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Planning the overall use of the organization’s assets

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1 Planning the overall use of the organization’s assets
Aggregate Planning Planning the overall use of the organization’s assets Applied Management Science for Decision Making, 1e © 2012 Pearson Prentice-Hall, Inc Philip A. Vaccaro , PhD

2 OVERVIEW Definition of the Quasi-Unit Strategies Computer Applications
Objectives Definition of the Quasi-Unit Strategies Computer Applications Master Production Schedule

3 Aggregate Planning Definition
The overall employment of the firm’s facilities and other resources over the next 3 to 18 months so as to satisfy customer demand for all goods and services at minimum cost, as well as certain corporate policies such as “no layoffs” and “no overtime pay”.

4 Corporate Policy Requirements EXAMPLES
A stable work force 100% in-house production Sufficient inventories to reduce the likelihood of stockouts to =< 5% Overtime labor hours not to exceed 10% of all regular labor hours

5 The Quasi-Unit A unit of product that is representative of
all the firm’s goods and services. Examples are appliances and vehicles in manufacturing. Examples are airline passenger miles flown and restaurant meals in the service sector.

6 The Meal Quasi-Unit x ounces of meat
RESTAURANT x ounces of meat x ounces of fish x ounces of poultry x gallons of water for cooking / cleaning x amount of gas and electricity for cooking x amount of labor time and cost for cooking x amount of labor time and cost for serving x ounces of vegetables of various types And much more!

7 The Quasi - Unit Not individual brands, bottles, kegs, cans, varieties
MANUFACTURING Gallons of Beer Not individual brands, bottles, kegs, cans, varieties Tons of Steel Not ingots or beams of varying tensile strength

8 The Quasi - Unit Transcends the number of hours of classroom
SERVICE SECTOR Faculty-to-Student Contact Hours Transcends the number of hours of classroom instruction, student advising, directed studies, internships, and so on. Airline Passenger Miles Flown Transcends the number of flights by specific aircraft over specific routes.

9 The Pseudo / Composite Unit
ALTERNATE NAMES FOR THE QUASI - UNIT Sometimes, the unit does not exist at all! It is a collection of square feet of sheet metal, several dozen screws or bolts, a variety of components, assemblies, ounces of glue, paint, fabric, and so on. STRICTLY USED FOR PLANNING PURPOSES

10 The New Quasi - Unit Definition
A SINGLE PRODUCT representing a family of individual products that: are processed on the same machines are processed by the same workers share the same general machine setup have similar cost structures, carry costs, and output rates share more / less the same parts and assemblies as well as physical charac- teristics

11 Quasi-Unit Interpretations
Other Mid-sized Product in a line of similar products ( autos, refrigerators ) Only Product made in a particular manufacturing plant Basic Product with minor differences between models Hybrid Product or “cross” between several types of products produced in one or more plants

12 Basic Product with Minor Differences
UNITED STATES MEXICO

13 Basic Product with Minor Differences
2013 Ford Fusion 2013 Lincoln MKZ

14 Basic Product with Minor Differences
2013 Ford Fusion 2013 Lincoln MKZ

15 Overview of the Process
AGGREGATE PLANNING A quasi-unit demand forecast is developed for 3 to 18 months into the future. The firm then manipulates production rates, inventory levels, and work force levels to generate a series of aggregate plans that meet the forecasted demand.

16 Overview of the Process
AGGREGATE PLANNING Cost estimates are developed and the lowest cost aggregate plan is adopted. Plan is then decomposed or disaggregated into a series of master production schedules that specify the exact number of products and services to be generated on a daily, weekly, or monthly basis. ( by make, model, color, and options )

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18 The Aggregate Plan Specified production rate for each time period.
MINIMUM DATA REQUIREMENTS Specified production rate for each time period. Specified level of inventory for each time period. Specified labor force size for each time period. * * ( USUALLY 1 MONTH OR 1 QUARTER )

19 The Three Principal Strategies
AGGREGATE PLANNING Inventory Cushion or Level Work Force Skeleton Force or Cadre Chase or Matching

20 Inventory Cushion Strategy
Labor force size is fixed. Production rate is fixed. Inventories rise during slow demand periods. Inventories shrink during high demand periods. Inventory stockout costs are reduced. Overtime pay, hiring, firing, subcontracting, and production rate change costs are eliminated.

