aggregate production planning.ppt

INSTITUTE OF DISTANCE LEARNINGK N U S TEXECUTIVE MBA/MPACEMBA/CEMPA 557OPERATIONS MANAGEMENT

LECTURE FOURBLOCK FOUR – PRODUCTION PLANNING & SCHEDULING

Unit 11 – Aggregate Production Planning

Unit 12 – Just-In-TimeUnit 13 – Scheduling and Sequencing

UNIT 11Aggregate Production

Planning

AGGREGATE PLANNINGAGGREGATE PLANNING

Objective is to minimize cost over Objective is to minimize cost over the planning period by adjustingthe planning period by adjusting Production ratesProduction rates Labor levelsLabor levels Inventory levelsInventory levels Overtime workOvertime work SubcontractingSubcontracting Other controllable variablesOther controllable variables

Determine the quantity and timing Determine the quantity and timing of production for the immediate of production for the immediate futurefuture


A logical overall unit for measuring A logical overall unit for measuring sales and outputsales and output

A forecast of demand for intermediate A forecast of demand for intermediate planning period in these aggregate planning period in these aggregate unitsunits

A method for determining costsA method for determining costs A model that combines forecasts and A model that combines forecasts and

costs so that scheduling decisions can costs so that scheduling decisions can be made for the planning periodbe made for the planning period

Required for aggregate Required for aggregate planningplanning

THE PLANNING PROCESSTHE PLANNING PROCESS

Figure 13.1Figure 13.1

Long-range plans (over one year)Research & DevelopmentNew product plansCapital investmentFacility location/expansion

Intermediate-range plans (3 to 18 months)Sales planningProduction planning and

budgetingSetting employment, inventory,

subcontracting levelsAnalyzing cooperating plansShort-range plans (up to 3 months)Job assignmentsOrderingJob schedulingDispatchingOvertimePart-time help

Top executives

Operations managers

Operations managers,

supervisors, foremen

ResponsibilityResponsibility Planning tasks and horizonPlanning tasks and horizon


Quarter 1Quarter 1JanJan FebFeb MarMar

150,000150,000 120,000120,000 110,000110,000

Quarter 2Quarter 2AprApr MayMay JunJun

100,000100,000 130,000130,000 150,000150,000

Quarter 3Quarter 3JulJul AugAug SepSep

180,000180,000 150,000150,000 140,000140,000

Master production schedule and MRP systems

Detailed work

schedules

Process planning

and capacity decisions

Aggregate

plan for productio

n



Product decision

s

Demand forecasts,

orders

Marketplace and

demand Researchand

technology

Raw materials available

Externalcapacity

(subcontractors)

Workforce

Inventoryon

hand


Combines appropriate resources Combines appropriate resources into general termsinto general terms

Part of a larger production Part of a larger production planning systemplanning system

Disaggregation breaks the plan Disaggregation breaks the plan down into greater detaildown into greater detail

Disaggregation results in a master Disaggregation results in a master production scheduleproduction schedule

AGGREGATE PLANNING STRATEGIESAGGREGATE PLANNING STRATEGIES1.1. Use inventories to absorb changes in Use inventories to absorb changes in

demanddemand2.2. Accommodate changes by varying Accommodate changes by varying

workforce sizeworkforce size3.3. Use part-timers, overtime, or idle time Use part-timers, overtime, or idle time

to absorb changesto absorb changes4.4. Use subcontractors and maintain a Use subcontractors and maintain a

stable workforcestable workforce5.5. Change prices or other factors to Change prices or other factors to

influence demandinfluence demand

CAPACITY OPTIONSCAPACITY OPTIONS Changing inventory levelsChanging inventory levels

Increase inventory in low Increase inventory in low demand periods to meet high demand periods to meet high demand in the futuredemand in the future

Increases costs associated with Increases costs associated with storage, insurance, handling, storage, insurance, handling, obsolescence, and capital obsolescence, and capital investmentinvestment

Shortages can mean lost sales Shortages can mean lost sales due to long lead times and poor due to long lead times and poor customer servicecustomer service

CAPACITY OPTIONSCAPACITY OPTIONS Varying workforce size by Varying workforce size by

hiring or layoffshiring or layoffs Match production rate to Match production rate to

demanddemand Training and separation costs for Training and separation costs for

hiring and laying off workers hiring and laying off workers New workers may have lower New workers may have lower

productivityproductivity Laying off workers may lower Laying off workers may lower

morale and productivitymorale and productivity

CAPACITY OPTIONSCAPACITY OPTIONS Varying production rate through Varying production rate through

overtime or idle timeovertime or idle time Allows constant workforceAllows constant workforce May be difficult to meet large May be difficult to meet large

increases in demandincreases in demand Overtime can be costly and may drive Overtime can be costly and may drive

down productivitydown productivity Absorbing idle time may be difficultAbsorbing idle time may be difficult

CAPACITY OPTIONSCAPACITY OPTIONS SubcontractingSubcontracting

Temporary measure during Temporary measure during periods of peak demandperiods of peak demand

May be costlyMay be costly Assuring quality and timely Assuring quality and timely

delivery may be difficultdelivery may be difficult Exposes your customers to a Exposes your customers to a

possible competitorpossible competitor

CAPACITY OPTIONSCAPACITY OPTIONS Using part-time workersUsing part-time workers

Useful for filling unskilled or low Useful for filling unskilled or low skilled positions, especially in skilled positions, especially in servicesservices

DEMAND OPTIONSDEMAND OPTIONS Influencing demandInfluencing demand

Use advertising or promotion to Use advertising or promotion to increase demand in low periodsincrease demand in low periods

Attempt to shift demand to slow Attempt to shift demand to slow periodsperiods

May not be sufficient to balance May not be sufficient to balance demand and capacitydemand and capacity

