Basics of Supply Chain Managment (Lesson 1)

Basics of Supply Chain Management
Unit 1
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Lesson 1
Supply Chain Management Introduction
Unit 1
© 2003 e - SCP -The Centre for Excellence in Supply Chain Management
No portion of this publication may be reproduced in whole or in part.
The Leading Edge Group will not be responsible for any statements, beliefs, or opinions expressed by the
authors of this workbook. The views expressed are solely those of the authors and do not necessarily
reflect any endorsement by The Leading Edge Training Institute Limited.
This publication has been prepared by E-SCP under the guidance of Yvonne Delaney MBA, CFPIM,
CPIM. It has not been reviewed nor endorsed by APICS nor the APICS Curricula and Certification
Council for use as study material for the APICS CPIM certification examination.
The Leading Edge Training Institute Limited

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Co Cork
Ireland
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Unit 1
Preface............................................................................................................4
Course Description................................................................................................................. 4
Target Audience and Pre -Requisite Knowledge ................................................................. 4
Scheduling Lessons and Review Sessions ............................................................................. 4
Online Examinations .............................................................................................................. 5
Frequently Asked Questions ................................................................................................. 5
Mentoring ................................................................................................................................ 5
Supplementary Reference Materials .................................................................................... 5
Lesson 1 – Supply Chain Management Introduction .......................................6
Introduction and Objectives.................................................................................................. 6
The Role of Manufacturing ................................................................................................... 6
Competition, Quality, and Customer Expectation.............................................................. 7
Strategy ................................................................................................................................... 8
Organizational Structure ..................................................................................................... 11
Difficulties with Traditional Systems ................................................................................. 12
Managing Materials ............................................................................................................. 14
Manufacturing Processes..................................................................................................... 15
Planning ................................................................................................................................. 17
Planning and Control Hierarchy ........................................................................................ 19
Manufacturing Resource Planning (MRP II) .................................................................... 23
Creating a Production Plan................................................................................................. 24
Summary ............................................................................................................................... 25
Review ................................................................................................................................... 26
What’s Next? ........................................................................................................................ 27
Appendix.......................................................................................................28
Answers to Review Questions .............................................................................................. 29
Glossary ........................................................................................................31
© Copyright Leading Edge Training Institute Limited iii

Unit 1
Preface
Course Description
This self-study unit aims to provide a generic understanding of the basics of supply chain
management, that is, the planning and control of materials throughout an organization. This unit
provides a good grounding in supply chain management which forms the basis for further study,
eventually leading to the Certificate in Production and Inventory Management (CPIM).
The unit, comprising 10 lessons, covers:
Types of manufacturing systems Forecasting
Master planning Material requirement planning
Capacity management Production activity and control
Purchasing Inventory management
Physical distribution Quality management
Just-In-Time manufacturing.
This document contains the first lesson in the Basics of Supply Chain Management unit, which is
one of five units designed to prepare students to take the APICS CPIM examination. The Basics
of Supply Chain Management unit provides the foundation upon which the other four units build.
It is necessary to complete this unit, or gain equivalent knowledge, before progressing to the
other units. The five units, which together cover the CPIM syllabus, are:
Master Planning of Resources
Detailed Scheduling and Planning
Execution and Control of Operations
Strategic Management of Resources
Target Audience and Pre-Requisite Knowledge

This course is intended for anyone involved in the supply chain who wishes to further their
understanding of supply chain management and improve their career prospects by gaining a
valuable recognized qualification in the area. It assumes some knowledge of manufacturing
organizations. The course may be used to prepare for the American Production and Inventory
Control Society (APICS) Certificate in Production and Inventory Management (CPIM) exams.
Scheduling Lessons and Review Sessions

You should set aside 2 hours for each lesson. Throughout this self study course you will find
review questions and exercises. These are designed to optimize your retention of the material
covered by encouraging retrieval of key information. In many cases you will be required to apply
that knowledge in a business context.
The answers are available in the appendix of this self study guide. The ideal time to check your
work against these answers is just before you start the next section. There are two advantages to
this approach: you can fill in any gaps in your learning and also refresh your memory on the
work covered so far before progressing to new content.
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Unit 1
Online Examinations
At regular intervals during your study you can test your progress and understanding by
completing an online examination. The questions provided in the online examination have been
carefully designed by a Fellow of the APICS organization to assess your understanding of the
material covered.
On completion of the examination, you receive immediate feedback of your score.
Frequently Asked Questions

A bank of questions frequently asked by students of CPIM is available on the e-scp website.
These questions have been answered in detail by APICS experts. If you have difficulty
understanding a concept in your self study manuals, the frequently asked questions section
should be your first port of call. The question bank is regularly updated to reflect the issues that
concern students.
Mentoring
You will have access to a highly qualified and experienced Fellow Member of APICS who will
respond to queries you may have on the course material contained in these courses.
Supplementary Reference Materials

Throughout the self-study lessons, appropriate further reading may be identified. Summaries
containing the key points of some references may be available from the e-scp web site. These
summaries and articles should help to broaden your understanding of the concepts covered in the
lessons and clarify issues with which you have difficulty.

