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 are
we going
to make?
What does
it take to
make it?
What
do we
already
have?
What must
we get?
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.”
Priority Management Techniques
Production Plan
Resource
Requirements
Plan (RRP)
Master Production
Schedule (MPS)
Rough-Cut
Capacity
Plan (RCCP)
Material
Requirements
Plan (MRP)
Capacity
Requirements
Plan (CRP)
Production Activity
Control (PAC)
Input/Output Control
Operation Sequencing
Capacity Management Techniques
Strategic Business
Plan
Manufacturing Planning and Control System
•
Strategic Business Plan
A 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
Manufacturing Planning and Control System
•
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
Manufacturing Planning and Control System
• 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
Manufacturing Planning and Control System
•
Master Production Schedule
A 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
Manufacturing Planning and Control System
•
Material Requirements Plan
A 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
Manufacturing Planning and Control System
•
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
Manufacturing Planning and Control System

At each level in the MPCS, three
questions must be answered:
–
–
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?
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
•
Purpose
Production 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
Making the Production Plan
•
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?
Making the Production Plan
•
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
Developing the Production Plan
1
2
3
4
5 6 7
Periods
8
9
10
11
12
Chase (demand matching) Strategy
The goal is to produce the amounts demanded at any
given time. Inventory levels remain stable while
production varies to meet demand
Developing the Production Plan
•
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.
Developing the Production Plan
•
Chase Strategy Disadvantages (continued)
– Manufacturing must have enough plant capacity to
produce at the highest capacity needed.
•
What industries use a chase strategy?
Developing the Production Plan
•
Production Leveling Strategy
The goal of this strategy is to continuously produce an
amount equal to the average demand.
1
2
3
4
5
6 7 8
Periods
9
10
11
12
Developing the Production Plan
•
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?
Developing the Production Plan
•
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
Developing the Production Plan
•
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
Developing the Production Plan
•
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
–
–
–
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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
Developing a Make-to-Stock Production Plan
•
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).
Making a Level Production Plan
•
Procedure for Level Production
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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
Making a Level Production Plan
Example Problem: (Pg. 29/33)
Period
Forecast Demand
Production
Ending Inventory
1
2
3
4
5 Total
110 120 130 120 120
Opening inventory (OI)
= 100 units
Desired ending inventory (EI) = 80 units
Total production needed = total forecast demand + EI - OI
= _____ + _____ - _____ = _______ units
Production each period =
5
units
Making a Level Production Plan
Ending Inventory for Period 1 = OI + production - forecast demand
= ______ + ______ - ______
= ______ units
Making a Level Production Plan
•
•
•
•
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?
Making a Level Production Plan
Answer:
a. Total production required = 600 + 80 - 100 = 580 cases
580
Production each period =
= 116 cases
5
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
Making a Level Production Plan
Answer: (continued)
c. The total cost of carrying inventory would be:
(106 + 102 + 88 + 84 + 80)($5) = $2300
d. There were no stockouts and no changes in the level of
production, $2300 is the total cost of the plan:
Period
Forecast (cases)
Production
Ending Inventory / 100
1
2
3
4
5 Total
110 120 130 120 120 600
116 116 116 116 116 580
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) = $200
Opening inventory is 100 cases, and the company wishes
to bring this down to 80 cases in the first period
110 - (100 - 80) = 90 cases
Developing a Make-to-Order
(Chase Strategy) Production Plan
Period
Demand (cases)
Production
Change in Production
Ending Inventory
0
1
2
3
4
5 Total
110 120 130 120 120 600
100 90 120 130 120 120 580
10 30 10 10
0
60
100 80 80 80 80 80
Cost of changing production level = (60)($20) = $1200
Cost of carrying inventory = (80 cases)(5 periods)($5) = $2000
Total cost of the plan = $1200 + $2000 = $3200
Assemble to Order
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Assemble-to-order is a subset of make-to-order
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–
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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-Order
Production Plan
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Information needed for make-to-order products
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–
–
•
Forecast by period for the planning horizon
Opening backlog of customer orders
Desired ending backlog
Backlog
Unfilled 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:
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–
•
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
Tables
Chairs
Stools
Bill of Resources
Wood
Labor
(board feet) (standard hours)
20
1.31
10
0.85
5
0.55
End of Lecture 3