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7/29/2019 OM II - Class 6
http://slidepdf.com/reader/full/om-ii-class-6 1/21
Demand Forecasting
Capacity Planning
Aggregate Planning
Inventory Control
Scheduling
Quality Control & Maintenance
7/29/2019 OM II - Class 6
http://slidepdf.com/reader/full/om-ii-class-6 2/21
Demand Forecasting
Capacity Planning
Aggregate Planning
Inventory Control
Scheduling
Quality Control & Maintenance
7/29/2019 OM II - Class 6
http://slidepdf.com/reader/full/om-ii-class-6 3/21
Aggregate planning is a process by which a company aimsat minimizing the cost over the planning period by
adjusting
Production rates
Labor levels
Inventory levels
Overtime work
Subcontracting
Other controllable variables
7/29/2019 OM II - Class 6
http://slidepdf.com/reader/full/om-ii-class-6 4/21
Master
productionschedule and
MR Psystems
Detailedwork
schedules
Processplanning and
capacitydecisions
Aggregateplan for
production
Productdecisions
Demand
forecasts,orders
Marketplaceand
demand
Research
and
technology
Rawmaterialsavailable
Externalcapacity
(subcontractors)
Workforce
Inventoryon
hand
7/29/2019 OM II - Class 6
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Planners usually try to avoid focusing on individual
products or services – unless the organization has only
one major product or service
Instead, they focus on a group of similar products or
services, or an entire product or service line
For example, planners in a company producingtelevision sets would not concern themselves with 21-
inch sets versus 25-inch or 27-inch sets
7/29/2019 OM II - Class 6
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Instead, planners would lump (aggregate) all models
together and deal with them as though they were a single
product
Hence the term aggregate planning
Why do organizations go for aggregation?
It is impossible to predict with any degree of accuracy the
timing and volume of demand for individual items
Locking-in on individual items would result in loss of
flexibility to respond to the market
7/29/2019 OM II - Class 6
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Demand Forecasts for each period in the planning
horizon
Production Costs
◦ Labor costs – Regular Time and Overtime ($/Hr)
◦ Cost of subcontracting production ($/Unit)
◦ Cost of changing production – cost of hiring/laying off
workforce ($/Worker) and cost of adding or reducing
machine capacity ($/Machine)
Labor/Machine Hours required per unit
7/29/2019 OM II - Class 6
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Inventory holding cost ($/Unit/Period)
Stock-out or Backlog Cost ($/Unit/Period)
Constraints
◦ Limits on Overtime
◦ Limits on Layoffs
◦ Limits on Capital available
◦ Limits on Stock-outs and Backlogs
7/29/2019 OM II - Class 6
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Production quantity from regular time, overtime, and
subcontracted time allows determination of number of
workers and supplier purchase levels
Inventory Held – Used to determine warehouse space required
Backlogs/Stock-outs – Used to determine customer service
levels
Workers Hired/Laid Off – Used to determine labor issues
Machine Capacity increase/decrease – Used to determine if
new production equipment needs to be purchased
7/29/2019 OM II - Class 6
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Demand options – Proactive
Capacity options – Reactive
7/29/2019 OM II - Class 6
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Influencing demand
Use advertising or promotion to increase
demand in low periods
Attempt to shift demand to slow periods
May not be sufficient to balance demand and
capacity
7/29/2019 OM II - Class 6
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Back ordering during high-demand periods
Requires customers to wait for an order without
loss of goodwill or the order
Most effective when there are few substitutes for
the product or service
Often results in lost sales
7/29/2019 OM II - Class 6
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Counter-seasonal product and service mixing
Develop a product mix of counter-seasonal
items
May lead to products or services outside the
company’s areas of expertise
7/29/2019 OM II - Class 6
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Changing inventory levels
Increase inventory in low demand periods to
meet high demand in the future
Increases costs associated with storage,
insurance, handling, obsolescence, and capital
investment
Shortages can mean lost sales due to long lead
times and poor customer service
7/29/2019 OM II - Class 6
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Varying workforce size by hiring or layoffs
Match production rate to demand
Hiring and firing costs for hiring and laying off workers
New workers may have lower productivity
Laying off workers may lower morale and
productivity
7/29/2019 OM II - Class 6
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Varying production rate through overtime or idle time
Allows constant workforce
May be difficult to meet large increases indemand
Overtime can be costly and may drive down
productivity
Absorbing idle time may be difficult
7/29/2019 OM II - Class 6
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Subcontracting
Temporary measure during periods of peak
demand
May be costly
Assuring quality and timely delivery may be
difficult
Exposes your customers to a possible competitor
7/29/2019 OM II - Class 6
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Level strategy
- Uses inventory as a lever
- A stable machine capacity and workforce are used
to maintain a constant output
- Inventories or backlogs play a big role
- It can used when inventory carrying costs and
backlog costs are low
7/29/2019 OM II - Class 6
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Chase strategy
- Uses capacity as a lever
- Production rate is synchronized with the demand
rate by varying machine capacity or hiring and
laying off workers
- It can be used when the carrying cost of inventoryis very high and costs to change levels of capacity
and workforce are low
7/29/2019 OM II - Class 6
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Mixed strategy
- Combination of Level production and Chase demand
strategies
- Examples of management policies
No more than x % of the workforce can be laid off in one
quarter
Inventory levels cannot exceed ‘x’ dollars
- Many industries may simply shut down manufacturingduring the low demand season and schedule employee
vacations during that time
7/29/2019 OM II - Class 6
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Jan Feb Mar Apr May Jun Totals
Demand 1200 1400 1700 1900 2300 2000 10500
No. of working days
22 18 20 20 21 19 120
Materials $100/unitInventory holding cost $10/unit/month
Marginal cost of stock-out $20/unit/month
Marginal cost of subcontracting
$100/unit
Hiring and Training cost $250/worker
Layoff cost $200/worker
Labor hours required 4/unit
Regular time cost (8 hours) $12.50/hour
Overtime cost (8 hours) $18.75/hour
Beginning inventory =300
Initial workforce = 45
Final inventory = 300