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Chapter 11

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Chapter 11

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Chapter 11 - Aggregate Planning and Master Scheduling

CHAPTER 11
AGGREGATE PLANNING AND MASTER SCHEDULING

Teaching Notes
In earlier chapters, we looked at certain problems that involve long-range planning such as facility
location, layout, and major equipment purchase decisions. Aggregate planning involves medium-range
planning. The planning horizon for medium-range plans varies from a couple of months to 18 months. A
major component of aggregate planning is to plan aggregate production and inventory levels to achieve a
desired level of customer service. In preparing the aggregate plan, a major consideration is to check the
desired production plan against the estimated capacity. On the other hand, in determining the estimated
capacity, we must take into account the expected demand and the resulting medium-range production
plan. We use the term aggregate plan in lieu of medium-range production plan because it generally
involves the production plan for a group or a family of products (aggregation of products) and over
months or quarters rather than days or weeks (aggregation of time).
Even though the aggregate plan is a function of many different factors, the key factor is the forecasted
demand over the length of the medium-range planning horizon. After an aggregate plan that is consistent
with the forecasted demand and capacity is developed, it is disaggregated into shorter time periods. The
process of disaggregation is the beginning of short-range planning using master scheduling and operations
scheduling. Both master scheduling and operations scheduling are designed to implement the medium-
range plan on the shop floor.
In determining the aggregate plan, integration and communication between various functions of the firm
are vital. Expected changes in the workforce levels need to be communicated to the human resources
department, while any major equipment purchases, layout changes, and capacity additions must involve
the approval of the finance department. On the other hand, changes in anticipated inventory levels and,
especially, expected stockouts must be discussed with the marketing department.

Answers to Discussion and Review Questions

1. The three levels of planning that involve operations managers and the kinds of decisions made at
each level are:
a. Long-range: Long-range capacity, location, layout, product design, and work system design.
b. Intermediate: Levels of employment, output, finished goods inventories, subcontracting, and
backorders.
c. Short-range: Detailed plans for production lot sizes, purchase order quantities, machine
loading, job assignments, job sequencing, and work schedules.
2. The three phases of intermediate planning are the business plan, the aggregate plan, and the
master schedule.
3. Aggregate planning involves developing a general plan for employment, output, and inventory
levels. The goal is to develop a plan that makes efficient use of the resources of an organization.
11-1

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 11 - Aggregate Planning and Master Scheduling

Planners attempt to determine the best way to meet forecasted demand requirements within the
constraints imposed by long-term decisions.
4. There is a need for aggregate planning because it takes time to implement plans and it is not
possible to predict with any degree of accuracy the timing and volume of demand for individual
items.
5. In both manufacturing and service settings, managers can vary the size of the workforce and
subcontract work. Manufacturers have the additional option of varying the size of inventories.
6. The aggregate planning difficulty that confronts an organization offering a variety of products
relates to finding a common unit on which to base aggregate plans, e.g., standard hours of output.
7. a. Maintain a level rate of output and let inventories absorb fluctuations in demand:
Advantages: This strategy makes estimating labor costs relatively easy, is good for morale,
and minimizes hiring and layoff costs. Disadvantages: Inventory carrying costs tend to be
high and resource utilization varies over time.
b. Vary the size of the workforce to correspond to predicted changes in demand requirements:
Advantages: Inventory carrying costs are very low because production is matched with demand,
resulting in little or no inventory, and labor utilization is kept high. Disadvantages: Hiring and
layoff costs tend to be high. Due to the instability of the labor force, employee morale is low.
c. Maintain a constant workforce size, but vary hours worked to correspond to predicted
demand: Advantage: Minimizes hiring and firing costs and is good for morale.
Disadvantages: Working overtime generally is less productive, increases quality problems,
and increases the risk of accidents.
8. Informal techniques are visual and easy to comprehend, and they enable planners to compare
alternatives. Their primary limitation is that they do not necessarily produce optimum solutions.
9. a. Spreadsheets: These involve a heuristic trial-and error approach that requires entering values
for regular time production, overtime production, part-time production, and subcontracting,
along with formulas for calculating associated costs. Advantages: They are intuitively
appealing and easy to understand. Disadvantage: They do not result in the optimal aggregate
plan necessarily.

b. Linear Programming (LP): LP approach is a method of obtaining optimal solutions to problems

involving allocation of limited resources. The objective of linear programming is either
maximization of profit or minimization of cost. In aggregate planning, the objective is usually
the minimization of costs related to labor time (regular and overtime), inventory carrying, hiring,
and layoffs. Advantage: We can use this approach to obtain an optimal aggregate plan.
Disadvantages: The limiting assumption of linear relationships among variables, the inability to
adjust output rates continuously, and the need to specify a single objective instead of using
multiple objectives. In addition, even for small problems, the LP approach requires
computerization due to massive data manipulation and calculations.
c. Simulation: It is a highly flexible computerized trial-and-error approach that provides testing
of the model under different conditions, assumptions, or scenarios. Advantage: Simulation
provides a “what-if” capability to identify possible options to a given aggregate planning

11-2

problem based on trial-and-error. Disadvantages: Simulation requires the use of the

computer. Therefore, computer programming and customization of different conditions and
scenarios may be time consuming.
10. The master schedule has three inputs: the beginning inventory, forecasts for each period of the
schedule, and customer orders for each period of the schedule. Its outputs are projected inventory
of finished goods, production requirements, and uncommitted (available-to-promise) inventory
each period.
11. Aggregate planning helps managers establish plans for inputs and outputs and employment level
and budgets for the intermediate term. The plans involve collaboration among finance,
operations, marketing, sales, and human resources personnel. Aggregate planning helps to get
everyone “on the same page.” In addition, it establishes a basic framework for the intermediate
term, which is particularly important when changes are called for because changes typically take
time to implement.

11-3

Taking Stock
1. When we freeze a portion of the master schedule, we make the schedule more stable and reduce the
“nervousness” of the schedule. However, freezing the schedule also leads to inflexibility and
reduced customer service because we will not be able to respond to the demands of customers in
a timely fashion.
2. Purchasing agents / buyers, the production planning and control manager, planners, schedulers, and
marketing personnel need to interface with the master schedule. Purchasing agents / buyers, planners,
and schedulers need direct information from the MPS to order the parts, manage the inventories of
the parts, and schedule the machines used to produce the parts going into the end items master
scheduled. The production planning and control manager needs the MPS information to determine
capacity needs of labor, machinery, and equipment. Marketing personnel need this information so
that they could let their customers know if there is a delay in the completion of an order. In the case
of capacity constrained manufacturing, marketing personnel also need to provide the master
scheduler with key information as to which orders to delay and which orders are crucial to try to
complete on time.
3. The new communication tools have made it easier to communicate changes in the master schedule.
Therefore, when a change is necessary in the master schedule (e.g., addition or a deletion of an
order, change in the due date or the quantity of an order), that change can be communicated to the
master scheduler faster through new communication tools (e-mail, fax, etc.). The master
scheduler can take this information, and through the utilization of a computerized production
planning and control system, incorporate the changes to the schedule (assuming the changes are
feasible). After incorporating the changes and making sure that the MPS is feasible, the master
scheduler can disseminate the information to the appropriate parties and to the shop floor very
quickly so that the manufacturing system can respond to the changes in a timely fashion.

Critical Thinking Exercises

1. Compared to manufacturing environments, service environments often experience more
pronounced variations in demand over shorter time intervals. Moreover, employing inventory as a
cushion is not always an option for a service organization. Advantages: Services often have a higher
degree of flexibility than manufacturing operations have, which allows more ability to respond to
demand fluctuations with relatively quick changes in capacity. Services are able to make quick
adjustments to capacity relatively easily, while changing capacity for a manufacturing firm can be a
difficult and more time consuming proposition.
2. Student answers will vary. Some possible answers are shown below:
A production manager who carelessly plans hiring and firing of workers would be violating the
Utilitarian Principle and the Rights Principle.
If marketing over-stated actual customer orders, this action would violate the Virtue Principle.

11-4

Solutions
1. Given:

Regular cost per unit = $40. Overtime cost per unit = $50. Subcontract cost per unit = $10.
Carrying cost per unit per month = $10 and is assessed on average inventory.

a. We have the following aggregate plan. Calculate the cost of the plan:

Period Jan Feb Mar Apr May Jun

Forecast 300 320 320 340 320 320
Output
Regular 300 300 300 300 300 300
Overtime 20 20 20 20 20 20
Subcontract 0 0 0 0 0 0

Period Jan Feb Mar Apr May Jun Total

Forecast 300 320 320 340 320 320 1,920

Output

Regular 300 300 300 300 300 300 1,800

Part Time 0

Overtime 20 20 20 20 20 20 120

Subcontrac
t 0 0 0 0 0 0 0

Output - Forecast 20 0 0 -20 0 0 0

Inventory

Beginning 0 20 20 20 0 0

Ending 20 20 20 0 0 0

Average 10 20 20 10 0 0 60

Backlog 0 0 0 0 0 0 0

11-5

Costs:

Regular @ 40 $12,000 $12,000 $12,000 $12,000 $12,000 $12,000 $72,000

Part Time @ $0 $0 $0 $0 $0 $0 $0

Overtime @ 50 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $6,000

Subcontrac
t @ 60 $0 $0 $0 $0 $0 $0 $0

Hire/Layoff $0

Inventory @ 10 $100 $200 $200 $100 $0 $0 $600

Back orders @ $0 $0 $0 $0 $0 $0 $0

Total $13,100 $13,200 $13,200 $13,100 $13,000 $13,000 $78,600

Conclusion: Total cost = $78,600.

11-6

b. We have the following aggregate plan. Calculate the cost of the plan:

Period Jul Aug Sep Oct Nov Dec

Forecast 320 340 360 380 400 400
Output
Regular 300 300 300 300 300 300
Overtime 20 20 20 20 30 30
Subcontract 20 30 40 40 60 70

Period Jul Aug Sep Oct Nov Dec Total

Forecas
t 320 340 360 380 400 400 2,200

Output

Regular 300 300 300 300 300 300 1,800

Part Time 0

Overtime 20 20 20 20 30 30 140

Subcontra
ct 20 30 40 40 60 70 260

Output - Forecast 20 10 0 -20 -10 0 0

Inventory

Beginning 0 20 30 30 10 0

Ending 20 30 30 10 0 0

Average 10 25 30 20 5 0 90

Backlog 0 0 0 0 0 0 0

Costs:

$12,00 $12,00 $12,00 $12,00 $12,00 $12,00 $72,00

Regular @ 40 0 0 0 0 0 0 0

Part Time @ $0 $0 $0 $0 $0 $0 $0

Overtime @ 50 $1,000 $1,000 $1,000 $1,000 $1,500 $1,500 $7,000

Subcontra @ 60 $1,200 $1,800 $2,400 $2,400 $3,600 $4,200 $15,60

11-7

ct 0

Hire/Layoff $0

Inventory @ 10 $100 $250 $300 $200 $50 $0 $900

Back
orders @ $0 $0 $0 $0 $0 $0 $0

$14,30 $15,05 $15,70 $15,60 $17,15 $17,70 $95,50

Total 0 0 0 0 0 0 0

Conclusion: Total cost = $95,500.

11-8

c. Refer back to part b. The manager is considering adding some temporary workers for the
second half of the year. This would increase regular output to a steady 350 units per month,
not use any overtime, and use subcontracting as needed to make up any shortages.

