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Production Planning, Scheduling and Inventory Control 1 Production Planning, Scheduling and Inventory Control 1

Production • Production: Use of resources such as people, capital, machinery, and information to Production • Production: Use of resources such as people, capital, machinery, and information to convert materials into finished goods and services. Production Process • Types of Production Systems: Manufacturing Systems, where the inputs and outputs are usually tangible, and the transformations are often physical. Service Systems, where the inputs and outputs may be intangible (e. g. information), and the transformations may not be physical (e. g. education). 2

Typical Production Systems 3 Typical Production Systems 3

Purpose of Production Planning Under the constraints of the production system, effectively utilize limited Purpose of Production Planning Under the constraints of the production system, effectively utilize limited resources in the production of goods and services 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. 4

Planning Horizon The types of decisions to be made in a production system depend Planning Horizon The types of decisions to be made in a production system depend on the planning horizon, which is no different from everyday life. Examples: • A decision to buy a house has long-term impact and takes a long time to prepare. • Deciding what to buy in the grocery store can be spontaneous, and its implications are short lived. 5

Types of Planning Horizons Long planning horizon (also known as strategic planning): • Covers Types of Planning Horizons Long planning horizon (also known as strategic planning): • Covers a horizon of one to several years into the future. • Decisions made for this horizon are called strategic decisions that have a long-range impact on the direction of production systems and should be consistent with long-term organizational goals. Medium planning horizon (also known as tactical planning): • Covers any period from one month to one year. • Decisions made for this time frame are called tactical decisions that are oriented towards achieving the annual goals set for the production system. Short planning horizon (also known as operational planning): • Covers any period from days (sometimes hours) to weeks or one month. • Decisions made for this time frame are called operational decisions that are concerned with meeting the targets of the monthly production plan. 6

Main Functions of Production Planning Forecasting – to predict customer demand on various products Main Functions of Production Planning Forecasting – to predict customer demand on various products over a given horizon. Aggregate Planning – to determine overall resources needed. Materials Requirement Planning – to determine all required components and timing. Inventory Management – to decide production or purchase quantities and timing. Scheduling – to determine shop-floor schedule of various components. 7

Inventory • Inventory – A physical resource that a firm holds in stock with Inventory • 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. 8

Types of Inventory • Raw material - Purchased but not processed • Work-in-process - Types of Inventory • Raw material - Purchased but not processed • Work-in-process - Undergone some change but not completed A function of cycle time for a product • Finished goods - Completed product awaiting shipment • Distribution - Goods-in-transit to warehouses and customers • Maintenance/repair/operating (MRO) - Necessary to keep machinery and processes productive 9

Types of Inventory 10 Types of Inventory 10

Ordering and Inventory Keeping Replenishment order Factory Replenishment order Wholesaler Replenishment order Distributor Shipping Ordering and Inventory Keeping Replenishment order Factory Replenishment order Wholesaler Replenishment order Distributor Shipping Delay Production Delay Wholesaler Inventory Customer order Retailer Shipping Delay Distributor Inventory Customer Item Withdrawn Retailer Inventory 11

Reasons for Keeping Inventory 1. To separate various parts of the production process 2. Reasons for Keeping Inventory 1. To separate various parts of the production process 2. To decouple the firm from fluctuations in demand 3. To provide a stock of goods that will provide a selection for customers 4. To protect against stock-out 5. To take advantage of quantity discounts 6. To hedge against prices increases 12

Objectives of Inventory Management 1. Provide desired customer service level (Customer service is the Objectives of Inventory Management 1. Provide desired customer service level (Customer service is the ability to satisfy customer requirements) 2. Minimize the inventory investment 2. Allow cost efficient operations 13

Independent versus Dependent Demand • Independent demand item – the demand for item is Independent versus Dependent Demand • Independent demand item – the demand for item is independent of the demand for any other item in inventory, i. e. , a finished product or part that is shipped as an end item to customers. Examples: Cars, appliances, computers, and houses. • Dependent demand item – the demand for item is dependent upon the demand for some other item in the inventory, i. e. , a material, a component part, or a subassembly that is used to produce a finished product. Examples: Parts that make up the cars, appliances, computers, and houses. 14

Ordering, Holding, and Out-of-stock Costs • Ordering costs - the costs of placing an Ordering, Holding, and Out-of-stock Costs • Ordering costs - the costs of placing an order and receiving goods q q q Order processing costs Shipping costs Handling costs • Holding costs - the costs of holding or “carrying” inventory over time q q Capital (opportunity) costs Inventory risk costs Space costs Inventory service costs • Out-of-stock costs q Lost sales cost q Back-order cost 15

Holding Costs Category Cost (and range) as a Percent of Inventory Value Housing costs Holding Costs Category Cost (and range) as a Percent of Inventory Value Housing costs (building rent or depreciation, operating costs, taxes, insurance) 6% (3 - 10%) Material handling costs 3% (1 - 3. 5%) (equipment lease or depreciation, power, operating cost) Labor cost Investment costs 3% (3 - 5%) 11% (6 - 24%) (borrowing costs, taxes, and insurance on inventory) Pilferage, space, and obsolescence Overall carrying cost 3% (2 - 5%) 26% 16

Inventory Management Questions • What should be the order quantity? • When should an Inventory Management Questions • What should be the order quantity? • When should an order be placed, called a reorder point? • How much safety stock should be maintained? 17

Inventory Control Sytems Continuous system (fixed-order-quantity) – constant amount ordered when inventory declines to Inventory Control Sytems Continuous system (fixed-order-quantity) – constant amount ordered when inventory declines to predetermined level Periodic system (fixed-time-period) – order placed for variable amount after fixed passage of time 18