Question

You are developing an aggregate plan for a toolbox maker which sells to professional mechanics. The relevant cost and demand data are shown below:

Holding cost	$8/toolbox/month		Month	Demand
Subcontract	$80/toolbox		July	400
Regular time	$45/toolbox		August	500
OT	Regular time cost plus additional $20 per toolbox		September	500
Capacity increase	$50/unit		October	700
Capacity decrease	$90/unit		November	800
Backlog cost	$10/toolbox/month		December	700
June capacity and demand	500 toolboxes
Beginning inventory	0 toolboxes

Plan A: Try a level strategy where the company produces to the average demand (of July-December) by allowing capacity increases (hiring) and decreases(firing) to occur.

1. What is the total cost of this plan?
2. What is the total holding (inventory) cost for this plan?

Plan B: In this plan, the toolbox maker would to the minimum demand of the 6 month planning period, then use subcontracting each month to meet that month's demand, ensuring that there is no backlog.

1. What is the total cost of this plan?
2. What is the total holding (inventory) cost for this plan?

Answer 1

Aggregate planning is a marketing activity that does an aggregate plan for the production process, in advance of 6 to 18 months, to give an idea to management as to what quantity of materials and other resources are to be procured and when, so that the total cost of operations of the organization is kept to the minimum over that period.

The quantity of outsourcing, subcontracting of items, overtime of labour, numbers to be hired and fired in each period and the amount of inventory to be held in stock and to be backlogged for each period are decided. All of these activities are done within the framework of the company ethics, policies, and long term commitment to the society, community and the country of operation.