Initial Plan: No Subcontracting

Note: Observe the months with backlog. Those are the months in which we must consider
subcontracting. We can determine the total amount that we will need to subcontract as follows:

Total Forecast – Beginning Inventory – Total Regular Output

Period Jul Aug Sep Oct Nov Dec Total

Forecas
t 320 340 360 380 400 400 2,200

Output

Regular 350 350 350 350 350 350 2,100

Part Time 0

Overtime 0

Subcontrac
t 0

Output - Forecast 30 10 -10 -30 -50 -50 -100

Inventory

Beginning 0 30 40 30 0 0

Ending 30 40 30 0 0 0

Average 15 35 35 15 0 0 100

Backlog 0 0 0 0 50 100 150

There are backlogs in November and December. How many units will it take to eliminate these
backlogs?

11-9

Total Forecast – Beginning Inventory – Total Regular Output = 2,200 – 0 – 2,100 = 100 units of
backlogs to cover with subcontracting.

We will add subcontracting in those months with backlogs to eliminate the backlogs.

11-10

Final Plan: Using Subcontracting to Eliminate Backlogs

Period Jul Aug Sep Oct Nov Dec Total

Forecast 320 340 360 380 400 400 2,200

Output

Regular 350 350 350 350 350 350 2,100

Part Time 0

Overtime 0

Subcontrac
t 50 50 100

Output – Forecast 30 10 -10 -30 0 0 0

Inventory

Beginning 0 30 40 30 0 0

Ending 30 40 30 0 0 0

Average 15 35 35 15 0 0 100

Backlog 0 0 0 0 0 0 0

Costs:

Regular @ 40 $14,000 $14,000 $14,000 $14,000 $14,000 $14,000 $84,000

Part Time @ $0 $0 $0 $0 $0 $0 $0

Overtime @ 50 $0 $0 $0 $0 $0 $0 $0

Subcontrac
t @ 60 $0 $0 $0 $0 $3,000 $3,000 $6,000

Hire/Layoff $0

Inventory @ 10 $150 $350 $350 $150 $0 $0 $1,000

Back orders @ $0 $0 $0 $0 $0 $0 $0

Total $14,150 $14,350 $14,350 $14,150 $17,000 $17,000 $91,000

11-11

Conclusion: Total cost = $91,000.

11-12

2. Given:

A manager would like to know the total cost of a chase strategy that matches the forecast below
using a steady regular production rate of 200 units per month, a maximum of 20 units per month
of overtime, and subcontracting as needed to make up any shortages. Regular cost per unit =
$35. Overtime cost per unit = $70. Subcontracting cost per unit = $80. We are using a
chase strategy, i.e., we will use overtime or subcontracting in a given month to make up
any shortages in that month.

Month 1 2 3 4 5 6

Forecast 230 200 240 240 250 240

Initial Plan: No Overtime & No Subcontracting

Note: Observe the months with backlog. Those are the months in which we must consider
overtime and subcontracting. Our first option will be overtime ($70 per unit) because it cost less
than subcontracting does ($80 per unit). We can determine the total amount that we will need to
cover using overtime or subcontracting as follows:

Total Forecast – Beginning Inventory – Total Regular Output

Period 1 2 3 4 5 6 Total

Forecas
t 230 200 240 240 250 240 1,400

Output

Regular 200 200 200 200 200 200 1,200

Part Time 0

Overtime 0

Subcontrac
t 0

Output – Forecast -30 0 -40 -40 -50 -40 -200

11-13

Inventory

Beginning 0 0 0 0 0 0

Ending 0 0 0 0 0 0

Average 0 0 0 0 0 0 0

Backlog 30 30 70 110 160 200 600

There are backlogs in every month. How many units will it take to eliminate these backlogs?

Total Forecast – Beginning Inventory – Total Regular Output = 1,400 – 0 – 1,200 = 200 units of
backlogs to cover with overtime and subcontracting. We will add overtime and subcontracting in
those months with backlogs to eliminate the backlogs.

11-14

Final Plan: Using Overtime (Maximum of 20 Units in a Period) & Subcontracting

Period 1 2 3 4 5 6 Total

Forecas
t 230 200 240 240 250 240 1,400

Output

Regular 200 200 200 200 200 200 1,200

Part Time 0

Overtime 20 20 20 20 20 100

Subcontra
ct 10 20 20 30 20 100

Output - Forecast 0 0 0 0 0 0 0

Inventory

Beginning 0 0 0 0 0 0

Ending 0 0 0 0 0 0

Average 0 0 0 0 0 0 0

Backlog 0 0 0 0 0 0 0

Costs:

$42,00
Regular @ 35 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 0

Part Time @ $0 $0 $0 $0 $0 $0 $0

Overtime @ 70 $1,400 $0 $1,400 $1,400 $1,400 $1,400 $7,000

Subcontra
ct @ 80 $800 $0 $1,600 $1,600 $2,400 $1,600 $8,000

Hire/Layoff $0

Inventory @ $0 $0 $0 $0 $0 $0 $0

Back
orders @ $0 $0 $0 $0 $0 $0 $0

11-15

$10,00 $10,00 $10,80 $10,00 $57,00

Total $9,200 $7,000 0 0 0 0 0

Conclusion: Total cost = $57,000.

11-16

3. Given:

Use regular output of 400 units per month. Use a maximum of 40 units per month of overtime
and subcontracting (no limit) as needed to make up any shortages. Regular cost per unit = $25.
Overtime cost per unit = $40. Subcontracting cost per unit = $60. Carrying cost per unit
per period = $15 and is assessed on average inventory.

Month 1 2 3 4 5 6

Forecast 380 400 420 440 460 480

Initial Plan: No Overtime & No Subcontracting

Note: Observe the months with backlog. Those are the months in which we must consider
overtime and subcontracting. Our first option will be overtime ($40 per unit) because it costs less
than subcontracting does ($60 per unit). We can determine the total amount that we will need to
cover using overtime and subcontracting as follows:

Total Forecast – Beginning Inventory – Total Regular Output

Period 1 2 3 4 5 6 Total

Forecas
t 380 400 420 440 460 480 2,580

Output

Regular 400 400 400 400 400 400 2,400

Part Time 0

Overtime 0

Subcontrac
t 0

Output – Forecast 20 0 -20 -40 -60 -80 -180

Inventory

11-17

Beginning 0 20 20 0 0 0

Ending 20 20 0 0 0 0

Average 10 20 10 0 0 0 40

Backlog 0 0 0 40 100 180 320

There are backlogs in Months 4 - 6. How many units will it take to eliminate these backlogs?

Total Forecast – Beginning Inventory – Total Regular Output = 2,580 – 0 – 2,400 = 180 units of
backlogs to cover with overtime and subcontracting. We will add overtime and subcontracting in
those months with backlogs to eliminate the backlogs.

11-18

Final Plan: Using Overtime (Maximum of 40 Units per Month) & Subcontracting

Period 1 2 3 4 5 6 Total

Forecas
t 380 400 420 440 460 480 2,580

Output

Regular 400 400 400 400 400 400 2,400

Part Time 0

Overtime 40 40 40 120

Subcontra
ct 20 40 60

Output – Forecast 20 0 -20 0 0 0 0

Inventory

Beginning 0 20 20 0 0 0

Ending 20 20 0 0 0 0

Average 10 20 10 0 0 0 40

Backlog 0 0 0 0 0 0 0

Costs:

$10,00 $10,00 $10,00 $10,00 $10,00 $10,00 $60,00

Regular @ 25 0 0 0 0 0 0 0

Part Time @ $0 $0 $0 $0 $0 $0 $0

Overtime @ 40 $0 $0 $0 $1,600 $1,600 $1,600 $4,800

Subcontra
ct @ 60 $0 $0 $0 $0 $1,200 $2,400 $3,600

Hire/Layoff $0

Inventory @ 15 $150 $300 $150 $0 $0 $0 $600

Back
orders @ $0 $0 $0 $0 $0 $0 $0

11-19

$10,15 $10,30 $10,15 $11,60 $12,80 $14,00 $69,00

Total 0 0 0 0 0 0 0

Conclusion: Total cost = $69,000.

11-20

4. Given:

Use regular output of 550 units per month. Use a maximum of 40 units of overtime per month
and a maximum of 10 units of subcontracting per month to make up any shortages. Regular cost
per unit = $20. Overtime cost per unit = $30. Subcontracting cost per unit = $25.
Carrying cost per unit per month = $10 and is assessed on average inventory. Backlog
(backorder) cost per unit per month = $18.

Month 1 2 3 4 5 6

Forecast 540 540 570 590 600 580

Determine the cost of the aggregate plan given the limits on overtime and subcontracting:

Initial Plan: No Overtime & No Subcontracting

Note: Observe the months with backlog. Those are the months in which we must consider
overtime and subcontracting. Our first option will be subcontracting ($25 per unit) because it
costs less than overtime does ($30 per unit). We can determine the total amount that we will need
to cover using subcontracting and overtime as follows:

Total Forecast – Beginning Inventory – Total Regular Output

Period 1 2 3 4 5 6 Total

Forecast 540 540 570 590 600 580 3,420

Output

Regular 550 550 550 550 550 550 3,300

Part Time 0

Overtime 0

Subcontrac
t 0

11-21

Output - Forecast 10 10 -20 -40 -50 -30 -120

Inventory

Beginning 0 10 20 0 0 0

Ending 10 20 0 0 0 0

Average 5 15 10 0 0 0 30

Backlog 0 0 0 40 90 120 250

Costs:

Regular @ 20 $11,000 $11,000 $11,000 $11,000 $11,000 $11,000 $66,000

Part Time @ $0 $0 $0 $0 $0 $0 $0

Overtime @ 30 $0 $0 $0 $0 $0 $0 $0

Subcontrac
t @ 25 $0 $0 $0 $0 $0 $0 $0

Hire/Layoff $0

Inventory @ 10 $50 $150 $100 $0 $0 $0 $300

Back orders @ 18 $0 $0 $0 $720 $1,620 $2,160 $4,500

Total $11,050 $11,150 $11,100 $11,720 $12,620 $13,160 $70,800

There are backlogs in Months 4 - 6. How many units will it take to eliminate these backlogs?

Total Forecast – Beginning Inventory – Total Regular Output = 3,420 – 0 – 3,300 = 120 units of
backlogs to cover with subcontracting and overtime. We will add subcontracting and overtime in
those months with backlogs to eliminate the backlogs.

11-22

Final Plan: Using Subcontracting (Maximum of 10 Units per Month) &

Overtime (Maximum of 40 Units per Month)

Period 1 2 3 4 5 6 Total

Forecas
t 540 540 570 590 600 580 3,420

Output

Regular 550 550 550 550 550 550 3,300

Part Time 0

Overtime 30 40 20 90

Subcontra
ct 10 10 10 30

Output – Forecast 10 10 -20 0 0 0 0

Inventory

Beginning 0 10 20 0 0 0

Ending 10 20 0 0 0 0

Average 5 15 10 0 0 0 30

Backlog 0 0 0 0 0 0 0

Costs:

$11,00 $11,00 $11,00 $11,00 $11,00 $11,00 $66,00

Regular @ 20 0 0 0 0 0 0 0

Part Time @ $0 $0 $0 $0 $0 $0 $0

Overtime @ 30 $0 $0 $0 $900 $1,200 $600 $2,700

Subcontra
ct @ 25 $0 $0 $0 $250 $250 $250 $750

Hire/Layoff $0

Inventory @ 10 $50 $150 $100 $0 $0 $0 $300

11-23

Back
orders @ 18 $0 $0 $0 $0 $0 $0 $0

$11,05 $11,15 $11,10 $12,15 $12,45 $11,85 $69,75

Total 0 0 0 0 0 0 0

Conclusion: Total cost = $69,750.

11-24

5. Given:

Regular output capacity is 130 units per month. Regular cost per unit = $60. Overtime cost per
unit = $90. Beginning inventory is 0 units. We have the forecast of engine demand shown below:

Month 1 2 3 4 5 6 7 8 Total

Forecast 120 135 140 120 125 125 140 135 1,040

a. Develop a chase plan that matches the forecast. Calculate the cost of the plan.

