Chapter 3 Notes - Supply Chain Management
Supply Chain Planning: Comprehensive Notes
Definition and scope
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 in a way that realizes the financial and service objectives of the company. It combines planning processes across the supply chain, including aggregate production planning, master production scheduling, materials requirement planning, and distribution requirements planning. (Refer to Figure 3.2 later in the chapter.)
It is hierarchical and can be divided into three broad time horizons:
Long range (typically 1-3 years; can be as long as 10 years): strategic actions like capital expenditures, facility/equipment purchases, and new product introductions (sales and operations planning and/or aggregate production planning). Example: Fictional Motor Company needs to increase capacity to respond to a 5\% annual demand growth for XL-150 pickup trucks over the next 1-3 years.
Intermediate range (typically 3-18 months): planning the quantity and timing of end items (master production scheduling). Examples: planning to make 1{,}000 XL-150 pickups per month for the next 3-18 months.
Short range: detailed planning for components and parts to support the master production schedule (ordering and scheduling using BOM, inventory, purchasing, etc.). Example: Plan and order components for weekly production of XL-150s over the next 24 weeks (e.g., engines, transmissions, seats, windows, etc.).
Hierarchy of planning processes
Supply chain planning is hierarchical and spans:
Long-range: aggregated Business Planning and S&OP (Sales and Operations Planning) processes
Intermediate-range: Master Production Scheduling (MPS)
Short-range: Materials Requirements Planning (MRP) and Distribution Requirements Planning (DRP)
Historical evolution and concepts (computer-based, push systems): Closed Loop MRP, Manufacturing Resource Planning (MRP II), Enterprise Resource Planning (ERP), and Distribution Requirements Planning (DRP).
Key definitions:
Closed Loop MRP: a planning and control system with feedback that synchronizes purchasing/ procurement with the master production schedule; integrates APP, MPS, MRP, and capacity planning tools.
MRP II: evolved from MRP by adding data such as labor, capacity, and financials; centralizes and processes information for scheduling, inventory, cost control; often a module of ERP.
ERP: integrates manufacturing with finance, HR, purchasing, distribution, etc.; provides real-time data sharing across business functions; implemented via software modules.
DRP: Distribution Requirements Planning; allocates finished product inventory to warehouses in a network; can optimize inventory movement within a multi-warehouse network.
Business planning
The business plan provides the company’s direction for the next 2-10 years; it is developed with input from finance, marketing, operations, and engineering.
It states objectives for profitability, growth, and return on investment; updated annually; serves as the starting point for the Aggregate Production Plan.
Sales and Operations Planning (S&OP)
An iterative process to determine the optimal level of manufacturing output and integrate demand and supply plans across functions (sales, marketing, development, production, sourcing, finance).
It is the definitive statement of the company’s mid-term to long-term plans, linking strategy with execution and helping management determine resource needs.
Typically performed at least monthly and reviewed at an aggregate (product family) level; issues are bubbled up to senior management on an exception basis.
Monthly S&OP meetings are essential for decision making, balancing customer service, inventory, production, supply availability, and distribution.
Standard steps in the S&OP process:
Review the current plan
Review demand/forecasts for changes and trends
Identify capacity and material/product shortages and propose solutions
Evaluate product portfolio changes for adding/dacing out products
Ensure the plan meets financial targets
Hold a formal monthly S&OP meeting to review major changes and proposed scenarios, to determine resource adjustments
Production Planning (Aggregate Production Planning, APP)
APP is the process to develop tactical plans by setting the overall level of manufacturing output (production plan) and coordinating with sales forecasts to satisfy demand while considering profitability and productivity targets.
APP translates annual business/marketing plans and forecasts into a production plan for product families over the next 6-18 months.
The plan identifies resources needed for operations (machines, labor, inventory), determines the aggregate production rate, and the workforce size; it also determines inventory levels, overtime, subcontracting, hiring/firing, and backorders.
Product families are used to reduce detail while preserving decision-relevant information; common measures include units, gallons, pounds, standard hours, and dollars.
APP is iterative and continuous; updated every 3 months (rolling the horizon by 3 months) and adjusted for major changes; it does not require continuous real-time updating to avoid instability.
