4.1 - Aggregate Planning

Logistics Management and
Operations
Mariana Oliveira
Dep. of Engineering and Management
Centre for Management Studies
Instituto Superior Técnico,
University of Lisbon, Portugal
1 Logistics Management and Operations IST,

IST 2023
2023
Brief Presentation Research Group
▪ Planning
▪ September 25th: Chapter 4.1 Aggregate Planning
▪ September 26th : Chapter 4.2 Transportation Method + Handout delivery
▪ September 28th: Chapter 4.3 Master Production Scheduling and Capacity
Requirement Planning
▪ October 2nd: Case study: Strategy
▪ October 3rd – October 16th: Prof. Inês Duarte + Case study
▪ October 17th: Chapter 6 Lean Manufacturing
▪ October 19th: Seminar (13:30 – 15:30)
▪ October 23rd: Case study
▪ October 24th: Q&A
▪ Important dates
▪ October 17th: Handout deadline
▪ October 26th: Test
▪ Office hours
▪ Mondays 8h30-10h00
▪ Send email the day before
▪ mariana.m.oliveira@tecnico.ulisboa.pt
2 Logistics Management and Operations IST, 2023

Chapter 4.1: Aggregate Planning
Mariana Oliveira
Dep. of Engineering and Management
Centre for Management Studies
Instituto Superior Técnico,
University of Lisbon, Portugal
3 Logistics Management and Operations IST,

IST 2023
2023
Overview Research Group
▪ Strategic planning
▪ Tactical planning
▪ Operational planning

Aggregate Planning Research Group
▪ What is agreggate planning?

▪ A plan for capacity and production, in the intermediate term, so as
to satisfy current and future demand
▪ No discrimination between different products and services
▪ Reconciles the supply of capacity with the level of demand
▪ Medium-term capacity planning
▪ What do we want to determine?
▪ The optimal combination that minimizes costs
▪ Workforce level
▪ Production rate
▪ Inventory level

Aggregate Planning Research Group
▪ Cost sources: When an order is placed for a

product or service that cannot
▪ Production costs
currently be fulfilled (possible
▪ Labour costs reasons may include:
▪ Changes in production costs (hiring, unavailability of requested item,
training, lay off, etc.) the product under production,
pending delivery by
▪ Inventory holding costs manufacturer,…). Rushing to
▪ Backordering costs meet backorder demands can
escalate costs, as suppliers may
capitalize on the urgency and
▪ Techniques for development heightened demand by selling
materials at higher rates, special
▪ Cut-and-try: evaluates the cost of
shipping terms, potential
different strategies and decides revenue loss and increased
which to use customer service demands.
▪ Linear programming: models the Companies often face a
problem and solves it substantial risk of order
cancellations when products are
backordered.

Cut-and-try Research Group
▪ Pure strategies
▪ Level capacity: steady production and/or steady employment level
▪ Ignore fluctuations and keep activities level constant
▪ Chase strategy
▪ Adjust capacity to fit fluctuations in demand
▪ Stable workforce and variable working hours
▪ Flexible hours and overtime
▪ Subcontracting
▪ Mixed strategies: more flexibility, small modifications can

result in dramatically lower costs
▪ Usually obtained using mathematical formulations (LP) or heuristic
rules

Cut-and-try strategies Research Group
Strategy Description Associated costs

Chase strategy Match the production capacity to Hiring, lay-off and training
demand by hiring and laying off
employees as demand fluctuates
Stable workforce & Stable workforce level resorting to Costs of non-
variable hours overtime when demand increases productive/idle time
worked Cost of overtime
Level Capacity Stable workforce with stable Backordering costs
production rate, using stock to Inventory costs
respond to higher demand levels and
accumulating inventory in times of
low demand
Subcontracting Subcontracting production when in Quality and parts cost
higher demand periods

Exercise 4.1 Research Group
Jason Enterprises (JE) produces video telephones for the home markets.
Quality is quite as good as it could be at this point, but the selling price is low
and Jason can study market response, while spending more time in R&D.
At this stage, however, JE needs to develop an aggregate production plan
from January through June.
In order to elaborate the final plan, please calculate the cost of each
production strategy.
1 – Produce exactly to meet demand; vary workforce (assuming a starting
workforce of 10).
2 – Constant workforce; vary inventory and allow shortages (assuming a starting
workforce of 10) and satisfy the backorders.
3 – Constant workforce of 10; vary the working hours:
a) existence of stocks
b) stocks not allowed (note: workers might be without production)
Which is the best plan to follow?

