SCM Workshops

SCM Planning workshops -
BUSINESS CONCEPTS Session 1 – Business Concepts 2 Institute

of Manufacturing Resource Management of India
Organizational Fundamentals In any manufacturing company,
material flow can be basically classified into three phases.
Flow of raw material from suppliers into the manufacturing
facility. Flow of material within the manufacturing facility as
they are processed. Flow of finished goods from the
manufacturing facility to the end customers. To be responsive
to the global competition, Organizations must be able to
manage the complete flow of material from the suppliers,
through manufacturing, till the end product reaches the
customers. Hence organizations must be involved in the
management of management of suppliers who provide direct
and indirect material inputs, must increase the manufacturing
competitiveness and must effectively manage the network of
distribution systems responsible for delivery of the product to
end customers. From this realization emerged the concept of
supply Chain. Definition of Supply Chain Supply Chain : The
supply chain encompasses all activities associated with the flow
and transformation of goods from the raw materials stage
(extraction), through to end users, as well as the associated
information flows. Material and information flows both up and
down the supply chain. The supply chain includes new product
development, systems management, operations and assembly,
purchasing, production scheduling, order processing, inventory
management, transportation, warehousing, and customer
service. Supply chains are essentially a series of linked suppliers
and customers; every customer is in turn a supplier to the next
downstream organization until a finished product reaches the
ultimate end user. What is SCM ? Supply Chain Management
(SCM) : SCM is the integration of all the activities in the supply
chain to achieve a sustainable competitive advantage. Supply
Chain can be broadly classified of comprising of three networks
– Supplier, Firm and Distribution. The supplier network consists
of all organizations that provide inputs, either directly or
indirectly, to the focal firm (i.e., the purchaser). Focal firms
network is involved in the conversion of input material to the
output material. The distributive network consists of Session 1 –
Business Concepts 3 Institute of Manufacturing Resource
Management of India all downstream organizations from the
focal firm that ensure that the right quantity of goods is
delivered to the appropriate customer location in a timely
manner. SCM Vs Logistics Logistics : Logistics, also called as
Physical distribution, focuses on the physical movement and
storage of goods and materials. Logistics is that part of the
supply chain process that plans, implements, and controls the
efficient, effective forward and reverse flow and storage of
goods, services, and related information between the point of
origin and the point of consumption. Typical issues in logistics
are evaluation of various transportation options, packaging
options, inventory management for different channels, develop
and manage networks of warehouses when needed, and
manage the physical flow of materials into and out of the
organization. Therefore, logistics is a subset in the broader
scope of SCM. Elements of Supply Chain Suppliers, Producers,
Distributors, Customers etc., Following are the key elements in
Supply Chain Management: Customers Producers (includes
Retailer, Distributor, Manufacturer) Suppliers Customers,
Producers and Suppliers can be interconnected in the Supply
chain as follows: Supplier Supplier Supplier Supplier Supplier
Supplier Manufacturing Facility Manufacturing Facility Supplier -
------------ Customer Customer Customer Customer -------------
Supplier Customer Customer Customer Manufacturing Facility
Session 1 – Business Concepts 4 Institute of Manufacturing
Resource Management of India Interrelationship of the
elements A number of companies can be linked in the supply
chain network. A supplier to one manufacturing facility can be
a customer to another manufacturing facility and so on.. hence
a number of supplier / customer relationships exist in the
supply chain network. A number of intermediaries
(distributors, wholesalers, retailers etc.,) form part of the supply
chain network. In defining the supply chain network and the
integrations between the elements, the following decisions
must be made Identifying the key supply chain elements in
the network to link the processes. Identifying the processes
that are to be linked with the key elements. Identifying the
level of integration and management control to be applied for
each of the processes Organizational Dynamics Three phases in
the evolution of SCM Organizational structure from the fifties to
the late eighties was marked by the functional silos where the
decisions were made keeping in mind the narrow view of the
business functions and the repercussions of the decisions on
the other functions were ignored. These often created
conflicting objectives within the various functions of a company.
The late eighties saw the advent of Business Process
Reengineering and ERP concepts. The corporate houses started
analyzing the importance of aligning their business with the
developments in the information technology capabilities to
collaborate effectively with its stakeholders, integrate its
functions and decision making and to remain competitive in the
market. There are three distinct phases in evolution of SCM:
Pre-1970 era : Supply Chain was not considered as a
competitive unit. Companies seek more profit by maneuvering
their suppliers and customers. Scientific methods like EOQ
and SPC were applied. Companies attempted at Vertical
integration – themselves. Session 1 – Business Concepts 5
Institute of Manufacturing Resource Management of India 1970
– 1980 era : Holding inventory becomes key due to Oil shock
TQM and JIT practice becomes popular in Japan Distribution is
not yet the focus area MRP systems gain popularity in US and
Europe Post 1980 era : Inventory profits dry up as inflation
reigns in US manufacturers embrace JIT philosophy. JIT pushes
inventory upstream. Lower setup times, lower batch
quantities result in reduction in lead times and drastic
improvement in customer responsiveness. Suppliers and
customers considered as part of the organization network. We
against them philosophy fades away. MRP systems give way to
MRP II systems, ERP and then to advanced supply chain systems
involving optimization. Operating Environments Business
Process that connect various elements in SCM Following are the
typical business that connect various elements in the SCM:
Product Development Order Fulfillment Demand
Management Customer Relationship Management Product
Development Process : As customer demands are ever
increasing with respect to quality, delivery and options,
organizations are increasingly finding it difficult to meet the
customer’s expectations. It is often noted that customers want:
Faster delivery Least price 0 % rejection rate Session 1 –
Management of India And as customer’s preference keeps
changing, organizations are forced to reduce the product
development lead-time as well as costs. Organizations are
increasingly employing the following strategies in the Product
Development Process: Integrate customers and suppliers early
in the development process Reduce time to market
Incorporate supply chain considerations into product design
Employ Concurrent Product Development Practices Order
Fulfillment Process : Organizations need to deploy appropriate
production systems depending on the Product and demand
environment in which they operate. Main objectives, which
need to be considered, are: Production must shift from a
supply/ push method of operation to a demand / pull method
based on customer needs. Manufacturing process must
flexibly respond to market changes with rapid changeover
possibilities for mass customizations. Minimum lot sizes are
planned to move toward a make to order environment.
