Detailed Scheduling and Planning (Lesson 3)

UUnit nit 22 DDetailed etailed SScheduling cheduling aand nd PPlanning lanning Lesson 3 Materials Planning Information Requirements

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© 2004 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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Detailed Scheduling and Planning Preface............................................................................................................4 Course Description................................................................................................................. 4

Lesson 3 – Materials Planning Information Requirements..............................5 Introduction and Objectives.................................................................................................. 5 Demand ................................................................................................................................... 5 Measuring Inventory Performance ...................................................................................... 7 Maintaining Inventory Data.................................................................................................. 8 Storing Inventory ................................................................................................................. 11 Balancing Stock .................................................................................................................... 13 Master Production Schedule (MPS) ................................................................................... 15 Overview of Information used in Material Planning ........................................................ 17 Summary ............................................................................................................................... 18 Further Reading ................................................................................................................... 18 Review ................................................................................................................................... 19 What’s Next? ........................................................................................................................ 20

Appendix.......................................................................................................21 Answers to Review Questions .............................................................................................. 22

Glossary ........................................................................................................24

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Detailed Scheduling and Planning Preface Course Description This document contains the third lesson in the Detailed Scheduling and Planning unit, which is one of five units designed to prepare students to take the APICS CPIM examination. Before completing the Detailed Scheduling and Planning unit, you should complete the Basics of Supply Chain Management unit or gain equivalent knowledge. The five units that cover the CPIM syllabus are: Basics of Supply Cha in Management Detailed Scheduling and Planning Master Planning of Resources 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. 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.

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Detailed Scheduling and Planning Lesson 3 – Materials Planning Information Requirements Introduction and Objectives This lesson looks at the information needed when calculating inventory requirements. The importance of such information to the detailed material planning process is examined. The lesson briefly examines management of engineering changes, order status, and master schedules and the characteristics required in an effective detailed material planning process, including issues of traceability of demand. The lesson also looks at effective storage of inventory items. This lesson revisits in greater depth some concepts introduced in the Basics of Supply Chain Management unit and introduces new related concepts. On completion of this lesson you will be able to: Differentiate between independent and dependent demand Describe the relationship between inventory and independent or dependent demand Explain how to calculate inventory turns Identify ways in which inventory performance may be monitored Identify principles of part of item identification Identify the data required on inventory to support the material planning process Describe various inventory storage methods Explain the importance of having timely access to up-to-date, accurate and complete data when making material planning decisions

Demand

Purchased Components Fabricated Components Sub-Assemblies Assemblies

Demand Ind ep en de nt

For example, a company that makes high quality ice cream has a demand for 2000 litres of vanilla ice cream from its customers. This is independent demand. However, in order to sell the 2,000 litres, the company will require 2,000 tubs. The demand for tubs is totally dependent on the demand for ice cream.

Raw Materials

t en nd pe De

Demand is the result of a customer’s needs or expectations for a product. Demand is termed independent when it arises externally from customers and is not linked to the demand for another parent product. Dependent demand occurs when demand for an item correlates with demand for another parent item.

Retail Requirements MRO Requirements Service / Replacement Parts Manufactured Finished Goods Wholesale Finished Goods

When demand is tracked over time, it is often possible to discern demand patterns, such as persistent trends or seasonal dips. These patterns help planners forecast future demand. The type of demand an item experiences has a direct correlation on the level of inventory for that item and © Copyright Leading Edge Training Institute Limited

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for dependent items. The relationship between various patterns and associated inventory levels are illustrated below: Stable Demand, No Trend 90 80 70 60 50 40 30 20 10 0

Stable Demand, Positive Trend

Demand Inventory Level

90 80 70 60 50 40 30 20 10 0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Demand Inventory level

Jan Feb Mar Apr May Jun Jul Aug Sep Oct N o v Dec

Stable Demand, No Trend, Seasonal 90 80 70 60 50 40 30 20 10 0

Stable Demand, Negative Trend

Demand Inventory level

90 80 70 60 50 40 30 20 10 0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Demand Inventory level

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Independent Demand The number of products that a company must produce is determined by customer orders or purchases or by sales forecasts. This is independent demand. This demand is recorded in the master production schedule over the planning horizon. Independent demand may be derived from: Customer orders Forecasts of customer demands Interplant requirements Needs of branch warehouses Requirements for safety stock replenishment Higher than expected levels of scrap Lower than expected yields in production Independent demand can be unpredictable and forecasts of such demand are often wrong. The level of demand can often exceed the level of sales. For example, a recent fad for trampolines has caused an unanticipated increase in demand for such items. Although sales rise, the toy shops and trampoline manufacturers cannot keep pace with the sudden rise in demand. As a result, most toy shops experience trampoline stockouts as they wait for the manufacturers to replenish stock. Waiting lists for trampolines in some stores prove that demand has greatly exceeded actual sales. Because of the unpredictability of independent demand, inventory control techniques such as economic order quantity (EOQ), reorder points, safety stocks, and statistical analysis, because they rely on assumptions of steady and continuous independent demand, are unsatisfactory for © Copyright Leading Edge Training Institute Limited