21 The Inventory Cushion DURING HIGH DEMAND DURING LOW DEMAND DECREASES
INCREASES THE INVENTORY CUSHION INSULATES THE FACTORY FROM DEMAND FLUCTUATIONS

22 Skeleton Force or Cadre Strategy
The permanent labor force size is usually set for the lowest monthly or quarterly forecasted quasi- unit demand. Higher demand must then be met by scheduling overtime, hiring temporary workers, subcontract- ing, and so on. Lower demand, if any, is tolerated as paid idle time.

23 SKELETON FORCE STRATEGY
U.S. ARMY $100,000. TO PAY AND EQUIP EACH SOLDIER PERMANENT WORK FORCE $25,000. TO PAY AND EQUIP EACH SOLDIER PART-TIME WORK FORCE * ACTIVE DUTY 480,000 46% RESERVE / NATIONAL GUARD 563,000 54% RETIRED AND STANDBY RESERVES ACTIVATED ONLY IF ABSOLUTELY NECESSARY - 12,000,000 TROOPS

24 SKELETON FORCE STRATEGY
HIGHER EDUCATION In 1984, full-time faculty were 80% of all faculty In 1987, full-time faculty were 67% of all faculty In 2001, full-time faculty were 55% of all faculty In 2003, full-time faculty were 50% of all faculty BETWEEN 1995 – 1997, 67% OF ALL NEW PROFESSORS WERE HIRED AS ADJUNCTS, IN ORDER TO SAVE $$$

25 Chase or Matching Strategy
Calls for monthly / quarterly adjustment of the labor force size as necessary to match produc- tion to demand. Eliminates or reduces inventory carry costs and stockout costs. It generates substantial hiring, training, and termination costs and risks the degradation of employee morale and loyalty.

26 Two Types of Costs Those that WILL change from one developed plan
to the next Those that WILL NOT change from one developed plan to the next RELEVANT NON-RELEVANT

27 NOT ASSIST THE PLANNER IN IDENTIFYING THE MOST COST- EFFECTIVE PLAN.
NON-RELEVANT COSTS ARE OMITTED FROM THE AGGREGATE PLANNING ANALYSIS SINCE THEY DO NOT ASSIST THE PLANNER IN IDENTIFYING THE MOST COST- EFFECTIVE PLAN. THEIR INCLUSION WOULD NOT DIFFERENTIATE ONE PLAN FROM ANOTHER

28 Possible Plan Costs Regular Hourly Labor Rate
AGGREGATE PLANNING Regular Hourly Labor Rate Overtime Hourly Labor Rate Direct Labor Unit Cost Direct Materials Unit Cost Overhead Unit Cost Labor Severance Cost per Unit Subcontracting Unit Cost Inventory Unit Carry Cost Inventory Unit Stockout Cost Production Rate Change Costs Labor Hire/Train Cost per Unit

29 Possible Data Input Productivity per worker per day
AGGREGATE PLANNING Productivity per worker per day Number of production days in the plan Accurate monthly or quarterly demand forecasts Existing plant capacity Required labor hours per unit Required direct materials per unit Corporate policy regarding overtime, subcontracting, backordering, etc. Machine processing hours per unit

30 Possible Decision Variables
AGGREGATE PLANNING Production Rate Changes Production Subcontracting Overtime Labor Hours Equipment Rental Backordering Temporary Employees Part-time Employees USEFUL FOR DEVELOPING ALTERNATIVE PLANS UNDER VARIOUS STRATEGIES

31 The Selected Aggregate Plan
ALMOST ALWAYS IT IS A MIXED STRATEGY CHARACTERIZED BY : MODERATE INVENTORY LEVELS MODERATE STOCKOUT COSTS A SMALL NUMBER OF PRODUCTION RATE CHANGES WITH RELATIVELY SMALL MAGNITUDES The “ 4th “ Strategy

32 PRODUCT DEMAND PATTERN
Aggregate Planning TWO STARTING ASSUMPTIONS PASSIVE AGGRESSIVE ASSUMES THE PRODUCT DEMAND PATTERN CAN BE ALTERED IF NECESSARY ASSUMES THE PRODUCT DEMAND PATTERN CANNOT BE ALTERED

