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Abstract Number: 002-0259

Title of the Paper: Excel Model for Aggregate Planning
Name of the Conference: Second World Conference on POM and 15th Annual POM
Conference, Cancun, Mexico, April 30-May 3, 2004

Francisco Aguado Correa

Departamento de Economa Financiera, Contabilidad y Direccin de Operaciones
Facultad de Ciencias Empresariales
Universidad de Huelva
Plaza de la Merced, 11 21002 Huelva (Spain)
agucor@uhu.es
Tel: +34 959017881

Nuria Padilla Garrido

Departamento de Economa General y Estadstica
Facultad de Ciencias Empresariales
Universidad de Huelva
Plaza de la Merced, 11 21002 Huelva (Spain)
padilla@uhu.es
Tel: +34 959017837

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EXCEL MODEL FOR AGGREGATE PLANNING

Abstract
Spreadsheets are the most common software tool managers use to analyze data and model
quantitative problems. They have also become one of the preferred tools for teaching quantitative
methods to business school students. In this paper we introduce an Excel model for aggregate
planning, characterized by its great flexibility and for the use of Excel Solver, which in many
cases allow us to find the optimal solution for a given set of conditions.

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EXCEL MODEL FOR AGGREGATE PLANNING

Introduction
It is a fact that spreadsheets are the preferred tool for teaching quantitative methods to
undergraduate and graduate business students (Jordan et al., 1997). This has led to the
publication of an increasing number of textbooks dealing with modeling and decision analysis
using spreadsheets (Hesse, 1997, Eppen et al., 1998, Savage, 1998, Barlow, 1999, Monahan,
2000, Winston and Albright, 2000, Lapin and Whisler, 2001, Weida, Richardson and Vazsonyi,
2001, Render, Stair and Balakrishnan, 2002, Hillier, Hillier and Reagan, 2003, Ragsdale, 2003).
The reasons for the popularity of spreadsheets are many, but we could highlight the
following: they are widespread (Mason and Keane, 1989), user-friendly, flexible, and allow the
analysis of multiple scenarios. Therefore, many companies and education centers have found
spreadsheets to be an easy method for business modeling as they offer a wide set of tools ranging
from formulas whether easy ones or more complex ones to simulation of different scenarios,
macros, charts, etc.
Perhaps the most remarkable fact is that spreadsheets have become an excellent delivery
vehicle for teaching optimization (Evans, 1986), which in many cases allow us to find the
optimal solution for a given set of conditions.
Microsoft Excel Solver has greatly helped in this, as it is the most widely distributed and
almost surely the most widely used general-purpose optimization modeling system (Fylstra et al.,
1998).
In fact, we use Microsoft Excel to teach our undergraduates aggregate planning. First, it
is necessary to introduce them to basic spreadsheet concepts and later proceed to the modeling of
problems, trying to include the greatest number of possibilities in order to analyze all the results
generated and use the tools previously mentioned.

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EXCEL MODEL FOR AGGREGATE PLANNING

Aggregate Planning
Aggregate planning involves translating business plans into broad labor and output plans
for the intermediate term. Its objective is to minimize the cost of resources required to meet
demand over that period.
To achieve this, it is necessary for the planner to consider various decision alternatives.
The two basic types of decision alternatives are reactive and aggressive (Krajewski and Ritzman,
2001).
Reactive alternatives admit forecasted demand as a given and try to fulfill it by
introducing modifications in the work force levels, overtime, vacation schedules, inventory
levels, subcontracting, undertime, and planned backlogs.
On the other hand, aggressive alternatives try to modify the demand in order to adapt it to
the firm's resources by means of promotional campaigns, price incentives, complementary
products, etc. This kind of alternative tends to be the responsibility of the marketing manager.
Assuming that the effect of aggressive alternatives has already been incorporated into the
demand forecasts, the planner will have to focus on reactive alternatives. Therefore, he/she will
have to establish a planning strategy which selects the best options. A possible way to achieve
this is by starting up with both chase and level strategies and then moving later on into a mixed
strategy.

