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AGGREGATE & CAPACITY AGGREGATE & CAPACITY PLANNING PLANNING Ir. Haery Ir. Haery Sihombing Sihombing/IP /IP Pensyarah Fakulti Kejuruteraan Pembuatan Universiti Teknologi Malaysia Melaka 7 Aggregate Planning Aggregate Planning Objective is to minimize cost over the Objective is to minimize cost over the planning period by adjusting planning period by adjusting Production rates Production rates Labor levels Labor levels Inventory levels Inventory levels Overtime work Overtime work Subcontracting Subcontracting Other controllable variables Other controllable variables Determine the quantity and timing of Determine the quantity and timing of production for the immediate future production for the immediate future Aggregate Planning Aggregate Planning A logical overall unit for measuring A logical overall unit for measuring sales and output sales and output A forecast of demand for intermediate A forecast of demand for intermediate planning period in these aggregate units planning period in these aggregate units A method for determining costs A method for determining costs A model that combines forecasts and A model that combines forecasts and costs so that scheduling decisions can costs so that scheduling decisions can be made for the planning period be made for the planning period Required for aggregate planning Required for aggregate planning The Planning Process The Planning Process Figure 13.1 Figure 13.1 Long-range plans (over one year) Research & Development New product plans Capital investment Facility location/expansion Intermediate-range plans (3 to 18 months) Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing cooperating plans Short-range plans (up to 3 months) Job assignments Ordering Job scheduling Dispatching Overtime Part-time help Top executives Operations managers Operations managers, supervisors, foremen Responsibility Responsibility Planning tasks and horizon Planning tasks and horizon Aggregate Planning Aggregate Planning Quarter 1 Quarter 1 Jan Jan Feb Feb Mar Mar 150,000 150,000 120,000 120,000 110,000 110,000 Quarter 2 Quarter 2 Apr Apr May May Jun Jun 100,000 100,000 130,000 130,000 150,000 150,000 Quarter 3 Quarter 3 Jul Jul Aug Aug Sep Sep 180,000 180,000 150,000 150,000 140,000 140,000 Master production schedule and MRP systems Detailed work schedules Process planning and capacity decisions Aggregate plan for production Aggregate Planning Aggregate Planning Figure 13.2 Figure 13.2 Product decisions Demand forecasts, orders Marketplace and demand Research and technology Raw materials available External capacity (subcontractors) Workforce Inventory on hand

DMFD 3513 CH-7 Aggregate & Capacity Planning R

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Page 1: DMFD 3513 CH-7 Aggregate & Capacity Planning R

AGGREGATE & CAPACITY AGGREGATE & CAPACITY PLANNINGPLANNING

Ir. Haery Ir. Haery SihombingSihombing/IP/IPPensyarah Fakulti Kejuruteraan Pembuatan

Universiti Teknologi Malaysia Melaka

7

Aggregate PlanningAggregate Planning

Objective is to minimize cost over the Objective is to minimize cost over the planning period by adjustingplanning period by adjusting

Production ratesProduction rates

Labor levelsLabor levels

Inventory levelsInventory levels

Overtime workOvertime work

SubcontractingSubcontracting

Other controllable variablesOther controllable variables

Determine the quantity and timing of Determine the quantity and timing of production for the immediate futureproduction for the immediate future

Aggregate PlanningAggregate Planning

A logical overall unit for measuring A logical overall unit for measuring sales and outputsales and output

A forecast of demand for intermediate A forecast of demand for intermediate planning period in these aggregate unitsplanning period in these aggregate units

A method for determining costsA method for determining costs

A model that combines forecasts and A model that combines forecasts and costs so that scheduling decisions can costs so that scheduling decisions can be made for the planning periodbe made for the planning period

Required for aggregate planningRequired for aggregate planning

The Planning ProcessThe Planning Process

Figure 13.1Figure 13.1

Long-range plans (over one year)Research & DevelopmentNew product plansCapital investmentFacility location/expansion

Intermediate-range plans (3 to 18 months)Sales planningProduction planning and budgetingSetting employment, inventory,

subcontracting levelsAnalyzing cooperating plans

Short-range plans (up to 3 months)Job assignmentsOrderingJob schedulingDispatchingOvertimePart-time help

Topexecutives

Operations managers

Operations managers, supervisors, foremen

ResponsibilityResponsibility Planning tasks and horizonPlanning tasks and horizon

