Problems related to production systems

It is divided into 2 areas:

1. Related to the design of production systems

2. Related to the planning , analysis and control of production systems.

1. It is an activity that occurs when the company starts production and that occurs
again intermittently when it is necessary to redesign it.
2. Systems design
a.
b. Plant location : Factors to be analyzed to make the decision include location
in markets , location of material, location of labor supplies, transportation
facility, power source, water availability, disposal facility of services ,
climate , government regulations, taxes and cost of land.

Different devices are used to return this problem related to the plant
arrangement, process flow chart, diagram and flow of operations , template
and scale models .

c. Plant layout: this decision refers to the arrangement of the facilities, the
continuous production system uses distribution by products , intermittent
production systems are distributed by process.
d. Materials management : the type of distribution used affects the type of
material management system that is implemented to design a production
system and incorporate digital materials management, it is essential that the
production manager knows the principles and management efficient use of
materials and the various devices that can provide this.
e. Acquisition of capital equipment : costs are an important factor in deciding
which equipment to buy or rent, for a good decision you must consider
interest , depreciation , potential return on investment , opportunity cost,
maintenance cost, taxes that can be removed or restrict investment.
3. Related to the planning, analysis and control of production systems.

A bad decision in this area can lock the company into inefficient operations and high
production costs, especially in those industries where technological changes occur quickly.

Problems related to analysis: planning and control of

production systems.
Once a production system has been designed and activated, the problems that a manager
faces are prevention and analysis of control in professional aspects.

One problem is aggregate planning, another is determining the route that the product must
follow through the plant.
The program that should be used, how work orders should be fulfilled and how production
activities can be unified within the program. These activities demonstrate chronological
scheduling , dispatch and extension are basic planning and control activities.

Various types of systems can be used for production control, defining the type of product
that is manufactured, thus we have:

 Load control system

 Block control system
 Flow control system
 Batch control system
 Control system by specific project control

Aggregate production planning: one of the most difficult problems in operating a given
product is determining how much to produce and when to do it. To solve this problem you
must know how to produce demand , translate demand into production orders and use
devices for chronological scheduling such as the GHANT graph.

Supply: one of the main functions of the manager is the purchase of inputs, materials,
equipment, services, supplies of adequate quality and in adequate quantities at the correct
prices and at the right time. To solve these input supply problems effectively, one must
know how to determine the sources of asbestos and how to discount it to the industry by
quantity and cash payment. Two recent developments that are useful with analyzes will
affect input costs. of purchasing products, value analysis and the Monte Carlo technique.

Inventory control : supply problems are related to inventory control products of raw
materials , products in process and finished product. Effective inventory control is
facilitated through the use of analytical devices such as the point-required technique. and
forms for order quantity.

Quality control: it is one of the problems faced by the quality manager. Even though it is
easy to establish an inspection program to determine what has happened in the production
system, it is more difficult to determine what will happen in the future determined by
graphic techniques . , mean, percentage, range, defective.

Organization of production systems

It is an administrative function of a manager and includes two basic processes :

1. Developing a structure for the company

2. The definition of administrative and operational relationships

Advantages in developing a good organization :

 It provides a group in which staff can act together rather than others.
 Provides efficient and effective communication
  Duplication of work can be minimized or eliminated
 The common employees, the route or networks of command in the organization,
knowing the types of positions provides employees to determine their professional
effectiveness .

Types of organization:

Most organizational structures used by commercial companies are a combination of

different types of organization such as:

 By function
 By location
 By product
 By process
 By specific project

Organization by function: They are separated into major divisions based on functions
such as production, theoretical framework and finance .

Most companies use this type of structure.

a. The functions represent areas of specialization, the staff is trained

b. Many kinds of products, customers can expand other structures while a functional
structure tends to ergonomic.
c. Because functional organizations are traditional.

Organization by location: Some companies find that their operations are better suited to
large organizational decisions based on multiple geographic points.

Organization by customer : sales -oriented companies. They can be organizations by

client in typical model includes the large definitions in retail and wholesale clients
traditionally. In some companies they follow these definitions: consumer sales and industry
sales. The customer organization is used in the marketing system.

Organization by product: when the company divides the organization on the basis of
main items that it produces, the organization by product promotes organized knowledge of
the product as well as the competition of the divisions.

Organization by process: Many feasible companies employ this type of organization is a

typical situation, separate departments are established on the basis of the process involved
in the industry for example.

