Manufacturing, Production, and Inventory Management
Demand type drives the planning method
Distinguish independent demand (finished goods, forecast-driven) from dependent demand (components derived from a BOM). Know the production environments: MTS (forecast, stock), ATO (configure at order, postponement), MTO (order-driven fabrication), ETO (design-to-order). MRP explodes the BOM against the master production schedule, netting on-hand and scheduled receipts to produce planned orders; MRP II adds capacity and financial planning via rough-cut capacity planning and CRP. ERP integrates these across functions.
Lean tools: JIT, kanban, takt time, level scheduling, SMED, TPM, 5S, value-stream mapping. Theory of constraints focuses improvement on the bottleneck (drum–buffer–rope). Inventory: EOQ, safety stock, reorder point, ABC/XYZ segmentation, cycle counting, turns and days of supply. Capacity metrics include OEE, yield, and utilization; scheduling may run forward or backward.
Traps: applying EOQ without quantity discounts or lead-time variability; thinking safety stock protects against average demand (it protects against variability); mixing MTS and ATO logic; setting ABC classes by unit quantity rather than value or volatility; and ignoring queue and setup time when quoting lead time.
Rule of thumb: Reorder point = demand during lead time + safety stock; safety stock scales with the service-level z-factor and lead-time demand variability, not average demand.
Worked example: Annual demand 12,000 units, order cost $50, holding cost $6/unit/year → EOQ = √(2×12,000×50/6) ≈ 447 units. With average daily demand 40 and a 5-day lead time, lead-time demand is 200; adding 60 units of safety stock gives a reorder point of 260.