The document discusses various production planning strategies for a company with the following demand forecast over six months: January 500 units, February 600 units, March 650 units, April 800 units, May 900 units, and June 800 units. It analyzes the costs of:
1) Varying the workforce to exactly meet demand
2) Maintaining a constant workforce and varying inventory levels and shortages
3) Maintaining a constant workforce and using subcontracting to meet excess demand
4) Maintaining a constant workforce on regular time and using overtime to meet additional requirements
It calculates the hiring, layoff, subcontracting, inventory, shortage and labor costs associated with each strategy.
2. Long range planning : annually focus on >1 year
Intermediate range planning : 6 to 18 months
Aggregate ( complete or total ) planning is
medium term planning the no. of units of the
product to be produced
on a weekly ,or monthly basis for the coming 3 to 6
or 12 months
in line with overall business of the company which
is based on demand forecast provided by the
marketing department
Short range planning : one day to 6 months
( weekly basis )
3. Necessity of Sales & Operations (aggregate)
planning
Demand fluctuations : festive , weather
Capacity fluctuations: holidays
Difficulty in altering production rates: complex
engineering products
Benefits of multi-period planning : likely scenario
Aggregate production planning is done to match the
demand with supply on a period to period basis
4. Objective is to minimize cost of resources
required to meet demand over that period
Aggregate planning process is essentially same
for service & manufacturing , except
inventory build up in manufacturing
After aggregate planning , manufacturing &
service planning are generally different
5. In manufacturing :
Master production schedule
Rough cut capacity planning
Material requirement planning
Capacity requirement planning
Order scheduling
In service
•After determination of aggregate staffing level ,
•Focus is on
Work force & customer scheduling during week
or hour by hour
6. Main purpose of aggregate planning is to
specify
optimal combination of
production rate ,
work force level
& inventory on hand to minimize various types
of costs related to unplanned production
Production rate : number Of units completed
per unit of time ( per hour / per day )
Work force level : number Of workers needed
for production
7. •Inventory on hand : balance of unused
inventory carried over from previous period
•Otherwise high costs of :
•Hiring ,
•layoff costs ,
•overtime ,
•inventory costs , excess & shortage costs
• shortage leads to stock out
• – loss of business & goodwill
•Another cost – under-time cost , if capacity is
not utilized
8. Business Plan
Capacity planning
Operations
Output planning
Aggregate output planning Aggregate capacity planning
Master production scheduling Roughcut capacity planning planning
Material requirement planning
Loading
Sequencing
Detailed scheduling
Detailed capacity planning
Shop floor control
Expediting,
9. Overview of major operations & supply planning activities
Process planning
Strategic capacity
planning
Supply network
planning
Forecasting & demand
Management
Sales & Operations
(aggregate ) planning
Sales plan Aggregate
operations plan
Manufacturing Services
Weekly work
force scheduling
Master production
scheduling
Daily workforce &
customer scheduling
Material requirement
planning
Long
range
Medium
range
Short Order scheduling
range
Logistics
Vehicle capacity
planning
Vehicle loading
Vehicle despatching
Warehouse receipt
planning
10. One approach to develop aggregate plan is
to simulate various production schedule &
calculate corresponding capacity
requirement & see if adequate labour &
requirement exist at each work centre
Else , specify additional requirement : -
overtime , sub contracting, extra workers
etc.
For each product –rough cut plan
Then cut – and – try or mathematical models
for final & lower cost plan
11. Required inputs for production planning system
Market demand
Current physical
capacity
Current work
force
Planning
for
Producti
on
Inventory
levels
Activities required
for production
Competitors
behaviour
Economic
conditions
Raw material
availability
External capacity
e.g. sub-contractor
external internal
12. Aggregate Production Planning Strategis
APP
Strategy
APP alternative Key features
Chase
strategy
Capacity adjustment No inventory carried from
one period to another
Made to order and project
environment
Several service system
a. overtime / under-time
b. vary number of shifts
c. hire / lay off workers
Stable
workforc
e
Vary output by varying
no. of working hours
Provides workforce
continuity
Avoids emotional & tangible
a. Flexible work schedules costs of hiring & firing
b,. Overtime
13. Level
Strategy
Inventory based Inventory as the critical link
between the periods , made
to stock environments ,
products with low risk of
obsolescence
a. Stable workforce
b.build inventory
c. backlog /
backorder/shortage
14. Chase : ,worker size is varied according to demand ,
keeping utilization of workers & inventory size
constant – hire & fire costs , morale low, insecurity .
during months of heavy demand ,overtime costs
Stable workforce : vary output by varying no. Of
working hours -. flexible work schedules ,b,.
