Basics of Supply Chain Managment (Lesson 3)

UUnit nit 11 BBasics asics ooff SSupply upply CChain hain M anagement Management Lesson 3 Master Planning

Unit 1

Basics of Supply Chain Management

Unit 1

Basics of Supply Chain Management

© 2003 e - SCP -The Centre for Excellence in Supply Chain Management No portion of this publication may be reproduced in whole or in part. The Leading Edge Group will not be responsible for any statements, beliefs, or opinions expressed by the authors of this workbook. The views expressed are solely those of the authors and do not necessarily reflect any endorsement by The Leading Edge Training Institute Limited. This publication has been prepared by E-SCP under the guidance of Yvonne Delaney MBA, CFPIM, CPIM. It has not been reviewed nor endorsed by APICS nor the APICS Curricula and Certification Council for use as study material for the APICS CPIM certification examination.

The Leading Edge Training Institute Limited Charter House Cobh Co Cork Ireland

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Basics of Supply Chain Management Preface............................................................................................................4 Course Description................................................................................................................. 4

Lesson 3 – Master Planning ............................................................................5 Introduction and Objectives.................................................................................................. 5 Production Planning .............................................................................................................. 5 Production Planning or Sales and Operations Planning Strategies.................................. 6 Make -to-Stock Production Planning .................................................................................... 9 Creating a Level Production Plan......................................................................................... 9 Resource Requirements Planning ....................................................................................... 11 Master Production Schedule (MPS) ................................................................................... 12 MPS Elements....................................................................................................................... 13 MPS Calculations ................................................................................................................. 15 MPS in Different Environments ......................................................................................... 16 MPS Development ................................................................................................................ 16 MPS, Sales and Delivery Promises ..................................................................................... 18 Summary ............................................................................................................................... 21 Further Reading ................................................................................................................... 21 Review ................................................................................................................................... 22 What’s Next? ........................................................................................................................ 24

Appendix.......................................................................................................25 Answers to Review Questions .............................................................................................. 26

Glossary ........................................................................................................28

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Basics of Supply Chain Management Preface Course Description This document contains the third lesson in the Basics of Supply Chain Management unit, which is one of five units designed to prepare students to take the APICS CPIM examination. The Basics of Supply Chain Management unit provides the fo undation upon which the other four units build. It is necessary to complete this unit, or gain equivalent knowledge, before progressing to the other units. The five units, which together cover the CPIM syllabus, are: Basics of Supply Chain Management Master Planning of Resources Detailed Scheduling and Planning Execution and Control of Operations Strategic Management of Resources Please refer to the preface of Lesson 1 for further details about the support available to you during this course of study.

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Basics of Supply Chain Management Lesson 3 – Master Planning Introduction and Objectives This lesson provides a basic overview of the purpose and functions of production planning and master production scheduling. On completion of this lesson you will be able to: Identify features of a basic level production plan for make-to-stock products Describe relationships between resource requirements planning and production planning State the purpose of a master production schedule (MPS) Identify the relationship between the MPS and the production plan Describe features of a simple MPS and rough-cut capacity plan Describe the importance of the MPS to sales with regard to promises of delivery

Production Planning Production planning and control involves several layers of activities. Planning begins with the business plan, which is used to guide the sales and operations plan. This is turn is a major input to the master production schedule which feeds into material requirements planning, production activity and control (PAC), and purchasing. Business Strategy Plan

Sales and Operations Plan

Master Production Schedule

Material Requirements Plan

Planning

PAC and Purchasing

Execution

At each stage in the planning process, the three factors that must be identified are: Demand priorities Required capacity Available capacity Purpose of Production Planning Production planning, an activity of Sales and Operations Planning, aims to ensure the overall level of manufacturing output, inventories, and other activities meet the requirements of the sales forecast and strategic business objectives, such as profitability, productivity, good labor relations, competitive customer lead times, and low inventories. Production Planning Activities The activity involves developing a production plan, accompanying budgets and financial statements, plans for materials and work force requirements. Production planning must establish production rates that will satisfy customer demand and accomplish the objectives of the strategic business plan, by maintaining, raising or lowering inventories or backlogs, while at the same time keeping the work force stable.

