summary - komplett

7/31/2019 Summary - Komplett

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Chapter 1 Intro and Background

Learning objectives

Describe the concepts of manufacturing planning and control Describe the historical development of the subject field of manufacturing planning and

control.

1.1The manufacturing companyThe manufacturing company and its relationships can be considered as the flows ofmaterials,

money and information. Materials go from supplier all the way to end customer. Information goes in

all directions (demand type and supply type) and money the opposite direction of materials. Flows of

resources are used to achieve value-adding processes. Easily expressed; four different flows to

characterize a manufacturing company.

1.2The concept of manufacturing planning and controlThe book is about two different areas of management: Materials management and production

management.

Materials management is about planning, control and follow-up of material flows from suppliers to

customers. Produce, replenishment and so on.

Production management is about planning, control and follow-up of the use of resources forproduction. Right capacity and so on.

The two concepts above are closely integrated and are often joined together. The term

manufacturing planning and control is used in our book.

This term is part of the logistics area, defined as planning, development, co-ordination, organization,

management and control of material flows.

Logistics can be divided in three sub-areas:

- Material supply system,- Production system (main emphasis of the book),- Distribution system

Manufacturing planning and control decisions are made on different time horizons and on different

degree of detail. Long-term: Capacity investments. Short-term: What products to make each week.

1.3A retrospectiveHow this subject has develop during the years since 1950. I dont think we should put so much

emphasis on this. But briefly: MRPMRP 2 ERP ERP 2.

Other planning system from the 90s: APS and SCP (Supply chain planning). The rest of the


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2.1 The concept of productionProduction = a process in which goods and services are created through a combination of materials,

work and capital.

Manufacturing of goods consist of value-adding activities. Raw materials are transformed during this

process to get the desired state. The transformation can take place in five different ways:

- Transformation through division. One item as input, several different items asoutput. E.g. sawing timber from logs.

- Transformation through combination. Several items as input and one item asoutput. E.g. machines and chemical products.

- Transformation through separation. The form of the input is changed throughremoval of material. E.g. products made from turning on a lathe.

- Transformation through shaping. Shape of the item is changed. E.g. molding ofplastic materials

-Transformation through adoption of properties. The properties of the item arechanged but not the items form. E.g. heat and surface treatment.

2.2 Material flows and stocksFlows are often intermittent, with interruptions between the value-adding activities involved.

Furthermore different sub-flows are decoupled from each other partly due to discontinuity and

partly to avoid disruptions in one sub-flow to transmit to other sub-flows.

The primary function ofinventory is to decouple all flows.

We can divide inventory in: Inventories of raw material and purchased components, inventories of

semi-finished manufactured items, work in process and inventories of finished goods.

Work in process (WIP) refers to goods under refinement in or between value-adding activities. This

enables different rate of production in different parts of a production system.

Finished goods inventories decouple the production from the sales and distribution. This enables

delivery to customers without delay. Work in process can sometimes also be seen as a buffer stock.

Inventory refers to materials that are stationary and not moving along the flow. This is partial true

for WIP. But we also have inventory which is moving = in-transit inventory. Generally in-transit

inventory is only materials in external transports, moving inventory in internal transport and

handling are usually defined as WIP.

Cycle stock = part of an inventory which arises due to inbound deliveries taking place at a different

speed and in larger quantities than consumption.

Safety stock = to avoid shortages due to disruptions and effects of unpredictable consumption.

Safety stock is also used in order to decouple different processes.

Levelling stock = decouple the rate of production from the rate of consumption. The company

manages to produce goods at a relatively even rate to achieve a smooth utilization of capacity and

thereby decrease capacity costs.


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There are many demands on planning methods and working procedures to achieve the necessary co-

ordination of different sub-flows towards a finished product. As a result of these difficulties, two

types of inventory arise:

Co-ordination stock = created to couple parallel material flows and achieve co-ordination effects.

Arise, for example, when jointly ordering several items even if they have different requirement dates.

Control stock = Arises accidentally. The size is related to imperfections in control. E.g. items are

required at the same time for final assembly but most wait in stock due to another component being

delayed or to shortage in stock.

Two more stocks: speculation stock and obsolescence stock.

Speculation stock = Building up stocks because its an expected price increase in the future.

Obsolescence stock = There is no expected consumption of these goods.

2.3 Manufacturing strategiesCategorization of company types with respect to the degree of customer order initiation may be

carried out by means of the customer order point and the customer order decoupling point.

Customer order point: the position in a products bill of material from which the products has

customer order specific appearance and characteristics. The delivery lead-time is at least as long as it

takes to complete manufacturing from this point.

Customer order decoupling point: the position in the bill of material from which material supply and

value-added activities are customer-order initiated. The activities are only executed as customer

orders are received.

The customer order decoupling point may lie before the customer order point, but never after.

Engineer to order (ETO): Products are engineered to customer order. Customer order decoupling

point lies in a very low level.

Make to order (MTO): As above but products are engineered and prepared for manufacturing before

customer orders are received. Decoupling point lies a little higher than ETOs.

Assembly to order(ATO): All raw materials and purchased components are produced and allfabrication of items takes place without connection to customer orders. The final form takes place

during final manufacture in conjunction with customer order. Decoupling point lies just below the

final product.

Make to stock (MTS) and make to delivery schedule: Products are completely known and decoupling

point lies after final manufacture. In (MTO) products are completely standardized and kept in stock.

Make to delivery schedule may also be completely standardized products but may also involve

customer-specific products that are delivered to individual customers.

The five company types can also be categorized from where the stock point lies. There is also a big

difference in the degree of information at order receipt, i.e. the extent to which products are known


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and defined when the customer order is received. At ETO less information is known, when all

information is known at MTS. I strongly recommend that you look at the figures in the book, pages

21-24.

2.4 Different manufacturing processesIts also possible to categorize companies with respect to the basic type of manufacturing process

used.

Project process: no product flow at all, production resources are organized around the product as it

evolves.

Job shop process: production resources organized by manufacturing function, the flow of materials

are adapted to this organization and production layout. Appropriate for manufacturing of semi-

finished items. Its also namedjobbing process.

Intermittent line process: line process in which entire batches are completed before they are

transported to next step. Flows are interrupted at each step.

Continuous line process: unit by unit in to next step. More product specific than the previous

described process.

2.5 Material flow typesCompanies can also be classified with respect to types of manufacturing flows. Figure 2.12 at page

27.

V types: divergent material flow, manufacturing takes place in form of transformation by division. At

divergent points raw material is transformed into various end products, e.g. Sawmills.

A type: Several types of materials/products are combined into single output semi-finished items and

to end products at convergence points, e.g. aircraft engines.

T type: Fewer convergence points than A type and the convergence points are concentrated at the

finished product level. Paint is a good example of T type flow.

X type: Several convergence points, greatest under the finished product level, e.g. Cars.

I type: One or few starting materials end up in a final product, e.g. glass blowing.

Chapter 3 Approaches in

Manufacturing Planning and Control

Learning objectives


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Describe how planning of material flows and production can be conducted in a hierarchicalstructure of function and processes

Explain the relationships between different planning levels Explain the balance between the materials and capacity perspectives Describe different approaches to capacity planning Explain the content of theory of constraints

3.1 Control at different levels in a companyThree different levels of control: Strategic, tactical and operative. Manufacturing planning and

control affects and is affected by all of these levels of control.

Strategic control: primarily to positioning the company in its business environment. About business

activity, goals and allocation of resources. What products should be manufactured? Which customer

segments and markets products will be marketed on?

The area of manufacturing planning and control of a strategic nature:

- Goals for production and materials management activities, e.g. delivery times.- Decision on product mix and breadth- Production in one place or separately for each market?- Policy for capacity sizing- Making and delivering to order or from stock?- Supplier structure? Single or multiple suppliers.

