Production Planning & Control

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Production planning and inventory control in a

company manufacturing PC parts: A case study

Katsuhiko Takahashi & Nobuto Nakamura

To cite this article: Katsuhiko Takahashi & Nobuto Nakamura (2001) Production planning and
inventory control in a company manufacturing PC parts: A case study, Production Planning &
Control, 12:3, 296-308, DOI: 10.1080/095372801300107842

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PRODUCTION PLANNING & CONTROL, 2001, VOL. 12, NO. 3, 296 ± 308

Production planning and inventory control in a

company manufacturing PC parts: a case study
KATSUHIKO TAKAHASHI and NOBUTO NAKAMURA

Keywords production planning, inventory control, MRP,
PC industry.
Abstract. In this paper, we present a case study on the produc-
tion planning and inventory system in a company manufactur-
ing personal computer (PC) parts. In the case study, the targets
are speci® ed for developing a system for production planning
and inventory control. The current state of the company is
analysed for clarifying the points necessary to achieve the tar-
gets. Also, a system based on the analysis is proposed and its
eå ects are estimated.
1. Introduction
Recent computers, especially personal computers
(PCs), show remarkable advancement, and this causes
strong competition among companies which manufacture
and sell PCs. As a result, the environment of production
and sales in the PC industry has become more and more
competitive. As the life cycle of products is short and
model changes in related parts occur frequently in the
PC industry, production planning and inventory control
play an especially important role not only for the prod-
ucts manufacture r but also the parts manufacturer .
In this paper, a case study on production planning and
inventory control in the object company for manufactur-
ing PC parts is presented. The object company studied in
this research was established in 1988, and it is developing
and producing electronics application parts and their
software, especially factory bus interface (FBI) boards
for various PCs. The company employs about 100 regular
employees, and it has a headquarters, one production
base, and three sales bases in Japan. The conceptual
model of the object company can be shown as ® gure 1.
In the object company, parts bought from outside are
assembled to the interface boards for various PCs. The

Authors: K. Takahashi and N. Nakamura, Dept. of Industrial & Systems Engineering, Faculty of
Engineering, Hiroshima University, 4-1, Kagamiyama 1 chome, Higashi-Hiroshima 739-8527,
Japan. E-mail: takahasi@pel.sys.hiroshima-u.ac.jp
K a t su h ik o Ta k a h a sh i is an Associate Professor of Production Planning and Control in the
Department of Industrial and Systems Engineering at Hiroshima University, Japan. He received
BE, ME and DE degrees in Industrial Engineering and Management at Waseda University in
1981, 1983 and 1989, respectively. His research interests include: modelling and analysis of manu-
facturing systems, especially, just-in-time system, logistics system, manufacturing ¯ exibility, and
manufacturing systems simulation. He is a member of INFORMS, IIE and SCS.

No bu t o Na k a mu r a is a Professor of Industrial and Systems Engineering at Hiroshima

University, Japan. He received BE and ME degrees in Industrial Engineering at Hiroshima
University in 1965, 1969, respectively, and DE degree at Osaka University in 1974. His reseach
interests include: productivity analysis and improvement, manufacturing control and scheduling,
computer integrated manufacturing, distributed decision making, and arti® cial intelligence. He is a
member of IIE and HFES.

