1

DEPARTMENT OF MANAGEMENT STUDIES

IIT, New Delhi

Session No.:

Aggregate Planning & Strategies

Introduction:

1. Operation Management is the study of products and services, which are

required by people all over the world in day to day life (world population

is over 700 crores and India’s it is 130 crores) i.e 7 billion and 1.3 billion

2. By the end of this semester, you will be familiar or master of

manufacturing processes of products and designing of services as per

ISI/ISO.

3. In addition to this, the cost of products/services have to be within the

buying power of customers and the study of aggregate planning (A.P.)

enables the operations managers to control the cost.

4. Aggregate planning is co-ordination between market forecast of

demand, manpower requirement, cash flow, etc. under the given

conditions.
 2

There are three methods of A.P., namely,

a) Meet the demand strategy, with minimum inventory called “JIT” (for

expensive products) (Pure stratergy)

b) Capacity utilization by regular production and have inventory (for low

value items) (Pure stratergy) ; and third is

c) Mixed strategy of above two.

Options available with operations manager are:

1) Have regular production with the available manpower (capacity

utilization)

2) Hire and fire workers as per demand

3) Give overtime or subcontract

4) Have stock out conditions

5) Part time workers for services.

Any other option?

 3

Example no.1 : to understand the above two pure strategies:

1) Have regular production and build inventory (as in India)

Data Demand for next 4 months is

1 80,000 units

2 50,000 units

3 1,20,000 units

4 1,50,000 units

You have 100 regular workers and the production is 1000 units per month

per worker. Inventory carrying cost is 0.50 per unit and production cost is

2.00 per unit (Rs.).

Ans:
S.No. Demand Regular Inventory
production (@ 0.50 per unit)
(100 x1000)
1 80,000 1,00,000 20,000
2 50,000 1,00,000 70,000
3 1,20,000 1,00,000 50,000
4 1,50,000 1,00,000 0

Total 4,00,000 4,00,000 1,40,000

Total cost (4,00,000 x2) + (1,40,000 x .50) = 8,70,000

It is prevalent in India (No fire)
 4

2) Have production as per demand (No inventory) and use hire @100 and

fire @500 respectively:-

S.No. Demand Production Hire @ 100 Fire @ 500

1 80,000 80,000 20
2 50,000 50,000 30
3 1,20,000 1,20,000 70
4 1,50,000 1,50,000 30 0

Total 4,00,000 4,00,000 100 50

Total cost (4,00,000 x 2) + (100 x 100) + (50 x 500) = 8,35,000

Any Question?

When demand in 4th month is 1,60,000 then options: give overtime @ 3

per unit or outsource @ 2 per unit

Extra cost is 30,000 with OT and 20, 000 with outsource

 5

Example no.2: on Pure strategies with mix strategy

Data Other data:

Sl. No. Demand Regular workers 10 nos.

1. 1000 production: 100 units/worker
2. 400 Rate Rs.10 per unit
3. 400 Inventory cost 1 per unit
4. 400 Hire cost 1000 per worker
5. 400 Fire cost 500 per worker
6. 400 Overtime cost 15 per worker
7. 500 Subcontract 25 per unit
8. 500
9. 1000 No closing inventory
10. 1500 Find total cost with all 3 strategies
11. 2500
12. 3000
Total 12,000

a) Chase demand i.e. Hire and Fire

Demand Production Hire Fire Inventory
(10 nos @ 100 per (@1000) (@ 500)
worker)

1000 1000 0 0 0
400 400 0 6 0
400 400 0 0 0
400 400 0 0 0
400 400 0 0 0
400 400 0 0 0
500 500 1 0 0
500 500 0 0 0
1000 1000 5 0 0
1500 1500 5 0 0
2500 2500 10 0 0
3000 3000 5 0 0

TOTAL : 12000 12000 26 6 0

Total cost: (12000 x 10) + (26 x 1000) + (6 x 500) = 1,49,000
 6

b) Ans: Regular production (with inventory)

Demand Production Inventory

(10 nos @ 100 per
worker)

1000 1000 0
400 1000 600
400 1000 1200
400 1000 1800
400 1000 2400
400 1000 3000
500 1000 3500
500 1000 4000
1000 1000 4000
1500 1000 3500
2500 1000 2000
3000 1000 0

