Master Planning of Resources Concepts
Strategic Planning includes a vision, mission statement and core values for the business
Strategic plan -> tactical plan (synchronizing activities across functions) -> operational plan (by functional area)
Business planning answers questions regarding volumes, places, methods, and responsibilities that move the firm forward attaining a strategic goal (it’s more detailed in terms of numbers, currency amount, time and performance metrics).
Business plans describe marketplace conditions, segments or profits targeted, competitive threats and opportunities, and internal strengths or weaknesses (financial projections). The output of the process is a business plan for direct input into master planning of resources (MPR)
The objective of MPR is to balance demand with supply while optimizing resources and performing at the lowest operating cost. Output of MPR is S&OP production plan
The matched pairs of Priority and Capacity Planning steps are:
- Production Planning & Resource Planning
- Master Production Scheduling and RCCP
- MRP and CRP
- Production Activity Control and Input/Output Control
4 components of MPR:
- Demand Management: forecasting, customer order servicing, customer relationship management (CRM).
Demand management is the function of recognizing all demands for goods and services to support the marketplace. This function includes forecasting, order entry, order promising, determining branch warehouse requirements, interplant orders, and service parts requirements. The key 4 elements of demand management are to predict, communicate, influence, and manage demand. Demand includes Forecast demand + Actual demand
Inputs: business plan (sales forecast, update from marketplace, past sales history, current order backlog)
Outputs: forecasts that establish specific sales by product family or service group, existing customer orders
- Distribution Planning
Inputs: design of distribution network, lead-time estimates, safety stock levels
Outputs: sent to S&OP for aggregate logistics control of demand and supply requirements
- S&OP
Inputs: sales forecast from the business plan in terms of product family
Output: sales plan, inventory and backlog plan, production plan (operations plan), product release plan (for new products), resource plan (showing changes to capacity going to occur)
Overall objective to link the strategic plan and operational plan with the functional plans
5 steps: FCT generation, Demand Planning, Supply planning, Pre-S&OP planning, Executive S&OP
The S&OP grid: sales plan, production plan, inventory plan (for MTS)
Or sales plan, production plan, backlog plan (for MTO and ATO)
The forecasts for MTS are based on statistical forecasts
MTO and ETO forecasts will depend more heavily on human input (orders in the system)
Contractual limitations can be more important than physical resources when production is subcontracted or outsourced.
- Master Scheduling
1stsubprocess:Master production schedule planning. Master Scheduling disaggregates the S&OP production plan into specific end items, lot sizes, and due dates
Inputs: S&OP production plan, conflicts coming from S&OP with special priority, previous master production schedule, previous final assembly schedules, brand-new customer orders, inventory and planning data (quantities on hand, lost sizes, safety stock, lead times, scrap and yield rates)
Outputs: MPS (Master Production Schedule) – time phased build plan by part number including due dates and quantities of specific end items. In the MPS the determinant of planning horizon is the longest cumulative material lead-time and MPS is the link between sales and manufacturing.If the MPS is overstated, priorities will not be valid.
2ndsubprocess: Final assembly scheduling (FAS) time phased by either part number or customer order by due date and by quantity. FAS serves as a basis for releasing materials from the stockroom to the assembly area, scheduling assembly and test operations, and scheduling the production and procurement of any components that are not under the control of the MPS but are needed for final assembly.
3rdsubprocess: Rough Cut Capacity Planning – used to balance the known product mix loads against availability at critical work centers, contributes to an MPS that is realistic in its delivery promises to its customers. Rough-cut capacity planning (RCCP) is the tool used to test the feasibility of the master schedules. RCCP is concerned with ALL known bottleneck resources (not only bottleneck workcenters) and enables to validate MPS draft while Capacity Requirements Planning identifies new bottlenecks. RCCP will NOT help to identify work center capacity based on the load, it’s high level planning process for key resources which may constrain the execution of the manufacturing plan. CRP provides the load by work center.
