Module 2 Section B

Finishing lead time

1) The time that is necessary to finish manufacturing a good after receipt of a customer order. 2) The time allowed for completing the good based on the final assembly schedule.

Load percent

= (total load/capacity available) x 100

Load

= planned production x bill of resources category

Total load

= product family a + product family b + product family c + product family d

product line

A group of products associated by function, consumer group, distribution channel, manufacturing characteristics, or price range. Typically reflects the marketing and sales aspects of a product or service (similar in customer needs) and used in aggregate planning, marketing, costing, and sales planning.

Product family

A group of products or services that pass through similar processing steps, have similar characteristics, and share common equipment prior to shipment or delivery to the customer. Can be different overlapping product lines that are produced in one factory and often used in production planning (or sales and operations planning).

distribution center

A location used to store inventory. Decisions driving warehouse management include site selection, number of facilities in the system, layout, and methods of receiving, storing, and retrieving goods.

Order backlog

A past due order or open order yet to be fulfilled.

chase production method

A production planning method that maintains a stable inventory level while varying production to meet demand. Companies may combine chase and level production schedule methods.

Significant changes in resource planning fall into the following categories:

Acquisitions Facility startup and shutdown Hiring, layoffs, and shift changes Adding and removing tooling and equipment Outsourcing and subcontracting Education and training

There are three things that top management can do to lead the S&OP culture change:

Align performance goals and metrics Enforce changes Resolve tradeoffs between departments before approval

Typical financial evaluation steps, depending on the situation, are as follows:

Assess the impact of production planning choices—chase, level, or hybrid methods—or changes on customer service and inventory investment. Compare projected revenue, cost, and profit scenarios. Analyze the impact of S&OP choices on financial statements and cash flow. Reach an agreement on one set of numbers for forecasting and sales, production, and financial planning.

Calculating Backlog

B(ending) = B(beginning) + Demand - Supply

Revise the production plan or adjust Revise the production plan or adjust capacity as necessary.

Based on decisions by the pre-S&OP meeting team or the executive team, revise the production plan or adjust capacity to achieve an acceptable balance of supply and demand.

Product family groupings should be logical and representative of the way in which products are offered to the marketplace. They should

Be selected to align product families so it is convenient for the different business functions to forecast and provide accurate data Be meaningful in terms of volume of sales generated Be meaningful in terms of production and capacity planning Help the organization select the appropriate unit of measure for each product family

The S&OP process requires thorough analysis of alternative sales and operations scenarios to assess their financial implications. Alternative plans may reflect

Choice of production planning method Product family composition decisions (how they are defined) Product family volume decisions Inventory or backlog and resulting customer service tradeoffs Differences in internal priorities Impact of new product introductions.

capacity-related costs

Costs generally related to increasing (or decreasing) capacity in the medium- to long-range time horizon. Personnel costs include hiring and training of direct laborers, supervisors, and support personnel in the areas related to the capacity increase. Equipment purchases to increase capacity are also considered. In contrast, costs related to decreasing capacity include layoffs, the fixed overhead spread over fewer units, the impact of low morale, and the inefficiencies of lower production levels.

If demand exceeds supply, then

Customer service levels fall, as manufacturing cannot match customer demand for products. Costs increase because of overtime and the need to expedite shipping at premium transportation rates. Quality suffers from the rush to ship products. Profit margins decrease as a result of premium transportation, labor, and quality problems.

There are six steps in the resource planning process

Determine bill of key resources for each product family in the production plan. Determine the UOM for each key resource. Determine key resource capacity availability for each resource by period. Calculate the load on each key resource by time period. Compare load to available capacity in each time period for each resource. Revise the production plan or adjust Revise the production plan or adjust capacity as necessary.

Distribution planning Linkage to S&OP

Distribution planning covers inventory at distributed locations. Demand at distribution centers can be rolled up to a central supply source to determine aggregate distribution inventory demand. In addition, logistics resource planning provides input to S&OP on the ability of the distribution resources to move and store product at stocking locations to meet customer demand.

Step 3 of Calculating chase production: Calculate the number of employees required

Employees(T) = Planned Production(T) / Employee Productivity

As expected by the different processes involved, each manufacturing environment uses different units of measure in their planning process.

