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3. Explain the basic trade-offs to consider when creating an aggregate plan. The
basic trade-offs involve balancing the cost of capacity, the cost of inventory, and the cost of
stockouts to maximize profitability. Increasing any one of the three allows the planner to lower
the other two.
4. Formulate and solve aggregate planning problems using Microsoft Excel. Aggre-
gate planning problems can be solved in Excel by setting up cells for the objective function and
the constraints and using the Solver to produce the solution.

Discussion Questions
1. What are some industries in which aggregate planning would 6. How does the availability of subcontracting affect the aggre-
be particularly important? gate planning problem?
2. What are the characteristics of the industries from Question 1 7. If a company currently employs the chase strategy and the
that make them good candidates for aggregate planning? cost of training increases dramatically, how might this change
3. What are the main differences among the aggregate planning the company’s aggregate planning strategy?
strategies? 8. What are some key issues to consider when picking an aggre-
4. What types of industries or situations are best suited to the gate unit of analysis?
chase strategy? The flexibility strategy? The level strategy? 9. How can aggregate planning be used in an environment of
5. What are the major cost categories needed as inputs for high demand uncertainty?
aggregate planning?

Exercises
1. Skycell, a major European cell phone manufacturer, is mak-
ing production plans for the coming year. Skycell has worked hours each day. One person can assemble a phone every
with its customers (the service providers) to come up with -
forecasts of monthly requirements (in thousands of phones) cent premium for overtime. The plant currently employs

Manufacturing is primarily an assembly operation,

and capacity is governed by the number of people on the product prices, carrying inventory from one month to the
next incurs a cost of 3 euros per phone per month. Skycell
currently has a no-layoff policy in place. Overtime is limited

Monthly Demand for Cell Phones,

TABLE 8-10
in Thousands wants to end the year with the same level of inventory.
Month Demand a. Assuming no backlogs, no subcontracting, and no new
hires, what is the optimum production schedule? What is
January 1,000 the annual cost of this schedule?
February 1,100 b. Is there any value for management to negotiate an increase
March 1,000
April 1,200 c. Reconsider parts (a) and (b) if Skycell starts with only
May 1,500
June 1,600
additional overtime as the workforce size decreases?
July 1,600 d. Consider part (a) for the case in which Skycell aims for a
August 900 level production schedule such that the quantity pro-
September 1,100 duced each month does not exceed the average demand

October 800 Thus, monthly production, including overtime, should be

November 1,400
level production schedule? What is the value of overtime
December 1,700
flexibility?
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2. Reconsider the Skycell data in Exercise 1. Assume that the

TABLE 8-11 Demand Forecast for FlexMan
Month Router Demand Switch Demand
January 1,800 1,600

a. What is the average per unit of in-house production February 1,600 1,400
(including inventory holding and overtime cost) if the March 2,600 1,500
third party is not used? April 2,500 2,000
b. How should Skycell use the third party? How does your
May 800 1,500
unit? June 1,800 900
c. Should Skycell use the third party if the per unit cost is July 1,200 700
d. Why would Skycell use the third party even when the per- August 1,400 800
unit cost of the third party is higher than the average per- September 2,500 1,400
unit cost (including inventory holding and overtime) for October 2,800 1,700
in-house production?
3. Reconsider the Skycell data in Exercise 1. Assume that the November 1,000 800
December 1,000 900

assume no subcontracting option. Skycell has a team of in inventory, the company recovers less given the rapidly
dropping component prices.
a. Assuming no backlogs, no subcontracting, no layoffs, and
no new hires, what is the optimum production schedule
a. What is the optimal production, hiring, and layoff schedule? for FlexMan? What is the annual cost of this schedule?
b. How does the optimal schedule change if the seasonal What inventories does the optimal production schedule
build? Does this seem reasonable?
b. Is there any value for management to negotiate an increase
employees, will Skycell gain significantly if it carries

employees? c. Reconsider parts (a) and (b) if FlexMan starts with only

more by eliminating its no-layoff policy for its permanent additional overtime as the workforce size decreases?
employees or by increasing the seasonal employee pool 5.
considering the option of changing workforce size with
be hired or laid off at the same cost as the seasonal
employees.
4. FlexMan, an electronics contract manufacturer, uses its Topeka, reach full production capacity. During those two months, a
Kansas, facility to produce two product categories: routers and -
switches. Consultation with customers has indicated a demand pating a similar demand pattern next year, FlexMan aims to
-
sands of units) to be as shown in Table 8-11. a. What is the optimal production, hiring, and layoff sched-
Manufacturing is primarily an assembly operation, ule? What is the cost of such a schedule?
and capacity is governed by the number of people on the pro- b. If FlexMan could improve its training so new employees
achieve full productivity right away, how much improve-
- ment in annual cost would the company see? How is the
hiring and layoff policy during the year affected by this
change?
6. FlexMan has identified a third party that is willing to produce
routers and switches as needed. The third party will charge

switches in inventory. The cost of holding a router in inven-

a. How should FlexMan use the third party if new employ-

products are paid for by the customer at existing market rates
when purchased. Thus, if FlexMan produces early and holds months?
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b. How should FlexMan use the third party if new employ- a. Assuming no backlogs, no subcontracting, no layoffs, and
ees are able to achieve full productivity right away? no new hires, what is the optimum production schedule
c. Why does the use of the third party change with the pro- for FlexMan? What is the annual cost of this schedule?
ductivity of new employees? b. How much does the service contract mandating minimum
7. inventories increase costs for FlexMan?
has signed a service-level agreement with its customers c. What would be the increase in cost if FlexMan agreed to a
and committed to carry safety inventory from one month to
minimum for routers? What would be the increase in cost
month’s demand. Thus, FlexMan is committed to carrying
over at least .1 * 1,8 , = 7 , routers and
.1 * 1, , = , switches in inventory from the two is better for FlexMan?
December to January.

Bibliography
Bitran, G. R., and A. Hax. “Disaggregation and Resource Alloca- Jacobs, F. Robert, Richard B. Chase, and Nicholas J. Aquilano.
- Operations and Supply Management,
ables.” Management Science
Nahmias, Steven. Production & Operations Analysis

CASE STUDY
Kloss Planters and Harvesters
-
- farmers to plant two acres per day instead of the single
ning team wondering whether it made sense to replace acre possible with hand-planting. Today, planters can
the separate plants for planters and harvesters with a
single plant that could assemble both. The evolution of both planters and harvesters has cer-
tainly made the farmer much more effective.
A Brief History of Planters and Harvesters
KPH Production Planning
Since humans started farming, they have sought to ease
the task of planting and harvesting their crops. In his -
Naturalis historica vesters in Ames, Iowa. Demand for each product was
a reaping machine that broke off the ears of corn and -
accumulated them in a box. In 1799, the first verifiable erally planted between March and May and harvested
patent for a reaping machine was granted to the English between September and November. As a result, demand
inventor Joseph Boyce. In 1831, Cyrus Hall McCormick for planters peaked in March, whereas demand for har-
introduced the world’s first corn reaper under the name vesters peaked in September. Each plant aimed for a pro-
- duction plan that allowed them to meet annual demand
ered by a horse. Over time, other companies introduced at the lowest possible cost.
combine harvesters that were self-propelled and pow- The capacity of each plant was determined by the
ered by a combustion engine. Harvesters today allow a number of assembly workers available. Each machine
farmer to harvest large cornfields in the comfort of air-
conditioned cabs!
After years of planting corn the way Squanto had
taught the settlers, help arrived for American farmers during regular time. They could be asked to work up to
when hand planters were introduced during the late