Production Planning and Control. Allocate the company’s ressources Taking into account : ...

Production Planning and Control

Production Planning and Control

Allocate the company’s ressources

Taking into account : Strategic and operational objectives

(quantity, quality, lead time, costs)

Existing constraints

Forecasted demand

Lon

g t

erm

Business Plan Determine the long-term strategies for production and capacity

Source : Stevenson W., Benedetti, (2001), p 426

Inte

rmeti

ate

term

Sh

ort

term

Externalenvironment

Forecast ofdemand

Strategies andpolicies

Material Requirements Planning (MRP)

Determine the needs for components and raw materials

Aggregate Plan Determine production capacity

Master ProductionSchedule (MPS)

Determine the production schedule for specific products

SchedulingDetailed planning of orders

Aggregate planning

Masterscheduling

5

LinkagesFacilitiesPlanning

AggregatePlanning

Scheduling

Time FrameFacilities Planning

Aggregate PlanningScheduling

Time

6

Aggregation is done according to:ProductsLaborTime

Aggregation????????

7

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)

Aggregate Plan

Demandforecast

I nventory

Machinecapacitiesand costs

Laborcapacitiesand costs

Outsourcingcapacitiesand costs

Aggregate Plan

Amount toproduce

Amount oflabor andovertimerequired

ProjectedI nventories

Amount tooutsource

Demandforecast

I nventory

Machinecapacitiesand costs

Laborcapacitiesand costs

Outsourcingcapacitiesand costs

Aggregate Plan

Managerial InputsManagerial Inputs

Supplier capabilities Storage capacity Materials availability

Materials

Current machine capacities Plans for future capacities Workforce capacities Current staffing level

Operations

New products Product design changes Machine standards

EngineeringLabor-market conditions Training capacity

Human resources

Cost data Financial condition of firm

Accounting and financeAggregate

plan

Customer needs Demand forecasts Competition behavior

Distribution and marketing

Minimize Costs/Maximize ProfitsMinimize Costs/Maximize Profits Maximize Customer ServiceMaximize Customer Service Minimize Inventory InvestmentMinimize Inventory Investment Minimize Changes in Production RatesMinimize Changes in Production Rates Minimize Changes in Workforce Minimize Changes in Workforce

LevelsLevels Maximize Utilization of Plant and Maximize Utilization of Plant and

EquipmentEquipment

13

Work force levelsWork force levels - the number of workers required for production.

Production ratesProduction rates - the number of units produced per time period.

Inventory levelsInventory levels - the balance of unused units carried forward from the previous period.

MINIMIZE:MINIMIZE:cost, inventory levels, changes in work force levels, use of overtime, use of subcontracting, changes in production rates, changes in production rates, plant/personnel idle time

MAXIMIZE:MAXIMIZE:profits, customer service

Price Incentives Reservations Backlogs Complementary Products or Services Advertising/promotion

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

17

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

Washing machineModel Number

Required labor time(hrs)

Item demand as % ofaggregate demand

A5532 4.2 32

K4242 4.9 21

L9898 5.1 17

3800 5.2 14

M2624 5.4 10

M3880 5.8 06

Aggregate unit labor time = (.32)(4.2)+(.21)(4.9)+(.17)(5.1)+(.14)(5.2)+(.10)(5.4)+(.06)(5.8) = 4.856 hrs

1. Demand Chasing: Vary the Workforce Level

D(t) P(t) = D(t)

W(t)

PC WC HC FC

•D(t): Aggregate demand series•P(t): Aggregate production levels•W(t): Required Workforce levels•Costs Involved:

•PC: Production Costs•fixed (setup, overhead)•variable (materials, consumables, etc.)

•WC: Regular labor costs•HC: Hiring costs: e.g., advertising, interviewing, training•FC: Firing costs: e.g., compensation, social cost

2. Varying Production Capacity with Constant Workforce:

D(t) P(t)

O(t)

PC WC OC UC

U(t)

S(t)

SC

W = constant•S(t): Subcontracted quantities•O(t): Overtime levels•U(t): Undertime levels•Costs involved:

•PC, WC: as before•SC: subcontracting costs: e.g., purchasing, transport, quality, etc.•OC: overtime costs: incremental cost of producing one unit in overtime•(UC: undertime costs: this is hidden in WC)

3. Accumulating (Seasonal) Inventories:

D(t) P(t)

I(t)

PC WC IC

W(t), O(t), U(t), S(t) = constant

•I(t): Accumulated Inventory levels•Costs involved:

•PC, WC: as before•IC: inventory holding costs: e.g., interest lost, storage space, pilferage, obsolescence, etc.

