Lecture Principle of inventory and material management - Lecture 3: Production Planning System

Lecture 3 - Production Planning System. Manufacturing is complex. Some firms make a few different products, whereas others make many products. However, each uses a variety of processes, machinery, equipment, labor skills, and material. To be profitable, a firm must organize all these factors to make the right goods at the right time at top quality and do so as economically as possible. It is a complex problem, and it is essential to have a good planning and control system.

Production Planning System

Books

• Introduction to Materials Management, Sixth Edition, J. R. Tony Arnold, P.E., CFPIM, CIRM, Fleming  College, Emeritus, Stephen N. Chapman, Ph.D., CFPIM, North Carolina State University, Lloyd M.  Clive, P.E., CFPIM, Fleming College

• Operations Management for Competitive Advantage, 11th Edition, by Chase, Jacobs, and Aquilano, 2005,  N.Y.: McGraw­Hill/Irwin.

What does

it take to make it?

What are

we going

to make?

The APICS Dictionary defines priority as “the relative 

importance of jobs, i.e., the sequence in which jobs  should be worked on.” Priority refers to what is 

needed, how much is needed, and when it is 

needed.

The APICS Dictionary defines capacity as  “the 

capability of a worker, machine, work center, plant 

or organization to produce output per time period.”

Production Plan

Master Production

Schedule (MPS)

Material Requirements Plan (MRP)

Production Activity

Control (PAC)

Resource Requirements Plan (RRP)

Rough-Cut Capacity Plan (RCCP)

Capacity Requirements Plan (CRP)

questions must be answered:

• Manufacturing resource planning (MRP II) is a method for the 

effective planning of all resources of a manufacturing company.  Ideally, it addresses operational planning in units, financial 

planning in dollars, and has a simulation capability to answer 

“what if” questions. It is made up of a variety of functions, each  linked together: business planning, sales and operations planning,  production planning, master production scheduling, material 

requirements planning, capacity requirements planning, and the  execution support systems for capacity and material. Output from  these systems is integrated with financial reports such as the 

business plan, purchase commitment report, shipping budget, and  inventory projections in dollars.

APICS Dictionary, 8th edition, 1995

• Three Basic Strategies  

– Chase (Demand Matching) Strategy: Produce the 

amounts that are demanded at any one time– Production Leveling Strategy: Continuously 

produce an amount equal to the average demand– Subcontracting: Meeting additional demand 

through subcontracting.

above strategies

Chase (demand matching) Strategy

The goal is to produce the amounts demanded at any 

given time. Inventory levels remain stable while  production varies to meet demand 

• Subcontracting Strategy

– Subcontracting means always producing at the level 

of minimum demand and meeting any additional  demand through subcontracting

• Major Advantage

– Costs associated with excess capacity are avoided– Since production is leveled, there are no costs 

associated with changing production levels

• Subcontracting Strategy ­ Disadvantage

– The cost of purchasing may be greater than if the 

item were made in the plant– Certain core skills or technologies may be lost

marketing plans

• Under a make­to­stock production plan, goods are 

put into inventory and sold from inventory. It is  used when

Developing a Make­to­Stock Production Plan

• Procedure for Level Production

– Total the forecast demand for the planning horizon– Determine the opening inventory and the desired 

ending inventory– Calculate the total production

– Calculate the production required each period by 

dividing the total production by the number of  periods

– Calculate the ending inventory for each period

Example Problem: (Pg 29/33)

Opening inventory (OI) = 100 units

Desired ending inventory (EI) = 80 units

Total production needed = total forecast demand + EI - OI

= _ + _ - _ = _ units

Period 1 2 3 4 5 Total Forecast Demand 110 120 130 120 120

Production Ending Inventory

Production each period =

5 units

Ending Inventory for Period 1 = OI + production - forecast demand

= + -

= units

Production each period = 580

5 = 116 cases

Developing a Make­to­Order  (Chase Strategy) Production Plan

Using preceding example, suppose that changing the 

production level by one case costs $20.

A change from 50 to 60 would cost

(60 ­ 50)($20) = $200 Opening inventory is 100 cases, and the company wishes 

to bring this down to 80 cases in the first period

110 ­ (100 ­ 80) = 90 cases

Developing a Make­to­Order  (Chase Strategy) Production Plan

• The preliminary production plan must be compared with 

the existing resources of the company. Two questions  must be answered:

• Helpful tool is the resource bill or bill of resources

• Resource bill or Bill of Resources

– shows the quantity of critical resources (materials, 

labor, and “bottleneck” operations) needed to make one  average unit of the product group 

Bill of Resources

(board feet)

Labor(standard hours)

End of Lecture 3