Required delivery dates rather than EOQ drive production
priorities. Specific supply strategies are developed for each
customer segment. Customer needs dates and requirements
drive the process. Manufacturing, distribution and
transportation plans are integrated. Organizations can employ
following Production Typologies to accomplish the above
objectives: Session 1 – Business Concepts 7 Institute of
Manufacturing Resource Management of India Manufacturing
process Choices : Considering the demand for the items, range
of products, product design, equipment, material movement,
etc., manufacturing process choices can be categorized as
follows : Lot/Batch/Intermittent Flow Line / Repetitive /
Continuous Project Lot/Batch/Intermittent : In the batch /
intermittent process, goods are produced in batches / lots.
Work centres are generally organized into groups / departments
having the similar equipment an skills. Ex., all milling machines
in one group, all Lathe machines in one group etc., These work
centers can perform a variety of operations due to the different
machine’s and skills present and hence are capable of
producing different products. The products move along the
various machines in the work centers based on the required
operations to be performed on them. These work centers hence
comprise of general purpose machinery with the flexibility of
making a variety of products. Control of work is managed
through the individual work centers for each lot. A B C Flow Line
/ Repetitive / Continuous : In a flow line / repetitive /
continuous manufacturing process, workstations are organized
in the sequence needed to make the product. The product
moves from one work station to the next along the defined
sequence at an almost constant rate. In Out Work Station 1
Work Station 2 Work Station 3 1 2 3 4 5 6 7 8 9 Session 1 –
Management of India If the products are discrete ex.,
automobiles, Refrigerators etc., the process is called repetitive
manufacturing process. If the products are not discrete ex.,
gasoline, oils etc., the process is called continuous
manufacturing process. The repetitive / continuous
manufacturing process has the following characteristics :
Setting up of a flow line is justified only if the demand of the
product is large enough. Only a limited range of products can
be produced in each flow line The work stations comprise of
specialized machinery and tooling required for the product
Since the flow of products between the work stations is
balanced and is nearly constant, there is a minimal build up of
work in process inventory. Project : The Project manufacturing
process choice is applicable to huge complex projects. In most
cases, the product is developed at a particular location with all
the necessary resources and equipment moving to the product
development location. Large aircrafts, ship building and
construction are examples. Production Environments : On-Time
Delivery is one of the key attributes in meeting customer
expectations. To cater to the varying needs of different
customers, operations must device the required production
environment / strategy which will help in minimizing the lead
times. Production environment can be classified into Design /
Engineer to Order Make to Order Assemble / Package to
Order Make to Stock Design / Engineer - to - Order : ETO
environment caters to specific customers’ requirements. The
process starts with the preparation of unique / highly
customized engineering designs of the product, with the close
involvement of the customer. After the designs are finalized,
required material is purchased and the components and
subassemblies are manufactured. Its during this process that
inventories, mostly work in process are maintained. The goods
are then assembled and shipped to the customer. Hence the
total delivery lead time that has to be optimized in this
environment to provide a faster customer service include
Delivery Lead Time Designing Purchasing Manufacturing
Assembling Shipping Session 1 – Business Concepts 9 Institute
of Manufacturing Resource Management of India Make - To -
Order : In this environment, the final product is made after the
receipt of the customer order. Standard components are
purchased / manufactured and are usually stocked as raw
material inventory. On receipt of customer orders, the product
is made from these standard components and the process may
include minor customizations of the design. The main activities
contributing to the delivery lead time in this environment
include the manufacturing time, assembling time and shipping.
Delivery Lead Time Assemble / Package - To - Order : In this
environment, the standard components and sub-assemblies are
manufactured and stocked in the form of component / sub-
assembly inventories. On the receipt of the customer orders,
these standard components / sub-assemblies are assembled
according to the configurable options specified by the customer.
There is no design and product manufacturing activity involved
and hence the delivery lead time includes the time to assemble
and ship. Delivery Lead Time Make - To - Stock : In this
environment, the products are completely manufactured and
the finished goods are stocked as end item / finished goods
inventory. On the receipt of customer orders, the goods are
packed and shipped to the customers and hence the delivery
lead time in this environment comprises of only the shipping
time. Delivery Lead Time Manufacturing Assembling Shipping
Raw material Inventory Assembling Shipping Standard
Components / Sub-assemblies Inventory Shipping Finished
Goods Inventory Session 1 – Business Concepts 10 Institute of
Manufacturing Resource Management of India Demand
Management Process : Organizations have to forecast demand
accurately. This will result in Synchronized flow of products
and materials to customer demand Reduction of variability
Organizations should combine accurate demand forecasting
with marketing plans, inventory management and sales
projections to gain an advantage over the competitors. Better
demand management process utilizes information resources to
reduce costs, improve customer service and tap into hidden
value throughout the supply chain. In this process customer
demand is continuously gathered, complied and renewed in
order to match the organization’s supply capability with the
requirements of the market. The process has the following main
objectives: Demand requirements and Supply capabilities are
continuously modeled using point of sale and “key” customer
demand data. Market requirements and production plans are
coordinated on an enterprise-wide basis. Multiple sourcing
and routing options are considered at the time of receipt of the
order. Demand and production rates are synchronized and
inventories need to be managed. Customer Relationship
Management Process : Organizations should maximize
customer service as a means of providing focused point of
contact for all customer enquiries in order to insulate them
from the complexity of a large, multi-divisional corporation.
Main objectives of a Customer Relationship Management
process are: Customer service provides a single source of
customer information, a point of contact for administration of
the product / service agreement. Instant promising /
availability information is available for the customer On-
line/real-time access to product and pricing information assists
customers with quick order placement. On-line/real-time
access to order status information is available to support
customer order enquiries. Procurement Process : Organizations
maintain relationships with major suppliers, which are
corporately managed; in strategic alliances while purchase
order transactions become simplified and integrated with
supply process. Session 1 – Business Concepts 11 Institute of
Manufacturing Resource Management of India Main objectives
of an efficient Purchase Process are: Strategic plans of
suppliers and organization are aligned to focus on resources on
holding down costs and developing new products. Supplier
categorization and management is implemented on a corporate
global basis, with purchasing in a strategic contracting role.
