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Efficient Production Planning Strategies and Cost Optimization in Supply Chain Management

Learn about production planning horizons, matching demand strategy, aggregate planning, and linear programming methods to minimize costs and optimize production capacities. Understand how to calculate inventory holding costs and make effective decisions based on demand forecasts.

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Efficient Production Planning Strategies and Cost Optimization in Supply Chain Management

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  1. Chapter 13 Production Planning Supplemental Slides

  2. Overview • Production-Planning Hierarchy • Aggregate Planning • Master Production Scheduling • Types of Production-Planning and Control Systems • Wrap-Up: What World-Class Companies Do

  3. Chapter 13 Homework – Not for Submission • Problem 13.7 • Use average inventory to calculate inventory holding cost.

  4. Production Planning Horizons • Long-range planning • Greater than one year • Usually with yearly increments • Intermediate-range planning • Six to eighteen months • Usually with monthly or quarterly increments • Short-range planning • Less than six months • Usually with weekly increments

  5. Matching Demand Strategy Demand Units Production Time

  6. Level Capacity Strategy Demand Production Units Time

  7. Aggregate Planning Using “Pure” Strategies—An Example Hiring cost = $100 per worker Firing cost = $500 per worker Inventory carrying cost = $0.50 per pound per quarter Production per employee = 1,000 pounds per quarter Beginning work force = 100 workers Quarter Sales Forecast (lb) Spring 80,000 Summer 50,000 Fall 120,000 Winter 150,000

  8. Inventory Carrying Cost • Inventory carrying cost: $0.50/unit/period $1.00 $0.50 $0 t t+1 t+2 Time

  9. Level Capacity Strategy Sales Production Inventory Quarter Forecast Plan On-Hand, Ending Spring 80,000 100,000 20,000 Summer 50,000 100,000 70,000 Fall 120,000 100,000 50,000 Winter 150,000 100,000 0 400,000 140,000 Relevant Cost = 140,000 pounds x $0.50 per pound = $70,000

  10. Matching Demand Strategy Sales Production # Workers # Workers # Workers Quarter Forecast Plan Needed Hired Fired Spring 80,000 80,000 80 - 20 Summer 50,000 50,000 50 - 30 Fall 120,000 120,000 120 70 - Winter 150,000 150,000 150 30 - 100 50 Relevant Cost = (100 workers hired x $100) + (50 workers fired x $500) = $10,000 + $25,000 = $35,000

  11. Aggregate Planning Using the Transportation Method of Linear Programming

  12. Aggregate Planning by the Transportation Method of Linear Programming: Example Expected Regular Overtime Subcontract Quarter Demand Capacity Capacity Capacity 1 900 1000 100 500 2 1500 1200 150 500 3 1600 1300 200 500 4 3000 1300 200 500 Regular production cost per unit = $20 Overtime production cost per unit = $25 Subcontracting cost per unit = $28 Inventory carrying cost per unit per period = $3 Beginning inventory = 300 units Desired ending inventory = 100 units

  13. Aggregate Planning Using the Transportation Method of Linear Programming • Sources (‘supply points’): Beginning inventory & production periods. • Destinations (‘demand points’): Sales periods & ending inventory. • Objective: To determine production rates (on regular time and overtime, and by subcontract) that would minimize relevant production and inventory carrying costs, subject to capacity and demand constraints.

  14. Inventory Balance Equations Ending Inventory = Beginning Inventory + Production Level - Deliveries EIt = EIt-1 + (Rt + Ot+St) - Dt EIt = Ending Inventory for Period t Rt = Regular Time Production in Period t Ot = Overtime Production in Period t St = Subcontracted Production in Period t Dt = Deliveries/Sales in Period t

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