Instructions: Week 6: Final journal Referenced Outline Create an introduction and detailed outline of your research topic journal (the journal is due in week 7). List at least four references, using library articles. This outline

Chapter 5. Supply Planning: Meeting Customer Demand

After we’ve made our best estimate of a demand forecast for goods or services and netted it against our current and targeted inventory position to determine our future inventory requirements, it becomes necessary to make sure that we have enough capacity to meet the anticipated demand.

When we think of planning the capacity for a goods or service business, we typically think in terms of three time horizons:

Long range (1-3+ years) – Where we need to add facilities and equipment that have a long lead time.

Medium range (roughly 2 to 12 months), we can add equipment, personnel, and shifts; we can subcontract production and/or we can build or use inventory. This is known as “aggregate planning”.

Short range (up to 2-3 months) –Mainly focused upon scheduling production and people, as well as allocating machinery, generally referred to as production planning. It is hard to adjust capacity in the short run since we are usually constrained by existing capacity.

The supply chain and logistics function must actively support all of the above by supplying material and components for production and product to the customer and in fact has many of its own capacity constraints in terms of its distribution and transportation services.

In many service organizations, the actual work of capacity and supply planning for the production of inventory may be partially or totally in another organization as is the case of retailers or wholesalers. But even in those instances, retail and wholesale supply chain organizations are intertwined with the vendor’s manufacturing process, so they should participate, support and integrate vendor production plans into their own processes when possible. Additionally, service organizations have capacity constraints in terms of various resources that are impacted by inventory levels (ex: labor, warehouse capacity, back room retail storage, shelf space, etc). So it is well worth understanding the aggregate planning process no matter where you are in the supply chain.

The Process Decision

Stepping back for the moment, it should be understood that all organizations, both goods and services, have to make what is known as the process decision. That is, how the goods or services are to be delivered.

In most established organizations, there is already an existing process that is usually based upon the industry and managements competitive strategy.

Goods and Service Processes

Process choices in goods and service industries can be defined and delineated by what has become to be known as the “product-process matrix” ( Hayes and Wheelwright; 1979 ; Chart 5.1). In this model, an organization’s process choices are based upon both the volume produced and variety of products. At the upper left of the chart, companies are considered process oriented or focused and those in the lower right are considered product focused. The ultimate decision of where a firm locates on the matrix is determined by whether the production system is organized by grouping resources around the process or the product

Figure 5.1. Product-Process Matrix

Project Process

Some industries, such as construction or pharmaceutical are for the most part project oriented where they typically make “one off” types of products. They are usually customer specific and too large to be moved; thus people, equipment and supplies are moved to where they are being constructed or worked on.

Job Shop Process

Job shops typically make low volume, customer specific products. Machine shops, tool and die manufacturers and opticians (i.e. prescription glasses) are primary examples of a job shop. As such, they require a relatively high level of skill and experience as they must create products based upon the customer's design and specifications.

Each unique job travels from one functional area to another, usually with its own piece of equipment, according to its own unique routing, requiring different operations, different inputs, and requiring varying amounts of time.

Job shops can be extremely difficult to schedule efficiently.

Batch Process

Companies that run a batch process deliver similar items and services on a repeat basis, usually in larger volumes than a job shop. Batch processes have average to moderate volumes, but variety is still too high to justify dedicating many resources to an individual product or service. The flow tends to have no standard sequence of operations throughout the facility. They do tend to have more substantial paths than at a job shop and some segments of the process may have a linear flow

Examples of batching processes would be scheduling air travel, manufacturing apparel or furniture, producing components that supply an assembly line, processing mortgage loans, and manufacturing heavy equipment

Assembly Line or Repetitive Process

When product demand is high enough, an assembly line or repetitive process, also referred to as mass production, may be used. Assembly line processes tend to be heavily automated, utilizing special-purpose equipment with workers usually performing the same operations for a production run in a standard flow. In many cases, there is a conveyor type system that links the various pieces of equipment used.

Examples of this are automotive manufacturing (the classic example) and assembly lines. In service industries, examples are car washes, registration in universities and fast food operations.

