IM111 – INDUSTRIAL RELATIONS
Operations Management – Production Planning
The Planning Process
• Long-range plans (more than 18 months)
• Based on company policy and strategy
• Includes issues related to capacity, capital investment, facility location, new products, and new processes.
• Intermediate plans (3 to 18 months)
• Based on long-range plans and strategy
• Limited with resources availability
• Short-range plans (less than 3 months)
• Translates the intermediate plans into short-term plans
• Weekly, daily, and hourly schedules.
Planning Levels
Aggregate Planning
The objective of aggregate planning is to meet forecasted demand while minimizing cost over
the planning period
Aggregate Planning Process
• Determining the quantity and timing of production for the intermediate future to satisfy demand by adjusting:
• Production rates
• Labor levels
• Inventory levels
• Overtime work
• Subcontracting rates
• Other variables
Quarter 1 Quarter 2 Quarter 3
Jan Feb Mar Apr May Jun Jul Aug Sep
150,000 120,000 110,000 100,000 130,000 150,000 175,000 145,000 135,000
The Nature of Aggregate Planning
• Looking at the production in the aggregate
• Not product by product
• Examples: an aggregate plan tells:
• How many cars to make but not how many should be two-door vs. four-door or red vs. green.
• How many tons of steel to produce but does not differentiate grades of steel.
• The process of breaking the aggregate plan down into greater detail is called disaggregation.
Aggregate Planning Strategies
1. Use inventories to absorb changes in demand 2. Accommodate changes by varying workforce size
3. Use part-timers, overtime, or idle time to absorb changes 4. Use subcontractors and maintain a stable workforce
5. Change prices or other factors to influence demand
Capacity Options (1 of 2)
• Changing inventory levels
• Increase inventory in low demand periods to meet high demand in the future
• Increases costs associated with storage, insurance, handling, obsolescence, and capital investment
• Varying workforce size by hiring or layoffs
• Match production rate to demand
• New workers may have lower productivity
• Laying off workers may lower morale and productivity
Capacity Options (2 of 2)
• Varying production rate through overtime and idle time
• Allows constant workforce
• May be difficult to meet large increases in demand
• Overtime can be costly and may drive down productivity
• Absorbing idle time may be difficult
• Subcontracting
• Temporary measure during periods of peak demand
• May be costly
• Assuring quality and timely delivery may be difficult
• Exposes your customers to a possible competitor
• Using part-time workers
• Useful for filling unskilled or low skilled positions, especially in services
Demand Options
• Influencing demand
• Use advertising or promotion to increase demand in low periods
• May not be sufficient to balance demand and capacity
• Back ordering during high-demand periods
• Requires customers to wait for an order without loss of goodwill or the order
• Most effective when there are few if any substitutes for the product or service
• Often results in lost sales
• Counterseasonal product and service mixing
• Develop a product mix of counterseasonal items
• May lead to products or services outside the company’s areas of expertise
Aggregate Planning Options (1 of 2)
Option Advantages Disadvantages Some Comments
Changing inventory levels Changes in human
resources are gradual or none; no abrupt
production changes
Inventory holding cost may increase. Shortages may result in lost sales
Applies mainly to
production, not service, operations
Varying workforce size by hiring or layoffs
Avoids the costs of other alternatives
Hiring, layoff, and training costs may be significant.
Used where size of labor pool is large.
Varying production rates through overtime or idle time
Matches seasonal fluctuations without hiring/ training costs.
Overtime premiums; tired workers; may not meet demand.
Allows flexibility within the aggregate plan.
Sub-contracting Permits flexibility and smoothing of the firm’s output
Loss of quality control;
reduced profits; loss of future business.
Applies mainly in production settings.
Aggregate Planning Options (2 of 2)
Option Advantages Disadvantages Some Comments
Using part-time workers Is less costly and more flexible than full-time workers.
High turnover/ training costs; quality suffers;
scheduling difficult.
Good for unskilled jobs in areas with large
temporary labor pools.
Influencing demand Tries to use excess
capacity. Discounts draw new customers.
Uncertainty in demand.
Hard to match demand to supply exactly.
Creates marketing ideas.
Overbooking used in some businesses.
Back ordering during high-demand periods
May avoid overtime.
Keeps capacity constant.
Customer must be willing to wait, but goodwill is lost.
Many companies back order.
Counter-seasonal product and service mixing
Fully utilizes resources;
allows stable workforce.
May require skills or equipment outside the firm’s areas of expertise.
Risky finding products or services with opposite demand patterns.
Aggregate Planning Costs
• Hiring and firing costs
• Overtime and under time costs
• Inventory carrying costs
• Subcontracting costs
• Part-time labor costs
• Stock outs or back orders costs
Aggregate Planning Outputs
• Total cost of a plan
• Projected levels of:
• Inventory
• Output
• Employment
• Subcontracting
• Backordering
Pure Planning Strategies
• Level capacity strategy
• Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options.
• Chase demand strategy
• Matching capacity to demand; the planned output for a period is set at the expected demand for that period.
• Mixed strategy
• A strategy that considers and implements a fuller range of reactive alternatives than any one “pure” strategy.