33 Product Demand Pattern
PRE - STABILIZATION THE DEMAND RATE MAY VARY DRAMATICALLY FROM THE NORMAL PRODUCTION RATE, MAKING AGGREGATE PLANNING DIFFICULT AND LESS COST EFFECTIVE ( units ) Normal Production Output Variable Product Demand ( time )

34 Product Demand Pattern
STABILIZATION THE LEVELING OF DEMAND TO APPROACH THE NORMAL PRODUCTION RATE MAKES AGGREGATE PLANNING MUCH EASIER AND MORE COST EFFECTIVE Normal Production Output ( units ) Variable Product Demand ( time )

35 Some Demand Leveling Tactics
Heavy advertising, price discounts, coupons, and contests during periods of low demand. Little or no advertising and price increases during periods of high demand. Production of countercyclic, similar products. Reservation systems.

36 Aggregate Planning with QM for Windows

37 WE SELECT AGGREGATE PLANNING
From The Menu WE SELECT AGGREGATE PLANNING FROM THE MENU

38 WE DESIRE TO SET UP A NEW PROGRAM To

39 We Select The 1st Menu WE SELECT THE FIRST OPTION

40 THE DIALOGUE BOX APPEARS

41 WE SELECT SIX PERIODS FOR THE AGGREGATE PLAN
AND LABEL THEM “JANUARY” THROUGH “JUNE” IF DEMAND EXCEEDS PRODUCT SUPPLY IN ANY MONTHLY PERIOD, IT IS ASSUMED THOSE SALES ARE LOST FOREVER

42 THE DATA TABLE APPEARS

43 Inventory Cushion Strategy
EXAMPLE OBJECTIVE TO MAINTAIN A CONSTANT-SIZE WORK FORCE AND UNIFORM PRODUCTION RATE OVER THE SPECIFIED PLANNING PERIOD. ASSUMPTIONS DEMAND FORECAST OF 6,200 QUASI-UNITS OVER THE NEXT SIX MONTHS ONE-HUNDRED-TWENTY- FOUR AVAILABLE PRODUCTION DAYS QUASI-UNIT INVENTORY CARRY COST IS $5.00 PER MONTH EACH WORKER PRODUCES FIVE QUASI-UNITS PER DAY EACH WORKER IS PAID $ PER DAY

44 ∑ Inventory Cushion Strategy JAN 1100 900 +200 200 FEB 700 400 MAR
FIRM MUST PRODUCE 50 UNITS DAILY IN ORDER TO MEET THE SIX-MONTH DEMAND ( 6,200 / 124 DAYS ) CALENDAR MONTH ACTUAL PRODUCTION QUASI-UNIT FORECAST CUSHION NET CHANGE ENDING INVENTORY JAN 1100 900 +200 200 FEB 700 400 MAR 1050 800 +250 650 APR 1200 - 150 500 MAY 1500 - 400 100 JUN 1000 - 100 6200 units 1850 units 22 DAYS AVAILABLE X 50 UNITS DAILY 18 DAYS AVAILABLE X 50 UNITS DAILY 21 DAYS AVAILABLE X 50 UNITS DAILY

45 1.6 hours of labor per quasi-unit $15.00 / hour average labor rate
Inventory Carry Cost per Month Quasi-Unit Demand Forecasts Planned Monthly Production 1.6 hours of labor per quasi-unit X $15.00 / hour average labor rate

46 Inventory Cushion Strategy
EXAMPLE TOTAL COSTS: $158,050.00 INVENTORY CARRY COSTS…………...….$9, ( 1,850 units x $5.00/unit ) OVERTIME, HIRE/FIRE, SUBCONTRACTING $0.00 ( fixed work force ) PRODUCTION RATE CHANGE COSTS………$0.00 ( uniform production rate ) LABOR COSTS..$148,800.00…..( 50/5 = 10 workers x $120.00/day x 124 days)

47 Total Inventory Carry Costs
Strategy Total Cost Total Labor Cost Total Inventory Carry Costs

48 Quasi-Unit Production
Regular Time Quasi-Unit Production Quasi-Unit Demand

49 ( peaks at mid-term of plan )
The Inventory Cushion ( peaks at mid-term of plan )

