Industrial Facilities Design

28/3/2012

lectur # 31 & 32

(7th Term, Batch 2009)

Lecture Outline

28/3/2012

Production + Planning
Common of Objectives Of P Planning
P Planning (Classification)
Aggregate P Planning
Capacity Decision Hierarchy
Aggregate Planning Process
Methods of Influencing Demand & Supply
APP Variables
Strategies for Adjusting Capacity
Aggregate P Planning Example

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Production
Production is a function in which raw
materials or human efforts (inputs) are
transformed into finished good or
services (outputs)

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Planning
An organizational process of creating
and maintaining a plan;
Or
The psychological process of thinking
about the activities required to create a
desired goal on some scale
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Common objectives of
production planning...
MINIMIZE:
cost, inventory levels, changes in work
force levels, use of overtime, use of
subcontracting, changes in production
rates, plant/personnel idle time
MAXIMIZE:
profits, customer service

Slide
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11.5
11.5

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Production Planning

Long Range Planning

Strategic planning (1-5 years)

Medium Range Planning

Employment, output, and inventory levels (2-

18 months)

Short Range Planning

Job scheduling, machine loading, and job

sequencing (0-2 months)

Slide
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11.6
11.6

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Aggregate production
planning
is medium-term capacity
planning over a two to eighteen
month planning horizon. It
involves determining the lowestcost method of providing the
adjustable capacity for meeting
Slide
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11.7
11.7

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Capacity Decisions
Hierarchy
Linkages
Facilities
Planning
Aggregate
Planning
Scheduling

Time Frame
Time
Slide
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11.8
11.8

Scheduling
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Facilities Planning
Aggregate Planning

Aggregation refers to the idea

of focusing on overall capacity,
rather than individual products
or services.
Aggregation is done according to:
Products
Labor
Time

Slide
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11.9
11.9

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Aggregate production
planning involves managing...

Slide
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11.10
11.10

Work force levels - the number of

workers required for production.
Production rates - the number of units
produced per time period.
Inventory levels - the balance of unused
units carried forward from the previous
period.

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Aggregate Planning Process

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Methods of Influencing
Demand

Slide
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11.12
11.12

Price Incentives
Reservations
Backlogs
Complementary Products or Services
Advertising/promotion
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Methods of Influencing
Supply

Slide
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11.13
11.13

Hiring/firing workers
Overtime/slack time
Part time/temporary labor
Subcontracting
Cooperative arrangements
Inventories

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Aggregate Production
Planning Variable Costs

Slide
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11.14
11.14

Hiring/firing costs
Overtime/slack time costs
Part time/temporary labor costs
Subcontracting costs
Cooperative arrangements costs
Inventory carrying costs
Backorder or stock out costs

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Strategies for Adjusting

Capacity

Level production

Overtime and under-time

Producing at a constant rate

and using inventory to absorb

fluctuations in demand

Chase demand

Increasing or decreasing

working hours

Subcontracting
Let outside companies

Hiring and firing workers to

match demand

complete the work

Peak demand

Part-time workers
Hiring part time workers to

Maintaining resources for

high-demand levels

complete the work

Backordering
Providing the service or

product at a later time period

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Level Production
Demand

Units

Production

Time
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Chase Demand
Demand

Units

Production

Time
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Level Production
Strategy
Level production
(50,000 + 120,000 + 150,000 + 80,000)
= 100,000 pounds
4
SALES
FORECAST
80,000
50,000
120,000
150,000

PRODUCTION
QUARTER
PLAN
INVENTORY
Spring
100,000
20,000
Summer
100,000
70,000
Fall
100,000
50,000
Winter
100,000
0
400,000
140,000
Cost of Level Production Strategy
(400,000 X $2.00) + (140,00 X $.50) = $870,000
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Chase Demand Strategy

QUARTER

SALES PRODUCTION
FORECAST
PLAN

Spring
Summer
Fall
Winter

80,000
50,000
120,000
150,000

WORKERS WORKERS WORKERS

NEEDED
HIRED
FIRED

80,000
50,000
120,000
150,000

80
50
120
150

0
0
70
30

20
30
0
0

100

50

Cost of Chase Demand Strategy

(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

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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

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Many industries may simply shut down

manufacturing during the low demand
season and schedule employee
vacations during that time
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Aggregate Planning
Example
A small manufacturing company with 200 employees produces
umbrellas. The company produces the following three product lines:
1) the Executive Line, 2) the Durable Line and 3) the Compact line,
as shown in the below

Executive
Line
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Compact
Line
Durable
Line

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Aggregate Planning
Example:
Demand for Executive
Umbrellas
10000

10000

8000
6000

Number of working days:

8000
7000
6000

5500
4500

4000
2000
0
Jan

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Fe b

Ma r

Apr

Ma y

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J un

Jan:
Feb:
Mar:
Apr:
May:
Jun:

22
19
21
21
22
20

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Aggregate Planning
Example:
CostMaterials
Information for
$5.00 /unit
Holding costs Umbrellas
$1.00 /unit/month
Executive
Marginal cost of stockout
Hiring & training cost
Layoff costs
Labor hours required

$1.25
$200.00
$250.00
0.15

Straight time labor cost

Beginning inventory
Productive hours
Paid straight hours
Beginning # of workers
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$8.00
250
7.25
8
7

/unit/month
/worker
/worker
hrs/unit

/hr
units
hrs/worker/day
hrs/day
workers
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Aggregate Planning Example:

