Production Planning and Control

Production Planning and Control Chapter 4 Production Planning Professor JIANG Zhibin Department of Industrial Engineering & Management Shanghai Jiao Tong University

Chapter 4 Production Planning Contents • Introduction • Aggregate Planning • Master Production Planning (MRP) • Material Requirement Planning (MPS) • Capacity Planning • Improvement in MRP

Overview of Production Planning Activities • Production Planning: Given specific process planning, process technologies, and production conditions, production planning predetermine varieties, quantities, quality, and schedules of products to be produced according to market demand of products; Figure 4.1 Framework of Production Planning Activities

Overview of Production Planning Activities • Time Dimensions: • Long-range planning is done annually and focus on a planning horizon greater than one year; • Medium-range planning usually covers a period from 6 months to 18 months, with monthly or sometimes quarterly time increments; • Short-range planning covers a period from one day or less to six months, with weekly time increment usually. Figure 4.1 Framework of Production Planning Activities

Overview of Production Planning Activities • Process Planning determines the specific technologies and procedures required to produce a product a service. • Strategic capacity planning determines long-term capabilities (e. g. size and scope) • Aggregate planning concerns with setting up production rate by product family or other categories for intermediate term (6-18 months). Figure 4.1 Framework of Production Planning Activities

Overview of Production Planning Activities • Master production scheduling generates the amounts and dates of specific items required by orders. • The inputs into MPS are arrived orders and AP results. • Rough-cut capacity planning is used to verify that the production and warehouse facilities, equipment, and labor are available , and the key suppliers have allocated sufficient capacity to provide materials when needed. Figure 4.1 Framework of Production Planning Activities

Overview of Production Planning Activities • Material requirement planning takes the end product requirements from MPS and breaks them down into their components and subassemblies to create a material plan (production orders and purchase order). • Capacity requirement planning (CAP) allocate production resources to each production order. • Operations scheduling allocates jobs to specific machines, production lines or work centers. Figure 4.1 Framework of Production Planning Activities

Overview of Production Planning Activities • Operation scheduling Figure 4.1 Framework of Production Planning Activities

Aggregate planning-Introduction • Aggregate planning (AP), also called macro planning, addresses problem of deciding how many employees the firm should retain and, for a manufacturing firm, the quantity and the mix of products to be produced. • The aggregate planning methodology here assume that demand is deterministic, or known in advance. • Aggregate planning methodology is designed to translate demand forecast into blueprint for planning staffing and production level for a firm over a predetermined planning horizon;

AP-Introduction (2) • Aggregate planning (AP) involves competing objectives. • Make frequent and large changes in size of labor force-a chase strategy to react quickly to anticipated changes in demand-cost effective, but a poor long-term strategy; • Retain a stable workforce-results in larger buildups of inventory during period of low demand ; • Develop a production plan for a firm to maximize profit over the planning horizon subject to constraints on capacity.

AP- Aggregate Units of Production (1) • AP describes aggregate units in the following situations: • In terms of “average’ item-when the items produced are similar; • In terms of weights (tons of steel), volume (gallons of gasoline), amount of work required (worker-years of programming time, and dollar value (value of inventory in dollars)-when many kinds of items are produced; • Appropriate aggregating schema are determined by context of the particular planning problem and the level of the aggregation require.

AP- Aggregate Units of Production (2) Example 3.1: Decide on aggregating schema for the manager of a plant that produces six models of washing machines to determine the workforce and production levels.

4.2/285=0.0147 WR/$ 5.4/525=0.008 WR/$ AP- Aggregate Units of Production (3) • One possibility is to define aggregate unit as one dollar of output-Unfortunately, it is impossible since the selling prices of the various models are not consistent with the number of worker-hours required to produce them. • Since the percentages of the total number of sales for these six models have been fairly constant (32% ,21%, 17%, 14%, 10% and 6% for six models respectively), he decide to define the aggregate unit of production as a fictitious washing machine requiring .324.2+.21 4.9+.17 5.1+.14 5.2+.10 5.4+.06 5.8=4.856 hrs of labor time.

