DESIGN OF A PRODUCTION & INVENTORY MANAGEMENT PLANNING SYSTEM FOR FINISHED PRODUCT ON A MAKE TO STOCK MANUFACURING ENVIRONMENT

Miguel Columbus Ponce1, Juan Cajas Mendoza2

1 2

Industrial Engineer 2005,email: miguelcolumbus@hotmail.com

Thesis Director, Mechanical Engineer, Escuela Superior Politcnica del Litoral, 1994, MSc. Industrial Engineering, Purdue University, EEUU, 2000, ESPOL Professor since 2001,email: cajasmen@gye.satnet.net

ABSTRACT
The present project comprehends the design of a Planning System for the Production and Inventory Management of finished product applied to the glass manufacturing industry. The designed system is a pull one using a fixed reorder point and Economic Lot Sizes considering a finite production rate. This new system was designed using real data during eight months of activity of the factory. The data was used to determine the demand distribution and other variables. Finally, a simulation was conducted with a commercial stochastic program and the results were compared with the real results of the actual system during the same time horizon of 8 months.

INTRODUCTION
For the industry in general, proper inventory management is an actual issue for Management. Hence, disadvantages and weaknesses of carrying high stock inventory levels are known in order to satisfy demand, those might be traduced in terms of freeze money and associated maintenance costs. In the other hand, work with designed strategies to reduce at maximum the inventory producing only for confirmed orders, practically means big efforts for plants, which due to lack of flexibility related to its physical or organizational structure, results on poor performance indexes with significant losses. Then, several researchers through Management Science had studied and developed analysis tools to solve those problems. On this thesis, a combination of techniques wil be used to set a working model in order to develop a system for production planning and inventory management. This system must improve the service level and minimize inventory costs. The objective is to design a system that reduces the average cost of carrying inventory by the

design of a pull system, and test its effectiveness using a simulation with a commercial stochastic program, comparing simulation results with the real ones of the actual system.

SCOPE, DESCRIPTION OPERATIONAL ANALYSIS PROCESS BUSINESS

& OF

Description of the actual production management system: Product manufacturing begins with the sales forecast. The Commercialization Department prepares an annual sales plan (ASP) between August/September every year. Then, based on the ASP and the inventory levels the Master Production Schedule (MPS) is developed. On that MPS the required Machine Operating Days (MODs) are determined, those are compared against the plant capacity. The MPS is reviewed on weekly and monthly basis, being corrected depending on firm orders generated, the ASP is corrected too. Any change on the MPS, tems to produce, their quantities, or its sequence is aproved by the Comercial Director and the Plant Manager, or the apropriate persons in charge. In case of

disagreement, a meeting with the CEO is conducted to define the MPS.

GESTION DE REALIZACIN DEL PRODUCTO
PROCESO DE APOYO: DESARROLLO DE PRODUCTOS
SISTEMAS MANTENIMIENTO MOLDES

DEMAND ANALYSIS SYSTEM DESIGN

AND

REPARACIN MQUINAS Y CAMBIOS DE REFERENCIA

FORECAST

PROGRAMACIN DE LA PRODUCCIN

COORDINACIN DE CAMBIOS DE REFERENCIA

RECEPCIN DE MATERIA PRIMA

FORMACIN DE ENVASES

ACONDICIONAMIENTO DEL VIDRIO

FUSIN DEL VIDRIO

MEZCLA DE MATERIA PRIMA

CONTROL DE CALIDAD EN FORMACIN

TRATAMIENTO EN CALIENTE

TRATAMIENTO DE DURABILIDAD EN ARCHAS

TRATAMIENTO DE LUBRICACIN

CONTROL DE CALIDAD EN ZONA FRIA

DESPACHO

ALMACENAMIENTO

CONTROL DE CALIDAD EN EMPAQUE

EMPAQUE

DECORACIN

Picture 1.5 Product Manufacturing Flowchart Analysis for the actual system: It is clear that the actual production system is push, since production obeys to an annual sales forecast. Hence, all the administrative steps previously mentioned are done, but market uncertainty, lack of standard operating procedures (SOPs), poor operational resource management, and the lack of clear inventory management policies, carry to frequent changes in the MPS, entry of urgent orders, or reduction of the length of manufacturing orders, affecting the plant performance indexes, and the manufacturing process stability and product quality. Market uncertainty and its dynamics rule the situation, that is difficult to predict by a forecast. Then, it is needed to work with a pull system, in which the real demand sets how much and when production must occur in a natural fashion according to its dynamic. Objetives and restrictions for the new system: The objective of the new system is to minimize cost of carrying inventory, using known techniques from the Inventory Management and Production Planning field, looking for a better service level at that minimum cost. The system designed considers: a reorder point with security stock (RP), and the Economical Order Quantity (EOQ). The service level is determined considering 24 hours MODs. Estimating the RP demand variability is considered by a probability distribution. The system considers that demand is satisfied from inventory on hand until production occurs, then all demand is satisfied. The system does not consider penalties for stockouts.

