Master Operations Scheduling Game

Background to your company operations Marketing Considerations Your company manufactures a consumer product which is purchased for resale by numerous wholesale and retail establishments. The market for your product is highly competitive and subject to both cyclical and seasonal fluctuations. The timing and extent of seasonal peaks are influenced by weather conditions and thus can be forecast with only moderate accuracy. Although the annual sales forecast made each November has been, on the average, within plus or minus 10 per cent of total actual sales, there had been years in which the forecast total varied from the actual results by as much as plus or minus 20 per cent. Moreover, the forecast of sales for any of the four 13-week operating periods into which the year is divided is sometimes in error by as much as plus or minus 33 per cent of the results actually obtained. These forecasting inaccuracies are tempered somewhat by the fact that certain customers usually negotiate purchase contracts for at least a portion of their requirements 60 to 120 days in advance of the shipping date. As a result, in most years anywhere from 10 to 30 per cent of the shipping requirements for a given operations period are booked sometime during the second operating period ahead of the period in which delivery has to be made. An additional 20 to 60 per cent are booked one period ahead. In total, therefore, Advanced Commitment Sales already on the books at the start of a period rarely represent less than 30 per cent and sometimes amount to as much as 90 per cent of the shipments that the factory will be called to make out of current production or finished goods inventory during the period. The remaining delivery commitments, known as Single Period Sales that is, sales that are booked and shipped during the same operating period sometimes involve as little as three weeks lead time. Since such sales frequently represent supplemental orders placed by important customers, your company makes every effort to meet even the tightest delivery deadline, as do its major competitors. Customers rarely cancel an order once it has been booked. On the other hand, since the product is bulky and therefore costly to handle and store, customers are unwilling to accept delivery much in advance of the date requested. Therefore, if factory production runs

Master Operations Scheduling Game

ahead of the actual shipping requirements during a given operating period, your company has to carry the excess units as finished goods inventory. Advertising and Sales Promotion Efforts Basic Programs and Special Supplementary Campaigns Within your company and the industry there is agreement that industry-wide sales for any operating period are more decisively influenced by weather conditions than any other single factor. Moreover, research studies have indicated that brand loyalty is significant to only about half of the customers who regularly purchased this product. Therefore, even though weather plays a major role in determining when and in what quantities retail customers buy such items, the choice between competing brands can be considerably influenced by advertising and other sales promotional techniques, such as price discounts, premium offers, and contests. In common with all major companies in the industry, prior to the start of each calendar year your company commits itself to a carefully planned basic advertising and sales promotion program for the ensuing year. This entails the commitment of a specific amount of money. The exact amount usually is a predetermined percentage of the sales revenues forecast for the coming year. Experience has convinced your organisations top management that under certain circumstances it is profitable to augment this basic program with supplemental advertising and sales promotion campaigns (SASP) during all, or part, of particular operating periods. To assess the advisability of launching such campaigns, the following rules of thumb have proven useful: Type of supplemental advertising and sales promotion campaign Extra costs per period incurred from supplemental campaign
Approximate percentage increase in sales for the period that can probably be achieved over the sales that would result from the basic program alone.

Type 1 (Modest step-up in efforts) Type 2 (Major step-up in efforts) Type 3 (Max. step-up in efforts)

$ 10,000 $ 20,000 $ 50,000

10% 20% 30%

For any of these supplemental campaigns to yield results during a given operating period it is essential that commitments be made no later than the start of the period. Nor is it possible, except at prohibitive cost, to abandon a campaign once it has been undertaken.

Master Operations Scheduling Game

Furthermore, experience indicates that even if the extra expenditures are increased substantially beyond $ 50,000, sales are not likely to exceed 130 per cent of the level they will reach with only the basic program. In commenting upon this phase of operations, one of your senior executives has stated, It is imperative that a decision regarding a SASP campaign be based on a painstaking analysis of the total situation. I have reference not only to the status quo then surrounding the company, but also the probable future course of events, the plans being launched by the other sectors of the business, and so on. This can be tricky. It is a nightmare to find yourselves committed to a maximum effort Type 3 campaign during a period in which actual sales are so favourable that the factory is unable to meet even the demand that would have been generated by the basic program. On the other hand, not to have launched an SASP campaign during a period in which sales fall seriously short of the factory output appears, by hindsight, to be inexcusably poor management. But by digging and analysing, it is possible to assess if a supplemental campaign is likely to be helpful. Factory Output Capabilities and Direct Labour Costs As noted previously, your company divides the calendar year into four consecutive operating periods of 13 weeks each. The range of factory output capabilities per period, and the average direct labour cost per unit under each of the three factory operating conditions that management believes to be feasible, are as follows: Factory Operating Conditions Single shift without Overtime Single shift with Overtime Output Capabilities per Operating Period* 60,000 units or less 61,000 to 80,000 units Average Direct Labour Cost per Unit $ 5.00 $ 5.00 for first 60,000 units $ 7.50 per unit thereafter $ 5.00 for first 60,000 units $ 5.50 per unit thereafter

Two shifts

61,000 to 110,000 units

* (Note: For planning and scheduling purposes, factory output is always expressed in multiples of thousands of units.)

