Production Planning and Control (Assignment)

Dawood College Of Engineering and Technology, Karachi

Department: Industrial Engineering and Management

Muhammad Ehsan (08-Dcet-314)

Production Planning and Control Assignment No # 3

Submitted To: Engr. Imran Khan Shaikh Date # 08-11-2010

M Ehsan (08-Dcet-314)

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Production Planning and Control (Assignment) Question No # 1: Explain aggregate planning, managerial importance of aggregate planning, objectives, reactive and aggressive alternatives of aggregative planning?

a) Aggregate Planning:
Introduction:
Aggregate Production Planning (APP) is a macro approach to operational planning that focuses on determining the best way to satisfy demand with production, workforce, inventory and capacity constraints. For example, a manufacturing company may use APP to determine how much production to schedule each month to satisfy forecasted demand with minimal inventory and workers. Aggregate production planning (APP) is an approach to operations management focused on satisfying demand as it relates to production, workforce, inventory and other concepts. APP can tie in facility planning with scheduling decisions.

Definition:
Aggregate production plans are necessary to maximize workforce opportunity and constitute a crucial part of operations management. Aggregate production plans help match supply and demand while minimizing costs. Aggregate production planning applies the upperlevel forecasts to lower-level, production-floor scheduling and is most effective when applied to periods 2 to 18 months in the future. Plans generally either "chase" demand, adjusting workforce accordingly, or are "level" plans, meaning that labor is relatively constant with fluctuations in demand being met by inventories and back orders.

There are two basic types of aggregate plans: Plans for production Plans for staffing Two level of aggregation: Aggregation by product family Aggregation by time Aggregate Planning Strategies:
Supply: Workforce Hire / fire Overtime / slack Temporaries Extra shifts Subcontracting
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Inventory

Product Mix
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Production Planning and Control (Assignment)

Demand: Pricing Customer Service

Promotion Backorders

b) The Managerial Importance of Aggregate Plans:

Managerial Importance:
Aggregate production planning helps to minimize production costs, the effect of variant demand, cost of inventory and labor costs. By doing so, aggregate production planning also maximizes plant and equipment utilization and profits. Aggregate production planning is also a useful tool in creation and evaluation of alternatives such as the adjustment of the labor force through hire/fire/layoff/overtime, the use of subcontractors, anticipatory inventory, and even the development of complementary products and pricing strategies. There are several APP techniques available to the operations manager.

Chase Planning:
The "chasing" strategy adjusts production to meet demand. Also called just-in-time management, the chase strategy maintains minimal levels of inventory, if any. While this feature is positive for many industries, such as a bakery, employment of this strategy decreases the ability to the company to meet unexpected demand increases and increases the risk of back orders.

Level Planning:
The level aggregate plan essentially smooths over fluctuations, holding inventory or placing back orders as needed. This plan supports regular scheduling and minimal overtime. The level plan approach has more holding cost that the hybrid aggregate plan, but does not require the use of as much overtime.

Hybrid Aggregate Planning:

A hybrid aggregate plan will take advantage of a combination of "chasing" and "leveling." Basically, the current workforce will be used with demand fluctuations being handled by overtime. Should the levels of demand overreach the maximum labor output, back orders will be used. In this system, there is a greater probability of layoffs and large amounts of overtime. Hybrid planning is the most popular form of aggregate production planning.

Importance of Aggregate planning other than above are:

1. Typical managerial objectives: (APP is often called "management's hold on the business") Minimize production costs Maximize profits Maximize customer service Minimize inventory Minimize changes in production rates Minimize changes in work-force levels Maximize utilization of plant and equipment

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Production Planning and Control (Assignment) 2. Reactive alternatives: Adjusting the workforce (hire, fire and layoff) Vacation schedules Subcontractors Backorder,

Overtime and under-time Anticipation inventory backlogs and stock-outs

3. Aggressive alternatives (adjusting the demand patterns): Complementary products Creative pricing 5. Planning strategies: The level strategy holds the production rate constant and uses anticipation inventory, subcontractors, backorders, backlogs and stock-outs to satisfy demand.

