Introduction to Operations and Supply Chain Management

Introduction to Operations and Supply Chain Management

Sales and Operations Planning (Aggregate Planning) Sales and Operations Planning Strategic and tactical considerations Top-down planning Bottom-up planning Optimization techniques 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 2 Back to Pennington Cabinet Strategic Capacity Level: Five machines, nine assembly teams Company produces make-to-stock cabinets for sale at Lowes, etc. Effective capacity: 5,000 jobs per year OR about 420 jobs per month 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 3 Pennington (continued) Raw Demand for next 6 months: January 150 jobs

February 250 March 350 April 450 May 600 June 650 What are our options . . . ? 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 4 Pennington (again) . . . Raw Demand 600 Need 450 Monthly capacity = 420 300 April 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 5 Sales and Operations Planning (SOP) Purpose: Select capacity options over the intermediate time horizon

Capacity options: Workforces Shifts Overtime Subcontracting Inventories etc. 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 6 Time Horizon View . . . Short-Range Plan (days, weeks out) SOP (months out) Long-Range Plan (years out) Capacity levels considered frozen in the short-term Changes in adjustable capacity possible Changes in fixed capacity

possible 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 7 SOP continued (2 - 18 months out) Outside of time frame strategic planning Inside of time frame tactical planning Big Picture approach to planning Families or groups (aggregation) of: Products Resources Technologies or skills Provide rough estimates 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 8 Position in the Overall Business Planning Cycle Decisions Long-Range Plans SOP Short-Range Plans Product and process

Bricks and Mortar Employment and overall inventory levels What demand to meet? Specific products and times Scheduling of people and equipment 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Time Frame 18+ months 2 to 18 months Less than 2 months Chapter 12, Slide 9 Inputs to the Process Strategic Capacity Levels Existing buildings Processes Demand Management Forecasts of customer demand Need for spares, etc. Pricing SOPs External Capacities Suppliers Subcontractors

2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 10 Advantages of SOP Negotiated process Agreed demand Functional coordination Budgets and cash flow analyses Reduces operations task to meeting the plan 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 11 SOP Approaches Top-Down Bottom-Up Similar products OR stable mix Different products AND unstable mix Standards available for planning Requires forecasts and

production data for individual products time, cost requirements from history and/or planning documentation Can Average product Can be extremely dataintensive 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 12 Top-Down Planning 1. Develop the aggregate sales forecast and planning values. 2. Translate the sales forecast into resource requirements. Personnel, equipment, materials 3. Generate alternative production plans. Chase, level, mixed 4. Select the best of the plans. Lowest cost, best fit to capability 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 13 Top-Down Example I (Product Data)

Product % of Total Labor/Unit A100 10% 40 hours B200 50% 20 hours C300 20% 15 hours D400 5% 10 hours E500 10% 20 hours

F600 5% 10 hours 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 14 Top-Down Example II (Average Products) Product % of Total Labor/Unit A100 10% 40 hours B200 50% 20 hours C300 20% 15 hours

D400 5% 10 hours E500 10% 20 hours F600 5% 10 hours 10%(40) + 60%(20) + 20%(15) + 10%(10) = 20 hours 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 15 Top-Down Example III (Conditions or Constraints) Agreed upon demand to be met for upcoming 12 month period Can vary workforce and inventory levels No backordering Average unit requires 20 worker hours Each worker works 160 hours per month 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain

Management Bozarth & Handfield Chapter 12, Slide 16 Top-Down Example IV (Demand Forecast for 12 months) Month Demand Month Demand March 1592 September 2504 April 1400 October 2504 May 1200

November 3000 June 1000 December 3000 July 1504 January 2504 August 1992 February 1992 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 17 Top-Down Example V (Other tidbits of data )

Hiring cost = $300 Firing cost = $200 Inventory holding cost = $6 / unit / month Start and end with 227 workers (goal) Start and end with about 1000 units in inventory (goal) 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 18 Detail of First Six Months from Level Strategy Demand Demand in Employee Hours Employees to Meet Production Plan Actual Employees Actual Production March 1592

31840 199 252 2016 0 25 1424 April 1400 28000 175 252 2016 0 0 2040 May 1200

24000 150 252 2016 0 0 2856 June 1000 20000 125 252 2016 0 0 3872 July

1504 30080 188 252 2016 0 0 4384 August 1992 39840 249 252 2016 0 0 4408 Month

Firings Ending Inventory Hirings Note: We develop a level strategy by setting Actual Employees equal to the average required for the 12 month planning period 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 19 Detail of First Six Months from Chase Strategy Demand Demand in Employee Hours Employees to Meet Production Plan Actual Employees Actual Production March

