Ch 13 Aggregate Planning

Ch 13 Aggregate Planning - Operations Management Chapter 13...

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Unformatted text preview: Operations Management Chapter 13 – Chapter Aggregate Planning Aggregate 13 – 1 Outline Global Company Profile: Global Anheuser-Busch Anheuser-Busch The Planning Process The Nature of Aggregate Planning Aggregate Planning Strategies Capacity Options Demand Options Mixing Options to Develop a Plan 13 – 2 Outline – Continued Methods for Aggregate Planning Graphical Methods Mathematical Approaches Comparison of Aggregate Planning Comparison Methods Methods 13 – 3 Outline – Continued Aggregate Planning in Services Restaurants Hospitals National Chains of Small Service National Firms Firms Miscellaneous Services Airline Industry Yield Management 13 – 4 Learning Objectives When you complete this chapter you should be able to: 1. Define aggregate planning 2. Identify optional strategies for Identify developing an aggregate plan developing 3. Prepare a graphical aggregate plan 13 – 5 Learning Objectives When you complete this chapter you should be able to: 1. Solve an aggregate plan via the Solve transportation method of linear programming programming 2. Understand and solve a yield Understand management problem management 13 – 6 Anheuser-Busch Anheuser-Busch produces nearly 40% Anheuser-Busch of the beer consumed in the U.S. of Matches fluctuating demand by brand Matches to plant, labor, and inventory capacity to achieve high facility utilization to High facility utilization requires Meticulous cleaning between batches Effective maintenance Efficient employee and facility scheduling 13 – 7 Anheuser-Busch Product-focused facility with high fixed Product-focused costs costs High utilization requires effective High aggregate planning of the four basic stages of production stages Selection and delivery of raw materials Brewing process from milling to aging Packaging Distribution 13 – 8 Aggregate Planning Determine the quantity and timing of Determine production for the immediate future production Objective is to minimize cost over the Objective planning period by adjusting planning Production rates Labor levels Inventory levels Overtime work Subcontracting rates Other controllable variables 13 – 9 Aggregate Planning Required for aggregate planning A logical overall unit for measuring sales logical and output and A forecast of demand for an intermediate forecast planning period in these aggregate terms planning A method for determining costs A model that combines forecasts and model costs so that scheduling decisions can be made for the planning period be 13 – 10 The Planning Process Long-range plans (over one year) Research and Development New product plans Capital investments Facility location/expansion Top executives Intermediate-range plans (3 to 18 months) Operations managers Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans Short-range plans (up to 3 months) Operations managers, supervisors, foremen Responsibility Job assignments Ordering Job scheduling Dispatching Overtime Part-time help Planning tasks and horizon Figure 13.1 13 – 11 Aggregate Planning Jan 150,000 Quarter 1 Feb 120,000 Quarter 2 May 130,000 Quarter 3 Aug 150,000 Mar 110,000 Apr 100,000 Jun 150,000 Jul 180,000 Sep 140,000 13 – 12 Aggregate Planning Figure 13.2 13 – 13 Aggregate Planning Combines appropriate resources Combines into general terms into Part of a larger production planning Part system system Disaggregation breaks the plan Disaggregation down into greater detail down Disaggregation results in a master Disaggregation production schedule production 13 – 14 Aggregate Planning Strategies 1. Use inventories to absorb changes in Use demand demand 2. Accommodate changes by varying Accommodate workforce size workforce 3. Use part-timers, overtime, or idle time to Use absorb changes absorb 4. Use subcontractors and maintain a stable Use workforce workforce 5. Change prices or other factors to Change influence demand influence 13 – 15 Capacity Options Changing inventory levels Increase inventory in low demand Increase periods to meet high demand in the future the Increases costs associated with Increases storage, insurance, handling, obsolescence, and capital investment 15% to 40% investment Shortages can mean lost sales due Shortages to long lead times and poor customer service customer 13 – 16 Capacity Options Varying workforce size by hiring Varying or layoffs or Match production rate to demand Training and separation costs for Training hiring and