Article Inventory Management Production Planning
Inventory management is a vital part of production planning. In fact, if production planning is simplified to its most basic, it really is a type of inventory management. In order to manage production, one must manage inventory, be it of raw materials, works-in-progress or finished pieces. Understanding what inventory management and production planning are and how different inventory/production tools are used is necessary for a manager in any production-oriented business.
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Inventory Control
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Production is managed by balancing workforce with inventory. In environments where the workforce is taken to remain constant, inventory becomes a primary consideration. Inventory control theory is a title given to a class of tools/models that help determine optimal inventory levels. By using mathematical models, storage costs and ordering costs are balanced with shortage costs. Some models (for example, multi-item models) are even able to include the benefits found in manufacturing environments where several items are produced using the same, or some of the same, raw materials.
Inventory and Production Planning
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Production planning is simply inventory control with the added variable of the workforce--for example, the cost of work hours, the cost of layoffs, the cost of overtime and the cost of temporary help. The same type of multi-item models used in inventory control theory is many times modified to include the workforce as another type of inventory. Parallels are drawn between work hours, including overtime and layoffs, and inventory costs of shortage, ordering and storage.
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Aggregate Production Planning
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Aggregate production planning is also frequently used. These models are specific to production planning and involve either a level assumption of customer demand (not realistic in most circumstances) or a more "just-in-time" approach (which frequently results in large swings in work hours; for example, overtime followed by layoffs), or a combination of the two, referred to as hybrid production planning and generally the most effective.
Forecasting
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Forecasting also comes into play; as a result, inventory control and production planning are limited by the same characteristics that limit forecasting--subjective assumptions regarding future demand and delivery cannot be known definitively. That said, forecasting is a necessary assumption in any form of production planning; it stands to reason that customer demand must be estimated in order to plan production. The more that the assumptions made are based on quantitative data, such as inflation or public spending trends, the more accurate the forecast likely is.
Considerations
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Many people make the mistake of applying whatever type of model they feel most comfortable executing to various time series and situations; by and large, this is largely ineffective. Models are separated by the variables they include and the time period they analyze for a reason. For example, aggregate production planning is more effective than using multi-item inventory models and including labor as a variable. Regarding time periods, weighted averages, a commonly used technique, is most effective when dealing with short-term forecasting (up to one month); when looking at time periods up to one year (medium-term forecasting), time series analyses and regression should be used.
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