Production Scheduling Simulation
KASIL's General Strategy
During the seminars of Logistics and Operations Management module, a production simulation exercise took place. During this, we had to manage a company, which concentrates on the manufacturing of electrical car aerials for sale through a chain of distributors. More specifically, our objectives were to create a production schedule, order the necessary materials, control the inventory and generally to manage the resources of the company at the best possible way. The team which I participated in, decided to name our company "KASIL".
First of all, the main target of KASIL was to forecast the demand for the "Standard Model" (Std.) of the current year, for weeks 13 till 24. Additionally, we had to minimise our costs and satisfy our customers' demand in the best possible way (100% satisfaction), since it was one of the most important segments of our specified strategy. The given data for our forecasting method we could count on, were the last year's weekly demand and the current year's demand for the first twelve weeks. After comparing the demand during the first 12 weeks between these two years, we initially decided to order more materials and produce 50% more products for safety stock. However, we reconsidered this strategy after the second week, since the excess stock increased our costs greatly. We finally decided to adjust our production procedure and implement a strategy of continuous weekly forecasting. We examined the average previous year's demand and we determined our current year's demand to be approximately 26% greater weekly, compared to the previous years' weekly one, for weeks 13-24. Substantially, we planned a fixed rising weekly demand. We thought that it would be the best way so as to plan our production procedure more effectively and being able to satisfy our customers' demand without delays, while at the same time avoiding penalties.
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A challenge during the forecasting and ordering procedure, was that the "Accessories" would take two weeks to be delivered, instead of the other materials that would take one. Our orders depended on the delivery time, as well, so a good forecasting would help us to overpass possible delivery delays. The cost of not satisfying customers' demand was 12% of the sales value of under-delivered goods, something that could affect our liquidity and would even lead us to bankruptcy, if we had received many penalties. Things hardened when the XL model embodied in KASIL. We had to accomplish a more difficult and accurate forecast, because the production of XL required two units of Accessories. Even though we knew that its demand would be at about the half of the one of Std. model, we still had to consider and organise our orders, as the demand for the XL model would be added to the demand of the Std. one. In that way, the weekly forecast and the inventory levels we had adopted, helped us to handle the orders more effectively.
Regarding the capacity, we tried to adopt a strategy of using the whole capacity of a chosen shift. We mainly concentrated on the day shift one and used it at all its lengths, since it was more productive and cheaper, as well. While our target and desire was to use only the day shift capacity in order to decrease our expenditures, in some cases we had to use the night and evening shifts, so as to meet our orders' demand. Particularly, we were led to use the night shift capacity four times (in weeks 19, 20, 21 and 24) and the evening shift one, two times (in weeks 19 and 21), in order to be consistent with our goals. These may cost more, but we had to satisfy our customers' demand at any price. Up to a point, the specific options could not have been avoided due to the production of the XL model, which required additional capacity and materials to the Std. one. Subsequently, we decided not to risk losing the customers' goodwill. By selling and delivering the products on time, it would increase our revenue more, compared to the money that we would have saved if we had not used those shifts.
The scheduling we organised, was in accordance with our forecasting. We were ordering the materials for both the Std. and XL models when we were selling our products, at the end of every week. That was the reason why we did not implement some more specific strategy for our inventory. We were ordering and selling our products when they were needed at the amount they were needed. By this way, we tried to keep our costs at the lowest level possible. Due to the strategy of forecasting we deployed, thus to make a new one at the end of every week, we organised our overall scheduling according to this. This multitasking scheduling, helped us keeping our enterprising activities smooth, without any serious problems and complications.
Always on Time
Marked to Standard
Whereas a good scheduling and forecasting was necessary so as to be consistent with our objectives, a misunderstanding in the demand at the beginning of the simulation, led us to a penalty of £2,160 in week 15. While initially, in the first weeks, we had no problem to meet our targets, we ordered less material than we needed for the continuing of our production procedure, in order to reduce our costs and increase our revenue. This problem became visible in week 14 but we could not avoid it. We delayed our production and we were unable to meet our customers' demand. Fortunately, with the aforementioned scheduled forecasting we did not suffer any other penalties and we continued our production evenly.
