1. © 2008 Prentice Hall, Inc.13 – 1 Operations Management Chapter 13 – Aggregate Planning PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 7e Operations Management, 9e

2. © 2008 Prentice Hall, Inc.13 – 2 Aggregate Planning  Objective is to minimize cost over the planning period by adjusting  Production rates  Labor levels  Inventory levels  Overtime work  Subcontracting rates Determine the quantity and timing of production for the immediate future

3. © 2008 Prentice Hall, Inc.13 – 3 Aggregate Planning  A logical overall unit for measuring sales and output  A forecast of demand for an intermediate planning period in these aggregate terms  A method for determining costs  A model that combines forecasts and costs so that scheduling decisions can be made for the planning period Required for aggregate planning

4. © 2008 Prentice Hall, Inc.13 – 4 Aggregate Planning Quarter 1 JanFebMar 150,000120,000110,000 Quarter 2 AprMayJun 100,000130,000150,000 Quarter 3 JulAugSep 180,000150,000140,000

5. © 2008 Prentice Hall, Inc.13 – 5 Aggregate Planning  Part of a larger production planning system  Disaggregation breaks the plan down into greater detail  Disaggregation results in a master production schedule

6. © 2008 Prentice Hall, Inc.13 – 6 Demand Options  Influencing demand  Use advertising or promotion to increase demand in low periods  Attempt to shift demand to slow periods  May not be sufficient to balance demand and capacity

7. © 2008 Prentice Hall, Inc.13 – 7 Demand Options  Back ordering during high- demand periods  Requires customers to wait for an order without loss of goodwill or the order  Most effective when there are few if any substitutes for the product or service  Often results in lost sales

8. © 2008 Prentice Hall, Inc.13 – 8 Demand Options  Counterseasonal product and service mixing  Develop a product mix of counterseasonal items  May lead to products or services outside the company’s areas of expertise

9. © 2008 Prentice Hall, Inc.13 – 9 Capacity Options  Changing inventory levels  Increase inventory in low demand periods to meet high demand in the future  Increases costs associated with storage, insurance, handling, obsolescence, and capital investment 15% to 40%  Shortages can mean lost sales due to long lead times and poor customer service

10. © 2008 Prentice Hall, Inc.13 – 10 Capacity Options  Varying workforce size by hiring or layoffs  Match production rate to demand  Training and separation costs for hiring and laying off workers  New workers may have lower productivity  Laying off workers may lower morale and productivity

11. © 2008 Prentice Hall, Inc.13 – 11 Capacity Options  Varying production rate through overtime or idle time  Allows constant workforce  May be difficult to meet large increases in demand  Overtime can be costly and may drive down productivity  Absorbing idle time may be difficult

12. © 2008 Prentice Hall, Inc.13 – 12 Capacity Options  Subcontracting  Temporary measure during periods of peak demand  May be costly  Assuring quality and timely delivery may be difficult  Exposes your customers to a possible competitor

13. © 2008 Prentice Hall, Inc.13 – 13 Capacity Options  Using part-time workers  Useful for filling unskilled or low skilled positions, especially in services

14. © 2008 Prentice Hall, Inc.13 – 14 Develop a Plan: Strategies  Chase strategy  Match output rates to demand forecast for each period  Vary workforce levels or vary production rate  Favored by many service organizations

15. © 2008 Prentice Hall, Inc.13 – 15 Develop a Plan: Strategies  Level strategy  Daily production is uniform  Use inventory or idle time as buffer  Stable production leads to better quality and productivity

16. © 2008 Prentice Hall, Inc.13 – 16 Develop a Plan: Strategies  Mixed strategy  Keep daily production uniform  Don’t build inventory  Use overtime and subcontracting to meet demand fluctuations

17. © 2008 Prentice Hall, Inc.13 – 17 Aggregate Planning Options Table 13.1 OptionAdvantagesDisadvantages Some Comments Chase strategy Avoids inventory costs Hiring, layoff, and training costs may be significant. Used where size of labor pool is large. Level strategy Changes in human resources are gradual or none; no abrupt production changes. Inventory holding cost may increase. Shortages may result in lost sales. Applies mainly to production, not service, operations.