Key role: tie between business plan/forecasts and the detailed execution plan; cross-function collaboration with marketing, manufacturing, sales, engineering, finance, materials, and workforce planning.
It is advisable to test or challenge the APP to assess robustness and contingency needs.
Example concept: a cosmetic company planning production for product families (e.g., tubes of lipstick) rather than each color/style; helps manage complexity.
Aggregate Production Planning (APL) goals
High-level goals include:
Meeting demand
Using capacity efficiently
Achieving target inventory levels
Minimizing costs
The APP considers several resources and constraints:
Labor, inventory, plant and equipment, subcontracting
Decision framework based on capacity vs demand:
If capacity ≈ demand: focus on meeting demand efficiently
If capacity > demand: promote and advertise to increase demand
If capacity < demand: consider subcontracting part of the workload
APP strategies (to balance demand and supply)
DEMAND STRATEGIES:
Influencing demand: use marketing/promotions to align demand with capacity (e.g., discounts, off-season promotions)
Backordering: accept some demand during peak periods and fulfill later; note potential negative customer experience and long-term impact
Counter-seasonal product mix: develop products with opposite seasonal demand to balance capacity (e.g., lawn mowers in summer vs snow blowers in winter)
SUPPLY STRATEGIES:
Change inventory levels: build stock in advance or reduce inventory during peak demand to match capacity
Change capacity: adjust output via overtime/idle time; adjust workforce size (hiring/layoffs); use part-time workers; subcontract work
Master Production Scheduling (MPS)
The MPS represents what the company plans to produce in specific configurations, quantities, and dates; it is the set of planning numbers that drives MRP.
It considers the forecast, the APP production plan, backlog, material availability, capacity, and management policies/goals.
The MPS is a plan that the business can achieve, not necessarily what customers want; it may have finished goods produced ahead of demand and held in inventory.
The MPS is a disaggregation of APP (detailed scheduling for end items) and lists exact end items to be produced by each period; it coordinates with available capacity and materials.
The MPS horizon is shorter than APP but longer than the item lead time; typically 3-12 months; it is reviewed and updated frequently (weekly or daily).
Service industry note: in services, the MPS may be an appointment log or book balancing capacity with demand.
ATP (Available-to-Promise): a business function tied to the MPS that provides quantities and delivery dates in response to customer orders based on resource availability; ATP reflects the unconstrained portion of inventory and planned production in the master schedule.
ATP helps respond to new customer orders or inquiries and determine whether arrivals can be promised; it indicates how much inventory is left for new orders.
Available-to-Promise (ATP) calculations
The three basic methods for calculating ATP quantities are:
1) Discrete ATP: ATPt^{(Discrete)} = ext{MPS}t - iggl( ext{CCO}t + ext{CCO}{t+1} + \dots + ext{CCO}_{t^{ ext{next MPS}}}iggr) where CCO are committed customer orders and the sum runs up to the next scheduled MPS. If no MPS is scheduled for a period, ATP is zero. If the result is negative, deficits are subtracted from the most recent positive ATP and ATP is revised accordingly.
2) Cumulative ATP without look ahead: sum of ATP contributions up to horizon without considering future MPS beyond the current view. (Text describes conceptually; not given as a single formula in the transcript.)
3) Cumulative ATP with look ahead: includes look-ahead information about future MPS releases when computing ATP.
Practical interpretation: discrete ATP is the most operational approach for calculating available inventory to promise in the near term, given current MPS and committed orders; the other two approaches consider broader planning horizons.
Time fencing
Time fencing is used to minimize nervousness and instability caused by changes to the MPS.
It divides the planning horizon into two periods:
Firmed time period: outermost window where changes are not made automatically; only approved changes occur.
Planned time period: after the firmed period, where the planning system can create or modify planned orders based on planning logic without prior approval.
Definitions:
Firmed time period: e.g., the first 6 weeks of the horizon; changes require authorized review.
Planned time period: from the end of the firmed period to the end of the planning horizon; changes can be made automatically by the planning system.
Figure 3.5 (example) illustrates this concept and discusses the tradeoff between stability and responsiveness.
