Basics of Supply Chain Managment (Lesson 3)

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Basics of Supply Chain Management

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Unit 1Basics of Supply Chain

Management

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Copyright Leading Edge Training Institute Limited i i


Unit1

2003 e-SCP -The Centre for Excellence in Supply Chain Management

No portion of this publication may be reproduced in whole or in part.The Leading Edge Group will not be responsible for any statements, beliefs, or opinions expressed by theauthors of this workbook. The views expressed are solely those of the authors and do not necessarilyreflect 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 CertificationCouncil for use as study material for the APICS CPIM certification examination.

The Leading Edge Training Institute LimitedCharter House

CobhCo Cork

Ireland


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Copyright Leading Edge Training Institute Limited ii i


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Preface............................................................................................................4

Course Description................................................................................................................. 4

Lesson 3 Master Planning ............................................................................5 Introduction and Objectives.................................................................................................. 5Production Planning .............................................................................................................. 5Production Planning or Sales and Operations Planning Strategies.................................. 6

Make-to-Stock Production Planning .................................................................................... 9Creating a Level Production Plan......................................................................................... 9

Resource Requirements Planning....................................................................................... 11Master Production Schedule (MPS)................................................................................... 12MPS Elements....................................................................................................................... 13

MPS Calculations ................................................................................................................. 15MPS in Different Environments ......................................................................................... 16

MPS Development................................................................................................................ 16MPS, Sales and Delivery Promises ..................................................................................... 18Summary............................................................................................................................... 21

Further Reading ................................................................................................................... 21Review ................................................................................................................................... 22

Whats Next? ........................................................................................................................ 24

Appendix.......................................................................................................25

Answers to Review Questions.............................................................................................. 26

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


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Copyright Leading Edge Training Institute Limited 4


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Preface

Course Description

This document contains the third lesson in the Basics of Supply Chain Management unit, whichis one of five units designed to prepare students to take the APICS CPIM examination. The

Basics of Supply Chain Management unit provides the fo undation upon which the other fourunits build. It is necessary to complete this unit, or gain equivalent knowledge, beforeprogressing to the other units. The five units, which together cover the CPIM syllabus, are:


Master Planning of Resources

Detailed Scheduling and Planning

Execution and Control of Operations

Strategic Management of Resources

Please refer to the preface of Lesson 1 for further details about the support available to youduring this course of study.


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Lesson 3 Master Planning

Introduction and ObjectivesThis lesson provides a basic overview of the purpose and functions of production planning andmaster production scheduling.

On completion of this lesson you will be able to:

Identify features of a basic level production plan for make-to-stock products

Describe relationships between resource requirements planning and production planning

State the purpose of a master production schedule (MPS)

Identify the relationship between the MPS and the production plan

Describe features of a simple MPS and rough-cut capacity planDescribe the importance of the MPS to sales with regard to promises of delivery

Production Planning

Production planning and control involves several layers of activities. Planning begins with thebusiness plan, which is used to guide the sales and operations plan. This is turn is a major input

to the master production schedule which feeds into material requirements planning, productionactivity and control (PAC), and purchasing.

Business

Strategy Plan

Sales and

Operations Plan

Master

Production

Schedule

Material

Requirements

Plan

Planning Execution

PAC and

Purchasing

Business

Strategy Plan

Sales and

Operations Plan

Master

Production

Schedule

Material

Requirements

Plan

Planning Execution

PAC and

Purchasing

At each stage in the planning process, the three factors that must be identified are:

Demand priorities

Required capacity

Available capacity

Purpose of Production PlanningProduction planning, an activity of Sales and Operations Planning, aims to ensure the overall

level of manufacturing output, inventories, and other activities meet the requirements of the salesforecast and strategic business objectives, such as profitability, productivity, good labor

relations, competitive customer lead times, and low inventories.

Production Planning ActivitiesThe activity involves developing a production plan, accompanying budgets and financial

statements, plans for materials and work force requirements. Production planning must establishproduction rates that will satisfy customer demand and accomplish the objectives of the strategic

business plan, by maintaining, raising or lowering inventories or backlogs, while at the same

time keeping the work force stable.


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Finance Production

Marketing

Production

Plan

Materials Others

Finance Production

Marketing

Production

Plan

Materials Others

Production planning, also known as sales and operations planning, affects many functions and is

usually a cross-functional activity requiring input from marketing, production, finance, materialsand other functions when necessary.

As it is not required to be very detailed, production planning is usually at the product grouplevel. Products are grouped according to the similarity of their production processes.

