Chapter 6 Planning and Controlling Production: Work-in-Process and Finished-Good Inventories. Omar Maguiña Rivero

Transcription

1 Chapter 6 Planning and Controlling Production: Work-in-Process and Finished-Good Inventories

2 Learning Objectives At the end of the class the student will be able to: 1. Describe the production budget process for a manufacturing company. 2. Describe the different inventory policies and their influence in the related areas of a company.

3 Overview of Production Planning

4 Overview The marketing plan specifies the planned volume for each product in a specific period of time, the next step in a manufacturing enterprise is to developed a production plan. Production requirements = Sales volume +/ - Finished goods inventory change

5 Planning Manufacturing Operations

6 Responsibility for Production Planning Responsibility rests on production managers. Although, top-management policies must be considered in such matters as inventory levels, stability of production, and capital additions (plant capacity). Complexity is added when multiplant production is required.

7 Budgeting Process (Sales Through Production Planning) for a Manufacturing Company

8 Responsibility for Production Planning (cont.) Lower production costs usually result from standardization of products and stable production levels. Sales managers are usually aggressive in requesting new products and changes in the old products. There may be pressure from both sales and manufacturing for high inventory levels. Therefore the need of coordination.

9 Production Budget

10 Production Budget Steps 1 st step: the establishment of policies for inventory levels. 2 nd step: Planning of the total quantity of each product that is to be manufacture during the budgeted period. 3 rd step: Scheduling of the production by time periods.

11 General Considerations in Planning Production and Inventory Levels The production budget should be developed in terms of quantities of physical units of finished products. When it is possible plan sales volumes should be developed by units and by dollars.

12 Production Plan Decisions 1. Total production requirements 2. Inventory level policies 3. Plant capacity policies 4. Adequacy of manufacturing facilities 5. Availability of direct materials, components and labor 6. Length of the processing time 7. Economic lots or runs (batch) 8. Timing of production

13 Developing the Production Plan Units of Product Required for sales (from sales plan) 14,200 Add planned ending inventory level of finished goods (based on management policy) 1,500 Total required 15,700 Less beginning inventory of finished goods 2,000 Planned production for the year 13,700

14 Developing the Production Plan (cont.) Beginning inventory for the budget period must be estimated. Production has to be prorated by specific periods during the budget year. Production for each period of time must be planned to : Provide products to meet specific sales periods Keep specific inventory levels Manufacture goods as economically as possible

15 Basic Patterns for Highly Seasonal Inventory Level 1. Give priority to production stability 2. Give priority to inventory stability 3. Give no priority to inventory or production

16 Proposal A: Policy, Stable Production Level Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year Planned sales 1,500 1,600 1,600 1,400 1,200 1, ,100 1,200 1,400 14,200 Add ending inventory 1,700 1, ,000 1,500 1,700 1,700 1,700 1,500 1,500 Total 3,200 2,900 2,500 2,000 1,700 1,600 1,700 2,100 2,600 2,800 2,900 2,900 15,700 Less beginning inventory 2,000 1,700 1, ,000 1,500 1,700 1,700 1,700 2,000 Planned production 1,200 1,200 1,200 1,100 1,100 1,100 1,100 1,100 1,100 1,100 1,200 1,200 13,700 Proposal B: Policy, Stable Inventory Level Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year Planned sales 1,500 1,600 1,600 1,400 1,200 1, ,100 1,200 1,400 14,200 Add ending inventory 1,900 1,800 1,700 1,600 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 Total 3,400 3,400 3,300 3,000 2,700 2,500 2,200 2,100 2,400 2,600 2,700 2,900 15,700 Less beginning inventory 2,000 1,900 1,800 1,700 1,600 1,500 1,500 1,500 1,500 1,500 1,500 1,500 2,000 Planned production 1,400 1,500 1,500 1,300 1,100 1, ,100 1,200 1,400 13,700 Proposal C: Policy, Flexible Production and Inventory Levels Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year Planned sales 1,500 1,600 1,600 1,400 1,200 1, ,100 1,200 1,400 14,200 Add ending inventory 1,700 1,300 1,100 1,100 1,300 1,500 1,500 1,600 1,600 1,700 1,600 1,500 1,500 Total 3,200 2,900 2,700 2,500 2,500 2,500 2,200 2,200 2,500 2,800 2,800 2,900 15,700 Less beginning inventory 2,000 1,700 1,300 1,100 1,100 1,300 1,500 1,500 1,600 1,600 1,700 1,700 2,000 Planned production 1,200 1,200 1,400 1,400 1,400 1, ,200 1,100 1,200 13,700

17 Developing Inventory Policies Each of the related functions causes different, and frequently inconsistent, inventory demands, such as the following: Sales: Large inventory of finished goods. Production: large inventories of raw material and purchased components are needed. Purchasing: Large purchases minimize unit cost and overall purchasing expenses. Finance: Low inventory levels.

18 Developing Inventory Policies (cont.) Inventory policies should include: 1. The establishment of inventory standards, such as maximum and minimum level or target turnover rates. 2. The application of techniques and methods that will ensure conformity with planned inventory standards.

19 Consideration to Determine Inventory Policies 1. Quantities (in units) needed to meet sales requirements. 2. Perishability of items. 3. Length of the production period. 4. Storage facilities. 5. Adequacy of capital to finance inventory production. 6. Distribution time requirements. 7. Cost of holding inventory.

20 Consideration to Determine Inventory Policies (cont.) 8. Protection against direct material and components shortage. 9. Protection against labor shortage. 10. Protection against materials and parts price increase. 11. Risk involved in inventory (price decline, obsolescence of stock, casualty loss and theft, lack of demand, customer return policies).

21 Example of Policy Expression METHOD EXAMPLE OF POLICY EXPRESSION 1. Month s supply For product X Three months supply based on moving three month average of budgeted requirements For product Y Two months supply based on average annual issues budgeted for the year 2. Maximum limit For product X Inventory not to exceed 5,000 units 3. Maximum and minimum limits For product X Maximum 5,000 units; minimum 3,000 units 4. Specific amount For product X Equal to the sales budgeted for the following month 5. Inventory turnover rates For product X Turnover rate to be six annualize (six turnovers per year) For product Y Turnover rate to be two on a monthly (two turnover per month)

22 Material Requirements Planning

23 Material Requirements Planning Production is usually coordinated throughout the various production stages. MRP is a technique for coordinating production in multistage production environments with many parts, materials, subassemblies, components and finished products.

24 Data Files Used in MRP Inventory item master: list all the materials and parts items in inventory. Product structure file: contains the details for the production of all items produced both subassemblies and end products.

25 Just-in-Time (JIT) production

26 JIT Main Characteristics 1. It is inefficient and costly to hold large inventories of safety stock for raw materials, subassemblies, or finish products. 2. Setup times for production can be minimize through the use of robotics and process improvements studies. 3. Very high quality of subassemblies and final products must be achieve in order to reduce the need for safety stock.

27 The Production Budget as a Planning, Coordinating, and Control Tool

28 The Production Budget as a Planning, Coordinating, and Control Tool The production budget is the primary basis for raw material and component requirements, labor needs, capital additions, cash requirements, and factory costs.

29 Quantitative Methods in Planning and Controlling Production In planning and controlling production, linear programming and inventory models have broad applications, which should be fully integrated with a comprehensive profit planning and control program.