Concept Paper on Inventory Control
Quality, production times, distribution of items and final prices will brand you as a successful company, using some key management components can get you to that level. This concept paper is going to focus on production planning, developing a master production schedule, capacity planning, inventory management and total quality management. Each of the topics is crucial in materials management and whether the company is going to flourish or fall. The examples used are going to help bring an understanding on how each phase is important to each other.
No manufacturing or service industry can be productive without a sound production plan. Effective planning is fundamental in any business; it’s a complex process that covers a wide variety of activities that ensure that materials, equipment and human resources are available to complete the work. Think of production planning as a road map; it helps you know where you are going, and how long it will take to get to your final destination. To plan effectively you will need to estimate potential sales with some reliability.
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Most businesses do not have firm sales or service figures; however, they can forecast sales based on historical information and market trends. Initially the plan needs to address specific key elements well in advance of production on order to ensure an uninterrupted flow of work as it unfolds. Material ordering, equipment procurement, bottlenecks and human resources acquisitions and training are some of these elements. Production planning needs to be done on several time scales; Long-range is plans for a five year term, Medium-range are made for two months to a year, and Short-range is no more than two months.
Some basic strategies used to supplement these time scales are chase strategy, production leveling, subcontracting, and the hybrid strategy. Chase strategy is producing the amounts demanded at any given time. Inventory levels remain stable while production varies to meet demand. Production leveling is continually producing an amount equal to the average demand. Subcontracting is always producing at the level of minimum demand and meeting any additional demand through outsourcing. These three strategies are considered pure strategies; each has its own set of costs.
The hybrid strategy is basically a combination of the three mixed to produce a unique production plan. The production plan provides a foundation to schedule the actual work and plan the details of day-to-day activities. As sales orders come in, you will need to address them individually based on their priority. The importance of the sales order will determine the work flow and when it should be scheduled. Typically, a plan addresses materials, equipment, human resources, training, capacity and the routing or methods to complete the work in a standard time to meet customer demands.
In order to summarize production planning you have to look at three items. First is the work force level, this is the number of workers required for production. Second is production rate, the number of units produced per time period. The final item is the inventory level; this is the remainder of unused units carried from the last time period. The most productive plan should be done at minimum cost but at the same time try to maximize customer service and profits. The problem faced for each time period is to find a production level, inventory level, and number of workers that will meet the required forecast.
After production planning, the next step is to prepare a master production schedule (MPS). A 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 unique part of the company’s sales program which deals with the planned response to the demands of the market.
Due to software limitations, but especially the intense work required by the “master production schedulers”, schedules do not include every aspect of production, but only key elements that have proven their control effectively, such as forecast demand, production costs, inventory costs, lead time, working hours, capacity, inventory levels, available storage, and parts supply. The choice of what to model varies among companies and factories. The MPS is a statement of what the company expects to produce and purchase Make-to-stock products, Make-to-order products, Assemble-to-order roducts, and Final assembly schedule are all decisions a company needs to make to efficiently manufacture products. Make-to-stock products are a limited number of standard items are assembled from many components. Make-to-order products are many different end items are made from a small number of components. Assemble-To-order is many end items can be made from combinations of basic components and subassemblies. Final assembly is basically used when there are many options and it is difficult to forecast which combination the customers will want.
A MPS is necessary for organizations to synchronize their operations and become more efficient. An effective MPS will give production, planning, purchasing, and management the information to plan and control all aspects of manufacturing. Enable marketing to make legitimate delivery commitments to warehouses and customers. It will also increase the efficiency and accuracy of a company’s manufacturing capacity. Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products.
In the context of capacity planning, design capacity is the maximum amount of work that an organization is capable of completing in a given period. Effective capacity is the maximum amount of work that an organization is capable of completing in a given period due to constraints such as quality problems, delays, and material handling. Capacity management is huge phase in any manufacturing company. Capacity should be first be analyzed during business planning sessions. The company should have a good sense of their current capacity and at what percentage they are operating.
This number can be tricky, if you’re running close to full-capacity but most of your product goes to inventory, then you might be okay. You should measure your capacity versus actual demand, not versus actual production. During these business planning sessions, the long-term should be analyzed and discussions regarding the purchase of equipment or facilities should be discussed. These are obviously major decisions with huge capital expenditures. As a result you will want to analyze your options fully with financial data.
In the medium-term, capacity should be analyzed during monthly meetings. If capacity is consistently less than what is demanded, it may be necessary to take short-term measures. When making the decision to increase capacity in the medium-term financial data and comparisons need to be completed. The decision to hire more people, subcontract or use overtime are all costly and need to be analyzed appropriately. In the short-term, capacity should be analyzed on a weekly basis when the production schedule is being released. You want to have a balanced workload if possible.
