AGGREGATE PLANNING PRODUCTION
OF ICE BLOCK FOR MINIMIZING COST
AT PT.PUTRI EKA MAJU
Daniel Phen and Bachtiar H. Simamora
BINUS University, Jl. K.H. Syahdan No.9, Kemanggisan/Palmerah, Jakarta Barat, 021-5345830
Email: danielphen7@gmail,com ; [email protected]
ABSTRACT
PT. PUTRI EKA MAJU is company producing ice block located in Medan, North Sumatra.
PT. PUTRI EKA MAJU supplying ice block to fisherman around Sumatra. The problem that PT.
PUTRI EKA MAJU faced is how to fulfill seasonal demand with optimal cost. The research purpose is
to determine the forecasted demand of PT. PUTRI EKA MAJU by using multiplicative seasonal
method. Researcher compare the current practice total cost with aggregate planning total cost. The
research result showed us by using current practice the total cost is Rp.6.323.519.428 and by using
mixed strategy the total cost is Rp.5.849.143.099. The difference in total cost is Rp.474.376.329. PT.
PUTRI EKA MAJU can save 7, 6 % in total cost by using mixed strategy.
Keywords: Multiplicative Seasonal, Aggregate Planning, Mixed Strategy.
ABSTRAK
PT. PUTRI EKA MAJU adalah perusahaan yang memproduksi es balok yang berlokasi di Medan,
Sumatera Utara. PT. PUTRI EKA MAJU menyalurkan es balok ke nelayan di sekitar wilayah
Sumatera. Masalah yang terjadi pada PT. PUTRI EKA MAJU adalah bagaimana memenuhi
permintaan yang sifatnya musiman dengan biaya optimal. Tujuan dari riset ini adalah menentukan
perkiraan permintaan PT. PUTRI EKA MAJU dengan menggunakan metode multiplicative seasonal.
Peneliti membandingkan total biaya dari praktik tradisional dengan aggregate planning. Hasil dari
riset ini menunjukkan bahwa menggunakan praktik tradisional menghasilkan total biaya
Rp.6.323.519.428 dan dengan menggunakan strategy mixed menghasilkan total biaya
Rp.5.849.143.099. Perbandingan total biayanya adalah Rp.474.376.329. PT. PUTRI EKA MAJU
dapat menghemat total biaya yang dikeluarkan sebesar 7, 6 %.
Keywords:Multiplicative Seasonal, Aggregate Planning, Mixed Strategy,
INTRODUCTION
Fishing industry not only give a big impact in Indonesia economic growth but also give a job
opportunity for Indonesia citizen. Growth Domestic Product of fishing industry in third quarter 2014
is Rp 86,878 trillion (www.bps.go.id). Indonesia Minister of Maritime Affairs and Fisheries Susi
Pudjiastuti targets in 5 years, fishing industry will give 7% contribution of Indonesia Growth
Domestic Product (bisniskeuangan.kompas.com). The increase in contribution of fishing industry also
give impact to ice block industry that is the increase of demand for ice block. The ship need ice block
to keep the fish fresh. Company in ice block industry compete each other to gain market share in
fishing industry. If the company gain the market share it become competitive advantage for the
company. In order for company to gaining market share, trust is one of the most important factor. In
order for a company to gain the trust of consumer, they must fulfill the demand of consumer. If
company cannot fulfill the demand, consumer will lose the trust for the company and find another
company to supply the demand.
PT.Putri Eka Maju is a company that producing ice block. In fulfilling the demand of customer
PT.Putri Eka Maju have four machines that help the company to produce ice block. PT.Putri Eka
Maju sell the ice block to fisherman around North Sumatra. PT. Putri Eka Maju have a troubles in
their current practice. The troubles are the increasing of cost which lead to decrease in profit and
fulfilling the customer demand.