There are 4 business choices influenced by business objectives:
- Demand fulfillment – based on relationship between the lead time demanded by customer and cumulative lead time for product or service. The relationship of product’s volume and variety demands will determine the required fulfillment choice: engineer to order (ETO, good project management techniques), make to order (MTO, tracks beg and end backlogs, need to have delivery-promise and pricing capabilities), assemble to order (ATO), make to stock (MTS, needs good distribution systems, tracks beg and end inventories, doesn’t use FAS that is based on customer order)
- Manufacturing process – determines the type of equipment that will be employed based on volume and mix (variety) requirements
MTO approach – multipurpose equipment organized into work centers to process product on an order-by-order basis (labor sensitive)
MTS,ATO approach – controlled flow of work measured by a time-phased production rate with appropriate inventory buffer maintaining balanced movement of items running on production line or continuous flow (automated, reduces labor involvement)
- Facility layout
- Workflow
Developing and Validating the Production Plan
Production Plan is the link between the business plan and the master production schedule (link between senior management and operation staff), developed for each family that is included in the S&OP planning process. For production plan the determinant of planning horizon is the time taken to change major resources in production planning. Disaggregating the Production Plan into MPS means both breaking product families into individual products and breaking monthly quantities into weekly quantities. Work center capacity would NOT be considered by top management when evaluating production plan (it’s happening on lower level). The production plan time horizon would be influenced by several factors, including the cumulative lead time of the manufacturing process, the business plan cycle, and the time it requires to acquire more capacity.
Production Planning Process Steps:
- Develop the preliminary Supply Plan
- Perform Resource Planning
- Develop Inventory and Backlog Plans
- Update S&OP Grids
The marketing plans would not be considered when planning the production. The sales plans would be developed from the marketing plans and would support the forecast by which production would be planned.
The rate of production can vary by one unit only in product layout processes. Otherwise determining the feasible production rate will start by bracketing the demand (setting up ranges)
In Making Supply Plan there are 3 possible strategies: Chase (prod. plan reflecting demand, appropriate when the costs of changing the level of production are high), Level (prod. plan covering demand fluctuating by building up inventories, when costs of changing level of production are high), Hybrid (appropriate for product families with seasonal demand and constrains of both inventory and production). A level strategy uses inventory to create the balance (it produces at the same rate in every period thus minimizing the amount of capacity change that will be required); the hybrid uses inventory and periodic capacity changes to create balance.Hybrid approach for development of Production Plan it’s a Trial-and-Error Method.
4 methods/techniques for resource planning(used as well of Rough-cut capacity planning):
- Production rates – if the planned production is within the allowed range, the plan is feasible; appropriate when the critical resources are aligned with product families
- Capacity Planning using Overall Factors (CPOF) – production plan quantity is multiplied by the total amount of resources required to build one unit of the family to arrive at the total resource requirement, used in stable environment when the production planning periods and prod. lead times are similar and when the resources are aligned with product families
- Bill of resources (or bill of labor) – moderately complex method, uses bill of material structure to identify the capacity of key resources required to produce one unit of product family. The production plan quantity is multiplied be the amount of each resource indicated in the bill of resources to determine the resources required. It can incorporate changes in the product family mix and planned changes in work methods, process technologies and resources , used when resources are not aligned with product families, may be the most widely used method
5 steps of bill of resources:
1. Develop capacity bills (estimates of critical resources to produce one unit of the item)
Capacity bills are created based on capacity required at certain work center for certain product by exploding the bill of material and summing the requited capacity at that work center for the item and all of its components
2. Determining the capacity available (by calculating rated capacity or checking performance – demonstrated capacity)
3. Calculate the capacity required
4. Accumulate the capacity required
5. Identify imbalances
- Resources profiles – most detailed method, it builds on the resource bills and indicates the timing of the demand for each resource as well as quantity, used when resources are not aligned with product families, the production planning periods and production lead-times are very different and same resource is used multiple times in producing a single product
Performance Measurements:
- How well the production plan meets the requirements of the business
- How well the actual events reflect the plans, or conformance to plan (effectiveness of the process DOING THE CORRECT THINGS)
- How well the resources are being used to develop and maintain the plans (efficiency of the process DOING THINGS CORRECTLY) 2 resources that are common to all organizations are the stuff hours and elapsed time required for the process -> the should be measured by the period and tracked over time
