Basics of Supply Chain Managment (Lesson 1)

Basics of Supply Chain Management Un

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Unit 1

Basics of Supply Chain Management

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© Copyright Leading Edge Training Institute Limited ii


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© 2003 e - SCP -The Centre for Excellence in Supply Chain Management No portion of this publication may be reproduced in whole or in part. The Leading Edge Group will not be responsible for any statements, beliefs, or opinions expressed by the authors of this workbook. The views expressed are solely those of the authors and do not necessarily reflect any endorsement by The Leading Edge Training Institute Limited.

This publication has been prepared by E-SCP under the guidance of Yvonne Delaney MBA, CFPIM, CPIM. It has not been reviewed nor endorsed by APICS nor the APICS Curricula and Certification Council for use as study material for the APICS CPIM certification examination. The Leading Edge Training Institute Limited Charter House Cobh Co Cork Ireland

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Preface............................................................................................................4

Course Description................................................................................................................. 4 Target Audience and Pre-Requisite Knowledge ................................................................. 4 Scheduling Lessons and Review Sessions ............................................................................. 4 Online Examinations .............................................................................................................. 5 Frequently Asked Questions ................................................................................................. 5 Mentoring ................................................................................................................................ 5 Supplementary Reference Materials .................................................................................... 5

Lesson 1 – Supply Chain Management Introduction .......................................6 Introduction and Objectives.................................................................................................. 6 The Role of Manufacturing ................................................................................................... 6 Competition, Quality, and Customer Expectation.............................................................. 7 Strategy ................................................................................................................................... 8 Organizational Structure ..................................................................................................... 11 Difficulties with Traditional Systems ................................................................................. 12 Managing Materials ............................................................................................................. 14 Manufacturing Processes..................................................................................................... 15 Planning................................................................................................................................. 17 Planning and Control Hierarchy ........................................................................................ 19 Manufacturing Resource Planning (MRP II) .................................................................... 23 Creating a Production Plan................................................................................................. 24 Summary ............................................................................................................................... 25 Review ................................................................................................................................... 26 What’s Next? ........................................................................................................................ 27

Appendix.......................................................................................................28 Answers to Review Questions .............................................................................................. 29

Glossary........................................................................................................31

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Preface

Course Description This self-study unit aims to provide a generic understanding of the basics of supply chain management, that is, the planning and control of materials throughout an organization. This unit provides a good grounding in supply chain management which forms the basis for further study, eventually leading to the Certificate in Production and Inventory Management (CPIM).

The unit, comprising 10 lessons, covers:

Types of manufacturing systems Forecasting

Master planning Material requirement planning

Capacity management Production activity and control

Purchasing Inventory management

Physical distribution Quality management

Just-In-Time manufacturing.

This document contains the first lesson in the Basics of Supply Chain Management unit, which is one of five units designed to prepare students to take the APICS CPIM examination. The Basics of Supply Chain Management unit provides the foundation upon which the other four units build. It is necessary to complete this unit, or gain equivalent knowledge, before progressing to the other units. The five units, which together cover the CPIM syllabus, are:

Basics of Supply Chain Management

Master Planning of Resources

Detailed Scheduling and Planning

Execution and Control of Operations

Strategic Management of Resources

Target Audience and Pre-Requisite Knowledge This course is intended for anyone involved in the supply chain who wishes to further their understanding of supply chain management and improve their career prospects by gaining a valuable recognized qualification in the area. It assumes some knowledge of manufacturing organizations. The course may be used to prepare for the American Production and Inventory Control Society (APICS) Certificate in Production and Inventory Management (CPIM) exams.

Scheduling Lessons and Review Sessions You should set aside 2 hours for each lesson. Throughout this self study course you will find review questions and exercises. These are designed to optimize your retention of the material covered by encouraging retrieval of key information. In many cases you will be required to apply that knowledge in a business context.

The answers are available in the appendix of this self study guide. The ideal time to check your work against these answers is just before you start the next section. There are two advantages to this approach: you can fill in any gaps in your learning and also refresh your memory on the work covered so far before progressing to new content.



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Online Examinations At regular intervals during your study you can test your progress and understanding by completing an online examination. The questions provided in the online examination have been carefully designed by a Fellow of the APICS organization to assess your understanding of the material covered.

On completion of the examination, you receive immediate feedback of your score.

Frequently Asked Questions A bank of questions frequently asked by students of CPIM is available on the e-scp website. These questions have been answered in detail by APICS experts. If you have difficulty understanding a concept in your self study manuals, the frequently asked questions section should be your first port of call. The question bank is regularly updated to reflect the issues that concern students.

