Final Year B.

Tech
Production and Operations Management

Unit-5

Capacity and Aggregate Planning

Forecasting

• Predict the next number in the pattern:

a) 3.7, 3.7, 3.7, 3.7, 3.7, ?

b) 2.5, 4.5, 6.5, 8.5, 10.5, ?

c) 5.0, 7.5, 6.0, 4.5, 7.0, 9.5, 8.0, 6.5, ?

Forecasting

• Predict the next number in the pattern:

a) 3.7, 3.7, 3.7, 3.7, 3.7, 3.7

b) 2.5, 4.5, 6.5, 8.5, 10.5, 12.5

c) 5.0, 7.5, 6.0, 4.5, 7.0, 9.5, 8.0, 6.5, 9.0

What is Forecasting?
 Process of predicting a future event based on
historical data
 Educated Guessing
 Underlying basis of all business decisions
 Production
 Inventory
 Personnel
 Facilities
Meaning of Demand Forecasting

• “An estimate of sales in dollars or physical units for a

specified future period under a proposed marketing plan.”
American Marketing Association
• Demand forecasting is the scientific and analytical
estimation of demand for a product (service) for a
particular period of time.
• It is the process of determining how much of what
products is needed when and where.
• An operations research technique of planning and
decision making.
 Why do we need to forecast?

In general, forecasts are almost always wrong.

So,
•Throughout the day we forecast very different
things such as weather, traffic, stock market, state
of our company from different perspectives.

•Virtually every business attempt is based on

forecasting. Not all of them are derived from
sophisticated methods. However, “Best" educated
guesses about future are more valuable for
purpose of Planning than no forecasts and hence
no planning.
Importance of Forecasting in OM
•Departments throughout the organization depend
on forecasts to formulate and execute their plans.

•Finance needs forecasts to project cash flows and

capital requirements.

•Human resources need forecasts to anticipate

hiring needs.

•Production needs forecasts to plan production

levels, workforce, material requirements,
inventories, etc.
 Importance of Forecasting in OM

•Demand is not the only variable of interest to

forecasters.

•Manufacturers also forecast worker

absenteeism, machine availability, material costs,
transportation and production lead times, etc.

•Besides demand, service providers are also

interested in forecasts of population, of other
demographic variables, of weather, etc.
Categorization of Demand Forecasting

By Level of Forecasting
• Firm (Micro) level: forecasting of demand for its product
by an individual firm.
– decisions related to production and marketing.
• Industry level: for a product in an industry as a whole.
– insight in growth pattern of the industry
– in identifying the life cycle stage of the product
– relative contribution of the industry in national
income.
• Economy (Macro) level: forecasting of aggregate demand
(or output) in the economy as a whole.
– helps in various policy formulations at government
level.
Categorization of Demand Forecasting
By nature of goods
• Capital Goods: Derived demand
– demand for capital goods depends upon demand of consumer
goods which they can produce.
• Consumer Goods: Direct demand
– durable consumer goods: new demand or replacement demand
– Non durable consumer goods
By Time Period
• Short Term (0 to 3 months): for inventory management and
scheduling.
• Medium Term (3 months to 2 years): for production planning,
purchasing, and distribution.
• Long Term (2 years and more): may extend up to 10 to 20 years.
– for capacity planning, facility location, and strategic planning, long term capital
requirement, and investment decisions.
Types of Forecasts by Time Horizon
Quantitative
• Short-range forecast methods
– Usually < 3 months
• Job scheduling, worker assignments
Detailed
• Medium-range forecast use of
system
– 3 months to 2 years
• Sales/production planning

• Long-range forecast
– > 2 years
• New product planning Design
of system
Qualitative
Methods
Forecasting During the Life Cycle

Introduction Growth Maturity Decline

Qualitative models Quantitative models

- Executive judgment
- Time series analysis
- Market research
- Regression analysis
-Survey of sales force
-Delphi method
Sales

Time
Choice of a forecasting technique
• depends on:
– Imminent objectives of forecast, whether it is for a new
product, or to gauge impact of a new advertisement, etc.
– Cost involved, cost of forecasting should not be more than its
benefits, here opportunity cost of resources will also be
important.
– Time perspective, whether the forecast is meant for the short
run or the long run
– Complexity of the technique, vis-à-vis availability of expertise;
this would determine whether the firm would look for experts
“in house” or outsource it
– Nature and quality of available data, i.e. does the time series
show a clear trend or is it highly unstable.
Techniques of Demand Forecasting
• Subjective (Qualitative) methods: rely on human judgment and
opinion.
– Buyers’ Opinion
– Sales Force Composite
– Market Simulation
– Test Marketing
– Experts’ Opinion
• Group Discussion
• Delphi Method
• Quantitative methods: use mathematical or simulation models
based on historical demand or relationships between variables.
– Trend Projection
– Smoothing Techniques
– Barometric techniques
– Econometric techniques
Qualitative Forecasting Methods
Qualitative
Forecasting