The plan generally covers a 12 month time period and makes allowances for seasonal variation

in product demand where necessary. The production plan is concerned with:

planning for each product group

maintaining inventory levels to optimize the balance between cost and customer service

identifying required resources

identifying gaps between resources currently available and requirements

Production Planning or Sales and Operations Planning StrategiesThe traditional approach of developing a production plan is evolving toward the concept of sales

and operations planning. The change of title is important as it highlights the importance of salesand marketing having a direct involvement in the plan. The title of production plan does not referto the fact that this plan is the combined effort of several functions within an organization. It

implies that the plan is made by production only. Production planning is much more effectivewhen sales and marketing are directly involved.

The two main strategies for production planning are the chase strategy, which strives to producethe amounts required by demand in each period, and the level production strategy, which aims toproduce at a constant rate that is equal to the average demand. Sometimes a combination, or

hybrid, of these strategies is used. So a sales and operations plan may employ:

Match / chase strategy

Level production strategy

Hybrid or combination strategy

Demand Matching / Chase Strategy

This strategy requires that production varies to meet demand and inventory levels remain stableas a result. The company manufactures just enough at any time to exactly meet demand. Such a

strategy must be used in many industries, for example, restaurants, courier services, and

telecommunications.


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0

5

10

15

20

25

30

35

40

Jan Apr Jul Oc

tJan Ap

r Jul Oct

Jan

Apr Jul Oc

t

Demand

Production

Figure 1 Chase Strategy

This strategy requires that a company is capable of meeting peak demand without relying onstockpiles of finished product. In some cases, this may require hiring and training additional

temporary workers, and operating shifts or overtime. Although these measures add cost, they canbe offset against the savings made by maintaining minimum inventory levels, which is the main

advantage of this strategy.

Advantages Disadvantages

Stable inventory levels

Production is flexibleenough to meet demand

requirements

Increased hiring, training, overtime, and shift costs

Layoffs adversely affect employee morale

Sufficient skilled workers may not be available

Increased cost of ensuring plant capacity matchespeak demand

Level Production Strategy

The level production strategy maintains a constant amount of production which is equal to theaverage demand over the period. Each day of operation will result in the same amount of

production. When demand is lower than the average, inventories of finished goods are built up.These can be used to supplement production when demand levels are higher than production.Some seasonal products, for example, Christmas tree lights, require level production as the costs

of continually laying off workers then rehiring and retraining would be prohibitive.

0

5

10

15

20

25

30

35

40

Jan Apr Jul Oc

tJan Ap

r Jul Oct

Jan Apr Jul Oc

t

Demand

Production

Figure 2 Level Production Strategy


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The main advantage of this strategy is the stability of the production process. Companies do notneed to have excess capacity to meet peak demand and they can maintain a stable work force.

However, when demand is low, inventory levels will rise, and the costs of storing and managingthis inventory will also rise. To meet demand levels, the company will need to accurately predict

the amount of working days available and use this to average the total demand into the dailyproduction requirement.

Advantages Disadvantages

Avoids the labor costs associated withdemand matching

Plant capacity is not required to match

peak demand

Increased inventory costs

Depends on accurate forecasting ofdemand over the year and available

working days

1. Given the demand figures below and the number of working days eachmonth, calculate the amount that must be produced each day if using a levelproduction strategy to meet demand.

Jan Feb Mar Apr May Jun

10 18 25 27 29 32 DemandReview Q

21 20 23 22 20 21 Work Days

Daily Production Rate:

Hybrid StrategiesAn unending number of combinations between these two strategies are possible. The importanttask is to find the best fit for the company, its objectives, its product, and environment. Most

usually, combination strategies produce at full capacity for part of the cycle and either lower orstop production at other times. The strategy should strive to balance production and inventory

costs at the optimum level to meet demand.

0

5

10

15

20

25

30

35

Jan Feb

Mar

Apr

May Jun Ju

lAug

Sep Oc

tNo

vDec

Demand

Production

Figure 3 Hybrid Strategy

This example of a hybrid strategy (shown above) employs full capacity throughout the summer

months and reduces production levels when demand drops in the winter months.


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Sub-Contracting

Although this is not strictly a production strategy, as the production is undertaken by another

company, it is a way of quickly achieving the required capacity without the complexities andexpense of increasing plant capacity and changing production levels.

Subcontracting is useful for dealing with changing demand although it can be expensive. Often

the cost of such items would be greater than if the items were made in the plant. Whencalculating the cost of sub-contracted items its important to factor in not only the item cost, but

also the costs of purchasing, transporting, and checking the quality of the item.

