Master Operations Scheduling Game

Background to your company operations

Marketing Considerations

Your company manufactures a consumer product which is purchased for resale by

numerous wholesale and retail establishments. The market for your product is highly
competitive and subject to both cyclical and seasonal fluctuations. The timing and
extent of seasonal peaks are influenced by weather conditions and thus can be forecast
with only moderate accuracy. Although the annual sales forecast made each
November has been, on the average, within plus or minus 10 per cent of total actual
sales, there had been years in which the forecast total varied from the actual results by
as much as plus or minus 20 per cent. Moreover, the forecast of sales for any of the
four 13-week “operating periods” into which the year is divided is sometimes in error
by as much as plus or minus 33 per cent of the results actually obtained.

These forecasting inaccuracies are tempered somewhat by the fact that certain
customers usually negotiate purchase contracts for at least a portion of their
requirements 60 to 120 days in advance of the shipping date. As a result, in most
years anywhere from 10 to 30 per cent of the shipping requirements for a given
operations period are “booked” sometime during the second operating period ahead of
the period in which delivery has to be made. An additional 20 to 60 per cent are
booked one period ahead. In total, therefore, “Advanced Commitment Sales” already
on the books at the start of a period rarely represent less than 30 per cent – and
sometimes amount to as much as 90 per cent – of the shipments that the factory will
be called to make out of current production or finished goods inventory during the
period.

The remaining delivery commitments, known as “Single Period Sales” – that is, sales
that are booked and shipped during the same operating period – sometimes involve as
little as three weeks’ leadtime. Since such sales frequently represent supplemental
orders placed by important customers, your company makes every effort to meet even
the tightest delivery deadline, as do its major competitors.

Customers rarely cancel an order once it has been booked. On the other hand, since
the product is bulky and therefore costly to handle and store, customers are unwilling
to accept delivery much in advance of the date requested. Therefore, if factory
production runs ahead of the actual shipping requirements during a given operating
period, your company has to carry the excess units as finished goods inventory.

Advertising and Sales Promotion Efforts

Basic Programs and Special Supplementary Campaigns

Within your company and the industry there is agreement that industry-wide sales for
any operating period are more decisively influenced by weather conditions than any
other single factor. Moreover, research studies have indicated that “brand loyalty” is
significant to only about half of the customers who regularly purchased this product.
Master Operations Scheduling Game 2

Therefore, even though weather plays a major role in determining when and in what
quantities retail customers buy such items, the choice between competing brands can
be considerably influenced by advertising and other sales promotional techniques,
such as price discounts, premium offers, and contests.

In common with all major companies in the industry, prior to the start of each
calendar year your company commits itself to a carefully planned basic advertising
and sales promotion program for the ensuing year. This entails the commitment of a
specific amount of money. The exact amount usually is a predetermined percentage
of the sales revenues forecast for the coming year.

Experience has convinced your organisation’s top management that under certain
circumstances it is profitable to augment this basic program with supplemental
advertising and sales promotion campaigns (SASP) during all, or part, of particular
operating periods. To assess the advisability of launching such campaigns, the
following “rules of thumb” have proven useful:

Type of supplemental Extra costs per period Approximate percentage

advertising and sales incurred from increase in sales for the
promotion campaign supplemental campaign period that can probably
be achieved over the sales
that would result from the
basic program alone.
Type 1
(Modest step-up in efforts) $ 10,000 10%
Type 2
(Major step-up in efforts) $ 20,000 20%
Type 3
(Max. step-up in efforts) $ 50,000 30%

For any of these supplemental campaigns to yield results during a given operating
period it is essential that commitments be made no later than the start of the period.
Nor is it possible, except at prohibitive cost, to abandon a campaign once it has been
undertaken. Furthermore, experience indicates that even if the extra expenditures are
increased substantially beyond $ 50,000, sales are not likely to exceed 130 per cent of
the level they will reach with only the basic program.

