Aggregate Production Planning
Given data
January February March April May June Total
Beginning Inventory 400
Demand Forecast 1800 1500 1100 900 1100 1600 8000
Number of Working Days by Month 22 19 21 21 22 20 125
Initial number of workers available 53
Costs
Materials $100.00 $ per unit
Inventory holding cost $1.50 $ per unit per month
Marginal cost of stockout $5.00 $ per unit per month
Marginal cost of subcontracting $20.00 $ per unit ($120 less $100 material cost)
Hiring and training cost $200.00 $ per worker
Layoff cost $250.00 $ per worker
Labor hours required per unit 5.0 per unit
Regular Time labor cost $4.00 $ per hour
Overtime cost $6.00 $ per hour
Regular Hours/day 8 per day
(1) Aggregate Production Planning Requirements
January February March April May June
Beginning Inventory 400 450 375 275 225 275
Demand Forecast 1,800 1,500 1,100 900 1,100 1,600
Safety Stock (.25 x Demand Forecast) 450 375 275 225 275 400
Production Requirement 1,850 1,425 1,000 850 1,150 1,725
Ending Inventory 450 375 275 225 275 400
(2) Costs of various Production Plans
Production Plan 1: Exact monthly Production; Vary Workforce
January February March April May June Total
Production Requirement 1,850 1,425 1,000 850 1,150 1,725
Production Hours Required 9,250 7,125 5,000 4,250 5,750 8,625
Working Days per Month 22 19 21 21 22 20
Hours per Month per Worker 176 152 168 168 176 160
Workers Required 53 47 30 26 33 54
New Workers Hired 0 0 0 0 7 21
Hiring Cost $0 $0 $0 $0 $1,400 $4,200 $5,600
Workers Laid Off 0 6 17 4 0 0
Layoff Cost (Workers Laid Off x $250) $0 $1,500 $4,250 $1,000 $0 $0 $6,750
Regular Time Cost $37,312 $28,576 $20,160 $17,472 $23,232 $34,560 $161,312
Inventory 16 19 27 51 63 66
Inventory Cost 23.4 29.1 41.1 76.5 93.9 98.4 $362
Total Cost 174,024
Production Plan 2: Constant Workforce; Vary Inventory and Stockout
January February March April May June Total
Working Days per Month 22 19 21 21 22 20
Production Hours Available (Working Days per
7040 6080 6720 6720 7040 6400
Month x 8 Hr./Day x 40 Workers)*
Actual Production (Production Hours Available/5
1408 1216 1344 1344 1408 1280
Hr./Unit)
Cumulative production 1408 2624 3968 5312 6720 8000
Production requirement 1850 1425 1000 850 1150 1725
Cumulative requirement 1850 3275 4275 5125 6275 8000
Units Short 442 651 307 0 0 0
Shortage Cost (Units Short x $5) $2,210 $3,255 $1,535 $0 $0 $0 $7,000
Units Excess 0 0 0 187 445 0
Inventory Cost (Units Excess x $1.50) $0 $0 $0 $281 $668 $0 $948
Layoff Cost $3,250 $0 $0 $0 $0 $0 $3,250
Regular Time Cost $28,160 $24,320 $26,880 $26,880 $28,160 $25,600 $160,000
*(Sum of Production Requirement calculated in (1) x 5
hr./unit)/(Sum of Production days Available x 8 hr./day) = 40 Total Cost 171,198
(8,000 x 5)/(125 x 8) = 40
Production Plan 3: Constant Low Workforce; Subcontract
January February March April May June Total
Production Requirement 1,850 1,425 1,000 850 1,150 1,725
Working Day per Month 22 19 21 21 22 20
No. of workers required to meet the monthly
53 41 29 25 33 50
requirement
Production Hours Available (Working Day x 8
4,400 3,800 4,200 4,200 4,400 4,000
Hrs./Day x 25 Workers)*
Actual Production (Production Hours Available/5
880 760 840 840 880 800
hr.per Unit)
Units Subcontracted (Production Requirement -
970 665 160 10 270 925
Actual Production)
Subcontracting Cost (Units Subcontracted x $20) $19,400 $13,300 $3,200 $200 $5,400 $18,500 $60,000
Layoff Cost $7,000 $0 $0 $0 $0 $0 $7,000
Regular Time Cost $17,600 $15,200 $16,800 $16,800 $17,600 $16,000 $100,000
*Minimum production requirement. In this example,
April is minimum of 850 units. Number of workers 25 Total Cost $167,000
required for April is (850 x 5)/(21 x 8) = 25
(3) Comparison of Plans
Cost Plan 1 Plan 2 Plan 3
Hiring $5,600 $0 $0
Layoff $6,750 $3,250 $7,000
Excess inventory $362 $948 $0
Shortage $0 $7,000 $0
Subconstract $0 $0 $60,000
Overtime $0 $0 $0
Regular time $161,312 $160,000 $100,000
Total $174,024 $171,198 $167,000