The chase strategy adjusts production to exactly match demand.

The mixed (or hybrid) strategy may employ any or all of the reactive or aggressive alternatives.

c) Objectives of Aggregate Planning:

Objective of aggregate planning frequently is to minimize total cost over the planning horizon. Other objectives should be considered:

Maximize customer service Minimize inventory investment Minimize changes in workforce levels Minimize changes in production rates Maximize utilization of plant and equipment
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Production Planning and Control (Assignment)

d) Reactive Alternatives:
Accept demand forecast as a given and React to fluctuations in demand. i. Workforce adjustment: Hiring and firing (Varies by industry, training requirements, labor pool). Limitations: Labor supply Economic conditions Cost Skill requirements Union contract Productivity Anticipation inventory: Stock goods during light periods and use it during heavy periods. Stabilizes output rates and workforce levels, but can be costly, especially if inventory is in the form of finished goods. This, generally, is not an option for services, although some services can be performed in anticipation of need (For example: Laying cables for service to new subdivision before construction begins). Workforce utilization (overtime and under-time): Overtime means that work longer than regular workday or workweek and paid extra (if nonexempt). Under-time means that dont work productively for the regular-time workday or workweek. Under-time can be paid or unpaid. Excessive overtime leads to declining quality and productivity. To retain skilled employees in a slack business period, under-time is preferable to layoffs. Limitations: Wage premium Productivity Legal limit Vacation schedules: Schedule vacations to decrease output when inventories are high, or when replacement labor is available. Limitations: Union contract Availability of seasonal workers

ii.

iii.

iv.

v.

Subcontractors (outsourcing): Subcontractors provide extra capacity, but scheduling, quality, and labor relations issues are more difficult to control.
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Production Planning and Control (Assignment) Limitations: Cost Subcontractor capability vi. Backlogs, backorders, and stock-outs: Backlogan accumulation of customer orders promised for a future date. Backlogs are used when customers expect to wait some defined time period for delivery as a normal course of business. A back order is an order that the customer expected to be filled immediately; the customer reluctantly asks for delivery as soon as possible. A stock-out is an inability to satisfy demand for a stock item at the time it occurs, leading the customer to go elsewhere. Limitations: Lost sales, Competition, and Competitive priorities

e) Aggressive Alternatives:
Adjust the demand pattern to achieve efficiency and reduce costs. These actions are typically specified in the marketing (sales) plan. i. Complementary products: Peak demand occurs at different times, leveling demand on production facilities. Example: Parks counterbalancing seasonal staffing requirements for summer activities by offering winter ones as well. Limitations Resource flexibility Maintaining focus Creative pricing: Gives customers an incentive to shift demand from peak times. Example: automobile rebate programs. Limitation: squeezes the contribution margin

ii.

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Production Planning and Control (Assignment) Question No # 2: Explain graphical approach of aggregate planning in the preparation of inventory balance?

Methods of aggregate production planning range from the simplistic (i.e., trial and
error) to the use of complex quadratic calculus methods. However, aggregate production planning can have a mathematical basis while still being easy to implement and understand.

Mathematical Techniques/Approaches:
Linear Programming Simulation The above two techniques are mostly used and usually provide accurate answer, (i-e More involved, and usually better answers are obtained).

Graphical & Charting Techniques/Approaches:

Trial & error approach (Popular & easy-to-understand)

Mathematical Techniques/Approaches:
Some most commonly used techniques are: Linear Decision Rule (LDR): Uses calculus to derive decision rules that minimize four cost functions (regular payroll, hire & fire, overtime & under-time, and inventory & backlog). There are a couple of major concerns with this tool that limit its applicability: All cost functions are quadratic and thus symmetric Implementation is difficult The tool has seen little exposure Management coefficient model (MCM): Uses regression and historical management behavior to derive decision rules. This model attempts to combine the best, most-recent marketplace information with smoothed past practice to eliminate erratic managerial behavior. Data gathering is challenging Simply tries to mimic managerial behavior thus not intuitive Little exposure to real-world problems Parametric production planning (PPP): Uses a grid search procedure to minimize more general cost functions. Frightfully complex Search decision rule (SDR): A computer-based heuristic that does not restrict form of the cost functions