Separate areas are established to receive the trunk, to manipulate them, to cut the sawn
points, shorten them, select them and sharpen them like wood .
In this type of organization it is possible to place managers at division points where
technical knowledge is used, both payroll and specialized workers are decisive. Processes
should place you next to this type of process.

Organization – sale Organization – client

Organization Production sales
Coast
Functional
Mountain range Minority sale
Marketing
East Most sale

Accounting
Process
Finance Financial analysis
type
Budget
EITHER. partial
Product Organization Sawed
Duplicate
Production Empty
plastic production
Welding
Extrusion
metal production
Wrought

Staff line concept: concepts are used to describe and analyze organizations.

 The line concept

 The concept of staff.

One of the fundamental ideas of line organizations is that every subordinate has only one
superior and this is known as the principle of unity of command.
In the figure, the system channels are clearly defined and indicated in a line organization to
a basic linear structure, the concept of staff is grouped, the staff units serve many purposes
in an organization.

 Align lines functions for many details and paperwork

 Provides specialized knowledge in specific areas and topics.
 Preparing reports and studying often serves several online departments.

Problems related to the staff unit

Even when staff have specific training with some sectors of a business, it is common to find
that their specialization has created a lack of perspective to understand the comprehensive
picture related to all operations.

A market research staff unit may suggest a new product as a result of research, in some
cases such a suggestion cannot be used because the product cannot be manufactured
economically by the production department or the company cannot afford the expense
necessary for development. of the product in this case the suggestion was made blindly in
terms of the company's capacity in the areas of production and finance.

Other problems of staff units are that more personnel are grouped into the unit when the
workload does not increase. Another problem is the tendency of the staff to usurp the
prerogatives of the line functions, which causes conflicts with the staff. of line.

To solve some of these problems, certain activities by line functions can be used.

1. Staff units and their personnel must have carefully well-defined objectives so that
participating personnel accurately know what they are expected to do and where the
extreme limits of activity are.
2. The degree of activity designed for staff personnel with an attitude
3. Staff units must use the specialized specialization for which the staff is formed
4. Staff names should be considered potential line functions. Line officials make
decisions and staff gather the data , analyze it and advise line staff.

The production department related to other areas.

Department of Finance

Investment analysis: when the Production Manager faces the problem of making a decision
regarding alternative investments in facility equipment, he must consult the Department. of
Finance.

Forecasting money for improvements: Sometimes the Production Manager faces relative
problems of costly change in the production process. Example: if the decision is made to
build a new plant to expand the existing plant, the Department. of Finance must take part in
the discussions, since it is necessary to manage the funds for financing .

Provision of information about the general conditions of the company: since the
Department. Finance is responsible for preparing financial statements such as the balance
sheet and income statement .

Accounting department

The accounting function is related to keeping records of the company's activities. From the
Production Manager's point of view, Accounting provides reports regarding the following:

1. Cost data, including cost of materials, direct labor, and overhead .

2. Special reports on the operation of the production system, these include reports on
waste, jobs to be done, finished goods, and parts inventories.
3. Provision of services or information for data processing .

Purchasing department

The Purchasing function primarily involves the acquisition of appropriate materials,

equipment, services and supplies in the correct quantities, in the right quantity and at the
right prices at the right time.

The Production Manager needs to exchange information with Purchasing in the following
areas:

1. Determination of what should be purchased

2. Determination of delivery date
3. Discovery of new products, materials and prices
4. Inventory control

Marketing department

Influences production management by providing:

1. Sales prediction of future levels of demand, this information is required to

effectively plan how much should be produced in the future and to schedule
production.
2. Relevant sales order data
3. Quality requirements for the client
4. New products and processes
5. Customer feedback on the product

Research and Development Department

It involves 2 activities, the first of which is research that includes the development of what
was previously unknown.

And the second is the development of discoveries in terms of objectives that can be
achieved, such as new products, processes, materials, tools , etc.

Personnel department

The Personnel function is mainly interested.

1. In personnel recruitment
2. In training
3. Labor Relations
4. Security

Department of Industrial Engineering

He is in charge of translating the ideas developed by the Department. Research and

Development, Marketing and Purchasing in realities.

The focal point is the search for the most efficient way to produce items and services.

The Dept. of Industrial Engineering provides the Department. of Production the following
information.

