Master Operations Scheduling Game
Background to your company operations
Marketing Considerations
Your company manufactures a consumer product which is purchased
for resale by numerous wholesale and retail establishments. The
market for your product is highly competitive and subject to both
cyclical and seasonal fluctuations.
The timing and extent of
seasonal peaks are influenced by weather conditions and thus can
be forecast with only moderate accuracy. Although the annual sales
forecast made each November has been, on the average, within
plus or minus 10 per cent of total actual sales, there had been years
in which the forecast total varied from the actual results by as much
as plus or minus 20 per cent. Moreover, the forecast of sales for any
of the four 13-week operating periods into which the year is
divided is sometimes in error by as much as plus or minus 33 per
cent of the results actually obtained.
These forecasting inaccuracies are tempered somewhat by the fact
that certain customers usually negotiate purchase contracts for at
least a portion of their requirements 60 to 120 days in advance of
the shipping date. As a result, in most years anywhere from 10 to
30 per cent of the shipping requirements for a given operations
period are booked sometime during the second operating period
ahead of the period in which delivery has to be made. An additional
20 to 60 per cent are booked one period ahead. In total, therefore,
Advanced Commitment Sales already on the books at the start of
a period rarely represent less than 30 per cent and sometimes
amount to as much as 90 per cent of the shipments that the
factory will be called to make out of current production or finished
goods inventory during the period.
The remaining delivery commitments, known as Single Period
Sales that is, sales that are booked and shipped during the same
operating period sometimes involve as little as three weeks
leadtime.
Since such sales frequently represent supplemental
orders placed by important customers, your company makes every
effort to meet even the tightest delivery deadline, as do its major
competitors.
Customers rarely cancel an order once it has been booked. On the
other hand, since the product is bulky and therefore costly to handle
and store, customers are unwilling to accept delivery much in
advance of the date requested. Therefore, if factory production runs
ahead of the actual shipping requirements during a given operating
Master Operations Scheduling Game
period, your company has to carry the excess units as finished
goods inventory.
Advertising and Sales Promotion Efforts
Basic Programs and Special Supplementary Campaigns
Within your company and the industry there is agreement that
industry-wide sales for any operating period are more decisively
influenced by weather conditions than any other single factor.
Moreover, research studies have indicated that brand loyalty is
significant to only about half of the customers who regularly
purchased this product. Therefore, even though weather plays a
major role in determining when and in what quantities retail
customers buy such items, the choice between competing brands
can be considerably influenced by advertising and other sales
promotional techniques, such as price discounts, premium offers,
and contests.
In common with all major companies in the industry, prior to the
start of each calendar year your company commits itself to a
carefully planned basic advertising and sales promotion program for
the ensuing year. This entails the commitment of a specific amount
of money. The exact amount usually is a predetermined percentage
of the sales revenues forecast for the coming year.
Experience has convinced your organisations top management that
under certain circumstances it is profitable to augment this basic
program with supplemental advertising and sales promotion
campaigns (SASP) during all, or part, of particular operating periods.
To assess the advisability of launching such campaigns, the
following rules of thumb have proven useful:
Type of supplemental
advertising and sales
promotion campaign
Type 1
(Modest step-up in efforts)
Type 2
(Major step-up in efforts)
Type 3
(Max. step-up in efforts)
Extra costs per period
incurred from
supplemental campaign
Approximate percentage
increase in sales for the
period that can probably
be achieved over the sales
that would result from the
basic program alone.
$ 10,000
10%
$ 20,000
20%
$ 50,000
30%
For any of these supplemental campaigns to yield results during a
given operating period it is essential that commitments be made no
later than the start of the period. Nor is it possible, except at
prohibitive cost, to abandon a campaign once it has been
Master Operations Scheduling Game
undertaken. Furthermore, experience indicates that even if the
extra expenditures are increased substantially beyond $ 50,000,
sales are not likely to exceed 130 per cent of the level they will
reach with only the basic program.
In commenting upon this phase of operations, one of your senior
executives has stated, It is imperative that a decision regarding a
SASP campaign be based on a painstaking analysis of the total
situation.