TOTAL : 12000 12000 26000

Total cost under regular production

12000 x 10 + 26,000 x 1 =1,46,000

c) Mix strategy of regular production with hire and fire

Demand Production Inventory Hire Fire
(10 nos @
100 per
worker)

1000 1000 0 0 0
400 400 0 0 6
400 400 0 0 0
400 400 0 0 0
400 400 0 0 0
400 400 0 0 0

500 1500 1000 11 0

500 1500 2000 0 0
 7

1000 1500 2500 0 0

1500 1500 2500 0 0
2500 1500 1500 0 0
3000 1500 0 0 0

TOTAL : 12000 12000 9,500 11 6

Total Cost (12000x10) + (9500 x 1) + (11x 1000) + (6x 500)

= 1,43,500

Exercise : can it be further reduced to 1,42,500 ?

Ans: Yes

Demand Production Inventory Hire Fire

1000 1000 0 0 0
400 400 0 0 6
400 400 0 0 0
400 400 0 0 0
400 400 0 0 0
400 400 0 0 0
500 500 0 1 0
500 500 0 0 0
1000 2000 1000 15 0
1500 2000 1000 0 0
2500 2000 1000 0 0
3000 2000 0 0 0

TOTAL :
12000 12000 3500 16 6

Total Cost (12000 x 10) + (3500 x 1) + (16 x 1000) + (6 x 500)

= 1,42,500
 8

Example no. 3 :

S.No Demand Production Overtime Give Sub Have

Contract Inventory
1 900 1000 100 0 500
2 1500 1200 150 250 600
3 1600 1300 200 500 1000
4 3000 1300 200 500 0

Total 7000 4800 650 1250 2100

Production cost @20

Overtime @25
Sub Contract @28
Inventory Cost @3
Open inventory is 300 and closing is 0

Find total cost when Maximum sub contract can be @500

Ans: Shortfall is 7000 – 4800 = 2200

Total production is 4800 + 300 Inventory = 5100
Overtime = 650
Total = 5750
Shortfall = 1250 to be distributed by sub contract

Total Cost (4800 x 20) + (650 x 25) + (1250 x 28)+ (2100 x 3)

= 153550

________________________________________________________________
 9

page no.9

Ex.4.

Data

S.No. 1 2 3 4 5 6
Demand 300 500 400 100 200 300
Working 22 19 21 21 22 20
days/month

All Cost in :Rs

Opening Inventory :50 Numbers

inventory policy : 20% of Demand
holding cost :4/Unit
Stock out cost :40/Unit
Hiring Cost :600/worker
Firing Cost :1000/worker
labour cost :12/hour
Hours required/unit :10 hours
Shift Hours :8 hours
Present workers :20 Numbers

Find total cost with both strategies?

Ans. a) Inventory policy is 20% of demand

S.No Open Inventory Closing Net Net

Inventory Inventory Demand
1 50 60 +10 300+10 310
2 60 100 +40 500+40 540
3 100 80 -20 400-20 380
4 80 20 -60 100-60 40
5 20 40 +20 200+20 220
6 40 60 +20 300+20 320
Grand Tota :1810
 10

Current Man power is 20

Man Power requirement /month =Hours required/houes available/worker

1st Month : 310X10/22X8=17.6 that is 18 Net result -2

2nd Month :540x10/19X8=35.52 that is 36 Net result +18

3rd Month : 22.61 that is 23 Net result -13

4th Month : 2.38 that is 3 Net result -20

5th month : 12.5 that is 13 Net result +10

6th month : 20 that is 20 Net result +7

Calculation for chase demand

Net Demand Workers Hier fire
Requirement
310 18 0 2
540 36 18 0
380 23 0 13
40 3 0 20
220 13 10 0
320 20 7 0

Grand Total: 35 35

Total Cost Calculation

(1810X12X10)+(35X600)+(35X1000) = 2,73,200
 11

page.11

Option B - Build Inventory(add to production or stockout(add to demand)

with 20 workers each month.-constant

S.No. Demand Production Final figure Inventory Stockout

1 310 20X22X8/10 352 42 0
2 540 20X19X8/10 304+42 0 194
3 380 336 0 194+44=238
4 40 336-40-238 58 0
5 220 352+58-220 190 0
6 320 320 190 0

Grand Total : 2000 480

432

Total Cost Calculation

(2000X12X10)+(480X4)+(432X40)=2,59,200

_________________________________________________________________