Chapter 3 Supply Chain Planning

Change capacity:

Vary production output through overtime or idle time Vary work force size by hiring or layoff Using part-time workers Subcontract work

Enterprise Resource Planning (ERP) PArt 3

Large implementations came from Y2K concerns A key enabler to efficient operations, access to critical information, speed and flexibility

Top Management

Long-Range (over 3-5 year) R&D New market / product family plans Capital investments Facility expansion

Material Requirements Planning (MRP)

MRP - The short-range plan from a computer-based materials management system that calculates the exact quantities, need dates, & planned order releases for subassemblies & materials required to manufacture a final product

Available-to-Promise (ATP) Quantity -

The difference between confirmed customer orders & the quantity the firm planned to produce (amount available to other orders). It enables the firm to respond to customer order inquiries, based on planned product availability.

Explosion -

The process of converting a parent item's planned order releases into component gross requirements

Implementation Challenges:

Cost, committed resources, time, staff inertia, inability to change processes to leverage system capabilities, top management commitment, data conversion, "Go Live" methodology

Developing the Production Plan Step 4

Determining the labor and material requirements to achieve the production plan.

Counter-seasonal product mix -

Develop a product mix with offsetting seasonal trends to level the required production capacity

Developing the Production Plan Step 6

Develop the detailed Materials Requirements Plan for execution.

Bill of Materials (BOM) -

A document that shows an inclusive listing of all component parts and assemblies making up the final product.

Gross Requirement -

A time-phased requirement prior to netting out on-hand inventory and lead-time

MRP II Part 1

A computer-based system that creates detail production schedules using realtime data.

Fluctuating inventory levels Increase inventories -

build stock in advance of demand in order to use available capacity

Short-Range - Supply Chain Planning

detailed planning process for components and parts to produce the master production schedule based on the demand plan

Lead time -

duration between order release and receipt

Short-Range - Supply Chain Planning Example

e.g. - Daily production plan for every line and model at the Chattanooga, TN. Plant Includes ordering of raw materials, scheduling of human resources, delivery from suppliers, alignment of multiple production lines to feed the final assembly. Includes planning for transportation and warehouse needs Execution based plans

Capacity -

the maximum amount or number that can be received or contained*

Lot Size -

the required quantity of an item for ordering or production

Influence demand -

to align with production capacity Pricing Advertising Promotions

Scheduled Receipt -

A committed order awaiting delivery for a specific period.

Developing the Production Plan Step 3

Identifying constraints / risks which may influence the plan.

Enterprise Resource Planning Systems (ERP)

Information system connecting all functional areas and operations of an organization, and in some cases suppliers and customers, via common software infrastructure and database

Planning factor -

The number/quantity of each component or material needed to produce a single unit of the parent item

Chase Production Strategy -

Adjusts capacity to match demand. Firm hires and lays off workers to match output to demand. Finished goods inventory remains consistent based on worker productivity. Works well for make-to-order firms

Enterprise Resource Planning (ERP) PArt 2

All areas are updated simultaneously as data is updated - eliminates duplicate data entry and inconsistent information across an organization

Available-to-Promise (ATP) Pre Reqs

Beginning inventory (BI) Production schedule (firm and tentative) (MPS) Confirmed Customer Orders (CCO)

Distribution Requirements Planning (DRP)

Establish requirements for the distribution network and balances warehouse capacity with production plans DRP is an extension of the MRP system and ties physical distribution to the manufacturing planning and control system Also plans finished good inventory replenishment in the distribution network balancing inventory at throughout the network.

The Mid Term Business Plan Part 2

Executive Management gathers input from the various organizational functions such as finance, marketing, operations, and engineering, on what is needed to achieve the objectives.

The Mid Term Business Plan Part 3

It determines the long term capital investment plan, business investments and funding requirements,

Available-to-Promise (ATP) Quantity Continued-

It generates available quantities of the product along with expected availability dates. It represents "the uncommitted portion of a company's inventory and planned production maintained in the master schedule to support customer order promising

Master Production Schedule (MPS) Part 1

More detailed than APP & easier to plan under stable demand. Breaks down months into weeks / days Planning horizon is shorter than APP, but longer than the lead time to produce the item so product is completed within the plan.

Long-Range - Strategic Plans Examples

Multi-year plans establishing overall business goals driven by top executives e.g.- VW groups wants to be the #1 car company in the world All division, department complete a plan to achieve the overall goal Normally 3-5 years, top down direction

Planning factor -

Number of components needed to produce a unit of the parent item

Projected On-Hand Inventory -

Projected closing inventory at end of a period. Beginning inventory minus gross requirements, plus scheduled receipts plus planned receipts from planned order releases.

Preparing a Material Requirements Plan (MRP) Step 1 Cont

Projected on hand inventory for week 1 becomes beginning inventory for week 2 and so on.

