Supply Chain Planning
Supply Chain Planning - Introduction
Supply Chain Planning is the element of supply chain management responsible for determining how best to satisfy the requirements created by the Demand Plan.
Its objective is to balance supply and demand to realize the company's financial and service objectives.
Operations managers continuously plan operations and resources to balance capacity and output.
Supply Chain Planning is a combination of all the planning processes used across the supply chain, primarily:
Business Planning
Aggregate Production Planning (APP)
Sales & Operations Planning (S&OP)
Master Production Scheduling (MPS)
Materials Requirement Planning (MRP)
Capacity Planning
Distribution Requirements Planning (DRP)
Advanced Planning and Scheduling (APS)
Hierarchy of Supply Chain Planning Process
A central principle of supply chain management is using a standardized and stepwise approach to managing the supply chain.
This involves a hierarchy of planning processes executed in sequence to produce the right product at the right time to satisfy customer demand:
Long Range “Strategic”
Intermediate Range “Tactical”
Short Range “Operational”
Supply Chain Planning – Levels and Horizons
Supply chain planning is usually hierarchical and can be divided into three broad categories:
### Long-Range Planning
Involves planning for actions such as the construction of facilities and major equipment purchase.
References the Aggregate Production Plan (APP).
Conducted at the Executive level.
Example: Ford Motor Company wants to grow its market share by 5\% over the next 1-3 years.
### Intermediate-Range Planning
Shows the quantity and timing of end items.
References the Master Production Schedule (MPS).
Conducted at the Mid-level.
Example: Ford Motor Company wants to make 1,000 F-150 pickup trucks/week for the next 3-18 months.
### Short-Range Planning
Detailed planning process for components and parts to support the Master Production Schedule.
References the Materials Requirement Planning (MRP).
Conducted by a Planner or 1st line Supervisor.
Example: Planning for 1,000 engines, 1,000 transmissions, seats, windows, etc. each week over the next 1-12 weeks.
Planning Responsibilities and Tasks
### Top Management
Responsibility: Long-Range (over 1 year)
Planning Tasks: R&D, new product plans, capital expenses, facility expansion.
### Middle-Management Operations
Responsibility: Intermediate-Range ( 3-18 months)
Planning Tasks: Sales planning, production planning, setting employment/inventory/subcontracting levels, analyzing operating plans.
### Operations Managers, Supervisor, Foremen, etc.
Responsibility: Short-Range (up to 3 months)
Planning Tasks: Job assignments, job scheduling, dispatching, ordering.
Overall Supply Chain Planning Framework
Strategic Plans and Financial Plans feed into Business Planning.
Forecasting and Demand Planning also provide input to Business Planning.
Business Planning informs the Aggregate Production Planning (APP), which is checked by Resource Requirements Planning (RRP).
APP feeds into Master Production Scheduling (MPS), which is checked by Rough-Cut Capacity Planning (RCCP).
MPS feeds into Material Requirements Planning (MRP), which is checked by Capacity Requirements Planning (CRP).
MRP guides Manufacturing (internal & external) and interaction with Suppliers (internal & external).
Distribution Requirements Planning (DRP) interacts with planning processes for finished goods deployment.
Sales & Operations Planning (S&OP) is a critical integrating process across the supply chain.
Advanced Planning and Scheduling (APS) represents advanced systems for optimizing these plans.
Business Planning
Focus: Long-term ( 2-10 years) direction and objectives for the company.
Input: Management gathers input from various organizational functions (finance, marketing, operations, engineering).
Objectives: States the company’s objectives for profitability, growth rate, and return on investment.
Update Cycle: Typically updated and reevaluated annually, usually during the annual budgeting cycle.
Role: Used as the starting point for developing the organization’s Production Plan or Aggregate Production Plan.
Aggregate Production Plan (APP)
Definition: A hierarchical planning process that translates annual business plans, marketing plans, and demand forecasts into a production plan for a product family in a plant or facility.
A Product Family refers to products that share similar characteristics.
Planning Horizon: At least one year, and usually rolled forward by three months every quarter.
Relevant Costs: Includes costs relevant to aggregate planning decisions such as inventory, setup, machine operation, hiring, firing, training, and overtime costs.
