Certified in Planning and Inventory
Management (CPIM) Learning System
APICS acknowledges the contributions of the following
individuals to this and previous versions.
Adolfo Alvarez, CPIM
Henry L. E. Barr, CFPIM, CSCP
Lu Bergstrand, CPM
Paul A. Bernard, CIRM
Richard Bernett, CFPIM, CPM
William M. Boyst Jr., CFPIM
Richard L. Bragg, CPIM
Al Bukey, CFPIM, CIRM, CSCP
Jorge E. Calaf, CPIM, CIRM, CPA
Jesús Campos Cortés, CPIM, CIRM,
CSCP, PLS, C.P.M., CPSM,
PMP,PRINCE2, CQIA, CEI, CPF,
CS&OP, CA-AM
Jim Caruso, CPIM, CSCP
Stephen Chapman, PhD, CFPIM, CSCP
Edward C. Cline, CFPIM
John H. Collins
Russell W. Comeaux
Maria Cornwell
Thomas F. Cox, CFPIM, CSCP
Barbara M. Craft, CPIM
Carol L. Davis, CPIM, CSCP
William David DeHart
Lon DeNeui
Kerry Depold, CSCP
Richard Donahoue, CPIM, CSCP, CLTD
Wayne L. Douchkoff
Sharon Dow, CIRM, CPM
Brian J. Dreckshage, CFPIM
Jody Edmond, CPIM, CSCP
Richard A. Godin, CFPIM, CIRM, CSCP
James C. Greathouse, CPIM Barry
Griffin, PhD, CFPIM
Jerome J. Groen, PMP, CFPIM
Debra Hansford, CPIM, CIRM, CSCP,
CPM, CPSM
O. Kermit Hobbs Jr., CFPIM, CIRM
Terry N. Horner, CFPIM
Henry A. Hutchins, CFPIM, CIRM
Instructors in the APICS Atlanta
Chapter
Scott Irving
David T. Jankowski, CFPIM, CSCP
Edward J. Kantor, CPIM
William M. Kerber, Jr., CFPIM
Jack Kerr, CPIM, CSCP, CLTD, C.P.M., Six
Sigma Green Belt
Gerald L. Kilty, CFPIM, CIRM, CSCP
Bonnie Krause-Kapalczynski
Anthony Kren, CFPIM, CIRM, CSCP, CPM
Gary A. Landis, EdD, CFPIM, CIRM,
CSCP
William F. Latham, CFPIM, CIRM, CSCP
William Leedale, CFPIM, CIRM, CSCP
Theodore Lloyd, CPIM
Henry W. Lum
Terry Lunn, CFPIM, CIRM, CSCP
Kare T. Lykins, CPIM, CIRM
Bruce R. MacDermott
David A. Magee, CPIM, CIRM, CSCP
Daniel B. Martin, CPIM, CIRM, CSCP
John Fairbairn
Barry E. Firth, CIRM
Michael D. Ford, CFPIM, CSCP, CQA,
CRE, PITA
Quentin K. Ford, CFPIM
Howard Forman CIRM, CSCP
Susan Franks, CPIM-F, CSCP-F, CLTD-F
Cara Frosch
Jack Kerr, CPIM, CSCP, C.P.M., Six
Sigma Green Belt
Eileen Game-Kulatz, CIRM
Martin R. Gartner, CFPIM, CSCP
Ann K. Gatewood, CFPIM, CIRM
Michel Gavaud, CFPIM, CIRM, CSCP,
CPM
Thomas P. Geraghty, CPIM, CDP
James R. McClanahan, CFPIM, CIRM
Kaye Cee McKay, CFPIM, CSCP
Leila Merabet, CPIM, MBA
Alan L. Milliken CFPIM, CIRM, CSCP,
CPF, MBA
William L. Montgomery, CFPIM, CIRM
William M. Monroe, CFPIM, CIRM, CSCP
Rebecca A. Morgan, CFPIM
Mel N. Nelson, CFPIM, CIRM, CSCP
Susan M. Nelson, CFPIM, CSCP
Charles V. Nemer, CPIM, MALeadership
Michael O’Callaghan, CPIM, CSCP,
CLTD
Murray R. Olsen, CFPIM, CIRM
Timothy L. Ortel, CPIM, CIRM
Zygmunt Osada, CPIM
Ronald C. Parker, CFPIM
Michael J. Pasek, CPIM
James D. Peery
William C. Pendleton, CFPIM
Philip D. Pitkin, CIRM
Paul Pittman, PhD, CFPIM
Barbara B. Riester
Maryanne Ross, CFPIM, CIRM, CSCP
Eric Schaudt, CPIM, CSCP
Fran Scher, PhD, MBA
Paul Schönsleben, PhD
David L. Scott
Arvil J. Sexton, CPIM
Bruce Skalbeck, PhD, CIRM, CSCP
Carolyn Farr Sly, CSCP, CPIM, CPM
Kimberlee D. Snyder, PhD, CPIM
Pamela M. Somers, CPIM, CIRM, CSCP
Angel A. Sosa, CFPIM
Daniel Steele, PhD, CFPIM
Peter W. Stonebraker, PhD, CFPI
Michael W. Stout
Jesse E. Taylor
Merle J. Thomas, Jr., CFPIM
Rob Van Stratum, CPIM, CIRM, CSCP
Nancy Ann Varney
Robert J. Vokurka, PhD, CFPIM, CIRM,
CSCP
Gary Walrath
Reino V. Warren, PhD, CPIM
Joni White, CFPIM, CIRM, CSCP
Rollin J. White, CFPIM, CIRM, CSCP
Blair Williams, CFPIM, CSCP
Mark K. Williams, CFPIM, CSCP
Jim Winger, CPIM-F, CSCP, CLTD, SCORP
Dennis Wojcik
Mary Wojtas
Paula Wright
Anthony Zampello, CPIM, CIRM, CSCP
Henry Zoeller, CFPIM
Lee Zimmerman, CFPIM, CIRM, CSCP
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Notice
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material and information in the companion online
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Version 7.1 © 2022
APICS
APICS
8430 W. Bryn Mawr Ave., Suite 1000
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Introduction to the APICS
CPIM Learning System
Thousands of employers around the world use the APICS
Certified in Planning and Inventory Management (CPIM)
designation to determine if prospective employees have the
needed knowledge and skills to manage production and
inventory operations effectively and efficiently. Being
effective means adding value to the organization in part by
understanding its inventory and operations strategies and
then implementing tactics that help those strategies to
succeed. CPIMs also add value when they find ways to
streamline operations and make them more efficient; this
can directly improve the organization’s profitability.
While some people will use this APICS CPIM Learning System
to help study for the CPIM exam, others will use it as a
means of self-improvement or because they work in a
complementary field and want to know the basics. Part 1 of
the learning system presents these basics and can be used
as a stand-alone course for a wide range of audiences. Part
2 of the course adds the depth that those working directly in
the field will desire.
(Note that the two parts of the learning system mirror the
two parts of the CPIM exam. Earning the CPIM designation
requires passing both parts of the exam.)
This course is largely presented from the perspective of
manufacturers and suppliers. However, many of the
concepts discussed are also applicable in distribution or
service-focused organizations. Every organization
participates in the supply chain in some capacity, from
hospitals to grocery stores, shippers to banks. The larger
functions of physical supply to organizations and physical
distribution of completed work are addressed at a lower
level of detail. If organizations want to remain viable in
today’s global markets, they need to integrate with the
larger supply chain. Better collaboration with internal and
external parties provides more value to the end customer at
a lower total cost than more conventional adversarial
relationships can provide. Both Parts 1 and 2 address how
organizations can integrate with the greater supply chain,
but the primary focus remains on production and inventory
control.
Learners with a strong interest in managing the broader
supply chain might be interested in the APICS Certified
Supply Chain Professional (CSCP) designation, while those
more interested in specializing in logistics (physical supply
and physical distribution) might want to pursue the APICS
Certified Logistics, Transportation and Distribution (CLTD)
designation. Information on these designations can be found
on the APICS website, www.apics.org.
APICS CPIM Learning
System, Part 1
Part 1 of the APICS CPIM Learning System contains six
modules that present the basics of supply chain
management. Part 1 generally follows the same structure as
the Exam Content Manual (ECM); however, minor
differences may occur in order to better suit the needs of
the reader.
Module 1: Supply Chain
Overview
Section A of this module starts by introducing the supply
chain management environment. It shows how
manufacturing fits within this highly interconnected system
and helps it thrive. Since organizations choose many
different ways to compete and succeed, the discussion
starts at the top with strategy and shows how operations
strategies directly flow from and support corporate strategy.
Section B explores how marketing strategies can affect
manufacturing environments by causing changes in
demand; how these strategies are used to determine sales
price and volume is also discussed. This section describes
how manufacturers move their product from creation to the
customer via distribution channels, and it also discusses the
value of market and supplier segmentation.
Section C discusses the basic process surrounding sales and
operations planning, including the functions of each step in
the process.
Section D examines manufacturing strategies, including the
pros
and cons of each major strategy and why they may be
employed by manufacturers in various environments. It
continues on to cover the different manufacturing processes
and layouts, including the benefits of different layouts and
why one layout may be chosen over another for the
production of a given product. This section also discusses
the use of key performance indicators and metrics. Metrics
are important to ensure that adequate organizational
performance is achieved and are equally important in
identifying continuous improvement opportunities.
Section E examines sustainable and socially responsible
supply
chains, including the use of the United Nations Global
Compact when operating a supply chain.
Section A: Operational Objectives to
Meet Competitive Priorities
After completing this section, students will be able to
Describe the operating environment of manufacturers
within the overall supply chain
Discuss the effect of customer expectations, government
regulations, economic conditions, and competition on an
organization
Explain the role the company vision, mission, and values
play in planning and executing a supply chain
Describe the use of strategic buffers in a supply chain
Show how manufacturing fits within and supports the
larger supply chain
Describe how organizations become cross-functional to
enable tradeoff resolution and external integration
Identify manufacturing and supplier objectives and the
role of materials management.
This section introduces the supply chain management
environment, and it shows how manufacturing fits within
this highly interconnected system and helps it thrive. Since
organizations choose many ways to compete and succeed,
the discussion starts with strategy and shows how
operations strategies directly flow from and support
corporate strategy.
Topic 1: Operating Environment
The operating environment for a supply chain requires that
the supply be able to respond changing customer
expectations, government regulations, economic conditions,
and global and domestic competitors.
The Supply Chain
Manufacturers form the core of a supply chain that stretches
from the most upstream raw materials, through various tiers
of suppliers, and then through a downstream distribution
function (which may include retailers), until it reaches the
final customer (who could be an individual or an
organization). A manufacturer may have multiple supply
chains to reflect differences in source materials or
production or distribution methods.
The APICS Dictionary, 16th edition, defines a supply chain
as
the global network used to deliver products and
services from raw materials to end customers
through an engineered flow of information, physical
distribution, and cash.
While the supply chain concept is oriented toward producers
of products, even pure service organizations will have
suppliers and customers and thus will form a supply chain.
The Dictionary defines a service industry as follows:
1) In its narrowest sense, an organization that
provides an intangible product (e.g., medical or
legal advice). 2) In its broadest sense, all
organizations except farming, mining, and
manufacturing. Includes retail trade; wholesale
trade; transportation and utilities; finance,
insurance, and real estate; construction;
professional, personal, and social services; and
local, state, and federal governments.
Professionals who work in the fields of production and
inventory management might be called supply chain
managers, operations managers, or materials managers, or
they might have more focused job titles. Organizations
might have supply chain managers who have a broader
focus or other job roles that focus on production and
inventory control. Regardless of how the organization does
it, both the overall supply chain and production and
inventory control need management.
The Dictionary defines supply chain management as
follows:
The design, planning, execution, control, and
monitoring of supply chain activities with the
objective of creating net value, building a
competitive infrastructure, leveraging worldwide
logistics, synchronizing supply with demand, and
measuring performance globally.
Exhibit 1-1 shows how a supply chain is composed of
various entities that each have upstream partners (toward
the raw materials end of the chain) and downstream
partners (toward the final customer). (Note that B2B refers
to business-to-business commerce.)
Exhibit 1-1: Supply Chain
The Dictionary defines upstream and downstream as
follows.
Upstream: Used as a relative reference within a
firm or supply chain to indicate moving in the
direction of the raw material supplier.
Downstream: Used as a relative reference within a
firm or supply chain to indicate moving in the
direction of the end customer.
The exhibit shows that a supply chain provides certain
distinct functions, such as supply, consolidation,
manufacturing, distribution, wholesale, and retail. These are
called echelons. An echelon can contain many entities that
are serving that particular supply chain function, but it is
still just one echelon. A given supply chain may or may not
have or need a particular echelon. If an echelon adds more
value than it costs, then it is value-added and should be
part of the chain. If it consumes more value than it adds, it
should be eliminated. A consolidation warehouse may add
value, for example, if it reduces transportation costs by
more than the cost of the warehouse, including the profit it
expects to make. Value can be in terms of improving a
material through further processing, or it can be in terms of
a service, such as getting the goods closer to the point of
demand.
The next thing to realize is that a supply chain is always
centered on the organization. If an organization is a
manufacturer that acts as a supplier to an auto plant, for
example, a graphic would show the suppliers upstream (and
perhaps even their suppliers further upstream), and the
auto plant would be a downstream B2B customer. A supply
chain can have a large number of supplier-customer
relationships within it.
The bottom of the exhibit shows that direct-to-customer
interactions could occur beginning from any echelon point,
such as a computer graphics card supplier selling graphics
cards directly to end customers through a website. Many
supply chains provide more than one path for selling
products or services.
Three primary flows need to be managed from the
perspective of an entire supply chain rather than being
individually optimal but ineffective overall:
Flow of information
Flow of cash
Flow of materials and services
The primary flow of materials and services is from left to
right as materials are processed and services are performed
to add value, including the important distribution function
that adds value by making goods and services available at
the point of demand.
Product returns flow in the opposite direction. Returns of
products that end customers don’t want or that are
defective are not the only returns in the supply chain. There
can also be B2B returns across the supply chain; the graphic
shows that returns could be initiated from any downstream
point, such as a manufacturer making a freight claim and
returning damaged deliveries from one of its suppliers or a
distribution center returning unsold inventory as allowed by
contract. The supply chain for returns is called reverse
logistics; this system often needs some investment in
planning and infrastructure to keep it efficient without
disrupting the forward supply chain. Reverse logistics may
also play a role in the recovery of hazardous or valuable
substances at the end of a product’s life. For example,
Samsung provides a box for shipping back empty toner
cartridges so they can be reused. In the Netherlands, 95
percent of a car is recycled at the end of its life. Cell phones
that are traded in are often remanufactured by adding new
external cases and sold again.
As goods flow downstream, payments for the goods
generally flow upstream. (Refunds are obviously the
exception.) In addition, information flows between partners
in both directions. Information on demand and design or
other product requirements flows primarily upstream, but
this could become more of a collaboration or conversation
and go in both directions. Similarly, information on
manufacturing capacity or inventory might flow both ways.
Customer Expectations
The product or service features available in the market at a
given price become a baseline for competitors in that field.
Customer expectations can take the form of rapid design,
product requirements, prices, specific lead times (the time
from order to arrival), quality, delivery frequency,
dependability, product and volume flexibility, and
aesthetics.
Two terms from marketing can help explain why these
expectations seem to be ever increasing.
Minimum customer expectations for lead times or other
specifics are called order qualifiers, defined in the APICS
Dictionary, 16th edition, as follows:
Those competitive characteristics that a firm must
exhibit to be a viable competitor in the
marketplace. For example, a firm may seek to
compete on characteristics other than price, but in
order to “qualify” to compete, its costs and the
related price must be within a certain range to be
considered by its customers.
A good example of an order qualifier that applies to almost
any product is a certain minimum level of quality.
Organizations unable to meet minimum requirements such
as these will not be considered further. (Failure to meet
minimum requirements or unwanted features are
sometimes called order disqualifiers.) Organizations know
this and develop strategies they hope will provide these
minimum requirements in some areas while differentiating
themselves from the competition in other areas to provide a
competitive advantage. If the customer’s criteria for
selection align better with the qualities offered by a product
and its related services than with those offered by the
alternatives, then the product becomes an order winner. The
Dictionary defines order winners as follows:
Those competitive characteristics that cause a
firm’s customers to choose that firm’s goods and
services over those of its competitors. Order
winners can be considered to be competitive
advantages for the firm. Order winners usually
focus on one (rarely more than two) of the following
strategic initiatives: price/cost, quality, delivery
speed, delivery reliability, product design, flexibility,
after-market service, and image.
Order winners can be a unique capability or quality no
competitor has or a combination of price, product features,
quality, and related services that customers will see as a
superior value.
Two forces keep order winners from remaining permanently
at the top. First, different customer groups will have
different priorities and thus different ideas of what is best
value. Second, new products, features, and services—like a
faster processor or rapid delivery—quickly move from the
category of order winners and into the category of order
qualifiers as competitors also adopt them. This helps explain
why product life cycles are shrinking, especially for
innovative products.
Government Regulations
Each nation has its own regulations related to business
operations or buying and selling goods within its borders. All
relevant laws and regulations must be understood, and
plans for ensuring and proving compliance must be made.
Common areas of regulation include taxation, movement of
funds in and out of the country, worker and product safety,
worker and job seeker rights, environmental protection, anticorruption, and legal liability. Understanding and complying
with these regulations will help the organization stay in
business or possibly be a source of competitive advantage if
it can comply at low cost.
In some instances, supranational organizations have made
navigating regulatory and legal differences between
countries easier. Joining a trade bloc or treaty helps to
standardize international trade regulations and
requirements. To that end, the World Trade Organization, the
European Union, and the Organisation for Economic Cooperation and Development all have their own standards
and regulations for trade, shipping, and other shared
economic concerns.
Economic Conditions
The economy will influence demand—or lack of demand—for
an organization’s products and services. Some organizations
diversify to include products that sell well in tough
economies. The economy will also influence market wages
and the availability of qualified workers. Long-term
demographic shifts can influence demand for particular
products and services or the relative age of the workforce
(which impacts worker availability and cost and skill levels).
