Operations Management Aggregate Planning Transparency Masters to accompany

Operations Management Aggregate Planning Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 1 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Aggregate Planning Requires ¨ Logical overall unit for measuring sales and outputs ¨ Forecast of demand for intermediate planning period in these aggregate units ¨ Method for determining costs ¨ Model that combines forecasts and costs so that planning decisions can be made Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 2 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Planning ¨ Setting goals & objectives ¨ Example: Meet demand within the limits of available resources at the least cost ¨ Determining steps to achieve goals ¨ Example: Hire more workers ¨ Setting start & completion dates ¨ Example: Begin hiring in Jan. ; finish, Mar. ¨ Assigning responsibility Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 3 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Planning Tasks and Responsibilities Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 4 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Planning Horizons Responsibl Short-range plans e: Job assignments Operations Ordering managers Job scheduling Intermediate-range plans Responsible: Sales planning Dispatching Top Production planning and executives budgeting Responsibl Long-range plans Setting employment, inventory, e: R&D subcontracting levels Operations New product plans Analyzing operating plans managers, Capital expenses supervisor Facility location, expansion s, foremen Today 1 year 3 Months 5 years Planning Horizon Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 5 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Relationships of the Aggregate Plan Marketplace and Demand Forecasts, orders Product Decisions Research and Technology Process Planning & Capacity Decisions Work Force Aggregate Plan for Production Raw Materials Available Inventory On Hand External Capacity Subcontractors Master Production Schedule, and MRP systems Detailed Work Schedules Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 6 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

What’s Needed for Aggregate Planning A mathematically based aggregate planning model requires considerable: ¨ time ¨ problem definition ¨ model development ¨ model verification ¨ model application ¨ expertise ¨ money ¨ people who understand the problem who understand both the modeling process, and the specific model ¨ money to pay for all of the above ¨ often requires funding for several months! Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 7 people for several © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Aggregate Planning ¨ Provides the quantity and timing of production for intermediate future ¨ Usually 3 to 18 months into future ¨ Combines (‘aggregates’) production ¨ Often expressed in common units ¨ Example: Hours, dollars, equivalents (e. g. , FTE students) ¨ Involves capacity and demand variables Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 8 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Aggregate Planning Goals ¨ Meet demand ¨ Use capacity efficiently ¨ Meet inventory policy ¨ Minimize cost Labor ¨ Inventory ¨ Plant & equipment ¨ Subcontract ¨ Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 9 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Aggregate Planning Strategies Pure Strategies ¨ Capacity Options — change capacity: ¨ ¨ ¨ changing inventory levels varying work force size by hiring or layoffs varying production capacity through overtime or idle time subcontracting using part-time workers Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 10 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Aggregate Planning Strategies Pure Strategies ¨ Demand Options — change demand: influencing demand ¨ backordering during high demand periods ¨ counterseasonal product mixing ¨ Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 11 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Aggregate Scheduling Options - Advantages and Disadvantages Option Advantage Changing inventory levels Changes in human resources are gradual, not abrupt production changes Varying workforce size by hiring or layoffs Avoids use of Hiring, layoff, other alternatives and training costs Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e Disadvantage 12 Inventory holding costs; Shortages may result in lost sales Some Comments Applies mainly to production, not service, operations Used where size of labor pool is large © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Advantages/Disadvantages - Continued Option Advantage Disadvantage Some Comments Varying production rates through overtime or idle time Matches seasonal fluctuations without hiring/training costs Permits flexibility and smoothing of the firm's output Overtime premiums, tired workers, may not meet demand Allows flexibility within the aggregate plan Loss of quality control; reduced profits; loss of future business Applies mainly in production settings Subcontracting Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 13 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Advantages/Disadvantages - Continued Option Advantage Disadvantage Some Comments Using part-time workers Less costly and more flexible than full-time workers Good for unskilled jobs in areas with large temporary labor pools Influencing demand Tries to use excess capacity. Discounts draw new customers. High turnover/training costs; quality suffers; scheduling difficult Uncertainty in demand. Hard to match demand to supply exactly. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 14 Creates marketing ideas. Overbooking used in some businesses. © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Advantage/Disadvantage Continued Option Advantage Back ordering during highdemand periods May avoid Customer must overtime. Keeps be willing to capacity constant wait, but goodwill is lost. Many companies backorder. Counterseasonal Fully utilizes May require products and resources; allows skills or service mixing stable workforce. equipment outside a firm's areas of expertise. Risky finding products or services with opposite demand patterns. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e Disadvantage 15 Some Comments © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

