AP - Methods

The Graphical
Method to Aggregate
Planning
ADM 3301 ~ Rim Jaber
Aggregate Planning -- RECAP
Aggregate Planning: Intermediate-range

capacity planning, usually covering 3 to 18
months.
The Goal of aggregate planning is to achieve
a production plan that will effectively utilize
the organizations resources to satisfy the
expected demand and Inventory
requirements, while minimizing the sum of
costs related to regular labor time, overtime,
subcontracting, inventory holding costs, and
costs associated with changing the size of the
workforce.
Constraints involve the maximums of the
The Graphical Approach

to Aggregate Planning
Forecast the demand for each period

Determine the capacity for regular
time, overtime, and subcontracting
Determine labor costs, hiring and firing
costs, and inventory holding costs
Consider company policies that may
apply to the worker or the stock levels
Develop alternative plans, and
examine their total costs
Determining the
Aggregate Plan: Example
1
Step #1: Collect relevant data:

Forecasts, inventory levels, desired
final inventory levels, current and
future resource availability,
production times and costs.
Example 1-Relevant Data: collect of the forecasts

and capacity
Month Forecasted Demand
January
1100
February
1500
March
1800
April
1600
May
900
June
1100
8000
Total
Capacity: 27 employees @ 21 days/month @ 8 hours/day
Example 1: Beginning inventory levels, Production time and relevant

costs
Relevant costs:
Raw materials
Inventory
Backlogs
Sub-contracting
Hiring
Firing
Regular cost
OT cost
Production hours
Inventory:
beg. inventory
safety stock
$100/unit
$12/unit/month
$20/unit/month
$45/unit
$200
$250
$12/hr (8 hrs/day)
$18/hr
3hrs/unit
400 units
25% of demand
Example 1-Relevant Data: Production Requirements and Inventory levels
(1)
Beg
Inv
400
January
February 275
375
March
450
April
400
May
225
June
(2)
Month
Dem.
1100
1500
1800
1600
900
1100
8000
(3)=0.25*(2)
Safety
Stock
275
375
450
400
225
275
(5)=(1)+(4)-(2)
(4)=(2)+(3)-(1)
Quantity
produced
975
1600
1875
1550
725
1150
7875
End
Inventory
275
375
450
400
225
275
2000
P.S.: The Quantity Produced to meet the monthly requirement

includes the forecasted demand and Safety Stock.
Total Production Quantity= 7875 units
Determining the Aggregate Plan for

Example1-- Next Step
Step # 2: Analyze per unit costs for each of the

strategies:
Determine the preference thresholds

Estimates the cost of each option on a homogeneous
unit of measure (e.g. $/hr, $/month, $/unit)
Compare between options using this unit cost to
determine at what moment an option becomes
preferable over another (refer to Example 2 and
Example 4 on how to compute Preference Thresholds)

Example:
- Overtime (unit cost $6/hr {$18/hr $12/hr})
Versus hire/fire ($450 = Cost of Hiring + Cost of
Firing = $200 + $250 )
- Overtime (unit cost $54/unit{ $18/hr*3hr/unit}
Versus Sub-Contracting (unit cost $45/unit)
- Idle time (unit cost $12/hr) Versus fire/hire
($450)
- Sub-contracting (unit cost $45/unit) versus
Backlogs ($56/unit {$20/unit + ($12/hr*3hr)}

Step # 3: Develop and evaluate alternative plans:
Development of plans corresponding to dominant
strategies and evaluation of total cost
For Example 1:
The dominant strategies are: Chase Strategy and
Level Strategy
The Graphical method is used for the evaluation of
total cost of the aggregate plan 1 using the Chase
strategy and the aggregate plan 2 using Level Strategy
10
Example 1: Chase Strategy

A possible option:
Hire and layoff workers as needed to
produce exact quantity to meet the
monthly requirement (forecasted demand
and Safety Stock). Inventory is not used to
absorb demand fluctuations.
Prepare an aggregate Production plan using
this option and determine its cost using the
graphical method
11
Example 1: Development and evaluation of aggregate plan 1 using the Chase Strategy
January
February
March
April
May
June
725
1150
Total
Production required
(1)
975
1600
1875
1550
2925
4800
5625
4650
2175
3450
27
18
29
34
28
13
168
168
168
168
168
168
17.42
18
28.6
29
33.5
34
27.7
28
12.95
13
20.54
21
11
Hours of Prod. required

(2)=(1)*3/hr/units
Employee available
(3)
Hours/month/empl
(4)=21day*8hr/day
Employee required
(5)=(2)/(4)
Employee required (Int.)

