Master Planning of Resources Exam Practice Guide

Exam Contents:
Demand Management 30% Sales and Operations Planning 25% Master Scheduling 45%

High Level Definitions

Demand Management recognizes demand, including making demand happen and prioritizing demand when supplies are insufficient. Demand management includes 1) forecasting 2) order entry 3) order promising 4) determining branch warehouse requirements, interplant orders and service part requirements. Forecasting attempts to predict sales to allow manufacturing to plan for the acquisition of resources or manufacturing to meet demand. A forecast may be based on quantitative (mathematics, trend) or qualitative techniques (business judgment). The accuracy of the forecast must be measured and monitored, and is based on quality data for independent demand. Distribution Resource Planning is the planning of key resources in a distribution system, as well as the management of distribution inventory. Order Servicing includes receiving, entering and promising orders form customers, distribution centers, and interplant operations. Order servicing is responsible for customer requests and interaction with the master schedule. Sales and Operations Planning integrates marketing plans with the management of the supply chain. The process brings all the plans for sales, marketing, product development, manufacturing, sourcing and financial) into one integrated set of plans by product group (not individual products). The S&OP is the definitive plan for the near to mid term, allowing for resource planning and to support business planning. Output includes: Sales plan Production plan Financial plan New product development plan Inventory / backlog plan Master Scheduling includes activities to prepare the master production schedule (MPS). The MPS is adjusted to meet the production plan according to the S&OP process. The MPS is the anticipated build schedule, stated in specific product configurations. The MPS is a statement of production, not a forecast of product demand. For make-to-stock companies, the MPS is stated in terms of end product items. For assemble-to-order companies, the MPS is in common parts options called planning bills. In a make to order

Master Planning of Resources Exam Practice Guide firm, the MPS is often stated in terms of customer orders. For service industries, the MPS is typically stated in terms of capacity. Rough-cut Capacity Planning (RCCP) validates the MPS by converting into requirements for key resources and identifies bottlenecks. The Final Assembly Schedule (FAS) schedules the operations required to complete the product from the level where it is stocked (or master scheduled) to the end item level. The MPS also provides input into material and capacity requirements planning. Sample Master Schedule Problem: Header Description Lot Size On hand Mfg Lead Time Safety stock Demand Time Fence Planning Time Fence Period Values
Period Forecast Customer Orders Projected Available Balance Available to Promise Master Production Schedule 1 20 19 1 1 2 21 20 31 9 (A) 50 3 20 21 10 (D) 4 22 21 38 4 (B) 50 5 24 25 13 6 26 24 37 6 50 7 28 20 9 8 28 18 31 16 50 9 25 16 6 (C) 10 25 12 31 28 50 11 20 10 11

Value 50 20 2 0 3 8

Notes MPS is always a multiple of lot size, typically equal to it Initial inventory, period 0 You need to release the order 2 periods before it is needed If you do have a value in safety stock, it can drive the need for an MPS value (if you add in either customer orders or forecast demand) This is the frozen zone where MPS cant be changed. The PAB uses the planning time fence. Within the planning time fence, PAB uses actual customer orders; outside the planning fence, forecast is used

Calculation of Certain Items: A) ATP = 50 (period 2 MPS) 20 (customer orders period 2) 21 (customer orders period 3) = 9 B) ATP = 50 (period 4 MPS) 21 (customer orders period 4) 25 (customer orders period 5) = 4 C) PAB = 31 (prior period PAB) 25 (forecast BECAUSE WE ARE PAST THE PLANNING TIME FENCE in period 8) = 6 D) PAB = 31 (prior period PAB) 21 (customer orders period 3 BECAUSE WE ARE INSIDE THE PLANNING TIME FENCE) = 10

Master Planning of Resources Exam Practice Guide Notes Forecast is the sales forecast (this is usually, but not always, greater than customer orders for the period). Note that the forecast is different than the MPS (anticipated build schedule) Customer Orders are actual demands (usually from a direct customer, may be interplant demand). Customer orders are usually less than the forecast. Projected Available Balance for periods BEFORE the value in the demand time fence, PAB = (prior period PAB) + MPS Customer Orders. Alternatively, PAB = (beginning inventory) + MPS Customer orders (for period 1). Projected Available Balance for periods AFTER the value in the demand time fence, PAB = prior period PAB + MPS (the greater of customer orders or forecast) Available to Promise the ATP is the periods MPS the sum of customer orders occurring before the next MPS receipt. During the first master schedule period, the ATP quantity includes the on-hand balance (beginning inventory). Note that ONLY customer orders PRIOR to the next MPS receipt are counted as reducing the ATP. Mean Absolute Deviation the MAD is calculated as (absolute value of sum of errors) / total number of occurrences (i.e. the # of periods). One Standard Deviation equals approximately 1.25 Mean Absolute Deviations. 68% confidence = 1 MAD, 95% confidence = 2.06 MAD, and 99% = 3 MAD. Mean Absolute Deviation is used because it is easier to calculate the forecast and it can use exponential smoothing Exponential Smoothing the Alpha is the weighting of the current actual results against the prior months total. For example, if the alpha is 10%, and the current months actual result is 153, and the prior months values are 140, 155, 150, and 100 (note that 100 was the cumulative FORECAST, not the actual value for that month); the equation would be:
100 * .9 = 90 + 150 * .1 = 15 = 105 105 * .9 = 94.5 + 155 * .1 = 15.5 = 110 110 * .9 = 99 + 140 * .1 = 14 = 113 113 * .9 = 101.7 + 153 * .1 = 15.3 = 117

