Production management (I + II parziale)

PLANNING PLANNING MANAGEMENT

MPS Front End

When talking about DETAILED Inventory MPS, only finished Routing Bills of MATERIAL statusfile materialproducts are involved PLANNING dataRESOURCE TIME-PHASEDPLANNING REQUIREMENT(MRP)RECORDS EngineMATERIAL ANDCAPACITY PLANSVENDORSHOP-FLOOR Back endSYSTEMSYSTEM 8AGGREGATE PLANNING

It determines the necessary resource capacity a firm will need in order to meet its expected demand.Only finished product are considered (Families), we don’t considered materials.Only the most critical production resources are considered (Bottlenecks).

Aggregate planning: an overview

Accounting data (costs, Demand (orders + demand forecasts)revenues) Machine, manpower availabilityAGGREGATE Supplier, subcontractor availabilityPLANNING Finished product availabilityMaster Production Schedule (MPS):How many units of finished products are to be manufactured in the medium-long term?Notice that:- Only finished products are considered (not materials)- Only the most critical

production resources (bottlenecks *) are considered 7I. Front End

MPS: Master Production Schedule

It tells us what, when and how much produce.

This document receives informations from three different inputs:

• Production planning (strategic)
• Resource planning (machinery and labor or production capacity)
• Demand management (which is the forecast)

At this first step we don’t considered materials.

We are building the Planning.

II. Engine - Material Planning:

MRP: Material Requirements Plan

Dependent demand.!

III. Back end

Internal vs External supplier.

How to develop an aggregate plan:

• Develop alternative plans and calculate the cost for each of them;
• Choose the best overall plan based on company objectives.

We have two main different situation:

• Unconstraint capacity, that is pure theory;
• Constraint capacity.

Two pure production planning strategies are available:

• Level

Maintain a constant output rate along the planning horizon;

• Chase

Match the production rate to the order rate along the

planning horizon[“Abbinare il tasso di produzione al tasso dell'ordine lungo l'orizzonte di pianificazione”].

In order to decide which is the best plan we have to consider the trade off between stock holding! costs and set-up costs.

Relevant Production Costs

An important issue when we talking about planning is minimizes the cost, we need to determinate the most convenient plan.

We consider “relevant” a cost that:

• Is a future cost
• Is avoidable
• Is differential between alternative plans.

The most relevant costs for production planning are:

• Overtime cost
• Subcontracting cost
• Stock-out cost

It incurs when current availability of finished product is unable to meet current orders.

Consequences: image loss for the company loss of other orders + loss of the customer.

Setup cost

It incurs when:

• The product entering the system (machine) is much different from the previous one (ex: white painted bicycle after black one).
• The production rate of the system is
Anytime there's a change affecting the setting of the system. - Stock holding cost It incurs when an item has been produced or purchased before the moment in which it is consumed. Ex: A finished product is manufactured on the basis of demand forecasts. The supplier is very far from the manufacturer so the transportation costs are very high; then the component is purchased in a huge quantity (FTL, full truckload) even if it will be consumed in few units per period during the year. [I costi di spedizione di questi produttori sono molto elevati; quindi il componente viene acquistato in grandi quantità (FTL, pieno carico di camion) anche se verrà consumato in poche unità per periodo durante l'anno] Lead Time Management There's two significant type of lead time: - MTD: Manufacture Lead Time Time unit needed to produce your goods (week or months). Manufacture time starts from raw materials. - DLT: Delivery Lead Time We have to focus on the order time. If: DLT

MTD Your customer has to wait, no good.!DLT << MTD You need to have stocks – inventory.

Inventory Management

The main objective is to minimize the related costs and to maximize the service level for downstream phases.

Minimization of a total cost function composed by:

• Stock holding costs
• Execution costs (order, setup)
• Costs of control
• Costs of low service level at downstream phase (stock-out costs)

Stocks is a cost, so we have to determinate if it is or it isn't an investment.

In order to do this we have to consider the specific type of stock:

• Supply Chain Stocks

Purpose: fulfil customer need.

It exists in order to manage the problem of DLT << MTD.

This isn't an investment, it's just a way to provide your service level.

• Strategic Stocks (or Speculative)

To avoid a lack of raw materials (ex: oil, iron, steal, ...)

This is an investment, but at the same time a risk, because it depends from the dynamic of the price.

• Safety Stocks

A way to...

protect the supply chain from an unexpected event. This is a cost: the cost of flexibility.

