ProSim 4: Production Planning Game
Dr. Ron Tibben-Lembke
v2007.5 - Sept. 28, 2007
Chapter 1: Introduction
The purpose of ProSim is to provide you with an opportunity to experience, first-hand, many of the same issues and situations that production managers must deal with on a daily basis, albeit in a very simplified environment.
The basic structure of the game is that the class is divided into teams of usually two students each. Each team is a separate company that makes its own decisions, and the decisions of one team have no impact on the other teams. You are not competing for market share or anything else. Each team is trying to run its company as well as possible.
The company is a manufacturer of three final products, X, Y, and Z, assembled out of components (X’, Y’, and Z’) that are purchased or made in-house using a raw material. The future demand for the products can be predicted, based on past sales information that is available, but we don’t know for sure what the demand will be, until it actually arrives.
The goal of the company is twofold: to minimize costs (be efficient), and to deliver as high a level of customer service as possible (be effective). In the real world, your performance in both areas is judged by the marketplace, and determines the fortunes of the company. In class, these are judged by the professor, and determine the fortunes of your grade.
Decision Process
The game is played in a series of “weeks”. You will enter your decisions for the current “week” on a webpage which will email the decisions to the course TA. Your decisions will be run through a simulator, which will determine what your actual production outputs were. Production will not go exactly as planned, because production problems can occur from machine breakdowns, product defects, and parts or raw material shortages. The results will then be emailed to you.
The decisions that must be made are the following:
- How much to spend for the week on quality and maintenance.
- How many units of raw material to order, either regular delivery, and/or expedited
- How many units of components X’, Y’, and Z’ to order (if any) from the outside vendor
- Which products or subassemblies to make at each workstation
- How many hours each workstation should work 0-60.
The web page where you will enter your decisions is shown below. You enter your decisions, and your email address, and click “submit” and a copy of your decisions will be sent to you, in a very compact, very hard to understand format, but that’s format the simulator needs, and this way you can verify that your decisions did get sent.
Figure 1.1 Online Decision Form
Bottom of Form
The first week’s worth of decisions have already been made for you, so you will begin making decisions with week 2. How you should go about making each of these decisions is an issue we will a fair amount of time figuring out, but below you will at least learn more about what effect these decisions have. The table below shows what decisions were made for week 1.
Firm / 1 / Week / 1Quality Planning Expenditures ($) / 750
Plant Maintenance Expenditures ($) / 500
Regular Raw Materials Order (Units) / 10,000
Expedited Raw Materials Order (Units) / 10,000
Finished Part X' Order (Units) / 600
Finished Part Y' Order (Units) / 500
Finished Part Z' Order (Units) / 400
Machine / / Product / Hours Sched.
Dept / Station / Scheduled / (Max 60)
Part / 1 / 1 / 40
Part / 2 / 2 / 40
Part / 3 / 3 / 40
Part / 4 / 1 / 40
Assem. / 1 / 3 / 40
Assem. / 2 / 2 / 40
Assem. / 3 / 1 / 40
Assem. / 4 / 3 / 40
Assem. / 5 / 3 / 40
Table 1.1 Week 1 Decisions
Product Demand
You will make decisions for each week, but demand only occurs every four weeks, at the end of the month. Demand for the three products is very seasonal. Over a four month cycle, demand starts small, grows larger, then reaches its peak in the third month, and falls in the fourth month. In the following four month cycle, the demands will be larger than they were in the same months of the previous cycle.
Sales over the previous 12 months are graphed below, and listed in the table. In the graph, we definitely see an upward trend to sales. In the game, we will be trying to satisfy the demands for months 13-16 of this graph, which we will just refer to as months 1-4.
We can obviously use our knowledge of forecasting to make estimates of what the demand is likely to be in future periods. But also, the ProSim reports we will get will also include, each week, a prediction of what demand is likely to be in the current month. Those estimates are getting more accurate as we get closer to the end of the month, but they may be too high or too low, and as always, we won’t know for sure until wee see the demand.
Figure 1.2 Past Demand Values
Table 1.2 Past Demand Values
In order to make our production and ordering decisions, we need to know the cost, revenue and production structure of the plant.
Product Holding and Shortage Costs
For every unit that is in inventory at the end of a week, we will have to pay a holding cost. The weekly cost is $0.10 for X, $0.23 for Y, and $0.42 for Z.
If we don’t have enough inventory of a product to meet the demand, the amount we’re short by will be carried over to next month, and we will pay a penalty cost for each unit of shortage. So if we have 7,500 units of X, and demand is 8,000, we’re short 500 units. If the demand in the next month turns out to be 8,800 units, we have to have 9,300 units on hand to meet all of the demand, because the 500 unit shortage will have been carried over.