Demand Analysis An ABC classification is performed to all the 137 products manufactured. Then, 43 articles represents 86.09% of total sales. Within these 43 products 18 were selected as input data to design the new system. Those 18 products represents 47.67% of sales. For each one of that 18 products its theorical probability distribution was assesed using monthly sales data for 8 months (January to August 2004). The Kolmogorov Smirinov goodness of fit test was used for a population with y . From the goodness of fit test the null hypothesis of data comes from a normal distribution was not rejected. Policy selection fro inventory management: EOQ and RP EOQ: For EOQ determination (Q*) the following expresin for finite production rate was used, PAUL H. ZIPKIN (2000): Q* = 2K H(1)

Where: = monthly demand (distribution average for each product). K = setup cost H= holding cost. = utilization / , < 1 where, = production rate (bottles/month). RP: To define the RP the security stock and demand during the lead time (L) is considered. The RP expression considered focus on the stochastic case where presence of stockouts is associated to a probability, R.Chase. et all (2004). RP= d*L+z*L Where: RP: reorder point (bottles). d: average daily demand (bottles/day) L: lead time (days). Set to 4 days (as the time since a production order is set and production begins). z = number of typical standard deviations for a given service level (z=1.64 for 95% service level). L = Demand standard deviation during lead time.

Formula variables were determined based on historical records from January August 2004. On the next table shows values for Q* and RP for the 18 products. Table 2.7 Q* AND RP VALUES No. Product Q* 1 C-7475 2.195.292 bot 2 GN-3178 1.672.089 bot 3 L-00058 1.167.907 bot 4 G-3191 1.071.024 bot 5 C-7487 973.790 bot 6 L-00041 952.766 bot 7 L-00055 908.486 bot 8 L-00054 768.431 bot 9 E-4104 750.457 bot 10 C-3003 746.539 bot 11 L-1401 720.240 bot 12 GB-00053 610.425 bot 13 G-20855 608.259 bot 14 E-4103 535.090 bot 15 GN-200 509.911 bot 16 L-00052 505.488 bot 17 C-7418 412.519 bot 18 E-4129 378.138 bot

MODEL VALIDATION
Simulation with a stochastic comercial system ARENA from Rockwell Software is used. Then, an individual simulation is performed for each product. A picture showing the model network is considered below.

R 363.435 bot 212.020 bot 115.923 bot 132.991 bot 84.527 bot 114.860 bot 83.620 bot 61.569 bot 54.335 bot 47.927 bot 50.863 bot 50.934 bot 51.089 bot 26.848 bot 26.649 bot 26.379 bot 17.058 bot 14.442 bot

Figura 3.1 Model network example To validate the model, total inventory system cost and service levels were considered. Analysis of simulation results: average service level, inventory system cost. A time horizon of 8 months (245 days) was considered. Then, proper comparison respect actual values would be possible. The next formulas were considered to determine inventory system total cost, and average service level, Ronald H. Ballou (2004).: C(Q*) = c + k + Q* H( 1- )Q* + H*z*L 2

Capacity Analysis
The manufacturing plant has three prodcution lines, their capacity is: A1 Line: 142,12 bottles/min bottles/month) (6.312.309,68

A2 Line: 118,93 bottles/min (5.138.165,85 bottles/month) A3 Line: 175,42 bottles/min bottles/month) Overall Plant Capacity 19.028.899,06 bottles/month (7.578.423,52 ( )

Service Level = 1 L *E(z)/Q*

Where, = monthly demand K = setup cost

Total capacity is for three lines in parallel. Average monthly demand for the 137 products is 17.463.613 bottles, since 17.463.613 < 19.028.899,06 then, there is enough capacity to satisfy demand. System Design The new system is pull, where each time inventory reach the RP value a prodcution order of Q* is released.

