CPIM (Certified in Production and Inventory Management)

Detailed Scheduling and Planning

Introduction
Material Requirements Planning Relations

The major objectives of production are:

1. Maximize customer service

2. Minimize inventory investment
3. Minimize production cost

In commerce, the three objectives are in conflict. High customer service requires high inventory
investment. Low production cost requires long, interrupted production runs, maintained by high
inventory levels. Inventories may be low if customers and production must wait and suffer material
shortages.

Detailed Scheduling and Planning explains systems that strike a balance among the three objectives
of production. In commerce, few firms can afford to favour one of these objectives to the exclusion
of the other two. All three are about equally important for commercial success. Detailed Scheduling
and Planning begins with inventory principles, control, and its relations with customer service and
production.

Master production addressed the questions:

1. What must we make?

2. How many must we make?
3. When will our customers need them?

The detailed answers to these questions become the master production schedule (MPS).

The MPS covers a planning horizon, typically six months to a year or so depending on the nature of
the scheduling environment. The MPS is expressed in terms of actual end-products and is developed
in coordination with a marketing plan that predicts what is to be sold based on either a forecast, firm
customer orders, or a combination of both, Often, a rough-cut capacity evaluation verifies that
sufficient worker and equipment capacity is available.

Next, Detailed Scheduling and Planning addresses the question of the resources required to fulfil the
MPS:

1. What terms, components, or raw material do we need?

2. Which of these are here, now?
3. What others will be here in time?
4. What more do we need?
5. When will we need them?
6. Do we have sufficient worker and equipment capacity?

Detailed Scheduling and Planning seeks a material balance between what we need to make and the
items needed to make them. This ties inventory to customer service and production. It also seeks to
plan feasible workloads on workers and equipment, an exercise in planning capacity. Generally, we
may plan either capacity or material first. However, which is better?
Which of capacity or material we should plan first depends on the scheduling environment. In
general, we plan capacity first when

1. Capacity is expensive
2. Capacity is a constraint or bottleneck
3. Setups are expensive

We plan material first when

1. Materials are expensive

2. There is excess capacity
3. Setups are inexpensive
4. The scheduling environment is a job shop

Detailed Scheduling and Planning begins production planning with job shop environments. Material
planning begins with the computer system, material requirements planning (MRP). MRP advises
planners what components must be available in the right quantities at the right times to meet MPS.
Thus, MRP tends to meet customer service requirements while lowering inventory to what is really
necessary. Furthermore, MRP is a system used to avoid missing components at every stage of
production. Since missing components elevate production costs, MRP also tends to lower
production costs. It establishes a schedule showing the quantity and timing of components needed
at each level of assembly or fabrication. It is a tool that helps balance all three major production
objectives.

MRP explodes the MPS into a schedule for both purchased and factory production orders for the
components and raw materials necessary to meet the MPS for finished products. MRP uses bills of
material, inventory status data, and planning data to guide the explosion process and timing
calculations.

MRP planned order releases for make items represent planned production orders. Capacity
requirements planning (CRP) evaluates these planned production orders and work in process for
sufficient workcentre capacity. MRP determines whether or not there is a sufficient worker and
equipment capacity to execute the material plan successfully.

The bill of material guides MRP scheduling calculations. The process industry and continuous,
discrete manufacturing use a planning and scheduling system called process flow scheduling (PFS).
The process structure guides PFS scheduling calculations. The process structure consists of a series
of operations divided into stages separated by storage units. Separating stages with inventory
allows these stages scheduling to be somewhat independent. Operations capacity scheduling may
precede materials for a stage. Conversely, material scheduling may be first. When two adjacent
stages have been scheduled independently, they are reconciled with each other.

Constraint management is another system that balances the three conflicting production objectives.
It schedules production with a plant logistics algorithm called drum-buffer rope. It manages capacity
to maximize overall production throughput. The drum is the rate of production set by the overall
production constraint or bottleneck. The buffer provides the constraint with protection against
uncertainty thereby maximizing production. The rope is the communication channel from constraint
to material release into production. Thus, inventory is kept to just what is needed.
Part of the scheduling and planning process applies to purchases of components and raw materials.
Purchasing addresses supplier selection, contract negotiations and material availability. Feedback
from purchasing of exceptions may require rescheduling by the primary scheduling and planning
system: MRP, PFS or constraints management.
Session 1
Inventory Management: Order Planning

Purpose:

This session covers types and classifications of inventory, order review methodologies, lot-sizing
factors, costs associated with order-quantity decisions, and lot-sizing techniques. The intent is to
provide a review of factors that may be input to MRP (material requirements planning) and that
relate to inventory management, planning and control.

Objectives:

At the end of this session, the participant should be able to:

Identify types of inventory and how they are assessed from their different requirements and
impacts on the planning process.
Describe order review methodologies and apply them to different types of inventory and
inventory strategies.
Indentify lot-sizing techniques, including the effects of order-quantity constraints and
modifiers.

Purpose of Inventory Strategy

The companys inventory strategy translates the inventory investment and service level aspects of
the higher-level strategies into average inventory levels, reorder quantity policy and timing, and
safety stock levels. How effectively this strategy aligns with those of manufacturing and suppliers
determines, in large part, competitive advantage and customer value.

