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PLANT PRODUCTION AND INVENTORY CONTROL OPERATIONS MANAGEMENT AN INTRODUCTION:

Operation- Part of organization which is concerned with the transformation of a range of inputs into the required output having the requisite quality level. Business Plan

Forecast

having the requisite quality level. Business Plan Forecast Production Plan Resource Requirement Plan Master Production

Production Planhaving the requisite quality level. Business Plan Forecast Resource Requirement Plan Master Production Schedule

Resource Requirement Plan

Plan Forecast Production Plan Resource Requirement Plan Master Production Schedule Customer Orders Rough Cut
Master Production Schedule
Master Production Schedule

Customer Orders Plan Resource Requirement Plan Master Production Schedule Rough Cut Capacity Planning Inventory Control Materials

Rough Cut Capacity PlanningRequirement Plan Master Production Schedule Customer Orders Inventory Control Materials Requirement Planning Capacity

Inventory Control Materials Requirement Planning Capacity Requirements Plan Purchase Orders Work Orders Receiving
Inventory Control
Materials Requirement Planning
Capacity Requirements Plan
Purchase Orders
Work Orders
Receiving
Shop Floor Control
Production

1. Business Plan- Identifies the nature and direction of the business

2. Production Plan- Define the overall level of manufacturing output planned

3. Resource Requirements Plan- Identify in broad terms the major classes of resources that will be needed to provide the long range capacity to complete the production plan

4. Forecast- anticipate the level of demand for the products

5. Master Schedule- Serves as the game plan from which more specific plans are derived

6. Material Requirements Planning- The level of planning at which individual components requirements are identified and scheduled.

7. Rough cut capacity planning- Determining whether the master schedule can be met with the existing capacity

8. Capacity Requirements Planning- Specific components are converted into standards measure of capacity requirements FORECASTING DEMAND:

What are forecasts?

Estimate of occurrence, timing or magnitude of uncertain future events

Essential for smooth operation of business

Operations managers are primarily concerned with forecasts of demand

What are the costs associated with forecasting?

Better use of capacity, more responsive service to customers and improved profitability Key features commonly used forecasting methods:

Opinion/ Judgemental Method

Time Series

Qualitative

Quantitative

Consist of:

Set of observations over time

Forecast by individual sales people

Forecast by division of product-line manager

Combined estimates of the 2

Time Series

Equation: Y=TxSxRxC

Y-forecast T-Trend- tendency of time series to exhibit a stable pattern of growth and decline S-Seasonal-repeats at fixed interval R-Random component-no recognizable pattern of data C-Cyclical- similar to seasonal but length and magnitude of cycle may vary

Steps:

1.

Plot historical data to confirm relationship (e.g. linear, exponential)

2.

Develop trend equation

Measures of Forecast Accuracy

Mean absolute deviation (MAD)= (1/n)

Mean square error (MSE)= (1/n)

deviation (MAD)= (1/n) Mean square error (MSE)= (1/n) e i 2 |e i | Mean absolute

e i 2

(MAD)= (1/n) Mean square error (MSE)= (1/n) e i 2 |e i | Mean absolute percentage

|e i |

Mean absolute percentage error (MAPE)= [(1/n) Method of Forecasting: Stationary Series

1. Moving Averages Disadvantage:

Stationary Series 1. Moving Averages Disadvantage: |e i /D i |]x100  One must recomputed the

|e i /D i |]x100

One must recomputed the average of the last N observations each time a new demand observations become available

Moving average lags behind trend- not appropriate forecasting method when there is a trend in the series

2. Exponential smoothing

SIMILARITIES of (1) and (2)

1. Both assume underlying demand is stationary

2. Both depend on specification of a single parameter

a. MA: parameter = N (number of periods)

b. ES: parameter = α (smoothing constant)

Conclusion: small values of N or large values of α put greater weight on current data

(may be more responsive to change in demand process but result in forecast errors with higher variances)

4.

When α=2/(N+1) both method have same accuracy but not necessarily mean same forecast

DIFFERENCE of (1) and (2)

1. Exponential smoothing: weighted average of all past data points Moving average: weighted average of only past N data Advantage of MA: Outlier washed out of MA after N period but remains with exponential smoothing

2. To use MA: one must save all N past data points To use ES: only need last forecast (Advantage: less cost with inventory of information)

Method of Forecasting: Trend Based Method

1. Regression Analysis

of Forecasting: Trend Based Method 1. Regression Analysis Di S x y =n S x x
of Forecasting: Trend Based Method 1. Regression Analysis Di S x y =n S x x

