Lernzettel: Production Planning and Cost Optimization

📋 Course Outline

1. Material Requirements Planning (MRP) and Master Production Schedule (MPS) concepts
2. Capacity Planning and Capacity Requirement Planning (CRP) in production scheduling
3. Order splitting and scheduling alternatives to manage capacity constraints
4. Lot-sizing methods and their impact on production and inventory costs
5. Economic Order Quantity (EOQ) and Part Period Balancing (PPB) lot sizing methods with cost calculations
6. Comparative analysis of lot sizing methods: L4L, EOQ, and PPB for cost optimization
7. Application of EOQ and PPB techniques in MRP tables and cost evaluation
8. Statistical demand forecasting, safety stock, and minimizing total costs through optimal order quantity

📖 1. Material Requirements Planning (MRP) and Master Production Schedule (MPS) concepts

🔑 Key Concepts & Definitions

• Material Requirements Planning (MRP) : Uber Easts type contracts = “zero-hour contracts” Work when there is work, flexible work force = contractors
• Bill of Materials (BOM) : Uber Easts type contracts = “zero-hour contracts” Work when there is work, flexible work force = contractors
• Planning (MRP) ▪ Master production schedule : Uber Easts type contracts = “zero-hour contracts” Work when there is work, flexible work force = contractors

📝 Essential Points

• MRP does not explicitly address capacity planning, which can lead to infeasible schedules at lower levels despite feasible higher-level plans.
• The MPS aims to even out demand to manage the 3Ms (Man, Machine, Material) effectively.
• ➢ Operations splitting send the lot to two different machines for the same operation ➢ Order (lot) splitting, involves breaking up the order and running part of it earlier (or later) in the schedule MPS: There can be many sources of demand Netted sales forecast Customer orders Dependent demand Interplant orders Warehouse orders Charity donations Special marketing promotion Safety stock increase Anticipation buildup Prototype build Total 50 60 60 70 90 100 100 100 50 40 40 30 10 50 50 50 50 10 10 10 20 20 20 20 5 10 10 10 10 -10 5 10 15 5 5 160 130 165 130 160 130 175 135 1 2 3 4 5 6 7 8 Source: APICS Try to even out demand, remember the 3Ms?
• MPS: There can be many sources of demand Netted sales forecast Customer orders Dependent demand Interplant orders Warehouse orders Charity donations Special marketing promotion Safety stock increase Anticipation buildup Prototype build Total 50 60 60 70 90 100 100 100 50 40 40 30 10 50 50 50 50 10 10 10 20 20 20 20 5 20 10 10 15 15 5 5 150 145 150 150 150 150 150 150 1 2 3 4 5 6 7 8 Source: APICS Try to even out demand, remember the 3Ms?

💡 Key Takeaway

Understanding the fundamentals of MRP and MPS is essential for balancing supply and demand before addressing capacity planning and lot sizing.

📖 2. Capacity Planning and Capacity Requirement Planning (CRP) in production scheduling

🔑 Key Concepts & Definitions

• Lead time : = 1 week Average weekly gross requirements = 27;
• Capacity Planning : The process of ensuring that resource availability aligns with production requirements to create feasible production schedules.

📝 Essential Points

• Capacity Requirement Planning (CRP) calculates capacity requirements at work centers using MRP planned order releases.
• CRP addresses the shortcoming of MRP by explicitly considering labor and machine time capacities.
• Possible CRP alternatives include scheduling overtime at bottlenecks, revising the MPS to fit current capacity, operations splitting across machines, and order splitting to spread production.
• Utilization is measured as the difference between required and available capacity at each work center to identify over- or under-utilization.

💡 Key Takeaway

Capacity planning ensures production schedules are feasible by aligning resource availability with MRP outputs.

📖 3. Order splitting and scheduling alternatives to manage capacity constraints

🔑 Key Concepts & Definitions

• Capacity : The maximum amount of production output that a facility or machine can handle within a specific time frame, which must be managed to prevent bottlenecks.

