SALES AND OPERATIONS PLANNING AGGREGATE PLANNING PRODUCTION PLANNING OPERATIONS PLANNING How to meet effectively and efficiently forecasted requirements of the market (demand) in midterm horizon planning?

PLANNING AND CONTROL ACTIVITIES IN MANUFACTURING ENTERPRISE Strategic planning Sales & Operations Plan. (aggregate planning) Master Production Scheduling (MPS) Material Requirements Plan. Purchasing Control Production Control Input /Output Control Detailed Capacity Req. P. Rough-cut Capacity Plan. Resource Planning Plan Execution Demand Forcasts Customers Orders Resources Production

SALES AND OPERATIONS PLANNING IN ENTERPRISE Sales and Operations Planning (SOP). The process of planning future aggregate resources levels so that supply - capacity is in balance with demand. SOP for a service firm: staffing plan. SOP for a manufacturing firm: production plan (concentrate on production and inventory levels projected for several time periods (months) into the future. SOP must balance supply with demand to achieve the best compromise between such performance measures as: customer service, work force stability, costs and profit.

AGGREGATE PRODUCTION PLANNING Objectives of Production Planning: Elaboration of Production Plan which will: be consistent with enterprise policy meet demand requirements be realistic within capacity constraints minimize costs Inputs Business or annual financial plan Aggregate Demand forecast Capacity and other resource constraints Available decision options and their costs Outputs Production levels for the forthcoming periods Inventory levels Employment levels Over time levels Subcontracting levels Capacity levels

Requirements to production planning EFFECTIVENESS- meeting of market requirements FEASIBILITY - production plan should be balanced with available resources EFFICIENCY- costs minimization through efficient and rational resource utilization

AGGREGATION IN PRODUCTION PLANNING Production planning uses a single measure of output – aggregation of products into commmon output unit. OBJECTIVE of aggregation – to simplify planning proces Product family – a group of products that have similar demand requirements and common proces, labor and materials requirements. Usually 1-4 families in enterprise Ways of aggregation According to design similarity According to process similarity According to labor similarity Aim of aggregation – building the production, resources and financial plans without having to schedule each of the company’s hundreds of products and employees individualy. Advantages of aggregation - midterm planning simplification, more accurate demand forcasts

DEMAND VERS SUPPLY (CAPACITY) STATIC ASPECTS Total Demand in Planning Horizon Case A D = C Case B D  C Case C D  C D C D C D C Time Time Time demand capacity Necessary Condition for Balancing D  C in planning horizon

DEMAND VERS CAPACITY (SUPPLY) DYNAMIC ASPECTS Average demand in planning periods Czas P ZP demand capacity Necessary Condition to Balance D  C in planning perid

PLANNING DECISION-MAKING OPTIONS Demand Options Objective – change demand model Vary prices, vary advertising, vary promotion Back ordering during high- demand periods and carry finished goods inventory – vary the level of customer service Add contracyclical products - offer complementary products Capacity (production) Options Objective – change capacity model (supply model) Varying workforce size by hiring or layoffs (increase or decrease) Varying production rates through overtime or idle time Using part-time workers Changing inventory levels Subcontract work to other firms Eight Aggregate Planning Options

Contracyclical Demand Products Sales (Units) 5,000 Total demand 4,000 Snowmobiles 3,000 2,000 1,000 Jet Skis (water scooter) J M M J S N J M M J S N J Time (Months) 44

PRODUCTION PLANNING STRATEGIES LEVEL STRATEGY (level capacity, level scheduling) Maintaining a constant production rate and work force level over the planning horizon Advantages: there are no production increasing and decreasing costs, no hiring and firing costs. Strategy used in many „lean production” enterprises) CHASE DEMAND STRATEGY (produce to demand) Strategy that sets production equal to forecasted demand. Involves hiring and laying off employees to match the demand forecast No inventory but there are production increasing and decreasing costs MIXED STRATEGY Strategy that uses two or more options such as production rate, inventory and overtime to set a feasible production plan. Combination of the eight options must be investigated to achieve minimum cost

LEVEL STRATEGY PP  SP SP PP Time Production plan Sales plan Inventory Capacity Regular Used

CHASE DEMAND STRATEGY PP = SP SP PP Production Plan Sales plan Time Inventory Time Capacity Regular Used

Types of costs considered in production planning The planner considers several types of costs when preparing sales and operations (production) plans: Regular- time costs (regular time wages paid to workers) Overtime costs. Typically 150% of regular- time wages. Hiring and layoff costs. Inventory holding costs Backorder and stockout costs.

