21st Century Purchasing

Manufacturings Objectives The goal of manufacturing is to produce The right goods Of the right quality In the right quantities At the right time At minimum cost OMGT6743

1 Four Basic Questions What are we going to make? What do we need to make it? What do we already have? What must we procure? OMGT6743 2 Priority The APICS Dictionary defines priority as: the relative importance of jobs, i.e., the sequence in which jobs should be worked on. - APICS Dictionary, 8th Edition Priority refers to what is needed, how much is

needed, and when it is needed. OMGT6743 3 Capacity The APICS Dictionary defines capacity as: the capability of a worker, machine, work center, plant or organization to produce output per time period.- APICS Dictionary, 8th Edition OMGT6743 4 Aggregate Production Plan Resource Requirements Plan (RRP) Master Production Schedule (MPS)

Rough-Cut Capacity Plan (RCCP) Material Requirements Plan (MRP) Capacity Requirements Plan (CRP) Production Activity Control (PAC) OMGT6743 Input/Output Control Capacity Management Techniques Priority Management Techniques Hierarchical Planning Process

Operation Sequencing 5 Manufacturing Planning and Control System (MPCS) Strategic Business Plan - A statement of the major goals and objectives the company expects to achieve over the next 2-10 years or more. - broad/general direction - low level of detail - long-range forecasts - responsibility of senior management - includes Marketing, Finance, & Production participation - usually reviewed every six months to a year OMGT6743 6 MPCS Aggregate Production Plan (APP) must

OMGT6743 Satisfy market demand within resources available Assist strategic business plan implementation Based upon families of products Fairly low level of detail Address a six to 18 month planning horizon Reviewed each month or quarter 7 MPCS Master Production Schedule - Plan for the production of individual end items (finished goods). breaks down aggregate production plan

list the quantity of each end item to be made level of detail is higher than the aggregate production plan developed for individual end items three to 18 month planning horizon reviewed and changed weekly or monthly OMGT6743 8 MPCS Material Requirements Plan (MRP) - Plan for the production and purchase of the components used in making the items in the MPS Production control & purchasing use MRP to decide the purchase or manufacture of specific items Level of detail is high Determines when the components & parts are needed

Planning horizon is at least as long as the combined purchase and manufacture lead times (3 to 18 months) Usually reviewed daily or weekly OMGT6743 9 MPCS Production Activity Control & Purchasing Represents the implementation & control phase Purchasing is responsible for establishing and controlling flow of raw materials into the factory

PAC is responsible for planning & controlling flow of work through the factory Planning horizon is very short, a day to a month Level of detail is high Reviewed and revised daily OMGT6743 10 MPCS At each level in the MPCS, 3 questions must be answered:

1. What are the priorities - how much of what is to be produced & when? 2. What is the available capacity - what resources do we have? 3. How can differences between priorities & capacity be resolved? OMGT6743 11 Manufacturing Resource Planning (MRP II) Manufacturing resource planning (MRP II) is a method for the effective planning of all resources of a manufacturing company. Ideally, it addresses operational planning in units, financial planning in dollars, & has a simulation capability to answer what if questions. It is made up of a variety of functions, each linked together: business planning, sales and operations planning, production planning, master production scheduling, material requirements planning, capacity requirements planning, and the execution support systems for capacity & material. Output from these systems is integrated with financial reports such as the business plan, purchase commitment report, shipping budget, & inventory projections in dollars. - APICS Dictionary, 8th edition, 1995

OMGT6743 12 Creating the APP APP is . . . setting the overall level of manufacturing output . . . & other activities to best satisfy the current planned levels of sales . . . while meeting general business objectives of profitability, productivity . . . etc., as expressed in the overall business plan. - APICS Dictionary, 8th edition, 1995 OMGT6743 13 Creating the APP APP is concerned with

