LECTURE 20 LSM 733 PRODUCTION OPERATIONS MANAGEMENT By

LECTURE 20 LSM 733 -PRODUCTION OPERATIONS MANAGEMENT By: OSMAN BIN SAIF 1

Summary of last Session þ Inventory Models for Independent Demand þ Production Order Quantity Model þ Quantity Discount Models 2

Summary of last Session (Contd. ) þ Probabilistic Models and Safety Stock þ Other Probabilistic Models þ Fixed-Period (P) Systems 3

Agenda for this Session þ Global Company Profile: Anheuser-Busch þ The Planning Process þ The Nature of Aggregate Planning þ Aggregate Planning Strategies þ Capacity Options þ Demand Options þ Mixing Options to Develop a Plan 4

Agenda for this Session (Contd. ) þ Methods for Aggregate Planning þ Graphical Methods þ Mathematical Approaches þ Comparison of Aggregate Planning Methods 5

Chapter : Aggregate Scheduling 6

Anheuser-Busch þ Anheuser-Busch produces nearly 40% of the beer consumed in the U. S. þ Matches fluctuating demand by brand to plant, labor, and inventory capacity to achieve high facility utilization þ High facility utilization requires þ Meticulous cleaning between batches þ Effective maintenance þ Efficient employee and facility scheduling 7

Anheuser-Busch þ Product-focused facility with high fixed costs þ High utilization requires effective aggregate planning of the four basic stages of production þ Selection and delivery of raw materials þ Brewing process from milling to aging þ Packaging þ Distribution 8

Aggregate Planning Determine the quantity and timing of production for the immediate future þ Objective is to minimize cost over the planning period by adjusting þ Production rates þ Labor levels þ Inventory levels þ Overtime work þ Subcontracting rates þ Other controllable variables 9

Aggregate Planning Required for aggregate planning þ A logical overall unit for measuring sales and output þ A forecast of demand for an intermediate planning period in these aggregate terms þ A method for determining costs þ A model that combines forecasts and costs so that scheduling decisions can be made for the planning period 10

The Planning Process Long-range plans (over one year) Research and Development New product plans Capital investments Facility location/expansion Top executives Operations managers Intermediate-range plans (3 to 18 months) 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 11

Aggregate Planning Jan 150, 000 Quarter 1 Feb 120, 000 Mar 110, 000 Apr 100, 000 Quarter 2 May 130, 000 Jun 150, 000 Jul 180, 000 Quarter 3 Aug 150, 000 Sep 140, 000 12

Aggregate Planning Figure 13. 2 13

Aggregate Planning þ Combines appropriate resources into general terms þ Part of a larger production planning system þ Disaggregation breaks the plan down into greater detail þ Disaggregation results in a master production schedule 14

Aggregate Planning Strategies 1. 2. 3. Use inventories to absorb changes in demand Accommodate changes by varying workforce size Use part-timers, overtime, or idle time to absorb changes 4. Use subcontractors and maintain a stable workforce 5. Change prices or other factors to influence demand 15

Capacity Options þ Changing inventory levels þ Increase inventory in low demand periods to meet high demand in the future þ Increases costs associated with storage, insurance, handling, obsolescence, and capital investment 15% to 40% þ Shortages can mean lost sales due to long lead times and poor customer service 16

Capacity Options þ Varying workforce size by hiring or layoffs þ Match production rate to demand þ Training and separation costs for hiring and laying off workers þ New workers may have lower productivity þ Laying off workers may lower morale and productivity 17

Capacity Options þ Varying production rate through overtime or idle time þ Allows constant workforce þ May be difficult to meet large increases in demand þ Overtime can be costly and may drive down productivity þ Absorbing idle time may be difficult 18

Capacity Options þ Subcontracting þ Temporary measure during periods of peak demand þ May be costly þ Assuring quality and timely delivery may be difficult þ Exposes your customers to a possible competitor 19

Capacity Options þ Using part-time workers þ Useful for filling unskilled or low skilled positions, especially in services 20

Demand Options þ Influencing demand þ Use advertising or promotion to increase demand in low periods þ Attempt to shift demand to slow periods þ May not be sufficient to balance demand capacity 21

Demand Options þ Back ordering during high- demand periods þ Requires customers to wait for an order without loss of goodwill or the order þ Most effective when there are few if any substitutes for the product or service þ Often results in lost sales 22

Demand Options þ Counterseasonal product and service mixing þ Develop a product mix of counterseasonal items þ May lead to products or services outside the company’s areas of expertise 23

Aggregate Planning Options Option Advantages Disadvantages Some Comments Changing inventory levels Changes in Inventory human holding cost resources are may increase. gradual or Shortages may none; no abrupt result in lost production sales. changes. Applies mainly to production, not service, operations. Varying workforce size by hiring or layoffs Avoids the costs Hiring, layoff, of other and training alternatives. costs may be significant. Used where size of labor pool is large. Table 13. 1 24