4. Backlogging:

D(t) P(t)

B(t)

PC WC BC

W(t), O(t), U(t), S(t) = constant

•B(t): Accumulated Backlog levels•Costs involved:

•PC, WC: as before•BC: backlog (handling) costs: e.g., expediting costs, penalties, lost sales (eventually), customer dissatisfaction

A “mixture” of the previously discussed pure options:

D

PC WC HC FC

OCUC SC IC BC

PWHFOUSIB

+Additional constraints arising from the company strategy; e.g.,

•maximal allowed subcontracting•maximal allowed workforce variation in two consecutive periods•maximal allowed overtime•safety stocks•etc.

Io

Wo

24

Trial-and-error method Mathematical techniques

Materials $5/unitHolding costs $1/unit per mo.Marginal cost of stock-out $1.25/unit per mo.Hiring and training cost $200/workerLayoff costs $250/workerLabor hours required .15 hrs/unitStraight time labor cost $8/hourBeginning inventory 250 unitsProductive hours/worker/day 7.25Paid straight hrs/day 8

Suppose we have the following unit demand and cost information:Demand/mo Jan Feb Mar Apr May Jun

4500 5500 7000 10000 8000 6000

Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/moUnits/worker$/worker

Productive hours/worker/day 7.25Paid straight hrs/day 8

Demand/mo Jan Feb Mar Apr May Jun

4500 5500 7000 10000 8000 6000

Given the demand and cost information below, what are the aggregate hours/worker/month, units/worker, and dollars/worker?

Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1063.33 918.33 1015 1015 1063.33 966.67$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Productive hours/worker/day 7.25Paid straight hrs/day 8

Demand/mo Jan Feb Mar Apr May Jun

4500 5500 7000 10000 8000 6000

Given the demand and cost information below, what are the aggregate hours/worker/month, units/worker, and dollars/worker?

7.25x22

7.25/0.15=48.33 & 48.33x22=1063.3322x8hrsx$8=$140

8

JanDays/mo 22Hrs/worker/mo 159.5Units/worker 1,063.33$/worker $1,408

JanDemand 4,500Beg. inv. 250Net req.Req. workersHiredFiredWorkforceEnding inventory 0

Lets assume our current workforce is 7 workers.

First, calculate net requirements for production, or Demand-Begin Inv.

Then, calculate number of workers needed to produce the net requirements, or Net req/Units per worker or # workers

Finally, determine the number of workers to hire/fire. Current Workers-Required = (-) hire or (+) fire

JanDays/mo 22Hrs/worker/mo 159.5Units/worker 1,063.33$/worker $1,408

JanDemand 4,500Beg. inv. 250Net req. 4,250Req. workers 3.997HiredFired 3Workforce 4Ending inventory 0

Lets assume our current workforce is 7 workers.

First, calculate net requirements for production, or 4500-250=4250 units

Then, calculate number of workers needed to produce the net requirements, or 4250/1063.33=3.997 or 4 workers **Round-up

Finally, determine the number of workers to hire/fire. In this case we only need 4 workers, we have 7, so 3 can be fired.

Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1,063 918 1,015 1,015 1,063 967$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0

Below are the complete calculations for the remaining months in the six month planning horizon.

Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0

Jan Feb Mar Apr May Jun CostsMaterial $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62Hiring cost 400.00 200.00 600.00 1,200.00Firing cost 750.00 500.00 250.00 1,500.00

$260,408.62

Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included.

JanDemand 4,500Beg. inv. 250Net req. 4,250Workers 6Production 6,380Ending inventory 2,130Surplus 2,130Shortage

Lets take the same problem as before but this time use the Level Workforce strategy.

This time we will seek to use a workforce level of 6 workers.

Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250 2,130 2,140 1,230 -2,680 -1,300Net req. 4,250 3,370 4,860 8,770 10,680 7,300Workers 6 6 6 6 6 6Production 6,380 5,510 6,090 6,090 6,380 5,800Ending inventory 2,130 2,140 1,230 -2,680 -1,300 -1,500Surplus 2,130 2,140 1,230Shortage 2,680 1,300 1,500

Note, if we recalculate this sheet with 7 workers we would have a surplus.

Below are the complete calculations for the remaining months in the six month planning horizon.

Jan Feb Mar Apr May Jun4,500 5,500 7,000 10,000 8,000 6,000

250 2,130 10 -910 -3,910 -1,6204,250 3,370 4,860 8,770 10,680 7,300

6 6 6 6 6 66,380 5,510 6,090 6,090 6,380 5,8002,130 2,140 1,230 -2,680 -1,300 -1,5002,130 2,140 1,230

2,680 1,300 1,500

Jan Feb Mar Apr May Jun$8,448 $7,296 $8,064 $8,064 $8,448 $7,680 $48,000.0031,900 27,550 30,450 30,450 31,900 29,000 181,250.002,130 2,140 1,230 5,500.00

3,350 1,625 1,875 6,850.00

$241,600.00

Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included.

