OPERATIONS MANAGEMENT;

Transcription

1 KRAJEWSKI / RITZMAN OPERATIONS MANAGEMENT; Strategy and Analysis THIRD EDITION

2 Sponsoring Editor Mac Mendelsohn Text Development Editor Sue C/eason Art Development Editor Meredith Nightingale Senior Production Supervisor Jim Rigney Editorial-Production Service Woodstock Publishers' Services Copyeditor Joyce Crandy Text Designer Karen Mason Cover Designer Peter Blaiwas Layout Artist Woodstock Publishers' Services Illustrators Network Graphics and lim Bryant Art Coordinator Ceri Davis, Quadrata, Inc. Photo Researcher Laurel Anderson, Photosynthesis Senior Marketing Manager Dave Theisen Prepress Services Manager Sarah McCracken Senior Manufacturing Manager Roy Logan PHOTO CREDITS p., Courtesy of Honda of America Manufacturing, Inc.; p. 9, Courtesy of Precision, Tune, Inc.; p., 99 Bechtel Corporation/photo by Philip Jones Griffiths/Magnum; p. 3, Courtesy of Zoom Telephonies, Inc.; p. 39, Courtesy of Pizza Hut, Inc.; p. 3, Courtesy of Motorola Corporation; p. 7, Courtesy of Borden, Inc.; p. 7, Photos courtesy of Chaparral Steel Company; p., Courtesy of General Motors, Inc.; p. Ill, Courtesy of AT&T Archives; p., Courtesy of NCR Corporation; p. 3, Courtesy of Motorola, Inc.; p. 39, Courtesy of Harley-Davidson, Inc.; p. 6, Courtesy of Hay and Forage Industries, Inc.; p. 8, Courtesy of K Corporation; p. 9, Courtesy of Wendy's International, Inc.; p. 7, H.P. Merten/The Stock Market; p., Stephen Frisch/Stock Boston; p., Courtesy of Motorola, Inc.; p. 8, Peter Vadnai/The Stock (credits continued on page iv) Library of Congress Cataloging-in-Publication Data Krajewski, Lee J. Operations management : strategy and analysis / Lee J. Krajewski, Larry P. Ritzman. 3rd ed. p. cm. Includes bibliographical references and index. ISBN Production management. I. Ritzman, Larry P. II. Title. TS.K dc CIP Copyright 993, 99, 987 by Addison-Wesley Publishing Company, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. ISBN DO

3 Chapter MASTER PRODUCTION SCHEDULING Key Questions from Managers How do our competitive priorities affect our approach to master production scheduling? How should our master production schedule relate to our production plan? C H A P T E R OUTLINE The Master Production Scheduling Process The Master Production Schedule Typical Constraints Managerial Issues The Master Production Schedule and Competitive Priorities Functional Interfaces Computer-Assisted Master Production Scheduling Managerial Practice, Master Production Scheduling at Hyundai Motor Company Developing a Prospective Master Production Schedule Calculating Projected On-Hand Inventories Determining the Timing and Size of MPS Quantities Calculating Available-to-Promise Quantities Linking the Production Plan and the MPS Freezing the MPS Rough-Cut Capacity Planning Method of Overall Factors Evaluating the Method of Overall Factors How can we provide accurate shipping dates to our customers? How can we get better estimates of cash flows and capacity requirements? 6

4 Ethan Allen Furniture Company produces more than wood furniture products in geographically dispersed factories. The Ethan Allen production plan determines the desired aggregate production output of each assembly line. Ultimately, however, the company must develop a more detailed plan, one that determines the production quantities and sequence of specific products on the lines. Atypical assembly line manufactures from to different products, so care must be taken to produce a schedule that does not exceed the lines' capacities. Otherwise, the strategic objectives of the production plan will not be met. The need to determine such a schedule is common in the world of manufacturing. In this chapter we show how such a detailed plan, called the master production schedule, disaggregates the production plan into specific product schedules. We also discuss how competitive strategies affect a firm's approach to master production scheduling. THE MASTER PRODUCTION SCHEDULING PROCESS 66 The master production scheduling process begins where we left off in Chapter. Using the authorized production plan as a basis, operations develops a pro- ^f spective master production schedule. A master production schedule (MPS) details how many end items will be produced within specified periods of time. End items are either finished products or the highest-level assemblies from which shippable products are built (see Chapter ). Time periods are usually measured in weeks, although hours, days, or even months are sometimes used. Figure. shows the master production scheduling process. Think of the prospective MPS as a trial of whether operations can meet the schedule with the resources (such as machine capacities, labor, overtime, and subcontractors) estimated in the production plan. Operations revises the MPS until it either finds a schedule that satisfies all resource limitations or determines that no feasible schedule can be found. In the latter event, the production plan must be revised to adjust production requirements or increase authorized resources. Ultimately, an acceptable prospective MPS emerges for plant management authorization. Operations then uses the authorized MPS as input to material requirements planning, which, as you will see in Chapter 6, determines specific schedules for part, component, and assembly production. A master production scheduler is responsible for developing an MPS that satisfies the intent of the production plan. Other responsibilities typically include those in Table.. The MPS process may differ from company to company, depending on whether the firm has a process or product focus. Thus the specific procedures and record formats presented later in this chapter illustrate types of procedures and may not apply to specific firms. In summary, as Fig.. illustrates, the MPS process is linked to the authorized production plan and therefore requires feedback from the functional areas involved in production planning. In this way, the master production schedule sets in motion the operations to achieve the production plan's objectives.

