operations management; - yolachapter 15 master production scheduling key questions from managers how...

KRAJEWSKI / RITZMAN

OPERATIONS MANAGEMENT;Strategy and Analysis

THIRD EDITION

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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 0-201-56630-31. Production management. I. Ritzman, Larry P. II. Title.

TS155.K788 1992 92-12241658.5—dc20 CIP

Copyright© 1993, 1990, 1987 by Addison-Wesley Publishing Company, Inc.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, ortransmitted, in any form or by any means, electronic, mechanical, photocopying, recording, orotherwise, without the prior wri t ten permission of the publisher. Printed in the United States ofAmerica.

ISBN 0-201-56630-3

1 2 3 4 5 6 7 8 9 1 0 DO 979695949392

Chapter 15 MASTERPRODUCTIONSCHEDULING

Key Questionsfrom Managers

How do ourcompetitive

priorities affect ourapproach to master

productionscheduling?

How should ourmaster productionschedule relate to

our production plan?

C H A P T E R O U T L I N E

The Master Production Scheduling ProcessThe Master Production ScheduleTypical Constraints

Managerial IssuesThe Master Production Schedule and Competitive PrioritiesFunctional InterfacesComputer-Assisted Master Production Scheduling

Managerial Practice 15,1Master Production Scheduling at Hyundai Motor Company

Developing a Prospective Master Production ScheduleCalculating Projected On-Hand InventoriesDetermining the Timing and Size of MPS QuantitiesCalculating Available-to-Promise QuantitiesLinking the Production Plan and the MPSFreezing the MPS

Rough-Cut Capacity PlanningMethod of Overall FactorsEvaluating the Method of Overall Factors

How can weprovide accurate

shipping dates to ourcustomers?

How can we getbetter estimates of

cash flows andcapacity

requirements?

615

E than Allen Furniture Company produces more than 1400 wood furniture prod-ucts in 14 geographically dispersed factories. The Ethan Allen productionplan determines the desired aggregate production output of each assembly

line. Ultimately, however, the company must develop a more detailed plan, one thatdetermines the production quantities and sequence of specific products on the lines.Atypical assembly line manufactures from 15 to 100 different products, so care mustbe taken to produce a schedule that does not exceed the lines' capacities. Other-wise, the strategic objectives of the production plan will not be met. The need todetermine such a schedule is common in the world of manufacturing.

In this chapter we show how such a detailed plan, called the master productionschedule, disaggregates the production plan into specific product schedules.We also discuss how competitive strategies affect a firm's approach to masterproduction scheduling.

THE MASTER PRODUCTION SCHEDULING PROCESS

The master production scheduling process begins where we left off in Chapter14. 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 fromwhich shippable products are built (see Chapter 12). Time periods are usuallymeasured in weeks, although hours, days, or even months are sometimes used.

Figure 15.1 shows the master production scheduling process. Think of theprospective MPS as a trial of whether operations can meet the schedule withthe resources (such as machine capacities, labor, overtime, and subcontractors)estimated in the production plan. Operations revises the MPS until it eitherfinds a schedule that satisfies all resource limitations or determines that no fea-sible schedule can be found. In the latter event, the production plan must berevised to adjust production requirements or increase authorized resources. Ul-timately, an acceptable prospective MPS emerges for plant management au-thorization. Operations then uses the authorized MPS as input to materialrequirements planning, which, as you will see in Chapter 16, determines spe-cific schedules for part, component, and assembly production.

A master production scheduler is responsible for developing an MPS thatsatisfies the intent of the production plan. Other responsibilities typically in-clude those in Table 15.1. The MPS process may differ from company to com-pany, depending on whether the firm has a process or product focus. Thus thespecific procedures and record formats presented later in this chapter illustratetypes of procedures and may not apply to specific firms. In summary, as Fig. 15.1illustrates, the MPS process is linked to the authorized production plan andtherefore requires feedback from the functional areas involved in productionplanning. In this way, the master production schedule sets in motion the op-erations to achieve the production plan's objectives.

616

E than Allen Furniture Company produces more than 1400 wood furniture prod-ucts in 14 geographically dispersed factories. The Ethan Allen productionplan determines the desired aggregate production output of each assembly

line. Ultimately, however, the company must develop a more detailed plan, one thatdetermines the production quantities and sequence of specific products on the lines.Atypical assembly line manufactures from 15 to 100 different products, so care mustbe taken to produce a schedule that does not exceed the lines' capacities. Other-wise, the strategic objectives of the production plan will not be met. The need todetermine such a schedule is common in the world of manufacturing.

In this chapter we show how such a detailed plan, called the master productionschedule, disaggregates the production plan into specific product schedules.We also discuss how competitive strategies affect a firm's approach to masterproduction scheduling.

THE MASTER PRODUCTION SCHEDULING PROCESS

The master production scheduling process begins where we left off in Chapter14. 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 fromwhich shippable products are built (see Chapter 12). Time periods are usuallymeasured in weeks, although hours, days, or even months are sometimes used.