Production Planning & Control ISSN 0953± 7287 print/ISSN 1366± 5871 online # 2001 Taylor & Francis Ltd
http://www.tandf.co.uk/journals
 Production planning and inventory control
Figure 1. The conceptual model of the object company.
production process in the production base of the com-
pany can be considered as a single process (` products
production’ in the ® gure), and it has the production
capacity of 300 units a day. In the production base,
there is a parts warehouse (` part inventory’ in the ® gure)
and a products warehouse (` product inventory’ in the
® gure) for stocking parts and products. In order to
plan and control the production, the demand of each
product is forecast, the production of each product is
planned, and the necessary parts are ordered from sup-
pliers. In addition, the inventories of parts and products
are controlled in planning the production of products
and the procurement of parts.
When the case study was started, production planning
and inventory control in the object company was per-
formed as follows. Based on the average and trend of
actual demands during the last 3-, 6- or 12-month period,
the demands for products are forecast for every month.
Based on the forecasted demand, the products production
after 3 months is planned for releasing orders of parts
procurements. By material requirements planning
(MRP), the production plan of each product is translated
into the necessary amount of parts to procure for produ-
cing the product, and the orders of procuring parts are
released to suppliers 2 or 3 months before the parts are
used. For producing products, the production schedule
for 3 days is planned and dispatched every day. In addi-
tion, the income and outcome of products and parts are
monitored for controlling the inventories of products and
parts.
In our case study, both production planning and
inventory control are considered together in order to
reduce inventories of products and parts through exam-
ining the production planning and inventory control
system. The following researchers report case studies
related to production planning and inventory control.
297
Kalpic et al. (1995) study a case on the multi-purpose
production plan of the multi-plan period. Karacapilidis
and Pappis (1996) study a case of production control in a
textile industry, and McGarrie (1998) examines a case on
selecting, improving and executing the production con-
trol system. Cases on hierarchical production planning
(HPP) are studied by Carravilla and Sousa (1995),
Ozdamar et al. (1997, 1998). Carravilla and Sousa
(1995) study a case on HPP in a make-to-orde r company.
Ozdamar et al. (1997) study a case on the integration of
HPP and MRP. Moreover, Ozdamar et al. (1998) intro-
duce a case on proposing a hierarchical decision support
system. Cases on just-in-time (JIT) are studied by
Mazany (1995), Caputo and Dulmin (1997), and
Gunasekaran and Lyu (1997). Mazany (1995) studies a
case on introducing JIT to a small-scale company manu-
facturing knit wear. Caputo and Dulmin (1997) study a
case on JIT in a company manufacturing automobiles,
and Gunasekaran and Lyu (1997) look at a case intro-
ducing JIT into a small company. Cases on material
requirements planning (MRP) are studied by Manthou
et al. (1996) and Venkatarama n (1996). Manthou et al.
(1996) review cases introducing MRP into a company in
the north of Greece. Venkatarama n (1996) studies the
in¯ uence of the frequency of the plan in MRP based on
a case in a process industry. The above studies are for
production planning, and cases on inventory control and
purchase control are studied by Stenger (1996), and
Perkins and Gunasekaran (1998). Stenger (1996) studies
a case on reducing the stock of a company with multiple-
stages production bases. Perkins and Gunasekaran (1998)
study a case of improving the eæ ciency of purchase in a
small company.
This paper is organized as follows. After the
Introduction, the targets which were speci® ed before
examining production planning and inventory control
of the object company are described. This is followed
by the analysis of the current state for clarifying the
points necessary to achieve the target, the proposal for
the system based on the analysis, and its examination.
2. Targets for system development
At ® rst, the targets were speci® ed by the persons
responsible in the object company for developing the
system of production planning and inventory control. If
the targets can be described brie¯ y, it is an eæ cient
production, and the target is translated into achieving
the maximum production at minimum cost. The follow-
ing three essential points are enumerated as targets by the
persons responsible in the object company.
298 K. Takahashi and N. Nakamura

(1) Holding period of products inventory: no more

than 1 month. However, the products whose
amount of production is temporarily increased
for improving the productivity are excluded.
(2) Holding period of parts inventory: no more than 1
month. However, the parts whose amount of pur-
chase is temporarily increased for reducing the
purchase cost is excluded.
(3) Total amount of production: 700 per day, which is
about twice the current amount.

For the products and parts inventories, holding an

inventory of products or parts for 1 month is almost the
same as the maximum amount of inventory in a single
month’ s demand. As not only the maximum amount of
products inventory but also that of parts inventory must
be suppressed to the demand in 1 month, the targets
cannot be achieved if the products are produced for a
Figure 2. The average and standard deviation of monthly
demand of more than 1 month. In addition, to achieve
demand for each product.
the third target, the man-hours required for producing
each product cannot be increased much more than the
current level. Table 1. Total average or standard deviation of monthly
demand for each product.

3. A nalysis of current state No. of Average Std dev.

products (per product) (per product)