Adjust regular time and overtime production to meet demand each period:

Period 1 2 3 4 5 6 7 8 Total

Forecast 120 135 140 120 125 125 140 135 1,040

Output

Regular 120 130 130 120 125 125 130 130 1,010

Part Time 0

Overtime 5 10 10 5 30

Subcontract 0

Output – Forecast 0 0 0 0 0 0 0 0 0

Inventory

Beginning 0 0 0 0 0 0 0 0

Ending 0 0 0 0 0 0 0 0

Average 0 0 0 0 0 0 0 0 0

Backlog 0 0 0 0 0 0 0 0 0

Costs:

Regular @ 60 $7,20 $7,800 $7,80 $7,200 $7,50 $7,500 $7,80 $7,800 $60,600

11-25

0 0 0 0

Part Time @ $0 $0 $0 $0 $0 $0 $0 $0 $0

Overtime @ 90 $0 $450 $900 $0 $0 $0 $900 $450 $2,700

Subcontract @ $0 $0 $0 $0 $0 $0 $0 $0 $0

Hire/Layoff $0

Inventory @ $0 $0 $0 $0 $0 $0 $0 $0 $0

Back orders @ $0 $0 $0 $0 $0 $0 $0 $0 $0

$7,20 $8,70 $7,50 $8,70

Total 0 $8,250 0 $7,200 0 $7,500 0 $8,250 $63,300

Conclusion: Total cost = $63,300.

11-26

b. Develop a level plan that uses inventory to absorb fluctuations. Compare the costs of the
level plan to the costs of the chase plan from Part a. Inventory carrying cost per unit per
month = $2. Backlog cost per unit per month = $90. There should be no backlog in the final
month.

Level Plan Regular Production per Month = (Total Forecast – Beginning Inventory) /
Number of Months.

Level Plan Regular Production per Month = (1,040 – 0) / 8 = 130 units per month.

Is this number of units per month feasible? Yes, the regular time capacity is 130 units per
month; therefore, this is the amount that we plan for regular production each month.

Period 1 2 3 4 5 6 7 8 Total

Foreca
st 120 135 140 120 125 125 140 135 1,040

Output

Regular 130 130 130 130 130 130 130 130 1,040

Part Time 0

Overtime 0

Subcontra
ct 0

Output – Forecast 10 -5 -10 10 5 5 -10 -5 0

Inventory

Beginning 0 10 5 0 5 10 15 5

Ending 10 5 0 5 10 15 5 0

Average 5.0 7.5 2.5 2.5 7.5 12.5 10.0 2.5 50

Backlog 0 0 5 0 0 0 0 0 5

Costs:

11-27

$7,80 $7,80 $7,80 $7,80 $7,80 $7,80 $7,80 $7,80 $62,4

Regular @ 60 0 0 0 0 0 0 0 0 00

Part Time @ $0 $0 $0 $0 $0 $0 $0 $0 $0

Overtime @ 90 $0 $0 $0 $0 $0 $0 $0 $0 $0

Subcontra
ct @ $0 $0 $0 $0 $0 $0 $0 $0 $0

Hire/
Layoff $0

Inventory @ 2 $10 $15 $5 $5 $15 $25 $20 $5 $100

Back
orders @ 90 $0 $0 $450 $0 $0 $0 $0 $0 $450

$7,81 $7,81 $8,25 $7,80 $7,81 $7,82 $7,82 $7,80 $62,9

Total 0 5 5 5 5 5 0 5 50

Conclusion: Cost of chase plan = $63,300. Cost of level plan = $62,950.

The level plan costs $350 less than the chase plan does.

11-28

6. Given:

The forecasts for bolts of cloth are shown in the table below. The figures are in hundreds of bolts.
Regular output capacity is 275(00) bolts per month, except for Month 7 when regular output
capacity will be 250(00) bolts. Regular cost per unit (hundred bolts) = $40. Beginning inventory
is 0 bolts.

Month 1 2 3 4 5 6 7 Total

Forecast (00) 250 300 250 300 280 275 270 1,925

a. Develop a chase plan that matches the forecast and compute the total cost of the plan.
Overtime cost per unit (hundred bolts) = $60.

Adjust regular time and overtime production to meet demand each period. Remember:
Regular output capacity in month 7 decreases to 250(00) bolts.

Period 1 2 3 4 5 6 7 Total

Foreca
st 250 300 250 300 280 275 270 1,925

Output

Regular 250 275 250 275 275 275 250 1,850

Part Time 0

Overtime 25 25 5 20 75

Subcontra
ct 0

Output – Forecast 0 0 0 0 0 0 0 0

Inventory

Beginning 0 0 0 0 0 0 0

Ending 0 0 0 0 0 0 0

11-29

Average 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0

Backlog 0 0 0 0 0 0 0 0

Costs:

$10,0 $11,0 $10,0 $11,0 $11,0 $11,0 $10,0 $74,0

Regular @ 40 00 00 00 00 00 00 00 00

Part Time @ $0 $0 $0 $0 $0 $0 $0 $0

$1,50 $1,50 $1,20 $4,50

Overtime @ 60 $0 0 $0 0 $300 $0 0 0

Subcontra
ct @ $0 $0 $0 $0 $0 $0 $0 $0

Hire/
Layoff $0

Inventory @ $0 $0 $0 $0 $0 $0 $0 $0

Back
orders @ $0 $0 $0 $0 $0 $0 $0 $0

$10,0 $12,5 $10,0 $12,5 $11,3 $11,0 $11,2 $78,5

Total 00 00 00 00 00 00 00 00

Conclusion: Total cost = $78,500.

11-30

b. Compute the cost of using regular production with no overtime, but using a subcontractor to
handle the excess above regular capacity at a cost of $50 per hundred bolts. Backlogs are not
allowed. Inventory carrying cost per unit (hundred bolts) per month = $2.

Before solving, compare the cost of regular production to subcontracting:

Regular cost per unit (hundred bolts) = $40.

Subcontracting cost per unit (hundred bolts) = $50.

If we have excess capacity available in the current month, it would cost less to produce a unit
up to four months early using regular production and carry it in inventory [cost = $40 + (4 *
$2) = $48] than it would to subcontract that unit in the current month (cost = $50). As shown
below, regular production will be maxed out each period, thereby requiring some limited
subcontracting.

Period 1 2 3 4 5 6 7 Total

Foreca
st 250 300 250 300 280 275 270 1,925

Output

Regular 275 275 275 275 275 275 250 1,900

Part Time 0

Overtime 0

Subcontra
ct 5 20 25

Output – Forecast 25 -25 25 -25 0 0 0 0

Inventory

Beginning 0 25 0 25 0 0 0

Ending 25 0 25 0 0 0 0

Average 12.5 12.5 12.5 12.5 0.0 0.0 0.0 50

11-31

Backlog 0 0 0 0 0 0 0 0

Costs:

$11,0 $11,0 $11,0 $11,0 $11,0 $11,0 $10,0 $76,0

Regular @ 40 00 00 00 00 00 00 00 00

Part Time @ $0 $0 $0 $0 $0 $0 $0 $0

Overtime @ 60 $0 $0 $0 $0 $0 $0 $0 $0

Subcontra $1,00 $1,25

ct @ 50 $0 $0 $0 $0 $250 $0 0 0

Hire/
Layoff $0

Inventory @ 2 $25 $25 $25 $25 $0 $0 $0 $100

Back
orders @ $0 $0 $0 $0 $0 $0 $0 $0

$11,0 $11,0 $11,0 $11,0 $11,2 $11,0 $11,0 $77,3

Total 25 25 25 25 50 00 00 50

Conclusion: It cost less for this aggregate plan than it costs for the plan from Part a.

The difference is $78,500 – $77,350 = $1,150.

11-32

7. Given:

We have the aggregate forecasts shown below:

Month Mar Apr May Jun Jul Aug Sep Total

Forecast 50 44 55 60 50 40 51 350

We have the following additional information:

Regular production cost $80 per unit

Overtime production cost $120 per unit

Regular capacity 40 units per month

Overtime capacity 8 units per month

Subcontracting cost $140 per unit

Subcontracting capacity 12 units per month

Holding cost $10 per unit per month

Backorder cost $20 per unit

Beginning inventory 0 units

a. Use regular production. Supplement using inventory, overtime, and subcontracting as

needed. No backlogs allowed.

Step 1: Determine how much regular production to plan each month. Regular capacity is 40
units per month, and each month’s forecast is at least 40 units. Furthermore, we know that
producing a unit using regular production costs less than producing that unit using overtime
production or subcontracting in the current month. Therefore, we know that we will plan on
40 units per month of regular production every month.

11-33

Step 2: Compare the costs of overtime production to subcontracting:

Overtime production cost per unit = $120.

Subcontracting cost per unit = $140.

Therefore, using overtime production in the current month always is preferred to

subcontracting in the current month.

If we have excess capacity available in the current month, it would cost less to produce a unit
up to one month early using overtime production and carry it in inventory [cost = $120 + (1 *
$10) = $130] than it would to subcontract that unit in the current month (cost = $140).

11-34

Period Mar Apr May Jun Jul Aug Sep Total

Forecast 50 44 55 60 50 40 51 350

Output

Regular 40 40 40 40 40 40 40 280

Part Time 0

Overtime 8 8 8 8 8 3 8 51

Subcontrac
t 2 0 3 12 2 19

Output – Forecast 0 4 -4 0 0 3 -3 0

Inventory

Beginning 0 0 4 0 0 0 3

Ending 0 4 0 0 0 3 0

Average 0.0 2.0 2.0 0.0 0.0 1.5 1.5 7

Backlog 0 0 0 0 0 0 0 0

Costs:

$3,20 $3,20
Regular @ 80 $3,200 $3,200 0 $3,200 $3,200 $3,200 0 $22,400

Part Time @ $0 $0 $0 $0 $0 $0 $0 $0

Overtime @ 120 $960 $960 $960 $960 $960 $360 $960 $6,120

Subcontrac
t @ 140 $280 $0 $420 $1,680 $280 $0 $0 $2,660

Hire/Layoff $0

Inventory @ 10 $0 $20 $20 $0 $0 $15 $15 $70

Back orders @ 20 $0 $0 $0 $0 $0 $0 $0 $0

$4,60 $4,17
Total $4,440 $4,180 0 $5,840 $4,440 $3,575 5 $31,250

11-35

Conclusion: Total cost = $31,250.

b. Use a level strategy. Use a combination of backlogs, subcontracting, and inventory to

handle variations in demand. There should be no backlog in the final month.

Step 1: Determine how much regular production to plan each month. Level Plan Regular
Production per Month = (Total Forecast – Beginning Inventory) / Number of Months =

(350 – 0) / 7 = 50 units per month.

However, regular capacity is 40 units per month. Therefore, we will plan on 40 units per
month of regular production every month.

Step 2: Compare the costs of overtime production to subcontracting:

Overtime production cost per unit = $120.

Subcontracting cost per unit = $140.

Therefore, using overtime production in the current month always is preferred to

subcontracting in the current month.

Step 3: Consider whether having a backlog makes sense. Backorder cost = $20 per unit per
month while holding cost = $10 per unit per month. Given the choice of producing a unit one
month early or one month late, we would prefer to produce that unit one month early.
Similarly, given the choice of subcontracting a unit one month early or one month late, we
would prefer to subcontract that unit one month early.

Because producing a unit using overtime production costs $20 less than subcontracting does,
we would be indifferent between producing a unit one month late using overtime [cost =
$120 + (1 * $20) = $140] and subcontracting that unit in the current month (cost = $140).

