Operations and Supply Chain Management The Core

246 OPERATIONS AND SUPPLY CHAIN MANAGEMENT
AGGREGATE PLANNING TECHNIQUES
LO8–2 Construct
and evaluate
aggregate plans that
employ different
strategies for
meeting demand.
Companies commonly use simple cut-and-try charting and graphic methods to develop
aggregate plans. A cut-and-try approach involves costing out various production planning
alternatives and selecting the one that is best. Elaborate spreadsheets are developed to
facilitate the decision process. Sophisticated approaches involving linear programming
and simulation are often incorporated into these spreadsheets. In the following, we demonstrate
a spreadsheet approach to evaluate four strategies for meeting demand for the
JC Company. Later we discuss more sophisticated approaches using linear programming
(see Appendix A).
A Cut-and-Try Example: The JC Company
A firm with pronounced seasonal variation normally plans production for a full year to capture
the extremes in demand during the busiest and slowest months. But we can illustrate
the general principles involved with a shorter horizon. Suppose we wish to set up a production
plan for the JC Company’s Chinese manufacturing plant for the next six months. We
are given the following information:
DEMAND AND WORKING DAYS
JANUARY FEBRUARY MARCH APRIL MAY JUNE TOTALS
Demand forecast
Number of working days
1,800
22
1,500
19
1,100
21
900
21
1,100
22
1,600
20
8,000
125
COSTS
Materials
Inventory holding cost
Marginal cost of stockout
Marginal cost of subcontracting
Hiring and training cost
Layoff cost
Labor hours required
Straight-time cost (first eight hours each day)
Overtime cost (time and a half)
$100.00/unit
$1.50/unit/month
$5.00/unit/month
$20.00/unit ($120.00 subcontracting cost
less $100.00 material savings)
$200.00/worker
$250.00/worker
5/unit
$4.00/hour
$6.00/hour
INVENTORY
Beginning inventory
Safety stock
400 units
25% of month demand
In solving this problem, we can exclude the material costs. We could have included
this $100.00 cost in all our calculations, but if we assume that a $100.00 cost is common
to each demanded unit, then we need only concern ourselves with the marginal costs.
Because the subcontracting cost is $120.00, our marginal cost that does not include
materials is $20.00.
Note that many costs are expressed in a different form than typically found in the
accounting records of a firm. Therefore, do not expect to obtain all these costs directly
from such records, but obtain them indirectly from management personnel, who can help
interpret the data.