1 Chapter 13 Production Planning Supplemental Slides

2 OverviewOverview l Production-Planning Hierarchy l Aggregate Planning l Master Production Scheduling l Types of Production-Planning and Control Systems l Wrap-Up: What World-Class Companies Do

3 Chapter 13 Homework – Not for Submission l Problem 13.7 l Use average inventory to calculate inventory holding cost.

Production Planning Horizons l Long-range planning l Greater than one year l Usually with yearly increments l Intermediate-range planning l Six to eighteen months l Usually with monthly or quarterly increments l Short-range planning l Less than six months l Usually with weekly increments

5 Matching Demand Strategy Time Units Production Demand

6 Level Capacity Strategy Time Production Demand Units

7 Aggregate Planning Using “Pure” Strategies —An Example Hiring cost = $100 per worker Firing cost = $500 per worker Inventory carrying cost = $0.50 per pound per quarter Production per employee = 1,000 pounds per quarter Beginning work force = 100 workers QuarterSales Forecast (lb) Spring80,000 Summer50,000 Fall120,000 Winter150,000

Inventory Carrying Cost l Inventory carrying cost: $0.50/unit/period tt+1t+2 $0.50 $1.00 $0 Time

9 Level Capacity Strategy SalesProductionInventory SalesProductionInventory QuarterForecastPlanOn-Hand, Ending Spring80,000100,00020,000 Summer50,000100,00070,000 Fall120,000100,00050,000 Winter150,000100, , ,000 Relevant Cost = 140,000 pounds x $0.50 per pound = $70,000

10 Matching Demand Strategy SalesProduction# Workers# Workers# Workers SalesProduction# Workers# Workers# Workers QuarterForecastPlanNeededHiredFired Spring80,00080, Summer50,00050, Fall120,000120, Winter150,000150, Relevant Cost = (100 workers hired x $100) + (50 workers fired x $500) = $10,000 + $25,000 = $35,000 = $10,000 + $25,000 = $35,000

Aggregate Planning Using the Transportation Method of Linear Programming

12 Aggregate Planning by the Transportation Method of Linear Programming: Example ExpectedRegularOvertimeSubcontract ExpectedRegularOvertimeSubcontract QuarterDemandCapacity Capacity Capacity Regular production cost per unit = $20 Overtime production cost per unit = $25 Subcontracting cost per unit = $28 Inventory carrying cost per unit per period = $3 Beginning inventory = 300 units Desired ending inventory = 100 units

Aggregate Planning Using the Transportation Method of Linear Programming l Sources (‘supply points’): Beginning inventory & production periods. l Destinations (‘demand points’): Sales periods & ending inventory. l Objective: To determine production rates (on regular time and overtime, and by subcontract) that would minimize relevant production and inventory carrying costs, subject to capacity and demand constraints.

Inventory Balance Equations Ending Inventory = Beginning Inventory + Production Level - Deliveries EI t = EI t-1 + (R t + O t +S t ) - D t EI t = Ending Inventory for Period t R t = Regular Time Production in Period t O t = Overtime Production in Period t D t = Deliveries/Sales in Period t S t = Subcontracted Production in Period t