Global and Domestic Competitors
Competition is now global thanks to the internet and the
shipping container, among other innovations. The internet
makes it easy to find and assess multiple sources for a
product or service as well as conduct many business
communications at very low cost. The shipping container
and oceangoing containerships have reduced the cost of
transportation to the point where goods can be sold in most
parts of the world at a competitive price. While this can be a
blessing because the firm can market its products and
services globally, it is also a curse because few industries
have only local competition today.
Topic 2: Business Strategy and
Supply Chain Planning
This topic discusses the company vision, mission, and
values, which set organizational strategies and goals, and
how a company should best be aligned to meet those
strategies and goals.
Company Vision, Mission, and Core
Values
The foundation of an organization’s business strategy starts
with its vision, mission, and core values. Statements are
written to communicate this foundation internally and
externally. These statements communicate to all
stakeholders (customers, employees, suppliers, and the
general public) the organization’s direction, purpose, and
beliefs. It is important to understand how all three interact
and contribute to developing a strategic business plan that
will provide a competitive advantage for an organization.
The APICS Dictionary, 16th edition, defines several terms
relating to company mission and vision as follows:
Vision: The shared perception of the organization’s
future—what the organization will achieve and a
supporting philosophy. This shared vision must be
supported by strategic objectives, strategies, and
action plans to move it in the desired direction.
Vision statement: An organization’s statement of
its vision.
Mission: The overall goal(s) for an organization set
within the parameters of the business scope.
Mission statement: The company statement of
purpose.
Essentially, a company’s vision statement answers the
question “Where are we going?” It is aspirational in nature
and puts a focus on the direction that the organization is
headed in. This is contrasted with the mission statement,
which is grounded in the present and defines the reason a
company exists. It gives the company an identity and
describes the scope and purpose of its current business.
A value statement describes the core values of an
organization, defining principles that support the vision,
culture, and beliefs of the organization. It may also be
referred to as a code of ethics and often lays out the
expectations for the actions and behavior for company
personnel, partners, and suppliers.
Taken together, the vision, mission, and values of an
organization help guide voluntary decisions made by
executive management in an effort to balance pursuit of
profit against the needs and expectations of society. These
decisions are often referred to as corporate social
responsibility.
Alignment with All Functional
Strategies
Functional-level strategies should align with the corporate
and business strategies presented by the organization in its
mission, vision, and core value statements. The alignment
should be both vertical and horizontal, spanning the entirety
of the organization. To achieve successful horizontal
alignment, a company must become cross-functional, which
requires increased intercommunication and the ability for
each business unit to see and understand the company’s
strategic goals. Let’s start by looking at the current state for
many organizations.
Functionally Oriented Organizations
Organizations historically have been functionally oriented—
organized into departments such as research and
development, purchasing, production, distribution, and
marketing and sales. These departments have often been
compared to grain silos, each operating in its own walled-in
world. Not only has communication between such
departments been slow and formal, but each department
has been given a strong incentive to maximize its own
metrics for success regardless of how this impacts other
departments. Because the incentives of these departments
have often been in opposition, optimizing one has invariably
created problems for the others. This results in tradeoffs,
and the system overall becomes suboptimal. Exhibit 1-2
shows the objectives of some key functional areas and gives
some examples of the less-than-optimal results.
Exhibit 1-2: Tradeoffs in Functionally Oriented Organizations
Functional
Area
Objectives
Supply Chain Tradeoffs Results
Purchasing
Lowest price
Sufficient supplies
Quantity
discounts
Adversarial buying and
low quality
Inventory buffers
Inventory increased by
bulk orders
Operations
Materials
available
Reduced setup
costs
Reduced cost per
unit and high
economies of
scale
Maximized labor
and equipment
utilization
Stable production
schedules
Safety stocks
Inventory increased by
long runs, few
changeovers; risk of
stockouts of other items
Buffer inventories for high
utilization
High inventory
Less responsive to order
changes
Functional
Area
Objectives
Supply Chain Tradeoffs Results
Distribution
Lowest shipping
rate
Full truckloads
Inventory
available
Low transportation costs
but high inventory and
warehouse costs…
…Or fewer warehouses
for low warehouse costs
but higher transportation
costs
Safety stocks
Sales and
marketing
Maximized sales
Satisfied
customers
Flexible product
mix
Safety stocks
High inventory in
distribution system
Changes to production as
orders change (instability)
Finance
Maximized profit
Rapid cash flow
Minimized assets
(e.g., inventory)
Promotion of customer
service and production
efficiency…
…But with low safety
stocks or other inventory
Engineering
Innovative
designs
Quality materials
New features
Customers not wanting to
pay more for features not
in demand
Conflict with low-price
purchasing
Planning
Stable schedules
Reduced
uncertainty and
risk
Less production flexibility
Missed opportunities
Cost for
redundancy/resilience
Key tradeoffs from an operations (manufacturing and/or
service provision) perspective include interactions with
sales/marketing and finance.
Sales and marketing’s highest priority will be customer
service, which often results in requests for expedited orders
or changes in what is being produced with little notice.
Honoring these requests by interrupting current production
orders will reduce production efficiency; not honoring them
may affect customer service. Sales and marketing could
also desire high production flexibility, which will increase
setup costs and reduce economies of scale. Other ways to
provide a high level of customer service include maintaining
high inventories and/or a distribution network with facilities
near each market for rapid delivery; these choices create
significant inventory, infrastructure, and labor costs.
Finance’s highest priority is to minimize inventory and
physical assets. Assets on the books are money tied up in
the system that cannot be used for other purposes. Such
assets usually require having raised money through
expensive means such as debt financing or owner
investment. Reducing inventory or having a less-extensive
distribution network will impact customer service unless
more creative methods of satisfying customers are part of
the organization’s strategy. Another finance priority is to
have high production efficiency to minimize costs. This
reinforces the goals of operations—except when a focus on
short-term cost cutting hinders long-term goals or customer
service.
Cross-Functional Organizations
Taking a cross-functional view of the internal organization
essentially means applying the concepts of supply chain
management to the internal organizational structures,
incentives, and metrics. It may also involve strategic-level
analyses of what adds value and what does not add value in
a supply chain. This can be called a value chain analysis,
defined in the APICS Dictionary, 16th edition, as
an examination of all links a company uses to
produce and deliver its products and services,
starting from the origination point and continuing
through delivery to the final customer.
Once the organization decides who it wants to partner with
and who it can omit, the next thing is to ensure that it is
capable of collaborating effectively. Changing organizational
structures to become more cross-functional often takes the
form of focusing more on process flows than on functional
areas. When processes are considered to be more important
than the functions that perform them, organizations gain an
overall systems perspective, which helps to ensure that
each aspect of the process is value-added and takes the
final result and the total of all costs into account.
A process of getting a new product to market, for example,
would start with research and development and then
include procurement management, production, distribution,
and marketing and sales (including order management).
Clearly, this process, as defined, goes outside of what one
department might do. However, due to inefficiencies and
the need to optimize the overall process, organizations have
found it necessary to develop a method of getting these
departments to act as one. This unifying role was initially
called materials management and is now more commonly
called logistics management, and the function is called
logistics. The Dictionary defines logistics as follows:
1) In a supply chain management context, it is the
subset of supply chain management that controls
the forward and reverse movement, handling, and
storage of goods between origin and distribution
points. 2) In an industrial context, the art and
science of obtaining, producing, and distributing
material and product in the proper place and in
proper quantities. 3) In a military sense (where it
has greater usage), its meaning can also include
the movement of personnel.
Supply chain managers take the concept of a unifying role
beyond even the boundaries of logistics. The most senior
supply chain manager might have some degree of authority
over an entire process. For example, this role could ensure
that product design accounts for the needs of the later parts
of the process, including ease of production and distribution.
Similarly, a person in this position could ensure that overall
inventory targets are maintained. When appropriate, a
unifying role such as this might also work with other support
functions, such as finance, information systems, or human
resources, to ensure that the needs of the overall process
come first. Often, supply chain managers will also be
involved in risk management from an organization and/or
supply chain perspective, because they have the big-picture
perspective that risk management requires. The Dictionary
defines risk management as follows:
The identification, assessment, and prioritization of
risks followed by coordinated and economical
application of resources to minimize, monitor, and
control the probability and/or impact of unfortunate
events or to maximize the realization of
opportunities.
Risk management is needed in supply chains because these
are complex systems that are often streamlined to the point
where a failure in any part could create a supply disruption.
This in turn can lead to dissatisfied or lost customers.
Identifying, analyzing, and creating plans for how to address
risks can often be less costly than simply reacting to events
after they occur. Insurance is a good example of a valueadded risk tool. Other examples include geographic
diversification to reduce the risk of disruption from severe
weather and other regional events, redundancy to allow for
operations to be resilient (e.g., the same part can be made
in two different plants), and getting supply from multiple
sources rather than just one. Investing in resilience does
have a cost tradeoff, however, in part because it can reduce
economies of scale. (For example, a supplier who gets all of
the business can have a larger, more dedicated plant.)
When unifying roles such as that of a supply chain manager
are added, it is vital that the organization clearly designate
a chain of command for production and inventory control.
This way any consensus opinion on tactics or operations can
be enforced and planners and other professionals will
understand how to direct their concerns or challenge these
decisions when needed. Production and inventory control
professionals will know their processes and current issues
best and need to be able to provide input into any larger
discussions. There is also a real risk in this type of
organizational structure of having the “two boss” problem,
where a given individual is given conflicting commands from
different managers. Conversely, if the supply chain
management position is given no real authority, it may be
unable to accomplish the overall goals of process
streamlining and end result effectiveness.
Cross-functional organizations also need cross-functional
measurements and incentives, such as what is assessed in a
person’s performance review. For example, equipment
and/or staff utilization could be assessed alongside changes
in inventory levels. This would provide a disincentive to
building up inventory just to keep production equipment or
personnel in use.
Becoming a cross-functional organization will not eliminate
the tradeoffs discussed earlier, but the players involved will
better understand the total impact of their decisions and
might therefore agree on a third way that balances all
parties’ needs. Some of the methods discussed elsewhere in
this text, such as sales and operations planning for mediumterm balancing and master scheduling for short-term
balancing, help to achieve this consensus path between
inventory and other customer service costs and production
efficiency. Some organizations will be able to implement
systems such as lean manufacturing or apply the theory of
constraints to execution to achieve better results for many
of these objectives simultaneously.
Planning of Strategic Buffers
The seven “rights” of logistics define the objectives of
manufacturing: Provide the right quantity of the right
products and/or services to the right customer at the right
time, the right place, the right cost, and the right quality
level. Inventory serves as a buffer throughout the system,
between
Supply and demand
Customer demand and finished goods
Finished goods and component availability
Requirements for an operation and the output from the
preceding operation
Parts and materials to begin production and the suppliers
of materials.
Being perfect at achieving the seven “rights” all of the time
becomes prohibitively expensive, because it would require
expensive investments such as large amounts of safety
stock or unused manufacturing capacity. Therefore,
organizations determine what percentage of the time they
will risk a stockout or other type of customer service failure
in order to balance customer service against profitable and
sustainable operations. The role of a materials manager is
therefore an act of balancing organizational resources
against demand in a profitable and feasible manner.
Strategy and the Role of Metrics
A strategy is the organization’s plan for providing
competitive advantage, and thus it includes how the
organization plans to compete, win customers, grow or
sustain its market share, and satisfy its stakeholders. The
APICS Dictionary, 16th edition, defines a strategic plan as
follows:
The plan for how to marshal and determine actions
to support the mission, goals, and objectives of an
organization. Generally includes an organization’s
explicit mission, goals, and objectives and the
specific actions needed to achieve those goals and
objectives.
Competitive advantage can be provided in many different
ways, such as by being the low price leader, the best value
for the money, or a key provider to a niche market. For
example, one strategy is called product differentiation,
which the Dictionary defines as
a strategy of making a product distinct from the
competition on a nonprice basis such as availability,
durability, quality, or reliability.
The financial goals of the strategy are often expressed in a
business plan. The Dictionary defines a business plan in
part as follows:
1) A statement of long-range strategy and revenue,
cost, and profit objectives usually accompanied by
budgets, a projected balance sheet, and a cash flow
(source and application of funds) statement. A
business plan is usually stated in terms of dollars
and grouped by product family. The business plan is
then translated into synchronized tactical functional
plans through the production planning process (or
the sales and operations planning process).
Although frequently stated in different terms
(dollars versus units), these tactical plans should
agree with each other and with the business plan.
2) A document consisting of the business details
(organization, strategy, and financing tactics)
prepared by an entrepreneur to plan for a new
business.
Exhibit 1-3 shows an example of an integrated
measurement model. It is shown here because it starts with
organizational strategy. Strategy directs all of the remaining
priorities for each part of the organization. These priorities
are used to determine what is important to measure and
what targets are important to achieve if the overall strategy
is to succeed.
Exhibit 1-3: Integrated Measurement Model
Note how the overall strategy is broken down into divisional
strategic objectives. A division, business unit, or segment is
a major line of business that tracks its own profits and
losses separately, for example, a mining division or a
manufacturing division. Objectives at this level need to
balance various priorities, so four perspectives akin to the
perspectives of the balanced scorecard are shown here. This
is one way to ensure that goals and the metrics used to
measure them relate to both the short- and long-term
objectives set in the strategy. Financial objectives are
sometimes more short-term, such as meeting near-term
cost reduction goals, while customer, business process, and
continuous improvement goals tend to help the division get
where it needs to be to enable the long-term strategy to
succeed.
At the next level down are functional area strategies,
including the operations strategy (e.g., manufacturing
strategy or service organization operations strategy) and
related high-level performance objectives. Speed,
dependability, flexibility, quality, and cost are often basic
ways to categorize the ways priorities can be shaped.
Organizations might work to be order qualifiers in all of
these categories, but, due to inherent tradeoffs, they
generally cannot be order winners for more than one or
possibly two of these, meaning that they need to specialize
in the areas that the strategy dictates will produce a
competitive advantage. The other areas then are provided
to the degree possible that allows them to support the area
of specialization. Exhibit 1-4 shows some ways to describe
each of these functional area performance objectives from
the perspective of manufacturing along with examples of
how they might create tradeoffs.
Exhibit 1-4: Categories of Functional Area Performance
Objectives
Category
Speed
Description
Tradeoff
Time to market (e.g.,
Faster equipment may be less
fast research and
flexible.
development), short lead Emphasizing speed increases cost.
times, high output per
time period, and/or fast
delivery
Dependability Promise fulfillment, on(resilience)
time delivery (neither
early nor late), and/or
products that can take a
certain level of wear and
tear
May require unused capacity or
plant/equipment redundancy to
provide resilience from service
disruptions (e.g., natural disasters)
or other investment in continuous
improvement. These add cost.
Flexibility
(agility)
Ability to ramp up or
down in volume quickly
or change what is being
produced without
significant disruption
More-flexible organizations may be
less able to maximize economies of
scale than competitors who focus on
making lots of the same thing. For
example, cross-training employees
means that they are less specialized.
Quality
Fitness for use (Note that For example, equipment that can
there are many ways to
operate within tight specification
define quality.)
limits might limit speed or flexibility.
Quality investments increase shortterm costs but tend to reduce longterm costs.
Cost
Ability to provide goods
at lowest price versus
the competition
Organizations need to have a
competitive price but often cannot
lead in this and other areas
simultaneously.
Manufacturing will settle on a mix of priorities that promote
the overall strategy, and these will in turn guide selection of
detailed goals and performance measures at lower and
lower levels. One way to ensure that metrics link back to
higher-level goals is to select just a few critical metrics that
can be proven to directly link back to strategy. These are
called key performance indicators (KPIs).
It is also important to note that tying objectives to metrics is
an important part of making sure that objectives are SMART:
specific, measurable, attainable, relevant, and time-bound.
The idea is that these goals are useful only if they can
translate strategy into actual results, and this is possible
only if the objectives have all of the SMART qualities.
Specific and measurable goals are vital qualities; there is no
way of objectively identifying whether vague or
unmeasurable goals are successful or unsuccessful. What is
called a success might also be changed arbitrarily.
Attainable goals are important, because unrealistic goals
tend to demoralize people and thus have unintended
negative side effects. Goals must be relevant; irrelevant
goals distract users from working toward the actual
strategic priorities (thus the need for a limited set of KPIs).
Time-bound goals are not open-ended but need to be
achieved during the indicated time horizon, such as during
the three- to five-year strategic plan or before the end of a
shorter planning period.
One way to ensure that strategies and objectives are SMART
is to perform a what-if analysis or other type of simulation to
determine whether the strategy will be profitable. The
Dictionary defines a what-if analysis as
the process of evaluating alternate strategies by
answering the consequences of changes to
forecasts, manufacturing plans, inventory levels,
and so forth.
These types of simulations can also be used to evaluate
tactical and operational decisions.
There are two other important points to note about Exhibit
1-3. First, each part of the organization needs to link back to
the organization’s strategy, or that strategy will fail to be
realized. Second, objectives and metrics are set at each
level of management, from strategic objectives all the way
down to measurement of operations at specific workstations
and so on.
Section B: Marketing Strategies
After completing this section, students will be able to
Describe the four Ps of marketing
Explain the use of distribution channels for a
manufacturer
Describe the use of market segmentation in marketing.
This section explores how marketing strategies can affect
the manufacturing environment by causing changes in
demand and how they are used to determine sales prices
and volumes that should be profitable. Distribution
channels, which describe how manufacturers move their
product from creation to the customer, are discussed, as is
the value of market segmentation.
Topic 1: The Four Ps
How an organization decides to market a product can
impact demand throughout the supply chain. This topic will
examine how companies can use the four Ps (product, price,
place, promotion) to achieve their marketing goals and how
to perform a cost-volume-profit analysis.
Marketing Strategies
Marketing management is based on marketing strategy,
which is defined in the APICS Dictionary, 16th edition, as
follows:
The basic plan the marketing function expects to
use to achieve its business and marketing
objectives in a particular market. Includes
marketing expenditures, marketing mix, and
marketing allocation.