Determining Straight Labor Costs and Output for Executive Umbrellas

Days/mo
Hrs/worker/mo
Units/worker
$/worker

J an
22
159.5
1063.33
$1,408

Feb
19
137.75
918.33
1,216

Mar
21
152.25
1015
1,344

Apr
21
152.25
1015
1,344

May
22
159.5
1063.33
1,408

J un
20
145
966.67
1,280

January
159.5
1063.33
$1,408

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= 22 [days/month] * 7.25 [productive hrs/worker]

= 159.5 [hrs/worker/month] / .15 [hrs/unit]
= 8 [$/hr] * 8 [paid hrs/day] * 22 [days/month]

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Aggregate Planning Example:

Determining Straight Labor Costs and Output for Executive Umbrellas

Aggregate Planning Problem

Days/month
Hrs/worker/month
Units/worker
Labor cost/worker

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Jan
Feb
Mar
Apr
May
Jun
22
19
21
21
22
20
160
138
152
152
160
145
1,063
918
1,015
1,015
1,063
967
$1,408.00 $1,216.00 $1,344.00 $1,344.00 $1,408.00 $1,280.00

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Aggregate Planning
Example

Objective:Umbrellas
Adjust workforce level so as to
n
Chase StrategyJ afor
Executive

Days/mo
Hrs/worker/mo
Units/worker
$/worker

Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory
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22
159.5
1,063.33
$1,408

J an
4,500
250
4,250
3.997
3
4
0

eliminate the need to carry inventory from

period to period

4,500 units is the demand in January (any

combination of firm orders and forecast
250 is the starting inventory position
4,250 = 4,500 250
3.997 = 4,250 / 1,063.33
7 = workforce level at the beginning of
January
3 = 7 4 = workers fired
4 = workforce level at end of January
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0 =# ending
inventory level
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Aggregate Planning
Example
Chase Strategy for Executive Umbrellas
Chase Strategy
Demand
Beginning inventory
Net requirements
Beginning # of workers
Required workers
Workforce adjustment
Production quantity
Ending inventory

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Jan
4,500
250
4,250
7
4
-3
4,250
0

Feb
5,500
0
5,500
4
6
2
5,500
0

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Mar
7,000
0
7,000
6
7
1
7,000
0

Apr
10,000
0
10,000
7
10
3
10,000
0

May
8,000
0
8,000
10
8
-2
8,000
0

Jun
6,000
0
6,000
8
6
-1
6,000
0

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Aggregate Planning
Example
Chase Strategy Costs

Chase Strategy for Executive Umbrellas

Material cost
Labor cost
Hiring cost
Firing cost
Inventory holding cost
Inventory stockout cost

Jan
Feb
Mar
Apr
May
Jun
$21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 $203,750.00
$5,628.00 $7,283.00 $9,269.00 $13,242.00 $10,594.00 $7,945.00 $53,961.00
$0.00 $400.00 $200.00 $600.00
$0.00
$0.00 $1,200.00
$750.00
$0.00
$0.00
$0.00 $500.00 $250.00 $1,500.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
TOTAL: $260,411.00

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January costs: $21,250.00 = 4,250 [units] * $5 [$/unit]

$ 5,627.59 = 3.997 [workers] * 1,408 [$/worker]
$ 750.00 = 3 [workers fired] * 250 [$/worker fired]
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Aggregate Planning
Example
Level Strategy for Executive Umbrellas

Demand
Beg. inv.
Net req.
Workers
Production
Ending inventory
Surplus
Shortage
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J an
4,500
250
4,250
6
6,380
2,130
2,130

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Objective: Adjust inventory

level so as to eliminate the
need to hire or fire workers
from period to period
Assume that January is started
with 6 employees
6,380 = 6 [employees] *
1,063.33
[units/worker]
2,130 = 6,380 4,250 (surplus)

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Aggregate Planning
Example
Level
for Executive Umbrellas
LevelStrategy
Capacity Strategy
Demand
Beginning inventory
Net requirements
Beginning # of workers
Required workers
Workforce adjustment
Production quantity
Ending inventory

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Jan
4,500
250
4,250
6
4
0
6,380
2,130

Feb
5,500
2,130
3,370
6
4
0
5,510
2,140

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Mar
7,000
2,140
4,860
6
5
0
6,090
1,230

Apr
10,000
1,230
8,770
6
9
0
6,090
-2,680

May
8,000
-2,680
10,680
6
10
0
6,380
-4,300

Jun
6,000
-4,300
10,300
6
11
0
5,800
-4,500

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Aggregate Planning
Example

Level Capacity
Strategy Costs
Level
Strategy
for Executive Umbrellas
Material cost
Labor cost
Hiring cost
Firing cost
Inventory holding cost
Inventory stockout cost

Jan
Feb
Mar
Apr
May
Jun
Total
$31,900.00 $27,550.00 $30,450.00 $30,450.00 $31,900.00 $29,000.00 $181,250.00
$8,448.00 $7,296.00 $8,064.00 $8,064.00 $8,448.00 $7,680.00 $48,000.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$2,130.00 $2,140.00 $1,230.00
$0.00
$0.00
$0.00 $5,500.00
$0.00
$0.00
$0.00 $3,350.00 $5,375.00 $5,625.00 $14,350.00
TOTAL: $249,100.00

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January costs: $8,448 = 6 [workers] * $1,408 [$/worker]

$ 31,900 = 6,380 [units] * $5 [$/unit]
$ 2,130 = 2,130 [surplus units] * $1 [$/unit held/month]
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Aggregate Planning
Example
Which
PlanCapacity
is Cheaper?
Level

$249,100.00

Chase
$260,411.00

Clearly, the level capacity plan is cheaper over

the selected time horizon
Note: Be cautious in using the chase strategy as many
intangibles, such as employee loyalty and commitment
to the organization are adversely affected
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