Outline

Examples
Chase Strategy
Level Strategy
Optimization

LESSON 9: AGGREGATE PLANNING
EXAMPLES
Chase strategy
Produce as much as needed
Zero inventory, no holding cost, no shortages
Zero inventory is difficult to achieve because work
hours may not be flexible
Low inventory costs, high smoothing costs
Level strategy
Produce a constant amount each period
Stable workforce, no hiring/firing, no overtime,
no subcontract
Low smoothing costs, high inventory costs

Two Simple Strategies
Chase Strategy
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Demand
Production
Chase Strategy
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Cumulative
Demand
Cumulative
Production
Level Strategy
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Production
Level Strategy
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Cumulative
Demand
Cumulative
Production
Optimization
The chase and level strategies are two extreme
strategies. Chase strategy minimizes inventory costs
and level strategy minimizes smoothing costs. The
goal of optimization is to identify a production plan
that minimizes the total inventory and smoothing
costs.This can be done using linear programming.
Lesson 10 discusses the application of linear
programming using Excel Solver.
Develop a production plan and calculate the annual cost
for a firm whose demand forecast is fall, 10, 000; winter,
8,000; spring 7,000; summer, 12,000. Inventory at the
beginning of fall is 500 units. At the beginning of fall you
currently have 30 workers, but you plan to hire temporary
workers at the beginning of summer and lay them off at the
end of summer. In addition, you have negotiated with the
union an option to use the regular workforce on overtime
during winter or spring if the overtime is necessary to
prevent stock-outs at the end of those quarters. Overtime
is not available during fall. (Continued...)
Example
Relevant costs are: hiring, $100 for each temp; layoff,
$200 for each worker laid off; inventory holding, $5 per
unit-quarter; backorder, $10 per unit; straight time, $5 per
hour; overtime $8 per hour. Assume that the productivity is
0.5 units per worker hour, with eight hours per day and 60
days per season.
Develop a production plan using
(1) all the constraints as stated
(2) chase strategy, no overtime, work hours not flexible
(3) chase strategy, no overtime, flexible hours (self study)
Example
(4) Suppose that a level strategy will be used without any
overtime. What is the minimum number of workers required
to avoid shortages? Develop a production plan using the
minimum number of workers required to avoid shortages.
(5) Assuming that the shortages are allowed and that 6 new
workers will be hired in the beginning of the fall term develop
a production plan using level strategy and no overtime (self
study)
(6) Assuming that the overtime will be used in fall and winter to
prevent shortages and that 7 new workers will be hired in the
beginning of the fall term, develop a production plan using
level strategy with overtime (self study)
Example
Problem 1: The original problem
Example
Forecast Beginning Production Production Production
Inventory Required Hours Hours
Required Available
Fall 10000 500
Winter 8000
Spring 7000
Summer 12000
Overtime Workers Workers Actual Ending
Hours Hired Fired Production Inventory
Fall
Winter
Spring
Summer
Problem 1 sample computation:
Production required in fall = forecast in fall - beginning
inventory in fall = 10,000 - 500 = 9,500
Production hours required in fall = production required in
fall / productivity in units per worker = 9,500 / 0.50 = 19,000
hours
Production hours available in fall = 30 workers 60 days
per season 8 hours per day = 14,400 hours
Overtime and temporary workers are not available in fall
Actual production in fall = production hours available in fall
productivity in units per worker = 14,400 0.50 = 7,200
units
Example
Problem 1 sample computation (continued):
Ending inventory in fall = actual production in fall
- production required in fall = 7,200 - 9,500 = -2,300 units
Beginning inventory in winter = ending inventory in fall
= -2,300 units
Overtime hours required in winter = production hours
required - production hours available = 20,600 - 14,400 =
6,200 hours
Actual production in winter = (production hours available in
winter + overtime hours in winter) productivity in units per
worker = (14,400+6,200) 0.50 = 10,300 units
Example
Problem 1 sample computation (continued):
Workers hired in summer = (production hours required in
summer - production hours available in summer) / number
of working hours per worker in summer [Note: the result
should be rounded up, the number of workers is an integer
and enough workers should be hired to avoid shortages]
= (23,600-14,400)/(60 days per season 8 hours per day)
= 19.167 rounded up to 20
Note: Actual production in summer is 11,800 units, as
much as required. The assumption is that temporary
workers will not work for full 480 hours, but only as much
as needed. So, they can be stopped after producing 11,800
units.
Example
Problem 1: The original problem
Example
Backorder Overtime Hiring Firing
Cost Cost Cost Cost
Fall
Winter
Spring
Summer
Inventory Straighttime Total
H. Cost Cost Cost
Fall
Winter
Spring
Summer
Total cost
Problem 1 sample computation:
Straighttime cost in summer = actual production hours
$5 per hour = 23,600 hour 5 per hour = $118,000
Note: the actual production hour in summer is the same as
production hours required in summer because sufficient
number of temporary worker are hired and the temporary
workers can be stopped after producing the required
amount of products.
Example
Problem 2: Chase, no overtime, work hours not flexible
Example (Chase Strategy)
Forecast Beginning Net Production Workers
Inventory Production Hours Required
Fall 10000 500
Winter 8000
Spring 7000
Summer 12000
Workers Workers Actual Ending
Hired Fired Production Inventory
Fall
Winter
Spring
Summer
Problem 2 sample computation:
Workers required in fall = production hours required in fall /
number of working hours per worker in fall [Note: the result
should be rounded up, the number of workers is an integer
and enough workers should be hired to avoid shortages]
= 19,000/ (60 days per season 8 hours per day)
= 39.583 rounded up to 40
Number of workers hired in fall = Number of workers
required in fall - number of workers available in the
beginning of fall = 40 - 30 = 10

