A detailed planning process that tracks production output and matches this output to actual customer orders.
-Picks up where S&OP left off!
-Allows managers to see ahead and take corrective action when needed.
-If we add up the numbers for production and demand across the three master schedules, we see that they match the figures in the sales and operations plan.
Why is it Master Scheduling Important?
-> Salespeople wouldn't be sure if and when they could fill customer orders, production managers would not be aware of the impact of new demand on inventory levels in time to do something about it, and salespeople might continue to promise products to customers, unaware that all output has already been spoken for. When master scheduling works well, it allows organizations to avoid these problems by closely matching demand with supply, anticipating customers' needs, and adjusting the organization's plans accordingly.
As long as the numbers in the sales and operations plan are close to those in the master schedule, firms will be able to manage the differences (hard to be exact)
The Master Schedule Record: Tracks info like...
1. Forecasted demand
2. Booked orders (order already placed)
3. Projected inventory levels
4. Production quantities
5. Units still available to meet customer needs (Available to Promise)
Forecasted Demand vs Booked Orders:
-Forecasted Demand=A company's best estimate of the demand in any period
-Booked Orders=Confirmed demand for products.
*Forecasted demand must meet booked orders, but if there are too little booked orders, cutting back production or lowering prices may be needed
Master Production Schedule (MPS): Shows how many products will be finished and available for sale at the beginning of each week.
-Another line on the master schedule record
-Drive more detailed planning activities like material requirements planning
Projected Ending Inventory: Estimated inventory level at the end of each time period based on current info
-Part of MS record
-Is a conservative estimate of the inventory position at the end of each week.
Formula: EIt = EI(t−1) + MPSt − maximum (Ft, OBt)
EIt = Ending inventory in time period t
MPSt = Master production schedule quantity available in time period t
Ft = Forecasted demand for time period t
OBt = Orders booked in time period t
Available to Promise (ATP): Indicates the number of units that are available for sale each week, given those that have already been promised to customers (what is still available that we have not already committed to customers?)
Formula for first week: ATPt = EI(t−1) + MPSt − ∑OBi
Formula for week where MPS>0: ATPt = MPSt - ∑OBi
ATPt = Available to promise in week t
EI(t-1) = Ending inventory in previous period
MPSt = Master production schedule quantity in week t
∑OBi = Sum of all orders booked from week t until next positive MPS quantity is due)
Difference is the first week uses ending inventory from previous period and second formula does NOT use inventory at all
The Planning Horizon: The amount of time the master schedule record or MRP record extends into the future.
-The longer the production and supplier lead times, the longer the planning horizon must be
-Products with very short lead times may have planning horizons that are just a few weeks long, but more complex products may need horizons of several months or more.
-As weeks go by, a firm will need to revise the numbers in the master schedule record, a task that is referred to as "rolling through" the planning horizon.
-Can be flexible (great), moderately firm (okay), or frozen (bad)
Time Fences: Boundaries between different periods in the planning horizon. They define short-term regions within which planning restrictions minimize costly disruption to shop floor and supplier schedules.
Ex: Amount of weeks that separate flexible, frozen, or moderately firm
A planning process that translates the master production schedule into planned orders for the actual parts and components needed to produce the master schedule items.
-Used to manage dependent demand inventory
-Dependent Demand Inventory=Inventory items whose demand levels are tied directly to the production of another item (legs on a chair)
-Based on 3 concepts...
1.) The Bill of Material (BOM)
2.) Backward scheduling
3.) Explosion of the bill of material
Bill of Materials (BOM): A listing of all the subassemblies, intermediates, parts, and raw materials that go into a parent assembly, showing the quantity of each required to make an assembly.
Ex: Parts of a chair are the legs, seat, side rails, cross bars, and back slats
-Uses a Product Structure Tree=A graph showing how the components in the BOM are put together to make the level 0/completed item (how parts are put together to make the final product)
*Parent and child where on tree, parents are on top and children branch out
-Production tree also shows planning lead time=The time from when a component or material is ordered until it arrives and is ready to use (amount of time it takes worker to assemble a product). Used for purchased items and production.
-Low Level Coding=Shows the levels and what letters are in each level with what quantity they have (captures all the demand)
Backward Scheduling (Exploding the BOM): The process of working backward from the master production schedule for a level 0 item to determine the quantity and timing of orders for the various subassemblies and components. Is the underlying logic used by MRP.
The MRP Record: Works backward from the the planned completion date for the final item.