Chase strategy
This strategy adjusts production rates to match the demand requirements period by
period. In order to achieve this objective, the planner cannot make use of the anticipation

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EXCEL MODEL FOR AGGREGATE PLANNING

inventory, or undertime. Therefore, he/she has to use other options such as hiring and laying off
workers, overtime, and subcontracting. This approach has the advantage of low inventory
investment and backlogs, although it has some disadvantages, such as the potential alienation of
the work force and the loss of productivity and lower quality because of the constant churn in the
work force.

Level strategy
This strategy either keeps a constant output rate or work force level over the planning
horizon. To achieve this, and contrary to the previous strategy, it can use the anticipation
inventory and/or undertime. The main advantages are level output rates and a stable work force
at the expense of increased inventory investment, undertime, overtime, and backlogs.

Obviously, between these two strategies there is a range of possible strategies and the
planner should find the best mixed strategy to improve the solution obtained by the two previous
strategies.
To do so, the planner will have to answer certain questions:
1. Should inventories be used to absorb changes in demand?
2. Should changes in demand be accommodated by varying the size of the work force?
3. Should overtime and undertime be used to absorb changes in demand?
4. Should subcontracting be used?

Despite the many possibilities this approach offers, it makes aggregate planning much
more complicated due to the large number of alternative plans.

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EXCEL MODEL FOR AGGREGATE PLANNING

To analyze aggregate planning in the classroom we use the trial-and-error approach using
graphs and charts that can easily be developed with a spreadsheet.

Defining the problem

The planning department of a company is faced with determining the aggregate plan for a
product family over the next twelve months. In this plan, the company wants to determine the
number of workers needed each month, the number of regular and overtime hours required, the
number of units to be produced and subcontracted, and the total cost associated with the plan.
Table 1 presents the demand forecast and other relevant parameters.

TABLE 1: Forecasted Demand and Other Relevant Parameters

Demand Forecast
Working days
Initial Inventory
Safety Stock

Jan.
6,000
20
1,000
500

Feb. Mar. Apr. May

Jun.
Jul.
Aug.
6,000 6,000 8,000 14,000 18,000 24,000 12,000
20
22
20
22
21
20
22

Labor Hours/Unit
0.5
Regular Labor Hours/Day
7.1
Maximum Overtime Hours/Day
1
Maximum Subcontracting Units/Month 5,000
Beginning Work Force
40
Minimum Work Force
15
Maximum Work Force
60

Labor Cost/HourRegular Time

Labor Cost/HourOvertime
Labor Cost/HourUndertime
Subcontracting Cost/Unit
Holding Cost (unit/month)
Stockout Cost (unit/month)
Hiring and Training Cost/Worker
Layoff Cost/Worker

Sep.
Oct. Nov. Dec.
7,000 6,000 4,000 10,000
22
20
21
20

Cost ($)
6
8
7
20
1.5
3
200
250

The size of the work force is set at the beginning of each month. Workers may be hired or
fired to change the available amount of production. We do not try to plan for vacations, sickness,
relocation, or death of employees during the year.
Hourly rates are associated with regular and overtime labor and it is assumed that all
workers are paid to work an entire month, even if they are not productive. The company uses a
maximum subcontracted production of 5,000 units per month.

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EXCEL MODEL FOR AGGREGATE PLANNING

Inventory at the beginning of the first month is 1,000 units. Because the demand forecast
is imperfect, the company has determined that a safety stock of 500 units should be established.
In addition, inventory holding cost is calculated on ending inventory.
The company policies establish that unsatisfied demand can be backordered and filled in
a future period. Additionally, according to policies, the minimum number of employees must be
15 at all times, and the maximum number 60, which corresponds to the maximum capacity of the
facility. A final policy establishes that overtime on a daily basis cannot exceed one hour per
worker.
Finally, the total cost is made up of the sum of costs derived from the wages of regular
work and overtime, undertime (this cost is only computed if the number of workers needed in a
given month is lower than the minimum number of employees), subcontracting, carrying
inventory, backorders, and hires and fires.
The goal is to create a feasible low-cost production plan.

