National Institute of Technology Calicut Department of Mechanical Engineering

AGGREGATE PLANNING
PROBLEMS

Problem 1.

ABC Corporation has developed a forecast for a group of items that has the following
seasonal demand pattern.
Quarter Demand Cumulative
Demand
1 220 220
2 170 390
3 400 790
4 600 1390
5 380 1770
6 200 1970
7 130 2100
8 300 2400
1. Plot the demand as a histogram. Determine the production rate required to
meet average demand, and plot the average demand forecast on the graph.
2. Plot the actual cumulative forecast requirements over time and compare them
with the available average forecast requirement. Indicate the excess
inventories and backorders of the graph.
3. Suppose that the firm estimates that it costs Rs.100 per unit to increase the
production rate, Rs.150 to decrease the production rate, Rs.50 per quarter to
carry the items on inventory, and an incremental cost of Rs.80 per unit if
subcontracted and Rs. 20 per unit if overtime is used.
Compare the cost incurred if pure strategies are used.
4. Given these costs, design a mixed strategy solution for this problem.

The histogram and the cumulative requirements graph show how the forecast
deviates from the average requirements (see Figures 1 and 2). Using pure
strategies, it is possible to come up with several plans as follows:
Production rate units/quarter

Forecast requirements
Average Forecast
300 requirements

1 2 3 4 5 6 7 8
Figure 1 Histogram of forecast and average requirements

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Actual forecast

Cumulative demand units

requirements

Backorders

Average forecast
requirements

Inventory

1 2 3 4 5 6 7 8
Periods (Quarters)
Figure 2 Cumulative and average forecast graph

Plan 1: Varying the Workforce Size. Demand can be met exactly by varying the
workforce size. The plan involves hiring and firing as necessary. The
production rate will equal the demand. The cost of this plan is Rs.138,000, as
computed in Table 1. Notice that inventory and backorders are both zero in
each quarter, and the resulting costs for those are zero.

Plan 2: Changing Inventory Levels. Suppose that a firm wants to avoid frequent
hiring and layoffs. It might choose a production level equal to its average
demand and meet the variations in demand by holding inventory. The cost of
such a plan is computed in Table 2. The plan incurs a maximum shortage of
270 units during period 5. Since a certain amount of uncertainty is involved in
any forecast, the firm might decide to carry the inventory from the beginning
of period 1. Adjusted inventories and cost of carrying inventories are shown.
The total cost of the plan is Rs.96,500. Notice, however, that if the item in
question is high-fashion apparel the firm might not want to carry unnecessary
inventory, even though Plan 2 is less costly than Plan 1.
Table 1: Varying the Workforce size to meet the demand

Cost of Increasing Cost of Decreasing Total cost of

Quarter Demand forecast Production Level: Production Level: Plan
Hiring (Rs.) Layoff (Rs.) (Rs.)
1. 220 - - -
2. 170 - 7,500 7,500
3. 400 23,000 - 23,000
4. 600 20,000 - 20,000
5. 380 - 33,000 33,000
6. 200 - 27,000 27,000
7. 130 - 10,500 10,500
8. 300 17,000 - 17,000
Total 138,000

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Table 2 Changing Inventory Levels to Meet the Demand

Adjusted

Inventory
Demand

Production
Quarter

Forecast

Level
Cost of
Inventory
Cumulative Cumulative Holding
with 270 at
Demand Production Inventories
Beginning
(Rs. 1000s)
of Period 1
1. 220 220 300 300 80 350 17.5
2. 170 390 300 600 210 480 24.0
3. 400 790 300 900 110 380 19.0
4. 600 1390 300 1200 -190 80 4.0
5. 380 1770 300 1500 -270 0 0
6. 200 1970 300 1800 -170 100 5.0
7. 130 2100 300 2100 0 270 13.5
8. 300 2400 300 2400 0 270 13.5
96.5

Plan 3: Subcontracting. A firm might prefer to produce an amount equal to its lowest
requirements and meet the rest of the demand by subcontracting. The cost of
such a plan amounts to Rs.108,000, as computed in Table 3. Again, it may not
always be feasible or desirable to subcontract. This decision leads us to a
fourth plan, involving a mixed strategy.

Plan 4: Mixed Strategy. As a compromise, a firm might combine the pure strategies,
thus designing a mixed strategy. This mixed strategy varies production
capacity slightly up or down as aggregated demand varies. Drastic changes in
production capacity are curtailed, and frequent hiring and lay off situations are
avoided. For example, based on past experience and available personnel,
management may decide to maintain a constant production rate of 200 per
quarter and permit 25% overtime when the demand exceeds the production
rate. To meet any further demand, the firm chooses to hire and layoff workers.
Remember, in a mixed strategy, a host of other alternatives exist. Trial-and-
error computations of such a plan can be carried out step by step, as shown in
Table 4.

