An HMMS Type Interactive Model for Aggregate Planning

For purposes of aggregate production smoothing, quadratic functions often produce good fits to data on some of the relevant incremental costs, such as inventory and overtime costs. However, when costs of hiring and laying off workers are described by smooth quadratic functions, the model solutions tend to involve very frequent minor workforce adjustments. Production managers are often unwilling to actually implement such decisions because changing workforce levels involves a great many intangible costs, many of which seem to defy meaningful analytic representation.

In this paper an interactive model is developed where, through parametric analysis of a set of workforce constraints, a manager can establish the appropriate trade-offs between his judgmental estimates of hiring and firing costs and other more tangible production costs.