Preparing a Material Requirements Plan (MRP) Step 1

Start with the part that is the highest level on the Bill of Materials. Beginning Inventory (BI) - gross requirements + scheduled receipts = projected on hand inventory.

Long-Range - Supply Chain Planning

Strategic Plans involves planning for investments in markets, facilities and major equipment purchase

Aggregate Production Plan (APP)

The Intermediate to long range plan that translates annual business plan & demand forecasts into a production plan for a product family (products that share similar characteristics) in a plant or facility.

The MRP requires the following information:

The independent demand information Parent-component relationships from the Bill of Materials Inventory status of final product & components. Lead time and lot size for each component (buy) and Time required for each process step (make) Safety Stock amount for each level of the BOM

Time Bucket -

Unit of time / time period used in MRP, e.g., days, weeks, months

Preparing a Material Requirements Plan (MRP) Step 1 Cont.

When your projected inventory drops below the safety stock (SS) you need to enter a scheduled receipt that week. Based on the lead time (LT) you go back the correct number of weeks to enter the same amount as the planned order release. Remember to make sure your quantity is compatible with the required lot size (Q). Continue the process for all the weeks on this part.

Firm Time Fence

is established as the period when changes can no longer be made by the planning system. Changes during this period must be reviewed and approved by the Production Manager or an authorized person.

Components -

parts demanded by a parent.

Best-of-breed -

pick the best application for each individual function. Challenge - integrating the software, data duplication, support resource requirements, training.

Planned Order Release -

A specific order for a specific item and quantity to be released to the shop or to the supplier.

Multilevel Bill of Materials -

A comprehensive listing of all the components used in a product, the parent - component relationships along with the quantity of each component required for corresponding parent (the planning factor).

Resource Requirement Planning (RRP)

A long-range capacity plan used to check whether aggregate resources (i.e., labor and manpower) are capable of satisfying the Aggregate Production Plan.

Rough-Cut Capacity Planning (RCCP)

A medium-range capacity plan used to check the feasibility of the Master Production Schedule. Converts MPS from the production needed to the capacity required, then compares it to capacity available.

Firmed Planned Order -

A planned order that can be frozen in quantity and time so that the MRP computer logic cannot automatically change when conditions change. Established by the Planner or Supply Chain Manager to prevent system nervousness. This can aid planners working with MRP systems to respond to material and capacity problems by firming up selected planned orders.

Capacity Requirement Planning (CRP)

A short-range capacity plan used to check the feasibility of the Material Requirements Plan.

Intermediate-Range - Supply Chain Planning

Business Plans (financial, operational, product) establishing annual goals and timing of key events (entering new market, new product introduction)

Aggregate Production Plan (APP) Part 2

Enables the firm to see its capacity requirements and address gaps (RRP) Determines the production strategy the firm will use (discussed later)

Developing the Production Plan Step 5

Calculate the production costs each product (labor, materials, overhead).

Master Production Schedule (MPS) - Time Fencing

Changes in the MPS can cause inefficiency and cost increases throughout the organization. To address the impact of lead times and maintain cost control, many companies have adopted a time fencing policy to minimize changes to the MPS.

Developing the Production Plan Step 2

Compare to the available capacity for each period in planning horizon. Develop the capacity plan.

Preparing a Material Requirements Plan (MRP) Step 3

Continue to follow the above for all parts in order of the hierarchy.

MRP II Part 2

Coordinates the arrival of materials with the availability of machine and labor.

Capacity Planning

Determining the amount of capacity required to produce a good or service in the future.

Enterprise Resource Planning (ERP) PArt 1

ERP is an information system connecting all functional areas & operations of an organization via common software infrastructure and database. It ties together the specialized system needs with a common, shared centralized database

Preparing a Material Requirements Plan (MRP) Step 2

For the next part in the hierarchy, the Planned order releases you entered above become the gross requirements for the next part in the order. If there is a planning factor remember to multiply by the factor to determine the gross requirement.

Master Production Schedule (MPS) Part 2

For the service industry, the master production schedule may just be the appointment log or book, where capacity (e.g., skilled labor or professional service) is balanced with demand.

Key elements necessary for an effective DRP:

Forecasted demand by Distribution Center (DC) Current inventory levels by DC Targeted safety stock by DC Established replenishment quantities Replenishment lead times

Firm (Fixed) Time Period:

From the current date into the future covering the lead time of the major production cost components.

Planned Time Period:

From the end of the Firm Time Period to the end of the planning horizon. The planning system can make changes to production in this time period. The changes are constrained by availability of components, capacity and resources.

Developing the Production Plan Step 1

Gather the demand for each product by period covered by the planning horizon.