METHODS FOR AGGREGATE PRODUCTION PLANNING GRAPHICAL and CHARTING METHODS MATHEMATICAL METHODS Planning process based on „trials and errors” approach Graphical and Charting Methods with Sreadsheeds applications Planning process based on mathematical methods Linear programming Transportation method of linear programming Transportation matrix technique Dynamic programming Heuristic techniques (management coefficients model) Simulation models Aggregate planning methods that work with a few variables to compare projected demand with existing capacity. Aggregate planning methods that use production planning models with planning function that produces an optimal plan for minimizing costs.

GRAPHICAL AND CHARTING METHODS Charting methods are trial and error approaches that do not quarantee an optimal production plan, but they require only limited computations and can be performer by clerical staff. D P Cumulative Demand Cumulative Production D C Projected Demand v. Capacity Time Time Graph of Forcast Demand and Capacity Graph of cumulative level Production and Demand Steps in the production planning Determine the forcast demand in each period Determine capacity for regular time, overtime, and subcontracting in each period. Find labor costs, hiring and layoff costs and inventory holding costs Consider policy that company may apply to the workers and to stock levels. Develop alternative plans and examine their total costs. Choose the proper plan.

PRODUCTION PLANNING MODEL (Function) Current status Production rates Work force size Inventory levels Production plan Production rates Work force size Inventory levels Production planning function Demand forecasts Capacity constraints Equipment Labour Materials Overtime Extra shifts Subcontracting

Planning period (month) Example 500 Total 1.800 Planning period (month) Demand forcast [unit] 200 06 05 04 03 02 01 300 400 Capacity Regular labor = 300 unit/m Overtime = 75 unit/m Subcontracting = 50 unit/m Initial inventory = 0 Final inventory = 0 Costs Regular time production = 20 $/unit Overtime production = 30 $/unit Subcontracting = 40 $/unit Holding = 7 $/unit/m Shortages = 50 $/unit/m Increase production = 35 $/unit/m Decrease production = 35 $/unit/m Time D C demand capacity

Plan A – LEVEL CAPACITY STRATEGY (pure) PRODUCTION PLAN [units] Planning period DEMAND [units] Regular Inventory Shortages January 200 300 400 1.800 500 300 100 February 300 200 March 300 200 April 300 100 May 300 100 June 300 100 TOTAL [units] 1.800 700 100 Partial costs [$] 36.000 4.900 5.000 TOTAL COSTS = $45.900

Plan B – CHASE DEMAND STRATEGY (pure) PRODUCTION PLAN [units] Planning period Demand [units] Regular Increase Decrease Inventory January 200 300 400 1,800 500 200 300 400 500 1,800 36,000 100 February March 100 April 100 May 100 June 300 Total [units] 300 400 Partial costs [$] 10,500 14,000 TOTAL COSTS = $60.500

PRODUCTION PLAN [units] Plan C – MIXED STRATEGY PRODUCTION PLAN [units] Planning period DEMAND [units] Regulartime Overtime Subcontracting Inventory January 200 300 400 1,800 500 300 1,800 36,000 100 February 200 March 200 April 100 May 75 25 June 100 TOTAL [unit] 75 25 700 PARTIAL COSTS [unit] 2,250 1,000 4,900 TOTAL COSTS = $44.150

Example of Transportation Matrix use in Production Planning 500 Total 1.800 Planning period (month) Demand forcast [unit] 200 06 05 04 03 02 01 300 400 Capacity Regular labor =300 unit/m Overtime =75 unit/m Subcontracting = 50 unit/m Initial inventory = 0 Final inventory = 0 Costs Regular time production = 2 $/unit Overtime production = 3 $/unit Subcontracting = 6 $/unit Holding = 3 $/unit/m Increase production = 0 $/unit/m Decrease production = 0 $/unit/m Increasing of regular time capacity above 300 units is imposible Zwiększenie zdolności produkcyjnej czasu nominalnego powyżej 300 szt. jest niemożliwe Time D C demand capacity

Transportation matrix Period 1 2 3 4 5 6 Unused capacity Capacity R 8 11 14 17 300 O 9 12 15 18 50 S 21 75 Demand 200 400 500

Transportation matrix Period 1 2 3 4 5 6 Unused capacity Capacity R 8 11 14 17 300 O 9 12 15 18 50 S 21 75 Demand 200 400 500 200 100 200 100 300 50 300 50 75 300 50 75 200 100

Production Plan PLAN [units] Planning period Demand [units] Regular Overtime Subcontract Inventory January 200 300 400 1.800 500 200 February 200 March 300 50 50 Appril 300 50 75 75 May 300 50 75 June 200 TOTAL [units] 1.500 150 150 125 Partial cost [zł] 3000 450 900 375 Total cost = $ 4725