Objectives
After completing this chapter, you will be able to:
• Describe the steps in the production planning process
of a high-volume manufacturer such as Fitter Snacker
• Describe Fitter Snacker’s production and materials
management problems
• Describe how a structured process for Supply Chain
Management planning enhances efficiency and decision
making
• Describe how production planning data in an ERP
system can be shared with suppliers to increase supply
chain efficiency
1
1
Production Overview
• To meet customer demand efficiently, Fitter Snacker
must:
– Develop a forecast of customer demand
– Develop a production schedule to meet the
estimated demand
• ERP system is a good tool for developing and
executing production plans
• Goal of production planning is to schedule production
economically
2
Production Overview (cont’d.)
• Three general approaches to production
– Make-to-stock items: made for inventory
(the “stock”) in anticipation of sales orders
– Make-to-order items: produced to fill
specific customer orders
– Assemble-to-order items: produced using a
combination of make-to-stock and maketo-order processes
3
Capacity Planning
• Capacity planning is a long-term strategic decision
that establishes a firm's overall level of resources.
• long time horizon: usually a year or more for building
new facilities or acquiring new businesses.
• Capacity decisions affect product lead times,
customer responsiveness, operating costs, and a
firm's ability to compete.
• Inadequate capacity can lose customers and limit
growth. Excess capacity can drain a company's
resources and prevent investments in more lucrative
ventures. When to increase capacity and how much
to increase capacity are critical decisions.
Strategy of Timing Capacity
Expansion
• Capacity lead strategy. Capacity is expanded in anticipation of demand
growth. This aggressive strategy is used to lure customers from competitors
who are capacity constrained or to gain a foothold in a rapidly expanding
market.
• Capacity lag strategy. Capacity is increased after an increase in demand has
been documented. This conservative strategy produces a higher return on
investment but may lose customers in the process. It is used in industries
with standard products and cost-based or weak competition. The strategy
assumes that lost customers will return from competitors after capacity has
expanded.
• Average capacity strategy. Capacity is expanded to coincide with average
expected demand. This is a moderate strategy in which managers are certain
they will be able to sell at least some portion of the additional output.
Factors Affecting Capacity
Expansion
• How much to increase capacity depends on
– the volume and certainty of anticipated demand;
– strategic objectives in terms of growth, customer service, and
competition; and
– the costs of expansion and operation.
• Capacity can be increased incrementally
• Incremental expansion is less risky but more costly.
• An attractive alternative to expanding capacity is
outsourcing, in which suppliers absorb the risk of
demand uncertainty.
The Production Planning Process
• Three important principles for production planning:
– Work from sales forecast and current inventory
levels to create an “aggregate” (“combined”)
production plan for all products
– Break down aggregate plan into more specific
production plans for individual products and
smaller time intervals
– Use production plan to determine raw material
requirements
7
The SAP ERP Approach to Production
Planning
Concepts in Enterprise
Resource Planning,
Third Edition
Figure 4-2 The production planning process
8
Production Planning and Control
•
•
Production Planning is one of the main function of a
production Manager. This is concerned with determining
the QUANTITY and TIMING of production for the FUTURE.
Isn’t it DIFFICULT!
Production manager try to determine the BEST way to
meet forecasted demands by:
1. Adjusting production rates
2. Adjusting manpower levels
3. Inventory levels
4. Overtime works
5. subcontracting
Decision-making in Operations Management
•
•
•
1.
2.
3.
4.
5.
6.
Operations managers are decision makers.
What makes the difference between a Good
Decision and a Bad Decision?
“Good’ decision = logic + Data + Alternatives
•
Steps
Define the problem and the factors that influence it
Establish decision criteria and goals
Formulate a model (relation between goals and
variables)
Identify and evaluate alternatives
Select BEST alternative
Implement the decision
Quantitative Analysis
Logic
Historical Data
Market research
Scientific analysis
Modeling
Decision
Problem
?
Qualitative Analysis
Emotions
Intuition
Personal experiences
Rumors
The Planning Process
• Planning
Short Term
Medium Term (begins once long term
capacity decisions are made. Monthly and
quarterly plans, AGGREGATE
PRODUCTION PLAN – related to operation
managers – Tactical Scheduling decisions)
Long Term (Facility Location and
expansion, New product development,
Research funding, investment over several
years, strategic issues – related to Top
Management)
Master Production Scheduling (MPS)
• Objectives
• Determine the quantity and timing of completion of
end items over a short-range planning horizon.
• Schedule end items (finished goods and parts
shipped as end items) to be completed promptly and
when promised to the customer.
• Avoid overloading or under loading the production
facility so that production capacity is efficiently
utilized and low production costs result.
Time Fences

The rules for scheduling
1-2
weeks
2-4
weeks
4-6
weeks
6+
weeks
+/- 5%
+/- 10%
+/- 20%
Change
Change
Change
No Change
Frozen
Firm
Full
Open
Detailed Scheduling
• Detailed plan of what is to be produced, considering
machine capacity and available labor
• One key decision in detailed production scheduling
– How long to make the production runs for each
product
– Production run length requires a balance between
setup costs and holding costs to minimize total
costs to the company
15
Detailed Scheduling (cont’d.)
• Fitter Snacker uses repetitive manufacturing
• Repetitive manufacturing environments usually
involve production lines that are switched from one
product to another similar product
– Production lines are scheduled for a period of
time, rather than for a specific number of items
16
Detailed Scheduling (cont’d.)
• Production runs should be decided by
evaluating the cost of equipment setup
and holding inventory
• Integrated information system simplifies
this analysis
– Automatically collects accounting
information that allows managers to better
evaluate schedule trade-offs in terms of
costs to company
17
Materials Requirements Planning
(MRP)
• Determines required quantity and
timing of the production or purchase of
subassemblies and raw materials
needed to support MPS
• Bill of material (BOM): list of the
materials (including quantities) needed
to make a product
18
Materials Requirements Planning
(MRP)
Figure 4-16 The bill of material (BOM) for Fitter Snacker’s NRG bars
19
Materials Requirements Planning
(MRP)
• Lead times and lot sizing
– Lead time: cumulative time required for the
supplier to receive and process the order, take the
material out of stock, package it, load it on a
truck, and deliver it to the manufacturer
– Lot sizing: determining production quantities and
order quantities
• MRP record: standard way of viewing the MRP
process on paper
20
Materials Requirements Planning
(MRP) (cont’d.)
Figure 4-17 The MRP record for oats in NRG bars, weeks 1 through 5
21
Production – Inventory System
#
#
25 Day Delay to sense
needs, place
and transmit
orders
5 Day Delay
to sense
needs, place
and transmit
M.O.s
25 Day Delay
for Review
and
Transmission
of orders
Information Flow
Material Flow
Days for transit time
Days to process or to
handle and issue orders
13 Day Delay
for Review
and
Transmission
of orders
Demand
Raw
Material
Vendor
Factory
Factory
Warehouse
35
30
Distributor
Inventory
4
1
Company System Under
Retail
Inventory
2
10
1
5
50 Independent
Distributors
Managerial Control
Production Planning
Ultimate
Customer
1
500 Independent
Retailers
Dynamo.xls
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