Aggregate Planning Options Option Advantages Disadvantages Some Comments Allows flexibility within the aggregate plan. Varying production rates through overtime or idle time Matches seasonal fluctuations without hiring/ training costs. Overtime premiums; tired workers; may not meet demand. Subcontracting Permits flexibility and smoothing of the firm’s output. Loss of quality Applies mainly in control; production reduced profits; settings. loss of future business. Table 13. 1 25

Aggregate Planning Options Option Advantages Disadvantages Some Comments Using parttime workers Is less costly High turnover/ and more training costs; flexible than full quality suffers; -time workers. scheduling difficult. Good for unskilled jobs in areas with large temporary labor pools. Influencing demand Tries to use excess capacity. Discounts draw new customers. Creates marketing ideas. Overbooking used in some businesses. Uncertainty in demand. Hard to match demand to supply exactly. Table 13. 1 26

Aggregate Planning Options Option Advantages Disadvantages Some Comments Back May avoid ordering overtime. during high Keeps capacity -demand constant. periods Customer must be willing to wait, but goodwill is lost. Many companies back order. Counter. Fully utilizes seasonal resources; product allows stable and service workforce. mixing May require skills or equipment outside the firm’s areas of expertise. Risky finding products or services with opposite demand patterns. Table 13. 1 27

Methods for Aggregate Planning þ A mixed strategy may be the best way to achieve minimum costs þ There are many possible mixed strategies þ Finding the optimal plan is not always possible 28

Mixing Options to Develop a Plan þ Chase strategy þ Match output rates to demand forecast for each period þ Vary workforce levels or vary production rate þ Favored by many service organizations 29

Mixing Options to Develop a Plan þ Level strategy þ Daily production is uniform þ Use inventory or idle time as buffer þ Stable production leads to better quality and productivity þ Some combination of capacity options, a mixed strategy, might be the best solution 30

Graphical Methods þ Popular techniques þ Easy to understand use þ Trial-and-error approaches that do not guarantee an optimal solution þ Require only limited computations 31

Graphical Methods 1. Determine the demand for each period 2. Determine the capacity for regular time, overtime, and subcontracting each period 3. Find labor costs, hiring and layoff costs, and inventory holding costs 4. Consider company policy on workers and stock levels 5. Develop alternative plans and examine their total costs 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 Average requirement = = Production Days 22 18 21 21 22 20 124 Demand Per Day (computed) 41 39 38 57 68 55 Total expected demand Number of production days Table 13. 2 6, 200 = 50 units per day 124 33

Roofing Supplier Example 1 Production rate per working day Forecast demand 70 – 60 – Level production using average monthly forecast demand 50 – 40 – 30 – Jan Feb Mar Apr May June 22 18 21 21 22 20 Figure 13. 3 = Month = Number of working days 34

Roofing Supplier Example 2 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1. 6 hours per unit 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 $300 per unit $600 per unit force k r o w t nstan o c – 1 Plan 35

Roofing Supplier Example 2 Cost Information Production at Month carry 50 Units Inventory cost per Day Subcontracting cost per unit Jan 1, 100 Feb pay rate 900 Average Mar 1, 050 Overtime pay rate Monthly Demand Inventory Ending Forecast $ 5 Change per unit per Inventory month 900 700 800 Apr 1, 050 1, 200 Labor-hours to produce a unit May 1, 100 1, 500 Cost of increasing daily production rate June 1, 000 1, 100 (hiring and training) Cost of decreasing daily production rate (layoffs) $10 +200 per unit 200 $ 5 per hour ($40 per day) +200 400 +250 650 $ 7 per hour (above 8 hours per day) -150 500 1. 6 hours per unit -400 $300 per unit -100 $600 per unit 100 0 1, 850 Total units of inventory carried over from one orkforce nt w = 1, 850 units a t s n Table 13. 3 month to the next o c Plan 1 – Workforce required to produce 50 units per day = 10 workers 36

Roofing Supplier Example 2 Monthly Costs Calculations Cost Information Production at Demand Inventory Ending Month carry 50 Units Forecast Inventory $ 5 Change perunits unit per monthx $5 Inventory cost per Day $9, 250 Inventory carrying (= 1, 850 carried unit) $10 per unit Subcontracting cost per unit Jan 1, 100 900 per +200 Regular-time labor 49, 600 x $40 per $ 5 workers per hour ($40 day) Feb pay rate 900 700 (= 10 +200 400 Average 124 days) 650 Mar 1, 050 800 day x+250 Overtime pay rate Other Apr costs (overtime, 1, 050 1, 200 hiring, layoffs, Labor-hours to produce a unit May 1, 100 1, 500 subcontracting) 0 Cost of increasing daily production rate June 1, 000 1, 100 Total cost $58, 850 (hiring and training) Cost of decreasing daily production rate (layoffs) $ 7 per hour (above 8 hours per day) -150 500 1. 6 hours per unit -400 $300 per unit -100 $600 per unit 100 0 1, 850 Total units of inventory carried over from one Table 13. 3 month to the next = 1, 850 units Workforce required to produce 50 units per day = 10 workers 37

