Chapter 5:operation planning and

controlling operations system

Quality management and control-

Reading
Aggregate sales and operations
planning
Inventory management
Operations scheduling

13 - 1
 5.1 Aggregate Planning

operations management 13 - 2
 The Planning Process
Determine the quantity and timing of
production for the intermediate future
 Objective is to minimize cost over the
planning period by adjusting
 Production rates
 Labor levels
 Inventory levels
 Overtime work
 Subcontracting rates
 Other controllable variables
operations management 13 - 3
 Aggregate Planning
Quarter 1
Jan Feb Mar
150,000 120,000 110,000

Quarter 2
Apr May Jun
100,000 130,000 150,000

Quarter 3
Jul Aug Sep
180,000 150,000 140,000

operations management 13 - 4
 Aggregate Planning
 Combines appropriate resources
into general terms
 Part of a larger production planning
system
 Disaggregation breaks the plan
down into greater detail
 Disaggregation results in a master
production schedule

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 Aggregate Planning Strategies (capacity
and demand options

operations management 13 - 6
 1. Capacity Options
 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 may mean lost sales
due to long lead times and poor
customer service
operations management 13 - 7
 Capacity Options cont…
 Varying workforce size by hiring
or layoffs
 Match production rate to demand
 Training and separation costs for
hiring and laying off workers
 New workers may have lower
productivity
 Laying off workers may lower
morale and productivity

operations management 13 - 8
 Capacity Options cont…
 Varying production rate through
overtime or idle time
 Allows constant workforce
 May be difficult to meet large
increases in demand
 Overtime can be costly and may
drive down productivity
 Absorbing idle time may be
difficult

operations management 13 - 9
 Capacity Options cont…
 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

operations management 13 - 10
 Capacity Options cont..
 Using part-time workers
 Useful for filling unskilled or low
skilled positions, especially in
services

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 2. Demand Options
 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
operations management 13 - 12
 Demand Options cont…
 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
if any substitutes for the product
or service
 Often results in lost sales

operations management 13 - 13
 Demand Options cont…
 Counterseasonal product and
service mixing
 Develop a product mix of
counterseasonal items
 May lead to products or services
outside the company’s areas of
expertise

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 Methods for Aggregate
Planning

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 Cont..

1. Chase strategy
 Match output rates to demand
forecast for each period
 Vary workforce levels or vary
production rate
 Favored by many service
organizations

operations management 13 - 16
 Cont…

2. Level strategy
 Daily production is uniform
 Use inventory or idle time as buffer
 Stable production leads to better
quality and productivity
 Some combination of capacity
options, a mixed strategy, might be
the best solution
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 Aggregate Planning in
Services
Controlling the cost of labor is critical
1. Accurate scheduling of labor-hours
to assure quick response to customer
demand
2. An on-call labor resource to cover
unexpected demand
3. Flexibility of individual worker skills
4. Flexibility in rate of output or hours of
work
operations management 13 - 18
 Reading

Costs of aggregate planning strategies

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 Inventory
5.2 Management

OM 13 - 20
 Functions of Inventory
1. To decouple or separate various
parts of the production process
2. To decouple the firm from
fluctuations in demand and
provide a stock of goods that will
provide a selection for customers
3. To take advantage of quantity
discounts
4. To hedge against inflation
OM 13 - 21
 Types of Inventory
 Raw material
 Purchased but not processed
 Work-in-process
 Undergone some change but not completed
 A function of cycle time for a product
 Maintenance/repair/operating (MRO)
 Necessary to keep machinery and
processes productive
 Finished goods
 Completed product awaiting shipment
OM 13 - 22
 The Material Flow Cycle

Cycle time

95% 5%

Input Wait for Wait to Move Wait in queue Setup Run Output
inspection be moved time for operator time time

