“MIDTERM EXAM”

AGGREGATE PLANNING

Submitted as the requirement to pass Mid Exam

Subject: Operation Management
Lecture: Dr.Ir. Muhammad Ikhsan, M.Sc

By :
NADIRA LAKSITA
NIM : 1710246542

MAGISTER MANAGEMENT PROGRAM

FACULTY OF ECONOMY & BUSINESS
RIAU UNIVERSITY
PEKANBARU
2018

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Aggregate planning is the way to determine the quantity and timing of production for the immediate
future. There are several methods to determine the best option or plan to produce a product with the
cheapest cost. Based on that, from the power point “Aggregate Planning”, we will determine which
plans that have the cheapest cost to produce a product.

Information :

Forecasting Sales Information on Januari – Juni

Month Expected Demand Production Days Demand Per Day (computed)

Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

Cost Information

Inventory carrying cost $ 4 per unit per month

Subcontracting cost per unit $11 per unit

Average pay rate $ 5,5 per hour ($44 per day)

Overtime pay rate $ 7 per hour (above 8 hours per day)

Labor-hours to produce a unit 1,5 hours per unit

Cost of increasing daily production rate (hiring

$200 per unit
and training)

Cost of decreasing daily production rate (layoffs) $400 per unit

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Question :

Which scenario is the cheapest? (The question based on example 1, 2 and 3, and for the
information cost based on data above)

Answer :
Aggregate Planning Option
To determine which plan is the best to produce a product with the cheapest cost, there are several
option that we can use, such as:

Option Advantages Disadvantages Some Comments

Changes in human
Inventory holding cost Applies mainly to
Changing resources are gradual or
may increase. Shortages production, not service,
inventory levels none; no abrupt
may result in lost sales. operations
production changes
Varying Hiring, layoff, and
Avoids the costs of Used where size of
workforce size by training costs may be
other alternatives labor pool is large
hiring or layoffs significant
Varying
Matches seasonal Overtime premiums; Allows flexibility
production rates
fluctuations without tired workers; may not within the aggregate
through overtime
hiring/ training costs meet demand plan
or idle time
Permits flexibility and Loss of quality control;
Applies mainly in
Sub-contracting smoothing of the firm’s reduced profits; loss of
production settings
output future business
Is less costly and more High turnover/ training Good for unskilled
Using part-time
flexible than full-time costs; quality suffers; jobs in areas with large
workers
workers scheduling difficult temporary labor pools
Creates marketing
Tries to use excess Uncertainty in demand.
Influencing ideas. Overbooking
capacity. Discounts Hard to match demand
demand used in some
draw new customers. to supply exactly.
businesses.

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Back ordering May avoid overtime. Customer must be Allows flexibility
during high- Keeps capacity willing to wait, but within the aggregate
demand periods constant. goodwill is lost. plan
Risky finding products
Counter-seasonal May require skills or
Fully utilizes resources; or services with
product and equipment outside the
allows stable workforce opposite demand
service mixing firm’s areas of expertise
patterns

Based on the table above, we will make 3 plans which are one of the plan will be the cheapest cost
and can be used as the company to produce a product.

 Plan 1 : Average production (Option : Changing inventory levels)

Month Expected Demand Production Days Demand Per Day (computed)

Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

Explanation:

Based on the table above, we can see the total of demand from January to June is $ 6,200 with the
total of effective days to produce a product is 124 days. On the plan 1 we used the average
requirement or we can say as the average of production per day is 50 units per day.

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Explanation:

Based on the table above and match with the table plan 1, we can see that from January to March,
the production is below 50 units, means the production did not meet the requirement. From April to
June production in exceed more than 50 units per day, means that it is meet the requirement to
produce a product 50 units per day.

Production at Demand Monthly

Month Ending Inventory
50 Units per Day Forecast Inventory Change
Jan 1,100 900 +200 200
Feb 900 700 +200 400
Mar 1,050 800 +250 650
Apr 1,050 1,200 -150 500
May 1,100 1,500 -400 100
June 1,000 1,100 -100 0
1,850

Total units of inventory carried over = 1,850 units

from one month to the next
Workforce required to produce 50 units per day = 1.5 x 50 units ÷ 8 hours
= 9.375 workers
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Explanation:
The table above shown that the total of production in a month with the average production is 50
units per day, which are:
1. On January the effective days for production is 22 days and the average product to produce is
50 units per days, based on the data we can calculate in a month we can produce 1,100
product while the demand forecast is 900 units. Means that the product exceed by 200 units.
The 200 units become our inventory.
2. On February the effective days for production is 18 days and the average product to produce
is 50 units per days, based on the data we can calculate in a month we can produce 900
product while the demand forecast is 700 units. Means that the product exceed by 200 units.
The 200 units become our inventory plus the inventory from January 200 units, the ending
inventory is 400 units.
3. On March the effective days for production is 21 days and the average product to produce is
50 units per days, based on the data we can calculate in a month we can produce 1,050
product while the demand forecast is 800 units. Means that the product exceed by 250 units.
The 250 units become our inventory plus the inventory from January and February 400 units,
the ending inventory is 650 units.
4. On April the effective days for production is 21 days and the average product to produce is
50 units per days, based on the data we can calculate in a month we can produce 1,050
product while the demand forecast is 1,200 units. Means that the product run short of 150
units. So, we need the 150 units from the inventory to fulfill the demand. Because of that, the
inventory become 650 units minus 150 units, the ending inventory is 500 units.
5. On May the effective days for production is 22 days and the average product to produce is 50
units per days, based on the data we can calculate in a month we can produce 1,100 product
while the demand forecast is 1,500 units. Means that the product run short of 400 units. So,
we need the 400 units from the inventory to fulfill the demand. Because of that, the inventory
become 500 units minus 400 units, the ending inventory is 100 units.
6. On June the effective days for production is 20 days and the average product to produce is 50
units per days, based on the data we can calculate in a month we can produce 1,000 product
while the demand forecast is 1,100 units. Means that the product run short of 100 units. So,
we need the 100 units from the inventory to fulfill the demand. Because of that, the inventory
become 100 units minus 100 units, the ending inventory is 0 units.
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At the end, the ending inventory is 0. The total units of inventory carried over from one month to the
next are 1,850 units. Based on the table, we can find the workforce required to produce 50 units per
day is 9.375 workers.