Exercise 4.1: Data Research Group
Demand Initial Demand Cost Data

/Month Stock Forecast ▪ Inventory holding cost = €
January 200 500 10/unit./Month
▪ Backorder cost = € 20/unit ./Month
February 600
▪ Cost/Unit. Subcontracting = € 100
March 650 ▪ Hiring cost = € 50
April 800 ▪ Layoff cost = € 100
▪ Workforce Cost Regular = € 12,5
May 900
▪ Workforce cost Extra Time = € 18,75
June 800
Production data
▪ Labor hours required per unit = 4
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
1
▪ Days of work/month = 22
= ▪ Actual workforce = 10
𝑡𝑖𝑚𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡/𝑤𝑜𝑟𝑘𝑒𝑟
1 ▪ Number of hours/day/worker = 8
= = 0.25
4

Scenario 1: Produce exactly to meet demand; vary workforce (assuming

a starting workforce of 10)
▪ Produce exactly what is needed to satisfy demand
𝑃𝑡 = 𝐷𝑡 − 𝐼𝑡−1
▪ Do not have backordering or inventory costs
𝐼𝑡 = 𝑃𝑡 + 𝐼𝑡−1 − 𝐷𝑡
▪ Allowed to hire or layoff according to the production needs for that
time period

Scenario 1: Exact production and variable workforce Jan Feb Mar Apr May Jun
Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Total production
Final Inventory
Inventory
Backorders
Inventory cost
Backorders cost
Workforce size
Workforce hired
Workforce lay-off
Hiring cost
Layoff cost
Overtime production hours required
Regular time cost
Overtime cost
Total cost

Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Total production 500 - 200
Final Inventory
Inventory
Backorders
Produce exactly what is needed to satisfy demand
Inventory cost
𝑷𝒕 = 𝑫𝒕 − 𝑰𝒕−𝟏
Backorders cost
Workforce size
Workforce hired
Workforce lay-off
Hiring cost
Layoff cost
Regular time cost
Overtime cost
Total cost

Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Total production 300
Final Inventory 300+200-
500
Inventory
Backorders
Inventory cost
Do not have backordering or inventory costs
Backorders cost
𝑰𝒕 = 𝑷𝒕 + 𝑰𝒕−𝟏 − 𝑫𝒕
Workforce size
Workforce hired
Workforce lay-off
Hiring cost
Layoff cost
Regular time cost
Overtime cost
Total cost
Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Total production 300 600 650 800 900 800
Final Inventory 0
Inventory
Backorders
Inventory cost
Backorders cost
Workforce size Produce exactly what is needed to satisfy demand
Workforce hired 𝑷𝒕 = 𝑫𝒕 − 𝑰𝒕−𝟏
Workforce lay-off
Hiring cost
Layoff cost
Regular time cost
Overtime cost
Total cost

Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Final Inventory 0 0 0 0 0 0
Inventory 0 0 0 0 0 0
Backorders 0 0 0 0 0 0
Inventory cost
Backorders cost
Workforce size
Workforce hired
Workforce lay-off
Do not have backordering or inventory costs
Hiring cost
Layoff cost
Regular time cost
Overtime cost
Total cost

Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Inventory cost
Backorders cost We do not consider
Workforce size overtime since we hire and
Workforce hired fire according to production
Workforce lay-off needs
Hiring cost
Layoff cost
Overtime production hours required 0 0 0 0 0 0
Regular time cost
Overtime cost
Total cost

Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Inventory cost
Backorders cost
Workforce size (300/44) (600/44) (650/44) (800/44) (900/44) (800/44)
Workforce hired
Workforce lay-off
Hiring cost
Layoff cost
Regular time cost 𝑷𝒕 = 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 × 𝑳𝒂𝒃𝒐𝒖𝒓𝑯𝒐𝒖𝒓𝒔𝒕 × 𝑾𝒕 + 𝑶𝒕 × 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚
Overtime cost 𝑷𝒕 = 0.25 × 𝟐𝟐 × 𝟖 × 𝑾𝒕 = 44 × 𝑾𝒕
Total cost 𝑾𝒕 = 𝑷𝒕 /𝟒𝟒
Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Inventory cost
Backorders cost
Workforce size 7 14 15 19 21 19
Workforce hired 0 +7 +1 +4 +2 0
Workforce lay-off -3 0 0 0 0 -2
Hiring cost
Layoff cost
Regular time cost
Overtime cost 𝑾𝒕= 𝑾𝒕−𝟏 + 𝑯𝒕 − 𝑭𝒕
Total cost

Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Inventory cost 0 0 0 0 0 0
Backorders cost 0 0 0 0 0 0
Workforce hired 0 7 1 4 2 0
Workforce lay-off 3 0 0 0 0 2
Hiring cost
Layoff cost
Regular time cost
Overtime cost
Total cost

Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Hiring cost 0 50 * 7 50 * 1 50 * 4 50 * 2 0
Layoff cost 100 * 3 0 0 0 0 100 * 2
Regular time cost
Overtime cost
Hiring cost is 50 euros and
Total cost
layoff cost is 100 euros
Scenario 1: Exact production and variable Jan Feb Mar Apr May Jun
workforce
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Inventory 0 0
Labour cost at0regular time
0 0
is 12,5 €/hour 0
Backorders 0 0
Each worker works 8h/day,0 22days/month
0
= 22 0* 8 = 176h/month
0
Hiring cost 0 350 50 200 100 0
Layoff cost 300 0 0 0 0 200
Regular time cost 176*7*12.5 176*14*12.5 176*15*12.5 176*19*12.5 176*21*12.5 176*19*12.5
Overtime cost 0 0 0 0 0 0
Total cost

Scenario 1: Exact production and variable Jan Feb Mar Apr May Jun
workforce
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Hiring cost 0 350 50 200 100 0
Layoff cost 300 0 0 0 0 200
Regular time cost 15400 30800 33000 41800 46200 41800
Total cost 15700 31150 33050 42000 46300 42000

Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Workforce hired 0
Total7 cost of this
1
scenario
4
= 2102002 0
Hiring cost 0 350 50 200 100 0
Layoff cost 300 0 0 0 0 200
Total cost 15700 31150 33050 42000 46300 42000

Scenario 2: Constant workforce; vary inventory and allow shortages

(assuming a starting workforce of 10) and satisfy the backorders
▪ It is not possible to hire or layoff workers
▪ Production capacity remains the same throughout the planning period
𝑃𝑡 = 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 × 𝐿𝑎𝑏𝑜𝑢𝑟𝐻𝑜𝑢𝑟𝑠𝑡 × 𝑊𝑡 =
0.25𝑢𝑛𝑖𝑡𝑠 8ℎ 22𝑑𝑎𝑦𝑠
= × × × 10 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 =
ℎ 𝑑𝑎𝑦 𝑚𝑜𝑛𝑡ℎ
= 440 𝑢𝑛𝑖𝑡𝑠
▪ Backorders and Inventory is allowed

Scenario 2: Constant workforce and variable stock Jan Feb Mar Apr May Jun
Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Final Inventory
Inventory
Backorders
Inventory cost
Backorders cost
Hiring cost
Layoff cost
Regular time cost
Overtime cost
Total cost

Scenario 2: Constant workforce and Jan Feb Mar Apr May Jun
variable stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Final Inventory 440+200-500 440+140-600 440-20-650 440-230-800 440-590-900 440-1050-800
Inventory
Backorders
Inventory cost 𝑰𝒕 = 𝑷𝒕 + 𝑰𝒕−𝟏 − 𝑫𝒕
Backorders cost
Hiring cost
Layoff cost
Regular time cost
Overtime cost
Total cost

variable stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Final Inventory 140 - 20 - 230 - 590 - 1050 - 1410
Inventory 140 0 0 0 0 0
Backorders 0 20 230 590 1050 1410
Inventory cost 140*10 0 0 0 0 0
Backorders cost 0 20*20 230*20 590*20 1050*20 1410*20
Hiring cost
Layoff cost
Overtime production hours required 0 0 0 0
Inventory holding cost0= 10€/unit0
Regular time cost Backorder cost = 20€/unit
Overtime cost
Total cost

variable stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Final Inventory 140 - 20 - 230 - 590 - 1050 - 1410
Inventory 140 0 0 0 0 0
Backorders 0 20 230 590 1050 1410
Backorders cost 0 400 4600 11800 21000 28200
Hiring cost 0 0 0 0 0 0
Layoff cost 0 0 0 0 0 0
Regular time cost
Overtime cost
Total cost

variable stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Final Inventory 140 - 20 - 230 - 590 - 1050 - 1410
Inventory 140 0
Labour cost at0 regular time
0 0
is 12,5 €/hour 0
Backorders
Each0 worker works
20 230
8h/day, 590
22days/month = 221050 1410
* 8 = 176h/month
Backorders cost 0 400 4600 11800 21000 28200
Total cost

variable stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Final Inventory 140 - 20 - 230 - 590 - 1050 - 1410
Inventory 140 0 0 0 0 0
Backorders 0 20 230 590 1050 1410
Backorders cost 0 400 4600 11800 21000 28200
Total cost 23400 22400 26600 33800 43000 50200

variable stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Final Inventory 140 - 20 - 230 - 590 - 1050 - 1410
Inventory 140 0 0 0 0 0
Backorders 0 20 230 590 1050 1410
Backorders cost 0 400 4600 11800 21000 28200
Workforce hired 0 0
Total cost
0
of this scenario
0
= 199400
0 0
Total cost 23400 22400 26600 33800 43000 50200