Purchase Order transactions are integrated with supply process
to improve productivity and all areas of supplier performance.
Financial Fundamentals Practitioners of Supply chain
management need to understand the cost structure of each
organization in the supply chain. Following figure depicts how
the cost structure of one entity in the supply chain impacts
other entities: An important activity in the management of a
supply chain is to reduce the costs in the entire supply chain
network. Therefore, one needs to be acquainted with the
fundamental aspects of accounting. Session 1 – Business
Concepts 12 Institute of Manufacturing Resource Management
of India Accounting Cycle : Major steps of Accounting cycle are:
Analyze Business Transactions Record entries in Journal
Post entries to Ledger Prepare a Trial Balance Prepare
Adjusting entries and Post to the Ledger Accounts Prepare
Adjusted Trial Balance Prepare Financial Statements ▫ Profit
and Loss Statement ▫ Balance Sheet Statement Closing entries
are made Balance Sheet It is a financial statement that
summarizes organization’s financial position at a specific point
of time. It’s a numeric illustration of the balance between a
firm’s assets on one hand and its liabilities and owner’s equity
on the other hand in a given point of time. Assets: The
resources the business owns. Assets are listed in the order of
their liquidity – the speed which they can be converted into
cash. Types of Assets are: Current Assets – Assets that can be
quickly converted into Cash. Ex: Inventory Fixed Assets –
Assets that are held or used for a period longer than a year. Ex:
Plant and machinery. Intangible Assets – Assets that do not
exist physically but have a value based on rights or privileges
they confer on the firm. Ex: Brand Value. Liabilities: What a firm
owes, its obligations Liabilities are listed in the order that they
are scheduled to be paid. Types of liabilities are: Current
liability ▫ Debts to be re-paid within a year or less. ▫ Ex:
Accounts payable, Income Tax payable, Current portion of long
term debt Long term liability ▫ Debts that need not to be paid
within a year ▫ Ex: Mortgages, bonds and long-term loans.
Resource Management of India Owner’s equity : The owners
investment after all obligations have been met. Accounting
equation : Assets = Liabilities + Owner’s Equity The Income
Statement This summarizes the firm’s revenues and expenses
and shows total loss or profit during a specified accounting
period. This is also called as Profit and Loss Statement or
Earnings Statement. Revenues : All of the amount earned by a
firm from all sources (e.g., selling goods, providing services,
investing on stocks etc.,). Gross sales – Total value of all goods
and services sold during accounting period. Net Sales – The
adjusted value after subtracting sales returns, sales allowances
and sales discounts. Expenses : Cost of Goods Sold ▫ Beginning
inventory plus net purchases less ending inventory Operating
Expenses ▫ All other business Costs ▫ Selling Costs – Marketing
related activities cost ▫ General Expenses – Costs for managing
the business Net Profit or Loss : The profit earned (cash surplus)
or the loss (cash deficit) suffered by the organization during an
accounting period, after all expenses have been deducted from
revenues. Financial Analysis Financial Analysis enables SCM
practitioner to analyze the cost structure of the supply network.
Resource Management of India Some of the financial ratios
widely used are: Liquidity ratios Profitability ratios Activity
ratios Leverage ratios Valuation ratios Liquidity Ratios :
Liquidity Ratios are used to examine the firm’s ability to meet
short-term cash outflow needs. Current Ratio: indicator of
company’s ability to pay it’s short term liabilities Current Ratio =
current assets/current liabilities Quick (acid test) Ratio:
Measures ability to pay off short term obligations excluding
inventory Quick (acid test) Ratio = (current assets-
inventory)/current liabilities Inventory to net working capital:
Measure of inventory balance, shows if balance can be
threatened by unfavorable changes in inventory. Inventory to
net working capital = Inventory/(current assets-current
liabilities) Cash Ratio: Shows how much of the current
obligations can be paid from cash or near-cash assets. Cash
Ratio = (cash + cash equivalents)/current liabilities Profitability
Ratios : Profitability Ratios are ratios used to measure the
profitability of the firm. Net Profit Margin: shows how much
after tax profits are generated by each dollar of sales. Net Profit
Margin = Net profit after taxes/net sales Gross Profit Margin:
Indicates the total margin available to cover other expenses
beyond cost of goods sold, and still yield a profit. Gross Profit
Margin = (sales-cost of goods sold)/net sales Return on
Investment (ROI): a measure of a company’s efficiency, it shows
the return on all assets under it’s control. Return on Investment
(ROI) = Net profit after taxes/total assets Return on Equity
(ROE): measures rate of return on the book value of
shareholder’s total investment in the company. Return on
Equity (ROE) = Net profit after taxes/shareholder’s equity
Resource Management of India Earnings Per Share (EPS):
Shows the after-tax earnings generated for each share of
common stock. EPS = (Net profit after taxes-preferred stock
dividends) / (Average number of common shares) Activity
Ratios : Activity Ratios are ratios used to measure the efficiency
with which the firm conducts its business. Inventory Turnover:
measures number of times that average inventory turned over
during a period of time. Inventory Turnover Ratio = Cost of
Goods Sold (COGS) / Average Inventory (inventory of finished
goods) Accounts Receivable Turnover: the average length of
time it takes to collect the sales made on credit. Accounts
Receivable Turnover =Sales/Average Accounts Receivable
(Sales/Accounts receivable) Days (Inventory/Receivable)
Outstanding: measures number of days each is outstanding.
Days (Inventory/Receivable) Outstanding =365/Inventory
Turnover; 365/Accounts Receivable Turnover Total Asset
Turnover: a measure of the utilization of all the firm’s assets.
