Example Graphical Methods

Graphical techniques are popular because they are easy to understand and use. These plans
work with a few variables at a time to allow planners to compare projected demand with existing
capacity. They are trial-and-error approaches that do not guarantee an optimal production plan,
but they require only limited computations and can be performed by clerical staff. Following are
the five steps in the graphical method:

1. Determine the demand in each period.

2. Determine capacity for regular time, overtime, and subcontracting each period.

3. Find labor costs, hiring and layoff costs, and inventory holding costs.

4. Consider company policy that may apply to the workers or to stock levels.

5. Develop alternative plans and examine their total costs.

Total expected demand

6200/124=50 units per day

If demand for June increases to 1,200 (from 1,100), [Answer: The daily rate for June will go up
to 60, and average production will increase to 50.8 (6,300/124)
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Possible strategy

(Call it plan 1) for the manufacturer described in Example 1 is to maintain a constant workforce
throughout the 6-month period.

A second (plan 2) is to maintain a constant workforce at a level necessary to meet the lowest
demand month (March) and to meet all demand above this level by subcontracting. Both plan 1
and plan 2 have level production and are, therefore, called level strategies.

Plan 3 is to hire and lay off workers as needed to produce exact monthly requirements—a chase
strategy.

Cost information necessary for analyzing these three alternatives:

Inventory carrying cost $ 5 per unit per month

Subcontracting cost per unit $ 20 per unit

Average pay rate $ 10 per hour ($80 per day)

Overtime pay rate $ 17 per hour (above 8 hours per day)

Labor-hours to produce a unit 1.6 hours per unit

Cost of increasing daily production rate (hiring and training) $300 per unit

Cost of decreasing daily production rate (layoffs) $600 per unit

Analysis of plan 1 Approach: Here we assume that 50 units are produced per day and that we
have a constant workforce, no overtime or idle time, no safety stock, and no subcontractors.

The firm accumulates inventory during the slack period of demand, January through March, and
depletes it during the higher-demand warm season, April through June. We assume beginning
inventory =0 and planned ending inventory= 0

SOLUTION: We construct the table below and accumulate the costs:

Table 1.1

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Month Productio Production Demand Monthly Ending
n at Forecast Inventory Inventory
Days 50 Units Change
per Day

Jan. 22 1,100 900 +200 200

Feb 18 900 700 +200 400

Mar 21 1050 800 +250 650

Apr 21 1050 1200 -150 500

May 22 1100 1500 -400 100

June 20 1000 1100 -100 0

1850

Total units of inventory carried over from one month to the next month = 1,850 units

Workforce required to produce 50 units per day = 10 workers because each unit requires 1.6
labor-hours to produce, each worker can make 5 units in an 8-hour day.

Therefore, to produce 50 units, 10 workers are needed.

Finally, the costs of plan 1 are computed as follows:

Cost Inventory carrying $ 9,250 (= 1,850 units carried * $5 per unit)

Regular-time labor $ 99,200 (= 10 workers * $80 per day * 124

Other costs (overtime, hiring, layoffs, subcontracting) $0

Total cost $108,450

If demand for June decreases to 1,000 (from 1,100), what is the change in cost?

Total inventory carried will increase to 1,950 at $5, for an inventory cost of $9,750 and total cost
of $108,950

Plan 2 for the roofing supplier—use of subcontractors within a constant workforce

Analysis of Plan 2 Approach

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 Although a constant workforce is also maintained in plan 2, it is set low enough to meet demand
only in March, the lowest demand-per-day month. To produce 38 units per day (800/21) in-
house, 7.6 workers are needed. (You can think of this as 7 fulltime workers and 1 part-timer.) All
other demand is met by subcontracting. Subcontracting is thus required in every other month. No
inventory holding costs are incurred in plan 2.

SOLUTION _ Because 6,200 units are required during the aggregate plan period, we must
compute how many can be made by the firm and how many must be subcontracted:

The costs of plan 2 are computed as follows:

Subcontract units = 6,200 - 4,712 = 1,488 units = 4,712 units

In-house production = 38 units per day * 124 production days

Regular-time labor $ 75,392 (= 7.6 workers * $80 per day * 124 days)

Subcontracting $ 29,760

Total cost $105,152

If demand for June increases to 1,200 (from 1,100), what is the change in cost? Subcontracting
requirements increase to 1,588 at $20 per unit, for a subcontracting cost of $31,760 and a total
cost of $107,152.

Analysis of plan 3 Approach

The final strategy, plan 3, involves varying the workforce size by hiring and layoffs as
necessary. The production rate will equal the demand, and there is no change in production from
the previous month, December.

SOLUTION _ Table 1.2 shows the calculations and the total cost of plan 3. Recall that it costs
$600 per unit produced to reduce production from the previous month’s daily level and $300 per
unit change to increase the daily rate of production through hirings.

Table 1.2

Month Productio Demand Basic Extra Extra Total

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 Daily Production Cost of Cost of Cost $
rate Cost
Increasing Decreasing
(demand *
1.6 Production Production

hr per unit * (hiring cost) (layoff cost)

$10 per hr)

Jan. 41 900 14400 - 14400

Feb 39 700 11200 - $1,200(=2*$600) 12,400

Mar 38 800 12800 - $600(= 1 * $600) 13,400

Apr 57 1200 19200 $5,700(=19* $300) 24,900

May 68 1500 2400 $3,300(=11*$300) 27,300

June 55 1100 17600 - $7,800(=13*$600) 25,400

99200 $9,000 $9,600 $117,800

Thus, the total cost, including production, hiring, and layoff, for plan 3 is $117,800.

Note the substantial cost associated with changing (both increasing and decreasing) the
production levels.

If demand for June increases to 1,200 (from 1,100), what is the change in cost? [: Daily
production for June is 60 units, which is a decrease of 8 units in the daily production rate from
May’s 68 units, so the new June layoff cost is $4,800 1= 8 * $600 with a total plan 3 cost of
$114,800.]

The final step in the graphical method is to compare the costs of each proposed plan and to select
the approach with the least total cost. A summary analysis is provided in Table 1.3. We see that
because plan 2 has the lowest cost, it is the best of the three options.

Summary of the plan Table 1.3

Cost Plan 1 Plan 2 Plan 3

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 (constant

workforce of (workforce of (hiring and

10 workers) 7.6 workers plus layoffs to

subcontract) meet demand)

Inventory $ 9,250 0 0
carrying

Regular labor $99,200 75,392 99,200

Overtime labor 0 0 0

Hiring 0 0 9,000

Layoffs 0 0 9,600

Subcontracting 0 29,760 0

Total cost $108,450 $105,152 $117,800

N.B. Many other feasible strategies can be considered in a problem like this, including
combinations that use some overtime.

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