Coordination of demand forecasts

Copyright 2016 Pearson Education, Inc. 8 1 Welcome Week 4 Aggregate Planning in a Supply Chain Product characteristics and Customer value Copyright 2016 Pearson Education, Inc. 8 2 Role of Aggregate Planning in a Supply Chain Aggregate planning: process by which a company determines levels of capacity, production, subcontracting, inventory, stockouts, and pricing over a specified time horizon goal is to maximize profit decisions made at a product family (not SKU) level time frame of 3 to 18 months how can a firm best use the facilities it has? Copyright 2016 Pearson Education, Inc. 8 3 Role of Aggregate Planning in a Supply Chain Identify operational parameters over the specified time horizon Production rate Subcontracting Workforce Backlog Overtime Inventory on hand Machine capacity level All supply chain stages should work together on an aggregate plan that will optimize supply chain performance Copyright 2016 Pearson Education, Inc. 8 4 The Aggregate Planning Problem Given the demand forecast for each period in the planning horizon, determine the production level, inventory level, and the capacity level for each period that maximizes the firms (supply chains) profit over the planning horizon Specify the planning horizon (typically 3-18 months) Specify the duration of each period Specify key information required to develop an aggregate plan Copyright 2016 Pearson Education, Inc. 8 5 The Planning Process Figure 13.1 Long-range plans (over one year) Capacity decisions critical to long range plans Issues: Research and Development New product plans Capital investments Facility location/expansion Top executives Operations managers with sales and operations planning team Intermediate-range plans (3 to 18 months) Issues: Sales and operations planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans Short-range plans (up to 3 months) Scheduling techniques Issues: Job assignments Ordering Job scheduling Dispatching Overtime Part-time help Operations managers, supervisors, foremen Responsibility Planning tasks and time horizons Copyright 2016 Pearson Education, Inc. 8 6 Sales and Operations Planning Coordination of demand forecasts with functional areas and the supply chain Typically done by cross-functional teams Determine which plans are feasible Limitations must be reflected Provides warning when resources do not match expectations Output is an aggregate plan Copyright 2016 Pearson Education, Inc. 8 7 Aggregate Planning QUARTER 1 Jan. Feb. March 150,000 120,000 110,000 QUARTER 2 April May June 100,000 130,000 150,000 QUARTER 3 July Aug. Sept. 180,000 150,000 140,000 Copyright 2016 Pearson Education, Inc. 8 8 Information Needed for an Aggregate Plan Aggregate demand forecast Ft for each Period t over T periods Production costs Labor costs, regular time ($/hr) and overtime ($/hr) Subcontracting costs ($/hr or $/unit) Cost of changing capacity hiring or layoff ($/worker), adding or reducing machine capacity ($/machine) Labor/machine hours required per unit Inventory holding cost ($/unit/period) Stockout or backlog cost ($/unit/period) Constraints overtime, layoffs, capital available, stockouts, backlogs, from suppliers Copyright 2016 Pearson Education, Inc. 8 9 Outputs of Aggregate Plan Production quantity from regular time, overtime, and subcontracted time Inventory held Backlog/stockout quantity Workforce hired/laid off Machine capacity increase/decrease A poor aggregate plan can result in lost sales, lost profits, excess inventory, or excess capacity Copyright 2016 Pearson Education, Inc. 8 10 Identifying Aggregate Units of Production Aggregate unit should be identified in a way that the resulting production schedule can be accomplished in practice Focus on the bottlenecks when selecting the aggregate unit and identifying capacity and production times Account for activities such as setups and maintenance Copyright 2016 Pearson Education, Inc. 8 11 Red Tomato Tools Family Material Cost/ Unit ($) Revenue/ Unit ($) Setup Time/B atch (hour) Average Batch Size Production Time/ Unit (hour) Net Production Time/Unit (hour) Percentage Share of Units Sold A 15 54 8 50 5.60 5.76 10 B 7 30 6 150 3.00 3.04 25 C 9 39 8 100 3.80 3.88 20 D 12 49 10 50 4.80 5.00 10 E 9 36 6 100 3.60 3.66 20 F 13 48 5 75 4.30 4.37 15 TABLE 8-1 Copyright 2016 Pearson Education, Inc. 8 12 Red Tomato Tools Weighted average approach Material cost per aggregate unit = (15 x 0.10) + (7 x 0.25) + (9 x 0.20) + (12 x 0.10) + (9 x 0.20) + (13 x 0.15) = $10 Similarly Revenue per aggregate unit = $40 Net production time per aggregate unit = 4.00 hours Copyright 2016 Pearson Education, Inc. 8 13 Aggregate Planning Strategies Trade-off between capacity, inventory, backlog/lost sales Chase strategy using capacity as the lever Flexibility strategy using utilization as the lever Level strategy using inventory as the lever Tailored or hybrid strategy a combination of strategies Copyright 2016 Pearson Education, Inc. 8 14 Chase