Employees Hired
(7)
Cost of Hiring
(8)=(7)*$200
$ 2200-
1000-
$ 1600
15
4,800
Employees Fired
(9)
$ 1,500
$3750
-
56,448
$ 26,208
Cost of Firing
(10)=(9)*$250
$ 2250
-
$-
$ 7,500
Cost of Salaries
(11)=(6)*(4)* $12/hr
$ 36,288
58,464
68,544
Total inventory Cost: 2000 units* 12 = $24,000

$ 42,336
Total Cost:
$ 288,288
$
324,588
Level Strategy
Maintain a constant production rate and workforce
level throughout the six month period. Inventory is
build up during periods of less than average demand;
alternatively, delivery lead time, Backlogs, may be
allowed to grow during periods of high demand.
Maintain a Monthly production rate of 1313
units/month
(Total Quantity Produced/6 = 7875/6 = 1312.5).
Maintain a constant workforce of 24 employees/month
{(1313units * 3hr)/168 = 23.4 employees/month }
Prepare an aggregate plan using this option and
determine its cost.
13
Example 1: Development and evaluation of

aggregate plan 2 using the Level Strategy
14
Comments on Aggregate Plan 2

using the Level Strategy
1.
2.
In the Production Row- June Column you can

have the following 2 options:
The quantity produced to be 1310 units
(7875units (1313units*5month))
Then there is no need to compute the Cost of Raw
Materials, which is $787,500( 7875 units *
$100/units), cause it is a fixed cost for both plan 1
and plan 2
The quantity produced is similar to other months,
and thus 1313 units.
Then you have to include the Cost of Raw materials in
plan 1, which is $787,500; and the Cost of Raw
material in plan 2, which is $787,800; cause the total
15
number of units produced in each plan is variable.
Comments on Aggregate Plan 2 using

the Level Strategy
Notice the following
January
February
March
April
May
June
-61
-348
65
Final Inventory
(1)
Safety Stock
613
426
275
375
450
400
338
51
275
225
275
(2)
Excess units in
Safety Stock
(3)=max{ (1)-(2), 0}
16
Determining the Aggregate Plan

for Example 1- Last Step
Choose the aggregate plan:

The best plan is chosen and implemented.
The Total Cost of aggregate plan 1 (Chase Strategy) = $324,588

The Total Cost of aggregate plan 2 (Level Strategy) = $315,782
Given these two options the plan to be implemented is the one with
them minimum cost Aggregate plan 2 using the Level Strategy.
17
Example 2
Consider a company that experiences seasonal

demand for its product family.
The company estimates that the typical unit of its
product requires 20 hours to produce. Each
employee is estimated to contribute 162 hours per
month, so each employee can produce about
162 / 20 = 8.1 units per month on average.
Estimates indicate that it costs $300 to hire an
employee and $400 to lay off an employee.
At least 1000 units should be available as work-inprocess inventory and safety stock, and this
amount will be on hand at the start of the planning
horizon. It costs $6 per month to hold a unit in
inventory.
The demand for the next twelve months is given in
the following table. ADM 3301 ~ Rim Jaber
18
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678 22,50
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Example 2: Demand
19
Forecasted Demand
FORECAST
3000
2025
0
1
7 8
9 10 11 12
MONTH
20
Example 2
Assume that the company begins
the planning year with a workforce of 250, and that employees
are paid $18 per hour
21
Step # 2: Preference
If the demand is more than what you can satisfy
Thresholds
with your present work-force, is it more
economical to use:
Overtime?
Part-time employees?
Subcontracting?
Increased inventory levels?
Stockouts or backlogs?
How long should you be able to use a new

employee so that the cost of hiring is offset?
If your work-force is larger than what the demand
requires, how much idle time can you tolerate
before it is more economical to fire part of it?
22
Thresholds
At the beginning of month 1, our workforce is larger than needed. We can:
Tolerate idle time (at a cost of $18 per

employee per hour or $2,916 per
employee per month);
Fire some employees (and hire more
later);
Build inventory for later use.
For idle time to be preferable over firing

then Hiring, the number of hours we keep
of hiring +idle
costhas
of firing
700 than:
ancost
employee
to be less
39.
idle cost per employee per hour 18
23
Idle Time Versus Inventory

