Aggregate Planning

EXERCISES
Graphical Method
 Aggregate Planning Level Mixed Chase
Strategies Demand
Capacity

Level
Maintaining a constant production rate over the planning horizon.
(output per day/ no. of workers) – 8hrs per day

Set Production rate = average demand of planning horizon

• Production in excess of demand is stored in inventory, then it is used to meet demand in a
later period.
• Demand in excess of production is met by using inventory from the previous periods.
Inventory level of each period changes -> Inventory carrying cost
 Aggregate Planning Level Mixed Chase
Strategies Demand
Capacity

Chase
Attempting to achieve output rates for each period that match the
demand forecast for that period.
Setting production exactly equal to demand.
Cost of increasing/decreasing production rate
 Aggregate Planning Level Mixed Chase
Strategies Demand
Capacity

Mixed
1. Setting a stable production rate.
Regular production (RP)
2. RP > demand -> Inventory
3. RP < Demand -> Apply Overtime/ Subcontracting
 Notices
• Regular time = regular production: 8 working hrs per day
• Initial Inventory -> used in the 1st period
• How may kinds of cost in a plan?
• When should we make a table for developing a plan?
• Increase/ decrease production rate at 1st period
5
The president of Hill Enterprises, Terri Hill, projects the firm’s aggregate demand requirements over the next 8 months
of 2021 as follows: The operations manager is considering a new plan, which begins in January with
200 units on hand. Stockout cost of lost sales is $100 per unit. Inventory holding
Month Demand
cost is $20 per unit per month. Regular production cost is $40 per unit. Ignore any
Jan. 1400 idle-time costs. Evaluate the plans and choose the best one for Hill Enterprises.
Feb. 1600 Plan A: Vary the workforce level to execute a strategy that produces the quantity
demanded in the prior month. The year 2020 demand and rate of production are
Mar. 1800
both 1,600 units per month. The cost of hiring additional workers is $5,000 per 100
Apr. 1800 units. The cost of laying off workers is $7,500 per 100 units.
May 2200 Plan B: Produce at a constant rate of 1,400 units per month, which will meet
Jun. 2200 minimum demands. Then use subcontracting, with additional units at a premium
price of $75 per unit.
Jul. 1800
Plan C: Keep a stable workforce by maintaining a constant production rate equal to
Aug. 1800 the average requirements and allow varying inventory levels.
Plan D: Keep the current workforce stable at producing 1,600 units per month. Permit a maximum of 20% overtime at
an additional cost of $50 per unit. A warehouse now constrains the maximum allowable inventory on hand to 400 units
or less.
Plan E: Keep the current workforce, which is producing 1,600 units per month, and subcontract to meet the rest of the
demand.
1
The Good and Rich Candy Company makes a variety of candies in three factories
worldwide. Its line of chocolate candies exhibits a highly seasonal demand pattern,
with peaks during the winter months (for the holiday season and Valentine’s Day)
and valleys during the summer months (when chocolate tends to melt and customers
are watching their weight). Given the following costs and quarterly sales forecasts,
determine whether (a) level production, or (b) chase demand would more
economically meet the demand for chocolate candies:
Quarter Sales forecast (lbs) Cost Information
Spring 80,000 Hiring cost $100 per worker
Summer 50,000 Firing cost $500 per worker
Fall 120,000 Inventory carrying cost $0.5
Winter 150,000 Regular production cost $2 per pound
Production per employee 1000 lbs per quarter
Beginning workforce 90 workers
2
Month 1 2 3 4 5 6 7 8 9 10 11 12
Demand 1000 400 400 400 400 400 500 500 1000 1500 2500 3000

