PM105:

MATERIALS TECHNOLOGY MANAGEMENT

Planning System
MANUFACTURING PLANNING AND CONTROL SYSTEM
(Continuation)
ENTERPRISE RESOURCE PLANNING - As MRP systems evolved, they tended to
take advantage of two changing conditions:
2. Movement toward integration of knowledge and decision making in all aspects of direct and indirect functions and areas that impact
materials flow and materials management. This integration not only included internal functions such as marketing, engineering, human
resources, accounting, and finance but also included the “upstream” activities in supplier information and the “downstream” activities
of distribution and delivery. That movement of integration is what is now recognized as supply chain management.

As these systems became both larger in scope and integration when compared to the existing MRP and MRP II systems, they
were given a new name— enterprise resource planning, or ERP.

Production and Inventory Control Society (APICS) APICS Dictionary defines ERP as “Framework for organizing, defining, and
standardizing the business processes necessary to effectively plan and control an organization so the organization can use its internal
knowledge to seek external advantage.”

To fully operate there must be applications for planning, scheduling, costing, and so forth, to all layers in an organization, work
centers, sites, divisions, and corporate. Essentially, ERP encompasses the total company and MRP II is manufacturing.

The larger scope of ERP systems allows the tracking of orders and other important planning and control information throughout
the entire company from procurement to ultimate customer delivery. In addition, many ERP systems can allow managers to share data
between firms, meaning that these managers can potentially have visibility across the complete span of the supply chain. Although the
power and capability of these highly integrated ERP systems is extremely high, there are also some large costs involved.
MAKING THE PRODUCTION PLAN
This section discusses some details involved in making production plans. Based on the market plan and available resources, the
production plan sets the limits or levels of manufacturing activity for some time in the future.

Its prime purpose is to establish production rates that will accomplish the objectives of the strategic business plan. These
include inventory levels, backlogs (unfilled customer orders), market demand, customer service, low- cost plant operation, labor
relations, and so on.

Over the time span of the production plan, large changes in capacity are usually not possible. Additions or subtractions in plant
and equipment are impossible or very difficult to accomplish in this period. However, some things can be altered, and it is the
responsibility of manufacturing management to identify and assess them. Usually the following can be varied:

• People can be hired and laid off, overtime and short time can be worked, and shifts can be added or removed.

• Inventory can be built up in slack periods and sold or used in periods of high demand.

• Work can be sub-contracted or extra equipment leased.

Basic Strategies - In summary, the production planning problem typically has the following characteristics:

• A time horizon of 12 months is used, with periodic updating perhaps every month or quarter.

• Production demand consists of one or a few product families or common units.

• Demand is fluctuating or seasonal.

• Plant and equipment are fixed within the time horizon.

• A variety of management objectives are set, such as low inventories, efficient plant operation, good customer service, and
good labor relations.
There are three basic strategies that can be used in developing a production plan:

1. Chase strategy- means producing the amounts demanded at any given time. Inventory levels remain stable while production varies
to meet demand.

2. Production leveling- is continually producing an amount equal to the average demand. Companies calculate their total demand over
the time span of the plan and, on the average, produce enough to meet it. The advantage of a production leveling strategy is that it
results in a smooth level of operation that avoids the costs of changing production levels.

3. Subcontracting- As a pure strategy, subcontracting means always producing at the level of minimum demand and meeting any
additional demand through subcontracting. Subcontracting can mean buying the extra amounts demanded or turning away extra
demand. The major advantage of this strategy is cost. Costs associated with excess capacity are avoided, and because production is
leveled, there are no costs associated with changing production levels.

The main disadvantage is that the cost of purchasing the main disadvantage is that the cost of purchasing (item cost,
purchasing, transportation, and inspection costs) may be greater than if the item were made in the plant.

