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# IME 483

TEAM: G

## EXECUTIVE SUMMARY REPORT

LAB ASSIGNMENT 2
AGGREGATE PRODUCTION PLANNING
IME 483- Production Planning and Control
BY

MUSAAB ZAFER
ZAHEERUDDIN ALI KHAN
TEAM G

FALL
2014

IME 483
TEAM: G

TOPIC

PAGE

NO.
1. Introduction

2. Types of Strategies

## 3. Advantages of Aggregate Planning... 5

4. Chase Strategy. 6
5. Mixed Strategy. 7
6. Linear Programming 8
7. Conclusion. 9
8. Appendix
10

FALL
2014

IME 483
TEAM: G

Introduction
The purpose of this assignment is to compare Aggregate Planning
methods and determining the more cost efficient strategy of three i.e. Level
Strategy, Chase Strategy and Mixed Strategy.
Using Level Chase and Mixed strategy models, the number of workers and the
resulting inventory levels are determined according to forecasted demand
values. The demand values (in units) are given in the Table 1 below

## the plans related to pricing, inventory constraints and changing level of

workforce to meet the monthly demand as closely as possible. It is assumed
that a worker works for a standard time of 160 hours a month.

FALL
2014

IME 483
TEAM: G

Background
What is aggregate planning?
Aggregate planning is a technique for adjusting production to the ups and
downs of demand. An aggregate plan must include demand forecasts, resources
and capacity and express these as an aggregate, or combined, strategy.

## What are the different types of strategies?

1. Pure chase strategy match demand period by period
2. Pure level strategy maintain a level workforce or a steady output rate
3. Mixed strategy use a combination of decision variables

## Why do we need different strategies?

Resources are determined i.e. total number of workers, total machine
hours available and the amount of raw materials on hand. Other
resources may include packaging materials, products in progress, and
tools needed to produce and finish goods.
Total capacity can be calculated i.e. the number of units produced per
day, week, productivity per employee and current number of employees
working.
Finally, adjust capacity to meet demand. If demand figures are not in line
with capacity, we can decide how to increase resources- by adjusting the
number of employees, machines, raw materials or productivity.
FALL
2014

IME 483
TEAM: G

## What are the advantages of using Aggregate Planning?

Minimize Staffing Fluctuations: By using aggregate planning to forecast
production demand, businesses are better able to predict their staffing
requirements. Through proper forecasting, a business will be able to
reduce or eliminate the need to hire these extra workers. This will save
the business both time and money.
Reduce Overhead: Additional materials will need to be stored, and having
finished products lying around increases the likelihood of damage to the
products before they reach the customer. Adhering to an aggregate
planning model can help businesses operate in a leaner manner.
Increase Production Rates: A significant advantage of using aggregate
planning is that it maximizes the utilization of production equipment.
Since production equipment is being used at its full capacity, production
rates significantly increase. This creates a much more streamlined
process where businesses can accurately determine the time it will take
to fulfill orders and can then plan their production operations accordingly.
Accommodate Changes: Since production orders often vary, most
businesses cannot stick to one plan at all times. Aggregate planning
allows for contingency measures to be put in place so businesses can
better

accommodate

significant

changes

in

customer

orders

and

production.

FALL
2014

IME 483
TEAM: G

LEVEL STRATEGY.
A level strategy seeks to produce an aggregate plan that maintains a steady
production rate and/or a steady employment level. In order to satisfy changes
in customer demand, the firm must raise or lower inventory levels in
anticipation of increased or decreased levels of forecast demand. The firm
maintains a level workforce and a steady rate of output when demand is
somewhat low. This allows the firm to establish higher inventory levels than are
currently needed. As demand increases, the firm is able to continue a steady
production rate/steady employment level, while allowing the inventory surplus
to absorb the increased demand.

## A second alternative would be to use a backlog or backorder. A backorder is

simply a promise to deliver the product at a later date when it is more readily
available, usually when capacity begins to catch up with diminishing demand. In
essence, the backorder is a device for moving demand from one period to
another, preferably one in which demand is lower, thereby smoothing demand
requirements over time.

A level strategy allows a firm to maintain a constant level of output and still
meet demand. This is desirable from an employee relations standpoint.
Negative results of the level strategy would include the cost of excess
FALL
2014

IME 483
TEAM: G

## inventory, subcontracting or overtime costs, and backorder costs, which

typically are the cost of expediting orders and the loss of customer goodwill.

Level Strategy

Total Cost= Hiring Cost+ Laying Off Cost+ Production Cost+ Inventory
Cost
= \$2,780,300.00
Thus, total cost using Level Strategy is \$2,780,300.00

CHASE STRATEGY
The chase strategy model of aggregate planning uses lean principles to
eliminate all excess inventories. Through hiring and firing workers with
fluctuating demand, this strategy tries to maintain the minimum inventory
required. The number of workers are first determined according to the given
FALL
2014

IME 483
TEAM: G

production rate and adjusted for each forecasted demand. The number of
workers and resulting inventories are tabulated and shown.
Table 2 shows the Chase Strategy approach to the given assignment problem.
The following calculations are done on excel and the general formulation can
be seen in the Excel File attached

FALL
2014

IME 483
TEAM: G

Chase Strategy

Total Cost= Hiring Cost+ Laying Off Cost+ Production Cost+ Inventory
Cost
= \$2,897,075.00
Thus, total cost using Chase Strategy is \$2,897,075.00

Mixed strategy
A cost effective aggregate plan which requires the use of a combination of
the various strategies is referred to as a mixed strategy. It uses alternatives
consisting of mixing inventory, back order, capacity change and work force
change.

IME 483
TEAM: G

Mixed Strategy

Total Cost= Hiring Cost+ Laying Off Cost+ Production Cost+ Inventory
Cost
= \$2,158,225.00
Thus, total cost using Mixed Strategy is \$2,158,225.00

LINEAR PROGRAMMING
Cost of Production: \$350,
Inventory: \$5/Month
Workers Pay: \$1500/Month

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TEAM: G

## Hiring Cost: \$500.

Firing Cost: \$750.
Back Order Cost: \$35/ Month
350 P

Min

t=1

## It= It-1+Pt-Dt {t=1, 2, 3, .6}

Wt=Wt-1+Ht-Ft
Pt= 350Rt
I0Dt
Wt12
D1=1020, D2=950, D3=800, D4=1000, D5=1250, D6=650
Pt, It, Wt, Ht, Ft, Bt 0
Pt: Number of Products Produce.
It: Inventory.
Wt: Number of workers.
Ht: Number of workers Hired.
Ft: Number of workers Fired.

IME 483
TEAM: G

## Bt: Back Order cost.

Conclusion
Calculations for each strategy yielded a range of cost values. A
comparison of the costs can be found in the Table below.
Model

## Cost incurred (in \$)

Level strategy

\$2,780,300.00

Chase strategy

\$2,897,075.00

Mixed strategy

\$2,158,225.00
Comparison of Three Strategys

## Hence, through mathematical formulation carried out in MS Excel, it is concluded

that mixed strategy is preferable over Level and Chase strategies because of low
cost of production.

IME 483
TEAM: G