Ch 13 - California State University, Sacramento

Ch 13 - California State University, Sacramento

Chapter 13 Aggregate Planning Operations Management by R. Dan Reid & Nada R. Sanders 3rd Edition Wiley 2007 Types of Operational Planning Activities ACTIVITY 13-4 Long-range planning Medium-range planning Short-range planning TIME FRAME 18 months 5+ years 6-18 months 1 day 6 months Productio n Planning The Role of the Aggregate Plan Aggregate Planning

Based on composite (representative) products: Simplifies calculations Forecasts for grouped items are more accurate Considers trade-offs between holding inventory & short-term capacity based on workforce Aggregate Production Planning Purpose: specify the combination of production rate, workforce level, and inventory on-hand that satisfies the forecasted demand at the lowest cost. Production rate: quantity of product produced per unit of time (autos/day). Workforce level: number of workers required to meet a specific level of output. Inventory on hand: unsold units carried over from one period to the next. Managing Demand 13-6 Pricing Advertising and Promotion Backlogs and Reservations Develop Alternative Products

Managing Supply (Capacity) 13-7 Overtime/Undertime Hiring/Firing of Personnel Temporary/Part-time Personnel Subcontracting Adjusting Inventories Adjusting Lead Times Aggregate Planning: Objectives and Approaches Objectives: Match Supply and Demand (Effectiveness) Minimize Costs (Efficiency) Approaches Reactive approach: Proactive approach: 13-5 Allow volume forecasts based on Marketing plan to drive production planning Coordinate Marketing & Production plans to level demand using advertising & price incentives

Aggregate Plan Strategies Chase strategy: Match the production rate to meet the demand rate by adjusting the workforce level (hiring/firing) as the demand rate changes. Minimize finished good inventories by matching demand fluctuations. Level strategy: Use a stable workforce working at a constant production rate. Use inventories and backorders to absorb demand peaks and valleys. Pure Aggregate Strategies Chase Plan Example Chase hires and fires staff to exactly meet each periods demand Period 1 = (500 units x .64 std.)/160 = 2 people, need to fire 16 people Level Plan Example Level production rate= 28,000 units/7 periods= 4000 units Level workforce= (4000 units x .64 std.)/160 = 16 people Hybrid Strategies Combine elements of the chase/level strategies with other options:

Stable workforce but variable work rate (overtime/undertime). Subcontract production or hire part-time or temporary workers to cover shortterm peaks. Preliminary Considerations Identify the point of departure: How much capacity is currently in use? Identify the magnitude of change needed Identify the anticipated duration the modified capacity is necessary Developing the Aggregate Plan Step Step rate Step Step 1- Choose strategy: level, chase, or Hybrid 2- Determine the aggregate production 3- Calculate the size of the workforce 4- Test the plan as follows: Calculate Inventory, expected hiring/firing, overtime needs Calculate total cost of plan

Step 5- Evaluate performance: cost, service, human resources, and operations Aggregate Planning Costs Basic production costs (fixed and variable): material costs, labor costs, overtime pay. Production rate-change costs: hiring, training, layoff/firing, adding/cutting shifts. Inventory holding costs: cost of capital, storage, insurance, taxes, spoilage, shrinkage, obsolescence. Backlog costs: expediting, loss of customer goodwill, loss of sales revenue from cancelled orders (due to product unavailability). Aggregate Planning Techniques Trial-and error (usually employing spreadsheets): costing out various production planning scenarios to determine which has the lowest cost. Mathematical approaches: Linear programming. Linear decision rule (LDR). Heuristic approaches. Plan for Companies with Tangible Products Plans A, B, C, D

Plan A: Level aggregate plan using inventories and back orders Plan B: Level plan using inventories but no back orders Plan C: Chase aggregate plan using hiring and firing Plan D: Hybrid plan using initial workforce and overtime as needed Problem Data for Plans A, B, C, D (Table 13.4) A 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 B Cost Data

