Master Planning of Resources (MPR)

The Business Planning Process

Forecasting Demand
Demand Management and Customer Service
Distribution Planning
Sales and Operations Planning Process
The Master Scheduling Process
Managing the Master Scheduling Process

The Business Planning Process

Processes of Master Planning of Resources (MPR):

Demand Management
o Forecasting independent demand
o Planning distribution
o Managing actual customer orders

Sales and Operations Planning (S&OP)

o Formal monthly process
o Primary purpose of the S&OP:
Determine supply rates to achieve inventory targets
o Output from S&OP:
Approved production plans

 Sales Plan
Inventory/Backlog Plan

Master Scheduling
o Rough-Cut Capacity Planning (RCCP)
Develop master production schedule > Test against
production constraints > Evaluate > Retest if needed >
Evaluate > Determine final plan
o Output from Master Scheduling Process
An Approved Master Production Schedule (MPS)
o Final Assembly Schedule (FAS)
Supported by the MPS
Represents how products are made to customer
specifications
Can replace MPS in some environments (e.g. engineer-toorder)

The Planning Process

Balance of Supply and Demand

Demand Side of the scale: Forecasts and Actual Demand

Supply Side of the scale: Production Orders and Purchase Orders

(placed with suppliers)

The CHALLENGE: TO KEEP THE DEMAND AND THE SUPPLY SIDES IN

BALANCE

Product Volume: Expressed in rates of demand at the product family level. The
demand for your product determines how much youll make.

Product Mix: Determines amounts of each individual product within a family that
should be produced based on the plan.

Birds Eye View

How much to produce?
Selling and Production Rates
Product Families
Sales and Operation Planning
Planning Hierarchy

1. Strategic Planning:

Less Detailed; Long term

a. Very high level: Vision, mission, and value statements; Analysis

of organizations strengths and weaknesses, opportunities, and
threats.
b. Goals are normally defined broadly at this step and financial in
nature.
2. Business Planning
a. Specific goals and Targets based on direction set by strategic
planning.
3. Sales and Operations Planning
4. Master Scheduling:

Most Detailed; Near Term

Planning Horizon: the amount of time a plan extends into the future APICS
dictionary

How long would the planning horizon be for the Master Scheduling
process, short of long? Why? Short, the master scheduling process
deals with working the details of the production schedules: lead times,
lot sizing, small capacity changes to individual work centers.

When discussing the planning horizon you can include recent history
with it.

Long-term horizons: 5 year; S&OP: 2 years; Budget and Financial

plans: 1 year
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The Business Plan: Long-range strategy typically stated in dollars and grouped
in product families

Includes:
o Revenue, cost, and profit objectives
o Budgets
o Statement of Cash Flows
o Projected Balance Sheet

The Common Features:

o Nature of the firm: What is it? What kind of business?
o Location/facilities
o Type of Organization and what skills of people required: How is
your organization structured? What skills are crucial for your
team?
o Processing Technology levels
o Requirements for Capital Resources: How will you get the $$ you
need?
o Primary stakeholders interests: Who and what groups of people
will be affected? What are their interests/goals out of this
business?

Market Environment
o Location of Customers and their relationship with you.
o Growth Rates
o Changing needs of the customer

o Economic considerations

Business Environment
o Competitors current and future
o Business growth projections
o Financial resources availability
o Emerging technologies their impact on your plan

Key Business Performance Goals

o Growth
o Profitability
o ROI (Return on Investment)
o Market Share
o Customer Service
o Reputation
o Company Value

Business Stakeholders: Any group of people affected by your

operations
o Community
o Management Team
o Owners and Shareholders
o Members of Associations
o Employees
o Customers
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o Suppliers
* Be careful about pleasing one group too much which then could
anger another groupbalance is the key for long-term success.

Benchmarking: Comparing how your organization does with you

competitors
o Strategies
o Capabilities
o Processes
o Costs
o Logistics
o Systems

Business Plan Strategic Data Sources

o Marketplace Needs Market research, focus groups, forecasts
o Environmental Scanning Demographic data, govt. regulation,
economic outlook, competitive environment.
o Company Capabilities skill levels of team members, available
resources
o Financial Targets Revenue, cash flow, and profit
o Strategic Goals cost reduction, productivity, customer service,
quality

Manufacturing Environments

Make-To-Stock (MTS): Many types of raw materials; Few types of

finished goods

Make-To-Order/Engineer-To-Order (MTO/ETO): Few types of raw

material; Many types of finished goods.
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Assemble-To-Order (ATO)/Mass Customization: Hybrid

P/D Ratio

P = Manufacuring Production Time or Lead Time

D = Customer required Delivery Time

If this is greater than 1 (production time exceeds customer required

delivery time) youll have to forecast which means more risk.