Aggregate PlanningAggregate Planning

Quarter 1Quarter 1

JanJan FebFeb MarMar

150,000150,000 120,000120,000 110,000110,000

Quarter 2Quarter 2

AprApr MayMay JunJun

100,000100,000 130,000130,000 150,000150,000

Quarter 3Quarter 3

JulJul AugAug SepSep

180,000180,000 150,000150,000 140,000140,000

Master production

schedule and MRP

systems

Detailed work

schedules

Process planning and

capacity decisions

Aggregateplan for

production

Aggregate PlanningAggregate Planning

Figure 13.2Figure 13.2

Productdecisions

Demand forecasts,

orders

Marketplace and

demand

Researchand

technology

Rawmaterials available

Externalcapacity

(subcontractors)

Workforce

Inventoryon

hand

Page 2: DMFD 3513 CH-7 Aggregate & Capacity Planning R

Aggregate PlanningAggregate Planning

Combines appropriate resources Combines appropriate resources into general termsinto general terms

Part of a larger production planning Part of a larger production planning systemsystem

Disaggregation breaks the plan Disaggregation breaks the plan down into greater detaildown into greater detail

Disaggregation results in a master Disaggregation results in a master production scheduleproduction schedule

Aggregate Planning Aggregate Planning StrategiesStrategies

1.1. Use inventories to absorb changes in Use inventories to absorb changes in demanddemand

2.2. Accommodate changes by varying Accommodate changes by varying workforce sizeworkforce size

3.3. Use partUse part--timers, overtime, or idle time to timers, overtime, or idle time to absorb changesabsorb changes

4.4. Use subcontractors and maintain a stable Use subcontractors and maintain a stable workforceworkforce

5.5. Change prices or other factors to Change prices or other factors to influence demandinfluence demand

Capacity OptionsCapacity Options

Changing inventory levelsChanging inventory levels

Increase inventory in low demand Increase inventory in low demand periods to meet high demand in periods to meet high demand in the futurethe future

Increases costs associated with Increases costs associated with storage, insurance, handling, storage, insurance, handling, obsolescence, and capital obsolescence, and capital investmentinvestment

Shortages can mean lost sales due Shortages can mean lost sales due to long lead times and poor to long lead times and poor customer servicecustomer service

Capacity OptionsCapacity Options

Varying workforce size by hiring Varying workforce size by hiring or layoffsor layoffs

Match production rate to demandMatch production rate to demand

Training and separation costs for Training and separation costs for hiring and laying off workers hiring and laying off workers

New workers may have lower New workers may have lower productivityproductivity

Laying off workers may lower Laying off workers may lower morale and productivitymorale and productivity

Capacity OptionsCapacity Options

Varying production rate through Varying production rate through overtime or idle timeovertime or idle time

Allows constant workforceAllows constant workforce

May be difficult to meet large May be difficult to meet large increases in demandincreases in demand

Overtime can be costly and may Overtime can be costly and may drive down productivitydrive down productivity

Absorbing idle time may be Absorbing idle time may be difficultdifficult

Capacity OptionsCapacity Options

SubcontractingSubcontracting

Temporary measure during Temporary measure during periods of peak demandperiods of peak demand

May be costlyMay be costly

Assuring quality and timely Assuring quality and timely delivery may be difficultdelivery may be difficult

Exposes your customers to a Exposes your customers to a possible competitorpossible competitor

Page 3: DMFD 3513 CH-7 Aggregate & Capacity Planning R

Capacity OptionsCapacity Options

Using partUsing part--time workerstime workers

Useful for filling unskilled or low Useful for filling unskilled or low skilled positions, especially in skilled positions, especially in servicesservices

Demand OptionsDemand Options

Influencing demandInfluencing demand

Use advertising or promotion to Use advertising or promotion to increase demand in low periodsincrease demand in low periods

Attempt to shift demand to slow Attempt to shift demand to slow periodsperiods

May not be sufficient to balance May not be sufficient to balance demand and capacitydemand and capacity

Demand OptionsDemand Options

Back ordering during highBack ordering during high--demand periodsdemand periods

Requires customers to wait for an Requires customers to wait for an order without loss of goodwill or order without loss of goodwill or the orderthe order

Most effective when there are few Most effective when there are few if any substitutes for the product if any substitutes for the product or serviceor service

Often results in lost salesOften results in lost sales

Demand OptionsDemand Options

Counterseasonal product and Counterseasonal product and service mixingservice mixing

Develop a product mix of Develop a product mix of counterseasonal itemscounterseasonal items

May lead to products or services May lead to products or services outside the companyoutside the company’’s areas of s areas of expertiseexpertise

Aggregate Planning OptionsAggregate Planning Options

Table 13.1Table 13.1

Used where size Used where size of labor pool is of labor pool is largelarge

Hiring, layoff, Hiring, layoff, and training and training costs may be costs may be significantsignificant

Avoids the costs Avoids the costs of other of other alternativesalternatives

Varying Varying workforce workforce size by size by hiring or hiring or layoffslayoffs

Applies mainly to Applies mainly to production, not production, not service, service, operationsoperations

Inventory Inventoryholding cost holding cost may increase. may increase. Shortages may Shortages may result in lost result in lost sales.sales.

