Chapter – 4

Operations Planning
and Control

1
Components of Ch.4

 4.0 Introduction
 4.1 Aggregate Planning
 4.2 Materials requirement planning
 4.3 Operations scheduling

2
 Introduction
 Operations planning is concerned with the determination, acquisition
and arrangement of all facilities necessary for the future operations,
 whereas Operations control is concerned with the implementation of a
predetermined operations plan or policy and the control of all aspects of
operations according to such a plan or policy. It is also called ‘Production
Planning and Control (PPC)’ in manufacturing sector.
 OPC or PPC can be defined as the process of planning the production in
advance, setting the exact route of each item, fixing the starting and
finishing date for each item, giving production orders to shop and lastly
following up the progress of products according to orders.
 It is also called the ‘nerve center’ of the factory.

3
 Planning Process
Long-range plans
(over one year)
Research and Development
New product plans
Capital investments
Facility location/expansion

Top
executives Intermediate-range plans
(3 to 18 months)
Sales planning
Production planning and budgeting
Operations Setting employment, inventory,
managers subcontracting levels
Analyzing operating plans

Short-range plans
(up to 3 months)
Job assignments
Supervisors, Ordering
Foremen, Job scheduling
Operations Dispatching
managers Overtime
Part-time help

Responsibility Planning tasks and horizon

4
 Production Planning Horizons
Long-Range
Long-Range Capacity Planning (years)

Medium-Range
Aggregate Planning (3-18 months)

Short-Range
Master Production Scheduling (weeks)

Very-Short-Range
Production Planning and Control Systems
(hours - days)

Pond Draining Push Pull Focusing on

Systems Systems Systems Bottlenecks

5
Long-range Capacity Planning
 Long-range capacity planning is necessary to
develop facilities, equipment and production
processes and it becomes constraints on the
medium and short-range planning

6
Forecasting long-range Capacity
Demand
 Consider the life of the input (e.g. A facility’s
life may be 10-30 yrs)
 Understand product life cycle as it impacts
capacity
 Anticipate technological developments
 Anticipate competitors’ actions
 Forecast the firm’s demand

7
 Aggregate Planning
 Is concerned with the overall operations of an organization
over a specified time horizon
 Determines the efficient way of responding (allocating
resources) to market conditions
 Effectively allocate system capacity (plant, equipment, and
manpower) over designated period
 A medium range tactical problem of establishing aggregate
production rates, work force sizes, inventory levels and
possibly shipping rates

8
 Aggregate Planning---cond
 The main purpose of the aggregate
plan is to specify the optimal
combination of:
 production rate,
 workforce level, and
 inventory on hand

9
 Why Aggregate Planning Is
Necessary? It is needed:
 To have full load facilities and minimize overloading
and under loading
 To make sure enough capacity available to satisfy
expected demand
 To plan for the orderly and systematic change of
production capacity to meet the peaks and valleys
of expected customer demand
 To get the most output for the amount of resources
available
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 Aggregate Demand:
 Is the total demand for all products
 We must use the same unit of measure to
facilitate planning at the highest level of a firm
 When many different types of items are produced
it would be more appropriate to consider
aggregate units in terms of:
 weight (tons of steel),
 volume (gallons of gasoline),
 amount of work required (labor-hours, machine-
hours), or dollar value 11
Aggregate planning---cond

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Inputs to Aggregate Planning
 A forecast of aggregate demand covering the
selected planning horizon (3-18 months)

 The alternative means available to adjust

short- to medium-term capacity, to what
extent each alternative could impact capacity
and the related costs
 Examples: Cost of inventory, Back orders, Hiring /
firing, Overtime, Subcontracting etc.

13
Inputs to Aggregate Planning---cond
 The current status of the system in terms of
workforce level, inventory level and
production rate

 Company policy regarding

 workforce changes (layoffs, overtime)
 subcontracting
 inventory levels
 back orders

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Inputs to Aggregate Planning---cond

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Outputs from Aggregate Planning
 A production plan: aggregate decisions for
each period in the planning horizon about
 workforce level
 inventory level
 production rate

