1.

Plan: This refers to all the operations needed to plan

and organize the operations in the other three categories 2. Source: Operations included to acquire the inputs to create goods and services to meet planned or actual demand. 3. Make: transforming goods and services to a finished state to meet demand. 4. Deliver: managing orders, transportation, and distribution to provide the goods and services.

Supply chain management decisions are based on forecasts that define Which products will be required? In what quantities? When?

Role of Forecasting in a Supply Chain

The basis for all strategic and planning decisions in a supply chain Used for both push and pull processes Examples: Production: scheduling, inventory, aggregate planning Marketing: sales force allocation, promotions, new production introduction Finance: plant/equipment investment, budgetary planning Personnel: workforce planning, hiring, layoffs All of these decisions are interrelated

All forecasts deal with four major variables that combine to determine what market conditions will be like. These variables are: 1. Demand : refers to the overall market demand for a group of related products or services in a particular time. Impact of Market growth rate on demand? Demand patterns-- Seasonal demand

2. Supply : Supply is determined by the number of producers of a product and by the lead times that are associated with a product Supply chain forecasts must cover a time period that encompasses the combined lead times of all the components that go into the creation of a final product 3. Product Characteristics: include the features of a product that influence customer demand for the product 4. Competitive Environment: refers to the actions of a company and its competitors

1. Qualitative: methods rely upon a persons intuition or subjective opinions about a market. 2. Causal : methods of forecasting assume that demand is strongly related to particular environmental or market factors 3. Time Series: methods are based on the assumption that historical patterns of demand are a good indicator of future demand 4. Simulation: methods use combinations of causal and time series methods to imitate the behavior of consumers under different circumstances

Characteristics of Forecasts

Forecasts are always wrong. Should include expected value and measure of error. Long-term forecasts are less accurate than short-term forecasts (forecast horizon is important) Aggregate forecasts are more accurate than disaggregate forecasts

Once demand forecasts have been created, the next step is to create a plan for the company to meet the expected demand. Companies must accurately forecast demand so they can produce & deliver the right quantities at the right time at the right cost. Companies must find ways to better match supply and demand to achieve optimal levels of cost, quality, and customer service to enable them to compete with other supply chains.

Planning Sequence
Corporate strategies and policies Economic, competitive, and political conditions Aggregate demand forecasts

Business Plan

Aggregate plan

Master schedule

Hierarchical Planning Process

Items
Product lines or families

Production Planning
Aggregate production plan

Capacity Planning
Resource requirements plan

Resource Level
Plants

Individual products

Master production schedule

Rough-cut capacity plan

Critical work centers

Components

Material requirements plan

Capacity requirements plan

All work centers

Manufacturing operations

Shop floor schedule

Input/ output control

Individual machines

Role of Aggregate Planning in a Supply Chain

Capacity has a cost, lead times are greater than zero Aggregate planning:
process by which a company determines levels of capacity, production, subcontracting, inventory, stockouts, and pricing over a specified time horizon goal is to maximize profit decisions made at a product family (not SKU) level time frame of 3 to 18 months how can a firm best use the facilities it has?

Role of Aggregate Planning in a Supply Chain

Specify operational parameters over the time horizon: production rate workforce overtime machine capacity level subcontracting backlog inventory on hand All supply chain stages should work together on an aggregate plan that will optimize supply chain performance

The Aggregate Planning Problem

Given the demand forecast for each period in the planning horizon, determine the production level, inventory level, and the capacity level for each period that maximizes the firms (supply chains) profit over the planning horizon Specify the planning horizon (typically 3-18 months) Specify the duration of each period Specify key information required to develop an aggregate plan

Demand forecast in each period Production costs labor costs, regular time ($/hr) and overtime ($/hr) subcontracting costs ($/hr or $/unit) cost of changing capacity: hiring or layoff ($/worker) and cost of adding or reducing machine capacity ($/machine) Labor/machine hours required per unit Inventory holding cost ($/unit/period) Stockout or backlog cost ($/unit/period) Constraints: limits on overtime, layoffs, capital available, stockouts and backlogs

Information Needed for an Aggregate Plan

Outputs of Aggregate Plan

Production quantity from regular time, overtime, and subcontracted time: used to determine number of workers and supplier purchase levels Inventory held: used to determine how much warehouse space and working capital is needed Backlog/stockout quantity: used to determine what customer service levels will be Machine capacity increase/decrease: used to determine if new production equipment needs to be purchased A poor aggregate plan can result in lost sales, lost profits, excess inventory, or excess capacity