Another problem of PT. Putri Eka Maju is in fulfilling the demand of customer. The problem in
fulfilling the demand of customer is because the demand is fluctuative. The demand is not a constant
variable. In some month the demand can be very high and in some month the demand can be low. The
variation of demand in PT. Putri Eka Maju caused them the increase in cost. According to Heizer and
Render (2011), manufacturers such as Frito-Lay also face tough decisions when trying to schedule
products, such as snack food which the demand is heavily dependent on seasonal variation.
PT. Putri Eka Maju cannot fulfill the demand of ice block in February, March , May, June, July,
August, October, and December. The increase in the demand caused by the seasonal variation of fish
in that month. Because the quantity of the fish increasing, the demand of ice block also increasing. PT.
Putri Eka Maju has a problem in fulfilling customer demand in those certain months. In solving this
demand problem PT. Putri Eka Maju have a current practice that they always used, which is
subcontracting. By using subcontracting PT. Putri Eka Maju will increase their competitor sales and
also the cost is expensive. PT. Putri Eka Maju must have a good plan in producing the ice block to
fulfill the demand of customer. The plan they need to generate not only must solve the demand
problem but also have a low cost, in order for them to compete with other company.
Based on the problems in the background, the problems identification to be investigated are:
1. What is the suitable forecasting method for calculating the demand of ice block and how
much is the forecasted demand for the ice block?
2. What is the optimal solution for PT.Putri Eka Maju by using aggregate planning?
The objectives that the researcher aims of this research are:
1. To determine forecasted demand using forecast method that give smallest Mean Absolute
Deviation (MAD) and Mean Squared Error (MSE)
2. To define aggregate plan practice and compare the yearly cost with current practice that PT.
Putri Eka Maju used.
LITERATURE REVIEW
According to Krajewski, Ritzman, and Malhotra (2007:4) operation management refers to the
systematic design, direction, and control of processes that transform inputs into services and products
for internal, as well as external, customers. That’s why, it is important to learn about operations
management.
According to Evans and Collier (2008:5) operation management is the science and art of
ensuring that goods and services are created and delivered successfully to customers.
So it can be concluded that, operation management is a process consist of one or more actions
that transform inputs into outputs.
Ideally capacity of a process will be such that its output just matches demand. Excess capacity is
wasteful and costly; too little capacity means dissatisfied customers and lost revenue. Having the right
capacity requires having accurate forecasts of demand, the ability to translate forecasts into capacity
requirements, and a process in place capable of meeting expected demand. Even so, process variation
and demand variability can make the achievement of a match between process output and demand
difficult. Therefore, to be effective, it is also necessary for managers to be able to deal with variation.
1.
Forecasting
Forecasting is an estimation of future level from the past data that is used to make decision
within company in uncertainty condition. This method is needed to calculate, how much product is
needed in future.
Heizer and Render (2011:139) also stated that there are five quantitative forecasting methods
which use historical data, there are:
Time series models
 Naive approach
 Moving averages
 Exponential smoothing
 Trend projection
Associative model
 Linear regression
Time series models predict on the assumption that the future is a function of the past. In other
words, they look at what has happened over a period of time and use a series of past data to
make a forecast. Associative models, such as linear regression, incorporate the variables or
factors that might influence the quantity being forecast.
2.
Aggregate Planning
1.
2.
3.
1.
2.
3.
4.
5.
Heizer & Render (2011:544) stated that Aggregate Planning or Aggregate Scheduling is an
approach to determine the quantity and timing of production for the intermediate future (usually 3 to
18 months ahead).
2.1 Capacity/ Planning Options
Schroeder (2007:249) stated that capacity can be defined as the maximum output that can be
produced over a given period of time such as day, week, or year. In some cases not only physical
assets may limit capacity but also labor availability. Capacity can be measured in terms of not only
hours of output but also output measures such as number of unit produced, tons produced, or number
of customer served order a specified period of time.
Chase and Jacobs (2006:430) stated that capacity is the ability to hold, receive, store or
accommodate. In view of the general business, capacity is often seen as the amount of output that can
be achieved by a system over a given period.