 Projected costs if the production plan was

implemented

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Aggregate Planning Strategies
 1.Proactive
 Involve demand options: Attempt to alter
demand to match capacity
 2.Reactive
 Involve capacity options: Attempt to alter
capacity to match demand
 3.Mixed
 Some combination of the above strategies
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 Aggregate Planning Options
1. Capacity Options:- changing capacity
 changing inventory levels

 varying work force size by hiring or layoffs

 varying production capacity through overtime or

idle time
 Subcontracting

 using part-time workers

 Capacity options include: 1.Hire and layoff workers,

2. overtime/ slack time, 3.Partime workers, 4. Inventories,
5. subcontracting 18
 Capacity Options----cond
Changing inventory levels
 Increase inventory in low demand periods to

meet high demand in the future

 Increases costs associated with storage,

insurance, handling, obsolescence, and capital

investment
 Shortages can mean lost sales due to long lead

times and poor customer service

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 Capacity Options----cond
Varying workforce size by hiring or layoffs
 Match production rate to demand
 Incur training and separation costs for hiring
and laying off workers
 New workers may have lower productivity
 Laying off workers may lower morale and
productivity

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 Capacity Options----cond
Varying production rate through overtime or
idle time
 Allows constant workforce
 May be difficult to meet large increases in
demand
 Overtime can be costly and may drive down
productivity
 Absorbing idle time may be difficult

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 Capacity Options----cond
Subcontracting
 Temporary measure during periods of peak
demand
 May be costly
 Assuring quality and timely delivery may be
difficult
 Exposes your customers to a possible
competitor

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Capacity Options----cond
Using part-time workers
 Useful for filling unskilled or low skilled
positions, especially in services

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 Aggregate Planning Options---cond

2. Demand Options: deals with altering demand

 influencing demand
 Demand options include:
 1.Pricing,
 2. Promotion,
 3. Creating New demand and
 4. Backordering=during high demand periods

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 Demand Options-----cond
For influencing demand:
 Use advertising or promotion to increase
demand in low periods
 Attempt to shift demand to slow periods
(using pricing)
 May not be sufficient to balance demand
and capacity
 (e.g., airlines and hotels weekend discount,
 telecommunication companies’ weekend rates)
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 Demand Options----cond
Back ordering during high- demand periods
 Requires customers to wait for an order
without loss of goodwill or the order
 Most effective when there are few if any
substitutes for the product or service
 Often results in lost sales

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Demand Options---cond
Complementary products
 Develop a product mix with seasonal trends that level
the cumulative required production capacity.
 Produce products that uses same processes &
equipment
 E.g :- Produce Lawnmower during spring and summer, and

 snowmobiles & snow blowers during fall and

winter

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Aggregate Planning Approaches

 Informal or Trial-and-Error Approach

 Mathematical Approaches
 Linear Programming
 Linear Decision Rules
 Simulation

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Strategies for the Informal Approach
 1. Matching Demand=chase demand
 2. Level (constant) Capacity
 Buffering (support) with inventory
 Buffering with backlog
 Buffering with overtime or subcontracting
 3. Mixed strategies: Combining elements from
the above pure strategies

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Strategies for the Informal Approach---cond

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1. Matching Demand Strategy
 Capacity (Production) in each time period is
varied to exactly match the forecasted
aggregate demand in that time period
 Capacity is varied by changing the workforce
level
 Finished-goods inventories are minimal/zero
 Labor and materials costs tend to be high due
to the frequent changes
 Employee moral can suffer
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Evaluating the Matching Production Plan

 Production rate is dictated by the forecasted

aggregate demand
 Convert the forecasted aggregate demand
into the required workforce level using
production time information
 The primary costs of this strategy are the
costs of changing workforce levels from
period to period, i.e., hiring and layoffs costs

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2. Level (constant) Capacity Strategy
 Capacity (production rate) is held level
(constant) over the planning horizon
 The difference between the constant
production rate and the demand rate is
supported (buffered) by inventory, backlog,
overtime and/or subcontracting.
 Level production= level capacity= constant capacity
= production rate is held constant
 Chase demand= Matching demand= capacity and
production rate is changed/varied/ based on demand
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 Choosing a Strategy

 Two important factors to be considered when

selecting an aggregate plan are:
 Cost and
 Company policy

 Aggregate planners seek to match supply and

demand within constraints imposed by
policies and at minimum cost.