(Cumulative) Variance = (Cumulative) Actual Inventory/Plan – (Cumulative) Planned Inventory/Plan
Forecasting Demand
In Product Life Cycle (PLC) stages:
- Introduction – special techniques that rely on intuition and judgments to predict introductory demand (little to no historical data). For new introductions and phase-outs best is to use historical analogy (qualitative methods), also for business plan can be used an qualitative method
- Growth and maturity – several quantitative methods take advantage of historical data that is available. For products in the mature phase of their lifetime best are quantitative forecasting methods
- Growth and decline – techniques that recognize trend changes rapidly, this will allow to make business decisions for their organizations
Forecasting methods:
Qualitative (involve the analysis of one or more judgments or opinions e.g. expert opinion when new product introducing or entering new market; market research; panel consensus; sales force estimates when developing account-specific forecasts; Delphi method utilized between supply partners to develop a consensus forecast; historical analogy)
Used when historical data is scarce or invalid for making future projections
And Quantitative (rely on the statistical analysis of data to generate a future forecast)
Intrinsic (internal resources) extrapolate past demand of a product into the future by finding the underlying components in the demand pattern and the extrapolating into the future maintaining the same demand pattern over time:
Base or horizontal: baseline demand, average demand for horizontal or seasonal patterns and the projected demand for the first period for trend or trend-seasonal patterns
Seasonal: represents fluctuations in demand due to the time of the year; may be daily, weekly, monthly, quarterly or annually
Trend: consist of either an upward or a downward movement of the demand pattern over time
Cyclical: related to the business cycle of product or industry
Decomposition in forecasting refers to time series data being separated into trend, seasonality, and cyclic data
Random: exists in all demand patterns representing the impact from a collection of uncontrollable factors in any demand system
Basic characteristics of intrinsic techniques:
- Simple average
- Moving average (using most recent data to calculate future forecast)
- Weighted moving average – similar to moving average except that each historical data point has a different degree of importance
- Exponential smoothing
New FCT = (α * Actual Demand) +((1-α) * Old FCT); α is from 0 to 1
When exponential smoothing is with higher alpha then the trend will be better and more closely tracked.
Extrinsic (external resources) utilized to predict trends for product families (one product drives forecast for another product e.g. housing market for furniture market) one of techniques is called least regression/least squares where fitting a line through a graph of the data points approximates the relationship between 2 variables. Also life cycle analysis is another example where it attempts to forecast the demand for a product throughout its life cycle by utilizing the actual demand from a similar discontinued product
Focus forecasting (expost testing) – systematic approach used to select the best forecasting method.
Method selection is based on the least amount of error produced
Pyramid forecasting – combining qualitative and quantitative forecasting methods to achieve better results. Basically product code level is generated utilizing intrinsic techniques and then is aggregated (rolled-up) to total business forecast where qualitative factors are analyzed and the forecast adjusted to reflect these factors.
Collaborative Forecasting – the process of collecting and RECONCILING IN COLLABORATION from within and outside organization to come up with a single projection of demand
Collaborative planning, forecasting and replenishment (CPFR) demand is shared by trading partners in supply chain better synchronizing supply and demand and thus improving the performance of supply chain. CPFR provides for supply chain partners to jointly manage business processes that are important for the determination of demand, supply and measurement information.
Data Outliers are data points that differ significantly from past demand and can be caused by a variety of events. Filtering is a process of adjusting outliers in the forecast. To screen for outliers, a forecast system would identify exceptional demand based on a parameter.
Demand data (collection for FCT generation, considers stock and production) DOESN’T EQUAL Sales data (what is sold to customer). True demand results from the original quantity and requested shipping date
Time Series Decomposition -> 5 steps:
Step1 calculate the average demand for the historical data
Step2 calculate the seasonal index by dividing the average period demand by the average demand of all periods
Step3 deseasonalize all of the historical data by dividing the actual demand by the previously calculated seasonal index. Use regression analysis to estimate a straight-line approximation of the deseasonalized demand
Step4 use the previous straight-line approximation to forecast future deseasonalized demand
Step5 use the output from step4 and multiple each period’s extrapolated demand by the appropriate seasonal index to arrive at final forecast
Exponential smoothing (first-order smoothing) It assumes that no trends exist in historical data (to accommodate trends use second-order smoothing introducing second soothing constant (if trend is accelerating or decelerating with time triple-order smoothing is used). In other words second order smoothing provides a point from which the trend can be measured in addition to the exponential smoothing.