Make-to-Order
Assemble-to-Order
Make-to-Stock
Mass Customization
Engineer-to-order
Process Choices

Process Industry
o Manufacture of any product that can be moved by hydraulic or
pneumatic pressure through pipes/tubes
o Liquids, chemicals, gases
o A raw material undergoing changes via a chemical process
(mixing, sterilizing, fermenting, cooking, combining, etc)

Service Delivery
o Delivered direct to customer that cannot be stored ahead of time.
o Standardized Service: same for all customers
o Customized Service: unique for each customer

Distribution Network Structure

o The middle man between the manufacturer and the consumer

(e.g. grocery store)
o Retailers, agents, wholesalers, brokers

Multiple Environments within Same Facility

o Can have make-to-stock, make-to-order, and engineer-to-order all
within one facility
o Example: Lamps inc.
Make-to-Stock: produces many of the exact same lamps to
sell in high volume.
Make-to-Order: High end, expensive, anti-aging lamp only
made when a customer places an order.
Engineer-to-Order: A lamp that must be engineered and
completely customized for specific use on the space
shuttle for instance.

Sales and Operations Planning

Balances supply and demand

Deal with products families (not individual products)

Focus on volumes

Reviewed monthly

Formal business process

Benefits
o Connects business plan to departmental activities
o Means to achieve a common goal among different departments
o Realistic production plans are created

o Avoids hidden decisions made by only one department

Product Families

Similar manufacturing requirements

Similar sales requirements

Proportionate cost and revenue effects

Similar function and design

Product/Service Hierarchy (Forecast accuracy the best at the top, the worst at the
bottom)

1. Total Company
2. Business Unit
3. Product Family
4. Product Subfamily
5. Catalog Number/Model/Brand
6. Package/lot Size
7. Stock keeping Unit (SKU)
Resource Planning

Process of establishing, measuring, and adjusting levels of long-range

capacity

Is the plan feasible based on capacity?

Bill of Resources

What is needed to produce one unit of the selected item or family?

Labor, Materials/Components, Facilities, Equipment, Research and

Development, Finances.
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Master Scheduling (usually determined by a person, not a computer)

Balances supply and demand

Specific products/end items

Subject to independent demand

For order promising

Sets boundaries for material and capacity planning

Formal business process

Rough-Cut Capacity Planning (RCCP)

Process of converting the master production schedule into

requirements for critical resources (labor machinery, warehouse space,
suppliers capabilities, money)

Is the MPS feasible?

Forecasting Demand
What is a forecast?

An estimate of future demand

Forecast Error

Difference between actual demand and forecast demand

Note: its very important to monitor the accuracy of the forecast consistently
and establish targets to improve accuracy

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Why a Forecast?

Plan for future/reduce uncertainty

Manage/anticipate change

Increase communication between planning teams

Manage lead times/anticipate capacity and inventory demands

Project operations costs into budget

Improve productivity/competitiveness through decreased costs, improved

delivery times, and responsiveness to customers.

Areas Impacted by the Forecast

Investment/capital equipment decisions

Inventory levels desired level of customer service and safety stock buffers

Capacity

Budgets

Lead-time management

Forecast System Design

What information needs to be forecasted? Define source of data and periods

of data collection

Who is the person accountable for forecast accuracy? There performance =

accuracy of forecast

Forecast parameters
o Forecast horizon
o Forecast level of detail (product family? Subfamily? Model? SKU?)
o Forecast periods

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o Forecast frequency (how often is it formally reviewed and revised?)

o Forecast revision (how will revisions be recorded and tracked?)

Forecasting models/techniques based on volatility of demand

Collection of data for input into the forecast models

Test scenarios/models for accuracy

Record actual demand compared to forecasted demand

Report forecast accuracy

Root cause analysis on the forecast errors

Review forecasting system consistently how is the forecast system

performing? Does it need to be changed?

Forecast Techniques

Qualitative: estimated based on expert or informed opinions of future

product demand. Newly introduced products, derived from focus groups,
research, surveys, etc
Types:
o Expert Opinion
o Market Research: usually conducted through surveys, need a sufficient
sample size
o Focus Groups: group of customers who are asked to provide their
opinion about a product/service.
o Historical Analogy: comparing the potential sales of a new product with
the historical sales of a similar product/service.
o Delphi Method: specific question is asked to a group of experts about
the future such as what types of fuel will be used in 10 years to power
vehicles?

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o Panel Consensus: group of people share opinions about the future and a
facilitator brings the group to consensus. The thought is that the group
makes better decisions than individuals.

