DEMAND PLANNING Session 3 – Demand Planning 39 Institute of Manufacturing Resource Management

of India Introduction Demand Management is a function of recognizing and managing all of the demands
for products to ensure that the master scheduler is aware of them. The two main components of
Demand Management are: Forecast (Uncertainty) and Order Service (Certainty). Demand Management
encompasses the activities of Forecasting, Handle order receipt & entry, Order promising, Branch
warehouse requirements, Interplant Orders and Service parts requirement and would cover demand
from the following: ◊ Customers – domestic & foreign ◊ Other plants in the same corporate family ◊
Branch warehouse in other locations ◊ Consigned stocks in customers’ locations. Demand planning is
vital to every business & every significant management decision.. It also helps in long-term & short-term
process selection, Capacity planning & facility planning. Market place, customer expectations, and
customer relationship drives planning. Key Demand Drivers Marketplace a Key Driver Market place
basically consists of customers, competitors and economic & regulatory policies. Customers Customers
are considered as a king in today’s fierce competition. The preferences of customer changes due to
various factors beyond the control of the organization viz change in customer’s need based in his
experience with the product , general perception of a product, word of mouth etc. All these factors play
an important role in future demand of the product. Competitors Entry of new competition, competitor’s
differentiation in product and technological innovation/revolution by competitor causes major threats
on firm’s existing product line. Session 3 – Demand Planning 40 Institute of Manufacturing Resource
Management of India An organization has to continuously innovate to sustain competitive advantage in
the market place. Economy and Regulatory Policy Economic Policies : Economic policies declared by
states & central government has major effect on demand. Increase in individual taxes & on product itself
may discourages customer from spending. On the other hand removal of taxes may boosts demand for
the product. Regulatory Policies : These are the legal guidelines set by regulatory authority. The
introduction and amendments in statutory requirement increases or lowers the demand, sometimes it
may kill the demand completely. Customer Expectations Order Winners and Qualifiers To be competitive
in market place, an organization must have minimum set of characteristics/features in its product.
Customer requirements may be based on cost, quality, delivery, after sale service. These basic
requirements are called Order qualifier. On the other side to attract the customer to buy its product an
organization must have certain special characteristics in the product it offers. Those features &
characteristics that make customer to choose its product over a competitor are called order winner.
Order winner provides organization with competitive advantage As the customer expectation changes
order winner also changes. Order winner over a period of time may change and become an order
qualifier. In addition to Order qualifier & Order Winner, there are certain characteristics whose presence
or absence may not make any difference on customer’s choice, such features are called Non Issues.
Marketing Strategy Marketing strategy deals with number of issues like determining market segment,
developing market niches, analyzing competition & increasing market share Session 3 – Demand
Planning 41 Institute of Manufacturing Resource Management of India Customer Relationship Customer
relationship management is important to be competitive in the market and increase the market share. It
has to be a systematic approach that will develop a long-term relationship with a customer that builds
loyalty for an organization. Customers are continuously informed about new products, innovations in
existing products, sales schemes, annual maintenance renewals, discounts & so on. This gives customer a
feeling of uniqueness & in turn develops loyalty for an organization. Demand Management Demand
management is the function of coordinating and controlling of all the sources of demand in order to
enhance efficiency and effectiveness of total business. Demand management could be short, medium or
long term. Sources of Demand Following are the sources of demand ◊ Consumers – the end user of a
product ◊ Referrers – people who recommend the products ◊ Dealers & Distributors – channel of
distribution ◊ Inter company – demand from sister or group company ◊ Service needs – requirement
from after sales service department Kinds of Demand Dependent Demand It is a demand for the product
or service caused by demand for another product or services. Dependent demand is directly related to
or derived from the bill of material structure for other items or end products. Such demands are
therefore calculated and need not or should not be forecasted. This typically includes raw materials,
purchased or manufactured parts or ingredients and manufactured subassemblies, attachments and
accessories. Dependent demand is derived from other products and is hence calculated Session 3 –
Demand Planning 42 Institute of Manufacturing Resource Management of India For example if an
organization is making table tops with wooden top & 4 legs, then if firms sells100 table tops, then it
requires 100 wooden tops & 400 legs. This demand of wooden tops & legs is dependent on demand of
tabletop & hence termed as dependent demand. Independent Demand If the demand does not depend
upon or is unrelated to the demand of other items then it is called independent demand. Tabletop in
above example is an independent demand. This typically includes demand for finished goods, parts
required for destructive testing and service parts. Independent demand is forecasted. Sometime an
inventory item can be subjected to both dependent demand and independent demand. For example,
parts like automobile glass may represent both demands – dependent (as it depends on the
manufacturing schedule of new automobiles) and independent (as it may be used as a replacement
parts). Aggregate Vs Disaggregate Demand Aggregate demand : Demand estimates for a product group
or family is called aggregate demand Disaggregate demand : Demand estimates for an individual product
is called disaggregate demand For an example in a Home Appliance manufacturing company that makes
air conditioner, refrigerator of different capacities, the demand estimates for total of air conditioner &
refrigerator is aggregate demand. E.g. 20,000 air conditioner or 1,00,000 refrigerators. Similarly demand
estimates of each product like 10,000 nos of 165 Ltr Refrigerator, 30,000 nos. of 200 Ltr refrigerators is
disaggregate demand. Higher the level of aggregation is, the more accurate the demand estimate; the
lower or more detailed or disaggregated the level, the less accurate the demand estimate. Though the
increased demand forecast accuracy results from aggregation, the aggregated data may not be as useful.
The most commonly used dimensions of aggregation and desegregations are time, geographic location
and product group. The above example cited above is at product group level. Characteristics of Demand
Demand pattern for products & services could be as follow : Session 3 – Demand Planning 43 Institute of
Manufacturing Resource Management of India Trend : It is an increasing or decreasing steady pattern of
demand from year to year. A trend could be a) Linear trend b) S Curve c) Asymptotic Trend d) Exponential
trend Seasonality : The demand in a particular period every year rises above or goes below the average
yearly demand. This happens as a result of seasonal changes like festival, holiday’s etc. Random
variations : Random variations are caused by chance events. Statistically when all the known causes for
demand (trend, seasonal, cyclical) are subtracted from the total demand, what remains is unexplained
portion of demand. This unexplained portion is due to randomness. Cyclical : The world economy as well
as country’s economy influences overall demand pattern. Cyclical factors are more difficult to determine
because the time span may be unknown. Cyclical influence on demand may also come from political
election, war, and sociological pressure. Forecast Management The forecast is an estimate of future
demand. A forecast can be determined by mathematical means using historical data; it can be created
subjectively by using estimate from informal sources; or it can represent a combination of both
techniques. It looks into occurrences, timings or magnitudes of future events. Accurate forecast can
reduce uncertainty and minor forecasting improvements have a remarkable and direct impact on
inventory cost and responsiveness to customer requirements. Definition of Forecast Management
Forecast management is a process of collection of data, selection of appropriate techniques, forecasting
& then taking corrective action if actual demand varies significantly. Objectives : Planning of long lead
time resources like plant expansion, capital equipment Planning of medium & short term resources like
labor, procurement of materials To shorten customer’s delivery time Session 3 – Demand Planning 44
Institute of Manufacturing Resource Management of India Principles of Forecast ◊ Forecasts will be
wrong- as forecasting is based on various consideration viz., the source of data, the forecasting method,
the time dimension of data, the level of aggregation of data, the unit of measure used, the frequency of
reassessment, and the quality and accuracy of the data itself, it is bound to go wrong. ◊ Forecast shall
include an estimate of error. This estimates of error can be mentioned either as percentage or plus /
minus tolerances. ◊ Forecast is more accurate for shorter time periods. This is simply because nearest
future is more predictable ◊ Forecasts are more accurate for a family or group of products. On the other
hand, forecast of individual items is more erratic. Collection of Data The quality of forecast is as good as
data used. Data collection shall be done in an accurate way leaving no way for errors & ambiguity.
Following guidelines shall be considered. ◊ Data shall be recorded in proper units & location as needed
for forecast. For example if forecast of sales is to be made, data shall be of actual sales made in the past
& shall not be of production or shipment. ◊ Capture the event or circumstances related to data. Certain
events & circumstances influence the demand in that particular period like festivals, holiday’s etc.
Capturing the data with relevance to such incidents would enable forecaster to account or discount such
events in forecasting. ◊ Demand data of different customer group shall be recorded separately. Methods
/ Techniques Forecasting methods are broadly divided as : ◊ Qualitative Techniques ◊ Quantitative
techniques Quantitative Techniques are further divided into : ◊ Intrinsic Techniques ◊ Extrinsic
Techniques Session 3 – Demand Planning 45 Institute of Manufacturing Resource Management of India
Qualitative Techniques It is a subjective, judgmental & is based on estimates & opinions. It is generally
used by senior managers. Following are few examples of qualitative techniques, Grass Roots : Derives
forecast by compiling input from those at the end of the hierarchy who deal with what is being
forecasted Market Research : This is used to forecast long range & new product sales & includes surveys,
interviews. Generally market research connotes a more rigorous, often hypothesis-testing approach.
Panel Consensus : Sales executives, middle managers, supplier, customer is invited in free meeting &
future trends are discussed & summarized. Historical Analogy : Forecast is derived from actual sale of
similar item in the past. Knowledge of past and mostly completed event may be closely related to a
future event. Eg. Market development of colour TV may follow pattern Black & White TV. Historical
analogies tend to be best for replacement products and where direct market substitutability relationship
exist. Delphi Method : Group of experts responds to questionnaire. A group co ordinator collects the
feedback, compiles & prepares new questionnaire, which is re submitted, to group. Quantitative
Techniques This incorporates more extensive computational evaluation of data pattern or external
relationships. There are two subsets of Quantitative methods : ◊ Extrinsic Technique ◊ Intrinsic
Technique Extrinsic Technique : A certain set of external factors/ indicators outside the organization are
used to forecast product demand. Examples are, rise in sales of automobiles & refrigerators will increase
demand on steel industry. Some frequently used indicators are GDP growth, agricultural production,
automobile production, steel production, hosing sector growth, census etc. Extrinsic demand is mostly
used to forecast group or family of products. Intrinsic Methods : These techniques use historical
recorded data for future estimates. Past performance of product in the marketplace is studied/ analyzed
with mathematical or statistical tools to arrive at future demand. Individual products are forecasted by
these methods. Following are major techniques of intrinsic methods Session 3 – Demand Planning 46
Institute of Manufacturing Resource Management of India ◊ Average Demand ◊ Simple Moving Average
◊ Weighted Moving average ◊ Exponential smoothing ◊ Seasonal Index ◊ Regression analysis ◊ Box
Jenkins Technique All of above are forecasts based on time series analysis. First techniques are discussed
in details below. Refer to following table for all further examples, Sr. No. Month Demand Forecast Error 1
Jan 02 10000 9000 +1000 2 Feb 02 9000 10000 -1000 3 Mar 02 15000 14000 +1000 4 Apr 02 20000
20000 0 5 May 02 22000 23000 -1000 6 Jun 02 10000 9500 +500 7 Jul 02 6000 5500 -500 8 Aug 02 8000
6900 +1100 9 Sept 02 12000 12300 -300 10 Oct 02 15000 14500 +500 11 Nov 02 20000 20500 -500 12
Dec 02 15000 14000 +1000 Average Demand : This is a simple average of last year’s actual demand. It
has limitation of not able to capture trend & seasonal variation. Referring to above table, Average
Demand for the year = (10000 +9000+ ---------+15000) / 12 Simple Moving Average : Simple moving
average is used when demand for a product is neither growing nor declining rapidly & if there is no
seasonality in it. In our example, if we want to find demand for Jan 03 on the basis of 3 month’s moving
average then, Session 3 – Demand Planning 47 Institute of Manufacturing Resource Management of
India Forecast of Jan 03 = (Dec 02 + Nov 02 +Oct 02)/ 3 = 16667 nos Similarly 5 month’s moving average
will be, Forecast of Jan 03 = (Dec 02 +--------+ Aug 02) / 5 = (15000 +-------+8000) / 5 = 14000 nos It is very
important to select the best period for the moving average. There are several conflicting effects of
different period lengths. The longer the moving average period, the greater the random elements are
smoothed out. But if there is a trend in the data either increasing or decreasing, the moving average has
the adverse characteristics of lagging trend. Like 3 months moving average for Jan 03 is 16667 but
looking at last year data, actual demand will be less than forecast. Weighted Moving Average : This
allows any weights to be placed on each element, but ensuring that the sum of all weights equals to 1.
Weights are chosen by experience & trial & error . As a logical rule, most recent data is given higher
weight. But if data are seasonal, then weights shall be established accordingly. In our example, let’s
assign 20%, 30%& 50% weights to Dec/ Nov/ Oct respectively, Hence, Forecast for Jan 03 on 3 months
moving average could be, Forecast For Jan 03 = Dec 03 * 0.2 + Nov 02 *0.3 + Oct 02 * 0.5 = 15000*0.2 +
20000*0.3+15000*0.5 = 16500 If different weights for each period are selected, the following three rules
should be followed: ◊ Rule 1: The sum of the weights should be 1.0 (or factored to be 1.0) ◊ Rule 2:
Weights should not be zero or negative ◊ Rule 3: More recent periods should receive heavier weights.
Exponential Smoothing : In both the above methods, an organization has to carry a large amount of
historical data. It is well established that forecast based on recent data is more indicative of future than
more distant past. Exponential smoothing is a technique that uses this kind of recent data in establishing
future demand. In the exponential smoothing method, only 3 pieces of data are needed, Session 3 –
Demand Planning 48 Institute of Manufacturing Resource Management of India ◊ the most recent
forecast ◊ the actual demand that occurred for that forecast period ◊ smoothing constant alpha (α). This
smoothing constant alpha(α) determines the level of smoothing & the speed of reaction to difference
between forecasts & actual occurrences. The value of alpha is determined by nature of product,
forecasters’ intuition. The another way is to use computer simulations & by trial & error arrive at the
alpha value. Again calculating Jan 03 forecast, let us assume that Dec 02 forecast was 13000 & alpha
value chosen is 0.4 New Forecast = (α) (latest Demand) + ( 1 -α ) (forecast of Latest demand) Hence, Jan
03 Forecast = 0.4 *15000 + ( 1- 0.4) *13000 = 13800 It is clear from the above example that if (α) chosen
is low then heavy weightage is given on old forecast & possible trend will not be taken care. On the other
hand high(α) value is used, then recent demand is heavily accounted. Seasonal Index : Demand of the
product increases or decreases in a particular period every time, such demand is termed Seasonal. This
could happen as a result of festival, recurring occurrences of certain event, holidays & so on. This
seasonal variation in demand is captured through seasonal index. Seasonal index estimates by how much
the demand in season will be below or above the average demand. Seasonal Index = Period Average
demand / Average Demand for all periods Applying this formula to our example, Seasonal Index For Jan
03 = Jan 02 Demand / Average Demand For the year 02 = 10000 / 13500 = 0.75 The average demand for
all periods is a value that averages out seasonality. This is called the desesonalized demand. Equation
given above can be re written like this, Seasonal Index = Period average demand / Deseasonalised
demand Session 3 – Demand Planning 49 Institute of Manufacturing Resource Management of India
Regression Analysis : Quantitative models for finding the mathematical expression that best describe the
relationship between two or more variables. Regression models often are used in forecasting. Box-
Jenkins Models : A quantitative forecasting approach based on regression and moving average models,
where the model is based not on regression of independent variables but on past observations of the
item to be forecast at varying time lags and on previous error values from forecasting Forecast Error
Measurement and Response The accuracy of a particular forecast method is measured in terms of the
forecast error. The difference between the actual demand & the forecast demand is called forecast error.