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manufacturing inventories of subassemblies, components and raw materials. Material Requirements Planning (MRP) was developed to address these difficulties. Dependent Demand Dependent demand occurs when the demand for an item is derived from the bill of material for another item. For example, a company that manufactures beds and mattresses experiences independent demand from its customers for the finished beds. This generates dependent demand for the components of the bed, such as wadding, upholstery material, springs, and wooden frames. As demand for these items is dependent on the demand for beds, requirements for each item does not need to be independently forecast but can be calculated directly from the forecast demand for beds. Only independent demand needs to be forecast. Any dependent demand can be calculated from the demand figures for the item from which the dependent item is derived. The master production schedule consists of independent demand items. Material Requirements Planning is concerned with planning requirements for both dependent and independent demand items. A given inventory item may be subject to both dependent and independent demand. For example, Buzz Electronics manufacture a range of speakers. These speakers may be bought by consumers to augment their existing HiFi systems. However, the speakers are also integral parts of other products such as home cinema products and other Hi- fi systems.

Measuring Inventory Performance When measuring inventory performance, most companies concentrate on three areas: Inventory investment, measured by the inventory turns ratio Customer service level, indicated by the percentage of orders filled within required dates for example Inventory accuracy Inventory Turns Inventory turns or inventory turnover measures the number of times in a given period that a company reaps back the cost of its average inventory. The formula used to calculate inventory turns is: Inventory turnover =

Cost of goods sold over a period Average inventory for the period

For example, if the cost of goods sold for a company is 140,000 and the average inventory for that period is 70,000, then the inventory turnover is equal to 2. In a typical retail grocery outlet, the cost of goods sold for a month may be 416000 with an average inventory of 8000, resulting in an inventory turnover of 52. The higher the inventory turnover, the lower the level of inventory needed per dollar of cost of goods sold. Often, inventory turnover is calculated regularly to track from period to period the inventory performance. The aim is to increase inventory turnover. Often, companies will use actual month-end inventory levels to determine average inventory. However, this is not a true average level and may erroneously increase or decrease the inventory © Copyright Leading Edge Training Institute Limited

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Unit 2

Detailed Scheduling and Planning turnover figure. Inventory turns should be based on the company’s annual average inventory level. Deviation from Target The analysis of inventory turns over time provides indication of changes in the levels of inventory compared to cost of goods sold. Deviation from target is used to measure how far performance is from target levels and how much improvement is required to reach target. First, the target inventory turn level must be set by management. It will then be possible to calculate the deviation from the target level using the following formula: Inventory Turns Deviation from Target =

(Actual Turns – Target Turns) x 100% Target Turns

By comparing cost of goods sold (CGS) and target average inventory with actual CGS and actual average inventory, improvements can be measured. The inventory turns deviation from target should be as close to zero as possible. When inventory turns are equal to target turns, the inventory turns deviation from target equation will equate to zero. When the result of the inventory turns deviation from target is a negative number, the company has failed to make the target. When the number is positive, the company has beaten its targets. In order for improvement to occur, companies must set a realistic target and outline a series of measures or actions that can be undertaken to reach that target. Companies that employ JIT manufacturing techniques should constantly review their targets as they continually strive to improve their processes. 1. Which of the following are characteristics of dependent demand? A. It originates from customer orders B. It can be calculated rather than forecast Review Q

C. Types of dependent demand include finished goods and spare parts D. It occurs when demand for an item is driven by the BOM of another item

Maintaining Inventory Data Inventory Data and Databases Inventory systems rely on data that provides information on replenishment, demand, safety stock requirements and other variables. The performance of inventory information systems may be measured in terms of database design, timeliness of reports, and data communication. Databases for inventory do not have to be computerized. They may be maintained manually on paper systems or card systems. In reality, most companies use some form of computerization to maintain inventory information, for example spreadsheets, databases, or specially designed inventory control packages.

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Detailed Scheduling and Planning Any inventory database system should maintain the following information for each item in inventory: Item identification

Item description

Stock location(s)

On-hand balances at each stock location

On-order information by due date

Reorder and safety stock information

Financial information

Usage

Unit of measure

Classification of information

Sourcing information

Lead time

If the inventory database is to be used as part of an MRP or enterprise resources planning (ERP) system, it may require extra fields of information. The following paragraphs discuss in more detail requirements, principles and conventions for designing and maintaining some of the above information. Principles of Part or Item Identification Unique individual part numbers should be assigned to each and every raw material item, component item, part- finished item, and finished product. Unique numbers avoid uncertainty about items that may be very similar in appearance or description. When designing a system of identification codes, the following principles should be adhered to: Item numbers should be unique . This can cause difficulty when there are engineering changes. If a change results in revision to a particular part, it should be given a new identification number to ensure accurate count ing and costing. This may cause confusion in bills of materials that specify the old number but the new part is to be used. Only one set of item numbers should be used in an organization. Marketing may use catalog numbers that are simple and descriptive. Engineering may prefer simple sequential numbers that are assigned chronologically. It is easier to maintain one system for everyone. Responsibility for item number creation should be assigned to a single authority, to ensure uniformity and uniqueness Expired part numbers (for parts no longer used) should not be reassigned to new parts as it may often be necessary to identify the parts further down the line. For example, if the door catch on a washing machine fails, the customer should be able to order a new door catch of the same type using the part number. Item numbers should be concise. This minimizes the chance of error when item numbers are copied or keyed into computers. Item numbers should be uniform, containing the same number of characters and with the same relative positions of alphabetical and numeric portions. A good example is that of car registration numbers. Confusing characters should be avoided, for example, using I and 1, 2 and Z, or 0 and O together may cause confusion due to the similarity in the construction of these figures. All numeric codes, or all alphabetical codes are less likely to lead to such confusion.