In commenting upon this phase of operations, one of your senior executives has
stated, “It is imperative that a decision regarding a SASP campaign be based on a
painstaking analysis of the total situation. I have reference not only to the status quo
then surrounding the company, but also the probable future course of events, the plans
being launched by the other sectors of the business, and so on. This can be tricky. It
is a nightmare to find yourselves committed to a ‘maximum effort’ Type 3 campaign
during a period in which actual sales are so favourable that the factory is unable to
meet even the demand that would have been generated by the basic program. On the
other hand, not to have launched an SASP campaign during a period in which sales
fall seriously short of the factory output appears, by hindsight, to be inexcusably poor
management. But by digging and analysing, it is possible to assess if a supplemental
campaign is likely to be helpful.”
Master Operations Scheduling Game 3

Factory Output Capabilities and Direct Labour Costs

As noted previously, your company divides the calendar year into four consecutive
operating periods of 13 weeks each. The range of factory output capabilities per
period, and the average direct labour cost per unit under each of the three factory
operating conditions that management believes to be feasible, are as follows:

Factory Operating Output Capabilities per Average Direct Labour

Conditions Operating Period* Cost per Unit
Single shift without
Overtime 60,000 units or less $ 5.00
Single shift with Overtime 61,000 to 80,000 units $ 5.00 for first 60,000
units
$ 7.50 per unit thereafter
Two shifts 61,000 to 110,000 units $ 5.00 for first 60,000
units
$ 5.50 per unit thereafter

* (Note: For planning and scheduling purposes, factory output is always expressed in
multiples of thousands of units.)

Scheduling and Planning Factory Activity

Until recently, your company’s policy has been to increase or to decrease the rate of
factory output frequently. This has been accomplished by hiring or laying off
workers; increasing or decreasing overtime; changing the number of shifts, and so on,
whenever sales fluctuation seemed to warrant it. After careful study, however, your
Board of Directors has become convinced that the costs and inefficiencies associated
with such frequent changes are excessive, and that with careful planning a more
stable, and hence more profitable, pattern of operations could be achieved.
Instructions have been given, therefore, to your operating management that until
further notice it is to adhere to a policy decision that the level of factory operations
can be changed no more than four times per calendar year, and that such changes can
only occur at the start of an operating period. Once the level of factory activity has
been determined for a given period, it cannot be changed until the start of the next
period.

In commenting on this new policy, your Board Chairman has stated, “Granting that
forecasting is difficult in our industry, we feel that it still is not unreasonable to expect
our operating management to do a sufficiently sound job of planning to be able to live
with their decisions for at least a three-month period.”

Extra Costs arising from Scheduling or Forecasting Problems

Simultaneously with announcing the new policy regarding the number and frequency
of changes in factory output rate, your company’s Directors announced their intention
to employ the results of a recently completed cost analysis. This study had been
undertaken by representatives of the Sales, Production, Finance, and Accounting
Departments to provide information on the extra costs incurred whenever problems of
Master Operations Scheduling Game 4

scheduling or forecasting caused your company to adopt any of the following three
types of action:

1. Making changes in the rate of factory operations: that is, the extra costs incurred
from having to recruit, hire, and train additional employees – or from having to
lay off present employees; from having to place rush orders for additional
materials; from increases in state unemployment taxes arising from an irregular
employment record; and so on.

2. Carrying finished goods inventories: that is, the extra costs incurred from the
physical movement and storage of finished products; the cost of insurance, the
risk of theft, damage, deterioration, or obsolescence, or all of these; the cost of the
capital tied up in such inventories; and so on.

3. Defaulting on a delivery promise made to a customer: that is, extra costs arising
from the use of airfreight to expedite delivery on a delayed order; losses arising
from a customer’s refusal to accept late delivery; estimates, based on past
experience, of the risk that such non-deliveries will result in legal action or in the
loss of future sales from the customer in question or from other customers who
learn of the situation; and so on.

The results of the study were as follows:

 Extra costs incurred from changes in the rate of factory output: $2.00 per unit of
change, regardless of whether the change is upward or downward.