Mentoring You will have access to a highly qualified and experienced Fellow Member of APICS who will respond to queries you may have on the course material contained in these courses.

Supplementary Reference Materials Throughout the self-study lessons, appropriate further reading may be identified. Summaries containing the key points of some references may be available from the e-scp web site. These summaries and articles should help to broaden your understanding of the concepts covered in the lessons and clarify issues with which you have difficulty.



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Lesson 1 – Supply Chain Management Introduction

Introduction and Objectives This lesson looks at the role of manufacturing in the economy, explains the features of materials management and the need for overall supply chain management.

On completion of this lesson you will be able to:

Describe the role of manufacturing in the economy

Identify areas of difficulty in traditional supply systems

Explain the role, objectives and responsibilities of materials manufacturing

Differentiate between various manufacturing processes

State the importance of planning

Describe a planning and control system

Identify the levels of the planning hierarchy and the questions that must be addressed at each level

Define manufacturing resource planning (MRP II)

The Role of Manufacturing

Wealth What is wealth and how do we get it? Most people would answer that it is money. That’s not true though. Money is a means of exchanging or measuring wealth. Wealth itself comes from:

Natural resources

Manufacturing

Services

For example, a piece of land is a natural resource and has a va lue for most people. If you mine precious metal from the land you have increased the wealth you can gain from the land. Both of these are natural resources.

Many natural resources are of limited use but can be made more useful through transforming of the raw materials into a more useful form. One example might be the transformation of stone and quarry dust into bricks.

Services are not reliant on transforming a raw material into a more useful product. Instead, they rely on providing knowledge and skill. Services also generate wealth. For example, the services of an architect may be required in the transformation of the bricks into a useful building.

How do we increase our wealth? We can do this by adding value to a product or service. The more value we add, the more our wealth increases. The value of a pile of bricks can be increased by adding a wire rack or two along with instructions on how to build a barbecue.

To add value, we need to design effective production processes and operate them efficiently.



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Competition, Quality, and Customer Expectation The way in which a business operates is affected by the environment it finds itself in. Most businesses compete with other companies that provide similar products or services. In the end, the market decides on the winners, based on the quality of the product offering and the ability of the organization to meet the needs of its customers. The major external factors that affect companies are:

Competition

Quality

Customer Expectations

Competition Most companies can identify competitors in their business. For example, when you buy a new car, you have the choice of several dealerships in your area, and a choice of many more makes of car. Businesses in today’s world often have to compete with companies from all over the world. Where previously, it might only have been cost effective to buy a car from a native car manufacturer, now, you can choose from Japanese, Italian, Russian, American, British and many other types of car.

Quality The quality of your product or service must meet or exceed your customer’s expectations. If the lawn mower you sell persistently chews up the grass while spewing stones and other small objects like lethal weapons to either side, you have lost their custom and potentially that of many others as they will tell their story to all and sundry.

Peter Druker

Customer Expectation The customer’s expectations drive the market. Suppliers need to identify the elements that provide value to a customer. There are several elements of a product or service that are important to the customer, including:

Price

Quality

Delivery

Pre- and post-sale service

Flexibility (of product and volume)

Note: The characteristics that are important to the customer will differ from market to market and from customer to customer. Customers’ needs and the factors they consider important will also change over time.

“The result of a business is a satisfied customer.”



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Order Qualifiers

These are the characteristics of your product that are the absolute minimum for you to compete in the market place. A garden chair that will collapse under 20 kilos of weight will not attract any customers. To qualify for consideration, it must be capable of supporting an adult weight.

Order Winners

Order winners are characteristics of your product or service that cause customers to choose your products and services over that of your competitors. If the chocolate muffins you produce have more chocolate chips and a better texture than the competition, and that’s what the customers like, then you win the customers.

But what if your customers don’t want chocolate chips? Understanding the needs of your customers is vital. Good communication is needed to achieve that understanding. You need to work with customers to solve design and production problems, ensuring a spirit of free and open sharing of knowledge and opinions.

As customer expectations rise and product development continues to improve, characteristics that once won an order will be expected as order qualifiers. It’s not enough to sell a car that gets you from A to B. It must also have comfortable seats, safety features, and a good audio system.

1. Which of the following objectives is not needed to increase profit?

A. Best quality department

B. Maximum customer service

C. Accurate production forecast Review Q D. Lowest inventory investment

Strategy To meet customer expectations, companies must focus on the market and tune their operations to meet the changing needs of that market. All functions in the company must contribute to a winning market-based strategy.

Business Strategy To meet customer expectations, companies must focus on the market and tune their operations to meet the changing needs of that market. All functions in the company must contribute to a winning market-based strategy.

