CILT International Diploma in LT DIP-08 Production Planning Material V1.1 (1)

CILT International Diploma
in Logistics and Transport
DIP-08
Production Planning
AO/INT/0064 – V1.1
Acknowledgements
We are grateful to the following contributors for their authorship of the material contained
in this document.
Author: Michael Wakefield (MILT)
Verifier: Peter Ellement (FCILT)
Ben Bvepfepfe (FCILT)
David Maunder (FCILT)
Jon Harris (FCILT)
© Chartered Institute of Logistics and Transport (UK).
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior written permission of the Chartered
Institute of Logistics and Transport (UK).
AO/INT/0064 – V1.1 II
Introduction to Study
Welcome to the study guide for the unit DIP-08 Production Planning, which is intended to
assist students in successfully completing the CILT International Diploma in Logistics and
Transport.
These icons represent key activities to be undertaken – specific activities have been set to
assist learning and references are made to the recommended textbook. Keywords and
important information are reinforced, where appropriate. The aims are clearly set out at
the beginning of each section and key benchmarks are listed on completion of these
sections to enable you (the learner) to monitor your own progress.
Key to icons:
 Tasks
 Case study
 Suggested reading
 Reading List
Key Text Books

Vollmann, T. E., (2004). Manufacturing Planning and Control Systems for Supply Chain
Management: The Definitive Guide for Professionals. 5th ed. Mcgraw-Hill Higher
Education. ISBN: 9780071440332.
Recommended Text Books
Bolton, W., (1994). Production Planning and Control. Longman Scientific and Technical.
ISBN: 9780582228207.
Chapman. S., (2005). Fundamentals of Production Planning and Control. Pearson
Prentice Hall. ISBN: 9780130176158.
Dickersbach, J., Keller, G. and Weihrauch, K., (2013). Production Planning and Control
with SAP ERP. 2nd ed. SAP Press. ISBN: 9781592298686.
Slack, N., Chambers, S. and Johnston, R., (2013). Operations Management. 7th ed.
Prentice Hall. ISBN: 9780273776208.
Waller, D., (2003). Operations Management: A Supply Chain Approach. 2nd ed.
International Thomas Business Press. ISBN: 9781408069943.
AO/INT/0064 – V1.1 III

Study Techniques
You should manage your time and set realistic targets for each element of the
specification. This unit consists of 90 guided learning hours. This figure is only a guide and
students must be aware that more time may be needed in some circumstances.
Work in quiet areas, with minimal distractions.
Make clear notes and bullet points where appropriate – make use of the highlighted
sections and icons within the course manual to guide you to the key information. Refer to
the recommended reading as directed. Develop all core information with wider reading.
Always remember that you will learn better when you have support available and that you
follow the learning process of reflecting, reconstructing alternative ways and then revising
what is done or thought about the subject. Support can be available via the Institute’s
Knowledge Centre as well as from colleagues and friends. Learning skills are important
also, more information is available in the bibliography at the end of this unit.
The International Knowledge Centre gives you access to information around the
world.
Tel: +44(0)1536 740167

Fax: +44(0)1536 740102
E-mail: knowledge@ciltuk.org.uk
Web-Site: www.ciltuk.org.uk
www.ciltinternational.org
Students taking the CILT International qualifications will have e-access to the online
Knowledge Centre resources for duration of their studies. The password will be
provided to the training provider and it is their responsibility to ensure that it stay
confidential for use only by students, lecturers and learning resource managers
within the specific institution.
AO/INT/0064 – V1.1 IV
Contents
Introduction to Study ........................................................................................................... III

Key Text Books................................................................................................................... III
Recommended Text Books ................................................................................................ III
Study Techniques .............................................................................................................. IV
List of Tables/Figures ........................................................................................................ VI
Abbreviations .................................................................................................................... VII
Glossary of Terms ........................................................................................................... VIII
Course Overview .............................................................................................................. XV
1. The Concepts of Production Planning .................................................................. 17
1.1 The Concept of Production Planning .................................................................... 17
1.2 Sales Planning and Forecasting ........................................................................... 26
1.3 Summary .............................................................................................................. 41
2. Fundamentals of Production Planning .................................................................. 43
2.1 The Fundamentals of Production Planning – Introduction .................................... 43
2.2 Materials Planning and Capacity Management .................................................... 60
2.3 Summary .............................................................................................................. 77
3. Current Manufacturing and Materials Planning Systems ...................................... 79
3.1 Current Manufacturing and Materials Planning Systems –Introduction ................ 80
3.2 Manufacturing Planning and Control Systems ...................................................... 98
3.3 The Impact of Globalisation on Production Planning .......................................... 107
3.4 New Manufacturing Environment ........................................................................ 112
3.5 Summary ............................................................................................................ 121
4. Managing Material Flows Through a Production Process................................... 123
4.1 Managing Material Flows Through the Production Process – Introduction ......... 123
4.2 Summary ............................................................................................................ 132
Bibliography ..................................................................................................................... 133
Journals/Magazines ......................................................................................................... 133
Web Sites ........................................................................................................................ 134
AO/INT/0064 – V1.1 V
List of Tables/Figures
Figure 1.1 Production Planning – From Idea to Customer ........................................................ 19
Figure 1.2 Production Planning Horizon ................................................................................... 29
Figure 1.3 Planning Stages from Forecast Demand to Production ............................................ 30
Figure 1.4 Combining Known Order and Forecast Orders ........................................................ 31
Figure 1.5 Materials Requirement Planning (MRP) Diagram .................................................... 38
Figure 1.6 Inputs into the Master Production Schedule (MPS) .................................................. 39
Figure 1.7 The Three Dimensions of Forecasting Techniques and Examples of Data and
Intelligence Sources ..................................................................................................................... 51
Figure 2.1 Moving Averages ..................................................................................................... 53

Figure 2.2 Material Requirement Plans (MRP) Open Loop System .......................................... 62
Figure 2.3 Closed-Loop MRP System....................................................................................... 71
Figure 2.4 Closed-Loop MRP System in Reality ....................................................................... 72
Figure 3.1 Operational Improvements....................................................................................... 81

Figure 3.2 Performance Measurement ..................................................................................... 82
Figure 3.3 The Five Key Elements of Performance and Examples of Their End Objectives ...... 90
Figure 3.4 Reconciling Supply and Demand ............................................................................. 98
Figure 3.5 Enterprise Resource Planning (ERP) ..................................................................... 103
Figure 3.6 The Seven Types of Wastage to be removed by a Lean Production System ......... 117
Figure 4.1 Typical Management Activities involved in Production Planning ............................ 131
Table 2.1 Demand Data for a Manufacturing Company ........................................................... 45

Table 2.2 Loaded Demand Data with Balanced Capacity for a Manufacturing Company......... 46
Table 2.3 Master Production Schedule: Balanced ................................................................... 47
Table 2.4 Example of a Simple MPS for One Single Item ........................................................ 54
AO/INT/0064 – V1.1 VI
Abbreviations
APS Advanced Planning and Scheduling
BOM Bill of Material
CILT The Chartered Institute of Logistics and Transport
CPOF Capacity Planning using overall factors
CPFR Collaborative Planning Forecast and Replenishment
CRM Customer Relationship Management
CRP Capacity Requirements Planning
CSR Corporate Social Responsibility
DSS Decision support system
EDI Electronic Data Interchange
EIA Environmental Impact Assessment
ERP Enterprise Resource Planning
ES Expert System
FMEA Failure Modes Effects Analysis
GPS Global Positioning System
IT Information Technology
JIT Just In Time
LAN Local Area Network
MIS Management Information System
MPS Master Production Schedule
MRP Material Requirements Planning
MRPII Manufacturing Resource Planning
MTBF Mean time between failures
MTO Make to Order
MTS Make to Stock
RCCP Rough Cut Capacity Planning
RF Radio Frequency
RFID Radio Frequency Identification
SAP Leading ERP software
TQM Total Quality Management
WAN Wide Area Network
WEEE Waste electronic and Electrical Equipment (regulations)
WIP Work in Progress
AO/INT/0064 – V1.1 VII

Glossary of Terms
ABC Analysis – an exercise which will analyse the products being ordered and stocked in
terms of fast/slow movers, sometimes referred to as ‘Pareto’ or 80/20 rule.
Activity Based Costing (ABC) - an accounting system that links costs directly to the
activities that drive them.
Agile concept - a supply chain approach for an organisation to respond quickly to

changes in demand.
Alternative Dispute Resolution (ADR) - is the collective term for the ways that parties
can settle civil disputes, with the help of an independent third party and without the need
for a formal court hearing.
Benchmarking - methods of comparing operations and performance with other operations

or organisations.
Bill of Materials (BoM) - is the quantification of the materials and components that are
necessary for the manufacture of the products required from the MPS.
Bottleneck items - Need to ensure the supply and reduce the risk on non-supply and
disruption to the business.
Buffer stock - is that held to cover the unexpected use during the supply lead time, any
uncertainty in supply and/or in demand and to provide a higher levels of stock cover for
availability. It is also known as safety stock.
Business–to-Business (B2B) - online trading transactions between organisations with

automatic information flows.
Collaboration - sharing and working together between members of a supply chain.
Coordination - integration of functional and at times geographically dispersed operations.
Corporate Social Responsibility (CSR) - is an approach where organisations integrate

their strategic planning with social and environmental issues.
Critical items - require closer relationships to ensure competitive advantage is

maintained. These will involve longer term relationships and partnering approaches with
suppliers.
AO/INT/0064 – V1.1 VIII

Cross docking - a form of warehousing in which large shipments are received and broken
down into smaller outgoing shipments, without being placed into storage.
Cycle stock is that held to cover the normal in/out movements from normal order policies;
it is also known as replenishment stock.
Cycle time - the actual time between receipt of an order or initiation of an activity to the
time the activity ends or the time the order is received.
Demand chain - represents the identification or creation of demand, for example,

marketing and selling with product development.
Direct costs - are costs that are tied directly to an activity, product or service.
Downstream - a term used to describe supply chain activities or partners positioned

towards end users.
E- commerce - the buying and selling of products and services over the internet, the term
now used to refer to the whole process of developing, marketing, selling, delivery and
payment of products and services online.
E- fulfilment - the complete electronic process from point of sales inquiry to delivery of a
product to the customer.
E-business - a term used to refer to trading between organisations and their business
customers by electronic means, i.e., business-to -business (B2B).
Economic Order Quantity (EOQ) - result of a calculation that determines the most cost
effective quantity to order (purchased items) or produce (manufactured items). The
formula basically finds the point at which the combination of order cost and carrying cost is
the least.
End customer – the ultimate user of the product, which may not be the same as the
organisation or individual who places the order and/or pays for the product.
Fixed costs – costs that an organisation incurs regardless of the level and timing of
activities, and cannot be changed very quickly.
Indirect costs - these are costs that are not tied to a product/service or level of
operations.
AO/INT/0064 – V1.1 IX
Inventory - stocks and items used to supply organisational operations and customer
service.
Just-in-time (JIT) – a philosophy of production based on planned elimination of all waste

and on continuous improvement.
Key Performance Indicator (KPI) - quantifiable measures that reflect an organisation’s

critical success factors.
Lead Time (LT) - the time elapsed between the receipt of an order or request to the time
that order or request is fulfilled.
Lean thinking – an approach of seeking to reduce unnecessary costs by eliminating

waste from supply chain operations thereby enriching value from a customer perspective.
Leverage items are those where a high volume is purchased. Here therefore the need is
to obtain at the lowest cost.
Life Cycle costing and can be defined as: “The systematic consideration of all relevant
costs and revenues associated with the acquisition and ownership of the asset.” It is the
same with whole life costing.
Logistics concept - is a management concept requiring that an organisation’s objectives

can be realised by the mutual interdependence of all major functional activities of the
organisation.
Master Production Schedule (MPS) - the total requirements from customer orders and
any provisional demand for a specific time period.
Material Requirement Planning (MRP) – a planning process that translates the master
production schedule (MPS) into planned orders for actual parts and components (based
upon the BoM) needed for the production of items on the MPS.
Open tenders - invite everyone and are only really useful where a small number of
suppliers are expected to respond.
Opportunity costs - the cost of not having the money available for alternative
investments, which would earn money or the interest payable on loans to finance work.
AO/INT/0064 – V1.1 X
Postponement - a manufacturing/distribution strategy where specific operations
associated with a product are delayed until just prior to shipping. Storing product in a
generic state and then applying custom labels or packaging before shipping is an example
of postponement.
Product Life Cycle (PLC) - a concept that states that products and services evolve
through a life cycle so that specific management techniques apply at each of the stages in
the life cycle.
Primary sector - these companies are engaging in the extraction of raw materials or
products from ‘mother earth’ from, farming/fishing (food, beverages, and forestry),
quarrying/mining (minerals, coals and metals) or drilling (oil, gas, water).
Proof of Delivery (POD) - evidence that goods or a service has been received, usually
signed document by recipient or their representative.
Purchasing ‘Rights’ - Securing supplies, materials and services of the right quality in the
right quantity at the right time from the right place (source) at the right cost.
Purchasing cycle - the whole procurement process from need identification to receipt of
goods including supplier performance appraisal.
Quality - a measure of whether or not a product or service lives up to customer

expectations.
Quick Response (QR) – an information and logistics system that aim to provide and
supply the right product of the right quality to the right place at the right time. This derives
from the need to be competitive by responding to market needs quickly.
Radio Frequency Identification (RFID) - tracking technology attached to the product or

packaging informing the reader on the nature and location of what is attached.
Reverse logistics - the management of the flow of goods upstream, usually unwanted,
used, damaged or packaging materials.
Routine items - Routine buying of commodities, needing efficiency. Relationships maybe

conducted at “arm’s length” for those low value items required irregularly, or use of low-
cost, simple mechanism, such as procurement cards.
AO/INT/0064 – V1.1 XI
Safety stock - is that held to cover the unexpected use during the supply lead time, any
uncertainty in supply and/or in demand and to provide a higher levels of stock cover for
availability. It is also known as buffer stock.
Secondary sector - Conversion of raw materials into finished or semi-finished products;

milling, smelting, extracting, refining into oils/chemicals/products and then maybe;
machining, fabricating, moulding, assembly, mixing, processing, constructing into
components, sub-assemblies, building construction/structures .
Service or tertiary sector - business, personal and entertainment services, which involve
the channels of distribution from suppliers to customers via direct, wholesale or retail
channels. Services include packaging, physical distribution, transport, hotels, catering,
banking, insurance, finance, education, public sector, post, telecoms, retail, repairs, etc.
Six rights – refers to the objectives of logistics planning, i.e., ensuring that the right
product, is delivered to the right place, at the right time, in the right quantity and quality
with the right supporting information.
Supply chain - comprises all activities associated with the flow and transformation of
goods from raw material stage through to the final consumer.
Supply chain flows - the movements as ‘material, information and money flows’ in a
supply chain.
Supply chain integration - the coordination of the flows of information and materials from
source through production up to final consumption in a supply chain.
Supply chain management - is the efficient, effective management of supply chain

activities for the production of goods and services in order to maximise customer value
and maintain sustainable operations.
Supply chain networks - a group of organisations and activities interconnected for

purposes of production and delivery of a product or service.
AO/INT/0064 – V1.1 XII

Total cost of ownership approach - is a costing philosophy that also includes all cost
associated with owning an asset, and sees the benefit of ownership will only come when
the value added to the business through owning the asset is greater than the TCO.
Trade-off - a compromise of one activity or function in order to gain in another for the
overall benefit of the system or whole.
Upstream - relates to activities and partners from the supply side of a supply chain.
Value chain - represents all activities necessary to ensure a product or service is

produced and delivered to final consumer with any residual disposals done satisfactorily.
For example, from product/service design, procurement through into production, storage,
distribution to final customer and final disposal after use.
Variable costs these are cost that change with the scale of level of operational activity.
Vendor-Managed Inventory (VMI) - phrase used to describe the process of a supplier

managing the inventory levels and purchases of the materials he supplies to the customer.
Vendor-managed inventory may be owned by the vendor (consignment inventory) or the
customer.
Whole Life Costing (WLC) - is the same as Life Cycle costing and can be defined as:
“The systematic consideration of all relevant costs and revenues associated with the
acquisition and ownership of the asset.”
AO/INT/0064 – V1.1 XIII

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AO/INT/0064 – V1.1 XIV

Course Overview
This unit provides the fundamental knowledge required by managers in
the logistics business sector involved in the flow of materials through a
production process. It covers production planning as part of the logistics
system and how production planning fits into a company’s supply chain
strategy.
This unit views the logistics of production planning processes in terms of

the creation of value to the customers, delivering sustainable competitive
advantage and minimising waste.
The unit consists of these elements:
1.0 The Concepts of Production Planning

2.0 Fundamentals of Production Planning
3.0 Current Manufacturing and Materials Planning Systems
4.0 Managing Material Flows Through a Production Process
Tutors and students of this unit are encouraged to “localise and

customise” the materials described in the text by comparing and
contrasting them with the current situation and environment in their
own country and/or region.
AO/INT/0064 – V1.1 XV
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AO/INT/0064 – V1.1 XVI

1. The Concepts of Production Planning
Learning Outcomes
After studying this element you will be able to:
 Understand the elements of production planning;