Terms:
Actual Demand consumes the forecast within the customer order backlog horizon (demand time fence) and net against the forecast outside this horizon Adaptive Smoothing form of exponential smoothing where the smoothing constant is automatically updated for forecast error Available to Promise uncommitted portion of inventory and planned production

Master Planning of Resources Exam Practice Guide Bias a consistent deviation from the mean in a forecast, either high or low Bill of Resources listing of required capacity and key resources to manufacture one unit of an item or family. RCCP uses this to calculate the approximate capacity requirements Bottom-up Replanning In MRP, use pegging data to solve material availability or other problems by the planner; options include compressing lead time, cutting order quantity, substituting material, and changing the master schedule Bucket vs. Bucketless System bucket uses time phased period (usually a week), while bucketless goes by actual date Business Plan long range plan by product family, can be in $$ or units Capacity Management done at 4 levels 1) resources requirement planning 2) rough cut capacity planning 3) capacity requirements planning 4) input / output control Common parts bill (of material) planning bill that groups common components for a product or family of products into one pseudo bill (fake item number) Cumulative Lead Time longest planned length of activity review the lead time for each bill of material below the item Customer Service measure of the delivery of a product to the customer at the time the customer requested Decomposition method of forecasting with 3 components 1) trend 2) seasonal 3) cyclical. Fourth component is random (no pattern) Delivery Cycle time from the receipt of a customer order to the delivery of the product Demand need for a product 1) customer order 2) forecast 3) interplant requirement 4) branch warehouse 5) service part (demand does not equal sales because there is generally demand that is not fulfilled) Demand filter monitor data for individual items in a forecasting model tripped by amount or mean absolute deviations Demand Time Fence - 1) point where forecast is not longer included in total demand (only customer orders considered) 2) point in which changes to MPS must be approved by senior management Demonstrated Capacity proven capacity using actual performance data, usually expressed by average items produced by standard hour per item

Master Planning of Resources Exam Practice Guide Distribution 1) transportation 2) warehousing 3) inventory control 4) material handling 5) order administration 6) site and location analysis 7) industrial packaging 8) data processing 9) communications network. Also includes return of goods to manufacturer Distribution Requirements Planning (DRP) determine need to replenish inventory at distribution warehouses. Time phased order point approach is used where the planned orders at the branch warehouse are exploded via MRP logic to become gross requirements at the supplying source Double order point system distribution inventory mgmt system with 2 points 1) original order point which covers demand during the replenishment led time, second order point is the sum of the first order point plus normal usage during the manufacturing lead time. Enables warehouse to forewarn manufacturing of future replenishment orders Exponential Smoothing weighted average forecast where observations are discounted according to their age Extrinsic Forecast forecast based on correlated leading indicator, such as furniture being based on housing starts Final Assembly Schedule (FAS) schedule of end items to finish the product for specific customer orders in a make-to-order or assemble-to-order environment. FAS is prepared after receipt of a customer order schedules the operations required to complete the product from the level where it is stocked to the end item level. For make-to-stock environments, the FAS corresponds to the MPS (you plan at end-item level) Firm Planned Orders planned order that can be frozen in quantity and time normal method of stating the MPS Forecast Bias (cumulative actual cumulative forecast) / number of periods. Note that values close to zero indicate that the forecast is not biased (which is a good thing, for forecasting) Forecast Error CUMULATIVE difference between actual and forecast demand stated as an absolute value or a forecast (actual - forecast) Hedge 1) in master scheduling, a scheduled quantity to protect against uncertainty in demand or supply (similar to safety stock). 2) in purchasing, eliminate negative price fluctuations Intrinsic Forecasting base forecast on internal factors such as an average of past sales Just in Time philosophy of manufacturing based on elimination of all waste and continuous improvement in productivity. Have only required inventory, zero defects, reduce setup times and lot sizes

Master Planning of Resources Exam Practice Guide Least Squares Method curve fitting that selects a line of best fit through a plot of data to minimize the sum of squares of the deviations of the given points from the sum of the line Master Planning consists of 1) forecasting 2) order service 3) production & resource planning 4) master scheduling Master Production Schedule (MPS) line on master schedule grid that reflects anticipated builds. Planned Build Schedule Master Schedule Item part number selected to be planned by master scheduler (may be an end item, a component, a pseudo number, or a planning bill of material) Master Scheduler job title of person who maintains master schedule Mean Absolute Deviation AVERAGE of absolute values of the deviations from actual DIVIDED by observations Median middle value in a set of values Mixed-model master schedule setting an MPS to support mixed model scheduling, which makes several different parts in varying lot sizes so that the factory produces close to the same set of products that will be sold that day Mode most common of a set of values Modular Bill of Materials planning bill that is arranged in product modules or options used often in assemble to order companies such as auto manufacturers Multilevel master schedule (MPS) A master scheduling technique that allows any level in an end items bill of material to be master scheduled (a planning bill of material can be used for a family, along with selected key features) Option Overplanning used on multilevel MPS, schedule options greater than typical forecast to allow for greater than normal demand Order entry translating customer wants into terms used by distributor or manufacturer. Commitment should be based on ATP in master schedule Order promising making a delivery commitment Overstated MPS MPS that includes either past due quantities or quantities that are greater than the ability to produce. An overstated MPS should be made feasible before running MRP Package to order packaging determines the end product