18. © 2008 Prentice Hall, Inc.13 – 18 Aggregate Planning Options Table 13.1 OptionAdvantagesDisadvantages Some Comments Varying production rates through overtime or idle time Matches seasonal fluctuations without hiring/ training costs. Overtime premiums; tired workers; may not meet demand. Allows flexibility within the aggregate plan. Sub- contracting Permits flexibility and smoothing of the firm’s output. Loss of quality control; reduced profits; loss of future business. Applies mainly in production settings. Mixed strategy options

19. © 2008 Prentice Hall, Inc.13 – 19 Cost of a plan Cost summary Labor costRegular wages OT wagesOnly for mixed strategy SC costOnly for mixed strategy Hiring/firingHiring costBased on worker hired/fired or change in production rate Firing cost InventoryCarrying cost Total cost

20. © 2008 Prentice Hall, Inc.13 – 20 Example Given data Cost data Wage/hour$15.00 OT pay rate/hour$18.75 Subcontracting rate/unit$35.00 Carrying cost$10.00 Hiring cost/unit$200.00 Firing cost/unit$400.00 Other data Labor-hours/unit1.6 Hours/day8 OT Limit25% Initial condition Workers on roll8 Current inventory25 Safety stock20 Demand forecast MonthDemandDays Jan90022 Feb70018 Mar80021 Apr120021 May150022 June110020

21. © 2008 Prentice Hall, Inc.13 – 21 Example Given data Cost data Wage/hour$15.00 OT pay rate$18.75 Subcontracting rate/unit$35.00 Carrying cost$10.00 Hiring cost/unit$200.00 Firing cost/unit$400.00 Other data Labor-hours/unit1.6 Hours/day8 OT Limit25% Initial condition Workers on roll8 Current production rate40 Current inventory25 Safety stock20 Demand forecast MonthDemandDays Jan90022 Feb70018 Mar80021 Apr120021 May150022 June110020 Compute from input data: Production rate/worker/day: Wage rate per day per worker: = 8 hours x $15/hour = $120

22. © 2008 Prentice Hall, Inc.13 – 22 Example : Chase Plan MonthDemandProduction Jan900895 Feb700 Mar800 Apr1200 May1500 June1100 Production for Jan = Demand – (Initial inventory – Safety stock) i.e. for Jan: 900 – (25 – 20) = 895 Production for all other months = Demand

23. © 2008 Prentice Hall, Inc.13 – 23 Example : Chase Plan MonthDemandProduction Jan900895 Feb700 Mar800 Apr1200 May1500 June1100 Days Production rate 40 2241 1839 2138 2157 2268 2055 Workers = Production rate/Rate per worker e.g. for Jan: 41/5 = 8.2 rounded up to 9 Workers 9 8 8 12 14 11 Wages $23,760 $17,280 $20,160 $30,240 $36,960 $26,400 $154,800 Wages = Worker x Days x Wage per day e.g. for Jan: 9 workers x 22 days x $120/day = $23,760

24. © 2008 Prentice Hall, Inc.13 – 24 Example : Chase Plan MonthDemandProduction Jan900895 Feb700 Mar800 Apr1200 May1500 June1100 Days Production rate 40 2241 1839 2138 2157 2268 2055 Production rate = Production/Days e.g. for Jan: 895/22 = 40.7 or 41 “Hire”“Fire” 10 02 01 190 110 013 3116 Hiring cost = 31 x 200 = $6,200 Firing cost = 16 x 400 = $6,400

25. © 2008 Prentice Hall, Inc.13 – 25 Cost of Chase plan Cost summary Labor costRegular wages$154,800 OT wages SC cost Hiring/firingHiring cost$6,200 Firing cost$6,400 InventoryCarrying cost$1,200 Total cost$168,600 Carrying cost = 20 units safety stock x 6 months x $10 = $1,200

26. © 2008 Prentice Hall, Inc.13 – 26 Example : Level Plan Net demand rate = (Total demand-(Initial inv. – Safety stock))/Total days i.e. = (6200 – (25 – 20))/124 = 49.96 or 50 = Production rate per day MonthDemandDays Jan90022 Feb70018 Mar80021 Apr120021 May150022 June110020 6200124 Production each month = Production rate x No. of days e.g. for Jan: 50 x 22 days = 1100 Production 1100 900 1050 1100 1000 E.I. 25 225 425 675 525 125 25 2000 E.I = Ending inventory = Previous E.I. + Production - Demand e.g. for Jan: 25 + 1100 – 900 = 225 Inventory carrying cost = Total E.I. x Carrying cost i.e. = 2000 x $10 = $20,000

