Basics of Supply Chain Management

Unit 1
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Lesson 3
Master Planning
 Basics of Supply Chain Management

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© 2003 e - SCP -The Centre for Excellence in Supply Chain Management
No portion of this publication may be reproduced in whole or in part.
The Leading Edge Group will not be responsible for any statements, beliefs, or opinions expressed by the
authors of this workbook. The views expressed are solely those of the authors and do not necessarily
reflect any endorsement by The Leading Edge Training Institute Limited.
This publication has been prepared by E-SCP under the guidance of Yvonne Delaney MBA, CFPIM,
CPIM. It has not been reviewed nor endorsed by APICS nor the APICS Curricula and Certification
Council for use as study material for the APICS CPIM certification examination.

The Leading Edge Training Institute Limited

Charter House
Cobh
Co Cork
Ireland

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Preface............................................................................................................4
Course Description................................................................................................................. 4
Lesson 3 – Master Planning ............................................................................5
Introduction and Objectives.................................................................................................. 5
Production Planning .............................................................................................................. 5
Production Planning or Sales and Operations Planning Strategies.................................. 6
Make -to-Stock Production Planning .................................................................................... 9
Creating a Level Production Plan......................................................................................... 9
Resource Requirements Planning ....................................................................................... 11
Master Production Schedule (MPS) ................................................................................... 12
MPS Elements....................................................................................................................... 13
MPS Calculations ................................................................................................................. 15
MPS in Different Environments ......................................................................................... 16
MPS Development ................................................................................................................ 16
MPS, Sales and Delivery Promises ..................................................................................... 18
Summary ............................................................................................................................... 21
Further Reading ................................................................................................................... 21
Review ................................................................................................................................... 22
What’s Next? ........................................................................................................................ 24
Appendix.......................................................................................................25
Answers to Review Questions .............................................................................................. 26
Glossary ........................................................................................................28

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Preface
Course Description
This document contains the third lesson in the Basics of Supply Chain Management unit, which
is one of five units designed to prepare students to take the APICS CPIM examination. The
Basics of Supply Chain Management unit provides the fo undation upon which the other four
units build. It is necessary to complete this unit, or gain equivalent knowledge, before
progressing to the other units. The five units, which together cover the CPIM syllabus, are:
Basics of Supply Chain Management
Master Planning of Resources
Detailed Scheduling and Planning
Execution and Control of Operations
Strategic Management of Resources
Please refer to the preface of Lesson 1 for further details about the support available to you
during this course of study.

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Lesson 3 – Master Planning
Introduction and Objectives
This lesson provides a basic overview of the purpose and functions of production planning and
master production scheduling.
On completion of this lesson you will be able to:
Identify features of a basic level production plan for make-to-stock products
Describe relationships between resource requirements planning and production planning
State the purpose of a master production schedule (MPS)
Identify the relationship between the MPS and the production plan
Describe features of a simple MPS and rough-cut capacity plan
Describe the importance of the MPS to sales with regard to promises of delivery

Production Planning
Production planning and control involves several layers of activities. Planning begins with the
business plan, which is used to guide the sales and operations plan. This is turn is a major input
to the master production schedule which feeds into material requirements planning, production
activity and control (PAC), and purchasing.

Sales and Master Material PAC and

Business
Operations Plan Production Requirements Purchasing
Strategy Plan
Schedule Plan

Planning Execution

At each stage in the planning process, the three factors that must be identified are:
Demand priorities
Required capacity
Available capacity

Purpose of Production Planning

Production planning, an activity of Sales and Operations Planning, aims to ensure the overall
level of manufacturing output, inventories, and other activities meet the requirements of the sales
forecast and strategic business objectives, such as profitability, productivity, good labor
relations, competitive customer lead times, and low inventories.

Production Planning Activities

The activity involves developing a production plan, accompanying budgets and financial
statements, plans for materials and work force requirements. Production planning must establish
production rates that will satisfy customer demand and accomplish the objectives of the strategic
business plan, by maintaining, raising or lowering inventories or backlogs, while at the same
time keeping the work force stable.

