14-12-2021

PRODUCTION & OPERATION MANAGEMENT-II

SALES & AGGREGATE OPERATIONAL PLAN
OPERATIONS
PLANNING
is a plan for labor & production for the intermediate
term with the objective to minimize the cost of
resources needed to meet demand.

Dr.Deepak Kumar Singh Companies use to keep demand and supply in balance
by coordinating
manufacturing,
distribution,
marketing &
financial plans.
Dr.D K Singh, Professor in Office, KSOM 1 Dr.D K Singh, Professor in Office, KSOM

Sales and Major Sales and Operations Planning Activities

Operations
Planning
Involves:
• Strategic and tactical
considerations
• Top-down planning
• Bottom-up planning
• Optimization techniques

Dr.D K Singh, Professor in Office, KSOM 3 Dr.D K Singh, Professor in Office, KSOM 4

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Dr.D K Singh, Professor in Office, KSOM 5 Dr.D K Singh, Professor in Office, KSOM 6

Dr.D K Singh, Professor in Office, KSOM 7 Dr.D K Singh, Professor in Office, KSOM 8

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Sales and Operations Planning Activities – Overview Aggregate Operations Plans

• Specifies the optimal combination of
Sales and operations planning was coined by companies to • Production rate (units completed per unit of time)
refer to aggregate planning.
• Workforce level (number of workers needed in a period)
• Inventory on hand (inventory carried from previous period)
The new terminology is meant to capture the importance of
cross-functional work.
• Product group or broad category (aggregation)

Aggregation on the supply side is done by product families,

and on the demand side it is done by groups of customers. • Planning done over an intermediate-range planning period of 3 to
18 months
Dr.D K Singh, Professor in Office, KSOM 9 Dr.D K Singh, Professor in Office, KSOM 10

Inputs to the Production Planning System Production Planning Strategies

Match the production rate by
hiring and laying off
Production planning strategies are Chase
strategy
employees
Must have a pool of easily

the plans for meeting demand. trained applicants to draw on

Trade offs involved include

workers employed, work hours, Vary the number of hours
worked through flexible
Stable
workforce—
work schedules or overtime variable
inventory and shortages. work hours

A pure strategy uses just one of Level

Demand changes are
absorbed by fluctuating
strategy inventory levels, order
these approaches, a mixed backlogs, and lost sales

strategy uses two or more.

Hiring and laying off are
translated into
Sub-
subcontracting Contracting

Dr.D K Singh, Professor in Office, KSOM 11 Dr.D K Singh, Professor in Office, KSOM 12

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Relevant Costs Aggregate Planning Techniques

Costs associated Cut-and-try approach
Basic production
with changes in the
costs • Involves costing out various production planning alternatives and
production rate selecting the one that is best
• Elaborate spreadsheets developed to facilitate the decision process

Cost Types Linear programming

• Use of mathematical analysis to determine an optimal plan

Simulation
Inventory holding
Backorder costs • What-if analysis using simulated demand to evaluate effectiveness
costs of alternative plans

Dr.D K Singh, Professor in Office, KSOM 13 Dr.D K Singh, Professor in Office, KSOM 14

Dr.D K Singh, Professor in Office, KSOM 15 Dr.D K Singh, Professor in Office, KSOM 16

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Dr.D K Singh, Professor in Office, KSOM 17 Dr.D K Singh, Professor in Office, KSOM 18

https://www.youtube.com/watch?v=qo0g_YUOBKc
Dr.D K Singh, Professor in Office, KSOM 19 Dr.D K Singh, Professor in Office, KSOM 23

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Aggregate Planning Examples: Unit Demand and Cost Data Cut-and-Try Example: Determining Straight Labor Costs and Output
Suppose we have the following unit Given the demand and cost information below, what
demand and cost information: are the aggregate hours/worker/month, units/worker, and
dollars/worker?
Demand/mo Jan Feb Mar Apr May Jun
Demand/moJan Feb Mar Apr May Jun
4500 5500 7000 10000 8000 6000 4500 5500 7000 10000 8000 6000 7.25x22
Materials Costs $5/unit
Holding costs $1/unit per mo.
Productive hours/worker/day 7.25 7.25/0.15=48.33 &
Marginal cost of stockout $1.25/unit per mo. Paid straight hrs/day 8
Hiring and training cost $200/worker 48.33x22=1063.33
Layoff costs $250/worker 22x8hrsx$8=$140
Labor hours required .15 hrs/unit 8 Jan Feb Mar Apr May Jun
Straight time labor cost $8/hour Days/mo 22 19 21 21 22 20
Beginning inventory 250 units Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Productive hours/worker/day 7.25 Units/worker 1063.33 918.33 1015 1015 1063.33 966.67
Paid straight hrs/day 8 $/worker $1,408 1,216 1,344 1,344 1,408 1,280

Chase Strategy (Hiring & Firing to meet demand) Below are the complete calculations for the remaining
months in the six month planning horizon
Lets assume our current workforce is 7 Jan Feb Mar Apr May Jun
Jan workers. Days/mo 22 19 21 21 22 20
Days/mo 22
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Hrs/worker/mo 1 5 9.5 First, calculate net requirements for
Units/worker 1,063 918 1,015 1,015 1,063 967
Units/wo rker 1 ,0 6 3 .33 production, or 4500-250=4250 units $/worker $1,408 1,216 1,344 1,344 1,408 1,280
$ /worker $1,40 8