Table 3 Subcontracting Costs

Incremental
Demand Production Subcontract Cost at
Quarter
Forecast Units Units Rs.80 per
Unit (Rs.)
1. 220 130 90 7,200
2. 170 130 40 3,200
3. 400 130 270 21,600
4. 600 130 470 37,600
5. 380 130 250 20,000
6. 200 130 70 5,600
7. 130 130 0 0
8. 300 130 170 13,600
108,800

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Table 4 Mixed strategy

Additional units Cost of

Units of Regular Time Additional Units Cost of Cost of
Overtime Needed After Changing Total Cost
Quarter Demand Production Needed After Inventory Overtime
Production Regular Time + Workforce (Rs.)
Forecast Units Regular Time (Rs.) (Rs.)
Overtime (Rs.)
1. 220 200 20 50 -30 (-30)c 1500 1000 0 2,500
a
2. 170 200 -30 - -30 (-60) 3000 0 0 3,000
3. 400 200 200 50 150b (90) 0 1000 9,000 10,000
4. 600 200 400 50 350 (350) 0 1000 26,000 27,000
5. 380 200 180 50 130 (130) 0 1000 33,000 34,000
6. 200 200 0 - - - 0 0 19,500 19,500
7. 130 200 -70 - -70 (-70) 3500 0 0 3,500
8. 300 200 100 50 50 (-20) 1000 1000 0 2,000
Rs.101,500
a
Note that the inventory in period 2 is sixty units
b
If the existing inventory of sixty units is used, an increase of only ninety units is required.
c
Negative quantities in parenthesis indicate inventories, and positive quantities in parentheses denote the quantities to be produced by changing
the capacity.

Note:- All the above cost calculated are incremental cost. They are the cost incurred over the regular time production cost. That is, the total cost of
a plan is the plan cost shown above plus the cost incurred if all the requirements are produced in regular time.

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Problem 2.

You are supplied with a monthly demand forecast, an organizational policy of

requiring 10% of a month’s forecast as safety stock, and the number of operating days
available each month. There is no inventory available at the beginning of the first
month, January. The following table contains the demand requirements.
January February March April May June
1. Beginning inventory 0 1,000 1,500 3,000 2,700 3,000
2. Forecasted demand 10,000 15,000 30,000 27,000 30,000 16,000
3. Safety Stock 1,000 1,500 3,000 2,700 3,000 1,600
4. Production
requirements (2+3-1) 11,000 15,500 31,500 26,700 30,300 14,600
5. Operating days 22 19 21 21 22 20
6. Cumulative forecasted 10,000 25,000 55,000 82,000 112,000 128,000
demand
7. Cumulative production 11,000 26,500 58,000 84,000 115,000 129,600
requirements
8. Cumulative operating 22 41 62 83 105 125
days

The costs for the organization are as follows:

Manufacturing cost/unit Rs.100

Inventory holding costa Rs.2.00/unit-month
Hourly wage rate Rs.8.00
Stockout cost per unit Rs.5.00
Hourly overtime wage rate 150%, or Rs.12.00
Subcontracting cost/unit Rs.104
Labour hours/unit 4 hours
Layoff cost/worker Rs.500
Hiring and training cost/worker Rs.400
a
2% of manufacturing cost per month.
Three potential plans for the production are:

1. Produce to exact production requirements by varying the size of the work force on
regular hours. Assume there are 250 workers available in January.

2. Maintain a constant work force of 518 workers. Assume no subcontracting is

available and inventory will fluctuate with stockouts filled from the following
month's production.

3. Produce with a fixed work force of 500 on regular time and subcontract all excess
demand over the period of production. Inventory will increase when production
exceeds demand; no stockouts are permitted.

Each of the three plans is tabulated in Table 5, and a comparison is made in Table 6.
Plan 2 with the constant work force and production rate with variable inventory and
stockouts result’s the lowest incremental cost, Rs.102,176. There are obviously many
other plans that could be evaluated.

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Table 5 Three possible strategies

Plan 1
1 2 3 4 5 6 7 8
Production Available Workers No. of No. of Hiring cost Layoff cost

Production
hours hours per required workers workers [(col.5)xRs. [(col.6)xRs.

required
hireda laid offa
Month

required month per [(col.2)/ 400] 500]

Unit

[(col.1)x4] worker [(no. (col.3)]

of days)x8]
Jan. 11,000 44,000 176 250 0 0 0 0
Feb. 15,500 62,000 152 408 158 0 Rs. 63,200 0
Mar. 31,500 126,000 168 750 342 0 Rs. 136,800 0
Apr. 26,700 106,800 168 636 0 114 0 Rs. 57,000
May 30,300 121,200 176 689 53 0 Rs. 21,200 0
Jun. 14,600 58,400 160 365 0 324 0 Rs. 162,000
Rs. 221,200 Rs. 219,000