 Extra costs, in addition to those cited above, from changes in the number of shifts
employed in the factory:

1. Going from 1 shift to 2 shifts: $7,000

2. Going from 2 shifts to 1 shift: $3,000

 Extra costs from overtime or second – shift premiums:

1. Overtime: $2.50 per unit for each unit of factory output in excess of
60,000 units per period.
2. Second-shift: $.50 per unit for each unit of factory output in excess of
60,000 units per period.

 Extra costs of missed delivery promises: $6.00 per unit per period.

 Extra costs of carrying finished goods inventory: $1.00 per unit per period (to be
applied to the average size of the inventory, that is, one –half of the sum of the
beginning inventory for the period plus the closing inventory).

(Note: Single shift plus overtime can be used only up to a maximum factory output
rate of 80,000 units per period. To obtain an output rate in excess of 80,000 units
requires the use of a second shift. To obtain an output rate between 61,000 and
80,000 units, operating management can choose either single-plus-overtime, or two-
Master Operations Scheduling Game 5

shift operations. Also note that if the output rate falls below 60,000 units, the factory
will operate in the single shift mode only.)

Special Internal Controls

One of the top management’s objectives in obtaining such cost information was to
establish a special system of internal controls which would help the Directors make a
continuing assessment of the performance of operating management. Therefore, in
addition to the conventional profit and loss statement, the Directors also now require
that at the close of each operating period operating management complete and submit
the form shown in Exhibit 1.
These internal controls are based upon the conviction that, on the average, each unit
shipped from the factory generates a potential contribution of $3.00. That is to say, if
operations are at maximum efficiency, your company can meet all variable costs
arising from the production of the unit in question and still have $3.00 of the selling
price available as a contribution toward its fixed costs, taxes, and profits. This
potential contribution is reduced, however, by any extra costs incurred during the
period.

Use of this concept requires that the following computations be made for each
operating period:

1. Number of units actually shipped X $3.00 = potential contribution for the period.
2. Extra costs incurred during period = cost of any supplementary advertising or
sales promotion campaign plus any extra costs arising from scheduling or
forecasting problems.
3. Net operating contribution for period = potential contribution minus extra costs
incurred.

An Example of the System at Work:

The First Operating Period of the Current Year

During the final week of the year just concluded, your factory was operating at an
output rate of 71,000 units per period, that is, the rate that had been set at the start of
the period. This had been accomplished through use of single shift plus overtime. All
orders calling for shipments during the fourth period have now been received, and it
has been determined that after meeting these your company will end the current year
with a finished goods inventory of 10,000 units.

The sales forecast for the following year, prepared by the Sales Department in
November, is as follows:

Period # Delivery Requirements Forecast

1 70,000 units
2 82,000 units
3 125,000 units
4 59,000 units
Total 336,000 units
Master Operations Scheduling Game 6

By late December, your company’s operating management also knew that 44,000
units of advance sales commitments calling for delivery during period #1 of the
coming year were already on the books. Of this total, 18,000 units had been booked
during period #3 of the year just concluding, and 26,000 units during period #4. An
additional 28,000 units of advance commitments had been booked in period #4 for
delivery during period #2 of the coming year.

After studying these facts, your company’s operating management decided that during
period #1 of the new year, the factory would be operated on a single-shift-plus-
overtime basis at an output rate of 62,000 units; that is to say, a reduction of 9,000
units would be made in the rate maintained during the fourth period of the year then
concluding. In addition, it was decided that a “Type 1” supplementary advertising
and sales promotion campaign would be launched during period #1 in an effort to
stimulate sales by about 10 per cent.

During actual operations in period #1, the following sales results were achieved1:

Period in which Shipment Amount of Orders

Called for Booked
1 (Single Period Sales) 32,000 units
2 40,000 units
3 28,000 units

As a result of these developments, total delivery requirements for period #1 turned out
to be 76,000 units: the 44,000 units of advanced commitment sales booked prior to the
start of period #1, plus the 32,000 units of single period sales booked during period
#1. However, your company was able to ship 2 only 72,000 units of this total: the
62,000 units that were produced by the factory during period #1, plus the 10,000 units
which were available in the form of finished goods inventory at the start of the period.