Unit 1
Lesson 1 – Supply Chain Management Introduction
Introduction and Objectives
This lesson looks at the role of manufacturing in the economy, explains the features of materials
management and the need for overall supply chain management.
On completion of this lesson you will be able to:
Describe the role of manufacturing in the economy
Identify areas of difficulty in traditional supply systems
Explain the role, objectives and responsibilities of materials manufacturing
Differentiate between various manufacturing processes
State the importance of planning
Describe a planning and control system
Identify the levels of the planning hierarchy and the questions that must be addressed at
each level
Define manufacturing resource planning (MRP II)
The Role of Manufacturing

Wealth
What is wealth and how do we get it? Most people would
answer that it is money. That’s not true though. Money is a
means of exchanging or measuring wealth. Wealth itself comes
from:
Natural resources
Manufacturing
Services
For example, a piece of land is a natural resource and has a va lue for most people. If you mine
precious metal from the land you have increased the wealth you can gain from the land. Both of
these are natural resources.
Many natural resources are of limited use but can be made more useful through
transforming of the raw materials into a more useful form. One example might
be the transformation of stone and quarry dust into bricks.
Services are not reliant on transforming a raw material into a more useful product. Instead, they
rely on providing knowledge and skill. Services also generate wealth. For example, the services
of an architect may be required in the transformation of the bricks into a useful building.
How do we increase our wealth? We can do this by adding value to a product
or service. The more value we add, the more our wealth increases. The value of
a pile of bricks can be increased by adding a wire rack or two along with
instructions on how to build a barbecue.
To add value, we need to design effective production processes and operate them efficiently.

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Competition, Quality, and Customer Expectation
The way in which a business operates is affected by the environment it finds itself in. Most
businesses compete with other companies that provide similar products or services. In the end,
the market decides on the winners, based on the quality of the product offering and the ability of
the organization to meet the needs of its customers. The major external factors that affect
companies are:
Competition
Quality
Customer Expectations
Competition
Most companies can identify competitors in their business. For
example, when you buy a new car, you have the choice of several
dealerships in your area, and a choice of many more makes of car.
Businesses in today’s world often have to compete with companies
from all over the world. Where previously, it might only have been
cost effective to buy a car from a native car manufacturer, now, you
can choose from Japanese, Italian, Russian, American, British and
many other types of car.
Quality
The quality of your product or service must meet or exceed your customer’s expectations. If the
lawn mower you sell persistently chews up the grass while spewing stones and other small
objects like lethal weapons to either side, you have lost their custom and potentially that of many
others as they will tell their story to all and sundry.
“The result of a business is a satisfied customer.”
Peter Druker
Customer Expectation
The customer’s expectations drive the market. Suppliers need to identify the elements that
provide value to a customer. There are several elements of a product or service that are important
to the customer, including:
Price
Quality
Delivery
Pre- and post-sale service
Flexibility (of product and volume)
Note: The characteristics that are important to the customer will differ from market to market
and from customer to customer. Customers’ needs and the factors they consider important will
also change over time.

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Order Qualifiers
These are the characteristics of your product that are the absolute
minimum for you to compete in the market place. A garden chair
that will collapse under 20 kilos of weight will not attract any
customers. To qualify for consideration, it must be capable of
supporting an adult weight.
Order Winners
Order winners are characteristics of your product or service that caus e customers to choose your
products and services over that of your competitors. If the chocolate muffins you produce have
more chocolate chips and a better texture than the competition, and that’s what the customers
like, then you win the customers.
But what if your customers don’t want chocolate chips? Understanding the needs
of your customers is vital. Good communication is needed to achieve that
understanding. You need to work with customers to solve design and production
problems, ensuring a spirit of free and open sharing of knowledge and opinions.
As customer expectations rise and product development continues to improve, characteristics
that once won an order will be expected as order qualifiers. It’s not enough to sell a car that gets
you from A to B. It must also have comfortable seats, safety features, and a good audio system.
1. Which of the following objectives is not needed to increase profit?

A. Best quality department
B. Maximum customer service
Review Q C. Accurate production forecast

D. Lowest inventory investment
Strategy
To meet customer expectations, companies must focus on the market and tune their operations to
meet the changing needs of that market. All functions in the company must contribute to a
winning market-based strategy.
Business Strategy
To meet customer expectations, companies must focus on the market and tune their operations to
meet the changing needs of that market. All functions in the company must contribute to a
winning market-based strategy.
Lead Time
The term ‘lead time’ refers to the span of time required to perform a process. To meet customer
expectations, lead times are very important, particularly delivery and cumulative lead time.
Delivery lead time is the time from the receipt of the order to the delivery of the product.
Cumulative lead time (see below) is the longest planned length of time to accomplish
the activity. Ideally, the lead time should be as short as possible, but the delivery lead
time is affected by the time it takes to manufacture the goods.

