Material and Inventory Management: Types of Production Planning
Material and Inventory Management: Types of Production Planning
Material and Inventory Management: Types of Production Planning
Routing
It refers to the process of determining the optimal sequence of operations and the flow of
materials and resources required to produce a product or deliver a service. It involves
identifying the specific machines, workstations, or departments that will be involved in each
step of the production process.
The primary goal of routing is to establish an efficient and logical path for the transformation
of raw materials or inputs into finished products or services.
Routing involves:
1. Operation Sequence: Routing defines the order in which specific operations or tasks
should be performed to transform inputs into the desired output. It determines the logical
flow of work through different work centers or machines. The tasks, dependencies between
operations, and efficiency considerations.
2. Work Centers or Machines: Routing identifies the specific work centers, machines, or
departments that will be involved in each operation. It considers the capabilities, capacities,
and availability of these resources to ensure that the necessary equipment or workstations
are assigned to perform the required tasks.
3. Material Flow: Routing also considers the movement and flow of materials through the
production process. This includes decisions about storage, handling, and transfer methods
to ensure a smooth and efficient flow of materials.
4. Skill Requirements: Routing takes into account the skills and expertise required for
each operation. This helps optimize resource utilization and ensures that the operations are
performed efficiently and effectively.
Scheduling
Scheduling refers to the process of planning and organizing tasks, activities, or resources in
a systematic and efficient manner to achieve specific goals or meet desired objectives within
a given timeframe.
The advantages and benefits of effective scheduling are:
1. Optimal Resource Utilization: Scheduling helps ensure that resources, such as
human resources, equipment, or materials, are allocated
and utilized optimally.
The Master Production Schedule (MPS) is a key component of production planning and
control that specifies the quantity and timing of production for each finished product. It
serves as a detailed plan that guides the production activities within an organization.
The primary purpose of the MPS is to synchronize the production process with customer
demand, inventory levels, and available production resources.
The key aspects related to the Master Production Schedule:
1. Time Horizon: The MPS typically covers a medium-term time horizon, often ranging
from a few weeks to several months. The specific time frame depends on the nature of the
industry, product characteristics, and demand patterns.
2. Demand Forecast: It estimates the expected customer demand for finished products.
The demand forecast considers historical sales data, market trends, customer orders, and
other relevant information.
3. Available-to-Promise (ATP) Quantity: The MPS takes into account the available-to-
promise (ATP) quantity, which represents the portion of production capacity that can be
allocated to new customer orders without affecting existing commitments.
4. Safety Stock and Inventory Levels: Safety stock is an additional quantity of inventory
maintained as a buffer to accommodate demand variability, lead time uncertainties, and unexpected
events.
5. MPS Updates: The MPS is subject to periodic updates to reflect changes in demand,
production capacities, or other relevant factors. This allows organizations to adapt their
production plans and schedules to changing conditions.
Aggregate Production Planning (APP) is a strategic planning process that aims to determine
the overall production levels and resource allocation for a specific time horizon.
It involves balancing the organization's capacity and resources with the anticipated demand
while considering various constraints and objectives.
The key aspects are:
1. Time Horizon: The planning horizon for aggregate production planning typically
ranges from a few months to a year, depending on the industry and the organization's
needs. It provides a medium- term perspective that allows for effective capacity planning
and resource allocation.
2. Demand Forecast: It estimates the expected customer demand for the planning
period. The demand forecast serves as a basis for determining the production levels
required to meet customer requirements.
3. Production Capacity: It ensures that the planned production levels align with the
organization's production capabilities.
4. Production Strategies: It involves selecting appropriate production strategies to meet
the forecasted demand. These strategies may include level production, chase production, or
a combination of both.
5. Workforce Planning: It considers the required workforce levels to support the planned
production volumes. It involves determining the number of workers needed.
Types of Inventories
The common inventories found in businesses are:
1. Raw Materials: Raw materials are the basic components or materials used in the
production process. They are typically acquired from suppliersand are used to create
finished goods.
2. Work-in-Progress (WIP): Work-in-progressinventory consists of partially completed
products that are still in the production process.
3. Finished Goods: Finished goods are the final products that are ready for sale or
distribution to customers.
EOQ
EOQ stands for Economic Order Quantity, which is amathematical formula used in
inventory management to determine the optimal order quantity that minimizes total
inventory costs. The EOQ calculation takes into account the costs associated with
ordering inventory and holding inventory.
The formula for calculating Economic Order Quantity(EOQ) is as follows:
EOQ = √[(2 * D * C0) / Ch]
Where:
• D represents the annual demand for the product or inventory item.
• C0 represents the ordering cost per order placed.
• Ch represents the holding cost per unit per year.
The assumptions underlying the EOQ model are:
1. Demand is constant and known.
2. Ordering costs are fixed per order.
3. Holding costs are based on a per-unit-per-yearbasis.
4. The lead time for replenishment is constant.
5. The entire order quantity is received at once.
ABC
ABC analysis, is a technique used in inventory management to categorize items based
on their importance or value. It is named after the three categories it creates: A, B, and
C.
The classification is typically determined using the Pareto principle, which states that a
significant portion of the effects is derived from a relatively small portion of the causes.
The main purpose of ABC analysis is to prioritize resources and focus attention on
items that have the most
impact.
Category A:
Items in Category A are the most important or valuable ones. These items
typicallyrepresent a small percentage of the total inventory but have a
Category B:
Items in Category B are of moderate importance or value. They fall between Category
A and Category Cin terms of their impact on the organization. These
items have a moderate contribution to sales, profits, or other relevant factors.
