Example for Production Strategy
Demand forecast
Number of working days
JANUARY
1,800
22
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)
Beginning inventory
Safety stock
FEBRUARY
1,500
19
MARCH
1,100
21
APRIL
900
21
MAY
1,100
22
JUNE
1,600
20
TOTALS
8,000
125
COSTS
Rs. 100.00/unit
Rs. 1.50/unit/month
Rs. 5.00/unit/month
Rs. 20.00/unit (Rs. 120 subcontracting cost less Rs.
100 material savings)
Rs. 200.00/worker
Rs. 250.00/worker
5/unit
Rs. 4.00/hour
Rs. 6.00/hour
INVENTORY
400 units
25 % of month demand
Aggregate Production Planning Requirements
Beginning inventory
Demand forecast
Safety stock (.25 x Demand forecast)
Production requirement = (Demand forecast +
Safety stock – Beginning inventory)
Ending inventory = (Beginning inventory +
Production requirement – Demand forecast)
JAN
400
1,800
450
1,850
FEB
450
1,500
375
1,425
MAR
375
1,100
275
1,000
APR
275
900
225
850
450
375
275
225
MAY JUNE
225
275
1,100 1,600
275
400
1,150 1,725
275
400
Costs of Four Production Plans
PRODUCTION PLAN 1: EXACT PRODUCTION; VARY WORKFORCE
Production requirement
Production hours required
(Production requirement x 5
hr./unit)
Working days per month
Hours per month per worker
(Working days x 8 hrs./day)
Workers required (Production hours
required/Hours per month per
worker)
New workers hired (assuming
opening workforce equal to first
month’s requirement of 53
workers)
Hiring cost (New workers hired x Rs
200)
Workers laid off
Layoff cost (Workers laid off x Rs
250)
Straight-time cost (Production hours
required x Rs 4)
JANUARY
1,850
FEBRUARY
1,425
MARCH
1,000
APRIL
850
MAY
1,150
JUNE
1,725
9,250
7,125
5,000
4,250
5,750
8,625
22
176
19
152
21
168
21
168
22
176
20
160
53
47
30
25
33
54
0
0
0
0
8
21
Rs 0
Rs 0
Rs 0
Rs 0
Rs 1,600
Rs 4,200
Rs 5, 800
0
Rs 0
6
Rs 1,500
17
Rs 4,250
5
Rs 1,250
0
Rs 0
0
Rs 0
Rs 7,000
Rs. 37,000
Rs. 28,500
Rs.
20,000
Rs.
17,000
Rs. 23,000
Rs. 34,500
Total cost
TOTAL
Rs.
160,00
Rs.
172,800
PRODUCTION PLAN 2: CONSTANT WORKFORCE; VARY INVENTORY AND STOCKOUT
Beginning inventory
Working days per month
Production hours available
(Working days per month x 8
hr./day x 40 workers)*
Actual production (Production hours
available/5 hr./unit)
Demand forecast
Ending inventory = (Beginning
inventory + Actual production–
Demand forecast)
Shortage cost = (Units short x Rs 5)
Permitted Safety stock
Units excess (Ending inventory –
Safety stock) only if positive
amount
Inventory cost (Units excess x Rs
1.50)
Straight-line cost (Production hours
available x Rs 4)
JANUARY
400
22
7,040
FEBRUARY
8
19
6,080
MARCH
-276
21
6,720
APRIL
-32
21
6,720
MAY
412
22
7,040
JUNE
720
20
6,400
1,408
1,216
1,344
1,344
1,408
1,280
1,800
8
1,500
-276
1,100
-32
900
412
1,100
720
1,600
400
Rs 0
450
0
Rs. 1,380
375
0
Rs. 160
275
0
Rs. 0
225
187
Rs. 0
275
445
Rs. 0
400
0
Rs. 1,540
Rs. 0
Rs. 0
Rs. 0
Rs. 281
Rs. 668
Rs 0
Rs. 948
Rs. 28,160
Rs. 24,320
Rs.
26,880
Rs.
26,880
Rs. 28,160
Rs. 25,600
Rs.
160,000
Rs.
