TU-E2020 ADVANCED OPERATIONS MANAGEMENT. Demand management Sales & Operations Planning Master Production Scheduling

TU-E2020 ADVANCED OPERATIONS MANAGEMENT Demand management Sales & Operations Planning Master Production Scheduling

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Pieces Volumes: Manufacturing and service life 300 250 200 150 100 50 0 Year Manufacturing life (Pieces sold annually) Service life (Pieces serviced annually) ELINKEINOELÄMÄN TUTKIMUSLAITOS THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY 2

Share of Total Value Adeed The distribution of the total added value 100% 90% 80% 70% Services 54% 60% 50% 40% 30% 20% Manufacturing 46% 10% 0% 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014e 2016e 2018e 2020e ELINKEINOELÄMÄN TUTKIMUSLAITOS THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY 3 Year

Distribution of added value from manufacturing 100% 100% 90% 80% 70% 60% 21% 3% 1% 37% Distribution Logistics Headquarter 90% 80% 70% 60% 23% 5% 9% 10% Other Asia 50% 40% 30% 20% 21% Manufacturing 1 tier Suppliers Suppliers of material inputs 50% 40% 30% 20% 53% North America Eu 27 Finland 10% 17% 10% 0% 0% The share of value added from manufacturing is 46% of the total value added ELINKEINOELÄMÄN TUTKIMUSLAITOS THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY 4

Distribution of added value from services 100% 100% 90% 80% 38% Distribution 90% 80% 33% 70% 60% 50% 40% 30% 20% 6% 12% 0% 33% Logistics Headquarter Manufacturing 1 tier Suppliers Suppliers of material inputs 70% 60% 50% 40% 30% 20% 2% 22% 30% Other Asia North America Eu 27 Finland 10% 0% 11% 10% 0% 13% The share of value added from services is 54% of the total value added ELINKEINOELÄMÄN TUTKIMUSLAITOS THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY 5

TU-E2020 Advanced Operations Management Lecture 4 Demand management Sales & Operations Planning Master Production Scheduling

Enterprise resource planning (ERP) Production Planning & Control System Framework Resource planning Sales & Oper. planning Demand management Master production scheduling Front end : The planning task Detailed capacity planning Detailed material planning Material and capacity plans Engine : The scheduling task Shop-floor systems Supplier systems Back end : The execution task 7

Demand management Determining or estimating the demand from customers (and potential customers) Helping balance demand with supply Converting specific customer requests into promised delivery dates making timely and honest customer promises possible Serves as a basis for determining the capacity and material needs 8

Demand management (continued) Delivery time quotations and available-topromise Demand forecasting for inventory levels of finished goods Proactive demand management, like campaigns, pricing and setting sales targets for the organization Managing new product introductions and phasing out 9

Independent and dependent demand When a customer decides to buy our product, that decision is independent of the actions of the company. Independent demand is defined as the demands of customers, while production decisions remain under company s control. Dependent material requirements can be derived from plans, independent requirements and Bill-Of-Materials (BOM), and Bill-of-Capacity (BOF), 10

The main categories of production environments Make-to-stock, MTS Serving customers from the finished goods inventories Assemble-to-order, ATO Assembling modules / options according to a customer order Make-to-order, MTO Making products from raw materials, parts and components to a customer order Engineer-to-order, ETO Working with the customer to design the product and then make it from purchased materials, parts and components

Different production environments and OPP Production environment Engineerto-order (ETO) Make-toorder (MTO) Assembleto-order (ATO) Make-tostock (MTS) OPP location Suppliers Raw materials, suppliers Work-inprocess (WIP) parts, components and modules Finished goods Order-penetration point (OPP) Raw materials Forecast-driven Supply chain time line Customer-driven End customer 12

Customer Order Decoupling point or Order Penetration Point (OPP) Order penetration point is the point in the company material flow, where an item becomes earmarked to a specific, known customer. OPP is also the last point where unallocated inventory is held last point of forecasting. OPP choice affects both capacity and material management. Order-penetration point (OPP) Raw materials Forecast-driven Supply chain time line Customer-driven End customer 13

Forecast and customer-order-driven parts of supply chain Forecast-driven (push) supply chain Production and distribution decisions are based on long-term forecasts Customer-order driven (pull) supply chain Production and distribution are demand-driven so that they are coordinated with true customer demand rather than forecast demand In a pure pull system, there is no inventory but the firm responds only to specific orders Combination of both The initial stages of the supply chain are operated in a customer-driven manner while the remaining part is forecast-driven Order-penetration point (OPP) Raw materials Forecast-driven Supply chain time line Customer-driven End customer