DEMAND OPTIONSDEMAND OPTIONS Back ordering during high- Back ordering during high-

demand periodsdemand periods Requires customers to wait for Requires customers to wait for

an order without loss of goodwill an order without loss of goodwill or the orderor the order

Most effective when there are Most effective when there are few if any substitutes for the few if any substitutes for the product or serviceproduct or service

Often results in lost salesOften results in lost sales

DEMAND OPTIONSDEMAND OPTIONS Counterseasonal product and Counterseasonal product and

service mixingservice mixing Develop a product mix of Develop a product mix of

counterseasonal itemscounterseasonal items May lead to products or services May lead to products or services

outside the company’s areas of outside the company’s areas of expertiseexpertise

AGGREGATE PLANNING OPTIONSAGGREGATE PLANNING OPTIONS

Table 13.1Table 13.1

OptionOption AdvantagesAdvantages DisadvantageDisadvantagess

Some Some CommentsComments

Changing Changing inventory inventory levelslevels

Changes in Changes in human human resources resources are gradual are gradual or none; no or none; no abrupt abrupt production production changeschanges

Inventory Inventory holding cost holding cost may may increase. increase. Shortages Shortages may result in may result in lost sales.lost sales.

Applies mainly Applies mainly to to production, production, not service, not service, operationsoperations

Varying Varying workforce workforce size by size by hiring or hiring or layoffslayoffs

Avoids the Avoids the costs of costs of other other alternativesalternatives

Hiring, layoff, Hiring, layoff, and training and training costs may be costs may be significantsignificant

Used where Used where size of labor size of labor pool is largepool is large



OptionOption AdvantagesAdvantages DisadvantagesDisadvantages Some CommentsSome CommentsVarying Varying production production rates rates through through overtime or overtime or idle timeidle time

Matches Matches seasonal seasonal fluctuations fluctuations without hiring/ without hiring/ training coststraining costs

Overtime Overtime premiums; tired premiums; tired workers; may workers; may not meet not meet demanddemand

Allows flexibility Allows flexibility within the within the aggregate planaggregate plan

Sub-Sub-contractingcontracting

Permits Permits flexibility and flexibility and smoothing of smoothing of the firm’s the firm’s outputoutput

Loss of quality Loss of quality control; control; reduced profits; reduced profits; loss of future loss of future businessbusiness

Applies mainly in Applies mainly in production production settingssettings



OptionOption AdvantagesAdvantages DisadvantagesDisadvantages Some CommentsSome CommentsUsing part-Using part-time time workersworkers

Is less costly Is less costly and more and more flexible than flexible than full-time full-time workersworkers

High turnover/ High turnover/ training costs; training costs; quality suffers; quality suffers; scheduling scheduling difficultdifficult

Good for Good for unskilled jobs in unskilled jobs in areas with large areas with large temporary labor temporary labor poolspools

Influencing Influencing demanddemand

Tries to use Tries to use excess excess capacity. capacity. Discounts draw Discounts draw new customers.new customers.

Uncertainty in Uncertainty in demand. Hard demand. Hard to match to match demand to demand to supply exactly.supply exactly.

Creates Creates marketing marketing ideas. ideas. Overbooking Overbooking used in some used in some businesses.businesses.



OptionOption AdvantagesAdvantages DisadvantagesDisadvantages Some CommentsSome CommentsBack Back ordering ordering during during high-high-demand demand periodsperiods

May avoid May avoid overtime. overtime. Keeps capacity Keeps capacity constant.constant.

Customer must Customer must be willing to be willing to wait, but wait, but goodwill is lost.goodwill is lost.

Allows flexibility Allows flexibility within the within the aggregate planaggregate plan

Counter-Counter-seasonal seasonal product product and service and service mixingmixing

Fully utilizes Fully utilizes resources; resources; allows stable allows stable workforceworkforce

May require May require skills or skills or equipment equipment outside the outside the firm’s areas of firm’s areas of expertiseexpertise

Risky finding Risky finding products or products or services with services with opposite opposite demand demand patternspatterns

METHODS FOR AGGREGATE PLANNINGMETHODS FOR AGGREGATE PLANNING

A mixed strategy may be the A mixed strategy may be the best way to achieve minimum best way to achieve minimum costscosts

There are many possible mixed There are many possible mixed strategiesstrategies

Finding the optimal plan is not Finding the optimal plan is not always possiblealways possible

MIXING OPTIONS TO MIXING OPTIONS TO DEVELOP A PLANDEVELOP A PLAN Chase strategyChase strategy

Match output rates to demand Match output rates to demand forecast for each periodforecast for each period

Vary workforce levels or vary Vary workforce levels or vary production rateproduction rate

Favored by many service Favored by many service organizationsorganizations

MIXING OPTIONS TO MIXING OPTIONS TO DEVELOP A PLANDEVELOP A PLAN Level strategyLevel strategy

Daily production is uniformDaily production is uniform Use inventory or idle time as bufferUse inventory or idle time as buffer Stable production leads to better Stable production leads to better

quality and productivityquality and productivity Some combination of capacity Some combination of capacity

options, a mixed strategy, might options, a mixed strategy, might be the best solutionbe the best solution

GRAPHICAL AND CHARTING METHODSGRAPHICAL AND CHARTING METHODS

Popular techniquesPopular techniques Easy to understand and useEasy to understand and use Trial-and-error approaches that Trial-and-error approaches that

do not guarantee an optimal do not guarantee an optimal solutionsolution

Require only limited Require only limited computationscomputations

GRAPHICAL AND CHARTING METHODSGRAPHICAL AND CHARTING METHODS

1.1. Determine the demand for each period.Determine the demand for each period.2.2. Determine the capacity for regular time, Determine the capacity for regular time,

overtime, and subcontracting each overtime, and subcontracting each period.period.

3.3. Find labor costs, hiring and layoff costs, Find labor costs, hiring and layoff costs, and inventory holding costs.and inventory holding costs.