Engineer-to-order: engineering labor hours Assemble-to-order: machine and labor hours Make-to-order: order backlog Make-to-stock: material supply capacity

The key roles involved in the S&OP process include

Executive champion/sponsor S&OP process owner Demand planning team Supply planning team Pre-S&OP team Executive S&OP team

The basic information needed to build a production plan includes

Forecast by period for the planning horizon Opening inventory Desired ending inventory Any past-due customer orders (backorders)

The primary principles behind the resource planning concepts include

Identifies limits of key resources required by product families Supports business and strategic planning by identifying resources with long acquisition and installation lead times Requires management approval of major capital investment or human capital investments.

Step 4 of Calculating chase production: Calculate hires and fires (layoffs) each period

IfEmployees(T) >= Emloyees(T-1), then Hires(T) = Employees(T) - Employees(T-1) elseFires(T) = Employees(T-1) - Employees(T)

Which of the following actions to improve the validity of the master schedule is most under the master scheduler's control? Improve accuracy of resource bills of material Identify sources of demand problems Reduce sources of supply problems Aggregate capacity by flattening bills of material

Improve accuracy of resource bills of material Maintaining the resource bill of material to reflect current conditions has an ongoing impact on the validity of the master schedule; the other responses can be supported, but are done by other individuals.

product/service hierarchy

In sales and operations planning, a general approach to dividing products or services into families, brands, and subfamilies for various planning levels. This ensures that a correct top-down or bottom-up approach is taken to grouping (or aggregating) demand at each subsequent level. Forecasts are more accurate the higher up the product hierarchy they are developed; consequently, forecasts should usually be driven down from the top.

If supply exceeds demand, then

Inventories increase as a result of the imbalance between production and demand. Production rate reductions lead to job layoffs and reduction in plant efficiency. Profit margins suffer from price cuts and discounting.

Step 1 of Calculating level production: Calculate the number of employees needed.

Inventory(T) = Expected Demand (T+1) / Working Days (T+1) Planned Production Each Period = Total Production Required / Number of Periods Employees Required Each Period = Planned Production Each Period / Employee Productivity/Days

Step 1 of Calculating chase production: Calculate end-of-month inventory target values

Inventory(T) = Target Days x Expected Demand(T+1) / Working Days(T+1)

Step 2 of Calculating level production: Calculate ending inventory levels and days of supply.

Inventory(t) = Inventory(T-1) + Planned Production(T) - Forecast Demand(T) Days of Supply(T) = Inventory(t)/ [Expected Demand(T+1) / Working Days(T+1)]

S&OP success factors include

Involving the executive level Well-constructed meeting agendas Regularly scheduled S&OP meetings Participation of individuals and departments from across the organization Using a collaborative process Empowering individuals at all levels to make decisions Measuring and monitoring throughout the process Support and integration of technology.

Step 4 of The four steps of the monthly S&OP process: Reconciling Demand, Supply, and Financial Plans

Key activities for the financial review meeting are as follows: - Analyze the demand plan in dollars as well as any alternative production plans for the financial impact and feasibility. - Finalize projections on the revenues, profits, cash flow, or need for capital for investments for each alternative. - Provide a recommendation on the plan that best meets the organization's financial goals as well as financial constraints: -- Budgets -- Cash flow -- Capital expenditure limits Key activities for the pre-S&OP meeting are as follows: -Reach an agreement and making decisions regarding balancing supply and demand and out-of-tolerance conditions. -Develop alternatives for decisions referred to the executive meeting. -Develop specific recommendations for each product family in third-pass spreadsheets: --No change in sales or operations plan --Increase or decrease in sales plan or operations plan -Develop recommendations for resource additions or reductions as in labor, shifts, equipment, and outsourcing. -Set demand priorities when resources are constrained (sales and marketing). -Approve an updated financial view of the plans: matching dollar value of the latest sales forecast for all product families to the revenue goals in the annual business plan. The key activities for the executive meeting are as follows: -Review, accept, or modify the pre-S&OP team decisions. -Make decisions on product family issues on which the pre-S&OP team did not reach consensus. -Authorize significant changes in procurement and production rates. -Relate the dollarized version of the sales and operations plans to the business plan and modify each as necessary. -Review customer service performance and new product issues. -Review changes to existing policies relating to supply and demand balancing. -Create the fourth-pass spreadsheets to reflect the final decisions.