laying off workers New workers may have lower New productivity productivity Laying off workers may lower Laying morale and productivity morale 13 – 17 Capacity Options Varying production rate through Varying overtime or idle time overtime Allows constant workforce May be difficult to meet large May increases in demand increases Overtime can be costly and may Overtime drive down productivity drive Absorbing idle time may be Absorbing difficult difficult 13 – 18 Capacity Options Subcontracting Temporary measure during Temporary periods of peak demand periods May be costly Assuring quality and timely Assuring delivery may be difficult delivery Exposes your customers to a Exposes possible competitor possible 13 – 19 Capacity Options Using part-time workers Useful for filling unskilled or low Useful skilled positions, especially in services services 13 – 20 Demand Options Influencing demand Use advertising or promotion to Use increase demand in low periods increase Attempt to shift Attempt demand to slow periods periods May not be May sufficient to balance demand and capacity and 13 – 21 Demand Options Back ordering during highBack demand periods demand Requires customers to wait for an Requires order without loss of goodwill or the order the Most effective when there are few Most if any substitutes for the product or service or Often results in lost sales 13 – 22 Demand Options Counterseasonal product and Counterseasonal service mixing service Develop a product mix of Develop counterseasonal items counterseasonal May lead to products or services May outside the company’s areas of expertise expertise 13 – 23 Aggregate Planning Options Option Changing inventory levels Advantages Changes in human resources are gradual or none; no abrupt production changes. Avoids the costs of other alternatives. Disadvantages Inventory holding cost may increase. Shortages may result in lost sales. Hiring, layoff, and training costs may be significant. Some Comments Applies mainly to production, not service, operations. Varying workforce size by hiring or layoffs Used where size of labor pool is large. Table 13.1 13 – 24 Aggregate Planning Options Option Varying production rates through overtime or idle time Subcontracting Advantages Disadvantages Some Comments Allows flexibility within the aggregate plan. Matches seasonal Overtime fluctuations premiums; tired without hiring/ workers; may not training costs. meet demand. Permits flexibility Loss of quality and smoothing of control; reduced the firm’s output. profits; loss of future business. Applies mainly in production settings. Table 13.1 13 – 25 Aggregate Planning Options Option Advantages Disadvantages High turnover/ training costs; quality suffers; scheduling difficult. Some Comments Good for unskilled jobs in areas with large temporary labor pools. Using partIs less costly and time workers more flexible than full-time workers. Influencing demand Tries to use excess capacity. Discounts draw new customers. Uncertainty in Creates marketing demand. Hard to ideas. match demand to Overbooking supply exactly. used in some businesses. Table 13.1 13 – 26 Aggregate Planning Options Option Advantages Disadvantages Some Comments Back ordering May avoid during highovertime. Keeps demand capacity periods constant. Customer must be Many companies willing to wait, but back order. goodwill is lost. Counterseasonal product and service mixing Fully utilizes resources; allows stable workforce. May require skills or equipment outside the firm’s areas of expertise. Risky finding products or services with opposite demand patterns. Table 13.1 13 – 27 Methods for Aggregate Planning A mixed strategy may be the best mixed way to achieve minimum costs way There are many possible mixed There strategies strategies Finding the optimal plan is not Finding always possible always 13 – 28 Mixing Options to Develop a Plan Chase strategy Match output rates to demand Match forecast for each period forecast Vary workforce levels or vary Vary production rate production Favored by many service Favored organizations organizations 13 – 29 Mixing Options to Develop a Plan Level strategy Daily production is uniform Use inventory or idle time as buffer Stable production leads to better Stable quality and productivity quality Some combination of capacity Some options, a mixed strategy, might be the best solution the 13 – 30 Graphical Methods Popular techniques Easy to understand and use Trial-and-error approaches that do Trial-and-error not guarantee an optimal solution not Require only limited