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

Long-term
(years)

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

Intermediate-term
(6 to 18 months)

Short-term
(weeks)

Very Short-term
(hours days)

Production Planning: Units of Measurement

Long-Range Capacity Planning Aggregate Planning Entire Product Line Product Family Specific Product Model

Master Production Scheduling

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 Influencing demand backordering during high demand periods counterseasonal product mixing

Demand Options --change demand:

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.

Compact Line

Executive Line

Durable Line

Aggregate Demand for the Executive Line

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

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/wo rker/mo Units/wo rker $ /wo rker Jan 22 1 5 9 .5 1 0 6 3 .3 3 $ 1 ,4 0 8 Feb 19 1 3 7 .7 5 9 1 8 .3 3 1 ,2 1 6 M ar 21 1 5 2 .2 5 1015 1 ,3 4 4 Apr 21 1 5 2 .2 5 1015 1 ,3 4 4 M ay 22 1 5 9 .5 1 0 6 3 .3 3 1 ,4 0 8 Jun 20 145 9 6 6 .6 7 1 ,2 8 0

12

Chase Strategy (Hiring & Firing--meet demand)

Days/mo Hrs/wo rker/mo Units/wo rker $ /wo rker Jan 22 1 5 9 .5 1 ,0 6 3 .3 3 $ 1 ,4 0 8

Beginning workforce level: 7 employees

Demand Beg. inv. Net req. Req. wo rkers Hired Fired W o rkfo rce Ending invento ry

Jan 4 ,5 0 0 250 4 ,2 5 0 3 .9 9 7 3 4 0
13

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

Jan 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

Jun 20 145 967 1,280

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

Jan 4,500 250 4,250 3.997 3 4 0

Feb 5,500 5,500 5.989 2 6 0

Mar 7,000 7,000 6.897 1 7 0

Apr 10,000 10,000 9.852 3 10 0

May 8,000 8,000 7.524 2 8 0

Jun 6,000 6,000 6.207 1 7 0

14

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

Jan 4,500 250 4,250 3.997 3 4 0

Feb 5,500 5,500 5.989 2 6 0

M ar 7,000 7,000 6.897 1 7 0

Apr 10,000 10,000 9.852 3 10 0

M ay 8,000 8,000 7.524 2 8 0

Jun 6,000 6,000 6.207 1 7 0

M aterial Labor Hiring cost Firing cost

Jan Feb M ar Apr M ay Jun $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

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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 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 Replenishment Replenishment order order Customer order

Factory

Wholesaler

Distributor

Retailer

Customer

Production Delay

Shipping Delay

Shipping Delay

Item Withdrawn

Wholesaler Inventory

Distributor Inventory

Retailer Inventory

Type of Inventory
Type of Organization
Supplies Raw Materials In-Process Goods Finished Goods

A. Retail systems 1. Sale of goods 2. Sale of services B. Wholesale / Distribution systems C. Manufacturing systems 1. Special project 2. Intermittent process . 3. Continuous process a. Process industries b. Repetitive mfging.

* *

* * * *
* * * * * *

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:

Carrying (Holding) Costs

Order processing Shipping Handling

Out-of-Stock Costs

Capital (opportunity) costs Inventory risk costs Space costs Inventory service 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)

B(4)

C(2)

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

Total Annual Stocking Costs Annual Carrying Costs Annual Ordering Costs Smaller EOQ Larger

Lower

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.

A - very important B - mod. important C - least important

High Annual $ value of items Low

A B C
Low

High

Percentage of Items

ABC Classification System