Roofing Supplier Example 2 7, 000 – Cumulative demand units 6, 000 – 5, 000 – 4, 000 – 3, 000 – Reduction of inventory 2, 000 – Cumulative forecast requirements 1, 000 – – 6, 200 units Cumulative level production using average monthly forecast requirements Excess inventory Jan Feb Mar Apr May June Figure 13. 4 38

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 ting c a r t n o subc – 2 n a l P Demand Per Day (computed) 41 39 38 57 68 55 Table 13. 2 Minimum requirement = 38 units per day 39

Roofing Supplier Example 3 Production rate per working day Forecast demand 70 – Level production using lowest monthly forecast demand 60 – 50 – 40 – 30 – Jan Feb Mar Apr May June 22 18 21 21 22 20 = Month = Number of working days 40

Roofing Supplier Example 3 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) 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) $ 7 per hour (above 8 hours per day) 1. 6 hours per unit $300 per unit $600 per unit Table 13. 3 41

Roofing Supplier Example 3 Cost Information Inventory carry cost In-house production Subcontracting cost per unit Average pay rate Overtime pay rate $ 5 per unit per month = 38$10 units per day per unit x 124 days $ 5 per hour ($40 per day) = 4, 712 units $ 7 per hour Labor-hours to produce aunits unit Subcontract (above 8 hours per day) 1. 6 hours per unit 6, 200 - 4, 712 = Cost of increasing daily production rate $300 per unit = 1, 488 units (hiring and training) Cost of decreasing daily production rate (layoffs) $600 per unit Table 13. 3 42

Roofing Supplier Example 3 Cost Information Inventory carry cost In-house production Subcontracting cost per unit Average pay rate Overtime pay rate $ 5 per unit per month = 38$10 units per day per unit x 124 days $ 5 per hour ($40 per day) = 4, 712 units $ 7 per hour Costs Subcontract Labor-hours to produce aunits unit (above 8 hours per day) 1. 6 hours per unit Calculations 6, 200 - 4, 712 = Regular-time labor $37, 696 7. 6 workers Cost of increasing daily production rate $300 per unit x $40 per = (= 1, 488 units (hiring and training) day x 124 days) Cost of decreasing daily production unitx $10 per Subcontracting 14, 880 rate (= $600 1, 488 per units (layoffs) unit) Table 13. 3 Total cost $52, 576 43

Roofing Supplier Example 4 Month Jan Feb Mar Apr May June Plan 3 Expected Demand 900 700 800 1, 200 1, 500 1, 100 6, 200 Production Days 22 18 21 21 22 20 124 firing d n a g – hirin Demand Per Day (computed) 41 39 38 57 68 55 Table 13. 2 Production = Expected Demand 44

Production rate per working day Roofing Supplier Example 4 Forecast demand monthly production 70 – 60 – 50 – 40 – 30 – Jan Feb Mar Apr May June 22 18 21 21 22 20 = Month = Number of working days 45

Roofing Supplier Example 4 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) 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) $ 7 per hour (above 8 hours per day) 1. 6 hours per unit $300 per unit $600 per unit Table 13. 3 46

Roofing Supplier Example 4 Basic Production Cost Inventory carrying cost (demand x Daily Forecast Prod 1. 6 hrs/unit x Subcontracting cost per unit Month (units) Rate $5/hr) Cost Information Jan 900 rate Average pay Extra Cost of $ 5 per. Decreasing unit per month Increasing Production $10 per unitcost) Total Cost (hiring cost) (layoff 41 $ 7, 200 — Feb 700 Overtime pay rate 39 5, 600 — Mar 800 to produce 38 6, 400 Labor-hours a unit — $ 5 per hour day) — ($40 per$ 7, 200 $1, 200 $ 7 per hour 6, 800 (= 2 x $600) (above 8 hours per day) $600 7, 000 1. 6 hours per unit (= 1 x $600) $5, 700$300 per unit Cost rate Apr of increasing 1, 200 57 daily production 9, 600 — (= 19 x $300) (hiring and training) $3, 300 Cost rate $600 per unit May of decreasing 1, 500 68 daily production 12, 000 — (= 11 x $300) (layoffs) June Table 13. 3 1, 100 55 8, 800 $49, 600 15, 300 — $7, 800 (= 13 x $600) 16, 600 $9, 000 $9, 600 $68, 200 Table 13. 4 47

Comparison of Three Plans Cost Plan 1 Plan 2 Inventory carrying $ 9, 250 $ Regular labor 49, 600 37, 696 49, 600 Overtime labor 0 0 0 Hiring 0 0 9, 000 Layoffs 0 0 9, 600 Subcontracting 0 14, 880 0 $58, 850 $52, 576 $68, 200 Total cost Plan 2 is the lowest cost option 0 Plan 3 $ 0 Table 13. 5 48

Summary of this Session þ Global Company Profile: Anheuser-Busch þ The Planning Process þ The Nature of Aggregate Planning þ Aggregate Planning Strategies þ Capacity Options þ Demand Options þ Mixing Options to Develop a Plan 49

Summary of this Session (Contd. ) þ Methods for Aggregate Planning þ Graphical Methods 50

THANK YOU 51