Demand

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1 MGT 3110: Exam 2 Study Guide 1. What is aggregate planning? What is its purpose? 2. What are demand options for aggregate planning? Give examples and discuss the effects of each. 3. Why is there a need for aggregate planning? 4. Briefly discuss the advantages and disadvantages of each of these planning strategies: a. Maintain a level rate of output and let inventories absorb fluctuations in demand. b. Vary the size of the workforce to correspond to predicted changes in demand requirements. c. Maintain a constant workforce size, but vary hours worked to correspond to predicted demand requirements. 5. What is Master Production Schedule? 6. What are the inputs to master scheduling? What are the outputs? 7. Define independent and dependent demand items. 8. What is Bill of Materials? 9. What is Low-Level coding and what how is it used? 10. What are the benefits of MRP? 11. What are the inputs required for MRP? 12. What is Lot Sizing in MRP? 13. What are the reasons for using a lot sizing method other than Lot-for-lot? 14. What is the objective of ABC analysis? 15. Describe the thumb rule used in ABC classification. 16. List the assumptions needed for developing the EOQ formula. 17. What costs are included in the total cost for the EOQ model? 18. The EOQ formula consists of three numbers, D, S, and H. Increasing which of these three will result in increase in the value of EOQ. 19. If annual demand were to double, would the value of EOQ also double? Why or why not? 20. Which of the assumptions required for developing the EOQ formula is not necessary for the Economic Production Quantity Model? 21. For the Economic Production Quantity to be valid, production rate p must be greater than the demand rate u. Explain the reasons for this. 22. What costs are included in the total cost if quantity discount is allowed? PROBLEMS 1. Wormwood, Ltd., produces a variety of furniture products. The planning committee wants to prepare an aggregate plan for the next five months. Demand forecast as given below Demand Cost of production per unit using regular time is $50, using overtime it is $75, and using subcontracting it is $80. Inventory holding cost per unit per period is $5. Backorder cost is $60 per unit. Hiring cost is $150 per worker. Firing cost is $200 per worker.

2 Currently there are 12 workers and each can produce 15 units per period. Workers can be hired or fired, but at most only 12 workers can be on the roll. Overtime capacity is 30 units per period and subcontracting capacity is 10 units per period. Beginning inventory is zero. No backorder is allowed at the end of period 5. When computing number of workers needed, make sure you round the number up to a whole number. a. Develop a chase and determine the cost. b. Develop a level and determine the cost. c. An image of the spreadsheet Solver model is give below. Fill out the formulas in the appropriate cells. d. Fill out the Solver parameters in the table below. A B C D E F G 1 Solver model 2 3 Capacity 4 No. of workers 12 5 Production/worker/period 15 6 Capacity/period 7 Overtime capacity 30 8 Subcontracting capacity 10 9 Initial inventory 0 10 Safety stock Costs 13 Output cost per unit 14 Regular time $10 15 Overtime $16 16 Subcontracting $20 17 Inventory/unit/period $2 18 Backorder/unit $25 19 Hiring cost/worker $ Firing cost/worker $ Forecast Workers Total 26 Beginning workers 27 Hires 28 Fires 29 Workers available

3 30 31 Output Total 32 Regular time 33 Overtime 34 Subcontracting 35 Total output 36 Output-Forecast Inventory Total 39 Beginning 40 Available 41 Ending 42 Average 43 Backlog Costs Total 46 Output 47 Regular time 48 Overtime 49 Subcontracting 50 Inventory 51 Backorder 52 Hiring cost 53 Firing cost 54 Total Solver parameters Set Target Cell Changing cells Constraints

4 2. The forecast is 30 units for each of the first two periods and 40 units for each of the next four periods. The starting inventory is 50 units. The lot size of 60 units. Develop the master schedule and available to promise given the following committed customer orders. Week Customer order A Bill of Materials is desired for a bracket (A) that is made up of a base (B), two springs (C) and four clamps (D). The base is assembled from one clamp (D) and two housings (E). Each clamp has one handle (F) and one casting (G). Each housing has two bearings (H) and one shaft (I). a. Develop a product structure tree. b. The lead time for the parts are given below. Develop a time-phased product structure. c. The available inventory for each part is given in the table below. Determine the net requirement quantities of all parts required to assemble 50 units of bracket A. Item Lead time Available A 1 5 B 2 5 C 3 10 D 2 20 E 1 50 F G 1 50 H 1 5 I A product (A) consists of a base (B) and a casting (C). The base consists of a plate (P) and three fasteners (F). The lead time, current on-hand inventory and scheduled receipts are given below. All components are lot for lot. The Master Schedule requires 100 units of product A be available in week 4 and 150 in week 6. Produce the MRP for the upcoming six weeks. Produce a list of all planned order releases. Part Lead time On-hand Scheduled receipts A 1 20 None B in week 1 C in week 1, 30 in week 2 P in week 1 F in week 1, 40 in week 3 5. A company has 12 items in its inventory. Using the data given below classify the items