Tactical control: Aiming at developing the structure of the company within the framework achieved

from the strategic control. Issues of the type of organization, planning system etc. Decisions andactivities regarding procurement of resources and the usages of the resources. Issues and tasks from

the manufacturing planning and control of a tactical nature:

- Preparation and establishment of sales plans and production plans.- Planning of capacity and usage of capacity- Choice of manufacturing layout- Making rules for determining order quantities and safety stocks- Centralized or decentralized planning organization?- Selection of planning system and planning methods

Operative control: the lowest control level, concerns ongoing activities and daily decisions. Issues

and tasks from the manufacturing planning and control of an operative nature:

- Setting delivery dates to customer orders- Planning manufacturing orders and purchase orders/call-offs- Short-term capacity planning- Prioritize production- Delivery monitoring- Stock accounting


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3.2 A concept and structure for planning material flows & productionDecisions situations about future activities and events differ in time horizons and precision and level

of details of information. There are four different planning levels:

Sales and operations planning: Longest planning time-horizon and lowest detail of information. This

is a process at top management level, establishing master plans for sales, deliveries and production.

Based on forecast, plans are produced for expected sales and deliveries. These plans are the basis of

theproduction plan. Plans regard product groups.

Master production scheduling: Delivery plans and production schedules, on the basis of current

customer orders and/or forecast. Products are planning object. Six month to a year.

Order planning: Ensure that all raw materials, purchased components, parts and other semi-finished

items are purchased or manufactured in time and right quantity so that the plans in the master

production scheduling can be carried out. Two to six months.

Execution and control: For internally manufactured items, plans are detailed for the different

manufacturing steps. Involves planning of new order releases to the shop floor. Day or week.

3.3 The relationship between different planning levels

Two conditions: decision at one planning level must be made within the limits of decision taken at

the planning level above. Planning methods must contain functions so that the implementation of

the first condition can be ensured. Figure 3.5, page 35 shows in a simple way that planning decision

at one planning level must be taken within the framework of the planning level above.All different planning levels doesnt exist in every company. It is usual for sales and operations

planning and master production scheduling to be included in one planning process. That is master

planning. In some companies there is no specific execution and control level, in lean production

kanban-cards are used instead.

3.4 Materials and capacity perspectivesFor the four planning levels there are four questions that need to be answered:

- How large are the quantities demanded, and for when?- How much is there available to deliver?- How large are the quantities that must be manufactured or purchased, and for

when?

- What capacity is required to manufacture these quantities?Planning from materials perspective: Establish what items need to be produced, what quantities of

these items need to be delivered and when the items must be delivered.

Planning from capacity perspective: What capacity is required to manufacture the quantities

needed, and what capacity is available.


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Planning of material flows and production is a balance between the need to be able to deliver and

the possibilities of being able to produce. The importance of planning from materials or capacity

perspective depends on the planning horizon. Material perspective is important in short-term, e.g.

what should be produced when. Less important in long-term, e.g. determine quantities per rough

time period. In long-term planning its more important to ensure access to capacity. The room to

adjust available capacity in short-term is small, more important to use the capacity available in the

best way.

3.5 Approaches to capacity considerationsWhen planning manufacturing and control considerations to limitations must be taken.

Capacity limitations: primary limitation is access to manufacturing capacity. Other limitations are

access to supplier capacity, raw materials, tools, storage area, transportation and handling

equipment.

If the planning horizon is long, there is always time to eliminate any limitations and to adapt available

resources. In long-term the problem is more of an economical or financial nature. At the planning

level ofsales and operations the capacity planning is mostly intended to provide data for assessing

what capacity requirements exist and to make decisions on future capacity adaptions based on

planned sales and production volumes.

At the level ofmaster production scheduling and order planning consideration must be taken to

current access to capacity.

Planning systems capable of simultaneous optimization of material flows and manufacturing systems

are advanced planning and scheduling (ASP) systems.

Another problem beside the limitations is that of making cost estimates which can be used inoptimization models. Estimating costs for shortages and delay deliveries, and weighing these against

costs for increasing capacity through overtime or subcontracting is extremely difficult.

Two different step-by-step approaches exist:

Prioritize materials resolve capacity requirements: The flows of materials are planned in

accordance with existing demand or demand which can be forecast. Next step is to check the

consequences of the planned material flow on the capacity. If the capacity requirements exceed

what is possible to achieve, material flows are adjusted. Product and market orientation.

Prioritize capacity

resolve materials requirements: Manufacturing is planned for existing capacityto obtain the highest and most even workload possible. Utilization of capacity is being prioritized,

that is production oriented. This alternative is common in processing industry, and other extremely

capital-intensive operations.

The first alternative is the most common and here are four main reasons why:

- Companies must be customer focused and market oriented,- available capacity is not completely fixed and given in advance,- Future access to capacity is in many cases not known exactly, not possible to

optimize material flows in an acceptable fashion and,


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- Less complicated to adjust scheduled manufacturing than to try to eliminateexpected disruptions.

3.6 The theory of constraints approach

Theory of constraints origins from optimized production technology (OPT), focus on identifying and

fully utilizing bottlenecks and subordinating the entire production system to these bottlenecks.

A constraint is defined as everything that limits the performance of a system. The constraint is

generally of the form:physical, marketorpolicy.

Physical constraint: When capacity in manufacturing is less than the demand or if available raw

material is less than needed.

Market constraint: If the demand on the market is less than the volumes the system has capacity to

manufacture.

Policy constraint: Applied policies, formal or informal rules or just traditions limit the productive

capacity of the system.

The core of TOC is the following five-step process to improve the throughput of the system:

1. Identify the constraint. The weakest link of the system represents theconstraint. There are very few constraints in a system.

2. Exploit the constraint. Determine the most effective means to exploit it. Thatis bringing maximum efficiency from the constraint in its present

configuration.

3. Subordinate everything else. The utilization of other resources is adapted sothat the material flow through these resources is synchronized with the flow

through the constraint.

4. Elevate the constraint. Adding capacity to the system at the constraint.5. Go back to the first step. The constraint has been broken and a new

constraint will show up. Here we go again!


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Chapter 4 Manufacturing Planning

and Control Performance

Learning objectives

Explain how manufacturing planning and control systems affect a companys revenues, costsand assets

Describe how to express and measure common logistics performance measures Explain the trade-offs between various performance measures Explain how organizational goal conflicts between performance variables may occur

Stock Service Level

The extent to which products can be delivered to the customer directly from stock. May refer to

individual products, a product group or the overall performance for the entire product range in stock.

1) Proportion oforder lines delivered directly from stockNumber of order lines, unique type of items, delivered directly from stock. E.g. 467 order

lines out of a total 531 during a month ----> Stock service level of 467/531 = 88 %

2) Proportion ofcompletely delivered orders delivered directly from stockHow many customer orders have been completely delivered to stock in relation to the total

number of delivered orders during a time period.

3) Value related proportion of orders delivered directly from stockValue of the goods delivered directly from stock in relation to value of all deliveries during a

Delivery Precision

The extent to which deliveries can take place at the delivery dates agreed with the customer.

Mainly relevant expression of delivery capacity for companies with assemble-to-order, make-to-

order and engineer-to-order.

For make-to-stock companies it refers to delivery precision for backlogged orders.

Growing significance of delivery precision due to Lean production and JIT-systems.

1) Number ofactual deliveries in relation to number of promised deliveries2) Number ofnot delayed deliveries in relation to the total number of deliveries during one

period. Good to use when great variances in value, i.e. mix of low and high product prices.