Basic production strategies
Level production strategy: maintain a constant output rate while using inventory and backlog to meet fluctuating demand; ideal when changeovers are costly or difficult; suits make-to-stock environments.
Example: with a fixed capacity producing 50 units per day; if demand falls, keep the workforce stable and use excess inventory; if demand rises, use inventory/backlog to meet the shortfall.
Chase production strategy: adjust capacity to match demand; hire/fire workers to align output with demand; finished goods inventory remains relatively constant.
Example: start with capacity to produce 20 units per period; if demand drops to 10, fire/lay off workers; if demand rises to 30, hire more workers to meet demand.
Mixed or Hybrid production strategy: maintain a stable core workforce and use short-term measures (overtime, subcontracting, part-time help) to manage short-term demand fluctuations.
Example: construction firms and retailers during holiday seasons use overtime and outsourcing to handle peaks while preserving core staff.
Bill of Materials (BOM)
A BOM is a document listing all component parts and assemblies, with quantities, needed to produce or assemble a single unit of a parent item.
BOM is used with the MPS to determine which items require purchase requisitions and production orders.
Types of BOM formats:
Single-level BOM: shows direct components used in a parent item, one level deep.
Multilevel BOM: shows all components directly or indirectly used in a parent item, including subassemblies; indented format.
Planning BOM (Artificial grouping): groups items/events to facilitate master scheduling and material planning; may include historical averages expressed as a percentage of total demand for all options within a feature or for a specific end item within a product family.
Real-world analogy: recipe for baking a cake; ingredients are the BOM; the cake is the parent item; ingredients are independent vs dependent demand items.
Demand types:
Independent demand: external demand for finished products, forecasted (e.g., cakes per week).
Dependent demand: internal demand for components derived from the BOM (e.g., flour for cakes) and calculated, not forecasted directly.
Example (Single-Level BOM): For each table produced, require 4 legs, 2 ends, 2 sides, 1 top, and 1 hardware kit. The finished product (table) is an independent demand item; the legs, ends, sides, etc., are dependent demand items.
Material Requirements Planning (MRP)
MRP uses BOM data, inventory data, and the MPS to calculate material requirements and to recommend replenishment orders.
Time-phased MRP begins with MPS items and determines (1) quantities of all components and materials needed to fabricate those items and (2) the dates those components/materials are required. MRP explodes the BOM, adjusts for on-hand inventory and open orders, and offsets net requirements by lead times.
Input to MRP:
The independent demand information (finished product forecast from the MPS)
Parent–component relationships from the BOM
Inventory status of final product and each component/material
Released, firmed, or planned order releases for final product and components/materials
MRP outputs:
Planned orders: schedules indicating quantities and timing of future orders
Order releases: authorization to execute planned orders
Changes to planned orders: revisions of due dates or quantities; cancellations as needed
Performance-control reports: deviations from plans (delays, stockouts) and cost performance data
Planning reports: inventories, procurement contracts, future material requirements
Exception reports: highlight inconsistencies, such as overdue orders
Advantages: provides detailed planning for all products/materials
Disadvantages: can reduce visibility for complex, deep BOMs, and may ignore shop-floor capacity and conditions
Example: MRP for bicycle with BOM and planning factors; levels shown (Level 0: Bicycle; Level 1: Wheel assembly; Level 2: Spokes, rim, tire; Level 3: subcomponents) and planning factors used to determine material needs over an 8-week horizon. The process demonstrates how MRP computes gross requirements, scheduled receipts, beginning inventories, safety stock, and lot sizes to plan releases.
Key terms used in MRP
GROSS REQUIREMENT: time-phased need before netting inventory and lead times.
NET REQUIREMENT: unsatisfied item requirement after netting on-hand inventory.
PROJECTED ON-HAND INVENTORY: projected closing inventory at period end: beginning inventory + receipts/planned receipts − gross requirements.
PLANNED ORDER RELEASE: a specific order for a specific item and quantity to be released to the shop or supplier.
FIRMED PLANNED ORDER: a planned order that is frozen in quantity and time to prevent automatic changes; used to stabilize execution.
SCHEDULED RECEIPT: committed order awaiting delivery for a specific period.