All things considered, the overall strategy that we implemented, led us to avoid bankruptcy and to continue our enterprising activity even smoothly. In addition, by following this strategy, we somehow could predict our "future", up to a point, as well as possible and we had the ability to accomplish our scheduled orders. On the other hand, our strategy did not offer the best possible revenue for KASIL. We had almost had the money to function without problems in the specific span and not something more profitable at all. In some cases, our strategy led to higher unit cost and at a rather "preservative", instead of a profitable situation. Last but not least, with the stable 26% rising forecasting -regarding the demand-, in many cases we were unable to take into account all the order and production peaks.
Master Production Schedule
The table that follows consists a master production schedule for weeks 25 through 35, which adds up to the continuing of the scheduling during the seminars.
Considering that the forecast strategy remains the same with the one during the seminar simulation we can draw the Total Forecast Demand for weeks 25-35, as it is indicated in the upper table. The average increase of the demand for weeks 1-24 is 40%, so we consider that we have to fulfil the specific demand for the span afterwards. At the end of week 24 we had 0 units in stock for the Std. model and 593 units for the XL one, which we do not count in the specific scheduling. So, supposedly, we start week 25 without any stock. Given the aforementioned forecast, we can calculate the Total Raw Materials Required for both models which are necessary in order to meet our demand throughout weeks 25-35. Moreover, the Production figures show the capacity we have to produce our products, using at the same time different possible shift combinations. The rows with the Extra numbers indicate the spare products which are produced, beyond the normal weekly demand, for both models. Additionally, the Total Extra Inventory rows point the inventory that we hold for the current week's production plus the extra stock from the previous week, for each model.
As it is indicated from the Total Extra Inventory rows, by following the same strategy for weeks 25-35, it would led us to many penalties -in the nine out of eleven weeks-, as we would not be able to meet our customers' demand. For the purpose of the specific scheduling, we suppose that at the end of week 24 we had an inventory constituting of 6900 units for the Std. model and 3200 units for the XL one, which would be added at the Total Extra Inventory rows. As it is indicated at the Total Stock rows, we would be able to meet our goals and produce our products without complications, even at the high peak weeks.
Capacity and Inventory Considerations
"Just enough" capacity and inventory, are two of the many issues, that every company has to take into account and implement specific strategies according to them. In the real business environment, all companies have a given limited capacity in a short-term period, which should handle as effectively as possible without any service level conciliation, while maintaining the minimum inventory levels. This is crucial, due to the fact that inventory carries a lot of costs for the companies, something that will be examined more thoroughly in the following unit of the specific assignment. With the term of "just enough", it is denoted that companies have to produce and hold in stock the products that are exactly necessary so as to function evenly. This is rendered by fulfilling their customers' demand and following up their production procedure, without delays, while keeping their costs as low as possible.
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A major concern for companies is the demand of their products. The demand is an uncertain and in most cases an unpredictable issue for them. Even though a lot of techniques and scientific tools have been developed in order to enable the companies to predict the demand, no one is in the position of knowing it for certain. The fluctuation and unpredictability of the demand, is a significant consideration that every company should make, since their capacity and inventory are adjusted to this. The demand for every single product relies greatly on the forecasting methods that have been implemented from each company's management executives. Forecasting with its turn, in most cases, is something inaccurate and uncertain, since it depends on assumptions and ambitions of each company. In reality, the orders of the products are almost never stable and given. All in all, management policies have to be examined carefully, before being implemented and should be as realistic as possible. Although companies have to adjust their capacity and their inventory with the demand, a "safety" inventory and capacity level should be available, just in case they need it.
Furthermore, except for the capacity and inventory level, companies should consider about the costs that those two elements hide, as well. Apart from the direct costs, there are still some others which are connected indirectly with the inventory and the capacity of each company. For example, lack of capacity and inventory could lead to the loss of the customers' goodwill, which actually constitutes a major cost for companies if they lose their customers, since they are unable to satisfy their demand. Additionally, excess inventory and capacity levels, which necessitates a lot of capital to be employed, would mean less revenue for the companies. This situation could lead even to bankruptcy, if these will not be able to sell their products and have a lot of liabilities to fulfil. All things considered, companies should conform their capacity and inventory with their products' demand and their overall costs. More than "just enough" capacity and inventory means excess expenditures for the companies, while less than "just enough" of them, hides many risks for them, as well. The strategies they adopt, should be relevant with the aforementioned topics and be adapted according to these.