Figure 15.1 shows the master production scheduling process. Think of theprospective MPS as a trial of whether operations can meet the schedule withthe resources (such as machine capacities, labor, overtime, and subcontractors)estimated in the production plan. Operations revises the MPS until it eitherfinds a schedule that satisfies all resource limitations or determines that no fea-sible schedule can be found. In the latter event, the production plan must berevised to adjust production requirements or increase authorized resources. Ul-timately, an acceptable prospective MPS emerges for plant management au-thorization. Operations then uses the authorized MPS as input to materialrequirements planning, which, as you will see in Chapter 16, determines spe-cific schedules for part, component, and assembly production.

A master production scheduler is responsible for developing an MPS thatsatisfies the intent of the production plan. Other responsibilities typically in-clude those in Table 15.1. The MPS process may differ from company to com-pany, depending on whether the firm has a process or product focus. Thus thespecific procedures and record formats presented later in this chapter illustratetypes of procedures and may not apply to specific firms. In summary, as Fig. 15.1illustrates, the MPS process is linked to the authorized production plan andtherefore requires feedback from the functional areas involved in productionplanning. In this way, the master production schedule sets in motion the op-erations to achieve the production plan's objectives.

616

The Master Production Scheduling Process 617

FIGURE 15.1

Master ProductionScheduling Process

Authorizedreduction plan

Prospective masterproduction schedule

-

Resources ">v. NOavailable?

Materialrequirements

planning

-

The Master Production Schedule

To give you a clearer idea of master production scheduling, let's consider theMPS of a bicycle manufacturer, first introduced in Chapter 14, Fig. 14.1. Thecompany doesn't accept orders for custom designed bicycles; rather, it pro-duces to stock. For production planning purposes, the firm has grouped itsentire line of products into several families, based on wheel diameter. Onefamily of bicycles, based on a 20-inch wheel, includes three different styles:Alpha, which comes with training wheels, is designed for children just learning

TABLE 15.1 I Typical Responsibilities of a Master Production Scheduler

Specify delivery promise dates on incoming orders and match actual requirements with themaster production schedule.

Evaluate the impact of "top-down" inputs, such as introducing new products, or promising anorder, in less than normal lead time.

Evaluate the impact of "bottom-up" inputs, such as anticipated shortage reports frommanufacturing or purchasing, indicating that certain components will not be available asscheduled 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,1974), p. 69.

618 CHAPTER 15 I Master Production Scheduling

to ride. Dirty Dan is a dirt bike with racing decals and rugged tires. And Road-ster has hand-caliper brakes, polished aluminum fenders, and a rearview mir-ror. All three styles are basically the same bicycle, with minor variations in colorand accessories.

The production plan for the 20-inch family calls for a steady increase in out-put to satisfy anticipated increases in sales over the next several months. Pres-ently, the company has excess capacity, which it plans to use up beforeresorting to overtime to reach peak production in March. This approach keepscostly inventory to a minimum. Consequently, the production plan schedules10,000 units in January, 15,000 units in February, and 20,000 units in March.

One possible MPS for this family is shown in Fig. 15.2. Note that Dirty Danis a high-volume product made continuously, while Alpha and Roadster areproduced on an intermittent basis. In all cases the batch sizes reflect consider-ations for assembly capacity, product demands, setup costs, inventory holdingcosts, and requirements for good customer service. This example, just one ofmany possible lot size combinations, demonstrates a basic purpose of the MPS:setting due dates for production orders. For example, Fig. 15.2 shows that inJanuary, production is scheduled to complete 400 units of Roadster in week 1and 400 units in week 3.

Another purpose of the MPS is to provide an accurate picture of the re-sources and materials needed to support the production plan. Recall that theproduction plan estimates resource requirements, but it states resource quan-tities in aggregate terms. Because it specifies the production quantities of spe-cific products, the MPS provides a more accurate picture of resource needs.Also, by specifying the number of end items to be produced during each timeperiod, the MPS determines requirements for all intermediate and purchaseditems as well. This is the point at which the bill of materials (see Chapter 12)is important. For example, in Fig. 15.2 the MPS shows 1600 units of Alphascheduled for completion in week 2. This means that by week 2, to completethe 1600 bicycles on schedule, operations must have available 1600 Alpha mainframes, 3200 20-inch wheels, 1600 sets of training wheels, and specific quan-tities of other parts contained in the bill of materials. Thus a good MPS enablesa company to make efficient use of its most valuable resources—labor, capital,capacity, and materials.

