PRODUCTION PLANNING AND

CONTROL
ASSOC. PROF. PERAL TOKTAŞ-PALUT

Lecture 7
Agenda

 Methods for aggregate planning

 Graphical methods (cont.’d)
 Mathematical programming approaches
Example 1

 A firm producing disk drives for mainframe computers

 Aim is to plan workforce and production levels for the
six-month period January to June
 Demand forecasts over the next six months are 1280,
640, 900, 1200, 2000, 1400
 There are currently 300 workers (end of December)
 Starting inventory = 500 units (end of December)
 Ending inventory = 600 units (end of June)
Example 1

 CH = Cost of hiring one worker = $500

 CF = Cost of firing one worker = $1000
 CI = Cost of holding one unit of inventory for one month
= $80
 In the past, the plant manager observed that over 22
working days, with the workforce level constant at 76
workers, the firm produced 245 disk drives
 K = Number of aggregate units produced by one worker in
one day = 245 / (22 × 76) = 0.14653
Example 1

 PLAN 1: To change the workforce each month in order to

produce enough units to most closely match the demand
pattern (Chase strategy)
 PLAN 2: To maintain the minimum constant workforce
necessary to satisfy the net demand (Level strategy)
 Example 1: Plan 1

A B C D E
Month Number of Number of Net demand Minimum
working days units produced forecast number of
per worker workers
(B × 0.14653) required (D/C
rounded up)
January 20 2.931 780 267
February 24 3.517 640 182
March 18 2.638 900 342
April 26 3.810 1200 315
May 22 3.224 2000 621
June 15 2.198 2000 910
By considering net demand, we make the simplifying assumption that starting and
ending inventories are zero
 Example 1: Plan 1

A B C D E F G H I

Month Number Number Number Number Number Cum. Cum. net Ending
of hired fired of units of units product. demand inventory
workers per produced (G − H)
worker (B × E)
January 267 33 2.931 783 783 780 3

February 182 85 3.517 640 1423 1420 3

March 342 160 2.638 902 2325 2320 5

April 315 27 3.810 1200 3525 3520 5

May 621 306 3.224 2002 5527 5520 7

June 910 289 2.198 2000 7527 7520 7

Total 755 145 30

Example 1: Plan 1

 Total cost for Plan 1

 Hiring cost = 755 × 500 = $377,500
 Firing cost = 145 × 1000 = $145,000

 Inventory holding cost = 30 × 80 + 600 × 80 = $50,400

 Total cost = $572,900

Example 1: Plan 2

A B C D
Month Cumulative net Cumulative Ratio (B/C
demand number of rounded up)
units produced
per worker
January 780 2.931 267
February 1420 6.448 221
March 2320 9.086 256
April 3520 12.896 273
May 5520 16.120 343
June 7520 18.318 411

Minimum workforce required = 411

Cumulative production  Cumulative net demand  No backorders occur

Example 1: Plan 2

A B C D E F

Month Number of Monthly Cumulative Cumulative Ending

units per production production net demand inventory
worker (B × 411) (D − E)
January 2.931 1205 1205 780 425

February 3.517 1445 2650 1420 1230

March 2.638 1084 3734 2320 1414

April 3.810 1566 5300 3520 1780

May 3.224 1325 6625 5520 1105

June 2.198 903 7528 7520 8

Total 5962
Example 1: Plan 2

 Total cost for Plan 2

 Hiring cost = 111 × 500 = $55,500
 Inventory holding cost = 5962 × 80 + 600 × 80 = $524,960

 Total cost = $580,460

Agenda

 Methods for aggregate planning

 Graphical methods (cont.’d)
 Mathematical programming approaches
Mathematical programming approaches

 Linear programming
 Transportation model
Linear programming: Parameters

 cH : Cost of hiring one worker

 cF : Cost of firing one worker
 cI : Cost of holding one unit of stock for one period
 cR : Cost of producing one unit on regular time
 cO : Incremental cost of producing one unit on
overtime
 cU : Idle cost per unit of production
 cs : Cost to subcontract one unit of production
Linear programming: Parameters

 nt : Number of production days in period t

 K : Number of aggregate units produced by one
worker in one day
 I0 : Initial inventory on hand at the start of the
planning horizon
 W0 : Initial workforce at the start of the planning
horizon
 Dt : Forecast of demand in period t
Linear programming: Variables

 Wt : Workforce level in period t

 Pt : Production level in period t
 It : Inventory level in period t
 Ht : Number of workers hired in period t
 Ft : Number of workers fired in period t
 Ot : Overtime production in units in period t
 Ut : Worker idle time in units (undertime) in period t
 St : Number of units subcontracted in period t
Linear programming: Constraints

 Conservation of workforce constraints

 Number of workers in t = Number of workers in (t − 1) +
Number hired in t − Number fired in t

Wt = Wt −1 + Ht − Ft for 1  t  T
Linear programming: Constraints

 Conservation of units constraints

 Inventory in t = Inventory in (t − 1) + Number of units
produced in t + Number of units subcontracted in t −
Demand in t

It = It −1 + Pt + St − Dt for 1  t  T
Linear programming: Constraints

 Constraints relating production levels to workforce levels

 Number of units produced in t = Number of units produced
by regular workforce in t + Number of units produced on
overtime in t − Number of units of idle production in t