1. Gross Requirements (total demand for product)
2. Scheduled Receipts (when orders are coming in)
3. Projected Ending Inventory
4. Net Requirements (how many units are you short?)
5. Planned Receipts (order that comes in that week; net requirement > 0)
6. Planned Orders
Ex: To have 500 chairs ready in week 5, taking lead time of 1 week into account shows the chairs need to start being assembled in week 4
-Gross Requirements=How many seats are needed each week (can be drawn from "start assembly" line)
-Goss requirements can be met by drawing from three sources: inventory carried over from the previous week (projected ending inventory), units already on order (scheduled receipts), and new orders (termed planned receipts).
-Net Requirements=Determines if any new orders need to be placed
->NR Formula: NRt = maximum (0; GRt − EI(t−1) − SRt)
NRt = Net requirements in time period t
GRt = Gross requirements in time period t
EI(t-1) = Ending inventory in pervious period
SRt = Scheduled receipts in time period t
If enough seats can be obtained from inventory and scheduled receipts to cover the gross requirements, then managers don't need to order more seats (net requirement equals zero)
-Lot for Lot has minimum order quantity=1
Ending Inventory for MRP Formula:
EIt = EI(t−1) + SRt + PRt − GRt
PRt = Planned receipts in time period t
Advantages of MRP:
1.) MRP is directly tied to the master production schedule and indicates the exact timing and quantity of orders for all components. By eliminating a lot of the guesswork associated with the management of dependent demand inventory, MRP simultaneously lowers inventory levels and helps firms meet their master schedule commitments.
2.) MRP allows managers to trace every order for lower-level items through all the levels of the BOM, up to the master production schedule. This logical linkage between higher and lower levels in the BOM is sometimes called the parent/child relationship. If for some reason the supply of a lower-level item is interrupted, a manager can quickly check the BOM to see the impact of the shortage on production.
3.) MRP tells a firm and its suppliers precisely what needs to be made when. This information can be invaluable in scheduling work or shipments, or even in planning budgets and cash flows. In fact, MRP logic is often called the "engine" of planning and control systems. MRP plays a big part in many enterprise resource planning (ERP) systems, described in the supplement.
1. Supports "replanning"
2. Time fences
3. Pegging (go from component in back of MPS and tie it to a customer order)
4. A manager can react to changes, but does not mean they should
Special Considerations in MRP:
-Systems are computerized and require organizational discipline (provides little benefit to those who do not understand or exploit the system)
-For system to work properly, it must have accurate information (MPS, BOM, inventory levels, lead times)
-Must accommodate uncertainty about host factors (variable lead times, shipment levels, changes in quantities of MPS). Firms deal with uncertainty by lengthening the planning lead times or by holding additional units as safety stock
*Eliminate uncertainty (choose good suppliers)!
-MRP Nervousness=The observation that any change, even a small one, in the requirements for items at the top of the bill of material can have drastic effects on items further down the bill of material (a minor change at the top can cause huge changes at lower levels).
The broad set of activities carried out by organizations to analyze sourcing opportunities, develop sourcing strategies, select suppliers, and carry out all the activities required to procure goods and services.
Why is Supply Management Crucial?
1.) Global Sourcing: Firms compete not only against global competitors but against their competitors' supply chains. Companies that were once content to purchase services and goods from local suppliers now seek to build relationships with world-class suppliers, regardless of their location.
*To compete globally, companies need to source globally!
-Advances in information systems have served as a catalyst for global sourcing efforts (share electronic blueprints)
Ex: Automotive industry (Original Equipment Manufacturers like Toyota look to partner with the best supplier regardless of location and expect them to take on manufacturing and deign responsibility), GM manager video calls purchasing executives around the world to discuss strategies
2.) Financial Impact:
-For the average manufacturer, just over 59% of the value of shipments comes from materials. For some services, such as retailing or wholesaling, the figure can be even higher.
-When much of a firm's revenue is spent on materials and services, supply management represents a major opportunity to increase profitability through what is known as the profit leverage effect
-> Profit Leverage Effect: A term used to describe the effect of $1 in cost savings increasing pretax profits by $1 and a $1 increase in sales increasing pretax profits only by $1 multiplied by the pretax profit margin (Every dollar saved in purchasing lowers COGS by $1 and increases pretax profit by $1. Every dollar saved in purchasing also lowers the merchandise inventory figure, as a result, total assets by $1)
-Cost of Goods Sold (COGS)=The purchased cost of goods from outside suppliers (how much a company paid for the goods it sold to customers)
-Merchandise Inventory=A balance sheet item that show the amount a company paid for the inventory it has on hand at a point in time.