Changes in Changes in humanhumanresources are resources are gradual or gradual or none; no abrupt none; no abrupt production production changeschanges

ChangingChanginginventory inventorylevelslevels

Some CommentsSome CommentsDisadvantagesDisadvantagesAdvantagesAdvantagesOptionOption

Aggregate Planning OptionsAggregate Planning Options

Table 13.1Table 13.1

Applies mainly in Applies mainly in production production settingssettings

Loss of quality Loss of quality control; control; reduced profits; reduced profits; loss of future loss of future businessbusiness

PermitsPermitsflexibility and flexibility and smoothing of smoothing of the firmthe firm’’ssoutputoutput

SubSub--contractingcontracting

Allows flexibility Allows flexibility within the within the aggregate planaggregate plan

Overtime Overtime premiums; tired premiums; tired workers; may workers; may not meet not meet demanddemand

Matches Matches seasonalseasonalfluctuationsfluctuationswithout hiring/ without hiring/ training coststraining costs

Varying Varying production production ratesrates through through overtime or overtime or idle timeidle time

Some CommentsSome CommentsDisadvantagesDisadvantagesAdvantagesAdvantagesOptionOption

Page 4: DMFD 3513 CH-7 Aggregate & Capacity Planning R

Aggregate Planning OptionsAggregate Planning Options

Table 13.1Table 13.1

CreatesCreatesmarketing marketing ideas.ideas.Overbooking Overbooking used in some used in some businesses.businesses.

Uncertainty in Uncertainty in demand. Hard demand. Hard to match to match demand to demand to supply exactly.supply exactly.

Tries to use Tries to use excess excess capacity.capacity.Discounts draw Discounts draw new customers.new customers.

InfluencingInfluencingdemanddemand

Good for Good for unskilled jobs in unskilled jobs in areas with large areas with large temporary labor temporary labor poolspools

High turnover/ High turnover/ training costs; training costs; quality suffers; quality suffers; schedulingschedulingdifficultdifficult

Is less costly Is less costly and more and more flexible than flexible than fullfull--timetimeworkersworkers

Using partUsing part--timetimeworkersworkers

Some CommentsSome CommentsDisadvantagesDisadvantagesAdvantagesAdvantagesOptionOption

Aggregate Planning OptionsAggregate Planning Options

Table 13.1Table 13.1

Risky finding Risky finding products or products or services with services with oppositeoppositedemanddemandpatternspatterns

May require May require skills or skills or equipmentequipmentoutside the outside the firmfirm’’s areas of s areas of expertiseexpertise

Fully utilizes Fully utilizes resources; resources; allows stable allows stable workforceworkforce

CounterCounter--seasonalseasonalproduct product and service and service mixingmixing

Allows flexibility Allows flexibility within the within the aggregate planaggregate plan

Customer must Customer must be willing to be willing to wait, but wait, but goodwill is lost.goodwill is lost.

May avoid May avoid overtime.overtime. Keeps capacity Keeps capacity constant.constant.

BackBackordering ordering during during highhigh--demanddemandperiodsperiods

Some CommentsSome CommentsDisadvantagesDisadvantagesAdvantagesAdvantagesOptionOption

Methods for Aggregate Methods for Aggregate PlanningPlanning

A mixed strategy may be the best A mixed strategy may be the best way to achieve minimum costsway to achieve minimum costs

There are many possible mixed There are many possible mixed strategiesstrategies

Finding the optimal plan is not Finding the optimal plan is not always possiblealways possible

Mixing Options to Mixing Options to Develop a PlanDevelop a Plan

Chase strategyChase strategy

Match output rates to demand Match output rates to demand forecast for each periodforecast for each period

Vary workforce levels or vary Vary workforce levels or vary production rateproduction rate

Favored by many service Favored by many service organizationsorganizations

Mixing Options to Mixing Options to Develop a PlanDevelop a Plan

Level strategyLevel strategy

Daily production is uniformDaily production is uniform

Use inventory or idle time as bufferUse inventory or idle time as buffer

Stable production leads to better Stable production leads to better quality and productivityquality and productivity

