Unit 1 PRODUCTION PLANNING AND CONTROL

Objectives

After completing this unit, you would be able to:

 state the concept of production planning and control ;

 write objectives of production planning and control ;
 recall functions of production planning and control ;
 write symptoms of poor production planning and control;
 state the concept of manufacturing planning and control.
Structure

1.1. Introduction
1.2. Concept
1.3. Production Control
1.4. Role of Production Planning and Control
1.5. Objectives of Production Planning and Control
1.6. Significance
1.7. Functions
1.8. Factors Affecting Production Planning and Control
1.9. Symptoms Of Poor Production Planning and Control
1.10. Organisation for PPC Function
1.11. Manufacturing Planning and Control
1.12. Measurement Of Effectiveness
1.13. Production Planning and Control In Services
1.14. Summary
1.15. Key Words

1.1 INTRODUCTION

"Planning acts as an intervening variable between knowledge and action" Westley F.

Planning is a basic managerial function. Effective planning is seen and sometimes unseen hero of most
successful business endeavours. Planning means looking ahead and chalking out future courses of
action followed. It is rightly said, “Well planned is half done.”
Koontz & O'Donnell define planning as: “Planning is deciding in advance what to do, how to do and
who is to do it. Planning bridges the gap between where we are to, where we want to go. It makes
possible things to occur which would not otherwise occur”.
Hence, if we want to be effective managers, we need to be good planners. Production is defined as
the “manufacturing of goods and services.” Planning is a systematic activity which determines when,
how and who is going to perform a specific job. The generic term used is Operations Planning, Control,
which is planning, and control of goods and services. Good Production Planning and Control helps a
company operate and produce more efficiently and achieve the lowest possible costs. The success of
an enterprise greatly depends on the performance of its production control department.

1.2 CONCEPT

Production Planning and Control states as: “the process of planning the production of operations
establishing the exact route of each item, part of the assembly; setting and finishing dates for each
important item, assembly and the finished products and releasing the necessary orders as well as
initiating the required follow-up to effectuate the smooth functioning of the enterprises.”
Ray Wild defines Production Planning as: “Production planning is the determination, acquisition and
arrangement of all facilities necessary for future production of items. In other words, production
planning is essentially a pre-production activity, associated with the design of the production system.
Production planning is the pre-determination of manufacturing requirements such as materials, men,
machines, the priority of order, manufacturing process, etc. for the production of goods and services
of the right quality, in the right quantities and at the right time.
Production Control means gathering information of actual production: find any variances: shortfall or
excess production against the plan, take necessary corrective action wherever required to ensure that
planned production takes place.
According to Henry Fayol, “Production Planning and Control is the art and science of ensuring that all
which occurs is following the rules established and the instructions issued.”
Production planning and control systems refer to the plan, schedule and control production activities
for a manufacturing enterprise. Effective production planning is of the topmost priority for survival,
growth and to surge ahead for organisations in this highly competitive environment. The production
plan states the total amount of output that the manufacturing department is responsible to produce
for each period in the planning horizon. The output is usually expressed in terms of units of
measurement, e.g. tons, litres, kg. or units of the aggregate product / weighted average of all the
products in the company. The production plan is the authorisation manufacturing department to
produce the items at a rate consistent with the company’s overall corporate plan.
Production planning and control thus is the process of:
 Planning production in advance
 Setting the production rate of each item
 Fixing starting and finishing dates for each item
 Authorizing production shop to commence production by the release of production orders
 Follow up the progress of production and expediting wherever required
Thus, Production Planning and Control regulates the orderly flow of materials in the manufacturing
process from the raw material stage to the finished product.
Production Planning and Control aims at meeting production targets ensure optimum use of available
resources, help in increasing profits through productivity and meet customer needs. An effective
production control system requires reliable information, sound organisation structure, a high degree
of standardisation and trained personnel for its successful operation.

1.3 PRODUCTION CONTROL

Production planning is the projected flow of production, while production control is the systematic
approach to control the flow of projected production. The word Production Planning and production
control functions are in a way inseparable. There cannot be a Production Plan without Production
Control. Merely drawing a plan without control serves little purpose. It does not help in the effective
implementation of the plan. Similarly, there cannot be any control without a plan; it is the plan which
is controlled. Tasks involved in the Production Control function are shown in the diagram below.

Gathering information of actual production against plan

Compute variances if any in actual against targeted production

Analyse causes of variances

Initiate suitable action to make up for shortfall in production if any

If shortfall in production or delays in delivery is unavoidable,

inform top management and Sales

Production Control Process

However, we need to understand clearly the difference between the production plan and production
control, which is given in the table.
Difference between Production Planning and Production Control
Sr. Production Planning Production Control
No.
1 Production Planning is concerned with Production Control is concerned with getting
determination, acquisition and arrangement of information about actual production; take
the resources required for the production of necessary action to ensure that production targets
specified quantity and delivery. are met.
2 It is a preproduction activity. Production Control starts only after the
commencement of production.
 3 Production Planning can be done anywhere. Production Control can be done at the place
where production takes place

1.4 ROLE OF PRODUCTION PLANNING AND CONTROL

Production Planning and Control plays a vital role in the manufacturing organisation. Effective
Production Planning and Control function directly help in increasing customer satisfaction and
profitability. The major role of Production Planning and Control is explained below:
The balance between demand and supply
This customer demand for the product is met by manufacturing the product in the manufacturing
plant using the capacity of its resources like plant/machinery, manpower, space, utilities. The capacity
of a manufacturing organisation is rather rigid. Increase in capacity can not be made in a short time
and require investments. Increasing shift working hours, overtime, incentives etc can help in
increasing capacity but these strategies may not be possible for all the organisations. Role of
Production Planning and Control is to balance the demand for the products with the capacities
available to achieve highest customer satisfaction and profits.

CAPACITY DEMAND

Role of Production Planning And Control

In a competitive business, perfect matching of demand with capacity is impossible.
The effective link between Marketing and Manufacturing
Production Planning and Control function instruct Production function what to make when to make
and how much to make through the release of several documents like work orders, shop orders.
Nerve Centre of Organisation
Production Planning and Control function play the role of Heart of an organisation. All
activities/processes are concerned with customer requirement/conversion process and the related
flow of information pass from or to Production Planning and Control.

1.5 OBJECTIVES OF PRODUCTION PLANNING AND CONTROL

The ultimate objective of production planning and control function is to contribute to the profits of
the organisation. This is accomplished by keeping the customers satisfied through the meeting of
delivery schedules at overall minimum cost. Thus, the main objective of production planning and
control can be stated as to ensure the coordinated flow of work so that the required number of
products is manufactured in the required quantity and of the required quality at the required time at
optimum efficiency.
Specific objectives of production planning and control are to establish routes and schedules for work
that will ensure the optimum utilization of materials, workers and machines and to provide the means
for ensuring the operation of the plant following these plans.
Following are the major objectives of Production Planning and Control:
Continuous Flow of Production: To ensure a continuous flow of production to meet customer
requirements.
Planned Requirements of Resources: To ensure a system of regular availability and adequacy of
labour, machines and raw materials for production through the preparation of work and materials
schedule thus allowing smooth and continuous production runs with reduced possibilities of
disruptions and fewer stocking of raw materials.
Optimum Inventory: To ensure that raw materials, finished goods and work in progress are generally
maintained at the optimum levels with the cardinal aim of ensuring an uninterrupted system of
production to meet demand.
Increased Productivity: To make sure that machines and workers are coordinated and used efficiently
i.e. to prevent under and overutilization of equipment and manpower through the preparation of
machine utilization schedules otherwise called machine loading.
Customer Satisfaction: To ensure that orders are met and that production targets and schedules are
achieved in quantity, quality and cost. It aims at satisfying customers’ requirements by producing the
items as per the specifications or desires of the customers.
Coordination: To facilitate, the co-ordination of production with other functions of the business and
ensure harmony with other sectional policies and the corporate objectives of the company.
Minimize Costs: To minimize manufacturing costs by measures like reducing wastages, optimizing
resource utilization, reducing throughput time.
Evaluation of Performance: The process of production planning and control is expected to keep a
constant check on operations by judging the performance of various individuals and workshops and
taking suitable corrective measures if there is any deviation between planned and actual operations.

1.6 SIGNIFICANCE

Production Planning and Control is of immense value to management in capacity utilisation and
inventory control. A coordinating agency co-ordinates the activities of engineering, purchasing,
production, selling and stock control departments. An efficient system of production planning and
control helps in providing better and more economic goods to customers at a lower investment. As
such, effective Production Planning and Control contributes to following parameters of business
success:
 1 Delivery
2 Quantity
3 Quality and
4 Cost
5 Flexibility
The principal advantages of production planning and control are summarized below:
Better customer Service
Production Planning and Control helps in providing better customer service by improving delivery
performance and service level.
Better Inventory Control
One of the signs of Production Planning and Control is the lower level of inventories during
manufacturing.
Lesser Rush Orders
Though rush orders are a reality of competitive business, in an organisation, where there is an effective
system of production planning and control, production, operations move quite smoothly as per
original planning and matching with the promised delivery dates.
More Effective Use of Manpower/Equipment
An efficient system of production planning and control makes for the most effective use of
manpower/equipment. It provides information to the management regularly about the present
position of all orders in process, equipment and personnel requirements.
Reduced Idle Time
Production planning and control help in reducing idle time i.e. loss of time by workers waiting for
materials, job or other facilities. Production Planning and Control ensures that material and other
facilities are available to the workers in time as per the production schedule.

Improved Employee Morale

An effective system of production planning and control co-ordinates the activities of all the
departments involved in the production activity. It ensures even flow of work and avoids rush orders.
Create Good image
A proper production planning and control system in an organisation is in a position to meet its orders
in time to the satisfaction of its customers.
Lower capital requirements
Under an effective production planning and control system, everything relating to production is
planned well in advance of operations.

1.7 FUNCTIONS
Functions of Production Planning and Control vary widely from organisation to organisation. In
many organisations, some of the traditional functions of Production Planning and Control like
Process Planning come under another department. However, some of the common functions are
listed in the diagram below.

PRODUCTION PLANNING
AND CONTROL

PRODUCTION PRODUCTION
PLANNING CONTROL

FORECASTING
DISPATCHING

CAPACITY
PLANNING

ORDER
PREPARATION PROGRESSING

PROCESS
PLANNING
EXPEDITING
LOADING

SCHEDULING

COST
ESTIMATION

Functions of Production Planning and Control

Forecasting

This function essentially refers to forecasting the resources for the short or medium term. Demand
Forecasting is concerned with projecting the company’s product market.
Capacity planning
Capacity planning is one of the vital functions of Production Planning and Control affecting short
as well as the long-term performance of the organisation in terms of order fulfilment and
profitability.
Order preparation
A customer order received by the Sales department is communicated to the Production Planning
and Control for execution. Production Planning and Control instructs various manufacturing
department to manufacture through the release of formal documents.
Process Planning (Routing)
Routing decisions include fixation of the method of manufacture operations and their sequence,
machine for each operation to enable shops to produce goods of the right quality at the lowest
cost. The determination of where each operation on a part, subassembly or assembly is to be
performed results in a route for the movement of a manufacturing lot through the factory. Under
this, the operations, their path and sequence are established.
Loading
Once the route has been established, the work required can be loaded against the selected
machine or workstation. The total time required to operate is computed by multiplying the unit
operation times given on the standard process sheet by the number of parts to be processed.
Scheduling
Scheduling is concerned with the preparation of machine loads, fixation of calendar dates of
various operations to be performed on a job, coordination with sales to confirm delivery dates of
new items and periodical preparation of dispatch schedules of regular items.
Dispatching
Dispatching does not mean physical dispatch of goods. It is related to the dispatch of documents.
It is concerned with the preparation and distribution of shop orders and manufacturing
instructions to the concerned department as their authority to perform the work according to the
predetermined schedule.
Progressing
Progressing function is on gathering information on actual production against planned production.
Progressing involves:
● Collection of data from manufacturing shops
● Recording of the progress of work and
● Comparing progress against the plan
Expediting
Expediting is a crucial production control function. Optimum operation of the plant, however, is
attained only if the original plan has been carefully prepared to utilise the manufacturing facilities
fully and effectively. It is concerned with the following:
 Intensive progress chasing to identify delays and interruptions, which may hold up production
  Corrective action from time to time to keep the rate of production in line with the
schedule
 Communicating possible failure in delivery commitments to the Sales Department
Combining Functions
In actual operations, routing, loading and scheduling are often combined and performed concurrently.
How far in advance routes, loads and schedules should be established always presents an interesting
problem.
Preplanning
Re-planning is concerned with revising routes, loads and schedules; developing a new plan. In
manufacturing, this is often required and necessary. Changes in market conditions, manufacturing
methods or many other factors affecting the plant will often indicate that a new manufacturing plan
is needed.

1.8 FACTORS AFFECTING PRODUCTION PLANNING AND CONTROL

Some of the major factors affecting the nature and magnitude of Production Planning and Control in
an organisation are briefly discussed below.
Nature of production
In job production, products and operations are designed for some particular order, which may or may
not is repeated in future. Hence, production usually requires more time, whereas in a continuous
manufacturing system inventory, problems are more complex but control operations are rather simple
due to the fixed process.
Nature of operations/activities
In intermittent manufacturing systems such as job or batch production, the operations are markedly
varied in terms of their nature, sequence and duration. Due to this, the control procedure requires
continuous adjustments to suit the requirements of each order.
Magnitude of operations
Centralized control secures the most effective co-ordination but as an organisation grows in size,
decentralization of some production control functions becomes necessary. The degree to which the
performance of an activity should be decentralized depends upon the scope of operations and
convenience of their locations.

1.9 SYMPTOMS OF POOR PRODUCTION PLANNING AND CONTROL

In the following paragraphs, some of the common symptoms of poor Production Planning and Control
are identified and stated.
Delay in Deliveries
Frequent delays in delivery of products are one of the easily identifiable symptoms of poor
Production Planning and Control. Inability to meet committed delivery schedule is indicative of
the lack of proper assessment of the capacity available while committing a delivery date and poor
production control. Delays in supply from vendors leading to delays in delivery can also be
attributed to poor/ineffective follow-up and late placement of purchase order to the vendors.
Frequent Short Supplies
Frequent short supplies mean occurs when actual production is less than the planned production.
This leads to dispatch of less quantity of products than that committed to the customer. Poor
Production Planning and Control is not the only reason for short supply, other factors like
absenteeism, breakdown of plant/machines, disruptions in power supply, delays in supply of
parts/components/ material by the supplier, Quality problems like rework, rejections also
contribute to the shortfall in production.
Huge Raw Material Inventory

Huge stocks of raw material and bought out items at stores can normally occur due to the
following reasons:

 procurement of material much over the requirement

 High safety stock and reorder level

 Suppliers supplying material in excess anticipating future requirements

Huge Work In Progress Lying in Shop Floor
Piling of huge work in progress at the shop floor takes place due to poor scheduling, poor control,
frequent changes in the plan all symptoms of poor planning. Sometimes, to keep machines
utilised, jobs are loaded on the machines for a few processes. The semi-processed jobs wait for
long at the shop floor as machines for subsequent operations are busy in other jobs.
Material Shortage
Frequent shortage/stock out of material mean inadequate availability or non-availability of
material when required. Occasional shortage of material can also occur due to the following
reasons:
 A sudden increase in demand
 Rejection of material

 Loss/deterioration in stores
 Poor inventory accuracy
 The inability of a supplier to supply the required quantity
Poor Resource Utilization
Optimum resource utilization is one of the objectives of Production Planning and Control.
Workmen idling at machines waiting for job or material, machines idle waiting for material, worker
or job are the typical situation of poor resource utilization. Idling of resources for a long period
 can be directly attributed to poor Production Planning and Control in an organisation. Some of the
reasons for low resource utilisation are given below:
 Error in the estimation of resource requirement

 Poor coordination for providing men/machine/material in the required quantity,

 Poor production control
High Manufacturing Cost
Inefficient and ineffective Production Planning and Control function would lead to high
manufacturing costs. If due to poor Production Planning and Control resource utilization is low,
this would lead to the idleness of capacity of machines or manpower. This idleness of employees
would increase manufacturing costs. Similarly, huge inventory would increase inventory carrying
costs and cost due to evaporation, deterioration and degradation of materials. Shortage of
material would result in less production resulting in higher cost of production.

1.10 ORGANISATION OF PPC FUNCTION

The organisation structure of Production Planning and Control changes widely from organisation to
organisation. Production Planning and Control function can be organized as centralized or
decentralized. Centralization or decentralization of duties of the production control staff depends
upon the design of the production planning and control system.
Centralized Production Planning and Control
In a completely centralised setup, determination of delivery promises; sales analysis, shop orders;
preparation of routes, load charts and schedule charts; and dispatching of work to the shop complete
with job tickets and all other necessary paper would be accomplished by a central production planning
and control unit.
Decentralized Production Planning and Control
Some companies are endeavouring to make each production engineer/foreman a manager of his
departmental operation. In these cases, the foreman is furnished with complete staff for the
production planning and control of the activities in the department.
Planning Phase
Working from the basic data mentioned earlier, the personnel in this part of the activity routes and
load and schedule charts.
Control Phase
The completed job ticket or its equivalent is the key to this phase of the production planning and
control system. This means of reporting back from the shop floor indicates that a job is completed or
if daily job tickets are turned in, the daily progress of a job can be determined.
Relation to Other Functions
Good relationships with all the other functions in the enterprise are essential to effective production
planning and control. Full cooperation with the marketing group is necessary, particularly because of
the importance of market conditions and the goodwill of customers. Both product engineering and
process engineering must keep production planning and control informed as to their plans to avoid
the manufacture of goods either to incorrect specifications or by an improper method.

1.11 MANUFACTURING PLANNING AND CONTROL (MPC)

A manufacturing planning and control (MPC) system is concerned with planning and controlling all
aspects of manufacturing, including materials, scheduling machines and people and coordinating
suppliers and customers. An effective MPC system is critical to the success of any company. An MPC
system's design is not a one-off undertaking; it should be adaptive to respond to changes in the
competitive arena, customer requirements, strategy, supply chain and other possible problems.

Manufacturing planning and control address decisions on the acquisition, utilisation and allocation of
production resources to satisfy customer requirements most efficiently and effectively. Typical
decisions include workforce level, production lot sizes, assignment of overtime and sequencing of
production runs. Optimization models are widely applicable for providing decision support in this
context.
Characteristics of the MPC system

 MPC systems concerns planning and controlling all aspects of manufacturing, including managing
materials, scheduling machines and people and coordinating suppliers and key customers
 Both the MPC system and manufacturing process are designed to meet the dictates of the
marketplace and to support overall company strategy

 An effective MPC system can provide a substantial competitive advantage for a company in its
marketplace

 The MPC system provides information to effectively manage the flow of material, effectively
utilise people and equipment and coordinate supply chains

continuously adapt and respond to changes in the company environment, strategy, customer
requirements, particular problems and new supply chain opportunities

 Firms to be an effective competitor must have MPC systems with the ability to determine,
transmit, revise and coordinate requirements throughout a global supply chain system
Typical MPC Support Tasks

 Plan capacity requirements and availability to meet marketplace needs

 Plan for material to arrive on time in the right quantities needed for product production

 Ensure utilisation of capital equipment and other facilities is appropriate

 Maintain appropriate inventories of raw materials, work in process and finished goods
incorrect locations
 Schedule production activities so people and equipment are working on the correct things
  Track material, people, customers’ orders, equipment and other resources in the factory

 Communicate with customers and suppliers on specific issues and long-term relationships
 Meet customer requirements in a dynamic environment that may be difficult to anticipate

 Respond when things go wrong and unexpected problems arise

 Provide information to other functions on the physical and financial implications of the
manufacturing activities
Support Activity
Long Term
The system is responsible for providing information to make decisions on:

 The appropriate amount of capacity (including supplier capacity) to meet the market
demands of the future.

 Provide the appropriate mix of human resource capabilities, technology and geographic
locations.
Intermediate-Term
The fundamental issue is matching supply and demand in terms of both volume and product mix.
 Planning for the right logistics.
 Providing customers with information on correct quantities and location to meet market
needs.
 Planning of capacity to determine employment levels, budgets, overtime and
subcontracting needs etc.
Short term
There is a need for detailed scheduling of resources to meet production requirements.
 Involves time, people, material, equipment and facilities.
 Involves people working on the right things.

 Involves tracking the use of resources and execution results.

 Provides problem-solving support

ELEMENTS OF MPC

 Demand management

 Aggregate production planning

 Master production scheduling

 Rough-cut capacity planning

 Material requirement planning
 Capacity planning
  Order release

 Shop floor scheduling and control

1.12 MEASUREMENT OF EFFECTIVENESS

The cost of the control system about the value of goods shipped is another possibility. Again, however,
this may not be sound: if markets slump, a bad ratio will develop. Many good production planning and
control systems have been discontinued because of “high costs” under these conditions- and have
never revived after business picked up.
In a study of benefits and costs of computerised production planning and control systems, Schroeder
et al list the following performance criteria by which production planning and control systems might
be judged:
 Inventory turnover
 Delivery lead-time
 Per cent of time meeting delivery promises
 Per cent of orders requiring “splits” because of unavailable material
 Number of expeditors
 Average unit cost

1.13 PPC IN SERVICES

Production Planning and Control concepts and techniques are increasingly being used in all types of
service organisations like health care, hospitality, entertainment. In the service industry, Production
Planning and Control is called Operation Planning and Control. The importance of Planned approach I
service sector has grown enormously due to competitive pressures. Service industry understands that
a planned approach is prerequisite for customer satisfaction/delight.

1.14 SUMMARY

Production planning: Production planning may be defined as the technique of foreseeing every step
in a long series of separate operations, each step to be taken at the right time and in the right place
and each operation to be performed in maximum efficiency. It helps the entrepreneur to work out the
quantity of material manpower, machine and money require for producing a predetermined level of
output in a given period.

 To avoid delays in production and errors arising from a stampede, rush or fire brigade
approach.
 To plan production facilities in the best possible manner, along with the proper systematic
planning of production activities.
  To provide men, machines, materials etc. of the right quality, quantity and also providing them
at the right time forms a very important factor.
 To inform beforehand to the management of the difficulties or the various awkward positions
expected to crop up later.
The success of an enterprise greatly depends on the performance of its production control
department. Production Planning and Control department generally have to perform the following
functions:

 To provide raw material, equipment, machines and labour

 To organize production schedules in conformity with the demand forecasts
The resources are used in the best possible manner in such a way that the cost of production is
minimized and the delivery date is maintained.
Determination of economic production runs intending to reduce setup costs.
Proper coordination of the operations of various sections/departments responsible for the production
To ensure regular and timely supply of raw material at the desired place and of prescribed quality and
quantity to avoid delays in production
To perform an inspection of semi-finished and finished goods and use quality control techniques to
ascertain that the produced items are of required specifications.

1.15 KEYWORDS
 Production Planning and Control- Determination, acquisition and arrangement of all
facilities necessary for future production of items.
 Scheduling- Preparation of machine loads, fixation of calendar dates of various
operations to be performed on a job, coordination with sales to confirm delivery dates
of new items, and periodical preparation of dispatch schedules of regular items.
 Dispatching- Preparation and distribution of shop orders and manufacturing
instructions to the concerned department
 Manufacturing Planning and Control: Planning and controlling all aspects of
manufacturing, including materials, scheduling machines and people and coordinating
suppliers and customers.
UNIT 2 DEMAND MANAGEMENT

Objectives

After completing this unit, you would be able to:

• state the concept and role of demand management;

• recall techniques of demand forecasting;
• write some of the strategies to cope with balancing demand fluctuation;
• explain the meaning and the causes of the bullwhip effect.

Structure
2.1 Introduction
2.2 Concept
2.3 Functions
2.4 Demand Planning
2.5 Demand Forecasting
2.6 Forecasting Techniques
2.7 Bullwhip Effect
2.8 Strategies For Demand Fluctuations
2.9 Demand Management In Services:
2.10 Summary
2.11 Key Words

2.1 INTRODUCTION

Demand for products is the driving force for any production activity. Demand management is,
therefore, an important input to production planning. Adjusting business operations to account for
customer demand is a basic requirement of any business that wants to compete in the open market.
Many of these businesses practice principles of demand management to make this responsibility
easier.

Demand management is the supply chain management process that balances the customers’
requirements with the capabilities of the supply chain. With the right process in place, management
can match supply with demand proactively and execute the plan with minimal disruptions. The
process is not limited to forecasting. It includes synchronizing supply and demand, increasing
flexibility, and reducing variability.
In the unit, we understand the basics of demand management and its major functions. Besides, we
would have an overview of common demand forecasting techniques.
2.2 CONCEPT

Demand for product/services tends to fluctuate. Higher is the competition, more the uncertainty in
demand and pressure for delivery. These demands in quantity, variety and delivery are to be met
through internal manufacturing infrastructure. While inventory, outsourcing and overtime/extra
hours working do help in coping with supply capacity shortages. But these measures may not be
possible in all situations. For example, supplier for non-standard, complex items at a short lead-time
is difficult to get. Besides, these strategies come with a cost. Also, demand management considers
strategies, which influence demand for products itself for the short term just as price discount is one
of the strategies to boost demand.

The term demand management has its roots in economics. It has been defined from a different
perspective as shown below.

Microeconomics perspective: Activities in support of a firm's products in their marketplace, such as

stimulating the demand, estimating its volume and planning the production accordingly.

Planning Perspective: Demand Management is the management of matching supply and demand over
time –in real-time and during planning. MIT Centre for Transportation and Logistics

Supply Chain perspective: Demand management-focused efforts to estimate and manage customer's
demand to use this information to operating decisions. - Roger Blackwell

Demand management is a vital component of the framework for manufacturing planning and control
(MPC). The demand management process is concerned with balancing the customers’ requirements
with the capabilities of the supply chain. This includes forecasting demand and synchronizing it with
production, procurement, and distribution capabilities. A good demand management process can
enable a company to be more proactive to anticipated demand and more reactive to unanticipated
demand. An important component of demand management is finding ways to reduce demand
variability and improve operational flexibility.
Reducing demand variability aids inconsistent planning and reduces costs. Increasing flexibility helps
the firm respond quickly to internal and external events.
Most customer-driven variability is unavoidable, but one of the goals of demand management is to
eliminate management practices that increase variability and to introduce policies that foster smooth
demand patterns. Another key part of demand management is developing and executing contingency
plans when there are interruptions to the operational plans.
Demand Management processes bridge supply and demand-side management to help optimize
decision-making as shown in the figure below.
 (Ref: L. Lapide, "Optimally Bridging Supply and Demand", Supply Chain Management Review, May/June 2007)

Role of Demand Management

Both manufacturing and service industries recognize the need for demand management. Manufac-
turing companies often use inventory as a buffer between the demand fluctuations and the desire to
maintain a constant level of production. Demand management has also been a matter of concern in
service industries, where the perishability of the service may often preclude the use of inventory,
thereby requiring a much closer matching of demand and supply (capacity).

Demand Management in Supply Chain

Optimally Matching Supply and Demand has become more important in supply chain perspective
due to the following:
● SCM moving from primarily reducing costs and inventories to also enhancing revenues
● Focus on Demand-driven supply chains, e.g. P&G’s (Proctor and Gamble) CDSN (Customer
Driven Supply Network)
● Demand is viewed as variable and (somewhat) controllable
● Maximize corporate profitability, rather than maximise revenues and minimise costs
All the above necessitate management attention for better effective Demand Management, Demand
management is the supply chain activity of forecasting, effectively planning for and meeting customer
demand for a product. It strives to balance demand, which may have high variations and supply
capacities.
The traditional supply chains begin· at the point of supply of material and end with the sale of the
finished product to consumers. Much of the focus has been related to the product flow, inventory
turnover, information technology, transportation and delivery speed and consistency. Little attention
has been given to demand management. The modem supply chain is of the view that any attention
paid to demand management would provide benefits throughout the supply chain.
2.3 FUNCTIONS

A simple way to understand functions involved in demand management is to break demand

management into Demand Planning, Demand Forecasting and Demand Management itself as
illustrated in the diagram below.

Functions
Demand Forecasting
Demand forecasting is concerned with predicting the demand for product/s in future. The
efficiency of the entire supply chain in many businesses is dependent on the accuracy of the
forecast as entire planning for order fulfilment is based on the forecast and the orders. Forecasting
techniques are discussed later in this unit.
Demand Planning
Demand planning refers to the process of forecasting consumer demand for a company's products
or services well into the future, sometimes as far into the future as one year and is usually
associated with sales, but it is closely tied to supply planning, which seeks to ensure that a
company has enough supplies to meet demand. Ideally, a company's demand-planning process
helps maintain supply levels that meet demand or just slightly exceed demand.
Demand Management
Demand management helps keep supplies and demand about even. Demand management is the
oversight of current consumer demand to ensure that a business does not experience recessionary
activity, such as a loss of profits. Demand management is much more capable of taking advantage of
business opportunities in response to local events. For instance, if an area celebrates a festival, making
special offers like a discount, prizes etc would increase demand.

2.4 DEMAND PLANNING

Supply and demand planning is continuously performed during the manufacturing and distribution
process to ensure that planned production will meet forecasted demand and the appropriate amount
of raw materials and goods are available for production runs. Beyond the basic analysis of current
supply and past demand, supply and demand planning requires predictive modelling, statistical
forecasting and the ability to drill into demand detail by region, customer segment or product
category. Shortfalls in supply can be detected or predicted, with automatic alerts sent to managers or
triggering a reorder process.
Demand Planning is a method by which we can make a plan to fulfil the customer's requirement. Good
demand planning is a prerequisite for an excellent performance.
The Demand Planning process is essential for any company. Its purpose is to determine trends -
detailed distribution over time, markets and products - of demand and expected sales. The main
business processes (purchases, production, and distribution) derive their results from this
fundamental information, the quality of which has a direct and highly significant effect on all the main
performance parameters of a company: profitability, customer service level, the level of tangible
assets, production costs, etc. Effective demand planning can guide users to improve the accuracy of
revenue forecasts, align inventory levels with peaks and troughs in demand and enhance profitability
for a given channel or product.
Nowadays, most of the organisations use software for demand planning. Modules and processes of
one of the software Infor 10 for Demand Planning are stated below:
Demand Planning contains three modules that you can deploy individually or combine to form a
complete supply chain-planning platform:
• Demand Planner — to deliver accurate "self-learning" forecasts for improved forecast
accuracy.
• Inventory Planner — to optimize inventory at each distribution hub, ensuring the highest
levels of available stock for a given customer service-level target.
• Replenishment Planner — to plan inventory and distribution movements through every node
of your supply chain, from supplier through the manufacturer and all levels of your
distribution chain.
Demand planning software does the following
Demand forecasting
This powerful forecasting tool in a graphical environment automatically detects seasonality,
trends, slow-moving items, unusual outliers and step-changes in demand. With the "self-
learning" engine, you forecast demand at any combination of the product group, customer or
channel, Model scenarios to see the effect of promotions and events and their future impact.
Web-based collaboration
Share knowledge with every stakeholder in the demand planning process. Your internal sales and
demand planners shape demand. External customers contribute with visible input to improve your
responsiveness. Suppliers upstream know your plans and improve their delivery performance.
Inventory planning
Analyze, model and strike the right balance between target service levels and your inventory
investment. Redistribute inventory according to predicted demand to ensure it meets tailored
service levels—and increase your stock turn rates.

Replenishment planning
Automatically align supply replenishment with demand across your entire manufacturing and
distribution network. Using different modelled scenarios, you can see results ripple through and
quickly realign inventory, transport, manufacturing and buying plans.
Benefits of Demand Planning
• Improved service levels – good demand planning allows a more rapid and efficient response
to actual demand
• Reduced stock levels and inventory costs: reduced safety stocks and remainders at all levels
of the distribution chain
• Improved purchase planning with the subsequent reduction in supply costs
• Improved use of production assets
• Improved promotion and assortment planning with benefits in terms of increased sell-out,
reduced lost sales and seasonal remainders at sales outlets, reduced inventory costs

2.5 DEMAND FORECASTING

Demand forecasting refers to an estimate of most likely future demand for product under given
conditions. Such forecasts are of immense use in making decisions about
production, sales, investment, expansion, employment of manpower etc both in short-run
as well as in the long run.

Concept
Companies plan their business - production or sales in anticipation of future demand. Hence,
forecasting future demand becomes important. It is the very soul of good business because every
business decision is based on some assumptions about the future whether right or wrong, implicit or
explicit. The art of successful business lies in avoiding or minimizing the risks involved as far as
possible and face the uncertainties in a most befitting manner. Thus, Demand Forecasting refers
to an estimation of most likely future demand for a product under given conditions.

Important features
• It is undertaken in an uncertain atmosphere.
 • A forecast is made for a specific period, which would be sufficient to make a decision and
put it into action.
• It is based on historical information and past data.
• It tells us only the approximate demand for a product in the future.
• It is based on certain assumptions.
• It cannot be 100% precise as it deals with future expected demand.

Demand forecasting is needed to know whether the demand is subject to cyclical fluctuations or not,
so that the production and inventory policies etc., can be suitably formulated. Demand forecasting is
generally associated with forecasting sales and manipulating demand. A firm can make use of the
sales forecasts made by the industry as a powerful tool for formulating sales policy and
sales strategy. They can become action guides to select the course of action, which will maximize the
firm’s earnings.

When external economic factors such as the size of the market, competitors etc,
attitudes, movement in prices, consumer tastes, possibilities of new threats from substitute
products etc, influence sales forecasting, internal factors like money spent on advertising, pricing
policy, product improvements, sales efforts etc. help in manipulating demand. To use demand
forecasting in an active rather than a passive way, management must recognize the degree to which
sales are a result not only of external economic environment but also of the action of
the company itself.

Criteria for Good Demand Forecasting

Apart from being technically efficient and economically idea, l a good method of demand
forecasting should satisfy a few broad economic criteria. They are as follows:
Accuracy: Accuracy is the most important criterion of a demand forecast, even though cent per
cent accuracy about the future demand cannot be assured. It is generally measured
in terms of the past forecasts on the present sales and by the number of times, it is correct.

Intelligible: The techniques used and the assumptions made should be intelligible to the
management. It is essential for the correct interpretation of the results.

Simplicity: It should be simple, reasonable and consistent with the existing knowledge. A simple
method is always more comprehensive than the complicated one.

Availability of data: Immediate availability of required data is of vital importance to the

business. It should be made available on an up-to-date basis. There should be scope for
making changes in the demand relationships as they occur.

Economy: It should involve lesser costs as far as possible. Its costs must be compared to
the benefits of forecasts.

Quickness: It should be capable of yielding a quick and useful result. This helps the management
to take quick and effective decisions.
2.6 FORECASTING TECHNIQUES

There are several forecasting techniques and many ways to classify them. The figure provides
classification as statistical (Quantitative) and Survey(Qualitative) techniques.

TECHNIQUES OF DEMAND FORECASTING

STATISTICAL METHODS SURVEY METHODS

1. Time Series Method 1. Opinion Survey

2. 2. Economic Indicators 2. Collective Opinion
3. Delphi method
4. End Use Method

Forecasting Techniques

Time Series
A Time Series is a series of observations at equal increments of time. In Time Series models we
extrapolate past data in the search for the best statistical fit. In each model, it is assumed that the
past pattern will continue. Among all the forecasting models, Time Series models are, by and large,
the simplest easy to understand and easy to use. They generally work well for short-term
forecasting. Some of the popular Times Series models are introduced below:

Moving Average
The past data of sales of a firm may show peaks and valleys on account of seasonal variations and
random variations. To compute the average demand for the entire period to obtain an estimate of the
future requirement shall be meaningless since the trend is an important factor.

The most common method, used to smoothen the effect of random fluctuations, is to estimate the
average demand by some kind of moving average.
Moving average is a simple statistical method to establish and extrapolate the trend of past sales. The
method makes use of old data and computes a rolling average for a constant number of periods, n. It
discards old figures as new ones come in i.e. fresh average is computed at the end of each period by
adding the demand for the most recent period and omitting the demand of the oldest period. Since
the data used in this method changes from period to period, hence the expression “moving average”
is used.
The best-known forecasting methods is the moving averages or simply takes a certain number of past
periods and add them together; then divide by the number of periods. Simple Moving Averages (MA)
is an effective and efficient approach provided the time series is stationary in both mean and variance.
The following formula is used in finding the moving average of order n, MA(n) for a period t+1, MAt+1 =
[Dt + Dt-1 + ... +Dt-n+1] / n

where n is the number of observations used in the calculation.

The forecast for period t + 1 is the forecast for all future periods. However, this forecast is revised only
when new data becomes available.

Exponential Smoothing Techniques

One of the most successful forecasting methods is the exponential smoothing (ES) techniques.
Moreover, it can be modified efficiently to use effectively for time series with seasonal patterns. It is
also easy to adjust for past errors-easy to prepare follow-on forecasts, ideal for situations where many
forecasts must be prepared, several different forms are used depending on the presence of trend or
cyclical variations. In short, an ES is an averaging technique that uses unequal weights; however, the
weights applied to past observations decline exponentially.

Single Exponential Smoothing

It calculates the smoothed series as a damping coefficient times the actual series plus 1 minus the
damping coefficient times the lagged value of the smoothed series. The extrapolated smoothed series
is a constant, equal to the last value of the smoothed series during the period when actual data on the
underlying series are available.

Economic Indicators
Economic indicators as a method of demand forecasting are developed recently. Under this method,
a few economic indicators become the basis for forecasting the sales of a company. An economic
indicator indicates the change in the magnitude of an economic variable. It gives the signal about the
direction of change in an economic variable. This helps in the decision-making process of a company.
We can mention a few economic indicators in this context.
• Construction contracts sanctioned for the demand for building materials such as cement.
• Personal income towards the demand for consumer goods.
• Agriculture income towards the demand for agricultural inputs, instruments, fertilizers, manure,
etc.

Survey Methods
Survey methods help us in obtaining information about the future purchase plans of potential buyers
through collecting the opinions of experts or by interviewing the consumers. These methods are
extensively used in short-run and estimating the demand for new products. There are different
approaches to survey methods.

Opinion Survey
Under this method, consumer buyers are requested to indicate their preferences and willingness
about particular products. They are asked to reveal their ‘future purchase plans concerning specific
items. They are expected to give answers to questions like what items they intend to buy, in what
quantity, why, where, when, what quality they expect, how much money they are planning to spend
etc. Generally, the field survey is conducted by the marketing research department of the company
or hiring the services of outside research organisations consisting of learned and highly qualified
professionals.

The heart of the survey is a questionnaire. It is a comprehensive one covering almost all questions
either directly or indirectly in a most intelligent manner. It is prepared by an expert body who are
specialists in the field of marketing.

Collective opinion method or opinion survey method

This method is also known as “Salesforce polling” or “Opinion poll method”. Under this method, sales
representatives, professional experts and the market consultants and others are asked to express their
considered opinions about the volume of sales expected in the future.

The logic and reasoning behind the method are that these salesmen and other people connected with
the sales department are directly involved in the marketing and selling of the products in different
regions. Salesmen, being very close to the customers, will be in a position to know and feel the
customer’s reactions towards the product. They can study the pulse of the people and identify the
specific views of the customers.

It is simple, less expensive and useful for short-run forecasting particularly in case of new products.
The main drawback is that it is subjective and depends on the intelligence and awareness of the
salesmen. It cannot be relied upon for long-term business planning.

Delphi Method or Experts Opinion Method

Delphi Method Perhaps the best known of the various judgmental approaches to technological
forecasting, the Delphi method uses a panel of individuals who make anonymous, subjective
judgments about the probable time when a specific technological capability will be available. The
results of these estimates are aggregated by a process administrator and fed back to the group, which
then uses the feedback to generate another round of judgments. After several iterations, the process
is stopped and areas of agreement or disagreement are noted and documented.

It has proved more useful and popular in forecasting non– economic rather than economical variables.
Under this method, the management requests the experts to express their considered opinions and
views about the expected future sales of the company. Their views are generally regarded as objective
ones.

End-Use or Input-Output Method

Under this method, the sale of the product under consideration is projected based on-demand surveys
of the industries using the given product as an intermediate product. The demand for the final product
is the end-use demand of the intermediate product used in the production of the final product. An
intermediate product may have many end-users, e.g. steel can be used for making various types of
agricultural and industrial machinery, for construction, for transportation etc. It may have the demand
in both the domestic market and international market.

Demand Forecasting for a New Product

Demand forecasting for new products is quite different from that for established products. These
methods are not mutually exclusive. The management can use a combination of several of the
supplement and cross-check each other. Here the firms will not have any experience or past data for
this purpose. An intensive study of the economic and competitive characteristics of the product should
be made to make efficient forecasts. Some of the techniques are listed below;

Evolutionary approach: The demand for the new product may be considered as an outgrowth of an
existing product. For example, demand for the new model of Pulsar bike, which is a modified version
of Old Pulsor bike can most effectively be projected based on the sales of the old Pulsar.

Substitute approach: If the new product developed serves as a substitute for the existing product, the
demand for the new product may be worked out based on a ‘market share’.

Opinion Poll approach: Under this approach, the potential buyers are directly contacted or through
the use of samples of the new product and their responses are found out. These are finally blown up
to forecast the demand for the new product.

Sales experience approach: Offer the new product for sale in a sample market; say supermarkets or
big bazaars in big cities, which are also big marketing centres. The product may be offered for sale
through one supermarket and the estimate of sales obtained may be ‘blown up’ to arrive at estimated
demand for the product.