Models
Sales Delphi
Executive Market
Force Method
Judgement Research/
Composite
Survey

Smoothing
 Subjective Methods of Demand Forecasting

Consumers’ Opinion Survey

• Buyers are asked about future buying intentions of products, brand
preferences and quantities of purchase, response to an increase in the
price, or an implied comparison with competitor’s products.
– Census Method: Involves contacting each and every buyer
– Sample Method: Involves only representative sample of buyers
• Merits
• Simple to administer and comprehend.
• Suitable when no past data available.
• Suitable for short term decisions regarding product and promotion.
• Demerits
• Expensive both in terms of resources and time.
• Buyers may give incorrect responses.
• Investigators’ bias regarding choice of sample and questions cannot be
fully eliminated.
Subjective Methods of Demand Forecasting
Contd…

Sales Force Composite

• Salespersons are in direct contact with the customers. Salespersons are
asked about estimated sales targets in their respective sales territories in a
given period of time.
• Merits
– Cost effective as no additional cost is incurred on collection of data.
– Estimated figures are more reliable, as they are based on the notions
of salespersons in direct contact with their customers.
• Demerits
– Results may be conditioned by the bias of optimism (or pessimism) of
salespersons.
– Salespersons may be unaware of the economic environment of the
business and may make wrong estimates.
– This method is ideal for short term and not for long term forecasting
Subjective Methods of Demand Forecasting
Contd…

Experts’ Opinion Method

i) Group Discussion: (developed by Osborn in 1953) Decisions may be
taken with the help of brainstorming sessions or by structured
discussions.
ii) Delphi Technique: developed by the Rand Corporation at the
beginning of the Cold War, to forecast impact of technology on warfare.
– Way of getting repeated opinion of experts without their face to face
interaction.
– Consolidated opinions of experts is sent for revised views till conclusions
converge on a point.
• Merits
– Decisions are enriched with the experience of competent experts.
– Firm need not spend time, resources in collection of data by survey.
– Very useful when product is absolutely new to all the markets .
• Demerits
– Experts’ may involve some amount of bias.
– With external experts, risk of loss of confidential information to rival firms.
 Qualitative Methods
Delphi Method: As opposed to regular panels where the individuals
involved are in direct communication, this method eliminates the effects of
group potential dominance of the most vocal members. The group involves
individuals from inside as well as outside the organization.

Typically, the procedure consists of the following steps:

Each expert in the group makes his/her own forecasts in form of
statements
The coordinator collects all group statements and summarizes
them
The coordinator provides this summary and gives another set of
questions to each
group member including feedback as to the input of other experts.
The above steps are repeated until a consensus is reached.

.
 Subjective Methods of Demand Forecasting
Contd…..

Market Simulation
• Firms create “artificial market”, consumers are instructed to shop with some
money. “Laboratory experiment” ascertains consumers’ reactions to changes in
price, packaging, and even location of the product in the shop.
– Grabor-Granger test:
Half of members are shown new product to see whether they would actually
buy it at various prices on a random price list and then are shown the existing
product. Other half is shown the existing product first and then the new product
to ascertain if a product would be bought at different prices.
• Merits
– Market experiments provide information on consumer behaviour regarding
a change in any of the determinants of demand.
– Experiments are very useful in case of an absolutely new product.
• Demerits
– People behave differently when they are being observed.
– In Grabor-Granger tests consumers may not quote the price they may pay.
 Subjective Methods of Demand Forecasting
Contd….

