12. Production and Material Requirements Planning

In this chapter, the sales and operation planning (S&OP) concept is presented. It starts with an introductory case-study considering sales and operations planning at a petrochemistry company. In the beginning, different planning horizons and the role of aggregate planning are discussed. Afterwards, different options for matching demand and supply at an aggregated level are explained. Next, the rolling planning concept is introduced. Subsequently, the concept of the master production schedule (MPS) is presented. We will learn how to apply linear programing methods to production planning. Finally, the principles of exploiting the bill-of-materials are discussed to show how dependent material requirements can be computed while taking lead time into account. This chapter is accompanied by an E-Supplement providing additional case studies, Excel templates, tasks and video streams.

Suresh Chandra has just received the demand forecast data for next year. He is new in the company and responsible for operations planning. His previous experiences in different companies provided him with valuable knowledge and tools for aggregate planning, master production scheduling, and material requirements planning. In the new position, his responsibility was to integrate all these activities into the operations planning.

The previous operations planning manager applied the following concept. First, sales and production plans were set up very early (typically in September of the previous year), and then agreements with customers and suppliers were signed. The problem with this system was that production and material procurement were not flexible enough to react to demand fluctuations. In addition, since the structure of the products was set up far in advance, the possibility of product individualization according to customer orders was missing.

Janna, who is a trainee in the SCOM department, should support Suresh in the redesign of the operations planning system. Janna and Suresh understand that matching demand and supply should take place as close as possible to the date when a customer order or demand is known. Janna makes a suggestion: “We could make production planning on a weekly basis each Friday for the following week when customer orders and demands are known”. Suresh saw two problems here. First, it would be difficult to plan material requirements since many purchased items had quite a long lead time. Second, frequent production setups are expensive and not always possible for technological reasons.

Then Janna proposed analyzing which data should be set up for a long period of time (so-called design variables) and which data can be adjusted during the planning process (so-called control variables). This was a really good idea. Suresh and Janna invited marketing, sales, manufacturing, and procurement managers to a meeting and jointly analyzed the as-is planning process.

They found that rough demand data and production quantities for each month must really be known in advance. It is necessary to plan capacities and personnel, and to make basic agreements with customers and suppliers. At the same time, such data are not required in detail for each product. It would be enough to aggregate products into product families according to marketing and sales interests.

For manufacturing, it is important to know detailed data on production quantities at least 3–5 days before the beginning of the next month. This would be the basis for calculating master production schedules among all the production factories in the SC which are interconnected in the technological process. For procurement, such a timeline would also be okay for calculating material requirements and replenishing items from suppliers, while taking lead times into account.

Then, daily production plans can be set up. Suresh asked if it could be demonstrated that it would be possible to update production plans twice a month using new demand information.

Janna also noticed that exact material specifications were not available for all products. This could create difficulties in procurement planning and result in missing items in production, and very expensive breaks in manufacturing. Indeed, each product was composed of 2000 parts on average. Even if one part was missing, delivery delays would occur. Suresh asked if this problem could be rectified and all the BOM (Bill-of-Materials) entered into the ERP system.

In this chapter, we learn basic methods of operations planning which will help Janna and Suresh increase profits and reduce costs.