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Detailed Scheduling and Planning Item numbers should allow for expansion. As companies grow the number of inventory items may grow. Restructuring a part item numbering system will lead to hassle and expense. Therefore, the initial design should allow for future growth. Significant or Meaningful Identification A meaningful part number, as well as identifying the part in a system, immediately conveys some information about that item. For example, ABC Beverages have part numbers for their freshly squeezed orange and grapefruit juices as follows: FSO-0250

FSG-1000

FSO-0500

FSG-0500

FSO-1000

FSG-0250

FS refers to freshly squeezed, as opposed to products made from concentrate. The O and the G refer to the flavour: orange or grapefruit. The numbers after the dash refer to the size of the container: 1 litre, 500 ml and 250 ml. The International Standard Book Number (ISBN) system for numbering books is recognized worldwide. Although initially it does not appear to be meaningful it follows several conventions in the assignment of numbers that impart information about each book: For example, the ISBN of 0-452-26603-3 indicates the language, the publisher, and the title of the book. The initial zero indicates that the book is in the English language. The next set of digits (452) is an identification number for the publisher. The numbers 26603 are an indicator of the title in the ISBN system and the final digit is used as a check digit. Further examples include the identification numbers used in mail order catalogues where numbers and letters may be used to distinguish size and color and type of garment: TR10BLU may indicate a pair of blue size 10 trousers. The advantages of using meaningful part numbers are: Increased organizational efficiency Increased understanding of part numbers, making it easier to work with them and remember them It is easier to spot mistakes in codes that refer to size or color Part numbers are easier to interpret using hyphens or symbols Non-meaningful part numbers may consist of random or sequential numbers or letters that only identify rather than describe. The advantages of choosing non- meaningful part numbers are: Codes are generally shorter and therefore faster to type, write, or check Codes are usually entirely numeric and therefore faster to type It is easier to accommodate future growth

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Detailed Scheduling and Planning 2. Which of the following are common methods of measuring inventory performance? A. Accuracy of inventory records Review Q

B. Inventory Turns C. Level of dependent demand D. Levels of inventory

Storing Inventory Bin Examples Materials in inventory are stored in areas that are often called bins. Each bin should be identified with a location code, which will be used along with a picking list to help identify the location of goods that must be retrieved from storage. Locations codes are also used when storing inventory as it is received. The bin is a metaphorical term and could refer to a vat or tank, a space on a shelf or on the floor, an outdoor space in a storage lot or a designated segment of a rack. Bin identification codes are usually meaningful. They are often longer and more complex than item identification codes. Requirements for Bin Location Systems The principles for assigning bin location codes are the same as those for assigning item identification numbers. In addition, the following guidelines are useful: Bin location codes should be sequences so that materials can be gathered in the shortest possible route Where there are multiple storage sites, the location of bin numbers should be identified Aisle numbers should be used in location codes for shelving or racking to help with the sequencing of pick lists. A typical aisle numbering arrangement is illustrated here. Grid arrangements should be used where cell locations are incorporated into bin location codes. Location Methods There are various methods of associating bin locations with specific inventory items. These include fixed locations, random locations and zoned locations. Some companies may use a combination of these methods. Fixed Location In dedicated storage or fixed location warehouses, a pre-set place is reserved for every part number. Spaces are left vacant until parts allocated to the area arrive. In this type of system each © Copyright Leading Edge Training Institute Limited

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Detailed Scheduling and Planning bin is designated a particular item number. The bin is assigned based on the size or other physical item characteristic. There are several advantages to the use of fixed locations: Stockroom items are always in the same place so that stockroom personnel get to know where regularly used items are located and can quickly retrieve what is needed Items most frequently used can be located in easily accessible areas near the front of the stock room The location strategy is easy to understand Bin locations can be assigned in such a way as to facilitate the picking of materials However, the use of fixed locations is often an inefficient use of space: there may not be sufficient capacity in some bins for the number of items that must be stored, while other bins may be almost empty for quite a while. Random Location In random storage, any new arrival is located in the first suitable place available. Random storage optimises the use of space. Such systems are only feasible when there are very few items or when a computer is used to store item locations. Bins are assigned each time a shipment of items arrives, selected by computer according to the quantity, size of other determining characteristic of the item. The advantages of random location systems include: More efficient use of space and handling of variations in stock quantities as more than one bin can be assigned to the stock Lot or batch identify can be maintained more easily Picking orders can be scheduled on a first- in, first-out basis when needed, due to potential spoilage or corrosion Random storage can adapt easily to changes in the variety of items stocked Zoned Location The most efficient systems use random storage, but within zones which take account of the location rules. They require the support of a good and reliable IT system. The warehouse is divided into zones and order pickers work only in the zone assigned to them. Each zone stores related items, that is, items needing the same type of storage (for example, shelving or freezer storage), or items often ordered together. Each order picker retrieves items from their assigned zone and brings them to the stage or marshalling area. Here, the items making up an order are assembled for shipment. No other order is handled until all items from each zone have reached the stage area. Sometimes an order is moved from zone to zone rather than from a zone directly to the stage area. So, an order will be fully assembled by the time it reaches the stage area. A zoned locatio n is a good compromise between random and fixed systems. For example, materials that are suitable for storage outside may be assigned to a lot or yard with random © Copyright Leading Edge Training Institute Limited