The trial-and-error charting and graphic technique

This approach is easy to understand and convenient to use, and involves costing out
various aggregate planning alternatives and selecting the one that is best on a trial-and-error
basis.
The main problem is that the vast amount of calculations required makes it difficult to
apply the process manually, and so a spreadsheet is required. In our case, we use Microsoft
Excel, which allows the students to simulate different alternatives within a few seconds.
However, before investigating alternative aggregate plans, it is often useful to convert
demand forecasts into production requirements (Chase, Aquilano and Jacobs, 1998), which take

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EXCEL MODEL FOR AGGREGATE PLANNING

into account the amount of inventory on hand at the beginning of the forecast period and the
safety stock estimates. Note that these requirements implicitly assume that the safety stock is
never actually used, so that the ending inventory each month equals the safety stock for that
month.
The three aggregate plans included in the spreadsheet are a chase (i.e., variable
production rate model), a level (i.e., constant work force model), and a manual aggregate plan.
The first two plans are automatically calculated, while the third plan, the manual, is user inputted
based upon the information provided in the other two plans. In this latter case, the student has the
button Set Workers Required which, after establishing the strategy offering fewer costs, equates
the number of workers needed in the mixed strategy with those in the lower-cost strategy (see
table 2 and figures 1 and 2). From this moment on, the student can modify the number of
workers on a trial-and-error basis to look for the best solutions. Changes in this row have an
influence on all the other spreadsheet numbers, and therefore on the final total cost. For further
details, Appendix 1 shows the formulas required in each cell, based on Excel protocols.

TABLE 2: Summary of Costs for Alternative Aggregate Plans

Cost Category

Pure Chase Strategy

Pure Level Strategy

Mixed Strategy
(Mixed Strategy Work Force =
Chase Strategy Work Force)

Regular Production

$340,296

$361,500

$347,147

Overtime Production

$10,032

$9,600

Subcontracted Production

$91,200

$73,960

$1,656

$197,439

$11,401

$29,350

$1,514

$29,350

$472,534

$560,453

$471,459

Undertime
Inventory Holding/Shortage
Hiring/Firing
Total Cost

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EXCEL MODEL FOR AGGREGATE PLANNING

FIGURE 1: Mixed Strategy

However, in spite of its relative simplicity, finding a minimum cost solution is not guaranteed. In
other words, given that we are dealing with an iterative process, the quality of the solution for
the mixed or manual plan will depend on the actual skills of the planner. Therefore, it is
reasonable to try to find a method that could lead to an optimal or satisfactory solution,
independently of the skills of the planner. The Solver tool bundled with Microsoft Excel can help
to achieve this.

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EXCEL MODEL FOR AGGREGATE PLANNING

FIGURE 2: Graphic representation of the aggregate plan

Optimizing with Microsoft Excel Solver

Optimizing with Excel Solver takes as a starting point the model developed in the
spreadsheet. Later on, and using the Solver Parameters dialog box (see figure 3), the planner
specifies the objective function (in our case, total cost), variables (the number of workers
required each month), and constraints. After entering all the appropriate parameters and choosing
any necessary options for our model, Excel Solver extracts the optimization problem from the
spreadsheet formulas and builds a representation of the problem adapted to the corresponding
optimizer: Simplex, Generalized-Reduced-Gradient (GRG), and Branch-and-Bound (B&B)
methods. Finally, Excel Solver obtains an optimal solution and updates the model developed in
the spreadsheet.
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EXCEL MODEL FOR AGGREGATE PLANNING

FIGURE 3: Excel Solver Parameters

In our model, the decision variables are the number of workers required from January to
December, and so the optimization problem involves integers variables with three constraints,
which are actually 36 because of the ranges under consideration:
1. The number of workers needed each month has to be less than or equal to the maximum
number of employees.
2. The number of workers required each month has to be an integer.
3. The number of workers required each month has to be greater than or equal to minimum
number of employees.