In the case of KASIL, we recognised this need and we tried to be as consisted with our initial strategy as possible. By updating our forecast continuously and using all our sources with the most effective way, led us to meet most of our goals and to avoid bankruptcy. By balancing and comparing our inventory levels with our production costs and using all the capacity of the chosen shifts, we tried to minimise our production and inventory costs. Recognising the level of inventory that we should hold, and using the exact capacity that was necessary for our production, was really important, in order to assure that we meet our customers' demand. Failing to satisfy it, would cost us more than it would, if we were ordering more materials and using more capacity than we needed just in order to reduce our total functional costs.
As we deduce from the upper analysis, the amount of inventory that a company holds and the capacity of production that it has, may be enough for some procedures, but still deficient for some others. So, the term "just enough" capacity and inventory is not particular and depends on many factors.
Inventory Holding Formula
Inventory holding levels, is an issue that concerns most businesses, in order to be able to meet their customer's demand, while simultaneously, minimising the cost of holding it. While this seems to form a more theoretical concern, there are still some formulas that render it more practical, as well. A formula that can be used to calculate inventory holding levels for a required or given customer service level, as it is stated at the Module Notes (2009), is the following:
Average inventory = (batch size / 2) + safety stock
Regarding the above equation, batch size can be defined as the number of items that can be produced or bought from a company, in order to balance the time difference between the supply and the demand. Safety stock, with its turn, can be calculated as MAD x CSF x v L.T., where:
• MAD = Sales Forecast Accuracy (Mean Absolute Deviation)
• CFS = Customer Service Level Factor
• L.T. = Manufacturing Order Lead Time + Distribution Lead Time
Combining the upper equations, a company has the ability to estimate the inventory levels for a required or given customer service level, more accurately. For example, supposing that it has a batch size of 4,000 items, the lead time is 25 days, its service level factor is 95% (which equals to 2.06, according to Module Notes, 2009) and it has three orders for three weeks (1,250 items for the first week, 500 items for the second week and 250 for the third one), using the above formula, it has the opportunity to estimate its inventory holding levels. This is as follows:
Safety stock = MAD x CSF x v L.T. = 425 x 2.06 x 5 ≈ 4,378 units
Average inventory = (batch size/ 2) + safety stock = (4,000/ 2) + 4,378 = 6,378 units
As a result, the company should hold 6,378 units of inventory, in order to balance the time difference between the supply and the demand in the specific period of time. Generally, inventory holding levels depend greatly on forecasting, something not so specific and accurate at all, but with formulas like the aforementioned one, companies have the opportunity to quantify their inventory levels as precisely as possible.
Throughout all years, one of the most major problems that almost every business contends, is the control of its inventory. Since businesses organised their structure and began to operate more systematically and united in a more modern way, regarding the whole processes, they always faced inventory problems. Nowadays, even if the inventory control has been polished and always is being handled more effectively, this problem has not been amended and still constitutes a problem for managers, according to Cooper (1994).
Wild (1997) states that inventory control is the activity which organises the availability of items to the customers. On the one hand, inventory substantially constitutes an asset for every company, by the time it operates so as to make profit through the products and services it provides to its costumers. It should be able to offer its products/ services at its customers at the right place, the right time and the right cost. From this aspect, a company should hold a "safety" stock properly, in order to balance the time difference between the supply and the demand (Module Notes, 2009). On the other hand, inventory may also constitute a liability for the company. Holding a high stock level, more than it is needed, in order to work properly and effectively, it can be converted at expenditures for the company, in terms of capital, storage, risk and opportunity costs.
The following report, taking into account both the aforementioned aspects, aims to provide a clear view analysing some cases that the inventory consists an asset or a liability for a company. But, none can estimate for sure the ideal level of inventory, so as it to constitute an asset and not a liability for the company, even if in our days, according to Cooper (1994), the views of stock holdings have changed considerably, for example with the use of forecasting.
The analysis and the examples that follow, will contribute to the specification of what the factual aim of the inventory is and what its suitable levels are. Thus, companies will be able to maximise their profit, while simultaneously minimising their costs.