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placement within that zone. Zones may also be assigned based on physical characteristics, suc h as flammability, dimension, value, requirement for refrigeration, or risk of theft. The advantages of zoned systems include: The ability to group similar items together regardless of size The possibility of changing the size of the zone if required The use of physical or virtual (logical) zones is possible Automatic Storage and Retrieval Systems With automated storage and retrieval (ASR) systems, items are put away and retrieved using robotic arms or other automated devices. An operator keys the required item number and quantity into the computer, which then directs the robot mechanism to store or retrieve the item. Some warehouses are completely automated; others make use of driverless carts following tramlines in the floor. ASR systems generally make use of random location methods although some may use fixed locations. 3. Which is the best description of the inventory turns calculation? A. The ratio of cost of goods sold against target cost of goods sold over a period is divided by the average inventory for that period Review Q

B. The cost of goods sold over a period is divided by the total inventory for that period C. The average inventory for a particular period is divided by the cost of goods sold over that period D. The cost of goods sold over a particular period is divided by the average level of inventory for that period.

Balancing Stock Scheduled Receipts A scheduled receipt is an order, previously released to production or to a supplier, which meets its due date. It may be placed in inventory or sent directly to a production process. A scheduled receipt must indicate order quantity, date of arrival, and destination of material. Scheduled receipts are active data maintained by the inventory control system. Allocations Some of the inventory on hand may be reserved for specific purposes. Reserved on-hand inventory is said to be allocated. It may be allocated to a specific work order that has not yet reached production. Allocations are used to manage expensive items or items in short supply. Like scheduled receipts, allocations are active data maintained by the inventory control system. When an order is released to the factory floor it may yet take some days before the inventory allocated to that order is released from storage. During this time, although the inventory is physically available in the storage area and therefore on-hand, it is not available for any other use as it has been allocated to that particular work order. Allocations are uncashed requisitions.

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When someone withdraws the item, the inventory on-hand and allocated inventory amounts will be reduced by the appropriate amount. Current Usage Rates To predict sales, companies must track and forecast usage rates. Forecasting enables a planner to determine the purchasing and manufacturing needs of the company in a given period. If customers require delivery in less than the replenishment lead time, demand for parts and assemblies should also be forecast. Without effective forecasting, excess and obsolete inventories begin to build. Forecast accuracy must be continually reviewed in order to reach target inventory levels. To determine usage rates, a company should measure the amount of product ordered in any given time period, rather than the amount of product shipped. The latter does not take into account unfulfilled demand due to stockouts or delays. 4. Which type of inventory storage system makes the most efficient use of warehouse space? A. Fixed Location Review Q

B. Random Location C. Zoned Location D. Automatic Storage

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Unit 2

Detailed Scheduling and Planning Master Production Schedule (MPS) The master production schedule (MPS) lists the items that a company aims to produce and covers a predefined planning horizon and is a key link in the manufacturing planning and control chain. It interfaces with marketing, distribution planning, production planning and capacity planning and drives the MRP system. Production Planning Distribution Requirements Planning Final Assembly Schedule

Resource Requirements Planning

MPS

Rough-Cut Capacity Planning

MRP

The MPS data is built from customer orders, sales forecasts, and the production plan. The MPS must account for material and capacity availability, manufacturing constraints, and company policies and objectives. The outputs of the MPS form the inputs to detailed scheduling and planning. Production planning and scheduling may schedule material first, as with MRP, or begin by scheduling critical and constrained operations first. Either way, the MPS is required. The MPS may be presented in various forms. Usually the MPS grid looks similar to a spreadsheet with rows representing sources of MPS requirements and columns representing time periods. Each individual cell is a time bucket, representing the intersection of the time period with the item requirement.

The size of the time bucket has a strong influence on the design of the production planning and scheduling system. Most companies operate with time buckets of one week but some have daily time buckets. Other companies may use a four week period.