Aggregate Production Planning Illustration

Given the following information: Additional information available: Sales Forecast 300 500 400 100 200 300 Work Days 22 19 21 21 22 20 Work Hours at 8 Hrs. / Day 176 152 168 168 176 160

6 month production planning period

10 labor-hours per unit required Labour cost = $10/hour regular = $15/hour overtime Total unit cost = $200 / unit = $228/unit subcontract Current wworkforce = 20 employees Hiring cost = $500 / employee Layoff cost = $800 / employee Safety stock = 20% of monthly forecast Beginning inventory = 50 units Inventory carrying cost = $10/unit/month Stockout cost = $50/unit/month Month Jan. Feb. Mar. Apr. May. June

First Step: Calculate Production Requirement

Month Jan. Feb. Mar. Apr. May. June Sales Forecast 300 500 400 100 200 300 Safety Stock 60 100 80 20 40 60 Production Required 300+60-50 = 310 500+100-60 = 540 400+80-100 = 380 100+20-80 = 40 200+40-20 = 220 300+60-40 = 320

Aggregate Production Planning Illustration

Plan # 1 - Exact Production; Vary Work Force
Month Jan. Feb. Mar. Apr. May June Production Required 310 540 380 40 220 320 Hours Required 3100 5400 3800 400 2200 3200 Hrs. Avail. per Worker 176 152 168 168 176 160 Workers Required 18 36 23 3 13 20 Workers Hired 18 Hire/Fire Costs $1600 9000 10400 13 16000 20 5000 3500 Total Cost = $45,500 Workers Fired 2

10 7

Plan # 2 - Exact Production; Vary Production Rate

Month Jan. Feb. Mar. Apr. May June

Production Required 310 540 380 40 220 320

Hours Required 3100 5400 3800 400 2200 3200

Total Hrs. Available 3520 3040 3360 3360 3520 3200

Overtime Hours
2360 440

Undertime Hours 420

OT/ UT Costs $4200 11800 2200 2960 29600 1320 13200 0 Total Cost = $61,000

Aggregate Production Planning Illustration

Plan # 3 - Exact Production; Vary Inventory Level With 20 Employees
Cum. Prod. Required 310 850 1230 1270 1490 1810 Hours Available 3520 3040 3360 3360 3520 3200 Total Production 352 304 336 336 352 320 Cumulative Production 352 656 992 1328 1680 2000 Inventory Level 42 Stockout Level Inv. / SO Costs $420 194 9700 238 11900 580 1900 1900 Total Cost = $26,400

Month Jan. Feb. Mar. Apr. May June

58 190 190

Plan # 4 - Exact Production; Vary Workforce Level; Vary Inventory Level

Month Jan. Feb. Mar. Apr. May June Cum. Prod. Required 310 850 1230 1270 1490 1810 Hours Available 3520(20) 4560(30) 5040(30) 1680(10) 1760(10) 1600(10) Total Production 352 456 504 168 176 160 Cumulative Production 352 808 1312 1480 1656 1816 Inv. / (SO) Level 42 (42) 82 210 166 6 Inv. / SO Costs $420 2100 820 2100 1660 60 $7,160 Hire/Fire Costs 5000 16000

$21,000

Total Cost = $7,160 + $ 21,000 = $28,160

Aggregate Production Planning Illustration Final Cost Analysis:

Units Produced 1810 1810 2000 1816 Plan Costs 45,500 61,000 26,400 28,160 Production Costs 362,000 362,000 400,000 363,200 Total Costs 407,500 446,500 426,400 391,360 Cost per Unit $225.14 $233.70 $213.20 $215.51

Plan 1 2 3 4

Decision: Go with Plan # 3 on the basis of lowest cost per unit.

Balancing Aggregate Demand and Aggregate Production Capacity

Suppose the figure to the right represents forecast demand in units. Now suppose this lower figure represents the aggregate standard capacity of the company to meet demand. What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up.
10000 10000 8000 8000 6000 4000 5500 4500 7000 6000

2000
0 Jan Feb Mar 9000 8000 6000 Apr May Jun

10000 8000

6000
4000 2000 0

4500

4000

4000

Jan

Feb

Mar

Apr

May

Jun

Chase Strategy

Production rate is synchronized with demand by varying machine capacity or hiring and laying off workers as the demand rate varies However, in practice, it is often difficult to vary capacity and workforce on short notice Expensive if cost of varying capacity is high Negative effect on workforce morale Results in low levels of inventory Should be used when inventory holding costs are high and costs of changing capacity are low Works well for make-to-order firms