Some combination of capacity Some combination of capacity options, a mixed strategy, might be options, a mixed strategy, might be the best solutionthe best solution

Graphical and Charting Graphical and Charting MethodsMethods

Popular techniquesPopular techniques

Easy to understand and useEasy to understand and use

TrialTrial--andand--error approaches that do error approaches that do not guarantee an optimal solutionnot guarantee an optimal solution

Require only limited computationsRequire only limited computations

Page 5: DMFD 3513 CH-7 Aggregate & Capacity Planning R

Graphical and Charting Graphical and Charting MethodsMethods

1.1. Determine the demand for each periodDetermine the demand for each period

2.2. Determine the capacity for regular time, Determine the capacity for regular time, overtime, and subcontracting each periodovertime, and subcontracting each period

3.3. Find labor costs, hiring and layoff costs, Find labor costs, hiring and layoff costs, and inventory holding costsand inventory holding costs

4.4. Consider company policy on workers and Consider company policy on workers and stock levelsstock levels

5.5. Develop alternative plans and examine Develop alternative plans and examine their total coststheir total costs

Planning Example 1Planning Example 1

Table 13.2Table 13.2

1241246,2006,200

555520201,1001,100JuneJune

686822221,5001,500MayMay

575721211,2001,200AprApr

38382121800800MarMar

39391818700700FebFeb

41412222900900JanJan

Demand Per Day Demand Per Day (computed)(computed)

Production Production DaysDaysExpected DemandExpected DemandMonthMonth

= = 50= = 50 units per dayunits per day6,2006,200

124124

Average Average requirementrequirement ==

Total expected demandTotal expected demand

Number of production daysNumber of production days

Planning Example 1Planning Example 1

Figure 13.3Figure 13.3

7070 –

6060 –

5050 –

4040 –

3030 –

00 –JanJan FebFeb MarMar AprApr MayMay JuneJune == MonthMonth

2222 1818 2121 2121 2222 2020 == Number ofNumber ofworking daysworking days

Pro

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wo

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ay

Pro

du

cti

on

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te p

er

wo

rkin

g d

ay

Level production using average Level production using average monthly forecast demandmonthly forecast demand

Forecast demandForecast demand

Planning Example 1Planning Example 1

Table 13.3Table 13.3

$600$600 per unitper unitCost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)

$300$300 per unitper unitCost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)

1.61.6 hours per unithours per unitLaborLabor--hours to produce a unithours to produce a unit

$ 7$ 7 per hour per hour ((aboveabove 88 hours per dayhours per day))

Overtime pay rateOvertime pay rate

$ 5$ 5 per hour per hour ($40($40 per dayper day))Average pay rateAverage pay rate

$10$10 per unitper unitSubcontracting cost per unitSubcontracting cost per unit

$ 5$ 5 per unit per monthper unit per monthInventory carrying costInventory carrying cost

Cost InformationCost Information

Planning Example 1Planning Example 1

Table 13.3Table 13.3

$600$600 per unitper unitCost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)

$300$300 per unitper unitCost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)

1.61.6 hours per unithours per unitLaborLabor--hours to produce a unithours to produce a unit

$ 7$ 7 per hour per hour ((aboveabove 88 hours per dayhours per day))

Overtime pay rateOvertime pay rate

$ 5$ 5 per hour per hour ($40($40 per dayper day))Average pay rateAverage pay rate

$10$10 per unitper unitSubcontracting cost per unitSubcontracting cost per unit

$ 5$ 5 per unit per monthper unit per monthInventory carry costInventory carry cost

Cost InformationCost Information

1,850

0-1001,1001,000June

100-4001,5001,100May

500-1501,2001,050Apr

650+2508001,050Mar

400+200700900Feb

200+2009001,100Jan

Ending Inventory

Monthly Inventory Change

Demand Forecast

Production at 50 Units per DayMonth

Total units of inventory carried over from onemonth to the next = 1,850 units

Workforce required to produce 50 units per day = 10 workers

Planning Example 1Planning Example 1

Table 13.3Table 13.3

$600$600 per unitper unitCost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)

$300$300 per unitper unitCost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)

1.61.6 hours per unithours per unitLaborLabor--hours to produce a unithours to produce a unit

$ 7$ 7 per hour per hour ((aboveabove 88 hours per dayhours per day))