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Detailed Scheduling and Planning Planning Horizon The planning horizon is the amount of future time covered by the master production schedule. To ensure there is enough lead time to order all necessary components, the planning horizon should be equal to or greater than the cumulative lead time for the items to be scheduled. Usually, the planning horizon is much longer. This is to accommodate component lot sizing, shop floor and capacity planning, and scheduling for vendors and work centers. Longer planning horizons look further into the future, making it possible to identify and avoid future problems and perhaps take advantage of especially favourable circumstances. For example, where there is a steady upward trend in demand, the extended planning horizon may indicate when capacity will be strained or exceeded by demand. The master production schedule is a rolling operation. Assuming a time bucket of one week, at any point in time period 1 refers to the current or following week. When the current week expires, period 2 becomes period 1. Resolution of Differences When the initial master plan has been drafted, the total time required by the production schedule and the available resources must be compared. The capacities of constraining work centers or the availability of critical material must be looked at. If the available capacity is greater than that required by the MPS, then the MPS is workable. In other situations, the differences between available and required capacity must be resolved, either by increasing capacity or reducing the load. Where it is not possible to increase capacity either by overtime, extra staff, extra work centers, or subcontracting, then it may be necessary to revise the production schedule. When differences have been resolved, the planned must measure the effectiveness of the master production schedule with regard to: Use of resources: the MPS should make the best possible use of resources and remain within material and capacity restraints in each period. Customer Service: The MPS should ensure that due dates will be met and delivery performance will be acceptable Cost: The MPs should be economical to implement, without incurring excessive costs due to overtime, subcontracting, expediting or transportation. 5. Which factors must be taken into consideration when balancing stock? A. Storage location methods B. Item identification numbers Review Q

C. Scheduled receipts D. Allocations

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Detailed Scheduling and Planning Overview of Information used in Material Planning Detailed scheduling and planning deals with two main areas of an organization: work capacity and materials management. It must address conflicting objectives; the need to maintain low inventory and low cost while ensuring operational efficiency and high levels of customer service. Customer service may be measured in many ways through observing inventory levels. Inventory breaks the direct link between material demand and supply, allowing for efficient production. As independent demand from customers is variable, it must be forecast. Any items that are wholly dependent on parent items should not be forecast, but rather calculated from the forecast demand for the parent item. Inventory performance is measured in terms of inventory investment, inventory record accuracy, and custome r service. Inventory turns and customer service levels provide quantitative measurements of inventory performance. To facilitate inventory management, each item in inventory must be assigned a unique item number. This number may or may not be meaningful. Item numbers should not be reused by other items. Additionally, the warehouse or storage space should be organized either into fixed, random or zoned storage locations. Each ‘bin’ should have a unique identifier and a system should be used to match bin numbers with the appropriate item numbers. In preparation for material and capacity planning, the master production schedule must be devised for an appropriate planning horizon. It must be checked for feasibility and rough-cut capacity planning should be performed. Further inputs to the material planning process are stock status, scheduled receipts, and allocations. Material planning and scheduling systems require accurate, complete and timely data. Any errors or delays in maintaining data will upset the credibility and efficacy of the material planning and scheduling results.

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Detailed Scheduling and Planning Summary This lesson examined the information required to calculate inventory requirements and the importance of such information to the detailed material planning process. The lesson also covered management of engineering changes, open order status, and master schedules and the characteristics required in an effective detailed material planning process, including issues of traceability of demand, the impact of system action messages, and safety policies. This lesson examined the information required to calculate inventory requirements and the importance of such information to the detailed material planning process. The lesson briefly covered management of engineering changes, order status, and master schedules, the characteristics required in an effective detailed material planning process, including issues of storage and traceability of demand. You should be able to: Differentiate between independent and dependent demand Describe the relationship between inventory and independent or dependent demand Explain how to calculate inventory turns Identify ways in which inventory performance may be monitored Identify principles of part of item identification Identify the data required on inventory to support the material planning process Describe various inventory storage methods Explain the importance of having timely access to up-to-date, accurate and complete data when making material planning decisions

Further Reading Introduction to Materials Management, JR Tony Arnold, CFPIM, CIRM and Stephen Chapman CFPIM 5th edition, 2004, Prentice Hall APICS Dictionary 10th edition, 2002 Manufacturing Planning and Control Systems, Vollmann, T.E.; W.L. Berry; and D.C. Whybark 5th edition, 2004, McGraw-Hill Production & Inventory Management, Fogarty, Donald W. CFPIM; Blackstone, John H. JR. CFPIM; and Hoffmann, Thomas R. CFPIM 2nd edition, 1991, South-Western Publishing Co., Cincinnati, Ohio

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Detailed Scheduling and Planning Review The following questions are designed to test your recall of the material covered in lesson 2. The answers are available in the appendix of this workbook. 6. Any inventory tracking system should maintain unique item identification numbers, item descriptions, stock locations, item cost information, item lead time and: A. Balance on hand at each stock location B. Forecast usage rates C. The unit of measure for each item D. Safety stock information 7. Which are guidelines for creating part or item identification codes? A. Item numbers should be unique B. To improve speed and efficiency, anyone involved with inventory should be able to create a new item number C. Expired part numbers should be reassigned D. Item numbers should be designed to avoid confusing characters and allow for expansion. 8. Which of the following diagrams illustrates the effect on inventory levels of stable demand with a negative trend?

A

B

C

D

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Detailed Scheduling and Planning What’s Next? Lesson 2 covered a variety of techniques and tools that can be used to improve forecasting. At this point you have completed two of the 10 lessons in Unit 1. You should review your work before progressing to the next lesson which is: Supply Chain Management Basics – Lesson 3 Master Planning.