computations 13 – 31 Graphical Methods 1. Determine the demand for each period 2. Determine the capacity for regular time, Determine overtime, and subcontracting each period overtime, 3. Find labor costs, hiring and layoff costs, Find and inventory holding costs and 4. Consider company policy on workers and Consider stock levels stock 5. Develop alternative plans and examine Develop their total costs their 13 – 32 Roofing Supplier Example 1 Month Jan Feb Mar Apr May June Expected Demand 900 700 800 1,200 1,500 1,100 6,200 Production Days 22 18 21 21 22 20 124 Demand Per Day (computed) 41 39 38 57 68 55 Table 13.2 Average Average requirement requirement Total expected demand Number of production days 6,200 124 = = 50 units per day 13 – 33 Roofing Supplier Example 1 Production rate per working day Forecast demand 70 – Level production using average 70 Level 60 – 60 50 – 50 40 – 40 30 – 30 monthly forecast demand monthly 0– Jan 22 Feb 18 Mar 21 Apr 21 May 22 June 20 = Month = Number of working days 13 – 34 Figure 13.3 Roofing Supplier Example 2 Cost Information Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs) Table 13.3 $ 5 per unit per month $10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit $600 per unit rc e workfo nt consta – Plan 1 13 – 35 Roofing Supplier Example 2 Month Production at Cost Information 50 Units per Day Inventory carry cost Demand Forecast 900 Jan 1,100 Subcontracting cost per unit Feb Average pay rate Monthly Ending Inventory Inventory $ 5Changeper month per unit 200 $10 +200 per unit +200 400 $ 5 per hour ($40 per day) +250 650 $ 7 per hour (above 8 hours per day) -150 500 1.6 hours per unit 100 -400 $300-100unit per $600 per unit 900 700 Mar 800 Overtime pay rate 1,050 Apr 1,050 1,200 Labor-hours to produce a unit May 1,100 1,500 Cost of increasing1,000production rate daily June 1,100 (hiring and training) Cost of decreasing daily production rate (layoffs) 0 1,850 Total units of inventory carried over from one t workforce n month to – conext = 1,850 units the nsta Table 13.3 Plan 1 Workforce required to produce 50 units per day = 10 workers 13 – 36 Roofing Supplier Example 2 Month Production at Demand Monthly Ending Cost Information Costs Calculations 50 Units per Day Forecast Inventory Inventory Inventory carry cost $ 5Change carried x per unit Inventory carrying $9,250 (= 1,850 unitsper month $5 Jan 1,100 900 per unit) unit 200 Subcontracting cost per unit $10 +200 per Feb 700 +200 400 Regular-time labor 49,600 (= 10 workers ($40 per day) Average pay rate 900 $ 5 per hour x $40 per day days) Mar 800 x 124per hour 650 Overtime pay rate 1,050 $ 7 +250 (above 8 hours per day) Other costs (overtime, 0 Apr 1,050 1,200 -150 500 hiring, layoffs, 1,100 Labor-hours to produce a unit 1.6 hours per unit 100 May 1,500 -400 subcontracting) Cost of increasing1,000production rate daily $300-100unit per June 1,100 0 Total cost training) $58,850 (hiring and 1,850 Cost of decreasing daily production rate (layoffs) $600 per unit Total units of inventory carried over from one month to the next = 1,850 units Table 13.3 Workforce required to produce 50 units per day = 10 workers 13 – 37 Roofing Supplier Example 2 7,000 – 7,000 6,000 – 6,000 Cumulative demand units 5,000 – 5,000 4,000 – 4,000 3,000 – 3,000 2,000 – 1,000 – – Cumulative forecast Cumulative requirements requirements Excess inventory Jan Figure 13.4 13 – 38 Reduction Reduction of inventory of Cumulative level Cumulative production using average monthly forecast requirements requirements 6,200 units Feb Mar Apr May June Roofing Supplier Example 3 Month Jan Feb Mar Apr May June Expected Demand 900 700 800 1,200 1,500 1,100 6,200 Production Days 22 18 21 21 22 20 124 Demand Per Day (computed) 41 39 38 57 68 55 Table 13.2 ng ntracti co 2 – sub Plan Minimum requirement = 38 units per day 13 – 39 Roofing Supplier Example 3 Production rate per working day Forecast demand 70 – 70 60 – 60 50 – 50 40 – 40 30 – 30 Level production Level using lowest monthly forecast demand demand 0– Jan 22 Feb 18 Mar 21 Apr 21 May 22 June 20 = Month = Number of working days 13 – 40 Roofing Supplier Example 3 Cost Information Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs) Table 13.3 $ 5 per unit per month $10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit $600 per unit 13 – 41 Roofing Supplier Example 3 Cost Information Inventory carry cost In-house production = 38 units per day $10 per unit x $ 5 perdays per day) 124 hour ($40 Average pay rate = 4,712 units Overtime pay rate $ 7 per hour Subcontracting cost per unit $ 5 