General Procedure for Planning
1. Determine demand for each period 2. Determine capacities for each period 3. Identify company policies
4. Determine unit costs
5. Develop alternative plans and costs
6. Select the plan that best satisfies objectives. Otherwise go to step 5.
Plan Objectives
• The objective is come up with a plan that satisfies one, more than one, or all of the following objectives:
• Minimize Costs/Maximize Profits
• Maximize Customer Service
• Minimize Inventory Investment
• Minimize Changes in Production Rates
• Minimize Changes in Workforce Levels
• Maximize Utilization of Plant and Equipment
Developing the Plan
Trial-and-Error Techniques
• Trial-and-error approaches consist of developing simple table or graph that enable planners to visually compare projected demand requirements with existing capacity
• Alternatives are compared based on their total costs
• Disadvantage of such an approach is that it does not necessarily result in an optimal (best or ideal) aggregate plan
Trial-and-Error Technique Assumptions
• The regular output capacity is the same in all periods
• Cost is a linear function composed of unit cost and number of units
• Plans are feasible
• All costs are associated with a decision option can be represented by a lump sum
• Cost figures can be reasonably estimated and are constant for the planning period
• Inventories are built up and drawn down at a uniform rate throughout each period
• Backlogs are treated as if they exist the entire period
Example 1:
• Planners for a company that makes several models of skateboards are about to prepare the aggregate plan that will cover six months.
• Forecasted demand for the next six months is: 400, 400, 600, 800, 1000, and 400; with a total of 3,600 units.
• Costs
• Regular time = $4 per skateboard
• Overtime = $6 per skateboard
• Inventory = $2 per skateboard per month on average inventory
• Back orders = $10 per skateboard per month
Example 1: Level Approach
• They want to evaluate a plan that calls for a steady rate of regular-time output that uses inventory and backorder to absorb the uneven demand.
• Overtime is not used.
• They intend to start with zero inventory on hand in the first month and plan to end inventory with zero units as well.
• Assume a level output rate of 600 units per month with regular time (i.e., 3,600/6 = 600).
• There are 15 workers and each can produce 40 skateboards per month.
• Prepare an aggregate plan and determine its cost using the preceding information.
Example 1: Level Approach Solution
Month 1 2 3 4 5 6 Total
Forecast 400 400 600 800 1,000 400 3,600
Output
Regular 600 600 600 600 600 600 3,600
Overtime - - - - - -
Output – Forecast 200 200 0 (200) (400) 200 0
Inventory
Beginning 0 200 400 400 200 0
Ending 200 400 400 200 0 0
Average 100 300 400 300 100 0 1,200
Backlog 0 0 0 0 200 0 200
Costs Output
Regular $2,400 2,400 2,400 2,400 2,400 2,400 $14,400
Overtime - - - - - -
Hire/Lay off - - - - - -
Inventory $200 600 800 600 200 0 $2400
Back orders $0 0 0 0 2,000 0 $2,000
Total $,2600 3,000 3,200 3,000 4,600 2,400 $18,800
Example 1: Mixed Approach
• After reviewing the plan developed in the preceding example, planners have decided to develop an alternative plan.
• They have learned that one person is about to retire from the company.
Rather than replace that person, they would like to stay with the smaller workforce and use overtime to make up for the lost output.
• The reduced regular-time output is 560 units per month (14 workers @ a rate of 40 units/worker).
• The maximum amount of overtime output per month is 80 units and overtime is allowed in months 3, 4, and 5.
• Develop a plan and compare it to the previous one.
Example 1: Mixed Approach Solution
Month 1 2 3 4 5 6 Total
Forecast 400 400 600 800 1,000 400 3,600
Output
Regular 560 560 560 560 560 560 3,360
Overtime - - 80 80 80 - 240
Output – Forecast 160 160 40 (160) (360) 160 0
Inventory
Beginning 0 160 320 360 200 0
Ending 160 320 360 200 0 0
Average 80 240 340 280 100 0 1,040
Backlog 0 0 0 0 160 0 160
Costs Output
Regular $2,240 2,240 2,240 2,240 2,240 2,240 $13,440
Overtime - - 480 480 480 - $1,440
Hire/Lay off - - - - - -
Inventory $160 480 680 560 200 0 $2,080
Back orders $0 0 0 0 1,600 0 $1,600
Example 1: Chase Approach
• The production planner of the skateboard company is now considering to switch to a chase planning strategy.
• The company will start with 14 workers and will adjust the production level using hiring and laying off.
• The cost of hiring is set at $400 per worker, and lay off is $200 per worker.
• Develop a chase plan and compare it to the other ones.
Example 1: Chase Approach Solution
Month 1 2 3 4 5 6 Total
Forecast 400 400 600 800 1,000 400 3,600
Output
Regular 400 400 600 800 1,000 400 3,600
Workforce 10 10 15 20 25 10
Hire/Lay off
Hire 0 0 5 5 5 0 15
Layoff 4 0 0 0 0 15 19
Costs Output
Regular $1,600 1,600 2,400 3,200 4,000 1,600 $14,400
Hire/Lay off $800 0 2,000 2,000 2,000 3,000 $9,800
Total $2,400 1,600 4,400 5,200 6,000 4,600 $24,200
Practice Question (Level Approach)
• Use the quantities given in slide 5 as a demand forecast and assume the following costs:
• Regular time = $0.5 per unit
• Inventory = $0.1 per unit per month on average inventory
• Back orders = $2.5 per unit per month
• Assume that there are 900 workers and each can produce 150 units per month. Also assume that the beginning inventory is zero and the ending inventory is planned to be zero.
• Use the level strategy to develop an aggregate plan for the mentioned 9-month period.
Practice Question (Mixed Approach)
• Assume that the number of workers has been reduced to 830 and the maximum amount of overtime output per month is 31,500 units,
which is allowed in January, February, and March only.
• The overtime cost = $0.65 per unit.
• Develop a plan and compare it to the previous one.
Practice Question (Chase Approach)
• If you want to consider switching to a chase planning strategy.
• Assume that the company will start with 1,000 workers and will adjust the production level using hiring and laying off.
• The cost of hiring is set at $100 per worker, and lay off is $50 per worker.
• Develop a chase plan and compare it to the other ones.
References
• Stevenson, “Operations Management”, 11th Edition, McGraw-Hill.
• Jay Heizer and Barry Render, “Operations Management”, 10th Edition, Pearson.