TIME BUCKET: unit of time used in MRP (days, weeks, months).
PARENT: item generating demand for lower-level components.
COMPONENTS: parts demanded by a parent item.
PLANNING FACTOR: quantity of each component or material needed to produce a single unit of the parent item.
EXPLOSION: converting a parent’s planned orders into component gross requirements.
PEGGING: links gross requirements for a component back to planned order releases of the parent item.
LOT SIZE: order quantity for MRP logic.
SAFETY STOCK: stock kept to protect against demand/supply fluctuations.
MRP inputs and outputs in practice
Inputs required: finished product forecast (from MPS), BOM relationships, current inventory status, released/firmed/planned orders.
Outputs typically include: planned orders, order releases, changes to planned orders, performance reports, planning reports, and exception reports.
MRP process can be manual but is usually computer-based (e.g., Excel or ERP like SAP). Companies run MRP at least monthly; many run it daily; planning horizon can range from a few months to multiple years.
Capacity planning
Capacity is the capability of a system to perform its intended function and is planned to determine the amount of capacity required for future production.
Levels of capacity planning include:
At the aggregate or product-line level (Resource Requirements Planning, RRP)
At the master-scheduling level (Rough-Cut Capacity Planning, RCCP)
At the MRP level (Capacity Requirements Planning, CRP)
Objectives: balance the production plan with available capacity; determine optimal utilization of resources and guide strategic decisions about capacity expansion, product mix, or new product introduction.
Key factors affecting capacity planning include facility layout, location and design, product mix, production technology, human resources, organizational structure, and external supply structure.
Standard steps in capacity planning:
1) Estimate future capacity requirements
2) Evaluate existing capacity and identify gaps
3) Identify alternatives for meeting requirements
4) Conduct financial analyses of each alternative
5) Assess qualitative issues for each alternative
6) Select the best long-term solution
7) Implement the selected alternative
8) Monitor results
Capacity planning tools:
RESOURCE REQUIREMENT PLANNING (RRP): Long-range capacity planning at the business plan level; focuses on resources that take long to acquire; often tied to the production plan; requires top management approval.
ROUGH-CUT CAPACITY PLANNING (RCCP): Converts the MPS into resource requirements (labor, machinery, warehouse space, supplier capabilities, money) and compares with available capacity; helps determine a feasible MPS; uses several approaches (bill of labor, overall factor, resource profile); RCCP is a gross check and ignores scheduled receipts and on-hand inventory.
CAPACITY REQUIREMENT PLANNING (CRP): Detailed capacity planning; translates MRP outputs into hours of work by work centers; identifies potential overloads; used to generate a load report or load profile for each work center; helps decide whether to adjust labor, equipment, overtime, or shifts.
Distribution Requirements Planning (DRP)
DRP determines replenishment needs at branch warehouses; uses a time-phased order point approach where planned orders at the branch are exploded by MRP logic to become gross requirements on the supplying source. In multi-level networks, the explosion can continue through regional warehouses to input to the MPS.
DRP aims to optimize movement of inventory in a multi-warehouse environment so that demand is met efficiently and without excessive inventory.
DRP typically applies to wholesale or manufacturing settings with regional demand supplied by one or more warehouses or plants.
Key elements of DRP:
Forecast demand
Current inventory levels
Target safety stock
Recommended replenishment quantities
Replenishment lead times
DRP methods: push vs pull
Push method: shipments routed through the network based on forecasts; tends to lower costs but may reduce service levels if planning is detached from actual demand.
Pull method: fulfillment driven by actual customer orders; improves service levels but can be challenging to manage inventory due to the bullwhip effect.
Enterprise Resource Planning (ERP) systems
ERP is a framework for organizing, defining, and standardizing business processes to effectively plan and control an organization so it can use internal knowledge to gain external advantage.
ERP automates and integrates core processes: taking orders, scheduling operations, inventory records, and financial data.
