ba 411 introduction to the production planning and inventory control

BA 411

Introduction to the Production PlanningAnd Inventory Control

Learning Objectives• Provide basic description of production

systems– What they are– How they operate

• Because inventory plays a central role in the operation of a production system– Overview of inventory basics – How they relate to the production system

2

The Production System

• Definition:– The set of resources and procedures involved in

converting raw material into products and delivering them to customers

• Production and delivery of products are central to the firm– Functions have value only if they enhance the ability

to do this profitably

3

Value-Added-Process

The difference between the cost of inputs and the value or price of outputs.

Inputs Land Labor Capital

Transformation/Conversion

process

Outputs Goods Services

Control

Feedback

FeedbackFeedback

Value added

Activity Analysis

Value-added activity• Increases worth of

product or service to a customer

• Customer is willing to pay for it

Non-value-added activity• Increases time spent on

product or service but does not increase worth

• Unnecessary from customer perspective

• Can be reduced, redesigned or eliminated without affecting market value or quality

ABM

Activity Analysis• Create a Process Map (detailed flowchart)

for each process– Identify each step

• Create Value Chart– Identify stages and time spent in stages from

beginning to end of process

Value-AddedProcessing Time

Service Time

Non-Value-AddedInspection TimeTransfer Time

Idle Time

ABM

Cycle Time

Cycle Value- Non-Time = Added + Value-Added Activities Activities

Eliminate or minimize activities that add the most time and cost and the least value

Production and Inventory Control- Introduction (10)

Production Planning and Control

Purpose

Minimize non-value added activities and effectively utilize limited resources in the production of goods so as to satisfy customer demands and create a profit for investors.

Resources include the production facilities, labor and materials.

Constraints include the availability of resources, delivery times for the products, and management policies.

Efficiency Versus Effectiveness

• The difference between efficient and effective is that efficiency refers to how well you do something, whereas effectiveness refers to how useful it is.

• For example, if a company is not doing well and they decide to train their workforce on a new technology. The training goes really well - they train all their employees in avery short time and tests show they have absorbed the training well. But overall productivity doesn't improve. In this case the

company's strategy was efficient but not effective.

Operation of Production Systems and Production Planning Involve

• Planning and execution of the activities that use workers, energy, information, and equipment to convert raw materials into finished products

• Delivering products with the desired functions, aesthetics, and quality to the customers at right time and with minimum cost

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High Profitability

LowCosts

Low UnitCosts

High Throughput

Less Variability

High Utilization

LowInventory

QualityProduct

HighSales

Many products

Fast Response

MoreVariability

High Inventory

LowUtilization

ShortCycle Times

High CustomerService

Production Objectives

Hierarchical Structure of Production Planning Activities

Production Planning and control functions of industrial firms often follow a hierarchical structure

Time frame and dollar value of decisions decrease as we move down the hierarchy

In general, decisions made at each level are passed down one level◦Constraints and instructions

Current status and performance data are passed upward to facilitate decision making and guidance

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System Components and Hierarchy

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Corporation

Parts Plant 2

Shaft Production

Gear Hobber

PowerController

Parts Plant 1 Assembly Plant 1

Robotic Load/Unload

ToolExchanger

ForceSensor

Equipmentlevel

Automated PartHandling System

CNC LatheCNC Mill

Gear ProductionHeat

TreatingPurchasing

Workstationlevel

Departmentlevel

Shoplevel

Corporatelevel

Parts Plant 2

Gear Hobber

Assembly Plant 1

CNC Lathe

Gear ProductionHeat

TreatingPurchasing

Production Activity and Information Flow

• Production-planning decisions typically made in a hierarchical manner:1. Physical material flow from raw material

through delivered product2. Support functions and design activities

preceding production3. Operational decisions for production planning,

scheduling, and control

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Production Activity and Information Flows

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FabricationPlant

AssemblyPlant

DistributionCenter

Retailer

Forecasting

Strategic Planning

Aggregate ProductionPlanning

Disaggregation

Production Scheduling

Shop Floor Control

Administrative Functions(Purchasing, Payroll,Finance, Accounting)