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In Figure 1 below, the cumulative lead time begins when the planner records the need for the
lowest level item, and ends when the finished product is available for shipment.
Pick Start Completion
Date Date Date
Planner Paper Pick Production

Assembly Time Time Time Time
Completion
Pick Start Date
Date Date
Fabricated
Planner Paper Pick Production
Part
Time Time Time Time
Completion
P.O. Place Dock Date
Date Receipt
Purchased Planner Buyer Vendor Recv. Insp

Item Time Time Time Time Time
Cumulative Lead Time

Figure 1 Cumulative Lead Time
Manufacturing Strategy
Manufacturing strategies should aim to reduce delivery lead times where possible. The process
of manufacturing from beginning to end is very long. The time that would elapse between
design, purchase, manufacture, assembly and shipping of an item would be unacceptably long
for most products. Therefore, three common manufacturing strategies may be used:
Make-to-stock
Make-to-order
Assemble-to-order
Manufacturers that make-to-stock keep a stock of finished goods. When a customer order
arrives it is filled from this stock. Production orders are used to maintain appropriate levels of
finished goods stock.
Make -to-order manufacturing is the opposite extreme. Manufacture of the product does not
begin until a customer order is received. In some cases, not only must the product be
manufactured after the order arrives, it also requires design engineering, and is referred to as
engineer-to-order.
Products that can be assembled to the customer’s specification from a set of standard
components stored in inventory are known as assemble-to-order.

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Delivery Lead Time
Engineer- Research Production Assembly Distribution
Vendor
to-Order and Design
Make-to-
Warehouse Production Assembly Distribution
Order
Assemble Warehouse Assembly Distribution

Production
-to-Order
Make-to- Assembly Warehouse Distribution

Production
Stock
Figure 2 Manufacturing Strategies
Impact of Product Design on Lead Time

When customer orders are filled from finished goods inventory (make-to-stock), delivery lead
time is short (see the bar chart above). The greater the customer input into the final
configuration, the longer the delivery lead time. Products that are designed to suit the customer’s
precise specifications (engineer-to-order) have the longest delivery lead times.
Manufacturing Strategies and Lead Times
60
50
40
Days 30
20
10
0
make-to- assemble- make-to- engineer-
stock to-order order to-order
Manufacturing Strategy

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Organizational Structure
As the way each company functions is unique to itself, organizational structures differ from
company to company. However, there are common elements to be found. The following
organization chart is an example of a typical manufacturing organization.
Chief Executive Officer
Information Human Marketing

Manufacturing Quality Finance Engineering Technology Resources And Sales
Manufacturing Materials Research and

Engineering Management Development
Industrial
Production Product Design
Engineering
Manufacturing
This section of the company makes the product. It usually comprises the following functions:
A process or manufacturing engineering function is responsible for designing the
manufacturing process, that is, the way in which the product is made. This function is
responsible for process design, plant layout, and selecting equipment among other
activities.
A materials management function manages the flow of materials through the
manufacturing process and out to the customer.
The production or manufacturing function is responsible for actually making the product
The industrial engineering function is required to maintain the machinery, equipment,
buildings and grounds of the manufacturing plant.
Quality
This function is responsible for ensuring that the product meets the required specifications.
Finance
Mainly concerned with profitability and cash flow, this section ensures the economic health of
the organization is maintained.
Engineering
Product engineers are responsible for transforming ideas for new
products into reality. They undertake the product research, design and
development and produce final specifications which can be used to
manufacture the new product for the market.

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Information Technology
Few companies today do not require some form of information technology or systems. This
section is usually responsible for computer systems, software, hardware, and communications
systems.
Human Resources
This section of an organization is responsible for hiring staff, agreeing contracts, managing
holidays, pensions and other staff benefits. They maintain records on staff performance and are
responsible for ensuring adequate staff training.
Sales and Marketing

This section of the company is ge nerally the customer- facing section. It is responsible for
identifying and developing market demands in line with the company’s overall strategy. The
marketing function is responsible for devising the way in which the company responds to market
demand. The y are also responsible for estimating the types of products customers will want and
the amount of product the company will be able to sell.
All these sections within the company have discrete areas of activity. Traditionally,
communication between the sections was minimal and took place only at managerial level. In
recent times, a strong trend towards cross- functional teams has emerged.
2. Select the correct statement about delivery time for an engineer-to-order

company.
A. Delivery time is shorter than for an assemble-to-order company
B. Delivery time is shorter than a make-to-order company
Review Q
C. Delivery time would be longer than an assemble-to-order company
D. Delivery time is the same as for a make-to-stock item
Difficulties with Traditional Systems

The supply chain covers all activities needed to supply a product or service to
the final customer. Any number of companies can be linked together in a
supply chain. Also, your customer may be the supplier for another company
so a number of supplier/customer relationships may be included in the total
supply chain. When you buy a shirt, for example, the supply chain starts right
from the cotton plantation, through cloth weavers, clothing manufacturers,
distributors and finally retail stores.
The figure below shows a basic supply chain. Raw materials must be physically transported from
suppliers to manufacturers to make the product. Finished goods are then sent to distributors who
then ensure their delivery to the customers. The distribution system may be direct to the
customer or may use wholesalers, warehouses or retail outlets to reach the end customer.