The shortage penalty cost is $0.65 for X, $1.50 per unit of Y, and $2.80 per unit of Z.
ProductProduct HoldingPenaltyPartPart Holding
X $0.10 $0.65 X’$0.05
Y $0.23 $1.50 Y’$0.09
Z $0.42 $2.80 Z’$0.13
Table 1.3 Holding and Penalty Costs
Product Structure and Production Cost
So how do we produce enough parts to meet demand, now that we can estimate what it is? We will assemble the final products out of components we have produced or purchased. The final products, X, Y, and Z, are produced out of various combinations of the three parts X’, Y’, and Z’. Each unit of X is made up of one unit of X’. Y is made of one unit each of X’ and Y’. As you might guess, then, Z is made of one unit each of X’, Y’, and Z’, as Figure 1.3 shows.
Figure 1.3 Product Bill of Materials
We can either produce the components in-house, or we can buy them from a supplier at a cost of $2.55 for X’, $4.43 for Y’, and $6.45 for Z’. As we will discuss later, when we make the parts ourselves, we don’t typically get 100% good units. But if we buy the components, 100% of the units we buy are good. Ordering the parts incurs a $400 cost for each type of part ordered. (e.g. if you order both Y’ and Z’, the total ordering cost will be $800.)
The lead time for buying the parts is one week, so if you place the order in week 5, you will be able to use the parts in production in week 6. Because the parts are made in the same facility as the final assembly, any parts we make are available the very next day for the final assembly. Any parts left at the end of the week incur a carrying cost per unit of $.05 for X’, $.09 for Y’, and $.13 for Z’.
If we run out of a part in a week, the software will figure out exactly how many units we would have used (taking into account breakdowns, setups, and any shortages of other products), and determine what percentage of that total the parts available represent. If we wanted to use 10,000 units of X’, but only have 9,500 on hand, then each station will get to work 95% of the time it was scheduled for. So a station scheduled to work 40 hours would end up working 38.0 hours. A station scheduled for 10 hours would work only 9.5 hours. If a station was scheduled for 12 hours, but will lose 2 hours because of a setup (as explained below), it would work 95% of 10 hours.
Component Costs
As you might expect, it’s cheaper to make the parts than to buy them. When we produce the parts, we use only one kind of raw material, called M, but each part uses different quantities. Each unit of X’ requires one unit of M. Y’ requires two units, and Z’ requires three.
The cost of M is $0.96 per unit, but our supplier charges us an order processing charge of $1,500 for each order placed. So we pay our supplier $1,500 + $0.96 * x for x units of M. The Table below shows what the price per unit works out to be, for various order sizes. For orders of less than 9,375 units, the supplier just charges us a flat $1.12 per unit. For orders of 9,375 units or less, the price is $1.12 per unit. As the purchase quantity increases, the price goes down continuously. If you purchase a quantity in-between two of the prices shown below, you get a price in-between the prices shown.
M Order QuantityPrice / UnitPartPrice
9,375 $1.120 X’ $2.55
12,000 1.085 Y’ $4.43
20,000 1.035 Z’ $6.45
30,000 1.010
40,000 0.998
60,000 0.985
80,000 0.979
100,000 0.975
Table 1.4 Part and Material Ordering Costs
Regular orders for M take 3 weeks to arrive. If you place an order in week 5, you can use them in week 8. Expedited orders for raw materials are available, and arrive in one week, and are priced using the same pricing scale, with an additional surcharge of $0.10 per unit. When M arrives, all the units are immediately available for usage.
When we place an order for raw materials, our purchasing department incurs costs $1200, in addition to the $1500 fee from the supplier and the $0.96 cost of materials. The company can place a regular order, with a lead time of 3 weeks, or an expedited order, with a lead time of 1 week. The ordering cost is charged for each order placed. Therefore, if a regular and an expedited order are placed in the same week, the ordering costs will be $2,400.
In order to figure out how to cost the raw materials used in a given week, all units are costed on a weighted average. If we have 2,500 units on hand, which cost us $1.120 per unit, that is a total of $2,800 worth of M. If we receive an order of 20,000 units at a cost of 1.035, those are worth $20,700. So we have a total of 22,500 units on hand that we paid $23,500 for, which is an average cost per unit of $1.044. The reason this is important is that we are actually charged for the units of raw material in the week when we use them, not the week when we buy them. We pay ordering costs when we place the orders, but the material costs are incurred when the material is used.
The weekly holding cost per unit of raw material is $0.03 (yes, 3 cents), based on the number of units of M on hand at the end of the week.