5 into A, B, and C classes. SKU Annual usage (units) Unit $ value D E C E B B E A E A F B Herbert Adams sells bicycles. One particular model is highly popular with annual sales of 2,000 units per year. The cost of one such bicycle is $ Annual holding costs are 25% of the item's cost, and the ordering cost is $40. The store is open 250 days a year. a. What is the economic order quantity? b. What is the average number of orders per year? c. What is the average cycle time in days? d. What is the annual total costs? 7. Montegut Manufacturing produces a product for which the annual demand is 10,000. Production averages 100 per day, while demand is 40 per day. Holding costs are $1.50 per unit per year; set-up costs $ If they wish to produce this product in economic batches, what size batch should be used? What is the maximum inventory level? What is the time between orders? What is the time to producing a lot? How many order cycles are there per year? Determine the total annual inventory cost? 8. The annual demand, ordering cost, and the inventory carrying cost rate for a certain item are D = 600 units, S = $10/order and holding cost is 30% of item price. Price is established by the following quantity discount schedule. What should the order quantity be in order to minimize the total annual cost? Quantity 1 to to and up Unit price $5.00 $4.50 $4.10 Answers to discussion questions: 1. What is aggregate planning? What is its purpose? Aggregate planning involves developing a general plan for employment, output, and inventory levels. The goal is to develop a plan which makes efficient use of the resources of an organization. Planners attempt to determine the best way to meet forecasting demand requirements within the constraints imposed by long-term decisions. 2. What are demand options for aggregate planning? Give examples and discuss the effects

6 of each. Demand options are techniques used to even out fluctuations in demand. Following are some examples. Back ordering during high- demand periods (Effective if substitute products are not available, but may result in loss of customer orders to competition and lost customer good will) Counter-seasonal product mix (effective in reducing huge ups and downs in demand, but may lead to products or services outside the company s areas of expertise Economic incentives such as discounts (loss of profit) 3. Why is there a need for aggregate planning? The need for aggregate planning is to begin to translate long-term decisions into shortterm operating plans. Aggregate planning constitutes the intermediate step in this process. 4. Briefly discuss the advantages and disadvantages of each of these planning strategies: a. Maintain a level rate of output and let inventories absorb fluctuations in demand. b. Vary the size of the workforce to correspond to predicted changes in demand requirements. c. Maintain a constant workforce size, but vary hours worked to correspond to predicted demand requirements. a. Maintaining a constant workforce has the advantage of making estimation of labor costs relatively easy, is good for morale, and minimizes hiring and layoff costs. However, inventory carrying costs tend to be high. b. Since labor force has to be continually adjusted, hiring and layoff costs tend to be high. Due to the instability of the labor force, employee morale is low. However, the inventory carrying costs are very low because production is matched with demand, resulting in little or no inventory. c. Varying the workforce can cause morale problems. Moreover, working overtime generally is less productive, increases quality problems, and increases the risk of accidents. 5. What is Master Production Schedule? Master Production Schedule specifies production quantities of each Independent Demand item for a planning horizon of 12 to 15 weeks. Total of MPS quantities must be in accordance with the aggregate production plan. 6. What are the inputs to master scheduling? What are the outputs? The master schedule has three inputs: the beginning inventory, forecasts for each period of the schedule, and customer orders. Its outputs are projected inventory, production requirements, and uncommitted (available-to-promise) inventory. 7. Define independent and dependent demand items. Finished products whose demand is independent of production decisions are called Independent demand items. Items for which demand can be directly calculated from production decisions are called Dependent demand items. These are raw-materials and parts required for the production of the finished goods. 8. What is Bill of Materials?

