Cost, aggregate planning

One of the basic problems that exists in business today is the issue of imeven demand As a result of this, processes need to be put in place that will minimize the costs involved in leveling the demand and effectively using the available capacity. This is the goal of aggregate planning. In the area of operations management, you will find models and simulations that can be run to help optimize this process. 

Thus, the general model, given by Equations 2.27 through 2.33, would represent most aggregate planning situations that may arise in practice. If all the cost functions are linear, then we get the LP model discussed in Section 2.15. 

Shortages are allowed but all backlogs must be filled by the Tth period. The aggregate planning problem is to determine the optimal production plan that minimizes the total cost of production, inventory, and shortage. 

Red Tomato s objective is to find an aggregate plan that minimizes the total cost (Equation 8.1) incurred during the planning horizon. 

By optimizing the objective function (minimizing cost in Equation 8.1) subject to the listed constraints (Equations 8.2 to 8.5), the vice president obtains the aggregate plan shown in Table 8-4. (Later in the chapter, we discuss how to perform this optimization using Excel with the spreadsheet Chapters,9-examples.)... 

In this case, the optimal aggregate plan (using the same costs as those used before) is shown in Table 8-6. 

Observe that monthly production remains the same, but both inventories and stockouts (backlogs) go up compared to the aggregate plan in Table 8-4 for the demand profile in Table 8-2. The cost of meeting the new demand profile in Table 8-5 is higher, at 433,080 (compared to 422,660 for the previous demand profile in Table 8-2). 

Assume that demand at Red Tomato is as shown in Table 8-2, and all other data are the same except that the costs of hiring and layoff are now 50 each. Evaluate the total cost corresponding to the aggregate plan in Table 8-4. Suggest an optimal aggregate plan for the new cost structure. 

As expected, the workforce size is varied (because the cost of varying capacity has decreased), whereas inventory and stockouts have decreased compared with the aggregate plan in Table 8-4. The total cost of the aggregate plan in Table 8-7 is 412,770, compared with 422,660 (for the aggregate plan in Table 8-4) if the costs of hiring and layoff are 50 each. 

Optimal Aggregate Plan for Hiring and Layoff Cost of 50/Worker... 

The goal is to build an aggregate plan by changing inputs in a way that minimizes the total cost in cell C12. 

Data accuracy is critical if APSs are to deliver their full potential. If the APS is using lead times or capacities that are different from reality, the resulting aggregate plan is likely to lead to unhappy customers and high costs. It is thus important to track the accuracy of these parameters and ensure that people are held accountable for these inputs. 

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. 

What are the major cost categories needed as inputs for aggregate planning ... 

There are no limits on subcontracting, inventories, and stockouts. All stockouts are back-logged and supplied from the following month s production. Inventory costs are incurred on the ending inventory in each month. The companies goal is to obtain the optimal aggregate plan that leaves at least 500 units of inventory at the end of June (i.e., no stockouts at the end of June and at least 500 units in inventory). The base demand forecast is shown in cells J5 J10 of Figure 9-1. 

For the base case aggregate plan, the supply chain obtains the following costs and revenues ... 

Seismic zone basis must be specified for structural design. Soil data is important, especially for cases where extensive use of foundation piling is required with major cost impact. Availability of aggregate or natural pond stabilization materials near the site will not be considered for early cost estimates, but can be kept in mind for future planning if the project is given the green light. 

Closure costs for existing plants incurred at a site are again determined in two steps. Plant closure costs are calculated in equation (3.14) which, in combination with the non-negativity constraint (3.57), ensures that no negative closure costs are calculated. Closure costs are allocated to the time period during which the capacity is decommissioned. To account for lead times in closure decisions no plant closures can occur in the first period of the planning horizon. Equation (3.15) aggregates the closure costs to the site level. 

The level of aggregation used in strategic planning makes obvious the need to focus on core cost items that actually determine the economic viability of alternative network designs. A two-step approach was used to prioritize cost items. 

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