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
2
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
3
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
Outputs
Goods
Services
Feedback
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
12
Production Objectives
High
Profitability
Low
Costs
High
Sales
Low Unit
Costs
High
Throughput
High
Utilization
Less
Variability
Quality
Product
High Customer
Service
Low
Inventory
Short
Cycle Times
Fast
Response
Low
Utilization
Production and Inventory ControlIntroduction (13)
Many
products
High
Inventory
More
Variability
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
14
System Components and Hierarchy
Corporate
level
Corporation
Parts Plant 1
Parts
PartsPlant
Plant22
Assembly
AssemblyPlant
Plant11
Shop
level
Shaft Production
Gear
GearProduction
Production
Heat
Heat
Treating
Treating
Purchasing
Purchasing
Department
level
CNC Mill
CNC
CNCLathe
Lathe
Gear
GearHobber
Hobber
Automated Part
Handling System
Workstation
level
Robotic Load/
Unload
Tool
Exchanger
Power
Controller
Force
Sensor
Equipment
level
15
Production Activity
and Information Flow
• 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
16
Raw Material
Production Activity
and Information Flows
Forecasting
Fabrication
Plant
Administrative Functions
(Purchasing, Payroll,
Finance, Accounting)
Strategic Planning
Assembly
Plant
Finished
Products
Distribution
Center
Marketing
Aggregate Production
Planning
Disaggregation
Production Scheduling
Retailer
Shop Floor Control
Customer
a) Product Flow
b) Decision Hierarchy
Product Design
Process Planning
Manufacturing Support
(Facilities Planning,
Tool Management,
Quality Control,
Maintenance)
c) Support Functions
17
Inputs
Production System
Decision Hierarchy
Process
 Long Range Economic Forecasts
 Financial Choices
Strategic
Planning
 Processing Technologies/Efficiency
 Medium Range Product
 Family Forecasts
 Machine Schedules
Aggregate
Production
Planning





Production Levels
Workforce Levels
Current Inventory Status
Changeover Times and Costs
Item Forecasts
Disaggregation
Outputs
 Operating Facilities
 Product Line (Families)
 Technologies
Years
 Production Level
 Workforce Level
 Family Inventories
Months
 Master Production Schedule
(MPS) - Final Assembly by item
 Item Inventories
Weeks
 MPS
 Bill of Materials
 Process Plans
Production
Scheduling
 Job Priorities
 Order Releases
 Machine Schedules





Shop Floor
Control





Labor Status
Machine Status
Job Priorities
Order Releases
Machine Schedules
Length of
Planning
Horizon
Machine Priorities
Job Status
Labor Reporting
Material Handling Tasks
Load/Prices/Unload Authorization
Days-Shift
Real Time –
Minutes
18
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
19
Types of Production Systems

There are four basic types of production
systems:
1. Process
2. Product
3. Cellular
4. Fixed positions
20
Layout Goals
•
•
•
•
•
•
Use space efficiently
Efficient personnel movement
Maximum equipment utilization
Convenient / safe work environment
Simplify repair / maintenance
Smooth flow of work
21
Products, Processes, and Layouts
PRODUCTS
Make-to-stock
standardized
commodities
Assemble-to-order
modular
Make-to-order
custom
Engineer-to-order
one-of-kind
PROCESSES
Continuous
process industries
repetitive mfg
Hybrid, FMS,
CAM, CIM
Job-Shop(Intermittent)
LAYOUTS
high volume,
low variety
low volume,
Product Layout
Cellular Layout
medium variety
low volume,
Process Layout
high variety
low volume,
Special Project
low variety
Fixed Position
22
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
23
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
24
Process Layouts
Milling
Assembly
& Test
Grinding
Drilling
Plating
Process Layout –products travel
to dedicated process centers
6-25
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
26
Product Layout
Raw
materials
or customer
Material
and/or
labor
Station
1
Material
and/or
labor
Station
2
Material
and/or
labor
Station
3
Station
4
Finished
item
Material
and/or
labor
Used for Repetitive or Continuous Processing
6-27
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
6-28
Part families
Part families with similarity
in manufacturing process
Part families with similarity
in shape
Original Process Layout
Assembly
4
6
7
8
5
2
A
B
12
10
3
1
9
C
11
Raw materials
Cellular Layout
Assembly
8
10
9
12
11
4
Cell 1
Cell 2
6
Cell 3
7
2
1
3
A B C
Raw materials
5
Comparison of Product
and Process Layouts
Product
•
•
Workers
Inventory

•
•
•
•
•
•
Storage space
Material handling
Aisles
Scheduling
Layout decision
Goal

•
Advantage







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
Process









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
33
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
34
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.
35
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
36
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
37
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
38
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
39
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
40
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 customer
41
Types of Inventory
42
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
43
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)
44
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
45
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
46
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
47
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
48
Information Flow for Various
Production Systems
Order Entry
Raw
Material
I
I
I
a. Materials Requirements Planning (MRP)
Raw
Material
b. Just-In-Time (KANBAN)
Processor
I
Infinite Capacity
Inventory Buffer
Finite Capacity
Inventory Buffer
Material Flow
49
Information Flow
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.
50
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.
51
Information Flow for Various
Production Systems
Raw
Material
I
Limit on
Total
Inventory
I
c. Constant Work-In-Process (CONWIP)
Raw
Material
d. Hybrid CONWIP-KANBAN
Processor
I
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.
53
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.
54
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
55
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
56
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
57
Capacity Balancing
Flow In




1
2
3
4
5
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
58
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)
20-62
Goldratt’s 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
63
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
64
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
65
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
67
BA 411 Course Topics
•
•
•
•
•
•
Demand Forecasting
Long-Range Capacity Planning
Aggregate Production Planning
Inventory Management
Material Requirements Planning
Scheduling and Sequencing
68
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.
and Inventory Control– AnticipatingProduction
Execution:
AP is virtually always
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
release
times.
Production and
Inventory ControlIntroduction (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
75
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
76
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
77
Review Questions
•
Total production is limited by:
a)
b)
c)
d)
The workstation with the largest capacity
The workstation with the smallest capacity
The amount of WIP inventory
The number of workstations available
78
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
79
Questions? Comments?
80