Heizer & Render (2011:547) stated that the aggregate planning problem can be clarified by a
discussion of the various decision options available. These will be divided into two types of decisions:
(1) modifying demand and (2) modifying supply.
From demand options, there are several options which are:
Influencing demand: when demand is low, a company can try to increase demand through
advertising, promotion, personal selling, and price cuts. Airlines and hotels have long offered
weekend discounts and off-season rates; telephone companies charge less at night; some colleges give
discounts to senior citizens; and air conditioners are least expensive in winter. However, even special
advertising, promotions, selling, and pricing are not always able to balance demand with production
capacity.
Back ordering during high-demand periods: back orders are order for goods or services that a firm
accepts but is unable (either on purpose or by chance) to fill at the moment. If customers are willing to
wait without loss of their goodwill or order, back ordering is a possible strategy. Many firms back
order, but the approach often results in lost sales.
Counter seasonal product and service mixing: a widely used active smoothing technique among
manufacturers is to develop a product mix of counter seasonal items. Examples include companies
that make both furnaces and air conditioners or lawn mowers and snow blowers. However, companies
that follow this approach may find themselves involved in products or services beyond their area of
expertise or beyond their target market.
From capacity options, there are several options can be used:
Changing inventory levels: managers can increase inventory during period of low demand to meet
high demand in future periods. If this strategy is selected, costs associated with storage, insurance,
handling, obsolescence, pilferage, and capital invested will increase. On the other hand, with low
inventory on hand and increasing demand, shortages can occur, resulting in longer lead times and poor
customer service.
Varying workforce size by hiring or layoffs: one way to meet demand is to hire or lay off
production workers to match production rates. However, new employees need to be trained, and
productivity drops temporarily as they are absorbed into the workforce. Layoffs or terminations, of
course, lower the morale of all workers and also lead to lower productivity.
Varying production rates through overtime or idle time: keeping a constant workforce while
varying working hours may be possible. Yet when demand is on a large upswing, there is a limit on
how much overtime is realistic. Overtime pay increases costs and too much overtime can result in
worker fatigue and a drop in productivity. Overtime also implies added overhead costs to keep a
facility open. On the other hand, when there is a period of decreased demand, the company must
somehow absorb workers’ idle time often a difficult and expensive process.
Subcontracting: a firm can acquire temporary capacity by subcontracting work during peak demand
periods. Subcontracting, however, has several pitfalls. First, it may be costly; second it risks opening
the door to a competitor. Third, developing the perfect subcontract supplier can be a challenge.
Using part-time workers: especially in the service sector, part time workers can fill labor needs. This
practice is common in restaurants, retail stores, and supermarkets.
2.2 Planning Strategy
There are some strategies in aggregate planning to solve operations’ problems. According to Jay
Heizer and Barry Render (2011, p 548-549) there are two strategies, which are chase strategy and
level strategy. When just one of these variables is used to absorb demand fluctuations, it is termed a
pure strategy; two or more strategy used in combination called a mixed strategy (Chase and Jacobs,
2011:570).
Chase strategy is a strategy to achieve output rates of each period that match the demand forecast
for that period. According to Aarabi and Radwan (2011), chase strategy that is also called “Just-InTime”, tries to adjust production to meet demand. A chase strategy adjust the labour inputs in order to
track the expected monthly demands. Common tactics for varying capacity are overtime or undertime,
hiring or firing and subcontracting some work out (Buxey, 2005). According to Heizer and Render
(2011, p 548-549), this strategy can be accomplished by changing workforce level, varying work
hours, or subcontracting. The main purpose of this strategy is to meet demand in each period with any
possible ways. The inventory cost in this strategy is low. However, it results in high training cost,
overhead cost and high hiring and firing cost.