Total Asset Turnover = Sales/total assets during period Leverage
Ratios : Leverage Ratios are ratios used to measure firm’s ability
to meet its long-run debt service obligation. Debt-to-assets
ratio: measures extent to which borrowed funds have been
used to finance the firm’s operations. Includes long term, short-
term debt. Debt-to-assets ratio = Total debt/total assets Debt-
to-equity ratio: Provides another measure of the funds provided
by creditors vs. funds provided by owners. Debt-to-equity ratio
= Total debt/total stockholder’s equity Valuation Ratios :
Valuation Rules are used to describe the way the market values
the firm and the way that certain characteristics are related to
the value of the firm. • Price per Earnings Ratio = Current
market price per share/after tax earning per share Session 1 –
Management of India Key Terminology 01) Activity Ratios 02)
Assets 03) Assemble / Package – to – Order 04) Balance Sheet
05) Customer 06) Customer Relationship Management 07)
Distributors 08) Design / Engineer – to – Order 09) Delivery
Lead Time 10) Demand Management 11) Expenses / Costs 12)
Flow line / Repetitive / Continuous Manufacturing 13) Income
Statement 14) Logistics 15) Lot / Batch / Intermittent
Manufacturing 16) Liabilities 17) Liquidity Ratios 18) Leverage
Ratios 19) Manufacturer / Producer 20) Make – to – Order 21)
Make – to – Stock 22) Order Fulfillment 23) Owner’s Equity 24)
Product Development 25) Project Manufacturing 26)
Procurement 27) Profit and Loss 28) Profitability Ratios 29)
Revenues 30) Supplier 31) Supply Chain 32) Supply Chain
Management 33) Valuation Ratios Session 1 – Business
Concepts 17 Institute of Manufacturing Resource Management
of India Practice Questions – Session 1 Question 1 : Which of
the following are elements of a supply chain ? A) Customers B)
Manufacturers C) Distributors D) All the above Correct Answer
is: ---------------------------------------------------------------------------------
--------------------------- Question 2 : Which of the following is not
true about a supply chain : A) A number of companies can be
linked in the supply chain network B) A supplier to one
manufacturing facility cannot be a customer to another
manufacturing facility C) A number of intermediaries
(distributors, wholesalers, retailers etc., ) form part of the
supply chain D) All the above are true Correct Answer is: ---------
------------------------------------------------------------------------------------
--------------- Question 3 : Strategies for the product development
process to meet customer expectations does not include ? A)
Decoupling customers and suppliers early in the development
process B) Reducing time to market C) Incorporating supply
chain considerations into the product design D) Employing
concurrent product development practices Correct Answer is: --
------------------------------------------------------------------------------------
---------------------- Question 4 : The manufacturing process choice
in which the work centers are organized into groups /
departments having the similar equipments and skills is : A)
Flow line B) Repetitive C) Intermittent D) Project Correct Answer
is: ---------------------------------------------------------------------------------
--------------------------- Session 1 – Business Concepts 18 Institute
of Manufacturing Resource Management of India Question 5 :
Which of the following is not a characteristic of repetitive /
continuous manufacturing process ? A) Setting up of a flow line
is justified only if the demand for the product is large enough B)
Broad range of products can be produced in each flow line C)
Work stations comprise of specialized machinery and tooling
required for the products D) Since flow of products between
the workstations is balanced, there is minimal build up of
inventory Correct Answer is: ----------------------------------------------
-------------------------------------------------------------- Question 6 :
Delivery lead time in a Engineer-to-order environment consists
of : A) Only Designing B) Designing and Manufacturing C)
Designing, Purchasing, Manufacturing, Assembling and Shipping
D) Designing, Manufacturing, Assembling and Shipping Correct
Answer is: ----------------------------------------------------------------------
-------------------------------------- Question 7 : In which of the
following environments, there is no / least involvement of the
customer in the product design : A) Engineer to order B) Make
to order C) Make to stock D) Assemble to order Correct Answer
is: ---------------------------------------------------------------------------------
--------------------------- Question 8 : Manufacturing, Assembling
and Shipping constitute the deliver lead time for which of the
following environments: A) Engineer to order B) Make to order
C) Assemble to order D) Make to stock Correct Answer is: --------
------------------------------------------------------------------------------------
---------------- Session 1 – Business Concepts 19 Institute of
Manufacturing Resource Management of India Question 9 :
Which of the following accounting equation is correct : A)
Assets = Liabilities – Owners’ Equity B) Assets = Liabilities +
Owners’ Equity C) Owners’ Equity = Assets + Liabilities – Cost of
Goods Sold D) Owners’ Equity = Assets + Liabilities + Cost of
Goods Sold Correct Answer is: --------------------------------------------
---------------------------------------------------------------- Question 10 :
Inventory Turnover Ratio is : A) Cost of Goods Sold / Average
Inventory B) Average Inventory / Cost of Goods Sold C) (Cost of
Goods Sold + Net Sales) / Average Inventory D) (Cost of Goods
Sold – Net Sales) / Average Inventory Correct Answer is: ----------
------------------------------------------------------------------------------------
-------------- 20 Institute of Manufacturing Resource
Management of India SESSION 2 MANAGEMENT APPROACHES
Session 2 – Management Approaches 21 Institute of
Manufacturing Resource Management of India Management
Approaches - Overview In today’s world there are plenty of
approaches to run a business. Some focus on quality, some on
customers, some on HR. But of all these solutions, three
approaches stand out as the most encompassing, covering the
entire gamut of a company’s operation. You could not term
them as solutions to your current problems, for they are more
than solutions, they are a way of life. These are MRP-II, Just in
Time (JIT), Total Quality Management (TQM). Judiciously
applied in tandem these approaches can create wonders. In this
session we will touch upon the salient features of each of these,
and in the end learn which approach is more suitable under a
particular environment. Manufacturing Resource Planning (MRP
II) Objectives The base block of any company is the strategic
business plan. The strategic business plan incorporates the
plans of marketing, finance, and production. Marketing must
agree that its plans are realistic and achievable. Finance must
agree that the marketing plan is financially viable, and
production must agree that it can meet the desired demand.