Marketing

Product Design

Process Planning

Manufacturing Support(Facilities Planning,Tool Management,

Quality Control,Maintenance)

a) Product Flow b) Decision Hierarchy c) Support Functions

Raw Material

Customer

FinishedProducts

Production System Decision Hierarchy

Inputs Process Outputs Length of Planning Horizon

Long Range Economic Forecasts Financial Choices

StrategicPlanning

Operating Facilities Product Line (Families) Technologies

Years

Processing Technologies/Efficiency Medium Range Product Family Forecasts Machine Schedules

Aggregate Production

Planning

Production Level Workforce Level Family Inventories

Months

Production Levels Workforce Levels Current Inventory Status Changeover Times and Costs Item Forecasts

Disaggregation Master Production Schedule (MPS) - Final Assembly by item

Item Inventories

Weeks

MPS Bill of Materials Process Plans

Production Scheduling

Job Priorities Order Releases Machine Schedules

Days-Shift

Labor Status Machine Status Job Priorities Order Releases Machine Schedules

Shop Floor Control

Machine Priorities Job Status Labor Reporting Material Handling Tasks Load/Prices/Unload Authorization

Real Time – Minutes

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Aggregate Production Planning

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• A typical aggregated plan states the level of major product families to be produced monthly over the next year Workforce levels,

overtime levels,

inventory levels

Types of Production Systems

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There are four basic types of production systems:

1. Process2. Product3. Cellular4. Fixed positions

Layout Goals• Use space efficiently• Efficient personnel movement• Maximum equipment utilization• Convenient / safe work environment• Simplify repair / maintenance• Smooth flow of work

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Products, Processes, and Layouts

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Make-to-stock standardized commodities

Continuous process industries

repetitive mfgProduct Layout

Assemble-to-order modular

Hybrid, FMS, CAM, CIM

Cellular Layout

Job-Shop(Intermittent) Process Layout

Engineer-to-order one-of-kind

Special Project Fixed Position

PRODUCTS PROCESSES LAYOUTS

Make-to-order custom

low volume,

low variety

low volume,

high variety

low volume,

medium variety

high volume,

low variety

Fixed Position Layout

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•The product or project remains stationary, and workers, materials, and equipment are moved as needed.

Examples: Home building, ship and aircraft buiding, drilling for oil

Process Layout

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Similar processes (or processes with similar needs) are located together

By grouping similar processes utilization of resources is improved

Customers, products, patients move through the processes according to their needs

Different products = different needs = different routes Complex flow pattern in the operation Examples:

• Supermarkets, job-shops, hospitals

Process Layouts

Process Layout –products travel to dedicated process centers

Milling

Assembly& Test Grinding

Drilling Plating

6-25

Product Layout

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Sometimes called line layout, flow line or assembly line

Parts follow a specified route – the sequence of workstations matches with the sequence of required operations

Work Flow is clear, predictable, easy to control Examples:

• Car assembly, paper manufacture, self-service canteen

Product Layout

6-27

Raw materialsor customer

Finished item

Station 2

Station 2

Station 3

Station 3

Station 4

Station 4

Material and/or labor

Station 1




Used for Repetitive or Continuous Processing

Cellular Layouts

– machines are grouped into a cell that can process items that have similar processing requirements

– Based on Group technology which involves grouping items with similar design or manufacturing characteristics into part families

Could be considered as mini product layouts Can improve and simplify a functional/process

layout Flexible Duplicates some resources

6-28

Part families

Part families with similarity in shape

Part families with similarity in manufacturing process

Original Process Layout

CA B Raw materials

Assembly

1

2

3

4

5

6 7

8

9

10

11

12

Cellular Layout

3

6

9

Assembly

12

4

8 10

5

7

11

12

A B CRaw materials

Cell 1 Cell 2 Cell 3

• Workers• Inventory

• Storage space• Material handling• Aisles• Scheduling• Layout decision• Goal

• Advantage

• Workers• Inventory

• Storage space• Material handling• Aisles• Scheduling• Layout decision• Goal

• Advantage

Limited skills Low in-process, high

finished goods Small Fixed path (conveyor) Narrow Line balancing (Easier) In-line, U-type Equalize work at each

station Efficiency

Process

Comparison of Productand Process Layouts

High skills High in-process, low

finished goods Large Variable path (forklift) Wide Dynamic (More difficult) Functional Minimize material

handling cost Flexibility

Product

Product Volume and Variety

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ProductLayouts

FixedPositionLayouts Mixed Layouts Process Layouts

Quantity

Number of Different Products

Cellular

Product Flow Control

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Batch Processing (Process Layout)• From a couple to several thousands identical parts• A batch for each different part type• Move together through the production system• May split for material handling or to reduce processing

time

Examples are clothing, furniture production Repetitive or Flow processing (Product Layout)

• Continuous– chemicals, foods, pharmaceuticals• Discrete – car, refrigerator production

Setup Costs Affect The Batch Size

• Cost and time to set up production facilities to manufacture a specific product affect the batch size.

