© 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

© 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

© 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

© 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

© 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

© 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

© 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

© 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

© 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

© 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

© 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

© 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

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

© 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

© 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

© 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

© 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.

© 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

© 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

© 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$10.00 Hiring cost/unit$ Firing cost/unit$ 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 Apr May June110020

© 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$10.00 Hiring cost/unit$ Firing cost/unit$ 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 Apr May June Compute from input data: Production rate/worker/day: Wage rate per day per worker: = 8 hours x $15/hour = $120

© 2008 Prentice Hall, Inc.13 – 22 Example : Chase Plan MonthDemandProduction Jan 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

© 2008 Prentice Hall, Inc.13 – 23 Example : Chase Plan MonthDemandProduction Jan Feb700 Mar800 Apr1200 May1500 June1100 Days Production rate Workers = Production rate/Rate per worker e.g. for Jan: 41/5 = 8.2 rounded up to 9 Workers 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

© 2008 Prentice Hall, Inc.13 – 24 Example : Chase Plan MonthDemandProduction Jan Feb700 Mar800 Apr1200 May1500 June1100 Days Production rate Production rate = Production/Days e.g. for Jan: 895/22 = 40.7 or 41 “Hire”“Fire” Hiring cost = 31 x 200 = $6,200 Firing cost = 16 x 400 = $6,400

© 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

© 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 = or 50 = Production rate per day MonthDemandDays Jan90022 Feb70018 Mar80021 Apr May June Production each month = Production rate x No. of days e.g. for Jan: 50 x 22 days = 1100 Production E.I E.I = Ending inventory = Previous E.I. + Production - Demand e.g. for Jan: – 900 = 225 Inventory carrying cost = Total E.I. x Carrying cost i.e. = 2000 x $10 = $20,000

© 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

© 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

© 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

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

© 2008 Prentice Hall, Inc.13 – 31 Example : Mixed Plan MonthReq.Days Jan89522 Feb70018 Mar80021 Apr May June Production rate capacity = 50 /day Capacity O.T. Capacity = Capacity x OT Limit %, e.g. for Apr. = 1050 x 25% = round down Produ ction Shorta ge O.T. production = Min{Shortage, OT Capacity) e.g. for Apr. = Min{150, 262} = 150 OT Capacity OT

© 2008 Prentice Hall, Inc.13 – 32 Example : Mixed Plan MonthReq.Days Jan89522 Feb70018 Mar80021 Apr May June Production rate capacity = 50 /day Capacity Subcontracting = Shortage – O.T. production e.g. for May = 400 – 275 = 125 Produ ction Shorta ge OT Capacity OT SC

© 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

© 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

© 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

© 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

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

© 2008 Prentice Hall, Inc.13 – 38 Solver Method EFGHIJKL 74MonthBeginHireFireRateDaysProductionWorkers 75Jan Feb Mar Apr May June Sum =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

© 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 85Jan Feb Mar Apr May June Sum =

© 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, Total cost$95,740

© 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)

© 2008 Prentice Hall, Inc.13 – 42 Solver Solution Inventory table MonthBeginHireFireRateDays Produc tionWorkers Jan Feb Mar Apr May June MonthBIRTOTSCDemandEIOT Limit Jan Feb Mar Apr May June 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

© 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