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

5.7.4b Scenario: Master Planning Case —  Production Plan and Inventory Plan

Intended learning outcomes: Work out and explain various variants of the production plan and inventory plan on the basis of a long-term sales plan of a company in the wood industry.

Continuation from previous subsection (5.7.4)

Task a: Production and inventory plan:

Taking into account the loss of material during the planing process, calculate the load profile according to Figure and enter it into Figure Discuss the result: Is there sufficient capacity?

Fig.        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

  1. 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 flexible capacity (see the definition in Section 4.4.3).
  2. 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 flexible capacity.
  3. 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 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 flexible 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.

Continuation in next subsection (5.7.4c).

Course section 5.7: Subsections and their intended learning outcomes

  • 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.

  • 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.