Production Planning and Inventory

Control
Dr. Mohammed Othman
Faculty of Engineering and IT
Production Planning System

2
 Learning Objectives

• Explain five levels of planning and control

• Explain sales and operations planning
• Identify different aggregate planning strategies
& options for changing demand and/or capacity
in aggregate plans
• Develop aggregate plans, calculate associated
costs, and evaluate the plan

© Wiley 2010 3
 Planning System Questions

A good production planning system

must answer four questions:
• What are we going to make?
• What does it take to make it?
• What do we already have?
• What do we need to get?
 Key is to match

• Priority
– What is needed, when, and how much
• Capacity
– Capability to produce what is needed and when

Priority Capacity
(Demand) (Resources)
 Major levels of Planning and Control

• Five major levels in the manufacturing planning and

control system.
• In order of time span (long to short) and detail
(general to detailed), these are:
– Strategic business plans
– Sales and Operations Plans (Production Plans and
Marketing Plans)
– Master Production Schedules
– Material Requirements Plans
– Purchasing and Production Activity Control
 Major levels of Planning and Control

Each level differs in the following:

1. Purpose of the plan
2. Planning horizon: time span from now till
sometime in the future for which the plan is
created.
3. Level of details: about products in the plan
4. Planning cycle: frequency of plan review
 At each level, need to decide

• What are the priorities

– What to produce?
– How much?
– When?
• What is the available capacity?
• How can the differences between priorities and
capacities best be resolved?
 Planning Hierarchy

Strategic
Business Plan

Marketing & Master

Production Plan
Plan
Planning
Master Production
Schedule

Material
Requirements
Plan

Production Activity Implementation

Control and
Purchasing
 Strategic Business Plan (SBP)

• Statement of the firm’s broad direction

• Shows the kind of business – product lines,
markets – the firm wants to do in the future.
• Based on long range forecasts.
• SBP is coordinated with production, marketing,
financial and engineering plans.
• Level of detail is not high
• Usually reviewed every six months to a year
 Production Plan

• Quantities of each product group to be produced

each period
• Projected/desired inventory levels
• Resources needed: Equipment, Labor, Material
• Availability of needed resources
• Level of detail is not high
• Planning horizon: 6 to 18 months
• Reviewed each month or quarter
 Master Production Schedule

• Shows, for each period, the quantity of each end

item to be made.
• Level of detail is higher than the Production Plan
– End items versus groups of items
– Time periods usually shorter (e.g., weeks versus
months)
• Planning horizon extends from 3 to 18 months.
• Plans are reviewed weekly or monthly.
 More Detailed Planning and Control

• Material Requirements Plan (MRP)

– End item requirements broken down into specific
components – what to make or buy, and when
• Production Activity Control
– Execution plan, detailing specific orders to produce
items from the Material Requirements Plan
• Purchasing
– Similar to Production Activity Control, only includes
items to be purchased rather than produced.
 Capacity Management

• At each level of the planning and control

system, reconciliation with resources must be
made
– Must obtain the right resources or change the
plan
• Insufficient resources = missed production
schedules
• Resources significantly exceed planned
production = idle resources and extra cost
Sales and Operations Plan

Strategic Annual
Business Plan

SALES AND OPERATIONS PLAN

Monthly
Marketing Production
Plan Plan

Detailed Master Weekly

Sales Plan Production or
Schedule Daily
 Sales and Operations Planning

• Is used to continually update the SBP.

• Intermediate-range planning decisions to balance
supply and demand, integrating financial and
operations planning
• Enforces functional plans to be realistic and
coordinated
• Represents a plan to achieve company objectives
• Provides management visibility of production,
inventory, and backlogs.
 Manufacturing Resource Planning (MRP II)

• Computerized planning and control system

• Differs from the MRP in the resource
availability check being an inherent part of the
process.
• Method for effective planning of all resources
of a manufacturing company.
• Also called “closed-loop MRP”
MRP II
 Enterprise Resource Planning (ERP)

• Computerized Integration of all direct and

indirect functions and areas with an impact on
material flow and management.
• ERP is similar to MRP II except it doesn’t
dwell on manufacturing, includes marketing,
finance,
• Instead, the whole enterprise is taken into
account.
 Developing the Production Plan

• Prime purpose of a production plan is to

establish production rates that accomplishes
the objectives of strategic business plan.
• These include:
– Market demand
– Customer service
– Inventory levels
– Backlogs (unfilled customer orders)
 Developing the Production Plan