162,488
Total cost
*(Sum of total production requirement for all months x 5 hr./unit)/(Sum of production days available x 8 hr./day) = (8,000 x 5)/(125 x 8) = 40.
TOTAL
PRODUCTION PLAN 3: CONSTANT LOW WORKFORCE; SUBCONTRACT
Production requirement
Working days per month
Production hours available
(Working days per month x 8
hr./day x 25 workers)*
Actual production (Production hours
available/5 hr./unit)
Units subcontracted (Production
requirement – Actual production)
Subcontracting cost (Units
subcontracted x Rs 20)
Straight-line cost (Production hours
available x Rs 4)
JANUARY
1,850
22
4,400
FEBRUARY
1,425
19
3,800
MARCH
1,000
21
4,200
APRIL
850
21
4,200
MAY
1,150
22
4,400
JUNE
1,725
20
4,000
880
760
840
840
880
800
970
665
160
10
270
925
Rs. 19,400
Rs. 13,300
Rs. 3,200
Rs. 200
Rs. 5,400
Rs. 18,500
Rs. 17,600
Rs. 15,200
Rs.
16,800
Rs.
16,800
Rs. 17,600
Rs. 16,000
Total cost
*Minimum production requirement. In this example, April is minimum of 850 units. Number of workers required for April is (850 x 5)/(21 x 8) = 25.
TOTAL
Rs.
60,000
Rs.
100,000
Rs.
160,000
PRODUCTION PLAN 4: CONSTANT WORKFORCE; OVERTIME
Beginning inventory
Working days per month
Production hours available
(Working days per month x 8
hr./day x 38 workers)*
Regular shift production (Production
hours available/5 hr./unit)
Demand forecast
Units available before overtime
(Beginning inventory + Regular
shift production – Demand
forecast). This number has been
rounded to the nearest integer.
Units overtime
Overtime cost (Units overtime x 5
hr./unit x Rs. 6/hr.)
Recommended Safety stock
Units excess (Units available before
overtime – Safety stock) only if
positive amount
Inventory cost (Units excessive x Rs
1.50)
Straight-line cost (Production hours
available x Rs 4)
JANUARY
400
22
6,688
FEBRUARY
0
19
5,776
MARCH
0
21
6,384
APRIL
177
21
6,384
MAY
554
22
6,688
JUNE
792
20
6,080
1,338
1,155
1,277
1,277
1,338
1,216
1,800
-62
1,500
-345
1,100
177
900
554
1,100
792
1,600
408
62
Rs 1,860
345
Rs 10,350
0
Rs 0
0
Rs 0
0
Rs 0
0
Rs 0
450
0
375
0
275
0
225
329
275
517
400
8
Rs 0
Rs 0
Rs 0
Rs 494
Rs 776
Rs 12
Rs 1,281
Rs 23,104 Rs 25,536
Rs
25,536
Rs 26,752
Rs 24,320
Rs
152,000
Rs.
165,491
Rs 26,752
Total cost
TOTAL
Rs 12,210
*Workers determined by trial and error. (From constant work force case we see that if we have 40 workers no overtime would be needed. However, that number would
certainly be less than 40 if we use a combination of constant workforce and OT. We then use trial and error method for worker numbers of 39, 38, 37, 36 etc and zeroed in on
38 workers)
Comparison of Four Plans
Cost
Hiring
Layoff
Excess inventory
Shortage
Subcontract
Overtime
Straight time
PLAN 1: EXACT
PRODUCTION; VARY
WORKFORCE
Rs 5,800
7,000
0
0
0
0
160,000
Rs. 172,800
PLAN 2: CONSTANT
WORKFORCE; VARY
INVENTORY AND
STOCKOUT
Rs 0
0
948
1,540
0
0
160,000
Rs. 162,488
PLAN 3: CONSTANT
LOW WORKFORCE;
SUBCONTRACT
PLAN 4: CONSTANT
WORKFORCE;
OVERTIME
Rs 0
0
0
0
60,000
0
100,000
Rs. 160,000
Rs 0
0
1,281
0
0
12,210
152,000
Rs. 165,491