34
 Techniques for Aggregate Planning:
A general procedure for aggregate planning consists of the
following steps:
1. Determine the demand for each period
2. Determine the capacity for regular time,
overtime, and subcontracting each period
3. Find labor costs, hiring and layoff costs,
and inventory holding costs
4. Consider company policy on workers and
stock levels
5. Develop alternative plans and examine
their total costs
6. Select the best plan that satisfies
objectives. Otherwise return to step 5. 35
 Aggregate Planning Relationships
 1. Number of workers in a period = Number of Workers at
the end of the previous period + Number of new Workers at the
start of the current period - Number of laid off Workers at the
start of the current period.
 N.B: Since the organization would not hire and layoff
simultaneously, so at least one of the last two terms will be “0”.

 2. Inventory at the end of a ( current) period = Inventory at

the end of the previous period + Production in the current
period – Amount used to satisfy the demand in the current
period

36
..

 3. Average Inventory for a period =

(Beginning Inventory + Ending
Inventory)/2.
 The cost of a particular plan for a given
period can be determined by summing the
appropriate costs:
4. Cost for a ( current) period = Output
Cost i.e. (Regular +OT+ Subcontract) +
Hire/Layoff Cost+ Inventory Cost +
Backorder cost

37
The appropriate costs are calculated as follows:
Type of Cost How to Calculate
Output:

5. Regular Regular Cost per Unit X Quantity of Regular Output

6. Overtime Overtime Cost per Unit X Overtime Quantity

7.Subcontract Subcontract Cost per Unit X Subcontract Quantity

Hire/lay off:

8. Hire Cost Per Hire X Number Hired

9. Layoff Cost per Layoff X Number laid off

10. Inventory Carrying Cost per Unit X Average Inventory

11. Back Order Back Order Cost Per Unit X Number of Backorder Units

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 Example on how to determine total cost
of aggregate plan:
 Aggregate Demand
J F M A M J
200 200 300 400 500 200
 Capacity: Regular work-force can meet the average
demand (1800 / 6 = 300 units / month)
 Initial Inventory = 0 = Ending inventory of previous
period
 Costs: Regular time: $ 2 / unit
Overtime $ 3 / unit
Subcontracting $ 6 / unit
Inventory (average) $ 1 / unit / month
Backorder $ 5 / unit / month

39
 Example 1
 Policy: Level Production
 Determine total cost of aggregate demand:
 Assuming steady/stable rate of regular time-
output use inventory, backordering or
subcontracting to meet uneven demand
Plan 1
 Level production= level capacity= constant
capacity = production rate is held constant

40
.
 .

41
 Example 1 (Cont.)----- Class Work
 Policy: Chase demand
 Determine total cost of aggregate demand:
 Useinventory, overtime, or subcontracting to meet
uneven demand
 Maximum over time = 50 units / month

plan 2

 Chase demand= Matching demand= capacity and

production rate is changed/varied/ based on demand
.
 .

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Example 2: Calculating TC & Average requirement?
Production
Month Expected Demand Days
Jan 900 22
Feb 700 18
Mar 800 21
Apr 1,200 21
May 1,500 22
June 1,100 20
6,200 124

44
Example 2 ---cond
E.g. Using constant workforce?
Cost Information TC =?
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

45
Solution: E.g.2: Calculating TC….cond
Production 1.Demand Per
Month Expected Demand Days Day (computed)
Jan 900 22 41=900/22
Feb 700 18 39=700/18
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

2.Average Total expected demand

requirement =
Number of production days
6,200
= = 50 units per day
124
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 Example 2 ---cond
Forecast demand
Production rate per working day

70 – Level production using average

monthly forecast demand
60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
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Example 2 ---cond

Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

t w or k force
1 – co ns t a n
Pl a n
TC=? 48
Example 2 ---cond constant work force

4.Monthly
Cost Information
3.Production at Demand Inventory 5.Ending
Month carry
Inventory 50 Units
cost per Day Forecast $ 5Change
per unit per Inventory
month
Subcontracting cost per unit $10 per unit
1,100 =
Jan 22x50 900 $+200
5 per=1100-900 200
hour ($40 per day)
Average pay rate
Feb 900= 18 700 +200 =900 -700 400
x50 $ 7 per hour
Overtime pay rate (above 8 hours per day)
Mar 1,050 800 +250 650
Labor-hours to produce a unit 1.6 hours per unit
Apr 1,050 1,200 -150 500
Cost of increasing daily production 1,500
rate $300 per unit
May 1,100 -400 100
(hiring and training)
June 1,000 1,100 -100
Cost of decreasing daily production rate $600 per unit
0
(layoffs) 6. 1,850
Total units of inventory carried over from one t workforce
Table 13.3 periodnto1 the
– nstan = 1,850 units
conext
Pla
7. Workforce required to produce 50 (6200/124)units per day= 10wrks
i.e. Workforce required = Labor hr to produce a unit x Average prodn per day/ no. of hours per day per worker
= (1.6 hours X 50 units) / 8 hours =80/8 = 10
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Example 2 ---cond constant work force