50 Skeleton Force Strategy
EXAMPLE OBJECTIVE TO BUILD A PERMANENT LABOR FORCE AROUND A SPECIFIC LEVEL OF DEMAND, TOLERATING PAID IDLE TIME DURING LOWER DEMAND PERIODS AND INCURRING COSTS OF OVERTIME LABOR OR SUBCONTRACTING DURING HIGHER DEMAND PERIODS. THE SPECIFIC LEVEL OF DEMAND IS USUALLY THE LOWEST LEVEL OF DEMAND

51 Skeleton Force Strategy
EXAMPLE ASSUMPTIONS A PERMANENT LABOR FORCE BUILT AROUND THE LOWEST DEMAND PERIOD IN ORDER TO SAVE ON RETIREMENT BENEFITS, HEALTH INSURANCE , PAID VACATIONS, LEAVE, ETC. FEBRUARY HAS THE LOWEST FORECASTED QUASI-UNIT DEMAND (700 units) FEBRUARY HAS EIGHTEEN (18) AVAILABLE PRODUCTION DAYS FIRM WANTS TO SUBCONTRACT PRODUCTION TO AN OUTSIDE COMPANY WHENEVER QUASI-UNIT DEMAND EXCEEDS THE PERMANENT LABOR FORCE CAPABILITY SUBCONTRACTED QUASI-UNITS COST THE FIRM $10.00 EACH

52 Skeleton Force Strategy
EXAMPLE CALCULATIONS DAILY FEBRUARY PRODUCTION… /18 days = 39 units daily IN-HOUSE PRODUCTION…..39 units/day x 124 days = 4,836 units SUBCONTRACTED PRODUCTION…….6,200 – 4,836 = 1,364 units REQUIRED WORKERS……..…39/5 units per worker per day = 7.8

53 which resulted in overproduction of 2 quasi-units
Over Production in Regular Time Quasi-Unit Subcontract Cost In February, in-house production was 39 units per day for 18 days = 702 quasi-units which resulted in overproduction of 2 quasi-units In March, in-house production was 39 units per day for 21 days = 819 quasi-units which resulted in overproduction of 19 quasi-units In April, in-house production was 39 units per day for 21 days = 819 units. The shortfall seems to be ( ) = 381 units, but it was reduced to 360 quasi-units, due to the 21 quasi-unit surplus generated in February and March

54 Skeleton Force Strategy
EXAMPLE COSTS: $129,704.00 LABOR COST...$116, ( 7.8 workers x $ per day x 124 days) SUBCONTRACT COST………..$13, (1,364 units x $10.00 per unit) OVERTIME, HIRE/FIRE, TRAINING COSTS……..$0.00 (rejected options) INVENTORY CARRY COST……..$0.00 (all demand satisfied exactly via house production or subcontracting)

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56 RT - Regular Time Production Sub - Subcontracted Production
Subcontracting Over Production In Regular Time

57 In-House Production Shortfall ( Subcontracted )

58 Chase or Matching Strategy
EXAMPLE OBJECTIVE TO HIRE OR TERMINATE PERSONNEL AS NEEDED IN ORDER TO MATCH PRODUCTION TO DEMAND, PERIOD-BY-PERIOD, RESULTING IN THE ELIMINATION OR DRASTIC REDUCTION OF BOTH INVENTORY CARRY AND STOCKOUT COSTS.

59 Chase or Matching Strategy
EXAMPLE ASSUMPTIONS EACH QUASI-UNIT REQUIRES 1.6 HOURS OF DIRECT LABOR PERSONNEL TERMINATION COST IS PRORATED AT $15.00 PER MANUFACTURED QUASI-UNIT CANCELLED PERSONNEL RECRUITING AND TRAINING COST IS PRORATED AT $10.00 PER MANUFACTURED QUASI-UNIT ADDED EACH WORKER EARNS $15.00 PER HOUR ON AVERAGE.

