NOTES OF KMBN 205 UNIT-3

Types of Production Planning

If you work in a manufacturing plant as a supervisor you have heard the words “production
planning” many times. This is the procedure that they use to decide just how many goods to
manufacture. For the company to be successful efficiency is important. They do not want to over
produce products and then have them just sit in the warehouse

Batch Production Planning

Job-or Project-Based Production Planning

Continuous or Mass Production Planning

Process of Production planning and Control

(PPC) Routing, Scheduling, Loading, Just-in-
time (JIT)
Procedures for Production Planning

(i) Planning

(ii) Routing

(iii) Scheduling

(iv) Dispatching

(v) Follow-up or checking the progress

(vi) Inspection

JIT in Production and Operation Management

JIT provides an efficient production in an organization and delivery of only the necessary parts in
the right quantity, at the right time and place while using the minimum facilities”.

Benefits of JIT
The most significant benefit is to improve the responsiveness of the firm to the changes in the
market place thus providing an advantage in competition. Following are the benefits of JIT:

(i) Product cost: is greatly reduced due to reduction of manufacturing cycle time, reduction of
waste and inventories and elimination of non-value added operation.

(ii) Quality: is improved because of continuous quality improvement programs.

(iii) Design: Due to fast response to engineering change, alternative designs can be quickly brought
on the shop floor.

(iv) Productivity improvement.

(v) Higher production system flexibility.

(vi) Administrative and ease and simplicity.

Master Production Schedule

A Master Production Schedule is a Schedule of the completions of the end items and these
completions are very much planned in nature. Master production schedule acts as a very distinct
and important linkage between the planning processes. With the help of this schedule, one can
know the requirements for the individual end items by date and quantity. In companies, MPS are
generally produced in order to know the number of each product that is to be made over some
planning horizon. This schedule forms a very unique part of the company’s sales program which
deals with the planned response to the demands of the market

Objectives of Master Production Schedule (MPS)

1. Keeping the inventories at the desired level by making perfect use of the resources that are
available with the company.
2. Setting up due dates for the availability of the end items and also providing the required
information regarding resources and also the materials – which act as the supporting
pillars of the aggregate planning.
3. Maintaining properly, the desired level of customer service.
4. Setting particular schedules for the production of the parts and the components that are
used as the inputs to materials requirements planning, in the end items.

5. Economic Order Quantity (EOQ)

6. Economic order quantity (EOQ) is the ideal order quantity a company should purchase for
its inventory given a set cost of production, demand rate and other variables. This is done
to minimize variable inventory costs, and the equation for EOQ takes into account
storage, ordering costs and shortage costs.
7. The full equation is:
8. EOQ = √(2SD / H), or the square root of (2 x S x D / H).
 9. S = Setup costs (per order, generally includes shipping and handling)
10. D = Demand rate (quantity sold per year)
11. H = Holding costs (per year, per unit)
12. EOQ applies only when demand for a product is constant over the year and each new order
is delivered in full when inventory reaches zero. There is a fixed cost for each order placed,
regardless of the number of units ordered. There is also a cost for each unit held in storage,
commonly known as holding cost, sometimes expressed as a percentage of the purchase
cost of the item.
13. The economic order quantity is computed by both manufacturing companies and
merchandising companies. Manufacturing companies compute it to find the optimal order
size of raw materials inventory and
14. merchandising companies compute it to find the optimal order size of ready to use
merchandise inventory.
15. The ordering and holding costs
16. The two significant factors that are considered while determining the economic order
quantity (EOQ) for any business are the ordering costs and the holding costs.
17. Ordering costs
18. The ordering costs are the costs that are incurred every time an order for inventory is placed
with the supplier. Examples of these costs include telephone charges, delivery charges,
invoice verification expenses and payment processing expenses etc. The total ordering cost
usually varies according to the frequency of placing orders. Mostly, it is directly
proportional to the number of orders placed during the year which means If the number of
orders placed during the year increases, the annual ordering cost will also increase and if,
on the other hand, the number of orders placed during the year decreases, the annual
ordering cost will also decrease.
19. Holding costs
20. The holding costs (also known as carrying costs) are the costs that are incurred to hold the
inventory in a store or warehouse. Examples of costs associated with holding of inventory
include occupancy of storage space, rent, shrinkage, deterioration, obsolescence, insurance
and property tax etc. The total holding cost usually depends upon the size of the order
placed for inventory. Mostly, the larger the order size, the higher the annual holding cost
and vice versa. The total holding cost is some time expressed as a percentage of total
investment in inventory.

ABC Analysis
ABC analysis is a method of analysis that divides the subject up into three categories: A, B and C.
Category A represents the most valuable products or customers that you have. These are the
products that contribute heavily to your overall profit without eating up too much of your
resources. This category will be the smallest category reserved exclusively for your biggest money
makers.