Make-to-Stock Production Planning

Frozen foods, retail clothing, soft drinks and household products are all examples of make-to-stock production, where products are stored as finished goods inventory before an order isreceived from a customer. Make-to-stock production plans tend to be used when:

Demand is steady and predictableThere are few product options

The products have a long shelf life

The market expects delivery much faster than the time needed to make the product

The act of planning for make-to-stock production focuses on the level of inventory rather than

the level of demand. The information required includes the current inventory levels, the desiredinventory levels, any back orders, and the period of time to plan for.

Creating a Level Production Plan

This section looks at the steps involved in making a level production plan for make-to-stockgoods. The general procedure for developing a level production plan is as follows:

1. Calculate the forecast demand for the planning horizon

2. Determine the opening inventory and desired ending inventory levels

3. Identify the total number of back orders (orders that are late for delivery)

4. Calculate the total production requirement by adding the total forecast, back orders andending inventory requirements then subtracting the opening inventory balance.

5. Calculate the ending inventory for each period by adding production to the existing

inventory and subtracting the demand for that period.

Level Production Planning Example

KuteKidz clothing manufacturers are planning produc tion for thecoming 12 months. They have identified all the information they

require to make a level production plan for their caterpillar t-shirtproduction line.

They make these t-shirts for the 2 to 5 year old age group in a range of colors and with long orshort sleeves, all with the caterpillar graphic added. The production plan is concerned only withpredicting the total production of all caterpillar t-shirts for the year. This product is made-to-

stock. The company aim to minimize costs by maintaining level production and reducing theirinventory to a safe level.


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Total Demand 12500

Current Inventory 2600

Current Back Orders 700

Required Ending Inventory 1000

Period 12 months

The required total production is calculated in the following way:

Total Production = total forecast + back orders + ending inventory opening inventory

Using the figures recorded above, this gives the following equation:

Total production = 1250 + 700 + 1000 2600

Total production = 11600

This total production figure is then divided by the number of production days available in the

year to give the required daily production figures (note that the daily production is rounded up tothe nearest whole unit):

Daily production = 11600 / 254

Daily production = 46

The number of working days in each month determines the production rate each month:

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

Working days 21 20 23 22 20 21 22 21 22 20 22 21

Production 966 920 1058 1012 920 966 1012 966 1012 920 966 1012

Once production rates have been set for each period, the ending inventory for each period can be

calculated using the following formula:

Ending inventory = opening inventory + production demand

Assuming demand for the product is fairly stable at 1042 units per month and that the back

orders are fulfilled in January; the ending inventories for each period are as follows:

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

Production 966 920 1058 1012 920 966 1012 966 1012 920 966 1012

EndingInventory

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

Note that the ending inventory for one period becomes the opening inventory for the next period.

For example, the following January, the opening inventory will be 1126. Production is expected

to reach 1012, and the demand for January is expected to be 1200. Using the formula above tocalculate the ending inventory:


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Ending inventory = 1126 + 1012 1140

Ending inventory = 998

2. If the opening inventory for the month of January is 500 units, demand is

1000 units, there are no back orders, and production is 1200 units, what willthe ending inventory be?

Review Q

A. 300

B. 700

C. 1200

D. 1700

3. Given that the opening inventory is 100 units, calculate the planned endinginventory for each month below, using the information provided about

demand and production rates.


100 180 253 279 294 322 DemandReview Q

236 225 259 247 225 236 Production

Inventory

4. Fresco Frozen Fruits want to develop a level production plan for six monthsfor their summer fruits packs. The opening inventory level is 400. They intend

to reach an ending inventory level of 520. Assuming equal periods and usingthe total production and ending inventory formulae, calculate the planned

production and inventory levels for each period using the demand data below.


400 480 520 560 540 440 Demand

Review Q

Production

Inventory

Resource Requirements Planning

At this stage in the planning process the company knows what is required and when it is

required. The question now is whether or not the company has the capacity to manufacture what

is required. The production plan will only be workable if there is sufficient capacity to achieve


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the planned production levels. Where there is insufficient capacity, plans must be made toreconcile the differences.

A bill of resources is useful when addressing capacity issues. It shows the quantity of critical

resources needed to make an average unit of a product group.The table below is an example of a resources bill for a beverage company. The two main product

lines are fruit smoothies and yogurt smoothies. The resources bill lists the amount of fruit, yogurtand labor required to make one case of smoothies.