Running sum of forecasting errors = ∑ (Actual Demand – Forecasted Demand)
DIFFERENCE MAD VS BIAS
BIAS = ∑ (Actual Demand – Forecasted Demand) / no. of observations
Average Forecast Error (Mean ABS deviation MAD)= ∑ ABS(Actual Demand – Forecasted Demand)/n
The standard deviation is 1.25 times the MAD
Tracking signal = Running Sum of forecast errors/Mean absolute deviation of the forecast errors
Measurements of FCT error over Time Steps
Step1 Calculate the period forecast error
Step2 Calculate a single-point error or an error over time
Step3 Calculate one or more: running sum of fct errors, average fct error, tracking signal
Step4 if either or the error or bias measures are outside of acceptable performance goals, initiate corrective action. The most critical problem for management in forecasting is to control bias.
Recognizing and processing actual demand
Sales Cycle:
Pre-Transaction Phase (setting customer expectations and formalizing the sales and support structures of the firm: costumer service policy)
Transaction phase: contains CS dimensions that focus around sales order execution
One of elements is customer order cycle which is time from the moment customer order is placed until the date product is delivered; includes order entry, order allocation and picking, order shipment and delivery
Post-Transaction phase: concerned with after-sale product support
Order promising methods
- Commitment based on customer-requested delivery date
can be used with all approaches but is inappropriate unless supplier has a very high level of volume and mixed flexibility
- Commitment based on standard lead-times – frequently used in MTS environments
- Commitment based on uncommitted inventory and planned production (Avail. To Promise ATP)
appropriatefor MTS orders for future delivery
- Commitment based on Uncommitted Resources of all types (Capable to Promise CTP) appropriate or MTS orders for future delivery
Employs a finite-scheduling model of the manufacturing system to determine delivery
Master Scheduling Management Considerations
One of most critical master scheduling considerations is the effective management of change coming from 2 sources: actual deviations from past plans, requested changes to future plans
Master Scheduling Time Zones (Time Fences)
Frozen(fixed) – changes in this zone typically require management approval
Flexible (slushy,firm) – changes in priorities and mix are allowed in this zone and they typically require negotiations between Operations and Marketing
Free (liquid)
Demand time fence – boundary between the frozen and the flexible (firm) zone
Planning time fence – boundary between the flexible and free zone
Firmed Planned Order (FPO) represents an unreleased order that cannot be changed by software, normally used when moving to the firm zone or in slushy zone. If the planner fails to address exception messages planned orders are not converted on time (exception messages address conditions).
The master scheduler apart from using time fences and FPO for minimizing negative impacts of MPS changes can use safety factors:
- Safety stock – exists at all times to protect against unknown future demand and the uncertainties of SUPPLY (fluctuations)
- A master scheduling hedge (same as safety stock uses inventory to buffer against MPS change or the uncertainty of demand), uses element of timing and quantity associated with them (in contrast, safety stock only has a quantity dimension)
2 types of hedges exist:
Volume hedge (market hedge) protects against fluctuations in demand especially if typical forecasting error exists
Mix hedge in organizations that utilize planning bill structure, is utilized to manage fluctuations in demand that occur at the product feature or option level (e.g. keeping buffer of mix color paints)
- Reserve or safety capacity
- Safety lead-time
3 common classifications of deviations and requests for changes exist – the timing of the change, the significance of the change, and whether it is a change to the demand plan of the supply plan
Developing the Master Schedule
The basic process consists of: develop the preliminary MPS, test the feasibility, resolve any imbalances, release the approved MPS (results in the development of a FAS, not in MTS environment)
Projected Available Balance (PAB; on-hand balance)
Projected Available Balance (PAB) in first period = Current on-hand inventory + MPS Receipts – Safety Stock – Orders
Projected Available Balance (PAB) after first period before time fence = Prior period PAB + MPS receipts – Customer Orders
Projected Available Balance (PAB) after first period after demand fence = Prior period PAB + MPS receipts – Greater of Forecast/Customer Orders
MPS and FAS are likely to be identical when a product is made to stock. FAS is derived from MPS and it’s focused on short term supply. FAS states the exact set of product configurations to be produced and identifies processing steps required to produce. Mission of FAS is to assign specific products and orders to specific resources and to establish the sequence and timing of these jobs. In MTO and ATO environments there are two levels of Master Scheduling –> MPS + FAS. In ATO env. (many final configurations, few subassemblies, many components) good master scheduling practices would include using the planning bill technique and setting the MPS at the subassembly level.