60 PRORATED TERMINATION COST PRORATED HIRE/TRAIN COST
EXAMPLE: If sales were forecasted to be 100 units lower in the next period, then the prorated employee termination costs would be ( 100 x $15.00 ) $ If sales were forecasted to be 100 units higher in the next period, then the prorated employee hiring and training costs would be ( 100 x $10.00 ) $

61 The Chase Strategy ∑ JAN 900 FEB 700 MAR 800 APR 1200 MAY 1500 JUN
TOTAL MONTHLY COST = PRODUCTION + HIRE( FIRE ) COSTS MONTH DEMAND FORECAST PRODUCTION COSTS FORECAST CHANGE HIRE/FIRE TOTAL COSTS JAN 900 $21,600. FEB 700 $16,800. (200)x$15 $3,000. $19,800. MAR 800 $19,200. 100 x $10 $1,000. $20,200. APR 1200 $28,800. 400 x $10 $4,000. $32,800. MAY 1500 $36,000. 300 x $10 $39,000. JUN 1100 $26,400. (400)x$15 $6,000. $32,400. $148,800. $8,000. $9,000. $165,800. 900 UNITS x 1.6 HOURS $15.00 = $21,600.00 700 UNITS X 1.6 HOURS $15.00 = $16,800.00

62 Chase or Matching Strategy
EXAMPLE COSTS : $165,800.00 REGULAR TIME LABOR COST……………………………..$148,800. HIRE / TERMINATION COSTS………………………………..$17,000 INVENTORY CARRY AND STOCKOUT COSTS………………... $ 0. 6200 UNITS x 1.6 HOURS/UNIT = 9,920 HOURS x $15.00/HOUR $8, HIRE COSTS + $9, TERMINATION COSTS PRODUCTION MATCHES DEMAND EXACTLY PERIOD-BY-PERIOD

63 $17, total broken down into hire/fire and termination

64 Period Demand = Period Production

65 PRODUCTION EQUALS CUMULATIVE DEMAND
( ONE IN THE SAME LINE )

66 Aggregate Plan Examples
POSTSCRIPT If only three strategies or plans were generated and evaluated, the firm would select the skeleton force since it has the lowest projected total costs. Direct material cost, direct machine hour cost, and applied overhead per quasi-unit were identical under all three plans. Hence, they are non-relevant costs and routinely omitted from the analysis.

67 The Relevant Range of Activity
PRODUCTION OF 6200 QUASI-UNITS FALLS JUST WITHIN THE RELEVANT COST RANGE OF UNITS. THEREFORE, UNIT DIRECT LABOR, DIRECT MATERIALS, AND OVERHEAD REMAIN THE SAME VARIABLE COSTS SEMI-VARIABLE COSTS C O S T Relevant Range 2 Relevant Range 3 Relevant Range 1 FIXED COSTS 6200 X CUMULATIVE PRODUCTION ( IN UNITS )

68 Aggregate Plan Examples
POSTSCRIPT The mix of resources—labor force size, production rate, and inventory level as well as subcontracting ----and their timing allowed the development of 3 unique aggregate plan proposals and associated costs. In the skeleton force strategy, the firm elected to augment the capacity of its small permanent labor force by subcontracting exclusively. Variations of this strategy could, and usually are generated us- ing overtime hours, temporary labor hours, and subcontracting exclusively or in combination.

69 Aggregate Plan Examples
POSTSCRIPT Corporate policies may impose limitations on the use of subcontracting, overtime hours, inventory levels, production rates, machines, available days for production, and so on.

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71 Aggregate Planning with QM for Windows
Transportation Algorithm

72 Transportation Algorithm Approach to Aggregate Planning
When aggregate planning is viewed as an allocation of capacity to meet forecasted demand. Produces an optimal plan for minimizing costs ! Can specify regular, overtime, and subcontracting production in each time period. Can specify inventory carryover from period to period. Will not handle non-linear costs such as hiring and layoff. Applied Management Science for Decision Making, 1e © 2011 Pearson Prentice-Hall, Inc Philip A. Vaccaro , PhD

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77 The number of quasi-units Beginning Inventory ( from May )
that can be subcontracted out each month Per Unit Labor Costs Beginning Inventory ( from May ) 50 Quasi-Units can be produced on overtime each month Forecasted Quasi-Unit Demand 700 Quasi-Units can be produced on regular time each month Inventory Carry Costs per Quasi-Unit per Month

78 June demand of 800 is met by 50 units of beginning inventory, 700 units of June regular production,
and 50 units of June subcontracted production. July demand of 1000 is met by 50 units of beginning inventory, 50 units of June overtime production, 700 units of July regular production, 50 units of July overtime production, and 150 units of subcontracted July production. August demand of 750 is met by 700 units of August regular production, and 50 units of August overtime production.