The manufacturing planning and control system is a master
game plan for all functions of the company. This fully integrated
planning and control system is called “manufacturing resource
planning-II” or MRP-II. “II” to differentiate it from MRP i.e.
Materials requirement planning. The MRP-II activities in the
below diagram can be roughly broken up in to three parts. The
front end : These activities consist of production planning and
Master production schedule. These are basically the plans on
which your whole system will be based. The engine : These
consist of Materials requirement planning (MRP), Detailed
capacity planning (CRP), and its result detailed material and
capacity plans. The Back End : It consists of the shop floor
control system and the vendor plans. This is where the action
takes place, and all the detailed planned is brought into fruition.
Monitoring is very important and any deviation has to report
“up” to keep priorities current. Session 2 – Management
Approaches 22 Institute of Manufacturing Resource
Management of India Process flow Feedback flow Closed loop
MRP BUSINESS PLAN SALES AND OPERATING PLAN M’KT PLAN
PROD’N PLAN SALES PLAN MASTER SCHEDULE MATERIALS
REQUIREMENT PLAN RESOURCE OK RESOURCE OK PROD
ACTIVITY CONTROL PURCHASING PERFORMANCE MEASURES
YES NO NO YES Session 2 – Management Approaches 23
Institute of Manufacturing Resource Management of India
Principles and Characteristics Integrated Planning Structure
Fully integrated: The MRP-II system is intended to be a fully
integrated system that works from top down and has feedback
from bottom up. Taken up with simulations it is a top
management-planning tool. MRP-II requires all functions to
interact through this system, any change in plan in any of the
functions requires validation through MRP-II. Cross-functional
Integration Coordinate between functions: MRP-II is fully
integrated and cross functional in nature. MRP-II provides
coordination between marketing and production. All the
functions viz. Marketing, Finance and Production agree on a
workable plan, which is the production plan. Marketing and
production must work together on a daily or weekly basis to
adjust the plan as changes occur. Generally this kind of changes
is made through MPS, however care must be taken to respect
the time fences when any changes are made to meet the
customer demand. The nature of changes could be from
changing the batch size to order cancellation or delivery dates.
Closed Loop – Feedback Feed back loop: As seen from the
diagram MRP-II provides feedback from within its various parts,
making it closed loop. At every stage resource availability,
through modules like, Rough cut capacity planning (RCCP),
Capacity resource planning (CRP) is checked. Any deficit or
inability to make the priority true calls for a change in plan or
some alternate means to meet the demand. What – if
Simulation Simulations: Another ability of MRP-II system is a
what-if analysis. This tool can be used early in the planning
stage to find out what resources are required beforehand.
Forewarned being forearmed. This can be done by simulating
the desired conditions and getting to know the effect of pre-
supposed conditions down the line on say a critical resource like
material, or a work center or for that matter on capacity.
Manufacturing Resource Management of India Just – in – Time
(JIT) Objectives As a philosophy initially it is difficult to
understand what is JIT. JIT is linked with the idea of high velocity
manufacturing. Basically if factory is a pipe and raw material is
water, which you want to flow from one end to the other, then
our aim is to reduce the time gap of payment to the supplier on
one end and receipts from the dealer at the other. Hence we
need to move materials and assemblies through the pipeline
more and more quickly. Which basically means reducing the
diameter of the pipe. With a narrower pipe we can have the
same rate of shipments if we accelerate the velocity of “water”
through the pipe. A faster throughput time also allows us to be
more responsive to any change in customer demands. Ideally
we would like to have the “diameter of the pipe” as low as
possible, in the ultimate situation a single piece flow made
instantaneously. Till we as mortals reach that goal we have to
pass through some intermediate phase. As we go on reducing
we invariably come across constraints. First that constraint must
be resolved before we proceed to do any further reduction. We
must therefore employ methods that determine the location
and cause of constraints. Once we remove that constraint we
can safely move ahead on our journey. This “continuous
improvement” is an important arm of JIT. Embedded in this
endeavor is “elimination of waste”. So basically JIT philosophy is
nothing but making as much as possible with as little resources.
To achieve that, various methods like pull systems, work cells,
flexible manufacturing, etc are used in JIT. Concepts of Waste
and Value added Activity Before we go on to have a look at the
various principles and characteristics of JIT, we must understand
what constitutes wastes, understanding wastes in
manufacturing is understanding the core of JIT. Waste can be
defined as any activity that does not add value for the
customer. It is the use of resources in excess of theoretical
minimum, be it manpower, material, equipment, time, space
etc. Waste can be excess inventory, setup times, inspection,
material movement etc. Session 2 – Management Approaches
25 Institute of Manufacturing Resource Management of India
Shingeo Shingo, one of Japan’s founding fathers of improved
manufacturing techniques, lists his Famous Seven Wastes. They
are… ◊ Waste of over production…. Making products which are
not needed in the immediate future. This leads to locked
inventory, extra material handling, ageing, and can be very
costly. ◊ Waste of waiting….. These are of two kinds, that of the
operator and that of the material. ◊ Waste of transportation…
Moving and storing components add cost not value, and hence
should avoided as far as possible. ◊ Waste of stocks… Any
inventory costs money to carry. ◊ Waste of motion… Waste is
added if the method of working by the operator needs
unnecessary motions like searching for tool, walking, are all
wastes of motion. ◊ Waste of making defects… This not only
costs money but also interrupts the flow of production. ◊ Waste
of processing itself… When the product should not be made or
the process should not be used. The best process is the one
that consistently makes the product with an absolute minimum
of scrap in the quantities needed. Added to this is the waste
caused due to poor product specification and design. It is the
responsibility of the management to establish policy for the
market segment, which the company wants to serve. A mistake
in this fundamental decision can sound the death knell of the
company even if its other functions are working efficiently.
Principles and Characteristics Due to application of JIT and its
philosophy, a way of doing things differently than previous one
emerges, these give rise to many elements which are a part of
JIT environment. Remember these elements are not the ends in
itself, but rather the means in achieving the JIT philosophy.
