Balancing the Costs for Finished Goods Inventory and Production Capacity in a Make-to-Order Company

Abstract: In most manufacturing companies, it is necessary to carry inventory to a greater or lesser extent in order to disconnect the activities in the supply chain that are not conducted at the same pace. This way, a smoother flow through the chain, from raw material extraction to arrival at the final customer of a finished product, is facilitated. However, different parts of a company often have conflicting goals when it comes to inventory decisions. From a financial point of view, for example, it is beneficial to have as little capital as possible tied up in inventory, while high stock levels can enable an even level of production and better customer service. However these different goals are prioritized, the benefits in one department will incur costs in another one. The purpose of this project is to investigate how these costs are connected to each other, and increase the understanding of how they affect the total cost of ownership in a make-to-order company. Moreover, a model that describes the relationship between the different costs and that calculates a near cost optimal production plan over a given planning horizon will be developed. An interview based, deductive case study with focus on finished goods inventory at Tetra Pak in Lund has been conducted to state an example of a typical make-to-order firm. Company specific cost factors have been identified and used for setting up an aggregate planning model and making calculations for a cost optimal production plan in an example case. Furthermore, the cost factors have been compared individually in order to establish an understanding of how they are interrelated in isolated decision situations. It can be concluded that while the costs for inventory and production are relatively easy to determine, due to their concrete nature, other costs related to inventory and production management are more difficult to estimate. One such cost is the one of insufficient customer service, as this parameter cannot be measured only in financial terms, but also have soft aspects that have to be taken into consideration. It is therefore recommended that companies that wish to use methods similar to the one exemplified in this study, bear in mind that their strategic priorities have to be taken into account when making decisions based on the suggested cost optimal production plan.