5 Ethan Allen Furniture Company produces more than wood furniture products in geographically dispersed factories. The Ethan Allen production plan determines the desired aggregate production output of each assembly line. Ultimately, however, the company must develop a more detailed plan, one that determines the production quantities and sequence of specific products on the lines. Atypical assembly line manufactures from to different products, so care must be taken to produce a schedule that does not exceed the lines' capacities. Otherwise, the strategic objectives of the production plan will not be met. The need to determine such a schedule is common in the world of manufacturing. In this chapter we show how such a detailed plan, called the master production schedule, disaggregates the production plan into specific product schedules. We also discuss how competitive strategies affect a firm's approach to master production scheduling. THE MASTER PRODUCTION SCHEDULING PROCESS 66 The master production scheduling process begins where we left off in Chapter. Using the authorized production plan as a basis, operations develops a pro-.j( spective master production schedule. A master production schedule (MPS) details how many end items will be produced within specified periods of time. End items are either finished products or the highest-level assemblies from which shippable products are built (see Chapter ). Time periods are usually measured in weeks, although hours, days, or even months are sometimes used. Figure. shows the master production scheduling process. Think of the prospective MPS as a trial of whether operations can meet the schedule with the resources (such as machine capacities, labor, overtime, and subcontractors) estimated in the production plan. Operations revises the MPS until it either finds a schedule that satisfies all resource limitations or determines that no feasible schedule can be found. In the latter event, the production plan must be revised to adjust production requirements or increase authorized resources. Ultimately, an acceptable prospective MPS emerges for plant management authorization. Operations then uses the authorized MPS as input to material requirements planning, which, as you will see in Chapter 6, determines specific schedules for part, component, and assembly production. A master production scheduler is responsible for developing an MPS that satisfies the intent of the production plan. Other responsibilities typically include those in Table.. The MPS process may differ from company to company, depending on whether the firm has a process or product focus. Thus the specific procedures and record formats presented later in this chapter illustrate types of procedures and may not apply to specific firms. In summary, as Fig.. illustrates, the MPS process is linked to the authorized production plan and therefore requires feedback from the functional areas involved in production planning. In this way, the master production schedule sets in motion the operations to achieve the production plan's objectives.

6 The Master Production Scheduling Process 67 FIGURE. Master Production Scheduling Process Authorized reduction plan Prospective master production schedule Resources available? " > v. NO - Material requirements planning - The Master Production Schedule To give you a clearer idea of master production scheduling, let's consider the MPS of a bicycle manufacturer, first introduced in Chapter, Fig... The company doesn't accept orders for custom designed bicycles; rather, it produces to stock. For production planning purposes, the firm has grouped its entire line of products into several families, based on wheel diameter. One family of bicycles, based on a -inch wheel, includes three different styles: Alpha, which comes with training wheels, is designed for children just learning TABLE. I Typical Responsibilities of a Master Production Scheduler Specify delivery promise dates on incoming orders and match actual requirements with the master production schedule. Evaluate the impact of "top-down" inputs, such as introducing new products, or promising an order, in less than normal lead time. Evaluate the impact of "bottom-up" inputs, such as anticipated shortage reports from manufacturing or purchasing, indicating that certain components will not be available as scheduled or that planned production rates are not being attained. Review the master production schedule when necessary for lack of materials or capacity. Bring basic conflicts to the attention of management for resolution. Source: Oliver Wight, Production and Inventory Management in the Computer Age (Boston: Cahners Books, 97), p. 69.

7 68 CHAPTER I Master Production Scheduling to ride. Dirty Dan is a dirt bike with racing decals and rugged tires. And Roadster has hand-caliper brakes, polished aluminum fenders, and a rearview mirror. All three styles are basically the same bicycle, with minor variations in color and accessories. The production plan for the -inch family calls for a steady increase in output to satisfy anticipated increases in sales over the next several months. Presently, the company has excess capacity, which it plans to use up before resorting to overtime to reach peak production in March. This approach keeps costly inventory to a minimum. Consequently, the production plan schedules, units in January,, units in February, and, units in March. One possible MPS for this family is shown in Fig... Note that Dirty Dan is a high-volume product made continuously, while Alpha and Roadster are produced on an intermittent basis. In all cases the batch sizes reflect considerations for assembly capacity, product demands, setup costs, inventory holding costs, and requirements for good customer service. This example, just one of many possible lot size combinations, demonstrates a basic purpose of the MPS: setting due dates for production orders. For example, Fig.. shows that in January, production is scheduled to complete units of Roadster in week and units in week 3. Another purpose of the MPS is to provide an accurate picture of the resources and materials needed to support the production plan. Recall that the production plan estimates resource requirements, but it states resource quantities in aggregate terms. Because it specifies the production quantities of specific products, the MPS provides a more accurate picture of resource needs. Also, by specifying the number of end items to be produced during each time period, the MPS determines requirements for all intermediate and purchased items as well. This is the point at which the bill of materials (see Chapter ) is important. For example, in Fig.. the MPS shows 6 units of Alpha scheduled for completion in week. This means that by week, to complete the 6 bicycles on schedule, operations must have available 6 Alpha main frames, 3 -inch wheels, 6 sets of training wheels, and specific quantities of other parts contained in the bill of materials. Thus a good MPS enables a company to make efficient use of its most valuable resources labor, capital, capacity, and materials. FIGURE. ly Master Production Schedule Product January 3 February March Alpha Dirty Dan Roadster Monthly total,,,