Therefore, your company will enter period #2 with a shipping deficit of 4,000 units in
overdue orders which will have to be met at the earliest possible date out of period #2
factory output.

Under your company’s internal control system, period #1 operations resulted in a net
operating contribution of $154,000, computed as shown in Exhibit 1.

Now, operating management must make various decisions regarding operations

during period #2. It knows positively that as early as possible in period #2 your
company must ship the 4,000 units of delayed deliveries, that is, the shipping deficit

1
The figures have already been adjusted for the additional sales expected due to Type 1 advertising
campaign launched at the beginning of the period.
2
In most instances, orders shipped from the factory during the last few days of a period are not
received by the customer until early in the following period. This brief lag is not considered important
within the industry, however, and all shipments leaving the factory during a particular period are
assumed to be applicable to the shipment requirements of the period.
Master Operations Scheduling Game 7

incurred in period #1. It knows also that during period #2 the factory will have to ship
an additional 68,000 units to satisfy advanced sales commitments booked for period
#2: the 28,000 units booked during period #4 of the previous year, plus the 40,000
units booked during period #1 of the current year. Before deciding upon the rate at
which to operate the factory during period #2, your management will also have to
reach a conclusion regarding the additional shipping requirements that are likely to
arise from single period sales that will be booked during period #2. Attention will
have to be given to the possibility that the factory should begin building up its
inventory position in anticipation of shipping requirements in period #3. Decisions on
these points will be based, of course, on a careful analysis of the sales forecasts and
the sales trends that seem to be developing, as reflected in sales to date for the year.

An Unexpected Development
Several hours prior to the time they were to meet to reach final decisions regarding
period #2 operations, the entire operating management of your company was “pirated
en masse” by a desperate competitor who tripled their salaries and offered them lavish
stock options.

In light of this crisis, you have accepted an assignment to join a newly formed
management group which will assume full responsibility for the company’s operating
decisions. You and your new associates have agreed to meet as soon as possible to
decide upon the organisational techniques and procedures you will employ in meeting
your new responsibilities. In recognition of the difficulty of your situation the
Directors have given you and your associates complete latitude regarding who, among
you, will assume what executive positions.

While congratulating you on your new responsibilities, one of the Directors offers you
a few words of advice:

Look, the secret of success in our company – like any other – is organising an
effective management team. In a technical sense, there are only three things that
have to be done:
(1) before the start of each period you have to decide upon the rate at which the
factory is going to be run during the ensuing 13 weeks;
(2) you have to decide whether or not to employ a supplemental advertising and
sales promotion campaign during the forthcoming period and, if so, which one;
and
(3) you have to compute the net operating contribution for the period just ended, and
submit this figure to the Directors.

Clearly it’s imperative that you assign specific responsibility for each of these steps.

But these formal requirements represent only part of the story. Sound decisions
regarding the factory rate and the desirability of a supplemental advertising campaign
can only grow out of careful analysis of various known facts, and a resourceful
prediction regarding certain unknowns. There are data, and trends, and other
evidence that helpfully can be brought to bear on both of these matters. The trick is
to organise for the analytical job that is required. The task is too complex – and the
time pressure too great – for any one man to do alone. And the situation is
undergoing too rapid a rate of change to permit operating management to rely merely
on intuition, or on the hope that the disorganised efforts of able men will somehow
Master Operations Scheduling Game 8

yield wise results. Instead, each manager must assume some portion of the total job,
and all of these individual efforts must then be blended into an effective whole.

I urge you and your colleagues to start by making a careful analysis of our company,
the market it serves, the relationship between the various costs it encounters, and so
on. Then reach agreement regarding the precise information and data that you need
to compile to sharpen your judgement regarding the various decisions you know you
will be having to make. For example, might there be some way to highlight the
constantly changing relationship between sales forecasts and actual sales results?
Might there be some way to assure that before committing the factory to a given
output rate for the next period, you examine the costs under several different output
rates? Is there some device that will assure that the plans of the factory, and of the
Sales Department, are carefully co-ordinated? And so on.

