om ii - class 6

7/29/2019 OM II - Class 6

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Demand Forecasting

Capacity Planning

Aggregate Planning

Inventory Control

Scheduling

Quality Control & Maintenance

7/29/2019 OM II - Class 6


Demand Forecasting

Capacity Planning

Aggregate Planning

Inventory Control

Scheduling

Quality Control & Maintenance

7/29/2019 OM II - Class 6


Aggregate planning is a process by which a company aimsat minimizing the cost over the planning period by

adjusting

Production rates

Labor levels

Inventory levels

Overtime work

Subcontracting

Other controllable variables

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Master

productionschedule and

MR Psystems

Detailedwork

schedules

Processplanning and

capacitydecisions

Aggregateplan for

production

Productdecisions

Demand

forecasts,orders

Marketplaceand

demand

Research

and

technology

Rawmaterialsavailable

Externalcapacity

(subcontractors)

Workforce

Inventoryon

hand

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Planners usually try to avoid focusing on individual

products or services – unless the organization has only

one major product or service

Instead, they focus on a group of similar products or

services, or an entire product or service line

For example, planners in a company producingtelevision sets would not concern themselves with 21-

inch sets versus 25-inch or 27-inch sets

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Instead, planners would lump (aggregate) all models

together and deal with them as though they were a single

product

Hence the term aggregate planning

Why do organizations go for aggregation?

It is impossible to predict with any degree of accuracy the

timing and volume of demand for individual items

Locking-in on individual items would result in loss of

flexibility to respond to the market

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Demand Forecasts for each period in the planning

horizon

Production Costs

◦ Labor costs – Regular Time and Overtime ($/Hr)

◦ Cost of subcontracting production ($/Unit)

◦ Cost of changing production – cost of hiring/laying off

workforce ($/Worker) and cost of adding or reducing

machine capacity ($/Machine)

Labor/Machine Hours required per unit

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Inventory holding cost ($/Unit/Period)

Stock-out or Backlog Cost ($/Unit/Period)

Constraints

◦ Limits on Overtime

◦ Limits on Layoffs

◦ Limits on Capital available

◦ Limits on Stock-outs and Backlogs

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Production quantity from regular time, overtime, and

subcontracted time allows determination of number of

workers and supplier purchase levels

Inventory Held – Used to determine warehouse space required

Backlogs/Stock-outs – Used to determine customer service

levels

Workers Hired/Laid Off – Used to determine labor issues

Machine Capacity increase/decrease – Used to determine if

new production equipment needs to be purchased

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Demand options – Proactive

Capacity options – Reactive

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Influencing demand

Use advertising or promotion to increase

demand in low periods

Attempt to shift demand to slow periods

May not be sufficient to balance demand and

capacity

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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 substitutes for

the product or service

Often results in lost sales

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Counter-seasonal product and service mixing

Develop a product mix of counter-seasonal

items

May lead to products or services outside the

company’s areas of expertise

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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

Shortages can mean lost sales due to long lead

times and poor customer service

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Varying workforce size by hiring or layoffs

Match production rate to demand

Hiring and firing costs for hiring and laying off workers

New workers may have lower productivity

Laying off workers may lower morale and

productivity

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Varying production rate through overtime or idle time

Allows constant workforce

May be difficult to meet large increases indemand

Overtime can be costly and may drive down

productivity

Absorbing idle time may be difficult

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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

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Level strategy

- Uses inventory as a lever

- A stable machine capacity and workforce are used

to maintain a constant output

- Inventories or backlogs play a big role

- It can used when inventory carrying costs and

backlog costs are low

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Chase strategy

- Uses capacity as a lever

- Production rate is synchronized with the demand

rate by varying machine capacity or hiring and

laying off workers

- It can be used when the carrying cost of inventoryis very high and costs to change levels of capacity

and workforce are low

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Mixed strategy

- Combination of Level production and Chase demand

strategies

- Examples of management policies

No more than x % of the workforce can be laid off in one

quarter

Inventory levels cannot exceed ‘x’ dollars

- Many industries may simply shut down manufacturingduring the low demand season and schedule employee

vacations during that time

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Jan Feb Mar Apr May Jun Totals

Demand 1200 1400 1700 1900 2300 2000 10500

No. of working days

22 18 20 20 21 19 120

Materials $100/unitInventory holding cost $10/unit/month

Marginal cost of stock-out $20/unit/month

Marginal cost of subcontracting

$100/unit

Hiring and Training cost $250/worker

Layoff cost $200/worker

Labor hours required 4/unit

Regular time cost (8 hours) $12.50/hour

Overtime cost (8 hours) $18.75/hour

Beginning inventory =300

Initial workforce = 45

Final inventory = 300

om ii - class 6

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