Lecture 7 Production Planning System Revisited Books Introduction

Lecture 7 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, 11 th Edition, by Chase, Jacobs, and Aquilano, 2005, N. Y. : Mc. Graw-Hill/Irwin.

Objectives • • • 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

Manufacturing’s Objectives • The goal of manufacturing is to produce – The right goods – Of the right quality – In the right quantities – At the right time – At minimum cost

Four Basic Questions What are we going to make? What does it take to make it? What do we already have? What must we get?

Priority 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.

Capacity The APICS Dictionary defines capacity as “the capability of a worker, machine, work center, plant or organization to produce output per time period. ”

Priority Management Techniques Production Plan Resource Requirements Plan (RRP) Master Production Schedule (MPS) Rough-Cut Capacity Plan (RCCP) Material Requirements Plan (MRP) Capacity Requirements Plan (CRP) Production Activity Control (PAC) Input/Output Control Operation Sequencing Capacity Management Techniques Strategic Business Plan

Manufacturing Planning and Control System • Strategic Business Plan A statement of the major goals and objectives the company expects to achieve over the next 2 -10 years or more. – broad/general direction – low level of detail – long-range forecasts – responsibility of senior management – includes participation from Marketing, Finance, and Production – usually reviewed every six months to a year

Manufacturing Planning and Control System • Production Plan Concerns – – Quantities of each product group required to be produced The desired inventory levels The resources of equipment, labor, and material needed in each period The availability of resources needed

Manufacturing Planning and Control System • Production Plan must – – – Satisfy market demand within resources available Assist the implementation of the strategic business plan Be based upon families of products Be fairly low level of detail Address a planning horizon of six to 18 months Be reviewed each month or quarter

Manufacturing Planning and Control System • Master Production Schedule A plan for the production of individual end items (finished goods). – breaks down production plan – list the quantity of each end item to be made – level of detail is higher than the production plan developed for individual end items – planning horizon extends three to 18 months – reviewed and changed weekly or monthly

Manufacturing Planning and Control System • Material Requirements Plan A plan for the production and purchase of the components used in making the items in the MPS – Production control and purchasing use MRP to decide the purchase or manufacture of specific items – Level of detail is high – Determines when the components and parts are needed – Planning horizon is at least as long as the combined purchase and manufacture lead times (3 to 18 months) – Usually reviewed daily or weekly

Manufacturing Planning and Control System • Production Activity Control and Purchasing – Represents the implementation and control phase of the production planning and control system – Purchasing is responsible for establishing and controlling the flow of raw materials into the factory – PAC is responsible for planning and controlling the flow of work through the factory – Planning horizon is very short, a day to a month – Level of detail is high – Reviewed and revised daily

Manufacturing Planning and Control System 2 At each level in the MPCS, three questions must be answered: – – What are the priorities - how much of what is to be produced and when? What is the available capacity - what resources do we have? • Can we outsource? – How can differences between priorities and capacity be resolved?

Manufacturing Resource Planning (MRP II) • 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, 8 th edition, 1995

Sales and operations planning (SOP) • Medium time range • Benefits: – Provides a means of updating the strategic business plan – Provides a means of managing change – Permits better management of production, inventory and backlog

Making the Production Plan • Purpose Production planning is. . . setting the overall level of manufacturing output. . . and other activities to best satisfy the current planned levels of sales. . . while meeting general business objectives of profitability, productivity. . . etc. , as expressed in the overall business plan. APICS Dictionary, 8 th edition, 1995

Making the Production Plan • Production planning is concerned with – – The quantities of each product group in each period. The desired inventory levels. The resources of equipment, labor, and material needed in each period. The availability of needed resources. • Why are plans made for product groups? • What should the product groups be based on?

Making the Production Plan • Production planning characteristics – The time horizon may be more or less than 12 months, depending on the manufacturing cycle. – Demand is seasonal for many products, but not for all. Seasonal demand is the worst-case scenario. – A plan is made for families or groups. – Management will have a variety of objectives. • What might be some management objectives?

