3 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 ForecastFor 2003Quarter 1307,200Quarter 2379,200Quarter 3360,000Quarter 4489,600Total1,536,000
4 Aggregate Planning Goals Meet demand(Sales Forecast)Use capacity efficientlyMeet inventory policyMinimize costLaborInventoryPlant & equipmentSubcontractAt this point, we are making the decisions as to “how” we will meet the aggregate schedules, and “when” each major task with be performed.
5 Aggregate Planning Strategies Pure Strategies Demand Options — change demand:influencing demand (e.g. change price)backordering during high demand periodscounterseasonal product mixing
6 Aggregate Planning Strategies Pure Strategies Capacity Options — change capacity:changing inventory levelsvarying work force size by hiring or layoffsvarying production capacity through overtime or idle timesubcontracting (aka “outsourcing”)using part-time workersThis 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.
7 Aggregate Scheduling Options - Advantages and Disadvantages SomeCommentsChanginginventory levelsChanges inhuman resourcesare gradual, notabruptproductionchangesInventoryholding costs;Shortages mayresult in lostsalesApplies mainlyto production,not serviceoperationsVaryingworkforce sizeby hiring orlayoffsAvoids use ofother alternativesHiring, layoff,and trainingcostsUsed where sizeof labor pool islarge
8 Advantages/Disadvantages - continued OptionAdvantageDisadvantageSomeCommentsVaryingproduction ratesthrough overtimeor idle timeMatches seasonalfluctuationswithouthiring/trainingcostsOvertimepremiums, tiredworkers, may notmeet demandAllowsflexibility withinthe aggregateplanSubcontractingPermitsflexibility andsmoothing of thefirm's outputLoss of qualitycontrol; reducedprofits; loss offuture businessApplies mainlyin productionsettings
9 Advantages/Disadvantages - continued OptionAdvantageDisadvantageSomeCommentsUsing part-timeworkersLess costly andmore flexiblethan full-timeHighturnover/trainingcosts; qualitysuffers;schedulingdifficultGood forunskilled jobs inareas with largetemporary laborpoolsInfluencingdemandTries to useexcess capacity.Discounts drawnew customers.Uncertainty indemand. Hard tomatch demand tosupply exactly.Createsmarketing ideas.Overbookingused in somebusinesses.
11 The Extremes Level Strategy Chase Strategy Production equals sales forecastProduction rate is constant
12 Aggregate Planning Strategies Level scheduling strategyProduce same amount every dayKeep work force level constantVary non-work force capacity or demand optionsOften results in lowest production costsChase scheduling strategyVary the amount of production to match (chase) the sales forecastThis requires changing the workforce (hiring & firing)Mixed strategyCombines 2 or more aggregate scheduling optionsStudents might be asked to suggest what problem level-scheduling enables one to avoid. Why would level-scheduling result in the lowest production costs?
13 The Trial & Error Approach to Aggregate Planning Forecast the demand for each periodDetermine the capacity for regular time, overtime, and subcontracting, for each periodDetermine the labor costs, hiring and firing costs, and inventory holding costsConsider company policies which may apply to the workers, overtime, outsourcing, or to inventory levelsDevelop alternative plans, and examine their total costs
14 The IDES Sales Forecast for 2003 Unit Sales ForecastFor 2003Quarter 1307,200Quarter 2379,200Quarter 3360,000Quarter 4489,600Total1,536,000
15 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).
16 IDES Cost Information Inventory Carrying Cost (per quarter) $ 0.50/unitSubcontracting cost $ 7/unitPay rate – regular time $20/hrPay rate – overtime $30/hrLabor standard per unit hrsCost to increase production $ 3/unitCost to decrease production $ 2/unitIDES has 0 units in inventoryEach Quarter has 60 working daysAt end of 2002, IDES has 150 prod. workersIDES Policy – Maximum of 72,000 units/qtr produced using overtime
17 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/day240 daysThen determine how many workers are needed.Workers needed = 6,400/day = 1605 units/hr X 8 hrs
19 Option 1 Continued: Calculation of Annual Costs Inventory carrying cost:264,000 units X $0.50/unit = $ 132,000Cost to increase capacity:(384, ,000) units X $5/unit = $ 120,000Regular time labor cost:1,536,000 units X $4/unit = $6,144,000Total Annual Cost for Option 1 = $6,396,000
21 Option 2 Continued: Calculation of Annual Costs Inventory Carrying Costs120,000 units X $.50/unit = $ 60,000Regular time labor (150 workers)$4/unit X 1,440,000 units = $5,760,000Overtime labor$6/unit X 72,000 units = $ 432,000Out-sourcing$7/unit X 24,000 units = $ 168,000Total Annual Costs for Option 2 = $6,420,000
22 Option 3 – Vary Production (Workforce) to match Sales Forecast QtrSalesForecastBeginningCapacityChangeNeededCost of1307,200360,000-52,800$105,6002379,200+72,000216,0003-19,20038,4004489,600+129,600388,800Total1,536,000$748,800
23 Option 3 Continued Calculation of Annual Costs Regular time labor costs1,536,000 units X $4/unit = $6,144,000Capacity Change Costs = $ 748,800Total Annual Cost - Option 3 = $6,892,800
24 Annual Cost Comparison of the Aggregate Scheduling Strategies OptionAnnual Cost1. Level – No use of O/T or Outsourcing$6,396,0002. Mixed – Present work force w/ O/T & Outsourcing$6,420,0003. Chase – Vary Production (workforce)$6,892,800
25 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 StrategyChase StrategyMaintain Present work force and use overtime production and sub-contracting as needed
26 The IDES Sales Forecast for 2003 Revised Unit Sales ForecastFor 2003Quarter 1388,000Quarter 2440,000Quarter 3400,000Quarter 4500,000Total1,728,000
27 IDES Cost Information - Revised Inventory Carrying Cost(per quarter) $ 0.75/unitSubcontracting cost $ 7.50/unitPay rate – regular time $20/hrPay rate – overtime $30/hrLabor standard per unit hrsCost to increase production $ 1.50/unitCost to decrease production $ 1/unitIDES has 0 units in inventoryEach Quarter has 60 working daysAt end of 2000, IDES has 140 prod. workersIDES Policy – Maximum of 78,000 units/qtr produced using overtime