Overtime ,provides workforce continuity
Avoids emotional & tangible costs of hiring & firing
Level output rate : inventory size is varied ,keeping
workforce & utilization of workers constant – high
inventory during low demand/ backorder/ backlog /
stock-out
15. Pure Strategy: when just one variable , say hiring &
firing is used to absorb demand fluctuations
Mixed Strategy: when two or more used in
combination – more in demand
Subcontracting: similar to chase but instead of hiring
& firing subcontracting is done
16. Relevant costs
1. Basic Production costs
a.Fixed costs
b.Variable costs
c.Including direct & indirect labour
17. 2. Costs associated with change in rate of
Production
a.Hiring & training costs
b.Firing / lay off costs
18. 3. Inventory Holding (Carrying )costs
Cost For Storage Facilities
Handling
Insurance
Pilferage (Theft)
Breakage
Obsolescence
Deterioration/Depreciation /Degradation
Taxes
Opportunity Cost Of Capital
19. 4. Backordering or shortage (Stock out ) costs
a.Very Difficult to measure or calculate
b.Include cost of expediting
c.loss of customer goodwill
d.Order may be lost
e.Short term & long term losses – customer may
go to competitors this time or permanently
f.Loss of sales revenue
20. Q13-p-623SHONEY VIDEO trying to determine production plan for
next 12 months whose forecast is
month JAN FEB MARAPR
MA
Y JUN JUL AUGSEP OCT NOVDEC TOTAL
demand 600 800 900 600 400 300 200 200 300 700 800 900 6700
working
days 22 22 22 22 22 22 7 22 22 22 22 22 249
manufacturing cost 200 per set
opening inventory 200
Production
Time labour hours required 10 Hr per Unit
no. of workers
inventory holding cost 5 per unit per month
stock out cost 20 per unit per month
develop an agrgregate production plan
21. A. Production Plan -I : Constant Workforce -
Excess / Stockout Inventory
month JAN FEB
MA
R APR
MA
Y JUN JUL
AU
G
SEP
T OCT
NO
V DEC
TOTA
L
Opening Inventory 200 180.8 -38.4
-
357.6
-
376.
8 -196 84.8 69.6
450.
4
731.
2 612392.8 1752.8
demand forecast 600 800 900 600 400 300 200 200 300 700 800 900 6700
safety stock 0*forecast) 0 0 0 0 0 0 0 0 0 0 0 0 0
TotalRequirement(dema
nd+safety stock) 600 800 900 600 400 300 200 200 300 700 800 900 6700
working days per month 22 22 22 22 22 22 7 22 22 22 22 22 249
hours per month per
worker
( working days*8hrs per
day) 176 176 176 176 176 176 56 176 176 176 176 176 1992
TOTAL ANNUAL REQUIREMENT 6700
LESS OPENING INVENTORY 200
ACTUAL PRODUCTION REQUIRED 6500
PRODUCTION HOURS REQUIRED 65000
NO. OF WORKERS REQUIRED
32.630522
( TOTAL PRODN HOURS/ANNUAL WKG HOURS )
WORKERS REQD TO NEXT VHIGHER NO. 33
22. TOTAL ANNUAL REQUIREMENT 6700
LESS OPENING INVENTORY 200
ACTUAL PRODUCTION REQUIRED 6500
PRODUCTION HOURS REQUIRED 65000
NO. OF WORKERS REQUIRED
( TOTAL PRODN HOURS/ANNUAL WKG
HORS) 32.630522
WORKERS REQD TO NEXT HIGHER NO. 33
23. total
worker 33 33 33 33 33 33 33 33 33 33 33 33 0
total working hours
available per month 5808 5808 5808 5808 5808 5808 1848 5808 5808 5808 5808 5808 65736
Units Produced( hours
Av/hrs per unit) 581 581 581 581 581 581 185 581 581 581 581 581 6574
Total Available inventory 781 762 542 223 204 385 270 650 1031 1312 1193 974 8326
Ending Inventory 181 -38 -358 -377 -196 85 70 450 731 612 393 74 74
Excess
Inventory Cost 904 424 348 2252 3656 3060 1964 368 12976
Stock out cost 768 7152 7536 3920 19376
Normal
1161
11616
11616
1161
116
3696
1161
11616
1161
1161
1161
cost 116160
60
0
0
60
160
0
60
0
60
60
60 1314720
TOTAL
COST 1347072
month JAN FEB
MA
R APR
MA
Y JUN JUL
AU
G
SEP
T OCT
NO
V DEC
TOTA
L
Opening Inventory 200 180.8 -38.4
-
357.6
-
376.