4.4. Consider company policy on workers Consider company policy on workers and stock levels.and stock levels.

5.5. Develop alternative plans and examine Develop alternative plans and examine their total costs.their total costs.

PLANNING EXAMPLE 1PLANNING EXAMPLE 1


MonthMonth Expected DemandExpected DemandProduction Production

DaysDaysDemand Per Day Demand Per Day

(computed)(computed)JanJan 900900 2222 4141FebFeb 700700 1818 3939MarMar 800800 2121 3838AprApr 1,2001,200 2121 5757MayMay 1,5001,500 2222 6868JuneJune 1,1001,100 2020 5555

6,2006,200 124124

= = 50 units per day= = 50 units per day6,2006,200124124

Average Average requiremenrequiremen

tt== Total expected demandTotal expected demand

Number of production daysNumber of production days



70 70 –

60 60 –

50 50 –

40 40 –

30 30 –

0 0 – JanJan FebFeb MarMar AprApr MayMay JuneJune == MonthMonth 2222 1818 2121 2121 2222 2020 == Number ofNumber of

working daysworking days

Prod

uctio

n ra

te p

er w

orki

ng d

ayPr

oduc

tion

rate

per

wor

king

day

Level production using Level production using average monthly forecast average monthly forecast

demanddemand

Forecast demandForecast demand



Cost InformationCost InformationInventory carrying costInventory carrying cost $ 5$ 5 per unit per month per unit per monthSubcontracting cost per unitSubcontracting cost per unit $10$10 per unit per unit

Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per day per day))

Overtime pay rateOvertime pay rate $ 7$ 7 per hour per hour ((above above 88 hours per day hours per day))

Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit

Cost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)

$300$300 per unit per unit

Cost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)




Cost InformationCost InformationInventory carry costInventory carry cost $ 5$ 5 per unit per month per unit per monthSubcontracting cost per unitSubcontracting cost per unit $10$10 per unit per unit








MonthProduction at

50 Units per DayDemand Forecast

Monthly Inventory Change

Ending Inventory

Jan 1,100 900 +200 200Feb 900 700 +200 400Mar 1,050 800 +250 650Apr 1,050 1,200 -150 500May 1,100 1,500 -400 100June 1,000 1,100 -100 0

1,850

Total units of inventory carried over from onemonth to the next = 1,850

unitsWorkforce required to produce 50 units per day = 10 workers











MonthProduction at

50 Units per DayDemand Forecast

Monthly Inventory Change

Ending Inventory

Jan 1,100 900 +200 200Feb 900 700 +200 400Mar 1,050 800 +250 650Apr 1,050 1,200 -150 500May 1,100 1,500 -400 100June 1,000 1,100 -100 0

1,850

Total units of inventory carried over from onemonth to the next = 1,850

unitsWorkforce required to produce 50 units per day = 10 workers

Costs CalculationsInventory carrying $9,250 (= 1,850 units carried x $5

per unit)Regular-time labor 49,600 (= 10 workers x $40 per

day x 124 days)Other costs (overtime,

hiring, layoffs, subcontracting) 0

Total cost $58,850



Cum

ulat

ive

dem

and

units

Cum

ulat

ive

dem

and

units

7,000 7,000 –

6,000 6,000 –

5,000 5,000 –

4,000 4,000 –

3,000 3,000 –

2,000 –

1,000 –

– JanJan FebFeb MarMar AprApr MayMay JuneJune

Cumulative forecast Cumulative forecast requirementsrequirements

Cumulative level Cumulative level production using production using average monthly average monthly

forecast forecast requirementsrequirements

Reduction Reduction of inventoryof inventory

Excess inventoryExcess inventory






6,2006,200 124124

Minimum requirement = 38 units per dayMinimum requirement = 38 units per day


70 70 –

60 60 –

50 50 –

40 40 –

30 30 –



Prod

uctio

n ra

te p

er w

orki

ng d

ayPr

oduc

tion

rate

per

wor

king

day

Level production Level production using lowest using lowest

monthly forecast monthly forecast demanddemand

Forecast demandForecast demand











In-house production = 38 units per day x 124 days

= 4,712 unitsSubcontract units= 6,200 - 4,712

= 1,488 units











In-house production = 38 units per day x 124 days

= 4,712 unitsSubcontract units= 6,200 - 4,712

= 1,488 unitsCosts CalculationsRegular-time labor $37,696 (= 7.6 workers x $40 per

day x 124 days)Subcontracting 14,880 (= 1,488 units x $10 per

unit)

Total cost $52,576






6,2006,200 124124

Production = Expected DemandProduction = Expected Demand


70 70 –

60 60 –

50 50 –

40 40 –

30 30 –



Prod

uctio

n ra

te p

er w

orki

ng d

ayPr

oduc

tion

rate

per

wor

king

day Forecast demand Forecast demand

and monthly and monthly productionproduction











MonthForecast

(units)

Daily Prod Rate

Basic Production

Cost (demand x

1.6 hrs/unit x $5/hr)

Extra Cost of Increasing Production (hiring cost)

Extra Cost of Decreasing Production (layoff cost) Total Cost

Jan 900 41 $ 7,200 — — $ 7,200

Feb 700 39 5,600 — $1,200 (= 2 x $600) 6,800

Mar 800 38 6,400 — $600 (= 1 x $600) 7,000

Apr 1,200 57 9,600 $5,700 (= 19 x $300) — 15,300

May 1,500 68 12,000 $3,300 (= 11 x $300) — 15,300

June 1,100 55 8,800 — $7,800 (= 13 x $600) 16,600

$49,600 $9,000 $9,600 $68,200

COMPARISON OF THREE COMPARISON OF THREE PLANSPLANS


CostCost Plan 1Plan 1 Plan 2Plan 2 Plan 3Plan 3

Inventory carryingInventory carrying $ 9,250$ 9,250 $ 0$ 0 $ 0$ 0

Regular laborRegular labor 49,60049,600 37,69637,696 49,60049,600Overtime laborOvertime labor 00 00 00HiringHiring 00 00 9,0009,000LayoffsLayoffs 00 00 9,6009,600SubcontractingSubcontracting 00 00 00Total costTotal cost $58,850$58,850 $52,576$52,576 $68,200$68,200

