Lecture 3 Production Planning System Books Introduction to Materials Management, Sixth Edition, J. R. Tony Arnold, P.E., CFPIM, CIRM, Fleming College,

Lecture 3

Production Planning System

Books• Introduction to Materials Management, Sixth Edition, J. R. Tony Arnold, P.E., CFPIM, CIRM, Fleming

College, Emeritus, Stephen N. Chapman, Ph.D., CFPIM, North Carolina State University, Lloyd M. Clive, P.E., CFPIM, Fleming College

• Operations Management for Competitive Advantage, 11th Edition, by Chase, Jacobs, and Aquilano, 2005, N.Y.: McGraw-Hill/Irwin.

Manufacturing’s Objectives

• The goal of manufacturing is to produce– The right goods– Of the right quality– In the right quantities– At the right time– At minimum cost

Objectives

• Manufacturing Planning and Control System• Sales and operations planning (SOP)• Making production plan• Developing production plan• Market to stock production plan• Market to order production plan

Four Basic Questions

What must we get?

What do wealreadyhave?

What doesit take tomake it?

What arewe goingto make?

Priority

The APICS Dictionary defines priority as “the relative importance of jobs, i.e., the sequence in which jobs should be worked on.” Priority refers to what is needed, how much is needed, and when it is needed.

Capacity

The APICS Dictionary defines capacity as “the capability of a worker, machine, work center, plant or organization to produce output per time period.”

Production Plan

Master ProductionSchedule (MPS)

Material RequirementsPlan (MRP)

Production ActivityControl (PAC)

ResourceRequirements

Plan (RRP)

Rough-CutCapacity

Plan (RCCP)

CapacityRequirements

Plan (CRP)

Input/Output Control

Operation Sequencing

Strategic BusinessPlan

Prio

rity

Man

agem

ent T

echn

ique

s Capacity M

anagement Techniques

Manufacturing Planning and Control System

• Strategic Business PlanA statement of the major goals and objectives the company

expects to achieve over the next 2-10 years or more.– broad/general direction– low level of detail– long-range forecasts– responsibility of senior management– includes participation from Marketing, Finance, and

Production– usually reviewed every six months to a year


• Production Plan Concerns– Quantities of each product group required to be

produced– The desired inventory levels– The resources of equipment, labor, and material needed

in each period– The availability of resources needed


• Production Plan must– Satisfy market demand within resources available– Assist the implementation of the strategic business plan– Be based upon families of products– Be fairly low level of detail– Address a planning horizon of six to 18 months– Be reviewed each month or quarter


• Master Production ScheduleA plan for the production of individual end items (finished

goods). – breaks down production plan– list the quantity of each end item to be made– level of detail is higher than the production plan -

developed for individual end items– planning horizon extends three to 18 months– reviewed and changed weekly or monthly


• Material Requirements PlanA plan for the production and purchase of the components

used in making the items in the MPS– Production control and purchasing use MRP to decide

the purchase or manufacture of specific items– Level of detail is high– Determines when the components and parts are needed – Planning horizon is at least as long as the combined

purchase and manufacture lead times (3 to 18 months)– Usually reviewed daily or weekly


• Production Activity Control and Purchasing– Represents the implementation and control phase of the

production planning and control system– Purchasing is responsible for establishing and

controlling the flow of raw materials into the factory– PAC is responsible for planning and controlling the

flow of work through the factory– Planning horizon is very short, a day to a month– Level of detail is high– Reviewed and revised daily


– What are the priorities - how much of what is to be produced and when?

– What is the available capacity - what resources do we have? • Can we outsource?

– How can differences between priorities and capacity be resolved?

2 At each level in the MPCS, three questions must be answered:

Manufacturing Resource Planning (MRP II)

• Manufacturing resource planning (MRP II) is a method for the effective planning of all resources of a manufacturing company. Ideally, it addresses operational planning in units, financial planning in dollars, and has a simulation capability to answer “what if” questions. It is made up of a variety of functions, each linked together: business planning, sales and operations planning, production planning, master production scheduling, material requirements planning, capacity requirements planning, and the execution support systems for capacity and material. Output from these systems is integrated with financial reports such as the business plan, purchase commitment report, shipping budget, and inventory projections in dollars.

APICS Dictionary, 8th edition, 1995

Sales and operations planning (SOP)

• Medium time range• Benefits:

– Provides a means of updating the strategic business plan

– Provides a means of managing change– Permits better management of production, inventory

and backlog

Making the Production Plan

• PurposeProduction planning is. . . setting the overall level of manufacturing output . . .

and other activities to best satisfy the current planned levels of sales . . . while meeting general business objectives of profitability, productivity . . . etc., as expressed in the overall business plan.

APICS Dictionary, 8th edition, 1995


• Production planning is concerned with– The quantities of each product group in each period. – The desired inventory levels.– The resources of equipment, labor, and material needed in

each period.– The availability of needed resources.

• Why are plans made for product groups?• What should the product groups be based on?


• Production planning characteristics– The time horizon may be more or less than 12

months, depending on the manufacturing cycle.– Demand is seasonal for many products, but not for

all. Seasonal demand is the worst-case scenario.– A plan is made for families or groups.– Management will have a variety of objectives.

• What might be some management objectives?

Developing the Production Plan

• Three Basic Strategies – Chase (Demand Matching) Strategy: Produce the

amounts that are demanded at any one time– Production Leveling Strategy: Continuously

produce an amount equal to the average demand– Subcontracting: Meeting additional demand

through subcontracting.• Hybrid Strategy: Combination of any of the

above strategies


Chase (demand matching) StrategyThe goal is to produce the amounts demanded at any

given time. Inventory levels remain stable while production varies to meet demand

Uni

ts

1 2 3 4 5 6 7 8 9 10 11 12Periods


• Chase Strategy Disadvantages– As production increases, workers must be hired and

trained. Extra shifts may be needed, and overtime may be necessary. These requirements all increase cost.