I have reference not only to the status quo then
surrounding the company, but also the probable future course of
events, the plans being launched by the other sectors of the
business, and so on. This can be tricky. It is a nightmare to find
yourselves committed to a maximum effort Type 3 campaign
during a period in which actual sales are so favourable that the
factory is unable to meet even the demand that would have been
generated by the basic program. On the other hand, not to have
launched an SASP campaign during a period in which sales fall
seriously short of the factory output appears, by hindsight, to be
inexcusably poor management. But by digging and analysing, it is
possible to assess if a supplemental campaign is likely to be
helpful.
Factory Output Capabilities and Direct Labour Costs
As noted previously, your company divides the calendar year into
four consecutive operating periods of 13 weeks each. The range of
factory output capabilities per period, and the average direct labour
cost per unit under each of the three factory operating conditions
that management believes to be feasible, are as follows:
Factory Operating
Conditions
Single shift without
Overtime
Single shift with Overtime
Two shifts
Output Capabilities per
Operating Period*
60,000 units or less
61,000 to 80,000
units
61,000 to 110,000
units
Average Direct Labour
Cost per Unit
$ 5.00
$ 5.00 for first
60,000
units
$ 7.50 per unit
thereafter
$ 5.00 for first
60,000
units
$ 5.50 per unit
thereafter
* (Note: For planning and scheduling purposes, factory output is
always expressed in
multiples of thousands of units.)
Master Operations Scheduling Game
Scheduling and Planning Factory Activity
Until recently, your companys policy has been to increase or to
decrease the rate of factory output frequently. This has been
accomplished by hiring or laying off workers; increasing or
decreasing overtime; changing the number of shifts, and so on,
whenever sales fluctuation seemed to warrant it. After careful
study, however, your Board of Directors has become convinced that
the costs and inefficiencies associated with such frequent changes
are excessive, and that with careful planning a more stable, and
hence more profitable, pattern of operations could be achieved.
Instructions have been given, therefore, to your operating
management that until further notice it is to adhere to a policy
decision that the level of factory operations can be changed no
more than four times per calendar year, and that such changes can
only occur at the start of an operating period. Once the level of
factory activity has been determined for a given period, it cannot be
changed until the start of the next period.
In commenting on this new policy, your Board Chairman has stated,
Granting that forecasting is difficult in our industry, we feel that it
still is not unreasonable to expect our operating management to do
a sufficiently sound job of planning to be able to live with their
decisions for at least a three-month period.
Extra Costs arising from Scheduling or Forecasting Problems
Simultaneously with announcing the new policy regarding the
number and frequency of changes in factory output rate, your
companys Directors announced their intention to employ the results
of a recently completed cost analysis.
This study had been
undertaken by representatives of the Sales, Production, Finance, and
Accounting Departments to provide information on the extra costs
incurred whenever problems of scheduling or forecasting caused
your company to adopt any of the following three types of action:
1. Making changes in the rate of factory operations: that is,
the extra costs incurred from having to recruit, hire, and train
additional employees or from having to lay off present
employees; from having to place rush orders for additional
materials; from increases in state unemployment taxes arising
from an irregular employment record; and so on.
2. Carrying finished goods inventories: that is, the extra costs
incurred from the physical movement and storage of finished
products; the cost of insurance, the risk of theft, damage,
deterioration, or obsolescence, or all of these; the cost of the
capital tied up in such inventories; and so on.
Master Operations Scheduling Game
3. Defaulting on a delivery promise made to a customer: that
is, extra costs arising from the use of airfreight to expedite
delivery on a delayed order; losses arising from a customers
refusal to accept late delivery; estimates, based on past
experience, of the risk that such non-deliveries will result in legal
action or in the loss of future sales from the customer in question
or from other customers who learn of the situation; and so on.
The results of the study were as follows:
Extra costs incurred from changes in the rate of factory output:
$2.00 per unit of change, regardless of whether the change is
upward or downward.
Extra costs, in addition to those cited above, from changes in the
number of shifts employed in the factory:
1.