EOQ- ROP Model

The Economic Order Quantity – Re-Order Point

The Best way to manage inventory is to use

Characteristics

• Variable interval of orders issuing
• Fixed quantity ordered
• Continuous Control
• Independent entries reorder

Objectives

• Identifying the quantity Q (pieces) to re-order that minimizes the total cost, sum of the ordering cost, purchasing/production cost and stock holding cost.
• The condition that determine the orders issuing.

The EOQ-ROP model

Cost of stock holding Cshq [€/year]

Csh cm p 2

Under the stated hypotheses, the average inventory level is equal to q/2. So, the annual stock holding cost is linear in q.

Cost of order issuing Co (or setup cost)

DCo o [€/year]q

The number of orders issued in a year is equal to D/q. So the cost of order issuing Co and q are inversely proportional.

Cost of purchasing Cp (or cost of production)

Cp D p [€/year]

The total cost of purchasing

(or cost of production) Cp is independent from q.

The EOQ-ROP model

The cost function

Purchasing price

Cost of Constant annual or (constant) consumption

p x D

purchasing variable cost of (demand) or production

Constant ownership rate

Average stockp x c x q / 2

Cost of holding stocks equals to halfm the lot

Constant cost issuing 1 order

Annual number of orders issued, i.e. the ratio betweena x D / q the annual demand and the Cost of order issuing lot quantity

Overall cost function

F = p x D + p x c x q / 2 + a x D / qm

How to approximate the overall cost function?

IE Model

In this model there’s no way to optimize costs.

It is useful for big quantity of orders.

But it allows us to manage:

- Multi-sku ordering

- Multi-sku picking

- Combined entire ordering.

In this model we have:

- Reorders are placed at the fixed time of review T

- We have variable ordered quantity (exactly the opposite of the first model)

- Objective Level: a pre-defined level that each product have to achieve.(Identifying

The quantity to re-order that allows the availability of each product to achieve a pre-defined level (O.L.)

The Fixed-time period model

Characteristics:

• Fixed-time between reviews T
• Variable ordered quantity
• Discontinuous control
• Combined (or independent) entries reorder
• Reorders are placed at the (fixed) time of review T

Objective:

Identifying the quantity to re-order that allows the availability of each product to achieve a pre-defined level, called objective level (OL)

How many pieces have just been promised

How many pieces you can see to a customer downstream, but that are still in the warehouse

Physical & Reserved Orders in inventory + Availability = stocks progress level Safety

How many pieces have stocks

Pieces "untouchable", just been ordered upstream, but stored to protect the system against unpredictable events

Hypotheses ("real" availability should not consider them)

The same as EOQ-ROP model 38

Safety Stocks

Used in

1. Those protect the inventory management system against high variability of downstream consumption (demand) and of upstream lead time.
2. Safety stocks are considered "untouchable" so they are subtracted from the real availability.
3. The properly dimension of safety stocks are determinate by considering both consumption and lead time as random variables, distributed according the Normal Distribution.
4. Safety stock is determined so that a minimum service level SL Percentage of times in which company has not incurred in stockout (product was available when the market asked for it).
5. The probability of stock coverage is equal or higher than SL SL: percentage of times in which company has not incurred in stockout (product was available when the market asked for it).

Criticism:

• Whenever the (demand) variance is unable to express in a right way the variability (e.g. in the case of lumpy demand), the SS calculation model

is useless;- Even by having to resort to a remarkably high level of safety stocks, the production system cannot be (effectively) protected against the peak. (In this case safety stocks are at the same time costly and useless)

The SS determination

• The most common case is where demand and not-correlated 2 2SS k kd ,LT d in LT LT i

The SS determination 22SS k ( LT ) dd L

The general calculation formula

The service level factor (k) is calculated by using the cumulative InveNormal standard distribution for random variables ( , provided by Service level factor tables) that corresponds to the required service level (SL):

Service level factor, 2 2 2SS k LT di.e., number of standard “Combined” Re-odeviations d LT standard point deviation of demand

SS k Average Variance Variance Average during LT Safetd , LT demand of of lead lead stock empowered at 2 demand time time

SL 90% k 1.281

SL 95% k 1.645

SL 99% k 2.326

SL(k) xk

Inventory systems for dependent demand

I. Pull systems (stock based)

Objective:

Having always the required product stored in the warehouse, according to the servicelevel.