– As production decreases, people are laid off and morale suffers,

– When production starts to increase again, the best workers may have other jobs and their skills will not be available.


• Chase Strategy Disadvantages (continued)– Manufacturing must have enough plant capacity to

produce at the highest capacity needed.

• What industries use a chase strategy?


• Production Leveling StrategyThe goal of this strategy is to continuously produce an

amount equal to the average demand.

1 2 3 4 5 6 7 8 9 10 11 12

Uni

ts

Periods


• Production Leveling Strategy– This strategy avoids the disadvantages of demand

matching. However, inventory builds up.

• What are some examples of industries that could use this strategy?


• Subcontracting Strategy– Subcontracting means always producing at the level

of minimum demand and meeting any additional demand through subcontracting

• Major Advantage– Costs associated with excess capacity are avoided– Since production is leveled, there are no costs

associated with changing production levels


• Subcontracting Strategy - Disadvantage– The cost of purchasing may be greater than if the

item were made in the plant– Certain core skills or technologies may be lost


• Hybrid Strategy– Combination of any of the three previous strategies– Production management is responsible for finding the

combination of strategies that minimizes the sum of all costs involved, providing the level of service required, and meeting the objectives of the financial and marketing plans

Developing a Make-to-Stock Production Plan

• Under a make-to-stock production plan, goods are put into inventory and sold from inventory. It is used when– Demand is fairly constant and predictable– Only a few product options exists– Required delivery times are shorter than the time

needed to make the product– Product has a long shelf life

• Information needed for a make-to-stock production plan includes– A forecast by time period for the planning horizon– Opening inventory– Desired ending inventory

• The objective in developing a production plan is to minimize the costs of carrying inventory, changing production levels, and stocking out (not supplying the customer what is wanted when it is wanted).

Developing a Make-to-Stock Production Plan

Making a Level Production Plan

• Procedure for Level Production– Total the forecast demand for the planning horizon– Determine the opening inventory and the desired

ending inventory– Calculate the total production– Calculate the production required each period by

dividing the total production by the number of periods

– Calculate the ending inventory for each period


Period 1 2 3 4 5 Total Forecast Demand 110 120 130 120 120 Production Ending Inventory

Example Problem: (Pg. 29/33)

Opening inventory (OI) = 100 unitsDesired ending inventory (EI) = 80 units

Total production needed = total forecast demand + EI - OI = _____ + _____ - _____ = _______ units

Production each period = 5 units


Ending Inventory for Period 1 = OI + production - forecast demand= ______ + ______ - ______ = ______ units


• How much should be produced each period?• What is the ending inventory for each period?• If the cost of carrying inventory is $5 per case per period

based on ending inventory, what is the total cost of carrying inventory?

• What will be the total cost of the plan?


Answer:a. Total production required = 600 + 80 - 100 = 580 cases b. Ending inventory = OI + production - demand Ending inventory after the first period = 100 + 116 - 110 = 106 cases Ending inv. for period 1 becomes the opening inv. for period 2 Ending inventory (period 2) = 106 + 116 - 120 = 102 cases

Production each period = 5805

= 116 cases


Answer: (continued)c. The total cost of carrying inventory would be:

(106 + 102 + 88 + 84 + 80)($5) = $2300d. There were no stockouts and no changes in the level of

production, $2300 is the total cost of the plan:

Period 1 2 3 4 5 Total Forecast (cases) 110 120 130 120 120 600 Production 116 116 116 116 116 580 Ending Inventory / 100 106 102 88 84 80

Developing a Make-to-Order (Chase Strategy) Production Plan

Using preceding example, suppose that changing the production level by one case costs $20.A change from 50 to 60 would cost

(60 - 50)($20) = $200Opening inventory is 100 cases, and the company wishes

to bring this down to 80 cases in the first period110 - (100 - 80) = 90 cases

Developing a Make-to-Order (Chase Strategy) Production Plan

Cost of changing production level = (60)($20) = $1200Cost of carrying inventory = (80 cases)(5 periods)($5) = $2000

Total cost of the plan = $1200 + $2000 = $3200

Period 0 1 2 3 4 5 Total Demand (cases) 110 120 130 120 120 600 Production 100 90 120 130 120 120 580 Change in Production 10 30 10 10 0 60 Ending Inventory 100 80 80 80 80 80

Assemble to Order

• Assemble-to-order is a subset of make-to-order– several product options exists– customer is not willing to wait until the product is made– manufacturers assemble the component parts from

inventory according to the order– Examples: automobiles and computers

Developing a Make-to-OrderProduction Plan

• Information needed for make-to-order products– Forecast by period for the planning horizon– Opening backlog of customer orders– Desired ending backlog

• BacklogUnfilled customer orders that will be delivered in the future.

Resource Requirements Planning

• The preliminary production plan must be compared with the existing resources of the company. Two questions must be answered:– Are the required resources available?– If not, how will the differences be reconciled?

• Helpful tool is the resource bill or bill of resources

Resource Requirements Planning

• Resource bill or Bill of Resources– shows the quantity of critical resources (materials,

labor, and “bottleneck” operations) needed to make one average unit of the product group

Product Wood(board feet)

Labor(standard hours)

Tables 20 1.31Chairs 10 0.85Stools 5 0.55

Bill of Resources

End of Lecture 3

Documents

Lecture 3 Production Planning System Books Introduction to Materials Management, Sixth Edition, J. R. Tony Arnold, P.E., CFPIM, CIRM, Fleming College,