Industrial Facilities Design(7th Term, Batch 2009)

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Lecture Outline Production + Planning Common of Objectives Of P Planning P Planning (Classification) Aggregate P Planning Capacity Decision Hierarchy Aggregate Planning Process Methods of Influencing Demand & Supply APP Variables Strategies for Adjusting Capacity Aggregate P Planning Example

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Production

Production is a function in which raw

materials or human efforts (inputs) are

transformed into finished good or

services (outputs)

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Planning

An organizational process of creating and maintaining a plan;

Or

The psychological process of thinking about the activities required to create a desired goal on some scale

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Slide 11.Slide 11.55

Common objectives of Common objectives of production planning...production planning...MINIMIZE:MINIMIZE:cost, inventory levels, changes in work cost, inventory levels, changes in work force levels, use of overtime, use of force levels, use of overtime, use of subcontracting, changes in production subcontracting, changes in production rates, plant/personnel idle timerates, plant/personnel idle time

MAXIMIZE:MAXIMIZE:profits, customer serviceprofits, customer service

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Slide 11.Slide 11.66

Production PlanningProduction Planning

Long Range Planning Strategic planning (1-5 years)

Medium Range PlanningEmployment, output, and inventory levels (2-

18 months)

Short Range PlanningJob scheduling, machine loading, and job

sequencing (0-2 months)

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Slide 11.Slide 11.77

Aggregate production Aggregate production planningplanning

is medium-term capacity is medium-term capacity planning over a two to eighteen planning over a two to eighteen month planning horizon. It month planning horizon. It involves determining the lowest-involves determining the lowest-cost method of providing the cost method of providing the adjustable capacity for meeting adjustable capacity for meeting

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Slide 11.Slide 11.88

Capacity Decisions Capacity Decisions HierarchyHierarchy

LinkagesLinkagesFacilitiesFacilitiesPlanningPlanning

AggregateAggregatePlanningPlanning

SchedulingScheduling

Time FrameTime Frame Facilities PlanningFacilities PlanningAggregate PlanningAggregate Planning

SchedulingSchedulingTimeTime

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Slide 11.Slide 11.99

Aggregation Aggregation refers to the idea refers to the idea of focusing on overall capacity, of focusing on overall capacity, rather than individual products rather than individual products or services.or services.Aggregation is done according to:

ProductsLaborTime

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Slide 11.Slide 11.1010

Aggregate production Aggregate production planning involves managing...planning involves managing... Work force levelsWork force levels - the number of

workers required for production. Production ratesProduction rates - the number of units

produced per time period. Inventory levelsInventory levels - the balance of unused

units carried forward from the previous period.

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13-13-1111

Aggregate Planning ProcessAggregate Planning Process

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Slide 11.Slide 11.1212

Methods of Influencing Methods of Influencing DemandDemand

Price Incentives Reservations Backlogs Complementary Products or Services Advertising/promotion

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Slide 11.Slide 11.1313

Methods of Influencing Methods of Influencing SupplySupply

Hiring/firing workers Overtime/slack time Part time/temporary labor Subcontracting Cooperative arrangements Inventories

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Slide 11.Slide 11.1414

Aggregate Production Aggregate Production Planning Variable CostsPlanning Variable Costs

Hiring/firing costs Overtime/slack time costs Part time/temporary labor costs Subcontracting costs Cooperative arrangements costs Inventory carrying costs Backorder or stock out costs

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Strategies for Adjusting Capacity

Level production Producing at a constant rate

and using inventory to absorb fluctuations in demand

Chase demand Hiring and firing workers to

match demand Peak demand

Maintaining resources for high-demand levels

Overtime and under-time Increasing or decreasing

working hours Subcontracting

Let outside companies complete the work

Part-time workers Hiring part time workers to

complete the work Backordering

Providing the service or product at a later time period

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Level Production

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DemandDemand

Un

its

Un

its

TimeTime

ProductionProduction

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Chase Demand

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DemandDemand

Un

its

Un

its

TimeTime

ProductionProduction

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Level Production Strategy

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Level production

= 100,000 pounds(50,000 + 120,000 + 150,000 + 80,000)

4

SpringSpring 80,00080,000 100,000100,000 20,00020,000SummerSummer 50,00050,000 100,000100,000 70,00070,000FallFall 120,000120,000 100,000100,000 50,00050,000WinterWinter 150,000150,000 100,000100,000 00