Shifting OPP forwards (towards customers) Competitive advantage addressed Delivery speed Delivery reliability Price; (although a tradeoff exists between production capacity optimization and increased inventory cost) Reasons for forward shifting Reduce the customer lead-time Process optimization (improved manufacturing efficiency) Negative effects Rely more on forecasts (risk of obsolescence) Reduced product customization (to maintain WIP and inventory levels) Increased work-in-process (due to more items being forecast driven) Order-penetration point (OPP) Raw materials Forecast-driven Supply chain time line End customer

Shifting OPP backwards (towards suppliers) Competitive advantage addressed Product range Product mix flexibility Customization / Quality Reasons for backward shifting Increasing the degree of product customization Reduce the reliance on forecasts Reduce or eliminate WIP buffers Reduce the risk of obsolescence of inventories Negative effects Longer delivery lead times and reduced delivery reliability Reduced manufacturing efficiency (due to reduced possibilites to process optimization) Order-penetration point (OPP) Raw materials Customer-driven Supply chain time line End customer

Capacity Demand management and master production scheduling: the basic principle Orders Forecasts MTS ATO MTO ETO Current date Time into the future -> Consume forecasts by orders! 17

Forecasting Plans and forecasts drive operations Accurate forecasts increase operational efficiency Make-to-order: capacity and materials management Assemble-to-order: capacity, materials and component management Make-to-stock: capacity, materials, component and stock management Forecasts are never completely accurate Good response management improves efficiency Planning for uncertainty: efficient buffering Responsive operations: operational flexibility Demand shaping: pricing and customer negotiations

Principles of all forecasting The forecast is always wrong! In practice, this means that it is challenging to match supply and demand The longer the forecast horizon, the worse the forecast It is even more challenging to predict customer demand for a long period of time Aggregate forecasts are more accurate It is difficult to predict customer demand for individual SKU or local market, but it is much easier to predict demand across a product family or a region Nevertheless, forecasting is a critical tool in demand management. The uncertainty related to forecasts needs to be matched with the flexibility in the production system.

SOP links to the other PPC modules Strategic Planning Resource Planning Sales & Operations Planning (Volume) Financial Planning Sales Plan Operations Plan Demand Management Rough-Cut Capacity Planning Master Production Scheduling (Mix) Front End

Sales and operations planning 2500000 2000000 1500000 1000000 500000 0 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1 SOP is needed to match manufacturing and distribution capacity to nonlinear demand across quarters and months Process of determining aggregate levels of production Managerial objective is to develop an overall business plan integrating various functional planning efforts: marketing, finance, operations, human resource planning 22

Value of SOP The SOP process provides visibility of the interactions between sales, marketing, production, and finance Critical trade-off decisions are documented Manufacturing performance is controlled in a clear fashion This leads to better integration among functional areas and better response to the marketplace

SOP is top management s handle on the business Provides important visibility of the critical interactions between sales, marketing, production and finance Operations plan provides basis for clear monitoring and controlling of performance Sales and operations plan is not a forecast of demand! It is a plan for which production management is held responsible One set of numbers : complete and integrated plans, budgets, objectives and goals to be used to make decisions and evaluate performance across the whole business 24

Elevating the planning and empowering execution Total business in Product lines x y z Individual items x 1 x 2 x 3 x 4 x 5 A way to get both detailed knowledge and empowerment while ensuring the big picture is about right 25

Monthly SOP process Step 5 Executive SOP meeting Decisions and game plan Step 4 Pre-SOP meeting Recommendations Step 1 Run sales forecast reports Step 2 Demand planning phase Statistical forecasts Step 3 Supply planning phase Management forecasts Capacity constraints End of month 26

SOP process key activities Update the sales forecast Review the impact of operations plan changes can current capacity and materials support the changes? Identify alternatives where problems exist Formulate recommendations for top management Communicate the information to top management

Case Unilever Nordic Source: Anna-Maria Tuominen 2010

Sales and Operations Planning (S&OP) process in Unilever Nordic Sales: We might sell 200 units Finance: We have 300 units in the budget Marketing Finance Demand forecasting Purchasing One Plan Product management Production: We ll make 150 units Marketing: the campaign target is to sell 400 units Sales Production Customer service Source figure: Red Pepper. Modified E&Y 1999

Unilever Nordic S&OP in a nutshell S&OP is a Business Planning process One, shared plan = ONE FIGURE Volume forecast serves as the basis for financial forecast S&OP helps to identify the present state and serves as the basis for action planning Rolling forecast for the next 12-18 months Transparency! S&OP target is to balance Supply and Demand Production and supply is scaled to meet the demand, ensuring better customer service level, reduced buffer stocks and reduced amounts of outdated products S&OP helps to reach the business objectives!

