Planning Horizons Today3 Months 1 year5 years Planning Horizon Short-range plans Job assignments Ordering Job scheduling Dispatching Intermediate-range plans Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans Long-range plans R&D New product plans Capital expenses Facility location, expansion Responsible: Operations managers, supervisors, foremen Responsible: Operations managers Responsible: Top executives

Short-range Resource Allocation Decisions Production Planning and Product Mix Decisions –How to make the most effective use of existing resource supplies? (TJ Nut example, Chpt. 3.11) Make or Buy Decisions –Given limited available material and labor resources for upcoming periods, which products should be produced in-house and which should be subcontracted? (Chpt. 3.8) Labor Scheduling –How to effectively utilize the workforce in the daily operations to produce the scheduled outputs? (Arlington Bank example)

TJ Inc. Product Mix Problem Three nut products: regular, deluxe and holiday mixes Each mix consists of different proportions of five nuts: almonds, brazils, filberts, pecans and walnuts Management wants an analysis and recommendation for the product mix problem

Objective Determine how many pounds of each product mix should be produced so that profits will be maximized for the fall season. Assume that the nuts are perishable and cannot be used beyond this season.

Constraints Limited supply of each type of nut Existing customer orders that must be satisfied Demand is greater than capacity

Profit contribution & costs Profit contribution which includes labor production and packaging variable costs are $1.65/lb for regular, $2.00/lb for deluxe, and $2.25 for holiday. Cost per pound of the nuts included in each mix are $ for regular, $1.07 for deluxe, and $1.10 for holiday. These costs are sunk however and should not be included in the product mix decision.

Sunk -versus- Variable Costs Only the variable costs are relevant in optimization models. Sunk costs do not need to be added as a separate term in the objective. The problem can be optimized without it and the sunk cost subtracted later. Sunk costs should never be allocated across the coefficients of the decision variables. This will influence the values identified for the decision variables and result in inappropriate allocations.

LP Formulation maximize 1.65 X1+ 2 X X3 subject to.15X1+.2X2+.25X3<=6000 almond lbs.25X1+.2X2+.25X3<=7500 brazil lbs.25X1+.2X2+.15X3<=7500 filbert lbs.10X1+.2X2+.25X3<=6000 pecan lbs.25X1+.2X2+.20X3<=7500 walnut lbs X1 >=10000 lbs X2 >=3000 lbs X3>=5000 lbs

Optimal Product Mix Produce 17,500 lbs of regular mix, 10,625 lbs of deluxe mix and 5000 lbs of holiday mix. Resulting total profit is $24,925 ($61,375 less the $36,450 sunk cost of the nuts)

Aggregate Planning An intermediate time horizon “macro” approach for developing a production plan that determines what resource capacity a firm will use to meet its forecasted demand.

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

Aggregate Planning Decisions Employment Level –Resizing decisions –Use of part-time, idle-time, over-time Contract Negotiations –Suppliers –Subcontractors Inventory Levels

Disaggregation Aggregate plans must be disaggregated into specific production plans for each unique product and planning period In manufacturing this process is referred to as Master Production Scheduling where the company determines how much of each product to produce each period

Capacity Planning A long-term strategic decision that establishes a firm’s overall level of production resources Examples of Decision Variables Involved: –Building or closing structures or facilities –Upgrading equipment –Acquiring new businesses or selling existing subcomponents –Outsourcing services