Industrial Facilities Design

(7th Term, Batch 2009)

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 Lecture Outline
 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 lectur # 31 & 32
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 lectur # 31 & 32
 Aggregate production planning

is medium-term capacity planning over a

two to eighteen month planning horizon.
It involves determining the lowest-cost
method of providing the adjustable
capacity for meeting production
requirements.

Slide
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11.7
11.7 lectur # 31 & 32
 Capacity Decisions Hierarchy
Linkages
Facilities
Planning

Aggregate
Planning

Scheduling

Time Frame
Facilities Planning
Aggregate Planning
Scheduling
Time

Slide
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11.8 lectur # 31 & 32
 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 lectur # 31 & 32
 Aggregate production planning
involves managing...
 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.

Slide
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11.10 lectur # 31 & 32
 Aggregate Planning Process

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Methods of Influencing Demand

 Price Incentives
 Reservations
 Backlogs
 Complementary Products or Services
 Advertising/promotion

Slide
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11.12 lectur # 31 & 32
Methods of Influencing Supply

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

Slide
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11.13 lectur # 31 & 32
Aggregate Production Planning
Variable Costs
 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

Slide
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Strategies for Adjusting Capacity
 Level production
 Producing at a constant rate
and using inventory to absorb
fluctuations in demand
 Chase demand
 Hiring and firing workers to
match demand
 Peak demand
 Maintaining resources for
high-demand levels
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 Overtime and under-time
 Increasing or decreasing
working hours
 Subcontracting
 Let outside companies
complete the work
 Part-time workers
 Hiring part time workers to
complete the work
 Backordering
 Providing the service or
product at a later time period
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Level Production

Demand

Production
Units

Time

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Chase Demand

Demand

Production
Units

Time

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

SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY
Spring 80,000 100,000 20,000
Summer 50,000 100,000 70,000
Fall 120,000 100,000 50,000
Winter 150,000 100,000 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

SALES PRODUCTION WORKERS WORKERS WORKERS

QUARTER FORECAST PLAN NEEDED HIRED FIRED
Spring 80,000 80,000 80 0 20
Summer 50,000 50,000 50 0 30
Fall 120,000 120,000 120 70 0
Winter 150,000 150,000 150 30 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
 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

Compact
Line
Executive Durable
Line Line
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Aggregate Planning Example:
Demand for Executive Umbrellas

10000
10000
8000 Number of working days:
8000 7000

6000 5500
6000 Jan: 22
4500
4000 Feb: 19
2000
Mar: 21
0
Jan Fe b Ma r Ap r Ma y J un
Apr: 21
May: 22
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Aggregate Planning Example:
Cost Information for Executive
Umbrellas
Materials $5.00 /unit
Holding costs $1.00 /unit/month
Marginal cost of stockout $1.25 /unit/month
Hiring & training cost $200.00 /worker
Layoff costs $250.00 /worker
Labor hours required 0.15 hrs/unit

Straight time labor cost $8.00 /hr

Beginning inventory 250 units
Productive hours 7.25 hrs/worker/day
Paid straight hours 8 hrs/day
Beginning # of workers 7 workers

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Aggregate Planning Example:
Determining Straight Labor Costs and Output for Executive Umbrellas

Jan Feb Mar Apr May Jun

Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1063.33 918.33 1015 1015 1063.33 966.67
$/worker $1,408 1,216 1,344 1,344 1,408 1,280

January
159.5 = 22 [days/month] * 7.25 [productive hrs/worker]
1063.33 = 159.5 [hrs/worker/month] / .15 [hrs/unit]
$1,408 = 8 [$/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

Jan Feb Mar Apr May Jun
Days/month 22 19 21 21 22 20
Hrs/worker/month 160 138 152 152 160 145
Units/worker 1,063 918 1,015 1,015 1,063 967
Labor cost/worker $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
Chase Strategy for Executive Umbrellas
Jan • Objective: Adjust workforce level so as to
Days/mo 22 eliminate the need to carry inventory from
Hrs/worker/mo 159.5 period to period
Units/worker 1,063.33
$/worker $1,408

• 4,500 units is the demand in January (any

Jan combination of firm orders and forecast
Demand 4,500 • 250 is the starting inventory position
Beg. inv. 250 • 4,250 = 4,500 – 250
Net req. 4,250
• 3.997 = 4,250 / 1,063.33
Req. workers 3.997
Hired • 7 = workforce level at the beginning of
Fired 3 January
Workforce 4 • 3 = 7 – 4 = workers fired
Ending inventory 0 • 4 = workforce level at end of January
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Aggregate Planning Example
Chase Strategy for Executive Umbrellas

Chase Strategy
Jan Feb Mar Apr May Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beginning inventory 250 0 0 0 0 0
Net requirements 4,250 5,500 7,000 10,000 8,000 6,000
Beginning # of workers 7 4 6 7 10 8
Required workers 4 6 7 10 8 6
Workforce adjustment -3 2 1 3 -2 -1
Production quantity 4,250 5,500 7,000 10,000 8,000 6,000
Ending inventory 0 0 0 0 0 0

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Aggregate Planning Example
Chase Strategy for Executive Umbrellas
Chase Strategy Costs
Jan Feb Mar Apr May Jun
Material cost $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 $203,750.00
Labor cost $5,628.00 $7,283.00 $9,269.00 $13,242.00 $10,594.00 $7,945.00 $53,961.00
Hiring cost $0.00 $400.00 $200.00 $600.00 $0.00 $0.00 $1,200.00
Firing cost $750.00 $0.00 $0.00 $0.00 $500.00 $250.00 $1,500.00
Inventory holding cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Inventory stockout cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

TOTAL: $260,411.00

 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

Jan
• Objective: Adjust inventory
Demand 4,500 level so as to eliminate the
Beg. inv. 250 need to hire or fire workers
from period to period
Net req. 4,250
• Assume that January is started
Workers 6 with 6 employees
Production 6,380 • 6,380 = 6 [employees] *
Ending inventory 2,130  1,063.33
[units/worker]
Surplus 2,130 • 2,130 = 6,380 – 4,250 (surplus)
Shortage

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Aggregate Planning Example
Level Strategy for Executive Umbrellas

Level Capacity Strategy

Jan Feb Mar Apr May Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beginning inventory 250 2,130 2,140 1,230 -2,680 -4,300
Net requirements 4,250 3,370 4,860 8,770 10,680 10,300
Beginning # of workers 6 6 6 6 6 6
Required workers 4 4 5 9 10 11
Workforce adjustment 0 0 0 0 0 0
Production quantity 6,380 5,510 6,090 6,090 6,380 5,800
Ending inventory 2,130 2,140 1,230 -2,680 -4,300 -4,500

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Aggregate Planning Example
Level Strategy for Executive Umbrellas
Level Capacity Strategy Costs
Jan Feb Mar Apr May Jun Total
Material cost $31,900.00 $27,550.00 $30,450.00 $30,450.00 $31,900.00 $29,000.00 $181,250.00
Labor cost $8,448.00 $7,296.00 $8,064.00 $8,064.00 $8,448.00 $7,680.00 $48,000.00
Hiring cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Firing cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Inventory holding cost $2,130.00 $2,140.00 $1,230.00 $0.00 $0.00 $0.00 $5,500.00
Inventory stockout cost $0.00 $0.00 $0.00 $3,350.00 $5,375.00 $5,625.00 $14,350.00

TOTAL: $249,100.00

 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 Plan is Cheaper?

Level Capacity Chase

$249,100.00 $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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