 Know the purpose of production planning within a supply chain;
 Understand the links between production planning and sales planning
and forecasting;
 Understand the process of demand management;
 Understand the various forecasting techniques.
1.1 The Concept of Production Planning
1.1.1 Introduction
Important terminology used within this element is categorised below.
Definitions of these terms and concepts are given in the text.
 Aggregate plan;
 Demand management;
 Just in Time (JIT);
 Lean production;
 Master Production Schedule (MPS);
 Material Requirement Planning (MRP);
 Strategic planning;
 Production planning.
AO/INT/0064 – V1.1 17
1.1.2 The Basic Concepts of Production Planning
Nowadays global developments have a
profound effect on industry,
necessitating frequent and on-going
revaluation of business practices and
priorities, particularly (but not
exclusively) in areas of production
planning.
Planning entails a series of actions that engage every aspect of a firm’s

activities. Basic information is assembled and tracked from its earliest
stages and applied as a process by which future performance within all
areas of the company’s operations may best be anticipated, designed and
implemented.
The essential ingredient in any planning process is information and

utilising this to understand fully your company requirements and to
implement production plans to fulfil it.
Production planning is best defined as:
The process of creating an overall production plan for a factory, over

a specified period of time.
The basic concepts of production planning can be defined as a method of

managing the production process to reach a balance of business criteria
such as cost; time; labour; resources (e.g. power, fuel, overheads) and
customer expectations.
18 AO/INT/0064 – V1.1
Figure 1.1 Production Planning – From Idea to Customer
Idea
Design
Marketing Procurement
Test
Sales Finance
Prove
Manufacturing product or Prototype Logistics
idea
I.T.
Planning
Forecasting
Product/idea
launch
Launch
On-going
Production
Customers
(Source: Unit author – Wakefield, M., (MILT)
In designing and developing a production plan the following elements

need to be considered:
 sales forecast;
 customer expectations;
 manufacturing forecast requirements;
 stocks of finished goods;
 stocks of raw material;
 raw material on order;
 raw material to purchase;
AO/INT/0064 – V1.1 19
 production capacity (change over times and cost/run sizes);
 warehouse capacity;
 maintenance plan/strategy;
 labour availability skilled and unskilled (holidays, sickness and

overtime);
 make or buy (components or sub-assemblies);
 cash flow forecast;
 quality issues;
 waste minimisation issues;
 Investment in new machinery.
Before considering in greater depth these parameters – it is necessary to

examine why it is necessary and important to develop any plan of
production.
The broad objective(s), which any operations within the company must
pursue to satisfy the stakeholders, form the foundation for all production
and operational decision making.
However, at a more practical, fundamental (production) level, a more

tightly defined set of objectives is required. These are the five basic
performance objectives and apply to all and any type of operations,
including production and manufacturing.
20 AO/INT/0064 – V1.1
 Task 1.1
Considering these five objectives in relation to the car production plant –

how would each objective translate into the action that could be taken
within the automobile company?
 Quality of product;
 Speed of production;
 Dependability;
 Flexibility;
 Cost consideration.
AO/INT/0064 – V1.1 21
 Task 1.2
Imagine that you are a production manager at a car production plant.

What kind of things are you likely to want to achieve in order to
contribute to the company’s competitiveness?
1. You would want to do things right – that is you would want to

ensure that mistakes are not made and you would want to satisfy
your customers by providing error free goods, which are ‘fit for the
purpose for which they were intended’ – this is giving quality
advantage to your company’s customers.
2. You would want to do things fast – thus minimising the time
between the customers’ orders and them receiving the goods in full –
so increasing the availability of your goods to the market place and
giving your customers a speed advantage.
3. You would want to do things on time – so as to keep to delivery
times. If your operation is able to achieve this, your customers are
receiving a dependability advantage.
4. You would want to be able to change what you do – that is being
able to vary or adapt the operation’s activities to cope with
unexpected circumstances and/or to give your customers individual
treatment. To achieve this, your range of goods/products has to be
wide enough to deal with all customer possibilities – either way,
being able to change far enough and fast enough to meet customer
requirements gives a flexibility advantage to your customers.
5. You would want to do things at least cost – that is produce the
goods or products at a cost which enables them to be priced
appropriately for the market, whilst still allowing a financial return for
the organisation. When your organisation is able to do this, you are
giving a cost advantage to your customers.
22 AO/INT/0064 – V1.1
1.1.3 Production Planning in a Changing Business
Environment
Forecasting or estimating the demand for finished goods is the starting

point for all operational activities. It is the trigger that sets the supply-chain
in motion and includes the preparation of:
 capital budgets for plants and equipment and shorter term operating
budgets;
 production plans;
 short term operating cash requirements;
 personnel needs;
 capacity levels of equipment, machines and buildings;
 purchase of raw materials and components;
 transportation requirements.
Forecasting product or customer demands is probably one of the most

problematic functions of management – there is the need to understand
and evaluate:
 The external environment – including markets, clients and changing

technology – where there is considerable uncertainty.
Poor forecasting of client needs by the marketing department is often cited

as the reason for poor production planning.
In forecasting demand, it is possible to be:
 optimistic – making an estimate of demand higher than actually occurs;
 pessimistic – making an estimation of demand lower than actually

occurs.
In either case, there are risks and associated costs.
AO/INT/0064 – V1.1 23
 Task 1.3
A computer company estimates that it will sell 4 million units per annum.
In reality it only sells 2.7 million.
What are the effects that this might have on the following:
a) the whole organisation; and
b) the production department?
By contrast, a rival company estimates it will have annual sales of 5

million units. It actually received orders and sells 7.6 units.
What are the implications of this for:
a) the whole organisation; and

b) the production department?
Production planning in a changing business environment, therefore,

becomes complex because the sales forecasts are only for a short time
period. The manufacturing forecast requirements are, therefore, difficult to
predict and may change daily, rather than weekly or monthly. Some
stable manufacturing businesses that produce the same goods all the
time, for different customers, will have more accurate sales forecasts.
For example, a small engineering firm with lathes, milling and polishing
machines will have to manage production of many different orders for
many different customers all at the same time every week. A production
plan for all the different parts required each week and the raw material
requirement will be more complicated than that of a business with only
standard products and dedicated production lines and operating staff.
24 AO/INT/0064 – V1.1
1.1.4 Links between Production Planning and Business
Planning
Business planning is linked to

production planning. The future
business strategy and direction
detailed in the business plan has an
impact on the goods that will be
produced in future. There will be an
impact on the machinery, factory
layout, labour – both skilled and
unskilled, warehousing space, cash flow and tooling required in the future.
Manufacturing forecast requirements are generated with knowledge of the

business plan and awareness of maintenance procedures. Investment
plans for new machinery will be part of the future production plan and also
influenced by the business plan.
However sophisticated the forecasting process in any business can be,

using historical data to predict future trends, cycles and/or seasonality is
always difficult.
In spite of these difficulties, the nature of anticipating customer demands

and needs means that many businesses have little choice but to forecast
and plan ahead.
For example, in order to satisfy customer demands for speed of delivery

and product availability, an automotive manufacturer, at the time the
customer places their order, will have already made an estimate of the
number of models, engines and colours that it thinks will be sold.
When the customer places an order, one of the models in their chosen
colour, with the correct sized engine will already be in production and is,
therefore, allocated to that customer.
Customers (as any discussion with a car salesman will reveal) are then
also able to choose from a wider range of options, in terms of external
trim, audio systems, interior colour and vehicle accessories – all of which
can be added to the manufacturing assembly, effectively giving the
impression of customisation.
AO/INT/0064 – V1.1 25
Therefore, the manufacturer has to predict ahead the likelihood of the
required mix of models and colours and the likely mix of options that its
customers may choose to purchase and have these products available in
its inventory.
1.2 Sales Planning and Forecasting

1.2.1 Introduction
The purpose of sales and operations planning is to maximise the
efficiency, effectiveness and value added by production and the supply
chain to meet customer expectations in terms of quality, service and
quantity whilst minimising waste and making a contribution to profits.
The sales and operations planning process converts customer

expectations and the available capacity of the supply chain production
process into value added finished goods of the right quality and quantity,
with the right documentation, packaging and approvals.
Testing the production plan can be in the form of computer simulation to

identify bottlenecks, shortages of raw materials or other issues that will
need to be addressed prior to the expense of commencing actual
production.
Making the production plan work involves managing all the elements to
ensure raw materials, parts and sub-assemblies of the right quality and
quantity are at the correct location on time to contribute to the production
of finished goods in time to meet customer expectations. To assess the
progress being made the actual production needs to be compared with the
forecast at a convenient stage to identify any issues.
Taking together the management of customer orders and sales forecasts

is called ‘demand management’.
Demand management encompasses a set of process, which interfaces

between the business of production and the customer demands.
Customers will sometimes change their minds about what they require,
even after having placed their orders. Because customer service and
flexibility are becoming increasingly competitive factors, the opportunity to
change their requirements and specification is becoming an increasingly
common feature in many manufacturing operations.
26 AO/INT/0064 – V1.1
In fact, in a business-to-business supply chain relationship, it may be the
customers’ customers who are the cause of the change in requirements.
Considering that each of several hundred customers may make several

changes to their sales order, not just once, but several times after an order
has been placed – it is apparent that managing sales order books is both a
complex and dynamic process.
1.2.2 Sales and Operations Planning – Purpose, Process

and Implementation
The term planning covers all those activities required for the
organisation’s/company’s desired objectives to be met.
In business, the planning process generally has its roots in the strategic or
long range plan, which is then broken down into a more detailed operating
plan:
 A strategic plan has a nominal time horizon of about five years; through
this period may be longer or shorter depending on the nature of the
industry and organisation.
 The time horizon for the operation/production plan is usually around one
year – but again this figure may vary and for some businesses may be
up to 18 months.
The objective of the production plan is to enumerate in detail all the

activities necessary in order to produce the end products. (See Figure
1.2.)
The production plan may then be further split into:
 short term components;
 long term components.
Short range plans usually consider the activities over less than a 3 month
period and perhaps in some cases just one week or one day time periods.
AO/INT/0064 – V1.1 27
The business activities usually considered in such plans may include:
 scheduling the program of work;
 estimate of the work assignment;
 organising the delivery of raw materials;
 organising the shipment of finished products and goods;
 short term staffing levels.
Within the short term planning period Just In Time (JIT) and Lean
Production management methods are used.
Medium range plans usually consider activities over a period of between

three and twelve months’ duration.
The activities included in such plans may include:
 sales plans;
 staffing levels;
 budget and spending considerations;
 selection of new suppliers;
 use and/or purchase of machinery and equipment;
 production planning.
28 AO/INT/0064 – V1.1
Figure 1.2 Production Planning Horizon
Short Term Medium Term
J.I.T. MRP
TASKS TASKS
 Scheduling;  Production levels;

 Delivery;  Sales plan;
 Reception;  Budget;
 Organising tasks;  Staffing;
 Quantities to make/assemble.  Purchasing;
 Equipment needed.
Depending on business
3 Months 18 Months
(Source: Waller, D., (2002.) Operations Management: A Supply Chain Approach.

International Thomas Business Press.)
The production plan is driven by firm customer orders or by forecast

demand and then developed into 3 component plans:
 aggregate plan – where short term capacity adjustments are made;
 master production schedule;
 material requirement plan.
These plans are closely interlinked (see Figure 1.3) and when a change
occurs to any one variable in one plan, other variables and options in both
that and the other plans occur.
Consequently, the production plan is dynamic and often in a state of flux

because of the changes that may and do occur in both the external
environment and customer requirements.
AO/INT/0064 – V1.1 29
Figure 1.3 Planning Stages from Forecast Demand to Production
Firm order or
forecast demand
Aggregate plan
Master production
schedule (MPS)
Material requirement
plan (MRP)
Production schedule
(Source: Waller, D., (2002). Operations Management: A Supply Chain Approach,

So it is important that in order to achieve the smooth operation of the

supply chain that rigorous attention be paid to the production plan. Poor
scheduling in the reception of raw materials, in the production program or
in the delivery of finished goods can all lead to delays and (importantly)
dissatisfied customers.
Similarly, poor planning for labour and/or machinery use can diminish an
organisation’s capacity, meaning that products cannot be produced and
delivered to the customers when promised.
 Task 1.4
Consider and then evaluate, for any chosen manufacturing company the
impact that a customer, who, having placed and confirmed their order,
then makes:
a) minor specification amendments; and

b) changes the quantity of goods required as on the production plan.
30 AO/INT/0064 – V1.1
Combining known and forecasted orders is used to represent the demand
in many businesses – this should be the best estimate, at any time, of
what reasonably could be expected to happen in terms of customer
demands and orders for the product(s).
Figure 1.4 Combining Known Order and Forecast Orders
Total demand
Forecast
Demand
Known orders
Time in the future
(Source: Slack, N., Chambers, S. & Johnston, R., (2001). Operational Management. 3rd
ed. Prentice Hall.)
Figure 1.4 shows that one important feature of demand management is

that the further the company looks ahead into the future, then the less
certainty there is about demand for the product.
Most businesses have knowledge about the short term demand for
individual orders; however, very few customers place their orders well into
the future. Based on history and market information (from sales reports) a
forecast is put together to reflect likely demand.
As orders come in, the forecast element of the demand profile should be
reduced, giving the impression of the forecast being ‘consumed’ over time
by ‘firm’ orders.
AO/INT/0064 – V1.1 31
It must be appreciated that the above explanation is just an overview of
the way customers order are anticipated and combined with planning for
the actual production of the product(s). Different types of operations have
different profiles, in terms of the mix of known and forecast orders.
 Make-to-order businesses (i.e. jobbing printer) tend to have greater

visibility of their known order over a period of time than does a made-
from-stock business (i.e. consumer durable manufacturer).
 Purchase-to-order businesses do not order most of their raw materials

until they have received a confirmed order from the customer.
Some organisations have very little order certainty (i.e. a newspaper

publisher) – where the real demand is only evident after each day’s
trading.
Therefore, it can be appreciated that different types of business have

different degrees of confidence in anticipating customer demand when
they are making their planning and control decisions; also the level of
confidence that the business may have in their decisions will also vary
over time.
From the planning and control perspective – the output from the demand
management is a predication into the future about what the customer will
require to purchase – both in terms of quantity and specification.
This information – be it knowing the levels of sales orders, forecasting

customer demands or a combination of both, is the major input into the
Master Production Schedule (MPS).
32 AO/INT/0064 – V1.1
1.2.3 Management Development
The effectiveness of any business may be measured by a number of
factors, such as:
 the success with which it achieves its goals;
 its rational and application of the resources available;
 its management’s commitment to efficiency and increased production;
 its recognition of the economic, social, cultural and technical structures;
 changes in the structure and operational style of the organisation.
(Source: Kazan, H., 2005)
To be effective, workforce planning must incorporate these and other

changes that are occurring daily within the dynamic and moving
environment of the workplace (i.e. the shift in emphasis from industrial
production to service and information sectors; the increased number of
women in the workplace; developments and advancement in information
technology, etc.)
The right skill set of labour and management is essential to the successful
running of a production process. It is recommended to train and develop
labour, as well as to develop succession plans and put in place holiday
cover for every skill required.
Skills gap analysis can define the requirements of the training and
development needs of all the staff. The training plan may include group
training as well as individual training requirements for key skills.
Investing in training is seen as a continuous process to encourage all

employees to achieve their highest level of skill and minimise inventory.
Managers need to be trained and developed in leadership and

motivational techniques to improve quality, morale and productivity.
AO/INT/0064 – V1.1 33
Typical training courses that may be considered are as follows:
 presentation skills;
 time management;
 finance for non-financial managers;
 sales;
 customer service;
 health and safety;
 IT system advanced awareness;
 forklift truck driving;
 risk management and assessment;
 quality management and auditing;
 communication.
1.2.4 Forecasting Techniques

Forecasting demand for
production planning is based on
historic usage and trends with
some adjustments for seasonality
and extraordinary demand
fluctuation that can be identified in
the future.
It is important to remember that forecasting can never be 100% accurate.