Benefits of ERP:
Improves flow and visibility of information across the organization
Standardizes manufacturing processes
Helps measure performance and facilitates decision making through standardized methods
ERP integration and modules:
A central repository for data shared across functions
Modules commonly include: Accounting & Finance, Customer Relationship Management, Human Resource Management, Manufacturing, Supplier Relationship Management, and Supply Chain Management
ERP system characteristics: real-time data sharing, cross-functional visibility, and process standardization
ERP implementations typically fall into two major approaches:
Best-of-breed: pick the best application for each function and integrate them; advantages include best-in-class functionality; disadvantages include integration and ongoing upgrades challenges.
Single integrator solution: a single vendor providing multiple integrated applications; advantages include seamless integration and easier upgrades; disadvantages include higher cost and potential unused functionality.
Common ERP implementation problems:
Lack of top management commitment
Lack of adequate resources
Insufficient training (initial and ongoing)
Poor communication
Incompatible system environments
ERP vendors and market segments:
Large Enterprise ERP: SAP, Oracle, Microsoft
Mid-market ERP: Infor, QAD, Lawson, Epicor, Sage, IFS
Small Business ERP: Exact Globe, Syspro, NetSuite, Visibility, Consona, CDC Software, Activant Solutions
ERP implementation notes:
Success requires comprehensive integration across the business—from the customer-facing front end to planning, production, and distribution.
ERP modules focus on different areas of the business process; selecting modules should align with organizational needs.
References and context
The material is drawn from the Fundamentals of Supply Chain Management (APICS/industry standard), with examples from fictional companies and industry practices.
The content emphasizes the dynamic interplay among planning horizons, demand forecasting, capacity constraints, inventory management, and information systems in achieving a responsive and cost-effective supply chain.
Quick recap of key formulas and terms
Planning horizons: ext{Long-range} = 1-3 ext{ years} \text{(up to 10 years)}, ext{Intermediate-range} = 3-18 ext{ months}, ext{Short-range} = ext{detailed planning for components}
Demand-capacity balance: meet demand within resource limits, minimize total cost
MPS planning horizon: typically 3-12 months; shorter than APP but longer than lead time to manufacture an item
Beginning inventory to projected ending balance (example):
ext{PEI}t = ext{BI}{t-1} + ext{MPS}t - Dt
ATP (Discrete example):
ATPt^{(Discrete)} = ext{MPS}t - iggl( ext{CCO}t + ext{CCO}{t+1} + ext{CCO}_{t^{ ext{next MPS}}}iggr)
If no MPS scheduled for a period, ATP_t = 0; if negative, adjust from the most recent positive ATP
Capacity planning tools: RCCP, CRP, RRP
BOM types: Single-Level BOM, Multilevel BOM, Planning BOM
MRP key definitions: Gross Requirement, Net Requirement, Planned Order Release, Firm Planned Order, Scheduled Receipt, Lot Size, Safety Stock, Explosions, Pegging
Connections to real-world practice
APP, S&OP, MPS, MRP, and DRP collectively manage the flow of information and materials from business strategy through to execution on the shop floor and in distribution.
ERP systems are often deployed to unify data across functions and improve decision making with real-time visibility and standardized processes.
The balance of stability vs. flexibility (e.g., time fencing) is a critical organizational decision to support both customer service and efficient operations.
Ethical, philosophical, and practical implications
The choice of production strategy (level vs chase vs mixed) has implications for employee stability, morale, and workforce planning, as well as environmental and social considerations related to inventory waste, overtime, and subcontracting.
DRP and ERP implementations raise concerns about data integrity, privacy, and the distribution of power within an organization; robust governance and change management are essential.
The drive for efficiency must be balanced with reliability and resilience, particularly in turbulent markets where demand or supply disruptions can occur.
Practical study tips
Familiarize yourself with the hierarchy: APP → S&OP → MPS → MRP/DRP → ERP, and understand how each feeds the next.
Practice with simple numeric examples for MPS/ATP calculations and an example BOM to reinforce how gross and net requirements propagate.
Understand the difference between independent vs dependent demand and how planning factors determine material needs.
Be able to explain the tradeoffs between push vs pull DRP approaches and the implications for service levels and inventory costs.
End of notes
Concise Version of Notes
Supply chain planning determines how to satisfy demand, balancing supply and demand to meet financial and service objectives. It is hierarchical, spanning long-range (1-10 years: capital expenditures, S&OP, APP), intermediate-range (3-18 months: MPS), and short-range (detailed component planning: MRP, DRP).