2.7 BULLWHIP EFFECT

Meaning

The bullwhip effect is an issue of vital importance affecting demand management and supply chain
efficiency.
The bullwhip effect can be described as a series of events that leads to supplier demand variability up
the supply chain. Trigger events include the frequency of orders, varying quantities ordered or the
combination of both events by downstream partners in a supply chain. As the orders make their way
upstream, the perceived demand is amplified and produces the bullwhip effect. The bullwhip effect is
the magnification of demand fluctuations, not the magnification of demand. The bullwhip effect is
evident in a supply chain when demand increases and decreases. The effect is that these increases
and decreases are exaggerated up the supply chain. The essence of the bullwhip effect is that orders
to suppliers tend to have a larger variance than sales to the buyer. The more chains in the supply
chain the more complex this issue becomes. This distortion of demand is amplified the farther
demand is passed up the supply chain as shown in the diagram below.
 Bullwhip Effect
(Source: Supply Chain Digest March31,2010)

Proctor & Gamble coined the term “bullwhip effect” by studying the demand fluctuations for Pampers
(disposable diapers). This is a classic example of a product with every little consumer demand
fluctuation. P&G observed that distributor orders to the factory varied far more than the preceding
retail demand. P & G orders to their material suppliers fluctuated even more. Babies use diapers at a
very predictable rate, and retail sales resemble this fact. Information is readily available concerning
the number of babies in all stages of diaper wearing. Even so, P&G observed that this product with
uniform demand created a wave of changes up the supply chain due to very minor changes in demand.
The bullwhip effect has been perceived as an unavoidable effect of demand variation. Only recently
have companies begun to tackle the ripple associated with variances in demand. The key to stemming
the effect is realizing who is signalling the change in demand. Is it the manufacturer, distributor, the
retailer or the customer? Knowing where the demand shifts are originating is vital to attacking this
problem.
The bullwhip effect describes how inaccurate information, a lack of transparency throughout the
supply chain and a disconnect between production and real-time supply chain information result in
lost revenue, bad customer service, high inventory levels and unrealised profits.
Causes of the Bullwhip effect
As information (usually forecast data) is passed down the supply chain, most participants only have
access to data from businesses either directly above or directly below them. In industries where the
entire supply chain can consist of numerous layers, this means that the majority of the information
that managers use to make decisions is localised to only a few participants and hidden from those
further up or downstream. Without a clear view of end-user demand, companies must rely on only
that information they have access to. Unfortunately, this information is often distorted by multiple
layers of forecasts and transactions.
Impact of Bullwhip Effect
The variability that results from Bullwhip effect can cause numerous problems for the manufacturers.
These negative financial outcomes are the result of the following consequences resulting from the
bullwhip effect:
Excessive inventory investments: Since the Bullwhip effect makes the demand more unpredictable, all
companies need to safeguard themselves against the variations to avoid the stock-outs.
Poor customer service level: Despite the excessive inventory levels mentioned in the first
consequence, demand unpredictability may cause stock-outs anyways.
Lost Revenues: In addition to the poor customer service levels of the second consequence, stock-outs
may also cause in lost revenues.
Reduced Productivity: Since revenues are lost, operations are less cost-efficient.
Sub-Optimal transportation: Transportation planning is made more difficult by demand uncertainties
induced by the Bullwhip effect.
Sub-Optimal production: As transportation, greater demand unpredictability causes missed
production schedules.
Action to minimize the effect of the bullwhip effect
Essential to minimizing the “Bullwhip Effect” is to first specifically understand what drives customer
demand planning and inventory consumption, as they are the triggers for replenishment order
quantities at various points in the supply chain. The most effective process for smoothing out the
oscillations of the “Bullwhip Effect” will be customers and suppliers understanding what drives
demand and supply patterns. Then, collaboratively working to improve information quality and
compressing cycle times throughout the entire process. By adopting some or all of the following
actions aimed to minimize the “Bullwhip Effect” and increase business performance.
● Minimize the cycle time in receiving projected and actual demand information.
● Establish the monitoring of actual demand for the product to as near a real-time basis as
possible.
● Understand product demand patterns at each stage of the supply chain.
● Increase the frequency and quality of collaboration through shared demand information.
● Minimize or eliminate information queues that create information flow delays.
● Eliminate inventory replenishment methods that launch demand lumps into the supply chain.
● Eliminate incentives for customers that directly cause demand accumulation and order
staging before a replenishment request, such as volume transportation discounts.
● Minimize incentive-based promotions that will cause customers to delay orders and thereby
interrupt smoother ordering patterns.
● Offer products at consistently good prices to minimize buying surges brought on by temporary
promotional discounts.
● Identify and preferably, eliminate the cause of customer order reductions or cancellations.
 ● Provide vendor-managed inventory (VMI) services by collaboratively planning inventory
needs with the customer to projected end-user demand then, monitor actual demand to fine-
tune the actual VMI levels.
Even the most modern of Supply Chain Management systems, cannot automatically stop the
“Bullwhip Effect”. It is a demand management process problem with very broad implications because
it often encompasses policies, measurements systems, practices and, in some cases, the very core of
an organization’s value and belief system. However, the degree of the negative effect it can have on
sales, market share, cost and profits can be enormous.

2.8 STRATEGIES FOR DEMAND FLUCTUATIONS

Basic strategies to absorb the demand fluctuations are:

• Maintain a uniform production rate and absorb demand fluctuations.
• Maintain the workforce but change the production rate by permitting planned overtime, idle
time and subcontracting.
• Change the production rate by changing the size of the workforce through planned hiring and
layoffs.
• Explore the possibility of planned backlogs if customers are willing to accept delays in the
delivery of products.
• A suitable combination of these strategies should be explored to develop an optimal
aggregate production plan.
Options for matching supply and demand are shown in the diagram below.

(Ref: http://classes.bus.oregonstate.edu/ba302/reitsma/capacity_planning.html)
 Demand Management strategy-elements

Information needs
Development demand - management strategies requires informational help, which may include:

• Historical data on the level and composition of demand over time, including responses to
changes in price or other marketing variables

• Forecasts of the level of demand for each major segment under specified conditions
• Segment by segment data to help management evaluate the impact of periodic cycles and
random demand fluctuations

• Good cost data to enable the organisation to distinguish between fixed and variable costs and
to determine the relative profitability of incremental unit sales to different segments and
different prices.

• In multisite organisations, identification of meaningful variations in the levels and composition

of demand on the site-by-site basis.

• Customer attitudes toward queuing under varying conditions.

• Customer opinions on whether the quality of service delivered varies with different levels of
capacity utilization.

Options for situations in which demand needs to be increased to match capacity include:
Pricing
Varying (lower) pricing to increase demand in periods when demand is less than the peak. For
example, matinee prices for movie theatres, off-season rates for hotels, nighttime rates for mobile
telephone service and off-season pricing for items that experience seasonal demand.
Promotion
Advertising, direct marketing, bulk purchase discounts, bonus/free offers and other forms of
promotion are used to shift demand.
Back ordering
By postponing delivery on current orders, demand is shifted to the period when capacity is not
fully utilized. This is just a form of smoothing demand. Service industries can smooth demand by
taking reservations or by making appointments in an attempt to avoid walk-in customer. Some
refer to this as “partitioning” demand.
New demand creation
A new, but complementary demand is created for a product or service. When restaurant
customers have to wait, they are frequently diverted into a complementary service, the bar. Other
 examples include the addition of video arcades within movie theatres and the expansion of
services at convenience stores.
Adjusting Capacity
Options, which can be used to increase or decrease capacity to match current demand include:

• Hire/lay off - By hiring additional workers as needed or by laying off workers not currently
required to meet demand, firms can maintain a balance between capacity and demand.

• Overtime - By asking or requiring workers to work extra hours a day or an extra day per week,
firms can create a temporary increase in capacity without the added expense of hiring the
additional worker.

• Hire Part-time or casual labour - By utilising temporary workers or casual labour (workers who
are considered permanent but only work when needed, on an on-call basis and typically without
the benefit given to full-time workers).

• Inventory - Finished-goods inventory can be built up in periods of slack demand and then used
to fi ll demand during periods of high demand. In this way, no new workers have to be hired, no
temporary or casual labour is needed and no overtime is incurred.

• Subcontracting – Frequently, firms choose to allow another manufacturer or service providers

to provide the product or service to the subcontracting firm’s customer. By subcontracting work
to an alternative source, additional capacity is temporarily obtained.

• Contract manufacturing: Subletting spare or idle manufacturing facilities to other firms needing
extra facilities. This is the reverse of sub-contracting.
Cross-training/ Multi skill: Cross-trained employees may be able to perform tasks in several
operations, creating some flexibility when scheduling capacity. Flexibility Common approaches
to managing demand are detailed in the table below.

Capacity situation relative to demand

The approach used to Insufficient capacity (excess Sufficient capacity Excess Capacity
manage demand demand) (satisfactory demand) (insufficient demand)
Take no action Unorganised queuing Capacity is fully utilised. Capacity is wasted.
results (May irritate (But is this the most (Customers have a
customers and discourage profitable mix of business?) disappointing experience
future use). for services like theatre).
Reduce demand Pricing higher will increase Take no action (but see Take no action (but see
profits. Communication can above). above).
be employed to encourage
usage in other time slots.
(Can this effort be focused
on less profitable/desirable
segments?)
Increase demand Take no action, unless Take no action, unless Price lower selectively (try
opportunities exist to opportunities exist to to avoid cannibalising
 stimulate (and give priority stimulate (and give priority existing business; ensure all
to) more profitable to) more profitable relevant costs are covered).
segments segments Use communications and
variation in
products/distribution (but
recognise extra costs, if any
and make sure appropriate
trade-offs are made
between profitability and
usage levels).
Inventory demand by the Consider the priority Try to ensure the most Clarify that space is
reservation system system for most desirable profitable mix of business available and that no
segments. Make other reservations are needed.
customers shift:
- outside peak period or
- to future peak
Inventory demand by Consider overriding for Try to avoid bottleneck Not applicable
formalising queuing most desirable segments. delays.
Seek to keep waiting
customers occupied and
comfortable. Try to predict
wait accurately.

Approaches used to manage Demand

(Source: Service Marketing by Lovelock)

No action: Customers learn from experience or word-of-mouse when there is no delay in service.
However, the same causes turn customers to competitors.
More interventionist approaches: reduce demand in peak periods or increase demand when there is
excess capacity.
Inventory demand until capacity becomes available by reservations system that promises customers
access to capacity at specific times or by creating formalized queuing systems (or combination of the
two).

2.9 DEMAND MANAGEMENT IN SERVICES

There is an agreement that the separation of the selling function from the operations function is much
less definite in services than in manufacturing. The term "customer encounter" represents a unique
feature of services and implies the coming together of demand and supply, so there is a vital interface
between marketing and operations. The fact that most service businesses do not have the buffers of
physical inventory or order backlog intensifies the importance of manageing the customer encounter.
This suggests a need for an integrative model that recognizes the close relationship between the
marketing of the product (demand side) and the operations of the service activity (supply-side).
The fact that almost all services have the characteristics of intangibility, perishability, heterogeneity and
simultaneity of production and consumption cause the customer encounter to be a key point in the
total process of providing a service. Each customer has unique characteristics and wants. This
uniqueness adds variety and complexity to the demand pattern, the service provided and even
the processes used to provide the service.
Companies try to offer service variations for different segments. The objective is to maximize the
revenues received from each segment. However, when capacity is constrained, the goal in a profit-
seeking business should be to ensure that as much capacity as possible is utilized by the most
profitable segments. For this reason, various usage conditions may have to be set to discourage
customers willing to pay top-of-the-line prices from trading down to less expensive versions of the
product. Airlines, for instance, insist that excursion tickets be purchased 21 days in advance and that
ticket holder remains at their destinations for at least one week before returning – conditions that are
too constraining for most business travellers.

2.10 SUMMARY

Demand for products is the driving force for any production activity. Demand management is,
therefore, an important input to production planning. Demand management is the supply chain
management process that balances the customers’ requirements with the capabilities of the supply
chain. In this unit, we understand the basics of demand management and its major functions. Besides,
we would have an overview of common demand forecasting techniques. The demand management
process is concerned with balancing the customers’ requirements with the capabilities of the supply
chain. Demand management is a vital component of the framework for manufacturing planning and
control (MPC). Most customer-driven variability is unavoidable, but one of the goals of demand
management is to eliminate management practices that increase variability and to introduce policies
that foster smooth demand patterns. Another key part of demand management is developing and
executing contingency plans when there are interruptions to the operational plans. Demand Planning
is a method by which we can make a plan to fulfil the customers’ requirement. Good demand planning
is a prerequisite for an excellent performance. Demand forecasting refers to an estimate of most likely
future demand for product under given conditions. Such forecasts are of immense use in making
decisions concerning production, sales, investment, expansion, employment of manpower etc both in
short-run as well as in the long run. To use demand forecasting in an active rather than a passive way,
management must recognize the degree to which sales are a result not only of external economic
environment but also of the action of the company itself. There are several forecasting techniques
and many ways to classify them. One way of classification as statistical (Quantitative) and
Survey(Qualitative) techniques. Various techniques for forecasting were introduced. The bullwhip
effect is an issue of vital importance affecting demand management and supply chain efficiency. The
most effective process for smoothing out the oscillations of the “Bullwhip Effect” will be customers
and suppliers understanding what drive demand and supply patterns. Strategies for demand
management such as price discount etc. were stated. In the end, aspects of demand management in
service business were explained. Companies try to offer service variations for different segments.
2.11 KEYWORDS

• Demand management is the management of matching supply and demand over time –in real-
time and during planning.
• Demand forecasting: is concerned with predicting the demand for product/s in future.
• A Time Series: series of observations at equal increments of time
• Moving average: a simple statistical method to establish and extrapolate trend of past sales
• The bullwhip effect: a series of events that leads to supplier demand variability up the supply
chain
UNIT 3 SALES AND OPERATIONS PLANNING

Objectives

After completing this unit, you would be able to:

• explain the concept of Sales & Operations Planning (SOS);
• state the objectives of Sales & Operations Planning (SOS);
• recall stages in the process of implementation;
• write major requirements for successful implementation.
Structure
3.1 Introduction
3.2. Concept
3.3. Features
3.4. Objectives and functions
3.5. Benefits
3.6. Process of SOP
3.7. Requirements for implementation
3.8. Implementation of S & OP
3.9. Key indicators of a successful S & OP
3.10. Summary
3.11. Keywords

3.1. INTRODUCTION

A resurgence and interest in Sales & Operations Planning (SOS) can be seen in manufacturing
organisation essentially due to competitive pressures.
There always has been Sales & Operations Planning (S &OP) practised in some form in the
manufacturing industry. However, the efforts were in piecemeal lacking formal structured and
integrated approach. Further, it was difficult to find tangible gains attributable to Sales & Operations
Planning (SOS).
Sales & Operations Planning (SOS) is an important component of Operations planning and control
system.
Sales & Operations Planning (SOS) is not a new technique. It has been a management tool for
decades. There is a wide variation in the degree to which it is used and the results of the effort over
an extended time frame.

Sales & Operations Planning (S&OP) is the function of setting the overall level of manufacturing output
(production plan) and other activities to best satisfy the current planned levels of sales (sales plan
and/or forecasts), while meeting general business objectives of profitability, productivity, competitive
customer lead times etc., as expressed in the overall business plan.
Sales and Operations Planning (S&OP) supports the notion that making good decisions all of the time
is preferable to making outstanding decisions some of the time.
One of its primary purposes is to establish production rates that will achieve management’s objective
of maintaining, raising or lowering inventories or backlogs, while usually attempting to keep the
workforce relatively stable. It must extend through a planning horizon sufficient to plan the labour,
equipment, facilities, material and finances required to accomplish the production plan. As this plan
affects many company functions, it is normally prepared with information from marketing,
manufacturing, engineering, finance, materials, etc."

3.2. CONCEPT

Sales and operations planning (S&OP) is an integrated business management process developed in
the 1980s by Oliver Wight through which the executive/leadership team continually achieves focus,
alignment and synchronization among all functions of the organisation. The Sales & Operations
Planning (SOS) plan includes an updated forecast that leads to a sales plan, production plan, inventory
plan, customer lead-time (backlog) plan, new product development plan, strategic initiative plan and
resulting financial plan. Plan frequency and planning horizon depend on the specifics of the industry.
Short product life cycles and high demand volatility require tighter S&OP planning as steadily
consumed products. Done well, the S&OP process also enables effective supply chain management.

Sales & Operations Planning is a decision-making process to balance demand & supply (at the
volume level)and to integrate financial & operating plans.
At its heart, S&OP is a business solution, which addresses the business processes, metrics, information
requirements and the culture of the company. It is applied to ensure that a holistic perspective is
brought to the system that matches what the customers need and what the firm is capable of
supplying through its network of suppliers and its system of manufacturing and delivery. Such a
solution mandates the involvement of constituents across that business network.

Sales & Operations Planning (SOS) is a decision-making process that makes certain that tactical plans
in every business area are in line with the overall view of the company’s business plan. The overall
result of the Sales & Operations Planning (SOS) process is that a single operating plan is created that
identifies the allocation of company resources, including time, money and employees.
Sales & Operations Planning is a core business process, which notifies the appropriate functional areas
of the business of anticipated demand volume and how the company plans to supply product to meet
that demand and best serve the customer at the lowest risk to the enterprise.
If top management wishes to truly control inventories, backlogs and employment levels, it must
ensure that the level of manufacturing output scheduled recognizes current sales plans and backlogs.
Concurrence from all company functions that can affect or be affected by the plans is vital to ensure
realism and commitment. The production plan must be stated in a unit of measure, by product family,
which can be converted and reconciled to detailed end item schedules, the master production
schedule.
S&OP takes a business’ sales & marketing ambitions, supply possibilities and financial goals and
balances them to create a single, achievable plan.
S&OP is a set of business processes and technologies that enable an organization to respond to
demand and supply variations and risks with timely, data-driven decisions
As per the AMR Research report 2005, Sales & Operations Planning (SOS) is a business initiative, not a
supply chain imperative. S&OP is no longer just a supply chain process; instead, in the most successful
organizations, it has become a critical business process, championed by a cross-functional team of
senior executives.
Sales and operations planning (S&OP), is a process where executive level management regularly meets
and reviews projections for demand, supply and the resulting financial impact.
S&OP is a means to translate demand data into an actionable and resourced operational plan; a
collaborative process to align demand, supply and financial resources with a defined business strategy
and priorities
Definition
APICS defines Sales & Operations Planning (SOS) as the "function of setting the overall level of
manufacturing output (production plan) and other activities to best satisfy the current planned levels
of sales (sales plan and/or forecast) while meeting general business objectives of
profitability, productivity, competitive customer lead times, etc., as expressed in the overall business
plan.
Sales and operations planning has also been described as "a set of decision making processes to
balance demand and supply, to integrate financial planning and operational planning and to link high-
level strategic plans with day-to-day operations"
Tom Wallace (MRP II: Making it happens) defines Sales & Operations Planning (SOS) as follows: Sales
& Operations Planning (S&OP) is a business process that helps companies keep demand and supply in
balance.

What Sales & Operations Planning (SOS) is not

• Informal, cross-functional communications
• Paralysis by meetings
• A perfect solution to resolve all business problems
 • A short term business issue resolution process

3.3. FEATURES

At its core, Sales & Operations Planning (SOS) is about gathering information that is generally available
but not provided or used. Moreover, it is about balancing supply and demand in a way that overcomes
the deficiencies of weak forecasting and results in more optimum performance – from the initial
suppliers to satisfied customers. Several action cases will be used to demonstrate how to apply the
tool to cope with the problems and meet business objectives through the solutions it provides.
The operations portion of the SOP is a plan for manufacturing that if followed will meet the strategic
objectives of the firm from a manufacturing view. The operations plan (SOP) is stated in terms
commonly understood by upper-level management - aggregate units of output per month (sometimes
per week), while the MPS will be in units per week (sometimes per day). The operations plan is not a
forecast. It is the planned production, stated on an aggregate basis, for which manufacturing
management is to be held responsible.
Following are some of the major features/characteristics of Sales & Operations Planning (SOS):
• S&OS is cross-functional
• It enables the company’s managers to view the business holistically and gives them a window
into the future
• It focuses on a general course of action, consistent with the company’s strategic goals and
objectives, without being bogged down in details
• A top-down and bottom-up approach, linking the firm’s business plan with the current
demand and supply plans
• A cross-functional, collaborative process that focuses on improving business performance
• A structured, formal, holistic set of monthly consensus business processes
• Data-driven
• Close involvement of concerned executives
• Require review/ monitoring
Inputs
Information inputs to Sales and Operations plans:
• Business or Annual plan
• Operations Strategy
• Capacity Constraints
• Demand Forecast
Managerial inputs from functional areas to sales and operations plans are shown in the Figure
below.
 Managerial Inputs from Functional Areas
(Ref: Krajewski “Operations Management”)

3.4. OBJECTIVES AND FUNCTIONS

S &OP is a missing link between strategy and execution. In the absence of formal and structured Sales
& Operations Planning (SOS) the organisation is at a heavy risk of not meeting its strategic goals. With
an effective Sales & Operations Planning (SOS) in place, an organisation can be more assured of the
effectiveness of the process of translating business plans into reality and achieving congruence.
Diagram 3.2 below shows the role of Sales & Operations Planning (SOS) as a link between business
planning and production planning and control

Detailed Planning,
Strategic Planning Business Planning DISCONNECT Scheduling, and
Execution
Fig 3.2 Sales & Operations Planning (SOS) –As A Link

Functions of SOP
Detailed Planning,
SALES AND OPERATIONS
Strategic •Planning Business Planning
Sales & Operations Planning (SOS) aims at aligning PLANNING Scheduling,
all stakeholders in the business towards and
Execution
one goal – meeting customer/consumer demand profitably in a manner that ensures delivery
of the company’s strategic agenda. Major functions of Sales & Operations Planning (SOS) are
stated below:
 – Identifies the product domain in which the company plays through the Product
Management Review –if done as part of an Integrated Business Management Process
– Formalises the generation and adoption of a Company Demand Plan through the
Demand Review
– Provides a transparent view of the company’s response to the Company Demand
through the Supply Review
– Ensures that the Supply and Demand views are reconciled and evaluated against
financial targets in the Management Review
– Whilst delivering one clear plan that answers all the customer/consumer demand
questions that the organisation faces
Objectives
Following are some of the objectives of Sales & Operations Planning (SOS):
• Minimize Costs/Maximise Profits
• Maximize Customer Service
• Minimize Inventory Investment
• Minimize Changes in Production Rates
• Minimize Changes in Workforce Levels
• Maximize Utilization of Plant and Equipment

3.5. BENEFITS

There are many benefits from formal and structured Sales & Operations Planning (SOS). These benefits
are tangibles as well as intangibles.
Hard Benefits:
• Increasing revenues because there are fewer out-of-stocks

• Determining more accurately what the real demand is from key customers

• Reducing inventories closer to what is needed

• Shortening cycle times from order to cash

• Improving planning and scheduling due to the greater accuracy created

• Eliminating mistakes in the processing

• Better satisfying customers while reducing supplier frustrations

• Higher Productivity
• Shorter Customer Order Lead times

• More Stable Production Rates

Soft Benefits
• Enhanced Teamwork - Operating Level Management
 • Enhanced Teamwork - Executive Management

• Better Decisions with Less Effort and Time

• Greater Accountability and Control

In the table below are just a few of the advantages to be gained from the application of Sales &
Operations Planning (SOS).
BEFORE S & OP AFTER S & OP
1. Function-to-Function Handoffs Cross-functional

2. Multiple Forecasts One Set of Numbers

3. Units & Rs Don’t Match Integrated Financials

4. Disconnected Views Holistic

5. Reactive A window into the Future

Benefits of Sales & Operations Planning (SOS)

3.6. PROCESS OF SOP

Sales and Operations Planning (S&OP) is widely considered a best practice management methodology
for manufacturing, engineering and distribution organisations. It is a monthly management process
that brings into one integrated plan all of a business’s separate operational plans. The process ensures
that all the plans are synchronized; particularly demand, supply, inventory, new product and finance.
If done well, the process provides a formal method for senior management to respond to change, both
positive and negative, such as new and previously unrecognized market opportunities and risks over
a 24- to 60-month planning horizon.
A mature process enables strategic management visibility of the status of strategic initiatives and
identification of gaps between current plans and strategic goals. This gap identification leads to action
plans to close the gaps.
A properly implemented Sales & Operations Planning (SOS) process routinely reviews customer
demand and supply resources and ‘re-plans’ quantitatively across an agreed rolling horizon. The re-
planning process focuses on changes from the previously agreed sales and operations plan. While it
helps the management team to understand how the company achieved its current level of
performance, its primary focus is on future actions and anticipated results. Companies that
have an integrated business management process use the S&OP process to monitor the execution of
the company’s strategies
Process of Sales & Operations Planning (SOS), to be effective, has to be formal and structured and
rigorously followed. The S&OP process begins by developing a demand plan for a rolling period of 12-
24 months (depending on the needs of the company). Next, a corresponding supply plan is created for
the same period. The demand and supply plans are then used to create an operating plan.
The steps involved in the Sales & Operations Planning (SOS) process traditionally is organised around
four meetings listed below with specific pieces of work being done in between them. Oliver Wight’s
model has introduced Product Management Review Meeting.
• Demand Review Meeting
• Supply Review Meeting
• Pre-S&OP Meeting/Integrated Reconciliation Meeting
• Executive S&OP/ Management Review Meeting
• Product Management Review Meeting as a starting point (In Oliver Wight IBM Model)

The typical steps involved in monthly Sales & Operations Planning (SOS) are shown in Diagram 3.3
below.
Product management review meeting:
Product management review meeting is held to discuss and decide on new products,
modifications and withdrawals. Answers to questions like these are sought:
• What products do we offer our customers/consumers?
• What are the trends in the customer/consumer’s world that we need to keep in touch
with?
• What else could we offer them that is in line with our strategic intentions as an
organisation?
• How well are the products that we currently offer doing?
• What changes, if any do we need to make, to our existing range going forward?
 Based on the discussions, data, analysis, market, infrastructure, resources and other factors,
necessary decisions are made. Recommended frequency for product management review
meeting is monthly; however, most organisations make this a quarterly or at least seasonal
review.

Demand Review Meeting

The ultimate goal of the demand plan is to gain consensus on what will be sold and what revenue
will be produced for each product line each month. The intent is to continuously improve forecast
accuracy. At a meeting of all the stakeholders – sales, marketing, finance, product
development and supply chain – participants discuss factors that influence demand (new or
deleted products, competitors or market conditions) and agree on a single demand plan that is
then passed to the supply team.
With clarity on products to be marketed, the next set of questions answered in the Sales and
Operations Planning (SOS) processes are:

• What is the quantitative demand for each of the product that we market for any future given
period
• How is this demand constituted by the customer, region,…etc?

Factors Critical for review:

• Some statistical baseline of the demand based on history
• Input from Sales and Marketing about deals, promotions, competitor activity, the
effect of launches on the projected statistical sales forecast – “market intelligence”
• Each assumption that is made on the state of demand needs to be explicitly
documented
• The demand numbers should be challenged sufficiently during this meeting, but once
agreed become binding for the whole organisation
Metrics Reviewed
• Forecast Accuracy/Error. Mean Absolute Percentage Error (MAPE), Forecast Bias
Process output
• Detailed Company demand plan – official view of customer demand
• Challenge is how to ensure that demand is truly unconstrained if customer service is
erratic – how do you capture true demand into your company?
• The plan is sales units (tons/kg/units and not Rs)

Supply Review Meeting

Once a view of the demand has been generated, the focus is then on the supply chain components
that create the needed products to fulfil this demand. Issues of plant/material constraints are
discussed in this review. Consistent shortfalls in meeting demand are reviewed and fed back into
Capacity Improvement/ and Capital Expenditure plans too are discussed in the meeting. The main
questions answered here are:

• How shall we meet this demand at the appropriate times and in the right places
 • A detailed supply plan (Depot Requirements Plans, Master Production Schedule, Materials
Requirements Plan) is drawn in an attempt to meet the demand.
• The supply plan is based on the proven capacity of the manufacturing and delivery operations
and the basis of any known/anticipated improvement plans

Metrics Reviewed
• Factory order fill,
• Overall Equipment Effectiveness (OEE),
• On-Time in Full ( OTIF)
• Customer Case Fill

Process Output
• Company Supply Plan – company’s manufacturing response to the known demand
• Detailed production plans for the next four to six weeks, by week. (This is also a volumetric
(i.e. sales units) plan
• Top-level plans by month going into the future as dictated by material lead times (for MRP
generation)

Pre-S&OP Review
Pre-S&OP aims at resolving any discrepancies between Supply and Demand gave the financial and
other strategic implications. This review looks at the different prioritisations and makes
recommendations to the senior management on the best options to take given the financial
implications of each alternative. Issues involved are:

• Where the trade-offs are pretty routine, this can be standardised/ incorporated into a
template
• Sometimes this is collapsed into the agenda of the Supply Review, making it a longer meeting
• This meeting serves as a preparation for the final Executive Sales & Operations Planning (SOS)
meeting run by the senior managers

The process output

• Recommended final Company Sales and Operations Plan for discussion in the main Sales &
Operations Planning (SOS) meeting
• Any unresolved issues/prioritisation for senior management’s attention/resolution
• This plan is communicated ahead of time to the senior managers to facilitate the final
discussion

Executive S&OP
Sales and Operations Planning meeting is held to discuss and resolve any imbalances between
supply and demand. Participants in this meeting include senior leadership representing finance,
sales, marketing, purchasing, operations, planning, logistics and other operational and sales
management, as needed.
In the meeting, the demand and supply plans, financial plans, strategic business goals and
unresolved issues from previous meetings are all reviewed and resolved. Where imbalances exist,
 participants discuss alternatives and options. The group sets strategic direction on capacity, raw
material availability and new business opportunities and comes to a consensus on the Sales and
Operations Plan. All decisions resulting from the meeting are published as a single authorized plan,
which becomes the operating plan for each function within the company.

The ultimate aim of the Sales and Operations Review is to sign off the final plan for the business for
any given period.
• It answers all those fundamental questions that the business strives to solve:
- What products will we be selling, in each of our markets at any given future time?
- How much of each product do we hope to procure/produce and hence ultimately sell?
- If this is different from what we need to meet our Strategic and other plans, what are
we going to do to close the gap? (Who will do what?)
- When do we expect to sell what volume?

• A review of the previous plan, any key performance indicators and key business and macro-
economic and socio-political trends is carried out first
• Based on the information provided from the Supply and demand review, senior management
makes final calls on specific prioritisation options.
• The risks to the plan are discussed and contingencies put in place with clear accountabilities
for delivering the plan.

Process Output
• Company Sales and Operations Plan detailing
- the demand that the company is aiming to meet
- how it will meet this demand
- the financial implications of meeting this demand in the specific manner that is planned

3.7. REQUIREMENTS FOR IMPLEMENTATION

Requirements for implementing successful Sales and Operations Planning processes are many. Below
is a list of prerequisites, which includes experiences of Hitachi Consulting:

• Gain Top Management Commitment and support. This is fundamental as well as a

crucial requirement.
• Develop among employees a collaborative culture and working in cross-functional
teams
• Develop a formal structure to support Sales and Operations Planning. Include specific
schedules and participants. Make sure that it is backed by executive leadership.
• Develop skills among employees on tool/techniques like forecasting (software),
Scenario analysis.
• Identify Key Performance Indicators (KPIs) before beginning and monitor them
monthly to identify areas for improvement.
 • Have an attitude of continuous improvement. 100 per cent accuracy at the beginning
of the Sales & Operations Planning (SOS) project is not possible. The Sales and
Operations Planning process will continuously change and improve to suit the needs
of the company.
• Deploy and stabilise the Demand Planning process before the Supply Planning
process. Do not attempt the two simultaneously.
• Hold regular meetings with your executive sponsors to discuss process improvements
and direction.
• Make meetings effective. The meetings need to focus only on strategic and tactical
relevant issues. Recognise the difference between productive and non-productive
meetings. The Sales and Operations Planning process is a decision-making tool –do
not confuse having meetings with making progress.

3.8. IMPLEMENTATION OF SOP

Steps involved in the implementation of SOP based on John R., Dougherty’s implementation plan is
stated below:
Step-1 Decision and Orientation:
The first step would be a decision by the management to implement a formal structured Sales &
Operations Planning (SOS). The management commits and provides the necessary resources. A
team for implementation should be formed. All employees concerned must be provided with
necessary orientation and training.
Step-2 Define Planning Families.
Most companies group their products into families or lines, but often based on the customer’s
perspective (i.e., products bought together such as a particular computer CPU with its matching
printers, CRT’s, etc.). It is vital to add or define families from a manufacturing viewpoint.
All products must be grouped in 10 to 12 families (a number capable of review in a 2-hour
meeting). The units of measure in which the family production plans are expressed must also
relate to the manufacturing process - pieces, sets, kg, litre, cases etc..
Step-3 Define the Format
A standard format to display forecasts (sales plans), customer orders, production plans, backlogs
and inventories needs to be determined upfront. This format should be extended for the full
planning horizon (12 to 24 months).
Step-4 Prepare Pilot Data
A few families should be selected which will best demonstrate the benefit of the Sales and
Operations Planning process. These may include families subject to seasonal demand, marketing
promotions, volatile swings in actual demand versus forecast and/or limited capability to adjust
manufacturing output rates.
Forecasts, actual customer demands, production and inventory plans and actuals should be
posted for the prior three months. Plans, forecasts and customer orders for at least the next three
months (to start) should also be posted. The starting production plans can be derived from the
 current planning process or annual budgets or current master schedules, depending on what is
available.
Any plans or forecasts that appear to require review or alteration should be highlighted. Marketing
and planning personnel should jointly prepare suggested changes for top management review and
approval.
Step-5 Develop a Proposed Sales & Operations Planning Policy
The policy should include:
• The objective of the process
• Schedule of future meetings
• .Responsibilities (such as "VP Marketing - review of actuals versus forecasts/sales plans
and changes to the future")
• A description of the mechanics of the planning process (how forecasts/sales plans,
backlogs, inventory goals, production plans, etc. are to be considered, by product family).
• A description of how demonstrated capacities by product family will be maintained and
utilised.
• A description of the Rough Cut Capacity Planning techniques to be used.
• A guideline for determining which families will be reviewed in the meeting, based on
actual variances from forecasts and plans.
• A guideline for developing and approving various changes to the plans depending on the
timing and impact of the changes (e.g. different approvals required for overtime,
subcontract, new hires etc.).
• A statement defining how the plans will be used to establish financial plans, budgets and
detailed Master Production Schedules and line item forecasts.
• A timed agenda for a monthly review meeting to last no longer than 2 hours.
Step-6 Begin Monthly Meetings
The first few meetings often run longer since everyone is still becoming familiar with the process,
formats, etc. It may take a few monthly meetings to fine-tune the process and finalize the
procedures and formats. Until everything is final, it may be advisable to just review the initial pilot
families or to only gradually add new families.
Step-7 Implement Full Sales & Operations Planning
The following key issues need to be resolved to ensure that the full benefits of Sales and
Operations Planning can be achieved:
Horizon: Establish how far one needs to plan based on the cumulative product replenishment cycle
(manufacturing and purchase lead times) and the visibility required for planning changes in capacity
(internal manufacturing, new plants and suppliers). Near the end of the horizon, data may be grouped
quarterly.
Rolling Forecasts/Sales Plans: The shipment forecast/plan needs to be maintained continuously
through the full horizon, not just determined annually.
Bookings Versus Shipments: The forecast/ sales plan must be expressed by customer requested ship
dates, not by when the orders are received. In make-to-order companies this may involve developing
standard lead time offset averages by product family, to convert planned booking dates into shipment
dates. Some companies find it useful to track shipments and bookings versus the customer backlog,
to provide early analysis by the marketing of potential forecast changes.
Production Plans: If the initial numbers used are annual budget figures or a summing up of current
master production schedules, the process of maintaining a rolling, monthly-updated production plan,
separate from the master production schedules, must be developed.
Ongoing measurement of how closely the summary of the master production schedules matches the
production plans, by month, within tolerances established by family, should be initiated.
Appropriate adjustments to the plan, based on changing customer demands, forecasts/sales plans and
inventory levels should then be implemented.
Step-8 Measurements
A set of standard measurements, by family, should be published and reviewed at each meeting. These
should include Customer service, Sales versus forecast/plan, Shipment Rs, Actual production versus
master production schedules versus plan, Level and frequency of schedule changes, within time zones.

3.9. KEY INDICATORS OF A SUCCESSFUL S&OP

• High levels of customer service, satisfaction and retention

• Senior management leads and is actively involved in the process

• Commitment at all levels of the organisation including executive and team members
• Short, mid and long-term demand/supply/financial risks and plans are managed, re-evaluated and
integrated continuously across a rolling horizon
• Clear demand planning accountability, unbiased forecasts
• Ability to reliably execute on supply commitments
• Trade-offs articulated and commercially evaluated
• Prioritisation of Business Initiatives
• Adherence to the process through discipline and accountability Disciplined, consistent process in
place
• Appropriate information systems support through accurate, timely, exception- reporting

3.10. SUMMARY

Sales & Operations Planning is The function of setting the overall level of manufacturing output
(production plan) and other activities to best satisfy the current planned levels of sales (sales plan
and/or forecasts) while meeting general business objectives of profitability, productivity, competitive
customer lead times, etc., as expressed in the overall business plan. Sales and operations planning
(S&OP) is an integrated business management process developed in the 1980s by Oliver Wight
through which the executive/leadership team continually achieves focus, alignment and
synchronization among all functions of the organisation. The Sales & Operations Planning (SOS) plan
includes an updated forecast that leads to a sales plan, production plan, inventory plan, customer lead
time (backlog) plan, new product development plan, strategic initiative plan and resulting financial
plan.
One of its primary purposes is to establish production rates that will achieve management’s objective
of maintaining, raising or lowering inventories or backlogs, while usually attempting to keep the
workforce relatively stable.
S&OP is a business initiative, not a supply chain imperative. S&OP is no longer just a supply chain
process; instead, in the most successful organizations, it has become a critical business process,
championed by a cross-functional team of senior executives.
There always has been Sales & Operations Planning (S &OP) practised in some form of the
manufacturing industry. However, the efforts were in piecemeal lacking formal structured and
integrated approach. Further, it was difficult to find tangible gains attributable to Sales & Operations
Planning (SOS). Sales & Operations Planning (SOS) is an important component of Operations planning
and control system. Process of Sales & Operations Planning (SOS) to be effective as to be formal and
structured and rigorously followed. The S&OP process begins by developing a demand plan for a
rolling period of 12-24 months depending on the needs of the company. A corresponding supply plan
is created for the same time. The demand and supply plans are then used to create an operating plan.
Sales & Operations Planning (SOS) is not a new technique. It’s been a management tool for decades.
There is a wide variation in the degree to which it is used and the results of the effort over an extended
time frame. There are many benefits from formal and structured Sales & Operations Planning (SOS).
These benefits are tangibles as well as intangibles.

3.11. KEYWORDS

• Sales and operations planning: a set of decision-making processes to balance demand and supply,
to integrate financial planning and operational planning.
• Supply Chain Management: is the design and management of seamless, value-added process
across organizational boundaries to meet the real needs of the end customer.
• Aggregate planning is the process of developing, analyzing and maintaining a preliminary,
approximate schedule of the overall operations of an organisation.
• Demand forecasting is the activity of estimating the quantity of a product or service that
consumers will purchase.
UNIT 4 CAPACITY PLANNING

Objectives

After completing this unit, you would be able to:

• state the concept of capacity;
• recall decisions to cope with capacity shortage;
• state factors affecting capacity;
• calculate the effective capacity of a machine/equipment;
• State strategies for capacity expansion.

Structure
4.1 Introduction
4.2 Meaning of Capacity
4.3 Types of Capacity
4.4 Capacity Management
4.5 Capacity Shortage
4.6 Factors affecting Capacity
4.7 Capacity Planning
4.8 Capacity Planning and Product Life Cycle
4.9 Capacity Expansion Strategies
4.10 Summary
4.11 Key Words

4.1 INTRODUCTION

Capacity planning is one of the crucial functions of Production Planning and Control, directly affecting
an organization’s performance and customer satisfaction. If capacity planned were much higher than
actual demand, it would result in high manufacturing cost due to low utilization of resources. Capacity
planned falling short of the demand results in loss of sales, short supply and loss of profits and
customer dissatisfaction. When organisations are making key decisions regarding manufacturing
facilities, the important aspect that comes to mind is capacity. To a certain extent, manufacturing
capacity also decides the nature and purpose of a business unit.

Capacity Planning is concerned with maximizing output and minimising input. One of the most
important challenges to Management is to make the fullest use of resources available with the
company. The task is complex because when there are competing outputs and constraints such as
labour and material availability, equipment utilization and limited space. Capacity planning enables
the determination of sufficient resources so that user satisfaction can be maximised through timely,
efficient and accurate responses.

Any available resources not utilized to the fullest extent can be considered as waste. Capacity planning
is concerned with minimizing/eliminating this waste of resources thereby increasing productivity,
meeting customer requirement and make the bottom line healthier of an organisation.

4.2 MEANING OF CAPACITY

Capacity is the maximum available amount of output or multiple types of output of the transformation
process over a specified duration. In business, capacity is the maximum rate of output for a process.
This means that capacity is the work that the system is capable of doing in a given period. Capacity is
the rate of doing work, not the quantity of work done. American Production and Inventory Control
Society has defined capacity as: Capacity is the capability of a worker, machine, work centre, plant or
organization to produce output per period.

The capacity of a production unit (e.g. machine, factory) is its ability to produce or do that which the
customer requires. It is the ability to

• receive, hold or absorb

• perform or produce

Capacity can also be expressed indicated as the maximum amount that can be contained eg. a stadium
/hall filled.

Capacity can be expressed in the formula

(Number of machines and/or workers) x (number of shifts) x (utilization) x (efficiency) = capacity

4.3 TYPES OF CAPACITY

Following are the types of capacity

Design Capacity
It is the target output rate or maximum capacity, for which the production facility was
designed.

Potential Capacity
 The capacity that can be made available to influence the planning of senior management (e.g.
in helping them to make decisions about overall business growth, investment etc). This is
essentially a long-term decision that does not influence day-to-day production management.

Immediate Capacity
The amount of production capacity that can be made available in the short-term. This is the
maximum potential capacity, assuming that it is used productively.