Product Fruit (KG) Yogurt (Litres) Labour (Minutes)

Fruit Smoothie 8 0 15

Yogurt Smoothie 4 1.5 17

Master Production Schedule (MPS)

Once production planning has been completed, the next step is the preparation of a master

production schedule (MPS), an important planning tool and a vital link in the planning system.The MPS forms the basis of communication between sales and manufacturing. Using the MPS asa contract between sales and production means that sales can make valid order promises.

However, the MPS is not a rigid plan. It is a referencepoint between manufacturing and sale and can be

changed as required when there are changes in demand

of capacity.The MPS builds on the information available in the

production plan and other sources to provide a detailedpicture of the demand for individual end items by date

and quantity. While the production plan providesmonthly aggregate requirements for product groups, theMPS is much more detailed, providing weekly

requirements for each single product item.

Objectives

The MPS strives to form a detailed plan that fulfils the following objectives:Achieve desired customer service levels

Make the most efficient use of resources

Maintain a desirable level of inventory

It is limited by the production plan and should therefore aggregate to the same figures for each

product group as detailed in the production plan. The MPS must balance the demand identifiedby sales and marketing with the availability of resources.

Value of the MPS

The MPS is a link between planning and actual manufacturing. It is used as the basis forcalculating the capacity and resources required to fulfil the production plan.


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The MPS is the main driver of the material requirements plan. Along with the bills of material, itcan determine what components are needed from manufacturing and what components must be

purchased. The MPS is a priority plan for manufacturing.

Inputs

The MPS must take into account the forecast, production plan, and other important

considerations such as the availability of material, the availability of capacity, and managementpolicies and goals. The information required to develop an MPS is found in:

The production plan Forecasts for individual end items

Actual orders received fromcustomers

Inventory levels for individual enditems

Limits of capacity Orders for stock replenishment

MPS ElementsAn MPS is a series of time-based quantities for the end product produced by the organization.The MPS details the expected demand or quantities for a product's constituent components and

the expected timings or dates of these demands. It is the anticipated production schedule for allcomponents that are assigned to the master scheduler.

Time Period

The time period of an MPS in which the quantity of an item appears meansthat this quantity is to be completed through the final operation in thatparticular period. The time period is known as a time bucket. Time buckets

can be monthly, weekly, daily, or hourly. It is usual for most manufacturingcompanies to have time buckets of one week.

Safe ComponentsIn some organizations, only certain components are included in the MPS. Furthermore, thesecomponents are classified according to the number of customers that regularly purchase them or

the number of products that they can be used for. These components are regarded as being safe,in that they have a limited risk of becoming obsolete and, as such, the significance of

overstocking is low. The calculation analysis for their procurement is based on historic or futureforecast data but not from customer orders. This data is combined with other associated data thatis based on labour and equipment resource availability.

Ad-Hoc ComponentsThere are usually other components to be produced or procured that may or may not be included

in the MPS. However, labour and equipment resource capacity must be provided for these too,often from common or shared capacities.

System Forecast

A material requirements planning (MRP) system generates a system forecast that is based on theinput of data to the system by the scheduler or materials manager at the start of the planning

year. This data is for the whole year so that there is a forecast for product requirements beyondthe planning period.


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The planning period is the number of detailed time buckets in each planning run of the systemand is usually a number of weeks. The system forecast assumes the role of the manual forecast in

an MPS if the latter is missing.

Manual Forecast

Information from the manual forecast is entered by the scheduler or materials manager to thetime buckets of the MPS in which there are no purchase orders (POs).Beyond the fixed period, the manual forecast will be used by the MPS to drive the MRP. Thefixed period is the number of time buckets during which a quantity cannot be changed.

Therefore, production and purchasing are given a fixed plan for a period of time and they do nothave to change their production and POs respectively, every time the MPS and MRP are run.

Actual Orders

Actual orders are POs that have been placed by customers. These order quantities must becompleted and shipped to the customers in the relevant time bucket. Customers can place orders

at any time, although quantities may have to be above, and in multiples of, minimum order

quantities. The order quantities and multiples will depend on the type of products being supplied.

Minimum Order Quantity

To illustrate the term, take the example of the sale of beer. Some beers are only sold by themanufacturers in kegs. The minimum order quantity of beer is therefore, one keg. It would not be

possible for retail outlets, such as bars, to buy a quantity of beer in pints or in litres from themanufacturers.

Total Demand

This is the actual demand quantity that the MPS will use to generate the data that drives theMRP.

Starting Inventory

This is the number of units that are in the finished goods warehouse at the start of the planningperiod. It is different from initial inventory.