OM 13 - 23
 Managing Inventory

1. How inventory items can be

classified
2. How accurate inventory records
can be maintained

OM 13 - 24
 ABC Analysis
 Divides inventory into three classes
based on annual dollar volume
 Class A - high annual dollar volume
 Class B - medium annual dollar
volume
 Class C - low annual dollar volume
 Used to establish policies that focus
on the few critical parts and not the
many trivial ones
OM 13 - 25
 Percent of annual dollar usage ABC Analysis
A Items
80 –
70 –
60 –
50 –
40 –
30 –
20 – B Items
10 – C Items
0 – | | | | | | | | | |

10 20 30 40 50 60 70 80 90 100
Percent of inventory items

OM 13 - 26
 ABC Analysis

 Other criteria than annual dollar

volume may be used
 Anticipated engineering changes
 Delivery problems
 Quality problems
 High unit cost

OM 13 - 27
 ABC Analysis

 Policies employed may include

 More emphasis on supplier
development for A items
 Tighter physical inventory control for
A items
 More care in forecasting A items

OM 13 - 28
 Record Accuracy
 Accurate records are a critical
ingredient in production and inventory
systems
 Necessary to make precise decisions
about ordering, scheduling, and
shipping
 Incoming and outgoing record keeping
must be accurate
 Stockrooms should be secure

OM 13 - 29
 Cycle Counting
 Items are counted and records updated on a
periodic basis
 Often used with ABC analysis
to determine cycle
 Has several advantages
1. Eliminates shutdowns and interruptions
2. Eliminates annual inventory adjustment
3. Trained personnel audit inventory accuracy
4. Allows causes of errors to be identified and
corrected
5. Maintains accurate inventory records
OM 13 - 30
 Control of Service
Inventories
 Can be a critical component
of profitability
 Losses may come from
shrinkage or pilferage
 Applicable techniques include
1. Good personnel selection, training, and
discipline
2. Tight control on incoming shipments
3. Effective control on all goods leaving
facility
OM 13 - 31
 Independent Versus
Dependent Demand
 Independent demand - the
demand for item is independent
of the demand for any other
item in inventory
 Dependent demand - the
demand for item is dependent
upon the demand for some
other item in the inventory

OM 13 - 32
 Holding, Ordering, and
Setup Costs
 Holding costs - the costs of holding
or “carrying” inventory over time
 Ordering costs - the costs of
placing an order and receiving
goods
 Setup costs - cost to prepare a
machine or process for
manufacturing an order
OM 13 - 33
 Inventory Models for
Independent Demand
Need to determine when and how
much to order

1. Basic economic order quantity

2. Production order quantity
3. Quantity discount model

OM 13 - 34
 EOQ
Objective is to minimize total costs
Total cost of
holding and
setup (order)

Minimum
total cost
Annual cost

Holding cost

Setup (or order)

cost
Optimal order Order quantity
quantity (Q*)
Table 12.4(c)
OM 13 - 35
 Reorder Points
 EOQ answers the “how much” question
 The reorder point (ROP) tells “when” to
order
Demand Lead time for a
ROP = per day new order in days
=dxL
D
d = Number of working days in a year

OM 13 - 36
 Reorder Point Curve
Q*
Inventory level (units)

Resupply takes place as order arrives

Slope = units/day = d

ROP
(units)

Time (days)
Lead time = L
OM 13 - 37
 Production Order Quantity
Model
 Used when inventory builds up
over a period of time after an
order is placed
 Used when units are produced
and sold simultaneously

OM 13 - 38
 Production Order Quantity
Model
Q = Number of pieces per order p = Daily production rate
H = Holding cost per unit per year d = Daily demand/usage rate
D = Annual demand

Setup cost = (D/Q)S

Holding cost = 1 HQ[1 - (d/p)]
2
1
(D/Q)S = 2 HQ[1 - (d/p)]

2
2DS
Q =
H[1 - (d/p)]

2DS
Q*p =
H[1 - (d/p)]
OM 13 - 39
 Quantity Discount Models
 Reduced prices are often available when
larger quantities are purchased
 Trade-off is between reduced product cost
and increased holding cost

Total cost = Setup cost + Holding cost + Product cost

D Q
TC = S+ H + PD
Q 2

OM 13 - 40
 Probabilistic Models and
Safety Stock
 Used when demand is not constant
or certain
 Use safety stock to achieve a desired
service level and avoid stockouts