If the future could be anticipated with certainty, there would never be any
risks. Forecasting is based on taking past events and extrapolating them
into the future. This assumes that what happened in the past is relevant to
future events which may or may not be true.
An effective inventory control system is essential to provide records of

stock and to track historic usage and trends of demand for raw materials
and components. The most common techniques for forecasting are based
on time series. A time series merely shows how the values of a variable
change over time. The time series can be used to establish a trend, which
is then extended into the future as the basis for the forecast, referred to as
extrapolation.
34 AO/INT/0064 – V1.1
The better and more up to date the data the better the forecast will be.
It can be argued that the best estimate of the future is the present and so
we should allocate more importance to the most recent data in trend
estimating.
Exponential smoothing is a method that adopts this approach and it gives

more weight to the most recent data available in order to build a forecast.
There are a number of non-statistical forecasting techniques such as

scenario planning.
For example, an organisation may have created four scenario situations:
 more of the same;
 the optimistic view;
 the pessimistic view;
 radical change – revolutionary invention or discovery.
1.2.5 Long Term and Short Term Forecasts

Consulting sales targets creates long term forecasts and strategic
business plans to identify any growth or decline in demand for the future
and combining this information with the historic usage in a convenient
aggregated form.
Short term forecasts are more tangible and based on historic usage in
disaggregated form with every detail on each item and component. It
needs to consider availability of raw material items from stock, from order
and lead times from suppliers, as well as production capacity available
and capacity required, labour required (skilled and unskilled), cash flow
implications and warehousing capacity for raw materials and finished
goods. Planned maintenance of machinery may also need to be
considered.
 Task 1.5
Discuss the differences between long term and short term forecasting
and the implications of changes in customer demand.
AO/INT/0064 – V1.1 35
1.2.6 Demand Management
Demand management is the combination of the management of sales
forecast and customer orders.
Depending on the business, demand management can include the

following customer interfaces:
 sales order entry;
 demand forecasting;
 order promising;
 customer service;
 physical distribution.
For example when you contact any customer services department on the
telephone about the delivery date of any goods, the operator will use a
computer to access the details of your particular order and be able to
advise the current status of the order and provide the expected delivery
date and the way it will be delivered, by post or by courier.
The interaction with customers and the resulting requirements from that
interaction, make a chain reaction of production planning requirements.
To meet the customer expectation, the item needs to be picked from stock
in the warehouse; the warehouse needs to have the details to ensure the
correct item is selected and a courier or other means of transport needs to
be arranged for a particular time.
It is very important to production planning that the demand information is

made available and communicated effectively to enable plans to be
arranged and resources to be organised.
36 AO/INT/0064 – V1.1
 Case Study – Demand Forecasts
Production is ultimately planned against demand forecasts. Companies

have developed methodologies to manage this.
Demand unpredictability – seasonal/weather.
“The London Eye” This is an observational wheel, based in London, has

32 passenger capsules holding 25 persons and a rotation takes 30
minutes. Operated by the airline British Airways, a creative solution to
levelling/managing demand was to sell timed flights. These are easily
purchased by customers in advance on their website so foreign visitors
can pre-book alongside domestic customers. The benefit is to smooth
demand and avoid unnecessary queuing. This also increases sales.
Companies now have a greater understanding regarding seasonal and

weather related events.
Barbecue Products and Supermarkets. Sales of such products in the

“temperate regions of northern Europe” will greatly increase if the weather
is set to be hot. The large chain retailers understand this and have
developed formulae which they use to predict sales. The formulae will
predict sales increase to each degree of increase in temperature. It does
rely on the accuracy of the “Meteorological forecast“.
AO/INT/0064 – V1.1 37
1.2.7 Master Production Schedules (MPS)
The master production schedule (MPS) is the most important planning and
control schedule in business and forms the main input to materials
requirements planning, as shown in Figure 1.5.
Figure 1.5 Materials Requirement Planning (MRP) Diagram
ed. Prentice Hall.)
The MPS contains a statement of the production volume and timing of the
finished goods to be manufactured. This schedule drives the operation
and determines what is assembled, what is ordered and what is
manufactured.
MPS is the basis of:
 planning;
 the utilisation of labour, and
 determines the provision of material and cash.
38 AO/INT/0064 – V1.1
Figure 1.6 Inputs into the Master Production Schedule (MPS)
Known orders
Forecast demand Key capacity
constraints
Inventory
Sister plant demands levels
Spare demand
Research &
Development
Safety stock requirements
Promotional requirements
ed. Prentice Hall.)
The MRP system can be explained as follows:

 The MRP process commences with the latest updated sales forecast,
as this is the best estimate of demand.
 From this the MPS is produced to detail the amount of each product
that needs to be produced and when it is to be produced.
 The MPS is then compared to the Bill of Materials (BOM) to identify
quantities for each and every piece part in all the sub-assemblies,
components and raw materials required in each time period.
 The material requirement is then compared to the level of inventory held
and orders are created to provide the balance of all the items and
components. The order quantity will take account of any waste and
process yield data.
 A works order is created for all the items made in-house and lead time
issues will be considered for all orders. The order release must also
take into account any open orders with suppliers to avoid over stocking.
AO/INT/0064 – V1.1 39
It is important that all sources of demand are considered when the MPS is
created – it is usually the loss/lack of the odds and ends of the stock
required by the business that may disrupt the whole of the planning
system. For example, certain parts/components or materials may be
taken to build a demonstration model, the factory will/may then be short of
the required components; also, a sister company may ‘borrow’ a spare
part at short notice for their own needs – which if not incorporated into the
plan, may lead to a deficit at the company and ultimately disruption if that
unit/part is subsequently required.
MRP stands for materials requirements planning, which is a dependent

system that calculates material requirements and production plans to
satisfy known and forecast sales orders.
MRP helps to make volume and timing calculations based on an idea of

what will be the necessary supply demand in the future.
The MRP systems is a demand management system that must interface

with customers’ orders to set the requirements for the master production
schedule – this schedule being the central reference source for what the
system is supposed to produce and when.
The output from the MRP system comprises purchase orders, materials
plans and works orders which trigger the purchasing and/or manufacture
of parts.
The Master Schedule drives the rest of the MRP process. Having
established this top level schedule, it performs the calculations to work out
the volume and timing of assemblies, sub-assemblies and the materials
needed to meet the master system.
40 AO/INT/0064 – V1.1
 Case Study
Victoria Foods (a UK based food and baking producer) identified a

problem in its off-site storage of ‘work in progress’ (WIP) among its 160
items of stock. As a result of subsequent efficiency assessment and
evaluation studies around 50,000 WIP units were reduced to 30,000.
To achieve this, the company encouraged the different work departments

and teams within the factory to carry out an assessment of the product
manufacturing frequencies and volumes throughout the year. The aims
being to identify which items were the company’s core products and where
the manufacturing effort should be concentrated.
Of the changes introduced, new resource planning systems, overall

equipment effectiveness measures and exercises to identify the location
and extent of any problem areas in the production process (i.e. delays,
excessive stock holding, meeting clients specific requirements, wastage,
etc.).
The outcome of undertaking the assessment of production practices and

planning techniques and implementing appropriate changes to the
production process meant that the company was able to increase its
overall equipment efficiency rate from 42% to 55%.
1.3 Summary
Having completed this element you should now have a clear
understanding of:
 the basic concepts of production planning;
 production planning in a changing business environment;
 the links between production planning and business planning;
 sales and operations planning – the purpose; processes and

implementation of plans;
 production planning forecasting techniques and demand management.
AO/INT/0064 – V1.1 41
 Task 1.6
The ‘Racal Recorder’ company manufacture recording systems that are

used by a large number of companies and organisations (including
recording emergency telephone conversations and vehicle test
performances).
The company is a market leader with a turnover £50 million per year.
The technology used by the company is complex and controlling its

manufacturing process is equally complex.
One of the major production planning and control problems experienced

by the company is how to coordinate the production process and the
movement of ALL the parts that go into the assembly of the finished
product – especially as ALL the products and systems are configured to
meet the individual customer requirements.
The MRP translates orders and forecasts into work instructions for
purchasing and manufacturing of the parts, sub-assemblies and finished
products.
The main problem encountered by the company, was that after running
the MRP process, finished goods were put into stock to await a
customer order.
When the order was received, the finished goods never exactly matched
the forecasted demand. Some products had to go back into stock to be
re-manufactured into a configuration that the customer really wanted;
while other finished goods for customers remained on the shelves.
Discuss:
a) Exactly what the key problems are at Racal Recorder.
b) The solutions (in terms of planning and control) that may help the
company redress the situation.
42 AO/INT/0064 – V1.1
2. Fundamentals of Production Planning
Learning Outcomes
 Understand Master Scheduling terminology and processes;

 Understand the purposes and management of Rough Cut Capacity
Planning (RCCP);
 Understand the use and processing of Bills of Materials. (BoM);
 Know the purpose of Capacity Requirements Planning;
 Know the responsibilities of Production Control;
 Understand basic scheduling concepts.

Definition of these terms and concepts are given in the text.
 Aggregate plan;
 Bill of Material (BoM);
 Capacity Requirement Plans (CRP);
 Closed loop material requirement plans;
 Master schedule;
 Material Requirement Planning (MRP);
 Produce to order;
 Produce to stock;
 Resource requirement plans;
 Rough cut capacity plans.
2.1 The Fundamentals of Production Planning –

Introduction
2.1.1 Master Scheduling
Linking sales to manufacturing is a key element in successful production
planning.
The objectives of minimising waste and contributing to profits balance with

the need to provide sufficient quantity and quality of finished goods to
meet the customer expectations and hold the required stock.
AO/INT/0064 – V1.1 43
Master scheduling is the key-planning tool that determines a time horizon
in weeks or months (depending on the company or nature of the
manufacturing process) indicating what end items need to be completed.
These may include:
 finished products or goods to be shipped directly to the client;
 finished products to be placed in inventory;
 intermediate goods or industrial products to be despatched to another

company;
 intermediate goods to be transferred to another section of the same

company.
The master schedule is the pilot steering

all the work centres and, as such, acts as
the link between:
 the aggregate plan, and
 the material requirement plan.

Nowadays, in many organisations, the
master schedule is a computer driven
schedule, linked to other aspects of
planning within the organisation.
Master scheduling is the planning mechanisms that should be prepared in

collaboration with the managers of production, sales and perhaps finance
and is established by considering the following:
 manufacturing capacity constraints + inventory strategy;
 client’s demand + freshness policy/shelf life;
 financial means of the organisation.
The overall objective of the master schedule is to develop a schedule of

end items to be completed, when promised, so that client delivery dates
are respected.
It should also avoid overloading or under loading the production facilities

and processes so that the production and/or manufacturing system is
optimised.
44 AO/INT/0064 – V1.1
2.1.2 Rough Cut Capacity Planning (RCCP)
The master schedule is developed from:
 firm or expected customer orders;
 forecasts;
 inventory status reports;
 production capacity information.
The most urgent orders are placed in the first available open slot of the
master schedule and then, as all the orders are slotted, in a rough cut
capacity plan emerges that shows the load of the production work centre
in relationship to the available capacity.
The load may equal the capacity or the system may be under loaded or
overloaded.
Table 2.1 Demand Data for a Manufacturing Company
Week 1 2 3 4 5 6 7 8 9 10 11 12 13
Committed 220 180 160 45
Planned 105 230 240 190 275 190 150 100 20 10
Forecast 80 60 115 230 270 140
TOTAL 220 180 265 275 240 190 275 270 210 215 250 180 140
(Source: Waller, D., (1999). Operations Management: A Supply Chain Approach.

The data in Table 2.1 shows, for a manufacturing company, the number of
schedule units that have to be finished each week over a time horizon of
13 weeks according to whether they are committed (that is a firm
customer’s order) expected (not a firm order, but an order that is fairly
definite) and forecasted (based on anticipated/expected) sales.
The production capacity for this (and any) company is fixed according to
the capacity of the machinery and the labour force (when the data is
transposed on to the MPS) – in this instance it is determined at 240 units
per week.
AO/INT/0064 – V1.1 45
Unloading is where, on the initial MPS, not enough production has been
scheduled, so that the facility is not fully loaded (and thus not operating at
optimum capacity) – in this instance, this is occurring in weeks 1, 2, 6, 9,
10, 12 and 13.
Overloading occurs when too much production has been scheduled and
the production schedule is at over capacity. For the above company, this
is occurring in weeks 3, 4, 7, 8 and 11.
The purpose of the rough cut capacity plan is to see where any
adjustments to production can be made – with the aim of balancing the
manufacturing production process.
Table 2.2 Loaded Demand Data with Balanced Capacity for a Manufacturing
Company
Week/
1 2 3 4 5 6 7 8 9 10 11 12 13
Period
Committed 240 240 125 0 0
Planned 0 0 115 240 240 240 240 155 150 100 30 10
Forecast 0 0 0 0 0 85 90 140 210 230 140
TOTAL 240 240 240 240 240 240 240 240 240 240 240 240 140
(Source: Waller, D., (1999) Operations Management: A Supply Chain Approach,

Table 2.2 shows how the total units for each category has remained the
same, but that by adjusting the production loading, adjusting the weeks
that had over and under loa ding, the system is now completely balanced
and any excess load and spare capacity has been left for week/period 13.
If this information is transposed on to a graph, the final master schedule

can be broken down into a series of 4 zones or fences, an activity
undertaken by many companies – depending on the rigidity of their
planning programme.
46 AO/INT/0064 – V1.1
Table 2.3 Master Production Schedule: Balanced
Production Froz Froz Fixed Fixed Fixed Full Full Full Full Open Open Open Open
240
220
200
180
160
140
120
100
80
60
40
20
Week 1 2 3 4 5 6 7 8 9 10 11 12 13

Thomson.)
The frozen period (the first stage) covers the weeks/periods where there
are all the committed units, as shown in Table 2.3 for weeks 1 and 2. The
implication of the definite planning is made in terms of using the staff,
machines and materials optimally and during this time frame any changes
would seriously disrupt the operations.
Any modifications suggested during the frozen period, would usually be

prohibited because it would be too costly to alter and change the plans –
although, with approval from the Planning Production Director (or the
equivalent depending on company policy) changes may be permitted
under extraordinary circumstances.
The fixed period (the second stage) is programmed for the remaining
committed and some planned units, as illustrated in Table 2.3 during
weeks 3 to 5. This time frame is considered as being fairly rigid, though
less so than the frozen period.
The plans during this period may be modified, but only under exceptional
circumstances and in reality any changes would be resisted as much as
possible.
The full period (the third stage) contains the planned and forecast units
(weeks 6 to 9 in Table 2.3). During this period all available production
capacity has been allocated, but changes may be made without an
excessive increase in production costs.
AO/INT/0064 – V1.1 47
The open period (the fourth and final stage) is the most flexible in terms of
modifications to the productions schedule. Here not all the production
capacity has been allocated (as shown in week 13 in Table 2.3) and so
this is where any new orders may be allocated.
 Task 2.1
Time fences/zones (frozen, fixed, full and open) in a master production

schedule make sense from an internal planning point of view.
Discuss the constraints that these time fences/zones would have on a

manufacturer producing small components for 12 small local and
national companies and 2 major international clients.
It may appear that this time fencing/zoning approach to planning is very

inflexible and does not/cannot accommodate any last minute changes
from the customer.
Whilst the schedule, once established is not flexible, especially in the early
frozen and fixed periods, it does reinforce the importance for effective
supply chain management and that the production, sales and finance
aspects of the business should be closely involved in the preparation of
the master schedule and that ALL should make the commitment to support
the plan, once an agreement has been made.
Any last minute changes may represent cost (both in terms of financial
and time inconvenience) to the company, whether this arises through
under-utilisation of the machinery and stock, stock lying on shelves, delays
to customer orders, lack of adequate components to complete orders,
customer dissatisfaction, etc.
48 AO/INT/0064 – V1.1
 Case Study – Increased Productivity
A medium size manufacturer of specialist joinery products, producing to

stock and with an important made to order sector. The company
employed 20 skilled joiners that could work on any aspect of the
production. Joiners would work on a piece of work from cutting through to
completion. Quality of work was excellent but the business owner was
surprised that they were winning less than 20% of the quotations they
prepared for made to measure staircases - a particularly important and
thriving business in their area.
His analysis showed that the method of production was wasteful on time
and also materials, resulting in cost of production that was too high and
non-competitive. He re-organised the factory unit into areas of expertise
which still allowed the joiners to use their skills, but it dramatically
increased productivity. Without this intervention, the company would have
gone out of business.
 Task 2.2
Discuss, in relation to production planning and operations, the key

factors evident from the above case study.
Aside from the business closure, what were the implications of their
business practices for:
a) all the customers?

b) the suppliers?
c) the overall organisations?
d) the production process?
AO/INT/0064 – V1.1 49
2.1.3 Demand Forecasting
Demand forecasting is a most important element in production planning.
The outcomes of such forecasting will affect the:
 types of product developed and marketed;
 production facilities to be provided;
 volume of output;
 inventory levels.
Short term forecasts are useful for production managers in order to

indicate the expected demand for products and the consequent
requirement for materials.
Predicting the quantity and type of materials required is an essential

element of production control – since a lack of materials will result in
production delays, while excessive stocks of materials will be an
unnecessary cost to the company.
Medium term forecasts provide information on which personnel,

equipment and material requirements can be based – on average over a
yearly time span.
Long term forecasts, by comparison, are used to provide the general

future of the company, including consideration of product mix, exploiting
and developing new products, capacity changes and site relocation.
Forecasting techniques can be considered to fall into three categories,

those based on:
 opinion;
 the analysis of historical data;
 the analysis of correlation with one or more variables that can be linked
to product demand.
Typically, for short term forecasting, analysis of historical data is the

preferred choice, whilst forecasts based on correlation with linked
variables is more generally used for short and medium term forecasting
and those based on opinion for medium and long term forecasting.
50 AO/INT/0064 – V1.1
Opinion based forecasts may draw on information and data from a variety
of sources, including:
 Sales representatives – i.e. the strength of competitors, customer

attitudes and sales prospects.
 Distributors – sales prospects, etc. – this group, because they will

probably be selling a range of products will be more likely to present a
balanced view than the sales representatives.
 Customers – information may be gained by including a product based

questionnaire in the distributed goods.
 General public – their opinion on product preference and choice, etc.