Quantities of each product group in each period. Desired inventory levels. Resources of equipment, labor, & material needed Availability of needed resources Why are plans made for product groups? What should the product groups be based on? OMGT6743 14 Creating the APP APP characteristics

Time horizon may be more or less than 12 months, depending on the manufacturing cycle Demand is seasonal for many products, but not for all (seasonal demand is the worst-case scenario) Plan is made for families or groups Management will have a variety of objectives What might be some management objectives? OMGT6743 15 Developing the APP Three Basic Strategies

Chase (Demand Matching) Strategy: Produce the amounts that are demanded at any one time Production Leveling Strategy: Continuously produce an amount equal to the average demand Subcontracting: Meeting additional demand through subcontracting Hybrid Strategy: Combination of any of the above strategies OMGT6743 16 Units Chase APP Strategy 1

2 3 4 5 6 7 Periods 8 9 10 11 12

Chase (demand matching) Strategy - Produce the amounts demanded at any given time. - Inventory levels remain stable as production varies to meet demand. OMGT6743 17 Chase APP Strategy Chase Strategy Disadvantages As production increases, workers must be hired and trained - increases cost. As production decreases, people are laid off and morale suffers - increases cost When production starts to increase again, the best workers may have other jobs and their skills will not be available Manufacturing must have enough plant capacity to produce at the highest capacity needed

What industries use a chase strategy? OMGT6743 18 Level APP Strategy Production Leveling Strategy Units - Continuously produce an amount equal to the average demand - Maintain stable workforce 1 12 OMGT6743 2 3 4 5

6 7 Periods 8 9 10 11 19 Level APP Strategy Production Leveling Strategy Avoids the disadvantages of demand matching

However, inventory builds up What are some examples of industries that could use this strategy? OMGT6743 20 Subcontracting & APP Subcontracting Strategy Producing at the level of minimum demand & meeting additional demand through subcontracting Major Advantage Excess capacity costs are avoided Since production is leveled, there are no costs associated with changing production levels Major Disadvantages

OMGT6743 Purchasing cost may be greater than if made in-house Certain core skills or technologies may be lost 21 Hybrid APP Strategy Hybrid Strategy - Combination of any of the 3 strategies - Combination of strategies that minimizes the sum of all costs involved provides required level of service meets financial & marketing plan objectives OMGT6743 22 APP Using Pure Strategies Quarter

Spring Summer Fall Winter Sales Forecast (lb) 80,000 50,000 120,000 150,000 Hiring cost = $100 per worker Firing cost = $500 per worker Inventory carrying cost = $0.50 pound per quarter Production per employee = 1,000 pounds per quarter Beginning work force = 100 workers OMGT6743 23 Level Production Strategy Sales Production QuarterForecast PlanInventory Spring 80,000 100,000 20,000

Summer 50,000 100,000 70,000 Fall 120,000 100,000 50,000 Winter 150,000 100,000 0 400,000 140,000 Cost = 140,000 pounds x 0.50 per pound = $70,000 OMGT6743 24 Chase Demand Strategy Sales Workers Quarter Spring Summer Fall Winter Cost OMGT6743

Forecast 80,000 50,000 120,000 150,000 Production Plan Needed 80,000 80 50,000 50 120,000 120 150,000 150 100 50 Workers Hired 70 30 Workers Fired 20

30 - = (100 workers hired x $100) + (50 workers fired x $500) = $10,000 + 25,000 = $35,000 25 Strategies for Managing Demand Shift demand into other periods incentives, sales promotions, advertising campaigns Offer product or services with countercyclical demand patterns create demand for idle resources OMGT6743 26 Hierarchical Planning Process Items Product lines or families

Production Planning Capacity Planning Resource level Aggregate Production Plan Resource Requirements Plan Individual products Master Production Schedule Rough-Cut Capacity Plan Components Material Requirements Plan

Capacity Requirements Plan All work centers Shop Floor Schedule Input/Output Control Individual machines Manufacturing operations OMGT6743 Plants Critical work centers 27

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