Supply Chain Planning-Supply Planning PDF

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Supply Chain Planning:

Supply Planning
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Introduction
Introduction
Availabilityfeasibilityand service. The goal of supply planning is to ensure an adequate supply of

products at the right place and time to meet customer demand. Companies use the supply planning
process to plan finished goods requirements and determine how to satisfy customer orders. If there
is insufficient production capacity to meet the requirements, they evaluate other options, including
alternate sourcing and product allocation. The result: a match between demand and supply. Supply
planning helps address tough business problems, like these:
Improving customer fill rates

Reducing inventory levels and costs
Minimizing transportation costs
Lowering capital investments and expenditures
How Is Supply Planning Integrated with Supply Chain Planning?
Supply planning is one of the four supply chain planning processes: supply, demand, production,
and fulfillment. Note in the figure how these processes overlap the three supply chain functions:
procurement, manufacturing, and fulfillment. (Click the boxed-in arrows for more details.)
In a well-run supply chain, the planning processes are interdependent. Plans from one process
depend on and feed the other plans. The goal is to synchronize the plansand the plannersby
integrating the processes. This helps you answer key questions:
How do the planning processes relate to each other?

What should I do with the information from my or another planning process?
Let's look at each of these questions before we get into the details of supply planning.
Course Objectives
After completing this module, you should be able to do the following:
Identify the purpose, objectives, and benefits of supply planning.
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Describe the different components of supply planning, the business problems they solve, and
the key capabilities they require.
Identify key inputs, outputs, and concepts for each of the components of supply planning.
Describe the metrics used to measure the effectiveness of supply planning.
Introduction to Supply Planning

Overview
A supply chain is a network of the entitieswithin and across companiesinvolved in producing,

shipping, and distributing products. Each entity is a link in the movement of a product from its raw
materials stage to its consumption by the customer. A typical supply chain has the following entities:
Inventory Plan Determine and plan for how much inventory to hold (finished goods) and
where to place the inventory (in which distribution centers).
Distribution Plan Determine how, when, and where to replenish this inventory.
Sourcing Plan Plan when and where to manufacture a product.
Materials Plan Determine what materials are needed and when.
Supply Planning Constraints
Every company is restricted in some ways in its ability to produce and deliver goods. This concept
called "constraints" is central to the supply planning process. For something to qualify as a
constraint, it must be definable in terms of a resourcefor example, transportation, manufacturing,
laborand a given time period. With money and resources, a constraint is addressed and is no
longer an issue.
Capacity Constraints
Refers to the number of products that can be produced over a period of time. For instance, a
manufacturing line can produce only a certain number of motorcycles in a week.
Materials Constraints
Occurs when the number of red motorcycles produced in a week, for example, is limited by the
number of red fenders available from a supplier. (This is not just a materials constraint for the
manufacturer, but also a capacity constraint for the fender supplier.)
Transportation Constraints
Occurs when transportation capacity is limited for a given time period; when the preferred mode
(truck, rail, air) is not available or usable; or when customer requirements (for service or a
preferred mode) cannot be met.
Lead-Time Constraints
Reflects the time it takes for material to progress from one stage to another. For example,
"manufacturing lead time" refers to the time it takes for product to be manufactured. "Transportation

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lead time" is the time it takes for product to move from one location to another.
Components of Supply Planning
Supply planning has three componentsInventory Planning, Distribution Planning, and Master
Production Scheduling (MPS). How muchwhereand when (see the figure).
SUPPLY PLANNING
Inventory Planning
Plan how much inventory to maintain to meet customer demand.
Distribution Planning
Plan where to manufacture the product to meet actual customer demand. Plan how to distribute the
product to distribution centers and customers.
Master Production Scheduling

Plan when to manufacture the product to meet actual customer demand. Plan material requirements
to meet production schedule.
Supply Planning Process Flow
Supply planning is an iterative process. Click on the boxed-in arrows to see where and why the
process repeats.
Inventory Planning This process results in a plan that specifies target safety stock levels at each
location (based on replenishment policies). This is input into the distribution planning process.
Distribution Planning After taking into account both current inventory and high-level
manufacturing constraints, this process creates a plan to fulfill customer orders; generates the net
finished goods requirements for manufacturing; and specifies which factories should replenish the
inventories at each distribution center (the sourcing plan). Most discrepancies in the plans are
resolved by going back and forth between distribution planning and master production scheduling.
Master Production Scheduling This process results in a feasible production plan/schedule. It is

"feasible" because it takes into account more detailed capacity as well as materials constraints.
Production Planning then uses the master production schedule to generate more detailed production
schedules and materials requirements.
Here, we differentiate explicitly between the components of supply planning. In reality, there may be
a lot of overlap among them.

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Although the general principles of inventory planning, distribution planning, and master production
scheduling are much the same, planning challenges can vary by industry. Next, we will look at the
planning challenges in two industries: semiconductor and consumer product goods.
Supply Planning in Different Industries: Semiconductor
The semiconductor industry is capacity constrained. Few manufacturers produce this type of product
without first having a customer order. This business model is known as Make-To-Order (MTO).
Because these manufacturers have limited capacity to satisfy customer orders, demand often
exceeds supply. As a result, master production schedulingwhich considers detailed capacity and
materials constraintsis critical in this industry. Let's look at some of their challenges:
Chronic Capacity Shortages

Occurs when demand exceeds supply. Planners need to be able to allocate capacity among
different customers so as to maximize business objectives.
Inaccurate Due-Date Promises

Since there is no inventory on hand in an MTO environment, manufacturers must be able to quote
accurate order-promise dates to customers. Unfortunately, they rely on predetermined lead times, so
the promises may not reflect reality. With supply planning, manufacturers know precisely when and
where product will be manufactured, so they can quote more accurate order-promise dates to
customers.
Visibility into Contract Manufacturers' Plans

Many semiconductor companies outsource manufacturing to other manufacturers (known as
contract manufacturers). The semiconductor companies need visibility into the contract
manufacturers plans to ensure accurate order promise dates to customers and to manage any
delays.
Ability to Quickly Adjust Plans

Actual demand never follows the exact pattern of forecasted demand. As companies receive
updated demand and customer order information, they must be able to react quickly.
Supply Planning in Different Industries: Consumer Products
The consumer product goods (CPG) industry is low-margin and distribution intensive. That
combination makes both inventory and distribution planning key to managing costs. Challenges in
the CPG industry include the following:
Numerous Production Facilities and DCs

With lots of final points-of-sale, CPG depends on distribution planning to minimize cost. These
planners need visibility into the entire network to ensure that they can fulfill customer orders from
other DCs if planners project that a key DC will be stocked out. They carefully plan safety stock
levels to avoid having too much or too little inventory in the supply chain.

