Creating a level production plan is a simple, three-step process. We will review those steps, but first a definition of the concept from the APICS Dictionary.
Level production method-A production planning method that maintains a stable production rate while varying inventory levels to meet demand.
We need to set some parameters of a theoretical example for purposes of illustration this concept. For Rocket Car Manufacturing Company, they have a forecast for the big selling item, the two-seat go-cart. This forecast is for the 2015 manufacturing year. Here are the numbers:
- Total forecasted demand for the 2015 production year is 11,000 units
- The beginning inventory is 450 units.
- The desired ending inventory is 250 units.
- The company closes down manufacturing for two weeks in the summer and two weeks at the end of the year. The total number of weeks the manufacturing department works is 48 weeks per year.
Step 1: Determine the Forecast
Using the given value above, we know the forecasted demand for the year is 11,000 units. When creating a level production plan, forecast accuracy is very important. If the forecast is biased high, inventory levels will be above the desired level at the end of the production plan horizon. If the forecast is low, the organization runs the risk of stock outs and the consequences of that on customer service.
Step 2: Add the Desired Change to Inventory Level
I like to think of the desired change in inventory in terms of demand on the manufacturing resources. In this case, example, the starting inventory is 450, and then shrinks to 250 at the end of the horizon. This is a reduction in inventory of 200 units. The formula to calculate the change in inventory is:
ending inventory – beginning inventory = change in inventory level.
Or, in our case example:
Change in inventory level = 250 – 450 = -200
The result is that reducing the desired level of inventory reduces the amount of product you are required to make. This acts very much as if that change is ‘supplying’ material to support the production plan. Conversely and increase in desired level of inventory would place an addition load on productive resources and simulate demand on the system.
Step 3: Divide by the Number of Planning Buckets
Of the 52 weeks in the year, Rocket Car Manufacturing Company works 48. (No, they are not hiring. They do not exist outside of my imagination and in this case example.) Each of those 48 weeks is one planning time bucket in the Rocket Car production plan.
Now let us pull this all together using the formula to calculate what quantity of two-seat go-carts is required for the level production plan.
(Forecasted Demand + (Ending Inventory – Beginning Inventory)) / Number of Planning Buckets
(11,000 + (250 – 450)) / 40 =
11,000 + (-200) / 40 =
9,000 / 40 = 225
The level production plan for Rocket Car Manufacturing company requires that they produce 250 two-seat go-cards a week to achieve the desire inventory levels while satisfying customer demand.
More from Garrison
Production Plan Strategies — Level Production
The Importance of Bill of Material Accuracy
Making Material Requirements Planning Work
APICS Dictionary 13th edition