• Some key questions that must be answered to

develop an effective planning strategy:
– How flexible are the resources, both in quantity and
timing?
– Are “outside” resources available (subcontracting)?
– Can we utilize inventory to meet demand?
 Basic Production Plan Strategies

• Chase strategy – vary production rates to meet

changes in demand
– Often used when inventory cannot be used or when
resources are flexible and inexpensive to change
• Production Leveling – establish average demand
level and set production rate to that level
– Often used when resources are difficult or very
expensive to change
• Hybrid – use a combination.
• Subcontracting, backlogging, …
 For Example:

No. of Units

Demand

Time
 Chase Production:

No. of Units
Chase Production

Demand

Time
 Level Production:

No. of Units

Level Production

Demand

Time
 Level Production:

No. of Units
USE Inventory

Level Production

CREATE Inventory

Demand

Time
 Hybrid:

No. of Units

Hybrid
Demand

Time
 Subcontracting, backlogging

No. of Units Demand

Subcontract,
backlog

Production

Time
 Introductory Example

• A company wants to produce 10,000 units of an

item over 3 months at a level rate. There are 20, 21
and 12 working days in the first, second and third
months respectively. On average, how much
should the company produce every day?

Total production = 10,000 units

Total working days = 20 + 21 + 12 = 53 days
Average daily production = 10,000/53 = 188.7 units
 Make-to stock (MTS)

Generally we make to stock when:

1. Demand is fairly constant and predictable
2. There are few product options
3. Delivery times demanded are shorter than
time needed to make the product
4. Product has a long shelf life
 MTS production plan

Information needed to make a production plan:

1. Forecast by period for the planning horizon
2. Opening inventory (positive)
3. Any past-due customer orders(backorders/opening neg.
inventory)
4. Desired ending inventory
Outcome:
5. Quantities of each product group to be produced each period
6. Projected inventory levels at each period
7. Resources needed: Labor, Material, Equipment.
 Level production plan (MTS)

General procedure:
1. Total the forecast demand for the planning horizon
2. Determine opening inventory and desired ending
inventory
3. Calculate the total production required as:
Total production = total forecast + backorders
+ ending inventory – opening inventory
4. Calculate the production required each period
5. Calculate the ending inventory for each period
 Numerical Example:

Suppose the forecasted demand for a product family looks

like the table below. Assume the product family is a
Make-to-Stock family with a starting and ending inventory of 100.

Period 1 2 3 4 5 6 Total

Forecast (Demand) 150 160 180 175 155 140 960

 Production Plan Using a Level Strategy

Period 1 2 3 4 5 6 Total

Forecast (Demand) 150 160 180 175 155 140 960

Planned 160 160 160 160 160 160 960

Production

Planned Inventory 110 110 90 75 80 100

 Production Plan using Chase Strategy

Period 1 2 3 4 5 6 Total

Forecast (Demand) 150 160 180 175 155 140 960

Planned 150 160 180 175 155 140 960

Production
Planned Inventory 100 100 100 100 100 100
 Remarks

• Thus far, the discussion in this chapter assumes a

single product/product family.
• In case of multiple products, planning is based on a
representative unit for all products.
• This unit is called aggregate unit.
 Spreadsheet methods

• Precision Gears Inc. produces 41,383 gears/year.

• There are 260 working days and 40 workers ⇒ ≈ 4
gears/workerday.
• Production costs, excluding labor, do not change over the
planning horizon
• Inventory holding cost is $5 per gear per month.
• New workers can be hired at a cost of $450 per worker.
• Existing workers can be laid off at a cost of $600 per worker.
• Wages and benefits for a worker are $15 per hour.
• All workers are paid for eight hours per day,
• There are currently 35 workers at Precision Inc.
• Develop the aggregate plan using chase strategy?
• Develop the aggregate plan using production
leveling strategy with backorders are allowed?
• Develop the aggregate plan using production
leveling strategy with backorders are not allowed?

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 Chase Strategy

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 Level Production

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 Level Production: No Backorders

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 Remarks

• Neither level strategy nor chase strategy

guarantees optimality of the resulting
production plan
• In fact, this is rarely the case.
• A hybrid strategy usually results in a more cost
effective plan.
• Linear programming (LP) is the tool to develop
optimal production plans
Linear Programming
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 Example

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 Continue

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