PRODUCTION ENGINEERING 2 (PENG 201)

TUTORIAL 5 – SALES AND OPERATIONS PLANNING

1. Develop a production plan and calculate the annual cost for a firm whose demand forecast is
fall, 10,000, winter, 8,000, spring, 7,000 and summer 12,0000. Inventory at the beginning of fall
is 500 units. At the beginning of fall you currently have 30 workers but you plan to hire
temporary workers at the beginning of summer and lay them off at the end of summer. In
addition you have negotiated with the union an option to use the regular workforce on overtime
during winter or spring if overtime is necessary to prevent stockouts at the end of those
quarters. Overtime is not available during the fall. Relevant costs are: hiring , R100 for each
temp; layoff, R200 for each worker laid off; inventory holding, R5 per unit-quarter; backorder,
R10 per unit; straight time, R5 per hour; overtime, R8 per hour. Assume that the productivity is
0.5 unit per worker hour, with eight hours per day and 60 days per season.
Solution
  Fall Winter Spring Summer
Forecast 10000 8000 7000 12000
Beginning inventory 500 -2300 0 200
Production required 9500 10300 7000 11800
Production hours required 19000 20600 14000 23600
Production hours available1 14400 14400 14400 14400
Overtime hours 6200
2
Temp workers 20
Temp worker hours available 9600
Total hours available 14400 20600 14400 24000
Actual production 7200 10300 7200 12000
Ending inventory -2300 0 200 200
Workers hired 20
Workers laid off 20

Straight time R72,000 R72,000 R72,000 R120,000

Overtime 0 49600 0 0
Inventory R1,000 R1,000
Backorder R23,000
Hiring R2,000
Layoff R4,000
Total R95,000 R121,600 R73,000 R127,000
R416,600
1
30 workers*8*60
2
Temp workers to be hired = (23,600-14400)/(8*60) = 19.17 workers

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2. Plan production for a four-month period: February through May. For February and March, you
should produce to exact demand forecast. For April and May you should use overtime and
inventory with a stable workforce: stable means that the number of workers needed for March
will be held constant through May. However, government constraints put a maximum of 5,000
hours of overtime labor per month in April and May (zero overtime in February and March).If
demand exceeds supply, then backorders occur. There are 100 workers on January 31.You
are given the following demand forecast: February, 80,000; March, 64,000; April, 100,000;
May, 40,000. Productivity is four units per worker hour, eight hours per day, and 20 days per
month. Assume zero inventories on February 1. Costs are hiring, R50 per new worker; layoff,
R70 per worker laid off; inventory holding, R10 per unit-month; straight-time labor, R10 per
hour; overtime, R15 per hour; backorder, R20 per unit. Find the total cost of this plan.
Solution
  February March April May
Forecast 80,000 64,000 100,000 40,000
Beginning inventory - - - (16,000)
Production required 80,000 64,000 100,000 56,000
Production hours
3. Arequired
l a n 20,000 I n 16,000d u 25,000
s t 14,000
r i e s
Regular workforce 125 100 100 100 are
Regular production 80,000 64,000 64,000 64,000
to
Overtime hours - - 5,000
Overtime production - - 20,000 - be
Total production 80,000 64,000 84,000 64,000
Ending inventory - - - 8,000
Ending backorders - - 16,000 -
Workers hired 25
Workers laid off - 25

Straight time R200,000 R160,000 R160,000 R160,000

Overtime - - R 75,000 -
Inventory - - - 80,000
Backorder R0 R0 R320,000 R0
Hiring 1,250 - - -
Layoff - 1,750 - -
Total R201,250 R161,750 R555,000 R240,000
R1,158,000

produced on the same production equipment and the objective is to meet the demands for

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 the three products using overtime where necessary. The demand forecast for the next four
months in hours required to make each product is as shown below.