The error can come in two ways ◊ Bias ◊ Random When actual demand is consistently above or below
the forecast demand, the error is called bias. To improve upon bias, an organization needs to change
forecast. Random errors in forecast are natural variation about the average demand. Bias & random
variations are similar to assignable & inherent causes in SQC. Forecast error can be measured in any of
following ways, ◊ Mean Absolute error ◊ Standard Error ◊ Tracking Signal Mean Absolute Deviation
(MAD) : MAD is simple method & very useful in obtaining tracking signal. MAD is the average error in the
forecast, using absolute value. MAD is calculated using the difference between the actual demand & the
forecast demand without regard to sign. It equals the sum of absolute deviations divided by the number
of data points, Referring to our (additional column of forecast is added) MAD = Sum of Absolute error /
No of Observations = 8400 / 12 = 700 Session 3 – Demand Planning 50 Institute of Manufacturing
Resource Management of India MAD is the average amount by which the forecast errs. MAD does not
consider the direction of the error, only the average amount of the error. Standard Error : As shown in
the example, MAD is a measurement of the differences between actual demand & forecast. If we plot
histogram of frequency of actual demand of a particular value, it gives bell shaped curve also known as
normal distribution. Normal distribution curve has three properties, mean (average), central tendency,
and dispersion. This dispersion is measured by standard deviation. This dispersion is directly proportion
to standard deviation. MAD though different can be interpreted the way standard deviation is
interpreted in following manner, The forecast error will be within, +/-1 MAD of the average about 60 %
of time +/-2 MAD of the average about 90 % of time +/-3 MAD of the average about 98 % of time
Tracking Signal : It is measurement that indicates whether the forecast average is keeping pace with any
genuine upward or downward changes in demand. A tracking signal is the number of mean absolute
deviation that the forecast value is above or below the actual occurrences. Tracking signal is useful
because it measures error over a specified range of data, for example 4 weeks in a month or 52 weeks in
a year, Thus it can identify periodic areas where forecast has greater error. In addition to this, tracking
signal can be used to indicate that the inherent pattern of the data is changing and the forecasting
method needs to be adjusted. Tracking Signal = Algebraic sum of forecast error / MAD Referring to our
example (MAD IS already calculated as 700) Tracking Signal = 1800 /700 = 2.57 Thus Jan 02 tracking
signal is –1. , that means forecast models providing forecast that is quite a bit below the mean of the
actual occurrences. Organizational sets limits for tracking signal called trigger, say +/- 4. If tracking signal
calculated is beyond this limit, then forecasting model needs review otherwise not. Acceptance limits for
tracking signal depend on the size of the demand being forecast & the amount of time available. Session
3 – Demand Planning 51 Institute of Manufacturing Resource Management of India Distribution
Requirements Planning (DRP) What is DRP ? DRP provides a framework for implementation of
centralized push systems of distribution inventory management. Distribution resource includes more
than just the planning and control system for replenishment. It includes many of the physical aspects of
distribution – warehousing and transportation facilities. It also implies the connection of replenishment
system to financial systems and use of simulation as a means to improve system performance. DRP is
similar to MRP applied to MPS .The process of determining the need to replenish finished good inventory
at branch warehouses. A time-phased order Point (TPOP) approach is used where the planned orders at
the branch warehouse level are “exploded” with the help of MRP logic to become gross requirements on
the supplying source. This gross requirement then becomes input to MPS. The extension of distribution
requirements planning into the planning of the key resources contained in a distribution system:
warehouse space, workforce, money, truck, freight is known as distribution requirement planning 2
(DRPII) Inputs / Outputs DRP Input : Requirement of each distribution system is calculated by Forecast.
Hence, forecasting method shall be selected with utmost care so that trends & seasonality are captured
properly. As in case of MRP actual customer order also becomes input to DRP system. DRP Output :
Planned order release are output of DRP which can be automatically generated from the system. This
Planned order release is input for Master Production Schedule. The point of connection between the
production system and the distribution system is the master production schedule (MPS). DRP provides a
framework for managing orders, shipments and inventories even in the face of dynamic market place.
Unplanned events and changing conditions may often be accommodated through pegging of
requirements, fair share allocations, and firm planned orders, while still maintaining overall lower safety
stock levels. Session 3 – Demand Planning 52 Institute of Manufacturing Resource Management of India
Key Terminology 01) Aggregate Demand 02) Bias 03) Cyclical 04) Demand Management 05) Dependent
Demand 06) Disaggregate Demand 07) Distribution Requirement Planning (DRP) 08) Forecast Error 09)
Independent Demand 10) Mean Absolute Deviation 11) Random 12) Seasonality 13) Trend 14) Tracking
Signal 15) Order Winner 16) Order Qualifier Session 3 – Demand Planning 53 Institute of Manufacturing
Resource Management of India Practice Questions – Session 3 Question 1 : Which of the following is not
a source of demand : A) Consumers – the end user of a product B) Dealers and Distributors – channel of
distribution C) Service Needs – requirement from after sales service department D) Component
Requirements – planned by MRP Correct Answer is: ----------------------------------------------------------------------
-------------------------------------- Question 2 : Dependent demand is not : A) Calculated B) Forecasted C)
Related to the demand of its parent D) Derived from BOM Correct Answer is: ------------------------------------
------------------------------------------------------------------------ Question 3 : Which of the following are
characteristics of demand : A) Trend B) Random Variation C) Seasonality D) All the above Correct Answer
is: ------------------------------------------------------------------------------------------------------------ Question 4 : Which
of the following statements if incorrect : A) Forecasts are usually inaccurate B) Forecasts should include
an estimate of error C) Forecasts are more accurate for longer time periods D) Forecasts are more
accurate for family / group of products Correct Answer is: --------------------------------------------------------------
---------------------------------------------- Question 5 : Which of the following are techniques / methods of
forecasting : Session 3 – Demand Planning 54 Institute of Manufacturing Resource Management of India
A) Qualitative Techniques B) Intrinsic Techniques C) Extrinsic Techniques D) All the above Correct Answer
is: ------------------------------------------------------------------------------------------------------------ Question 6 : Which
of the following is not an intrinsic method of forecasting : A) Simple Moving Average B) Exponential
Smoothing C) Regression Analysis D) Delphi Method Correct Answer is: --------------------------------------------
---------------------------------------------------------------- Question 7 : Considering “C” as the smoothing
constant, the formula to calculate the forecast by exponential smoothing method is : A) Forecast = (C)
(Latest Demand) + (1 + C) (Forecast of Latest Demand) B) Forecast = (1 – C) (Latest Demand) + (C)
(Forecast of Latest Demand) C) Forecast = (C) (Latest Demand) + (1 – C) (Forecast of Latest Demand) D)
Forecast = (1 + C) (Latest Demand) + (C) (Forecast of Latest Demand) Correct Answer is: -----------------------
------------------------------------------------------------------------------------- Question 8 : Forecast error can be
measured by : A) Mean Absolute Deviation B) Standard Error C) Tracking Signal D) All the above Correct
Answer is: ------------------------------------------------------------------------------------------------------------ Question 9
: Which of the following is a quantitative forecasting method : A) Market Research Method B) Panel
Consensus Method C) Historical Analogy Method D) Box-Jenkins Method Correct Answer is: Session 3 –
Demand Planning 55 Institute of Manufacturing Resource Management of India --------------------------------
---------------------------------------------------------------------------- Question 10 : When actual demand is
consistently above or below the forecast demand, the error is called : A) Random Variation B) Bias C)
Standard Error D) Mean Absolute Error Correct Answer is: -------------------------------------------------------------
----------------------------------------------- 56 Institute of Manufacturing Resource Management of India
SESSION 4 DESIGN Session 4 - Design 57 Institute of Manufacturing Resource Management of India
Manufacturing Feasibility Manufacturing Feasibility or Manufacturability is a measure of design of a
product or process in terms of its ability to be produced easily, consistently and with high quality. New
Product Design and Introduction Introduction Numbers of activities are associated with design for
quality. These include reliability engineering, collaborative design, value engineering, design for
manufacturability, and design for cost. All these concepts/tools are useful in designing products to
optimally fulfill customer needs and provide a quality product. Product Development Principles Steps in
new product design and introduction include : Guide product development with an understanding of
customer needs and wants. Many firms design products because “they can”. Avoid this tendency. Design
should proceed from outside in, rather than inside out. Test the feasibility of design through engineering
breadboard. This means including a step in product development to test whether the product can be
technologically achieved (feasible) is necessary. Package the product, design tools, make make/buy
decision during engineering prototype. A model of the product is assembled, often from existing and
handmade parts. At this stage, features and options, and basic functions of the product are decided.
Make or buy decisions and tooling design for production parts are accomplished at this phase. Establish
suppliers and test production parts during manufacturing prototype. During this phase ◊ Suppliers are
selected, production parts are received, and assembly instructions are written ◊ Design changes are
made to improve manufacturability. ◊ Initial purchase contracts are established and production line is
laid out. ◊ Test procedures and machine choices are made. Train workers, establish procedures, set up
line, establish throughput times, try production/ assembly/ test tooling. This is a stage where Session 4 -
Design 58 Institute of Manufacturing Resource Management of India ◊ All the procedures, test steps,
inspection, tools are tested before full-scale production starts. ◊ Production workers are trained ◊
Production layout is tested ◊ Standards are established ◊ First production run of parts from suppliers is
made ◊ Throughput times and capacities needed are verified ◊ Manufacturability changes are made
before the product is released into production. Begin production Product Specification and Design
Participative design is a central part of the overall process of product design and introduction. Customers
and all the major functional areas of the firm are partners in the design activity. Role of P&IM
professional in the design process at various stages in new product design process includes ◊
Understanding customer needs and wants – boundary spanning ◊ Engineering breadboard – P&IM
system design begins ◊ Engineering prototype – Make or buy decisions – coordinate with new or existing
suppliers ◊ Manufacturing prototypes – Database additions, start MPS and demand management
activities ◊ Doing pilot run – verify suppliers, start shop floor reporting, demonstrate all capabilities ◊
Begin production – Normal operations Process Design The alignment of the process with what firm is
trying to do in the marketplace to achieve competitive advance and to the current and expected volumes
and varieties of product offerings is critical. Process choices are generally made infrequently. Process
choices put machinery and systems in place that must be compatible with market needs. Session 4 -
Design 59 Institute of Manufacturing Resource Management of India Influencing Factors A number of
issues, strategic, and tactical are connected to process choice. A firm may choose leading edge
technologies, or a more conventional technology, having different mixes of machinery and people. The
nature of firms’ order winners and order qualifiers; current and expected volumes and varieties of firms’
products set the stage for firms’ process choice decision. Process Choices Choice of a new process must
provide the firm with the strategic capabilities it needs. Consideration should be placed on needed
resources to implement the chosen process, impact of these technologies on the information system and
planning and control systems is required. Process choice decisions should be made for strategic reasons
than simply evaluation of financial payback. For a firm competing on cost, having products in mature
stage of product life cycle, the likelihood is of low variety and high volume of products. The process
choice calls for dedicated, high volume equipment – e.g. automated assembly line. In this mature part of
life cycle, focus on cost is high. High volume, dedicated equipment minimizes deployment cost. A firm
with many machining operations generally competes on quality and delivery capability. The products
have mid range of volume and high variety. The choice of process is multi-purpose machine that can
offer quick changeovers, is highly reliable, easy to maintain, with high tolerance capability. Process
Flexibility Process flexibility refers to the speed and ease with which the manufacturing transformation
tasks can respond to internal or external changes. Flexibility demands the ability to introduce new
products rapidly and to increase and decrease production quickly in response to changes in the
marketplace for firms’ products. Process flexibility requires a master schedule that can drive the
production system quickly and efficiently. As volumes and varieties change rapidly and new products are
introduced more frequently, the management of the master schedule is critical. Excess capacity must be
reflected and managed in the master schedule. Process flexibility also leads to greater need to simulate –
carry out “what if” analysis. Session 4 - Design 60 Institute of Manufacturing Resource Management of
India Continuous Process Improvements Continuous process improvement refers to a never-ending
effort to expose and eliminate root causes of problems; continuous process improvements are small step
improvements as opposed to big-step improvements. The process improvement activities identify and
eliminate causes of poor quality, process variation and non-value-added activities. Steps in process
improvement include 1. Choose a process - Choose an easier process. The process should be well
understood. The objectives and customers of the process should be clear. Customers, their needs and
wants should be clear. 2. Identify the goals and what are we trying to accomplish with the process? Goals
of the process should be related both to the goals of the operating unit and to the needs and wants of
the customer. 3. Choose measurements - The measurements should coincide with the goals of the
process. 4. Measure output reliability- The process owner should determine the process capability. 5.
The process should be fundamentally capable of perfect output. Baseline measures should be made on
current process. The baseline measures are used to provide feedback on process improvement over
time. 6. Take the process apart piece by piece - The process is studied in details – showing each step,
who does it, paperwork/information involved, the source of information, the use of information, time
required to perform each step, waiting time, transportation time. 7. Eliminate waste - Waste are the
activities that add cost without adding value. Process simplification starts with elimination of as many
forms of waste as possible. 8. Simplify, fix, train - Eliminate steps, doing less activity at steps wherever
possible. Training and education can help where process has shown problems because of lack of training.
9. Measure output again - Ensures that there has actually been improvement in quality and determines
the degree of improvement 10. Repeat from number 6 Session 4 - Design 61 Institute of Manufacturing
Resource Management of India Planning Parameters Manufacturing and Purchasing Lead Time Definition
and Functions of Lead Time Lead time is a span of time required to perform a process (or series of
operations). In a logistics context, lead time is the time between recognition of the need for an order and
the receipt of goods. Individual components of lead time can include order preparation time, queue
time, processing time, move or transportation time, and receiving and inspection time. Manufacturing
lead time is 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 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 finished good inventory. Included here
are order preparation time, setup time, run time, move time, inspection time, and put-away time.
Purchasing lead time is 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. Elements and Determinants of Lead Time Move or transportation time : The time that a job
spends in transit from one operation to another in the plant Order preparation time : The time needed
to analyze requirements and open order status and to create the paperwork necessary to release a
purchase order or a production order Processing Time : The time during which the material is being
changed, whether it is machining operation or an assembly. Process time per piece is (Setup time/lot-
size) + Runtime per piece. Put-away Time : Put-away relates to removing the material from the dock or
another location of receipt, transporting the material to a storage area, placing that material in a staging
area and then moving it to a specific location, and recording the movement and identification of the
location where the material has been placed. Session 4 - Design 62 Institute of Manufacturing Resource
Management of India Queue Time : The amount of time a job waits at a work center before setup or
work is performed on the job. Queue time is one element of total manufacturing lead time. Increases in
queue time result in direct increases to manufacturing lead time and work-inprocess inventories.
Receiving and inspection time : Relates time taken in the function of receiving and encompasses physical
receipt of material, inspection of the shipment for conformance with the purchase order (quantity and
damage), the identification and delivery to destination, and the preparation of receiving reports.
Inspection activities involve measuring, examination, testing, gauging one or more characteristics of a
product or service and comparing the results with specified requirements to determine whether
conformity is achieved for each characteristics. Set-up Time : Setup refers to the work required to change
a specific machine, resource, work center, or line from making the last good piece of unit A to the first
good piece of unit B. Setup also refers to the refitting of equipment to neutralise the effects of the last
lot produced; e.g. teardown of the just completed production and preparation of the equipment for
production of the next scheduled item. Set up time is the time needed to prepare a manufacturing
process to start. Setup lead time may include run and inspection time for the first piece. Supplier Lead-
time : is the amount of time that normally elapses between the time an order is received by a supplier
and the time the order is shipped. Planned, Cumulative and Actual Lead Times Planned Lead Time : MRP
requires planned lead time value to offset the planned receipt of an item, using backward scheduling, to
properly place the planned order release in the correct time period. Cumulative Lead time : is the
longest planned length of time to accomplish the activity in question. For any item planned through
MRP, it is found by reviewing the lead time for each bill of material path below the item,; whichever path
adds up to the greatest number defines cumulative lead time. Cumulative manufacturing lead time : is
the cumulative planned lead time when all purchased items are assumed to be in stock. Actual Lead time
: Planned lead time estimates are generally of not the same accuracy as on-hand balances and scheduled
receipts. For this reasons, actual lead times are extremely volatile. Session 4 - Design 63 Institute of
Manufacturing Resource Management of India Controlling Actual Lead Times Often there is a temptation
to intentionally overstate lead time to be on safe side. When lead times are overstated consistently at
each level of the product structure, they are additive, increasing the cumulative lead time for production
of the product and thereby contributing to uncertainty and likelihood of subsequent MPS changes with
their accompanying costs and disruptions. Planned lead-times should therefore be reasonably even
when they cant be made totally accurate. Order Quantity / Lot Size / Batch Significance Lot size is the
amount of a particular item that is ordered from the plant or a supplier or issued as a standard quantity
to the production process. Batch is a quantity scheduled to be produced or in production. For discrete
products, the batch is planned to be the standard batch quantity, but during production, the standard
batch quantity may be broken into smaller lots. In non-discrete products, the batch is a quantity that is
planned to be produced in a given time period based on a formula or recipe, which often is developed to
produce a given number of end items. Lot sizing means producing a quantity that may exceed the
immediate need due to economies of scale or constraints inherent in the production process. Often
purchase discounts based on the quantity are also cited as reasons for lot sizing. Policies regarding lot
size quantities and how they will be determined must be provided as an input to the MRP process.
Seldom will a single lot size rule be appropriate for all levels of end products, assemblies and
components. There are also substantial cash flow and cost consequences associate with lot-size
decisions. Therefore formulation of lot-size rules must be done with great care. Costs and Other
Considerations The cost to place additional orders with suppliers or the production facility is inverse to
the cost to carry inventory. If you order only as required, or in smaller quantities, the inventory will be
smaller and the cost to carry the inventory will be minimised Session 4 - Design 64 Institute of
Manufacturing Resource Management of India On the other hand, large lot sizes will have fewer orders
or setups and therefore the costs attendant on orders and setups will be minimised. The cost
implications are shown in graph below: Available Techniques Fixed order quantity : is a lot sizing
technique in MRP or inventory management that will always cause planned or actual orders to be
generated for a predetermined fixed quantity, or multiples thereof, if net requirements for the period
exceed the fixed order quantity. Economic Order Quantity (EOQ) : a lot size based on a well known
square root formula that may be optimum so long as requirements are regular and continuous. Periods
of Supply (POS) : a popular method with MRP where lot sizes are based on covering a certain number of
periods of requirements Lot for Lot : Lot sizes that just cover net requirements as necessary, sometimes
called “as needed” or “as required”. Least unit cost (LUC) : a mathematical lot-size rule that selects the
order quantity that minimises the unit cost of each item being produced or procured. Least Total Cost
(LTC) : a mathematical lot size rule that selects the order quantity that minimises the total of order/setup
and carrying costs. Order Cost Carrying Cost LOT SIZE C O S T Order Cost Carrying Cost LOT SIZE C O S T
Session 4 - Design 65 Institute of Manufacturing Resource Management of India Part period balancing
(PPB) : a method similar to LTC that measures the costs associated with carrying one unit of inventory for
one period Wagner Whitin Algorithm : A method using management science techniques that looks at all
possible combinations of lot-size choices to select the optimum. Safety Stock and / or Capacity Concepts,
Significance and Design Considerations of Safety Stock and Safety Capacity Safety Stock – is a quantity of
stock planned to be in inventory to protect against fluctuations in demand or supply. In the context of
master production scheduling, the additional inventory and capacity planned as protection against
forecast errors and shortterm changes in backlog. Over planning can be used to create safety stock.