LaborMaterialStorageStock-out

Note, the total costs under this strategy are less than under Chase.

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

Level strategyLevel strategy Daily production is uniformDaily production is uniform Use inventory or idle time as Use inventory or idle time as

bufferbuffer Stable production leads to Stable production leads to

better quality and productivitybetter quality and productivity

Some combination of Some combination of capacity options, a mixed capacity options, a mixed strategy, might be the best strategy, might be the best solutionsolution

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

that do not guarantee an that do not guarantee an optimal solutionoptimal solution

Require only limited Require only limited computationscomputations

1.1. Determine the demand for each Determine the demand for each periodperiod

2.2. Determine the capacity for regular Determine the capacity for regular time, overtime, and subcontracting time, overtime, and subcontracting each periodeach period

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

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

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

MonthMonth Expected DemandExpected DemandProduction Production

DaysDaysDemand Per Day Demand Per Day

(computed)(computed)

JanJan 900900 2222 4141

FebFeb 700700 1818 3939

MarMar 800800 2121 3838

AprApr 1,2001,200 2121 5757

MayMay 1,5001,500 2222 6868

JuneJune 1,1001,100 2020 5555

6,2006,200 124124

= = 50 units per day= = 50 units per day6,2006,200

124124

Average Average requiremerequireme

ntnt==

Total expected demandTotal expected demand

Number of production daysNumber of production days

Figure 13.3Figure 13.3

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 ofworking daysworking days

Pro

du

cti

on

rate

per

work

ing

day

Pro

du

cti

on

rate

per

work

ing

day

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

demanddemand

Forecast demandForecast demand

Cost InformationCost Information

Inventory carrying costInventory carrying cost $ 5$ 5 per unit per month per unit per month

Subcontracting 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)


Plan 1 – constant workforce


Table 13.3Table 13.3


Inventory carry costInventory carry cost $ 5$ 5 per unit per month per unit per month











MonthProduction at

50 Units per DayDemand Forecast

Monthly Inventory Change

Ending Inventory

Jan 1,100 900 +200 200

Feb 900 700 +200 400

Mar 1,050 800 +250 650

Apr 1,050 1,200 -150 500

May 1,100 1,500 -400 100

June 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 +200 200

Feb 900 700 +200 400

Mar 1,050 800 +250 650

Apr 1,050 1,200 -150 500

May 1,100 1,500 -400 100

June 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 Calculations

Inventory 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

Cu

mu

lati

ve d

em

an

d u

nit

sC

um

ula

tive d

em

an

d u

nit

s7,000 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 Cumulative forecast forecast requirementsrequirements

Cumulative Cumulative level level

production production using average using average

monthly monthly forecast forecast

requirementsrequirements

Reduction Reduction of of

inventoryinventory

Excess inventoryExcess inventory

6,200 units6,200 units




JanJan 900900 2222 4141

FebFeb 700700 1818 3939

MarMar 800800 2121 3838

AprApr 1,2001,200 2121 5757

MayMay 1,5001,500 2222 6868

JuneJune 1,1001,100 2020 5555

6,2006,200 124124

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

Plan 2 – subcontracting

Plan 2 – subcontracting

70 70 –

60 60 –

50 50 –

40 40 –

30 30 –



Pro

du

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rate

per

work

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day

Pro

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cti

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rate

per

work

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day

Level Level production production

using lowest using lowest monthly monthly forecast forecast demanddemand

Forecast demandForecast demand












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

= 4,712 units

Subcontract units = 6,200 - 4,712= 1,488 units












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

= 4,712 units

Subcontract units = 6,200 - 4,712= 1,488 units

Costs Calculations

Regular-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




JanJan 900900 2222 4141

FebFeb 700700 1818 3939

MarMar 800800 2121 3838

AprApr 1,2001,200 2121 5757

MayMay 1,5001,500 2222 6868

JuneJune 1,1001,100 2020 5555

6,2006,200 124124

Production = Expected DemandProduction = Expected DemandPlan 3 – hiring and firing

Plan 3 – hiring and firing

70 70 –

60 60 –

50 50 –

40 40 –

30 30 –



Pro

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rate

per

work

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day

Pro

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per

work

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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



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 49,60049,600

Overtime laborOvertime labor 00 00 00

HiringHiring 00 00 9,0009,000

LayoffsLayoffs 00 00 9,6009,600

SubcontractingSubcontracting 00 14,88014,880 00

Total 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

Useful for generating Useful for generating strategiesstrategies Transportation Method of Transportation Method of

Linear ProgrammingLinear Programming Produces an optimal planProduces an optimal plan

Management Coefficients Management Coefficients ModelModel

Model built around manager’s experience Model built around manager’s experience and performanceand performance

Other ModelsOther Models Linear Decision RuleLinear Decision Rule SimulationSimulation

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