Costs Calculations

Inventory carrying $7,400 (= 1,850 units carried x $5,5 per unit)

Regular-time labor $51.150 (= 9.375 workers x $44 per day x 124 days)

Other costs (overtime, hiring,

$0
layoffs, subcontracting)

Total cost $58,550

Based on the table above we can conclude that total cost of Plan 1 is $ 58,550

 Plan 2 : Minimum Production (Option : Sub-contracting)

Month Expected Demand Production Days Demand Per Day (computed)

Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

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Explanation:
Based on the table above the minimum production is 38 unit per day. For the total of expected
demand for 6 (six) months is 6,200, effective days for produce a product or production days is 124.
For demand per day, the table shown that for 6 (six) months the company could produce a product
above the minimum production.

In-house production = 38 units per day x 124 days

= 4,712 units
Subcontract units = 6,200 - 4,712
= 1,488 units

Workforce required to produce 50 units per day = 1.5 x 38 units ÷ 8 hours

= 7.1 workers

Explanation:

Based on the table and the calculation above, we can see In-House production in total is 4,712 while
the expected demand for 6 (six) months is 6,200. So, the company should fulfill the run out of 1,488
units by subcontract to other company to help fulfill the demand. To produce the product, the
company need 7.1 workers.

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 Costs Calculations
(= 7.1 workers x $44 per day x 124
Regular-time labor $38,737.60
days)
Subcontracting $16,368 (= 1,488 units x $11 per unit)
Other costs (overtime, hiring,
$0
layoffs, subcontracting)
Total cost $55,105.60

Based on the table above we can conclude that total cost of Plan 1 is $ 55,428.

 Plan 3 : Production Based on Demand (Option : Varying workforce size by hiring or

layoffs)

Month Expected Demand Production Days Demand Per Day (computed)

Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

Based on the table above the company use production based on demand which is the option is
varying workforce size by hiring or layoffs the workers. For the total of expected demand for 6 (six)
months is 6,200, effective days for produce a product or production days is 124. For demand per
day, the table shown that for 6 (six) months the company could produce a product above the
minimum production.

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Month Forecast Daily Basic Extra Cost of Extra Cost of Total
(units) Prod Production Increasing Decreasing Cost
Rate Cost (demand Production Production
x 1.5 hrs/unit x (hiring cost) (layoff cost)
$5,5/hr)
Jan 900 41 $7,425 — — $7,425
Feb 700 39 $5,775 — $800 (= 2 x $400) $6,575

Mar 800 38 $6,600 — $400 (= 1 x $400) $7,000

Apr 1,200 57 $9,900 $3,800 (= 19 x $200) — $13,700

May 1,500 68 $12,375 $2,200 (= 11 x $200) — $14,575

June 1,100 55 $9,075 — $5200 (= 13 x $14,275

$400)
$51,150 $6,000 $6,400 $63,550

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Explanation:
1. On January, the company produces 41 units product with the expected demand 900 unit per
month. The total cost is $ 7,425.
2. On February, the company produces 39 units product, with expected demand 700 units per
month. Based on daily production on January, the production run off by 2 units, means that
there are decreasing production and the company should lay off 2 workers with the cost
$800.
3. On March, the company produces 38 units product, with expected demand 800 units per
month. Based on daily production on February, the production run of fby 1 units, means that
there are decreasing production and the company should lay off 1 workers with the cost
$400.
4. On April, the company produces 57 units product, with expected demand 1,200 units per
month. Based on daily production on March, the production exceed by 19 units, means that
there are increasing production and the company should hiring 19 workers with the cost
$3,800.
5. On May, the company produces 68 units product, with expected demand 1,500 units per
month. Based on daily production on April, the production exceed by 11 units, means that
there are increasing production and the company should hiring 11 workers with the cost
$2,200.
6. On June, the company produces 55 units product, with expected demand 1,100 units per
month. Based on daily production on May, the production run off by 13 units, means that
there are decreasing production and the company should lay off 13 workers with the cost
$5,200.

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 Comparison of 3 (Three) Plans

Cost Plan 1 Plan 2 Plan 3

Inventory carrying $ 7,400 $0 $0

Regular labor $51,150 $38,737.60 $51,150

Overtime labor $0 $0 $0

Hiring $0 $0 $6,000

Layoffs $0 $$0 $6,4 00

Subcontracting $0 $16,368 $0

Total cost $58,550 $55,105.60 $63,550

Based on the calculation on the plan 1, 2 and 3 to compare which

the cheapest option to produce a product, we can conclude based on
the table above is Plan 2 with the total cost $ 55,105.60 is the
cheapest.

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