What is aggregate planning and how long is the planning horizon? What demand and

Question

What is aggregate planning and how long is the planning horizon? What demand and capacity manipulators do we use? A manager has prepared a forecast of expected aggregate demand for the next six months. Develop an aggregate plan to meet this demand given this additional information: A level production rate of 100 units per month will be used with regular output. Backorders are allowed, and they are charged at the rate of $8 per unit per month. Inventory holding costs are $1 per unit per month. Determine the cost of this plan if regular time cost is $2 per unit and beginning inventory is zero. Expected demand: 80,100,120,120,100,80

Explanation / Answer

Aggregate planning is about the production planning taking into account the aggregate demand for the future. Generally used for a period of six months to 18 months. We try to match the aggregates of demand and capacity. This may be about minimization of total cost of meeting the demand considering the costs on regular production, overtime production, inventory carrying costs, shortages costs etc.

In the given question the total demand for the six months is 600 units that can be met from the regular production of 100 units per month. Cost of the plan is worked out as follows:

Total Cost is $1,560 (Production-$1,200, Carrying- $40, Backorders-$320)

Month 1 2 3 4 5 6 Total Demand 80 100 120 120 100 80 600 Opening Inventory 0 20 20 0 -20 -20 Regular Production 100 100 100 100 100 100 600 Closing Inventory 20 20 0 -20 -20 0 Number of Shortages 0 0 0 20 20 0 Cost of Production @$2 200 200 200 200 200 200 1200 Carrying cost @$1/month 20 20 0 0 0 0 40 Backorder Cost @$8/month 0 0 0 160 160 0 320 Total cost 220 220 200 360 360 200 1560

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