Plan 2
1 2 3 4 5 6
Production
Unit Units Inventory
hours available Ending Stockout
Month Production produced holding
[(no. of days ) x Inventoryb costd
required [(col.2)/4] costc
8x518]
Jan. 11,000 91,168 22,792 11,792 Rs. 23,584 0
Feb. 15,500 78,736 19,684 15,976 31,952 0
Mar. 31,500 87,024 21,756 6,232 12,464 0
Apr. 26,700 87,024 21,756 1,288 2,576 0
May 30,300 91,168 22,792 (-6,220) 0 31,100
Jun. 14,600 82,880 20,720 (-100) 0 500
Rs. 70,576 Rs. 31,600

Plan 3
1 2 3 4 5 6 7
Inventory
Production Subcontr-
Unit Units Units holding
hours available Ending acting cost
costd
Month

Production produced Subcontr-

[(no. of days ) Inventory [(Col.4xR
required [(Col.2)/4] actede [(Col.5xRs
x 8x500] s4)]
2)]
Jan. 11,000 88,000 22,000 0 11,000 0 Rs. 22,000
Feb. 15,500 76,000 19,000 0 14,500 0 29,000
Mar. 31,500 84,000 21,000 0 4,000 0 8,000
Apr. 26,700 84,000 21,000 1,700 0 Rs. 6,800 0
May 30,300 88,000 22,000 8,300 0 Rs. 33,200 0
Jun. 14,600 80,000 20,000 0 5,400 0 10,800
Rs. 40,000 Rs. 69,800

a
lf the difference (col. 4)t+1 - (col.4)t is positive, it represents the number of workers hired. If negative,
it represents the number laid off.
b
Ending inventory is (beginning inventory) + (units produced) - (unit production required).
C
lnventory holding cost is the positive ending inventory balance times 2.
d
Stockout cost is the negative ending inventory balance times 5. -
e
Ending inventory is (beginning inventory) + (units produced) - (unit production required). When a
negative number is obtained for ending inventory, it represents the units subcontracted, and ending
inventory is recorded as zero.

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Table 6 Comparison of the three plans

Plan 1 Plan 2 Plan 3

(constant work (constant work
(exact production; force; vary force; vary
Cost item
vary work force) inventory and inventory and
stockouts) subcontract)
Hiring cost Rs. 221,200 0 0
Layoff cost 219,000 0 0
Inventory holding cost 0 Rs. 70,576 Rs. 69,800
Stockout cost 0 31,600 0
Subcontract cost 0 0 Rs. 40,000
Rs. 440,200 Rs. 102,176 Rs. 109,800

Problem 3.

An organization uses overtime, inventory, and subcontracting to absorb fluctuations in

demand. A production plan for 12 months is devised and updated each month. The
expected demand for the next 12 periods is as follows:
Time period 1 2 3 4 5 6 7 8 9 10 11 12
Unit demand (103) 10 15 30 27 30 16 12 10 18 26 30 15

The following costs and constraints are relevant:

Maximum regular production/period 19,000 units

Maximum overtime production/period 4,000 units
Regular production cost Rs.30/unit
Overtime production cost Rs.35/unit
Subcontracting cost Rs.37/unit
Inventory holding cost/period Rs.l/unit

What is the optimum production plan for the next 12 months (assume beginning
inventory is zero, desired ending inventory is zero, and no stockouts can be
tolerated)?

From the costs and constraints it is apparent that it is desirable to produce to

inventory on regular time for five holding periods before overtime production is
economic. Overtime production should be used for two holding periods before
subcontracting is desirable. Production to inventory on regular time should be used
for seven holding periods before subcontracting is desirable. If units are not used in
the period in which they are produced, holding costs are incurred. With these cost
tradeoffs in mind, the optimum production plan will be devised in the following table:
Table 7 Development of production plan
Strategy variablesa

Beginning Regular Overtime Ending

Period Demand Subcontract
inventory production production inventoryb
1. 10 0 10(1), 7(3), 2(4) 9
2. 15 9 15(2), 4(3) 13
3. 30 13 19(3) 2(4), 2(5) 6
4. 27 6 19(4) 4(4) 2
5. 30 2 19(5) 4(5) 5(5) 0

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6. 16 0 16(6), 1(11) 1
7. 12 1 12(7), 7(11) 8
8. 10 8 10(8), 6(10), 3(11) 17
9. 18 17 18(9), 1(10) 18
10. 26 18 19(10) 11
11. 30 11 19(11) 0
12. 15 0 15(12) 0

a
The quantity to be produced is entered in the row associated with the production
time period. The parentheses immediately after the production quantity indicate the
time period in which it will be demanded.
b
The beginning and ending inventory columns are determined after all the strategy
variables are assigned.