7 Bill of materials is structured list of components, ingredients, and materials needed to make an end product. Items needed to produce a given part are called components or children. The part into which the components go us called Parent. The BOM also gives the number of units of a child item needed to produce one unit of the parent item. 9. What is Low-Level coding and what how is it used? A level code starting from zero at the top of the BOM tree and incremented by 1 going down each level of the BOM tree is assigned. Then, the lowest level at which an item appears is called Low-Level code. The MRP computations are processed one level at a time, starting from level zero. 10. What are the benefits of MRP? Better response to customer orders Faster response to market changes Improved utilization of facilities and labor Reduced inventory levels 11. What are the inputs required for MRP? Master Production Schedule Bill of Materials Inventory status 12. What is Lot Sizing in MRP? The process of combining net requirements into production lots is called lot sizing. 13. What are the reasons for using a lot sizing method other than Lot-for-lot? Lot-for-lot often requires too many lots that may not be economically justifiable Sometime lot-for-lot generates absurdly small lots 14. What is the objective of ABC analysis? The objective of ABC analysis is to identify the inventory items with (i) the largest annual dollar expenditure (class A), (ii) least annual dollar investment (class C), and (iii) all other items that fall in between (class B). 15. Describe the thumb rule used in ABC classification. Class A: 10 to 20% of items, 60 to 70% annual $ usage Class B: intermediate items Class C: 50 to 60% of items, <= 15% annual $ usage 16. List the assumptions needed for developing the EOQ formula. Only one product is involved. Annual demand requirements are known. Demand is spread evenly throughout the year so that the demand rate is reasonably constant. Lead time is known and constant. Each order is received in a single delivery. There are no quantity discounts. 17. What costs are included in the total cost for the EOQ model?

8 Annual holding cost and annual ordering cost 18. The EOQ formula consists of three numbers, D, S, and H. Increasing which of these three will result in increase in the value of EOQ. D and S are in the numerator of the EOQ formula. Therefore increasing these two values will result in higher value for EOQ. 19. If annual demand were to double, would the value of EOQ also double? Why or why not? No. The annual demand is inside square-root. 20. Which of the assumptions required for developing the EOQ formula is not necessary for the Production Lot Size Model? The assumption that each order is received in a single delivery is not necessary. 21. For the Production Lot Size to be valid, production rate p must be greater than the demand rate u. Explain the reasons for this. If p < u, a negative number will result inside the square-root. If p = u, a zero will result in the denominator. These two cases represent situations where the production needs to be continuous without a stop, i.e. there is no determinable batch size. 22. What costs are included in the total cost if quantity discount is allowed? Annual holding cost, annual ordering cost, and annual item cost Answers to problems 1. (a) Chase: 2. Forecast Output Regular time Overtime Subcontracting Total output Output-Forecast Workers Hires 2 2 Fires Inventory Beginning Available Ending Average

9 Backlog Costs Output Regular time $7,500 $8,500 $9,000 $8,000 $8,000 $41,000 Overtime $0 $0 $0 $0 $0 $0 Subcontracting $0 $0 $0 $0 $0 $0 Hiring cost $0 $300 $0 $0 $0 $300 Firing cost $400 $0 $0 $200 $0 $600 Inventory $0 $0 $0 $0 $0 $0 Backorder $0 $0 $0 $0 $0 $0 Total $7,900 $8,800 $9,000 $8,200 $8,000 $41,900 (b) Level: Average demand = 164 Number of workers = or 11 Forecast Output Regular time Overtime 0 Subcontracting 0 Total output Output-Forecast Workers Hires 0 Fires 1 1 Inventory Beginning Available Ending Average Backlog Costs Output Regular time $8,200 $8,200 $8,200 $8,200 $8, Overtime $0 $0 $0 $0 $0 0

10 Subcontracting $0 $0 $0 $0 $0 0 Hiring cost $0 $0 $0 $0 $0 0 Firing cost $200 $0 $0 $0 $0 200 Inventory $35 $55 $20 $0 $0 110 Backorder $0 $0 $480 $240 $0 720 Total $8,435 $8,255 $8,700 $8,440 $8,200 $42,030 A B C D E F G 1 Solver model 2 3 Capacity 4 No. of workers 12 5 Production/worker/period 15 6 Capacity/period =B4*B5 7 Overtime capacity 30 8 Subcontracting capacity 10 9 Initial inventory 0 10 Safety stock Costs 13 Output cost per unit 14 Regular time $10 15 Overtime $16 16 Subcontracting $20 17 Inventory/unit/period $2 18 Backorder/unit $25 19 Hiring cost/worker $ Firing cost/worker $ Forecast Workers Total 26 Beginning workers =B4 =B29 =COPY 27 Hires =SUM(B27:F27) Changing cells 28 Fires =SUM(B27:F27) 29 Workers available =B26+B27-B28 COPY Output Total 32 Regular time =B29*$B$5 =SUM(B32:F32) 33 Overtime 34 Subcontracting Changing cells 35 Total output =SUM(B32:B34)