The Extremes Level Strategy Chase Strateg y Production rate is constant Production equals demand Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 16 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Aggregate Planning Strategies ¨ Mixed strategy ¨ Combines 2 or more aggregate scheduling options ¨ Level scheduling strategy Produce same amount every day ¨ Keep work force level constant ¨ Vary non-work force capacity or demand options ¨ Often results in lowest production costs ¨ Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 17 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Aggregate Planning Methods ¨ Graphical & charting techniques Popular & easy-to-understand ¨ Trial & error approach ¨ ¨ Mathematical approaches Transportation method ¨ Linear decision rule ¨ Management coefficients model ¨ Simulation ¨ Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 18 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

The Graphical Approach to Aggregate Planning ¨ Forecast the demand for each period ¨ Determine the capacity for regular time, overtime, and subcontracting, for each period ¨ Determine the labor costs, hiring and firing costs, and inventory holding costs ¨ Consider company policies which may apply to the workers or to stock levels ¨ Develop alternative plans, and examine their total costs Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 19 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Forecast and Average Forecast Demand 22 20 18 Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 21 20 21 22 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Cumulative Demand Graph for Plan 1 7, 00 0 Cumulative Demand (Units) 6, 00 0 5, 00 0 4, 00 0 3, 00 0 Reduction Cumulative of inventory level production using average monthly forecast requirements Cumulative forecast requirements Excess inventory Jan Feb Mar Apr May 2, 00 Jun 21 Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Farnsworth’s Transportation Table Period 1 (Mar) Beginning Inventory Regular Period 2 Overtime Subcontract Regular Overtime Period 3 Period 1 Subcontract Regular Overtime Subcontract Total Demand Period 2 (Apr) 0 100 40 700 50 70 X X Period 3 (May) Total Capacity Available (Supply) 2 4 0 42 44 0 52 50 72 150 40 700 50 50 70 50 54 0 74 0 42 0 52 0 72 0 100 0 40 700 50 50 70 X X 800 x 1000 Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e Unused Capacity (Dummy) 750 22 0 0 230 100 700 50 150 700 50 130 2780 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Comparison of Three Major Aggregate Planning Methods Techniques Aspects Charting/graphical Approaches Trial and error Transportation method Simple to understand, easy to use. Many solutions; one chosen may not be optimal Optimization Management coefficient model Heuristic LP software available; permits sensitivity analysis and constraints. Linear function may not be realistic methods Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 23 Simple, easy to implement; tries to mimic © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. manager’s decision 07458 process; uses regression

Controlling the Cost of Labor in Service Firms Seek: ¨ Close control of labor hours to ensure quick response to customer demand ¨ On-call labor resource that can be added or deleted to meet unexpected demand ¨ Flexibility of individual worker skills to permit reallocation of available labor ¨ Flexibility of individual worker in rate of output or hours of work to meet demand Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 24 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Making Yield Management Work ¨ Multiple pricing structures must be feasible and appear logical ¨ Forecast the use and duration of use. ¨ Manage the changes in demand. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e 25 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Hotel: Single Price Level Sales Demand Curve $sales = Net price * 50 rooms =150*50 =$7500 Potential customers exist who are willing to pay more than the $15 Passed up variable cost Some customers profit who paid $150 for contributio the room were ns actually willing to pay more Money $15 variable cost of room Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e left on the table Price $150 Price charged for room © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 26 07458

Hotel: Two Price Levels Sale s Net prices are: Price #1 => $85 Price #2 => $175 Deman d Total sales = 1 st net price *30 + 2 nd net price *30 = $8100 $15 variable Transparency Masters to accompany cost of Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, room 7 e $100 Price #1 27 $200 Price #2 © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458

Yield Management Matrix D u r a t I o n o f u s e Fixed Predictable Quadrant 1 use Movies, stadiums, arenas, convention centers, hotel meeting space Unpredicta Quadrant 3 ble use Restaurants, Golf courses, Internet 28 service providers Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5 e, and Operations Management, 7 e Variable Quadrant 2 Hotels, Airlines, Rental cars, Cruise lines Quadrant 4 Continuing care hospitals © 2004 by Prentice Hall, Inc. Upper Saddle River, N. J. 07458