Lecture Principle of inventory and material management - Lecture 7

Lecture 7 - Production Planning System (Revisited). The contents of this chapter include all of the following: Manufacturing planning and control system, sales and operations planning (SOP), making production plan, developing production plan, market to stock production plan, market to order production plan, production planning hierarchy, inventory cost, type of inventory, production settings.

Production Planning System (Revisited)

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) Input/Output Control Operation Sequencing

2 At each level in the MPCS, three

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

– Provides a means of updating the strategic business  plan

– Provides a means of managing change

– Permits better management of production, inventory  and backlog

APICS Dictionary, 8th edition, 1995 

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 

of minimum demand and meeting any additional demand through subcontracting

associated with changing production levels

marketing plans

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

Developing a Make­to­Stock Production Plan

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

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) = $200Opening 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 existing resources of the company. Two questions must be answered:

– Are the required resources available?

– If not, how will the differences be reconciled?

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

Bill of Resources

(board feet)

Labor (standard hours)

Short­Range (weeks) Very­Short­Range (hours ­ days)

Specific Product Model Labor, Materials, Machines

Aggregate Planning

available

level, inventory level and production rate 

exactly match the forecasted aggregate demand in that time period

frequent changes

Time Horizon in Production Planning Static Vs. Dynamic Environments

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more efficient use of resources.

manufacturing lead time, the lower the inventory turns

a fairly high turnover rate

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quicker than they can be produced imply finished

goods inventory must be kept near the customer

material and parts are purchased

consume them in periods of large demand to smooth production rate (seasonal demand)

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

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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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• 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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• 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

• May decide to wait for delivery - backorders

• May cancel the order – lost sales

• May look elsewhere next time – lost customer

• May pay expedite charges

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

• Once  the  consumer  removes  a  part  from  the  finished goods inventory, the first machine in the  chain is authorized to load another part.

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• Like  KANBAN, the CONWIP system only 

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

•  But unlike kanban, the buffers for all downstream  machines are empty, except finished goods, which 

is full. 

• This occurs because any part released to the 

system will move to finished goods. New parts 

will not be released if the finished goods buffer is  full. 

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each work center

be made per time period

the smallest capacity (bottleneck station)

   A management philosophy developed by Dr. Eliyahu Goldratt

   The goal of a firm is to make money

End of Lecture 7