BA 411

Introduction to the Production Planning And Inventory Control

Learning Objectives
Provide basic description of production systems What they are How they operate Because inventory plays a central role in the operation of a production system Overview of inventory basics How they relate to the production system
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The Production System

Definition:
The set of resources and procedures involved in converting raw material into products and delivering them to customers Production and delivery of products are central to the firm Functions have value only if they enhance the ability to do this profitably

Value-Added-Process
The difference between the cost of inputs and the value or price of outputs.
Value added Inputs Land Labor Capital Transformation/ Conversion process
Feedback

Outputs Goods Services

Control
Feedback Feedback

ABM

Activity Analysis

Non-value-added activity Increases time spent on Value-added activity product or service but does Increases worth of not increase worth product or service to a Unnecessary from customer customer perspective Customer is willing to Can be reduced, redesigned pay for it or eliminated without affecting market value or quality

ABM

Activity Analysis
Create a Process Map (detailed flowchart) for each process
Identify each step

Create Value Chart

Identify stages and time spent in stages from beginning to end of process
Value-Added Processing Time Service Time Non-Value-Added Inspection Time Transfer Time Idle Time

Cycle Time
Cycle Time Value= Added Activities NonValue-Added Activities

Eliminate or minimize activities that add the most time and cost and the least value

Production Planning and Control

Purpose
Minimize non-value added activities and effectively utilize limited resources in the production of goods so as to satisfy customer demands and create a profit for investors.
Resources include the production facilities, labor and materials. Constraints include the availability of resources, delivery times for the products, and management policies. Production and Inventory ControlIntroduction (10)

Efficiency Versus Effectiveness

The difference between efficient and effective is that efficiency refers to how well you do something, whereas effectiveness refers to how useful it is. For example, if a company is not doing well and they decide to train their workforce on a new technology. The training goes really well - they train all their employees in avery short time and tests show they have absorbed the training well. But overall productivity doesn't improve. In this case the company's strategy was efficient but not effective.

Operation of Production Systems and Production Planning Involve

Planning and execution of the activities that use workers, energy, information, and equipment to convert raw materials into finished products Delivering products with the desired functions, aesthetics, and quality to the customers at right time and with minimum cost
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Production Objectives
High Profitability Low Costs Low Unit Costs High Throughput High Utilization Low Inventory Quality Product Fast Response High Sales High Customer Service Many products

Less Variability

Short Cycle Times

Low Utilization

High Inventory

More Variability

Production and Inventory ControlIntroduction (13)

Hierarchical Structure of Production Planning Activities

Production Planning and control functions of industrial firms often follow a hierarchical structure Time frame and dollar value of decisions decrease as we move down the hierarchy In general, decisions made at each level are passed down one level
Constraints and instructions

Current status and performance data are passed upward to facilitate decision making and guidance
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System Components and Hierarchy

Corporation

Corporate level

Parts Plant 1

Parts Plant 22 Parts Plant

Assembly Plant 11 Assembly Plant

Shop level

Shaft Production

Gear Production Gear Production

Heat Heat Treating Treating

Purchasing Purchasing

Department level

CNC Mill

CNC Lathe CNC Lathe

Gear Hobber Gear Hobber

Automated Part Handling System

Workstation level

Robotic Load/ Unload

Tool Exchanger

Power Controller

Force Sensor

Equipment level 15

 Production-planning decisions typically made in a hierarchical manner: 1. Physical material flow from raw material through delivered product 2. Support functions and design activities preceding production 3. Operational decisions for production planning, scheduling, and control
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Production Activity and Information Flow

Raw Material

Production Activity and Information Flows

Forecasting Administrative Functions (Purchasing, Payroll, Finance, Accounting) Strategic Planning

Fabrication Plant

Assembly Plant
Finished Products

Marketing Aggregate Production Planning

Product Design

Distribution Center

Disaggregation

Process Planning

Production Scheduling
Retailer Shop Floor Control Customer a) Product Flow b) Decision Hierarchy

Manufacturing Support (Facilities Planning, Tool Management, Quality Control, Maintenance)

c) Support Functions
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Inputs

Production System Decision Hierarchy

Process Outputs
Strategic Planning Operating Facilities Product Line (Families) Technologies

Length of Planning Horizon

Years

Long Range Economic Forecasts Financial Choices

Processing Technologies/Efficiency Medium Range Product Family Forecasts Machine Schedules

Production Levels Workforce Levels Current Inventory Status Changeover Times and Costs Item Forecasts

Aggregate Production Planning

Production Level Workforce Level Family Inventories

Master Production Schedule (MPS) - Final Assembly by item Item Inventories

Months

Disaggregation

Weeks

MPS Bill of Materials Process Plans Labor Status Machine Status Job Priorities Order Releases Machine Schedules

Production Scheduling Shop Floor Control

Job Priorities Order Releases Machine Schedules Machine Priorities Job Status Labor Reporting Material Handling Tasks Load/Prices/Unload Authorization

Days-Shift

Real Time Minutes

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Aggregate Production Planning