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Marketing

Production
Finance Production
Plan

Materials Others
Production planning, also known as sales and operations planning, affects many functions and is
usually a cross- functional activity requiring input from marketing, production, finance, materials
and other functions when necessary.
As it is not required to be very detailed, production planning is usually at the product group
level. Products are grouped according to the similarity of their production processes.
The plan generally covers a 12 month time period and makes allowances for seasonal variation
in product demand where necessary. The production plan is concerned with:
planning for each product group
maintaining inventory levels to optimize the balance between cost and customer service
identifying required resources
identifying gaps between resources currently available and requirements

Production Planning or Sales and Operations Planning Strategies

The traditional approach of developing a production plan is evolving toward the concept of sales
and operations planning. The change of title is important as it highlights the importance of sales
and marketing having a direct involvement in the plan. The title of production plan does not refer
to the fact that this plan is the combined effort of several functions within an organization. It
implies that the plan is made by production only. Production planning is much more effective
when sales and marketing are directly involved.
The two main strategies for production planning are the chase strategy, which strives to produce
the amounts required by demand in each period, and the level production strategy, which aims to
produce at a constant rate that is equal to the average demand. Sometimes a combination, or
hybrid, of these strategies is used. So a sales and operations plan may employ:
Match / chase strategy
Level production strategy
Hybrid or combination strategy

Demand Matching / Chase Strategy

This strategy requires that production varies to meet demand and inventory levels remain stable
as a result. The company manufactures just enough at any time to exactly meet demand. Such a
strategy must be used in many industries, for example, restaurants, courier services, and
telecommunications.

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40
35
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25
Demand
20
Production
15
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r
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Jul
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Ap
Ap

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Oc

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Ja
Ja

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Figure 1 Chase Strategy

This strategy requires that a company is capable of meeting peak demand without relying on
stockpiles of finished product. In some cases, this may require hiring and training additional
temporary workers, and operating shifts or overtime. Although these measures add cost, they can
be offset against the savings made by maintaining minimum inventory levels, which is the main
advantage of this strategy.

Advantages Disadvantages

Stable inventory levels
Production is flexible
enough to meet demand
requirements
Increased hiring, training, overtime, and shift costs
Layoffs adversely affect employee morale
Sufficient skilled workers may not be available
Increased cost of ensuring plant capacity matches
peak demand

Level Production Strategy

The level production strategy maintains a constant amount of production which is equal to the
average demand over the period. Each day of operation will result in the same amount of
production. When demand is lower than the average, inventories of finished goods are built up.
These can be used to supplement production when demand levels are higher than production.
Some seasonal products, for example, Christmas tree lights, require level production as the costs
of continually laying off workers then rehiring and retraining would be prohibitive.
40
35
30
25
Demand
20
Production
15
10
5
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n

n
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Ap

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Figure 2 Level Production Strategy

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The main advantage of this strategy is the stability of the production process. Companies do not
need to have excess capacity to meet peak demand and they can maintain a stable work force.
However, when demand is low, inventory levels will rise, and the costs of storing and managing
this inventory will also rise. To meet demand levels, the company will need to accurately predict
the amount of working days available and use this to average the total demand into the daily
production requirement.

Advantages Disadvantages

Avoids the labor costs associated with Increased inventory costs

demand matching Depends on accurate forecasting of
Plant capacity is not required to match demand over the year and available
peak demand working days

1. Given the demand figures below and the number of working days each
month, calculate the amount that must be produced each day if using a level
production strategy to meet demand.
Jan Feb Mar Apr May Jun
Review Q 10 18 25 27 29 32 Demand
21 20 23 22 20 21 Work Days
Daily Production Rate:

Hybrid Strategies
An unending number of combinations between these two strategies are possible. The important
task is to find the best fit for the company, its objectives, its product, and environment. Most
usually, combination strategies produce at full capacity for part of the cycle and either lower or
stop production at other times. The strategy should strive to balance production and inventory
costs at the optimum level to meet demand.

35

30
25

20 Demand
15 Production

10

0
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Jul
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p
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Figure 3 Hybrid Strategy

This example of a hybrid strategy (shown above) employs full capacity throughout the summer
months and reduces production levels when demand drops in the winter months.

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Sub-Contracting
Although this is not strictly a production strategy, as the production is undertaken by another
company, it is a way of quickly achieving the required capacity without the complexities and
expense of increasing plant capacity and changing production levels.
Subcontracting is useful for dealing with changing demand although it can be expensive. Often
the cost of such items would be greater than if the items were made in the plant. When
calculating the cost of sub-contracted items its important to factor in not only the item cost, but
also the costs of purchasing, transporting, and checking the quality of the item.

Make-to-Stock Production Planning

Frozen foods, retail clothing, soft drinks and household products are all examples of make-to-
stock production, where products are stored as finished goods inventory before an order is
received from a customer. Make-to-stock production plans tend to be used when:
Demand is steady and predictable
There are few product options
The products have a long shelf life
The market expects delivery much faster than the time needed to make the product

The act of planning for make-to-stock production focuses on the level of inventory rather than
the level of demand. The information required includes the current inventory levels, the desired
inventory levels, any back orders, and the period of time to plan for.