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Production Planning and Control (Assignment) Has a great deal of intuitive appeal Possible artificial intelligence application Production switching heuristic (PSH): Uses a rule with three levels of production. Routine switches between levels as required by the sales forecast, inventory levels, and cost functions Simple to apply Very limited in scope Probably best application is within larger system Linear programming (LP): Locate the optimal solution to a linear objective function using linear constraints. Goal programming used when multiple objectives must be satisfied. Mixed integer programming allows nonlinear relationships to be expressed within the model Easy to use and understand Very flexible Linear form of objective function and constraints may limit its usefulness in Some applications

Simulation models: Uses a search procedure to try different combinations of variables. Develops feasible but not necessarily optimal solutions.

Graphical & Charting Techniques/Approaches:

Determine the demand for each period. Determine the capacity for regular time, overtime, and subcontracting each period. Find labor costs, hiring and layoff costs, and inventory holding costs. Consider company policy on workers and stock levels. Develop alternative plans and examine their total costs.

Graphical approach
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Mathematical approach
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Production Planning and Control (Assignment) Question No # 3: Explain EOQ and also derive formula?

Economic Order Quantity (EOQ):

Inventory & Inventory System:
Inventory is the set of items that an organization holds for later use by the organization. An inventory system is a set of policies that monitors and controls inventory. It determines how much of each item should be kept, when low items should be replenished, and how many items should be ordered or made when replenishment is needed.

Basic Types of Inventory:

Independent demand, Dependent demand, and Supplies. Independent demand items are those items that we sell to customers. Dependent demand items are those items whose demand is determined by other items. Demand for a car translates into demand for four tires, one engine, one transmission, and so on. The items used in the production of that car (the independent demand item) are the dependent demand items. Supplies are items such as copier paper, cleaning materials, and pens that are not used directly in the production of independent demand items

Why Hold Inventory:

To decouple work-centers; To meet variations in demand; To allow flexible production schedules; As a safeguard against variations in delivery time; and To get a lower price.

The Cost Of Inventory:

Holding costs; Setup costs; Ordering costs; and Shortage costs.
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Production Planning and Control (Assignment)

The Economic Order Quantity Model:

This is one of the simplest inventory models. In this model we have to assume the following necessary factors: Production is instantaneous: There is no capacity constraint and the entire lot is produced simultaneously. Delivery is immediate: There is no time lag between production and availability to satisfy demand. Demand is deterministic: There is no uncertainty about the quantity or timing of demand. Demand is constant over time: In fact, it can be represented as a straight line, so that if annual demand is 365 units this translates into a daily demand of one unit. A production run incurs a constant setup cost: Regardless of the size of the lot or the status of the factory, the setup cost is the same. Products can be analyzed singly: Either there is only a single product or conditions exist that ensure reparability of products. Now Suppose: Total Cost of Inventory = C Set-up Cost or Procurement Cost = CS Holding Cost = CH Level of Inventory = S Rate of Consumption = R Time Factor = t Inventory Level = S

S = R xt

t T
Inventory Situation for a Model

Time = t

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Production Planning and Control (Assignment) Now Total Cost = Set-up Cost + Holding Cost C = CS + CH Where St-up Cost with respect to time cycle will be: CS = And Holding Cost will be: CH =
xS x

A CS t

CH

Put the valves in Equation A C B

Also we know that: S=Rxt t= put the value in B

Differentiate Equation C with respect to S, 0 = - CS x R x S + CH CH = CS x R x S-2 Or CH

-2

S2 =
D

S=
Or

Rxt=

:-

t=

t=

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Production Planning and Control (Assignment)

