OPSM 301 Operations Management

Koç University OPSM 301 Operations Management Class 22: Aggregate Planning (Chapter 13) Zeynep Aksin zaksin@ku.edu.tr

Announcements • Reminder: Midterm 2 next Tuesday on 20/12 at 17:00 CAS-Z08 • Aggregate Planning: will skip AP in services; however OPSM 405 Service Operations Management has an extensive module on this topic • Linear Programming: Quantitative Module B; will skip graphical solution and sensitivity analysis parts

Example 2: Finding Cu and Co A textile company in UK orders coats from China. They buy a coat from 250€ and sell for 325€. If they cannot sell a coat in winter, they sell it at a discount price of 225€. When the demand is more than what they have in stock, they have an option of having emergency delivery of coats from Ireland, at a price of 290. The demand for winter has a normal distribution with mean 32,500 and std dev 6750. • How much should they order from China??

Operations Planning ProcessPlanning Long range Strategic Capacity Planning Manufacturing Aggregate Planning Service Master Production Scheduling Medium range Material Requirement Planning Order Scheduling Weekly workforce and Customer scheduling Short range Daily workforce and customer scheduling

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

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

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

Aggregate Planning StrategiesPure Strategies • Capacity Options — change capacity: • changing inventory levels (recall from earlier session that these are known as seasonal inventory) • varying work force size by hiring or layoffs • varying production capacity through overtime or idle time • subcontracting • using part-time workers

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

Option Advantage Disadvantage Some Comments Changing Changes in Inventory Applies mainly inventorylevels humanresources 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

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

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.

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

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

Example 1: Total sales for the year = $130 million Jan Feb Mar Apr May Jun. July Aug Sept. Oct. Nov. Dec. Monthly sales forecasts ($ million) 7.6 8.4 10.2 9.0 11.8 7.0 8.6 12.6 14.4 12.8 15.8 11.8

Cumulative Chart 120- Jan Feb Mar Apr May Jun. July Aug Sept. Oct. Nov. Dec. Cumulative sales forecasts ($ million)

Chase Strategy 120- Jan Feb Mar Apr May Jun. July Aug Sept. Oct. Nov. Dec. Cumulative sales forecasts ($ million) Cumulative sales and cumulative production

Level Strategy 120- Jan Feb Mar Apr May Jun. July Aug Sept. Oct. Nov. Dec. Cumulative sales Cumulative sales forecasts ($ million) excess Cumulative production shortage

Labor Capacity Requirements Chase Strategy Level Strategy Sales in labor-hours (000)s Variable work force Working days Variable work week Variable inventory January 253 20 1581 28.4 3099 February 280 21 1667 29.6 5933 March 340 23 1848 33.1 8037 April 300 20 1875 33.7 9737 May 393 22 2235 40.2 9706 …. … … ….. …. …. December 393 20 2458 44.2 0 Total 4333 243 2229 40 7035

Illustration of calculations • Level production • Total sales = $130 million • Total labor-hours required = $130 million/$30 = 4.333 M labor-hrs. • Total hours = 243 days . 8 hrs/day = 1944 hrs • Number of workers = 4.333 M / 1944 = 2229 • Variable workforce for January • Sales in labor-hours = $7.6 M /$30 = 253,333 • Working hours = 20 days . 8 hrs/day = 160 hours • Variable work force = 1581

Variable workweek for January • Sales in labor-hours = $7.6 M /$30 = 253,333 • Number of workers = 2229 (average required, constant) • Variable monthly load for a worker = 253,333/2229 = 113.65 • Variable workweek = 113.65/4 = 28.4 hours/week • Variable inventory for January (Level production) • Production in January = (2229 workers)(20 days/month)(8 hrs/day) = 356,640 • Demand for January = 253,333 (labor-hours) • Inventory = 103,307 labor-hours • Inventory ($) = (103,307)($30/labor-hour) = $309,920

Evaluating Alternatives • Hiring cost = $200 per employee • Firing cost = $500 per employee • Regular labor cost = $5 per hour • Overtime premium cost = $2.5 per hour • Undertime premium cost = $3 per hour • Inventory carrying cost = 2% per month (applied to the monthly ending inventory) • Beginning labor force = 1,583 persons • Beginning inventory = 0

Alternative 1: Variable Workforce Zero-inventory, hire-fire as required Starting Required Hire-fire Cost Workforce Workforce January 1,583 1,583 0 0 February 1,583 1,667 84 $16,800 March 1,667 1,848 181 $36,200 April 1,848 1,875 27 $5,400 May 1,875 2,235 360 $72,000 June 2,235 1,326 -909 $454,500 …. ….. ……. ……. ……... December 3,292 2,458 -834 $417,000 Total $2,708,300

Alternative 2: Level Production constant worforce :2229, Variable Inventory Initial hire = (2229-1583) = 646 Cost = 129,200 Initial Production Required Ending Cost Inventory (labor-hours) Inventory January 0 356,640 253,333 103,307 $61984.2 …. ….. ……. ……. ……... Total$1,882,420

Example 2: National Steel Corporation (NSC) produces a special-purpose steel used in the aircraft and aerospace industries. The Sales Department of NSC has received orders of 2400, 2200, 2700, and 2500 tons of steel for each of the next 4 months. NSC can meet these demands by producing the steel, by drawing from its inventory, or by using any combination of the two alternatives.

The production costs per ton of steel during each of the next 4 months are projected to be $7400, $7500, $7600, and $7650. Because costs are rising each month-due to inflationary pressures- NSC might be better off producing more steel than it needs in a given month and storing the excess. • Production capacity cannot exceed 4000 tons in any one month. The monthly production is finished at the end of the month, at which time the demand is met. Any remaining steel is then stored in inventory at a cost of $120 per ton for each month it remains there.

If the production level is increased from one month to the next, then the company incurs a cost of $50 per ton of increased production to cover the additional labor and/or overtime. Each ton of decreased production to cover the additional labor and/or overtime. Each ton of decreased production incurs a cost of $30 to cover the benefits of unused employees. • The production level during the previous month was 1800 tons, and the beginning inventory is 1000 tons. Inventory at the end of the fourth month must be at least 1500 tons to cover anticipated demand. Formulate a production plan for NSC that minimizes the total costs over the next 4 months.

Data for the Production-Planning Problem of NSC Month 1 2 3 4 Demand (tons) 2400 2200 2700 2500 Production cost ($/ton) 7400 7500 7600 7650 Inventory cost ($/ton/month) 120 120 120 120 Starting inventory = 1000 tons Ending inventory (at the end of 4th month) = 1500 tons Starting production level = 1800 tons Cost of changing production level = $50 per ton (increase) $30 per ton (decrease)

OPSM 301 Operations Management