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Supplier Manufacturer Distributor Customer
Flow of demand and design information
Flow of products and services
Two-way communication is required throughout the chain to ensure accurate information of

demand and design and optimum flow of products and services. A difficulty at any point in the
chain may adversely affect the rest of the chain.
Physical Distribution
Physical distribution is the movement of goods from suppliers to the beginning of the production
process and then from the end of the production process to consumers.
Distribution Distribution
Physical distribution involves transportation, inventory management, warehousing of inventory,

packaging, materials handling and order management.
Costs of Inventory
Holding a lot of inventory increases costs. The inventory costs money to buy, to store and to
manage. Therefore excess inventory adversely affects cash flow and decreases profit.
Costs of Distribution
The main of distribution are transportation, inventory and warehousing. Transportation costs can
be reduced by ensuring that only full loads are shipped, but this can increase distribution
inventory. It is also in conflict with the principles of Just-In-Time (JIT).
Conflicts in Organizational Objectives

Most organizations aim to provide the best customer service they can while minimizing costs
such as production, inventory and distribution.
By providing the best customer service, they hope to increase their revenue by increasing sales.
This means ensuring that the customer can have what they want when they want it.
However, this may lead to high inventory levels and a lot of short production runs which will
increase costs. The overall profits will be reduced if costs are high so it is important to minimize
all costs. If you reduce your cost of production by a dollar, you add a dollar to your profit.

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Manufacturing may reduce costs by planning long production runs and often through bulk
buying raw material inventory.
Objectives Manufacturing Operations Finance

Implications Increase revenue Reduce Increase profit and
manufacturing costs reduce investment
High Customer Service
High Production Efficiency
Low inventory investment
Figure 3 Conflicts in Traditional Systems
Each function in the company has different perspectives and objectives (see Figure 3 above).
For example, Marketing and Sales are concerned sole with increasing revenue. They want to
ensure high customer service which usually involves interrupting production schedules to
respond quickly to customer demands and maintaining high levels of finished goods inventory.
These factors increase costs.
Production may be concerned with reducing manufacturing costs. They may try to ensure long
production runs, few products and few setups, which will require high raw material and finished
goods inventories to ensure that the production schedule is not interrupted.
Finance is mainly concerned with increasing the profit margin. They are equally interested in
reducing costs and increasing revenue. Therefore, they will support high customer service, so
long as production efficiency remains high and inventory levels remain low.
Managing Materials
Materials management co-ordinates demand with available resources. It must balance the
conflicting objectives of the marketing, production and finance functions by managing the flow
of materials at an optimum level to ensure:
The desired level of customer service
The best use of company resources
Materials management is concerned with two main areas: manufacturing planning and control,
and distribution.
Remember, customer service means providing the right quality and quantity of product at the
right time, in the right place and at the right price. Materials management makes sure these
elements are provided and therefore adds value.

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3. These activities form part of the physical distribution system, except:
A. Materials Handling
B. Planning
Review Q C. Warehousing
D. Transportation
Manufacturing Processes
Manufacturing Planning and Control
Planning and controlling the flow of material through the manufacturing operation is a key
function of manufacturing. Throughout this course, the elements of manufacturing planning and
control will be covered. These include:
Production planning (forecasting, master planning, material requirements planning and
capacity planning
Implementation and control
Inventory management
Plant Layout and Process Flow

Manufacturing processes usually involve either product layout, process layout or project layout.
Sometimes these processes can be combined. ABC Beverages have continuous production of
orange juice and grapefruit juice. They also have intermittent production of breakfast juice.
There are three basic plant layouts:
product layout
process layout
project layout
There are also three ways to organize the manufacturing process:
Continuous flow
Intermittent
Repetitive manufacturing
Product Layout
Product layout involves arranging workstations in the sequence designed to make the product. In
a plant that manufactures aspirin tablets, for example, the first workstation mixes the active
ingredients, the next workstation moulds the aspirin into tablets, the workstation after that
performs blister packing and, at the final workstation, the blister packs are boxed. This is an
example of repetitive manufacturing.
Other manufacturing processes may be continuous flow, for example, an oil refinery.