Building
Idle cost: $2,916/month per employee

Inventory cost: $48.6/months production per
employee
The cost of one employee building inventory for one

month is $6 8.1 = $48.6;
The cost of one employee building inventory for two
months is $6 8.1 2) = $48.6 2);
The cost of one employee building inventory for n
months is $6 8.1 2 + ... + n) = $48.6 2
+ ... + n) = $48.6 x [(n+1)*n]/2;
For idle time to be preferable, the number n of months
we have one employee working to build it has to be
such that $2,916 n $48.6 2 + ... + n)
24
Idle Time Versus Inventory

Building
# months Idle cost
Inventory cost
1
$ 2,916 $ 48.6*
2
$ 5,832 $ 145.8*
3
$ 8,748 $ 291.6*
4
$ 11,664 $ 486*
5
$ 14,580 $
729*
6
$ 17,496 $ 1,020.6*
etc.
etc.
etc.
119
$347,004*
$347,004*
120
$349,920*
$352,836
Idle time is preferable if an employee has to build up inventory
for more than 120 months (10 years)!!
Thus Inventory building is always better during the planning
period.
25
Inventory building versus firing and

hiring
Inventory cost =$6/unit =$48.6/months

production per employee
Firing and hiring cost = $700
# months
Inventory cost
1
$ 48.6*
2
$ 145.8*
3
$ 291.6*
4
$ 486*
5
$
729
it is better to fire an employee if he has to be kept

building inventory for 5 months or more.
26
Thresholds
Similarly, at the beginning of month 5, the

demand begins to rise, and we can:
Use overtime or subcontracting;
Hire some new employees (and fire more
later);
Accept shortages or backlogs.
The cost of any two options can be

compared to come up quickly with an
economical (maybe not optimal)
aggregate plan.
27
Example 2: Step # 3
We consider the three strategies:
A chase strategy;
A level strategy with a work-force
level of 250;
A mixed strategy with a work-force
level of 201 employees for the first
five months, and 285 employees
afterwards.
28
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Example 2: Chase Strategy
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Example 2: Level Strategy
30
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Example 2: Mixed Strategy
31
Example 2: Summary
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32
The Transportation
Method
33
The Transportation
Method
The transportation problems involve

finding the lowest-cost plan for distributing
goods and services from a number of
sources (supply points) to a number of
destinations (demand points).
We can use the transportation method as a
way to obtain aggregate plans that would
match capacity with demand and ending
inventory requirements at minimum costs.
34
The Transportation
Method Contd
The transportation method starts with the

development of a feasible solution, which
is then sequentially tested and improved
until an optimal solution is obtained. The
major steps in the process are:
1. Obtaining an initial solution/plan
2. Testing for optimality (Stepping stone Method,
MODI Method)
3. Improving sub-optimal solutions
We will discuss step 1 that is often

optimal or near optimal, as for the last
two steps they will not be discussed.
35
Obtaining an Initial
Plan
Different methods are available for

obtaining such a plan
Focus on the intuitive lowest-cost
approach
Heuristic approach that yields an initial
solution that is often optimal.
The method requires that the total

supply is equal to the total demand
Balanced transportation problem
Total supply > total demand
We need to add an extra column entitled Excess

or Unused Capacity to the Transportation table.
36
Intuitive Lowest-cost
Approach
1.
2.
3.
4.
Identify the cell with the lowest cost.