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MPS Calculations

Firm Planned Orders

These allow the scheduler to force the MRP system to plan in a particular way, by overriding lotsize or lead-time rules. It involves a manual input to the MPS and the scheduler will have to be

alert to possible unforeseen repercussions. For example, the scheduler will have to ensure thatshipments are being made to customers and that there is not a build-up of excessive quantities offinished goods in the warehouse.

Net Requirements

The net requirements calculation for a period of the MPS uses total values as opposed to single

values.

Projected Inventory

This is the expected number of units to be in stock during a particular time bucket of theplanning period. Projected inventory helps the scheduler to view the available inventory in future

time buckets, if everything goes according to plan. The projected inventory for a particular timebucket will become the initial inventory for the next time bucket.

Available to Promise

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

calculation.


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MPS in Different Environments

The MPS needs to represent what will be manufactured at the most efficient level. If the MPS

covers too many items, it will be very difficult to manage effectively. If it is not detailed enough,production will suffer. As a general rule, master scheduling should occur where the smallest

number of product options exists.

In make-to-stock environments, a limited number of items are assembled froma larger number of components, for example, video recorders or computers.

The MPS should in this case be a schedule of finished goods items.

In a make-to-order environment, generally many different end items can beproduced from a relatively small number of raw materials. One example iscustom-tailored clothes. Another example is car manufacturing. The

subassemblies for many cars will be the same but each car manufactured willdiffer in specific options such as color, stereo, sunroof, and electric windows.

The MPS in this case is a schedule of the actual customer orders.

Assemble to order environments use many raw materials to form basiccomponents and subassemblies. However, these components and

subassemblies can provide a great variety of finished products.

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

customer orders.

MPS DevelopmentThere are three phases in the preparation of an MPS:

Developing a preliminary MPS

Checking the preliminary MPS against available capacity

Resolving differences between the preliminary MPS and available capacity

Preliminary MPS

Earth Mother, a producer of baby food products, makes to stock several differenttypes of organic baby food. The food is prepared in batches and stored as finished

goods inventory. Their organic pear and banana dessert is produced in batches of1000. The on-hand or opening inventory is expected to be 800 units.

Period 1 2 3 4 5 6

Forecast 600 600 600 600 600 600

Projected Available 800 200 600 0 400 800 200

MPS Receipt 1000 1000 1000

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

E n d P r o d u c t

R a w M a t e r i a l

MP SE n d P r o d u c t

R a w M a t e r i a l

MP S

End Product

Raw Material

MPS

FAS

End Product

Raw Material

MPS

End Product

Raw Material

MPS

FAS

End Produc t

Raw Mate r ia l

MPS F A S

End Produc t

Raw Mate r ia l

MPS F A S


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As the demand in period 2 will not be satisfied by the inventory available, an MPS receipt for1000 is scheduled for that week. This means that the projected availability at the end of period 2

will be 600 (200 carried over in inventory, plus 1000 in production less 600 demand).

In period 3, the forecast demand matches the available inventory. At this point inventory levelsare zero. So, to satisfy production in period 4 a further batch must be produced.

The remainder of the batch in period 4 is available in inventory but it is not sufficient to satisfydemand for period 5 so a further batch is produced. This leaves 800 in inventory which is

sufficient to satisfy demand in period 6 and still leaves 200 units in inventory.

This process must be followed for each individual product item in thefamily. The MPS is then checked to ensure that the planned production

for all the group items and the total ending inventory agree with theproduction plan.

The MPS is an expansion of the production plan in greater detail. It must

always agree with the figures in the production plan.

Rough Cut Capacity Planning (RCCP)

RCCP is a check to ensure that the critical resources required to support the preliminary MPS are

available. RCCP determines the impact of the MPS on resources:

By checking sample key resource, for example, manpower, machine hours, storage,standard costs, the shipping plan (in monetary terms), and inventory levels

In order to ensure production capacity is feasible

If the proposed MPS is not feasible, production control should inform management. MPS andRCCP plans are developed interactively. In RCCP, a bill of resources is attached to each of theitems in the MPS, and the capacity plan is derived by exploding the MPS against the bill ofresources. No consideration is given to component inventories. The main aim of RCCP is to

identify bottleneck work centers and availability issues in critical resources.

Resolving Differences

When the available capacity is greater than the required capacity, the MPS is workable. If that isnot the case, either the available capacity must be adjusted by means of overtime, extra shifts,extra work centers and temporary workers or subcontracting. If this is not possible, the MPS

must be revised to fit available capacity.

