Chapter 2

Production Planning

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What are the reasons behind production planning?
✓ Production planning is carried out to meet fluctuating
demand
✓ When the demand is constant , there is no need for
production planning
✓ production planning aims at determining the appropriate
production level for each period that is associated with the
minimum cost while satisfying customers ‘ demand.
Based on the planning horizon, we can differentiate between
three types of plans:
1. Long term plans
2. Intermediate term plans
3. Short term plans

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Long term plans:
✓ Known as capacity planning
✓ It aims at determining the amounts of output that will be
produced over a long period of time that exceeds 1 year
✓ It involves determining two types of capacity
• Design capacity
• Effective capacity
Design capacity:
✓ It refers to the maximum amount of output that will be
produced under standard conditions
Effective capacity:
✓ It refers to the maximum amount of outputs that will be
produced under normal conditions while taking into
consideration distractions that could occur due to
maintenance , machine break downs, lunch time ,etc.

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Intermediate term planning:
✓ Often termed as aggregate scheduling
✓ It covers a period of one year with monthly details
Short term planning:
✓ Often termed as scheduling
✓ It shows details for periods less than 1 month
What are the different strategies that can be employed to
meet fluctuating demand?
1- producing according to demand by hiring extra workers during
periods of sudden demand increase
2- producing according to demand by working for extra shifts to
meet sudden demand increases and relying on outsourcing
3- maintaining steady production levels all the year and holding
extra production as inventory

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Note that:
✓ each alternative has got its own costs
The first strategy:
✓ there are costs associated with:
A- hiring extra workers :
• Recruiting extra workers to meet the sudden increase in demand
• Cost associated with training the recruited workers
• B- The costs associated with firing the extra workers when demand
declines
The second strategy:
✓ The costs of working overtime and satisfying the rest demand
through outsourcing
The third strategy:
✓ The costs associated with :
• Inventory holding costs
• Storage costs

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Inventory holding costs :
✓ Often termed as inventory carrying costs , which include:
▪ Depreciation expense
▪ Taxes
▪ Insurance
▪ Employees costs
example (1):
You are given the following information about the expected
demand on chairs Month Expected
demand
January 120
February 125
March 130
April 115
May 110
June 100
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Inventory information:
✓ Beginning period inventory = 15 units
Production information :
✓ Time required to produce 1 unit = 10 hours
✓ Average number of working hours for each
worker Per month = 50 hours
Current number of workers = 20 workers
Cost information:
✓ Hiring cost \ worker = $100
✓ Firing cost \worker = $300
✓ Monthly Inventory holding cost = $50 \ unit
✓ Shortage cost= $100 \unit
✓ Over time cost = $5\hour

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The cost of buying one unit from another party = $70
Required:
Evaluate each of the following strategies:
evaluate the following strategies
1. Varying production by changing the number of workers
2. Varying production by working for over time (within 10% of
monthly production capacity) and outsourcing
3. Stable production while holding excess inventory
4. Which strategy you will select?
Strategy 1:
Varying production by changing the number of workers :

✓ Planned production for January = expected demand on January –

beginning inventory balance
= 120 -15 = 105 units

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Month Forecasted Planned Required Required Change in
demand production number of number of workers
hours workers Hirin Firin
g g
January 120 105 1,050 21 1 -
February 125 125 1,250 25 4 -
March 130 130 1,300 26 1 -
April 115 115 1,150 23 - 3
May 110 110 1,100 22 - 1
June 100 100 1,000 20 - 2
total 6 6

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Required number of hours :
✓ Time required to produce 1 unit * number of units that will be
produced during the month
Required number of workers :
Required number of hours \ average production time for the worker \
month
Total cost associated with the strategy:
Total hiring costs + total firing costs
Total hiring costs:
Total Number of workers who will get hired * hiring cost \worker
6 * 100 = $600
total firing costs :
Total Number of workers who will get fired * firing cost \worker
6 * 300 = $ 1800
Total cost: 600 + 1800 = $ 2400

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Strategy 2:
Varying production by working for over time (within 10% of
monthly production capacity) and outsourcing:
Over time = 10% of total production time available for the month
total production time available for the month:
Average number of working hours by the worker \month * total
number of workers available
= 50 * 20 = 1,000 hours
Over time: 10% (1000) = 100 hours
Overtime cost:
Overtime in hours *Over time cost for one hour
Number of units to be outsourced:
(Total production time required for the month – total production
time available for the month – overtime)\ production time \ unit