Plan 2 is the lowest cost optionPlan 2 is the lowest cost option

MATHEMATICAL APPROACHESMATHEMATICAL APPROACHES Useful for generating strategiesUseful for generating strategies

Transportation Method of Linear Transportation Method of Linear ProgrammingProgramming Produces an optimal planProduces an optimal plan

Management Coefficients ModelManagement Coefficients Model Model built around manager’s Model built around manager’s

experience and performanceexperience and performance Other ModelsOther Models

Linear Decision RuleLinear Decision Rule SimulationSimulation

TRANSPORTATION METHODTRANSPORTATION METHOD Sales PeriodSales Period

MarMar AprApr MayMayDemandDemand 800800 1,0001,000 750750Capacity:Capacity: RegularRegular 700700 700700 700700 OvertimeOvertime 5050 5050 5050 SubcontractingSubcontracting 150150 150150 130130Beginning inventoryBeginning inventory 100100tires tires

CostsCostsRegular timeRegular time $40$40 per tireper tireOvertimeOvertime $50$50 per tireper tireSubcontractingSubcontracting $70$70 per tireper tireCarryingCarrying $ 2$ 2 per tireper tire Table 13.6Table 13.6

TRANSPORTATION TRANSPORTATION EXAMPLEEXAMPLEImportant pointsImportant points

1.1. Carrying costs are $2/tire/month. If Carrying costs are $2/tire/month. If goods are made in one period and goods are made in one period and held over to the next, holding costs held over to the next, holding costs are incurredare incurred

2.2. Supply must equal demand, so a Supply must equal demand, so a dummy column called “unused dummy column called “unused capacity” is addedcapacity” is added

3.3. Because back ordering is not viable in Because back ordering is not viable in this example, cells that might be used this example, cells that might be used to satisfy earlier demand are not to satisfy earlier demand are not availableavailable

TRANSPORTATION EXAMPLETRANSPORTATION EXAMPLEImportant pointsImportant points

4.4. Quantities in each column designate Quantities in each column designate the levels of inventory needed to the levels of inventory needed to meet demand requirementsmeet demand requirements

5.5. In general, production should be In general, production should be allocated to the lowest cost cell allocated to the lowest cost cell available without exceeding unused available without exceeding unused capacity in the row or demand in the capacity in the row or demand in the columncolumn

TRANSPORTATITRANSPORTATION EXAMPLEON EXAMPLE


MANAGEMENT COEFFICIENTS MANAGEMENT COEFFICIENTS MODELMODEL

Builds a model based on Builds a model based on manager’s experience and manager’s experience and performanceperformance

A regression model is constructed A regression model is constructed to define the relationships to define the relationships between decision variablesbetween decision variables

Objective is to remove Objective is to remove inconsistencies in decision inconsistencies in decision makingmaking

OTHER MODELSOTHER MODELSLinear Decision RuleLinear Decision Rule

Minimizes costs using quadratic cost curvesMinimizes costs using quadratic cost curves Operates over a particular time periodOperates over a particular time period

SimulationSimulation Uses a search procedure to try different Uses a search procedure to try different

combinations of variablescombinations of variables Develops feasible but not necessarily Develops feasible but not necessarily

optimal solutionsoptimal solutions

SUMMARY OF AGGREGATE SUMMARY OF AGGREGATE PLANNING METHODSPLANNING METHODS

TechniquesTechniquesSolution Solution

ApproachesApproaches Important AspectsImportant Aspects

Graphical/charting Graphical/charting methodsmethods

Trial and errorTrial and error Simple to understand and Simple to understand and easy to use. Many solutions; easy to use. Many solutions; one chosen may not be one chosen may not be optimal.optimal.

Transportation Transportation method of linear method of linear programmingprogramming

OptimizationOptimization LP software available; permits LP software available; permits sensitivity analysis and new sensitivity analysis and new constraints; linear functions constraints; linear functions may not be realisticmay not be realistic

Management Management coefficients modelcoefficients model

HeuristicHeuristic Simple, easy to implement; Simple, easy to implement; tries to mimic manager’s tries to mimic manager’s decision process; uses decision process; uses regressionregression


AGGREGATE PLANNING IN AGGREGATE PLANNING IN SERVICESSERVICES

Controlling the cost of labor is criticalControlling the cost of labor is critical1.1. Close scheduling of labor-hours to Close scheduling of labor-hours to

assure quick response to customer assure quick response to customer demanddemand

2.2. Some form of on-call labor resourceSome form of on-call labor resource3.3. Flexibility of individual worker skillsFlexibility of individual worker skills4.4. Individual worker flexibility in rate Individual worker flexibility in rate

of output or hoursof output or hours

FIVE SERVICE SCENARIOSFIVE SERVICE SCENARIOS

RestaurantsRestaurants Smoothing the production Smoothing the production

processprocess Determining the workforce sizeDetermining the workforce size

HospitalsHospitals Responding to patient demandResponding to patient demand


National chains of small National chains of small service firmsservice firms Planning done at national level Planning done at national level

and at local leveland at local level Miscellaneous servicesMiscellaneous services

Plan human resource Plan human resource requirementsrequirements

Manage demandManage demand

LAW FIRM EXAMPLELAW FIRM EXAMPLE

(3)(3) (4)(4) (5)(5) (6)(6)(1)(1) (2)(2) LikelyLikely WorstWorst MaximumMaximum Number ofNumber of