A typical aggregated plan states the level of major product families to be produced monthly over the next year Workforce levels, overtime levels, inventory levels
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Types of Production Systems

There are four basic types of production systems: 1. Process 2. Product 3. Cellular 4. Fixed positions

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Layout Goals
Use space efficiently Efficient personnel movement Maximum equipment utilization Convenient / safe work environment Simplify repair / maintenance Smooth flow of work

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Products, Processes, and Layouts

PRODUCTS
Make-to-stock standardized commodities

PROCESSES
Continuous process industries repetitive mfg
high volume, low variety

LAYOUTS
Product Layout

Assemble-to-order modular

Hybrid, FMS, CAM, CIM

low volume, medium variety

Cellular Layout

Make-to-order custom

Job-Shop(Intermittent)

low volume,

Process Layout

high variety

Engineer-to-order one-of-kind

low volume,

Special Project
low variety

Fixed Position
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Fixed Position Layout

The product or project remains stationary, and workers, materials, and equipment are moved as needed.

Examples: Home building, ship and aircraft buiding, drilling for oil

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Process Layout

Similar processes (or processes with similar needs) are located together By grouping similar processes utilization of resources is improved Customers, products, patients move through the processes according to their needs Different products = different needs = different routes Complex flow pattern in the operation Examples:
Supermarkets, job-shops, hospitals
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Process Layouts
Milling Assembly & Test

Grinding

Drilling

Plating

Process Layout products travel to dedicated process centers

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Product Layout

Sometimes called line layout, flow line or assembly line Parts follow a specified route the sequence of workstations matches with the sequence of required operations Work Flow is clear, predictable, easy to control Examples:
Car assembly, paper manufacture, self-service canteen

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Product Layout

Raw materials or customer

Material and/or labor

Station 1 Material and/or labor

Station 2
Material and/or labor

Station 3
Material and/or labor

Station 4

Finished item

Used for Repetitive or Continuous Processing

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Cellular Layouts

machines are grouped into a cell that can process items that have similar processing requirements Based on Group technology which involves grouping items with similar design or manufacturing characteristics into part families

Could be considered as mini product layouts Can improve and simplify a functional/process layout Flexible Duplicates some resources

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Part families
Part families with similarity in manufacturing process Part families with similarity in shape

Original Process Layout

Assembly

5 2 1 3 10

8
12 11

Raw materials

Cellular Layout

Assembly

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12

11
4 Cell 1 Cell 2 6 Cell 3 7 2 1 3 5

A B C Raw materials

Comparison of Product and Process Layouts

Product
Workers Inventory Storage space Material handling Aisles Scheduling Layout decision Goal Advantage

Process

Limited skills Low in-process, high finished goods Small Fixed path (conveyor) Narrow Line balancing (Easier) In-line, U-type Equalize work at each station Efficiency

High skills High in-process, low finished goods Large Variable path (forklift) Wide Dynamic (More difficult) Functional Minimize material handling cost Flexibility

Product Volume and Variety

Cellular

Quantity

Product Layouts Fixed Position Layouts

Mixed Layouts

Process Layouts

Number of Different Products

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Product Flow Control

Batch Processing (Process Layout)

From a couple to several thousands identical parts A batch for each different part type Move together through the production system May split for material handling or to reduce processing time Examples are clothing, furniture production

Repetitive or Flow processing (Product Layout)

Continuous chemicals, foods, pharmaceuticals Discrete car, refrigerator production

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Setup Costs Affect The Batch Size

Cost and time to set up production facilities to manufacture a specific product affect the batch size. When changeover time (setup time) and cost are large, the size of batch is kept large. Large batch sizes result in high inventory cost.

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Production Choices

Make-to-stock
Number of units of each product are kept on hand at all times Quick delivery to customers upon receipt of an order When delivery response time is a key competitive factor Limited number of products manufactured repeatedly An idea what customers will want Allows to schedule production in advance Make-to-order Only produce items after they have been ordered Production system must respond quickly Products have high degree of customization Shelf life of products is short Assemble-to-order Customers have influence on the design They can select various options from predesigned subassemblies
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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 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 Turnover

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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 backorders
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 Raw Materials

Types of Inventory

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 customer
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Types of Inventory

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Justification of Inventory

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

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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

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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Setup Costs

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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Inventory Carrying Costs

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
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Information Flow for Various Production Systems

Order Entry

Raw Material

a. Materials Requirements Planning (MRP)

Raw Material b. Just-In-Time (KANBAN)

Material Flow
49 Information Flow

Processor

Infinite Capacity Inventory Buffer

Finite 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

Raw Material

Limit on Total Inventory

c. Constant Work-In-Process (CONWIP)

Raw Material d. Hybrid CONWIP-KANBAN

Processor

Infinite Capacity Inventory Buffer

Finite Capacity Inventory Buffer

Material Flow
52 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.
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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 Wasteful practice all too common Prevents the system from improving Defects not detected until later Operate with reliable processes, quick changeovers, low inventories, small space, low scrap and rework, closer communication
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Inventory should not be used to cover problems

Lean companies

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

Littles 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

Flow 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

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Theory of Constraints (TOC)

A management philosophy developed by Dr. Eliyahu Goldratt. The goal of a firm is to make money.