FIGURE 15.2

Weekly MasterProduction Schedule

Product

AlphaDirty DanRoadster

Monthly total

January

Week

1

1500400

2

16001500

3

1500400

4

16001500

10,000

February

Week

5

2250600

6

24002250

7

2250600

8

24002250

15,000

March

Week

9

3000800

10

32003000

11

3000800

12

32003000

20,000

Managerial Issues 619

Typical Constraints

A master production schedule must satisfy several constraints. First, the sumof the quantities in the MPS must equal those in the production plan. Figure15.2 demonstrates two aspects of this constraint. Note that each month thetotal quantity for all three styles equals the total quantity of bicycles specifiedin the production plan (see Fig. 14.1). If the production plan specified quan-tities in dollars or labor hours, the scheduler would have to convert the MPSquantities to the same unit of measure. Master production schedules shouldspecify 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 effi-cient manner. For example, in January the plan calls for operations to produce3200 units of Alpha, 6000 units of Dirty Dan, and 800 units of Roadster, or atotal of 10,000 units. The specific mix is based on historical demand and mar-keting and promotional considerations. The bicycle company's MPS states pro-duction quantities in weekly time periods, although they could be in days ormonths. The scheduler for the 20-inch bicycle family must select weekly lotsizes for each product, taking into account economic factors such as productionsetup costs and inventory carrying costs.

The decision that determines lot size and timing is subject to a second con-straint: capacity limitations. Typically, several key resources limit productionvolume. For example, work stations that are usually short on labor capacity,storage space for components and finished products, or working capital canlimit the output a company can produce. The scheduler must acknowledgethese limitations and recognize that some products require more critical re-sources than others.

MANAGERIAL ISSUES

The master production schedule is important because it links the firm's broadstrategies, as expressed in the production plan, to more specific tactical plansthat will enable a firm to achieve its objectives. The relationship of the MPSto competitive priorities, functional area interfaces, and the influence of com-puters on the MPS are important managerial issues.

The Master Production Schedule and Competitive Priorities

In Chapter 2 you learned that firms structure themselves to gain distinctiveadvantages over other firms by emphasizing one or more competitive priorities.With respect to the MPS, three basic strategies enable a firm to manage inven-tories in support of these priorities. The strategy chosen will determine theoperations manager's approach to master production scheduling. Choosingamong these strategies is related to the issues of inventory placement. (SeeChapter 12.)

Make-to-Stock Strategy. Product-focused firms tend to use a make-to-stockstrategy, an approach in which the firm holds items in stock for immediate


delivery. The main advantage of placing most inventory toward the finished-goods level is that customer delivery times are minimized. This strategy isfeasible because most product-focused firms produce relatively few standard-ized products, for which they can make reasonably accurate forecasts. Exam-ples of products produced with a make-to-stock strategy include garden tools,electronic components, and chemicals. Thus these firms develop master pro-duction schedules for end items. Figure 15.3 demonstrates that make-to-stockoperations typically produce a small number of finished products from a largenumber of different raw materials. Scheduling production of end items is easierfrom the standpoint of numbers alone.

Assemble-to-Order Strategy. The assemble-to-order strategy is an approachfor producing end items with many options from relatively few major assem-blies and components, after customer orders are received. This strategy ad-dresses the two competitive priorities, customization and fast delivery time.Operations holds the major assemblies and components in stock until a specificorder comes in. Stocking end items would be economically prohibitive becauseforecasts are relatively inaccurate and options are numerous. For example, anautomobile manufacturer can literally produce millions of cars, no two alike, tomeet the mix of options and accessories demanded by customers. Other ex-amples include farm tractors, upholstered furniture, and automatic teller ma-chines.

As Fig. 15.3 shows, the number of different items produced and purchasedunder an assemble-to-order strategy assumes an hourglass shape, emphasizingthe relatively small number of major assemblies and components. For exam-ple, suppose you were manufacturing an automobile with the following limitednumber of customer options: 3 engine sizes, 4 transmission types, 2 drivetrains, 3 steering options, 3 tire sizes, 3 body styles, 2 trim options, 4 interioroptions, and 2 brake systems. The body frame and certain other parts are com-mon to every car you produce. Based on these customer choices, you can pro-duce 10,368 different cars (3 X 4 x 2 • • •) . However, there are only 26 majorassemblies and components (3 + 4 + 2 • • •), plus a common assembly of partsneeded for every car—a far smaller number than the total number of cars that

FIGURE 15.3

Relationship of theMRS to Competitive

Priorities

Number offinished products

Number ofmajor assemblies

Number ofraw materials _

_ Typical level for master' production schedule

Maketo stock

Assembleto order

Maketo order


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 Ironand Steel Corporation follows a make-to-order strategy in its steel casting plant (c).

could be produced. Demand for these major assemblies and components ismuch easier to forecast than that for any completely assembled product. Con-sequently, operations bases master production scheduling on the major assem-blies and components, rather than on the end items.

Make-to-Order Strategy. Many process-focused firms use a make-to-orderstrategy, whereby operations produces end items to customer specifications.This strategy provides a high degree of customization. Because most enditems, components, and assemblies are custom-made, their number usuallyexceeds the number of raw materials used to produce them, as illustrated inFig. 15.3. Examples include specialized medical equipment, castings, and


plastic bottles for a particular brand of shampoo. Because a few raw materialsare common to many products, an organization can more easily forecast demandfor them than for end items or major assemblies. In such situations, operationsgenerally schedules raw-material utilization only. However, end-item schedul-ing is feasible if customer orders allow sufficiently long delivery times.

