Introduction to Operations Planning and Control

LECTURES

IN

OPERATIONS PLANNING

AND

CONTROL

Prepared by:

MARLUNA LIM URUBIO, Ph. D

Introduction to Operations Planning and Control

Production = Factories / Machines /Assembly

From

Manufacturing managementwhich involves methods/techniques in factory operation.

Whereas,

Responsible for management of production systems either for creation of goods or providing services.

Ex. For service oriented company, it involves managing food service, providing medical services, housekeeping etc.

Ex. Managing a factory that involves decisions on raw materials, equipment, etc.

Functions within Business Organizations

Functions overlap and they do not exist independently, but they interact to achieve the goals and objective of the organization.

Marketing-includes promotion/selling of goods

(demand=supply)

Finance - ensuring funds are available for production requirement as well as product/ service promotions.

-includes budgeting, analysis of investment

proposal, sales, allocation of funds.

Operation/Production- production of goods, services

-it consists of all activities that are directly related to producing goods or providing service.

Accounting – provides data for cost of labor, materials, overhead, scraps, downtime, inventory

Purchasing – procurement of raw materials

Personnel –recruitment, training of personnel, labor relations, health, safety

Public Relations– building/maintaining image of the organization

(sportsfest/cultural events/tours of facilities, etc.)

Industrial Engineering– productivity/ quality improvement

Maintenance– general maintenance and repair of equipment and facilities

Operations Management Function

Main: guide the system thru decision making, especially day today operating decisions

1. Designing and operating production systems

• System design – decisions on system capacity, location of facilities, arrangement of department, acquisition of equipment
• usually involves decision that are for long-term use

• System Operation- decision on management of personnel, inventory planning and control, scheduling, project management, quality control

PRODUCTIVITY

Productivity - is one of the primary concern and responsibility of a manager, that is to achieve productive use of the organization’s resource.

- is an index that measures output ( goods or service ) relative to the input ( labor, materials, energy and other resources ).

PRODUCTIVITY = OUTPUT

INPUT

Productivity growth is the increase in productivity from 1 period to the next relative to the productivity in the preceding period.

Productivity Growth = Current Period Prod – Previous period Prod

Previous PeriodProd

Multifactor Productivity = Quality of production at standard price

labor cost+ material cost + overhead

Classsifying Production Systems

1. Mass Production –there is large volume of standardized products/goods, produced by low skilled or semi skilled workers, using highly specialized and expensive equipment.

1. Lean production - uses minimal amount of resource to produce high volume of high quality goods with some variety.

1. Craft Production -uses highly skilled workers using simple, flexible tools to produce small quantities of customized goods

Efficiency-getting the most out of a fixed set of resources

TO ATTAIN PRODUCTIVITY, INDUSTRIAL ENGINEERS MUST

Maximize ProfitTHROUGHEFFECTIVE and

EFFICIENT MEANS

Integration of

MAN

MACHINE

MATERIALS

METHODS

SAMPLE PROBLEM:

Given:output produced-1,000 pcs

Labor hours-250 hrs

Solution:

Productivity = units produced/ labor hours

= 1,000 pcs / 250 hours

= 4 pcs / hour

Multifactor Productivity= output / labor + materials + Energy + Capital + Misc.

Sample Problem:

Collins Title Company has a staff of 4 each working 8 hours per day for a payroll cost of USD 640/day and overhead expenses of USD 400/day. The company recently purchased a computerized title search system that will allow processing of 14 titles/day. Although the staff, their work hours and pay will be the same, the overhead expenses are now USD 800/day.