In addition, and due to the inclusion in the spreadsheet of discontinuous functions such as
IF or AND, related to the target cell, the model becomes nonlinear, which means we will be
dealing with a nonlinear integer problem.
Although it is possible to solve nonlinear integer problems with the Excel Solver, users
should be aware of the intrinsic limitations of this process (Eppen et al., 1998):
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EXCEL MODEL FOR AGGREGATE PLANNING

The use of an IF function or related functions that introduce discontinuities in the

spreadsheet cell(s) will be very likely invalidate responsible use of Solver if the objective
function cell formula or any constraint formulas depend directly or indirectly upon the
cell(s) containing those functions. Not only does the IF function void linearity, but it is
likely introduces discontinuities into the feasible region or the set of possible objective
function values. This in turn affects the partial derivative estimates computed internally
by Solver that guide it toward optimality. Neither Solver nor any known optimization
procedure can be guaranteed to handle such discontinuities reliably for all models.

For nonlinear models, the Changing Cell values from a previous Solver run, if any,
become the initial Changing Cell values used if Solver is run again; that is, if it is
feasible, Solver starts from where a previous Solver run left off.

Linear and especially nonlinear model optimizations by Solver are very sensitive to the
scaling of numbers in the model. Avoid units of measure in models that produce numbers
whose differences span more than about 6 or 7 orders of magnitude. If the difference is
greater, it will lead to cumulating roundoff and/or truncation errors as Solver optimizes
the model that may result in wrong Changing Cell solutions or bogus error messages. For
some nonlinear models the internal re-scaling generated by Use Automatic Scaling may
not be enough to avoid this problem in unusual circumstances.

Because the arithmetic accuracy of calculations is finite, the constraints cannot always be
satisfied exactly. The Precision value in Solver Options is used to assess whether a
constraint is adequately satisfied. In any event, its value should not exceed 0.001 nor be
below 0.00000001.

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EXCEL MODEL FOR AGGREGATE PLANNING

Solver optimization of a model having integer constraints is computationally very

intensive, and hence convergence is slow. To speed up solution time, Solver uses a
Tolerance value permitting a "slightly" less than optimal objective function value. For
example, the default setting of Tolerance = 5% means that an approximate solution with
objective function value within 5% of the true optimum while satisfying the constraint is
acceptable. Overriding this default by setting Tolerance = 0% forces Solver to continue
optimizing the model until an optimal integer solution is found.

Therefore, given the intrinsic limitations of this process, the branch-and-bound algorithm
that uses GRG to solve subproblems may fail to find a feasible solution for a subproblem, even
though one exists, or it may return a local optimum that is not global. Because of this, the
branch-and-bound algorithm is not guaranteed to find the integer true optimum for nonlinear
problems, although it will often succeed in finding a "good" integer solution (Fylstra et al.,
1998).
In other words, Solver will lead different planners starting up from the same model
to an improved solution, should this exist, which might not match the global optimum.
Considering this, the options selected for our problem are those shown in figure 4. Note
the option Use Automatic Scaling is selected and the value in the Tolerance edit box.

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EXCEL MODEL FOR AGGREGATE PLANNING

FIGURE 4: Excel Solver Options

After running Excel Solver for the first time, the total cost drops from $471,459 to
$408,088. As we pointed earlier, this solution might not necessarily be the optimum one.
Therefore, we run Excel Solver again taking as a starting point the solution obtained and we
repeat the process until no further improvement is obtained in total cost (to simplify the process
we have programmed a macro, we have called Solver, that runs Excel Solver repeatedly until it
cannot improve the solution. See Appendix 2). In our problem, the final total cost is $406,465,
which involves an improvement over the original model of $64,994. Despite the limitations, we
think this saving justifies the use of Excel Solver to optimize models and find satisfactory
solutions. In this way, the planner will not have to develop the trial-and-error method manually.