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Basics of Supply Chain Management Marketing

Finance

Production Plan

Materials

Production

Others

Production planning, also known as sales and operations planning, affects many functions and is usually a cross- functional activity requiring input from marketing, production, finance, materials and other functions when necessary. As it is not required to be very detailed, production planning is usually at the product group level. Products are grouped according to the similarity of their production processes. The plan generally covers a 12 month time period and makes allowances for seasonal variation in product demand where necessary. The production plan is concerned with: planning for each product group maintaining inventory levels to optimize the balance between cost and customer service identifying required resources identifying gaps between resources currently available and requirements

Production Planning or Sales and Operations Planning Strategies The traditional approach of developing a production plan is evolving toward the concept of sales and operations planning. The change of title is important as it highlights the importance of sales and marketing having a direct involvement in the plan. The title of production plan does not refer to the fact that this plan is the combined effort of several functions within an organization. It implies that the plan is made by production only. Production planning is much more effective when sales and marketing are directly involved. The two main strategies for production planning are the chase strategy, which strives to produce the amounts required by demand in each period, and the level production strategy, which aims to produce at a constant rate that is equal to the average demand. Sometimes a combination, or hybrid, of these strategies is used. So a sales and operations plan may employ: Match / chase strategy Level production strategy Hybrid or combination strategy Demand Matching / Chase Strategy This strategy requires that production varies to meet demand and inventory levels remain stable as a result. The company manufactures just enough at any time to exactly meet demand. Such a strategy must be used in many industries, for example, restaurants, courier services, and telecommunications.

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Basics of Supply Chain Management 40 35 30 25 Demand

20

Production

15 10 5

Jul Oc t

Jul Oc t Ja n Ap r

Ap r

Ju l Oc t Ja n

Ja n Ap r

0

Figure 1 Chase Strategy

This strategy requires that a company is capable of meeting peak demand without relying on stockpiles of finished product. In some cases, this may require hiring and training additional temporary workers, and operating shifts or overtime. Although these measures add cost, they can be offset against the savings made by maintaining minimum inventory levels, which is the main advantage of this strategy. Advantages

Disadvantages

Stable inventory levels

Increased hiring, training, overtime, and shift costs

Production is flexible enough to meet demand requirements

Layoffs adversely affect employee morale Sufficient skilled workers may not be available Increased cost of ensuring plant capacity matches peak demand

Level Production Strategy The level production strategy maintains a constant amount of production which is equal to the average demand over the period. Each day of operation will result in the same amount of production. When demand is lower than the average, inventories of finished goods are built up. These can be used to supplement production when demand levels are higher than production. Some seasonal products, for example, Christmas tree lights, require level production as the costs of continually laying off workers then rehiring and retraining would be prohibitive. 40 35 30 25 Demand

20

Production

15 10 5

Ju l Oc t

Ap r

Ju l Oc t Ja n

Ap r

Ju l Oc t Ja n

Ap r

Ja n

0

Figure 2 Level Production Strategy

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The main advantage of this strategy is the stability of the production process. Companies do not need to have excess capacity to meet peak demand and they can maintain a stable work force. However, when demand is low, inventory levels will rise, and the costs of storing and managing this inventory will also rise. To meet demand levels, the company will need to accurately predict the amount of working days available and use this to average the total demand into the daily production requirement. Advantages

Disadvantages

Avoids the labor costs associated with demand matching

Increased inventory costs Depends on accurate forecasting of demand over the year and available working days

Plant capacity is not required to match peak demand

1. Given the demand figures below and the number of working days each month, calculate the amount that must be produced each day if using a level production strategy to meet demand. Review Q

Jan

Feb

Mar

Apr

May

Jun

10

18

25

27

29

32

Demand

21

20

23

22

20

21

Work Days

Daily Production Rate:

Hybrid Strategies An unending number of combinations between these two strategies are possible. The important task is to find the best fit for the company, its objectives, its product, and environment. Most usually, combination strategies produce at full capacity for part of the cycle and either lower or stop production at other times. The strategy should strive to balance production and inventory costs at the optimum level to meet demand. 35 30 25 20

Demand

15

Production

10 5

Oc t No v De c

Jul Au g Se p

Ju n

Ap r Ma y

Ma r

Ja n Fe b

0

Figure 3 Hybrid Strategy

This example of a hybrid strategy (shown above) employs full capacity throughout the summer months and reduces production levels when demand drops in the winter months. © Copyright Leading Edge Training Institute Limited

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Basics of Supply Chain Management Sub-Contracting Although this is not strictly a production strategy, as the production is undertaken by another company, it is a way of quickly achieving the required capacity without the complexities and expense of increasing plant capacity and changing production levels. Subcontracting is useful for dealing with changing demand although it can be expensive. Often the cost of such items would be greater than if the items were made in the plant. When calculating the cost of sub-contracted items its important to factor in not only the item cost, but also the costs of purchasing, transporting, and checking the quality of the item.

