Chapter 8: Aggregate Planning in a Supply Chain

Exercise Solutions :

We define a comprehensive set of decision variables that are utilized in problems 8-1 to
8-3 depending on the problem context.

Decision Variables:

Ht = # of workers hired in month t (t = 1,..,12)

Lt = # of workers laid-off in month t (t = 1,..,12)
Wt = # of workers employed in month t (t = 1,..,12)
Ot = # of hours of overtime in month t (t = 1,..,12)
It = # of units (000s) held in inventory at the end of month t (t = 1,..,12)
Ct = # of units (000s) subcontracted in month t (t = 1,..,12)
Pt = # of units (000s) produced in month t (t = 1,..,12)

Parameters:
Dt = # of units (000s) demanded in time period t (t = 1,…12)

Problem 8-1:
12 12 12 12
3200 ∑ W t +30 ∑ Ot + 3000 ∑ I t +20000 ∑ Pt
Minimize t=1 i=1 i=1 i=1
Subject to:

Inventory constraints:
I t−1 +P t −I t =D t , t=1 ,. . ,12
I 0=I 12=50

Overtime constraints:

Ot −20 W t ≤0, t=1 , .. . ,12

Production constraints:

6 Ot 960 W t
Pt − − ≤0 , t=1 , .. .12
1000 1000

Workforce constraints:

W t =1250 , t=0 , .. . ,12

Chapter 8: Aggregate Planning in a Supply Chain

Exercise Solutions :

(a) Worksheet 8.1 provides the solution to this problem and the corresponding aggregate
plan. The total cost of the plan is $360,400,000.

(b) If the number of overtime hours per employee were increased from 20 to 40 it would
result in decreasing the total cost to $356,450,000. So, it is advantageous to do it.

(c) If the number of employees is decreased to 1200 and the overtime hours per
employee are held at 20 and 40 then the total costs of the plan are $363,324,000 and
$357,422,000, respectively. If the number of employees is increased to 1300 and the
overtime hours per employee are held at 20 and 40 then the total costs of the plan are
$358,790,000 and $356,270,000, respectively. So, the value of additional overtime
increases as workforce size decreases.

Pt  1291.667, t  1,...12
(d) We add a new constraint: . The cost will be $363,049,982.

Problem 8-2:

We now include the subcontract option in the model:

12 12 12 12 12
3200 ∑ W t +30 ∑ Ot + 3000 ∑ I t +20000 ∑ Pt + 26000 ∑ C t
Minimize t=1 i=1 i=1 i=1 i=1
Subject to:

Inventory constraints:
I t−1 +P t +C t −I t =Dt , t=1 , .. , 12
I 0=I 12=50

Overtime constraints:

Ot −20 W t ≤0, t=1 , .. . ,12

Production constraints:

6 Ot 960 W t
Pt − − ≤0 , t=1 , .. .12
1000 1000

Workforce constraints:

W t =1250 , t=0 , .. . ,12

Worksheet 8-2 provides the solution to this problem.

Chapter 8: Aggregate Planning in a Supply Chain

Exercise Solutions :

(a) Without the subcontract option the total cost is $360,400,000 (from problem 8-1) and
the total number of units produced is 14,900,000. Thus, the cost per unit is $24.19.

(b) Third party production must be used in periods 5, 6, 7, and 10 for a total of 1,050,000
units. If the subcontract cost per unit decreases to $25 per unit then a total of 1,650,000
units must be acquired from this option.

(c) If the subcontract cost increases to $28 per unit then a total of 700,000 units must be
acquired from this option.

(d) The total number of units produced, including subcontract production, is 14,900. So,
using subcontract the total cost incurred is $357,450,000, which leads to an average cost
of $23.99 per unit. Without the subcontract option, the cost per unit is $24.18 (from a).
Therefore, it is still beneficial for Skycell to use subcontracting option even if the per unit
cost is higher. Without using subcontracting, Skycell would need to use overtime to
produce extra units to fulfill demand. The cost of using overtime is 1.5 times regular
labor cost. In addition, in the absence of subcontracting, holding costs will also increase
due to extra units being carried into future time periods.