8 -196 84.8 69.6
450.
4
731.
2 612392.8 1752.8
demand forecast 600 800 900 600 400 300 200 200 300 700 800 900 6700
24. P-617 demand &
working days
month JAN FEB MAR APR MAY JUN TOTAL
demand 500 600 650 800 900 800 4250
working days 22 19 21 21 22 20 125
Materials 100 per unit
inventory holding cost 10 per unit per month
stock out cost 20 per unit per month
subcontracting cost 100 per unit per month
( 200 subcontracting cost less 100 material
cost)
hiring cost 50 per worker
firing / layoff cost 100 per worker
labour hours required 4 per unit
straight( normal)time cost 12.75 per worker
overtime cost 18.75 per worker
beginning inventory 200 units
safety stock reqd 0% of month demand
what is cost of following production strategies
a. produce exactly to meet demand , vary work force ( assume opening workforce equal to
first month's requirement)
b. constant workforce (10), very inventory & allow shortages
c.constant workforce(10) use subcontracting
25. month JAN FEB MAR APR MAY JUN
TOTA
L
Beginning Inventory 200 0 0 0 0 0
demand forecast 500 600 650 800 900 800 4250
safety stock 0*forecast) 0 0 0 0 0 0
production Requirement
( forecast+safety stock
- beginning inventory) 300 600 650 800 900 800 4050
ending inventory
(beginning inventory
+production Requirement
-demand Afo.r ePcraosdtu)ction Plan -I : Exac0t Produ0ction - 0 0 0 0
vary workforce
month JAN FEB MAR APR MAY JUN
TOTA
L
Production Requirement 300 600 650 800 900 800
production hours Required 1200 2400 2600 3200 3600 3200
('=production equirement * 4
hrs/unit)
working days per month 22 19 21 21 22 20
hours per month per worker
( working days*8hrs per day) 176 152 168 168 176 160
26. Workers required (
(production hours Required /
hours
per month per worker
6.81818
2
15.7894
7
15.4761
9
19.0476
2
20.4545
5 20
Workers required ( rounding to
next 7 16 16 20 21 20
integer
New workers required (opening
workers
=1st months requirement of 7
workers 0 9 0 4 1 -1
hiring cost(new workers*50) 0 450 0 200 50 700
workers laid off 0 0 0 0 0 1
layoff cost(workers laid off
*100) 0 0 0 0 0 100 100
Straight time cost ( Production
hours 15000 30000 32500 40000 45000 40000 202500
*12.50)
TOTAL COST 203300
27. B.PRODUCTION PLAN 2- Constant Workforce (10): Vary
inventory & Stock out
month JAN FEB MAR APR MAY JUN TOTAL
Beginning Inventory 200 140 -80 -310 -690 -1150
working days per month 22 19 21 21 22 20
hours per month( 10 workers *
working days*8hrs per day) 1760 1520 1680 1680 1760 1600
Actual Production( hours per
month
/ 4 hrs per unit) 440 380 420 420 440 400
Total Stock Available
(=Beginning Inventory+ Actual
Production) 640 520 340 110 -250 -750
Demand per month 500 600 650 800 900 800
29. C.PRODUCTION PLAN 3- Constant Workforce (10): Subcontract
month JAN FEB MAR APR MAY JUN TOTAL
Beginning Inventory 200 140
Demand 500 600 650 800 900 800
production Requirement 300 460 650 800 900 800
working days per month 22 19 21 21 22 20
hours per month( 10 workers *
working days*8hrs per day) 1760 1520 1680 1680 1760 1600
Actual Production( hours per month
/ 4 hrs per unit) 440 380 420 420 440 400
unit subcontracted ( production
Reqmnt- 0 80 230 380 460 400
actual Production)
unit excess 140 0 0 0 0 0
31. SUMMARY
PLAN HIRING LAYOFF
SUBCONTRA
CT
STRAIG
HT
SHORT
AGE
EXCES
S TOTAL
TIME
INVEN
TORY COST
Exact
producti
1
o 700 100 202500 203300
vary workforce