Regular time labor cost per hour Ov ertime labor cost per hour Subcontracting cost per unit (labor only) Back order cost per unit per period Inventory holding cost per unit per period Hiring cost per employee Firing cost per employee Capacity Data Beginning workforce (employees) Beginning inventory (units) Production standard per unit (hours) Regular time available per period (hours) Overtime available per period (hours) $12.50 $18.75 $125.00 $25.00 $10.00 $800.00 $500.00 90 0 8 160 40 Demand Data (units) Period Period Period Period Period Period Period Period 1 2 3 4 5 6 7 8 Total Number of Periods 1920

2160 1440 1200 2040 2400 1740 1500 8 Plan A - Level Using Inventory & Backorders (Table 13-5) First calculate the level production rate (14400/8=1800) D 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

E F G H I J K L M 5 2040 8760 1800 9000 -240 240 0 6 2400 11160 1800 10800 360 0 360 7 1740 12900 1800 12600 300 0 300 8 1500 14400 1800

14400 0 0 0 Total 14400 Plan A: Level Aggregate Plan, Using Inventories and Backorders Compute Level Production Rate Total Demand Less: Beginning Inventory Total Net Demand Average Demand Per Period 14400 0 14400 1800 Compute Workforce Needed Units per Employee per Period Employees Required Number to Hire Number to Fire 20 90 0 0 <-- Production Rate for Level Plan Detailed Plan Computations Demand (units) (net of beg. Inventory) Cumulative demand (units) Period production (units) Cumulative production (units) Cum.Dem. Minus Cum.Prod. Ending Inventory (units) Backorders (units) Cost Calculations for Plan A Regular time labor cost Overtime labor cost Inventory holding cost Back order cost Hiring cost Firing cost Total Cost

1 1920 1920 1800 1800 120 0 120 $1,440,000 $0 $7,200 $34,500 $0 $0 $1,481,700 2 2160 4080 1800 3600 480 0 480 Period 3 4 1440 1200 5520 6720 1800 1800 5400 7200 120 -480 0 480 120 0 14400 720 1380 Plan A Evaluation

Back orders were 13.9% of demand (1380) Marketing will not be satisfied at these levels Workable plan for operations Worst performance was period 2 at 21% of demand No employees hired or fired, no overtime or undertime needed, and output is constant No human resource problems are anticipated Plan B Level, Inventory but No Backorders (Table 137) Set the level rate equal to the peak cumulative demand/period D 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55

56 57 58 59 60 61 62 63 64 65 66 E F G H I J K L M 4 1200 6720 1680 2040 8160 -1440 1440 0 5 2040 8760 1752 2040 10200 -1440 1440 0

6 2400 11160 1860 2040 12240 -1080 1080 0 7 1740 12900 1842.857 2040 14280 -1380 1380 0 8 1500 14400 1800 2040 16320 -1920 1920 0 Total 14400 Plan B: Level Aggregate Plan, Using Inventories but No Backorders Detailed Plan Computations Demand (units) (net of beg. Inventory) Cumulative demand (units) Cumulative demand/periods Period production (units) Cumulative production (units) Cum.Dem. Minus Cum.Prod. Ending Inventory (units) Backorders (units) Period 1 1920 1920 1920 2040

2040 -120 120 0 Compute Level Production Rate and Workforce Needed 2040 Production Rate (units) Units per Employee per Period 20 Employees Needed 102 12 Number to Hire 0 Number to Fire Cost Calculations for Plan B Regular time labor cost Overtime labor cost Inventory holding cost Back order cost Hiring cost Firing cost Total Cost $1,632,000 $0 $79,800 $0 $9,600 $0 $1,721,400 2 2160 4080 2040 2040 4080 0 0 0 3 1440 5520 1840 2040 6120 -600

600 0 16320 7980 0 N Plan B Evaluation Plan B costs $240K (16%) more than plan A and has ending inventory of 7980 units To be fair, Plan B built 1920 additional units ($192K) which will be sold later Plan B costs $2.58 more per unit (2.5%) Marketing satisfied by 100% service level Workable Operations and HR plan- hire 12, no OT or UT, and level production Plan C Chase Using Hires and Fires (Table 13- 9) The production rate equals the demand each period D E F G H I J K 68 Plan C: Chase Aggregate Plan, Using Hiring and Firing (no overtime)