Safety capacity is the planned amount by which the available capacity exceeds current productive
capacity. This capacity provides protection from planned activities, such as resource contention, and
preventive maintenance and unplanned activities, such as resource break-down, poor quality, rework or
lateness. Safety capacity plus productive capacity plus excess capacity is equal to 100% of capacity.
Safety stock is employed to buffer against uncertainties of demand and should be utilized for
independent demand end products that are planned using MPS. The items, the demand for which is
computed using MRP and not forecast have little need for safety stock. Safety stock is best planned at
MPS level, to generate matched sets through the explosion into component orders. Potential spoilage,
unreliable suppliers, use of intermediate product as service part, however are the conditions, that may
lead to inclusion of safety stock for MRP planned items. Safety lead time often is used to compensate for
uncertainty regarding receipt or completion of orders. This means receipt of item in inventory before it is
needed, and tends to increase the cumulative lead time. Session 4 - Design 66 Institute of Manufacturing
Resource Management of India Data Sources and Data Accuracy Bill of Materials (BOM) Definition Bill of
material (BOM)- is a listing of all the subassemblies, intermediates, parts, and raw materials that go into
a parent assembly showing the quantity of each required to make an assembly. It is used in conjunction
with the master production schedule to determine the items for which purchase requisitions and
production orders must be released. A variety of display formats exists for bills of material, including the
single-level bill of material, indented bill of material, modular (planning) bill of material, transient bill of
material, matrix bill of material, and costed bill of material. The bill of material may also be called the
formula, recipe, or ingredients list in certain process industries. Bill of material information is used to
show how the product is made; generate pick lists showing how many of each component to issue;
provide “where used” information. BOM Structure and Representation BOM structure represents more
than just a part list. It shows the assembly and subassembly break-downs of a product “as built” rather
than “as designed” that are often at variance. BOM representation – If a complete, multi-level BOM were
constructed for each and every product in a large product line, there would be a considerable amount of
duplication. It makes sense to create single level bills for each product, assembly, and sub-assembly so
that each needs to be retained in data files only once. Indented Part List or Indented BOM – is a result of
brining together multiple single-levels bills to prepare a complete multilevel display or printout, using
indentation, to show the structure. Summarized Parts List – is the quick reference display of total
number of components used in the assembly or product without showing indented break-downs.
Where-used report – is a possible way of displaying BOM data. While this format is not directly used in
MRP process, it is very useful in maintenance of BOM and by purchasing, production control,
engineering in various decision making situations. Session 4 - Design 67 Institute of Manufacturing
Resource Management of India Maintenance of BOM Maintenance of BOM is the responsibility of
Engineering. Firms where changes to product specifications are frequent, a good engineering change
system and a consistent method of updating the data files is precondition to an effective MRP.
Maintenance procedures should be able to attend to requirement of a future effectivity date of a
planned change. Accuracy of BOM is a necessary condition for the use of MRP, for MRP to perform its
job of planning the right material at the right time. Just as inventory data accuracy should be ensured
before implementing MRP, accurate BOM and effective BOM maintenance procedures should also be in
place. Planning BOM Planning Bill of Material (BOM) is an artificial grouping of items or events in bill-
ofmaterial format, used to facilitate master scheduling and material planning. Modular bill of material is
a type of planning bill that is arranged in product modules or options. It is often used in companies
where the product has many optional features, e.g., assemble-to-order companies such as automobile
manufacturers. Item Master / Material Master Significance, Data Elements and Design Considerations It
is essential that item identification (part numbers) be unique and unambiguous in BOM data for use with
MRP. The sub-assemblies should be assigned a unique part number so that they be planned and
prioritized appropriately in the MRP system. In case of a minor change made by engineering to a
product, apart from the engineering change notice (ECN), a new part number should be created. If a
single part goes through multiple stages of processing/value addition/finishing, a separate part number
should be assigned for different stages for MRP to perform its planning function appropriately. In case
dies, drill bits, and other tools are used in production process, tooling information should be included in
BOM. A tool may be assigned a part number with fractional usage in order to properly plan the tool
availability based on lot size to be produced. Session 4 - Design 68 Institute of Manufacturing Resource
Management of India Routing / Process Significance and Routing Data Elements Routing data include
information that pertains to the sequence of operations necessary to complete a manufacturing order.
There is a separate routing for every part, assembly and product to be produced. The sequenced
operations also identify the work center in which the operation should be performed. The data elements
that are typical of each operation in a routing file are ◊ Operation identification code ◊ Operation
description ◊ Planned work center ◊ Standard setup time ◊ Standard run time per unit ◊ Tooling
requirements Work Center / Flow Line Work Center Data Elements Much of the work center data is
related to capacity and to lead time and are used in CRP calculation. Several factors that are typically
included in work center data are listed below- ◊ Work Center Identification and Description ◊ Number of
shifts scheduled ◊ Number of machines or workstations ◊ Hours scheduled per shift ◊ Workdays per
period ◊ Utilization factor ◊ Efficiency factor ◊ Planned queue time Session 4 - Design 69 Institute of
Manufacturing Resource Management of India Functional Responsibilities According to the APICS
Dictionary - Often the job title of the person charged with the responsibility of managing, establishing,
reviewing, and maintaining a master schedule for select items is “Master Scheduler”. Ideally the master
scheduler should have substantial product, plant, process and market knowledge because the
consequences of this individual’s actions often have a great impact on customer service, material, and
capacity planning. The functions of the master scheduler include ◊ Understand the forecasting approach
and its limitations ◊ Participate in the development of the production plan ◊ Manage the limitations of
production capacity. ◊ Maintain an attainable master schedule ƒ Monitor consistency with the
production plan ƒ Maintain planning bills with the master schedule ƒ Execute master production
schedule policies, such as time fences, safety stocks, subcontracting, and lot sizing ƒ Manage forecast
assumptions ƒ Identify, negotiate and resolve conflicts ƒ Act as a business manager Session 4 - Design 70
Institute of Manufacturing Resource Management of India Key Terminology 01) Actual Lead Time 02)
Batch 03) Bill of Material 04) BOM Representation 05) Continuous Process Improvement 06) Cumulative
Lead Time 07) Economic Order Quantity (EOQ) 08) Engineering Breadboard 09) Engineering Prototype
10) Fixed Order Quantity 11) Indented Part List / Indented BOM 12) Least Unit Cost 13) Lot-for-Lot 14)
Lot Size 15) Manufacturability 16) Manufacturing Feasibility 17) Manufacturing Lead Time 18)
Manufacturing Prototype 19) Master Scheduler 20) Modular Bill of Material 21) Move Time 22) Order
Preparation Time 23) Parts Period Balancing 24) Periods of Supply 25) Planned Lead Time 26) Planning
Bill of Material 27) Process Flexibility 28) Processing Time 29) Purchasing Lead Time 30) Put-away Time
31) Queue Time 32) Receiving and Inspection Time 33) Routing 34) Safety Capacity 35) Safety Lead Time
36) Safety Stock 37) Set-up Time 38) Summarized Part List 39) Supplier Lead Time 40) Wagner Whitin
Algorithm 41) Where-used Report 42) Work Center Session 4 - Design 71 Institute of Manufacturing
Resource Management of India Practice Questions – Session 4 Question 1 : At which stage in the product
development is the feasibility of the design tested : A) Manufacturing Prototype B) Engineering
Breadboard C) Engineering Prototype D) Engineering Pilot Correct Answer is: -------------------------------------
----------------------------------------------------------------------- Question 2 : Which one of the following is not a
responsibility of the Master Scheduler : A) Prepare Production Plan B) Manage Production Capacity
limitations C) Maintain attainable Master Schedule D) Monitor consistency of Master Schedule with
Production Plan Correct Answer is: --------------------------------------------------------------------------------------------
---------------- Question 3 : One part used in multiple automobile models has to be replaced with a new
part. Which of the following representations of BOM would be most useful to find all the instances
where this part needs to be replaced : A) Indented BOM B) Where used Report C) Summarized BOM D)
Modular BOM Correct Answer is: ----------------------------------------------------------------------------------------------
-------------- Question 4 : Lot sizing technique, that looks at all possible choices of lot sizes and selects the
optimum is called : A) Part Period Balancing B) Periods of Supply C) Wagner Whitin Algorithm D)
Economic Order Quantity Correct Answer is: Session 4 - Design 72 Institute of Manufacturing Resource
Management of India ------------------------------------------------------------------------------------------------------------
Question 5 : The time needed to prepare the manufacturing process to start is called: A) Queue Time B)
Move Time C) Put-away Time D) Set-up Time Correct Answer is: ------------------------------------------------------
------------------------------------------------------ Question 6 : Which one of the following is NOT true about EOQ
: A) Produces optimum quantity to be ordered for which the total cost of ordering and setup is
minimized B) At EOQ, the ordering cost is equal to the carrying cost C) Is same as periods of supply D)
May result in excess inventory of items Correct Answer is: --------------------------------------------------------------
---------------------------------------------- Question 7 : Purchasing lead time includes all of the following except
: A) Supplier lead time B) Order preparation and release time C) Receiving and inspection time D) Queue
time Correct Answer is: -----------------------------------------------------------------------------------------------------------
- Question 8 : Which of the following information would not be found in the routing file : A) Planned
work center B) Actual processing taken C) Standard setup time D) Tooling requirements Correct Answer
is: ------------------------------------------------------------------------------------------------------------ Question 9 : Factors
affecting data selection and forecast accuracy include all of the following except : Session 4 - Design 73
Institute of Manufacturing Resource Management of India A) Consistency B) Availability C) Forecast
frequency D) Time spent on researching published data Correct Answer is: ----------------------------------------
-------------------------------------------------------------------- Question 10 : For a firm competing on cost, which of
the following is least likely to be true : A) Products would be in mature stage of life cycle B) Products
would be of low variety and high volume C) Use of high volume, dedicated equipment would increase
costs D) Ideal process choice would be dedicated, high volume equipment – e.g. automated assembly
line Correct Answer is: ------------------------------------------------------------------------------------------------------------
74 Institute of Manufacturing Resource Management of India SESSION 5 CAPACITY MANAGEMENT
Session 5 – Capacity Management 75 Institute of Manufacturing Resource Management of India
Fundamental Concepts Introduction Capacity Management is concerned with supplying the necessary
resources to achieve the priority plans. It address the questions like how much of capacity is available,
how much is required and how to balance priority (demand) and capacity. Before discussing on capacity
management further lets try to understand the Capacity and types of capacity. Capacity According to
APICS Dictionary, Capacity is defined as “the capability of a worker, machine, work center or organization
to produce output per period of time”. Thus it can inferred that capacity is the rate of doing work, not
the quantity of work done. Types of Capacity For effective and efficient capacity management two types
of capacity can be identified - Capacity Available and Capacity required. Capacity Available : is the
capacity of a system or resource to produce a quantity of output in given time period. Capacity Required
: is the capacity of a system or resource needed to produce a desired output in given time period. Load :
is a term closely related to capacity required. Load is the amount of released and planned work assigned
to a facility for a particular time period. Load Capacity Available Output Session 5 – Capacity
Management 76 Institute of Manufacturing Resource Management of India These three terms are
important for capacity management. Relationship between these can be pictured in the above diagram
Capacity is often pictured as a funnel, capacity available is the rate at which work can be drawn from the
system and load is the amount of work in the system. Capacity Management – Definition Capacity
Management can defined as “ the function of establishing, measuring, monitoring and adjusting limits or
levels of capacity in order to execute all manufacturing schedules” – APICS dictionary. Thus capacity
management is responsible for determining the capacity available and capacity required. Resolve the
difference if any between them. And it is also about monitoring production output and work center
capacity control. Objectives of Capacity Management Following are the objectives of Capacity
management: ƒ To determine the capacity needed to achieve the priority ƒ Provide, monitor and control
the capacity so that priority plan can be met. Capacity Management Process As all management process
even capacity management process involve planning and control functions. Capacity planning process
occurs at each level in the priority planning process, varying only in the level of detail and time spans
involved. Capacity Control monitors the production output and takes corrective action when needed.
Capacity Planning To determine the capacity needed to achieve the priority plans as well as providing,
monitoring and controlling the capacity so that priority plan can be met. It involves calculating the
capacity needed to achieve the priority plan and finding ways of making that capacity available. If the
capacity requirement cannot be met then the priority plan will be changed. Session 5 – Capacity
Management 77 Institute of Manufacturing Resource Management of India Capacity planning process is
as follows: ƒ Identify the resources : Resources (ex., machine , manpower or work center) for which
capacity available and load will be measured need to be identified. ƒ Measure available capacity:
Determine the capacity available at each work center in each time period. ƒ Determine the Capacity
Required: Determine the load at each work center in each time period ◊ Translate the priority plan into
the hour of work required at each work center in each time period to determine the capacity required. ◊
Sum up the capacities required for each time on each work center to determine the load on each work
center in each time period. ƒ Resolve the Differences: Resolve differences between available capacity
and required capacity. If possible, available capacity should be adjusted to match the load. Otherwise the
priority plans must be changed to match the available capacity. Capacity Planning Levels and relationship
with priority planning levels: This process occurs at each priority planning level (Production plan, master
production schedule and materials requirement plan), varying only in the level of detail and time spans
involved. Thus capacity plan links various priority plans to manufacturing resources. Resource Planning:
involves long-range resource requirement planning and is directly linked to production planning. It
involves translating quarterly or annual product priorities from the production plan into some total
measure of capacity, such as gross labor hours. Resource planning involves changes in manpower, capital
equipment, product design or other facilities that take long time to acquire and eliminate. If a resource
plan cannot be devised to meet the production plan then production plan has to be changed. Rough-cut
capacity planning: Purpose of rough-cut capacity planning is to check the feasibility of the MPS, provide
warnings of any bottlenecks, ensure utilization of work centers and advise vendors of capacity
requirements. Capacity Requirement Planning: is linked to Materials requirement planning. Since MRP
focus on components parts, greater detail is involved in CRP. It is concerned with individual orders at
individual work centers and calculates work center loads and labor requirements for each time period at
each work center. Session 5 – Capacity Management 78 Institute of Manufacturing Resource
Management of India Priority Capacity Long range Plan Medium Range Short Range Implement/Control
Short Range The above diagram shows the relationship between the different priority planning levels
and capacity planning levels. Although the upper priority plans are input to lower level, the various
capacity plans relate only to their level in the priority plan, not to subsequent capacity planning level.
Capacity Control Capacity Control is the process of monitoring production output, comparing with
capacity plans and taking corrective action when needed. Such a increasing or decreasing capacity by
overtime or under time, by adding workers or shifting workers, by adding machinery or removing
machinery and so forth. Resources At least three levels of resources need to be identified so as to
measure capacity available and required. They are ƒ Machine or individual worker. ƒ Work center (can be
considered as a group of machines and individual workers) ƒ Plant (can be considered as a group of
different work centers) Production Plan Resource Plan Master Prod. Schedule Rough-cut Capacity plan
Material Req. Plan Capacity Req. Plan Prod. Activity Control Capacity Control Session 5 – Capacity
Management 79 Institute of Manufacturing Resource Management of India Measuring Available
Capacity Before determining the Capacity Available, one need to understand the factors that affect
capacity and the units used to measure capacity. Understanding and considering these will help in
determining the capacity available more accurately. Factors Affecting Capacity Product Specifications If
the product specifications change, the work content (work required to produce the product) will change,
thus affecting the number of units that can be produced. Product Mix Each product has its own work
content measured in the time it takes to make the product. If the mix of products being produced
changes, the total work content (time) for the mix will change. Plant and Equipments This relates to the
methods used to make the product. If the method is changed – for example, a faster machine is used the
output will change. Similarly, if more machines are added to the work center, the capacity will change.