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Exploit Alternative Manufacturing Sources

When primary manufacturing facilities are unable to meet projected demand, CPG manufacturers
must have a plan that allows them to obtain product from alternative sources.
Topic Summary
Supply planning has three components: inventory planning, distribution planning, and master
production scheduling. Through this process, you can balance supply and demand using
inventory, distribution, sourcing, and materials plans.
Constraints restrict the ability to produce and deliver goods. Supply planning constraints include
limits on capacity, material, transportation, and lead time.
Supply planning also differs by industry. A capacity constrained industry, such as the
semiconductor industry, conducts supply planning differently from the consumer product goods
industry, which is distribution intensive.
Inventory Planning
Overview
The demand plan forecasts what customers will want, how much, and when. It is only a forecast,
thoughactual demand could be higher or lower. If actual demand is higher, you may not be able to
meet it unless you have inventory on hand or can expedite production. If demand is lower, you are
stuck with excess inventory.
You want to avoid excess costs, either from carrying too much inventory or from too much
expediting. That brings us to the goals of inventory planning:
"To determine how much inventory to maintain at each locationto meet actual
customer demandwithin a pre-established, acceptable service level."
Introduction to Inventory Planning
Inventories are stocks of goods and materials used for many purposes: for resale to others, to use in
further manufacturing and assembling processes, or for the operation or maintenance of existing

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equipment. Inventories serve as cushions while items are replenished (arrive) in one pattern and
demanded (depart) in another pattern.
To meet demand on time, companies carry inventory to protect against rising and falling demand
(demand fluctuation). As inventory dwindles in each location, replenishment policies govern when
to place an order for more items, and what quantities to order. In developing these policies,
companies strive to optimize: not too much inventory in the network, and not too little.
Inventory Planning Capabilities
To achieve inventory-planning objectives, companies must develop these capabilities:
Set inventory targets Determine the amount of buffer required (safety stock) to meet the
service level target (order fill rate).
Define replenishment policies Decide on order quantity (how much finished goods to order
each time inventory needs to be replenished) and when to place the order.
Monitor and track inventory Set acceptable inventory ranges and ensure that inventory is
maintained within those ranges.
Usually conducted monthly or quarterly, inventory planning requires advanced modeling techniques
and specialized software. Course Note
Although inventory is carried for many purposes and in many forms, we limit our discussion to
finished goods inventory and to subassemblies and components that are defined as critical to the
manufacturing process. In reality, inventory planning may be done for all subassemblies and
components and for raw materials as well. In addition, we discuss only those inventory planning
activities performed internally (not across entities in the supply chain).
Inventory Planning: Stakeholders and Business Objectives
The functions most affected by inventory planning are Fulfillment and Finance:
Fulfillment ensures that product is available to meet customer demand and target customer
service levels.
Finance is concerned with the amount of money spent on meeting service levels. Finance
monitors inventory levels closely to ensure they are within set limits, and not too high or too
low.
Effective inventory planning addresses the following business issues:
Improve Customer Service Levels

Increase the total number of orders that are filled completely and on time.

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Manage Inventory Costs

Minimize the total cost of inventory across the supply chain, focusing on these costs:
Inventory Carrying Costs what it costs to carry inventory at each location, based on the cost
of capital.
Ordering Costs what it costs to place an order, including paperwork, time, and processing
costs.
Stock-out Costs the lost revenue opportunity when a product is out of stock when a
customer wants it.
Smooth the Effect of Demand Fluctuation

Operate manufacturing facilities as if demand were constant (which it never is): ensure that they run
at a constant ratefacilities and resources are not underused or overused. Without inventory
planning, demand could fluctuate wildly.
Inventory Planning: Inputs, Outputs, and Concepts
Now let's focus on how inventory planning works: its inputs and outputs (see the figure), and two key
concepts (predictable demand and demand variability). First, let's look at the key outputs.
Key Outputs Safety Stock Levels
The demand forecast is a best guess; actual demand can be higher or lower. Because demand is
variable, some excess inventory is kept on hand as a buffer. Referred to as "safety stock," this is a
key output of the inventory planning process.
At the same time, companies strive for a high level of customer service. For example, you may
decide that 95 percent of all demand will be met on timea 95 percent service level. In general, the
higher the service level goal, the more safety stock required. But you cannot simply carry large
inventories to ensure that all customer demands are met. Carrying inventory is expensive. It is not
only the cost of carrying the inventory, but also the cost of the capital tied up in the inventory
investment. What you want is a balance, between service level and total cost.
Key Outputs Safety Stock Levels (continued)
In the chart, the curve illustrates a trade-off: the better the service, the more safety stock required.
And, the higher the cost of carrying that stock.
Note also how the curve rises as service levels increase. Between 80 to 90 percent, the safety stock
needed to meet the service level increases only gradually. As the service level rises from 90 to 95

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percent, the safety stock needed rises more sharply. And note the big jump in safety stock when the
service level increases from 95 to 99 percent.
You must balance this trade-off between high customer service levels and the costs to meet those
service levels.
Key Outputs Replenishment Policies
As inventory dwindles at each location, the question is, when and how much to reorder? If you
reorder in small quantities, you have to reorder more often. If you reorder in large quantities, you
have to carry some excess inventory.
The answer is to determine optimal order quantities that minimize total costs. This is sometimes
called the economic order quantity, or EOQ. And, the best time to place an order must also be
determined:
Periodically: for example, every week or every month

When inventory has fallen below a certain point, called the reorder point
Replenishment policies set out your EOQ's and reorder points. (In this course, we focus only on
these two replenishment policies; there are many others). Click below for an example.
EOQ Example
Suppose that demand is 100 units per day. You can choose to reorder 100 units to arrive every day.
That might incur high transportation costs if that small quantity only partially fills a truck. Or, you can
order a full truckload at a time, which lowers the transportation costs, but increases the inventory
carrying cost. You want to use an economic order quantity for the lowest total cost.
Key Concepts Predictable Demand
When demand can be predicted, the result is lower overall costs: better on-time delivery, fewer stock-
outs, and higher levels of customer service with less inventory. This takes a strong planning focus.
Sophisticated modeling techniques compute safety stock levels and replenishment policies, and tie
them directly to customer service targets. If the model is accurateif demand is accurately predicted
and actual demand equals forecasta company can meet its customer demand without dipping into
their safety stock.
The figure shows a predictable demand scenario. A company places orders weekly, using an order
quantity, and maintains a safety stock to account for demand variability. The actual demand over
time does not require any safety stock.
Predictable demand works best with your "bread and butter" products. Meaningyour big sellers,
with high volumes, where the planning is straightforward. Predictable.