Evaluating the MPS

Once the MPS is agreed it must then be judged on its merits in three criteria:

Does the MPS remain within capacity restraints in each period and make the best use ofresources

Does the MPS ensure that acceptable customer service will be provided: that due dateswill be met

Does the MPS avoid excessive production costs such as overtime or extra shifts.

The MPS should be realistic and workable. It provides detailed information about the antipicated

manufacturing schedule. It is not a sales forecast, a wish list or a final assembly schedule.

Production Plan

Master Production

Schedule

Production Plan

Master Production

Schedule


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Final Assembly Schedule

The final assembly schedule (FAS) is used when there are many options and combinations of

subassemblies, for which it is difficult to forecast detailed customer demand. The MPS willgenerally deal with the components in this case. The final assembly then only takes place when

the customer places an order.

Take for example car manufacture. The customer can choose optionssuch as the colour, type of stereo equipment, and seat covers. The MPS

deals with the basic car. The FAS ensures that the extras are added asspecified by each customer.

The FAS schedules customer orders as they arrive. It is based on the components planned in the

MPS and is responsible fro scheduling from production through final assembly to customershipment.

MPS, Sales and Delivery Promises

The MPS is an achievable plan of production built on forecasts and actual demand. If the MPS is

unrealistic the results are overloaded capacity, late orders, and unreliable delivery promises.Once the production is underway and customer orders start to come in, it must be possible tomake valid delivery promises.

Available-to-Promise

As firm orders are received, they consume available capacity or inventory. The remaininginventory is available to promise (ATP).

ATP is the uncommitted part of finished goods inventory and planned production maintained in

the master schedule to support customer order promising. The ATP is the uncommitted inventorybalance in the first period. It is generally calculated for each period in which an MPS receipt isscheduled.

You calculate ATP by adding scheduled receipts to the opening inventory and subtracting all

actual orders scheduled before the next MPS scheduled receipt. A scheduled receipt is an orderthat has been issued to manufacturing or to a supplier for more material.

In the following scenario the opening inventory is 800 units.

Period 1 2 3 4 5

Customer Orders 600 600 600 600 600

MPS Receipt 1200 1000 1000

ATP 200 0 400

ATP for the first period is equal to the opening inventory less all customer orders due before the

next MPS receipt. As opening inventory is 800 and 600 orders are scheduled before the MPSreceipt in period 2, the amount available to promise is 200.

In period 2, the ATP is equal to the MPS receipt minus all customer orders due before the nextMPS receipt. In this case, the MPS is 1200 and available inventory is 200, but the customerorders before period 4 total 1200 so ATP is 0.

Each ATP calculation assumes that the entire ATP will be sold before the next scheduled receipt.


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5. Assuming there is another MPS receipt in period 6, what is the ATP forperiod 5?

Review Q

A. 0

B. 400

C. 600

D. 800

Planning Horizons

The planning horizon is the time projected by the master schedule. It is set to cover a minimumof cumulative lead time plus time for lot sizing low-level components and for capacity changes

of primary work centers or of key suppliers. However, the planning horizon is often longer thanthis in order to give greater visibility and improve the chances of identifying and avoiding future

problems, for example capacity issues.

If a final assembly schedule is used, the planning horizon for that schedule must include all thetime needed to assemble the customers order. The time needed to manufacture the components

will be included in the planning horizon of the MPS

Time Fences

Although the MPS spans the cumulative lead time, there are

differences in the way each part of the MPS operates,particularly with regard to changes. Although changes will and

do occur, their impact is markedly different depending on how

far out they are. The following graphic explains the concept.

ActualOrders

Actual and ForecastDemand

Forecast

Demand Only

Fixed Period

Due

Date

0

Final

Assembly

Time Fence

2 weeks

Cumulative LeadTime Fence

26 Weeks

Slushy Period Liquid Period

ActualOrders

Actual and ForecastDemand

Forecast

Demand Only

Fixed Period

Due

Date

0

Final

Assembly

Time Fence

2 weeks

Cumulative LeadTime Fence

26 Weeks

Slushy Period Liquid Period

Fixed Period

During the fixed or firmed period, the actual orders are the drivers and make up the totaldemand. Therefore, total demand will be equal to actual orders. Capacity and materials are

committed to actual orders I this period. Changes here lead to increased cost, reduced efficiencyand poor customer service. During this period, only emergency changes may be made.