Summary of Rules for This Problem

11-36

1. We always prefer using overtime production in the current month over subcontracting in
the current month.
2. If we have excess capacity available in the current month, it would cost less to produce a
unit up to one month early using overtime production and carry it in inventory than it
would to subcontract that unit in the current month.
3. We prefer using overtime one month early over one month late.
4. We prefer using subcontracting one month early over one month late.
5. We are indifferent between producing a unit one month late using overtime and
subcontracting that unit in the current month.

As we apply the rules listed above, we will see that we will maximize overtime production
each month as shown below:

Initial Solution – Using Regular Time & Overtime (No Subcontracting)

Period 1 2 3 4 5 6 7 Total

Forecas
t 50 44 55 60 50 40 51 350

Output

Regular 40 40 40 40 40 40 40 280

Part Time 0

Overtime 8 8 8 8 8 8 8 56

Subcontra
ct 0

Output – Forecast -2 4 -7 -12 -2 8 -3 -14

Inventory

Beginning 0 0 2 0 0 0 0

Ending 0 2 0 0 0 0 0

Average 0.0 1.0 1.0 0.0 0.0 0.0 0.0 2

11-37

Backlog 2 0 5 17 19 11 14 68

Costs:

$3,20 $3,20 $3,20 $3,20 $3,20 $3,20 $3,20 $22,40

Regular @ 80 0 0 0 0 0 0 0 0

Part Time @ $0 $0 $0 $0 $0 $0 $0 $0

Overtime @ 120 $960 $960 $960 $960 $960 $960 $960 $6,720

Subcontra
ct @ 140 $0 $0 $0 $0 $0 $0 $0 $0

Hire/Layoff $0

Inventory @ 10 $0 $10 $10 $0 $0 $0 $0 $20

Back
orders @ 20 $40 $0 $100 $340 $380 $220 $280 $1,360

$4,20 $4,17 $4,27 $4,50 $4,54 $4,38 $4,44 $30,50

Total 0 0 0 0 0 0 0 0

Looking at the solution above, we see that we have backlogs, including in the last month.

We know that we must not have a backlog in the final month.

How many units do we need to subcontract to ensure that we do not have a backlog in the
final month?

Total Forecast – Beginning Inventory – Total Regular Production – Total Overtime

Production = 350 – 0 – 280 – 56 = 14 units.

The challenge to this problem then becomes how to distribute the 14 units of subcontracting
to minimize total cost as shown below:

Final Solution – Using Regular Time, Overtime, & Subcontracting

Period 1 2 3 4 5 6 7 Total

Forecast 50 44 55 60 50 40 51 350

11-38

Output

Regular 40 40 40 40 40 40 40 280

Part Time 0

Overtime 8 8 8 8 8 8 8 56

Subcontrac
t 2 3 9 14

Output – Forecast 0 4 -4 -3 -2 8 -3 0

Inventory

Beginning 0 0 4 0 0 0 3

Ending 0 4 0 0 0 3 0

Average 0.0 2.0 2.0 0.0 0.0 1.5 1.5 7

Backlog 0 0 0 3 5 0 0 8

Costs:

$3,20 $3,20
Regular @ 80 $3,200 $3,200 0 $3,200 $3,200 $3,200 0 $22,400

Part Time @ $0 $0 $0 $0 $0 $0 $0 $0

Overtime @ 120 $960 $960 $960 $960 $960 $960 $960 $6,720

Subcontrac
t @ 140 $280 $0 $420 $1,260 $0 $0 $0 $1,960

Hire/Layoff $0

Inventory @ 10 $0 $20 $20 $0 $0 $15 $15 $70

Back orders @ 20 $0 $0 $0 $60 $100 $0 $0 $160

$4,60 $4,17
Total $4,440 $4,180 0 $5,480 $4,260 $4,175 5 $31,310

Conclusion: Total cost = $31,310.

11-39

8. Given:

A planner has developed aggregate forecasts for the next six months shown below:

Month May Jun Jul Aug Sep Oct

Forecast 4,000 4,800 5,600 7,200 6,400 5,000

Use the following information:

Regular production cost $10 per case

Regular production capacity 5,000 cases

Overtime production cost $16 per case

Subcontracting cost $20 per case

Holding cost $1 per case per month

Beginning inventory 0 cases

a. Use level production. Supplement using overtime as needed. No backlogs are allowed.

Step 1: Determine how much regular production to plan each month. Level Plan Regular
Production per Month = (Total Forecast – Beginning Inventory) / Number of Months =
(33,000 – 0) / 6 = 5,500 units per month. However, regular capacity is 5,000 units per month.
Therefore, we will plan on 5,000 units per month of regular production every month.

Step 2: Supplement with overtime production each month to ensure that there are no backlogs
in every month.

Period May Jun Jul Aug Sep Oct Total

Forecast 4,000 4,800 5,600 7,200 6,400 5,000 33,000

Output

Regular 5,000 5,000 5,000 5,000 5,000 5,000 30,000

11-40

Part Time 0

Overtime 1,600 1,400 3,000

Subcontract 0

Output – Forecast 1,000 200 -600 -600 0 0 0

Inventory

Beginning 0 1,000 1,200 600 0 0

Ending 1,000 1,200 600 0 0 0

Average 500 1,100 900 300 0 0 2,800

Backlog 0 0 0 0 0 0 0

Costs:

$50,00 $50,00 $50,00 $50,00 $50,00 $50,00 $300,00

Regular @ 10 0 0 0 0 0 0 0

Part Time @ $0 $0 $0 $0 $0 $0 $0

$25,60 $22,40
Overtime @ 16 $0 $0 $0 0 0 $0 $48,000

Subcontract @ 20 $0 $0 $0 $0 $0 $0 $0

Hire/Layoff $0

Inventory @ 1 $500 $1,100 $900 $300 $0 $0 $2,800

Back orders @ $0 $0 $0 $0 $0 $0 $0

$50,50 $51,10 $50,90 $75,90 $72,40 $50,00 $350,80

Total 0 0 0 0 0 0 0

Conclusion: Total cost = $350,800.

11-41

b. Use a combination of overtime (500 cases per month maximum), inventory, and
subcontracting (500 cases per month maximum) to handle variations in demand. Backlogs are
not allowed.

Step 1: Determine the least cost option out of regular production, overtime production, and
subcontracting:

Regular production = $10 per case.

Overtime production = $16 per case.

Subcontracting = $20 per case.

Holding cost = $1 per case per month.

Regular production costs less than the other two options. Comparing regular time production
to overtime production, we see that it would cost less to meet the demand in the current
month up to five months early using regular time production [cost = $10 + (5 * $1) = $15]
than it would to use overtime production in the current period (cost = $16). Given that we
have only six months, we will maximize regular time production each month at 5,000 units.

Step 2: Compare the costs of overtime production to subcontracting:

Overtime production cost per unit = $16.

Subcontracting cost per unit = $20.

Therefore, using overtime production in the current month always is preferred to

subcontracting in the current month.

If we have excess capacity available in the current month, it would cost less to produce a unit
up to three months early using overtime production and carry it in inventory [cost = $16 + (3
* $1) = $19] than it would to subcontract that unit in the current month (cost = $20).

Period May Jun Jul Aug Sep Oct Total

Forecast 4,000 4,800 5,600 7,200 6,400 5,000 33,000

Output

Regular 5,000 5,000 5,000 5,000 5,000 5,000 30,000

Part Time 0

11-42

Overtime 500 500 500 500 500 2,500

Subcontract 500 500

Output – Forecast 1,500 700 -100 -1,700 -400 0 0

Inventory

Beginning 0 1,500 2,200 2,100 400 0

Ending 1,500 2,200 2,100 400 0 0

Average 750 1,850 2,150 1,250 200 0 6,200

Backlog 0 0 0 0 0 0 0

Costs:

$50,00 $50,00
Regular @ 10 0 $50,000 $50,000 $50,000 $50,000 0 $300,000

Part Time @ $0 $0 $0 $0 $0 $0 $0

Overtime @ 16 $8,000 $8,000 $8,000 $8,000 $8,000 $0 $40,000

Subcontract @ 20 $0 $0 $0 $0 $10,000 $0 $10,000

Hire/Layoff $0

Inventory @ 1 $750 $1,850 $2,150 $1,250 $200 $0 $6,200

Back orders @ $0 $0 $0 $0 $0 $0 $0

$58,75 $50,00
Total 0 $59,850 $60,150 $59,250 $68,200 0 $356,200

Conclusion: Total cost = $356,200.

c. Use overtime up to 750 cases per month and inventory to handle variations in demand. No
backlogs allowed.

Step 1: Determine the least cost option out of regular production, overtime production, and
subcontracting:

Regular production = $10 per case.

Overtime production = $16 per case.

11-43

Holding cost = $1 per case per month.

Regular production costs less than overtime production costs. Comparing regular time
production to overtime production, we see that it would cost less to meet the demand in the
current month up to five months early using regular time production [cost = $10 + (5 * $1) =
$15] than it would to use overtime production in the current period (cost = $16). Given that
we have only six months, we will maximize regular time production each month at 5,000
units.

Step 2: Supplement with overtime production each month (maximum of 750 units) to ensure
that there are no backlogs in every month. We may have to plan overtime production early to
cover demand in some months. The key to this problem is determining how many units need
to be produced using overtime and then timing the production of those units to minimize total
cost and to ensure that there are no backlogs in every period.

For how many units do we need to use overtime production?

Total Forecast – Beginning Inventory – Total Regular Production = 33,000 – 0 – 30,000 =

3,000 units.

Period May Jun Jul Aug Sep Oct Total

Forecast 4,000 4,800 5,600 7,200 6,400 5,000 33,000

Output

Regular 5,000 5,000 5,000 5,000 5,000 5,000 30,000

Part Time 0

Overtime 750 750 750 750 3,000

Subcontract 0

Output - Forecast 1,000 950 150 -1,450 -650 0 0

Inventory

Beginning 0 1,000 1,950 2,100 650 0

Ending 1,000 1,950 2,100 650 0 0

Average 500 1,475 2,025 1,375 325 0 5,700

Backlog 0 0 0 0 0 0 0

11-44

Costs:

$50,00 $50,00
Regular @ 10 $50,000 $50,000 0 $50,000 0 $50,000 $300,000

Part Time @ $0 $0 $0 $0 $0 $0 $0

$12,00 $12,00
Overtime @ 16 $0 $12,000 0 $12,000 0 $0 $48,000

Subcontract @ 20 $0 $0 $0 $0 $0 $0 $0

Hire/Layoff $0

Inventory @ 1 $500 $1,475 $2,025 $1,375 $325 $0 $5,700

Back orders @ $0 $0 $0 $0 $0 $0 $0

$64,02 $62,32
Total $50,500 $63,475 5 $63,375 5 $50,000 $353,700

Conclusion: Total cost = $353,700. We should choose the plan from Part a because it has the
lowest cost ($350,800). The plan from Part a is $2,900 lower.

11-45

9. Given:

We have the information shown below. Subcontracting can handle a maximum of 10 units per
month. Beginning inventory is 0. No backorders are allowed.

Month 1 2 3 4 5 6

Demand 160 150 160 180 170 140

Regular 150 150 150 150 160 160

capacity

Overtime 10 10 0 10 10 10
capacity

Cost per Unit

Regular time $50

Overtime $75

Subcontract $80

Holding per month $4

Develop a plan that minimizes total cost. The key to solving this problem is meeting demand
when demand exceeds regular capacity. When this happens, we should add overtime production
first, and then add subcontracting if needed. We must be careful to avoid backorders in every
period.

Step 1: Regular production = regular capacity each month.

Step 2: In Months 1 – 5, add overtime production first (cost per unit = $75) and then
subcontracting (cost per unit = $80) so that no backlogs occur.

