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However, in practice, service and manufacturing organizations share many characteristics.

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Many manufacturers offer their own service operations and both require skilled people to create a profitable business. The key difference between service firms and manufacturers is the tangibility of their output. The output of a service firm, such as consultancy, training or maintenance, for example, is intangible.

Manufacturers produce physical goods that customers can see and touch. Service firms, unlike manufacturers, do not hold inventory; they create a service when a client requires it. Manufacturers produce goods for stock, with inventory levels aligned to forecasts of market demand.

Some manufacturers maintain minimum stock levels, relying on the accuracy of demand forecasts and their production capacity to meet demand on a just-in-time basis.

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Inventory also represents a cost for a manufacturing organization. The computed costs for the individual variables of the plan are as follows:. A second example, shown in Figure 2, presents the same scenario as in Figure 1 but demonstrates the use of a combination strategy i. For this example, let's assume that company Figure 1 policy prevents us from utilizing backorders and limits our plan to no more than 50 units of overtime per period.

Notice that the regular output level is constant, implying a level workforce, while overtime and subcontracting are used to meet demand on a period by period basis chase strategy.

One will notice that the cost of the combination plan is slightly lower than the cost of the level plan. The following are some of the better known mathematical techniques that can be used in more complex aggregate planning applications. Linear programming is an optimization technique that allows the user to find a maximum profit or revenue or a minimum cost based on the availability of limited resources and certain limitations known as constraints.

A special type of linear programming known as the Transportation Model can be used to obtain aggregate plans that would allow balanced capacity and demand and the minimization of costs.

Disaggregation - Problems in manufacturing and service organizations | L.P. Ritzman | Springer

However, few real-world aggregate planning decisions are compatible with the linear assumptions of linear programming. Supply Chain Management: Strategy, Planning and Operation, by Sunil Chopra and Peter Meindl, provides an excellent example of the use of linear programming in aggregate planning. For aggregate plans that are prepared on a product family basis, where the plan is essentially the summation of the plans for individual product lines, mixed-integer programming may prove to be useful.

Mixed-integer programming can provide a method for determining the number of units to be produced in each product family.


Linear decision rule is another optimizing technique. Then, by using calculus, two linear equations can be derived from the quadratic equation, one to be used to plan the output for each period and the other for planning the workforce for each period. The management coefficients model, formulated by E. It then uses regression analysis to estimate the values of a, b, c, and K. The end result is a decision rule based on past managerial behavior without any explicit cost functions, the assumption being that managers know what is important, even if they cannot readily state explicit costs.

Essentially, this method supplements the application of experienced judgment.

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The search decision rule methodology overcomes some of the limitations of the linear cost assumptions of linear programming. The search decision rule allows the user to state cost data inputs in very general terms.

Problems in manufacturing and service organizations

It requires that a computer program be constructed that will unambiguously evaluate any production plan's cost. It then searches among alternative plans for the one with the minimum cost. However, unlike linear programming, there is no assurance of optimality.

A number of simulation models can be used for aggregate planning. By developing an aggregate plan within the environment of a simulation model, it can be tested under a variety of conditions to find acceptable plans for consideration. These models can also be incorporated into a decision support system, which can aid in planning and evaluating alternative control policies. These models can integrate the multiple conflicting objectives inherent in manufacturing strategy by using different quantitative measures of productivity, customer service, and flexibility.

The functional objective search FOS system is a computerized aggregate planning system that incorporates a broad range of actual planning conditions. It is capable of realistic, low-cost operating schedules that provide options for attaining different planning goals.

The system works by comparing the planning load with available capacity. After management has chosen its desired actions and associated planning objectives for specific load conditions, the system weights each planning goal to reflect the functional emphasis behind its achievement at a certain load condition. The computer then uses a computer search to output a plan that minimizes costs and meets delivery deadlines. For manufacturing firms the luxury of building up inventories during periods of slack demand allows coverage of an anticipated time when demand will exceed capacity.

Services cannot be stockpiled or inventoried so they do not have this option. Also, since services are considered "perishable," any capacity that goes unused is essentially wasted.

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An empty hotel room or an empty seat on a flight cannot be held and sold later, as can a manufactured item held in inventory. Service capacity can also be very difficult to measure. When capacity is dictated somewhat by machine capability, reasonably accurate measures of capacity are not extremely difficult to develop. However, services generally have variable processing requirements that make it difficult to establish a suitable measure of capacity.

Historically, services are much more labor intensive than manufacturing, where labor averages 10 percent or less of total cost. This labor intensity can actually be an advantage because of the variety of service requirements an individual can handle. This can provide quite a degree of flexibility that can make aggregate planning easier for services than manufacturing. Under AH, employees are contracted to work for a certain number of hours say 1, hours per year, for a certain sum of money.

Employees can be asked to put in more hours during busy periods and fewer hours in slow periods. Typically, employees receive equal monthly or weekly payments so that hourly workers in effect have gained salaried status. Please review our Terms and Conditions of Use and check box below to share full-text version of article. Get access to the full version of this article. View access options below. You previously purchased this article through ReadCube. Institutional Login. Log in to Wiley Online Library. Purchase Instant Access. View Preview. Learn more Check out.

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