Scenario 3a: Constant workforce of 10; vary the working hours, with
existence of stocks
▪ Backorders and Inventory is allowed
▪ Production capacity may be adapted using overtime, if needed:
▪ If regular production and inventory is enough to satisfy demand
▪ Produce only on regular hours
▪ Extra production is inventory
▪ If regular production and inventory is not enough to satisfy demand
▪ Produce the extra units needed in overtime
𝑃𝑡 = 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 × 𝐿𝑎𝑏𝑜𝑢𝑟𝐻𝑜𝑢𝑟𝑠𝑡 × 𝑊𝑡 + 𝑂𝑡 × 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦


Scenario 3a: Constant workforce, overtime and stock Jan Feb Mar Apr May Jun
Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Total production
Final Inventory
Inventory
Backorders
Inventory cost
Backorders cost
Hiring cost
Layoff cost
Regular time cost We consider constant workforce
Overtime cost
Total cost

Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Final Inventory Regular production capacity:
Inventory 500 – 200 = 300 < 440 𝑷𝒕 = 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 × 𝑳𝒂𝒃𝒐𝒖𝒓𝑯𝒐𝒖𝒓𝒔𝒕 × 𝑾𝒕 =
𝟎.𝟐𝟓𝒖𝒏𝒊𝒕𝒔 𝟖𝒉 𝟐𝟐𝒅𝒂𝒚𝒔
Backorders × × × 𝟏𝟎 𝒘𝒐𝒓𝒌𝒆𝒓𝒔 =
𝒉𝒐𝒖𝒓 𝒅𝒂𝒚 𝒎𝒐𝒏𝒕𝒉
Inventory cost
𝟒𝟒𝟎 𝒖𝒏𝒊𝒕𝒔
Backorders cost
Hiring cost
Layoff cost
𝟒𝟒𝟎, 𝒊𝒇 𝑫𝒕 − 𝑰𝒕−𝟏 < 𝟒𝟒𝟎
Overtime production hours required 𝑷𝒕 = ቊ
Regular time cost
𝑫𝒕 − 𝑰𝒕−𝟏 , 𝒐𝒕𝒉𝒆𝒓𝒘𝒊𝒔𝒆
Overtime cost
Total cost

Scenario 3a: Constant workforce, Jan Feb Mar Apr May Jun
overtime and stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Final Inventory 440+200-500
Inventory
Backorders 𝑰𝒕 = 𝑷𝒕 + 𝑰𝒕−𝟏 − 𝑫𝒕
Inventory cost
Backorders cost
Hiring cost
Layoff cost
Regular time cost
Overtime cost
Total cost

Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Total production 440 460
Final Inventory 140
600 – 140 = 460 > 440
Inventory
Backorders
Regular production capacity:
Inventory cost
𝑷𝒕 = 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 × 𝑳𝒂𝒃𝒐𝒖𝒓𝑯𝒐𝒖𝒓𝒔𝒕 × 𝑾𝒕 =
Backorders cost
Workforce size 10 10 10 × × 10 × 𝟏𝟎10𝒘𝒐𝒓𝒌𝒆𝒓𝒔10=
Workforce hired 0 0 0 𝟒𝟒𝟎
0 𝒖𝒏𝒊𝒕𝒔 0 0
Hiring cost
Layoff cost
𝟒𝟒𝟎, 𝒊𝒇 𝑫𝒕 − 𝑰𝒕−𝟏 < 𝟒𝟒𝟎
Regular time cost
Overtime cost
Total cost

Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Total production 440 460
Final Inventory 140 0
Inventory
Inventory cost
Backorders cost
Hiring cost
Layoff cost
Regular time cost
Overtime cost
Total cost

Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Inventory
Regular production capacity:
Inventory cost
𝑷𝒕 = 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 × 𝑳𝒂𝒃𝒐𝒖𝒓𝑯𝒐𝒖𝒓𝒔𝒕 × 𝑾𝒕 =
Backorders cost
Workforce size 10 10 10 × × 10 × 𝟏𝟎10𝒘𝒐𝒓𝒌𝒆𝒓𝒔10=
Workforce hired 0 0 0 𝟒𝟒𝟎
0 𝒖𝒏𝒊𝒕𝒔 0 0
Hiring cost
Layoff cost
𝟒𝟒𝟎, 𝒊𝒇 𝑫𝒕 − 𝑰𝒕−𝟏 < 𝟒𝟒𝟎
Regular time cost
Overtime cost
Total cost

Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Inventory 140 0 0 0 0 0
Inventory cost
Backorders cost
𝑰𝒕 = 𝑰+ −
𝒕 − 𝑰𝒕
Hiring cost
Layoff cost
Regular time cost
Overtime cost
Total cost

Scenario 3a: Constant workforce, overtime and Jan Feb Mar Apr May Jun
stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
𝑷𝒕 = 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 × 𝑳𝒂𝒃𝒐𝒖𝒓𝑯𝒐𝒖𝒓𝒔𝒕 × 𝑾𝒕 + 𝑶𝒕 × 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 =
Inventory 140
𝟎.𝟐𝟓𝒖𝒏𝒊𝒕𝒔 𝟖𝒉𝒐𝒖𝒓𝒔 0
𝟐𝟐𝒅𝒂𝒚𝒔 0 0 𝟎.𝟐𝟓𝒖𝒏𝒊𝒕𝒔 0 0
Backorders
× 0
× 0 × 𝟏𝟎 0𝒘𝒐𝒓𝒌𝒆𝒓𝒔 +0 ×0 𝑶𝒕 = 0
𝒉𝒐𝒖𝒓 𝒅𝒂𝒚 𝒎𝒐𝒏𝒕𝒉 𝒉𝒐𝒖𝒓
Inventory cost 𝟎. 𝟐𝟓𝐮𝐧𝐢𝐭𝐬
𝟒𝟒𝟎 𝐮𝐧𝐢𝐭𝐬 + × 𝑶𝒕 ֞
Backorders cost 𝐡𝐨𝐮𝐫
(𝑷𝒕 −𝟒𝟒𝟎)
Workforce size 10 10֞ 𝑶𝒕 = 10 10 10 10
𝟎.𝟐𝟓
Hiring cost
Layoff cost
Overtime production hours required 0 (460-440)*4 (650-440)*4 (800-440)*4 (900-440)*4 (800-440)*4
Regular time cost
Overtime cost
Total cost

stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Inventory 140 0 0 0 0 0
Inventory cost 140*10 0 0 0 0 0
Hiring cost Inventory holding cost = 10€/unit
Layoff cost Backorder cost = 20€/unit
Regular time cost
Overtime cost
Total cost

stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Inventory 140 0 0 0 0 0
Regular time cost
Overtime cost
Total cost

overtime and stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Inventory 140 0
0 0
is 12,5 €/hour 0
Backorders 0 0
Each worker works 8h/day,0 22days/month
0
= 22 * 08 = 176h/month
0
Overtime cost
Total cost

overtime and stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Inventory 140 0 0 0 0 0
Backorders 0 0 0 Labour cost
0 on overtime
0 is 18,750 €/hour
Overtime cost 0 80*18.75 840*18.75 1440*18.75 1840*18.75 1440*18.75
Total cost

Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Inventory 140 0 0 0 0 0
Overtime cost 0 1500 15750 27000 34500 27000
Total cost 23400 23500 37750 49000 56500 49000

Demand forecast 500 600 650 800 900 800

Days per month 22 22 22 22 22 22
Inventory 140 0 0 0 0 0
Workforce hired 0
Total0 cost of this
0
scenario
0
= 2391500 0
Overtime cost 0 1500 15750 27000 34500 27000
Total cost 23400 23500 37750 49000 56500 49000

Scenario 3b: Constant workforce of 10; vary the working hours, with
stocks not allowed (note: workers might be without production)
▪ Backorders and Inventory are not allowed
▪ Production capacity may be adapted using overtime, if needed:
▪ If regular production and inventory is enough to satisfy demand
▪ Produce only what is needed to meet demand – no stock policy
𝑃𝑡 = 𝐷𝑡 − 𝐼𝑡−1
▪ If regular production and inventory is not enough to satisfy demand
▪ Produce the extra units needed in overtime
𝑃𝑡 = 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 × 𝐿𝑎𝑏𝑜𝑢𝑟𝐻𝑜𝑢𝑟𝑠𝑡 × 𝑊𝑡 + 𝑂𝑡 × 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦

Scenario 3b: Constant workforce, overtime Jan Feb Mar Apr May Jun
and no stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Total production
Final Inventory
Inventory
Backorders
Inventory cost
Backorders cost
Hiring cost
Layoff cost
Regular time cost We consider constant workforce
Overtime cost
Total cost

and no stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Total production 500-200
Final Inventory
Inventory Produce exactly what is needed to satisfy demand
Backorders 𝑷𝒕 = 𝑫𝒕 − 𝑰𝒕−𝟏
Inventory cost
Backorders cost
Hiring cost
Layoff cost
Regular time cost
Overtime cost
Total cost

and no stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Final Inventory 300+200-500
Inventory
Backorders
Inventory cost
Backorders cost
Hiring cost
Layoff cost
Regular time cost
Overtime cost
Total cost