Level Strategy

Maintain stable machine capacity and workforce levels with a constant output rate Shortages and surpluses result in fluctuations in inventory levels over time Inventories that are built up in anticipation of future demand or backlogs are carried over from high to low demand periods Better for worker morale Large inventories and backlogs may accumulate Should be used when inventory holding and backlog costs are relatively low Works well for make-to-stock manufacturing firms

Time Flexibility Strategy

Can be used if there is excess machine capacity Workforce is kept stable, but the number of hours worked is varied over time to synchronize production and demand Can use overtime or a flexible work schedule Requires flexible workforce, but avoids morale problems of the chase strategy Low levels of inventory, lower utilization Should be used when inventory holding costs are high and capacity is relatively inexpensive

Capacity Options - Advantages and Disadvantages

Option Advantage Disadvantage Some Comments
Applies mainly to production, not service, operations

Changing inventory levels

Changes in human resources are gradual, not abrupt production changes Avoids use of other alternatives

Inventory holding costs; Shortages may result in lost sales

Varying workforce size by hiring or layoffs

Hiring, layoff, and training costs

Used where size of labor pool is large

Advantages/Disadvantages
Option
Varying production rates through overtime or idle time Subcontracting

Advantage
Matches seasonal fluctuations without hiring/training costs Permits flexibility and smoothing of the firm's output

Disadvantage
Overtime premiums, tired workers, may not meet demand Loss of quality control; reduced profits; loss of future business

Some Comments
Allows flexibility within the aggregate plan Applies mainly in production settings

Advantages/Disadvantages
Option
Using part-time workers

Advantage
Less costly and more flexible than full-time workers

Disadvantage
High turnover/training costs; quality suffers; scheduling difficult Uncertainty in demand. Hard to match demand to supply exactly.

Some Comments
Good for unskilled jobs in areas with large temporary labor pools Creates marketing ideas. Overbooking used in some businesses.

Influencing demand

Tries to use excess capacity. Discounts draw new customers.

Advantages/Disadvantages
Option
Back ordering during highdemand periods

Advantage

Disadvantage

Some Comments
Many companies backorder.

May avoid Customer must overtime. Keeps be willing to capacity constant wait, but goodwill is lost.

Counterseasonal Fully utilizes May require products and resources; allows skills or service mixing stable workforce. equipment outside a firm's areas of expertise.

Risky finding products or services with opposite demand patterns.

The Extremes
Level Strategy Production rate is constant Chase Strategy Production equals demand

 Time-phased plan specifying how many and when the firm

plans to build each end item

Aggregate Plan (product groups)

MPS (specific items)

What is Master Production Scheduling?

Start with Aggregate plan Disaggregates Converts into specific schedule for each end item

Furniture Mfg Co Ltd.

Produces 3-types of wooden chairs

Ladder-back chair Kitchen chair Desk chair

Master Production Schedule

April
1 2 3 4 5 6 150 120 200 200 200 120 200

May
7 8

Ladder-back chair
Kitchen chair Desk chair Aggregate production plan for chair family

150

670

670

Master Production Scheduling

Kitchen Chairs MPS

level production plan
1 Forecast 10 Available (End) 5 MPS 10 On hand (start) 5 2 10 5 10 5 3 10 5 10 5 4 10 5 10 5 5 10 5 10 5 6 10 5 10 5 7 10 5 10 5 8 10 5 10 5 9 10 11 12 10 10 10 10 5 5 5 5 10 10 10 10 5 5 5 5

Kitchen Chairs MPS

Forecast Available (End) 25 30 35 40 45 50 45 40 35 30 25 25 10 10 10 10 10 10 10 10 10 10 10 10 MPS On hand (start) 20 25 30 35 40 45 50 45 40 35 30 25
1 2 3 5 5 5 4 5 5 5 6 7 8 9 10 11 12 5 15 15 15 15 15 15

Different sales forecast Same total: 120 units, starts lower, goes higher Level production plan

Kitchen Chairs MPS

1 2 3 4 5 6 7 8 9 10 11 12

5 5 5 5 5 5 15 15 Forecast Available (End) 0 0 0 0 0 0 0 0 5 5 5 5 5 5 15 15 MPS On hand (start) 0 0 0 0 0 0 0 0

15 0 15 0

15 0 15 0

15 0 15 0

15 0 15 0

Same demand as Fig 2 Production adjusts to meet demand Chase production strategy

Kitchen Chairs MPS

1 2 3 4 5 6 7 8 9 10 11 12

5 5 5 5 5 5 15 Forecast Available (End) 15 10 5 30 25 20 5 0 0 0 30 0 0 0 MPS On hand (start) 20 15 10 5 30 25 20