A level strategy is an aggregate plan in which the company produce the same amount of product
from period to period. According to Buxey (2005), a level strategy maintains a contant daily
(aggregate) production rate, and draws upon stockpiles of finished good whenever monthly outputs
dip below their matching sales marks. In addition, Heizer and Render (2011) said that, a level strategy
prefer to produce same level of output that can be saved to cover the shortfall in other periods, which
means using constant workforce in constant work hours. It results in high inventory cost but the cost
of employee is constant. Aarabi and Radwan (2011) stated that this strategy that also called “Just-InCase”, basically moderates the fluctuations, holding inventory or placing backorders as needed levels.
Mixed strategy is the combination of two or more alternatives. Normally, a certain combination
of level and chase strategy (a mixed strategy) minimizes the total marginal (labor-inventory) cost
summed over a 12 months horizon (Geoff Buxey, 2005). Russell and Taylor said that mixed strategy
can incorporate management policies, like no more than 5% can be laid off.
Heizer and Render (2011: p549-554) stated that there are several techniques that operations
managers use to develop aggregate plans:
1. Graphical Methods.
Aggregate planning techniques that work with a few variables at a time to allow planners to
compare forecasted demand with existing capacity. They are trial and error approaches that do
not guarantee an optimal production plan. Operations manager can use graphical methods to
calculate either chase or level strategy. Following are the five steps in the graphical method:
a. Determine the demand in each period.
b. Determine capacity for regular time, overtime, and subcontracting each period.
c. Find labor cost, hiring and layoff costs, and inventory holding cost.
d. Consider company policy that may apply to the workers or to stock levels.
e. Develop alternative plans and examine their total costs.
2. Mathematical Approaches.
One of mathematical approaches is the transportation method of linear programming; a way of
solving for the optimal solution to an aggregate planning problem. The transportation method
of linear programming is not a trial and error approach like graphing but rather produces an
optimal plan for minimizing cost. It is also flexible in that it can specify regular and overtime
production in each time period, the number of units to be subcontracted, extra shifts, and the
inventory carryover from period to period. Based on the literature of Russel and Taylor
(2011:623), the transportation method is used when hiring and firing is not an option. The
transportation method gathers all the cost information into one matrix and plans production
based on the lowest cost alternatives. Sukendar and Kristomi (2008) also suggested to use the
transportation method for aggregate planning due to efficiency. This model is calculated with
transportation table. This method uses rows that represent capacity alternatives and colomns
that represent demand. In each cell, there is the cost of each capacity alternatives.
RESEARCH METHODOLOGY
This research is done at PT.Putri Eka Maju. This research is considered descriptive study, which
is undertaken in order to ascertain and be able to describe the characteristics of the variables interest in
a situation. The time horizon used in this research is cross sectional studies. Cross sectional studies
can be undertaken in which data are gathered just once, perhaps over a period of days or weeks or
months, in order to answer a research question. The time horizon in this research is from January 2009
– December 2014. This research used secondary data from the company and data from literature
review. The researcher uses multiplicative seasonal model to forecast the seasonal demand. In
determining the aggregate planning strategy, the researcher uses three planning strategies, such as
chase, level and mixed strategy to evaluate which is the optimal strategy. The planning strategies is
calculated using manual calculation and POM for Windows application.
RESEARCH ANALYSIS AND DISCUSSION
Based on the data collected, the researcher calculated the seasonal forecasted demand. This is the
result of seasonal forecasted demand using multiplicative seasonal method:
January
Table 1 Seasonal Forecasted Demand
Average Demand of
Seasonal Index
2015
0,81063
70.849
February
0,98241
70.849
69.603
March
1,01224
70.849
71.716
April
0,84157
70.849
59.624
May
0,95161
70.849
67.421
June
1,22298
70.849
86.647
July
1,19916
70.849
84.959
August
1,23005
70.849
87.148
September
0,89398
70.849
63.338
October
0,98318
70.849
69.657
November
0,90371
70.849
64.027
0,96849
70.849
68.617
Month
December
Source: Result of Data Processing
Seasonal Forecasted
Demand
57.432
After obtaining the seasonal forecasted demand for 2015, which is then followed by the
computation of the company current strategy and cost for each strategy. There are three strategies:
chase, level and mixed strategy.