69 70 Beginning Number of Employees 90 71 Units per Worker per Period 20 (used to compute workforce size requirement each period) 72 73 Detailed Plan Computations Period 1 2 3 4 5 6 7 74 75 Demand (units) (net of beg. Inventory) 1920 2160 1440 1200 2040 2400 1740 76 Production per period (units) 1920 2160 1440 1200 2040 2400 1740 77 Employees needed in period 96 108 72 60 102 120 87 78 Number to hire 6 12

0 0 42 18 0 79 Number to fire 0 0 36 12 0 0 33 80 81 Cost Calculations for Plan C 82 Regular time labor cost $1,440,000 83 Overtime labor cost $0 84 Inventory holding cost $0 85 Back order cost $0 86 Hiring cost $62,400 87 Firing cost $46,500 $1,548,900 88 Total Cost 89 L M 8 1500 1500 75 0 12

Total 14400 720 78 93 N Plan C Evaluation Costs an additional $2 per unit more than Plan B Marketing is satisfied again by 100% service level From Operations and HR standpoint, not easy to implement: Need space, tools, equipment for up to 120 people in period 6 and only have 60 people in period 4 High training costs and potential quality problems Low morale likely due to poor job security Plan D Hybrid, Initial Workforce and OT as Needed (Table 13-12) This is basically a level plan using OT to avoid backorders D E F G H I 91 Plan D: Hybrid Aggregate Plan, Using Initial Workforce and Overtime as Needed

92 93 Compute Regular Time Production Rate 94 Number of Employees 90 95 Units per Employee per Period 20 96 Regular Time Production per Period 1800 97 98 Detailed Plan Computations Period 1 2 3 4 5 99 100 Total Demand in Period 1920 2160 1440 1200 2040 101 Net Demand After Inventory Considered 1920 2160 1440 840 1080 102 Regular Time Production 1800 1800 1800 1800 1800 103 Overtime Production Needed 120 360 0 0 0 104 Ending Inventory 0

0 360 960 720 105 106 Cost Calculations for Plan C 107 Regular time labor cost $1,440,000 108 Overtime labor cost $72,000 109 Inventory holding cost $28,200 110 Back order cost $0 111 Hiring cost $0 112 Firing cost $0 $1,540,200 113 Total Cost 114 J K L M 6 2400 1680 1800 0 120 7 1740 1620 1800 0 180

8 1500 1320 1800 0 480 Total 14400 14400 480 2820 N Plan D Evaluation Cost is only $.61 (.6%) more than Plan A with a reasonable increase in ending inventory (+1440) Marketing is satisfied as well with 100% service level Not difficult for Operations to implement Does not need excessive overtime Uses overtime in just periods 1 and 2 (7%, 20%) Aggregate Plan Objective: Keep customer service high and costs low Aggregate Plans for Service Companies with Non-Tangible Products- Plans E, F, G Options remain the same level, chase,

and hybrid plans Overtime and undertime can be used Staff can be hired and fired Inventory cannot be used to level the service plan All demand must be satisfied or lose business to a competing service provider Problem Data for Plans E, F, G (Table 13.4) 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 A Cost Data Regular time labor cost per hour Overtime labor cost per hour Subcontracting cost per unit (labor only)

Hiring cost per employee Firing cost per employee Capacity Data Beginning workforce (employees) Service standard per call (hours) Regular time available per period (hours) Overtime available per period (hours) B $8.00 $12.00 $60.00 $250.00 $150.00 60 4 160 24 Demand Data (calls) Period Period Period Period Period Period Period Period 1 2 3 4 5 6 7 8 Total Number of Periods 2400 1560 1200 2040 2760 1680 1320 2400 8

Plan E Level with Staffing for Peak Demand- (Table 13-14) D 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 E F G H I J K L M Plan E: Level Aggregate Plan with No Backorders, No Tangible Product

Compute Workforce Needed Maximum Demand Calls per Worker per Period (Reg Time) Workers Needed Number to Hire Number to Fire 2760 40 69 9 0 Detailed Plan Computations Demand (calls) Service hours needed Regular time hours available Undertime hours Cost Calculations for Plan E Regular time labor cost Hiring cost Firing cost Total Cost 1 2400 9600 11040 1440 <-- Need to staff to meet the maximum number of calls Period 2 3 4 5 6 7 8 Total 1560 1200 2040 2760 1680 1320 2400 15360 6240 4800 8160 11040 6720 5280 9600 61440 11040 11040 11040 11040 11040 11040 11040 4800