Overtime pay rateOvertime pay rate

$ 5$ 5 per hour per hour ($40($40 per dayper day))Average pay rateAverage pay rate

$10$10 per unitper unitSubcontracting cost per unitSubcontracting cost per unit

$ 5$ 5 per unit per monthper unit per monthInventory carry costInventory carry cost

Cost InformationCost Information

1,850

0-1001,1001,000June

100-4001,5001,100May

500-1501,2001,050Apr

650+2508001,050Mar

400+200700900Feb

200+2009001,100Jan

Ending Inventory

Monthly Inventory Change

Demand Forecast

Production at 50 Units per DayMonth

Total units of inventory carried over from onemonth to the next = 1,850 units

Workforce required to produce 50 units per day = 10 workers

$58,850Total cost

0

Other costs (overtime, hiring, layoffs, subcontracting)

(= 10 workers x $40 perday x 124 days)

49,600Regular-time labor

(= 1,850 units carried x $5per unit)

$9,250Inventory carrying

CalculationsCosts

Page 6: DMFD 3513 CH-7 Aggregate & Capacity Planning R

Planning Example 1Planning Example 1

Figure 13.4Figure 13.4

Cu

mu

lati

ve

de

ma

nd

un

its

Cu

mu

lati

ve

de

ma

nd

un

its

7,0007,000 –

6,0006,000 –

5,0005,000 –

4,0004,000 –

3,0003,000 –

2,000 –

1,000 –

–JanJan FebFeb MarMar AprApr MayMay JuneJune

Cumulative forecast Cumulative forecast requirementsrequirements

Cumulative level Cumulative level production using production using average monthly average monthly

forecast forecast requirementsrequirements

Reduction Reduction of inventoryof inventory

Excess inventoryExcess inventory

Planning Example 2Planning Example 2

Table 13.2Table 13.2

1241246,2006,200

555520201,1001,100JuneJune

686822221,5001,500MayMay

575721211,2001,200AprApr

38382121800800MarMar

39391818700700FebFeb

41412222900900JanJan

Demand Per Day Demand Per Day (computed)(computed)

Production Production DaysDaysExpected DemandExpected DemandMonthMonth

Minimum requirementMinimum requirement = 38= 38 units per dayunits per day

Planning Example 2Planning Example 2

7070 –

6060 –

5050 –

4040 –

3030 –

00 –JanJan FebFeb MarMar AprApr MayMay JuneJune == MonthMonth

2222 1818 2121 2121 2222 2020 == Number ofNumber ofworking daysworking days

Pro

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wo

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ay

Pro

du

cti

on

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te p

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wo

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g d

ay

Level production Level production using lowest using lowest

monthly forecast monthly forecast demanddemand

Forecast demandForecast demand

Planning Example 2Planning Example 2

Table 13.3Table 13.3

$600$600 per unitper unitCost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)

$300$300 per unitper unitCost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)

1.61.6 hours per unithours per unitLaborLabor--hours to produce a unithours to produce a unit

$ 7$ 7 per hour per hour ((aboveabove 88 hours per dayhours per day))

Overtime pay rateOvertime pay rate

$ 5$ 5 per hour per hour ($40($40 per dayper day))Average pay rateAverage pay rate

$10$10 per unitper unitSubcontracting cost per unitSubcontracting cost per unit

$ 5$ 5 per unit per monthper unit per monthInventory carrying costInventory carrying cost

Cost InformationCost Information

Planning Example 2Planning Example 2

Table 13.3Table 13.3

$600$600 per unitper unitCost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)

$300$300 per unitper unitCost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)

1.61.6 hours per unithours per unitLaborLabor--hours to produce a unithours to produce a unit

$ 7$ 7 per hour per hour ((aboveabove 88 hours per dayhours per day))

Overtime pay rateOvertime pay rate

$ 5$ 5 per hour per hour ($40($40 per dayper day))Average pay rateAverage pay rate

$10$10 per unitper unitSubcontracting cost per unitSubcontracting cost per unit

$ 5$ 5 per unit per monthper unit per monthInventory carry costInventory carry cost

Cost InformationCost Information

In-house production = 38 units per day x 124 days

= 4,712 units

Subcontract units = 6,200 - 4,712= 1,488 units

Table 13.3Table 13.3

$600$600 per unitper unitCost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)

$300$300 per unitper unitCost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)

1.61.6 hours per unithours per unitLaborLabor--hours to produce a unithours to produce a unit

$ 7$ 7 per hour per hour ((aboveabove 88 hours per dayhours per day))