Effective Capacity
Effective capacity is the actual capacity to reflect current conditions. It could be less than or
more than design capacity. It refers to the maximum rate of output achievable, given the
quality standards, scheduling constraints and other factors.
Effective capacity can be calculated using following formula:

C E = CA × η × μ
Where C E = Effective Capacity
C A = Available Capacity
η = Efficiency
μ = Utilization

Example 4.1: Forge shop of a company has 3 Hammers (forging machines) working in two shifts.
The Average utilisation of the hammers is 90% and worker efficiency is 70%. Calculate the
effective Hammer capacity per month.
Solution:
Assumptions:
No of hours per shift = 8 Hours
No of working days /month = 25 Days
Capacity available per shift 8 x 3 = 24 Hours
Capacity available per 2 shift 24 x 2 = 48 Hours
Hence Capacity available (C A) per month 48x 25 =1200 Hours
Capacity utilized (C U ) = Capacity available x Utilization
= CA x μ
Capacity utilized (C U ) = 1200 x 0.90 = 1080 Hours
Effective Capacity (C E ) = C U X μ = 1080 x 0.70 = 756 Hours/ month

Measure of Capacity
There are several measures of capacity; however, most commonly, capacity refers to the
maximum productive capability of a facility or the maximum rate of output from a process. It is
measured as a quantity of output per unit of time. Capacity is the ability to produce work in a
given time, must be measured in the unit of work.
 For example, consider a factory that has a capacity of 30,000 “machine hours” in 45-hour week.
This factory should be capable of producing 30,000 "standard hours of work" during a 44-hour
week. The actual volume of product that the factory can produce will depend on the following:
• the amount of work involved in the production
• additional time required in production (e.g. machine set-up, maintenance) if any
• the productivity or effectiveness of the factory.

Errors in Estimates in Capacity

Different marketplaces, situations and product life stages demand a different kind of strategic
planning and responses. Most often decisions of strategic importance are taken based on
assumptions. It is the same with capacity planning. The greatest business losses are often due to
miscalculations related to manufacturing capacity. Some of the miscalculations in manufacturing
capacity could be as under:
Generally, firms miscalculate manufacturing capacity due to overstating demand and growth
projections. Marketing personnel are generally optimistic in their outlook. This optimism in
projections leads to building manufacturing capacity that later would be underutilised. Underutilised
manufacturing capacity directly affects the profitability of a manufacturing plant.
Corporate personnel focus on increasing sales and revenues. They are not too concerned about the
product mix, which generates those revenues. This, however, is an issue for the manufacturing
personnel who need to plan their production capacities properly to generate an optimum product
mix.
The miscalculation can also be due to the difference in the scope of work for the same kind of part
produced. For example, the marketing team may bring an order for 10,000 piston rods. These piston
rods may be of varying lengths. Thus, though the order is for piston rods, for the production
department, the differences in lengths mean a proportional difference in time to manufacture.

4.4 CAPACITY MANAGEMENT

APICS (American Production and Inventory Control Society) has defined capacity management as:
“The function of establishing, measuring, monitoring and adjusting limits or levels of capacity to
execute all manufacturing schedules.”

Capacity management is the process of planning, analyzing, sizing and optimizing capacity to satisfy
demand promptly and at a reasonable cost. This process should be proactive and responsive to
business needs because the business cannot add resources after a capacity problem has happened
without affecting performance.

In information technology, business capacity planning is the science and art of estimating the space,
computer hardware, software and connection infrastructure resources that will be needed over some
future period.
Thus, capacity management is essential to ensure that priority plans are met. Incapacity management,
there are usually two potential constraints - TIME and CAPACITY.

Time may be a constraint where a customer has a particular required delivery date. In this situation,
managers often "plan backwards". In other words, they allocate the final stage (operation) of the
production tasks to the period where delivery is required, the penultimate task one period earlier and
so on. This process helps identify whether there is sufficient time to meet the production demands
and whether capacity needs to be increased, albeit temporarily.

Components of Capacity Management

There are two components of capacity management:
• Capacity Planning (creating a valid "Do-able" plan)
• Capacity Control (ensuring the plan is met by managing resources)
Without capacity (and materials) to meet the demand, the plan cannot be valid.
Capacity management comprises of capacity planning and capacity control. Capacity control includes
activities like:
• monitoring production output
• comparing production output with capacity plan
• taking corrective action wherever necessary

Levels of Capacity Management

There are, in a typical business, four levels, where capacity planning is required:
• High-level business planning, e.g. to justify capital expenditure or produce profit forecasts
• Management of the demand and the gross capacity to meet it (Sales and Operations
Planning)
• Scheduling of individual cells or process areas
• Individual process management, e.g. speeds/make-ready times

4.5 CAPACITY SHORTAGE

All manufacturing organisations face problems related to capacity. Each of them has to work out ways
to tackle those problems. The solutions worked out have to be in line with the organisation's basic
strategy. Some of the ways that manufacturing organisations can manage capacity are:

Standardizing
If the products are all standard, then the organisation can probably produce to stock in times of
low demand to offset manufacturing capacity requirements in times of high demand. The same
principle can be followed if the standardisation is up to a certain level of production in the
products. For manufacturing organisations that are making custom-built products, the design
should focus on incorporating as many standard parts as possible. With the help of
standardisation, manufacturing organisations can offset capacity requirements in periods of high
 demand by building inventory in times of low demand. Though this goes contrary to the popular
Just-In-time inventory system, many manufacturing organisation are applying this principle to
efficiently manage capacity.

Temporary Adjustments
Organisations can, to a certain extent manage, excess production demand without making more
capital investment. Adding more shifts such as second and third shift based on the demand is one
of the ways of doing it. For temporary spurts in demand, organisations can also try to get the job
done by running overtime or working on normal holidays. Another way is to outsource work to
subcontractors to offset demand load on the plant. These solutions, however, have their related
problems like:
• In case of overtime, organisations may find workers doing lesser work at normal times to
get more overtime work and money.
• Having worked overtime, the workers can get tired and then start producing substandard
goods, which can be rejected. This can prove costly to the organisation.
• With overtime and working on holidays workers may lose interest in the work which in
turn leads to lower worker morale.
• As the equipment gets overused they may break down faster and hence require more
repair and maintenance.
• When outsourcing to subcontractor organisations, should also be aware of the possibility
of the sub-contractor becoming a competitor in future.

Refusing Orders

Though refusing orders should be the last option but in some situations, this seems to
unavoidable.

Organisations find it very difficult to say no to an additional order from a customer even when
they know they cannot fulfil it. This goes against the organization’s common business stand. While
trying to overreach is good to an extent, it always has its problems. Sometimes it may be better in
the long term to refuse an order. It is much better to refuse a customer at the time of order and
explain to him the reasons than to take up an order and then let him know that the order could
not be fulfilled after some time. Failing to fulfil an order committed to can result in gaining a bad
reputation and loss of goodwill in the market. The customer could also file a case against the
organisation for failing to keep a commitment.

Locating Capacity
While the amount of manufacturing capacity to be built in the organisation is an important
consideration, another equally important consideration is the location of the manufacturing
facility. Some issues related to the location of manufacturing facilities are
Presence of appropriate labour
The location of a manufacturing facility is dependent on the skill set required for doing the work
and availability of personnel with those skill set. It may be found that some regions are having an
abundance of appropriate labour while others have none at all. The availability of appropriate and
low-cost labour is a very important element in being competitive. It, therefore, plays an important
role in the location of the manufacturing facility.

One Large or many small

Many aspects make organisations decide to centralise or disperse their manufacturing facilities.
While centralising, the entire manufacturing operations can reduce 'manufacturing' costs. It can
also result in higher 'distribution' costs, especially if the product caters to a geographically
distributed market. Large manufacturing facilities may also result in powerful unions being
formed, which could result in the greater bargaining power of employees and thus increasing the
cost of manufacturing. Large manufacturing facilities tend to be less flexible and responsive to
market changes.

Apart from these reasons, organisations may consider distributing their manufacturing facilities
geographically to get access to certain markets, which would otherwise be closed due to political
or governmental reasons. For instance, certain countries may require the organisation to locate
their manufacturing facilities within their country to sell their products there.

Availability of resources
Manufacturing of a product requires certain resources such as energy, water basic infrastructure
and so on. Hence, manufacturing organisations will try to locate their facilities in places where
these basic resources are available and available cheaper compared to other places.

Outsource
Organisations can either undertake the entire manufacturing operations of the business it is
involved in or outsources a part of it and focus on the core areas of manufacturing where it can
add value. While organisations may feel that by undertaking all the production in- house they can
earn more without having to share profits with suppliers, it may not be true. Outsourcing work to
other suppliers may help the organisation to be flexible and become more focused. A supplier
might also manufacture a component better and at a lower cost, thus saving costs for the
organisation. Also, organisations can turn to new suppliers for new products and new changes in
manufacturing without incurring major costs. This would not be possible if everything is made in-
house.

It is generally found that most manufacturing organisations outsource 50 to 70 % of their total

manufacturing in terms of raw materials and semi-finished components. Therefore,
manufacturers need to consider the proximity of important suppliers to their manufacturing site.
The physical proximity of suppliers plays a large part inefficient manufacturing and supply chain
operations. There are some manufacturing organisations such as Toyota and Dell that are large
 enough to attract suppliers to locate near to them. However, the other smaller organisations will
have to seriously consider the availability of suppliers when setting up their plant.

4.5 FACTORS AFFECTING CAPACITY

Following factors have a major impact on capacity:

Bottlenecks: Bottlenecks will also determine the capacity for any particular stage of the process. It
does not matter that a final output capacity of say 1000 hospital beds if the admissions section can
only process a certain number that produces peak occupancy of 800.

Demand: Demand will also impact on capacity. Having and resourcing a hospital of say 50 beds in a
country town where the average bed occupancy is, say 6, with a peak of 12 results in a meaningless
capacity.

Product Mix: Many manufacturing organisations are concerned with providing customers with a wide
range of products to choose from. When the mix of products is small, capacity can easily be decided.
However, as the product mix increases, capacity decisions can become complex. Some organisations
decide on manufacturing certain products and sourcing the rest from other suppliers. Few other
manufacturers centre their manufacturing plant on certain activities and works and outsource the
rest. Of course, some organisations do everything in the house and some others who outsource
everything and merely act as intermediaries. Each of these decisions naturally has a bearing on the
plant's capacity.

Product Volume: Manufacturing organisations face fluctuations in demand volume. These

fluctuations could be seasonal or due to market forces or the life cycle of the product. Seasonal
fluctuations in demand can be considerable in some industries. With a proper study of the industry,
manufacturing organisations can work out capacity to take care of seasonal fluctuations. The demand
fluctuations due to market forces can be unique and unpredictable market forces such as competition,
new substitutes and so on.

4.6 CAPACITY PLANNING

The goal of capacity planning is to meet current and future demand with a minimal amount of waste.
A typical capacity concern of many enterprises is whether resources will be in place to handle an
increasing number of requests as the number of users or interactions increase. The planner aims to
plan so well that new capacity is added just in time to meet the anticipated need but not so early that
resources go unused for a long period. The successful capacity planner is one that makes the trade-
offs between the present and the future that overall prove to be the most cost-efficient.
There are five major reasons that companies initiate for Capacity Planning :
• Increasing Demand
• Dropping Demand
• Changing Technology
• Changing Environment
• Spotting Opportunities

Capacity Planning Process

The capacity planning process for an organisation depends on several factors like top management
approach, type of industry. Incapacity planning, process implementation is of as importances
planning itself. An important component of implementation is time and achieving planned output.
In the planning process, the accuracy of the forecast is of vital importance. However, a generic
capacity planning process has been given in the chart below.

FORECAST DEMAND

COMPUTE NEEDED CAPACITY

DEVELOP ALTERNATIVE PLANS

EVALUATE CAPACITY PLANS

SELECT BEST CAPACITY PLAN

IMPLEMENT THE SELECTED PLAN

Capacity Planning Process

Inputs to Capacity Planning

Generating a capacity plan requires two things- demand (in the form of material requirements)
and supply (resource capabilities). To open production orders and estimate product costs we need
a definition of which resources are required and the amount of each resource needed (even if
capacity planning is not currently done). With a viable material plan, the only factor left to
develop is an estimate of resource availability. If we are currently running MRP, open a production
schedule and have a standard costing system, most of the work in generating a capacity plan is
already done. Even if MRP is not being run, capacity requirements can be generated from open
production orders and manually created projected orders- firm planned orders (FPO).
Inputs to Capacity Planning

Input Source
• Open production requirements • Shop floor system
• Planned production requirements • MPS/MRP
• Production routings/rates • Product definition/costing
• Resource availability • Capacity Planning

Importance of Capacity Planning

Capacity decisions have a long -term influence. Where Capital investments can be very high,
demand fluctuations can result in serious problems for the organisation. Building a large capacity
could be financially risky. Not having the capacity to cater to customer demand could be equally
problematic.
Capacity planning decisions are strategic decisions and of vital importance as for any organisation,
too much capacity can cause the inventory level to rise or it may underutilise the company's
workforce and machinery while too little capacity causes loss of customers to competitors.
Increase in manufacturing capacity brings with it greater costs, greater complications and need
for better management. At the same time, insufficient manufacturing capacity can result in
turning down orders, which could lead to customer dissatisfaction. Insufficient capacity also
results in overstretching of present equipment and labour leading to other problems.
Organisations need to be aware of the reality of declining demand too. Because of its importance,
organisations should be able to integrate business, growth and capacity planning for its long-term
health.
Capacity planning is important in the following situations:
• Starting a new manufacturing or service organisation
• Diversification of business
• Expanding the operations of an existing business
• Introduction of new technology /equipment/material

Long Term and Short Term Capacity Planning

Over the long term, capacity planning relates primarily to strategic issues involving the firm's
major production facilities. 0Also, long-term capacity issues are interrelated with location
decisions. Technology and transferability of the process to other products are also intertwined
with long-term capacity planning. Long-term capacity planning may evolve when short-term
changes in capacity are insufficient. For example, if the firm's addition of a third shift to its current
two-shift plan still does not produce enough output and subcontracting arrangements cannot be
made, one feasible alternative is to add capital equipment and modify the layout of the plant
 (long-term actions). It may even be desirable to add additional plant space or to construct a new
facility (long-term alternatives).

In the short term, capacity planning concerns issues of scheduling, labour shifts and balancing
resource capacities. The goal of short-term capacity planning is to handle unexpected shifts in
demand in an efficient economic manner. The time frame for short-term planning is frequently
only a few days but may run as long as six months.

Alternatives for making short-term changes in capacity are fairly numerous and can even include
the decision to not meet demand at all. The easiest and most commonly used method to increase
capacity in the short term is working overtime. This is a flexible and inexpensive alternative. While
the firm has to pay one and one-half times the normal labour rate, it foregoes the expense of
hiring, training and paying additional benefits. When not used abusively, most workers appreciate
the opportunity to earn extra wages. If overtime does not provide enough short-term capacity,
other resource-increasing alternatives are available. These include adding shifts, employing casual
or part-time workers, the use of floating workers, leasing workers and facilities subcontracting.

Effect of Huge Capacity

Certain manufacturing organisations tend to create huge capacities to create an entry barrier for
new players. With the huge capacity, the organisation can manufacture at very low prices which
other players will find difficult to match. This huge capacity can, however, become an exit barrier.
With massive investments, the manufacturing organisations can create barriers to moving out of
the present activity. Though demand is declining, organisations will continue with the existing
capacity, as they might not be able to use the current equipment or plant for any other purpose.
This is truer for those organisations whose capacity is located in one plant. For organisations
having a capacity that is distributed across various plants geographically, it is a little easier to scale
down.

Capacity Requirement Planning

Capacity requirement' planning is an important part of ensuring that a company can meet
production expectations. If a firm fails to take this step before production, it may find itself
unexpectedly unable to produce the number of goods that it has agreed to make with its current
facilities. This can be disastrous for the firm if it is unable to meet the requirements of a contract
or other formal production agreement. It is a method used to determine the available production
capacity of a company. Capacity requirement planning first assesses the schedule of production
that has been planned upon by the company. Then it analyzes the company's actual production
capacity and weighs the two against each other to see if the schedule can be completed with the
current production capacity.

It is the process of determining in detail the amount of labour and machine resources needed to
achieve the required production. This process considers the lead time of operations and offsets
the operations at work centres accordingly.

Rough-cut Capacity Planning

Capacity model based on critical or bottleneck resource availability and by interpreting the
demand on that resource alone to determine the overall likely output. This technique is called
 "Rough Cut Capacity Planning" and provides a rough check that demand and capacity are in
balance.

RCCP (Rough-cut Capacity Planning) is a long-term plan capacity planning tool that production
function uses to balance required and available capacity and to negotiate changes to the master
schedule and/or available capacity. Rough cut capacity plans are therefore a statement of the
capacity required to meet your gross production requirements. RCCP (Rough-cut Capacity
Planning) is a gross capacity planning technique that does not consider scheduled receipts or on-
hand inventory quantities when calculating capacity requirements.

RCCP (Rough-cut Capacity Planning) is a part of the MRP (Material Requirement Planning) System,
which will be discussed in a separate unit of the workbook. It is used to validate master schedules
against key and critical resources before use the planning process to generate detailed MRP plans.
This ensures a realistic, achievable master schedule to drive the planning process.

A major difference between the rough cut planning techniques and capacity requirements
planning is that the rough cut processes are tests of the feasibility of the plan. The plans will be
modified or decisions taken to change resources available and the promise date for customer
orders based on the outcome of the rough cut process. At the capacity requirements planning
level, an order may already have been received and a commitment made to the customer or, in
make to the stock environment, a commitment made to a marketing plan. If the rough cut process
is working correctly, the master production schedule should be achievable. Any adjustments to
the plans should be at the detail level or to take account of problems and interruptions,
organisation do not want to have to contact the customer and change the delivery date promised.

4.8 CAPACITY PLANNING AND PRODUCT LIFE CYCLE

Capacity requirements are closely linked to the stage in the life cycle the product manufactured is in.
Hence, it is necessary to study the product's life cycle stage to come out with appropriate projections
and future manufacturing capacity requirements. Failing to do so may result in an organization getting
stuck with excess capacity and outdated machinery. The stages in a product's life cycle are as follows:

Product Introduction Phase

During this stage when a new product has been developed and introduced in a market, the demand
is still very fluid. At this stage, the total size of the market and the company's market share cannot be
gauged. Hence, organisations should not presumptuously invest in a high level of manufacturing
capacity. Apart from this, the industry will also find newer and better methods of production coming
up quickly during this early stage. Therefore, organisations should be careful not to make large or
significant investments in a particular technology or process.
Growing Phase
Once a product's market enters the growth phase it may experience varying degrees of quick growth,
depending on the Industry. The rate at which an organisation's market share grows may differ from
the industry rate based on the business strategy adopted by the organization.
Organizations wanting to gain market through the lower price factor should consider making the large-
scale investment to increase manufacturing capacity. However, the organizations should also consider
the possibility of other players and competitors to investing to increase manufacturing capacity. If this
happens beyond an extent it may lead to the problem of overcapacity in the industry.
Overcapacity in the industry can lead to unhealthy and mutually destructive competition, not good
for anyone. This happens more in industries where the capital investment involved in increasing
manufacturing capacity is very high. The race for increasing more manufacturing capacity generally
happens between competing organizations seeking to outdo each other to fill a gap in the demand
and supply of the market. In such situations, organizations do not want to lose out on increasing
market share. What they fail to consider is the consequences of being stuck with high investments
with no means of any returns.
Some organizations, on the other hand, try to compete on the non-price attribute of the product. Such
organizations will most often invest in technology and process to make differentiation their
competitive advantage. These organizations will invest in increasing their manufacturing capacity to a
certain extent but are often willing to forgo a large market share to benefit more through larger profit
margins.
Plateau phase
In the plateau or market maturity phase, the size of the market starts to become constant with no
considerable growth. Once this phase is reached, organizations tend to have a stable market share, all
things kept constant. At this stage, organizations increase profitability by reducing costs and utilizing
available manufacturing capacity to the maximum. However, there is the possibility of some
organizations trying to increase profitability by increasing manufacturing capacity. The strategy is to
increase manufacturing capacity, which results in reducing costs resulting in lower pricing which in
turn helps gain market share. The increase in manufacturing capacity in the plateau or maturity phase
however, is most often in small amounts than in large degrees.
Shrinking Phase
Every product reaches a stage where the demand for it starts to fall. This is because the market has
found better alternatives to meet a particular need or want. At this stage, manufacturers are faced
with falling demand and underutilization of manufacturing capacity. Ideally, the organization should
sell or close down the extra manufacturing capacity and shift to a lower manufacturing capacity gear.
However, this does not always happen in most industries. In many cases, the manufacturing capacity
gets transferred to places having lower labour costs resulting in products being made cheaper. The
lowering of costs can result in an improvement of the market for the product to some extent. In other
cases, new players may be found entering the market with improved technology and processes
resulting in a shakeout and restructuring of the market.

4.9 CAPACITY EXPANSION STRATEGIES

A company typically bases its capacity strategy on a series of assumptions and predictions about
technological innovations, long-term marketing and the behaviour of competitors, including

• The predicted growth and variability of primary demand

• The costs of building and operating plants of different sizes
• The rate and direction of technological innovation
• The likely behaviour of competitors
• The anticipated effects of international competitors, markets and resources of supply

Capacity expansion strategies are necessary as rarely the demand for capacity matches the capacity
available. These strategies are for the timing of capacity expansion. The three main types of capacity
planning are lead strategy, lag strategy and match strategy.

There are three commonly employed strategies:

Capacity lead strategy: In this strategy, in anticipation of the increase in demand, capacity expansion
takes place as shown in the graph. This strategy is deployed when an organization wants to gain a
foothold in an emerging market. His strategy is proactive and aggressive. In this strategy, the risk
involved in creating excess capacity is very high. The lead capacity strategy is adding capacity in
anticipation of an increase in demand. The lead strategy is an aggressive strategy to lure customers
away from the company’s competitors. The possible disadvantage to this strategy is that it often
results in excess inventory, which is costly and often wasteful.

Units
Capacity

Demand

Time

Capacity Lead Strategy

Capacity Lag Strategy: Under this strategy, capacity is expanded only after actual demand has risen. In
this strategy, there are chances of stock-outs/shortages, which besides the loss of sales may result in
customer dissatisfaction. This works well in case of monopoly or little competition businesses. The
figure below provides a graphical representation of capacity lag lead strategy. Lag strategy refers to
adding capacity only after the company is running at full capacity or beyond due to increasing in
demand. This is a more conservative strategy that decreases the risk of the waste but may result in
the loss of possible customers.

Units Demand
 Capacity

Time

Capacity Lag Strategy

Average Capacity Strategy: Under this strategy, capacity is expanded as the average demand
increases. This strategy avoids situations of creating huge unutilised capacities or huge
backorders/shortages/stock-outs due to lack of capacity. This is a moderate strategy, which is
used extensively. The match strategy (also known as the tracking strategy) is adding capacity
in small amounts, in response to changing demand in the market.
Figure 4.3 below provides a graphical representation of capacity lag lead strategy:

Units Demand
Capacity

Time
Average Capacity Strategy

4.10 SUMMARY

Decisions on capacity planning at the firm level are strategic decisions. They are very important as
they directly affect an organizations’ ability to fulfil customer requirement and profitability.
Capacity Planning is concerned with maximizing output and minimizing input. Capacity planning
enables the determination of sufficient resources so that user satisfaction can be maximized through
timely, efficient and accurate responses. Capacity is the maximum available amount of output or
multiple types of output of the transformation process over a specified duration. In business, capacity
is the maximum rate of output for a process. This means that capacity is the work that the system is
capable of doing in a given period. Capacity is the rate of doing work, not the quantity of work done.
Capacity can be classified into four types: Design Capacity, Potential Capacity, Immediate Capacity and
Effective Capacity.
There are several measures of capacity, however most common, capacity refers to the maximum
productive capability of a facility or the maximum rate of output from a process. -It is measured as a
quantity of output per unit of time. Capacity is the ability to produce work in a given time, must be
measured in the unit of work.

Capacity management is the process of planning, analyzing, sizing and optimising capacity to satisfy
demand promptly and at a reasonable cost. This process should be proactive and responsive to
business needs because the business cannot add resources after a capacity problem has happened
without impacting performance.

In information technology business capacity planning is the science and art of estimating the space,
computer hardware, software and connection infrastructure resources that will be needed over some
future period. Thus capacity management is essential to ensure that priority plans are met. Incapacity
management, there are usually two potential constraints - time and capacity.

Actual capacity falling short of demand is a common occurrence. Organisations adopt different
approaches to deal with this capacity shortage. Some of the ways that manufacturing organisations
can manage capacity are Standardizing, Temporary Adjustments, Refusing Orders, Locating Capacity,
Outsourcing etc.

A brief introduction to factors affecting capacity, a generic process of capacity planning and the
importance of capacity planning was made. Further concepts of Capacity requirements planning and
RCCP (Rough-cut Capacity Planning) were introduced. Capacity requirement planning is an important
part of ensuring that a company can meet production expectations. If a firm fails to take this step
before production, it may find itself unexpectedly unable to produce the number of goods that it has
agreed to make with its current facilities.

RCCP (Rough-cut Capacity Planning) is a long-term plan capacity-planning tool that production use to
balance required and available capacity and to negotiate changes to the master schedule and/or
available capacity. Rough cut capacity plans are therefore a statement of the capacity required to
meet your gross production requirements. RCCP (Rough-cut Capacity Planning) is a gross capacity
planning technique that does not consider scheduled receipts or on-hand inventory quantities when
calculating capacity requirements. Three strategies for capacity expansion: lead, lag and average were
explained. At the end linkage of capacity planning to product life cycle was explained.

4.11 KEYWORDS

• Capacity: It is the capability of a worker, machine, work centre, plant or organisation to produce
output per period. Capacity refers to the maximum productive capability of a facility or the
maximum rate of output from a process.
• Design Capacity: It is the target output rate or maximum capacity, for which the production facility
was designed.
• Potential Capacity: The capacity that can be made available to influence the planning of senior
management (e.g. in helping them to make decisions about overall business growth, investment
etc.
• Immediate Capacity: The amount of production capacity that can be made available in the short-
term.
• Capacity management: the function of establishing, measuring, monitoring and adjusting limits
or levels of capacity to execute all manufacturing schedules.
• Capacity Requirement Planning: It is the process of determining in detail the amount of labour
and machine resources needed to achieve the required production.
• RCCP (Rough-cut Capacity Planning): is a capacity planning tool that production use to balance
required and available capacity and to negotiate changes to the master schedule and/or available
capacity.
UNIT 5 AGGREGATE PLANNING

Objectives

After completing this unit, you would be able to:

• explain the concept of aggregate planning;
• write strategies for aggregate planning;
• apply the techniques for aggregate planning;
• recall service industries utilising aggregate planning concepts.

Structure
1.1 Introduction
1.2 Concept
1.3 Capacity and Demand Balance
1.4 Aggregate Planning Strategies
1.5 Steps in Aggregate Planning
1.6 Use of QT In Aggregate Planning
1.7 Aggregate Planning In Services
1.8 Trends in Aggregate Planning
1.9 Summary
1.10 Key Words

5.1 INTRODUCTION

Aggregate planning is an operational activity, which does an aggregate plan for the production process
to give an idea to management as to what quantity of materials and other resources are to be
procured and when, so that the total cost of operations of the organisation is kept to the minimum,
over that period. In simple terms, aggregate planning is an attempt to balance capacity and demand
in such a way that costs are minimized. Properly done, aggregate planning should minimize the effects
of shortsighted, day-to-day scheduling, in which small amounts of material may be ordered one week,
with an accompanying layoff of workers, followed by ordering larger amounts and rehiring workers
the next week. This longer-term perspective on resource use can help minimize short-term
requirements changes with resulting cost savings.
The term "aggregate" is used because planning at this level includes all resources "in the aggregate",
for example, as a product line or family. Aggregate resources could be a total number of workers,
hours of machine time or tons of raw materials. Aggregate units of output could include gallons, feet,
pounds of output, as well as aggregate units appearing in service industries such as hours of service
delivered, number of patients seen, etc.

Aggregate planning is considered intermediate-term (as opposed to long- or short-term) in nature.

Hence, most aggregate plans cover a period of three to 18 months.

5.2 CONCEPT

Aggregate planning is the process of developing, analyzing and maintaining a preliminary,

approximate schedule of the overall operations of an organisation. The aggregate plan generally
contains targeted sales forecasts, production levels, inventory levels and customer backlogs. This
schedule is intended to satisfy the demand forecast at a minimum cost.

Aggregate planning is a type of medium-range capacity planning that typically covers a 3 to

18 month period. Used in a manufacturing environment, it determines overall output levels planned
as well as appropriate resource input mix to be used for related groups of products.

Aggregate planning does not distinguish among sizes, colours, features and so forth. For example, with
automobile manufacturing, aggregate planning would consider the total number of cars planned for
not the individual models, colours or options. When units of aggregation are difficult to determine (for
example, when the variation in output is extreme) equivalent units are usually determined. These
equivalent units could be based on value, cost, worker hours or some similar measure. The quantity
of outsourcing, subcontracting of items, overtime of labour, numbers to be hired and fired in each
period and the amount of inventory to be held in stock and to be backlogged for each period are
decided. All of these activities are done within the framework of the company policies and long-term
commitment to the society, community and the country of operation.

Classification of aggregate plan

Aggregate plan can be classified into two types:

• Manufacturing aggregate plan

• Service aggregate plan
Production Plan (manufacturing aggregate plan) is a managerial statement of the period-by-period
(time-phased) production rates, work-force levels and inventory investment, given customer
requirements and capacity limitations.

Staffing Plan (service aggregate plan) is a managerial statement of the period-by-period staff sizes and
labour-related capacities, given customer requirements and capacity limitations.

Role of aggregate planning

Aggregate planning plays a vital role in planning. Aggregate planning facilitates management taking
decision to meet customer requirements at the least cost. Aggregate plans serve as a foundation for
future short-range type planning, such as production scheduling, sequencing and loading. The master
production schedule (MPS) used in material requirements planning (MRP) has been described as the
aggregate plan "disaggregated." Role of aggregate planning in production planning activities is shown
in Figure 5.1 given below:

Corporate Financial
Planning Planning

Master Production
Schedule

Capacity Planning
Product and
Market Planning

Aggregate
Planning

Master
Production
Schedule

Material
Material
Requirement
Requirement
Planning
Planning

Production Activity
Production Activity
Control
Control

Role of Aggregate Planning in Production Planning

It can be seen that aggregate planning strives to balance the requirement of the market (demand)
with capacity available at the aggregate level. Master Production Schedule, which will be
discussed separately in another unit, is derived from the aggregate plan.

Objectives
 Objectives of aggregate planning normally are as under:
• Minimize total cost over the planning horizon
• Maximize customer service
• Minimize inventory investment
• Minimize changes in workforce levels
• Minimize changes in production rates
• Maximize utilization of plant and equipment

Characteristics
Characteristics of an aggregate plan are as under:
• Considers a "planning horizon" from about 3 to 18 months, with periodic updating
• Looks at aggregate product demand, stated in common terms
• Looks at aggregate resource quantities, stated in common terms
• Possible to influence both supply and demand by adjusting production rates,
workforce levels, inventory levels etc., but facilities cannot be expanded.

Relationship with other functions

Aggregate Planning is related practically with all the functions of the organisation. Heizer and
Render in their book on Operations Management explain the relationship of aggregate planning
with other function through a diagram, which is shown below in the figure.

Marketpla Product Research

ce Decisions and

Demand Process
Forecasts, Planning & Work
Force Raw
Aggregate Materials Inventory
Plan for External On
Capacity
Master
Production

Detailed
Work

Relationship of aggregate planning with other functions

(Ref: Principles of Operations Management by Heizer and Render)

5.3 CAPACITY AND DEMAND BALANCE

Steps taken to produce an aggregate plan begin with the determination of demand and the
determination of current capacity. Capacity is expressed as the total number of units per time that
can be produced. This requires that an average number of units be computed since the total may
include a product mix utilising distinctly different production times. Demand is expressed as the total
number of units needed. If the two are not in balance (equal), the firm must decide whether to
increase or decrease capacity to meet demand or increase or decrease demand to meet capacity. To
accomplish this, several options are available.

Increasing demand to match capacity

Options for situations in which demand needs to be increased to match capacity include:

Pricing
Varying pricing to increase demand in periods when demand is less than the peak. For example,
matinee prices for movie theatres, off-season rates for hotels, weekend rates for telephone
service and pricing for items that experience seasonal demand.

Promotion
Advertising, direct marketing and other forms of promotion are used to shift demand.

Back ordering
By postponing delivery on current orders, demand is shifted to the period when capacity is not
fully utilised. This is just a form of smoothing demand. Service industries can smooth demand by
taking reservations or by making appointments in an attempt to avoid walk-in customers. Some
refer to this as "partitioning" demand.

New demand creation

A new, but complementary demand is created for a product or service. When restaurant
customers have to wait, they are frequently diverted into a complementary (but not
complimentary) service- the bar. Other examples include the addition of video arcades within
movie theatres and the expansion of services at convenience stores.

Change in capacity to meet demand

Options that can be used to increase or decrease capacities to match current demand include:
Hire/lay off
By hiring additional workers as needed or by laying off workers not currently required to
meet demand, firms can maintain a balance between capacity and demand.

Overtime
By asking or requiring workers to work extra hours a day or an extra day per week, firms
can create a temporary increase in capacity without the added expense of hiring
additional workers.

Part-time or casual labour

By utilizing temporary workers or casual labour (workers who are considered permanent
but only work when needed, on an on-call basis and typically without the benefits given
to full-time workers).

Inventory
 Finished-goods inventory can be built up in periods of slack demand and then used to fill
demand during periods of high demand. In this way, no new workers have to be hired, no
temporary or casual labour is needed and no overtime is incurred.

Subcontracting
Frequently firms choose to allow another manufacturer or service provider to provide the
product or service to the subcontracting firm's customers. By subcontracting work to an
alternative source, additional capacity is temporarily obtained.

Cross-training
Cross-trained employees may be able to perform tasks in several operations, creating
some flexibility when scheduling capacity.

Other methods
While varying workforce size and utilisation, inventory buildup/backlogging and
subcontracting are well-known alternatives, there are other more novel ways that find
use in industry. Among these options are sharing employees with counter-cyclical
companies and attempting to find interesting and meaningful projects for employees to
do during slack times.

Inputs to Aggregate Planning

Aggregate planning has certain pre-required inputs, which are inevitable. They include the
following:

• Information about the resources and the facilities available

• Demand forecast for the period for which the planning has to be done
• Cost of various alternatives and resources. This includes the cost of holding inventory,
ordering cost, cost of production through various production alternatives such as
subcontracting, back-ordering and overtime.
• Organizational policies regarding the usage of the above alternatives

5.4 AGGREGATE PLANNING STRATEGIES

Strategies for aggregate planning can be broadly classified into three categories:

• Active Strategies
• Passive (Reactive) strategies
• Mixed Strategies
Active strategies mainly concerned with decisions on the demand side. Passive strategies can be
further divided into two types:

• Chase strategy
• Level Strategy
Salient features of all the strategies are stated below:
Active strategy
• Attempts to handle fluctuations in demand by focusing on demand management
• Use pricing strategies and/or advertising and promotion
• Develop counter-cyclical products
• Request customers to backorder or advance-order

Passive strategy (reactive strategy):

• Attempts to handle fluctuations in demand by focusing on supply and capacity
management
• Vary size workforce size by hiring or layoffs
• Vary utilisation of labour and equipment through overtime or idle time
• Build or draw from inventory
• Subcontract production
• Negotiate cooperative arrangements with other firms
• Allow backlogs, backorders and/or stockouts

Mixed strategy:
• Combines elements of both an active strategy and a passive (reactive) strategy
• Firms will usually use some combination of the two

Passive (reactive) Strategies in Aggregate Planning

Chase Strategy
A chase strategy implies matching demand and capacity period by period. Capacities
(workforce levels, production schedules, output rates, etc.) are adjusted to match
demand requirements over the planning horizon.

This could result in a considerable amount of hiring, firing or laying off of employees; insecure
and unhappy employees; increased inventory carrying costs; problems with labour unions;
and erratic utilisation of plant and equipment. It also implies a great deal of flexibility on the
firm's part. The major advantage of a chase strategy is that it allows inventory to be held to
the lowest level possible and for some firms, this is a considerable saving. Most firms
embracing the just-in-time production concept utilise a chase strategy approach to aggregate
planning.

Advantages:
• anticipation inventory is not required and investment in inventory is low
• Labour utilisation is kept high

Disadvantages:
• the expense of adjusting output rates and/or workforce levels
• alienation of workforce
 Level strategy
A level strategy seeks to produce an aggregate plan that maintains a steady production rate
and/or a steady employment level. To satisfy changes in customer demand, the firm must
raise or lower inventory levels in anticipation of increased or decreased levels of forecast
demand. The firm maintains a level workforce and a steady rate of output when demand is
somewhat low. This allows the firm to establish higher inventory levels than are currently
needed.

As demand increases, the firm can continue a steady production rate/steady employment
level, while allowing the inventory surplus to absorb the increased demand.
A second alternative would be to use a backlog or backorder. A backorder is simply a promise
to deliver the product at a later date when it is more readily available, usually when capacity
begins to catch up with diminishing demand.

In essence, the backorder is a device for moving demand from one period to another,
preferably one in which demand is lower, thereby smoothing demand requirements over
time.

A level strategy allows a firm to maintain a constant level of output and still meet demand.
This is desirable from an employee relations standpoint. Negative results of the level strategy
would include the cost of excess inventory, subcontracting or overtime costs and backorder
costs, which typically are the cost of expediting orders and the loss of customer goodwill.
Advantages of the strategy are stable output rates and workforce levels.

Following are the disadvantages:

• greater inventory investment is required
• increased over time and idle time
• resource utilizations vary over time

Most firms find it advantageous to utilize a combination of the level and chase strategy. A combination
strategy (sometimes called a hybrid or mixed strategy) can be found to better meet organizational
goals and policies and achieve lower costs than either of the pure strategies used independently.

5.5 STEPS IN AGGREGATE PLANNING

Techniques for aggregate planning range from informal trial-and-error approaches, which usually
utilize simple tables or graphs, to more formalized and advanced mathematical techniques. An
informal but useful trial-and-error process for aggregate planning presented in outline form. This
general procedure consists of the following steps:

• Determine the demand for each period.

• Determine capacity for each period. This capacity should match demand, which means it may
require the inclusion of overtime or subcontracting.

• Identify company, departmental or pertinent union policies. For example, maintaining a

certain safety stock level, maintaining a reasonably stable workforce, backorder policies,
overtime policies, inventory level policies and other less explicit rules such as the nature of
employment with the individual industry, the possibility of a bad image and the loss of
goodwill.

• Determine unit costs for units produced. These costs typically include the basic production
costs (fixed and variable costs as well as direct and indirect labour costs). Also included are
the costs associated with making changes in capacity. Inventory holding costs must also be
considered, as should storage, insurance, taxes, spoilage and obsolescence costs. Finally,
backorder costs must be computed. While difficult to measure, this generally includes
expediting costs, loss of customer goodwill and revenue loss from cancelled orders.

• Develop alternative plans and compute the cost for each.

• If satisfactory plans emerge, select the one that best satisfies objectives. Frequently, this is
the plan with the least cost. Otherwise, return to step 5.

Example: 1
A Toy making unit makes a variety of toys having the same manufacturing process. The unit has
the policy to keep 10% of the forecast quantity as safety stock. Monthly demand for the Toys, is
shown in the table below along with the number of working days:

MONTH JAN FEB MAR APR MAY JUN JUL AUG

Forecast 10,000 15,000 30000 27000 25000 20000 16000 20000
demand
Safety Stock 1000 1500 3000 2700 2500 2000 1600 2000
(10% of
forecast)
Beginning 000 1000 1500 3000 2700 2500 2000 1600
Inventory
No of days 18 22 25 20 25 15 20 25
/month

Safety stock is calculated as 10% of the demand for each month.

Cost data and other information is furnished as under:

 Inventory holding cost: RS 2/unit/month
Shift hours:8
Hourly wage rate: Rs8
Stockout cost/unit : Rs 5
Hourly overtime wage rate: Rs 10
Subcontracting cost/unit: Rs 5
Labour hour/unit: Rs 4
Layoff cost/worker: Rs 500
Hiring cost/worker: Rs 400

Three alternative plans are suggested to meet the demand:

PLAN I: Produce exactly as per production requirement by varying size of workforce assuming
250 workers available in January:

PLAN II: No of workers is a constant 518 nos. Assume no subcontractors are available and stock-
outs would be filled from following month’s production

PLAN III. Keep worker strength of 500 as fixed and resort to subcontracting to meet further
demand. No stockout is permitted.

Compare alternative plans and determine the aggregate plan which gives the lowest cost.

In January there is no inventory. However after January, safety stock is equal to the beginning
inventory.

MONTH JAN FEB MAR APR MAY JUN JUL AUG

Forecast 10,000 15,000 30000 27000 25000 20000 16000 20000
demand
Beginning 000 1000 1500 3000 2700 2500 2000 1600
Inventory
Safety Stock 1000 1500 3000 2700 2500 2000 1600 2000
(10% of
forecast)
Production +1000 +500 +1500 -300 -200 -500 -400 +400
requirement
to maintain
stock
Production 11.000 15,500 31,500 26,700 24,800 19,500 15,600 20,400
required

Production requirement to maintain stock is calculated from variations in the quantity of safety
stock ever month.
 Production requirement is calculated as the sum of Forecast Quantity and production requirement
to maintain stock.