Developing the Production Plan • 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. Hybrid Strategy: Combination of any of the above strategies

Units Developing the Production Plan 1 2 3 4 5 6 7 Periods 8 9 10 11 12 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

Developing the Production Plan • Chase Strategy Disadvantages – – – As production increases, workers must be hired and trained. Extra shifts may be needed, and overtime may be necessary. These requirements all increase cost. As production decreases, people are laid off and morale suffers, When production starts to increase again, the best workers may have other jobs and their skills will not be available.

Developing the Production Plan • Chase Strategy Disadvantages (continued) – Manufacturing must have enough plant capacity to produce at the highest capacity needed. • What industries use a chase strategy?

Developing the Production Plan Production Leveling Strategy The goal of this strategy is to continuously produce an amount equal to the average demand. Units • 1 2 3 4 5 6 7 8 Periods 9 10 11 12

Developing the Production Plan • Production Leveling Strategy – This strategy avoids the disadvantages of demand matching. However, inventory builds up. • What are some examples of industries that could use this strategy?

Developing the Production Plan • Subcontracting Strategy – • Subcontracting means always producing at the level of minimum demand 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

Developing the Production Plan • 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

Developing the Production Plan • Hybrid Strategy – – Combination of any of the three previous strategies Production management is responsible for finding the combination of strategies that minimizes the sum of all costs involved, providing the level of service required, and meeting the objectives of the financial and marketing plans

Developing a Make-to-Stock Production Plan • Under a make-to-stock production plan, goods are put into inventory and sold from inventory. It is used when – – Demand is fairly constant and predictable Only a few product options exists Required delivery times are shorter than the time needed to make the product Product has a long shelf life

Developing a Make-to-Stock Production Plan • Information needed for a make-to-stock production plan includes – – – • A forecast by time period for the planning horizon Opening inventory Desired ending inventory The objective in developing a production plan is to minimize the costs of carrying inventory, changing production levels, and stocking out (not supplying the customer what is wanted when it is wanted).

Making a Level 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

Making a Level 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

Making a Level Production Plan Ending Inventory for Period 1 = OI + production - forecast demand = ______ + ______ - ______ = ______ units

Making a Level Production Plan • • • How much should be produced each period? What is the ending inventory for each period? If the cost of carrying inventory is $5 per case period based on ending inventory, what is the total cost of carrying inventory? • What will be the total cost of the plan?

Making a Level Production Plan Answer: a. Total production required = 600 + 80 - 100 = 580 cases b. Ending inventory = OI + production - demand Ending inventory after the first period = 100 + 116 - 110 = 106 cases Ending inv. for period 1 becomes the opening inv. for period 2 Ending inventory (period 2) = 106 + 116 - 120 = 102 cases

Making a Level Production Plan Answer: (continued) c. The total cost of carrying inventory would be: (106 + 102 + 88 + 84 + 80)($5) = $2300 d. There were no stockouts and no changes in the level of production, $2300 is the total cost of the plan:

Developing a Make-to-Order (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 Make-to-Order (Chase Strategy) Production Plan Cost of changing production level = (60)($20) = $1200 Cost of carrying inventory = (80 cases)(5 periods)($5) = $2000 Total cost of the plan = $1200 + $2000 = $3200

Assemble to Order • Assemble-to-order is a subset of make-to-order – – several product options exists customer is not willing to wait until the product is made manufacturers assemble the component parts from inventory according to the order Examples: automobiles and computers

Developing a Make-to-Order Production Plan • Information needed for make-to-order products – – – • Forecast by period for the planning horizon Opening backlog of customer orders Desired ending backlog Backlog Unfilled customer orders that will be delivered in the future.