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Delivery Reliability

The extent to which the right products are delivered in the right quantities ----> 2 dimensions:

Quantity and right product. Quantity refers to if the intended quantity stated in the delivery

document is actually delivered (i.e. If what is said to be delivered is actually delivered, not a question

of backlog or other deviations known by the supplier). Right product refers to not only the delivery ofthe right product but also the right product in terms of quality.

Performance measurement: Proportion ofcustomer orders without complaints from the customer

in relation to the total number of delivered customer orders.

Delivery Lead Time

From the suppliers perspective: the time between a customer order being received until delivery can

take place. Dependent on product characteristics, manufacturing methods logistics system and

planning methods. 2 main elements: Operations and Current workload from additional orders on

hand. Operations refer to administration and order-processing time, waiting times, time for

engineering and manufacturing operations, throughput time in manufacturing, and dispatch and

transport time. The current workload is affected by capacity and the logistics system, meaning that

the logistics system may provide reliable workload information and thereby enable control of current

available capacity. Delivery lead times are expressed in calendar weeks, consecutive workdays and in

certain cases hours.

Flexibility

3 dimensions related to manufacturing planning and control:

1) Product mix flexibilityAbility to rapidly adapt to shifts in demand between existing products and product variants

2) Volume flexibilityAbility to quickly increase or decrease manufacturing volumes in the company, whether or

not mix changes take place simultaneously

3) Delivery flexibilityAbility to temporarily adjust delivery lead times due to deficiencies in customers own

material control systems and disruptions or other unpredictable events.

Logistics Costs

Transportation and handling costs (external and internal): External transportation and handling

costs are an issue for material supply and distribution in the logistics system, but also influenced in

the production system through the sizing of manufacturing order quantities and thereby the number

of transports and shortages generating back-order deliveries. Internally refers to internal


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transportation and movement of goods including capital costs for transportation and handling

equipment.

Packaging costs: all costs associated with packaging materials, wrapping and marking of goods.

Slightly out of scope for manufacturing planning and control, but relevant packaging costs are e.g.

standard load carriers used for kanban-managed material flows in production that are shaped inspecial forms to facilitate physical inventory and item counting.

Inventory carrying costs: 3 types: capital costs, storage costs and risk costs(insurance, wastage,

scrapping).

Shortage costs and delay costs: Costs that arise due to shortage in stock or delayed delivery from

manufacturing. May be costs as loss of earnings due to absence of sales, loss of goodwill, damage

costs, costs of extra transportation or special (rapid) transportation.

Administrative costs: All costs associated with control of material flows and production, e.g.

administrative personnel costs and costs for computer systems (ERP)

Capacity costs: costs for capital invested in manufacturing equipment including write-down, and

costs for maintenance and operation of equipment. Influenced by utilization since higher rate of

utilization means that these fixed costs can be divided over a larger number of units produced, thus

decreasing unit product costs.

Costs for changing rate of production: Leveled scheduling in contrast to adaptation to the rate of

demand. Costs for adjusting rate of production in the short term without making capacity

investments are included here e.g. costs of overtime, subcontracting.

Set-up costs: Costs of switching from manufacturing one item to another. Costs of switching tools,

cost of down-time. Considered as fixed costs.

Tied-up Capital

Manufacturing planning and control also affects a companys assets and the capital tied up in the

assets. Divided into fixed or capital assets and current or liquid assets. Fixed assets are factory

buildings, manufacturing equipment etc. and are related to capacity utilization. Current assets are

less permanent and constantly renewed. 2 dominant types of current assets: inventory (3 categories:raw material, purchased components and manufactured semi-finished items) and accounts

receivable.

Tied-up capital in monetary values: The value of the inventory in monetary terms, one value for

each of the three inventory categories.


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Inventory turnover rate (ITR): A more comparable measurement than value in monetary terms.

Run-out time

Also called cover time.

52 refer to how many weeks deliveries the stock on hand corresponds to (Answer in weeks). Otherfactor if other time unit than weeks is used.

May also be calculated as

Capacity Utilization


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Optimization of Performance Variables

Seeking optimal solutions means to achieve best results with respect to the mentioned performance

parameters. 2 issues: is there any limit on how much a company has reason to improve each

parameter? And how do companies deal with problems related to conflicting parameters? Balance

between costs and revenues and delivery service to maximize profit.

Goal Conflicts and Priorities

Usually when thought of trade-offs and parameters conflicts one thinks of financial trade-offs.

However, there are also trade-offs related to organization. Different opinions about importance of

different variables are often related to different functional areas in an organization, i.e. managers

have different opinions of what is most important overall for the company.

- Marketing manager: High Service level/delivery precision. High flexibility in product mix anddelivery

- Financial manager: Low tied-up capital. Low total costs- Production manager: High capacity utilization. Large order quantities

When discussing importance of competition variables it is useful to separate between order-winners

and order-qualifiers as well as effectiveness and efficiency. The effectiveness and efficiency of an

organization may conflict with each other and therefore have to be considered here.

Chapter 5 Basic Data for

Manufacturing Operations

Learning objectives

Describe what types of basic data are necessary for conducting manufacturing planning andcontrol

Explain how item data is used in manufacturing planning and control Explain how bill-of-material is used in manufacturing planning and control Explain how routing data is used in manufacturing planning and control Explain how work centre data is used in manufacturing planning and control Explain the purpose and strategies of analyzing basic data


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Introduction

Complete and correct information is of crucial significance for the quality of decisions made and for a

company to fulfil objectives for its operations. One part of the required information is given the

generic term of basic data.

Basic data:Fundamental information about a companys products, items it consists of, how they are

manufactured and manufacturing resources.

5.1 Types of basic data4 types of basic data handled by the ERP system:

Item data Characteristics for the items i.e weight, description etc. Bill-of-material data Describes what the products consist of; raw materials, purchased

components etc.

Routing data Describes how the products manufactured; what resources are needed Work centre data Real-time data about which manufacturing resources are available;

capacity and performance of these

5.2 Areas of use (DPMPPC)These areas also use the basic data in the ERP

Design and product development Production engineering Material control Production control Purchasing Customer-order processing

5.3 Item dataItem Products, raw materials, purchased components, manufactured parts, semi finished items and

indirect material

Base data Item number, description, item type, stock location, unit of measure, supplier Price and costing data - Latest price, actual cost price, average price, price conversion factor,

standard price, overhead percentage

Forecasting data Forecast value, control limit, forecast error, smoothing factor, standarddeviation

Sales data Delivery statistics, order statistics, sales data Planning data Lot sizing method, ordering cost, order quantity, lead time, safety factor, re-

order point

Inventory data Stock on hand, date physical inventory, allocated quantity, physicalinventory discrepancy, open order quantity, number of issues per year


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Some of these data are obtained internally, some externally. Some of these change over time, some

dont.

5.4 Bills-of-material data

A bill of material for a product describes how it is composed of other items including the quantity of

each item. It also includes information on when the material is used in manufacturing process. All

this info is needed to calculate its manufacturing cost and for estimating requirements for raw

material and components needed. This info is also needed to enable MRP.

There are two subgroups to this a bill of material: One-level bill and indented bill.

One-level bill Info on the direct items incorporated in the composite item i.e the legs of a chair

Indented bill Info on the complete structure of an item down to raw material and/or purchased

components i.e the type of wood in the leg of the chair

Level code A code that ranks the items included in a product from level 1, which is the items closest

to the final product, to as high needed to describe the total content of the product. This is included in

the ERP system of a company.

Design bills and manufacturing bills

Compromises are always needed when choosing materials for products. These may lead to lack of

quality. Therefore the need for design bills and manufacturing bills arise.

Design bills Describes how a product is composed from a design and functional point of view. One

level of the design bill represents one step in the design process.