may be gained through market surveys, focus groups and
questionnaires.
Figure 1.7 The Three Dimensions of Forecasting Techniques and Examples of
Data and Intelligence Sources
There is a range of techniques for making forecasts based on historical

data. Below is an explanation of how various forecasting techniques have
developed. There is extensive science and algorithms now in use in
modern planning systems. The standard Enterprise Resource Planning
[ERP] system includes forecasting as its first step in estimating sales and
demand. Sales and Operations Planning systems are based on
forecasting demand both short and long term.
AO/INT/0064 – V1.1 51
It is, therefore, essential to understand what a forecast is and the
strengths and weaknesses of different methodologies used in estimating
demand. The latest software systems continually strive to improve
forecasting. It is not an exact science as there are many dynamic
variables, both internally but also external factors are now so important.
Most businesses are operating in a global market, and so many external
events can also affect demand forecasts. In the early 21st century we
have experienced national events that immediately have impacted
companies worldwide. For example: earthquake and tsunami in
Fukushima, Japan. This impacted the supply lines of many industries
such as auto manufacturing and hi-tech electronics worldwide especially
within Europe where car factories went on short time working for a number
of months due to supply chain disruptions to auto assembly components
manufactured in Japan.
2.1.4 Some Examples of Forecasting Techniques

Drawing Trend Lines
Where, for example, the annual sales of a product are plotted on a graph,
and then from the scatter of these points a trend line is added, indicating
the best fit between all these variables. At this simplest level, this trend
line can be drawn by eye; although there are now computer packages
which will do this and more complex trend lines (such as regression lines;
least squares regression lines, etc.)
Simple and Weighted Average Scores
The simple way of smoothing out the effects of random variation in, say
product demand, is to take a moving average.
To achieve such calculations – in a given set of data (n), the average is

obtained by totalling the required variables and then dividing by the
number of variables (i.e. total of sales each month over a 12 month period,
divided by the number of month, in this case 12).
The term moving average is used when each time the average is taken for
the latest (n) set of data. The set moves forward each time by dropping
the earliest piece of data and incorporating the most current figure.
52 AO/INT/0064 – V1.1
Figure 2.1 Moving Averages
Chart shows 50 day moving averages 3 different methods.
Blue: Simple moving average 50 day

Yellow: Exponential moving average 50 day
Red: Weighted moving average 50 day
Exponential Moving Averages (Exponential Smoothing)
Overcomes the problems with the simple moving averages or the

weighted moving averages where there is arbitrariness about the number
of values used in calculating the averages. For example, should a three or
six month time period be used and that new calculations need to be
performed on each occasion.
 Task 2.3
What principal aspects would need to be considered in forecasting

demand in the following businesses?
a) garden furniture?
b) Christmas (or similar religious/seasonal festival) decorations you

would have to consider when utilising the smoothing and averaging
techniques?
AO/INT/0064 – V1.1 53
2.1.5 Basic Process
MPS in manufacturing contains details of volume and timing of the finished
goods. This schedule drives the whole production process in terms of
what is purchased, what is manufactured and what is assembled.
All sources of information are required to create a master production

schedule and can include the following:
 sales forecast demand;
 stock levels;
 spares demand;
 research and development requirements;
 customer orders;
 safety stocks;
 promotional requirements;
 seasonality;
 planned maintenance periods.
Table 2.4 Example of a Simple MPS for One Single Item
Week no.
1 2 3 4 5 6 7 8 9
Demand 20 10 20 10 15 15 15 20 20
Available 15 5 0 0 0 0 0 0 0
MPS 0 0 15 10 15 15 15 20 20
On hand 35
‘Demand’ is a combination of sales orders and any sales forecast.
‘Available’ is how much stock is expected to be available at the end of

each weekly time bucket within the MPS.
‘MPS’, master production schedule requirement to meet the demand in

that weekly time bucket.
‘On Hand’ is the opening balance of stock for the item.
54 AO/INT/0064 – V1.1
In this example (Table 2.4) the opening balance of stock for the item is 35.
The demand in week 1 is 20, leaving 15 available for the following week.
The MPS is zero as there is no requirement to manufacture.
The demand in week 2 is 10 and as 15 are available from week 1, the

amount available in week 2 is 5 and the MPS is zero as no production is
required.
In week 3 the demand is 20, 5 are available from week 2 and therefore
MPS needs to be 15 to produce the balance.
The MPS is a dynamic (moving) tool and is usually updated weekly, so

that when week 1 is finished that week is deleted and a new week added
to the end of the schedule. The demands for the whole MPS are then re-
estimated with any changes taken into account and, if necessary, the MPS
is rebalanced.
The accuracy of the data in the latter part of the schedule is not as reliable
as the early weeks, which are usually dominated by firm customer orders,
whereas the latter end is dominated by forecast information and data.
The planning horizon for the MPS can be increased from a few weeks to
months. Whilst this largely depends on the nature of the industry, the time
horizon should at least be equal to the longest cumulative end item lead
time.
The cumulative end item lead time is based on the length of the supply
chain and is the amount of time taken to:
 obtain materials from suppliers;
 produce all parts and assemblies;
 assemble items;
 pack and ready the completed items for shipment;
 deliver the goods to the customer.
It is the end item with the greatest cumulative lead time in the supply chain
that determines the span of the planning horizon, although in reality, the
planning horizons are usually greater than this minimum figure.
AO/INT/0064 – V1.1 55
2.1.6 Produce to Order Master Scheduling
The total throughput time in
production planning includes three
elements:
 purchase time;
 manufacturing time;
 delivery time.
The demand times are different in

MTS (make to stock) and MTO
(make to order) planning.
The demand time in MTS planning is just the delivery time.
The demand time in MTO planning includes manufacturing time and

delivery time.
The demand time is shorter in MTS scheduling and this method will
provide the quickest delivery to customers, the disadvantage with this
approach is that the business will need to carry a stock of each item and
determine what quantity of each item to hold in stock. This stock will have
to be financed and that will impact on the available working capital.
MTO scheduling has no finished goods held in stock, if the business is in a

flexible ever changing environment with customers that have different
requirements and rarely order the same items then this approach is
advantageous as there is no finished goods stock to waste when the
customer requirement changes.
In producing-to-order it is the customer specific orders that dominate the

demand management in the MPS.
Scheduling work in from backlog and the product forecasts may never be
used.
In updating the MPS, orders in the backlog are assigned open production
slots and the number of products to produce in an order (lot size) is
usually determined by the customer requirements.
If a customer orders, say 1000 desks, ordinarily 1000 of these desks will
be produced for that order. This approach to lot sizing is call lot-for-lot.
56 AO/INT/0064 – V1.1
Since the product to order firms have many product designs, the number
of product references that have to be placed in the MPS can be very large.
In operations planning, as well as in manufacturing, warehousing or

purchasing, decisions need to be made about how much material and
what size of lots to prepare.
Lot size is an important part of MRP and depending on lot size, ordering
components by lots, results in periods of high inventory when the materials
arrive, interrupted by longer periods with falling inventory as the materials
are consumed.
In terms of produce to order units/products are produced when the order is

received, therefore, if feasible, with the resources available, the lot size is
equal to the order size. For example, a furniture manufacturer receives an
order for 45 cabinets, the order made is therefore 45.
2.1.7 Produce to Stock Master Scheduling

In updating the MPS in produce-to-stock companies, the product orders
may come from the warehouse within the company or the firm’s own
distribution centre.
These orders are based on forecasts of future demand and so accurate

forecasting plays an important part in demand management situations.
In the early part of the MPS, the warehouse orders, which were based on
forecasts, may be backed up by actual customer orders.
Lot sizes in produce-to-stock companies are a matter of economies, where

small lots increase the set-up costs and large lot sizes increase the
carrying costs.
The produce-to-stock product is standard and the company and the

expected scale of production base the size of the lot on the economic size
that is feasible.
AO/INT/0064 – V1.1 57
When large lot sizes are produced in any one period then:
 the cost of the machinery set up per unit is less.
 the carrying costs are higher for finished goods than for the raw
materials, this is because of the value added activity in the production
process.
If small lot sizes are produced (i.e. as in Just in Time and Lean Production
Methods) in any one period then:
 the set up costs will be large;
 the carrying costs will be lower;
 there will be a reduced risk of the stock becoming obsolete.
 Task 2.4
In the development of an MPS discuss, using specific examples:
a) The reasons why firms may choose to produce their products in

large and small lots.
b) The advantages and disadvantages of these two modes of

production.
c) The types of products that may be produced in large and small lots.
 Task 2.5
In the development of an MPS discuss, using specific examples, what

the advantages and disadvantages are between produce-to-stock and
produce-to-order?
58 AO/INT/0064 – V1.1
Measuring Performance
There are five performance objectives for measuring performance of

production planning:
 quality;
 speed;
 dependability;
 flexibility;
 cost.
Performance measures need to be consistent across all the different parts

of the organisation. Consistency across both strategic business objectives
and operational criteria will help to establish credibility. Credible measures
are more effective as suppliers tend to take them more seriously.
Performance objectives include the following:

 organisation needs and requirements;
 user needs and requirements;
 impact of measurement;
 links between performance measures and production process.
Managing Master Scheduling and Rough-Cut Capacity Planning

Processes
The MPS within MRP is said to be open loop, as the system has no
feedback loop to confirm the actual production quantity at the end of each
time period or time bucket.
Rough-cut capacity plans fill this gap and provide a link to effectively close
the loop for MRP.
Rough cut capacity plans (RCCPs) are a form of closed loop MRP.
They provide a feedback loop at the end of each weekly or monthly time
bucket in MPS to check the MPS against known capacity bottlenecks and
key resources to ensure they are feasible.
If the MPS is not achievable, it needs to be adjusted to operate in certain

constraints. It is sometimes termed a ‘finite capacity plan’.
AO/INT/0064 – V1.1 59
2.2 Materials Planning and Capacity Management
2.2.1 Planning and Control
The division between planning and control changes over time.
A ‘plan’ can be described as a list of events that are intended to happen in

the future but with no guarantee that the events will actually happen.
‘Control’ can be described as the process of coping with these variables

and changes in customer expectations.
The blend of planning and control will vary over time. Planning will tend to
dominate in the long term (months, years) and control will tend to
dominate in the short term (hours, days).
 Long term planning and control (months, years) uses aggregated

demand forecasts and determines resources in aggregated form.
Objectives are set in largely financial terms.
 Medium term planning and control (weeks, months) uses partially

aggregated demand forecasts and determines resources and
contingencies. Objectives are set in both financial and operations
terms.
 Short term planning and control (hours, days) uses totally

disaggregated forecasts or actual demand and makes adjustments to
the resources to correct deviations from plans. Objectives are set in an
ad hoc manner as current customer expectations and actual demand
have priority.
The MRP system is a computer based system and many companies have
developed or purchased one of the commercial available software
packages.
60 AO/INT/0064 – V1.1
The MRP is driven by the MPS (see Figure 2.2) and the basic purpose is
to indicate:
 What types of materials have to be obtained from outside the

organisation and/or company and in what quantities, taking into account
current inventory levels?
 What types of materials are needed to be manufactured internally and

again, in what quantities, taking into account current levels of stock?
 When to place the orders, either for purchases from outside or inside
the company, taking into account the lead time for the materials to
arrive or be produced.
As a planning tool the MRP provides the precise control for manufacturing
operations regarding the amount and timing of the deliveries of the
materials needed to produce the end items, as identified in the MPS.
Such a planning tool helps to:
 avoid inventory stock-outs;
 minimise excessive levels of inventory;
 optimise the utilisation of labour and materials.
MRP is one of the major planning tools for supply chain management –
linking the purchasing and manufacturing activities within the company.
When coupled/linked to a distribution requirement planning system, the

MRP serves as a complete integrated operation.
AO/INT/0064 – V1.1 61
Figure 2.2 Material Requirement Plans (MRP) Open Loop System

For the MRP to provide accurate program materials requirement, the

following inputs are needed:
 Master Production Schedule – the driving wheel of the MRP, where
early periods of activity are frozen, middle periods are fixed and the
latter weeks either full and/or open. This schedule is a dynamic plan,
with periods dropped once they have been completed or fulfilled.
 Product structure on the Bill of materials – a diagram, drawing or list of

all materials and the quantities required to produce one unit of finished
goods or an end item. The product structure is usually shown as a
hierarchy relationship, with the components and materials illustrated at
different levels, where the end product is at the highest level (0 or 1)
and then the components that make up that product at a lower level.
The inventory file contains a complete record of the quantity of each

materials held in the inventory.
62 AO/INT/0064 – V1.1
A detailed file would provide details of the following:
 transactions;
 receipts;
 disbursements;
 scrapped material;
 planned orders;
 projections of delivery dates;
 quantities of each material need for the order;
 when to place the order.
Also in the inventory file will be the lead time or the time required to
produce a production lot in-house or to receive a lot purchased from a
supplier.
To take account of the lead time a requirement in one time period will
necessitate the release of the order in some earlier period according to the
estimated delivery period.
When the inputs have been estimated, the MRP will generate the
necessary outputs, which will be the purchase requirements for any
products needed to be obtained from outside the company and also the
products required to be made in-house.
The relationship between the manufacturing inputs and outputs is shown

on the MRP diagram on the previous page. As is shown, the MRP is
interrelated with all the elements in the system, so any errors and/or
changes in one component/part of the MRP can snowball throughout the
whole manufacturing system.
The use of the MRP is widespread in the manufacturing and production

sectors of industry, but the terminology used, because of the enormous
range of commercial products manufactured is immense, although many
of their meanings are similar.
AO/INT/0064 – V1.1 63
Some of the more common generally used terms, and their definition are:
Gross Requirements
The total quantity of materials needed to satisfy demands within a given

time period, some gross requirements may be satisfied by units already
held in stock.
Available, or On-Hand Inventory
The material available for use during the corresponding time period.
These may include units held in storage from previous time periods, safety
stock or schedule receipts expected to arrive during the time period in
question.
Allocated Inventory
Material in storage but which is destined for purposes other than the MRP
being developed, for example, spares held for another production process.
Safety Stock
Inventory is not normally available for the operation in question. The

material that can be used for the MRP program is determined from the
relationship:
Inventory on hand = Inventory allocated – Safety stock
Schedule Receipts
Inventory anticipated to have been received from suppliers within a

defined time period as a result of order already placed (i.e. open orders).
Scheduled receipts are often assumed to be available for use during the
relevant time period – they are NOT the same as planned ordered
receipts.
Net Requirements
The quantity of materials needed to meet the schedule demand. The

calculation to determine net requirements is:
Net requirement = Gross requirement – Inventory available.
64 AO/INT/0064 – V1.1
Planned Order Releases
Quantities of the units that need to be planned for release, within a certain
time period, so that they are available to meet planned order receipts at a
future date. The formula for calculating the lead time is:
Lead time = time difference between planned order released + planned

order receipts.
Planned Order Receipts
It is anticipated that the quantity of material will be received in order to

meet the net requirements. There may be lot-size limitations resulting in
planned order receipts being greater than the net requirements. In these
instances, the excess inventory goes into storage for the next period.
When calculating lot sizes, in addition to the above considerations, the

yield rate also needs to be evaluated as, if the material is lost during an
operation, the actual order quantity will need to be greater than the net
requirement.
Whilst, it is hoped that 100% of the material will be available and used, in
reality this may not be the case – especially as some parts and/or
materials may:
 not be according to the required specification;
 be damaged;
 become wastage and waste material.
In these cases, and to allow for such situations, the yield of the component
needed to be at a higher level will be less than that actually put into
operation at the lower level.
The yield rate is % of the starting material that actually ends up being
utilised and incorporated into the final product.
This yield rate takes into account the proportion of the material that does
not conform to the specified requirement and is, therefore, unusable in the
production process.
AO/INT/0064 – V1.1 65
The actual order quantity (Q) is given by the relationship:
net requiremen t
Q
100  scrap %
Where (100 - Scrap %) is the yield rate.
For example:
The net requirement of a sub-assembly unit in a lot-for-lot ordering system

is 800 units with an estimated loss of 4%, the actual quantity of material
needed to be ordered is (having converted the % to a proportion):
800
Q
1.0  0.04
Q = 834 units (the figure having been rounded up).
2.2.2 Bills of Material (BoM)

Bills of material (BoM) are essential in production planning using MRP.
They can be likened to the list of ingredients in a recipe.
Bills of material contain a full list of all parts and which parts fit on to other
parts to form sub-assemblies. The same part may be used on several
sub-assemblies in different quantities. The total quantity required for each
part to complete one finished product including packaging, is held in the
Bill of Materials.
Bills of Material for different product types are defined in product structures
or shapes, which relate to product designs.
Typical shapes of BoM product structures are ‘A’, ‘T’, ‘V’, and ‘X’.
 ‘A’ shaped product structures describe products with many different

parts and only a limited number of finished goods or products. For
example the game of Monopoly with lots of different pieces in the box
but only one product on the market.
 ‘T’ shaped product structures describe products with a small variety of

parts that can form many different highly customised end products. For
example, a printing machine for making business cards, the business
cards are different for each customer but the equipment and raw
materials are the same.
66 AO/INT/0064 – V1.1
 ‘V’ shaped product structures describe products which are similar to the
‘T’ shaped structure but with more possibility to combine and mix the
sub-assemblies to form different products. For example, the mixing and
blending of different liquids to produce a range of shampoo products.
 ‘X’ shaped product structures describe products that have a standard

collection of sub-assemblies in the heart of the product which are
further enhanced by many different options such as fashionable surface
finishes and decoration on a standard ‘shell’ of an item of kitchen or
bedroom furniture.
The Bill of Material is managed by the production planning function. The

production planning team are responsible for ensuring that the correct,
accurate and most recent data is available in the BoM with their effective
dates.
 Task 2.6
Prepare a bill of materials (BoM) for a plastic ballpoint pen (e.g.: Bic).
2.2.3 Material Requirements Planning (MRP)