Aggregate Planning - Purpose and Goals
Purpose: To establish production rates that will achieve management’s objective of satisfying customer demand by maintaining, raising, or lowering inventories while attempting to keep the workforce relatively stable.
Goals:
Meet demand.
Use capacity efficiently.
Meet inventory policy.
Minimize costs including labor, inventory, plant and equipment, and subcontractor (i.e., third parties).
Aggregate Production Planning (APP) Strategies
The APP can be revised to meet business plan objectives through adjustments to the Demand, Supply, or both.
### Demand Adjustments
Influencing demand: Adjusting demand to align with available production capacity (e.g., airline and hotel weekend discounts, telecommunication companies’ weekend rates).
Accomplished through advertising, promotional plans, and pricing.
Backordering: Accepting demand greater than supply capabilities during high demand periods.
Counter-seasonal product mixing: Developing a product mix with offsetting seasonal trends that level the cumulative required production capacity (e.g., producing lawnmowers and snow blowers).
### Supply Adjustments
Change inventory levels:
Increase inventories: Build stock in advance of demand to utilize available capacity.
Decrease inventories: Temporarily reduce inventory below normal safety stock levels during peak demand periods to meet customer requirements.
Change capacity:
Vary production output through overtime or idle time.
Vary workforce size by hiring or layoff.
Using part-time workers.
Subcontracting to external parties.
Sales & Operations Planning (S&OP)
Definition: A process to develop tactical plans that allow management to strategically direct the business to achieve a competitive advantage continuously by integrating customer-focused marketing plans for new and existing products with the management of the supply chain.
Brings together all the plans for the business into one integrated set of plans.
Typically performed monthly and reviewed by management at an aggregate level (product family).
Reconciles all supply, demand, and new product plans.
It is the definitive statement of the company’s plans for the near to intermediate term.
Covers a horizon sufficient to plan for resources and to support the annual business planning process.
Links the strategic plans for the business with its execution.
Reviews performance measurements for continuous improvement.
### Advantages of Integrated S&OP
Traditionally, companies developed Financial, Sales, and Operations plans sequentially and often independently.
S&OP determines the most profitable combination of marketing and supply chain activities.
Establishes a coordinated plan for responding to customer requirements within the resource constraints of the enterprise.
Response strategies based on capacity vs. demand:
If capacity and demand are nearly equal, emphasis should be placed on meeting demand as efficiently as possible.
If capacity exceeds demand, the firm might choose promotion and advertising to increase demand.
If capacity is less than demand, the firm might consider subcontracting a portion of the workload to an outside 3rd party.
Monthly S&OP Cycle
### Week #1: Demand Review Meeting(s)
Review/Revise Sales Forecasts.
Hold Demand Review Meeting(s).
Drive Consensus Demand Plan.
Result: Proposed Demand Plan(s).
### Week #2: Supply Review Meeting(s)
Review/Adjust Supply Plan(s).
Hold supply review meeting(s).
Drive Consensus Supply Plan.
Result: Proposed Supply Plan(s).
### Week #3: Pre-S&OP Meeting
Financial Review.
Prepare for Exec S&OP.
Hold Pre-S&OP Meeting.
Result: Balanced Supply and Demand Plans.
### Week #4: Executive S&OP Meeting
Review aggregated plans.
Make decisions on key resources.
Resolve impasses.
Result: Direction provided to sales and operations teams.
Master Production Scheduling (MPS)
Definition: The Master Production Schedule (MPS) represents what the company plans to produce, expressed in specific product configurations, quantities, and dates.
In the service industry, the MPS may be represented by an appointment book, balancing capacity (e.g., skilled labor or professional service) against demand.
Key characteristics of MPS:
It is the plan that drives the business.
It is a detailed disaggregation of the Aggregate Production Plan (APP).
It provides a set of planning numbers that serve as the major input for material requirements planning.
MPS is a statement of production, not a statement of demand:
It represents what the business plans to achieve, not necessarily what the customer wants.
Individual products can be finished ahead of time (i.e., before they are required to meet demand) and held in inventory rather than only finished as needed.
