1

Topic 2
Supply Chain Management

Topic 2.1.

Planning levels
Гаврилов Д.А., CPIM, APICS Associate CPIM Instructor,
MSD Pharmaceuticals, Москва,29-30.10.2012
 3 Organization’s planning system levels

Strategic planning

STRATEGY
(Investments
Business planning
Management )

TACTICS
Sales & Operations planning (Capacity
Management)

Priority and Capacity planning

ACTIONS
(Orders
Management )
Dispatching & Execution

4
Planning Strategic
system structure planning

Business
planning

Customers Manufacturing
Sales and
Operations planning
Forecasts Engineering
Master Rough-Cut
Demand Production Capacity
Distribution Management Scheduling Planning Suppliers
(MPS ) (RCCP )

Bills of
Material Requirements Inventory
materials
Planning (MRP) and
Work centers Capacity Requirements Open
and routings Planning (CRP) orders

Quality Production
Purchasing
Control Activity Control
 5

Parameters of plans
Parameters of plans – detailing, planning horizon, updates frequency, time
bucket, top-management involvement
Parameter Examples

Detailing Product categories, Product lines,

Items (SKUs)
Updates frequency Annually , Quarterly, Weekly,
Daily …
Planning horizon 3- 5 years; 3- 12months; 1- 8
weeks…
Time bucket Year, Quarter, Month, Day, Shift
Top-management involvement Significant , Moderate, Low

Parameters of the plan are determined by plan’s goal.

Priority planning hierarchy

Level Detailing Horizon Time Review
bucket
Sales & Operations Product Line 1-2 years Quarter Quarterly/
Plan or Monthly
Month
Master Production Independent Quarter Month or Monthly
Schedule Demand Items and Year Week
Final Assembly
Schedule

Material Dependent Like for Week or Weekly

Requirements Demand Items MPS Day
Planning
Production Operations in 1-4 weeks Day or Daily
Activity Control or routing Hour
Shop Floor
Control
7

Capacity planning hierarchy

Level Priority plan Detailing Inputs Output

Resource Sales & Product lines Production plan (by Resource

requirements Operations product lines) requirements
planning (RRP) Plan (S&OP) Resource profile versus resource
availability
(usually monthly)

Rough-cut Master Independent Available time and Bottleneck

capacity Production demand items resources for bottlenecks capacity load
planning Schedule MPS versus time
(RCCP) (MPS) Resource profile (with available (weekly)
resource lead-time offsets
if necessary)

Capacity Material Components MRP Work centers

requirements Requirements and raw Available time (in capacity load
planning (CRP) Plan (MRP) materials standard hours) versus time
WIP information available (daily)

Topic 2.2.

Manufacturing environments
Гаврилов Д.А., CPIM, APICS Associate CPIM Instructor,
MSD Pharmaceuticals, Москва,29-30.10.2012
9
Manufacturing Environments
• Engineer-to-order (ETO)
• Make-to-order (MTO)
• Assemble-to-order (ATO)
• Make-to-stock (MTS)
• Mass customization

10

Determinants of Manufacturing
Environments
• Lead time expectations
• Product design input from customers
• Product volume and variety
• Product life cycle
11
Cumulative lead time
LT : 4
CLT AA CLT : 22

LT : 10 LT : 3 LT : 5
P1 CLT : 10 P2 CLT : 10 BB CLT : 18

LT : 7
P3 CLT : 7

LT : 3 LT : 6
CC CLT : 13 P4 CLT : 6 P5

LT – lead time
LT : 10
DD CLT : 10
CLT – cumulative
lead time

Purchase Purchase Purchase Purchase

order order order order

12
Manufacturing environments (strategies)
Engineer - Make - Assemble - Make -
to-order (ETO) to-order (MTO) to-order (ATO) to-stock (MTS)