AP- Aggregate Units of Production (4) • Defining an aggregate unit of production at higher level of the firm is more difficult; • In cases where the firm produces a large of products, a natural aggregate unit is sales dollars; • Aggregate planning is closely related to hierarchical production planning (HPP). HPP considers workforce sizes and production rates at variety of levels of the firm. The recommended hierarchy is as follows: • Items-correspond to individual models of washing machines; • Families-a group of items, e.g. all washing machines; • Types-groups of families, e.g. large house appliances;

Fig 3-2 Cost of Changing the Size of the Workforce AP-Costs in Aggregate Planning (1) • (1) Smoothing cost-Occurs as result of changing the production level from one period to the next. • Cost for changing size of workforce-advertise positions; interview prospective employees, and training new hires; • Assumed to be linear;

AP-Costs in Aggregate Planning (2) • (2) Holding costs-Occurs as a result of having capital tied up in inventory. • Always assumed to be linear in the number of units being held at a particular point in time; • For aggregate planning, it is expressed in terms of dollars per unit held per planning period; • It is charged against the inventory remaining on hand at the end of the planning period; • (3) Shortage costs- • Shortage occurs when demands are higher than anticipated; • For aggregate planning, it is assumed that excess demand is backlogged and filled in a future period; • In a highly competitive situation, the excess demand may be lost---lost sales; • It is generally considered to be linear.

Fig.3-3 Holding and Back-Order Costs $ Cost Slope = Ci Slope = CP Back-orders Positive inventory Inventory AP-Costs in Aggregate Planning (3)

AP-Costs in Aggregate Planning (6) • (4) Regular time costs-Involve the cost of producing one unit of output during regular working hours; • Actual payroll cost of regular employees working on regular time; • Direct and indirect costs of materials; • Other manufacturing expense; • (5) Overtime and subcontracting costs-costs of production units not produced on regular time; • Overtime-production by regular-time employees beyond work day; • Subtracting-the production of items by an outside supplier; • Assumed to be linear; • (6) Idle time costs-underutilization of workforce; • In most contexts, the idle time cost is zero; • Idle time may have other consequences for the firm, e.g. if the aggregate units are input to another process, idle time on the line could result in higher costs to subsequent processes.

AP-A Prototype Problem (1) • Example 3.2 • Densepack is to plan workforce and production level for six-month period Jan. to June. • The firm produces a line of disk drives for mainframe computers. • Forecast demand over the next six months for a particular line of drives in a plant are 1,280, 640, 900, 1,200, 2,000 and 1,400. • There are currently (end of Dec.) 300 workers employed in the plant. • Ending inventory in Dec. is expected to be 500 units, and the firm would like to have 600 units on hand at the end of June.

AP-A Prototype Problem (2) • How to incorporate the starting and ending inventory constraints into formulation?-the simplest way is to modify the values of the predicated demand; • Define : the net predicated demand in period 1 =the predicated demand-initial inventory; • If there is ending inventory constraint, this amount should be added to the demand in final period; 30-10=20 80+20=100

AP-A Prototype Problem (3) • How to handle minimum buffer inventories?-By modifying the predicted demand. • If there is a minimum buffer inventory in every period, this amount should be added to the first period’s demand; • If there is a minimum buffer inventory in only one period, this amount should be added to the that period’s demand, and subtracted from the next period’s demand; • However, actual ending inventories should be computed using the original demand pattern.

AP-A Prototype Problem (4)

Fig. 3-4 A Feasible Aggregate Plan for Densepack AP-A Prototype Problem (5) If the shortage is not permitted, the cumulative production must be at least as great as cumulative net demand each period.

AP-A Prototype Problem (6) • How to make cost trade-offs of various production plans? • Only consider three costs: • CH=Cost of hiring one worker=$500; • CF=Cost of firing one worker=$1,000; • CI=Cost of holding one unit of inventory for one month=$80 • Translate aggregate production in units to workforce levels: • Use a day as an indivisible unit of measure (since not all month have equal number of working days) and define: • K=Number of aggregate units produced by one worker in one day. • A known fact: over 22 working days, with the workforce constant at 76 workers, the firm produced 245 disk drives. • Average production rate=245/22=11.1364 disk drives per day; • One worker produces an average of 11.1364/76=0.14653 drive in one day. K=0.14653.

AP-A Prototype Problem (7) • Two alternative plans for managing workforce: • Plan 1 is to change workforce each month in order to produce enough units to most closely match the demand pattern-zero inventory plan; • Plan 2 is to maintain the minimum constant workforce necessary to satisfy the net demand-constant workforce plan; P1 Zero Inventory Plan (Chase Strategy)–minimize inv. level. Table 3-1 Initial Calculation for Zero Inv. Plan for Denspack

AP-A Prototype Problem (8) • The number of workers employed at the end of Dec. is 300; • Hiring and firing workers each month to match forecast demand. Table 3-2 Zero Inv. Aggregate Plan for Densepack

AP-A Prototype Problem (9) • The total cost of this production plan is obtained by multiplying the totals at the bottom of Table 3-2 by corresponding unit cost: • 755500+145 1000+30 80=$524,900; • In addition, the cost of holding for the ending inventory of 600 units, which was considered as the demand for June, should be included in holding cost: 600 80=$48,000 • The total cost= $524,900+$48,000=$572,900. • Note that the initial inventory of 500 units does not enter into the calculation because it will be netted out during the month January. • It is impossible to achieve zero inventory at the end of each planning period since it is impossible to have a fractional number of workers. • It is possible that ending inventory in one or more period could build up to a point where the size of the workforce may be reduced by one or more workers.

