14 – 1 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Operations Planning and Scheduling 14 For Operations Management, 9e by Krajewski/Ritzman/Malhotra © 2010 Pearson Education

14 – 2 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Across the Organization Operations planning and scheduling is the process of making sure that demand and supply plans are in balance at all levels Sales and operations planning and scheduling Requires managerial inputs from all of the firm’s functions Each function is affected by the plan

14 – Aggregate Planning Responsibility Planning tasks and horizon Determining the quantity and timing of production for the intermediate future (3 – 18 months)

14 – Relationships of the Aggregate Plan Aggregate Plan for Production Demand Forecasts, orders Master Production Schedule, and MRP systems Detailed Work Schedules External Capacity Subcontractors Inventory On Hand Raw Materials Available Work Force Marketplace and Demand Research and Technology Product Decisions Process Planning & Capacity Decisions

14 – 5 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Across the Organization TABLE 14.1| TYPES OF PLANS WITH OPERATIONS PLANNING AND | SCHEDULING TermDefinition Sales and operations plan (S&OP) A time-phased plan of future aggregate resource levels so that supply is in balance with demand throughout the organization Aggregate planAnother term for the sales and operations plan Production planA manufacturing firm’s sales and operations plan that centers on production rates and inventory holdings Staffing planA sales and operations plan for a service firm, which centers on staffing and on other human resource-related factors Resource planAn intermediate, more detailed, step in the planning process that lies between S&OP and scheduling ScheduleA detailed plan that allocates resources over shorter time horizons to accomplish specific tasks

14 – 6 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Aggregation  Product families  Workforce  Time The relationship of operations plans and schedules to other plans  A business plan  An annual plan or financial plan  Resource planning  The lowest planning level is scheduling Stages in Planning and Scheduling

14 – Aggregate Planning Requires  Logical overall unit for measuring sales and outputs  Forecast of demand for intermediate planning period in these aggregate units  Management policy constraints  Method for determining costs*  Model that combines forecasts and costs so that planning decisions can be made* * Discussed in more detail in our next class.

14 – Aggregation Clustering goods or services that have similar demand requirements and common processing, labor, and materials requirements: Individual 1040’s Trust returns Small business returns Tax planning Estate planning # returns – or – # forms – or – # hours # clients – or – # consultations – or – # hours $

14 – 9 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Stages in Planning and Scheduling Business or annual plan Employee and equipment schedules Production order schedules Purchase order schedules Scheduling Employee schedules Facility schedules Customer schedules Scheduling Master production schedule Material requirements planning Resource Planning (manufacturing) Workforce schedule Materials and facility resources Resource Planning (services) Sales Plan Operations Plan Sales and Operations Plan Forecasting Operations strategy Constraint management Figure 14.1 –The Relationship of Sales and Operations Plans and Schedules to Other Plans Assignment I Assignment III Assignment II

14 – 10 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Reactive — matching supply with demand. This becomes challenging when forecasts call for uneven demand patterns (Assignment I results) Proactive — demand management. This is a process of trying to change demand patterns using one or more demand options Managing Demand

14 – 11 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Managing Demand TABLE 14.2| DEMAND AND SUPPLY OPTIONS FOR | OPERATIONS PLANNING AND SCHEDULING Proactive OptionsReactive (Supply) Options Complementary products Anticipation inventory Promotional pricingWorkforce adjustment (hiring or layoffs) Prescheduled appointments Workforce utilization (overtime and undertime) ReservationsPart-time workers and subcontractors Revenue managementVacation schedules BacklogsWorkforce schedules BackordersJob and customer sequence StockoutsExpediting

14 – Sales (Units) Jet Skis Snow-mobiles Total Demand 0 1,000 2,000 3,000 4,000 5,000 JMMJSNJMMJSNJ Complementary Products