The inventory strategy must account for the complexity of the manufacturing environment,
including factors such as time of season and demand and supply variability, cumulative versus
marketing lead time, and management policies. These policies are typically specified at the category
level by management, and implemented at the item level by the planners.

Service Level
Dependent Demand
Independent Demand
Demand Variability
Supply Variability
Seasonality
Lead Time Fluctuation
Company Policy

Definition of Inventory

Those stocks or items used to support production (raw materials and work-in-process items),
supporting activities (maintenance, repair, and operating supplies), and customer service (finished
goods and spare parts). Demand for inventory may be dependent or independent. Inventory
functions are anticipation, hedge, cycle (lot size), fluctuation (safety, buffer, or reserve),
transportation (pipeline), and service parts.

Some companies use an alternative view of inventory for some areas of accounting.

In theory of constraints, inventory is defined as those items purchased for resale and includes
finished goods, work in progress, and raw materials. Inventory is always valued at purchased price
and includes no value-added costs, as opposed to the traditional cost accounting practice of adding
direct labour and allocating overhead as work in process progresses through the production process.

Classification of Inventory

The following classifications of inventory are used throughout the production and distribution
network: raw materials; work in process (WIP); finished goods; and maintenance, repair and
operating supplies (MRO). They are valued at material (eg standard) cost while in inventory.
Operating, excess, surplus, inactive, and obsolete are sub-classifications, as are consignment and
vendor-managed inventory.

Raw Materials (RM)

Work in Process (WIP)
Finished Goods (FG)
Maintenance, Repair, and Operating Supplies (MRO)

Raw Materials (RM)

Raw materials represent any material inputs used in a manufacturing process. This includes
manufactured products from other companies, referred to as finished goods at the supplying
company. Raw materials form the lowest level of a bill-of material structure, and typically constitute
the longest portion of cumulative lead time.

Work in Process

Raw materials are withdrawn from stock in order to have work performed on them by various
classes of labour and equipment in the production transformation process. While these materials
are in various stages of completion, they are referred to work-in-process inventory. The amount of
work in process differs greatly from company to company, depending on the particular production
process. Generally, all manufacturing firms have some inventory that fits this classification. Work-
in-process materials form the middle levels of a bill-of-material structure. As pay points are reached
in the manufacturing and assembly process, work-in-process value increases to account for direct
labour hours expended and overhead absorbed.

Finished Goods (FG)

Finished goods, or end items, can be completed product or a service part. A finished good is an item
that is sold to a customer or transferred to a sister division in a vertically integrated company.
Manufacturing companies may keep a stock of finished goods at the producing facility or in a
warehouse or distribution centre to reduce delivery times.

Maintenance, Repair, and Operating Supplies (MRO)

Al companies hold MRO inventories of these types of items. Operating supplies are often low cost,
but numerous, and include office and janitorial supplies. Maintenance and spare parts are
maintained to support uptime and availability requirements, and may include items ranging from
cents to tens of thousands of dollars. Replenishment is typically by visual review, direct one-for-one
replacement, or reorder point.

The following sub-classifications excess, surplus, inactive, obsolete, consignment, and vendor-
managed inventory (VMI) relate to inventories in stock and their usefulness in supporting the
inventory strategy.

Excess
Surplus
Inactive
Obsolete
Consignment
Vendor-managed (VMI)

Excess

Excess inventory is inventory procured or manufactured in excess of current operational needs. The
definition of current need must be established by policy for each category. The timeframe is
typically shorter for expensive items and longer for inexpensive items. Excess inventory may occur
by plan, such as lot-sizing rules or anticipation builds, or by accident. A price break for a part may
give the purchasing department sufficient reason to buy a larger quantity than normal. When
inventory records indicate shortages that, in fact, do not exist, premature replenishment could lead
to spoilage, obsolescence, and storage problems. Inventory may also become excess after the fact,
in spite of following policy, due to order cancellations and engineering changes (a new component
or assembly replacing an existing one on the bill of material).

Surplus

Surplus inventory applies to items in demand, but the available balance is well in excess of need.
The company could procure or manufacture this quantity later because the supply is longer than the
items lead time. A company that differentiates between excess and surplus will typically do so
based on aging and demand. Therefore, as demand is extended into the future, some portion of a
parts inventory may be assigned to excess, surplus and inactive categories simultaneously.

Inactive

Inactive inventory is considered an asset from an accounting perspective, but there is no foreseeable
demand. It is of no value to manufacturing, materials management, inventory management, or the
customers, but entails ongoing carrying costs. It is the direct result of surplus inventory that has not
been used within 12-18 months and that will not be used in the foreseeable future.

Obsolete

Obsolete inventory will never be used or sold at full value because the products are no longer
produced or supported. Disposing of the inventory can reduce a companys profit.
Consignment

Consignment inventory occurs when the supplier physically gives the customer the inventory for use
and the supplier retains ownership of the product until used. The supplier or sometimes the
customer periodically inventories the consigned product and, as a result, the supplier bills the
customer and replenishes the consigned inventory. An alternative is that the customer pays
periodically based on usage.

Vendor-Managed (VMI)

Vendor-managed inventory differs from consignment in several respects. The customer shares
visibility of its forecasts, such as promotions and production rates, with the supplier. Visibility can be
achieved with various technologies such as point-of-sale information or EDI. The customers
information is an input to the planning process used by the supplier, who now assumes the entire
role for planning and replenishment.
Order Review Methodologies