Considerations: It must consider the forecast, production plan, and other important factors such as backlog, availability of materials, availability of capacity, and management policies and goals.
Review and Update: It is reviewed and updated as necessary.
Planning Horizon: The planning horizon must exceed the lead time to produce the item. Typically, the MPS planning horizon is 3 to 18 months.
Projected Available Balance Calculation
The formula for Projected Available Balance is:
Projected Available Balance [current period] = Projected Available Balance [from the previous period] - Customer Orders (if received) or Forecast (if no customer orders received) [for the current period] + Master Production Schedule (MPS) quantity [for the current period]
Implication: If the MPS is set at a level of e.g. 1,000 units per month to keep resources stable, the Projected Available Balance at the end of each month will vary.
Master Production Schedule and Rough-cut Capacity Plan Example
An example for Item Number 301 - Scarlet Knights demonstrates:
Sales Forecast Units and Master Production Schedule Units over 16 weeks.
Projected OH Inventory Units indicating stock levels.
A Rough-cut Capacity Plan detailing labor hours required (e.g., Final Assembly Labor 0.56 hours/unit, Quality Inspection Labor 0.07 hours/unit, Packaging Labor 0.04 hours/unit).
Total Capacity Hours Required calculated from MPS units and labor hours per unit.
Total Capacity Hours Available based on demonstrated capacity (e.g., 7.2 hours per shift per manufacturing line, 2 shifts per day, 5 days per week, 5 manufacturing lines, totaling 360 hours available per week).
Variance = Total Capacity Hours Available - Total Capacity Hours Required, where a negative number signifies a capacity constraint.
Initially, an MPS might show negative variance in later weeks (e.g., weeks 13-16 ), indicating capacity is insufficient.
A revised MPS (e.g., distributing a large order more evenly) can remove these negative variances and ensure sufficient capacity.
Time Fencing
Purpose: To minimize the impact of even small changes in the MPS, which can cause significant nervousness and instability throughout the organization.
Policy: Many companies have adopted a time fencing policy separating the planning horizon into a Firmed Time Period and a Planned Time Period.
### Firmed Time Period
From the current date out several weeks into the future.
A Firm Time Fence is established at the outer limit of this period, signifying the point when changes can no longer be made automatically by the planning system.
Recommended changes within this period must be reviewed and approved by the Master Production Scheduler or authorized personnel before implementation.
### Planned Time Period
From the end of the Firmed Time Period to the end of the planning horizon.
The planning system is free to create or make changes to planned orders in this period based on the data and planning logic determined by the company.
Basic Production Strategies
### Level Production Strategy
Maintains a constant production rate and allows inventory and backlog to vary according to fluctuating demand.
Characteristics:
Constant production rate regardless of demand.
No increases or decreases in labor (i.e., no hiring or layoffs), materials, necessary resources, or associated production costs.
The company allows finished goods inventory and backlogs to fluctuate up and down to meet demand.
Suitability: Used when the skill level, training required, or the cost of hiring and terminating people is high. Works well for Make-to-Stock (MTS) items.
### Chase Production Strategy
Adjusts the production rate and capacity to match demand.
Characteristics:
Production is set to match demand exactly.
The company increases or decreases labor (i.e., hiring or layoffs), materials, or necessary resources as needed.
Finished goods inventory remains constant, with no backlogs, but production costs fluctuate up and down.
Suitability: Used when the skill level, training required, or the cost of hiring and terminating people is low. Works well for Make-to-Order (MTO) items.
### Hybrid Production Strategy
Sets a baseline production rate based on a stable core workforce and then uses other short-term means, such as overtime, subcontracting, and part-time labor, to manage short-term fluctuations in demand.
Characteristics:
Production is set to match demand as closely as possible.
The company uses a combination of options, such as varying the production rate, building and temporarily holding inventory, working overtime, etc., to achieve the demand plan.
The plan is developed to minimize costs while still meeting demand.
No backlogs, but finished goods inventory and production costs can fluctuate up and down.
Material Requirements Planning (MRP)
Definition: A computer-based materials management tool that calculates the exact quantities, need dates, and planned order releases for all the parts and materials required to manufacture a product.
