BU395

Agenda
Aggregate Production Planning
Trial and Error
Graph

Table (worksheet)

Trade-off Analysis

Aggregate Services Planning

Disaggregation of the Production Plan

Developing a Master Production Schedule
 Balancing Aggregate Demand
and Aggregate Production Capacity
10000
Suppose the figure to 10000
8000
the right represents 8000 7000
6000
forecast demand in 6000 5500
4500
units
4000

Now suppose this 2000

lower figure represents 0
the aggregate capacity Jan Feb Mar Apr May Jun
of the company to
9000
meet demand 10000
8000
8000
What we want to do is 6000
6000
4500 4000
balance out the 4000
4000
production rate,
workforce levels, and 2000

inventory to make 0
these figures match up Jan Feb Mar Apr May Jun
Basic Strategies
 Basic Strategies
Level output/workforce strategy:
maintain steady rate of output

meeting variations in demand with inventories and back-orders

only for durable goods

Chase demand strategy:

matching capacity to demand;

planned output set at forecasted demand

meeting variations in demand with overtime and part-time /

temporary workers
Mixed Strategy
 Aggregate Planning Techniques
Trial-and-Error
Develop simple tables (worksheets) or graphs that enable managers
to visually compare projected demand requirements with
production
Assumptions:
regular output capacity is the same in all periods

each total cost is a linear function of number of units

Optimization
 Trial and Error Techniques- graph
2400

Inventory
Cumulative demand units
2000
reduction /
1600
back order
Cumulative
1200
production
800
Inventory build up
400 Cumulative
demand
0
1 2 3 4 5 6
Time period
 Trial and Error Techniques- worksheet
Example:

Period 1 2 3 4 5 6 Total
Forecast 2,000 2,000 3,000 4,000 5,000 2,000 18,000

units Cost/unit $
production per month 2800 Regular permanent 100
initial inventory 1000 Temporary 100
desired ending inventory 1000 Hire/Layoff (one time) 25
max. over time 400 Inventory 10
# of workers 140 Back orders 150
Overtime 150
 Aggregate Planning Relationships
1. To determine ending inventory and back order in any period i, first
calculate X:
X = Beginning inventoryi + (Output - Forecast)i - Back orderi-1,
where output = sum of regular, overtime, and part-time production.
If X 0, then ending inventoryi = X and back orderi = 0;
If X < 0, then ending inventoryi = 0 and back orderi = -X.
2. For each period
Avg. inventory = (Beginning inventory + Ending inventory)/2
3.
Beginning inventoryi = ending inventoryi-1

9
 Alternative 1: Backorder
Period 1 2 3 4 5 6 Total
Forecast 2,000 2,000 3,000 4,000 5,000 2,000 18,000
Output
Regular 2,800 2,800 2,800 2,800 2,800 2,800 16,800
Temporary 0
Overtime 0
Subcontract 0
Output - Forecast 800 800 -200 -1,200 -2,200 800 -1,200
Inventory X=Beginning inventoryi + (Output - Forecast)i - Back orderi-1
Beginning 1,000 1,800 2,600
1000+800-0=1800 2,400 1,200 0
Ending 1,800 2,600 2,400 1,200 0 0
Average 1,400.0 2,200.0 2,500.0 1,800.0 600.0 0.0 8,500
Backlog 0 0 0 0 1,000 200 1,200
Costs: X=Beginning inventoryi + (Output - Forecast)i - Back orderi-1
Regular @ 100 280,000 280,000 280,000 280,000 280,000 280,000 1,680,000
1200-2200-0= -1000`
Temporary @ 100 0 0 0 0 0 0 0
Overtime @ 150 0 0 0 0 0 0 0
Hire/Layoff @ 25 0
Inventory @ 10 14,000.0 22,000.0 25,000.0 18,000.0 6,000.0 0.0 85,000.0
Back orders @ 150 0 0 0 0 150,000 30,000 180,000
Total 294,000.0 302,000.0 305,000.0 298,000.0 436,000.0 310,000.0 1,945,000.0
 Alternative 2: Overtime
Period 1 2 3 4 5 6 Total
Forecast 2,000 2,000 3,000 4,000 5,000 2,000 18,000
Output
Regular 2,800 2,800 2,800 2,800 2,800 2,800 16,800
Temporary 0
Overtime Max 400 units 400 400 400 1,200
Subcontract 0
Output - Forecast 800 800 200 -800 -1,800 800 0
Inventory
Beginning 1,000 1,800 2,600 2,800 2,000 200
Ending 1,800 2,600 2,800 2,000 200 1,000
Average 1,400.0 2,200.0 2,700.0 2,400.0 1,100.0 600.0 10,400
Backlog 0 0 0 0 0 0 0
Costs:
Regular @ 100 280,000 280,000 280,000 280,000 280,000 280,000 1,680,000
Temporary @ 100 0 0 0 0 0 0 0
Overtime @ 150 0 0 60,000 60,000 60,000 0 180,000
Hire/Layoff @ 25 0
Inventory @ 10 14,000.0 22,000.0 27,000.0 24,000.0 11,000.0 6,000.0 104,000.0
Back orders @ 150 0 0 0 0 0 0 0
Total 294,000.0 302,000.0 367,000.0 364,000.0 351,000.0 286,000.0 1,964,000.0
 Productivity =20 units per worker per month
Temporary workers work during a 2nd shift
Hiring and training cost= $500
Layoff cost = $0
Maximum workers can be hired =60
 Alternative 3: Part-time
Period 1 2 3 4 5 6 Total

Forecast 2,000 2,000 3,000 4,000 5,000 2,000 18,000

Output
Regular 2,800 2,800 2,800 2,800 2,800 2,800 16,800
Temporary 600 600 1,200
Overtime 0
Subcontract 0
Output - Forecast 800 800 -200 -600 -1,600 800 0
Inventory
Beginning 1,000 1,800 2,600 2,400 1,800 200
Ending 1,800 2,600 2,400 1,800 200 1,000
Average 1,400.0 2,200.0 2,500.0 2,100.0 1,000.0 600.0 9,800
Backlog 0 0 0 0 0 0 0
Costs:
Regular @ 100 280,000 280,000 280,000 280,000 280,000 280,000 1,680,000
Temporary @ 100 0 0 0 60,000 60,000 0 120,000
Overtime @ 150 0 0 0 0 0 0 0
Hire/Layoff @ 25 15,000 15,000
Inventory @ 10 14,000.0 22,000.0 25,000.0 21,000.0 10,000.0 6,000.0 98,000.0
Back orders @ 150 0 0 0 0 0 0 0
Total 294,000.0 302,000.0 305,000.0 376,000.0 350,000.0 286,000.0 1,913,000.0
 Trade Off Analysis
Objective is to use variable costs to determine cost effective production
planning decisions without having to recalculate the total plan cost.

Involves the costs of:

Overtime
Holding inventory
Backorders
(and in some cases temporary workers)

Solution process
Complete the default scenario
Assess its shortcomings in light of given constraints
Determine the most cost effective remedy given the comparative
variable costs
 Trade Off Analysis
Backorder cost=$150 > Inventory holding cost=$10 => overtime in (or
before) the months with backorder
Holding inventory costs money => overtime should be as close as
possible to the month with backorder
Overtime cost=$150> Temporary worker cost=$100+$500/(20)=$125 =>
=> employ in (or before) the months with backorder
$100+$500/20=125
$100+$500/(2*20)=$112.5 employ for two month
$100+$500/(3(*20)=$122.5