Quantitative: mathematical formulas extrapolate historical demand into

potential future demand, based on the idea that historical demand is a good
indicator of future demand.
Types:
o Moving Average:
Average of a certain number (n) of the most recent
observations. As each new observation is added, the oldest
observation is dropped.
Pros:

Fast and Easy

Filters out random variation

Longer periods = more smoothing out of demand

Cons:

Hard to see trends

Lags trends

o Exponential Smoothing
Pros:

Good for fairly constant demand items

Satisfactory for short-term forecasts

Cons:

Lags trends

Smoothing Factor a.k.a. Alpha ()

Determines weight of historical data on projection

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Sets responsiveness to changes in demand

Closer is to 1 = more responsive the forecast will be to

the latest demand value

Closer is to 0 = the less responsive it is.

o Regression Analysis
o Adaptive Smoothing
o Graphical Methods
o Econometric Modeling
o Life-Cycle Modeling
Forecast Data Methods

Intrinsic: based on past demand, from data within the company

Extrinsic: from data outside the company e.g. research of economic and
market trends

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Demand: A want or need for a product

Sources of Demand
o Consumers ultimate users
o Customers pay for the product
o Referrers recommend products to others
o Dealers/Distributors resells product to others
o Intercompany purchase product from a business unit within the
company (e.g. between plants)
o Service Parts

Independent demand:

Demand for an item that is not related to another item

Finished Goods for the customer typically

Dependant demand:

Demand for items used to make independent demand items

On the bill of materials, Semi-Finished

Always calculated from finished good requirement, NEVER forecasted

*Ive actually been fed forecast for dependant demand itemslarge
corporations arent perfect. Learn this stuff and make some changes in your
organization.

Influencing factors of Demand:

Internal: Within the company itself

o Promotions for products: special packaging, special pricing, special
location on a shelf/in a store, etc

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o Substitution for products: A customer can get by with a similar product

if the original one is in short supply.

External: Outside the company

o Seasonality: winter clothes, back to school supplies, sunblock

o Trends
o Economic Cycles: recession, booms, depressions, inflation
Good economic cycle = customers spend more money on
purchases
Bad economic cycle = customers spend less money on purchases
o Preference changes of the customer: monthly instead of weekly
shipments, higher quantity orders
o Random Fluctuation: factor is unknown that causes the randomness

Pyramid Forecasting

Product/Service Hierarchy from session 1

o The most effective level to forecast: Product family or product
subfamily level

Roll-Up
o Two Products X and Y
o Product level forecast
X Unit 5,000
Price $10
Y Unit 3,000

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 Price $20
Total Units in family forecasted = 8,000 (the manager makes
qualitative decision to increase, or Roll-Up this forecast
to9,000 units)
Average Price = $15
Family-Adjusted Forecast = 9,000 units

Force-Down

Product X

Internal (Intrinsic) Data Sources/Factors

Product life-cycle management

o 4 Stages
1.

2.

Introductory phase: Usually no historical data; Qualitative

methods used
Growth phase: Mix of Qualitative and Quantitative used

3.

Maturity phase: Established product; Quantitative methods

based on history used (moving average and exponential
smoothing with adjustments for seasonality).

4.

Decline phase: Decreasing demand, End-of-Life decisions are

made.

Planned Price Changes: Customers will buy more (higher demand) right
before price increase.

Changes in Sales Force: Hire more sales people = more sales or higher
demand (if market isnt saturated)

Resource Constraints: Periods of constrained output in the past must be

taken into account when creating a forecast.
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Marketing and Sales Promotions: Promotion decrease prices = higher

demand; purpose gain market share; artificial/transitory demand.

Advertising: More advertising = higher demand

External (Extrinsic) Data Sources/Factors

Competition: more/better competitors will decrease sales/demand for your

product.

New Customers

Plans of major customers: e.g. new store openings, new offerings.

Government policies

Regulatory concerns

Economic conditions

Environmental issues

Weather conditions

Global trends

Leading Indicators

Indicators or Causal Factors that influence the demand or volume purchase

of a particular product or product family
o Schools built influences the desk volume and dry erase board
installations
o Death rate influences funeral bouquets

New Product Introduction

Calculated risk

Has potential to be the next

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o Blockbuster
o Lifesaver
o Money loser
o Disaster
o Liability nightmare

Product Life Cycle

Length of each stage depends on:

o Public acceptance
o Social and economic conditions
o Rate of competing products development
o Rate of innovation

Focus Forecasting

Assumptions

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o One forecasting model is better than others

o The most recent past is best indicator for future sales

Methods
o All forecasting models for all items compared to recent sales history
o Model selected with closest fit to actual sales
o This model will be used to forecast this item this time
o Next time, a different model may be selected

Data Issues for Forecasting

Availability

Consistency

Amount of Data History

Forecast frequency

Model reevaluation frequency

Cost & Time issues

Recording of true demand

Order date vs. ship date

Product units vs. financial units

Level of aggregation

Customer Partnering

Planning Horizon and Time Periods

Calendar: decide how reporting will be done every month, periods of four
weeks each no matter the month, number of manufacturing days in a
month/quarter.
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Time periods and planning intervals:

o Short term forecast by Day? Week? Month?
o Long term forecast by Years? Quarters?