6240 2880 0 4320 5760 1440 26880 $706,560 $2,250 $0 $708,810 Staff of 69 people creates excessive UT (30%) Cost per service call is $46.15 Plan F Hybrid with Initial Workforce and OT as Needed (Table 13- 16) D E F G H I J 26 Plan F: Hybrid Aggregate Plan Using Initial Workforce and Overtime as Needed 27 28 Detailed Plan Computations Period 1 2 3 4 5 6 29 30 Demand (calls) 2400 1560 1200 2040 2760 1680 31

Service hours needed 9600 6240 4800 8160 11040 6720 32 Regular time hours of capacity 9600 9600 9600 9600 9600 9600 33 Overtime hours needed 0 0 0 0 1440 0 34 Undertime hours 0 3360 4800 1440 0 2880 35 36 Cost Calculations for Plan F 37 Regular time labor cost $614,400 38 Overtime labor cost $17,280 $631,680 39 Total Cost K L M 7 8 Total 1320 2400 15360 5280 9600 61440 9600 9600 76800 0 0 1440 4320 0 16800 Costs reduced by $77K and undertime to 20% Cost per service call reduced to $41.13 (-$5.02) Plan G Chase Plan with Hiring

and Firing (Table 13-18) D 42 Plan G: Chase Aggregate Plan Using 43 44 Beginning Number of Employees 45 46 Detailed Plan Computations 47 48 Demand (calls) 49 Service hours needed 50 Number of employees needed 51 Number of hires 52 Number of fires 53 54 Cost Calculations for Plan G 55 Regular time labor cost 56 Hiring cost 57 Firing cost 58 Total Cost E F G H I J K L

6 1680 6720 42 0 27 7 1320 5280 33 0 9 8 2400 9600 60 27 0 Hiring and Firing 60 1 2400 9600 60 0 0 2 1560 6240 39 0 21 Period 3 4 5 1200 2040 2760 4800 8160 11040 30 51 69 0 21

18 9 0 0 $491,520 $16,500 $9,900 $517,920 Total cost reduced by $114K over Plan F, utilization improved to 100%, and cost per service call $33.72 (-$7.41) Workforce fluctuates from 30-69 people- morale problems Solution?? Compare smaller permanent workforce, more OT?? Aggregate Planning Bottom Line The Aggregate plan must balance several perspectives Costs are important but so are: Customer service Operational effectiveness Workforce morale A successful AP considers each of these factors Planning Links to MPS Role of the MPS Aggregate plan:

Specifies the resources available (e.g.: regular workforce, overtime, subcontracting, allowable inventory levels & shortages) Master production schedule: Specifies the number & when to produce each end item (the anticipated build schedule) Disaggregates the aggregate plan Objectives of Master Schedule The Master Scheduler must: Maintain the desired customer service level Utilize resources efficiently Maintain desired inventory levels The Master Schedule must: Satisfy customer demand Not exceed Operations capacity Work within the constraints of the Aggregate Plan Developing an MPS The Master Scheduler:

Develops a proposed MPS Checks the schedule for feasibility with available capacity Modifies as needed Authorizes the MPS Consider the following example: Make-to-stock environment with fixed orders of 125 units There are 110 in inventory to start When are new order quantities needed to satisfy the forecasted demand? The MPS Record Week BI 1 2 3 4 5 6 7 8 9 10

11 12 50 50 50 50 75 75 75 75 50 50 50 50 110 60 10 -40 BI 1 2 3 4 5 6

7 8 9 10 11 12 50 50 50 50 75 75 75 75 50 50 50 50 60 10 85 35 -40 Forecast Projected available MPS Week

Forecast Projected available MPS 110 125 Projected Available = beginning inventory + MPS shipments forecasted demand The MPS row shows when replenishment shipments need to arrive to avoid a stock out (negative projected available) Revised and Completed MPS Record Week BI 1 2 3 4 5 6 7 8 9 10 11 12 Forecast 50 50

50 50 75 75 75 75 50 50 50 50 Projected available 110 60 10 85 35 85 10 -65 MPS Week 125 1 2 3 4