Period 1 2 3 4 5 6 Total

Forecast 160 150 160 180 170 140 960

Output

Regular 150 150 150 150 160 140 900

11-46

Part Time 0

Overtime 10 10 10 10 40

Subcontrac
t 10 10 20

Output - Forecast 0 20 0 -20 0 0 0

Inventory

Beginning 0 0 20 20 0 0

Ending 0 20 20 0 0 0

Average 0 10 20 10 0 0 40

Backlog 0 0 0 0 0 0 0

Costs:

$7,50 $7,50 $8,00

Regular @ 50 0 $7,500 0 $7,500 0 $7,000 $45,000

Part Time @ $0 $0 $0 $0 $0 $0 $0

Overtime @ 75 $750 $750 $0 $750 $750 $0 $3,000

Subcontrac
t @ 80 $0 $800 $800 $0 $0 $0 $1,600

Hire/Layoff $0

Inventory @ 4 $0 $40 $80 $40 $0 $0 $160

Back orders @ $0 $0 $0 $0 $0 $0 $0

$8,25 $8,38 $8,75

Total 0 $9,090 0 $8,290 0 $7,000 $49,760

Conclusion: The total cost of this plan is $49,760.

11-47

10. Given:

Refer back to the solution in Solved Problem 1 (consider the solution for that problem to be Plan
A). The total cost of Plan A was $20,550. The given information in Solved Problem 1 was:
Current workforce = 20 people, each of whom can produce 10 units of output per period. Regular
production cost per unit = $6. Inventory carrying cost per unit per period = $5. Backlog cost per
unit per period = $10.

Period 1 2 3 4 5 6 7 8 9 Total

Forecast 190 230 260 280 210 170 160 260 180 1,940

Plan B:

Hire one worker at a cost of $200. Make up any shortfall, i.e., reduce backorders, using
subcontracting at $8 per unit, with a maximum of 20 units per period. Ending inventory in period
9 should be 0. Backorders cannot exceed 80 units in any period.

Regular production = regular capacity = (20 + 1) * 10 = 210 units per period.

Therefore, regular production could be used to meet demand of 9 * 210 = 1,890 units. How many
units do we need to subcontract to ensure that we do not have a backlog in the final month?

Total Forecast – Beginning Inventory – Total Regular Production = 1,940 – 0 – 1,890 = 50 units.
The key to this problem is when to plan the 50 units of subcontracting to stay within the
subcontracting limit of 20 units per period, to keep the backlog ≤ 80 units (Month 4 will be a
challenge because it has the peak demand), and to minimize total cost.

Period 1 2 3 4 5 6 7 8 9 Total

Foreca
st 190 230 260 280 210 170 160 260 180 1,940

Output

Regular 210 210 210 210 210 210 210 210 210 1,890

Part Time 0

11-48

Overtime 0

Subcontra
ct 10 20 20 50

Output - Forecast 30 0 -30 -70 0 40 50 -50 30 0

Inventory

Beginning 30 30 0 0 0 0 20 0

Ending 30 30 0 0 0 0 20 0 0

Average 15 30 15 0 0 0 10.0 10.0 0.0 80

Backlog 0 0 0 70 70 30 0 30 0 200

Costs:

$1,26 $1,26 $1,26 $1,26 $1,26 $1,26 $1,26 $1,26 $1,26 $11,34
Regular @ 6 0 0 0 0 0 0 0 0 0 0

Part Time @ $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Overtime @ $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Subcontra
ct @ 8 $80 $160 $160 $0 $0 $0 $0 $0 $0 $400

Hire/Layoff $0

Inventory @ 5 $75 $150 $75 $0 $0 $0 $50 $50 $0 $400

Back
orders @ 10 $0 $0 $0 $700 $700 $300 $0 $300 $0 $2,000

$1,41 $1,57 $1,49 $1,96 $1,96 $1,56 $1,31 $1,61 $1,26 $14,14
Total 5 0 5 0 0 0 0 0 0 0

Conclusion: Total Cost of Plan B = $14,140 + $200 (cost of hiring 1 worker) = $14,340.

11-49

Plan C:

No additional workers are to be hired. Make up any shortfall, i.e., reduce backorders, using
subcontracting at $8 per unit, with a maximum of 20 units per period. Ending inventory in period
9 should be 0. Backorders cannot exceed 80 units in any period.

Regular production = 200 units per period.

Therefore, regular production could be used to meet demand of 9 * 200 = 1,800 units. How many
units do we need to subcontract to ensure that we do not have a backlog in the final month?

Total Forecast – Beginning Inventory – Total Regular Production = 1,940 – 0 – 1,800 = 140
units. The key to this problem is when to plan the 140 units of subcontracting to stay within the
maximum of 20 units per period, to keep the backlog ≤ 80 units (Period 4 will be a challenge
because it has the peak demand), and to minimize total cost.

Period 1 2 3 4 5 6 7 8 9 Total

Foreca
st 190 230 260 280 210 170 160 260 180 1,940

Output

Regular 200 200 200 200 200 200 200 200 200 1,800

Part Time 0

Overtime 0

Subcontra
ct 20 20 20 20 20 20 20 140

Output – Forecast 30 -10 -40 -60 10 50 40 -40 20 0

Inventory

Beginning 30 20 0 0 0 0 20 0

Ending 30 20 0 0 0 0 20 0 0

Average 15 25 10 0 0 0 10.0 10.0 0.0 70

Backlog 0 0 20 80 70 20 0 20 0 210

11-50

Costs:

$1,20 $1,20 $1,20 $1,20 $1,20 $1,20 $1,20 $1,20 $1,20 $10,80
Regular @ 6 0 0 0 0 0 0 0 0 0 0

Part Time @ $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Overtime @ $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Subcontra
ct @ 8 $160 $160 $160 $160 $160 $160 $0 $160 $0 $1,120

Hire/Layoff $0

Inventory @ 5 $75 $125 $50 $0 $0 $0 $50 $50 $0 $350

Back
orders @ 10 $0 $0 $200 $800 $700 $200 $0 $200 $0 $2,100

$1,43 $1,48 $1,61 $2,16 $2,06 $1,56 $1,25 $1,61 $1,20 $14,37
Total 5 5 0 0 0 0 0 0 0 0

Conclusion: Total Cost of Plan C = $14,370.

Comparison of plans:

Plan A: $20,550

Plan B: $14,340

Plan C: $14,370

Conclusion: Plan B has the lowest cost.

11-51

11. Given:

Refer back to the solution in Solved Problem 1. The total cost in that plan was $20,550. The
given information in Solved Problem 1 was: Current workforce = 20 people, each of whom can
produce 10 units of output per period. Regular production cost per unit = $6. Inventory carrying
cost per unit per period = $5. Backlog cost per unit per period = $10. Forecasts are shown below:

Period 1 2 3 4 5 6 7 8 9 Total

Forecast 190 230 260 280 210 170 160 260 180 1,940

Another option is to use part-time workers during seasonal peaks. Cost per unit (hiring + training)
= $11. A maximum of 10 part-time workers can be used, and the same number of part-time
workers must be used in all periods that have part-time workers. The ending inventory in Period 9
should be 10 units. The limit on backlogs is 20 units per period. Try to make up backlogs as soon
as possible.

Regular production = 200 units per period.

Therefore, regular production could be used to meet demand of 9 * 200 = 1,800 units. How many
units do we need part-time workers to produce? Total Forecast + Ending Inventory Goal –
Beginning Inventory – Total Regular Production = 1,940 + 10 – 0 – 1,800 = 150 units. A part-
time worker can produce 10 units per period. Therefore, we will need to hire 5 part-time workers.
These 5 part-time workers will produce 50 units per month * 3 months = 150 units.

Period 1 2 3 4 5 6 7 8 9 Total

Foreca
st 190 230 260 280 210 170 160 260 180 1,940

Output

Regular 200 200 200 200 200 200 200 200 200 1,800

Part Time 50 50 50 150

Overtime 0

Subcontra
ct 0

11-52

Output – Forecast 10 20 -10 -30 -10 30 40 -60 20 10

Inventory

Beginning 10 30 20 0 0 10 50 0

Ending 10 30 20 0 0 10 50 0 10

Average 5 20 25 10 0 5 30.0 25.0 5.0 125

Backlog 0 0 0 10 20 0 0 10 0 40

Costs:

$1,20 $1,20 $1,20 $1,20 $1,20 $1,20 $1,20 $1,20 $1,20 $10,80
Regular @ 6 0 0 0 0 0 0 0 0 0 0

Part Time @ 11 $0 $550 $550 $550 $0 $0 $0 $0 $0 $1,650

Overtime @ $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Subcontra
ct @ 8 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Hire/Layoff $0

Inventory @ 5 $25 $100 $125 $50 $0 $25 $150 $125 $25 $625

Back
orders @ 10 $0 $0 $0 $100 $200 $0 $0 $100 $0 $400

$1,22 $1,85 $1,87 $1,90 $1,40 $1,22 $1,35 $1,42 $1,22 $13,47
Total 5 0 5 0 0 5 0 5 5 5

Conclusion: The total cost of the plan using part-time workers is $13,475. The cost of the plan in
Solved Problem 1 was $20,550. This plan using part-time workers is $7,075 lower.

11-53

12. Given:

Period 1 2 3 4 5 6 7 8 9 Total

Forecast 190 230 260 280 210 170 160 260 180 1,940

Prepare an aggregate plan that uses overtime ($9 per unit, maximum = 25 units per period) and
inventory variation. Try to minimize backlogs. The ending inventory in period 9 should be 0
units, and the limit on backlogs is 60 units per period.

Regular production = 200 units per period.

Therefore, regular production could be used to meet 9 * 200 = 1,800 units. How many units do
we need to use overtime to produce? Total Forecast – Beginning Inventory – Total Regular
Production = 1,940 – 0 – 1,800 = 140 units.

The key to this problem is to schedule OT production (140 units) early to minimize backlogs.
Remember: Maximum overtime is 25 units per period.

Period 1 2 3 4 5 6 7 8 9 Total

Foreca
st 190 230 260 280 210 170 160 260 180 1,940

Output

Regular 200 200 200 200 200 200 200 200 200 1,800

Part Time 0

Overtime 25 25 25 25 25 15 140

11-54

Subcontra
ct 0

Output - Forecast 35 -5 -35 -55 15 45 40 -60 20 0

Inventory

Beginning 35 30 0 0 0 0 40 0

Ending 35 30 0 0 0 0 40 0 0

Average 18 33 15 0 0 0 20.0 20.0 0.0 105

Backlog 0 0 5 60 45 0 0 20 0 130

Costs:

$1,20 $1,20 $1,20 $1,20 $1,20 $1,20 $1,20 $1,20 $1,20 $10,80
Regular @ 6 0 0 0 0 0 0 0 0 0 0

Part Time @ $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Overtime @ 9 $225 $225 $225 $225 $225 $135 $0 $0 $0 $1,260

Subcontra
ct @ $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Hire/Layoff $0

Inventory @ 5 $88 $163 $75 $0 $0 $0 $100 $100 $0 $525

Back
orders @ 10 $0 $0 $50 $600 $450 $0 $0 $200 $0 $1,300

$1,51 $1,58 $1,55 $2,02 $1,87 $1,33 $1,30 $1,50 $1,20 $13,88
Total 3 8 0 5 5 5 0 0 0 5

Conclusion: The total units backlogged over this plan = 130. The total cost of this plan is
$13,885. The cost of the plan in Solved Problem 1 was $20,550. This plan using overtime is
$6,665 lower.