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Detailed Scheduling and Planning Appendix

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Detailed Scheduling and Planning Answers to Review Questions 1. B and D Dependent demand for an item occurs when the demand is driven by the BOM of another item. The demand for that item is therefore dependent on the parent item. For example, in a company that manufactures a range of mattresses, demand for springs may be driven by demand for mattresses. Dependent demand does not need to be forecast but can simply be calculated from the forecast demand for the parent item. 2. B and C Inventory management performance is generally gauged by tracking inventory turns, customer service levels, and inventory record accuracy. 3. D Inventory turns or inventory turnover measures the number of times in a given period that a company reaps back the cost of its average inventory. The formula used to calculate inventory turns is: Inventory turnover =

Cost of goods sold over a period Average inventory for the period

4. B In random storage, any new arrival is located in the first suitable place available. Random storage makes more efficient use of space as more than one bin can be assigned to the stock. It can adapt easily to changes in the variety of items stocked 5. C and D When balancing stock, the item types and quantities and dates of arrival must be recorded from scheduled receipts. In addition, inventory that has been reserved for particular orders must be monitored. It is also important to track and predict item usage rates to ensure more accurate forecasting and reduce the risk of stockouts. 6. All except B Inventory management relies on accurate demand, replenishment, safety stock requirements and other variables. Any inventory database system should maintain the following information for each item in inventory: Item identification

Item description

Stock location(s)

On-hand balances at each stock location

On-order information by due date

Reorder and safety stock information

Financial information

Usage

Unit of measure

Classification of information

Sourcing information

Lead time

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Detailed Scheduling and Planning 7. A and D The creation of item identification codes should be the responsibility of a single authority within the company to ensure that item numbers are unique and that there is only one set of item numbers used throughout the organization. Expired part numbers (for parts no longer used) should not be reassigned. Item numbers should be concise, uniform, and designed to avoid confusing characters and allow for expansion. 8. D The following graphs illustrate the relationship between inventory and various demand patterns, including seasonal and positive and negative trends. Stable Demand, No Trend 90 80 70 60 50 40 30 20 10 0

Stable Demand, Positive Trend

Demand Inventory Level

90 80 70 60 50 40 30 20 10 0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Demand Inventory level

Jan Feb Mar Apr May Jun Jul Aug Sep Oct N o v Dec

Stable Demand, No Trend, Seasonal 90 80 70 60 50 40 30 20 10 0

Stable Demand, Negative Trend

Demand Inventory level

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

90 80 70 60 50 40 30 20 10 0

Demand Inventory level

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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Detailed Scheduling and Planning Glossary Term

Definition

ABC Classification

The grouping of items in a list in order depending on their importance. First, the items are measured against the critical criteria (for example dollar volume) and listed in descending order. The top group (usually around 20%) of items are classed as A items and account for around 50-70% of the critical measurement. The next 30% or so of items are B items and are responsible for around 20% of the critical measurement. The rest are C items and are of least value in terms of the critical measurement. ABC classification is used to focus management on the most important items. It is usually applied to inventories, purchasing and sales.

Actual cost

The labor, material, and associated overhead costs that are charged against a job s it moves through the production process

Allocation

Items that have been assigned to a particular order and are therefore not available to use but have not yet been released from the stockroom are said to be under allocation.

Anticipation inventory

Additional inventory above the baseline stock to cover projected sales increases, planned sales promotions, seasonality, plant shutdowns and vacations

Automatic Storage A rack inventory storage system that uses automatic equipment to store and and Retrieval retrieve items. (ASR) System Backorder

A customer order or commitment to a customer that has not been fulfilled by the promised date due to inventory stockout.

Bias

A consistent deviation from the average, either too high or too low. Bias is an undesirable trait in forecasts

Buffer

A quantity of material waiting for further processing. This may be raw material, partially completed material in stores, or a work backlog that is purposely maintained beside a work center.

Carrying cost

Cost or carrying inventory. This is defined usually as a percentage of the monetary value of the inventory per unit of time (usually a year). Carrying cost depends on the cost of capital invested and on costs of maintaining the inventory, paying tax on it, insuring it, spoilage, storage space, and obsolescence.

Consignment

A shipment that is handled by a common carrier or the process of a supplier placing goods at a customer location without receiving payment for the goods until after they are used or sold

Constraint

An element or factor that prevents a system from achieving a higher level of performance with respect to its goal. Constraints can be physical, such as a machine center or lack of material, or managerial, as defined in policies or

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The longest planned length of time needed to complete a particular activity. It may be calculated in MRP by reviewing the lead time for each BOM path below the item. The longest BOM path is equal to the cumulative lead time

Customer service

A measure of a company’s ability to delivery the right product at the right time to the right place of the required quality and in the desired quantities. In other words, customer service is the ability of a company to meet the needs of its customers.

