Production Planning and Inventory Control – Example

Production planning involves a decision of ‘quantity to be produced in future’ with efficient use of resources. It is an integrated plan across various functions of the organization. The following aspects are factored in the production planning process.

a) Customer orders

b) Production capacity / constraints

c) Material requirement (including inventory levels, procurement plan and space constraints)

d) Labor requirement

e) Financial Budgets

The production plan has to be integrated with the organization’s strategy.

Production Planning for Product – XYZ (1st Dec 2010)

The following information regarding product XYZ is available

1. Market Demand for Mar 2011 – 1500 units

2. A lot size of 100 units can be processed in two working days.

3. Average lead time of raw material (time gap from ordering the material to receiving them in stores) – 15 days

4. Bill of Material for product XYZ


5. Inventory Estimate as of 1st Mar 2011


Estimate would be based on


a) Inventory levels as on 1st Dec 2010

b) Consumption estimate for Dec 10, Jan 11 and Feb 11

c) Purchase orders in pipeline

Assuming that the entire 1,500 units of the product need to be available on 1st Mar 2011, production needs to start 30 working days in advance (1500 / 100 x 2) i.e. on 17th Jan 2011 (assuming a 5 day working week and no holidays during the period).

Total Material Required (based on Bill of Material)


Purchase Plan

Considering a lead time of 15 days…if the material is to be received by the 16th Jan 11, purchase orders need to be placed latest by 1st Jan 10

Order quantities (Total requirement – estimated stock in hand)


Further, the following factors need to be considered in the production plan

1. Distribution plan of product XYZ (especially the time to deliver goods at customers’ place)

2. Need for maintaining any buffer stocks

3. Workforce requirement

4. Wastages in the manufacturing process

5. Time taken for quality testing

6. Financial requirements (cash flows etc)

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