On-Line Lesson

Aggregate scheduling is concerned with determining the quantity and timing of production for the intermediate future, often from 3 to 18 months ahead with the goal of satisfying demand at minimum cost.  The plan looks at production in the aggregate, not on a product-by-product breakdown.  For example, an aggregate plan for an auto manufacturer would indicate how many cars to make, but not how many should be 2-door versus 4-door or red versus green.

 

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§ Chase Strategy, Level Strategy, Mixed Strategy, Stock Out, Subcontracting §

§ Aggregate Planning Strategies § Capacity Options §

§ Demand Options § Mixed Strategy Options §

§ Example – Chase Demand Strategy § Solution – Plan A §

§ Example – Level Production Strategy § Solution – Plan B §

§ Example – Mixed Strategy § Solution- Plan C §

 

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Chase Strategy, Level Strategy, Mixed Strategy, Stock Out, Subcontracting

Aggregate Planning Strategies

When generating an aggregate plan, the following questions must be answered:

 

1.      Should inventories be used to absorb changes in demand during the planning period?

2.      Should changes be accommodated by varying the size of the work force?

3.      Should part time workers be used, or should overtime and idle time absorb fluctuations?

4.      Should subcontractors be used on fluctuating orders so a stable work force can be maintained?

5.      Should prices or other factors be changed to influence demand?

 

Answering the above questions requires addressing the capacity of the operation or influencing the demand affecting the operation.

Capacity Options

A firm can chose from the following basic capacity (production) options:

 

1.      Changing inventory levels – Inventory can be increased or decreased in anticipation of demand changes.

2.      Varying work force size by hiring or layoffs – As demand changes, the work force size can be modified in order to adjust the output.

3.      Varying production rates through overtime or idle time.

4.      Subcontracting can be used to supplement capacity by contracting with a  third party at an additional cost to manufacture your components.

5.      Using part time workers.

Demand Options

The basic demand options are the following:

 

1.      Influencing demand – If an increase in demand is desired, promotions or price changes can be instituted.

2.      Allowing stock outs when demand can not be satisfied.  A stock out occurs whenever a customer order can not be satisfied.  Additionally, a cost is incurred whenever a stock out occurs.

 

Mixed Strategy Options

The capacity and demand options presented above should not be considered independently when developing an aggregate plan.  In fact, a combination of capacity and demand options can provide the minimum cost alternative.

 

1.      Chase Strategy – A chase strategy attempts to achieve output rates that match the demand forecast.  This strategy can be accomplished by planning to modify the capacity as the demand fluctuates.

 

2.      Level Strategy – A level strategy is an aggregate plan where daily production is uniform for the duration of the aggregate plan.  This implies that inventory will fluctuate up and down as the demand fluctuates.

 

The following figure graphically indicates chase and level strategies:

In the above figure, it is apparent that the level strategy (depicted in red) maintains the same capacity over time regardless of the forecast demand.  The chase strategy would follow exactly the forecast demand.  A mixed strategy would be a combination of both.

Example – Chase Demand Strategy

 

The president of Daves Enterprises, Carla Daves, projects the firm’s aggregate demand requirements over the next eight months as follows:

 

Her 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 cost is $20 per unit per month.  Ignore any idle time costs.  The plan is called plan A and is as follows.  Vary the workforce level to execute a “chase” strategy by meeting demand requirements exactly.  The December rate of production is 1600 units per month.  The cost of hiring additional workers is $5000 per 100 units.  The cost of laying off workers is $7500 per 100 units.  Develop a production schedule for plan A.

Solution – Plan A

First, the assumptions should be clearly stated:

 

·        Units on Hand = 200

·        Stock Out Cost/Unit = $100

·        Inventory Holding Cost/Unit = $20

·        Hiring Cost per 100 Units = $5000

·        Firing Cost per 100 Units = $7500

·        Last December Monthly Production (Units) = 1600

 

In this problem, the initial inventory is 200 units.  A stockout cost of $100/unit is incurred anytime demand can not be satisfied.  At the end of each month, a holding cost of $20/unit will be incurred for any inventory on hand.  In order to increase or decrease capacity, respective hiring and firing costs will be incurred for every 100 units of capacity change.  Finally, last December’s production rate is given as the starting base line for hiring or firing for the month of January.  The production schedule now follows:

In the above table, the columns are defined as follows:

 

·        Demand – The forecasted demand by month.

