1 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. RESOURCE MANAGEMENT CHAPTER 13 DAVID A. COLLIER AND JAMES R. EVANS OM2

2 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO1 Describe the overall frameworks for resource planning framework in both goods-producing and service-providing organizations. LO2 Explain options for aggregate planning. LO3 Describe how to evaluate level production and chase demand strategies for aggregate planning. LO4 Describe ways to disaggregate aggregate plans using master production scheduling and material requirements planning. LO5 Explain the concept and application of capacity requirements planning. l e a r n i n g o u t c o m e s Chapter 13 Learning Outcomes

3 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. he corporate office just doesn’t get it! They set a budget and staffing level that doesn’t fit this location. I can’t do the work and ensure accuracy of the patient’s prescriptions when the corporate office gives me an annual budget for only two pharmacists and two pharmacy technicians,” exclaimed Bill Carr, the manager of a retail pharmacy in a high-growth suburban location. The store was part of a national pharmaceutical chain with over 1,000 locations in the United States. The pharmacy was open 16 hours a day on Monday through Saturday and 10 hours on Sunday. Carr established two shifts for these professionals but they were now exhausted. The most senior pharmacist had already threatened to quit if something wasn’t done to correct the problem soon. Carr also had considered reducing the time the store was open, but that would hurt store revenue. Chapter 13 Resource Management What do you think? Think about planning a party or some student- related function. What resources do you need to pull it off, and how might you plan to ensure that you have everything at the right time and in the right quantity?

4 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Resource Management deals with the planning, execution, and control of all the resources that are used to produce goods or provide services in a value chain. Typical objectives of resource management are to: 1.Maximize profits and customer satisfaction, 2.Minimize costs, or 3.Maximize benefits to stakeholders. Resources include materials, equipment, facilities, information, technical knowledge and skills, and of course, people. Chapter 13 Resource Management

5 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. One framework for resource planning is divided into three levels:  Aggregate planning (Level 1),  Disaggregation (Level 2), and  Execution (Level 3). Resource management for service-producing organizations generally does not require as many intermediate levels of planning (Level 2) as it does for goods-producing firms. Chapter 13 Resource Management

6 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Aggregate planning is the development of a long-term output and resource plan in aggregate units of measure (see Exhibit 13.1). These typically define output levels over a planning horizon of 1 to 2 years, focusing on product families or total capacity requirements. Aggregate planning later translates into monthly or quarterly production plans, taking into account capacity limitations such as supply availability, equipment, and labor. Chapter 13 Resource Management

7 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 13.1 Framework for Resource Management Planning for Goods and Services

8 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Level 2 planning, or disaggregation, is the process of translating aggregate plans into short-term operational plans that provide the basis for weekly and daily schedules and detailed resource requirements. Level 3 focuses on execution, moving work from one workstation to another, assigning people to tasks, setting priorities for jobs, scheduling equipment, and controlling processes. Chapter 13 Resource Management

9 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Disaggregating Service Plans Most service organizations do not require as many levels of intermediate planning (Level 2) as goods-producing firms. Level 1 and 2 planning are often combined in service businesses. Chapter 13 Resource Management

10 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 13.2 Two Levels of Disaggregation for Many Service Organizations

11 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Disaggregating Service Plans One way to think of disaggregation in services is to go from aggregate planning (Levels 1 and 2) to front line resource (staff) capacity and scheduling decisions (Level 3). Manufacturers use and need an intermediate level of planning (Level 2), where work-in- process and subassemblies reside. Chapter 13 Resource Management

12 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Aggregate planning is most challenging when demand fluctuates over time. Managers have a variety of options in developing aggregate plans in the face of fluctuating demand:  Demand management  Production-rate changes  Workforce changes  Inventory smoothing  Facilities, equipment, and transportation Chapter 13 Resource Management

13 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 13.3 Example Aggregate Planning Variables and Revenue/Cost Implications

14 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Aggregate Planning Decisions and Strategies Demand Management:  Cooperation between marketing and manufacturing to create more feasible aggregate demands. Production-Rate Changes:  Utilizing overtime/undertime, subcontracting during peak months. Workforce Changes:  Hiring and firing employees—often not a feasible alternative. Chapter 13 Resource Management

15 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Aggregate Planning Decisions and Strategies Inventory Changes:  Building inventories or carrying back orders. Facilities, Equipment, and Transportation:  Typically a long-term investment, although companies can rent equipment for peak seasons. Chapter 13 Resource Management

16 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Aggregate Planning for Golden Beverages: Golden Beverages makes two major products—Old Fashioned and Foamy Delite root beers. The company operates a continuous flow factory and has a fluctuating forecast, with seasonal peaks in the summer and winter holiday season. Golden utilizes a level production strategy, planning for the same production rate in each time period. An alterative to level production is a chase demand strategy, setting the production rate equal to the demand in each time period. Chapter 13 Resource Management

17 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 13.4 Level Aggregate Production Plan for Golden Beverages

18 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 13.5 Chase Demand Strategy for Golden Beverages

