Operations Management

1. Operations Management Chapter 13 – Aggregate Planning PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 7e Operations Management, 9e

2. Aggregate Planning Determine the quantity and timing of production for the immediate future • Objective is to minimize cost over the planning period by adjusting • Production rates • Labor levels • Inventory levels • Overtime work • Subcontracting rates

3. Aggregate Planning Required for aggregate planning • A logical overall unit for measuring sales and output • A forecast of demand for an intermediate planning period in these aggregate terms • A method for determining costs • A model that combines forecasts and costs so that scheduling decisions can be made for the planning period

4. Quarter 1 Jan Feb Mar 150,000 120,000 110,000 Quarter 2 Apr May Jun 100,000 130,000 150,000 Quarter 3 Jul Aug Sep 180,000 150,000 140,000 Aggregate Planning

5. Aggregate Planning • Part of a larger production planning system • Disaggregation breaks the plan down into greater detail • Disaggregation results in a master production schedule

6. Demand Options • Influencing demand • Use advertising or promotion to increase demand in low periods • Attempt to shift demand to slow periods • May not be sufficient to balance demand and capacity

7. Demand Options • Back ordering during high- demand periods • Requires customers to wait for an order without loss of goodwill or the order • Most effective when there are few if any substitutes for the product or service • Often results in lost sales

8. Demand Options • Counterseasonal product and service mixing • Develop a product mix of counterseasonal items • May lead to products or services outside the company’s areas of expertise

9. Capacity Options • Changing inventory levels • Increase inventory in low demand periods to meet high demand in the future • Increases costs associated with storage, insurance, handling, obsolescence, and capital investment 15% to 40% • Shortages can mean lost sales due to long lead times and poor customer service

10. Capacity Options • Varying workforce size by hiring or layoffs • Match production rate to demand • Training and separation costs for hiring and laying off workers • New workers may have lower productivity • Laying off workers may lower morale and productivity

11. Capacity Options • Varying production rate through overtime or idle time • Allows constant workforce • May be difficult to meet large increases in demand • Overtime can be costly and may drive down productivity • Absorbing idle time may be difficult

12. Capacity Options • Subcontracting • Temporary measure during periods of peak demand • May be costly • Assuring quality and timely delivery may be difficult • Exposes your customers to a possible competitor

13. Capacity Options • Using part-time workers • Useful for filling unskilled or low skilled positions, especially in services

14. Develop a Plan: Strategies • Chase strategy • Match output rates to demand forecast for each period • Vary workforce levels or vary production rate • Favored by many service organizations

15. Develop a Plan: Strategies • Level strategy • Daily production is uniform • Use inventory or idle time as buffer • Stable production leads to better quality and productivity

16. Develop a Plan: Strategies • Mixed strategy • Keep daily production uniform • Don’t build inventory • Use overtime and subcontracting to meet demand fluctuations

17. Aggregate Planning Options Table 13.1

18. Aggregate Planning Options Mixed strategy options Table 13.1

19. Cost of a plan

20. Example Given data

21. Example Given data Compute from input data: Production rate/worker/day: Wage rate per day per worker: = 8 hours x $15/hour = $120

22. Example : Chase Plan Production for Jan = Demand – (Initial inventory – Safety stock) i.e. for Jan: 900 – (25 – 20) = 895 Production for all other months = Demand

23. Example : Chase Plan Workers = Production rate/Rate per worker e.g. for Jan: 41/5 = 8.2 rounded up to 9 Wages = Worker x Days x Wage per day e.g. for Jan: 9 workers x 22 days x $120/day = $23,760

24. Example : Chase Plan Production rate = Production/Days e.g. for Jan: 895/22 = 40.7 or 41 Hiring cost = 31 x 200 = $6,200 Firing cost = 16 x 400 = $6,400