Work Efforts This relates to the speed or pace at which the work is done. If the workforce changes pace,
perhaps producing more in a given time, the capacity will be altered. Capacity Measuring Units Units of
Output If the variety of products at a work center is not large, it is often possible to use a unit common
to all products. Ex., breweries measure capacity in barrels of beer, automobile manufacturers in number
of cars. If a variety of products is made, a good common unit may not exists. In such case, the unit
common to all products is time. Session 5 – Capacity Management 80 Institute of Manufacturing
Resource Management of India Standard Time Using time-study techniques the standard time for a job
can be determined—that is, the time it would take a qualified operator working at a normal pace to do
the Job. It provides a yardstick for measuring work center content and a unit for stating capacity. It is
useful in loading and scheduling. Available Capacity As per APICS Dictionary, “The capability of a system
or resource to produce a quality of output in a particular time period”. To calculate available capacity, we
need to know Available time, Utilization and Efficiency. Available time : It is maximum Number of hours a
work center can be used. It depends on the number of machines, the number of workers, and the hours
of operation. Example A work center has six machines, operated for eight hours a day for five days a
week. Calculate available time. Available time = 6 x 8 x 5 = 240 hrs per week Utilization : As a result of
breakdown, maintenance a work center is not fully utilized. The Percentage of time the work center is
actually used is called Utilization Utilization = hours actually worked /available hours x 100% Example:
Calculate utilization if a work center is available for 160 hours a week, but produces for 100 hours only.
Utilization=100 / 160 x 100% = 62.5% Efficiency : The workers working on the machine are not fully
trained or machines are worn out & hence the output of machines will be less than standard hours of
work as expected. It Session 5 – Capacity Management 81 Institute of Manufacturing Resource
Management of India could happen visa versa also. Efficiency is a measure of actual out put of a work
center compare to standard output expected. It is expressed in percentage. Efficiency = Actual rate of
production / Standard rate of production x 100% Example: Calculate efficiency if a work center is used
100 hours per week and produces 120 hours of work. Efficiency=120 / 100 x 100% = 120% Ways of
Determining Capacity We have to two ways to determine the capacity available. Demonstrated
(Measured) capacity is figured from historical data. Rated (calculated) is figured from available time,
utilization and efficiency. Rated Capacity Rated Capacity is calculated by taking into account the work
center utilization and efficiency. It is the product of available time, utilization and efficiency. Rated
Capacity = Available time x Utilization x Efficiency Available time: is the number of hours work center can
be used. It depends on the number of machines, the number of workers and the hours of operation. See
the comprehensive example below. Utilization: The available time is the maximum hours we can expect
from the work center. However, it is unlikely this will be attained all the time. Down time can occur due
to machine break down, absenteeism, lack of material and all those problems that cause unavoidable
delays. The Percentage of time that the work center is active compared to the available time is called
work center utilization. See the comprehensive example below. hours actually worked Utilization = --------
------------------------- * 100 available hours Efficiency: It is possible for a work center to utilize 100 hours a
week but not produce 100 standard hours of work. The workers might be working at a faster or slower
pace than the standard working pace, causing the efficiency of the work center to be more or less than
100%. See the comprehensive example below. Session 5 – Capacity Management 82 Institute of
Manufacturing Resource Management of India actual rate of production Efficiency = ---------------------------
--------- * 100 Standard rate of production Efficiency can be obtained from historical data if a record is
maintained of the hours available, hours actually worked and the standard hours produced by a work
center. Then it can also be calculated as: Standard hours of work produced Efficiency = ------------------------
------------------* 100 Hours actually worked Comprehensive example: In One Week, a work center
comprising 2 machines supposed to work 40 hours per week, produces 85 standard hours of work. Both
machines actually worked for 75 hours. Calculate the following for work center available time, utilization,
efficiency and rated capacity ? Available time per week = No. of machines x hours available per week = 2
x 40 = 80 hours. hours actually worked. Utilization = --------------------------------- x 100 available hours. 75 x
100 = ---------- 80 = 93.73 % Standard hours of work produced Efficiency = -----------------------------------------
----- x 100 Hours actually worked 85 x 100 = ---------- 75 = 113.33% Rated capacity = Available time x
Utilization x Efficiency (Note: if utilization and efficiency are in percentage then divide with 100) 80 *
93.75 * 113.33 = ----------------------------- = 85 hours 100 * 100 Session 5 – Capacity Management 83
Institute of Manufacturing Resource Management of India Demonstrated Capacity One way to find out
capacity of work center is to examine the previous production records and to use that information as the
capacity available of the work center. It is average not maximum output. It also depends on the
utilization and efficiency of the work center, although these are not included in the calculation Sum
(Output in the given periods) Demonstrated capacity = ---------------------------------------------- No. Periods
Example : Over the periods of six weeks, a work center produces 100, 120, 130, 140, 170, 180 standard
hours of work. What is the demonstrated capacity of the work center? Sum (Output in the given periods)
Demonstrated capacity = ---------------------------------------------- No. Periods 100+120+130+140+170+180
Demonstrated capacity = ---------------------------------------------- 6 840 = ------ 6 = 140 Standard Hours.
Capacity Requirement Planning (CRP) Load : Load can be calculated by translating the planned orders &
actual orders into time required by them into the time required at each work center in each period.
Capacity requirements planning : The function of establishing, measuring, and adjusting limits or levels
of capacity. It occurs at MRP level .The term capacity requirements planning in this context refers to the
process of determining in detail the amount of labor and machine resources required to accomplish the
tasks of production. Session 5 – Capacity Management 84 Institute of Manufacturing Resource
Management of India Inputs To CRP : ƒ Open shop orders - Information available in Open order file ƒ
Planned order releases - Information available in MRP ƒ Where work is done - Information available in
Routing file ƒ Time needed in standard hours - Information available in Routing file ƒ Lead times -
Information available in Routing file or work center file Open shop orders and planned orders in the MRP
system are input to CRP, which through the use of parts routings and time standards translates these
orders into hours of work by work center by time period. Even though rough-cut capacity planning may
indicate that sufficient capacity exists to execute the MPS, CRP may show that capacity is insufficient
during specific time periods. Shop Calendar Another input required by CRP is no of days available for the
production, The Gregorian calendar which we use daily has following drawbacks & cannot be used. o
Numbers of days are not same in all Months o Uneven spread of holidays o The calendar does not use a
decimal system To overcome this problem, shop calendar as shown below is used. Sunday Monday
Tuesday Wednesday Thursday Friday Saturday 1 1 2 2 3 3 4 4 5 5 6 7 8 6 9 7 10 8 11 9 12 10 13 14 15 11
12 12 17 13 18 14 19 15 20 21 22 16 23 17 24 18 25 19 26 20 27 28 29 21 30 22 31 23 Session 5 –
Capacity Management 85 Institute of Manufacturing Resource Management of India Manufacturing
Lead Time The total time required to make an item, once the order is released is called Manufacturing
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 finished goods
inventory. Included here are order preparation time, queue time, setup time, run time, move time,
inspection time, and put away time. Synonyms: manufacturing time, production cycle, and production
lead-time. Manufacturing Lead-time contains five components, Queue : Waiting before machine as some
other job is going on Setup : Time taken for changing over to a new set of production parameters Run :
Actual operation time on machine Wait : After end of operation part is waiting to be moved to next
operation Move : Actual time taken to move the part to next operation In most of the manufacturing
environment Queue time is the biggest of total manufacturing Lead-time & approximately accounts for
70 -80 % Schedule the Orders First step in CRP is to determine when orders should be started and
completed on each work center. Calculate the operation time required at each work center Operation
time = setup time + (run time per piece x number of pieces) Allow for queue, wait, and move times.
Order quantity 100 units From route sheet Operation Work center Setup time (std hrs) Runtime (Std hrs)
Totaltime (std hrs) Days 10 1 2.0 0.2 22 3 20 2 1.5 0.3 31.5 4 Session 5 – Capacity Management 86
Institute of Manufacturing Resource Management of India From work center files Work Center Queue
(days) Wait (days) Move (days) 1 2 1 1 2 4 1 1 Schedule Operation Work Center Arrival date Queue (days)
Operation (days) Finish Date Wait and Move 10 1 101 2 3 106 2 20 2 108 4 4 116 2 Store Stores 118 The
scheduling rule to convert hours to days is to round up to the nearest eight hours and express as days on
a one-shift basis. Load profile : Capacity required at a work center based on planned and released orders
for each time period Example : Work Center: 1 Rated capacity: 120 standard hours/week Week 12 13 14
15 Total Released load 105 100 90 40 335 Planned load 50 70 120 Total load 105 100 140 110 455 Rated
capacity 110 110 110 110 440 Over/under capacity 5 10 (30) 0 (15) Resolve the Differences (Capacity
Plan) Ideally, the required capacity and available capacity should be equal. If available capacity is more
than the required capacity, resources may not be used to the fullest. If available capacity is less than the
required capacity, the priority plan cannot be met. Session 5 – Capacity Management 87 Institute of
Manufacturing Resource Management of India To resolve the difference: Adjust Capacity by: ƒ Overtime
or under time ƒ Hiring or layoff ƒ Shift work force ƒ Alternate routings ƒ Subcontract Alter load by: ƒ
Alter lot sizes ƒ Reschedule ƒ Split Operation ƒ Operation Overlapping Altering the load may complicate
the schedule for other work centers. Session 5 – Capacity Management 88 Institute of Manufacturing
Resource Management of India Key Terminology 01) Capacity 02) Capacity Available 03) Capacity
Management 04) Capacity Required 05) Capacity Requirements Planning 06) Demonstrated Capacity 07)
Load 08) Load Leveling 09) Manufacturing Lead Time 10) Move Time 11) Queue Time 12) Rated Capacity
13) Run Time 14) Shop Calendar 15) Start Date 16) Wait Time 17) Work Center Session 5 – Capacity
Management 89 Institute of Manufacturing Resource Management of India Practice Questions – Session
5 Question 1 : Identify the correct relationships between the capacity planning levels and priority
planning levels : A) Resource Requirement Plan – Production Plan B) Rough-cut Capacity Plan – Master
Production Schedule C) Capacity Requirement Plan – Material Requirement Planning D) All the above
Correct Answer is: ------------------------------------------------------------------------------------------------------------
Question 2 : All of the following resources are required to measure the available capacity expect : A)
Work Center B) Individual Machines C) Individual Workers D) Suppliers Correct Answer is: --------------------
---------------------------------------------------------------------------------------- Question 3 : The following are the
primary factors affecting capacity expect : A) Product Mix B) Plant and Equipment C) Work Efforts D)
Warehouse Management System Correct Answer is: ---------------------------------------------------------------------
--------------------------------------- Question 4 : A work-center has 5 machines. Working hours of the work-
center are from 9.00 AM to 5.00 PM (Monday to Friday). What is the available time in hours, of the
work-center per week : A) 100 B) 200 C) 300 D) 400 Correct Answer is: ---------------------------------------------
--------------------------------------------------------------- Session 5 – Capacity Management 90 Institute of
Manufacturing Resource Management of India Question 5 : A work-center has 10 machines and operates
for 8 hrs a day, 5 days a week. The operators working on machines 5 and 6 were in a training program for
the first 2 days of the week and no suitable replacement could be found. Due to this, the work-centers’
actual production in that week was 300 hours. The utilization of the work-center was : A) 25 % B) 50 % C)
75 % D) 100 % Correct Answer is: ----------------------------------------------------------------------------------------------
-------------- Question 6 : What is the efficiency of a work-center if it is used for 200 hours/week and
produces 150 hours of work per week : A) 25 % B) 50 % C) 75 % D) 100 % Correct Answer is: -----------------
------------------------------------------------------------------------------------------- Question 7 : Which of the following
is correct : A) Rated Capacity = (Available time / Utilization) x Efficiency B) Rated Capacity = (Available
time / Efficiency) x Utilization C) Rated Capacity = Available time x Efficiency x Utilization D) Rated
Capacity = Available time + Efficiency + Utilization Correct Answer is: ------------------------------------------------
------------------------------------------------------------ Question 8 : Which of the following is not a direct input to
CRP : A) Open Shop Orders B) Planned Order Releases C) Time Required in Standard Hours D) MPS
Requirements Correct Answer is: ----------------------------------------------------------------------------------------------
-------------- Question 9 : Which of the following is not correct about lead times : Session 5 – Capacity
Management 91 Institute of Manufacturing Resource Management of India A) Setup Time – time taken
for changing over to a new set of production parameters B) Run Time – actual time taken to move the
part to the next operation C) Wait Time – after end of operation, part is waiting to be moved to the next
operation D) Queue Time – waiting before a machine as some other job is under process Correct Answer
is: ------------------------------------------------------------------------------------------------------------ Question 10 :
Which of the following can be done to resolve capacity differences : A) Shifting work force B)
Subcontracting C) Altering lot sizes D) All the above Correct Answer is: ---------------------------------------------
--------------------------------------------------------------- 92 Institute of Manufacturing Resource Management of
India SESSION 6 PLANNING Session 6 - Planning 93 Institute of Manufacturing Resource Management of
India The Planning Hierarchy Manufacturing companies produce a wide variety of products. Each
manufacturing company differs from the other in the type and number of products manufactured, the
processes and equipment used, the labour skills and materials required etc., To be profitable, every
manufacturing company must produce the right goods at the required time and of right quality and at
minimum costs. The system which helps every manufacturing company in attaining profitability by
planning and coordinating the various resources of the company, by linking the several functions
involved and which forms the core of practically every manufacturing company is the ‘manufacturing
planning system’. S T R A T E G I C P L A N N I N G B U S I N E S S P L A N N I N G RESOURCE PRODUCTION
REQUIREMENT PLANNING PLANNING MASTER ROUGH-CUT PRODUCTION CAPACITY SCHEDULE
PLANNING MATERIAL CAPACITY REQUIREMENT REQUIREMENT PLANNING PLANNING E X E C U T I O N
Figure 6.1 - Manufacturing Planning System Session 6 - Planning 94 Institute of Manufacturing Resource
Management of India The planning hierarchy includes a top-down, step by step planning process,
effective at each level in the manufacturing planning system as described below. Strategic Planning :
Strategic plans are high level plans based on the overall organizational perspective and are devised by
the top management of the company. They extend into longer periods into the future, usually 2 to 10
years and talk about the strategic direction of the firm. The strategic plans address the competitive
characteristics of the firm and establish the long-term objectives in terms of the markets served, types of
products etc., Planning for the necessary resources becomes an integral part of the strategic planning
process. Business Planning : Based on the strategic plans of a company, the business plans define the
objectives of the various functions of the company on an aggregate level. The business plans being more
financially oriented include the income, cost and profit objectives of the company. The business plans
address and drive the sales, manufacturing finance and other activities of the organization in order to
achieve the set objectives. The planning horizon usually extends from 12 to 18 months into the future
and the resource requirements necessary to achieve the business plans are an integral part of the
business planning process. Production Planning : Production plans include the planning of the
manufacturing facilities required to support the business plan. Production plans determine the overall
level of the manufacturing output broken down by quarterly or monthly time periods and ensures the
integration between the production function and the business plan. Production plans are responsible for
setting the overall production objectives and determine the production rates, desired inventory levels
and resource requirements. The resource requirements plan determines the requirements of the key
resources and evaluates the availability of these key resources to achieve the production plan. Master
Production Schedule : Master production schedule is a plan for the production of individual end items.
The production plan determines the manufacturing output for families or groups of products by time
periods. The master production schedule breaks down the production plan into the plan for
manufacturing individual end items by time period. For each individual end item, master production
schedule takes into consideration the forecast, actual customer orders, desired inventory levels and
capacity in determining the master production schedule requirements. The master production schedule
hence acts as an interface between production and marketing functions. Rough-cut capacity planning
helps in identifying and evaluating the bottleneck resources involved in achieving the master production
schedules. Material Requirements Planning : The master production schedule plans for the end item
requirements by time period. Each end item is made up of a number of manufactured and purchased
components. Material requirements plan is a plan for determining and scheduling the production and
purchase of the various components of the end items necessary to support the master production
schedule. Capacity Requirements planning determines the detailed requirements of the amount of
labour and Session 6 - Planning 95 Institute of Manufacturing Resource Management of India equipment
resources needed to achieve the production of components planned by the material requirements plan.
Material requirements plan is the final level of the planning hierarchy and forms the inputs for the
execution functions of production and purchasing. In the planning hierarchy, as we move from the
strategic planning to the material requirements planning through the various planning levels, ¾ The
purpose of the plans change from a broad general strategic direction to detailed component plans ¾ The
planning horizon decreases from years to months to days ¾ The level of detail increases from general
product categories to specific individual components ¾ The planning review periods decrease from
monthly reviews to daily reviews ¾ The resource requirements change from determining general
resource availability to calculating detailed labour and equipment resource requirements. Strategic
Planning & Business Planning Strategic Planning According to APICS dictionary, Strategic plan is defined
as the plan for how to marshal and determine the actions to support the mission, goals, and objectives.
Generally includes an organization’s explicit mission, goals and objectives, and the specific actions
needed to achieve those goals and objectives Strategic Fundamentals Strategic plans are high level plans
devised by the top management of the company and generally extend three to five years into the future.
They include a statement of the charter of business, the type of business the company does and intends
to do and sets the broad direction for the company in terms of markets entered, type of products
manufactured and the manufacturing practices followed. Strategic plans form the basic inputs to the
subsequent planning levels of the manufacturing resource planning (MRP II) ¾ Strategy specifies the
scope of the business of company and addresses the basis on which its business will achieve and
maintain a competitive advantage. Session 6 - Planning 96 Institute of Manufacturing Resource
Management of India ¾ Strategy involves plans that have long-term impact on the organization and is
collectively devised by the senior management of the company. ¾ Strategy comprises the collective
strategies of the functional units of the company viz., manufacturing, finance, marketing, R&D and
human resources and aims at setting a direction for the firm Strategic Planning Process and Strategy
Model The strategic planning process involves the following tasks ¾ Developing a strategic vision and
mission ¾ Setting strategic objectives ¾ Evaluating External Influences ¾ Analyzing Internal Strengths and
Weakness ¾ Executing / Formulating the strategic objectives ¾ Evaluating and making necessary
adjustments Developing a Strategic Vision and Mission : The strategic vision sets the long-term direction
for the company’s future and addresses the values and aspirations of the company. Vision is an
organizations’ sense of purpose. It is clear, inspiring and it prepares the organization for the future.