1. Information on method analysis.

2. Work Measurement Information
3. Plant layout and material handling information.
4. plant maintenance information

Analysis of the equilibrium point in production

1.- Calculate the profit or loss following the following information

SUT = $1.00

Q = 6000 units

CVU = $0.50

CFT = $2000

Q = Quantity produced and sold

U = IT – CT (1)
U = Utility

IT = Total Revenue

CT = Total costs

CT = CF + CV (2)

CT = Total costs

CF = Fixed costs

CV = Variable costs

CV = Q * CVU (3)

CVU = Variable cost per unit

I = Q * IVU (4)

I = Total income

IVU = Sales income per unit

Replace equation 2, 3, 4 in equation 1

U = Q * IVU – (CF + Q * CVU)

U = Q * IVU – CF – Q * CVU

U = Q * (IVU – CVU) – CF

Balance point = I = CT

0 = Q * (IVU – CVU) – CF

At a production volume of 6000 units

U = 6000 (1 – 0.50) – 2000

U = 6000 (0.50) – 2000

U = 3000 – 2000
U = $1000

to. What will be the quantity that has to be produced or sold to reach the break-even point?

Q = 4000 units

b. Calculate the value of Q = 4000 units in dollars.

I = Q * IVU

I = 4000 * $1.00 / unit

I = $4000

c. Suppose that a production manager must determine the profit or loss that would result
from production operations given the following information:

CF = $400 / week

CVU = $2.50

SUT = $5.00

d. What is the profit or loss at a production level of 100 units/week?

U = IT – CT

U = Q * IVU – CF – Q * CVU

U = Q * (IVU – CVU) – CF

U = 100 * (5 – 2.50) – 400

U = 100 * (2.50) – 400

U = 250 – 400

U = -$150 / week

U = ($150/week)
and. What must be the production level to achieve the break-even point ?

Q = 160 units/week

Suppose the production manager has higher goals that go beyond the break-even point.
Suppose you want to make a profit of $100 per week.

U = $100 / week

U = IT – CT

U = Q * IVU – CF – Q * CVU

U = Q * (IVU – CVU) – CF

Q = 200 units/week

Suppose the production manager arrives at the above figures for the production schedule to
yield a profit of $100/week with a production level of $200 units/week.

When setting this production program, you find that your maximum capacity with the
current machines is 150 units / week, to produce 200 units / week you need another
machine that will increase the fixed costs by $100 / week.

What effect will this acquisition have on the current situation?

CF = $500 / weekly

CVU = $2.50

SUT = $5.00

U = $100 / week
QPDE = 200 units/week

To maintain profit of $100/week

Q = 240 units/week

Production must be increased by 40 more units to obtain $100 per week, which is
equivalent to 20% of production.

U = $100 / week

SUT = $5.20

CVU = $2.70

CF = $500

Q = 240 units/week

QPDE = 200 units/week

Q = 240 units/week

If the SUT had been the only increase, the equilibrium point would have decreased, but if
the CVU had increased, the equilibrium point would have increased.
But as the situation is now, the IVU and CVU have increased by $0.20, the profit margin
remains the same, so to make a profit of $100 per week you must continue producing Q =
240 units / week.

Therefore the given changes do not affect the current economic situation.

2. A company has 3 manufacturing alternatives for a given product, which are

associated in a linear function of the production volume as indicated below.

Alternatives
A($) B($) C($)
Fixed costs 10000000/year 25000000/year 60000000/year
Variable costs

Per unit 500 300 100

(CVU)

a. CTA = CF + CV

CV = Q * CVU

CTA = 10000000 + 300000 * 500

CTA = $160000000

CTB = CF + CV

CV = Q * CVU

CTB = 25000000 + 300000 * 300

CTB = $115000000

CTC = CF + CV

CV = Q * CVU

CTC = 60000000 + 300000 * 100

CTC = $90000000
 b. Which alternative represents the lowest cost if we consider an annual production of
Q = 300,000/year?
c. At what production volume would be most convenient for each of the alternatives?

CTA = CF + 500Q

CTB = CF + 300Q

CTC = CF + 100Q

CTA = CTB

10000000 + 500Q = 25000000 + 300Q

200Q = 15000000

2Q = 150000

Q = 75000 units/year

CTB = CTC

25000000 + 300Q = 60000000 + 100Q

200Q = 35000000

2Q = 350000

Q = 175000 units/year

Answer:

1. From 1 unit/year to 75000 units/year, alternative A is preferable

2. From 75,001 units/year to 175,000 units/year, alternative B is preferable
3. For more than 175,000 units/year, alternative C is preferable

3. A food products company wants to evaluate the profitability of a certain product

given the following data:

CF = $40000

CVU = $5

SUT = $10

U = 20%
Q=?

a. U = I - CT

U = I – (CF + CV)

U = Q * IVU – (CF + Q * CVU)

0.20* (Q * IVU – (CF + Q * CVU)) = Q * IVU – (CF + Q * CVU)

0.20 * (40000 + 5Q) = 10Q – (40000 + 5Q)

8000 + Q = 5Q – 40000

4*Q=48000

Q = 12000 units

b. What is the quantity that must be produced for the company to ensure a profit of
20% of the total cost?