27. © 2008 Prentice Hall, Inc.13 – 27 Cost of Level plan Cost summary Labor costRegular wages$148,800 OT wages SC cost No. of workers = Production rate/Rate per worker = 50/5 = 10 Wages = 10 workers x 124 days x $120/day = $148,800 Hiring/firingHiring cost$2,000 Firing cost InventoryCarrying cost$20,000 Total cost$170,800 Hiring cost = (New production rate – old rate) x $200 i.e. = (50 – 40) x 200 = $2,000 Firing cost = 0

28. © 2008 Prentice Hall, Inc.13 – 28 Cost of the two plans Cost summaryChaseLevel Labor costRegular wages$154,800$148,800 OT wages SC cost Hiring/firingHiring cost$6,200$2,000 Firing cost$6,400$0 InventoryCarrying cost$1,200$20,000 Total cost$168,600$170,800

29. © 2008 Prentice Hall, Inc.13 – 29 Example : Mixed Plan Plan description ●Use 10 workers,  i.e., production capacity = 5 x 10 = 50 units/day ●Produce what is demanded ●If capacity is insufficient use overtime first and then sub- contracting as needed ●Do not accumulate inventory,  i.e. E.I. = Safety stock for all months

30. © 2008 Prentice Hall, Inc.13 – 30 Example : Mixed Plan MonthReq.Days Jan89522 Feb70018 Mar80021 Apr120021 May150022 June110020 Production rate capacity = 50 /day Capacity 1100 900 1050 1100 1000 Capacity = Rate x days, e.g. for Jan: 50 x 22 = 1100 Produ ction 895 700 800 1050 1100 1000 Production = Min{Demand,Capacity}, e.g. for Jan: Min{895,1100} = 895 Shorta ge 0 0 0 150 400 100 Shortage = Req. – Production, e.g. for Apr. = 1200 – 1050 = 150

31. © 2008 Prentice Hall, Inc.13 – 31 Example : Mixed Plan MonthReq.Days Jan89522 Feb70018 Mar80021 Apr120021 May150022 June110020 Production rate capacity = 50 /day Capacity 1100 900 1050 1100 1000 O.T. Capacity = Capacity x OT Limit %, e.g. for Apr. = 1050 x 25% = 262.5 round down Produ ction 895 700 800 1050 1100 1000 Shorta ge 0 0 0 150 400 100 O.T. production = Min{Shortage, OT Capacity) e.g. for Apr. = Min{150, 262} = 150 OT Capacity 275 225 262 275 250 OT 0 0 0 150 275 100 525

32. © 2008 Prentice Hall, Inc.13 – 32 Example : Mixed Plan MonthReq.Days Jan89522 Feb70018 Mar80021 Apr120021 May150022 June110020 Production rate capacity = 50 /day Capacity 1100 900 1050 1100 1000 Subcontracting = Shortage – O.T. production e.g. for May = 400 – 275 = 125 Produ ction 895 700 800 1050 1100 1000 Shorta ge 0 0 0 150 400 100 OT Capacity 275 225 262 275 250 OT 0 0 0 150 275 100 525 SC 0 0 0 0 125 0

33. © 2008 Prentice Hall, Inc.13 – 33 Cost of Mixed plan Cost summary Labor costRegular wages$148,800 OT wages$15,750 SC cost$4,375 Wages = 10 workers x 124 days x $120/day = $148,800 OT Wages = OT production 525 x 1.6 hours/unit x $18.75/hour = $15,750 SC cost = SC quantity 125 x $35 per unit = $4,375

34. © 2008 Prentice Hall, Inc.13 – 34 Cost of Mixed plan Cost summary Labor costRegular wages$148,800 OT wages$15,750 SC cost$4,375 Hiring/firingHiring cost$2,000 Firing cost Hiring cost = (New production rate – old rate) x $200 i.e. = (50 – 40) x 200 = $2,000 Firing cost = 0

35. © 2008 Prentice Hall, Inc.13 – 35 Cost of Mixed plan Cost summary Labor costRegular wages$148,800 OT wages$15,750 SC cost$4,375 Hiring/firingHiring cost$2,000 Firing cost InventoryCarrying cost$1,200 Total cost$172,125 Carrying cost = 20 units safety stock x 6 months x $10 = $1,200