Broadly these can be grouped as follows. Flow Manufacturing
Flow manufacturing: Repetitive manufacturing is the production
of discrete units on a flow basis. In these types of systems
machines needed to make a unit are arranged close Session 2 –
Management Approaches 26 Institute of Manufacturing
Resource Management of India together and the work flows
from one stage to another. These are suitable for repetitive
manufacturing type of environment where the process stages
are fairly constant. WORKSTATIONS Process Flexibility Flexibility:
In changing times where it is difficult to forecast customer
tastes it is desirable to have systems where the company can
react swiftly to changes in volume and mix of their product. To
achieve this operators and machine must be flexible. The single
piece flow in JIT aids in achieving flexibility and to achieve
machine flexibility quick change over are essential. Quick
change over means shorter set up times. Shorter setup times
have the following advantages : ◊ Reduced order quantity ◊
Reduced queue and manufacturing lead time ◊ Reduced WIP ◊
Improved quality ◊ Improved process flow. Quality at Source
Quality at source: Means doing it right for the first time and if
something goes wrong stopping the process and fixing it.
People become their own inspectors, personally responsible for
the quality of what they produce. Continuous Improvement
Continuous Improvement: The ultimate goal of JIT is to
eliminate waste the question is “How can we use JIT to
continuously improve quality delivery and cost?” The answer is
as simple as the philosophy of JIT. We must learn to
economically manufacture one less at a time. The starting point
is the question “Is the inventory grater than one?”, if the
answer is yes then what stops us from making the same quality
material with one less in stock, and so we proceed on our
journey till we remove bottle necks like uneconomical process,
quality problems, maintenance problems, setup problems, until
we reach the end of the journey i.e. zero inventory. This
approach unleashes the power of continuous improvement
since as we go on we expose layer after layer of constraints. 1 2
3 4 INPUT OUTPUT Session 2 – Management Approaches 27
Supplier Partnerships Supplier improvements: In JIT supplier is
not somebody to be squeezed to get the lowest price or the
best bargain. Those are important, but the approach is to treat
suppliers as partners in the journey of improvement. The result
is long term commitment, trust and shared vision. The JIT
Company could go as far ahead as whetting the suppliers
operation and suggest beneficial improvements, on the other
side the supplier could suggest beneficial changes in the
product. This type of mutual working results in a winwin type of
situation. Employee Involvement Employee involvement: A
successful JIT environment can only be achieved by the
cooperation and involvement of everybody in the organization.
Instead of receiving orders the employee takes responsibility in
improving processes, correcting deviations, suggesting changes,
doing preventive maintenance. An important aspect in a JIT
environment is flexibility, which brings up the question of
training. De-skilling of operation can also help. Total Productive
Maintenance Total Productive Maintenance: The general
tendency for maintaining a machine is to adopt a strategy of “If
it ain’t broke don’t fix it”. This leads to disruption in production,
defective parts, delayed deliveries and added costs. The next
stage is “Preventive maintenance” where using some statistical
means or historical data failure of machine parts is predicted
and before that actually happens you go ahead and replace that
part e.g. A bearing or a tool. Anyway it is important in the sense
that JIT means minimum inventory and little buffer is available.
The concept of “Total productive maintenance” is one stage
above total preventive maintenance it is “preventive
maintenance plus continuing effort to adapt, modify, and refine
equipment to increase flexibility reduce material handling and
promote continuous flow” Pull System Pull systems: In the
general way of working one work center produces to keep it in
stock and the subsequent work center takes material from
stock. In the pull systems the first work center will not make any
thing until it gets a signal from the subsequent work center, this
signal could be a “kanban” card an empty trolley or location.
Basically it is a two bin, fixed order quantity replenishment
system. Session 2 – Management Approaches 28 Institute of
Manufacturing Resource Management of India Work Cells Work
cells: Many companies do not have the volume to justify setting
up a line layout. The layout used is a functional type of layout.
These involve long queues, high WIP, and considerable material
handling. Such type of layout can be improved using commonly
used process flow. Like if say even in a batch type environment
if it is detected that 80% of the flow is in a particular sequence
then you can arrange most of your machines in that particular
sequence to mimic flow manufacturing, the rest can form a
separate unit. These unique arrangements of machines that
resemble flow manufacturing in a batch shop type of
environment is known as work cells and has all the advantages
of flow manufacturing. Total Quality Management (TQM)
Objectives In today’s world customer is king. You can ignore the
king at your own peril. Gone are the monopolistic days where
customer would take whatever the manufacturer dishes out.
Today he wants goods on his own terms and that too if he sees
value in it. Ultimately that means doing things that add value to
the product, from customer’s viewpoint. Which means
“meeting or exceeding customer’s expectation” (Juran’s
definition), or “conformance to requirement” (Crosby’s
definition). These are only some of the words that define
quality. And why “Total”? Total means bringing quality into
every aspect and not just in product or manufacturing, be it in
sales or even a lowly operator punching challans. Every activity
has to be viewed from customer’s perspective and hence
devoid of waste, and ‘filled ‘ with quality--- “TOTAL”. Quality
does not mean “best” in any sense, but “best” for certain
customer conditions. As a matter of fact JIT and TQM go hand in
hand together. They are two sides of the same coin, one
uncovers problem and the other solves it. It would be foolish to
implement JIT W/C A STOCK W/C B W/C B W/C A Empty
container – signal to make Session 2 – Management
Management of India without TQM. There is no sense to arouse
a lion if you cannot make it disappear. TQM is the process that
makes the lion of constraints disappear. You can implement
TQM without JIT but experts agree that it is not as effective.
Implementing JIT alone will give you paises whereas
implemented together will give you rupees. The sum of the
power of both these processes is greater than their individual
parts. Principles and Characteristics Problem Solving Tools So as
we have seen in the last section TQM is a way of overcoming
obstacles. Now the principle behind problem solving is simple,
basically it consists of four steps ◊ Measure ◊ Record ◊ Analyze
◊ Do This cycle is also known by many other names like Shewart
cycle (PDCA) etc. The cycle can be used via the following
statements: ◊ We will take no measurements without recording
the results. ◊ We will not record results without analysing them.