Each worker can produce on average 100 cases of action toys each month.
Overtime is limited to 300 cases, and subcontracting is unlimited. No action
toys are currently in inventory. The wage rate is $10 per case for regular
production, $15 for overtime production, and $25 for subcontracting. No
stockout are allowed. Holding cost is $1 per case per month. Increasing the
workforce costs approximately $1000 per worker; decreasing the workforce
costs $500 per worker. Management wishes to test the following scenarios
for planning production:
a. Level production over the 12 months.
b. Produce to meet demand each month
c. Maintain 5 workers and apply subcontracting & overtime when needed.
3
Bioway, Inc., a manufacturer of medical supplies, uses aggregate planning to set labor and
inventory levels for the year. While a variety of items are produced, a standard kit
composed of basic supplies is used for planning purposes. Demand varies with seasonal
illnesses and the quarterly ordering policies of hospitals. An average worker at Bioway can
produce 1000 kits a month at a cost of $9 per kit during regular production hours and $10
a kit during overtime production. Completed kits can also be purchased from outside
suppliers at $12 each. Inventory carrying costs are $2 per kit per month. Overtime is
limited to regular production, but subcontracting is unlimited. Due to high quality standards
and extensive training, hiring and firing costs are $1500 per worker. Bioway currently
employs 25 workers. Given the demand forecast below, develop a six-month aggregate
production plan for Bioway using:
(a) chase demand
(b) a mixed strategy where the current workforce is kept for April through September, and
supplemented with overtime and subcontracting as needed.

Month April May June July August September

Demand 60,000 22,000 15,000 46,000 80,000 15,000
The S&OP team at Kansas Furniture, has received the following estimates
of demand requirements:
Month Jul. Aug. Sep. Oct. Nov. Dec.
Demand 1.000 1,200 1,400 1,800 1,800 1,800
Assuming one-time stockout costs for lost sales of $100 per unit, inventory
carrying costs of $25 per unit per month, and zero beginning and ending
inventory. Which plan is best and why?
Plan A: Produce at a steady rate (equal to minimum requirements) of 1,000
units per month and subcontract additional units at a $60 per unit premium
cost.
Plan B: Vary the workforce, to produce the prior month’s demand. The firm
produced 1,300 units in June. The cost of hiring additional workers is
$3,000 per 100 units produced. The cost of layoffs is $6,000 per 100 units
cut back.
Transportation Model
Linear Programming
6
Sales period Roy’s firm has developed
1 2 3 the following supply,
Demand 40 50 40 demand, cost, and
Capacity inventory data. Allocate
Regular 30 35 30 production capacity to meet
Overtime 5 5 5 demand at a minimum cost
Subcontracting 40 50 40 using the transportation
method. What is the cost?
Beginning inventory 20
Cost
Regular time $100 per unit
OT $150 per unit
Subcontract $200 per unit
Carrying cost/ holding cost $4 per unit per period
7
Sales period Burruss Manufacturing
Company uses overtime,
1 2 3 4
inventory, and
Demand 900 1700 1600 3000 subcontracting to absorb
Capacity fluctuations in demand.
Cost data, expected
Regular 1000 1200 1300 1300
demand, and available
Overtime 100 150 200 200 capacities in units for the
Subcontracting 500 500 500 500 next four quarters are
Beginning inventory 300 units given here.
Demand must be
Cost satisfied in the period it
Regular time $20 per unit occurs; that is, no
backordering is allowed.
OT $25 per unit Design a production plan
Subcontract $28 per unit that will satisfy demand
Carrying cost/ holding cost $2 per unit per period at minimum cost.
8
Burruss Manufacturing
Sales period Company uses overtime,
inventory, and
1 2 3
subcontracting to absorb
Demand 450 550 750 fluctuations in demand.
Capacity Cost data, expected
demand, and available
Regular 300 400 450
capacities in units for the
Overtime 50 50 50 next four quarters are
Subcontracting 200 200 200 given here.
Beginning inventory 50 Demand must be
satisfied in the period it
Cost occurs; that is, no
Regular time $50 per unit backordering is allowed,
stockout cost = $5 per
OT $65 per unit unit
Subcontract $80 per unit Design a production plan
Carrying cost/ holding cost $1 per unit per period that will satisfy demand
at minimum cost.