11-55

13. Given:

Refer to Example 2. The total cost for Example 2 was $4,640. The forecasts for Example 2 are
shown below:

Period 1 2 3 4 5 6 Total

Forecast 200 200 300 400 500 200 1,800

Subcontracting can be used at a maximum rate of 50 units per period as needed. Overtime is not
allowed. Your plan should have ending inventory of 0 units. Ending backlog must equal 0.
Regular capacity = 280 units per period. Regular production can be less than regular capacity.

Step 1: Determine the least cost option out of regular production and subcontracting.

Regular production cost = $2 per unit.

Subcontracting cost = $6 per unit.

Inventory holding cost = $1 per unit per period (based on average inventory).

Backorder cost = $5 per unit per period.

Regular production costs less than subcontracting does. Comparing regular time production to
subcontracting, we see that it would cost less to meet the demand in the current period up to three
periods early using regular time production [cost = $2 + (3 * $1) = $5] than it would to use
subcontracting in the current period (cost = $6). If we were to produce a unit four periods early
using regular time production [cost = $2 + (4 * $1) = $6], that cost would equal the cost of
subcontracting in the current period ($6).

The cost per unit of producing a unit using regular time production one period late = $2 + (1 x $5)
= $7, which exceeds the cost of subcontracting that unit in the current period. Therefore, given
the choice of meeting demand late using regular time and subcontracting, we would prefer
subcontracting.

11-56

Step 2: Determine how much to produce using regular time and how much to subcontract.

Regular time production could be used to meet demand of 6 * 280 = 1,680 units. How many units
do we need to subcontract? Total Forecast – Beginning Inventory – Total Regular Production =
1,800 – 0 – 1,680 = 120 units. The key to this problem is to experiment with the subcontracting to
handle the peak demand period (Period 5) to minimize total cost.

11-57

Period 1 2 3 4 5 6 Total

Forecas
t 200 200 300 400 500 200 1,800

Output

Regular 280 280 280 280 280 280 1,680

Part Time 0

Overtime 0

Subcontrac
t 20 50 50 120

Output - Forecast 80 80 0 -70 -170 80 0

Inventory

Beginning 80 160 160 90 0

Ending 80 160 160 90 0 0

Average 40 120 160 125 45 0 490

Backlog 0 0 0 0 80 0 80

Costs:

Regular @ 2 $560 $560 $560 $560 $560 $560 $3,360

Part Time @ $0 $0 $0 $0 $0 $0 $0

Overtime @ $0 $0 $0 $0 $0 $0 $0

Subcontrac
t @ 6 $0 $0 $120 $300 $300 $0 $720

Hire/Layoff $0

Inventory @ 1 $40 $120 $160 $125 $45 $0 $490

Back orders @ 5 $0 $0 $0 $0 $400 $0 $400

$1,30
Total $600 $680 $840 $985 5 $560 $4,970

11-58

Conclusion: Total cost of this plan is $4,970. Total cost of the plan from Example 2 was $4,640.
The plan from Example 2 is $330 lower.

11-59

14. Given:
Plan from Example 3:
Unused cap.
Period 1 2 3 (dummy) Total
Beg. Inv. 0 1 2 0
100 100
Reg. 60 61 62 0
1 450 50 500
Over. 80 81 82 0
50 50
Sub. 90 91 92 0
30 90 120
Reg. 63 60 61 0
2 500 500
Over. 83 80 81 0
50 50
Sub. 93 90 91 0
20 100 120
Reg. 66 63 60 0
3 500 500
Over. 86 83 80 0
50 50
Sub. 96 93 90 0
100 100
Demand 550 700 750 90 2,090

Verify the transportation solution shown above:

a. Verify that total demand equals total supply:
Total demand = 550 + 700 + 750 = 2,000.
Total supply = 100 + 500 + 50 + 120 + 500 + 50 + 120 + 500 + 50 + 100 = 2,090.
Therefore, the dummy column with demand of 90 has been added to satisfy the requirement
that supply and demand must be equal.
b. Verify that all demand is met:
Period 1 Demand = 550. This demand will be met with 100 units of beginning inventory +
450 units of regular time production in Period 1.
100 + 450 = 550.
Period 2 Demand = 700. This demand will be met by 50 units of regular time production in
Period 1 + 50 units of overtime production in Period 1 + 30 units of subcontracting in Period
1 + 500 units of regular time production in Period 2 + 50 units of overtime production in
Period 2 + 20 units of subcontracting in Period 2.
50 + 50 + 30 + 500 + 50 + 20 = 700.

11-60

Period 3 Demand = 750. This demand will be met by 100 units of subcontracting in Period 2
+ 500 units of regular time production in Period 3 + 50 units of overtime production in Period
3 + 100 units of subcontracting in Period 3.
100 + 500 + 50 + 100 = 750.
The dummy demand = 90. That demand is satisfied from subcontracting in Period 1.

11-61

c. Verify that all capacity is used:

Beginning inventory of 100 units will be used to meet demand in Period 1.
Regular time capacity of 500 units in Period 1 will be used to meet demand of 450 units in
Period 1 + demand of 50 units in Period 2.
450 + 50 = 500.
Overtime capacity of 50 units in Period 1 will be used to meet demand of 50 units in Period
2.
Subcontracting capacity of 120 units in Period 1 will be used to meet demand of 30 units in
Period 2 + dummy demand of 90 units.
30 + 90 = 120.
Regular time capacity of 500 units in Period 2 will be used to meet demand of 500 units in
Period 2.
Overtime capacity of 50 units in Period 2 will be used to meet demand of 50 units in Period
2.
Subcontracting capacity of 120 units in Period 2 will be used to meet demand of 20 units in
Period 2 + demand of 100 units in Period 3.
20 + 100 = 120.
Regular time capacity of 500 units in Period 3 will be used to meet demand of 500 units in
Period 3.
Overtime capacity of 50 units in Period 3 will be used to meet demand of 50 units in Period
3.
Subcontracting capacity of 100 units in Period 3 will be used to meet demand of 100 units in
Period 3.

11-62

15. Given:
Refer to Example 3. Inventory carrying costs are now $2 per unit per month. All other costs
remain the same as shown below:
Regular time: $60 per unit
Overtime: $80 per unit
Subcontract: $90 per unit
Inventory carrying cost: $2 per unit per month
Back-order cost: $3 per unit per month
Demand:
Period 1 2 3
Demand 550 700 750
Regular capacity: 500 units per month
Beginning inventory: 100 units

Step 1: Compare the costs of each option:

Beginning inventory will be used first to meet demand in Month 1.
After that, the least cost option to meet demand in the current month is regular time, followed by
overtime, and then subcontracting.
Using regular time up to two months early costs $60 + (2 * $2) = $64. That cost is less than using
overtime ($80) or subcontracting ($90) in the current month.
Using regular time up to two months late costs $60 + (2 * $3) = $66. That cost is less than using
overtime ($80) or subcontracting ($90) in the current month.
Given an option of producing a unit one month early or one month late, we prefer to produce it
one month early because the carrying cost is $2 per unit per month while the back-order cost is $3
per unit per month.

Step 2: Begin creating the plan to meet demand each period and to minimize total cost. Note: We
can see that Month 3 has the highest demand and will require all of the regular time and overtime
capacity available in Month 3. Below are two possible solutions:

11-63

Solution 1:
Unused cap.
Period 1 2 3 (dummy) Total
Beg. Inv. 0 2 4 0
100 100
Reg. 60 62 64 0
1 450 50 500
Over. 80 82 84 0
50 50
Sub. 90 92 94 0
30 90 120
Reg. 63 60 62 0
2 500 500
Over. 83 80 82 0
50 50
Sub. 93 90 92 0
50 70 120
Reg. 66 63 60 0
3 500 500
Over. 86 83 80 0
50 50
Sub. 96 93 90 0
100 100
Demand 550 700 750 90 2,090

Solution 2:
Unused cap.
Period 1 2 3 (dummy) Total
Beg. Inv. 0 2 4 0
100 100
Reg. 60 62 64 0
1 400 100 500
Over. 80 82 84 0
50 50
Sub. 90 92 94 0
30 90 120
Reg. 63 60 62 0
2 500 500
Over. 83 80 82 0
50 50
Sub. 93 90 92 0
120 120
Reg. 66 63 60 0
3 500 500
Over. 86 83 80 0
50 50
Sub. 96 93 90 0
100 100
Demand 550 700 750 90 2,090

Conclusion: Total cost of both plans = $124,960.

11-64

11-65

16. Given:
Refer to Example 3. All costs remain the same as shown below:
Regular time: $60 per unit
Overtime: $80 per unit
Subcontract: $90 per unit
Inventory carrying cost: $1 per unit per month
Back-order cost: $3 per unit per month
Demand:
Period 1 2 3
Demand 550 700 750
Regular capacity: 500 units per month except for Month 3 (440 units). Note how this reduces
the demand in the Dummy column to 30.
Beginning inventory: 100 units

Step 1: Compare the costs of each option:

Beginning inventory will be used first to meet demand in Month 1.
After that, the least cost option to meet demand in the current month is regular time, followed by
overtime, and then subcontracting.
Using regular time up to two months early costs $60 + (2 * $1) = $62. That cost is less than using
overtime ($80) or subcontracting ($90) in the current month.
Using regular time up to two months late costs $60 + (2 * $3) = $66. That cost is less than using
overtime ($80) or subcontracting ($90) in the current month.
Given an option of producing a unit one month early or one month late, we prefer to produce it
one month early because the carrying cost is $1 per unit per month while the back-order cost is $3
per unit per month.

Below are two possible solutions:

11-66

Solution 1:

Unused cap.
Period 1 2 3 (dummy) Total
Beg. Inv. 0 1 2 0
100 100
Reg. 60 61 62 0
1 450 50 500
Over. 80 81 82 0
50 50
Sub. 90 91 92 0
90 30 120
Reg. 63 60 61 0
2 500 500
Over. 83 80 81 0
10 40 50
Sub. 93 90 91 0
120 120
Reg. 66 63 60 0
3 440 440
Over. 86 83 80 0
50 50
Sub. 96 93 90 0
100 100
Demand 550 700 750 30 2,090

Solution 2:

Unused cap.
Period 1 2 3 (dummy) Total
Beg. Inv. 0 1 2 0
100 100
Reg. 60 61 62 0
1 400 100 500
Over. 80 81 82 0
50 50
Sub. 90 91 92 0
30 60 30 120
Reg. 63 60 61 0
2 500 500
Over. 83 80 81 0
50 50
Sub. 93 90 91 0
120 120
Reg. 66 63 60 0
3 440 440
Over. 86 83 80 0
50 50
Sub. 96 93 90 0
100 100
Demand 550 700 750 30 2,090

11-67

Conclusion: Total cost for both solutions = $126,650. Total cost for Example 3 = $124,730. The
original solution for Example 3 is $1,920 lower ($126,650 - $124,730).

11-68

17. Given:

Use the same information as in Problem 16, except now the inventory carrying cost = $2 per unit
per period.

Regular time: $60 per unit

Overtime: $80 per unit
Subcontract: $90 per unit
Inventory carrying cost: $2 per unit per month
Back-order cost: $3 per unit per month
Demand:
Period 1 2 3
Demand 550 700 750
Regular capacity: 500 units per month except for Month 3 (440 units). Note how this reduces
the demand in the Dummy column to 30.
Beginning inventory: 100 units

Step 1: Compare the costs of each option:

Below are two possible solutions:

11-69

Solution 1:
Unused cap.
Period 1 2 3 (dummy) Total
Beg. Inv. 0 2 4 0
100 100
Reg. 60 62 64 0
1 450 50 500
Over. 80 82 84 0
50 50
Sub. 90 92 94 0
90 30 120
Reg. 63 60 62 0
2 500 500
Over. 83 80 82 0
10 40 50
Sub. 93 90 92 0
120 120
Reg. 66 63 60 0
3 440 440
Over. 86 83 80 0
50 50
Sub. 96 93 90 0
100 100
Demand 550 700 750 30 2,090

Solution 2:
Unused cap.
Period 1 2 3 (dummy) Total
Beg. Inv. 0 2 4 0
100 100
Reg. 60 62 64 0
1 400 100 500
Over. 80 82 84 0
50 50
Sub. 90 92 94 0
30 60 30 120
Reg. 63 60 62 0
2 500 500
Over. 83 80 82 0
50 50
Sub. 93 90 92 0
120 120
Reg. 66 63 60 0
3 440 440
Over. 86 83 80 0
50 50
Sub. 96 93 90 0
100 100
Demand 550 700 750 30 2,090

11-70

Conclusion: Total cost for both solutions = $127,000.