Manufacturing bills Describes the way a product is intended to be manufactured i.e the structure

of the material flows, how to assemble and so on. Items are divided into assembly groups or material

groups. One level of a manufacturing bill represents one step in the manufacturing process.

The goal is to find solutions that work for both the designers and for the manufacturers.

Bill of material principles

1. The manufacturing bill must be a model of how manufacturing is laid out and material flowsstructured.

2. The manufacturing bill must be structured so that forecasting and MPS can be carried outwith as few items as possible.

3. The manufacturing bill must be structured so that it supports customer-order processingwhen that is intended.

4. The manufacturing bill must, at minimum, cover all the items in products that aremanufactured or purchased.

5. The manufacturing bill must be structured so that adding and maintaining bills of materialare facilitated.

Phantom items -Items used in ERP systems to represent administrative phenomena. Used when

adding and maintaining bills of materials and for creating more rational planning procedures and


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material flows. They can work to group certain items together to emphasis their connection. This

grouping can be used both in forecasting and, planning and to handle changes in the bill of materials.

5.5 Routing data

To be able to carry out product costing, it is not only information on material consumption and

material prices that is required. Information is also needed about resource requirements; like man-

hours, machine hours and the cost these represent. This info can be obtained from routing data in a

routing file. Routing data also contains info like work description and manufacturing instructions.

Information about time for different processes can also be obtained through the routing file:

Quantity * time per piece=Run time

Operation time=Set-up time + Run time

5.6 Work Centre DataA work centre is a groups of machines and operators which can independently perform an operation.

The most central information in a work centre is its capacity; how much it can produce.

4 types of data in a work centre to determine capacity:

Number of machines Number of shifts per day Number of hours per shift Expected degree of utilization

Work centre files also store info on lead-times and queue times.

5.7 Analyzing Basic DataDifferent analyses needs to be obtained both to get the data required for the different types of data

and to use the data to improve.

Bill-of-material analysis Made to obtain the data necessary to make the bill. Here we findout which items each product consist of.

Where-used analysis - Inverted Bill-of-material analysis where we find out what producteach item belongs to

Work centre where-used analysis Same as where-used analysis but for operations. Findsout which operations are included in each work centre. Interesting for production engineers

when making changes.

Lead-time analysis Gives the information required to enable improvements in planning andlogistics


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Chapter 6 Planning parameters and

Variables

Learning objectives

Explain how to determine ordering and inventory carrying costs Define two measures for stock service level Explain the main lead time elements Explain how to conduct annual value classification and picking frequency classifications.

IntroductionWhen planning materials flow and production, the ERP-system uses a number of parameters and

variables. The following common parameters/variables are described in this chapter:

Ordering Costs Inventory Carrying Costs Service Level Procurement Lead Time Manufacturing Lead Time

Ordering CostsOrdering costs are the administrative costs of placing an order, usually independent of procured or

manufactured quantities per order event. Order costs are used in lot sizing, for example, in formulas

for calculating Economic Order Quantity.

Ordering costs for purchased items

In a simplified manner, the ordering cost can be calculated as an average incremental cost, for

example during one year, by dividing all the incremental costs for Procurement and Goods Receipt by

the number of order lines in that year.

Ordering costs for manufactured items

These are the costs that occur on top of the direct value adding costs required to perform a

manufacturing order. They can be split between the following activities:

-Administrative Activities (Mainly personnel and data processing costs, Planning, reporting etc.)

-Material Flow Activities (Withdrawal of materials, transport materials to manufacturing, etc.)

-Production Activities (Issue necessary tools, Set-up of machinery i.e. the time and cost of changing a

machine/work-station from producing product A to producing product B instead)

Inventory carrying costsAll those costs, generally both fixed and variable, of having stock in inventory. This parameter is used

in lot sizing for determining Economic Order Quantity. Examples of costs are: Capital costs, Handling


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Transportationtime

Queue timeSet-uptime

Manufacturing time

Planning

intervalOrder processing time Suppliers delivery time

Goods receipttime

costs, Insurance costs, Wastage costs and costs for shelves and such. The sum of the inventory

carrying costs are called the Inventory carrying factor and is expressed as a percentage in relation to

the capital tied up in stock. For example, if it is 26%, for an item with manufacturing cost 70 EUR the

inventory carrying cost per year will be 70*0,26=18,2 EUR.

Service LevelTwo definitions are pre-dominant:

1. Cycle Service - Probability of being able to deliver directly from stock during one inventorycycle, i.e. the time between one stock replenishment to the next. Using the calculation

below, high-turnover items should be given a higher service level than low-turnover items.

2. Fill rate Proportion of demand that can be delivered directly from stock

Procurement Lead TimeThe time from the moment a material need occurs until that material is delivered and ready to use.

Procurement Lead Time is used when determining re-order points, when comparing current run-out

time in the run-out planning and also to determine when new purchase orders should be released inmaterial requirements planning.

1 -

Main elements of procurement lead time

Manufacturing Lead TimeThis is the time from when a production need arises, for example to replenish stock, until the

moment when that product has been delivered and is ready to use. For engineer-to-order products

the R&D, engineering and manufacturing planning time might need to be added.

Note that throughput time can be divided further:

Annual Value ClassificationAnnual Value (also called volume value) of an item = One years consumption of that item * Item

price or item cost.

2 - Main elements of Manufacturing Lead Time

3 - The elements of Throughput time


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By doing this for all items, it is possible to rank them from highest to lowest Annual Value. An ABC-

analysis is when the items are then categorized based on annual value. It is usually the case that

Paretos 80/20 rule applies, i.e. 80% of value comes from 20% of the items.

Picking frequency classificationThe picking frequency is the frequency by which an item is picked, for example from stock, sub-

assemblies or wherever a forecasting could be put in place. Items with high picking frequency are

easier to forecast and by categorizing items based on picking frequency, more tailor-made

forecasting systems can be used for improved accuracy.

Chapter 7 Forecasting

Learning objectives

Explain when and when not forecast is needed Explain common reasons for defective forecasting Explain how the design of a forecasting system affects the efficacy Describe and compare common qualitative forecasting methods Describe and compare common quantitative forecasting methods Explain how to measure forecast errors and conduct forecast monitoring

What needs to be forecast?In principle, all demand for products and other items which must be delivered in a shorter lead time

than they can be manufactured or acquired must be forecast. However, this is not the same as saying

that all items should use what is normally called forecasting. Products with dependent demand, such

as raw materials and semi-finished goods can be forecasted based on planned manufacturing and

end products. Products with in-dependent demand, such as end products, spare parts and other

items sold on market will need to be forecast.

Reasons for inaccurate forecastYou must accept that a forecast will always be wrong but still try to minimize by how much it is

wrong. The following are some reasons of low forecasting quality:

Ineffective forecasting methods Misleading forecast data Discrepancies in manual assessments and automatic forecasting Unrealistic expectations Low acceptance level Conflicting interests (sales might want a high forecast and manufacturing a low forecast) Lack of forecasting responsibility and follow up of forecast.


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Demand uncertainties, Bull-whip and CPFRDemand is uncertain by nature and some firms behavior amplifies the uncertainty even further, for

example by the bull-whip effect. Reasons to the bull-whip effect include:

Large order quantities Few customers Non-aligned planning and control Not sharing POS (point-of-sales) data Price fluctuations and promotions Rationing and shortage gaming

A way of countering this is the Collaborative Planning Forecasting and Replenishment (CPFR) which

is a method of information sharing and collaboration along the supply chain invented by Wal-Mart

and P&G. It consists of five principles:

1. Collaborating in partnership relations with mutual trust2. Using common and agreed upon forecasts3. Exploiting and sharing core competencies within the companies4. Using a common performance measurement system5. Sharing risks and utilities within the supply chain.