Overtime pay rateOvertime pay rate

$ 5$ 5 per hour per hour ($40($40 per dayper day))Average pay rateAverage pay rate

$10$10 per unitper unitSubcontracting cost per unitSubcontracting cost per unit

$ 5$ 5 per unit per monthper unit per monthInventory carry costInventory carry cost

Cost InformationCost Information

Planning Example 2Planning Example 2

In-house production = 38 units per day x 124 days

= 4,712 units

Subcontract units = 6,200 - 4,712= 1,488 units

$52,576Total cost

(= 1,488 units x $10 perunit)

14,880Subcontracting

(= 7.6 workers x $40 perday x 124 days)

$37,696Regular-time labor

CalculationsCosts

Page 7: DMFD 3513 CH-7 Aggregate & Capacity Planning R

Planning Example 3Planning Example 3

Table 13.2Table 13.2

1241246,2006,200

555520201,1001,100JuneJune

686822221,5001,500MayMay

575721211,2001,200AprApr

38382121800800MarMar

39391818700700FebFeb

41412222900900JanJan

Demand Per Day Demand Per Day (computed)(computed)

Production Production DaysDaysExpected DemandExpected DemandMonthMonth

Production = Expected DemandProduction = Expected Demand

Planning Example 3Planning Example 3

7070 –

6060 –

5050 –

4040 –

3030 –

00 –JanJan FebFeb MarMar AprApr MayMay JuneJune == MonthMonth

2222 1818 2121 2121 2222 2020 == Number ofNumber ofworking daysworking days

Pro

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wo

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ay

Pro

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wo

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ay

Forecast demand and Forecast demand and

monthly productionmonthly production

Planning Example 3Planning Example 3

Table 13.3Table 13.3

$600$600 per unitper unitCost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)

$300$300 per unitper unitCost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)

1.61.6 hours per unithours per unitLaborLabor--hours to produce a unithours to produce a unit

$ 7$ 7 per hour per hour ((aboveabove 88 hours per dayhours per day))

Overtime pay rateOvertime pay rate

$ 5$ 5 per hour per hour ($40($40 per dayper day))Average pay rateAverage pay rate

$10$10 per unitper unitSubcontracting cost per unitSubcontracting cost per unit

$ 5$ 5 per unit per monthper unit per monthInventory carrying costInventory carrying cost

Cost InformationCost Information

Planning Example 3Planning Example 3

Table 13.3Table 13.3

$600$600 per unitper unitCost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)

$300$300 per unitper unitCost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)

1.61.6 hours per unithours per unitLaborLabor--hours to produce a unithours to produce a unit

$ 7$ 7 per hour per hour ((aboveabove 88 hours per dayhours per day))

Overtime pay rateOvertime pay rate

$ 5$ 5 per hour per hour ($40($40 per dayper day))Average pay rateAverage pay rate

$10$10 per unitper unitSubcontracting cost per unitSubcontracting cost per unit

$ 5$ 5 per unit per monthper unit per monthInventory carrying costInventory carrying cost

Cost InformationCost Information

$68,200$9,600$9,000$49,600

16,600$7,800

(= 13 x $600)—8,800551,100June

15,300—$3,300

(= 11 x $300)12,000681,500May

15,300—$5,700

(= 19 x $300)9,600571,200Apr

7,000$600

(= 1 x $600)—6,40038800Mar

6,800$1,200

(= 2 x $600)—5,60039700Feb

$ 7,200——$ 7,20041900Jan

Total Cost

Extra Cost of Decreasing Production(layoff cost)

Extra Cost of Increasing Production(hiring cost)

Basic Production

Cost (demand x

1.6 hrs/unit x $5/hr)

DailyProdRate

Forecast (units)Month

Comparison of Three PlansComparison of Three Plans

Table 13.5Table 13.5

$68,200$68,200$52,576$52,576$58,850$58,850Total costTotal cost

000000SubcontractingSubcontracting

9,6009,6000000LayoffsLayoffs

9,0009,0000000HiringHiring

000000Overtime laborOvertime labor

49,60049,60037,69637,69649,60049,600Regular laborRegular labor

$ 0$ 0$ 0$ 0$ 9,250$ 9,250Inventory carryingInventory carrying

Plan 3Plan 3Plan 2Plan 2Plan 1Plan 1CostCost

Plan 2 is the lowest cost optionPlan 2 is the lowest cost option

Mathematical ApproachesMathematical Approaches

Useful for generating strategiesUseful for generating strategies

Transportation Method of Linear Transportation Method of Linear ProgrammingProgramming