SOP into integrated business planning

SOP operations side Do you have excess capacity just in case? Do you maximize utilisation by letting inventories vary? Do you maximize own utilisation and use capacity outsourcing? An example: Seasonal demand in building materials manufacturing Does it make sense to have summer vacations in the production? 36

SOP decisions for operations Demand management change price to reduce/increase demand campaigns & other sales efforts Level capacity through Build-up and reduction in inventories Scheduling labour holidays Let customers wait longer: e.g. longer quoted delivery times Meet demand through subcontracting overtime (and reduced workweek) hiring (or layoffs) 37

One set of NUMBERS future of SOP is called Integrated Business Planning A planning factor is used to convert sales EUR to units The display includes both history and the plan Financial results of the plan are calculated and displayed Planning assumptions are clearly displayed

Summary The operations plan isn t a forecast. It is a statement of desired production output. The operations plan is included in the SOP process to maintain agreement with other functional plans. Trade-offs required to frame the operations plan must be made prior to final approval. Top management involvement is essential in the SOP process.

Master Production Schedule (MPS) Master Production Schedule answers, for an individual end item, e.g. on a weekly level, to the following questions: What product will be produced? How many should be completed? When these products are completed? 41

Master Production Schedule MPS is a planned production schedule MPS is stated in items (end item, sub-items and options) in order to figure out the materials and capacity needs Used as a vehicle for communication with sales sales can make accurate order promising against MPS MPS is updated as time goes on, this is called rolling through time 42

Attributes of the MPS The MPS is a statement of production, not of demand The MPS considers sales and operations plan, capacity constraints and other resource limitations, and the costs of production The MPS is stated in terms of product specifications usually part numbers which have specific bills of materials (BOM) In assemble-to-order environments, the MPS may be stated in terms of an average final product

MPS and the business environment In a make-to-stock company, the MPS is a statement of how much of each end item to be produced and when it will be available In a make-to-order (or engineer-to-order) firm, the MPS is usually defined as the specific end item(s) that make up an actual customer order In an assemble-to-order firm, the large number of possible product combinations is represented with a planning bill of materials

Master Production Scheduling Process and Techniques Determine supply and demand relationships over time (timephased record) Prepare production schedule according to strategy (chase, level, mixed) Calculate projected available balance (for available-topromise activities) Revise plans as time passes (rolling through time)

Time-Phased Record A means of gathering and displaying critical scheduling information (forecast, available stock, production schedule) Period On hand 1 2 3 4 5 Forecast 5 5 8 10 15 Projected available balance 20 25 30 32 32 27 Master production schedule 10 10 10 10 10

Linking MPS with the MRP records MPS plans become gross requirements for materials End item Master production schedule Period 1 2 3 4 5 6 30 25 45 Part A Gross requirements Scheduled receipts Projected available balance Planned order releases 30 25 45 47

Available-to-Promise When immediate delivery is not expected (or is not possible due to stockouts), a promised delivery date must be established The order promising task is to determine when the shipment can be made Available-to-promise (ATP) procedures coordinate order promising with production schedules

Available-to-Promise Logic with Planning BOM Are the common parts on the BOM available? Common Parts Available? No Is the requested gear option available? Yes Gear Available? Yes No Try 1 period later Is the requested Taylor option available? Taylor Available? Yes No Book order

Managing the MPS To be controlled, the MPS must be realistic People should only be held accountable for attainable performance levels Stability and buffering are important The MPS must not be overstated Sum of the MPS should equal the production plan

Summarizing principles The MPS unit should reflect the business environment and the company s chosen approach Customer order processing should be closely linked to MPS ATP information should be derived from the MPS and provided to the sales department An FAS should be used to convert the anticipated build schedule into the final build schedule The master production scheduler should ensure that the sum of the parts (the MPS) is equal to the whole (the operations plan)