Production Planning and Inventory Management (1)

8/12/2019 Production Planning and Inventory Management (1)

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Production PlanningAll manufacturing and service operations requireplanning and controlling, although the formality

and detail may vary. Some operations are moredifficult to plan than others. Those with highunpredictability can be difficult to plan. Some aremore difficult to control than others. The day today running of manufacturing and service systemrests with Production Planning.

The purpose of the production planning is toensure that manufacturing run effectively andefficiently and produces products as required bycustomers.


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Production Planning Activities

Capacity Planning1. Facility Size2. Equipment Procurement

Aggregate Planning

1. Facility Utilization2. Personnel needs3. Subcontracting

Master Production Scheduling

1. MRP2. Disaggregation of master plan

Short-term Scheduling1. Work center loading2. Job sequencing

Long-term(years)

Intermediate-term(6 to 18 months)

Short-term(weeks)

Very Short-term(hoursdays)


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Master Production Scheduling

Production Planning and Control Systems

Aggregate Planning

Long-Range Capacity Planning EntireProduct Line

Product

FamilySpecific

Product ModelLabor, Materials,

Machines

Production Planning: Units ofMeasurement


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Aggregate Planning Strategies PureStrategies

Capacity Options --change capacity: changing inventory levels

varying work force size by hiring or layoffs varying production capacity through overtime or

idle time

subcontracting

using part-time workers Demand Options --change demand:

Influencing demand

backordering during high demand periods

counterseasonal product mixing


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Why Aggregate Planning Is

Necessary Fully load facilities and minimize

overloading and underloading

Make sure enough capacity available tosatisfy expected demand

Plan for the orderly and systematic change

of production capacity to meet the peaksand valleys of expected customer demand

Get the most output for the amount of

resources available


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InputsA forecast of aggregate demand covering

the selected planning horizon (6-18 months)

The alternative means available to adjustshort- to medium-term capacity, to whatextent each alternative could impact

capacity and the related costs The current status of the system in terms of

workforce level, inventory level and

production rate


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OutputsA production plan: aggregate decisions

for each period in the planning horizon

about workforce level

inventory level

production rate

Projected costs if the production planwas implemented


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Aggregate Planning Example

Keepdry, a small manufacturing company (200 employees),produces umbrellas. The company, founded in 1991 produces the

following three product lines: 1) the Executive Line, 2) the Durable

Line and 3) the Compact line shown in the following figure.

ExecutiveLine DurableLine

Compact

Line


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Aggregate Demand for the

Executive Line

Number of working days:Jan 22Feb 19Mar 21Apr 21May 22Jun 20


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Cost InformationMaterials $5/unit

Holding costs $1/unit per mo.

Marginal cost of stockout $1.25/unit per mo.Hiring and training cost $200/worker

Layoff costs $250/worker

Labor hours required .15 hrs/unit

Straight time labor cost $8/hour

Beginning inventory 250 units

Productive hours/worker/day 7.25

Paid straight hrs/day 8


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Determining Straight Labor

Costs and OutputJan Feb Mar Apr May Jun

Days/mo 22 19 21 21 22 20

Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1063.33 918.33 1015 1015 1 063.33 966.67

$/worker $1,408 1,216 1,344 1,344 1,408 1,280


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Chase Strategy

(Hiring & Firing--meet demand)

Beginning workforce level: 7 employees

Jan

Days/mo 22

Hrs/worker/mo 159.5

Units/wo rke r 1 ,0 63 .3 3

$/worker $1,408

Jan

Demand 4,500

Beg. inv. 250

Net req. 4,250Req. workers 3.997

Hired

Fired 3

W orkforce 4

Ending inventory 0


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Jan Feb Mar Apr May Jun

Days/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145

Units/worker 1,063 918 1,015 1,015 1,063 967

$/worker $1,408 1,216 1,344 1,344 1,408 1,280


Demand 4,500 5,500 7,000 10,000 8,000 6,000

Beg. inv. 250

Net req. 4,250 5,500 7,000 10,000 8,000 6,000

Req. workers 3.997 5.989 6.897 9.852 7.524 6.207

Hired 2 1 3

Fired 3 2 1

Workforce 4 6 7 10 8 7

Ending inventory 0 0 0 0 0 0


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Demand 4,500 5,500 7,000 10,000 8,000 6,000

Beg. inv. 250

Net r eq. 4,250 5,500 7,000 10,000 8,000 6,000

Req. workers 3.997 5.989 6.897 9.852 7.524 6.207

Hired 2 1 3

Fired 3 2 1

Workforce 4 6 7 10 8 7

Ending inventory 0 0 0 0 0 0

Jan Feb Mar Apr May Jun Costs

Mate rial $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00

Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62

Hiring cost 400.00 200.00 600.00 1,200.00Firing cost 750.00 500.00 250.00 1,500.00

$260,408.62


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Inventory Management Inventory-A physical resource that a firm

holds in stock with the intent of selling it or

transforming it into a more valuable state.

