3B. Production planning

Production planning and control systems refer to the backbone architecture, concept and main driver to plan, schedule and control production activities for a manufacturing enterprise. Effective production planning is of the topmost priority for organizations to surge ahead in this highly competitive environment. Production planning is very complicated procedure and is time consuming.

 A good planning system must answer four important questions :

1. What to make (Say item XYZ)
2. What is required to make XYZ ( resources & raw materials)
3. What do we have ?
4. What & how much we need

These questions are answered by priority and capacity

Priority as established by the marketplace, relates to What products are needed, How Many are needed, and When they are needed. Priorities will change according to the business conditions. For example, a toy company that is preparing goods for the Christmas season will assign a priority to production of products that are projected to be its highest sellers. These products will take priority over other products that sell more steadily throughout the year.

Capacity is the Capability of manufacturing to produce goods and services (deliverables).  It depends on company Resources and the Availability of Material from suppliers.
Capacity can be expressed as the time available or as the number of units or dollars produced in a given period.  The demand for goods must be translated into the demand for capacity.  This requires identifying product groups, or families, of individual products based on the similarity of manufacturing process.

Usually the following can be varied to adjust capacity:

1. People can be hired and laid off, overtime and short time can be worked, and shifts can be added or removed.
2. Inventory can be built up in slack periods and sold or consumed during high demand.

3. Work can be subcontracted or extra equipment leased.

4. Manufacturing management is responsible for determining the least-cost alternative consistent with the goals and objectives of the business


In the long and short run, manufacturing must make plans to balance the demands with its resources and capacity. For long-range decisions, such as the building of new plants or the purchase of new equipment, the plans must be made for several years. For planning production over the next few weeks, the time span will be days or weeks.


Developing a Production Plan


Generally firms make to stock when:

- Demand is fairly constant and predictable,
- There are few product options,
- Delivery times demanded by marketplace are much shorter than the time needed to make the product,
- Product has a long shelf life.

The information needed to make a PP is as follows:
- Forecast by period for the planning horizon,
- Opening inventory,
- Desired ending inventory,
- Any past-due customers orders.
The objective in developing a PP is to minimize the costs of carrying inventory, changing production levels and stocking out

Level production plan
Following is the general procedure:

o Total the forecast demand for the planning horizon,
o Determine the opening inventory and the desired ending inventory,
o Calculate the total production required as follows:
Total Production = total forecast + back orders + ending inventory - opening inventory,
o Calculate the production required each period by dividing the total
production by the number of periods,
o Calculate the ending inventory for each period.

Chase strategy
Products are perishable and the company cannot built inventory for sale later. They must use a chase strategy and make only enough to satisfy demand in each period.


Where several options exist and where the customer is not willing to wait until the product is made, manufacturers produce and stock
standard component parts. When they receive an order, they assemble the component parts from inventory according to the order. Since the components are stocked, the firm needs only time to assemble before delivering to the customer.
The following information is needed to make a PP for make-to-order products:
- Forecast by period for the planning horizon,
- Opening backlog of customer orders,
- Desired ending backlog.

Backlog (queue). In a make-to-order environment, a company has a backlog of unfilled customer orders. The backlog normally will be for delivery in the future and does not represent orders that are late or past due.

Level production plan Following is a general procedure for developing a level PP:

- Total the forecast demand for the planning horizon,
- Determine the opening backlog and the desired ending backlog,
- Calculate the total production required as follows:
Total Production = total forecast + opening backlog – ending backlog,
- Calculate the production required each period by dividing the total production by the number of periods,
- Spread the existing backlog over the planning horizon according to due date per period.


In a make-to-order environment, manufacturers wait until an order is received from a customer before starting to make the goods. Very expensive items are usually made to order. Generally firms make to order when:
- Goods are produced to customer specification,
- The customer is willing to wait while the order is being made,
- The product is expensive to make and to store,
- Several product options are offered

Manufacturing Resources Planning (MRP II)

MRP II stands for Manufacturing Resources Planning, a computer modelling technique for analysing and controlling complicated Manufacturing operations. When the manufacturing data has been collected (parts, assemblies, resources) the lead time and cost of every component can be predicted under any manufacturing conditions. As soon as an order is received the workload on the manufacturing organisation and the delivery time can be calculated. MRP II systems also keep track of customers, suppliers and accounting functions. Inventory can be purchased and assemblies made "Just in Time". The records kept by an MRP system highlight inadequacies such as overloaded production centres and delays by suppliers. The effect of new orders, changes in capacity, shortages, delays and a myriad of other disturbances are calculated and tracked with confidence.
The major effects that an MRP II system will have on a manufacturing operation will be:

- Reduced inventory.
- Accurately predicted delivery times.
- Accurate costing at every stage of the manufacturing process.
- Improved use of manufacturing facilities.
- Faster response to changing conditions.
- Control of every stage of production.