Continuous Flow Process

A continuous flow process, as the name implies, flows continuously rather than being divided into individual steps. Material is passed through successive operations (i.e. refining or processing) and eventually come out the end as one or more products. This process is used to produce standardized outputs in large volumes. It usually entails a limited and standardized product range and is often used to manufacture commodities. Very expensive and complex equipment is used, so these facilities tend to produce in large quantities to gain “economies of scale” to spread the considerable fixed costs over as much volume as possible so the cost per individual pound or unit is as low as possible. Labor requirements are on the low side and typically involve mainly monitoring and maintaining of equipment.

Examples of this include chemical, petroleum and beverage industries. This type of process is less common in service industries but a good emerging example in supply chain are cross dock distribution facilities, which move finished good product through a distribution facility in as little as 24-48 hours.

Mass Customization

Mass customization is a process that produces in high volume and delivers customer specific product in small batches and can provide a business with a competitive advantage and maximum value to the customer. It is a relatively “new frontier” for most goods and service businesses, and as a result, there aren’t that many examples of it.

In manufacturing, Dell computer is a primary example used by many as they allow customers to more or less assemble their own personal computers (pc) online. Dell then assembles, tests and ships the pc’s direct to the customer in as little as 24-48 hours. Some clothing companies will manufacture blue jeans to fit an individual customer.

In service industries such as financial planning and fitness, the service is customized specifically to meet the individual needs and therefore is an example of mass customization.

Planning and Scheduling Process Overview ( Figure 5.2 )

Figure 5.2. Typical Planning and Scheduling Process

An aggregate plan, also known as a sales & operations plan (S&OP) is a statement of a company’s production rates, workforce and inventory levels based upon estimates of customer requirements and capacity limitations.

Many service organizations perform aggregate planning in the same way as goods organizations, except that there is more of a focus on labor costs and staffing as it is critical to the service industry (and “pure” service companies don’t have inventory to manage, other than supplies).

A variety of methods can be used for aggregate planning from simple spreadsheets to packaged software using algorithms such as the transportation method of linear programming which is an optimization tool to minimize costs.

Graphical tools can also be used to supplement this process to allow the planner to compare different approaches to meeting demand (see “supply options” later in this chapter).

As the name implies, the plan is usually stated in terms of an aggregate such as product family or class of products and displayed in monthly or quarterly time periods. It will determine resource capacity to meet demand in the short to medium term (3-12 months) and is usually accomplished by adjusting capacity (i.e. supply) or managing demand.

Once the aggregate plan is formalized, it is then disaggregated to create a master production schedule (MPS) for independent demand inventory (i.e. finished goods) which is also referred to by many as a production plan. The MPS is stated in SKU production requirements, usually in daily, weekly or sometimes monthly time periods.

The MPS is then “exploded” using a bill of materials (BOM) which is basically a “recipe of ingredients” (i.e. dependent demand) that goes into the final product (i.e. independent demand). This activity is known as “ Material Requirements Planning ” (MRP).

Once MRP has been run and material availability confirmed, a short term or detailed work schedule is created. This schedule is “where the rubber meets the road” as this is a schedule of the actual work to be done resulting in either meeting or not meeting customer requirements. The work schedule is usually in days or even hours and goes out up to a week or so. It has the specifics as to what will product or service will be delivered, when and who will deliver it.

Aggregate Planning

Aggregate planning also referred to as sales and operations planning (S&OP) is operational activity that generates an aggregate plan (i.e. for product or service families or classes) for the production process for a period of 2 to 18 months. The idea is to ensure that supply meets demand over that period and to give an idea to management as to material and other resource requirements are required and when, while keeping the total cost of operations of the organization to a minimum.

S&OP Process

“Best practice” companies have a structured S&OP process to ensure success for aggregate/S&OP planning. The executive S&OP process itself ( Figure 5.3 ) actually “sits on top of” the number crunching and analysis being done at a lower level of the organization and involves a series of meetings prior to a final S&OP executive level meeting which are used to create, validate and adjust detail demand and supply plans. The meetings are:

Figure 5.3. S&OP Process

Demand planning cross-functional meeting (step 2) – Generated forecasts are reviewed with a team that may include representatives from supply chain, operations, sales, marketing and finance. As mentioned in  Chapter 3 , forecasts have been generated statistically and aggregated in a format that everyone can understand and confirm (ex: sales might want to see forecasts and history by customer in sales dollars).

