Operations Management Aggregate Planning Chapter 13

Figure 13.1

Using our “Seasonally Adjusted Trend Sales Forecast as a starting point, IDES Management has decided upon the following sales forecast for 2003. 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

Aggregate Planning Goals Meet demand (Sales Forecast) Use capacity efficiently Meet inventory policy Minimize cost Labor Inventory Plant & equipment Subcontract At this point, we are making the decisions as to “how” we will meet the aggregate schedules, and “when” each major task with be performed.

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

Aggregate Planning Strategies Pure Strategies 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 This slide and the next list various scheduling strategies. The four slides following provide a framework for discussing the advantages and disadvantages of the pure strategies.

Aggregate Scheduling Options - Advantages and Disadvantages Some Comments Changing inventory levels Changes in human resources are gradual, not abrupt production changes Inventory holding costs; Shortages may result in lost sales Applies mainly to production, not service operations Varying workforce size by hiring or layoffs Avoids use of other alternatives Hiring, layoff, and training costs Used where size of labor pool is large

Advantages/Disadvantages - continued Option Advantage Disadvantage 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 Subcontracting Permits flexibility and smoothing of the firm's output Loss of quality control; reduced profits; loss of future business Applies mainly in production settings

Advantages/Disadvantages - continued Option Advantage Disadvantage Some Comments Using part-time workers Less costly and more flexible than full-time High turnover/training costs; quality suffers; scheduling difficult Good for unskilled jobs in areas with large temporary labor pools Influencing demand Tries to use excess capacity. Discounts draw new customers. Uncertainty in demand. Hard to match demand to supply exactly. Creates marketing ideas. Overbooking used in some businesses.

Advantage/Disadvantage - continued Option Advantage Disadvantage Some Comments Back ordering during high- demand periods May avoid overtime. Keeps capacity constant Customer must be willing to wait, but goodwill is lost. Many companies backlog. Counterseasonal products and service mixing Fully utilizes resources; allows stable workforce. May require skills or equipment outside a firm's areas of expertise. Risky finding products or services with opposite demand patterns.

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

Aggregate Planning Strategies 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 Students might be asked to suggest what problem level-scheduling enables one to avoid. Why would level-scheduling result in the lowest production costs?

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

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

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).

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

Option 1 – Constant Workforce without overtime or subcontracting First, determine the number of workers required to produce the units forecast for 2003. Ave. Prod/day = 1,536,000 = 6,400/day 240 days Then determine how many workers are needed. Workers needed = 6,400/day = 160 5 units/hr X 8 hrs

Option 1 Continued: Calculate Inventory Carrying Costs Qtr Production @ 6400/day Sales Forecast Inventory Change Ending Inventory 1 384,000 307,200 +76,800 76,800 2 379,200 + 4,800 81,600 3 360,000 +24,000 105,600 4 489,600 -105,600 Total 1,536,000 264,000

Option 1 Continued: Calculation of Annual Costs Inventory carrying cost: 264,000 units X $0.50/unit = $ 132,000 Cost to increase capacity: (384,000-360,000) 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

Option 2 – Present Workforce (150) using O/T & subcontracting Qtr Sales Forecast In-house Production Inv Change End Units Req’d O/T Out Source 1 307,200 360,000 +52,800 52,800 2 379,200 -19,200 33,600 3 4 489,600 -33,600 96,000 72,000 24,000 Total 1,536,000 1,440,000

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

Option 3 – Vary Production (Workforce) to match Sales Forecast Qtr Sales Forecast Beginning Capacity Change Needed Cost of 1 307,200 360,000 -52,800 $105,600 2 379,200 +72,000 216,000 3 -19,200 38,400 4 489,600 +129,600 388,800 Total 1,536,000 $748,800

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

Annual Cost Comparison of the Aggregate Scheduling Strategies Option Annual Cost 1. Level – No use of O/T or Outsourcing $6,396,000 2. Mixed – Present work force w/ O/T & Outsourcing $6,420,000 3. Chase – Vary Production (workforce) $6,892,800

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

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

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