Test Marketing
• Involves real markets in which consumers actually buy a product
without the consciousness of being observed.
• product is actually sold in certain segments of the market, regarded as the
“test market”.
• Choice and number of test market(s) and duration of test are very crucial
to the success of the results.
• Merits
– Most reliable among qualitative methods.
– Very suitable for new products.
– Considered less risky than launching the product across a wide region.
• Demerits
– Very costly as it requires actual production of the product, and in event of
failure of the product the entire cost of test is sunk.
– Time consuming to observe the actual buying pattern of consumers..
– Extrapolation of figures for calculating demand in widely varying markets
across its geographical regions may not give accurate results.
Quantitative Forecasting Methods
Quantitative
Forecasting

Time Series Regression

Models Models

2. Moving 3. Exponential
1. Naive
Average Smoothing
a) simple a) level
b) weighted b) trend
c) seasonality
Quantitative Forecasting Methods
Quantitative
Forecasting

Time Series Regression

Models Models

2. Moving 3. Exponential
1. Naive
Average Smoothing
a) simple a) level
b) weighted b) trend
c) seasonality
Time Series Models

• Try to predict the future based on past data

– Assume that factors influencing the past will

continue to influence the future
Time Series Models: Components

Random Trend

Composite
Seasonal
Product Demand over Time
Demand for product or service

Year Year Year Year

1 2 3 4
Product Demand over Time

Trend component
Seasonal peaks
Demand for product or service

Actual demand
Random line
variation
Year Year Year Year
1 2 3 4
Now let’s look at some time series approaches to forecasting…
Quantitative Methods of Demand Forecasting

Trend Projection
Statistical tool to predict future values of a variable on the
basis of time series data.
• Time series data are composed of:
– Secular trend (T): change occurring consistently over a long time and
is relatively smooth in its path.
– Seasonal trend (S): seasonal variations of the data within a year
– Cyclical trend (C): cyclical movement in the demand for a product
that may have a tendency to recur in a few years
– Random events (R): have no trend of occurrence hence they create
random variation in the series.
Additive Form: Y = T + S + C + R………..(1)
Multiplicative Form: Y = T.S.C.R………….(2)
Log Y= log T + log S + log C + log R………….(3)
 Quantitative Methods:
Methods of Trend Projection
Contd…
• Graphical method
– Past values of the variable on vertical axis and time on horizontal axis
and line is plotted.
– Movement of the series is assessed and future values of the variable are
forecasted
– simple but provides a general indication and fails to predict future value
of demand

200
180
160
Demand for mobiles (in lakhs)

140
120
100
80
60
40
20
0
2001 2002 2003 2004 2005
Year
Quantitative Forecasting Methods
Quantitative
Time Series
Models

Models

2. Moving 3. Exponential
1. Naive
Average Smoothing
a) simple a) level
b) weighted b) trend
c) seasonality
1. Naive Approach
 Demand in next period is the same as
demand in most recent period
 May sales = 48 → June forecast = 48

 Usually not good

2a. Simple Moving Average
• Assumes an average is a good estimator of future
behavior
– Used if little or no trend
– Used for smoothing

A t + A t -1 + A t -2 + ... + A t -n 1
Ft 1 =
n

Ft+1 = Forecast for the upcoming period, t+1

n = Number of periods to be averaged
At = Actual occurrence in period t
 A t + A t -1 + A t -2 + ... + A t -n 1
2a. Simple Moving Average Ft 1 =
n

You’re manager in Amazon’s electronics

department. You want to forecast ipod sales for
months 4-6 using a 3-period moving average.
Sales
Month (000)
1 4
2 6
3 5
4 ?
5 ?
6 ?
 A t + A t -1 + A t -2 + ... + A t -n 1
Ft 1 =
n
2a. Simple Moving Average
You’re manager in Amazon’s electronics
department. You want to forecast ipod sales for
months 4-6 using a 3-period moving average.
Sales Moving Average
Month (000) (n=3)
1 4 NA
2 6 NA
3 5 NA
4 ? (4+6+5)/3=5
5 ?
6 ?
2a. Simple Moving Average
What if ipod sales were actually 3 in month
4

Sales Moving Average

Month (000) (n=3)
1 4 NA
2 6 NA
3 5 NA
4 3? 5
5 ?
6 ?
2a. Simple Moving Average
Forecast for Month 5?

Sales Moving Average

Month (000) (n=3)
1 4 NA
2 6 NA
3 5 NA
4 3 5
5 ? (6+5+3)/3=4.667
6 ?
2a. Simple Moving Average
Actual Demand for Month 5 = 7

Sales Moving Average

Month (000) (n=3)
1 4 NA
2 6 NA
3 5 NA
4 3 5
5 ?7 4.667
6 ?
2a. Simple Moving Average
Forecast for Month 6?