Supply planning cross-functional meeting (step 3) – After confirmed forecasts have been “netted” against current on-hand inventory levels to create production/purchasing plans. Again, this data will usually be reviewed in the “aggregate” by product family in units for example.

Pre-S&OP meeting (step 4) – Data from the first demand and supply meetings are reviewed by department heads to ensure that consensus has been reached.

The discussions from this series of monthly management meetings highlights issues and looks at possible resolutions before the outcome of the discussions is presented to the senior management team as a series of issues to be resolved. These issues form the basis of the executive S&OP meeting.

The actual aggregate plan requires inputs that include:

 Resources and facilities available to the organization.

 Demand forecast with appropriate time horizon and planning buckets.

 Cost of various alternatives and resources. This includes inventory holding cost, ordering cost, cost of production through various production alternatives like subcontracting, backordering and overtime.

 Organizational policies regarding the usage of these alternatives.

Table 5.1  below is an example of an aggregate plan for a company that manufactures bicycles.

Table 5.1. Aggregate Plan Example

Some companies start with an aggregate plan and disaggregate to an MPS (i.e. SKU level), and others start at the MPS and then aggregate to a class or family of products or services. In any case, the plans, at all levels including detailed work schedule, are tested for various constraints (manpower, machine and material) and then adjusted accordingly.

Integrated Business Planning (IBP)

It should be noted that there is a movement or evolution towards what has been called “Integrated Business Planning” (IBP) or advanced S&OP for some leading organizations which moves from fundamental demand and supply balancing to a broader, more integrated strategic deployment and management process.

On the operations side, manufacturing develops plans to balance demand and supply but don’t always know if the plan will meet the budgets on which the company's revenue and profit goals are based. The sales department may agree to quotas that meet finance's revenue goals without a detailed understanding of what manufacturing can deliver. IBF attempts to bridge those gaps by making sure that revenue goals and budgets are validated against a bottom-up operating plan, and that the operating plan is reconciled against financial goals.

S&OP in Retail

Also, while S&OP has been a “best practice” in manufacturing for 25 or so years, the retail industry has been slow to adapt it to their planning processes. The migration towards a broader IBF mentioned above for manufacturing may prove to be an impetus to pull retailers into using an S&OP process. In any case, when it is used in retail, the S&OP process is very similar to that used by manufacturers. The main differences are that the sponsors and titles of each step as well as the details of each review such as issues, data and decisions are different.

Demand and Supply Options

During the aggregate planning process when trying to match supply with demand at the lower cost and highest service, an organization has options to adjust both demand and supply capacity.

Demand Options

These options refer to the ability to adjust customer demand in order to fit that demand to current available capacity. These options include:

Influence demand – This can be accomplished to some degree via advertising, pricing, promotions and price cuts. Examples would be using “early bird” meals in a restaurant or discounts offered if you buy before a certain date. These methods may not always have enough of an effect upon demand to free up capacity.

Also as we have discussed, the use of heavy promotes and discounting can also have the negative “bullwhip” effect as a consequence; thus the reason that some companies have gone to “everyday low pricing”.

Backorders – These occurs when a goods or service organization gets orders that they cannot fulfill. In many cases, customers are willing to wait. In others, it can result in lost sales. In some industries such as grocery stores, backorders are not used. Instead, if an item is out of stock, it is cut from the order and re-ordered next time. This is of course dangerous if your product is substitutable as it might not be re-ordered next time.

New or counter seasonal demand – This can be used to balance demand by season. For example, a company that sells lawn mowers may begin production of snow blowers. Companies must be careful to not go beyond their expertise or base markets.

Supply Capacity Options

These options refer to the ability of an organization to adjust its available resource capacity to meet demand and include:

Hire and lay off employees – As demand hits peaks and valleys, flexibility in the workforce can be used to compensate for these fluctuations. While this can be beneficial to the company, it can also have risks and costs in terms of unemployment and new hire training costs.

