Intended learning outcomes: Work out and explain various variants of the production planand inventory plan as well as the resulting procurement plan, on the basis of a long-term sales plan of a company in the wood industry.
On the basis of a long-term sales plan of a company in the wood industry, your task — with regard to resource management — will be to work out various variants of the production plan and inventory plan as well as the resulting procurement plan.
The case: The Planing Co. manufactures wood paneling in many different variants. Variants occur, of course, in the dimensions, but also in the profiled edges and the wood finishes. The company offers panels in both natural wood and in painted finishes. The Planing Co. has only one timber supplier, Forest Clear Co. in Finland.
As manager of the Planing Co., you are faced with the task of producing a master schedule for one year in preparation for a management meeting tomorrow morning. You are expected to provide information on capacity load and, in addition, on the quantities of raw material to be procured from your timber supplier.
Your job is to do the planning only for the four most important final products in Planing Co.’s varied product assortment. These four products are shown in Figure 5.7.4.1 below and fall into two product segments: painted finish panels (panel “tradition”) or natural wood panels (bio panel).
Fig. 5.7.4.1 Final products requiring master planning.
These panels, already precut to size, are planed down to specific profiled panels at a number of processing centers. As Figure 5.7.4.2 shows, during the planing process there is a material loss of 3 mm to the width and of 2 mm to the height of a precut panel.
Fig. 5.7.4.2 Profiled edge of a finished panel.
The Planing Co. has machines to plane down the precut panels to specific profiled panels for a total of 2.7 million square meters of precut panels per year. The capacity unit, which comprises several machines, is given as square meters of material to be planed. You can assume that the same amount of material is processed every month.
Task a:Production and inventory plan: You will base your master planning on available data in the cumulative sales plan for the next 12 months (see Figure 5.7.4.3).
Fig. 5.7.4.3 Sales plan for the next 12 months.
Taking into account the loss of material during the planing process, calculate the load profile according to Figure 1.2.4.1 and enter it into Figure 5.7.4.4. Discuss the result: Is there sufficient capacity?
Fig. 5.7.4.4 Production plan for the next 12 months.
Based on the load profile, create for the four products the following three variants of the production plan and enter them into Figure 5.7.4.4:
- Each month the quantity produced is exactly the planned load that results from the planned demand. As a result, no inventory stock is produced, but costs are engendered for (quantitatively) flexible capacity (see the definition in Section 4.4.3).
- Each month the quantity produced is the average load. Fluctuations in demand have to be covered by inventory. To ensure delivery reliability, initial inventory stocks of 180,000 m2 must be carried (for the sake of simplicity, assume that there is appropriate inventory for all four final products). However, no costs arise for (quantitatively) flexible capacity.
- Half of the capacity is adapted to the load. This means that each month, the quantity produced is one-half the difference between planned load (that results from the planned demand) and the average load. To ensure delivery reliability, initial inventory stocks of 90,000 m2 must be held. Again, costs are engendered for (quantitatively) flexible capacity, but the costs are lower than in variant 1, above.
Conduct a qualitative comparison of the total costs of the three solutions above, by comparing the following two aspects. On the one hand, the inventory carrying cost:
- Unit cost: $2 per m2
- Annual carrying cost rate: 30%
On the other hand, the costs for flexibility of capacity:
- Labor cost: $1 per m2
- Flexibility percentage required =
(maximum monthly load – average load) / average load - Flexibility costs = flexibility percentage * labor cost per year
Solution: The average load per month is about 237,000 m2, slightly exceeding the available capacity of 225,000 m2. Therefore, overtime of about 5% will be necessary to fulfill the demand (about 2,844,000 m2 per year).
- Variant 1 results in flexibility costs of about $1,300,000. The maximum load is in October (about 345,000 m2); its production requires a flexibility percentage of (345,000 – 237,000)/237,000 = 46%.
- Variant 2 of the production plan (production of 237,000 m2 each month) results in a carrying cost of about $80,000. Carrying cost is calculated on the basis of the inventories at the beginning of each of the 12 months in the inventory plan.
- Variant 3 results in a carrying cost of about $40,000 and flexibility costs of about $650,000. Maximum production is in October (about 291,000 m2), which requires a flexibility percentage of (291,000 – 237,000)/237,000 = 23%.
You can view the animated solution on the Internet at the end of this section.
- Variants between the two extremes of Variant 1 and Variant 2 — as well as the variants themselves — can be produced by entering a value for alpha between 1 and 0 in the formula Av + alpha * (Loadi – Av), where Av is the average load. Loadi is the planned load that results from the planned demand.
- To calculate the costs of each variant, the parameters for carrying cost and flexibility cost can be changed.
Task b: Procurement plan: The management at Forest Clear Co. has asked you to give them a rough estimate of the quantity of raw material that Planing Co. will order from them in the next 12 months. As upper management at Planing Co. has just recently decided to build a partnership relationship with this timber supplier, they expect you to respond to Forest Clear by tomorrow at the latest. Your answer will depend on which of the three variants of the production plan you decide is the best.The raw material — the timber — is the same for all four final products. It is procured and calculated in units of cubic meters. However, as Forest Clear supplies boards of 100-mm width, 50-mm height, and 5-m length only, Planing Co. has to cut the boards to precut panels (see Figure 5.7.4.1) before the precut panels can be planed. Because of the dimensions of the final products, two to three precut panels can be obtained from each raw board (see Figure 5.7.4.5). The raw material must be available in the same month as the final products.
Fig. 5.7.4.5 Possible ways to cut the raw boards into panels.
Create a formula for calculating the raw material requirements for a given production plan. Hint: Derive the quantity of raw material in cubic meters (the wood boards) in dependency upon the specific final product, which is given in units of square meters. Company management is only interested in the total raw material requirements per month in Figure 5.7.4.6 (the raw material requirement per product is important only to establish the subtotals).
Fig. 5.7.4.6 Procurement plan: raw material requirements.
Solution: For Variant 2 of the production plan, production per month is one-twelfth of the total annual demand. This results in raw material requirements of about 4900 m3 per month.
A mouse click on the icon “go to procurement plan” takes you to calculation of the procurement plan for the chosen variant; once there, click on “calculate.” The upper section shows the production plan for all variants; the lower section shows the raw material requirements. Run the mouse over the product identification numbers in the left-most column to see whether two to three precut panels can be cut out of a raw board.
To create another variant of the production plan, you can click again on the icon “return to production plan” and the raw material requirements can be calculated for that plan as well.
You can view the animated solution on the Internet here.
For all calculations, click on the “calculate” icon.
Course section 5.7: Subsections and their intended learning outcomes
5.7.1 Exercise: Master Scheduling and Product Variants
Intended learning outcomes: Determine the degree of overplanning of the number of variants in in the master production schedule (MPS).
5.7.2 Exercise: Available-to-Promise (ATP)
Intended learning outcomes: Calculate the quantity available-to-promise (ATP), whereupon the master production schedule as well as a list of customers’ orders that have already been promised are given.
5.7.3 Exercise: Theory of Constraints
Intended learning outcomes: Explain an example of the theory of constraints, whereupon you produce two products, which use the machine capacity of three machines with a certain load. Identify and speed up the bottleneck.
5.7.4 Scenario: Master Planning Case
Intended learning outcomes: Work out and explain various variants of the production plan and inventory plan as well as the resulting procurement plan, on the basis of a long-term sales plan of a company in the wood industry.
5.7 Scenarios and Exercises
Intended learning outcomes: Disclose master scheduling for product variants. Calculate the quantity available-to-promise (ATP). Examine an example of the theory of constraints. Elaborate the master planning case.