Sales Moving Average

Month (000) (n=3)
1 4 NA
2 6 NA
3 5 NA
4 3 5
5 7 4.667
6 ? (5+3+7)/3=5
2b. Weighted Moving Average

• Gives more emphasis to recent data

Ft 1 = w 1A t + w 2 A t -1 + w 3 A t -2 + ... + w n A t -n 1

• Weights
– decrease for older data
– sum to 1.0
Simple moving
average models
weight all previous
periods equally
2b. Weighted Moving Average: 3/6, 2/6,
1/6 Ft 1 = w 1A t + w 2 A t -1 + w 3 A t -2 + ... + w n A t -n 1

Month Sales Weighted

(000) Moving
Average
1 4 NA
2 6 NA
3 5 NA
4 ? 31/6 = 5.167
5 ?
6 ?
2b. Weighted Moving Average: 3/6, 2/6,
1/6 Ft 1 = w 1A t + w 2 A t -1 + w 3A t -2 + ... + w n A t -n 1

Month Sales Weighted

(000) Moving
Average
1 4 NA
2 6 NA
3 5 NA
4 3 31/6 = 5.167
5 7 25/6 = 4.167
6 32/6 = 5.333
3a. Exponential Smoothing
• Assumes the most recent observations have the
highest predictive value
– gives more weight to recent time periods

Ft+1 = Ft + (Dt - Ft)

et

Ft+1 = Forecast value for time t+1 Need initial

Dt = Actual value at time t forecast Ft

to start.
 = Smoothing constant
3a. Exponential Smoothing – Example 1
Ft+1 = Ft + (Dt - Ft)
i Di
Week Demand
1 820 Given the weekly demand
2 775 data what are the exponential
3 680 smoothing forecasts for
4 655 periods 2-10 using =0.10?
5 750
6 802 Assume F1=D1
7 798
8 689
9 775
10
3a. Exponential Smoothing – Example 1
Ft+1 = Ft + (Dt - Ft)
i Di Fi
Week Demand  = 0.1 0.6
1 820 820.00 820.00
2 775 820.00 820.00
F2 = F1+ (A1–F1)
3 680 815.50 793.00 =820+(820–820)
4 655 801.95 725.20 =820
5 750 787.26 683.08
6 802 783.53 723.23
7 798 785.38 770.49
8 689 786.64 787.00
9 775 776.88 728.20
10 776.69 756.28
3a. Exponential Smoothing – Example 1
Ft+1 = Ft + (At - Ft)
i Di Fi
Week Demand  = 0.1 0.6
1 820 820.00 820.00
2 775 820.00 820.00
3 680 815.50 793.00
F3 = F2+ (A2–F 2) =820+(775–820)
4 655 801.95 725.20
=815.5
5 750 787.26 683.08
6 802 783.53 723.23
7 798 785.38 770.49
8 689 786.64 787.00
9 775 776.88 728.20
10 776.69 756.28
3a. Exponential Smoothing – Example 1
Ft+1 = Ft + (At - Ft)
i Di Fi
Week Demand  = 0.1 0.6
1 820 820.00 820.00
2 775 820.00 820.00
3 680 815.50 793.00
4 655 801.95 725.20
5 750 787.26 683.08
6 802 783.53 723.23 This process
7 798 785.38 770.49 continues
8 689 786.64 787.00
through week 10
9 775 776.88 728.20
10 776.69 756.28
3a. Exponential Smoothing – Example 1
Ft+1 = Ft + (At - Ft)
i Di Fi
Week Demand  = 0.1  = 0.6
1 820 820.00 820.00
2 775 820.00 820.00
3 680 815.50 793.00
4 655 801.95 725.20
5 750 787.26 683.08 What if the
6 802 783.53 723.23  constant
7 798 785.38 770.49 equals 0.6
8 689 786.64 787.00
9 775 776.88 728.20
10 776.69 756.28
3a. Exponential Smoothing – Example 2
Ft+1 = Ft + (At - Ft)
i Di Fi
Month Demand  = 0.3  = 0.6
January 120 100.00 100.00
February 90 106.00 112.00
March 101 101.20 98.80
April 91 101.14 100.12
May 115 98.10 94.65 What if the
June 83 103.17 106.86  constant
July 97.12 92.54 equals 0.6
August
September
 3a. Exponential Smoothing – Example 3