I. Current Strategy
PT. Putri Eka Maju in fulfilling the demand of customer use subcontract with other company. The
consequences of subcontracting is the cost is higher than production cost and increasing competitor
sales count. The result can be seen in table 2:
Table 2. Current Practice
Month
Unit Produced x Cost
Total Cost
Demand
January
55.716 units x Rp.6.807
Rp.379.258.812
55.716 units
February
62.232 units x Rp.6.807
4.555 units x Rp.15.000
67.418 units x Rp.6.807
3.392 units x Rp.15.000
67.418 units x Rp.6.807
Rp.423.613.224
Rp.68.325.000
Rp.458.914.326
Rp.50.880.000
Rp.458.914.326
66.787 units
May
June
279
units x Rp.15.000
66.622 units x Rp.6.807
67.418 units x Rp.6.807
18.806 units x Rp.15.000
Rp.4.185.000
Rp.453.495.954
Rp.458.914.326
Rp.282.090.000
66.622 units
86.224 units
July
70.011 units x Rp.6.807
Rp.476.564.877
87.162 units
Month
17.151 units x Rp.15.000
Unit Produced x Cost
Rp.257.265.000
Total Cost
Demand
August
67.418 units x Rp.6.807
Rp.458.914.326
84.995 units
17.577 units x Rp.15.000
Rp.263.655.000
March
April
70.810 units
67.697 units
September
60.546 units x Rp.6.807
Rp.412.146.622
60.546 units
October
Rp.476.564.877
Rp.56.310.000
Rp.412.068.552
73.765 units
November
70.011 units x Rp.6.807
3.754 units x Rp.15.000
60.536 units x Rp.6.807
December
69.258 units x Rp.6.807
Rp.471.439.206
69.258 units
Total Cost
60.536 units
Rp.6.323.519.428
Source: The Researcher (2015)
II. Offered Strategy (Aggregate Planning)
There are three strategies that researcher use in aggregate planning. The first strategy is chase strategy
which is to achieve output rates of each period that match the demand forecast for that period. The
second strategy is level strategy which is to produce the same level of output each month during a
year. The third strategy is mixed strategy which is combination of more than one pure strategy. The
research uses POM for Window a software for production/ operations management, quantitative
methods, management science, and operations research.
a. Chase Strategy
Chase strategy is strategy to produce the amount of products of each month that match the
demand forecast for that month. In chase strategy there is no inventory cost. The company
must produce the exact amount of product that match demand through regular
production, overtime production, and subcontracting. The cost of using this strategy will be
shown in figure 1 below:
Figure 1 Cost of Chase Strategy
Source: POM QM for Windows 2 (2015)
The figure 4.4 show us the increase and decrease cost is Rp 0,00. That is because the company already
set the capacity production each day and the capacity cannot be increased. For decrease cost the
company pay the same cost even though the workers do not produce the amount of the product that is
match with the capacity. The total cost of chase strategy is Rp. 5.849.143.000.
b. Level Strategy
Level strategy is strategy to produce the same amount of products each month in one year. When
the company produce more than the demand, there will be too many inventories. When company
produce less than the demand there will be shortage. The result can be seen below.
Figure 2 Cost of Level Strategy
Source: POM QM for Windows 2 (2015)
From figure 4.5, the company must produce 811.069 units in regular time and 39.120 units in
overtime. The total cost using level strategy is 6.306.615.000.
c. Mixed Strategy
Calculation of aggregate planning is using mixed strategy. The mixed strategy consist of regular time,
overtime, and subcontract. The company policy is they do not allow back ordering. The table below
will show the calculation of this strategy.