Strategy Vary machine capacity or hire and lay off workers as demand varies Often difficult to vary capacity and workforce on short notice Expensive if cost of varying capacity is high Negative effect on workforce morale Results in low levels of inventory Used when inventory holding costs are high and costs of changing capacity are low Copyright 2016 Pearson Education, Inc. 8 15 Capacity Options 1.Changing inventory levels Increase inventory in low demand periods to meet high demand in the future Increases costs associated with storage, insurance, handling, obsolescence, pilferage, and capital investment Shortages may mean lost sales due to long lead times and poor customer service Copyright 2016 Pearson Education, Inc. 8 16 Capacity Options 2.Varying workforce size by hiring or layoffs Match production rate to demand Training and separation costs for hiring and laying off workers New workers may have lower productivity Laying off workers may lower morale and productivity Copyright 2016 Pearson Education, Inc. 8 17 Capacity Options 3.Varying production rates 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 Copyright 2016 Pearson Education, Inc. 8 18 Capacity Options 4.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 Copyright 2016 Pearson Education, Inc. 8 19 Capacity Options 5.Using part-time workers Useful for filling unskilled or low skilled positions, especially in services Copyright 2016 Pearson Education, Inc. 8 20 Level Strategy Stable machine capacity and workforce levels, constant output rate Inventory levels fluctuate over time Inventories carried over from high to low demand periods Better for worker morale Large inventories and backlogs may accumulate Used when inventory holding and backlog costs are relatively low Copyright 2016 Pearson Education, Inc. 8 21 Demand Options 1. Influencing demand Use advertising or promotion to increase demand in low periods Attempt to shift demand to slow periods May not be sufficient to balance demand and capacity Copyright 2016 Pearson Education, Inc. 8 22 Demand Options 2.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 Copyright 2016 Pearson Education, Inc. 8 23 Demand Options 3.Counterseasonal product and service mixing Develop a product mix of counterseasonal items May lead to products or services outside the companys areas of expertise Copyright 2016 Pearson Education, Inc. 8 24 Activity Choose a local organization and suggest how it might employ a level, chase, or mixed strategy to best meet demand. Explain how your suggestions would enable the firm to best meet their typical demand in a way that minimizes cost or maximizes profit. Copyright 2016 Pearson Education, Inc. 8 25 Aggregate Planning Options TABLE 13.1 Aggregate Planning Options OPTION ADVANTAGES DISADVANTAGES COMMENTS Changing inventory levels Changes in human resources are gradual or none; no abrupt production changes. Inventory holding cost may increase. Shortages may result in lost sales. Applies mainly to production, not service, operations. Varying workforce size by hiring or layoffs Avoids the costs of other alternatives. Hiring, layoff, and training costs may be significant. Used where size of labor pool is large. Copyright 2016 Pearson Education, Inc. 8 26 Aggregate Planning Options TABLE 13.1 Aggregate Planning Options OPTION ADVANTAGES DISADVANTAGES COMMENTS Varying production rates through overtime or idle time Matches seasonal fluctuations without hiring/ training costs. Overtime premiums; tired workers; may not meet demand. Allows flexibility within the aggregate plan. Sub contracting Permits flexibility and smoothing of the firms output. Loss of quality control; reduced profits; loss of future business. Applies mainly in production settings. Copyright 2016 Pearson Education, Inc. 8 27 Aggregate Planning Options TABLE 13.1 Aggregate Planning Options OPTION ADVANTAGES DISADVANTAGES COMMENTS Using part time workers Is less costly and more flexible than full-time workers. High turnover/ training costs; quality suffers; scheduling difficult. Good for unskilled jobs in areas with large temporary labor pools. Influencing demand Tries to use excess capacity. Discounts draw new customers. Uncertainty in demand. Hard to match demand to supply exactly. Creates marketing ideas. Overbooking used in some businesses. Copyright 2016 Pearson Education, Inc. 8 28 Aggregate Planning Options TABLE 13.1 Aggregate Planning Options OPTION ADVANTAGES DISADVANTAGES COMMENTS Back ordering during high demand periods May avoid overtime. Keeps capacity constant. Customer must be willing to wait, but goodwill is lost. Many companies back order. Counter seasonal product and service mixing Fully utilizes resources; allows stable workforce. May require skills or equipment outside the firms areas of expertise. Risky finding products or services with opposite demand patterns. Copyright 2016 Pearson Education, Inc. 8 29 Mixing Options to Develop a Plan A mixed strategy may be the best way to achieve minimum