EPT 432 Production Management

Laboratory Module

LAB 2AGGREGATE PLANNING

1.0OBJECTIVE1. Identify different aggregate planning strategies.2. To understand the graphical method/approaches and mathematical approaches.

3. Develop the methods above using Microsoft Excel.2.0INTRODUCTIONThe aggregate plan, also called the production plan identifies the resources needed by the operations group during the next 6 18 months to support the marketing plan. Aggregate plan includes the budgeted levels of finished products, inventory, backlogs, workforce size, and aggregate production rate needed to support the marketing plan.

Aggregate plans categorized by the kind of resources used: level, chase or mixed (hybrid) strategy. Level aggregate plan is planning approach that produces the same quantity each time period. Inventory and back orders are used to absorb demand fluctuations. Chase aggregate plan is a planning approach that varies production to meet demand each period. Mixed/Hybrid aggregate plan a planning approach that uses a combination of level and chase approaches while developing the aggregate plan.Companies can choose 2 groups of options when formulating an aggregate plan:

1. Demand Based options a group of options that respond to demand fluctuations through the use of inventory or back orders, or by shifting the demand pattern. Finished goods inventoryProducts available for shipment to the customer

Back ordersUnfilled customer orders

Shifting demandA marketing strategy that attempts to shift demand from peak periods to non-peak periods in an attempt to smooth out the demand pattern-2. Capacity Based options A group of options that allow the firm to change its current operating capacity OvertimeWork beyond normal established operation hours that usually requires a premium be paid to the workers

Under timeA condition occurring when there are more people on the payroll than are needed to produce the planned output

SubcontractingSending production work outside to another manufacturer or service provider

Hiring and firingLong term option for increasing or decreasing capacityGraphical method/techniques are popular because they are easy to understand and use. It is a technique that works with a few variables at a time to allow planners to compare projected demand with existing capacity. Following are the five steps in this method:-

1. Determine the demand in each period

2. Determine the capacity for regular time, overtime and subcontracting each period.3. Find labor costs, hiring and layoffs costs, and inventory holding costs.

4. Consider company policy that may apply to the workers or to the stock levels

5. Develop alternative plans and examine their total costs.

EXAMPLEA) Graphical ApproachesA manufacturer of roofing supplies has developed monthly forecasts for family of products. Data for 6 moth period January to June are presented in Table below, The firm would like to begin development of an aggregate plan.MonthExpected DemandProduction Days

January90022

February70018

March80021

April120021

May150022

June110020

Solution:

Average requirement = Total expected demand = 6200 = 50 units / day

Number of production days 124

There is a few plan can be made:-1st plan is to maintain a constant workforce through out the whole year.

2nd strategy is to maintain a constant workforce at level necessary to meet the lowest demand and to meet all the balance demand and subcontracting.

Both plan 1 and 2 have a level production, so its called level strategies.3rd plan is to hire and layoff workers as needed to produce exact monthly requirements a chase strategy. Table below provides cost information necessary for analyzing these three alternatives:Inventory carrying cost$5 per unit / month

Subcontracting cost per unit$10 / unit

Average per rate$5 / hour ($40 / day)

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

Labor hours to produce a unit1.6 hours per unit

Cost of increasing daily production rate

(hiring and training)$ 300 / unit

Cost of decreasing daily production rate (layoffs)$ 600 / unit

(i) Plan 1 - A constant workforce Assume that 50 units are produced per day and that we have a constant workforce, no overtime or idle time, no safety stock, and no subcontractors. The firm accumulates inventory during the slack period of demand, January through March and depletes it during the higher demand warm season, April through June. Assume beginning inventory = 0 and planned ending inventory = 0Solution:

(1) Find the production for 50 units/ day

(2) Find the monthly inventory change

(3) Ending inventory

Total units of inventory = 1850 units

(4) Find the total of man needed to produce 50 units / day

1 man who worker for 8 hours can produce 5 units. To produce 50 units a days, we need 10 men.