8 Managerial Issues 69 Typical Constraints MANAGERIAL ISSUES A master production schedule must satisfy several constraints. First, the sum of the quantities in the MPS must equal those in the production plan. Figure. demonstrates two aspects of this constraint. Note that each month the total quantity for all three styles equals the total quantity of bicycles specified in the production plan (see Fig..). If the production plan specified quantities in dollars or labor hours, the scheduler would have to convert the MPS quantities to the same unit of measure. Master production schedules should specify units of product, however, for inventory control purposes. The second aspect of the constraint is that total requirements for a product, as determined in the production plan, must be allocated over time in an efficient manner. For example, in January the plan calls for operations to produce 3 units of Alpha, 6 units of Dirty Dan, and 8 units of Roadster, or a total of, units. The specific mix is based on historical demand and marketing and promotional considerations. The bicycle company's MPS states production quantities in weekly time periods, although they could be in days or months. The scheduler for the -inch bicycle family must select weekly lot sizes for each product, taking into account economic factors such as production setup costs and inventory carrying costs. The decision that determines lot size and timing is subject to a second constraint: capacity limitations. Typically, several key resources limit production volume. For example, work stations that are usually short on labor capacity, storage space for components and finished products, or working capital can limit the output a company can produce. The scheduler must acknowledge these limitations and recognize that some products require more critical resources than others. The master production schedule is important because it links the firm's broad strategies, as expressed in the production plan, to more specific tactical plans that will enable a firm to achieve its objectives. The relationship of the MPS to competitive priorities, functional area interfaces, and the influence of computers on the MPS are important managerial issues. The Master Production Schedule and Competitive Priorities In Chapter you learned that firms structure themselves to gain distinctive advantages over other firms by emphasizing one or more competitive priorities. With respect to the MPS, three basic strategies enable a firm to manage inventories in support of these priorities. The strategy chosen will determine the operations manager's approach to master production scheduling. Choosing among these strategies is related to the issues of inventory placement. (See Chapter.) Make-to-Stock Strategy. Product-focused firms tend to use a make-to-stock strategy, an approach in which the firm holds items in stock for immediate

9 6 CHAPTER I Master Production Scheduling delivery. The main advantage of placing most inventory toward the finishedgoods level is that customer delivery times are minimized. This strategy is feasible because most product-focused firms produce relatively few standardized products, for which they can make reasonably accurate forecasts. Examples of products produced with a make-to-stock strategy include garden tools, electronic components, and chemicals. Thus these firms develop master production schedules for end items. Figure.3 demonstrates that make-to-stock operations typically produce a small number of finished products from a large number of different raw materials. Scheduling production of end items is easier from the standpoint of numbers alone. Assemble-to-Order Strategy. The assemble-to-order strategy is an approach for producing end items with many options from relatively few major assemblies and components, after customer orders are received. This strategy addresses the two competitive priorities, customization and fast delivery time. Operations holds the major assemblies and components in stock until a specific order comes in. Stocking end items would be economically prohibitive because forecasts are relatively inaccurate and options are numerous. For example, an automobile manufacturer can literally produce millions of cars, no two alike, to meet the mix of options and accessories demanded by customers. Other examples include farm tractors, upholstered furniture, and automatic teller machines. As Fig..3 shows, the number of different items produced and purchased under an assemble-to-order strategy assumes an hourglass shape, emphasizing the relatively small number of major assemblies and components. For example, suppose you were manufacturing an automobile with the following limited number of customer options: 3 engine sizes, transmission types, drive trains, 3 steering options, 3 tire sizes, 3 body styles, trim options, interior options, and brake systems. The body frame and certain other parts are common to every car you produce. Based on these customer choices, you can produce,368 different cars (3 X x ). However, there are only 6 major assemblies and components (3 + + ), plus a common assembly of parts needed for every car a far smaller number than the total number of cars that FIGURE.3 Relationship of the MRS to Competitive Priorities Number of finished products Number of major assemblies _ Typical level for master ' production schedule Number of raw materials _ Make to stock Assemble to order Make to order