14 – 13 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Aggregate plan Sales and Operations Plans Supplier capabilities Storage capacity Materials availability Materials Current machine capacities Plans for future capacities Workforce capacities Current staffing level Operations New products Product design changes Machine standards Engineering Labor-market conditions Training capacity Human resources Cost data Financial condition of firm Accounting and finance Customer needs Demand forecasts Competition behavior Distribution and marketing Figure 14.2 –Managerial Inputs from Functional Areas to Sales and Operations Plans

14 – Meet demand (maximize customer service) Use capacity efficiently (minimize changes in workforce) Meet inventory policy (minimize inventory) Minimize cost (maximize profit)  Labor  Inventory  Plant & equipment  Subcontract  Backorder / stockout costs Comply with organizational constraints Aggregate Planning Goals

14 – 15 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using Spreadsheets Figure 14.4 –Manufacturer’s Plan Using a Spreadsheet and Mixed Strategy

14 – 16 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Sales and Operations Plans Constraints and costs TABLE 14.3 | TYPES OF COSTS WITH SALES AND OPERATIONS PLANNING CostDefinition Regular timeRegular-time wages plus benefits and pay for vacations OvertimeWages paid for work beyond the normal workweek exclusive of fringe benefits Hiring and layoffCost of advertising jobs, interviews, training programs, scrap caused by inexperienced employees, exit interviews, severance pay, and retraining Inventory holdingCapital, storage and warehousing, pilferage and obsolescence, insurance, and taxes Backorder and stockoutCosts to expedite past-due orders, potential cost of losing a customer SubcontractingCosts paid to external suppliers to provide part of the production capacity (this is not listed in the text, but is an important tool for aggregate planning

14 – 17 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Use of Undertime in Aggregate Plans Undertime: A measure of how much of the time that an employee is paid for that is not used to produce anything. This can be a useful metric to: Evaluate how effectively a workforce is used Determine how much reserve capacity is available Provide estimates of time available for training However, it is often a cause for errors in determining actual operating costs since undertime is part of the regular salary already paid to employees. Therefore, when determining overall operating costs for selecting the least expensive aggregate plan it is a good idea to not include calculating undertime costs.

14 – 18 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Use of Subcontracting in Aggregate Plans Subcontracting: Using an external organization to do part of a company’s production requirement. This can be useful to: Handle periods of peak demand Avoid short-term need for added production capacity Provide a backup in case of internal production disruptions caused by equipment breakdowns, fire, etc. However, use of subcontracting has its risks. Potential competitors can gain knowledge of a company’s processes, the cost per unit is higher, material resource planning is more difficult, and there can be variances in product quality between the subcontractor’s production and the company’s.

14 – Aggregate Planning Strategies Level Strategy Chase Strategy Production capacity varies to equal demand Inventory is reduced to zero or safety stock Level – inventory Level– utilization Mixed Strategy Production capacity remains constant (level) Production Output + Inventory equals demand

14 – Chase Strategy  Often called Hiring/Firing Strategy  Production or Service Level = Demand  Minimal inventory = zero or Safety Stock  No increase in inventory beyond minimal level  Use up any excess inventory first  Full-time employees do not build more than needed per period

14 – Level-Inventory Strategy  Requires a manufacturing situation (inventory!)  Constant workforce during plan  Lays off excess workforce or hires additional workforce at beginning of plan to achieve the required level for the plan  Production or Service Level  Average Demand  Anticipation inventory used to satisfy difference when peak demand exceeds regular workforce capacity.  Inventory level built up during low demand periods  Minimal inventory level = zero or Safety Stock (except when needed to avoid backlog)  Full-time employees do not build more than needed for the plan.