• When changeover time (setup time) and cost are large, the size of batch is kept large.

• Large batch sizes result in high inventory cost.

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Production Choices

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Make-to-stock• Number of units of each product are kept on hand at all times• Quick delivery to customers upon receipt of an order• When delivery response time is a key competitive factor• Limited number of products manufactured repeatedly• An idea what customers will want• Allows to schedule production in advance

Make-to-order• Only produce items after they have been ordered• Production system must respond quickly• Products have high degree of customization• Shelf life of products is short

Assemble-to-order• Customers have influence on the design• They can select various options from predesigned subassemblies

Time Horizon in Production PlanningStatic Vs. Dynamic Environments

• Models used for production planning are either static or dynamic

• Static– Constant through time– Assume same plan acceptable in each period for the

foreseeable future• Dynamic

– Explicitly consider changes in demand and resource availability to determine what should be done through time over a planning horizon

– Require stochastic data – Require great effort to build and solve

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The Role of Inventory• Inventory consists of physical items moving through

the production system• Originates with shipment of raw material and parts

from the supplier• Ends with delivery of the finished products to the

customer• Costs of storing inventory accounts for a substantial

proportion of manufacturing cost– Often 20% or more

• Optimal level of inventory– Allows production operations to continue smoothly

• A common control measure is Inventory Turnover38

Inventory Turnover

• The ratio of annual cost of goods sold to average inventory investment.

• It indicates how many times a year the inventory is sold.

• Higher the ratio, the better, because it implies more efficient use of resources.

• Higher the profit margin and longer the manufacturing lead time, the lower the inventory turns.

• Example: Supermarkets (low profit margins) have a fairly high turnover rate

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Inventory Definitions and Decisions• Batch or order size, Q

– Batch size is the number of units released to the shop floor to be produced

• Reorder point, r– Specifies the timing for placing a new order

• Inventory PositionInventory Position = Inventory On Hand + On Order – Backorders

• Units on order – Have been ordered but not yet arrived

• Backorders – Items promised to customers but not yet shipped – New units are shipped out to cancel backorders

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Types of Inventory• Raw Materials

– Essential to the production process– Often kept in large quantities on site

• Finished Goods– Completed products awaiting shipment to customers

• Work-in-Process (WIP)– Batches of semi finished products currently in production– Batches of parts from time of release until finished goods

status• Pipeline

– Goods in transit between facilities– Raw materials being delivered to the plant– Finished goods being shipped to warehouse or customer41

Types of Inventory

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Justification of Inventory

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Inventory will always exist Competitive pressure to supply common products

quicker than they can be produced imply finished goods inventory must be kept near the customer

Price breaks are common when large quantities of material and parts are purchased

We may store inventory in periods of low demand and consume them in periods of large demand to smooth production rate (seasonal demand)

Speculation

Inventory Costs and Tradeoffs

• Holding inventory is costly• In constructing economic models for

choosing the optimal levels of inventory, trade of the costs caused by:

1. Ordering or set up of machines2. Investing and storing the goods3. Shortages (not having inventory available when

needed)

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Ordering Costs

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A fixed ordering cost can be associated with each replenishment when parts are ordered from suppliers• Identifying the need to order• Execute the order• Prepare the paperwork• Place the order• Delivery cost fixed component• Receiving inspection• Transportation to place of use• Storage

Setup Costs

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For parts produced in-house, we must:• Check status of raw material• Possibly place an order• Create route sheets with instructions for each stage of

the production process• Store routing data in a database• Check routing data for compatibility with shop status

and engineering changes• Make routing instructions with raw material• Deliver to production workers• Machine set up

Inventory Carrying Costs

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Carrying inventory incurs a variety of costs• Space heated and cooled• Move inventory occasionally because it blocks access

to other goods• Construct and maintain information system to track

location• Pay taxes based on value• Insurance costs• Some will be lost, damaged, or perished• Cost of capital invested in inventory