The main advantages of MRPII over MRP are
1. Feedback
MRP II includes feedback from the shop floor on how the work has progressed, to all levels of the schedule so that the next run can be updated on a regular basis. For this reason it is sometimes called 'Closed Loop MRP'.

2. Resource Scheduling
There is a scheduling capability within the heart of the system that concentrates on the resources, i.e. the plant and equipment required to convert the raw materials into finished goods. For this reason the initials `MRP' now mean Manufacturing Resources Planning. The advantages of this development are that detailed plans can be put to the shop floor and can be reported on by operation, which offers much tighter control over the plant. Moreover loading by resource means that capacity is taken into account. The difficulty is that capacity is only considered after the MRP schedule has been prepared. It may turn out that insufficient time was allowed within the MRP schedule for the individual operations to be completed.

3. Batching Rules
Batching rules can be incorporated, indeed they have to be if resource scheduling is to take place. Most software packages offer a variety of batching rules. Three of the more important are 'Lot for Lot', 'EBQ' and 'Part Period Cover'.

•'Lot for Lot' means batches that match the orders. Therefore if a company is planning to make 10 of Product A followed by 20 of Product B, then the batches throughout the process will match this requirement. If both A and B require two of a certain sub assembly then that will be made in quantities of 20 of A and 40 of B. It is the batching implicitly followed in basic MRP.
•'EBQ' stands for Economic Batch Quantity . The batch size is calculated by a formula that minimises the cost through balancing the set up cost against the cost of stock.
•'Part Period Cover' means making batches whose size cover a fixed period of demand. A policy of making a weeks requirement in one batch is an example.

Product Groups

Group of products derived from a common product platform. These goods or services use similar or same production processes, have similar physical characteristics, and may share customer segments, distribution channels, pricing methods, promotional campaigns, and other elements of the marketing mix. Products comprising a family are usually priced and discounted as a package. Several product families make up a product portfolio. Also called product family or product line.

Capacity is the ability to produce goods and services. For the time span of a PP, it can be expressed as the time available in a given period. Over the time span of the PP, large changes in capacity are impossible or very difficult to accomplish in this period. However, some things can be altered and it is the responsibility of manufacturing management to identify and assess them. Usually the following can be varied:

- People can be hired and laid off, overtime and short time can be worked and shifts can be added or removed;
- Inventory can be built up in slack periods and sold or used in periods of high demand;
- Work can be subcontracted or extra equipment leased.
Each alternative has its associated benefits and costs. Manufacturing management is responsible for finding the least-cost alternative consistent with the goals and objectives of the business.


Product groups are classified according to whether they are mutli-level or single-level.

A product group is multi-level if it contains other product groups. However, the lowest level in a product group hierarchy always consists of materials.

A product group is single-level if its members are materials only.

A material or product group can be a member of more than one owner product group.

Oracle EBS 11i/R12
In oracle you can define an item with bom type of product family. Next you can add the items to that belong to the product family

Production Plan

A production plan is that portion of your intermediate-range business plan that your manufacturing / operations department is responsible for developing. The plan states in general terms the total amount of output that the manufacturing department is responsible to produce for each period in the planning horizon.
The output is usually expressed in terms of pesos or other units of measurement (e.g. tons, liters, kgs.) or units of the aggregate product (this refers to the weighted average of all the products in your company). The production plan is the authorization of your manufacturing department to produce the items at a rate consistent with your company's overall corporate plan.
The purpose of the production plan is to balance the aggregate market Demand (product family) with the Factory Aggregated Capacities over the aggregate planning horizon (EFFECTIVENESS)  with a minimum Production Cost . (EFFICIENCY)

Other objectives should be considered such as:
maximize customer service
minimize inventory investment
maximize utilization of plant and equipment
minimize changes in workforce levels
minimize changes in production rates

Production planning is a complex process. The production planning document typically starts with a sales forecast, or sales plan usually supplied by the marketing group. From the production planning document all other process's start. The production planning document can include material, labor, capacity, training and should include a backup plan should things go wrong. Each area of planning is dependent on the other and must be done in unison. It makes no sense to bring in material if production can't produce, or plan production if materials are not available. It requires a collaborative effort between different departments to effectively bring all aspects of the process together.