19 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Can We Use Aggregate Planning for a Tennis Club? Services face many of the same issues in planning and managing resources as do manufacturing firms. Consider a 145-acre large oceanfront resort located in Myrtle Beach, South Carolina, that is owned and operated by a major corporation. The tennis club and four courts are located next to the Sport & Health Club. All courts are lighted for night play, and there is no more room to build additional tennis courts. The demand for tennis lessons is highly seasonal, with peak demand in June, July, and August. In the summer months when resort rooms are 98 percent to 100 percent occupied, requests for lesson time far exceed capacity, and owner and hotel guest complaints were increasing dramatically. The manager of the health club might consider a chase resource strategy with a base full-time tennis staff of two people and the use of part-time staff for much of the year. Or, she might consider a level strategy with four full-time staff and no part-time staff. Chapter 13 Resource Management

20 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Disaggregation in Manufacturing Disaggregation (Level 2) provides the link between aggregate plans developed at Level 1 and detailed execution at Level 3 (see Exhibit 13.6). This provides the basis for detailed purchasing and production schedules for all of the components that comprise the finished good or support service delivery. There are three major components for disaggregating aggregate plans into Level 2 plans.  Master production scheduling (MPS)  Materials requirements planning (MRP)  Capacity requirements planning (CRP) Chapter 13 Resource Management

21 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 13.6 Disaggregation Framework for Manufacturing Plans and Schedules

22 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Disaggregation in Manufacturing Master Production Schedule (MPS) A master production schedule (MPS) is a statement of how many finished items are to be produced and when they are to be produced. Typically developed for weekly time periods over a 6- to 12-month horizon. Chapter 13 Resource Management

23 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 13.7 Eight-Week Master Production Schedule Example

24 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Disaggregation in Manufacturing Materials Requirements Planning (MRP) Materials Requirements Planning (MRP) is a forward-looking, demand-based approach for planning the production of manufactured goods and ordering materials and components to minimize unnecessary inventories and reduce costs. The output of an MRP system is a schedule for obtaining raw materials and purchased parts, a detailed schedule for manufacturing and controlling inventories, and financial information that drives cash flow, budget, and financial needs. Chapter 13 Resource Management

25 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Three Major Concepts of MRP Systems 1.Dependent demand is demand that is directly related to the demand of other SKUs and can be calculated without needing to be forecasted. Demand for materials needed to produce finished goods is dependent on the number of finished goods planned. 2.Time phasing: all dependent demand requirements do not need to be ordered at the same time, but rather are time-phased as necessary. 3.Lot sizing is the process of determining the appropriate amount and timing of ordering to reduce costs. Chapter 13 Resource Management

26 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 13.8 Example of a Bill of Material and Dependent Demand

27 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 13.9 Dependent Demand Calculations

28 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Where’s the Surgery Kit? A 374-bed hospital with nine operating rooms in Houston, Texas, uses bills of materials and master production scheduling to plan surgeries and the surgical kits needed for a seven-day planning horizon. Bills of labor (BOL) are used to schedule surgeons, nurses, and orderlies. The bill of material (BOM) file contains the materials, instruments, and supplies needed for various surgical procedures. End items are specific surgery procedures with a lot size of one. The concept and methods of dependent demand are alive and well in this surgery suite! Chapter 13 Resource Management

29 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MRP explosion is the process of using the logic of dependent demand to calculate the quantity and timing of orders for all subassemblies and components that go into and support the production of finished goods. Lot sizing is the process of determining the appropriate amount and timing of ordering to reduce costs. There are three common lot sizing methods for MRP: 1.Lot-for-lot (LFL) 2.Fixed order quantity (FOQ) 3.Periodic order quantity (POQ) Each of these is illustrated in the following examples. Chapter 13 Resource Management

30 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit Production of a single product (A), which requires the components B, C, and D. Bill of Material

31 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibits 13.11, Item Inventory File; Example MPS

32 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit An ordering schedule that covers the gross requirements for each week is called lot-for-lot (LFL). MRP Record for Item C Using the Lot-for-Lot (LFL) Rule

33 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit The fixed order quantity rule (FOQ) uses a fixed order size for every order or production run. Item B Fixed Order Quantity (FOQ) Lot Sizing MRP Record

34 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit The periodic order quantity (POQ) orders a quantity equal to the gross requirement quantity in one or more predetermined time periods minus the projected on- hand quantity of the previous time period. Item D Fixed Period Quantity (POQ) Lot Sizing and MRP Record

35 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit Summary of MRP Explosion for Bill of Material in Exhibit in 13.10

36 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Capacity Requirements Planning (CRP) Capacity Requirements Planning (CRP) is the process of determining the amount of labor and machine resources required to accomplish the tasks of production on a more detailed level, taking into account all component parts and end items in the materials plan. Chapter 13 Resource Management

37 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Capacity planning information is provided in a work center load report. Basic MRP does not consider capacity limitations (assumes infinite capacity so no rescheduling, etc.), so CRP addresses this issue. Chapter 13 Resource Management

38 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit Work Center D Example Load Report

39 OM2, Ch. 13 Resource Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. In-Line Industries Case Study ILI would like to evaluate the level and chase demand strategies. Your report should address not only financial impacts but potential operational and managerial impacts of the different strategies. Chapter 13 Resource Management