costs There are many possible mixed strategies Finding the optimal plan is not always possible Copyright 2016 Pearson Education, Inc. 8 30 Graphical Methods 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 cost Copyright 2016 Pearson Education, Inc. 8 31 Roofing Supplier Figure 13.3 70 60 50 40 30 0 Jan Feb Mar Apr May June = Month 22 18 21 21 22 20 = Number of working days Production rate per working day Level production using average monthly forecast demand Forecast demand Copyright 2016 Pearson Education, Inc. 8 32 Roofing Supplier 70 60 50 40 30 0 Jan Feb Mar Apr May June = Month 22 18 21 21 22 20 = Number of working days Production rate per working day Level production using lowest monthly forecast demand Forecast demand Copyright 2016 Pearson Education, Inc. 8 33 Mathematical Approaches Useful for generating strategies Transportation Method of Linear Programming Produces an optimal plan Works well for inventories, overtime, subcontracting Does not work when nonlinear or negative factors are introduced Other Models General form of linear programming Simulation Copyright 2016 Pearson Education, Inc. 8 34 Aggregate Planning Using Solver FIGURE 8-1 Copyright 2016 Pearson Education, Inc. 8 35 Aggregate Planning Using Solver FIGURE 8-2 Copyright 2016 Pearson Education, Inc. 8 36 Aggregate Planning Using Solver FIGURE 8-5 Copyright 2016 Pearson Education, Inc. 8 37 The Role of IT in Aggregate Planning The ability to handle large problems The ability to handle complex problems (through either nonlinear optimization or linear approximations) The ability to interact with other core IT systems such as inventory management and sourcing Copyright 2016 Pearson Education, Inc. 8 38 Implementing Aggregate Planning in Practice 1. Think beyond the enterprise to the entire supply chain 2. Make plans flexible because forecasts are always inaccurate 3. Rerun the aggregate plan as new data emerge 4. Use aggregate planning as capacity utilization increases Copyright 2016 Pearson Education, Inc. 8 39 Activity 1 Group1 39 What are some industries in which aggregate planning would be particularly important? What are the characteristics of these industries that make them good candidates for aggregate planning? Copyright 2016 Pearson Education, Inc. 8 40 Activity 1 Group2 What are the main differences between the aggregate planning strategies? 40 Copyright 2016 Pearson Education, Inc. 8 41 Activity 1 Group3 What types of industries or situations are best suited to the chase strategy? The flexibility strategy? The level strategy? 41 Copyright 2016 Pearson Education, Inc. 8 42 Activity 1 Group4 What are the major cost categories needed as inputs for aggregate planning? 42 Copyright 2016 Pearson Education, Inc. 8 43 Activity 1 Group5 How does the availability of subcontracting affect the aggregate planning problem? 43 Copyright 2016 Pearson Education, Inc. 8 44 Activity 1 Group6 If a company currently employs the chase strategy and the cost of training increases dramatically, how might this change the companys aggregate planning strategy? 44 Copyright 2016 Pearson Education, Inc. 8 45 Activity 1 Group7 What are some key issues to consider when picking an aggregate unit of analysis? 45 Copyright 2016 Pearson Education, Inc. 8 46 Activity 1 Group 8 How can aggregate planning be used in an environment of high demand uncertainty? 46 Copyright 2016 Pearson Education, Inc. 8 47 The objective of the product decision is to develop and implement a product strategy that meets the demands of the marketplace with a competitive advantage Product Characteristics Copyright 2016 Pearson Education, Inc. 8 48 Product Strategy Options Differentiation Shouldice Hospital Low cost Taco Bell Rapid response Toyota Copyright 2016 Pearson Education, Inc. 8 49 Product-by-Value Analysis Lists products in descending order of their individual dollar contribution to the firm Lists the total annual dollar contribution of the product Helps management evaluate alternative strategies Copyright 2016 Pearson Education, Inc. 8 50 Delivering customer value Ultimately the success or failure of any business will be determined by the level of customer value that it delivers in its chosen markets. people dont buy products, they buy benefits (Theodore Levitt) Copyright 2016 Pearson Education, Inc. 8 51 The total cost of ownership Copyright 2016 Pearson Education, Inc. 8 52 Delivering customer value Each of the four constituent elements can briefly be defined as follows: Quality: The functionality, performance and technical specification of the offer. Service: The availability, support and commitment provided to the customer. Cost: The customers transaction costs including price and life cycle costs. Time: The time taken to respond to customer requirements, e.g. delivery lead-times. Each of these elements requires a continuous programme of improvement, innovation and investment to ensure continued competitive advantage. Copyright 2016 Pearson Education, Inc. 8 53 What is