Mission gives specific direction consistent with the general goals articulated in the vision and thus
provides a foundation for the strategic plans of the organization. Setting Strategic Objectives : Based on
the mission statement, the next key element is to explicitly state the business's Objectives in terms of
the results it needs/wants to achieve in the medium/long term. Objectives should relate to the
expectations and requirements of all the major stakeholders and should reflect the underlying reasons
for running the business. These objectives could cover growth, profitability, technology, offerings and
markets. Evaluating External Influences : The various external influences which impact the strategic
objectives both of an organization, both in the current and future time periods include o Competition o
Legal / Governmental rules, policies, regulations, other constraints o Social Environment o Economic
Conditions o Technology Trends Analyzing Internal Strengths and Weakness : The exercise of analyzing
the internal strengths and weakness on all functional areas help the firm in focusing on its strengths to
Session 6 - Planning 97 Institute of Manufacturing Resource Management of India gain a competitive
advantage and to improve on the identified weakness to decrease the vulnerability to competitor
initiatives Executing / Formulating the strategic objectives : In the Strategy formulation stage, the goals
and objectives of the firm are coordinated with the internal and external influencing factors and with the
needs and wants of the customers. The organization may formulate a number of alternative strategies to
meet the expected objectives of the firm Evaluating and making necessary adjustments : In this final
phase of strategic planning process, the chosen strategy is reviewed and evaluated for determining the
possible problems or changes that may occur during implementation of the strategy. Firms must develop
contingency plans that will specify the steps to be taken to accommodate the disruptions. Vision and
Mission Corporate Objectives Environment Scanning / External Influences Internal Strength and
Weakness Analysis Corporate Strategy Functional Strategy Figure 6.2 - Strategy Model Functional
Strategy : The functional strategies which include the marketing, manufacturing, finance and R&D
strategies are the next logical extensions of the overall firm strategy. Session 6 - Planning 98 Institute of
Manufacturing Resource Management of India Business Planning According to APICS dictionary, business
plan is defined as 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 financial terms and grouped by product family. The
business plan, the sales and operations plan, and the production plan, although frequently stated in
different terms, should agree with each other. Introduction to Business Planning The business plans
include a statement of the long-range strategy and income, cost and profit objectives. It is usually stated
in financial terms and is grouped by product families. The business plan integrates inputs from and
provides plans necessary to drive the activities of finance, marketing, human resources, operations and
other departments. The top management develops and implements the business plan. Business plans
have a long time horizon, typically extending 12 to 18 months into the future. The business plans have
more far-reaching strategic implications and define the following o Product Positioning Strategy o Sales
and Marketing Strategy o Types of Markets served / to be served o Manufacturing Process Decisions o
Resource Requirement Decisions o Capital and Investment Decisions o Manufacturing Infrastructure
Decisions Common Features of a Business Plan Though the business plan features vary from organization
to organization, the common features that can generally be found in business plans include ¾ The nature
of the firm, defined by its o Locations and facilities o Organization and people o Levels of processing
technology o The type and nature of capital resources required o Major suppliers o Primary investors
Session 6 - Planning 99 Institute of Manufacturing Resource Management of India ¾ The client base of
the firm o Location o Growth rates o Changing client needs o Regional economic considerations and
business conditions affecting client needs ¾ The business environment of the firm o Major competitors o
Projections of business growth, including environmental threats and opportunities o Availability of
financial resources o Emerging technologies Business Planning Cycle BUSINESS PLANNING FORECASTS
PRODUCTION & RESOURCE PLANNING (Check Resources) MPS & RCCP MRP & CRP (Check Plans)
PURCHASING PAC / SFC EVALUATION Figure 6.3 - Business Planning Cycle The business planning cycle
spans across the long-to-mid range activities of business planning, forecasting, production & resource
planning, mid-to-short range MPS, RCCP, MRP and CRP, short range activities of purchasing, PAC and
finally the evaluation Session 6 - Planning 100 Institute of Manufacturing Resource Management of India
criteria of the production operation involving the elements of cost, quality, delivery and flexibility. The
feedback loops and the appropriate evaluation /checking for resources, validating the plans as indicated
in the figure form the process of the business planning cycle. Sales & Operations / Production Planning
Production and Resource Planning After establishing the strategic plan and the business plans, the
process of setting the overall level of manufacturing output, consistent with the above plans is known as
production planning. Production planning is concerned with the quantities of each product group to be
manufactured in each period, in line with the objectives of marketing, finance and other components of
the business plan and hence planning is done for product groups. The planning horizon is usually 6 to 18
months into the future and is reviewed quarterly or monthly. The resource plan considers the availability
of key resources as part of the capacity evaluation and plans for the necessary capacity adjustment in
order to support the production plans. Objectives of Production and Resource Planning To effectively
integrate the production function with the other activities of the planning system and to support the
management objectives of establishing the required production rates, related inventory levels and the
management of key resources, production and resource planning must meet the following objectives : ¾
Realistic and valid plans : To prepare plans that are realistic and valid in terms of supporting the higher
level strategic and business plans and ensuring that the required resources are available in achieving
these plans. ¾ Integration with other activities : To ensure proper integration of the production and
resource plans with the other activities of the business plans and to have the appropriate
communication system. Session 6 - Planning 101 Institute of Manufacturing Resource Management of
India ¾ Top management involvement and feedback : To involve the top management in decisions
related to operational and strategic inputs to the production and resource planning and to have an
appropriate feedback mechanism to the higher planning levels. ¾ Linking planning levels : To form the
link between the higher planning levels and the next detailed planning levels of Master Production
Schedule. ¾ Driving the MPS : To form the inputs to and drive the master production scheduling and the
subsequent short-range planning activities of the planning system. Functions of Production and Resource
Planning Production and resource planning essentially perform the following functions in order to meet
the corporate objectives ¾ Providing Alternative Production Planning Strategies : Provide the top
management with the alternative production and resource planning strategies with their associated
costs. This helps top management in evaluating the various production planning alternatives and in
determining the best suitable strategy which meets the strategic and business goals of the company. ¾
Establishing Product Groups and Schedules : Since the production and resource planning plan on an
aggregate level of product groups, one of the functions of the production and resource planning is to
establish the appropriate product groups and their schedules to meet the objectives of marketing,
finance and other components of the business plan. The product groups are usually established based
on the similarity of the manufacturing processes. ¾ Time Phasing the Production Plan : Time phasing the
production plan resulting in o The plan becoming firm as time, resources and financial commitments are
made o Coordinating the planned schedule with each of the key functions of the firm viz.,
manufacturing, sales, finance, engineering, human resources and ensuring that the planned schedule is
acceptable across these functions and that it meets the goals of the organization. Alternative Strategies
and Costs Involved Session 6 - Planning 102 Institute of Manufacturing Resource Management of India
Alternative Strategies Production Planning provides the top management with a variety of ‘what if’
alternatives with their associated costs in order to facilitate selection of the best suitable plan to meet
the corporate objectives. The strategies that can be used in developing a production plan include ¾
Chase Strategy ¾ Level Strategy ¾ Subcontract Strategy ¾ Hybrid / Compromise Strategy Chase Strategy :
This strategy is also known as the demand matching strategy as it involves producing the amount of
goods required to exactly meet the demand at any given point of time. D E M A N D Demand Production
TIME Figure 6.4 - Graphical Representation of Chase Strategy Since Production matches demand,
production varies according to the demand resulting in the inventory to be constant. The advantage of
this strategy is that a constant level of inventory can be maintained but there is variation in the
production capacity based on the variations in the production rates. As an example, consider the six
period forecast demand for a product group as shown in figure 6.3. Session 6 - Planning 103 Institute of
Manufacturing Resource Management of India Chase Strategy Period 1 2 3 4 5 6 Total Forecast Demand
10 15 10 15 25 15 90 Production Plan 10 15 10 15 25 15 90 Inventory 30 30 30 30 30 30 30 180 Capacity
Changes -- 1 1 1 1 1 5 Figure 6.5 - Chase Strategy The total of the forecast demand is 90. In the chase
strategy since production matches demand, production plan in each period is same as the demand in
each period. Assuming the beginning inventory is 30, inventory remains constant through the six periods
as indicated but the total inventory carried at the end of the sixth period is 180. Since the production
rates vary based on the demand, the capacity to produce also varies accordingly and hence the number
of times the capacity varies sums up to 5. Level Strategy : Level strategy or the production leveling
strategy involves producing in each period an amount equal to the average of the total demand for a
given planning horizon. D E M A N D Demand Production TIME Figure 6.6 - Graphical Representation of
Level Strategy Session 6 - Planning 104 Institute of Manufacturing Resource Management of India Since
the production is leveled, the production rate remains constant resulting in the variation of the inventory
levels based on the difference between demand and production. This strategy has the advantage of
having a constant production capacity irrespective of the variations in demand resulting in a stable work
force but the building up of inventory during slack demand periods incurs high carrying costs.
Considering the demand to be same as shown in figure 6.3, the level strategy can be calculated as shown
in figure 6.5 The total demand for the 6 periods sums up to 90 and the average demand is 15. In the level
strategy, the production for each period is planned to be the average demand and hence each period
production is 15. Assuming the beginning inventory to be 30, the changes in inventory levels based on
the difference between the demand and the production is as indicated and the total inventory carried at
the end of the sixth period is 210. Since there is no change in the production capacity, the change in
production capacity is zero. Level Strategy Period 1 2 3 4 5 6 Total Forecast Demand 10 15 10 15 25 15 90
Production Plan 15 15 15 15 15 15 90 Inventory 30 35 35 40 40 30 30 210 Capacity Changes -- -- -- -- -- --
0 Figure 6.7 - Level Strategy Subcontract Strategy : This strategy involves continuously producing an
amount equal to the minimum of the demand over the planning horizon and subcontracting the extra
demand. Session 6 - Planning 105 Institute of Manufacturing Resource Management of India D E M A N
D Demand Production TIME Figure 6.8 - Graphical Representation of Subcontract Strategy This strategy
has the advantage of maintaining a level production rate resulting in the requirement of a constant
production capacity and maintaining constant inventory levels but the costs incurred in subcontracting
the extra demand compared to the cost of producing them in the plant are generally high. As an
example, consider the forecast demand for six periods as shown in figure 6.7. Subcontract Strategy
Period 1 2 3 4 5 6 Total Forecast Demand 10 15 10 15 25 15 90 Production Plan 10 10 10 10 10 10 60
Inventory 30 30 30 30 30 30 30 180 Subcontract amount 0 5 0 5 15 5 30 Capacity Changes -- -- -- -- -- -- 0
Figure 6.9 - Subcontract Strategy The minimum of the forecast demand over the six periods is 10 and
hence the production plan per period is 10 summing up to 60. Since the production is leveled at 10 per
period, inventory is constant and the total inventory carried at the end of the sixth period is 180. The
total amount subcontracted is 30 and there are no production capacity changes. Session 6 - Planning 106
Institute of Manufacturing Resource Management of India Hybrid Strategy : The chase strategy, level
strategy and subcontract strategy are known as pure strategies and each of these strategies have their
own cost implications in terms of carrying inventory, changing production capacity, subcontracting etc.,
To achieve cost benefits, a number of combinations of these strategies can be formulated which are
known as the hybrid strategies D E M A N D Demand Production TIME Figure 6.10 - Graphical
Representation of a Hybrid Strategy Considering the same example with the forecast demand for six
periods as shown in figure 6.9, one of the possible hybrid strategies could be to produce an amount of
30 in periods 3, 4 and 5 with no production in the other periods. The beginning inventory is assumed to
be 30. This inventory meets the demand for periods 1 and 2. The production capacity changes from
period 2 to 3 and again from period 5 to 6. Hybrid Strategy Period 1 2 3 4 5 6 Total Forecast Demand 10
15 10 15 25 15 90 Production Plan 0 0 30 30 30 0 90 Inventory 30 20 5 25 40 45 30 165 Capacity Changes
-- -- 1 -- -- 1 2 Figure 6.11 - Hybrid Strategy Session 6 - Planning 107 Institute of Manufacturing Resource
Management of India Costs Involved in the Various Strategies The basic costs involved in the alternate
production planning strategies include ¾ Base Production Costs ¾ Inventory Costs ¾ Production rate /
Production Capacity Change Costs ¾ Capacity Related Costs Base Production Costs : These are the base
costs incurred for producing each unit which include the cost components of labor, equipment, material,
overhead etc., These costs are the same for all alternative strategies and are not generally considered
while comparing the costs of various alternative production planning strategies Inventory Costs : These
costs include the cost of holding and carrying inventory. Costs of stockout, pilferage, obsolescence etc.,
are also part of inventory costs. Production rate / Production Capacity Change Costs : These costs include
the change in production rates or the production capacity caused due to starting / stopping a production
facility, Hiring and lay-offs, change in resources etc., Capacity Related Costs : These costs are incurred
due to capacity related changes caused by subcontracting, outsourcing, working Overtime etc., In the
examples considered to illustrate the various production planning strategy alternatives, the costs can be
calculated and compared by considering the following assumptions Base Production Cost is Rs. 5per unit
Inventory Carrying Cost is Rs. 2 per unit One time Production Rate / Production Capacity Change Costs is
Rs. 20 Capacity Related Cost (Subcontracting Cost) is Rs. 4 per unit Costs of Chase Strategy Period 1 2 3 4
5 6 Total Forecast Demand 10 15 10 15 25 15 90 Production Plan 10 15 10 15 25 15 90 Inventory 30 30
30 30 30 30 30 180 Capacity Changes -- 1 1 1 1 1 5 Session 6 - Planning 108 Institute of Manufacturing
Resource Management of India Base Production Cost = 90 units x Rs. 5 per unit = Rs. 450 Inventory
Carrying Cost = 180 units x Rs. 2 per unit = Rs. 360 Production Rate Cost = 5 times x Rs. 20 per change =
Rs. 100 Capacity Related Cost – (not incurred) Total Costs = Rs. 910 Costs of Level Strategy Period 1 2 3 4
5 6 Total Forecast Demand 10 15 10 15 25 15 90 Production Plan 15 15 15 15 15 15 90 Inventory 30 35
35 40 40 30 30 210 Capacity Changes -- -- -- -- -- -- 0 Base Production Cost = 90 units x Rs. 5 per unit = Rs.
450 Inventory Carrying Cost = 210 units x Rs. 2 per unit = Rs. 420 Production Rate Cost = 0 times x Rs. 20
per change = Rs. 0 Capacity Related Cost – (not incurred) Total Costs = Rs. 870 Costs of Subcontract
Strategy Period 1 2 3 4 5 6 Total Forecast Demand 10 15 10 15 25 15 90 Production Plan 10 10 10 10 10
10 60 Inventory 30 30 30 30 30 30 30 180 Subcontract units 0 5 0 5 15 5 30 Capacity Changes -- -- -- -- -- -
- 0 Base Production Cost = 60 units x Rs. 5 per unit = Rs. 300 Inventory Carrying Cost = 180 units x Rs. 2
per unit = Rs. 360 Production Rate Cost = 0 times x Rs. 20 per change = Rs. 0 Capacity Related Cost = 30
units x Rs. 4 per unit = Rs. 120 Total Costs = Rs. 780 Session 6 - Planning 109 Institute of Manufacturing
Resource Management of India Costs of Hybrid Strategy Period 1 2 3 4 5 6 Total Forecast Demand 10 15
10 15 25 15 90 Production Plan 0 0 30 30 30 0 90 Inventory 30 20 5 25 40 45 30 165 Capacity Changes -- -
- 1 -- -- 1 2 Base Production Cost = 90 units x Rs. 5 per unit = Rs. 450 Inventory Carrying Cost = 165 units x
Rs. 2 per unit = Rs. 330 Production Rate Cost = 2 times x Rs. 20 per change = Rs. 40 Capacity Related Cost
– (not incurred) Total Costs = Rs. 820 System Design Considerations The factors to be considered in the
design and development of a production planning system include Planning Time Horizon : The planning
time horizon should extend sufficiently into the future to accommodate the demand trends for product
groups, to realize the market environment and to handle necessary changes to the plans as required and
the planning time horizon must also include periodic updates and reviews. Characteristics of Demand :
The Plan must address the characteristics of demand which involve seasonal and fluctuating demand
patterns for families or groups of products. Aggregation Levels and Resource Commitments : In the
distant periods the plan is stated in more aggregate terms of product families, resource requirements
etc., and in the nearer periods of the production plan, the level is more detailed and requires that the
plant and necessary equipment are fixed. Management Objectives : The production planning system
must support the management objectives of estimated production rates, desired inventory levels,
expected customer service levels, efficient plant operations etc., Manufacturing Environments :
Manufacturing environments form an important criteria in the production planning system design as
they influence the planning decision and the computation of the production rates. Session 6 - Planning
110 Institute of Manufacturing Resource Management of India ¾ Production planning in a Make-to-Stock
(MTS) Environment : In a Make-toStock environment, products are manufacturing and inventoried. Sales
of products are done from the inventory. Computation of the total production and production rates is as
shown below Total Production = Total Forecast + back orders + ending inventory – opening inventory For
a Level Strategy, Production Rate = Total Production / Number of periods For a Chase Strategy,
Production Rate = Demand Problem 6.1 - Level Production Planning Strategy in a MTS Environment :
Given the following data, Calculate the total production, the production rates and the inventory levels
Opening Inventory = 100 units Desired Ending Inventory = 80 units Period 1 2 3 4 5 6 Total Forecast
Demand 100 120 130 110 120 100 680 Production Plan 110 110 110 110 110 110 660 Ending Inventory
110 100 80 80 70 80 (Total Production = Total Forecast Demand + Ending Inventory – Opening Inventory)
Total Production = 680 + 80 – 100 = 660 Units (Production Rate (level strategy) = Total Production /
Number of Periods) Production rate = 660 / 6 = 110 units per period (Ending Inventory for period 1 =
Opening Inventory + Production – Forecast) Ending Inventory for period 1 = 100 + 110 – 100 = 110 units.
