Quantitative techniques for Aggregate Planning

Process

Pure Strategies

Mixed Strategies

Linear Programming

Transportation Method

Other Quantitative Techniques

Dr T SAMPATH KUMAR, ASSOCIATE

1
PROFESSOR- SMEC
 Mixed Strategy

Combination of Level Production and Chase Demand strategies

Examples of management policies

no more than x% of the workforce can be laid off in one quarter

inventory levels cannot exceed x dollars

Many industries may simply shut down manufacturing during the low
demand season and schedule employee vacations during that time

Dr T SAMPATH KUMAR, ASSOCIATE

2
PROFESSOR- SMEC
 Graphical method

In graphical method, cumulative demand values and cumulative production

capacities are plotted on the same graph, to identify the gap between demand and
production capacity during different periods.
In this method, cost data is not taken in to account.

Dr T SAMPATH KUMAR, ASSOCIATE

3
PROFESSOR- SMEC
 Graphical method (problem 1)
ABC corporation has developed a forecast for a group of items that has the
following demand pattern.

Quarter Demand Cumulative demand

1 270 270
2 220 490
3 470 960
4 670 1630
5 450 2080
6 270 2350
7 200 2550
8 370 2920

Dr T SAMPATH KUMAR, ASSOCIATE

4
PROFESSOR- SMEC
 Graphical method (problem 1)

Plot the demand as a histogram. Determine the production rate required to meet
average demand and plot the average demand forecast (Production rate) on the
graph.
Plot the actual cumulative forecast requirements over time and compare them with
the available average forecast requirements. Indicate the excess inventories and
backorders on the graph

Dr T SAMPATH KUMAR, ASSOCIATE

5
PROFESSOR- SMEC
 Graphical method

800

700 670

600

500 470 450

400 370 Demand
Average demand
300 270 270
220 200
200

100

0
1 2 3 4 5 6 7 8

Periods (Quarters)
Dr T SAMPATH KUMAR, ASSOCIATE
6
PROFESSOR- SMEC
 Graphical method

3500

3000 2920
2500 2550
2350
2000 2080
Cumulative
1630
1500 demand

1000 960

500 490
270
0
1 2 3 4 5 6 7 8

Dr T SAMPATH KUMAR, ASSOCIATE

7
PROFESSOR- SMEC
 Preparation of inventory balance (Problem 2)

The monthly inventory balance required for a organization is tabulated. With

constant work force, no idle time or over time, no back order, no use of subcontract
an no capacity adjustments. Determine, only by following a plan of letting the
inventory to absorb all fluctuations in demand.

Month Forecast Production @ 16 /day

January 220 353
February 90 288
March 210 336
April 396 352
May 616 352
June 600 320
July 375 336
August 780 320
September 265 368
October 775 304
November 325 320
December Dr T SAMPATH 175
KUMAR, ASSOCIATE 320 8
PROFESSOR- SMEC
 Preparation of inventory balance (Problem 2)

Now imagine, that the organization has determined that to follow a plan of meeting
demand by varying the size of work force would result in hiring and layoff cost
estimated at Rs.22,000. If the cost of producing each unit is Rs.100, the carrying
costs/per annum are 20% of average inventory value and storage cost are Rs.9/unit,
which plan result in lower cost: varying inventory or varying employment
(hiring/layoff)?

Dr T SAMPATH KUMAR, ASSOCIATE

9
PROFESSOR- SMEC
 Preparation of inventory balance

Production @ Ending inventory Ending balance No. of

Month Forecast
16 /day balance with 1003 on Jan working days

January 220 353 353-220=133 133+1003=1136 353/16=22

288+133=421
February 90 288 331+1003=1334 288/16=18
421-90=331
March 210 336 457 1460 (Max) 21
April 396 352 413 1416 22
May 616 352 149 1152 22
June 600 320 -131 872 20
July 375 336 -170 833 21
August 780 320 -630 373 20
September 265 368 -527 476 23
October 775 304 -998 5 19
November 325 320 -1003 0 20
December 175 320 -858 145 20
Average inventory 9202/12=766.83
MaxKUMAR,
Dr T SAMPATH Inventory
ASSOCIATE 1460 10
PROFESSOR- SMEC
 Preparation of inventory balance

Solution:
1. Carying cost = Avg. Inventory Unit Production costCarrying cost/annum
Carying cost = Rs.766.8 1000.2 = Rs. 15,336
Storage cost = Storage cost/unit Max. Inventory
Storage cost = Rs.91460 = Rs.13,140
Total cost = Carying cost + Storage cost = Rs.28,476
2. Hiring / lay offcost = Rs.22,000

Conclusion:
So, hiring and layoff is the better option in this cost structure.

