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Chapter 13

Chapter 13. Capacity and Aggregate Planning. Aggregate Production Planning (APP). Matches market demand to company resources Plans production 6 months to 12 months in advance Expresses demand, resources, and capacity in general terms Develops a strategy for economically meeting demand

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Chapter 13

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  1. Chapter 13 Capacity and Aggregate Planning

  2. Aggregate Production Planning (APP) • Matches market demand to company resources • Plans production 6 months to 12 months in advance • Expresses demand, resources, and capacity in general terms • Develops a strategy for economically meeting demand • Establishes a company-wide game plan for allocating resources

  3. Adjusting Capacity to Meet Demand Producing at a constant rate and using inventory to absorb fluctuations in demand (level production) Hiring and firing workers to match demand (chase demand) Maintaining resources for high demand levels Increase or decrease working hours (overtime and undertime) Subcontracting work to other firms Using part-time workers Providing the service or product at a later time period (backordering)

  4. Strategy Details • Level production - produce at constant rate & use inventory as needed to meet demand • Chase demand - change workforce levels so that production matches demand • Maintaining resources for high demand levels - ensures high levels of customer service

  5. Strategy Details • Overtime & undertime - common when demand fluctuations are not extreme • Subcontracting - useful if supplier meets quality & time requirements • Part-time workers - feasible for unskilled jobs or if labor pool exists • Backordering - only works if customer is willing to wait for product/services

  6. Demand Production Units Time Level Production

  7. Demand Production Units Time Chase Demand

  8. QUARTER SALES FORECAST (LB) Spring 80,000 Summer 50,000 Fall 120,000 Winter 150,000 APP Using Pure Strategies Hiring cost = $100 per worker Firing cost = $500 per worker Inventory carrying cost = $0.50 pound per quarter Production per employee = 1,000 pounds per quarter Beginning work force = 100 workers

  9. QUARTER SALES FORECAST (LB) Spring 80,000 Summer 50,000 Fall 120,000 Winter 150,000 Level production (50,000 + 120,000 + 150,000 + 80,000) 4 = 100,000 pounds APP Using Pure Strategies Hiring cost = $100 per worker Firing cost = $500 per worker Inventory carrying cost = $0.50 pound per quarter Production per employee = 1,000 pounds per quarter Beginning work force = 100 workers

  10. SALES PRODUCTION QUARTER FORECAST PLAN INVENTORY Spring 80,000 100,000 20,000 Summer 50,000 100,000 70,000 Fall 120,000 100,000 50,000 Winter 150,000 100,000 0 400,000 140,000 Cost = 140,000 pounds x 0.50 per pound = $70,000 Level Production Strategy

  11. SALES PRODUCTION WORKERS WORKERS WORKERS QUARTER FORECAST PLAN NEEDED HIRED FIRED Spring 80,000 80,000 80 0 20 Summer 50,000 50,000 50 0 30 Fall 120,000 120,000 120 70 0 Winter 150,000 150,000 150 30 0 100 50 Chase Demand Strategy Cost = (100 workers hired x $100) + (50 workers fired x $500) = $10,000 + 25,000 = $35,000

  12. EXPECTED REGULAR OVERTIME SUBCONTRACT QUARTER DEMAND CAPACITY CAPACITY CAPACITY 1 900 1000 100 500 2 1500 1200 150 500 3 1600 1300 200 500 4 3000 1300 200 500 Regular production cost per unit $20 Overtime production cost per unit $25 Subcontracting cost per unit $28 Inventory holding cost per unit per period $3 Beginning inventory 300 units APP by the Transportation Method

  13. PERIOD OF USE Unused PERIOD OF PRODUCTION 1 2 3 4 Capacity Capacity 1 2 3 4 Beginning 0 3 6 9 Inventory 300 Regular 1000 Overtime 100 Subcontract 500 Regular 1200 Overtime 150 Subcontract 500 Regular 1300 Overtime 200 Subcontract 500 Regular 1300 Overtime 200 Subcontract 500 Demand 900 1500 1600 3000 750 20 23 26 29 25 28 31 34 28 31 34 37 20 23 26 25 28 31 28 31 34 20 23 25 28 28 31 20 25 28 The Transportation Tableau

  14. PERIOD OF USE Unused PERIOD OF PRODUCTION 1 2 3 4 Capacity Capacity 1 2 3 4 Beginning 0 3 6 9 Inventory 300 — — — 300 Regular 600 300 100 — 1000 Overtime 100 100 Subcontract 500 500 Regular 1200 — — 1200 Overtime 150 150 Subcontract 250 250 500 Regular 1300 — 1300 Overtime 200 — 200 Subcontract 500 500 Regular 1300 1300 Overtime 200 200 Subcontract 500 500 Demand 900 1500 1600 3000 750 20 23 26 29 25 28 31 34 28 31 34 37 20 23 26 25 28 31 28 31 34 20 23 25 28 28 31 20 25 28 The Transportation Tableau

  15. APP by Linear Programming Minimize Z = $100 (H1 + H2 + H3 + H4) + $500 (F1 + F2 + F3 + F4) + $0.50 (I1 + I2 + I3 + I4) Subject to P1 - I1 = 80,000 (1) Demand I1 + P2 - I2 = 50,000 (2) constraints I2 + P3 - I3 = 120,000 (3) I3 + P4 - I4 = 150,000 (4) Production 1000 W1 = P1 (5) constraints 1000 W2 = P2 (6) 1000 W3 = P3 (7) 1000 W4 = P4 (8) 100 + H1 - F1 = W1 (9) Work force W1 + H2 - F2 = W2 (10) constraints W2 + H3 - F3 = W3 (11) W3 + H4 - F4 = W4 (12) Decision Variables where Ht = # hired for period t Ft = # fired for period t It = inventory at end of period t Pt = units produced in periodt Wt = workforce size for periodt

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