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Input Output
Work Station Work Station Work Station Work Station
1 2 3 4
Figure 4 Product Layout
Usually when product layout is used there are a limited range of similar products, workstations
are dedicated to specific operations, demand levels are sufficiently high to justify the setting up
cost. Although costly to set up, there are a number of advantages to this layout:
Few bottlenecks occur in work- in-process inventory
Manufacturing and throughput lead times are short
Unit costs are low
Process Layout
The process layout, or functional layout, is often used in intermittent manufacturing, usually
known as job shop, batch, or lot manufacturing. This type of layout shares workstations between
different product lines.
Product A Output
Work Station Work Station Work Station
1 2 4
Work Station
3
Product B Output
Work Station Work Station
2b 4b
Figure 5 Process Layout
The characteristics of process layout are:

Intermittent production of lots or batches
Production and inventory control activities are complex and expensive
Machinery is general purpose
Workstations are flexible and can produce many different parts
Work-in-process inventory levels are high
Lead times are longer
Product or volume can be easily changed
Departments are based on similar types of skill and equipment
Work moves only to those stations required and skips the rest

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Comparing Process and Product Layouts
Process and Product Layout Comparison

Product Layout Process Layout
Lead Time Production / Setup Cost Running Flexibility Capital Cost

Inventory Costs
Costs
Product layouts have the advantage of lower costs in most areas such as inventory, setup,
running costs and capital costs. However, they are less flexible and tend to have greater lead
times than process layout manufacturing. The level of quality depends on how robust or
repeatable the process is. A product layout is often automated or controlled by machines and
therefore is more consistent or repeatable than the process layout which is usually controlled by
operators.
Project Layout
The project layout is generally used for large complex projects such as the assembly of a
prefabricated building. It is used for large buildings, large aircraft, chips and system
implementations. The product remains in the same place for most of the assembly to avoid the
costs of transporting the product from one workstation to another.
Planning
Planning is required to make sure that there are sufficient material and capacity resources to
satisfy customer demands. The goal of manufacturing is to produce
the right goods,
at the right quality,
in the right quantities,
at the right time,
and at minimum cost.
It’s important to carefully plan for all the component parts and activities required to make the
product. If there is a 95 % chance that each part is available, and four parts are needed to make
the product, the probability that all parts will be there when required is actually only 81% (.95 x
.95 x .95 x .95).

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A good planning system should answer four questions:
What will we What do we need What do we have What do we need
make to make it already to find
To plan effectively, you must consider your capacity and production priorities. You cannot
create a workload that exceeds your available capacity.
Capacity
Your capacity is the capability of a worker, machine, work center, plant or organization to
produce output per time period. In the short term, capacity is the amount of work that labor and
equipment can perform in a given period. You then need to work out what is needed, how much
of it is needed and when it is needed. This is your list of priorities (the relative importance of
jobs).
Priority
Priority rela tes to the products required, the amounts required, and the dates by which they are
required. This information is established by the marketplace. Production is responsible for
planning to satisfy the market demand as far as possible.
Priority-Capacity Relationship
Companies should strive for the optimum balance between priority or demand and capacity or
resources, as shown in the diagram below.
Priority Capacity
Production must devise plans to balance the demands of the marketplace with its resources and
capacity. For long-range decisions, for example, building a new production facility or investing
in new equipment, the plans may span several years. Detailed planning production usually deals
with a few days or weeks.
4. A process specification is a document that:

A. Explains the steps required to produce the final item
B. Shows how the product will appear
Review Q C. Flow charts several processes
D. Details the capacity available in a work center

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Planning and Control Hierarchy
There are five major levels in manufacturing planning and control:
Strategic business plan
Production plan
Master production schedule
Material requirements plan
Purchasing and production activity control
The purpose, planning horizon (or time span), and level of detail is different for each type of
plan. The strategic business plan may span several years but will not be very detailed. In
contrast, production activity control covers the shortest time span but provides the highest level
of detail, specifying individual products and workstations. The plans may also differ in their
analysis of priorities, available capacity, and ways in which differences between the two can be
resolved.
Business Strategy
Plan
Sales and Operations Master

Plan
Plan
Planning
Master Production
Schedule
Material
Requirements
Planning (MRP)
Purchasing and
Implementation Production
Activity Control
(PAC)
At each level of the hierarchy you need to define your available capacity, your production
priorities, and if necessary, the ways in which you will resolve any discrepancies between the m.
Business Strategy Plan

The business strategy plan, or strategic business plan, states the main goals and objectives the
company aims to achieve over the coming years. Depending on the company, this plan may span
two to ten or more years. It lays down the future direction of the firm and the sort of business the
company wants to do in the future. It also provides general direction on how the company