and no stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Total production 300 600-0 650-0 800-0 900-0 800-0
Final Inventory 0
Inventory
Backorders Produce exactly what is needed to satisfy demand
Inventory cost 𝑷𝒕 = 𝑫𝒕 − 𝑰𝒕−𝟏
Backorders cost
Hiring cost
Layoff cost
Regular time cost
Overtime cost
Total cost

and no stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Inventory cost
𝑰𝒕 = 𝑷𝒕 + 𝑰𝒕−𝟏 − 𝑫𝒕 𝑰𝒕 = 𝑰+ −
𝒕 − 𝑰𝒕
Backorders cost
Hiring cost
Layoff cost
Regular time cost
Overtime cost
Total cost

and no stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
𝑷𝒕 = 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 × 𝑳𝒂𝒃𝒐𝒖𝒓𝑯𝒐𝒖𝒓𝒔𝒕 × 𝑾𝒕 + 𝑶𝒕 × 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 =
Inventory 𝟎.𝟐𝟓𝒖𝒏𝒊𝒕𝒔 0 𝟖𝒉𝒐𝒖𝒓𝒔 𝟐𝟐𝒅𝒂𝒚𝒔
0 0 0 0
𝟎.𝟐𝟓𝒖𝒏𝒊𝒕𝒔 0
Backorders
×0 ×0 × 𝟏𝟎0 𝒘𝒐𝒓𝒌𝒆𝒓𝒔0 + 0
× 𝑶𝒕 = 0
𝒉𝒐𝒖𝒓 𝒅𝒂𝒚 𝒎𝒐𝒏𝒕𝒉 𝒉𝒐𝒖𝒓
Inventory cost 𝟎. 𝟐𝟓𝐮𝐧𝐢𝐭𝐬
𝟒𝟒𝟎 𝐮𝐧𝐢𝐭𝐬 + × 𝑶𝒕 ֞
Backorders cost 𝐡𝐨𝐮𝐫
(𝑷 −𝟒𝟒𝟎)
Workforce size 10 10 ֞ 𝑶𝒕 = 10 𝒕 10 10 10
𝟎.𝟐𝟓
Hiring cost
Layoff cost
Overtime production hours required 300<440 (600-440)*4 (600-440)*4 (600-440)*4 (600-440)*4 (600-440)*4
Regular time cost
Overtime cost
Total cost

and no stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Hiring cost
Layoff cost
Regular time cost
Overtime cost
Total cost

and no stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Regular time cost
Overtime cost
Total cost

and no stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Inventory 0 0
0 0
is 12,5 €/hour 0
Backorders
Each0worker works
0
8h/day,0 22days/month
0
= 22 0* 8 = 176h/month
0
Overtime cost
Total cost

and no stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Backorders 0 0 0 Labour cost
0 on overtime
0 is 18,750 €/hour
Overtime cost 0 640*18.75 840*18.75 1440*18.75 1840*18.75 1440*18.75
Total cost

and no stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Overtime cost 0 12000 15750 27000 34500 27000
Total cost 22000 34000 37750 49000 56500 49000

and no stock
Demand forecast 500 600 650 800 900 800
Days per month 22 22 22 22 22 22
Workforce hired 0 0
Total cost
0
of this scenario
0
= 248250
0 0
Overtime cost 0 12000 15750 27000 34500 27000
Total cost 22000 34000 37750 49000 56500 49000

Scenarios Strategy Cost
1 Exact production and variable workforce 210200

2 Constant workforce and variable stock 199400
3a Constant workforce, overtime and stock 239150
3b Constant workforce, overtime and no stock 248250
▪ Is it clear which scenario to choose?

▪ What other features could be added to the analysis?
▪ Hiring/Layoff:
▪ Available workforce with the required competences
▪ May be damaging for employees’ perception of the company
▪ Backorders: may be damaging for the company’s relationship with costumers
(loss of future sales)
▪ Overtime: Workforce satisfaction decreases, and fatigue levels increase
▪ Workers idle time: Workforce satisfaction decreases

Operations Research Research Group
“Operations Research (or

Management Science) means a
scientific approach to decision
making, which seeks to determine
how best to design and operate a
system, usually under conditions
requiring the allocation of scarce
resources."