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SAFETY STOCK
is the amount of inventory kept on hand to buffer for unplanned events. Safety stock can be driven
by service level requirements, forecast error, demand and lead-time variability.
Key Concepts Demand Variability
Actual demand seldom equals forecast. That variability is why we have safety stock. The following
figures show how safety stock can be used to lessen the effects of demand variability.
If actual demand exceeds forecast, you have to use some safety stock. This helps meet customer
demand even though the forecasted demand was lower than actual.
If actual demand is less than forecast, you do not need to use any safety stock to meet demand.
However, some inventory carrying costs are incurred.
Key Inputs
Most companies use modeling techniques to determine the right level of safety stock to carry for
each item (as well as their economic order quantities and reorder points). Safety stock calculations
require several inputs:
Forecast
The forecast of customer demand. If demand for a product is an average of 10 items per week, the
safety stock required will be less than if demand were 1,000 items per week.
Forecast Error
The expected difference between actual and forecasted demand, based on history and experience.
So, if the forecasted demand is 100 items per day, but actual demand varies between 80 and 120
items per day (the forecast error), safety stock can cover for this fluctuation. In general, the higher
the forecast error, the higher the safety stock required to cover it.
Lead Time
The time that elapses between placing an order and actually receiving it. Assume that demand is
100 units per week, and the lead time for an order is one week. That means an order must be placed
at the end of Week 1 to receive it at the beginning of Week 3. Knowing this, you can place an order
at the end of every week to ensure there is enough supply on hand for the following week. Typically,
the longer the lead time, the earlier you must place orders.
Lead-Time Variability
The amount by which lead time varies. For example, if the lead time for an order is seven days, and
the lead-time variability is two days, then actual lead time varies between five days (2) and nine
(+2). Despite variability, an order might still be placed every week, but some extra inventory would
also have to be carried in case the order took the full nine days to arrive. So, the higher the lead-time

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variability, the more safety stock required.
Supply Variability
The difference between the actual supply quantity and the quantity ordered. Supply variability could
be due to defective items or incomplete orders being shipped. In general, the higher the supply
variability, the more safety stock required.
Order Quantities
As inventory is depleted, you must decide how much to order for the next replenishment. You can
use several different methods to compute the reorder quantity, but the simplest and most commonly
used is EOQ, the economic order quantity. The simplest form of EOQ minimizes total cost computed
as the sum of inventory carrying costs and order processing costs. More advanced formulae are
available to include stock-out costs, backorder costs, and price discounts (Winston 2003).
Winston, Wayne L. [1991] 2003. Operations Research: Applications and Algorithms. 4th ed. Boston: PWS-Kent
Publishing Co.
Inventory Planning Considerations
We have seen that inventory planning is based on goals that may seem to conflict: minimize total
costs and increase customer service levels. Companies pursue these goals based on their
business objectives:
Improve Customer Service Levels:

Targeted Service A company may segment its service level targets by customer or by product:
Segment service levels by customer provide a higher level of service to your best
customers. For example, the airline industry provides a higher level of service to those who
fly a lot. A food-processor distributor could choose to provide a higher level of service to
large, high-volume housewares stores, and a lower service level to smaller independent
stores. This requires setting safety stock levels by item and by customer, which is more
complex than the standard process (by item only).
Segment service levels by product set a higher service level for fast-moving and high-
margin products. Using an ABC classification scheme, you set higher service levels for the
class A products.
Smooth the Effect of Demand Fluctuation:

Plan for Your Suppliers A company may set inventory and safety stock levels for their suppliers.
Based on demand pattern, you create customer service level agreements with targets not only for
your customers, but also for your suppliers. Companies may do this instead of embarking on big
supply chain improvement projects, which can be too expensive and too daunting for some. To help
your key suppliersand of course, to keep your own operations running smoothlyyou could take
this approach.

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Inventory Planning: Example
One output of the inventory planning process is the level of safety stock required for each item at
each location. Safety stock is calculated to ensure a targeted level of customer service. Two
measures of customer service include:
On-Time Delivery the percentage of all customer demand that is met on time
Number of Stock-Outs the expected number of times a shortage will occur per year
Often, a safety stock level is computed for each measure. In some cases, one safety stock level can
meet both objectives. Or, the choice may be to meet only one objective.
Let's do some inventory planning.
Inventory Planning: Example (continued)
We have seen that inventory planning is based on goals that may seem to conflict: minimize total
costs and increase customer service levels. Companies pursue these goals based on their
business objectives:
A computer store in a remote township in Ireland sells an average of 1,000 CD boxes per year.
Annual demand for the CD boxes is normally distributed with a standard deviation of 69.28 boxes
(see Course Note below). The store orders the boxes from a regional distributor and each order is
fulfilled within one month. The cost of placing an order is 50, and the cost of carrying a box of
inventory for one year is 10.
The store has the following customer service objectives:
On-Time Delivery The store would like to determine the most economic order quantity
(EOQ), the reorder point, and the safety stock they should carry to meet 80 percent of all
demand on time (Y equals 80 percent)
Number of Stock-Outs The store would also like to determine the reorder point and the
safety stock they should carry to yield an average of two stock-outs per year (Z equals 2).
Course Note
"Standard deviation" is determined using statistical computations. We do not show the computations
here, but they can be found in any operations research or inventory theory textbook.
To compute the right economic order quantity, safety stock, and reorder points, the store takes the
following steps.

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Determine the EOQ
EOQ is calculated based on average annual demand, ordering costs, and holding costs. This
is the formula:
The square root of ((2 x Ordering cost x Average annual demand)

Holding cost)
To calculate our EOQ:
The square root of ((2 x 50 x 1,000) 10) = 100
Determine the reorder point so that Y=80% (where Y is customer service level)
The reorder point so that Y equals 80 percent is 65.33.

This is determined using inventory theory and statistical computations.
Inputs to the reorder point calculation include EOQ (100), annual demand (1,000 CD boxes),
and the standard deviation for demand (69.28).
We do not show the computations here but they can be found in any operations research or
inventory theory textbook.
Compute the safety stock so that Y=80% (where Y is customer service level)
Inputs to the safety stock calculation are reorder point (computed in the previous step) and
average demand during lead time (lead time is one month):
Reorder point Average demand during lead time
So, here is the amount of safety stock needed to achieve an 80 percent customer service
level:
65.33 (1,000 12), or, 65.33 83.33 = 18
The negative number (18) means they do not need to carry any safety stock to meet the 80
percent target. They can meet it (and probably beat it) if they simply use the EOQ (100
boxes) every time safety stock falls below the reorder point (65.33 boxes).
Determine the reorder point that yields a set number of stock-outs (Z) so that Z=2
The reorder point so that Z equals 2 is 100.13.

