Production Planning Concepts

by Renee O'Farrell; Updated September 26, 2017

Production planning is a term assigned to the various types of planning techniques designed to maximize production and profitability. Although many of these techniques are mathematical in nature, concepts such as inventory control, capacity planning and rolling horizons must be understood in order for any planning technique to be effective. Understanding production-planning concepts is useful for any business looking to improve efficiency and reap the cost savings.

Aspects of Production Planning

Production is planned using a long-term, medium-term or short-term view. Long-term views focus on the major decisions a company makes that influence capacity, whereas short-term views focus more on using more efficiently what a company already has. Medium-term views focus on adjustments, such as hiring, firing, layoffs, increasing inventory, or expecting back orders. Typically, companies have separate production plans for the different time horizons. While a company can focus its efforts on a particular horizon, even to the exclusion of the others, it is beneficial to maintain a focus on the long term, even if that focus is broad. For example, a company focused on increasing profit margins in the short term might neglect to reinvest some of those profits--a bad idea for any business in the long term.

Inventory Control

Inventory control, while a large part of production planning, is frequently looked at as a minor subset of supply chain management; however, inventory control is a crucial part of the production system. Aside from the determination of the minimum level of stock a company can maintain as safety against a balloon in customer demand, inventory control looks at the costs associated with maintaining inventory, both of raw materials and finished product. Inventory control is affected by changes in customer demand, holding costs, ordering costs and back-order costs.

Capacity Planning

Capacity planning attempts to match the volume the company is producing to customer demand. Maximum output capacity is calculated and an optimal capacity is determined. Too much capacity can result in a low return on asset investment, whereas too little capacity can drive away customers by having too many backorders, or even having to refuse orders. A good capacity plan has a level amount of input (raw materials and other resources) for its output (the actual product) with little to no bottlenecks and little to no downtime.

Aggregate Planning

Finished inventory is frequently managed through aggregate planning, a method that looks at production, the workforce itself and inventory management. Aggregate plans help match supply and demand while minimizing costs by applying upper-level forecasts to lower level, production-floor scheduling. Aggregate plans do this by lumping together resources in a very general way; such as all labor are “labor resources” and all machines “machine resources. Plans either “chase” demand (such as a floral shop, where the products are made in response to an order) or assume “level” demand (such as a clothing manufacturer, where the products are produced at a regular rate and simply stored until demand requires them).

Rolling Horizon

Regardless of the concept employed in production planning, an extremely useful concept is “rolling horizon.” Production planning depends upon certain assumptions of customer demand and delivery; a “rolling horizon” means that a company implements a production plan but sets up to review its effectiveness in a short time (such as a yearly production plan being reviewed and adjusted biweekly). Using a “rolling horizon” allows a company to be more reflexive and adaptive.

About the Author

Renee O'Farrell is a freelance writer providing valuable tips and advice for people looking for ways to save money, as well as information on how to create, re-purpose and reinvent everyday items. Her articles offer money-saving tips and valuable insight on typically confusing topics. O'Farrell is a member of the National Press Club and holds advanced degrees in business, financial management, psychology and sociology.