Lead Time The term ‘lead time’ refers to the span of time required to perform a process. To meet customer expectations, lead times are very important, particularly delivery and cumulative lead time.

Delivery lead time is the time from the receipt of the order to the delivery of the product.

Cumulative lead time (see below) is the longest planned length of time to accomplish the activity. Ideally, the lead time should be as short as possible, but the delivery lead time is affected by the time it takes to manufacture the goods.



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In Figure 1 below, the cumulative lead time begins when the planner records the need for the lowest level item, and ends when the finished product is available for shipment.

Figure 1 Cumulative Lead Time

Manufacturing Strategy Manufacturing strategies should aim to reduce delivery lead times where possible. The process of manufacturing from beginning to end is very long. The time that would elapse between design, purchase, manufacture, assembly and shipping of an item would be unacceptably long for most products. Therefore, three common manufacturing strategies may be used:

Make-to-stock

Make-to-order

Assemble-to-order

Manufacturers that make-to-stock keep a stock of finished goods. When a customer order arrives it is filled from this stock. Production orders are used to maintain appropriate levels of finished goods stock.

Make-to-order manufacturing is the opposite extreme. Manufacture of the product does not begin until a customer order is received. In some cases, not only must the product be manufactured after the order arrives, it also requires design engineering, and is referred to as engineer-to-order.

Products that can be assembled to the customer’s specification from a set of standard components stored in inventory are known as assemble-to-order.

Assembly Pick Time

Paper Time

Planner Time

Production Time

Fabricated Part Pick

Time Paper Time

Planner Time

Production Time

Purchased Item

Vendor Time

Buyer Time

Planner Time

Recv. Time

Insp Time

Cumulative Lead Time

Completion Date

Pick Date

Start Date

Completion Date

Pick Date

Start Date

P.O. Place Date

Dock Receipt

Completion Date



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Vendor Production Assembly DistributionResearch and Design

Warehouse Production Assembly Distribution

Production Warehouse Assembly Distribution

Production Assembly Warehouse Distribution

Del

iver

y L

ead

Tim

e

Engineer-to-Order

Make-to-Order

Assemble-to-Order

Make-to-Stock

Vendor Production Assembly DistributionResearch and Design

Warehouse Production Assembly Distribution

Production Warehouse Assembly Distribution

Production Assembly Warehouse Distribution

Del

iver

y L

ead

Tim

e

Engineer-to-Order

Make-to-Order

Assemble-to-Order

Make-to-Stock

Figure 2 Manufacturing Strategies

Impact of Product Design on Lead Time When customer orders are filled from finished goods inventory (make-to-stock), delivery lead time is short (see the bar chart above). The greater the customer input into the final configuration, the longer the delivery lead time. Products that are designed to suit the customer’s precise specifications (engineer-to-order) have the longest delivery lead times.

0102030405060

Days

make-to-stock

assemble-to-order

make-to-order

engineer-to-order

Manufacturing Strategy

Manufacturing Strategies and Lead Times



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Organizational Structure As the way each company functions is unique to itself, organizational structures differ from company to company. However, there are common elements to be found. The following organization chart is an example of a typical manufacturing organization.

Chief Executive Officer

Manufacturing Quality Finance EngineeringInformation Technology

HumanResources

MarketingAnd Sales

Research andDevelopment

Product Design

ManufacturingEngineering

MaterialsManagement

ProductionIndustrial

Engineering

Chief Executive Officer

Manufacturing Quality Finance EngineeringInformation Technology

HumanResources

MarketingAnd Sales

Research andDevelopment

Product Design

ManufacturingEngineering

MaterialsManagement

ProductionIndustrial

Engineering

Manufacturing This section of the company makes the product. It usually comprises the following functions:

A process or manufacturing engineering function is responsible for designing the manufacturing process, that is, the way in which the product is made. This function is responsible for process design, plant layout, and selecting equipment among other activities.

A materials management function manages the flow of materials through the manufacturing process and out to the customer.

The production or manufacturing function is responsible for actually making the product The industrial engineering function is required to maintain the machinery, equipment,

buildings and grounds of the manufacturing plant.

Quality This function is responsible for ensuring that the product meets the required specifications.

Finance Mainly concerned with profitability and cash flow, this section ensures the economic health of the organization is maintained.

Engineering Product engineers are responsible for transforming ideas for new products into reality. They undertake the product research, design and development and produce final specifications which can be used to manufacture the new product for the market.



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Information Technology Few companies today do not require some form of information technology or systems. This section is usually responsible for computer systems, software, hardware, and communications systems.

Human Resources This section of an organization is responsible for hiring staff, agreeing contracts, managing holidays, pensions and other staff benefits. They maintain records on staff performance and are responsible for ensuring adequate staff training.