Allocate as many units as possible to
that cell, and cross out the row or
column (or both) that is exhausted by
this. Reduce the uncrossed row or
columns supply or demand by this
amount.
Find the cells with the next lowest cost
from among the not crossed out cells.
Repeat steps (2) and (3) until all units
have been allocated.
37
Example 3
Demand for pencils for the next four months is 560,000, 960,000,
1,140,000 and 700,000, respectively.
The production capacity at regular time is 600 boxes (of 1,000
pencils each) for the first month, and 800 boxes for each of the
other months.
Overtime costs $25 per box more than the regular production
cost. The cost of raw materials is $50 per box.
The overtime capacity is 150 boxes during the first month and
200 boxes per month for the other months.
The cost of holding inventory is $5 per unit per month, and no
backlogs are accepted (Demand must be satisfied in the period it
occurs; that is, no backordering is allowed.)
The inventory at the beginning of month 1 is 200 boxes, and the
required final inventory at the end of month 4 is 225 boxes.
38
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Transportation Table
39
Month 1
Month 2
Month 3
Month 4
Final
Inventory
Excess
Capacity
Beginning
Inventory
Month 1
Reg
Month 1
O-T
Month 2
Reg
Month 2
O-T
Month 3
Reg
Month 3
O-T
Month 4
Reg
Month 4
O-T
40
Demand
Month 1
Beginning
Inventory
Month 1
Month 2
Month 3
Month 4
10
Final
Inventory
Excess
15
20
200
0
Reg
50
55
60
16
0
O-T
65
70
80
75
80
600
80
240
85
90
95
150
150
Month 2
Reg
50
55
60
65
800
0
800
Month 2
O-T
75
80
85
90
60
Month 3
Reg
200
140
140
50
55
60
800
0
75
80
85
200
0
50
55
800
800
Month 3
O-T
200
Month 4
Reg
700
Month 4
O-T
100
100
75
80
125
Demand
360
0
560
Capacity
200
360
Month 1
160
0
960
340
260 60
1140
0
0
700
125
75
200
75
41
0
225
365
3950
Optimal Production Plan
Regular time production:

600 boxes in the first month, and 800 boxes in each of
the following months
Overtime production:
60 boxes in month 2, 200 in month 3 and 125 in month 4
Optimal cost:
Sum of the products of the quantities produced by the
unit costs (cost Reg.+ cost of O-T) plus cost of regular
time production
Optimal cost = $152,100 + $29,800 + cost of regular
time
Optimal cost = $181 900 + cost of regular time
42
Transportation Method
Variables and assumptions:
Let xijk be the number of units produced in period i to

meet the requirements of period j using production type
k (e.g. k = regular or overtime production or
subcontracting );
Variable costs are linear;
Demand is deterministic;
Work-force levels are known for each period.
The "transportation" costs cijk:
Production and inventory holding costs associated with

producing one unit in period i to meet demand of
period j using production type k
43
The sources (which have a

certain capacity):
Initial inventory level;

Regular time production for each period;
Overtime production for each period;
Quantity subcontracted for each period.
The sinks (which have a certain

demand):
Periods for which there is a demand;
Final inventory level.
44
Possible Generalizations
Production of n different products: create n

columns per demand period in tableau.
Backlogging accepted: adjust cijk by adding backlog
cost for i > j.
Stockouts (insufficient capacity): add "lost sales"
row to transportation tableau.
Perishability of length t periods: xijk = 0 if j-i > t
(non-feasible boxes).
Subcontracting: add "subcontracting" row to
transportation tableau.
Learning effects: adjust production capacity
accordingly.
45
Example 4
Collect relevant data:

Forecasts, inventory levels, desired final
inventory levels, current and future resource
availability, production times and costs.
46
Example 4 Relevant Data

Demand for product A for the next four months is
255, 294, 321 and 301 units.
The company has 30 employees who work an
average of 20 days per month, 8 hours a day, at
a rate of $20 per hour. However, due to a 1-week
lead time in the production process, there are only 15
production days left in Month 1. It is possible to hire
more, or to lay off some workers, and these decisions
are implemented at the beginning of each month.
Each unit requires 20 hours of labour, and
overtime is limited to no more than 40 hours per
employee per month (30 hours for Month 1) and
costs $30 per hour. Initial inventory is 85 units
and the company wishes to have a final inventory of
50 units at the end of the fourth month.
47
Subcontracting (the work only: the company will

provide the raw materials) is possible, but external
capacity is limited to 12, 15, 15 and 17 units for the
next four months respectively.
Costs for this problem are:
Subcontracting:
$650 per unit
Inventory holding:
$125 per unit per month
Backlog:
$250 per unit per month
(one month maximum)
Hiring:
$500 per worker
Laying off:
$750 per worker
48
Example 4: The
Develop and evaluate