10 Managerial Issues 6 r(a) Make-to stock (b) Assemble to order (c) Make to order //ewlett-packard uses a make-to-stock strategy in the manufacture of electronic equipment (a). Prefabricated homes are an example of an assemble-to-order process (b). American Iron and Steel Corporation follows a make-to-order strategy in its steel casting plant (c). could be produced. Demand for these major assemblies and components is much easier to forecast than that for any completely assembled product. Consequently, operations bases master production scheduling on the major assemblies and components, rather than on the end items. Make-to-Order Strategy. Many process-focused firms use a make-to-order strategy, whereby operations produces end items to customer specifications. This strategy provides a high degree of customization. Because most end items, components, and assemblies are custom-made, their number usually exceeds the number of raw materials used to produce them, as illustrated in Fig..3. Examples include specialized medical equipment, castings, and

11 6 CHAPTER I Master Production Scheduling plastic bottles for a particular brand of shampoo. Because a few raw materials are common to many products, an organization can more easily forecast demand for them than for end items or major assemblies. In such situations, operations generally schedules raw-material utilization only. However, end-item scheduling is feasible if customer orders allow sufficiently long delivery times. Functional Interfaces The master production scheduling process involves all of a firm's functional areas. As in the development of a production plan, operations needs inputs from various areas to develop an MPS that achieves production plan objectives and organizational goals. However, interaction with various functional areas doesn't end with the inputs they provide. Sometimes the way a firm competes prompts interaction through the MPS. For example, operations can create a master production schedule that maintains a stable work force and high utilization of critical work centers. Such a strategy reduces the firm's flexibility to respond to changes in customer demand, however. Reducing flexibility in this way may not be in the best interests of the firm from a marketing perspective. Trade-offs must be made in responding to customer-desired shipping dates, reducing inventory levels, and minimizing the costs of revising production schedules. Such situations require cooperation between marketing and manufacturing. Some companies require the vice presidents of marketing and manufacturing to jointly authorize major MPS changes to ensure mutual resolution of these issues. Managerial Practice. discusses how these functional interfaces were resolved in developing master production schedules at Hyundai. The MPS can also be used as a basis for more routine planning functions. Finance uses the MPS to estimate budgets and cash flows. Marketing uses it to project the impact of product mix changes on the firm's ability to satisfy customer demand and manage delivery schedules. Using rough-cut capacity planning, which we discuss later in the chapter, manufacturing can estimate the effects of MPS changes on loads at critical work stations. In general, all the firm's functional areas need the MPS. Computer-Assisted Master Production Scheduling The applications of the techniques for master production scheduling and rough-cut capacity planning that we discuss in this chapter require the use of computers. When thousands of items are involved, developing the MPS manually is an enormous, if not impossible, task. Most major computer suppliers and many companies specializing in software for manufacturing systems have developed software packages that perform the types of calculations we will present. These programs also provide managers with detailed reports that are useful for analyzing the MPS. Personal computers, with their excellent graphic capabilities, give managers access to many MPS-related reports, such as load profiles, in readable and useful formats. Interfacing a personal computer with

12 Managerial Issues 63 In 989 the Hyundai Motor Company produced 78, automobiles at a rate of 37 units per hour. The company offers approximately combinations of model, options, and interior color. Hyundai develops an annual business plan that is expressed in monthly sales volumes by model types and by engine and transmission types. This plan becomes the basis for the master production schedule, which is the responsibility of the production/sales control department. Each month, representatives from the sales, production planning, and materials departments meet to develop monthly production schedules. Prior to 986, when the production/sales control department was formed, the MPS was the responsibility of the production planning department, which only considered "requests" from the sales department. As capacity utilization increased between 98 and 986, the conflicts between sales and production intensified. The sales department wanted to maintain a maximum amount of flexibility in production schedules to satisfy customer orders, whereas the production department preferred to have stability in the schedules. The production/sales control department, which reports to the vice president of manufacturing, was created to mediate the conflicts. The MPS is developed on an eight-month rolling horizon basis; that is, each month the MPS is updated for the next eight months. During each meeting the schedule for the next month is confirmed and the following month's schedule is developed for the purpose of production planning and buying locally purchased parts. The rest of the monthly schedules are used as forecasts Managerial Practice. Master Production Scheduling at Hyundai Motor Company to provide the purchasing department and suppliers enough lead time to acquire imported raw materials and parts. A separate MPS is prepared for passenger and commercial vehicles. Each is further broken down by model, engine and transmission type, and interior color. For each of its five models Pony, Stellar, Sonata, Grandeur, and Excel Hyundai develops a separate master schedule, which is further broken down by destination and trim. These schedules are used to plan the production of different assembly lines dedicated to each model. Next, the MPS for each model is broken down by engine size and transmission type. This schedule is used as the primary input to the engine and transmission plant schedules. Finally, the MPS for each model is converted into a schedule that shows the monthly production volume requirements for the model (such as Excel door) by trim levels (such as L, GL, and GLS) and by interior color (such as chestnut red or dark sapphire). This schedule is of primary importance to suppliers that deliver various parts and interior furnishings. The production planning department uses the monthly schedules to develop weekly schedules specifying daily volumes by model and sequence. The materials department uses the schedules to calculate parts and materials requirements. Source: Chan Hahn and Kee Young Kim, Hyundai Motor Company: Manufacturing Strategies and Production Planning and Control Systems, Bowling Green State University, 989, pp a mainframe computer allows managers to ask "what if" questions about master production schedules and to estimate MPS effects using the data provided. The techniques that we present in this chapter are descriptive in the sense that modifications to the schedule are left to the discretion of the master production scheduler. The techniques project only what may happen //the prospective MPS is implemented. They do not prescribe what should be done. Various prescriptive approaches have been proposed, and, if you are interested, you can pursue them in Hax and Meal (97), Newson (97), and other publications referenced at the end of this chapter.

