AGGREGATE PRODUCTION PLANNING (APP)

Learning Objectives

1. Definition and concept of APP

2. Objectives of APP

3. Aggregate Planning Strategies

4. Chase and Level Strategies

5. Applications of Level and Chase Strategies

6. Relevant costs in APP

Introduction Most of the manufactures face tough decisions when

trying to schedule products such as snack foods, and air conditioners, the demand depend on seasonal variation.

Demand for particular product is not stable all the time. Product demand fluctuates from month to month.

The managers need to plan ahead of time and anticipate the appropriate amounts of products to produce.

Developing plans that minimize costs connected with such forecasts is aggregate planning, one of the main functions of an operations manager.

DefinitionAggregate planning (APP) is concerned with determining the quantity and timing of production for immediate future(usually 3 to 18 months into future) – Heizer & Render 2011

It also planning method, which evaluates future work schedule for one or more products so that forecasted sales can be satisfied.

Operations manager try to determine the best way to meet forecasted demand by adjusting production rates, labor levels, inventory levels, overtime work, subcontracting rates and other controllable variables.

Objectives of APP

1. To develop a feasible production plan to achieve a balance of expected demand and supply.

2. To meet forecasted demand while minimizing costs over the planning period.

3. To satisfy market or customer demand for each respective period.

Aggregate Planning Strategiesa) Vary workforce level by hiring and layoff

- This strategy requires for the number of productive workers vary according to the periodic output requirements. More workers are hired during the peak demand and laid off during low season.

b) Constant workforce, vary overtime only

- Managers adopt a strategy of retaining some constant number of workers and vary working hours providing overtime during peak demand periods.

c) Constant workforce, vary overtime and inventory

- Maintain current workforce level thus no additional workers will be hired. Workforce level and production rates are constant. Overtime is done during the months when inventory is sufficient to absorb demand fluctuations.

d) Constant workforce, changing the level of inventory

- Inventories may also be used to anticipate and absorb changes in demand. Workforce level and production rates are constant but carry sufficiently large amount of factory.

e) Constant workforce level uses subcontractor

- This strategy maintains a constant workforce size but uses the subcontractor to cater the shortages.

f) Constant workforce, varying inventory and allowing backordering during high demand

- In certain months the expected demand cannot be met but can filled during months when demand is low. Back orders are orders for goods/services that a firm accepts but is unable to fill at the moment. Back ordering only works if customers are willing to wait without loss of their goodwill or order. There is delay in the delivery of goods or services to customer.

Mixing options to develop a plan

1. Chase strategy

- Produce exactly based on Dd fluctuation. To achieve output rates for each period that match the demand forecast for that period.

- Example: the operations manager can vary workforce levels by hiring or laying off or can vary production by means overtime, idle time, part time employees or subcontracting.

- Many service organizations favor the chase strategy include education, hospitality and construction.

2. Level strategy

- Maintain constant workforce and produce the same amount every period (based on capacity).

- An aggregate plan in which production is uniform form period to period. Maintaining a constant output rate, production rate or workforce level over the planning horizon.

- Example: Firms like Toyota and Nissan keep production at uniform levels and may let the finished goods inventory vary to buffer the difference demand and production or find alternative work for employees.

- A stable workforce leads to a better quality product, less turnover and absenteeism and more employee commitment to corporate goals.

Relevant Cost in Aggregate Planning

a) Hiring Costs – the cost of hiring new employees during the peak demand.

b) Layoff costs – the cost of laying employees during the low demand

c) Overtime cost – the cost of doing overtime to meet the shortage

d) Inventory shortage cost (i.e inventory holding/carrying costs)- the cost of carrying excess unit

e) Shortage cost – the cost incurred if the manufactured could not meet the demand or asked customer to back order

f) Regular production costs- the cost of producing the amount of output at a particular time with the available resources

g) Cost of subcontracting – the cost of subcontracting the shortages to another manufacturer

h) Stock out – each time we run out of raw material or finished goods inventory, costs may be incurred, these costs include losts sales & dissatified customer.

Aggregate Strategies relating to Exam

1. Varying workforce level to meet exact demand.

2. Maintaining a constant workforce level, varying overtime only.

3. Maintaining a constant workforce level, varying overtime.

4. Maintaining a constant workforce level, varying overtime and building up inventory.

5. Maintaining a constant workforce level, varying overtime, building up inventory and subcontracting if necessary.

Question

MonthForecast Demand

January 11000

February 11500

March 12400

April 12000

May 10800

June 11600

Opening inventory is 300 units. Apart from the contract, the normal monthly forecasted demand from other buyers is 200 units. Additional information:

