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

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 Qualitative Consist of: Forecast by individual sales people Forecast by division of product-line manager Combined estimates of the 2 Time Series

Time Series Quantitative Set of observations over time

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) ei2 |ei|

Mean absolute percentage error (MAPE)= [(1/n) |ei/Di|]x100 Method of Forecasting: Stationary Series 1. Moving Averages Disadvantage: 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 = (smoothing constant) Conclusion: small values of N or large values of put greater weight on current data (may be more responsive to change in demand process but result in forecast errors with higher variances) 3. Both method lag behind trend if trend exists

4. When =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 Sxy=n iDi [n(n+1)/2] Di Sxx=(n2)(n+1)(2n+1)/6 (n2)(n+1)2/4 Let (x1,y1), (x2,y2) (xn,yn) be n paired of datapoints for 2 variables x and y Y= a+ bx b=Sxy/Sxx a=DA-b(n+1)/2 DA-arithmetic average of observed demands

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 Month B #Working Days C # Units produced per worker
B x constant

D Forecasted Net Demand

E Min. # worker required


D/C (round-up)

F # Hired

G # Fired

H # Units Produced
ExC

I Cumulative Production
H

J Cumulative Demand
D

K Ending Inventory
J-I

2. Constant Workforce Plan GOAL: Eliminate need of firing and hiring during planning horizon
A Month B Cumulative Net Demand C Cumulative # of units produced per worker D Ration B/C cumulative workers E CXD F Cumulative Production G Cumulative Demand H Ending Inventory

F-G

Evaluate which is more cost efficient between chase strategy and constant workforce plan using CH, CF and CI

MASTER SCHEDULING The heart of production planning and control PURPOSE: 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 Week Forecast Customer orders (committed) Projected onhand inventory MPS Available-topromise inventory (uncommitted)

June 1 30 33 2 30 20 3 30 10 4 30 4 1 40 2 2 40

July 3 40 4 40

31

41

11

41

31

61

11

70 56

70 68

70 70

70 70

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