2Constant
workforce, vary 125500 75600 1400 202500
inventory
3Constant
workforc
e 155000 125000 1400 281400
Subcontr
act
32. P-604- Sales & Operations Planning - Operations & Supply Chain Management -
Chase
A cut & try example- JC Penny
what is cost of following production strategies
a. produce exactly to meet demand , vary work force , 8 hrs per day
b. produce to meet expected average demand over next six month by maintaining
constant work force , 8 hrs per day
c. produce to meet minimum expected demand ( April 0 using constant workforce
on regular time . Subcontract to meet additional
requitrements
d.produce to meet expected demand for all but first two months using a constant
workforce on regular time.use overtime to meet additional
requirements. June ending inventory to be as close as possible to June safety stock
demand & working days
month JAN FEB MAR APR MAY JUN TOTAL
Beginning Inventory 400 450 375 275 225 275
demand forecast 1800 1500 1100 900 1100 1600 8000
working
days 22 19 21 21 22 20 125
33. Materials 100 per unit
inventory holding cost 1.50 per unit per month
stock out cost 5 per unit per month
subcontracting cost 20 per unit per month
(120 subcontracting cost
less 100 material cost)
hiring cost 200 per worker
firing / layoff cost 250 per worker
labour hours required 5 per unit
straight( normal)time cost 4 per worker
overtime cost 6 per worker
beginning inventory 400 units
safety stock reqd 25% of month demand
34. Beginning inventory 400 450 375 275 225 275
Demand forecast 1800 1500 1100 900 1100 1600
safety stock 0*forecast) 450 375 275 225 275 400
production Requirement
( forecast+safety stock
- beginning inventory) 1850 1425 1000 850 1150 1725 8000
ending inventory
(beginning inventory
+production Requirement
-demand forecast) 450 375 275 225 275 400
A. Production Plan -I : Exact Production - vary
workforce
month JAN FEB MAR APR MAY JUN TOTAL
Production Requirement 1850 1425 1000 850 1150 1725
production hours Required 9250 7125 5000 4250 5750 8625
('=production equirement * 5
hrs/unit)
working days per month 22 19 21 21 22 20
hours per month per worker
( working days*8hrs per day) 176 152 168 168 176 160
demand & working days
35. Workers required (
(production hours Required / hours
per month per worker 52.55682 46.875 29.761925.2976232.6704553.90625
Workers required ( rounding to next 53 47 30 26 33 54
integer
New workers required (opening
workers
=1st months requirement of 53
workers 0 -6 -17 -4 7 21
Workers hired 0 0 0 0 7 21
hiring cost(new workers*200) 0 1400 4200 5600
workers laid off 0 6 17 4 0 0
layoff cost(workers laid off *100) 0 1500 4250 1000 0 0 6750
Straight time cost ( Production hours 37000 28500 20000 17000 23000 34500 160000
*4)
TOTAL COST 172350
36. B.PRODUCTION PLAN 2- Constant Workforce (10): Vary
inventory & Stock out
month JAN FEB MAR APR MAY JUN TOTAL
Beginning Inventory 400 8 -276 -32 412 720
working days per month 22 19 21 21 22 20
no. of workers required( no. of
units 8000 40
* 5 hrs per unit/125 days/8 hrs
per day
hours per month( 40 workers *
working days*8hrs per day) 7040 6080 6720 6720 7040 6400
Actual Production( hours per
month
/ 5 hrs per unit) 1408 1216 1344 1344 1408 1280
Total Stock Available
(=Beginning Inventory+ Actual
Production) 1808 1224 1068 1312 1820 2000
Demand per month 1800 1500 1100 900 1100 1600
38. C.PRODUCTION PLAN 3- Constant Low Workforce :