Customer service a measurement of delivery of finished goods performance, usually a level or ratio percentage such as the number of items or dollars shipped on schedule during a specified time period, compared to the total that should have been shipped. In a make-to-order environment it may be measured by the number of jobs or dollars shipped in a particular period compared with the total number required. Cycle

The interval of time during which a system or process, periodically returns to similar initial conditions. It is also the interval of time during which an event or set of events is completed

Cycle counting

An inventory accuracy audit technique. Each inventory item is allocated a cycle count frequency, usually more frequent for high value or fast moving items. Each item is counted in isolation at regular intervals throughout the year as often as specified for each item. Many items may be counted very working day. Cycle counting is used to identify items in error. This may lead to research, identification, and elimination of the causes of the errors.

Demand

A need for a particular product or component which could come from a customer order, forecast of market requirements, interplant requirement, or a request from a branch warehouse for a service part

Demand

The need for a product of component. Demand may be generated from customer orders, forecasts, or internal requests.

Dependent demand

Demand for an item that is wholly influenced by demand for another item. For example, in the manufacture of computer monitors, the demand for the plastic monitor case will be entirely dependent on the demand for monitors.

Distribution

The activities associated with the movement of material, usually finished goods or service parts from production plant to the customer. Distribution incorporates functions such as transportation, warehousing, inventory control, material handling, order administration, location analysis, packaging, data processing and communications networks.

Economic order quantity (EOQ)

Reducing setup time and inventory to the point where it is economical to produce in batches of one.

Excess inventory

Inventory that exceeds the minimum amount required to achieve a desired throughput rate, or inventory over and above the minimum amount needed to ensure desired due date performance

Expedite

To speed up production orders or purchase orders that are required in a shorter time than the usual lead time.

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Finished goods or A product sold as a completed item or repair part. This term refers to any end items item that is subject to a customer order or sales forecast First-in-first-out (FIFO)

A calculation of inventory value that assumes, for the purposes of valuation, that the oldest inventory will be used first.

Fixed Location

A warehouse storage method that assigns parts of the warehouse to particular items. These fixed locations become familiar to workers, reducing the need for a locator file.

Fixed order quantity

À lot sizing technique in MRP or inventory management that will always cause an order to be generated for a fixed quantity or multiples of that fixed quantity, if net requirements for the period are higher than the fixed order quantity.

Hedge inventory

An amount of inventory built up to guard against a particular event that may or may not occur. Hedge inventories are the result of speculation related to potential strikes, price increases, government unrest, or other external events that could severely impair a company’s strategic initiatives.

Inactive inventory Stock that is in excess of consumption within a defined period of time or stocks of items that have not been used within a defined time frame. Independent demand

Demand for an item that does not depend on the order of other items. Demand for finished goods, parts required for destructive testing, and service parts are examples of independent demand.

Independent demand

The demand for an item that is derived from customer orders, forecasts, or internal requirements, and is not dependent on the demand for other items.

Inventory

Stocks or items used to support production (raw materials and WIP items), supporting activities (MRO supplies), and customer service (Finished goods and spare parts). Demand for inventory may be dependent or independent. Inventory functions are anticipation, hedge, cycle (lot size), fluctuation (safety, buffer, or reserve), transportation (pipeline), and service parts. In the theory of constraints, inventory refers to items purchased for resale and includes finished goods, WIP and raw materials. In this approach, inventory is always valued at purchase price and includes no value-added costs, whereas traditionally, direct labor and overhead costs were attributed to the items as they went through the production process.

Inventory turns

The number of times that an inventory turns over during a year. This is calculated by dividing the average inventory level into the annual cost of sales. For example, an average inventory of $600,000 divided into an average cost of sales of 1,800,000 means that inventory turned over 3 times during the year.

Inventory turns

Also known as inventory turnover, this refers to the number of times an inventory cycle turns over in a given period of time, usually a year. It is calculated by dividing the cost of sales over the period by the average inventory level during that period.

Kanban

A JIT production method that uses standard lot sizes. Material is pulled to the work center according to demand. A Kanban is a card, billboard or sign.

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When a work station requires material it sends some form of sign, such as an empty container, up the chain. Last-in-first-out (LIFO)

A calculation of inventory value that assumes the most recent material received will be the first to be used. LIFO does not relate to the physical use of goods. It is required solely for accounting purposes.

Lead time

The amount of time required to perform an operation. In logistics, it is the time between identifying the need for an order and the receipt of that order. Components of lead time may include order preparation time, queue time, processing time, and move time, receiving, and inspection time.

Lot-for-lot

A lot sizing technique that generates planned orders in quantities equal to the net requirements in each period.

Maintenance, Items used to support operations and maintenance, including for example repair, and maintenance supplies, spare parts, consumables used during manufacturing operating supplies and supporting operations. (MRO) Manufacturing environment

The framework in which a manufacturing strategy is developed and implemented. It includes external environmental forces, corporate strategy, business unit strategy, product selection, process technology, and management competency. It is often used to refer to whether a company is make-to-stock, make-to-order, or assemble-to-order.

Master Production A schedule that represents what the company wants to produce, in exact Schedule (MPS) configurations, amounts, and dates. It is based on the production plan and is the main input for MRP. Material requirements planning (MRP)

A set of techniques that use bill of material information, inventory data, and the master production schedule to calculate requirements for materials. MRP recommends replenishment orders and order dates for materials and helps to reschedule open orders when due dates and need dates are not in line. MRP takes the items listed on the MPS and determines the quantity of all components and materials required to make those items and the dates by which those materials are required. It explodes the bill of material for each item, takes into account inventory on hand or on order and offsets the net requirements by the lead time for each item.