400,000400,000 140,000140,000Cost of Level Production Strategy

(400,000 X $2.00) + (140,00 X $.50) = $870,000

SALESSALES PRODUCTIONPRODUCTIONQUARTERQUARTER FORECASTFORECAST PLANPLAN INVENTORYINVENTORY

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Chase Demand Strategy

13-13-1919

SpringSpring 80,00080,000 80,00080,000 8080 00 2020SummerSummer 50,00050,000 50,00050,000 5050 00 3030FallFall 120,000120,000 120,000120,000 120120 7070 00WinterWinter 150,000150,000 150,000150,000 150150 3030 00

100100 5050

SALESSALES PRODUCTIONPRODUCTION WORKERSWORKERS WORKERSWORKERS WORKERSWORKERSQUARTERQUARTER FORECASTFORECAST PLANPLAN NEEDEDNEEDED HIREDHIRED FIREDFIRED

Cost of Chase Demand StrategyCost of Chase Demand Strategy

(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000 (400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

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Mixed Strategy

Combination of Level Production and Chase Demand strategies

Examples of management policiesno more than x% of the workforce can be

laid off in one quarterinventory levels cannot exceed x dollars

Many industries may simply shut down manufacturing during the low demand season and schedule employee vacations during that time

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A small manufacturing company with 200 employees produces A small manufacturing company with 200 employees produces umbrellas. The company produces the following three product lines: umbrellas. The company produces the following three product lines: 1) the Executive Line, 2) the Durable Line and 3) the Compact line, 1) the Executive Line, 2) the Durable Line and 3) the Compact line, as shown in the below as shown in the below

Executive Executive LineLine

Durable Durable LineLine

Compact Compact LineLine

Aggregate Planning Example

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0

2000

4000

6000

8000

10000

J a n Fe b Ma r Apr Ma y J un

45005500

7000

10000

8000

6000

Number of working days:Number of working days:

Jan: Jan: 2222Feb:Feb: 1919Mar:Mar: 2121Apr:Apr: 2121May:May: 2222Jun:Jun: 2020

Aggregate Planning Example: Demand for Executive Umbrellas

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Aggregate Planning Example: Cost Information for Executive Umbrellas

Materials $5.00 /unitHolding costs $1.00 /unit/monthMarginal cost of stockout $1.25 /unit/monthHiring & training cost $200.00 /workerLayoff costs $250.00 /workerLabor hours required 0.15 hrs/unit

Straight time labor cost $8.00 /hrBeginning inventory 250 unitsProductive hours 7.25 hrs/worker/dayPaid straight hours 8 hrs/dayBeginning # of workers 7 workers

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Aggregate Planning Example: Determining Straight Labor Costs and Output for Executive Umbrellas

Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1063.33 918.33 1015 1015 1063.33 966.67$/worker $1,408 1,216 1,344 1,344 1,408 1,280

JanuaryJanuary159.5 159.5 = 22 [days/month] * 7.25 [productive hrs/worker]= 22 [days/month] * 7.25 [productive hrs/worker]1063.33 1063.33 = 159.5 [hrs/worker/month] / .15 [hrs/unit]= 159.5 [hrs/worker/month] / .15 [hrs/unit]$1,408 $1,408 = 8 [$/hr] * 8 [paid hrs/day] * 22 [days/month]= 8 [$/hr] * 8 [paid hrs/day] * 22 [days/month]

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Aggregate Planning Example: Determining Straight Labor Costs and Output for Executive Umbrellas

Aggregate Planning ProblemJan Feb Mar Apr May Jun

Days/month 22 19 21 21 22 20Hrs/worker/month 160 138 152 152 160 145Units/worker 1,063 918 1,015 1,015 1,063 967Labor cost/worker $1,408.00 $1,216.00 $1,344.00 $1,344.00 $1,408.00 $1,280.00

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• 4,500 units is the demand in January (any 4,500 units is the demand in January (any combination of firm orders and forecast combination of firm orders and forecast

• 250 is the starting inventory position250 is the starting inventory position

• 4,250 = 4,500 – 2504,250 = 4,500 – 250

• 3.997 = 4,250 / 1,063.333.997 = 4,250 / 1,063.33

• 7 = workforce level at the beginning of 7 = workforce level at the beginning of JanuaryJanuary

• 3 = 7 – 4 = workers fired3 = 7 – 4 = workers fired

• 4 = workforce level at end of January4 = workforce level at end of January

• 0 = ending inventory level0 = ending inventory level

JanDays/mo 22Hrs/worker/mo 159.5Units/worker 1,063.33$/worker $1,408

JanDemand 4,500Beg. inv. 250Net req. 4,250Req. workers 3.997HiredFired 3Workforce 4Ending inventory 0

Aggregate Planning ExampleChase Strategy for Executive Umbrellas

• Objective: Adjust workforce level so as to Objective: Adjust workforce level so as to eliminate the need to carry inventory from eliminate the need to carry inventory from period to period period to period