Ending Inventory for the remaining periods are calculated similarly Problem 6.2 - Chase Production
Planning Strategy in a MTS Environment : Given the following data, calculate cost of production rate
change, inventory carrying cost and the total cost of the strategy Cost of Changing production level = Rs.
10 per unit Opening Inventory = 20 units Inventory Carrying Cost = Rs. 3 per unit Session 6 - Planning 111
Institute of Manufacturing Resource Management of India Period 1 2 3 4 5 6 Total Forecast Demand 100
120 130 110 120 110 690 Production Plan 100 120 130 110 120 110 690 Change in Production 0 20 10 20
10 10 70 Ending Inventory 20 20 20 20 20 20 120 (Total Production = Total Forecast Demand + Ending
Inventory – Opening Inventory) Total Production = 690 + 20 – 20 = 690 Units (Production Rate (chase
strategy) = Demand in each period) Cost of changing production level = Rs. 10 per unit x 70 units = Rs.
700 Cost of carrying inventory = Rs. 3 per unit x 120 units = Rs. 360 Total Cost of the strategy = Rs. 1060
¾ Production planning in a Make-to-Order (MTO) Environment : In a Make-toOrder environment,
products are manufactured after the receipt of customer orders for that product. Hence there is no
buildup of inventory of the finished goods but takes into account the amount of customer orders to be
fulfilled which is also known as the backlog of customer orders. Computation of the total production and
production rates is as shown below Total Production = Total Forecast + opening backlog - ending backlog
For a Level Strategy, Production Rate = Total Production / Number of periods For a Chase Strategy,
Production Rate = Demand Problem 6.3 - Level Production Planning Strategy in a MTO Environment :
Given the following data, calculate the total production, production rates and per period backlogs
Beginning Backlog = 200 units Desired Ending Backlog = 110 units Period 1 2 3 4 5 6 Total Forecast
Demand 110 120 130 110 120 100 690 Production Plan 130 130 130 130 130 130 780 Ending Backlog
180 170 170 150 140 110 (Total Production = Total Forecast Demand + Beginning Backlog – Ending
Backlog) Total Production = 690 + 200 – 110 = 780 Units Session 6 - Planning 112 Institute of
Manufacturing Resource Management of India (Production Rate (level strategy) = Total Production /
Number of Periods) Production rate = 780 / 6 = 130 units per period (Backlog for a period = Old Backlog
+ Forecast Demand - Production) Backlog for period 1 = 200 + 110 – 130 = 180 units Backlog for period 2
= 180 + 120 – 130 = 170 units Backlog for period 3 = 170 + 130 – 130 = 170 units Backlog for period 4 =
170 + 110 – 130 = 150 units Backlog for period 5 = 150 + 120 – 130 = 140 units Backlog for period 6 = 140
+ 100 – 130 = 110 units ¾ Production planning in a Assemble-to-Order (ATO) Environment : ATO forms a
subset of the MTO environment and caters to products with various options. In this environment,
standard components are manufactured and stocked and depending on the customer orders, the
required components are assembled to meet the required customer options. Hence there is buildup of
inventory of standard components and backlog of the customer orders. Computation of the total
production and production rates is as shown below Total Production = Total Forecast + (ending inventory
- opening inventory ) of standard components / semi-finished goods + (beginning backlog - ending
backlog) of customer orders For a Level Strategy, Production Rate = Total Production / Number of periods
For a Chase Strategy, Production Rate = Demand Production Planning Process The process of establishing
an agreed upon and a do-able production plan which realizes the higher level business plans and
strategic plans involves the formal process of communication, coordination and integration within the
planning hierarchy and the various functions of the organization. The production planning processes
generally involves the following activities. ¾ The Data Collection Process : It involves collecting the
necessary input data from the various sources of demand with the provision to accommodate sudden
changes and probable fluctuations in demand. ¾ The Sales Plan Development Process : Forecasts are
indicators of demand patterns over long planning horizons and are based on the historical data.
However, in the nearer periods of the planning horizon, this data is evaluated and processed to develop
the sales plan. The sales plan helps in establishing the requirements and also includes any changes to be
incorporated due to promotions, advertisements, product mix changes etc., Session 6 - Planning 113
Institute of Manufacturing Resource Management of India ¾ The Capacity Planning Process : It involves
determining the availability of adequate capacity and material resources to support the aggregate plans
under the various conditions and if required, in establishing the best alternatives of adjusting production
capability in the form of subcontracting, Overtime, etc., ¾ The Partnership Meeting Process : The
partnership meeting provides the forum for communication and coordination between the various
functions of the company. It considers the strategic and business plans of the company and guides the
specific ways of achieving these plans, often stated in broad and general terms of expected aggregate
volume of product groups, production capacities etc., These meetings are held monthly or quarterly and
form the basis for the production planner to make a production plan in tune with the production and
sales objectives. The participant list for the partnership meeting include the General Manager /
President and the Heads / Managers of the following departments o Sales o Marketing o Manufacturing
o Engineering o Finance o Human Resources o Material Management o Quality And the agenda for the
partnership meeting includes the following o Special Issues o Performance Reviews of the Company o
Product Reviews by groups / families o New Products o Special Projects Resource Planning Process The
formulated production plan must be validated to ensure the availability of the critical resources to
achieve the plan and in the cases of difference between the requirement and availability of these critical
resources, necessary actions of either adjusting the capacity or revising the plans must be done. The
critical resources generally are a combination of equipment time, labour, material with long lead-times,
financial resources, storage facilities etc., and influence the production process in devising the
production plans and production rates. Session 6 - Planning 114 Institute of Manufacturing Resource
Management of India The resource planning process generally involves the following ¾ Obtaining a
production plan for a product group / family by time period ¾ Determining the product structure for
each product group / family ¾ To obtain the ‘Bill of Resources’ for each product group / family ¾ To
calculate the total resource requirements ¾ To evaluate against the available capacity ¾ Resolving the
differences, if any, by adjusting the capacity or the plans Let us consider the following example and
calculate the resource requirements. The level production plan for a product group ‘plastic utilities’ is as
given below Level Strategy for ‘plastic utilities’ Period 1 2 3 4 5 6 Total Forecast Demand 500 1000 500
1000 2000 1000 6000 Production Plan 1000 1000 1000 1000 1000 1000 6000 Inventory 0 500 500 1000
1000 0 0 3000 Capacity Changes -- -- -- -- -- -- The product structure for the product group ‘plastic
utilities’ with the products and the percentage of each product in the product group is as given below
Plastic Utilities Plastic Drums Waste Bins Plastic Buckets 20 % 30 % 50 % The Bill of Resources for the
critical resources, material and labour in our example, is as given below Session 6 - Planning 115 Institute
of Manufacturing Resource Management of India Product Plastic Labour (Square Feet) (Standard Hours)
Plastic Drums 5 3.0 Waste Bins 2 1.5 Plastic Buckets 3 1.0 Based on the production plan, since it follows a
level strategy, in each period a quantity of 1000 units of product group ‘plastic utilities’ are
manufactured. Based on the product structure and the percentage of each product in the product group,
in each period the following quantities of products must be manufactured Plastic Drums = 0.2 x 1000 =
200 Waste Bins = 0.3 x 1000 = 300 Plastic Buckets = 0.5 x 1000 = 500 Based on the bill of resources, the
quantity of resources of material (plastic) and manpower (labour) required each period can be calculated
as follows Plastic Required : Plastic Drums = 200 x 5 = 1000 SFT Waste Bins = 300 x 2 = 600 SFT Plastic
Buckets = 500 x 3 = 1500 SFT Total Plastic Required = 3100 SFT Labour Required : Plastic Drums = 200 x
3.0 = 600 Standard Hours Waste Bins = 300 x 1.5 = 450 Standard Hours Plastic Buckets = 500 x 1.0 = 500
Standard Hours Total Labour Required = 1550 Standard Hours These critical resource requirements per
period are evaluated against the availability. Differences if any, are to be adjusted by increasing the
capacity or by revising the plans. Session 6 - Planning 116 Institute of Manufacturing Resource
Management of India Sales and Operations Planning Introduction to Sales and Operations Planning S T R
ATEGICPLANNINGBUSINESSPLANNINGSALESANDOPERATIONSPLAN
MARKETING PRODUCTION PLAN PLAN Figure 6.12 - Sales and Operations Plan Definition of Sales and
Operations Planning : According to APICS dictionary, sales and operations planning is defined as a
process that provides 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. Sales and Operations Planning (SOP) is a process
that ensures coordination of all the essential functions of an organization to determine what and when
to produce and hence brings together all the plans of these functions into an aggregated set of plans. By
comparing the sales plan with the actual demand and by assessing the market potential on a regular
basis, future demand is forecasted and the marketing plans are updated accordingly. This updated
marketing plan is then communicated to the other functions viz., manufacturing, finance and
engineering which adjust their respective plans to support the updated marketing plan. Sales and
operations planning thus becomes the forum in which the production plan is developed. Session 6 -
Planning 117 Institute of Manufacturing Resource Management of India It thus provides a means of
managing change and updating the higher level plans as conditions change resulting in a realistic plan
that is coordinated between the various functions of the organization and which is in line with the
organizational objectives. Master Scheduling & Rough-Cut Capacity Planning After evaluating and
determining the suitable production plan from the various production planning alternatives, the next
step in the planning process known as ‘Master Scheduling’ helps in disaggregating the production plan
into a time-phased manufacturing schedule of individual end items with detailed consideration of the
forecasts, actual customer orders, backlogs, inventory levels at individual end item levels. The process of
identifying and evaluating the bottleneck resources and making the necessary capacity adjustments to
meet the master schedule is the function of ‘Rough-cut Capacity Planning (RCCP)’ Master Scheduling The
process of determining the time-phased planning chart for the manufacturing of individual end items in
order to support the production plan is known as master scheduling. The master schedule becomes an
input to the master scheduler in preparing an anticipated build schedule in the short run for each
individual end item, expressed in specific configurations, quantities and dates. This anticipated build
schedule is know as the ‘Master Production Schedule (MPS)’ General Concepts of Master Scheduling ¾
The master schedule / master production schedule helps in developing the schedule showing which
products, how many of them and when they are to be produced. ¾ In developing the schedule for
individual end items, the master production schedule should consider the production plan, item forecast
and actual customer orders, backlogs and the management goals and objectives. ¾ Since the master
production schedule is the disaggregation of the production plan, it is limited by the production plan and
hence the total of the items in the master production schedule must equal the total of the production
plan. Session 6 - Planning 118 Institute of Manufacturing Resource Management of India ¾ By
determining the anticipated build schedule of end items, the master production schedule integrates the
production plan and the manufacturing activity of the company. ¾ Master production schedule
integrates the marketing, sales and production functions at individual end item levels which help in
keeping the priorities current and in making valid delivery promises to the market. ¾ Master production
schedule with the specific information of the product configuration and available inventory levels
becomes the necessary inputs to further plan for the components of the end items and hence drives the
material requirements plan (MRP). Master Production Schedule (MPS) Relationships The production plan
for families / groups of products is disaggregated by the MPS into anticipated build schedule of individual
end items. This schedule drives the material requirements plan (MRP) to plan for the purchase and
manufacture of the various components that go into the end item. The relationship between the
production plan, the MPS and the material requirements plan (MRP) can be depicted as follows : Let us
consider a product group comprising of Bi-cycles. The production plan is stated in monthly periods and a
part of the plan for four months March to June 2003 is shown in figure 6.9. The product group – Bicycles
consists of three products – Bicycles for men (BM), Bicycles for women (BW) and Bicycles for Children
(BC). The master production schedule disaggregates the production plan into the build schedule for the
individual products. The MPS for the three products during week 22 to week 25 for the month of June
2003 is as shown in figure 6.9 and the total of the MPS for the three products for these four weeks
should equal the production plan for June as shown. The master production schedule drives the material
requirements plan (MRP) to calculate the component requirement for each end item. In figure 6.9, the
component requirements for one of the products – BM for week 22 is shown. The component
requirements for the other products of the MPS can similarly be derived. Session 6 - Planning 119
Institute of Manufacturing Resource Management of India Production Plan Jan 2003 – Jan 2004 Month
..…. Mar’03 Apr’03 May’03 June’03 …… Days 25 20 23 24 Production Plan 2500 2000 2300 2400 Master
Production Schedule June’03 Week 22 23 24 25 Product - BM 300 250 400 350 Product - BW 200 100 ---
100 Product – BC 100 250 200 150 600 600 600 600 Material Requirements Plan Week 22 (Product –
BM) Week 22 Product – BM Requirement = 300 units Purchase Requirements Manufacturing / Assembly
Requirements o Tyres = 600 Frame Assembly = 300 o Seat = 300 Chain Assembly = 300 o Case = 300
Handle Assembly = 300 o Rivets = 15000 o Tubes = 1500 o Fasteners = 3000 Figure 6.12 - Production
Plan, MPS and MRP Relationship Session 6 - Planning 120 Institute of Manufacturing Resource
Management of India Product BM Frame Assembly(1) Tyres(2) Seat(1) Chain Assembly(1) Handle
Assembly(1) Case(1) Rivets(50) Tubes(5) Fasteners(10) Purpose of Master Production Schedule (MPS)
Master scheduling of the production process serves the following purposes : Smoothing and Stabilizing
Production Plans : MPS helps to buffer the forecasts, which are generally based on historical patterns and
which seldom correspond to the actual demand patterns and thus help in reducing the nervousness
caused by the forecasts Estimating and Managing Key Resources : MPS forms the basis for estimating the
key resource requirements and involves the management of the impact on these key resources due to
schedule changes, technology changeovers and upgrades. It also involves identifying overtime /
outsourcing needs to manage production schedules. Keeping Priorities Valid : MPS ensures the execution
of the production plans and develops the data required to drive the detailed MRP planning level, keeping
the priorities current and valid Controlling Item Inventory : Through the techniques of netting and lot-
sizing, MPS determines the net requirements and batch sizes that result in economical groups for
production which helps in better utilization of facilities and equipment. Making Delivery Promises : MPS
helps in making possible reliable delivery promises by providing information on available-to-promise
(ATP) indicating when end products will be available Session 6 - Planning 121 Institute of Manufacturing
Resource Management of India MPS Design Considerations The important MPS Design Considerations
include ¾ The manufacturing environment characteristics ¾ Product Structure in the manufacturing
environments Manufacturing Environment Characteristics : The various characteristics associated with
the manufacturing environments impact the scheduling process / decisions. Considering a few examples,
o The level of customer interaction with the production function is generally very low in a make-to-stock
environment compared to the very high interface in a make-toorder environment. o In a make-to-stock
environment, the delivery lead-times are very short compared to the very long lead-times in a make-to-
order environment. o The number of different products produced in the production line is generally less
in a make-to-stock environment when compared with the number of products produced in a make-to-
order environment. o In a make-to-stock environment, forecasts become one of the major inputs for
planning the production but in a make-to-order environment, customer backlogs become the major
input for production planning. Product Structure in the various environments : The MPS plays an
important role in determining what manufacturing has to make and hence it must ensure planning
flexibility and reduction in complexities in terms of planning and managing the various product varieties.