Then, calculate number of workers Jan Feb Mar Apr May Jun
Jan needed to produce the net Demand 4,500 5,500 7,000 10,000 8,000 6,000
Dem and 4,50 0
requirements, or Beg. inv. 250
Beg. inv. 25 0
4250/1063.33=3.997 or 4 workers Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Net req. 4 ,25 0
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Req. wo rkers 3 .99 7
Finally, determine the number of Hired 2 1 3
Hired
Fire d 3
workers to hire/fire. In this case we Fired 3 2 1

W o rkfo rce 4 only need 4 workers, we have 7, so Workforce 4 6 7 10 8 7

3 can be fired. Ending inventory 0 0 0 0 0 0
Ending inventory 0

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Below are the complete calculations for the remaining months in

the six month planning horizon with the other costs included Level Workforce Strategy (Surplus and Shortage Allowed)
Jan Feb Mar Apr May Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250 Lets take the same problem as
Net req. 4,250 5,500 7,000 10,000 8,000 6,000 before but this time use the
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207 Level Workforce strategy Jan
Hired 2 1 3
Fired 3 2 1
Demand 4,500
This time we will seek to use
Workforce 4 6 7 10 8 7 a workforce level of 6 workers Beg. inv. 250
Ending inventory 0 0 0 0 0 0
Net req. 4,250
W orkers 6
Jan Feb Mar Apr May Jun Costs
Production 6,380
Material $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00
Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62 Ending inventory 2,130
Hiring cost 400.00 200.00 600.00 1,200.00 Surplus 2,130
Firing cost 750.00 500.00 250.00 1,500.00
Shortage
$260,408.62

Below are the complete calculations for the remaining

Below are the complete calculations for the remaining months
months in the six month planning horizon
in the six month planning horizon with the other costs included
Jan Feb Mar Apr May Jun Jan Feb Mar Apr May Jun
4,500 5,500 7,000 10,000 8,000 6,000 Note, total
Demand 4,500 5,500 7,000 10,000 8,000 6,000 250 2,130 10 -910 -3,910 -1,620 costs under
Beg. inv. 250 2,130 2,140 1,230 -2,680 -1,300 4,250 3,370 4,860 8,770 10,680 7,300 this strategy
Net req. 4,250 3,370 4,860 8,770 10,680 7,300 6 6 6 6 6 6
Workers 6 6 6 6 6 6 6,380 5,510 6,090 6,090 6,380 5,800 are less than
Production 6,380 5,510 6,090 6,090 6,380 5,800 2,130 2,140 1,230 -2,680 -1,300 -1,500 Chase at
2,130 2,140 1,230
Ending inventory 2,130 2,140 1,230 -2,680 -1,300 -1,500 $260.408.62
2,680 1,300 1,500
Surplus 2,130 2,140 1,230
Shortage 2,680 1,300 1,500 Jan Feb Mar Apr May Jun
$8,448 $7,296 $8,064 $8,064 $8,448 $7,680 $48,000.00 Labor
Note, if we recalculate this sheet with 7 workers 31,900 27,550 30,450 30,450 31,900 29,000 181,250.00 Material
Storage
we would have a surplus 2,130 2,140 1,230
3,350 1,625 1,875
5,500.00
6,850.00
Stockout

$241,600.00
https://www.youtube.com/watch?v=gmGOQMR6mq8

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Evaluate Alternative Plans

Plan 1: Exact Production; Vary Workforce
Produce to meet expected
Produce to exact monthly average demand by
production requirements by maintaining a constant
varying workforce size Production
workforce
exactly matches
requirements.

Produce to meet expected

Produce to meet the
demand for all but the first Workers are
minimum expected demand
two months using a added or reduced
using a constant workforce
constant workforce and use as needed.
and subcontract to meet
overtime to meet additional
additional requirements
output requirements

Dr.D K Singh, Professor in Office, KSOM 29

Plan 2: Constant Workforce; Vary Inventory and Stockout Plan 3: Constant Low Workforce; Subcontract
Workforce sized to
meet minimum
demand (April).

Number of
workers is
set to
meet
average
demand
over the
time
horizon.
This then
determine
s
productio
n rate and
inventory/
backorder Demand over
s. minimum is met with
subcontracting.

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Plan 3: Constant Low Workforce;Workforce

Subcontract
sized to
Plan 4: Constant Workforce; Overtime
meet minimum
demand (April).

Demand in
the first two
months is
high, so
overtime is
used to
compensate
. Then,
inventory
can be built
for high
demand in
June.
Demand over
minimum is met with
subcontracting.

Plan Comparison

Graphical
Summary

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Yield Management Success Factors Yield Management – Hotels

• Hotels offer one set of rates during the week and another set
Fixed costs are
Demand can be during the weekend.
high and Inventory is
segmented by
variable costs perishable • The variable costs associated with a room are low in comparison to
customer
are low
the cost of adding rooms to the property.
• Available rooms cannot be transferred from night to night.
Product can be Demand is • Blocks of rooms can be sold to conventions or tours.
sold in advance highly variable
• Potential guests may cut short their stay or not show up at all.

Dr.D K Singh, Professor in Office, KSOM 37 Dr.D K Singh, Professor in Office, KSOM 38

Yield Management Systems

Yield Management – Levers Yield management
is most common
when price is
• Pricing structures must appear logical to the customer and justify the
variable and
duration is
different prices.
predictable.
• Must handle variability in arrival or starting times, duration, and time
between customers.
• Must be able to handle the service process.
• Must train employees to work in an environment where overbooking
and price changes are standard occurrences that directly impact the
customer.
• The essence of yield management is the ability to manage demand.
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