Creating a Level Production Plan

This section looks at the steps involved in making a level production plan for make-to-stock
goods. The general procedure for developing a level production plan is as follows:
1. Calculate the forecast demand for the planning horizon
2. Determine the opening inventory and desired ending inventory levels
3. Identify the total number of back orders (orders that are late for delivery)
4. Calculate the total production requirement by adding the total forecast, back orders and
ending inventory requirements then subtracting the opening inventory balance.
5. Calculate the ending inventory for each period by adding production to the existing
inventory and subtracting the demand for that period.

Level Production Planning Example

KuteKidz clothing manufacturers are planning produc tion for the
coming 12 months. They have identified all the information they
require to make a level production plan for their caterpillar t-shirt
production line.
They make these t-shirts for the 2 to 5 year old age group in a range of colors and with long or
short sleeves, all with the caterpillar graphic added. The production plan is concerned only with
predicting the total production of all caterpillar t-shirts for the year. This product is made-to-
stock. The company aim to minimize costs by maintaining level production and reducing their
inventory to a safe level.

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Total Demand 12500
Current Inventory 2600
Current Back Orders 700
Required Ending Inventory 1000
Period 12 months
The required total production is calculated in the following way:
Total Production = total forecast + back orders + ending inventory – opening inventory
Using the figures recorded above, this gives the following equation:
Total production = 1250 + 700 + 1000 – 2600
Total production = 11600
This total production figure is then divided by the number of production days available in the
year to give the required daily production figures (note that the daily production is rounded up to
the nearest whole unit):
Daily production = 11600 / 254
Daily production = 46

The number of working days in each month determines the production rate each month:

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Working days 21 20 23 22 20 21 22 21 22 20 22 21
Production 966 920 1058 1012 920 966 1012 966 1012 920 966 1012
Once production rates have been set for each period, the ending inventory for each period can be
calculated using the following formula:
Ending inventory = opening inventory + production – demand
Assuming demand for the product is fairly stable at 1042 units per month and that the back
orders are fulfilled in January; the ending inventories for each period are as follows:

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Production 966 920 1058 1012 920 966 1012 966 1012 920 966 1012
Ending 1824 1702 1718 1688 1566 1490 1460 1384 1354 1232 1156 1126
Inventory
Note that the ending inventory for one period becomes the opening inventory for the next period.
For example, the following January, the opening inventory will be 1126. Production is expected
to reach 1012, and the demand for January is expected to be 1200. Using the formula above to
calculate the ending inventory:

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Ending inventory = 1126 + 1012 – 1140
Ending inventory = 998

2. If the opening inventory for the month of January is 500 units, demand is
1000 units, there are no back orders, and production is 1200 units, what will
the ending inventory be?
A. 300
Review Q B. 700
C. 1200
D. 1700

3. Given that the opening inventory is 100 units, calculate the planned ending
inventory for each month below, using the information provided about
demand and production rates.
Jan Feb Mar Apr May Jun
Review Q 100 180 253 279 294 322 Demand
236 225 259 247 225 236 Production
Inventory

4. Fresco Frozen Fruits want to develop a level production plan for six months
for their summer fruits packs. The opening inventory level is 400. They intend
to reach an ending inventory level of 520. Assuming equal periods and using
the total production and ending inventory formulae, calculate the planned
production and inventory levels for each period using the demand data below.
Review Q
Jan Feb Mar Apr May Jun
400 480 520 560 540 440 Demand
Production
Inventory

Resource Requirements Planning

At this stage in the planning process the company knows what is required and when it is
required. The question now is whether or not the company has the capacity to manufacture what
is required. The production plan will only be workable if there is sufficient capacity to achieve

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the planned production levels. Where there is insufficient capacity, plans must be made to
reconcile the differences.
A bill of resources is useful when addressing capacity issues. It shows the quantity of critical
resources needed to make an ‘average’ unit of a product group.
The table below is an example of a resources bill for a beverage company. The two main product
lines are fruit smoothies and yogurt smoothies. The resources bill lists the amount of fruit, yogurt
and labor required to make one case of smoothies.