This is determined using inventory theory and statistical computations.
Inputs to the reorder point calculation include EOQ (100), annual demand (1,000 CD boxes),
and the standard deviation for demand (69.28).
We do not show the computations here but they can be found in any operations research or
inventory theory textbook.
Determine the safety stock that yields a set number of stock-outs (Z) so that Z=2

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We use the same safety stock calculation, only this time, we use the stock-out reorder point:
Reorder point (for Z=2) Average demand during lead time
To calculate the amount of safety stock needed to yield only two stock-outs per year:
100.13 83.33 = 16.8
So, with 16.8 boxes in safety stock, there will be only two stock-outs per year.
This table shows what happens to reorder points and safety stock levels as service levels increase.
On-Time Delivery Reorder Point Safety Stock
80% 65.33 0
90% 79.53 0
95% 90.13 6.8
99% 108.33 25.0
99.9% 127.13 43.8

Number of Stock-Outs = 2 100.13 16.8
Note that both objectiveson-time delivery and the number of stock-outscan be met with the
same safety stock level. In fact, a safety stock level of about 17 boxes will ensure that the store has
no more than two stock-outs per year and meets more than 95 percent of demand on time. (This is a
higher level of service than the store originally wanted.)
Topic Summary
What is it? Key outputs
Determine how much inventory to maintain at the Inventory plan

different locations to meet actual customer demand Safety stock levels
Replenishment policies:
Order quantity (EOQ)
Order frequency
Reorder point
Sample business problems addressed Key capabilities

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Improve customer service levels Set inventory targets

Manage inventory costs, including: Define replenishment policies
Carrying costs Monitor and track inventory costs
Ordering costs
Stock-Out costs
Smooth the effect of demand
fluctuation
Distribution Planning
Overview
At this point, you have demand forecasts and inventory targets for each supply chain location
(including distribution centers). Now, you want to maintain those targets by replenishing product from
your production facilities. That brings us to the goals of distribution planning:
"To determine the net finished good requirements, taking into account demand,
inventory levels, and inventory targetsto inform the manufacturing side what
product is needed, by item and locationand to inform the distribution centers when
to replenish inventory and the locations from which to source this inventory."
Distribution Network
A typical supply chain is an extended network of suppliers, factories, distribution centers, and
customers. Finished goods can flow along many different paths in a network.
Introduction to Distribution Planning
Distribution planning replenishes finished goods so that inventory is balanced across the supply
chain network. The balance is achieved by determining how much, when, and where finished goods
are needed. Specifically, distribution planning produces the following:
Net Finished Goods Requirements what is needed for each item at each location and
when. Planners determine the net requirements starting with demand, and then netting out
inventory on hand as well as any expected receipts.
Sourcing Plan which factories, suppliers, or distribution centers should replenish
inventories at each distribution center
Distribution Plan which distribution centers should satisfy which customer orders

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Distribution Planning Capabilities
To achieve distribution-planning objectives, companies must develop these capabilities:
Match supply and demand Develop a plan with no discrepancy between demand and
expected supply.
Apply business constraints Ensure that supply constraints are considered during the
planning process. These include manufacturing capacity constraints, transportation
constraints, and lead-time constraints.
Manage exceptions Manage plans by resolving any variances to those plans.
For example, after the sourcing plan is first generated, capacity decreases at one of
the facilities because of a machine failure. This causes a discrepancy between
available supply and demand. This is flagged as an exception. Planners then resolve
this by sourcing the demand from a facility (or supplier) that can handle the added
capacity.
Distribution Planning: Stakeholders and Business Objectives
The functions most affected by distribution planning include the following:
Manufacturing and Purchasing need the outputs from distribution planning to determine the
net amount of product that must be manufactured or purchased from suppliers.
Fulfillment needs the distribution plan to determine which distribution centers will ship
products to which customers.
Finance needs the output from distribution planning to monitor total costs and compare them
with budgeted costs.
These stakeholders strive to meet the following business objectives:
Maintain Target Inventory Levels

Optimal inventory levels are established (based on minimizing costs) during inventory planning.
Distribution planners strive to maintain these levels to keep the process within guidelines.
Maximize Customer Service

In inventory planning, planners maximize customer service by setting target safety stock levels.
Now, in distribution planning, planners strive to minimize inventory while keeping service levels high.
Minimize Transportation Costs

Minimize the cost of transporting goods across the entire supply chain network. Some companies
determine their sourcing plan based on minimizing transportation costs and on transportation
capacity constraints.
Minimize Order Expediting

By planning ahead, there is enough inventory on hand to meet customer demand without expediting.
Expediting orders increases costs: for example, rush delivery, overtime, or premium charges for

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materials.
Distribution Planning: Inputs and Outputs
Now let's focus on how inventory planning works: its inputs and outputs (see the figure), and two key
concepts (predictable demand and demand variability). First, let's look at the key outputs.
Key Outputs Distribution Plan
When you have multiple distribution centers and multiple customers, more than one distribution
center may fill orders for any given customer. The plan that specifies which distribution center fulfills
which customer orders is the distribution plan.
Consider a company with two distribution centers (Kuala Lumpur and Manila) and two customers
(Calcutta and Hong Kong). For simplicity, assume that the lead time to fulfill a customer demand
from a distribution center is zero, referred to as instantaneous replenishment. A simple solution
follows:
Course Note
Note that in this example, we assumed that demand at one location (for example, Calcutta) could be
met by supply at one distribution center (Kuala Lumpur). In the real world, this is a process: the
planner/software has to consider the existing inventory position at each distribution center to match
demand to supply.
Key Outputs Net Finished Goods Requirements
As the distribution centers fulfill customer orders, inventory is depleted and must be replenished. The
DCs determine the quantity of product they need and place their orders with the manufacturing
facilities or other suppliers of finished goods. To determine "net" finished goods requirements,
inventory on hand and expected receipts are netted out (subtracted) from demand.
Assume that the lead time to replenish inventory at the distribution centers is zero. Also assume that
the inventory at the beginning of Week 1 is 25 for Kuala Lumpur and 20 for Manila.
Course Note
To simplify our example, we do not discuss other variables involved in determining net finished
goods requirements. These include lead time (the time between placing an order and receiving the
goods), expected receipts (finished goods that have been ordered and are expected to arrive),
safety stock level, and order quantities.

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Key Outputs Sourcing Plan
Net finished goods requirements are not specific about how the requirements are to be met. With
multiple factories supplying goods to distribution centers, the question is: which factories should
replenish the inventories at each distribution center? The result is a sourcing plan. The sourcing
plan can specify finished goods purchase orders (purchase from suppliers), transfer orders (move
from one DC to another), and manufacturing orders (produce at factories).
Consider the case of a company that has distribution centers in Reno and Pittsburgh and two
manufacturing facilities in Taipei and Bangkok. The cost of transportation from Taipei to Reno is
higher than the cost from Bangkok to Reno. Similarly, the cost of transportation from Bangkok to
Pittsburgh is higher than the cost from Taipei to Pittsburgh. As a result, the company prefers to
supply the Reno DC from Bangkok, and the Pittsburgh DC from Taipei whenever possible. The
manufacturing capacity of Taipei is 125 units per week, and the manufacturing capacity of Bangkok
is 125 units per week. Click on the button to see a sample sourcing plan.
Capacity, Requirements, and Sourcing Plans

As you can see, the sourcing plan is to source as much product as possible from Bangkok for Reno,
and to source any remainder from Taipei. Similarly, the plan for Pittsburgh is to source the entire
product from Taipei. For the sake of simplicity, we did not consider manufacturing and transportation
lead times in this example.
Key Inputs
Several inputs are required for distribution planning. Let's look at the most common and important
ones, classified as demand inputs, supply inputs, and static inputs (inputs that seldom change).
Demand, Supply, and Static Inputs
Demand Inputs visibility into customer demand
Forecast: The forecast of customer demand for the products.