Planning Horizons
o Planning Horizon = length of the period X number of periods

Data Preparation and Collection

Same Terms as forecast Collected in same terms as the forecast (weekly,

daily, monthly, etc)

Actual sales NOT just shipments we need to know how much our customer
requested (a.k.a. DEMAND) not how much we were able to produce based on
constraints.

Lost sales record sales that would have been made had we had the product
been available at the needed time.

Customer request date NOT the promised date customer could have decide
to cancel the order if we cant meet their date

Separate demand recorded for unique customer segments

Exceptional Demand circumstances

Dealing with Outliers

Point of data differing extremely out of the norm that will distort the good
data.

Decomposition of Data

Method of forecasting
o Data separated into 4 components:
1.

Trend
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2.

Seasonal

3.

Cyclical

4.

Random

o Project the patterns individually then combining them to create a

forecast. Steps
1.

Purify Data

2.

Adjust Data

3.

Take out baseline and components

4.

Identify Demand Components (Trend, Seasonal, Cyclical, and

Random)

5.

Measure random error

6.

Project Series

7.

Recompose

Demand Management and Customer Service

Monitoring Forecast:

Alerts the forecaster when the forecast accuracy is going out of

control.

Forecaster takes appropriate action:

1. Tracking Signals: Detect forecast Bias
2. Demand Filter: Identify unusual demand that exceed
predetermined upper and lower control limits

Accountability for the forecaster is ESSENTIAL

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Reasons for Forecast Inaccuracy:

Too Difficult to Understand: forecasting tool is too difficult to

understand/complex

Lack of Participation

Lack of Compatibility: between the forecasting tool and the

organization techniques not understood/results not trusted, wont be
followed.

Inappropriate forecasting method

Data may be Inaccurate (garbage in garbage out)

Some Data are Inappropriate: Dependant demand is NOT forecasted

Lack of Monitoring

Forecast Accuracy:

Forecast Accuracy % = 100 % Forecast Error %

Measurements:

o Period Forecast Error

Forecast Error = Actual Demand Forecast Demand

o Absolute Percentage of Error (APE)

o
A = Actual Demand
F = Forecast Demand

o Mean Absolute Deviation (MAD)

The average amount by which the forecast was in error

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 All else being equal the forecasting method with the

smallest MAD would be used.

o Mean Absolute Percentage of Error (MAPE)

o Standard Deviation

o Standard Deviation

Data points < 30? Use

Data points > 30? Use

e.g.

and Mean = 500

Range fall within 267 733

1: 68.26% of observations fall within the range (in
example: within 267 733)
2: 95.44% of observations fall within the range
(recalculate with 2)
3: 99.74% of observations fall within the range
(recalculate with 3)
Relationship between MAD and Standard Deviation:

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o Bias: Consistent deviation from the mean either negative or

positive.
Positive Bias? Forecast is constantly too low
Negative Bias? Forecast is constantly too high

o Tracking Signals: Used to measure forecasting bias

o Demand Filters
Quantity limit setting; when actual demand exceeds the
forecasted demand by more than a specified number of
mean absolute deviations
Process for setting Demand Filters:
1. Select appropriate items with the need for a demand
filter (items with heavy demand or long lead times)
2. Set filter at specific level per management policy
(e.g. one months production)
3. Assign responsibility to a planner (he/she reviews
demand filter defaults every day)

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4. Discuss and agree on a planned order schedule with

the customer
5. Track demand filters separately
6. Analyze opportunity for capacity increase for items
that consistently trip their demand filter

Process for developing a forecast:

1. Form team (marketing, sales, materials managers, etc..)
2. Establish policy
3. Group like items into families
4. Identify demand characteristics of product
5. Determine product life cycle stage
6. Classify items into categories based on revenue (usually A, B,
and C items)
7. Invest in forecasting software
8. Load up to 36 months of sales history (for new items, use history
from a like product)
9. Examine, modify, or purge sales history by item
10. Run the forecasting module
11. Obtain forecasts by family and item from team (these should
identify special events that can impact the forecast)
12. Develop planning bills
13. Generate rolling forecasts for 13 months or more
14. Monitor forecast through bias checks, tracking signals, and
demand filters
15. Work with the forecast, not against it
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Customer Relationship Management (CRM)