5 6 7 8 9 10 11 12 Forecast 50 50 50 50 75 75 75 75 50 50 50 50 Projected available 110 60 10 85

35 85 10 60 110 60 10 85 35 125 125 MPS BI 125 125 125 125 Evaluating the MPS Rough-cut capacity planning: An estimate of the plans feasibility Given the demonstrated capacity of critical resources (e.g.: direct labor & machine time), have we overloaded the system? Customer service issues:

Does available-to-promise inventory satisfy customer orders? If not, can future MPS quantities be pulled in to satisfy new orders? Rough Cut Capacity Problem: a shoe company produces two models of dance shoes. Over the past 3 years 72,000 pairs of Model M have been produced using 21,600 direct labor hours and 5760 machine hours, and 108,000 pairs of Model W using 43,200 hours of labor and 12,960 hours of machine time. Step 1: Determine the Planning factors: Total DL hours building model number of units built 21,6000 hours 43,200 hours DL PFM 0.30 hour ; DL PFW 0.40 hour 72,000 pairs 108,000 pairs Labor Factors Direct Labor Planning Factor Total machine hours building model number of units built 5760 hours 12,960 Machine PF M 0.08hour ; MachinePF W 0.12hour 72,000 pairs 108,000 Machine Factors Machine Planning Factor

Step 2:Calculate the Workload Generated by This Schedule A B C Planning Factors (hours per pair) Direct Machine Labor Time Model M 0.30 0.08 Model W 0.40 0.12 D E 4 5 6 7 8 9 10 Quarterly Master Production Schedule (MPS) (pairs) 11 Q1 Q2 Q3 Q4 12 Model M 6000 5500 9500 6500 13 Model W 10000 12000 7500 10100 F Totals 27500 39600 Step 3: Calculate the Capacity Needs for Each Resource for Each Time Period

A B C Direct Labor Hours Required Q1 Q2 Model M 1800 1650 Model W 4000 4800 Totals 5800 6450 15 16 17 18 19 20 21 Machine Time (Hours) Required 22 Q1 Q2 23 Model M 480 440 24 Model W 1200 1440 25 Totals 1680 1880 D E F Q3 2850 3000 5850 Q4 1950 4040 5990

Totals 8250 15840 24090 Q3 760 900 1660 Q4 520 1212 1732 Totals 2200 4752 6952 Workcenter Capacity Needs Based on Historical Percentage Allocation A B C D E 27 Work Center Historical Breakdown 28 Direct Machine 29 Labor Time 30 Center 101 60% 60% 31 Center 102 40% 40% 32 33 Direct Labor Hours Required by Work Center 34 Q1 Q2 Q3 Q4 35 Center 101

3480 3870 3510 3594 36 Center 102 2320 2580 2340 2396 37 Totals 5800 6450 5850 5990 38 39 Machine Time Hours Required by Work Center 40 Q1 Q2 Q3 Q4 41 Center 101 1008 1128 996 1039.2 42 Center 102 672 752 664 692.8 43 Totals 1680 1880 1660 1732 F Totals 14454 9636 24090 Totals 4171.2 2780.8 6952

Using the MPS to Order Promise The authorized MPS is used to promise orders to customers The MPS table is expanded to add customer orders and available-to-promise rows (inventory to satisfy new orders) ATPAction Bucket = (beginning inventory + MPS shipment) (customer orders before next replenishment). Available in period 1 ATP=MPS shipment Customer orders between current MPS shipment and next scheduled replenishment. Available in periods 3,5,7,8, & 11 Week 1 2 3 4 5 6 7 8 9 10 11 12 Forecast 50 50

50 50 75 75 75 75 50 50 50 50 Customer orders 35 25 25 20 0 15 0 0 10 0 0 10 60 10

85 35 85 10 60 110 60 10 85 35 Projected available Available-to-promise MPS BI 110 50 80 110 125 115 115 125 125 125 125 125