Material requirements planning,
or MRP, was developed in the
1970s and is a system to calculate
demand for each and every part
and component of an assembly to
meet the production planning
requirements for finished goods in
a specified time and volume to meet customer expectations.
MRP is managed by production planning and is an aid to making volume

and timing calculations to supply the future demand of goods that involve
a considerable amount of assembly and sub-assembly.
For example, a motor vehicle has many sub-assemblies and components

such as the engine and gearbox, the interior trim and seating and the body
shell and doors.
AO/INT/0064 – V1.1 67
The MRP system will be able to determine the quantities of each part for
each sub-assembly to ensure that the customer order is satisfied. If a
particular item is used in more than one sub-assembly then the MRP will
calculate the total quantity and the due dates for the items to ensure the
finished vehicle is available for the customer on time.
MRP aims to answer three questions regarding components and sub-

assemblies:
 what is required?
 how much is required?
 when is it required?
When the demand for a product is erratic, determining stock order by

stock point generation can result in problems.
Such a situation may arise with batch manufacture when certain

components or materials are required in large quantities at the infrequent
intervals at which a batch of a particular product is made. In such
circumstances it is more appropriate to generate orders by a method
based on the number of orders for finished goods that have been
received.
The stock levels can then be geared to when a batch is to be produced

and thus avoid stocks of components and materials being maintained and
held on the shelves – also perhaps freeing the production process for
more effective and efficient usage.
MRP is such a method that may be used in these circumstances.
MRP is for a given product based on:
 a bill of materials (BoM) which, as previously discussed, lists all the

components and materials required for a products, and
 a production or assembly schedule, which stipulates when all the

necessary components and materials to construct that product will be
required.
68 AO/INT/0064 – V1.1
Combining this information with knowledge of the lead times for the
delivery of the components and the materials from the suppliers enables
the purchase dates for the components and materials to be determined.
The aim of the MRP is to enable stocks of components and materials to be

available for production when, and in the quantities required, and
otherwise to keep levels of stock held (inventories) low.
For a company that manufactures and/or produces products by batches,

where (and if) each product contains many components and materials
then computer software, especially MRP software, is available to ease and
facilitate such planning necessities.
The success of the MRP is dependent on the inputs from the other
components - an accurate BoM; realistic MPS and accurate inventory
records.
2.2.4 Capacity Requirement Planning (CRP) including

Inputs, Capacity Availability and Requirements
Capacity requirement planning,

or CRP, is the management of
resources such as labour,
equipment and material that tests
the MPS to see if there is
sufficient capacity for the
operations and production.
CRPs are a form of closed loop

MRP. MRP will generate day-to-day works orders and this will have an
impact on the forward loading of some machines or fixtures.
The plans will project the forecast work loading and if necessary
temporary labour or resources can be used to support the future workload.
CRPs create a balance between the available capacity in production and

the required demand capacity over the short to medium term.
AO/INT/0064 – V1.1 69
2.2.5 Links to Other Planning Systems
MRP or ‘baby MRP’ as it is sometimes called was created in the 1960s
and has been developed and refined to include feedback loops to plan and
control production and inventory in manufacturing businesses.
The more recent development of manufacturing resource planning, MRPII

is a system for planning and monitoring all resources of a manufacturing
business including finance, engineering and marketing. It is based on one
integrated system containing databases, which is accessed and used by
the whole company.
When the MRP was originally used in manufacturing, material plans were
instigated at the beginning of each week, then a complete re-planning
exercise took place the following week – creating a new set of plans.
This process was repeated weekly but there was no feedback mechanism
to identify and determine either:
 whether the plan was achievable, and
 whether what was specified had actually been met.
Consequently, developments in MRP systems led to systems that started

to include feedback loops, these became known as ‘closed-loop MRP’
systems.
Closing the planning loop in the MRP system, involves checking the
production plans against the available resources, so that capacity is
checked throughout the process and if the proposed plans are NOT
achievable at any levels they are revised.
Today the simplest MRP systems are now ‘closed-loop’, using three
planning routines to check the production plans against the operation’s
resources.
70 AO/INT/0064 – V1.1
Figure 2.3 Closed-Loop MRP System
ed. Prentice Hall.)
Resource Requirement Plans (RRP)
These plans are static level plans that involve looking forward in the long
term to predict the requirement for large structural parts in the operation,
such as the numbers, locations and size of new plants and factories.
Because they are attempting at facilitating the long term production plan
by making arrangements to have the required resources available, they
are sometimes termed ‘infinite capacity plans’; as they assume on an
almost infinite ability to step up production, if demand warrants it.
Rough-Cut Capacity Plans (RCCP)
These plans are focused towards the medium and short term planning of
the organisational and production processes.
The feedback loop at this level only checks the MPS against known
capacity bottlenecks and key resources.
If the MPS is identified as NOT being achievable (at this phase/level) then
it needs to be adjusted.
AO/INT/0064 – V1.1 71
Unlike the RRP, the rough-cut capacity plans are ‘finite capacity plans’, as
they must operate within certain (pre-determined) constraints.
Capacity Requirement Plans (CRP)
On the day-to-day basis, the work orders intended to be issued from the
MRP will often have a variable effect on the work (and production) loading
of particular machines and/or workers. CRPs project and anticipate the
potential future effects of any loading.
CRPs are ‘infinite capacity plans’, in so much as they do not take the
capacity constraints of each machine or work area into account. If the
loading is lumpy, it may be smoothed by re-planning to a ‘finite capacity’ or
by allocating temporary resources to that work area.
The closed-loop system of the MRP can (and often is in industry) further
be developed to drive very short term plans, such as that show in Figure
2.4.
Figure 2.4 Closed-Loop MRP System in Reality
ed. Prentice Hall.)
72 AO/INT/0064 – V1.1
2.2.6 Production Control
Responsibilities of production control include the following:
 quality of components, sub-assemblies and finished goods;
 managing the MRP, BoM and MPS to optimise the production

availability and output of finished goods to meet customer expectations;
 managing information to ensure it is correct and up to date;
 liaise with all other functions to meet customer expectations in the

goods;
 maintenance of plant and machinery to ensure production availability;
 waste management and elimination;
 training of labour;
 ensure the goods meet customer expectations.
Information and data requirements include the following:
 the latest information available on the systems with no delay;
 no duplication of parts and descriptions;
 accurate details to support the suppliers systems;
 lead times;
 alternative part details;
 contact details;
 emergency procedures;
 waste handling;
 health and safety information;
 hazardous material handling and storing information.
2.2.7 Scheduling Concepts

Schedules are statements of volume and timing. Schedules of work are
used in operations where some planning is required to meet customer
expectations.
The scheduling activity is complicated because several different types of

resource need to be managed simultaneously, e.g. different types of
machines or staff with different skills.
AO/INT/0064 – V1.1 73
The number of possible schedules rapidly increases as the number of
activities and processes increase. The task of scheduling needs to be
repeated frequently to reflect any changes in the market and product mix.
Minor changes to the product mix may result in capacity constraints
creating bottlenecks that will move around the facility.
Forward scheduling involves starting work as soon as it arrives regardless

of when it is due. Backward scheduling involves starting jobs at the latest
possible moment in order to complete them on time. The most common
scheduling technique is the use of Gantt charts. Scheduling work patterns
are used when the dominant resource is staff. It ensures that the
maximum productive capacity of the staff within the operation is achieved.
Aggregate planning in the manufacturing sector involves deciding on

precisely how the resources will be used to meet the forecast or the actual
customer demand(s) cost effectively, within the constraints of the capacity
of the plant or facility.
To achieve this, the decision(s) needs to be made regarding the

requirements for and the use of the following:
 existing labour force within the company;
 machines and equipment already within the plant;
 raw materials and components that need to be purchased;
 outside labour services, including and subcontracting of work.
In an ideal situation the company would have a plan that is repetitive and
can be effected with a steady rhythm – such as producing similar
quantities of materials each week using the same machines and a level
labour force – all this would make the organisation process very simple.
However, in reality, client requirements are rarely constant and there may
be peaks of high demand and troughs of low demand.
To meet this variability, a well-conceived aggregate plan should provide

the means for organising the production process to accommodate the high
and low demands and, at the same time, keep the company’s resources
(both equipment and manpower) operating close to capacity, avoiding any
overloading and excessive under loading and underutilisation.
74 AO/INT/0064 – V1.1
The efficiency of the aggregate plan is expressed as:
Actual output
Efficiency 
Facility capacity
The capacity of an organisation is governed by its:
 physical space (buildings and land);
 labour force;
 financial resources;
 materials; and
 machines.
In the short term, the physical space is not normally a variable – and being
fixed, is considered and included as part of the longer term capacity plans.
Capacity adjustments, in terms of plant efficiency and operating at

optimum levels, refers to short term capacity changes, or those which can
be made within the framework of the operations plan.
Some of the ways in which capacity adjustments can be made to

accommodate increases or decreases in demand, without altering the
actual size of the plant include:
 Hiring and termination of permanent workforce;
 Overtime or reduced working hours;
 Temporary workers;
 Extra or reduced shifts;
 Weekend working;
 Leasing additional machinery, or subcontracting (in or out depending on

the nature of the business and client demands) the work.
 Purchasing of materials – this flexibility may only be feasible if the

supplier is close at hand, the product being made fairly simple and/or
the supplier is well known.
 Adjusting inventory levels so that when demand is slack, inventories are

allowed to accumulate (increase through continued production), which
can be used to satisfy future demand.
AO/INT/0064 – V1.1 75
 Demands of backordering – where the customer’s order is booked and
it is indicated that the delivery will be made some time in the future –
the details are then recorded on the manufacturing company’s books.
However, while backordering may be appropriate for custom made
products, the client may not accept such ordering, preferring a set date
for delivery.
 Subcontracting the work – this provides, in terms of capacity, flexibility

for the client company and the products might be produced more
cheaply.
2.2.8 Release Production Orders

Release of production orders within MRPII systems occurs after the MRP
schedule has had an input, both from the BoM and the inventory
transaction schedules. The MRP finite and infinite loading is the output of
the MRP schedule and this forms the input into the CRP, to balance with
the machine routing and capabilities to create a detailed production
schedule.
The detailed production schedule is used to release production orders and

supplier orders prior to parts and finished goods production.
Product Reporting and Control
Product reporting and control is performed between the release of

production and supplier orders and the parts production within MRPII.
 Task 2.7
Discuss the customer expectations of production planning including

detailed reference to the benefits of: CRP, RCCP, MPS, MRP, MRPII,
MTO, MTS and BoM.
76 AO/INT/0064 – V1.1
2.3 Summary
understanding of:
 Master scheduling and the links between sales and manufacturing.
 Desegregation forecasting.
 MPS environment and decisions.
 Make to order master scheduling and combined MTO, MTS master

scheduling.
 Materials planning and capacity management.
 Capacity requirement planning (including inputs, capacity availability

and requirements).
 The links between production planning and other planning systems.
 Production control and scheduling concepts.
 Task 2.8
A company manufactures, for retails stores, racking and the wire basket
containers that fit into the racks.
The racking is manufactured from lengths of standard section

galvanised steel and the company buys in the wire baskets as a
complete item.
The racking material is supplied in packs, which can be bolted together

to form both the vertical and horizontal members of the racks. There are
three standard packs:
 1 meter rack;
 2 meter rack;
 3 metre rack.
The 1 metre rack requires 10 metres of section and is supplied with 12
nuts and bolts and 3 small baskets.

nuts and bolts and 4 small baskets and 2 medium baskets.
AO/INT/0064 – V1.1 77
nuts and bolts and 6 small baskets, 4 medium baskets and 2 large
baskets.
The production department can produce at the rate of 100 of the 1 metre
pack per day or 80 of the 2 metre packs per day or 60 of the 3 metre
packs per day.
An allowance of 10 per cent has to be made for scrap with the work
involved with the galvanised steel section.
(a) Draw up a bill of materials for the three standard racking packs.
(b) The company has decided to plan for steady requirements for 100
of the 1 metre packs per week; 200 of the 2 metre packs per
week and 120 of the 3 metre packs per week. The Table below
shows current stock levels and lead times for additional stocks to
arrive. Draw up an assembly schedule and MRP, indicating
clearly the size of the orders to be placed and when.
Current stock levels and lead times

Item Current Stock Lead Time (Weeks)
Galvanised Steel Section 3000 metres 2
Nuts 1000 1
Bolts 1000 1
Small Baskets 1500 3
Medium Baskets 1200 3
Large Baskets 1000 3
78 AO/INT/0064 – V1.1
3. Current Manufacturing and Materials
Planning Systems
Learning Outcomes
 Understand the development of manufacturing and control systems;

 Understand the current manufacturing environment and the types of
system currently used;
 Understand the development of benchmarking and benchmarking
techniques;
 Know the impact of globalisation on production planning;
 Understand the development of information systems to support
production planning.

 Benchmarking;
 Customer Relationship Management (CRM);
 Customer service performance measures;
 Enterprise Resource Planning (ERP);
 Just in Time (JIT);
 Kaizen;
 Kanban;
 Lean production;
 Manufacturing Resource Planning II (MRP II);
 Master production schedule;
 Operational audit;
 Performance measures;
 Route master planning schedule.
AO/INT/0064 – V1.1 79
3.1 Current Manufacturing and Materials Planning
Systems –Introduction
3.1.1 Monitoring and Improving Performances
All businesses, in order to survive must
be competitive and attract (and retain)
customers. They must also be efficient,
perform quality work and operate at the
lowest possible cost.
An ‘operation audit’ is the starting point

for identifying and implementing efficiency improvements and cost
reductions.
The operations audit is a detailed analysis of the business, its operations

and/or supply chain. When undertaken, it provides an in-depth
understanding of the company’s current performance against a range of
key criteria.
The audit is conducted because there is the perception that improvements

can be made to the working and operational practices and, as such, it
forms the foundation from which any opportunities for improvements can
be identified and the relevant (and most effective) changes be
implemented.
Performing an audit of the whole organisation can take time and as a

result it can become a costly operation. However, there are a range of
approaches and techniques that can help ease the burden on this critical
undertaking.
One approach in monitoring and improving the company’s performance is

to take a holistic, global approach, examining the whole of the supply
chain – from purchasing of materials and products through to the actual
production process and delivery of goods to the customer.
80 AO/INT/0064 – V1.1
The emphasis of such an approach is determining and optimising the level
of customer satisfaction – as, irrespective of the product, these are the
clients for whom the business is in existence – and any shortfall in quality
(of goods/products and/or service levels) may result in:
 a loss of customer confidence;
 failure to receive repeat orders;
 the payments of compensation (i.e. for poor quality, damaged goods or

late delivery, etc.)
Once the global perspective has been established, the whole business
organisation is then broken down into the different operational
components/segments (i.e. production process; specific elements in the
assembly line, etc.) and a detailed audit of each undertaken sequentially.
All organisations, no matter how well they are managed or how profitable
the company accounts show it to be, are capable of some improvement,
Figure 3.2 shows how the following techniques:
 improvement techniques and approaches;
 preventing operations failure and;
 total quality management.
These are inter-related and together they can combine to identify business
shortfalls and meet operational improvement targets.
Figure 3.1 Operational Improvements
Measurement
Evaluation Targets &

Reporting
Enhancements Benchmarking
AO/INT/0064 – V1.1 81
3.1.2 Performance Measures
Setting performance objectives and measuring them against a pre-
determined baseline is an equitable way of managing and measuring a
company’s performance.
Figure 3.2 Performance Measurement
E.g.: Production line efficiencies
86%
84%
82%
80%
78% Target
Actual
76%
74%
72%
Jan Feb March April May June July Aug
Specific performance measures may include the following:
 Quality – warranty claims, scrap level, number of defects/unit.
 Speed – order lead times and frequency of delivery.
 Dependability – lateness of orders, proportion of products in stock,

adherence to schedule.
 Flexibility – average batch size, time to change schedules, changeover

times.
 Cost – cost per operation hour, added value and efficiency.
There are a multitude of areas within the company that may be considered
and assessed when undertaking an audit of the organisation’s
performance. The type of data collected and aspects of the organisation
measured will very much depend on the nature of the company and the
type of their operations.
82 AO/INT/0064 – V1.1
However, there are a number of key areas that are applicable to many
organisations, including:
Forecasting
Issues that may be assessed include:
 What are the forecasting procedures for determining a client’s needs?

 What forecasting tools are used?
 How accurate are the forecasts when compared to the actual
requirements?
 How good are the forecasts for managing production operations?
 If a client demands that changes be made to their product and/or order,
has the production operation the flexibility to respond?
Purchasing
Issues that may be evaluated in determining the effectiveness of the

company’s purchasing arrangement include:
 In what quantities are raw materials and component parts delivered?