Sales and Marketing This section of the company is generally the customer-facing section. It is responsible for identifying and developing market demands in line with the company’s overall strategy. The marketing function is responsible for devising the way in which the company responds to market demand. They are also responsible for estimating the types of products customers will want and the amount of product the company will be able to sell.

All these sections within the company have discrete areas of activity. Traditionally, communication between the sections was minimal and took place only at managerial level. In recent times, a strong trend towards cross-functional teams has emerged.

2. Select the correct statement about delivery time for an engineer-to-order company.

A. Delivery time is shorter than for an assemble-to-order company

B. Delivery time is shorter than a make-to-order company

C. Delivery time would be longer than an assemble-to-order company Review Q

D. Delivery time is the same as for a make-to-stock item

Difficulties with Traditional Systems The supply chain covers all activities needed to supply a product or service to the final customer. Any number of companies can be linked together in a supply chain. Also, your customer may be the supplier for another company so a number of supplier/customer relationships may be included in the total supply chain. When you buy a shirt, for example, the supply chain starts right from the cotton plantation, through cloth weavers, clothing manufacturers, distributors and finally retail stores.

The figure below shows a basic supply chain. Raw materials must be physically transported from suppliers to manufacturers to make the product. Finished goods are then sent to distributors who then ensure their delivery to the customers. The distribution system may be direct to the customer or may use wholesalers, warehouses or retail outlets to reach the end customer.



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Two-way communication is required throughout the chain to ensure accurate information of demand and design and optimum flow of products and services. A difficulty at any point in the chain may adversely affect the rest of the chain.

Physical Distribution

Physical distribution is the movement of goods from suppliers to the beginning of the production process and then from the end of the production process to consumers.

Physical distribution involves transportation, inventory management, warehousing of inventory, packaging, materials handling and order management.

Costs of Inventory Holding a lot of inventory increases costs. The inventory costs money to buy, to store and to manage. Therefore excess inventory adversely affects cash flow and decreases profit.

Costs of Distribution The main of distribution are transportation, inventory and warehousing. Transportation costs can be reduced by ensuring that only full loads are shipped, but this can increase distribution inventory. It is also in conflict with the principles of Just-In-Time (JIT).

Conflicts in Organizational Objectives

Most organizations aim to provide the best customer service they can while minimizing costs such as production, inventory and distribution.

By providing the best customer service, they hope to increase their revenue by increasing sales. This means ensuring that the customer can have what they want when they want it.

However, this may lead to high inventory levels and a lot of short production runs which will increase costs. The overall profits will be reduced if costs are high so it is important to minimize all costs. If you reduce your cost of production by a dollar, you add a dollar to your profit.

Supplier Manufacturer Distributor Customer

Flow of demand and design information

Flow of products and services

Distribution Distribution



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Manufacturing may reduce costs by planning long production runs and often through bulk buying raw material inventory.

Objectives Manufacturing Operations Finance

Implications Increase revenue Reduce manufacturing costs

Increase profit and reduce investment

High Customer Service

High Production Efficiency

Low inventory investment

Figure 3 Conflicts in Traditional Systems

Each function in the company has different perspectives and objectives (see Figure 3 above).

For example, Marketing and Sales are concerned sole with increasing revenue. They want to ensure high customer service which usually involves interrupting production schedules to respond quickly to customer demands and maintaining high levels of finished goods inventory. These factors increase costs.

Production may be concerned with reducing manufacturing costs. They may try to ensure long production runs, few products and few setups, which will require high raw material and finished goods inventories to ensure that the production schedule is not interrupted.

Finance is mainly concerned with increasing the profit margin. They are equally interested in reducing costs and increasing revenue. Therefore, they will support high customer service, so long as production efficiency remains high and inventory levels remain low.

Managing Materials Materials management co-ordinates demand with available resources. It must balance the conflicting objectives of the marketing, production and finance functions by managing the flow of materials at an optimum level to ensure:

The desired level of customer service

The best use of company resources

Materials management is concerned with two main areas: manufacturing planning and control, and distribution.

Remember, customer service means providing the right quality and quantity of product at the right time, in the right place and at the right price. Materials management makes sure these elements are provided and therefore adds value.



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3. These activities form part of the physical distribution system, except:

A. Materials Handling

B. Planning

C. Warehousing Review Q D. Transportation

Manufacturing Processes

Manufacturing Planning and Control

Planning and controlling the flow of material through the manufacturing operation is a key function of manufacturing. Throughout this course, the elements of manufacturing planning and control will be covered. These include:

Production planning (forecasting, master planning, material requirements planning and capacity planning

Implementation and control

Inventory management

Plant Layout and Process Flow

Manufacturing processes usually involve either product layout, process layout or project layout. Sometimes these processes can be combined. ABC Beverages have continuous production of orange juice and grapefruit juice. They also have intermittent production of breakfast juice.

