Lecture Principle of inventory and material management - Lecture 4: Production Planning System (Continued)

Lecture 4 - Production Planning System (Continued). After studying this chapter you will be able to understand: Production planning hierarchy, aggregate planning, why aggregate planning is necessary, inputs, outputs, medium-term capacity adjustments, approaches, pure strategies for the informal approach,...

Production Planning System (Continued)

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.

Long­Range Capacity Planning

Long­Range Capacity Planning Long­Range

(years)

Medium­Range (6­18 months)

Short­Range (weeks) Very­Short­Range (hours ­ days)

Long­Range Capacity Planning Entire 

Product Line

Product Family

Specific Product Model Labor, Materials, Machines

Aggregate Planning

• 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

• A forecast of aggregate demand covering the selected planning horizon (6­18 months)

• The alternative means available to adjust short­ to 

medium­term 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 

• A production plan: aggregate decisions for each period in the planning horizon about

• Capacity (Production) in each time period is varied to exactly match the forecasted aggregate demand in that time period

• Capacity is varied by changing the workforce level

• Finished­goods inventories are minimal

• Labor and materials costs tend to be high due to the frequent changes

• Production rate is dictated by the forecasted aggregate demand

• Capacity (production rate) is held level (constant) over the planning horizon

• The difference between the constant production rate and the demand rate is made up (buffered) by 

inventory, backlog, overtime, part­time labor and/or subcontracting

• Assume that the amount produced each period is 

constant, no hirings or layoffs

• The gap between the amount planned to be produced and the forecasted demand is filled with either 

inventory or backorders, i.e., no overtime, no idle 

time, no subcontracting

• For standardized services, aggregate planning may be simpler than in systems that produce products

• For customized services,

– there may be difficulty in specifying the nature and extent of services to be performed for each 

customer

– customer may be an integral part of the production system

• Absence of finished­goods inventories as a buffer 

between system capacity and customer demand

Time Horizon in Production Planning Static Vs. Dynamic Environments

– Require stochastic data 

– Require great effort to build and solve

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• Inventory consists of physical items moving through the 

production system

• Originates with shipment of raw material and parts from the supplier

• 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

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• Pipeline

– Goods in transit between facilities

– Raw materials being delivered to the plant

– Finished goods being shipped to warehouse or customer25

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l Inventory will always exist

l Competitive pressure to supply common products

quicker than they can be produced imply finished

goods inventory must be kept near the customer

l Price breaks are common when large quantities of

material and parts are purchased

l We may store inventory in periods of low demand and consume them in periods of large demand to smooth production rate (seasonal demand)

l Speculation

• Holding inventory is costly

• In constructing economic models for choosing the 

optimal levels of inventory, trade of the costs caused by:

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l 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

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l 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

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l Carrying inventory incurs a variety of costs

• Space heated and cooled

• Move inventory occasionally because it blocks access

• Some will be lost, damaged, or perished

• Cost of capital invested in inventory

Shortage Costs

l 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

l 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

Inventory Buffer Infinite Capacity

Inventory Buffer

• 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 

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I

Limit on Total Inventory Raw

Inventory Buffer Infinite Capacity

Inventory Buffer

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responds to actual demands, so it is still a ``pull''  type system.

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• Stationary process

– Probability of being in a particular state is 

independent of time

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l Desire to have same number of units produced in

each work center

l Capacity is measured by number of units that can

be made per time period

l Total production is limited by the workstation with

the smallest capacity (bottleneck station)

l Excess capacity reduces cycle time

   A management philosophy developed by Dr. Eliyahu Goldratt

   The goal of a firm is to make money

End of Lecture 4