Operations and Supply Chain Management The Core

SALES AND OPERATIONS PLANNING chapter 8 247
Aggregate Production Planning Requirements
exhibit 8.3
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 (0.25 × Demand forecast) 450 375 275 225 275 400
Production requirement (Demand forecast +
Safety stock − Beginning inventory)
Ending inventory (Beginning inventory +
Production requirement − Demand forecast)
1,850 1,425 1,000 850 1,150 1,725
450 375 275 225 275 400
Excel:
Aggregate
Planning
Inventory at the beginning of the first period is 400 units. Because the demand forecast
is imperfect, the JC Company has determined that a safety stock (buffer inventory)
should be established to reduce the likelihood of stockouts. For this example, assume the
safety stock should be one-quarter of the demand forecast. (Chapter 11 covers this topic
in depth.)
Before investigating alternative production plans, it is often useful to convert
demand forecasts into production requirements, which take into account the safety
stock estimates. In Exhibit 8.3, note that these requirements implicitly assume that the
safety stock is never actually used, so that the ending inventory each month equals the
safety stock for that month. For example, the January safety stock of 450 (25 percent
of January demand of 1,800) becomes the inventory at the end of January. The production
requirement for January is demand plus safety stock minus beginning inventory
(1,800 + 450 − 400 = 1,850).
Now we must formulate alternative production plans for the JC Company. Using a
spreadsheet, we investigate four different plans with the objective of finding the one with
the lowest total cost.
Plan 1. Produce to exact monthly production requirements using a regular eight-hour
day by varying workforce size.
Plan 2. Produce to meet expected average demand over the next six months by maintaining
a constant workforce. This constant number of workers is calculated by finding
the average number of workers required each day over the horizon. Take the total
production requirements and multiply by the time required for each unit. Then divide
by the total time that one person works over the horizon [(8,000 units × 5 hours per
unit) ÷ (125 days × 8 hours per day) = 40 workers]. Inventory is allowed to accumulate,
with shortages filled from next month’s production by backordering. Negative beginning
inventory balances indicate that demand is backordered. In some cases, sales may
be lost if demand is not met. The lost sales can be shown with a negative ending inventory
balance followed by a zero beginning inventory balance in the next period. Notice
that in this plan we use our safety stock in January, February, March, and June to meet
expected demand.
Plan 3. Produce to meet the minimum expected demand (April) using a constant workforce
on regular time. Subcontract to meet additional output requirements. The number
of workers is calculated by locating the minimum monthly production requirement and
determining how many workers would be needed for that month [(850 units × 5 hours