PRODUCTION PLANNING AND CONTROL

LECTURE NOTES

Author: Anupam Gupta

(16/08/2002)

 

AGGREGATE PRODUCTION PLANNING

 

Production may be defined as the process of converting raw materials into finished products. Management decisions in production planning and control for an organization can be broadly divided into three major categories:

 

1. Strategic Planning

This is a long term planning exercise which examines an organization's values, current status and environment, and relates those factors to the organization's desired future state, usually expressed in five- to ten-year time periods. The involved issues are:

§         Assessing the external environment.

§         Assessing internal capacity.

§         Developing a vision or mission for the future.

§         Developing goals and objectives to reach that future.

§         Implementing the plan.

§         Measuring progress and revising the plan

Based on these factors decisions are taken for

·        Location and sizing of new plants

·        Acquisition of new equipment

·        Selection of new product lines

·        Design of logistics systems

 

2. Tactical Planning

This is intermediate range planning of general levels of employment and output to balance supply and demand. This includes:

§         Resource allocation process.

§         Utilization of regular + overtime labor.

§         Allocation of capacity to product families.

Aggregate Production Planning forms a part of tactical planning and will be discussed in detail here.

 

3. Operations Planning

This relates to decisions dealing with day to day operational and scheduling problems. The issues involved include:

§         Production scheduling and lot sizing at item level.

§         Assignment of customer orders to independent machines.

§         Inventory accounting + control activities.

§         Dispatching processing orders.

§         Vehicle scheduling.

 

Key ideas in aggregate planning problem

 

• The term "aggregate" implies that planning is done for groups of products, or product types (i.e., product "families") rather than for specific or individual products.
• Thus the aggregate plan for a car factory would consider the total number of units produced per month, but would not be concerned with the scheduling of individual models, colours, standards of finish, engine sizes, etc. It would be concerned with the labour and machine hours available in a given period but not with what each machine would be doing at a particular time.
• Planners take into account projected demand, capacity, and costs of various options in devising an aggregate plan.
• Aggregate planning assumes that the product/service mix remains stable over the period of the plan and that the capacity remains fixed, i.e. that problems cannot be solved by bringing new plant on stream within the timescale of the plan.
• Among the variables available to planners are adjustments in output rate, employment level, overtime/undertime, and subcontracting.
• The goal of aggregate planning is to achieve output objectives at the lowest possible cost.
• Due to the nature of aggregate planning, it is seldom possible to structure a plan that is guaranteed optimal. Instead, planners usually resort to trial-and-error methods to achieve an acceptable plan.
• Strategies employed for responding to demand variation

 

(i)               Production Smoothing Strategy: Maintaining a steady rate of output, and using some combination of inventories and subcontracting to meet demand variations.

 

(ii)              Chase Strategy: Matching demand period by period with some combination of work force variations, subcontracting, and inventories. It is unlikely that planners would attempt to match demand period by period by varying employment levels alone because that would tend to be costly, disruptive, and result in low employee morale.

(iii)             Turn away some demand permanently.

(iv)             Demand management through other means like promotions, pricing, marketing policies etc.

(v)              Vacation planning of employees.

(vi)             Focus effort on training; experiment with new production methods, during low demand periods.

(vii)                         Divide workforce into permanent and seasonal.

 

• Costs involved include

(i)                  Regular Production Costs: These include actual payrolls costs of regular employees working on regular time, the direct and indirect costs of materials and other manufacturing expenses.

(ii)                Holding Costs: These costs are a result of having capital tied up in inventory, which could be, invested somewhere else.

(iii)               Shortage Costs: These costs are due to delayed satisfaction or even unsatisfied demand of the customer who can go elsewhere.

(iv)              Costs of alternate methods of production: Based on production strategy used, these can include hiring/firing costs, subcontracting and casual labour costs etc.

 

Short discussion on Game Theory (not a part of the course contents):

The key link between neoclassical economics and game theory was and is rationality. Neoclassical economics is based on the assumption that human beings are absolutely rational in their economic choices. Specifically, the assumption is that each person maximizes her or his rewards -- profits, incomes, or subjective benefits -- in the circumstances that she or he faces. This hypothesis serves a double purpose in the study of the allocation of resources. First, it narrows the range of possibilities somewhat. Absolutely rational behavior is more predictable than irrational behavior. Second, it provides a criterion for evaluation of the efficiency of an economic system.

In game theory, the case is more complex, since the outcome depends not only on my own strategies and the "market conditions," but also directly on the strategies chosen by others, but we may still think of the rational choice of strategies as a mathematical problem -- maximize the rewards of a group of interacting decision makers -- and so we again speak of the rational outcome as the "solution" to the game.

In four papers between 1950 and 1953 John Nash made seminal contributions to non-cooperative game theory. In two papers, Equilibrium Points in N- Person Games (1950) and Non-cooperative Games (1951), Nash proved the existence of a strategic equilibrium for non-cooperative games - the Nash equilibrium - and proposed the “Nash program", in which he suggested approaching the study of cooperative games via their reduction to non-cooperative form

John Nash is coming to India early next year.