Order Processing

Supplier requested changes

Substitution products

Change orders

Order entry accuracy

Customer returns

Customer Order Management

Accurate database

Effective and easy entry systems

Accurate product of service availability information

Rapid processing

Allocation

Order confirmation

Reliable delivery

Order Management: Directing, monitoring, planning , and controlling processes

related to customer order, manufacturing orders, and purchase orders
Order Service: Receiving, entering, and promising orders from customers,
distribution center, and interplant operations.
Dates

Most current dates must always be entered into the planning system

Must be valid (cant be in the past) and realistic

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Customer service must be measured based on the requested date

from the supplier

Due date changes by customer request must be recorded in system

Changes due to supplier constraints must be communicated to the

customer

Quick Response (QR)

Ability to respond quickly to customers with the proper products,

quantities, price and location at minimum cost.

Technological Elements of Quick Response (QR)

o Automatic replenishment
o Forecasting/planning systems
o Inventory management systems
o E-Commerce
o Streamlined distribution center processing
o Automated point of sale data
o Shipping container marking: Bar coding

Monitoring Order Status

Accurate and Timely Data

Priorities management

Performance measurement

Processing of changes

Re-planning

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Demand Management

Key: balance predicted sales activity with actual customer orders

Order Promising

Available-to-promise: Whats leftover after all the known customer

orders have been filled. This is whats available to promise to another
customer.

Products and other end items

Capable-to-promise: What are we able to make based on raw

materials, lead times, and capacity?

Service parts

Services: based only on available capacity

Customer Service

Defining
o Addressing the needs, inquiries, and requests from customers
o A measure of the delivery of a products/service to the customer at
the requested time
o Meeting/Exceeding expectations of the customer

Elements
o Responsiveness
o Reliability
o Courtesy
o Competence

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o Credibility
o Security
o Access
o Lead Time
o Understanding Expectations
o Communication

Sales Cycle

Three Phases:
1. Pre-Sales: Focus on customer expectations
2. Sales:
3. Post-Sales: claims, complaints, returns, replacements, repairs,
etc

Customer Service Leadership

Defined Vision

High Standards

Being Proactive with customers

Modeling Action Oriented behavior

Set Service goals

Customer Service Education for all employees

Monitoring service performance targets

Customer surveys
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Integrity

Customer Communications: Remember service perception is the reality in the

eyes of the customer

Treat every customer with respect

Acknowledge a customer order with a fast promise date

Communicate all changes in a timely manner regarding the commit

date

Tell the truth, even if its bad

Explain difference between customer requested date and order

promise date (if any)

Distribution Planning
Considerations for Distribution

# of stocking locations

# of stocking location at each level

Geographical location

Functions at each location

Mode of transportation

Ownership of carriers

Ownership of stocking location(s)

Cost reductions

Replenishment processes

Distribution System Objectives

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Overall goal: provide products/services timely, efficiently, and cost

effectively to multiple customers

Customer Service
o Delivery within lead times
o Buffering in case of increased demand
o Provide necessary variety of products (including samples and display
products)
o Item/Quantity accuracy

Distribution Efficiency
o Minimize transportation/storage costs
o Level production/replenishment orders
o Location/size of storage
o Timely/accurate inventory data

Minimize Inventory Investment

o Minimize necessary safety stock
o Optimize order quantities

Distribution Supply Channels

Distribution Function:
o Distribution Center
o Retailer

Distribution Relationships

Lowest Level Distribution Points

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o Retailers: close to ultimate customers as possible, provide high level of

customer service and reasonable transportation costs.

Area Distribution Points

o Wholesalers: supply directly to lower level distribution point, usually
located central to the markets being served (normally large
metropolitan areas)

Regional Distribution Points

o Larger area to cover such as whole continents: South America, Asia,
Europe, etc

Producing Locations

Forecasting by Aggregation

Estimate demand at each final distribution center

Based on historical demand

Sum of all distribution points (e.g. stores) served by an area DC is the

forecast for that area stocking point

Forecasting by Allocation

Forecasting total world/nationwide sales

More accurate predictions (larger volumes spread over many customers have
smaller forecast error)

Second forecast needed: historical percentage of total sales by regional

center

Safety Stock Levels in Distribution Center Network

Total Distribution Cost

More DCs =
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o Truckload (TL) costs will INCREASE

o Less than Truckload (LTL) costs will DECREASE
o Shipping TL is less costly than LTL total cost of transportation will
DECREASE

The first few DCs added will cause a major cost savings

As more DCs are added the rate of savings decreases

A point will come where transportations savings get reversed.