Product April May June July

A 800 600 800 1200
B 600 700 900 1100
C 700 500 700 850
Because the products deteriorate rapidly, there is a high loss in quality and, consequently, a high
carrying cost when a product is made and carried in inventory to meet future demand. Each hour’s
production carried into future months costs R3 per production hour for A, R4 for Model B, and R5
for Model C. Production can take place either during regular working hours or during overtime.
Regular time is paid at R4 when working on A, R5 for B, and R6 for C. The overtime premium is
50 percent of the regular time cost per hour. The number of production hours available for regular
time and overtime is

April May June July

  Regular time 1500 1300 1800 2000

  Overtime 700 650 900 1000

Set up the problem in a spreadsheet and an optimal solution using the Excel Solver.

Solution

The decision variables are how many regular and OT hours to assign to production of each product each
month. The constraints are the limits of total regular and OT hours each month, and no backorders. The
costs are a combination of production and inventory carrying costs.

  APRIL MAY JUNE JULY  

Demand A 800 600 800 1200
Demand B 600 700 900 1100
Demand C 700 500 700 850
Total Demand 2100 1800 2400 3150
Regular hours Available 1500 1300 1800 2000
Overtime Available 700 650 900 1000 Costs
Regular Hours A 200 100 200 50 4
Regular Hours B 600 700 900 1100 5
Regular Hours C 700 500 700 850 6

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 Total Regular Hours 1500 1300 1800 2000
OT Hours A 600 500 750 1000 6
OT Hours B 0 0 0 0 7.5
OT Hours C 0 0 0 0 9
Total OT Hours 600 500 750 1000
Total Hours A 800 600 950 1050
Total Hours B 600 700 900 1100
Total Hours C 700 500 700 850
Excess Hours A 0 0 150 0 3
Excess Hours B 0 0 0 0 4
Excess Hours C 0 0 0 0 5

Production Costs 11600 9900 14000 16800

Inventory Costs 0 0 450 0
TOTAL
COST: 52750
Objective value = R52 750. There may be alternative optimal solutions.

4. Shoney Video concepts produces a line of video streaming servers that are linked to personal
computers for storing movies. These devices have very fast access and large storage
capacity. Shoney is trying to determine a production plan for the next 12 months. The main
criterion for this plan is that the employment level is to be held constant over the period.
Shoney is continuing in its R&D efforts to develop new applications and prefers not to cause
any adverse feelings with local workforce. For the same reason, all employees should put in
full workweeks, even if that is not the lowest-cost alternative. The forecast for the next 12
months is:

 Month Forecast Demand     Month Forecast Demand

  January 600     July 200
  February 800     August 200
  March 900     September 300
  April 600     October 700
  May 400     November 800
  June 300     December 900

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 Manufacturing cost is R200 per set, equally divided between materials and labor. Inventory
storage cost is R5 per month. A shortage of sets results in lost sales and is estimated to cost
an overall R20 per unit short.
The inventory on hand at the beginning of the planning period is 200 units. Ten labor hours
are required per videodisc player. The workday is eight hours.
Develop an aggregate production schedule for the year using a constant workforce. For
simplicity, assume 22 working days each month except July, when the plant closes down for
three weeks’ vacation (leaving seven working days). Assume that total annual production
capacity is greater than or equal to total annual demand.

Solution

22 working days per month x 11 months + 7 days (July) =249 days

Total demand for year = 6700 videodisc players

Number of workers = (6700 -200) x10hr per videodisc player /(249*8) = 32.6 or 33 workers

Monthly production (except July) = 22 x8 x 33 workers /10hr per videodisc player = 580 units/month

July production = 7 x8 x 33 workers /10hr per videodisc player = 184.8 units

Augus
Jan. Feb. March April May June July Sept. Oct. Nov. Dec. Total
t
Forecast 600 800 900 600 400 300 200 200 300 700 800 900 6700
Beginning inventory 200 180 0 0 0 180 460 444 824 1104 984 764
Available Production 580 580 580 580 580 580 184 580 580 580 580 580 6564
Ending inventory 180 -40 -320 -20 180 460 444 824 1104 984 764 444
Costs Total
Lost Sales 0 800 6400 400 0 0 0 0 0 0 0 0 7600
Inventory 900 0 0 0 900 2300 2220 4120 5520 4920 3820 2220 26920
Total 900 800 6400 400 900 2300 2220 4120 5520 4920 3820 2220 34520

(R20 x 40 units)
Ending inventory x R5