1. 1 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Aggregate Planning and learning Curves Chapter outline: 1.The Nature of Aggregate Planning 2.Tradeoffs between Production and Inventory 3.Nonlinear cost and demand functions Introducing Overtime Introducing Double or Premium Time Tradeoffs between Level and Chase Strategies 4.Learning Curves Estimating Learning Curves Steep Learning Curves

2. 2 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Key Points 1. The term "aggregate" implies that planning is done for groups of products, or product types (i.e., product "families") rather than for specific or individual products. 2. The goal of aggregate planning is to achieve output objectives at the lowest possible cost. 3. Planners take into account projected demand, capacity, and costs of various options in devising an aggregate plan. 4. Among the variables available to planners are adjustments in output rate, employment level (including overtime/under time, and subcontracting).

3. 3 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM 5. Due to the nature of aggregate planning, it is seldom possible to structure a plan that is guaranteed optimal. Instead, planners usually resort to trial-and-error methods to achieve an acceptable plan.

4. 4 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Objectives of aggregate planning 1. Minimize costs / maximize profits - 2. Maximize Customer service - 3. Minimize Inventory Investments - 4. Minimize Changes in production rates - 5. Minimize Changes in workforce levels – 6. Maximize utilization of plant and equipment.

5. 5 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Among the aggregate planning strategies, Planners might try to: 1. Maintain a level work force and meet demand variations in some other manner. 2. Maintain a steady rate of output, and use some combination of inventories and subcontracting to meet demand variations. 3. Match demand period by period with some combination of work force variations, subcontracting, and inventories. 4. It is unlikely that planners would attempt to match demand period by period by varying employment levels alone because that would tend to be costly, disruptive, and result in low employee morale.

6. 6 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM In order to translate an aggregate plan into meaningful terms for production, it must be disaggregated (i.e., broken down into specific product requirements) to determine labor, material, and inventory requirements.

7. 7 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM The Aggregate Planning Strategies The are two types of aggregate planning strategies: CHASE strategy LEVEL strategy Choosing a strategy usually depends on the cost entailed and company policy. In order to effectively plan, and in addition to knowledge of company policy, estimates of the following items must be available to planners: a. Demand for each period b. Capacity for each period c. Costs (regular time, overtime, subcontracting, backorders, etc.)

8. 8 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM In this strategy, production is set to match forecasted demand. When the forecast goes UP: operations must react by increasing production, often by working overtime, adding a shift, or hiring new employees. When the forecast goes DOWN: operations must react by lowering production, often by Working fewer hours Laying off employees Chase Strategy

9. 9 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM If X items are forecasted to be needed over a long period, a fixed percentage of this amount is produced each period. For example, if 12,000 units are forecasted to be needed over the next year, the firm will produce one-twelfth each month, or 1,000. When demand is lower than production, inventory increases When demand exceeds production, inventory decreases The steady production results in lower production costs, but the larger inventories required to avoid a stock out result in higher inventory costs Level Strategy

10. 10 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM The Nature of Aggregate Planning The CHASE and the LEVEL strategies are rarely used in their pure form. Hybrid of the two is usually more cost-effective and efficient What-if scenario management is ideal for analyzing tradeoffs and determining the best aggregate plan

11. 11 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Tradeoffs between Production and Inventory Bricks and Tiles Corporation is making plans for the production of bricks for the coming year. The total requirements are 3000 bricks, and the corporation has enough facilities and labor to make 250 bricks a month The corporation currently following the level strategy and makes bricks at a steady rate of 250 per month Yesterday End Inventory (Unit Make+Start inventory)- Demand (Start inventory+End inventory)* inventory cost /2

12. 12 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Introducing Overtime According to Chase Strategy: When demand forecast goes up -------------------------  production must be increase ( working overtime) To meet the large demand, The bricks and Tiles Corporation will not build up inventories in advance, but rather it will produce the extra bricks using overtime. If labor required < 500, labor required * 25, else (500 * 25)+ (labor required –500) * 37.3

13. 13 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Introducing Overtime using a nonlinear function The result of introducing overtime is drop in the cost to $166,250, and a savings of $4,750. But is this a better way to operate ? Its NOT all the time. Some time this plan may cost more !!!! This plan can be useful or operate better and result in a savings only if excess labor can be put to productive or when less labor can be used without cost. To minimizing the total production cost The Cost Function must be determined. This function depends on whether overtime is required or not It’s a nonlinear function When the number of labor hours needed is under 500, the cost function is – N*25 When the number of labor hours needed is over 500, the cost function consists of two parts: first part is the cost of straight time labor = 500 * 25 second part is the overtime labor cost = (N- 500)* 37.5 Total labor cost = 500 * 25 + (N-500)* 37.5

14. 14 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Introducing Overtime using a nonlinear function Find the optimum solution (minimum cost) using Solver with a constraint in the value of the inventory which must be nonnegative If labor required < 500, labor required * 25, else (500 * 25)+ (labor required –500) * 37.3

15. 15 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Introducing Double or Premium Time The method of solution for nonlinear problems is not as reliable as that for linear problems. Linear programming is a mathematical procedure for finding the one best solution to a problem described by a linear equation and subject to linear constraints. Not all overtime is treated the same. Often, overtime worked in the weekend, holidays, or on third shift has an extra cost.this overtime is called double time or premium time.