Marketing strategy links back to organizational strategy and
helps determine what products and services the market
actually wants. Marketing management involves
implementing this strategy using marketing tools such as
advertising, trade discounts, and sales force incentives to
generate demand. Since marketing management also
involves prioritizing demand, demand-side professionals
have levers at their disposal to balance supply and demand
when there is a mismatch. If demand outstrips supply for a
given product, demand-side professionals can adjust prices
or quoted lead times. Increasing a price, for example, will
result in products going to those customers who are willing
to pay more, and thus the priority goes to those customers.
It could also be used to give customers an incentive to
choose an alternative product that is in surplus. Increasing
the quoted lead time can also enable meeting more of
demand, up to a point.
With some products, one or both of these levers are not
really an option, such as for commodity products where
consumers are highly sensitive to price increases. Even
when there is room to use these levers, overuse of them to
balance supply and demand could result in customers going
to the competition, so demand-side professionals often want
the supply side to correct imbalances using production
flexibility and/or inventory holding. Production flexibility, or
the ability to alter capacity, may or may not be an
economically feasible option. Production flexibility is
discussed more as part of the negotiation between demandand supply-side professionals called sales and operations
planning. In the case of inventory holding, marketing
management might provide input on the best place for
locating the inventory.
The combination of the tools available to demand-side
professionals to determine, promote, and prioritize demand
is called the marketing mix, or the four Ps. The Dictionary
defines the four Ps as follows:
A set of marketing tools to direct the business
offering to the customer. The four Ps are product,
price, place, and promotion.
Product includes product and service design to determine
the combination of features that will make products into
order qualifiers and some competitive differentiators that
will hopefully make them into order winners. Product
decisions also include selecting brand names, varieties,
sizes, grades (e.g., basic or deluxe, light or heavy duty),
return and warranty policies, and service levels. Note that
grade differs from quality, since even low-grade products
should be produced with high quality (e.g., few defects).
Price involves determining the price at which the product
will make the highest profit, which is a combination of both
the profit margin and the number of units sold at a given
price, since higher prices usually tend to reduce units sold.
This is especially true for commodities, but some premiumpriced items differ.
Marketing and operations may work together to determine
how their fixed and variable costs interrelate in what is
called a cost-volume-profit analysis, which will help
determine a combination of sales price and sales volumes
that should be profitable. Exhibit 1-5 shows the results of
such an analysis, comparing total costs and revenues
against unit sales in thousands of units (000s).
Exhibit 1-5: Cost-Volume-Profit Analysis
Note that two curves are compared, the total cost curve and
the total sales revenue curve. The total cost curve starts at
$500,000 in this case (due to the fixed costs) and then
moves upward steadily (due to the variable costs related to
units sold). The Dictionary defines a total cost curve as
follows:
1) In cost-volume-profit (breakeven) analysis, the
total cost curve is composed of total fixed and
variable costs per unit multiplied by the number of
units provided. Breakeven quantity occurs where
the total cost curve and total sales revenue curve
intersect. 2) In inventory theory, the total cost
curve for an inventory item is the sum of the costs
of acquiring and carrying the item.
The total sales revenue curve starts at $0 with no sales and,
for each 1,000 units sold, moves up steadily as more
revenue is earned. The idea is to find a way to exceed the
break-even point, defined in the Dictionary as follows:
The level of production or the volume of sales at
which operations are neither profitable nor
unprofitable. The break-even point is the
intersection of the total revenue and total cost
curves.
In this example, the break-even point is 16,667 units. This
can be calculated using the break-even point formula, which
starts by setting revenue equal to total cost, where revenue
is the unit price times the number of units and total cost is
the fixed cost plus the variable cost times the number of
units. Since the information we don’t know is the number of
units, the formula solves for number of units (in this
example, price per unit is $40 and cost per unit is $10):
Above this sales level, the organization will be profitable;
below it, there will be a loss. Note that the total sales
revenue curve is based on an assumption of sales prices.
Increasing prices will make this curve rise more quickly and
shift the break-even point, but because higher prices could
reduce unit sales, there will be an optimum price that
maximizes profit at an acceptable level of risk (the risk of a
loss). Note also that this type of analysis can be used for
other purposes, such as an inventory cost analysis.
Marketing may also decide to use market penetration
pricing, accepting a loss (called a loss leader) or low
margins to gain market share. Alternatively, the
organization could use price skimming, which is setting a
high price when you are the only game in town and then
dropping the price when competitors enter the market. Price
also involves setting credit terms, trade discounts, and
allowances (for example, discounts to compensate for
quality or delivery issues).
Place includes both where to sell products and what lead
times to offer. Decisions include selection of sales channels
such as online or retail, setting inventory policy for
distribution inventories, and determining what delivery
modes will be offered at various combinations of speed,
flexibility, and dependability.
Promotion types include sales promotions, advertising, sales
incentives for salespersons or retailers, campaign
management, and public relations.
Topic 2: Distribution Channels
Distribution channels are the various ways that products
move from raw materials to consumption. Separate
channels for physical possession and transfer of ownership
may operate concurrently.
Distribution Channels
Distribution channels are defined by the APICS
Dictionary, 16th edition, as
the distribution route, from raw materials through
consumption, along which products travel.
Companies may deliver products directly to their customers,
or they may use intermediary companies to distribute some
or all of their products. While the distribution channel
handles the disposition of goods or services, a transaction
channel addresses the transfer of funds and ownership
between the selling organization and the consumer. Exhibit
1-6 shows distribution and transaction channels for a
manufacturer that does not deliver directly to customers.
Exhibit 1-6: Distribution and Transaction Channels
Differences relating to bulk and condition between raw
materials and finished products influence the design of the
entire logistics system, including the location of warehouses
and factories. For example, a home improvement retailer
may not carry stock of large appliances at retail locations,
choosing instead to rely on warehouse storage and a local
carrier to fill orders due to the size of the appliances.
However, the same retailer will carry stock of smaller tools
at their retail location for direct sale to the customer. This
decision by the retailer will likely cause differences between
the supply chains of the appliance manufacturer and the
tool manufacturer and will affect how the retailer sets up its
internal supply chain to stores.
The specific way that materials and goods move depends on
many factors, including
The type and quantity of distribution channels available
for use
Market characteristics
Product characteristics
Available modes of transportation.
Topic 3: Market and Supplier
Segmentation
This topic looks at segmentation. Treating all customers as if
they were the same can lead to poor marketing and selling
strategies; treating all suppliers as if they were the same
can lead to inefficiencies or poor supply chain
responsiveness.
Market Segmentation
The APICS Dictionary, 16th edition, defines market
segmentation as
a marketing strategy in which the total market is
disaggregated into submarkets, or segments, that
share some measurable characteristic based on
demographics, psychographics, lifestyle,
geography, benefits, and so forth.
Market segmentation is often used to determine prospective
customers. For example, it is often used in the starting
stages of product design. It involves market analysis and
surveys of the preferences of existing customers. Basic
questions are typically used: Who? Where? When? Why?
What? How many? These determine who is interested in the
product or service and where they are interested. The
answers to the questions constitute market segmentation.
The primary reason to identify and understand market
segments is to increase the organization’s profits (or its
equivalent) over the long term. When discussing market
segments in the supply chain, there may be more than one
perspective of who the customer is. For example, consider
the following:
Intermediate customers are not at the end of the supply
chain. A raw material supplier may count several
manufacturers among its intermediate customers, and
one or more of these manufacturers could be grouped by
similar requirements.
Ultimate customers are the final recipients of the products
or services. The ultimate customer could be an
organization that is purchasing goods or services for its
employees or constituents, in which case segmentation
must also differentiate between organizational customers
and end users.
Supplier Segmentation
Just as treating all customers as if they were the same can
lead to poor marketing and selling strategies, treating all
suppliers as if they were the same can lead to inefficiencies
or poor supply chain responsiveness.
Supplier segmentation is a key tool to move an organization
toward having a responsive supply chain. While many
organizations used to base supplier selection on finding
suppliers who could minimize costs, such as by leveraging
economies of scale and low wages in one country, today’s
market is placing significant stress on responsiveness.
However, since responsiveness has a cost, this becomes a
dilemma for cost-competitive models. Supplier
segmentation is useful in maintaining the cost and
responsiveness balance.
Supplier segmentation increases responsiveness without
significantly increasing costs because it helps organizations
with complex networks of suppliers manage their risks and
responses. Cost and risk analyses can be simplified when
suppliers with similar attributes can be analyzed together.
Furthermore, a set of suppliers can be developed that can
all be selected as a group when strategy needs to shift.
Supplier segmentation is also ideal for organizations
pursuing strategies other than low cost. Organizations can
devise unique methods of segmentation that benefit their
industry and business model.
The following are forms of supplier segmentation:
Ideal relationship type. Segmenting suppliers by ideal
relationship type involves analyzing what a supplier would
bring to some form of partnership if one were to be
pursued.
Supplier capabilities. Segmentation by supplier
capabilities helps organizations that compete on a focus
or differentiation basis by segmenting suppliers based
their ability to deliver on the key business objectives at
the core of these strategies.
Customization versus standardization. Some
suppliers will specialize in being responsive and able to
provide custom solutions, while others will specialize in
providing standardized solutions at economies of scale.
Level of innovation. Some suppliers are better partners
when working to develop innovation in a product’s design.
Lead times. Grouping suppliers by similar lead times
might help organizations when scheduling orders for
goods, possibly by allowing certain shipments to be
grouped together.
Section C: Fundamentals of Sales and
Operations Planning
After completing this section, students will be able to
Describe the process used to update sales and operations
plans
Explain the tasks associated with each individual step in the
sales and operations planning process
Describe the purpose of sales and operations planning
Explain the basics of manufacturing planning and control.
This section discusses the basic process surrounding sales and
operations planning, including the functions of each step in the
process. It concludes with a discussion of manufacturing
planning and control.
Topic 1: Sales and Operations
Planning
This topic goes through the basics of sales and operations
planning, which is often conducted on a monthly basis, before
continuing into a brief discussion of how marketing impacts
demand.
Sales and Operations Planning
The APICS Dictionary, 16th edition, defines sales and
operations planning (S&OP) as follows:
A process to develop tactical plans that provide
management the ability to strategically direct its
businesses to achieve competitive advantage on a
continuous basis by integrating customer-focused
marketing plans for new and existing products with the
management of the supply chain. The process brings
together all the plans for the business (sales,
marketing, development, manufacturing, sourcing, and
financial) into one integrated set of plans.
S&OP is performed at least once a month and is
reviewed by management at an aggregate (product
family) level. The process must reconcile all supply,
demand, and new product plans at both the detail and
aggregate levels and tie to the business plan. It is the
definitive statement of the company’s plans for the
near to intermediate term, covering a horizon
sufficient to plan for resources and to support the
annual business planning process.
Executed properly, the S&OP process links the
strategic plans for the business with its execution and
reviews performance measurements for continuous
improvement.
S&OP is often conducted on a rolling basis, meaning that as one
month is completed, a new month is added to the end and all of
the months in between are revised, as needed, given new
information or priorities. The S&OP horizon varies depending on
the type of product and the market it serves. A typical horizon
might be 18 months. Revisions will typically occur mostly in the
short term. Further out, the planning horizon may only have
plans for things that take a long time to acquire or develop. This
iterative method is designed to allow plans to remain living and
realistic documents that can achieve organizational objectives.
In this way, the S&OP process forces management to look at its
functional areas in the context of the business as a whole, at
the needs of major customers, and at external events such as
the state of the economy at least monthly. It also gets the
organization to incorporate feedback from its activities, such as
actual demand rates and forecast error or actual responses to
marketing tactics.
Note that some organizations may use a different approach,
such as integrated business planning (IBP), but the general
goals remain the same.
Management attention to production through the S&OP process
typically improves production planning, for example, by
recognizing whether to increase or decrease the backlog or
fine-tune the production rate. The Dictionary defines a backlog
as follows:
All the customer orders received but not yet shipped.
Sometimes referred to as open orders or the order
board.
S&OP improves inventory planning by reviewing and adjusting
aggregate inventory levels toward a targeted level at least
monthly. Giving sales, marketing, product development,
finance, and human resources a better understanding of actual
capacity also helps these functions. Sales and marketing can
set expectations with customers more realistically.
Development might find ways to make new products that take
advantage of unused capacity. Finance can understand the
limitations of current investments and better assess what new
investments might be needed to achieve revenue or growth
goals. Human resources can look at staffing levels, skill gaps,
and training programs.
While managers from multiple functions will be doing a lot of
the work required to make the S&OP process effective, it is
essentially an executive decision-making process. According to
Wallace, author of Sales and Operations Planning, the following
steps are involved in the S&OP process:
1. Data gathering. Data on demand (sales, backorders, etc.),
supply (backlogs, inventory levels, etc.), marketing, finance,
and external events are gathered.
2. Demand planning. Forecasts are created, and input data or
results are modified, as needed, based on evolving
assumptions, price changes, new products, promotions,
competitors, the economy, etc. How much demand can be
generated through marketing efforts is determined.
3. Supply planning. Production planning compares demand
requests against capacity in the long and medium terms to
identify constraints.
4. Pre-S&OP meeting. Issues that do not require executive
attention to balance supply and demand are resolved, and an
agenda of exception items is created.
5. Executive meeting. Executives decide on exception items
and ensure that the overall plan can still meet objectives and
is consistent with strategy.
The result of this process will be consensus, making it a onenumber system. Rather than three or more conflicting plans,
the sales and marketing plan, the production plan, and the
finance plan will be in agreement. Sales and marketing agree to
generate this level of demand per product family, production
agrees to produce to this plan, and finance agrees that the plan
will be profitable and/or will meet other objectives such as
growing market share. This breaks the traditional silo approach,
where every functional area acts independently and to further
its own internal goals. Instead, the functional areas synchronize
their goals and the measurements they use to assess success.
Marketing Impact on Demand
By coordinating manufacturing with marketing, an organization
can increase manufacturing capacity for items that are about to
be featured in marketing promotional plans or plan for
increased demand for a new product that is preparing to
launch. Such coordination may also help the organization make
plans to manufacture fewer quantities of items that may be
replaced. The organization can plan to allocate the working
capital necessary to build up inventories in preparation for large
seasonal sales events, such as those typically associated with a
holiday season.
Marketing also impacts demand in other ways. For instance, an
organization may need to ensure that they can ship enough
units to retail locations to allow for seasonal displays and
product demonstrations. Accessory parts and repair parts may
also see an increase in demand if the product they are
associated with is marketed, even if the accessory or repair
parts themselves are not.
When organizations choose to integrate with external suppliers,
they work to integrate communications to the degree allowed
by the current level of trust between the organizations. Without
information sharing, there is no supply chain management.
Trust is not earned quickly, however, and conventional wisdom
will oppose sharing what some will see as information that
needs to be kept secret to maintain a competitive advantage.
The organizations will have to develop policies and strategies
for developing this trust and sharing more information over
time. The types of information to start with include that on
demand and orders and on promotions and marketing
campaigns. A key benefit of sharing information is that it will
allow the network of organizations to avoid major problems of
supply failing to match demand (oversupply or undersupply).
Failing to communicate demand or promotion information and
forecasting based only on your immediate customers’ orders
can create a situation called the bullwhip effect, which is a
major problem that supply chain management is intended to
solve. The APICS Dictionary, 16th edition, defines the bullwhip
effect as follows:
An extreme change in the supply position upstream in
a supply chain generated by a small change in
demand downstream in the supply chain. Inventory
can quickly move from being backordered to being
excess. This is caused by the serial nature of
communicating orders up the chain with the inherent
transportation delays of moving product down the
chain. The bullwhip effect can be eliminated by
synchronizing the supply chain.
Exhibit 1-7 shows how the bullwhip effect becomes a major
problem for manufacturers and suppliers.
Exhibit 1-7: Bullwhip Effect
Briefly, when a retailer has some minor fluctuation in demand,
it might order a little more than the average demand after a
stockout or not order at all when there is a surplus. If these
orders are all the distributor has to go on, and multiple retailers
are creating a wider shift between minimum and maximum
orders, then the distributor may also continue this trend of wide
swings in orders. Sales promotions that are not communicated
can exacerbate this effect, because they create a spike in
demand that is not anticipated by the manufacturers and their
suppliers. This encourages an overall increase in inventory and
results in very difficult production schedules for manufacturers.
Any failures to supply due to lack of inventory or raw materials
will also give customers an incentive to order more next time
for safety stock. An example of this effect was triggered
through increased demand for cleaning supplies and personal
protective equipment at the start of the COVID-19 pandemic in
the United States, Europe, and several other countries across
the globe. A sudden, massive surge in demand resulted in
stockouts at the retail levels, which triggered orders of
increasing size up the supply chain.
Communicating information on actual demand rather than
orders as well as planned promotions or increases in safety
stock can prevent this occurrence or lessen its effect. Methods
such as vendor-managed inventory can also mitigate this effect.
Topic 2: Updating the Sales
Forecasting Reports
This topic covers the sales plan, which is an input to the sales
and operations planning (S&OP) process. The S&OP process
also results in finalized sales plans that are in agreement with
the production plan.
Sales Plan
The most important outcome of the sales and operations
planning (S&OP) process is that the organization’s aggregate
inventory and/or backlog and production process will be in
balance with planned aggregate demand as expressed in the
sales plan. The APICS Dictionary, 16th edition, defines the
sales plan as follows:
A time-phased statement of expected customer orders
anticipated to be received (incoming sales, not
outgoing shipments) for each major product family or
item. Represents sales and marketing management’s
commitment to take all reasonable steps necessary to
achieve this level of actual customer orders. Is a
necessary input to the production planning process (or
sales and operations planning process). Expressed in
units identical to those used for the production plan
(as well as in sales dollars).
A preliminary sales plan is an input to the S&OP process, and it
is also an output in that it is the finalized plan that the
consensus-building process of S&OP ensures is in agreement
with the production plan.
The sales plan and forecast is a prediction of what will happen
in the future. The data accuracy, quality, and timeliness of the
distribution of sales forecasting reports are critical for crossfunctional collaboration. The sales plan and derived forecasts
are important to all areas of the business, including areas like
human resources, which must plan worker levels, and finance,
which may need to plan for capital spending associated with
increasing production capacity. Better collaborative decisions
that work to achieve organizational goals and objectives can be
made if each area trusts the forecast more.