Make-to-Stock Production Planning Frozen foods, retail clothing, soft drinks and household products are all examples of make-tostock production, where products are stored as finished goods inventory before an order is received from a customer. Make-to-stock production plans tend to be used when: Demand is steady and predictable There are few product options The products have a long shelf life The market expects delivery much faster than the time needed to make the product The act of planning for make-to-stock production focuses on the level of inventory rather than the level of demand. The information required includes the current inventory levels, the desired inventory levels, any back orders, and the period of time to plan for.

Creating a Level Production Plan This section looks at the steps involved in making a level production plan for make-to-stock goods. The general procedure for developing a level production plan is as follows: 1. Calculate the forecast demand for the planning horizon 2. Determine the opening inventory and desired ending inventory levels 3. Identify the total number of back orders (orders that are late for delivery) 4. Calculate the total production requirement by adding the total forecast, back orders and ending inventory requirements then subtracting the opening inventory balance. 5. Calculate the ending inventory for each period by adding production to the existing inventory and subtracting the demand for that period. Level Production Planning Example KuteKidz clothing manufacturers are planning produc tion for the coming 12 months. They have identified all the information they require to make a level production plan for their caterpillar t-shirt production line. They make these t-shirts for the 2 to 5 year old age group in a range of colors and with long or short sleeves, all with the caterpillar graphic added. The production plan is concerned only with predicting the total production of all caterpillar t-shirts for the year. This product is made-tostock. The company aim to minimize costs by maintaining level production and reducing their inventory to a safe level. © Copyright Leading Edge Training Institute Limited

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Total Demand

12500

Current Inventory

2600

Current Back Orders

700

Required Ending Inventory

1000

Period

12 months

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The required total production is calculated in the following way: Total Production = total forecast + back orders + ending inventory – opening inventory Using the figures recorded above, this gives the following equation: Total production = 1250 + 700 + 1000 – 2600 Total production = 11600 This total production figure is then divided by the number of production days available in the year to give the required daily production figures (note that the daily production is rounded up to the nearest whole unit): Daily production = 11600 / 254 Daily production = 46 The number of working days in each month determines the production rate each month: Jan

Feb Mar

Apr

May Jun

Jul

Aug Sep

Oct Nov Dec

Working days

21

20

22

20

22

21

20

Production

966 920 1058 1012 920

23

21

966 1012 966

22

22

1012 920 966

21 1012

Once production rates have been set for each period, the ending inventory for each period can be calculated using the following formula: Ending inventory = opening inventory + production – demand Assuming demand for the product is fairly stable at 1042 units per month and that the back orders are fulfilled in January; the ending inventories for each period are as follows: Jan

Feb

Mar

Production 966

920

1058 1012 920

Ending Inventory

Apr

May

Jun

Jul

Aug

966

1012 966

Sep

Oct

Nov

Dec

1012 920

966

1012

1824 1702 1718 1688 1566 1490 1460 1384 1354 1232 1156 1126

Note that the ending inventory for one period becomes the opening inventory for the next period. For example, the following January, the opening inventory will be 1126. Production is expected to reach 1012, and the demand for January is expected to be 1200. Using the formula above to calculate the ending inventory: © Copyright Leading Edge Training Institute Limited

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Basics of Supply Chain Management Ending inventory = 1126 + 1012 – 1140 Ending inventory = 998

2. If the opening inventory for the month of January is 500 units, demand is 1000 units, there are no back orders, and production is 1200 units, what will the ending inventory be? A. 300 Review Q

B. 700 C. 1200 D. 1700

3. Given that the opening inventory is 100 units, calculate the planned ending inventory for each month below, using the information provided about demand and production rates. Review Q

Jan

Feb

Mar

Apr

May

Jun

100

180

253

279

294

322

Demand

236

225

259

247

225

236

Production Inventory

Review Q

4. Fresco Frozen Fruits want to develop a level production plan for six months for their summer fruits packs. The opening inventory level is 400. They intend to reach an ending inventory level of 520. Assuming equal periods and using the total production and ending inventory formulae, calculate the planned production and inventory levels for each period using the demand data below. Jan

Feb

Mar

Apr

May

Jun

400

480

520

560

540

440

Demand Production Inventory

Resource Requirements Planning At this stage in the planning process the company knows what is required and when it is required. The question now is whether or not the company has the capacity to manufacture what is required. The production plan will only be workable if there is sufficient capacity to achieve

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the planned production levels. Where there is insufficient capacity, plans must be made to reconcile the differences. A bill of resources is useful when addressing capacity issues. It shows the quantity of critical resources needed to make an ‘average’ unit of a product group. The table below is an example of a resources bill for a beverage company. The two main product lines are fruit smoothies and yogurt smoothies. The resources bill lists the amount of fruit, yogurt and labor required to make one case of smoothies. Product