PLAN I: Produce exactly as per production requirement by varying size of workforce assuming
250 workers available in January:

Mont Unit Production Availabl Worker No of Laid- Hiring cost Firing cost
h prod. hours reqd e hours require worker off
Requir d s hired worker
ed s
A B C=Bx4(lab. D= No of E= C/D E F G=E x H=F x
hr/unit) working 400(hiring 500(layoff
days x 8 cost/worker cost/worker
(shift ) )
duration
)
Jan 11,000 44,000 144 306 56 0 22400 0
Feb 15,500 62,000 176 352 46 0 18400 0
Mar 31,500 126,000 200 630 278 0 1111200 0
Apr 26,700 106800 160 668 38 0 15200 0
May 24,800 99200 200 496 0 172 0 86000
Jun 19,500 78000 120 650 154 0 61600 0
Jul 15,600 66400 160 415 0 235 0 117500
Aug 20,400 81600 200 408 0 7 0 3500

TOTAL COST PLAN I= Total cost of hiring + total cost of firing (sum of column G and Column H) = Rs 4,
35,800

PLAN II: No of workers is a constant 518 nos. Assume no subcontractors are available and stock-outs
would be filled from following month’s production

Unit Production Available Man Total Inventory Inventory

Month prod. hours reqd hours/month/ hours Production for the balance
Required worker available month
A B C=Bx4(lab. D= No of E =D x F= G= F-B H
hr/unit) working days x 8 518(no of E/4(labour
(shift duration) workers) hour/unit)
Jan 11,000 44,000 144 74,592 18648 7648 7648
Feb 15,500 62,000 176 91168 22792 7292 14940
Mar 31,500 126,000 200 103600 25900 -5600 9340
Apr 26,700 106800 160 82880 20720 -5980 3360
May 24,800 99200 200 103600 25900 1100 4460
Jun 19,500 78000 120 62160 15540 -3960 500
Jul 15,600 66400 160 82880 20720 5120 5620
Aug 20,400 81600 200 103600 25900 5500 11120
 TOTAL COST FOR PLAN II= cumulative inventory balance x 2 (inventory holding cost)=
Rs 56988

PLAN III. Keep worker strength of 500 as fixed and resort to subcontracting to meet further
demand. No stock out is permitted.

Month Unit Producti Available No of hrs Total Invent. Net Subcon

prod. on hours hours/worker available productio Inventory tractin
Required reqd n balance g
A B C=Bx4(lab D= No of E= Dx 500 F=E/4(hrs G= F-B H= I
. hr/unit) working days x 8 (no of required/u cumulative
(shift duration) worker) nit of of col G
prodn)
Jan 11,000 44,000 144 72000 18000 7000 7000
Feb 15,500 62,000 176 88000 22000 6500 13500
Mar 31,500 126,000 200 100000 25000 -6500 7000
Apr 26,700 106800 160 80000 20000 -6700 300
May 24,800 99200 200 100000 25000 200 500
Jun 19,500 78000 120 60000 15000 -4500 - 4000
Jul 15,600 66400 160 80000 20000 4400 4400
Aug 20,400 81600 200 100000 25000 4600 9000

TOTAL COST UNDER PLANIII: total inventory balance x 2 (inventory holding cost)+ subcontracted
quantity x 5 Rs (subcontracting cost/unit)
41700 x2 + 4000 x 5 = Rs 1,03, 400

Plan I Plan II Plan III

Comparing total cost Rs: Rs 435800 Rs 113976 Rs 103400

Plan III gives the lowest cost hence preferable.

5.6 USE OF QT IN AGGREGATE PLANNING

The following are some of the better known mathematical techniques that can be used in more
complex aggregate planning applications.

Linear programming
Linear programming is an optimization technique that allows the user to find a maximum profit or
revenue or a minimum cost based on the availability of limited resources and certain limitations
known as constraints. A special type of linear programming known as the Transportation Model can
be used to obtain aggregate plans that would allow balanced capacity and demand and the
minimization of costs. However, few real-world aggregate planning decisions are compatible with the
linear assumptions of linear programming. Supply Chain Management: Strategy, Planning and
Operation, by Sunil Chopra and Peter Meindl, provides an excellent example of the use of linear
programming in aggregate planning.

Mixed-integer programming
For aggregate plans that are prepared on a product family basis, where the plan is essentially the
summation of the plans for individual product lines, mixed-integer programming may prove to be
useful. Mixed-integer programming can provide a method for determining the number of units to be
produced in each product family.

Linear Decision Rule

The linear decision rule is another optimising technique. It seeks to minimise total production costs
(labour, overtime, hiring/lay off, inventory carrying cost) using a set of cost-approximating functions
(three of which are quadratic) to obtain a single quadratic equation. Then, two linear equations can
be derived from the quadratic equation, one to be used to plan the output for each period and the
other for planning the workforce for each period.

Management Coefficients Model

The management coefficients model, formulated by E.H. Bowman, is based on the suggestion that
the production rate for any period would be set by this general decision rule:
Pt = aWt-1 − bIt-1 + cFt+1 + K, where
Pt = the production rate set for period t
Wt-1 = the workforce in the previous period
It-1 = the ending inventory for the previous period
Ft+1 = the forecast of demand for the next period
a, b, c and K are constants

It then uses regression analysis to estimate the values of a, b, c and K. The result is a decision rule
based on past managerial behaviour without any explicit cost functions, the assumption being that
managers know what is important, even if they cannot readily state explicit costs. Essentially, this
method supplements the application of experienced judgment.

Search Decision Rule

The search decision rule methodology overcomes some of the limitations of the linear cost
assumptions of linear programming. The search decision rule allows the user to state cost data inputs
in very general terms. It requires that a computer program be constructed that will unambiguously
evaluate any production plan's cost. It then searches among alternative plans for the one with the
minimum cost. However, unlike linear programming, there is no assurance of optimality.

Simulation
Several simulation models can be used for aggregate planning. By developing an aggregate plan within
the environment of a simulation model, it can be tested under a variety of conditions to find
acceptable plans for consideration. These models can also be incorporated into a decision support
system, which can aid in planning and evaluating alternative control policies. These models can
integrate the multiple conflicting objectives inherent in manufacturing strategy by using different
quantitative measures of productivity, customer service and flexibility.

Functional Objective Search Approach

The functional objective search (FOS) system is a computerised aggregate planning system that
incorporates a broad range of actual planning conditions. It is capable of realistic, low-cost operating
schedules that provide options for attaining different planning goals. The system works by comparing
the planning load with available capacity. After management has chosen its desired actions and
associated planning objectives for specific load conditions, the system weights each planning goal to
reflect the functional emphasis behind its achievement at a certain load condition. The computer then
uses a computer search to output a plan that minimises costs and meets delivery deadlines.

5.7 AGGREGATE PLANNING IN SERVICES

For manufacturing firms, the luxury of building up inventories during periods of slack demand allows
coverage of an anticipated time when demand will exceed capacity. Services cannot be stockpiled or
inventoried so they do not have this option. Also, since services are considered "perishable," any
capacity that goes unused is essentially wasted. An empty hotel room or an empty seat on a flight
cannot be held and sold later, as can a manufactured item held in inventory.

Service capacity can also be very difficult to measure. When capacity is dictated somewhat by machine
capability, reasonably accurate measures of capacity are not extremely difficult to develop. However,
services generally have variable processing requirements that make it difficult to establish a suitable
measure of capacity.

Historically, services are much more labour intensive than manufacturing, where labour averages 10
per cent (or less) of the total cost. This labour intensity can be an advantage because of the variety of
service requirements an individual can handle. This can provide quite a degree of flexibility that can
make aggregate planning easier for services than manufacturing.

Areas of application of aggregate planning in services include:

• Restaurants
• Hospital
• Miscellaneous Services
• Airline Industry

5.8 TRENDS IN AGGREGATE PLANNING

Rudy Hung, in his Production and Inventory Management Journal article entitled "Annualized Hours
and Aggregate Planning," presents a new, useful idea for aggregate planning called Annualized Hours
(AH). Under AH, employees are contracted to work for a certain number of hours (say 1,800 hours)
per year, for a certain sum of money. Employees can be asked to put in more hours during busy periods
and fewer hours in slow periods. Typically, employees receive equal monthly or weekly payments so
that hourly workers in effect have gained salaried status. Overtime is paid only when employees have
worked beyond their annual hours.
AH is also known as Flexi year, as it can be seen as an extension of flextime, in which employees can
vary their work hours within limits. This concept is used almost exclusively in Europe, particularly in
the United Kingdom. The Scandinavian pulp and paper industries pioneered AH in the mid-1970s.
Around that time, some West German firms, particularly those in the retail industry, also used AH.
AH gives employers much flexibility. AH serves to cut labour costs by offering employees an annual
sum less than their previous annual earnings with overtime. Even though their total earnings may fall,
their average earnings per hour would remain the same or even rise. Effective earnings could rise even
more so if the employer is unable to consume all contracted hours. Employees have greater income
security with no worries about layoffs. There is also increased morale because blue-collar workers are
now salaried.

Another development affecting aggregate planning is postponement. This refers to delaying the
"finish" of a product until the moment of sale. Firms that rely on the postponement strategy, such as
PC-maker Dell Inc. or clothing franchise Benetton Group Sp.A., depend upon the availability of
aggregate inventories of components that can be assembled to order shortly after or even
immediately, as an order is taken.

5.9 SUMMARY

Aggregate planning is an operational activity which does an aggregate plan for the production process.
The planning is done for a time horizon of about 3 to 18 months. The aggregate plan gives an idea to
management as to what quantity of materials and other resources are to be procured and when, so
that the total cost of operations of the organisation is kept to the minimum, over that period. Steps
taken to produce an aggregate plan begin with the determination of demand and the determination
of current capacity. Options which can be used to increase or decrease capacity to match current
demand include Hire/lay off., Overtime, Part-time or casual labour, Subcontracting, Inventory. There
are three common strategies for aggregate planning: Active Strategy, Reactive Strategy and Mixed
Strategy. Aggregate Planning techniques aim at developing a plan with minimum cost. Several
Operations Research Methods are used to solve complex real-life aggregate planning problem.
Aggregate Planning concepts have scope for application in service industries.

5.10 KEYWORDS

• Aggregate Planning: is an attempt to balance capacity and demand in such a way that costs are
minimized.
• Chase Strategy: implies matching demand and capacity period by period.
• Level Strategy: seeks to produce an aggregate plan that maintains a steady production rate and/or
a steady employment level.
• Capacity: is expressed as the total number of units per period that can be produced
Demand: is expressed as a total number of units needed.
UNIT 6 MASTER PRODUCTION SCHEDULE

Objectives

After completing this unit, you would be able to:

• state the role of Master Production Schedule;
• distinguish between MPS and production plan;
• compute MPS and projected inventory;
• recall Oliver Wight’s questions for evaluating MPS.

Structure
6.1. Introduction
6.2. Concept of MPS
6.3. Objectives of The MPS
6.4. MPS and Production Plan
6.5. Key Terms in MPS
6.6. Output of MPS
6.7. Steps in MPS
6.8. Time Fences and Time Zones
6.9. Changing MPS
6.10. Evaluation of MPS
6.11. Summary
6.12. Key Words

6.1. INTRODUCTION

The MPS (Master Production Schedule) is a statement of planned future output. The most important
element of customer service is product availability (Coyle, Bardi and Langley). Product availability
depends on the amount of end-item inventory in situations where a make-to-stock policy exists.
Manufacturing firms in the consumer goods industry adopt the make-to-stock policy because the
manufacturing lead-time for end-items is often longer than the cycle time for taking and shipping an
order.

Master Production Schedule (MPS) is considered as the main tool to control product availability. By
using the beginning inventory and the sales forecast for a particular end item, a planner can calculate
the amount of product needed per period to meet anticipated customer demand. This calculation
becomes more complex in a multi-product environment where forecast errors and capacity
constraints can add a great deal of uncertainty to the planning process.

Master Production Schedule is an important input for MRP (Material Requirement Planning System).
Master Production Schedule drives MRP System in an organisation, which we will study in the next
unit.

6.2. CONCEPT OF MPS

Master Production Schedule is a detailed plan that states how many end items (the final product sold
to the customer) will be available for sale or distribution during specific periods. “Master Production
Schedule States the requirements for individual end items by date and quantity.” APICS (American
Production and Inventory Control Society)

Business Directory defines Master Production Schedule as a process of translating a business into
a comprehensive product manufacturing schedule that covers what is to be assembled or made,
when, with what materials acquired when and the cash required. MPS is a key component of material
requirements planning (MRP).

Master Production Schedule is the time-phased schedule of plans to acquire (material that will thus
be available to satisfy anticipated or actual customer demand. Acquisition of material will normally be
by the manufacture, of course, but could be simply the buying in of finished goods for direct resale.)
Although there are a few exceptions, only end products are master scheduled.

The schedules and plans for lower-level components and raw materials are obtained by exploding the
master schedule itself down through the bill of materials.

The master production schedule (MPS) specifies which end items or finished products a firm is to
produce, how many are needed and when they are needed. Recall that aggregate production planning
creates a similar schedule for product lines or families, given by months or quarters of a year. The
master production schedule works within the constraints of the production plan but produces a more
specific schedule by individual products. The timeframe is more specific, too. An MPS is usually
expressed in days or weeks and may extend over several months to cover the complete manufacture
of the items contained in the MPS. The total length of time required to manufacture a product is called
its cumulative lead-time.

Requirement of MPS
The MPS (Master Production Schedule) should be realistic and achievable. A Master Production
Schedule, which is not achievable serves little purpose in meeting customer requirements. Master
Production Schedule should be drawn properly considering capacity and other constraints. The idea
is to make the plan realistic.

What MPS is not

Master Production Schedule is often confused with the following:
• Sales forecast
• A wish list
• A final assembly schedule

Master Production Schedule is none of these. Master Production Schedule is not a sales forecast.
Rather sales forecast is one of the inputs for Master Production Schedule. Master Production Schedule
provides the quantity and time of end items. It tells which products should be completed on which
dates. Master Production Schedule summarizes production to meet sales forecasts.

Master Production Schedule is not a wish list. It is a realistic and achievable Statement of the
requirements for individual end items by date and quantity for a timeframe.

It is not a final assembly schedule. Master Production Schedule provides the date of completion of
end items. While arriving at it, Master Production Schedule considers not only manufacturing time but
also capacity and customer delivery dates for a timeframe. Master Production Schedule tells when to
end items are available for sale, but not when the end items or their parts will be manufactured.

Time Phase
Time phase for Master Production Schedule will depend on several factors such as lead time, process
choice, manufacturing time etc. Normally, timeframe for a Master Production Schedule is between 1
to 3 months. The normal timeframe for aggregate planning, Master Production Schedule and Material
Requirement Planning is shown below:

Aggregate Plan (3-12 months ahead)

Master Production Schedule (1-3 months)

Material Requirements Plan (0-3 months)

The planning horizon is the amount of time for which the master schedule extends into the future.
This is normally set to cover a minimum of cumulative lead-time plus time for lot sizing low-level
components and for capacity changes of primary work centres

Benefits
Major benefits of the Master Production Schedule are as under:
• The basis for making customer delivery promises
• Utilising plant capacity effectively
• Attaining the firm’s strategic objectives as reflected in the production plan a
• Resolving trade-off between manufacturing and marketing
6.3 OBJECTIVES OF THE MPS

Following are the objectives of the Master Production Schedule:

• To set due dates for the availability of end items
• To provide information regarding resources and materials required to support the aggregate
plan
• To establish the Production Schedule for the specific models/options of products.
• To provide the schedule input for the Material Requirements Planning process.

• To provide the schedule used by Order Processing to acknowledge delivery dates for current
and new orders.

6.4 MPS AND PRODUCTION PLAN

Master Production Schedule is also referred to as disaggregating the plan to show specific items,
quantities and time.
Aggregate planning is a big picture approach to production planning. It is a production plant to meet
demand throughout the year. It is not concerned with individual products, but with a single aggregate
product representing all products. Intermediate-range capacity planning It usually covers about 12
months.
Desegregation is breaking down the aggregate plan into specific products. The result of disaggregation
is a master schedule. The master schedule shows the quantity and timing of specific products. It
usually covers 6 to 12 weeks. After preparing a tentative Master Schedule, a planner can do Rough-
cut capacity planning. Relationship between Master Schedule and Aggregate plan is shown in table
6.1 below:
AGGREGATE PLAN
MONTH APRIL MAY JUNE
General Purpose Machines 200 400 250

MASTER SCHEDULE
Lathe 125 200 100
Drilling machines 53 70 120
Milling machines 15 30 15
Grinding Machines 7 - 15
200 300 250

The relation between Aggregate Plan and Master Schedule

Rough-cut capacity planning is to check the feasibility of master schedule concerning available
manpower and machinery capacities, storage spaces and vendor capabilities. It is just a rough check
to ensure that the master schedule is achievable. The master schedule then is used as the basis for
short term planning. The master schedule states the quantity and delivery time of specific products.
It says we need 125 no. of Lathe Machines in April. But it does not say how we get it, from production
or inventory. Master Production Schedule (MPS) is developed based on a Master schedule. MPS
indicates Quantity and timing of planned production. MPS (Master Production Schedule) determines
the:

• Promised inventory
• Production requirements
• Available to promise inventory for each period

Relationship of production plan and MPS (Master Production Schedule) is given in Table 6.2 below:
PRODUCTION PLAN
MONTH JUNE JULY AUG SEP
DAYS 24 23 25 24
PLAN 23,000 23,000 25,000 24,000

MASTER PRODUCTION SCHEDULE

SEPTEMBER
WEEK I II III IV
PRODUCT A 4000 1000 600 2500
PRODUCT B 2000 5000 5400 3500
TOTAL 6000 6000 6000 6000

Relationship of Production Plan and Master Production Schedule

6.5 KEY TERMS IN MPS

Projected On-Hand - The level of inventory expected for an item in a future period. (Previous On-Hand
minus the larger of next periods forecast or actual orders).

• Master Production Schedule (MPS) - A detailed schedule that states which end items are to be
produced, when they are needed and in what quantities.

• Available-to-Promise (ATP) - Quantities from the MPS that have not been committed to actual
customer order. (Current On-Hand or MPS minus all customer orders up to the next MPS)

• Time Fence - Series of time intervals that specifies what types of order changes are allowed.
• Rough Cut Capacity Plan - A capacity check run at traditional bottleneck operations to verify
the feasibility of a given MPS.

6.6 OUTPUT OF MPS

The inputs and outputs of MPS are indicated in a simplified diagram below:
 CAPACITY CONSTRAINT

FORECAST MASTER WHAT TO PRODUCE

PRODUCTION
PRODUCTION PLAN SCHEDULE WHEN TO PRODUCE
PROCESS (End date)
CUSTOMER ORDER HOW MUCH TO
PRODUCE

LEAD TIME CONSTRAINTS

Master Production Schedule Process

MPS is a schedule that expresses the operations plan of production for a specific period only and
is stated in terms of the end items, which may be either shippable products or the highest level
assemblies used to make them.

In Master Production Schedule (MPS), inputs are used to draw a master production schedule and
the inputs used are – orders from customers, production plan from aggregate planning, forecast,
available resources, inventory levels and the capacity constraints. While drawing a MPS, quantities
of individual items must be equal to the aggregate quantities from the production plan and also
the total requirements for a product must be allocated over time in a very good manner.

MPS outputs include – the amounts that are to be produced, due dates, quantity that is available
to promise with the projected available balance.

The inputs to Master Production Schedule are listed below:

Inputs to Master Production Schedule

• Market requirements
• Production Plan from Aggregate Planning
• Resources available
• Forecast
• Orders from customers
 • Additional independent demand
• Inventory levels
• Capacity constraints
Constraints
• The demand which must be met
• Capacity available
• Lead time
Output
An MPS showing end items available every month (or period) that is feasible concerning demand
and capacity. The output of Master Production Schedule (MPS) besides this is ATP(Available to
Promise) quantities and Projected Inventory.

Example: Calculation of Projected order on hand:

JUNE JULY
64 1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Customer Orders
(committed) 33 20 10 4 2
Projected on-hand
inventory 31 1 -29

Forecast, customer order, beginning inventory data is given.

64 is the beginning inventory.
Projected inventory for period 1 June first week would be 64-33=31
Projected inventory for period 1I June second week would be 31-30=1
Among forecast and customer order always higher value is selected for calculating projected on-
hand inventory.

Negative projected on-hand inventory is the signal for production.

Suppose the economic production lot size for this product is 70 units.
Whenever production is called, 70 units are produced.
The negative projected inventory of -29 in period 3 calls for production, 70 units are produced,
the projected inventory becomes 41.
The same calculation continues for the whole planning horizon

64 June July
1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Customer Orders 33 20 10 4 2
(committed)
Projected on 31 1 41 11 41 1 31 61
hand inventory
MPS 70 70 70 70
Available To Promise (ATP) computations:
Now we can determine available to promise at each period.
We use a look-ahead procedure.
Sum booked customer orders week by week up to (not including) the
next week of production. This is booked orders.
The remaining inventory is ATP.
ATP is only calculated for weeks in which there is an MPS quantity and
the first week In this example; weeks 1, 3, 5, 7, 8.

Available To Promise (ATP); First week

64 JUNE JULY
1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Customer 33 20 10 04 02
orders
committed
Projected 31 01 41 11 41 01 31 61
on hand
inventory
MPS 70 70 70 70
ATP 11 56 68 70 70

Available to promise in week 1 = Inventory in week 0 + Production in week 1 - Customer Orders at

week 1 - Customer Orders at week 2

ATP(1) = I(0)+ P(1) - CO(1) - CO(2)

ATP(1) = 64+0 -33 -20 = 11
This is an uncommitted inventory.
Can be assigned to week 1, week 2 or both.

Available To Promise (ATP); other weeks

For another week, beginning inventory is removed from the formula
ATP(3) = P(3)-CO(3)-CO(4)
ATP(3)= 70-10-4= 56

64 JUNE JULY
1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Customer 33 20 10 04 02
orders
committed
Projected 31 01 41 11 41 01 31 61
on hand
inventory
MPS 70 70 70 70
 ATP 11 56 68 70 70

6.7 STEPS IN MPS

The main steps in the master production schedule can be summarized as:
• Forming a preliminary MPS
• Performing rough-cut capacity planning
• Resolving differences

If required capacity exceeds available capacity then either Capacity must be increased or Plan
must be altered

Rough – cut capacity planning plays a very critical role in checking whether the resources available
are capable of supporting PMS or not. (Resolving Differences) MPS starts with the preliminary
calculation of the projected inventory. As additional orders are booked, they would be
entered into the schedule and ATP would be updated which would reflect the new orders
booked. Diagram 6.2 below indicates the steps involved in preparing MPS(Master Production
Schedule):

RCCP
Authorised Prospective Are resources No
available?
production plan MPS

Yes

Material
Authorised
requirements
MPS
planning (MRP)

Steps in Master Production Schedule Process

6.8 TIME FENCES AND TIME ZONES

A policy or guideline established to note where various restrictions or changes in operating procedures
take place. For example, changes to the master production schedule can be accomplished easily
beyond the cumulative lead time, while changes inside the cumulative lead time become increasingly
more difficult to a point where changes should be resisted. Time fences can be used to define these
points.
Demand Time Fence
A designated period during which the MPS is frozen: The DTF starts with the present period and
extends into the future a relatively few periods. In some contexts, the demand time fence may
correspond to that point in the future inside which changes to the master schedule must be approved
by an authority higher than the planner. Note, however, that customer orders may still be promised
inside the demand time fence without higher authority approval if there are quantities available-to-
promise (ATP). Beyond the demand time fence, the planner may change the MPS within the limits of
established rescheduling rules, without the approval of the higher authority.
Planning Time Fence
A designated period during which the planner is allowed to make changes, but computer software is
not. The PTF starts at the end of the demand time fence and extends further into the future. A point
in time denoted in the planning horizon of the master scheduling process that marks a boundary
inside of which changes to the schedule may adversely affect component schedules, capacity plans,
customer deliveries and cost. Outside the planning time fence, customer orders may be booked and
changes to the master schedule can be made within the constraints of the production plan. Changes
inside the planning time fence must be made manually by the planner. The length of each time fence
is unique to each business and is based on the cost of making changes. Diagram 6.3 shows time fences
with illustrative data of MPS.

Week
1 2 3 4 5 6 7 8 9 10

MPS 0 150 0 0 0 0 150 0 0 0

Demand Planning time

time fence
fence

Time Fences Of MPS

Frozen Zone
In forecasting, this is the period in which no changes can be made to scheduled work orders
based on changes in demand. Use of a frozen zone provides stability in the manufacturing
schedule,
Firm planned order (FPO)
The planned order that can be frozen in Quantity and time: The computer is not allowed to
change it automatically; this is the responsibility of the planner in charge of the item that is being
planned. This technique can aid planners working with MRP systems to respond to material and
 capacity problems by firming up selected planned orders. Also, firm planned orders are the
normal method of stating the master production.
Slushy Zone
Capacity and material are committed to less extent. Tradeoffs must be met between marketing
and manufacturing.
Liquid Zone
Any change can be made to this MPS (Master Production Schedule).

6.9 CHANGING MPS

The need to continually manage change and keep schedules in balance is the real ongoing job of the
planner. A good planner must always be ready to react to change. But there is a very real risk of
overreacting, reacting too soon or reacting in a way that will throw other things out of balance. Good
planners, therefore, always consider five key questions before making a final decision to change the
master schedule.

MPS Change Considerations

• Did demand change?
• Impact on Production Plan?
• Is capacity available?
• Is the material available?
• Cost and risk?

QUESTION 1 - Has the demand changed?

For example, take a product that has an annual forecast of 1000, but with a seasonal factor such
that the current month has a forecast of 120. The current week’s forecast of 30 is overshadowed
by actual customer orders of 45 due for immediate shipment. The planner must decide whether
or not to react to this "demand change." Should the annual forecast for 1000 stay the same? Is
this month’s forecast for 120 still good? Is selling 45 in a week just "normal" lumpy or uneven
demand? Should the master schedule be changed every time there’s an increase in demand or
are there times when demand will even itself out?
On the surface, these may seem to be more demand management questions than master
scheduling questions, but they need to be answered before the master schedule can be changed?
Underlying the answers to these questions should be an analysis of the given item’s demand
compared to its normal historical pattern. This first question can be restated as "Do we need to
change?"
QUESTION 2: What is the impact on the Production Plan?
Aggregate monthly rates of production (the Production Plan) by the family are reviewed and
authorized by senior management in the Sales & Operations Planning process. The planner must
operate within these rates to ensure that the master schedule communicates detailed priorities
that will achieve business objectives and be supported by the resources budgeted and authorized
by senior management. This means that individual line item master schedules can only be altered
 in a way that preserves the validity of the overall monthly Production Plan totals. A planner may
have to find a way to counterbalance any master schedule change with an equal but opposite one
for another item in the same family. If this is not possible, the need to change the overall family
Aggregate Production Plan rate needs to be discussed with senior management so approval for
any resource changes and acceptance of restated targets can be gained. This key question can be
restated as "Are we allowed to change?"
QUESTION 3: Is the capacity available?
If the desire and permission to change are ascertained, the third key question to be answered is
whether the change is constrained by the ability to alter the supply of resources needed to
produce the product. This includes resource capacity in the factory, in support departments or at
suppliers. Is extra capacity available where and when it’s needed? Can more capacity be garnered
through overtime, redeployment of people or equipment, some subcontracting, etc.? Or
conversely, will lower utilisation caused by schedule reductions have adverse effects that cannot
be accepted?
QUESTION 4: Is the material available?
Capacity alone is not enough. Are the proper materials available for schedule increases? Or, if
requirements are being lowered, can increased inventories and added storage space
requirements are accommodated? Will schedule changes have any impact on the ability to meet
other end product schedules or on other material requirements? Questions 3 and 4 are asking
"Are we able to change?"
QUESTION 5: What are the costs and risks?
In most cases, extra capacity can be found and more material can be acquired, but often at some
premium cost or by taking some risk with other items, products or customers that are in the
schedule. Likewise, reduced requirements can be accommodated, but sometimes at the cost of
increased inventories or underutilised assets and people. Is this level of cost and risk acceptable?
Does management understand the impact on the ongoing weekly and monthly operating and
financial measurements? This must be balanced against the importance of the change and the
potential impact on supporting other customers and products. From a business viewpoint, this
last and crucial question can be restated as "Do we want to change?"
Each of these questions must be answered before any master schedule is changed. Obviously, in
complex environments where many materials and resources are used to build the product and where
many products are built, answering all these questions in total detail could be an enormously time
consuming and almost overwhelming task. In such environments, timesaving tools like Rough Cut
Capacity Planning (which focuses attention on only the key resources and materials) are invaluable.
Equally invaluable is the planner’s experience and judgment in knowing when and what key resources
need to be checked into, at what level of detail.
Sometimes the answer to one or more of these questions will be intuitive and happen in a matter of
seconds as the planner considers the problem. In other cases, it can take hours or days for the planner
to consult with the proper people to get the required information and to ensure that a consensus is
reached by all interested parties. The depth and extent of these analyses will vary, based on the
complexity and scope of the change in question.
A good master schedule will satisfy demands (forecasts, contracts, backlogs, etc.) along with normal,
predictable variation around that demand, utilising safety stock, safety capacity and selective
"overplanning." Building a good master schedule requires a lot of deliberate thought and analysis. But
the even bigger challenge is keeping a good master schedule, one that can be met at least 95% of the
time. Certainly, this is as much art as science, as the planner must balance the time and resources
needed against the impact of the decisions.

6.10 EVALUATION OF MPS

For evaluation of MPS (Master Production Schedule), Oliver Wight has developed ABCD Checklist for
MPS Detailed Assessment Questions
The detailed audit questions are taken from the Oliver Wight ABCD Checklist for Operational
Excellence. These questions are designed not only to enable a company to judge how well they
perform the master scheduling function but also to point out areas where they may improve.
The best way to use the checklist is to have a cross-functional, multilevel group of people rate each
question, in regards to the master scheduling process in the company. If the particular aspect or
question is not pursued or used at all in the company then it should be checked "no." If "yes" is
checked, each person should rate how well that particular function is performed in the company.

Ratings
4 = Excellent: The highest expected level of results from performing this kind of activity is achieved
in that company.

3 = Very Good: The company is fully performing this activity and has achieved the original goals
associated with it.

2 = Fair: The company has most of the processes and tools are in place, but is not fully using the
process and/or not getting the desired results.

1 = Poor: People, processes, data and/or systems are not at the minimum prescribed level,
resulting in little if any benefit.

Once a group of people has evaluated the master scheduling process, each of their ratings should be
compared. Wherever their rating is different by more than one, the discussion should be held to
understand why one person would rate it higher or lower than another.

In the end, you should be able to agree on a rating within one point. Then the company should put
together an implementation plan addressing the lowest-rated questions first in an attempt to get the
rating for each question up to at least three or four, which would be a world-class level.
Yes No 4 3 2 1
1. Accountability for maintaining the master schedule is
clear. The importance of the master schedule is
reflected in the organisation and reporting relationship
of the master scheduling function.

2. Planners understand the product, manufacturing

process and the manufacturing planning and control
system.

3. The planner participates in and provides important

situation information to the Sales & Operations
Planning process.

4. The planner reacts to feedback which identifies

material and capacity availability problems and
initiates the problem resolution process.

5. Planning bills of material, if needed, are maintained

jointly by the planner and Sales and Marketing.

6. A written master schedule policy is followed to monitor

stability and responsiveness, goals are established and
measured.

7. Policy governs the use of safety stock/option

overplanning used to increase responsiveness and
compensate for inconsistent supply or variable
demand.

8. The master schedule is summarised appropriately and

reconciled with the agreed-to rate of manufacture
(Production Plan) from the Sales & Operations Planning
process.

9. All levels of master scheduled items are identified and

master schedule.

10. The master schedule is “firmed up” over a sufficient

horizon using time fences and firm planned orders.
Guidelines for this horizon include a) cumulative lead
time, b) current backlog and c) the need for stability of
operations.

11. The master schedule is in weekly, daily or smaller

periods, maybe rate-based and replanned at least
weekly.

12. The bill of material structure supports the

forecasting/master scheduling process.
 13. Forecast consumption processes are used to prevent
planning nervousness.

14. The alternative approaches used with planning bills of

material to develop production forecasts for master
scheduled items are well understood and an
appropriate process is used.

15. Available to promise product/capacity information is

used for customer promises.

16. Rough cut capacity planning or its equivalent, is used

to evaluate the impact on critical resources of
significant master schedule changes. Demonstrated
capacity is measured and compared to the required
capacity.

17. A finishing / final assembly mechanism coordinated

with the master schedule is used to replenish finished
goods or schedule customer orders to completion.

18. The mixed model master schedule is being pursued

where applicable.

19. Master schedule changes within the “firmed up”

period (closest time fence) are measured and reviewed
for the cause.

20. A weekly master schedule communication meeting

exists and is attended by all using functions.

6.11 SUMMARY

Master Production Schedule is a detailed plan that states how many End Items (the final product sold
to the customer) will be available for sale or distribution during specific periods. Master Production
Schedule as a process of translating a business into a comprehensive product manufacturing schedule
that covers what is to be assembled or made, when, with what materials acquired when and the cash
required. MPS is a key component of material requirements planning (MRP). The master production
schedule (MPS) specifies which end items or finished products a firm is to produce, how many are
needed and when they are needed.

Master Production Schedule is often confused with the sales forecast, production wish list or final
assembly schedule. Time phase for Master Production Schedule will depend on several factors such
as lead time, process choice, manufacturing time etc. Normally time frame for a Master Production
Schedule is between 1 to 3 months. Master Production Schedule is also referred to as disaggregating
the plan to show specific items, quantities and periods. Desegregation is breaking down the aggregate
plan into specific products. The result of disaggregation is a master schedule. The master schedule
shows the quantity and timing of specific products.

Major objectives of Master Production Schedule include: to set due dates for the availability of end
items; to provide information regarding resources and materials required to support the aggregate
plan and to establishes the Production Schedule for the specific models/options of products.

In Master Production Schedule (MPS), inputs are used to draw a master production schedule and the
inputs used are – orders from customers, production plan from aggregate planning, forecast, available
resources, inventory levels and the capacity constraints. While drawing a MPS, quantities of individual
items must be equal to the aggregate quantities from the production plan and also the total
requirements for a product must be allocated over time in a very good manner.
MPS outputs include – the amounts that are to be produced, due dates, quantity that is available to
promise with the projected available balance.

Master Production Schedule can not remain rigid. Changes are necessary due to changes in the
environment. Time fence and time zone concept are used to cope with the changes. A policy or
guideline established to note where various restrictions or changes in operating procedures take
place. For example, changes to the master production schedule can be accomplished easily beyond
the cumulative lead time, while changes inside the cumulative lead time become increasingly more
difficult to a point where changes should be resisted. Time fences can be used to define these points.
In the end, Wight’s Questionnaire for evaluating the performance of MPS and criteria was explained.

6.12 KEYWORDS

• The master production schedule (MPS): specifies which end items or finished products a firm is to
produce, how many are needed and when they are needed.
• Projected On-Hand - The level of inventory expected for an item in a future period. (Previous On-
Hand minus the larger of next periods forecast or actual orders)
• Available-to-Promise (ATP) - Quantities from the MPS that have not been committed to actual
customer order.
• Time Fence - Series of time intervals that specifies what types of order changes are allowed.
• Rough Cut Capacity Plan - A capacity check run at traditional bottleneck operations to verify the
feasibility of a given MPS.
• Demand Time Fence –A designated period during which the MPS is frozen.
Planning Time Fence – A designated period during which the planner is allowed to make changes.
UNIT 7 MATERIAL REQUIREMENT PLANNING

Objectives

After completing this unit, you would be able to:

• state the meaning of MRP;
• explain inputs to MRP System;
• compute planned order release from the gross requirement;
• write the benefits and assumptions of MRP System;
• recall software for MRP System.

Structure
7.1. Introduction
7.2 Concept of MRP
7.3 MRP System
7.4 MRP Process
7.5 Lot Sizing Rules
7.6 MRP Computations
7.7 Regeneration and Net Change
7.8 Assumptions in MRP
7.9 Benefits of MRP
7.10 MRP Implementation
7.11 Software for MRP
7.12 Summary
7.13 Key Words

7.1 INTRODUCTION

Material requirement planning (MRP) is a key element in managing resources in a manufacturing

environment. MRP systems were developed to help companies manage dependent demand inventory
and schedule replenishment orders. Material requirements planning (MRP) is a computer-based
inventory management system designed to help managers in scheduling and placing orders for
dependent demand items.
Organizations need to control the inventories of the materials they purchase. They also need to
control, which products are to be produced, and in what quantities. Making a bad decision in any of
these areas will create losses to the company. A few examples are given below:
• If a company purchases insufficient quantities of an item used in manufacturing (or a wrong item),
it may be unable to meet the commitment to supply products on time. Besides, the cost of
production will increase, too.
• If a company purchases an excessive quantity of an item, money is wasted; the excess quantity
ties up cash while it remains as stock and may never even be used at all.
• Beginning production of order late can cause customer deadlines to be missed.
MRP is a tool to deal with these problems. MRP can be applied both to items that are purchased from
outside suppliers and to sub-assemblies, produced internally, that are components of more complex
items.
Before MRP and before computers dominated industry, reorder-point/reorder-quantity (ROP/ROQ)
type methods such as EOQ had been used in manufacturing and inventory management. Order point
systems can be used with independent demand items, but they are not suitable for dependent
demand items. MRP is suitable for dependent demand items. Order point is primarily concerned with
how much to order when the inventory drops to a certain level whereas MRP is more concerned with
when to order and time-phased requirements. Order point uses past information whereas MRP
emphasises future information and generates time-phased requirements based on expected future
demand over a planning horizon.
When applied to parts, the order point system determines the order quantity and reorder point for a
part as if that part is independent of the other parts or components comprising the same finished
product.
For example, if B were a part that goes into the finished product A, the inventory on hand for item A
would affect how many Bs are required. If the order quantity for B is determined by using the order
point system, the inventory on hand for the parent item A would not be taken into account and the
results would be inaccurate.
On the other hand, MRP considers all the parts, and components comprising the product concurrently
and recognize the relationships and interdependencies between them.
Therefore, using MRP for determining the requirements for dependent demand parts would be more
suitable than the order point method. Also, order point systems are not appropriate if the demand is
not uniform. The demand is not stable for dependent demand items and therefore the order point
system would not be suitable; MRP can deal much better with lumpy demands of dependent demand
items.
In 1964, Joseph Orlicky developed Material Requirements Planning (MRP). The first company to use
MRP was Black & Decker in 1964, with Dick Alban as project leader.
In 1983 Oliver Wight developed MRP into manufacturing resource planning (MRP II). Orlicky's book is
entitled The New Way of Life in Production and Inventory Management (1975). By 1975, MRP was
implemented in 150 companies. This number had grown to about 8,000 by 1981.
In the 1980s, Joe Orlicky's MRP evolved into Oliver Wight's manufacturing resource planning (MRP II),
which brings master scheduling, rough-cut capacity planning, capacity requirements planning, S&OP
(in 1983) and other concepts to classical MRP. By 1989, about one-third of the software industry was
MRP II software sold to American industry ($1.2 billion worth of software). The next generation of
MRP, known as manufacturing resources planning or MRP II, also incorporated marketing, finance,
accounting, engineering and human resources aspects into the planning process.
A related concept that expands on MRP is enterprise resources planning (ERP), which uses computer
technology to link the various functional areas across an entire business enterprise.

7.2 CONCEPT OF MRP

Material Requirements Planning (MRP) is a computer-based production planning and inventory

control system. MRP is concerned with both production scheduling and inventory control. It is a
material control system that attempts to keep adequate inventory levels to assure that the required
materials are available when needed. MRP is applicable in situations of multiple items with complex
bills of materials.

Material requirements planning (MRP) is a computer-based information system that translates master
schedule requirements for end items into time-phased requirements for subassemblies, components
and raw materials.

It is a computerized system for managing dependent-demand inventory, scheduling replenishment

orders and meeting the demand for end items as given in the Master Production Schedule.

Dependent versus Independent Demand

Dependent demand items are components of finished good such as raw materials, parts and
subassemblies or the amount of inventory needed depends on the level of production of the final
product. For example, in a plant that manufactured bicycles, dependent demand inventory items
might include tyres, chain, seat etc.

MRP is especially suited to manufacturing settings where the demand of many of the components and
subassemblies depend on the demands of items that face external demands. Demands for end items
are independent. In contrast, demands for components used to manufacture end items depend on
the demands for the end items. Independent demand is uncertain. Dependent demand is certain.
Dependent demand is the demand for items that are subassemblies or parts to be used in the
production of finished goods. Once the independent demand is known, the dependent demand can
be determined.
Differences between independent and dependent demands are important in classifying inventory
items and in developing systems to manage items within each demand classification. MRP systems
were developed to cope better with dependent demand items.
Comparison between characteristics of a material with dependent and independent
demand is given in Table 7.1 below:
SL PARTICULARS MATERIALS WITH INDEPENDENT MATERIALS WITH DEPENDENT
NO DEMAND DEMAND
1 DEMAND SOURCE Customers Parent Items
 2 MATERIAL TYPE Finished Goods Raw Material And Work In
Process
3 METHOD OF Forecast and booked customer Calculated
ESTIMATING orders
DEMAND
4 PLANNING EOQ and ROP(Reorder Point) MRP
METHOD

Independent and Dependent Demand Materials

Characteristics of MRP
Two basic characteristics of MRP are:

• MRP derives demand for components, subassemblies, materials etc., from the demand for and
production schedules of parent items.
• MRP offsets replenishment orders (purchase orders or production schedules) relative to the date
when replenishment is needed.

MRP works backwards from a production plan for finished goods to develop requirements for
components and raw materials.
William J. Stevenson wrote in his book Production/Operations Management "MRP begins with a
schedule for finished goods that is converted into a schedule of requirements for the subassemblies,
parts and raw materials needed to produce the finished items in the specified time frame".
Thus, MRP is designed to answer three questions:
 What is needed?
How much is needed?
When is it needed?
MRP breaks down inventory requirements into planning periods so that production can be completed
promptly while inventory levels and related carrying costs are kept to a minimum. Implemented and
used properly, it can help production managers to plan for capacity needs and allocate production
time.

Objectives of MRP
The major objectives of an MRP system are as follows:
• Ensure the availability of materials, components and products for planned production and
customer delivery,
• Determine the production and purchase quantities and timing of material requirements,
• Maintain the lowest possible level of inventory
• Keep priorities updated and valid to make sure that we respond to changes in the
environment, such as order changes or late supply deliveries.