The product structure in the various manufacturing environments can be depicted as shown in figure
6.10 Make-to-Stock Assemble-to-Order Make-to-Order (M T S) (A T O) (M T O) MPS MPS MPS Figure 6.26
Product Structures in Manufacturing Environments In each of the manufacturing environments, the MPS
should be made at the narrowest level of the product structure. Session 6 - Planning 122 Institute of
Manufacturing Resource Management of India o Make-to-Stock (MTS) Product Structure : In a MTS
environment, a few standard end items are produced from a large number of components which results
in a conical structure narrowed at the top. Hence the MPS should be made at the end item level in this
environment. Examples include most of the consumer durable items. o Assemble-to-Order (ATO) Product
Structure : In an ATO environment, a large number of subassemblies / standard components are made
and inventoried. Based on the customer orders received, various combinations of these subassemblies /
standard components are made to meet the customer options. The product structure in this
environment appears as an hour glass and the MPS should be made at the standard components /
subassembly level as indicated. Examples include automobiles, wooden furniture etc., in which the
standard components are made and various options are fitted / assembled based on the customer
requirements. o Make-to-Order (MTO) Product Structure : In a MTO environment, there are usually a
few raw materials and various end items, specific to customer orders are made from these raw materials
which results in an inverted cone structure. Since there can be many variations in the products that can
be made from the raw materials, the MPS is made at the narrowest level of the product structure which
is the raw material level. Examples include buildings, airplanes etc., MPS Inputs and Outputs The major
inputs to the master production schedule (MPS) include ¾ The Production Plan : The production plan
forms the primary input to the MPS. It limits the MPS and hence the total of the MPS of the individual
end items of a product group must equal the production plan of the product group. ¾ Demand Data : For
each individual end item, the demand data in the form of forecasts, actual customer orders, stock
replenishment requirements, interplant requirements, service requirements must be considered. ¾
Inventory Levels : It includes the desired inventory levels, the inventory on-hand and allocated stocks
and scheduled receipts. ¾ Capacity Restraints : The rough-cut capacity plan (RCCP) helps in determining
the feasibility of the MPS by identifying and evaluating the critical / bottleneck resources and in making
the necessary capacity adjustments. The primary output of MPS is an anticipated build schedule of the
individual end items which further becomes the input to the material requirements plan (MRP) which
plans for the necessary components to achieve the MPS. Session 6 - Planning 123 Institute of
Manufacturing Resource Management of India Master Production Schedule Techniques Frozen Slushy
Liquid Current Demand Time Planning Time Date Fence (DTF) Fence (PTF) Master Production schedule is
a time-phased schedule of end item requirements. The planned order releases of this time-phased
schedule become the inputs to Material Requirements Plan (MRP) in terms of quantity and time.
Demand Time Fence : The demand time fence is a point in the MPS and is set between the current date
and the planning time fence as shown in figure. The region between the current date and the demand
time fence is known as the ‘frozen zone’. The demand time fence contains actual customer orders. Since
the resources are committed to these orders, changes would result in excessive cost, reduced
manufacturing efficiency and poor customer service and hence any changes can only be made with the
approval of senior management Planning Time Fence : The planning time fence is a point in the MPS and
is set between the demand time fence and the end of the planning horizon as shown in figure. The
region between the demand time fence and the planning time fence is know as the ‘slushy zone’. The
planning time fence contains actual customer orders and forecast orders. Resources are committed but
to a lesser extent and it is possible to change the priorities. The region beyond the planning time fence
contains only forecast orders and the region is classified as ‘liquid zone’ and changes to the schedule can
be made as resources are still not committed . Projected Available Balance (PAB) : Projected available
balance is the projected inventory of end items if the MPS quantities are completed. The PAB for the
three zones are as follows PAB (frozen zone) = Prior period PAB + MPS – Customer Orders PAB (slushy
zone) = Prior period PAB + MPS – (greater of customer order or forecast) PAB (liquid zone) = Prior Period
PAB + MPS – forecasts Available to Promise (ATP) : Available to promise is the uncommitted portion of a
company’s inventory and planned production, maintained in the MPS to support customer order
promising. The ATP quantity is the uncommitted inventory balance in the Session 6 - Planning 124
Institute of Manufacturing Resource Management of India first period, and is normally calculated for
each period in which an MPS receipt is scheduled. In the first period, ATP = Inventory on Hand + MPS (if
it is + ve) – Customer Orders In further periods containing MPS scheduled receipts, ATP = MPS –
Customer orders due before next MPS Two-level Master Production Schedule : A master scheduling
approach where a planning bill of material is used to master schedule end items or product families.
Features like options and accessories are frequently used in the two-level MPS procedure. Multi-level
Master Production Schedule : A master scheduling approach that allows any level in an end item’s Bill of
Material to be master scheduled. To accomplish this, MPS items must receive requirements from
independent and dependent sources. Higher level MPS items are scheduled before lower level MPS
items. Rough-Cut Capacity Planning Rough cut capacity planning evaluates the capacity requirements in
the medium range. It gets its primary inputs from the Master Production Schedule (MPS). It determines
and evaluates the capacity availability of the bottleneck resources in order to realize the master
production schedule. Goal of Rough-Cut Capacity Planning Goal of RCCP include ¾ Converting high level
priority plans into the impact on resources. ¾ Checking the feasibility and validity of MPS ¾ Evaluating
the bottleneck resources for capacity requirements and availability ¾ Ensuring utilization of the work
centers ¾ Initiating actions for required capacity adjustments Session 6 - Planning 125 Institute of
Manufacturing Resource Management of India Process of Rough-Cut Capacity Planning The process of
rough-cut capacity planning (RCCP) is similar to that of the resource requirement planning used in the
production planning process except that RCCP deals with the capacity considerations of individual end
product manufacturing. To validate the feasibility of the MPS, RCCP evaluates the availability of
bottleneck resources and considers the possible capacity adjustments as required. The process of RCCP
involves the following ¾ Obtaining the MPS for individual end items ¾ Obtaining the “Bill of Resources”
for each individual end item ¾ Identifying the Calculating the bottleneck resource requirement and
availability ¾ Resolving the differences, if any, by adjusting the capacity or the plans Let us consider the
below example to calculate the rough-cut capacity requirements The master production schedule for
three models of cars for the month of June is as given below Master Production Schedule June’03 Week
22 23 24 25 Car 001 300 250 400 350 Car 002 200 100 --- 100 Car 003 100 250 200 150 600 600 600 600
let us assume that the cars after the final assembly on their respective assembly lines, pass through a
common paint shop for the painting operation and that the painting operation is a bottleneck. The
resource bill for the painting operation is as follows Resource Bill - Painting Operation Product Time for
painting (standard hours) Car 001 6 Car 002 5 Car 003 8 Session 6 - Planning 126 Institute of
Manufacturing Resource Management of India For week 22, the capacity requirement on the bottleneck
resource is Car 001 : 300 units x 6 std hours / unit = 1800 std hours Car 002 : 200 units x 5 std hours /
unit = 1000 std hours Car 003 : 100 units x 8 std hours / unit = 800 std hours Total time required on the
bottleneck operation for week 22 is 3600 standard hours. Material Requirement Planning (MRP) &
Capacity Requirement Planning (CRP) Based on the master production schedule (MPS), product structure
represented by the bill of materials (BOM), inventory levels and planning factors, the material
requirements plan (MRP) determines the time-phased requirement of all the components and then
schedules the planned purchase and planned production orders to meet the MPS requirements. It
therefore represents a priority planning and scheduling system at a very detailed planning level and is
the last step in the planning hierarchy The planned production orders, generated by the MRP become
the necessary inputs to the Capacity Requirements Planning (CRP) which evaluates and adjusts the
detailed labour and equipment capacity requirements at each work center by time period. Material
Requirement Planning (MRP) Nature of Demand There are basically two types of demand ¾ Independent
Demand ¾ Dependent Demand Session 6 - Planning 127 Institute of Manufacturing Resource
Management of India Cycle Tyres Chain Frame Seat Handle (2) Assembly (1) (1) Assembly (1) (1) Figure
6.11 - Nature of Demand Independent Demand : This demand is not based on the demand for other
products, assemblies or components. All end items have an independent demand and the demand must
be forecast. Master production schedule deals with independent demand items. In figure 6.11, the
demand for the cycle is independent and it must be forecast. Dependent Demand : This demand always
depends on the demand for the higher level assemblies or end products and hence the demand must be
calculated. Material requirements planning (MRP) deals with the components of the end items and
hence always calculates the component requirements based on the demand for the end item. In figure
6.11, all the components that make the cycle are dependent on the demand for cycle and hence the
demands for these components are calculated. Objectives of MRP To effectively plan the detailed
component requirements and to maintain an efficient system, material requirements planning (MRP)
must meet the following objectives ¾ Determining Requirements : To Determine the components
required to achieve the master production schedule (MPS) and to schedule the purchase and production
of the appropriate components based on their lead time so that the right components are available in
the right quantities at the required time. ¾ Maintaining Low Inventory Levels : By determining and
scheduling the purchased and manufactured components on a calculated need basis, MRP helps to avoid
build up of excess inventory of these components and hence results in maintaining low inventory levels.
Independent Demand (Forecasted) Dependent Demand (Calculated) Session 6 - Planning 128 Institute of
Manufacturing Resource Management of India ¾ Keeping Up-to-date and Valid Schedules : In a
manufacturing environment, things seldom go as planned due to reasons such as late deliveries from
suppliers, changing customer orders, machine breakdowns, excess scrap, change in designs, later arrival
of orders, etc., The MRP must be able to reorganize the priorities by accommodating these changes so
that the plans are valid and updated. Inputs to MRP The Material Requirements Plan (MRP) gets its
inputs from the following ¾ Master Production Schedule (MPS) ¾ Inventory Status ¾ Bill of Material
(BOM) ¾ Planning Factors Inventory Status MPS MRP BOM Planning Factors Figure 6.12 - MRP Inputs ¾
Master Production Schedule : The master production schedule determines the requirements of each end
item by quantity and date. This data becomes the primary input for the MRP to determine the
component requirements of each individual end item to meet the MPS. ¾ Inventory Status : The
inventory status forms an important input to the MRP. For each of the manufactured component, it gives
information regarding the on-hand inventory balance, allocated stock, scheduled receipts, planned lead
time, safety stock, scrap / yield factors, lot size etc., ¾ Bill of Material : BOM forms the most important
input to the MRP. It depicts a hierarchical structure of all the components that make the end item with
the Session 6 - Planning 129 Institute of Manufacturing Resource Management of India information
regarding the quantities of each component required and the purchase / manufacturing lead times. The
BOM becomes the basis for MRP to determine the quantity requirements for each component and to
time-phase these requirements based on their lead time. ¾ Planning Factors : The planning factors
provide the necessary information regarding the planning horizon of the MRP, length of the time buckets
and the re-planning frequency of the MRP. The MRP Process The material requirements plan, with the
inputs from the master production schedule (MPS), inventory records, bill of material (BOM) and the
planning factors determines the required quantities of the components at the required time to meet the
MPS. The MRP process follows the following techniques to determine and schedule the component
requirements. ¾ Exploding the Requirements ¾ Lead time Offsetting ¾ Planned Order (Release and
Receipt) ¾ Calculating Gross Requirements ¾ Calculating Net Requirements ¾ Releasing the Order
consider the following example of a product structure of a table with the individual component
requirements and lead times as given. Table LT = 1 week Top (1) LT = 2 weeks Legs (4) LT = 1 week
Wooden Fasteners (10) Wooden Bolts (8) Frame (1) Rounds (1) LT = 1 week LT = 1 week LT = 2 weeks LT =
1 week Exploding the Requirements : Exploding is the process of determining the quantities of all the
components required by multiplying the requirements by the usage quantity to meet the MPS. Session 6
- Planning 130 Institute of Manufacturing Resource Management of India If the MPS for the table in
week 10 is 200 units, then by exploding the BOM the requirements for the components can be
determined as follows Requirement for Top = 1 (one top per table) x 200 (tables) = 200 (tops)
Requirement for Legs = 4 (four legs per table) x 200 (tables) = 800 (legs) Requirement for Wooden frames
= 1(one frame per top) x 200 (tops) = 200 (frames) Requirement for Fasteners = 10 (ten fasteners per
top) x 200 (tops) = 2000 (fasteners) Requirement for Wooden rounds = 1 (one round per leg) x 800 (legs)
= 800 (rounds) Requirement for Bolts = 8 (eight bolts per leg) x 800 (legs) = 6400 (bolts) Lead Time
Offsetting : Lead-time offsetting is the process of placing the exploded requirement of the components in
the appropriate time periods based on their lead-times. If the MPS requirement for the table is 200 units
in week 10, then the offsetting process is as follows Table (LT = 1 week) and hence work on the table
should start by week 9 Top (LT = 2 weeks) and hence the 200 tops should be available by week 9 Legs (LT
= 1 week) and hence the 800 legs should be available by week 9 Wooden Frame (LT = 2 weeks) and
hence 200 frames should be available by week 7 Fasteners (LT = 1 week) and hence 2000 fasteners
should be available by week 7 Wooden Rounds (LT = 1 week) and hence 800 rounds should be available
by week 8 Bolts (LT = 1 week) and hence 6400 bolts should be available by week 8 Planned Orders
(Release and Receipt) : The planned order receipt and planned order release determine the periods in
which the orders will be received and released respectively and the calculation is based on the lead time.
In the above example,200 tables are required in week 10, the lead time is 1 week. Hence the planned
receipt will be in week 10 and in order to have the planned receipt in week 10, the order must be
released in week 9 and hence the planned order release is in week 9. Planned Order Receipt Planned
Order Release Lead Time Table week 10 week 9 1 week Top week 9 week 7 2 weeks Legs week 9 week 8
1 week Wooden Frame week 7 week 5 2 weeks Fasteners week 7 week 6 1 week Wooden Rounds week 8
week 7 1 week Bolts week 8 week 7 1 week Problem 6.4 : There is a requirement for 200 X’s in week 5.
Given the following product tree, calculate the Planned Order Receipts and Planned Order Releases for
the Components. All quantities per are one. Session 6 - Planning 131 Institute of Manufacturing
Resource Management of India X (LT = 1 week) Y (LT = 1 week) Z (LT = 2 weeks) W (LT = 1 week) V (LT = 2
weeks) Week Item No. 1 2 3 4 5 X Planned Order Receipt Planned Order Release 200 200 Y Planned
Order Receipt Planned Order Release 200 200 Z Planned Order Receipt Planned Order Release 200 200
W Planned Order Receipt Planned Order Release 200 200 V Planned Order Receipt Planned Order
Release 200 200 Problem 6.5 : There are 50 A’s required in week 5 and 100 in week 6. Calculate the
Planned Order Receipts and Planned Order Releases for all the components A (LT = 1 week) B (LT = 2
weeks) C (LT = 1 week) D (LT = 1 week) E (LT = 1 week) Session 6 - Planning 132 Institute of
Manufacturing Resource Management of India Week Item No. 1 2 3 4 5 6 A Planned Order Receipt
Planned Order Release 50 50 100 100 B Planned Order Receipt Planned Order Release 50 100 50 100 C
Planned Order Receipt Planned Order Release 50 50 100 100 D Planned Order Receipt Planned Order
Release 50 50 100 100 E Planned Order Receipt Planned Order Release 50 50 100 100 Gross
Requirements : The requirements of the components calculated without considering the available
inventory results in the gross requirements. In the example considered, a requirement of 200 tables
resulted in a requirement of 200 tops and 800 legs which is the gross requirement. Net Requirements :
Generally inventory of the components is available and hence the requirements must be netted. Net
requirements = Gross requirements – inventory available In the example considered if an inventory of
300 legs and 30 tops were present then the requirement of 200 tables will result in net requirements of
170 tops and 500 legs. Problem 6.6 : Given the below product structure, lead times and the projected
available inventory for items B and C, calculate the gross requirements, net requirements, planned order
receipt and planned order release. Session 6 - Planning 133 Institute of Manufacturing Resource
Management of India B (LT = 1 week) C (LT = 2 weeks) D (LT = 1 week) E (LT = 1 week) F (LT = 1 week) Item
Week Number 1 2 3 4 5 100 40 40 40 40 0 60 60 B Gross Requirements Projected Available 40 Net
Requirements Planned Order Receipt Planned Order Release 60 60 20 20 20 0 40 40 C Gross
Requirements Projected Available 20 Net Requirements Planned Order Receipt Planned Order Release
40 60 0 60 60 D Gross Requirements Projected Available Net Requirements Planned Order Receipt
Planned Order Release 60 40 0 40 40 E Gross Requirements Projected Available Net Requirements
Planned Order Receipt Planned Order Release 40 40 0 40 40 F Gross Requirements Projected Available
Net Requirements Planned Order Receipt Planned Order Release 40 Problem 6.7 : Given the following
product tree, explode, offset, and determine the gross and net requirements. All lead times are one
week, and the quantities required are shown in parentheses. The master production schedule calls for
100 A’s to be available in week 5. There are 20 B’s, 30 C’s, 100 D’s, 40 E’s and 10 F’s available. Session 6 -
Planning 134 Institute of Manufacturing Resource Management of India A B(2) C(1) D(1) E(1) D(2) F(1)
Item Week Number 1 2 3 4 5 100 0 100 100 A Gross Requirements Projected Available Net Requirements
Planned Order Receipt Planned Order Release 100 200 20 20 20 0 180 180 B Gross Requirements
Projected Available 20 Net Requirements Planned Order Receipt Planned Order Release 180 100 30 30
30 0 70 70 C Gross Requirements Projected Available 30 Net Requirements Planned Order Receipt
Planned Order Release 70 320 100 100 0 220 220 D Gross Requirements Projected Available 100 Net
Requirements Planned Order Receipt Planned Order Release 220 180 40 40 0 140 140 E Gross
Requirements Projected Available 40 Net Requirements Planned Order Receipt Planned Order Release
140 70 10 10 0 60 60 F Gross Requirements Projected Available 10 Net Requirements Planned Order
Receipt Planned Order Release 60 Session 6 - Planning 135 Institute of Manufacturing Resource
Management of India Releasing the Order : The planned order release is only a plan to release the order.