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objectives are to be achieved. The strategic plan includes participation from marketing, finance,
production, and engineering. The strategic plan helps direct and co-ordinate these various
functions in a common direction.
Marketing analyzes the marketplace and decides on the company’s response to perceived
market needs, in terms of markets to be served, products to supply, customer service levels,
pricing, promotion strategies, and so forth.
Finance decides upon the company’s sources of funding and the use that will be made of those
funds. Finance is responsible for cash flows, profits, return on investment and budgets.
Production is required to satisfy the demands of the market place by the efficient use of
available plants, machinery, equipment, labor, and materials
Engineering is responsible for the research and development, designing new products and
modifying existing products. This requires communication with marketing and production to
ensure that the product designs can be made economically and will sell in the marketplace.
The development of the business strategy plan is the responsibility of senior management. Each
department then produces its own plans to achieve the objectives set in the business strategy
plan. All the plans must co-ordinate with each other, as shown in Figure 6 below.
Production
Plan
Financial Business Marketing

Plan Strategy Plan
Plan
Engineering
Plan
Figure 6 Business Strategy plan
Sales and Operations Plan

The sales and operations plan, or production plan, is set by production management, following
the objectives set in the business strategy plan. This plan identifies:
The amounts of each product group to be produced in each period
The required inventory levels

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The equipment, labor, and materials needed for each period
The availability of such resources
This plan only deals with product groups. For example, if a company manufactures a range of
spirits, beers, and Alcopops, only the product groups will be detailed. The groups will not be
broken down into individual brands or flavors at this point.
The sales and operations plan must satisfy market demand within the resources available to the
company. This involves comparing required resources with available resources and devising
plans to bridge the gap.
The production plan is concerned with implementing the business strategy plan and has a
planning horizon of usually 6 to 18 months although it may be reviewed as often as each month.
Master Production Schedule

The master production schedule (MPS) is a plan for the production of discrete end items. It
breaks down the production plan to show, for each period, the quantity of each end item that
must be manufactured. For example, it might show that 2,000 cases of peach schnapps are to be
produced each week. The planning horizon for the MPS is generally between 3 and 18 months,
depending on purchasing and manufacturing lead times. It is usually reviewed weekly or
monthly.
Material Requirements Plan

The material requirements plan (MRP) details the production and purchase of components used
in the making of the items listed in the master production schedule. It shows the quantities
needed and when manufacturing intends to make or use them. The MRP is used by purchasing
and by production activity control to decide the purchase or manufacture of specific items. The
MRP is very detailed: it sets out when the component parts are needed to make each end item.
The planning horizon for the MRP must, at a minimum, equal the combined purchase and
manufacturing lead times. Like the master production schedule, it usually covers between 3 and
18 months.
Purchasing and Production Activity Control

The implementation phase and control phase of the production planning and control system
involves purchasing and production activity control. The control and flow of raw materials into
the manufacturing facility is the responsibility of purchasing. Production activity control is
responsible for controlling and planning the work flow. Although very detailed, the time span in
these plans is generally a month or less, sometimes just a day, and they are reviewed daily.

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Planning and Resources
The figure below shows the relationship between levels of production planning and the
associated resource planning activities:
Sales and
Resource
Operations
Planning (RP)
Planning (SOP )
Master Production
Rough Cut Capacity
Schedule
Planning (RCCP)
Material
Capacity
Requirements
Requirements
Planning (MRP)
Planning (CRP)
Input/Output Control
Production Activity
Control (PAC) Operation
Sequencing
Figure 7 Planning and Control Hierarchy

As you move down the hierarchy, the level of detail increases and the length of the planning
horizon decreases. This is true of almost any planning activity in life. For example, when you
plan a wedding, you first set the date and book the church and reception. It is not until closer to
the wedding date that you consider details such as the readings, the flowers, the menu, and the
invitations.
At the Sales and Operations Planning level, perhaps only the total amount of product will be
detailed without any information on product types or sizes. At the Materials Requirements
Planning stage it will be necessary to know how much of each product is required so that the
necessary parts and packaging can be planned.
PAC
MRP
Level of Detail
MPS
Strategic Business Plan
Planning Horizon
Figure 8 Level of detail versus planning horizon

Unit 1
5. The strategic plan for a company:
A. Provides a statement of income and expenditure
B. Outlines the sales plan for the coming year
Review Q C. Provides the manufacturing plan for product groups
D. Is a statement of goals and objectives over several years
Manufacturing Resource Planning (MRP II)

MRP II is a method for effective planning of all the resources in a manufacturing company. It is
distinct from the materials requirement plan (MRP) because it integrates many more planning
activities.
The objective of MRP II is to integrate company resources. Ideally, it addresses operational
planning in units, financial planning in dollars, and has a simulation capability to answer ‘what
if’ questions. It comprises several linked functions: business planning, sales and operations
planning, capacity planning, production planning, master production scheduling, material
requirements planning, and execution support systems for capacity and material. Output from
these systems is integrated with financial reports such as the business plan, purchase
commitment report, shipping budget, and inventory projections in dollars.
Business Strategy
Plan
Marketing Plan
Sales and Operations