·        Plan – the number of units scheduled (planned) for each month.

·        Increase Units – The number of units to increase for the month (capacity increase that will require hiring workers).

·        Hiring Cost – The corresponding cost for however many units of capacity that was increased.  This is calculated as the number of units increased for the month (divided by 100) multiplied by the corresponding hiring cost.

·        Decrease Units – The number of units to decrease for the month (capacity decrease that will require firing workers).

·        Firing Cost – The corresponding cost for however many units of capacity that was reduced.  This is calculated as the number of units decreased for the month (divided by 100) multiplied by the corresponding firing cost.

 

Since Plan A chases demand, zero inventory cost will be incurred becuase each month matches the forecasted demand exactly.  You will notice that for the month of January, the plan calls for 1200 units when the forecasted demand calls for 1400 units.  This is because 200 units were carried over from last December.  So, in order to match the forecasted demand for 1400 units, only 1200 is required to be planned.

 

For the month of January, a 400 unit decrease is planned.  This is because the production rate for last December was 1600 units.  Since the plan only calls for 1200 units, 400 units must be decreased.  The plan progresses by increasing and decreasing capacity units as necessary to match (chase) the corresponding monthly forecasted demand.  The total cost for Plan A is $140,000.

Example – Level Production Strategy

 

Daves is now considering plan B.  Beginning inventory, stockout costs, and holding costs are the same as in the previous example.  For this plan, keep a stable workforce by maintaining a constant productio rate equal to the average requirements and allow varying inventory levels.

Solution – Plan B

 

First, the assumptions should be clearly stated:

 

·        Units on Hand = 200

·        Stock Out Cost/Unit = $100

·        Inventory Holding Cost/Unit = $20

·        Hiring Cost per 100 Units = $5000

·        Firing Cost per 100 Units = $7500

·        Last December Monthly Production (Units) = 1600

 

As can be seen, these assumptions are the same as before.  The production schedule for Plan B now follows:

 

 

In this plan, four new columns can be found:

 

·        Stockout Units – This represents the number of units where demand could not be met.

·        Stockout Cost – The cost incurred for the total stockout units by month.

·        Ending Inventory – The number of units left on hand at the end of the month.

·        Holding Cost – The cost associated with holding inventory by month.

 

The level production plan is 1775 units/month.  This figure is the average of all monthly forecasted demands (thus producing a level monthly plan).  For this plan, inventory will be carried since there are months where the plan exceeds capacity.  Because of this, a holding cost will be incurred.  For January, the ending inventory is 575, this is because 200 units are carried forward from December; since the plan calls for 1775, the ending inventory will be last months ending inventory + the monthly plan + stock out units – the monthly demand.

 

Inventory holding costs are incurred until June.  In fact, during the month of June, the monthly demand exceeds the plan to the tune of 150 stock out units.  These 150 units represent that monthly demand that could not be met.  Additionally, the corresponding stockout cost is calculated by month.  The total cost for Plan B is $85,500 which is an improvement of $54,500.

Example – Mixed Strategy

 

Daves is now looking at plan C.  Beginning inventory, stockou costs, and holding costs are the same as before.  For this plan, produce at a constant rate of 1400 units per month, which will meet minimum demands.  The use subcontracting, with additional units a premium price of $75 per unit.

Solution – Plan C

 

First, the assumptions should be clearly stated:

 

·        Units on Hand = 200

·        Stock Out Cost/Unit = $100

·        Inventory Holding Cost/Unit = $20

·        Hiring Cost per 100 Units = $5000

·        Firing Cost per 100 Units = $7500

·        Last December Monthly Production (Units) = 1600

·        Sub Contracting Cost/Unit = $75

 

The assumptions are the same as before except for the addition of the sub contracting option.  The production schedule for Plan C now follows:

 

 

In this plan, two new columns can be found:

 

·        Sub Contract Units – The total units sub contracted by month.  This options is used when the level production plan is not adequate to meet the forecasted demand.

·        Sub Contract Cost – The monthly cost of sub contracting.

 

The level production plan is 1400 units/month.  Starting in March, the level production plan is not adequate to meet the forecasted demand.  So, each subsequent month through July utilizes sub contracting in order to satisfy the demand.  Plan C has a total cost of $214,000.

 

Of the three plans just presented, Plan B (Level Production Strategy) had the least cost.

[Click here for an excel example of the three strategies presented above]