Aggregate Planning

Part A
A gardening tools manufacturing company Red Tomato’s sold a product through retailers. Red
Tomato’s operations consist of the assembly of purchased parts into a multipurpose gardening tool.
Because of the limited equipment and space required for its assembly operations, Red Tomato’s
capacity is determined mainly by the size of its workforce. The demand for Red Tomato’s gardening
tools from consumers is highly seasonal, peaking in the spring as people plant their gardens. This
seasonal demand ripples up the supply chain from the retailer to Red Tomato, the manufacturer.
The options Red Tomato has for handling the seasonality are adding workers during the peak
season, subcontracting out some of the work, building up inventory during the slow months, or
building up a backlog of orders that will be delivered late to customers. To determine how to best
use these options through an aggregate plan, Red Tomato’s vice president of supply chain starts
with the first task- building a demand forecast. Although Red Tomato could attempt to forecast this
demand itself, a much more accurate forecast comes from a collaborative process used by Both Red
Tomato and its retailers to produce the forecast shown in the Table 1. Red Tomato sells each tool
through retailers for $ 40. The company has a starting inventory in January of 1000 tools. At the
beginning of January, the company has a workforce of 80 employees. The plant has a total of 20
working days in each month, and each employee earns $ 4 per hour regular time. Each employee
works eight hours per days on straight time and the rest on overtime. The capacity of the production
operation is determined primarily by the total labor hours worked. Therefore, machine capacity does
not limit the capacity of the production operation. Because of labor rules, no employee works more
than 10 hours of overtime per month. The various costs are shown in Table 2.
Currently, Red Tomato has no limits on subcontracting, inventories, and stockouts/backlog. All
stockouts are backlogged and supplied from the following months’ production. Inventory costs are
incurred on the ending inventory in the month. The supply chain manger’s goal is to obtain the
optimal aggregate plan that allows Tomato to end June with at least 500 units (i.e., no stockouts at
the end of June and at least 500 units in inventory).
Table 1: Demand forecast Table 2: Costs for Red Tomato
Month Demand Forecast Item Cost
January 1, 600 Material cost $ 10/unit
February 3, 000 Inventory holding cost $2/unit/month
March 3, 200 Marginal cost of stockout/backlog $5/unit/month
April 3, 800 Hiring and training costs $300/worker
May 2, 200 Layoff cost $500/worker
June 2, 200 Labor hours required 4/unit
Regular time cost $4/hour
Overtime cost $6/hour
Cost of subcontracting $30/unit

a) Construct an aggregate plan that minimises the total cost at the same time maintaining high
level of customer service.
b) Design a formulation to solve the problem using Linear programming.
c) Assume that the same overall demand (16,000 units) is distributed over the six months in
such a way that the seasonal fluctuation of demand is higher, as shown in Table 3. Obtain
the optimal aggregate plan in this case.

Table 3: Demand forecast

Month Demand Forecast
January 1,000
February 3, 000
March 3, 800
April 4, 800
May 2, 000
June 1, 400

d) Assume that all other data are the same except that the costs of hiring and layoff are now
$50 each. Evaluate the total cost corresponding to the aggregate plan. Suggest an optimal
aggregate plan for the new cost structure.

Part B
Green Thumb Gardens is a large retail chain that has signed an exclusive contract to sell all
products made by Red Tomato Tools. Demand for Garden tools peaks in the spring months of
March and April, as gardeners prepare to begin planting. In planning the goal of both firms is
to maximise supply chain profits. Red Tomato and green Thumb are exploring how the timing
of retail promotions affects profitability. Are they in better position if they offer the price
promotion during the peak period or during a low demand period? Green Thumb’s vice
president of sales favours a promotion during the peak period because this increase revenue by
the largest amount. In contrast, Red Tomato’s vice president of manufacturing is against such a
move because it increases manufacturing costs. She favors a promotion during the low-demand
season because it levels demand and lowers production costs. Green Thumb estimates that
discounting a Red Tomato tool from $40 to $39 in any period results in the period demand
increasing by 10 percent because of increased consumption or substitution. Further, 20 percent
of each of the two following months’ demand is moved forward. Management would like to
determine whether it is more effective to offer the discount in January or April. Management
also consider the situation in which discounting a unit from $40 to $39 results in the period
demand by 100 percent because of increased consumption or substitution. Further, percent of
each of the two following months’ demand is moved forward. The supply chain team wants to
determine whether it is preferable to offer the discount in January or April these conditions.