Updating the sales forecasting reports involves updating files
with data from the period that most recently ended. Data
included in this update may include actual sales, production,
inventory levels, and any other applicable information. The
updated information is then used to develop sales analysis
reports and change sales forecasts.
Topic 3: Demand Planning Phase
This topic introduces demand planning, which is the second
step of sales and operations planning.
Demand Planning
The APICS Dictionary, 16th edition, defines demand planning
as follows:
The process of combining statistical forecasting
techniques and judgment to construct demand
estimates for products or services (both high and low
volume; lumpy and continuous) across the supply
chain from the suppliers’ raw materials to the
consumer’s needs. Items can be aggregated by
product family, geographical location, product life
cycle, and so forth, to determine an estimate of
consumer demand for finished products, service parts,
and services. Numerous forecasting models are tested
and combined with judgment from marketing, sales,
distributors, warehousing, service parts, and other
functions. Actual sales are compared to forecasts
provided by various models and judgments to
determine the best integration of techniques and
judgment to minimize forecast error.
Demand planning is basically forecasting and forecast tracking.
The information received in the first step of the sales and
operations planning process is reviewed by sales and marketing
personnel in order to generate a new forecast for a given period
of time. It may be necessary to adjust statistical forecasts and
provide an update to senior marketing and sales personnel.
Note that demand planning is the recognition of all demand,
and the second major source of demand is actual orders from
internal or external customers. Internal customers could be
other plants or subsidiaries or owned distribution centers.
External customer orders include those from distribution
centers, wholesalers, retailers, and customers. Organizations
that use consignment hold inventories at customer locations, so
demand planning will also recognize demand from these
sources.
Once a new forecast is generated, it will be used along with
actual sales, production, and inventory data to create the new
sales plan. Once a new sales plan has been approved, it will be
applied to the last effective operations plan to identify areas
that must be changed due to unacceptable performance.
Changes to the previous operations plan result in a new
operating plan.
Topic 4: Supply Planning Phase
Another output of the sales and operations planning process is
supply planning, which must occur to satisfy the demand plan.
Manufacturing, distribution, and service providers all have to
execute some form of supply planning. The primary focus of
this topic is production planning, which is used in
manufacturing environments.
Production Planning
The APICS Dictionary, 16th edition, defines production
planning as follows:
A process to develop tactical plans based on setting
the overall level of manufacturing output (production
plan) and other activities to best satisfy the current
planned levels of sales (sales plan or forecasts), while
meeting general business objectives of profitability,
productivity, competitive customer lead times, etc., as
expressed in the overall business plan.
The sales and production capabilities are compared,
and a business strategy that includes a sales plan, a
production plan, budgets, pro forma financial
statements, and supporting plans for materials and
workforce requirements, and so on, is developed. A
primary purpose is to establish production rates that
will achieve management’s objective of satisfying
customer demand by maintaining, raising, or lowering
inventories or backlogs, while usually attempting to
keep the workforce relatively stable.
Because this plan affects many company functions, it
is normally prepared with information from marketing
and coordinated with the functions of manufacturing,
sales, engineering, finance, human resources, etc.
The sales and operations planning (S&OP) process results in a
sales plan and a production plan. Production planning is thus an
output of S&OP. (Or, when S&OP is not used at an organization,
production planning takes its place.) Note a few important
points from the definition of production planning:
It sets overall levels of manufacturing output at the product
family level over a horizon of six to 18 months, in monthly or
weekly time buckets. Details on individual products, options,
and so on would not be accurate at this point.
The primary purpose is to set production rates.
It is coordinated with other functions and optimizes tradeoffs.
(S&OP is one way this coordination can occur.)
Production planning transforms strategic plans into tactical
plans. An important part of this process is to compare the
resources that are available to the resources that are needed
(called the load). Resources that may be available include
inventories of raw materials or finished goods that can be used
rather than needing to order or produce them. Resources also
include worker and equipment capacities. Thus the primary
purpose of production planning is the planning of resources and
not the production of an end item. At this level, resource
planning will focus on capital-intensive resources and/or
resources with long lead times (material, people, equipment,
facilities). It is about getting the resources into place so
production will be possible and will flow smoothly.
Establishing Product Families
Product families, also called product groups, need to be
established when organizations enter into a new line of
business, when they create new products, and so on.
Organizations that make only one product may not need
families, but they can plan at a high level using units. When
multiple families are produced, planning is more complex.
While sales and marketing may group products by their
functions or by the customer segments to which they appeal,
these are not the product families that should be used in sales
and operations planning or production planning. Instead,
available capacity of various resources will dictate how much of
what can be produced in the available time period, thus
translating demand for products and services into demand for
capacity. Specifically, demand for capacity means that a
product family will include all products that use the same
routings between the same work centers as well as the same
materials, setups and tooling, and cycle times. This allows
planning to focus on production volumes and generate a
feasible plan without being bogged down in the details.
Production Environments
Production environments are fundamental choices for
manufacturing. The type of product and the demand
expectations of customers, in most cases, impact the choice of
production environment. The optimum production environment
is implemented based on the volume, variety, and lead time of
the products a company sells.
There are four basic production environments:
Make-to-stock (MTS). The APICS Dictionary, 16th edition,
defines make-to-stock as follows:
A production environment where products can be
and usually are finished before receipt of a customer
order. Customer orders are typically filled from
existing stocks, and production orders are used to
replenish those stocks.
Make-to-stock produces items for inventory based on
forecasts of demand. An example is a can of soup or a
clothing store’s inventory of underwear and plain t-shirts.
Assemble-to-order (ATO). The Dictionary defines
assemble-to-order (ATO) as follows:
A production environment where a good or service
can be assembled after receipt of a customer’s order.
The key components (bulk, semi-finished,
intermediate, subassembly, fabricated, purchased,
packing, and so on) used in the assembly or finishing
process are planned and usually stocked in
anticipation of a customer order. Receipt of an order
initiates assembly of the customized product. This
strategy is useful where a large number of end
products (based on the selection of options and
accessories) can be assembled from common
components.
ATO is sometimes called build-to-order, finish-to-order, or
even package-to-order. ATO forecasts subassemblies,
components, and/or raw materials to keep inventory on hand
instead of finished goods. The finished product is then
assembled upon receipt of a customer order. Some examples
include laptops ordered online from a manufacturer or a
motorcycle from a dealership.
Make-to-order (MTO). The Dictionary defines make-toorder as follows:
A production environment where a good or service
can be made after receipt of a customer’s order. The
final product is usually a combination of standard
items and items custom-designed to meet the
special needs of the customer. Where options or
accessories are stocked before customer orders
arrive, the term assemble-to-order is frequently
used.
Make-to-order produces nothing until a customer order is
received. The organization may still carry inventory, but it is
in the form of raw materials. Examples may include custom
windows or kitchen cabinets.
Engineer-to-order (ETO). The Dictionary defines engineerto-order as follows:
Products whose customer specifications require
unique engineering design, significant customization,
or new purchased materials. Each customer order
results in a unique set of part numbers, bills of
material, and routings.
Engineer-to-order items are unique or move at such a low
volume that it is not profitable to hold inventory until a
customer places an order and the design and specifications
have been approved. Examples may include a specialty tool
or die for use in production or a custom prosthetic.
Additional variant and hybrid production environments are
covered elsewhere in these materials.
Production Strategies
In looking at production strategies, let’s use a commercial door
manufacturer as an example. The organization has a 12-month
planning horizon, with updates every month, and we will focus
on just one product family (for simplicity). The organization
forecasted demand for one product family at 3,720 units for the
year. The forecast demand is shown here by month rather than
by quarter.
Production strategies include chase, level, subcontracting, and
hybrid.
Chase (Demand Matching)
The APICS Dictionary, 16th edition, defines chase production
method in part as
a production planning method that maintains a stable
inventory level while varying production to meet
demand.
A chase, or demand matching, strategy attempts to match
production to the level of demand to avoid the need for
inventory, but at the cost of high production variability. Exhibit
1-8 shows the product family’s forecasted demand for the door
manufacturer’s upcoming year. The lines at each demand point
indicate production levels, which will vary considerably
throughout the year and perhaps even on a daily basis if the
organization shifts production daily to match actual demand.
Exhibit 1-8: Chase (Demand Matching) Strategy
The costs of varying production levels might include the need to
hire and lay off workers throughout the year, schedule overtime
or short time, carry excess capacity at some times and idle
capacity at others, and have a lot of changeovers. However,
inventory costs will be very low, or there might not be any
inventory.
This strategy might be used with lean production to produce
units only as actual demand signals are received. Organizations
using conventional manufacturing planning and control might
use this strategy if it is impossible to stockpile inventory, such
as for perishable goods. Organizations that use a chase
strategy might have much less fluctuation in demand than
shown in this example, or they might have other ways of
compensating, such as by having another product family with
the opposite seasonality profile.
The total cost of these plans will be the cost of carrying
inventory plus the cost of changing production levels.
Level (Production Leveling at Average Level)
The Dictionary defines level production method as
a production planning method that maintains a stable
production rate while varying inventory levels to meet
demand.
A level strategy, also called production leveling, attempts to
consistently produce at an amount equal to average demand
and results in a level schedule, defined in the Dictionary as
follows:
1) In traditional management, a production schedule
or master production schedule that generates material
and labor requirements that are as evenly spread over
time as possible. Finished goods inventories buffer the
production system against seasonal demand. 2) In JIT,
a level schedule (usually constructed monthly) in
which each day’s customer demand is scheduled to be
built on the day it will be shipped. A level schedule is
the output of the load-leveling process.
In Exhibit 1-9, demand rises and falls due to seasonality, but
the line showing production is level at 300 units per month,
which is level production of 3,600 units annually to satisfy the
annual demand of 3,720 units given a certain amount of
beginning and ending inventory. (How this is calculated will be
shown elsewhere.) However, the amount per month will vary
depending on the number of workdays in the month, because a
level rate will actually be an average daily rate. If there are 251
workdays (called manufacturing calendar days) in a year, then
about 14.34 units would be produced each day.
Exhibit 1-9: Level (Production Leveling) Strategy
In this strategy, when production is greater than demand,
inventory builds up. When demand is greater than production,
inventory is depleted. This strategy prioritizes production
stability. Workers and equipment can be optimized to this level
of production so that the utilization rate can be kept high and
staffing can be stable, which will help with worker morale. There
is no need for excess or idle capacity, and equipment
changeover costs can be avoided because production runs can
be very long. However, the cost savings from lowering the
average production cost per unit may or may not compensate
for inventory holding costs, as these costs can be quite high.
Also, if the forecast is understated, there may be insufficient
inventory for peak periods. Forecast accuracy can become quite
an issue when pursuing a level strategy, and many
organizations use safety stock (additional inventory held to
reduce the chance of stockouts) based on the expected level of
forecast error to mitigate the risk of an understated forecast.
Safety stock is addressed in more detail elsewhere.
Producers of items with highly seasonal demand often pursue
this strategy, simply because the inventory holding costs are
less than the costs of having to vary production levels,
especially when maintaining good labor relations is considered.
Subcontracting (Minimum-Level Strategy with
Supplemental Subcontracting)
A subcontracting strategy is a leveling strategy that sets
production at the minimum level of annual demand and then
subcontracts out all excess demand. While any of the strategies
might use subcontracting (especially chase), this method will
use subcontracting on a regular basis. Subcontracting might
mean having suppliers who produce what is needed on demand
or who ship from inventory. Exhibit 1-10 shows how
subcontracting is used for demand over the minimum level.
Exhibit 1-10: Subcontracting Strategy
Since this is also a level strategy, all of the benefits to staffing
and avoidance of excess or insufficient capacity or multiple
changeovers are found in this method. In addition, there is no
excess inventory cost because supply should always meet this
minimum level of demand. However, purchasing and then
reselling products or services to fulfill the remaining demand
will tend to result in lower profit margins. There may be quality
issues or extra costs for quality control. Also, when contracted
supply is not available at the volumes demanded, the
organization’s demand management professionals may need to
ration supply by raising prices, proposing longer lead times or
backorders, or turning away demand (as a last resort).
It may not be possible to use this strategy if there are
production secrets or other proprietary technologies that cannot
be risked with outside firms. It is often used in flow (line or
continuous) environments when it is not possible to adjust
capacity much.
Hybrid
Hybrid strategies combine the prior three strategies in different
ways to arrive at custom solutions. Often a custom solution will
be optimal in terms of minimizing costs and meeting other
objectives. Exhibit 1-11 shows one possible hybrid strategy,
where production is at one level during peak demand periods
and at a lower level during non-peak demand periods. In this
case, this is the average demand level for the periods in
question. Lego® building blocks are produced using this twostage leveling hybrid strategy. They operate their plant using
one shift for part of the year and then add a second shift to
prepare for the holiday season.
Exhibit 1-11: Example of Hybrid Strategy
Hybrid methods generally seek to match demand to some
extent and to smooth out production to some extent. They may
or may not use subcontracting to supplement production, and,
if they do, it may be in only certain periods. In order for such a
strategy to be the optimum method, good forecast accuracy
and/or holdings of safety stock are still required.
Production Plans
The APICS Dictionary, 16th edition, defines the production
plan as follows:
The agreed-upon plan that comes from the production
planning (sales and operations planning) process—
specifically, the overall level of manufacturing output
planned to be produced, usually stated as a monthly
rate for each product family (group of products, items,
options, features, and so on). Various units of
measurement (e.g., units, tonnage, standard hours,
number of workers) can be used to express the plan.
Represents management’s authorization for the
master scheduler to convert it into a more detailed
plan—that is, the master production schedule.
The production plan is the tactical plan specifying how
production will be carried out over the medium term. It will be
tied back to strategy and the manufacturing business plan
through the consensus plan developed in sales and operations
planning. Production plans are used to track total production by
volume and by cost as well as to determine the degree to which
other goals, such as cycle times or sustainable manufacturing
goals, were met. Production plans will specify ending inventory
targets per period (these targets could be set at zero) as well as
inventory carrying costs. The plan will follow a given production
strategy (e.g., chase) for a given manufacturing environment
(e.g., make-to-order), process type, and layout. It might
determine the rate of production per day in advance or allow it
to shift throughout the year as demand information becomes
available.
In general, production plans require the following information as
inputs:
Forecast demand including backorders (orders late for
delivery) broken down by planning bucket period
Opening inventory (or opening backlog) if leveling production
Targeted ending inventory (or projected backlog) if leveling
production
Because these plans can become quite complex, we will
demonstrate one of the simpler varieties of these plans: a
make-to-stock production plan with a level strategy.
Example: Make-to-Stock Production Plan with
Level Strategy
We will assume that the organization in our example has reason
to believe that its forecast will be fairly accurate because
demand is fairly stable (it has predictable seasonality and the
trend is slightly downward but stable), so a level strategy will
be used. Make-to-stock will work for the organization, because
the required delivery time is shorter than the manufacturing
lead time, there are few product options, and the product has a
long shelf life. Exhibit 1-12 shows the organization’s annual
product family forecast per month as well as the total annual
demand in the final column. It also includes the opening
inventory for the end of the prior year (shown as the ending
inventory for month 0 in this and the later example since the
last period’s ending inventory is the next period’s beginning
inventory) as well as the targeted ending inventory (shown in
month 12). Assume that there are no backorders.
Exhibit 1-12: Initial Information for MTS Level Production Plan
The first step in developing this plan is to sum the forecast to
find the annual total (3,720). Next, the planner determines the
projected beginning inventory for the period and sets a target
ending inventory. In this case, demand is on a downward trend,
so the decision is to end with 400 units of inventory rather than
520 units.
In a make-to-stock level production plan, production per time
period is not simply the average period demand. Instead the
opening and targeted inventory levels are taken into account
using the following calculation:
Now that beginning and ending inventory have been accounted
for, total production is averaged by dividing by the number of
periods, or 3,600/12 = 300 units per month. Since production is
leveled, the amount to enter into each production field is 300
units. Next, the ending inventory per period is calculated. If
there is negative ending inventory in any period, adjustments
will need to be made. Ending inventory is calculated as follows.
(For the first period, the prior period ending inventory will be
the opening inventory; this is calculated below.)
Exhibit 1-13 shows production and ending inventory calculated
for each period as well as the average inventory per period
(calculated as the prior period ending inventory plus the current
period ending inventory divided by two).
Exhibit 1-13: Completed MTS Level Production Plan
Note that the inventory does get low in the spring and early
summer, but there are no stockouts, so this is considered a
workable plan.
Next we need to determine the inventory carrying cost of this
plan. There are two ways that carrying cost rates might be
calculated. One way is to calculate a rate that is based on
ending inventory levels per period; another is to calculate a rate
based on average inventory levels per period. In the first
method, you would multiply the ending inventory for the period
by the ending inventory carrying cost rate per period. The sum
of these, say, monthly costs would then be the total cost for the
year. For example, if the ending inventory carrying cost rate is
$9 per unit per month, this rate would be multiplied by each
period’s ending inventory, for example, for period 1 it would be
360 × $9 = $3,240. Each period would be separately
calculated, and the costs could be summed to find an annual
total of these costs. Let’s instead assume that the carrying cost
rate is $10 per month per unit and this is based on average
inventory. Average inventory is calculated in the exhibit above
as prior period ending inventory plus current period ending
inventory divided by two; the rationale for this method of
finding average inventory is captured in the following portion of
the Dictionary definition of average inventory:
The average can be calculated as an average of
several inventory observations taken over several
historical time periods; for example, 12-month ending
inventories may be averaged.
Carrying cost using an average carrying cost rate is calculated
by multiplying the average inventory per period by the average
inventory carrying cost rate and then summing the period
costs, for example, for period 1, 440 units × $10 per month =
$4,400. The same is done for each period. The result of these
calculations will be as follows: $4,400 + $2,850 + $1,550 +
$750 + $400 + $400 + $750 + $1,550 + $2,850 + $4,200 +
$4,950 + $4,550 = $29,200. Note that if you instead find the
annual average inventory level by summing last year’s ending
inventory of 520 units and this year’s ending inventory of 400
units and then dividing by two, you get an average annual
inventory of 460 units. Since this is an annual average, the
carrying cost rate also needs to be an annual cost, so 12
months × $10 per month = $120 per year, and 460 × $120 =
$55,200. This cost estimate differs because it doesn’t factor in
the mid-year drop in inventory to very low levels. Since we are
trying to assess the true costs of these strategies, we will use
the $29,200 cost estimate. Note that carrying cost is often
calculated against the average value of the inventory rather
than average inventory in units. This method is covered
elsewhere in these materials.