Plan (S&OP)
No
Resources available?
Yes
MPS
MRP
No
Resources available?
Yes
Purchasing PAC
Performance Measurement
Figure 9 MRP II
MRP II provides coordination between marketing and production. Marketing, finance and
production create a consensus workable production plan which must be adjusted on a weekly or
daily basis as changes occur. Order sizes and delivery dates may be changed and orders may be

Unit 1
cancelled or added through the master production schedule. Marketing managers and production
managers may update the MPS due to changes in forecast demand and senior management may
adjust the production plan to reflect changes in demand or resources. All these changes occur in
the integrated MRP II system so that the efforts of all functions in the organization can be
coordinated.
Creating a Production Plan

The production plan sets out the general levels of production and inventories over the specified
planning horizon. The main aim of the production plan is to set production rates that can
accomplish the objectives of the business strategy plan, including inventory levels, backlogs of
unfilled customer orders, market demand, customer service, optimum cost etc. The production
plan is not concerned with individual products or product options. Instead, units called product
groups are used.
Identifying Product Groups

Product groups are based on the similarity of the manufacturing process used. For example, a
beverage company may have product groups such as carbonated drinks, juice-based drinks, and
concentrates. A company that produces bicycles may identify product groups such as mountain
bikes, racer bikes, and children’s bikes.
Characteristics of Production Planning

The production planning problem usually has the following characteristics:
A planning horizon of 12 months updated quarterly or once a month
Production demand consists of a few product families
Demand is fluctuating or seasonal
Plant and equipment are fixed within the planning horizon
A number of management objectives that must be catered for, such as plant efficiency,
high levels of customer service, and low inventory levels

Unit 1
Summary
This lesson examined the role of manufacturing in the economy, the features of materials
management and the need for overall supply chain management. Your objectives for this lesson
were to be able to:
Describe the role of manufacturing in the economy
Identify areas of difficulty in traditional supply systems
Explain the role, objectives and responsibilities of materials manufacturing
Differentiate between various manufacturing processes
State the importance of planning
Describe a planning and control system
Identify the levels of the planning hierarchy and the questions that must be addressed at
each level
Define manufacturing resource planning (MRP II)

Unit 1
Review
The following questions are designed to test your recall of the material covered in
lesson 1. The answers are available in the appendix of this workbook.
6. Which of these manufacturing types would usua lly have the longest delivery time?
A. Assemble-to-order
B. Engineer-to-order
C. Make-to-stock
D. Make-to-order
7. Which of these is a function of physical distribution?
A. Lot sizing
B. Material handling
C. Kanban size
D. Routings
8. Which of the following uses the production plan as a main input?
A. Master Production Scheduling
B. Purchase order planning
C. Work center capacity load
D. Material requirements planning
9. Which is an activity of physical distribution?
A. Transferring produce between work stations
B. Forecasting inventory levels for manufacturing purposes
C. Planning the relocation of supplies to outside contractors
D. Receiving goods from suppliers
10. How would you classify consumer products, such as tinned foods or sports equipment?
A. Make-to-order
B. Assemble-to-order
C. Make-to-stock
D. Engineer-to-order

Unit 1
What’s Next?
This lesson covered the role of manufacturing, the characteristics of materials management and
the need for supply chain management.
You should review your work before progressing to the next lesson which is:
Supply Chain Management Basics – Lesson 2 Forecasting

Unit 1
Appendix

Unit 1
Answers to Review Questions
Lesson 1 Review
1. B
To maximize profits, organizations need to ensure the lowest production costs, inventory
investment and distribution costs while maintaining the best possible customer service. Accurate
production forecasts may help to lower costs but do not guarantee increased profits.
2. C
Delivery time is the time elapsed between receipt of the customer’s order to the delivery of the
order to the customer. Engineer-to-order companies have the longest delivery time in most cases,
as the time required to design and engineer the product is part of the delivery time. Make-to-
order companies maintain a stock of components from which they can build an order after it is
received. Make-to-stock companies ship to the customer from stock and assemble-to-order
companies assemble a customer order from existing sub-assemblies.
3. B
Planning is not a physical distribution activity. Physical distribution includes all activities of
transportation, distribution, inventory, warehousing, material handling, packaging and order
processing.
4. A
A process specification document describes the steps required to make a finished product.
Usually, such specifications are held in an online database or are printed on a routing sheet.
5. D
Strategic plans provide information for manufacturing, sales, and new product plans. However,
they are mainly concerned with the overall company direction. A strategic plan is a statement of
company aims and objectives covering between 2 and 5, sometimes up to 10 years.
6. B
See feedback for question 2 above
7. B
Material handling is involves when physically moving goods. Physical distribution includes all
the activities associated with the physical movement of goods from the supplier at the beginning
of the supply chain to the customer at the end.
8. A
The detailed master schedule is developed using the production plan. The production plan is a
management approved plan of production usually at the product family which specifies the
overall amount of each product group that should be produced and shipped in a given time
period. From this, the master scheduler can develop a more detailed plan at the individual
product level.