Fruit (KG)

Yogurt (Litres)

Labour (Minutes)

Fruit Smoothie

8

0

15

Yogurt Smoothie

4

1.5

17

Master Production Schedule (MPS) Once production planning has been completed, the next step is the preparation of a master production schedule (MPS), an important planning tool and a vital link in the planning system. The MPS forms the basis of communication between sales and manufacturing. Using the MPS as a contract between sales and production means that sales can make valid order promises. However, the MPS is not a rigid plan. It is a reference point between manufacturing and sale and can be changed as required when there are changes in demand of capacity. The MPS builds on the information available in the production plan and other sources to provide a detailed picture of the demand for individual end items by date and quantity. While the production plan provides monthly aggregate requirements for product groups, the MPS is much more detailed, providing weekly requirements for each single product item. Objectives The MPS strives to form a detailed plan that fulfils the following objectives: Achieve desired customer service levels Make the most efficient use of resources Maintain a desirable level of inventory It is limited by the production plan and should therefore aggregate to the same figures for each product group as detailed in the production plan. The MPS must balance the demand identified by sales and marketing with the availability of resources. Value of the MPS The MPS is a link between planning and actual manufacturing. It is used as the basis for calculating the capacity and resources required to fulfil the production plan. © Copyright Leading Edge Training Institute Limited

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The MPS is the main driver of the material requirements plan. Along with the bills of material, it can determine what components are needed from manufacturing and what components must be purchased. The MPS is a priority plan for manufacturing. Inputs The MPS must take into account the forecast, production plan, and other important considerations such as the availability of material, the availability of capacity, and management policies and goals. The information required to develop an MPS is found in: The production plan

Forecasts for individual end items

Actual orders received from customers

Inventory levels for individual end items

Limits of capacity

Orders for stock replenishment

MPS Elements An MPS is a series of time-based quantities for the end product produced by the organization. The MPS details the expected demand or quantities for a product's constituent components and the expected timings or dates of these demands. It is the anticipated production schedule for all components that are assigned to the master scheduler. Time Period The time period of an MPS in which the quantity of an item appears means that this quantity is to be completed through the final operation in that particular period. The time period is known as a time bucket. Time buckets can be monthly, weekly, daily, or hourly. It is usual for most manufacturing companies to have time buckets of one week. Safe Components In some organizations, only certain components are included in the MPS. Furthermore, these components are classified according to the number of customers that regularly purchase them or the number of products that they can be used for. These components are regarded as being safe, in that they have a limited risk of becoming obsolete and, as such, the significance of overstocking is low. The calculation analysis for their procurement is based on historic or future forecast data but not from customer orders. This data is combined with other associated data that is based on labour and equipment resource availability. Ad-Hoc Components There are usually other components to be produced or procured that may or may not be included in the MPS. However, labour and equipment resource capacity must be provided for these too, often from common or shared capacities. System Forecast A material requirements planning (MRP) system generates a system forecast that is based on the input of data to the system by the scheduler or materials manager at the start of the planning year. This data is for the whole year so that there is a forecast for product requirements beyond the planning period.

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The planning period is the number of detailed time buckets in each planning run of the system and is usually a number of weeks. The system forecast assumes the role of the manual forecast in an MPS if the latter is missing.

Manual Forecast Information from the manual forecast is entered by the scheduler or materials manager to the time buckets of the MPS in which there are no purchase orders (POs). Beyond the fixed period, the manual forecast will be used by the MPS to drive the MRP. The fixed period is the number of time buckets during which a quantity cannot be changed. Therefore, production and purchasing are given a fixed plan for a period of time and they do not have to change their production and POs respectively, every time the MPS and MRP are run. Actual Orders Actual orders are POs that have been placed by customers. These order qua ntities must be completed and shipped to the customers in the relevant time bucket. Customers can place orders at any time, although quantities may have to be above, and in multiples of, minimum order quantities. The order quantities and multiples will depend on the type of products being supplied. Minimum Order Quantity To illustrate the term, take the example of the sale of beer. Some beers are only sold by the manufacturers in kegs. The minimum order quantity of beer is therefore, one keg. It would not be possible for retail outlets, such as bars, to buy a quantity of beer in pints or in litres from the manufacturers. Total Demand This is the actual demand quantity that the MPS will use to generate the data that drives the MRP.