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Shortage Costs

When customer demands an out of stock item• May decide to wait for delivery - backorders• May cancel the order – lost sales• May look elsewhere next time – lost customer• May pay expedite charges

Within the plant, if material is unavailable to start production• Work center may lack work• Schedule may have to be modified• Completion of products may be delayed• Result in late deliveries or lost sales

Information Flow for Various Production Systems

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I I

Order Entry

RawMaterial

I

a. Materials Requirements Planning (MRP)

RawMaterial

b. Just-In-Time (KANBAN)

IProcessorInformation Flow

Material FlowFinite Capacity Inventory Buffer

Infinite Capacity Inventory Buffer

KANBAN control

• Kanban control uses the levels of buffer inventories in the system to regulate production. When a buffer reaches its preset maximum level, the upstream machine is told to stop producing that part type. This is often implemented by circulating cards, the kanbans, between a machine and the downstream buffer.

• The machine must have a card before it can start an operation. It can then pick raw materials out of its upstream (or input) buffer, perform the operation, attach the card to the finished part, and put it in the downstream (or output) buffer.

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KANBAN control

• Kanban control ensures that parts are not made except in response to a demand.

• The analogy is to a supermarket: Only the goods that have been sold are restocked on the shelves.

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Information Flow for Various Production Systems

52

I

Limit onTotal

Inventory

RawMaterial

I

c. Constant Work-In-Process (CONWIP)

RawMaterial

d. Hybrid CONWIP-KANBAN

IProcessorInformation Flow

Material FlowFinite Capacity Inventory Buffer

Infinite Capacity Inventory Buffer

CONWIP Control

• CONWIP stands for Constant Work-In-Process.• a control strategy that limits the total number of

parts allowed into the system at the same time. • Once the parts are released, they are processed as

quickly as possible until they fill up the last buffer as finished goods.

• Once the consumer removes a part from the finished goods inventory, the first machine in the chain is authorized to load another part.

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CONWIP Control

• Like KANBAN, the CONWIP system only responds to actual demands, so it is still a ``pull'' type system.

• But unlike kanban, the buffers for all downstream machines are empty, except finished goods, which is full.

• This occurs because any part released to the system will move to finished goods. New parts will not be released if the finished goods buffer is full.

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Inventory is Needed to Support Production

• Recent years claim a goal of zero inventory– But some is necessary to meet needs – Economically practical to maintain some WIP to facilitate

production scheduling– Variability in processing time and job arrival rates

• Inventory should not be used to cover problems– Wasteful practice all too common– Prevents the system from improving– Defects not detected until later

• Lean companies– Operate with reliable processes, quick changeovers, low

inventories, small space, low scrap and rework, closer communication

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Large Inventories Imply Long Throughput Times

• Throughout time (manufacturing Lead Time)– The span of time from when the part enters a system

until it leaves• Little’s Law I = X · T

– Relates average throughput time (T) to the level of average inventory (I) and the production rate (X) for any stationary process

• Stationary process– Probability of being in a particular state is

independent of time56

To reduce throughput time

Eliminate unnecessary, non-value added operations:– Reduce waiting time– Reduce transfer time– Reduce quality inspection time– Increase process rates– Reduce batch size

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Capacity Balancing

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1 2 3 4 5Flow In Flow Out

Desire to have same number of units produced in each work center

Capacity is measured by number of units that can be made per time period

Total production is limited by the workstation with the smallest capacity (bottleneck station)

Excess capacity reduces cycle time

Theory of Constraints (TOC)

A management philosophy developed by Dr. Eliyahu Goldratt.

The goal of a firm is to make money.

Dr. Eliyahu Goldratt wrote many books including:

• The Goal: A Process of Ongoing Improvement (sold more than 3 million copies)

• It's Not Luck (how to apply TOC in conflict resolution and marketing)

• Critical Chain (how to apply TOC in project management)

Goldratt’s Rules of Production Scheduling

• Do not balance capacity balance the flow• The level utilization of a nonbottleneck resource is

not determined by its own potential but by some other constraint in the system

• An hour lost at a bottleneck is an hour lost for the entire system

• An hour saved at a nonbottleneck is a mirage

20-62

Customer-Defined Value• The technical performance or quality of a product is

no longer the primary determinant of customer value• Customers evaluate other "value factors“ such as:

– On-time Delivery– After Sale Service– Business expertise– Low price for high quality