15 15 15 15 5 20 5 20 5 15 30 0 30 0 0 5 20 5 20 5

Lot size of 30 units Produce if projected balance falls below 5 units Extra on-hand inventory is cycle stock 5 unit trigger is safety stock

Materials Requirement Planning

MRP- A computer-based materials management system. The materials
requirement plan calculates the exact quantities, need dates, & planned order releases for components & raw materials required to manufacture the final products listed on MPS. MRP requires:

The independent demand information. Parent-component relationships from the bill of materials. Inventory status of the final product & all of the components. Planned order releases (output of the MRP system)
47

What operations Manager should know in the MRP model? Effective use of MRP requires that the operations manager know : Master Production Schedule (what is to be made and when) Specifications or bill-of-material (how to make the product) Inventory availability (what is in stock) Purchase orders outstanding (what is on order), and Lead times (how long it takes to make or get various components)

1. 2. 3. 4. 5.

Bill of Materials
List of components & quantities needed to make product
Provides product structure (tree)
Parents: Items above given level Children: Items below given level

Bill of Materials
Back slats Seat cushion

Leg supports

Seat-frame boards

Back legs

Front legs

A Ladder-back chair

Bill of Materials
A Ladder-back chair B (1) Ladder-back subassembly C (1) Seat subassembly

Back slats

D (2) Front legs

Seat cushion

E (4) Leg supports

Leg supports
F (2) Back legs G (4) Back slats H (1) Seat frame I (1) Seat cushion

Seat-frame boards

Back legs

Front legs
J (4) Seat-frame boards

A Ladder-back chair

Dependent vs. Independent Demand

Demand for chairs

A finished product

Demand for front legs (Independent)

A component or subassembly Depends on the demand for chairs (parent)

Materials With Independent Demand Demand Source Material Type Method of Estimating Demand Planning Method Company Customers Finished Goods Forecast & Booked Customer Orders EOQ & POQ

Materials With Dependent Demand Parent Items WIP & Raw Materials Calculated

MRP

Requirements for Effective Use of Dependent Demand Inventory Models-MRP

master

production schedule or bills-of-material availability orders outstanding

specifications inventory purchase lead

times

Lead-Time Elements

Queue time waiting before operation begins Setup time getting ready for operation Run

time performing operation

time waiting after operation ends time physically moving between operations

Wait

Move

Cooperstown Cars, Inc.

Produces toy cars

Bill of Materials for Toy Car

Body Wheel Assembly (2) Axles (2) Wheels (4)

Axle (1) Wheel Assembly(2)

Toy Car

Body

Wheels (2)

Cooperstown Cars, Inc.

- Each component has a known lead time
Bill of Materials for Toy Car Toy Car LT = 1

Wheel Assembly(2) LT = 1

Body LT = 2

Axle (1) LT = 2

Wheels (2) LT = 1

Cooperstown Cars, Inc.

Demand for Toy Car in June 8 is 100

Schedule production for:

Toy car assembly Wheel assembly Body Axle Wheels

Gross Requirements Plan 1 Toy Car Required Date Order release data Wheel assembly Required Date Order release data Body Required Date Order release data Axle Required Date Order release data Wheels Required Date Order release data 2 3 DAY 4 5 6 7 8

Gross Requirements Plan 1 Toy Car Required Date Order release data Wheel assembly Required Date Order release data Body Required Date Order release data Axle Required Date Order release data Wheels Required Date Order release data 2 3 DAY 4 5 6 7 8 100

Gross Requirements Plan 1 Toy Car Required Date Order release data Wheel assembly Required Date Order release data Body Required Date Order release data Axle Required Date Order release data Wheels Required Date Order release data 2 3 DAY 4 5 6 7 100 8 100

Gross Requirements Plan 1 Toy Car Required Date Order release data Wheel assembly Required Date Order release data Body Required Date Order release data Axle Required Date Order release data Wheels Required Date Order release data 2 3 DAY 4 5 6 7 100 200 8 100

Gross Requirements Plan 1 Toy Car Required Date Order release data Wheel assembly Required Date Order release data Body Required Date Order release data Axle Required Date Order release data Wheels Required Date Order release data 2 3 DAY 4 5 6 7 100 200 200 8 100

Gross Requirements Plan 1 Toy Car Required Date Order release data Wheel assembly Required Date Order release data Body Required Date Order release data Axle Required Date Order release data Wheels Required Date Order release data 2 3 DAY 4 5 6 7 100 200 200 100 8 100

