Production Planning

All manufacturing and service operations require

planning and controlling, although the formality
and detail may vary. Some operations are more
difficult to plan than others. Those with high
unpredictability can be difficult to plan. Some
are more difficult to control than others. The day
to day running of manufacturing and service
system rests with Production Planning.
The purpose of the production planning is to
ensure that manufacturing run effectively and
efficiently and produces products as required by
customers.

Production Planning Activities

Capacity Planning
1. Facility Size
2. Equipment Procurement
Aggregate Planning
1. Facility Utilization
2. Personnel needs
3. Subcontracting
Master Production Scheduling
1. MRP
2. Disaggregation of master plan
Short-term Scheduling
1. Work center loading
2. Job sequencing

Long-term
(years)

Intermediate-term
(6 to 18 months)

Short-term
(weeks)

Very Short-term
(hours days)

Production Planning: Units of

Measurement
Long-Range Capacity Planning

Entire
Product Line

Aggregate Planning

Product
Family

Master Production Scheduling

Specific
Product Model

Production Planning and Control Systems

Labor, Materials,
Machines

Aggregate Planning Strategies

Pure Strategies

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

Why Aggregate Planning Is

Necessary

Fully load facilities and minimize

overloading and underloading
Make sure enough capacity available to
satisfy expected demand
Plan for the orderly and systematic change
of production capacity to meet the peaks
and valleys of expected customer demand
Get the most output for the amount of
resources available

Inputs

A forecast of aggregate demand covering the

selected planning horizon (6-18 months)
The alternative means available to adjust
short- to medium-term capacity, to what
extent 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

Outputs

A production plan: aggregate

decisions for each period in the
planning horizon about

workforce level
inventory level
production rate

Projected costs if the production

plan was implemented

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.

Executive
Line

Compact
Line
Durable
Line

Aggregate Demand for the

Executive Line
10000

10000

8000

8000
6000

7000
6000

5500
4500

4000
2000

Number of working days:

Jan 22
Feb 19
Mar 21
Apr 21
May 22
Jun 20

0
Jan

Fe b

Ma r

Apr

Ma y

J un

Cost Information
Materials
Holding costs
Marginal cost of stockout
Hiring and training cost
Layoff costs
Labor hours required
Straight time labor cost
Beginning inventory
Productive hours/worker/day
Paid straight hrs/day

$5/unit
$1/unit per mo.
$1.25/unit per mo.
$200/worker
$250/worker
.15 hrs/unit
$8/hour
250 units
7.25
8
11

Determining Straight
Labor Costs and Output
Days/mo
Hrs/worker/mo
Units/worker
$/worker

J an
22
159.5
1063.33
$1,408

Feb
19
137.75
918.33
1,216

Mar
21
152.25
1015
1,344

Apr
21
152.25
1015
1,344

May
22
159.5
1063.33
1,408

J un
20
145
966.67
1,280

12

Chase Strategy
(Hiring & Firing--meet
J an
Days/modemand)
22
Hrs/worker/mo
Units/worker
$/worker

Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory

159.5
1,063.33
$1,408

Beginning workforce level: 7 employees

J an
4,500
250
4,250
3.997
3
4
0
13

Days/mo
Hrs/worker/mo
Units/worker
$/worker

Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory

J an
22
159.5
1,063
$1,408

Feb
19
137.75
918
1,216

Mar
21
152.25
1,015
1,344

Apr
21
152.25
1,015
1,344

May
22
159.5
1,063
1,408

J un
20
145
967
1,280

J an
4,500
250
4,250
3.997

Feb
5,500

Mar
7,000

Apr
10,000

May
8,000

J un
6,000

5,500
5.989
2

7,000
6.897
1

10,000
9.852
3

8,000
7.524

6,000
6.207

2
8
0

1
7
0

3
4
0

6
0

7
0

10
0

14

Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory

Material
Labor
Hiring cost
Firing cost

J an
4,500
250
4,250
3.997
3
4
0

Feb
5,500

Mar
7,000

Apr
10,000

May
8,000

J un
6,000

5,500
5.989
2

7,000
6.897
1

10,000
9.852
3

8,000
7.524

6,000
6.207

2
8
0

1
7
0

6
0

7
0

10
0

J an
Feb
Mar
Apr
May
J un
$21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00
5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83
400.00
200.00
600.00
750.00
500.00
250.00

Costs
203,750.00
53,958.62
1,200.00
1,500.00
$260,408.62

15

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 and

controls that monitors levels of inventory
and determines what levels should be
maintained, when stock should be
replenished, and how large orders should be

Types of Inventories

Raw Materials
Works-in-Process
Finished Goods
Distribution Inventory
Supplies: Maintenance, Repair and Operating
(MRO)

Managing Facilitating
Goods
Replenishment
order

Factory
Production
Delay

Replenishment Replenishment
order
order

Wholesaler

Distributor

Shipping
Delay
Wholesaler
Inventory

Retailer

Shipping
Delay
Distributor
Inventory

Customer
order

Customer

Item Withdrawn

Retailer
Inventory

Type of Inventory
Type of Organization

A. Retail systems
1. Sale of goods
2. Sale of services
B. Wholesale / Distribution
systems

Supplies

In-Process
Goods

Finished
Goods

*
*

C. Manufacturing systems
1. Special project
*
2. Intermittent process
*
.
3. Continuous process

a. Process industries
b. Repetitive mfging.

Raw
Materials

*
*
*

*
*
*

Inventory Positions in the

Supply Chain

Raw
Materials

Works
in
Process

Finished
Goods

Finished
Goods
in Field

Inadequate control of inventories can result

in both under- and overstocking of items.

Understocking (too few) results in missed

deliveries, lost sales, dissatisfied customers, and
production bottlenecks (idle workers or machines).
Resulting underage cost.

Overstocking (too many) ties up funds that might

be more productive elsewhere.
Resulting overage cost.
Goal: matching supply with demand!

Reasons for Inventories

Improve customer service

Economies of purchasing
Economies of production
Transportation savings
Hedge against future
Unplanned shocks (labor strikes, natural
disasters, surges in demand, etc.)
To maintain independence of supply chain

Reasons Against Inventory

Non-value added costs

Opportunity cost
Complacency
Inventory deteriorates, becomes
obsolete, lost, stolen, etc.

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

Independent and
Depenedent Demand

Independent demand items are

finished 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
produce a finished product.

Independent vs.
Dependent Demand
Independent Demand
(finished goods and spare parts)

Dependent Demand

(components)

C(2)

B(4)

D(2)

E(1)

D(3)

F(2)

Objectives of Inventory
Control

1) Maximize the level of customer

service by avoiding understocking.
2) Promote efficiency in production
and purchasing by minimizing the
cost of providing an adequate level
of customer service.

Balance in Inventory
Levels

When should the company replenish

its inventory, or when should the
company place an order or
manufacture a new lot?
How much should the company
order or produce?
Next: Economic Order Quantity
(EOQ)

Balancing Carrying against

Ordering Costs
Annual Cost ($)
Higher

Minimum
Total Annual
Stocking Costs

Lower

Total Annual
Stocking Costs
Annual
Carrying Costs
Annual
Ordering Costs
Smaller

EOQ

Larger

Order Quantity

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,
minimal records, large inventories,
periodic review and reorder

ABC Classification System

Classifying inventory according to
some measure of importance and
allocating control efforts accordingly.

ABC-

very important
mod. important
least important

High
Annual
$ value
of items

A
B
C

Low
Low

High

Percentage of Items

ABC Classification System