Category ofCategory of Best CaseBest Case CaseCase CaseCase Demand inDemand in QualifiedQualifiedLegal BusinessLegal Business (hours)(hours) (hours)(hours) (hours)(hours) PeoplePeople PersonnelPersonnelTrial workTrial work 1,8001,800 1,5001,500 1,2001,200 3.63.6 44Legal researchLegal research 4,5004,500 4,0004,000 3,5003,500 9.09.0 3232Corporate lawCorporate law 8,0008,000 7,0007,000 6,5006,500 16.016.0 1515Real estate lawReal estate law 1,7001,700 1,5001,500 1,3001,300 3.43.4 66Criminal lawCriminal law 3,5003,500 3,0003,000 2,5002,500 7.07.0 1212Total hoursTotal hours 19,50019,500 17,00017,000 15,00015,000Lawyers neededLawyers needed 3939 3434 3030



Airline industryAirline industry Extremely complex planning Extremely complex planning

problemproblem Involves number of flights, Involves number of flights,

number of passengers, air and number of passengers, air and ground personnelground personnel

Resources spread through the Resources spread through the entire systementire system

YIELD MANAGEMENTYIELD MANAGEMENTAllocating resources to customers at Allocating resources to customers at prices that will maximize yield or prices that will maximize yield or revenuerevenue

1.1. Service or product can be sold in Service or product can be sold in advance of consumptionadvance of consumption

2.2. Demand fluctuatesDemand fluctuates3.3. Capacity is relatively fixedCapacity is relatively fixed4.4. Demand can be segmentedDemand can be segmented5.5. Variable costs are low and fixed Variable costs are low and fixed

costs are highcosts are high

Demand Demand CurveCurve

YIELD MANAGEMENT YIELD MANAGEMENT EXAMPLEEXAMPLE


Passed-up contribution

Money left on the table

Potential customers exist who Potential customers exist who are willing to pay more than are willing to pay more than the $15 variable cost of the the $15 variable cost of the roomroom

Some customers who paid Some customers who paid $150 were actually willing $150 were actually willing to pay more for the roomto pay more for the room

$ margin$ margin ==(Price) x (Price) x (50(50rooms)rooms)==($150 - ($150 - $15)$15)x (50)x (50)==$6,750$6,750 PricePrice

Room salesRoom sales

100100

5050

$150$150Price Price

charged for charged for roomroom

$15$15Variable costVariable cost

of roomof room

Total $ margin =Total $ margin =(1st price) x 30 rooms + (2nd price) x 30 rooms =(1st price) x 30 rooms + (2nd price) x 30 rooms =

($100 - $15) x 30 + ($200 - $15) x 30 =($100 - $15) x 30 + ($200 - $15) x 30 =$2,550 + $5,550 = $8,100$2,550 + $5,550 = $8,100

Demand Demand CurveCurve

YIELD MANAGEMENT YIELD MANAGEMENT EXAMPLEEXAMPLE

Figure 13.6Figure 13.6PricePrice

Room salesRoom sales

100100

6060

3030

$100$100Price 1Price 1

for roomfor room$200$200

Price 2Price 2for roomfor room

$15$15Variable costVariable cost

of roomof room

YIELD MANAGEMENT MATRIXYIELD MANAGEMENT MATRIXDu

ratio

n of

use

Unpr

edict

able

Pr

edict

able

PriceTend to be fixed Tend to be variable

Quadrant 1: Quadrant 2:Movies Hotels

Stadiums/arenas AirlinesConvention centers Rental carsHotel meeting space Cruise lines

Quadrant 3: Quadrant 4:Restaurants Continuing careGolf courses hospitals

Internet serviceproviders


MAKING YIELD MANAGEMENT WORKMAKING YIELD MANAGEMENT WORK

1.1. Multiple pricing structures must Multiple pricing structures must be feasible and appear logical be feasible and appear logical to the customerto the customer

2.2. Forecasts of the use and Forecasts of the use and duration of useduration of use

3.3. Changes in demandChanges in demand

UNIT 12Just-In-Time

JUST-IN-TIME AND JUST-IN-TIME AND LEAN PRODUCTIONLEAN PRODUCTION JIT is a philosophy of continuous JIT is a philosophy of continuous

and forced problem solving that and forced problem solving that supports lean productionsupports lean production

Lean production supplies the Lean production supplies the customer with their exact wants customer with their exact wants when the customer wants it when the customer wants it without wastewithout waste

Key issues are continual Key issues are continual improvement and a pull systemimprovement and a pull system

WASTE REDUCTIONWASTE REDUCTION

Waste is anything that does not Waste is anything that does not add value from the customer add value from the customer point of viewpoint of view

Storage, inspection, delay, Storage, inspection, delay, waiting in queues, and defective waiting in queues, and defective products do not add value and products do not add value and are 100% wasteare 100% waste

WASTE REDUCTIONWASTE REDUCTION

Faster delivery, reduced work-in-Faster delivery, reduced work-in-process, and faster throughput process, and faster throughput all reduce wasteall reduce waste

Reduced waste reduces room for Reduced waste reduces room for errors emphasizing qualityerrors emphasizing quality

Reduced inventory releases Reduced inventory releases assets for other, productive assets for other, productive purposespurposes

VARIABILITY REDUCTIONVARIABILITY REDUCTION JIT systems require managers to JIT systems require managers to

reduce variability caused by both reduce variability caused by both internal and external factorsinternal and external factors

Variability is any deviation from Variability is any deviation from the optimum processthe optimum process

Inventory hides variabilityInventory hides variability Less variability results in less Less variability results in less

wastewaste

CAUSES OF VARIABILITYCAUSES OF VARIABILITY

1.1. Employees, machines, and suppliers Employees, machines, and suppliers produce units that do not conform to produce units that do not conform to standards, are late, or are not the standards, are late, or are not the proper quantityproper quantity