Important points about production plan
1. It integrates the capabilities and capacity of the factory with the market and financial plans to achieve business
2. Its prime purpose is to establish production rates that will accomplish the objectives of the SBP.
3. The plan must extend far enough in the future to plan for the labor, equipment, facilities and material needed. This is a period of 6 to 18 months and is done in monthly or sometimes weekly periods. With the time spans involved and the
uncertainly of demand over long periods, the detail would not be accurate or useful and the plan would be expensive to create.
4. For planning purposes, a common unit or small number of product groups is required

Production Strategies

There are 3 basic strategies that can be used in developing a production plan: subcontracting, a level strategy and a chase strategy. Firms may choose to utilize one of the pure strategies in isolation, or they may opt for a strategy that combines the three.


A level strategy seeks to produce an aggregate plan that maintains a steady production rate and/or a steady employment level. In order to satisfy changes in customer demand, the firm must raise or lower inventory levels in anticipation of increased or decreased levels of forecast demand. The firm maintains a level workforce and a steady rate of output when demand is somewhat low. This allows the firm to establish higher inventory levels than are currently needed. As demand increases, the firm is able to continue a steady production rate/steady employment level, while allowing the inventory surplus to absorb the increased demand.

A second alternative would be to use a backlog or backorder. A backorder is simply a promise to deliver the product at a later date when it is more readily available, usually when capacity begins to catch up with diminishing demand. In essence, the backorder is a device for moving demand from one period to another, preferably one in which demand is lower, thereby smoothing demand requirements over time.

A level strategy allows a firm to maintain a constant level of output and still meet demand. This is desirable from an employee relations standpoint. Negative results of the level strategy would include the cost of excess inventory, subcontracting or overtime costs, and backorder costs, which typically are the cost of expediting orders and the loss of customer goodwill.


A chase strategy implies matching demand and capacity period by period. This could result in a considerable amount of hiring, firing or laying off of employees; insecure and unhappy employees; increased inventory carrying costs; problems with labor unions; and erratic utilization of plant and equipment. It also implies a great deal of flexibility on the firm's part. The major advantage of a chase strategy is that it allows inventory to be held to the lowest level possible, and for some firms this is a considerable savings. Most firms embracing the just-in-time production concept utilize a chase strategy approach to aggregate planning.

As a pure strategy, subcontracting means always producing at the level of minimum demand and meeting any additional demand through subcontracting. The major advantage of this strategy is cost. Costs associated with excess capacity are avoided and there are no costs associated with changing production levels. The main disadvantage is
that the cost of purchasing (item cost, purchasing, transportation and inspection costs) may be greater than if the items were made in the plant.
There are several other factors that may be considered. Firms may manufacture to keep confidential processes within the company, to maintain quality levels and a workforce.

The three strategies discussed so far are pure strategies. There are many possible hybrid or combined strategies a company may use. Each will have its own set of cost characteristics. Production manager is responsible for finding the combination of strategies that minimize the sum of all costs involved, providing the level of service required and meeting
the objectives of the financial and marketing plans.


Strategic Business Plan

As per APICS dictionary “it is a statement of long-range strategy and revenue, cost, and profit objectives usually accompanied by budgets, a projected balance sheet, and a cash flow (source and application of funds) statement”.

A business plan is usually stated in terms of dollars and grouped by product family. The business plan is then translated into synchronized tactical functional plans through the production planning process (or the sales and operations planning process). Although frequently stated in different terms (dollars versus units), these tactical plans should agree with each other and with the business plan. It’s a document consisting of the business details (organization, strategy, and financing tactics) prepared by an entrepreneur to plan for a new business.

The business plan sets the overall activities for the business & addresses specific issues & concerns that typically relate to:
a) The nature of the firm which includes type of business, nature of the enterprise.
b) The locations & facilities of the enterprise, such as the use of the global supply chains, strategic alliances with partners, production facilities & distribution channels.
c) The type of organization & the skills of the people required.
d) Levels of processing technology, such as the processing of material resources into components, the assembly of components into finished products & the distribution of products to a customer.
e) The type & nature of capital resources required, such as short term bridging loans, long term debt financing & venture capital or market capitalization from & initial purchase offering.
f) The interest of primary stakeholders, such as members of an association, customers of a commercial enterprise, suppliers to a corporation, donors to a political organization, community groups to a government body & associates in retail organization.


The Market Definition in business plan should include:
a) The location of customers & the nature of their relationship with the supplying organization i.e. is the customer a direct customer, an indirect customer, a consumer of a product or service, or an influencer of a potential consumer.
b) Information about projected market growth rates & demographic information about future customers.
c) Impact of social changes including changing needs of customers.
d) Global & regional economic considerations & business conditions as they affect customer needs

The business environment definition should include:
a) Information about current & future potential competitors, including benchmarked information wherever possible.
b) Projections of business growth, including environmental threats & opportunities.
c) Information on the availability of financial resources & sources of funding required.
d) Information on potential & emerging technologies & their impact on business performance.