7.3 MRP SYSTEM

MRP System can be stated to be comprised of three components: INPUT, PROCESS and OUTPUT.
The information input into MRP systems comes from three main sources:

• Bill of Material(BOM)

• Master Production Schedule(MPS)

• Inventory records file

The output of the MRP process is the number of reports, broadly classified as Primary Reports and
Secondary Reports. The MRP system with inputs and outputs is shown in the diagram below:

MRP System
(Ref.: William J Stevenson “Operations Management”)
Bill of Materials
Bill of materials (BOM) is one of the three primary inputs of MRP. Bill of materials (BOM) is a listing
of all the raw materials, parts, subassemblies and assemblies required to produce one unit of a
specific finished product. Each different product made by a given manufacturer will have a
separate bill of materials. The bill of materials is arranged in a hierarchy so that managers can see
what materials are needed to complete each level of production. This arrangement is also called
Product structure tree, which is a visual depiction of the requirements in a bill of materials, where
all components are listed by levels.
MRP uses the bill of materials to determine the quantity of each component that is needed to
produce a certain number of finished products. From this quantity, the system subtracts the
quantity of that item already in inventory to determine order requirements.

Master Production Schedule

 Master Production Schedule (MPS) states which end items are to be produced when these are
needed and in what quantities. Time-phased plan specifying timing and quantity of production for
each end item. The demand for end items is scheduled over several periods and recorded on a
master production schedule (MPS). The MPS is developed from forecasts and firm customer
orders for end items, safety stock requirements and internal orders. MRP takes the master
schedule for end items and translates it into individual time-phased component requirements.
The master schedule outlines the anticipated production activities of the plant. Developed using
both internal forecasts and external orders, it states the quantity of each product that will be
manufactured and the time frame in which they will be needed. The schedule must cover a time
frame long enough to produce the final product. It is important to note that master schedules are
often generated according to demand and without regard to capacity.
Inventory Record File
The inventory status records contain the status of all items in inventory, including on-hand
inventory and scheduled receipts. These records must be kept up to date, with each receipt,
disbursement or withdrawal documented to maintain record integrity.
The inventory records file is used to store information on the status of each item by period. This
includes gross requirements, scheduled receipts and expected amount on hand. It also includes
other details for each item, such as supplier, lead-time and lot size.
The inventory records file provides an accounting of how much inventory is already on hand or
order and thus should be subtracted from the material requirements.

MRP Output
The main outputs from MRP include three primary reports and three secondary reports. Primary
reports consist of planned order schedules, which outline the quantity and timing of future
material orders; order releases, which authorise orders to be made and changes to planned
orders, which might include cancellations or revisions of the quantity or time frame.
Primary reports include the following:

• Planned orders - schedule indicating the amount and timing of future orders.
• Order releases - Authorisation for the execution of planned orders.
• Changes - revisions of due dates or order quantities or cancellations of orders.
Secondary reports generated by MRP include the following:

• Performance control reports, which are used to track problems such as missed delivery
dates and stock-outs to evaluate system performance.
• Planning reports, which can be used in forecasting future inventory requirements.
• Exception reports, which call managers' attention to major problems like late orders or
excessive scrap rates.
Most common secondary reports are Performance-control reports, Planning reports and
Exception reports.

MRP Terminology
 Gross requirements: The total of independent and dependent demand for a component before
the netting of on-hand inventory and scheduled receipts
Projected available balance: An inventory balance projected into the future. It is the running sum
of on-hand inventory minus requirements plus scheduled receipts and planned orders.
Net requirements: The net quantity of an item that must be acquired to meet the schedule output
for the period to avoid any stock-outs. It is calculated as:
Scheduled Receipts: The quantity of an item and the time of receipt which will be received from
the supplier as a result of some order placed previously for the same.

Planned Order receipts: The quantity of an item planned to be received from the supplier during
each period so that there will not be any stock-outs.
Planned order release: It is a planned release of orders to the suppliers so that the products will
be received on schedule considering the lead-time.

7.4 MRP PROCESS

MRP process involves determining planned order release i.e. quantity to be ordered and when for all
items-raw material, components, subassemblies etc. from the gross requirement. The process starts
with a Master Production Schedule (MPS). There are three distinct steps in preparing an MRP
schedule:
• Exploding
• Netting

• Offsetting
Exploding
Explosion uses the Bill of Materials (BOM). This lists how many and of what components are
needed for each item (part, sub-assembly, final assembly, finished product) of manufacture. Thus,
a car requires five wheels including the spare. BOM's are characterised by the number of levels
involved, following the structure of assemblies and sub-assemblies. The first level is represented
by the MPS and is 'exploded' down to final assembly. Thus, a given number of finished products is
exploded to see how many items are required at the final assembly stage.
Netting
The next step is 'netting', in which any stock on hand is subtracted from the gross requirement
determined through an explosion, giving the quantity of each item needed to manufacture the
required finished products.
Offsetting
The final step is 'offsetting'. This determines when manufacturing should start so that the finished
items are available when required. To do so, a 'lead-time' has to be assumed for the operation.
This is the anticipated time for manufacturing.
 The whole process is repeated for the next level in the BOM and so on until the bottom is reached.
These will give the requirements and timings to outside suppliers.
The planned order releases aggregated over all the end items will result in the gross requirements
for level one items; the gross requirements for these items are then netted and time-phased to
determined their order releases. The process is continued until all the items have been exploded.
Table 7.2 below is a typical MRP table. Example using the table for determining Planned Order
Receipt and planned order release will be in subsequent paragraphs.

WEEK 1 2 3 4 5 6
Gross Requirement
Scheduled Receipt
Net Requirement

Planned Order Receipt

Planned Order Release

MRP Process Table

Using information culled from the bill of materials, master schedule and inventory records file, an MRP
system determines the net requirements for raw materials, parts and subassemblies for each period
on the planning horizon. MRP processing first determines gross material requirements, then subtracts
out the inventory on hand and adds back in the safety stock to compute the net requirements. MRP
will determine from the master production schedule and the product structure records the gross
component requirements; the gross component requirements will be reduced by the available
inventory as indicated in the inventory status records.
Although working backwards from the production plan for a finished product to determine the
requirements for components may seem like a simple process, it can be extremely complicated,
especially when some raw materials or parts are used in several different products. Frequent changes
in product design, order quantities or production schedule also complicate matters.

7.5 LOT SIZING RULES

Lot Sizing Rules helps in determining the number of items to be ordered or produced in MRP System.
Deciding on a particular lot size to order or produce is an important issue in MRP. Unlike independent
demand items where demand is typically distributed in a relatively uniform manner, demand for
dependent items is usually lumpy with much shorter planning horizon. Hence, economic lot sizing is
significantly more complex.
The problem of lot sizing is one of satisfying the requirements while trying to minimise holding and
setup costs. A variety of lot-sizing rules has been developed. Broadly, they can be classified into two
types:

• Static lot-sizing rule

• Dynamic lot sizing rule

STATIC LOT SIZING RULE:

The static lot-sizing rule is a decision rule that orders the same quantity each time an order is placed.
It tends to generate higher average on-hand inventory because the lot size inventory is normally more
than the requirement. Two most common Static lot-sizing rules are Fixed order quantity (FOQ) and
Economic Order Quantity (EOQ) Rule, which are briefly described below:
Fixed order quantity (FOQ) Rule
In FOQ rule, quantity to be Ordered (or produced) is a fixed quantity or a multiple of that fixed
quantity. The FOQ approach specifies a fixed number of units to be ordered or produced for periods in
which available inventory cannot meet the demand requirements.
Economic Order Quantity (EOQ) Rule
In Economic Order Quantity (EOQ) Rule, quantity to be ordered/produced is the economic order
quantity, plus any additional items needed to replenish safety stock if it has fallen below its desired
level. It yields a minimum total setup/ordering plus holding costs. The rule assumes a relatively
constant demand.
DYNAMIC LOT SIZING RULE:
Dynamic lot sizing rule is a decision rule that changes the order quantity with each order, typically so
that each order is just large enough to prevent shortages over a specified period. It tends to cause
instability by tying lot-size to gross requirements. Using this rule, lower-level components may not be
able to respond sufficiently fast to changes in requirements. Lot-for-Lot (L4L) is the simplest rule.
Lot-for-Lot (L4L) Rule
In Lot-for-Lot (L4L) Rule, quantity to be ordered or produced is exactly the quantity required in each
period to satisfy gross requirements and to maintain safety stock at its required level.
Lot-for-Lot (L4L) Rule is Simple to use and agrees with Just-In-Time philosophy of ordering/producing
only when required. Lot size can be modified easily for purchase discounts or restrictions scrap
allowances, process constraints etc. Lot-for-Lot (L4L) Rule Minimizes on-hand inventory but maximizes
the number of orders placed. The application of the rule can be expensive if setup/ordering costs are
significant.
Periodic Order Quantity (POQ) Rule
In Periodic Order Quantity (POQ) Rule, quantity to be ordered/produced is not fixed. The quantity to
Order/produce is equal to the gross requirements for P periods minus any items in on-hand inventory
plus any additional items needed to replenish safety stock if it has fallen below its desired level.
The application of the rule restores safety stock and covers exactly P periods of gross requirements.
LOT SIZING RULES EXAMPLE:
Lot for Lot (LFL OR L4L)Rule:
For in item, the net requirement for the period is given. Lead-time is assumed to be zero. Order quantity
as per L4L lot-sizing rule will be exactly same as net requirement as shown in the table below.

PERIOD (Month)

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

Net Requirements 50 20 25 0 30 25 40 15 35 45 30 5
Planned Orders 50 20 25 0 30 25 40 15 35 45 30 5

Planned Order Release as per Lot For Lot Rule

Fixed Order Quantity (FOQ) Rule
In FOQ rule, a fixed number of units are to be ordered/produced for periods in which available
inventory cannot meet the demand requirements. For in item, the net requirement for a period is
given. Lead-time is assumed to be zero and order size = 50 units ( Fixed).

PERIOD (Month)
1 2 3 4 5 6 7 8 9 10 11 12

Net Requirements 50 20 25 0 30 25 40 15 35 45 30 5
Planned Orders 50 50 0 0 50 0 50 50 0 50 50 0

Planned Order Release as per FOQ Rule

Economic Order Quantity (EOQ)
The EOQ model performs relatively well with independent demand items whose demands are more
uniform as compared to dependent demand items. However, with dependent demand items especially
at the lower levels, demand tends to be lumpier and therefore the EOQ approach is less appropriate.
To use this technique, first EOQ must be computed based on demand, ordering cost and holding cost.
Then, a quantity equaling EOQ is ordered for periods in which available inventory cannot meet the
demand.
The difference between Fixed Order Quantity (FOQ) and Economic Order Quantity(EOQ) is that FOQ is
determined subjectively based on experience whereas EOQ is determined mathematically.
Assume EOQ = 80 units and lead-time to be zero

PERIOD (Month)
1 2 3 4 5 6 7 8 9 10 11 12
 Net 50 20 25 0 30 25 40 15 35 45 30 5
Requirements

Planned 80 80 80 80
Orders

7.6 MRP COMPUTATIONS

The computations and steps required in the MRP process are not complicated. They involve only
simple arithmetic. However, the bill-of-materials explosion must be done with care. What may get
complicated is the product structure, particularly when a given component is used in different stages
of the production of a finished item. Following data for some time is made available:

• Gross Requirement: in numbers at different period

• Inventory on hand: stock available

• Scheduled Receipt: orders for the item already placed, delivery expected at a future date

• Updated Bill Of Material and Product structure tree

• Lead-Time
• Lot Size rule
By using the above data, MRP calculation involves the determination of planned order release and
planned order receipt for each item. This would be explained by illustrative examples.

Example
The figure below shows Product Structure (bill of material) of a product Snow Shovel adapted from
Dr Ron Tibben-Lembke.
 Snow Shovel

The figure details part number, part name, quantity per shovel and level.

. Bill OF Material for 314 Scoop Assembly

 Product Structure 13122 Top Handle Assembly
Suppose 100 shovels are to be produced. The stock status and scheduled receipt data for Top
Handle Assembly items are given below:

Part Description Inventory Scheduled Gross Net

Receipt Requirement Requirement
Top handle assembly 25 -- 100 75

Top handle 22 25

Nail (2 required) 4 50

Bracket assembly 27 --

Top handle bracket 15 --

Top handle coupling 39 15

Inventory and Scheduled Receipt of Items

The net requirement of each item is calculated and given in the table below:

Part Description Inventory Scheduled Gross Net

Receipt Requirement Requirement
Top handle assembly 25 -- 100 75

Top handle 22 25 75 28
 Nail (2 required) 4 50 150 96

Net Bracket assembly 27 -- 75 48

Top handle bracket 15 -- 48 33

Top handle coupling 39 15 48 -

Requirement computation
Since 25 top handle assembly is already in stock, the net requirement is 100 - 25=75.
Similarly, the net requirement for other items can be computed.

• Top Handle: 75-(22 + 25) = 28

• Nail: Requirement for 75 top handle assembly would be 75 X 2 = 150 as two nails are
required per top handle assembly. 150 – (50 + 4) = 96

• Bracket assembly: 75 – 27 = 48

• Top handle bracket: One no Top-handle bracket is required for Top-handle bracket
assembly. As the net requirement of Top-handle bracket assembly is 48, the
requirement of top handle bracket would be 48 – 15 = 33.

• Top handle coupling: The net requirement is zero as inventory and scheduled receipt
to exceed the net requirement of Top-handle bracket assembly.
Calculation of planned Order receipt and Planned Order Release for TOP HANDLE
Lead-time:2 weeks
Lot sizing rule: Lot for lot

13112 TOP HANDLE 1 2 3 4 5 6 7 8 9 10

LT(Lead Time ) = 2
Gross Requirements - 20 - 10 - 20 5 - 35 10
Scheduled Receipts - - - - - - - - - -
Projected Available 25 5 5 0 0 0 0 0 0 0
Balance 25
Net Requirement 5 20 5 35 10
Planned Order Receipt 5 20 5 35 10
Planned Order Release 5 20 5 35 10

• The gross requirement of Top Handle: given for each period.

• Scheduled Receipt : Nil

• Projected Available Balance : 25: in period 1, it would remain 25. In period 2, as

the gross requirement is 25, projected available balance would be 25 – 20 = 5; in period
3, it would remain 5, as there is no requirement. Period 4 onwards the projected available
balance would be zero.
 • Net Requirement: Period 4:
Net Requirement = Gross Requirement –scheduled receipt –Projected available balance;
10-5-0 = 5
Period 6, 7, 9, 10: Net requirement will be equal to the gross requirement as Projected
Available Balance and the scheduled receipt is zero for the periods.

• Planned Order Receipt: Planned Order Receipt and net requirement will be the same as a
lot-sizing rule followed are Lot 4 Lot. Instead of the lot for lot rule, fixed order quantity of
50 no is decided as a lot-sizing rule, then in period 4 itself, Planned Order Quantity would
be 50. The next Planned Order Quantity would be 50 would be in 9th period.

• Planned Order Release: As lead-time is 2 weeks, Planned Order release would be two
periods before Planned Order Receipt for the same quantity.

7.7 REGENERATION AND NET CHANGE

Regeneration
Regeneration means that all MRP records are completely recalculated. It is complete re-planning
of requirements and update of inventory status for all items. Regenerative MRP is a process of
MRP system in which new requirements and predetermined orders are reestablished.
The conventional and traditional approach to material requirements planning is based on so-
called schedule regeneration. Under this approach, the entire master production schedule, which
constitutes the prime input to an MRP system, is broken down into detailed time-phased
requirements for every individual item. Under the regenerative approach, every end-item
requirement must be stated on the master production; every (active) bill of material must be
retrieved; every (active) inventory item record must be recalculated. The voluminous output is
generated.
In regenerative material requirements planning, all requirements are exploded in one batch
processing run, as the master production schedule is periodically being “regenerated.” During this
run, the gross and net requirements for each inventory item are being recalculated and its planned
order schedule is recreated.
The entire process is carried out in level-by-level fashion, starting with the highest (end item)
product level and progressing down to the lowest level.
Net change
Conventional approaches to Material Requirements Planning (MRP) entail an inherent massive
data-handling task. Consequently, batch-oriented MRP systems tend to be untimely in their
response to change since replanning can be done only periodically- at best, probably once a week.
Net change is a method of continuous replanning that minimises the number of accesses to
inventory records and bills of material at any given time is. Net change approach offers the user
the ability to replan at high frequency or continuously in a transaction-driven system.
 Net change approach minimises the number of inventory records and bills of material that must
be accessed during the replanning process and that will limit the volume of (automatically
generated) output to notices of currently required action. Such an approach is embodied in an
MRP system designed on the net change concept.
Net change MRP manifests itself through consecutive, partial explosions performed with high
frequency, in substitution for a full explosion performed periodically at relatively long intervals.
Net change can be done real-time and means that only those records affected by the change are
calculated. In Net Change, the material requirements plan is continually retained in the computer.
Whenever a change is needed in the requirements, open order inventory status or BOM, a partial
explosion and netting are made for only those parts affected by the change. The features of Net
Change can be summarized as follows:

• Daily update based on inventory transactions

• More responsive to changing conditions
• Requires more discipline in file maintenance

Most of the organisations using the MRP System follow Net Change method.

7.8 ASSUMPTIONS IN MRP

It is important to be fully aware of the assumptions made in MRP Systems. Materials Requirement
Planning System is based on several assumptions. When all those assumptions are correct, the MRP
system run will give accurate results, which can be implemented. Some of the major assumptions
relate to issues such as capacity, lead-time, which are discussed in brief below.

Capacity is Infinite
MRP Systems assume capacity to be infinite. Having enough material at the right time is no guarantee
that the schedule can be met without any delay. In manufacturing set up capacity is a constraint most
of the times. It could be machines, equipment, skilled manpower, a special tool, space or any other.
The capacity is never infinite.

So when while using MRP system, availability of capacity should be checked to ensure meeting
schedules.
Lead-times are constant
Another major assumption in MRP is Lead-times are constant or fixed. In reality, they are not for many
items. Lead-times, are two types:
• Fixed lead-time
• Variable lead-time

Fixed lead-times do not depend on a lot size of the items (like Set up lead-time) and the variable lead-
time depends on lot size. So, if a lot of 2000 requires 2 days, then to produce a lot of 6000 requires 6
days. However, in reality, these lead-times are not constant. It does not take exactly 2 days for a lot
of 2000 all the times. It may take more or even less time. The lead-times have cascading effect as the
material is converted from raw material to finished products through various levels in the BOM.
Realistic data on lead-time is necessary for an effective MRP System.

Accurate Stock Status/ On order status

MRP accuracy depends on the accuracy of stock status. The assumption made is the inventory status
as per stock register matches with the actual on-hand quantity. In practice, actual inventory does not
match with the inventory status data for all the items. Reasons can be many. This variation leads to
error in material planning and scheduling. So it is a difficult task for the planner to cross-check the
status. Many times the system does not get updated at all. It is essential to have a system for high
inventory accuracy so that variation in stock records in actual stock is minimised. Besides, a system of
timely /accurate updating of inventory status records is essential for an effective MRP System.

Demand is fairly constant

MRP starts with independent demand for the end products. It is very difficult to get accuracy in
demand.

Now when there is uncertainty there should be a provision for incorporating that uncertainty into the
planning. Too frequent changes in MRP System, incorporating new orders during time frame
frequently may make MRP system lose its effectiveness. Another important thing is not to plan for all
materials through MRP. Response time dictates, how frequently MRP should run and how many items
should be included for planning run.

7.9 BENEFITS OF MRP

MRP systems offer several potential benefits to manufacturing firms. Some of the main benefits
include minimise inventory levels and the associated carrying costs, track material requirements,
determine the most economical lot sizes for orders, compute quantities needed as safety stock,
allocate production time among various products and plan for future capacity needs.
The information generated by MRP systems is useful in other areas as well. A range of people in a
typical manufacturing company is important users of the information provided by an MRP system.
Production planners are obvious users of MRP. Production managers, who must balance workloads
across departments and make decisions about scheduling work and supervisors, who are responsible
for issuing work orders and maintaining production schedules, also rely heavily on MRP output. The
benefits of MRP system are listed below:

• Increased customer satisfaction due to meeting delivery schedules

• Improved labour & equipment utilisation

• Reduced inventory levels without reduced customer service
• Faster response to market changes

• Better inventory planning & scheduling

• Low levels of in-process inventories
• Ability to track material requirements
• Means of allocating production time

7.10 MRP IMPLEMENTATION

MRP System has both succeeded and failed in organisations. It is essential to make MRP System
implementation all success after deciding to use it. An understanding of requirements and
prerequisites would help in effective implementation.
MRP systems also have several potential drawbacks. MRP relies on accurate input information. If a
business has not maintained good inventory records or has not updated its bills of materials with all
relevant changes, it may encounter serious problems with the outputs of its MRP system. The
problems could range from missing parts and excessive order quantities to schedule delays and missed
delivery dates.
At a minimum, an MRP system must have an accurate master production schedule, good lead-time
estimates, and current inventory records to function effectively and produce useful information.
Another potential drawback associated with MRP is that the systems can be difficult, time-consuming
and costly to implement. Many businesses encounter resistance from employees when they try to
implement MRP. For example, employees who once got by with sloppy record-keeping may resent
the discipline MRP requires. Or departments that became accustomed to hoarding parts in case of
inventory shortages might find it difficult to trust the system and let go of that habit.
The key to making MRP implementation work is to provide training and education for all affected
employees. It is vital to identify whose power base will be affected or all concerned about job losses
by a new system. These persons must be converted or the system will fail. Key personnel must be
convinced that they will be better served by the new system than by any other alternative. One way
to improve employee acceptance of MRP systems is to adjust reward systems to reflect production
and inventory management goals. People generally act in their self-interest. If the performance
measures used in determining compensation and promotion, do not adequately address materials
management, then no system can improve the situation to full potential.

Prerequisites

• Top management commitment and support

• Orientation and training
• Employee involvement
• Data discipline
• Computer literacy
• Proper selection of software and vendor
• Project-based approach for implementation
• Effective processes for BOM preparation/ updating; inventory accuracy and inventory records

Requirements of MRP
 • Computer and necessary software
• Accurate and up-to-date:
- Master Production schedules
- Bills of materials
- Inventory records
• 99% inventory accuracy
• Stable lead-times

Favourable environments for MRP

• Batch manufacturing environment

• Stable Demand
• A limited number of products

• A large number of bill-of-materials levels

• Large lot sizes

Conditions which are less favourable for MRP

• Process-focused environments

• Many customised products

• Small production volumes
• The small number of bill-of-materials levels
• Just-In-Time environments

• small batch sizes

7.11 SOFTWARE FOR MRP

MRP System is a computer-based system. Selection of proper software for MRP is one of the essential
requirements for the success of the MRP System. Nowadays, the MRP system is provided in the
planning module of almost all the ERP System. Some of the known software are briefly introduced
below:
ECi M1
The ECi M1 is an on-premise system that is geared toward the small to medium discrete manufacturing
shop. The MRP application is offered as a best-of-breed and includes features for finite capacity
planning.
ShopVue
Since 1984, Casco has developed MRP and shop floor control software for mid-sized to large discrete
manufacturers. ShopVue is suitable for repetitive, make to order and engineer to order companies in
most industries.
Henning Visual EstiTrack ERP
The MRP application of Visual EstiTrack ERP is part of an integrated suite that includes human
resources, asset management, business bits of intelligence and more. The system supports both finite
and infinite capacity planning.
Exact JobBOSS
Exact JobBOSS is a popular system for manufacturers that need an MRP package at an affordable price.
The software comes with shop floor control, supplier management and can integrate with Quickbooks
accounting.
E2 Shop System
Shoptech has been in the manufacturing software industry for roughly two decades. The E2 Shop
System comes with an MRP application that includes finite capacity planning features and is part of
an integrated suite.
Epicor Manufacturing Express Edition
Epicor Manufacturing Express Edition is a full-featured cloud ERP manufacturing system. In addition
to MRP functionality, the software includes applications for MES, supply chain management, human
resources and asset management.
Epicor Manufacturing
Epicor’s material requirements planning (MRP) application is offered in an integrated suite. In addition
to MRP, the suite includes MES, product lifecycle management, human resources and asset
management.
Sage ERP
Sage is one of the largest software providers in the world with a strong base among small to medium-
sized enterprises. Their system that includes MRP is integrated with human resources, supply chain
management and accounting.
Fishbowl Inventory
Fishbowl Inventory is an on-premise solution designed for small to medium manufacturing firms. The
MRP application is part of a suite with supply chain management while MES and others are offered as
best-of-breed applications.
ERP123
The MRP application in ERP123 has functionality for inventory control, process scheduling and
procurement schedules. MRP is integrated into a suite of applications that includes human resources,
asset management and others.
7.12 SUMMARY

Material requirement planning (MRP) is a key element in managing resources in a manufacturing

environment. In 1964, Joseph Orlicky developed Material Requirements Planning (MRP). The first
company to use MRP was Black & Decker in 1964, with Dick Alban as project leader. MRP can be
applied both to items that are purchased from outside suppliers and to sub-assemblies, produced
internally.

MRP is a computerized system for managing dependent-demand inventory, scheduling replenishment

orders and meeting the demand for end items as given in the Master Production Schedule. Material
requirements planning (MRP) is a computer-based information system that translates master
schedule requirements for end items into time-phased requirements for subassemblies, components
and raw materials.

The major objectives of an MRP system are two ensure the availability of materials, components and
products for planned production and customer delivery and to determine the production and
purchase quantities and timing of material requirements.

The information input into MRP systems comes from three main sources: Bill Of Material (BOM),
Master Production Schedule (MPS) and Inventory records file. The output of the MRP process is the
number of reports broadly classified as Primary Reports and Secondary Reports. Few major lot-sizing
rules were explained. Computation of MRP system from the gross requirement to planned order
release was explained through an example. Net change and regeneration were briefly explained.
Implementation issues were explained listing prerequisites. Software for MRP System was listed with
few of the features.

7.11 KEYWORDS

• Material requirements planning (MRP): Is computer-based information system that translates

master schedule requirements for end items into time-phased requirements for subassemblies,
components and raw materials.
• Bill Of Materials (BOM): Is a listing of all the raw materials, parts, subassemblies and assemblies
required to produce one unit of a specific finished product.
• Master Production Schedule (MPS): States which end items are to be produced when these are
needed and in what quantities for a time phase.
• Gross requirements: The total of independent and dependent demand for a component before
the netting of on-hand inventory and scheduled receipts
• Projected available balance: The running sum of on-hand inventory minus requirements plus
scheduled receipts and planned orders
• Net requirements: The net quantity of an item that must be acquired to meet the schedule output
for the period to avoid any stock-outs.
• Scheduled Receipts: The quantity of an item and the time of receipt which will be received from
the supplier as a result of some order placed previously for the same.
• Planned Order receipts: The quantity of an item planned to be received from the supplier during
each period so that there won’t be any stock-outs.
• Planned order release: It is a planned release of orders to the suppliers so that the products will
be received on schedule considering the lead-time.
• Netting: In which any stock on hand is subtracted from the gross requirement determined through
the explosion, giving the quantity of each item needed to manufacture the required finished
products.
• Offsetting: This determines when manufacturing should start so that the finished items are
available when required.
UNIT 8 PRODUCTION ACTIVITY CONTROL

Objectives
After completing this unit, you would be able to:
 Explain the concept of production activity control;
 State the functions of production activity control;
 Differentiate between forwarding and backward scheduling;
 Recall functions of production activity control.

Structure
8.1 Introduction
8.2 Concept of Production Activity Control
8.3 Functions of Production Activity Control
8.4 Role of Shop Planner
8.5 Information and Documents
8.6 Operations Scheduling
8.7 Loading
8.8 Sequencing
8.9 Dispatching
8.10 Input/Output Control
8.11 Summary
8.12 Key Words

8.1 INTRODUCTION

Production activity control (PAC) is responsible for executing the master production schedule and the
material requirements plan. At the same time, it must make good use of labour and machines to
minimize work-in-process inventory and maintain customer service.
PAC is an essential system for managing concerning specific orders that must be properly launched
when material and labour resources and equipment are properly timed to be delivered or allocated
for the completion of those orders. There is no such thing as a “late or past due” order. The date of
an order that cannot be completed simply has the wrong completion date. At this level, errors are due
more to improper long-range and mid-range planning. The availability of resources in the short-range
is only possible via proper management of the tasks before starting the job.

8.2 CONCEPT OF PRODUCTION ACTIVITY CONTROL (PAC)

Production Activity Control (PAC) is the process by which manufacturing resources are coordinated,
scheduled and controlled.

Production Activity Control (PAC) is an essential part of the production planning system. Figure 8.1
shows the relationship between the planning system and Production Activity Control (PAC).
 Production Activity Control and Planning System

The PAC Cycle

Tasks of Production Activity Control function are cyclic. This is illustrated in figure 8.2 below.

The framework of the PAC cycle

(Source: Arnold, Tony: Introduction to Materials Management)

8.3 FUNCTIONS OF PRODUCTION ACTIVITY CONTROL

Production Activity Control function is responsible for executing the:

 Master Production Schedule (MPS)
 Materials Requirements Plan (MRP)
At the same time, it also aims at the following:

 Make good use of labour, machines and materials

 Minimise work-in-process inventory
 Maintain customer service

The functions of Production Activity Control (PAC) specified by Tony Arnold et al are given in the figure
below.

FUNCTIONS OF PAC

Release work Control work Control the flow of Manage day-

orders orders to work to-day activity
complete on -Through and provide
time manufacturing support
-Carrying out the
plan
Functions of Production Activity Control (PAC)
(Ref: Arnold Chapman and Clive “introduction To materials Management” )

Another approach to view the functions is by classifying them into planning, implementation and
control functions. The functions of production activity control can be grouped under three headings.

These functions are detailed given in the table as follows:

Plan  Ensure availability of resources

 Schedule start and completion dates of
jobs

Execute  Collect relevant information for the shop

order
  Release shop orders

Control  Establish and maintain order priority

 Check actual performance
 Monitor and control WIP, lead-times,
 Report work centre performance

Functions of Production Activity Control

8.4 ROLE OF SHOP PLANNER

McMahon et al. (1993) describe a simplified PAC architecture., It consists of five basic building blocks:
 Scheduler
 Dispatcher
 Monitor
 Mover
 Producer
The scheduler develops a detailed schedule over a specified period, based on the manufacturing data
and the schedule guidelines from the factory coordination module. This plan is then implemented by
the remaining four modules.

The role and responsibility of the PAC Person or shop planner can be briefly stated as under:

The shop planner or PAC person controls the production workflow, aims at achieving production plans
and prepares schedules. The planner releases the work order/shop orders to the shops. The Shop
Planner collects all documents required to carry tasks, verifies them and hands over to the
supervisor/foreman. The PAC job does not stop there. To control, the PAC person has to establish and
maintain priorities. Shop Planner also monitors and controls inventory, lead-time and the queues. This
is one of the most important management jobs in the plant. The person on the shop floor is watching
the queues and knows at all times what is in the queue and how long it has been there.

The Shop Planner has to report the work centre performance. Work centre performance is based on
acceptable output and completion time. Once again, that does not mean watching the workers see
who is not working. Work centre performance is based on acceptable output and time.

8.5 INFORMATION AND DOCUMENTS

The information required to PAC personnel he has to have relevant information to carry out his job.
Table 8.2 below lists the information required and the source of the information for carrying out PAC:
 SL NO INFORMATION REQUIRED SOURCE OF INFORMATION
1. Which and how many products MRP System
to produce
2. The requirement of parts/parts bill of material
list
3. What operations are needed to Routing/Process Planning
produce the part
4. Time standards Routing/Process Planning
5. The capacity of work centres Work centre data
6. No of jobs in progress Work orders/shop orders

Information required and Source

Practices about documents and information required vary from organisation to organisation. Several
factors influence the decision on information need. One of the dominant factors influencing
documentation is IT. Use of IT has integrated many functions of Production planning and
reduced/eliminated clerical work.

DOCUMENTS IN PRODUCTION PLANNING & CONTROL

Some of the basic documents required in Production Planning and Control are given below:
Planning Files
 Item master File
 Product Structure File

 Routing File
 Work Center File
Control Files
 Shop Order master File
 Shop Order Detail File
Item master File
 Part number- a unique number assigned component
 Part Description
 Manufacturing Lead-time
 Quantity in hand
 Quantity available
 On order quantities, the balance due on all outstanding orders
 Lot-size quantity, the quantity normally ordered at one time
Product Structure File
This is used to collect the parts required to make the assembly It shows the components
required to make the final product. It also describes the subassembly at various stages
of manufacture
Routing File
  The operation required to make the product
 Sequence of operations
 Equipment, tools and accessories needed for each operation
 Setup times, standard time, run time, lead-time for each operation
Work Center File
 Work centre number
 Capacity
 Number of shifts worked per week
 Number of labour hrs per shift
 Efficiency, Utilisation
 Queue time, waiting time
 Alternate work centres
Shop Order master File
 Shop order number, a unique number identifying the shop order
 Order quantity
 Quantity completed
 Quantity scraped
 Quantity of material issued to order
 Due date, priority, balance due date
 Cost information
Shop Order Detail File
 Operation number
 Setup hours, planned and actual
 Run hours planned and actual
 Quantity reported completed at that operation
 Quantity reported scrapped at that operation
 Due date or lead-time remaining
Shop Packet
Shop packet or shop order packet is the bundle of documents typically accompanying a shop floor
manufacturing order, used for planning, authorization and control. The packet may variously
include: an official manufacturing order; an operations sheet; engineering blueprints; picking lists;
move and inspection tickets; and so on. It is the paperwork (routing sheets, material requisitions
etc.) associated with an order released by production control.

8.6 OPERATIONS SCHEDULING

Concept of scheduling
The scheduling function differs considerably based on the type of process.
• Continuous processing industries, such as chemicals and pharmaceuticals, use linear
programming and EOQ with non-instantaneous replenishment to determine what the
correct mix of ingredients should be or when the system should be producing one type of
mixture instead of another.
 • Mass production processes use line balancing, which sets the speed at which products are
made.
• Projects use project-scheduling techniques like PERT and CPM,
• Batch production and job shop processes pose special scheduling problems.

Scheduling process
Scheduling involves the following:
• Entering/drawing up a timetable for the completion of various stages of a complex project
• Coordination of multiple related actions/tasks into a single time sequence
• A list of items to schedule (courses, events, meetings)
• A list of items that cannot be scheduled but may relate to calendaring (memos, address books,
phone logs)
• A list of times of departures and arrivals; a timetable: a bus schedule; a schedule of guided
tours
• A plan for performing work or achieving an objective, specifying the order and allotted time
for each part: finished the project on schedule
Objectives in Scheduling
Scheduling is a formal activity with many important objectives as listed below:
 Meeting customer due dates
 Minimizing response time
 Minimizing time in the system
 Minimizing overtime
 Maximizing machine or labour utilization
 Minimizing idle time
 Minimizing work-in-process inventory

Forward Scheduling

The figure below gives an illustration of forwarding schedule. A job has to be processed in five
work centre sequentially. Time for the five operations is given as 3, 2, 1, 2, 1 days sequentially. In
forward scheduling, job scheduling will start for the first operation at the first work centre. Other
work centres will be loaded sequentially. Thus, the completion date is 9th day.
 WORK DATE
CENTRE 1 2 3 4 5 6 7 8 9 10

Releasing Date Completion Date

Forward Scheduling

Backward Scheduling
In backward scheduling, jobs are scheduled from end to start. The last operation is scheduled first
from the due date. Scheduling continued to be done in a sequence of operations until all activities of
the jobs are scheduled. This would tell the starting time for each operation so that job can be
completed without delays. Figure 10.4 illustrates the same example with backward scheduling. It may
be noted that in backward scheduling release date is 2nd unlike 1st in foreword scheduling.
 WORK DATE
CENTRE 1 2 3 4 5 6 7 8 9 10

Releasing Date Completion Date

Figure Backward Scheduling

8.7 LOADING

Loading involves assigning jobs to work centres and various machines in the work centres. If a job can
be processed on only one machine, no difficulty is presented. The purpose of loading is to allocate
work to machines or other resources and to perform work on the most efficient resources. Two
approaches are used for loading work centres:
Finite Loading
Finite loading projects the actual start and stops times of each job at each work centre. Finite loading
considers the capacity of each work centre and compares the processing time so that processing time
does not exceed capacity. With finite loading, the scheduler loads the job that has the highest priority
on all work centres it will require. Then the job with the next highest priority is loaded on all required
work centres and so on. This process is referred to as horizontal loading. The scheduler using finite
loading can then project the number of hours each work centre will operate.
Infinite Loading
With infinite loading, jobs are assigned to work centres without regard to the capacity of the work
centre. Priority rules are appropriate for use under the infinite loading approach. Jobs are loaded at
work centres according to the chosen priority rule. This is known as vertical loading.
With vertical loading, the work centre would be fully loaded. Of course, this would mean that a higher
priority job would then have to wait to be processed since the work centre was already busy. The
scheduler will have to weigh the relative costs of keeping higher priority jobs waiting, the cost of idle
work centres, the number of jobs and work centres and the potential for disruptions, new jobs and
cancellations.

8.8 SEQUENCING

Sequencing is concerned with determining the order in which jobs are processed. Not only must the
order be determined for processing jobs at work centres but also work processed at individual
workstations. When work centres are heavily loaded and lengthy jobs are involved, the situation can
become complicated. The order of processing can be crucial when it comes to the cost of waiting to
be processed and the cost of idle time at work centres.
When more than one job is assigned to a machine or activity, the operator needs to know the order
in which to process the jobs. The process of prioritising jobs is called sequencing. Sequencing rules are
used to decide the order in which jobs are processed. Priority sequencing Rules specify the order in
which jobs are to be processed, based on the allocation of priorities.

8.9 DISPATCHING

Dispatching is the selecting and sequencing of available jobs to be run at individual workstations and
the assignment of those jobs to workers.
A dispatch list is a listing of manufacturing orders in priority sequence. The dispatch list is usually
communicated to the manufacturing floor via hard copy or CRT display and contains detailed
information on priority, location, quantity and the capacity requirements of the manufacturing order
by the operation. Dispatch lists are normally generated daily and oriented by work centre.
Dispatching starts with input as the route sheet and schedule chart. It concerns itself with starting the
processes and operation of production. It triggers the starting of the production activity on the shop-
floor through the release of orders and instructions, that are based on pre-planned times and
sequences contained in route sheets and schedule charts.
Dispatching determines the person who will do the job. Work order and authorizations are issued to
perform the work according to a planned sequence, using prescribed tools and a schedule. The
dispatching function must issue requisition for material and tools on a production order. Dispatching
is a process of translating production plan into output (action). This is because orders are issued for
the movement of material, parts and tools to the work centres and it also includes instructions for the
inspection and' recording of the work. Following are the major functions of dispatching:
• Ensure that right material, tools, parts, jigs and fixtures etc. are made available at the right time
and right machines from operation to operation.
• Issues authorisation to start work following the predetermined date and time.
• Obtains inspection schedules and issues those to the inspection section.
• Distribute machine loading and scheduling charts, route sheets, identification tags etc. to each
production and inspection stage.
• Informing and updating progress report and keeping records for reference.
• At the end of the production, ensure that all the drawings, tools etc. reach the proper place.

8.10 INPUT/OUTPUT CONTROL

The input/output control system is a method of managing queues and work-in-process, lead-times by
monitoring and controlling the input to and output from, a facility. It is designed to balance the input
rate in hours with the output rate so these will be controlled. Input/output control is an effective
technique for controlling queues, work in process and manufacturing lead-time (the time from the
release of an order to its completion).
The input rate is controlled by the release of orders to the shop floor. If the rate of input is increased,
queue, work-in-process and lead-times increase. The output rate is controlled by increasing or
decreasing the capacity of a work centre. Capacity change is a problem for manufacturing, but it can
be attained by overtime or under-time, shifting workers and so forth.
Input/output (I/O) planning and control is an integrated process that includes the following:
• Planning the acceptable input and output performance ranges per period in each work centre
• Measuring and reporting actual inputs and outputs (feedback)
• Correcting out-of-contro1 situations.
The table below illustrates an Input-Output Report.
Work Centre: 103
Month: April 2012

PERIOD -WEEK I II III IV TOTAL

Planned Input 45 45 42 38 170
Actual Input 39 46 39 40 164

Variance -6 +1 -3 +2 -6
Cumulative
variance -6 -5 -8 -6 -6
 PERIOD -WEEK I II III IV TOTAL
Planned Output 45 45 45 45 180
Actual Output 40 41 35 38 154
Variance -5 -4 -10 -7 -26
Cumulative -5 -9 -19 -26 -26
variance -6 -5 -8 -6 -6

Change In -1 +5 -4 +2
backlog*

Cumulative -1 +4 0 +2
Change In
backlog*
* Actual input – Actual output

INPUT-OUTPUT Report

8.11 SUMMARY

Production Activity Control (PAC) is concerned with converting plans into action, reporting the results
achieved and revising plans and actions as required achieving desired results. Thus, PAC converts plans
into action by providing the required direction. This requires the appropriate prior master planning of
orders, workforce personnel, materials and capacity requirements. PAC is an essential system for
managing about specific orders that must be properly launched when material and labour resources
and equipment are properly timed to be delivered or allocated for the completion of those orders.
Shop Control, Production Control, Shop Floor Control are some of the other terms which are used for
scheduling and control function. Production Activity Control (PAC) is an essential part of the
production planning system.
The function of production activity control (PAC) is also called shop floor control (SFC), which include
activities performed as planned, to report on operating results and to revise plans as required to
achieve desired results. In organisations designation for the person who carries out PAC activities vary.
Order release, dispatching and progress reporting are the three primary functions of PAC. The function
of production activity control (PAC)--often called shop floor control (SFC) is to have activities
performed as planned, to report on operating results and to revise plans as required to achieve desired
results.

Scheduling is the process of assigning tasks to a set of resources. In mathematical terms, a scheduling
problem is often solved as an optimization problem, to maximize a measure of schedule quality. For
example, an airline might wish to minimize the number of airport gates required for its aircraft to
reduce its operating costs.
Scheduling specifies when labour, equipment and facilities are needed to produce a product or
provide a service. It is the last stage of planning before production occurs.

In forward scheduling, jobs are scheduled as soon as an order is received. In backward scheduling,
jobs are scheduled from end to start. The last operation is scheduled first from the due date.
Scheduling continued to be done in a sequence of operations until all activities of the jobs are
scheduled. This would tell the starting time for each operation so that job can be completed without
delays. Loading involves assigning jobs to work centres and various machines in the work centres.
Finite loading projects the actual start and stops times of each job at each work centre.