Category C:
Items in Category C are of lower importance or value. They represent a larger portion
of the total inventory but have a relatively low impact on sales, profits, or other factors.
Category C items are typically less critical to the organization's overall performance.
VED
VED analysis is a widely used inventory management technique that categorizes items
based on their criticality and the level of attention they require. The acronym VED stands for
Vital, Essential, and Desirable.
1. Vital items: These are critical items that are necessary for the continuous operation of a
business. They are typically associated with high costs or significant consequences if they
are not available when needed. These items require close monitoring, and their inventory
levels should be carefully managed to prevent stock outs or disruptions in production.
2. Essential items: Essential items are important for the business but may not have the same
level of criticality as vital items. They are required to maintain day-to-day operations but do
not have immediate severe consequences if they are temporarily unavailable. Examples
could include
General office supplies, standard spare parts.
3. Desirable items: Desirable items are typically of lower importance or urgency for the
business. They are items that are not critical for immediate operations and can be managed
with less attention. Examples of desirable items could be luxury office furniture, non-
essential decorations, or items with low usage frequency.
FSN
FSN analysis is another inventory management technique that categorizes items based
on their consumption patterns. The acronym FSN stands forFast-moving, Slow-moving,
and Non-moving.
Fast-moving items: Fast-moving items are those that are consumed or sold quickly and
have a high turnover rate. These items have a high demand and are frequently
replenished. They often represent the majority of sales or consumption volume. Fast-
moving items require careful monitoring and efficientinventory control to ensure their
availability and prevent stock outs.
Slow-moving items: Slow-moving items are those that have a lower turnover rate
compared to fast- moving items. They have a lower demand and
longer holding periods. Slow-moving items may include products with seasonal demand
or items with lower customer demand.
Non-moving items: Non-moving items are those that have no consumption or sales
activity within a specified period. These items have virtually no demand and may have
become obsolete or redundant. Non-moving items tie up valuable storage space and
capital, and it is important to identify and address them promptly. Businesses may
consider strategies such as liquidating non- moving items, offering discounts, or
discontinuing their procurement to minimize inventory holding costs.
HML
HML analysis, also known as High-Medium-Low analysis, is a method used in inventory
management to classify items based on their value or importance. The acronym HML stands
for High, Medium, and Low.
High-value items: High-value items are those that have a significant monetary value or
contribute a substantial portion of revenue or profit to a business. These items are typically
expensive, critical for operations, or have high demand. Businesses need to ensure the
availability and security of high-value items while optimizing their inventory levels to
minimize holding costs and potential risks.
Medium-value items: Medium-value items fallin the middle range in terms of their value or
importance. They may not have the same level of monetary value or criticality as high-value
items, butthey still require attention and proper management. Medium-value items may
include components, equipment, or products that contribute moderately to a business's
operations or sales.
Low-value items: Low-value items have relatively low monetary value or contribute less
significantly to a business's operations or revenue. They may include inexpensive supplies,
low-cost spare parts, or items with low demand. While low- value items may not require the
same level of scrutiny as high-value or medium-value items, they still need to be managed
efficiently to avoid excess inventory and unnecessary costs.
Just In Time (JIT)
Just-in-Time (JIT) is an inventory management philosophy and approach that aims to
minimize
inventory levels by receiving goods or producing
items just in time for their use or sale. JIT focuses on improving operational efficiency,
reducing waste,and enhancing overall productivity.
2. Cost Savings: JIT can lead to cost savings in various areas. With reduced inventory
levels, organizations can reduce storage and warehousing costs. Additionally, JIT promotes
efficient productionprocesses by eliminating or reducing waste.
3. Improved Cash Flow: It reduces inventory levels & hence organizations can free up
their working capital that would otherwise be invested to hold inventory. This allows
organizations to invest their capital in other areas of the business, such as research and
development, marketing, or equipment upgrades.
4. Waste Reduction: JIT reduces waste associated with excess inventory, overproduction,
defects, waiting times, excess motion, and transportation. By eliminating or minimizing waste,
organizations can achieve greateroperational efficiency,
KANBAN
Kanban is a visual inventory management systemand production tool that helps to optimize
workflow, improve efficiency, and reduce waste. It originated from the Toyota Production
System andhas since been widely adopted across various
industries.
The advantages of using Kanban are:
1. Visual Management: Kanban provides a visual representation of the workflow and
inventorylevels, making it easy to understand the status of work and materials at a glance.
By using Kanban cards or boards, teams can visually track the progress of tasks, identify
bottlenecks, and take appropriate actions to maintain a smooth flow of
work.
2. Inventory Optimization: Kanban helps optimize inventory levels by implementing a
pull- based system. It allows teams to produce or replenish items only when they are
needed, based on actual customer demand. This reduces the risk ofoverproduction and
minimizes excess inventory, leading to cost savings and improved cash flow.
3. Waste Reduction: Kanban focuses on wastereduction by identifying and eliminating
non-value-added activities or processes. It helps teams identifyand address bottlenecks, reduce
waiting times, prevent overproduction, and minimize inventory carrying costs.
4. Improved Communication and
Collaboration: Kanban promotes communication and collaboration among team members.
The nature of Kanban allows for better visibility and transparency which helps the team
members to communicate effectively, coordinate tasks, and resolve issues in real time.
5. Flexibility and Adaptability: Kanban offers flexibility and adaptability to changing
needs and priorities. The system allows for easy reprioritization of work and resource
allocation based on evolving requirements or customer demands.
6. Continuous Improvement: Kanban fosters a culture of continuous improvement. By
regularly reviewing and analyzing Kanban metrics and performance indicators, teams can
identify areas for improvement and measure theimpact of those changes.