I = CT

Q * IVU = CF + Q * CVU

10Q = 40000 + 5Q

5Q = 40000

Q = 8000 units

c. What is the limit of profitability expressed in units of production? (Breakeven)

d. Calculate the contribution of the revenue generated by this product to the fixed costs
per unit.

IVU – CVU = $10 / unit - $5 / unit = $5 / unit

4. The owner of a supermarket plans to provide home delivery customer service . This
decision depends on the influx of clientele and according to the sales figures after the
implementation of the service.

The process can choose between two types of equipment A and B, after the market
study and cost analysis the reports shown below are connected:

No service With service

Income Probability Income Probability
 660000 60 810000 70
750000 30 900000 20
810000 10 1060000 10

The cost of services for team A and B is as follows:

Equipment
Cost TO b
Fixed 5000 10000
Variables
1.5% 1%
$/sale

What should be the alternative the market owner should take?

Mathematical hope 1

(660000 x 0.60) + (750000 x 0.30) + (810000 x 0.10) = 702000

Mathematical hope 1

(792850 x 0.70) + (881500 x 0.20) + (1039100 x 0.10) = 835205 answer

Mathematical hope 3
(791900 x 0.70) + (881000 x 0.20) + (1039400 x 0.10) = 834470

Team A service must be implemented

Problems in the balance of lines

The line balance problem that may present itself to the array analyst lends itself to several
quantitative techniques, such as precedence graphs and precedence matrices . In this
technique the sequence of operations is expressed graphically in terms that show all the
necessary operations and their relationships.

Example:

This graph is similar to the PERT graph. Once the precedence relationships are established,
the precedence matrix is formed.

Operation Operation
Operation
following Preceding
1 2, 6 None
2 3, 8 1
3 4 2
4 5 3
5 11 4
6 7 1
7 11 6
8 9 2
9 10 8
 10 11 9
11 None 7, 5, 10

Once the preference patterns between these 11 operations have been established, the lines
are balanced.

For these we assume that the production system will be balanced to produce 72 units/hour.

Considering the precedence graph we can choose to design the arrangement along 3
production lines.

Recognizing that 72 units/hour are needed on these 3 lines, we could determine the
production so that production lines A, B and C each feed operation 11 with 24 units/hour
and operation 2 would have to be designed so that it produces 48 units / hour.

The list of capabilities associated with each of the 11 operations is as follows, and is the
information necessary to develop the arrangement.

Machine capacity Quantities produced

Operation
Units / machine hour # of machines Line A Line B Line C
1 24 3 24 24 24
2 8 6 24 24
3 4 6 24
4 12 2 24
5 6 4 24
6 8 3 24
7 4 6 24
8 4 6 24
9 12 2 24
10 6 4 24
11 24 3 24 24 24

At this point the provenance graph has been reduced to a series of production lines, and the
# of machines required for each operation has already been determined.

The next requirement would be to program a detailed machine flow model from an
extended provenance graph.

Line C Extended Provenance Chart

Line B Extended Origin Chart

Line A Extended Provenance Chart

Classification of inventories by the ABC Method

This method consists of regrouping the items either based on the average annual expense of
each item (purchase cost and overhead costs) or based on the total investment for each one.
This classification is carried out once the items have been identified and the usage files
have been established and maintained during a complete cycle of operations.

Steps:

a.

Name of
03 19 22 23 27 36 41 54 68 82
article
Annual cost
15000 800 95000 425 25000 1500 225 7500 75000 13000
($)
Consump
Name of Percentage
tion
article %
annual
22 95000 40.69 T
68 75000 32.13 O
27 25000 10.71
03 15000 6.43 b
82 13000 5.57
54 7500 3.21
36 1500 0.64
19 800 0.34 c
23 425 0.18
41 225 0.10
233450 100

c. Items are classified in increasing or decreasing order based on average annual

expenditure or annual investment.
d. The values of all the items are added, the result represents the total annual number.
e. The value of each item is converted into a percentage of the total annual investment.
f. The articles are divided into three groups : A, B and C

