Operations Management Part II

Over view of Planning Levels

Long-range plans

Product and service design

Location / layout
Long term capacity

Intermediate plans (General levels)

Employment
Output and inventories
Subcontracting and backorders

Short-range plans (Detailed plans)

Machine loading
Job assignments
Production lot size and order quantities

Remember Aggregate Planning is intermediate range capacity planning

Aggregate plan is updated periodically (monthly) and result in a rolling planning horizon

Why aggregate planning?

It takes time to implement plans

Accurately predicting the timing and volume of individual item demand is very difficult

Central issue: what is the best (i.e., the lowest cost) way to satisfy the aggregated
intermediate future demand (subject to capacity constraints)?

Aggregate Planning Strategies

Proactive (Alter demand to match capacity)

Reactive (Alter capacity to match demand)
Mixed (Some of each)

Basic Strategies

Level capacity strategy: Maintaining a steady rate of regular-time output while meeting
variations in demand by a combination of options: inventories, overtime, part-time works,
subcontracting, and backorders.
Chase demand strategy: Matching capacity to demand; the planned output for a period is set
at the expected demand for that period.

Techniques for aggregate Planning

Trial and error (spreadsheet, graphs) and Mathematical (linear programming and linear
decision rules)

In practice, trial and error techniques are used more frequently

Procedure for Aggregate Planning

1. Determine demand for each period
2. Determine capacities for each period
3. Identify company or departmental policies that are pertinent
4. Determine unit costs
5. Develop alternative plans and costs (using Trial- and-Error)
6. Select the plan that best satisfies objectives. Otherwise return to step 5.
Supply Chain

Supply chain is a sequence of organizations, their facilities, functions and activities that are
involved in producing and delivering a product or service. The chain begins with suppliers of
raw materials and extends all the way to the final customer.
Elements of supply chain management consist of customers, forecasting, design, processing,
inventory, purchasing, suppliers, location and logistics.
Bullwhip effect is the increase of inventories on a supply chain starting at the end of a supply
chain with the final customer and working backwards towards the initial supplier (supplier of
raw materials). The main reason for the occurrence of this phenomenon is the lumpiness and
variability of demand at different stages of the supply chain. In order to protect themselves
from the uncertainties resulting from lumpy and variable demand, suppliers carry larger
amounts of inventory as safety stock. As the need for carrying inventory increases, the batch
or order size also progressively increases on the supply chain from customers all the way
back to initial suppliers.

Causes Demand forecast updating

Worse if
Order batching
Price fluctuation
Rationing and shortage gaming
Solutions
Demand forecast: information sharing
Order batching: reduce fixed ordering cost, schedule deliveries
Price fluctuation: Everyday Low Price (EDLP)
Shortage gaming: penalize order cancellations, prioritize retailers
Other lessons from Beer Game:
Change the structure, decide together
Just in Time

It is important to understand the difference between romantic JIT and pragmatic

JIT

Romantic Just-In-Time
JIT is the One True Path to manufacturing enlightenment.
Radical, new way of thinking
JIT is simple; you can implement it over the weekend.
The goal of JIT is zero inventory.
Used to be synonymous with JIT.
Pragmatic Just-In-Time
One form of waste is inventory.

Why do inventories exist? : Economies of scale, speculation, uncertainty (in demand,

supply, capacity and quality). These characteristics prevent a smooth flow of product
result in kinks in the system
JIT seeks to eliminate these kinks and smooth out the flow.

Dont eliminate inventory without first solving the underlying problem!: Make the
problem go away, Reduce setup times, remove uncertainty, improve quality, etc .

Simple, but not easy.