In subcontracting, Few companies make everything or buy everything they need. The decision about which items to buy and
which to manufacture depends mainly on cost, but there are several other factors that may be considered.
 Firms may manufacture to keep confidential processes within the company, to maintain quality levels, and to maintain a
workforce. They may buy from a supplier who has special expertise in design and manufacture of a component, to allow
the firm to concentrate on its own area of expertise, or to provide known and competitive prices.
 For many items, such as nuts and bolts or components that the firm does not normally make, the decision is clear. For
other items that are within the specialty of the firm, a decision must be made whether to subcontract or not

Hybrid strategy- In reality, there are many possible hybrid or combined strategies a company may use. Each will have its own set of
cost characteristics. Production management is responsible for finding the combination of strategies that minimizes the sum of all costs
involved, providing the level of service required and meeting the objectives of the financial and marketing plans.
DEVELOPING A MAKE-TO-STOCK PRODUCTION PLAN

In a make-to-stock environment, products are made and put into inventory before an order is received from a customer. Sale
and delivery of the goods are made from inventory. Off-the-rack clothing, frozen foods, and bicycles are examples of this kind of
manufacturing.

Generally, firms make to stock when:

• Demand is fairly constant and predictable.

• There are few product options.

• Delivery times demanded by the marketplace are much shorter than the time needed to make the product.

• Product has a long shelf life.

The information needed to make a production plan is as follows:

• Forecast by period for the planning horizon.

• Opening inventory.

• Desired ending inventory.

• Any past-due customer orders. These are orders that are late for delivery and are sometimes called back orders.
LEVEL PRODUCTION PLAN (MAKE-TO-STOCK)
Following is the general procedure for developing a plan for level production.
1. Total the forecast demand for the planning horizon.
2. Determine the opening inventory and the desired ending inventory.
3. Calculate the total production required as follows:
Total Production = total forecast + back orders + ending inventory – opening inventory.
4. Calculate the production required each period by dividing the total production by the number of
periods.
5. Calculate the ending inventory for each period.
Example:

Amalgamated Fish Sinkers makes a product group of fresh fish sinkers and wants to develop a production plan for them. The
expected opening inventory is 100 cases, and the company wants to reduce that to 80 cases by the end of the planning period. The
number of working days is the same for each period. There are no back orders. The expected demand for the fish sinkers is as follows:

a. How much should be produced each period?

b. What is the ending inventory for each period?

c. If the cost of carrying inventory is $5 per case per period based on ending inventory, what is

the total cost of carrying inventory?

DEVELOPING A MAKE-TO-ORDER PRODUCTION PLAN

In a make-to-order environment, manufacturers wait until an order is received from a customer before starting to make the
goods. Examples of this kind of manufacture are custom-tailored clothing, machinery, or any product made to customer specification.
Very expensive items are usually made to order. Generally, firms make to order when:

• Goods are produced to customer specification.

• The customer is willing to wait while the order is being made.

• The product is expensive to make and to store.

• Several product options are offered.

Assemble to order- Where several product options exist, such as in automobiles, and where the customer is not willing to wait until the
product is made, manufacturers produce and stock standard component parts. The following information is needed to make a
production plan for make-to-order products:

• Forecast by period for the planning horizon.

• Opening backlog of customer orders.

• Desired ending backlog.

Backlog- In a make-to-order environment, a company does not build an inventory of finished goods. The backlog normally will be for
delivery in the future and does not represent orders that are late or past due.
Following is a general procedure for developing a make-to-order level production plan:

1. Total the forecast demand for the planning horizon.

2. Determine the opening backlog and the desired ending backlog.

3. Calculate the total production required as follows:

Total production = total forecast + opening backlog - ending backlog.

4. Calculate the production required each period by dividing the total production by the number of periods.

5. Spread the existing backlog over the planning horizon according to due date per period.

Example:

A local printing company provides a custom printing service. Since each job is different, demand is forecast in hours per week.
Over the next 5 weeks, the company expects that demand will be 100 hours per week. There is an existing backlog of 100 hours, and at
the end of 5 weeks, the company wants to reduce that to 80 hours.

A. How many hours of work will be needed each week to reduce the backlog?

B. What will be the backlog at the end of each week (from 1 to 5)?

Resource Planning- Once the preliminary production plan is established, it must be compared to the existing resources of the
company. This step is called resource requirements planning or resource planning. Two questions must be answered:

1. Are the resources available to meet the production plan?

2. If not, how will the difference be reconciled?

If enough capacity to meet the production plan cannot be made available, the plan must be changed.
End