If the plan had stockouts, then either the monthly level might
be changed or production levels might be changed for part of
the year (making it a hybrid strategy). Changes such as these
would increase the cost of the plan. Since these things were not
necessary and there is no cost associated with changing
production levels, the $29,200 is the total cost of the plan in our
example. Note that if safety stocks are held, the amount held
would be added to the opening and ending inventory levels per
period (after the level production amount is determined so as
not to throw off the calculations). The carrying cost for this
inventory would add to the total cost.
Production Plans in Other Manufacturing
Environments
In a make-to-stock chase strategy, the production will match
the demand, but only after adjustments are made related to
opening inventory and desired ending inventory in a manner
that is very similar to what was just presented.
Rather than having an opening and an ending inventory,
environments that do not make-to-stock have an opening
backlog and a projected backlog that consist of unfilled
customer orders that are not yet overdue. New orders are
added to the end of this queue.
Resource Planning
The first capacity check occurs at the level of the preliminary
production plan. The APICS Dictionary, 16th edition, defines
resource planning as follows:
Capacity planning conducted at the business plan
level. The process of establishing, measuring, and
adjusting limits or levels of long-range capacity.
Resource planning is normally based on the production
plan but may be driven by higher-level plans beyond
the time horizon of the production plan (e.g., the
business plan). It addresses those resources that take
long periods of time to acquire. Resource planning
decisions always require top management approval.
Checking resources is of interest to multiple areas of an
organization. If resources are insufficient, this means that
production schedules might not be feasible. This will mean that
some demand might not be fulfilled, and sales will suffer, which
will in turn reduce revenues. Thus what starts out as an
operations concern rapidly affects sales and finance.
Resource planning is used at the sales and operations planning
level to determine capital investments or other changes in
property, plant, or equipment and workforce levels. It is also
used as a capacity check for the preliminary production plan.
Resource planning compares the quantity of critical
organizational resources against the plan and determines, first,
whether these resources are sufficient to meet the production
plan and, second, how to reconcile any shortfalls in capacity
when they are not. Generic tools include changing the
resources or changing the load on those resources. A primary
tool for determining whether there are sufficient resources is a
bill of resources.
Bill of Resources
The Dictionary defines a bill of resources (also called a
resource bill) as follows:
A listing of the required capacity and key resources
needed to manufacture one unit of a selected item or
family. Rough-cut capacity planning uses these bills to
calculate the approximate capacity requirements of
the master production schedule. Resource planning
may use a form of this bill.
Critical or key resources include bottleneck operations,
materials, labor, and facility resources (e.g., plant, warehouse,
logistics) required to make one average unit of a selected item
or family. While identifying some of these critical resources
might be obvious, others might be found only after some
analysis. Examples include a study to identify items that have
the longest lead times or that are part of the longest total lead
time, a discussion with purchasing to identify items with volatile
prices or scarcity, analysis of physical supply or distribution
constraints, or analysis of those resources that take the longest
to adapt to changes in volume or product requirements. Bills of
resources may take two forms, at different levels of
aggregation:
A bill of resources for one or more related product families.
This high-level bill will list the critical resources needed to
make one average unit of each product family. The critical
resources would be things all the families use. Since these are
averages of multiple units or product options, they are useful
for only high-level planning.
A bill of resources for one product family. This more detailed
bill will list the average time to make each individual unit in
the product family.
At the resource planning level, organizations might use the first
of these bills if they have related product families. If not, they
might still determine an average of all units in a single family
for planning at this level. The more detailed version of the bill of
resources is shown elsewhere in these materials as part of
rough-cut capacity planning.
Exhibit 1-14 shows a bill of resources for three product families,
again using a theoretical commercial door manufacturer as an
example. The bill of resources includes three product families,
one created using a make-to-stock production plan (family A)
plus two other families of custom-made doors that use these
critical resources. A critical resource is recycled polycarbonate
(plastic pellets), which is used in making the glass in the doors
vandalproof. The recycled material is desired to ensure that the
organization can meet its mandate toward sustainable
production, but, due to high demand, it is not always available,
especially at an attractive price. Due to high cost and new
worker learning curves, labor is a critical resource for most
organizations. Work center 23 is a bottleneck, because it is
where the glass sheets are annealed with the polycarbonate.
Due to the size and expense of this operation, the organization
currently has only one large work center for this process.
Exhibit 1-14: Bill of Resources
Assume that in addition to the January planned production of
300 units for family A, the organization has planned production
of 500 units of family B and 800 units of family C. (These are
based on backlogs of actual orders.) Exhibit 1-15 shows some
January load calculations made using this bill of resources.
Exhibit 1-15: Calculating Load on Critical Resources for One
Period
Once the load is estimated in this way, it is compared with the
available capacity for the same time period. For example, say
that there are only 5,000 hours of labor available in January for
these families. This would equate to a shortfall of about two
percent, which might be made up by authorizing overtime or
having a worker transferred from a different area if the
additional worker has the right skills and there is enough of the
right equipment to make use of the worker. Other solutions
might include extending lead times or shifting some production
to earlier periods, depending on what is feasible.
Once a plan for each period in the planning horizon has been
modified as needed to pass this high-level capacity check, it is
moved to the next stage of detail in planning: master
scheduling.
Topic 5: Pre-S&OP and Executive
Meetings
The pre-S&OP meeting may vary in format but typically
functions to help make decisions below the executive level
wherever possible and identify issues that require executive
input. The executive meeting is the final step in the S&OP
process; it serves to settle any disagreements that were not
resolved during the pre-S&OP meeting.
Pre-S&OP Meeting
The pre-S&OP meeting can be a single meeting or several
meetings with management at various levels of the
organization. It typically includes management from finance,
marketing and sales, product development, demand planning,
materials, and operations.
The pre-S&OP meeting functions to
Make decisions regarding demand and supply levels
Reconcile differing recommendations to generate a single
recommended action
Identify issues that cannot be reconciled (These will be
discussed in the executive meeting.)
Generate alternate action plans for consideration
Set the agenda for the executive meeting.
The pre-S&OP meeting will also include
A review of plans and the creation of recommendations for
each product family
Creation of updated financial forecasts
Recommended resource requirement changes.
The pre-S&OP meeting is functional in nature and provides the
foundation for necessary discussions in the executive meeting.
The S&OP team identifies areas of under-performance and gaps
within the business plan and develops strategies to resolve
these issues, with detailed financial and operations data as a
strong set of KPIs based on the metrics most important to the
business.
Executive Meeting
As with any cross-functional effort, the S&OP process will result
in disagreements. These disagreements may stem from
different ideas and proposed solutions to problems found in
tactical plans designed to achieve the organization’s overall
objectives. The executive meeting provides an opportunity for
the key management of each functional area to escalate any
decisions that could not be agreed upon among the S&OP team.
The team presents data and analysis to executive management
so that a final decision can be made and the next course of
action can be determined.
The executive meeting makes decisions on sales and operations
plans for each product family and authorizes spending based on
rate changes in production and procurement. The meeting
relates the impact of S&OP plans for various product groupings
to the overall business plan and reviews overall business
performance and customer service levels.
Executive management has several priorities when managing
the overall strategies of the business. They do not typically
have time to dig into all of the details. It is important that the
issues and proposed resolutions are clearly defined, with visual
representations of the data such as KPIs and projections with
the supporting information on hand to answer any questions.
The end result of the executive meeting should be a single
company-wide plan that has been agreed upon by the executive
team and is clearly understood by all internal stakeholders.
Topic 6: Manufacturing Planning
and Control
This topic gives an overview of the conventional method of
manufacturing planning and control—the way organizations
balance supply against demand.
MPC Components
The APICS Dictionary, 16th edition, defines manufacturing
planning and control system (MPC) in part as follows:
A closed-loop information system that includes the
planning functions of production planning (sales and
operations planning), master production scheduling,
material requirements planning, and capacity
requirements planning. Once the plan has been
accepted as realistic, execution begins. The execution
functions include input-output control, detailed
scheduling, dispatching, anticipated delay reports
(department and supplier), and supplier scheduling.
Closed-loop means that capacity constraints are considered
when planning and controlling manufacturing. Exhibit 1-16
shows how the components of MPC discussed in the definition
interrelate.
Exhibit 1-16: Manufacturing Planning and Control
As one moves from the top of the diagram to the bottom, the
level of detail increases while the time horizon shrinks.
Let’s walk through this diagram and informally define the
components. We will save the formal definitions for the topics in
which these components are discussed in greater detail.
Note that strategic planning is shown at the top. This includes
business planning and is usually considered to be an input to
manufacturing planning and control rather than a part of it.
Strategy and the manufacturing business plan (which is a
subset of the strategy) set the direction and goals that
manufacturing must meet.
The graphic conveys that the organization’s plans face pressure
from two directions: the demand side and the supply side. The
demand-side pressures are motivated to ensure that all demand
is satisfied to maximize revenue; the supply-side pressures are
a push back based on capacity or what is feasible to do given
available or planned resources. The center is priority planning,
where decisions are made on how to meet demand to the
extent possible.
The demand-side activities on the left of the exhibit provide key
inputs to manufacturing planning and control in the form of
quantities required. These quantities come from forecasting,
demand management, and distribution requirements planning
(DRP). Forecasts of demand can be made directly, or forecasts
or actual orders can be provided from downstream customers,
for example, orders from distribution centers through DRP. Note
that these orders are shown being provided at the master
schedule level, but any orders already in the system at earlier
planning phases will also be accounted for at the higher sales
and operations planning (S&OP) or production plan level. (The
graphic shows this as an arrow pointing up to demand
management and an arrow from there to S&OP.) Demand
management is used to prioritize this demand when necessary.
Demand management also estimates the impact of marketing
activities on demand. Consensus opinions of demand from the
supply side of the organization are provided to multiple levels of
planning. At the strategic planning level, this is in the form of
totals such as total projected sales revenues. Using this and
other information, the organization sets its strategic sales goals
and forms a manufacturing business plan.
At the next level down, manufacturing planning and control
meets the supply side of the organization. Demand information
in the aggregate (product families or total units) is used to
perform master planning. The Dictionary defines master
planning as
a group of business processes that includes the
following activities: demand management (which
includes forecasting and order servicing); production
and resource planning; and master scheduling (which
includes the master schedule and the rough-cut
capacity plan).
Master planning begins with sales and operations planning,
which is an executive-level decision-making process where the
supply, demand, and financial sides of the organization agree
on a consensus plan for satisfying demand in a feasible and
profitable manner. The result is a production plan: a consensus
set of numbers that the supply side of the organization commits
to produce and that the demand side (marketing and sales)
agrees to set as their sales goals. Resource planning occurs at
this point as well, which is the first of several capacity
management activities that grow more detailed and shorter in
time horizon from this first long-term, big-picture capacity
check. At this level, capacity management takes the form of
planning for long-term capacity needs such as adding or
reducing plants, equipment, and staffing.
The next level of master planning is master scheduling. This is
planning over a shorter time horizon, and the demand
information provided is now at the detail level for individual
units. (These could be raw materials in a make-to-order
environment, components in an assemble-to-order
environment, or finished goods in a make-to-stock
environment.) The second level of capacity planning, rough-cut
capacity planning, takes place at this point. This is a check to
see if bottleneck work centers and other key resources will have
sufficient capacity. Once any adjustments are made, the output
of master scheduling is a master production schedule for each
product. The schedule indicates what will be made in each time
period of the planning horizon.
Continuing down, now we begin the detailed planning and
scheduling needed to meet the master production schedule.
This involves material requirements planning (MRP), which uses
bills of material and other basic inputs to calculate all of the raw
materials and components that need to be used from inventory
or purchased. MRP also calculates when to purchase or release
these items so they will arrive on time. This is a highly detailed
activity, and the third level of capacity planning, capacity
requirements planning, occurs at this point. This capacity check
looks at all resource capacities, not just bottlenecks. The result
of this process is a finalized material requirements plan.
The bottom level is where planning ends and execution takes
over. The material requirements plan results in purchasing
wherever resources are not sufficient. Purchasing includes
sourcing, ordering, and scheduling deliveries. The parts of the
material requirements plan that will be produced in-house
become inputs to production activity control (PAC). PAC is used
to regulate the flow of work through the production processes,
which will involve scheduling. Scheduling can be used to adjust
when certain orders are released for production or final
assembly. This allows shop floor management to fine-tune
production efficiency, accommodate expedited orders, or
compensate for delays, material shortages, or quality issues.
Capacity control is the fourth level of capacity management and
is used here to control work center capacity.
Some key points about this system are as follows:
Planning occurs from the top down, meaning that every
planning and control activity links back to the manufacturing
business plan (the exhibit includes this as part of strategy)
and ultimately to strategic goals.
It is a closed-loop system, meaning that it incorporates
feedback in the form of reports or action alerts so that plans
can be adjusted in the long, medium, and short terms and
execution can be adjusted based on events before or during
production.
It is an iterative system, meaning that plans start out in a
rough state and are refined by revisiting them multiple times
as they become more and more detailed and shorter and
shorter in time horizon.
The system balances tradeoffs to find the optimum result for
all stakeholders, including the supply side, the demand side,
and finance. This cross-functional collaboration takes place
not only during sales and operations planning but also during
master scheduling and later during production activity control
as priorities can be shifted to account for new information.
Advanced planning and scheduling systems can also be used
to coordinate the activities of multiple plants or multiple
supply chain partners. The Dictionary defines advanced
planning and scheduling (APS) as follows:
Techniques that deal with analysis and planning of
logistics and manufacturing during short,
intermediate, and long-term time periods. APS
describes any computer program that uses advanced
mathematical algorithms or logic to perform
optimization or simulation on finite capacity
scheduling, sourcing, capital planning, resource
planning, forecasting, demand management, and
others.
These techniques simultaneously consider a range of
constraints and business rules to provide real-time
planning and scheduling, decision support, availableto-promise, and capable-to-promise capabilities. APS
often generates and evaluates multiple scenarios.
Management then selects one scenario to use as the
“official plan.” The five main components of APS
systems are (1) demand planning, (2) production
planning, (3) production scheduling, (4) distribution
planning, and (5) transportation planning.
The supply side is concerned with capacity in terms of
feasibility and availability, while the demand side is
concerned with prioritizing the timing and order of work,
especially to satisfy demand from the most important
customers or those with the most acute needs.
MPC Components and Business
Hierarchy
Exhibit 1-17 interrelates the components of manufacturing
planning and control to the manufacturing environments and
the strategic, tactical, and operational planning elements of the
business hierarchy.
Exhibit 1-17: MPC Components and Business Hierarchy
Level
Horizon Frequency
Detail Level
Process
Validation
Strategic
>2 years Annually
Summary
Business
planning
Financing
Tactical
~18
months
Monthly
Aggregate
Sales and
operations
planning
Resource
planning
~3
months
Weekly
Master
scheduling
Rough-cutcapacity
planning
Make-tostock = end
item
Assembleto-order =
subassembly
Make-toorder = raw
materials
Level
Horizon Frequency
Detail Level
Operational ~10
weeks
Daily
Intense
~6
weeks
Shift
Most intense
Process
Validation
Material
Capacity
requirements requirements
planning
planning
Work
orders
Purchase
orders
Scheduling
This exhibit shows how business planning horizons shrink as
planning becomes more detailed and intense. Note that the
horizons shown are for illustrative purposes only and could
differ depending on the industry. Note also how the level of
detail at the tactical level will depend on the manufacturing
environment. For the “Validation” column, note the addition of
financing as a validation step, which would be where the
financial merits of the overall strategy are assessed and
approved or rejected and how to finance the investment is
determined. Note that the lowest operational level
encompasses production activity control as well as purchasing.
Section D: Manufacturing Strategies,
KPIs, and Metrics
After completing this section, students will be able to
Describe the characteristics of make-to-stock, assembleto-order, configure-to-order, make-to-order, engineer-toorder, and remanufacturing strategies
Explain the appropriate situations in which to use various
manufacturing strategies
Describe the benefits and drawbacks of various
manufacturing strategies
Differentiate among manufacturing environments (e.g.,
make-to-order), process types (e.g., intermittent), and
layouts (e.g., cellular)
Describe the benefits and drawbacks of different
manufacturing layouts
Determine the best manufacturing process to use for a
given situation
Link strategy to the manufacturing business plan and
strategic, tactical, and operational performance measures
Understand the purpose and use of key performance
indicators
Describe the use of a balanced scorecard.
This section examines manufacturing strategies, including
the pros and cons of each. It explores how manufacturing
fits into organizational strategies and how strategy drives
the choice of manufacturing environment, process type, and
layout. Manufacturing environments will be reviewed and
explained. Next, the different manufacturing process types
and layouts will be explained, including the benefits of
different layouts and why one layout may be chosen over
another for the production of a given product.
This section also discusses the use of key performance
indicators and metrics and how they are used by
manufacturers to ensure that adequate organizational
performance is occurring in pursuit of the organization’s
strategic goals. It examines the use of balanced scorecards
when reporting metrics and key performance indicators.
Topic 1: Manufacturing Strategy
This topic discusses how manufacturing process and
philosophy choices impact an organization and introduces
some basic processes.
Manufacturing Process and
Philosophy
In order to successfully gain competitive advantage, an
organization must decide what type of manufacturing
process and overall philosophy it will follow. The APICS
Dictionary, 16th edition, defines these terms as follows:
Manufacturing process: The series of operations
performed upon material to convert it from the raw
material or a semifinished state to a state of further
completion. Manufacturing processes can be
arranged in a process layout, product layout,
cellular layout, or fixed-position layout.
Manufacturing processes can be planned to support
make-to-stock, make-to-order, assemble-to-order,
and so forth, based on the strategic use and
placement of inventories.