Once you decide the analytical approaches you want to employ, pin down
responsibility for executing them. And decide in advance just how you plan to go
about making final decisions. Is the President alone going to have the “final say,”
with all of the other managers acting as staff advisors to him? Or are decisions to be
divided up functionally, with a Sales Manager deciding matters relating to sales, a
Production Manager deciding factory matters, and so on? Or should the management
group act as a committee, reaching decisions via majority vote? Or would some still
different organisational approach be better suited to management’s needs?

Well, best of luck. We’re up against some tough competitors. But the other
Directors and I expect you to run circles around them.

Exhibit 1

NET OPERATING CONTRIBUTION CALCULATION SHEET

(to be turned in after each Period)

Management: Team A Period: 1 Year: 1

I. Activities During this Period

(a) Factory Operations (circle one);

Single Shift without overtime Single Shift with Overtime

Two Shifts

(b) Factory Rate

This period : 62,000 units

Prior period : 71,000 units
Change in rate : 9,000 units

(c) Supplementary Advertising & Sales Promotion Campaign (circle one):

None Type 1 ($ 10,000)

Master Operations Scheduling Game 9

Type 2 ($ 20,000) Type 3 ($ 50,000)

II. Shipping Requirements this Period (Units)

Delivery Deficits from prior Periods : Nil

Advance Commitment Sales Booked for delivery this period : 44,000
Single Period Sales, this Period : 32,000
Total shipping requirements : 76,000

III. Shipping Capabilities this Period (Units)

Starting Finished Good Inventory : 10,000

Factory Output Rate this Period : 62,000
Total Shipping capabilities : 72,000

IV. Shipments made During this Period (Units)

Minimum of the total in item II or item III : 72,000

V. Delivery Deficit (Units)

If item II is greater than item III, the difference : 4,000

VI. Ending Finished Goods Inventory (Units)

If item II above is less than item III, the difference : Nil

VII. Potential Operating Contribution for this Period

Shipments made this period (item IV above) 72,000 units x $ 3 :$ 216,000

VIII. Extra Costs and Expenses incurred this Period

a) Supplementary Advertising (see item I-c above) :$ 10,000

b) Change in Factory Rate (item 1-B above X $ 2) : $ 18,000

c) Change in number of Factory Shifts

(changing from 1 to 2 costs $ 7,000;
from 2 to 1 costs $ 3,000) : Nil

d) Overtime or 2nd Shift Premiums

(Overtime costs $ 2.5 per unit for all units in excess of
60,000; 2nd Shift costs $ 0.5 per unit for all units in
excess of 60,000 :$ 5,000
Master Operations Scheduling Game 10

e) Inventory Carrying Costs

(Starting Inventory + Ending Inventory) x 0.50 x $ 1.00 :$ 5,000

f) Missed Delivery Promises

(Item V above x $ 6.00) :$ 24,000

Total extra costs & Expenses incurred :$ 62,000

IX . Net Operating Contribution for Period

Item VII minus VIII :$ 154,000

Cumulative Operating Contribution from prior Periods :
New Cumulative Net Operating Contribution
(sum of the above two items) :

*******

Your company’s decisions regarding next operating period

Factory Operations :
Factory Rate : units
Supplementary Advertising :

Data Sheet for Master Operations Scheduling Game

Write your Name, Roll Number and Section in this box

Section:
Sl. No. Name Roll No.
1
2
3
4
5
6

Enter your decisions in the box below

Period Shift/OT Production Rate Type of

details* Advt.#
1 1S - OT 62,000 Type 1
2
3
4
Master Operations Scheduling Game 11

5
6
7
8
9
10
11
12

* Make use of the following notations for filling this column:

 1S – no OT – for singe shift with no over time
 1S – OT for single shift with over time
 2S – for double shift

# Make use of the following notations for filling this column:

 Type 0 – for no Advt. Campaign
 Type 1, 2, 3 – for the respective type of Advt. Campaign launched