Company A, a personal computer producer

purchases generic parts and assembles them to
final product. Even though most of the orders
require customization, they have many common
components. Thus, managers of Company A need
a good forecast of demand so that they can
purchase computer parts accordingly to minimize
inventory cost while meeting acceptable service
level. Demand data for its computers for the past 5
months is given in the following table .
3a. Exponential Smoothing – Example 3
Ft+1 = Ft + (Dt - Ft)
i Ai Fi
Month Demand  = 0.3  = 0.5
January 80 84.00 84.00
February 84 82.80 82.00
March 82 83.16 83.00
April 85 82.81 82.50
May 89 83.47 83.75 What if the
June 85.13 86.38  constant
July ?? ?? equals 0.5
3a. Exponential Smoothing

• How to choose α
– depends on the emphasis you want to place on
the most recent data

• Increasing α makes forecast more sensitive to

recent data
To Use a Forecasting Method

• Collect historical data

• Select a model
– Moving average methods
• Select n (number of periods)
• For weighted moving average: select weights
– Exponential smoothing
• Select 

• Selections should produce a good forecast

…but what is a good forecast?

A Good Forecast

 Has a small error

 Error = Demand - Forecast
Measures of Forecast Error
et
n

a. MAD = Mean Absolute Deviation MAD =

D
t =1
t - Ft

b. MSE = Mean Squared Error 

 t t
D - F 2

MSE = t =1
n

c. RMSE = Root Mean Squared Error RMSE = MSE

 Ideal values =0 (i.e., no forecasting error)

 n

MAD Example D t - Ft = 40 =10

MAD = t =1
4
n

What is the MAD value given the forecast

values in the table below?
At Ft
Month Sales Forecast |Dt – Ft|
1 220 n/a
2 250 255 5
3 210 205 5
4 300 320 20
5 325 315 10
= 40
 n
D - F 
 t t = 550 =137.5
2

MSE/RMSE ExampleMSE = t =1
4
n

What is the MSE value? RMSE = √137.5

=11.73
At Ft
Month Sales Forecast |Dt – Ft| (Dt – Ft)2
1 220 n/a
2 250 255 5 25
3 210 205 5 25
4 300 320 20 400
5 325 315 10 100
= 550
 Measures of Error
1. Mean Absolute Deviation
(MAD)
n
t Dt Ft et |et| et 2
e
MAD  1
t
84 = 14
Jan 120 100 20 20 400 n
6
-16 16
Feb 90 106 256 2a. Mean Squared Error
-1 1 1 (MSE)
Mar 101 102 n

-10 10 100 
 te  2

April 91 101 MSE  1 1,446

17 17 289 n = 241
May 115 98 6
-20 20 400
2b. Root Mean Squared Error
June 83 103 (RMSE)
-10 84 1,446
An accurate forecasting system will have small MAD, MSE RMSE  MSE
and RMSE; ideally equal to zero. A large error may indicate
that either the forecasting method used or the parameters = SQRT(241)
such as α used in the method are wrong.
Note: In the above, n is the number of periods, which is 6 in
=15.52
Regression – Example
y = a+ b X b
 xy  n x y
2
a  y  bx
 x  nx
2

MonthAdvertising Sales X 2 XY
January 3 1 9.00 3.00
February 4 2 16.00 8.00
March 2 1 4.00 2.00
April 5 3 25.00 15.00
May 4 2 16.00 8.00
June 2 1 4.00 2.00
July

TOTAL 20 10 74 38
 General Guiding Principles for
Forecasting

1. Forecasts are more accurate for larger groups of items.

2. Forecasts are more accurate for shorter periods of time.
3. Every forecast should include an estimate of error.
4. Before applying any forecasting method, the total system
should be understood.
5. Before applying any forecasting method, the method
should be tested and evaluated.
6. Be aware of people; they can prove you wrong very easily
in forecasting
Capacity Planning
• Capacity is the upper limit or ceiling on the load that
an operating unit can handle.
• The basic questions in capacity handling are:
– What kind of capacity is needed?
– How much is needed?
– When is it needed?
Importance of Capacity Decisions

• Impacts ability to meet future demands

• Affects operating costs
• Major determinant of initial costs
• Involves long-term commitment
• Affects competitiveness
• Affects ease of management
Various Capacities

• Design capacity
– Maximum obtainable output
• Effective capacity, expected variations
– Maximum capacity subject to planned and expected
variations such as maintenance, coffee breaks,
scheduling conflicts.
• Actual output, unexpected variations and demand
– Rate of output actually achieved--cannot exceed
effective capacity. It is subject to random disruptions:
machine break down, absenteeism, material shortages
and most importantly the demand.
Efficiency and Utilization

Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

This definition of efficiency is not used very much.