11-71

18. a. Initially, David should develop one aggregate plan for the next six months to determine his
output rate, employment levels and changes, inventory levels and changes, back orders, and
subcontracting. This will help him to achieve a plan that will utilize resources more
effectively and efficiently to satisfy expected demand. For the first two months though, David
will need to disaggregate his plan into a short-run master schedule for each size wheel.
Adjustments will be made in the planning process as needs arise over time and the planning
horizon gets shorter.
b. and c.
Given:
There are 28 full-time employees, each of whom can produce 50 wheels per month. David wants
to use a pure level plan. There is no inventory of finished wheels on hand at present, but David
would like to have 300 on hand at the end of April. Big Bike will tolerate back orders of up 200
units per month.

Demand for the next six months:

Month Nov. Dec. Jan. Feb. Mar. Apr.
20-inch 1,000 900 600 700 1,100 1,100
24-inch 500 500 300 500 400 600
Total 1,500 1,400 900 1,200 1,500 1,700

Costs:
Regular: $5.00/unit
Overtime: $7.50/unit
Hiring $300/employee
Layoff: $400/employee
Inventory: $1.00/unit/month
Back order: $6.00/unit/month

Step 1: Determine the total demand for wheels:

(20-inch total + 24-inch total) + desired ending inventory = 8,200 + 300 = 8,500 units.

Step 2: Determine the current total regular time capacity:

Capacity/month = 28 employees * 50 units/employee/month = 1,400 units/month.

6 months * 1,400 units/month = 8,400 units.

Amount short = 8,500 – 8,400 = 100 units.

Step 3: Determine the options to cover this shortage of 100 units:

11-72

Option 1: Keep the same number of employees (28), but produce 100 units using overtime.
Under this plan, the amount produced using overtime should be the same each month except for
the last month. The key will be to schedule overtime beginning in Month 1 to reduce backorder
costs. If the overtime must be equal in Months 1 – 5, we will use overtime for 100 / 5 = 20 units
per month in Months 1 – 5.

Option 2: Hire more workers. We need to produce 100 / 6 = 16.67 = 17 extra units per month.
How many employees would we need to hire? We would need to hire 1 employee because each
employee can produce up to 50 units per month.

Step 4: Compare the costs of Option 1 (keep the same number of employees, produce 1,400 units
per month using regular time, and produce 100 units total using overtime) vs. Option 2 (hire 1
employee and produce 1,417 units each month using regular time).

Option 1: Maintain 28 employees & produce 100 units total using overtime in equal
amounts in Months 1- 5:

Period 1 2 3 4 5 6 Total

Forecast 1,500 1,400 900 1,200 1,500 1,700 8,200

Output

Regular 1,400 1,400 1,400 1,400 1,400 1,400 8,400

Part Time 0

Overtime 20 20 20 20 20 100

Subcontract 0

Output - Forecast -80 20 520 220 -80 -300 300

Inventory

Beginning 0 0 0 460 680 600

Ending 0 0 460 680 600 300

Average 0 0 230 570 640 450 1,890

Backlog 80 60 0 0 0 0 140

Costs:

11-73

$7,00 $7,00 $7,00 $7,00 $7,00

Regular @ 5 $7,000 0 0 0 0 0 $42,000

Part Time @ $0 $0 $0 $0 $0 $0 $0

Overtime @ 7.5 $150 $150 $150 $150 $150 $0 $750

Subcontract @ $0 $0 $0 $0 $0 $0 $0

Hire/Layoff $0

Inventory @ 1 $0 $0 $230 $570 $640 $450 $1,890

Back orders @ 6 $480 $360 $0 $0 $0 $0 $840

$7,51 $7,38 $7,72 $7,79 $7,45

Total $7,630 0 0 0 0 0 $45,480

Conclusion: Total cost using overtime = $45,480.

11-74

Option 2: Hire 1 worker & produce 1,417 units every month using regular time:

Period 1 2 3 4 5 6 Total

Foreca
st 1,500 1,400 900 1,200 1,500 1,700 8,200

Output

Regular 1,417 1,417 1,417 1,417 1,417 1,417 8,502

Part Time 0

Overtime 0

Subcontr
act 0

Output - Forecast -83 17 517 217 -83 -283 302

Inventory

Beginning 0 0 451 668 585

Ending 0 0 451 668 585 302

Average 0 0 226 560 627 444 1,855

Backlog 83 66 0 0 0 0 149

Costs:

$7,08 $7,08 $7,08 $7,08 $7,08 $7,08 $42,5

Regular @ 5 5 5 5 5 5 5 10

Part Time @ $0 $0 $0 $0 $0 $0 $0

Overtime @ 7.50 $0 $0 $0 $0 $0 $0 $0

Subcontr
act @ $0 $0 $0 $0 $0 $0 $0

Hire/
Layoff $0

$1,85
Inventory @ 1 $0 $0 $226 $560 $627 $444 5

Back @ 6 $498 $396 $0 $0 $0 $0 $894

11-75

orders

$7,58 $7,48 $7,31 $7,64 $7,71 $7,52 $45,2

Total 3 1 1 5 2 9 59

Conclusion: Total cost of this plan = $45,259 + $300 (cost of hiring 1 employee) = $45,559.
Option 1 (maintaining the same number of employees and using overtime) is the lower cost plan
($45,480) of the two options. The cost of Option 1 (using overtime) is $79 lower.

11-76

19. Given:
Use the industrial pumps information from Figure 11.11:

June July

1 2 3 4 5 6 7 8

Forecast 30 30 30 30 40 40 40 40

Customer
33 20 10 4 2
Orders

Beginning inventory = 64 units

Lot size = 70 units

Now, change the MPS rule to “schedule production when the projected on-hand inventory would
be less than 10 without production”:

The calculations for MPS and projected on-hand inventory are shown below:

Net Projected
Inventory (70)
Inventory From before On-hand
Week Previous Week Requirements* MPS MPS Inventory

1 64 33 31 – 31

2 31 30 1 70 71

3 71 30 41 – 41

4 41 30 11 – 11

5 11 40 –29 70 41

6 41 40 1 70 71

7 71 40 31 – 31

8 31 40 –9 70 61

*Requirements equal the larger of forecast and customer orders in each week.

11-77

Net Inventory before MPS = Inventory from previous week – Current week’s
requirements.
Projected on-hand inventory = Inventory from previous week – Current week’s
requirements + Current week’s MPS.
Note: We need a MPS quantity whenever Net Inventory before MPS < 10 units.

Example calculations for projected on-hand inventory:

Week 1:
Net Inventory before MPS = 64 – 33 = 31. No MPS is needed.
Projected on-hand inventory = 31 + 0 = 31.
Week 2:
Net Inventory before MPS = 31 – 30 = 1. Warning: This is below the desired level of 10
units. We must plan for 70 units of MPS.
Projected on-hand inventory = 1 + 70 = 71.

The final MPS is shown below:

11-78

Beg. Inv. = 64 June July

1 2 3 4 5 6 7 8

Forecast 30 30 30 30 40 40 40 40

Customer
33 20 10 4 2
Orders

Projected on-
hand 31 71 41 11 41 71 31 61
inventory

MPS 70 70 70 70

ATP 31 36 68 70 70

ATP (first period) = Beginning inventory + MPS (first period) – sum of customer
orders until (but not including) the period of the next MPS.

ATP (other periods) = MPS (current period) – sum of customer orders until (but
not including) the period of the next MPS.

*We calculate ATP in the first period and in all other periods with MPS
quantities.

ATP (Week 1) = 64 + 0 – (33) = 31

ATP (Week 2) = 70 – (20 + 10 + 4) = 36
ATP (Week 5) = 70 – (2) = 68
ATP (Week 6) = 70 – (0 + 0) = 70
ATP (Week 8) = 70 – (0) = 70

11-79

20. Given:
Update the information from Figure 11.11:

It is now the end of Week 1. Customer orders are 25 for Week 2, 16 for Week 3, 11 for Week 4, 8
for Week 5, and 3 for Week 6. Use the MPS rule of ordering when project on-hand inventory
would be negative without production.

June July

2 3 4 5 6 7 8

Forecast 30 30 30 40 40 40 40

Customer
25 16 11 8 3
Orders

Beginning inventory = projected on-hand for Week 1 from Figure 11.11 = 31 units
Lot size = 70 units

The calculations for MPS and projected on-hand inventory are shown below:

Net Projected
Inventory (70)
Inventory From before On-hand
Week Previous Week Requirements* MPS MPS Inventory

2 31 30 1 – 1

3 1 30 -29 70 41

4 41 30 11 – 11

5 11 40 -29 70 41

6 41 40 1 – 1

7 1 40 -39 70 31

8 31 40 -9 70 61

*Requirements equal the larger of forecast and customer orders in each week.

11-80

Example calculations for projected on-hand inventory:

Week 2:
Net Inventory before MPS = 31 – 30 = 1. No MPS is needed.
Projected on-hand inventory = 1 + 0 = 1.
Week 3:
Net Inventory before MPS = 1 – 30 = -29. Warning: This is below the desired level of 0
units. We must plan for 70 units of MPS.
Projected on-hand inventory = -29 + 70 = 41.

The final MPS for Weeks 2 – 8 is shown below:

11-81

June July

Beg. Inv. = 31 2 3 4 5 6 7 8

Forecast 30 30 30 40 40 40 40

Customer
25 16 11 8 3
Orders

Projected on-
hand 1 41 11 41 1 31 61
inventory

MPS 70 70 70 70

ATP 6 43 59 70 70

ATP (first period) = Beginning inventory + MPS (first period) – sum of customer
orders until (but not including) the period of the next MPS.

ATP (other periods) = MPS (current period) – sum of customer orders until (but
not including) the period of the next MPS.

*We calculate ATP in the first period and in all other periods with MPS
quantities.

ATP (Week 2) = 31 + 0 – (25) = 6

ATP (Week 3) = 70 – (16 + 11) = 43
ATP (Week 5) = 70 – (8 + 3) = 59
ATP (Week 7) = 70 – (0) = 70
ATP (Week 8) = 70 – (0) = 70

11-82

21. Given:
We have the following forecasts and customer orders over the next eight weeks:

1 2 3 4 5 6 7 8

Forecast 50 50 50 50 50 50 50 50

Customer
52 35 20 12
Orders

Beginning inventory = 0 units

Lot size = 75 units

Use the MPS rule of ordering when project on-hand inventory would be negative without
production.

The calculations for MPS and projected on-hand inventory are shown below:

Net Projected
Inventory (75)
Inventory From before On-hand
Week Previous Week Requirements* MPS MPS Inventory

1 0 52 -52 75 23

2 23 50 -27 75 48

3 48 50 -2 75 73

4 73 50 23 – 23

5 23 50 -27 75 48

6 48 50 -2 75 73

7 73 50 23 – 23

8 23 50 -27 75 48

*Requirements equal the larger of forecast and customer orders in each week.
Net Inventory before MPS = Inventory from previous week – Current week’s
requirements.