There are three basic plant layouts:

product layout

process layout

project layout

There are also three ways to organize the manufacturing process:

Continuous flow

Intermittent

Repetitive manufacturing

Product Layout

Product layout involves arranging workstations in the sequence designed to make the product. In a plant that manufactures aspirin tablets, for example, the first workstation mixes the active ingredients, the next workstation moulds the aspirin into tablets, the workstation after that performs blister packing and, at the final workstation, the blister packs are boxed. This is an example of repetitive manufacturing.

Other manufacturing processes may be continuous flow, for example, an oil refinery.



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Figure 4 Product Layout

Usually when product layout is used there are a limited range of similar products, workstations are dedicated to specific operations, demand levels are sufficiently high to justify the setting up cost. Although costly to set up, there are a number of advantages to this layout:

Few bottlenecks occur in work- in-process inventory

Manufacturing and throughput lead times are short

Unit costs are low

Process Layout

The process layout, or functional layout, is often used in intermittent manufacturing, usually known as job shop, batch, or lot manufacturing. This type of layout shares workstations between different product lines.

Figure 5 Process Layout

The characteristics of process layout are:

Intermittent production of lots or batches

Production and inventory control activities are complex and expensive

Machinery is general purpose

Workstations are flexible and can produce many different parts

Work-in-process inventory levels are high

Lead times are longer

Product or volume can be easily changed

Departments are based on similar types of skill and equipment

Work moves only to those stations required and skips the rest

Work Station 1

Work Station 4

Work Station 3

Work Station 2

Input Output

Work Station 1

Work Station 4

Work Station 2

Product A Output

Work Station 4b

Work Station 3

Work Station 2b

Product B Output



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Comparing Process and Product Layouts

Process and Product Layout Comparison

Lead Time Production /Inventory

Costs

Setup Cost RunningCosts

Flexibility Capital Cost

Product Layout Process Layout

Product layouts have the advantage of lower costs in most areas such as inventory, setup, running costs and capital costs. However, they are less flexible and tend to have greater lead times than process layout manufacturing. The level of quality depends on how robust or repeatable the process is. A product layout is often automated or controlled by machines and therefore is more consistent or repeatable than the process layout which is usually controlled by operators.

Project Layout

The project layout is generally used for large complex projects such as the assembly of a prefabricated building. It is used for large buildings, large aircraft, chips and system implementations. The product remains in the same place for most of the assembly to avoid the costs of transporting the product from one workstation to another.

Planning Planning is required to make sure that there are sufficient material and capacity resources to satisfy customer demands. The goal of manufacturing is to produce

the right goods,

at the right quality,

in the right quantities,

at the right time,

and at minimum cost.

It’s important to carefully plan for all the component parts and activities required to make the product. If there is a 95 % chance that each part is available, and four parts are needed to make the product, the probability that all parts will be there when required is actually only 81% (.95 x .95 x .95 x .95).



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A good planning system should answer four questions:

What will we make

What do we need to make it

What do we have already

What do we need to find

To plan effectively, you must consider your capacity and production priorities. You cannot create a workload that exceeds your available capacity.

Capacity

Your capacity is the capability of a worker, machine, work center, plant or organization to produce output per time period. In the short term, capacity is the amount of work that labor and equipment can perform in a given period. You then need to work out what is needed, how much of it is needed and when it is needed. This is your list of priorities (the relative importance of jobs).

Priority

Priority rela tes to the products required, the amounts required, and the dates by which they are required. This information is established by the marketplace. Production is responsible for planning to satisfy the market demand as far as possible.

Priority-Capacity Relationship

Companies should strive for the optimum balance between priority or demand and capacity or resources, as shown in the diagram below.

Production must devise plans to balance the demands of the marketplace with its resources and capacity. For long-range decisions, for example, building a new production facility or investing in new equipment, the plans may span several years. Detailed planning production usually deals with a few days or weeks.

4. A process specification is a document that:

A. Explains the steps required to produce the final item

B. Shows how the product will appear

C. Flow charts several processes Review Q D. Details the capacity available in a work center

Priority Capacity



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Planning and Control Hierarchy There are five major levels in manufacturing planning and control:

Strategic business plan

Production plan

Master production schedule

Material requirements plan

Purchasing and production activity control

The purpose, planning horizon (or time span), and level of detail is different for each type of plan. The strategic business plan may span several years but will not be very detailed. In contrast, production activity control covers the shortest time span but provides the highest level of detail, specifying individual products and workstations. The plans may also differ in their analysis of priorities, available capacity, and ways in which differences between the two can be resolved.

