Before proceeding production planning terminology, we must understand how the Demand and Supply process are integrated. Demand & Supply process overview diagram is given below and users are requested to click on the diagram to view clearly.
Let us look in details about the Demand and Supply Process.
Demand Planning consist of Sales Forecast (explained in our earlier blogs) and Sales Orders are firm orders received from the customers (eg Institutional orders).
In manufacturing industry Supply (Production) encompass material management, procurement and production of finished goods.
Let me explain through simple example how demand and supply process are integrated. A tea shop owner sells on an average 100 cups of tea per day (expected sales) to the customers. He kept two workers (manpower), one to prepare tea and another to serve and wash the glass. He consumes roughly say three liters of milk, half kilo sugar and tea (raw materials) to make 100 cups of tea per day. He got two gas stoves with cylinder, boiler, tea filter and kettle to serve hot tea, two vessels to boil milk and two bottles to keep tea and sugar (equipments). Nearby factory owner approached him to serve 200 cups of tea in the morning and evening (400 cups per day) on working days to factory workers.
Now tea shop owner is expected to sell (forecast) of 100 cups of tea from regular customers and firm order of 400 cups of tea for the factory workers. From next week onwards he has to make 500 cups of tea instead of 100 cups of tea.
The tea shop owner will analyze, whether he can meet the increasing demand with the existing capacity of manpower (2 workers) and equipments (gas stove, boiler etc). This process is termed as capacity planning. This capacity planning will enable the tea shop owner to take decision either to go for additional capacity of manpower and equipment or not, to meet the expected demand. For simplicity we will assume that the existing capacity of manpower and equipments are sufficient to meet the increasing demand.
For 100 cups of tea per day he consumes three liters of milk, half kilo sugar and tea (raw materials). These items and quantity (recipe) become Bill of Material (BOM) to make 100 cups of tea. In order to meet demand of 500 cups of tea he has to procure 15 liters of milk, 2-1/2 Kg sugar and tea every day. This is simple mathematical calculation. This process is termed as Material Requirement Planning (MRP). MRP is the process of calculating raw material requirements basis BOM to meet the future demand.
Basis the calculation (MRP) the tea shop owner will procure the raw materials of tea, milk and sugar from a grocer shop and he negotiate the rate effectively as he purchase these items on daily basis.
We will add some more complexity in the existing process. Suppose the tea shop owner decided to serve masala tea to every body. To prepare masala tea he has to add one more ingredient (raw material) ie masala powder in that tea. The composition of the tea is changed due to masala powder. Let us assume he is using 20 grams of masala powder to prepare 100 cups of tea. The change in recipe (In Production Terminology this is termed as "Engineering Change") leads to change in Bill of Material (BOM). Once the BOM changes it automatically triggers changes in Material Requirement Plan. In this case the tea shop owner has to purchase 100grams of masala powder extra along with 15 liters of milk and 2-1/2 kgs of tea and sugar every day to prepare 500 cups of masala tea. We will see more complex method in the subsequent session.
The Material Management function in a factory handles raw material requirement planning (MRP), purchase, raw material issue and maintaining the records. Depending upon the organization structure of the company, the purchase department may function independently, come under Material Manager or reporting directly to Production Head.
In the next session we will learn in details about Production Planning and other concepts.
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