 Group A represents between 70 and 80% of total annual consumption in dollars and
contains 10 and 20% of the items.
 Group B represents between 20 and 25% of total annual consumption in dollars and
contains between 30 and 40% of the items.
 Group C represents between 3 and 10% of total annual consumption in dollars and
contains between 40 and 50% of the items.
 Investments Inventory
Groups Annual cost Percentage % # Of articles Percentage %
TO 170000 72.82 22, 68 20
b 53000 22.71 27, 03, 82 30
c 10450 4.47 54, 36, 19, 23, 41 50
233450 100 100

MRP systems
(Materials Requirement Planning)

The MRP uses the demand information from the master information schedule with a
description which components make up the finished product (material factors), the orders
or production time between the components and the current state of the inventory.

Inputs and production for materials requirement planning

MRP mechanism in lamp manufacturing

Determination of net requirements:

In order to understand the MRP and how its logic works, consider only the left branch of
the lamp diagram, that is, the base, shaft and tube assembly. Example:

Suppose that an order was placed for 25 lamps and today the following items are in
existence:

Lamps = 3 (22)
Base assembly = 7 (18)
Arrows = 4 (21)
Pipeline = 16 feet (34)

In this case the arrow requires 2 feet of pipe.

Analysis: The gross requirement or approximate 25 lamps should be analyzed sequentially
at each level to obtain the correct net requirement for each item. The logic for the gross
requirement and the net requirement is as follows.

for the lamp

Gross or approximate requirement = 25

Quantity Available = 3
Net Requirement = 22 lamps

For base assembly (1/lamp)

Gross or approximate requirement = 22

Quantity Available = 7
Net Requirement = 15 base assembly

For arrow assembly (1/each base assembly)

Gross or approximate requirement = 15

Quantity Available = 4
Net Requirement = 11 arrows

For tube assembly (2 feet / each arrow assembly)

Gross or approximate requirement = 22 feet of pipe

Quantity Available = 16 feet of pipe
Net Requirement = 6 feet of pipe

The gross requirement of a subassembly is equal to the net requirement of the next higher
items multiplied by the quantity used to make the base item. This process known as:
determination of net requirements or gross to net calculation must be combined with a
knowledge of how long it takes to produce or purchase the components in order to schedule
a date to start each assembly.

Lag due to procurement time

The time intervals necessary to either produce or purchase the components is known as lead
time.

Lamps = 2 weeks
Base assembly = 1 week
Arrows = 2 weeks
Pipeline = 3 weeks

This type of obtaining is used to calculate the phase shifts due to the obtaining time for
each of the components.

If the order must be shipped in week 27 then the delays:

In this way, the essence of MRP logic can be expressed in three interrelationships:

1. horizontal and vertical dependencies

2. gross to net calculations
3. lag due to obtaining times

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MRP logic (graphic)

The following graph is used to illustrate the administration of an item with dependent
demand .

Obtaining time = 3
safety inventory = 0
Lot size = 25
Quantity Available = 30
 Periods
1 2 3 4 5 6
Gross requirement 10 15 15 10 15 10
Scheduled receptions 25
Projected available 30 20 5 15 5 15 5
Net requirements
Planned order receipts 25
Planned order issues 25

MRP exercise

Q = 25 T = 2 periods

1 2 3 4 5 6 7 8 9
Gross requirement 12 15 9 17 8 10 16 7 11
Scheduled receptions 25 25
Projected available 0 13 23 14 22 14 4 13 6 20
Net requirements
Planned order receipts 25 25 25
Planned order issues 25 25 25

Cost per coordinate and maintenance :

For evaluation of lot sizes for dependent demand items, it is the sum of the preparation
(installation) and maintenance costs that result from applying a particular method . In the
previous algorithm for setting the lot size (order 25 units each time there is a requirement)
the entire planning program will continue to be requested, 9 months require 5 schedules and
the maintenance of the inventory as indicated in the row of the projected available.

If the installation costs are $5.00 each and the maintenance and inventory costs are $0.05
each unit then the setup cost would be equal to:
Total cost = Preparation cost + Maintenance cost

Total cost = $25.00 + $6.45 = $31.45

Economic order quantity = Q

Calculation of the economic lot for the purchase of raw materials

E = incremental cost

Q = quantity in lot size

S = acquisition cost per order

R = annual needs

C = inventory holding cost per unit per year

It is requested to calculate the economic lot analytically and graphically as well as the total
cost of the lot having the following information .