Sales and Operations Plan

Master Production Schedule

Material Requirements

Planning (MRP)

Purchasing and Production

Activity Control (PAC)

Business Strategy Plan

Master Plan

Planning

Implementation




Planning (MRP)

Purchasing and Production

Activity Control (PAC)


Master Plan

Planning

Implementation

At each level of the hierarchy you need to define your available capacity, your production priorities, and if necessary, the ways in which you will resolve any discrepancies between them.


The business strategy plan, or strategic business plan, states the main goals and objectives the company aims to achieve over the coming years. Depending on the company, this plan may span two to ten or more years. It lays down the future direction of the firm and the sort of business the company wants to do in the future. It also provides general direction on how the company



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objectives are to be achieved. The strategic plan includes participation from marketing, finance, production, and engineering. The strategic plan helps direct and co-ordinate these various functions in a common direction.

Marketing analyzes the marketplace and decides on the company’s response to perceived market needs, in terms of markets to be served, products to supply, customer service levels, pricing, promotion strategies, and so forth.

Finance decides upon the company’s sources of funding and the use that will be made of those funds. Finance is responsible for cash flows, profits, return on investment and budgets.

Production is required to satisfy the demands of the market place by the efficient use of available plants, machinery, equipment, labor, and materials

Engineering is responsible for the research and development, designing new products and modifying existing products. This requires communication with marketing and production to ensure that the product designs can be made economically and will sell in the marketplace.

The development of the business strategy plan is the responsibility of senior management. Each department then produces its own plans to achieve the objectives set in the business strategy plan. All the plans must co-ordinate with each other, as shown in Figure 6 below.

Figure 6 Business Strategy plan


The sales and operations plan, or production plan, is set by production management, following the objectives set in the business strategy plan. This plan identifies:

The amounts of each product group to be produced in each period

The required inventory levels

Financial Plan

Marketing Plan

Production Plan

Business Strategy

Plan

Engineering Plan



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The equipment, labor, and materials needed for each period

The availability of such resources

This plan only deals with product groups. For example, if a company manufactures a range of spirits, beers, and Alcopops, only the product groups will be detailed. The groups will not be broken down into individual brands or flavors at this point.

The sales and operations plan must satisfy market demand within the resources available to the company. This involves comparing required resources with available resources and devising plans to bridge the gap.

The production plan is concerned with implementing the business strategy plan and has a planning horizon of usually 6 to 18 months although it may be reviewed as often as each month.


The master production schedule (MPS) is a plan for the production of discrete end items. It breaks down the production plan to show, for each period, the quantity of each end item that must be manufactured. For example, it might show that 2,000 cases of peach schnapps are to be produced each week. The planning horizon for the MPS is generally between 3 and 18 months, depending on purchasing and manufacturing lead times. It is usually reviewed weekly or monthly.

Material Requirements Plan

The material requirements plan (MRP) details the production and purchase of components used in the making of the items listed in the master production schedule. It shows the quantities needed and when manufacturing intends to make or use them. The MRP is used by purchasing and by production activity control to decide the purchase or manufacture of specific items. The MRP is very detailed: it sets out when the component parts are needed to make each end item. The planning horizon for the MRP must, at a minimum, equal the combined purchase and manufacturing lead times. Like the master production schedule, it usually covers between 3 and 18 months.

Purchasing and Production Activity Control

The implementation phase and control phase of the production planning and control system involves purchasing and production activity control. The control and flow of raw materials into the manufacturing facility is the responsibility of purchasing. Production activity control is responsible for controlling and planning the work flow. Although very detailed, the time span in these plans is generally a month or less, sometimes just a day, and they are reviewed daily.



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Planning and Resources

The figure below shows the relationship between levels of production planning and the associated resource planning activities:

Figure 7 Planning and Control Hierarchy

As you move down the hierarchy, the level of detail increases and the length of the planning horizon decreases. This is true of almost any planning activity in life. For example, when you plan a wedding, you first set the date and book the church and reception. It is not until closer to the wedding date that you consider details such as the readings, the flowers, the menu, and the invitations.

At the Sales and Operations Planning level, perhaps only the total amount of product will be detailed without any information on product types or sizes. At the Materials Requirements Planning stage it will be necessary to know how much of each product is required so that the necessary parts and packaging can be planned.