per unit per month Subcontract Labor-hours to produce a unit units = Cost of increasing daily production rate = 1,488per nits $300 u unit (hiring and training) Cost of decreasing daily production rate (layoffs) Table 13.3 (above 8 hours per day) 6,200 - 4,712 1.6 hours per unit $600 per unit 13 – 42 Roofing Supplier Example 3 Cost Information Inventory carry cost In-house production = 38 units per day $10 per unit x $ 5 perdays per day) 124 hour ($40 Average pay rate = 4,712 units Overtime pay rate $ 7 per hour Subcontracting cost per unit $ 5 per unit per month Costs Subcontract Labor-hours to produce a unit units = Regular-time labor $37,696 1,488 u unit x 7.6 workers Cost of increasing daily production rate = (= $300 per nits $40 per (hiring and training) Cost of decreasing daily production rate Subcontracting 14,880 (layoffs) Table 13.3 (above 8 hours per day) Calculations unit 6,200 - 4,712 1.6 hours per day x 124 days) (= $600 per unit x $10 per 1,488 units unit) Total cost $52,576 13 – 43 Roofing Supplier Example 4 Month Jan Feb Mar Apr May June Expected Demand 900 700 800 1,200 1,500 1,100 6,200 Production Days 22 18 21 21 22 20 124 Demand Per Day (computed) 41 39 38 57 68 55 Table 13.2 ing and fir ng 3 – hiri Plan Production = Expected Demand 13 – 44 Roofing Supplier Example 4 Production rate per working day 70 – 70 60 – 60 50 – 50 40 – 40 30 – 30 Forecast demand and Forecast monthly production monthly 0– Jan 22 Feb 18 Mar 21 Apr 21 May 22 June 20 = Month = Number of working days 13 – 45 Roofing Supplier Example 4 Cost Information Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs) Table 13.3 $ 5 per unit per month $10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit $600 per unit 13 – 46 Roofing Supplier Example 4 Cost InformationProd (units) Month Forecast Daily Rate Inventory carrying cost Jan 900 Average pay rate 41 39 38 Subcontracting cost per unit Overtime pay rate Mar 800 Feb 700 Basic Production Cost (demand x 1.6 hrs/unit x $5/hr) $ 7,200 5,600 6,400 Extra Cost of Increasing Production $ (hiring cost)5 Extra Cost of Total Cost Decreasing Production per (unit per month layoff cost) $10 per unit — — — — $ 5 per hour ($40 per $ 7,200 day) Labor-hours to produce a unit $ 7 per(= 2 x $600) hour (above 8 hours per day) $600 7,000 (= x $600) 1.6 hours1per unit 15,300 15,300 16,600 $68,200 $1,200 6,800 Apr 1,200 57 9,600 $5,700 — Cost of increasing daily production rate(= 19 x $300) per unit $300 (hiring and training) May 1,500 68 12,000 $3,300 — Cost of decreasing daily production rate= 11 x $300) per unit $600 ( (layoffs) June 1,100 55 8,800 — $7,800 Table 13.3 (= 13 x $600) $9,600 $49,600 $9,000 Table 13.4 13 – 47 Comparison of Three Plans Cost Inventory carrying Regular labor Overtime labor Hiring Layoffs Subcontracting Total cost Plan 1 $ 9,250 49,600 0 0 0 0 $58,850 Plan 2 $ 0 Plan 3 $ 0 37,696 0 0 0 14,880 $52,576 49,600 0 9,000 9,600 0 $68,200 Plan 2 is the lowest cost option Table 13.5 13 – 48 Mathematical Approaches Useful for generating strategies Transportation Method of Linear Transportation Programming Programming Produces an optimal plan Management Coefficients Model Model built around manager’s Model experience and performance experience Other Models Linear Decision Rule Simulation 13 – 49 Transportation Method Demand Capacity: Regular Regular Overtime Overtime Subcontracting Subcontracting Beginning inventory Regular time Overtime Subcontracting Carrying Sales Period Sales Mar Apr May 800 1,000 750 700 700 50 50 150 150 100 tires tires 700 50 130 Costs $40 per tire $50 per tire $70 per tire $ 2 per tire per month Table 13.6 13 – 50 Transportation Example Important points 1. Carrying costs are $2/tire/month. If Carrying $2/tire/month. goods are made in one period and held over to the next, holding costs are incurred incurred 2. Supply must equal demand, so a Supply dummy column called “unused capacity” is added capacity” 3. Because back ordering is not viable in Because this example, cells that might be used to satisfy earlier demand are not available satisfy 13 – 51 Transportation Example Important points 1. Quantities in each column designate the Quantities levels of inventory needed to meet demand requirements demand 2. In general, production should be In allocated to the lowest cost cell available without exceeding unused capacity in the row or demand in the column column 13 – 52 Transportation Example Table 13.7 13 – 53 Management Coefficients Model Builds a model based on manager’s Builds experience and performance experience A regression model