Functional Interfaces

The master production scheduling process involves all of a firm's functionalareas. As in the development of a production plan, operations needs inputsfrom various areas to develop an MPS that achieves production plan objectivesand organizational goals. However, interaction with various functional areasdoesn'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 main-tains a stable work force and high utilization of critical work centers. Such astrategy reduces the firm's flexibility to respond to changes in customer de-mand, however. Reducing flexibility in this way may not be in the best inter-ests of the firm from a marketing perspective. Trade-offs must be made inresponding to customer-desired shipping dates, reducing inventory levels, andminimizing the costs of revising production schedules. Such situations requirecooperation between marketing and manufacturing. Some companies requirethe vice presidents of marketing and manufacturing to jointly authorize majorMPS changes to ensure mutual resolution of these issues. Managerial Practice15.1 discusses how these functional interfaces were resolved in developingmaster 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 itto project the impact of product mix changes on the firm's ability to satisfycustomer demand and manage delivery schedules. Using rough-cut capacityplanning, which we discuss later in the chapter, manufacturing can estimatethe effects of MPS changes on loads at critical work stations. In general, all thefirm's functional areas need the MPS.

Computer-Assisted Master Production Scheduling

The applications of the techniques for master production scheduling andrough-cut capacity planning that we discuss in this chapter require the use ofcomputers. When thousands of items are involved, developing the MPS man-ually is an enormous, if not impossible, task. Most major computer suppliersand many companies specializing in software for manufacturing systems havedeveloped software packages that perform the types of calculations we willpresent. These programs also provide managers with detailed reports that areuseful for analyzing the MPS. Personal computers, with their excellent graphiccapabilities, give managers access to many MPS-related reports, such as loadprofiles, in readable and useful formats. Interfacing a personal computer with


Managerial Practice 15.1

In 1989 the Hyundai MotorCompany produced 780,000 au-tomobiles at a rate of 137 unitsper hour. The company offers approximately 4000 com-binations of model, options, and interior color. Hyundaidevelops an annual business plan that is expressed inmonthly sales volumes by model types and by engineand transmission types. This plan becomes the basis forthe master production schedule, which is the responsi-bility of the production/sales control department. Eachmonth, representatives from the sales, production plan-ning, and materials departments meet to developmonthly production schedules.

Prior to 1986, when the production/sales control de-partment was formed, the MPS was the responsibilityof the production planning department, which onlyconsidered "requests" from the sales department. Ascapacity utilization increased between 1984 and 1986,the conflicts between sales and production intensified.The sales department wanted to maintain a maximumamount of flexibility in production schedules to satisfycustomer orders, whereas the production departmentpreferred to have stability in the schedules. The produc-tion/sales control department, which reports to the vicepresident of manufacturing, was created to mediate theconflicts.

The MPS is developed on an eight-month rolling ho-rizon basis; that is, each month the MPS is updated forthe next eight months. During each meeting the sched-ule for the next month is confirmed and the followingmonth's schedule is developed for the purpose of pro-duction planning and buying locally purchased parts.The rest of the monthly schedules are used as forecasts

Master Production Scheduling atHyundai Motor Company

to provide the purchasing de-partment and suppliers enoughlead time to acquire imported

raw materials and parts.A separate MPS is prepared for passenger and com-

mercial vehicles. Each is further broken down by model,engine and transmission type, and interior color. Foreach of its five models—Pony, Stellar, Sonata, Gran-deur, and Excel—Hyundai develops a separate masterschedule, which is further broken down by destinationand trim. These schedules are used to plan the produc-tion of different assembly lines dedicated to each model.Next, the MPS for each model is broken down by enginesize and transmission type. This schedule is used as theprimary input to the engine and transmission plantschedules. Finally, the MPS for each model is convertedinto a schedule that shows the monthly production vol-ume requirements for the model (such as Excel 5 door)by trim levels (such as L, GL, and GLS) and by interiorcolor (such as chestnut red or dark sapphire). This sched-ule is of primary importance to suppliers that deliver var-ious parts and interior furnishings.

The production planning department uses themonthly schedules to develop weekly schedules speci-fying daily volumes by model and sequence. The mate-rials department uses the schedules to calculate partsand materials requirements.

Source: Chan Hahn and Kee Young Kim, Hyundai MotorCompany: Manufacturing Strategies and Production Planning andControl Systems, Bowling Green State University, 1989, pp.53-68.

a mainframe computer allows managers to ask "what—if" questions about mas-ter production schedules and to estimate MPS effects using the data provided.

The techniques that we present in this chapter are descriptive in the sensethat modifications to the schedule are left to the discretion of the master pro-duction scheduler. The techniques project only what may happen //the pro-spective MPS is implemented. They do not prescribe what should be done.Various prescriptive approaches have been proposed, and, if you are inter-ested, you can pursue them in Hax and Meal (1975), Newson (1975), and otherpublications referenced at the end of this chapter.


