Production Planning and Inventory Management
Decisions of the Direction of Operations, Planning, and Production Control: The management of the production department is responsible for managing the production system to increase the value of goods and services. This is done by making a series of decisions, which can be divided into two groups: long-term strategic decisions and short-term tactical decisions.
Hierarchical Levels in Company Planning
Strategic Planning (Long-Term, Over 1 Year)
At this level, objectives are determined; it determines the production strategy, production system designs, and leads to several decisions such as:
- Product and process design
- Long-term capacity determination
- Selection of means to achieve capacity
- Location of productive activity and distribution of plant, equipment, and staff
Aggregate Planning (Medium-Term, 6-18 Months)
Decisions are made on the quantity of each product family and their delivery times. This is the field of tactical decisions, depending on the demand.
Short-Term Planning
Production scheduling (date, amount, etc.) is determined.
Production Planning and Control
Planned production is allocated to each workshop to monitor compliance with deadlines. Another important tactical decision is inventory management. Inventory management ensures the availability of the right amount of raw materials and manufactured products at the right time to meet customer needs.
PERT/CPM
PERT (Program Evaluation and Review Technique) was created in 1958 to plan the construction of nuclear submarines. Around the same time, CPM (Critical Path Method) was developed for maintenance scheduling in chemical production plants.
Production Programming
Production programming involves the allocation of productive resources and the technological matrix. The problem is to find a program that properly allocates available resources to productive processes to achieve production objectives. Linear programming is a tool for production scheduling. The technological matrix is a table listing the various processes a company can use to obtain final products. The matrix includes:
- A row for the direct yield of each product unit
- A column for the available quantities of various fixed factors
Enterprise Quality
Quality is a strategic weapon for maintaining and increasing market share. Goods and services must offer customers something more to retain them—products of the highest quality.
Quality Definition
A set of properties and characteristics of a good, process, or service that determine its ability to satisfy stated or implied needs. Different definitions highlight different aspects:
- User-based definitions: High quality means better finishes, more features, and other improvements.
- Production-based definitions: Quality means conformance to specifications and doing it right the first time.
- Product-based definitions: Quality is a quantifiable and measurable variable.
A product must meet or exceed consumer expectations by fulfilling these three meanings of quality. Quality must be controlled throughout the process, from conception and design to market launch and after-sales service. This leads to Total Quality Management (TQM).
Four Basic Elements of TQM
- Leadership: Essential for a company-wide quality management program.
- Employee Involvement: Allows direct information from those closest to problems, leading to solutions.
- Product/Process Excellence: Focuses on quality product design and failure analysis.
- Customer Focus: Considers customer perception of quality when setting standards. This involves translating customer demands and designing products to meet those demands.
Quality Costs
Quality costs fall into two groups:
Defective Products Identified
- Rejection: The cost equals the production cost.
- Used as Product B: Placed in a market where consumers accept an inferior product.
- Reconceived: Reworked.
Non-Defective Products Identified
- Claimed by the client: Costs of repair service, repairs, etc.
- Not claimed by the client: No tangible extra cost, but potential negative impact on company image.
Normalization and Quality Certification
The ISO (International Organization for Standardization) ensures that products, processes, and personnel meet expected quality standards. ISO 9000 is a widely used benchmark for quality certification, providing international standards for company processes in producing goods and services.
Inventories or Stocks
Final products are stored until delivery. Inventories are warehouses storing these products. Inventories are a set of stored items awaiting use. Final products supply the market, while raw materials and/or products in manufacturing are for company use.
Inventory Classification Criteria
By Nature
- Raw materials
- Work-in-progress
- Packaging materials
- Spare parts
- Finished products
By Functional Category
- Cycle inventories: Result from purchase orders larger than current needs.
- Safety stock: Protection against demand uncertainty.
- Seasonal inventories: To meet expected sales increases (Christmas, summer, etc.).
- Transit inventories: Items in various production or distribution phases.
Inventory Costs
Acquisition Cost
If a product is purchased at market price, the unit cost is X. If manufactured, the acquisition cost is the total manufacturing cost. If each purchase is at a different rate, the acquisition cost depends on the valuation method:
- Weighted Average Price (WAP): The unit cost is the weighted average acquisition cost.
- FIFO (First-In, First-Out): The unit cost is that of the first units bought.
- LIFO (Last-In, First-Out): The unit cost is that of the latest acquisition units.
Issuance or Renewal Cost
Includes all costs incurred in completing an order. Decreases with contract volume; higher orders mean fewer orders overall. It is calculated as: unit cost of issuing an order X (annual demand / order units).
Storage Cost
Cost of keeping products in stock. Includes the cost of funds used to finance inventory investment (proportional to warehouse stock).
- Physical storage cost: annual storage cost of each product X (products / 2)
- Financial cost: unit cost X (number of products / 2) X market interest rate
Total storage cost is the sum of the two.
Cost Breakdown
When there is insufficient inventory to meet demand or raw materials to produce, safety stocks are used to avoid stockouts.
Management of Lists
There are costs associated with increasing or decreasing order quantity. The optimal stock order size is determined by balancing opposing forces. The basic questions are: How much to order in each batch? And when to make that request? The best-known inventory management model is the Wilson method.
Just-In-Time (JIT) System
Developed at Toyota, JIT eliminates unnecessary activity and waste, using minimum personnel, materials, space, and time. It produces what is needed, when needed, with the highest possible quality. It is a demand-based system, producing just enough to meet demand. It is characterized by:
- Producing small batches of a variety of products
- Decreasing machine setup time
- Mixing production without increasing costs
Effective JIT requires:
- Multi-skilled and involved workers
- High-quality levels in all production phases
- Strong supplier and subcontractor relationships