What type of production planning system a company is operating on may also be important to the appraiser. This is because if a company is operating well on the system they are set up in, they are not expected to have a significant amount of raw material on-hand. If this is not the case, the appraiser must determine whether the raw material on-hand is slow-moving or obsolete. Therefore, analyzing this area is a useful tool, as it gives the appraiser some insight into the raw material aspects of the inventory under consideration.
Below is an explanation of the type of production planning systems on which a company may be operating.
1. Just-in-time (JIT): This system embodies a management philosophy, which is utilized to achieve high-volume production with a low-volume inventory. This philosophy focuses on product design, process design, equipment selection, material management, quality assurance, job design, and productivity improvements. The logic of this system is that nothing is produced until it is needed. With this procedure, materials are scheduled for delivery upon which time they are needed. Therefore, this system does not allow for any safety stock, which means the suppliers of those materials may deliver goods several times a day to the manufacturer. This system attacks inventory waste in time and materials, exposes problems and bottlenecks that may otherwise be hidden by a thriving economy, or excess inventory, machine downtime, vendor delinquencies, change orders, inspection, paperwork, order entry, and decision backlog, and achieves streamlined production. For this system to be successful, it requires employee participation, industrial engineering/basics, continuing improvement, total quality control, and small lot sizes. Above all, this system assumes a stable environment, which requires management support, commitment, and training. An adjunct to this would also be repetitive production, balanced workflow, and preventive maintenance.
This system has become integrated with Total Quality Control (TQC). The theory behind TQC is to build quality into the product, which puts the burden of quality on product design and the employee, thereby eliminating the need for safety stock. If a product’s design has been improved, which requires a modification in the standard product configuration; these changes are typically introduced into this type of system in batches.
2. Material Requirements Planning (MRP): MRP is a computer program that determines how much of and when each item is needed to complete a specified number of units, in a specific period. It also provides a time schedule by specifying when each of these items should be ordered or produced, which maintains an efficient flow in the production process. This enables a company to maintain a certain production level without carrying a large inventory of materials.
To implement this system, demand must be forecasted. This demand is dependent based, which means the need for individual elements that make up the end product is driven by the need for that end product. Once demand has been forecast, a master production schedule must be developed to meet that demand. This is accomplished through a Master Production Schedule System (MPS), which is a time-phased plan that specifies a quantity and time frame regarding each end item built. Once the production schedule is developed, the MRP program pulls from the Bill of Materials (BOM). The BOM contains the product structure data, which is a sequence of all elements that go into making the end product. It also pulls from the inventory records file, which contains specific detail about each item, i.e., vendor identity, cost, and lead-time. In short, it is the MRP that dictates total volume, and the MPS that schedules this volume.
There is also a new generation of the MRP system, which has been referred to as the new MRP Enterprise Resource Planning (ERP), or the next-generation MRP II. Basically, this system allows for multi-tier companies with global product demands. These systems can either be centralized or decentralized. A centralized operation maintains control at one central location. A decentralized operation distributes control locally, which allows for autonomous operation. A compromise to choosing one over the other could be the use of something such as Open Systems Interconnect (OSI) or R/3 MRP, which uses a common data architecture that permits both decentralization and data sharing.
MRP and JIT systems are sometimes viewed as competing ways for production. However, they can work effectively together, as there could be some products that a company produces repetitively. As a result, production of these products would be best suited for a JIT system.