Periodic performance reporting is the first key requirement for monitoring and control. It requires

Linkages to key data, including -Production, shipment, and sales data aggregated into the product family groupings used in S&OP -Unexpected changes in the availability of raw materials, parts, and subassemblies Determining what to measure and what to report Timely reporting

Compare load to available capacity in each time period for each resource.

Load versus capacity comparisons identify imbalances between supply and demand. Steps to correct over- or under-availability of resources need to be identified and discussed during the pre-S&OP meetings held each month.

In addition to all of the planning alternatives discussed so far, organizations can consider other alternatives, including

Low-cost operations plan Optimized plan Undertime Overtime Outside contracting

The differences between a MTS and MTO grid include:

MTO history - Shows backlog and not inventory. Sales plan - Shows expected bookings. MTS sales plan is based on demand for order in stock. Production plan - Based on order and backlog planning versus forecasts and inventory planning in MTS. Backlog plan - MTS has inventory plan. MTO includes orders waiting to be processed, in production, and waiting to be shipped.

Examples of resources in manufacturing and the supply chain are numerous and include

Machinery and equipment Plant and facilities Raw materials and manufactured components Labor Human capital (knowledge, skills, and expertise; the collective value of an organization's intellectual capital).

Calculate the load on each key resource by time period.

Multiply the number of units in the production plan for each product family for each period in the planning horizon by the key resource usage factors in the bill of resources. The loads for each of the product families using particular resources are summed to determine the total load on each resource.

The benefits of an integrated successful S&OP process include

No change in current plans Changes in the sales/production/inventory-backlog plans Changes in policies regarding volume/mix Benefits to the different manufacturing environments (MTS, ATO, MTO)

Enforce changes

One of the benefits of S&OP is running the business from one set of numbers. If managers are required to use a different set of numbers for budgeting than is used for S&OP, this may cause confusion and erode the process. Top management should be leading the culture change within the organization to align all numbers.

Align performance goals and metrics

One way for top management to reinforce the importance of S&OP is to ensure that performance measurement and rewards align with the plan. Many organizations find that S&OP and the existing process have conflicting performance measures; therefore, S&OP may require the organization to examine and rewrite performance goals.

Outsourcing and subcontracting

Outsourcing involves substitution, or the replacement of internal capacity and production with that of a supplier. Subcontracting uses other suppliers as supplemental resources to handle load imbalances, seasonal demand, and short-term increases in demand. Both are used to keep the employment base stable.

The elements of a conventional MTS grid include:

Period Rows

Step 2 of Calculating chase production: Calculate the operations plan in units

Planned Production(T) = Forecast Sales(T) - Inventory(T-1) + Inventory(T)

Which of the following actions will a company most likely take as a primary focus of their level production strategy to deal with demand peaks while meeting standard lead time delivery? Produce ahead Work overtime Subcontract Level load demand

Produce ahead Building up inventory is used to buffer peak demands; working overtime is unlikely to be a primary focus; level loading is already indicated; subcontracting might be an option, but cannot be inferred

To evaluate alternative production planning methods, it is important to conduct an analysis of the following key characteristics:

Production plan levels by month Number and productivity of workers required to produce the plan results in each month Monthly inventory plan in both physical and monetary units of measure Changes in the workforce as production levels change

Organizations that practice world-class S&OP see benefits such as

Production plans that are consistent with the business plan Greater visibility of demand and supply across the enterprise Improved inventory management and increased promotional planning Increased accuracy in budget forecasting Improved product life cycle management process

Data that is time sensitive includes

Production, shipment and sales data aggregated into product family groups Unexpected changes in availability of raw materials, parts and subassemblies Other important metrics

The objective of sales and operations planning is to Hold sales accountable for the forecast month to month Provide an integrated plan for sales and manufacturing Integrate the master schedule with the business plan Provide a means for the master scheduler to validate the schedule

Provide an integrated plan for sales and manufacturing Even though the S&OP may accomplish some of the other areas indirectly, it's primary objective is to tie the sales, inventory and production plans into one plan

Determine bill of key resources for each product family in the production plan.