2.2. Engineering drawings or Engineering drawings or specifications are inaccuratespecifications are inaccurate

3.3. Production personnel try to produce Production personnel try to produce before drawings or specifications are before drawings or specifications are completecomplete

4.4. Customer demands are unknownCustomer demands are unknown

PULL VERSUS PUSH SYSTEMSPULL VERSUS PUSH SYSTEMS

A pull system uses signals to A pull system uses signals to request production and delivery request production and delivery from upstream stationsfrom upstream stations

Upstream stations only produce Upstream stations only produce when signaledwhen signaled

System is used within the System is used within the immediate production process immediate production process and with suppliersand with suppliers

PULL VERSUS PUSH SYSTEMSPULL VERSUS PUSH SYSTEMS

By pulling material in small lots, By pulling material in small lots, inventory cushions are removed, inventory cushions are removed, exposing problems and exposing problems and emphasizing continual emphasizing continual improvementimprovement

Manufacturing cycle time is Manufacturing cycle time is reducedreduced

Push systems dump orders on the Push systems dump orders on the downstream stations regardless of downstream stations regardless of the needthe need

JIT AND COMPETITIVE ADVANTAGEJIT AND COMPETITIVE ADVANTAGE


JIT Requires:JIT Requires:

JIT AND COMPETITIVE ADVANTAGEJIT AND COMPETITIVE ADVANTAGE


Which Results In:Which Results In:

Which Yields:Which Yields:

SUPPLIERSSUPPLIERS JIT partnerships exist when a JIT partnerships exist when a

supplier and purchaser work supplier and purchaser work together to remove waste and together to remove waste and drive down costs.drive down costs.

Four goals of JIT partnerships are:Four goals of JIT partnerships are: Elimination of unnecessary activitiesElimination of unnecessary activities Elimination of in-plant inventoryElimination of in-plant inventory Elimination of in-transit inventoryElimination of in-transit inventory Elimination of poor suppliersElimination of poor suppliers

JIT PARTNERSHIPSJIT PARTNERSHIPSSuppliersSuppliersFew suppliersFew suppliersNearby suppliersNearby suppliersRepeat business with same suppliersRepeat business with same suppliersSupport suppliers so they become or remain Support suppliers so they become or remain

price competitiveprice competitiveCompetitive bidding mostly limited to new Competitive bidding mostly limited to new

purchasespurchasesBuyer resists vertical integration and Buyer resists vertical integration and

subsequent wipeout of supplier businesssubsequent wipeout of supplier businessSuppliers encouraged to extend JIT buying to Suppliers encouraged to extend JIT buying to

their supplierstheir suppliersTable 16.2Table 16.2

JIT PARTNERSHIPSJIT PARTNERSHIPSQuantitiesQuantities

Share forecasts of demandShare forecasts of demandFrequent deliveries of small-lot quantitiesFrequent deliveries of small-lot quantitiesLong-term contractLong-term contractMinimal paperwork to release order (EDI or the Minimal paperwork to release order (EDI or the

Internet)Internet)Little or no permissible overage or underageLittle or no permissible overage or underageSuppliers package in exact quantitiesSuppliers package in exact quantitiesSuppliers reduce production lot sizesSuppliers reduce production lot sizes


JIT PARTNERSHIPSJIT PARTNERSHIPSQualityQualityMinimal product specifications imposed on Minimal product specifications imposed on

suppliersupplierHelp suppliers meet quality requirementsHelp suppliers meet quality requirementsClose relationships between buyers’ and Close relationships between buyers’ and

suppliers’ quality assurance peoplesuppliers’ quality assurance peopleSuppliers use poka-yoke and process control Suppliers use poka-yoke and process control

chartscharts


JIT PARTNERSHIPSJIT PARTNERSHIPSShippingShippingScheduling inbound freightScheduling inbound freightGain control by using company-owned or Gain control by using company-owned or

contract shipping and warehousingcontract shipping and warehousingUse of advanced shipping notice (ASN)Use of advanced shipping notice (ASN)


JIT LAYOUTJIT LAYOUT


Reduce waste due to movementReduce waste due to movementLayout TacticsLayout TacticsBuild work cells for families of productsBuild work cells for families of productsInclude a large number operations in a small areaInclude a large number operations in a small areaMinimize distanceMinimize distanceDesign little space for inventoryDesign little space for inventoryImprove employee communicationImprove employee communicationUse poka-yoke devicesUse poka-yoke devicesBuild flexible or movable equipmentBuild flexible or movable equipmentCross train workers to add flexibilityCross train workers to add flexibility

DISTANCE REDUCTIONDISTANCE REDUCTION Large lots and long production Large lots and long production

lines with single-purpose lines with single-purpose machinery are being replaced by machinery are being replaced by smaller flexible cellssmaller flexible cells

Often U-shaped for shorter paths Often U-shaped for shorter paths and improved communicationand improved communication

Often using group technology Often using group technology concepts concepts

INCREASED FLEXIBILITYINCREASED FLEXIBILITY

Cells designed to be rearranged Cells designed to be rearranged as volume or designs changeas volume or designs change

Applicable in office Applicable in office environments as well as environments as well as production settingsproduction settings

Facilitates both product and Facilitates both product and process improvementprocess improvement

IMPACT ON EMPLOYEESIMPACT ON EMPLOYEES

Employees are cross trained Employees are cross trained for flexibility and efficiencyfor flexibility and efficiency

Improved communications Improved communications facilitate the passing on of facilitate the passing on of important information about important information about the processthe process

With little or no inventory With little or no inventory buffer, getting it right the first buffer, getting it right the first time is criticaltime is critical

REDUCED SPACE AND INVENTORYREDUCED SPACE AND INVENTORY

With reduced space, inventory With reduced space, inventory must be in very small lotsmust be in very small lots

Units are always moving because Units are always moving because there is no storagethere is no storage

INVENTORYINVENTORYInventory is at the minimum level Inventory is at the minimum level necessary to keep operations necessary to keep operations runningrunningJIT Inventory TacticsJIT Inventory Tactics