14 – Level-Utilization Strategy  Required for services (no inventory!), but can also be effective for manufacturing situations  Constant workforce during plan  Lays off excess workforce or hires additional workforce at beginning of plan to achieve the required level for the plan  Overtime used when peak demand exceeds regular workforce capacity  Significant undertime when demand is low  Minimal inventory level = zero or Safety Stock (except when needed to avoid backlog)  No production to increase inventory beyond minimal level  Use up any excess inventory first  Full-time employees do not build more than needed

14 – Constraints and Costs  Regular-Time Costs  Overtime/Undertime* Costs  Hiring and Layoff Costs Includes costs of advertising jobs, interviews, training, exit interviews, severance pay, and lost productivity  Inventory Holding Costs  Backorder and Stockout Costs  Material Costs  Capacity/inventory limitations  Unit production costs (cost of plan/units produced) *Be sure to not add undertime costs to regular-time costs since they are a part of regular-time costs.

14 – Basic Steps for Aggregate Planning Forecast the demand for each period Determine the capacity required for regular time, overtime, and subcontracting, for each period Determine the labor costs, hiring and firing costs, and inventory holding costs Consider company policies (constraints) which may apply to the workers, production volume, or stock levels Develop alternative plans, and compare their total costs

14 – Determining Production Capacity for a Level Strategy Depends on:  Demand pattern  Backlog/Stockout strategy  Minimal inventory level (safety stock)  Operating constraints (max capacity and/or max inventory) Simple average method  Lower average inventory, may need overtime during peak demand Cumulative average demand method  Higher inventory levels required, can avoid need for overtime

14 – Graphical Approach Production rate per working day Jan Feb Mar Apr May Jun Forecast Demand Level-inventory = production using average monthly forecast demand

14 – But what if demand pattern is reversed? Production rate per working day Jan Feb Mar Apr May Jun Forecast Demand Level-inventory = production using cumulative average monthly forecast demand

14 – 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using Chase and Level Strategies EXAMPLE 14.1 A large distribution center must develop a staffing plan that minimizes total costs using part-time stockpickers First level strategy that meets demand with the minimum use of undertime and not considering vacation scheduling Each part-time employee can work a maximum of 20 hours per week on regular time Instead of paying undertime, each worker’s day is shortened during slack periods and overtime can be used during peak periods Total Forecasted demand

14 – 29 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using Chase and Level Strategies Currently, 10 part-time clerks are employed. They have not been subtracted from the forecasted demand shown. Constraints and cost information are as follows: a.The size of training facilities limits the number of new hires in any period to no more than 10. b.No backorders are permitted. c.Overtime cannot exceed 20 percent of the regular-time capacity in any period. The most that any part-time employee can work is 1.20(20) = 24 hours per week. d.The following costs can be assigned: Regular-time wage rate$2,000/time period at 20 hrs/week Overtime wages150% of the regular-time rate Hires$1,000 per person Layoffs$500 per person

14 – 30 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using Chase and Level Strategies SOLUTION a. Chase Strategy This strategy simply involves adjusting the workforce as needed to meet demand, as shown in Figure Rows in the spreadsheet that do not apply (such as inventory and vacations) are hidden. The workforce level row is identical to the forecasted demand row. A large number of hirings and layoffs begin with laying off 4 part-time employees immediately because the current staff is 10 and the staff level required in period 1 is only 6. However, many employees, such as college students, prefer such part-time work. The total cost is $173,500, and most of the cost increase comes from frequent hiring and layoffs, which add $17,500 to the cost of utilized regular-time costs.

14 – 31 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using Chase and Level Strategies Figure 14.5 – Spreadsheet for Chase Strategy

14 – 32 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using Chase and Level Strategies b. Level-Utilization Strategy To minimize undertime, the maximum use of overtime possible must occur in the peak period. For this particular level strategy (other workforce options are possible), the most overtime that the manager can use is 20 percent of the regular-time capacity, w, so A 15-employee staff size minimizes the amount of undertime for this level strategy. Because the staff already includes 10 part-time employees, the manager should immediately hire 5 more. The complete plan is shown in Figure The total cost is $164, w = 18 employees required in peak period (period 3) w = = 15 employees

14 – 33 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using Chase and Level Strategies Figure 14.6 – Spreadsheet for Level Strategy

14 – 34 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.