Ch13 Aggregate Planning Lecture Notes 2009

Ch13 Aggregate Planning Lecture Notes 2009 - OPERATIONS...

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Unformatted text preview: OPERATIONS MANAGEMENT Chapter 13 Chapter 13 – Aggregate Planning Aggregate Planning 13 – 1 Anheuser-Busch Anheuser-Busch produces nearly 40% of Anheuser-Busch the beer consumed in the U.S. the Matches fluctuating demand by brand to Matches plant, labor, and inventory capacity to achieve high facility utilization achieve High facility utilization requires Meticulous cleaning between batches Effective maintenance Efficient employees Efficient facility scheduling 13 – 2 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 Other controllable variables 13 – 3 Aggregate Planning Info. needed for aggregate planning A logical overall unit for measuring logical sales and output sales A forecast of demand for intermediate forecast planning period in these aggregate units 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 – 4 Aggregate Planning Jan 150,000 Quarter 1 Feb 120,000 Mar 110,000 Quarter 2 May 130,000 Apr 100,000 Jun 150,000 Quarter 3 Aug 150,000 Jul 180,000 Sep 140,000 13 – 5 Aggregate Planning Aggregate Strategies 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 – 6 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 – 7 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 – 8 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 – 9 Aggregate Planning Options Option Advantages Disadvantages Some Comments Back ordering May avoid during highovertime. Keeps demand capacity periods constant. Customer must be Allows flexibility willing to wait, but within the goodwill is lost. aggregate plan 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 – 10 Mixing Options to Mixing Develop a Plan Develop 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 – 11 Mixing Options to Mixing Develop a Plan Develop 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 – 12 Planning 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 Average Average requirement requirement Total expected demand Number of production days 13 – 13 Planning 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 – 14 Figure 13.3 Planning Example 1 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 – 15 Planning Example 1 Month Production at Cost Information 50 Units per Day Inventory carry cost Demand Forecast 900 Monthly Ending Inventory Inventory $ 5Changeper month per unit $10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) -150 500 1.6 hours per unit 100 -400 $300-100unit per $600 per unit Jan 1,100 Subcontracting cost per unit Feb Average pay rate 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 month to the next = Table 13.3 Workforce required to produce 50 units per day = 13 – 16 Planning Example 1 Month Production at Cost Information Costs 50 Units per Day Inventory carry cost Inventory carrying Jan 1,100 Subcontracting cost per unit Demand Monthly Ending Calculations Forecast Inventory Inventory per unit carried (= $ 5Changeper month x units 900 +200 200 $$10 per unit unit) per Feb 700 (= $ 5 per hour ($40 x 400 +200 Average pay rate 900 Regular-time labor workers per day) Mar 800 +250 650 Overtime pay rate 1,050 $$ 7 perer day x 124 days) p hour (above 8 hours per day) Apr 1,050 1,200 -150 500 Other costs (overtime, 0 Labor-hours to produce a unit 1.6 hours per unit 100 May 1,500 -400 hiring, layoffs, 1,100 subcontracting)daily Cost of increasing1,000production rate $300-100unit per June 1,100 0 (hiring and training) Total cost 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 – 17 Planning Example 2 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 Minimum requirement = __________ units per day 13 – 18 Planning Example 2 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 – 19 Planning Example 2 Cost Information Inventory carry cost In-house production = _____units per day $10 per unit x $ 5 perdays per day) 124 hour ($40 Average pay rate = ___________ 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 = 1,488 units $300 per unit (hiring and training) Cost of decreasing daily production rate (layoffs) Table 13.3 (above 8 hours per day) _______ - unit 1.6 hours per 4,712 $600 per unit 13 – 20 Planning Example 2 Cost Information Inventory carry cost Costs $ 5 per unit Calculations per month Subcontracting cost per unit Average pay rate Overtime pay rate $10 per unit Regular-time labor (= _________workers x $ 5 per hour ($40 per day) $_________per day x Subcontracting produce a unit