In order to develop a system for achieving the targets,
the current state of the object company was analysed. As
the targets are given not only for products inventory but
also for parts inventory, the current state of products and
parts was analysed.
3.1. Analysis of products
First of all, the monthly demand data for the most
recent year (from August 1997 to July 1998) are ana-
lysed, the average and standard deviation of monthly
demand for each product is calculated, and this is
shown as a scatter chart in ® gure 2.
With ® gure 2, it can be seen that the average monthly
demand for each product is not more than 90, and almost
less than 40. Also, the standard deviation is ¹0.5± 1.2
times the average. To sum up the average or standard
deviation of all products, the total average or standard
deviation is obtained as shown in table 1.
With table 1, it can be understood that the total prod-
ucts inventory should be within 6497 items maximum in
order to achieve the target for products inventory. This
means that the current state of ¹10 000 inventories
should be reduced to about two thirds. If the production
of all products is planned and produced once a month,
the maximum inventories of all products may be 6497
items even if the safety stocks of products are not consid-
730 6497 (8.9) 4343 (5.94)
ered. It can be thought that the safety stocks of products
considerably increase the maximum inventories because
table 1 shows a rather high level of the standard devi-
ation of each product and the safety stocks are propor-
tional to the standard deviation. At the same time, the
number of products is 730 as shown in table 1, and this
number indicates the number of productions in a month
if all of the products are produced once a month. The
current number of products produced in each month is
about 350=25£20 ˆ 280, and it increases to about
730=280 ˆ 2:6 times. We can easily forecast that the
increase leads to increasing the man-hours in setups.
Based on the above results, excluding lump demands,
shortening the cycle of production plans, and classifying
the type of production planning are examined as a strat-
egy for achieving the targets. At ® rst, excluding lump
demands is examined. The lump demands and the
demand applying the discount for early orders are
excluded from the data because they can be planned by
another frame. As a result, the average and standard
deviation of monthly demand are decreased by ¹31%
and 28%, respectively. This means that the exclusion of
lump demands and early orders leads to reducing the
products inventories related to the production cycle by
 Production planning and inventory control 299

Table 2. Total monthly production quantity when products Table 4. The number of products and the total average or
are produced based on the minimum lot size. standard deviation of monthly demand of the products in each
class of production planning system.
Maximum
quantity/month Std dev. No. of orders Planning system No. of products Ave. Std dev.

7739 3109 1142 make-to-stock 36 2226 1380

lot production 1.5 100 1512 1043
lot production 2.0 82 587 484
lot production 2.5 121 402 460
Table 3. Product class and production planning system. make-to-order 485 870 1262
Total 824 5597 4628
Product class Ave. monthly demand Planning system

AA more than 25 units make-to-stock

BB1 10± 25 units lot production of Table 5. The number of splits in the make-to-stock system and
1.5 months the total of estimated maximum inventory and standard
BB2 5± 10 units lot production of deviation.
2.0 months
BB3 2± 5 units lot production of No. of splits Max inventory Std dev.
2.5 months
CC less than 2 units make-to-order 1 per month 6672 4068
2 per month 5560 3664
4 per month 5003 3378

¹31%, and those related to the safety stock by ¹28%.

However, the reduced standard deviations are still at a
high level, and it can be understood that only excluding
lump demands and early orders is not suæ cient for
achieving the targets. Next, shortening the cycle of prod-
uct plan and production is analysed. The products inven-
tories can be reduced proportionally to the cycle of plan
or production. Moreover, the safety stocks can be
reduced proportionally to the square root of the cycle.
Table 2 then shows the results of the analysis where the
cycles of production are reduced by producing products
based on the minimum lot size speci® ed for each product.
From table 2, it can be understood that the maximum
production quantity per month (4343) does not decrease
much less than the average monthly demand (6497),
whereas the standard deviation decreases, and the pro-
duction based on the minimum lot size has no eå ect on
reducing products inventories. In the long term, the pro-
duction quantity of a product should correspond to the
demand. However, this does not necessarily correspond
to the short term. Therefore, the production with mini-
mum lot size for every product decreases the production
cycle and product inventory of some products and
increases that of others, and the total product inventories
increases in this case. As a result, it can be understood
that the target products inventory would never be
achieved when the production of each product is planned
based on the minimum lot size.
In order to achieve the target of products inventory,
not for every product but as a whole, the products were
classi® ed into ® ve classes, the production planning system
for the products in each class was determined as shown in
table 3, and the eå ects analysed.
The number of products and the total average or stan-
dard deviation of monthly demand of the products in
each class can be calculated as shown in table 4. Where
the number of products increases much more than that
shown in table 1 because of the increase in the object
products.
Table 4 shows that the total monthly demand of all
products is 5597 units, and the target for products inven-
tories is to make the products inventory less than the
total. If the complete make-to-orde r is introduced for
the 485 products in CC class, the products inventories
for the products become unnecessary. However, in the
case of products inventories of the products with lot pro-
duction of a certain lot size, the maximum products
inventory increases proportionally to the lot size.
Consequently, the total of the maximum inventory
depends on the products inventories of the products
with the remaining planning system, make-to-stoc k
system. If the plan or production of the products is split
into n portions and the split productions are performed n
times a month, the maximum inventory of the products
can be estimated as one nth of the average monthly
p 
demand and the standard deviation as 1= n of the stan-
dard deviation of monthly demand. As a result, the total
of the maximum inventories and their standard devi-
ations of all products can be estimated as shown in
table 5.
With table 5, it can be understood that the target for
products inventory can be achieved only when the plan
and production of the products of make-to-stoc k system is
split into more than two portions per month.
 300

Table 6. Procurement lead time of each part and the number of parts.