Gross Requirements Plan 1 Toy Car Required Date Order release data Wheel assembly Required Date Order release data Body Required Date Order release data Axle Required Date Order release data Wheels Required Date Order release data 2 3 DAY 4 5 6 7 100 200 200 100 100 8 100

Gross Requirements Plan 1 Toy Car Required Date Order release data Wheel assembly Required Date Order release data Body Required Date Order release data Axle Required Date Order release data Wheels Required Date Order release data 2 3 DAY 4 5 6 7 100 200 200 100 100 200 200 8 100

Gross Requirements Plan 1 Toy Car Required Date Order release data Wheel assembly Required Date Order release data Body Required Date Order release data Axle Required Date Order release data Wheels Required Date Order release data 2 3 DAY 4 5 6 7 100 200 200 100 100 200 200 400 400 8 100

Net Requirements Plan 1 Toy Car Gross requirements Scheduled receipts Projected on-hand | 20 Planned order receipts Planned order releases 2 3 DAY 4 5 6 7

20

20

20

20

20

20

20

Net Requirements Plan 1 Toy Car Gross requirements Scheduled receipts Projected on-hand | 20 Planned order receipts Planned order releases 2 3 DAY 4 5 6 7

20

20

20

20

20

20

20

Net Requirements Plan 1 Toy Car Gross requirements Scheduled receipts Projected on-hand | 20 Planned order receipts Planned order releases 2 3 DAY 4 5 6 7

20

20

20

20

20

20

20 80

Net Requirements Plan 1 Toy Car Gross requirements Scheduled receipts Projected on-hand | 20 Planned order receipts Planned order releases Wheel assembly Gross requirements Scheduled receipts Projected on-hand |10 Planned order receipts Planned order releases 2 3 DAY 4 5 6 7

20

20

20

20

20

20

20 80 160

Net Requirements Plan 1 Toy Car Gross requirements Scheduled receipts Projected on-hand | 20 Planned order receipts Planned order releases Wheel assembly Gross requirements Scheduled receipts Projected on-hand |10 Planned order receipts Planned order releases 2 3 DAY 4 5 6 7

20

20

20

20

20

20

20 80 160

10

10

10

10

10

10

10

Net Requirements Plan 1 Toy Car Gross requirements Scheduled receipts Projected on-hand | 20 Planned order receipts Planned order releases Wheel assembly Gross requirements Scheduled receipts Projected on-hand |10 Planned order receipts Planned order releases 2 3 DAY 4 5 6 7

20

20

20

20

20

20

20 80 160

10

10

10

10

10

10 150

10 150

Net Requirements Plan 1 Toy Car Gross requirements Scheduled receipts Projected on-hand | 20 Planned order receipts Planned order releases Gross requirements Scheduled receipts Projected on-hand |40 Planned order receipts Planned order releases 2 3 DAY 4 5 6 7

20

20

20

20

20

20

20 80 80

Body

40

40

40

40

40

40

40

Net Requirements Plan 1 Toy Car Gross requirements Scheduled receipts Projected on-hand | 20 Planned order receipts Planned order releases Gross requirements Scheduled receipts Projected on-hand |40 Planned order receipts Planned order releases 2 3 DAY 4 5 6 7

20

20

20

20

20

20

20 80 80

Body

40

40

40

40

40 40

40

40 40

Net Requirements Plan 1 Wheel assembly Gross requirements Scheduled receipts Projected on-hand |10 Planned order receipts Planned order releases Axles Gross requirements Scheduled receipts Projected on-hand | 15 Planned order receipts Planned order releases 2 3 DAY 4 5 6 7 160 10 150

10

10

10

10

10

10 150 150

Net Requirements Plan 1 Wheel assembly Gross requirements Scheduled receipts Projected on-hand |10 Planned order receipts Planned order releases Axles Gross requirements Scheduled receipts Projected on-hand | 15 Planned order receipts Planned order releases 2 3 DAY 4 5 6 7 160 10 150

10

10

10

10

10

10 150 150

15

15

15

15

15

15 135

Net Requirements Plan 1 Wheel assembly Gross requirements Scheduled receipts Projected on-hand |10 Planned order receipts Planned order releases Axles Gross requirements Scheduled receipts Projected on-hand | 15 Planned order receipts Planned order releases 2 3 DAY 4 5 6 7 160 10 150

