Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

5.7 Scenarios and Exercises

Intended learning outcomes: Disclose master scheduling for product variants. Calculate the quantity available-to-promise (ATP). Examine an example of the theory of constraints. Elaborate the master planning case.

5.7.1 Master Scheduling and Product Variants

Your company produces scissors for left- and right-handed customers. While both models have the same blades, the handles differ. Blade and handle are assembled after you have received customer orders. You can assume that approximately 12% of your customers are left-handed. If you produce 100 blades, how many handles for each type of scissors should you produce?

Solution: Since the actual option percentage is not known in advance, over­planning in the master production schedule (MPS) is necessary to cover the un­certainty. A safety demand of 25% would result in 12 * 1.25 = 15 handles for left-handled scissors and 88 * 1.25 = 110 handles for right-handed scissors to be produced. Because only 100 blades are produced, it makes no sense to have more than 100 handles of either type. Thus, a good decision would be to produce 15 handles for left and 100 handles for right-handed scissors.

5.7.2 Available-to-Promise (ATP)

Sales employees in your company would like to know whether their customers’ orders for can openers can be fulfilled. In long-term planning for the next half-year, you have put up the master production schedule provided below. Furthermore, your sales department has given you a list of customers’ orders that have already been promised. At the beginning of the year, you have 800 can openers in stock.

Master Production Schedule:


Promised orders: 1200 pieces on February 14, 1400 pieces on April 5, 450 pieces on June 9.

How many can openers can your sales employees promise to customers in the next six months? (Assume that the amount planned to be produced in the master production schedule is available at the beginning of each month.)


Is the master production schedule feasible?

Yes, because in each period cumulative ATP is greater than zero.

On January 7, a customer asks for 600 can openers to be delivered instantly. How do you react?

Though the amount the customer asks for is generally available, fulfilling this order would mean that the company would not be able to accept any further orders for four months, from January to April. Your decision will depend on how likely it is that this would result in the loss of long-term customers.

5.7.3 Theory of Constraints

You produce two products A and B, which use the machine capacity of your production according to the following table:

If per working day (eight hours), you start producing three products A and five products B, what will happen? What will the buffer in front of machine II look like after one week (five working days)? What measures do you suggest to take if you cannot invest any money?

The capacity of machine II is not sufficient: (3 * 1.5 hours) + (5 * 1.0 hours) = 9.5 hours. Therefore, the buffer in front of machine II will fill with the speed of 1.5 hours of workload per day, which is equivalent to five products A per week. To reduce work-in-progress, the company should decide to release fewer production orders, e.g., for two products A and five products B, per working day only.

A consulting firm offers to speed up your machines, so that the time it takes to machine any product is reduced by a quarter of an hour. To which machine would you apply this measure first, to which next? (Your only objective is to increase the amount of production.)

The bottleneck is machine II, so it would be desirable to increase its speed. After implementing the consulting firm’s measures, the work on products A and B takes (3 * 1.25 hours) + (5 * 0.75 hours) = 7.5 hours. Machine I with a workload of 5 * 1.6 hours = 8 hours will become the new bottleneck.

5.7.4 Master Planning Case

On the basis of a long-term sales plan of a company in the wood industry, your task — with regard to resource management — will be to work out various variants of the production plan and inventory plan as well as the resulting procurement plan.

The case: The Planing Co. manufactures wood paneling in many different variants. Variants occur, of course, in the dimensions, but also in the profiled edges and the wood finishes. The company offers panels in both natural wood and in painted finishes. The Planing Co. has only one timber supplier, Forest Clear Co. in Finland.

As manager of the Planing Co., you are faced with the task of producing a master schedule for one year in preparation for a management meeting tomorrow morning. You are expected to provide information on capacity load and, in addition, on the quantities of raw material to be procured from your timber supplier.

Your job is to do the planning only for the four most important final products in Planing Co.’s varied product assortment. These four products are shown in Figure below and fall into two product segments: painted finish panels (panel “tradition”) or natural wood panels (bio panel).

Fig.        Final products requiring master planning.

These panels, already precut to size, are planed down to specific profiled panels at a number of processing centers. As Figure shows, during the planing process there is a material loss of 3 mm to the width and of 2 mm to the height of a precut panel.

Fig.        Profiled edge of a finished panel.

The Planing Co. has machines to plane down the precut panels to specific profiled panels for a total of 2.7 million square meters of precut panels per year. The capacity unit, which comprises several machines, is given as square meters of material to be planed. You can assume that the same amount of material is processed every month.

Task a:Production and inventory plan: You will base your master planning on available data in the cumulative sales plan for the next 12 months (see Figure

Fig.        Sales plan for the next 12 months.

Taking into account the loss of material during the planing process, calculate the load profile according to Figure and enter it into Figure Discuss the result: Is there sufficient capacity?

Fig.        Production plan for the next 12 months.

Based on the load profile, create for the four products the following three variants of the production plan and enter them into Figure

  1. Each month the quantity produced is exactly the planned load that results from the planned demand. As a result, no inventory stock is produced, but costs are engen­dered for (quantitatively) flexible capacity (see the definition in Section 4.4.3).
  2. Each month the quantity produced is the average load. Fluctuations in demand have to be covered by inventory. To ensure delivery reliability, initial inventory stocks of 180,000 m2 must be carried (for the sake of simplicity, assume that there is appropriate inventory for all four final products). However, no costs arise for (quantitatively) flexible capacity.
  3. Half of the capacity is adapted to the load. This means that each month, the quantity produced is one-half the difference between planned load (that results from the planned demand) and the average load. To ensure delivery reliability, initial inventory stocks of 90,000 m2 must be held. Again, costs are engendered for (quantitatively) flexible capacity, but the costs are lower than in variant 1, above.