is constructed regression to define the relationships between decision variables decision Objective is to remove Objective inconsistencies in decision making inconsistencies 13 – 54 Other Models Linear Decision Rule Minimizes costs using quadratic cost curves Operates over a particular time period Simulation Uses a search procedure to try different Uses combinations of variables combinations Develops feasible but not necessarily optimal Develops solutions solutions 13 – 55 Summary of Aggregate Planning Methods Techniques Graphical methods Solution Approaches Important Aspects Trial and error Simple to understand and easy to use. Many solutions; one chosen may not be optimal. Optimization LP software available; permits sensitivity analysis and new constraints; linear functions may not be realistic. Transportation method of linear programming Table 13.8 13 – 56 Summary of Aggregate Planning Methods Techniques Management coefficients model Simulation Solution Approaches Heuristic Important Aspects Simple, easy to implement; tries to mimic manager’s decision process; uses regression. Complex; may be difficult to build and for managers to understand. Change parameters Table 13.8 13 – 57 Aggregate Planning in Services Controlling the cost of labor is critical 1. Accurate scheduling of labor-hours to Accurate assure quick response to customer demand demand 2. An on-call labor resource to cover An unexpected demand unexpected 3. Flexibility of individual worker skills 4. Flexibility in rate of output or hours of Flexibility work work 13 – 58 Five Service Scenarios Restaurants Smoothing the production Smoothing process process Determining the optimal Determining workforce size workforce Hospitals Responding to patient demand 13 – 59 Five Service Scenarios National Chains of Small Service National Firms Firms Planning done at national level Planning and at local level and Miscellaneous Services Plan human resource Plan requirements requirements Manage demand 13 – 60 Law Firm Example (1) Category of Legal Business Trial work Legal research Corporate law Real estate law Criminal law Total hours Lawyers needed Labor-Hours Required (2) (3) (4) Forecasts Best Likely Worst Best Likely (hours) (hours) (hours) 1,800 4,500 8,000 1,700 3,500 19,500 39 1,500 4,000 7,000 1,500 3,000 17,000 34 1,200 3,500 6,500 1,300 2,500 15,000 30 Capacity Constraints (5) (6) Maximum Number of Demand in Qualified People Personnel 3.6 9.0 16.0 3.4 7.0 4 32 15 6 12 Table 13.9 13 – 61 Five Service Scenarios Airline industry Extremely complex planning Extremely problem problem Involves number of flights, Involves number of passengers, air and ground personnel, allocation of seats to fare classes seats Resources spread through the Resources entire system entire 13 – 62 Yield Management Allocating resources to customers at Allocating prices that will maximize yield or revenue revenue 1. Service or product can be sold in Service advance of consumption advance 2. Demand fluctuates 3. Capacity is relatively fixed 4. Demand can be segmented 5. Variable costs are low and fixed costs Variable are high are 13 – 63 Yield Management Example Room sales 100 Demand Demand Curve Curve Potential customers exist who Potential are willing to pay more than the $15 variable cost of the room $15 Passed-up contribution 50 Total $ contribution contribution = (Price) x (50 (50 rooms) = ($150 ($150 $15) $15) x (50) (50) = $6,750 $15 Variable cost of room Some customers who paid Some $150 were actually willing $150 to pay more for the room to Money left on the table $150 Price charged Price for room Price Figure 13.5 13 – 64 Yield Management Example Room sales 100 Demand Demand Curve Curve Total $ contribution = (1st price) x 30 rooms + (2nd price) x 30 rooms = 30 rooms ($100 - $15) x 30 + ($200 - $15) x 30 = $2,550 + $5,550 = $8,100 60 30 $15 Variable cost of room $100 Price 1 for room $200 Price 2 for room Price Figure 13.6 13 – 65 Yield Management Matrix Price Tend to be fixed Predictable Quadrant 1: Movies Stadiums/arenas Convention centers Hotel meeting space Quadrant 3: Restaurants Golf courses Internet service providers Tend to be variable Quadrant 2: Hotels Airlines Rental cars Cruise lines Quadrant 4: Continuing care hospitals Duration of use Unpredictable Figure 13.7 13 – 66 Making Yield Management Work 1. Multiple pricing structures must Multiple be feasible and appear logical to the customer the 2. Forecasts of the use and duration Forecasts of use of 3. Changes in demand 13 – 67 ...
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