AP-A Prototype Problem (10) • P2 Evaluation of the Constant Workforce Plan-to eliminate completely the need for hiring and firing during the planning horizon. • In order not incur the shortage in any period, compute the minimum workforce required for every month in the planning horizon. • For January, the net cumulative demand is 780 and units produced per worker is 2.931, thus the minimum workforce is 267(780/2.931) in Jan; • Units produced per worker in Jan. and Feb. combined=2.931+3.517=6.448, and the cumulative demand is 1,420, then the minimum workforce is 221(1420/6.448) to cover both Jan. and Feb. • Go on computing in the same way

AP-A Prototype Problem (11) Table 3-3 Computation of the Minimum Workforce Required by Denspack The minimum number of workers required for entire six-month planning horizon is 411, requiring hiring 111 new workers at the beginning of Jan.

AP-A Prototype Problem (12) Table 3-4 Inventory Level for Constant Workforce Schedule • The total cost is (5,962+600)80+111 500=580,460>569,540 for P1; • P2 is preferred because it has no large difference from P1 in cost, but keeps workforce stable.

AP-A Prototype Problem (13) Mixed Strategy and Additional Constraints • The zero inventory plan and the constant workforce strategies are to target one objective; • Combining the two plans may results in dramatically lower costs; • Figure 3-4 shows the constant workforce strategy (a straight line-a fixed production rate). Suppose that we may use two production rates (2 straight lines): • Make net inventory at the end of April to be zero (P1) by producing enough in each of the four months Jan. through April to meet the cumulative net demand each month: produce 3,520/4=880 units in each of the first four months; • The May and June production is then set to 2,000, exactly matching the net demand in these months.

Fig. 3-4 A Feasible Aggregate Plan for Densepack AP-A Prototype Problem (14) The two lines are above the cumulative net demand, the plan is feasible

AP-A Prototype Problem (15) • The graphical solution method can cope with additional constraints. For example: • Suppose that the production capacity of the plan is only 1,800 units per month-a constraint on the slope of the straight line. • One feasible solution: produce 980 in each of the first four months and 1,800 in each of the last two months.

AP-Aggregate Planning by Linear Programming (1) Linear Programming (LP) is used to determine values of n nonnegative variables to maximize or minimize a linear function of these variables that is m linear constraints of these variables. Cost Parameters CH=Cost of hiring one worker; CF= Cost of firing one worker; CH= Cost of holding one unit of stock for one period; CR= Cost of producing one unit product on regular time; CO= Incremental cost of one unit on overtime; CU= Idle cost per unit of production; CS= Cost of subcontract one unit of production; nt=Number production days in period t; K=Number of aggregate units produced by one worker in one day; I0=Initial inventory on hand at the start of the planning horizon; W0=Initial workforce at the start of the planning horizon; Dt=Forecast of demand in period t;

AP-Aggregate Planning by Linear Programming (2) Problem Variables: Wt=Workforce level in period t; Pt=Production level in period t; It=Inventory level in period t; Ht=Number of workers hired in period t; Ft=Number of workers fired in period t; Ot=Overtime production in units; Ut=Worker idle time in units (undertime); St=Number of units subcontracted from outside; • If Pt> KntWt : the number of units produced on overtime : Ot=Pt-KntWt; • If Pt< KntWt : the idle time is measured in units of production rather than in time, Ut= KntWt - Pt;

AP-Aggregate Planning by Linear Programming (3) Constraints-Three sets of constraints to ensure conservation of labor and that of units • Conservation of workforce constraints Wt=Wt-1+Ht-Ft; for 1t T 2. Conservation of units constraints It=It-1+Pt+St-Dt; for 1t T 3T constraints 3. Conservation of relating production level to workforce levels Pt=Knt Wt+Ot-Ut; for 1t T 4. Others • Non negative constraints; • Given I 0, IT, and W0.

AP-Aggregate Planning by Linear Programming (5) Objective function-to choose valuables Wt, Pt, It, Ht, Ft，Ot, Ut and St (total 8T) to Subject to • the above 3T constraints, • nonnegative constraint: Wt, Pt, It, Ht, Ft，Ot, Ut and St0, and • I0, IT, and W0.