◊ We will not analyse results without acting on them. ◊ We will
not act without measuring the results of our actions. Session 2
– Management Approaches 30 Institute of Manufacturing
Resource Management of India This cycle provides the formal
method for improving every aspect of our business based on
evidence and analysis. It can be used in all areas of the
company. Now there are some formal, time tested methods for
gathering evidence and analysis, and are in the region of
identifying a problem and analyzing, and they are known as
“The Seven Quality Tools”. A brief description of each is as
follows – Flow Charts… It is possible to create a flow chart of
any process or operation to show how work happens. This is
particularly useful for quality improvement because when you
can see what happens in a process you can begin to improve
the process. Check Sheets… One of the problems of
identification is that we rarely know where to begin, we all tend
to have ideas but there is little hard evidence and we act on
hunches rather than on evidence. The action cycle says that we
shall not measure without recording and check sheets provide
an easy way to record and analyse your results. A check sheet is
basically a form that you fill in with the results of your
observations. It must include who collected the data as well as
the time it was collected. Check sheets also act as the start to
the analysis process and can help to structure your data prior to
the analysis process Pareto Principle…This is the classic 80:20
rule that many of you will be familiar with i.e. in broad terms:
80% of your installation problems concerns will come from 20%
of the jobs, 80% of your concerns will come from 20% of your
operators (or operations or products), 80% of your profits will
come from 20% of your customers. Identification and analysis
via Pareto enables us to separate the 'the vital few' from the
'trivial many' and to take action for the best returns. Pareto is
probably the most powerful tool you can find for making a hero
of yourself in quality improvement. Session 2 – Management
Management of India Cause and Effect Charts…These are also
known as Fishbone Diagrams or Ishikawa Diagrams and are
used to list possible causes and to rate their importance. The
basic idea is to take a range of broad headings (such as Men,
Materials, Methods, Machines and Measures) and to use these
to group possible influences on the end result. The method is a
very specific development of 'brainstorming' that is targeted on
improving an effect by listing all the possible causes. Cause and
effect charts are best used by actual operators who have real
knowledge of the process. The method can be used as a
sophisticated way of 'picking the brains' of the best operators to
give real process improvements. Statistical Process Control
(SPC)… Statistical process control recognizes that any
manufacturing process is naturally variable and that it is
impossible to predict the value of any one characteristic at any
one time. Statistical methods take simple process data and use
it to describe the process itself rather than describing each
individual article. Control the process quality and the product
quality automatically follows. SPC is a unique tool to give
confidence that parts are being produced within tolerance,
without having to measure every part. SPC hands control back
to the operator and acts as a 'feed forward' control. Scatter
Plots… Scatter plots are a quick and dirty way of seeing if two
variables are related. The idea is not to plot a graph and
establish a direct relationship but simply to get some points on
a piece of paper and see if the cause and effect are related.
Histograms… Histograms are a form of graph that can
communicate a lot of information at a glance. They are basically
a form of bar chart based on the recorded values of a variable
and are probably the easiest graph type to under-stand. The
value of histograms lies in the ease of understanding for all
levels of the workforce. Cost of Quality Quality costs fall into
two categories, the cost of failure to control quality and the cost
of controlling quality. Cost of Failure : The cost of failing to
control quality are the cost of producing material that do not
confirm to quality standards, they are again of two types ◊
Internal failure costs : The cost of correcting quality problems
while the product is in the plant. Generally this cost includes
cost of scrap, rework, spoilage etc. ◊ External failure costs :
These are the costs of correcting problem after goods having
been delivered to the customer. These are the warranty cost,
field servicing cost, cost of replacement and all other costs
associated in trying to keep a customer satisfied. In real terms
external cost is nothing but a reflection of internal cost. If
internally there are so many defects that it becomes humanely
impossible to trap, these reflect in high external costs. Session 2
– Management Approaches 32 Institute of Manufacturing
Resource Management of India Cost of controlling Quality :
These can again be broken down into two parts. ◊ Preventive
costs : This is the cost of doing avoiding trouble by doing job
right the first time. They include training costs, costs associated
with SPC, machine maintenance, and quality planning costs. If
any cost is desirable this is it. ◊ Appraisal costs : The costs
associated with checking, auditing quality in an organization.
Inspection is a non value added activity, and hence costs added
in inspection are also of no value. Employee Empowerment
TQM is organization wide and everybody’s responsibility. In a
TQM environment, people come to work not only to do their
jobs but also work to improve their jobs. To get commitment
from an employee and to gain confidence, a organization has to
work for the employee on the following fronts ◊ Training ◊
Organization ◊ Local ownership Impact of Environment on
System Design and Deployment Now after learning about
management choices, their philosophies and their principles,
the question naturally arises which choice to apply in which
circumstance. Today customer is king, reams and reams of
paper have been written about him. So when an organization
ignores quality it does so at its own peril. Naturally under these
circumstances TQM becomes the most favored tool of the
management. You can say that whatever the environment, be it
service or manufacturing, TQM can be and should be applied.
Today quality is no longer an order winner, it has to be
considered as an order qualifier i.e. among the basic must’s in a
product necessary before a customer will even consider it for
buying. However TQM in application with JIT gives many fold
returns. So the question now is when to apply JIT or when to
apply MRP or can they be jointly applied? MRP : MRP is a
forward looking system, it is based on MPS, which tells which
end products to make, while the MRP projects the components
required for making them. MRP can be very effective in a
system where there is great deal of variability and uncertainty.
It is Session 2 – Management Approaches 33 Institute of
Manufacturing Resource Management of India also effective in
process or product design changes. However it is very data
dependent, lots of data need to be fed, and the data fed should
be accurate too. Another major drawback of an MRP system is
in designing it. MRP can be designed to accept inefficiencies.
Like if we expect late deliveries, we can use safety stock, if we
expect to pull up the MPS, we use safety lead time. MRP is just
a planning tool and certainly not an improvement tool. JIT : JIT
calls for smoothening of product flow on the shop floor, and
hence prefer a stable environment (as opposed to MRP). This is
natural as kanban is in a way a reactive system and very little is
planned ahead. This can work to its disadvantage in case of
environment with high volatility like quickly changing products,
changing customer demands, extensive and frequent changes
in product design. Hybrid Systems : To get the best of both
worlds the combination of these two systems is quiet common.
