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 Long-term
1. Facility Size (years)
2. Equipment Procurement

Aggregate Planning Intermediate-term

(6 to 18 months)
1. Facility Utilization
2. Personnel needs
3. Subcontracting

Master Production Scheduling

Short-term
(weeks)
1. MRP
2. Disaggregation of master plan

Short-term Scheduling Very Short-term

1. Work center loading (hours – days)
2. Job sequencing
 Production Planning: Units of
Measurement
Entire
Long-Range Capacity Planning
Product Line

Product
Aggregate Planning
Family
Specific
Master Production Scheduling
Product Model

Production Planning and Control Systems Labor, Materials,

Machines
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
 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.

Compact
Line
Executive Durable
Line Line 8
 Aggregate Demand for the
Executive Line

10000
10000
8000 Number of working days:
8000 7000 Jan 22
6000
6000 5500 Feb 19
4500 Mar 21
4000 Apr 21
May 22
2000
Jun 20
0
Jan Fe b Ma r Apr Ma y J un

9
 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
11
 Determining Straight
Labor Costs and Output

Jan Feb M ar Apr M ay Jun

Days/mo 22 19 21 21 22 20
Hrs/worker/mo 1 5 9 .5 1 3 7.75 1 52 .25 1 5 2 .2 5 159 .5 145
Units/worker 1 06 3.33 9 1 8.33 101 5 1 01 5 10 6 3 .3 3 96 6 .6 7
$ /wo rker $ 1,4 08 1 ,2 16 1,34 4 1,3 4 4 1,40 8 1 ,28 0

12
 Chase Strategy
(Hiring & Firing--meet
demand)
Jan
Days/mo 22
Hrs/worker/mo 159.5
Units/worker 1,063.33
$/worker $1,408 Beginning workforce level: 7 employees

Jan
Demand 4,500
Beg. inv. 250
Net req. 4,250
Req. workers 3.997
Hired
Fired 3
W orkforce 4
Ending inventory 0
13
 Jan Fe b M ar Apr M ay J un
D ays/m o 22 19 21 21 22 20
H rs/wo rke r/m o 1 5 9 .5 1 3 7 .7 5 1 5 2 .2 5 1 5 2 .2 5 1 5 9 .5 145
U nits/wo rke r 1 ,0 6 3 918 1 ,0 1 5 1 ,0 1 5 1 ,0 6 3 967
$ /wo rke r $ 1 ,4 0 8 1 ,2 1 6 1 ,3 4 4 1 ,3 4 4 1 ,4 0 8 1 ,2 8 0

Jan Fe b M ar Apr M ay J un
D e m and 4 ,5 0 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8 ,0 0 0 6 ,0 0 0
Beg. inv. 250
N e t re q. 4 ,2 5 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8 ,0 0 0 6 ,0 0 0
Req. wo rke rs 3 .9 9 7 5 .9 8 9 6 .8 9 7 9 .8 5 2 7 .5 2 4 6 .2 0 7
H ire d 2 1 3
Fire d 3 2 1
W o rkfo rc e 4 6 7 10 8 7
Ending inve nto ry 0 0 0 0 0 0

14
 Jan Feb M ar Apr M ay Jun
Demand 4 ,5 0 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8 ,0 0 0 6 ,0 0 0
Beg. inv. 250
Net req. 4 ,2 5 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8 ,0 0 0 6 ,0 0 0
Req. wo rkers 3 .9 9 7 5 .9 8 9 6 .8 9 7 9 .8 5 2 7 .5 2 4 6 .2 0 7
Hired 2 1 3
Fired 3 2 1
W o rkfo rce 4 6 7 10 8 7
Ending invento ry 0 0 0 0 0 0

Jan Feb M ar Apr M ay Jun Co sts

M aterial $ 2 1 ,2 5 0 .0 0 $ 2 7 ,5 0 0 .0 0 $ 3 5 ,0 0 0 .0 0 $ 5 0 ,0 0 0 .0 0 $ 4 0 ,0 0 0 .0 0 $ 3 0 ,0 0 0 .0 0 2 0 3 ,7 5 0 .0 0
Labo r 5 ,6 2 7 .5 9 7 ,2 8 2 .7 6 9 ,2 6 8 .9 7 1 3 ,2 4 1 .3 8 1 0 ,5 9 3 .1 0 7 ,9 4 4 .8 3 5 3 ,9 5 8 .6 2
Hiring co st 4 0 0 .0 0 2 0 0 .0 0 6 0 0 .0 0 1 ,2 0 0 .0 0
Firing co st 7 5 0 .0 0 5 0 0 .0 0 2 5 0 .0 0 1 ,5 0 0 .0 0

$260,408.62

15
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

Replenishment Replenishment Replenishment Customer

order order order order

Factory Wholesaler Distributor Retailer Customer

Production
Delay Shipping Shipping Item Withdrawn
Delay Delay

Wholesaler Distributor Retailer

Inventory Inventory Inventory
 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 Works
Materials Finished Finished
in Goods Goods
Process in Field
 Inadequate control of inventories can result
in both under- and overstocking of items.

 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!

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
Independent Demand
(finished goods and spare parts)

A Dependent Demand
(components)

B(4) C(2)

D(2) E(1) D(3) F(2)

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 ($)

Minimum
Higher

Total Annual
Stocking Costs
Total Annual
Stocking Costs
Annual
Carrying Costs
Annual
Lower

Ordering Costs
Order Quantity
Smaller EOQ Larger
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 High
A
C - least important Annual
$ value B
of items

Low C
Low High
Percentage of Items
ABC Classification System