Procurement lead time

Part class Description 1 7 12 14 20 21 30 35 45 60 75 90 100 105 120 135 150 165 175 180 Total

A on-hand item 7 71 64 108 193 84 19 35 2 27 1 2 1 614

B stock item 1 23 1 417 1 95 235 1 620 161 15 74 1 30 3 1 1 1680
B1 sleeping item 10 39 1 233 138 1 290 67 5 58 23 1 4 1 871
C stopping item 1 2 44 26 39 1 24 1 138
C1 prohibited item 1 2 3
N new item 15 2 9 22 6 1 1 56
X uncertain item 7 19 10 1 25 13 3 2 80
(blank) others 1 7 25 15 45 67 13 3 15 1 192
K. Takahashi and N. Nakamura

total 2 55 1 586 12 412 604 2 1232 375 44 208 1 3 82 2 9 1 1 2 3634

 Production planning and inventory control 301

Table 7. The minimum order size of each part and the number of parts.

Minimum order size

Class Description 1 ± 25 ± 50 ± 100 ± 200 ± 500 ± 1000 ± 2000 ± 5000 ± 50 000 Total

A on-hand item 100 235 11 77 4 25 43 49 66 4 614

B plan stock item 578 764 51 144 24 22 34 49 13 1 1680
B1 sleeping item 423 234 15 64 63 14 12 21 25 871
C stopping item 117 13 1 4 1 2 138
C1 prohibited item 1 3
N new item 44 8 1 2 1 56
X uncertain item 73 1 1 3 2 80
(blank) others 81 31 3 45 5 3 12 2 7 3 192
total 1418 1287 83 339 97 64 104 123 111 8 3634

Table 8. Average and standard deviation of monthly demand, parts inventory,

and stock rate.

Monthly parts demand

No. of parts Ave. Std dev. Parts inventory Stock rate

3634 840 640 375 737 5 711 659 6.79

3.2. Analysis of parts
In order to develop a parts procurement system that
achieves the target for parts inventory, the data related to
the procurement and demand of parts were analysed.
First of all, the procurement lead time of each part was
analysed as shown in table 6.
With table 6, it can be understood that the number of
parts that can be procured within 30 days is 1672 (46.0%
of all parts), and that within 60 days is 3281 (90.3% of all
parts). This means that 46% of parts can be procured
before the due date if the orders are released 1 month
before, 90% of parts can be procured before the due date
if the orders are released 2 months before, and the
remaining parts should be ordered more than 2 months
before.
As well as the procurement lead time, the minimum
order size of each part has an in¯ uence on the parts
procurement and inventories, and this is clari® ed in
table 7.
With table 7, it can be understood that the number of
parts with the minimum order size of one unit is 1418
(39.0% of all parts), the number of parts with the mini-
mum order size of no more than 25 is 2705 (74.4% of all
parts). As a result, ¹40% of all parts are possible to
procure with an individual order of one unit, ¹74% of
all parts by a lot with the size of no more than 25 units,
and the others should be ordered by a lot with the size of
more than 25 units.
Next, the state of parts inventory was analysed. From
the monthly demands data on parts for the most recent
year from August 1997 to July 1998, and the parts inven-
tory on 27 August, 1998, table 8 shows the total average
or standard deviation of monthly parts demand, the total
parts inventory of each inventory, and the stock rate,
which means the parts inventory divided by the monthly
parts demand.
With table 8, it can be seen that the stock rate is too
high when we consider that the procurement lead time of
parts is almost no more than 2 months. In order to inves-
tigate the cause of this high stock rate of parts, the factors
that in¯ uenced the part stock rate were analysed where
the object parts are limited to part class A, B and N (it
means 2011 parts) in the above tables. To start with the
parts demand was analysed, and the relation between the
average monthly demand and the stock rate of each part
is shown by a scatter chart in ® gure 3 where both axes of
the ® gure are shown with logarithmic scale.
With ® gure 3, it can be seen that the stock rate is high
as a whole, but there is a weak negative correlation
between the average monthly demand and the stock
rate of each part. This means that the stock rate of the
part with high average demand is suppressed. The ten-
dency is reasonable, and it can be understood that the
average monthly demand is not the deciding factor in the
high stock rate of parts. Next, the relation between the
minimum order unit of part and the stock rate of each
part was analysed. The relation between the minimum
302 K. Takahashi and N. Nakamura

