Tuesday, September 15, 2009

Production Planning and Control - Part III

Production planning is usually done at the following three horizon levels.

• Long Term (Capacity Planning)
• Medium Term (Aggregate Planning)
• Short Term (Operational Planning)

Diagrammatic representation production planning overview is given below.

Production planning components with time horizon and Unit of Measure is given below for better understanding. The explanation is given below the diagram.

Long Term (Capacity Planning)

- Upto 5 Years ahead or more
- Capital Intensive in nature
- This deals with Strategic and business issue. In the long term we deal with those issue which help us to create demand for our products and generating sufficient revenue for the company.
- Reflect in process choice and equipment selection. Since selection of equipment and facilities require lot of investment and decision is irreversible, one should pay utmost care keeping in mind customer requirements.

Medium Term (Aggregate Planning)

- How demand can be met from existing facilities and resources. Here we are trying to utilizing our existing resources (manpower, machine, facilities etc) to satisfy the market demand

Short Term (operational Planning)

- In short term we monitoring the production activities on day to day basis and compare the output against the plan and take corrective action.

Master Production Schedule (MPS) - Is a statement of how many finished items are to be produced and when they are to be produced.

Material Requirement Planning (MRP) - System that uses net demand from the MPS and explodes it using the bill of materials (BOM).

Now we must understand the terminology related to Unit of Measure.  This will help us to understand the production planning concept clearly.

- Items (SKU or Stock Keeping Unit) - The final products delivered to the downstream customers. The downstream customer is the one who intend to consume or use the product for personal use.

- Product Families – Group of items that share a common manufacturing setup cost. In other words those items that have similar production requirements. For example Complan drink sold in different flavor but they have similar production requirements.

Let us understand the production planning concept through example. Pepsico, India who is manufacturing soft drinks Pepsi, Miranda and other products. But we will focus our attention to Pepsi and Miranda alone to understand the production planning concept.  Readers are requested to note that the Pepsi actual production planning may differ from the example given below.

Long term capacity Planning - Marketing does the yearly forecast at Product group like Pepsi and Miranda (not SKU level) and country (India) level for next 5 to 10 years based on expected yearly product growth rate. This aggregated yearly plan quantities are compared against the existing capacity planning in terms of facility, manpower, current production rate etc. If the existing capacity is not sufficient to meet long term (5 to 10 years) expected sales volume growth then the management will go for increasing the existing capacity by increasing manpower, deploying additional machines, having more shift in the plant. Even this does not meet the long term yearly demand then the management may feel like to go for additional plant which is capital incentive or looking for third party manufacture to produce their products under their brand name and sell it in the market. The reason for Long term capacity planning to meet increasing demand for existing products and also to launch new products in future to generate more revenue for the company.

Caution : Company used to go for higher capacity (plant, machinery etc) to meet future expected sales volume growth. There are company which constructed new plant expecting high sales volume growth for next few years (more than 5 years), is still meeting the current demand from the existing old plants as the demand has not gone up to the expected level. The new plant has become thorn in their flesh. Hence as an SCM professional, we must explore for alternative like third party manufacturing facilities while deciding capacity planning and put forth our case strongly with top management for approval

Medium term Aggregate Planning - Marketing does the monthly Rolling Forecast at SKU and Distribution centre level, for one year. One should note that one year is rolling period and not calendar year. For example if marketing is forecast during July’09, one year period means July’09 to June’10 which is called rolling forecast. The SKUs of Pepsi and Miranda are 100ml bottle, 200 ml can, Pet bottle size of 500ml, 1 liter and 2 liters. Let us assume they are having 6 distribution centre. Sales & Marketing and customers are concerned about pack wise product. But production department aggregate the quantity /Net demand (refer blog on Demand Planning – DRP) of all sizes pertaining to particular product ( Pepsi and Miranda separately) at country (India) level and arrive total quantity required to manufacture that particular product on monthly basis. If the monthly production rate is less than expected demand rate then the company will go for overtime, hiring more temporary workers etc. Due to unavoidable circumstances if the company is not able to increase the production capacity then the current production rate will be treated as expected demand rate. This process is termed as Aggregate Planning. During recent global spread of Swine Flu epidemic, most of the pharma company still not able to match production rate of tamiflu (drug) to the expected demand rate.

Short Term Planning (MPS & MRP) -  Once the Aggregate planning quantity at Product family and country level is decided for a month then this quantity is disaggregated in to SKU and Distribution level as the plant need to produce products as per selling units. Now the production unit can sent the entire demand quantity in single lot to distribution centre. But the logistics team require the part quantities against the demand to be dispatched to distribution centers on different date in order to utilize the warehouse space and manpower efficiently. Hence the part quantity and schedule receipt date at distribution centre will be worked out and agreed upon by demand and supply planners. This process is called Master Production Schedule (MPS).

Now the Production unit is having the quantity to be produced and date of production as per distribution center requirement from MPS. But the product Pepsi drink require certain ingredients (raw materials) at certain quantity. The Pepsi company will be having BOM (refer my earlier blog) for each SKU. BOM will contain all raw materials and packing items the quantity required to produce one unit. According to BOM details the raw materials quantity are calculated and then purchase orders are placed to the suppliers based on lead time. Lead time is the time taken by the supplier to produce and deliver the raw materials to the Pepsi plant against the order date. This explosion from finished goods to the raw materials is called Material Requirement Plan (MRP).

Very Short Term Plan - Day to day production activities are monitored and the output are compared against the plan  for better control.

For example perfume manufacturing plant importing their raw materials from abroad with lead time 4 months. The production lead time i.e., raw material conversion to finished product at plant takes one month. Consider, September being the current month and forecast quantity for September has already been decided and Purchase order already been placed in April itself. By placing order to the supplier by 15th April the plant will receive the stocks on 15th July due to 4 months lead time. However the finished goods will be produced by 15th August due to 1 month production lead time . The plant require few days to transport the finished goods to distribution centers located at various places . Through this planning process the plant can ensure that finished goods are connected to the distribution centre as per the Sales and Marketing requirements.  Now one can understand how complex the production planning.

The above explanation is sufficient to understand the production planning concept.

We so far discuss about the manufacturing unit. This rise the question how the service industry planning their operation ? Given below diagram compare the components of production planning in respect of manufacturing and service industry.

In the next few sessions, we will touch upon production control and focus our attention to Capacity Planning, Aggregate Planning, Master Production Schedule, Material Requirement Planning with practical examples.


  1. Really enjoyed this post well written and easy to comprehend. Will be applying your metrics and examples to my upcoming projects!!

    Thanks again


  2. Very nice layout of all the levels of production planning. Would you consider MES to play a role in planning, very short term?

  3. Thanks for great information you write it very clean. I am very lucky to get this tips from you

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