13 6 CHAPTER I Master Production Scheduling DEVELOPING A PROSPECTIVE MASTER PRODUCTION SCHEDULE In this section we show how a firm that produces to stock develops a master production schedule. This process includes calculating the projected on-hand inventory, determining the timing and size of MPS quantities (the production quantities of specific products), and calculating available-to-promise quantities. Our discussion introduces some basic terminology of master production scheduling and illustrates the trial-and-error aspect of actual scheduling. For simplicity, we assume that our imaginary firm doesn't utilize safety stocks for end items, even though real firms usually do. (Later, in Chapter 6, we address the mechanics of incorporating safety stocks in material requirements planning.) The section concludes with discussions of linking the production plan and the MPS and freezing the MPS. You can find details of how eight specific firms develop MPSs in Berry, Vollmann, and Whybark (979). Calculating Projected On-Hand Inventories The first step is to calculate the projected on-hand inventory, which is an estimate of the amount of inventory available each week after demand has been satisfied. It equals the on-hand balance for the previous week, plus the MPS quantity for the current week, minus the forecast or actual orders booked for the current week whichever quantity is greater. Mathematically, we express this relationship as where /, = /,_, + MPS, - max(f, or CO,) I, = projected on-hand inventory balance at the end of week / MPS, = MPS quantity due in week / F, = forecast of orders in week / CO, = customer orders booked for shipment in week / MPS, indicates a quantity that management expects to be completed and ready to ship in week /. The scheduler subtracts the greater quantity, F, or CO,, recognizing that the forecast is subject to error. If actual booked orders exceed the forecast, the projection will be more accurate if the scheduler uses CO,. Conversely, if the forecast exceeds booked orders, F, will provide the best estimate of requirements for week /. Let's consider a valve manufacturer of a limited range of products: valves of varying types and sizes, all made to stock. Management needs to develop a master production schedule for its 3-inch gate valve. Marketing has forecast a demand of 8 units for April and 6 units for May. The MPS should be expressed in weekly time periods to enable operations to closely control production of components. Figure. shows a partial MPS record, to which we'll later add one row. The quantity on hand (in inventory) is. The forecast row shows marketing's forecast of total sales allocated evenly over the eight weeks in April and May. Keep in mind that these forecasts may not reflect actual sales. The customer

14 Developing a Prospective Master Production Schedule 6 FIGURE. Projected On-Hand Inventory for 3-inch Gate Valve Item: 3-in. gate valve Quantity on nana: April 3 Order policy: 8 units May I I I Forecast Customer orders (booked) Projected on-hand inventory MRS quantity /! / \ Explanation: / Forecast is less than booked orders in week ; projected on-hand balance = =. s Explanation: Forecast exceeds booked orders in week 3; projected on-hand balance = + - = -8. The shortage signals a need to schedule an MPS quantity for completion in week 3. orders row shows the number of actual customer orders promised for shipment each week. Note that customer orders for 3 valves exceed the forecast of valves for week. Using the formula /, = /,_, + MPS, - max(f, or CO,), the customer orders figure (CO,), rather than the forecast (F t ), is therefore used to determine the projected on-hand inventory for week : ( + 3). Although customer orders exceed the forecast for week, total booked orders () for April are still within that month's forecast (8). The projected on-hand inventory row shows a stockout in week 3; the projected on-hand balance is - 8 ( + ). The shortage signals a need for more valves in that week. At this stage, the MPS row is still blank. Determining the Timing and Size of MPS Quantities The second step is to determine the timing and size of MPS quantities. The goal to keep in mind when developing a master production schedule is to maintain a nonnegative projected on-hand inventory balance. As the scheduler projects shortages in inventory, MPS quantities are scheduled to cover them. The following is a simplified procedure for developing a prospective MPS. Schedule completion of the first MPS quantity for the first week when you expect inventory of the product to run out. You can determine this week by calculating the projected on-hand inventory for each week until a shortage (a negative balance, such as 8 in Fig..) occurs. The addition of the newly scheduled MPS