DEVELOPING A PROSPECTIVE MASTER PRODUCTION SCHEDULE

In this section we show how a firm that produces to stock develops a masterproduction schedule. This process includes calculating the projected on-handinventory, determining the timing and size of MPS quantities (the productionquantities of specific products), and calculating available-to-promise quan-tities. Our discussion introduces some basic terminology of master productionscheduling and illustrates the trial-and-error aspect of actual scheduling. Forsimplicity, we assume that our imaginary firm doesn't utilize safety stocks forend items, even though real firms usually do. (Later, in Chapter 16, we addressthe mechanics of incorporating safety stocks in material requirements plan-ning.) The section concludes with discussions of linking the production planand the MPS and freezing the MPS. You can find details of how eight specificfirms develop MPSs in Berry, Vollmann, and Whybark (1979).

Calculating Projected On-Hand Inventories

The first step is to calculate the projected on-hand inventory, which is anestimate of the amount of inventory available each week after demand hasbeen satisfied. It equals the on-hand balance for the previous week, plus theMPS quantity for the current week, minus the forecast or actual orders bookedfor the current week—whichever quantity is greater. Mathematically, we ex-press this relationship as

/, = /,_, + MPS, - max(F, or CO,)

where

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 andready 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 exceedthe forecast, the projection will be more accurate if the scheduler uses CO,.Conversely, if the forecast exceeds booked orders, F, will provide the best es-timate of requirements for week /.

Let's consider a valve manufacturer of a limited range of products: valves ofvarying types and sizes, all made to stock. Management needs to develop amaster production schedule for its 3-inch gate valve. Marketing has forecast ademand of 80 units for April and 160 units for May. The MPS should be ex-pressed in weekly time periods to enable operations to closely control produc-tion of components.

Figure 15.4 shows a partial MPS record, to which we'll later add one row.The quantity on hand (in inventory) is 45. The forecast row shows marketing'sforecast 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

FIGURE 15.4

Projected On-HandInventory for 3-inch

Gate Valve

Developing a Prospective Master Production Schedule

Item: 3-in. gate valveQuantity on

625

Order policy: 80 units

nana:45

Forecast

Customerorders(booked)

Projectedon-handinventory

MRS quantity

April

Week

1 2 3

20

23

22/

20

15

2

20

8

-18

!

4

20

4

/ \

May

Week

5 6 7 8

40 40 40 40

0 0 0 0

Explanation: /Forecast is less than bookedorders in week 1; projectedon-hand balance = 45 + 0 - 23 = 22.

s Explanation:Forecast exceeds bookedorders in week 3; projectedon-hand balance = 2 + 0-20 = -18.The shortage signals a need toschedule an MPS quantity forcompletion in week 3.

III

orders row shows the number of actual customer orders promised for ship-ment each week. Note that customer orders for 23 valves exceed the fore-cast of 20 valves for week 1. Using the formula /, = /,_, + MPS, -max(F, or CO,), the customer orders figure (CO,), rather than the forecast(Ft), is therefore used to determine the projected on-hand inventory for week1: 22 (45 + 0 — 23). Although customer orders exceed the forecast for week1, total booked orders (50) for April are still within that month's forecast (80).The projected on-hand inventory row shows a stockout in week 3; the pro-jected on-hand balance is - 18 (2 + 0 — 20). The shortage signals a need formore 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. Thegoal to keep in mind when developing a master production schedule is to main-tain a nonnegative projected on-hand inventory balance. As the scheduler pro-jects shortages in inventory, MPS quantities are scheduled to cover them. Thefollowing is a simplified procedure for developing a prospective MPS. Schedulecompletion of the first MPS quantity for the first week when you expect inven-tory of the product to run out. You can determine this week by calculating theprojected on-hand inventory for each week until a shortage (a negative balance,such as — 18 in Fig. 15.4) occurs. The addition of the newly scheduled MPS


FIGURE 15.4 Item: 3-in. gate valveQuantity on

Projgcted On-Hand hand:inventory for 3-inch

Gate Valve

625


nana:45

Forecast

Customerorders(booked)Projectedon-handinventory

MRS quantity

April

Week

1 2 3

20 20

23

22/

15

2

20

8

-18

4

20

4

\/ \

May

Week

5 6 7 8

40 40 40 40

0 0 0 0

Explanation:/Forecast is less than bookedorders in week 1; projectedon-hand balance = 45 + 0 - 23 = 22.

x Explanation:Forecast exceeds bookedorders in week 3; projectedon-hand balance = 2 + 0-20 = -18.The shortage signals a need toschedule an MPS quantity forcompletion in week 3.

orders row shows the number of actual customer orders promised for ship-ment each week. Note that customer orders for 23 valves exceed the fore-cast of 20 valves for week 1. Using the formula /, = /,_i + At PS, -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 week1: 22 (45 + 0 — 23). Although customer orders exceed the forecast for week1, total booked orders (50) for April are still within that month's forecast (80).The projected on-hand inventory row shows a stockout in week 3; the pro-jected on-hand balance is - 18 (2 + 0 — 20). The shortage signals a need formore 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. Thegoal to keep in mind when developing a master production schedule is to main-tain a nonnegative projected on-hand inventory balance. As the scheduler pro-jects shortages in inventory, MPS quantities are scheduled to cover them. Thefollowing is a simplified procedure for developing a prospective MPS. Schedulecompletion of the first MPS quantity for the first week when you expect inven-tory of the product to run out. You can determine this week by calculating theprojected on-hand inventory for each week until a shortage (a negative balance,such as — 18 in Fig. 15.4) occurs. The addition of the newly scheduled MPS

626 CHAPTER 75 / 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 nextperiod when a shortage occurs. This shortage signals a need for a second MPSquantity. 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 inthe MPS quantities needed to avoid shortages.

