OPSM 301 Operations Management Koç University OPSM 301 Operations Management Class 22: Aggregate Planning (Chapter 13) Zeynep Aksin zaksin@ku.edu.tr

Announcements Reminder: Midterm 2 next Tuesday on 20/12 at 17:00 CAS-Z08 Aggregate Planning: will skip AP in services; however OPSM 405 Service Operations Management has an extensive module on this topic Linear Programming: Quantitative Module B; will skip graphical solution and sensitivity analysis parts

Example 2: Finding Cu and Co A textile company in UK orders coats from China. They buy a coat from 250€ and sell for 325€. If they cannot sell a coat in winter, they sell it at a discount price of 225€. When the demand is more than what they have in stock, they have an option of having emergency delivery of coats from Ireland, at a price of 290. The demand for winter has a normal distribution with mean 32,500 and std dev 6750. How much should they order from China??

Daily workforce and customer Operations Planning Process Planning Long range Strategic Capacity Planning Manufacturing Aggregate Planning Service Master Production Medium range Scheduling Material Requirement Planning Order Scheduling Weekly workforce and Short range Customer scheduling Daily workforce and customer scheduling

Relationships of the Aggregate Plan Plan for Production Demand Forecasts, orders Master Schedule, and MRP systems Detailed Work Schedules External Capacity Subcontractors Inventory On Hand Raw Materials Available Work Force Marketplace and Demand Research and Technology Product Decisions Process Planning & Capacity

Provides the quantity and timing of production for intermediate future Aggregate Planning Provides the quantity and timing of production for intermediate future Usually 3 to 18 months into future Combines (‘aggregates’) production Often expressed in common units Example: Hours, dollars, equivalents (e.g., FTE students) Involves capacity and demand variables Point out that aggregate scheduling involves disaggregation of, or adding detail to, the aggregate schedules.

Aggregate Planning Goals Meet demand 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 Capacity Options — change capacity: changing inventory levels (recall from earlier session that these are known as seasonal inventory) varying work force size by hiring or layoffs varying production capacity through overtime or idle time subcontracting using part-time workers

Aggregate Planning Strategies Pure Strategies Demand Options — change demand: influencing demand backordering during high demand periods counterseasonal product mixing

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 Less costly and High Good for workers more flexible turnover/training unskilled jobs in than full-time costs; quality areas with large workers suffers; temporary labor scheduling pools difficult Influencing Tries to use Uncertainty in Creates demand excess capacity. demand. Hard to marketing ideas. Discounts draw match demand to Overbooking new customers. supply exactly. 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 backorder. 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 demand Production rate is constant It may be helpful to stress that the extremes depicted above are the opposite ends of a continuum.

Example 1: Total sales for the year = $130 million May Sept. Nov. Dec. Jan Feb Mar Apr Jun. July Aug Oct. Monthly sales forecasts ($ million) 7.6 8.4 10.2 9.0 11.8 7.0 8.6 12.6 14.4 12.8 15.8 11.8

Cumulative sales forecasts Cumulative Chart 120- May Sept. Nov. Dec. Jan Feb Mar Apr Jun. July Aug Oct. Cumulative sales forecasts ($ million)

Chase Strategy 120- Cumulative sales forecasts ($ million) May Sept. Nov. Dec. Jan Feb Mar Apr Jun. July Aug Oct. Cumulative sales forecasts ($ million) Cumulative sales and cumulative production

Level Strategy 120- Cumulative sales forecasts Cumulative sales May Sept. Nov. Dec. Jan Feb Mar Apr Jun. July Aug Oct. Cumulative sales Cumulative sales forecasts ($ million) excess Cumulative production shortage

Labor Capacity Requirements Chase Strategy Level Strategy Sales in labor-hours (000)s Variable work force Working days Variable work week Variable inventory January 253 20 1581 28.4 3099 February 280 21 1667 29.6 5933 March 340 23 1848 33.1 8037 April 300 20 1875 33.7 9737 May 393 22 2235 40.2 9706 …. … … ….. …. …. December 393 20 2458 44.2 0 Total 4333 243 2229 40 7035