Example
Problem 2 sample computation (continued):
Actual production in fall = Number of workers available in
fall 60 days per season 8 hours per day 0.5 units per
worker per hour = 40 60 8 0.50 = 9,600 units
Ending inventory in fall = actual production in fall -
production required in fall = 9,600--9,500 = 100 units
Beginning inventory in winter = ending inventory in fall = 10
units
Number of workers fired in winter = Number of workers
available in the beginning of winter - number of workers
required in winter = 40 - 33 = 7.
Example
Problem 2: Chase, no overtime, work hours not flexible
Example (Chase Strategy)
Hiring Firing Straight Inventory Total
Cost Cost time Holding Cost
Cost Cost
Fall
Winter
Spring
Summer
Total
Problem 3: Chase, no overtime, flexible hours
Net Production Workers Workers Workers
Production Hours Required Hired Fired
Requirement Required
Fall 9500 19000 40 10 0
Winter 8000 16000 34 0 6
Spring 7000 14000 30 0 4
Summer 12000 24000 51 21 0
Hiring Firing Straight Total
Cost Cost time Cost
Cost
Fall 1000 0 95000 96000
Winter 0 1200 80000 81200
Spring 0 800 70000 70800
Summer 2100 0 120000 122100
Total 370100
Example (Chase Strategy)
Self Study
Problem 4: Constant workforce, no overtime, no shortages
Example (Level Strategy)
Workers hired Initial hiring cost
Workers fired Initial firing cost
Total workers Straighttime cost
Computation of the workforce required for avoiding shortages
Net Cumulative Cumulative Workers
Production Net units Required
Requirement Production produced
Requirement per worker
Fall 9500
Winter 8000
Spring 7000
Summer 12000
Problem 4 computation of number of workers required:
Step1:
For each period compute the cumulative net production
requirement
Step2:
For each period compute the cumulative units produced
per worker
Step 3:
For each period compute the number of workers required
to meet the cumulative demand upto that period by dividing
the cumulative net production by the cumulative units
produced and rounding up.

Example (Level Strategy)
Problem 4 computation of number of workers required:

Number of workers required to meet the cumulative demand upto
Fall
Winter
Spring
Summer

Step 4:
The number of workers required is the maximum of all the
numbers obtained in Step 3

Number of workers required = max ( ) =
Example (Level Strategy)

40 583 . 39 240 / 9500
Problem 4: Constant workforce, no overtime, no shortages
Example (Level Strategy)
Forecast Beginning Actual Ending
Inventory Production Inventory
Fall 10000 500
Winter 8000
Spring 7000
Summer 12000
Inventory Backorder Total
Cost Cost Cost
Fall
Winter
Spring
Summer
Total cost
Problem 5: Constant 36 workers, no overtime, shortages allowed
Workers hired 6 Initial hiring cost 600
Workers fired 0 Initial firing cost 0
Total workers 36 Initial recruitment cost 600
Straighttime cost 345600
Example (Level Strategy)
Self Study
Problem 5: Constant 36 workers, no overtime, shortages allowed
Forecast Beginning Actual Ending
Inventory Production Inventory
Fall 10000 500 8640 -860
Winter 8000 -860 8640 -220
Spring 7000 -220 8640 1420
Summer 12000 1420 8640 -1940
Inventory Backorder Total
Holding Cost Cost
Cost
Fall 0 8600 8600
Winter 0 2200 2200
Spring 7100 0 7100
Summer 0 19400 19400
Total 383500
Example (Level Strategy)
Self Study
Problem 6: Constant 37 workers, overtime to prevent shortages
Workers hired 7 Initial hiring cost 700
Workers fired 0 Initial firing cost 0
Total workers 37 Initial recruitment cost 700
Straighttime cost 355200
Example (Level Strategy)
Self Study
Problem 6: Constant 37 workers, overtime to prevent shortages
Forecast Beginning Regular Units Units
Inventory Production Available Overtime
Before OT
Fall 10000 500 8880 -620 620
Winter 8000 0 8880 880 0
Spring 7000 880 8880 2760 0
Summer 12000 2760 8880 -360 360
Ending Inventory Overtime Total
Inventory Holding Cost Cost
Cost
Fall 0 0 9920 9920
Winter 880 4400 0 4400
Spring 2760 13800 0 13800
Summer 0 0 5760 5760
Total 389780
Example (Level Strategy)
Self Study
READING AND EXERCISES
Lesson 9
Reading: Section 3.4, pp. 121-127 (4
th
Ed.), pp. 117-125
(5
th
Ed.)
Exercises: 9, 13 and 14, pp. 127-129 (4
th
Ed.), pp. 123-
124 (5
th
Ed.)

Lesson 10
Reading: Section 3.5-3.6, pp. 129-138 (4
th
Ed.), pp.
125-135 (5
th
Ed.)
Exercises: 17, 19 and 20, pp. 138-139 (4
th
Ed.), pp.
133-134 (5
th
Ed.)