Safety Stock: The level of safety stock required for each item. Levels are predetermined
during the inventory planning process.
Orders: As placed by the customers.
Supply Inputs used to determine net requirements
On-Hand Inventory: Inventory of goods currently available.

Inventory In-Transit: Inventory of goods already shipped and en route to the appropriate
location.
Static Inputs inputs that seldom change

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Network Nodes: A model/map of the supply chain network that identifies each network node
(location) as a manufacturing facility, distribution center, warehouse, or customer.
Transportation Modes: The method used (air, rail, truck, or ship) to transport goods
between locations. There could be multiple transportation modes between locations. The
preferred modes are used to develop a distribution strategy that minimizes the total
transportation cost across the supply chain network.
Lead Time: The time required to fulfill an order. This determines when an order needs to be
placed. For example, if lead time is one week, the order is placed one week before the goods
are required. If it is two weeks, the order is placed two weeks prior.
EOQ: The "economic order quantity"the quantity that allows you to minimize your total
cost. Some companies place orders in any quantity while others will order only in the EOQ
amount.
Lot Sizes: The quantity in which manufacturing orders must be placed. If a manufacturer
uses a predetermined lot size of 100 for manufacturing, then they always make 100 items at
a time.
Minimum Quantities: The minimum quantity of any replenishment order. If the minimum
quantity is 50, and the net requirements are fewer than 50, the order must still be for at least
50 units. If the requirement is for more than 50, the order can be for the exact amount.
Distribution Planning: Example
Now, let's consider an example of the distribution planning process in action. This example
introduces how planners take into account variables such as safety stock, economic order quantities,
expected receipts, and lead times.
Assume that a company has one distribution center in Kuala Lumpur and one customer in Calcutta.
The company has one manufacturing facility in Bangkok and a finished goods supplier in Taipei.
The lead time to fulfill an order from the manufacturing facilities or the supplier to the DC is
one week, and the lead time to fill the Calcutta customer order from Kuala Lumpur is zero.
The Calcutta customer demand is projected at 125 per week with some variability. So,
inventory planning has determined that the safety stock at Kuala Lumpur should be 100.
The transportation cost from Bangkok to Kuala Lumpur is much lower than the transportation
cost from Taipei to Kuala L umpur. Ideally, the company would like to source as much
product from Bangkok as possible.
The manufacturing capacity is 75 units at Bangkok and 150 units at Taipei.
The company has also determined that the EOQ is 125 units per week.
Based on this information, the optimal sourcing solution is to source 75 units per week from Bangkok
to the Kuala Lumpur DC, and 50 per week from Taipei. Click on the button to see the solution in
more detail.
Distribution Planning: Example (continued)

Transcript
The Optimal Sourcing Solution specifies that Kuala Lumpur is to hold 100 units of safety stock in
inventory to account for demand variability.
Due to demand variability, actual orders do not follow the forecasted pattern. Assume that the
orders from Calcutta in four consecutive weeks are for 125, 135, 175, and 145 units.
To fulfill these orders (and comply with the EOQ), Kuala Lumpur has to use its safety stock.
Click on the Safety Stock Solution button. The safety stock position is shown as "Final Safety
Stock."
As you can see, with proper distribution planning, you can respond to customer demand variability
using safety stock.
Distribution Planning Considerations
Special Software
In the real world, supply chain networks are complex. Unlike our simple example, they have multiple
manufacturing facilitiesmore than one supplierand more than one manufacturer of
subassemblies and components. And, their distribution centers are in central and regional locations.
Distribution planning for such a complex network requires the use of specialized supply chain
planning software.
Collaboration
Today, the company doing distribution planning may not even own some of the nodes on its
network. Companies are increasingly collaborating with trading partners, and may include their
partners' facilities in their own supply chain models. So, instead of planning distribution only for their
"owned" nodes, they could suggest inventory levels and distribution plans to their partners.
Distribution Planning Considerations (continued)
Adaptability
Distribution plans should be adaptable to supply chain and business processes that make good
business sense. For example, so far, we have assumed that manufacturers complete the
manufacturing process and ship finished items to their customers. This is not always the best way.
Consider a computer manufacturer that assembles computers at their manufacturing facility and
purchases monitors from a supplier:
The manufacturer could have the monitors shipped to their manufacturing facility; complete
the assembly of the PC by packing the monitor and the computer together; and then ship the
product to the DC.
Or, they could ship the computer and the monitor separately to a central distribution center
where final assembly, packing, and shipping of the finished product are done. This is referred
to as merge-in-transit. Distribution planning in this case has to account for the supplier's
inventory as well.

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Topic Summary
Determine which distribution center fulfills which Distribution plan

customer orders Net finished goods requirements
Determine the net finished goods requirements by Sourcing plan
"netting" existing inventory levels and expected receipts
from demand
Determine how inventory will be replenished at each
location
Maintain target inventory levels Match supply and demand

Maximize customer service Apply business constraints
Minimize transportation costs Manage exceptions
Minimize expediting of orders
Master Production Scheduling

Overview
Once the distribution and sourcing plans have been created, the next step is to schedule production.
The master production schedule details the daily or weekly production requirements for each factory
or manufacturing facility. In this topic, we explore the goal of master production scheduling, or, MPS:
"To develop a feasible production schedule that enables you to meet expected
customer demandusing net requirements from distribution planningto specify
which items will be produced on what days in which factoriesand making sure
enough material is available in the network."
MPS Network
Recall that a distribution network has multiple suppliers, factories, distribution centers, and
customers. The network for master production scheduling consists of multiple finished goods
manufacturing facilities ("FG factories" in the diagram), multiple subassembly and components
manufacturing facilities ("component factories"), and suppliers. An FG factory could source much of
its subassembly and component requirements from more than one of the component factories or
suppliers.