Inventory System- A set of policies andcontrols that monitors levels of inventory anddetermines what levels should be maintained,when stock should be replenished, and howlarge orders should be


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Types of Inventories Raw Materials

Works-in-Process

Finished Goods

Distribution Inventory

Supplies: Maintenance, Repair and Operating (MRO)


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Managing Facilitating Goods

Factory Wholesaler Distributor Retailer Customer

Replenishment

order

Replenishment

order

Replenishment

order

Customer

order

Production

Delay

Wholesaler

Inventory

Shipping

DelayShipping

Delay

Distributor

InventoryRetailer

Inventory

Item Withdrawn


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Type of InventoryTypeofOrganization Supplies Raw In-Process Finished

Materials Goods Goods

A. Retail systems1. Sale of goods

2. Sale of services

B. Wholesale / Distribution

systems

C. Manufacturing systems1. Special project

2. Intermittent process

. 3. Continuous process

a. Process industriesb. Repetitive mfging.

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Inventory Positions in theSupply Chain

Raw

MaterialsWorks

in

Process

Finished

Goods

Finished

Goods

in Field


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Understocking(too few) results in missed deliveries, lostsales, dissatisfied customers, and production bottlenecks(idle workers or machines).

Resulting underage cost.

Overstocking (too many) ties up funds that might bemore productive elsewhere.

Resulting overage cost.

Goal: matching supply with demand!

Inadequate control of inventories can result

in both under- and overstocking of items.


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Reasons for Inventories

Improve customer service

Economies of purchasing

Economies of production Transportation savings

Hedge against future

Unplanned shocks (labor strikes, naturaldisasters, surges in demand, etc.)

To maintain independence of supply chain


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Reasons Against Inventory

Non-value added costs

Opportunity cost

Complacency

Inventory deteriorates, becomesobsolete, lost, stolen, etc.


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Inventory Related Costs

Procurement Costs: Order processing Shipping Handling

Carrying (Holding) Costs Capital (opportunity) costs Inventory risk costs Space costs Inventory service costs

Out-of-Stock Costs Lost sales cost Back-order cost


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Independent and DepenedentDemand

Independent demanditems arefinished products or parts that are

shipped as end items to customers. Dependent demand items are raw

materials, component parts, or

subassemblies that are used to producea finished product.


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Independent vs. DependentDemand

A

Independent Demand(finished goods and spare parts)

B(4) C(2)

D(2) E(1) D(3) F(2)

Dependent Demand(components)


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Objectives of InventoryControl

1) Maximize the level of customerservice by avoiding understocking.

2) Promote efficiency in production andpurchasing by minimizing the cost ofproviding an adequate level of customer

service.


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Balance in Inventory Levels

When should the company replenish itsinventory, or when should the company

place an order or manufacture a newlot?

How much should the company order or

produce? Next:Economic Order Quantity (EOQ)


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Balancing Carrying againstOrdering Costs

AnnualCost ($)

Order Quantity

Minimum

Total Annual

Stocking Costs

AnnualCarrying Costs

AnnualOrdering Costs

Total AnnualStocking Costs

Smaller Larger

Lower

H

igher

EOQ


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Classifying Inventory Items

ABC Classification (Pareto Principle)

A Items:very tight control, complete and

accurate records, frequent review B Items:less tightly controlled, good

records, regular review

C Items:simplest controls possible, minimalrecords, large inventories, periodic reviewand reorder


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ABC Classification System

Classifying inventory according tosome measure of importance and

allocating control efforts accordingly.

A -very important

B- mod. importantC- least important

Annual

$ valueof items

A

B

C

High

Low

Low High

Percentage of Items


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ABC Classification System

Documents

Production Planning and Inventory Management (1)