ME 391 A – Design, Planning and

Control of Production System

Dr. Kailash Chaudhary

Ph.D. (Mechanical Design), M.E. (P & I), B.E. (Mechanical
Engg)
Assistant Professor
Department of Mechanical Engineering
MBM Engineering College
ME 391 A – Design, Planning and
Control of Production System
Subject coverage

1. Production Planning

2. Scheduling

3. Inventory System

4. Project Planning and Control

5. Supply Chain Management

 Production Planning includes
a) Production planning main functions

b) Planning horizons

c) Product and service

d) Make or buy decision

Process

Approaches

e) Forecasting techniques
 Productıon Plannıng
Production planning is a process used by
manufacturing companies to optimize the efficiency of
their processes

• Useful in effective utilization of limited resources in the

production of goods so as to satisfy customer demands and
create a profit for investors

• Resources include the production facilities, labor and

materials

• Constraints include the availability of resources, delivery

times for the products, and
Dr. Kailash management
Chaudhary, MBM Engineering policies
College
Production Planning Main Functions
• Forecasting

• Aggregate planning

• Materials Requirement Planning

• Sequencing and Scheduling

Dr. Kailash Chaudhary, MBM Engineering

College
Forecasting predicts demand for planning purposes

Aggregate planning generate a long-term production

plan that establishes a rough product mix, anticipates
bottlenecks, and is consistent with capacity and
workforce plans

Materials Requirement Planning determines all

purchase and production components needed to
satisfy the aggregate plan

Sequencing and Scheduling develop a plan to guide the

release of work into the system and coordination with
needed resources Dr.(e.g., machines, staffing, materials)
Kailash Chaudhary, MBM Engineering
College
 Planning Horizons
• Strategic Planning(Long range): It is process of thinking
though the organizations current mission and environment
and setting a guide for future decisions and results. e.g.
Technology forecasting and choice of appropriate technology
for the long range time horizon.
• Tactical Planning(Intermediate Range): It is done over an
intermediate term or medium range time horizon by middle
level management. These plans focus on aggregate products
rather than individual products.
• Operational Planning(Short Range ): It is done over a short
range time span developed by junior level management. It is
concern with utilization of existing facilities rather than
creation of new facilities.
Dr. Kailash Chaudhary, MBM Engineering
College
Dr. Kailash Chaudhary, MBM Engineering
College
Dr. Kailash Chaudhary, MBM Engineering
College
 Product Exploring
Make or Buy Decision
Depends on

• The volume
• The fixed cost of making
• Per-unit direct cost when making
• Per-unit cost when buying

Dr. Kailash Chaudhary, MBM Engineering

College
 Reason for Making
• Cost concerns
• Desire to expand the manufacturing focus
• Need of direct control over the product
• Intellectual property concerns
• Quality control concerns
• Supplier unreliability
• Lack of competent suppliers
• Volume too small to get a supplier attracted
• Reduction of logistic costs (shipping etc.)
• To maintain a backup source
• Organizational pride
Dr. Kailash Chaudhary, MBM Engineering
College
 Reason for Buying

• Lack of technical experience

• Supplier's expertise on the technical areas and the
domain
• Cost considerations
• Need of small volume
• Insufficient capacity to produce in-house
• Brand preferences
• Strategic partnerships

Dr. Kailash Chaudhary, MBM Engineering

College
Make or Buy Decision Making Process

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Approaches for Make or Buy Decisions

1. Simple Cost Analysis

2. Economic Analysis

3. Break Even Analysis

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College
 Economic Analysis

Based on two inventory models

1. Purchase Model for Economic Order Quantity (EOQ or

Q System)

2. Manufacturing Model for Economic Production

Quantity (EPQ)

Dr. Kailash Chaudhary, MBM Engineering

College
EOQ: Total Cost Equation

 D  Q 
TC EOQ   S    H 
Q   2 
Where
TC  total annual cost
D  annual demand
Q  quantity t o be ordered
H  annual holding cost
S  ordering or setup cost

Dr. Kailash Chaudhary, MBM Engineering

College
 EOQ Total Costs
Total annual costs = annual ordering costs + annual holding costs

Dr. Kailash Chaudhary, MBM Engineering

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 The EOQ Formula
Minimize the TC by ordering the EOQ:

2 DS
EOQ 
H

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College
 When to Order:
The Reorder Point
• Without safety stock:

R  dL
where R  reorder point in units
d  daily/week ly demand in units
L  lead time in days/weeks

• With safety stock:

R  dL  SS
where SS  safety stock in units
Dr. Kailash Chaudhary, MBM Engineering
College
 EOQ Example
• Weekly demand = 240 units
• No. of weeks per year = 52
• Ordering cost = $50
• Unit cost = $15
• Annual carrying charge = 20%
• Lead time = 2 weeks

Dr. Kailash Chaudhary, MBM Engineering

College
 EOQ Example Solution

D  52  240  12,480units / year

H  0.2 15  $3 per unit per year
2 DS 2 12,480 50
Q   644.98  645units
H 3
 D   Q   12,480   645 
TC   S    H     50     3
 Q   2   645   2 
 967.44  967.5  $1,934.94

R  dL  240  2  480 units

Dr. Kailash Chaudhary, MBM Engineering
College
 EPQ Equations

 D   I MAX 
• Adjusted total cost: TC EPQ   S    H
Q   2 

 d
• Maximum inventory: I MAX  Q1  
 p

2 DS
EPQ 
• Adjusted order quantity:  d
H 1  
 p
Dr. Kailash Chaudhary, MBM Engineering
College
 EPQ Example
• Annual demand = 18,000 units
• Production rate = 2500 units/month
• Setup cost = $800
• Annual holding cost = $18 per unit
• Lead time = 5 days
• No. of operating days per month = 20

Dr. Kailash Chaudhary, MBM Engineering

College
 EPQ Example Solution
18,000
d  1500units / month; p  2500units / month
12
2 DS 2 18,000 800
Q   2000units
 d  1500 
H 1   18  1  
 p  2500 

 d  1500 
I MAX  Q1    2000 1    800 units
 p  2500 
D  I   18,000   800 
TC   S    MAX H     800   18
Q   2   2000   2 
 7,200  7,200  14,400
Dr. Kailash Chaudhary, MBM Engineering
College
 EPQ Example Solution (cont.)

• The reorder point:

1500
R  dL   5  375units
20
• With safety stock of 200 units:
1500
R  dL  SS   5  200  575units
20

Dr. Kailash Chaudhary, MBM Engineering

College
 Break-Even Analysis: Graphical
Approach
• Compute quantity of goods
that must be sold to break-
even
• Compute total revenue at an
assumed selling price
• Compute fixed cost and
variable cost for several
quantities
• Plot the total revenue line and
the total cost line
• Intersection is break-even
• Sensitivity analysis can be
done to examine changes in all
of the assumptions made Dr. Kailash Chaudhary, MBM Engineering
College
 Break-Even Analysis

• Total cost = fixed costs + variable costs (quantity):

TC  F  VC Q
• Revenue = selling price (quantity)

R  SPQ
• Break-even point is where total costs = revenue:

TC  R or F  VC Q  SPQ
F
or Q 
SP  VC Dr. Kailash Chaudhary, MBM Engineering
College
 Types of Forecasting Models

• Qualitative methods – judgmental methods

– Forecasts generated subjectively by the
forecaster
– Educated guesses
• Quantitative methods – based on mathematical
modeling:
– Forecasts generated through mathematical
modeling

Dr. Kailash Chaudhary, MBM Engineering

College
 Qualitative Methods

Type Characteristics Strengths Weaknesses

Executive A group of managers Good for strategic or One person's opinion
opinion meet & come up with new-product can dominate the
a forecast forecasting forecast

Market Uses surveys & Good determinant of It can be difficult to

research interviews to identify customer preferences develop a good
customer preferences questionnaire

Delphi Seeks to develop a Excellent for Time consuming to

method consensus among a forecasting long-term develop
group of experts product demand,
technological
Dr. Kailash Chaudhary,
changes, andMBM
Engineering College
 Quantitative Methods
• Time Series Models:
– Assumes information needed to generate a forecast is
contained in a time series of data
– Assumes the future will follow same patterns as the past
• Causal Models or Associative Models
– Explores cause-and-effect relationships
– Uses leading indicators to predict the future

Dr. Kailash Chaudhary, MBM

Engineering College
 Time Series Models

• Forecaster looks for data patterns as

– Data = historic pattern + random variation
• Historic pattern to be forecasted:
– Level (long-term average) – data fluctuates around a constant mean
– Trend – data exhibits an increasing or decreasing pattern
– Seasonality – any pattern that regularly repeats itself and is of a
constant length
– Cycle – patterns created by economic fluctuations
• Random Variation cannot be predicted

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College
Time Series Patterns