Time series and demand patternsTime series are a collection of historic demand data which shows demand period for period. When

working with forecasting it is important, based on the time series, to determine if demand was

random, if it is showing a trend or if it was seasonal.

Designing systems and procedures for forecastingWhen designing a forecasting system these factors should be considered: Forecast data, the length of

the forecast period, forecast horizon, forecast frequency, aggregation level and forecast units.

Forecast data

It is important to assure the accuracy of the data on which the forecast is based. Most companies use

either delivery statistics or invoicing statistics as a basis for forecasting.

The length of the forecast period

A suitable length will depend on the delivery frequency of the items involved, a production forecast

might be updated every week whereas economic order quantities might need forecasting only once a

year. The accuracy of the forecast usually depends on the period length and variety is higher the

more seldom you forecast.

Forecast horizon

The longer the horizon the further into the future you are forecasting. If you forecast too short you

will be unprepared and if you forecast too long you will be too uncertain. Cutting throughput times in

production will allow shorter forecast horizons and better forecast accuracy.


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Forecast frequency

Depends heavily on planning frequency and forecast horizon.

Aggregation level

The level of forecast, e.g. per product or per product family. A forecast on Product Family level might

be sufficient on a strategic level and a forecast per Product or even per Product Model might be usedin the operative level. The forecast on Product Model level might derive from BOM of the products

forecasted on the Product or Product Family levels.

For companies that produce many engineer-to-order products, forecasting is only possible on the

product family level and the certain tailor-made solutions are configured later.

Forecast units

Might be pieces, kg, liters or hours. For budget purposes, forecast might need to be converted to

monetary units and based on the forecast unit this conversion might be difficult and imprecise.

Qualitative forecasting methodsQualitative methods are based mainly on the individuals experience and more or less well-qualified

judgment of future demand. They range from subjective estimations from one sales manager to

highly formal processes with many people involved. Qualitative methods are good when the number

of products and the number of periods to be forecast are small. Qualitative forecasting is also

preferred when the forecasting horizon is long or when the products forecasted are new to the

market. Below are three approaches, the sales manager approach, the grass root approach and the

pyramid approach.

Sales manager approach

Gathering people with insight into the product and the market and letting them produce a forecast

based on personal experience, sales statistics and other types of sales data. Can be only a few people

or many people from different regions and departments. Useful for short-term and when speed of

producing a new forecast is important. A disadvantage is that one or a few people might have too

much influence and that wishful thinking might influence the accuracy.

The grass root approach

Means that all the people with direct customer and market contact makes assumptions on which the

forecast is based. Advantages include people with the most direct knowledge of the market providing

the data and that it is automatically divided into different regions, sales groups, product groups and

such. A draw-back is that it might take a lot of time and data processing

Pyramid forecasting

A combination of the sales manager and grass root approaches where they are compared with each

other. Upside: More data. Downside: takes time and might create a situation where responsibility of

the forecast is unclear.

Quantitative forecasting methodsQuantitative methods are based on calculations and numbers drawn from time series and other

historical data.


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Moving average

The simplest form of forecast is to assume that the demand will be the same as the previous one.

However, that method is too sensitive for spikes and therefore, an average should be calculated for a

number of previous periods. So, if we are in period five, and our moving average is three periods, the

forecast for period six is the sum of demand in period five, four and three, divided by the number of

periods. Using many periods in the moving average will make for a smoother forecast but also make

the forecast less responsive to large continuous increases in demand.

Exponential smoothing

Uses the same idea as moving average, i.e. calculating an average over many periods, but the

difference is that the exponential smoothing multiplies each period by a weight where the most

recent period has the highest weight. This makes the method more responsive that the moving

average and it can be shown that the formula for exponential smoothing is (we are in period p):

This means that we only need to monitor two things, actual demand and current forecast. A high

alpha value will correspond to a responsive forecast but will make it more sensitive to random

variations. A common value for alpha is 0,1.

Focus forecasting

In focus forecasting you perform a number of simultaneous forecasts done with different methods.

When the actual demand is known for period t, you use the method that was closest to actual

demand when forecasting period t+1. You still perform the other methods for this period and repeat

the procedure for the following forecasting period. The book presents seven different forecasting

methods but any method can be used, preferably methods that are quite easy to understand in order

to easily switch between them.

Consideration to trends

When considering trends, the book gives three examples of calculations where the first one is adding

a linear increase in demand to the forecast. Since nearly no demand increase is linear this calculation

might result in heavy discrepancies. The second calculation, called additive or multiplicative trends,

increases the forecast by a fixed amount for each month (additive) or multiplies it by a fixed

percentage (multiplicative). The third calculation, shown below, avoids the problem of excessive

influence of random fluctuations and is a variant of the exponential smoothing method.

( ) ( )


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Both smoothing factors are between 0 and 1. To minimize the influence of random variations, it is

usually better to calculate forecasts on product groups. These forecasts may then be used as a basis

for calculating forecasts for the individual products.

Consideration to seasonal variations

Adjusting the forecast for seasonal demand is made in a sequence of steps. First, calculate the

seasonal index:

When considering seasonal variations, the latest demand values are adjusted using the seasonal

index before they are used in any of the previously mentioned forecasting methods.

The DR(t) value will then be used in whatever quantitative forecasting method previously mentioned

which will result in the basic forecast L(n) which will then be seasonally adjusted using the following

formula:

Forecast errors and forecast monitoringThis section contains some heavier calculations with series and such which would take just as much

space to summarize as they currently take in the book. Please have a look in the book at pages 127-

129 for more information.


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Forecast error monitoringWhen calculating the MAD (Mean average deviation) of the forecast and the actual demand, one

should establish an upper and lower limit within which the forecasting error is acceptable.

Chapter 8 Customer order

management

Learning objectives

Outline a general customer order process Describe and compare customer order processes in different types of companies Explain how to conduct available-to-promise calculations

General view of Customer order process

Demand can either be known or unknown. Forecasting deals with managing the unknown demand

while customer order management deals with known demand i.e. orders that are placed. The role of

order management in relation to forecasting is dependent on the extent to which the companys

products are made to stock or order.

Order process for make-to-stock (MTS)In a company which make-to-stock, the products are standard and fully know at the time of order

and are therefore able to be manufactured without requiring a customer order. Usually this process

for a MTS company is carried out by a call-off agreement or traditional ordering, where an order

regarding quantities is put in.

Available to promise, the quantity at a given point in time that can be delivered from stock without

affecting any other customer orders, is a basis for providing information on delivery lead-times.

When an order is placed e.g. EDI, the different products are instantaneously allocated in the

demanded quantities and at the delivery date stated in the order.

Picking and delivery often take place at the same time since the products are already in stock, so

excluding transport the delivery is almost instantaneous. When the products are picked, from stock,

the inventory balance is decreased by the quantity picked for the order. If there are sufficient

products in stock the delivery must either be delayed or split up and a back-log is created.

Order process for make-to-delivery (MTD)

In companies the make-to-delivery the products are fully known at the time of ordering. The

difference to MTS is that production takes place to a delivery schedule, and nothing is produced until

there is a customer order. The quantities manufactured can be delivered directly to the customer in

accordance with the delivery schedule or from stock. Delivery from stock is common even though thegoods have a corresponding order due to handling, administration and accounting.


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The delivery schedule can be divided into three types of order; call-off, scheduled call-off and

forecast. The first, call-off for delivery, and may be considered as a pure order from customer. This

time horizon is viewed upon as frozen, neither the customer nor the manufacturer have the ability to

make sudden changed here. The second part is made orders that are not yet put in but are expected

due to previous agreements. The third part is forecasting and is used for prediction of future needs

and capacity.

