Planning. Planning Horizon. Stages of Planning. Dr. Richard Jerz

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1 Planning Dr. Richard Jerz 1 Planning Horizon Aggregate planning: Intermediate range capacity planning, usually covering 2 to 12 months. Long range Short range Intermediate range Now 2 months 1 Year 2 Stages of Planning 3 1

2 Overview of Planning Levels Long range plans Products and markets Long term capacity Location / layout (capital investment) Intermediate plans (General levels) Employment levels Raw material Operating hours Process output Short range plans (Detailed plans) Number of workers and daily production Machine loading Job assignments 4 Planning Sequence Corporate strategies and policies Economic, competitive, and political conditions Aggregate demand forecasts Business Plan Establishes production and capacity strategies Production plan Establishes production capacity Master schedule Establishes schedules for specific products 5 Aggregate Planning Inputs Resources Workforce Facilities Demand forecast Policy statements Subcontracting Overtime Inventory levels Back orders Costs Inventory carrying Back orders Hiring/firing Overtime Inventory changes subcontracting 6 2

3 Planning Techniques Technique Solution Characteristics Graphical/ charting Linear programming Linear decision rule Simulation Trial and error Optimizing Optimizing Trial and error Intuitively appealing, easy to understand; solution not necessarily optimal. Computerized; linear assumptions not always valid. Complex, requires considerable effort to obtain pertinent cost information and to construct model; cost assumptions not always valid. Computerized models can be examined under a variety of conditions. 7 Tableau Method Aggregate Planning Clear Number of periods: 6 1 Period Total Forecast ,800 Output Regular ,800 Part Time 0 Overtime 0 Subcontract 0 Output - Forecast Inventory Beginning Ending Average Backlog Costs: ,600 Part Hire/Layoff Back Total , , ,000 1,800 1,600 1,400 1,200 1, Cum Forecast Cum Production Aggregate Planning - Costs 1,400 1,200 1, Cumulative Forecast ,100 1,600 1,800 Cumulative Production ,200 1,500 1,800 Ending Inventory Backlog Re gular Part Time Overtime Inventory Hire/Layoff Inventory Back orders 8 Excel Demand Resources (facilities and equipment) People Leveling When is product demand level never. This becomes the challenge for OM. Our own resources, the effects on inventory 9 3

4 Strategies JIT Produce ahead with plan (MRP) Manage bottlenecks (Theory of Constraints) Lean 10 JIT Fundamental Concepts Theme: minimize inventory Wait for demand before building (pull versus push) 11 Elements of JIT Smooth flow of work (the ultimate goal) Elimination of waste Continuous improvement Eliminating anything that does not add value Simple systems that are easy to manage Small lots, reduced setup Cell layouts Use of product layouts to minimize moving materials and parts Quality at the source Preventative maintenance Set up time reduction Cross trained employees A pull system (Kanban) 12 4

5 Theory of Constraints Eli Goldratt Theme: bottleneck management 13 Steps in TOC Identify system constraints Determine how to exploit system s constraints Elevate constraints next higher Do not let inertia become new constraint 14 MRP Material requirements planning (MRP): Computer based information system for ordering and scheduling of dependent demand inventories 15 5

6 MRP Overview MRP Inputs MRP Processing MRP Outputs Master schedule Bill of materials Inventory records MRP computer programs Primary reports Secondary reports Changes Order releases Planned-order schedules Exception reports Planning reports Performancecontrol reports Inventory transaction 16 Requirements of MRP Computer and necessary software Accurate and up to date Master schedules Bills of materials Inventory records 17 Benefits of MRP Low levels of in process inventories Ability to track material requirements Ability to evaluate capacity requirements Means of allocating production time 18 6

7 MRP II Expanded MRP with and emphasis placed on integration Financial planning Marketing Engineering Purchasing Manufacturing 19 Enterprise Resource Planning (ERP) An expanded effort to integrate standardized record keeping that will permit information sharing throughout the organization Big computers systems, such as SAP 20 Inventory 21 7

8 Types of Inventories Raw materials & purchased parts Partially completed goods called work in process. Finished goods inventories (manufacturing firms) or merchandise (retail stores) 22 Types of Inventories (Cont d) Replacement parts, tools, & supplies Goods in transit to warehouses or customers 23 Functions of Inventory To meet anticipated demand To smooth production requirements To decouple components of the productiondistribution To protect against stock outs To take advantage of order cycles To help hedge against price increases or to take advantage of quantity discounts To permit operations 24 8

9 Effective Inventory Management A system to keep track of inventory A reliable forecast of demand Knowledge of lead times Reasonable estimates of Holding costs Ordering costs Shortage costs A classification system 25 ABC Classification System Classifying inventory according to some measure of importance and allocating control efforts accordingly. A very important B mod. important C least important High A Annual $ value of items Low B C Few Many Number of Items 26 The Inventory Cycle Q Quantity on hand Usage rate Profile of Inventory Level Over Time Reorder point Receive order Place Receive order order Lead time Place order Receive order Time 27 9

10 Procurement/Ordering Costs Fixed Staffing Office & Equipment Variable Shipping Ordering Setup cost Lost materials Receiving & inspection 28 Inventory Holding Costs Fixed Warehouse capital Property taxes Warehouse operating Personnel Variable Interest (cost of capital) Insurance Losses/breakage/theft Inventory taxes Rental costs 29 Economic Order Quantity (EOQ) A mathematical approach to determining how much to order based upon minimizing costs

11 EOQ Q = OPT 2DS H = 2(Annual Demand )(Order or Setup Cost ) Annual Holding Cost 31 Cost Minimization Goal The Total-Cost Curve is U-Shaped Annual Cost TC Q H D 2 Q S Holding Costs Ordering Costs Q O (optimal order quantity) Order Quantity (Q) 32 Total Cost Annual Total cost = carrying + cost Annual ordering cost Q 2 H D TC = + Q S 33 11

12 Total Cost First derivative H 0 = - 2 DS Q 2 34 Total Cost First derivative Q 2 = 2DS H 35 Deriving the EOQ Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q. Q = OPT 2DS H = 2(Annual Demand )(Order or Setup Cost ) Annual Holding Cost 36 12

13 Assumptions of EOQ Model Only one product is involved Annual demand requirements known Demand is even throughout the year Lead time does not vary Each order is received in a single delivery There are no quantity discounts 37 Inventory Hides Problems 38 Disaggregating Master schedule: The result of disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon. Rough cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a master schedule