Transcript
Work in process (WIP) can flow along many different paths in the network. Click on each Path button
beneath the diagram to see the ways WIP can flow through the MPS network.
Introduction to Master Production Scheduling
The master production schedule spells out which items will be used on what days to satisfy
customer demand. Recall that in most instances, the distribution plan has net requirements in
weekly or monthly buckets. The MPS converts that into daily or weekly buckets. Further, materials
constraints were not considered during distribution planning. Constraints are introduced during the
MPS process because this is where feasibility becomes a central theme. (The "materials" we refer to
here are the subassemblies and raw materials required for production of the finished goods.)
Master production scheduling creates the following outputs:
Master Production Schedule (MPS)

Defines which items will be produced on what days for each factory. The MPS may also
consider materials constraints to ensure that the plan is material-feasible.
Material Requirements
Material requirements are generated for suppliers of components, subassemblies, and/or raw
materials. These requirements are normally time-phased (by week, by day) and are used to
provide visibility to suppliers so that they can plan their own production. Detailed material
requirements are generated during the materials requirements planning process. (That
process is part of production planning, which is not covered in this course.)
Master Production Scheduling Capabilities
To achieve MPS objectives, companies must develop these capabilities:
Apply materials constraints determine if sufficient materials are available to manufacture

the required product. (More detailed than distribution planning constraints.)
Apply capacity constraints ensure that sufficient capacity is available for production.
(More detailed than distribution planning constraints.)
Manage exceptions support manufacturing decisions. For example, determine if the
product will be prebuilt, or if the order will be satisfied late, or if the material will need to be
expedited.
Often, a person known as the Master Production Scheduler is empowered to make any decisions
associated with master production scheduling.
MPS: Stakeholders and Business Objectives

Transcript
The functions most affected by distribution planning include the following:
Manufacturing uses the output from MPS to schedule production resourceslabor,

machines, and materials.
Fulfillment may use the master production schedule to quote due dates and monitor the
progress of customer orders throughout the planning processes.
Here are some of the key business objectives that MPS addresses:
Meet Sourcing and Distribution Requirements

The requirements generated during distribution planning are scheduled so that inventory can be
replenished at the distribution centers.
Provide Visibility into Material Requirements for Suppliers

Material requirements are sent to suppliers so that they can plan for their own production. Early
visibility into material requirements alerts suppliers to unusual fluctuations in the demand for raw
materials.
MPS: Inputs and Outputs
Now let's take a closer look at MPS: its key inputs and outputs (see the figure), and an example of
MPS in action. First, the key outputs.
Key Outputs Master Production Schedule
The master production schedule defines which items will be produced on what days for each factory.
Planners focus on feasibility during MPS: they consider capacity constraints at a more detailed level
than in distribution planning to assure enough product is available. They may also consider materials
constraints to ensure the plan is material-feasible. Consider the case of a company that
manufactures two types of motorcycles, fuel-injected and nonfuel-injected. They conduct inventory
planning and distribution planning at the motorcycle level. So, the company plans for total
motorcycles, not each individual SKU (fuel-injected or nonfuel-injected). For distribution planning
purposes, the company uses a weekly capacity of 120 bikes.
The Weekly Production Schedule shows the requirements from distribution planning. These
requirements are capacity-feasible during distribution planning, given the total capacity
constraint of 120 bikes.
Key Outputs Master Production Schedule (continued)

Transcript
In MPS, they must now consider capacity constraints at a more detailed level. They have the
capacity to manufacture a combination of fuel-injected and nonfuel-injected motorcycles. But to see
capacity-feasible combinations, click the "ADVANCE" button:
Manufacturing Capacity: Feasible Combinations
The Feasible Constraint Combinations table shows that the company cannot manufacture 60 non
fuel-injected and 60 fuel-injected motorcycles during a single week. As you can see, 6060 is not
one of the possible combinations.
Revised Weekly Production Schedule
MPS must modify the requirements: it generates a Revised Weekly Production Schedule based on a
Daily Master Production Schedule. ("Daily" is a 5-day workweek.) This detailed approach assures a
feasible schedule.
Daily Master Production Schedule
MPS must modify the requirements: it generates a Revised Weekly Production Schedule based on a
Daily Master Production Schedule. ("Daily" is a 5-day workweek.) This detailed approach assures a
feasible schedule.
Key Outputs Material Requirements
In our MPS example so far, we looked only at the manufacturing constraints. Many companies
look at both manufacturing and materials constraints. Why? Because suppliers may be unable to
provide materials when needed due to their own capacity constraints.
Bills of material (BOM's) list all material requirements. Also, material requirements must be offset by
lead timethe time it takes for the materials to arrive at the manufacturing facility after an order is
placed with the supplier. The resulting material requirements plan is a time-phased look at the
components, subassemblies, and/or raw materials required to meet the production schedule.
Although this is the same process as material requirements planning (a part of production planning),
it is often done now during MPS to provide visibility to suppliers. With long lead-time items
especially, suppliers need this time to consider their own materials constraints.
Key Outputs Material Requirements (continued)
Let's revisit the motorcycle example from earlier. Assume that the bill of material (BOM) has several
components. One of the key components is the electronic fuel injector assembly from one of the
suppliers. (We will not look at the entire BOM, but only at this assembly.) The lead time for the fuel

Transcript
injectors is one week, so orders must be placed one week prior to when they are needed for
assembly. Option 1 shows this.
However, the supplier for the fuel injectors has a plant shutdown scheduled for Week 3, and is not
able to supply the 50 units needed during that week. But, they do have sufficient capacity during the
previous weeks to fulfill the orders for all four weeks as shown in Option 2.
The planner notes that Option 2 allows all the demand to be met. But, this will require the
manufacturer to carry some excess inventory during the earlier weeks. This is still considered a
feasible plan and is accepted as such. With this early visibility, the supplier's capacity constraint was
not an issue.
Key Outputs Material Requirements (continued)
Prioritizing Suppliers
In many cases, there is more than one supplier for a given material. In such cases, you can decide
to procure based on prioritynaming a primary supplier, a secondary supplier, a tertiary supplier 1,
tertiary supplier 2, and so on. If higher-priority suppliers are unable to meet requirements, you would
procure from the next supplier on the priority list.
In our motorcycle example, assume that there are two suppliers for the fuel injectors. The primary
supplier has the planned shutdown during Week 3 and cannot meet the deadline. As a result, the
planner will consider obtaining the fuel injectors from the secondary supplier. If the secondary
supplier is able to commit to supplying the required fuel injectors during Week 3, the planner will be
able to generate a feasible material requirements plan.
Key Inputs
While there are numerous inputs into MPS, we focus on the most frequently used inputs. We classify
them into three typesdemand, supply, and static (inputs that seldom change).
Demand, Supply, and Static Inputs
Demand Inputs
Sourcing Plan
The plan generated during distribution planning that specifies the manufacturing
facility that should manufacture products, or the suppliers from which the finished
goods should be purchased.
Net Finished Goods Requirements

The requirements generated during distribution planning that specify the total amount

Transcript
of items that must be manufactured or purchased from suppliers of finished goods.

