Calculate a Production Plan with the Inventory Chain Template © 20111

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Calculate a Production Plan with the Inventory Chain Template

Intermediate Cost Analysis and Management

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What is a Forecast?

• A forecast is a plan for the future based on estimates, strategies and historical data

• Represents a standard for comparison to actual performance

• Implies a commitment to an agreed-upon level of output at an agreed-upon cost

• Encourages “What-If?” scenarios• May or may not be tied to the legal budget

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Terminal Learning Objective

• Task: Calculate a Production Plan with the Inventory Chain Template

• Condition: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors

• Standard: with at least 80% accuracy:• Identify and enter relevant scenario data into macro

enabled templates to calculate Production Needs, then Plan Direct Labor, Overhead and Forecast Material Purchases

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Consider the Following Process Flow

• Building, manufacturing, and all other processes start with inputs and physically progress to outputs

• Purchase meat for freezer, move from freezer to refrigerator to defrost, move to grill, move to table

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Planning’s Key Difference: Backward Chaining

• Planning starts with outputs and end state goals and logically works backwards to determine needed inputs

• If you are planning a menu with a desired output of ten burgers you will have to work backwards through the process

• If there is no inventory in the refrigerator and freezer, you will need to purchase hamburger meat for ten burgers

• If you wish to maintain inventories in the refrigerator and freezer for future cookouts you will need to specify output and inventory end states in order to plan properly

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Input-Output Equation

Beginning + Input – Output = End

If you take more water out of the bucket than you put in,

what happens to the level in the bucket?

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Using the Equation

• Given any three of the Variables, can Solve for the fourth

• Example: How much Fuel did my Car Use? • Start with a Full Tank • Drive 300 miles• Re-Fill Tank, using 10 gallons

Full Tank + 10 gallons – Output = Full TankFull Tank + 10 gallons = Output + Full TankFull Tank + 10 gallons = Output + Full Tank

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The Input-Output Equation

Inventory

Beginning

Input Output

Ending

Beginning + Input – Output = Ending

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Material Requirements Planning

InventoryBeginning

Input Output

Ending

InventoryBeginning

Input Output

Ending

InventoryBeginning

Input Output

Ending

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Learning Check

• How does a forecast differ from The Budget?• Where does the planning process begin?

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Demonstration Problem

• Planning assumptions• Output goal is 10• Planned ending grill inventory is 0• Planned ending refrigerator inventory is 35• Planned ending freezer inventory is 20

• Known facts• Actual beginning grill inventory is 0• Actual beginning refrigerator inventory is 10• Actual beginning freezer inventory is 30

• How many burgers should you plan to purchase and put into the freezer?

planned end states

starting points

planned action

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Backward Chaining Demonstration

Freezer

Beg

Purchase

-----------End

To frig

Beg 0

Cook 10

-----------End 0

Beg 0

Cook 10

-----------End 0

10 To table10 To table

Refrigerator

Beg

Defrost

-----------End

To grill

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Freezer Grill

Beg

Purchase

-----------End

To frig

Beg 0

Cook 10

-----------End 0

Beg 0

Cook 10

-----------End 0


Beg 10

Defrost 35

-----------End 35

10 To grill

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Grill

Beg 30

Purchase 25

-----------End 20

35 To frig

Beg 0

Cook 10

-----------End 0

Beg 0

Cook 10

-----------End 0


Refrigerator

Beg 10

Defrost 35

-----------End 35

10 To grill

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Bill of Materials

• Of course, the real world gets more complicated• Rather than eating plain hamburgers you might

specify the following bill of materials:• Buns• Cheese• Pickles, onion, lettuce, and tomatoes• Mustard, ketchup, mayo

• How would this affect your planning?

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S’mores

• After the cookout you plan to make s’mores on the grill

• The bill of materials for each s’more is:• 1 marshmallow• 2 graham crackers• 4 chocolate squares