15 Developing a Prospective Master Production Schedule 6 FIGURE. Projgcted On-Hand inventory for 3-inch Gate Valve Item: 3-in. gate valve Quantity on nana: hand: April Order policy: 8 units May Forecast Customer orders (booked) Projected on-hand inventory MRS quantity / \ / \ Explanation:/ Forecast is less than booked orders in week ; projected on-hand balance = =. x Explanation: Forecast exceeds booked orders in week 3; projected on-hand balance = + - = -8. The shortage signals a need to schedule an MPS quantity for completion in week 3. orders row shows the number of actual customer orders promised for shipment each week. Note that customer orders for 3 valves exceed the forecast of valves for week. Using the formula /, = /,_i + AtPS, - ma\(f, or CO,), the customer orders figure (CO,), rather than the forecast (F,), is therefore used to determine the projected on-hand inventory for week : ( + 3). Although customer orders exceed the forecast for week, total booked orders () for April are still within that month's forecast (8). The projected on-hand inventory row shows a stockout in week 3; the projected on-hand balance is - 8 ( + ). The shortage signals a need for more valves in that week. At this stage, the MPS row is still blank. Determining the Timing and Size of MPS Quantities The second step is to determine the timing and size of MPS quantities. The goal to keep in mind when developing a master production schedule is to maintain a nonnegative projected on-hand inventory balance. As the scheduler projects shortages in inventory, MPS quantities are scheduled to cover them. The following is a simplified procedure for developing a prospective MPS. Schedule completion of the first MPS quantity for the first week when you expect inventory of the product to run out. You can determine this week by calculating the projected on-hand inventory for each week until a shortage (a negative balance, such as 8 in Fig..) occurs. The addition of the newly scheduled MPS

16 66 CHAPTER 7 / Master Production Scheduling quantity will keep the projected on-hand inventory balance positive or zero. Continue calculating the projected on-hand inventory until you reach the next period when a shortage occurs. This shortage signals a need for a second MPS quantity. Repeat the process until you reach the end of the planning horizon. In this way, you proceed column by column through the MPS record, filling in the MPS quantities needed to avoid shortages. Using Fig.,, specify the timing and size of MPS quantities for the 3-inch gate valve for a lot size of 8 units. (We present other lot-sizing techniques in Chapter 6.)! Determine which weeks wilt experience shortages. In week, when beginning inventory is and requirements are 3, there is no shortage. There is also no shortage in week, as beginning inventory is and requirements are only. The first shortage occurs in week 3, as Fig.. shows, when the forecast () exceeds the projected onhand inventory (). The firm will be 8 units short unless it schedules an MPS quantity for that period. Calculations for alt 8 weeks are shown in the following table. Beginning Inventory Requirements Shortage? MPS Quantity Projected On-Hand Inventory No No Yes No No Yes No Yes H 8 Hi- h 8 H 8 : As the table shows, the 8 units scheduled in week 3 will last until week 6, when another 8-lot unit must be scheduled. The second lot lasts until week 8, when a third lot must be scheduled. Figure. shows the prospective MPS. Calculating Available-to-Promise Quantities The third step in developing a prospective master production schedule is to calculate the available-to-promise (ATP) inventory, that is, the quantities of end items that marketing can promise to deliver on specified dates. Marketing can also use this information to set shipping dates for new customer orders. The general rule for calculating available-to-promise information is slightly different for the first (current) week of the schedule than for other weeks. The first week: The ATP inventory for the first week equals current onhand inventory plus the MPS quantity for the first week, minus the cumulative total of booked orders, up to (but not including) the week in which the next MPS quantity arrives.

17 Developing a Prospective Master Production Schedule 67 FIGURE. A Prospective Master Production Schedule Item: 3-in. gate valve Quantity on hand' nana: r Forecast E April 3 Order policy: 8 units May I I I Customer orders (booked) Projected on-hand inventory MPS quantity Subsequent weeks: For each week in which an MPS quantity is scheduled for completion, the ATP inventory equals that week's MPS quantity minus the cumulative total of booked orders from that week up to (but not including) the week in which the next MPS quantity arrives. Projected on-hand inventory isn't used in this calculation because on-hand inventory was used to calculate the first week's ATP inventory. Application. 'sution to i Suppose that you have received the following orders for the 3-inch gate valve (shown in order of arrival). As they arrive you must decide whether to accept or reject them. Which orders can you accept for shipment, and what would your updated MPS record look like? Order 3 Amount (units) 38 Requested 3 First, you must determine the ATP inventories for the 3-inch gate valve. Refer to Fig..6 on the next page. The ATP in the first week is 7, [ (current on-hand inventory) + (MPS quantity) 3 (booked orders) + (booked orders)] units. The on-hand inven tory of units can satisfy all booked orders until week 3, when the first MPS quantity arrives. This leaves 7 extra units for new orders to be shipped in weeks and and beyond. The ATP inventory in week 3 is 68 [8 - (8 + + Q)J units. These 68 units can be promised for shipment in weeks 3,, and. As there are no booked orders in May, ATP inventories for weeks 6 and 8 equal 8, the respective MPS quantities. Thus eks 6, 7, and 8.