Conclusions
Spreadsheets motivate students to experiment with and learn more about production
planning and control systems, and particularly about aggregate planning. In addition, using
spreadsheets and add-ins develops students skills within a familiar context that will carry over to
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EXCEL MODEL FOR AGGREGATE PLANNING

the workplace, especially in small firms where they, probably, will have to develop their own
applications models adapted to their needs.

References
Barlow, J. F. Excel Models for Business and Operations Management. Chichester: John Wiley &
Sons, 1999.
Chase, R. B., N. J. Aquilano, and F. R. Jacobs. Production and Operations Management:
Manufacturing and Services. Boston: Irwin/McGraw-Hill, 1998.
Eppen, G. D., F. J. Gould, C. P. Schmidt, J. H. Moore, and L. R. Weatherford. Introductory
Management Science: Decision Modeling with Spreadsheets. Upper Saddle River, New
Jersey: Prentice Hall, 1998.
Evans, J. R. Spreadsheets and Optimization: Complementary Tools for Decision Making.
Production and Inventory Management 27, n 1 (1986): 36 -46.
Fylstra, D., L. Lasdon, J. Watson, and A. Waren. Design and Use of the Microsoft Excel
Solver. Interfaces 28, no. 5 (1998): 29-55.
Hesse, R. Managerial Spreadsheet Modeling and Analysis. Chicago: Irwin, 1997.
Hillier, F. S. , M. S. Hillier, and P. D.Reagan. Introduction to Management Science: A Modeling
and Case Studies Approach With Spreadsheets. Boston: McGraw-Hill/Irwin, 2003.
Jordan, E., L. Lasdon, M. Lenard, J. Moore, S. Powell, and T. Willemain. OR/MS and
MBAsMediating the Mismatches. OR/MS Today, February (1997): 36-41.
Krajewski, L. J., and L. P. Ritzman. Operations Management: Strategy and Analysis. Upper
Saddle River, New Jersey: Prentice Hall, 2001.
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EXCEL MODEL FOR AGGREGATE PLANNING

Lapin, L. L., and W. D.Whisler. Quantitative Decision Making with Spreadsheet Applications.
Belmont, CA: Duxbury/Thomson Learning, 2002.
Mason, D., and D. Keane. Spreadsheets: Solution or Problem? Interface New Zealand, October
(1989): 82-84.
Monahan, G. E. Management Decision Making: Spreadsheet Modeling, Analysis, and
Applications. New York: Cambridge University Press, 2000.
Ragsdale, C. T. Spreadsheet Modeling and Decision Analysis: A Practical Introduction to
Management Science. Cincinnati, Ohio: South-Western College Pub., 2003.
Render, B., R. M. Stair, and N. Balakrishnan. Managerial Decision Modeling with Spreadsheets
and Student CD-ROM. Upper Saddle River, N.J.: Prentice Hall, 2002.
Savage, S. L. Insight.xla: business analysis software for Microsoft Excel. Pacific Grove,
California: Brooks/Cole, 1998.
Weida, N. C., R. Richardson, and A. Vazsonyi. Operations Analysis Using Microsoft Excel.
Pacific Grove, California: Duxbury, 2001.
Winston, W. L., and S. C. Albright. Practical Management Science: Spreadsheet Modeling and
Applications. Belmont, California: Duxbury Press, 2000.

