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
Transformation/ Outputs
Land
Conversion Goods
Labor
process Services
Capital
Feedback

Control
Feedback Feedback
 ABM
Activity Analysis
Non-value-added activity
Value-added activity • Increases time spent on
product or service but does
• Increases worth of
not increase worth
product or service to a
customer • Unnecessary from customer
perspective
• Customer is willing to
pay for it • Can be reduced, redesigned
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 Non-Value-Added
Processing Time Inspection Time
Service Time Transfer Time
Idle Time
 Cycle Time

Cycle Value- Non-

Time = Added + Value-Added
Activities 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 High
Costs Sales

Low Unit Quality High Customer

Costs Product Service

High High Low Fast Many

Throughput Utilization Inventory Response products

Less Short Low High More

Variability Cycle Times Utilization Inventory Variability

Production and Inventory Control-

Introduction (13)
 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
Corporation
Corporate
level

Parts Plant 1 Parts

PartsPlant
Plant22 Assembly
AssemblyPlant
Plant11
Shop
level

Shaft Production Gear

GearProduction
Production
Heat
Heat
Purchasing
Purchasing
Department
Treating
Treating level

CNC Mill CNC

CNCLathe
Lathe Gear
GearHobber
Hobber
Automated Part Workstation
Handling System level

Robotic Load/ Tool Power Force Equipment

Unload Exchanger Controller Sensor 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
 Production Activity
Raw Material and Information Flows
Forecasting
Administrative Functions
Fabrication (Purchasing, Payroll,
Plant Finance, Accounting)
Strategic Planning
Assembly Marketing
Plant
Aggregate Production
Finished Planning
Products Product Design

Distribution
Disaggregation
Center Process Planning

Production Scheduling Manufacturing Support

Retailer (Facilities Planning,
Tool Management,
Shop Floor Control Quality Control,
Customer Maintenance)
a) Product Flow b) Decision Hierarchy c) Support Functions 17
 Production System
Decision Hierarchy
Inputs Process Outputs Length of
Planning
Horizon
 Long Range Economic Forecasts Strategic  Operating Facilities Years
 Financial Choices Planning  Product Line (Families)
 Technologies
 Processing Technologies/Efficiency Aggregate  Production Level Months
 Medium Range Product Production  Workforce Level
 Family Forecasts Planning  Family Inventories
 Machine Schedules

 Production Levels Disaggregation  Master Production Schedule Weeks

 Workforce Levels (MPS) - Final Assembly by item
 Current Inventory Status  Item Inventories
 Changeover Times and Costs
 Item Forecasts
 MPS Production  Job Priorities Days-Shift
 Bill of Materials Scheduling  Order Releases
 Process Plans  Machine Schedules
 Labor Status Shop Floor  Machine Priorities Real Time –
 Machine Status Control  Job Status Minutes
 Job Priorities  Labor Reporting
 Order Releases  Material Handling Tasks
 Machine Schedules  Load/Prices/Unload Authorization 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 PROCESSES LAYOUTS

Make-to-stock Continuous high volume,

standardized process industries Product Layout
commodities repetitive mfg low variety

Assemble-to-order Hybrid, FMS, low volume,

Cellular Layout
modular CAM, CIM medium variety

Make-to-order low volume,

Job-Shop(Intermittent) Process Layout
custom
high variety

low volume,
Engineer-to-order Special Project Fixed Position
one-of-kind low variety 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
Station Station Station Station Finished
materials 1 2 3 4 item
or customer
Material Material Material Material
and/or and/or and/or and/or
labor labor labor 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 Part families with similarity
in manufacturing process in shape
 Original Process Layout

Assembly

4 6 7 9

5 8

2 10 12

1 3 11

A B C Raw materials
 Cellular Layout

Assembly

8 10 9 12

11
4 Cell 1 Cell 2 6 Cell 3
7

2 1 3 5

A B C
Raw materials
 Comparison of Product
and Process Layouts
Product Process
• Workers  Limited skills  High skills
• Inventory  Low in-process, high  High in-process, low
finished goods finished goods
• Storage space  Small  Large
• Material handling  Fixed path (conveyor)  Variable path (forklift)
• Aisles  Narrow  Wide
• Scheduling  Line balancing (Easier)  Dynamic (More difficult)
• Layout decision  In-line, U-type  Functional
• Goal  Equalize work at each  Minimize material
station handling cost
• Advantage  Efficiency  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 I I I
Material

a. Materials Requirements Planning (MRP)

Raw
Material

b. Just-In-Time (KANBAN)

Material Flow
Processor I Infinite Capacity
Inventory Buffer
Finite Capacity
Inventory Buffer 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 Limit on
Total
Inventory
Raw I I
Material

c. Constant Work-In-Process (CONWIP)

Raw
Material

d. Hybrid CONWIP-KANBAN

Material Flow
Processor I Infinite Capacity
Inventory Buffer
Finite Capacity
Inventory Buffer 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 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.
– AnticipatingProduction
Execution: AP is virtually always
and Inventory Control-
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
Production and Inventory Control-
curves
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 release
Production and times.
Inventory Control-
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) Efficient use of space

b) Efficient personnel movement
c) Maximum equipment utilization
d) Smooth flow of work
e) 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) The workstation with the largest capacity

b) The workstation with the smallest capacity
c) The amount of WIP inventory
d) 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