18 68 CHAPTER I Master Production Scheduling FIGURE.6 wailable-to-promise Calculations Item: 3-in. gate valve Quantity on nana: hand: April 3 Order policy: 8 units May Forecast Customer orders (booked) Projected on-hand inventory MPS quantity Available-topromise (ATP) inventory 7 / Explanation: - The total number of orders booked until the next receipt of materials is 3 + = 38. The ATP = = 7., Explanation: The total number of orders booked until the next receipt of materials is =. The ATP = 8- = 68. You can now take action on the orders as follows: Action Accept Reason The amount requested () is less than the ATP (7) for weeks and. The adjusted ATP inventory for week is units. The new ATP inventory for week 3 would be = 3 units. The new ATP for week 3 is 3 - = 6 units. The ATP for weeks and 3 totals only 8 ( + 6) units, which is less than the quantity requested. Try to reschedule shipment for week 6 or later. lated MPS record. Note in Fig..7 that only the customer orders booked, projected on-hand inventory, and ATP inventory rows have been adjusted. Do the negative projected on-hand inventory balances in weeks and 7 pose a problem? Maybe. The forecast is for a total demand of units through week, but only 7 units have currently been booked. The units on hand plus the 8 units scheduled to arrive in week 3 will give a total supply of units, leaving 8 units available to promise. If customers demand no more than 8 additional units in new bookings before week, there is no problem. However, if customers were to request 6 more ( ) units for shipment in week and

19 Developing a Prospective Master Production Schedule 69 FIGURE.7 Updated Master Production Schedule Record Item: 3-in. gate valve Quantity on nana: April 3 Forecast Order policy: 8 units May : I Customer orders (booked) Projected on-hand inventory MPS quantity Available-topromise (ATP) inventory more ( - 38) units in week for a total of 8 units the firm would be units short in week. There are two important lessons here. First, operations will never miss customer order due dates if marketing doesn't promise orders in excess of the ATP inventories and'tf the MPS quantities arrive on time, because ATP inventories are based on actual booked customer orders, not forecasts. Problems arise when orders are booked without planning adequate production in the MPS. Second, the projected on-hand inventory balance gives a "worst case" estimate of inventory balance. The reason is that the demand estimate is the greater of two quantities either the forecast or actual customer orders booked. If projected on-hand inventory is negative, management should assess the situation before changing the MPS. Negative inventory projections might be the result of a mismatch in timing between forecasts and actual booked orders. In any case, once management revises the MPS, it determines the timing and size of revised MPS quantities in the same manner. Linking the Production Plan and the MPS In Applications. and., we didn't consider trade-offs associated with leveling production rates or the work force. Nor did we allow for anticipation inventories. Whenever the firm ran out of inventory or released production quantities, the MPS simply became an accumulation of forecasts. As you saw in Chapter, however, production planning does consider these trade-offs. The key to developing an acceptable MPS, therefore, is to link it tf«^the production plan. One way to do so is to use production requirements, rather than forecasts, to determine MPS quantities. Production requirements are desired production quantities for a specific end item. To derive them, the scheduler

20 63 CHAPTER 7 I Master Production Scheduling must disaggregate, or break down, aggregate product family production quantities, taking into account the desired product mix within each family, current on-hand inventory, and booked customer orders. The resulting requirements then replace the forecasts used in the MPS. The projected on-hand inventory row also undergoes a significant change. The scheduler does not include the current on-hand inventory and the booked customer orders to date because they are already part of the production requirements. Consequently, the resulting MPS responds directly to the needs of the production plan. When management links the MPS and the production plan in this way, the MPS for any given item becomes part of an orchestrated plan to achieve company objectives. Freezing the MPS The master production schedule is the basis of all assembly, component, and material schedules. For this reason, changes to the MPS can be costly, particularly if they are made to MPS quantities soon to be completed. Increases in an MPS quantity may cause delays in shipments to customers or excessive expediting costs because of material shortages. Decreases in MPS quantities can result in unused materials or assemblies (at least until another need for them arises) and valuable capacities consumed for something not needed. Similar costs occur when forecasted need dates for MPS quantities are changed. For these reasons many firms "freeze" a portion of the master production schedule. Freezing can be accomplished by specifying a demand time fence, the number of periods (beginning with the current period) during which no changes can be made to the MPS without special authorization from management. The Ethan Allen Furniture Company uses a demand time fence of 8 weeks. If the current period is period, the MPS is frozen for periods through 8. Neither the master scheduler nor the computer can reschedule MPS quantities for this period without management approval. Freezing the master production schedule is really a matter of degree. The demand time fence specifies a period when very few, if any, changes will occur. Other time fences can be specified that allow varying amounts of change. For example, another commonly used time fence is the planning time fence, which is the number of time periods (beginning with the current period) during which the computer will not reschedule MPS quantities. The planning time fence is greater than the demand time fence. Consequently, the master scheduler but not the computer can make changes to the MPS quantities between the demand time fence and the planning time fence. Beyond the planning time fence the computer is free to schedule the MPS quantities, using the approved ordering policy. The use of time fences in this way provides varying levels of control over the creation and execution of the master production schedule. Black and Decker uses a slightly different scheme. It uses three time fences: 8, 3, and 6 weeks. The 8-week fence is essentially a demand time fence. From 8 to 3 weeks the MPS is quite rigid, but minor changes to model series