An MRP system is used for advance planning, including long
lead time parts, adding resources, and introducing new
products. Once the MRP has the material and resources lined
up. I.e. having taken care of the front end, JIT can take care of
the back end, by being used as an execution system, bringing
with it the characteristics of rapid response to customer orders,
improved inventory levels, continuous improvement, people
involvement throughout the process Session 2 – Management
Management of India Key Terminology 01) Adding Value 02)
Empowerment 03) External Failure Cost 04) Flexibility 05)
Internal Failure Cost 06) Kanban 07) Performance 08)
Prevention Cost 09) Pull System 10) Quality 11) Quality at
Source 12) Quick Changeover 13) Statistical Quality Control
(SQC) 14) Total Productive Maintenance (TPM) 15) Work Cells
Manufacturing Resource Management of India Practice
Questions – Session 2 Question 1 : Which of the following is a
characteristic of MRP II : A) Integrated Planning Structure B)
Close-loop feedback C) Cross-functional integration D) All the
above Correct Answer is: ---------------------------------------------------
--------------------------------------------------------- Question 2 : Which
of the following is not a characteristic of JIT : A) High Inventory
Levels B) Quality at Source C) Continuous Improvement D)
Supplier Partnerships Correct Answer is: -------------------------------
-----------------------------------------------------------------------------
Question 3 : Which of the following represents the cost of
quality : A) Cost of failure to control quality B) Cost of
controlling quality C) Both A and B D) None of the above
Correct Answer is: ------------------------------------------------------------
------------------------------------------------ Question 4 : In MRP II, the
correct top-down planning sequence is? I. Business Plan II.
Material Requirements Plan III. Production Plan IV. Master
Production Schedule V. Production Activity Control A) I, II, III, IV,
V B) I, IV, III, II, V C) I, III, IV, II, V D) I, II, V, III, IV Session 2 –
Resource Management of India Correct Answer is: -----------------
------------------------------------------------------------------------------------
------- Question 5 : Shorter set up times have the following
advantages except : A) Reduced Manufacturing Lead Time B)
Reduced Work in Process C) Increased Order Quantity D)
Improved Process Flow Correct Answer is: ----------------------------
--------------------------------------------------------------------------------
Question 6 : Which of the following statements is true regarding
JIT : A) It is a philosophy that relates to the way in which a
manufacturing company organizes and operates its business. B)
It involves getting the goods to the customer as fast as possible
at all costs. C) It is a culturally based method of management.
D) It is concerned with adding cost to the product. Correct
Answer is: ----------------------------------------------------------------------
-------------------------------------- Question 7 : TQM can reduce
batch sizes by : A) Reducing lead time. B) Using statistical
analysis and destructive testing. C) Increasing per-order costs.
D) Lowering fixed costs associated with batch-size calculations.
------------------------------------------------ Question 8 : Which of the
following is an advantage of work cells : A) Maximum machine
utilization. B) Simplified production activity control. C) Larger
batches and lower unit costs. D) Reduced worker skills required.
------------------------------------------------ Question 9 : Sales and
Operations plan is the combination of : Session 2 –
Resource Management of India A) Marketing Plan and Strategic
Business Plan B) Sales Plan and Master Schedule D) Marketing
Plan and Production Plan D) Purchasing Plan and Production
Activity Control Correct Answer is: --------------------------------------
---------------------------------------------------------------------- Question
10 : Which of the following is not a quality tool : A) Check
Sheets B) Cause and Effect Charts C) Scatter Plots D) Kanban
Cards
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
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 –
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
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 –
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
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
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 –
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
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 –
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
following are techniques / methods of forecasting : Session 3 –
Management of India A) Qualitative Techniques B) Intrinsic
Techniques C) Extrinsic Techniques D) All the above Correct
Answer is: ----------------------------------------------------------------------
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
------------------------------------------------ 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
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
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 -
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
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
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 Monitor consistency with the
production plan Maintain planning bills with the master
schedule Execute master production schedule policies, such
as time fences, safety stocks, subcontracting, and lot sizing
Manage forecast assumptions Identify, negotiate and resolve
conflicts 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: ----------------------------------------------------------------------
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 -
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
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: To determine the
capacity needed to achieve the priority 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: Identify the resources :
Resources (ex., machine , manpower or work center) for which
capacity available and load will be measured need to be
identified. Measure available capacity: Determine the capacity
available at each work center in each time period. 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. 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 Machine or individual worker. Work center (can be
considered as a group of machines and individual workers)
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 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 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
Inputs To CRP : Open shop orders - Information available in
Open order file Planned order releases - Information available
in MRP Where work is done - Information available in Routing
file Time needed in standard hours - Information available in
Routing file 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 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: Overtime or under time Hiring or layoff Shift work
force Alternate routings Subcontract Alter load by: Alter
lot sizes Reschedule Split Operation Operation
Overlapping Altering the load may complicate the schedule for
other work centers. Session 5 – Capacity Management 88
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 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
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: ----------------------------------------------------------------------
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
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’.
STRATEGICPLANNINGBUSINESSPLANNING
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 -
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 -
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
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
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 -
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
(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 -
of India Sales and Operations Planning Introduction to Sales and
Operations Planning S T R A T E G I C P L A N N I N G B U S I N E S
SPLANNINGSALESANDOPERATIONSPLAN
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
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
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
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
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 -
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 -
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
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
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
Order Release 40 40 0 40 40 F Gross Requirements Projected
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 -
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
30 0 0 30 30 B Gross requirements Projected available Net
Scheduled Receipt Item Week No. 1 2 3 4 5 50 50 0 0 0 A Gross
requirements Scheduled Receipts Projected available Net
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
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
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
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: ----------------------------------------------------------------------
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: ----------------------------------------------------------------------
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: ----------------------------------------
-----------------------------------------------

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