ROP = d x L + ss

Annual stockout costs = the sum of the units short

x the probability x the stockout cost/unit
x the number of orders per year

OM 13 - 41
 Dependent Demand model Material
Requirements Planning (MRP)

OM 13 - 42
 Dependent Demand
 The demand for one item is related
to the demand for another item
 Given a quantity for the end item,
the demand for all parts and
components can be calculated
 MRP is the common technique

OM 13 - 43
 Dependent Demand
Effective use of dependent demand
inventory models requires the
following
1. Master production schedule
2. Specifications or bill of material
3. Inventory availability
4. Purchase orders outstanding
5. Lead times

OM 13 - 44
 Master Production Schedule
(MPS)
 Specifies what is to be made and when
 Must be in accordance with the aggregate
production plan
 Inputs from financial plans, customer
demand, engineering, supplier performance

OM 13 - 45
 Master Production Schedule
(MPS)
 MPS is established in terms of specific
products
 Schedule must be followed for a
reasonable length of time
 The MPS is quite often fixed or frozen in
the near term part of the plan
 The MPS is a rolling schedule
 The MPS is a statement of what is to be
produced, not a forecast of demand
OM 13 - 46
 The Planning Process
Production Marketing Finance
Capacity Customer Cash flow
Inventory demand

Procurement Human resources

Supplier Manpower
performance planning

Management Engineering
Return on Aggregate Design
investment production completion
Capital plan

Change
production
Master production plan?
schedule

OM 13 - 47
 The Planning Process
Master production
schedule Change
master
Change production
requirements? Material schedule?
requirements plan
Change
capacity? Capacity
requirements plan

No Is capacity Is execution
Realistic? plan being meeting the
met? plan?
Yes
Execute capacity
plans

Execute
material plans

OM 13 - 48
 Aggregate
Production Plan
Months January February
Aggregate Production Plan 1,500 1,200
(Shows the total
quantity of amplifiers)
Weeks 1 2 3 4 5 6 7 8
Master Production Schedule
(Shows the specific type and
quantity of amplifier to be
produced
240-watt amplifier 100 100 100 100
150-watt amplifier 500 500 450 450
75-watt amplifier 300 100

OM 13 - 49
 Bills of Material

 List of components, ingredients,

and materials needed to make
product
 Provides product structure
 Items above given level are called
parents
 Items below given level are called
children

OM 13 - 50
 BOM Example
Level Product structure for “Awesome” (A)
0 A

1 B(2) Std. 12” Speaker kit C(3) Std. 12” Speaker kit w/
amp-booster

2 E(2) E(2) F(2) Std. 12” Speaker

booster assembly

Packing box and

3 D(2) installation kit of wire, G(1) D(2)
bolts, and screws

Amp-booster

12” Speaker 12” Speaker

OM 13 - 51
 BOM Example
Level Product structure for “Awesome” (A)
0 A

Part B: 2 x number of As = (2)(50) =Std. 12” Speaker100

kit w/
1 BPart
(2) Std. 12” Speaker kit
C: 3 x number of As = C
(3)(50) =amp-booster 150
(3)

Part D: 2 x number of Bs
+ 2 x number of Fs = (2)(100) + (2)(300) = 800
2 Part E: E(2) 2 x number of Bs E(2) F(2) Std. 12” Speaker
booster assembly
+ 2 x number of Cs = (2)(100) + (2)(150) = 500
Part F: 2 x Packing
numberbox ofand
Cs = (2)(150) = 300
3 D(2) G(1) D(2)
Part G: 1installation
xbolts,
number kit of wire,
of Fs
and screws = (1)(300) = 300

Amp-booster

12” Speaker 12” Speaker

OM 13 - 52
 Lead Times
 The time required to purchase,
produce, or assemble an item

OM 13 - 53
 MRP Structure
Data Files Output Reports

MRP by
BOM Master period report
production schedule
MRP by
date report

Lead times
(Item master file) Planned order
report

Inventory data
Purchase advice
Material
requirement
planning
programs
(computer and Exception reports
Purchasing data software)
Order early or late
or not needed

Order quantity too

small or too large

OM 13 - 54
 MRP Planning Sheet

OM 13 - 55
 Read

 Connections between MRP and

ERP!