 How many suppliers are there?
 What are the lead or delivery times for raw materials, component parts
and packaging?
 Is quality of goods received according to the required specification?
 How quickly do raw material goods turn over?
 What is the order processing per cycle?
Inventory Management
Factors that may be considered include:
 What is the inventory policy for raw material, in-process inventory,

packaging and finished goods?
 How many products references are there?
 What is average value of inventory during a cycle?
 What is the inventory carrying cost?
 What is the value of working accuracy, safety stock, waste, raw
materials, work-in-progress at each value added step and finished
goods inventories?
AO/INT/0064 – V1.1 83
 What is the ratio of inventories to sales?
 What is the basis for stock keeping?
 What is the quality of finished goods, as measured by customer

complaints?
Production Operations
Issues that may be evaluated in determining the effectiveness of the

company’s production processes include:
 Are the production quantities made as an economic batch or JIT?
 Do integrated planning systems exist?
 Are there frequent changes to satisfy important clients’ orders?
 What is the average running length of the company’s operations and

production process?
 How quickly can the firm respond to customer demands?
 What is the level of manual labour to automation?
 Is the facility layout appropriate for optimising the production process?
There are ranges of indicators that can be used to determine how well
operations and functions within the operation process are being managed.
These indicators rely on accurate record keeping of past operational

performance being maintained and in order to be meaningful, should be
calculated and adjusted periodically for a specified set time period, for
example, one year, if improvements are being made.
An analysis of each month or quarter annually may be an appropriate time

scale for such assessment and performance calculations – although this
very much depends on the type and nature of the manufacturing or
production processes.
84 AO/INT/0064 – V1.1
3.1.3 Customer Service Performance Measures
A key area in an audit should be at the customer level. Businesses are in
‘business’ to make a profit and that means satisfying the customers with
the following:
 desired products;
 expected products;
 promised/agreed delivery schedule.
It is customers and their requirements

that pull the product through the supply
chain (and hence the production
process). Customer satisfaction is
determined by the level of the finished
product. Satisfied customers result in
increased market share and thus
increased activity at the operational
end of the business.
Customer service performance measures include the number of:
 customer orders overdue;
 invoices overdue;
 late deliveries;
 part shipments instead of full order quantities;
 warranty claims;
 quality issues.
Customer service levels, therefore, are a measure of customer satisfaction

regarding the delivery of the specified goods (and/or services). There are
a range of measures that can be used in order to determine how well the
organisation is performing in terms of meeting the customer needs, these
include:
AO/INT/0064 – V1.1 85
Service According to the Availability of Order of Finished Product
This is a measure of the product availability as a percentage of the orders

demanded by the customer.
This measure is determined by the following equation:
number of incomplete orders  100

100 
total number of orders demanded
For example, a food company may have given a producing firm 25 orders
for different products.
To calculate the level of service according to the availability of order of

finished product it is necessary to determine how many of these orders
can be filled out of the existing inventory or produced in time to meet the
required delivery date.
If two of the 25 orders were found to be incomplete, then the customer

service level will be:
2 100
100 
25
Customer service level is, therefore, in this instance calculated to be 92%.
Services According to the Availability of the Units of the Finished

Product
This indicator is similar to service according to the availability of order of

finished product, except that it measures the service level as a percentage
of the number of units supplied to the customer.
The formula for calculating the customer service level in this instance is
given by:
stockouts in units for the period  100

100 
total units demanded
For example, if a customer orders 250 units, with the consignment having
different order numbers out of these goods only 240 can be supplied; the
stock-out level is therefore 10 (number of goods in an order – number of
goods delivered to the customer).
86 AO/INT/0064 – V1.1
The calculation becomes:
10 100
100 
250
Therefore, the customer service level in this instance is calculated to be

96%.
Delivery
The level of delivery service, as a percentage, to the client can be

measured by the following formula:
number of late or early components  100

100 
total number in the shipment order
For example, a customer places an order for 20 shipments of items, which

are promised on a certain date, or by certain dates. One of the shipments
is not received by the specified time and so:
1 100
100 
20
In this instance the customer service level is calculated as being 95%.
Other measures and indicators of how the organisation is responding to its

customers and meeting the required level of customer service may be
evaluated by assessment of:
Order Cycle Time
This measure is an indicator of the flexibility of the organisation and

determines the time elapsed between the time the customer places the
order and when the goods are actually received by that customer.
One of the challenges for any business or company is that of reducing the
lead-time between the confirmation and delivery of an order; for example,
Dell strive to meet a 24 hour lead time to its customers.
Product Availability Combined with Order Cycle Time
This is a quantitative measure that, for example, maybe that 98% of all
orders can be delivered within a week.
AO/INT/0064 – V1.1 87
Information Systems
A company’s information system must be able to respond in a timely and

accurate manner to a customer’s request for information about the
products produced and/or supplied.
System Malfunction
This category of indicators is concerned with assessing the efficiency,

procedures and time required to recover from a system malfunction such
as, for example, a billing error, wrong shipment or shipment damage
claim. Whilst not directly concerned with the actual quality, timing and/or
delivery of the product to the customer, this measure determines how
efficiently customer complaints and queries are handled and resolved.
After Sales Service
This is a measure of the efficiency (time) taken in providing product

support, such as technical help, after the delivery of the product or service.
Minimum Order Size
This is the minimum order size a firm is willing to supply to the customer,
for example, are you prepared to provide service to the smaller clients,
who may only ask for one item on a irregular basis or small, more frequent
orders?
Emergency Orders
This measure determines the ability of the organisation to supply goods

and products outside of the normal working hours, such as at night,
weekends and during the major holiday periods.
Delivery Frequency
This parameter is concerned with identifying and assessing the ability of

the company to deliver goods and products reliably and frequently in small
numbers or lot sizes. These factors are becomingly increasingly important
and more companies operate ‘Just in Time’ production schedules.
88 AO/INT/0064 – V1.1
Delivery Reliability
In determining levels and quality of customer care, the delivery of the

products and goods to the customer are of paramount importance,
whether this is undertaken ‘in-house’ or through a third-party carrier. This
measure is concerned with determining the ability of the business, once a
delivery date has been fixed and confirmed, to adhere to and meet all the
conditions of delivery – in terms of location/site, time and date.
 Task 3.1
Consider the last purchase of a domestic product that you made. Were
you satisfied with the product and level of pre and post sales service
provided?
If yes, discuss why you came to this conclusion.
If no, discuss how the company could have improved its level of goods
and customer service to achieve a more appropriate degree of
satisfaction.
3.1.4 Management of Performance

Performance measurement is the process of, quantifying action, when
measurement means the process of quantification and the performance of
the operation is ‘assumed’ to derive from the actions of the management.
Performance can best be defined as:
The degree to which an operation fulfils the five performance objectives of:
 quality;
 speed;
 dependability;
 flexibility, and
 cost
at any point in time, to satisfy the customers.
(Source: Slack, et al, 1999)
AO/INT/0064 – V1.1 89
Figure 3.3 The Five Key Elements of Performance and Examples of Their End
Objectives
The market place and individual client needs and expectations for each
performance variable will vary. Therefore, the extent to which an
organisation meets its market’s needs will also vary – the organisation,
possibly with regard to its client’s needs will only meet some of them,
some of the time.
For example, an organisation, in terms of quality and flexibility almost

meets all the requirements and expectations of the market place, but may
under perform in areas of speed, dependability and cost.
90 AO/INT/0064 – V1.1
The organisation, as the
result of assessing its overall
performance and identifying
the market’s requirements,
may improve the speed at
which orders are produced
and delivered and the relative
cost of the product. However,
as a result its level of flexibility no longer matches and meets the
requirements of the market place and its clients. This is not because it
has, in an absolute sense, deteriorated, but instead because the external
(markets and clients) environment has changed.
The management of performance, therefore, aims to optimise the

performance of the organisation, in so far as is possible, given the
changing demands of the environment and customers in which that
business operates.
Some of the (many) indicators of product efficiency include:
Set Up Time of the Machinery
This in a given period, say one week, is measured by the formula:
total set up time

Set up time (%) 
operations  set up time
Time Lost due to Mechanical Breakdown
For any given period (i.e. one week) is determined by:
total time machines are down

Downtime (%) 
total time ( running  shutdown )
Production Costs or Total Unit Costs for Producing an Order (By

Product)
This can diminish or “eat” into an organisation’s profit margin.
If the production cost can be reduced, then for the same sales price,
margins can be increased.
AO/INT/0064 – V1.1 91
Alternatively, lower production costs may allow a reduction in sales price,
which could increase the products (and thus the organisation’s) market
share.
3.1.5 Management of Materials

Inventory management is the key indicator of how efficiently the
manufacturing process is operating.
Holding and maintaining stocks of inventory is costly – both in terms of

time and money. The inventory can easily become:
 obsolete;
 spoilt;
 damaged;
 stolen;
 lost.
There are a number of measures that can be used to determine the

efficiency of an organisation, in relation to inventory management, these
include:
Average Inventory Level during a Cycle
During the inventory cycle (the period between one order and the next),
the average inventory is calculated as follows:
beginning value of the inventory  end value of the inventory

2
In undertaking this assessment, the average inventory for each referenced

item should be measured and NOT the total inventory.
Order Processing Cost per Cycle
The measure of ordering cost per cycle is determined by:
( total demands in units)  (cos t of each order )

units per order
This measure can be applied and used whether the customers’ orders are
purchased from outside the manufacturing company or produced within
the company itself.
92 AO/INT/0064 – V1.1
If the orders are undertaken inside the manufacturing company, then the
cost of each unit will also have to give due consideration to the set-up and
other pre-operation preparation costs.
Inventory Carrying Costs
Such costs include the total expenditure of financing the components

through to finished product in relation to:
 warehousing;
 insurance;
 theft;
 waste;
 obsolescence;
 etc.
Inventory Turnover
This is defined by the formula:
cos t of goods sold

value of the inventory
Therefore, the greater the inventory turnover, the more efficient the
operation and the lower the inventory holding costs.
AO/INT/0064 – V1.1 93
 Case Study
A study of United States electronic companies showed that in the period

1981 to 1990 inventory turnover had improved in some companies by as
much as around 15 per cent per year.
This improvement was related to improvements being made in the

inventory turnover, thus freeing up company financial assets that could
then be used in improving operating performance, such as:
 investment in new products;
 stock buy-back;
 upgrading existing plant capacity.
(Source: Slack, N., Chambers, S. & Johnston, R., (2001). Operational Management.
3rded., Prentice Hall.)
Record accuracy
Mistakes can be made in the recording and maintenance of inventory

stock records. The records kept may not record the true level of the
holding stock.
For example, the records may show that there is more in stock than there
actually is on the shelves or in the warehouse. As a result, when the
production process requires this ‘inventory’, it is not available in the
quantity necessary. In such situations, the production process may have
to be delayed or halted and ultimately, the customer may experience a
delay in receiving their order(s). Such delays in production may also have
a ‘knock-on’ effect throughout the whole production process and to other
customers, whose goods may be ‘next’ in the production line.
Record accuracy can be measured and determine by the formula:
Number of inaccurate records during a cycle count

Re cord accuracy 
Number of items counted during a cycle
94 AO/INT/0064 – V1.1
3.1.6 Waste Identification
Material lost during the production process is rather like throwing money
down the drain.
Waste can be defined as:
Any activity, which does NOT add value to a product.
Identifying waste is the first step towards eliminating it. Seven types of
waste were identified by a Toyota engineer Taiicho Ohno as part of their
lean manufacturing process and became known by “Muda” which is
Japanese for waste.
 Over production – producing more stock than is immediately needed

by the next process in the operation is the greatest source of waste.
 Waiting time – machine efficiency and labour efficiency are two
popular measures, which are widely used to measure machine and
labour waiting time, respectively. Less obvious is the amount of waiting
time of materials, disguised by operators who are kept busy producing
work-in-progress which, is not needed at the time.
 Transport – moving materials around the plant, together with the
double and triple handling of work-in-progress, does not add value.
Layout changes that bring processes closer together, improvements in
transport methods and workplace organisation can all reduce waste.
 Process – the process itself may be a source of waste. Some
operations may only exist because of poor component design, or poor
maintenance, and so could be forced out of business.
 Inventory – all inventory becomes a target for elimination, however, it is
only by tackling the causes of poor inventory practice that issues of
wastage may be address and eliminated.
 Motion – an operation and/or production process may appear busy, but
sometimes no value is being added to the work. Simplification of work
is a very rich source of reduction in the waste of production and
efficiency.
 Defective goods – quality waste is very often significant in operations,
even if actual measure of quality is limited. Total costs of quality are
much greater than has traditionally been considered and it is, therefore,
more important to attack the causes of such costs.
AO/INT/0064 – V1.1 95
In simplistic terms, the amount of wastage in a production period can be
determined by the formula:
Cost of material lost in that period

Average value of the material used in that period
 Task 3.2
For any chosen manufacturing process of your choice, describe the

different types of waste that may arise during the manufacturing and/or
production process and the steps that a manufacturing company may
undertake to reduce such wastage.
3.1.7 Improving Quality

A company should aspire to design and produce goods and materials that
reflect actual and potential customers’ preferences, needs and priorities.
The quality function deployment is an analysis method that focuses and

co-ordinates the capabilities within an organisation to:
 design;
 manufacture;
 market.
the goods and products that are desired by the (its) customers.
The marketing department, design engineers, operating personnel,

company workforce (production and administrative departments) and
suppliers must all work together to ensure that the company produces a
product that will:
 be desirable to the consumer;
 needed by the customers (both now and in the future);
 meet the customer’s specifications and requirements.
Benchmarking is concerned with searching for new improved methods of

working and procedures from other organisations that can be adapted to
improve performance and to understand how better to satisfy the customer
expectations and to reduce waste.
96 AO/INT/0064 – V1.1
There are many types of benchmarking.
 Internal benchmarking takes place in large organisations as they

compare a production facilities operation with another plant in the group
that produces the same or similar goods.
 External benchmarking compares similar operations in different

organisations.
 Competitive benchmarking compares competitors in the same

market.
 Non-competitive benchmarking compares external organisations that

do not compete.
 Performance benchmarking compares the performance objectives,

quality, speed, dependability, flexibility and cost for different levels of
performance in operations.
 Practise benchmarking compares the procedures and systems of

different organisations.
3.1.8 Six Sigma

Six Sigma was introduced by engineers at Motorola – a quality system,
data driven that aims for zero defects in production. Defects are measured
and the standard deviation is measured in failure per million. The
engineers calculated the cumulative effect of defects. For example an
automobile has thousands of parts and if each separate component had
significant failure rates, then the cumulative effect is large and produces
an unreliable end product. This is measured in the Greek sign ∑ “sigma”
(the standard deviation). Standard deviation is +/- 3 and the engineers
targeted a reduction to +/- 6 standard deviations. To achieve this not only
were production method and tolerances raised but the actual design
specifications were tightened, and are continually challenged.
 Task 3.3
Describe, using specific examples, how you would plan a benchmarking

project for one area of production planning activity.
AO/INT/0064 – V1.1 97
3.2 Manufacturing Planning and Control Systems
The purpose of planning and control is to ensure that the operating
process operates effectively and efficiently and processes the products
and services as required by the customers.
Within the constraints imposed by its design, an operation has to be

operated on an ongoing basis. This is what ‘planning and control’ is
concerned with – managing the ongoing activities of the operation so as to
satisfy customer demands.
All operations require plans and require controlling, although the degree of
formality and detail may vary – according to the nature of the industry,
product produced and size of the company.
Those operations where there is a high level of unpredictability can be

particularly difficult to plan; consequently, some operations may be more
difficult to plan than others.
Additionally, the operations that have a high degree of customer contact

may be difficult to control because of the immediate nature of their
operations and the variability that customers may impose on the operation.
However, in all instances, the different aspects of planning and control can
be viewed as representing the reconciliation of supply with demand, as
shown in Figure 3.5 below.
Figure 3.4 Reconciling Supply and Demand
ed. Prentice Hall.)
98 AO/INT/0064 – V1.1
3.2.1 Manufacturing Resource Planning (MRPII)
MRPII is an extension to MRP that links together all other functions such
as production planning, engineering, purchasing, marketing, finance and
human resources into an integrated system. This acts as a decision
support system for the entire business. The MRP extension to MRPII has
to firstly be developed as a closed loop system.
Closed loop MRP means that the various functions in production planning
and control (capacity planning, inventory management and shop floor
control) have all been integrated into a single system.
This provides MRP with the following improvements:
 Priority Planning – urgent jobs can be brought forward and other work
can be held back in time and the raw material flows can be revised and
delivery schedules can be adjusted.
 Integration of functions into the system – capacity planning,

inventory management and shop floor control functions when integrated
provide feedback to update the production plan constantly.
 There is feedback – from suppliers, production and stores to enable

problems to be corrected by small adjustments before they become
massive issues.
The bringing together of all these functions and providing feedback is a

closed loop MRP system and it is an improvement on the original MRP
systems. The next stage is to convert closed loop MRP into MRPII by
linking with the financial systems of the organisation.
The inclusion of the financial systems into the closed loop MRP creates
MRPII and the advantages are that it is an operational and financial
system that can also be used to perform simulations of production.
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3.2.2 Master Production Schedule and MRPII
The master production schedule (MPS) drives the production process in
MRPII. Additional inputs are received from the other functions such as
purchasing and engineering. The MRPII system collects data to support
cost accounting, marketing and human resources.
The advantages of MRPII include:
 Organising the efforts of all the functions to achieve a common strategy

and business plan.
 ‘What if’ implications being available to managers.
 Better utilised resources in marketing and human resources in addition

to plant and equipment.
 Changes can be easily accommodated as they arise.
 The cost of resources used and to be used can be converted into

money values to support the budgeting process.
 Organising production with other functions to agree times for deliveries

of supplies and planning increases or decreases in staff numbers.
 Task 3.4
Describe, using examples, the advantages and disadvantages of MRPII

over the standard MRP for production planning in:
a) a manufacturer of domestic furniture;
b) an international computer manufacturer;
c) small electronic component producer.
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3.2.3 Route Master Planning Scheduling
Routing scheduling (also known
as operation process scheduling)
provides the detailed information
about all the activities involved in
the production process, including a
description of the activity and the
tools and equipment required to
complete the task(s).
Having determined the sequence in which work is to be completed, some

operations require a detailed timetable showing at what time or date the
jobs should start and when they should end – this is the schedule.
Schedules are used in some operations, where line planning is required to

ensure that customer demand is met. Other operations, such as rapid-
response operations cannot schedule the operation in a short-term sense,
they can only respond at the time the demand is placed upon them.
The scheduling activity is one of the most complex tasks in operations

management.
The complexity in scheduling arises because:
 Schedulers have to deal with several different types of resource

simultaneously.
 Machines have different capabilities and capacities.
 Staff have different abilities and skills.
 The number of possible schedules increases rapidly as the number of

activities and processes involved increases.
For example – one machine has five different jobs to process; any of the
five jobs could be processed first and, following that, any one if the
remaining four jobs – and so on.
This means that, in this instance, there are:
5 x 4 x 3 x 2 x 1 = 120 different possible schedules.
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A general formula can be devised to calculate the number of possible
schedules in any given situation, as follows:
Number of possible schedules = (n)m
Where:
n is the number of jobs
m is the number of machines.
Relating this to a real situation, where there may be 100 jobs going
through 30 machines in a route that takes an individual job through five
different machines, it becomes apparent that the scheduling task is
immediately very complicated and complex.
Within this vast number of schedules, there are many acceptable options
as to the appropriate routes and sequences for any set of jobs.
Even where a product is manufactured repeatedly, there may be a number

of different routes which that product could take.
However, while most of the calculated schedules may be possible in

theory, they will not be workable in practice – and so these can be rapidly
eliminated from consideration.
The scheduling tasks have to be repeated on a very frequent basis to

allow for market variations and changes in the product mix. Even minor
product mix changes may cause capacity constraints within the facility to
change very dramatically over a comparatively short time period – hence
bottleneck operations may move about the factory very quickly.
3.2.4 Enterprise Resource Planning (ERP)