• The process flow is:Pantry Assembly Grill

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S’mores

• Planned production is 30 s’mores

• Beginning state of Assembly and Grill is zero units

• Planned ending state of Assembly and Grill is zero units

Marshmallows Graham crackers Chocolate squares

Pantry contains: 5 6 30Planned ending: 12 20 10

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S’mores

Chocolate squares

Grill

Beg 30

Purchase 100

-----------End 10

120

Beg 0

Cook-----------

End 0

To table

Assembly

Beg 0

Assemble-----------

End 0

To grill

Graham crackers

Beg 6

Purchase 74

-----------End 20

60

Marshmallows

Beg 5

Purchase 37

-----------End 12

30

Pantry

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S’mores

Chocolate squares

Beg 30

Purchase 100

-----------End 10

120

Beg 0

Cook 30

-----------End 0

30 To table

Beg 0

Assemble 30

-----------End 0

30 To grill

Graham crackers

Beg 6

Purchase 74

-----------End 20

60

Marshmallows

Beg 5

Purchase 37

-----------End 12

30

Pantry

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S’mores

Chocolate squares

Grill

Beg 30

Purchase 100

-----------End 10

120

Beg 0

Cook 30

-----------End 0

30 To table

Assembly

Beg 0

Assemble 30

-----------End 0

30 To grill

Graham crackers

Beg 6

Purchase 74

-----------End 20

60

Beg 5

Purchase 37

-----------End 12

30

Pantry

1 per unit

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S’mores

Chocolate squares

Grill

Beg 30

Purchase 100

-----------End 10

120

Beg 0

Cook 30

-----------End 0

30 To table

Assembly

Beg 0

Assemble 30

-----------End 0

30 To grill

Beg 6

Purchase 74

-----------End 20

60

Marshmallows

Beg 5

Purchase 37

-----------End 12

30

Pantry

2 per unit

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S’mores

Grill

Beg 30

Purchase 100

-----------End 10

120

Beg 0

Cook 30

-----------End 0

30 To table

Assembly

Beg 0

Assemble 30

-----------End 0

30 To grill

Graham crackers

Beg 6

Purchase 74

-----------End 20

60

Marshmallows

Beg 5

Purchase 37

-----------End 12

30

Pantry

4 per

unit

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Real World Complexities

• These simple concepts are applied through materials requirement planning (MRP) systems in much more complex situations

• Consider the complexities of:• Automobile manufacturing• Computer assembly• Making and launching a space shuttle

• Can you see applications for ARFORGEN?

especially when you consider the

lead times of purchasing and

assembly!

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But My Organization Doesn’t Have Inventory!

• What about staffing and training requirements?• Ex. Air traffic controllers, Nuclear reactor

operators• Not having an adequate supply of trained

workers can be costly• Overtime, exhaustion, errors

• A “Just-in-Time” effort requires even more careful planning

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Learning Check

• How does the Bill of Materials affect the materials planning process?

• What are the non-manufacturing applications of Materials Resource Planning?

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Planning’s Impact on Cost

• Plans have financial consequences • There are costs of our burger production process• Fixed costs are energy and labor in this example• Variable costs are dependent on the number of

burgers produced• Flexible Forecasting• Uses same assumptions for fixed and variable

costs per unit, only changing (flexing) volume

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Flexible Forecast Example• Assumptions:• Fixed Cost = $20• Variable Cost per Burger = $5

Burgers Cooked 8 10 12Var. CostFixed Cost Total Cost

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Burgers Cooked 8 10 12Var. Cost 50Fixed Cost 20Total Cost 70

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Burgers Cooked 8 10 12Var. Cost 40 50Fixed Cost 20 20Total Cost 60 70

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Burgers Cooked 8 10 12Var. Cost 40 50 60Fixed Cost 20 20 20Total Cost 60 70 80

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Flexible Forecast Example with Revenue

• Assumptions:• Price per Unit = $10• Fixed Cost = $20• Variable Cost per Unit = $5

Burgers Sold 8 10 12RevenueVar. CostFixed Cost Profit

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Flexible Forecast Example with Revenue

• Assumptions:• Price per Unit = $10• Fixed Cost = $20• Variable Cost per Unit = $5

Burgers Sold 8 10 12Revenue 80 100 120Var. Cost 40 50 60Fixed Cost 20 20 20Profit 20 30 40

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Learning Check

• How does total cost change as quantity produced increases?

• What is a flexible forecast?

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Practical Exercise

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Planning/Flexible Forecasting Spreadsheet

Enter basic cost information and various production levels to

calculate the flexible forecast

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Planning/Flexible Forecasting Spreadsheet

Enter Data in the Bill of Materials tab to calculate Production and Materials Purchase Plan

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Practical Exercise

• Complete Practical Exercise

Documents

Calculate a Production Plan with the Inventory Chain Template © 20111