Figure 3. Relation between the average monthly demand and Figure 5. Relation between the average monthly demand of
the stock rate of each part. parts divided by the minimum order unit and the parts inven-
tory divided by the minimum order unit.

much more than those in the right side. As a result, it

can be shown that the order to procure a certain part of
smaller minimum order unit is not based on the mini-
mum order units but the other size. Similarly, the in¯ u-
ences of the procurement lead time and the parts price
were analysed. However, the in¯ uence upon the stock
rate could not be clari® ed.
Next, the causes of excessive parts inventories relative
to the minimum order unit were investigated. At ® rst, the
in¯ uence of the average monthly demand upon the parts
inventory was analysed, and the relation between the
average monthly demand of part divided by the mini-
mum order unit and the parts inventory divided by
the minimum order unit is shown by a scatter chart in
® gure 5.
From ® gure 5, it can be seen that there is a strong
positive correlation between the average monthly
Figure 4. Relation between the minimum order unit divided
demand of part divided by the minimum order unit
by the average monthly demand and the stock rate of each part. and the parts inventory divided by the minimum order
unit. As a result, it can be shown that the order unit of a
part is increased proportionally as the average monthly
order unit divided by the average monthly demand and demand of the part increases relative to the minimum
the stock rate of each part was analysed, and the relation order unit, and it leads to an increase of parts inventory.
is shown by a scatter chart in ® gure 4. Thus, it can be understood that the order unit should not
Because the minimum order unit of a part shows the be increased and the frequent order release with a small
lower limit as decreasing the maximum inventory, the size would be necessary to reduce the parts inventories
line with slope 1 in ® gure 4 shows the lower bound of even if the average monthly demand of a part increases.
the stock rate as decreasing the maximum inventory. As another possible cause of an excessive parts inven-
Compared with the line, most of the plots are higher tories relative to the minimum order unit, the minimum
than the line, and some plots are extremely higher. order unit was analysed, and the relation between the
Moreover, in the left side of the vertical axis, which indi- minimum order unit and the parts inventory divided
cates that the minimum order unit is lower than the by the minimum order unit is shown by a scatter chart
average monthly demand, the plots exceed the line in ® gure 6.
 Production planning and inventory control 303

Figure 6. Relation between the minimum order unit and the Figure 7. Relation between the diå erence of procurements and
parts inventory divided by the minimum order unit. demands and the stock rate.

From ® gure 6, it can be understood that parts inven-

tory decreases as the minimum order unit increases.
Though it is preferable, it can be understood as a prob-
lem that excessive parts inventories are held for the parts
with a small minimum order unit. Similar to ® gure 5, this
is caused by increasing the order unit of a part propor-
tionally to the average monthly demand of the part for
particular reasons, e.g. for reducing the load for order
release. Therefore, in order to reduce parts inventories,
it is necessary to release orders by a size as small as poss-
ible and as frequently as possible. Similarly, the in¯ uence
of the procurement lead time was analysed. However, the
in¯ uence upon excessive parts inventories could not be
clari® ed.
In addition, as another possible cause of excessive parts
inventories, the balance of procurements and demands of
each part were analysed. For the parts of the class A, B
and N, the balance of procurements and demands during Figure 8. Relation between the diå erence of procurements and
the current year were analysed, and the relation between demands divided by the average monthly demand and the stock
rate of each part.
the diå erence of procurements and demands and the
stock rate are shown by a scatter chart in ® gure 7
With ® gure 7, it can be seen that the diå erence of In addition, ® gure 8 shows the relation between the
procurements and demands distributes both sides around diå erence of procurements and demands divided by the
the vertical axis, which is zero diå erence, and this can be average monthly demand and the stock rate of each part.
accepted as reasonable. However, it is not necessarily From ® gure 8, it can be seen that many of the parts of a
preferable for the parts with a lot of inventories because high stock rate are the parts of the standardized diå er-
the balance of procurements and demands of a part ence of procurements and demands is 1, and it can be
means that the inventory level of the part continues. understood that many parts with a high stock rate in
Also, with ® gure 7, we can see the parts with positive ® gures 3 and 4 are the parts of no procurements.
diå erence of procurements and demands, especially Though it is preferable itself, it can be expected to take
some parts with fairly positive diå erence. For these a considerably long period to reduce the inventories of
parts, it is necessary to balance the procurements and the parts. Moreover, there are many positively unba-
the demands. lanced parts, which means that the procurements exceed
304 K. Takahashi and N. Nakamura