Now putting the values of S and t in equation B, :-

Where: C = Total Cost R = Consumption Rate CS = Set-up Cost CH = Holding Cost Example: A stockiest has to supply 12,000 $ units of a product per year to his customer. The demand is fixed and known and the storage cost is assumed to be infinite. The inventory holding cost is 0.20 $ per month and the ordering cost per order is 350 $. Determine: a) The optimum lot size, b) Optimum scheduling period, and c) Minimum total variable yearly cost? Solution: R = 12,000 $ units per year = 1,000 units per month CH = 0.20 $ per unit per month Cs = 350 $ per order Optimum lot size = S =? (Use equation D and answer will be: S = 1870 units per order). Optimum scheduling period = t =? (Use equation E and answer will be: t = 1.87 months). Minimum total variable yearly cost = C =? (Use equation F and answer will be: C = 4,490 $ per year).
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Production Planning and Control (Assignment) Question No # 4: Write down factors of Plant layout?

Plant Layout:
After the flow process diagrams are completed and before detailed piping, structural and electrical design can begin, the layout of process units in a plant and the equipment within these process unit must be planned. This layout can play an important part in determining construction and manufacturing costs, and thus must be planned carefully with attention being given to future problems that may arise. Thus the economic construction and efficient operation of a process unit will depend on how well the plant and equipment specified on the process flow sheet is laid out. The principal factors that are considered are listed below: a) b) c) d) e) f) g) h) Economic considerations: construction and operating costs. Process requirements. Convenience of operation. Convenience of maintenance. Health and Safety considerations. Future plant expansion. Modular construction. Waste disposal requirements.

a) Economic Considerations: construction and operating costs:

The coat of construction can be minimized by adopting a layout that gives the shortest run of connecting pipe between equipment, and least amount of structural steel work. However, this will not necessarily be the best arrangement for operation and maintenance.

b) Process Requirements:
An example of the need to take into account process consideration is the need to elevate the base of columns to provide the necessary net positive suction head to a pump.

c) Convenience of Operation:
Equipment that needs to have frequent attention should be located convenient to the control room. Valves, sample points, and instruments should be located at convenient positions and heights. Sufficient working space and headroom must be provided to allow easy access to equipment.

d) Convenience of Maintenance:
Heat exchangers need to be sited so that the tube bundles can be easily withdrawn for cleaning and tube replacement. Vessels that require frequent replacement of catalyst or packing should be located on the out side of buildings. Equipment that requires dismantling for maintenance, such as compressors and large pumps, should be places under cover.

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Production Planning and Control (Assignment)

e) Health and Safety Considerations:

Blast walls may be needed to isolate potentially hazardous equipment, and confine the effects of an explosion. At least two escape routes for operators must be provided from each level in process buildings.

f) Future Plant Expansion:

Equipment should be located so that it can be conveniently tied in with any future expansion of the process. Space should be left on pipe alleys for future needs, and service pipes over-sized to allow for future requirements.

g) Modular Construction:
In recent years there has been a move to assemble sections of plant at the plant manufacturers site. These modules will include the equipment, structural steel, piping and instrumentation. The modules are then transported to the plant site, by road or sea. The advantages of modular construction are: Improved quality control. Reduced construction cost. Less need for skilled labors on site. The disadvantages of modular construction are: Higher design costs & more structural steel work. More flanged constructions & possible problems with assembly, on site.

h) Waste Disposal Requirements:

A plant site must be closed or near to a disposal area like rivers or lake. But before disposing the waste, it should be properly treated to avoid pollution. The proper disposing of waste must be implemented in the industry or through other sources.

Plant Layout Keywords:

1. Raw material Storage 3. Process Site 5. Product Storage 7. Fire Station and Fire Brigade 9. Security office 11. Site for Expansion project 13. Power house 15. Plant utilities 17. Library and Laboratories 19. Research and Development Centre 2. Maintenance Workshop 4. Stores for maintenance and operating supplies 6. Canteen & Change house 8. Central Control Room 10. Administrative Building 12. Effluent treatment plant 14. Emergency water storage 16. Vehicle parking space 18. Training Centre 20. Green Belt Area

End
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