Hiring cost : RM500 per wkrLay-off cost : RM700 per wkrCurrent workforce : 35 workersStandard output : 30 minutes Working hour : 7 hourRegular labour cost : RM 3 per hourOvertime cost : RM 4 per hourOvertime unit capacity : Maximum of 300

units per monthInventory holding costs : RM 5 per unitSubcontract costs : RM 4 per unitStock-out cost : RM 2 per unitWorking days : 24 days

Strategy 1 : Varying workforce level to meet exact demand

MonthForecast Demand

Current Workers

Required Workers Hire Layoff

Jan11000+200-300 = 10900

35 10900/336 = 32 - 3

Feb 11700 32 11700/336 = 35 3 -

March 12600 35 12600/336 = 38 3 -

April 12200 38 12200/336 = 36 2

May 11000 36 11000/336 = 33 - 3

June 11800 33 11800/336 = 35 2 -

Total 70200 8 8

Capacity per worker = 60 mins x 7 hrs x 24 daysPer month 30 mins

= 336 units per worker per months

Inventory = 300 Mthly Dd = 200Hiring cost : RM500 Lay-off cost : RM700Current workforce : 35 workersStandard output : 30 minutes Working hour : 7 hourWorking days : 24 days

Monthly standard output (capacity per worker)=No. of days per month x Daily standard output

Total Costs

RM

1. Regular Production Cost

70200 x RM3/hr x (30 ÷ 60)hr 105300

2. Hiring Cost 8 workers x RM500/wkr 4000

3. Lay-off Cost 8 workers x RM700/wkr 5600

Total Costs 114900

Hiring cost : RM500 Lay-off cost : RM700Regular Labour Cost : RM3/hrStandard output : 30 minutes

Regular Production Costs=Total Units Produced x Regular Cost per hour x Standard Output per hour

Strategy 2 : Constant workforce level, varying overtime only

MonthForecast Demand

Capacity Excess Shortage Inventory OTStock-

Out

Jan11000+200-300 = 10900

11760 860 860

Feb 11700 11760 60 60

March 12600 11760 840 300 540

April 12200 11760 440 300 140

May 11000 11760 760 760

June 11800 11760 40 40

Total 70560 1680 640 680

Capacity per month = 60 mins x 7 hrs x 24 days x 35 workers 30 mins = 11760 units per month

Current workforce : 35 workersStandard output : 30 minutes Working hour: 7 hourWorking days : 24 days Overtime unit capacity: Max 300

Units Produces = (Number of workers) X (Working Days per period) X Standard Output per day

Total CostsRM

1. Regular Production Cost

70560 x RM3/hr x (30 ÷ 60)hr 105840

2. Inventory holding Cost

1680 units x RM5/unit 8400

3. Over-time Cost 640 units x RM4/hr x (0.5hr/unit)

1280

4. Stock-out Cost 680 units x RM2/unit 1360

Total Costs 116880

Regular labour cost: RM 3 per hourInventory holding costs: RM 5 per unitOvertime cost: RM 4 per hourStock-out cost : RM 2 per unit

Regular Production Costs=Total Units Produced x Regular Cost per hour x Standard Output per hour

Strategy 3 : Constant workforce level, varying overtime

MonthForecast Demand

Capacity Excess Shortage Inventory OTStock-

Out

Jan11000+200-

300 =

1090011760 860 860

Feb 11700 11760 60 60

March 12600 11760 840 300 480

April 12200 11760 440 300 140

May 11000 11760 760 760

June 11800 11760 40

Total 70560 1680 600 620

Capacity per month = 60 mins x 7 hrs x 24 days x 35 workers 30 mins

= 11760 units per month

Units Produces = (Number of workers) X (Working Days per period) X Standard Output per day

Total CostsRM

1. Regular Production Cost

70560 x RM3/hr x (30 ÷ 60)hr 105840

2. Inventory holding Cost

1680 units x RM5/unit 8400

3. Over-time Cost 600 units x RM4/hr x (0.5hr/unit)

300

4. Stock-out Cost 620 units x RM2/unit 1240

Total Costs 115780

Regular labour cost : RM 3 per hourInventory holding costs : RM 5 per unitOvertime cost : RM 4 per hourStock-out cost : RM 2 per unit

Regular Production Costs=Total Units Produced x Regular Cost per hour x Standard Output per hour

Strategy 4 : Constant workforce level, varying overtime and building up inventory

MonthForecast Demand

Capacity Excess Shortage Inventory OTStock-

Out

Jan11000+200-

300 =

1090011760 860 860

Feb 11700 11760 60 920

March 12600 11760 840 80

April 12200 11760 440 300 60

May 11000 11760 760 760

June 11800 11760 40 720

Total 70560 3340 300 60

Capacity per month = 60 mins x 7 hrs x 24 days x 35 workers 30 mins

= 11760 units per month

Units Produces = (Number of workers) X (Working Days per period) X Standard Output per day

