AGGREGATE PRODUCTION PLANNING (APP)

Learning Objectives
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
1.

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.

Definition
Aggregate 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.

2. 3.

To develop a feasible production plan to achieve a balance of expected demand and supply. To meet forecasted demand while minimizing costs over the planning period. To satisfy market or customer demand for each respective period.

Aggregate Planning Strategies

a)

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. 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.

b)

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. 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.

f)

1.

Mixing options to develop a plan

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.

2.
3. 4.

5.

Varying workforce level to meet exact demand. Maintaining a constant workforce level, varying overtime only. Maintaining a constant workforce level, varying overtime. Maintaining a constant workforce level, varying overtime and building up inventory. Maintaining a constant workforce level, varying overtime, building up inventory and subcontracting if necessary.

Question
Month January February March April May June Forecast Demand 11000 11500 12400 12000 10800 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 Lay-off cost Current workforce Standard output Working hour Regular labour cost Overtime cost Overtime unit capacity : RM500 per wkr : RM700 per wkr : 35 workers : 30 minutes : 7 hour : RM 3 per hour : RM 4 per hour : Maximum of 300 units per month Inventory holding costs : RM 5 per unit Subcontract costs : RM 4 per unit Stock-out cost : RM 2 per unit Working days : 24 days

Strategy 1 : Varying workforce level to meet exact demand

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

Capacity per worker = 60 mins x 7 hrs x 24 days Per month 30 mins = 336 units per worker per months
Month Jan Feb March Forecast Demand Current Workers 35 32 35 Required Workers 10900/336 = 32 11700/336 = 35 12600/336 = 38

Inventory = 300 Mthly Dd = 200 Hiring cost : RM500 Lay-off cost : RM700 Current workforce : 35 workers Standard output : 30 minutes Working hour : 7 hour Working days : 24 days

Hire 3 3 2

Layoff 3 -

11000+200300 = 10900
11700 12600

April
May June

12200
11000 11800

38
36 33

12200/336 = 36
11000/336 = 33 11800/336 = 35

2
3 -

Total

70200

Total Costs

Hiring cost Lay-off cost Regular Labour Cost Standard output

: RM500 : RM700 : RM3/hr : 30 minutes

RM 1. 2. 3. Regular Production Cost Hiring Cost Lay-off Cost Total Costs

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

70200 x RM3/hr x (30 60)hr 8 workers x RM500/wkr 8 workers x RM700/wkr

105300 4000 5600 114900

Strategy 2 : Constant workforce level, varying

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

Capacity per month = 60 mins x 7 hrs x 24 days x 35 workers Current workforce : 35 workers 30 mins Standard output : 30 minutes Working hour : 7 hour = 11760 units per month
Month Forecast Demand Capacity Excess Shortage Inventory OT StockOut

Working days : 24 days Overtime unit capacity: Max 300

Jan

11000+200 -300 = 10900 11700

12600 12200 11000 11800

11760

860

860

Feb
March April May June Total

11760
11760 11760 11760 11760 70560

60
840 440 760 40

60
300 300 760 40 1680 640 680 540 140

Total Costs
1.
2.

Regular labour cost: RM 3 per hour Inventory holding costs: RM 5 per unit Overtime cost: RM 4 per hour Stock-out cost : RM 2 per unit

RM

Regular Production Cost

Inventory holding Cost

70560 x RM3/hr x (30 60)hr

1680 units x RM5/unit

105840
8400

3.
4.

Over-time Cost
Stock-out Cost Total Costs

640 units x RM4/hr x (0.5hr/unit)

680 units x RM2/unit

1280
1360 116880

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

Strategy 3 : Constant workforce level, varying overtime

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

Capacity per month

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

OT StockOut

Month Jan

Forecast Demand
11000+200300 =

Capacity Excess Shortage Inventory 11760 860 860

10900

Feb
March April May June

11700
12600 12200 11000 11800

11760
11760 11760 11760 11760

60
840 440 760 40

60
300 300 760 480 140

Total

70560

1680

600

620

Total Costs
1.
2.

Regular labour cost Inventory holding costs Overtime cost Stock-out cost

: RM 3 per hour : RM 5 per unit : RM 4 per hour : RM 2 per unit

RM

Regular Production Cost

Inventory holding Cost

70560 x RM3/hr x (30 60)hr

1680 units x RM5/unit

105840
8400

3.
4.

Over-time Cost
Stock-out Cost Total Costs

600 units x RM4/hr x (0.5hr/unit)

620 units x RM2/unit

300
1240 115780

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

Strategy 4 : Constant workforce level,

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

varying overtime and building up inventory

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

Capacity per month

Month Jan

Forecast Demand
11000+200300 =

Capacity Excess Shortage Inventory 11760 860 860

10900

Feb
March April May June

11700
12600 12200 11000 11800

11760
11760 11760 11760 11760

60
840 440 760 40

920
80 300 760 720 60

Total

70560

3340

300

60

Total Costs
1.
2.

Regular labour cost Inventory holding costs Overtime cost Stock-out cost

: RM 3 per hour : RM 5 per unit : RM 4 per hour : RM 2 per unit

RM

Regular Production Cost

Inventory holding Cost

70560 x RM3/hr x (30 60)hr

3340 units x RM5/unit

105840
16700

3.
4.

Over-time Cost
Stock-out Cost Total Costs

300 units x RM4/hr x (0.5hr/unit)

60 units x RM2/unit

150
120 122,810

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

= 60 mins x 7 hrs x 24 days x 35 workers 30 mins = 11760 units per month
Excess Shortage Inventory OT Subcontract StockOut

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

Capacity per month

Month

Forecast Demand
11000+200300 =

Capacity

Jan Feb March April May June

10900 11700 12600 12200 11000 11800

11760 11760 11760 11760 11760 11760

860 60 840 440 760 40

860 920 80 300 760 720 60

Total

70560

3340

300

60

Total Costs
1.
2.

Regular labour cost Inventory holding costs Overtime cost Subcontract costs Stock-out cost

: RM 3 per hour : RM 5 per unit : RM 4 per hour : RM 4 per unit : RM 2 per unit

RM

Regular Production Cost

Inventory holding Cost

70560 x RM3/hr x (30 60)hr

3340 units x RM5/unit

105840
16700

3.
4.

Over-time Cost
Subcontract Cost Total Costs

300 units x RM4/hr x (0.5hr/unit)

60 units x RM4/unit

150
240 122,930

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

Summary of Total Costs for all strategies

Strategy 1 2 3 4 5 Total Cost 114900 116880 115780 122,810 122,930

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:

Season Chistmas

Quantity (Units) 10000

Season Thaipusam

Quantity (Units) 7000

Chinese New Year

8000

Hari Raya Aidilfitri

12000

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.

Exercise 2
Megah 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
February March April

6500
5000 6200 6400

May
June

5900
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 3
ADZ 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) 5500 4500

January February

March
April May June

5000
6500 6000 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 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.
a)