Refer to the bill of resources for each product family in the production plan to determine the resources required for production. For the typical item in a product family, the bill will list the key resources and the units of demand for those resources per unit of planned production, such as number of filling machine hours per thousand units of output.

Determine key resource capacity availability for each resource by period.

Resource capacity availability must be based on realistic and reliable estimates of the available time, efficiency, and utilization of key resources and availability of key materials.

Resource planning Linkage to S&OP

Resource planning provides S&OP with estimates of capacity requirements for alternative sales and operations plans being considered and for changes in the current production plan. Resource planning also ensures that adequate key resources are in place to support master scheduling.

Step 2 of The four steps of the monthly S&OP process: Evaluating Demand Levels

Review data from Step 1 on past sales performance. (This is done by sales and marketing.) Create statistical forecasts for make-to-stock products. Modify the statistical forecast to create the management forecast based on Additional demand data from field sales for large accounts. New product introductions and new customers Input from marketing on promotions, pricing, and competitor activity Forecast errors from the prior month, such as bias by family Analysis of causes of bias and necessary adjustments. Create the first-pass spreadsheet or grid for the new month's cycle. (The S&OP spreadsheet will be covered in more detail later in this topic.) Convert the unit sales forecast data into monetary units (dollars, euros, renminbi) for use by finance and accounting. Submit the management forecast to operations.

Step 3 of The four steps of the monthly S&OP process: Evaluating Supply Capability

Review the management forecasts in the first-pass spreadsheets (production plan) from Step 2. Modify existing production plans to account for changes in the forecast from Step 2 and necessary adjustments in inventory or customer order backlog. Include results in the second-pass spreadsheets. Test new production plans for sufficiency of aligned and non-aligned production resources and logistics resources. Include in the resource planning report. Develop a list of issues that require resolution at the pre-S&OP or executive meeting, including the need for funding additional resources. Prepare a financial analysis of the sales and operations plans.

Demand planning Linkage to S&OP

S&OP relies on demand planning to report all sources of demand that affect manufacturing capacity, forecasts and customer orders placed at all levels of the distribution network, interplant transfers, and service requirements.

Calculating chase production

Step 1: Calculate end-of-month inventory target values Step 2: Calculate the operations plan in units Step 3: Calculate the number of employees required Step 4: Calculate hires and fires (layoffs) each period

Calculating level production

Step 1: Calculate the number of employees needed. Step 2: Calculate ending inventory levels and days of supply.

The four steps of the monthly S&OP process

Step 1: Reviewing Performance Step 2: Evaluating Demand Levels Step 3: Evaluating Supply Capability Step 4: Reconciling Demand, Supply, and Financial Plans

Determine the UOM for each key resource.

The UOM for most products has been determined in advance. A UOM must be a relevant measure of the resource being used.

In manufacturing and services, resources have two important characteristics:

The ability to support production and service delivery The ability to constrain them

production plan

The agreed-upon plan that comes from the production planning (sales and operations planning) process—specifically, the overall level of manufacturing output planned to be produced, usually stated as a monthly rate for each product family (group of products, items, options, features, and so on). Various units of measurement (e.g., units, tonnage, standard hours, number of workers) can be used to express the plan. Represents management's authorization for the master scheduler to convert it into a more detailed plan—that is, the master production schedule.

Planning horizon

The amount of time a plan extends into the future. For a master schedule, this is normally set to cover a minimum of cumulative lead time plus time for lot sizing low-level components and time for capacity changes of primary work centers or of key suppliers. For longer-term plans, the planning horizon must be long enough to permit any needed additions to capacity.

Resolve tradeoffs between departments before approval

The commitment of top management to follow through and act is essential. It is often challenging to maintain the rigor required to gain the full benefit of S&OP. Top management must make and follow up on the tough decisions regarding tradeoffs between functions. If the decision is not executed on at the top, then, by the nature of the business, the decision will be made on the production floor, and it may not be in alignment with organizational goals. For example, if the sales volume is consistently being overstated then this causes an overstated production plan. If not addressed, those on the floor will make their own adjustments. However, if this issue is addressed at the S&OP level then the appropriate action can be taken.