Total CostsRM

1. Regular Production Cost

70560 x RM3/hr x (30 ÷ 60)hr 105840

2. Inventory holding Cost

3340 units x RM5/unit 16700

3. Over-time Cost 300 units x RM4/hr x (0.5hr/unit)

150

4. Stock-out Cost 60 units x RM2/unit 120

Total Costs 122,810

Regular labour cost : RM 3 per hourInventory holding costs : RM 5 per unitOvertime cost : RM 4 per hourStock-out cost : RM 2 per unit

Regular Production Costs=Total Units Produced x Regular Cost per hour x Standard Output per hour

Strategy 5 : Constant workforce level, varying, overtime,building up inventory and subcontracting if necessary

MonthForecast Demand

Capacity Excess Shortage Inventory OTSub-

contractStock-

Out

Jan11000+200-

300 =

1090011760 860 860

Feb 11700 11760 60 920

March 12600 11760 840 80

April 12200 11760 440 300 60

May 11000 11760 760 760

June 11800 11760 40 720

Total 70560 3340 300 60

Capacity per month = 60 mins x 7 hrs x 24 days x 35 workers 30 mins

= 11760 units per month

Units Produces = (Number of workers) X (Working Days per period) X Standard Output per day

Total Costs RM

1. Regular Production Cost

70560 x RM3/hr x (30 ÷ 60)hr 105840

2. Inventory holding Cost

3340 units x RM5/unit 16700

3. Over-time Cost 300 units x RM4/hr x (0.5hr/unit)

150

4. Subcontract Cost 60 units x RM4/unit 240

Total Costs 122,930

Regular labour cost : RM 3 per hourInventory holding costs : RM 5 per unitOvertime cost : RM 4 per hour Subcontract costs : RM 4 per unitStock-out cost : RM 2 per unit

Regular Production Costs=Total Units Produced x Regular Cost per hour x Standard Output per hour

Summary of Total Costs for all strategies

Strategy Total Cost

1 114900

2 116880

3 115780

4 122,810

5 122,930

Exercise 1 Mattel (M) Sdn Bhd a major supplier of high quality dolls has forecasted the demand for

Barbie dolls for the Malaysian market as follows:

Inventory at the beginning of Christmas season is 500 units and Mattel is currently employing 30 workers. One season is assumed to last for 60 days. Other relevant costs are as follows:

Hiring costs : RM100 per person

Layoff costs : RM200 per person

Inventory Holding Costs : RM 5 per unit

Overtime Rate : RM 8 per hour

Regular rate : RM 5 per hour

Assume the productivity is 2 hours per unit, with 8 hour per day and 60 days per season.

Develop a production plan strategy of using constant workforce , vary overtime. Calculate the plan.

Season Quantity (Units)

Season Quantity (Units)

Chistmas 10000 Thaipusam 7000

Chinese New Year

8000 Hari Raya Aidilfitri

12000

Exercise 2Megah Holding produces dining tables for overseas market. The company wants to develop an aggregate production plan for the period of January – June 2013. The estimated demands are as follows;

Month Forecasted demand (units)

January 6500

February 5000

March 6200

April 6400

May 5900

June 5800

The inventory at the beginning of January is zero. To anticipate uncertainty in demand, Megah Holding would like an extra production of 600 units each month. The overtime capacity is 500 units per month. Additional capacity is available by sub- contracting to anaother local manufacturer at a cost of RM 8 per unit.

Other information:

Number of working days per month : 25 days

Regular rate : RM 6 per hour

Overtime rate : RM 9 per hour

Number of workers : 16

Inventory carrying costs per unit : RM 1.50

Hiring costs per worker : RM 300

Layoff costs per worker : RM 200

Standard output : 2 units per hour

Working hours : 8 hours

Develop an aggregate production plan by using constant workforce; vary overtime strategy and subcontracting for the forecasted demand variations. Determine the production costs for the period of January – June 2012

Exercise 3ADZ Co. supplies aluminium alloy parts to the automative industry. The forecasted demand (in units) for the parts over the next six month planning horizon is:

Month Forecated Demand (Units)

January 5500

February 4500

March 5000

April 6500

May 6000

June 5750

Use the following information to develop an aggregate plan:

Current workforce level : 20 workers

Labor hours per unit : 48 minutes

Working hours per day : 8 hours

Regular wage date : RM 5 per hour

Overtime rate : 120% of regular wage rate

Holding Cost : RM 0.50 per unit per month

Hiring Cost : RM 400 per worker

Lay off cost : RM 500 per worker

a) Develop an aggregate production plan using vary workforce strategy to meet forecasted demand for the next six month period

b) Calculate the total costs for the plan.