Sequencing is concerned with determining the order which jobs are processed. There are several
priority rules or heuristics that can be used to select the order of jobs waiting for processing.
Dispatching is the selecting and sequencing of available jobs to be run at individual workstations and
the assignment of those jobs to workers.

The last function discussed in brief was Input/output control. The input/output control system is a
method of managing queues and work-in-process, lead-times by monitoring and controlling the input
to and output from, a facility. It is designed to balance the input rate in hours with the output rate so
these will be controlled. Input/output control is an effective technique for controlling queues, work in
process and manufacturing lead-time.

8.12 KEYWORDS

 Production Activity Control (PAC): Is the process by which manufacturing resources are
coordinated, scheduled and controlled.

 Shop packet or shop order packet: Is the bundle of documents typically accompanying a
shop floor manufacturing order, used for planning, authorization and control.

 Scheduling: Is the process of assigning tasks to a set of resources.

 Loading: Involves assigning jobs to work centres and to various machines in the work
canters.

 Sequencing: Is concerned with determining the order in which jobs are processed

 Infinite loading: Assumes that capacity to be infinite at any work centre.

 Forward scheduling: Jobs are scheduled as soon as an order is received

 Input/output control system: Is a method of managing queues and work-in-process, lead-

times by monitoring and controlling the input to and output from, a facility
UNIT 9 HIGH VOLUME PRODUCTION ACTIVITY CONTROL

Objectives
After completing this unit, you would be able to:
• state the types of manufacturing;
• recall the characteristics of flow production;
• solve simple line balancing problem using a heuristic method;
• write significant features of planning in the flow production environment.

Structure
9.1 Introduction
9.2 Types of Production
9.3 Flow Production
9.4 Characteristics of Flow Production
9.5 Requirements of Flow Production
9.6 Planning and Control In Flow Production
9.7 Line Balancing
9.8 Terminology In-Line Balancing
9.9 Line Balancing Methods
9.10 Line Balancing Procedure
9.11 Kilbridge and Wester Method
9.12 Summary
9.13 Key Words

9.1 INTRODUCTION
In the previous unit, we studied the concept, objectives, functions of Production Activity Control
(PAC). We must understand the practice of Production Activity Control in manufacturing organisation.
Practices of Production Activity Control vary. It depends on a large number of factors like the type of
business, manufacturing system, management policy, of the use of IT. In two organisations of a similar
size making the same products, the practice of Production Activity Control may vary. However, the
type of production is a key determinant of Production Activity Control practices. Types of production
can be broadly categorized into two categories: continuous and intermittent.
Flow production or mass production comes under continuous manufacturing. Project production, job
production, batch production methods are intermittent production. In this unit, we will study how
Production Activity Control is performed in the Flow production environment. The focus in the unit is
to understand the characteristics of flow production and techniques for scheduling.

9.2 TYPES OF PRODUCTION

As stated above, types of products can be categorized into continuous and intermittent production as
detailed in diagram 9.1 below:

TYPES OF PRODUCTION

CONTINUOUS INTERMITTENT

FLOW PROCESS BATCH JOB PROJECT

Types of Production

Mass or flow production

Under this, the production run is conducted on a set of machines arranged according to the
sequence of operations. A huge quantity of the same product is manufactured at a time and is
stocked for sale. The different product will require different manufacturing lines. Since one line
can produce only one type of product, this process is also called as line flow. Mass and flow
production where a production run is conducted either on a single machine or on several
machines, arranged according to the sequence of operations and several numbers of a product
are manufactured at a time and stocked in the warehouse awaiting sales. Flow methods are
similar to batch methods, except that the problem of rest/idle production/batch queuing is
eliminated. Flow has been defined as a "method of production organisation where the task is
worked on continuously or where the processing of the material is continuous and progressive,"
Examples of flow production are manufacturing of bulbs, cars, toys, cold drinks etc.
Process Production
Under this, the production run is conducted for an indefinite period. Only one product is produced
continuously without any interruption or halt. The technology is dedicated to the product.
Material handling is normally automated. A typical example of process production is refineries
where crude oil is processed round the year 24X7.
Batch Production
In this, limited quantities of each of the different types of products are manufactured on the same
set of machines. Different products are produced separately one after the other. Batch methods
require that the work for any task is divided into parts or operations. Each operation is completed
through the whole batch before the next operation is performed. By using the batch method, it is
possible to achieve specialization of labour. Capital expenditure can also be kept lower although
careful planning is required to ensure that production equipment is not idle. Batch methods are
not without their problems. There is a high probability of poor workflow, particularly if the batches
 are not of the optimal size or if there is a significant difference in productivity by each operation
in the process. Batch methods often result in the build-up of significant "work in progress" or
stocks Examples include the manufacture of parts for automobile, production of electronic
instruments.
Job Production
Herein, one or a few units of the products are produced as per the requirement and specification
of the customer. Production is to meet the delivery schedule and costs are fixed before the
contract. With Job production, the complete task is handled by a single worker or group of
workers. Jobs can be small-scale/low technology as well as complex/high technology. Examples
include hairdressers; tailoring, Carpenters’ job, prototype parts for an aircraft, servicing of cars.
Project Production
In the project type of production system, the product is either unique or non-repetitive. The
project has a specific beginning and a specific end. The project involves several interdependent
activities requiring diverse skills. Project production is characterized by complex sets of activities
that must be performed in a particular order within the given period and within the estimated
expenditure. Where the output of a project is a product, such products are generally characterized
by immobility during transformation. Operations of such products are carried out in “fixed
position assembly type of layout”. A typical example of projects is the construction of Worli Sea
Link Bridge at Mumbai, Metro Rail at Bangalore, designing NANO car, consultancy assignment,
and arrangement for an event.

9.3 FLOW PRODUCTION

Flow Production is also known as mass production. Mass production is called by different names like
repetitive flow production, series production, assembly line or serial production. Though these terms
are interchangeably used, there is a subtle difference in them. We will first define three terms
assembly line, mass production and flow production and then describe mass/flow production.
Assembly line
Assembly line is a sequence of machines, tools, operations, workers etc., in a factory, arranged so
that at each stage a further process is carried out. There are various methods used in the industry to
accomplish the assembly processes. Major methods can be classified into the following three
categories:
Manual Single-Station Assembly: It consists of a single workplace to accomplish the product or some
major subassembly of the product. It is generally used on a product that is complex and produced in
small quantities, by one or more workers.
Manual Assembly Lines: It consists of multiple workstations in which the assembly work is
accomplished as the product (subassembly) is passed from station to station along the line.
At each workstation, one or more human workers perform a portion of the total assembly work on
the product, by adding one or more components to the existing subassembly. Manual assembly lines
are used in high-production situations where the work to be performed can be divided into small tasks
and tasks assigned to the workstations on the line. The major advantage of using a manual assembly
line is a specialization of labour - by giving each worker a limited set of tasks to do repeatedly.
Automated Assembly System: Use of automated methods at the workstations rather than human
beings: This system facilitates very high productivity, consistency in quality. Automated Assembly
System is customized.
Mass Production
Mass production is the production of large amounts of standardized products, including and especially
on assembly lines. The concepts of mass production are applied to various kinds of products, from
fluids and particulates handled in bulk (such as food, fuel, chemicals and mined minerals) to discrete
solid parts (such as fasteners) to assemblies of such parts (such as household appliances and
automobiles).
This method is pioneered by Henry Ford for his Model T car and the efficiencies he gained enabled
him to produce large numbers of cars at low cost. The resulting manufacturing time for the product
was so reduced that it stimulated Ford to apply the same method to chassis assembly. These methods
greatly reduced the man-hours involved in automobile production, resulting in automobiles that were
more affordable to the general public. Any product made in high volumes will almost certainly be
made on a flow production line
Mass production pertains to a large quantity of production with standardized products having more
or less the same features. This single standard product is manufactured continuously over a period.
The determining factor is the demand, based on which, continuous or batch type production is chosen.
Only one type of product or maximum 2 or 3 types of products are manufactured in large quantities
and much emphasis is not given to retail consumer orders. Standardization of products, processes,
materials, machines, uninterrupted flow of materials is the main characteristics of this system.
Examples: petrochemical industry, cement industry, steel industry, sugar industry, cigarette industry
etc.
It is the manufacturing of large quantities of standardized products, frequently utilizing assembly line
technology. Mass production refers to the process of creating large numbers of similar products
efficiently. Mass production is typically characterized by some type of mechanization, as with an
assembly line, to achieve high volume, the detailed organization of materials flow, careful control of
quality standards and division of labour.
It is the manufacture of goods in large quantities, often using standardized designs and assembly-line
techniques.

Flow production
Flow production involves a continuous movement of items through the production process. This
means that when one task is finished, the next task must start immediately. Therefore, the time taken
on each task must be the same. Flow production is a production line method, where the product is
continuously produced, flowing from one stage of production to the next. Workers and, increasingly
robots, carry out individual repetitive tasks aiming to work as quickly as possible without loss of
quality.
Flow methods mean that as work on a task at a particular stage is complete, it must be passed
directly to the next stage for processing without waiting for the remaining tasks in the "batch".
 When it arrives at the next stage, work must start immediately on the next process. For the flow
to be smooth, the times that each task requires on each stage must be of equal length and there
should be no movement of the flow production line. Flow is appropriate when firms are looking
to produce a high volume of similar items. Some of the big brand names that have consistently
high demand are most suitable for this type of production.
One of the descriptions of mass production is that "the skill is built into the tool", which means
that the worker using the tool need not have the skill.

Flow production systems are typically capital intensive and it is important to keep them running
smoothly with high levels of capacity utilization so that these high overhead costs are spread over
as many units as possible. Once set up properly, flow production lines can, in some cases, produce
millions of consistently high-quality products.

9.4 CHARACTERISTICS OF FLOW PRODUCTION

Production is organized so that different operations can be carried out one after another, in a
continuous sequence. For example, cars will move from one operation to the next, often along a
conveyor belt. The main features of flow production are, as under:

Smooth Flow of Work: There is a smooth flow material from one workstation to another workstation.

Large Quantity: A large number of units produced particularly suited for high demand items. The
production lot size is very high and the production rate is continuous.

Standard product: Product variety is very low, which may be one of its kind. Normally the product is
standard. The entire plant is designed to cater to a few special varieties of products.

The high degree of automation: Special purpose tools and equipment are needed Most of the
equipment are semi-automatic or automatic.

Semi-skilled workforce: Skill level of workers may be moderately low, as repeated work on the same
machine is needed. Semi-skilled workers are normally employed, as most of the facilities are
automatic.

High Productivity: Due to automation, standardization and smooth flow of material productivity are
high. Production time of production unit as a whole is short.

Less Work In Process: Work in progress inventory is less due to smooth flow, continuous production
without any delay/halt and automation. In-process inventories are low, as production scheduling is
simple and can be implemented with ease.

High Investment: Higher investment in machine is needed due to the specialized machine and special
purpose operation.
Low Cost Of Production: Cost of production is low owing to the high rate of production.

Easy Planning and Control: Production planning and control are simple. As product flows along a pre-
defined line, planning and control of the system are much easier.

Product Layout: As the same product is manufactured for a sufficiently long time, machines can be
laid down in order of processing sequence. Product type layout is most appropriate for the mass
production system.

Effective Maintenance: Breakdown of even one machine in the line would lead to entire stoppage of
production. Hence, proper upkeep of plant and machinery is of vital importance.

9.5 REQUIREMENTS OF FLOW PRODUCTION

So that flow production works effectively, several requirements must be met, which are stated below:

Substantially constant demand

If demand is unpredictable or irregular, then the flow production line can lead to a substantial build-
up of stocks and possibility storage difficulties.

Standardized product and process

Flow methods are inflexible; they cannot deal effectively with variations in the product. Flow lines are
dedicated to manufacturing one product. Any change may involve huge expenditure and time.

Materials of specification and delivered on time

Since the flow production line is working continuously, it is not a good idea to use materials that vary
in style, form or quality. Similarly, if the required materials are not available, then the whole
production line will come to a close, with potentially serious cost consequences.

Process planning and Line Balancing

The achievement of a successful production flow line requires considerable planning, particularly in
ensuring that the correct production materials are delivered on time and that operations in the flow
are of equal duration.

Conformance to quality standards

Since the output from each stage moves forward continuously, there is no room for sub-standard
output to be "re-worked".

9.6 PLANNING AND CONTROL INFLOW PRODUCTION

It is usually far simpler than in a job or batch production. Extensive effort is required for detailed
planning before production starts, but both scheduling and control need not be elaborate usually. The
output is either limited by available capacity or regulated within given limits to conform to production
targets, based on periodic sales forecasts.

In a flow production system, the items are produced for the stocks and not for specific orders. Before
planning to manufacture to stock, a sales forecast is made to estimate the likely demand of the
product and a master schedule is prepared to adjust the sales forecast according to past orders and
level of inventory.

In the system, the inputs are standardized and a standard set of processes and sequence of processes
can be adopted. Due to this, routing and scheduling for the whole process can be standardized. After
setting of the master production schedule, detailed planning is carried on. Basic manufacturing
information and bills of material are recorded. Information for machine load charts, equipment,
personnel and material needs is tabulated.
In continuous manufacturing systems, each production run manufactures in large lot sizes and the
production process is carried on in a definite sequence of operations in a pre-determined order. In the
process, storage is not necessary which in turn reduces material handling and transportation facilities.
First in first out priority rules are followed in the system.
In this system, the control mechanism is not as elaborate and complex as for the intermittent system.
In a continuous system, large quantities of standardized products are produced using a standardized
production process.
Following are the important aspects of production activity control for such a system:

• This system does not involve diverse work, due to which routing standardized route and schedule
sheets are prepared.
• In the case of standard products meant for mass production, master route sheets are prepared
for more effective coordination of various departments.
• Scheduling is required to rate the output of various standard products in their order of priority,
operations and correct sequence to meet sales, requirements.

• Work relating to dispatching and follow-up is usually simple. Dispatch schedules can be prepared
well in advance in such systems

• Line balancing technique is used to determine the number of workstation in the assembly line for
smooth flow and optimum utilization.

9.7 LINE BALANCING

Assembly Line Balancing or simply Line Balancing (LB) is the problem of assigning operations to work
stations along an assembly line, in such a way that the assignment be optimal.
Line balancing is an effective tool to improve the throughput
of assembly lines while reducing manpower requirements and costs. Line balancing is concerned with
assigning numbers of operators or machines to each operation of an assembly line to meet the
required production rate with a minimum of idle time.
Ever since Henry Ford’s introduction of assembly lines, Line Balancing has been an
optimisation problem of significant industrial importance: the efficiency difference between an
optimal and a sub-optimal assignment can yield economies (or waste) reaching crores of rupees per
year. Line Balancing is a classic operation research optimization problem, having been tackled by
operations research over several decades.
Need for Line Balancing
Line balancing is performed when:

• A line is set up initially

• Line is rebalanced to change its hourly output rate

• When the product or process changes
The Line Balancing Problem

• The line balancing problem is to arrange the individual processing and assembly tasks at
the workstations so that the total time required at each workstation is approximately the
same.
• If the work elements can be grouped so that all the station times are exactly equal, we
have a perfect balance on the line and we can expect the production to flow smoothly.

• In most practical situations, it is very difficult to achieve perfect balance. When

workstation times are unequal, the slowest station determines the overall production rate
of the line.
Objectives of line balancing:

• To minimize the total amount of unassigned or idle times at the work station.

• To eliminate bottlenecks, ensuring a smoother flow of production.

• To determine the optimal number of workstations and operations in each station.

• To maintain the morale of workers since the work content of the different workers
will not be of great difference.

• To maximize the manpower utilisation by minimising the idle times of the operators.

• To improve the productivity of the assembled products.

• To reduce the waste of production and delay.

9.8 TERMINOLOGY IN LINE BALANCING

• Cycle time: Cycle time is the maximum time spent at any one workstation in other words largest
workstation time.

• Total work content: Total work content is the Sum of the task times for all the assembly tasks for
the product.

• Precedence diagram: Precedence diagram is a network showing the tasks and their precedent
relationships.

• Line efficiency: Efficiency can be measured as a ratio as given below:

Sum of task times
Line Efficiency = ------------------------------------------------------------------ x 100
Actual numbers of Workstations X cycle time

• Balance delay: Balance delay is a measure of the line inefficiency, which results from idle time
due to imperfect allocation of work among station.

Sum of idle times at all stations

Balance Delay (%) = ----------------------------------------------------------------- x 100
Available working time of all the stations

9.9 LINE BALANCING METHODS

Several methods have been developed for finding the solution of line balancing problems. With the
advent of computers, it has become possible to formulate and solve complex problems easily. Some
of the common techniques used for solving line balancing problems are as under:

• Linear Programming

• Dynamic Programming
• Branch and Bound Algorithm

• Heuristics Methods
Heuristic methods, based on simple rules, have been developed to provide good (not optimal)
solutions to line balancing problems. Three widely used heuristic methods are shown in the diagram
below.

HEURISTIC METHODS OF LINE BALANCING

 LCR KWM RPW
(Largest Candidate Rule) (Kilbridge and Wester (Ranked Positional
Method) weight Method)

Heuristic Methods

9.10 LINE BALANCING PROCEDURE

• Determine activities and estimate cycle time for each task

• Find precedent relationships for each activity
• Draw a precedence diagram for all the activities
• Determine feasible work station cycle time by using the following simple formula:

D
C max= --------------------
N

Where:
Cmax- Work station cycle time in minutes or hours
D: Available time per day for production in hours or minutes
N: Required production rate in units per hour

Determine the minimum number of work stations needed by the following formula:

 Ti
1
n = -----------------------
C

Where:
n– Number of workstations
Ti – Work content of ith element; the sum of work content of all the
stations
m- Number of work elements
C- Cycle time
• Select a suitable Heuristic method and assign tasks to individual workstations
• Look for further improvement in assignment
• Calculate the efficiency of the assembly line

Example: Elemental times in seconds for an assembly line of eight work elements is given below:
SL NO WORK ELEMENT ELEMENT TIME IN SECONDS
CODE
1 A. 30
2 B. 60
3 C. 50
4 D. 60
5 E. 30
6 F. 20
7 G. 40
8 H. 90

The desired output per shift is 300 numbers per shift.

Calculate:
a. Cycle time to meet desired capacity
b. Minimum numbers of work station
Solution:
a. Maximum allowable cycle time to meet desired capacity =
Available time per shift 8 x 60 x 60
Cmax = -------------------------------------------- = ------------------ = 96 seconds
Required quantity per shift 300

Since Cmax = 96 seconds 80 (the time for largest element), hence 96 seconds is
feasible cycle time.

b. Number of work stations

m

 Ti
1

n = -----------------------
C
30+60+ 50+ 60+ 30+ 20+ 40+90
----------------------------------
96

380
---------------
96
3.96 ≈ 4
9.11 KILBRIDE AND WESTER METHOD

Kilbridge and Weston's method are also sometimes called Predecessor Numbers technique. In the
method, numbers are assigned to each work element depending on the number of predecessor work
element into it. Tasks with smallest predecessor number are assigned first to the station. Following
are the steps involved in Kilbridge and Weston method:

• Draw a precedence diagram for all the elements.

• Group the elements into columns.
• Determine feasible workstation cycle time and a minimum number of work stations needed.
• Proceed column by column and assign work element to workstations such that work element with
the largest time is chosen first and the sum of the elemental time does not exceed cycle time.
• Repeat steps 4 until all elements are assigned to work stations.

Example: Given below are work elements for assembly of an electrical appliance with their process
time and precedent relationships:
______________________________________________________________________________
No. Element Description Time Precedent
(min.) activity
______________________________________________________________________________
1 Place frame on work holder and clamp 0.2 ---
2 Assemble plug, grommet to power cord 0.4 ---
3 Assemble brackets to frame 0.7 1
4 Wire power cord to motor 0.1 1,2
5 Wire power cord to switch 0.3 2
6 Assemble mechanism plate to bracket 0.11 3
7 Assemble blade to bracket 0.32 3
8 Assemble motor to bracket 0.6 3,4
9 Align blade and attach to motor 0.27 6,7,8
10 Assemble switch to motor bracket 0.38 5,8
11 Attach cover, inspect and test 0.5 9,10
12 Place in tote pan for packing 0.12 11
______________________________________________________________________________

Desired output capacity is 400 per day in single shift working.

Precedence diagram:
Grouping work elements in columns:

Work elements arranged according to columns:

Work Column Time Sum of column time

Element (min.)

1 I 0.20 ---
2 I 0.40 0.60
3 II 0.70
4 II 0.10
5 II 0.30 1.10
6 III 0.11
7 III 0.32
8 III 0.60 1.03
9 IV 0.27
10 IV 0.38 .65
 11 V 0.50
12 V 0.12 .62

Maximum allowable cycle time:

Maximum allowable cycle time to meet desired capacity =

Available time per shift 8 x 60 x1(shift)

Cmax = -------------------------------------------- = ------------------ = 1.2 min
Required quantity per shift 400

Since Cmax = 1.2 min 0.7 min (the time for largest element no 3), hence 1.2 min is feasible
cycle time.

Work elements assigned to stations

Work Station Work Element Time in min Sum of time

at station in min

1 1 0.20
2 0.40
4 0.10
5 0.30 1.00
3 .70
2 6 .11

7 0.32 1.13
8 0.60

3 10 0.38 0.98

9 0.27
4 11 0.50
12 0.12 0.89

Thus, there should be four work stations.

Balance Delay:
Sum of idle times at all stations
 Balance Delay (%) = ----------------------------------------------------------------- x 100
Available working time of all the stations

(1.20-1.0)+ (1.20- 1.13)+(1.20- 0.98 )+(1.20- 0.89) )

______________________________________________ x 100
1.20 x 4

0.20+0.07+0.22+0.31 0.80
---------------------------- x 100 = ------- x 100 = 16.67%
4.80 4.80

9.12 SUMMARY

In the unit, we discussed how Production Activity Control is performed in the flow production
environment. We briefly discussed types of production e.g. project, job, batch, flow production.
Assembly line, its types and flow production was elaborated. Major characteristics of mass
production like the smooth flow of work, large quantities, standard product, and high
automation were stated. Concept of line balancing was explained along with needs and objectives of
smooth flow, efficiency and others. Production Planning and control inflow production are discussed.
The terminology used in line balancing problems was explained. A generic procedure for line balancing
problems was stated. Among various heuristic method, Kilbridge and Wester method was explained
through a solved example determining the number of work station and balance delay.

9.13 KEYWORDS

• Flow Production: Flow Production is a production line method, where the product is continuously
produced, flowing from one stage of production to the next.

• Assembly line: Assembly line is a sequence of machines, tools, operations, workers etc., in a
factory, arranged so that at each stage a further process is carried out.

• Mass Production: Mass production is the production of large amounts of standardized

products, including and especially on assembly lines

• Cycle time: Cycle time is the maximum time spent at any one workstation, in other words, Largest
workstation time.

• Total work content: Total work content is the Sum of the task times for all the assembly tasks for
the product.

• Precedence diagram: Precedence diagram is a network showing the tasks and their precedent
relationships.
• Balance delay: Balance delay is a measure of the line inefficiency which results from idle time due
to imperfect allocation of work among station.
UNIT 10 JOB SHOP PRODUCTION ACTIVITY CONTROL
Objectives
After completing this unit, you would be able to:
• state the meaning of job production;
• write the characteristics of job production;
• explain the difficulties in job shop planning;
• recall sequencing rules in job shop planning.

Structure
10.1 Introduction
10.2 Job Production
10.3 Characteristics of Job Shop Production
10.4 Complexity Of Job Shop
10.5 Production Activity Control in Job Shop
10.6 Terminology in Job Shop Planning
10.7 Job Shop Scheduling
10.8 Sequencing Rules
10.9 Gantt Chart
10.10 Approaches to Job Shop Scheduling
10.11 Summary
10.12 Key Words

10.1 INTRODUCTION

For a planner, a job shop production environment is challenging and complex. A typical job shop is a
production unit that simultaneously processes several diverse, low-quantity jobs using shared
resources. Job production is an intermittent type of production. The products are as per customer
requirements in relatively small quantities. The jobs have different routings, due dates, priorities,
quantities and material and resource requirements. Job shop production handles a large variety of
products. In a competitive business besides quantity, quality timely delivery has become very
important for customer satisfaction. Effective planning and control help in meeting customer
requirement and adds to profitability. Paradoxically planning and control of Job Shop production are
very complex and difficult. In this unit, we will study important aspects of Production Activity Control
in job production with an emphasis on techniques for scheduling.

10.2 JOB PRODUCTION

Job production is a type of production in which single products are produced for particular customers.
Job shops handle a variety of jobs, where each job is different. In batch production, though there is a
continuous demand for products, the rate of production exceeds that of demand and hence there are
batches. In batch production, jobs are predictable. A job shop is a different proposition, where jobs
and demand both are unpredictable. Job shop handles the unique jobs each time a unique set of
operations and processing time. A key benefit of job production is that a high level of customization
is possible to meet the customer's exact needs.
Nowadays, increasing product customization is creating more job shop environment in the
manufacturing world. For example, Mazak now makes its complete line of CNC cutting tools to order
and Dell quickly assembles computers to order. Make-to-order (MTO) and engineer-to-order (ETO)
production systems, and repair (MRO) systems belong to the class of job shops by the complexity of
their production.
In general, a job shop is a production unit where order quantities are usually small. Process
requirements vary with a customer order and processing starts for order only after receiving the order
from the customer, and many work orders are simultaneously processed using shared resources. Even
the resource and material requirements often vary with the order in job shops. By this description,
most of the custom manufacturing units qualify as job shops. Although most of the job shops are
relatively smaller in size and revenue, from a production management viewpoint, they are more
complex than a large repetitive production system. Many job shops with small capital also have a
difficulty to maintain raw material inventories to achieve short order-to-delivery lead-times.
Job Shop management
Job shop production management involves:
Determining due dates and production start times for a stream of incoming customer orders with
different routings based on the existing workload and resource & material availability, Material
planning for each order, Production scheduling.
All the three functions are interdependent and they cannot be performed independent of one other.
The difficulty in planning production is aggravated by several factors including:
• Changes in customer orders
• Changes in the job due dates and priorities
• Delays in material supply
• Rework/rejection due to poor quality
• Machine breakdowns
• Acceptance of jobs for reasons like big margins
Each of the above factors can cause an impact on workflow, bottlenecks, WIP, lead times, on-time
delivery, utilization of critical resources and shop throughput.
Start Time and Due Date
 Many job shops fix due dates for customer orders, whenever allowed by the customers, based on
some average lead-times (for example, three weeks), irrespective of the existing situation.
Similarly, they fix production start times based on due dates and average lead-times.
Purchase and Inventory
Small and mid-sized job shops that work with low capital and receive diverse, low-volume orders
with poor predictability may not be able to maintain an inventory of raw materials and finished
goods for many parts. Quite often, the material requisition is made only after accepting such an
order and production starts only after receiving the material. Some job shops produce a few make-
to-stock items and maintain their inventory to promptly meet some repetitive demand. Since
material inventories have a significant impact on production cost in job shops, material for any job
must be received just before the scheduled start time of the job. Material requirements planning
and the production schedule must be synchronized with each other.

10.3 CHARACTERISTICS OF JOB SHOP PRODUCTION

High Variety of Products

In a job shop, a large number of products are produced as per customer requirements. Since each
customer’s requirement varies, a type of products becomes very high.

Customized jobs
The products in the job shop are customized. Job shop works in made to order environment.
Production normally starts only after receiving an order. The products are of order based mostly
non-standardized.

Small Quantity
Since it is order-based production, quantity produced per unit type is relatively less Production lot
size is generally small in a job shop. The quantity ordered by the customers varies but is not huge.

General Purpose Plant and Machines

Production equipment is mostly general purpose and flexible to meet specific customer orders
which vary from time to time. Since the product variety is large general-purpose machines capable
of carrying out processes of large wide range are necessary. Job shops use general-purpose
equipment rather than speciality, dedicated product-specific equipment. Digital numerically
controlled equipment is often used to give job shops the flexibility to change set-ups on the
various machines very quickly.

High Skilled Labour

Highly skilled labour is needed to handle this equipment, as variety and product range are very
high. Employees in a job shop are typically highly-skilled craft employees who can operate several
different classes of machinery. These workers are paid higher wages for their skill levels. Due to
their high skill level, job shop employees need less supervision.

Process Layout
 Job shop machines are general purposes machines organised department wise. This type of layout
is called a process layout. Layout in the job shop, similar equipment or functions is grouped, such
as all drill presses in one area and grinding machines in another in a process layout. The layout is
designed to minimize material handling, cost and work in process inventories.

Material Handling
Material handling in job production is high than in mass production. This is due to the process type
of layout required for job production.

Inventory
There is little raw material inventory as procurement starts normally after finalizing orders.
However, work in process is high due to many jobs under process at different stages at any time.
There is a lot of waiting time for the product to be manufactured in the system that results in
more in process inventory. Finished goods inventory is normally not kept as production is as per
quantity required by the customer. The product is not likely to be required by any other customer.
The job shop has work-in-process inventory while jobs are being completed, but typically the
customer is waiting on the order and expects prompt delivery, so there is no finished goods
inventory in this make-to-order environment.

Production Cost
Due to high material handling, work in progress and use of general-purpose machines, cost of
production in job production is higher than that at mass production. Job shops compete on quality,
speed of product delivery, customization and new product introduction, but are unlikely to
compete on price as few scale economies exist.

Cycle time
Because of more waiting time for the product in the production line, it results in more
manufacturing cycle time comparatively.

Production Planning and Control

The arrival, the operations demanded and the operations time required by the order mostly
uncertain. This makes the jobs of production planning and controls difficult.

10.4 COMPLEXITY OF JOB SHOP

A job shop is a complex waiting line system — a job exits from a machine to wait on a new machine
because of other jobs. Each machine has a waiting line of jobs. The converse is also true. Machines
may wait for the job but no job is forthcoming. The sequencing of each job is unique, depending
upon the technological requirement. Three main reasons for job shop complexity are:

• The unpredictability of nature and receiving time of customer orders,

• The loading of a job only after receiving a customer order and the required material,
• The simultaneous production of diverse, low-quantity jobs using shared resources of finite
capacity.
Forecasting
 Job shops perform several jobs and each job is different. In a job shop, production accurate
forecast of demand for products is not possible.
Process Planning
In a job shop, different jobs are performed with a prescribed set of operations and the time taken
by each operation. The equipment for job shop productions is divided for use in different
departments. The requirement of each machine is different based on the operation to be
performed for a particular job. In any job shop, a job passes through a sequence of work centres
as specified in its routing and it may wait for the required resources at those work centres.
Waiting
The job shop is waiting for the line system in the respect that when a job is finished from one
machine, it waits in line to enter the next machine because there are earlier jobs in line too. Vice
versa, the machines also wait for jobs while running idly. So, a proper system of planning and
control has to be in place for optimizing the job shop production.
The total waiting time of the job in the entire process usually constitutes a major part of
production lead-time. This undesirable time is usually large, particularly for job shops with high-
mix, low-volume production.
Throughput Time
It is not easy to measure the total job waiting time in such shops because:
• Jobs with diverse routings are processed simultaneously.
• The processing time of an operation of a job may vary with both job and work centre.
• Product mix keeps changing frequently.
• Resources have limited capacity.
Bottlenecks
This complexity makes it difficult to accurately predict job progress on the shop floor, WIP level at
each work centre, bottleneck formations, resource utilization, shop throughput and job
completion times. The bottlenecks may keep moving across work centres due to the changing
product mix. In job shops, it is not easy to do proactive capacity planning for preventing bottleneck
formations and for improving the workflow, production lead-times, on-time delivery and shop
performance.

10.5 PRODUCTION ACTIVITY CONTROL IN JOB SHOP

Production Planning and Control in a job shop as stated are a difficult and complex due to inherent
characteristics of the job shop environment.
In the job shop, it is difficult to predict:
  The time at which a customer will place an order
 Order due date (if fixed by the customer)
 Order quantity
 Process and material requirements of the order
For a majority of customer orders, production starts only after receiving an order, that is, maintaining
final goods inventory to meet future demand is uncommon. This usually happens in make-to-order,
engineer-to-order and assemble-to-order production systems.
The material acquisition process for a customer order may start only after receiving the order.
When, an order arrives in the job shop, the part being worked on travels, throughout the various areas,
according to a sequence of operations. Not all jobs will use every machine in the plant. Jobs often
travel in a jumbled routing and may return to the same machine for processing several times. Using
shared resources of finite capacity, a job shop simultaneously processes numerous jobs with different
routings, quantities, due dates, priorities and material and resource requirements.
Several jobs may wait in a queue for a resource at a work centre.
Product mix and bottlenecks keep changing frequently over time.
The sequencing of each job is unique, depending upon the technological requirement. A job shop is a
complex waiting line system — a job exits from a machine to wait on a new machine because of other
jobs. Each machine has a waiting line of jobs. The converse is also true. Machines may wait for the job
but no job is forthcoming.
Shop floor control is also known as production control and production activity control. The
responsibilities of a production activity control include:
Loading -- Checking the availability of material, machines and labour.
Sequencing -- Releasing work orders to the shop and issuing dispatch lists for individual machines.
Monitoring -- Maintaining progress reports on each job until it is complete.
Loading - The purpose of loading is to allocate work to machines or other resources and to perform
work on the most efficient resources. Facility loading means loading of facility or work centre and
deciding which jobs to be assigned to which work centre or machine. Loading is the process of
converting operation schedules into practice. Machine loading is the process of assigning specific
jobs to machines, men or work centres based on relative priorities and capacity utilization.
A machine-loading chart (Gantt chart) is prepared to show the planned utilization of men and
machines by allocating the jobs to machines or workers as per priority sequencing established at
the time of scheduling.
Loading ensures maximum possible utilization of productive facilities and avoids bottlenecks in
production. It is important to avoid either overloading or underloading the facilities, work centres
or machines to ensure maximum utilization of resources.
Sequencing
When more than one job is assigned to a machine or activity, the operator needs to know the
order in which to process the jobs. The process of prioritizing jobs is called sequencing.
Monitoring
As a job flows through the jumbled flow pattern of a job shop, it may difficult to keep track of its
progress. Two methods of monitoring the progress of jobs through the shop are Gantt Charts and
Input/Output Charts.
Given the importance of on-time delivery, often job shop customers want continual updating on
when work is projected to finish. Finally, if work looks like it is going to slip, the planner needs to
be able to know what actions to take to get completion dates back on schedule. In job shop
scheduling environments, staff must interact with their customers over completion dates. Often,
customers are placing orders for specially engineered or one time orders, of product for specific
applications. They need the product at a certain point in time to satisfy their customers. Therefore,
the ability to initially give prospective customers an accurate estimated completion date is crucial.
The ability to handle multiple simultaneous constraints can be very important in job shop
scheduling environments. For instance, sometimes multiple operations compete for the same
machine, but other times there are multiple operations available to run on multiple different
machines simultaneously, but not enough labour to staff the machines.
Many job shops somehow control their production by making quick, real-time decisions based on
experience, intuition, common sense and simple calculations and by pushing each job from one
work centre to another based on the job progress. If a job is being delayed, then they may adopt
firefighting to avoid late delivery.

10.6 TERMINOLOGY IN JOB SHOP PLANNING

Job flow time: The amount of time a job spends in the service or manufacturing system. The flow time
is the amount of time a job spends in the process before completion. The total flow time of the
operation is the sum of all jobs’ flow times.
Make-span: An operation’s make-span is the total amount of time required to completely process all
the jobs
Lateness is the difference between the actual completion time of the job and its due date.

• If a job completed before it due date, then its lateness value is negative and it is referred
to as earliness.

• If a job is completed after its due date, then its lateness value is positive and it is referred
to as tardiness.
Past due (Tardiness): The amount of time by which a job missed its due date or the percentage
of total jobs processed over some time that missed their due dates.
Work-in-process (WIP) inventory: Any job that is waiting in line, moving from one operation
to the next, being delayed, being processed or residing in a semi-finished state.
Utilization: The percentage of work time that is productively spent by an employee or
machine.
 Service Level:
• Used typically in made to order systems.
• A fraction of orders that are filled on or before their due dates.

10.7 JOB SHOP SCHEDULING

Job Shop scheduling is a special case of production scheduling. Scheduling for job shop/batch
production determines:

• The mix of machine, worker and job assignments.

• The match between resources and requirements.

Job shop scheduling environments are characterized by:
• Typically engineer-to-order (ETO) or make-to-order
• Engineering tasks that may constrain the schedule
• Typically long routings or routings of some complexity
• Multiple simultaneous constraints, for example, both labour and machines
• Machines that will intermix work on multiple orders (e.g. machining cells where different
orders will be loaded on different pallets)
• The need to promise a competitive completion date estimate to the customer before the
order is won
• The need to provide the customer continual status updates
Furthermore, job shop scheduling is difficult because of the following:
Variety of jobs processed.

• Distinctive routing and processing requirements of each job and customer order.
• The number of different orders in the facility at any one time.
• Competition for common resources.

In the simultaneous production of diverse jobs using shared resources of finite capacity, the
real-time decisions for scheduling heterogeneous workload on the shop floor will have a
domino effect on production and that effect cannot be easily predicted.

It is not easy to fully comprehend the complexity of job shop scheduling as long as the
production is somehow managed by real-time scheduling and firefighting without predicting
the domino effect. Long, serious discussions take place in daily production meetings in
response to the changing situation in the shop and managers regularly make bold, real-time
decisions to resolve fresh problems without predicting the domino effect of such decisions.
Resource-constrained production scheduling is necessary for controlling complex job shop
production and predicting workflow, bottleneck formations and job completion times. The
 control of the complex product is not effective without workflow prediction and what-if
analysis of production.

• Objectives in Scheduling
Scheduling is a formal activity with many important objectives:
Meeting customer due dates
– Minimizing job lateness
– Minimizing time in the system
– Minimizing overtime
– Maximizing machine or labour utilization
– Minimizing idle time
– Minimizing work-in-process inventory

10.8 SEQUENCING RULES

Sequencing prioritizes jobs assigned to a resource. Sequencing rules are used to decide the order in
which jobs are processed. Some of the more popular sequencing rules are:

FCFS -- processed by order of first-come, first-served

SPT -- processed in order of shortest processing time of all jobs
DDATE -- scheduled by order of earliest due date or highest customer priority
SLACK -- scheduled by minimum slack time left in each order (Due date - today’s date) - (remaining
processing time)
RWK -- processed according to remaining work on all operations
CR -- processed by order of Critical ratio = time remaining / work remaining
If CR > 1, the job is ahead of schedule
If CR < 1, the job is behind schedule
If CR = 1, the job is on schedule

Example:
For this example, the assumption is that a queue of jobs arrives at one machine and no new jobs
arrive at the machine during the analysis.

On the morning of October 1, five jobs, A, B, C, D and E, arrive to be processed. The data below
shows the processing time and due dates for each job:
Job Processing Time Due Date
(days)

A 5 October 10

B 10 October 15
 C 2 October 5

D 8 October 12

E 6 October 8

Q1 Sequence the jobs by:

a) FCFS -- first-come, first-served
b) DDATE -- earliest due date
c) SLACK -- minimum slack
d) CR -- smallest critical ratio
e) SPT -- shortest processing time

Q 2. Calculate the completion time and tardiness of each job under each sequencing rule.

Q 3. What sequencing would you recommend?

Solution:
First, calculate the slack and critical ratio for each job:

Job Processing Due Date Slack Critical Ratio

Time
A 5 10 (10-1) - 5 = 4 (10-1)/5 = 1.80
B 10 15 (15-1)-10 = 4 (15-1)/10 = 1.40
C 2 5 (5-1) - 2 = 2 (5-1)/2 = 2.00
D 8 12 (12-1)-8 = 3 (12-1)/8 = 1.37
E 6 8 (8 -1) - 6 = 1 (8-1)/6 = 1.16

The tables below show the order of jobs based on the different sequencing rules. To calculate
completion time, start the first job in each table at time 0. Completion time is the sum of the start
time and the processing time. The start time of the next job is the completion time of the previous
job.

First-Come First-Served
Sequence Start time Processing Completion Due Date Tardiness
Time time
A 0 5 5 10 0
B 5 10 15 15 0
C 15 2 17 5 12
D 17 6 25 12 13
E 25 6 31 8 23
18.60 9.6

Earliest Due Date

Sequence Start time Processing Completion Due Date Tardiness
Time time
C 0 2 2 5 0
E 2 6 8 8 0
A 8 5 13 10 3
D 13 8 21 12 9
E 21 10 31 15 16
18.60 5.6

Slack
Slack for each job: A - 4, B - 4, C - 2, D - 3, E - 1
Sequence Start time Processing Completion Due Date Tardiness
Time time
E 0 6 6 8 0
C 6 2 8 5 3
D 8 8 16 12 4
A 16 5 21 10 11
B 21 10 31 15 16
16.40 6.8

Critical Ratio
CR for each job: A - 1.80, B - 1.40, C - 2.00, D - 1.37, E - 1.16
Sequence Start time Processing Completion Due Date Tardiness
Time time
E 0 6 6 8 0
D 6 8 14 12 2
B 14 10 24 15 9
A 24 5 29 10 19
C 29 2 31 5 26
20.8 11.2

Shortest Processing Time

Sequence Start time Processing Completion Due Date Tardiness
Time time
C 0 2 2 5 0
A 2 5 7 10 0
E 7 6 13 8 5
D 13 8 21 12 9
B 21 10 31 15 16
14.80 6

Summary
 Rule Average Average No. of Jobs Maximum
Completion Tardiness Tardy Tardiness
Time
FCFS 18.60 9.6 3* 23
DDATE 15.00 5.6* 3* 16*
SLACK 16.40 6.8 4 16*
CR 20.80 11.2 4 26
SPT 14.80* 6.0 3* 16*
16.40
* Best values
Look at the results in the summary table. The last two columns show that no method will sequence
the jobs so that all are completed on time. Minimum due date and shortest processing time
provide the best results. The completion time for all jobs is lowest when the shortest processing
time method is used. Average tardiness is lowest when the earliest due date is used as the
sequencing method. The choice of which sequencing method to use should be based on company
policy or customer expectation.
The scheduling system can be studied via simulation using the various sequencing rules, but when
simulation cannot be done, several guidelines can be followed:

• SPT is most useful when the shop is highly congested.