16. 16 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM The problem now is to balance the work assignments with inventory. To get ready for large demand, should they build inventories or wait and go on overtime and premium. Should follow a Chase or Level strategy When inventory cost are low, a substantial inventory is build up to help meet the demand When inventory costs are high, it is better to use more overtime and premium time Introducing Double or Premium Time

17. 17 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Introducing Double or Premium Time

18. 18 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Introducing Double or Premium Time How to avoid solution that has overtime or double time, but not straight time? This could happened in an intermediate solution while Excel is searching for a solution, but not in the final solution, when costs are minimized. If additional straight-time capacity were available, the model shift overtime or double overtime work and lower costs even further. The same logic keeps premium overtime from being used before standard overtime When production quantities increase, cost seem to increase in a nonlinear manner

19. 19 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Tradeoffs between Level and Chase Strategies The Bricks and Tiles Corporation is currently producing at a Level rate to meet current demand, but production has been well automated and workers do not need much training to run the machines. Management is considering a reduction in capacity when the demand is low, and an expansion when demand is high; that is, management is considering a strategy to chase demand. Such a strategy will reduce inventory cost, but introduces the the issue of hiring and firing workers Chase strategy can has a bad effect on the morale of the worker The corporation want to base their decision on a cost analysis

20. 20 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Tradeoffs between Level and Chase Strategies The yearly demand is 2,400 million tiles, and 200 million are produced each month. The current approach does not allow for hiring and firing As a result, inventories balloon during the year, and inventory costs are more than twice the actual cost of production

21. 21 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Tradeoffs between Level and Chase Strategies The problem is to minimize the total cost under the constraints, including the constraint of hiring and firing Since production exactly matches demand, there is no inventory cost. Modification on the model involve lumps hiring and firing into one categories This solution allows for too many firings in any one period, so the model has to modify

22. 22 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Tradeoffs between Level and Chase Strategies Modification on the the following model involve place a limit on firings only because the management do not desire to limit hiring.

23. 23 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Tradeoffs between Level and Chase Strategies Here, cost of firing is limited to $500, which corresponds to ten firings. The results can be summarized as follows: Aggregate PlanCost Steady Production$380,000 Unlimited Firing$151,250 Limited Firing$243,625 ___________________________________________________________________

24. 24 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Learning Curves The general concept of learning curve theory is that the time required to produce a second units of product is less then that required for the first unit, the third unit can be produced faster than the second, and so on. Learning curves apply not only to an individual learning a new task but also to an organization learning to produce a new product or use a new production process

25. 25 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Learning Curves Learning curve theory provides the formula for any learning rate. Formula to calculate learning curve: Exponent = LN(Learning rate)/LN(2) Time to make the nth unit = (Time to make the first unit) * n Exponent Example: If the first unit takes 100 hours with a 90% learning rate, and you want to predict the time it will take to make unit number 4 then: Exponent = LN(Learning rate)/LN(2) = -0.152 Time to make the 4th unit = 100 * 4 ^-0.152 = 81 hours

26. 26 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Learning Curves The following worksheet calculate any learning curve and display a chart of the curve

27. 27 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Estimating Learning Curves To estimate the learning rate for individuals, the curve-fitting (cubic function), can be applied to existing data for individuals who have previously learned the same task 1- Average the data of a ten individuals to complete a task at various skills levels 2- the curve estimate using observation as x and exponent as coefficient 3- compute the squared deviations and total squared deviation 4- Use the Excel Solver to minimize the total squared deviation by varing the learning rate Estimating the learning rate for individuals learning a new task

28. 28 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Estimating Learning Curves Estimating the firm learning rate Naturally, the firm does not learn the same task more than once, however, learning rates for similar task can be used Since the organization is made up of many individuals, variation in learning tend to average out, so the firm’s learning rate tends to be more consistent over time and tasks than individual learning rates.

29. 29 BIS APPLICATION 2002-2003 MANAGEMENT INFORMATION SYSTEM Steep Learning Curves A Learning curve for a process with a 50% learning rate This process is very easy to learn Each time you double production, you cut the production time in half The curve is very steep A Learning curve for a process with a 90% learning rate This process is leaned much more slowly Each doubling of production gives only 10% reduction in processing time The curve much less steep