The actual release of the order is the responsibility of the material planner. By releasing the order,
authorization is given to the purchase department and the shop floor to procure and manufacture the
components respectively. Once the authorization is given, the plan will be actually realized and hence
the planned order receipt is cancelled and a scheduled receipt is created in that time period. Scheduled
receipts therefore represent a commitment to purchase or manufacture and shows when the
components are scheduled to be available. Consider the planned order release and planned order
receipt for components A and B as shown below Item Week No. 1 2 3 4 5 50 0 0 50 50 A Gross
requirements Projected available Net Requirements Planned Order Receipt Planned Order Release 50 30
0 0 30 30 B Gross requirements Projected available Net Requirements Planned Order Receipt Planned
Order Release 30 Scheduled Receipt Item Week No. 1 2 3 4 5 50 50 0 0 0 A Gross requirements
Scheduled Receipts Projected available Net Requirements Planned Order Receipt Planned Order Release
30 30 0 0 B Gross requirements Scheduled Receipts Projected available Net Requirements Planned Order
Receipt Planned Order Release Session 6 - Planning 136 Institute of Manufacturing Resource
Management of India MRP Outputs The primary outputs of MRP include ¾ Planned Purchase Order
Release Schedules ¾ Planned Manufacturing Order Release Schedules ¾ Action Notices and Messages
Planned Purchase Order Release Schedules : The planned purchase order release schedules specify the
scheduled requirements of all the purchased components in terms of quantity and time periods and
hence facilitates the purchasing function to plan the issue of necessary purchase authorizations to meet
these schedules. Planned Manufacturing Order Release Schedules : The planned manufacturing order
release schedules specify the scheduled requirements of all the manufactured components in terms of
quantity and time periods and hence facilitates the production function to plan the issue of necessary
work order authorizations to meet these schedules. Action Notices and Messages : The MRP software
performs the processes of exploding requirements, lead time offsetting, netting and generates the
planned purchase and manufacturing order schedules but does not issue or reschedule the purchase
and manufacturing orders. The MRP system generates action notices and messages to advice and involve
the planner for the events needing the attention of the planner. Notices / messages to a planner indicate
when to release orders, when to expedite / de-expedite orders, when to cancel orders etc., While using
an MRP system, the planner usually works with three types of orders ¾ Computer Planned Orders ¾
Released Orders ¾ Firm Planned Orders Computer Planned Orders : These orders are automatically
scheduled and controlled by the computer. The computer recalculates the quantities and timing of the
planned order releases based on the changes in the gross requirements, inventory status, scheduled
receipts etc., The system schedules the planned order release and recommends the planner to release
the orders which enter the action buckets Released Orders : The planner is responsible for the release of
the planned orders which when released become the an open order to either purchasing or
manufacturing. The planner can then meet the priorities by expediting, de-expediting or canceling the
order as required. Firm Planned Orders : Depending on the changes to the gross requirements or
inventory status, the computer automatically recalculates the planned order schedule based on a
predefined logic. But, based on a number of factors like the material Session 6 - Planning 137 Institute of
Manufacturing Resource Management of India availability, capacity constraints etc., the planner can
override the computer logic of recalculating the planned order release schedules and can freeze the
planned order schedules in terms of quantity and time thus making them firm planned orders. Capacity
Requirement Planning (CRP) Capacity Requirements Planning (CRP) is directly linked to the material
requirements plan (MRP). CRP considers the planned manufacturing orders generated by the MRP
together with the open orders already in the manufacturing process and estimates the load verses
capacity for each work-center by time period. Since MRP plans for the detailed component
requirements, CRP deals with the capacity evaluation at a very detailed level and considers individual
orders at each work center, calculates the work center loads and determines the amount of labour and
machine resources required. CRP Model Capacity requirements planning (CRP) being at a very detailed
capacity evaluation level among the capacity planning techniques, requires good amount of data for
complete and accurate calculations of load and capacity at each work center. This helps CRP to correct
shortfalls and imbalances in capacity by making the necessary adjustments to the capacity or the
schedules. Schedule of planned Routing Data Revised Schedule manufacturing order of planned manu-
release facturing orders CAPACITY REQUIREMENTS PLANNING Open order file Work center file Work
center Load Report Figure 6.13 - CRP Model Session 6 - Planning 138 Institute of Manufacturing
Resource Management of India CRP Inputs In determining the workload and capacity availability at each
work center, CRP considers the planned orders generated by MRP, open orders, routing data and work
center data. Open Order file Planned Orders CRP Routing File Work Center File Figure 6.14 - CRP Inputs
Open Order File : An open order which is a scheduled receipt on the MRP is an order already released for
manufacturing. The open order file contains all the active shop orders and includes the following data for
each order o Due date of the order o Quantity on the order o Completed operations o Remaining
operations Planned Orders : Planned orders are generated through the MRP and indicate the capacity
requirements in future periods of time. Capacity evaluation for the planned orders is based on the
following data o Planned order release date o Planned order receipt date o Planned order Quantity
Routing File : For every component to be manufactured, the information regarding the operations to be
carried out and their sequence, the path through which the work follows, alternate work centers, tooling
requirements, setup and run times, operator skill levels, inspections etc are given in the routing file. CRP
determines the resource requirements based on the routing files. Work Center File : Work center consist
of one or more people and machines with identical capabilities and can be considered as one entity for
the purpose of capacity Session 6 - Planning 139 Institute of Manufacturing Resource Management of
India planning. The work center file contains information on its capacity and the move, wait and queue
times for the components at these work centers. In addition the work center file also provides
information of the number of shits, hours per shift, workdays, utilization and efficiency factors etc. The
information from the work center file is used by CRP in estimating the capacity and determining the
loads on the individual work centers. Process of CRP CRP determines in detail, the amount of resources
required to achieve the production. It considers the planned orders generated by MRP and the open
orders to evaluate the resource requirements and determines the load in individual work centers. CRP
determines the time required for each order at each work center and adds up the capacity requirements
of all the orders to determine the load on each work center. For each order at each work center, the time
required is calculated by Time required = set up time + (run time x number of pieces) Consider the
following example to develop a load profile In week 1, on work center A, following are the planned and
open orders with their setup and run times. Calculate the load profile based on the given data Week 1
Work Center A Order Quantity setup Time Run Time (pieces) (hours) (hours / piece) Open Order 1 100
1.0 0.2 Open Order 2 200 2.0 0.3 Planned Order 1 200 1.5 0.2 Planned Order 2 150 3.0 0.4 Capacity
requirements are work center A Open order 1 = 1.0 + (100 x 0.2) = 21.0 hrs Open order 2 = 2.0 + (200 x
0.3) = 62.0 hrs Planned Order 1 = 1.5 + (200 x 0.2) = 41.5 hrs Planned Order 2 = 3.0 + (150 x 0.4) = 63.0
hrs Total load = 187.5 hrs Hence the total load on work center A in week 1 is 187.5 standard hours.
Similarly the loads for the remaining weeks on this work center can be determined. The load must be
Session 6 - Planning 140 Institute of Manufacturing Resource Management of India compared to the
existing capacity and differences if any must be handling by adjusting the capacity or the priority plans
CRP Outputs Following are the outputs of CRP ¾ Work Center Load Report ¾ Revised Schedule of
Planned Order Releases Work Center Load Report : The primary output of CRP is the work center load
report. The load report represents the load created by both the open orders and planned orders in each
work center by time period and then compares it with the available capacity. Since MRP does not
consider capacity in its calculations the load reports can have over-loads and under-loads which are
further balanced by adjusting either the capacity or the priority plans. Rated Capacity standard hours
Planned Order load Open Order load Weeks Figure 6.15 - Work Center Load Report Revised Schedule of
Planned Order Releases : Based on the CRP outputs, if the constraints in capacity are to be met by
changing priority plans then the MRP schedule may be revised accordingly. Session 6 - Planning 141
Institute of Manufacturing Resource Management of India Advantages and Limitations of CRP
Advantages of CRP include the following ¾ CRP provides a time-phased visibility of the load profile with
reference to the available capacity. The inputs from the load profile helps in making the necessary
adjustments to the load and capacity so that the over and under loads are balanced appropriately. ¾ CRP
confirms the availability of necessary Capacity across the planning horizon ¾ Since CRP considers a large
amount of data as its inputs, the lead times are better estimated by CRP than the MRP ¾ By smoothing
the loads across work centers, CRP contributes to eliminating erratic lead times and helps in better
control of the lead times Limitations of CRP include the following ¾ The concept of capacity
requirements planning as discussed above is more applicable to job shop environment ¾ CRP requires
large amount of input data and computation making computer processing almost mandatory ¾
Estimates can sometimes be misleading due to the variations in queue times and wait times MRP / CRP
in Repetitive Production Though MRP and CRP find their suitability in the job shop production
environment, the other production environments viz., repetitive production, just-in-time production and
project type production also operate on the basic principles of having the right material at the required
time, in the right quantities and balancing the load with the available capacity. Hence all types of
environments find the applicability of planning for the material and capacity requirements. In a
repetitive production environment, each of the equipment necessary to manufacture the product is
dedicated to particular operation of the process and are arranged in a welldefined and fixed sequence.
The manufacturing operations are performed in the defined manner on the product as it moves
sequentially through these operations. Large volumes of products that are fairly similar justify the setting
up of this type of environment. Auto assembly lines and bottling plants are examples of repetitive
production environments. Session 6 - Planning 142 Institute of Manufacturing Resource Management of
India Material Planning in Repetitive Production Environment Since the manufacturing operation is on a
sequential and continuous basis, material availability at every stage becomes critical to meet the defined
production rates. MRP must ensure that the components, both purchased and manufactured are
planned and scheduled to be available at the right time. The considerations in planning for the materials
in this environment are as follows ¾ Flat Bill of Material Structure : The components received at the
workstations are immediately used in the production process and hence the bill of material tends to
have a flat structure with one or two levels ¾ No On hand Inventory : The product moves through the
production process from one workstation to the next at a defined rate and there is no storage of
intermediate subassemblies. Hence there are no on-hand inventory balance considerations. ¾ Shorter
Time Buckets : The time buckets in repetitive production are shorter than that of the job shop
environment ¾ Gross Requirements equal to production rates : Since the production rates are constant,
the gross requirement for each period is equal to the production rates. ¾ Backflushing : In the repetitive
manufacturing environment, specific withdrawals of material is not recorded individually. The inventory
records are adjusted by backflushing which inturn reduces the number of inventory transactions. ¾
Phantom Assemblies : Repetitive manufacturing have more phantom assemblies when compared to job
shop production due to the immediate utilization of the subassemblies in the next level assemblies.
Capacity Planning in Repetitive Production Environment The production rate and the product mix form
the essential inputs to determine the load. The available capacity is then adjusted to achieve a balanced
production rate throughout the process. This is known as line balancing. The considerations in planning
for the capacity in this environment are as follows ¾ Routings : All the products moves sequentially
through the work centers and the routing sequence is fixed ¾ Run Times : The run times vary depending
on the product mix. ¾ Queue and Wait times : Since the flow of products through each work center is
balanced based on the production rates, there is very less scope for queue and wait times. Session 6 -
Planning 143 Institute of Manufacturing Resource Management of India ¾ Setup time : Setup in a
repetitive environment is done once for the entire line and will have to be done again only during a line
change over / changing the product mix. ¾ Production Rate : The rate of production is dependent on the
output of the bottleneck resource in the line Final Assembly Scheduling (FAS) Basics of Final Assembly
Scheduling (FAS) In the make-to-order and assemble-to-order environments, there are many possible
options of the end products that can be obtained by the various combinations of the basic components
and subassemblies. Customer requirements are met by the appropriate combination but it is difficult to
forecast these customer requirements. Master Production Schedule (MPS) considers the component /
subassembly forecasts, demand and plans at the basic component / subassembly levels and the actual
customer orders are scheduled by the Final Assembly Schedule and thus supplements the master
production schedule Definition According to the APICS dictionary, Final Assembly Schedule is a schedule
of end items to finish the product for specific customers’ orders in a make-to-order or assemble-toorder
environment. It is also referred to as the ‘finishing schedule’ because it may involve operations other
than just the final assembly. Also, it may not involve assembly, but simply final mixing, cutting, packing
etc., The final assembly schedule is prepared after receipt of a customer order as constrained by the
availability of material and capacity, and it schedules the operations required to complete the product
from the level where it is stocked (or master scheduled) to the end-item level Process of FAS The process
of FAS involves decoupling the MPS from the final configuration or end product that is manufactured.
The MPS hence plans at the basic component / subassembly level and maintains an inventory of these
components / subassemblies. The actual demand in the form of customer orders triggers the FAS to pull
the MPS inventory and to schedule the required combinations to form the end item configuration
needed by the customer. Session 6 - Planning 144 Institute of Manufacturing Resource Management of
India Key Terminology 01) Assemble–to–Order (ATO) 02) Available Inventory 03) Available–to–Promise
(ATP) 04) Back-flush 05) Backlog 06) Back Order 07) Bill of Material (BOM) 08) Bottleneck 09) Business
Plan 10) Capacity 11) Capacity Available 12) Capacity Required 13) Capacity Requirements Planning (CRP)
14) Carrying Cost 15) Chase (Demand Matching) Method 16) Closed-Loop MRP 17) Demand 18)
Dependent Demand 19) Due Date 20) Explode 21) Feedback 22) Final Assembly Schedule (FAS) 23)
Finished Goods 24) Firm Planned Order 25) Gross Requirements 26) Independent Demand 27) Inventory
28) Lead Time 29) Lead–Time Offset 30) Level Production Plan (Level Schedule) 31) Load 32) Make–to–
Order 33) Make–to–Stock 34) Manufacturing Resource Planning (MRP II) 35) Master Planning 36) Master
Production Schedule (MPS) 37) Master Schedule 38) Material Requirements Planning (MRP) 39) Net
Requirements 40) On–hand Balance Session 6 - Planning 145 Institute of Manufacturing Resource
Management of India Key Terminology (Cont’d) 41) Open Order 42) Order Promising 43) Pegging 44)
Planned Order 45) Planned Order Receipt 46) Planned Order Release 47) Planning Horizon 48)
Production Plan 49) Production Planning 50) Projected Available Inventory (Balance) 51) Purchasing 52)
Repetitive Manufacturing 53) Requirements Explosion 54) Resource Planning 55) Rough–Cut Capacity
Planning 56) Sales and Operations Planning 57) Scheduled Receipt 58) Strategic Plan 59) Subcontracting
60) Time Fence Session 6 - Planning 146 Institute of Manufacturing Resource Management of India
Practice Questions – Session 6 Question 1 : Which of the following planning process develops the
strategic vision and mission of an organization ? A) Master Planning B) Strategic Planning C) Material
Requirement Planning D) Purchase Planning Correct Answer is: -------------------------------------------------------
----------------------------------------------------- Question 2 : For a given planning horizon, in which of the
following is production in each period always equal to the average of the total demand : A) Level
Strategy B) Chase Strategy C) Subcontract Strategy D) Hybrid Strategy Correct Answer is: ---------------------
--------------------------------------------------------------------------------------- Question 3 : Which of the following
statements is most correct ? A) The MPS shows families of products B) The MPS has more detail than the
production plan C) The production plan has more detail that the MPS D) The production plan rolls up to
equal the MPS Correct Answer is: ----------------------------------------------------------------------------------------------
-------------- Question 4 : Which of the following are inputs to a realistic MPS ? I. Production plan II.
Forecasts for end items III. Product costs for end items IV. Capacity constraints A) I, II and III B) I, II and IV
C) II, III and IV D) I, III and IV Session 6 - Planning 147 Institute of Manufacturing Resource Management
of India Correct Answer is: -------------------------------------------------------------------------------------------------------
----- Question 5 : Final Assembly Scheduling is usually done after : A) Planning a build schedule B)
Capacity is constrained C) A customer order is received D) Goods are returned by the customer Correct
Answer is: ------------------------------------------------------------------------------------------------------------ Question 6
: Which of the following is not an input to MRP : A) Master Production Schedule B) Inventory records C)
Bill of Material D) Capacity Planning Correct Answer is: -----------------------------------------------------------------
------------------------------------------- Question 7 : A firm planned order is used to : A) Freeze the planned
order against changes in quantity and time B) Convert the planned order to a scheduled receipt C)
Simulate the projected inventory balance D) Manipulate the data and quantity of the customer order
Correct Answer is: ------------------------------------------------------------------------------------------------------------
Question 8 : Which of the following is an output of CRP : A) Planned purchase order release schedule B)
Planned manufacturing order release schedule C) Work center load report D) Action notices and
messages Correct Answer is: ----------------------------------------------------------------------------------------------------
-------- Question 9 : Which of the following are part of Sales and Operations Plan : Session 6 - Planning
148 Institute of Manufacturing Resource Management of India A) Strategic plan and production plan B)
Business plan and marketing plan E) Material requirements plan and capacity requirements plan D)
Marketing plan and production plan Correct Answer is: -----------------------------------------------------------------
------------------------------------------- Question 10 : Rough-cut capacity planning can be best described as : A)
Checking to be certain that critical resources are available to support the preliminary MPS B) Making
sure that enough warehouse space is available for raw materials C) Making certain that the load at each
work center is less than the capacity D) Ensuring resources are available by product family Correct
Answer is: ---------------------------------------------------------------------------------------