• Use SLACK for periods of normal activity.
• Use DATE when only small tardiness values can be tolerated.
• Use LPT if subcontracting is anticipated.
• Use FCFS when operating at low capacity values
• Do not use SPT to sequence jobs that have to be assembled with other jobs later.

Scheduling Jobs for Multiple Workstations

• Priority sequencing rules can be used to schedule more than one operation. Each operation is
treated independently.

• Identifying the best priority rule to use at a particular operation in a process is a complex
problem because the output from one process becomes the input for another.
• Computer simulation models are effective tools to determine which priority rules work best
in a given situation.

• When a workstation becomes idle, the priority rule is applied to the jobs waiting for that
operation and the job with the highest priority is selected.

• When that operation is finished, the job is moved to the next operation in its routing, where
it waits until it again has the highest priority.

10.9 GANTT CHART

Gantt charts are named for Henry Gantt, a management pioneer of the early 1900s. He proposed the
use of a visual aid for loading and scheduling. Appropriately, this visual aid is known as a Gantt chart.
This Gantt chart is used to organise and clarify the actual or intended use of resources within a time
framework. Generally, time is represented horizontally with scheduled resources listed vertically.
Managers can use the Gantt chart to make trial-and-error schedules to get some sense of the impact
of different arrangements. Gantt charts to monitor progress by plotting each job against a scheduled
timeline. The x-axis on a Gantt chart represents each period. Jobs are shown as the bars on the chart,
indicated with both planned and completed activities.
There are several different types of Gantt charts, but the most common ones and the ones most
appropriate to our discussion, are the load chart and schedule chart. A load chart displays the loading
and idle times for machines or departments; this shows when certain jobs are scheduled to start and
finish and where idle time can be expected. This can help the scheduler redo loading assignments for
better utilization of the work centres. A schedule chart is used to monitor job progress. On this type
of Gantt chart, the vertical axis shows the orders or jobs in progress while the horizontal axis
represents time. A glance at the chart reveals which jobs are on schedule and which jobs are on time.
Gantt charts are the most widely used scheduling tools. However, they do have some limitations. The
chart must be repeatedly updated to keep it current. Also, the chart does not directly reveal costs of
alternate loadings nor does it consider that processing times may vary among work centres.
Gantt chart is used as a tool to monitor the progress of work and to view the load on workstations.
The chart takes two basic forms:

• JOB or activity progress chart

• Workstation chart
The Gantt progress chart graphically displays the status of each job or activity relative to its scheduled
completion date. The Gantt workstation chart shows the load on the workstations and the
nonproductive time. An example of a Gantt chart for service organisation (healthcare) is shown in the
diagram below:

Diagram Gantt Workstation Chart for Hospital Operating Rooms

(Ref: Krajewski et al Operations Management)
 10.10 APPROACHES TO JOB SHOP SCHEDULING

Nowadays, many approaches like lean manufacturing, finite capacity scheduling, quick response
manufacturing (QRM), CONWIP, the theory of constraints (TOC), etc are being adopted for production
control and management. All these approaches provide a rough or detailed production schedule
either in real-time or in advance. The following is a brief discussion of a few production-scheduling
methods including the manual efforts.
Manual Scheduling
Quite often, a scheduler’s role is confined to tracking job progress on the shop floor and reports it to
management. There are several job shops where production scheduling is simplified by the following
practice:
• Due dates are fixed for customer orders based on some average lead-times (for example,
three weeks), irrespective of the pending workload and resource availability.
• Job loading time is based on material availability and a pre-determined production lead-
time. Some people make a few simple calculations for the workload at critical work
centres and adjust job loading times accordingly.
• Each job is pushed from one work centre to another following the completion of the
operation and some dispatch rule is adopted at each work centre for selecting jobs (for
processing) from the corresponding waiting line.
• When a job faces the risk of missing its due date, it will be expedited on a high priority
basis, utilizing overtime if necessary. The job is delivered after all of its operations are
completed.
Job shop production is manageable with this practice but it can lead to large WIP, long lead-times,
poor on-time delivery and frequent firefighting. The practice amounts to push scheduling, which
leans manufacturing experts always discourages. While struggling to meet the due dates, they do
extensive real-time scheduling, that is, firefighting without knowing the ripple effect of their real-
time decisions on production plan. Most often, the firefighting breeds itself and stays in the shop
for longer times. Firefighting could be a sign of chaos, poor planning and lack of comprehensive
knowledge of the dynamic nature of a job shop. It can reduce the confidence of management and
customer in the due date performance of the job shop. Job shops cannot easily improve their
performance until the need for firefighting is minimized without sacrificing productivity. Manual
scheduling is not efficient for complex job shops that simultaneously handle at any time
numerous, diverse orders with different due dates.

Scheduling on Whiteboards and Excel Spreadsheets

Many planners still use whiteboards for production scheduling purpose. This simple, manual
method could be sufficient for some small production systems. But, it is very inconvenient and
ineffective for scheduling numerous operations of diverse jobs on resources of finite capacity. It
is also not helpful for quick rescheduling of the workload when the actual workflow significantly
deviates from the whiteboard schedule. Many software vendors extended the whiteboard
 concept by offering an electronic version, which facilitates manual schedule construction and
modifications on the Gantt chart (on a computer screen). Low-cost software tools that facilitate
operational level production scheduling by simple drag-and-drop operations on the computer
screen will be far more beneficial than whiteboards for dynamic scheduling of job shops.
Excel spreadsheets are sought for production scheduling in job shops for many reasons including:
• Almost all people familiar with personal computers can easily handle data in Excel
spreadsheets.
• Data required for scheduling can be easily pulled into Excel spreadsheets from a majority
of ERP / MRP packages.
• In Excel spreadsheets, it is easy to perform many operations on data, e.g. editing,
reformatting and transformation.
• Programming in VBA is useful for advanced operations on Excel data

Some people have the perception that scheduling applications in Excel are cheaper and good
enough for small job shops.

They are indeed good enough for small and simple job shop production systems. Despite many
such advantages, Excel applications have some major limitations for scheduling the production of
complex job shops. Excel (plus VBA) cannot easily support a versatile scheduling paradigm and
powerful logic to sufficiently address the scheduling complexity of many job shops, irrespective of
the shop size. For example, Excel applications are not efficient to deal with (a) individual weekly
calendars and calendar exceptions of resources, (b) changes in job priorities, (c) multiple resource
requirements of operations, (d) fast and extensive what-if analysis, etc. They also lack powerful
and user-friendly graphic features and drag-and-drop functionality and offer little help in
controlling manual errors in data entry. Although users can easily edit Excel files, the editing task
is prone to human errors. As production size and complexity increase, Excel scheduling
applications tend to become massive, cumbersome and inflexible.
However, most of these drawbacks can be avoided when best-of-breed scheduling software can
directly accept data from Excel spreadsheets. For example, the users of Optisol's scheduling
software, Schedlyzer can benefit from the merits of Excel as well as the scheduling power of
Schedlyzer because the software can accept input data from Excel spreadsheets in a meaningful
format. A small add-in software component may be needed if Excel data is not available in the
required format. For small job shops, there is no guarantee that pure Excel applications with
sufficient scheduling capability have less cost of ownership (including implementation and
training) than some best-of-breed scheduling tools like Schedlyzer.
Finite Capacity Scheduling (FCS):
Finite capacity scheduling (FCS) tools are also available for job shop scheduling. Until recently, the
main disadvantages of FCS are:

• Users need to fix numerous parameters of the tool.

• Users find the tools quite cumbersome, unfriendly and less intuitive.
• Users need a lot of training on the tools.
• The input data is either unavailable or erroneous.
 • The tools need a lot of computing power and time.
However, these tools enormously improved and overcame the disadvantages over time due to
rapid advancements in hardware and software. The Windows-based tools offer a lot of flexibility,
convenience and context help to users. The high-speed personal computers greatly facilitate the
use of FCS tools. When top management starts looking at the schedule output from these tools,
the data quality and availability will gradually improve.
With the availability of powerful information systems and sophisticated shop floor data collection
systems, job shops can track job status and make seemingly rational decisions in real-time for
meeting job due dates. FCS tools depend on the same systems to provide efficient production
schedules and display the dynamic workflow and bottleneck formations over time.
The implementation of FCS tools brings to job shops many benefits including fast workload
rescheduling, prediction of future bottlenecks and job completion times and efficient capacity
planning.
FCS also has some drawbacks. Every FCS tool works with a specific scheduling model. If a
scheduling problem does not fit into the underlying paradigm, the FCS solution could be
meaningless even if it appears to be very sophisticated. It may be impractical to implement on the
shop floor the FCS solutions that are derived purely based on hours available for each resource in
each time interval (day, week, month, etc). Such schedules may not specify the sequence of jobs
to be loaded at each work centre.
Two major points of criticism about FCS are lack of ability to deal with variation and detailed
schedule output. FCS logic can be suitably modified to create time buffers (as in TOC methods) for
jobs at some stages to absorb the effect of variation on the schedule. The schedule output can be
considered at the required level of detail. The schedulers must use some commonsense and
domain knowledge while implementing these powerful tools. They can use the tools interactively
to get the best schedules.
The methods we have reviewed so far are infinite scheduling methods. They initially assume that
capacity loads are unlimited. If the load is too high after the scheduling has been completed, the
load must be levelled and jobs sequenced according to priority rules. Finite scheduling methods
make the opposite assumption and jobs are sequenced as part of the loading decision.
Synchronous manufacturing
One finite scheduling technique is called synchronous manufacturing and is based on the theory
of constraint. It was developed by Goldratt in Israel in response to a request for help from the
owner of a chicken coop business. The theory of constraints states that schedulers should consider
these features of manufacturing:
Not all resources are used evenly - do not try to balance the system; rather balance the flow of
work through the system.
Concentrate on the "bottleneck" resource because it controls the flow. Bottlenecks should have
as little non-productive activities as possible.
Synchronize flow through the bottleneck by scheduling the bottleneck resources, then scheduling
the non-bottleneck resources to support the bottleneck resources.
 Use process batch sizes (production) and transfer batch sizes (transport) to move product through
the facility. Process batch size for bottlenecks should be large to minimize setups. Batch size for
non-bottlenecks can be small.

10.11 SUMMARY

In the unit, first, the concept of job shop was explained. For a planner, a job shop production
environment is challenging and complex. A typical job shop is a production unit that simultaneously
processes several diverse, low-quantity jobs using shared resources. Job production is the intermittent
type of production. We discussed characteristics of job shop production like High Variety of Products,
Customized jobs, Small Quantity production, use of General Purpose Plant and Machines. Complexity
in job shop production and difficulty in planning due to its nature was elaborated. Terms used in job
shop planning and control like job flow time, lateness, and work in progress were defined. Significant
features of production activity control were discussed with emphasis on schedule. Gantt Chart was
described with an illustrative diagram showing the application in the service industry. Priority
sequencing rules were stated with a solved example with their application. At the end features of
manual scheduling, scheduling with excel, synchronous manufacturing and finite capacity scheduling
were explained.

10.12 KEYWORDS

Job shop: is a high-mix, low-volume production unit that simultaneously processes several diverse,
low-quantity jobs using shared resources.
Job flow time: The amount of time a job spends in the service or manufacturing system.
Flow time: is the amount of time a job spends in the process before completion. The total flow time
of the operation is the sum of all jobs’ flow times.
Make-span: An operation’s make-span is the total amount of time required to completely process all
the jobs
Lateness is the difference between the actual completion time of the job and its due date.
Past due (Tardiness): The amount of time by which a job missed its due date or the percentage of
total jobs processed over some time that missed their due dates.
Work-in-process (WIP) inventory: Any job that is waiting in line, moving from one operation to the
next, being delayed, being processed or residing in a semi-finished state.
UNIT 11 SEQUENCING MODELS
Objectives
After completing this unit, you would be able to:
• State the meaning of sequencing
• Recall taxonomy of sequencing
• Sequence jobs using Johnson’s method
• Compute total processing time
Structure
11.1 Introduction
11.2 Meaning of Sequencing
11.3 Taxonomy of Sequencing Models
11.4 General Assumptions in Sequencing
11.5 Priority Rules for Job Sequencing
11.6 Factors Affecting Sequencing
11.7 Sequencing In Flow Shop
11.8 Johnson’s Method
11.9 N Jobs- Three Machines Sequencing
11.10 Sequencing In Job Shop
11.11 Summary
11.12 Key Words

11.1 INTRODUCTION

Sequencing is one of the important functions of Production Activity Control which is carried out after
loading. Sequencing and scheduling of jobs in job and flow production environment are always a
challenge to the planner. Sequencing is concerned with deciding the order -which job should be taken
for processing on a work centre first then second and so on. Effective sequencing helps in achieving
service levels, timely completion of jobs, better utilisation and lesser throughput time. In service
businesses too like hospitals, operations (procedures) to be carried out at operations theatre(OT) are
sequenced. Poor sequencing may lead to poor utilisation of resources, idleness of manpower/OT, even
waiting by patients.

In this unit, we will understand the fundamentals of Sequencing and algorithm for sequencing for
specific situations. Priority rules for sequencing have been discussed in the previous unit however
given significance relevant aspects are discussed. Further sequencing techniques in flow shop is
described in more details.

11.2 MEANING OF SEQUENCING

Sequencing concentrates on the problem of determining the sequence (order) in which several jobs
should be performed on different machines to make effective use of available facilities and achieve
greater output. For example, consider a sequencing problem where n jobs are to be performed on
different machines. In such a case, our problem is to determine the sequence, which minimises the
total elapsed time. Here, the term elapsed time means the time from the start of the first job up to
the completion of the last job.
Sequencing is the decision of determining the order in which jobs should be processed on a
machine/work centre/facility. The issue of sequencing comes only when there is more than one job
to be processed in a work centre.
When more than one job is assigned to a machine or activity, the production personnel needs to know
the order in which to process the jobs. The process of prioritising jobs is called sequencing. Sequencing
is normally done by Production Activity Control (PAC) man. In many organisations, sequencing is
delegated to Production Manager.
Loading assigns jobs to machines regardless of the order in which the jobs will be done. Sequencing
establishes the order for performing jobs on each machine. So the process of prioritising jobs is called
sequencing.

Sequencing and scheduling

Sequencing precedes scheduling. However, many times sequencing and scheduling are carried out
together. We have already discussed the basics of scheduling in our previous unit.
After generating a demand forecast, workforce capacities, production plan and purchasing plan, it’s
logical to ask which worker or machine will be used to produce which product and when the products
will be produced. This is answered by operations scheduling. In more general terms, operations
scheduling is the allocation of resources over time to perform a collection of tasks.
• Examples of resources:
– Workers, Machines, Tools

• Examples of tasks:
– Operations that bring some physical changes to the material to eventually
manufacture products
– Setups such as walking to reach the workplace, obtaining and returning tools, setting
the required jigs and fixtures, positioning and inspecting material, cleaning etc.
– A schedule is the outcome of operations scheduling and gives a detailed chart of what
activities will be done using various resources over the planning horizon.
 Sequencing and scheduling are similar terms. But sequencing does not refer to time. For example, if
a bank teller processes 5 customers, the bank teller may just process the customers on a first come
first served basis without any planning about exact start and end times for each customer. That is
sequencing. Scheduling, in contrast, produces a detailed plan of various activities over time.

11.3 TAXONOMY OF SEQUENCING MODELS

Taxonomy is the theory and practice of grouping individuals into species, arranging species into larger
groups and giving those groups names, thus producing a classification. Taxonomy is a field of science
that encompasses description, identification, nomenclature and classification.
Before examining the solution of specific sequencing models, it will be useful to have an overview of
such systems. Sequencing problems can be classified in the following way:
Job Arrival Pattern
The usual pattern of arrivals of jobs into the system may be static or dynamic.
Static: If a certain number of jobs arrive simultaneously and no further jobs arrive until the present
set of jobs has been processed, then the problem is said to be static.
Dynamic: In this case, jobs arrive after a certain interval of time and arrival of jobs will continue
indefinitely in future also.
Number of Machines
A sequencing problem may be called a single processor or multiple processor problems, according to
the number of machines available in the shop. The multiple processor case may be further
classified as Parallel, Series, Hybrid
Sequence of Machines
Fixed sequence: In this case, given jobs are processed in a fixed order. An example of such a case will
be where each job is to be processed first on machine 1, then on machine 2 then on machine 3 and so
on.
Random Sequence
In this case, given jobs are processed in random order.

11.4 GENERAL ASSUMPTIONS IN SEQUENCING

Major general assumptions on sequencing problems are as follows:

● The processing time on each machine is known.
● The time required to complete a job is independent of the order of the jobs in which they are to
be processed.
● No machine may process more than one job simultaneously.
● Transportation time is negligible.
● The time taken by each job in changing over from one machine to another is negligible.
● Each job once started on a machine is to be performed up to completion on that machine.
● The order of completion of job has no significance, i.e., no job is to be given priority.
● A job starts on the machine as soon as the job and the machine both are idle.

11.5 PRIORITY RULES FOR JOB SEQUENCING

Priority rules provide guidelines for the sequence in which jobs should be worked. The rules generally
involve the assumption that job setup cost and time is independent of processing times. In using these
rules, job processing times and due dates are important pieces of information. Job times usually
include setup and processing times. Due dates may be the result of delivery times promised to
customers, MRP processing or managerial decisions. The rules are especially applicable for process-
focused facilities such as clinics, print shop and
manufacturing job shops.
Priority Rules try to minimise completion time, the number of jobs in the system and job lateness,
while maximising facility utilisation. Priority sequencing rules have been described in the previous unit.
However, given their significance to this unit some aspects are explained in this unit. There are several
priority sequencing rules; most common among them are listed below:

• First-come, first-served (FCFS)

• Shortest Processing Time (SPT) or Least Processing Time (LPT)
• Earliest Due Date (EDD)
• Critical Ratio (CR)
• Least Slack Time Remaining (STR)
• Earliest Start Date (due date minus lead time)
• Last come, first served (LCFS)
• Random order (R)
The assignment and features of the first four priority sequencing rules are stated in the table below.
SL NO PRIORITY RULES ASSIGNMENT FEATURES
1. First-come, first- Choose the jobs in the order in It is considered as being fair and many service
served (FCFS) which they arrive. operations use it for that reason.

Is far from optimal for many objectives

2. Shortest processing Choose a job that has the shortest SPT schedules are optimal for the number of
time (SPT) processing time first objectives (performance measures) such as
minimising total flow time, mean flow time,
Processing time include set-up
mean waiting for time, mean tardiness and total
time also
lateness

SPT is the best rule for performance measures

(mean flow time, mean lateness and WIP)
related to shopping congestion
 SPT, however, may cause long jobs to
experience excessive delays because short jobs
keep arriving and move to the front of the
queue
Therefore, the variance of job flow times may
be quite high with SPT

3. Earliest Due Date Choose a job that has the earliest EDD sequences are extremely easy to develop
(EDD) due date first so long as each job has a due date attached.

EDD minimises maximum lateness and

maximum tardiness
4. Critical Ratio (CR) Choose a job that has the lowest This rule relies on the due date as well as
critical ratio first processing time.

CR is the ratio of (Due date – Current time) to

the processing time remaining.

It is a dynamic rule because the ratio changes as

time progress
Assignment and features of four priority sequencing rules

The following standard measures of schedule performance are used to evaluate priority rules:

● Meeting due dates of customers or downstream operations.

● Minimising the flow time (the time a job spends in the process).
● Minimising work-in-process inventory.
● Minimising idle time of machines or workers.

General guidelines for when certain sequencing rules may be appropriate. Here are a few of their
suggestions:
SPT is most useful when the shop is highly congested. SPT tends to minimise mean flow time, the
mean number of jobs in the system (and thus work-in-process inventory) and per cent of jobs tardy.
By completing more jobs quickly, it theoretically satisfies a greater number of customers than the
other rules. However, with SPT some long jobs may be completed very late, resulting in a small
number of very unsatisfied customers.
For this reason, when SPT is used in practice, it is usually truncated (or stopped), depending on the
amount of time a job has been waiting or the nearness of its due date. For example, many mainframe
computer systems process jobs by SPT. Jobs that are submitted are placed in several categories (A, B
or C) based on expected CPU time. The shorter jobs or A jobs are processed first, but every couple of
hours the system stops processing A jobs and picks the first job from the B stack to run. After the B
job is finished, the system returns to the A stack and continues processing. C jobs may be processed
only once a day. Other systems that have access to due date information will keep a long job waiting
until its SLACK is zero or its due date is within a certain range.
Use SLACK or S/OPN for periods of normal activity. When capacity is not severely restrained, a SLACK-
oriented rule that takes into account both due date and processing time will produce good results.
Use DDATE when only small tardiness values can be tolerated. DDATE tends to minimise mean
tardiness and maximum tardiness. Although more jobs will be tardy under DDATE than SPT, the degree
of tardiness will be much less.
Use LPT if subcontracting is anticipated so that larger jobs are completed in-house and smaller jobs
are sent out as their due date draws near.
Use FCFS when operating at low-capacity levels. FCFS allows the shop to operate essentially without
sequencing jobs. When the workload at a facility is light, any sequencing rule will do and FCFS is
certainly the easiest to apply.
Do not use SPT to sequence jobs that have to be assembled with other jobs at a later date. For
assembly jobs, a sequencing rule that gives a common priority to the processing of different
components in an assembly, such as assembly DDATE, produces a more effective schedule.

11.6 FACTORS AFFECTING SEQUENCING

Established job priorities and the way arrivals are treated:

• Static arrival means we only enter jobs into consideration at fixed points in time – uses job
accumulation
• Dynamic scheduling means that jobs are dispatched as they arrive with continuously revised job
priorities
Types and numbers of workers and machines available
• Most scheduling algorithms are machine-limited (assumes labour is always available but
machine time is the problem)

• Newer algorithms are studying labour-limited systems (due to cells and multi-tasking
workers)
Internal flow patterns
Priority rules for job allocation
11.7 SEQUENCING INFLOW SHOP
n JOBS BANK OF m MACHINES (SERIES)

1
2 M1 M2 Mm

4 n

n jobs Bank of m machines

Flow Shop Environment

Flow shop is a production system in which several operations have to be done on every job. These
operations have to be done on all jobs in the same order, i.e., the jobs have to follow the same route.
The main characteristic of a two-machine flow shop system is that every job first visits machine 1 and
then machine 2.
Examples:
Customising and painting
Machining and polishing
Moulding and baking
Repair and testing
Typing and proofing (of chapters of a book)
Review and data entry (of claims)
Checkups by a nurse and a doctor (of patients)
A make-to-stock/assemble-to-stock production system is associated with
The high volume of production: so, it is feasible to make a high capital investment.
Products are standard, so there is a predictable pattern of flow of jobs through the machines. The
above characteristics of products encourage the use of a flow shop: the machines are arranged in the
order in which every job visits the machines. The production system is not flexible; it cannot produce
items if design changes significantly. Flow shop environment is shown in the diagram.

Common Assumptions
Unlimited storage or buffer capacities in between successive machines (no blocking).
A job has to be processed at each stage on only one of the machines (no parallel machines).
Common sequencing problems are discussed below:
One Machine, Two Jobs problem
This is the simplest scheduling problem. You go to a mall to buy a can of fruit juice. At the check-out
counter, just before you, is a customer with a large basket of groceries. The customer allows you to
go ahead of him, pay for your fruit juice in 1 min and then presents his basket to the clerk who takes
7 min to check and bag his order.
This customer was using a well-known rule for scheduling single-processor systems: Scheduling the
shortest job first will result in minimum average (and total) waiting time.
In the example above, if the system worked as First-Come, First-Served, then the total waiting time
would be = 0 min for the customer + 7min for you = 7 min.
If you go first, then the total waiting time = 0 min for you + 1 min for the customer= 1 min.
One machine, N Jobs problem
This logic easily extends to the case for 1 Machine (or server) and N Jobs. By scheduling the jobs in the
sequence of shortest time to the longest time, you are guaranteed to get the minimum waiting time
(total or average).
While the above example is simple, it can give a few lessons. An important lesson is to know the
objectives!
For instance, if the aim is to minimise the makespan (which is defined as the time between the
moment you start the first job, till the time you end the last job), then it does not matter how you
schedule a single server system. However, if the objective is to minimise average waiting time, then
the shortest job first rule is optimum (this rule is called the SPT rule or the shortest processing time
rule).
The heuristic technique for two machines – n jobs and three machines - n job problems of flow shop
is discussed in the following paragraphs with a solved example.

11.8 JOHNSON’S METHOD

Johnson’s Method is a heuristic method to solve 2 machines- n jobs sequencing problems. The
mathematics is much easy in this method. Many factories have more than one process through which
orders must flow. Johnson’s rule is used to sequence a series of jobs through a two-machine system
where every job follows the same sequence on the two machines. Johnson Method can be used to
find the optimal sequence that minimises the makespan for the n jobs on two machines in series.
Johnson’s rule is a procedure that minimises makespan when scheduling a group of jobs on two
workstations.

Objectives of Johnson's Rule

 The Objectives of Johnson's Rule are as under:

• To minimise the processing time for sequencing a group of jobs through two work centres.

• To minimise the total idle times on the machines.

• To minimise the flow time from the beginning of the first job until the finish of the last job.

Conditions for Johnson's Rule

For the technique to be used, the following conditions must be satisfied:

• Job time (including setup and processing) must be known and constant for each job at
each work centre.

• Job times must be independent of the job sequence.

• All jobs must follow the same two-setup work sequence.

Example:

Let us take an example:

There are three parts, P1, P2 and P3. Each needs to be processed first on Machine M1, then on
Machine M2. The processing times are as follows:

Parts

Machines P1 P2 P3

M1 6 2 8

M2 4 4 4
We could have 6 possible sequences for the parts: 1-2-3, 1-3-2, 2-1-3, 2-3-1, 3-1-2 and 3-2-1. For any
sequence, Machine 1 will start working at T=0 and work till T= 6+2+8 = 16.
Notice, however, the utilisation of M2:
It will not work at the initial period when M1 is doing its first scheduled job. This hints that we should
try to do the shortest job on M1 first.
What happens if the second operation (operation on M2) for a part is very short? In this case, M2 will
finish this part, while M1 is still working on the first operation of the next part. This will make M2 idle
for some time. This hints that we should try to place jobs that have long 2nd operations in the
beginning.
Of course, in the above example, I all 2nd operations of equal length was deliberately chosen, to make
it easy to identify the optimal sequence. Now let us look at this more carefully, using Gantt charts.
Note, whatever sequence we use, it is clear that Machine 1 will begin at T=0 and be fully utilised for
the duration = sum of Operation 1 durations for all parts.
Therefore, all scheduling of Parts we perform must concentrate on trying to make the Gantt chart for
Machine 2 as compact as possible as shown in the chart below:

0 2 4 6 8 10 12 14 16 18 20
MI P2 P1 P3

M II P2 P1 P3

Total duration for processing all the parts = 20 hours. We cannot do much better than this, since
Machine 1 must operate till T=16 and thereafter, Machine 2 still needs 4 units of time to complete the
last job on Machine 1. Any other sequence would always be higher than the above due to increased
idleness of machine. It appears to make sense to always put the shortest job of Machine 1 at the
beginning, for this will minimise the initial idle time of M2.
Also, since Machine 2 must work on the second operation of the final job after all work on Machine 1
is finished, it makes sense to always put the shortest operation of the second Machine at the end of
the schedule.
Procedure

The procedure is as follows:

Step 1: List the time required to process each job at each machine. Set up a one-
dimensional matrix to represent the desired sequence with the number of slots equal to
several jobs.
Step 2: Scan through all processing times for all jobs. Locate the smallest processing time
at either machine.
Step 3: If that time is on machine 1, put the associated job as near to the beginning of the
sequence as possible. If the smallest time occurs on machine 2, but the job as near to the
end of the sequence as possible.
Step 4: Remove the job from the list.
Step 5: Repeat steps 2-4 until all slots in the matrix are filled and all jobs are sequenced.
Example:
Jobs A through E must be scheduled on Machine Centers 1 and 2. The amount of processing time for
each job is shown in the table below. All jobs must be processed on Machine 1 first, then on Machine
2. How should the jobs be sequenced?

Johnson’s Rule Example

 Job Machine Center 1 Machine Center 2

A 6 8

B 11 6

C 7 3

D 9 7

E 5 10

Solution:

Using the steps for Johnson’s Rule, a one-dimensional matrix is set up for allocating jobs:

Look for the lowest processing time in the table above. Job C has a processing time of 3 on Machine
2. Because the processing time of 3 is on Machine 2, Job C should be placed nearest the end of the
matrix. Job C is then eliminated from the table.
C

Job Machine Center 1 Machine Center 2

A 6 8

B 11 6

7 3
C

D 9 7

E 5 10

The lowest processing time is now 5, Job Aeon Machine 1. It is assigned to the beginning of the matrix
because the lowest time is on Machine 1. Then eliminate Job E from the Table.

E C

Job Machine Center 1 Machine Center 2

 A 6 8

B 11 6

7 3
C

D 9 7

5 10
E

The lowest time is now 6, with Job A on Machine 1 and Job B on Machine 2. Job A is assigned near the
beginning of the matrix, Job B near the end.

E A B C

Job D is left for an assignment in the centre of the matrix.

E A D B C

This sequence will complete the jobs faster than any other sequence. The timelines below show the
time when each job will begin and end on the machines. Each must be complete on Machine 1 before
moving to Machine 2. The time to complete all five jobs is 41 hours. Note that jobs move from Machine
1 to Machine 2 in sequence. The details of processing and idle time on work centres can be seen in
the table below:

PROCESSING TIME FOR JOBS AND IDLE TIME ON MACHINE CENTRES

SL JOB MACHINE CENTRE I MACHINE CENTRE II

NO
Processi Start End Idle Processi Start End Idle
ng time hours ng time hours

1 E 5 0 5 - 10 5 15 5

2 A 6 5 11 - 8 15 23 -
3 D 9 11 20 - 7 23 30 -
 4 B 11 20 31 - 6 31 37 1
5 C 7 31 38 41-38=3 3 38 41 1

Optimum processing time = 4 hours

The idleness of Machine Centre I = 3 hours
The idleness of Machine Centre I = 7 hours

11.9 N JOBS- THREE MACHINES SEQUENCING

• Johnson’s method still applies to the 3-machine case if one of two specific conditions are met:
– The minimum processing time on machine 1 is greater than or equal to the maximum
processing time on machine 2.
– The minimum processing time on machine 3 is greater than or equal to the maximum
processing time on machine 2.

• In other words, Johnson’s method can be used if:

– min(Pi,1) ≥ max(Pi,2) or
– min(Pi,3) ≥ max(Pi,2)

• Two conditions for an easy solution:

1. The smallest duration on machine #1 is at least as great as the largest duration on
machine #2.
2. The smallest duration on machine #3 is at least as great as the largest duration on
machine #2.

• Two conditions for an easy solution:

1. The smallest duration on machine #1 is at least as great as the largest duration on
machine #2.
2. The smallest duration on machine #3 is at least as great as the largest duration on
machine #2.
• T1,smallest >= T2,largest
AND/OR
• T3,smallest >= T2,largest

• Add: T1 + T2 & T2 + T3

• Use these sums to do Johnson’s rule. This is done by creating two dummy machines with
processing times for D1 as the sum of processing times for M1 and M2 and the processing
times for D2 equal to the sum of the processing times for M2 and M3. This method is also
called Jackson’s method.
Example:
On three machines: A, B and C; five jobs are required to be processed. All the five jobs are processed
in the order of A, B and C that is through machine A first, then through machine B and lastly through
machine C. Processing times of these jobs on each of the three machines are given below:

Processing Times in Hours

Jobs

Machines

A B C

I 7 3 6

II 9 4 13

III 6 5 7

IV 13 2 2

V 10 6 5

i. Determine the sequence for the five jobs to minimise total elapsed time.
ii. Calculate the total elapsed time.
iii. Calculate idle time on the machines.

Solution:

From the table we find that minimum hour on first and third machines A and C as under:

MACHINE MIN HOURS

A 6
 C 2
Maximum hours on second machine B is 6 hours.
• Condition for using the heuristic Modified Johnson method is:
A max  Bmim

This is satisfied as 6 > 2, hence the problem can be converted as two machines 5 jobs problem. The
three machines are converted into two dummy machines D1 and D2. Times in hours on D1 and D2 will
be:
TD1 = TA + TB
TD2 = TB + TC
Job array for the dummy machines D1 and D2 and their processing time is as given below:

Processing Times in Hours

Jobs

Machines

D1 D2

I 10 9

II 13 17

III 11 12

IV 15 4

V 16 11

Look for the lowest processing time in the table above. Job IV has a processing time of 4 hours on
Machine D2. Because the processing time of 4 is on Machine D2, Job IV should be placed nearest the
end of the matrix. Job IV is then eliminated from the table.
IV

Job Machine D1 Machine D2

I 10 9

II 13 17

III 11 12

IV 15 4
 V I IV

Job Machine D1 Machine D2

I 10 9

II 13 17

III 11 12

IV 15 4

V 5 10

V 5 10

The lowest processing time is now 5, Job Aeon Machine D1. It is assigned to the nearest the beginning
of the matrix because the lowest time is on Machine D1. Then eliminate Job V from the Table.

V IV

Job Machine D1 Machine D2

I 10 9

II 13 17

III 11 12

IV 15 4

V 5 10

The lowest time is now 9 hours, with Job I on Machine D2. Because the processing time of 9 hrs is on
Machine D2, Job I should be placed nearest the end of the matrix. The job I am then eliminated from
the table.

Job III has the lowest time on machine D1 hence it is assigned next to job V on the beginning.
Job II is left for an assignment in the centre of the matrix.
 V III II I IV

The details of processing and idle time on work centres are detailed in the table below:
Time in hours
SL JOB MACHINE-A MACHINE B MACHINE C
NO

Proce Start End Idle Proce Start End Idle Proce Start End Idle
ss hours ss hours ss hours
Time Time Time

V 10 0 10 - 6 10 16 10 5 16 21 16

III 6 10 16 - 5 16 21 - 7 21 28 -

II 9 16 25 - 4 25 29 4 13 29 42 1

I 7 25 32 - 3 32 35 3 6 42 48 -

IV 13 32 45 5 2 45 47 10 2 48 50 -

Total processing time for all jobs on all the three machines: 50 hours
Idle time on Machine A: 50 – 45 = 5 hours
Idle time on Machine B: 10 +4 + 3+ 10 = 27 hours
Idle time on Machine C: 16+1 = 1 7 hours

11.10 SEQUENCING IN JOB SHOP

In a real-world job shop, jobs follow different routes through a facility that consists of many different
machine centres or departments. A small job shop may have three or four departments; a large job
shop may have fifty or more. From several to several hundred jobs may be circulating the shop at any
given time. New jobs are released into the shop daily and placed in competition with existing jobs for
priority in processing. Queues form and dissipate as jobs move through the system. A dispatch list that
shows the sequence in which jobs are to be processed at a particular machine may be valid at the
beginning of a day or week but become outdated as new jobs arrive in the system. Some jobs may
have to wait to be assembled with others before continuing to be processed. Delays in completing
operations can cause due dates to be revised and schedules changed.
Solutions to actual job shop sequencing problems require the use of sophisticated models and the
calculating power of computers. It is not unusual for job shop to have 50 customer orders in process
at any given time, with each order requiring 50 or 60 distinct processing or machine operations. The
number of combinations of feasible sequences is astronomical in such problems and they provide
many problems in modelling and systems development for operations researchers and industrial
engineers.
In this enlarged setting, the types of sequencing rules used can be expanded. The complexity and
dynamic nature of the scheduling environment preclude the use of analytical solution techniques. The
most popular form of analysis for these systems is the simulation. One early simulation study alone
examined ninety-two different sequencing rules. These studies are yet to address the complex
problem of job shop scheduling adequately however it has certainly helped planning managers to have
a better understanding of the scheduling environment and better decisions.
With the capability of computers, now it has become possible to solve any complex model quickly. In
future, we expect to have more and better solutions to job shop-sequencing problems.

11.11 SUMMARY

Sequencing is one of the important functions of Production Activity Control which is carried out after
loading. Sequencing establishes the order for performing jobs on each machine. So, the process of
prioritising jobs is called sequencing.

Sequencing and scheduling of jobs in job and flow production environment are always a challenge to
the planner. Effective sequencing helps in achieving service levels, timely completion of jobs, better
utilisation and lesser throughput time. In service businesses too like hospitals, operations
(procedures) to be carried out at operations theatre (OT) are sequenced. Poor sequencing may lead
to poor utilisation of resources, idleness of manpower/OT, even waiting by patients. Sequencing is the
decision of determining the order in which jobs should be processed on a machine/work
centre/facility. The issue of sequencing comes only when there is more than one job to be processed
in a work centre. In this unit, the taxonomy of sequencing models was stated. Priority rules with the
help of a table were explained. Sequencing in flow shop was discussed at length. Methodology and
steps of Johnson's method and its application on 3 machine-n job problem described with solves
example. In the end, scheduling issues in job shop were briefly introduced.

11.12 KEYWORDS

• Taxonomy: A field of science that encompasses description, identification, nomenclature and

classification;
• Loading: Assigns jobs to machines regardless of the order in which the jobs will be done.
• scheduling: The allocation of resources over time to perform a collection of tasks.
• Sequencing: The decision of determining the order in which jobs should be processed on a
machine/work centre/facility.
Flow shop: A production systems in which several operations have to be done on every job.
UNIT 12 JIT AND KANBAN

Objectives
After completing this unit, you would be able to:

 State the meaning of JIT

 Recall elements of JIT system
 Write salient features of JIT purchasing
 Explain the concept of Kanban
 Differentiate between production Kanban and withdrawal Kanban

Structure
12.1 Introduction
12.2 Concept of JIT
12.3 Philosophy of JIT
12.4 Elements of JIT
12.5 JIT Purchasing
12.6 Application of JIT
12.7 Benefits
12.8 Limitations of JIT
12.9 Concept of Kanban
12.10 Objectives and Functions of Kanban
12.11 Dual Card Kanban
12.12 Pull System
12.13 Principles of Implementation
12.14 Summary
12.15 Key Words

12.1 INTRODUCTION

One of the most important contributing factors to such phenomenal success of Toyota is its path-
breaking production philosophy and managerial practices popularly known as Toyota Production
System(TPS). Diagram 12.1 below shows the elements of the Toyota Production System.
 Elements of Toyota Production System

Just In Time (JIT) and Kanban are crucial components of the Toyota Production System(TPS). In this
unit, we will discuss the concepts and relevant aspects of Just In Time and Kanban with the focus on
conceptual clarity and develop a basic understanding. Just In Time system has influenced the
manufacturing practices all over the world and a large number of organisations have adopted fully or
in part Just In Time and Kanban System.
Taiichi Ohno developed this philosophy as a means of meeting customer demands with minimum
delays. Thus, in the olden days, JIT is used not to reduce manufacturing wastage, but primarily to
produce goods so that customer orders are met exactly when they need the products.

12.2 CONCEPT OF JIT

Definition
The definition of JIT is very simple and self-explanatory i.e. producing only what is needed, in necessary
quantity and at the necessary time.
The American Production and Inventory Control Society (APICS) has the following definition of JIT:
"Just in time is a philosophy of manufacturing based on planned elimination of all waste and
continuous improvement of productivity."
“Just In Time (JIT) A highly coordinated processing system in which goods move through the system and
services are performed, just as they are needed.” William Stevenson
Just In Time (JIT) is not about automation. JIT eliminates waste by providing the environment to
perfect and simplify the processes. JIT is a collection of techniques used to improve operations. It can
also be a new production system that is used to produce goods or services.

Concept
Just In Time (JIT), is a management philosophy aimed at eliminating manufacturing wastes by
producing only the right amount and combination of parts at the right place at the right time. This is
based on the fact that wastes result from any activity that adds cost without adding value to the
product, such as transferring of inventories from one place to another or even the mere act of storing
them.
Just-in-time (JIT) is easy to grasp conceptually; everything happens just-in-time.
Just In Time (JIT) is also known as lean production or stockless production, since the key behind
successful implementation of Just In Time (JIT) is the reduction of inventory levels at the various
stations of the production line to the absolute minimum. This necessitates good coordination between
stations such that every station produces only the exact volume that the next station needs. On the
other hand, a station pulls in only the exact volume that it needs from the preceding station.
The meaning, action, prerequisites of Just In Time (JIT) are summarised by Gaither and Frazier in their
book on Operations Management in a diagram below:

Just In Time Summary

(Source: Norman Gaither, Greg Frazier “Operations Management”)

The JIT system consists of defining the production flow and setting up the production floor such that
the flow of materials as they get manufactured through the line is smooth and unimpeded, thereby
reducing material waiting time. This requires that the capacities of the various workstations that the
materials pass through are very evenly matched and balanced, such that bottlenecks in the production
line are eliminated. This set-up ensures that the materials will undergo manufacturing without
queuing or stoppage.
Waste:
Just In Time (JIT) usually identifies seven prominent types of waste to be eliminated:
 Waste from overproduction
  Waste of waiting/idle time

 Transportation waste
 Inventory waste

 Processing waste
 Waste of motion

 Waste from defects

Goal of JIT
The goal of Just In Time (JIT) is to minimise the presence of non-value-adding operations and non-
moving inventories in the production line. The ultimate goal of Just In Time (JIT) is a balanced
system and Achieves a smooth, rapid flow of materials through the system.
The main objective of Just In Time (JIT) manufacturing is to reduce manufacturing lead times This is
primarily achieved by drastic reductions in work-in-process (WIP). The result is a smooth,
uninterrupted flow of small lots of products throughout production.