Utilization is more important.
Efficiency/Utilization Example
for a Trucking Company
Design capacity = 50 trucks/day available
Effective capacity = 40 trucks/day, because 20% of truck capacity goes
through planned maintenance
Actual output = 36 trucks/day, 3 trucks delayed at maintenance, 1 had a flat
tire

Actual Output 36 units / day

Efficiency    90%
Effective Capacity 40 units / day
Actual Output 36 units / day
Utilization    72%
Design Capacity 50 units / day
Determinants of Effective
Capacity/Output
• Facilities, layout
• Products or services, product mixes/setups
• Processes, quality
• Human considerations, motivation
• Operations, scheduling and synchronization problems
• Supply Chain factors, material shortages
• External forces, regulations

Caution: While discussing these the book considers

effective capacity almost synonymous to output.
 Some Possible Growth/Decline Patterns
Volume

Volume
Growth Decline

0 Time 0 Time
Figure 5-1

Cyclical Stable

Volume
Volume

0 0
Time Time
 Developing Capacity Alternatives

• Design flexibility into systems,

– modular expansion
• Take a “big picture” approach to capacity changes,
– hotel rooms, car parks, restaurant seats
• Differentiate new and mature products,
– pay attention to the life cycle, demand variability vs.
discontinuation
• Prepare to deal with capacity “chunks”,
– no machine comes in continuous capacities
• Attempt to smooth out capacity requirements,
– complementary products, subcontracting
• Identify the optimal operating level,
– facility
67 size
Aggregate Planning

• Determine the resource capacity needed to meet

demand over an intermediate time horizon
– Aggregate refers to product lines or families
– Aggregate planning matches supply and demand
• Objectives
– Establish a company wide game plan for allocating
resources
– Develop an economic strategy for meeting demand
Aggregate Planning Process
Meeting Demand Strategies

• Adjusting capacity
– Resources necessary to meet demand are
acquired and maintained over the time horizon
of the plan
– Minor variations in demand are handled with
overtime or under-time
• Managing demand
– Proactive demand management
Strategies for Adjusting Capacity

• Level production • Overtime and under-time

– Producing at a constant rate – Increasing or decreasing
and using inventory to working hours
absorb fluctuations in • Subcontracting
demand
– Let outside companies
• Chase demand complete the work
– Hiring and firing workers to •
match demand
Part-time workers
– Hiring part time workers to
• Peak demand complete the work
– Maintaining resources for • Backordering
high-demand levels
– Providing the service or
product at a later time period
Level Production

Demand

Production
Units

Time
Chase Demand

Demand

Production
Units

Time
Strategies for Managing
Demand

• Shifting demand into

other time periods
– Incentives
– Sales promotions
– Advertising campaigns
• Offering products or
services with counter-
cyclical demand patterns
• Partnering with suppliers
to reduce information
distortion along the
supply chain
Quantitative Techniques For APP

• Pure Strategies
• Mixed Strategies
• Linear Programming
• Transportation Method
• Other Quantitative
Techniques
Pure Strategies

Example:
QUARTER SALES FORECAST (LB)
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000
Hiring cost = $100 per worker
Firing cost = $500 per worker
Regular production cost per pound = $2.00
Inventory carrying cost = $0.50 pound per quarter
Production per employee = 1,000 pounds per quarter
Beginning work force = 100 workers
Level Production Strategy

Level production
(50,000 + 120,000 + 150,000 + 80,000)
= 100,000 pounds
4

SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY
Spring 80,000 100,000 20,000
Summer 50,000 100,000 70,000
Fall 120,000 100,000 50,000
Winter 150,000 100,000 0
400,000 140,000
Cost of Level Production Strategy
(400,000 X $2.00) + (140,00 X $.50) = $870,000
 Chase Demand Strategy

SALES PRODUCTION WORKERS WORKERS WORKERS

QUARTER FORECAST PLAN NEEDED HIRED FIRED
Spring 80,000 80,000 80 0 20
Summer 50,000 50,000 50 0 30
Fall 120,000 120,000 120 70 0
Winter 150,000 150,000 150 30 0
100 50

Cost of Chase Demand Strategy

(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000
Mixed Strategy
• Combination of Level Production and Chase
Demand strategies
• Examples of management policies
– no more than x% of the workforce can be laid off in
one quarter
– inventory levels cannot exceed x dollars
• Many industries may simply shut down
manufacturing during the low demand season
and schedule employee vacations during that
time
Scheduling of Operations
Hierarchy of Production
Decisions
 Scheduling