Starting Inventory This is the number of units that are in the finished goods warehouse at the start of the planning period. It is different from initial inventory. © Copyright Leading Edge Training Institute Limited

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Basics of Supply Chain Management MPS Calculations Firm Planned Orders These allow the scheduler to force the MRP system to plan in a particular way, by overriding lot size or lead-time rules. It involves a manual input to the MPS and the scheduler will have to be alert to possible unforeseen repercussions. For example, the scheduler will have to ensure that shipments are being made to customers and that there is not a build- up of excessive quantities of finished goods in the warehouse. Net Requirements The net requirements calculation for a period of the MPS uses total values as opposed to single values.

Projected Inventory This is the expected number of units to be in stock during a particular time bucket of the planning period. Projected inventory helps the scheduler to view the available inventory in future time buckets, if everything goes according to plan. The projected inventory for a particular time bucket will become the initial inventory for the next time bucket.

Available to Promise This is the inventory available to cater for new and as yet, unmade orders, if everything goes to plan. This is particularly useful to sales and marketing. See page 18 for more information on this calculation.

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Basics of Supply Chain Management MPS in Different Environments The MPS needs to represent what will be manufactured at the most efficient level. If the MPS covers too many items, it will be very difficult to manage effectively. If it is not detailed enough, production will suffer. As a general rule, master scheduling should occur where the smallest number of product options exists. MPS

End Product

In make-to-stock environments, a limited number of items are assembled from a larger number of components, for example, video recorders or computers. The MPS should in this case be a schedule of finished goods items. Raw Material

In a make-to-order environment, generally many different end items can be produced from a relatively small number of raw materials. One example is custom-tailored clothes. Another example is car manufacturing. The subassemblies for many cars will be the same but each car manufactured will differ in specific options such as color, stereo, sunroof, and electric windows. The MPS in this case is a schedule of the actual customer orders. End Product

MPS Raw Material

Assemble to order environments use many raw materials to form basic components and subassemblies. However, these components and subassemblies can provide a great variety of finished products.

FAS

MPS

End Product FAS

The MPS should therefore take place at the subassembly level. A Final Assembly Schedule (FAS) will also be required to manage actual customer orders.

Raw Material

MPS Development There are three phases in the preparation of an MPS: Developing a preliminary MPS Checking the preliminary MPS against available capacity Resolving differences between the preliminary MPS and available capacity Preliminary MPS Earth Mother, a producer of baby food products, makes to stock several different types of organic baby food. The food is prepared in batches and stored as finished goods inventory. Their organic pear and banana dessert is produced in batches of 1000. The on-hand or opening inventory is expected to be 800 units. Period

1

2

3

4

5

6

Forecast

600

600

600

600

600

600

200

600

0

400

800

200

1000

1000

Projected Available MPS Receipt

800

1000

The first period opens with an inventory of 800 units. This allows the demand of 600 units to be satisfied and leaves 200 units as the opening inventory for the next period.

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As the demand in period 2 will not be satisfied by the inventory available, an MPS receipt for 1000 is scheduled for that week. This means that the projected availability at the end of period 2 will be 600 (200 carried over in inventory, plus 1000 in production less 600 demand). In period 3, the forecast demand matches the available inventory. At this point inventory levels are zero. So, to satisfy production in period 4 a further batch must be produced. The remainder of the batch in period 4 is available in inventory but it is not sufficient to satisfy demand for period 5 so a further batch is produced. This leaves 800 in inventory which is sufficient to satisfy demand in period 6 and still leaves 200 units in inventory. Production Plan

Master Production Schedule

This process must be followed for each individual product item in the family. The MPS is then checked to ensure that the planned production for all the group items and the total ending inventory agree with the production plan. The MPS is an expansion of the production plan in greater detail. It must always agree with the figures in the production plan.

Rough Cut Capacity Planning (RCCP) RCCP is a check to ensure that the critical resources required to support the preliminary MPS are available. RCCP determines the impact of the MPS on resources: By checking sample key resource, for example, manpower, machine hours, storage, standard costs, the shipping plan (in monetary terms), and inventory levels In order to ensure production capacity is feasible If the proposed MPS is not feasible, production control should inform management. MPS and RCCP plans are developed interactively. In RCCP, a bill of resources is attached to each of the items in the MPS, and the capacity plan is derived by exploding the MPS against the bill of resources. No consideration is given to component inventories. The main aim of RCCP is to identify bottleneck work centers and availability issues in critical resources. Resolving Differences When the available capacity is greater than the required capacity, the MPS is workable. If that is not the case, either the available capacity must be adjusted by means of overtime, extra shifts, extra work centers and temporary workers or subcontracting. If this is not possible, the MPS must be revised to fit available capacity. Evaluating the MPS Once the MPS is agreed it must then be judged on its merits in three criteria: Does the MPS remain within capacity restraints in each period and make the best use of resources Does the MPS ensure that acceptable customer service will be provided: that due dates will be met Does the MPS avoid excessive production costs such as overtime or extra shifts. The MPS should be realistic and workable. It provides detailed information about the antipicated manufacturing schedule. It is not a sales forecast, a wish list or a final assembly schedule.