Raw materials Semi -finished goods Finished goods

t

Clients wants

Company wants
13

Lead Time and Manufacturing

Environments
ETO delivery lead time Engineer-
toorder

Design Purchase Manufacture Assemble Ship

MTO delivery lead time

Inventory Manufacture Assemble Ship Make-to-order

ATO delivery lead time

Assemble-to-
Manufacture Inventory Assemble Ship order

MTS delivery lead

time Make-to-stock
Manufacture Assemble Inventory Ship

14
Volume and Variety Relationships
High
Engineer -to-order
Mass
customization
Make -to-order
Product variety

Assemble -to-order

Make -to-stock

Low High
Product volume
15

Product Life Cycle

Units
sold Time

Introduction Growth Maturity Decline Phase -out

16
Product Life Cycle and Manufacturing Environments

Units
sold Time

Introduction Growth Maturity Decline Phase -out

ETO

MTO

ATO

MTS

Mass customization
17

Manufacturing environments and planning

MTS ATO MTO
Finished Final Finished Finished
goods assembly goods goods Manufacturing process

MPS MPS Final

assembly

MPS ?
Raw materials / Raw materials / Raw materials /
Components Components Components

18
Where safety stock sits to protect against demand
variation
MTS ATO MTO ETO

Finished goods
inventory

Semi-finished
goods
inventory

Raw material
inventory No
inventory 19

Topic 2.3.

Sales and Operations Planning

Гаврилов Д.А., CPIM, APICS Associate CPIM Instructor, MSD Pharmaceuticals,
Москва,29-30.10.2012

20
AMR Research Report

21

Trade -offs problem

Keep
inventories
low!

Chief financial
Keep factory
running !
officer Keep service
level high !

???

Chief production
Chief sales
officer
officer
Master scheduler
 22

Trade-offs
Inventory management

efficiency service level

There is an inherent conflict between operations management goals.
You have to resolve this conflict in your operations strategy.
23

S&OP in a planning
system Strategic
planning

Business
S&OP: planning

 provides linkage Customers

Sales and
Manufacturing

between strategy Operations planning

Forecasts Engineering
and operations ; Master Rough -Cut
 balances demand Demand
Management
Production
Scheduling
Capacity
Planning
Distribution Suppliers
and capacity ; (MPS ) (RCCP )

 is a framework Bills of
Material Requirements Inventory
materials
for detailed plans Planning (MRP) and
Work centers Capacity Requirements Open
( item sales plan, and routings Planning (CRP) orders
production and
Quality Production
supplier schedules Purchasing
Control Activity Control
etc.)
 24

Volume and Mix

• Volume
The «big picture» • Mix
The «details»
How much?
Rates Which ones?
Product families Sequence
Individual products,
Customer orders
25

Planning horizon

• Planning horizon (APICS Dictionary) – the amount of time a

plan extends into the future.

• Planning horizon rule for any plan: planning horizon must

be long enough to fulfill a plan.

• For S&OP planning horizon must be long enough to permit

any needed additions to capacity.

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 Forecasting and time fence

27

Demand forecast detailing

Forecast accuracy

 The more detailed forecast ??????

Business 98 %
object, the less accurate the
Business
??????? Unit
forecast 85 %
Segment
?????????
 Forecast detailing have to 65 %
Товарная группа
????? ?????????
Product family
be justified
?????
Brand

????????
Stock keeping
???????
unit

????????
Stock keeping
???????
unit by??customer
????????
5
0%

Product family – a group of products with similar key resource

consumption characteristics, grouped for demand forecasting
purposes.
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Product families

1. Market-oriented vs Resource-oriented vs Financially-

oriented
2.How many? Advise: 5-10 would be an optimal
decision(if less –it’s better but without
undermining a process)

3.Subfamilies – for calculations and preparations but not

for top-management attention (the only
exception if a special attention should be paid for
a particular subfamily)

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Key resources
Key resources requirements in S&OP process are compared
against availability of these resources.
Key resources could be:
 Machinery
 Personnel
 Raw materials  Warehouses capacity  Etc.
Particular resource could be considered as key resource if it is:
• Long lead time resource
• Scarce resource
• Expensive resource
 30

S&OP Process steps 5

Executive S&OP
meeting

4 Pre -S&OP
meeting

3 Supply review

2 Demand review

1
Product review

1 week 2 week 3 week 4 week

30

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S&OP process roles

Sponsor: General manager
Process owner: S&OP process coordinator
Process team: marketing, sales, customer service, finance, supply
chain, HR, …

Sponsor – a person who makes key decisions.