📝 Essential Points

• Order splitting involves breaking up an order and running parts earlier or later to manage capacity constraints.
• Operations splitting sends the lot to two different machines for the same operation to alleviate bottlenecks.

💡 Key Takeaway

Order and operations splitting are practical tactics to smooth production flow and mitigate capacity bottlenecks.

📖 4. Lot-sizing methods and their impact on production and inventory costs

🔑 Key Concepts & Definitions

• Setup Costs : Expenses incurred to prepare equipment and processes for production runs, including ordering, transportation, inspection, and administrative activities.
• Holding Costs : Expenses related to storing and maintaining inventory, such as facility storage (rent, depreciation, utilities, security), material handling, labor, and record keeping.

📝 Essential Points

• Setup costs include ordering, transportation, inspection, and administrative expenses associated with production runs.
• Holding costs encompass facility storage, material handling, labor, and record keeping expenses for inventory.
• Part Period Balancing (PPB) aims to balance setup and holding costs by combining periods to minimize total cost over the planning horizon.
• 47 Total on Hand inventory Setup cost Holding cost Total cost L4L 0 700 0 700 EOQ 375 400 375 775 Part period balancing 190 300 190 490 (455)Controller Look at the Lotsizing spreadsheet 48 Hip Replacements, Inc.

💡 Key Takeaway

Choosing the right lot-sizing method directly influences the trade-off between setup and holding costs in production.

📖 5. Economic Order Quantity (EOQ) and Part Period Balancing (PPB) lot sizing methods with cost calculations

🔑 Key Concepts & Definitions

• Economic Order Quantity (EOQ) : A calculated order quantity that minimizes the total cost of inventory by balancing setup costs and holding costs based on demand and cost parameters.

📝 Essential Points

• PPB combines demand periods to approximate the EOQ by balancing cumulative holding and setup costs.
• Setup cost is a fixed cost incurred per production run, influencing lot size decisions.
• Holding cost is a variable cost per unit per time period, affecting inventory carrying costs.
• Total cost in EOQ and PPB methods is the sum of setup and holding costs, used to evaluate lot sizing efficiency.
• Lead time = 1 week Holding Cost Criticisms
• A cheat product costing say $0.01 will attract$1.00 per week holding cost making it impossible to sell economically
• An expensive product, costing saty $1 000 000, will attract$1 per week, not affecting the margins significantly.

💡 Key Takeaway

EOQ and PPB provide quantitative frameworks to optimize lot sizes by balancing fixed and variable production costs.

📖 6. Comparative analysis of lot sizing methods: L4L, EOQ, and PPB for cost optimization

🔑 Key Concepts & Definitions

• Labor Productivity : The efficiency of labor in production processes, which can be enhanced by determining economic batch quantities that reduce setup frequency and idle time.
• Machinery Uptime : The period during which machinery is operational and available for use, increased by selecting batch sizes that minimize downtime and changeover frequency.
• Total cost : The sum of all expenses related to production, including inventory and setup costs, which can be lowered by choosing the most economic batch quantities.

📝 Essential Points

• Comparative analysis shows PPB often yields the lowest total cost compared to L4L and EOQ in example scenarios.
• Strategic lot sizing enhances labor productivity by reducing frequent setups and idle times.
• Optimized lot sizing reduces excess inventory costs by balancing holding and setup expenses.

💡 Key Takeaway

Evaluating lot sizing methods comparatively enables selection of the most cost-effective production strategy.

📖 7. Application of EOQ and PPB techniques in MRP tables and cost evaluation

🔑 Key Concepts & Definitions

• 1 week EPP : The estimated production period set at 100 units per week, used as a benchmark in the Part Period Balancing lot-sizing method to balance holding and setup costs.
• 10 Order quantity : A specific fixed order size used as a standard lot size in inventory management to simplify ordering and production scheduling.
• Lot-sizing methods : Heuristic techniques such as Lot-for-Lot, Economic Order Quantity (EOQ), and Part Period Balancing (PPB) that determine order quantities by balancing setup and holding costs within Material Requirements Planning.

