Case Study 2: Aggregate Planning - Eight Glasses a Day (EGAD)

Case Study 2: Aggregate Planning - Eight Glasses A Day (EGAD)

The EGAD Bottling Company has recently expanded its bottles spring water operations to include several new flavors. Marketing manager Georgianna Mercer is predicting an upturn in demand based on the new offerings and the increased public awareness of the health benefits of drinking more water. She has prepared aggregate forecast for the next six months, as shown in the following table:

Month / Jan / Feb / Mac / Apr / May / Jun / Total
Forecast / 50 / 60 / 70 / 90 / 80 / 70 / 420

Other information been provided by the production manager as follow:

Regular production cost $10 per unit

Regular production capacity 60 units

Overtime production cost $16 per unit

Subcontracting cost $18 per unit

Holding cost $2 per unit per month

Back-ordering cost $50 per month per unit

Beginning inventory 0 units

Develop 3 aggregate plans for EGAD. Determine which plan gives a lowest total cost.

Eight Glasses a Day: Example of solution

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

Period / May / Jun. / Jul. / Aug. / Sep. / Oct. / Total
Forecast / 50 / 60 / 70 / 90 / 80 / 70 / 420
Output
Regular / 60 / 60 / 60 / 60 / 60 / 60 / 360
Overtime / 10 / 10 / 10 / 10 / 10 / 10 / 60
Subcontract
Output - Forecast / 20 / 10 / 0 / –20 / –10 / 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
Costs:
Regular @ $10 / 600 / 600 / 600 / 600 / 600 / 600 / 3,600
Overtime @ $16 / 160 / 160 / 160 / 160 / 160 / 160 / 960
Inventory / 20 / 50 / 60 / 40 / 10 / 0 / 180
Backlog / 0 / 0 / 0 / 0 / 0 / 0 / 0
Total / 780 / 810 / 820 / 800 / 770 / 760 / 4,740

Strategy 2: A combination of overtime, inventory and subcontracting.

Period / May / Jun. / Jul. / Aug. / Sep. / Oct. / Total
Forecast / 50 / 60 / 70 / 90 / 80 / 70 / 420
Output
Regular / 60 / 60 / 60 / 60 / 60 / 60 / 360
Overtime / 10 / 10 / 10 / 10 / 10 / 50
Subcontract / 10 / 10
Output - Forecast / 10 / 10 / 0 / –20 / 0 / 0
Inventory
Beginning / 0 / 10 / 20 / 20 / 0 / 0
Ending / 10 / 20 / 20 / 0 / 0 / 0
Average / 5 / 15 / 20 / 10 / 0 / 0 / 50
Backlog / 0 / 0 / 0 / 0 / 0 / 0 / 0
Costs:
Regular @ $10 / 600 / 600 / 600 / 600 / 600 / 600 / 3,600
Overtime @ $16 / 0 / 160 / 160 / 160 / 160 / 160 / 800
Subcontract @ $18 / 180 / 180
Inventory / 10 / 30 / 40 / 20 / 0 / 0 / 100
Backlog / 0 / 0 / 0 / 0 / 0 / 0 / 0
Total / 610 / 790 / 800 / 780 / 940 / 760 / 4,680

Strategy 3: Using inventory up to 15 tank loads a month from overtime.

Period / May / Jun. / Jul. / Aug. / Sep. / Oct. / Total
Forecast / 50 / 60 / 70 / 90 / 80 / 70 / 420
Output
Regular / 60 / 60 / 60 / 60 / 60 / 60 / 360
Overtime / 5 / 15 / 15 / 15 / 10 / 60
Subcontract
Output - Forecast / 10 / 5 / 5 / –15 / –5 / 0
Inventory
Beginning / 0 / 10 / 15 / 20 / 5 / 0
Ending / 10 / 15 / 20 / 5 / 0 / 0
Average / 5 / 12.5 / 17.5 / 12.5 / 2.5 / 0 / 50
Backlog / 0 / 0 / 0 / 0 / 0 / 0 / 0
Costs:
Regular @ $10 / 600 / 600 / 600 / 600 / 600 / 600 / 3,600
Overtime @ $16 / 0 / 80 / 240 / 240 / 240 / 160 / 960
Subcontract @ $18
Inventory / 10 / 25 / 35 / 25 / 5 / 0 / 100
Backlog / 0 / 0 / 0 / 0 / 0 / 0 / 0
Total / 610 / 705 / 875 / 865 / 845 / 760 / 4,660

Since $4,660 < $4,680 < $4,740, the company should choose the third strategy.