Chapter 2 Production Planning

System
A good planning system must answer 4 questions:
 What are we going to make?
 What does it take to make it?
 What do we already have?
 What do we need to get?

Arnold, Chapman & Clive : Intro Materials © Pearson Education, Upper Saddle River, N J
Management 6th ed. 07458 All Right Reserved
 • Priority
• What is needed, when, and how much

• Capacity
• Capability to produce what is needed and when

Priority Capacity
(Demand) (Resources)

Arnold, Chapman & Clive : Intro Materials © Pearson Education, Upper Saddle River, N J 07458 All
Management 6th ed. Right Reserved
 Major Levels Of Planning & Control

At each level of the planning and control system,

reconciliation with resources must be made
 Must obtain the right resources or change the plan
Inadequate resources = missed production
schedules
Resources significantly exceed planned
production = idle resources and extra cost
 Major Levels Of Planning &Control
• In order of time span (long to short) and detail (general to
detailed):
1. Strategic Business Plans (SBP)
2. Production Plan (PP)
3. Master Production Schedules (MPS)
4. Material Requirements Plans (MRP)
5. Purchasing and Production Activity Control (PAC)
 Major Levels Of Planning &Control

Each level varies in At Each Level, Need to Decide

 Purpose  What are the priorities

 Time span (planning  What is the available
horizon) capacity?
 Level of detail  How can the differences
 Planning cycle between priorities and
(Frequency). capacities best be
resolved?
 Strategic
Business Plan

Master
Production Plan
Plan

Planning
Master Production
Schedule

Material
Requirements
Plan

Production Activity Implementation

Control and
Purchasing
1) The Strategic Business Plan (SBP)
A statement of the major goals and
objectives the company expects to
achieve over the next 2-10 years or
more.
 broad/general direction
 low level of detail
 long-range forecasts
 responsibility of senior management
 includes participation from
Marketing, Finance, and Production
 usually reviewed every six months to
a year
 2) PRODUCTION PLAN (PP)

 Production Plan Concerns

 Quantities of each product group
required to be produced
 The desired inventory levels
 The resources of equipment, labor, and
material needed in each period
 The availability of resources needed
 2) PRODUCTION PLAN (PP)
 Production Plan must
 Satisfy market demand within resources available
 Assist the implementation of the strategic business
plan
 Be based upon families of products
 Be fairly low level of detail
 Address a planning horizon of six to 18 months
 Be reviewed each month or quarter
3) MASTER PRODUCTION SCHEDULE
(MPS)
 A plan for the production of
individual end items (finished
goods).
 breaks down production plan
 list the quantity of each end item to be made
 level of detail is higher than the production
plan - developed for individual end items
 planning horizon extends three to 18 months
 reviewed and changed weekly or monthly
 4) MATERIAL REQUIREMENTS PLAN
(MRP)
 A plan for the production and purchase of the
components used in making the items in the MPS
 Production control and purchasing use MRP to decide
the purchase or manufacture of specific items
 Level of detail is high
 Determines when the components and parts are needed
 Planning horizon is at least as long as the combined
purchase and manufacture lead times (3 to 18 months)
 Usually reviewed daily or weekly
 5) Purchasing and Production Activity Control (PAC)

Production Activity Control

 responsible for planning and controlling the flow of work through
the factory.
Purchasing
 responsible for establishing and controlling the flow of raw
materials into the factory.
The planning horizon is very short, perhaps from a day to a month.
The level of detail is high since it is concerned with individual
components, workstations, and orders.
Plans are reviewed and revised daily.
Provide your answer in a table format .
Compare in terms of [definition and abbreviation,
Purpose, Time span (planning horizon),
Level of detail and Planning cycle (Frequency)]
Mainly links the previous plans in different ways
 Strategic Annual
Business Plan

SALES AND OPERATIONS PLAN

Monthly
Marketing Production
Plan Plan

Detailed Master Weekly

Sales Plan Production or
Schedule Daily
SOP is a cross-functional medium range business plan
that includes the marketing, production, engineering,
and finance plans. SOP has several benefits:
 Can be used to update the strategic plan
 Enforces functional plans to be realistic and
coordinated
 Provides management visibility of production, inventory,
and backlogs.
 MRP II is a master game plan for all departments in the
company and works from the top down with feedback from
the bottom up
 This fully integrated planning and control system is called a
manufacturing resource planning, or MRP II, system.
 The phrase “MRP II” is used to distinguish the
“manufacturing resource plan” (MRP II) from the “materials
requirement plan” (MRP).
 ERP is similar to the MRP II system except it does not
dwell on manufacturing. Essentially, ERP encompasses
the total company and MRP II is manufacturing.
 The whole enterprise is taken into account.
 APICS Dictionary defines ERP as “Framework for
organizing, defining, and standardizing the business
processes necessary to effectively plan and control an
organization so the organization can use its internal
knowledge to seek external advantage.”
Some key questions that must be
answered to develop an effective
planning strategy:
How flexible are the resources, both in quantity
and timing?
Are “outside” resources available
(subcontracting)?
Can we utilize inventory to meet demand?
 BASIC PRODUCTION PLAN STRATEGIES
 Three Basic Strategies
 Chase (Demand Matching) Strategy: Produce the
amounts that are demanded at any one time
 Production Leveling Strategy: Continuously
produce an amount equal to the average demand
 Subcontracting: Meeting additional demand
through subcontracting.
 Hybrid Strategy: Combination of any of the
above strategies
Chase – vary production rates to meet
changes in demand
Often used when inventory cannot be used or
when resources are flexible and inexpensive
to change

 What industries use a chase strategy?