Table 9. Production planning system for products. S the safety stock of product, and It the on-hand
No. of Production
inventory at the end of t-th period.
Product class products planning system Production split: The products inventory can be
reduced by splitting the production lot for a per-
AA 227 periodical planning system iod into speci® ed portions (e.g. split into two±
AB
AC
BB
123
162
89
] order point system
four portions in each month).
Safety stock: By analysing the distribution of the
CC 86 make-to-order system inventory level just before the products are sup-
687 plied, the relationship between the safety stock
and the service rate can be clari® ed. Also, the
safety stock has an in¯ uence upon the inventory
level as well as the service level. The safety stock
demand, and they increase the inventories of the parts. is determined based on the trade-oå relationship
As for the parts, it would be necessary to balance the between the service rate and the inventory level.
procurements and the demands of the parts. Production schedule: The production schedule in a
period, or in the divided period in case of the
split production, can be adjusted in the period.
Necessary condition: The parts necessary for produc-
4. Proposal of a system and the e€ ects tion should be procured before starting the pro-
duction, 60 days after the production is planned.
Based on the result of data analysis, we proposed a In the parts of 3634 items, 3281 items can be
system for production planning and inventory control. procured within 60 days, and the remaining
In this section the proposed system is shown with the 353 items should be ordered beforehand as
eå ects of the proposed system investigated. shown in table 6. Moreover, it is necessary that
the products demand is forecast 3 months before
(the performance of the forecasting method
in¯ uences the inventory level).
4.1. Planning system for products production (2) Order point system.
Object product: The products of product class AB,
The planning system for products production proposed AC and BB (374 of 687 products).
is classi® ed into periodical planning system, order point Time of plan: At any time when the inventory level
system and make-to-orde r system as shown in table 9. It (on-hand inventory plus the amount of back-
is noted that the number of products is diå erent from that orders) of an object product falls below the
shown above because of the review of the product class. order point of the product.
Through the three planning systems, the production of Object period: The period from the time when the
products is planned as follows. on-hand inventory runs out to the time when the
(1) Periodical planning system. ordered quantity is consumed.
Object products: The products within product class Production quantity: The average monthly demand
AA (227 of 687 products are classi® ed in this or the speci® ed lot size of the product.
class). Order point: The average demand in 1 month and
Time of plan: At the end of every month.
the safety stock.
Object period: Three months after (e.g. the produc- Safety stock: The safety stock is determined as the
tion during April is planned at the end of level that optimizes the trade-oå relation
January). between the service rate and the inventory
Production quantity: The production quantity of the level based on the standard deviation of inven-
three periods after the current period, Pt‡3 is tory level 1 month after the inventory level falls
calculated by the following equation. The logic below the order point.
is based on that for calculating net requirements Production schedule: Just 1 month after the order is
in MRP (see Orlicky 1975). released.
X
2 Necessary condition: It is necessary to procure the
^t;t‡3 ‡
Pt‡3 ˆ D ^ t;t‡l
…D Pt‡l † ‡ …S It † parts for the product 1 month later (among all
lˆ1
of the object parts, 3634 items, it is possible to
where D ^ t;t‡l means the demand forecast during procure 1672 items within 30 days, and the pro-
(t ‡ l)th period forecast at the end of t-th period, curement beforehand is necessary for the
 Production planning and inventory control
remaining 1962 items). Moreover, as the pro-
duction time distributes, it is necessary to corre-
spond to the distribution of production time.
(3) Make-to-orde r system.
Object product: The products of product class CC
(86 of 687 products).
Time of plan: At any time when the object product
is demanded.
Object period: The period from the time when the
necessary parts are procured to the time when
production is completed.
Production quantity: The demanded quantity of the
object product.
Safety stock: The safety stock is unnecessary.
Necessary condition: If there is enough time in the
due date of the object product for procuring the
necessary parts and producing the product, the
order for the necessary parts is released after
receiving the demand and the order for produ-
cing the product is released after receiving the
parts from suppliers. Otherwise, the order for the
parts should be released beforehand.
4.2. Parts procurement system
As a system for parts procurement, a synchronized
procurement system and an independent procurement
system are proposed. Table 10 shows the relation
among the procurement systems, the planning system of
products, and the procurement lead time of parts.
In the parts procurement system, the procurement of
parts is planned as follows.
(1) Synchronized procurement system.
Object parts: The parts used for the products
planned by the periodical planning system and
procured within no more than 60 days. Also, the
parts used for the product planned by the order
point system and procured within 30 days.
Time of plan: The parts used for the product