Mean absolute deviation (MAD)

A figure calculated by averaging the sum of the absolute values of each deviation of an actual from an expected figure. This can be used to track the accuracy of a forecast.

Normal distribution

A commonly known statistical distribution pattern where most events are close to a ‘mean’ and only occasional events stray far from that mean.

Obsolete inventory Inventory that is out of date or no longer required in the manufacturing process, or made worthless due to the appearance of a better or more economical alternative Open order

A manufacturing or purchase order that has been released or an unfilled customer order

Opportunity cost

The return on capital that would have resulted had the capital been available for some purpose other than what it has been used for

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Order point or reorder point

A predefined inventory level, which if it is higher than the stock on hand and stock on order combined, will trigger an action to replenish the stock.

Order Quantity or The amount of an item that is ordered from a supplier or from the plant or is Lot size issued as a standard quantity to the production process. Period order quantity

A lot-sizing technique which equates the lot size to the net requirements for a specified number of periods in the future. The number of periods to order is variable. The order size should equalize the holding costs and ordering costs for the time interval

Periodic inventory A physical count of all inventory undertaken either monthly, quarterly or audit annually. Periodic review

A fixed reorder cycle inventory model

Periodic review system

This is also called fixed reorder cycle inventory model. It is a form of independent demand item management in which an order has a fixed quantity. The reorder point will be large enough to cover the maximum expected demand during the replenishment lead time.

Planning Horizon The length of time a plan extends into the future. Master schedules typically cover a minimum planning horizon equal to the cumulative lead time for product allowing for lot sizing low- level components and capacity changes. Process cost

A system of cost accounting that collects cost by time period and calculates the average for all units produced during that time period.

Procurement

A fussiness function of planning, purchasing, inventory control, traffic, receiving, incoming inspection, and salvage operations

Product group

A number of similar products. Generally they are grouped according to the process or materials required to make them

Project cost

A method of costing used in project-based industries. Each assignment is costed as a standalone project without reference to other assignments.

Random Location A warehouse storage method that maximizes warehouse space. As items arrive they are placed in any suitable empty space. A locator file is used to ensure items can be easily retrieved Raw material

Purchased items or extracted materials that are converted via the manufacturing process into components and products.

reconciliation

Comparison of physical inventory figures with perpetual inventory records followed by appropriate adjustments to correct the records.

Reserve

Material on hand or on order that is assigned to specific future production or customer orders

Safety stock

This is a quantity of stock that is planned for inventory to protect against fluctuations in demand or supply. In the context of master production scheduling, the additional inventory and capacity planned as protection against forecast errors and short term changes in the backlog. Overplanning can be used to create safety stock. Safety stock is also known as buffer or reserve stock.

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Unit 2

Detailed Scheduling and Planning Scheduled Receipt An open order with an assigned due date Scrap

Material outside specifications for which rework is not possible or practical

Seasonality

A pattern of demand that repeats from year to year (or other identified season) where some periods have very high demand compared to others

Service level

A desired measure (usually a percentage) of satisfying demand through inventory or by the current production schedule in time to satisfy the customers’ requested delivery dates and quantities. In a make-to-stock environment, level of service is sometimes the percentage of orders picked complete from stock upon receipt of customer order.

Service parts

Parts (modules, components or elements) that are planned to be used without modification to replace an original part

Shelf life

The amount of time an item may be stored before becoming unusable.

Significant identification

An item identification number that comprises elements that can impart characteristics of the inventory item, for example, the source or shape of the part.

Spare parts or service parts

These are modules, components or elements that may be used without modification to replace an original part

Standard cost

An accounting system that determines cost by using set cost units for estimating the cost of an order. The standard cost is regularly compared against actual costs.

Stock

Items in inventory or stored products / service parts ready for sale, as distinguished from stores that hold components and raw materials

Stockout

A lack of required materials components or finished goods.

Time period safety An amount of safety stock that covers requirements for a set period of time. stock Time-phased order point (TPOP)

Similar to MRP planning logic for independent demand items, where gross requirements come from a forecast. The TPOP may be used to plan distribution center inventories and repair parts. The TPOP approach uses time periods, allowing for lumpy withdrawal instead of average demand.

Tracking signal

A signal used to highlight when the forecasting method is inaccurate. It is usually the ratio of the cumulative sum of deviations between forecast and actual values compared to the mean absolute deviation (MAD)

Visual review system

A simple inventory control system which involves looking at the amount of inventory on hand before reordering. It is used for low value items

Work-in-process (WIP)

Also known as work in progress, this refers to products that are in a partial stage of completion throughout the plant. This includes all material from raw material that has been released for initial processing up to completely processed material awaiting final inspection and acceptance as finished product.

Yield

The amount of usable output from a process as compared to its input. This is usually expressed as a percentage of the input.

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Zoned Location

A warehouse storage method that combines the characteristics of fixed and random location methods

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Detailed Scheduling and Planning