### Major Advantages
Ensures on-time availability of the right materials required for production.
Facilitates lower inventory levels.
Helps to optimize the use of production resources and lowers costs.
### Major Disadvantages
Ignores capacity; focuses on what is needed and when, regardless of capacity.
Loss of visibility for products with a multi-level Bill of Materials (BOM) and items used in multiple finished products.
Works well for Make-to-Stock products, but not as well for Make-to-Order or Engineer-to-Order products.
### MRP Requires
The finished product production schedule from the Master Production Schedule (MPS).
Bill of Materials (BOM) data, including the parent-component relationships.
Item master data for each of the components and materials needed.
Inventory status of each of the components and materials needed.
Any planned or scheduled receipts for any components and materials needed.
The Bill of Materials (BOM)
Definition: A document that shows an inclusive listing of all raw materials, component parts, and assemblies making up the final product.
### Single Level Bill of Materials
A display of components that are directly used in a parent item, together with the quantity required for each component (i.e., the planning factor).
Shows only the relationships one level down.
Example: A table requires 4 legs, 2 ends, 2 sides, 1 top, and 1 hardware kit.
### Multilevel Bill of Materials
A display of all the components directly or indirectly used in a parent, together with the quantity required for each component (i.e., the planning factor).
If a component is a subassembly, blend, intermediate, etc., all its components and all their components will also be exhibited, down to purchased parts and raw materials.
Example: A bicycle (Level 0) may have a Wheel Assembly (Level 1), which decomposes into Rim, Spokes, Tire (Level 2), and the Tire may require Rubber (Level 3).
### Planning Bill of Materials (For Your Information Only)
An artificial grouping of items (e.g., a product family) in BOM format, used to facilitate master scheduling and material planning. (Will NOT be on the test).
Independent and Dependent Demand
Independent Demand: The external demand for an item unrelated to the demand for other items (e.g., a finished product).
The demand for these items is forecasted and can be affected by trends, seasonal patterns, and market conditions.
Dependent Demand: The internal demand for items that are assembled or combined to make up the final product (e.g., component parts).
Demand for these items is calculated based on the demand for the final product in which the parts are used, by means of the planning factor.
Terms Used in MRP
Gross Requirement: A time-phased requirement before netting out on-hand inventory and lead-time.
Net Requirement: The unsatisfied item requirement for a specific period. Calculated as Gross requirement for the period minus current on-hand inventory.
Projected Available Inventory: Projected closing inventory at the end of a period. Calculated as Beginning inventory minus gross requirements, plus scheduled receipts, plus planned receipts from planned order releases.
Planned Order Release: A specific order for a particular item and quantity to be released to the shop floor or the supplier.
Firmed Planned Order: A planned order that can be frozen in quantity and time so that the MRP computer logic cannot automatically change it when conditions change. Established by the Planner or Supply Chain Manager to prevent system nervousness and aid in responding to material and capacity problems.
Scheduled Receipt: A confirmed order awaiting delivery for a specific period.
Lead Time: The time it takes to process and prepare material, produce the product, and transport it to the customer.
Time Bucket: Unit of time/period used in MRP, e.g., days, weeks, months.
Parent: Item generating demand for lower-level components.
Components: Parts demanded by a parent.
Planning Factor: The number/quantity of each component or material needed to produce a single unit of the parent item.
MRP Explosion: The process of converting a parent item’s planned order releases into component gross requirements.
Pegging: Relates the gross requirements for a component part to the planned order releases of the parent item to identify the source(s) of the item’s gross requirements. Pegging can be thought of as active where-used information.
Lot Size: The order size used for MRP logic.
Safety Stock: A quantity of stock planned to be in inventory to protect against fluctuations in demand or supply. Over-planning supply versus demand can be used to create safety stock.
MRP Explosion Example
The textbook (Pages 86-88 ) provides an example illustrating the Master Production Schedule feeding into the Material Requirements Plan, showcasing the process of "MRP Explosion" where planned orders for parents are broken down into gross requirements for components.
Capacity Planning
Definition: Capacity is the maximum amount of work an organization can complete in a given period.
Purpose: Capacity Planning determines the production capacity needed by an organization to produce the goods or services its customers require.
