BA 411

1. BA 411 Introduction to the Production Planning And Inventory Control

2. 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

3. 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

4. Value added Inputs Outputs Transformation/ Land Goods Conversion Labor Services process Capital Feedback Control Feedback Feedback Value-Added-Process The difference between the cost of inputs and the value or price of outputs.

5. 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

7. 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-Added Processing Time Service Time Non-Value-Added Inspection Time Transfer Time Idle Time

9. 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

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. Production and Inventory Control- Introduction(10)

11. 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.

12. 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

13. High Profitability Low Costs High Sales Low Unit Costs Quality Product High Customer Service High Throughput High Utilization Low Inventory Fast Response Many products Less Variability Short Cycle Times Low Utilization High Inventory More Variability Production Objectives Production and Inventory Control- Introduction(13)

14. 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

15. System Components and Hierarchy Corporation Corporate level Parts Plant 1 Parts Plant 2 Parts Plant 2 Assembly Plant 1 Assembly Plant 1 Shop level Shaft Production Gear Production Gear Production Heat Treating Heat Treating Purchasing Purchasing Department level CNC Mill CNC Lathe CNC Lathe Gear Hobber Gear Hobber Automated Part Handling System Workstation level Robotic Load/ Unload Tool Exchanger Power Controller Force Sensor Equipment level

16. Production Activity and Information Flow • Production-planning decisions typically made in a hierarchical manner: • Physical material flow from raw material through delivered product • Support functions and design activities preceding production • Operational decisions for production planning, scheduling, and control

17. Production Activity and Information Flows Raw Material Forecasting Strategic Planning Aggregate Production Planning Disaggregation Production Scheduling Shop Floor Control Administrative Functions (Purchasing, Payroll, Finance, Accounting) Fabrication Plant Assembly Plant Marketing Product Design Process Planning Finished Products Distribution Center Manufacturing Support (Facilities Planning, Tool Management, Quality Control, Maintenance) Retailer Customer b) Decision Hierarchy a) Product Flow c)Support Functions

18. Production System Decision Hierarchy

19. Aggregate Production Planning • 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

20. Types of Production Systems • There are four basic types of production systems: • Process • Product • Cellular • Fixed positions

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

22. Products, Processes, and Layouts PRODUCTS PROCESSES LAYOUTS high volume, Product Layout Make-to-stock standardized commodities Continuous process industries repetitive mfg low variety Cellular Layout low volume, Assemble-to-order modular Hybrid, FMS, CAM, CIM medium variety Job-Shop(Intermittent) Process Layout low volume, Make-to-order custom high variety Fixed Position low volume, Special Project Engineer-to-order one-of-kind low variety

23. Fixed Position Layout • 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

24. Process Layout • 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

25. Milling Assembly& Test Grinding Plating Drilling Process Layout –products travel to dedicated process centers Process Layouts

26. Product Layout • 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

27. Product Layout Raw materials or customer Station 2 Station 3 Station 4 Finished item Station 1 Material and/or labor Material and/or labor Material and/or labor Material and/or labor Used for Repetitive or Continuous Processing

28. 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

29. Part families Part families with similarity in manufacturing process Part families with similarity in shape

30. Assembly 4 7 9 6 8 5 12 2 10 3 1 11 A B C Raw materials Original Process Layout

31. Assembly 8 10 9 12 11 4 6 Cell 1 Cell 3 Cell 2 7 2 1 3 5 A B C Raw materials Cellular Layout

32. Comparison of Productand Process Layouts • Workers • Inventory • Storage space • Material handling • Aisles • Scheduling • Layout decision • Goal • Advantage Product Process • 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 • High skills • High in-process, low finished goods • Large • Variable path (forklift) • Wide • Dynamic (More difficult) • Functional • Minimize material handling cost • Flexibility

33. Product Volume and Variety Cellular Product Layouts Quantity Fixed Position Layouts Mixed Layouts Process Layouts Number of Different Products

34. Product Flow Control • 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

35. 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.

36. Production Choices • 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

37. Time Horizon in Production PlanningStatic Vs. Dynamic Environments • Modelsused 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

38. 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 isInventory Turnover

39. 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

40. 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 Position Inventory 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

41. 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 customer

42. Types of Inventory

43. Justification of Inventory • 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

44. 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: • Ordering or set up of machines • Investing and storing the goods • Shortages (not having inventory available when needed)

45. Ordering Costs • 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

46. Setup Costs • 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

47. Inventory Carrying Costs • 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

48. 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

49. Material Flow Infinite Capacity Inventory Buffer Finite Capacity Inventory Buffer Processor I Information Flow Information Flow for Various Production Systems Order Entry Raw Material I I I a. Materials Requirements Planning (MRP) Raw Material b. Just-In-Time (KANBAN)

50. 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.