Conduct a qualitative comparison of the total costs of the three solutions above, by comparing the following two aspects. On the one hand, the inventory carrying cost:

  • Unit cost: $2 per m2
  • Annual carrying cost rate: 30%

On the other hand, the costs for flexibility of capacity:

  • Labor cost: $1 per m2
  • Flexibility percentage required =
    (maximum monthly load – average load) / average load
  • Flexibility costs = flexibility percentage * labor cost per year

Solution: The average load per month is about 237,000 m2, slightly exceeding the available capacity of 225,000 m2. Therefore, overtime of about 5% will be necessary to fulfill the demand (about 2,844,000 m2 per year).

  • Variant 1 results in flexibility costs of about $1,300,000. The maximum load is in October (about 345,000 m2); its production requires a flexibility percentage of (345,000 – 237,000)/237,000 = 46%.
  • Variant 2 of the production plan (production of 237,000 m2 each month) results in a carrying cost of about $80,000. Carrying cost is calculated on the basis of the inventories at the beginning of each of the 12 months in the inventory plan.
  • Variant 3 results in a carrying cost of about $40,000 and flexibility costs of about $650,000. Maximum production is in October (about 291,000 m2), which requires a flexibility percentage of (291,000 – 237,000)/237,000 = 23%.

You can view the animated solution on the Internet at the end of this section.

  • Variants between the two extremes of Variant 1 and Variant 2 — as well as the variants themselves — can be produced by entering a value for alpha between 1 and 0 in the formula Av + alpha * (Loadi – Av), where Av is the average load. Loadi is the planned load that results from the planned demand.
  • To calculate the costs of each variant, the parameters for carrying cost and flexibility cost can be changed.

Task b: Procurement plan: The management at Forest Clear Co. has asked you to give them a rough estimate of the quantity of raw material that Planing Co. will order from them in the next 12 months. As upper management at Planing Co. has just recently decided to build a partnership relationship with this timber supplier, they expect you to respond to Forest Clear by tomorrow at the latest. Your answer will depend on which of the three variants of the production plan you decide is the best.The raw material — the timber — is the same for all four final products. It is procured and calculated in units of cubic meters. However, as Forest Clear supplies boards of 100-mm width, 50-mm height, and 5-m length only, Planing Co. has to cut the boards to precut panels (see Figure before the precut panels can be planed. Because of the dimensions of the final products, two to three precut panels can be obtained from each raw board (see Figure The raw material must be available in the same month as the final products.

Fig.        Possible ways to cut the raw boards into panels.

Create a formula for calculating the raw material requirements for a given production plan. Hint: Derive the quantity of raw material in cubic meters (the wood boards) in dependency upon the specific final product, which is given in units of square meters. Company management is only interested in the total raw material requirements per month in Figure (the raw material requirement per product is important only to establish the subtotals).

Fig.        Procurement plan: raw material requirements.

Solution: For Variant 2 of the production plan, production per month is one-twelfth of the total annual demand. This results in raw material requirements of about 4900 m3 per month.

A mouse click on the icon “go to procurement plan” takes you to calculation of the procurement plan for the chosen variant; once there, click on “calculate.” The upper section shows the production plan for all variants; the lower section shows the raw material requirements. Run the mouse over the product identification numbers in the left-most column to see whether two to three precut panels can be cut out of a raw board.

To create another variant of the production plan, you can click again on the icon “return to production plan” and the raw material requirements can be calculated for that plan as well.

You can view the animated solution on the Internet here.
For all calculations, click on the “calculate” icon.

Course 5: Sections and their intended learning outcomes

  • Course 5 – The MRP II / ERP Concept: Business Processes and Methods

    Intended learning outcomes: Disclose business processes and tasks in planning & control. Explain in detail master planning or long-term planning, Describe detailed planning and execution.

  • 5.1 Business Processes and Tasks in Planning & Control

    Intended learning outcomes: Describe the MRP II concept and its planning hierarchy. Explain the part processes and tasks in long-term, medium-term planning as well as in short-term planning & control. Present the reference model of processes and tasks in planning & control. Produce an overview beyond MRP II: DRP II, integrated resource management, and the “theory of constraints”.

  • 5.2 Master Planning — Long-Term Planning

    Intended learning outcomes: Describe demand management, sales and operations planning as well as resource requirements planning. Explain master scheduling and rough-cut capacity planning. Disclose supplier scheduling: blanket order processing, release, and coordination.

  • 5.3 Introduction to Detailed Planning and Execution

    Intended learning outcomes: Disclose basic principles of materials management, scheduling and capacity management concepts. Produce an overview of materials management, scheduling and capacity management techniques. Differentiate between available-to-promise and capable-to-promise.

  • 5.4 Logistics Business Methods in R&D

    Intended learning outcomes: Produce an overview on integrated order processing and simultaneous engineering. Describe release control and engineering change control. Differentiate between various views of the business object according to task.

  • 5.5 Summary


  • 5.6 Keywords


  • 5.7 Scenarios and Exercises

    Intended learning outcomes: Disclose master scheduling for product variants. Calculate the quantity available-to-promise (ATP). Examine an example of the theory of constraints. Elaborate the master planning case.

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