Overtime/idle time – Most companies have the ability to run some overtime when things get busy. The opposite may be true when things slow down, by moving idle workers to other jobs, at least to some extent. Equipment and workers efforts, to some degree, can also be sped up or slowed down. While this may extend capacity a bit in the short term, employees may burn out. In the case of slack demand, profitability may suffer as a result of having too many workers doing “make work”.

Part time or temporary workers – This is especially common for contract manufacturers and in the service industry during the holiday season. It isn’t usually an option in more technical jobs other than some exceptions such computer programming and nursing. Also, quality and productivity may suffer as a result of this approach.

Sub-contracting (or contract manufacturing) – Very common in some industries such as cosmetics as well as household and personal care products, especially when the demand for a new item is uncertain or a company doesn’t yet have the capability to make the product. The downside is that costs may be greater as the sub-contractor has to make a profit too, quality may suffer a bit as you have less control, as well as the fact you may be working with a future competitor.

Vary inventory levels – Inventory may be produced before a peak season when excess capacity may be limited. However, it can also drive up holding costs including obsolete or damaged inventory. An example of this is the ice cream industry where ice cream can be produced in the winter and put in a deep freeze until the busy season starts.

Aggregate Planning Strategies

There are three general aggregate planning strategies that are commonly used which use many of the demand and supply options discussed above which are:

Level plans – Use a constant workforce and produce similar quantities each time period. This method uses inventories and backorders to absorb demand peaks and valleys and therefore tends to increase inventory holding costs.

Chase plans – This method minimizes finished goods inventories by adjusting production and staffing to keep pace with demand fluctuations. It looks to match demand by varying either work force level or output rate. This can of course negatively affect productivity as well as costs.

Mixed Strategies – Probably used the most with a mix of both of the first two methods. In some cases, inventory is increased ahead of rising demand and in other cases, backorders are used to level output during extreme peak periods. There may be layoff or furlough of workers during the slower, extended periods and companies may subcontract production or hire temporary workers to cover short-term peak periods. As an alternative to layoffs, workers may be reassigned to other jobs such as preventive maintenance during slow periods.

An example of this may be where a company has two production facilities that manufacture the same products, one on the east coast and one on the west coast. If one plant has a distinct cost advantage, it may make sense to sometimes shift production to the lower cost plant and expand its service area temporarily, such as during a slow period of demand. This will of course result in less production required at the lower cost plant during those periods possibly requiring layoffs. This decision isn’t to be taken lightly and must consider the total “landed” cost of the product for each plant including transportation and distribution to the customer.

Master Production Schedule (MPS)

Once the S&OP process has been completed, the aggregate plan is “disaggregated” into a master production schedule (MPS), which shows net production requirements for the next 2-3 months, usually in weekly or monthly time periods by SKU for independent demand items (see  Table 5.1 ). This is known as “time phased planning”.

The net requirements above and beyond existing, known ones which are referred to as “scheduled receipts” are called “planned orders” and “planned receipts”; the only difference being that planned orders are planned receipts that have been offset by the item’s lead time.

It should be noted that the lead time for manufacturing, which is the time required to manufacture an item, is the estimated sum of order preparation time, queue time, setup time, run time, move time, inspection time, and put-away time. In the case of purchased items, the lead time is usually stated by the vendor and may or may not include inbound transit times.

Production Strategies

Manufacturers typically have one or a combination of the production strategies below:

Make-to-stock (MTS) – Production for finished goods is based upon a forecast using predetermined inventory targets. Customer orders are then filled from existing stock and those stocks are replenished through production orders. MTO enables customer orders to be filled immediately from available stock and allows the manufacturer to organize production in ways that minimize costly changeovers and other disruptions.

Make-to-order (MTO) – Produced specifically to customer order. Usually standardized (but low volume) or custom items produced to meet the customer's specific needs. MTO environments are slower to fulfill demand than MTS and assemble-to-order environments (described below), because time is required to make the products from scratch. There also is less risk involved with building a product when a firm customer order is in hand.