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Final Assembly Schedule The final assembly schedule (FAS) is used when there are many options and combinations of subassemblies, for which it is difficult to forecast detailed customer demand. The MPS will generally deal with the components in this case. The final assembly then only takes place when the customer places an order. Take for example car manufacture. The customer can choose options such as the colour, type of stereo equipment, and seat covers. The MPS deals with the basic car. The FAS ensures that the extras are added as specified by each customer. The FAS schedules customer orders as they arrive. It is based on the components planned in the MPS and is responsible fro scheduling from production through final assembly to customer shipment.

MPS, Sales and Delivery Promises The MPS is an achievable plan of production built on forecasts and actual demand. If the MPS is unrealistic the results are overloaded capacity, late orders, and unreliable delivery promises. Once the production is underway and customer orders start to come in, it must be possible to make valid delivery promises. Available-to-Promise As firm orders are received, they consume available capacity or inventory. The remaining inventory is ‘available to promise’ (ATP). ATP is the uncommitted part of finished goods inventory and planned production maintained in the master schedule to support customer order promising. The ATP is the uncommitted inventory balance in the first period. It is generally calculated for each period in which an MPS receipt is scheduled. You calculate ATP by adding scheduled receipts to the opening inventory and subtracting all actual orders scheduled before the next MPS scheduled receipt. A scheduled receipt is an order that has been issued to manufacturing or to a supplier for more material. In the following scenario the opening inventory is 800 units. Period

1

2

3

4

5

Customer Orders

600

600

600

600

600

1200

1000

1000

0

400

MPS Receipt ATP

200

ATP for the first period is equal to the opening inventory less all customer orders due before the next MPS receipt. As opening inventory is 800 and 600 orders are scheduled before the MPS receipt in period 2, the amount available to promise is 200. In period 2, the ATP is equal to the MPS receipt minus all customer orders due before the next MPS receipt. In this case, the MPS is 1200 and available inventory is 200, but the customer orders before period 4 total 1200 so ATP is 0. Each ATP calculation assumes that the entire ATP will be sold before the next scheduled receipt.

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Basics of Supply Chain Management 5. Assuming there is another MPS receipt in period 6, what is the ATP for period 5? A. 0 B. 400

Review Q

C. 600 D. 800

Planning Horizons The planning horizon is the time projected by the master schedule. It is set to cover a minimum of cumulative lead time plus time for lot sizing low-level components and for capacity changes of primary work centers or of key suppliers. However, the planning horizon is often longer than this in order to give greater visibility and improve the chances of identifying and avoiding future problems, for example capacity issues. If a final assembly schedule is used, the planning horizon for that schedule must include all the time needed to assemble the customer’s order. The time needed to manufacture the components will be included in the planning horizon of the MPS Time Fences Although the MPS spans the cumulative lead time, there are differences in the way each part of the MPS operates, particularly with regard to changes. Although changes will and do occur, their impact is markedly different depending on how far out they are. The following graphic explains the concept. 0

2 weeks

26 Weeks

Fixed Period

Slushy Period

Liquid Period

Actual Orders

Actual and Forecast Demand

Forecast Demand Only

Due Date

Final Assembly Time Fence

Cumulative Lead Time Fence

Fixed Period During the fixed or firmed period, the actual orders are the drivers and make up the total demand. Therefore, total demand will be equal to actual orders. Capacity and materials are committed to actual orders I this period. Changes here lead to increased cost, reduced efficiency and poor customer service. During this period, only emergency changes may be made. Beyond the Fixed Period Outside the fixed order period, the manual forecast is the driver, regardless of whether there is actual customer demand in the same period or not. Therefore, the total demand is equal to the manual forecast. In the first part of this period, the ‘slushy’ zone, some firm planned orders may be available so capacity and materials are committed to some extent. However, there is still room © Copyright Leading Edge Training Institute Limited

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Basics of Supply Chain Management for tradeoffs. Where material and capacity are available, MPS changes are possible here. If not, other orders may be shifted around. In the liquid zone any change to the MPS is possible once it remains within the limits of the production plan. Changes in this zone are common and often automatically calculated by computer.