Inventory as an Asset
Every company, in order to meet its customers demand and be able to produce its products at the right place, the right time and the right cost, has to hold an inventory of its products so as to provide them whenever they are needed. Inventory is an issue that concerns most of the companies, in terms of what the suitable stock level should be hold, minimising at the same time the cost of holding it. This is explained by the fact that a company invests in the inventory so as to enable it to decouple successive operations or anticipate changes in demand, but in financial terms it means that a company ties up a large amount of capital. Subsequently, this "money" should be used as effectively as possible, in order to return the maximum level of profits and capital employed that was used to buy the specific products (Quayle, 2006).
Classes of Inventory
The inventory, according to Lewis (1975), is separated in three sections, each of which has the same level of significance throughout the whole production process; raw materials, work in progress or in - process stocks and finished products.
Raw materials, virtually constitute the unfinished goods which are used by every company, so as to provide its customers with the final products. Holding stocks of raw materials enables a company to produce the final products in a shorter period of time, because the time between the supply of raw materials from the suppliers till the final production, is reduced. (Greene, 1974; Module Notes, 2009) This stock definitely forms an expenditure for the company, because of the fact that money was committed to buy it. However, if the company makes a bulk purchasing of raw materials takes the opportunity to make a good deal with its suppliers to buy them cheaper. Consequently, if the company is able to use effectively these raw materials when they are needed, for example in a high peak season, this bulk, which initially cost a lot, will automatically be transformed in assets for the company, due to the fact that it can respond to the high customer's demand. This demand indicates long-term profit for the company and more revenue, as well.
Kallberg and Parkinson (1984) define finished goods inventory as the items which are ready for distribution or sale to the customers. The stock of finished goods gives a company the opportunity to balance the demand between the customers and its suppliers. If a company has a finished goods inventory at a rate that can satisfy the customer's demand in a specific period of time, then it is more independent from the suppliers, who may delay the particular supply of the desirable commodity. This means that the company can operate regularly, without production and delivery delays, which subsequently leads to less raw materials required to be ordered for the production process. From this aspect, less capital is constrained and the specific inventory of finished goods adds up to an asset for the company. In an ideal business environment, the finished goods that are sold instantly when they have passed through the final stage of the assembly line, constitute an asset for every company. Hereupon, a part of the money that was earned during the aforementioned procedure, can be reinvested and the same purchasing and producing procedure is initiated. That means that money follow somehow a "circular direction" from the company, towards the company. Substantially, the initial invested capital can flow evenly without being constrained in the lungs of the company as a stock.
TOYOTA's perspective of Inventory
At all aspects, inventory can constitute a strong asset for every company. The best example that supports this belief is the Toyota automotive industry. Toyota adopted the Just In Time system (JIT) which, according to Waters (2003), is a set of techniques that improves the return on investment of a company, by reducing the inventory and the costs that relate with it. Toyota implemented this system and managed to organise all its operations as to occur exactly the time they were needed. The company managed to handle its products and materials effectively, without laying in stock idle, while, in the same time, they had exactly the volume of products and materials they needed for their production, so as not to offer poor customer service. Toyota, after many years of continuous effort, combined effectively many techniques of inventory control, process planning and plant design, workforce motivation, cost reduction, logistics and material requirements planning. The results of this effort met the company's expectations. The response time of the factory fell to about a day; in other words Toyota was able to satisfy its customers by delivering the cars within one or two days. In addition, many vehicles were constructed after customer's order, which meant that there was no risk not to be sold and be hold in inventory for a long time. Considering its inventory, Toyota has intermediate storage after the component's production and additional intermediate storage in front of assembly work centres. This means that the work flows from a producing work centre into an inventory, after that to another inventory and then to the next work centre. All this manipulation and programming of the inventory, led Toyota to increase its liquidity, while diminishing the chances to hold large inventory. From this point of view, the inventory of Toyota and for any other company, that holds the exact amount that is required, forms an asset for it. (Vollmann et al., 2005; Wild, 1997; Hall & American Production & Inventory Control Society, 1983)
Inventory as a Liability
On the other hand, the inventory can amount to a considerable liability for every company. In case the raw materials, work in process and stocks of finished goods are hold without being used, constitute an esteemed liability for companies. As it was previously mentioned, inventory does exist in order to enable a company to balance the time difference between the supply and the demand. If this does not accomplish to handle its inventory effectively, minimising costs and stocks simultaneously, the inventory, which is supposed to consist the primary tool for its functions and for its enterprising activities, will eventually grow to be a liability for it. As Plossl (1985) states, the financial people consider the inventories as a necessary evil, that tie up capital, which in other cases could be used better elsewhere. All in all, defunct inventory means defunct investment for every company.