R = 1000 units

S = $20
Q = 500 units

Total cost
Q Q = 500 units
AND
100 8 200 208
200 16 100 116
300 24 66.67 90.67
400 32 50 82
500 40 40 80
600 48 33.33 81.33
700 56 28.58 84.58
800 64 25 89
900 72 22.22 94.12
1000 80 20 100

The assumptions underlying this mathematical model include:

1. Constant inventory utilization rate

2. Constant time for order placement
3. Constant unit prices without provision for quantity discounts
4. Constant acquisition costs per order
5. Constant inventory holding costs per unit and per year
6. That the order quantity be delivered in total only once.
Many of these assumptions are not valid in business problems since in addition to the
previous factors, opportunity costs and certain associated costs such as fluctuations affect
inventory decisions but are not represented in the mathematical model but can be solved by
modifying the basic model. to adjust to more realistic assumptions.

Purchases with quantity discounts can be investigated by modifying the model and testing
the alternatives, these to the incremental costs, acquisition and inventory stock must be
added to the price of the material in certain quantities.

A = material cost per unit

CT = total cost of the item + inventory costs + acquisition cost.

Where A = raw material value

Required point:

We have already seen and analyzed the economic quantity of the order, the issue of how
much to order is one of the two basic points for inventory management , the other point is
when the order should be placed.

The question of when the requisition should be made for items within the plant must also be
answered. A method that provides an answer to this question uses the system of maximums
and minimums to determine the required point.

To use this method you must determine:

1. What will be the maximum level of inventory that will be carried?

2. What will be the minimum level of inventory or safety stock?
3. How long will the inventory supply delay between the maximum and minimum
stocks.
4. How long will it take for an order to be filled and delivered.
Determining inventory should be made after considering inventory costs, the company 's
financial position, the market for the items, and other factors; The determination of
minimum or safety inventories is based on expectations of how much inventory should be
kept in case new orders do not arrive when expected. Determining how long items will last
should be made by examining historical records and calculating wear rates. The critical
time to fulfill an order includes the time it takes to place the purchase requisition, to place
the purchase orders, to send it to the supplier, to have the order filled, and finally the time
required to ship the goods to the supplier. buyer and place them in inventory.

Suppose:

Maximum inventory level = 700 units

Minimum inventory level = 100 units

Supply duration = 30 days

Critical time for a new order = 10 days

Analytically and graphically calculate the required point.

U = usage ratio

δ = minimum safety inventory

L = critical time it takes to place the new order.

Least Squares

It serves to project historical production into the future, depending on the extent to which
the past is representative of the future.

This method is used when making short-term adjustments in production and inventory
levels, if the situation is considered that demand in the market has more or less uniform
periodic variations between certain levels of time, that is, when the demand for products is
to some extent predictable, future demand could then be estimated using this method.

Y = a + bX

Yp = a + bX

Yp = is the value of the trend for the period of X

X = time period

a = value of Yp at a base point

b = value of the slope with amount of increase or decrease in Yp for each unit change in X.

Two equations are used to determine the values of a and b

Suppose that the production management of a company knows the demand for a product for
the following months.
 Historical lawsuit

Demand
Month
(units)
January 108
Februar 119
y
March 110
April 122
May 130

Production management is interested in knowing the demand for the months of July and
November.

AN
x XY x2
D
108 0 0 0
119 1 119 1
110 2 220 4
122 3 366 9
130 4 520 16
Σ 589 10 1225 30

589 = 5a + 10b (1) (-2)

1225 = 10a + 30b (2)

-1178 = -10a -20b

1225 = 10a + 30b

47 = 10b

b = 4.7

589 = 5a + 10(4.7)

589 – 47 = 5a
542 = 5a

a = 108.4

July

Yp = 108.4 + 4.7X

Yp = 108.4 + 4.7(6)

Yp = 136.6

November

Yp = 108.4 + 4.7X

Yp = 108.4 + 4.7(10)

Yp = 155.4

Demand trend

And p = to + bX =
January = 108.4 + 4.7(0) = 108.4
Februar = 108.4 + 4.7(1) = 113.1
y
March = 108.4 + 4.7(2) = 117.8
April = 108.4 + 4.7(3) = 122.5
May = 108.4 + 4.7(4) = 127.2
Statistical method of exponential adjustment.
It is a special moving average technique in which excessive collection of sales demand
records is not used, thereby shortening the time required to analyze the forecast.

These same techniques can be extended to calculate trend in demand, changes in trend and
in the distribution of errors in the forecast, making a very small additional calculation to
specify the data .