AP-Aggregate Planning by Linear Programming (6) • Rounding the Variables • Some variables such as It, W, Ft, Ht should be integers; • May calculate by integer linear programming, however, may be too complex; • Results of LP should be rounded up- by Conservative approach • Round Wt to the next larger integer, and then calculate Ht, Ft, and Pt; • Always feasible solution, but rarely optimized; • Additional constraints • OtUt=0-either one is zero in case that there are both overtime an idle production in the same period ; • HtFt=0- either in case of hiring and firing workers in the same period • Both the two constraints are linear;

AP-Aggregate Planning by Linear Programming (7) • Extensions • Account for uncertainty in demand by minimum buffer inventory Bt: ItBt, for 1tT, where Bt should be specified in advance; • Capacity constraints on amount of production: PtCt; • In some cases, it may be desirable to allow demand exceed the capacity. To treat the backlogging of excess demand, the inventory needs to be expressed in terms of two different non-negative variables It+ and It-, such that It= It+ - It-, and holding cost is charged against It+, while the penalty cost for back orders against It-. • Convex piece-linear functions-composed of straight-lines segments; Figure 3-5

Fig. 3-5 A Convex Piecewise-Linear Function AP-Aggregate Planning by Linear Programming (8) Cost of hiring workers, the marginal cost of hiring one additional worker increases with number of workers that have been already hired.

AP-Aggregate Planning by Linear Programming (9) Example 4.2: Since no subcontracting, overtime, or idle time allowed, and the cost coefficients are constant with respect to time, the objective function is simplified as W1-W0-H1+F1=0; W2-W1-H2+F2=0; W3-W2-H3+F3=0; W4-W3-H4+F4=0; W5-W4-H5+F5=0; W6-W5-H6+F6=0; P1-I1+I0=1,280; P2-I2+I1=640; P3-I3+I2=900; P4-I4+I3=1,200; P5-I5+I3=2,000; P6-I6+I5=1,400; P1-2.931W1=0; P2-3.517W2= 0; P3-2.638W3=0; P4-3.810W4=0; P5-3.224W5=0; P6-2.198W6=0; Wi, Pi, Ii, Fi, Hi (i=1-6) 0; W0=300, I0=500, I6=600

AP-Aggregate Planning by Linear Programming (10) • Solved by LNGO system; • The value of objective function is $379,320.90, considerably less than that obtained by either P1 and P2, since this value is obtained by fractional values of variables . • Rounded up result: the total cost=465  500+1,00027+900 80=$379,500

Mater Production Scheduling (1) Aggregate production plan for mattress MPS for mattress models • Aggregate production plan for mattress specifies the total number of mattress planned per month, without regard of mattress types; • MPS specifies the exact types of mattress and quantities planned for production by week

Aggregate planning specifies product groups, rather than exact items; As the next level down in the planning process, MPS is time phased plan that specifies how many and when a firm to build each end item. In the case of the furniture company Its AP may specify the total volume of mattress it plan to produce over next month, e. g. 900 for the next 1 month; Its MPS identifies period by period ( usually weekly) which mattress styles and how many of these mattress styles are needed, 200 Model 200 for Wk 1, 100 Model 538 for both Wks 2 and 3 respectively, and 100 Model 749 for Wk 3. Mater Production Scheduling (2)

Could a MPS be changed?-Flexibility of MPS Mater Production Scheduling (3) • The flexibility with a MPS depends on the following factors: • Production lead time; • Commitment of parts and components to a specified end items • Relationship between the customer and vender, • Amount of access capacity; and • Reluctance and willing of management to make changes • Time Fences are defined as periods of time having some specified level of opportunity for customer to make change • Time fences are introduced to maintain a reasonable controlled flow through the production system.

Mater Production Scheduling (4) • Each company may have its own time fences and operating rules • Frozen: absolutely no change could be made in a firm, or the most minor changes may be allowed in another. • Moderately firm: some changes to specific products within a products group so long as parts are available ; • Flexible: almost an variations in products are allowable, providing that capacity remains about the same and that there are no long lead time items involved. Figure 4.2 MPS Time Fences

MRP create schedules identifying the specific parts and materials required to produce end items planned by MPS; The exact numbers needed; and The date when orders for these materials should be released and be received or completed within the production cycle. MRP-Overview • The main purpose of MRP are to control inventory levels, assign operating priorities for items, and plan capacity to load the production system. • Inventory-Order the right part in right quantity at the right time; • Priorities-Order with right due date; keep the due date valid • Capacity-Plan for a complete load, an accurate load, or for an adequate time to view future load.

Production Planning and Control