-Return on Assets (ROA): A measure of financial performance, generally defined as earnings/total assets. Higher ROA values are preferred because they indicate that the firm is able to generate higher earnings from the same asset base
-> ROA Formula = (Earnings / Assets) x 100%
-Profit Margin: The ratio of earnings to sales for a given time period
-> Profit Margin Formula = (Earnings / Sales) x 100%
3.) Performance Impact:
-Purchased goods and services can have a major effect on other performance dimensions, including quality and delivery performance.
-Cost is not the only consideration!
-Identifying ways to improve long-term business performance by better understanding sourcing needs, developing long-term sourcing strategies, selecting suppliers, and managing the supply base.
-Commodity managers at a manufacturer might follow a strategic sourcing process to identify and negotiate three-year agreements with two major steel suppliers.
-Two things to keep in mind: 1) How much effort a company spends on each step will differ greatly from one situation to the next. 2) Companies can gain a competitive advantage by performing these steps better than their competitors do.
-Has 6 Steps:
Step 1: Assess Opportunities
-Spend Analysis=The application of quantitative techniques to purchasing data in an effort to better understand spending patterns and identify opportunities for improvement.
-> Used to answer what categories of products or services make up the bulk of company spending?
How much are we spending with various suppliers?
What are our spending patterns like across different locations?
-Personnel responsible for spend analysis must have flexibility and skills needed to analyze large quantities of data. The types of tools used can range from sophisticated statistical techniques like regression analysis to simple graphing techniques like Pareto charts.
Step 2: Profile Internally and Externally
-Decision makers need to develop a more detailed picture or profile of the internal needs of the organization, as well as the characteristics of the external supply base.
-Use category profiles and industry analysis
1. Category Profile: Understand all aspects of a particular sourcing category that could ultimately have an impact on the sourcing strategy (breakdown of total category spend by subcategories, suppliers, and locations, understanding how the purchased components/services are used and how demand levels in the organization change over time).
Ex: A manufacturer looking at the spend category "purchased components" may break this down into electrical, mechanical, and molded components; components purchased for plants in Asia, the United States, and Canada; components used in production versus those used as spare parts; and components provided from the company's internal sources versus those purchased from external suppliers.
2. Industry Analysis: Profiles the major forces and trends that are impacting an industry, including pricing, competition, regulatory forces, substitution, technology changes, and supply/demand trends.
-> Maverick Spending=Spending that occurs when internal customers purchase directly from nonqualified suppliers and bypass established purchasing procedures.
Ex: How many potential suppliers are there? Who are the major suppliers? Is the supply base growing or shrinking? What are the technological trends facing the industry? Where does negotiating power lie?
Step 3: Develop the Sourcing Strategy
-Single-Sourcing: The buying firm depends on a single company for all or nearly all of a particular item or service.
-Multiple Sourcing: The buying firm shares its business across multiple suppliers (reduce risk by having multiple suppliers for one part)
-Cross Sourcing: A company uses a single supplier for one particular part or service and another supplier with the same capabilities for a different part or service, with the understanding that each supplier can act as a backup for the other supplier (provides a backup supplier) Ex: Similar parts come from different suppliers, but if one supplier does not work, you can easily switch due to the similarity
-Dual Sourcing: Two suppliers are used for the same purchased product or service (70% to Supplier A and 30% to Supplier B). Helps reduce risk
-Has 3 Parts...
1.) Make or Buy Decision: A high-level, strategic decision regarding which products or services will be provided internally and which will be provided by external supply chain partners (produce internally/insource or source it from outside supply chain partner/outsource)
-Advantages of Insourcing=Gives company a high degree of control over its operations, can lower costs but only if a company enjoys the business volume necessary to achieve economies of scale, ability to oversee entire process
Companies should try to insource processes that are core competencies (organizational strengths or abilities, developed over a long period, that customers find valuable and competitors find difficult or even impossible to copy)
-Disadvantages of Insourcing=Can be risky because it decreases a firm's strategic flexibility, catching up to suppliers technologically can be an expensive proposition that could restrict a firm's ability to invest in other projects or even threaten its financial viability, require high investments, potential suppliers may offer superior products/services
-Advantages of Outsourcing=Increases a firm's flexibility and access to state-of-the-art products and processes, less investment is required up front in the resources needed to provide a product or service, improved cash flow, products and services
-Disadvantages of Outsourcing=Has risks, suppliers can misstate capabilities, supplier may not have capability to produce product at desired quality level, control and coordination, lose key skills and technologies part of their core competencies, pick a bad supplier, poor communication, CSR risks
->Corporate Social Responsibility (CSR)=Economic, legal, ethical, and discretionary expectations society has of a company at a point in time (expectations extend to supply chain partners)
2.) Total Cost Analysis: A process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options.