Other Distribution costs: each increase with every DC

o Inventory $
o Inventory Carrying Costs
o Packaging materials and equipment
o Warehouse utility costs and lease
o Material handling

Distribution Site Selection

Quantitative Factors:
o Inbound shipping costs
o Outbound shipping costs
o Land and building costs
o Taxes
o Labor costs
o Operating costs

Qualitative Factors:
o Customer geographical base
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o Skilled labor supply

o Government Regulations
o Climate
o Infrastructure (roads, industrial parks, energy stations)
o Quality of Life considerations (schools, recreation, medical facilities)
o Labor relations
o Transportation system availability
o ***Qualitative Factor Analysis: Assign percentage weights to each
factor based on relative importance***
Distribution Planning Systems

Push system
o Centralized: what? How many? When? All these decisions made from
one central command
o Push system concepts:
Time-Phased Order Point (TPOP)

Planned order in calculated lot size quantities whenever

projected balance falls below SS

Feasibility of Centralized Push Systems

All centers, productions facilities, and distribution must

be owned by one company

Data Processing and Communications

Sales Replacement and Base Stock Systems
Push System Allocation (Fair Share Allocation)

Reorder point
o Demand: fairly predictable and constant
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o Anticipated demand during replenishment lead time (DDLT) + level of

safety stock (SS)
o SS set to cover variability in demand (forecast error) and variability in
supply (lead time and quantity)
o Reactive, only looks at previous usage and assumes this will continue
o No advance notice to the supplier. Surprise!

Pull system w/ reorder point

o Decentralized: each stocking point determines its own replenishment
order actions
o Triggered from replenishment order from stocking locations directly
supplying the customers
o Orders move up the supply chain to the beginning factory or first step
o Double order point:
may order point Up to the planner if he/she will place an
order
must order point The planner must place and order if stock
drops below this

Distribution requirements planning (DRP)

o Provides framework for centralized push systems of distribution
inventory management
o TPOP/MRP Logic
o Multilevel usage
o Imploding to Master Scheduling
o The Planning Horizon
o Replanning Fregquency

Distribution resource planning (DRP II)

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Vendor-managed and vendor-owned inventory (VMI and VOI)

o Supplier has access to inventory data
o Supplier responsible for maintaining customers inventory levels
o Replenishment is triggered at specific sales level
o Contracts specify ownership of inventory

Collaborative planning, forecasting , and replenishment (CPFR)

o Sharing of info between partners in global supply chains
o Objective: eliminate safety stocks caused by demand variability at each
level in supply chain

Bill of Distribution

Purpose: systematically set the sourcing requirements generated at the

demanding warehouses

DRP/MRP interface with MPS

Master production schedule can check capacity as part of the rough-cut

capacity planning feasibility check

Demand Management
o Represents the connection between manufacturing and the marketplace

Safety Stock with DRP

DRP and Just in Time (JIT)

To make JIT work distributors must:

o Supply exact quantities
o Meet specific schedules
o Supply Quality products
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o Adjust deliveries and quantities when needed

o Perform with minimum paperwork

DRP/JIT Interface to Materials Management

Capacity Planning

Material Planning
o JIT manages actual orders in near term
o DRP manages the forecast

Distribution Process Control

Cross Functional Support

Just-in-time (JIT) Considerations

Repeatable delivery cycles

Partnerships

Smooth Flow from Supplier to Customer

Reducing Number of stocking points

Use of small, standard-size containers

Emphasis on local Supply

Transportation Choices

Mixed Loads: combining dissimilar items into same shipment to utilize

vehicle space

Milk Runs: Regular routes to pick up from several suppliers

Load Switching Points and Cross Docking: staging/transferring shipments

from vehicle to vehicle (semis pull in, the product is unloaded from them and
loaded directly onto local delivery trucks)
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Delivery Vehicles: Suitable for their purpose

Freight Consolidation: combining several loads on a vehicle to optimize use

of the vehicle (FEDEX, UPS, and DHL all do this)

Local Warehouses when necessary: have defined region (local coverage

only)

U.S. Domestic Terms of Sale

Title passes to buyer at sellers facility

o F.O.B. origin, freight collect: Buyer owns goods while in transit, pays
freight charges, files claims
o F.O.B. origin, freight prepaid: Buyer owns goods while in transit and files
claims. Seller pays freight charges.
o F.O.B. origin, freight prepaid and charged back: Buyer owns goods while
in transit and files claims. Seller collects freight charges from buyer by
adding amount to invoice

Title passes to buyer upon delivery to buyers facility

o F.O.B. destination, freight collect: Seller owns goods while in transit and
files claims. Buyer pays freight charge
o F.O.B. destination, freight prepaid: Seller owns goods while in transit,
pays freight charges and files claims
o F.O.B. destination freight collected and allowed: Seller owns goods while
in transit and files claims. Buyer pays freight charges but bills them
back to seller by deducting amount from invoice

Freight Management

Transportation Specialists

Good Planning and Control Systems

Multiple Handling

Ownership vs. Subcontracting

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Full vs. Partial Loads

Shipment Tracking

Shipment Scheduling

Export and Import

Sales and Operations Planning

Sales and Operations Planning:

Brings all sales, marketing, development, manufacturing, sourcing, and

financial plans together into one set of plans.