The process of picking and delivery is similar as for MTS and the only difference is that it can be made

simpler due to more frequent deliveries and every product has an assigned customer. Available to

promise do not have to be calculated here since the products already are assigned to a customer

prior to manufacturing. The delivery time is therefore the manufacturing time plus the time it has to

wait to get a place in the production schedule.

Order process for assemble-to-order (ATO)

In companies that assemble-to-order the specific product variants are not completely known until

the order arrives. The products are specified from customer requirements, e.g. a computer. The raw

material and components on the other hand are fully known and are either bought or manufactured

to stock. Since the assembly takes place to an order, the delivery cannot be instant and is always

done with a delivery lead-time. This lead-time must at least be as long as the lead-time for the

assembly process and as a result of this there is a constant backlog.

To enable ATO the final product are assembled from standardized products e.g. by using modules,

that are put together after an order has been placed. A large number of different product variants

can be created from using few standard components which means that the bill-of-material is not

known until the order is placed.

The delivery time is harder to predict for ATO than MTS since available to promise for ATO must

cover both capacity and access to material. Available to promise must therefore also take available

capacity to promise into consideration. When an order is received, a calculation is made of when the

number of hours required for the order is earliest available in the work centers used. It is also

possible to look at the master production schedule to calculate delivery time and see what quantities

that can be delivered per time period for each product model. To make the estimation of what

delivery time, can be promised, easier many companies have fixed delivery times.

Order registration is also different for ATO since the products often dont have a serial number and

instead are assigned an identification number that are linked to the customer order. There is nowalso a greater need for order confirmation and status update on when assembly and delivery can

take place.

At the time of manufacturing the semi-finished items are withdrawn from stock and at the same time

the inventory levels are updated. The value of the material is also transferred from stock to work-in-

process.

Order process for engineer-to-order and make-to-order

This is the most complicated ordering process since it is not only the final product that is unknown,

but the components and raw material can also be unknown. The manufacturing process might alsonot be standardized. Delivery lead-time will vary between different orders and has to be calculated


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after the order is received and so that both the amount of work and access to material can be

known.

The orders are not specified in advanced as for MTS where call-off agreements often are used. The

ordering process is carried out by using quotation, where a buyer submits a request with overall

performance for functions and product performance.

As stated earlier the available to promise must include both access to material and capacity due to

the highly customized products. The same method of calculation available to promise could be used

as for ATO but there could also be need for using more detailed methods e.g. using capacity bills. A

capacity bill expresses the total capacity requirements per item of a product on those resources

required for its manufacturing. Since the products are not ready for production when the order

arrive the information on capacity cannot be taken from a data file but has to be estimated from

experience.

Order registration has other characteristics than the prior ordering processes. The products do notusually have identifications in the form of serial numbers. Instead the products are described in the

form of drawings, functional requirements etc. Since the delivery date is hard to predict and the

functionality highly of the products are highly specified there is a great need for order confirmation

and status update on when assembly and delivery can take place. This process is more commonly

done by mail rather than EDI.

There is no finished goods stock and when the production of the order is finished the goods are

instantly shipped to the customer.

Chapter 9 -Sales & Operations Planning

Learning objectives

Explain how to design systems and processes for S&OP Describe the steps of a general S&OP process Describe and compare S&OP calculations for different company types

Planning needs to be made both on short and long term. For long planning horizons however,

uncertainties will increase, and will increase the longer the horizon (called planning horizon). The

planning horizon is often set to the time it takes for the company to adapt its capacity to upcoming

changes in demand. This to make sure that no unnecessary demand is unexploited. Conversely, if the

horizon is too short and demand drops, the company will not have fully utilized resources.

Companies work in different at different planning levels to cope with required planning details. S&OP

is the longest planning level, and also the least detailed. Issues involve interactions between a

number of units at the company and is influenced by available production capacity, capacity to

manufacture in relation to supply of material (raw, semi, finished), capacity to distribute, sell and

receive orders, as well as financial. S&OP will therefore be influenced by the limitations and

opportunities within and outside the company.


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Processes and relationships

S&OP is the process where top management set the overall plans for sales and operations, and can

be found in the top level of the planning chart:

The process is aimed at achieving and maintaining balance between demand (forecast and customer

order) and supply (inventory and production capacity), calling for co-ordination between

departments, and is decisive for the companys performance. If demand exceeds supplies there will

be loss of sales, poorer delivery capacity to customers (delivery lead time if MTO or lower service

level if MTS), and higher costs due to ambulance deliveries, back orders and so on. If supply is higher

than demand the stocks will increase so as the holding costs, higher unit price due to low utilization,

and decreased revenue due to necessary price cuts.

It is evident that conditions will affect how the planning can be carried out. For an example, higher

stocks to increase service level are not possible with low liquidity. In the same manner, increasing

capacity can be limited by the supply of purchased material.

Strategies for operations and overall goals will be the basis for every S&OP, and is affected by desired

profit margins and/or growth goals. Rough sales-, production- and delivery plans will be the results of

S&OP.

Production plan: Volumes to be manufactured per period (related to capacity-, material- andproduction budget)

Delivery plan: Volume to be delivered to customers (related to sales plans budget)The relation between the two as follows:

(for MTS)Delivery plan and materials purchase plans will influence the companys cash flow.

Designing Systems and Procedures for S&OP

Planning Objects

The detail level in S&OP should be low with respect to the unit expressed demand in the sales and

delivery plans as well as production volumes in the production plan. Generally it is preferable to work

at product group level, except for ETO companies where number of products may be very small and

unique, why every individual product or basic design may be used instead. Forecasting is carried out


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on chosen planning objects. Products placed in a product group must show high levels of similarity

when it comes to demand characteristics, so as production resources required.

Units of Capacity

Often units of capacity and production volume are not the same. Capacity can be in terms of

machine resources, human work hours, number of employees, square meters or kilograms. Just like

for planning objects, the level of details should be low, and sometimes whole line segments or

workshops are used as units. Capacity bills are used to translate production volume to capacity

requirements (figure 14.12 in course book).

Planning Horizon

Planning as far as possible in the future is not a goal since the longer it is, the bigger errors will be

involved, and it will consequently be less meaningful to allocate resources, and spend time on the

actual forecasting.

The planning horizon:

is normally between 1-2 years. should always be longer or equal to 1 year since S&OP is closely related to budgeting should include all seasonal variations (if all seasons are covered over one year, include one

year)

should be longer or equal to the time it takes to adapt the capacity (invest in machines,employ personnel)

should be longer or equal to the accumulated product lead time (sourcing of material toready to deliver)

Time Fences for Changes in Plans

Change production volumes on short notice is often hard since it takes time to change capacity and

purchased material. Normally the next weeks and sometimes months production volumes cant be

changed, and is evidently dependent on lead time of sourcing and production, so as the process

adaptability. Time fences are regulations to what, how much and when changes can be done over

time. The following rule is common (in reality the working environment of the company will be

decisional):

Time horizon Allowed changes

Within month 1 Only CEO can change volumesDuring month 2 Max 20% changes to volume

During month 3 Max 40% changes to volume

From month 4 No limitations


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The Planning Process

S&OP is process carried out in consecutive steps with a number of key persons from different

departments involved. It is carried out repetitively, often on a monthly basis.

Step 1: Forecasting Future Demand

The marketing department produces a forecast based on planning object and unit chosen (often in

monetary terms). It should never be influenced by wishful thinking, since this might misguide the

actual upcoming utilization. Judgments should be based on sales volume demanded by the market,

including effects of marketing activities that are assumed to affect demand within the planning

horizon.

Step 2: Preparing a Preliminary Delivery Plan & Setting up Goals for Inventory Levels or

Order Backlogs.