Table 3. Cost of Mixed Strategy
Month
Unit Produced x Cost
Total Cost
Demand
January
57.432 unit x Rp.6.807
Rp.390.939.624
57.342 unit
February
62.232 unit x Rp.6.807
7.371 unit x Rp.7.751
67.418 unit x Rp.6.807
4.298 unit x Rp.7.751
59.624 unit x Rp.6.807
Rp.423.613.224
Rp.57.132.621
Rp.458.914.326
Rp.33.313.798
Rp.405.860.568
69.603 unit
Rp.458.914.326
Rp.23.253
Rp.458.914.326
Rp.149.043.979
Rp.476.564.877
Rp.115.861.948
Rp.458.914.326
Rp.152.927.230
Total Cost
67.421 unit
Month
67.418 unit x Rp.6.807
3
unit x Rp.7.751
67.418 unit x Rp.6.807
19.229 unit x Rp.7.751
70.011 unit x Rp.6.807
14.948 unit x Rp.7.751
67.418 unit x Rp.6.807
19.730 unit x Rp.7.751
Unit Produced x Cost
September
63.338 unit x Rp.6.807
Rp.431.141.766
63.338 unit
October
69.657 unit x Rp.6.807
Rp.474.155.199
69.657 unit
November
64.027 unit x Rp.6.807
Rp.435.831.789
64.027 unit
December
68.617 unit x Rp.6.807
Rp.467.075.919
68.617 unit
March
April
May
June
July
August
Total Cost
71.716 unit
59.624 unit
86.647 unit
84.959 unit
87.148 unit
Demand
Rp.5.849.143.099
Source: The Researcher (2015)
The total cost of the mixed strategy from POM QM for Windows 2 is Rp.5.849.143.000. There is a
slight of differences between manual calculation and the software computation because the application
automatically rounded the result from Rp.5.849.143.099 rounded to Rp.5.849.143.000
Implication of Research
Table 4. 1 Comparison for Current Practice and Aggregate Planning
Solution
Total Cost (Rp)
Current Practice
6.323.519.428
Chase Strategy
5.849.143.000
Level Strategy
6.306.615.000
Mixed Strategy
5.849.143.000
Source: The Researcher (2015)
If PT. Putri Eka Maju continue to use current practice in fulfilling the customer demand, then
their total cost is Rp.6.323.519.428. But by using mixed strategy their total cost is Rp.5.849.143.099.
There is Rp.474.376.329 difference between current practice and mixed strategy. Mixed strategy have
a lower cost compare to subcontracting. With mixed strategy PT. Putri Eka Maju can lower their cost
by 7,6 % and avoiding subcontract with competitor.
In conclusion the optimal solution for PT. Putri Eka Maju is mixed strategy calculated using
transportation method. The company can fulfill the demand and also lowering their cost.
CONCLUSION AND RECOMMENDATIONS
Based on the analysis that has been discussed above, it can be concluded as follows:
1.
Ice block seasonal demand in 2015 was forecasted using multiplicative seasonal method by
determining the seasonal index each month from the past six years. The forecasted demand in
2015 is 850.953 unit, highest demand is in August with 87.148 unit and the lowest demand of
the year is in January with 57.342 unit.
2. The current practice total cost for PT. Putri Eka Maju is Rp.6.323.519.428, and Aggregate
Planning total cost is Rp.5.849.143.099. Optimal solution for the company is aggregate
planning with the total cost of Rp.5.849.143.099. By using aggregate planning company can
save Rp.474.376.329 or 7, 6 % of their total cost.
From the result of this study that have been described above, the researcher is up on some suggestions
as below:
1. PT. Putri Eka Maju should starting to use overtime option in increasing the production
capacity. Overtime option was proved to have a lower cost than subcontracting.
2. Subcontracting should be avoided in the future, because of the high cost and also it helps
competitor in gaining additional sales. Subcontracting should be used only in emergency
situation.
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WRITER’S BIOGRAPHY
Daniel Phen, was born in Pekanbaru, January 7, 1994. The writer obtained Bachelor (Sarjana – S1)
degree at Bina Nusantara University in Management major, School of Business Management in 2015.