Product Fruit (KG) Yogurt (Litres) Labour (Minutes)

Fruit Smoothie 8 0 15

Yogurt Smoothie 4 1.5 17

Master Production Schedule (MPS)

Once production planning has been completed, the next step is the preparation of a master
production schedule (MPS), an important planning tool and a vital link in the planning system.
The MPS forms the basis of communication between sales and manufacturing. Using the MPS as
a contract between sales and production means that sales can make valid order promises.
However, the MPS is not a rigid plan. It is a reference
point between manufacturing and sale and can be
changed as required when there are changes in demand
of capacity.
The MPS builds on the information available in the
production plan and other sources to provide a detailed
picture of the demand for individual end items by date
and quantity. While the production plan provides
monthly aggregate requirements for product groups, the
MPS is much more detailed, providing weekly
requirements for each single product item.

Objectives
The MPS strives to form a detailed plan that fulfils the following objectives:
Achieve desired customer service levels
Make the most efficient use of resources
Maintain a desirable level of inventory
It is limited by the production plan and should therefore aggregate to the same figures for each
product group as detailed in the production plan. The MPS must balance the demand identified
by sales and marketing with the availability of resources.

Value of the MPS

The MPS is a link between planning and actual manufacturing. It is used as the basis for
calculating the capacity and resources required to fulfil the production plan.

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The MPS is the main driver of the material requirements plan. Along with the bills of material, it
can determine what components are needed from manufacturing and what components must be
purchased. The MPS is a priority plan for manufacturing.

Inputs
The MPS must take into account the forecast, production plan, and other important
considerations such as the availability of material, the availability of capacity, and management
policies and goals. The information required to develop an MPS is found in:
The production plan Forecasts for individual end items
Actual orders received from Inventory levels for individual end
customers items
Limits of capacity Orders for stock replenishment

MPS Elements
An MPS is a series of time-based quantities for the end product produced by the organization.
The MPS details the expected demand or quantities for a product's constituent components and
the expected timings or dates of these demands. It is the anticipated production schedule for all
components that are assigned to the master scheduler.

Time Period
The time period of an MPS in which the quantity of an item appears means
that this quantity is to be completed through the final operation in that
particular period. The time period is known as a time bucket. Time buckets
can be monthly, weekly, daily, or hourly. It is usual for most manufacturing
companies to have time buckets of one week.

Safe Components
In some organizations, only certain components are included in the MPS. Furthermore, these
components are classified according to the number of customers that regularly purchase them or
the number of products that they can be used for. These components are regarded as being safe,
in that they have a limited risk of becoming obsolete and, as such, the significance of
overstocking is low. The calculation analysis for their procurement is based on historic or future
forecast data but not from customer orders. This data is combined with other associated data that
is based on labour and equipment resource availability.

Ad-Hoc Components
There are usually other components to be produced or procured that may or may not be included
in the MPS. However, labour and equipment resource capacity must be provided for these too,
often from common or shared capacities.

System Forecast
A material requirements planning (MRP) system generates a system forecast that is based on the
input of data to the system by the scheduler or materials manager at the start of the planning
year. This data is for the whole year so that there is a forecast for product requirements beyond
the planning period.

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The planning period is the number of detailed time buckets in each planning run of the system
and is usually a number of weeks. The system forecast assumes the role of the manual forecast in
an MPS if the latter is missing.

Manual Forecast
Information from the manual forecast is entered by the scheduler or materials manager to the
time buckets of the MPS in which there are no purchase orders (POs).
Beyond the fixed period, the manual forecast will be used by the MPS to drive the MRP. The
fixed period is the number of time buckets during which a quantity cannot be changed.
Therefore, production and purchasing are given a fixed plan for a period of time and they do not
have to change their production and POs respectively, every time the MPS and MRP are run.

Actual Orders
Actual orders are POs that have been placed by customers. These order qua ntities must be
completed and shipped to the customers in the relevant time bucket. Customers can place orders
at any time, although quantities may have to be above, and in multiples of, minimum order
quantities. The order quantities and multiples will depend on the type of products being supplied.

Minimum Order Quantity

To illustrate the term, take the example of the sale of beer. Some beers are only sold by the
manufacturers in kegs. The minimum order quantity of beer is therefore, one keg. It would not be
possible for retail outlets, such as bars, to buy a quantity of beer in pints or in litres from the
manufacturers.

Total Demand
This is the actual demand quantity that the MPS will use to generate the data that drives the
MRP.

Starting Inventory
This is the number of units that are in the finished goods warehouse at the start of the planning
period. It is different from initial inventory.

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MPS Calculations
Firm Planned Orders
These allow the scheduler to force the MRP system to plan in a particular way, by overriding lot
size or lead-time rules. It involves a manual input to the MPS and the scheduler will have to be
alert to possible unforeseen repercussions. For example, the scheduler will have to ensure that
shipments are being made to customers and that there is not a build- up of excessive quantities of
finished goods in the warehouse.