Resource Requirements Planning • The preliminary production plan must be compared with the existing resources of the company. Two questions must be answered: – – • Are the required resources available? If not, how will the differences be reconciled? Helpful tool is the resource bill or bill of resources

Resource Requirements Planning • 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

Production Planning Hierarchy Long-Range Capacity Planning Aggregate Planning Master Production Scheduling Production Planning and Control Systems Pond Draining Systems Push Systems Pull Systems Focusing on Bottlenecks

Production Planning Horizons Long-Range Capacity Planning Long-Range (years) Aggregate Planning Medium-Range (6 -18 months) Master Production Scheduling Short-Range (weeks) Production Planning and Control Systems Very-Short-Range (hours - days) Pond Draining Systems Push Systems Pull Systems Focusing on Bottlenecks

Production Planning: Units of Measure Long-Range Capacity Planning Entire Product Line Aggregate Planning Product Family Master Production Scheduling Specific Product Model Production Planning and Control Systems Labor, Materials, Machines Pond Draining Systems Push Systems Pull Systems Focusing on Bottlenecks

Aggregate Planning

Why Aggregate Planning Is Necessary • 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

Inputs • A forecast of aggregate demand covering the selected planning horizon (6 -18 months) • The alternative means available to adjust short- to medium-term 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

Outputs • A production plan: aggregate decisions for each period in the planning horizon about – workforce level – inventory level – production rate • Projected costs if the production plan was implemented

Medium-Term Capacity Adjustments • Workforce level – Hire or layoff full-time workers – Hire or layoff part-time workers – Hire or layoff contract workers • Utilization of the work force – Overtime – Idle time (undertime) – Reduce hours worked • . . . more

Medium-Term Capacity Adjustments • Inventory level – Finished goods inventory – Backorders/lost sales • Subcontract

Approaches • Informal or Trial-and-Error Approach • Mathematically Optimal Approaches – Linear Programming – Linear Decision Rules • Computer Search • Heuristics

Pure Strategies for the Informal Approach • Matching Demand • Level Capacity – Buffering with inventory – Buffering with backlog – Buffering with overtime or subcontracting

Matching Demand Strategy • 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 • Finished-goods inventories are minimal • Labor and materials costs tend to be high due to the frequent changes

Developing and Evaluating the Matching Production Plan • Production rate is dictated by the forecasted aggregate demand • Convert the forecasted aggregate demand into the required workforce level using production time information • The primary costs of this strategy are the costs of changing workforce levels from period to period, i. e. , hirings and layoffs

Level Capacity Strategy • 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, part-time labor and/or subcontracting

Developing and Evaluating the Level Production Plan • 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 • . . . more

Developing and Evaluating the Level Production Plan • The primary costs of this strategy are inventory carrying and backlogging costs • Period-ending inventories or backlogs are determined using the inventory balance equation: EIt = EIt-1 + (Pt - Dt )

Aggregate Plans for Services • 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 finished-goods inventories as a buffer between system capacity and customer demand

Preemptive Tactics • There may be ways to manage the extremes of demand: – Discount prices during the valleys. . have a sale – Peak-load pricing during the highs. . electric utilities, Nucor

Time Horizon in Production Planning Static Vs. Dynamic Environments • • • Models used for production planning are either static or dynamic Static – Constant through time – Assume same plan acceptable in each period for the foreseeable future Dynamic – Explicitly consider changes in demand resource availability to determine what should be done through time over a planning horizon – Require stochastic data – Require great effort to build and solve 61

The Role of Inventory • Inventory consists of physical items moving through the production system • Originates with shipment of raw material and parts from the supplier • Ends with delivery of the finished products to the customer • Costs of storing inventory accounts for a substantial proportion of manufacturing cost – Often 20% or more • Optimal level of inventory – Allows production operations to continue smoothly • A common control measure is Inventory Turnover 62

Inventory Turnover • The ratio of annual cost of goods sold to average inventory investment. • It indicates how many times a year the inventory is sold. • 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 63

Inventory Definitions and Decisions • Batch or order size, Q – Batch size is the number of units released to the shop floor to be produced • Reorder point, r – Specifies the timing for placing a new order • Inventory Position = Inventory On Hand + On Order – Backorders • Units on order – Have been ordered but not yet arrived • Backorders – Items promised to customers but not yet shipped – New units are shipped out to cancel backorders 64

Types of Inventory • Raw Materials – Essential to the production process – Often kept in large quantities on site • Finished Goods – Completed products awaiting shipment to customers • Work-in-Process (WIP) – Batches of semi finished products currently in production – Batches of parts from time of release until finished goods status • Pipeline – Goods in transit between facilities – Raw materials being delivered to the plant 65 – Finished goods being shipped to warehouse or customer