OM 13 - 56
 Operations scheduling/Short-Term
5.3 Scheduling

operations management 13 - 57
 Scheduling Issues
 Scheduling deals with the timing of
operations
 The task is the allocation and
prioritization of demand
 Significant issues are
 The type of scheduling, forward or
backward
 The criteria for priorities

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 Scheduling
Flow

operations management 13 - 59
 Forward and Backward
Scheduling
 Forward scheduling starts as soon
as the requirements are known
 Produces a feasible schedule
though it may not meet due dates
 Frequently results in
buildup of work-in-
process inventory
Due
Now Date

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 Forward and Backward
Scheduling
 Backward scheduling begins with
the due date and schedules the final
operation first
 Schedule is produced by working
backwards though the processes
 Resources may not
be available to
accomplish the Due
Now
schedule Date

operations management 13 - 61
 Forward and Backward
Scheduling
 Backward scheduling begins with
the due date and schedules the final
operation first
 Schedule is produced by working
backwards though the processes
 Resources may not
be available to
accomplish the Due
Now
schedule Date

operations management 13 - 62
 Scheduling Criteria
1. Minimize completion time
2. Maximize utilization of facilities
3. Minimize work-in-process (WIP)
inventory
4. Minimize customer waiting time

Optimize the use of resources so

that production objectives are met
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 Loading Jobs

 Assign jobs so that costs, idle

time, or completion time are
minimized
 Two forms of loading
 Capacity oriented
 Assigning specific jobs to work
centers

operations management 13 - 64
 Gantt Charts
 Load chart shows the loading and
idle times of departments,
machines, or facilities
 Displays relative workloads over
time
 Schedule chart monitors jobs in
process
 All Gantt charts need to be updated
frequently to account for changes
operations management 13 - 65
 Gantt Load Chart Example

Work Day
Monday Tuesday Wednesday Thursday Friday
Center

Metalworks Job 349 Job 350

Mechanical Job 349 Job 408

Electronics Job 408 Job 349

Painting Job 295 Job 408 Job 349

Processing Unscheduled Center not available

operations management 13 - 66
 Gantt Schedule Chart
Example
Start of an
Day Day Day Day Day Day Day Day activity
Job
1 2 3 4 5 6 7 8
End of an
activity
A Scheduled
activity time
allowed
Maintenance Actual work
B progress

Nonproduction
time
C
Point in time
when chart is
reviewed
Now
operations management 13 - 67
 Sequencing Jobs
 Specifies the order in which jobs
should be performed at work centers
 Priority rules are used to dispatch or
sequence jobs
 FCFS: First come, first served
 SPT: Shortest processing time
 EDD: Earliest due date
 LPT: Longest processing time

operations management 13 - 68
 Critical Ratio (CR)
 An index number found by dividing the
time remaining until the due date by the
work time remaining on the job
 Jobs with low critical ratios are
scheduled ahead of jobs with higher
critical ratios
 Performs well on average job lateness
criteria
Time remaining Due date - Today’s date
CR = =
Workdays remaining Work (lead) time remaining

operations management 13 - 69
 Critical Ratio Example
Currently Day 25

Due Workdays Priority

Job Date Remaining Critical Ratio Order

A 30 4 (30 - 25)/4 = 1.25 3

B 28 5 (28 - 25)/5 = .60 1

C 27 2 (27 - 25)/2 = 1.00 2

With CR < 1, Job B is late. Job C is just on schedule

and Job A has some slack time.

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 Critical Ratio Technique
1. Helps determine the status of specific
jobs
2. Establishes relative priorities among
jobs on a common basis
3. Relates both stock and make-to-order
jobs on a common basis
4. Adjusts priorities automatically for
changes in both demand and job
progress
5. Dynamically tracks job progress

operations management 13 - 71