12.3 PHILOSOPHY OF JIT

Just In Time (JIT) is a philosophy embodying various concepts that result in a different way of
doing business for most organisations. The basic tenets of this philosophy include:
 All waste, anything that does not add value to the product or service, should be eliminated
Value is anything that increases the usefulness of the product or service to the customer or
reduces the cost to the customer.
 Just In Time (JIT) is a never-ending journey, but with rewarding steps and milestones.
 Inventory is a waste. It covers up problems that should be solved rather than concealed.
Waste can gradually be eliminated by removing small amounts of inventory from the system,
correcting the problems that ensue and then removing more inventory.

 The customers' definitions of quality, their criteria for evaluating the product, should drive
product design and the manufacturing system. This implies a trend toward increasingly
customised products.

 Manufacturing flexibility, including quick response to delivery requests, design changes and
quantity changes, is essential to maintain high quality and low cost with an increasingly
differentiated product line.

 Mutual respect and support based on openness and trust should exist among an organisation,
its employees, its suppliers and its customers.
  A team effort is required to achieve world-class manufacturing capability. Management, staff
and labour must participate. This implies increasing the flexibility, responsibility and authority
provided to the hourly worker.

 The employee who performs a task often is the best source of suggested improvements in the
operation. It is important to employ the workers' brains, not merely their hands.

12.4 ELEMENTS OF JIT

Main elements of Just In time are stated below:

Uniform Loading
Create a uniform load on all work centres through constant daily production. Adopt a mixed
model assembly i.e. produce roughly the same mix of products each day, using a repeating
sequence if several products are produced on the same line.
Stable production
Meet demand fluctuations through end-item inventory rather than through fluctuations in
production level. Use of a stable production schedule.
Reduce Setup Time
Aim for single-digit setup times (less than 10 minutes). This can be done through better
planning, process redesign and product redesign.
Reduce lot size
Reducing setup times allows economical production of smaller lots; close cooperation with
suppliers is necessary to achieve reductions in order lot sizes for purchased items since this
will require more frequent deliveries.
Reduce lead time
Production lead times can be reduced by moving work stations closer together, applying
group technology and cellular manufacturing concepts, reducing queue length (reducing the
number of jobs waiting to be processed at a given machine) and improving the coordination
and cooperation between successive processes; delivery lead times can be reduced through
close cooperation with suppliers, possibly by inducing suppliers to locate closer to the factory.
Preventive Maintenance
Use machine and worker idle time to maintain equipment and prevent breakdowns.
Flexible workforce
Workers should be trained to operate several machines, to perform maintenance tasks and
to perform quality inspections. In general, JIT requires teams of competent, empowered
employees who have more responsibility for their work.
Supplier Quality Assurance and Zero Defect
 Errors leading to defective items must be eliminated since there are no buffers of excess
parts. Quality at the source (jidoka) program must be implemented to give workers the
personal responsibility for the quality of the work they do and the authority to stop production
when something goes wrong.
Small Lot Conveyance
Use a control system such as a Kanban (card) system (or other signalling systems) to convey
parts between workstations in small quantities (ideally, one unit at a time). In its largest
sense, JIT is not the same thing as a Kanban system and a Kanban system is not required to
implement JIT.
Pull Production
Another important aspect of JIT is the use of a 'pull' system to move inventories through the
production line. Under such a system, the requirements of the next station are what
modulates the production of a particular station.

12.5 JIT PURCHASING

The most challenging area for most manufacturers in achieving Just In Time (JIT) is the purchasing of
raw materials and parts. This is important because an internal Just In Time (JIT) system can only be
operated successfully when the material being fed into it are of sufficient quality and delivered on
time. In Just In, Time (JIT) purchasing several tactics are being used to achieve certain goals and
objectives.

Goals
 Secure a steady flow of quality parts.
 Reduce the lead-time required for ordering product.
 Reduce the amount of inventory in the supply and production pipelines.
 Reduce the cost of purchased material.

Objectives
 Improve purchasing efficiency.
 Improve the quality and delivery performance of suppliers.
 Remove unnecessary cost factors in the materials supply system

Features of JIT purchasing

 Supplier selection: Crucial

 Supplier Relation
 Purchase lot size
 Receiving Inspection
 Negotiating and bidding process
 Packaging
12.6 APPLICATION OF JIT

Just In Time (JIT) applies primarily to repetitive manufacturing processes in which the same products
and components are produced over and over again. The general idea is to establish flow processes by
linking work centres so that there is an even, balanced flow of materials throughout the entire
production process, similar to that found in an assembly line. To accomplish this, an attempt is made
to reach the goals of driving all inventory buffers toward zero and achieving the ideal lot size of one
unit.
Just In Time (JIT) is most applicable to operations or production flows that do not change, i.e., those
that are simply repeated over and over again. An example of this would be an automobile assembly
line, wherein every car undergoes the same production process as the one before it.

12.7 BENEFITS

When the Just In Time (JIT) principles are implemented successfully, significant competitive
advantages are realised. Just In Time (JIT) principles can be applied to all parts of an
organisation: order taking, purchasing, operations, distribution, sales, accounting, design, etc. Just
In Time (JIT) should improve profits and return on investment by reducing inventory levels (increasing
the inventory turnover rate), reducing variability, improving product quality, reducing production and
delivery lead times and reducing other costs (such as those associated with machine setup and
equipment breakdown).
Benefits from effective implementation are listed as below:

 Reduced inventory levels

 High quality
 Flexibility
 Increased productivity

 Increased equipment utilisation

 Reduced scrap and rework

 Reduced space requirements

 Pressure for good vendor relationships

 Customer satisfaction
 Better quality
 Reduced lead times

 Reduced setup times

 Higher worker motivation and increased teamwork
12.8 LIMITATIONS OF JIT

Shapiro at Harvard Business School and Cusumano at MIT’s Sloan School of Management notes the
irony of Japanese managers and policymakers now recognising that continuous improvement and
just-in-time are encountering a new set of problems in the present global environment and that these
concepts have real practical limits.
Pro Tony Polito and Kevin Watson have identified and described following reservations on the Just In
Time system:
External Obstacles
Just-in-time faces difficulties under certain economic environments. Just-in-time systems cannot
cope with increasing rates in demand.
Global and Logistical Issues
As could be expected, serious logistical issues impede the success of just-in-time. The brief 1992
railroad strike is often cited as a major example of the most obvious inherent risk within Just In Time
(JIT).
Behavioural Constraints
Just-in-time assumes employees are motivated and perform at best when entrusted with increasing
responsibility and authority; ie, Just In Time (JIT) generally requires the implementation of the Theory
Z organisation.
Small Supplier Difficulties
Small supplier companies report tremendous difficulties and resistance to Just In Time (JIT). A survey
of such suppliers says that only half believe they can ever hope to take advantage of the efficiencies
attributed to just-in-time.

12.9 CONCEPT OF KANBAN

The Just In Time (JIT) approach to control manufacturing systems with `Kanbans’ has received
much attention in the last decade. The idea of Kanban originated from US supermarkets, where
customers get: (1) what is needed, (2) at the time it is needed and (3) the amount needed. A
supermarket manager maintains a certain amount of inventory on the shelves. The idea of tangible
and touchable food items in a supermarket was applied by Taiichi Ohno in Toyota around 1953 to:
 Reduce inventory and production cycle time

 Increase the speed of information exchange

 Improve productivity
Kanban systems are often associated with Just In Time (JIT) implementation. Some people have the
misimpression that Just In Time (JIT) requires the use of a Kanban system. Having a Kanban system is
not a strict requirement of Just In Time (JIT) implementation, but their use as a tool for production
control in Just In Time (JIT) has become quite popular owing to its simplicity.
A Kanban or “pull” production control system uses simple, visual signals to control the movement of
materials between work centres as well as the production of new materials to replenish those sent
downstream to the next work centre.
Kanban Card
A Kanban is a card attached to the carrier or container of a lot used to match what needs to be
produced in a workstation and what needs to be delivered to the next station.
As implemented in the Toyota Production System, a Kanban is a card that is attached to a storage and
transport container. It identifies the part number and container capacity, along with other
information and is used to provide an easily understood visual signal that a specific activity is required.

12.10 OBJECTIVES AND FUNCTIONS OF KANBAN

The key objectives of a Kanban system are:

• To deliver the material just-in-time to the manufacturing workstations
• To pass information to the preceding stage as to what and how much to produce
A Kanban fulfils the following functions:
 Visibility function
 Production function
 Inventory Function

12.11 DUAL CARD KANBAN

In Toyota’s dual-card Kanban system, there are two main types of Kanban:

Production Kanban: signals the need to produce more parts.

Withdrawal Kanban (also called a "move" or a "conveyance” Kanban): signals the need to withdraw
parts from one work centre and deliver them to the next work centre.

These two types of Kanban are also called (P- Kanban) and a conveyance Kanban (C-Kanban). The
P-Kanban denotes the need to produce more parts while the C-Kanban denotes the need to deliver
more parts to the next station. No parts can be produced unless authorised by a P-Kanban. On the
other hand, a C-Kanban triggers the 'pulling' or 'withdrawal' of units from the preceding station. C-
Kanbans are also known as 'move' or 'withdrawal' Kanbans.
Inventory Control
Decisions regarding the number of Kanban (and containers) at each stage of the process are carefully
considered because this number sets an upper bound on the work-in-process inventory at that stage.
Dual-card Kanban Rules:

 Each container of parts must have a Kanban card. There is exactly one Kanban per container.
 The parts are always pulled. The using department must come to the providing department
and not vice versa.
 No parts may be obtained without a conveyance Kanban card.
 All containers contain their standard quantities and only the standard container for the part
can be used. Containers for each specific part are standardised and they are always filled
with the same (ideally, small) quantity. (Think of an egg carton, always filled with exactly
one dozen eggs.)
 No extra production is permitted. Production can only be started on receipt of a production
Kanban card.
 Container sizes are kept small and standard, e.g., no container should have more than 10%
of a day’s requirements.

12.12 PULL SYSTEM

A Kanban system is referred to as a pull system because the Kanban is used to pull parts to the next
production stage only when they are needed. In contrast, an MRP system (or any schedule-based
system) is a push system, in which a detailed production schedule for each part is used to push parts
to the next production stage when scheduled. Thus, in a pull system, material movement occurs only
when the workstation needing more material asks for it to be sent, while in a push system the station
producing the material initiates its movement to the receiving station, assuming that it is needed
because it was scheduled for production.
The weakness of a push system (MRP) is that customer demand must be forecast and production lead
times must be estimated. Bad guesses (forecasts or estimates) result in excess inventory and the
longer the lead-time, the more room for error. The weakness of a pull system (Kanban) is that
following the JIT production philosophy is essential, especially concerning the elements of short setup
times and small lot sizes because each station in the process must be able to respond quickly to
requests for more materials.

12.13 PRINCIPLES OF IMPLEMENTATION

The main principles for the implementation of Kanban systems are as follows:
o Level production to achieve low variability of the number of parts from one time period to
the next.
o Avoid complex information and hierarchical control systems on a factory floor.
o Do not withdraw parts without a Kanban.
o Withdraw only the parts needed at each stage.
o Do not send defective parts to the succeeding stages.
 o Produce the exact quantity of parts withdrawn.

12.14 SUMMARY

In this unit, we discussed Just In Time (JIT) and Kanban, components of Toyota Production
System(TPS). Just In Time system has influenced the manufacturing practices all over the world and a
large number of organizations have adopted fully or in part Just In Time and Kanban System. Just In
Time system has influenced the manufacturing practices all over the world and a large number of
organizations have adopted fully or in part Just In Time and Kanban System. Just In Time (JIT), is a
management philosophy aimed at eliminating manufacturing wastes by producing only the right
amount and combination of parts at the right place at the right time. Just-in-time (JIT) is easy to
grasp conceptually, however achieving it in practice is likely to be difficult. APICS defines Just In Time
as a philosophy of manufacturing based on planned elimination of all waste and continuous
improvement of productivity.

The ultimate goal of Just In Time (JIT) is a balanced system and Achieves a smooth, rapid flow of
materials through the system. Just In Time (JIT) is a very eclectic approach. It includes many old ideas
and some new ones and relies on basic concepts from many disciplines. But first and foremost, it is
pragmatic and, thus, empirical. We discussed in brief elements of Just In Time which include uniform
loading, reducing the uptime. Significant aspects of purchasing in the JIT environment were explained.
Just In Time (JIT) applies primarily to repetitive manufacturing processes in which the same products
and components are produced over and over again.

We became aware of the limitations of the JIT system and also benefits of JIT such as customer
satisfaction, high productivity, less cost etc.

Further, we discussed the concept of Kanban which is widely used for production control in a JIT
environment. We got clarity on the objectives and functions of Kanban. We discussed elements of
dual Kanban system. At the end of the unit principles of implementation of Kanban system were
stated.

12.15 KEYWORDS

• Just in time: Is a philosophy of manufacturing based on planned elimination of all waste

and continuous improvement of productivity
• Waste: Any activity that adds cost without adding value,
• Value: Is anything that increases the usefulness of the product or service to the customer or
reduces the cost to the customer.
• Theory Z: Organisation where workers are involved in all aspects of the decision-making
processes
• Kanban: A visual signals to control the movement of materials between work centres as
well as the production of new materials to replenish those sent downstream to the
next work centre.
• Production Kanban: Card that signals the need to produce more parts
• Conveyance Kanban: Card that signals the need to withdraw parts from one work
centre and deliver them to the next work centre.
UNIT 13 PROJECT SCHEDULING

Objectives
After completing this unit, you would be able to:
 state the characteristics of the project;
 recall project scheduling techniques;
 draw network diagram and calculate project duration;
 compute estimated time and activity variance in probabilistic activity period;
 differentiate between CPM/PERT and PDM.

Structure

13.1 Introduction
13.2 Characteristics of Project
13.3 Project Scheduling
13.4 Gantt Chart
13.5 Network Scheduling
13.6 PERT/CPM
13.7 Probabilistic Activity Time
13.8 Precedence Diagramming Method (PDM)
13.9 Critical Chain Scheduling
13.10 Summary
13.11 Key Words

13.1 INTRODUCTION
Use of project concept has gained importance in the practice of management. A project is a
work effort made over a finite period with a start and a finish to create a unique product, service or
result. Project production is an intermittent type of production. PMBOK (Project Management body
of knowledge) defines a project as “a temporary endeavour undertaken to create a unique product,
service or result.”

Planning and control of the project are complex and requires different approaches, tools and
techniques. In this unit, we will discuss commonly used techniques for project scheduling and
monitoring.
13.2 CHARACTERISTICS OF PROJECT

 Unique/Non-repetitive Product
 Objectives
 Specific Beginning And End
 Non -uniform requirement of resources
 Involvement of different agencies
 “Fixed position” layout
 High Skill
 Time overruns
 Planning and control

13.3 PROJECT SCHEDULING

Project scheduling is concerned with the techniques that can be employed to manage the activities
that need to be undertaken during the development of a project. PMI defines the scheduling process
as:
“The identification of the project objectives and the ordered activity necessary to complete the project
including the identification of resource types and quantities required.”
Project scheduling defines the network logic for all activities that must either precede or succeed other
tasks from the beginning of the project until its completion.
Scheduling is carried out in advance of the project commencing and involves the following:
• Identifying the tasks that need to be carried out
• Estimating how long they will take
• Allocating resources
• Scheduling when the tasks will occur
Benefits
Good scheduling can eliminate problems due to production bottlenecks, facilitate the timely
procurement of necessary materials and otherwise ensure the completion of a project as soon as
possible. Effective project planning will help to ensure that the project is completed:
 Within cost

 Within the time constraint

 To a specific standard of quality

Attitude towards formal scheduling

Attitudes toward the formal scheduling of projects vary.
Time oriented and resource-oriented schedule
A basic distinction exists between resource-oriented and time-oriented scheduling techniques. For
resource oriented scheduling, the focus is on using and effectively scheduling particular resources. For
example, the project manager's main concern on a high-rise building site might be to ensure that
cranes are used effectively for moving materials; without effective scheduling, in this case, delivery
trucks might queue on the ground and workers wait for deliveries on upper floors.
Scheduling techniques
Scheduling techniques commonly used are listed below:

 Gantt Chart
 Critical Path Method( CPM)

 Programme Evaluation and Review Technique (PERT)

 Precedence Diagramming Method(PDM)
 Critical Chain Scheduling
CPM, PERT and Precedence Diagramming Method (PDM) comes under the broad classification of
Network Diagram.

13.4 GANTT CHART

Concept of Gantt chart has already been discussed in an earlier unit. However, given importance and
enormous use, the technique is described with illustrative examples.
A Gantt chart is a horizontal bar or line chart, which will commonly include the following features:

 Activities identified on the left-hand side

 Time scale is drawn on the top (or bottom) of the chart
 Horizontal open oblong or a line is drawn against each activity indicating the estimated
duration
 Dependencies between activities are shown
 At a review point, the oblongs are shaded to represent the actual time spent (an
alternative is to represent actual and estimated by 2 separate lines)
 A vertical cursor (such as a transparent ruler) placed at the review point makes it possible
to establish activities which are behind or ahead of schedule
Example of a Gantt Chart of sample activities of an IT project is shown in the figure below.
 Example of a Gantt Chart

Alternative Gantt Chart incorporating features commonly present in automated tools is shown in
figure 13.2 for the same sample project:
Example of a Gantt Chart showing Project Management Tool Features

Gantt charts produced in this form are:

 Graphical
 Easy to read
 Easy to update

13.5 NETWORK SCHEDULING

A network diagram is a graphical presentation of a project. Network scheduling techniques are based
on a network diagram for project scheduling and control. Network scheduling techniques
provide a logical process to consider the order in which the project activities should occur.

Functions of Network Diagram

Show Help
interdependence schedule
resources
Show
Facilitate start &
communication finish
dates
Determine Identify
project critical
completion activities

Key Functions of Network Diagram

 Provide a basis for planning and how to use the resources

 Identify the critical path and project completion time
 Identify where slacks (float) are
 Reveal interdependencies of activities
 Aid in risk analysis (what-if analysis)
 Help in communication
Symbols
There are two ways to show the network:
Activity-On-Arrow (AOA) – arrow represents the activities shown below in Diagram 13.4 and Activity-
On-Node (AON) – nodes represent the activities shown as Diagram 13.5.
AON is easier and it used in commercial software.

B D
A E
C

Fig 13.4: Activity on Arrow

C D
A E

Activity On Node

Network Development Rules

 All activities must be linked to each other.
 Network diagrams flow from left to right.
 An activity cannot begin until all preceding connected activities have been completed.
 Each activity should have a unique identifier (number, letter, code etc.).
 Looping is not permitted.
 It is common to start from a single beginning and finish on a single ending node.

13.6 PERT/CPM

CPM (Critical Path Method) and PERT (Programme Evaluation Review Technique) are project
management techniques developed in different which have been created out of the need of Western
industrial and military establishments to plan, schedule and control complex projects.
Concept
The Key Concept used by CPM/PERT is that a small set of activities, which make up the longest path
through the activity network control the entire project. If these "critical" activities could be
identified and assigned to responsible persons, management resources could be optimally used by
concentrating on the few activities, which determine the fate of the entire project.
Non-critical activities can be replanned, rescheduled and resources for them can be reallocated
flexibly, without affecting the whole project.
CPM Assumptions
• The project consists of a collection of well-defined tasks (jobs).
• The project ends when all jobs completed.
• Jobs may be started and stopped independently of each other within a given sequence (no
“continuous-flow” processes).
• Jobs are ordered in “technological sequence”.

The Framework for PERT and CPM

Essentially, there are six steps, which are common to both the techniques. The procedure is listed
below:
 Define the project and all of its significant activities or tasks. The project (made up of
several tasks) should have only a single start activity and a single finish activity.
 Develop the relationships among the activities. Decide which activities must precede
and which must follow others.

 Draw the "Network" connecting all the activities. Each activity should have unique
event numbers. Dummy arrows are used where required to avoid giving the same
numbering to two activities.

 Assign time and/or cost estimates to each activity.

 Compute the longest time path through the network. This is called the critical path.
Calculate activity slacks (float).
 Use the network to help plan, schedule, monitor and control the project.
Node Label
Nodes representing activities should be labelled with the following information:
 Description
 Duration
 Early Start Time
 Early Finish Time
 Late Start Time
 Late Finish Time
 Float

A node label is shown in figure 13.6 below:

Early Start ID Number Early Finish

 Activity Float Activity Description
Late Start Activity Duration Late Finish

Node Labels

 Early Start (ES) – Earliest possible date an activity can start based on the network logic and
any schedule constraints.
 Early Finish (EF) = ES + Dur
 Late Start (LS) – Latest possible date an activity may begin without delaying a specified
milestone (usually project finish date).
 Late Finish (LF) = LS + Dur

Forward Pass
 Forward pass determines the earliest times (ES) each activity can begin and the earliest it can be
completed (EF).
 There are three steps for applying for the forward pass:
 Add all activity times along each path as we move through the network (ES + Dur = EF).
 Carry the EF time to the activity nodes immediately succeeding the recently completed node. That
EF becomes the ES of the next node unless the succeeding node is a merge point.
 At a merge point, the largest preceding EF becomes the ES for that node (because the earliest the
successor can begin is when all preceding activities have been completed).
Backward Pass
 The goal of the backward pass is to determine each activity's Late Start (LS) and Late Finish (LF)
times.
 There are three steps for applying for the backward pass:
– Subtract activity times along each path through the network (LF – Dur = LS).
– Carry back the LS time to the activity nodes immediately preceding the successor
node.
– That LS becomes the LF of the next node unless the preceding node is a burst point.

Slack Time /Float

Total Float is the spare time available when all preceding activities occur at the earliest possible times
and all succeeding activities occur at the latest possible times.
Free float is the spare time available when all preceding activities occur at the earliest possible times
and all succeeding activities occur at the earliest possible times.
When an activity has zero Total floats, free float will also be zero.
There are various other types of float (Independent, Early Free, Early Interfering, Late Free, Late
Interfering) and float can also be negative. We shall not go into these situations at present for the sake
of simplicity and be concerned only with Total Float for the time being.
 Since there exists only one path through the network that is the longest, the other paths must be
either equal or shorter.
 Therefore, some activities can be completed before the time when they are needed.
 The time between the scheduled completion date and the required data to meet critical path is
referred to as the slack time. The critical path is the path in a network diagram of the longest duration.
 The activities on the critical path are called critical activities. They have zero slack time.
 The use of slack time provides better resource scheduling.
 It is also used as a warning sign i.e. if available slack begins to decrease when the activity is taking
longer than anticipated.
 Slack time is equal to LS – ES or LF – EF
 Activities on the critical path have 0 slack, i.e. any delay in these activities will delay the project
completion.

13.7 PROBABILISTIC ACTIVITY TIME

In many projects like in R and D projects, activity duration is not known as the activities may never
have been carried out before. In such cases the time estimates become probabilistic. A distinguishing
feature of PERT is its ability to deal with uncertainty in activity completion time. For each activity, the
model usually includes three-time estimates:
Optimistic time
Generally, the shortest time in which the activity can be completed. It is common practice to specify
an optimistic time to be three standards deviations from the mean so that there is an approximately
a 1% chance that the activity will be completed within an optimistic time.
Most likely time
The completion time having the highest probability. Note that this time is different from the expected
time.
Pessimistic time
The longest time that activity might require. Three standard deviations from the mean are commonly
used for the pessimistic time.
PERT assumes a beta probability distribution for the time estimates. For a beta distribution, the
expected time for each activity can be approximated using the following weighted average:
Expected time = ( Optimistic + 4 x Most likely + Pessimistic ) / 6
To calculate the variance for each activity completion time, if three standard deviation times were
selected for the optimistic and pessimistic times, then there are six standard deviations between
them, so the variance is given by:
Variance = [ ( Pessimistic time – Optimistic time ) / 6 ]2

13.8 PRECEDENCE DIAGRAMMING METHOD (PDM)

Precedence Diagram Method (PDM) is a visual representation technique that depicts the activities
involved in a project. It is a method of constructing a project schedule network diagram that uses
boxes/nodes to represent activities and connects them with arrows that show the dependencies.
The CPM/PERT techniques are essentially limited to “finish-start” relationships (i.e., activity B cannot
start until activity A is completed). PDM was developed after the PERT/CPM techniques and its
function is to permit a more accurate depiction of relationships among various activities.
There are four (4) types of dependencies that you need to be aware of before creating a Precedence
Diagram.
Finish-Start: In this dependency, an activity cannot start before a previous activity has ended. This is
the most commonly used dependency.
Start-Start: In this dependency, there is a defined relationship between the start of activities.
Finish-Finish: In this dependency, there is a defined relationship between the end dates of activities.
Start-Finish: In this dependency, there is a defined relationship between the start of one activity
and the end date of a successor activity. This dependency is rarely used.
PERT/CPM networks do not allow for leads and lags between two activities, i.e. a preceding activity
must be finished before the start of the successor activity. Precedence Diagramming Method (PDM)
allows these leads and lags. Most project management software systems use PDM and show
interrelationships on bar charts. An illustrative example is given in the Gantt chart below shown as
Diagram.

MONTHS AFTER GO-AHEAD

TASKS 1 2 3 4 5

Precedence Network in Gantt Chart

Activity 3 and 4 are starting after one month of the start of activity 2.

13.9 CRITICAL CHAIN SCHEDULING

The Critical Chain approach is perhaps the most important new development in project scheduling in
the last 30 years. The Critical Chain Method (CCM) or Critical Chain Project Management (CCPM) is an
outgrowth of the Theory of Constraints (TOC) developed by Eliyahu Goldratt to scheduling and
managing manufacturing. TOC focuses on identifying and fixing bottlenecks to improve the
throughput of the overall system. Likewise, Critical Chain focuses on bottlenecks. For example, one
pharmaceutical company was experiencing significant delays with drug approvals. After investigation,
it found that the bottleneck was statisticians to analyze clinical trial data. The cost of hiring statisticians
was more than offset by the revenue from getting products to market sooner.
Time overrun is common in projects. Not all projects are executed in time. Many projects exceed their
planned schedule. Often this is attributed to uncertainty or the unforeseen. To compensate for this
age-old dilemma, managers and project personnel have learned to compensate by adding additional
time to their schedule estimates. Yet even when they do, projects still overrun their schedules.
The following points illustrate some of the problems associated with traditional project scheduling:
Loose time estimation
High task durations (providing worst-case estimates) is done to ensure a high probability of task
completion. The knowledge that there is so much safety time built into tasks results in various time-
wasting practices, e.g., waiting until the last moment to complete a task. As a result, all the safety time
can be wasted at the start of the task so that if problems are encountered, the task over-runs.
Multitasking
Starting work as early as possible, even when not scheduled, is a response to worst-case estimates.
When workers give worst-case estimates, they do not expect to stay busy with just one task, so they
multi-task, working on several tasks at once by switching between them. The result is that everything
takes a long time to complete and very little completes early.
Wasteful Early completion
With the focus on meeting commitment dates (start and finish), the output from a task completed
early will rarely be accepted early by the next person needing this output. Therefore, any effort spent
in finishing early will be wasted. Early delivery of one task cannot be used to offset lateness on
another. Lateness, however, is always passed on and the lost time cannot be made up without cutting
the specifications or increasing resources allocated to subsequent tasks, if possible.
In Critical Chain scheduling, uncertainty is primarily managed by the following:
 Using average task duration estimates
 Scheduling backwards from the date a project is needed (to ensure work that needs to be done is
done and it is done only when needed)
 Placing aggregate buffers in the project plan to protect the entire project and the key tasks
 Using buffer management to control the plan- the key tasks are those on which the ultimate
duration of the project depends, also known as the Critical Chain.
The specific steps to identify and manage a Critical Chain schedule are as follows:

 Reduce activity duration estimates by 50%. Activity durations are normal estimates, which we
know to be high probability and contain excessive safety time. We estimate the 50% probability
by cutting these in half. (The protection that is cut from individual tasks is aggregated and
strategically inserted as buffers in the project.
 Eliminate resource contentions by levelling the project plan. The Critical Chain can then be
identified as the longest chain of path and resource dependencies after resolving resource
contentions.

 Insert a Project Buffer at the end of the project to aggregate Critical Chain contingency time
(initially 50% of the critical chain path length).

 Protect the Critical Chain from resource unavailability by Resource buffers. Resource buffers are
correctly placed to ensure the arrival of Critical Chain resources.

 Size and place Feeding Buffers on all paths that feed the Critical Chain. Feeding buffers protect the
Critical Chain from an accumulation of negative variations, e.g. excessive or lost time, on the
feeding chains. This subordinates the other project paths to the Critical Chain.

 Start gating tasks as late as possible. Gating tasks are tasks that have no predecessor. This helps
prevent multitasking.
 Ensure that resources deliver Roadrunner performance. Resources should work as quickly as
possible on their activities and pass their work on as they complete it.
 Provide resources with activity durations and estimated start times, not milestones. This
encourages resources to pass on their work when done.

 Use buffer management to control the plan. Buffers provide information to the project manager,
for example, when to plan for recovery and when to take recovery action.

13.10 SUMMARY

Project is a temporary endeavour undertaken to create a unique product, service or result. Use of
project concept has increased significantly in the practice of management. Planning and control of
the project are complex and requires different approaches, tools and techniques. In the unit,
commonly used techniques for project scheduling and monitoring are discussed. Attitudes toward the
formal scheduling of projects vary. The basic distinction between resource-oriented and time-oriented
scheduling techniques was explained. Gantt Chart with an example was described. Network technique
is discussed in details with a solved example ERT /CPM. Background, steps involved, benefits were
described. Calculation of estimated time and variance in case of probabilistic time estimates was
described with an example. Fundamentals of the precedence diagramming method as a network
technique were explained. One of the emerging non-network technique for project scheduling called
critical chain scheduling was introduced. Critical chain scheduling is based on Goldratt’s Theory of
Constraint and help in timely completion of projects.

13.11 KEYWORDS

 Project: Temporary endeavour undertaken to create a unique product, service or result.

 Project scheduling: The identification of the ordered activity necessary to complete the
project including the identification of resource types and quantities required.
 Network Diagram: Is a graphical presentation of a project
 Total Float: Is the spare time available when all preceding activities occur at the earliest
possible times and all succeeding activities occur at the latest possible times
 Critical path: Is the path in a network diagram of longest duration
 Critical Activities: All the activities on the critical path
UNIT 14 PPC IN SERVICE INDUSTRIES

Objectives
After completing this unit, you would be able to:

 state the characteristics of service business;

 explain the difference between manufacturing and service operations;
 recall aspects of operation planning control in the service business;
 state the gains of effective planning in the service business.

Structure
14.1 Introduction
14.2 Characteristics of Service Business
14.3 Differences between Service and Manufacturing
14.4 OPC in Service Industry
14.5 Effect of Poor Planning in Service Industry
14.6 OPC in Logistics Operations
14.7 Operation Planning in Entertainment Business
14.8 Operations Control at Air France
14.9 OPC In IT Industry
14.10 OPC in Health Care
14.11 Summary
14.12 Key Words

14.1 INTRODUCTION

Accordingly, “Operations Planning and Control” is used by many in place of “Production Planning
Control” for planning and control of goods as well as services. However the workbook the two words
are used interchangeably. Basic concepts and many tools and techniques of Production Planning and
Control are increasingly being used in the service industry. In the unit, we will understand the features
of service business and practice of aspects of planning and control in select service businesses.

14.2 CHARACTERISTICS OF SERVICE BUSINESS

The services have unique characteristics, which make them different from that of goods. This makes
planning and control in service business complex. The most common characteristics of services are:
 Intangibility
 Inseparability
  Perishability
 Variability

14.3 DIFFERENCES BETWEEN SERVICE AND MANUFACTURING

Following is the brief description of the differences between the manufacturing and service
environments:
Goods
The key difference between service firms and manufacturers is the tangibility of their output. The
output of a service firm, such as consultancy, training or maintenance, for example, is intangible.
Manufacturers produce physical goods that customers can see and touch.
Inventory
Service firms, unlike manufacturers, do not hold inventory; they create a service when a client requires
it. Manufacturers produce goods for the stock, with inventory levels aligned to forecasts of market
demand. Some manufacturers maintain minimum stock levels, relying on the accuracy of demand
forecasts and their production capacity to meet demand on a just-in-time basis. Inventory also
represents a cost for a manufacturing organisation.
Customisation vs. Standardisation
In general, manufacturers have a standardised way of producing goods. Goods are produced en masse
in a factory or warehouse-type environment. One finished product is generally the same as the next.
Service operations, by contrast, have more opportunities to customise the services they provide. For
example, beauticians and hairdressers must customise the styling and treatments to match the
customer's hair, the shape of the face and other characteristics. Even in service operations where you
receive a tangible product, the service you receive from workers may not always be the same.
Production Environment
Manufacturing and service operations both plan the environment in which work takes place, but they
focus on different elements. Manufacturing operations, for instance, consider the manufacturing
layout. For example, the manufacturing layout can be fixed, process-focused or product-focused, such
as in an assembly line factory. These issues affect the manufacturer's workforce performance and total
output. Service operations, by contrast, plan the environment according to how it affects customers.
Operations Management
In a manufacturing environment, operations managers oversee the activities required to produce
goods from raw materials. Issues managers in this environment face include managing the space to
store raw materials, the flow of materials through the manufacturing process, how much product to
produce and quality of output. In a service operation, operations managers schedule workers to
handle customer demand. They must coach and train employees to provide optimal services to
customers. Service operations that also sell physical goods also face inventory control issues, such as
how much to stock and when to order.
Customers
Service firms do not produce a service unless a customer requires it, although they design and develop
the scope and content of services in advance of any orders. Service firms generally produce a service
tailored to customers' needs, such as 12 hours of consultancy, plus 14 hours of design and 10 hours
of installation. Manufacturers can produce goods without a customer order or forecast of customer
demand.
Labour
A service firm recruits people with specific knowledge and skills in the service disciplines that it offers.
Service delivery is labour intensive and cannot be easily automated, although knowledge management
systems enable a degree of knowledge capture and sharing. Manufacturers can automate many of
their production processes to reduce their labour requirements, although some manufacturing
organisations are labour intensive, particularly in countries where labour costs are low.
Location
Service firms do not require a physical production site. The people creating and delivering the service
can be located anywhere. For example, global firms such as consultants Deloitte use communication
networks to access the most appropriate service skills and knowledge from offices around the world.
Manufacturers must have a physical location for their production and stockholding operations.
Production does not necessarily take place on the manufacturer's site; it can take place at any point
in the supply chain.
These differences have a direct bearing on planning and control practices in service organisations.

14.4 OPC IN SERVICE INDUSTRY

Globalisation and competition have forced service industry to focus on issues like customer service
and satisfaction, cost and resource utilisation. Effective operations planning and control are essential
to improve on parameters such as delivery, quantity, resource utilisation and cost. For example, in
business software organisations, the delivery performance was less than 50% a decade earlier.
Competition forced management to have better planning. Service industry being highly diverse and
customised, there cannot be uniform or common approaches to planning and control. Many service
industries have their practices and terminology for planning.

14.5 EFFECT OF POOR PLANNING IN SERVICE INDUSTRY

In the service industry, if operations planning is poor, it may lead to many tangible and intangible
losses to individual, organisation and society.
Apart from financial losses, there are other losses, some of which are described below:

 Transport
 Schedule
 Power
 Food
 Medical
  Tickets

14.6 OPC IN LOGISTICS OPERATIONS

Effective planning and control can help in increasing business, customer satisfaction, reduce delivery
times and cut costs. In the following paragraphs, we understand the interventions made by a leading
global logistics company United Parcel Service (UPS) for improvement in planning and control.
United Parcel Service held a virtual monopoly on small-package deliveries until Federal Express arrived
on the scene in 1973. By 1986, Federal Express was earning four times the profit of UPS on
approximately one-eighth of UPS's daily package and letter volume. Its technological edge permitted
Federal Express to operate with one-third the number of UPS employees.

14.7 OPERATION PLANNING IN ENTERTAINMENT BUSINESS

The entertainment business is considered to be critically depending on the entertainment itself. Fans
do not come to the show to witness the operations planning function, but to be entertained. If the
entertainment had failed to satisfy them, no amount of operations planning skill could have saved the
day. However, effective operations planning is an essential prerequisite for success. Operations
planning processes in such business remain in the background but are of utmost importance.

14.8 OPERATIONS CONTROL AT AIR FRANCE

In the air transport business like AIR France, operations planning concepts and techniques are used
extensively. For example, for routing and scheduling of planes, quantitative techniques are used.
Aircraft maintenance is done on a planned and systematic manner, using preventive maintenance.
Just some of the considerations, which need to be taken into account, include the following:
Frequency – For each airport, how many separate services should the airline provide?
Fleet assignment – Which type of plane should be used on each leg of a flight?
Banks – At any airline hub, where passengers arrive and may transfer to other flights to continue their
journey, airlines like to organise flights into ‘banks’ of several planes which arrive close together, pause
to let passengers change planes and all depart close together. So how many banks should there be
and when should they occur?
Block times: A block time is the elapsed time between a plane leaving the departure gate at an airport
and arriving at its gate in the arrival airport. The longer the allowed block time the more likely a plane
will be to keep to schedule even if it suffers minor delays. However, longer block times also mean
fewer flights can be scheduled.
Planned maintenance: Any schedule must allow time for planes to have time at a maintenance base.
Crew planning: Pilot and cabin crew must be scheduled to allocate pilots to fly planes on which they
are licensed and to keep within maximum ‘on duty’ times for all staff.
Gate plotting: If many planes are on the ground at the same time, there may be problems in loading
and unloading them simultaneously.
Recovery: Many things can cause deviations from any plan in the airline industry. Allowances must be
built in to allow for recovery.

14.9 OPC IN IT INDUSTRY

Project schedules slipped during test runs, especially when confusion occurred in the grey zone
between the user specifications and the delivered software. To be able to avoid these problems,
software project management methods focused on matching user requirements to delivered
products, in a method known now as the Waterfall model, as shown in diagram 14.1 below:

Waterfall Model of Software Development Planning

Software development Process

A software development process is concerned primarily with the production aspect of Software
development, as opposed to the technical aspect, such s software tools. These processes exist
primarily for supporting the management of software development and are generally skewed toward
addressing business concerns. Many software development processes can be run in a similar way to
general project management processes. Some of the areas are:
 Risk management
 Requirement Management
 Change Management
 Software Configuration Management
 Release Management
Project planning, monitoring and control
The purpose of project planning is to identify the scope of the project, estimate the work involved and
create a project schedule. If the project deviates from the plan, then the project manager can take
action to correct the problem. Project monitoring and control involves status meetings to gather
status from the team. When changes need to be made, change control is used to keep the products
up to date.
Project management software is used for many processes such as estimation, planning,
scheduling, cost control and budget management. Tasks or activities of project management software
are as below:
Scheduling
One of the most common purposes is to schedule a series of events or tasks and the complexity of the
schedule can vary considerably depending on how the tool is used. Some common challenges include
events that depend on one another in different ways or dependencies, scheduling people to work on
and resources required by the various tasks, commonly termed resource scheduling. Dealing with
uncertainties in the estimates of the duration of each task. Use of methods such as a Gantt chart has
become common.
Providing information
Project planning software can be expected to provide information to various people or stakeholders
and can be used to measure and justify the level of effort required to complete the project(s). Typical
requirements might include overview information on how long tasks will take to complete; early
warning of any risks to the project; information on workload, for planning holidays; evidence;
historical information on how projects have progressed and in particular, how actual and planned
performance are related; optimum utilisation of available resource; cost; maintenance.

14.10 OPC IN HEALTH CARE

Planning and control in health care have received an increased amount of attention over the last ten
years. This attention is due to an increase in demand for health care and increasing expenditures. As
a result, health care organisations are trying to reorganise processes more efficiently and effectively.
A generic framework for health care planning and control includes the following managerial areas for
medical planning, resource capacity planning, materials planning and financial planning.
Medical planning
The role of engineers/ process planners in manufacturing is performed by clinicians in health care. We
refer to health care’s version of “technological planning” as medical planning. Medical planning
comprises decision-making by clinicians regarding, for example, medical protocols, treatments,
diagnoses and triage. It also comprises the development of new medical treatments by clinicians.
The more complex and unpredictable health care processes, the more autonomy is required for
clinicians.
Resource capacity planning
Resource capacity planning addresses the dimensioning, planning, scheduling, monitoring and control
of renewable resources. These include equipment and facilities (e.g. MRIs, physical therapy
equipment, bed linen, sterile instruments, operating theatres, rehabilitation rooms), as well as staff.
Materials planning
Materials planning addresses the acquisition, storage, distribution and retrieval of all consumable
resources/materials, such as suture materials, prostheses, blood, bandages, food etc. Materials
planning typically encompasses functions such as warehouse design, inventory management and
purchasing.
Financial planning
Financial planning addresses how an organisation should manage its costs and revenues to achieve its
objectives under current and future organisational and economic circumstances. Since health care
spending has been increasing steadily, market mechanisms are being introduced in many countries as
an incentive to encourage cost-efficient health care delivery.

14.11 SUMMARY

The service sector has grown over the last couple of decades. It has become the largest industry in
many developed countries in the world. The term service is rather general in concept and it includes
a wide variety of services ranging from business and professional services, such as advertising,
marketing research, banking, insurance, Software, hospitality, legal and medical services.
“Operations planning and control” is used by many in place of “Production Planning Control” for
planning and control of goods as well as services. In the unit, the features of service business and
practice of aspects of planning and control in select service businesses are introduced. The services
have unique characteristics, which make them different from that of goods. This makes planning and
control in service business complex. The most common characteristics of services are Intangibility,
Inseparability, Perishability and Variability.

Effective Operations Planning and Control are essential to improve on parameters like delivery,
quantity, resource utilisation, cost. Service industry, being highly diverse and customised, there
cannot be uniform or common approaches to planning and control. Many service industries have their
practices and terminology for planning. However, practically all service industries have adopted some
of the practices and techniques of planning commonly used in the manufacturing industry.
14.12 KEYWORDS

 Intangible: Incapable of being perceived by the senses especially the sense of touch
 Perishability: Unsatisfactoriness by virtue of being subject to decay, spoilage or
destruction
 Operations Management; Management of conversion process for making
goods/services.
 Banks – At any airline hub where passengers arrive and may transfer to other flights to
continue their journey
 Block times – A block time is the elapsed time between a plane leaving the departure
gate at an airport and arriving at its gate in the arrival airport.