H= inventory holding cost = utilization / <1

where = production rate L : demand standard deviation during lead time E(z) : normal unit of integral normal lost (as a function of z)

Since z=1.64, the E(z) value is : E(z)=E(1.64)=0.0211 The following tables compare the total cost and service level for the two systems, for the new system data comes from the simulation. TABLE 3.6 Comparisson of total cost for Simulacin vs Real
Comparacin Costo Total Inventario REAL vs NUEVO SISTEMA SIMULADO (tiempo de comparacin 8 meses) Enero-Agosto 2004 Promedio rplicas simuladas No. Producto Costo Total Invenario real Costo Total Inventario Simulacin (usd/8meses) Nuevo Sistema (usd/8meses) 1 C-7475 1.707.480 usd/8meses 1.593.200 2 GN-3178 1.478.776 usd/8meses 1.098.700 3 L-00058 585.842 usd/8meses 577.600 G-3191 454.184 usd/8meses 4 529.230 5 C-7487 472.498 usd/8meses 418.690 6 L-00041 506.119 usd/8meses 451.510 7 L-00055 392.377 usd/8meses 368.380 8 L-00054 226.909 usd/8meses 263.820 9 E-4104 324.648 usd/8meses 254.230 10 C-3003 236.576 usd/8meses 249.710 11 L-1401 318.397 usd/8meses 232.190 12 GB-00053 301.098 usd/8meses 201.630 13 G-20855 96.128 usd/8meses 202.100 14 E-4103 106.976 usd/8meses 132.890 15 GN-200 172.553 usd/8meses 122.260 16 L-00052 139.679 usd/8meses 120.150 17 C-7418 104.836 usd/8meses 80.222 18 E-4129 59.716 usd/8meses 67.691 Costo Total 8 meses C(Q*) 7.684.790 usd/8meses 6.964.203 usd/8meses Ahorro en 8 meses 720.587 usd/8meses

Production planning implications A more stable production Schedule might be get. It is possible to reduce number of urgent orders.

CONCLUTIONS RECOMENDATIONS

AND

It is possible to reduce the total cost of carrying inventory and at the same time keep a desired service level, using the proponed system. The new system shows potential savings of up to US$5.404.402,5 within 5 years as minimum, however it is important to keep feedback and updates for the system in the form of costs and demand This estimation is based only considering 18 A products from an ABC analysis, representing 47.67% of total sales. Real savings might be higher than estimated if we consider all 43 A products, in case we consider B products too, we may account for up to 86.09% of total sales. It is recommended adopt the new system for A, and B products as an inventory policy. For the C products, the recommended policy would be to manufacture only when formal orders were received. It is crucial to design a software considering those new policies. This new system, is a pull one in accordance with actual demand, able to achieve better service levels and reduce total costs for inventory management.

TABLE 3.7 Comparisson of Service Level for Simulation vs Real.

Comparacin Nivel de Servicio REAL vs NUEVO SISTEMA SIMULADO (tiempo de comparacin 8 meses) Enero-Agosto 2004 Promedio rplicas simuladas No. Producto Nivel de Servicio Simulacin Nuevo Nivel de Servicio real Sistema 1 C-7475 1,000 0,95027 2 GN-3178 1,000 0,95932 3 L-00058 1,000 0,95920 4 G-3191 0,942 0,96019 5 C-7487 1,000 0,96380 6 L-00041 1,000 0,95944 7 L-00055 1,000 0,96290 8 L-00054 0,865 0,96499 9 E-4104 1,000 0,96610 10 C-3003 0,958 0,96503 11 L-1401 1,000 0,96674 12 GB-00053 1,000 0,96720 13 G-20855 0,221 0,96680 14 E-4103 0,765 0,96697 15 GN-200 1,000 0,96794 16 L-00052 1,000 0,96829 17 C-7418 1,000 0,96273 18 E-4129 0,882 0,96517 Nivel Sevicio Promedio 8 meses 0,92 0,96

The new system considering a 8 months period of simulation results in savings for total inventory costs of US$720,587 with a service level of 96%, an improvement in both indexes respect the actual system. Long range benefits for the new system. Projection up to 5 years may sum savings for US$5,404,402.50 at a 96% service level. Of course it is needed to keep updated the system variables in order to account for changes in costs and demand.

REFERENCES

1.-Stevens M.A D'Agostino R.B. Marcel Dekker, Goodness of Fit Techniques. New York 1986. 2.-Paul H. Zipkin , Foundations of Inventory Management, McGraw-Hill 2000. 3.-R.Chase.F. Jacobs N. Aquilano.Irwin , Administracin de la Produccin y Operaciones: para una ventaja competitiva, McGraw-Hill 2004. 4.-Ronald H. Ballou, Logstica Administracin de la Cadena de Suministro, Quinta Edicin, 2004. 5.-W. D. Kelton, Simulation with Arena, Third Edition,2004,p 17-235