customer service? Pre-transaction elements Transaction elements Post-transaction elements List example customer service for each above elements Copyright 2016 Pearson Education, Inc. 8 54 Examples of Pre-transaction elements Written customer service policy (Is it communicated internally and externally? Is it understood? Is it specific and quantified where possible?) Accessibility (Are we easy to contact/do business with? Is there a single point of contact?) Organisation structure (Is there a customer service management structure in place? What level of control do they have over their service process?) System flexibility (Can we adapt our service delivery systems to meet particular customer needs?) Copyright 2016 Pearson Education, Inc. 8 55 Examples of Transaction elements Order cycle time (What is the elapsed time from order to delivery? What is the reliability/variation?) Inventory availability (What percentage of demand for each item can be met from stock?) Order fill rate (What proportion of orders are completely filled within the stated lead-time?) Order status information (How long does it take us to respond to a query with the required information? Do we inform the customer of problems or do they contact us?) Copyright 2016 Pearson Education, Inc. 8 56 Examples of Post-transaction elements Availability of spares (What are the in-stock levels of service parts?) Call-out time (How long does it take for the engineer to arrive and what is the first call fix rate?) Product tracing/warranty (Can we identify the location of individual products once purchased? Can we maintain/extend the warranty to customers expected levels?) Customer complaints, claims, etc. (How promptly do we deal with complaints and returns? Do we measure customer satisfaction with our response?) Copyright 2016 Pearson Education, Inc. 8 57 Using service to augment the core product Copyright 2016 Pearson Education, Inc. 8 58 The impact of out-of-stock Copyright 2016 Pearson Education, Inc. 8 59 The impact of logistics and customer service on marketing *A consumer franchise refers to the cumulative image of a product, held by the consumer. Copyright 2016 Pearson Education, Inc. 8 60 Linking customer value to supply chain strategy Copyright 2016 Pearson Education, Inc. 8 61 Identifying customers service needs 1.Identify the key components of customer service as seen by customers themselves 2.Establish the relative importance of those service components to customers. 3.Identify clusters of customers according to similarity of service preferences. Copyright 2016 Pearson Education, Inc. 8 62 The cost benefit of customer Service Copyright 2016 Pearson Education, Inc. 8 63 The cost benefit of customer Service Copyright 2016 Pearson Education, Inc. 8 64 Shifting the costs of service Changing strategy (Example: speeding up the flow of information about customer requirements and by using faster modes of transport, then the same level of service can be achieved with less inventory) Copyright 2016 Pearson Education, Inc. 8 65 Setting customer service priorities Copyright 2016 Pearson Education, Inc. 8 66 Activity Based Costing What? Why? How? Copyright 2016 Pearson Education, Inc. 8 67 0 100 1 2 3 4 Composition of Cost Direct Material Labour Overheads Copyright 2016 Pearson Education, Inc. 8 68 Traditional Costing Systems Product Costs Direct labor Direct materials Factory Overhead Period Costs Administrative expense Sales expense Appear on the income statement when goods are sold, prior to that time they are stored on the balance sheet as inventory. Appear on the income statement in the period incurred. Copyright 2016 Pearson Education, Inc. 8 69 Traditional Costing Systems Product Costs Direct labor Direct materials Factory Overhead Period Costs Administrative expense Sales expense Direct labor and direct materials are easy to trace to products. The problem comes with factory overhead. Copyright 2016 Pearson Education, Inc. 8 70 Traditional Costing Systems Typically used one rate to allocate overhead to products. This rate was often based on direct labor dollars or direct labor hours. This made sense, as direct labor was a major cost driver in early manufacturing plants. Copyright 2016 Pearson Education, Inc. 8 71 Problems with Traditional Costing Systems Manufacturing processes and the products they produce are now more complex. This results in over-costing or under-costing. Complex products are not allocated an adequate amount of overhead costs. Simple products get too much. Copyright 2016 Pearson Education, Inc. 8 72 Todays Manufacturing Plants Are more complex Are often automated Often make more than one product Use proportionately smaller amount of direct labor making direct labor a poor allocation base for factory overhead. Copyright 2016 Pearson Education, Inc. 8 73 When the manufacturing process is more complex: Then multiple allocation bases should be used to allocate overhead expense. In such situations, managers need to consider using activity