Pi+1 = Pi + α (Vi - Pi)

Pi+1 = forecast for the next period

Pi = forecast for the current period.

Vi = sales of the current period

α = exponential constant that takes a value between 0 and 1

Suppose that we want to calculate the sales forecast for the next month and that the sales
for the current month were 150 units, if the forecast for the current month was 142 units
and the exponential constant chosen is 0.4

Pi+1 = Pi + α (Vi - Pi)

Pi+1 = 142 + 0.4 (150 - 142)

Pi+1 = 142 + 0.4 (8)

Pi+1 = 145.2

The most appropriate value of α should be determined by the forecasting executive. Then,
to determine the value of α, several forecast series must be simulated, based on a large
number of past sales periods.

Generally its effectiveness is limited to short-term forecasting of market demand.

In other words, a strategic demand forecast should be based on the functional analysis of
the market rather than the technical analysis.

Sa
Pi
w
 May 180 170
June 195 175
July 170 180
August 180 190
September 195 210
October 190 215

αmay = 1

αJune = 1

αjoule = 1

αAugust = 1

αSeptember = 0.33

αaverage = 0.87

Ratio technique for Temporality prediction

Historical Demand
 1999 260
2000 220
2001 230
2002 255
2003 295
2004 310
2005 320
2006 280
2007 336
TO b c d CD
Demand Demand Average Demand Demand
A/B
last year Average Next year Next year
January 5 20 0.25 28 7
February 10 20 0.5 28 14
March 15 20 0.75 28 21
April 20 20 1 28 28
May 20 20 1 28 28
June 30 20 1.5 28 42
July 40 20 2 28 56
August 50 20 2.5 28 70
September 20 20 1 28 28
October 15 20 0.75 28 21
November 10 20 0.50 28 14
December 5 20 0.25 28 7
240 336

1. We calculate the average demand for the previous year (or averaged over several
years to minimize interference, in which case monthly demand data should also be
averaged.
2. By dividing the demand figure for each month by the average, you can obtain a
factor each month to see the percentage that each month represents of the average
demand. This approach provides weights that reflect the inherent temporality in the
data that can be applied to the average associated with an additional new forecast to
arrive at monthly forecasts.
3. An average demand is calculated for the current year.
 4. The monthly prediction for the current year is calculated by multiplying the ratio of
the previous year by the average demand for the following year.

Monte Carlo simulation technique

Some waiting problems cannot be solved directly with equations; if arrival and departure
rates are not controllable, it is difficult to evaluate alternatives with equations alone.

An effective approach to such problems is simulation using the Monte Carlo technique.
Simulation involves the manipulation of many variables and constants associated with the
problem.

The Monte Carlo technique is a type of simulation through which data is generated by a
random number generator. Suppose the manager of an industrial plant is faced with the
problem of determining the optimal number of trucks for his delivery workforce.

This issue is of interest to the plant layout analyst as he or she must provide storage ,
maintenance, and loading facilities. If a large fleet of trucks is purchased, customers will be
served quickly and little extra time may be required to make all deliveries, however a large
fleet of trucks represents a large investment and results in a lot of idle time for some trucks
and a small fleet requires less investment, fewer installations and maintenance needs as
well as fewer idle trucks; but perhaps you cannot make all the necessary deliveries on time
and therefore will need too much extra time.

To find the optimal solution it is necessary to find the number of trucks that minimizes the
costs involved.

To keep the example simple, we will assume that the company 's policy is to deliver all
shipments on the same day it arrives at the loading dock.

If all shipments cannot be delivered in a normal work day, extra time will be required for
delivery. For our example the cost of overtime per truck per day will be used as the penalty
cost for having too few trucks.

The optimal number of trucks will not eliminate overtime deliveries.

We will assume the following data:

1.
2. The normal distribution of customer arrivals (shipments that must be delivered) is
300 shipments per day, with a standard deviation of 30 shipments per day, that is
Service time distribution (number of shipments that can be delivered) is 60 deliveries per

day per truck, this indicates that the average delivery rate

1. The cost of operating a delivery truck is $25 per day including the cost of labor,
operation, depreciation , maintenance, etc.
2. The cost of delay in deliveries is represented by the cost of overtime. This is
supposed to cost $5 per hour – truck.

With this basic information plus the random numbers available in a random number table
we are ready to begin the Monte Carlo simulation of what is likely to happen with different
fleet sizes.

 Column A represents the number of trucks being tested.