The net requirements are determined by netting out (subtracting) inventory on hand
and expected receipts from demand.
Supply Inputs
Materials Inventory
An inventory of what materials are currently available.
Materials Inventory in Transit

Inventory of materials that have already been shipped and are en route to the
appropriate location. This information is used to determine the net requirements for
materials.
Work In Process (WIP)

Work that has already started and is partially completed. WIP can be used in the
calculation of net manufacturing requirements.
Bill of Material (BOM)

Used to plan for materials and subassemblies that are purchased from suppliers. A
detailed BOM at this stage helps determine the requirements for all materials, and
provides early visibility to suppliers. Final material requirements are determined during
production planning and sent to suppliers.
Static Inputs
Capacity Constraints
The capacity constraints at each manufacturing facility. These are more detailed than
the capacity constraints used during distribution planning.
Items
A list of the manufactured items that need to be built.
Lead Times
The time it takes for material to become available after an order is placed with a
supplier.
MPS Planning Considerations
In developing master production schedules, other considerations are taken into account:
Global vs. Regional Planning A company that plans globally, for all its factories, can also
plan for regional and local diversity. ("Diversity" could include laws, regulations, customer
preferences, and so on). In these cases, the global MPS process generates a region or
locale-specific MPS.
Customer Prioritization When developing master production schedules, customer

Transcript
priorities assure that delivery dates are met for your big, important customers. (This could
cause delivery dates to slip for other customers.)
Supply Prioritization We have already discussed "supplier" prioritization (primary,
secondary, and so on). "Supply" prioritization goes into even more detail. You establish how
much product you want to source from each supplier, based on a set split. For example, you
could decide that 75 percent of a product's requirements will be sourced from the primary
supplier, and 25 percent from the secondary.
Alternate Production Routes In many instances, product can follow more than one route
through the network. You can specify a primary route and one or more alternate routes. The
alternate routes may be used in cases of insufficient capacity and/or materials.
MPS: Example
Recall the motorcycle example in which a company manufactures two types of motorcycles, fuel-
injected and nonfuel-injected.
Manufacturing Capacity: Feasible Combinations

For distribution planning purposes, the company uses a weekly capacity of 120 motorcycles. The
company has the capacity to manufacture 80 nonfuel-injected motorcycles every week, and 40 fuel-
injected. The company can also manufacture in other combinations:
Distribution Center Requirements

We will add more complexity to that example by introducing manufacturing lead times and work in
process (WIP). First, let's look at the requirements generated for a distribution center during
distribution planning.
Manufacturing Requirements
With a one-week manufacturing lead time, the manufacturer must start production of the motorcycles
the week prior to when they are needed. This is capacity-feasible during distribution planning
because the total capacity constraint is 120 per week. So, MPS produces the Manufacturing
Requirements for building the motorcycles.
Master Production Schedule (MPS) The manufacturing facility has a WIP inventory of 10 fuel-
injected motorcycles during Week 1. From the possible capacity combinations presented, however,
we can see that the company cannot manufacture 60 nonfuel-injected and 60 fuel-injected
motorcycles during a week. As a result, 10 of the fuel-injected motorcycles cannot be manufactured
as desired, and their production will have to be pushed out to Week 4. This is reflected in the Master
Production Schedule.
The plant will manufacture 50 fuel-injected motorcycles during Weeks 1, 2, and 3, and 10 during
Week 4. The planner already knows that 10 of the fuel-injected motorcycles will be late because of
capacity constraints at the plant.
Let's further assume that the bill of material (BOM) has several components, one of which is the
electronic fuel injector assembly provided by one of the suppliers. (For the purpose of this example,
we will look only at this one assembly.) The lead time for the fuel injectors is one week, so orders
have to be placed one week prior to when they are required. This is shown in Table 1. Table 2

Transcript
shows the capacity of the fuel injector manufacturer. Looks like the material requirements can be
satisfied, and a feasible plan is generated.
Topic Summary
Determine if sufficient manufacturing capacity and Master production schedule

material are available to manufacture product in each Material requirements
factory
Meet sourcing and distribution requirements Apply material constraints

Provide material requirements visibility to suppliers Apply capacity constraints
Manage exceptions
Metrics for Supply Planning

Overview
Use metrics to gauge the health of your supply planning processes:
Metrics to ensure process is being followed

Metrics to measure supply chain effectiveness
A company that has an effective supply planning process develops capabilities thatalong with well-
run procurement, manufacturing, and fulfillment functionsincrease shareholder value.
Supply Planning: Process Control
One of the goals of planning is to trust in the process-generated plans, and to minimize the changes
people make to them. Otherwise, why invest so much in a process?
The number of manual overrides is a measure of whether you have control of the planning
processes. This metric measures the number of times someone manually revises a plan, and
identifies the level of intervention in the planning process. A high level of intervention may mean
that there are process, organizational, or training issues that need to be resolved.

Transcript
Supply Planning: Effectiveness-Oriented Metrics
In addition to tracking how well the processes work, companies track a variety of metrics that
measure the effectiveness of the supply chain itself.
Inventory Turns
The number of times inventory is turned over during a year. The more turns per year, the more
working capital available to the business.
Number of Stock-Outs
The number of times a product is out of stock when a customer orders it. This number is a measure
of service level to customers, and has a cost measured in lost revenues. The lower it is the better.
Order Lead Time

The average time it takes to deliver an order once the order is received. This is a measure of "lead
time to customer delivery" performance against other industry benchmarks and against your own
targets. This is a measure of customer service.
Delivery in Full
The percentage of all orders in which the quantity is delivered in full, on first delivery. Delivery in full
shows how often an order is 100 percent right upon delivery and, conversely, how often a company
misses this goal. (Even if the miss is one unit per order.) You want to maximize the percentage of
orders that are delivered in full.
On-Time Delivery
The percentage of customer orders delivered on time, on the date promised to the customer at the
time the order was placed. You want to maximize the percentage of orders delivered on time.
Supply Planning: Influences on Shareholder Value
What these metrics typically show is that supply planning can increase shareholder value.
Companies strive to ensure product availability and high service levels for their customers. At the
same time, they set safety stock levels as low as they can go without harming customer service
levels. This leads to good news for the bottom line:
Increased inventory turns

Reduced work in process inventory
Reduced finished goods inventory
Reduced inventory carrying costs.
Accurate safety stock levels mean product is available when customers want it. This increases the
service level to customers. It also lowers costs for fulfilling customer orders because fewer orders

Transcript
are expedited and most orders can be delivered in full. Plus, less expediting leads to reduced
manufacturing and distribution overtime: people involved in expediting can be redeployed to other,
more productive roles.
Topic Summary
Companies use metrics to gauge the health of their supply planning processes. They use metrics to
make sure the process is being followed, and to measure how well the supply chain itself is working.
Companies reap benefits through well-run supply planning. Benefits include improved order fill rates,
reduced inventory, and reduced transportation costs. These benefits ultimately translate into
increased shareholder value.
Supply Planning Case Study