Master Operations Scheduling Game

Scheduling and Planning Factory Activity Until recently, your companys policy has been to increase or to decrease the rate of factory output frequently. This has been accomplished by hiring or laying off workers; increasing or decreasing overtime; changing the number of shifts, and so on, whenever sales fluctuation seemed to warrant it. After careful study, however, your Board of Directors has become convinced that the costs and inefficiencies associated with such frequent changes are excessive, and that with careful planning a more stable, and hence more profitable, pattern of operations could be achieved. Instructions have been given, therefore, to your operating management that until further notice it is to adhere to a policy decision that the level of factory operations can be changed no more than four times per calendar year, and that such changes can only occur at the start of an operating period. Once the level of factory activity has been determined for a given period, it cannot be changed until the start of the next period. In commenting on this new policy, your Board Chairman has stated, Granting that forecasting is difficult in our industry, we feel that it still is not unreasonable to expect our operating management to do a sufficiently sound job of planning to be able to live with their decisions for at least a three-month period. Extra Costs arising from Scheduling or Forecasting Problems Simultaneously with announcing the new policy regarding the number and frequency of changes in factory output rate, your companys Directors announced their intention to employ the results of a recently completed cost analysis. This study had been undertaken by representatives of the Sales, Production, Finance, and Accounting Departments to provide information on the extra costs incurred whenever problems of scheduling or forecasting caused your company to adopt any of the following three types of action: 1. Making changes in the rate of factory operations: that is, the extra costs incurred from having to recruit, hire, and train additional employees or from having to lay off present employees; from having to place rush orders for additional materials; from increases in state unemployment taxes arising from an irregular employment record; and so on. 2. Carrying finished goods inventories: that is, the extra costs incurred from the physical movement and storage of finished products; the cost of insurance, the risk of theft, damage, deterioration, or obsolescence, or all of these; the cost of the capital tied up in such inventories; and so on.

Master Operations Scheduling Game

3. Defaulting on a delivery promise made to a customer: that is, extra costs arising from the use of airfreight to expedite delivery on a delayed order; losses arising from a customers refusal to accept late delivery; estimates, based on past experience, of the risk that such non-deliveries will result in legal action or in the loss of future sales from the customer in question or from other customers who learn of the situation; and so on. The results of the study were as follows: Extra costs incurred from changes in the rate of factory output: $2.00 per unit of change, regardless of whether the change is upward or downward. Extra costs, in addition to those cited above, from changes in the number of shifts employed in the factory: 1. 2. Going from 1 shift to 2 shifts: Going from 2 shifts to 1 shift: $7,000 $3,000

Extra costs from overtime or second shift premiums: 1. 2. Overtime: $2.50 per unit for each unit of factory output in excess of 60,000 units per period. Second-shift: $.50 per unit for each unit of factory output in excess of 60,000 units per period.

Extra costs of missed delivery promises: $6.00 per unit per period. Extra costs of carrying finished goods inventory: $1.00 per unit per period (to be applied to the average size of the inventory, that is, one half of the sum of the beginning inventory for the period plus the closing inventory). (Note: Single shift plus overtime can be used only up to a maximum factory output rate of 80,000 units per period. To obtain an output rate in excess of 80,000 units requires the use of a second shift. To obtain an output rate between 61,000 and 80,000 units, operating management can choose either single-plus-overtime, or two-shift operations. Also note that if the output rate falls below 60,000 units, the factory will operate in the single shift mode only.) Special Internal Controls One of the top managements objectives in obtaining such cost information was to establish a special system of internal controls which would help the Directors make a continuing assessment of the performance of operating management. Therefore, in addition to the conventional profit and loss statement, the Directors also now require

Master Operations Scheduling Game

that at the close of each operating period operating management complete and submit the form shown in Exhibit 1. These internal controls are based upon the conviction that, on the average, each unit shipped from the factory generates a potential contribution of $3.00. That is to say, if operations are at maximum efficiency, your company can meet all variable costs arising from the production of the unit in question and still have $3.00 of the selling price available as a contribution toward its fixed costs, taxes, and profits. This potential contribution is reduced, however, by any extra costs incurred during the period. Use of this concept requires that the following computations be made for each operating period: 1. Number of units actually shipped X $3.00 = potential contribution for the period. 2. Extra costs incurred during period = cost of any supplementary advertising or sales promotion campaign plus any extra costs arising from scheduling or forecasting problems. 3. Net operating contribution for period = potential contribution minus extra costs incurred. An Example of the System at Work: The First Operating Period of the Current Year During the final week of the year just concluded, your factory was operating at an output rate of 71,000 units per period, that is, the rate that had been set at the start of the period. This had been accomplished through use of single shift plus overtime. All orders calling for shipments during the fourth period have now been received, and it has been determined that after meeting these your company will end the current year with a finished goods inventory of 10,000 units. The sales forecast for the following year, prepared by the Sales Department in November, is as follows: Period # 1 2 3 4 Total Delivery Requirements Forecast 70,000 units 82,000 units 125,000 units 59,000 units 336,000 units