 Column B represents the 5 days of the week.
 Column C is composed of random numbers taken from a table of random numbers,
these numbers are used to generate data relating to the number of deliveries in
column D.
 Column E is composed of random numbers taken from a table of random numbers,
these numbers are used to calculate the expected number of deliveries that will be
completed in column F.
 Column G represents the number of overtime delivery.
 Column H represents the cost of overtime deliveries.
 Column I represents the total overtime costs for each alternative fleet size.

The required deliveries are simulated by multiplying the standard deviation (30) by the
random number for that day and adding to this product the average arrival rate (300).

The deliveries made each day are simulated by multiplying the standard deviation (6) by
the random number for that day and adding to the product the average service rate (60)
(deliveries made by each truck). This figure is then multiplied by the number of fleet
trucks.

The overtime columns in column G will be equal to the difference that exists between the
required deliveries in column D and the deliveries made in column F.
The cost of overtime in column H is found by taking the cost per truck – hour $5.00 and
multiplying 8 hours per day by the number of trucks in column A and the number of
overtime deliveries G and dividing this product by the deliveries made.

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Production budget in units

The main purpose is to ensure that the production of finished items is carried out in
sufficient quantities to meet demand in accordance with the sales budget , thus avoiding the
accumulation of excessive inventories .

The sales objective is the budget axis, that is, the items are produced to be sold with a profit
margin.

Production cannot be scheduled independently of sales and financial possibilities, whether

it is produced to store the units that demand requires or what is produced according to the
client 's specifications. In both cases, budgeting is carried out in analogous places. ,
although in the order system it cannot be projected long-range and therefore a more
frequent review of the plans drawn up is necessary.

Example 1

To calculate the required annual production budget, it is done as follows:

Based on yx, the sales department y will increase by units of manufactured items whose
existence is desired to form the inventory at the end of the budgeted year.

From the sum obtained we subtract from the initial inventory of manufactured items x
difference the units that must be manufactured before the budgeted year.

Value required by the sales department:

TO b c
Units required by the sales department (2007) 103610 97335 11400
+
Desirable inventory for December 31, 2007 (final) 20720 24335 1900
124330 121670 13300
-
Initial inventory January 1, 2007 (December 31, 2006) 18000 25000 1200
Units to be produced in 2007 106330 96670 12100

When the sales budget is not based on physical units but rather on monetary units, we need
to convert them, for which we rely on experience.

Annual production planning

An annual classification of production is required to satisfy.

1. Have an inventory that allows you to supply the sales department according to its
requirements.
2. Produce what is necessary in the most economically possible way.

Coordination of these two factors requires careful consideration of the following factors,
which are themselves independent.

1. Duration of the production period

2. Maintaining a flowing rhythm of production
3. Inventory control, production facilities
4. Availability of labor
5. Availability of materials .

1. If the time required for manufacturing is of a certain consideration, it is noted that it

is not easy to admit a greater demand than planned.
2. Duration of the production period.- When the time used between the initiation of
an order and the delivery of the product to the warehouse is short, errors in planning
are of little importance, since at any time production can increase to be able to
comply with the demand.
3. Fluidity in production - this does not mean that the same production is recorded all
the time (days, weeks, months). Fluidity implies the minimum graduation of
production progress that allows the imposed objectives to be met in the planned
time, avoiding abrupt programming in the quantities produced throughout the
corresponding period. This behavior normalizes the consumption of materials and
stabilizes the hand of construction site.

Example 2

Based on the sales budget of Company "X" we will calculate the distribution of the
production volume of item "A" for the first 6 months of the budgeted year.
Firstly, we will establish the minimum and maximum stocks to which production must be
subject.

Maximum existence: we consider it convenient to set it to cover the first four months of
budgeted sales.

Minimum existence:

The next step will be the determination of the desired inventory for June 30, 2007.

Initial inventory January 1, 2007 18000 units

+ Projection in the first 6 months
106330/12 = 8861 * 6 = 53165 53165 units
71165 units
- Sales for the first 6 months
103610/12 = 8634 * 6 = 51805 51805 units
Inventory as of June 30, 2007 19360 units

Once the previous elements have been fixed, we will proceed....

1.

Inventory at
Shipping sales
Production
ending of
required
month
January 1 18000
January 31 18000 7250 7250
28 19000 6180 5180
February
March 31 19000 8290 8290
April 30 18000 9400 10400
31 May 20000 12600 10600
June 30 19360 9445 10085
53165 51805
 2. Trying to keep inventories as low as possible, then approaching the minimum stock
limit.

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