Held at least once every month

Reviewed at an aggregate (product family) level

Statement of companys plans for the near to intermediate future

Balances supply and demand

Focuses on Product Volume

Information in both financial numbers and product units

What is Sales and Operations Planning Process and its relationship within Master
Planning of Resources?

S&OP relies on demand info from forecasting and demand management

functions

Determines supply available based on capacity to meet the demand

Produces a Production Plan

The Production Plan then drives the Master Scheduling Process

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Volume Mix in S&OP process

Birds Eye View
How much to produce?
Selling and Production Rates
Product Families
Sales and Operation Planning
S&OP Process Steps
1.

Run Sales Forecast Reports

a.

Update last months data: inventory, actual sales, production, etc

b. Gather information for marketing and sales: forecast reports, sales

analysis data, revised worksheets for field salespeople
c.
2.

Share information to appropriate people

Demand Planning Phase

a.

Information from step one reviewed by marketing/sales

b. Update current forecast or create new one

c.

Forecast includes:
product families
product life-cycle phase changes

3.

Supply Planning Phase

a.

Operations review step 2 information

b. Review existing operations, which ones need to be changed based on

new info?
c.

4.

If Changes: Validate revised operations plans against available

resources using resource planning

Pre-Sales and Operations Plan Meeting

a.

Objectives:

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 Make decisions that will balance supply and demand

Resolve differences/problems; single set of recommendations
brought to executive S&OP meeting
Identify areas of no agreement, propose alternative plans
Create scenarios of alternative plans
b. Key Players: Decision-Makers from
Sales
Marketing
Product Development
Finance
Operations
The Product Manager
c.

Family-By-Family review of demand and supply plans

d. Check constraints
e. Establish priorities
f.

Focus on actual, not planned demand/supply

g.

Review inventory backlog plans

h. Output:
Updated financial plan
Recommended action by product family
New production introduction plans
Recommendations for changes in resources
Alternative scenarios for areas not agreed on plus analysis
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 Recommended changes to demand and supply strategies

Agenda for the executive S&OP meeting
5.

Executive S&OP Meeting

a.

Objectives
Make decisions on each product family, accept
recommendations, or determine alternative action
Authorize procurement and production changes
Compare production plan to business plan, make adjustments if
needed
Make decisions for non-agreed-on areas
Review indicators where performance < planned

b. Output
Meeting minutes
Decisions mad Summary
Action plan with due dates and responsibilities
Authorized game plan
Production plan for each product family

Outputs from S&OP:

Production Plan: manufactured product families

Purchase Plan: purchased production families

Inventory Plan: make-to-stock product families

Backlog Plan: make-to-order production families

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Difference between Sales and Operations Planning and Production Plan

S&OP is the process in which the production plan is created.

The production plan is an output of the S&OP process.

Participant/Decision-makers in S&OP Process

Engineering: Product development/product changes

Human Resources: Workforce availability

Operations: Production Constraints

General Manager: Business Plan

Materials: Supplier Constraints

Finance: Capital and Financing Information

Marketing: Product Demand

Sales: Customer Interface/Concerns

Inputs and Outputs of S&OP

Inputs
o Statement of projected Demand Marketing
o Market Intelligence Marketing
o Actual Sales and booked orders Sales
o Management Targets Management
o Indication of capabilities and capacities Manufacturing or Purchasing
o Estimate of Financial resources required Finance
o New Product information Product Development, Engineering

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o New Process information Process Development, Engineering

o Workforce availability Human Resources

Outputs
o Sales plan Marketing and Sales
o Production Plan Manufacturing
o Inventory Plan Materials Management
o Backlog Plan Customer Service
o Financial Plan Finance
o Product and Process Development Plan Engineering
o Workforce Plan Human Resources

Production Strategies in S&OP

1.

Level
a.

As evenly spread over time as possible

b. Finished goods inventories buffer for demand variation

2.

Chase
a.

Stable inventory level while varying production to meet demand

b. Produce only what you sell

c.

Just in Time (JIT)

d. No Sales = No production
3.

Combination/Hybrid
a.

Combination between Level and chase

b. Example: Ice cream producer; 1 shift per day in slow season, 2 shifts
during busy season

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Backlog vs. Backorder

Backlog
o All customer orders received but not shipped yet (open orders)
o Includes backorders

Backorder
o Unfulfilled customer order or commitment
o Inventory or capacity was insufficient to meet demand
o Does not include all back log

Backlog Target Levels

Maximum/minimum backlog

Planned order times

Maximum customer waiting time

What is a Resource?