Pt = KntWt + Ot − Ut for 1  t  T
Linear programming: Constraints

 Nonnegativity constraints
 Specification of I0 (initial inventory) and W0 (initial
workforce)
 May include specification of IT (ending inventory)
Linear programming: Objective function

 Includes all the costs

 Hiring cost + Firing cost + Inventory holding cost + Regular
time production cost + Overtime cost + Undertime cost +
Subcontracting cost
T
Minimize (c H
t =1
H t + cF Ft + cI It + cR Pt + cOOt + cUUt + cS St )
Linear programming: Model

T
Minimize (c H
t =1
H t + cF Ft + cI It + cRPt + cOOt + cUUt + cS St )

s.t.
Wt = Wt −1 + Ht − Ft for 1  t  T
It = It −1 + Pt + St − Dt for 1  t  T
Pt = KntWt + Ot − Ut for 1  t  T
Ht , Ft , It ,Ot ,Ut , St ,Wt , Pt  0 for 1  t  T

plus any additional constraints that define the values

of starting inventory, starting workforce, ending inventory,
or any other variables with fixed values
Linear programming: Model

 Rounding the variables

 Size of the workforce, number of workers hired/fired,
number of units produced should be integers
 Integer linear programming requires much more
computational effort
 Rounding off each variable to the closest integer may lead
to an infeasible solution and/or one in which production
and workforce levels are inconsistent
Linear programming: Model

 Rounding the variables: Conservative approach

 Round workforce level in period t (Wt) to the next larger
integer
 Determine the values of the other variables Ht, Ft, and Pt
accordingly
 This approach will always result in a feasible solution, but
will rarely give the optimal solution
Linear programming: Model

 Extensions
 Minimum buffer inventory Bt
It  Bt for 1  t  T
Linear programming: Model

 Extensions
 Capacity Ct constraint on the production amount
Pt  Ct for 1  t  T
Linear programming: Model

 Extensions
 Backorder case: Inventory holding cost for It+ and
backorder cost for It−

It = It+ − It−
It+ , It−  0
Example 2

 Turn back to Example 1

 Objective function
6
Minimize  ( 500H
t =1
t + 1000Ft + 80It )
Example 2

 Conservation of workforce constraints

W1 = W0 + H1 − F1
W2 = W1 + H2 − F2
W3 = W2 + H3 − F3
W4 = W3 + H4 − F4
W5 = W4 + H5 − F5
W6 = W5 + H6 − F6
Example 2

 Conservation of units constraints

I1 = I0 + P1 − 1280
I2 = I1 + P2 − 640
I3 = I2 + P3 − 900
I4 = I3 + P4 − 1200
I5 = I4 + P5 − 2000
I6 = I5 + P6 − 1400
Example 2

 Constraints relating production levels to workforce levels

P1 = 2.931W1
P2 = 3.517W2
P3 = 2.638W3
P4 = 3.810W4
P5 = 3.224W5
P6 = 2.198W6
Example 2

 Other constraints

W1 ,,W6 , P1 ,, P6 , F1 ,, F6 , H1 ,, H6  0

W0 = 300
I0 = 500
I6 = 600
Example 2

 Optimal solution obtained using Excel Solver

Cell Name Final Value Reduced Cost Cell Name Final Value Reduced Cost
$B$1 P1 800.0248138 0 $B$16 H4 0 6.736013641
$B$2 P2 959.9751862 0 $B$17 H5 464.7822998 0
$B$3 P3 720.0496276 0 $B$18 H6 0 192.7502199
$B$4 P4 1039.950372 0 $B$19 F1 27.04714645 0
$B$5 P5 2378.458134 0 $B$20 F2 0 708.6219791
$B$6 P6 1621.541866 0 $B$21 F3 0 1277.559996
$B$7 W1 272.9528535 0 $B$22 F4 0 1493.263956
$B$8 W2 272.9528535 0 $B$23 F5 0 1500
$B$9 W3 272.9528535 0 $B$24 F6 0 1307.24975
$B$10 W4 272.9528535 0 $B$25 I1 20.02481378 0
$B$11 W5 737.7351533 0 $B$26 I2 340 0
$B$12 W6 737.7351533 0 $B$27 I3 160.0496276 0
$B$13 H1 0 1499.999969 $B$28 I4 0 18.44597474
$B$14 H2 0 791.3779904 $B$29 I5 378.4581338 0
$B$15 H3 0 222.4399738 $B$30 I6 600 0

Objective Cell (Min)

Cell Name Final Value
$A$31 minZ 379320.9023
 Example 2

 Rounding the linear programming solution

A B C D E F G H I

Month Number Number Number Number Number Cum. Cum. net Ending
of hired fired of units of units product. demand inventory
workers per produced (G − H)
worker (B × E)
January 273 27 2.931 800 800 780 20

February 273 3.517 960 1760 1420 340

March 273 2.638 720 2480 2320 160

April 273 3.810 1040 3520 3520 0

May 738 465 3.224 2379 5899 5520 379

June 738 2.198 1622 7521 7520 1

Total 465 27 900

Example 2

 Total cost
 Hiring cost = 465 × 500 = $232,500
 Firing cost = 27 × 1000 = $27,000

 Inventory holding cost = 900 × 80 + 600 × 80 = $120,000

 Total cost = $379,500

Example 2

 Comparison of total costs

 Chase strategy : $572,900
 Level strategy : $580,460
 LP model : $379,500