2.
Going from 1 shift to 2 shifts:
Going from 2 shifts to 1 shift:
$7,000
$3,000
Extra costs from overtime or second shift premiums:
1.
2.
Overtime: $2.50 per unit for each unit of factory output in
excess of 60,000 units per period.
Second-shift: $.50 per unit for each unit of factory output
in excess of 60,000 units per period.
Extra costs of missed delivery promises: $6.00 per unit per
period.
Extra costs of carrying finished goods inventory: $1.00 per unit
per period (to be applied to the average size of the inventory,
that is, one half of the sum of the beginning inventory for the
period plus the closing inventory).
(Note: Single shift plus overtime can be used only up to a maximum
factory output rate of 80,000 units per period. To obtain an output
rate in excess of 80,000 units requires the use of a second shift. To
obtain an output rate between 61,000 and 80,000 units, operating
management can choose either single-plus-overtime, or two-shift
operations. Also note that if the output rate falls below 60,000 units,
the factory will operate in the single shift mode only.)
Special Internal Controls
One of the top managements objectives in obtaining such cost
information was to establish a special system of internal controls
which would help the Directors make a continuing assessment of the
performance of operating management. Therefore, in addition to
Master Operations Scheduling Game
the conventional profit and loss statement, the Directors also now
require that at the close of each operating period operating
management complete and submit the form shown in Exhibit 1.
These internal controls are based upon the conviction that, on the
average, each unit shipped from the factory generates a potential
contribution of $3.00. That is to say, if operations are at maximum
efficiency, your company can meet all variable costs arising from
the production of the unit in question and still have $3.00 of the
selling price available as a contribution toward its fixed costs, taxes,
and profits. This potential contribution is reduced, however, by any
extra costs incurred during the period.
Use of this concept requires that the following computations be
made for each operating period:
1. Number of units actually shipped X $3.00 = potential contribution
for the period.
2. Extra costs incurred during period = cost of any supplementary
advertising or sales promotion campaign plus any extra costs
arising from scheduling or forecasting problems.
3. Net operating contribution for period = potential contribution
minus extra costs incurred.
An Example of the System at Work:
The First Operating Period of the Current Year
During the final week of the year just concluded, your factory was
operating at an output rate of 71,000 units per period, that is, the
rate that had been set at the start of the period. This had been
accomplished through use of single shift plus overtime. All orders
calling for shipments during the fourth period have now been
received, and it has been determined that after meeting these your
company will end the current year with a finished goods inventory of
10,000 units.
The sales forecast for the following year, prepared by the Sales
Department in November, is as follows:
Period #
1
2
3
4
Delivery Requirements Forecast
70,000 units
82,000 units
125,000 units
59,000 units
Total
336,000 units
Master Operations Scheduling Game
By late December, your companys operating management also
knew that 44,000 units of advance sales commitments calling for
delivery during period #1 of the coming year were already on the
books. Of this total, 18,000 units had been booked during period #3
of the year just concluding, and 26,000 units during period #4. An
additional 28,000 units of advance commitments had been booked
in period #4 for delivery during period #2 of the coming year.
After studying these facts, your companys operating management
decided that during period #1 of the new year, the factory would be
operated on a single-shift-plus-overtime basis at an output rate of
62,000 units; that is to say, a reduction of 9,000 units would be
made in the rate maintained during the fourth period of the year
then concluding. In addition, it was decided that a Type 1
supplementary advertising and sales promotion campaign would be
launched during period #1 in an effort to stimulate sales by about
10 per cent.
During actual operations in period #1, the following sales results
were achieved1:
Period in which Shipment
Called for
1 (Single Period
Sales)
2
3
Amount of Orders Booked
32,000 units
40,000 units
28,000 units
As a result of these developments, total delivery requirements for
period #1 turned out to be 76,000 units: the 44,000 units of
advanced commitment sales booked prior to the start of period #1,
plus the 32,000 units of single period sales booked during period
#1. However, your company was able to ship 2 only 72,000 units of
this total: the 62,000 units that were produced by the factory during
period #1, plus the 10,000 units which were available in the form of
finished goods inventory at the start of the period.