Anything that adds value to a product or service in its creation, production,

or service.

A constraint could be skilled engineers to design a product, not just labor or

machine hours.

Resource Planning

The way in which the production plan is evaluated for feasibility

Long range capacity

Requires top management approval

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Based on production plan

Steps in Resource Planning Process

1.

Determine bills of potential constraining resources (bottlenecks, short RM

supply, lead times)

2.

Determine unit of measure

3.

Determine planned capacity

4.

Calculate load on each resources (load comes from production plan)

5.

Compare load to planned capacity

6.

Revise production plan or adjust capacity where necessary

Planned changes in resources

Facility Startup/Shutdown

Adding/removing tooling and equipment maintenance

Acquisitions

Hiring, layoff, shift changes

Education and training

Facility issues handled by maintenance

Outsourcing/subcontracting

The Master Scheduling Process

Master Scheduling Process

Develop build schedules for specific products

Master Production Schedule is the output to this process

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o MPS: set of planning numbers that drive detailed scheduling and

planning

Objective
Item Planned
Constraints
Planning Horizon
Time Periods
Planning Focus
Process Output
Relation to Master Planning of Resources

Production plan is how much needs to be produced by month of a product

family

The Master Production Schedule breaks down that month by week and
quantities per individual product

Master Scheduling Applications

MPS development

Projects backlog/inventory levels

Order Promising

Drives detailed scheduling/planning

Helps assign priorities

MPS IS NOT A FORECAST!

Master Scheduling Process

1.

Develop preliminary MPS

2.

Evaluate MPS using RCCP (Rough-Cut Capacity Planning)

3.

Revise MPS

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4.

Re-evaluation of MPS using RCCP

5.

Publish MPS

Master Scheduling Process vs. Master Production Schedule

Master Scheduling process creates the Master production schedule

Inputs to the master scheduling process

Detailed Forecasts

Production plan from S&OP

Inventory/backlog targets

Time fence policies

Interplant/intraplant orders

Customer orders

Service parts forecasts/orders

Distribution requirements

Planning bills of material

Actual production/supply levels

Outputs from Master Scheduling Process

MPS

Projected Finished Goods inventory levels for Make-to-stock items

Projected Sub-Assembly inventory levels for Assemble-to-order items

Projected Finished Goods backlog levels for Make-to-order and Engineer-toorder items

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Order Promising info

Product availability info

Projected available balance:

First Period
o PAB = Current on-hand quantity + MPS Customer Orders

After first period but before demand time fence

o PAB = Prior Period PAB + MPS Customer Orders

After Demand Time Fences

o PAB = Prior Period PAB + MPS (Greater of Forecast or customer orders)

Available to Promise:

Non Cumulative First Period

o ATP = On-hand balance + MPS Sum of customer orders before next
MPS

Non-Cumulative All future periods that contain an MPS planned receipt

o ATP = MPS Sum of customer orders before next MPS

Cumulative First Period

o ATP = On- hand quantity + MPS receipt quantity Customer Orders in
this period

Cumulative All other periods

o ATP = Previous Periods ATP + MPS receipt quantity Customer orders in
this period

Look Ahead (Backward ATP)

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o If period 1 has an ATP of 2 and the next two periods demand create a
negative ATP of 2 units in period 2, then the necessary quantity of 2
units would be borrowed from current period. Zeros out the ATP for
each period.

Types of bills of material used in master scheduling

Modular BOM
o Options for customized products (Dell Computer)

Common Parts BOM

o Common components that can be sold with different models of a
product (regular, deluxe, or heavy-duty gas ranges)
o Kitting Bill: subset of common parts bill because involves small parts for
assembly/installation (e.g. garage door and opener)

Super BOMS
o Most widely used BOM
o Catalog number is made up of abbreviated characteristics/components
of end item
o Each option for each component in BOM is given a percentage of how
often its usually chosen

Advantages of Planning Bills

Reduced # of end items: items not assembled until demanded

Increased forecast accuracy: higher product family level

Facilitates order entry (configurator)

Increased scheduling and planning accuracy: MPS at the component level,

FAS at finished goods level, less FGs and better customer service

Permits two-level scheduling

Increased computer processing flexibility/efficiency

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Master Scheduler Responsibilities

Understand forecasting process

Manage supply constraints

Participate in S&OP

Monitor consistency in production plan

Create/upkeep MPS

Execute policies: Time fences, safety, stock, subcontracting, and lot-sizing

Identify, negotiate, and resolve conflicts

Maintain planning bills

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