Process owner – a manager who is responsible for a
process team work and its results.
Process team – employees who are responsible for
performing particular process tasks.
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 32

1. Product review
Product review should help to manage products life cycle and to
create new products to substitute the old ones and to support a
business growth
New to the world

New for us

Addition to
existing products

Product change
Sales Product cost
change
Time
Existing products
Products
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1. Product review
Sponsor:
Research & Development Director or
Marketing Director
Inputs: Agenda: Outputs:
1. Sales actuals 1. NPI projects status: recently completed 1. New products promotion
(recently released NPI’s, new NPI’s, product cancellations plan
new products only) 2. Resources re-allocations 2. NPI projects plans
2. NPI Projects status 3. Plan/actual gap influence on approved 3. Product cancellation plan
3. New NPI initiatives S&OP plan analysis

Owner: product manager KPI: NPI’s on time; NPI

Team members: R&D, marketing, manufacturing, purchasing and budget plan/actual;
logistics, project management timeto-market
34
 2. Demand review
Demand review should create a request from marketing and
sales to supply chain (to operations) for materials and
capacity, required to address customer’s demand in particular
time period.

35

Different demand forecast viewpoints

MARKETING

FINANCE

SUPPLY CHAIN

SALES

TODAY

36

2. Demand review

Sponsor:
Sales Director or Marketing Director
Inputs: Agenda: Output:
1.Sales actuals 1. Market changes analysis 1. Approved demand plan
2.NPI and 2. Sales actuals/Sales plan gaps analysis 2. Approved promotion plan
cancellations plan 3. Promotion plan review and approval 3. Revenue plan
from Step 1
4. Demand plan review and approval
3.Sales targets
5. Plan/actuals gap influence on approved
S&OP plan analysis

Owner: demand planning manager KPI: demand forecast

Team members: sales, marketing, finance, customer service accuracy; customer service
level
37

3. Supply review
Supply review should assess supply chain capabilities
(in terms of production facilities capacity, inventory,
other resources and financial capabilities) to fulfill
marketing and sales request economically efficiently.
The task of operations is to create capacity plans
which allows to address demand plan requirements.

37

38

3. Supply review
Sponsor:
Logistics Director or
Manufacturing Director
 Inputs: Agenda: Outputs:
1.Available 1. Supply Plan/Actuals gaps analysis 1. Approved operations plan
resources 2. Supply plan approval, gaps between (production,
(inventory, shelf demand and supply identification inventory/backlog plans)
space etc.) limits 2. Resources required plan,
3. Resources requirements calculation and
2.NPI and assessment capital costs plan
cancellation plans 3. Issues to consider on
4. Plan/Actuals gaps influence on approved
from step 1 PreS&OP meeting
S&OP plan analysis
3.Demand plan from
step 2
Owner: Supply chain manager KPI: customer service level,
Team members: manufacturing, purchasing and logistics, finance, HR inventory and supply
plan/actuals, costs
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Aggregate planning problem

1. Chase strategy
2. Level strategy
3. Subcontracting strategy
Strategy choice depends upon several factors:
Demand, product and market features
Associated costs analysis Resources
availability
Resources flexibility
Pure strategies are seldom (hybrid

…
strategies is a more common case)

40

1. Chase strategy
Advantages Disadvantages
 Stable inventory level  Extra-resources requirements
 Faster demand changes reaction  High production costs

2. Level strategy
Advantages
 Low production costs
 Good employer reputation
 High production efficiency
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Disadvantages
 Too high inventory in low season
 Too low inventory in high season
 Slow reaction to market changes