Di

S xy =n

S xx =(n 2 )(n+1)(2n+1)/6 (n 2 )(n+1)2/4 Let (x 1 ,y 1 ), (x 2 ,y 2 )(x n ,y n ) be n paired of datapoints for 2 variables x and y Y= a+ bx b=S xy /S xx a=D A -b(n+1)/2 D A -arithmetic average of observed demands

iDi [n(n+1)/2]

AGGREGATE PLANNING:

Purpose: Develop techniques for aggregating units of productions, and determining suitable production levels and workforce levels based on predicted demand for aggregate units

Addresses the problem of deciding how many employees the firm should retain and for a manufacturing firm the quantity and mix of products to be produced Primary issues related to aggregate planning problem:

1. Smoothing:

Cost that results from changing production and workforce levels from one period to next Key Components:

a. Hiring Employees

b. Firing Employees

2. Bottleneck problems:

Inability of the system to respond to sudden changes in demand as a result of capacity restriction e.g. Bottleneck arise when demand in a month is unusually high Breakdown of equipment

3. Planning horizon (T)

Number of periods for which demand is to be forecasted

If too small- current production level might not be adequate for meeting the demand beyond the horizon length

If too big- forecast into the future is inaccurate

Cost in Aggregate Planning

1. Smoothing cost-cost of changing production and/or workforce levels

2. Holding cost-opportunity cost of dollar invested in inventory

3. Shortage cost-cost associated with back-ordered or lost demand

4. Labor cost-direct labor cost on regular time, overtime, subcontracting cost, idle time cost

Strategies for Aggregate Planning:

1. Chase Strategy (Zero inventory Plan)

GOAL: minimizes # inventory the firm must hold during planning horizon

A

B

C

D

E

F

G

H

I

J

K

Month

#Working

# Units

Forecasted

Min. #

# Hired

# Fired

# Units

Cumulative

Cumulative

Ending

Days

produced

Net

worker

Produced

Production

Demand

Inventory

per worker

Demand

required

   

B x constant

 

D/C

   

E x C

J - I

(round-up)

2. Constant Workforce Plan

GOAL: Eliminate need of firing and hiring during planning horizon

A

B

C

D

E

F

G

H

Month

Cumulative

Cumulative #

Ration B/C

C X D

Cumulative

Cumulative

Ending

Net Demand

of units

cumulative

Production

Demand

Inventory

produced per

workers

worker

           

B

F - G

Evaluate which is more cost efficient between chase strategy and constant workforce plan using C H , C F and C I

MASTER SCHEDULING The heart of production planning and controlPURPOSE: It determines the quantities needed to meet demand from all sources and that governs key decisions and activities throughout the organization

Inputs:

1. Beginning Inventory-actual quantity on hand from the preceding period

2. Forecast

3. Customer orders (committed)- quantities are already committed to customers

Outputs:

1. Projected Inventory

2. Master production schedule

3. Uncommitted inventory (Available-to-promise inventory)

Master Production Schedule (MPS)- indicates the quantity and timing of planned production,

taking into account desired delivery quantity and timing as well as on-hand inventory. Projected on hand inventory = inventory from previous week current weeks requirement

Available to promise inventory= [Beginning Inventory + MPS] (Customer orders weeks before next MPS)

Month

 

June

   

July

 

Week

1

2

3

4

1

2

3

4

Forecast

30

30

30

30

40

40

40

40

Customer

33

20

10

4

2

     

orders

(committed)

Projected on-

31

1

41

11

41

1

31

61

hand

inventory

MPS

   

70

 

70

 

70

70

Available-to-

11

 

56

 

68

 

70

70

promise

inventory

(uncommitted)

Time Fences

Problem: Changes to a master schedule can be disruptive, particularly changes to the early, or near, portions of the schedule

Use: Divides a scheduling time horizon into three sections or phases sometimes referred to as frozen, slushy, and liquid.

1.

Frozen- near-term phase that is so soon that delivery of a new order would be impossible, or only possible using very costly or extraordinary option such as delaying another order. Length depends on the total time needed to produce the product

2.

Slushy-few periods beyond the frozen phase. Order in this phase necessitates trade-offs.

3.

Liquid- Farthest out on the time horizon. New orders or cancellations can be entered with ease

 

1

2

3

4

5

6

7

8

9

FROZEN (FIRM OR FIXED)

Do not accept order

SLUSHY (SOMEWHAT FIRM)

Try our best to commit order

LIQUID (OPEN)

Can deliver order

Rough Cut Capacity Planning (RCCP)

Approximate balancing of capacity and demand to test the feasibility of a master schedule.

Checking capacities of production and warehouse facilities, labor and vendors to ensure

that no gross deficiencies exist that will render the master schedule unworkable