Therefore, your company will enter period #2 with a shipping deficit
of 4,000 units in overdue orders which will have to be met at the
earliest possible date out of period #2 factory output.
1
The figures have already been adjusted for the additional sales expected due to
Type 1 advertising campaign launched at the beginning of the period.
2
In most instances, orders shipped from the factory during the last few days of a
period are not received by the customer until early in the following period. This
brief lag is not considered important within the industry, however, and all
shipments leaving the factory during a particular period are assumed to be
applicable to the shipment requirements of the period.
Master Operations Scheduling Game
Under your companys internal control system, period #1 operations
resulted in a net operating contribution of $154,000, computed as
shown in Exhibit 1.
Now, operating management must make various decisions
regarding operations during period #2. It knows positively that as
early as possible in period #2 your company must ship the 4,000
units of delayed deliveries, that is, the shipping deficit incurred in
period #1. It knows also that during period #2 the factory will have
to ship an additional 68,000 units to satisfy advanced sales
commitments booked for period #2: the 28,000 units booked during
period #4 of the previous year, plus the 40,000 units booked during
period #1 of the current year. Before deciding upon the rate at
which to operate the factory during period #2, your management
will also have to reach a conclusion regarding the additional
shipping requirements that are likely to arise from single period
sales that will be booked during period #2. Attention will have to be
given to the possibility that the factory should begin building up its
inventory position in anticipation of shipping requirements in period
#3. Decisions on these points will be based, of course, on a careful
analysis of the sales forecasts and the sales trends that seem to be
developing, as reflected in sales to date for the year.
An Unexpected Development
Several hours prior to the time they were to meet to reach final
decisions regarding period #2 operations, the entire operating
management of your company was pirated en masse by a
desperate competitor who tripled their salaries and offered them
lavish stock options.
In light of this crisis, you have accepted an assignment to join a
newly formed management group which will assume full
responsibility for the companys operating decisions. You and your
new associates have agreed to meet as soon as possible to decide
upon the organisational techniques and procedures you will employ
in meeting your new responsibilities. In recognition of the difficulty
of your situation the Directors have given you and your associates
complete latitude regarding who, among you, will assume what
executive positions.
While congratulating you on your new responsibilities, one of the
Directors offers you a few words of advice:
Look, the secret of success in our company like any other is
organising an effective management team. In a technical sense,
there are only three things that have to be done:
(1) before the start of each period you have to decide upon the rate
at which the factory is going to be run during the ensuing 13
weeks;
Master Operations Scheduling Game
(2) you have to decide whether or not to employ a supplemental
advertising and sales promotion campaign during the
forthcoming period and, if so, which one; and
(3) you have to compute the net operating contribution for the
period just ended, and submit this figure to the Directors.
Clearly its imperative that you assign specific responsibility for
each of these steps.
But these formal requirements represent only part of the story.
Sound decisions regarding the factory rate and the desirability of a
supplemental advertising campaign can only grow out of careful
analysis of various known facts, and a resourceful prediction
regarding certain unknowns. There are data, and trends, and other
evidence that helpfully can be brought to bear on both of these
matters. The trick is to organise for the analytical job that is
required. The task is too complex and the time pressure too great
for any one man to do alone. And the situation is undergoing too
rapid a rate of change to permit operating management to rely
merely on intuition, or on the hope that the disorganised efforts of
able men will somehow yield wise results. Instead, each manager
must assume some portion of the total job, and all of these
individual efforts must then be blended into an effective whole.
I urge you and your colleagues to start by making a careful analysis
of our company, the market it serves, the relationship between the
various costs it encounters, and so on. Then reach agreement
regarding the precise information and data that you need to
compile to sharpen your judgement regarding the various decisions
you know you will be having to make. For example, might there be
some way to highlight the constantly changing relationship
between sales forecasts and actual sales results? Might there be
some way to assure that before committing the factory to a given
output rate for the next period, you examine the costs under
several different output rates? Is there some device that will assure
that the plans of the factory, and of the Sales Department, are
carefully co-ordinated? And so on.