Subcontract Labor-hours to units _________124 days) day) (above 8 hours per _________per unit =(=6,200 - 4,712 1.6 hours x $ 7 per hour $ 1,488per nits Cost of increasing daily production rate = ___________ per unit) $300 u unit (hiring and training) Cost of decreasing daily production rate $600 per unit (layoffs) Total cost $52,576 Table 13.3 13 – 21 Planning 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 Production = Expected Demand 13 – 22 Planning Example 3 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 hour (above 8 hours per day) ____________ 7,000 1.6 hours per unit 15,300 15,300 16,600 $68,200 ____________ 6,800 Apr 1,200 57 9,600 _____________ — Cost of increasing daily production rate $300 per unit (hiring and training) May 1,500 68 12,000 _____________ — Cost of decreasing daily production rate $600 per unit (layoffs) June 1,100 55 8,800 — ____________ Table 13.3 $49,600 $9,000 $9,600 13 – 23 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 0 $52,576 49,600 0 9,000 9,600 0 $68,200 Plan 2 is the lowest cost option 13 – 24 Mathematical Approaches: Mathematical Transportation Method Transportation Demand Capacity: Regular Regular Overtime Overtime Subcontracting Subcontracting Beginning inventory Costs Costs 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 $40 per tire $50 per tire $70 per tire $ 2 per tire Table 13.6 13 – 25 Transportation Example Important points 1. Carrying costs are $2/tire/month. If goods are made in one period and held over to the next, holding costs are incurred 2. Supply must equal demand, so a dummy column called “unused capacity” is added 3. Because back ordering is not viable in this example, cells that might be used to satisfy earlier demand are not available 4. Quantities in each column designate the levels of inventory needed to meet demand requirements 5. In general, production should be allocated to the lowest cost cell available without exceeding unused capacity in the row or demand in the column 13 – 26 13 – 27 Law Firm Example (1) Category of Legal Business Trial work Legal research Corporate law Real estate law Criminal law Total hours Lawyers needed (2) Best Case (hours) 1,800 4,500 8,000 1,700 3,500 19,500 39 (3) Likely Case (hours) 1,500 4,000 7,000 1,500 3,000 17,000 34 (4) Worst Case (hours) 1,200 3,500 6,500 1,300 2,500 15,000 30 (5) Maximum Demand in People 3.6 9.0 16.0 3.4 7.0 (6) Number of Qualified Personnel 4 32 15 6 12 13 – 28 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 – 29 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 $ margin margin = (Price) x (50 (50 rooms) = ($150 ($150 $15) $15) x (50) (50) = $6,750 $15 Variable cost of room 50 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 – 30 Yield Management Example Room sales 100 Demand Demand Curve Curve Total $ margin = (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 – 31 Making Yield Management Making Work 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 – 32 A small private university normally charges the same price —$200—per credithour for all courses and for all students. While the university is pretty near capacity in the fall and spring, it finds that its classrooms are only about 60 percent occupied during the summer session. A student of operations management (who has recently read this chapter) wonders if yield management might be useful to both the university and its students alike. This student, with help from some economics majors, estimates a demand curve for summer course enrollment. Points on this demand curve include 9000 credit-hours at the current rate of $200, 12,000 credit hours at $180, 15,000 credit-hours at $160, and 18,000 credit-hours at $140. Based on this demand curve, what price point would best serve the university, if its objective is the greatest revenue for the summer session? A professional services firm is investigating yield management as a means of taking advantage of unused capacity. Analysts for this firm estimate a demand curve for the firm's service, which is sold by the hour. Points on this demand curve include 9000 hours at the current rate of $60 per hour, 9500 hours at $55, 10,000 hours at $50, and 10,500 hours at $45. Based on this demand curve, what price point would be best for the firm, if its objective is maximum revenue? 13 – 33 ...
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This note was uploaded on 10/29/2009 for the course BUSQOM 1070 taught by Professor Shang during the Fall '09 term at Pittsburgh.

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