Net Requirements
The net requirements calculation for a period of the MPS uses total values as opposed to single
values.

Projected Inventory
This is the expected number of units to be in stock during a particular time bucket of the
planning period. Projected inventory helps the scheduler to view the available inventory in future
time buckets, if everything goes according to plan. The projected inventory for a particular time
bucket will become the initial inventory for the next time bucket.

Available to Promise
This is the inventory available to cater for new and as yet, unmade orders, if everything goes to
plan. This is particularly useful to sales and marketing. See page 18 for more information on this
calculation.

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MPS in Different Environments
The MPS needs to represent what will be manufactured at the most efficient level. If the MPS
covers too many items, it will be very difficult to manage effectively. If it is not detailed enough,
production will suffer. As a general rule, master scheduling should occur where the smallest
number of product options exists.
MPS End Product

In make-to-stock environments, a limited number of items are assembled from

a larger number of components, for example, video recorders or computers.
The MPS should in this case be a schedule of finished goods items.
Raw Material
End Product
In a make-to-order environment, generally many different end items can be FAS
produced from a relatively small number of raw materials. One example is
custom-tailored clothes. Another example is car manufacturing. The
subassemblies for many cars will be the same but each car manufactured will MPS
differ in specific options such as color, stereo, sunroof, and electric windows.
Raw Material
The MPS in this case is a schedule of the actual customer orders.
End Product
Assemble to order environments use many raw materials to form basic
MPS FAS
components and subassemblies. However, these components and
subassemblies can provide a great variety of finished products.
The MPS should therefore take place at the subassembly level. A Final
Assembly Schedule (FAS) will also be required to manage actual
Raw Material
customer orders.

MPS Development
There are three phases in the preparation of an MPS:
Developing a preliminary MPS
Checking the preliminary MPS against available capacity
Resolving differences between the preliminary MPS and available capacity

Preliminary MPS
Earth Mother, a producer of baby food products, makes to stock several different
types of organic baby food. The food is prepared in batches and stored as finished
goods inventory. Their organic pear and banana dessert is produced in batches of
1000. The on-hand or opening inventory is expected to be 800 units.
Period 1 2 3 4 5 6
Forecast 600 600 600 600 600 600
Projected Available 800 200 600 0 400 800 200
MPS Receipt 1000 1000 1000
The first period opens with an inventory of 800 units. This allows the demand of 600 units to be
satisfied and leaves 200 units as the opening inventory for the next period.

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As the demand in period 2 will not be satisfied by the inventory available, an MPS receipt for
1000 is scheduled for that week. This means that the projected availability at the end of period 2
will be 600 (200 carried over in inventory, plus 1000 in production less 600 demand).
In period 3, the forecast demand matches the available inventory. At this point inventory levels
are zero. So, to satisfy production in period 4 a further batch must be produced.
The remainder of the batch in period 4 is available in inventory but it is not sufficient to satisfy
demand for period 5 so a further batch is produced. This leaves 800 in inventory which is
sufficient to satisfy demand in period 6 and still leaves 200 units in inventory.
This process must be followed for each individual product item in the
Production Plan
family. The MPS is then checked to ensure that the planned production
for all the group items and the total ending inventory agree with the
production plan.
Master Production
Schedule
The MPS is an expansion of the production plan in greater detail. It must
always agree with the figures in the production plan.

Rough Cut Capacity Planning (RCCP)

RCCP is a check to ensure that the critical resources required to support the preliminary MPS are
available. RCCP determines the impact of the MPS on resources:
By checking sample key resource, for example, manpower, machine hours, storage,
standard costs, the shipping plan (in monetary terms), and inventory levels
In order to ensure production capacity is feasible
If the proposed MPS is not feasible, production control should inform management. MPS and
RCCP plans are developed interactively. In RCCP, a bill of resources is attached to each of the
items in the MPS, and the capacity plan is derived by exploding the MPS against the bill of
resources. No consideration is given to component inventories. The main aim of RCCP is to
identify bottleneck work centers and availability issues in critical resources.

Resolving Differences
When the available capacity is greater than the required capacity, the MPS is workable. If that is
not the case, either the available capacity must be adjusted by means of overtime, extra shifts,
extra work centers and temporary workers or subcontracting. If this is not possible, the MPS
must be revised to fit available capacity.