-Direct Costs (variable costs)=Costs tied directly to the level of operations or supply chain activities, such as the production of a good or service, or transportation.
Ex: Product requires 1.3 square feet of sheet metal, the cost of sheet metal is $0.90 per square foot, the direct cost of the sheet metal is 0.9 x 1.3 = $1.17
-Indirect Costs (fixed costs)=Costs that are not tied directly to the level of operations or supply chain activity.
Ex: Building lease payments, staff salaries, utilities
*With outsourcing, the indirect costs are included in the direct purchase price shown on the supplier's invoice (bulk of insourcing costs are indirect)
-Managers must also consider time frame of make-or-buy decisions for determining total cost
*If managers expect an insourcing arrangement to become part of ongoing operations, they should consider all relevant costs that might reasonably be incurred over the long term, including all indirect costs.
3.) Portfolio Analysis: A structured approach used by decision makers to develop a sourcing strategy for a product or service, based on the value potential and the relative complexity or risk represented by a sourcing opportunity.
-The more money a company spends on a particular good or service, the higher its value potential
-Has 4 Quadrants (on next card)
Step 4: Screen Suppliers and Create Selection Criteria
-Qualitative criteria that a company might use to evaluate suppliers include:
a) Process and design capabilities (different manufacturing and service processes have different strengths and weaknesses, so the buying firm must be aware of these up front. Should also assess the supplier's design capability. One way to reduce the time required to develop new products is to use qualified suppliers who are able to perform product design activities)
b) Management capability (different aspects of management capability include management's commitment to continuous process and quality improvement, overall professional ability and experience, ability to maintain positive relationships with the workforce, and willingness to develop a closer working relationship with the buyer)
c) Financial condition and cost structure (selecting a supplier that is in poor financial condition presents risk that the organization will go out of business, disrupting the flow of goods or services, suppliers who are in poor financial condition may not have the resources to invest in required personnel, equipment, or improvement efforts)
d) Longer-term relationship potential (a buying firm may be looking to develop a long-term relationship with a potential supplier)
-Companies use a Request for Information/RFI (an inquiry to a potential supplier about that supplier's products or services for potential use in the business and can provide certain business requirements or be of a more exploratory nature) to gather data about potential suppliers. Is quantitative and qualitative
Step 5: Conduct Supplier Selection
-Identify a short list of suppliers with whom the buying firm will engage in competitive bidding or negotiations.
-Multicriteria Decision Models=Allow decision makers to evaluate various alternatives across multiple decision criteria (are helpful when there is a mix of quantitative and qualitative decision criteria, there are numerous decision alternatives to be considered, and when there is no clear "best" choice)
-> The Weighted-Point Evaluation System: The user is asked up front to assign weights to the performance measures (WY), and rate the performance of each supplier with regard to each dimension (PerformanceXY)
Formula: ScoreX= ∑(PerformanceXY × WY)
X = Supplier X
Y = Performance dimension Y
PerformanceXY = Rates performance of supplier X with regard to performance dimension Y
WY = Weight for performance dimension Y (sum)
Want to choose the highest number
Step 6: Negotiate and Implement Agreements
-The strategic sourcing process does not end until the buying firm has reached a formal agreement with one or more suppliers regarding terms and conditions such as the price to be paid, volume levels, quality levels, and delivery performance
-By maintaining a preferred supplier list, purchasing personnel can quickly identify suppliers that have proven performance capabilities.
-When there is not a preferred supplier, competitive bidding and negotiation are two methods commonly used to select a supplier.
1.) Competitive Bidding=A request for bids from suppliers with whom a buyer is willing to do business (process is typically initiated when the buying firm sends a request for quotation (RFQ) to qualified suppliers)
->The Request for Quotation (RFQ)=A formal request for the suppliers to prepare bids based on the terms and conditions set by the buyer.
-Description by Market Grade/Industry Standard=A description method used when the requirements are well understood and there is common agreement between supply chain partners about what certain terms mean.
-Description by Brand=Used when a product or service is proprietary or when there is a perceived advantage to using a particular supplier's products or services.
-More detailed and expensive methods of description are needed when the items or services to be purchased are more complex, when "standards" do not exist, or when the user's needs are more difficult to communicate.
