Appunti sulle Lezioni del Corso di Production Management - Primo Parziale

RELEVANT COSTS FOR DECISION MAKING

To be defined "relevant" for the design of a production system a cost should be:

• FUTURE COST (past is already "sunk")
• Only costs that haven't yet been paid (e.g. do not consider amortisation)
• AVOIDABLE COST (if we do not follow a certain design / plan we do not sustain that cost)
• Costs that are avoidable moving from a certain decision to an alternative one
• DIFFERENTIAL COST (with respect to other alternative designs / plans)
• Only costs that vary according to a different utilisation profile of the available resources analyse cost drivers
• Costs that occur only if a decision has been taken
• Don't take in consideration the accounting costs of "base case"

RELEVANT COSTS FOR DECISION MAKING

EFFICIENCY EFFECTIVENESS

• Production
• Transportation
• Penalties for Breakdown
• Waste/Rework
• CASH Returns
• Handling
• Quality Costs
• Direct Set Up Costs
• Direct Warehouse Costs
• Financial Costs

reinvesting the immobilised capital and depends on the cost/returns that it can produce.

Cost of capital= is the opportunity cost connected with making a specific investment. It's the RATE OF RETURN that could be earned by putting the same amount of money in another investment with equal risk.

ex. I invest 50.000 and I expect a i% of 12%/year => each year this investment produces me 6000€.

Monthly rate= (1+ i yearly) = (1+ i monthly) or Monthly rate = i% yearly / 12 months

12(GM*V) = Immobilised value

2.3. STOCK KEEPING COSTS - OBSOLESCENCE

Obsolescence costs is due to the fact that keeping a product in stock can generate value destruction.

Several causes:

EXPIRATION (Food, pharma)

TECHNOLOGY DEVELOPMENTS (More powerful computers)

REDESIGN (ex. Car restyling)

FASHION (Seasonal collections, capsules, events)

DEPRECIATION

Exogenous (lower components price)

Endogenous (damaging, weight loss)

3. SETUP COSTS

The setup is any variation that occur for the

production system(ie. change of production rate, change of the item (retooling)...)Made of two different elements, to be calculated on the basis of the activity that take place during the setup:

1. Cash costs (consumption materials, extra defectiveness when restarting, cleaning materials, workforce, ...)
2. Opportunity costs connected to the lost opportunities alternatives to doing the setup (ex. instead of doing setup I could have produced more items)

Pay extreme attention when calculating setup costs in order to avoid dangerous mistakes!

3.1. SETUP COSTS - WORKFORCE

Workforce costs —> fixed workforce —> if related to fixed workforce do not take place in the setup (not relevant).

Temporary extra time workers is variable (if they take part in the setup)

Cost = cost (direct workforce hour) x n° of people involved

3.2. SETUP COSTS - OPPORTUNITY

4. STOCKOUT COSTS

STOCKOUT takes place when an item is not available for delivering to the customer in the promised times.

Stockout

The dependent demand. When we start to PLAN, we need to calculate several things which are the Production Manager questions:

• WHAT to produce (which product),
• WHEN to produce, which is the time bucket (considered some time horizon),
• HOW to produce, which are the required raw materials..
• WHERE to produce (on which work center),
• HOW MUCH (which lot dimension)

Manufacturing, in order to optimise a given objective function, provided that the production plan satisfies all the con-straints.

PRODUCTION PLANNING IS COMPLEX! So we can use the hierarchical approach to simplify it.

The production planning is broken down in 3 levels:

1. STRATEGIC

Horizon: 2-5 years (long term)

Objectives: price, quality, service

Planned Item: production level as a whole

Decision: long term production capabilities (size and scope)

Pace: year

2. PRODUCTION BUDGETING

Horizon: 1 year (6 – 18 months)

Objectives: to fulfil forecasted demand at the lowest cost, to avoid stock-out

Planned Item: product families (groups,

1. AGGREGATE PLANNING
• Horizon: 1 week/day (shift)
• Objectives: to effectively fulfill production orders
• Planned Item: each (single) part number
• Decision: when to produce, which workcentre, which sequence, etc.
• Pace: hour/real-time
2. PRODUCTION SCHEDULING
3. PRODUCTION CONTROL
4. PERFORMANCE MEASUREMENT

The highest the details the shorter the time horizon! And the larger the volume of data, the stricter the constraints, the lower the economic impact of decisions!

AGGREGATE PLANNING: OVERVIEW

When we talk about planning:

• Only finished products are considered (not materials)
• Only the most critical production resources (bottlenecks *) are considered
• MPS (Master production schedule) is the basis for Materials Planning.

MATERIALS PLANNING: OVERVIEW

Notice that:

• MPS is a constraint for materials planning

very simple systems (in terms of bill of materials or production system),• this planning phase may be avoided

The output of this phase is the proposal of production orders and of purchasing orders•PRODUCTION SCHEDULING: OVERVIEWTHE WHOLE PROCESS

What about if the problem at some phase results unfeasible?e.g. material are not available for producing the production plane.g. machine capacity is not enough for producing the production orders within the planned delivery time

If a phase results unfeasible, the output of the previous phase must be modified, for instance by:- abandoning the optimal solution of aggregate planning- using safety stocks

The last constraint to be relaxed is usually demand constraint (i.e. service level)RELEVANT PRODUCTION COSTS

Going deep with aggregate planning we understand that AGGREGATE PLANING consists in:- Determination of feasible plans- Plans Evaluation—> The output will be the MPS.The most relevant costs for decision making about production

planning are:- overtime cost (work contract, operator's yield)- subcontracting cost (transport; quality control, know-how, marginal cost)- setup cost- stockout cost- stock holding cost

Generally costs could be:

• VARIABLE (i.e. a cost that varies depending on a company's production volume)
• FIXED (i.e. a cost that does not change with an increase or decrease in the amount of goods or services produced)
• DIRECT (i.e. a cost that can be easily and completely attributed to the production of specific goods or services)
• INDIRECT (i.e. a cost that is more difficult to assign to a specific product and calls for an arbitrary rule for assignment)

We need to determine the most convenient plan (i.e. the plan which minimises the costs) among several feasible alternatives, then we consider "relevant" cost.

A cost is considered "relevant" if:

• is a future cost (past costs are sunk cost!)
• is avoidable (if we do not follow plan P1, we do not
stock: the finished product is not available in stock when the customer places an order. Stockout costs can include: 1. Lost sales: When a customer is unable to purchase the product due to unavailability, the company loses potential revenue. 2. Backorders: If the company allows customers to place backorders, there may be additional costs associated with managing and fulfilling these orders. 3. Expedited shipping: In order to meet customer demand, the company may need to incur additional costs for expedited shipping to replenish stock quickly. 4. Customer dissatisfaction: Stockouts can lead to customer dissatisfaction and potentially damage the company's reputation. To mitigate stockout costs, companies can implement effective inventory management strategies, such as maintaining safety stock levels, improving demand forecasting, and implementing just-in-time production methods.