Example of Revising the ATP MPS Record: A customer calls marketing willing to purchase 200 units if they can be delivered in period 5. The two tables below show how the system logic would first slot the 200 into period 5 and then how the order would be allocated across periods 1, 3, and 5 and adjusting the ATP row. Stabilizing the MPS Aggregate Planning Across the Organization Aggregate planning, MPS, and rough-cut capacity affection functional areas throughout the organization Accounting is affected because aggregate plan details the resources needed by operations Marketing as the aggregate plan supports the marketing plan Information systems maintains the databases that support demand forecasts and other such information Chapter 13 Homework Hints These problems are based on The BackPack Company. Problem 13.1: level strategy allowing backorders. Calculate the production rate and workforce level. Develop the plan, calculate the costs, and evaluate the strategy. Problem 13.3-4: chase strategy. 3) Calculate the production rate and workforce levels. 4) Develop the plan,

calculate the costs, and evaluate the strategy. Problem 13.5: chase strategy using overtime. Calculate the production rate and workforce level, develop the plan, calculate the costs, and evaluate the strategy. Problem 13.22: using the data given, calculate the projected available and the available-to-promise (ATP).

Recently Viewed Presentations

  • American Sign Language - University of Washington

    American Sign Language - University of Washington

    American Sign Language: Some further points LING 400 Winter 2010 Overview General characteristics Iconicity Phonetic dimensions of ASL Iconicity vs. phonology Simultaneous morphology in ASL Questions from Lance Forshay lecture What is the difference between deaf and Deaf?
  • RECOVERY PROCESS  During muscular exercise, blood vessels in

    RECOVERY PROCESS During muscular exercise, blood vessels in

    The two major components of oxygen recovery are: Alactacid oxygen debit (fast component) The portion of oxygen required to synthesise and restore muscle phosphagen stores (ATP and PC) Lactacid oxygen debit (slow component) the portion of oxygen required to remove...
  • MILITARY STANDARD 105E (MIL-STD-105E) Ir. BUDI NURTAMA, M.

    MILITARY STANDARD 105E (MIL-STD-105E) Ir. BUDI NURTAMA, M.

    PROGRAM DIPLOMA - IPB. MIL-STD-105E. Suatu sistem rencana penarikan sampel atribut (attribute acceptance sampling plan) Dikembangkan dari tabel-tabel inspeksi sampel untuk Army Ordnance, US selama PD II. 1950 - 1963 : 105A, B, C. 1963 - 1989 : 105D. 1989...
  • Segregation in American Schools TODAY

    Segregation in American Schools TODAY

    Gary Orfield and the Civil Rights Project of Harvard University show that 2 million students attend these apartheid schools (a term Kozol uses for schools where the student body is more than 99 percent non-white). Overall, almost three-quarters of Black...
  • Yew Tee Primary School Reflective Learners, Gracious Citizens

    Yew Tee Primary School Reflective Learners, Gracious Citizens

    The PSLE Aggregate Score. Is a sum of scores. Incorporates performance of pupils in all 4 subjects. Allows pupils to be ranked fairly. Basic consideration in the derivation of the aggregate: Must do JUSTICE to the pupils, the aggregate must...
  • Chapter 18 Classification - Weebly

    Chapter 18 Classification - Weebly

    20th Century Font Arial Impact Tahoma Arial Black Comic Sans MS Times New Roman dakota_hearts 1_dakota_hearts Unit B Taxonomy Part 2 Domains ARCHAEA Slide 4 EUBACTERIA Slide 6 Domain Eukarya is Divided into Kingdoms Protista Fungi Plantae Animalia Slide 12...
  • LEGISLATIVE SUPREMACY OF PARLIAMENT : 1 Introduction and

    LEGISLATIVE SUPREMACY OF PARLIAMENT : 1 Introduction and

    Statutes which conflict with international law 'Duallist' Approach Mortensen v. Peters (1906) 14 SLT 227. Cheney v. Conn [1968] 1 All ER 779. LEGISLATIVE SUPREMACY OF PARLIAMENT : 1 The Enrolled Act Rule Edinburgh & Dalkeith Railway v. Wauchope (1842)...
  • Welcome [www.opengroup.org]

    Welcome [www.opengroup.org]

    Welcome Jericho Forum Meeting ... Maintain same level of trust at each layer in multi-layer boundary model Ensure that SCB network protected by "defence in depth" Provide range of cost-effective solutions for above scenarios Provide resilient connectivity as option where...