Production Planning

1. 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.

2. Production Planning Activities Long-term (years) Capacity Planning 1. Facility Size 2. Equipment Procurement Intermediate-term (6 to 18 months) Aggregate Planning 1. Facility Utilization 2. Personnel needs 3. Subcontracting Short-term (weeks) Master Production Scheduling 1. MRP 2. Disaggregation of master plan Very Short-term (hours – days) Short-term Scheduling 1. Work center loading 2. Job sequencing

3. Production Planning: Units of Measurement Entire Product Line Long-Range Capacity Planning Product Family Aggregate Planning Specific Product Model Master Production Scheduling Labor, Materials, Machines Production Planning and Control Systems

4. 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

5. 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

6. 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

7. 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

8. Compact Line 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 8

9. Aggregate Demand for the Executive Line Number of working days: Jan 22 Feb 19 Mar 21 Apr 21 May 22 Jun 20 9

10. Cost Information Materials $5/unit Holding costs $1/unit per mo. Marginal cost of stockout $1.25/unit per mo. Hiring and training cost $200/worker Layoff costs $250/worker Labor hours required .15 hrs/unit Straight time labor cost $8/hour Beginning inventory 250 units Productive hours/worker/day 7.25 Paid straight hrs/day 8 11

11. Determining Straight Labor Costs and Output 12

12. Chase Strategy(Hiring & Firing--meet demand) Beginning workforce level: 7 employees 13

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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

16. Types of Inventories • Raw Materials • Works-in-Process • Finished Goods • Distribution Inventory • Supplies: Maintenance,Repair and Operating (MRO)

17. Managing Facilitating Goods Replenishment order Replenishment order Customer order Replenishment order Factory Wholesaler Distributor Retailer Customer Production Delay Shipping Delay Shipping Delay Item Withdrawn Wholesaler Inventory Distributor Inventory Retailer Inventory

18. Type of Inventory TypeofOrganizationSuppliesRawIn-ProcessFinished MaterialsGoodsGoods 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. * * * * * * * * * * * * * * *

19. Inventory Positions in the Supply Chain Raw Materials Works in Process Finished Goods Finished Goods in Field

20. Goal: matching supply with demand! 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.

21. 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

22. Reasons Against Inventory • Non-value added costs • Opportunity cost • Complacency • Inventory deteriorates, becomes obsolete, lost, stolen, etc.

23. 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

24. 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.

25. Independent Demand(finished goods and spare parts) Dependent Demand(components) A C(2) B(4) D(2) E(1) D(3) F(2) Independent vs. Dependent Demand

26. 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.

27. 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)

28. Balancing Carrying against Ordering Costs AnnualCost ($) Minimum Total Annual Stocking Costs Higher Total Annual Stocking Costs Annual Carrying Costs Annual Ordering Costs Lower Order Quantity Smaller Larger EOQ

29. 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

30. High A Annual $ value of items B C Low Low High Percentage of Items 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

31. ABC Classification System