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Basics of Supply Chain Management Summary This lesson provided a basic overview of the purpose and functions of production planning and master production scheduling. You should be able to: Identify features of a basic level production plan for make-to-stock products Describe relationships between resource requirements planning and production planning State the purpose of a master production schedule (MPS) Identify the relationship between the MPS and the production plan Describe features of a simple MPS and rough-cut capacity plan Describe the importance of the MPS to sales with regard to promises of delivery

Further Reading Introduction to Materials Management, JR Tony Arnold, CFPIM, CIRM and Stephen Chapman CFPIM APICS Dictionary 10th edition, 2002

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Basics of Supply Chain Management Review The following questions are designed to test your recall of the material covered in lesson 3. The answers are available in the appendix of this workbook. 6. A production plan will have all of the following except: A. Shipment plan B. Product families C. Inventory plan D. Daily Production 7. Choose the most appropriate statement(s) to complete the following sentence: The production plan: 1. sets the level of production in activities for some time in the future 2. integrates the capabilities and capacities of the factory with the market 3. sets the production level to achieve the overall business goal of the company A. 1. only B. 1. and 2. C. All three statements D. 1 and 3 8. You are the master scheduler in a job shop production environment. One of your largest customers has asked if you can deliver an orde r late next week but you have some short term capacity constraints. Which of the following can you do to ensure the order can be delivered? 1. Add an additional shift in three weeks time 2. Organize overtime 3. Build inventory in slower production times 4. Subcont ract work to another intra-company production facility A. All except 1 B. All except 2 C. All except 3 D. 4 only

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Basics of Supply Chain Management 9. Which manufacturing strategies are used when developing a production plan? A. Chase strategy and level production B. Delphi strategy and inventory reduction C. Delphi strategy and level production D. Inventory reduction and level production 10. Which are inputs to a realistic MPS: A. Production plan, forecasts for end items, and product costs for end items B. Production plan, forecasts for end items, and capacity constraints C. forecasts for end items, capacity constraints, trend analysis, and product costs for end items D. Trend analysis, product costs for end items and production plan 11. Choose three main objectives when establishing an MPS: A. Efficient use of resources B. Efficient final assembly C. Improved customer service levels D. Efficient use of inventory E. Inventory reduction 12. Final assembly scheduling occurs when: A. A customer order is received B. The build schedule is planned C. A customer forecast is received D. The MPS has been developed E. Capacity is limited 12. The diagram represents a make to stock environment. How are customer orders satisfied in this type of manufacturing environment?

MPS

End Product

A. Capacity review B. Sub-assembly inventory C. Finished goods inventory D. Customization of components

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Raw Material

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Basics of Supply Chain Management What’s Next? Lesson 3 covered the basic characteristics and methods of production planning and master production scheduling. You should review your work before progressing to the next lesson which is: Supply Chain Management Basics – Lesson 4 – Material Requirements Planning (MRP)

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Basics of Supply Chain Management Appendix

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Basics of Supply Chain Management Answers to Review Questions Lesson 2 Review 1. 23.5 2. 700 3. Jan

Feb

Mar

Apr

May

Jun

100

180

253

279

294

322

Demand

236

225

259

247

225

236

Production

236

281

287

255

186

100

Inventory

4. The opening inventory level is 400. Ending inventory level should be 520. Jan

Feb

Mar

Apr

May

Jun

400

480

520

560

540

440

Demand

510

510

510

510

510

510

Production

510

530

540

480

450

520

Inventory

5. 400 6. Option D A production plan is usually presented in monthly figures showing shipments, production and inventory (or unfinished customer orders) broken down by product families. 7. Option C The production plan specifies the overall level of manufacturing output planned to be produced, usually stated as monthly rates for each product family. It usually spans a year. 8. Option A. The 2nd, 3rd and 4th actions could be taken. Creating an extra shift in three weeks time is unlikely to create the inventory required in time for the customer’s requirements. Short term capacity is increased by overtime, inventory or subcontracting. The use of overtime is a way to increase quickly a short term capacity problem. Adding an additional shift could be too long for the customer to wait. 9. Option A. The chase strategy requires that production varies to meet demand and inventory levels remain stable as a result. The company manufactures just enough at any time to exactly meet demand. © Copyright Leading Edge Training Institute Limited