alternative plans:
The Transportation method is used
for the evaluation of total cost of the
aggregate production plan (Note that
hiring and firing is not an option in this
plan)
49
Month 1
Month 2
Begin.
Month 3
125
Month 4
Ending
Inventory
250
375
Excess
Capacity
500
Inv.
85
REG.
125
250
375
500
180
Month 1
O-T
600
725
850
975
1100
45
Sub-C
650
775
900
1025
1150
12
REG.
250
125
250
375
240
Month 2
O -T
850
600
725
850
975
60
Sub-C
900
650
775
900
1025
15
REG.
250
125
250
240
Month 3
O-T
850
600
725
850
60
Sub-C
900
650
775
900
15
REG.
250
125
240
Month 4
O -T
850
600
725
60
Sub-C
900
650
775
17
DEMAND
255
294
321
301
50
50
1269
Month 1
Month 2
Begin.
Inv.
Month 3
125
Month 4
250
Ending
Inventory
375
Excess
Capacity
500
85
REG.
O-T
125
250
375
500
10
600
725
650
180
10
850
975
1100
9
Sub-C
85
170
Month 1
775
900
1025
36
36
45
1150
12
12
REG.
250
125
250
375
240
Month 2
O-T
850
600
900
725
850
975
44
Sub-C
650
10
16
10
775
900
250
125
O-T
850
600
725
900
650
775
250
O-T
850
600
900
650
16
DEMAND
170
255
0
294
54
44 0
321
81 21 6
0
61
301
1 0
240
60
15
0
240
60
725
60
Sub-C
125
240
Month 4
15
900
15
REG.
850
60
Sub-C
60
250
240
Month 3
1025
15
REG.
240
34
24
17
16
50
9
775
48
0
51
1269
Optimal Production
Plan
(30
employees)
Regular time:
Produce to full capacity each month
Overtime:
Produce 9 units in month 1 and 60 units
each subsequent month.
Subcontracting:
Do not subcontract in month 1, but use
the whole allowance in months 2 to 4.
Backlogs:
Do not backlog.
52
The Cost of the Production

Plan
Optimal cost=Variable Costs+ workforce

cost
Workforce Cost = 30*($20*8*20)*4 =

= $384,000
Variable Costs is determined directly from

the transportation table
= 10*125 +Overtime cost + Subcontracting cost
= $1250 + $122,400 + $38,175 = $161,825
Optimal Cost = $161,825 + $384,000 = $545
825
53
Example 4: Graphical
Method- Preference
Thresholds
Analyze per unit costs for each of

the strategies
determine the preference
thresholds
Estimates the cost of each option
on a homogeneous unit of
measure (e.g. $/hr, $/month, $/unit)
Compare between options using this
unit cost to determine at what
moment an option becomes
preferable over another
54
Preference Thresholds:
Costs of Different Options
Idle cost:$3,200/month, $20/hour, or

$400/unit
One employee idle for a month Cost is one

month salary: $20/hr 8hr/day 20day/month
= $3200/month
One employee idle for an hour $20/hour
One employee idle for the production of one
unit Cost is: 20hr/unit $20/hr = $400/unit
Inventory cost: $125/unit/month, or

$1,000/months production/employee
Each employee produces 8 units per month
(8hr/day20day/month)/20 hr/unit =
8 unit/month/employee 125 8 = $1000
55
Firing and hiring:

($1,250-$3,200/month)/employee
Cost of Firing+Cost of Hiring=

$500/employee +$750/employee =
$1250/employee
One month Salary is $3200/month/employee
Firing means saving one month salary, thus
one way to look at Firing and hiring Cost is:
($1,250-$3,200/month)/employee
Hiring and firing: ($1,250+

$3,200/month)/employee
Hiring means paying one month salary as
well, which is an additional $3200/month
56
Preference Thresholds:
Costs of Different Options
Contd
Overtime cost: $600/unit
20hr/unit $30/hr = $600/unit
Sub-contracting cost: $650/unit

Backlog cost: $250/unit/month, or
$2,000/months production/employee
Each employee produces 8 units per
month 8 unit/employee
$250/unit/month =
$2000/months production/employee
57
Preferences Thresholds:
Comparing Between Two
Options
Idle Time Versus Inventory Building
Idle cost: $3,200/month
Inventory cost: $1,000/months production
The cost of one employee building inventory for one
month is $125 8 = $1000
The cost of one employee building inventory for two
months is $12582) = $10002);
The cost of one employee building inventory for n
months is $10002+...+ n) = $1000 x [(n+1)*n]/2;
For idle time to be preferable, the number n of months
we have one employee working to build it has to be
such that $3200 n $1000 2 + ... + n)
58
Idle Time Versus