History

The data shown in first three periods are past period data and often provide a useful perspective on the sales and production plan.

The roles and responsibilities of two participants are particularly important:

The executive champion or sponsor, who lends legitimacy and authority to bringing various functional interests together in a transparent, well-organized process The process owner, who is responsible for framing issues and identifying which decisions can be made by the pre-S&OP team and which need to be resolved by the executive team

Demand and supply

The first pair is demand and supply. The challenge is that demand and supply must always be in balance. When demand exceeds supply, the organization cannot provide products in sufficient volumes to meet the total required by customers. As a result, costs increase due to overtime and premium freight rates. Quality suffers as production hurries to produce and ship products. On the opposite side, if supply exceeds demand, productive assets are not optimized, inventories increase, layoffs occur, decreasing plant efficiency, and profit margins are squeezed due to price cuts and discounting. The role of S&OP is to prevent demand and supply imbalances from occurring. This can be accomplished through the effective coordination of the different operating plans of the business functions constituting demand and supply. Later in this section, we review methods that are available to help organizations balance supply and demand.

Inventory plan

The first row of the inventory plan is a calculated field. It shows planned inventory levels based on sales, production, and inventory plan data. For February it was the beginning or planned inventory of 90 plus planned production (supply) of 100 minus planned sales (demand) of 80 = 110. The second row shows actual inventory levels. The actual inventory at the end of February. 112 + 100 - 87 = 125 units. The third row shows the difference (+ or -) between the planned and actual inventory. In our example it is plus 15.

Production plan

The first row of the production plan section is the production plan generated by S&OP. It represents projected volume based on level, chase, or hybrid production methods. The second row shows actual receipts into inventory by period of actual quantities from production or suppliers. The third and fourth rows show the period and cumulative variances between planned and actual.

Sales plan

The first row of the sales plan section in a MTS grid is the sales plan. It represents sales that were forecasted for the past three months or are in the current forecast for future months based on qualitative and quantitative techniques. The second row represents actual sales during the past three months. The third and fourth rows show the period and cumulative variances between planned and actual sales.

Aggregate inventory

The inventory for any grouping of items or products involving multiple stockkeeping units.

Level production strategy

The level production strategy sets production (supply) at a fixed rate (usually to meet average demand) and uses inventory to absorb the variations in demand.

Master production scheduling (MPS) Linkage to S&OP

The master production schedule is a disaggregation of the production plan from the product family to the end-item mix level. In any event, the planned MPS end-item quantities must agree with the product family volume for manufacturing to succeed in meeting the schedule.

Period

The minimum recommended planning horizon is from 15 to 18 months. The standard period is one month. Some companies might use quarterly periods after the irst nine months and annual periods after 18 months or two years if the planning horizon is more than two years. (These time periods are to be used as a rule of thumb only.)

tactical planning

The process of developing a set of tactical plans (e.g., production plan, sales plan, marketing plan). Two approaches to tactical planning exist for linking tactical plans to strategic plans—production planning and sales and operations planning.

mixed-model scheduling

The process of developing one or more schedules to enable mixed-model production. The goal is to achieve a day's production each day.

product mix

The proportion of individual products that make up the total production or sales volume. Changes in the product mix can mean drastic changes in the manufacturing requirements for certain types of labor and material.

Production rate

The rate of production usually expressed in units, cases, or some other broad measure, expressed by a period of time (e.g., per hour, shift, day, or week).

Rows

The rows are grouped into three sections: sales plan, production plan, and inventory plan.

Volume and mix

The second two essentials that are often paired when discussing S&OP are volume and mix. Although they are often discussed together in this context, it is important to remember that they need to be treated separately in the manufacturing planning and control function. Volume is a big-picture decision that determines how much to make; mix focuses on what to make in which order based on customer requests. The challenge is that many organizations get caught up in managing the mix in a reactive mode due to customer requests and they never take a step back and focus on the big picture. The best S&OP organizations are methodical versus reactive; they carefully plan their volume and then use that to drive their decisions regarding product mix.

