Planning

Dr. Richard Jerz

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Planning Horizon

• Aggregate planning: Intermediate‐range capacity planning, usually covering 2 to 12 months.

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Shortrange

Intermediate range

Long range

Now 2 months 1 Year

Stages of Planning

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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

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Planning Sequence

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Corporatestrategies

and policies

Economic,competitive,and political conditions

Aggregatedemand

forecasts

Business Plan

Production plan

Master schedule

Establishes productionand capacity strategies

Establishesproduction capacity

Establishes schedulesfor specific products

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

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Planning Techniques

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Technique Solution Characteristics Graphical/charting

Trial anderror

Intuitively appealing, easy tounderstand; solution notnecessarily optimal.

Linearprogramming

Optimizing Computerized; linear assumptionsnot always valid.

Lineardecision rule

Optimizing Complex, requires considerableeffort to obtain pertinent costinformation and to constructmodel; cost assumptions notalways valid.

Simulation Trial anderror

Computerized models can beexamined under a variety ofconditions.

Tableau Method

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Aggregate Planning Number of periods: 6

Period 1 2 3 4 5 6 TotalForecast 200 200 300 400 500 200 1,800Output

Regular 300 300 300 300 300 300 1,800Part Time 0Overtime 0Subcontract 0

Output - Forecast 100 100 0 -100 -200 100 0Inventory

Beginning 100 200 200 100 0Ending 100 200 200 100 0 0Average 50.0 150.0 200.0 150.0 50.0 0.0 600

Backlog 0 0 0 0 100 0 100Costs:

Regular @ 2 600 600 600 600 600 600 3,600Part Time @ 0 0 0 0 0 0 0Overtime @ 3 0 0 0 0 0 0 0Subcontract @ 6 0 0 0 0 0 0 0Hire/Layoff 0Inventory @ 1 50.0 150.0 200.0 150.0 50.0 0.0 600.0Back orders @ 5 0 0 0 0 500 0 500

Total 750.0 800.0 750.0 1,150.0 600.0 4,700.0

1 2 3 4 5 6Cumulative Forecast 200 400 700 1,100 1,600 1,800Cumulative Production 300 600 900 1,200 1,500 1,800Ending Inventory 100 200 200 100Backlog 100

Aggregate Planning - Costs

0

200

400

600

800

1,000

1,200

1,400

1 2 3 4 5 6

Regular Part Time OvertimeInventory Hire/Layoff InventoryBack orders

Clear

0200400600800

1,0001,2001,4001,6001,8002,000

1 2 3 4 5 6

Cum Forecast Cum Production

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

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Strategies

• JIT• Produce ahead with plan (MRP)• Manage bottlenecks (Theory of Constraints)• Lean

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JIT Fundamental Concepts

• Theme: minimize inventory• Wait for demand before building (pull versus push)

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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)

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Theory of Constraints

• Eli Goldratt• Theme: bottleneck management

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Steps in TOC

• Identify system constraints• Determine how to exploit system’s constraints

• Elevate constraints next higher• Do not let inertia become new constraint

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MRP

• Material requirements planning (MRP): Computer‐based information system for ordering and scheduling of dependent demand inventories

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MRP Inputs MRP Processing MRP Outputs

Masterschedule

Bill ofmaterials

Inventoryrecords

MRP computerprograms

ChangesOrder releases

Planned-orderschedules

Exception reports

Planning reportsPerformance-controlreports

Inventorytransaction

Primaryreports

Secondaryreports

MRP Overview

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Requirements of MRP

• Computer and necessary software• Accurate and up‐to‐date

• Master schedules• Bills of materials• Inventory records

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Benefits of MRP

• Low levels of in‐process inventories• Ability to track material requirements• Ability to evaluate capacity requirements• Means of allocating production time

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MRP II

• Expanded MRP with and emphasis placed on integration• Financial planning• Marketing• Engineering• Purchasing• Manufacturing

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Enterprise ResourcePlanning (ERP) 

• An expanded effort to integrate standardized record‐keeping that will permit information sharing throughout the organization

• “Big” computers systems, such as SAP

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Inventory

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Types of Inventories

• Raw materials & purchased parts• Partially completed goods called work in process.

• Finished‐goods inventories • (manufacturing firms) or merchandise (retail stores)

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Types of Inventories (Cont’d)

• Replacement parts, tools, & supplies• Goods‐in‐transit to warehouses or customers

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Functions of Inventory

• To meet anticipated demand• To smooth production requirements• To decouple components of the production‐distribution

• 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

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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

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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

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Annual $ valueof items

AB

C

High

LowFew Many

Number of Items

The Inventory Cycle

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Profile of Inventory Level Over Time

Quantityon hand

Q

Receive order

Placeorder

Receiveorder

Placeorder

Receiveorder

Lead time

Reorderpoint

Usage rate

Time

Procurement/Ordering Costs

• Fixed• Staffing• Office & Equipment

• Variable• Shipping• Ordering• Setup cost• Lost materials• Receiving & inspection

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Inventory Holding Costs

• Fixed• Warehouse‐capital• Property taxes• Warehouse‐operating• Personnel

• Variable• Interest (cost of capital)• Insurance• Losses/breakage/theft• Inventory taxes• Rental costs

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Economic Order Quantity (EOQ) 

• A mathematical approach to determining how much to order based upon minimizing costs.

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EOQ

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Q = 2DSH

= 2(Annual Demand )(Order or Setup Cost )Annual Holding CostOPT

Cost Minimization Goal

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Order Quantity (Q)

The Total-Cost Curve is U-Shaped

Ordering Costs

QO

Ann

ual C

ost

(optimal order quantity)

TC Q H DQ

S 2

Holding Costs

Total Cost

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Annualcarryingcost

Annualorderingcost

Total cost = +

Q2 H D

QSTC = +

Total Cost

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First derivative

H2

DSQ20 = -

Total Cost

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First derivative

2DSHQ2 =

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.

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Q = 2DSH

= 2(Annual Demand )(Order or Setup Cost )Annual Holding CostOPT

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

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Inventory Hides Problems

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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.

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