By late December, your companys operating management also knew that 44,000 units of advance sales commitments calling for delivery

Master Operations Scheduling Game

during period #1 of the coming year were already on the books. Of this total, 18,000 units had been booked during period #3 of the year just concluding, and 26,000 units during period #4. An additional 28,000 units of advance commitments had been booked in period #4 for delivery during period #2 of the coming year. After studying these facts, your companys operating management decided that during period #1 of the new year, the factory would be operated on a single-shift-plus-overtime basis at an output rate of 62,000 units; that is to say, a reduction of 9,000 units would be made in the rate maintained during the fourth period of the year then concluding. In addition, it was decided that a Type 1 supplementary advertising and sales promotion campaign would be launched during period #1 in an effort to stimulate sales by about 10 per cent. During actual operations in period #1, the following sales results were achieved1: Period in which Shipment Called for 1 (Single Period Sales) 2 3 Amount of Orders Booked 32,000 units 40,000 units 28,000 units

As a result of these developments, total delivery requirements for period #1 turned out to be 76,000 units: the 44,000 units of advanced commitment sales booked prior to the start of period #1, plus the 32,000 units of single period sales booked during period #1. However, your company was able to ship2 only 72,000 units of this total: the 62,000 units that were produced by the factory during period #1, plus the 10,000 units which were available in the form of finished goods inventory at the start of the period. Therefore, your company will enter period #2 with a shipping deficit of 4,000 units in overdue orders which will have to be met at the earliest possible date out of period #2 factory output.

The figures have already been adjusted for the additional sales expected due to Type 1 advertising campaign launched at the beginning of the period. 2 In most instances, orders shipped from the factory during the last few days of a period are not received by the customer until early in the following period. This brief lag is not considered important within the industry, however, and all shipments leaving the factory during a particular period are assumed to be applicable to the shipment requirements of the period.

Master Operations Scheduling Game

Under your companys internal control system, period #1 operations resulted in a net operating contribution of $154,000, computed as shown in Exhibit 1. Now, operating management must make various decisions regarding operations during period #2. It knows positively that as early as possible in period #2 your company must ship the 4,000 units of delayed deliveries, that is, the shipping deficit incurred in period #1. It knows also that during period #2 the factory will have to ship an additional 68,000 units to satisfy advanced sales commitments booked for period #2: the 28,000 units booked during period #4 of the previous year, plus the 40,000 units booked during period #1 of the current year. Before deciding upon the rate at which to operate the factory during period #2, your management will also have to reach a conclusion regarding the additional shipping requirements that are likely to arise from single period sales that will be booked during period #2. Attention will have to be given to the possibility that the factory should begin building up its inventory position in anticipation of shipping requirements in period #3. Decisions on these points will be based, of course, on a careful analysis of the sales forecasts and the sales trends that seem to be developing, as reflected in sales to date for the year. An Unexpected Development Several hours prior to the time they were to meet to reach final decisions regarding period #2 operations, the entire operating management of your company was pirated en masse by a desperate competitor who tripled their salaries and offered them lavish stock options. In light of this crisis, you have accepted an assignment to join a newly formed management group which will assume full responsibility for the companys operating decisions. You and your new associates have agreed to meet as soon as possible to decide upon the organisational techniques and procedures you will employ in meeting your new responsibilities. In recognition of the difficulty of your situation the Directors have given you and your associates complete latitude regarding who, among you, will assume what executive positions. While congratulating you on your new responsibilities, one of the Directors offers you a few words of advice:
Look, the secret of success in our company like any other is organising an effective management team. In a technical sense, there are only three things that have to be done: (1) before the start of each period you have to decide upon the rate at which the factory is going to be run during the ensuing 13 weeks;