Conceptual model
Problem formulation
Model building
Real world system Symbolic model
Interpretation Solve the model
Solution

▪ Building a model
Determine what the decision maker wants to know
Define the appropriate decision variable, reflecting

the needs
Formulate an objective function computing

benefits/costs
Formulate mathematical constraints indicating the

interplay between the different variables

Operations research Research Group
Problem statement for linear programming aggregate planning model

▪ Given
▪ A planning horizon t=1,2,…T
▪ The demand forecast in each time period 𝑡
▪ The inventory holding cost per unit
▪ The backordering cost
▪ The hiring cost
▪ The layoff cost
▪ The cost of labour per hour
▪ The initial workforce size
▪ The productivity – units produced per worker per time period, or equivalent
▪ The initial inventory size
▪ Determine for each time period in the planning horizon
▪ The workforce level: computing the number of workers hired and layoff
▪ The production level: determining the production during regular time, overtime and
subcontracted
▪ The inventory level: considering inventory and backorders
▪ So as to
▪ Minimize costs while meeting demand

Linear programming aggregate
Research Group
planning model
▪ Define indices and sets
▪ The time horizon
▪ 𝑡 ∈ T the set of time periods, T = 1,2, … , |T|
▪ Define parameters
▪ Costs
▪ 𝑐𝐻 = Cost of hiring one worker
▪ 𝑐𝐹 = Cost of firing one worker
▪ 𝑐𝐼 = Cost of holding one unit in inventory for one time period t
▪ 𝑐𝐵 = Cost of having one unit in backorder for one time period t
▪ 𝑐𝑅 = Cost of production during regular time
▪ 𝑐𝑂 = Cost of production in overtime
▪ Problem data
▪ 𝐷𝑡 = Demand forecast for time period t
▪ 𝐾 = Worker productivity
▪ 𝐿ℎ = Labour hours contracted per worker
▪ 𝑛𝑡 = Number of production days in time period t
▪ 𝐼0 = Initial inventory level
▪ 𝑊0 = Initial workorce size

Research Group
planning model
▪ Define the decisions variables

▪ The workforce level in each time period
▪ 𝑊𝑡 = Workforce size in period t
▪ 𝐻𝑡 = Number of employees hired in period t
▪ 𝐹𝑡 = Number of employees fired in period t
▪ The production level in each time period

▪ 𝑃𝑡 = Number of units produced in period t
▪ 𝑂𝑡 = Number of overtime production hours required in period t
▪ The inventory level in each time period

▪ 𝐼𝑡 = Inventory level in period t
+
▪ 𝐼𝑡 = Number of units in inventory in period t
−
▪ 𝐼𝑡 = Number of units in backorder in period t

Research Group
planning model
▪ Define the objective function
▪ Minimize total costs
𝑀𝑖𝑛𝑖𝑚𝑖𝑧𝑒 σ𝑡∈𝑇 (𝑐𝐻 𝐻𝑡 + 𝑐𝐹 𝐹𝑡 + 𝑐I 𝐼𝑡+ + 𝑐B 𝐼𝑡− + 𝑐R 𝐿ℎ 𝑊𝑡 + 𝑐𝑂 𝑂𝑡 )
▪ Define constraints
▪ Production capacity
𝑃𝑡 ≤ 𝐾 × 𝐿ℎ × 𝑛𝑡 𝑊𝑡 + 𝐾𝑂𝑡 ∀𝑡 ∈ 𝑇
▪ Inventory balance
𝐼𝑡 = 𝑃𝑡 + 𝐼𝑡−1 − 𝐷𝑡 ∀𝑡 ∈ 𝑇
𝐼𝑡 = 𝐼𝑡+ − 𝐼𝑡− ∀𝑡 ∈ 𝑇
▪ Worforce balance
𝑊𝑡 = 𝑊𝑡−1 + 𝐻𝑡 − 𝐹𝑡 ∀𝑡 ∈ 𝑇
▪ Variable type definition
𝑃𝑡 , 𝑊𝑡 , 𝐻𝑡 , 𝐹𝑡 , 𝑂𝑡 , 𝐼𝑡+ , 𝐼𝑡− ≥ 0 ∀𝑡 ∈ 𝑇
𝑃𝑡 , 𝑊𝑡 , 𝐻𝑡 , 𝐹𝑡 , 𝑂𝑡 , 𝐼𝑡+ , 𝐼𝑡− ∈ ℤ ∀𝑡 ∈ 𝑇

OpenSolver Research Group
▪ Spreadsheet solver: Easy to use

▪ Solves linear, integer and non-linear
problems
▪ It is open source
▪ Has no limits on model size
▪ Compatible with commercial solvers
▪ It is developed and maintained by
University of Auckland, New Zealand
▪ Uses COIN-OR CBC optimization engine
▪ Compatible with Windows and Mac
machines
▪ Download at: https://opensolver.org/

OpenSolver: Example Research Group
▪ You operate a small transportation company and you have three

drivers: John, Peter and Joanna.
▪ Three requests arrive and you have three drivers available to take the
servicee.
▪ The distance (in minutes) from each driver to each client is given in the
table below:
Client 1 Client 2 Client 3

John 8 7 7
Peter 11 9 14
Joanna 15 5 6

▪ What decisions do you need to make?