11 36 Output-Forecast =B35-B Inventory Total 39 Beginning =B9 =B41 40 Available =B39+B35 41 Ending =MAX(0,B40-B23) =MAX(0,C40- (C23+B43)) 42 Average =(B39+B41)/2 43 Backlog =MAX(0,B23-B40) =MAX(0,(C23+B43)- C40) =SUM(B43:F43) Costs Total 46 Output 47 Regular time =B32*$B14 =SUM(B47:F47) 48 Overtime 49 Subcontracting 50 Inventory =B42*$B17 51 Backorder 52 Hiring cost =B27*$B19 63 Firing cost 54 Total =SUM(B45:B51) =SUM(B54:F54) Solver parameters Set Target Cell =G54 MINIMIZE Changing cells Constraints B27:F28, B33:F34 B33:F33 <= B7 B34:F34 <= B8 G43 = 0 B33:F33 = INT B34:F34 = INT #2. Fixed order quantity 60 Period Forecast Customer orders - committed Projected on-hand inventory

12 MPS Available to promise #3. (a) A B C 2 D 1 E 2 D 4 F G H 2 I F G (b) Lead time = 7 weeks F G D I H E C B A F G D (c) Part Gross Available Net A = 45 B 1 x A = = 40 C 2 x A = 2 x 45 = = 80 D 4 x A + 1 x B = 4 x = = 200 E 2 x B = = 30 F 1 x D = = 50 G 1 x D = = 150

13 H 2 x E = 2 x 30 = = 55 I 1 x E = = 30 #4. Item A Lead time = 1 Week: Gross requirement Scheduled receipts Projected on-hand Planned receipts Planned order releases Item B Lead time = 1 Week: Gross requirement Scheduled receipts 50 Projected on-hand Planned receipts Planned order releases Item C Lead time = 3 Week: Gross requirement Scheduled receipts Projected on-hand Planned receipts Planned order releases Item P Lead time = 2 Week: Gross requirement Scheduled receipts 50 Projected on-hand Planned receipts Planned order releases Item F Lead time = 3 Week Gross requirement Scheduled receipts Projected on-hand Planned receipts Planned order releases Action report: Order 170 units of F; Exception: None

14 5. No. SKU Annual usage (units) Unit $ value Annual Dollar volume Dollar % Cum. % for $ Cum. % for no. of items Class 1 B , % 44.4% 8.3% A 2 B , % 62.8% 16.7% A 3 C , % 70.5% 25.0% B 4 E , % 77.8% 33.3% B 5 A , % 84.9% 41.7% B 6 E , % 88.9% 50.0% B 7 D , % 92.6% 58.3% C 8 E , % 95.2% 66.7% C 9 A , % 97.3% 75.0% C 10 E , % 98.7% 83.3% C 11 B , % 99.7% 91.7% C 12 F % 100.0% 100.0% C % 6. D = 2000, No. of days = 250, H = 25% x $800 = $200, S = $40 2(2000)40 a. EOQ = = b. N = D/Q = 2000/28 = 70.7 c. u = D/No. of days per year = 2000/250 = 8, T = Q/u = 28/8 = 3.5 days d. Annual total cost = (D/Q)S + (Q/2)H = (2000/28)40 + (28/2)200 = $5, D = 10,000, H = $1.50, S = $200, p = 100/day, u = 40/day EPQ = =. = 2108 I max = (Q/p)(p - u) = (2108/100)(100-40) = Average number of orders per year = D/Q = 10000/2108 = 4.74 Cycle time (Time between orders) = Q/d = 2108/40 = 52.7 days Production time = Q/p = 2108/100 = days Annual holding cost = (I max /2) x H = ( /2) x 1.50 = $948.60

15 Annual setup cost = (D/Q) x S = (10000/2108) x 200 = $ Total cost = = $1, D = 600 S = 10 Holding cost = 30% Q Price Holding cost Formula Q Candidate Q Formula Q > upper limit -- not a candidate Formula Q is within range, = Candidate Q = Formula Q & above Formula Q < lower limit, Candidate Q = lower limit 250 Q Price Candidate Q Ordering cost Holding cost Item cost Total cost >= EOQ = P = $4.10