Master Operations Scheduling Game (2) you have to decide whether or not to employ a supplemental advertising and sales promotion campaign during the forthcoming period and, if so, which one; and (3) you have to compute the net operating contribution for the period just ended, and submit this figure to the Directors. Clearly its imperative that you assign specific responsibility for each of these steps. But these formal requirements represent only part of the story. Sound decisions regarding the factory rate and the desirability of a supplemental advertising campaign can only grow out of careful analysis of various known facts, and a resourceful prediction regarding certain unknowns. There are data, and trends, and other evidence that helpfully can be brought to bear on both of these matters. The trick is to organise for the analytical job that is required. The task is too complex and the time pressure too great for any one man to do alone. And the situation is undergoing too rapid a rate of change to permit operating management to rely merely on intuition, or on the hope that the disorganised efforts of able men will somehow yield wise results. Instead, each manager must assume some portion of the total job, and all of these individual efforts must then be blended into an effective whole. I urge you and your colleagues to start by making a careful analysis of our company, the market it serves, the relationship between the various costs it encounters, and so on. Then reach agreement regarding the precise information and data that you need to compile to sharpen your judgement regarding the various decisions you know you will be having to make. For example, might there be some way to highlight the constantly changing relationship between sales forecasts and actual sales results? Might there be some way to assure that before committing the factory to a given output rate for the next period, you examine the costs under several different output rates? Is there some device that will assure that the plans of the factory, and of the Sales Department, are carefully co-ordinated? And so on. Once you decide the analytical approaches you want to employ, pin down responsibility for executing them. And decide in advance just how you plan to go about making final decisions. Is the President alone going to have the final say, with all of the other managers acting as staff advisors to him? Or are decisions to be divided up functionally, with a Sales Manager deciding matters relating to sales, a Production Manager deciding factory matters, and so on? Or should the management group act as a committee, reaching decisions via majority vote? Or would some still different organisational approach be better suited to managements needs? Well, best of luck. Were up against some tough competitors. But the other Directors and I expect you to run circles around them.

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Exhibit 1 NET OPERATING CONTRIBUTION CALCULATION SHEET (to be turned in after each Period) Management: Team A I. Activities During this Period (a) Factory Operations (circle one); Single Shift without overtime Two Shifts (b) Factory Rate This period : Prior period : Change in rate 62,000 units 71,000 units : 9,000 units Single Shift with Overtime Period: 1 Year: 1

(c) Supplementary Advertising & Sales Promotion Campaign (circle one): None Type 2 ($ 20,000) II. Nil Advance Commitment Sales Booked for delivery this period : 44,000 Single Period Sales, this Period : 32,000 Total shipping requirements : 76,000 III. Shipping Capabilities this Period (Units) Starting Finished Good Inventory 10,000 Factory Output Rate this Period 62,000 Total Shipping capabilities 72,000 : : : Type 1 ($ 10,000) Type 3 ($ 50,000)

Shipping Requirements this Period (Units) Delivery Deficits from prior Periods :

Master Operations Scheduling Game

11

IV.

Shipments made During this Period (Units) :

Minimum of the total in item II or item III 72,000 V. Delivery Deficit (Units) If item II is greater than item III, the difference 4,000 VI. Ending Finished Goods Inventory (Units) If item II above is less than item III, the difference : Nil VII. Potential Operating Contribution for this Period

Shipments made this period (item IV above) 72,000 units x $ 3 :$ 216,000 VIII. Extra Costs and Expenses incurred this Period a) Supplementary Advertising (see item I-c above) :$ 10,000 b) Change in Factory Rate (item 1-B above X $ 2) : $ 18,000 c) Change in number of Factory Shifts (changing from 1 to 2 costs $ 7,000; from 2 to 1 costs $ 3,000) d) Overtime or 2nd Shift Premiums (Overtime costs $ 2.5 per unit for all units in excess of 60,000; 2nd Shift costs $ 0.5 per unit for all units in excess of 60,000 5,000 e) Inventory Carrying Costs (Starting Inventory + Ending Inventory) x 0.50 x $ 1.00 5,000 f) Missed Delivery Promises (Item V above x $ 6.00) 24,000 :$

Nil

:$

:$

Master Operations Scheduling Game

12 :$

Total extra costs & Expenses incurred 62,000 IX . Net Operating Contribution for Period Item VII minus VIII :$ 154,000 Cumulative Operating Contribution from prior Periods New Cumulative Net Operating Contribution (sum of the above two items) ******* Your companys decisions regarding next operating period Factory Operations : Factory Rate : Supplementary Advertising : units

: :

Data Sheet for Master Operations Scheduling Game Write your Name, Roll Number and Section in this box Section: Sl. No. 1 2 3 4 5 6

Name

Roll No.

Enter your decisions in the box below Period 1 2 3 4 5 6 Shift/OT details* 1S - OT Production Rate 62,000 Type of Advt.# Type 1

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7 8 9 10 11 12 * Make use of the following notations for filling this column: 1S no OT for singe shift with no over time 1S OT for single shift with over time 2S for double shift # Make use of the following notations for filling this column: Type 0 for no Advt. Campaign Type 1, 2, 3 for the respective type of Advt. Campaign launched