Production Planning

All manufacturing and service operations require

planning and controlling, although the formality
and detail may vary. Some operations are more
difficult to plan than others. Those with high
unpredictability can be difficult to plan. Some are
more difficult to control than others. The day to
day running of manufacturing and service system
rests with Production Planning.
The purpose of the production planning is to
ensure that manufacturing run effectively and
efficiently and produces products as required by
customers.
Production Planning Activities
Capacity Planning
1. Facility Size
2. Equipment Procurement
Aggregate Planning
1. Facility Utilization
2. Personnel needs
3. Subcontracting
Master Production Scheduling
1. MRP
2. Disaggregation of master plan
Short-term Scheduling
1. Work center loading
2. Job sequencing
Long-term
(years)
Intermediate-term
(6 to 18 months)
Short-term
(weeks)
Very Short-term
(hours days)
Master Production Scheduling
Production Planning and Control Systems
Aggregate Planning
Long-Range Capacity Planning
Entire
Product Line
Product
Family
Specific
Product Model
Labor, Materials,
Machines
Production Planning: Units of
Measurement
Aggregate Planning Strategies Pure
Strategies
Capacity Options --change capacity:
changing inventory levels
varying work force size by hiring or layoffs
varying production capacity through overtime or
idle time
subcontracting
using part-time workers
Demand Options --change demand:
Influencing demand
backordering during high demand periods
counterseasonal product mixing
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
8
Aggregate Planning Example
Keepdry, a small manufacturing company (200 employees),
produces umbrellas. The company, founded in 1991 produces the
following three product lines: 1) the Executive Line, 2) the Durable
Line and 3) the Compact line shown in the following figure.
Executive
Line
Durable
Line
Compact
Line
9
Aggregate Demand for the
Executive Line

Number of working days:
Jan 22
Feb 19
Mar 21
Apr 21
May 22
Jun 20
11
Cost Information

Materials $5/unit
Holding costs $1/unit per mo.
Marginal cost of stockout $1.25/unit per mo.
Hiring and training cost $200/worker
Layoff costs $250/worker
Labor hours required .15 hrs/unit
Straight time labor cost $8/hour
Beginning inventory 250 units
Productive hours/worker/day 7.25
Paid straight hrs/day 8
12
Determining Straight Labor
Costs and Output
Jan Feb Mar Apr May Jun
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1063.33 918.33 1015 1015 1063.33 966.67
$/worker $1,408 1,216 1,344 1,344 1,408 1,280
13
Chase Strategy
(Hiring & Firing--meet demand)
Beginning workforce level: 7 employees
Jan
Days/mo 22
Hrs/worker/mo 159.5
Units/worker 1,063.33
$/worker $1,408
Jan
Demand 4,500
Beg. inv. 250
Net req. 4,250
Req. workers 3.997
Hired
Fired 3
Workforce 4
Ending inventory 0
14
Jan Feb Mar Apr May Jun
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1,063 918 1,015 1,015 1,063 967
$/worker $1,408 1,216 1,344 1,344 1,408 1,280
Jan Feb Mar Apr May Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
Workforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0
15
Jan Feb Mar Apr May Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
Workforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0
Jan Feb Mar Apr May Jun Costs
Material $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00
Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62
Hiring cost 400.00 200.00 600.00 1,200.00
Firing cost 750.00 500.00 250.00 1,500.00
$260,408.62
Inventory Management
Inventory-A physical resource that a firm
holds in stock with the intent of selling it or
transforming it into a more valuable state.

Inventory System- A set of policies and
controls that monitors levels of inventory and
determines what levels should be maintained,
when stock should be replenished, and how
large orders should be
Types of Inventories
Raw Materials
Works-in-Process
Finished Goods
Distribution Inventory
Supplies: Maintenance, Repair and Operating (MRO)
Managing Facilitating Goods
Factory Wholesaler Distributor Retailer Customer
Replenishment
order
Replenishment
order
Replenishment
order
Customer
order
Production
Delay
Wholesaler
Inventory
Shipping
Delay
Shipping
Delay
Distributor
Inventory
Retailer
Inventory
Item Withdrawn
Type of Inventory
Type of Organization Supplies Raw In-Process Finished
Materials Goods Goods
A. Retail systems
1. Sale of goods
2. Sale of services

B. Wholesale / Distribution
systems

C. Manufacturing systems
1. Special project
2. Intermittent process
. 3. Continuous process
a. Process industries
b. Repetitive mfging.

*
*
*
* *
*
*
*
*
*
*
*
*
*
*
Inventory Positions in the
Supply Chain
Raw
Materials
Works
in
Process
Finished
Goods
Finished
Goods
in Field
Understocking (too few) results in missed deliveries, lost
sales, dissatisfied customers, and production bottlenecks
(idle workers or machines).
Resulting underage cost.
Overstocking (too many) ties up funds that might be
more productive elsewhere.
Resulting overage cost.
Goal: matching supply with demand!
Inadequate control of inventories can result
in both under- and overstocking of items.
Reasons for Inventories
Improve customer service
Economies of purchasing
Economies of production
Transportation savings
Hedge against future
Unplanned shocks (labor strikes, natural
disasters, surges in demand, etc.)
To maintain independence of supply chain
Reasons Against Inventory
Non-value added costs
Opportunity cost
Complacency
Inventory deteriorates, becomes
obsolete, lost, stolen, etc.
Inventory Related Costs
Procurement Costs:
Order processing
Shipping
Handling
Carrying (Holding) Costs
Capital (opportunity) costs
Inventory risk costs
Space costs
Inventory service costs
Out-of-Stock Costs
Lost sales cost
Back-order cost
Independent and Depenedent
Demand
Independent demand items are
finished products or parts that are
shipped as end items to customers.
Dependent demand items are raw
materials, component parts, or
subassemblies that are used to produce
a finished product.


Independent vs. Dependent
Demand
A
Independent Demand
(finished goods and spare parts)
B(4) C(2)
D(2) E(1) D(3) F(2)
Dependent Demand
(components)
Objectives of Inventory
Control
1) Maximize the level of customer
service by avoiding understocking.
2) Promote efficiency in production and
purchasing by minimizing the cost of
providing an adequate level of customer
service.
Balance in Inventory Levels
When should the company replenish its
inventory, or when should the company
place an order or manufacture a new
lot?
How much should the company order or
produce?
Next: Economic Order Quantity (EOQ)
Balancing Carrying against
Ordering Costs
Annual Cost ($)
Order Quantity
Minimum
Total Annual
Stocking Costs
Annual
Carrying Costs
Annual
Ordering Costs
Total Annual
Stocking Costs
Smaller Larger
L
o
w
e
r

H
i
g
h
e
r

EOQ
Classifying Inventory Items
ABC Classification (Pareto Principle)
A Items: very tight control, complete and
accurate records, frequent review
B Items: less tightly controlled, good
records, regular review
C Items: simplest controls possible, minimal
records, large inventories, periodic review
and reorder
ABC Classification System
Classifying inventory according to
some measure of importance and
allocating control efforts accordingly.
A - very important
B - mod. important
C - least important
Annual
$ value
of items
A
B
C
High
Low
Low
High
Percentage of Items
ABC Classification System