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Operations Management Aggregate Planning Chapter 13.

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Presentation on theme: "Operations Management Aggregate Planning Chapter 13."— Presentation transcript:

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2 Operations Management Aggregate Planning Chapter 13

3 Figure 13.1

4 Using our “Seasonally Adjusted Trend Sales Forecast as a starting point, IDES Management has decided upon the following sales forecast for Our goal is to compare the cost of “Aggregate Plan Options” that will deal with this sales forecast. Unit Sales Forecast For 2003 Quarter 1 307,200 Quarter 2 379,200 Quarter 3 360,000 Quarter 4 489,600 Total 1,536,000

5 Meet demand (Sales Forecast) Use capacity efficiently Meet inventory policy Minimize cost –Labor –Inventory –Plant & equipment –Subcontract Aggregate Planning Goals

6 Aggregate Planning Strategies Pure Strategies Demand Options — change demand : influencing demand (e.g. change price) backordering during high demand periods counterseasonal product mixing

7 Capacity Options — change capacity: changing inventory levels varying work force size by hiring or layoffs varying production capacity through overtime or idle time subcontracting (aka “outsourcing”) using part-time workers

8 Aggregate Scheduling Options - Advantages and Disadvantages

9 Advantages/Disadvantages - continued

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11 Advantage/Disadvantage - continued

12 The Extremes Level Strategy Chase Strategy Production equals sales forecast Production rate is constant

13 Level scheduling strategy –Produce same amount every day –Keep work force level constant –Vary non-work force capacity or demand options –Often results in lowest production costs Chase scheduling strategy –Vary the amount of production to match (chase) the sales forecast –This requires changing the workforce (hiring & firing) Mixed strategy –Combines 2 or more aggregate scheduling options Aggregate Planning Strategies

14 The Trial & Error Approach to Aggregate Planning Forecast the demand for each period Determine the capacity for regular time, overtime, and subcontracting, for each period Determine the labor costs, hiring and firing costs, and inventory holding costs Consider company policies which may apply to the workers, overtime, outsourcing, or to inventory levels Develop alternative plans, and examine their total costs

15 The IDES Sales Forecast for 2003 Unit Sales Forecast For 2003 Quarter 1 307,200 Quarter 2 379,200 Quarter 3 360,000 Quarter 4 489,600 Total 1,536,000

16 IDES Manufacturing Example IDES Manufacturing wants to compare the annual (year 2003) costs associated with scheduling using the following three (3) options: Option 1 – Maintain a constant work force during the entire year (Level). Option 2 – Maintain the present work force of 150 and use overtime and sub-contracting as needed (Mixed) Option 3 – Hire/layoff workers as needed to produce the required output (Chase).

17 IDES Cost Information Inventory Carrying Cost (per quarter) $ 0.50/unit Subcontracting cost $ 7/unit Pay rate – regular time $20/hr Pay rate – overtime $30/hr Labor standard per unit 0.2 hrs Cost to increase production $ 3/unit Cost to decrease production $ 2/unit IDES has 0 units in inventory Each Quarter has 60 working days At end of 2002, IDES has 150 prod. workers IDES Policy – Maximum of 72,000 units/qtr produced using overtime

18 Option 1 – Constant Workforce without overtime or subcontracting First, determine the number of workers required to produce the units forecast for Ave. Prod/day = 1,536,000 = 6,400/day 240 days Then determine how many workers are needed. Workers needed = 6,400/day = units/hr X 8 hrs

19 Option 1 Continued: Calculate Inventory Carrying Costs Qtr 6400/day Sales Forecast Inventory Change Ending Inventory 1 384, ,200+76,800 76, , ,200+ 4,800 81, , ,000+24, , , , ,600 0 Total 1,536, ,000

20 Option 1 Continued: Calculation of Annual Costs Inventory carrying cost: 264,000 units X $0.50/unit = $ 132,000 Cost to increase capacity: (384, ,000) units X $5/unit = $ 120,000 Regular time labor cost: 1,536,000 units X $4/unit = $6,144,000 Total Annual Cost for Option 1 = $6,396,000

21 Option 2 – Present Workforce (150) using O/T & subcontracting QtrSales Forecast In-house Production Inv Change End Inv Units Req’d O/TOut Source 1 307, , ,800 52, , , ,200 33, , , , , , ,000 72,000 24,000 Tot al 1,536,000 1,440, ,000 24,000

22 Option 2 Continued: Calculation of Annual Costs Inventory Carrying Costs 120,000 units X $.50/unit = $ 60,000 Regular time labor (150 workers) $4/unit X 1,440,000 units = $5,760,000 Overtime labor $6/unit X 72,000 units = $ 432,000 Out-sourcing $7/unit X 24,000 units = $ 168,000 Total Annual Costs for Option 2 = $6,420,000

23 Option 3 – Vary Production (Workforce) to match Sales Forecast Qtr Sales Forecast Beginning Capacity Change Needed Cost of Capacity Change 1 307,200360,000-52,800$105, ,200307,200+72, , ,000379,200-19,200 38, ,600360, , ,800 Total1,536,000$748,800

24 Option 3 Continued Calculation of Annual Costs Regular time labor costs 1,536,000 units X $4/unit = $6,144,000 Capacity Change Costs = $ 748,800 Total Annual Cost - Option 3 = $6,892,800

25 Annual Cost Comparison of the Aggregate Scheduling Strategies OptionAnnual Cost 1. Level – No use of O/T or Outsourcing $6,396, Mixed – Present work force w/ O/T & Outsourcing $6,420, Chase – Vary Production (workforce) $6,892,800

26 Homework Problem – Due at the beginning of class Tuesday March 11 Use the Revised IDES Cost information shown on the following two slides to evaluate the following scheduling options: Level Strategy Chase Strategy Maintain Present work force and use overtime production and sub-contracting as needed

27 The IDES Sales Forecast for 2003 Revised Unit Sales Forecast For 2003 Quarter 1 388,000 Quarter 2 440,000 Quarter 3 400,000 Quarter 4 500,000 Total 1,728,000

28 IDES Cost Information - Revised Inventory Carrying Cost (per quarter) $ 0.75/unit Subcontracting cost $ 7.50/unit Pay rate – regular time $20/hr Pay rate – overtime $30/hr Labor standard per unit 0.2 hrs Cost to increase production $ 1.50/unit Cost to decrease production $ 1/unit IDES has 0 units in inventory Each Quarter has 60 working days At end of 2000, IDES has 140 prod. workers IDES Policy – Maximum of 78,000 units/qtr produced using overtime


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