Manufacturing philosophy: The set of guiding
principles, driving forces, and ingrained attitudes
that helps communicate goals, plans, and policies
to all employees and that is reinforced through
conscious and subconscious behavior within the
manufacturing organization.
These process and philosophy choices are translated into
decisions on the manufacturing environment and process
layout to use for each product line. Exhibit 1-18 shows an
overview of the main manufacturing environments and
process choices. It is structured as a volume-variety matrix,
because these choices all range on a scale from high
variety, low volume to low variety, high volume.
Exhibit 1-18: Volume-Variety Matrix
The exhibit shows that manufacturing environments,
process types, and process layouts are all interrelated to
some degree based on the volume of production that is
needed versus the variety of items that need to be
manufactured. Variety might also be described as the
degree of customer influence over design. The high-variety,
low-volume end of the scale, for example, has engineer-toorder (ETO), such as building construction, which is typically
run using the project process type and a fixed position
layout (meaning that the thing being made generally stays
in one place). With ETO in particular, variety might best be
described as a high degree of customer influence over the
design. The high-volume, low-variety end of the scale has
make-to-stock (MTS), which produces items to sell from
inventory. A gas refinery could use a continuous
manufacturing process type, as the materials flow without
stopping through the refinement process, with a productbased layout that is designed to work with only a limited
range of products.
Note that the environments and process choices have some
overlap where hybrid systems might be developed.
Exhibit 1-18 also shows a few other scales:
Customer lead time tends to be very long for high-variety,
low-volume production, often because engineering
designs need to be made. This lead time becomes shorter
and shorter as variety is reduced and volume is increased.
Items that can be sold from stock have only ordering and
shipping time as their lead time.
Tasks are diverse and complex at the high-variety, lowvolume end, as one might expect in building unique items
or items in small batches. Tasks at the low-variety, highvolume end tend to be repetitive and are divided up into
efficient groupings.
There are three general categories of process types
related to process frequency: project, intermittent, and
flow. Projects have project scheduling, which means they
proceed on their own custom schedules. Intermittent
processes include work center and batch process types,
and these are items best made in lots or batches. Flow
processes include line and continuous manufacturing, and
these are processes that ideally never stop, such as a
bottling line.
External influences, organizational strategy, the operations
business plan, and customer and product characteristics will
determine which combination of these elements will be the
most efficient and effective for a given product or product
line. In some cases, however, there may be more than one
acceptable way to proceed, in which case senior operations
management will need to determine the costs and benefits
of each alternative. The ability to use existing plants and
equipment may be a factor in the decision, but, in other
cases, new capital investments may provide the best longterm return on investment.
Topic 2: Manufacturing
Environments
Manufacturing environments are a fundamental choice for
manufacturing. This decision is typically informed by
strategic choices made by the organization, such as what
types of products an organization decides to produce and
the mission of the business. Different environments may
result in different lead times and inventory costs.
Make-to-Stock
Lead time in make-to-stock can be very short, as it is limited
to shipping. A variety of methods can be used to ship or to
position the inventory closer to the customer. Customers are
not able to make design decisions but may indirectly
influence designs of future products or product
enhancements. This strategy entails high inventory costs.
Assemble-to-Order
Assemble-to-order is much more common than make-toorder these days. Often when people say make-to-order
what they really mean (or what is really being done) is
assemble-to-order.
Assemble-to-order builds standard components based on
forecasts but waits to assemble or complete the processing
of the components until actual customer orders are
received. The APICS Dictionary, 16th edition, defines
components as follows:
The raw material, part, or subassembly that goes
into a higher-level assembly, compound, or other
item. This term may also include packaging
materials for finished items.
Assembly might include putting components together or
completing finish work such as painting.
Assemble-to-order is often made more economical through
a process called modularization. The Dictionary defines
modularization as follows:
In product development, the use of standardized
parts for flexibility and variety. Permits product
development cost reductions by using the same
item(s) to build a variety of finished goods. This is
the first step in developing a planning bill of
material process.
Since the components are in inventory, the lead time is
short, consisting only of assembly and shipping. This results
in lower inventory costs than in a make-to-stock
environment, because the components can be made into a
wide variety of end products that, if all built, would require
significantly more inventory overall. Assemble-to-order also
reduces risk, because varieties that are not in demand will
never be produced. ATO is best when variety is low to
medium and volume is medium to high. Customers will be
involved in assembly decisions only.
Configure-to-Order
Configure-to-order (CTO) has the same lead time as
assemble-to-order, but it allows customers to configure a
product, selecting from various features and options. This
results in the potential for entirely unique configurations
that have not been produced before. The lack of design time
required reduces the lead time to nearly equal to that in a
make-to-order environment. Unlike assemble-to-order, the
components may not be manufactured until the order is
received, but typically they are based on existing designs.
Components common to all units can be produced in
advance so they are available to assemble to order once the
unique components or assemblies are available.
Make-to-Order
Delivery lead time for make-to-order (MTO) includes
production, assembly, and shipping, so lead time is fairly
long. In some cases, some components might be customdesigned, and this would add some lead time for design.
Generally, however, this would not be to the degree
required in engineer-to-order. Make-to-order is best when
variety is medium to high and volume is low to medium.
Engineer-to-Order
Engineer-to-order is used for items so high on the variety
scale (high customer influence over design) and so low on
the volume scale that they are often unique. These items
require extensive lead times. The significant design lead
time often involves a back-and-forth dialogue between the
customer and the supplier or a design firm. Once designs
are finalized, there is additional lead time for the purchasing
of materials for manufacturing. Assembly and shipping (if
applicable) also add to lead time.
Remanufacturing
Remanufacturing is defined in the APICS Dictionary, 16th
edition, as follows:
1) An industrial process in which worn-out products
are restored to like-new condition. In contrast, a
repaired product normally retains its identity, and
only those parts that have failed or are badly worn
are replaced or serviced. 2) The manufacturing
environment where worn-out products are restored
to like-new condition.
Remanufacturing is an aspect of reverse logistics. Materials
may be reused and recycled from worn-out products.
Hybrids and Subtypes
In addition to these basic environments, a number of terms
have been used to describe efforts to achieve the benefits
of more than one method or to remove the limitations of a
method. Often these methods require more mature supply
chain management networks and may involve advanced
production methods or flexible equipment and flexible
workers. These environments include mass customization,
postponement, and package-to-order.
Mass customization is an attempt to serve markets that
desire both high volume and high variety. The APICS
Dictionary, 16th edition, defines mass customization as
follows:
The creation of a high-volume product with large
variety whose manufacturing cost is low due to the
large volume, allowing customers to specify an
exact model out of a large volume of possible end
items. An example is a personal computer order in
which the customer specifies processor speed,
memory size, hard disk size and speed, removable
storage device characteristics, and many other
options when PCs are assembled on one line and at
low cost.
In mass customization, customers are allowed some degree
of customization, while manufacturing produces the
products at nearly the same cost as that of a high-volume
process. Mass customization is usually considered to be a
subset of assemble-to-order (ATO) and configure-to-order
(CTO) because the customer is choosing among previously
manufactured or purchased options. Lead times can,
however, be longer than for ATO or CTO. Dell uses mass
customization to build computers, waiting to order
components from its suppliers until orders are received,
thus adding purchasing lead time to delivery lead time. Dell
keeps lead times short and costs low by getting rapid
deliveries of just the needed components from suppliers
who bear the cost of holding the inventory.
On the other end of the scale is postponement. The
Dictionary defines postponement as follows:
A product design, or supply chain strategy that
deliberately delays final differentiation of a product
(assembly, production, packaging, tagging, etc.)
until the latest possible time in the process. This
shifts product differentiation closer to the consumer
to reduce the anticipatory risk of producing the
wrong product. The practice eliminates excess
finished goods in the supply chain. Sometimes
referred to as delayed differentiation.
Postponement is an assemble-to-order strategy that often
performs final assembly in a distribution center because the
assembly usually does not require specialized equipment or
extensive manufacturing expertise. This may involve putting
a country-specific power supply in a unit or labeling for a
specific language. It could also involve shipping units by air
with no individual packaging and adding the bulky
packaging at the distribution center, which is what Hewlett
Packard does. To the degree that high volumes can be
output at a low cost per unit, this can also be considered a
type of mass customization.
Package-to-order is a type of assemble-to-order that uses
postponement to delay packaging items produced and
stored in bulk until orders for specific package sizes are
received. The Dictionary defines package-to-order as
follows:
A production environment in which a good or
service can be packaged after receipt of a customer
order. The item is common across many different
customers; packaging determines the end product.
Topic 3: Differences Between
Manufacturing Environments
The optimum environment is based on volume, variety, and
lead time. This topic delves into those distinctions,
discussing why one environment may be favored over
another for a given product.
Environments Differentiated by
Volume, Variety, and Lead Time
Exhibit 1-19 shows the relationship of product variety to
product volume, listing only the basic manufacturing
environments and the hybrid method, mass customization.
The interplay of volume and variety strongly impacts the
cost of production. For example, higher volumes can be
produced at a low cost per unit, because the high volume
will justify investments in specialized manufacturing
equipment that can operate at a faster rate than more
generalized equipment.
Exhibit 1-19: Manufacturing Environments by Volume and
Variety
In addition to the basic product characteristics, lead time is
another strong differentiator for manufacturing
environment. The APICS Dictionary, 16th edition, defines
delivery lead time as “the time from the receipt of a
customer order to the delivery of the product.” The
customer may also include some time on their end to
prepare the order once the decision to purchase has been
made, but the supplier cannot control this component of
lead time.
Exhibit 1-20 shows the basic elements that add to lead time
in each of the basic manufacturing environments. Note that
Raw material inventory includes purchased components.
WIP (work-in-process) inventory includes manufactured
components that will later be assembled.
FG inventory is finished goods inventory.
Exhibit 1-20: Lead Time per Manufacturing Environment
Summing the lead time for each component results in a
cumulative lead time that needs to be compared to the
customer’s requested or expected delivery date (which
could be immediate, as in the case of retail). While
customers desire the shortest lead time possible, their
expectations can be managed based on the types of
activities (e.g., design work) that are necessary to make the
product variety they desire. The Dictionary defines many
types of lead times, including the following.
Supplier lead time: The amount of time that
normally elapses between the time an order is
received by a supplier and the time the order is
shipped.
Procurement lead time: The time required to
design a product, modify or design equipment,
conduct market research, and obtain all necessary
materials. Lead time begins when a decision has
been made to accept an order to produce a new
product and ends when production commences.
Purchasing lead time: The total lead time
required to obtain a purchased item. Included here
are order preparation and release time; supplier
lead time; transportation time; and receiving,
inspection, and put-away time.
Manufacturing lead time: The total time required
to manufacture an item, exclusive of lower-level
purchasing lead time. For make-to-order products, it
is the length of time between the release of an
order to the production process and shipment to
the final customer. For make-to-stock products, it is
the length of time between the release of an order
to the production process and receipt into
inventory. Included are order preparation time,
queue time, setup time, run time, move time,
inspection time, and put-away time.
One basic determinant of necessary lead time is the level of
involvement the customer requires during design,
manufacturing, or assembly, but product volume and
variety also play a strong role. Low-volume items are costprohibitive to produce in advance and so often require
longer lead times. Similarly, customized items or allowing
for design flexibility will require longer lead times, while
standardized items will shorten lead times.
Another influence on lead time is proximity to the customer,
which is why some auto parts manufacturers locate their
plants right next to the auto plant that uses the parts. A
distribution network with a distribution center near
customers is another way to provide flexibility in the
manufacturing model chosen while still satisfying customer
lead time expectations.
Topic 4: Manufacturing Process
Types
Organizations will determine which manufacturing process
to use based on the volume and variety for the product
being manufactured.
Flow Process Types
Manufacturing items with relatively high volumes and low
variety tends to lend itself to flow manufacturing. The APICS
Dictionary, 16th edition, defines flow terminology as follows:
Flow processing: In process systems
development, work flows from one workstation to
another at a nearly constant rate and with no
delays. When producing discrete (geometric) units,
the process is called repetitive manufacturing;
when producing non-geometric units over time, the
process is called continuous manufacturing. A
physical-chemical reaction takes place in the
continuous flow process.
Flow shop: A form of manufacturing organization
in which machines and operators handle a
standard, usually uninterrupted, material flow. The
operators generally perform the same operations
for each production run. A flow shop is often
referred to as a mass production shop or is said to
have a continuous manufacturing layout. The plant
layout (arrangement of machines, benches,
assembly lines, etc.) is designed to facilitate a
product “flow.” Some process industries (chemicals,
oil, paint, etc.) are extreme examples of flow shops.
Each product, though variable in material
specifications, uses the same flow pattern through
the shop. Production is set at a given rate, and the
products are generally manufactured in bulk.
Flow manufacturing has standardized products. Work
centers are arranged in the sequence in which they will be
used, so the product flows directly from work center to work
center. The time it takes to move between work centers is
the same by design, so processing is constant. The
equipment used is more specialized, allowing higher
volumes but less variety to be produced. The equipment is
usually designed to make only specific products, and new
products typically require new equipment. The capacity of
the line is fixed and difficult to alter. The material flow
between workstations is often automated, meaning that
work-in-process (WIP) inventory is low (and very
predictable) as are throughput times. The low amount of
WIP inventory means that lead times are short. This makes
production activity control and inventory management
straightforward.
These processes can make only a limited range of products,
but the process generates large economies of scale. A
family of products that can be produced on a given line or
continuous flow needs to be in high enough demand to
justify the large capital investment. Often organizations can
reduce labor costs to compensate for the much larger
capital expense.
Flow processes use a product-based layout. Two types of
flow processes include line and continuous.
Line
The line process type, also called repetitive flow or line flow,
is used when the products being produced are discrete
units, like cans of soda or cars. The Dictionary defines some
related terms as follows:
Discrete manufacturing: The production of
distinct items such as automobiles, appliances, or
computers.
Repetitive manufacturing: The repeated
production of the same discrete products or families
of products. Repetitive methodology minimizes
setups, inventory, and manufacturing lead times by
using production lines, assembly lines, or cells.
Work orders are no longer necessary; production
scheduling and control are based on production
rates. Products may be standard or assembled from
modules. Repetitiveness is not a function of speed
or volume.
Assembly line: An assembly process in which
equipment and work centers are laid out to follow
the sequence in which raw materials and parts are
assembled.
Production line: A series of pieces of equipment
dedicated to the manufacture of a specific number
of products or families.
Note that there is also a flow process type called batch flow,
which starts out in large batches of material that are
transformed into discrete end items, such as a batch of
candy that starts in liquid form and ends as distinct items.
This differs from the intermittent (batch) process type in
that it is a flow process.
Continuous
The continuous process type, also called continuous flow, is
used when the products being produced are liquids, liquid
metals as in a foundry, or bulk solids like flour or pet food.
The Dictionary defines continuous production as follows:
A production system in which the productive
equipment is organized and sequenced according
to the steps involved to produce the product. This
term denotes that material flow is continuous
during the production process. The routing of the
jobs is fixed and setups are seldom changed.
Intermittent Process Types
The APICS Dictionary, 16th edition, defines intermittent
production as
a form of manufacturing in which the jobs pass
through the functional departments in lots, and
each lot may have a different routing.
Intermittent process types are useful when there are many
product design variants that have different process
requirements and therefore have unbalanced workflows
between work centers. Both equipment and workers need to
be flexible enough to perform this varied type of work. In
other words, general purpose equipment is often needed
instead of specialized units. Order quantities are also
typically variable, meaning that some job runs will be longer
than others.
The time from when an order starts work to when it is
complete is often very long, and this combination of
unbalanced workflows, different-sized orders, and long
throughput times typically makes scheduling production
(called production activity control) and inventory control
complex. It is difficult to schedule equipment capacities, and
bottlenecks can form in different places. Issues with
scheduling or capacity control result in a high amount of
work-in-process inventory. These processes typically require
longer lead times, in part because of extensive material
handling. Benefits include the flexibility to change order
quantities or orders quickly and the relative ease of
introducing new products.
Intermittent processes might use fixed-position, functional,
or cellular layouts. Two types of intermittent manufacturing
are work center and batch.
Work Center
The work center process type, also called job shop or
intermittent manufacturing, is organized around similar
processes and usually involves smaller lots or batches. Work
centers are production areas that are grouped by function,
such as all lathes in one area and all sanding in a different
work area. Products are routed between work centers in odd
patterns depending on what process needs to be done next.
The emphasis in planning is to have fast changeovers with
skilled, flexible labor.
Batch
The batch process type, also called batch flow or lot
manufacturing, is a version of intermittent manufacturing
for higher production volume. Lots or batches are larger,
and the flow between the chain of activities is optimized to
minimize distances traveled between workstations. The
emphasis in planning is to have longer production runs and
fewer changeovers.
Project Process Type
Buildings, ships, aircraft, and other large, complex
deliverables are produced using project manufacturing.
Whenever the product is primarily made at one site, is
unique, and has a deadline for completion, project
management techniques are recommended. Project
management and a key project management tool for
scheduling called a Gantt chart are defined in the APICS
Dictionary, 16th edition, as follows:
Project management: The use of skills and
knowledge in coordinating the organizing, planning,
scheduling, directing, controlling, monitoring, and
evaluating of prescribed activities to ensure that
the stated objectives of a project, manufactured
good, or service are achieved.
Gantt chart: The earliest and best-known type of
planning and control chart, especially designed to
show graphically the relationship between planned
performance and actual performance over time.
Named after its originator, Henry L. Gantt, the chart
is used for (1) machine loading, in which one
horizontal line is used to represent capacity and
another to represent load against that capacity; or
(2) monitoring job progress, in which one horizontal
line represents the production schedule and
another parallel line represents the actual progress
of the job against the schedule in time.
Exhibit 1-21: Gantt Chart
Project management has two key elements that differentiate
it from normal operations: It is time-delimited and it
produces unique deliverables. All projects need an end date,
and specialized teams form for the express purpose of
completing projects. The deliverables are unique, meaning
that they require custom designs and, in the case of
buildings, need to be adapted to their environment. Project
management can efficiently manage costs and schedules by
ensuring that the project manager controls the scope (what
will and will not be done).