• Scheduling: Establishing the timing of the use of

equipment, facilities and human activities in an
organization
• Answering “when” question for activities
JAN FEB MAR APR MAY JUN
Build A

A Done

Build B

B Done

Build C

C Done

Build D

Ship On time!
85
Scheduling Definitions

• Routing: The operations to be performed, their

sequence, the work centers, & the time standards
• Bottleneck: A resource whose capacity is less than
the demand placed on it
• Due date: When the job is supposed to be finished
• Slack: The time that a job can be delayed & still
finish by its due date
• Queue: A waiting line

86
 Objectives in Job Shop Scheduling

• Meet due dates

• Minimize work-in-process (WIP) inventory
• Minimize average flow time
• Maximize machine/worker utilization
• Reduce set-up times for changeovers
• Minimize direct production and labor costs
(note: that these objectives can be conflicting)
 How to Sequence Jobs
Which of several jobs should be scheduled first?
• Techniques are available to do short-term planning
of jobs based on available capacity & priorities
• Priority rules:
– Decision rules to allocate the relative priority of jobs at a
work center
– Local priority rules: determines priority based only on
jobs at that workstation
– Global priority rules: also considers the remaining
workstations a job must pass through

88
Commonly Used Priorities Rules

• First come, first served (FCFS)

• Last come, first served (LCFS)
• Earliest due date (EDD)
• Shortest processing time (SPT)
• Longest processing time (LPT)
• Critical ratio (CR):
– (Time until due date)/(processing time)
• Slack per remaining Operations (S/RO)
– Slack /(number of remaining operations)
89
Example Using SPT, EDD

Example Using SPT and EDD at Jill's Machine Shop-Work Center 101

Job Time Days to SPT Rule EDD Rule

Job Number (includes Setup & Run Time) Due Date Sequence Sequence
AZK111 3 days 3 EZE101 AZK111
BRU872 2 days 6 BRU872 EZE101
CUF373 5 days 8 AZK111 DBR664
DBR664 4 days 5 DBR664 BRU872
EZE101 1day 4 FID448 CUF373
FID448 4 days 9 CUF373 FID448
90
How to Use Priority Rules

1. Decide which priority rule to use

2. List all jobs waiting to be processed with their job
time
3. Using priority rule determine which job has
highest priority then second, third and so on

91
Performance measures

• Flow time of a job: Duration of time from a job

enters into the system until it leaves
• Lateness of a job: Amount by which completion
date exceeds due date. Could be negative.
• Tardiness=max(lateness,0)
• Makespan: total time needed to finish a group of
jobs
• Average number of jobs until the last is finished:
=Total flow time / Makespan
92
 Example: Average number of jobs
• Jobs: A and B with processing times 10 each
Number of jobs

2
Average number of jobs

A finishes at 10 B finishes at 20 Time

Makespan=20, Total Flow time=10+20

Average number of jobs=30/20
93
Example: Sequencing rules

Jobs Processing time DD=Due date

A 11 61
B 29 45
C 31 31
D 1 33
E 2 32

94
Ex: FCFS

Jobs Proc.time Flow time DD Late Tardy

A 11 11 61 -50 0
B 29 40 45 -5 0
C 31 71 31 40 40
D 1 72 33 39 39
E 2 74 32 42 42
Total 268 202 66 121
Aver. 53.6 40.4 13.2 24.2
95
Ex: SPT to minimize the total flow time

Jobs Proc.time Flow time DD Late Tardy

D 1 1 33 -32 0
E 2 3 32 -29 0
A 11 14 61 -47 0
B 29 43 45 -2 0
C 31 74 31 43 43
Total 135 202 -67 43
Aver. 27.0 40.4 -13.4 8.6
96
Ex: EDD to minimize the maximum lateness

Jobs Proc.time Flow time DD Late Tardy

C 31 31 31 0 0
E 2 33 32 1 1
D 1 34 33 1 1
B 29 63 45 18 18
A 11 74 61 13 13
Total 235 202 33 33
Aver. 47.0 40.4 6.6 6.6
97
Example summary

Average
Average Average Number of
Flow Time Tardiness Jobs at the
Rule (days) (days) Work Center

FCFS 53.6 24.2 268/74=3.62

27 8.6 135/74=1.82
SPT
6.6 235/74=3.17
EDD 47

98
Two Machine Flow Shop

• Flow shop is introduced in Lesson 1, in Slides 18-19.