Evaluating the MPS

Once the MPS is agreed it must then be judged on its merits in three criteria:
Does the MPS remain within capacity restraints in each period and make the best use of
resources
Does the MPS ensure that acceptable customer service will be provided: that due dates
will be met
Does the MPS avoid excessive production costs such as overtime or extra shifts.
The MPS should be realistic and workable. It provides detailed information about the antipicated
manufacturing schedule. It is not a sales forecast, a wish list or a final assembly schedule.

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Final Assembly Schedule
The final assembly schedule (FAS) is used when there are many options and combinations of
subassemblies, for which it is difficult to forecast detailed customer demand. The MPS will
generally deal with the components in this case. The final assembly then only takes place when
the customer places an order.
Take for example car manufacture. The customer can choose options
such as the colour, type of stereo equipment, and seat covers. The MPS
deals with the basic car. The FAS ensures that the extras are added as
specified by each customer.
The FAS schedules customer orders as they arrive. It is based on the components planned in the
MPS and is responsible fro scheduling from production through final assembly to customer
shipment.

MPS, Sales and Delivery Promises

The MPS is an achievable plan of production built on forecasts and actual demand. If the MPS is
unrealistic the results are overloaded capacity, late orders, and unreliable delivery promises.
Once the production is underway and customer orders start to come in, it must be possible to
make valid delivery promises.

Available-to-Promise
As firm orders are received, they consume available capacity or inventory. The remaining
inventory is ‘available to promise’ (ATP).
ATP is the uncommitted part of finished goods inventory and planned production maintained in
the master schedule to support customer order promising. The ATP is the uncommitted inventory
balance in the first period. It is generally calculated for each period in which an MPS receipt is
scheduled.
You calculate ATP by adding scheduled receipts to the opening inventory and subtracting all
actual orders scheduled before the next MPS scheduled receipt. A scheduled receipt is an order
that has been issued to manufacturing or to a supplier for more material.
In the following scenario the opening inventory is 800 units.
Period 1 2 3 4 5
Customer Orders 600 600 600 600 600
MPS Receipt 1200 1000 1000
ATP 200 0 400
ATP for the first period is equal to the opening inventory less all customer orders due before the
next MPS receipt. As opening inventory is 800 and 600 orders are scheduled before the MPS
receipt in period 2, the amount available to promise is 200.
In period 2, the ATP is equal to the MPS receipt minus all customer orders due before the next
MPS receipt. In this case, the MPS is 1200 and available inventory is 200, but the customer
orders before period 4 total 1200 so ATP is 0.
Each ATP calculation assumes that the entire ATP will be sold before the next scheduled receipt.

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5. Assuming there is another MPS receipt in period 6, what is the ATP for
period 5?
A. 0
B. 400
Review Q
C. 600
D. 800

Planning Horizons
The planning horizon is the time projected by the master schedule. It is set to cover a minimum
of cumulative lead time plus time for lot sizing low-level components and for capacity changes
of primary work centers or of key suppliers. However, the planning horizon is often longer than
this in order to give greater visibility and improve the chances of identifying and avoiding future
problems, for example capacity issues.
If a final assembly schedule is used, the planning horizon for that schedule must include all the
time needed to assemble the customer’s order. The time needed to manufacture the components
will be included in the planning horizon of the MPS

Time Fences
Although the MPS spans the cumulative lead time, there are
differences in the way each part of the MPS operates,
particularly with regard to changes. Although changes will and
do occur, their impact is markedly different depending on how
far out they are. The following graphic explains the concept.
0 2 weeks 26 Weeks

Fixed Period Slushy Period Liquid Period

Actual Actual and Forecast Forecast

Orders Demand Demand Only

Due Final Cumulative Lead

Date Assembly Time Fence
Time Fence

Fixed Period
During the fixed or firmed period, the actual orders are the drivers and make up the total
demand. Therefore, total demand will be equal to actual orders. Capacity and materials are
committed to actual orders I this period. Changes here lead to increased cost, reduced efficiency
and poor customer service. During this period, only emergency changes may be made.
Beyond the Fixed Period
Outside the fixed order period, the manual forecast is the driver, regardless of whether there is
actual customer demand in the same period or not. Therefore, the total demand is equal to the
manual forecast. In the first part of this period, the ‘slushy’ zone, some firm planned orders may
be available so capacity and materials are committed to some extent. However, there is still room

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for tradeoffs. Where material and capacity are available, MPS changes are possible here. If not,
other orders may be shifted around.
In the liquid zone any change to the MPS is possible once it remains within the limits of the
production plan. Changes in this zone are common and often automatically calculated by
computer.