Types of Inventory Costs
Apart from the upper obvious cost, idle inventory includes additional costs for a company, which, according to Vollmann et al. (2005) and Kallberg & Parkinson (1984), are divided in four sectors. These add up to Order Preparation Costs, Inventory Carrying Costs, Shortage and Customer Service Costs and finally to Policy and Other Inventory Costs. In most cases, these costs have even greater impact on the liquidity and the financial state of the companies and harm more the company's initial inventory capital.
With respect to the order preparation costs, they include all the fixed and variable cots which result by the time an inventory order has being placed. These can include transportation costs from the supplier's place till the distribution centre of the company which places the order, the warehouse preparation for the storage of the new commodity, the quality control of this, the verification of receipts and some other hidden costs. Maybe these costs seem negligible to some companies and are treated superficially, but there are still others which deal daily with huge amounts of inventory. Gathering all these costs at the end of the year, they figure out that these are not so negligible at all and that they have raised against to the initial invested capital.
Regarding inventory carrying costs, they virtually indicate the cost of holding the company's products in stock. These costs are relevant to the volume of the stock, but there are some more fundamental elements that in most cases relate with them. These elements amount to the obsolescence of the inventory, the deterioration of it, the insurance and the storage of the inventory and mainly the capital of the company that was employed. (Plossl, 1985) By committing capital substantially to an underutilised inventory, a company relinquishes use of this investment for some other functions, like the acquisition of new buildings or machines, the investment in new markets etc. Furthermore, this inactivity leads to the obsolescence and deterioration of the inventory. Markets and needs change rapidly, so if a company does not manage to sale its products quickly in the specific patterns, it is at high risk of leaving its inventory out of demand. Additionally, long term inventory in most cases means spoilage of it. The obsolescence and deterioration of the inventory, render it useless and unsaleable. The company, not only does not take the invested money back, but it has in many cases to squander it, if the inventory has spoiled, as well. As it was mentioned above, the initial attitude of the company towards the inventory is to treat it as an asset. Like all company's assets are covered by insurance, the inventory has to be covered too. The cost of the insurance for the inventory is high and if it lays within the company, without being sold, it consists an additional expense for it. Last but not least, the inventory carrying costs, include storage costs which are rendered as costs for the warehouse space, the personnel that associate with it, heat, light and so on. It is distinguishable that these inventory carrying costs not only commit every company with extra costs, but deprive it the ability to invest its money more effectively in some other fields, which is more probable to deliver more value to its shareholders. (Vollmann et al., 2005; Module Notes, 2009)
Apart from excess inventory costs, there are shortage inventory costs, as well. Quayle (2006) states that when a company runs out of stock, this promptly conducts to some other indirect costs, like the ones of production "down time", arranging special orders and delivery, and the loss of customers' goodwill. This cost is even more difficult to be measured compared to the previous two ones, due to the fact that this cost exists when the demand surplus the company's available inventory. The demand in a specific period of time is not given, but the costs that emerge from this uncertainty are definitely very high for the companies. First of all, when a company runs out of stock, means that they lose sales. If the customer cannot be satisfied from a company, definitely he is going to fulfil his need from another one. Things become even worse for a company, when a lot of its customers lose their goodwill due to lack of products and they appeal to a competitive one. Even though they do not find the same product, they can use a substitute of it in order to satisfy their needs. In terms of the company's processes, although no capital is employed, since no inventory exists, the company still functions. That means that it has to pay all the operational expenses (employees salary, rent, machinery expenses etc.), essentially without operating. This idle time, may seem costless for a company, indeed it costs a lot in terms of money and liability.