Problem 8-3:

We define and include a new decision variable for this model called Tt, which represents
the number of temporary workers employed in time period t. Since hiring and layoff of
temporary workers is allowed, we include hiring and layoff costs in the model. Also,
note that there is no subcontract option available for this case. The LP model for this
case is shown below:

Minimize
12 12 12 12 12 12
800 ∑ H t +1200 ∑ Lt +3200 ∑ (W t +T t )+ 30 ∑ Ot +3000 ∑ I t + 20000 ∑ P t
t =1 t=1 t=1 i=1 i=1 i=1
Subject to:

Inventory constraints:
I t−1 +P t −I t =D t , t=1 ,. . ,12
I 0=I 12=50

Overtime constraints:

Ot −20(W t +T t )≤0 , t=1 , .. . ,12

Production constraints:
Chapter 8: Aggregate Planning in a Supply Chain

Exercise Solutions :

6 Ot 960(W t +T t )
Pt − − ≤0 , t=1 , .. .12
1000 1000

Full-Time Workforce constraints:

W t =1250 , t=0 , .. . ,12

Temporary Workforce constraints:

Tt  Tt 1  H t  Lt  0, t  1,...,12
Tt<=50

(a)
Total cost = $ 358,210,000

Ht Lt Tt Wt Pt
Period # Productio
# Hired # Laid off # Temp Workforce n
0 0 0 0 1,250 0
1 0 - - 1,250 950
2 0 - - 1,250 1184
3 - - 0 1,250 1200
4 50 - 50 1,250 1404
5 0 - 50 1,250 1404
6 - - 50 1,250 1404
7 - 0 50 1,250 1404
8 - 50 - 1,250 900
9 - - - 1,250 1100
10 (0) - - 1,250 1200
11 50 - 50 1,250 1346
12 0 - 50 1,250 1404
Chapter 8: Aggregate Planning in a Supply Chain

Exercise Solutions :

(b)

Total cost = $ 356,658,667

Ht Lt Tt Wt Pt
Period # Productio
# Hired # Laid off # Temp Workforce n
0 0 0 0 1,250 0
1 0 - - 1,250 950
2 (0) - - 1,250 1100
3 0 - - 1,250 1200
4 100 - 100 1,250 1326
5 - - 100 1,250 1458
6 0 - 100 1,250 1458
7 - 0 100 1,250 1458
8 - 100 - 1,250 900
9 (0) - - 1,250 1100
10 (0) - - 1,250 1200
11 96 - 96 1,250 1292
12 4 - 100 1,250 1458

(c) If Skycell only carries 1100 permanent employees but has 200 seasonal employees,
the total cost will be reduced to $356,984,667, a 0.34% cost saving compared to (a)

(d) Since there is no difference between regular employees and temporary employees in
terms of productivity and cost of hiring and layoffs, this problem is equivalent to using at
most 1300 employees and allowing hiring and layoffs. So, the formulation can be revised
as follows.

12 12 12 12 12 12
800 H t  1200 Lt  3200 Wt  30 Ot  3000 I t  20000 Pt
Minimize t 1 t 1 t 1 i 1 i 1 i 1

Subject to:

Inventory constraints:
I t−1 +P t −I t =D t , t=1 ,. . ,12
I 0=I 12=50

Overtime constraints:

Ot −20 W t ≤0, t=1 , .. . ,12

Chapter 8: Aggregate Planning in a Supply Chain

Exercise Solutions :

Production constraints:

6 Ot 960 W t
Pt − − ≤0 , t=1 , .. .12
1000 1000

Full-Time Workforce constraints:

W t −W t−1 −H t +Lt =0 , t=1 ,. .. , 12

W 0 =1250
W t ≤1300 , t=0 , .. . ,12

Temporary Workforce constraints: (not needed)

Total cost = $ 356,926,500

Ht Lt Wt Pt
Period Productio
# Hired # Laid off # Temp # Permanent # workforce n
0 0 0 50 1,250 1,300 0
1 - 310 0 990 990 950
2 156 - 0 1,146 1,146 1100
3 154 - 50 1,250 1,300 1284
4 - - 50 1,250 1,300 1404
5 - - 50 1,250 1,300 1404
6 - - 50 1,250 1,300 1404
7 - - 50 1,250 1,300 1404
8 - 363 0 938 938 900
9 208 - 0 1,146 1,146 1100
10 44 - 0 1,190 1,190 1142
11 110 - 50 1,250 1,300 1404
12 0 - 50 1,250 1,300 1404

So, if the no layoff no hiring policy for the permanent employees can be relaxed, Skycell
will be able to further reduce the total cost. However, the reduction from case (c) is
marginal.