Once you decide the analytical approaches you want to employ, pin
down responsibility for executing them. And decide in advance just
how you plan to go about making final decisions. Is the President
alone going to have the final say, with all of the other managers
acting as staff advisors to him? Or are decisions to be divided up
functionally, with a Sales Manager deciding matters relating to
sales, a Production Manager deciding factory matters, and so on?
Or should the management group act as a committee, reaching
decisions via majority vote?
Or would some still different
organisational approach be better suited to managements needs?
Well, best of luck. Were up against some tough competitors. But
the other Directors and I expect you to run circles around them.
Master Operations Scheduling Game
10
Exhibit 1
NET OPERATING CONTRIBUTION CALCULATION SHEET
(to be turned in after each Period)
Management: Team A
Period: 1
Year: 1
I. Activities During this Period
(a) Factory Operations (circle one);
Single Shift without overtime
Single Shift with Overtime
Two Shifts
(b) Factory Rate
This period
:
Prior period :
Change in rate
62,000 units
71,000 units
:
9,000 units
(c) Supplementary Advertising & Sales Promotion Campaign (circle one):
II.
None
Type 1 ($ 10,000)
Type 2 ($ 20,000)
Type 3 ($ 50,000)
Shipping Requirements this Period (Units)
Delivery Deficits from prior Periods
Nil
Advance Commitment Sales Booked for delivery this period
: 44,000
Single Period Sales, this Period
:
32,000
Total shipping requirements
:
76,000
III.
Shipping Capabilities this Period (Units)
Starting Finished Good Inventory
10,000
Factory Output Rate this Period
62,000
Total Shipping capabilities
72,000
:
:
:
Master Operations Scheduling Game
IV.
11
Shipments made During this Period (Units)
Minimum of the total in item II or item III
72,000
V.
Delivery Deficit (Units)
If item II is greater than item III, the difference
4,000
VI.
Ending Finished Goods Inventory (Units)
If item II above is less than item III, the difference
: Nil
VII. Potential Operating Contribution for this Period
3
Shipments made this period (item IV above) 72,000 units x $
:$ 216,000
VIII. Extra Costs and Expenses incurred this Period
a) Supplementary Advertising (see item I-c above)
:$ 10,000
b) Change in Factory Rate (item 1-B above X $ 2)
: $ 18,000
c) Change in number of Factory Shifts
(changing from 1 to 2 costs $ 7,000;
from 2 to 1 costs $ 3,000)
d) Overtime or 2nd Shift Premiums
(Overtime costs $ 2.5 per unit for all units in
excess of 60,000; 2nd Shift costs $ 0.5 per
unit for all units in
excess of 60,000
5,000
Nil
:$
e) Inventory Carrying Costs
(Starting Inventory + Ending Inventory) x 0.50 x $ 1.00 :$
5,000
f) Missed Delivery Promises
(Item V above x $ 6.00)
24,000
:$
Master Operations Scheduling Game
12
Total extra costs & Expenses incurred
62,000
IX .
:$
Net Operating Contribution for Period
Item VII minus VIII
154,000
Cumulative Operating Contribution from prior Periods
New Cumulative Net Operating Contribution
(sum of the above two items)
*******
Your companys decisions regarding next operating period
Factory Operations
:
Factory Rate
:
Supplementary Advertising :
units
Data Sheet for Master Operations Scheduling Game
Write your Name, Roll Number and Section in this box
Section:
Sl. No.
1
2
3
4
5
6
Name
Roll No.
Enter your decisions in the box below
:$
:
:
Master Operations Scheduling Game
Period
1
Shift/OT
details*
1S - OT
13
Production Rate
62,000
Type of
Advt.#
Type 1
2
3
4
5
6
7
8
9
10
11
12
* Make use of the following notations for filling this column:
1S no OT for singe shift with no over time
1S OT for single shift with over time
2S for double shift
# Make use of the following notations for filling this column:
Type 0 for no Advt. Campaign
Type 1, 2, 3 for the respective type of Advt. Campaign
launched