Given:Output:8 titles / day

Labor cost:USD 640/day

Overhead:USD 400/day

No. of Staff:4

Available hours: 8 hours

New output:14 titles/day

New Overhead Cost:USD 800/day

Solution:

Labor Productivity ( old system ) =8 titles/ 4 8 = 0.125 titles/labor-hr

Labor Productivity ( new system ) =14 titles/ 4 8 = 0.4375 titles/labor-hr

Multifactor Productivity ( old system ) =8 titles/ USD 640 + USD 400

=0.0077 titles / dollar

Multifactor Productivity ( new system )=14 titles/ USD 640 + USD 800

=0.0097 titles / dollar

Productivity Measures are useful to the following:

1. To track performance over time
2. To determine what has changed and then devise means of improving productivity in the subsequent periods.
3. To judge the performance of an entire industry or the productivity of a country as a whole.

Factors that Affect Productivity:

1. Methods ( Simple? Complicated ? )

Example: Bombing of IC in Helium Gas or FC 84

1. Capital

Example: From manual packing to automated packing but requires capital investment for autopacker

1. Quality

Example: will it be 100% inspection which is time consuming or just random sampling?

1. Technology

Example: Embroidery which used to be manual can now be programmed

1. Management

Example: A supportive management will boost morale of employees

1. Raw Materials

Example: Will production be able to work if RM do not come on time?

1. Equipment

Example: What will be the output if the machines are too old and experience downtime?

1. Working Condition/Environment

Example: Will one produce more if the work area is too hot?

SAMPLE PROBLEMS FOR PRODUCTIVITY

1) A company that processes fruits and vegetables is able to produce 400 cases of canned peaches in one half hour with four workers. What is the labor productivity?

2) A wrapping paper company produced 2,000 rolls of paper one day. Standard price is $ 1/roll. Labor cost was $ 160, material cost was $ 50, and overhead was $ 320. Determine the multifactor productivity.

3) Sample Problem

1. Find the productivity if four workers installed 720 square yards of carpeting in eight hours.
2. Compute for the productivity of a machine which produced 68 usable pieces in two hours.

4) Determine the multifactor productivity for the combined input of the labor and the machine time using the following data:

Input:

Labor: $ 1,000

Materials: $ 520

Overheads: $ 2,000

5) Collins Little Company has a stuff of 4, each working 8 hours per day (for a payroll cost of $ 640 / day) and overhead expenses of $ 400 / day. Collins processes and closes on 8 titles each day. The company recently purchased a computerized title search system that will allow the processing of 14 titles per day. Although the staff, their works hours, and pay will be same, the overheads expenses are now $ 800 per day.

6) At Modem Lumber, Inc., Art Binley, a president and a producer of an apple crates sold to growers, has been able, with his current equipment, to produces 400 crates per 100 logs. He currently purchases 100 logs per day, and each logs required 3 labor hours to process. He believes that he can hire a professional buyer who can buy a better quality log at the same cost. If this is the case, he increases his production to 260 crates per 100 logs. His labor hours will increase by 8 hours per day. What will be the impact on productivity (measured in crates per labor –hour) if the buyers is hired?

7) Art Binley has decided to look at his productivity from a multi factor (total factor productivity) perspective (to solve problem n0.5). To do so, he has determined his labor, capital, energy, material usage and decided to use dollars as the common denominator. His total labor hours are now 300 per day and will increase to 308 per day. His capital and energy cost will remain constant at $350 and $150 per day, respectively. Material costs for the 100 logs per day are $1000 and will remain the same. Because he will pay an average of $10 per hour (with fringes), Binley determine his productivity increase as follows:

8) Calculate the productivity (labor and Multifactor) for the following operations:

a) Three employees processed 600 insurance policies last week. They 8 hours per day, 5 days per week.

b) A team of workers made 400 units of product, which is valued by its standard cost of $10 each (before markups for other expenses and profit). That accounting department reported that for this job the actual cost were $ 400 per labor, $1000 for materials and 4300 for overhead

CAPACITY PLANNING

Capacity planning refers to the upper limit or ceiling on the load that an operating unit can handle.

It enables manager to quantify production capability.

3 Basic Questions in Capacity Planning:

• What kind of capacity is needed?
• How much is needed?
• When is it needed?