For example, a software company might engineer different pieces of software, but one is a niche
software that can be sold at a significantly higher price than the others. That’s why it accounts for
about 60% of the overall revenue, although the company sells far less of these products compared
to other software categories. Hence, this specific software is a category A product.

Category B represents your middle of the road customers or products. Many wrongly approach
this group as those who contribute to the bottom line but aren’t significant enough to receive a lot
of attention.

Yet, category B is all about potential. The members of this category can, with some
encouragement, be developed into category A items.

Category C is all about the hundreds of tiny transactions that are essential for profit but don’t
individually contribute much value to the company. This is the category where most of your
products or customers will live. It is also the category where you must try to automate sales as
much as possible to drive down overhead costs.

THE PARETO PRINCIPLE

ABC analysis is based on what is called the Pareto Principle, an economic principle created by the
economist Vilfredo Pareto. Pareto gained notoriety for saying that most economic productivity
comes from only a small part of the economy. Essentially, it shows that there is an unequal
relationship between your input and your output.

For example, a business might get 80% of its results from only 20% of its staff. This demonstrates
that 20% of the staff are more productive than the other 80% of the team.

Another common example of the Pareto Principle suggests that you get 80% of your sales from
only 20% of your customers. In this case, these 20% would be your category A customers, hence,
those who make the biggest contribution to your revenue. Basically, only 20% of your customers
are valuable enough that losing one would significantly hurt the business.

You can bring the Pareto Principle even further into ABC analysis when you consider lifetime
value. The relationship between your input and output plays a major contribution in a customers’
lifetime value. It also forms the foundation of ABC analysis by providing guidelines for breaking
down customers into

JIT,VED
`Just-in-time’ is a management philosophy and not a technique.

It originally referred to the production of goods to meet customer demand exactly, in time, quality
and quantity, whether the `customer’ is the final purchaser of the product or another process further
along the production line.

It has now come to mean producing with minimum waste. “Waste” is taken in its most general
sense and includes time and resources as well as materials. Elements of JIT include:

 Continuous improvement
o Attacking fundamental problems – anything that does not add value to the product.
o Devising systems to identify problems.
o Striving for simplicity – simpler systems may be easier to understand, easier to
manage and less likely to go wrong.
o A product oriented layout – produces less time spent moving of materials and parts.
o Quality control at source – each worker is responsible for the quality of their own
output.
o Poka-yoke – `foolproof’ tools, methods, jigs etc. prevent mistakes
o Preventative maintenance, Total productive maintenance – ensuring machinery and
equipment functions perfectly when it is required, and continually improving it.
 Eliminating waste. There are seven types of waste:
o Waste from overproduction.
o Waste of waiting time.
o Transportation waste.
o Processing waste.
o Inventory waste.
o Waste of motion.
o Waste from product defects.
 Good housekeeping – workplace cleanliness and organisation.
 Set-up time reduction – increases flexibility and allows smaller batches. Ideal batch size is
1item. Multi-process handling – a multi-skilled workforce has greater productivity,
flexibility and job satisfaction.
 Levelled / mixed production – to smooth the flow of products through the factory.
 Kanbans- simple tools to `pull’ products and components through the process.
  Jidoka (Autonomation) – providing machines with the autonomous capability to use
judgement, so workers can do more useful things than standing watching them work.
 Andon (trouble lights) – to signal problems to initiate corrective action.

HML Analysis

H-M-L analysis is similar to ABC analysis except the difference that instead of “Annual Inventory
Turnover”, cost per unit criterion is used.
The items under this analysis are classified based on their unit prices. They are categorized in three
groups , which are as follows

H-High Price Items

M-Medium Price Items
L-Low Price Items

Objectives of hml analysis

 Determine the frequency of stock verification

 To keep control over the consumption at the department level
 To evolve buying policy, to control purchase
 To delegate the authority to different buyer
 Determine the frequency of stock verification
 To keep control over the consumption at the department level
 To evolve buying policy, to control purchase
 To delegate the authority to different buyer

FSN Analysis:

Here the items are classified into fast-moving (F), slow-moving (S) and Non-moving (N) items on
the basis of quantity and rate of consumption. The non-moving items (usually, not consumed over
a period of two years) are of great importance. It is found that many companies maintain huge
stocks of non-moving items blocking quite a lot of capital.

Moreover, there are thousands of such items. Scrutiny of these items is made to determine whether
they could be used or to be disposed off. The classification of fast and slow moving items helps in
arrangement of stocks in stores and their distribution and handling methods.

Types of inventories
An inventory is a stock of goods maintained for the purpose of future production or sales. In broad
sense, the term inventory refers to all materials, parts, supplies, tools, in-process or finished
products recorded in the books by an organization and kept in its stocks, warehouse or plant for
some period of time. It is a list or schedule of materials held on behalf of an enterprise.