Topic 5: Manufacturing Process
Layouts
A manufacturing process layout is how work centers are
arranged in a process to best produce everything the
operation needs to produce. Layouts correspond with
particular process types for the most part, but there may be
times when a process type will switch to a different layout
for a portion of a process.
Fixed-Position Layout
The APICS Dictionary, 16th edition, defines fixed-position
manufacturing as follows:
Similar to project manufacturing, this type of
manufacturing is mostly used for large, complex
projects where the product remains in one location
for its full assembly period or may move from
location to location after considerable work and
time are spent on it. Examples of fixed-position
manufacturing include shipbuilding or aircraft
assembly, for which the costs of frequent
movement of the product are very high.
A fixed-position layout is used with project manufacturing to
manufacture items that cannot be moved or are
uneconomical to move frequently. The product remains in
place, and workers and equipment are moved into place as
needed. Some components might still be made elsewhere
and shipped to the production site. The layout thus avoids
the cost of moving the product. Exhibit 1-22 illustrates this
layout.
Exhibit 1-22: Fixed-Position Layout
Functional Layout
A functional layout, also called a process or job shop layout,
organizes work centers by function. The APICS Dictionary,
16th edition, defines some functional layout terms as
follows:
Functional layout: A facility configuration in which
operations of a similar nature or function are
grouped together; an organizational structure
based on departmental specialty (e.g., saw, lathe,
mill, heat treat, press).
Job shop: 1) An organization in which similar
equipment is organized by function. Each job
follows a distinct routing through the shop. 2) A
type of manufacturing process used to produce
items to each customer’s specifications. Production
operations are designed to handle a wide range of
product designs and are performed at fixed plant
locations using general-purpose equipment.
Each work center thus specializes in a given type of activity
and will have the specialized skill sets and equipment
needed to perform those activities. However, the work
centers need to be flexible enough to handle a variety of
tasks within their areas of specialization. Various products
are routed to a customized sequence of workstations. As
Exhibit 1-23 shows, the most frequently produced products
(product line A) may have the most efficient path through
the layout, while others may follow more convoluted paths.
This layout can be used with either of the intermittent
manufacturing process types. It is an economical choice
when there is not enough production volume to justify
setting up an assembly line.
Exhibit 1-23: Functional Layout
Cellular Layout
A cellular layout, also called work cells or cellular
manufacturing, is a hybrid of a functional layout and a
product-based layout that places sequential steps adjacent
to one another so one unit or a small batch can be
processed from start to finish with no waiting at each
station. Thus no work-in-process inventory accumulates and
lead times shrink significantly. The APICS Dictionary, 16th
edition, defines cellular manufacturing and some related
terms as follows:
Cellular manufacturing: A manufacturing process
that produces families of parts within a single line
or cell of machines controlled by operators who
work only within the line or cell.
Work cell: Dissimilar machines grouped together
into a production unit to produce a family of parts
having similar routings.
Nesting: The act of combining several small
processes to form one larger process.
This layout is used extensively in lean to enable fast,
repetitive processing of small batches or single units.
Cellular layouts can be used in intermittent environments
that need to produce low volume and high variety as long as
the products can be grouped into product families. In this
case, each family gets its own custom production line,
called a work cell. Work centers with multiple identical
pieces of equipment might be split up so that each line has
some of the equipment, now placed where it is needed to
minimize materials-handling distances and factory floor
space. In other cases, a large, high-capacity or generalized
piece of equipment might be replaced by smaller, lowercapacity equipment or more-specialized equipment.
Exhibit 1-24 shows how a functional layout might be
rearranged into a cellular layout. Note how each product line
uses nesting to produce dedicated work cells.
Exhibit 1-24: Cellular Layout
Notice how some shared work centers (2, 3, 4, and 7) might
be kept in close proximity to allow for some of the benefits
of a functional layout, such as shared storage of tools and
dies. Even in this case, each cell would still likely have
dedicated equipment so that no work-in-process inventory
accumulates. Since locating similar work centers nearby
may not always be possible (1, 2, 3, 4, and 6 have all or part
of their work centers in more than one place), some work
centers may need to be split up or smaller equipment may
need to be acquired to prioritize flow. When all equipment is
dedicated to a single cell, the equipment in each work cell is
effectively one work center to control, which greatly
simplifies production activity control and scheduling. Since
each part produced is immediately used by the next step in
the line, quality issues will be detected before multiple units
are produced with the same issue. Also, cellular layouts are
designed to accommodate one-piece flow. This means that
only items that are actually ordered are produced, so these
layouts tend to reduce finished goods inventories. The work
center files might still list the similar work centers as
alternate centers for emergency increases in capacity.
A final thing to note about Exhibit 1-24 is that the lines are
arranged in a U shape. The Dictionary defines U-lines as
follows:
Production lines shaped like the letter “U.” The
shape allows workers to easily perform several
nonsequential tasks without much walk time. The
number of workstations in a U-line is usually
determined by line balancing. U-lines promote
communication.
Shapes such as Us or Ls are considered ideal for cellular
layouts, because many things no longer needed at the end
of the process, such as empty bins, will be where they need
to be to repeat the process. Many U cells can also be
located along a single trunk line to allow for a common area
for materials handling. The workers at various pieces of
equipment will be near enough to communicate with each
other or move between stations without wasted motion.
Product-Based Layout
The fixed position and functional layouts might be
considered process-based layouts, and the cellular layout is
a hybrid that could be called a product-family layout. With
the product-based layout, also called a product layout or an
assembly line, the focus is more specialized for a particular
product. The APICS Dictionary, 16th edition, defines a
product layout as follows:
Another name for flow process layout. A system
that is set up for a limited range of similar products.
Focused-factory production is also considered to be
in this category.
A product-based layout is a dedicated flow that minimizes
materials handling between work centers by placing each
workstation in the proper sequence. This results in little
build-up of work-in-process inventory. Exhibit 1-25 shows
how the flow is straightforward and customized for a limited
range of very similar products.
Exhibit 1-25: Product-Based Layout
Product-based layouts are used with either type of flow
system (line or continuous) to maximize efficiency (lowest
cost per unit), but their high degree of specialization
requires large capital expenditures that need to be justified
by large volumes.
Link to Strategy
Tactical and operations decisions must link back to the
overall companywide strategy and the S&OP plan as
determined and approved by executive-level management.
The manufacturing strategy is the basis for all of these
tactical and operational choices. For example,
manufacturing may choose a competition strategy of
becoming a low-cost leader for the supply of intermittently
requested items by deciding to be the most flexible or agile
competitor in the market. This would require the company
to scale production fast enough to meet demand in a maketo-order system and then adjust production to meet a
different order. The emphasis placed on speed and flexibility
as operational priorities requires that they are able to
change over equipment quickly and refrain from producing
large inventories of low-demand items. If these operational
decisions have a lower total cost than competitors can
achieve, the strategy will be effective.
Topic 6: KPIs
Key performance indicators (KPIs) are a key way for an
organization to monitor its progress toward organizational
goals. A balanced scorecard may be used to more efficiently
gather and organize the KPIs that are being monitored.
Key Performance Indicators
The APICS Dictionary, 16th edition, defines a key
performance indicator (KPI) as follows:
A financial or nonfinancial measure that is used to
define and assess progress toward specific
organizational goals and typically is tied to an
organization’s strategy and business stakeholders.
A KPI should not be contradictory to other
departmental or strategic business unit
performance measures. A metric used to measure
the overall performance or state of affairs. SCOR
level 1 metrics are considered KPIs.
An organization can measure many things. Measuring too
few things can result in some goals not being tracked or
managed, and this usually means that the goal will not be
met. The adage is “If you can’t measure it, you can’t
manage it.” However, measuring too many things
complicates and slows decision making. KPIs help focus
organizational efforts and provide critical links to strategy.
KPIs should be set at strategic, tactical, and operational
levels. Metrics selected as KPIs should relate directly to the
priorities set in the strategy, such as helping the
organization to become the low-cost leader.
Note that this model can be extended to the entire supply
chain. Strategies can be set by mutual agreement of all
supply chain partners, who then set their individual
strategies and tactics to work toward this shared goal. In
addition, KPIs can be rolled up to show total supply chain
costs, total inventory in the network, total lead time, and so
on. These metrics become available only if each supply
chain partner agrees to share its summary costs and other
metrics. The benefit can be a faster, cheaper, more-efficient
network that benefits each participant as well as the
ultimate customer.
One way to help all parties agree on the KPIs that should be
measured across the supply chain is to use SCOR metrics,
which were mentioned in the KPI definition. (SCOR metrics
have several levels of increasing specificity, with level 1
being the most general or aggregated level.) The Dictionary
defines the Supply Chain Operations Reference (SCOR)
model in part as follows:
[T]he standard cross-industry diagnostic tool for
supply chain management. The SCOR model
describes the business activities associated with
satisfying a customer’s demand, which include
plan, source, make, deliver, return, and enable. Use
of the model includes analyzing the current state of
a company’s processes and goals, quantifying
operational performance, and comparing company
performance to benchmark data. SCOR has
developed a set of metrics for supply chain
performance, and ASCM members have formed
industry groups to collect best practices information
that companies can use to evaluate their supply
chain performance.
More information on SCOR can be found in the additional
online resources.
Balanced Scorecard
A tool for ensuring that performance measurement links
back to strategy is the balanced scorecard. The APICS
Dictionary, 16th edition, defines the balanced scorecard
as follows:
A list of financial and operational measurements
used to evaluate organizational or supply chain
performance. The dimensions of the balanced
scorecard might include customer perspective,
business process perspective, financial perspective,
and innovation and learning perspectives. It
formally connects overall objectives, strategies, and
measurements. Each dimension has goals and
measurements.
Organizations have conventionally measured performance
using financial results, but the authors of The Balanced
Scorecard, Kaplan and Norton, believed that this led to
short-term management at the expense of long-term goals.
While the financial perspective remains vital to measure and
manage, Kaplan and Norton added three other perspectives
to help organizations focus on the long term:
The customer perspective helps organizations stay
focused on their customers’ changing needs.
The business process perspective helps organizations
measure the cost and efficiency of their processes and
continually improve them.
The innovation and learning perspective helps spur
investment in future growth and workforce maturity.
Organizations might customize these categories to suit their
needs.
The scorecard itself is a simple tool listing the key
performance indicators (KPIs) related to each area. The KPIs
are designed to be drilled down into, so that a strategic KPI
would have several tactical KPIs linked to it and each
tactical KPI would have several operational KPIs.
Management would view the scorecard at the appropriate
level of detail. Each KPI has a goal, a metric, a target, and
an actual result for a given time period or set of periods.
Some organizations set multiple goals, such as a goal and a
stretch goal or good, better, and best goals. Scorecards can
also be used to monitor and control specific areas such as
work centers or supplier performance.
Exhibit 1-26 provides an abridged example of a balanced
scorecard developed to measure the performance of plant
XYZ.
Exhibit 1-26: Balanced Scorecard Example
Goal
Measure
Target
Actual
99%
98%
0
1
20%
fewer
orders
15%
fewer
orders
Customer Perspective
Meet customer
delivery promises.
Plant XYZ delivery
performance
Meet customer quality
expectations.
Number of floor failure
events for XYZ work
centers
Innovation and Learning Perspective
Plant XYZ can
withstand economic
downturns.
Downside supply chain
adaptability (SCOR
metric)
Goal
Workforce flexes to
relieve bottlenecks.
Measure
Percent cross-trained
in 3+ machines
Target
Actual
50%
28%
90%
85%
0
2
100%
94%
<$50,000
$62,000
Business Process Perspective
Maximize plant XYZ
capacity.
Bottleneck work center
02 utilization
Minimize need for
work-in-process
rework.
Number of units
needing rework
Financial Perspective
Maximize plant XYZ
efficiency.
Overall plant efficiency
Minimize finished
goods inventory.
A items’ inventory
carrying cost
Topic 7: Measuring Performance
Performance measurement occurs at strategic, tactical, and
operational levels within an organization. Metrics must be
measurable and have a target goal to be compared to.
Metrics to Measure Performance
Performance measurement involves determining a set of
metrics and the targets or goals for those metrics and then
collecting measurements and comparing results to the
targets to determine relative levels of success. It also serves
to motivate individuals and provide managers with the
information needed to control activities or steer them back
on course.
Performance measurement occurs at various organizational
levels, and these measurements need to be interrelated.
The lower-level measures might be summed to the higher
levels, such as aggregating costs, or two or more metrics
might be combined in some way to form a composite
metric. In this way the metrics help form the links between
the three levels of management—strategic, tactical, and
operational.
Strategic. Strategy sets the long-term direction of the
organization. In order to successfully conduct strategic
planning, measurements must provide information on how
well the actions taken by the organization work toward its
strategic goals. Performance measurements at this level
relate to long-term goals such as profitability, productivity,
learning and growth, and market share.
Strategic metrics are used to monitor progress or trends
as they relate to the overall company strategy and
objectives instead of day-to-day activity. Strategic metrics
will have value only if the same ones are used over the
long term so that the business can get an accurate picture
of its progress.
Tactical. Tactics turn strategy into discrete medium-term
plans. The APICS Dictionary, 16th edition, defines tactical
plans as
the set of functional plans (e.g., production plan,
sales plan, marketing plan) synchronizing
activities across functions that specify production
levels, capacity levels, staffing levels, funding
levels, and so on, for achieving the intermediate
goals and objectives to support the organization’s
strategic plan.
Performance measurements at the tactical level show
progress toward medium-term goals needed to realize the
strategy. These might include budgets, production plans,
and manufacturing metrics like inventory turnover or
perfect orders.
Tactical metrics also show the progress of the operational
effectiveness of the operational metrics and the actions
taken to improve those metrics. Tactical metrics are the
link between the day-to-day operations and the executive
level to ensure that the organization is aligned in
accomplishing the desired goals and objectives.
Operational. Operations are the daily activities of the
organization. Performance measurements at this level
relate to daily work progress. Manufacturing metrics might
include utilization, efficiency, and work center cycle times.
Operational metrics measure the immediate short term on
an hourly or daily basis. These metrics should be
monitored in real time whenever possible, so that day-today activities can be assessed to determine the
operational issues that are having the most impact on the
business. Root cause analysis can be conducted, and
continuous improvement solutions can be identified and
implemented.
Metrics can determine the extent to which strategy is being
realized. A strategy can fail because it was not put in place
properly. If this is the case, metrics related to efficiency will
show that certain targets were missed. If, instead, the
metrics show that efficiency goals were met but overall
revenue goals are off nonetheless, this would point to either
a poor strategy or poor marketing.
Well-designed metrics and targets will motivate individuals
and teams to work toward operational goals, which in turn
will help achieve tactical and then strategic goals. Poorly
designed metrics might motivate individuals and teams to
optimize their own goals at the expense of the goals of
other areas or other parts of the supply chain.
Metrics need three things to be useful. First, there needs to
be a performance criterion, which is the metric itself and
could be a ratio or other guideline specifying what to
measure and how to measure it. Second, there needs to be
a target value or goal, which is called a performance
standard. The Dictionary defines a performance standard
as follows:
In a performance measurement system, the
accepted, targeted, or expected value for the
criterion.
The third thing needed is an actual result or measurement.
The result is then compared to the standard to determine
relative performance.
One way to design metrics to ensure that they support the
overall strategy and the most optimal result for the system
overall is to use key performance indicators.
Section E: Sustainable and Socially
Responsible Supply Chains
After completing this section, students will be able to
Understand the internal and external influences that
shape the organization’s strategy, including mandates for
corporate social responsibility such as the United Nations
Global Compact
Describe the risks associated with failing to comply with
laws and regulations.
This section examines sustainable and socially responsible
supply chains, including the use of the United Nations
Global Compact when operating a supply chain.
Topic 1: Internal and External
Strategy Influences
Organizations may make decisions regarding corporate
social responsibility based on a combination of internal and
external influences.
Internal Influences
Organizations have a number of internal influences within
their own control that help guide their strategy. In choosing
the types of customers they want to market to and the
types of products they will produce to satisfy those
customers’ requirements, organizations accept the fact that
the customers will have expectations that are only partially
in their control.
Organizations may create mission and vision statements
and define values that guide how they want to be perceived
and how they choose to act. The governance style and
polices that result determine an organization’s commitment
to corporate social responsibility.
One example of an international framework that can be
adopted for corporate social responsibility is the United
Nations Global Compact. Other examples include the World
Trade Organization, the European Union, and the
Organisation for Economic Co-operation and Development,
which also issue their own corporate governance guidance
or regulations.
External Influences
Organizations operate in environments that contain
numerous external influences beyond their direct control.
These influences should be understood and accounted for in
any strategy and tactics defined by an organization.
Depending on the nature of a business, competition can be
local, national, or global. The internet and international
shipping containers are examples of the many innovations
that have enabled competition to become much more global
in the world today. The internet makes it easy to find and
assess multiple sources for a product or service as well as
conduct many business communications at very low cost.
The shipping container and oceangoing containerships have
reduced the cost of transportation to the point where most
goods can be sold in most parts of the world at a
competitive price. While this can be a blessing, because a
business can market its products and services globally, it
can also be a curse; few industries remain that have only
local competition.
As discussed elsewhere, an organization must understand
and follow all applicable national laws and regulations in any
state or country in which it chooses to do business.
Topic 2: United Nations Global
Compact
In addition to internally and externally driven choices,
organizations may also choose to participate in external
certifications such as the United Nations Global Compact,
which provides 10 universal principles related to human
rights, labor, environmental protection, and anti-corruption.
UNGC
Within the constraints of laws and regulations, organizations
can choose how they want to operate in their given
environments. Some will do the minimum required to
maintain compliance; others will voluntarily elect to live by
a higher set of standards. Corporate social responsibility
refers to voluntary efforts to balance the needs of the
organization to make a profit and stay in business against
the needs and expectations of society. Areas of particular
concern for policy development include human rights, labor
practices, the environment, and anti-corruption.
