Varying the size of inventory: Under this strategy, an organization maintains a constant workforce and level production. When demand is low, the constant rate of production results in accumulation of inventories. If the demand is more than the capacity, the additional requirement is met by utilizing already accumulated inventories. This planning strategy results in fluctuating inventory levels throughout the planning horizon. Stable employment, no idle time and no overtime are some of the advantages of this strategy. The disadvantages are increased inventory-carrying costs and materials handling costs, additional storage space requirements and the risk of damage or obsolescence.

Problem 

Aggregate demand for product X for the next four months is given in the following table:

Given:

Opening stock of inventory = 500 units

Inventory holding cost = Rs. 40

Worker productivity = 20 units/day

Worker strength = 10

Shortage cost (due to lost sales) = Rs. 30/unit

Based on the above information, generate a production plan with varying inventory levels.

Solution

The aggregate production plan with varying inventory is given in Table 9.2.

In aggregate planning with varying inventory level, the workforce is kept constant.

Actual production in a month is calculated as = (Number of working days) × (Number of workers) × (worker productivity in units/day)      

Table : Production Plan with Varying Inventory Level

Case 1: If (Opening inventory + actual production) >= Demand forecast, then

1. Closing inventory = Opening inventory + actual production - Demand forecast

2. Shortage in supply = 0

Case 2: If (Opening inventory + actual production) < Demand forecast, then

1. Shortage in supply = Demand forecast - (Opening inventory + actual production)

2. Closing inventory = 0

Shortage cost (due to lost sales) = (Units short) × (Per unit shortage costs)

Inventory carrying costs = (Closing inventory) × (Per unit inventory holding costs)

Closing inventory in one month is taken as the opening inventory for the next month.               

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