Master Planning of Resources Exam Practice Guide Pegging in MRP and MPS, capability to identify for a given item the sources of its gross requirements or allocations. This is also where-used information Planning bill of material artificial group of items in bill of material format used for scheduling and material planning. Planning time fence outside the planning time fence, changes to MPS can be made w/out mgmt authorization Point of sale relief of inventory and computation of sales data, through bar coding, at retail Production forecast projected level of customer demand. Used in 2 level master scheduling, net customer backlog against MPS and factor ATP by the option percentage in a planning bill of material Production Plan plan that comes from production planning process (sales and operations planning). Usually stated in terms of monthly rate by product group or family. Drives and provides managements authorization for MPS Production Planning set overall level of manufacturing output to support sales plan while meeting other business objectives Product load profile list of required capacity and key resources needed to manufacture one unit. Used for RCCP planning Projected Available Balance an inventory balance projected into the future (on hand inventory minus requirements plus scheduled receipts and planned orders) Pyramid forecasting adjusting forecasts made at an aggregate level and to keep lower level forecasts in balance. 1) roll up of item forecasts into product group 2) establish new forecast for product group 3) force down (disaggregate) values into end items Regression Analysis statistical technique to determine best mathematical relationship between one response and one or more independent variables (i.e. sales to weather, housing starts, etc) Resource Planning capacity planning conducted at the business plan level (long range), based on the production plan Rough cut capacity planning (RCCP) convert MPS into requirements for key resources including labor and work stations determine if MPS is feasible. Done by bill of labor overall factors, or resource profile approaches.

Master Planning of Resources Exam Practice Guide Safety Capacity amount available capacity exceeds productive capacity (for resource breakdown, poor quality, rework) Safety factor numerical value used in the service function to provide a given level of customer service. If an item MAD (average demand) is 100 and a .95 customer service level is required (safety factor of 2.06), then a safety stock of 206 should be carried. Note that at 50% service level safety stock is zero would expect to be out of stock of the time (assuming a normal distribution) Service level (%) 50 75 80 85 90 95 99 99.99 Safety factor 0 .67 .84 1.04 1.28 1.65 2.33 4

Sales and Operations Planning (S&OP) bring together sales, marketing, development, manufacturing, sourcing and financial into one plan. Performed at least once a month and reviewed by management at a product group level. Links strategic plans with execution and basis for performance measurement Sales Plan time phased statement of expected customer orders anticipated to be received for each major product family or item. It represents sales commitment to achieve this level of customer orders put in at same level as production plan Sales Promotion stimulate interest for purchase by customers Scatter Chart graphical display to analyze the relationship of 2 variables (one of the 7 tools of quality) Seasonal Index a number used to adjust data to seasonal demand Second order smoothing a method of exponential smoothing for trend averages that employs two previously computed averages to extrapolate (i.e. May and June moving averages to forecast for July) Service function relation of safety factor to service level (fraction of demand that is met through stock) Service parts demand need for a component to be sold by itself, as opposed to being used in production Sigma the greek letter to indicate the standard deviation of a population 8

Master Planning of Resources Exam Practice Guide Single exponential smoothing weighted moving average used where the data does not exhibit trend or seasonality problems Smoothing averaging data through a mechanical process or by curve fitting Smoothing constant the amount of weight applied to the most recent demand item (the higher it is, the more fluctuation in demand) Standard deviation a measurement of dispersion. Take actual average observations, square each difference, divide by n-1, and take the square root of the sample Substitutions use of a non-primary product or component, where the primary item is not available Super Bill of Material a planning bill for an entire family. Represents forecasted demand for each module Time Fence guideline where policy restrictions (i.e. freeze) take place Time-Phased Order Point MRP like logic for independent demand items, where gross requirements come from a forecast, not via explosion. This technical can be used to plan distribution inventories as well as service part demand. Use time periods to account for lumpy demand Tracking signal ratio of cumulative deviations between forecast and actual. Used to signal when forecasting model might be in error Trend forecasting models method of exponential smoothing where there are trends Two level MPS planning bill used for an entire family along with selected key features or options Utilization percentage of time used to available time, generally between 0 and 100 percent Vendor managed inventory (VMI) supplier has access to customers inventory and is responsible for maintaining the inventory level desired by the customer Warehouse demand need for an item to be replenished at a warehouse Weighted moving average data is not uniformly weighed but are given values according to their importance

Master Planning of Resources Exam Practice Guide

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