Importance of Capacity Decision:

• capacity decisions have impact on the ability of the organization to meet future demands
• it affects operating costs
• it is a major determinant of initial cost
• it affects competitiveness
• it affects the ease of management

2 Useful Definitions of Capacity

• Design capacity-the maximum output that can possibly be attained.

• Effective capacity-the maximum possible outputs given a product mix, scheduling difficulties, machine maintenance, quality factors, etc.

2 Measures of System Effectiveness:

• Efficiency is the rate of actual output to effective capacity.

• Utilization is the ratio of actual output to design capacity.

Efficiency=Actual Output

Effective capacity

Utilization=Actual Output

Design Capacity

Determinants of Effective Capacity:

1. Facilities
2. Product or Service
3. Processes-quality
4. Human Consideration-training
5. Operations-schedule
6. External Forces-product standards

Aggregate Planning

It is an intermediate range capacity planning that covers a time horizon of 2 – 12 months.

3 Levels of Capacity Decisions in an Organization:

1. Long term-relate to product and service selection, facility size and location, equipment decision, lay out of facilities.

1. Intermediate term-relate to general level of employment, output and inventories.

1. Short term-consists scheduling of jobs, workers and equipment.

Demand Options in Aggregate Planning:

• Pricing
• Promotion
• Back Order
• New Demand

Capacity Options in Aggregate Planning:

1. Hire and Lay off workers
2. Overtime/slack time
3. Part time workers
4. Inventories
5. Subcontracting

Strategies for Meeting Demand:

1. Maintain a level workforce
2. Maintain a steady output rate
3. Match demand period by period
4. Use a combination of options

General Procedure for Aggregate Planning consists of the following:

1. Determine demand for each period.
2. Determine capacities for each period.
3. Identify policies that are pertinent.
4. Determine units costs of regular time, overtime, holding of inventories, back orders , layoffs, etc.
5. Develop alternative plans and compute cost for each.
6. Select the alternative that satisfies objectives.

CAPACITY DECISIONS ARE STRATEGIC

For a number of reasons, capacity decisions are among the most fundamental of all the design decisions that managers must make. In fact, capacity decisions can be critical for an organization:

1. Capacity decisions have a real impact on the ability of the organization to meet future demands for products and services; capacity essentially limits the rate of output possible. Having capacity to satisfy demand can allow a company to take advantage of tremendous opportunities.]

1. Capacity decisions affect operating costs. Ideally, capacity and demand requirements will be matched, which will tend to minimize operating costs. In practice, this is not always achieved because actual demand either differs from expected demand or trends to vary. In such cases, a decision might be made to attempt to balance the costs of over-and under capacity.

1. Capacity usually a major determinant of initial cost. Typically, the greater the capacity of a productive unit, the greater its cost. This does not necessarily imply a one-for-one-relationship; larger units tend to cost proportionately less than smaller units.

1. Capacity decisions often involved long-term commitment of resources and the fact that once they are implemented, it may be difficult or impossible to modify those decisions without incurring major cost.

1. Capacity decision can affect competitiveness. If a firm has excess capacity, or can quickly add capacity that may serve as a barrier to entry other firms. Then too, capacity can affect delivery speed which can be competitive advantage.

1. Capacity can affect the ease of the management, having appropriate capacity makes management easier then when the capacity is mismatched.

1. Globalization has increased the importance and the compellability of the capacity decisions, Fur-flung supply chains and distant markets add to the uncertainty about capacity needs.

1. Because capacity decisions often involve substantial financial and other resources, it is necessary to plan for them far in advance.

DEFINING AND MEASURING CAPACITY

Capacity often refers to an upper limit on the rate of output.

-Actual output cannot exceed effective capacity and is often less because of machine breakdowns, absenteeism, shortages of materials, and equality problems as well as factors that are outside the control of the operating managers.

-Efficiency is the ratio of actual output to effective capacity

-Capacity utilization is the ratio of actual output to design capacity.