Types/Classification of Inventory
 1. Direct Inventories

Direct inventories are those inventories that play a major role in the production and constitute a
vital part of finished goods. These inventories can be easily assigned to specific physical units.
Direct inventories may be categorized into four groups.

(i) Raw materials

Raw materials are the physical resources to be used in the manufacture of finished products. They
include materials that are in their natural or raw form. For example, cotton in the case of textile
mill, sugarcane in the case of sugar factory, oil seeds in the case of an oil mill etc. The chief
objective of keeping raw material is to ensure uninterrupted production in the event of delays in
delivery and also to enjoy the economies of large scale buying.

(ii) Semi-finished Goods

Semi-finished goods are those materials which are not cent per cent (100%) complete in all
respects i.e., some processing still remains to be done before the product can be sold. For example,
a person who is engaged in the manufacture of furniture, may purchase unpolished furniture from
market and sell it after polishing the same.

(iii) Finished Goods

Finished goods are complete products that are ready for sale or distribution. For instance, in case
of a hosiery factory, sweaters, shawls etc. are finished products.

(iv) Spare Parts

Spare parts means duplicate parts of a machine. Usually, almost all the industrial concerns
maintain spare parts of various machines which they use for manufacture. This will enable them
to ensure smooth running of machines which in turn provide for uninterrupted production.

2. Indirect Inventories

Indirect inventories include those items which are necessary for manufacturing but do not become
component of the finished goods. They normally include petrol, maintenance materials, office
materials, grease, oil lubricants etc. These inventories are used for ancillary purposes to the
business and cannot be assigned to specific, physical units. These inventories may be used in the
factory, the office or the selling and distribution divisions.

Factors affecting Plant Location

Eight Factors Affecting Plant Location

1. Selection of Region
The selection of a region or area in which plant is to be installed requires the consideration of the
following:

(i) Availability of Raw Materials: Proximity of sources of raw materials is the obvious explanation
of the location of majority of sugar mills in Uttar Pradesh. This means that the raw material should
be available within the economical distance. Easy availability of supplies required for
maintenance and operation of the plant should also be considered.

(ii) Proximity to Markets: Cost of distribution is an important item in the overhead expenses. So
it will be advantageous to be near to the center of demand for finished products. Importance of
this is fully realized if the material required for the manufacturing of products are not bulk and
fright charges are small.

(iii) Transport Facilities: Since freight charges of raw materials and finished goods enter into the
cost of production, therefore transportation facilities are becoming the governing factor in
economic location of the plant. Depending upon the volume of the raw materials and finished
products, a suitable method of transportation like rail, road, water transportation (through river,
canals or sea) and air transport is selected and accordingly plant location is decided. Important
consideration should be that the cost of transportation should remain fairly small in comparison
to the total cost of production.

(iv) Availability of Power, Fuel or Gas: Because of the wide spread use of electrical power the
availability of fuel or gas has not remained a deciding factor in most of the cases for plant location.
The location of thermal power plants (like Bokaro Thermal Plant) and steel plants near coal fields
are for cutting down cost of the fuel transportation. The reliability of continuous supply of these
facilities is an important factor.

(v) Water Supply: Water is required for processing as in chemical, sugar and paper industries and
is also used for drinking and sanitary purposes. Investigation for quality and probable source of
supply is important, since the cost of treating water is substantial so the chemical properties like
hardness, alkalinity and acidity.

(vi) Disposal Facility for Waste Products: Thorough study should be made regarding disposal of
water like effluents, solids, chemicals and other waste products likely to be produced during the
production process.

(vii) Availability of Labour: Potential supply of requisite type of labour governs plant location to
major extent. Some industries need highly skilled labour while other need unskilled and
intelligent labour. But the former type is difficult in rural areas in comparison with industrially
developed location.

2. Township Selection

The factors to be considered regarding township selection are:

(i) Availability of men power of requisite skill

(ii) Competitive wage rates of workers

(iii) Other enterprises which are complementary or supplementary regarding raw materials,
other input, labour and skill required.

(iv) Moderate taxes and the absence of restricting laws.

(v) Favourable cooperative and friendly attitude towards the industry.

Inventory Control Techniques: EOQ, ABC and

others
Five Techniques of Inventory Control

1. Economic Order Quantity

Inventory Models

ABC Analysis

Material Requirements Planning

5. VED Analysis

Vital essential and desirable analysis is used primarily for the control of spare parts. The spare
parts can be divided into three categories:

(i) Vital

(ii) Essential

(iii) Desirable

(i) Vital: The spares the stock out of which even for a short time will stop production for quite
some time and future the cost of stock out is very high are known as vital spares.

(ii) Essential: The spare stock out of which even for a few hours of days and cost of lost production
is high is called essential.

(iii) Desirable: Spares are those which are needed but their absence for even a week or so will not
lead to stoppage of production.