10

10

10

10

10

10 150 150

15

15

15

15 135

15

15 135

Net Requirements Plan 1 Wheel assembly Gross requirements Scheduled receipts Projected on-hand |10 Planned order receipts Planned order releases Wheels Gross requirements Scheduled receipts Projected on-hand | 30 Planned order receipts Planned order releases 2 3 DAY 4 5 6 7 160 10 150

10

10

10

10

10

10 150 300

Net Requirements Plan 1 Wheel assembly Gross requirements Scheduled receipts Projected on-hand |10 Planned order receipts Planned order releases Wheels Gross requirements Scheduled receipts Projected on-hand | 30 Planned order receipts Planned order releases 2 3 DAY 4 5 6 7 160 10 150

10

10

10

10

10

10 150 300

30

30

30

30

30

30 270

Net Requirements Plan 1 Wheel assembly Gross requirements Scheduled receipts Projected on-hand |10 Planned order receipts Planned order releases Wheels Gross requirements Scheduled receipts Projected on-hand | 30 Planned order receipts Planned order releases 2 DAY+A9 3 4 5 6 7 160 10 150

10

10

10

10

10

10 150 300

30

30

30

30

30 270

30 270

MRP Matrix

Materials Requirement Planning- Cont.

Terms used in Materials Requirement Planning

1. 2. 3. 4. 5. 6.

7.

Parent: Item generating the demand for lower-level components. Components: parts demanded by a parent. Gross requirement: A time-phased requirement prior to netting out on-hand inventory & the lead-time consideration. Net requirement: The unsatisfied item requirement for a specific time period. Gross requirement for that period minus the current on-hand inventory. Scheduled receipt: A committed order awaiting delivery for a specific period. Projected on-hand inventory: Projected closing inventory at the end of the period. Beginning inventory minus the gross requirement, plus the scheduled receipt & planned receipt & planned receipt from planned order releases. Planned order release: Specific order to be released to the shop or to the supplier.

Materials Requirement Planning- Cont.

Terms used in Materials Requirement Planning- Cont. 8. Time bucket: Time period used on the MRP. Days or weeks. 9. Explosion: The process of converting a parent items planned order releases into component gross requirements. 10. Planning factor: Number of components needed to produce a unit of the parent item.
11. 12. 13.

14.

Pegging: Relates gross requirements for a part to the planned order releases the reverse of the explosion process. Low-level coding: assigns the lowest level on the bill of materials to all common components to avoid duplicate MRP computations. Lot size: The order size for MRP logic Safety Stock: Protects against uncertainties in demand supply, quality, & lead time.

84

ELEMENTS OF MRP Orders / Forecast of Service Parts

Inventory Transactions Data

Inventory Status File

Changes to Planned Orders Planned Order Schedule

Master Production Schedule

MRP System

Primary Outputs

Secondary

Bills of Material File

Outputs

Planning Reports Performance Reports Exception Reports

Inputs

MRP Computer Program

Outputs

BENEFITS AND COSTS OF MRP

Potential Benefits: Lower inventories. The ability to plan ahead and the flexibility to reschedule rather than maintain large safety stocks allows significant reduction in inventory levels. Improved customer service. Late orders and stock-outs is reduced. Reduced overtime and idle time the result of smoother and better planned production. Improved response to market demands. Ability to modify the master schedule and respond to unanticipated changes in demand. Reduced subcontracting and purchasing cost. The largest cost of any MRP system is the cost of installing the MRP system (computer system)

Capacity Requirement Planning

Capacity requirements planning is a computerized tool that is used to determine the available and required capacity to help alleviate bottlenecks and to help identify potential problems before they occur

Capacity Requirements Planning (CRP)

Creates a load profile Identifies under-loads and over-loads Inputs

Planned order releases Routing file Open orders file

Defining Capacity

Capacity is the amount of work that can be done in a period of time Capacity = Available time x Utilization x Efficiency

Actual Hours Charged Utilization = Scheduled Available Hours

CRP
MRP planned order releases

Routing file

Capacity requirements planning

Open orders file

Load profile for each machine center

What is a load?

Load refers to the standard hours of work assigned to a facility.

What Is Load Percent?

Load percent is the ratio of load to capacity. Load

Load percent = x 100

Capacity

Russell and Taylor

Load % Example

A local road construction company needs to develop engineering specifications prior to doing any pre-surfacing preparation. The company has been awarded the bid on four projects. They have one engineer. It takes 4 hours per mile to develop the engineering specifications. The first project is 30 miles long and must be started by March 15th to complete on schedule. The second project is 20 miles long and must be started by April 1st. The third project is 5 miles long and must be started by May 1st. The fourth project is 15 miles long and must be started by May 23rd. It is now February 15th. The engineer works a 40 hours week and is very experienced so he operates at 100% efficiency. Assume one project can not be started until the previous project is completed. Does the engineer have enough time to accomplish the specifications on time?