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Summary
This lesson provided a basic overview of the purpose and functions of production planning and
master production scheduling.
You should be able to:
Identify features of a basic level production plan for make-to-stock products
Describe relationships between resource requirements planning and production planning
State the purpose of a master production schedule (MPS)
Identify the relationship between the MPS and the production plan
Describe features of a simple MPS and rough-cut capacity plan
Describe the importance of the MPS to sales with regard to promises of delivery

Further Reading
Introduction to Materials Management, JR Tony Arnold, CFPIM,
CIRM and Stephen Chapman CFPIM

APICS Dictionary
10th edition, 2002

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Review
The following questions are designed to test your recall of the material covered in
lesson 3. The answers are available in the appendix of this workbook.

6. A production plan will have all of the following except:

A. Shipment plan
B. Product families
C. Inventory plan
D. Daily Production

7. Choose the most appropriate statement(s) to complete the following sentence: The
production plan:
1. sets the level of production in activities for some time in the future
2. integrates the capabilities and capacities of the factory with the market
3. sets the production level to achieve the overall business goal of the company

A. 1. only
B. 1. and 2.
C. All three statements
D. 1 and 3

8. You are the master scheduler in a job shop production environment. One of your largest
customers has asked if you can deliver an orde r late next week but you have some short
term capacity constraints. Which of the following can you do to ensure the order can be
delivered?
1. Add an additional shift in three weeks time
2. Organize overtime
3. Build inventory in slower production times
4. Subcont ract work to another intra-company production facility

A. All except 1
B. All except 2
C. All except 3
D. 4 only

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9. Which manufacturing strategies are used when developing a production plan?
A. Chase strategy and level production
B. Delphi strategy and inventory reduction
C. Delphi strategy and level production
D. Inventory reduction and level production

10. Which are inputs to a realistic MPS:

A. Production plan, forecasts for end items, and product costs for end items
B. Production plan, forecasts for end items, and capacity constraints
C. forecasts for end items, capacity constraints, trend analysis, and product costs for end
items
D. Trend analysis, product costs for end items and production plan

11. Choose three main objectives when establishing an MPS:

A. Efficient use of resources
B. Efficient final assembly
C. Improved customer service levels
D. Efficient use of inventory
E. Inventory reduction

12. Final assembly scheduling occurs when:

A. A customer order is received
B. The build schedule is planned
C. A customer forecast is received
D. The MPS has been developed
E. Capacity is limited

12. The diagram represents a make to stock environment. How MPS End Product
are customer orders satisfied in this type of manufacturing
environment?
A. Capacity review
B. Sub-assembly inventory
C. Finished goods inventory
D. Customization of components Raw Material

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What’s Next?
Lesson 3 covered the basic characteristics and methods of production planning and master
production scheduling.
You should review your work before progressing to the next lesson which is:
Supply Chain Management Basics – Lesson 4 – Material Requirements Planning (MRP)

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Appendix

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Answers to Review Questions
Lesson 2 Review
1. 23.5

2. 700

3.
Jan Feb Mar Apr May Jun
100 180 253 279 294 322 Demand
236 225 259 247 225 236 Production
236 281 287 255 186 100 Inventory

4. The opening inventory level is 400. Ending inventory level should be 520.
Jan Feb Mar Apr May Jun
400 480 520 560 540 440 Demand
510 510 510 510 510 510 Production
510 530 540 480 450 520 Inventory

5. 400

6. Option D
A production plan is usually presented in monthly figures showing shipments, production and
inventory (or unfinished customer orders) broken down by product families.

7. Option C
The production plan specifies the overall level of manufacturing output planned to be produced,
usually stated as monthly rates for each product family. It usually spans a year.
8. Option A. The 2nd, 3rd and 4th actions could be taken.
Creating an extra shift in three weeks time is unlikely to create the inventory required in time for
the customer’s requirements. Short term capacity is increased by overtime, inventory or
subcontracting. The use of overtime is a way to increase quickly a short term capacity problem.
Adding an additional shift could be too long for the customer to wait.
9. Option A.
The chase strategy requires that production varies to meet demand and inventory levels remain
stable as a result. The company manufactures just enough at any time to exactly meet demand.