For example, organizations might take back products at the
end of their life cycle and then extract expensive or toxic
materials from them for reuse or proper disposal. (In the
European Union and some U.S. states, this is mandated by
law for electronics or products containing certain hazardous
substances.) An even less costly option would be to design
products that avoid using toxic materials when possible. In
another example, an organization might use only postconsumer recycled paper in order to reduce deforestation
while possibly saving money on raw materials. Similarly,
investing in LED lighting will reduce electricity use and total
costs in the long run. These examples show that there can
be some quick wins available to materials managers looking
to comply with corporate social responsibility mandates:
Look for projects that provide simultaneous economic and
social benefits.
An organization that chooses to emphasize sustainability
will work toward responsible economic growth that benefits
the society within which it operates by providing fair wages,
equal opportunities for local workers, minimal impact on the
environment, and so on. In return for these investments, it
may achieve a strategic advantage in the form of, for
example, increased worker and customer loyalty and
positive press.
Because there is a cost to develop and implement a social
responsibility policy, many organizations turn to standards
or frameworks to help ensure that policies are complete,
practical to implement, and easy for the public, investors,
and others to understand. One such framework is the United
Nations Global Compact (UNGC). The APICS Dictionary, 16th
edition, defines this compact and its management model as
follows:
United Nations Global Compact: A voluntary
initiative whereby companies embrace, support,
and enact, within their sphere of influence, a set of
core values in the areas of human rights, labor
standards, the environment, and anticorruption.
UN Global Compact Management Model: A
framework for guiding companies through the
process of formally committing to, assessing,
defining, implementing, measuring, and
communicating the United Nations Global Compact
and its principles.
Organizations that obtain board approval and have their
chief executive become a signatory to the UN Global
Compact voluntarily pledge to adhere to 10 universal
principles. Exhibit 1-27 reproduces these principles verbatim
(with permission from the UN Global Compact).
Exhibit 1-27: UN Global Compact 10 Principles
UN Global Compact 10 Principles
Human Rights
Principle 1
Businesses should support and respect the protection of
internationally proclaimed human rights; and
Principle 2
make sure that they are not complicit in human rights
abuses.
Labour
Principle 3
Businesses should uphold the freedom of association and
the effective recognition of the right to collective
bargaining;
Principle 4
the elimination of all forms of forced and compulsory
labour;
Principle 5
the effective abolition of child labour; and
Principle 6
the elimination of discrimination in respect of
employment and occupation.
Environment
Principle 7
Businesses should support a precautionary approach to
environmental challenges;
Principle 8
undertake initiatives to promote greater environmental
responsibility; and
Principle 9
encourage the development and diffusion of
environmentally friendly technologies.
Anti-Corruption
Principle
10
Businesses should work against corruption in all its
forms, including extortion and bribery.
Voluntarily complying with such a program may help
prevent nations from developing regulations that are costly
to comply with. Organizations that commit to these
principles in policy and action not only improve their public
image but also often find that they have lower risks, such as
for corruption, which makes the organization more stable in
the eyes of investors and thus a more attractive investment.
Of course, in an extended supply chain the actions of an
organization’s suppliers may reflect positively or negatively
on the organization, especially if the organization is the
channel master or the most visible partner in the network.
For this reason, the Global Compact stresses the need to
ensure that suppliers are compliant with these principles or
are making reasonable progress in that direction. When
suppliers are located in countries with low labor costs,
compliance becomes both more vital and more difficult to
ensure.
The UN Global Compact Management Model assists with
incorporating the 10 principles into strategy and daily
operations within an organization and with its suppliers. The
model is practical and scalable and includes a feedback loop
to ensure continuous improvement. The cyclical steps in the
model are as follows:
Commit. This first step is undertaken by company
leaders, including management and the board of
directors. They commit in a transparent way to
incorporate the principles into formal governance
structures such as board approval processes, culture,
strategy, and daily operations.
Assess. In this step, the organization assesses its current
state in terms of risks and opportunities related to human
rights, labor, the environment, and anti-corruption. A risk
and opportunity analysis considers financial costs or
potential gains as well as other harder-to-quantify positive
and negative impacts and then weights these benefits and
costs. This helps the organization prioritize areas for
improvement based on the largest net gains or mitigation
of the worst risks.
Define. This is where the results of the assessment are
used to create or refine the organization’s strategy and
related policies, goals, and metrics. This step defines the
end results up front so success can be determined.
Implement. In this step, the new strategy is transformed
into tactics such as capital improvement projects to
provide any necessary capacity and resources, worker
engagement and education, new policies and procedures
for the organization and its suppliers or distributors, plans
for assessing compliance, and action plans for dealing
with missed goals. Note that suppliers or other partners
who choose not to comply with these policies or cannot
become compliant within a reasonable amount of time
may need to be replaced.
Measure. This is a monitoring and controlling step. It
involves adjusting metrics to ensure that there is a way to
determine whether the new policies and procedures are
being followed. It is also important to adjust metrics used
in individual, team, and external provider performance
assessments so that everyone has an incentive to work
toward the committed goals.
Communicate. The last step is where much of the payoff
of the investment in corporate social responsibility comes
from. Engaging with local communities, the workforce, the
press, and other stakeholders helps the organization to
celebrate its successes and improve its reputation. Since
communication includes listening, a vital part of this step
is listening to these various stakeholders to identify goals
for continuous improvement and new levels of
commitment.
The intent is that the learning generated by the feedback
loop should create an upward spiral of progress in terms of
further refinements and innovative new projects.
The UN Global Compact Management Model has three key
elements that need to be in place for this type of effort to
succeed: governance, transparency, and engagement. The
first step highlights the need for corporate governance,
which includes the “tone at the top” from executives as well
as checks and balances provided by a board of directors.
Transparency is provided when goals and specific metrics
for success are shared so that stakeholders can make a
reasonable assessment of the organization’s activities and
progress. Engagement is embodied in the final step, but it is
important that this engagement be ongoing so that the
organization forms lasting relationships. These relationships
can often be an important source of information on
customer expectations.
Once an organization understands the environment in which
it will operate and decides what its general mission is to be,
it can take these inputs and develop a strategy.
Topic 3: Ethics, Sustainability,
and Social Responsibility
Supply chains may choose to highlight the ethical, socially
responsible, and sustainable choices they make in an effort
to attract and retain customers.
Ethics
Ethics from an organizational standpoint refers to efforts to
establish, promote, monitor, and maintain fair and honest
standards throughout all interactions with every company
stakeholder. Ethics also encourages and expects the same
from all other stakeholders. Ethical practices may require
companies to go above and beyond local laws, especially in
the realms of human rights and diversity.
Follow-through, in the form of effective observation,
evaluation, and communication of ethical performance,
including self-reporting ethical violations to the appropriate
authorities, is encouraged. Companies may also create
codes of conduct, develop education programs, and honor
internationally recognized standards such as those
described in the United Nations Global Compact.
Sustainability
The APICS Dictionary, 16th edition, defines sustainability
as
an organizational focus on activities that provide
present benefit without compromising the needs of
future generations.
This may include contributing to economic growth,
environmental protection, and social progress.
Economic growth refers to the long-term interest for a
company to improve the community it exists in, creating a
better place to live and conduct business. This may exist in
the form of promotion of health, safety, education, and
other economic development.
Environmental protection means striving to protect and
restore the environment while using products, processes,
services, and other activities to promote continued
sustainable development. Common efforts in this realm
include reduction of emissions and waste and using
renewable energy sources. Efforts to reduce overall energy
consumption as well as consumption of water and other
natural resources are also often-pursued goals.
Organizations may choose to highlight sustainability or
other socially responsible goals in their balanced scorecard
to ensure that appropriate attention is given to these issues.
Social Responsibility
The APICS Dictionary, 16th edition, defines social
responsibility as follows:
Commitment by top management to behave
ethically and to contribute to community
development. This may also entail improving the
workforce’s quality of life.
Logistics and manufacturing have a particular role to play in
social responsibility, given the wide reach and potential to
affect people and communities that span multiple regions
and localities. This subset called logistics social
responsibility and is described by the Dictionary as
follows:
The subset of corporate social responsibility that
relates to logistics, including minimizing negative
impacts, monitoring and controlling, reporting, and
continuously improving in social responsibility areas
that include the environment, health and safety,
and labor issues related to warehousing,
transportation, and other logistics areas.
Note that the definitions encompass ethical behavior, which
is concerned with health, safety, and labor issues. Social
responsibility also encompasses sustainability through
environmental concern. Thus, social responsibility can be
understood as a company’s responsibility to act both
ethically and sustainably and to make efforts to
continuously improve in those areas as opportunities arise.
Topic 4: Financial, Legal, and
Regulatory Compliance
Organizations must be aware of the risks associated with
failing to follow established financial, legal, and regulatory
codes.
Financial Compliance
A sustainable supply chain in terms of financial returns
focuses on providing a competitive and stable return on
investment to investors and lenders while protecting
company assets. Organizational strategies should be
focused on promoting growth to enhance long-term
shareholder value instead of attempting to capture shortterm, unsustainable goals.
Companies are increasingly realizing that shareholder value
can be increased through creating value for employees,
customers, suppliers, the community, and other
stakeholders. By analyzing where shareholder value can be
created, organizations can identify investment opportunities
to create value while also serving other sustainability goals.
An example of this may be investing in fuel-efficient
vehicles that reduce long-term fuel costs while also cutting
overall emissions.
Organizations must explicitly recognize investor and lender
interests and use formal mechanisms to create
opportunities to communicate with those investors and
lenders.
Legal and Regulatory Compliance
There are several types of legal and regulatory risk in a
supply chain, including the following:
Compliance risk. Supply chains must comply with the
laws and regulations of the country or countries where
they maintain operations. Of particular note are labor
conditions in developing nations, where unethical and
illegal working conditions may be more common.
Contract risk. Financial or reputational damage may
occur when an organization or one of their business
partners fails to follow contractual obligations.
Trademark/patent infringement. Misusing intellectual
property, infringing on a patent, or using a trademark
without authorization may result in financial and legal
damages to an organization.
Bribery and corruption. Bribery and corruption risk may
occur not only due to the actions of a given organization
but also due to actions taken on an organization’s behalf
by other parties.
Noncompliance with laws and regulations can result in
various costs, including
Financial penalties and other fines
Increased legal costs
Productivity loss associated with increased inspections
Forced closure of operations
Corporate reputation harm and associated financial
losses.
Companies that have legal departments will rely on those
departments to stay abreast of changing laws and
regulations and determine how to best share information on
these changing laws throughout the organization.
Index
A
Advanced planning and scheduling (APS) [1]
Advanced planning systems [1]
Agility [1]
APS [1]
Assemble-to-order (ATO) [1] , [2] , [3] , [4]
ATO [1] , [2] , [3] , [4]
Average inventory [1]
B
Backlogs [1]
Balanced scorecard (BSC) [1] , [2]
Bills of capacity [1]
Bills of resources [1]
Break-even point [1]
See also: Break-even analysis
BSC [1] , [2]
Buffers [1]
See also: Buffer management
Bullwhip effect [1]
Business plans [1]
C
Cash flows [1]
See also: Statement of cash flows
Cells [1]
Cellular layouts [1]
See also: Work cells
Cellular manufacturing [1]
Chase production methods [1]
Competitive analysis [1]
Compliance [1] , [2]
Continuous processes [1]
Continuous production [1]
Corporate social responsibility (CSR) [1] , [3] , [5]
See also: Triple bottom line (TBL)
Costs [1]
Cross-functional organizations [1]
CSR [1] , [2] , [3]
Customer expectations [1]
See also: Order qualifiers, Order winners
Customer segmentation [1]
Customization
Mass customization [1] , [2]
D
Data gathering/collection [1]
Delivery cycle [1]
Delivery lead time [1]
Demand [1]
Demand forecasting [1]
Demand planning [1] , [2] , [4]
Design-to-order [1] , [2] , [3]
Discrete manufacturing [1]
Distribution channels [1]
Downstream [1]
See also: Upstream
E
Echelons [1]
Engineer-to-order (ETO) [1] , [2] , [3]
Environmental scanning
Value chain analysis [1]
Ethics [1]
ETO [1] , [2] , [3]
Executive meeting [1] , [2]
Executive sales and operations planning [1]
Expert judgment forecasting [1]
F
Finance [1]
Finish-to-order [1] , [2] , [3] , [4]
Fixed position layouts [1]
Fixed position manufacturing [1]
Flow manufacturing
Continuous processes [1]
Line processes [1]
Flow processing [1]
Flow shop [1]
Forecasting
Demand forecasting [1]
Forecasts [1] , [2]
Four Ps
Place (as one of the four Ps) [1]
Price (as one of the four Ps) [1]
Promotion (as one of the four Ps) [1]
Functional area strategies [1] , [2]
Functional layouts [1]
Functionally oriented organizations [1]
G
Gantt charts [1]
Globalization [1]
Government regulations [1] , [2]
Governments [1]
H
Hybrid production methods [1] , [2]
I
Integrated measurement model [1]
Intermittent manufacturing processes
Work centers [1]
Intermittent production [1]
Inventory
Average inventory [1]
J
Job shop layout [1]
Job shops [1]
Judgmental forecasting [1]
K
Key performance indicators (KPIs) [1] , [3]
See also: Performance standards
KPIs [1] , [2]
L
Lead time
Delivery lead time [1]
Manufacturing lead time [1]
Procurement lead time [1]
Purchasing lead time [1]
Supplier lead time [1]
Legal infrastructure [1]
Level production methods [1] , [2]
Level schedules [1]
Line processes [1]
Logistics [1] , [2]
M
Macroeconomics [1]
Make-to-order (MTO) [1] , [2] , [3]
Make-to-stock (MTS) [1] , [2] , [3] , [4]
Manufacturing
Discrete manufacturing [1]
Repetitive manufacturing [1]
Manufacturing environments
Assemble-to-order (ATO) [1] , [2] , [3] , [4]
Engineer-to-order (ETO) [1] , [2] , [3]
Make-to-order (MTO) [1] , [2] , [3]
Make-to-stock (MTS) [1] , [2] , [3] , [4]
Package-to-order [1] , [2]
Manufacturing lead time [1]
Manufacturing philosophy [1]
See also: Manufacturing process
Manufacturing planning and control (MPC) [1] , [2]
Manufacturing process layouts
Cellular layouts [1]
Fixed position layouts [1]
Functional layouts [1]
Product layouts [1]
Manufacturing process types
Flow manufacturing [1]
Intermittent manufacturing processes [1]
Project processes [1]
Manufacturing strategy [1] , [2]
Marketing [1] , [3]
See also: Four Ps
Marketing management [1]
Marketing strategies [1] , [2] , [3]
Mass customization [1] , [2]
Master planning [1]
Master scheduling [1]
Material requirements planning (MRP) [1]
See also: Closed-loop MRP, Enterprise resources planning
(ERP), Manufacturing resources planning (MRP II)
Materials management [1]
Matrix diagrams [1]
Metrics
Supplier metrics [1]
Mission [1]
Mission statement [1]
Mixed-model production methods [1] , [2]
Modularization [1] , [3]
See also: Standardization
MPC [1] , [2]
MRP [1]
MTO [1] , [2] , [3]
MTS [1] , [2] , [3] , [4]
N
Nesting [1]
O
Operations speed [1]
Order qualifiers [1]
See also: Customer expectations
Order winners [1]
See also: Customer expectations
Organizational strategies [1]
P
PAC [1]
Package-to-order [1] , [2]
Performance measurement [1] , [2]
Performance objectives [1]
Performance standards [1]
See also: Key performance indicators (KPIs)
Place (as one of the four Ps) [1]
Placement [1]
Postponement [1] , [2]
Pre-meeting [1] , [2]
Pre-S&OP meeting [1] , [2]
Price (as one of the four Ps) [1]
Process batches [1]
Process flow [1]
Procurement lead time [1]
Product-based layouts [1]
Product differentiation [1]
Product families [1]
Production activity control (PAC) [1]
Production environments [1] , [2] , [3] , [4] , [5] , [6] , [7] ,
[8]
Production lead time [1]
Production leveling [1] , [2]
Production planning [1] , [2]
Production planning methods
Chase production methods [1]
Hybrid production methods [1] , [2]
Level production methods [1] , [2]
Production plans [1]
Product layouts [1]
Project management [1]
Project processes [1]
Promotion (as one of the four Ps) [1]
Purchasing lead time [1]
Q
Qualitative forecasting methods
Judgmental forecasting [1]
Quality [1]
Quality tools
Matrix diagrams [1]
R
Remanufacturing [1]
Repetitive manufacturing [1]
Resiliency [1]
Resource bills [1]
Resource planning [1]
Resource requirements planning [1]
Reverse logistics [1]
See also: Green reverse logistics
Risk management [1] , [2]
Risks [1]
S
S&OP [1] , [2] , [3]
S&OP meetings [1] , [2]
Sales and operations planning (S&OP) [1] , [2] , [3]
Sales and operations planning (S&OP) meetings
Executive meeting [1] , [2]
Pre-meeting [1] , [2]
Sales and operations planning (S&OP) process [1]
Sales and operations planning process [1]
Sales plan [1]
SCM [1]
SCOR model [1]
Segmentation
Customer segmentation [1]
Supplier segmentation [1]
Service industries [1]
SMART criteria [1]
Social responsibility [1] , [2] , [3] , [4]
Specific, measurable, attainable, relevant, and timely
criteria [1]
Strategic plans [1]
Subcontracting [1]
See also: Outsourcing
Supplier lead time [1]
Supplier metrics [1]
Supplier segmentation [1]
Supply chain management (SCM) [1]
Supply Chain Operations Reference (SCOR) level 1 metrics
Agility [1]
Supply Chain Operations Reference (SCOR) model [1]
Supply chains [1]
Supply chain strategies [1]
Supply planning [1]
Sustainability [1]
T
Tactical plans [1]
Total cost curve [1]
Transaction channels [1]
Transportation stakeholders
Governments [1]
U
U-lines [1]
UNGC [1]
UN Global Compact [1]
UN Global Compact Management Model [1]
United Nations Global Compact (UNGC) [1]
United Nations Global Compact Management Model [1]
Upstream [1]
See also: Downstream
V
Value [1]
Value chain analysis [1]
Variety [1] , [2]
Vision [1]
Vision statement [1]
Volume [1] , [2]
W
What-if analysis [1]
Work cells [1]
See also: Cellular layouts
Work centers [1]