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Aggregate Planning ExampleChase Strategy for Executive Umbrellas

Chase StrategyJan Feb Mar Apr May Jun

Demand 4,500 5,500 7,000 10,000 8,000 6,000Beginning inventory 250 0 0 0 0 0Net requirements 4,250 5,500 7,000 10,000 8,000 6,000Beginning # of workers 7 4 6 7 10 8Required workers 4 6 7 10 8 6Workforce adjustment -3 2 1 3 -2 -1Production quantity 4,250 5,500 7,000 10,000 8,000 6,000Ending inventory 0 0 0 0 0 0

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Aggregate Planning ExampleChase Strategy for Executive Umbrellas

January costs: $21,250.00 = 4,250 [units] * $5 [$/unit]January costs: $21,250.00 = 4,250 [units] * $5 [$/unit]$ 5,627.59 = 3.997 [workers] * 1,408 [$/worker]$ 5,627.59 = 3.997 [workers] * 1,408 [$/worker]$ 750.00 = 3 [workers fired] * 250 [$/worker fired]$ 750.00 = 3 [workers fired] * 250 [$/worker fired]

Chase Strategy CostsJan Feb Mar Apr May Jun

Material cost $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 $203,750.00Labor cost $5,628.00 $7,283.00 $9,269.00 $13,242.00 $10,594.00 $7,945.00 $53,961.00Hiring cost $0.00 $400.00 $200.00 $600.00 $0.00 $0.00 $1,200.00Firing cost $750.00 $0.00 $0.00 $0.00 $500.00 $250.00 $1,500.00Inventory holding cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Inventory stockout cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

TOTAL: $260,411.00

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Aggregate Planning ExampleLevel Strategy for Executive Umbrellas

JanDemand 4,500Beg. inv. 250Net req. 4,250Workers 6Production 6,380Ending inventory 2,130Surplus 2,130Shortage

• Objective: Adjust inventory Objective: Adjust inventory level so as to eliminate the level so as to eliminate the need to hire or fire workers need to hire or fire workers from period to period from period to period

• Assume that January is started Assume that January is started with 6 employees with 6 employees

• 6,380 = 6 [employees] * 6,380 = 6 [employees] * 1,063.33 1,063.33 [units/worker][units/worker]

• 2,130 = 6,380 – 4,250 (surplus) 2,130 = 6,380 – 4,250 (surplus)

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Aggregate Planning ExampleLevel Strategy for Executive Umbrellas

Level Capacity StrategyJan Feb Mar Apr May Jun

Demand 4,500 5,500 7,000 10,000 8,000 6,000Beginning inventory 250 2,130 2,140 1,230 -2,680 -4,300Net requirements 4,250 3,370 4,860 8,770 10,680 10,300Beginning # of workers 6 6 6 6 6 6Required workers 4 4 5 9 10 11Workforce adjustment 0 0 0 0 0 0Production quantity 6,380 5,510 6,090 6,090 6,380 5,800Ending inventory 2,130 2,140 1,230 -2,680 -4,300 -4,500

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Aggregate Planning ExampleLevel Strategy for Executive Umbrellas

January costs: $8,448 = 6 [workers] * $1,408 [$/worker]January costs: $8,448 = 6 [workers] * $1,408 [$/worker]$ 31,900 = 6,380 [units] * $5 [$/unit]$ 31,900 = 6,380 [units] * $5 [$/unit]$ 2,130 = 2,130 [surplus units] * $1 [$/unit held/month]$ 2,130 = 2,130 [surplus units] * $1 [$/unit held/month]

Level Capacity Strategy CostsJan Feb Mar Apr May Jun Total

Material cost $31,900.00 $27,550.00 $30,450.00 $30,450.00 $31,900.00 $29,000.00 $181,250.00Labor cost $8,448.00 $7,296.00 $8,064.00 $8,064.00 $8,448.00 $7,680.00 $48,000.00Hiring cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Firing cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Inventory holding cost $2,130.00 $2,140.00 $1,230.00 $0.00 $0.00 $0.00 $5,500.00Inventory stockout cost $0.00 $0.00 $0.00 $3,350.00 $5,375.00 $5,625.00 $14,350.00

TOTAL: $249,100.00

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Aggregate Planning ExampleWhich Plan is Cheaper?

Level CapacityLevel Capacity ChaseChase

$249,100.00 $260,411.00

Clearly, the level capacity plan is cheaper over Clearly, the level capacity plan is cheaper over the selected time horizonthe selected time horizon

Note: Be cautious in using the chase strategy as many Note: Be cautious in using the chase strategy as many intangibles, such as employee loyalty and commitment intangibles, such as employee loyalty and commitment to the organization are adversely affectedto the organization are adversely affected

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