Leve

l of D

etai

l

Strategic Business Plan

Planning Horizon

PAC

MRP

MPS

Leve

l of D

etai

l

Strategic Business Plan

Planning Horizon

PAC

MRP

MPS

Figure 8 Level of detail versus planning horizon

Sales and Operations

Planning (SOP)

Resource Planning (RP)

Master Production Schedule Rough Cut Capacity

Planning (RCCP)


Planning (MRP)

Capacity Requirements

Planning (CRP)

Production Activity Control (PAC)

Input/Output Control

Operation Sequencing



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5. The strategic plan for a company:

A. Provides a statement of income and expenditure

B. Outlines the sales plan for the coming year

C. Provides the manufacturing plan for product groups Review Q D. Is a statement of goals and objectives over several years

Manufacturing Resource Planning (MRP II) MRP II is a method for effective planning of all the resources in a manufacturing company. It is distinct from the materials requirement plan (MRP) because it integrates many more planning activities.

The objective of MRP II is to integrate company resources. Ideally, it addresses operational planning in units, financial planning in dollars, and has a simulation capability to answer ‘what if’ questions. It comprises several linked functions: business planning, sales and operations planning, capacity planning, production planning, master production scheduling, material requirements planning, and execution support systems for capacity and material. Output from these systems is integrated with financial reports such as the business plan, purchase commitment report, shipping budget, and inventory projections in dollars.

Marketing Plan

Sales and Operations Plan (S&OP)

MPS


Resources available?

MRP


Purchasing

Performance Measurement

PAC

No

No

Yes

Yes

Marketing Plan

Sales and Operations Plan (S&OP)

MPS



MRP


Purchasing

Performance Measurement

PAC

No

No

Yes

Yes

Figure 9 MRP II

MRP II provides coordination between marketing and production. Marketing, finance and production create a consensus workable production plan which must be adjusted on a weekly or daily basis as changes occur. Order sizes and delivery dates may be changed and orders may be



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cancelled or added through the master production schedule. Marketing managers and production managers may update the MPS due to changes in forecast demand and senior management may adjust the production plan to reflect changes in demand or resources. All these changes occur in the integrated MRP II system so that the efforts of all functions in the organization can be coordinated.

Creating a Production Plan The production plan sets out the general levels of production and inventories over the specified planning horizon. The main aim of the production plan is to set production rates that can accomplish the objectives of the business strategy plan, including inventory levels, backlogs of unfilled customer orders, market demand, customer service, optimum cost etc. The production plan is not concerned with individual products or product options. Instead, units called product groups are used.

Identifying Product Groups

Product groups are based on the similarity of the manufacturing process used. For example, a beverage company may have product groups such as carbonated drinks, juice-based drinks, and concentrates. A company that produces bicycles may identify product groups such as mountain bikes, racer bikes, and children’s bikes.

Characteristics of Production Planning

The production planning problem usually has the following characteristics:

A planning horizon of 12 months updated quarterly or once a month

Production demand consists of a few product families

Demand is fluctuating or seasonal

Plant and equipment are fixed within the planning horizon

A number of management objectives that must be catered for, such as plant efficiency, high levels of customer service, and low inventory levels



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Summary This lesson examined the role of manufacturing in the economy, the features of materials management and the need for overall supply chain management. Your objectives for this lesson were to be able to:

Describe the role of manufacturing in the economy

Identify areas of difficulty in traditional supply systems

Explain the role, objectives and responsibilities of materials manufacturing

Differentiate between various manufacturing processes

State the importance of planning

Describe a planning and control system

Identify the levels of the planning hierarchy and the questions that must be addressed at each level

Define manufacturing resource planning (MRP II)



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Review The following questions are designed to test your recall of the material covered in lesson 1. The answers are available in the appendix of this workbook.

6. Which of these manufacturing types would usua lly have the longest delivery time?

A. Assemble-to-order

B. Engineer-to-order

C. Make-to-stock

D. Make-to-order

7. Which of these is a function of physical distribution?

A. Lot sizing

B. Material handling

C. Kanban size

D. Routings

8. Which of the following uses the production plan as a main input?

A. Master Production Scheduling

B. Purchase order planning

C. Work center capacity load

D. Material requirements planning

9. Which is an activity of physical distribution?

A. Transferring produce between work stations

B. Forecasting inventory levels for manufacturing purposes

C. Planning the relocation of supplies to outside contractors

D. Receiving goods from suppliers

10. How would you classify consumer products, such as tinned foods or sports equipment?

A. Make-to-order

B. Assemble-to-order

C. Make-to-stock

D. Engineer-to-order



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What’s Next? This lesson covered the role of manufacturing, the characteristics of materials management and the need for supply chain management.

You should review your work before progressing to the next lesson which is:

Supply Chain Management Basics – Lesson 2 Forecasting



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Appendix



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Answers to Review Questions

Lesson 1 Review

1. B

To maximize profits, organizations need to ensure the lowest production costs, inventory investment and distribution costs while maintaining the best possible customer service. Accurate production forecasts may help to lower costs but do not guarantee increased profits.

