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Table 6. Comparison of the optimal costs of production planning models.

Model based on

Model based on

the current

recommended

practice

forecasting models

Optimal costs (Baht/year)

Overtime cost

1,961,695

1,766,220

Total cost

4,078,746

3,541,772

1,775,552

Inventory holding cost

2,117,051

that the optimal inventory holding cost and overtime cost in the production planning model based on the recommended forecasting models are almost equal which indicates that the model can efficiently achieve a tradeoff between both costs.

Normally, the optimal decisions in the first planning period will be implemented. After the first period has passed, the new forecasts will be determined, and the model parameters will be updated. The updated model is solved again to deter- mine the optimal decisions in the current period. This is called a rolling horizon concept. However, the details and results of this step are not shown in this paper.

DISCUSSION AND CONCLUSION

The ARIMA model provides more reliable demand forecasts but it is more complicated to apply than the decomposition model. Therefore the ARIMA model should be used only when the decom- position model is inadequate. When compared against those of the current practice of the company, the errors of our selected models are considerably lower. This situation can lead to substantial reduc- tions in safety stocks. Consequently, the lower safety stocks result in decreased inventory holding and overtime costs.

The results of the production planning model are of great value to the company since the model can determine the optimal overtime work, production quantities, and inventory levels that yield the optimal total overtime and holding costs. The production planning method is more suitable than the existing one that does not consider any cost factors. Moreover, it has been proven that an application of appropriate forecasting techniques can reduce total inventory holding and overtime costs significantly. In conclu- sion, this paper demonstrates that an improvement in demand forecasting and production planning can be achieved by replacing subjective and intuitive judgments by the systematic methods.

ScienceAsia 27 (2001)

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