Inventory Building
# months Idle cost Inventory cost
1
$3,200 $ 1,000*
2
$6,400 $ 3,000*
3
$9,600 $ 6,000*
4
$12,800
$10,000*
5
$16,000
$15,000*
6
$19,200*
$21,000
Idle time is preferable if an employee has to
build up inventory for more than 5 months
59
Options
Idle time versus firing and hiring:
Idle cost: $20/hour

Firing and hiring cost: $1,250
1,250/20 = 62.5 hours

Firing and hiring is better if an employee
has to stay idle for more than 62.5
hours.
For idle time to be preferable, the number
of hours we keep an employee idle has
to be less than 62.5 hours
60
Inventory building
versus firing and hiring
Inventory cost =$125/unit

=$1,000/months prod
Firing and hiring cost = $1,250
# months
Inventory cost
1
$1,000
2
$3,000
It is better to fire and then hire an
employee when needed, if he has to
be kept building inventory for more
than 1 month.
61
Options
Overtime versus sub-contracting
Overtime cost = $600/unit
Sub-contracting cost = $650/unit
Overtime is always better.

Overtime versus backlogs
Overtime cost = $600/unit
Backlog cost = $250 + $400 = $650/unit
Overtime is always better.

62
Overtime versus hiring and

firing
Overtime at $30/hr versus Hiring an
employee at $20/hr when needed than fire
him later on.
Incremental overtime cost: $30/hour $20/hour = $10/hour
Hiring and firing cost: $1,250
1,250/10 = 125 hours
It is better to hire and fire if more than 125
hours of overtime are needed
For overtime to be preferable, the number of
hours of overtime has to be less than 125
hours
63
Sub-contracting versus
backlogs
Sub-contracting to produce one unit

versus backlogs by allowing back
orders (orders are taken in one period
and deliveries in the next month)
Sub-contracting cost: $650/unit
Backlog cost: $250 + $400 = $650/unit
Neither is better than the other
64
Sub-contracting versus hiring and

firing
Sub-contracting to produce one unit
versus hiring an employee to produce

that unit and firing him later
Hiring and firing cost = $1,250
The cost to produce one unit using
regular time is $400/unit, thus
Incremental cost of sub-contracting =
$650-$400 = $250/unit
1,250/250 = 5 units
It is better to hire and fire if more than

5 units have to be sub-contracted.
65
Backlog versus hiring and

firing
Backlog to meet unsatisfied demand

by allowing back orders for a given
month versus hiring someone during
that month and firing him later on
Backlog cost=$250/unit=$2,000/months
prod
Hiring and firing cost = $1,250
It is better to hire and fire

66
Example 4: Graphical Method
Develop and evaluate

alternative plans
Development of plans corresponding
to dominant strategies and mixed
strategies.
Use the preferences thresholds as

guidelines for mixed strategies.
Evaluate the total cost of each plan.

Choose the plan with the lowest cost
option.
67
Linear Programming
xi: # of items to produce in regular time in period i,

yi: # of items to produce in overtime in period i,
zi: # of items supplied by subcontractors in period i,
si: # of items in stock at the end of period i,
ri: # of items produced late in period i + 1 for
demand of period i (i = 1, 2, 3),
vi: # of workers to hire at the beginning of period i,
wi: # of workers to fire at the beginning of period i.
68
Linear Programming
Minimize:
600 (y1 + y2 + y3 + y4) + 650 (z1 + z2 + z3 + z4) +
125 (s1 + s2 + s3 + s4) + 250 (r1 + r2 + r3) +
500 (v1 + v2 + v3 + v4) + 750 (w1 + w2 + w3 + w4) +
12,800(v1-w1)+9,600(v2-w2)+6,400(v3-w3)+3,200(v4w 4)
Subject to:
Capacity constraints (regular time):
x1 180+6v1-6w1
x2 240+8v1+8v2-8w1-8w2
x3 240+8v1+8v2+8v3-8w1-8w2-8w3
x4 240+8v1+8v2+8v3+8v4-8w1-8w2-8w3-8w4
69
Linear Programming
Capacity constraints (overtime):
y1 45+1.5v1-1.5w1
y2 60+2v1+2v2-2w1-2w2
y3 60+2v1+2v2+2v3-2w1-2w2-2w3
y4 60+2v1+2v2+2v3+2v4-2w1-2w2-2w32w4
Sub-contracting limit constraints:

z1 12,
z2 15,
z3 15,
z4 17
70
Constraints
Do not fire more employees than you have:

w1 30
w2 30 + v1 - w1
w3 30 + v1 + v2 - w1 - w2
w4 30 + v1 + v2 + v3 - w1 - w2 - w3
Demand constraints (with inventories and

backlogs):
x1 + y1 + z1 + 85 + r1 = 255 + s1
x2 + y2 + z2 + s1 + r2 = 294 + r1 + s2
x3 + y3 + z3 + s2 + r3 = 321 + r2 + s3
x4 + y4 + z4 + s3 = 301 + r3 + s4
s4 = 50
71
Optimal Solution
x1 = 180, x2 = 280, x3 = 320, x4 = 352, y2 = 4,

s1 = 10, s4 = 50, r3 = 1, v2 = 5, v3 = 5, v4 =
4.
Manufacture at regular time 180, 280, 320 and 352
units in months 1, 2, 3, and 4, respectively, as well
as 4 units at over-time in month 2.
Keep in inventory 10 units at the end of month 1
and 50 units at the end of month 4.
Backorder 1 unit in month 3.
Hire 5 workers in month 2, 5 in month 3 and 4 in
month 4.
Minimal variable cost = $109,950,
72
Total cost = $109,950 + $384,000 = $493 950
Aggregate Planning in
Services
Most services use combination
strategies and mixed plans
Controlling the cost of labor is critical
1.
Accurate scheduling of labor-hours to

assure quick response to customer
demand
2.
An on-call labor resource to cover

unexpected demand
3.
Flexibility of individual worker skills
4.
Flexibility in rate of output or hours of

73
Five Service Scenarios
Restaurants
1. Smoothing the production process

2. Determining the optimal workforce size
Hospitals
Responding to patient demand
National Chains of Small Service

Firms
Planning done at national level and at

local level
Five Service Scenarios
Miscellaneous Services
Plan human resource requirements

Manage demand
Airline industry
Extremely complex planning problem

Involves number of flights, number of
passengers, air and ground personnel,
allocation of seats to fare classes
Resources spread through the entire
system
Law Firm Example

Labor-Hours Required
Capacity
Constraints
(2)
(3)
Forecasts
(4)
(5)
Maximum
(6)
Number
Best
1,800
(hours)
4,500
8,000
1,700
3,500
Likely
1,500
(hours)
4,000
7,000
1,500
3,000
Worst
1,200
(hours)
3,500
6,500
1,300
2,500
Demand in
3.6
People
9.0
16.0
3.4
7.0
Qualified
4
Personnel
32
15
6
12
(1)
of
Category of
Trial work
Legal Business
Legal research
Corporate law
Real estate law
Criminal law
Total hours
Lawyers needed
19,500
39
17,000
34
15,000
30
Table 13.9
76
2011 Pearson Education, Inc. publishing as Prentice
Hall
Revenue (Yield)
Management
Allocating resources to customers at
prices that will maximize yield or
revenue
1. Service or product can be sold in

advance of consumption
2. Demand fluctuates
3. Capacity is relatively fixed
4. Demand can be segmented
5. Variable costs are low and fixed costs
are high
Revenue (Yield) Management

Example
Room sales
Demand
Curve
Potential customers exist who

are willing to pay more than the
$15 variable cost of the room,
but not $150
100
Passed-up
contribution
50
Total
$ contribution
= (Price) x
(50
rooms)
= ($150 $15)
x (50)
= $6750
$15
Variable cost
of room
Some customers who paid

$150 were actually willing
to pay more for the room
Money left
on the table
$150
Price charged
for room
Price
Figure 13.5
Revenue (Yield) Management

Example
Demand
Curve
Room sales
100
Total $ contribution =
(1st price) x 30 rooms + (2nd price) x 30 rooms =
($100 - $15) x 30 + ($200 - $15) x 30 =
$2550 + $5550 = $8100
60
30
$15
Variable cost
of room
$100
Price 1
for room
$200
Price 2
for room
Price
Figure 13.6
Predictable
Unpredictable
Duration of use
Revenue (Yield)
Management Matrix
Price
Tend to be fixed
Tend to be variable
Quadrant 1:
Quadrant 2:
Movies
Stadiums/arenas
Convention centers
Hotel meeting space
Hotels
Airlines
Rental cars
Cruise lines
Quadrant 3:
Quadrant 4:
Restaurants
Golf courses
Internet service
providers
Continuing care
hospitals
Figure 13.7
Hall
80
Revenue (Yield)
Management Approaches
Airlines, hotels, rental cars, etc.