Dr. Eliyahu Goldratt wrote many books including:

The Goal: A Process of Ongoing Improvement (sold more than 3 million copies) It's Not Luck (how to apply TOC in conflict resolution and marketing) Critical Chain (how to apply TOC in project management)

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Goldratts Rules of Production Scheduling

Do not balance capacity balance the flow The level utilization of a nonbottleneck resource is not determined by its own potential but by some other constraint in the system An hour lost at a bottleneck is an hour lost for the entire system An hour saved at a nonbottleneck is a mirage

Customer-Defined Value
The technical performance or quality of a product is no longer the primary determinant of customer value Customers evaluate other "value factors such as:
On-time Delivery After Sale Service Business expertise Low price for high quality

Value is what the customer wants and how much would be paid for it Eliminate non-value-added operations
the customer will not pay for non-value-added operations
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Models to Study Production Systems

Testing new ideas on full-scale systems is expensive, time consuming, complex, and unnecessary Instead, we build models to visualize and examine aspects of a system Models allow us to learn about the system and test various system designs For instance, Production System Models allow us to test the impact of production planning and inventory control decisions so that
Wrong decisions can be avoided Distruptions of the real process can be avoided

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Definition of a Model
A model is a simplified, artificial representation of reality Constructed to facilitate off-line study of real object or system
Flow diagrams Philosophical (conceptual) Small-scale prototype Mathematical
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Systems and Models

Ways to study a system

A Systems Perspective
Production system represents a key aspect of the firm Must maintain global view of the entire supply chain from materials through product delivery Must integrate and cooperate with marketing, purchasing, quality assurance, accounting, design engineering, and manufacturing Instability of the production system may occur:
Misuse of marketing (demand) information Misunderstanding of the relationship among safety stock, inventory, and production Bad production decisions
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BA 411 Course Topics

Demand Forecasting Long-Range Capacity Planning Aggregate Production Planning Inventory Management Material Requirements Planning Scheduling and Sequencing

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Forecasting
Objective: predict demand for production planning purposes. Laws of Forecasting: 1. Forecasts are always wrong! 2. Forecasts always change! 3. The further into the future, the less reliable the forecast will be! Forecasting Tools: Qualitative: Delphi, Analogies Quantitative: Causal and time series models
Production and Inventory ControlIntroduction (69)

Aggregate Planning
Objective: generate a long-term production plan that establishes a rough product mix, anticipates bottlenecks, and is consistent with capacity and workforce plans. Issues: Aggregation: product families and time periods must be set appropriately for the environment. Coordination: AP is the link between the high level functions of forecasting/capacity planning and intermediate level functions of MRP, inventory control, and scheduling. AnticipatingProduction and Inventory Control- is virtually always Execution: AP Introduction (70)

Capacity/Facility Planning

How much and what kind of physical equipment is needed to support production goals? Issues:
Basic Capacity Calculations: stand-alone capacities and congestion effects (e.g., blocking) Capacity Strategy: lead or follow demand

Make-or-Buy: vendoring, long-term identity Flexibility: with regard to product, volume, mix Speed: scalability, learning curves Production and Inventory ControlIntroduction (71)

Inventory Management
How much to order of each material when orders are placed with either outside suppliers or production departments within organizations When to place the orders The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds by answering these two questions .

Material Requirement Planning

Objective: Determine all purchase and production components needed to satisfy the aggregate/disaggregate plan. Issues:

Bill of Materials: Determines components, quantities and lead times.

Inventory Management: Must be coordinated with inventory.
Production and Inventory ControlIntroduction (73)

Sequencing and Scheduling

Objective: develop a plan to guide the release of work into the system and coordination with needed resources (e.g., machines, staffing, materials).

Methods: Sequencing: Gives order of releases but not times. Scheduling: Gives detailed and Inventory ControlProduction release times.
Introduction (74)

Review Questions
A Production System is:

a) The set of resources and procedures involved in converting raw materials into products and delivering them to customers b) The set of resources and procedures involved in converting products into raw materials and delivering them to customers c) The set of resources and procedures involved in producing a system d) None of the above
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Review Questions
Efficient production layout will result in:

a) b) c) d) e)

Efficient use of space Efficient personnel movement Maximum equipment utilization Smooth flow of work All of the above

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Review Questions
As order quantity increase:

a) Ordering cost increase and holding cost decrease b) Ordering cost decrease and holding cost increase c) Ordering and holding cost increase d) Ordering and holding cost decrease
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Review Questions
a) b) c) d) Total production is limited by: The workstation with the largest capacity The workstation with the smallest capacity The amount of WIP inventory The number of workstations available

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Review Questions
Production system models allow us to:

a) Learn about the system and test various system designs b) Test impact of production planning and control decisions c) Visualize and examine aspects of a system d) All of the above
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Questions? Comments?

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