Lecture 4

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.: McGraw-Hill/Irwin.

Objectives

• Production planning hierarchy• Inventory cost• Type of inventory• Production settings

Production Planning Hierarchy

Master Production Scheduling

Production Planning and Control Systems

Pond DrainingSystems

Aggregate Planning

PushSystems

PullSystems

Focusing onBottlenecks

Long-Range Capacity Planning

Production Planning Horizons

Master Production Scheduling

Production Planning and Control Systems

Pond DrainingSystems

Aggregate Planning

PushSystems

PullSystems

Focusing onBottlenecks

Long-Range Capacity PlanningLong-Range

(years)

Medium-Range(6-18 months)

Short-Range(weeks)

Very-Short-Range(hours - days)

Production Planning: Units of Measure

Master Production Scheduling

Production Planning and Control Systems

Pond DrainingSystems

Aggregate Planning

PushSystems

PullSystems

Focusing onBottlenecks

Long-Range Capacity PlanningEntire

Product Line

ProductFamily

SpecificProduct Model

Labor, Materials,Machines

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 PlanningStatic 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 and resource availability to determine what should be done through time over a planning horizon

– Require stochastic data – Require great effort to build and solve

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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 Turnover22

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

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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 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 backorders24

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– Finished goods being shipped to warehouse or customer25

Types of Inventory

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Justification of Inventory

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

Speculation

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)

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Ordering Costs

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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

Setup Costs

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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

Inventory Carrying Costs

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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

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Shortage Costs

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

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

Information Flow for Various Production Systems

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I I

Order Entry

RawMaterial

I

a. Materials Requirements Planning (MRP)

RawMaterial

b. Just-In-Time (KANBAN)

IProcessorInformation Flow

Material FlowFinite Capacity Inventory Buffer

Infinite Capacity Inventory Buffer

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.

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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.

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Information Flow for Various Production Systems

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I

Limit onTotal

Inventory

RawMaterial

I

c. Constant Work-In-Process (CONWIP)

RawMaterial

d. Hybrid CONWIP-KANBAN

IProcessorInformation Flow

Material FlowFinite Capacity Inventory Buffer

Infinite Capacity Inventory Buffer

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.

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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.

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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

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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

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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

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Capacity Balancing

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1 2 3 4 5Flow In 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)

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 4