Let me start with what leveling production is all about.
Production leveling is a scheduling method in which the main goal is to create a production plan that is optimized for the use of production resources.
To clarify more precisely, I will use a simple example.
We have a production line where one machine per shift can produce one piece of product per month. Currently, we have 10 such machines and 30 operators to operate these machines. That is, our line is able to produce 30 pieces of product per month. In the chart below I put information on the future demand for this product. It is clear that in some months the demand is higher than our production capacity and in others lower.
This means that if we produce 1:1 to demand (which still happens in many organizations) then in the months when demand is higher, we will not be able to fulfill orders on time. And in the months when demand is lower, we will not be able to provide work on all machines (especially if our material is also ordered for customer demand and no extra demand is placed during periods of lower demand), i.e. our capacity utilization will be lower.
And here the first solution can come – let's hire more people, let's make a 24/7 shifts and then we will be able to fulfill all the customer orders, because that is the priority. And yes, it will work. But as you can see in the chart below at the same time, this will increase the problem with the proper utilization of resources. And that will automatically increase the cost of production.
The alternative here, of course, is to level the production. Leveling is, scheduling it in order to produce a buffer of finished goods during periods of lower demand, which will help us to carry out orders smoothly during periods of high demand. Of course, in order to be able to do this, we need to setright the signal sent to suppliers – so that the material is delivered to support the production plan and not for the customer demand.
How does it work? I will present in the examples 3 reasons why it is worth considering production leveling.
Reason 1 Capacity utilization
The graphs above show the production schedule at baseline after capacity is increased and after production levels. Above each chart is a utilization percentage. As you can see, the highest capacity utilization rate is obtained when leveling production and the lowest when increasing production capacity.
Reason 2 On-time delivery
One of the main tasks of production leveling is to provide adequate service to customers. As you can see on the graphs, in the case of production levelling, we are building a temporary buffer that absorbs high demand during periods when demand exceeds our production capacity.
Reason 3 Inventory
There is another layer of problems that cause unleveled production. In a situation when we are sending signals to suppliers with 1:1 ratio of customer demand, the material is delivered even though our production capacity is unable to convert it. In the charts below you can see that if we level the production, the material is consumed on an ongoing basis. And in unleveled production, where demand exceeds our production capacity, we have a growing stock of materials that we are unable to use. Of course, with level production, we build buffers for finished products. So our stock value is growing either way, but there's one difference. The stock of finished goods in this case has its function: it is needed to ensure continuity of deliveries to the customer according to his demand. On the other hand, the stock of materials with unleveled production is simply an unnecessary stock (we would not feel any negative effects if this stock were not there).
You can see the differences in effects between approaches in the table.
While the underlying situation, i.e. "I do nothing", is clearly unacceptable. It is worth considering between increasing production capacity and leveling production. The advantage of increasing production capacity is the low level of stocks, i.e. the absence of the need to freezing capital, but on the other hand, it is characterized by a very low level of capacity utilization. On the other hand, the leveling of production requires capital expenditure in stocks, but it also makes high use of capacity. In assessing which solution is better I will appeal to the old world-like principle: it depends. In most cases, the leveling of production will certainly give us much better results, but there will certainly be companies and situations in which this increase in capacity (e.g. temporary) will be a much better idea. It is always necessary to think about what is more worth doing (and let's not confuse here with what is more profitable, because not always what is worth doing).