Download - Production Planning and Inventory Management
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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.
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Production Planning Activities
Capacity Planning1. Facility Size2. Equipment Procurement
Aggregate Planning1. Facility Utilization2. Personnel needs3. Subcontracting
Master Production Scheduling1. 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(hours – days)
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Master Production SchedulingMaster Production Scheduling
Production Planning and Control SystemsProduction Planning and Control Systems
Aggregate PlanningAggregate Planning
Long-Range Capacity PlanningLong-Range Capacity PlanningEntire Entire
Product LineProduct Line
ProductProductFamilyFamily
SpecificSpecificProduct ModelProduct Model
Labor, Materials,Labor, Materials,MachinesMachines
Production Planning: Units of Measurement
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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
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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
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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
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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
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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.
Executive Line
Durable Line
Compact Line
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Aggregate Demand for the Executive Line
0
2000
4000
6000
8000
10000
J a n Fe b Ma r Apr Ma y J un
45005500
7000
10000
8000
6000
Number of working days:Jan 22Feb 19Mar 21Apr 21May 22Jun 20
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Cost Information
Materials $5/unitHolding costs $1/unit per mo.Marginal cost of stockout $1.25/unit per mo.Hiring and training cost $200/workerLayoff costs $250/workerLabor hours required .15 hrs/unitStraight time labor cost $8/hourBeginning inventory 250 unitsProductive hours/worker/day 7.25Paid straight hrs/day 8
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Determining Straight Labor Costs and Output
Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1063.33 918.33 1015 1015 1063.33 966.67$/worker $1,408 1,216 1,344 1,344 1,408 1,280
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Chase Strategy(Hiring & Firing--meet demand)
Beginning workforce level: 7 employees
JanDays/mo 22Hrs/worker/mo 159.5Units/worker 1,063.33$/worker $1,408
JanDemand 4,500Beg. inv. 250Net req. 4,250Req. workers 3.997HiredFired 3Workforce 4Ending inventory 0
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Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1,063 918 1,015 1,015 1,063 967$/worker $1,408 1,216 1,344 1,344 1,408 1,280
Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0
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Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0
Jan Feb Mar Apr May Jun CostsMaterial $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62Hiring 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 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
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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
WholesalerInventory
Shipping Delay
Shipping Delay
DistributorInventory
RetailerInventory
Item Withdrawn
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Type of Inventory Type of Organization Supplies Raw In-Process Finished
Materials Goods 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.
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Inventory Positions in the Supply Chain
RawMaterials
WorksinProcess
FinishedGoods
Finished Goodsin Field
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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!
Inadequate control of inventories can result Inadequate control of inventories can result in both under- and overstocking of items.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, natural
disasters, 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, becomes
obsolete, 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 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.
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Independent vs. Dependent Demand
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 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.
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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)
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Balancing Carrying against Ordering Costs
AnnualAnnual Cost ($)Cost ($)
Order QuantityOrder Quantity
MinimumMinimumTotal AnnualTotal Annual
Stocking CostsStocking Costs
AnnualAnnualCarrying CostsCarrying Costs
AnnualAnnualOrdering CostsOrdering Costs
Total AnnualTotal AnnualStocking CostsStocking Costs
SmallerSmaller LargerLarger
Low
erL
ower
Hig
her
Hig
her
EOQEOQ
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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,
minimal records, large inventories, periodic review and reorder
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ABC Classification System
Classifying inventory according to some measure of importance and allocating control efforts accordingly.
AA - very important
BB - mod. important
CC - least important Annual $ value of items
AA
BB
CC
High
Low
Low HighPercentage of Items
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ABC Classification System