Production planning

economic-dictionary

Production planning consists of the organizational activity aimed at relating market demand with the company's supply. All this, through productive work and within a temporal plane.

Production planning, therefore, is nothing more than the management carried out by the company to be able to adequately supply the products. All this, with the aim of avoiding stock out of stock, in which it could not satisfy market demand.

However, it involves great complexity, since, although it is relatively easy to control orders, it is difficult to make future predictions.

The importance of production planning

Companies operate in markets that are global and highly competitive. Although it is true that the demand for a product in the long term tends to have some stability, there are peaks and valleys to take into account. That is, there are situations in which customers can buy less than what we had planned or more.

To avoid supply problems that could occur, you have to plan. To do this, you have to calculate the minimum stock necessary to avoid running out of products. Also, we must study inventory turns and other issues related to production. Therefore, training and acquisition of knowledge in this area is very necessary.

Production planning and inventory management

As we have already mentioned, one of the main objectives of production planning is to avoid stock outs. Therefore, proper inventory management is essential.

Next, let's look at some of the methods used to carry it out.

  • Manufacturing resources planning (MRP): The manufacturing resource planning model is useful for these types of companies. In them, the production processes, from the arrival of the raw material to the sale of the finished product, are complex. For this reason, this model focuses on the rationalization of orders and their relationship with the optimal stock.
  • Economic Order Quantity (EOQ): The economic order quantity, or Wilson model, is nothing more than a mathematical method to calculate the time and quantity to order from the supplier. Use a series of mathematical formulas to find out the different variables. We will see a case in the example.
  • Materials Requirement Planning (MRP): The material requirements planning model is another one used in production planning. In this case, we are dealing with an inventory management method that takes into account demand to schedule orders efficiently.
  • Just in Time (JIT): The "near-time" inventory system is a method of Japanese origin. Its operation is simple, ask what you need and when you need it. It is also called the Toyota method, as this company was the first to apply it. Its main drawback is managing a high volume of data to achieve efficiency.

An example of production planning: the Wilson model

To finish, let's look at an example based on the Wilson model.

Let's imagine a construction material sales company that has a series of data related to sales forecasts and different costs, as well as an approximation to its minimum necessary stock. The following table shows how each variable to study is calculated (in bold).

We can see that we start from a level of expected sales (D), order costs (s) and warehouse (g) and a safety stock (ss). With them and the formulas shown, we calculate the optimal order quantity (Q *), the total order cost (Cp) and the warehouse cost (Ca).

The Wilson model is one of the most widely used, especially for its simplicity in production planning.

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