Using Fig. 15,4, specify the timing and size of MPS quantities for the 3-inch gate valvefor a lot size of 80 units. (We present other lot-sizing techniques in Chapter 16.)

Determine which weeks wilt experience shortages. In week 1, when beginning inven-tory is 45 and requirements are 23, there is no shortage. There is also no shortage inweek 2, as beginning inventory is 22 and requirements are only 20. The first shortageoccurs in week 3, as Fig. 15.4 shows, when the forecast (20) exceeds the projected on-hand inventory (2). The firm will be 18 units short unless it schedules an MPS quantityfor that period. Calculations for alt 8 weeks are shown in the following table.

Week

12345678

BeginningInventory

45222

62422

422

Require-ments

2320202040404040

Shortage?

NoNoYes HNo HNoYesNoYes H

MPSQuantity

00

80i- 0h 0

800

80

ProjectedOn-HandInventory

22

: •2

422

42

As the table shows, the 80 units scheduled in week 3 will last until week 6, whenanother 80-lot unit must be scheduled. The second lot lasts until week 8, when a thirdlot must be scheduled. Figure 15.5 shows the prospective MPS.

!

Calculating Available-to-Promise Quantities

The third step in developing a prospective master production schedule is tocalculate the available-to-promise (ATP) inventory, that is, the quantitiesof end items that marketing can promise to deliver on specified dates. Market-ing can also use this information to set shipping dates for new customer orders.The general rule for calculating available-to-promise information is slightly dif-ferent for the first (current) week of the schedule than for other weeks.

• The first week: The ATP inventory for the first week equals current on-hand inventory plus the MPS quantity for the first week, minus the cu-mulative total of booked orders, up to (but not including) the week inwhich the next MPS quantity arrives.



A Prospective Master hand'Production Schedule

627


nana: rEForecast


MPS quantity

AprilWeek

1 2 3 4

20

23

22

0

20

15

2

0

20

8

62

80

20

4

42

0

MayWeek

5 6 7 8

40

0

2

0

40

0

42

80

40

0

2

0

40

0

42

80

III

Subsequent weeks: For each week in which an MPS quantity is sched-uled for completion, the ATP inventory equals that week's MPS quantityminus the cumulative total of booked orders from that week up to (but notincluding) the week in which the next MPS quantity arrives. Projectedon-hand inventory isn't used in this calculation because on-hand inven-tory was used to calculate the first week's ATP inventory.

Application 15.2 'sution to i

Suppose that you have received the following orders for the 3-inch gate valve (shownin 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 recordlook like?

Order1234

Amount(units)

5382415

WeekRequested

2534

First, you must determine the ATP inventories for the 3-inch gate valve. Refer to Fig.15.6 on the next page. The ATP in the first week is 7, [45 (current on-hand inventory) +0 (MPS quantity) — 23 (booked orders) + 15 (booked orders)] units. The on-hand inventory of 45 units can satisfy all booked orders until week 3, when the first MPS quantityarrives. This leaves 7 extra units for new orders to be shipped in weeks 1 and 2 andbeyond. The ATP inventory in week 3 is 68 [80 - (8 + 4 + Q)J units. These 68 unitscan be promised for shipment in weeks 3,4, and 5. As there are no booked orders inMay, ATP inventories for weeks 6 and 8 equal 80, the respective MPS quantities. Thus

eks 6, 7, and 8.



wailable-to-Promise hand:Calculations


nana:45

Forecast


MPS quantity

Available-to-promise (ATP)inventory

AprilWeek

1 2 3 4

20

23

22

0

7/

20

15

2

0

20

8

62

80

68

20

4

42

0

MayWeek

5 6 7 8

40

0

2

0

40

0

42

80

80

40

0

2

0

40

0

42

80

80

Explanation: -The total number of ordersbooked until the next receiptof materials is 23 + 15 = 38.The ATP = 45 + 0 - 38 = 7.

, Explanation:The total number of ordersbooked until the next receiptof materials is 8 + 4 + 0=12.The ATP = 80-12 = 68.

You can now take action on the orders as follows:

ActionAccept

ReasonThe amount requested (5) is less than the ATP (7) for weeks 1and 2. The adjusted ATP inventory for week 1 is 2 units.The new ATP inventory for week 3 would be 68 — 38 =30 units.The new ATP for week 3 is 30 - 24 = 6 units.The ATP for weeks 1 and 3 totals only 8 (2 + 6) units, whichis less than the quantity requested. Try to reschedule shipment forweek 6 or later.

lated MPS record.