79 For each month that a quasi-unit remains in inventory, an additional
$2.00 carry (holding) cost is added to its original cost This shows the costs and headings to be inserted in each cell for the normal transportation tableau, if there had been one. Note that cells that are not allowed to be filled, have a prohibitive cost of $9, ! Also note that the dummy column for unused capacity in each month is missing in the original transportation tableau !

80 Total quasi-unit production over the 3-month aggregate plan
Shows the total number of quasi-units that should be made under regular-time, overtime, and subcontracting over the life of the 3-month aggregate plan. The only carry costs were for the initial inventory of 100 quasi-units

81 Here, we are using the regular transportation algorithm
module to solve the same aggregate planning problem

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85 For each month that a quasi-unit is kept in inventory, a $2.00 carry cost will be added to its original production cost

86 June demand of 800 was met by 100 units of beginning inventory (from May) and 700 units
of regular time production in June itself. July demand of 1,000 was met by 50 units made overtime in June, 50 units subcontracted in June, 700 units of regular time production in July itself, 50 units made overtime in July, and 150 units subcontracted in July. August demand of 750 was met by 700 units of regular time production in August and 50 units made overtime in August.

87 The 1st feasible solution The 2nd feasible solution

88 The 3rd feasible and optimal solution

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91 Aggregate Planning

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95 Sample Data + Basic Template

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101 The Simplex Method An alternative to the transportation method of
linear programming. Must be employed where non-linear costs are involved, such as hiring and layoff. Minimum and maximum constraints can be put on the desired amounts of regular labor, overtime labor, subcontracting, backordering, and many other factors on a monthly, bi-monthly, quarterly, or semi-annual basis.

102 The Simplex Method Constraint formulation is quite complex.
The optimal solution virtually always must be obtained via computer. Dozens or hundreds of variables are involved.

103 The Simplex Method EXAMPLE A production manager must develop an aggregate plan for the next two quarters of the year. The plant produces computer terminals. 700 terminals need to be shipped to customers in the 1st quarter and 3,200 in the 2nd quarter. It is the firm’s policy to ship orders in the quarter in which they are ordered. It takes 5 hrs labor to produce each terminal, and only 9,000 hours of straight-time labor is available in each of the two quarters. Overtime can be used, but the firm limits overtime in each quarter to 10% of straight-time labor available. Labor costs $12.00 per hour at the straight-time rate and $18.00 per hour at the overtime rate.

104 The Simplex Method If a terminal is produced in one quarter and shipped in the next quarter, a carrying cost of $50.00 is incurred. Requirement: How many terminals should be produced on straight-time and overtime in each of the two quarters to minimize straight-time labor, overtime labor, and carrying costs? The market requirements, straight-time labor availability, and overtime policy must be adhered to.

105 The Simplex Method Defining the Decision Variables
X1 = terminals made on straight-time in 1st quarter and shipped in 1st quarter. X2 = terminals made on overtime in 1st quarter and shipped in the 1st quarter. X3 = terminals made on straight-time in 1st quarter and shipped in the 2nd quarter. X4 = terminals made on overtime in 1st quarter and shipped in the 2nd quarter. X5 = terminals made on straight-time in 2nd quarter and shipped in the 2nd quarter. X6 = terminals made on overtime in 2nd quarter and shipped in the 2nd quarter. Q1 = 1st quarter , Q2 = 2nd quarter, Z = total cost of the plan

106 The Simplex Method The Model
Minimize Z = 60X1 + 90X X X4 + 60X5 + 90X6 Subject to: X1 + X => Q1 demand X3 + X4 + X5 + X6 => 3,200 Q2 demand 5X X =< 9,000 Q1 straight-time labor 5X =< 9,000 Q2 straight-time labor 5X X =< Q1 overtime labor 5X6 =< Q2 overtime labor

107 Aggregate Planning with QM for Windows
Simplex Linear Programming

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time in 1st Qtr X2 = 120 units made on overtime and shipped in 1st Qtr X3 = 1,220 units made on straight-time in 1st Qtr and shipped during 2nd Qtr X5 = 1,800 units made and shipped on straight- time in 2nd Qtr X6 = 180 units made on overtime in 2nd Qtr and shipped in 2nd Qtr

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137 Aggregate Planning Applied Management Science for Decision Making, 1e © 2012 Pearson Prentice-Hall, Inc Philip A. Vaccaro , PhD


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