36. © 2008 Prentice Hall, Inc.13 – 36 Cost of the three plans Cost summaryChaseLevelMixed Labor costRegular wages$154,800$148,800 OT wages$15,750 SC cost$4,375 Hiring/firingHiring cost$6,200$2,000 Firing cost$6,400$0 InventoryCarrying cost$1,200$20,000$1,200 Total cost$168,600$170,800$172,125

37. © 2008 Prentice Hall, Inc.13 – 37 Transportation Method Skip Use Excel Solver

38. © 2008 Prentice Hall, Inc.13 – 38 Solver Method EFGHIJKL 74MonthBeginHireFireRateDaysProductionWorkers 75Jan40 228808 76Feb40 187208 77Mar40 218408 78Apr40 218408 79May40 228808 80June40 208008 81Sum =00 Production rate table Cell F75 = Given Cell range: G75:H80 = Solver changing cells Column I = New production rate, Cell I75 = F75 + G75 – H75 Column K = Production, Cell K75 = I75*J75 Column L = No. of workers, Cell L75 = I75/Rate per worker cell Cell F76 = I75

39. © 2008 Prentice Hall, Inc.13 – 39 Solver Method Inventory table Cell F85 = Given Cell range: G85:G90 = K75:K80 Cell range: H85:I90 = Solver changing cells Column K = Ending inventory, Cell K85 = SUM(F85:I85) – J85 Column L = O.T. Limit = RT * OT Limit %, Cell L85 = G85 x $B$16 Cell F86 = K85 EFGHIJKL 84MonthBIRTOTSCDemandEIOT Limit 85Jan25880 9005220 86Feb5720 70025180 87Mar25840 80065210 88Apr65840 1200-295210 89May-295880 1500-915220 90June-915800 1100-1215200 91Sum =00-2330

40. © 2008 Prentice Hall, Inc.13 – 40 Solver Method Cost summary Cell I95 = SUMPRODUCT(L75:L80,J75:J80)*B35 (B35 = wage rate/day) Cell I96 = H91*B7*B14 (B7 = OT pay rate, B14 = Hours/unit) Cell I97 = I91*B8 (B8 = SC cost/unit) Cell I98 = G81*B10 (B10 = Hiring cost/unit) Cell I99 = H81*B11 (B11 = Firing cost/unit) Cell I100 = K91*B9 (B9 = Inventory carrying cost/unit/month) HI 95Regular wages$119,040 96OT wages$0 97SC cost$0 98Hiring cost$0 99Firing cost$0 100Carrying cost-$23,300 101Total cost$95,740

41. © 2008 Prentice Hall, Inc.13 – 41 Solver Method Solver Parameters Set Target cell = Total cost Changing cells = Hire & Fire and OT & SC Constraints OT Production <= OT Limit ($H$85:$H$90 <= $L$85:$L$90) E.I. >= Safety stock ($K$85:$K$90 >= $B$31) OT and SC must be integer ($H$85:$I$90 = Int)

42. © 2008 Prentice Hall, Inc.13 – 42 Solver Solution Inventory table MonthBeginHireFireRateDays Produc tionWorkers Jan4000 228808.00 Feb4000 187208.00 Mar4000 218408.00 Apr401405421114010.86 May54105522121011.00 June5500 20110011.00 150 MonthBIRTOTSCDemandEIOT Limit Jan2588015090020220 Feb207200070040180 Mar408400080080210 Apr80114000120020285 May2012102900150020302.5 June20110000 20275 3050200 Cost summary Regular wages$141,360 OT wages$9,150 SC cost$0 Hiring cost$3,000 Firing cost$0 Carrying cost$2,000 Total cost$155,510

43. © 2008 Prentice Hall, Inc.13 – 43 Cost of the all four plans Cost summaryChaseLevelMixedSolver Labor costRegular wages$154,800$148,800 $141,360 OT wages$12,600 $9,150 SC cost$4,375 $0 Hiring/firingHiring cost$6,200$2,000 $3,000 Firing cost$6,400$0 InventoryCarrying cost$1,200$20,000$1,200 $2,000 Total cost$168,600$170,800$168,975 $155,510