Beyond the Fixed Period

Outside the fixed order period, the manual forecast is the driver, regardless of whether there isactual customer demand in the same period or not. Therefore, the total demand is equal to the

manual forecast. In the first part of this period, the slushy zone, some firm planned orders maybe available so capacity and materials are committed to some extent. However, there is still room


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for tradeoffs. Where material and capacity are available, MPS changes are possible here. If not,other orders may be shifted around.

In the liquid zone any change to the MPS is possible once it remains within the limits of the

production plan. Changes in this zone are common and often automatically calculated bycomputer.


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Summary

This lesson provided a basic overview of the purpose and functions of production planning and

master production scheduling.You should be able to:

Identify features of a basic level production plan for make-to-stock products

Describe relationships between resource requirements planning and production planning

State the purpose of a master production schedule (MPS)

Identify the relationship between the MPS and the production plan

Describe features of a simple MPS and rough-cut capacity plan

Describe the importance of the MPS to sales with regard to promises of delivery

Further Reading

Introduction to Materials Management, JR Tony Arnold, CFPIM,

CIRM and Stephen Chapman CFPIM

APICS Dictionary

10th edition, 2002


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Review

The following questions are designed to test your recall of the material covered in

lesson 3. The answers are available in the appendix of this workbook.

6. A production plan will have all of the following except:

A. Shipment plan

B. Product families

C. Inventory plan

D. Daily Production

7. Choose the most appropriate statement(s) to complete the following sentence: Theproduction plan:

1. sets the level of production in activities for some time in the future

2. integrates the capabilities and capacities of the factory with the market

3. sets the production level to achieve the overall business goal of the company

A. 1. only

B. 1. and 2.

C. All three statements

D. 1 and 3

8. You are the master scheduler in a job shop production environment. One of your largest

customers has asked if you can deliver an order late next week but you have some shortterm capacity constraints. Which of the following can you do to ensure the order can bedelivered?

1. Add an additional shift in three weeks time

2.

Organize overtime 3. Build inventory in slower production times

4. Subcontract work to another intra-company production facility

A. All except 1

B. All except 2

C. All except 3

D. 4 only


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9. Which manufacturing strategies are used when developing a production plan?

A. Chase strategy and level production

B. Delphi strategy and inventory reduction

C. Delphi strategy and level production

D. Inventory reduction and level production

10. Which are inputs to a realistic MPS:

A. Production plan, forecasts for end items, and product costs for end items

B. Production plan, forecasts for end items, and capacity constraints

C. forecasts for end items, capacity constraints, trend analysis, and product costs for enditems

D. Trend analysis, product costs for end items and production plan

11. Choose three main objectives when establishing an MPS:

A. Efficient use of resources

B. Efficient final assembly

C. Improved customer service levels

D. Efficient use of inventory

E. Inventory reduction

12. Final assembly scheduling occurs when:

A. A customer order is received

B. The build schedule is planned

C. A customer forecast is received

D. The MPS has been developed

E. Capacity is limited

12. The diagram represents a make to stock environment. Howare customer orders satisfied in this type of manufacturingenvironment?

A. Capacity review

B. Sub-assembly inventory

C. Finished goods inventory

D. Customization of components

End Product

Raw Material

MPSEnd Product

Raw Material

MPS


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Whats Next?

Lesson 3 covered the basic characteristics and methods of production planning and master

production scheduling.

You should review your work before progressing to the next lesson which is:

Supply Chain Management Basics Lesson 4 Material Requirements Planning (MRP)


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Appendix


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Answers to Review Questions

Lesson 2 Review

1. 23.5

2. 700

3.


100 180 253 279 294 322 Demand

236 225 259 247 225 236 Production

236 281 287 255 186 100 Inventory

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


400 480 520 560 540 440 Demand

510 510 510 510 510 510 Production

510 530 540 480 450 520 Inventory

5. 400

6. Option D

A production plan is usually presented in monthly figures showing shipments, production andinventory (or unfinished customer orders) broken down by product families.

7. Option CThe production plan specifies the overall level of manufacturing output planned to be produced,

usually stated as monthly rates for each product family. It usually spans a year.

8. Option A. The 2nd, 3rd and 4th actions could be taken.

Creating an extra shift in three weeks time is unlikely to create the inventory required in time forthe customers requirements. Short term capacity is increased by overtime, inventory orsubcontracting. The use of overtime is a way to increase quickly a short term capacity problem.

Adding an additional shift could be too long for the customer to wait.

9. Option A.

The chase strategy requires that production varies to meet demand and inventory levels remainstable as a result. The company manufactures just enough at any time to exactly meet demand.