📝 Essential Points

• EOQ and PPB techniques can be applied to fill MRP tables by determining planned order receipts and releases based on net requirements.
• Cross requirements represent dependent demand from other production stages and must be accounted for in MRP calculations.
• Cost evaluation involves calculating total holding and setup costs from planned orders derived using EOQ or PPB.
• Applying EOQ and PPB in MRP helps achieve level demand (Heijunka) and just-in-time deliveries.
• Week 1 2 3 4 5 6 7 8 9 10 Cross requirements 0 0 50 0 0 35 15 0 100 0 Scheduled receipts Projected on hand 0 0 0 15 0 0 0 0 Net requirements 50 35 100 Planned order receipts 50 50 100 Planned order releases 50 50 100 Holding cost = 15 × $2 =$30 Ordering cost = 3 × $50 =$150 Total cost PPB lot sizing = $𝟑𝟎 +$𝟏𝟓𝟎 = $𝟏𝟖𝟎 Making MRP do Heijunka (Level demand for suppliers, JIT deliveries) 54 Outline ▪ Just in Case ▪ Material Requirements Planning (MRP) ▪ Master production schedule ▪ Bill of Materials (BOM) ▪ Lead Times ▪ MRP sheets ▪ Capacity planning ▪ Lot-sizing methods ▪ Just in Time (JIT) APICS 99.99%
• Mean demand plus 4 sigma 55 Copyright 2006 John Wiley & Sons, Inc.

💡 Key Takeaway

Integrating EOQ and PPB into MRP enhances production planning accuracy and cost control.

📖 8. Statistical demand forecasting, safety stock, and minimizing total costs through optimal order quantity

🔑 Key Concepts & Definitions

• Safety Stock : Inventory held to protect against demand uncertainty and supply delays, often set at mean demand plus four standard deviations to achieve a 99.99% service level.
• Optimal Order Quantity : The order quantity that minimizes total costs by balancing holding costs and ordering costs.

📝 Essential Points

• Normal distribution assumptions underpin the calculation of safety stock and service levels in inventory management.
• 4-55 Normal Distribution =0 1 2 3-1-2-3 95% 99.74% © Adapted from Heizer and Render 2011 Pearson Education Minimizing Costs Objective is to minimize total costs Table 12.4(c) Annual cost Order quantity Total cost of holding and setup (order) Holding cost Setup (or order) cost Minimum total cost Optimal order quantity (Q*) 50 100Minor increase in costs is tolerable 𝑋(𝑡) 𝑡 𝑄 0 𝑇 APICS graphical representation 57 +4σ +3σ = 99.73% +4σ = 99.99% Focus here: Halve the time.

💡 Key Takeaway

Normal distribution assumptions underpin the calculation of safety stock and service levels in inventory management.

📊 Synthesis Tables

Comparison of Lot Sizing Methods

Method	Total Cost	Main Benefit
L4L	700	Minimal inventory
EOQ	775	Cost minimization
Part period balancing	490	Cost balance between setup and holding

⚠️ Common Pitfalls & Confusions

1. Confusing lot sizing methods and their cost implications.
2. Overlooking capacity constraints when planning with MRP.
3. Ignoring safety stock requirements in demand forecasting.
4. Misapplying EOQ and PPB without considering demand variability.
5. Underestimating setup and holding costs impact on total costs.
6. Neglecting capacity planning in the scheduling process.
7. Assuming demand is always constant, ignoring statistical demand forecasting.

✅ Exam Checklist

1. Understand the fundamentals of MRP and MPS.
2. Learn capacity planning and CRP concepts.
3. Study order splitting and scheduling alternatives.
4. Compare different lot-sizing methods and their costs.
5. Calculate EOQ and PPB lot sizes with cost analysis.
6. Analyze the benefits of different lot sizing methods.
7. Apply EOQ and PPB in MRP tables.
8. Understand demand forecasting and safety stock calculation.
9. Minimize total costs through optimal order quantities.
10. Recognize the importance of capacity constraints.
11. Differentiate between setup and holding costs.
12. Use statistical methods for demand forecasting.