Produces an optimal planProduces an optimal plan

Management Coefficients ModelManagement Coefficients Model

Model built around managerModel built around manager’’ssexperience and performanceexperience and performance

Other ModelsOther Models

Linear Decision RuleLinear Decision Rule

SimulationSimulation

Page 8: DMFD 3513 CH-7 Aggregate & Capacity Planning R

Transportation MethodTransportation Method

Sales PeriodSales Period

MarMar AprApr MayMay

DemandDemand 800800 1,0001,000 750750

Capacity:Capacity:

RegularRegular 700700 700700 700700

OvertimeOvertime 5050 5050 5050

SubcontractingSubcontracting 150150 150150 130130

Beginning inventoryBeginning inventory 100100 tires tires

CostsCosts

Regular timeRegular time $40$40 per tireper tire

OvertimeOvertime $50$50 per tireper tire

SubcontractingSubcontracting $70$70 per tireper tire

CarryingCarrying $ 2$ 2 per tireper tire Table 13.6Table 13.6

Transportation ExampleTransportation Example

Important pointsImportant points

1.1. Carrying costs are Carrying costs are $2$2/tire/month. If /tire/month. If goods are made in one period and held goods are made in one period and held over to the next, holding costs are over to the next, holding costs are incurredincurred

2.2. Supply must equal demand, so a Supply must equal demand, so a dummy column called dummy column called ““unused unused capacitycapacity”” is addedis added

3.3. Because back ordering is not viable in Because back ordering is not viable in this example, cells that might be used to this example, cells that might be used to satisfy earlier demand are not availablesatisfy earlier demand are not available

Transportation ExampleTransportation Example

Important pointsImportant points

4.4. Quantities in each column designate the Quantities in each column designate the levels of inventory needed to meet levels of inventory needed to meet demand requirementsdemand requirements

5.5. In general, production should be In general, production should be allocated to the lowest cost cell allocated to the lowest cost cell available without exceeding unused available without exceeding unused capacity in the row or demand in the capacity in the row or demand in the columncolumn

TransportationTransportationExampleExample

Table 13.7Table 13.7

Management Coefficients Management Coefficients ModelModel

Builds a model based on managerBuilds a model based on manager’’ssexperience and performanceexperience and performance

A regression model is constructed A regression model is constructed to define the relationships between to define the relationships between decision variablesdecision variables

Objective is to remove Objective is to remove inconsistencies in decision makinginconsistencies in decision making

Other ModelsOther Models

Linear Decision RuleLinear Decision Rule

Minimizes costs using quadratic cost curvesMinimizes costs using quadratic cost curves

Operates over a particular time periodOperates over a particular time period

SimulationSimulation

Uses a search procedure to try different Uses a search procedure to try different combinations of variablescombinations of variables

Develops feasible but not necessarily optimal Develops feasible but not necessarily optimal solutionssolutions

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Summary of Aggregate Summary of Aggregate Planning MethodsPlanning Methods

Simple, easy to implement; Simple, easy to implement; tries to mimic managertries to mimic manager’’ssdecision process; uses decision process; uses regressionregression

HeuristicHeuristicManagement Management coefficients modelcoefficients model

LP software available; permits LP software available; permits sensitivity analysis and new sensitivity analysis and new constraints; linear functions constraints; linear functions may not be realisticmay not be realistic

OptimizationOptimizationTransportation Transportation method of linear method of linear programmingprogramming

Simple to understand and Simple to understand and easy to use. Many solutions; easy to use. Many solutions; one chosen may not be one chosen may not be optimal.optimal.

Trial and errorTrial and errorGraphical/charting Graphical/charting methodsmethods

Important AspectsImportant AspectsSolution Solution

ApproachesApproachesTechniquesTechniques

Table 13.8Table 13.8

Aggregate Planning in Aggregate Planning in ServicesServices

Controlling the cost of labor is criticalControlling the cost of labor is critical

1.1. Close scheduling of laborClose scheduling of labor--hours to hours to assure quick response to customer assure quick response to customer demanddemand

2.2. Some form of onSome form of on--call labor resourcecall labor resource

3.3. Flexibility of individual worker skillsFlexibility of individual worker skills

4.4. Individual worker flexibility in rate of Individual worker flexibility in rate of output or hoursoutput or hours

Five Service ScenariosFive Service Scenarios

RestaurantsRestaurants

Smoothing the production Smoothing the production processprocess

Determining the workforce sizeDetermining the workforce size

HospitalsHospitals

Responding to patient demandResponding to patient demand

Five Service ScenariosFive Service Scenarios

National chains of small service National chains of small service firmsfirms

Planning done at national level Planning done at national level and at local leveland at local level