 Chase Production:

No. of Units
Chase Production

Demand

Time
 CHASE STRATEGY ADVANTAGES

Advantages: goods are made when demand

occurs and are not stockpiled. Thus, the costs
associated with carrying inventories are avoided.
Disadvantages: As production increases, workers
must be hired and trained. Extra shifts may be
needed, and overtime may be necessary. These
requirements all increase cost. As production
decreases, people are laid off and morale suffers.
Production Leveling Strategy – establish average
demand level and set production rate to that level
 Often used when resources difficult or very expensive
to change.
 This strategy avoids the disadvantages of demand
matching. However, inventory builds up.

 What are some examples of industries that

could use this strategy?
 Level Production:

No. of Units

Level Production

Demand

Time

Arnold, Chapman & Clive : Intro Materials © Pearson Education, Upper Saddle River, N J
Management 6th ed. 07458 All Right Reserved
 Level Production:

No. of Units
USE Inventory

Level Production

CREATE Inventory

Demand

Time

Arnold, Chapman & Clive : Intro Materials © Pearson Education, Upper Saddle River, N J
Management 6th ed. 07458 All Right Reserved
 SUBCONTRACTING
Subcontracting
means producing at
the level of minimum
demand and meeting
any additional
demand through
subcontracting.
 Major Advantage
 Costs associated with excess capacity are
avoided
 Since production is leveled, there are no costs
associated with changing production levels
 Main Disadvantage
 The cost of purchasing may be greater than if
the item were made in the plant
 Certain core skills or technologies may be lost
Hybrid – is a combination of the other 3
strategies.
No. of Units

Hybrid
Demand
Time
Continue Chapter 2
- Developing A Make-to-stock Production Plan.
- Developing A Make-to-order Production Plan.
This section develops a plan for leveling
production and one for chase strategy
Remember: Manufacturing Strategies
Delivery Lead Time

Engineer-
Design Purchase Manufacture Assemble Ship
to-Order

Delivery Lead Time

Make-to-
Inventory Manufacture Assemble Ship Order

Delivery Lead Time

Assemble-
Manufacture Inventory Assemble Ship to-Order

Delivery Lead Time

Make-to-
Manufacture Assemble Inventory Ship
Stock
 In a make-to-stock environment, products are
made and put into inventory before an order is
received from a customer.
 Sale and delivery of the goods are made from
inventory.
 Off-the-rack clothing, frozen foods, and bicycles are
examples of this kind of manufacturing.
 Information Needed To Make A
Production Plan
Forecast by period for the planning horizon.
Opening inventory.
Desired ending inventory.
Any past-due customer orders. These are
orders that are late for delivery and are
sometimes called back orders.
 Procedure For Developing A Plan For
Level Production
1. Total the forecast demand for the planning horizon.
2. Determine the opening inventory and the desired ending
inventory.
3. Calculate the total production required as follows: Total
Production = total forecast + back orders + ending
inventory (EI) - opening inventory (OI)
4. Calculate the production required each period by dividing
the total production by the number of periods.
5. Calculate the ending inventory for each period (Ending
Inventory for Period 1 = OI + production - forecast demand).
Suppose the forecasted demand for a product family looks
like the table below. Assume the product family is a
Make-to-Stock family with a starting inventory of 100.

Period 1 2 3 4 5 6 Total

Forecast (Demand) 150 160 180 175 155 140 960

Period 1 2 3 4 5 6 Total

Forecast (Demand) 150 160 180 175 155 140 960

Planned 160 160 160 160 160 160 960

Production
Planned Inventory 110 110 90 75 80 100
Period 1 2 3 4 5 6 Total

Forecast 150 160 180 175 155 140 960

(Demand)
Planned 150 160 180 175 155 140 960
Production
Planned 100 100 100 100 100 100
Inventory
Period 1 2 3 4 5 6 Total

Forecast (Demand) 150 160 180 175 155 140 960

Planned Production 140 140 140 175 175 175 945

Planned Inventory 90 70 30 30 50 85
This section develops a plan for leveling
production
In a make-to-order environment, manufacturers
wait until an order is received from a customer
before starting to make the goods.
 Firms generally make to order when:
Goods are produced to customer specification.
Customer is willing to wait while the order is being made.
Product is expensive to make and store.
Several product options are offered.
Assemble to order (is a subset of
make to order)
 Information needed for make-to-order
products
 Forecast by period for the planning
horizon
 Opening backlog of customer orders
 Desired ending backlog
 Backlog
Make to order environment has backlog of
unfilled customer orders instead of an
1. Total forecast demand for the planning horizon,
2. Determine the opening backlog and the desired ending
backlog,
3. Calculate total production required. Total production =
total forecast + opening backlog – ending backlog),
4. Calculate the production required each period, and
5. Spread the existing backlog over the planning horizon
according to due date per period.