Key Business Goals:
a) Projected business growth.
b) Targeted profitability.
c) Anticipated return on investment.
d) Desired market share.
e) Shareholder value.
f) Company Value.
g) Customer Service.

Business Stakeholders: Business stakeholders include all those groups affected by the operations of the organization like the community, the management team, the business owners and shareholders, the members of an association, the workers, the customers & the suppliers of the organization. All these business stakeholders must be considered in the development of the
business plan.

Benchmarking: As per the APICS dictionary “It is the process of measuring the company’s products, services, costs, and practices”. Two types of benchmarking exist—competitive, a comparison against your industry best, and process, a comparison of a process to the best-inclass. During the development of the business plan may aspects of operational performance must
be compared with the performance of other organizations. Benchmarking can be done in many ways but these normally include reciprocal site visits & mutual exchange of specific information bet’n 2 organizations. It is recommended to compare an organization’s performance with others that have clearly demonstrated that they are the best in class for that particular process.

Strategic Data Sources for Business Plan:
a) Many companies deploy a process called environmental scanning that basically provides input from the marketplace about trends occurring within global communities where the organization is operating or seeking to penetrate. It provides information about demographics, likely changes in regulation, market growth potential, general economic conditions, current market players, potential competitors, current customer preferences & satisfaction levels with current suppliers & more.

b) Also an organization needs to review it’s current capabilities such as the skills of the workforce, the core competencies of the organization, that available resources & the application of information technology for competitive advantage.

c) Financial targets that are set by the executive team which includes projected earning levels, business growth, market penetration, cash flow generation, ROI targets & product volume targets.

d) Strategic goals set by executive team which includes desired levels of customer service, planned quality improvements, cost reduction goals, lead time reduction & productivity improvements.

Validating the Plan & Measuring Performance

In business it is important to create a balanced approach to performance measurement. In many organizations financial measurements are considered to be the most important. The problem with focusing exclusively on financial measurements is that these tend to be historical & are not necessarily good indicators of the future performance. It is critical for continued business success that a balanced approach to performance measurement be adopted. This should consider all aspects of business performance including customer service, operational improvement, employee satisfaction etc. This process of performance measurement has been called the balanced scorecard.

“a list of financial and operational measurements used to evaluate organizational or supply chain performance. The dimensions of the balanced scorecard might include customer perspective, business process perspective, financial perspective, and innovation and learning perspectives. It formally connects overall objectives, strategies, and measurements. Each dimension has goals and measurements”.

Then what exactly is a Balanced Scorecard? A definition often quoted is: 'A strategic planning and management system used to align business activities to the vision statement of an organization'. More cynically, and in some cases realistically, a Balanced Scorecard attempts to translate the sometimes vague, pious hopes of a company's vision/mission statement into the practicalities of managing the business better at every level.

A Balanced Scorecard approach is to take a holistic view of an organization and co-ordinate MDIs so that efficiencies are experienced by all departments and in a joined-up fashion. 
To embark on the Balanced Scorecard path an organization first must know (and understand) the following:

The company's mission statement
The company's strategic plan/vision


The financial status of the organization
How the organization is currently structured and operating
The level of expertise of their employees
Customer satisfaction level

The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. The “new” balanced scorecard transforms an organization’s strategic plan from an attractive but passive document into the "marching orders" for the organization on a daily basis. It provides a framework that not only provides performance measurements, but helps planners identify what should be done and measured. It enables executives to truly execute their strategies.

This new approach to strategic management was first detailed in a series of articles and books by Drs. Kaplan and Norton. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective. The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise.

The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives:

The Learning & Growth Perspective
This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people -- the only repository of knowledge -- are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization.

Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools; what the Baldrige criteria call "high performance work systems."

The Business Process Perspective
This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not something that can be developed by outside consultants.

The Customer Perspective
Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good.

In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups.

The Financial Perspective
Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to the "unbalanced" situation with regard to other perspectives.  There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category.

Strategy Mapping
Strategy maps are communication tools used to tell a story of how value is created for the organization.  They show a logical, step-by-step connection between strategic objectives (shown as ovals on the map) in the form of a cause-and-effect chain.  Generally speaking, improving performance in the objectives found in the Learning & Growth perspective (the bottom row) enables the organization to improve its Internal Process perspective Objectives (the next row up), which in turn enables the organization to create desirable results in the Customer and Financial perspectives (the top two rows).