The marketing department prepares a preliminary plan for future sales and delivery volumes. Firstly

the previous sales and delivery plan volumes are compared with actual outcomes. The aim is to learnfrom past experience, but also see how marketing manage to meet established sales goals. The

delivery plan is based on the forecast of future demand. It might be identical with the sales plan, if

delivery normally takes place from stock, but might also deviate considerably if order-specific

products are involved and/or if products have very long lead times. Delivery and sales plans are

expressed in volumes per period. Delivery plans refer to volumes that the company wishes to sell ,

while forecasts (step 1) are referring to volumes demanded. They are often the same, but can differ.

This is the case if the company wants to decrease sales when phasing out products. Goals are also set

for inventory and backlog levels. The starting point is the existing inventory and/or order backlog.

Backlog levels refer to desired customer lead times, while inventory levels can be set to be able to

meet future seasonal trend.

Step 3: Preparing a Preliminary Production Plan

In step 3, production and purchasing will prepare a production volume plan. As in last step,

step 3 starts with comparing last periods outcome versus the planned levels, and deviations

are analyzed. The preliminary production plan is based on the delivery plan, considering

desired levels of inventory at the end of the horizon. All volumes that cannot be covered by

the inventory must be produced.

For MTO/ETO companies, opening and closing inventory corresponds to opening backlogs

and closing ordering backlogs, but with the difference that backlogs are referred to as


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negative inventory and therefore demand, not supply. The volumes that must be

manufactured will then depend on the delivery plan and the desired inventory or backlog

levels, so as the available capacity and supply of material. Because of the last mentioned,

S&OP in this step is part of the resource planning. Before approving the preliminary plan, it

must be checked that available start-up material and capacity is sufficient to carry out theplan. If not, volumes must be adjusted correspondingly.

Step 4: Adjusting the Delivery & Production Plan

This step involves reconciliation between managers from marketing, production, procurement and

logistics. Delivery and production plans have large impact of cash flow and tied-up capital, why the

financial department is often involved too. The aim is change production or delivery plans or goals

for inventory or backlog levels to reach balance of supply and demand in such a way that the

financial requirements of the company are met. When requirements are met from all departments

point of view, proposals for the two plans are made.

Step 5: Settling the Delivery & Production Plan

The proposals are brought to top management together with any unsolved matters. When

an agreement has been reached the final production and delivery plan are settled, which will

imply an undertaking from production, marketing, and procurement to meet the set goals.

S&OP Calculations

Most often ERP systems are available for drawing the plans, but sometimes only spreadsheets are

available as tools. Such tools should provide an overview of current plans, and support all necessary

calculations so as tools for converting production plans into capacity requirements.

Rickards comments: The tables are only provided. Think youll be able to grasp the essence without

the text. If not, see page 169-170 in the text book.

Calculations in MTS Companies

Delivery time is neglected since delivery normally takes place from inventory, which means that

planned sales volumes are equal to planned delivery. One example is presented below with the first

three columns representing previous elapsed periods:

Red are to be calculated, given initial inventory, planned and actual volumes.

Period -3 -2 -1 - 1 2 3 4 5 6 7 8

Delivery PlanPlan 70 70 70 70 70 90 90 90 90 90 90

Actual 54 75 87

Deviation -16 5 17

Production Plan

Plan 80 80 80 80 80 80 80 80 90 90 90

Actual 59 72 78

Deviation -21 -8 -2

Inventory

Plan 55 65 75 48 58 48 38 28 28 28 28

Actual 45 50 47 38

Deviation -5 -18 -37


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Calculations in MTO Companies

For MTO/ATO companies it is change in the order backlog and thus lead times to customers that

constitute the difference between volumes in delivery plans and production plans for each periods,

given opening backlog. Since no stock is available, delivery lead times must be taken into

consideration.

Chapter 10 Master Production

Scheduling (MPS)

Learning objectives

- Explain how to design systems and procedures for MPS- Describe the steps of a general MPS process- Describe and compare the MPS process in different types of companies- Explain the similarities and differences between the MPS and the final assembly schedule

(FAS)

MPS involves more detail and a shorter planning horizon compared to S&OP.

Functions and relationships

MPS aims at achieving a balance between supply and demand.

Supply consists of:

- Current production capacity can adjust through overtime, reallocation of personal.- Inventory of:

o Raw materialo Componentso

Finished products

Period -3 -2 -1 - 1 2 3 4 5 6 7 8

Delivery Plan

Plan 60 60 60 60 60 60 50 50 50 50 50

Actual 64 77 54

Deviation 4 17 -6

Production Plan

Plan 65 65 65 60 60 60 55 55 55 60 55

Actual 71 69 62

Deviation 6 4 -3

Order Stock

Plan 92 87 82 90 90 90 85 80 75 65 60

Actual 97 90 98 90

Deviation -2 11 8


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Demand consists of:

- Orders at hand- Forecasts

MPS has five steps

- Forecast- Preliminary delivery plan differs depending on make to stock/order etc.- Preliminary master production schedule differs depending on make to stock/order etc.- Make sure materials and capacity is accessible and adapt plan accordingly- Settle the prepared plan the finished plan is used as input for material planning.

Functions of MPS

- Putting S&OP into practice making S&OP into a concrete plan.- Coordinate and control the flow of material into, trough and out of the company.- Provide a timing and quantity of deliveries should answer when and how much to deliver.

Designing systems and procedures for MPS

Planning objects

- Make to stock -> product as planning object- Assemble to order -> Models as planning object. Cant use product since its impossible to

forecast products. Both delivery plans and forecast are made on model level.

- Make/engineer to order -> product types as planning object. Orders are received as certainvariant of a specific product types.

Order types

Four types of orders

- Planned orders order automatically generated by ERP.- Firm planned orders same as above but with a limit to the system about rescheduling.

Cant reschedule to close to production. Connects to time fences.

- Released orders Components required are beginning to get allocated. If rescheduling isnecessary this has to be done manually. These are checked by planning department.

- Order released to shop floor The orders are released to the shop floor for manufacturing.

Damping functions

When a ERP system automatically tries to reschedule production and send messages about this to

the planning manager there is a risk that the system becomes over sensitive. Too much information

is generated. In order to correct this a damping function is used. It is for instance unnecessary to try

to reschedule a manufacturing order that have already been started.

Planning horizon

One of the main purposes of MPS is to coordinate and control the material flows of the company. To

achieve this, the planning horizon must be longer than the accumulated lead time for the product


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- Engineering/making to order Since the forecasting is unreliable, make to order, thecapacity planning is based upon the S&OP which is vaguer.

Multi-site MPSMPS are developed for more than one location at the same time. The aim is to optimize the planning

on a supply chain level. Demand is assigned to different sites in order to avoid bottlenecks etc. Linier

programing or mixed integer programming are the optimization models used. These models are

often included in APS systems. The first step is to define nodes and links included in the supply chain

that is to be modeled.

Nodes production centers Links material flows

The main feature of this MPS is the ability to coordinate sourcing, production, distribution etc onmulti-site basis.

MPS in relation to final manufacturing and assembly scheduling

Final assembly schedules are the final production orders. When and what to produce.

Final assembly schedules differ from MPS in the following ways:

- More short-term- Relates to specific products rather than product models/types- Refers only to manufacturing orders, not any forecasts

In companies that assemble to order the differences are greater than when manufacturing to stock.

Final assembly schedules refers to released manufacturing orders for specific products while the MPS

also consists of forecasted product models, which doesnt tell which model out of several similar

ones that will be produced. There is an uncertainty involved.