S&OP process owner

This individual is recognized as the leader of the monthly S&OP planning process. The process owner has strong leadership skills and is capable of presenting issues to decision makers and facilitating conflict resolution. This person has another job within the organization, such as demand, sales, materials, or production control manager or controller.

Executive champion or sponsor

This individual sets clear performance expectations for top management, authorizes necessary resources, and clears obstacles to effective process performance. This should be a senior executive who has a close working relationship with the president.

Executive S&OP team

This team decides on the sales and operations plan for product families, authorizes spending for production and procurement rate changes, relates the impact of the monetized version of the sales and operations plan to the business plan, resolves issues from the pre-S&OP meeting, and reviews customer service and business performance. It includes the president, the chief operating officer, or the general manager; the vice presidents of sales, marketing, operations, product development, finance, logistics, and human resources; and the process owner.

Demand planning team

This team is responsible for the reviewing the sales forecasting reports and ensuring that price changes, promotions, market conditions, and competitor activity are properly accounted for in the forecasts. This typically includes demand, product, customer service, sales administration, and accounting managers as well as the forecast analyst, the new products coordinator, field sales, and the process owner.

Pre-S&OP team

This team makes decisions on the demand and supply balance, resolves problems, identifies issues needing resolution, and develops alternatives for consideration by the executive S&OP team. It typically includes the demand, materials, customer service, product, accounting, plant, and purchasing managers as well as the forecast analyst, the controller, the new products coordinator, and the process owner.

Supply planning team

This team reviews the preliminary production plan, recommends changes as necessary to meet the demand plan, and identifies any need to ask top management for additional resources. It typically involves plant, purchasing, materials, production control, accounting, and distribution managers as well as the master scheduler, the new products coordinator, and the S&OP process owner.

Below is a list of possible product family groupings in order of least to most detailed as suggested by Jacobs

Total company Business unit Product family Product subfamily Model/brand Package size SKU SKU by customer SKU by customer by location

Measurements that organizations use that need to be in alignment include

Total units for each product line Dollar value of total monthly output Total output by factory Direct labor hours Tons of product

Step 1: Reviewing Performance

Update data from the prior month's results (finished goods levels, forecast accuracy, on-time performance, etc.). Generate data needed for the current planning cycle and distribute those data. Update data on actual sales, inventories, production, and backlog for the month just ended. Generate new data for sales and marketing analysts to use in the new demand forecast: sales analysis data, statistical forecast reports, and revised worksheets for the field sales force.

Planning time fence

Within the planning time fence, orders and forecasts cannot be accepted without approval of the master scheduler as they might adversely affect component schedules, deliveries, costs, and capacity plans.

Hybrid (mixed-model) production method

a production planning method that combines the aspects of both the chase and level production planning methods.

Acquisitions

companies constrained by resource shortages may consider acquisition of other suppliers or capacity from other suppliers by blanket purchase orders or by reserving capacity by contract.

Education and training

companies in short supply of skilled labor often sponsor training programs in technical colleges, community colleges, and vocational training schools, as well as offering internships to build a competent labor force.

Once the production plan has been calculated, it must be evaluated using two key cost factors:

cost of workforce changes and cost of inventory

Facility startup and shutdown

resource planning can identify the appropriate time to bring on additional production facilities or the right time to phase out operations at a particular facility. Such decisions should account for longer-term production plans and avoid over-reacting to short-term situations of rising or falling demand.

Hiring, layoffs, and shift changes

resource planning provides information for workforce planning, and this can be very useful for determining when to hire additional people, or when to add or drop shifts in a production facility. Many local or national regulatory agencies require advance notice of layoffs. They require these changes to be planned and communicated several periods before the change actually occurs. Resource planning provides the future visibility necessary to plan and enact such changes in a proactive manner.

Adding and removing tooling and equipment

resource planning provides information that is useful for determining when to invest in additional equipment and when to remove surplus equipment for potential disposal. Again, it is important to avoid overreacting to short-term situations. Trends in demand and supply situations require analysis to determine if there are any long-term trends that could require the addition or removal of equipment. The long lead times associated with the acquisition of many pieces of industrial equipment require careful planning to ensure that supply is available to meet the anticipated demand at all times.

Units of measure

the unit in which the quantity of an item is managed

role of S&OP

to balance demand and supply at the volume level