Note in Fig. 15.7 that only the customer orders booked, projected on-handinventory, and ATP inventory rows have been adjusted. Do the negative pro-jected on-hand inventory balances in weeks 5 and 7 pose a problem? Maybe.The forecast is for a total demand of 120 units through week 5, but only 117units have currently been booked. The 45 units on hand plus the 80 unitsscheduled to arrive in week 3 will give a total supply of 125 units, leaving 8units available to promise. If customers demand no more than 8 additionalunits in new bookings before week 5, there is no problem. However, if cus-tomers were to request 16 more (20 — 4) units for shipment in week 4 and 2

FIGURE 15.7

Updated MasterProduction Schedule

Record


Item: 3-in. gate valveQuantity on

629


nana:45

Forecast

Customerorders(booked)

Projectedon-handinventory

MPS quantity


April

Week

1 2 3 4

20

23

22

0

2

20

20

2

0

20

32

50

80

6

20

4

30

0

May

Week

5 6 7 8

40 40

38 0

-10

0

40

0

30 -10

80

80

0

40

0

30

80

80

•I:

more (40 - 38) units in week 5—for a total of 18 units—the firm would be 10units short in week 5.

There are two important lessons here. First, operations will never miss cus-tomer order due dates if marketing doesn't promise orders in excess of the ATPinventories and'tf the MPS quantities arrive on time, because ATP inventoriesare based on actual booked customer orders, not forecasts. Problems arise whenorders are booked without planning adequate production in the MPS. Second,the projected on-hand inventory balance gives a "worst case" estimate of in-ventory balance. The reason is that the demand estimate is the greater of twoquantities—either the forecast or actual customer orders booked. If projectedon-hand inventory is negative, management should assess the situation beforechanging the MPS. Negative inventory projections might be the result of amismatch in timing between forecasts and actual booked orders. In any case,once management revises the MPS, it determines the timing and size of re-vised MPS quantities in the same manner.

Linking the Production Plan and the MPS

In Applications 15.1 and 15.2, we didn't consider trade-offs associated withleveling production rates or the work force. Nor did we allow for anticipationinventories. Whenever the firm ran out of inventory or released productionquantities, the MPS simply became an accumulation of forecasts. As you sawin Chapter 14, however, production planning does consider these trade-offs.The key to developing an acceptable MPS, therefore, is to link it tf«^the pro-duction plan. One way to do so is to use production requirements, rather thanforecasts, to determine MPS quantities. Production requirements are desiredproduction quantities for a specific end item. To derive them, the scheduler


must disaggregate, or break down, aggregate product family production quan-tities, taking into account the desired product mix within each family, currenton-hand inventory, and booked customer orders. The resulting requirementsthen 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 bookedcustomer orders to date because they are already part of the production require-ments.

Consequently, the resulting MPS responds directly to the needs of the pro-duction plan. When management links the MPS and the production plan inthis way, the MPS for any given item becomes part of an orchestrated plan toachieve company objectives.

Freezing the MPS

The master production schedule is the basis of all assembly, component, andmaterial schedules. For this reason, changes to the MPS can be costly, partic-ularly if they are made to MPS quantities soon to be completed. Increases inan MPS quantity may cause delays in shipments to customers or excessive ex-pediting costs because of material shortages. Decreases in MPS quantities canresult in unused materials or assemblies (at least until another need for themarises) and valuable capacities consumed for something not needed. Similarcosts occur when forecasted need dates for MPS quantities are changed. Forthese reasons many firms "freeze" a portion of the master production schedule.Freezing can be accomplished by specifying a demand time fence, the numberof periods (beginning with the current period) during which no changes can bemade to the MPS without special authorization from management. The EthanAllen Furniture Company uses a demand time fence of 8 weeks. If the currentperiod is period 1, the MPS is frozen for periods 1 through 8. Neither the mas-ter scheduler nor the computer can reschedule MPS quantities for this periodwithout management approval.

Freezing the master production schedule is really a matter of degree. Thedemand 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. Forexample, another commonly used time fence is the planning time fence,which is the number of time periods (beginning with the current period) duringwhich the computer will not reschedule MPS quantities. The planning timefence is greater than the demand time fence. Consequently, the master sched-uler—but not the computer—can make changes to the MPS quantities be-tween the demand time fence and the planning time fence. Beyond theplanning time fence the computer is free to schedule the MPS quantities, usingthe approved ordering policy. The use of time fences in this way provides vary-ing levels of control over the creation and execution of the master productionschedule.

Black and Decker uses a slightly different scheme. It uses three time fences:8, 13, and 26 weeks. The 8-week fence is essentially a demand time fence.From 8 to 13 weeks the MPS is quite rigid, but minor changes to model series


Load Profiles and the Authorization Decision. By comparing load profiles tolabor capacities approved in the production plan, the scheduler can determinewhether the prospective MPS is feasible. If total direct labor requirements fallwithin authorized limits of regular time plus overtime—and if the schedulemeets other considerations, such as shipping promises and financial require-ments—management would likely authorize the prospective MPS. If not, themaster 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-cutcapacity planning. The direct labor hours per unit used to calculate the loadprofiles can be a gross estimate based on accounting system data. Alternatively,it can be a more precise estimate based on detailed records of time standardsand item routings.

