Production Planning and Inventory Control

Although understanding the behavior of a process, finding bottlenecks, reducing work-in-

process inventories, developing optimal scheduling, forming optimal forecasting methods and
polishing inventory control methods are the main concerns of production planning, its primary
focus is on scheduling and controlling inventory levels. There are significant costs associated
with holding, or not holding, inventory.
1) Production Planning
Production planning, or production scheduling, is a term assigned to the planning of production
in all aspects, from workforce activities to product delivery. Production planning is almost
exclusively seen in manufacturing environments; however, many of the techniques employed in
production planning can be and are used by many service-oriented businesses. Production
planning is primarily concerned with the efficient use of resources. While it is sometimes
referred to as operations planning, and truly employs many of the same techniques, the
primary distinguishing characteristic is that production planning is focused on the actual
production, whereas operations planning looks at the operation as a whole.
2) Inventory Control
Inventory control, while a large part of production planning, is frequently looked at as a minor
subset of supply chain management; however, inventory control is a crucial part of the
production system. Aside from the determination of the minimum level of stock a company can
maintain as safety against a balloon in customer demand, inventory control looks at the costs
associated with maintaining inventory. Inventory control can comprise inventory of a finished
product or inventory of materials used in making such products. Inventory control is affected by
changes in customer demand, holding costs, ordering costs and back order costs.
3) Raw Materials
Keeping an optimal amount of raw materials in stock is a crucial component of any production-
oriented business. Before a product can be manufactured, the raw materials must be in stock
and in good quality. The optimal level of raw materials is commonly determined by the
Economic Order Quantity (EOQ). The EOQ is calculated by taking the square root of the
quantity of two times the order cost multiplied by the demand divided by the holding cost.
EOQ = square root ((2 x order cost x demand)/holding cost)
ABC Analysis
Another useful tool for determining an optimal level of raw materials is ABC analysis, also called
a Pareto analysis or the 80-20 concept. This concept divides the products being manufactured
into three categories: A is the high-value category and includes those products that require the
most materials; B is a medium-value category and comprises products that have an average
cost to produce and an average demand; and C is a category that is made up of those products
requiring the least amount of resources.
The 80-20 concept is derived from the fact that typically 20 percent of the products
manufactured account for 80 percent of the resources consumed. It is referred to as Pareto
analysis in honor of Vilfredo Pareto, an Italian economist who found that 80 percent of the
income earned in most countries belongs to 20 percent of the population. Joseph M. Juran
suggested and applied the principle to change management, attributing the concept to Pareto.
4) Aggregate Planning
Finished inventory is frequently managed through aggregate planning, a method that looks at
production, the workforce itself and inventory management. Aggregate planning basically ties
facility planning in with scheduling decisions, and it does so in a way that is quantitative,
meaning it produces numbers to back up an operations plan. Aggregate plans help match
supply and demand while minimizing costs by applying upper-level forecasts to lower-level,
production floor scheduling. Plans generally either "chase" demand, adjusting its workforce
accordingly, or are "level" plans, meaning that labor is relatively constant with fluctuations in
demand being met by inventories and back orders. A "hybrid" plan, which combines chase
planning and level planning may also be used. The suitability of aggregate plan chosen will be
very individual to the company.