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
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 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 Value= Added Activities + Non. Value-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 Control. Introduction (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 Control. Introduction (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 Plant 22 Parts Plant Assembly Plant 11 Assembly Plant Shop level Shaft Production Gear Production Heat Treating Purchasing Department level CNC Mill CNC Lathe Gear 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 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 Production System Decision Hierarchy Process Strategic Planning Aggregate Production Planning 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 l 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 Special Project low volume, 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 l l l 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 l Parts follow a specified route – the sequence of workstations matches with the sequence of required operations l Work Flow is clear, predictable, easy to control l Examples: l • 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 l Can improve and simplify a functional/process layout l Flexible l Duplicates some resources l 6 -28
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 l l l l l 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 l l l l l 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 l Batch Processing (Process Layout) • • l 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 l 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 l 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 l 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 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 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 l l l 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 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 l 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 l 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 l 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 l When customer demands an out of stock item • • l 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 – – – 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 – – Inventory should not be used to cover problems Lean companies 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 l l 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 Control. Introduction (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. – Anticipating. Production 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 Control. Introduction (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 Control. Introduction (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 Control. Production 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 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
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