Operations managers generally use gross estimates more often than preciseestimates when using this technique. Further, labor requirements usually areproportioned to each work station solely on the basis of historical labor require-ments. The assumption that historical requirements represent future require-ments implies that the product mix doesn't change. If the mix changes, thecapacity bills approach would be preferred. Also, the method of overall factorswill not reflect a specific work station's large swings in capacity requirementson a week-to-week basis because its assigned hours represent a fixed percent-age of the total critical hours for a week. The method of resource profiles worksbetter in this case. Nonetheless, the method of overall factors works reasonablywell in situations where the MPS is fairly stable with respect to product mix ona week-to-week basis. It also works well when the MPS is specified in monthlytime periods and only a rough estimate of labor requirements is needed.

SOLVED PROBLEMS

FIGURE 15.9

1. You have the data shown in Fig. 15.9 for a particular end item. Your com-pany's order policy is to produce in lots of 50 units.

Quantity on Hand: 5

Forecast

Customer orders (booked)

Projected on-hand inventory

MPS quantity


Week

1

20

30

25

50

5

2

10

20

5

3

40

5

-35

4

10

8

5

0

0

6

0

0

7

40

0

8

20

0

9

30

0

10

10

0

-

Solved Problems 635

FIGURE 15.10

a. Develop a prospective MPS and calculate the available-to-promise in-ventory quantities.

b. Decide which of the following customer orders you would accept. Whatwould the updated MPS look like? The three orders arrived in the fol-lowing sequence:

Order123

Quantity154

32

Week Due623

Solution a. Figure 15.10(a) shows the prospective MPS, including ATP quantities.As indicated, we will need the first MPS quantity in week 1, anotherorder in week 3, a third in week 7, and a fourth in week 8. For theindicated ATP inventories and assuming that we have to commit to theorders in their sequence of arrival, we would accept the first two cus-tomer orders and reject the third.

Quantity on Hand: 5

Forecast



MPS quantity


Week

1

20

30

25

50

5

2

10

20

5

3

40

5

15

50

37

4

10

8

5

5

0

0

5

6

0

0

5

7

40

0

15

50

50

8

20

0

45

50

50

9

30

0

15

10

10

0

5

(a) Prospective MPS

,

.

Quantity on Hand: 5

Forecast



MPS quantity


Week

1

20

30

25

50

1

2

10

24

1

3

40

5

11

50

22

4

10

8

1

5

0

0

1

6

0

15

-14

7

40

0

-4

50

50

8

20

0

26

50

50

9

30

0

-4

10

10

0

-14

(b) Updated MPS


Solution

FIGURE 15.11

We could ask the third customer if she would accept a shipment of 23(1 from week 1 ATP and 22 from week 3 ATP) in week 3, with another9 units following in week 7. The updated MPS record, reflecting the twoaccepted orders, is shown in Fig. 15.10(b).

b. The latter part of the schedule shows negative projected inventory bal-ances, so we should verify the forecasts. If the forecasts remain valid, wecould revise the MPS starting in week 6. However, our ATP quantitiesshow that 123 (1 + 2 2 + 50 + 50) units will be available for deliveryover the next 10 weeks.

2. The Acme Rocket Company produces two products for crafty coyotes in-terested in a road-runner dinner. The harness rocket (HR) is designed forquick acceleration and low-level flying in the pursuit of fleeing road run-ners. The shoe rocket (SR) is useful for high-speed chases over long,straight Arizona roads. The prospective MPS shown in Fig. 15.11 has beenproposed.

The Acme Rocket Company has two critical work stations: powder pack-ing (PP) and wick setting (WS). Historically, PP has had 70 percent, andWS 30 percent, of the critical work station hours. The direct labor hours perunit follow.

ItemHRSR

Critical WorkStations (hr)

10.07.2

Noncritical WorkStations (hr)

6.03.5

Total(hr)16.010.7

a. Create a load profile for weeks 1-5 based on the prospective MPS, usingthe method of overall factors.

b. Suppose that the production plan specified a total of 680 labor hours perweek, including 420 hours at the critical work stations. Do you see anypotential problems with the prospective MPS? If so, what changes to theschedule do you propose?

a. Table 15.3 shows the load profile for weeks 1—5.b. Note that the suggested schedule results in an uneven load on the fac-

tory. In particular, the week 5 load exceeds available resources by 281(961 - 680) total labor hours, including 196 (616 - 420) hours at thecritical work stations.

A change that would ease the MPS is to shift 30 units of SR productionfrom week 5 to week 2, as shown in Table 15.4. This change increasesthe inventory holding cost of SR but satisfies the capacity constraints.(The profile for weeks 1, 3, and 4 doesn't change.) This change resultsin approximately 640 labor hours per week.

Item

HRSR

Week

1

2030

2

20-

3

2030

4

40-

5

4030

TotalUnits

14090

operations management; - yolachapter 15 master production scheduling key questions from managers how...

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