Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

5.2.2c Iterative Master Planning — an Example of Integrated Resource Management

Intended learning outcomes: Disclose an example of iterative master planning by comparing three production plans, with zero, two or four changes in production rhythm per year.

Continuation from previous subsection (5.2.2b)

Figures through illustrate iterative master planning that accords with the con­cept of integrated resource management: All resources are planned simultaneously. Using forecasted sales figures, the objective is to produce an optimal production plan. To estimate the consequences of different manufacturing strategies for total production, different variants are calculated. Thus, only steps 2 and 3 of the steps shown in Figure are iterated.

Fig.       Plan 1: production plan at a constant level.

Fig.        Plan 2: production plan with four changes in production rhythm per year.

Fig.       Plan 3: production plan with two changes in production rhythm per year.

Many products, such as toys or lawnmowers, have a seasonal demand pattern like the one shown in the example. Should planners choose regular production, which will create inventory, or should production be a function of the demand, which will incur the costs of changing production rhythm? These costs go beyond micro costs, such as machine setup costs. Macro costs will be incurred, such as the costs of making changes to personnel or machinery. In the example, planners should calculate the following three production plans:

  1. Maintain the production rhythm throughout the whole year.
  2. Change production rhythm frequently — in this case, four times a year.
  3. Attempt to find an optimal compromise between plans 1 and 2.

The planners can now compare the three variants with respect to budget, assuming the following cost rates:

  • Number of hours required to manufacture one unit: 100
  • Cost per hour: $100
  • Carrying cost: 20% of inventory value
  • Cost of changing production rhythm: $800,000 (at least once a year, according to the new sales plan)

Figure shows that the third solution results in the lowest total costs.

Fig.        Comparison of the three production plans.

The following simulation shows the production planning of one good depending on the demand evoking during a year.
Objective of the planning is to minimize inventory costs and cost of change(s) in the montly production.
Inventory costs are calculated by taking a percentage of the worth of the units laying in the warehouse. Cost of change(s) is the product of number of changes and cost per change.

To get a clue how production planning works, push the buttons in the top left corner.

Course section 5.2: Subsections and their intended learning outcomes