Miscellaneous servicesMiscellaneous services

Plan human resource Plan human resource requirementsrequirements

Manage demandManage demand

Law Firm ExampleLaw Firm Example

(3)(3) (4)(4) (5)(5) (6)(6)(1)(1) (2)(2) LikelyLikely WorstWorst MaximumMaximum Number ofNumber of

Category ofCategory of Best CaseBest Case CaseCase CaseCase Demand inDemand in QualifiedQualifiedLegal BusinessLegal Business (hours)(hours) (hours)(hours) (hours)(hours) PeoplePeople PersonnelPersonnel

Trial workTrial work 1,8001,800 1,5001,500 1,2001,200 3.63.6 44

Legal researchLegal research 4,5004,500 4,0004,000 3,5003,500 9.09.0 3232

Corporate lawCorporate law 8,0008,000 7,0007,000 6,5006,500 16.016.0 1515

Real estate lawReal estate law 1,7001,700 1,5001,500 1,3001,300 3.43.4 66

Criminal lawCriminal law 3,5003,500 3,0003,000 2,5002,500 7.07.0 1212

Total hoursTotal hours 19,50019,500 17,00017,000 15,00015,000

Lawyers neededLawyers needed 3939 3434 3030

Table 13.9Table 13.9

Five Service ScenariosFive Service Scenarios

Airline industryAirline industry

Extremely complex planning Extremely complex planning problemproblem

Involves number of flights, Involves number of flights, number of passengers, air and number of passengers, air and ground personnelground personnel

Resources spread through the Resources spread through the entire systementire system

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Yield ManagementYield Management

Allocating resources to customers at Allocating resources to customers at prices that will maximize yield or prices that will maximize yield or revenuerevenue

1.1. Service or product can be sold in Service or product can be sold in advance of consumptionadvance of consumption

2.2. Demand fluctuatesDemand fluctuates

3.3. Capacity is relatively fixedCapacity is relatively fixed

4.4. Demand can be segmentedDemand can be segmented

5.5. Variable costs are low and fixed costs Variable costs are low and fixed costs are highare high

DemandDemandCurveCurve

Yield Management ExampleYield Management Example

Figure 13.5Figure 13.5

Passed-upcontribution

Money left on the table

Potential customers exist who Potential customers exist who are willing to pay more than the are willing to pay more than the $15$15 variable cost of the roomvariable cost of the room

Some customers who paid Some customers who paid $150$150 were actually willing were actually willing to pay more for the roomto pay more for the room

$$ marginmargin== ((PricePrice)) xx (50(50

roomsrooms))== ($150($150 -- $15)$15)

xx (50)(50)== $6,750$6,750

PricePrice

Room salesRoom sales

100100

5050

$150$150Price charged Price charged

for roomfor room

$15$15Variable costVariable cost

of roomof room

Total $ margin =Total $ margin =(1(1st pricest price) x 30 ) x 30 roomsrooms + (2+ (2ndnd price) x 30 rooms =price) x 30 rooms =

($100($100 -- $15) x 30 + ($200 $15) x 30 + ($200 -- $15) x 30 =$15) x 30 =$2,550 + $5,550 = $8,100$2,550 + $5,550 = $8,100

DemandDemandCurveCurve

Yield Management ExampleYield Management Example

Figure 13.6Figure 13.6

PricePrice

Room salesRoom sales

100100

6060

3030

$100$100Price 1Price 1

for roomfor room

$200$200Price 2Price 2

for roomfor room

$15$15Variable costVariable cost

of roomof room

Yield Management MatrixYield Management Matrix

Du

rati

on

of

use

Un

pre

dic

tab

leP

red

icta

ble

Price

Tend to be fixed Tend to be variable

Quadrant 1: Quadrant 2:

Movies HotelsStadiums/arenas Airlines

Convention centers Rental carsHotel meeting space Cruise lines

Quadrant 3: Quadrant 4:

Restaurants Continuing careGolf courses hospitals

Internet serviceproviders

Figure 13.7Figure 13.7

Making Yield Management Making Yield Management WorkWork

1.1. Multiple pricing structures must Multiple pricing structures must be feasible and appear logical to be feasible and appear logical to the customerthe customer

2.2. Forecasts of the use and duration Forecasts of the use and duration of useof use

3.3. Changes in demandChanges in demand

•• THE ENDTHE END