Subcontract
month JAN FEB MAR APR MAY JUN TOTAL
production Requirement 1850 1425 1000 850 1150 1725 8000
working days per month 22 19 21 21 22 20
hours per month( 25 workers *
no. of workers for minimum 850-
25.2976
April
2
Actual Production hours
available 4400 3800 4200 4200 4400 4000
actual Production- 5 hrs per unit) 880 760 840 840 880 800
unit subcontracted ( production
Reqmnt- 970 665 160 10 270 925
actual Production)
subcontracted cost 19400 13300 3200 200 5400 18500 60000
Straight time cost ( Production
hours 17600 15200 16800 16800 17600 16000 100000
*4)
TOTAL COST 160000
39. D.PRODUCTION PLAN 4- Constant
Workforce : Overtime
month JAN FEB MAR APR MAY JUN
TOTA
L
Beginning Inventory 400 177 554 791
production Requirement 53 47 30 26 33 54 0
working days per month 22 19 21 21 22 20
hours per month( 25 workers *
no. of workers for minimum
(8000-400)/12l 38
Actual Production hours
available 6688 5776 6384 6384 6688 6080
actual Production- 5 hrs per
unit) 1338 1155 1277 1277 1338 1216
demand Forecast 1800 1500 1100 900 1100 1600
40. unit available before overtime -62 -345 177 554 791 407
actual Production)
units overtime 62 345
overtime cost=units5*6 per
hour 1872 10344 12216
safety
stock 450 375 275 225 275 400
units
excess 0 0 0 329 516 7
inventory cost 0 0 0 492.9 774.3 10.8 1278
Straight time cost ( Production
hours 26752 23104 25536 25536 26752 24320 152000
*4)
TOTAL COST 165494
41. SUMMARY
Plan A Plan B Plan C Plan D
ExactPrdn
const
work constlow constant
vary work
force,
vary
work
force workforce
force
inv
&stock
sub
contract overtime
out
1hiring 5600 0 0 0
2layoff 6750 0 0 0
3excess inventory 0 948 0 1281
4shortage 0 1540 0 0
5subcontract 0 0 60000 0
6overtime 0 0 0 12210
7straight tim 160000 160000 100000 152000
total cost 172350 162488 160000 165491
42. Yield management
In service Operations -Managing Demand strategies
1.Partitioning demand- business visitors generally
walk in between 11am to 1 pm. So schedule other
appointment before or after that
2.Price incentives & promotion of off-peak demand
– telephone , hotels , day of the weak
3.Develop complementary services-a.
AC & Heating Services
b.-skiing equipment in winter and mountain racing
bikes in summer
43. 4.Yield management - it involves / deals with
1. Ability to segment markets
2. Perishable inventory
- News paper boy problem
3. Advance sales
-railways , aeroplanes
4. Fluctuating demand
5. Accurate , detailed information systems
44. Industries that utilize fully yield management
techniques are
1. Transportation – oriented industries e.g.
airlines , railways , car rental , shipping ,
vacation oriented tour operatrors ,Cruise
ships, resorts
And other capacity constrained industries
a. Hotel
b. Medicine
c. Storage facilities
d. Broadcasting ( selling commercial time)
45. Yield management how is it done
1. Overbooking – accepting more requests than
capacity
2. Assigning capacity amounts to different market
segments
3. Differential pricing in different market segments
4. Yield management , is misnomer , actually
concerned with managing revenue
Purpose of yield management technique is to sell
right capacity to right customer at right price
Airlines charging differential fare for the same seat
– higher price from price – insensitive business
customers and lower prices to price – sensitive
vacationers