Instead of the upper most common inventory costs, there are still others that do not relate directly to the inventory considering it as material objects, but principally to the costs that ensue from the whole inventory as a general operation. These costs can emerge due to data gathering and computation, personnel's training, monitoring and inspecting inventory level etc. All in all, these costs arise from all the general operating procedures that depend on the particular inventory control system that is utilised from each company. The policy that every company deploys for the inventory control, connects directly to the costs that will arise from this. The management of a company should consider, before developing a specific policy, whether these costs represent an actual out-of-pocket expenditure, or a forgone profit and if actually these costs vary with the decision being made. This can be rendered as, if the company did not hold inventory, it would not have to take into account these costs. (Vollmann et al., 2005; Kallberg & Parkinson, 1984)
Example of Inventory as a Liability
The example that follows will try to make more clear, the case that the inventory can constitute a liability for a company. It is not a concrete example like in the case of Toyota, but it can help us to clarify things better. Let's suppose that we elaborate on a company which concentrates its enterprising activities on ice cream production. As we consider, the demand of the specific company will thrive mainly during the summer months, rather than in the winter ones. That entails that the company should hold more inventory during these months, in order to correspond to the high demand and to avoid supply difficulties. Considering that the management of the company decides to purchase raw materials (milk, sugar, cups etc. ) for the ice cream production during the winter, it would not form the best business decision. In order to buy these products, the company has to employ capital and invest it in the inventory. The problem is that these products will be useless for the company, because these are going to be utilised during the scheduled production procedure, which is going to be held a lot of months later from the purchasing one. That consists investment without substantial corresponding for the company, because holding a large amount of inventory without using it, carries many other costs, as it was previously mentioned. Furthermore, these raw materials, which are perishable, are going to be spoiled and be rendered useless till the production of the ice cream. That means that the company will essentially waste its capital due to the deterioration and obsolescence of the materials, losing at the same time the chance of investing its money to some other more profitable and important sections. In addition, it will have spared capital for the storage of these products, for the salaries of the personnel that associate with these products etc. It is obvious that this decision does not fall in step with the demand of the customers and the production needs of the company. In this case the inventory constitutes not only a liability for this company, but a useless expenditure, too. This example comes to explain that inventory is considered as an esteemed liability for every company, when it is hold without being in need.
From the antecedent analysis and examples I come to the conclusion that inventory finally constitutes both assets and liabilities for the companies according to particular factors. It can not surely be treated and examined only as an asset or a liability. Just as the coin has two faces, the same condition exists for the evaluation of the inventory. It is not something static and it can not be assigned merely the one or the other role individually. It depends on many factors and mainly on the way each company is going to treat it. It is an issue that necessitates multidimensional examination and careful consideration. Inventory can help at a great extend every company, but in the same time it can inflict it very seriously.
The fact is that the perception towards the inventory has changed greatly since companies started realising and taking its costs into account more seriously. Whereas they had developed a strategy of holding as much stock as they could, just in case they need it, they reconsidered it and developed a strategy of holding as much as it is needed for the even flow of their functions. Of course the more effective stock control and the objective of minimising costs and stocks emerged gradually, after many surveys and observations.
As Cooper (1994) states, a lot of developments have been made, in order the stock levels to be controlled more effectively. The most important of them are: the computerised inventory control systems, the improvement of models to represent real problems, some improved forecasting methods, the growth of materials requirement planning and extensions (e.g. MRP II), the reduced lead times and finally the growth of just-in-time systems. All these methods individually, or in most cases, the combination of them, enabled the companies to fulfil their targets, while simultaneously decreasing their costs significantly. In our days, the inventory relates to these methods acutely and business decisions are made according to them.
In an ideal world, any single company would hold inventory. If it could have the products needed for the production available, exactly the time that they were needed, the inventory would not exist in the business environment not even as a definition. With the exact forecast and material requirement planning, the inventory would not form any kind of cost for any company. But in real business environment, a safety stock is necessary for the smooth transaction of every company's operations. The fact is that companies find it very difficult to operate properly without stock, so the balance between the amount of stock and the reduction of costs, is necessary.
All things considered, inventory is not only a vital factor but also an investment for every company. Just as all investments must be treated as effectively as possible, so as to help companies increase their profitability, the same treatment should also be applied for the inventory. All investments with the appropriate handling can constitute an asset for every company, otherwise they will evolve as a liability for them. The same perception shall exist about the inventory.
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