Steps in FAS process:
Determine material required and routing of order
Check material availability
Schedule the final assembly order
Update the final assembly orders
Update the master production schedules
Release the final assembly order
Relating FAS to environment:
MTS here MPS and FAS are typically at the same finished goods level. The customer demand is typically filled from inventory and no final assembly schedule processing is required. Make-to-stock policy would be most appropriate where product has stable demand. In MTS env.component assembly lead time is slushy and order process and shipping lead time is firm.
ETO material is typically not the constraining resource. Lead time to fill customer order is typically long and design resources are typically the constraint in this environment
MTO material availability checking typically includes key raw materials and unique subassemblies. In MTO and ATO final assembly lead time is firm.
Planning BOMS can be used in all the following environments: make-to-stock, make-to-order, assemble-to-order. Both material and capacity availability are important in determining the commitment to the customer.
FAS is constrained by the availability of those items scheduled on the master production schedule plus those in inventory. Therefore MPS and FAS must be coordinated. FAS planning horizon depends on how far into the future customer orders are.
Master Scheduling Techniques
Forecast in Master Scheduling Grid = Original FCT – Customer Orders
Procedure for consuming the Forecast:
Does the order represent forecast demand: if YES then update the forecast and consumer orders rows, if NO then add the quantity to customer orders and forecast rows
Available to Promise (ATP) methods calculation:
Discrete ATP – simplest method, calculated only in first period (on hand – orders due before next MPS) and then only in other periods when there is scheduled MPS
Cumulative ATP – calculated for every period, the ATP for one period may be included in subsequent periods causing some concern of overbooking the product
Cumulative ATP with lookahead attempts to solve this problem. When it is used, units committed to future orders are not included in the quantity shown in previous periods
The production forecast is the exploded option requirements based on the ATP of end products in a ATO environment. This becomes the forecast requirements for these options at MPS level. The production forecast forecasts the group available to promise multiplied by option percentages.
Multilevel scheduling – in some industries where firms produce goods with wide variety of features and options can’t master schedule every possible configuration so they typically master schedule the product family or subfamily – and then complete products based on FAS. The planning bill of material is a key tool utilized by this method.
Advanced methods in scheduling and planning:
Mixed model scheduling – attempting to produce the same mix of products as are sold on a given day + determining the sequence in which products will be scheduled for assembly (not appropriate for a product with a wide variety of options, features due to configuration constraint) ->excellent for repetitive manufactures with level production rates
Mathematical methods – identifying optimal solution given a number of constrains (often used in chemical and petrochemical companies where cost of changing volume or/and variety is high
Simulation – modeling approach used to evaluate alternative master production schedules, but not seeking for optimum solution, used to model the behavior of system under various conditions
Measuring Master Scheduling Performance
Master scheduling must be: aligned with business strategy, consistent with environment (aligned with demand fulfillment and method of controlling production), consistent with S&OP output
Indicators of: effectiveness of a process (overall performance), demand time fence violations, resource usage, over-promising (over-committing), how closely actual events reflect the plans, stability of MPS in terms of no. of changes over time
Master scheduling directly influences the customer perception of quality by providing reliable info for order promising and processing, it also directly affects delivery by scheduling product mix and availability to meet the projected demand and production plan. Master scheduling indirectly influences the customer perception of support by providing the information that enables order promising and processing, and by planning the mix that meets customer demand.