Overview
Here are the facts of our case study:
A company has one computer distributor in France and two manufacturing facilities.
The distributor sells an average of 85 CD boxes per month.
The monthly demand for the CD boxes is normally distributed with a standard deviation of 20.
The distributor orders the boxes from its manufacturing facilities, and each order is fulfilled
within one month.
The cost of placing an order is 50.
The cost of holding a box of inventory (for one year) is 10.
The company would like to determine how much safety stock the distributor should carry so they can
meet 95 percent of all demand on time and have an average of only two stock-outs per year.
Now that planners know how much safety stock they needwith seven boxes of CDs they can meet
demand 95 percent of the timethey go a step further. They determine that with an increase in
safety stock to 15 boxes, they can also ensure that the distributor has an average of only two stock-
outs per year. (They used theory and statistics to compute this.)
The company decides it is cost effective to meet both customer service objectives, and they set the
safety stock level at 15.
A Supply Planning Case Study (continued)

Transcript
The company's forecast for the next five months is 100, 80, 75, 80, and 90 respectively. Thus, given
the order lead time, the company must place an order at the beginning of month one to receive it at
the beginning of month two. The company has also determined that the optimal way to source the
product from the two manufacturing plants (Plant 1 and Plant 2) is to take 40 percent of demand
from Plant 1 and 60 percent of demand from Plant 2.
Click the arrow to see how the requirements for each of the plants are determined.
The Manufacturing Requirements are equal to the forecast but offset by the one-month lead-time.
The Requirements for Plants 1 and 2 are determined by allocating the Manufacturing Requirements
to each plant using the allocation percentages - 40% to Plant 1 and 60% to Plant 2.
The Scheduled Receipts are equal to the quantity manufactured and shipped (Manufacturing
Requirements) but offset by the one-month lead-time.
The Beginning Inventory during each month is equal to the Ending Inventory of the previous month.
The Ending Inventory for each month is computed as (Beginning Inventory + Scheduled Receipts -
Forecast).
Supply Planning: Effectiveness-Oriented Metrics
Sourcing Plan 1 is only feasible if the company has enough manufacturing capacity at each of their
two plants. Current capacity is 40 boxes at Plant 1 and 80 boxes at Plant 2. That total capacity of
120 boxes per month is more than enough: the average demand is 85 boxes per month.
Actual customer orders begin to hit the distributor. The company notices unusually heavy demand in
the first three months and less demand in the next two months. (The orders are 110, 120, 110, 45,
and 40 for each month respectively.)
A negative number means "on back order." So, if they were to use this original plan, they would have
a shortage during several months. Recall how ending inventory is computed:
Beginning inventory + Scheduled receipts Forecast = Ending inventory
A new Ideal Sourcing Plan must be developed based on actual customer orders.

Transcript
If you need help with these questions, just click on "MORE DETAIL."
Why is the Ideal Sourcing Plan infeasible?

The Ideal Sourcing Plan is not feasible because capacity at Plant 1 (40 boxes) is not sufficient to
meet the requirements.
What should the company do to make the plan feasible?

The company should shift some of the requirements from Plant 1 to Plant 2, to take advantage of its
higher capacity of 80 boxes per month.
The company realizes that there isn't enough capacity at Plant 1, and that Plant 2 must take on
some of Plant 1's requirements. Also, due to planned capital improvements, they expect to shut
down Plant 2 during months three and four. However, in spite of the shutdown, the company is able
to develop a Feasible Sourcing Plan to meet the expected demand by prebuilding five units during
month two to satisfy the demand during months four and five. (This does mean the distributor has to
carry some excess safety stock during month four.)
The Master Production Schedule shows each plant's monthly manufacturing requirements broken
out by week.
Conclusion
Module Summary
Supply planning ensures the right supply of product, at the right place, at the right time to meet
demand. During this process, companies develop inventory, distribution, sourcing, and materials
plans. They also consider constraints on capacity and materials to make sure their plans are feasible.
Supply planning has three main components:
Inventory planning set safety stock levels and replenishment policies. The goal is to keep
customer service up while keeping inventory costs down.
Distribution planning determine net finished goods requirements: what do we need,
when, and from which locations? This balances inventory across the supply network.
Master production scheduling determine if enough manufacturing capacity and materials
are on hand to meet demand. Often used to provide suppliers with early insight into demand.
Supply planning metrics show lower safety stock levels, shorter order fulfillment lead times, more
inventory turns, and lower transportation costs. That translates into increased shareholder value.

Transcript
References
Winston, Wayne L. [1991] 2003. Operations Research: Applications and Algorithms. 4th ed. Boston:
PWS-Kent Publishing Co.

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Supply Chain Planning:

Availabilityfeasibilityand service. The goal of supply planning is to ensure an adequate supply of

Improving customer fill rates

How Is Supply Planning Integrated with Supply Chain Planning?

How do the planning processes relate to each other?

After completing this module, you should be able to do the following:

Identify the purpose, objectives, and benefits of supply planning.

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Introduction to Supply Planning

A supply chain is a network of the entitieswithin and across companiesinvolved in producing,

Supply Planning Constraints

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Components of Supply Planning

Master Production Scheduling

Supply Planning Process Flow

Master Production Scheduling This process results in a feasible production plan/schedule. It is

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Supply Planning in Different Industries: Semiconductor

Chronic Capacity Shortages

Inaccurate Due-Date Promises

Visibility into Contract Manufacturers' Plans

Ability to Quickly Adjust Plans

Supply Planning in Different Industries: Consumer Products

Numerous Production Facilities and DCs

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Exploit Alternative Manufacturing Sources

Introduction to Inventory Planning

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Inventory Planning Capabilities

To achieve inventory-planning objectives, companies must develop these capabilities:

Inventory Planning: Stakeholders and Business Objectives

Effective inventory planning addresses the following business issues:

Improve Customer Service Levels

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Manage Inventory Costs

Smooth the Effect of Demand Fluctuation

Inventory Planning: Inputs, Outputs, and Concepts

Key Outputs Safety Stock Levels

Key Outputs Safety Stock Levels (continued)

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Key Outputs Replenishment Policies

Periodically: for example, every week or every month

Key Concepts Predictable Demand

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Key Concepts Demand Variability

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variability, the more safety stock required.

Inventory Planning Considerations

Improve Customer Service Levels:

Smooth the Effect of Demand Fluctuation:

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Inventory Planning: Example

Let's do some inventory planning.

Inventory Planning: Example (continued)

The store has the following customer service objectives:

Inventory Planning: Example (continued)

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Determine the EOQ

The square root of ((2 x Ordering cost x Average annual demand)

To calculate our EOQ:

The square root of ((2 x 50 x 1,000) 10) = 100

The reorder point so that Y equals 80 percent is 65.33.