OPERATIONS MANAGEMENT INTEGRATING MANUFACTURING AND SERVICES FIFTH EDITION Mark M. Davis Janelle Heineke Copyright ©2005, The McGraw-Hill Companies, Inc. PowerPoint Presentation by Charlie Cook, The University of West Alabama

CHAPTER PowerPoint Presentation by Charlie Cook The University of West Alabama Copyright © 2005 The McGraw-Hill Companies. All rights reserved. Aggregate Planning 13

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–3 CHAPTER OBJECTIVES Demonstrate how aggregate planning provides the link between long-range strategic planning and short-range scheduling. Present alternative strategies for matching supply and demand: adjusting supply (an operations function) or adjusting demand (a marketing function). Introduce alternative strategies for developing aggregate plans and ways to identify their strengths and weaknesses. Define marginal costs and total costs as they pertain to aggregate planning. Introduce yield management as a tool for matching supply and demand in service operations.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–4 Managerial Issues Translating long-range strategic plans into daily work schedules for the shop floor. Using aggregate planning to develop intermediate-range plans that link the long-range strategic plan and the short- range operational plan. Developing aggregate plans that match the demand for products with the firm’s ability to supply the products and to do so at minimum cost. Coordinating marketing management and operations to develop an aggregate plan that is both effective and efficient.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–5 Overview of Operational Planning Activities Long-Range Planning –Focuses on strategic issues relation to capacity, process, selection, and plant location. Intermediate-Range Planning –Focuses on tactical issues pertaining to aggregate workforce and material requirements for the coming year. Short-Range Planning –Addresses day-to-day issues of scheduling workers on jobs at assigned work stations.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–6 Overview of Manufacturing Planning Activities Exhibit 13.1

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–7 Intermediate-Range Planning Aggregate Production Planning –The process for determining the most cost effective way to match supply and demand over the next 12–18 months. Item Forecasting –Estimating specific products (and replacement parts), which, when integrated with the aggregate production plan, becomes the output requirement for the master production schedule (MPS). –The process of monitoring and integrating this information is termed demand management.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–8 Intermediate-Range Planning (cont’d) Master Production Scheduling (MPS) –Short-term scheduling of specific end product requirements for the next several quarters. Rough-Cut or Resource Capacity Planning –Determining that adequate production capacity and warehousing are available to meet demand.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–9 Aggregate Production Planning Production Rate –The capacity of output per unit of time (such as units per day or units per week. Workforce Level –Number of workers required to provide a specified level of production.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–10 Required Inputs to the Production Planning System Exhibit 13.2

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–11 Aggregate Production Planning (cont’d) Inventory on Hand –The surplus of units that results when production exceeds demand in a given time period. Backlog (or Stockout) –The deficit in units that results when demand exceeds the number of units produced in a given time period.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–12 Production Planning Strategies Chase Strategy –Matching the production rate to exactly meet the order rate by hiring and laying off workers as the order rate varies. Stable Workforce—Variable Work Hours –Varying output by varying the number of hours worked through flexible schedules or overtime. Level Strategy –Maintain a stable workforce working at constant output rate; absorb demand variations with inventory, backlogs, or lost sales.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–13 Production Planning Strategies (cont’d) Pure Strategy –Either a chase strategy when product exactly matches demand or a level strategy when production remains constant over a specified number of periods. Mixed Strategy –A combination of chase and level strategies to match supply and demand.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–14 Examples of Pure Chase and Pure Level Strategies Exhibit 13.3

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–15 Aggregate Production Planning Relevant Costs –Basic production costs (fixed and variable) –Costs associated with changes in the production rate (e.g., labor costs) –Inventory holding costs –Backlog (stockout) costs Budgets –Aggregate planning helps justify requests for organizational resources.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–16 Aggregate Planning Techniques Trial and Error –Costing out the production alternatives and choosing the one with the lowest cost. Linear Programming Linear Decision Rule Various Heuristic Methods

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–17 Aggregate Planning Techniques (cont’d) Full Costs –All of the actual, out-of-pocket costs associated with a particular aggregate plan. –Used for developing a labor and material budget. Marginal (Incremental) Costs –Unique costs attributable to a particular aggregate plan that are above and beyond those required to build the product by its most economical means.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–18 New England Shirt Company

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–19 New England Shirt Company (cont’d)

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–20 Forecast Demand and Workdays for the D&H Company Exhibit 13.4

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–21 First Alternative: Pure Chase Strategy Exhibit 13.5

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–22 Second Alternative: Pure Level Strategy Exhibit 13.6

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–23 Third Alternative: Minimum Workforce with Subcontracting Strategy Exhibit 13.7

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–24 Fourth Alternative: Constant Workforce with Overtime Strategy Exhibit 13.8

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–25 Summary of Costs for Alternative Aggregate Plans Exhibit 13.9

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–26 Actual Demand Requirement for Full-Time Direct Employees and Full-Time-Equivalent (FTE) Part-Time Employees Exhibit Note: Some workweeks are staggered to include weekdays, but this does not affect the number of workdays per employee. *Full-time days are derived by multiplying the number of days in each month by the number of workers.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–27 Three Possible Plans for the Parks and Recreation Department Exhibit 13.11

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–28 Yield Management Yield (Revenue) Management –The concept used in service operations with high-fixed costs and low-variable costs that attempts to match supply and demand (a chase strategy) to maximize capacity utilization. Yield Management Requires: –The ability to segment the market –High-fixed and low-variable costs where additional sales create more profits –Product perishability (cannot be inventoried) –Lower-priced capacity that can be presold

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 13–29 Comparison of Costs for All Three Alternatives Exhibit 13.12