Dr T SAMPATH KUMAR, ASSOCIATE

11
PROFESSOR- SMEC
 Heuristic method

In heuristic method, a list of pure strategies and mixed strategies are generated and
evaluated in terms of cost and finally a pure strategy or a mixed strategy with the
minimum total cost is selected for implementation.

Dr T SAMPATH KUMAR, ASSOCIATE

12
PROFESSOR- SMEC
 Pure strategies

Various pure strategies are

Vary the work force size
Changing the inventory levels
Subcontracting

Dr T SAMPATH KUMAR, ASSOCIATE

13
PROFESSOR- SMEC
 Pure strategies (Problem 3)

The forecast for a group of items is reproduced as shown in previous table of

graphical method.
1. Suppose that the firm estimates that it costs Rs.150 per unit to increase the
production rate, Rs.200 per unit to decrease the production rate, Rs. 50 per unit
per quarter to carry the items on inventory and Rs.100 per unit if
subcontracted. Compare the cost incurred if pure strategies are followed.

Dr T SAMPATH KUMAR, ASSOCIATE

14
PROFESSOR- SMEC
Quarter Demand Cumulative
Demand
1 270 270
2 220 490
3 470 960
4 670 1630
5 450 2080
6 270 2350
7 200 2550
8 370 2920

Dr T SAMPATH KUMAR, ASSOCIATE

15
PROFESSOR- SMEC
1) Plan I varying the work force size:-
Work force will be varied to meet the actual demand. (ie) During the period
of low demand, the company must fire employees (or) During the period of
high demand, the company must hire employees.
Table Varying the workforce size to meet the demand
Quarter Demand Compare Cost of increasing the Cost of Decreasing Total cost of
(eg.) production level the production level Plan
2-1, (hiring) (firing)
so on (x150) (x 200)
1 270 - - -
2 220 -50 - 50x200 =10,000 10,000
3 470 250 250x150 = 37,500 - 37,500

4 670 200 200x150 = 30,000 - 30,000

5 450 -220 - 220x200 = 44,000 44,000
6 270 -180 - 180x200 = 36,000 36,000
7 200 -70 - 70x200 = 14,000 14,000
8 370 170 170x150 = 25,500 - 25,500
Total cost of Plan I 1,97,000
Dr T SAMPATH KUMAR, ASSOCIATE
16
PROFESSOR- SMEC
2) Plan II Changing Inventory levels: -
The company set the average demand as its production capacity to this
average demand
To avoid shortages, 255 units is added from the beginning of period 1
Table Cost calculation for changing Inventory levels

Qua Demand Cumulativ Production Cumulative Inventory Adjusted Cost of

rter e Demand level production Inventory holding
level with 255 Inventories
(min)
0 1 2 3 4 5 = 4-2 6 = 5+255 7 = 6x Rs.50

1 270 270 365 365 95 350 17,500

2 220 490 365 730 240 495 24,750
3 470 960 365 1095 135 390 19,500
4 670 1630 365 1460 -170 85 4,250
5 450 2080 365 1825 -255(min) 0 0
6 270 2350 365 2190 -160 95 4750
7 200 2550 365 2555 5 260 13,000
8 370 2920 365 2920 0 255 12,750
2920/8 = 365 Total cost of Plan II 96,500
Dr T SAMPATH KUMAR, ASSOCIATE
17
PROFESSOR- SMEC
3) Plan III subcontracting
Some firms may be interested in setting up its regular time capacity to its minimum
value and meet the rest of the demand using subcontracting. The cost of such a plan
was calculated.
200 minimum is set as production level.
Table Cost calculation for subcontracting

Quarter Demand Production units Subcontract units Incremental

1 2 3 = 1-2 subcontracting cost at
Rs. 100/unit
4 = 3x 100

1 270 200 70 70x100 = 7000

2 220 200 20 2000
3 470 200 270 27,000
4 670 200 470 47,000
5 450 200 250 25,000
6 270 200 70 7000
7 200 (min) 200 0 0
8 370 200 170 17,000
Total cost of plan III 1,32,000
Dr T SAMPATH KUMAR, ASSOCIATE
18
PROFESSOR- SMEC
Conclusion:
Plan Total cost
I - 1,97,000
II - 96,500
III - 1,32,000

Plan II has the least cost (ie) Changing Inventory

levels.

Dr T SAMPATH KUMAR, ASSOCIATE

19
PROFESSOR- SMEC