Dr. Kailash Chaudhary, MBM

Engineering College
 Time Series Models

• Naive: Ft 1  At
– The forecast is equal to the actual value observed during the
last period – good for level patterns
• Simple Mean: Ft 1   A t / n
– The average of all available data - good for level patterns
• Moving Average: Ft 1   A t / n
– The average value over a set time period
(e.g.: the last four weeks)
– Each new forecast drops the oldest data point & adds a new
observation
– More responsive to a trend but still lags behind actual data

Dr. Kailash Chaudhary, MBM

Engineering College
 Time Series Models con’t

• Weighted Moving Average: Ft 1   C t A t

• All weights must add to 100% or 1.00

e.g. Ct .5, Ct-1 .3, Ct-2 .2 (weights add to 1.0)

• Allows emphasizing one period over others; above

indicates more weight on recent data (Ct=.5)

• Differs from the simple moving average that weighs all

periods equally - more responsive to trends

Dr. Kailash Chaudhary, MBM

Engineering College
 Time Series Models con’t
Ft 1  αA t  1  αFt
• Exponential Smoothing:
Most frequently used time series method because of ease
of use and minimal amount of data needed
• Need just three pieces of data to start:
– Last period’s forecast (Ft)
– Last periods actual value (At)
– Select value of smoothing coefficient, ,between 0 and 1.0
• If no last period forecast is available, average the last few
periods or use naive method

• Higher values (e.g. .7 or .8) may place too much weight
on last period’s random variation
Dr. Kailash Chaudhary, MBM
Engineering College
 Linear Trend Line

A time series technique that computes a forecast

with trend by drawing a straight line through a
set of data using this formula:
Y = a + bx where
Y = forecast for period X
X = the number of time periods from X = 0
A = value of y at X = 0 (Y intercept)
B = slope of the line

Dr. Kailash Chaudhary, MBM

Engineering College
 Forecasting Trend

• Basic forecasting models for trends compensate for the lagging that
would otherwise occur
• One model, trend-adjusted exponential smoothing uses a three step
process
– Step 1 - Smoothing the level of the series

S t  αA t  (1  α)(St 1  Tt 1 )
– Step 2 – Smoothing the trend

Tt  β(St  S t 1 )  (1  β)Tt 1
– Forecast including the trend
FITt 1  S t  Tt
Dr. Kailash Chaudhary, MBM
Engineering College
 Forecasting Seasonality

• Calculate the average demand per season

– E.g.: average quarterly demand
• Calculate a seasonal index for each season of each
year:
– Divide the actual demand of each season by the
average demand per season for that year
• Average the indexes by season
– E.g.: take the average of all Spring indexes, then of all
Summer indexes, ...

Dr. Kailash Chaudhary, MBM

Engineering College
 Seasonality con’t
• Forecast demand for the next year & divide by the
number of seasons
– Use regular forecasting method & divide by four for
average quarterly demand
• Multiply next year’s average seasonal demand by
each average seasonal index
– Result is a forecast of demand for each season of next year

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Engineering College
 Causal Models

• Often, leading indicators can help to predict changes in

future demand e.g. housing starts
• Causal models establish a cause-and-effect relationship
between independent and dependent variables
• A common tool of causal modeling is linear regression:

Y  a  bx
• Additional related variables may require multiple
regression modeling

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Engineering College
 Linear Regression

• Identify dependent (y) and

independent (x) variables
b
 XY  X  Y  • Solve for the slope of the line
 X 2  X  X 

b
 XY  n XY

 X  nX
2 2

• Solve for the y intercept

a  Y  bX
• Develop your equation for the
trend line
Y=a + bX
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Engineering College
 Measuring Forecast Error

• Forecasts are never perfect

• Need to know how much we should rely on
our chosen forecasting method
• Measuring forecast error:
Et  A t  Ft
• Note that over-forecasts = negative errors
and under-forecasts = positive errors

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Engineering College
 Measuring Forecasting Accuracy

• Mean Absolute Deviation (MAD) MAD 

 actual  forecast
– measures the total error in a forecast n
without regard to sign
• Cumulative Forecast Error (CFE) CFE   actual  forecast
– Measures any bias in the forecast

 actual - forecast2

• Mean Square Error (MSE) MSE 

– Penalizes larger errors n
CFE
• Tracking Signal TS 
MAD
– Measures if your model is working

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Engineering College
Selecting the Right Forecasting Model

1. The amount & type of available data

 Some methods require more data than others
2. Degree of accuracy required
 Increasing accuracy means more data
3. Length of forecast horizon
 Different models for 3 month vs. 10 years
4. Presence of data patterns
 Lagging will occur when a forecasting model meant
for a level pattern is applied with a trend
Dr. Kailash Chaudhary, MBM
Engineering College