25. Cost of Chase plan Carrying cost = 20 units safety stock x 6 months x $10 = $1,200

26. Example : Level Plan Inventory carrying cost = Total E.I. x Carrying cost i.e. = 2000 x $10 = $20,000 Net demand rate = (Total demand-(Initial inv. – Safety stock))/Total days i.e. = (6200 – (25 – 20))/124 = 49.96 or 50 = Production rate per day Production each month = Production rate x No. of days e.g. for Jan: 50 x 22 days = 1100 E.I = Ending inventory = Previous E.I. + Production - Demand e.g. for Jan: 25 + 1100 – 900 = 225

27. Cost of Level plan No. of workers = Production rate/Rate per worker = 50/5 = 10 Wages = 10 workers x 124 days x $120/day = $148,800 Hiring cost = (New production rate – old rate) x $200 i.e. = (50 – 40) x 200 = $2,000 Firing cost = 0

28. Cost of the two plans

29. Example : Mixed Plan • Plan description • Use 10 workers, • i.e., production capacity = 5 x 10 = 50 units/day • Produce what is demanded • If capacity is insufficient use overtime first and then sub-contracting as needed • Do not accumulate inventory, • i.e. E.I. = Safety stock for all months

30. Example : Mixed Plan Production rate capacity = 50 /day Capacity = Rate x days, e.g. for Jan: 50 x 22 = 1100 Production = Min{Demand,Capacity}, e.g. for Jan: Min{895,1100} = 895 Shortage = Req. – Production, e.g. for Apr. = 1200 – 1050 = 150

31. Example : Mixed Plan Production rate capacity = 50 /day O.T. Capacity = Capacity x OT Limit %, e.g. for Apr. = 1050 x 25% = 262.5 round down O.T. production = Min{Shortage, OT Capacity) e.g. for Apr. = Min{150, 262} = 150

32. Example : Mixed Plan Production rate capacity = 50 /day Subcontracting = Shortage – O.T. production e.g. for May = 400 – 275 = 125

33. Cost of Mixed plan Wages = 10 workers x 124 days x $120/day = $148,800 OT Wages = OT production 525 x 1.6 hours/unit x $18.75/hour = $15,750 SC cost = SC quantity 125 x $35 per unit = $4,375

34. Cost of Mixed plan Hiring cost = (New production rate – old rate) x $200 i.e. = (50 – 40) x 200 = $2,000 Firing cost = 0

35. Cost of Mixed plan Carrying cost = 20 units safety stock x 6 months x $10 = $1,200

36. Cost of the three plans

37. Transportation Method Skip Use Excel Solver

38. Solver Method Production rate table Cell F75 = Given Cell range: G75:H80 = Solver changing cells Column I = New production rate, Cell I75 = F75 + G75 – H75 Column K = Production, Cell K75 = I75*J75 Column L = No. of workers, Cell L75 = I75/Rate per worker cell Cell F76 = I75

39. Solver Method Inventory table Cell F85 = Given Cell range: G85:G90 = K75:K80 Cell range: H85:I90 = Solver changing cells Column K = Ending inventory, Cell K85 = SUM(F85:I85) – J85 Column L = O.T. Limit = RT * OT Limit %, Cell L85 = G85 x $B$16 Cell F86 = K85

40. Solver Method Cost summary Cell I95 = SUMPRODUCT(L75:L80,J75:J80)*B35 (B35 = wage rate/day) Cell I96 = H91*B7*B14 (B7 = OT pay rate, B14 = Hours/unit) Cell I97 = I91*B8 (B8 = SC cost/unit) Cell I98 = G81*B10 (B10 = Hiring cost/unit) Cell I99 = H81*B11 (B11 = Firing cost/unit) Cell I100 = K91*B9 (B9 = Inventory carrying cost/unit/month)

41. Solver Method Solver Parameters Set Target cell = Total cost Changing cells = Hire & Fire and OT & SC Constraints OT Production <= OT Limit ($H$85:$H$90 <= $L$85:$L$90) E.I. >= Safety stock ($K$85:$K$90 >= $B$31) OT and SC must be integer ($H$85:$I$90 = Int)

42. Solver Solution Inventory table

43. Cost of the all four plans