planned by the periodical planning system are
Table 10. Parts procurement systems, the product planning system, and the
procurement lead time.
Production planning system
Periodical planning system
Order point system
Make-to-order system
* In the make-to-order system, not only the procurement lead time but also the due
date have an in¯ uence upon whether it is possible to procure parts by synchronizing
with products production.
305
planned at the end of each month. The parts
used for the product planned by the order
point system are planned at any time.
Due date of procurement: For the parts used for the
product planned by the periodical planning
system, the due date of procurement is speci® ed
as 60 days later. For the parts used for the prod-
ucts planned by the order point system, the due
date is 30 days later.
Planning quantity: The quantity of the parts to be
procured is calculated by exploding the planned
quantity of products. When a part is procured
by the synchronized procurement system and
the individual procurement system simul-
taneously, it is better to separate both.
Safety stock: The safety stock is unnecessary. If the
procurement of parts is completely synchronized
with the production of products, the parts inven-
tory itself does not exist.
Necessary condition: The production quantity of the
products for which the object part is used should
be recorded, and the planned receipt of the parts
should be scheduled for the production . In this
way, the procurement of the parts is synchro-
nized with the production of the products, and
the inventory of the parts does not occur.
(2) Independent procurement system
Object parts: The parts used for the products
planned by the periodical planning system and
which cannot be procured within 60 days. Also,
the parts used for the products planned by the
order point system and which cannot be pro-
cured within 30 days, as well as the parts used
for the products planned by the make-to-orde r
system and which cannot be procured before the
products production.
Time of plan: At any time when the inventory level
of the object part, which means the on-hand
inventory plus the released order quantity, falls
below the order release point.
Due date of procurement: The due date speci® ed by
suppliers.
Procurement lead time (days)
± 30 30± 60 60±
synchronized synchronized individual
synchronized individual individual
synchronized individual individual
306 K. Takahashi and N. Nakamura
Planning quantity: Average monthly demand or the
speci® ed lot size of the object part .
Order point: The average demand during the pro-
curement lead time of the parts and the safety
stock. When the parts are used for both of the
products planned by the periodical planning
system and order point system, the average
demand is estimated based on the demand
data only for the products planned by the
order point system.
Safety stock: By analysing the distribution of the
inventory level just before the parts are supplied,
the relationship between the safety stock and the
service level can be clari® ed. Also, the safety
stock has an in¯ uence upon the inventory level.
As a result, the safety stock is determined based
on the trade-oå relationship between the service
rate and the inventory level.
Necessary condition: When the parts are used both
for the products planned by the periodical plan-
ning system and order point system, the demand
data related to the synchronized procurement
should be excluded and only the demand data
related to the independent procurement should
be recorded. In this way, the recorded demand
data are used for calculating average demand,
order point, planning quantity and safety stock.
4.3. Estimated eå ects of the proposal system
The eå ects of the proposal system were estimated by
investigating the in¯ uence upon the products inventory,
parts inventory and man-hours of products production in
producing the products and procuring parts with the
proposed system. Based on the monthly demand data
during the recent 6 months from February to July
1998, the number of products and the total average or
standard deviation of monthly demand of the products
planned by each planning system can be calculated as
shown in table 11.
Table 11. The number of products and the total average or standard deviation of
monthly demand of the products planned by each planning system.
Products class Planning system
AA periodical
]
AB
AC order point
BB
CC make-to-order
Total
With table 11, it can be understood that the target
for products inventory is the total average monthly
demand of 4663. The inventories of the products with
the periodical planning system are in¯ uenced by the
number of splits in one month as described above. For
example, the maximum inventories of the products
can be estimated as 3423=1 ˆ 3423, 3423=2 ˆ 1712,
3423=3 ˆ 1141 and 3423=4 ˆ 856 for the number of
splits 1, 2, 3 and 4 per month, respectively. In the
order point system, the production of the demand in 1
month is ordered when the on-hand inventory falls below
the order point. As a result, the total of the maximum
inventory of product in the order point system can be
estimated as 494 ‡ 243 ‡ 431 ˆ 1168. Also, in the
make-to-orde r system, the total of the maximum inven-
tory of product can be estimated as 0 because the prod-
ucts produced are immediately used to satisfy demands
and the inventories of the products do not exist.
Therefore, the total of the maximum inventory of prod-
uct can be estimated as 4591, 2880, 2309 and 2024 for the
number of splits per month in the periodical planning
system, 1, 2, 3 and 4, respectively.
In the estimation, safety stocks are not included. In the
periodical planning system and the order point system, it