The most recent development of MRPII is Enterprise Resource Planning
(ERP).
ERP systems facilitate the integration of databases and decisions from all
functions of the business to enable the impact of any changes to be
available to the entire business, in order to improve planning and control
decisions. The consequences of these decisions are followed through the
whole organisation.
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The ERP system is structured as an integrated database in the centre of
all the business functions such as Human Resources, Sales and
Marketing, Delivery and Logistics, Operations, Finance and Purchasing.
ERP integrates the planning and control activities of all these functions.
The integration of planning and control is sometimes difficult and

expensive in practice when faced with old systems interfacing with new
ones. It is, therefore, easier, but more expensive, to replace all of the
existing business systems.
Figure 3.5 Enterprise Resource Planning (ERP)
S Financials Sales and C

u Marketing
Logistics u
p
Central company s
p
wide database t
l Forecasting
o
Planning &
i
m
e Distribution
e
r Human
r
s Purchasing Resources
s
The advantages of ERP planning and control are:

 Information is only entered once into the system;
 Access to information systems is open to anyone with a computer
linked to the central system;
 Faster inventory turnover;
 Improved customer service;
 Decision makers can include the latest information as part of the
decision making process;
 Improved inventory accuracy;
 Reduced set up times;
 It is generally linked to external systems through EDI, Electronic Data
Interchange. The organisations supply chain can therefore improve
with better information;
AO/INT/0064 – V1.1 103
 Focuses on best practices;
 Coordination of the operation of different organisations within the supply
chain;
 Higher quality and fewer reworks;
 Improved revenue collection and cash flow.
The disadvantages of ERP are:
 Expensive and lengthy implementation;
 High maintenance costs in time and money;
 Any data errors are replicated throughout the entire system;
 Depends on complete trust between different organisations and free

flow of information.
3.2.5 Advanced Planning and Scheduling (APS)

Advanced planning and scheduling (APS) closes the loop between ERP
and a picture of the current shop floor production by providing a real time
view of production. It provides production planning with complete flexibility
and control over a dynamic manufacturing process.
APS provides immediate feedback to the scheduler about the impact of

new orders, machine downtimes and new priorities. It also helps to
improve confidence in the production process to react to customer
demands and provide product choices as well as improved customer
service and faster delivery.
3.2.6 Customer Relationship Management (CRM)

Customer relationship management (CRM) is a sales and customer
management system that can enhance ERP systems. It provides remote
access to production planning information to enable the customer service
team to check the capacity and quote a lead-time to the customer directly.
The new order can also be entered into the schedule (real time). Progress
reports can then be provided to the customers along with planned delivery
details.
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CRM is designed to capture customer data and record external sources
and consolidate the information in a central database. This helps to better
understand and anticipate the needs of current and potential customer
base.
When CRM is understood and utilised it can create improved customised

communication and persuasion strategies – aimed in some cases at
individuals and not merely at demographic groups or market segments.
These strategies are driven by the need to configure both communication
(marketing and advertising) and production planning in response to
increasing competition.
In the field of logistics there has been a shift recently towards an

increasing reliance on relationships. In many industries, the role of the
supplier has radically expanded. In many cases this has been the result of
increasingly sophisticated approaches to supply chain management but it
has also been the result of a range of drivers including the need to
eliminate waste in the production planning process across the whole
supply chain.
In the case of integrated product design and development, for example,

the whole of the design process may have been outsourced to a new type
of supplier that can manage a turnkey project. This type of early supplier
involvement means that, in some cases, suppliers have gone from being
made aware of the designer’s decision, to being invited to the design team
meetings and then on to becoming the design team.
In the case of lean or agile supply, the role of the supplier has also been
changed by the need for assured supply. More outsourcing, higher levels
of product complexity and operations such as the use of vendor managed
inventories have all increased the risk that a critical component may not be
available when it is time to make an original equipment manufacturer’s
delivery. If this happens to a major production line, it can lead to an
organisation missing its financial targets for the quarter and a resulting
impact on its annual performance and profitability.
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This can mean that there has been a fundamental power shift between
supplier and purchaser. Suppliers are no longer simply supplying, they
have become critical players in the success of the business. The
interdependence of an organisation with its supply network has never
been so explicit. If a supplier fails to develop and deliver competitive
features or fails to allocate adequate supply, it can have a major impact on
the organisation.
The penalties for failure can be heavy for the supplier, but where the
relationship is strongly interdependent, such penalties cannot be utilised.
Increasingly, purchasing and supply chain management needs to balance
strategies and tactics that simultaneously reduce cost and risk.
3.2.7 MRP in Just-in-Time Environment

MRP planning for supplier materials aims to provide enough parts in the
process for them to be called up Just in Time (JIT).
Kanbans control the material movements within the factory to each

operation, thereby providing the parts required just at the correct time
(JIT).
MRP and JIT combined systems have the following advantages:
 No internal inter-stage works orders are required.
 Only need to monitor in-process inventory between cells and not for
each activity.
 The BOM has fewer levels than for MRP.
 Simplified process route information.
 Reduced lead times and WIP (work in progress).
MRP combined with JIT requires the BoM to be divided into common parts
and optional parts. The common parts are of high volume and rate-based
master production scheduling is used to form Kanban requests.
The optional parts tend to be of low volume and time-phased, volume-

based master production scheduling is used to form batch schedules
controlled by MRP.
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 Task 3.5
With reference to one specific manufacturing company or product,

evaluate the advantages of MRP and JIT combined systems?
3.2.8 Materials with Kanbans

Kanban systems are a version of JIT that rely on visual signals to pull
work through production.
The Japanese word ‘Kanban’ roughly translates as ‘signal’ or

‘signboard’.
Each Kanban container carries a set amount of parts and components.

When production needs parts to complete a batch, it will call forward the
required amount of containers and return empty containers to the supplier.
The empty container returning to the supplier will be the signal to produce
more and send them as the system pulls parts through the production line.
Only the exact amount of containers to complete the work is requested

with no buffer stocks, spares or slack work in progress so minimising
production costs.
3.3 The Impact of Globalisation on Production

Planning
3.3.1 Introduction
Globalisation is a strategic issue that provides a challenge for logistics
management. There is no doubt that globalisation has become a major
issue in business.
The world seems to be getting smaller and is more convenient to do

business in. The use of IT and web-based technology has enabled the
globalisation of some organisations. Small to medium sized businesses
are also enjoying a global market presence.
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The competitive pressures and
challenges that have led to this
upsurge in interest have been well
documented. What are less well
understood are the implications for
operations management and
It is important to define the global business and recognise its

distinctiveness from international or multinational business.
A global business is one that: ‘does more than simply export’.
The global business will typically source raw materials from more than one
country and it will often have assembly and manufacturing locations
geographically dispersed and will market its products worldwide.
Globalisation in the early 21st century is incredibly sophisticated and a

connected world has emerged where trade and commerce is possible for
all companies regardless of their size. This has been driven by the
advance of computer systems, satellite networks and the World Wide Web
(Internet). The result is:
 Improvements in shipping with super large shipping and

sophisticated materials handling.
 Instant communications – mobile data and hand held devices.
 The Logistics functions and Information Technology have enabled
advances in the manufacturing, transportation, warehousing and
retailing.
This has provided business with spectacular efficiencies and allowed

production to be based almost anywhere. Many of the processes we
discuss in these elements have been the outcome of these developments
and have led to dramatic reductions and savings in the value chain. Major
world retailers now boast of supply chains of just a few days.
These advances are not without risk and the Production Planner needs to
be aware and plan accordingly and management kept aware and plan
alternatives and backups.
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Examples:
Japanese Tsunami –Toyota and Nissan production halted. Electronic

component production delays impacted companies throughout world.
Certain paints only produced in Japan impacted other companies like
BMW.
Iceland Volcano – shut down airspace over Western Europe for weeks.
Political upheaval in Libya impacted oil supplies and price.
Mobile network outages.
These events now affect world commerce, JIT, lean manufacturing

processes and cause manufacturing and production lines to be halted
within days. This creates shortages and will impact prices and can give
competitors an opportunity.
The challenge for global companies is how to achieve the cost advantage
of standardisation while still catering for the local demand for variety. The
aim is to standardise on parts, components and modules, and then
through flexible manufacture and local assembly, provide the specific
variants demanded by each market.
Production planning has to consider the international dimension. There is

a need to compete and keep production costs and overheads low. This
forces the consideration of outsourcing or developing facilities
internationally that will lower the total cost of production and split the
manufacturing and production operation in to many different parts of the
world to take advantage of the cultures and labour rates available.
Some people say that this is unfair exploitation and also corrupt. The
pressure to lower production costs and the need to compete for global
market share far outweighs these concerns for some large corporate
organisations and, therefore, they have invested in production facilities
around the world.
The issue for production planning is the demand for global distribution
channels and the potential to collect and deliver to any global location.
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To create a structure of logistics and operations networks that can provide
local service and variety while seeking to achieve low cost production.
The way in which the pipeline from components through to finished
product is managed can literally mean the difference between profit and
loss for the global organisation; hence the current emphasis in these
businesses is logistics management.
 Task 3.6
For a specific product, evaluate the impact that increased globalisation

over the last 25 years has had on:
a) the production of that product;
b) the company producing the product;
c) the distribution and customer base for that product.
3.3.2 Strategic Importance

Considering the corporate strategic objectives can identify the strategic
importance of globalisation on production planning:
 customer satisfaction;
 growth;
 a defined share of the available market;
 maximised profit;
 product leadership;
 target return on investment;
 implementation of social responsibilities and ethical principles;
 survival.
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3.3.3 Information Systems
Information systems technology includes:
 LAN (Local Area Network);
 WAN (Wide Area Network);
 EDI (Electronic Data Interchange);
 Internet;
 Intranets;
 Extranets;
 RF (Radio Frequency);
 GPS (Global Positioning System);
 Satellite Communications;
 Robotics;
 Mobile Communications.
Information Systems drive and control the production machinery and

processes but also all other facets of the Production Planning
environment, from forecasting, warehousing, Inventory, communications
and transport.
3.3.4 Customer-Focused Material Plan

Customer focussed material planning puts the customer expectations first;
the production plan is created to optimise material availability for the
customer. The most efficient use of plant and machinery is, therefore,
secondary and additional set up and change over times may be required
to achieve the customer-focussed material plan.
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3.3.5 Material Management
Material management refers to the management of the flow of materials
and information through the immediate supply chain.
It includes the following:
 purchasing;
 inventory management;
 stores management;
 operations planning and control;
 management of physical distribution.
Associated information follows the flow of materials. Management

information systems, or MIS, need to be established and managed to
maximise the availability and accessibility of this data to all relevant
functions of the business, as well as the customer, to support in decision-
making.
3.4 New Manufacturing Environment

3.4.1 Introduction
There are many challenges
being faced by operation and
production managers in their
continuing attempts to make
sense of the complexity and
uncertainty which characterises
many production and
manufacturing operations.
There are an enormous number of strategic challenges being faced by

production managers, many depending on the nature of the products or
goods being produced, and the complexity of the production process and
client base. However, there are five specific challenges that production
planners encounter as a result of a continually changing manufacturing
environment.
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These are summarised as being the following:
 Impact of the globalisation of markets, supply bases and (perhaps the

most important) the state-of-the-art mind of operation and production
managers.
 Changing view of the social responsibility that all types of business

should show and the role of the operations manager in establishing
ethical values.
 Environmental responsibility of businesses, especially the impact that

operations management decisions have on the environment, and the
impact that the ‘environment impact assessment’ (EIA) regulatory
frameworks have on operations managers.
Businesses now summarise these within Corporate Social
Responsibility (CSR) and the role of Operations Management is
especially important in implementing purchasing and logistics strategies
which consider the social and environmental impact.
 influence of increasingly rapid, but difficult to predict technology

developments in operations management.
 emergence of the concept of knowledge management and the

operations manager as a key supervisor of process technology.
 Task 3.7
Consider recent examples of companies that have received publicity for

failing in their Corporate Responsibility. Make a list of these.
a) Examine the impact on Operations Management within these

companies.
b) How could they have foreseen these impacts on the Operational
Strategy?
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3.4.2 Lean Production
The aim of lean production is to get the right things to the right place at the
right time, the first time, while minimising waste and being open to change.
Lean production uses less of everything, compared to mass production.

Some (i.e. half) the human effort in the factory, part of the manufacturing
space, part of the investment in tooling, a proportion of the engineering
hours to develop new products in less of the time, and reduce the need for
inventory on site. Thus, resulting in fewer defects and producing a greater
variety of products.
3.4.3 Just in Time (JIT)

JIT is a philosophy of manufacturing based on planned elimination of all
waste and continuous improvement of productivity. It encompasses the
successful execution of all manufacturing activities required to produce a
final product from design engineering to delivery and including all stages
of conversion from raw material onward.
The primary elements include the following:
 only have the required inventory when needed;
 aim to improve quality to zero defects;
 reduce lead time by reducing set up times, queue lengths and lot size;
 revise incrementally the operations and processes;
 accomplish the above with minimal costs.
JIT is a system for inventory reduction. Stock is seen as a liability not an

asset in JIT.
JIT goes beyond the technical aspects of scheduling and ordering and
involves high levels of worker cooperation and motivation.
Also required is high degree of openness with suppliers and a willing to

exchange data.
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The principles central to JIT include the following:
 quality is built in to products to ensure zero defects;
 inventory is not an asset but a liability to be eliminated;
 set-up times are reduced to a minimum.