21 63 CHAPTER I Master Production Scheduling Load Profiles and the Authorization Decision. By comparing load profiles to labor capacities approved in the production plan, the scheduler can determine whether the prospective MPS is feasible. If total direct labor requirements fall within authorized limits of regular time plus overtime and if the schedule meets other considerations, such as shipping promises and financial requirements management would likely authorize the prospective MPS. If not, the master production scheduler would have to create a better schedule. Evaluating the Method of Overall Factors The method of overall factors is one of the simplest available for rough-cut capacity planning. The direct labor hours per unit used to calculate the load profiles can be a gross estimate based on accounting system data. Alternatively, it can be a more precise estimate based on detailed records of time standards and item routings. Operations managers generally use gross estimates more often than precise estimates when using this technique. Further, labor requirements usually are proportioned to each work station solely on the basis of historical labor requirements. The assumption that historical requirements represent future requirements implies that the product mix doesn't change. If the mix changes, the capacity bills approach would be preferred. Also, the method of overall factors will not reflect a specific work station's large swings in capacity requirements on a week-to-week basis because its assigned hours represent a fixed percentage of the total critical hours for a week. The method of resource profiles works better in this case. Nonetheless, the method of overall factors works reasonably well in situations where the MPS is fairly stable with respect to product mix on a week-to-week basis. It also works well when the MPS is specified in monthly time periods and only a rough estimate of labor requirements is needed. SOLVED PROBLEMS FIGURE.9. You have the data shown in Fig..9 for a particular end item. Your company's order policy is to produce in lots of units. Quantity on Hand: Forecast 3 Customer orders (booked) 3 8 Projected on-hand inventory -3 MPS quantity Available-to-promise (ATP) inventory -

22 Solved Problems 63 Solution a. Develop a prospective MPS and calculate the available-to-promise inventory quantities. b. Decide which of the following customer orders you would accept. What would the updated MPS look like? The three orders arrived in the following sequence: Order 3 Quantity 3 Due 6 3 a. Figure.(a) shows the prospective MPS, including ATP quantities. As indicated, we will need the first MPS quantity in week, another order in week 3, a third in week 7, and a fourth in week 8. For the indicated ATP inventories and assuming that we have to commit to the orders in their sequence of arrival, we would accept the first two customer orders and reject the third. FIGURE. Quantity on Hand: Forecast 3 Customer orders (booked) 3 8 Projected on-hand inventory MPS quantity Available-to-promise (ATP) inventory 37 (a) Prospective MPS Quantity on Hand: Forecast 3 Customer orders (booked) 3 8, Projected on-hand inventory MPS quantity Available-to-promise (ATP) inventory. (b) Updated MPS

23 636 CHAPTER I Master Production Scheduling Solution We could ask the third customer if she would accept a shipment of 3 ( from week ATP and from week 3 ATP) in week 3, with another 9 units following in week 7. The updated MPS record, reflecting the two accepted orders, is shown in Fig..(b). b. The latter part of the schedule shows negative projected inventory balances, so we should verify the forecasts. If the forecasts remain valid, we could revise the MPS starting in week 6. However, our ATP quantities show that 3 ( ) units will be available for delivery over the next weeks.. The Acme Rocket Company produces two products for crafty coyotes interested in a road-runner dinner. The harness rocket (HR) is designed for quick acceleration and low-level flying in the pursuit of fleeing road runners. The shoe rocket (SR) is useful for high-speed chases over long, straight Arizona roads. The prospective MPS shown in Fig.. has been proposed. The Acme Rocket Company has two critical work stations: powder packing (PP) and wick setting (WS). Historically, PP has had 7 percent, and WS 3 percent, of the critical work station hours. The direct labor hours per unit follow. Item HR SR Critical Work Stations (hr). 7. Noncritical Work Stations (hr) Total (hr) 6..7 a. Create a load profile for weeks - based on the prospective MPS, using the method of overall factors. b. Suppose that the production plan specified a total of 68 labor hours per week, including hours at the critical work stations. Do you see any potential problems with the prospective MPS? If so, what changes to the schedule do you propose? a. Table.3 shows the load profile for weeks. b. Note that the suggested schedule results in an uneven load on the factory. In particular, the week load exceeds available resources by 8 (96-68) total labor hours, including 96 (66 - ) hours at the critical work stations. A change that would ease the MPS is to shift 3 units of SR production from week to week, as shown in Table.. This change increases the inventory holding cost of SR but satisfies the capacity constraints. (The profile for weeks, 3, and doesn't change.) This change results in approximately 6 labor hours per week. FIGURE. Item 3 Total Units HR SR