11-83

Projected on-hand inventory = Inventory from previous week – Current week’s

requirements + Current week’s MPS.
Note: We need a MPS quantity whenever Net Inventory before MPS < 0 units (i.e.,
when it would be negative).

Example calculations for projected on-hand inventory:

Week 1:
Net Inventory before MPS = 0 – 52 = -52. Warning: This is below the desired level of 0
units. We must plan for 75 units of MPS.
Projected on-hand inventory = -52 + 75 = 23.
Week 2:
Net Inventory before MPS = 23 – 50 = -27. Warning: This is below the desired level of
0 units. We must plan for 75 units of MPS.
Projected on-hand inventory = -27 + 75 = 48.

The final MPS is shown below:

11-84

Beg. Inv. = 0 Week

1 2 3 4 5 6 7 8

Forecast 50 50 50 50 50 50 50 50

Customer
52 35 20 12
Orders

Projected on-
hand 23 48 73 23 48 73 23 48
inventory

MPS 75 75 75 75 75 75

22. Calculate the ATP for Problem 21:

Beg. Inv. = 0 Week

1 2 3 4 5 6 7 8

Forecast 50 50 50 50 50 50 50 50

Customer
52 35 20 12
Orders

Projected on-
hand 23 48 73 23 48 73 23 48
inventory

MPS 75 75 75 75 75 75

ATP 23 40 43 75 75 75

ATP (first period) = Beginning inventory + MPS (first period) – sum of customer
orders until (but not including) the period of the next MPS.

ATP (other periods) = MPS (current period) – sum of customer orders until (but
not including) the period of the next MPS.
11-85

*We calculate ATP in the first period and in all other periods with MPS
quantities.

ATP (Week 1) = 0 + 75 – (52) = 23

ATP (Week 2) = 75 – (35) = 40
ATP (Week 3) = 75 – (20 + 12) = 43
ATP (Week 5) = 75 – (0) = 75
ATP (Week 6) = 75 – (0 + 0) = 75
ATP (Week 8) = 75 – (0) = 75

11-86

23. Given:

The forecasts and customer orders for the next five periods are shown below:

Period 1 2 3 4 5

Forecast 80 80 60 60 60

Customer Orders 82 80 60 40 20

Beginning inventory = 20 units.

The company uses a chase strategy for determining production lot size, except there is an upper
limit on the lot size of 70 units. The desired safety stock is 10 units. Note: A negative projected
on-hand can occur.

The calculations for MPS and projected on-hand inventory are shown below:

Net Max. of Projected

Inventory (70)
Inventory From before On-hand
Week Previous Week Requirements* MPS MPS Inventory

1 20 82 -62 70 8

2 8 80 -72 70 -2

3 -2 60 -62 70 8

4 8 60 -52 62 10

5 10 60 -50 60 10

*Requirements equal the larger of forecast and customer orders in each week.
Net Inventory before MPS = Inventory from previous week – Current week’s
requirements.
Projected on-hand inventory = Inventory from previous week – Current week’s
requirements + Current week’s MPS.

11-87

Note: We need a MPS quantity whenever Net Inventory before MPS < 10 units.

Calculations for projected on-hand inventory:

Week 1:
Net Inventory before MPS = 20 – 82 = -62. Warning: This is below the desired safety
stock of 10 units. We need 72 units to increase projected on-hand inventory to the desired
safety stock of 10 units; however, the MPS is capped at 70. Therefore, we plan a MPS of
70.
-62 + 70 = 8.
Week 2:
Net Inventory before MPS = 8 – 80 = -72. Warning: This is below the desired safety
stock of 10 units. We need 82 units to increase projected on-hand inventory to the desired
safety stock of 10 units; however, the MPS is capped at 70. Therefore, we plan a MPS of
70.
-72 + 70 = -2.

11-88

Week 3:
Net Inventory before MPS = -2 – 60 = -62. Warning: This is below the desired safety
stock of 10 units. We need 72 units to increase projected on-hand inventory to the desired
safety stock of 10 units; however, the MPS is capped at 70. Therefore, we plan a MPS of
70.
-62 + 70 = 8.
Week 4:
Net Inventory before MPS = 8 – 60 = -52. Warning: This is below the desired safety
stock of 10 units. We need 62 units to increase projected on-hand inventory to the desired
safety stock of 10 units. Therefore, we plan a MPS of 62.
-52 + 62 = 10.
Week 5:
Net Inventory before MPS = 10 – 60 = -50. Warning: This is below the desired safety
stock of 10 units. We need 60 units to increase projected on-hand inventory to the desired
safety stock of 10 units. Therefore, we plan a MPS of 60.
-50 + 60 = 10.

The final MPS is shown below:

Week

Beg. Inv. = 20 1 2 3 4 5

Forecast 80 80 60 60 60

Customer
82 80 60 40 20
Orders

Projected on-
hand 8 -2 8 10 10
inventory

MPS 70 70 70 62 60

ATP 8 -10 10 22 40

ATP (first period) = Beginning inventory + MPS (first period) – sum of customer orders
until (but not including) the period of the next MPS.

ATP (other periods) = MPS (current period) – sum of customer orders until (but not
including) the period of the next MPS.

*We calculate ATP in the first period and in all other periods with MPS quantities.
11-89

ATP (Week 1) = 20 + 70 – (82) = 8

ATP (Week 2) = 70 – (80) = -10
ATP Week 3 = 70 – (60) = 10
ATP (Week 4) = 62 – (4) = 22
ATP (Week 5) = 60 – (20) = 40

11-90

Case: Eight Glasses a Day

Given:
Forecasts:
Ju Oc
Month May Jul Aug Sept Total
n t

Forecast 50 60 70 90 80 70 420

Costs (all costs are in thousands of dollars):

Regular production cost = $1 per tankload
Regular production capacity = 60 tankloads
Overtime production cost = $1.6 per tankload
Subcontracting cost = $1.8 per tankload
Holding cost = $2 per tankload per month

Beginning inventory = 0 tankloads

Backlogs are not allowed.

1. Select the plan that has the lowest costs:

Strategy 1: Level production supplemented by up to 10 tankloads a month from overtime.

Total Demand = 420 units. We have regular time capacity = 60 tankloads per month = 6 months *
6 tankloads/month = 360 tankloads over the 6-month plan. We will need to use overtime for 420
– 360 = 60 tankloads. Given that overtime is limited to 10 tankloads/month, we will plan
overtime of 10 tankloads each month. The plan using overtime is shown below:
Period May Jun Jul Aug Sept Oct Total

Forecas
t 50 60 70 90 80 70 420

Output

Regular 60 60 60 60 60 60 360

Part Time 0

Overtime 10 10 10 10 10 10 60

Subcontract 0

Output - Forecast 20 10 0 -20 -10 0 0

Inventory

11-91

Beginning 20 30 30 10 0

Ending 20 30 30 10 0 0

Average 10 25 30 20 5 0 90

Backlog 0 0 0 0 0 0 0

Costs:

Regular @ 1 $60 $60 $60 $60 $60 $60 $360

Part Time @ $0 $0 $0 $0 $0 $0 $0

Overtime @ 1.6 $16 $16 $16 $16 $16 $16 $96

Subcontract @ 1.8 $0 $0 $0 $0 $0 $0 $0

Hire/Layoff $0

Inventory @ 2 $20 $50 $60 $40 $10 $0 $180

Back orders @ $0 $0 $0 $0 $0 $0 $0

Total $96 $126 $136 $116 $86 $76 $636

Conclusion: Total cost = $636,000.

Strategy 2: Level production with a combination of overtime, inventory, and
subcontracting.

Total Demand = 420 units. We have regular time capacity = 60 tankloads per month = 6 months *
6 tankloads/month = 360 tankloads over the 6-month plan. We will need to use overtime or
subcontracting for 420 – 360 = 60 tankloads. Overtime is limited to 10 tankloads/month. The key
is to focus on the peak month (August).

Overtime costs $1.6 per tankload while subcontracting costs $1.8 per tankload. Therefore, in a
given month, we prefer using overtime over subcontracting. When would it make sense to use
subcontracting instead of overtime? If we use overtime 1 month early to meet demand in the
current month, the cost per tankload = $1.6 + $2 = $3.6. Therefore, if the choice is to produce a
tankload 1 month early or to subcontract it in the current month, we prefer to subcontract it in the
current month. This means that if we exhaust overtime in the current month, we would prefer to
subcontract in the current month over using overtime in earlier months to meet the excess demand
in the current month.

Period May Jun Jul Aug Sept Oct Total

11-92

Forecast 50 60 70 90 80 70 420

Output

Regular 60 60 60 60 60 60 360

Part Time 0

Overtime 10 10 10 30

Subcontrac
t 20 10 30

Output - Forecast 10 0 -10 0 0 0 0

Inventory

Beginning 0 10 10 0 0 0

Ending 10 10 0 0 0 0

Average 5 10 5 0 0 0 20

Backlog 0 0 0 0 0 0 0

Costs:

Regular @ 1 $60 $60 $60 $60 $60 $60 $360

Part Time @ $0 $0 $0 $0 $0 $0 $0

Overtime @ 1.6 $0 $0 $0 $16 $16 $16 $48

Subcontrac
t @ 1.8 $0 $0 $0 $36 $18 $0 $54

Hire/Layoff $0

Inventory @ 2 $10 $20 $10 $0 $0 $0 $40

Back orders @ $0 $0 $0 $0 $0 $0 $0

Total $70 $80 $70 $112 $94 $76 $502

Conclusion: Total cost = $502,000.

11-93

Strategy 3: Level production supplemented by up to 15 tankloads a month from overtime.

Total Demand = 420 units. We have regular time capacity = 60 tankloads per month = 6 months *
6 tankloads/month = 360 tankloads over the 6-month plan. We will need to use overtime for 420
– 360 = 60 tankloads. The key is to focus on the peak month (August). The plan using a
maximum of 15 tankloads of overtime in a period is shown below:

Period May Jun Jul Aug Sept Oct Total

Forecast 50 60 70 90 80 70 420

Output

Regular 60 60 60 60 60 60 360

Part Time 0

Overtime 5 15 15 15 10 60

Subcontrac
t 0

Output - Forecast 10 5 5 -15 -5 0 0

Inventory

Beginning 0 10 15 20 5 0

Ending 10 15 20 5 0 0

Average 5 13 18 13 3 0 50

Backlog 0 0 0 0 0 0 0

Costs:

Regular @ 1 $60 $60 $60 $60 $60 $60 $360

Part Time @ $0 $0 $0 $0 $0 $0 $0

Overtime @ 1.6 $0 $8 $24 $24 $24 $16 $96

Subcontrac
t @ 1.8 $0 $0 $0 $0 $0 $0 $0

11-94

Hire/Layoff $0

Inventory @ 2 $10 $25 $35 $25 $5 $0 $100

Back orders @ $0 $0 $0 $0 $0 $0 $0

Total $70 $93 $119 $109 $89 $76 $556

Conclusion: Total cost = $556,000.

Summary of Strategies & Costs:

1) Level production with overtime (maximum of 10 tankloads/month): $636,000

2) Level production with overtime (maximum of 10 tankloads/month & subcontracting): $502,000
3) Level production with overtime (maximum of 15 tankloads/month): $556,000

Conclusion: Strategy 2 is preferred because it has the lowest cost ($502,000).

2. Suppliers would need to know projections of initial demand and demand growth over time, and
product characteristics that would relate to new materials and new methods so they could prepare
for the new line. They, in turn, would need to collaborate with their suppliers. Transportation
partners would need to be made aware of changes in transportation requirements. Information
sharing is important to ensure that supply partners can adjust to the changes. However, ideally,
supply chain partners should be consulted prior to committing to a new line so that they can
contribute ideas and any cautions.

11-95

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