Chapter 11 Material planning

Learning objectives

Describe what material planning is in the context of production and material management Describe the relationship between common business processes in a manufacturing company

and material flows

Explain what synchronization of material flows means Describe a number of commonly used material planning methods and their characterizing

properties Calculate re-order points, order-up-to levels and run-out times


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Carry out MRP calculation including explosions in a multi-level bills of material Explain in what environments the different planning methods primarily can be used

Basic starting points for material planning

The process of material planning deals with the balance between access to material and

requirements of material i.e. securing that the right material and available at the right time. Material

planning is closely linked to order planning and the decision for what and when to order. The

purpose of material planning is to optimize the flow of material as efficiently as possible regarding to

tied-up capital, delivery service and utilization of resources. It is possible to say that material

planning should answer the following questions;

For what items must new orders be planned? (What item) How large must the quantities of each item in the order be? (What quantity) When must the order for each item be delivered to stock, to manufacturing and to

customer? (What time to be delivered)

When must the order for each item be placed with the supplier, or start the internallymanufacturing? (What time to start)

Before looking on the planning process it is important to understand what drives the material flow

and what characterizes it. The book lists four principles of a material flow;

Dependent or independent demand It is crucial to understand what drives the demand to be able

to choose an appropriate planning method. Independent demand for an item is demand that has no

direct relationship to demand for other items. Dependent demand on the other hand means that the

demand for an item can be traced to the demand for other products.

Information on requirements and supplies Material planning is all about balancing the demand for

material with the supply of materials. If the supply is smaller than the demand the flow must be

increased by putting in new manufacturing or purchasing orders and vice versa. In the short term

there can be an unbalance between supply and demand but in the long term there must always be

balance. For operative material planning, the information on supply consists of the stock balance and

purchase orders and therefore represents the current supply.

Push or pulled planning A common way of describing the material flow is by distinguishing

between push and pull. Pull is when manufacturing and movements only take place on the initiativeof a consuming unit in the material flow. Material planning with push characteristics on the other

hand allows material to move forward without a consuming unit telling the too i.e. by initiating new

material into the manufacturing from a production schedule.

Synchronization of the material flow

When balancing supply and demand there are two dimensions to it, a quantitative and a time based.

This can be achieved either by matching exactly the supply with the demand in both quantities and

time or it could be done according to the most economical order quantity. Whatever view is chosen

the biggest challenge is to secure the material at the right time, to early and the will be unnecessary

capital tied-up and to late may cause shortages. Efficient material planning therefore depends on


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Frequent and continuous demand Small order sizes and short lead-times

Periodic ordering system

A different method from the re-ordering point systems where the ordered quantities were fixed is to

have a periodic ordering system where the intervals for ordering are fixed but the quantity varies.

This is a suitable method when many components are bought from the same supplier.

The same principles are used for periodic ordering as for re-order point system. There is also an

order-up to level that is calculated from the expected usage during the order lead-time. This point is

preferable counted so that the ordered quantity on average is equivalent to the economic order

quantity. The periodic ordering system can be expressed as the following function;

T= order-up to level D= Demand per time unit R= re-ordering interval L= Lead-time SS= Safety stock S= Stock on hand

The periodic ordering system is mainly useful in the following planning environments;

Finished goods stock Independent demand and frequent requirements Co-ordination of items and joint ordering Small order sizes and short lead-times

Run-out time planning

Instead of expressing the requirements in quantitative measure it could be expressed as a unit of

time. The run-out planning method is a material planning method that uses time as a unit and

expresses the stock level as how much time is kept in stock. It is calculated as how much time is left

before the items run out, by dividing stock on hand by expected demand per time unit, plusscheduled receipts. To cope with variations there is a safety lead-time stock and it is calculated by

multiplying the safety lead-time with the expected demand per time unit.

The run-out time planning is mainly useful in the following planning environments;

Finished goods stock Independent demand and frequent requirements Volume flexibility Low basic data quality


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Material requirement planning (MRP)

Material requirement planning is a material planning method that is based on points in time for

scheduling new deliveries being determined through the calculation of when further requirements of

material arise. The fundamental principle of this method is to not schedule a new order for delivery

until there is a net requirement. The purpose of MRP is the same as the methods stated above, to

answer the time related questions, when must the ordered items arrive and when must the order be

placed. When designing an MRP there are a number of parameters that must be selected and

established e.g.;

Length of each time period Length of planning horizon Planning frequency Time fences

The planning horizon must at least be as long as the longest accumulated time for manufacturing and

purchasing of all items included in the end product.

When using MRP for items with dependent demand, explosion is included on the method with help

of bill-of-material. Starting point for the MRP is the master production schedule, which states what

quantities and at what times the companys end products are to be manufactured and delivered to

stock or to customer.

From the master production schedule and bill-of-material, required quantities of components and

raw material are calculated as well as the times when these requirements occur. The order levels are

decided by using various lot-sizing methods.

The material requirement planning is mainly useful in the following planning environments;

Dependent demand Allocations and seasonal variations Items that are a part of a Bill-of-material High basic data quality

Chapter 12 Lot sizing

This chapter sets out the most common methods for determining lot sizes. The characteristics

properties of each method are also discussed, as are in which contexts they may primarily be used.

Learning objectives

Explain the motives for lot sizing Explain how to design and use different types of lot sizing methods Categorize and compare the characteristics of different types of lot sizing methods


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Motives for lot sizing

The reasons for lot sizing may be divided into financial and non-financial reasons. The most common

reasons for lot sizes to deviate from quantities in direct demand are of a financial nature. The larger

the order quantity, the less will be the ordering cost per piece. If order quantities are greater than

immediate needs, the surplus will need to be stored until it is needed (carrying cost). Since inventory

carrying costs increase and ordering costs decrease as lot sizes become greater, the choice of a

suitable lot size is obviously a trade-off between these two costs. The optimized inventory is called

economic order quantity.

Since lot sizing involves procurement or manufacturing for future needs, it must be built on an

expectation that these needs will arise and any costs that thus risk-taking may incur. For companies

that make to stock and deliver directly to customers from stock, this risk is greatest since demand is

totally based on forecasts. The risk is less if the company has delivery agreements with its customers

regarding volumes to be delivered on an annual basis. Likewise, companies that make to delivery

schedule will face less risk since delivery schedules form customers will provide a safer indication of

possible future quantities than if these are based on internal forecasts.

Categorization of Lot Sizing Methods

The different lot sizes can be classified according to whether the order quantity is fixed or variable

from order to order, and whether the time period that the order is expected to cover is fixed or

variable.

Lot for Lot

This method means that there is no lot sizing at all in the sense of consolidating demand. Thus, it

does not involve any storage or tied-up capital. The method is quantity based, time invariant and

discrete. The method is mainly used for expensive products and in planning environments with short


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set-up times, e g just in time. With other words, you buy exactly the demand that the customer

wants, no safety stocks or anything. Simplest method ever!

Estimated Order Quantity

This method is built on a fixed order quantity being intuitively estimated with the aid of judgments

based on experience. Theoretically at least, an estimated order quantity is always inferior to aneconomic order quantity as a method, since it is virtually impossible to balance ordering costs and

inventory carrying costs to achieve a reasonable optimized order quantity only on grounds of

experience. This method might be suited where necessary information regarding financial

calculations isnt available, for example if a new product is introduced and there is no historic

demand data available. One disadvantage is that it is difficult in practice as well as time-consuming to

update order quantities as conditions and demand change.

Economic Order Quantity

The method is focusing on minimal total cost for keeping the stock that an order gives rise to and for

executing the ordering process. It stems from the formula for total cost:

TC = Q*I*C/2 + (D*S/Q). Deriving the total cost with respect to the quantity gives us:

dTC/dQ = (I*C)/2 (D*S/Q^2) EOQ (dTC/dQ) = sqrt((2*D*S)/(I*C))

D = demand per time uni

summary - komplett

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