CONFIDENTIAL

Production Planning

Global Lean Transformation Program

This report is solely for the use of client personnel. No part of it may be
circulated, quoted, or reproduced for distribution outside the client
organization without prior written approval from McKinsey & Company.
This material was used by McKinsey & Company during an oral
presentation; it is not a complete record of the discussion.
Objectives

• Understand how demand, capacity and communication to

production are essential parts of production planning

• Be able to diagnose, design and implement an effective

production planning system

• Discuss real options when faced with a production planning

issue using a case study

2
Agenda

Module time ~ 60 minutes

Background and introduction

Theory and frameworks

Application/implementation

Example

3
The planning function has the challenge of finding the right
balance between cost and service

Service
• Capacity Make-to- • Due date
Constraints • Material supply Cost
order promising
• Material • Due date
• Changeover cost • Production keeping
• Batch size fixed cost • Transportation Make-to- • Goods
• Handling stock availability
Batching & • Sequence
sequencing dependent cost • Inventory
• Administration
• Demand variability
and forecastability
Variability &
(bull-whip effect)
uncertainty
• Supply reliability

4
 CLIENT
In a lean environment, planning also has the challenge of EXAMPLE
minimizing variability for production
Example: Demand variability generation upstream the supply chain - the Bull-whip effect Demand
Shipments
Production
Units

Observations
• Demand data
quite stable (7%)
shipments and
production
planning forecast
3X more volatile
• Volatility doubles
at each stage of
order process

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Week

Statistics Demand Shipments Production

• Mean absolute deviation (MAD) • 87,016 • 193,151 • 483,086
• Mean • 1,237,179 • 989,526 • 1,086,468
• Volatility (MAD/mean) • 7% • 20% • 44%

5
Agenda

Module time ~ 60 minutes

Background and introduction

Theory and frameworks

Application/implementation

Example

6
Production planning is based on four main activities

Systems/procedures to forecast long term demand and the

Demand systems/procedures that process incoming orders and link them
management to production routes and material requirements

Systems/procedures to allocate production capacity on a long

Capacity and short term basis and determine production routes as well as
management load the relevant machines correctly

Systems/procedures to transfer work orders to production, to

Communication secure production follow-up and to feed back status against the
to production production plan

Systems/procedures to secure long term supply of raw materials

Supply to place replenishment orders to suppliers
management

Essentially the interaction of demand and

capacity management linked with the right
communication between different producers
7
Demand management and capacity scheduling focuses on
changing one if the other one is a given
Demand
Demand management is the manipulation of demand to match the Capacity
capacity of a process. Typically, this involves trying to smooth the peaks
and valleys of the demand level

When would you use

which approach?

Capacity scheduling is the scheduling of manpower and equipment to

match the process capacity to the customer demand. Typically, this
assumes a fixed or uncontrollable demand.

8
 EXAMPLE
Demand management example: the demand is manipulated to
match the fixed capacity

An ice-cream manufacturer would suffer a drop off in demand over the winter period
and so runs coordinated sales and marketing campaigns to mitigate the effect.
Other possibilities are
• A change in sales price to influence demand
• Introduction of buffers to cope with high demand periods
• Spare capacity filled with additional products or subcontracting during busy periods
Volume

capacity

Demand with sales initiative

Demand without sales initiative

Months
9
 EXAMPLE
Capacity scheduling example: if it is impossible to change
demand, capacity should be adjusted
Demand
Capacity
Example: At Toyota Takt Time is recalculated every 6 months to
adjust capacity to demand

• Scheduling levels the total volume for a set period

• Section balances line to a short Takt Time, with
many people, for peak demand periods

A flexible
Customer Demand -

manpower system
Total Volume

allows adjustment
of capacity to
demand

Small peaks can

be smoothed • Scheduling re-levels total volume
through • Section re-balances line at longer Takt Time,
overtime with fewer people for lower demand
Time
10
 EXAMPLE
Often both demand and capacity can be manipulated to improve
service
Fax demand
Example: Mortgage application form processing in bank back office Current schedule
capacity

Before the transformation After the transformation

Number of applications sent by the
branches
Branches
Branches send send batches
batches before
after closure
140 lunch break
140
120
120
100
100
80
80
60
60

40
40

20 20

0 0
7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11
AM PM AM PM

Branches send Underwriters are

applications asked to adopt flexible
in small batches, i.e. schedules, i.e.
demand management capacity management

11
 EXAMPLE
The communication to production is a crucial part of any
production system

Communication to production is about how demand information flows

upstream to trigger the right production at the right time

Example:
The decision of which products to make to stock and which ones to make to order

Variability and the process

capabilities determine whether to
introduce a supermarket at any point
as well as the stock critical levels

12
Agenda

Module time ~ 60 minutes

Background and introduction

Theory and frameworks

Application/implementation

Example

13
To define an effective production planning system capacity,
demand and communication have to be optimized

Design
Diagnose demand, capacity
and communication Implementation
Demand Capacity
management management Communication
system system
Diagnostic/Design Implementation