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Such a strategy must be used in many industries, for example, restaurants, courier services, andtelecommunications. This strategy requires that a company is capable of meeting peak demand

without relying on stockpiles of finished product. In some cases, this may require hiring andtraining additional temporary workers, and operating shifts or overtime. Although these

measures add cost, they can be offset against the savings made by maintaining minimuminventory levels, which is the main advantage of this strategy.

The level production strategy maintains a constant amount of production which is equal to the

average demand over the period. Each day of operation will result in the same amount ofproduction. When demand is lower than the average, inventories of finished goods are built up.These can be used to supplement production when demand levels are higher than production.

Some seasonal products, for example, Christmas tree lights, require level production as the costsof continually laying off workers then rehiring and retraining would be prohibitive.

10. Option B

The production plan, forecasts and capacity constraints are all inputs to the MPS. Trend analyses

without specific forecasts are of no use to the MPS. Costs are not a necessary input.

11. Options A, C and D

The master scheduler must make sure labour, equipment, material, and inventory are being usedefficiently to maintain high levels of customer service. Inventory reduction is not a key objective

of an MPS. Efficient final assembly would be developed by a final assembly schedule.

12. Option A

Final assembly scheduling occurs when a customer order has been received. The FAS is a buildschedule that ensures customers get exactly what they ordered. Usually an FAS is developed

when there are a variety of options for the customer to order. If the FAS was prepared onforecasts, the organization could be left with inventory that may never be ordered.

13. Option C

In a make to stock environment, customer orders are shipped from finished goods inventory as

products are made and placed in stock.


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Glossary

Term Definition

assemble-to-order

Assemble-to-order is a production strategy where key components are stockedin anticipation of customer orders. Assembly is triggered by receipt of an

order. This is useful when a large number of products use commoncomponents.

Available-to-promise (ATP)

The uncommitted portion of a companys inventory and planned productionmaintained in the master schedule to support customer order promising. The

ATP quantity is the uncommitted inventory balance in the first period. It is

normally calculated for each period in which an MPS receipt is scheduled.

Bill of material

(BOM)

A listing of all the subassemblies, intermediates, parts and raw materials

required for a parent assembly. The BOM shows the quantity of each and isused in conjunction with the MPS to calculate production orders and purchaserequisitions. Also called a formula, recipe or ingredients list in some process

industries.

Chase method orstrategy

A production planning method that maintains a stable inventory level whileproduction levels vary to meet demand.

Cumulative leadtime Cumulative lead time is the longest planned length of time to accomplish theactivity in question. For any item planned through MRP, it is the longest lead

time in the bill of materials item list.

Delivery leadtime

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

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

Level production A production planning method that maintains a stable production rate while

inventory levels fluctuate according to the level of demand.

Make-to-order Make-to-order is a production strategy where a product or service can bemade after receipt of a customers order. The final product is a combination ofstandard items and customized items.

Make-to-stock Make-to-stock is a production strategy where products are finished before

receipt of a customer order. Customer orders are filled from existing stocks offinished goods and production orders are used to replenish those stocks.

Master

Production

Schedule (MPS)

The anticipated build schedule for those items assigned to the master

scheduler. It becomes a set of planning numbers that drive materialrequirements planning. The MPS represents what the company plans to

produce expressed in quantities and dates.


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Planninghorizon

The amount of time the master schedule extends into he future. This isnormally set to cover the cumulative lead time plus time for lot sizing and for

capacity changes of primary work centers.

productionactivity andcontrol (PAC)

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

production

planning

Setting the overall level of manufacturing output required to satisfy the sales

plan or forecast while meeting objectives such as profitability, productivity,and competitive lead times. The production plan should aim to fulfil

requirements while maintaining a stable work force where possible.Production planning is usually a cross-functional activity with input frommarketing and other functions.

Resource

Planning (RP)

Capacity planning at the business plan level .this establishes and measures

long-range capacity. It is based on the production plan but may be driven byhigher level plans such as the business plan. It addresses long range planning

issues.

resourcerequirementsplanning

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

rough-cut

capacityplanning

(RCCP)

The process of converting the master production schedule into requirements

for resources such as labor, machinery, warehouse space, suppliercapabilities. Demonstrated capacity is examined for each key resource.

sales andoperationsplanning

(S&OP)

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

the business.

Subcontracting Sending production work to another manufacturer

Time fence A policy that notes where various restrictions or changes in operatingprocedures takes place.

Documents

Basics of Supply Chain Managment (Lesson 3)