42

Costs, associated with aggregate planning

 ▫ Tax
strategy problem
• Chase strategy:
• Level strategy: production volume
inventory costs changes costs ▫
▫ Capital costs Overtime
▫ Warehouse space maintenance ▫ Additional shifts
▫ Warehouse personnel ▫ Temporary
subcontract
▫ Inventory spoilage and
costs
deterioration
▫ Higher scrap
▫ Theft
▫ Hiring and layoff costs
▫ Insurance costs
▫ Low employees moral
43 3. Subcontracting strategy
Advantages Disadvantages
 Low production costs  Out-sourcing costs
 Good employer reputation  Out-sourcing lead time

44

Resource Requirements Planning

 RRP – for Production Plan validation
 Resource Profile required (by product lines)
  Resources could be «aligned» and «non-aligned»
« Aligned » «Non-

А В С D E F

1 2 3 4 5 6

7 8
aligned»

Product lines

Resources

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4. Pre-S&OP Meeting

• Meeting goals:

▫ To prepare demand and supply balancing decisions with

respect to company’s business plan and policies;
▫ To prepare recommendations for Executive S&OP Meeting;
▫ To detect issues without clear consensus; ▫ To
play alternative business scenarios; ▫ To create
S&OP Meeting agenda.
 46

4. Pre-S&OP Meeting
Sponsor:
General manager or director from C-line
Inputs: Agenda: Outputs:
1.NPI and 1. Demand and Supply gaps analysis 1. Approved S&OP plan – for
cancellation plan 2. Business plan and S&OP plan gaps analysis Executive S&OP Meeting
(1) 3. Gaps influence on S&OP plan analysis 2. Additional resources plan
2.Demand plan (2) and costs
4. Gaps closure suggestions discussion
3.Supply plan (3) 3. Issues to solve on
4.Issues to discuss Executive S&OP Meeting

Owner: Planning manager KPI: meeting preparation quality

Team members: marketing, sales, R&D, manufacturing, purchasing (meeting hours)
and logistics, finance, HR
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S&OP and budgeting

Balance sheet

Sales plan

P&L Report
S&OP Budget

Operations plan
Cash-flow Report

48
Strategy and tactics alignment
One of Business strategy
most Top 4-10 + years
important down
S&OP
Business plan
outputs
2-3 years

Plan to close gap between S&OP and business plan

 What changes in S&OP balance do we see S&OP

since last S&OP cycle? 1818-24-24 monthsS&OP monthsS&OP
 Is this gap 18-24 monthsS&OP
systematic or random? 18-24 monthsS&OP
 What actions should Bottom 1818-24-24 monthsS&OP months
we do to close or up 18-24 months minimize a gap?
49

5. Executive S&OP Meeting

• Meeting goals:

▫ To consider Pre-S&OP meeting suggestions and make

decisions;
▫ To make decisions on product groups under question;
▫ To approve production volume changes associated with
significant costs;
▫ To align S&OP plan in dollars with business plan;
▫ To solve issues which wasn’t decided on Pre-S&OP meeting;
▫ To consider special issues and to make decisions (NPI
problems, special projects etc.)
▫ To estimate strategy and policies with respect to demand and
supply balance.
 50

5. Executive S&OP Meeting

Sponsor :
General manager

Inputs : Agenda :
Outputs from steps1-4 1. KPI’s analysis
Revenue\ profitability
Customer service level
Outputs : NPI KPI’s, demandKPI’s, supply KPI’s
Approved integrated 2. Business trends and changes analysis
S&OP plan
3. Key issues to discuss and approve
4. S&OP and business plan alignment
5. S&OP plan approval
6. Next S&OP improvements recommendations discussion and
approval
Owner : planning manager KPI : meeting preparation
Team members : marketing, sales, R&D, manufacturing, quality (meeting hours)
purchasing & logistics
, finance, HR