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 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)

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

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

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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

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

Factory Wholesaler Distributor Retailer Customer

Replenishment order

Replenishment order

Replenishment order

Customer order

Production Delay

WholesalerInventory

Shipping Delay

Shipping Delay

DistributorInventory

RetailerInventory

Item Withdrawn

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

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.

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

A

Independent Demand(finished goods and spare parts)

B(4) C(2)

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

Dependent Demand(components)

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

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

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.

AA - very important

BB - mod. important

CC - least important Annual $ value of items

AA

BB

CC

High

Low

Low HighPercentage of Items

ABC Classification System