-> Description by Specification=Used when a company needs to provide very detailed descriptions of the characteristics of an item or service (materials used, the manufacturing or service steps required, or the physical dimensions of the product)
-> Description by Performance Characteristics=Focuses attention on the outcomes the buyer wants, not on the precise configuration of the product or service (the supplier will know the best way to meet the buyer's needs)
*Competitive Bidding is most effective when...
a) The buying firm can provide qualified suppliers with clear descriptions of the items or services to be purchased.
b) Volume is high enough to justify the cost and effort
c) The buying firm does not have a preferred supplier
-Buying firms use competitive bidding when price is a dominant criterion and the required items or services have straightforward specifications. Government agencies often require competitive bidding.
2.) Negotiation: Work with one supplier to get what you need (ends with contract). Is more costly, but best when...
a) The item is a new and/or technically complex item with only vague specifications.
b) The purchase requires agreement about a wide range of performance factors.
c) The buyer requires the supplier to participate in the development effort.
d) The supplier cannot determine risks and costs without additional input from the buyer.
Contracting: A detailed purchasing contact is required to formalize the buyer-supplier relationship. A contract can be required if the size of the purchase exceeds a predetermined monetary value or if there are specific business requirements that need to be put in writing.
-2 Types of Purchasing Contracts...
1.) Fixed-Price Contract: The stated price does not change, regardless of fluctuations in general overall economic conditions, industry competition, levels of supply, market prices, or other environmental changes.
-If market prices for a purchased good or service rise above the stated contract price, the seller bears the brunt of the financial loss. However, if the market price falls below the stated contract price due to outside factors such as competition, changes in technology, or raw material prices, the buyer assumes the risk of financial loss.
-If the supplier increases its contract price in anticipation of rising costs and the anticipated conditions do not occur, then the buyer has paid too high a price for the good or service. For this reason, it is very important for the buying firm to adequately understand existing market conditions prior to signing a fixed-price contract.
2.) Cost-Based Contract: Ties the price of a good or service to the cost of some key input(s) or other economic factor(s), such as interest rates.
-Cost-based contracts are used when the goods or services procured are expensive or complex or when there is a high degree of uncertainty regarding labor and material costs.
-Typically represent a lower risk level of economic loss for suppliers, but they can also result in lower overall costs to the buyer through careful contract management.
-Used when there is price volatility
The set of activities required to first identify a need, assign a supplier to meet that need, approve the specification or scope, acknowledge receipt, and submit payment to the supplier.
-Tactical in nature:
-> It involves day-to-day communications and transactions between the buyer and supplier, and it is completed once the goods or services have been received, the supplier has been paid, and the information has been recorded into the database
-Has 5 main Steps...
Step 1: Ordering
-Begins through the release of a purchase order
-Purchase Order (PO)=Document that authorizes a supplier to deliver a product or service and often includes terms and conditions, such as price, delivery, and quality requirements.
-> PO's are released through EDI (technology that allows supply chain partners to transfer data electronically between their information systems)
-> By eliminating the time associated with the flow of physical documents between supply chain partners, EDI can reduce the time it takes suppliers to respond to customers' needs. This leads to shorter order lead times, lower inventory, and better coordination between supply chain partners.
Step 2: Follow-Up and Expediting
-Someone (typically purchasing or materials personnel) must monitor the status of open purchase orders. May have to expedite an order or work with a supplier to avoid shipment delays. The buying firm can minimize order follow-up by selecting only the best suppliers and developing internally stable forecasting and ordering systems.
Step 3: Receipt and Inspection
-When the order for a physical good arrives at the buyer's location, it is received and inspected to ensure that the right quantity was shipped and that it was not damaged in transit. Physical products delivered by suppliers become part of the company's working inventory.
-For services, the user will typically sign off on a supplier time sheet or another document to signal to purchasing that the supplier satisfied the conditions stated in the statement of work, or scope of work (SOW)
-> Statement of Work/Scope of Work (SOW)=Documents the type of service required, the qualifications of the individual(s) performing the work, and the outcome or deliverables expected at the conclusion of the work, among other things (deviations must be noted and passed on to the supplier and might require modifications to the original agreement)
Step 4: Settlement and Payment
-Once an item or a service is delivered, the buying firm issues an authorization for payment to the supplier. Payment is then made through the firm's accounts payable department.
-This is increasingly being accomplished through electronic means.
-Suppliers are often paid through electronic funds transfer (EFT)=The automatic transfer of payment from the buyer's bank account to the supplier's bank account.
Step 5: Records Maintenance
-After a product or service has been delivered and the supplier paid, a record of critical events associated with the purchase is entered into a supplier performance database.
-The supplier performance database accumulates critical performance data over an extended period (data are often used in future negotiations and dealings with the supplier in question)
-The data gathered here can also support spend analysis efforts, as described earlier in the chapter.