Use a pull system to move inventoryUse a pull system to move inventoryReduce lot sizesReduce lot sizesDevelop just-in-time delivery systems with suppliersDevelop just-in-time delivery systems with suppliersDeliver directly to point of useDeliver directly to point of usePerform to schedulePerform to scheduleReduce setup timeReduce setup timeUse group technologyUse group technology


REDUCE VARIABILITYREDUCE VARIABILITY

Inventory levelInventory level

Process downtimeScrap

Setup time

Late deliveries

Quality problems


Inventory Inventory levellevel

REDUCE VARIABILITYREDUCE VARIABILITY

ScrapSetup time

Late deliveries

Quality problems

Process downtime


REDUCE LOT SIZESREDUCE LOT SIZES


200 200 –

100 100 –

Inve

ntor

yIn

vent

ory

TimeTime

QQ22 When average order size = 100When average order size = 100average inventory is 50average inventory is 50

QQ11 When average order size = 200When average order size = 200average inventory is 100average inventory is 100

REDUCE LOT SIZESREDUCE LOT SIZES Ideal situation is to have lot Ideal situation is to have lot

sizes of one pulled from one sizes of one pulled from one process to the nextprocess to the next

Often not feasibleOften not feasible Can use EOQ analysis to Can use EOQ analysis to

calculate desired setup timecalculate desired setup time Two key changesTwo key changes

Improve material handlingImprove material handling Reduce setup timeReduce setup time

LOT SIZE EXAMPLELOT SIZE EXAMPLEDD== Annual demand = 400,000 unitsAnnual demand = 400,000 unitsdd== Daily demand = 400,000/250 = 1,600 Daily demand = 400,000/250 = 1,600 per dayper daypp== Daily production rate = 4,000 unitsDaily production rate = 4,000 unitsQQ== EOQ desired = 400EOQ desired = 400HH== Holding cost = $20 per unitHolding cost = $20 per unitSS== Setup cost (to be determined)Setup cost (to be determined)

Q =Q = 2DS2DSH(1 - d/p)H(1 - d/p) QQ22 = = 2DS2DS

H(1 - d/p)H(1 - d/p)

S = = = $2.40S = = = $2.40(Q(Q22)(H)(1 - d/p))(H)(1 - d/p)2D2D

(3,200,000)(0.6)(3,200,000)(0.6)800,000800,000

LOWER SETUP COSTSLOWER SETUP COSTS


Sum of ordering Sum of ordering and holding costsand holding costs

Holding costHolding cost

Setup cost curves (SSetup cost curves (S11, S, S22))TT11

SS11

TT22

SS22

Cost

Cost

Lot sizeLot size

REDUCE SETUP COSTSREDUCE SETUP COSTS

High setup costs encourage High setup costs encourage large lot sizeslarge lot sizes

Reducing setup costs reduces lot Reducing setup costs reduces lot size and reduces average size and reduces average inventoryinventory

Setup time can be reduced Setup time can be reduced through preparation prior to through preparation prior to shutdown and changeovershutdown and changeover

REDUCE SETUP TIMESREDUCE SETUP TIMES


Use one-touch system to Use one-touch system to eliminate adjustments (save 10 eliminate adjustments (save 10 minutes)minutes)

Step 4Step 4

Step 5Step 5 Training operators and Training operators and standardizing work procedures standardizing work procedures (save 2 minutes)(save 2 minutes)Repeat cycle until sub Repeat cycle until sub

minute setup is achievedminute setup is achieved

Initial Setup Time

Step 2Step 2Move material closer and improve material handling

(save 20 minutes)

Step 1Step 1

Separate setup into preparation and actual setup, doing as much as possible while the

machine/process is operating (save 30 minutes)

Step 3Step 3Standardize and improve tooling

(save 15 minutes)

90 min —90 min —

60 min —60 min —

45 min —45 min —

25 min —25 min —

15 min —15 min —13 min —13 min —

——

SCHEDULINGSCHEDULING

Schedules must be Schedules must be communicated inside and communicated inside and outside the organizationoutside the organization

Level schedulesLevel schedules Process frequent small batchesProcess frequent small batches Freezing the schedule helps stabilityFreezing the schedule helps stability

KanbanKanban Signals used in a pull systemSignals used in a pull system

KANBANKANBAN1.1. User removes a standard User removes a standard

sized containersized container2.2. Signal is seen by the Signal is seen by the

producing department as producing department as authorization to replenishauthorization to replenish

Part numbers Part numbers mark locationmark location

Signal marker Signal marker on boxeson boxes


SCHEDULING SMALL LOTSSCHEDULING SMALL LOTS

AA BB CCAA AAAABB BB BB BB BB CCJIT Level Material-Use ApproachJIT Level Material-Use Approach

AA CCAA AAAA BB BB BB BB BB CC CCBB BB BB BBAA AA

Large-Lot ApproachLarge-Lot Approach

TimeTimeFigure 16.5Figure 16.5

MORE KANBANMORE KANBAN

When the producer and user are When the producer and user are not in visual contact, a card can be not in visual contact, a card can be usedused

When the producer and user are in When the producer and user are in visual contact, a light or flag or visual contact, a light or flag or empty spot on the floor may be empty spot on the floor may be adequateadequate

Since several components may be Since several components may be required, several different kanban required, several different kanban techniques may be employedtechniques may be employed

MORE KANBANMORE KANBAN

Usually each card controls a Usually each card controls a specific quantity or partsspecific quantity or parts

Multiple card systems may be used Multiple card systems may be used if there are several components or if there are several components or different lot sizesdifferent lot sizes

Kanban cards provide a direct Kanban cards provide a direct control and limit on the amount of control and limit on the amount of work-in-process between cellswork-in-process between cells