Assemble-to-order (ATO) – Products are assembled from components after the receipt of a customer order. The customer order initiates assembly of the customized product. This strategy can be useful when there are a large number of end products based on the selection of options and accessories can be assembled from common components (this is one example of the concept of “postponement”).

Engineer-to-order (ETO) – This strategy uses customer specifications that require unique engineering design, significant customization or new purchased materials. Each customer order results in a unique set of part numbers, bills of material (i.e. items required to make the product), and routings (i.e. steps to manufacture a product).

For the service industry, the MPS may only be an appointment book or log to make sure that capacity, in this case skilled labor or professional service, is in balance with anticipated demand.

Depending on the production strategy used, the production requirements in the MPS can be expressed based upon a forecast, customer orders or modules that are required for the manufacture of other items (ex:  Table 5.2 ).

Table 5.2. Disaggregation of Aggregate Plan Example

System Nervousness

Frequent changes to the MPS (or subsequently the material requirements plan which we will be discussing shortly) can cause what is known as “system nervousness” where small changes, usually as a result of updating the MPS plan too often, causes major changes to the requirements plan.

To avoid this, many companies use a “time fence” whereby the planning horizon is broken into two parts:

Demand (or firm) time fence (DTF) – A designated period where the MPS is “frozen” (i.e. not changes to current schedule). The DTF starts with the present period, extending as several weeks into the future. It can only be altered by senior management. Unfortunately all too often from what I’ve seen, the frozen segment is changed often due to “fire fighting” and customer emergencies.

Planning time fence (PTF) – A designated period during which the master scheduler is allowed to make changes. The PTF starts after the DTF ends and extends several weeks or more into the future.

Material Requirements Planning (MRP)

Once the MPS has been solidified, it can then be “exploded” through a bill of materials (BOM) file to determine raw material and component (i.e. dependent demand) requirements.

The information needed to run an MRP model include the MPS, a bill of materials, inventory balances, lead times and scheduled receipts (i.e. purchase orders and production work orders). All of these inputs need to be accurate and up to date. Otherwise, it’s the old “garbage in garbage out” situation, resulting in poor execution and ultimately customer dissatisfaction.

All of the inputs are fairly straightforward, but it would be helpful at this point to delve a little bit into the BOM.

Bill of Material (BOM)

A bill of materials is like a recipe for a product (in fact, in the case of food, it is). A BOM file has a defined structure to it. In this structure, the independent demand item is called the “parent” item (ex: 26” boys blue bike) and any dependent demand requirements (ex: 2 wheels for each bike) are called “child” items with a quantity (2/bike in our example) of each child item needed to make each parent item. This is often referred to as the “product structure” (see  Figure 5.4 ).

Figure 5.4. Bicycle Bill of Materials (BOM) and Product Structure

The finished good or parent item is referred to as being on “level 0” and the child “level 1”. There can be multiple levels in a BOM, in which case the child item on level 1 of the wheel in the bike example, can then be the parent to the child items of the rim, tire and spokes (i.e. level 2), and so on.

MRP Mechanics

The calculations involved in an MRP system are fairly routine. Think of it as a giant calculator that crunches the information supplied to create net, future replenishment requirements based upon some user defined parameters.

As mentioned previously, an MRP system is driven by the MPS (which may in turn, potentially be driven by a DRP system). The mechanics of the MPS and MRP systems are basically the same, with the requirements from the MPS (independent demand) driving MRP requirements (dependent demand) via the bill of material file.

In our bicycle example,  Figure 5.5  illustrates the basic calculation where we have gross requirements (in MPS, “gross” would be the forecast “consumed” by open customer orders”) for the production of 75 bikes in week 8. Typically, safety stock or safety time targets would be in place for independent demand items, but for sake of simplicity, there is none in the example. As we have 50 bikes in inventory, we will need to produce an additional 25 units by week 8. To do so, we will need to have 50 wheels and 25 frames available in week 6, after offsetting the components’ lead time, for the bike production. Through the BOM “explosion” these requirements show up as gross requirements for the wheels and frames in MRP. The same “nettin