Engineering Calculations (Capacity)

Numbers of hours = 40 Shifts = 1 Efficiency = 100% Utilization = 80% Capacity = 40 x 1 x 0.8 x 1.00 = 32 hours Project 1 capacity = 4 (weeks) x 32 = 128 Project 2 capacity = 2 (weeks) x 32 = 64 Project 3 capacity = 4 (weeks) x 32 = 128 Project 4 capacity = 3 (weeks) x 32 = 96

Engineering Calculations (Load)

Project 1 = 30 x 4 hours per mile = 120 hours
(start by February 15th must be completed by March 15th)

Project 2 = 20 x 4 hours per mile = 80 hours

(start March 16th must be completed by April 1st)

Project 3 = 5 x 4 hours per mile = 20 hours

(start April 2nd must be completed by May 1st)

Project 4 = 15 x 4 hours per mile = 60 hours

(start by May 2nd must be completed by May 23rd)

Engineering Calculations (Load %)

Project 1 = 120/128 = 94% Can be completed Project 2 = 80/64 = 125% Can not be completed Project 3 = 20/128 = 16% Can be completed Project 4 = 60/96 = 63% Can be completed

Road Construction Bidding

In analyzing the engineering calculations, the company must decide if it cost effective to accept the bid on project 2. Based on the current capacity, the engineer is not able to complete the engineering specifications as needed. If the company accepts the bid, one of the following adjustments will need to be made: Add extra shift (weekend or evening) Schedule overtime Add personnel temporarily

Load Sources

Open Orders MRP - Planned Order Releases Other Sources

Rework Quality problems

Routing Data

Operation identification code Operation description Planned work center Standard setup time Standard run time per unit Tooling requirements

Initial Load Profile

120 110 100 90 80 70 60 50 40 30 20 10 0

Hours of capacity

Normal capacity

Time (Weeks)

Adjusted Load Profile

120 110 100 90 80 70 60 50 40 30 20 10 0

Hours of capacity

Pull ahead Overtime

Work an extra shift

Push back Push back

Normal capacity

Time (Weeks)

Reducing Over-load Conditions

1.

2.
3. 4. 5. 6. 7.

8.

Eliminating unnecessary requirements Rerouting jobs to alternative machines, workers, or work centers Splitting lots between two or more machines Increasing normal capacity Subcontracting Increasing efficiency of the operation Pushing work back to later time periods Revising master schedule

Test Exercise of Load %

A local hospital prides themselves in top quality patient care. They have 5 registered nurses on each of the 3 shifts and each nurse cares for 5 patients. Each patient requires 1.5 hours of RNs time. For week one they have projected the patient load to be 200 patients, week two the patient load will be 225 patients, week three the patient load will be 180 patients and week four the patient load will be 195 patients. The staff consists of about 30% student graduate RNs; therefore the efficiency is 70%. Each nurse works 36 hours per week. Unitization factor to be considered is 80 %. Does the hospital have sufficient staff to provide care for the patients?

Calculations

Registered Nurse Calculations (Capacity) Number of hours = 36 Shifts = 5 x 3 = 15 Utilization = 4/5 = 80% Efficiency = 70% Capacity = 36 x 15 x 0.80 x 0.70 = 302.40 hours

Week 1 = 200 x 1.5 = 300 Week 2 = 225 x 1.5 = 337.5 Week 3 = 180 x 1.5 = 270 Week 4 = 195 x 1.5 = 292.5 Week 1 = 300 / 302.4 = 99% = Can be accomplished Week 2 = 337.5 / 302.4 = 111.6% = Can not be accomplished Week 3 = 270 / 302.4 = 89% = Can be accomplished Week 4 = 292.5 / 302.4 = 97% = Can be accomplished

Inventory Management

Inventory Definition

A stock of items held to meet future demand

Types of Inventory
Inputs
Raw Materials Purchased parts Maintenance and Repair Materials

Process

Outputs
Finished Goods Scrap and Waste

(in warehouses, or in transit)

In Process
Partially Completed Products and (often on the Subassemblies factory floor)

Types of Inventory

Work in process
Vendors

Raw Materials Work in process

Work in process

Finished Customer goods

Water Tank Analogy for Inventory

Inventory Level Supply Rate

Inventory Level

Buffers Demand Rate from Supply Rate

Demand Rate

Independent and Dependent Demand Inventory

Independent demand

items demanded by external customers (Kitchen Tables)