• Recall that a flow shop is suitable for a make-to-stock
or assemble-to-stock production system where
standard products are produced in high volume.
• Here, we discuss the special cases of two-and three-
machine systems.

E nter E xit
M1 M2

A C onc eptual V iew of

A T wo-M achine Flow S hop 99
Two Machine Flow Shop

• The main characteristic of a two-machine flow shop

system is that every job first visits Machine 1 and
then Machine 2.
• Examples:
– Customizing and painting
– Machining and polishing
– Moulding and baking
– Repair and testing
– Typing and proofing (of chapters of a book)
– Review and data entry (of claims)
– Checkups by a nurse and a doctor (of patients)
100
Two Machine Flow Shop

• We continue to assume that

– every machine can process one job at a time.
– every job can be processed by one machine at a
time and
• So, in terms of a Gantt chart every job will appear
twice: once on Machine 1 and again on Machine 2
– No two rectangles can overlap (every machine
processes one job at a time)
– If a vertical line is drawn, the line must not intersect
two rectangles corresponding to the same job
(every job can be processed by one machine at a
time) 101
Two Work Center Sequencing

• Johnson’s Rule: technique for minimizing completion

time for a group of jobs to be processed on two
machines or at two work centers.
• Minimizes total idle time and the makespan
• Several conditions must be satisfied

102
Johnson’s Rule Conditions

• Job time must be known and constant

• Job times must be independent of sequence
• Jobs must follow same two-step sequence
• Job priorities cannot be used
• All units must be completed at the first
work center before moving to the second

103
 Johnson’s rule
1. Select a job with the shortest processing time
If the processing time is on the first workcenter
Schedule the job right after the already scheduled at the
beginning of the list
If the processing time is on the second workcenter
Schedule the job right before the already scheduled at
the end of the list
2. Cross out the scheduled job and go to 1

104
Johnson’s rule
Example: Johnson’s rule

Job Processing time on 1 Processing time on 2

A 15 25

B 8 6

C 12 4

D 20 18

106
The sequence that minimizes the
makespan
A-D-B-C

MC1 15 20 8 12 13
15 35 43 55
MC2 25 18 6 4
15
15 40 58 64 68
Idle time = 28

Makespan = 68

107
 Extension of Johnson’s Rule
To A Three Machine Flow Shop
• An extension of Johnson’s rule minimizes makespan in
some three machine flow shops (repetitive application of
the rule yields a schedule with least makespan)
• First, recall that in a three machine flow shop, every job
is processed first on Machine 1, then on Machine 2 and
then on Machine 3.

E nter E xit
M1 M2 M3

A C onceptual V iew of
A T hree-M achine Flow S hop
 Extension of Johnson’s Rule
To A Three Machine Flow Shop

• The extension of Johnson’s rule does not guarantee an optimal makespan for
all three-machine flow shop cases. However, the extension guarantees an
optimal makespan
• if the largest processing time on the second machine is not larger than the
smallest processing times on
1. Machine 1 or
2. Machine 3 or
3. Both
• In Case 1 Machine 1 dominates Machine 2,
• In Case 2 Machine 3 dominates Machine 2 and
• In Case 3 both Machines 1 and 3 dominate Machine 2

109
Extension of Johnson’s Rule To A Three Machine Flow Shop
 Extension of Johnson’s Rule
To A Three Machine Flow Shop

• Some examples when the rule applies are given in the next slide:
• Example (a): The largest processing time on Machine 2 = max (5, 3, 4, 2,
3) = 5  5 = min (6, 9, 5, 8, 7) = smallest processing time on Machine 1.
So, Machine 1 dominates Machine 2 and the extension of Johnson’s rule
applies.
• Example (b): The largest processing time on Machine 2 = max (6, 3, 2, 4,
5) = 6  6 = min (7, 8, 6, 9, 8) = smallest processing time on Machine 3.
So, Machine 3 dominates Machine 2 and the extension of Johnson’s rule
applies.

111
 Extension of Johnson’s Rule
To A Three Machine Flow Shop

Machine Machine Machine

Job 1 2 3 Job 1 2 3 Job 1 2 3
1 6 5 7 1 6 6 7 1 9 5 6
2 9 3 3 2 9 3 8 2 5 3 5
3 5 4 8 3 4 2 6 3 7 4 8
4 8 2 4 4 5 4 9 4 6 2 7
5 7 3 5 5 3 5 8 5 7 3 5
(a) (b) (c)

Johnson’s rule applies in each of the above cases

112
Processing n jobs through m machines