The JIT approach pulls work through the system. Nothing is produced
unless there is a demand for it at a future stage. Inventory and work in
progress are eliminated.
JIT is making what the customer needs, when it is needed and in the
quantity required by the customer with no waste and using the minimum
resources of people, material and machinery.
The requirements for JIT include:
 flexibility in production;
 change-over times reduced or eliminated;
 production in small lots of the same product mix;
 fast progress through production;
 the smoothing of the master production schedule to give the correct mix
of products.
3.4.4 Mass Consumption

Mass consumption is contributing to the world being reshaped into a
global capitalist marketplace. International flows of capital and goods and
new structures of information, transportation and communication are
transforming our daily lives. The issue for production planning is the
demand for distribution channels to any consumer around the world.
There is now a need to collect and deliver goods from any global location,
at a prescribed time, to meet customer expectations.
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Mass production can be characterised by:
 low costs and prices being the focus;

 economies of scale;
 product standardisation;
 high degree of specialisation;
 vertical integration;
 a focus on operational efficiency;
 professional managers in hierarchical organisations.
Lean production is set on achieving perfection while mass producers have

aims of achieving acceptable levels of inventory and defects for a narrow
range of standard products.
Lean production requires the organisation to remove the non-value added

activities from its operation. When this concept is applied to the supply
side of the organisation it is termed lean supply, which requires the
removal of all non-value added activities from the supply chain.
Lean production can be defined as:

A system of work that strives to deliver high quality, low cost products
through the efficient use of resources and the elimination of waste.
Lean manufacturing is driven by five key elements:
 cost;
 quality;
 delivery;
 safety; and
 morale.
The fundamental considerations in lean manufacturing are:
 the elimination of waste;
 continuous one-piece production;
 continuous improvement, or Kaizen.
The elimination of waste in the context of lean production is an activity or

output that adds costs but does not add value to the finished goods as
perceived by the end user, customer or consumer.
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Figure 3.6 The Seven Types of Wastage to be removed by a Lean Production
System
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There are seven types of waste within the lean production system:
 overproduction;
 waiting;
 transportation;
 inappropriate processing;
 excess inventory;
 unnecessary motion;
 correction of defects or mistakes.
Continuous one piece production is characterised by the following:
 factory layout based on product flow;
 just in time production;
 reduced inventory by use of Kanban systems;
 customer pull, production is based on customer orders;
 quick change over of machines and equipment;
 autonomation, a feature of machine design used in Toyota Production

System and Lean Manufacturing and described as "intelligent
automation" or "automation with a human touch." (Source: Toyota
Production System, Taiichi Ohno, Productivity Press, 1988.)
Autonomation is a process in which machines automatically inspect
finished items and stop production when there is a problem detected.
3.4.5 Set-Up Time Reduction

Set up time is defined as the time taken to change from one product type
to another on the production process. This time is non-productive and
regarded as waste which needs to be reduced to a minimum.
Set up time can be reduced in different ways, for example, cutting out the
time to search for tools, prior preparation of tasks that delay change over
times, creating procedures to minimise delays and waste.
The activity and tasks are part of the changeover routine (internal set up
work) and converted so as to be performed before the changeover. This
is referred to as the transfer of internal set up work to external work.
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There are three methods:
 Use of pre-set tools so that a complete unit is fixed to the machine

instead of having to be built up while the machine is stopped.
 Use standard fixtures or jigs to attach tools to standardise the

changeover routine.
 Use roller conveyors or ball mounted surface tables to improve the

handling of tools.
3.4.6 Kaizen
Kaizen, or continuous improvement, is implied in all lean production
activities and means that every process and operation is continuously
evaluated and improved.
Factors such as time required, resources used and the quality of the
finished goods are measured and improved by small work groups in cross-
functional teams or quality circles. They are encouraged to think
creatively and take pride in making a small improvement every day.
Lean production is an amalgamation of just in time, kaizen and total quality

ideas leading to zero paper, zero inventory, zero down time, zero defects
and zero delays in design, manufacture and distribution. The techniques
used by lean production include the following:
 Just in time;
 FMEA, Failure modes effects analysis;
 SPC, Statistical Process Control;
 six sigma quality;
 production control;
 pull systems;
 load levelling;
 one-piece production flow;
 continuous flow;
 kanban systems;
 materials flow;
 TPM ,Total Production Maintenance;
 workplace management;
 visual controls;
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 standard work;
 change management;
 kaizen;
 value stream mapping;
 cross functional mapping;
 analysis tools;
 quick changeover.
Kaizen is the Japanese philosophy of continuous improvement of

employees to perform the tasks a little better all the time. It is a never-
ending journey.
Kaizen is small but continuous improvement implemented by workers and

middle management with support from above. They form cross-functional
teams to study how to improve the processes.
Kaizen involves people solving problems in quality circles. Therefore,

these people will require training to give them the skills to solve the
problems.
Training for Kaizen includes the following:
 the concept of quality circles;
 brainstorming;
 pareto analysis;
 cause and effect analysis;
 data gathering and histograms;
 statistical control charts;
 sampling;
 presentation skills.
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3.4.7 Design for Manufacture and Assembly
Product design for manufacture and assembly includes:
 modular construction where possible to reduce variations;
 quick turnaround times from one product to another;
 maximise the use of common standard components;
 improved quality;
 value analysis and value engineering;
 evaluation of cheaper alternative materials or components;
 improved tolerances and effective use of machine tools;
 improved spares and after sales parts requirements;
 clearly-defined customer expectations.
3.5 Summary
understanding of:
 Managing and monitoring production planning to improve the

company’s performance.
 The effectiveness of the different production planning and control

systems.
 The impact and implications of globalisation of the production planning

processes.
 The changes that have occurred in the manufacturing environment.
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 Task 3.8
Discuss and explain the benefits to the customer of the following:
 Waste minimisation;
 Quality;
 JIT;
 MRP;
 JIT combined with:
 ERP;
 APS;
 CRM;
 Kanban;
 Kaizen;
 Benchmarking
 Lean production.
 Task 3.9
For a specific production process of your choice, discuss how you would
evaluate, design and implement and appropriate information system that
will support, enhance and improve the production process.
Evaluate the benefits that this system would have for:
a) the company (as a whole);
b) the production manager;
c) the night shift foreman;
d) the customers.
Describe the problems that may be encountered in proposing and

implementing the information system and the measures that could be
introduced to resolve such issues.
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4. Managing Material Flows Through a
Production Process
Learning Outcomes
 Understand the need to improve production planning performance;

 Understand the options for measuring production planning
performance;
 Know how to eliminate waste from the production planning process;
 Understand the management and technical skills required within
 Competitive advantage;
 Performance measuring systems;
 Financial performance;
 Resource productivity.
4.1 Managing Material Flows Through the

Production Process – Introduction
4.1.1 The Need for Performance Measures
The measurement and evaluation of performance are essential to
control and involve posing some basic questions:
 What has happened?
 When has it happened?
 Is it going to continue?
 What are we going to do about it?
Performance measurement will reveal what has happened. The

management can then determine with certainty which direction the
business is going in and decide if that is the best option at that time. If the
performance measurement indicates that there are some problems ahead
then the management can make some changes to the direction of the
business to avoid or minimise risks with time to spare.
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The range of performance measures
used by an organisation will vary
depending on the strategic direction
of the business, the market sector
and the competition. For example,
an organisation that has technical
leadership and product innovation
as a competitive advantage should
be measuring its performance in these competitive areas.
An appropriate range of performance measures will create a balance to

ensure that one set of dimensions is not to the detriment of the others.
Each organisation will select a range of different performance indicators,

as there are such a variety to choose from and no common standards.
The various performance measures can be categorised as follows:
 financial performance;
 competitive advantage;
 quality of service;
 flexibility;
 innovation;
 resource utilisation.
Financial performance measures are most commonly used to assess

quickly the state of any business and the management will always keep an
eye on the bottom line. However, not every aspect of corporate activity
can be expressed in financial terms. Non-financial performance measures
are needed to relate to the following functions:
 production and manufacturing;
 sales and marketing;
 research and development;
 human resources;
 facilities management.
124 AO/INT/0064 – V1.1

The management of any successful organisation should be concerned
with ensuring the following:
 Supplier delivery performance is constantly monitored;
 Quality standards are constantly reviewed;
 Warranty repairs are minimised and dealt with quickly;
 Products move smoothly and swiftly through the production process;
 Sales orders, shipments and backlog are minimised;
 There is overall customer satisfaction;
 Research and development costs are monitored;
 Labour turnover rates are monitored to identify management weakness;
 The finance and accounts departments understand the business.
Specific resource productivity measures include the following:
 head count control;
 multi skilled labour;
 head count by responsibility;
 skilled verses non-skilled;
 management verses operations staff;
 own labour verses contractors;
 labour turnover;
 staff evaluation techniques;
 staff morale.
AO/INT/0064 – V1.1 125

4.1.2 Management of Materials
Performance measurement is managed by the functional managers. They
measure their own performance from data within their function and report
it to the other parts of the business.
In order for performance measurement systems to be controlled

effectively, there needs to be four components present:
 Objectives – because without objectives control is meaningless.

 A plan of how these objectives can be reached.
 A method of determining whether the system or process is adhering to
the plan.
 A method of controlling the system to bring it back on course if it strays
away from the plan.
Management of performance measurement systems includes the
comparison between actual results and desired results. It keeps the
planning and implementation phases of the system on target by helping
the organisation to adjust strategies, resources and timings.
Management of materials performance measures include:
 measurement of waste and scrap;
 fault analysis;
 testing of components, sub-assemblies and finished goods;
 actual failure rates against target failure rates, measured in MTBFs,

(mean time between failures);
 complaints received from quality assurance testing programmes;
 failures as a percentage of units sold and shipped;
 various indicators of product service quality and reliability.
126 AO/INT/0064 – V1.1

4.1.3 Waste Identification
The types of waste produced by the production operation need to be
separated into categories to be treated differently.
 The waste that can be recycled, either in the organisation or externally.
 The waste that has to be burnt or go to landfill.
 The waste that can be further worked or processed to form raw material
for other production processes.
 Some waste is considered dangerous and hazardous to health and the
environment such that this type of waste requires proper handling and
safe disposal.
Waste is defined in JIT (just in time) as any activity that does not add
value. Identifying waste is very important and different types of waste
include:
 over production;
 waiting time;
 transport;
 process;
 inventory;
 motion;
 defective goods.
Reducing and eliminating waste improves performance.
4.1.4 The Benefits of Simplification

The introduction of a warehouse stage in the distribution system can
simplify the routes and communications between production facilities and
customers. If several contacts in a number of the organisation’s factories
were all allowed to communicate directly to each customer, then there
would be a lot of traffic. By introducing a warehouse to shield the
customer and the factories from each other the lines of communication are
greatly simplified.
AO/INT/0064 – V1.1 127

4.1.5 Measurement of Improved Performance
The importance of quality has been emphasised by JIT approaches, lean
manufacturing and global purchasing.
Improved quality may enable an organisation to charge a higher price for

the goods or obtain an enhanced market share. It may be possible to
reduce costs by reducing the number of rejects, the amount of rework and
scrap of parts; thus improving yield.
Quality decisions made by operation managers directly affect revenue,

cost and profitability.
Quality is not necessarily the best or highest quality available but that
which conforms and meets the customer requirements.
Quality means delivering the right product to the right place at the right
time in the right quality at the right price. When these requirements are
met then there is quality.
Quality can be measured a number of ways:
 Performance, the operating characteristics;
 Features, the functions and extras in a product;
 Reliability, survival over a period of use;
 Conformance, degree of match to established standards;
 Durability, how much use it can have before replacing it;
 Serviceability, speed and courtesy of repair;
 Aesthetics, how a product looks and feels;
 Perceived quality, the subjective image or branding.
Measurement of improved performance include the following:
 lower rather than higher prices to customers, unless enhanced quality

levels dictate otherwise;
 higher rather than lower quality;
 rapid rather than slow service and response;
 reliable rather than unpredictable products and services;
128 AO/INT/0064 – V1.1

 good after sales service rather than poor support;
 products with many options rather than a limited range;
 products customised to customer’s unique expectations routinely

without excessive lead-time extensions.
 Case Study
In 1960s Joan Woodward studied 100 manufacturing companies to

determine organisational effectiveness and the extent of their relation to
classical management principles.
Woodward discovered three distinct technologies of increasing levels of

sophistication and complexity:
 Unit production comprising unit or small batch producers manufacturing

customised products.
 Mass production where large batches of products were manufactured in

assembly line fashion by combining components and sub-assemblies in
a specified manner.
 Continuous process production where raw materials are transformed

into finished goods using a production system to change the initial
materials such as chemicals.
Woodward found that organisations with the same technologies tend to

have similar types of organisation structure.
 Unit production organisation structures tend to be flat and no manager

was far from the actual production.
 Process technologies with equipment that does the work have taller
organisation structures and include university-trained graduates. The
proportion of the workforce in actual production is low.
 Mass production technologies have lines of command that are shorter

than process and longer than in unit production.
Woodward also suggests that there is no best way to define an

organisation structure other than to ensure that the structure suits the
organisation.
AO/INT/0064 – V1.1 129

The logistics and operations functions are the key to the overall profitability
and sustainability of production organisations.
Logistics and operations Director positions are more common within the
organisational structure nowadays.
Senior manager or head of department positions appear in all modern

production organisation structures because the future success of the
business depends upon them.
4.1.6 Production Planning

The production planning management process achieves organisational
objectives through the efficient use of labour, material, financial and
information resources.
The activities involved in management are:
 planning;
 control;
 coordination;
 motivation;
 authority and responsibility;
 decision making;
 accountability;
 communication and interpretation of information.
130 AO/INT/0064 – V1.1

Figure 4.1 Typical Management Activities involved in Production Planning
AO/INT/0064 – V1.1 131

 Task 4.1
Discuss the purpose of performance measurement, using specific

examples to illustrate your answer.
 Task 4.2
Explain and evaluate the use of performance measures for the

management of materials.
How can the use and application of such measures help the
organisation ensure that their product and planning system meets
customer expectation?
4.2 Summary
understanding of:
 The need to monitor and implement improvements to the production

planning performance.
 The sources of waste and the measures available to eliminate waste

from the production planning process.
132 AO/INT/0064 – V1.1

Bibliography
Bolton, W., (1994). Production Planning and Control. Longman Scientific
and Technical. ISBN: 9780582228207.
Chapman. S., (2005). Fundamentals of Production Planning and Control.

Pearson Prentice Hall. ISBN: 9780130176158.
Dickersbach, J., Keller, G. and Weihrauch, K., (2013). Production Planning

and Control with SAP ERP. 2nd ed. SAP Press. ISBN: 9781592298686.
Slack, N., Chambers, S. and Johnston, R., (2013). Operations

Management. 7th ed. Prentice Hall. ISBN: 9780273776208.
Taiichi Ohno, (1988). Toyota Production System: Beyond Large-Scale

Production. Productivity Press. ISBN: 9780915299140.
Vollmann, T. E., (2004). Manufacturing Planning and Control Systems for

Supply Chain Management: The Definitive Guide for Professionals. 5th ed.
Mcgraw-Hill Higher Education. ISBN: 9780071440332.
Waller, D., (2003). Operations Management: A Supply Chain Approach.

2nd ed. International Thomas Business Press. ISBN: 9781408069943.
Journals/Magazines
Transport and Logistics Focus
Supply Chain Management Review
Journal of Business Logistics
International Journal of Logistics
Business Horizon
Supply Management Magazine
Journal of Business and Industrial Marketing
International Journal of Operations and Production Management
International Journal of Retail and Distribution Management
AO/INT/0064 – V1.1 133

Web Sites
www.ciltuk.org.uk
www.productionplanning.com
www.sap.com/uk/
www.preactor.com
www:businesscasestudies.co.uk/nissan/planning-for-quality-and-
productivity/production
www.slideshare.net/hazman/toyota-production-system-bussiness-case-
studies-plan
134 AO/INT/0064 – V1.1

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CILT International Diploma

in Logistics and Transport

Author: Michael Wakefield (MILT)

Verifier: Peter Ellement (FCILT)

Ben Bvepfepfe (FCILT)

David Maunder (FCILT)

Jon Harris (FCILT)

© Chartered Institute of Logistics and Transport (UK).

Key Text Books

AO/INT/0064 – V1.1 III

Work in quiet areas, with minimal distractions.

Tel: +44(0)1536 740167

Introduction to Study ........................................................................................................... III

Figure 2.1 Moving Averages ..................................................................................................... 53

Figure 3.1 Operational Improvements....................................................................................... 81

Table 2.1 Demand Data for a Manufacturing Company ........................................................... 45

AO/INT/0064 – V1.1 VII

Agile concept - a supply chain approach for an organisation to respond quickly to

Benchmarking - methods of comparing operations and performance with other operations

Business–to-Business (B2B) - online trading transactions between organisations with

Collaboration - sharing and working together between members of a supply chain.

Coordination - integration of functional and at times geographically dispersed operations.

Corporate Social Responsibility (CSR) - is an approach where organisations integrate

Critical items - require closer relationships to ensure competitive advantage is

AO/INT/0064 – V1.1 VIII

Demand chain - represents the identification or creation of demand, for example,

Downstream - a term used to describe supply chain activities or partners positioned

Just-in-time (JIT) – a philosophy of production based on planned elimination of all waste

Key Performance Indicator (KPI) - quantifiable measures that reflect an organisation’s

Lean thinking – an approach of seeking to reduce unnecessary costs by eliminating

Logistics concept - is a management concept requiring that an organisation’s objectives

Quality - a measure of whether or not a product or service lives up to customer

Radio Frequency Identification (RFID) - tracking technology attached to the product or

Routine items - Routine buying of commodities, needing efficiency. Relationships maybe

Secondary sector - Conversion of raw materials into finished or semi-finished products;

Supply chain management - is the efficient, effective management of supply chain

Supply chain networks - a group of organisations and activities interconnected for

AO/INT/0064 – V1.1 XII

Value chain - represents all activities necessary to ensure a product or service is

Vendor-Managed Inventory (VMI) - phrase used to describe the process of a supplier

AO/INT/0064 – V1.1 XIII

AO/INT/0064 – V1.1 XIV

This unit views the logistics of production planning processes in terms of

The unit consists of these elements:

1.0 The Concepts of Production Planning

Tutors and students of this unit are encouraged to “localise and

AO/INT/0064 – V1.1 XVI

After studying this element you will be able to:

 Understand the elements of production planning;

1.1 The Concept of Production Planning

Planning entails a series of actions that engage every aspect of a firm’s

The essential ingredient in any planning process is information and

Production planning is best defined as:

The process of creating an overall production plan for a factory, over

The basic concepts of production planning can be defined as a method of

(Source: Unit author – Wakefield, M., (MILT)

In designing and developing a production plan the following elements

 manufacturing forecast requirements;

 stocks of finished goods;