Activities • Understand customer • Build forecasting • Define machine • Define tools and • Start pilot followed
demand including lead system and loading rules and procedures by roll-out
time, variation, procedures constraints to communicate
product/volume mix, etc • Build / modify order – Maximum work orders
• Understand machine intake system and capacity to production
constraints (esp. procedures – Capacity (push vs. pull)
bottlenecks) • Re-negotiate reservations • Define which
• Understand labor capacity contracts – Maximization of products to
constraints including • Cooperate with sales contribution per make to order
shift/holiday patterns, skills and marketing to bottleneck hour and which to
mix, etc stabilize demand • Define machine make to stock
• Understand supermarket and product mix synchronization • Continuously
function and structure rules reduce lead
• Understand current planning • Build / modify time through
and communication corresponding effective order
including forecasting, systems intake and
order handling, capacity • Build a flexible processing
management, etc manpower system • Re-negotiate
• Negotiate flexible with long lead
working patterns time suppliers
(e.g. annualized
hours etc)
• Build a continuous
improvement
infrastructure
14
 EXAMPLE
Analyze the customer demand in terms of time based variation,
product/volume mix and lead time requirements
Customer order lead times and frequency of sales Quantity per order type
40

35

30

25

Quantity
Frequency

20

15 Lead
Mix
time
10

0
0 20 40 60 80 100
Lead time Month
Quantity per week Volume per product
4,000,000

3,500,000

Quantity
3,000,000

2,500,000

2,000,000

Time based 1,500,000

Volumes by
variation product
1,000,000

500,000

0
1

64
85
22
43

106
127
148
169
190
211
232
253
274
295
316
337
358
379
400
421
442
463
484
505
526
547
568
589
610
631
652
673
694
715
Products
15
 EXAMPLE
Analyze the current production schedule and how it relates to the
actual demand

Demand
Production
Product A ( 600 ml bottle) Excess inventory is Inventory
10 Thousands built to prepare for
14 peak season

12

10 Is there an
opportunity to
8
increase capacity
6 during the peak
months to reduce
4 inventory?

0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

16
 EXAMPLE
Production sequence and change over cycle should be
diagnosed to understand constraints

Current State
Filling line X Change over
between A, B & C
only require filling Change over from A
head change to D requires
flushing the line
Product A Product A
Product B
Product C
Product D

Monday Tuesday Wednesday Thursday Friday

Potential analyses: Opportunity

• Duration of change overs between different • Sequence products to minimize change over time
products (e.g. going from ACB may require (due to equipment setup time, cleaning, regulatory
less change over time than ABC) papework, etc)

• Current state batch size requirements • Smaller batch sizes add flexibility to production (e.g.
customer would not have to wait until Friday to get
product D)

17
 EXAMPLE
Analyze the available capacity taking into account OEE of the
bottleneck machines

Units per week

504.0

182.0

322.0 50.3 66.0%

OEE
21.0
250.7 28.3
0 222.4 3.8 5.3 213.3

Total Un- Sche- Break- Change-Avail- Minor Speed RunScrap Start Value-
time sche- duled down over able stops loss time up added
duled time time time
time

18
 EXAMPLE
Variation over time and skill levels influence the
availability of labor
Headcount –total Absenteeism by month
Number of employees Percent
1:1 ratio
88 of super- 2.0
4 77 11
65 visors to
8 Salary team
Team 1.5
Main- leaders
lead-
te-
ers 1.0
nance Salary
repre-
sents 0.5

Produc- Hourly Total 12.5% of

labor 0.0
0
tion head- head-
force J F M A M J J A S O N D
operator count count

Turnover rate
Percent

18 15
8

2000 2001 2002

19
A current state VSM quickly explains the current information
flow practices
30/60/90 day
Confirmed orders forecasts Lait
Fungus (Tuesday /1 x week)
Confirmed orders
(Thursday/ 1 x week)
MRP

Mon / Wed Build

Schedules
/ Thu (Monday /
Shipping
12500 products/week
List Copy
1 x week) 100 products/pallet
(Fridays)
1 x week
Goods In Electrical Assembly
Department Department
3000 1 x day
Goods In 500
Elec Assy Test
Man c/t = 5s
Man c/t =100-200s
Elec box Dedicated equip. 1800 M/c c/t= 12s

Assembly Department
Available=840 min
300 10 operators
Dedicated equip.
2000 1 operator
Downtime Issue

Dispatch
500 Department
Base 300
1O.000
plate

Dispatch
Body 250 Station 1 Station 2 Station 3 Station 4 Strapping
moulds 100 heaters / pallet
500 5
Op. #4 1 operator 2 people 2 people p/t
9000
Op. #1
Man c/t =5s
Man c/t =5s 500 Op. #6 5 Op. #7 50 100 heaters on 1
pallet
Available=840 min

