Aggregate Planning and Inventory Management Strategies

Topic 5: Aggregate Planning

Objective

The objective is to meet the forecast demand while minimizing the total cost over the planning period. The planning process determines the quantity and timing of production for the intermediate future.

Requirements for Aggregate Planning

• Measure sales and output
• Forecast demand
• Determine costs
• Schedule decisions for the planning period

Chase Strategy

Match output rates to the demand forecast for each period. Vary workforce levels or vary production rates.

Level Strategy

Daily production is uniform. Use inventory or idle time. Stable production leads to better quality and productivity.

Topic 7: Inventory Management

ABC Analysis

Divides inventory into three classes based on annual dollar volume:

• Class A: High annual dollar volume
• Class B: Medium annual dollar volume
• Class C: Low annual dollar volume

Function: Used to establish policies that focus on the few critical parts and not the many trivial ones.

Annual Dollar Volume = Annual Volume Units * Unit Cost

Cycle Counting

Items are counted and records updated on a periodic basis.

Number of Items Counted per Day = Quantity / Working Days

Inventory Costs

• Holding Costs: The costs of holding or carrying inventory over time.
• Ordering Costs: The costs of placing an order and receiving goods.
• Setup Costs: Cost to prepare a machine or process for manufacturing an order.

Inventory Models for Independent Demand

Basic Economic Order Quantity Model (EOQ)

Assumptions:

• Known, constant, and independent demand
• No possible quantity discounts
• Variable costs: setup and holding
• Stockouts can be avoided
• Q* --> Maximum inventory level

EOQ answers the "how much" question.

Reorder Points

Tells "when" to order.

Production Order Quantity Model

• Used when inventory builds up over a period of time after an order is placed.
• Used when units are produced and sold simultaneously.

Quantity Discount Models

Reduced prices are often available when larger quantities are purchased. The trade-off is between reduced product costs and increased holding cost.

Procedure:

1. For each discount, compute Q*.
2. Choose the smallest order size to get the discount.
3. Choose the price and quantity that gives the lowest total cost.

Probabilistic Models and Safety Stock

Used when demand is not constant or certain. Use safety stock to achieve a desired service level and avoid stockouts. The goal is the lowest total cost.

Probabilistic Demand

Use prescribed service levels to set safety stock when the cost of stockouts cannot be determined.

Other Probabilistic Models

1. Demand is variable, lead time is constant
2. Demand is constant, lead time is variable
3. Both demand and lead time are variable