Importance:
Organizations must balance the production plan with capacity, as this directly impacts how effectively the organization deploys its resources to produce goods.
Capacity planning helps businesses identify their optimal levels of operations.
It also helps determine how services are offered and the appropriate time frames and staff required to meet current demand and cover all operational costs.
Capacity Planning Tools
### Resource Requirement Planning (RRP)
A long-range capacity planning module used to check whether aggregate resources (i.e., labor and manpower) are capable of satisfying the Aggregate Production Plan.
### Rough-Cut Capacity Planning (RCCP)
A medium-range capacity planning module used to check the feasibility of the Master Production Schedule.
It converts MPS from the production needed to the capacity required and then compares it to the capacity available.
### Capacity Requirement Planning (CRP)
A short-range capacity planning module used to check the feasibility of the Material Requirements Plan.
Distribution Requirements Planning (DRP)
Definition: A time-phased finished good inventory replenishment plan in a distribution network.
Process: Determines how and where to deploy the finished goods inventory that is produced.
Integration: DRP is a logical extension of the MRP system and ties physical distribution to the manufacturing planning and control process.
Key elements necessary for DRP:
Forecast demands by Distribution Center (DC).
Current inventory levels by DC.
Target safety stock by DC.
Recommended replenishment quantities.
Replenishment lead times.
Enterprise Requirements Planning Systems (ERP)
Also known as Enterprise Resource Planning Systems.
Definition: An information system connecting an organization's functional areas and operations via a common software infrastructure and database.
Functionality: Provides real-time integrated management of the central business processes necessary to plan and control the organization, including Production, Inventory, Sales, Human Resources, Purchasing, MRP, CRM, and Finance.
### ERP Software Applications and Providers
Major ERP applications: Accounting and Finance, Customer Relationship Management, Human Resource Management, Manufacturing, Supplier Relationship Management, Supply Chain Management.
Three major ERP providers: SAP, Oracle, Microsoft.
Other small software firms provide applications (e.g., Sage’s MAS 90 ) as well as complete ERP solutions but may lack applistructure (the amalgamation of enterprise applications and technological infrastructure).
### Configuration of ERP Systems
ERP provides a conduit for supply chain members to share information so that scarce resources can be fully utilized to meet demand while minimizing supply chain inventories.
### Implementing ERP Systems
Two Types of Implementation:
Best-of-breed: Picking the best application for each function. Disadvantage: software may not integrate well, though this may become less an issue in the future.
Single integrator solution: Picking all desired applications from a single vendor.
Common Implementation Problems:
Lack of top management commitment.
Lack of adequate resources.
Lack of proper training.
Lack of communication.
Incompatible system environment.
### Advantages and Disadvantages of ERP Systems
Advantages:
Added visibility leads to reduced supply chain inventories.
Helps to standardize manufacturing processes.
Measures performance and communicates via a standardized method.
Disadvantages:
Substantial time and capital investment.
Complexity to implement and to run.
Firms may adapt processes just to meet ERP system requirements.
Data Management and Data Analytics
Data Management and Data Analytics are two essential disciplines that work together to help organizations get the most out of their data.
### Data Management
Provides the foundation for data analytics.
Involves collecting, storing, organizing, and securing data, ensuring that data is accurate, complete, and accessible.
### Data Analytics
The process of analyzing, exploring, and transforming data to find patterns and trends that can provide insights and help decision-making.
It can also help organizations and systems act based on automated analytics in real time.
Supply Chain Digital Transformation
Definition: Starts with aligning all processes and data on one platform, automating key processes, and using technologies such as artificial intelligence to collect and analyze massive amounts of data to identify, predict, and prevent problems.
### Traditional Supply Chains
Rely on the linear progress of goods and services from sourcing materials to manufacturing, distribution, and sale.
Delays at one point can create costly delays in another, as each step of the supply chain depends on the step before it.
Often bogged down by a lack of actionable information.
### Digital Supply Chains
Use the data produced by every supply chain step to plan effectively and create dynamic responses when unforeseen delays arise.
Are empowered by a stream of real-time data that enables a more efficiently managed supply chain.