Dependent demand
items used to produce final products (table top, legs, hardware, paint, etc.) Demand determined once we know the type and number of final products

Independent and Dependent Demand Inventory Management

Independent demand
Uncertain / forecasted Continuous Review / Periodic Review

Dependent demand
Requirements / planned Materials Requirements Planning / Just in Time

Reasons To Hold Inventory

Meet variations in customer demand:

Meet unexpected demand Smooth seasonal or cyclical demand Temporary price discounts Hedge against price increases Take advantage of quantity discounts

Pricing related:

Transit Time

Reasons To NOT Hold Inventory

Carrying cost

Financially calculable Especially for in-process inventory

Takes up valuable factory space

Inventory Cost Structures

Ordering cost The costs of placing and receiving an order.

Examples: Clerical costs, documents etc

Carrying (or holding) cost:

Cost of capital Cost of storage Cost of obsolescence, deterioration, and loss

Stock out cost Cost Of acquisition: , shipping costs , labor cost, taxes, duties paid etc

Inventory Management Systems

Functions of Inventory Management

Track inventory How much to order When to order

Prioritization Inventory Management Approach

EOQ Continuous / Periodic

ABC Prioritization

Classification of items as A, B, or C often based on $ volume.

Purpose: set priorities for management attention.

Annual Usage of Items by Dollar Value

Percentage of Annual Usage in Total Dollar Units Unit Cost Dollar Usage Usage 5,000 $ 1.50 $ 7,500 2.9% 1,500 8.00 12,000 4.7% 10,000 10.50 105,000 41.2% 6,000 2.00 12,000 4.7% 7,500 0.50 3,750 1.5% 6,000 13.60 81,600 32.0% 5,000 0.75 3,750 1.5% 4,500 1.25 5,625 2.2% 7,000 2.50 17,500 6.9% 3,000 2.00 6,000 2.4% $ 254,725 100.0%

Item 1 2 3 4 5 6 7 8 9 10 Total

ABC Chart For Previous Slide

45.0% 40.0% 35.0% 120.0% 100.0%

Percent Usage

30.0% 25.0%

80.0% 60.0%

20.0% 15.0% 10.0% 20.0% 5.0% 0.0% 3 6 9 2 4 1 10 8 5 7 0.0% 40.0%

Item No. Percentage of Total Dollar Usage Cumulative Percentage

Cumulative % Usage

ABC Prioritization

A items: 20% of SKUs, 80% of dollars B items: 30 % of SKUs, 15% of dollars C items: 50 % of SKUs, 5% of dollars Three classes is arbitrary; could be any number. Percents are approximate. Danger: dollar use may not reflect importance of any given SKU!

Economic Order Quantity

Given the cost structure of a company, there is an order quantity that is the most cost effective amount to purchase at a time. This is called the economic order quantity (EOQ)

EOQ Lot Size Choice

There is a trade-off between lot size and inventory level.

Frequent orders (small lot size): higher ordering cost and lower holding cost. Fewer orders (large lot size): lower ordering cost and higher holding cost.

EOQ

EOQ = (square root of 2UO / hC) where: U = annual usage rate O = ordering cost C = cost per unit h = holding cost per year as a percentage of unit cost

Economic Order Quantity (EOQ) Model

Annual Demand rate U is constant, recurring, and known Amount in inventory is known at all times Ordering cost O per order is fixed Lead time L is constant and known. Unit cost C is constant (no quantity discounts) Annual carrying cost / Holding Cost H is known No stockouts allowed. Material is ordered or produced in a lot or batch and the lot is received all at once

Answer to Inventory Management Questions for EOQ Model

For instance, lets say that Item Z has an annual usage rate (U) of 240,000 / year a fixed cost per order (O) of $5.00, a unit cost (C) of $7.00, and an annual holding cost (h) of 30 percent per unit. If we do the math, it works out as:

EOQ = 1069.044 and rounded to the nearest whole unit, it is 1070

Re-order Point Example

Demand = 240,000 units/year Lead time = L = 10 days

When inventory falls to R, we order so as not to run out before the new order comes in. R=?

Re-order Point Example

Demand = 240,000 units/year Daily demand = 240,000 / 365 = 657.553 units/day Lead time = L = 10 days

R = D*L = (657.553)(10) = 6575.34 units or 6576 Units (usually can neglect issues of working days vs weekends, etc.)
Dont forget to convert to consistent time units!

EOQ Question
Why Re-order Point quantity is larger than EOQ lot size?