Types of Inventory 66

Justification of Inventory l l l Inventory will always exist Competitive pressure to supply common products quicker than they can be produced imply finished goods inventory must be kept near the customer Price breaks are common when large quantities of material and parts are purchased We may store inventory in periods of low demand consume them in periods of large demand to smooth production rate (seasonal demand) Speculation 67

Inventory Costs and Tradeoffs • • Holding inventory is costly In constructing economic models for choosing the optimal levels of inventory, trade of the costs caused by: 1. Ordering or set up of machines 2. Investing and storing the goods 3. Shortages (not having inventory available when needed) 68

Ordering Costs 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 69

Setup Costs 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 70

Inventory Carrying Costs l Carrying inventory incurs a variety of costs • Space heated and cooled • Move inventory occasionally because it blocks access to other goods • Construct and maintain information system to track location • Pay taxes based on value • Insurance costs • Some will be lost, damaged, or perished • Cost of capital invested in inventory 71

Shortage Costs l When customer demands an out of stock item • • l May decide to wait for delivery - backorders May cancel the order – lost sales May look elsewhere next time – lost customer May pay expedite charges 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 72

Information Flow for Various Production Systems Order Entry Raw Material I I I a. Materials Requirements Planning (MRP) Raw Material b. Just-In-Time (KANBAN) Processor I Infinite Capacity Inventory Buffer Finite Capacity Inventory Buffer Material Flow 73 Information Flow

KANBAN control • 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 circulating cards, the kanbans, between a machine and the downstream buffer. • The machine must have a card before it can start an operation. It can then pick raw materials out of its upstream (or input) buffer, perform the operation, attach the card to the finished part, and put it in the downstream (or output) buffer. 74

KANBAN control • Kanban control ensures that parts are not made except in response to a demand. • The analogy is to a supermarket: Only the goods that have been sold are restocked on the shelves. 75

Information Flow for Various Production Systems Limit on Total Inventory Raw Material I I c. Constant Work-In-Process (CONWIP) Raw Material d. Hybrid CONWIP-KANBAN Processor I Infinite Capacity Inventory Buffer Finite Capacity Inventory Buffer Material Flow 76 Information Flow

CONWIP Control • CONWIP stands for Constant Work-In-Process. • a control strategy that limits the total number of parts allowed into the system at the same time. • Once the parts are released, they are processed as quickly as possible until they fill up the last buffer as finished goods. • Once the consumer removes a part from the finished goods inventory, the first machine in the chain is authorized to load another part. 77

CONWIP Control • 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. 78

Inventory is Needed to Support Production • • • Recent years claim a goal of zero inventory – But some is necessary to meet needs – Economically practical to maintain some WIP to facilitate production scheduling – Variability in processing time and job arrival rates Inventory should not be used to cover problems – Wasteful practice all too common – Prevents the system from improving – Defects not detected until later Lean companies – Operate with reliable processes, quick changeovers, low inventories, small space, low scrap and rework, closer communication 79

Large Inventories Imply Long Throughput Times • Throughout time (manufacturing Lead Time) – The span of time from when the part enters a system until it leaves • Little’s Law I = X · T – Relates average throughput time (T) to the level of average inventory (I) and the production rate (X) for any stationary process • Stationary process – Probability of being in a particular state is independent of time 80

To reduce throughput time Eliminate unnecessary, non-value added operations: – Reduce waiting time – Reduce transfer time – Reduce quality inspection time – Increase process rates – Reduce batch size 81

Capacity Balancing Flow In l l 1 2 3 4 5 Flow Out Desire to have same number of units produced in each work center Capacity is measured by number of units that can be made per time period Total production is limited by the workstation with the smallest capacity (bottleneck station) 82 Excess capacity reduces cycle time

Theory of Constraints (TOC) A management philosophy developed by Dr. Eliyahu Goldratt. The goal of a firm is to make money.

End of Lecture 7