is necessary to possess safety stocks in relation to the
uncertainty of monthly demand of product. If a demand
for the product planned by the periodical planning
system cannot be satis® ed by the inventory of product
and the customer waits until the next production time
of the split production in a month, it is not necessary to
possess safety stocks of the product. Similarly, if a
demand for the product planned by the order point
system cannot be satis® ed by the inventories, the demand
will be satis® ed only by the production of 1 month later.
If the unsatis® ed customer cannot wait until 1 month
later, it is necessary to possess the safety stock for prepar-
ing unexpected demand. Supposing that the monthly
demand distributes normally and the safety stock is
twice the standard deviation of monthly demand, that
is, 2 £ …438 ‡ 171 ‡ 317† ˆ 1852, then the probability
of lack of stock can be estimated to be ¹2.3%. At this
time, the total of the maximum inventory of product
No. of products Average Std dev.
227 3423 1460
123 494 438
162 243 171
89 431 317
86 72 79
687 4663 2465
 Production planning and inventory control
including the safety stocks is estimated as 4732, 4161 and
3876 for the number of splits per month in the periodical
planning system, 1, 2, 3 and 4, respectively, and it can be
understood that the target of products inventory can be
achieved in any case.
Next, the in¯ uence of the proposed system upon the
parts inventory was estimated as follows. For the parts
which are used for the products planned by the periodical
planning system and the procurement lead time of no
more than 60 days, together with the parts which are
used for the products planned by the order point system
and the procurement lead time of no more than 30 days,
the orders can be released by synchronizing with the
production plan of products. In this way, it can be
expected that the inventory of those parts hardly exists
excluding the inventory related to the minimum order
unit. For the parts which are used for the products
planned by the make-to-orde r system, it can be expected
that the inventory of those parts hardly exists if the
due date of the products is speci® ed as 1 month later.
Consequently, for the parts that can be procured within
30 days, the inventory hardly exists because of the syn-
chronization of procurement and production. Based on
the fact that the procurement lead time of 46.0% of all
parts is no more than 30 days as shown in table 6, it can
be roughly estimated that the stocks of 46.0% of all parts
will be reduced to 0. On the other hand, for the parts
procured by the independent procurement system, the
procurement order of the parts is calculated on the
basis of forecasts. As the ordered and procured quantity
of a part is not necessarily corresponding to the demand,
it is necessary to possess the safety stock for the part in
order to avoid running out of stock. Based on the total
average monthly demand of parts of 840 640 and the
standard deviation of 375 737 as shown in table 8 and
by assuming the normally distributed demand of parts,
the total maximum inventories with the safety stock for
maintaining the depletion of stock probability as 2.3%
can be estimated roughly as …840 640 ‡ 2:0 £ 375 737† £
0:46 ˆ 732 372, and the target of parts inventory can be
achieved. However, even if the system for producing
products and procuring parts is changed, it can be
expected that the parts inventory cannot be reduced im-
mediately because the stock rates of most parts are more
than 10, and this means that it takes at least 10 months to
exhaust the parts inventory.
In addition, for accomplishing the third target, i.e. to
double the production, the man-power in producing the
products cannot be increased. However, in order to
reduce the products inventory, it is necessary to split
the production of the products planned by the periodical
planning system, which will lead to an increase in man-
hours in setting up the production. Therefore, it can be
claimed that some eå orts for reducing the man-hours in
307
setting up the production will be needed in order to
achieve the third target.
5. Conclusions
In this paper, we presented a case study where we
examined production planning and inventory control in
a company for manufacturing PC parts for reducing the
stock of products and parts. In the case study, the data on
demand and procurement of products and parts are ana-
lysed for clarifying the state of production planning and
inventory control in the company, and a system for pro-
duction planning of products and parts procurements is
proposed on the basis of the data analysis. In addition,
the eå ects of the proposed system to determine whether
the target can be achieved were examined. Although it is
a rough estimation, it was estimated that the targets for
products and parts inventories will be able to be achieved
by the proposed system for production planning and
inventory control. However, in order to achieve the
other target, i.e. the target for production, we claimed
that reducing the man-hours in setting up the production
will be needed. The proposed system is not novel and has
not been implemented yet. However, it can be claimed
that the proposed system will be valuable for achieving
the targets for products and parts inventories. Also, it can
be claimed that the data analysis and the proposed
system shown in this paper will be valuable for other
case studies.
A cknowledgements
We sincerely wish to express our gratitude to the pre-
sident and the persons responsible in the object company
who gave us the chance of this case study.
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