1592 31840 199 199 1592 28 0 1000 April 1400 28000 175 175 1400 24 0 1000

May 1200 24000 150 150 1200 25 0 1000 June 1000 20000 125 125 1000 25 0 1000

July 1504 30080 188 188 1504 0 63 1000 August 1992 39840 249 249 1992 0 61

1000 Month Firings Ending Inventory Hirings Note: We develop a chase strategy by setting Actual Employees equal to the number needed in each period 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 20 Another View ... Chase SOP 30000 25000 20000 15000 10000 5000 Ju ly Au Se gus t pt

em be r O ct ob er No ve m be De r ce m be r Ja nu a Fe ry br ua ry M Ap ril M ay Ju ne 0

ar ch Cumulative Production Level SOP 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 21 Cost Details from the Spreadsheets ... Cost of current plan: Level strategy Totals: Costs: Firing: 25 $5,000 $205,844 Hiring: 25 $7,500 Cost of current plan: Chase strategy Totals: Costs:

Firing: 250 $50,000 Inventory: 32224 $193,344 $197,000 Hiring: 250 $75,000 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Inventory: 12000 $72,000 Chapter 12, Slide 22 Top-Down Example (Other Issues ) Are complete costs shown? Expand out for budget and cash flow analysis Input (suppliers) and output (logistics and warehousing) considerations Lead time, materials availability, storage space? Variations in actual production

Scrap, rework, equipment breakdowns 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 23 Top-Down Example (Expand the options ) We can now subcontract production Maximum subcontract of 1400 units per month Cost is $5 more per unit than internal production cost Will this option: 1) increase costs? 2) decrease costs? 3) have no effect on costs? 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 24 Second Approach: Bottom-Up SOP Products with very different requirements Requires forecasts and production data for individual products Can be extremely data-intensive 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 25

Iterative Approach (Similar to Top Down) Develop Production Plans for Distinct Families or Otems NO Determine Total Load Check feasibility: Bottleneck processes Key suppliers Other resources (cash) Feasible? YES 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Implement Plan Chapter 12, Slide 26 Detail from Bottom Up Plan Bill of Labor CSEs Home Gyms Assembly

50 2 Painting 2 3 Month Hours of Assembly Hours of Painting CSEs Home Gyms Assembly Maximum Painting Maximim January

30 200 1900 2200 660 750 February 25 205 1660 2200 665 750 March 20 210 1420 2200

670 750 April 15 215 1180 2200 675 750 May 20 210 1420 2200 670 750 June

50 180 2860 2200 640 750 Total: 160 1220 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 27 and Load Profile for Assembly Assembly Load Profile 3500 3000 2500 2000 Assembly Max. 1500

1000 500 0 1 2 3 4 5 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield 6 Chapter 12, Slide 28 Smoothing Production in April, May, and June . . . Bill of Labor CSEs Home Gyms Assembly 50 2 Painting

2 3 Month Hours of Assembly Hours of Painting Assembly Max. Painting Max CSEs Home Gyms January 30 200 1900

2200 660 750 February 25 205 1660 2200 665 750 March 20 210 1420 2200 670 750 April

25 215 1680 2200 695 750 May 30 210 1920 2200 690 750 June 30 180 1860

2200 600 750 Total: 160 1220 NOTE: Total production over the six months isnt changing, just the timing 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 29 and the New Load Profile Assembly Load Profile 2500 2000 1500 Assembly Max. 1000 500 0 1 2

3 4 5 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield 6 Chapter 12, Slide 30 Options for Services Smooth out demand: Appointments Discounts and promotions Seasonal complements Tiered workforce: Full-time and part-time Customer involvement Minimize on-line activities 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 31 Self-Test Go into SOP.xls and try to develop a aggregate production plan with lower costs than either the pure chase or pure level strategies. Do this by varying the actual workforce in place, making sure you keep inventory levels above 0 at all times.