Hierarchy of Planning Processes
Long-range: Business Planning, Sales and Operations Planning (S&OP)
Intermediate-range: Master Production Scheduling (MPS)
Short-range: Materials Requirements Planning (MRP), Distribution Requirements Planning (DRP)
Key evolutionary concepts include Closed Loop MRP, Manufacturing Resource Planning (MRP II), and Enterprise Resource Planning (ERP).
Business Planning
Provides company direction for 2-10 years, setting objectives for profitability and growth; input for Aggregate Production Plan.
Sales and Operations Planning (S&OP)
An iterative process integrating demand and supply plans across functions to determine optimal manufacturing output. It links strategy with execution, typically performed monthly at an aggregate level.
Production Planning (Aggregate Production Planning, APP)
Develops tactical plans, setting overall manufacturing output for product families over 6-18 months. It translates business plans into a production plan, identifying resources and determining aggregate production rates, workforce size, and inventory levels.
APP Strategies: Balance demand and supply.
Demand Strategies: Influence demand (promotions), backordering, counter-seasonal product mix.
Supply Strategies: Change inventory levels, adjust capacity (overtime, workforce changes, subcontracting).
Basic Production Strategies:
Level production: Constant output, uses inventory/backlog for fluctuating demand.
Chase production: Adjusts capacity to match demand; hires/fires workers.
Mixed/Hybrid: Stable core workforce with short-term adjustments (overtime, subcontracting).
Master Production Scheduling (MPS)
Specifies exact end items, quantities, and dates, driven by forecasts, APP, and capacity. It's a disaggregation of APP. The horizon is typically 3-12 months.
Available-to-Promise (ATP): A function tied to MPS that shows quantities and delivery dates available for new customer orders.
Time Fencing: Divides the planning horizon into a firmed time period (changes require approval) and a planned time period (system makes automatic changes proactively) to minimize instability.
Bill of Materials (BOM)
A document listing components and quantities for a parent item. Used with MPS for purchase requisitions and production orders.
Types: Single-level (direct components), Multilevel (all components, subassemblies), Planning BOM (artificial grouping for scheduling).
Demand Types: Independent (finished products, forecasted) vs. Dependent (components, calculated from BOM).
Material Requirements Planning (MRP)
Uses BOM, inventory, and MPS data to calculate material requirements and recommend replenishment orders. It explodes the BOM, adjusts for inventory, and offsets by lead times.
Inputs: MPS forecast, BOM relationships, inventory status.
Outputs: Planned orders, order releases, changes, performance/exception reports.
Key Terms: Gross/Net Requirements, Projected On-Hand Inventory, Planned Order Release, Scheduled Receipt, Time Bucket, Parent, Components, Planning Factor, Explosion, Pegging, Lot Size, Safety Stock.
Capacity Planning
Determines required capacity to balance the production plan with available resources.
Levels:
Resource Requirements Planning (RRP): Long-range, strategic capacity planning.
Rough-Cut Capacity Planning (RCCP): MPS-level capacity check (labor, machinery), identifies feasible MPS.
Capacity Requirements Planning (CRP): Detailed planning, translates MRP outputs into work hours by work centers, identifies overloads.
Distribution Requirements Planning (DRP)
Determines replenishment needs for branch warehouses using a time-phased order point approach. Optimizes inventory movement in multi-warehouse networks.
Methods: Push (forecast-driven, lower cost, potential service issues) vs. Pull (customer order-driven, better service, prone to bullwhip effect).
Enterprise Resource Planning (ERP) Systems
A framework integrating and automating core business processes (orders, scheduling, inventory, finance) to improve information flow and decision-making.
Benefits: Enhanced information visibility, standardized processes, improved performance measurement.
Modules: Finance, CRM, HR, Manufacturing, SCM, etc.
Implementation Approaches: Best-of-breed (specialized apps, integration challenge) vs. Single Integrator (one vendor, seamless integration, higher cost).
Common Problems: Lack of commitment, inadequate resources, insufficient training, poor communication.