(5) Find the total cost for the above figure

Inventory carrying = (1850 units in inventory x $5 per unit) = $9250

Regular time labor = (10 workers x $40 per day x 124 days) = $49600 Other cost (overtime, hiring, layoffs, subcontracting)

=0

Total cost = $58,850*Note the significant cost of carrying the inventory

(ii) Plan 2 Subcontractors and constant workforceAlthough constant workforce is maintained, it is set low enough to meet demand only in March, the lowest demand per day month. To produce 38 units per day in house, 7.6 workers are needed. (You can think of this as 7 full time workers and 1 part timer). All other demand is met by subcontracting. Subcontracting is thus required in every other month. No inventory holding costs are incurred in plan 2.Solution:Because 6200 units are required during the aggregate plan period, we must compute how many can be made by the firm and how must be subcontracted:

(1) Find the in house and subcontract total production

(1) In-House production = 38 units per day x 124 production days

= 4,712 units

(2) Subcontract units= 6,200 4,712

= 1,488 units

(2) Find the total cost for regular time labor and subcontractor

Regular time labor= (7.6 workers x $40 per day x 124 days) = $37,696.00 Subcontracting= (1,488 units x $10 per unit)

= $ 14,880.00

Total cost= $52,576.00

* Note the lower cost of regular labor but the added subcontracting cost

(iii) Plan 3 Hiring and FiringThis plan involves varying the workforce size by hiring and firing as necessary. The production rate will equal the demand, and there is no change in production from the previous month, December

Solution:Below show the calculations and total cost plan 3. Recall that it costs $600 per unit produced to reduce production from the previous months daily level and $300 per unit change to increase the daily rate of production hiring. Thus, the total cost, including production, hiring, and layoffs for plan 3 is $68, 200

* Note the substantial cost associated with changing (both increasing and decreasing) the production levels.

(iv) Final step in graphical methodThe final step in the graphical method is to compare the costs of each proposed plan and to select the approach with the least total cost. A summary analysis is provided below. We can see that plan 2 has the lowest cost, it is the best of the 3 options.

B) Mathematical ApproachesThe transportation method of linear programming is not a trial-and-error method like graphing but is rather produces an optimal plan for minimizing costs. Example below shows the supply consists of on hand inventory and units produced by regular time, overtime and subcontracting.

Farnsworth Tire Co. would like to develop an aggregate plan via the transportation method. Data that relate to production, demand, capacity and cost at its West Virginia Plant are shown in the table below:-Sales Period

MarchAprilMay

Demand Capacity:8001000750

Regular700700700

Overtime505050

Subcontracting150150130

Beginning Inventory100 tires

Costs

Regular time$40 per tire

Overtime$50 per tire

Subcontract$70 per tire

Carrying cost$2 per tire per month

Illustration below showed the structure the transportation table and initial feasible solution. However, the transportation method is flexible when costs are linear but does not work when costs are non-linear.

The total cost for the initial solution is $105,900.

EXERCISE

1. The president of Hill Enterprise, Terri Hill, projects the firms aggregate demand requirements over the next 8 months as follows:

January1400May2200

February1600June2200

March1800July1800

April1800August1400

Her operations manager is considering a new plan, which begins in January with 200 units on hand and ends with zero inventories. Stock out cost of lost sales in $100 per unit. Inventory holding cost is $20 per unit per month. Ignore any idle time costs. The plan is called plan A.Plan a: Vary the workforce level to execute a chase strategy by producing the quantity demand in the prior month. The December demand and rate of production are both 1,600 units per month. The cost of hiring additional workers is $5000 per 100 units. The cost laying off workers is $7500 per 100 units. Evaluate the plan.

2. Haifa Instruments, an Israeli producer of portable kidney dialysis units and other medical products, develops a 4 months aggregate plan. Demand and capacity in units are forecasts as follows:Capacity SourceMonth 1Month 2Month 3Month 4

Labor

Regular time235255290300

Overtime20242624

Subcontract12151517

Demand255294321301

The cost of producing each dialysis units is $985 on regular time, $1319 on overtime and $1500 on a subcontract. Inventory carrying cost is $100 per unit per month. There is to be no beginning or ending inventory in stock and backorders are not permitted. Set up a production plan that minimizes cost using the transportation method.

LAB 2

AGGREGATE PLANNING

Lab Result

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