Unit 1
9. D
Receiving goods is part of the function of physical distribution, which is defined as the physical
movement of goods from suppliers to the beginning of production and from the end of
production to the customer.
10. C
Consumer products are for the most part make-to-stock. There are a few standard items
assembled from a number of components.

Unit 1
Glossary
Term Definition
assemble-to- Assemble-to-order is a production strategy where key components are stocked
order in anticipation of customer orders. Assembly is triggered by receipt of an
order. This is useful when a large number of products use common
components.
capacity The function of establishing, measuring and adjusting limits or levels of
requirements capacity, determining the amount of labor and machine resources required to
planning (CRP) accomplish the tasks of production.
cumulative lead Cumulative lead time is the longest planned length of time to accomplish the
time activity in question. For any item planned through MRP, it is the longest lead
time in the bill of materials item list.
delivery lead Delivery lead time is the time from receipt of a customer order to the delivery
time of the product.
distribution The activities associated with the movement of material, usually finished
goods, from the manufacturer to the customer. It includes all activities related
to physical distribution as well as the return of goods to the manufacturer.
engineer-to- Engineer-to-order products are those with customer specifications that require
order unique engineering design or significant customization. Each customer order
requires a unique set of part numbers, bills of material and routings.
industrial The engineering discipline concerned with facilities layout, methods measure
engineering and improvement, statistical quality control, job design and evaluation, and
the use of management sciences to solve business problems.
lead time Lead time is the span of time required to perform a process.
make-to-order Make-to-order is a production strategy where a product or service can be
made after receipt of a customer's order. The final product is a combination of
standard items and customized items.
make-to-stock Make-to-stock is a production strategy where products are finished before
receipt of a customer order. Customer orders are filled from existing stocks of
finished goods and production orders are used to replenish those stocks.
master The anticipated build schedule for those items assigned to the master
production scheduler. It becomes a set of planning numbers that drive material
schedule (MPS) requirements planning. The MPS represents what the company plans to
produce expressed in quantities and dates.
material A set of techniques that uses bill of material data, inventory data, and the
requirements master production schedule to calculate requirements for materials. It makes
planning (MRP) recommendations to release replenishment orders for material and to
reschedule orders.
materials The grouping of management functions supporting the complete cycle of

Unit 1
management material flow, from the purchase and internal control of production materials
to the planning and control of work in process to the warehousing, shipping
and distribution of goods
plant layout Configuration of the plant site with lines, buildings, major facilities, work
areas, aisles and other data such as department boundaries.
process layout Process (or functional) layout groups operations of a similar nature together.
quality Conformance to requirement or fitness for use.
resource Capacity planning at the business plan level .this establishes and measures
planning (RP) long-range capacity. It is based on the production plan but may be driven by
higher level plans such as the business plan. It addresses long range planning
issues.
rough-cut The process of converting the master production schedule into requirements
capacity for resources such as labor, machinery, warehouse space, supplier
planning capabilities. Demonstrated capacity is examined for each key resource.
(RCCP)
sales and A process that provides the ability to direct business to achieve competitive
operations advantage by integrating customer- focused marketing plans for products with
planning the management of the supply chain. The process integrates all the plans for
(S&OP) the business.

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Basics of Supply Chain Management

The Leading Edge Training Institute Limited

© Copyright Leading Edge Training Institute Limited ii

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Target Audience and Pre-Requisite Knowledge

Scheduling Lessons and Review Sessions

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Frequently Asked Questions

Supplementary Reference Materials

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The Role of Manufacturing

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1. Which of the following objectives is not needed to increase profit?

Review Q C. Accurate production forecast

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Planner Paper Pick Production

Purchased Planner Buyer Vendor Recv. Insp

Cumulative Lead Time

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Assemble Warehouse Assembly Distribution

Make-to- Assembly Warehouse Distribution

Figure 2 Manufacturing Strategies

Impact of Product Design on Lead Time

Manufacturing Strategies and Lead Times

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Chief Executive Officer

Information Human Marketing

Manufacturing Materials Research and

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Sales and Marketing

2. Select the correct statement about delivery time for an engineer-to-order

Difficulties with Traditional Systems

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Flow of demand and design information

Flow of products and services

Two-way communication is required throughout the chain to ensure accurate information of

Physical distribution involves transportation, inventory management, warehousing of inventory,

Conflicts in Organizational Objectives

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Objectives Manufacturing Operations Finance

High Production Efficiency

Low inventory investment

Figure 3 Conflicts in Traditional Systems

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Plant Layout and Process Flow

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Figure 4 Product Layout

Figure 5 Process Layout

The characteristics of process layout are:

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Process and Product Layout Comparison

Lead Time Production / Setup Cost Running Flexibility Capital Cost

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4. A process specification is a document that:

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Sales and Operations Master

Business Strategy Plan

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Financial Business Marketing