Op. #5 Man c/t =8s Man c/t =30s

Auto c/t=13s Man c/t =300s
Man c/t=15s Auto c/t=15s Available=840 min
500 Op. #2
Man c/t=13s
Available=840 min Available=840 min
Available=840 min

2 operators Downtime issues

Lid Op#3
Man c/t=14s
Available=840 min

16.000 3000 3 operators

Longest lead time = 11,4 days (handle mould)

Handl
150s 17s 45s 20s 23s 30s 3s
e
6,4d 1.2d 0 0,2d 0 0 3.6d

20
Existing information management systems and procedures
should also be evaluated in details

Demand management Load control system Supply management

system (order intake +
forecasting)
• What is the current • Is there a capacity
forecasting procedure? allocation procedure in
– Sources place with production,
– Target setting planning and sales?
– Communication
• What are the capabilities
• What is the order intake of the loading system?
procedure? – Infinite / finite capacity
– Order transmission – Machine / cost centre
mode – Capacity reservation
– IT / manual system – Ease of re planning
– Frequency of order – Overviews
transmission
• What are the current
procedures?
– Loading
– Re planning
system
• What are the
agreements with the
current suppliers?
– Delivery frequency
– Lead times
– Communication
• What are the capabilities
of the supply
management system?
– Ordering frequency
– Follow-up
• What are the current
procedures?
– Ordering
– Handling exceptions

21
Good forecasting, order processing and close cooperation with
sales and marketing are key to effective demand mgmt.
Replenishment orders Inventory (end of
period)
Stock outs
Replenishment receipts
Demand

In case of stable demand, forecasts are However, fundamental demand

not necessary but instead a pull system changes not incorporated into the system in
is sufficient time can lead to stock out situation
4,000 4,000
3,500
New
3,500 demand
3,000 3,000 level
2,500 2,500
2,000 2,000
1,500 1,500 Stock outs
in case of
1,000 1,000 un-changed
500 500 Pull para-
meter
0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Effective marketing and

Demand planning is necessary to sales as a demand
management tool can
• Adjust Pull parameter to fundamental demand changes
adjust demand to capacity
• Provide the required capacity in time
• Provide a basis for customer due date quoting

22
A number of factors can influence the design of the capacity
management system

Issues

Machine • Machine loading rules to deal with overall capacity constraints

capacity • Rules to optimize product mix
• Capacity reservation rules to ensure short and long term
availability of capacity
• Machine synchronization to reduce WIP and introduce stability
• Changeover optimization to OEE

Labor • Design of a FMS to flexibly share manpower between lines

capacity • Enhancing the correct skills mix to prevent demarcation
• Introduction of flexible working patterns including annualized
hours, flexible shift patterns, different holiday cover, plant
closure etc
• Building a continuous improvement infrastructure to adjust
labor capacity to requirements

23
 STEEL CLIENT
The position of supermarkets must be carefully chosen to EXAMPLE
communicate production effectively and cope with variability
Variability ‘filters’
Key consideration: What should be made to stock and what
made to order? (Lead time, variability , etc)

Upstream supermarket
covering for upstream
process variability and
Downstream
long lead time products’
supermarket
demand variability

Peeling Fine Finish- Cut-to-length

& FIFO rolling FIFO ing
Melt shop Upstream drilling

Peeling Fine Finish- Cut-to-length

& FIFO rolling FIFO FIFO
ing
drilling
Upstream
supermarket Downstream supermarket
covering for short lead time
products demand variability and
drill steel line process variability
24
Agenda

Module time ~ 60 minutes

Background and introduction

Theory and frameworks

Application/implementation

Example

25
How can we deal with highly variable customer demand and a
large anticipated increase requiring highly skilled workers?
Background (Consider yourself to be in Jan 2004)
•Large industrial manufacturer
•Long lead time and long Takt time products
•1,100 employees in direct production
•Skill level high for manual labor with 4 years minimum experience required

Demand (units per year)

160 Today

140

120

100

80

How can we deal

60 with this increase?
What information do
we need?
40

20

0
1975 77 79 81 83 85 87 89 91 93 95 97 99 2001 2003 2005 2007 2009

Product A Product B Product C Product D Product E Product F

26
The current forecast predicts a 2 year manpower surplus
followed by a 2 year manpower shortfall

What are the options? in terms of:

•Demand management
•Capacity management
–Labor and Machine
•Communication
•Other (supply chain integration,
etc)
FTE

1,600
Workload
1,400

1,200 Manpower available

1,000
30% Manpower
800 shortfall
30% Manpower surplus

Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09

Year
(Now)

27
What about SCJ?

Source: Production S&Ops June 2006

28
Key takeaways

• Demand management
– Analyzing and influencing the real customer requirements without
the noise often induced by MRP systems

• Capacity management
– Analyzing and optimizing machine rate and mix loading and
capacity as well as managing labor capacity and skills levels

• Communication
– Effectively communicating demand upstream throughout the whole
production process

29