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 Outsourcing cost:
Number of outsourced units * outsourcing cost \ unit
Total cost:
Overtime cost + outsourcing cost

Month Forecaste Planned Required Overtime Overtime Number of Outsourcin Total

d demand productio number 10% cost units to be g cost cost
n of hours outsourced

Januar 120 105 1,050 50 250 - - 250

y
Februa 125 125 1,250 100 500 15 1050 1550
ry
March 130 130 1,300 100 500 20 1400 1900
April 115 115 1,150 100 500 5 350 850
May 110 110 1,100 100 500 - - 500
June 100 100 1,000 - - - - -
total 5050
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Startegy 3:
Stable production while holding excess inventory:
Planned production in units :
(total demand for all periods – beginning inventory balance)\
number of periods
(700 -15)\6 = 114 units
Ending inventory balance:
Beginning inventory balance + planned production in units –
expected demand
✓ Ending inventory balance for one period is the beginning
inventory balance for the next period
Average inventory balance:
(beginning inventory balance + ending inventory balance )\2

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 Storage cost:
Positive Average inventory balance * storage cost \unit

Month Forecaste Planned Beginnin Ending Average Holding

d demand productio g inventory inventory and
n inventor balance shortage
y costs
balance
January 120 114 15 9 12 600
February 125 114 9 -2 3.5 175
March 130 114 -2 -18 0 1800
April 115 114 -18 -19 0 1900
May 110 114 -19 -15 0 1500
June 100 114 -15 -1 0 100
total 700 6075

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 ✓ The best strategy is strategy 1, because it is associated with the lowest
total cost.
Example 2:
you are given the following information about the expected demand on Asala
rice for the following months
January February March April May June
Forecasted 230 240 220 230 200 230
demand

Inventory information:

Beginning inventory balance 30 units

Production information:
✓ Time required to produce 1 unit :20 hours
✓ Average monthly working hours \worker = 100 hours
✓ Current number of workers = 40 workers

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Cost information:
✓ Hiring cost \ workers = $300
✓ Firing cost \ worker = $500
✓ Holding cost \ unit of inventory = $50
✓ Shortage cost = $100
✓ Overtime cost \ hour for the worker = $10
✓ Outsourcing cost =$70
Required:
evaluate the following strategies
1. 1- Varying production by changing the number of workers
2. Varying production by working for over time (within 10% of
monthly production capacity) and outsourcing
3. Stable production while holding excess inventory
4. Which strategy you will select?

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Strategy 1:
Varying production by changing the number of workers:
Period Forecasted Planned Required Required Changes in workers
demand production number of number of Hiring firing
hours workers

January 230 200 4000 40 0 0

February 240 240 4800 48 8 0
March 220 220 4400 44 0 4
April 230 230 4600 46 2 0
May 200 200 4000 40 0 6
June 230 230 4600 46 6 0
Total 16 10

Total hiring and firing costs:

(16*300) + (10*500) = $ 9800
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Strategy 2:
Varying production by working for over time (within 10% of
monthly production capacity) and outsourcing:

Period Deman Producti Require Overtim Overtim Number Total Total

d on d e 10% e cost of units outsourci cost
number to be ng costs
of outsourc
hours ed
January 230 200 4000 - - - - -
February 240 240 4800 400 4000 20 1400 5400
March 220 220 4400 400 4000 - - 4000
April 230 230 4600 400 4000 10 700 4700
May 200 200 4000 - - - - -
June 230 230 4600 400 4000 10 700 4700
Total 16,000 2800 18,800

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Strategy 3:
Stable production while holding excess inventory:

Period Demand Production Beginning Ending Average Total holding

inventory inventory inventory and shortage
balance balance balance cost

January 230 220 30 20 25 1250

February 240 220 20 0 10 500
March 220 220 0 0 0 0
April 230 220 0 (10) 0 1000
May 200 220 (10) 10 0 0
June 230 220 10 0 5 250
Total 1350 3000

The best strategy is strategy 3, because it is associated with the

lowest cost

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