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Critical Processes

Several critical processes drive the success of business operations. This section explains the most common ones.

Production Planning Processes

Production planning is an integral part of the business planning process. This process begins when management of an organization gathers input from the various organizational functions—such as finance, marketing, operations, and engineering—to develop a business plan. The business plan, with its long-term focus, provides the company’s direction and objectives for the next two to ten years. The business plan is then typically updated and reevaluated annually. The business plan, which states the company’s objectives for profitability, growth rate, and return on investment, is typically the starting point for the organization’s production plan, often termed the aggregate plan. So what is a production plan?

The aggregate or production plan is an organizational plan that identifies the resources needed by operations management to support the business plan over the next 6 to 18 months. The aggregate plan details the aggregate production rate and the size of the workforce, which enables planners to determine the amount of inventory to be held; the amount of overtime or undertime authorized; any authorized subcontracting, hiring, or firing of employees; and back-ordering of customer orders. The production plan is usually updated and reevaluated monthly by operations management.

A company typically develops the production plan based on a composite product that represents the expected product mix. To minimize the level of details, individual products are not represented in the aggregate plan. Think about how many different products most companies have, and you can see that it would become cumbersome to include every product in the plan. Companies may group products into major product families to facilitate production planning. For example, a paint company may produce many different products, such as different colors of paint, different finishes (e.g., gloss versus flat), and container sizes (e.g., gallon or half gallon). Including all of these in a plan would be cumbersome. The aggregate plan considers a composite product—such as “gallons of paint” in this example—as a product measure.

The goal of the aggregate plan is to develop a plan for all the operations resources—machines, labor, and inventory—to produce the amount of product needed over a certain period of time. The aggregate plan will then specify for a particular period, say, the month of January, how many units of product are produced, how much labor is needed, and how much inventory. The goal is to have a big picture; using a composite product, or product families, reduces the level of detail but still provides the information needed for decision making. Common terms of output used in the aggregate plans are units, gallons, pounds, standard hours, and dollars. For example, a simplified production plan is shown in Table 1-2.

Table 1-2 A Simplified Production Plan

QUARTER

1

2

3

4

Demand

8,000

11,000

14,000

15,000

(Demand is given in units, say gallons or dollars.)

Produce

12,000

12,000

12,000

12,000

(In this case we chose to produce average demand.)

Inventory

4,000

5,000

3,000

0

(Inventory is computed as Amount Produced + Inventory from previous period - Demand.)

Labor

6 workers

6 workers

6 workers

6 workers

(We assumed that each worker produces 2,000 units per quarter.)

To summarize, the purpose of the production or aggregate plan is to develop production rates and authorize resources that allow the company to meet the objectives of the strategic business plan.

Master Production Schedule (MPS)

The plan below the production plan is a master production schedule (MPS). An MPS is the anticipated production schedule for the company expressed in specific configurations, quantities, and dates. It is stated as specific finished goods. It details how operations will use available resources and which units or models will be built in each time frame. This allows marketing to make informed commitments to customers. The MPS and the detailed sales plan are reviewed weekly or even daily.

The MPS is used as an anticipated schedule for building specific finished products and providing specific services. The key distinction here is that the MPS is a statement of production or services and is not a statement of demand—a plan to satisfy customer demand while considering operational effectiveness and cost. Due to this, individual products can be finished ahead of time and held in inventory rather than finished as needed. The master scheduler or office manager balances customer service and capacity usage.

The aggregate plan shows how many products or services are planned for each time period. The MPS identifies the specific products or services planned for a given period. The relationship of these plans is shown in Figure 1-4.

Figure 1-4

Figure 1-4 The relationships of different planning processes

Material Requirements Planning (MRP)

The authorized MPS is a critical input into material requirements planning (MRP), the next plan below the MPS. MRP is a plan that uses the MPS, bill of material data, and inventory records to calculate specific requirements for materials. The MPS tells the MRP system what the company plans to build and when. The MRP system then calculates the materials needed to build the products in the schedule and plan for the necessary materials. Notice that as we move from the business plan through the production plan, MPS, and then MRP we progressively become more specific and detailed.

Rough Cut Capacity Planning (RCCP)

This is the process of converting the MPS into specific capacity requirements for key resources such as direct labor and machine time. This process calculates a rough estimate of the workload placed on critical resources by the proposed MPS. This workload is compared against demonstrated capacity for each critical resource. This comparison enables the master scheduler to develop a feasible MPS.

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