G5 "217,481 -221,956 - 207,735 -373,504 -335,574 -450,229 S3J9,967 300,934 259,544 220,225 158.447 128,212 151,368 i28,,523 48,702 - 5,849 - 72,944 - 128,023 -135,398 - 245,335 -288,878 -299,234 -312,517 -310,394 -301,667 -391.850 -462,54: -60i,734

2 3
4

23 24 25 26
^7

6 7 S 9 10 11 12 13
14

28 29 30 31 32 33 34
1^

15 16 17 !8 19 20 21

36 37 38 39 40 41 42 43 44

T',A.BLE 5 Selling Price as Affected by Productivity Estimate Initiaf P.'-oductivftv Curve 95%: 90%; 85%. 80%, 75% 70% 4 = 5.103 S 342.852 288.927 248.640 218.957 197.919 183.07 Q = 5.67 S 323.437 274.938 238.319 211,730 192.713 179.254 C4= 6.2 37 S 307.108 262.945 230.136 205,716 188.469 I76.;23

AGGRhCATt PL,ANN1NC WITH LE,4RN:NG CURVt PRODL CTIVIT^'

j8;

increased and decreased by lO^"^ from the original estimate. The resuiiing selling price decisions are shown hi Table 5. From a competitix-e \'iewpoint relatively minor changes in the mitiai estimate can have significant effects on price-setting. This can also have substantial impact from a profitability standpoint, ail oi -i^'hich emphasizes the importance of accurate parameter estimation. ^ ariatioiis of the Model The model is written to accept several variations in addition to those used ;n the runs reported above. Planning Horizon The abo^'e search routine used a six-period decision horizon to generate the decisions for each month. That is, each search iteration minimizes costs for six mionths into the future. When further improvement cannot be found the decisions for the first m;onth are retained, while those for months two through six are discarded. The search horizon is then mde.xed to include an additional future month thus restoring the horizon to six months. This decision horizon can be varied bv the user to be between one and twelve periods. The pricing problem was rerun using a twelve-period horizon for the 95, 85, and 75 percent curves. The results were co,mpared to the corresponding prices for the six-period horiz,on. The maximram: difference in product price was 0,238 percent (for the 95% curve) and this additional precision required m-ore than three times as miuch com.puting time as the six-period horizon. Double Curves The miodel can be adapted for situations m which the rate of learning is expected to change. Conway and Schultz [51 present an exam^pie where finai assembly labor for an electronic assembly changed from; a 73 percent to a 96 percent curve. The current model has been run for pricing, manpower planning, and cash flow anahsis under such double curve conditions. The user must specify the cur\es as well a.s the cumulaiive output levei aS which I'hc switch is lo occur. Standard Units The demonstration runs reported above assumed thai the improvement (learning) rate applied to each 100 units of actual output; a "unit" on the learning curve corresponded to 100 units of actual production. Thus, the productivity rate (5.6"^ units per man per month} of the first unit on the curve is actually the rate ihai applies to the 100th unit of real output. The size of this standard unit mia\ be selected b}' the user of the m,odet. Suggested Extensions of the Mode! The demonstration runs m this study represent oniy one of several possible situations. It was assumed that product price, once determined, would remain constant during the life of the product. A different condition, not considered herein, occurs if product prices are allowed to vary m relation to reduced labor costs through learning. If so, sales forecasts may increase as price dimsinishes. The miodel as currently written could approximate optim^al schedules for this condition, by rerunning the miodel after periodically updating sales forecasts. However, the product-pricing decision would have to be done outside the current m,ode'. The model assumes that the effects of changing productivity are solely reflected in the productivity constant. C4,, in (5.0), This assumption may be lenuous for substan-

182

RON,A.I.D J. HBFRT

tial productivity changes in which, for examsple, C-, may not adequately capture overtimie/jdle tim:e costs for fiuctuatiag output levels. Inventory costs might also be affected. These considerations are not accounted for in the existing miodel. Summary This paper presents a method for approximiating optimal aggregate schedules under conditions of changing productivity. Systematic changes in productivity are incorporated into the traditional aggregate scheduling formulation through the productivity constant Q . A computer search routine then approximates the optima! workforce and production-rate vectors for meeting forecasted demand over the expected life of the product. The resulting production plan m^ay then be used to assist in product-pricing decisions, mianpower planning., and in estimating cash flow requirements. The msajor limitations and difficulties in using the model rest in the area of estim.ation. First, the form and parameters of the cost structure must be estimated, as do monthly demand forecasts. Next the learning curve parameters must be estimated. Experimental results showed that prod-uct price, manpower requirements, and cash flows are ail sensitive to variations in the learning curve estimates. A major contribution of the model is that it explicitly considers scheduling costs in addition to the administrative, initial investment, materials, and overhead costs typically treated in learning curve analysis. Furthermore, if one assumes thaf the search routine is performing as intended, then the m.odel creates an optimal (approximiately) response to a variable demiand pattern when productivity is systematically changing. Methods for treating this problemj have not been previously presei), ted.'
The author gratefully acknowledges the vaiuabie research assistance of Mr. Dan Maune and the resource support of the College of Busiriess; and Public Administration, the University of MissouriColumbia. References 1. 2. 3. 4. 5. 6. 7. 8. 9.
10,

BALOFF, N . , "The i^eamsng CurveSome Controversial issues.," Journal of Industrial Economics (July 1966), pp. 275-282. , "Estimating the Parameters of the Startup Model- An Empirical .Approach,''' Journal of Industrial Engineering, Vol, 18 (1967). pp. 248-253. BOWMAN, E . H . , "Production Scheduling by the Transportation Method of Linear Programming," Journal oi the Operations Research Society, Vol. 4 (1956), pp. 100-103. BUFFA, E, S. AND TAUBERI. W . H., "Evaluatiors of Direct Computer Search Methods for the .Aggregate Scheduling Problem," Industrial Management Review, Vol. 9 (1967), pp. 19-36. CONWAY, R . W , AN,O ScHt'i.TZ. A., "The Manufacturing Progress Function," The Journal of industrial Engineering, VoL 10 (1959). pp. 39 54. GREENE. J H., Production and Inventory Control. Richard D. Irw-in, Homewood, !!L, S974. HiRSCHMANN. W. B., "Profit From the Learning Curve," Harvard Business Review, Voi. 42 (1964), pp. 125-139. HOLT, C . C , MODiGi.iAKi, F.. MUTI-:, J. F. AND SIMON. H . A., Pianning Production Inventories and Work force, Prentice-Hail, Engiewood Cliffs, N J., i960. HooKE, R. AND ,{EEV!;S, T . A . , " -Direct Search' Solution of Numerical and Statistical Problems.." Journal of the Association jor Computing Machinery. Vol. 8 (t96i), pp. 212-229.
LIPPMAN, S. .A.., ROLFE. .\. J., WAGNER, H , M . AND Y-CAN, J. S. C , "Optimal Production Scheduling

and Employmenl, Smoothing 'ft'lth Detertrimistic Demands," Management Science., VoL !4 (1967), pp. 127-158, ! 1. MAC-EE. J. F . , "Guides to Inventory Policy. !U. Anticipating Future Needs," Harvard Business Review, Voi. 34(1956',), pp, 57-70. 12. NiLAND, P.. Production Planning, Scheduling, and Inventory Control, MacmiElan, London, 1970.