• Value is what the customer wants and how much would be paid for it

• Eliminate non-value-added operations– the customer will not pay for non-value-added operations

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Models to Study Production Systems

• Testing new ideas on full-scale systems is expensive, time consuming, complex, and unnecessary

• Instead, we build models to visualize and examine aspects of a system

• Models allow us to learn about the system and test various system designs

• For instance, Production System Models allow us to test the impact of production planning and inventory control decisions so that– Wrong decisions can be avoided– Distruptions of the real process can be avoided

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Definition of a Model

• A model is a simplified, artificial representation of reality

• Constructed to facilitate off-line study of real object or system– Flow diagrams– Philosophical (conceptual)– Small-scale prototype– Mathematical

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• Ways to study a systemSystems and Models

A Systems Perspective

• Production system represents a key aspect of the firm• Must maintain global view of the entire supply chain from

materials through product delivery• Must integrate and cooperate with marketing,

purchasing, quality assurance, accounting, design engineering, and manufacturing

• Instability of the production system may occur:– Misuse of marketing (demand) information – Misunderstanding of the relationship among safety stock,

inventory, and production– Bad production decisions

67

BA 411 Course Topics

• Demand Forecasting• Long-Range Capacity Planning• Aggregate Production Planning• Inventory Management• Material Requirements Planning• Scheduling and Sequencing

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Forecasting

• Objective: predict demand for production planning purposes.

• Laws of Forecasting:

1. Forecasts are always wrong!

2. Forecasts always change!

3. The further into the future, the less reliable the forecast will be!

• Forecasting Tools:– Qualitative: Delphi, Analogies– Quantitative: Causal and time series models


Aggregate Planning

• Objective: generate a long-term production plan that establishes a rough product mix, anticipates bottlenecks, and is consistent with capacity and workforce plans.

• Issues:– Aggregation: product families and time periods

must be set appropriately for the environment.– Coordination: AP is the link between the high

level functions of forecasting/capacity planning and intermediate level functions of MRP, inventory control, and scheduling.

– Anticipating Execution: AP is virtually always done deterministically, while production is carried out in a stochastic environment.


Capacity/Facility Planning

• How much and what kind of physical equipment is needed to support production goals?

• Issues:

– Basic Capacity Calculations: stand-alone capacities and congestion effects (e.g., blocking)

– Capacity Strategy: lead or follow demand

– Make-or-Buy: vendoring, long-term identity

– Flexibility: with regard to product, volume, mix

– Speed: scalability, learning curves

Inventory Management

• How much to order of each material when orders are placed with either outside suppliers or production departments within organizations

• When to place the orders The overall objective of inventory

management is to achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds by answering these two questions .


Material Requirement Planning

• Objective: Determine all purchase and production components needed to satisfy the aggregate/disaggregate plan.

• Issues:

– Bill of Materials: Determines components, quantities and lead times.

– Inventory Management: Must be coordinated with inventory.


Sequencing and Scheduling

• Objective: develop a plan to guide the release of work into the system and coordination with needed resources (e.g., machines, staffing, materials).

• Methods:– Sequencing:

• Gives order of releases but not times.– Scheduling:

• Gives detailed release times.

Review Questions

• A “Production System” is:

a) The set of resources and procedures involved in converting raw materials into products and delivering them to customers

b) The set of resources and procedures involved in converting products into raw materials and delivering them to customers

c) The set of resources and procedures involved in producing a system

d) None of the above75

Review Questions

• Efficient production layout will result in:

a) Efficient use of space b) Efficient personnel movementc) Maximum equipment utilizationd) Smooth flow of worke) All of the above

76

Review Questions

• As order quantity increase:

a) Ordering cost increase and holding cost decrease

b) Ordering cost decrease and holding cost increase

c) Ordering and holding cost increase d) Ordering and holding cost decrease

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Review Questions

• Total production is limited by:

a) The workstation with the largest capacityb) The workstation with the smallest capacityc) The amount of WIP inventoryd) The number of workstations available

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Review Questions

• Production system models allow us to:

a) Learn about the system and test various system designs

b) Test impact of production planning and control decisions

c) Visualize and examine aspects of a systemd) All of the above

79

Questions? Comments?

80

ba 411 introduction to the production planning and inventory control

Documents

value slide

production planning

inventory control slide

production of goods

customers production

production facilities

right time

activity increases time