Suppose firing and hiring costs were to double while inventory holding cost per unit was cut in half. How do you think this would affect the relative attractiveness? 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 32 Advanced Topic: Optimization Modeling What is optimization modeling? Essential conditions Application to operations problems 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 33 Optimization Modeling Family of mathematical techniques used to allocate limited resources among competing demands in an optimal way What is our financial objective? What are our constraints? 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 34 Optimization Example 1

Product mix: Find the product mix that will maximize revenue, given limits on materials, labor hours, and machine hours available 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 35 Optimization Example 2 SOP: Find the workforce and inventory levels which will minimize hiring, firing, and inventory costs while still meeting demand. 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 36 Optimization Example 3 Transportation Problem: Minimize the cost of shipping items from different plants to different stores 150 Plants 100 Stores 300

200 150 300 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 37 Optimization Example 4 Material Yield: Minimize the amount of scrap generated by cutting steel, fabric, wood, etc. 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Scrap Material Chapter 12, Slide 38 Optimization Essential Conditions I 1. Explicit objective Maximize revenue or profit Minimize costs 2. Some constraint(s) Resource limits Demand requirements

2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 39 Optimization Essential Conditions II 3. Conditions can be expressed mathematically Revenue = $1000X Variable cost = $310X Assembly hours needed = 15X 4. Divisibility OK to make half a unit or hire two thirds of an individual 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 40 SOP Optimization Two major types of problems 1. Maximize profit or revenues subject to resource constraints 2. Minimize costs subject to demand requirements 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 41 Maximization Problem I 1. CSE: $1000 per unit

Home Gym: $150 per unit 2. Labor requirements: Assembly Painting CSE 50 2 Home Gym 2 3 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 42 Maximization Problem II 3. Hours available per month Assembly Painting 2200 hours 750 hours 4. Sales of home gyms limited to 150 per month 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 43 In mathematical form:

(CSE C, Home Gym H) Maximize: $1000C + $150H Subject to the following conditions: 50C + 2H < 2200 (Assembly hours constraint) 2C + 3H < 750 (Painting hours constraint) H < 150 (Demand limit on home gyms) C, H > 0 (think about it!) 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 44 Bottom Up Plan to Allocate Capacity to Maximize Profits Revenue: Maximum that can be Actual sold per Production Labor Requirements Before Solving

$ Assembly Painting CSEs Home Gyms Assembly Painting 50 2 Hours Actual Available Hours 2200 750 Price 2 $ 3 $ 1,000 50 10000 150 0 0 Slack Hours 0 0

2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield 2200 750 Chapter 12, Slide 45 Bottom Up Plan to Allocate Capacity to Maximize Profits Revenue: Solving Maximum that can be Actual sold per Production Labor Requirements and After $ 45,500 Assembly Painting CSEs Home Gyms Assembly Painting 50 2

Price 2 $ 3 $ 1,000 50 10000 150 38 150 Hours Actual Slack Available Hours Hours 2200 2200 0 750 526 224 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 46 Key Points This is the most revenue we could generate, given the constraints No slack assembly time, Home gym demand

More painting time or more CSE demand wouldnt change anything More constraints can only make the problem more difficult, fewer constraints can only help 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 47 Minimization Problem SOP: Meet the production plan with the minimum total hiring, firing, and inventory cost Take earlier SOP problem and solve using optimization techniques. Can you figure out how the problem would be defined? 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 48 Highlight from Optimization Solution Unit Demand Employees 1592.0 1400.0 1200.0 1000.0 1504.0

1992.0 2504.0 2504.0 3000.0 3000.0 2504.0 1992.0 227.0 147.4 147.4 147.4 147.4 147.4 301.0 331.0 331.0 331.0 331.0 331.0 331.0 227.0 Production 1179.2 1179.2 1179.2 1179.2 1179.2 2408.0 2648.0 2648.0 2648.0 2648.0 2648.0

2648.0 Hirings 0.0 0.0 0.0 0.0 0.0 153.6 30.0 0.0 0.0 0.0 0.0 0.0 0.0 Firings 79.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 104.0 Inventory 1000.0 587.2

366.4 345.6 524.8 200.0 616.0 760.0 904.0 552.0 200.0 344.0 1000.0 Annual Cost = $130,200 (Note: Solution didnt let inventory go below 200) 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 49 What to Take Away from this ... Essential conditions: Explicit objective Constraints Linearity Divisibility Write out an objective function or constraint for simple problem Interpret simple results 2006 Pearson Prentice Hall Introduction to Operations and Supply Chain Management Bozarth & Handfield Chapter 12, Slide 50

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