based costing (ABC). Copyright 2016 Pearson Education, Inc. 8 74 ABC Definitions Activity based costing is an approach for allocating overhead costs. An activity is an event that incurs costs. A cost driver is any factor or activity that has a direct cause and effect relationship with the resources consumed. Copyright 2016 Pearson Education, Inc. 8 75 ABC Steps Overhead cost drivers are determined. Activity cost pools are created. A activity cost pool is a pool of individual costs that all have the same cost driver. All overhead costs are then allocated to one of the activity cost pools. Copyright 2016 Pearson Education, Inc. 8 76 Conventional Costing Expenses Cost Objects AB Costing Economic Element Resources Activities Cost Objects Product or service Work Performed Copyright 2016 Pearson Education, Inc. 8 77 Basics of A B C Cost of a product is the sum of the costs of all activities required to manufacture and deliver the product. Products do not consume costs directly Money is spent on activities Activities are consumed by product/services Copyright 2016 Pearson Education, Inc. 8 78 Basics of A B C (contd.) ABC assigns Costs to Products by tracing expenses to activities. Each Product is charged based on the extent to which it used an activity The primary objective of ABC is to assign costs that reflect/mirror the physical dynamics of the business Copyright 2016 Pearson Education, Inc. 8 79 Basics of A B C (contd.) Provides ways of assigning the costs of indirect support resources to activities, business processes, customers, products. It recognises that many organisational resources are required not for physical production of units of product but to provide a broad array of support activities. Copyright 2016 Pearson Education, Inc. 8 80 ABC systems addresses the following Questions: What activities are being performed by the organisational resources? How much does it cost to perform activities? Why does the oranisation need to perform those activities? How much of each activity is required for the organisations products, services, and customers? Copyright 2016 Pearson Education, Inc. 8 81 Basics of A B C : How? Steps: 1. Form cost pools 2. Identify activities 3. Map resource costs to activities 4. Define activity cost drivers 5. Calculate cost Cost pools are groups or categories of individual expense items Copyright 2016 Pearson Education, Inc. 8 82 Identify Activities In developing an ABC system, the organisation identifies the activities being performed: Move material Schedule production Purchase material Inspect items Respond to customers Improve products Introduce new products Explore new markets Activity Dictionary Copyright 2016 Pearson Education, Inc. 8 83 Map resource costs to activities Financial accounting categorises expenses by spending code; salaries, fringe benefits, utilities, travel, communication, computing, depreciation etc. ABC collects expenses from this financial system and drive them to the activities performed. Copyright 2016 Pearson Education, Inc. 8 84 Salaries 313,000 Depreciation 155,000 Electricity 132,000 Supplies 25,000 Travel 100,000 Total 725,000 Accounting Records Activities Salaries Depreciati oElectricity Supplies Travel Total Business Development 20,000 25000 5000 5000 55,000 Maintianing Present Business 80,000 60000 50000 5000 10000 205,000 Purhcasing Material 125,000 50000 20000 20000 60000 275,000 Set up Machines 25,000 10000 2000 37,000 Running Machines 50,000 10000 50000 110,000 Resolve Quality Problems 13,000 5000 25000 43,000 Total 313,000 155000 132000 25000 100000 725,000 ABC Records Mapping Copyright 2016 Pearson Education, Inc. 8 85 Activities: Types Unit level: Performed each time a unit is produced Batch level: Performed each time a batch is produced Product level: Performed to support production of different type of product Customer Level: Performed to support servicing customers Facility level:Residuary head Copyright 2016 Pearson Education, Inc. 8 86 Define activity drivers The linkage between activities and cost objects, such as products, customers,, is accomplished by using activity drivers. An activity driver is a quantitative measure of the output of an activity. The selection of an activity driver reflects a subjective trade-off between accuracy and cost of measurement. Copyright 2016 Pearson Education, Inc. 8 87 Building an ABC Model Identify Resources Identify Activities Identify Cost Objects Define Resource Drivers Define Activity Drivers Enter Resource Costs Enter Resource Driver Qty. Enter Activity Driver Qty. Calculate Costs Copyright 2016 Pearson Education, Inc. 8 88 ABC: Where to Use? High Overheads Product Diversity or Multiple Products Customer Diversity Service Diversity Stiff Competition Copyright 2016 Pearson Education, Inc. 8 89 Please share your learning experiences using Gosoapbox app. https://app.gosoapbox.com Access code: 6352unitec Thanks for your participation and contribution

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