MORE KANBANMORE KANBAN In an MRP system, the schedule In an MRP system, the schedule

can be thought of as a build can be thought of as a build authorization and the kanban a authorization and the kanban a type of pull system that initiates type of pull system that initiates actual productionactual production

If there is an immediate storage If there is an immediate storage area, a two-card system can be area, a two-card system can be used with one card circulating used with one card circulating between the user and storage area between the user and storage area and the other between the storage and the other between the storage area and the producerarea and the producer

KANBAN SIGNALSKANBAN SIGNALS

Work Work cellcell

Raw Raw Material Material SupplierSupplier

KanbanKanban

Purchased Purchased Parts Parts

SupplierSupplier

Sub-Sub-assemblyassembly

ShipShip

KanbanKanban

KanbanKanban

KanbanKanban

KanbanKanban

Finished Finished goodsgoods

Customer Customer orderorder

Final Final assemblyassembly

KanbanKanban


THE NUMBER OF CARDSTHE NUMBER OF CARDSOR CONTAINERSOR CONTAINERS

Need to know the lead time needed to produce a container of parts

Need to know the amount of safety stock needed

Number of kanbans =Number of kanbans =Demand during Demand during SafetySafety

lead timelead time ++ stockstockSize of containerSize of container

NUMBER OF KANBANS EXAMPLENUMBER OF KANBANS EXAMPLEDaily demandDaily demand == 500 cakes500 cakesProduction lead timeProduction lead time == 2 days2 days(wait time + (wait time + material handling time + material handling time + processing time)processing time)Safety stockSafety stock == 1/2 day1/2 dayContainer sizeContainer size == 250 cakes250 cakes

Demand during lead time = 2 days x 500 cakes = 1,000Demand during lead time = 2 days x 500 cakes = 1,000

Number of kanbans = = 5Number of kanbans = = 51,000 + 2501,000 + 250250250

ADVANTAGES OF KANBANADVANTAGES OF KANBAN Allow only limited amount of faulty or delayed materialAllow only limited amount of faulty or delayed material Problems are immediately evidentProblems are immediately evident Puts downward pressure on bad aspects of inventoryPuts downward pressure on bad aspects of inventory Standardized containers reduce weight, disposal costs, Standardized containers reduce weight, disposal costs,

wasted space, and laborwasted space, and labor

QUALITYQUALITY

Strong relationshipStrong relationship JIT cuts the cost of obtaining good quality because JIT JIT cuts the cost of obtaining good quality because JIT

exposes poor qualityexposes poor quality Because lead times are shorter, quality problems are Because lead times are shorter, quality problems are

exposed soonerexposed sooner Better quality means fewer buffers and allows simpler Better quality means fewer buffers and allows simpler

JIT systems to be usedJIT systems to be used

JIT QUALITY TACTICSJIT QUALITY TACTICS

Use statistical process Use statistical process controlcontrolEmpower employeesEmpower employeesBuild fail-safe methods Build fail-safe methods (poka-yoke, checklists, etc.)(poka-yoke, checklists, etc.)Expose poor quality with Expose poor quality with small lot JITsmall lot JITProvide immediate feedbackProvide immediate feedback


EMPLOYEE EMPOWERMENTEMPLOYEE EMPOWERMENT Empowered employees bring their knowledge and Empowered employees bring their knowledge and

involvement to daily operationsinvolvement to daily operations Some traditional staff tasks can move to empowered Some traditional staff tasks can move to empowered

employeesemployees Training, cross-training, and fewer job classifications can Training, cross-training, and fewer job classifications can

mean enriched jobsmean enriched jobs Companies gain from increased commitment from employeesCompanies gain from increased commitment from employees

LEAN PRODUCTIONLEAN PRODUCTION

Different from JIT in that it is Different from JIT in that it is externally focused on the externally focused on the customercustomer

Often called the Toyota Often called the Toyota Production System (TPS)Production System (TPS)

In practice, JIT, Lean Systems, In practice, JIT, Lean Systems, and TPS are often essentially the and TPS are often essentially the samesame

TOYOTA PRODUCTION SYSTEMTOYOTA PRODUCTION SYSTEM Work shall be completely specified as to content, sequence, Work shall be completely specified as to content, sequence,

timing, and outcometiming, and outcome Every customer-supplier connection must be directEvery customer-supplier connection must be direct Product and service flows must be simple and directProduct and service flows must be simple and direct Any improvement must be made in accordance with the Any improvement must be made in accordance with the

scientific method at the lowest possible level of the scientific method at the lowest possible level of the organizationorganization

LEAN SYSTEMSLEAN SYSTEMS

Use JIT techniquesUse JIT techniques Build systems that help Build systems that help

employees produce perfect partsemployees produce perfect parts Reduce space requirementsReduce space requirements Develop close relationships with Develop close relationships with

supplierssuppliers

LEAN SYSTEMSLEAN SYSTEMS Educate suppliersEducate suppliers Eliminate all but value-added Eliminate all but value-added

activitiesactivities Develop the workforceDevelop the workforce Make jobs more challengingMake jobs more challenging Reduce the number of job Reduce the number of job

classesclasses

THE 5 S’STHE 5 S’S

Sort/segregateSort/segregate Simplify/straightenSimplify/straighten Shine/sweepShine/sweep StandardizeStandardize Sustain/self disciplineSustain/self discipline Safety Support/maintenance

SEVEN WASTESSEVEN WASTES

OverproductionOverproduction QueuesQueues TransportationTransportation InventoryInventory MotionMotion Over-processingOver-processing Defective productDefective product

A broader perspective suggests other resources like energy and water are wasted

but should not be

JIT IN SERVICESJIT IN SERVICES

The JIT techniques used in The JIT techniques used in manufacturing are used in manufacturing are used in servicesservices

SuppliersSuppliers LayoutsLayouts InventoryInventory SchedulingScheduling

aggregate production planning.ppt

Documents