Monthly
Costs
Cost Information
Production at Calculations
Demand Inventory Ending
8.Inventory
Month carry
Inventory 50carrying
Units
cost per Day Forecast (= 1,850
perunits
$ 5Change carried
unit per monthx $5
Inventory
Jan 1,100 $9,250 900 per $10unit)
+200
per unit 200
Subcontracting cost per unit
9.Regular-time
Feb pay rate labor
900 700 (= 10
$ 5 workers
+200
per x $40
hour ($40 per
400
per day)
Average
49,600 day x 124 days)
Mar 1,050 800 +250
$ 7 per hour 650
Other costs
Overtime pay (overtime,
rate
Apr layoffs,
hiring, 1,050 1,200 (above -1508 hours per 500day)
Labor-hours to produce a unit 0
subcontracting) 1.6 hours per unit
May
Cost cost 1,100
of increasing
10.Total daily production 1,500
rate -400unit
$300 per 100
(hiring and training)
June 1,000 $58,8501,100 -100 0
Cost of decreasing daily production rate $600 per unit 1,850
(layoffs)
Total units of inventory carried over from one
Table 13.3 period to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers

50
Example 3
Production 1.Demand Per
Month Expected Demand Days Day (computed)
Jan 900 22 41 (900/22)
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

on tra c ting
–s ub c
Plan 2
2.Minimum requirement = 38 units per day TC= ?

51
 Example 3 TC with subcontracting- -----cond
Forecast demand
Production rate per working day

70 –
Level production
60 – using lowest
monthly forecast
demand
50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
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Example 3 TC with subcontracting- -----cond

Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

53
Example 3 TC with subcontracting- -----cond

Cost Information
Inventory carry cost $ 5 per unit per month
3. In-house
Subcontracting production=
cost per unit 38$10units per day
per unit
Average pay rate x $124
5 per days
hour ($40 per day)

Overtime pay rate

= 4,712
$ 7 per units
hour
(above 8 hours per day)
4.Subcontract
Labor-hours to produce a unitunits = 1.6ddhours
Total per unit
– In-house production
Cost of increasing daily production rate
(hiring and training)
= 6,200 - 4,712
$300 per unit

= 1,488
Cost of decreasing daily production rate units
$600 per unit
(layoffs)

54
Example 3 TC with subcontracting- -----cond

 5.Workforce required = (Labor hrs to

produce a unit x Average production
per day)/ no. of hours per day per
worker
 = (1.6 hrs for a unit X 38 units) / 8

hours =60.80/8 = 7.6 = 8 workers

55
Example 3 TC with subcontracting----cond
Cost Information
Costs
Inventory carry cost
Calculations
$ 5 per unit per month
Subcontracting cost per unit $10 per unit
6.Regular-time labor (= 8 workers x $40 per day
Average pay rate $39,680 x $124
5 per hour ($40 per day)
days)
$ 7 per hour
Overtime pay rate (above 8 hours per day)
Subcontract
Labor-hours units
to produce a unit
7.Subcontracting = 6,200
(= 1.6 -units
hours
1,488 4,712
per unit
x $10 per
14,880 rate unit)
Cost of increasing daily production
(hiring and training)
= 1,488 units
$300 per unit

Cost of decreasing daily production rate $600 per unit

(layoffs)
8.Total cost
Table 13.3 $54,560

56
Example 4 Class Work
Production 1.Demand Per
Month Expected Demand Days Day (computed)
Jan 900 22 41 (900/22)
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

a n d f iring
3 – Hiring
Plan
TC= ?
2.Production = Expected Demand
Use cost information given earlier.