Illustration of calculations Level production Total sales = $130 million Total labor-hours required = $130 million/$30 = 4.333 M labor-hrs. Total hours = 243 days . 8 hrs/day = 1944 hrs Number of workers = 4.333 M / 1944 = 2229 Variable workforce for January Sales in labor-hours = $7.6 M /$30 = 253,333 Working hours = 20 days . 8 hrs/day = 160 hours Variable work force = 1581

Variable workweek for January Sales in labor-hours = $7.6 M /$30 = 253,333 Number of workers = 2229 (average required, constant) Variable monthly load for a worker = 253,333/2229 = 113.65 Variable workweek = 113.65/4 = 28.4 hours/week Variable inventory for January (Level production) Production in January = (2229 workers)(20 days/month)(8 hrs/day) = 356,640 Demand for January = 253,333 (labor-hours) Inventory = 103,307 labor-hours Inventory ($) = (103,307)($30/labor-hour) = $309,920

Evaluating Alternatives Hiring cost = $200 per employee Firing cost = $500 per employee Regular labor cost = $5 per hour Overtime premium cost = $2.5 per hour Undertime premium cost = $3 per hour Inventory carrying cost = 2% per month (applied to the monthly ending inventory) Beginning labor force = 1,583 persons Beginning inventory = 0

Alternative 1: Variable Workforce Zero-inventory, hire-fire as required Starting Required Hire-fire Cost Workforce Workforce January 1,583 1,583 0 0 February 1,583 1,667 84 $16,800 March 1,667 1,848 181 $36,200 April 1,848 1,875 27 $5,400 May 1,875 2,235 360 $72,000 June 2,235 1,326 -909 $454,500 …. ….. ……. ……. ……... December 3,292 2,458 -834 $417,000 Total $2,708,300

Alternative 2: Level Production constant worforce :2229, Variable Inventory Initial hire = (2229-1583) = 646 Cost = 129,200 Initial Production Required Ending Cost Inventory (labor-hours) Inventory January 0 356,640 253,333 103,307 $61984.2 …. ….. ……. ……. ……... Total $1,882,420

Example 2: National Steel Corporation (NSC) produces a special-purpose steel used in the aircraft and aerospace industries. The Sales Department of NSC has received orders of 2400, 2200, 2700, and 2500 tons of steel for each of the next 4 months. NSC can meet these demands by producing the steel, by drawing from its inventory, or by using any combination of the two alternatives.

The production costs per ton of steel during each of the next 4 months are projected to be $7400, $7500, $7600, and $7650. Because costs are rising each month-due to inflationary pressures- NSC might be better off producing more steel than it needs in a given month and storing the excess. Production capacity cannot exceed 4000 tons in any one month. The monthly production is finished at the end of the month, at which time the demand is met. Any remaining steel is then stored in inventory at a cost of $120 per ton for each month it remains there.

If the production level is increased from one month to the next, then the company incurs a cost of $50 per ton of increased production to cover the additional labor and/or overtime. Each ton of decreased production to cover the additional labor and/or overtime. Each ton of decreased production incurs a cost of $30 to cover the benefits of unused employees. The production level during the previous month was 1800 tons, and the beginning inventory is 1000 tons. Inventory at the end of the fourth month must be at least 1500 tons to cover anticipated demand. Formulate a production plan for NSC that minimizes the total costs over the next 4 months.

Data for the Production-Planning Problem of NSC Month 1 2 3 4 Demand (tons) 2400 2200 2700 2500 Production cost ($/ton) 7400 7500 7600 7650 Inventory cost ($/ton/month) 120 120 120 120 Starting inventory = 1000 tons Ending inventory (at the end of 4th month) = 1500 tons Starting production level = 1800 tons Cost of changing production level = $50 per ton (increase) $30 per ton (decrease)