If we run out of M in a week, the calculation as to how much production actually gets completed is done in exactly the same way that the calculations are done for a shortage of one of the parts.
Machines
To make the parts and assemble the finished products, we have a total of 9 workstations available. There are 4 parts stations that can only make parts from the raw materials, and 5 assembly stations that only can assemble the parts into final products. Each station can only make only one type of item in a week. The parts production machines are numbered 1-4, and the product assembly workstations are numbered 1-5.
For every hour that you schedule a machine, you will incur a machine utilization cost of $20 per hour. If the machine is unable to work productively that whole time (because you run out of material or there is a setup or a breakdown), the machine utilization costs will still be incurred, nonetheless. Assembly workstation number 5 is known as the marginal workstation, because it is more expensive to run. On the marginal workstation, the cost per hour to run it is $40 per hour of work scheduled. Its quality and productivity levels are the same as the other machines.
For each hour up to 40 hours/week, the workers who run the machines are paid $10/hour. For every hour beyond 40 hours, workers receive $15/hour, up to a maximum possible 60 hours. The union contract says anyone who is scheduled to work, must be paid for at least 20 hours. So if you only schedule a machine to work for 4 hours, the worker will get paid for 20.
Also, workers will be paid for scheduled hours, not for hours actually worked. Therefore, if a worker is scheduled for 50 hours, but only works 40 hours because of a materials shortage, the worker will be paid for 50 hours. Also, if the machine a worker is using breaks down, the worker will continue to draw regular pay during the 4 hour repair time.
There is a standard rate for each product, as the table below shows:
Table 1.5 Standard Rates of Production
So if a machine is scheduled to produce X’, and if the machine produces at the standard rate, it will produce 60 units of X’ per hour.
Setups
If you set a machine up to make X or X’, it takes 2 hours to perform the setup. If you switch a machine over to making Y or Y’, the setup is 3 hours, and going to Z or Z’ takes 4 hours. If you make the same type for two weeks in a row, you don’t have to do a setup. Similarly, if you produced one product on a machine, and then didn’t produce anything on it for a few weeks, and then the next thing you produce is the same thing, there is no setup. In addition to paying machine utilization costs during the setup, you have to pay an additional $20 per hour of setup.
If you schedule a machine to make a different product than the last thing that it made, a setup is required. But if you don’t schedule the machine for a sufficient number of hours to be able to perform the setup, the machine will just run the scheduled number of hours making the product that was last made on the machine. For example, if you made X in week 1 on a given machine, and scheduled the machine to make 3 hours of Z in the next week, the 3 hours would not be enough time to complete the Z setup. Therefore, it would work for 3 hours making X. This situation is not likely to ever arise, however.
Breakdowns
The machines are subject to random breakdowns. How often the machine breaks down depends on how much money you spend on maintenance: the more you spend, the lower the probability of machines breaking down. When a machine does break down, you have to pay $400 to get it fixed. You also lose out on 4 hours of production time. All machines have the same probability of breaking down, so if you have a low probability of a breakdown, one or two machines might break down. If your probability of a breakdown is very high, many of the machines might break down, and it is possible for a machine to break down more than once in a single week. We will study quality expenditures in chapter 3.
Quality and Rejects
The amount you spend on quality will directly impact the defect rate of both the final products that you assemble, and the parts that you make. This is discussed in Chapter 3. But the formula depends on both the amount you spend in the current period, and how much you have spent in the past.
Output Report
After every week of decisions, a report is generated that tells how much the firm produced in the week, how much of each resource was used up, and how much expense was incurred. Also, the report estimates how much it should have cost to produce that given amount of finished goods output, and also gives a cumulative number for that figure. These projected costs are divided by the actual costs, and the resulting number is known as the firm’s efficiency. The primary long-term objective of the firm is to get the cumulative efficiency number as high as possible.
On the first page of the report, we have the cost information, and ordering information. The top cost section shows the costs for the current week, and the lower cost section gives the same costs, cumulatively.
For both the finished goods X, Y, and Z, and the parts X’, Y’, and Z’, we have cost information about a large number of categories. In some cases, the costs refer to both the parts and the finished products, for example, the labor costs for each product, for the costs of doing any setups, for fixing any breakdowns, in the first column all refer to both X’ and X combined. Obviously, the numbers for the raw materials are only used in making the X’, Y’ or Z’ parts, as are the purchased finished parts and parts carrying costs. Equipment usage is for parts and products. Product carrying cost and demand penalty categories only apply to products.
Quality planning, plant maintenance, raw materials carrying cost and fixed expense (which is always $1500) don’t refer to any particular product or machine. Ordering expense is summed over all parts and raw material orders.