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EXCEL MODEL FOR AGGREGATE PLANNING

APPENDIX 1: CELL FORMULAS

In this model (see figure 1), the decision variables are indicated by cells with dashed
borders (cells B17 through M17), constraint cells are indicated by cells with solid borders
(B37:M40; B40:B41), and the cell representing the objective function is indicated with a double
border (cell N33).
Cell Formulas (Mixed Strategy)
Cell:
Working Days
B8
Demand Forecast
B10
Initial Inventory
B11
Safety Stock
B12
Production Requirements
B13
C13
Production Hours Needed
B16
Production Hours Available
B18
Workers Hired/Fired
B19
C19
Units ProducedRegular
B22
Units ProducedOvertime
B23
C23
Units Subcontracted
B24
C24
Monthly Inventory
B25
C25
Regular Production (Cost)
B28
Overtime Production (Cost)
B29
Subcontracted Production (Cost)
B30
Inventory Holding/Shortage
(Cost)
B31
Hiring/Firing (Cost)
B32
Total Costs
B33

Formula:

Copied to:

='Available Data'!B3

C8:M18

='Available Data'!B6

C10:M10

='Available Data'!B7

='Available Data'!B8

=B10-(B11-B12)
=C10

D13:M13

=B13*LaborHours_Unit

C16:M16

=B17*B8*Regular_Labor_Day

C18:M18

=B17-Beggining_Work_Force
=C17-B17

D19:M19

=B18/LaborHours_Unit

C22:M22

=IF(B22<B13,IF(B13-B22<B37,B13-B22,B37),0)
=IF(C22+B25<C13,IF(C13-C22-B25<C37,C13-C22-B25,C37),0)

D23:M23

=IF(B22+B23<B13,IF(AND(B13-B22B23>B38,B38>0),B38,B13-B22-B23),0)
=IF(B25+C22+C23<C13,IF(AND(C13-C22-C23B25>C38,C38>0),C38,C13-C22-C23-B25),0)

=SUM(B22:B24)-B13
=B25+SUM(C22:C24)-C13

D25:M25

=B22*LaborHours_Unit*Labor_Cost_Hour_Regular_Time

C28:M28

=B23*LaborHours_Unit*Labor_Cost_Hour_Overtime

C29:M29

=B24*Subcontracting_Cost_Unit

C30:M30

D24:M24

=IF(B25>=0,B25*Holding_Cost__unit_month,ABS(B25)*Stockou C31:M31
t_Cost__unit_month)
=IF(B19>0,B19*Hiring_and_Training_Cost_Worker,ABS(B19)*L
ayoff_Cost_Worker)

C32:M32

=SUM(B28:B32)

C33:M33

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EXCEL MODEL FOR AGGREGATE PLANNING

Cell Formulas (Mixed Strategy)

Cell:
Maximum permissible overtime
hours
B36
Maximum overtime production
B37
Maximum subcontracted
production
B38

Formula:

Copied to:

=B8*Maximum_Overtime_Day*B17

C36:M36

=ROUNDDOWN(B36/LaborHours_Unit,0)

C37:M37

=Maximum_Subcontracting

C38:M38

APPENDIX 2: SOLVER MACRO

This macro is associated with the Solver button (see figure 1), and its source code is as
follows:
Sub Solver()
' Solver Macro
Dim val As Variant
' Run the macro Set_Workers_Required to establish the initial number of workers
Set_Workers_Required
' It makes the value of variable val equal to the value that appears in cell N33
val = Range("N33").Value
' Set up the parameters for the model
SolverOk SetCell:="$N$33", MaxMinVal:=2, ValueOf:="0", ByChange:="$B$17:$M$17"
' Solve the model but do not display the Solver Results dialog box
SolverSolve UserFinish:=True
' Run Solver until it cannot improve the solution
Do While Range("N33").Value < val
val = Range("N33").Value
SolverOk

SetCell:="$N$33",

MaxMinVal:=2,

ByChange:="$B$17:$M$17"
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ValueOf:="0",

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EXCEL MODEL FOR AGGREGATE PLANNING

SolverSolve UserFinish:=True
Loop
' Select cell N33
Range("N33").Select
' Show the result in a message box
MsgBox "Optimization Finished", vbInformation

End Sub

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