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29982776 Operations Management

# 29982776 Operations Management

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02/16/2014

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Aggregate planning is a complex problem largely because of the need to coordinate interacting
variables in order for the firm to respond to the (uncertain) demand in an effective way. Table 8.2
identifies some of the key variables available to planners and the costs associated with them.

Table. 8.2

Decision variable

Associated cost

1.Varying size of work force

1.Hiring, training, and layoff costs

2.Using overtime or accepting idle time

3.Varying inventory levels

3.Carrying and storage costs

4.Accepting back orders

4.Stockout costs of lost orders

5.Subcontracting work to others

5.Higher labour and material costs

6.Changing the use of existing capacity

6.Delayed response and higher fixed costs

To best understand the effect of changes in these variables, it is useful to first focus upon the
impact of a change in only one variable at a time, with other variables held constant. The examples
that follow show the effect on production costs of (isolated) changes in the decision variables. They
are presented in a simplified format in order to best convey the underlying concept; more realistic

ILLUSTRATION 1: Paris Candy Company has estimated its quarterly demand (cases) as
shown in Table 8.3 and Figure 8.1. It expects the next demand cycle to be similar to this one
and wishes to restore ending inventory, employment, etc., to beginning levels accordingly.

Table 8.3

Demand

Quarter

Units

1st

500

2nd

900

3rd

700

4th

300

Fig. 8.1 Histogram of demand

Aggregate Planning and Master Scheduling

193

Each quarterly change of 200 units output has an incremental labour cost of Rs. 2,000 and
ending levels must be restored to initial levels. What is the cost associated with changing the work
force size?

SOLUTION

Table 8.4

Period

Demand

Work force required

Change of work

Cost

1

500

3

1

2000

2

900

5

2

4000

3

700

4

1

2000

4

300

2

2

4000

Six changes of work force have to be made. Employment change cost = 6 (Rs.2,000)

= Rs.12,000.

ILLUSTRATION 2: (Overtime and idle time) Maintain a stable work force capable of
producing 600 units per quarter, and use OT (at Rs. 5 per unit) and IT (at Rs. 20 per unit).

SOLUTION

Table 8.5

Period

Demand

OT production

Idle Time (IT) capacity Cost in Rs.

(units)

(units)

1

500

-

100

2000

2

900

300

-

1500

3

700

100

-

500

4

300

-

300

6000

Total cost

10000

As shown in Table 8.5, 400 units will be produced on overtime, and workers will be idle when
400 units could have been produced. Total cost is Rs.10000.

ILLUSTRATION 3: Vary inventories: Vary inventory levels, but maintain a stable work
force producing at an average requirement rate (of 2,400 units + 4 quarters = 600 units
per quarter) with no OT or IT. The carrying cost (based on average inventory) is Rs. 32 per
unit per year, and the firm can arrange to have whatever inventory level is required before
period I at no additional cost. Annual storage cost (based on maximum inventory) is Rs. 5
per unit.

194

Operations Management

SOLUTION

Table 8.6

Quarter

Forecast

Rate of

Change in

Cls. balance

End balance

production

inventory

1

500

600

100

100

400

2

900

600

–300

–200

100

3

700

600

–100

–300

0

4

300

600

300

0

300

Total

2400

800

As shown in Table 8.6, inventory is accumulated during quarters 1 and 4, and depleted in quarters
2 and 3. The preliminary inventory balance column shows a negative inventory of 300 in quarter 3,
so 300 must be on hand at the beginning of quarter 1 to prevent any shortage. The average inventory
on hand is the ending balance total of 800 units divided by 4 quarters = 200 units.
Carrying cost, Cc (on avg. inventory)=(Rs. 32 per unit-yr) (200 units) = Rs. 6,400
Storage cost,Cs (on max. inventory)=(Rs. 5 per unit) (400 units) = Rs. 2,000
Total inventory cost (Cc + Cs)=Rs. 8,400
ILLUSTRATION 4: Back orders: Produce at a steady rate of 500 units per period, and
accept a limited number of back orders when demand exceeds 500. The Stockout cost of lost
sales is Rs. 20 per unit.

SOLUTION: A back order is an arrangement to fill a current order during a later period. Stockout
costs occur when some sales (or customers) are lost because products are not immediately available.
In this example, 200 units of the excess demand in period 2 are placed on back order for delivery in
period 4. The other 200 units demanded in period 2 are lost, alongwith the 200 in period 3.
Stockout cost=(200 + 200) (Rs.20 per unit) = Rs. 8,000

ILLUSTRATION 5: Subcontract: Produce at a steady rate of 300 units per period, and
subcontract for excess requirements at a marginal cost of Rs. 8 per unit.

SOLUTION: The firm must subcontract 200 units in period 1, 600 in period 2, and 400 in period 3,
as shown in table.

Subcontract cost=(1200)(Rs. 8 per unit) = Rs.9,600
of the five decision variables considered above, accepting back orders results in the least cost
(Rs. 8,000).

Aggregate Planning and Master Scheduling

195

Qt.

Demand unit

Rs.

Subcontract

1

500

300

200

2

900

300

600

3

700

300

400

4

300

300

400

Total

1200

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