▪ Decide which driver goes to each client
▪ What is your objective?
▪ To minimize the response time
▪ What do you need to guarantee?
▪ That all drivers serve a client
▪ That all clientes are served
▪ How can you guarantee you have the best solution?
▪ Formulate and solve the mathematical problem

▪ Formulate the mathematical problem

▪ Define the decision variables
1, 𝑖𝑓 𝑑𝑟𝑖𝑣𝑒𝑟 𝑖 𝑖𝑠 𝑎𝑠𝑠𝑖𝑔𝑛𝑒𝑑 𝑡𝑜 𝑐𝑙𝑖𝑒𝑛𝑡 𝑗 𝑓𝑜𝑟 𝑖, 𝑗 = 1,2,3
𝑥𝑖𝑗 = ቊ
0, 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒
▪ Define the objective function
𝑀𝑖𝑛𝑖𝑚𝑖𝑧𝑒 8𝑥11 + 7𝑥12+ 7𝑥13+ 11𝑥21 + 9𝑥22+ 14𝑥23 + 15𝑥31 + 5𝑥32 + 6𝑥33
▪ Formulate the drivers’ constraint
3
෍ 𝑥𝑖𝑗 = 1 ∀ 𝑗 = 1,2,3
𝑖=1
▪ Formulate the clients’ constraint
3
෍ 𝑥𝑖𝑗 = 1 ∀ 𝑖 = 1,2,3
𝑗=1

▪ Insert data
▪ Indicate objective function’s cell
▪ Indicate variables’ cells
▪ Define variables’ type
▪ Add constraints
▪ Clear selection for
unconstrained variable cells
▪ Save model
▪ Define model settings
▪ Display model
▪ Solve
▪ Inspect solution

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Logistics Management and

1 Logistics Management and Operations IST,

2 Logistics Management and Operations IST, 2023

3 Logistics Management and Operations IST,

4 Logistics Management and Operations IST, 2023

▪ What is agreggate planning?

5 Logistics Management and Operations IST, 2023

▪ Cost sources: When an order is placed for a

6 Logistics Management and Operations IST, 2023

▪ Mixed strategies: more flexibility, small modifications can

7 Logistics Management and Operations IST, 2023

Strategy Description Associated costs

8 Logistics Management and Operations IST, 2023

Which is the best plan to follow?

9 Logistics Management and Operations IST, 2023

Demand Initial Demand Cost Data

10 Logistics Management and Operations IST, 2023

Scenario 1: Produce exactly to meet demand; vary workforce (assuming

11 Logistics Management and Operations IST, 2023

Demand forecast 500 600 650 800 900 800

12 Logistics Management and Operations IST, 2023

Demand forecast 500 600 650 800 900 800

13 Logistics Management and Operations IST, 2023

Demand forecast 500 600 650 800 900 800

Demand forecast 500 600 650 800 900 800

15 Logistics Management and Operations IST, 2023

Demand forecast 500 600 650 800 900 800

16 Logistics Management and Operations IST, 2023

Demand forecast 500 600 650 800 900 800

17 Logistics Management and Operations IST, 2023

Demand forecast 500 600 650 800 900 800

Demand forecast 500 600 650 800 900 800

19 Logistics Management and Operations IST, 2023

Demand forecast 500 600 650 800 900 800

20 Logistics Management and Operations IST, 2023

Demand forecast 500 600 650 800 900 800

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23 Logistics Management and Operations IST, 2023

Demand forecast 500 600 650 800 900 800

24 Logistics Management and Operations IST, 2023

Scenario 2: Constant workforce; vary inventory and allow shortages

25 Logistics Management and Operations IST, 2023

Demand forecast 500 600 650 800 900 800

26 Logistics Management and Operations IST, 2023

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29 Logistics Management and Operations IST, 2023

30 Logistics Management and Operations IST, 2023

31 Logistics Management and Operations IST, 2023

32 Logistics Management and Operations IST, 2023

𝑃𝑡 = 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 × 𝐿𝑎𝑏𝑜𝑢𝑟𝐻𝑜𝑢𝑟𝑠𝑡 × 𝑊𝑡 + 𝑂𝑡 × 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦

33 Logistics Management and Operations IST, 2023

Demand forecast 500 600 650 800 900 800

34 Logistics Management and Operations IST, 2023

Demand forecast 500 600 650 800 900 800

35 Logistics Management and Operations IST, 2023

36 Logistics Management and Operations IST, 2023