Mechanics of detailed material planning process
Steps of MRP process:
- Initiate the MRP planning grid (establishing the current and projected demands for an item)
- Project on-hand inventory (calculating PAB)
PAB in period 1 = current on hand – allocated quantity + scheduled receipts + planned order receipts – gross requirements
PAB in other periods = prior period PAB + scheduled receipts + planned order receipts – gross requirements
If PAB>Safety stock then net requirements = 0
If Net requirements > 0 then need of additional replenishment is indicated
Netting is determination of additional supply orders (not performed on items that are being managed with alternative replenishment methodologies, such as reorder point or min-max systems
- Plan additional supply orders
Procedure for Planning Replenishment Orders
Determine the planned lot size, determine the release date for supply order, recalculate PAB, eliminate all net requirements over horizon
Lot sizing techniques:
Lot-for-lot (reflects net req.), fixed quantity, periods of supply (no. of future net req.), least total cost, least unit cost, maximum and minimum order quantities (LTL less than truck load and FTL full truck load)
- Re-plan all affected components and start over again
The source of the item requirements depends upon the inventory classification
For finished goods -> independent demand via forecasting or distribution requirements planning (DRP)
For materials, components, sub-assemblies -> dependent demand via MRP (bill of material) explosion
Yield – expected useable output (considering scrap factor being component specific or shrinkage factor) scrap factor data is stored in the bill of material file
Shrinkage factor = 100% – Yield factor/Yield factor
Product Structure offset – delaying the timing of a gross requirement for a component that is not required until later in the manufacturing process
Engineering change control is implemented thanks to specification of date effectivity (date effectivity in DEI/date effectivity out DEO)
After the MRP supply planning is completed for a parent item, the resulting planned order releases must be exploded to all of the direct component items. This process updates the gross requirements for the components. Upon aggregation of all gross requirements, the MRP process can begin for the component items. The explosion process can be modified through the use of any of the following factors: product structure scrap factor, product structure offset, or engineering change control. Raw Materials Planning is a function of MRP (it’s not a function of Master Planning). Dependent demands are managed through MRP and not via demand management. Closed MRP system includes: production planning, MPS, CRP, Purchasing, shop floor control activities, financial systems.
Distribution planning
Distribution network structure choices: no. of stocking levels than can exist within distribution structure (direct shipment to customer vs no. of retailers), number and placement of stocking locations, functions performed at each location, ownership and operations of facilities
Bill of distribution – definition of the channels of inventory movements and replenishment
Distribution channel – is the distribution route from raw materials to consumption that a product travels
Distribution partner initiatives:
Vendor-owned inventory (VOI) – occurs when the supplier provides consigned goods to the seller
Vendor-managed inventory (VMI) – the supplier takes responsibility for monitoring product demand and maintaining appropriate levels of goods in the seller’s facility
Determining inventory levels in distribution network will be best achieved by using first then ABC item classification.
Safety stock can be: fixed quantity, time supply covering specific future period of demand, statistical using the service level safety factor multiplied against an item’s current deviation from a specific forecast
2 approaches to the forecasting process for distribution network: top down (centralized forecast disaggregated) and bottom up (decentralized forecast aggregated to the main distribution system level at the central warehouse)
Inventory replenishment techniques: visual review, two-bin (first bin in used, second covering safety stock and delivery lead-time), min-max (min and max set targets based upon storage capacity or financial limitation), periodic review, order point,
Double reorder point system – first one (call ‘Must order point’) in a normal statistical order point system, second one (called ‘May order point’) is established to cover the first order point plus the expected usage during the item’s manufacturing lead-time
Base Stock – base stock level is set for each item and copies of sales records or shipping documents are kept as a record of the demand; these records of depletion of the base stock are then sent back through all levels of distribution and to the producing location to trigger replenishment of the base stock; in sales replenishment case these records are only sent one level up to the supplying location.
Distribution Requirements Planning (DRP)– centralized push system of replenishment linking the producing central warehouse with all levels in the distribution network, dependencies between stocking locations and supply points are done by the use of bill of distribution. Distribution Requirements Planning is a PUSH system (reorder point, on the other hand, is a pull system) only used in the make-to-stock environments. Output of DRP is the planned orders. Economic order quantity is not a part of DRP (because DRP is push system and EOQ belongs to pull system). In the DRP system the transit times are used to plan when the order must arrive at the warehouse in order to satisfy the customer demands.
Distribution Resources Planning (DRP II) – capacity tool for the total distribution system in a collaborative effort to share information, manage costs, and most importantly, support the customer. It uses DRP output to measure current operations support and to project any adjustments in resources needed to execute the plan. Replenishment orders and delivery commits, or DRP, are the links between manufacturing and distribution
Safety stock calculation when adding new warehouses to distribution network
X – centralized system safety stock
N – number of DC
New Safety stock (SUM FOR ALL WRHs)= 
Total cost of distribution = transportation costs + warehousing costs + materials handling costs + packaging costs + costs of carrying inventory
Measurements of inventory efficiency would include inventory turns ratio and days’ supply of inventory.