Table 8 Production plan

Period
Strategy variable 1 2 3 4 5 6 7 8 9 10 11 12
Regular production 19 19 19 19 19 17 19 19 19 19 19 15
Overtime production 4 4 4
Subcontract 5
Total 19 19 23 23 28 17 19 19 19 19 19 15

Problem 4.
An organization with a stable work force uses inventory, overtime, and subcontracting
to meet demand requirements. No shortages are permitted, and demand must be
satisfied through in-house production or subcontracting. The following data are
available for the upcoming periods:

Period Expected Regular capacity Overtime Subcontract

demand (units) capacity (units) capacity (units)
(units)
1. 1,000 600 180 200
2. 500 500 150 200
3. 700 600 180 200
4. 800 650 200 200
5. 900 600 180 200
6. 900 600 180 200
4,800 3,550 1,070 1,200

The beginning inventory at the start of period 1 is 200 units and the desired ending
inventory for period 6 is 100 units. The relevant cost data are as follows:

Regular cost/unit Rs.100

Overtime cost/unit Rs.125
Subcontract cost/unit Rs.130
Inventory holding cost/period Rs.2/unit

Determine the production plan that will satisfy demand at minimum cost. Use the
transportation method of linear programming.

The problem is attacked by starting with a linear programming tableau similar

to the tableau shown in Fig.3. (The table shown in Fig. 3 is suitable for three-period
problem) The last column in the table (total capacity available) is filled in, as is the

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last row (demand). On an incremental cost basis, the regular cost per unit of Rs.100 is
assigned a zero value; the overtime cost becomes Rs.25/unit, and the subcontract cost
becomes Rs.30/unit. The appropriate incremental costs are added to each feasible cell
in the table. The next step is to assign available capacity to meet the demand
requirement at the least cost. When all the demand has been satisfied without
violating the capacity constraints, the problem is solved. The optimum production
plan is contained in Table 9.

The following should be noted while preparing the linear programming tableau:

1. Total capacity exceeds demand, so a "slack" demand of unused capacity is added to

achieve the required balance of supply and demand. .
2. The beginning inventory of 200 units is available at no additional cost if used in
period 1. Holding cost is Rs.2/unit if units are retained until period 2, Rs.4/unit
until period 3, and so on.
3. Regular cost per unit is assigned a zero incremental cost if used in the month
produced; otherwise a holding cost of Rs.2/unit-period is added on for each month
the units are retained.
4. Overtime cost per unit is assigned a Rs.25 incremental cost if used in the month
produced; otherwise a holding cost of Rs.2/unit-period is incurred as in the regular
situation.
5. Subcontract cost per unit is assigned a Rs.30 incremental cost if used in the period
produced. If unused in the period, a holding cost of Rs.2/unit-period is incurred.
6. The desired ending inventory (100 units) must be available at the end of period 6,
and it has been added to the period 6 demand of 900 units to obtain the 1000 units.
7. Since no stockouts are permitted, production in any month to satisfy a preceding
month's demand is not a feasible alternative. Infeasible cells in the table are
crosshatched.
8. Unused capacity is assigned a zero value in this problem. If there were an
opportunity cost to unused capacity on regular time, it would normally be assessed.
For example, unused capacity on regular time might result in idle labour. In this
situation the labor cost contribution to the product would be the cost of unused
capacity.

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Figure 3 A sample table

Demand for Unused Total
Supply from Capacity
Period 1 Period 2 Period 3 Capacity Available
(supply)
Beg. Inventory o h 2h 0 I0
Regular r r+h r + 2h 0 R1
1 Overtime v v+h v + 2h 0 O1
Subcontract s s+h s + 2h 0 S1
Regular r r+h 0 R2
2 Overtime v v+h 0 O2
Subcontract s s+h 0 S2
Regular r 0 R3
3 Overtime v 0 O3
Subcontract s 0 S3

Demand D1 D2 D 3 + le C Grand Total

h – Carrying cost per unit per period

r – Incremental cost for regular time production
v – Incremental cost for over time production
s - Incremental cost for subcontracted quantity
Ie – Ending inventory, I0 – Initial inventory
Ri, Oi, Si – Regular time, over time, and subcontracting capacities respectively for
period i
Di – Demand of period i

Table 9 Optimum production plan

Regular Overtime
Subcontract Total production
Period production production
production (units) costa
(units) (units)
1. 600 180 20 Rs. 85,100
2. 500 0 0 50,000
3. 600 180 0 82,500
4. 650 200 0 90,000
5. 600 180 10 83,800
6. 600 180 200 108,500
3,350 920 230 Rs. 499,900
a
Total production cost does not include holding cost, which is 4(70*) + 6(10*) + 2(50*)
+ 2(10*) = Rs.460. Thus total cost is Rs.499,900 + Rs.460 = Rs.500,360.
*These quantities can be obtained from linear programming table.

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