You should fully understand where your bottlenecked machines are and manage the throughput as close to the bottleneck as possible. There’s no point pumping out product through certain machines only to have them form a queue at your bottleneck. Bottlenecks are important to the flow of scheduling so controlling them is extremely important. Inventory management is crucial in the reduction of time spent at bottlenecks, you are able to control the material and adjust the loads. Without knowing your inventory you can have a lot of money tied up in a bottleneck.
Objectives of inventory management are to ensure that the supply of raw material and finished goods will remain continuous so that production process is not halted and demands of customers are met. It will minimize carrying costs and keep investment in inventory at optimum level. Security measures are in place to reduce the theft, obsolescence and waste. Also minimizes inventory ordering costs and makes arrangement of sale for slow moving items. Effective Inventory management covers amongst other things, stock control.
It is important to order enough stock of a product that sells well – but it is also very easy to over order good selling items. You are then faced with the problem of additional overheads in the form of insurance, stock control and storage. It is also just as easy to over order products that just don’t sell, or just sell very slowly. Products such as these can sometimes be shifted with concerted sales and marketing effort but often these products end up being sold at a loss or sometimes even disposed of as this option works out cheaper than storing it.
Ultimately bad inventory management represents money that is being lost to a business. Bad inventory that is stored for too long not only ties up money in insurance but also ties up money because of the cost of the product itself. There is a fine balance to be learned and put into place between not ordering to much stock and also not reducing service. Ultimately customers don’t like to be kept waiting whilst a good has to be reordered. Inventory should also be spread over a large range of stock, but the most popular items should have plenty of stock against them.
Inventory management covers everything from inventory costs, transportation costs, ordering costs, evaluating inventory and many more categories. With the information provided I only scratched the surface of how important inventory management is. Being able to evaluate inventory by using FIFO and LIFO to adjust the monetary value of what is kept in stock. Perishable items such as fruits and vegetables need to be under constant vision to make sure quality is of the highest priority. Always keep in mind that a company can have the entire inventory in the world but if their quality is sub-par then they will not be able to turn a profit.
After the First World War, quality inspection became more commonplace in manufacturing environments and this led to the introduction of Statistical Quality Control (SQC), a theory developed by Dr. W. Edwards Deming. This quality method provided a statistical method of quality based on sampling. Where it was not possible to inspect every item, a sample was tested for quality. The theory of SQC was based on the notion that a variation in the production process leads to variation in the end product. If the variation in the process could be removed this would lead to a higher level of quality in the end product.
Total quality management (TQM) can be summarized as a management system for a customer-focused organization that involves all employees in continual improvement. It uses strategy, data, and effective communications to integrate the quality discipline into the culture and activities of the organization. The customer ultimately determines the level of quality. No matter what an organization does to foster quality improvement, such as training, upgrading software, or integrating a new design process, the customer determines whether the efforts were worthwhile.
There are six basic concepts in TQM: a committed and involved management, focus on the customer, involvement of the total workforce, continuous process improvement, supplier partnering, and performance measurement. When these concepts are in place and followed the goods or services offered will satisfy the needs and expectations of the user. Trying to oversee such a big area of quality control is difficult but there are measurement tools in place to help. In order to know how well an organization is performing, data on performance measures are necessary.
TQM requires that an organization continually collect and analyze data in order to improve decision making accuracy, achieve consensus, and allow prediction based on past history. Pareto diagrams, checksheets, process flow diagrams, scatterplots, and cause-and-effect (fishbone) diagrams are all quality control tools. Using charts is one of the easiest ways to see any fluctuation in quality in the manufacturing process. Benchmarking, ISO 9000, and Six Sigma are all process control modules that are used worldwide in order to keep the quality of products standardized.
ISO 9000 standards are becoming universally accepted and customers throughout the world have come to expect a quality standard and to demand ISO certification of their suppliers. Benchmarking is a method by which organizations can compare their performance in a particular process to that of a “best in class” organization. Six Sigma was originally aimed to detect defect rates of modern equipment, but it also encourages companies to focus on improving all business processes. Bringing together some of the most important phases of materials management and how they integrate one another is important to a business.
This is a summarized version of the keep components that I believe will lead to a successful company. When you think of an organization as being successful what are some attributes that come in to mind? High profits, huge inventory, massive customer base, or companies spread throughout the world are things that come to mind. Without having principles built into a company’s mission and taking all parts of materials management into consideration there will be a lost vision of an entrepreneur that was poised to be great.