Operations Middle-Management

Intermediate-Range (6 - 18 months) Sales & production planning Long lead time components Setting employment, inventory, and subcontracting objectives Operating and financial plans

Sales & Operations Planning (S&OP) Continued

It utilizes the Resource Requirements Plan (RRP). - Capacity plan It utilizes the Aggregate Production Plan (APP). - Manufacturing Plan It is the benchmark established to drive decision making throughout the year.

Parent -

Item generating demand for lower-level components.

MRP II Part 3

MRP II is used widely by itself in manufacturing environments, but is also as a module of more extensive enterprise resource planning (ERP) systems."

Mixed Production Strategy -

Maintains stable core workforce while using short-term means, such as overtime, subcontracting and part time helpers to manage short-term demand fluctuations. Works well for make-to-stock firms with custom options, seasonal businesses.

Production Planning Strategies Objectives

Objectives: Satisfy demand Manage capacity efficiently Manage inventory levels Minimize cost: Labor Inventory Plant and Equipment Workforce

MRP output >

Planned order releases (purchase & produce)

MRP output -

Planned order releases (purchase & produce) Basic MRP relies on information provided and ignores capacity & shop floor conditions. (Utopian plan)

Production Planning Strategies

Primary purpose is to establish the production methodology that will satisfying customer demand while balancing production costs and inventory through workforce management.

Pegging -

Relates the gross requirements for a component part to the planned order releases of the parent item, so as to identify the source(s) of the item's gross requirements. Pegging can be thought of as active where-used information.

Level Production Strategy -

Relies on a constant output rate over an extend period of time based on worker productivity while varying inventory and backlog according to fluctuating demand. Works well for make-to-stock firms

Operations Managers, Supervisor, Foremen, etc.

Short-Range (up to 3-4 months) ordering scheduling producing delivering

Closed Loop MRP Part 1

System for production planning and inventory control. Synchronizes the purchasing of materials with the master production schedule.

Master Production Schedule (MPS)

The Intermediate-range plan that provides a detailed breakdown of the aggregate production plan, listing the exact end items to be produced by a specific period.

Sales & Operations Planning (S&OP)

The annual business plan simulates the business for a year - 18 months. It establishes the near term objectives aligned to the mid term plan. It covers all areas of the company (sales, marketing, R&D, operations, production, sourcing, service, finance, etc) to provide management with the knowledge of actions needed to be taken to achieve the objectives.

Resource Planning

is the process of determining the required resources to effectively and efficiently produce the output required.

Objective of Supply Chain Planning

The objective is to balance supply and demand such that the financial and customer service objectives of the company are achieved. Operations managers are continuously involved in planning operations and resources to balance capacity and output.

The Mid Term Business Plan PArt 1

The plan states the company's objectives for profitability, growth rate, and return on investment as determined by the company executives and board

Aggregate Production Plan (APP) PArt 1

The planning horizon of APP is at least one year and is usually rolled forward by three months every quarter. Sets the production output requirements, workforce needs and inventory plans

Closed Loop MRP Part 2

The system feeds back information about completed manufacture and materials on hand into the MRP system, so that these plans can be adjusted according to capacity and other requirements.

Closed Loop MRP Part 3

The system is called a closed loop MRP because of its feedback feature to address capacity, etc

Net Requirement -

The unsatisfied item requirement for a specific time period. Gross requirement for period minus current on-hand inventory.

Safety Stock -

a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply. Over planning supply versus demand can be used to create safety stock.

Resource -

a source of supply, support, or aid, especially one that can be readily drawn upon when needed.*

Back-ordering during high demand periods -

accept that demand is greater than supply capabilities, supply when available.

Intermediate-Range - Supply Chain Planning Examples

e.g. - VW plans to produce 1,000 Jettas / week at its Chattanooga, TN plant. Normally 1 year - 18 months focused on quarterly goals Basis for detailed operational plans and setting individual objectives Plans are at the product category level, indicating introduction and discontinuation dates Plans are impacted by lead times

Independent Demand -

external demand for the final product affected by trends, seasonal patterns, & general market conditions.

Supply Chain Planning is responsible

for determining how operations will best satisfy the requirements created by the Demand Plan.

Single software solution -

implement the desired applications from a single vendor. Resolves integration and data issues but individual system functionality may be reduced

The Mid Term Business Plan

is long-term focus, provides the company's direction and objectives for the long term (3 - 10 years)

Production Capacity

is the maximum amount an organization can complete in a given period of time based on the resources available. Excess (or insufficient) capacity prevents the firm from manufacturing efficiently. Organizations must balance the production plan with capacity.

Fluctuating inventory levels Decrease inventories -

temporarily reduce inventory below normal safety stock levels during peak demand periods to meet customer requirements.

Dependent Demand -

the calculated internal demand for subassemblies and component parts based on the demand of the final product and the planning factor of each part

Production Capacity -

the maximum amount an organization can complete in a given period of time based on the resources available.