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Such a strategy must be used in many industries, for example, restaurants, cour ier services, and telecommunications. This strategy requires that a company is capable of meeting peak demand without relying on stockpiles of finished product. In some cases, this may require hiring and training additional temporary workers, and operating shifts or overtime. Although these measures add cost, they can be offset against the savings made by maintaining minimum inventory levels, which is the main advantage of this strategy. The level production strategy maintains a constant amount of production which is equal to the average demand over the period. Each day of operation will result in the same amount of production. When demand is lower than the average, inventories of finished goods are built up. These can be used to supplement production when demand levels are higher than production. Some seasonal products, for example, Christmas tree lights, require level production as the costs of continually laying off workers then rehiring and retraining would be prohibitive. 10. Option B The production pla n, forecasts and capacity constraints are all inputs to the MPS. Trend analyses without specific forecasts are of no use to the MPS. Costs are not a necessary input. 11. Options A, C and D The master scheduler must make sure labour, equipment, material, and inventory are being used efficiently to maintain high levels of customer service. Inventory reduction is not a key objective of an MPS. Efficient final assembly would be developed by a final assembly schedule. 12. Option A Final assembly scheduling occurs when a customer order has been received. The FAS is a build schedule that ensures customers get exactly what they ordered. Usually an FAS is developed when there are a variety of options for the customer to order. If the FAS was prepared on forecasts, the organization could be left with inventory that may never be ordered. 13. Option C In a make to stock environment, customer orders are shipped from finished goods inventory as products are made and placed in stock.

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Basics of Supply Chain Management

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Basics of Supply Chain Management Glossary Term

Definition

assemble-toorder

Assemble-to-order is a production strategy where key components are stocked in anticipation of customer orders. Assembly is triggered by receipt of an order. This is useful when a large number of products use common components.

Available-topromise (ATP)

The uncommitted portion of a company’s inventory and planned production maintained in the master schedule to support customer order promising. The ATP quantity is the uncommitted inventory balance in the first period. It is normally calculated for each period in which an MPS receipt is scheduled.

Bill of material (BOM)

A listing of all the subassemblies, intermediates, parts and raw materials required for a parent assembly. The BOM shows the quantity of each and is used in conjunction with the MPS to calculate production orders and purchase requisitions. Also called a formula, recipe or ingredients list in some process industries.

Chase method or A production planning method that maintains a stable inventory level while strategy production levels vary to meet demand. Cumulative lead Cumulative lead time is the longest planned length of time to accomplish the time activity in question. For any item planned through MRP, it is the longest lead time in the bill of materials item list. Delivery lead time

Delivery lead time is the time from receipt of a customer order to the delivery of the product.

Lead time

Lead time is the span of time required to perform a process.

Level production A production planning method that maintains a stable production rate while inventory levels fluctuate according to the level of demand. Make-to-order

Make-to-order is a production strategy where a product or service can be made after receipt of a customer’s order. The final product is a combination of standard items and customized items.

Make-to-stock

Make-to-stock is a production strategy where products are finished before receipt of a customer order. Customer orders are filled from existing stocks of finished goods and production orders are used to replenish those stocks.

Master The anticipated build schedule for those items assigned to the master Production scheduler. It becomes a set of planning numbers that drive material Schedule (MPS) requirements planning. The MPS represents what the company plans to produce expressed in quantities and dates. © Copyright Leading Edge Training Institute Limited

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Basics of Supply Chain Management Planning horizon

The amount of time the master schedule extends into he future. This is normally set to cover the cumulative lead time plus time for lot sizing and for capacity changes of primary work centers.

production activity and control (PAC)

This involves routing and dispatching work through the production facility and controlling suppliers. PAC covers activities on the shop floor that schedule, control, measure, and evaluate the effectiveness of production.

production planning

Setting the overall level of manufacturing output required to satisfy the sales plan or forecast while meeting objectives such as profitability, productivity, and competitive lead times. The production plan should aim to fulfil requirements while maintaining a stable work force where possible. Production planning is usually a cross- functional activity with input from marketing and other functions.

Resource Planning (RP)

Capacity planning at the business plan level .this establishes and measures long-range capacity. It is based on the production plan but may be driven by higher level plans such as the business plan. It addresses long range planning issues.

resource requirements planning

Also known as resource planning. It is capacity planning at a business plan level and is concerned with measuring and adjusting long-range capacity.

rough-cut capacity planning (RCCP)

The process of converting the master production schedule into requirements for resources such as labor, machinery, warehouse space, supplier capabilities. Demonstrated capacity is examined for each key resource.

sales and operations planning (S&OP)

A process that provides the ability to direct business to achieve competitive advantage by integrating customer- focused marketing plans for products with the management of the supply chain. The process integrates all the plans for the business.

Subcontracting

Sending production work to another manufacturer

Time fence

A policy that notes where various restrictions or changes in operating procedures takes place.

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