1. 1 OM3 Chapter 13 Resource Management © 2012 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

2. 2 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT 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.

3. 3 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT t 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.

4. 4 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT 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? What do you think?

5. 5 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT 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. Resources include materials, equipment, facilities, information, technical knowledge and skills, and of course, people. Objectives: 1.Maximize profits and customer satisfaction. 2.Minimize costs. 3.Maximize benefits to stakeholders.

6. 6 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Exhibit 13.1 Framework for Resource Management Planning for Goods and Services

7. 7 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Resource Planning Framework for Goods and Services Aggregate planning is the development of a long-term output and resource plan in aggregate units of measure.

8. 8 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Resource Planning Framework for Goods and Services 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.

9. 9 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Resource Planning Framework for Goods and Services Execution refers to moving work from one workstation to another, assigning people to tasks, setting priorities for jobs, scheduling equipment, and controlling processes.

10. 10 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Resource Planning Framework for Goods and Services 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.

11. 11 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Exhibit 13.2 Two Levels of Disaggregation for Many Service Organizations

12. 12 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT

13. 13 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT  Demand management  Production-rate changes  Workforce changes  Inventory smoothing  Facilities, equipment, and transportation Aggregate Planning Options Managers have a variety of options in developing aggregate plans in the face of fluctuating demand:

14. 14 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Exhibit 13.3 Example Aggregate Planning Variables and Revenue/Cost Implications

15. 15 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Strategies for Aggregate Planning A level production strategy plans for the same production rate in each time period. A chase demand strategy sets the production rate equal to the demand in each time period.

16. 16 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Exhibit 13.4 Level Aggregate Production Plan for Golden Beverages

17. 17 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Exhibit 13.5 Chase Demand Strategy for Golden Beverages

18. 18 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT

19. 19 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Disaggregation in Manufacturing Three important techniques for disaggregating aggregate plans into executable operations plans:  Master production scheduling (MPS)  Materials requirements planning (MRP)  Capacity requirements planning (CRP)

20. 20 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Exhibit 13.6 Disaggregation Framework for Manufacturing Plans and Schedules

21. 21 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT 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.

22. 22 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Exhibit 13.7 Eight-Week Master Production Schedule Example

23. 23 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT 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.

24. 24 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Disaggregation in Manufacturing MRP depends on understanding three basic concepts: 1.Dependent demand 2.Time-phasing 3.Lot sizing

25. 25 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Disaggregation in Manufacturing Dependent demand is demand that is directly related to the demand of other SKUs and can be calculated without needing to be forecasted. A bill of labor (BOL) is a hierarchical record analogous to a BOM that defines labor inputs necessary to create a good or service. End items are finished goods scheduled in the MPS or FAS that must be forecasted. A parent item is manufactured from one or more components. Components are any item (raw materials, manufactured parts, purchased parts) other than an end item that goes into a higher- level parent item(s). A subassembly always has at least one immediate parent and also has at least one immediate component.

26. 26 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Exhibit 13.8 Example of a Bill of Material and Dependent Demand

27. 27 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Exhibit 13.9 Dependent Demand Calculations

28. 28 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT

29. 29 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Disaggregation in Manufacturing Time Phasing and Lot Sizing in MRP Dependent demand requirements do not need to be ordered at the same time, but are time-phased as needed. Orders may be consolidated to take advantage of ordering economies of scale; this is called lot sizing.

30. 30 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Disaggregation in Manufacturing Time Phasing and Lot Sizing in MRP 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. Time buckets are the time period size used in the MRP explosion process and usually are one week in length.

31. 31 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Disaggregation in Manufacturing An MRP record consists of the following: Gross requirements (GR) are the total demand for an item derived from all of its parents. Scheduled or planned receipts (S/PR) are orders that are due or planned to be delivered. Planned order receipt (PORec) specifies the quantity and time an order is to be received. Planned order release (PORel) specifies the planned quantity and time an order is to be released to the factory or a supplier. Projected on-hand inventory (POH) is the expected amount of inventory on-hand at the beginning of the time period considering on-hand inventory from the previous period plus scheduled receipts or planned order receipts minus the gross requirements.

32. 32 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Production of a single product (A), which requires the components B, C, and D. Exhibit 13.10 Bill of Materials

33. 33 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Exhibit 13.11 Item Inventory File Exhibit 13.12 Example MPS

34. 34 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Disaggregation in Manufacturing Lot sizing is the process of determining the appropriate amount and timing of ordering to reduce costs. Three common lot-sizing methods for MRP: 1.Lot-for-lot (LFL) 2.Fixed order quantity (FOQ) 3.Periodic order quantity (POQ)

35. 35 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT An ordering schedule that covers the gross requirements for each week is called lot-for-lot (LFL). Exhibit 13.13 MRP Record for Item C Using the Lot-for-Lot (LFL) Rule

36. 36 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT The fixed order quantity (FOQ) rule uses a fixed order size for every order or production run. Exhibit 13.14 Item B Fixed Order Quantity (FOQ) Lot Sizing MRP Record

37. 37 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT 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. Exhibit 13.15 Item D Fixed Period Quantity (POQ) Lot Sizing and MRP Record

38. 38 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Exhibit 13.16 Summary of MRP Explosion for Bill of Materials in Exhibit in 13.10

39. 39 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT 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.

40. 40 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Capacity Requirements Planning (CRP) Capacity requirements are computed by multiplying the number of units scheduled for production at a work center by the unit resource requirements and then adding in the setup time. Capacity required (C i ) = Setup time (S i ) + [Processing time (P i )  Order size (Q i )] This is Equation 10.2 in Chapter 10.

41. 41 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT Exhibit 13.17 Work Center D Example Load Report

42. 42 OM3 Chapter 13 Resource Management © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 13 RESOURCE MANAGEMENT In-Line Industries Case Study 1.Evaluate the costs of level and chase demand strategies. 2.Comment on potential operational and managerial impacts of these different strategies in a brief report not to exceed one page. 3.What strategy do you recommend and why?