57
Example 4 TC with hiring and firing----cond

Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

58
 Example 4 TC with hiring and firing----cond

Forecast demand and

Production rate per working day

monthly production
70 –

60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
59
Example 4 TC with hiring and firing----cond

Cost Information 4.Basic

Production
Cost 5.Extra Cost
$ of per6.Extra
5 unit Costmonth
per
Inventory carrying cost
3.Daily (demand x Increasing of Decreasing
Forecast Prod 1.6 hrs/unit x Production
$10 per Production
unit 7.Total
Subcontracting
Month (units) cost
Rate per unit
$5/hr) (hiring cost) (layoff cost) Cost
Average pay rate 41= $ 7,200 $ 5 per hour ($40 per day)
= 900 $
Jan 900 — —
900/22 $ 7 per hour 7,200
Overtime pay rate x 1.6x5
(above 8 hours per day)
39= 5,600= $1,200
Feb 700 — 1.6 hours 6,800=
Labor-hours to produce700x1.6x5
700/18 a unit (= 2 xper unit
$600)
5600+1200

Cost
Mar
of increasing
800
daily production
38 6,400
rate — $300 per $600unit
(hiring and training) (= 1 x $600) 7,000
$5,700
Cost
Apr of decreasing
1,200
57daily production
9,600 rate
(=
$600 per unit
19 x $300)
—
15,300
(layoffs)
$3,300
May 68 12,000 —
1,500 (= 11 x $300) 15,300
Table 13.3 $7,800
June 55 8,800 —
1,100 (= 13 x $600) 16,600
$49,600 $9,000 $9,600 $68,200
60
Comparison of the Three Plans
Plan 1 – Plan 2 – Plan 3 – hiring
constant subcontracting and firing
workforce

Cost Plan 1 Plan 2 Plan 3

Inventory carrying $ 9,250 $ 0 $ 0
Regular labor 49,600 39,680 49,600
Overtime labor 0 0 0
Hiring 0 0 9,000
Layoffs 0 0 9,600
Subcontracting 0 14,880 0
Total cost $58,850 $54,560 $68,200

Plan 2 is the lowest cost option

61
 Aggregate Planning in
Services
 Controlling the cost of labor is critical
- Services occur when they are rendered
- Demand for service can be difficult to predict
- Capacity availability can be difficult to predict
 Labor flexibility can be an advantage in services
1. Flexibility of individual worker skills
2. Flexibility in rate of output or hours of work

62
 Disaggregating the Aggregate Plan
 The Aggregate Plan is broken down into Master
Schedules and Rough Cut Capacity Planning charts
respectively.
􀂾 Master schedule: The result of disaggregating
an aggregate plan; shows quantity and timing of
specific end items for a scheduled horizon. Aggregate
􀂾 Rough-cut capacity planning (RCCP): Planning
Approximate balancing of capacity and demand to
test the feasibility of a master schedule.
􀂾 Master schedule: Determines quantities
needed to meet demand Disaggregation
􀂾 Interfaces with
1. Marketing 3. Production planning
2. Capacity planning 4. Distribution planning Master
Schedule63
 Master Production Scheduling (MPS)

 MPS is the plan that states what is to be

produced, how many are to be completed
and when they are to be completed.

 As contrasted with aggregate plans, MPS is

more detailed:
 it deals with individual products and when
 they will be produced usually week by week

64
Disaggregating the Aggregate Plan------- (Cont.)
 A master schedule shows the planned output for
individual products rather than an entire
product group, along with the timing of
production.
 With Rough cut capacity planning we can check
whether capacities of production and warehouses
constraints exist. This means checking capacities of
production and warehouse facilities, labor and
vendors to ensure that no gross deficiencies exist
that will render master schedule unworkable.
 The master schedule then serves as the basis for
short range planning.
 MPS is disaggregated in stages or phases, which
may cover weeks or months. 65
 Master Schedule------cond
􀂾A Master schedule indicates the quantity and timing
( i.e. delivery times) for a product, or a group of products,
but it does not show planned production.
 For e.g. a master schedule may call for delivery of 500 Air
conditioners on April 1. But it may not require any
production because of availability of 1000 air conditioners
in inventory. Or if there are only 400 Air conditioners, 100
would be planned for production.
 Master Scheduler:
􀂾 Evaluates impact of new orders
􀂾 Provides delivery dates for orders
􀂾 Deals with problems like:
- Production delays
- Revising master schedule
- Insufficient capacity
66