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Such a strategy must be used in many industries, for example, restaurants, cour ier services, and
telecommunications. This strategy requires that a company is capable of meeting peak demand
without relying on stockpiles of finished product. In some cases, this may require hiring and
training additional temporary workers, and operating shifts or overtime. Although these
measures add cost, they can be offset against the savings made by maintaining minimum
inventory levels, which is the main advantage of this strategy.
The level production strategy maintains a constant amount of production which is equal to the
average demand over the period. Each day of operation will result in the same amount of
production. When demand is lower than the average, inventories of finished goods are built up.
These can be used to supplement production when demand levels are higher than production.
Some seasonal products, for example, Christmas tree lights, require level production as the costs
of continually laying off workers then rehiring and retraining would be prohibitive.

10. Option B
The production pla n, forecasts and capacity constraints are all inputs to the MPS. Trend analyses
without specific forecasts are of no use to the MPS. Costs are not a necessary input.

11. Options A, C and D

The master scheduler must make sure labour, equipment, material, and inventory are being used
efficiently to maintain high levels of customer service. Inventory reduction is not a key objective
of an MPS. Efficient final assembly would be developed by a final assembly schedule.

12. Option A
Final assembly scheduling occurs when a customer order has been received. The FAS is a build
schedule that ensures customers get exactly what they ordered. Usually an FAS is developed
when there are a variety of options for the customer to order. If the FAS was prepared on
forecasts, the organization could be left with inventory that may never be ordered.

13. Option C
In a make to stock environment, customer orders are shipped from finished goods inventory as
products are made and placed in stock.

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Glossary

Term Definition

assemble-to- Assemble-to-order is a production strategy where key components are stocked

order in anticipation of customer orders. Assembly is triggered by receipt of an
order. This is useful when a large number of products use common
components.

Available-to- The uncommitted portion of a company’s inventory and planned production

promise (ATP) maintained in the master schedule to support customer order promising. The
ATP quantity is the uncommitted inventory balance in the first period. It is
normally calculated for each period in which an MPS receipt is scheduled.

Bill of material A listing of all the subassemblies, intermediates, parts and raw materials
(BOM) required for a parent assembly. The BOM shows the quantity of each and is
used in conjunction with the MPS to calculate production orders and purchase
requisitions. Also called a formula, recipe or ingredients list in some process
industries.

Chase method or A production planning method that maintains a stable inventory level while
strategy production levels vary to meet demand.

Cumulative lead Cumulative lead time is the longest planned length of time to accomplish the
time activity in question. For any item planned through MRP, it is the longest lead
time in the bill of materials item list.

Delivery lead Delivery lead time is the time from receipt of a customer order to the delivery
time of the product.

Lead time Lead time is the span of time required to perform a process.

Level production A production planning method that maintains a stable production rate while
inventory levels fluctuate according to the level of demand.

Make-to-order Make-to-order is a production strategy where a product or service can be

made after receipt of a customer’s order. The final product is a combination of
standard items and customized items.

Make-to-stock Make-to-stock is a production strategy where products are finished before

receipt of a customer order. Customer orders are filled from existing stocks of
finished goods and production orders are used to replenish those stocks.

Master The anticipated build schedule for those items assigned to the master
Production scheduler. It becomes a set of planning numbers that drive material
Schedule (MPS) requirements planning. The MPS represents what the company plans to
produce expressed in quantities and dates.

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Planning The amount of time the master schedule extends into he future. This is
horizon normally set to cover the cumulative lead time plus time for lot sizing and for
capacity changes of primary work centers.

production This involves routing and dispatching work through the production facility
activity and and controlling suppliers. PAC covers activities on the shop floor that
control (PAC) schedule, control, measure, and evaluate the effectiveness of production.

production Setting the overall level of manufacturing output required to satisfy the sales
planning plan or forecast while meeting objectives such as profitability, productivity,
and competitive lead times. The production plan should aim to fulfil
requirements while maintaining a stable work force where possible.
Production planning is usually a cross- functional activity with input from
marketing and other functions.

Resource Capacity planning at the business plan level .this establishes and measures
Planning (RP) long-range capacity. It is based on the production plan but may be driven by
higher level plans such as the business plan. It addresses long range planning
issues.

resource Also known as resource planning. It is capacity planning at a business plan

requirements level and is concerned with measuring and adjusting long-range capacity.
planning

rough-cut The process of converting the master production schedule into requirements
capacity for resources such as labor, machinery, warehouse space, supplier
planning capabilities. Demonstrated capacity is examined for each key resource.
(RCCP)

sales and A process that provides the ability to direct business to achieve competitive
operations advantage by integrating customer- focused marketing plans for products with
planning the management of the supply chain. The process integrates all the plans for
(S&OP) the business.

Subcontracting Sending production work to another manufacturer

Time fence A policy that notes where various restrictions or changes in operating
procedures takes place.

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