Tend to have predictable duration of service
and use variable pricing to control availability
and revenue
Movies, stadiums, performing arts

centers
Tend to have predicable duration and fixed
prices but use seating locations and times to
manage revenue
Revenue (Yield)
Management Approaches
Restaurants, golf courses, ISPs

Generally have unpredictable duration of
customer use and fixed prices, may use offpeak rates to shift demand and manage
revenue
Health care businesses, etc.

Tend to have unpredictable duration of
service and variable pricing, often attempt to
control duration of service
Making Revenue (Yield)

Management Work
1.
Multiple pricing structures must

be feasible and appear logical to
the customer
2.
Forecasts of the use and

duration of use
3.
Changes in demand
Whats Needed for

Aggregate Planning
The development and application
of any mathematically based
aggregate planning model
requires considerable
- Time:
Problem definition,
Model development,
Model verification,
Model application;
84
Whats Needed for

Aggregate Planning
Expertise:
People who understand the problem,
People who understand both the
modeling process, and the specific
model;
Money:
Money to pay for all of the above,
Often requires funding for several
people for several months.
85
Summary of Aggregate
Planning Methods
Techniques
Graphical
methods
Solution
Approaches
Trial and
error
Transportation
Optimization
method of linear
programming

Hall
Important Aspects
Simple to understand and
easy to use. Many
solutions; one chosen
may not be optimal.
LP software available;
permits sensitivity
analysis and new
constraints; linear
functions may not be
realistic.
Table 13.886
Summary of Aggregate
Planning Methods
Techniques
Solution
Approaches
Important Aspects
Management
coefficients
model
Heuristic
Simple, easy to implement;

tries to mimic managers
decision process; uses
regression.
Simulation
Change
parameters
Complex; may be difficult

to build and for managers
to understand.

Hall
Table 13.887
All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher.
Printed in the United States of America.
2011 Pearson Education, Inc. publishing as Prentice Hall

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The Graphical

ADM 3301 ~ Rim Jaber

Aggregate Planning -- RECAP

Aggregate Planning: Intermediate-range

The Graphical Approach

Forecast the demand for each period

Step #1: Collect relevant data:

ADM 3301 ~ Rim Jaber

Example 1-Relevant Data: collect of the forecasts

Example 1: Beginning inventory levels, Production time and relevant

Example 1-Relevant Data: Production Requirements and Inventory levels

P.S.: The Quantity Produced to meet the monthly requirement

Determining the Aggregate Plan for

Step # 2: Analyze per unit costs for each of the

Determine the preference thresholds

ADM 3301 ~ Rim Jaber

Determining the Aggregate Plan for

Determining the Aggregate Plan for

Example 1: Chase Strategy

Hours of Prod. required

Employee required (Int.)

Total inventory Cost: 2000 units* 12 = $24,000

Example 1: Development and evaluation of

ADM 3301 ~ Rim Jaber

Comments on Aggregate Plan 2

In the Production Row- June Column you can

Comments on Aggregate Plan 2 using

ADM 3301 ~ Rim Jaber

Determining the Aggregate Plan

Choose the aggregate plan:

The Total Cost of aggregate plan 1 (Chase Strategy) = $324,588

Consider a company that experiences seasonal

ADM 3301 ~ Rim Jaber

ADM 3301 ~ Rim Jaber

How long should you be able to use a new

Tolerate idle time (at a cost of $18 per

For idle time to be preferable over firing

Idle Time Versus Inventory

Idle cost: $2,916/month per employee

The cost of one employee building inventory for one

Idle Time Versus Inventory

ADM 3301 ~ Rim Jaber

Inventory building versus firing and

Inventory cost =$6/unit =$48.6/months

it is better to fire an employee if he has to be kept

Similarly, at the beginning of month 5, the

The cost of any two options can be

Example 2: Level Strategy

ADM 3301 ~ Rim Jaber

The transportation problems involve

The transportation method starts with the

We will discuss step 1 that is often

Different methods are available for

The method requires that the total

We need to add an extra column entitled Excess

Identify the cell with the lowest cost.

Optimal Production Plan

Workforce Cost = 30($20820)4 =