FORMULA TO REMEMBER IN CAPACITY PLANNING:

Business / Inputs / Outputs
Auto manufacturing / Labor hours, machine per hours / Number of cars per shift
Steel mill / Furnace size / Tons of steel per day
Oil refinery / Refinery size / Gallons of fuel per day
Farming / Number of acres, number of cows / Bushels of grains per acre per year gallons milk per day
Restaurant / Number of tables, sitting capacity / Number of milk served per day
Theater / Number of seats / Number of tickets per performance
Retail sails / Square feet of floor space / Revenue generated per day

DETERMINANTS OF EFFECTIVE CAPACITY

Facilities

-Design of facilities, including size and provision for expansions is key. Location factors, such as transportation costs, distance to market, labor supply, energy sources, and room for expansion are also important. Likewise the layout of the work area often determines how smoothly work can be performed, and environmental factors such as heating, lighting, and ventilation also play a significant role in determining whether personnel can perform effectively or whether they must struggle to overcome poor design characteristics.

Product and services factors

-in general the more the output is uniform, the more opportunities there are for standardization of methods and materials, which leads to a greater capacity. The particular mix of products or services rendered also must be considered since different items will have different rates of output.

Process factors

-The quantity capability of the process is an obvious determinant of capacity. A more subtle determinant is the influence of output quality.

Human factors

-the task that make up a job, the variety of activities involved, and the training, skill, and experience required to perform a job all have impact on the potential and actual output. In addition, employee motivation has a very relationship to capacity, as do absenteeism and labor turn-over.

Operational factors

-Scheduling problems occurs when an organization has differences in equipment, capabilities among alternative pieces of equipment or differences in job requirements. Inventory stocking decisions, late deliveries, purchasing requirements, acceptability of purchased materials and parts, quality inspection and control procedures also can have an impact on effective capacity.

Supply chain factors

-Must be taken into account capacity planning if substantial capacity changes are involved. Key question include: What impact will the changes have on the suppliers, warehousing, transportation, and distributors? If capacity will be increased, will these elements of the supply chain be able to handle increase? Conversely, if the capacity decreased, what impact will be loss in business have on these elements of the supply chain?

External factors

-Product standards, especially minimum quality performance standards, can restrict management’s option for increasing and using capacity.

STRATEGY FORMULATION

An organization typically bases its capacity strategy on assumptions and predictions about long-term demand patterns, technological changes, and the behavior of its competitors. These typically involve: (1) the growth rate and variability of demand (2) the costs of building and operating facilities of various sizes (3) the rate direction of technological innovation (4) the likely behavior of the competitors, and (5) availability of capital and other inputs.

Key decisions of capacity planning relate to:

1. The amount of capacity needed

1. The timing of changes.

1. The need to maintain balance through out the system.

1. The extent of flexibility of facilities and the workforce.

• Capacity cushion – extra demand intended to offset uncertainty.

Determining Capacity Requirements

Capacity Planning Decisions involves;

a. Long- term considerations- relate to overall level capacity.

b. Short term considerations- relate to probable variations in capacity requirements

Developing Capacity Alternatives

1. Design flexibility into systems

Example: Expand restaurant in the original design or remodel an existing structure.

Factors to be considered are layout of equipment, location, equipment , production planning, scheduling, and inventory policies.

1. Take stage of life cycle into account

Example

INTRODUCTION / GROWTH / MATURITY / DECLINE
Third generation mobile phones / Portable DVD Players / Personal Computers / Typewriters
E-conferencing / Email / Faxes / Handwritten letters
All-in-one racing skin-suits / Breathable synthetic fabrics / Cotton t-shirts / Shell Suits
iris-based personal identity cards / Smart cards / Credit cards / Cheque books

3.Take a “big picture” approach to capacity changes

Example: A restaurant increases the number of chairs and tables, there’s a probable increase in demand of parking and maintenance.

4. Prepare to deal with capacity “chunks” – developing capacity alternatives may result to shortage or excess