Operations Management

1. Operations Management Chapter 6 Aggregate Planning PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 7e Operations Management, 9e

2. AGGREGATE PLANNING STRATEGIES • Capacity Options • Demand Options • Mixing Options to Develop a Plan

3. METHODS FOR AGGREGATE PLANNING • Graphical and Charting Methods • Mathematical Approaches to Planning • AGGREGATE PLANNING IN SERVICES • Restaurants • Hospital • Miscellaneous Services • National Chains of Small Service Firms • Airline Industry

4. Anheuser-Busch • Anheuser-Busch produces nearly 40% of the beer consumed in the U.S. • Matches fluctuating demand by brand to specific plant, labor, and inventory capacity • High facility utilization requires • meticulous cleaning between batches • effective maintenance • efficient employees • efficient facility scheduling

5. 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

6. 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

7. Planning Tasks and Responsibilities

8. Responsible: Operations managers Short-range plans Job assignments Ordering Job scheduling Dispatching Intermediate-range plans Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans Responsible: Top executives Responsible: Operations managers, supervisors, foremen Long-range plans R&D New product plans Capital expenses Facility location, expansion 1 year 5 years Today 3 Months Planning Horizon Planning Horizons

9. Marketplace and Demand Research and Technology Product Decisions Process Planning & Capacity Decisions Demand Forecasts, orders Work Force Raw Materials Available Inventory On Hand Aggregate Plan for Production External Capacity Subcontractors Master Production Schedule, and MRP systems Detailed Work Schedules Relationships of the Aggregate Plan

10. What’s Needed for Aggregate Planning • A mathematically based aggregate planning model requires considerable: • time • problem definition • model development • model verification • model application • expertise • people who understand the problem • people who understand both the modeling process, and the specific model • money • money to pay for all of the above • often requires funding for several people for several months!

11. 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

12. Aggregate Planning Goals • Meet demand • Use capacity efficiently • Meet inventory policy • Minimize cost • Labor • Inventory • Plant & equipment • Subcontract

13. The Extremes Chase Strategy Level Strategy Production equals demand Production rate is constant

14. Aggregate Planning StrategiesPure 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

15. Aggregate Planning StrategiesPure Strategies • Demand Options — change demand: • influencing demand • backordering during high demand periods • counterseasonal product mixing

16. Option Advantage Disadvantage Some Comments Changing Changes in Inventory Applies mainly inventory levels human resources holding costs; to production, are gradual, not Shortages may not service, abrupt result in lost operations production sales changes Varying Avoids use of Hiring, layoff, Used where size workforce size other alternatives and training of labor pool is by hiring or costs large layoffs Aggregate Scheduling Options - Advantages and Disadvantages

17. Option Advantage Disadvantage Some Comments Varying Matches seasonal Overtime Allows production rates fluctuations premiums, tired flexibility within through overtime without workers, may not the aggregate or idle time hiring/training meet demand plan costs Subcontracting Permits Loss of quality Applies mainly flexibility and control; reduced in production smoothing of the profits; loss of settings firm's output future business Advantages/Disadvantages - Continued

18. Advantages/Disadvantages - Continued Option Advantage Disadvantage Some Comments Using part-time Less costly and High Good for workers more flexible turnover/training unskilled jobs in than full-time costs; quality areas with large workers suffers; temporary labor scheduling pools difficult Influencing Tries to use Uncertainty in Creates demand excess capacity. demand. Hard to marketing ideas. Discounts draw match demand to Overbooking new customers. supply exactly. used in some businesses.

19. Option Advantage Disadvantage Some Comments Back ordering May avoid Customer must Many companies during high- overtime. Keeps be willing to backorder. demand periods capacity constant wait, but goodwill is lost. Counterseasonal Fully utilizes May require Risky finding products and resources; allows skills or products or service mixing stable workforce. equipment services with outside a firm's opposite demand areas of patterns. expertise. Advantage/Disadvantage - Continued

20. 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

21. Aggregate Planning Methods • Graphical & charting techniques • Popular & easy-to-understand • Trial & error approach • Mathematical approaches • Transportation method • Linear decision rule • Management coefficients model • Simulation

22. 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

23. 22 18 21 21 22 20 Forecast and Average Forecast Demand

24. 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Reduction of inventory Cumulative level production using average monthly forecast requirements Cumulative Demand (Units) Cumulative forecast requirements Excess inventory Jan Feb Mar Apr May Jun Cumulative Demand Graph for Plan 1

25. Comparison of Three Major Aggregate Planning Methods Techniques Approaches Aspects Trial and error Optimization Heuristic Simple to understand, easy to use. Many solutions; one chosen may not be optimal LP software available;permits sensitivity analysis and constraints. Linear function may not be realistic Simple, easy to implement; tries to mimic manager’s decision process; uses regression Charting/graphical methods Transportation method Management coefficient model

26. 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

27. Hotel: Single Price Level Sales Demand Curve Potential customers exist who are willing to pay more than the $15 variable cost Passed up profit contributions Some customers who paid $150 for the room were actually willing to pay more $sales = Net price * 50 rooms =150*50 =$7500 Money left on the table Price $15 variable cost of room $150 Price charged for room

28. Sales Demand Total sales = 1st net price *30 + 2nd net price *30 = $8100 $100 Price #1 $200 Price #2 Hotel: Two Price Levels Net prices are: Price #1 => $85 Price #2 => $175 $15 variable cost of room