2. C

Delivery time is the time elapsed between receipt of the customer’s order to the delivery of the order to the customer. Engineer-to-order companies have the longest delivery time in most cases, as the time required to design and engineer the product is part of the delivery time. Make-to-order companies maintain a stock of components from which they can build an order after it is received. Make-to-stock companies ship to the customer from stock and assemble-to-order companies assemble a customer order from existing sub-assemblies.

3. B

Planning is not a physical distribution activity. Physical distribution includes all activities of transportation, distribution, inventory, warehousing, material handling, packaging and order processing.

4. A

A process specification document describes the steps required to make a finished product. Usually, such specifications are held in an online database or are printed on a routing sheet.

5. D

Strategic plans provide information for manufacturing, sales, and new product plans. However, they are mainly concerned with the overall company direction. A strategic plan is a statement of company aims and objectives covering between 2 and 5, sometimes up to 10 years.

6. B

See feedback for question 2 above

7. B

Material handling is involves when physically moving goods. Physical distribution includes all the activities associated with the physical movement of goods from the supplier at the beginning of the supply chain to the customer at the end.

8. A

The detailed master schedule is developed using the production plan. The production plan is a management approved plan of production usually at the product family which specifies the overall amount of each product group that should be produced and shipped in a given time period. From this, the master scheduler can develop a more detailed plan at the individual product level.



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9. D

Receiving goods is part of the function of physical distribution, which is defined as the physical movement of goods from suppliers to the beginning of production and from the end of production to the customer.

10. C

Consumer products are for the most part make-to-stock. There are a few standard items assembled from a number of components.



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Glossary

Term Definition

assemble-to-order

Assemble-to-order is a production strategy where key components are stocked in anticipation of customer orders. Assembly is triggered by receipt of an order. This is useful when a large number of products use common components.

capacity requirements planning (CRP)

The function of establishing, measuring and adjusting limits or levels of capacity, determining the amount of labor and machine resources required to accomplish the tasks of production.

cumulative lead time

Cumulative lead time is the longest planned length of time to accomplish the activity in question. For any item planned through MRP, it is the longest lead time in the bill of materials item list.

delivery lead time

Delivery lead time is the time from receipt of a customer order to the delivery of the product.

distribution The activities associated with the movement of material, usually finished goods, from the manufacturer to the customer. It includes all activities related to physical distribution as well as the return of goods to the manufacturer.

engineer-to-order

Engineer-to-order products are those with customer specifications that require unique engineering design or significant customization. Each customer order requires a unique set of part numbers, bills of material and routings.

industrial engineering

The engineering discipline concerned with facilities layout, methods measure and improvement, statistical quality control, job design and evaluation, and the use of management sciences to solve business problems.

lead time Lead time is the span of time required to perform a process.

make-to-order Make-to-order is a production strategy where a product or service can be made after receipt of a customer's order. The final product is a combination of standard items and customized items.

make-to-stock Make-to-stock is a production strategy where products are finished before receipt of a customer order. Customer orders are filled from existing stocks of finished goods and production orders are used to replenish those stocks.

master production schedule (MPS)

The anticipated build schedule for those items assigned to the master scheduler. It becomes a set of planning numbers that drive material requirements planning. The MPS represents what the company plans to produce expressed in quantities and dates.

material requirements planning (MRP)

A set of techniques that uses bill of material data, inventory data, and the master production schedule to calculate requirements for materials. It makes recommendations to release replenishment orders for material and to reschedule orders.

materials The grouping of management functions supporting the complete cycle of



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management material flow, from the purchase and internal control of production materials to the planning and control of work in process to the warehousing, shipping and distribution of goods

plant layout Configuration of the plant site with lines, buildings, major facilities, work areas, aisles and other data such as department boundaries.

process layout Process (or functional) layout groups operations of a similar nature together.

quality Conformance to requirement or fitness for use.

resource planning (RP)

Capacity planning at the business plan level .this establishes and measures long-range capacity. It is based on the production plan but may be driven by higher level plans such as the business plan. It addresses long range planning issues.

rough-cut capacity planning (RCCP)

The process of converting the master production schedule into requirements for resources such as labor, machinery, warehouse space, supplier capabilities. Demonstrated capacity is examined for each key resource.

sales and operations planning (S&OP)

A process that provides the ability to direct business to achieve competitive advantage by integrating customer-focused marketing plans for products with the management of the supply chain. The process integrates all the plans for the business.

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Basics of Supply Chain Managment (Lesson 1)

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