Like all other stages of the supply chain, manufacturing and production activities require careful planning. A production plan is a tool that companies can use to develop a strategy for meeting forecasted demands while minimizing costs.
An effective production plan also enables companies to reduce the amount of stored inventory they hold and make the best use of their manufacturing plant space and equipment.
How to create a production plan
To create a production plan, companies must begin by determining the total amount of product output that the manufacturing department or outsourced company is responsible for in upcoming periods. This amount will be based on forecasted demands.
Companies use demand forecasting to estimate the required amount of product that they must produce to meet customer demands. However, like any forecast, demand forecasting is never completely accurate.
When planning production, managers must also take into account factors that might affect demand and sales forecasts. These include internal factors, such as marketing campaigns and price changes. There are also external factors that influence demand levels, such as consumer behaviour and changes in economic conditions.
The next part of production planning involves the creation of a Master Production Schedule (MPS). This allocates scheduled dates for product completion so that promised delivery dates can be met without creating excess inventory levels. Although a MPS can be created manually, most companies use a software-based system called Materials Requirement Planning (MRP) to develop the MPS.
What is Materials Requirement Planning (MRP)?
MRP first came into existence in the 1970s and has since been updated to take account of rapidly fluctuating global sales forecast demands. The more modern version of MRP is known as MRP II.
The goals of MRP are to enable companies to:
- meet production targets
- reduce requirement for inventory
- plan manufacturing activities and purchasing schedules
To effectively use MRP, several inputs are required:
- Production requirements: This is the amount of required product and when it is required
- Current inventory levels for raw materials, components and finished product: This enables a calculation of the current shortfall in production
- Structure of the production system: This enables the number of production steps to be gauged and production times to be estimated
Scheduling steps of a production plan
Scheduling production activities involves three key steps:
- Machine and human resources needs
Exploding examines the Bill of Materials (BOM) for each product. This lists how many parts are needed for each component or finished product that the company manufactures. The required number of finished products are “exploded” and multiplied by the production requirements to see how many component parts are required in total.
In netting, any available component inventory is subtracted from the requirement determined through explosion. This calculates the amount of each item needed to manufacture the required finished products and enables a purchasing schedule to be created.
Offsetting determines when manufacturing should begin so that all the finished items are available and can be assembled into the final product by the required date for shipping. To perform offsetting, an anticipated time for all manufacturing activities must be estimated.
Machine and human resource needs determines and schedules the exact requirements for the production activity from a machinery and personnel perspective.
Two other key considerations in setting up the MPS are time buckets and the planning horizons. A time bucket is the unit of time around which the schedule is constructed. This is usually daily or weekly.
The planning horizon indicates how far forward a company should plan production schedules. This can be decided by determining the lead times for transporting finished goods to customers and by the time periods for predicted demand.
Planning how to meet requirements
When companies have a solid idea of the amount of product they must produce and of the production schedules that will enable customer demands to be met, they must identify all the strategies that could be used to meet these schedules at a minimum cost. This might involve outsourcing certain aspects of the production. The most appropriate strategy will become the basis for the production plan.
To confirm the appropriateness of the selected strategy, companies must confirm the plan against the following data:
- Materials and purchasing information
- Engineering or process designs
- Sales, marketing and distribution information
- Financial and accounting information
- Human resources information
Addressing fluctuations in demand
Some companies manufacture products for which demand fluctuates wildly at different times. There are three basic production-planning strategies that a company can choose from to address these demand fluctuations.
- Demand chase strategy: This strategy matches the production rate to the demand rate by employing and laying off employees as demand rises and falls.
- Level production strategy: This strategy aims to maintain a constant production rate and workforce with demand fluctuations met by changing inventory levels or by allowing order backlogs, in which deliveries are made at a later date.
- Mixed strategy: This strategy aims to maintain a stable workforce and meet fluctuations in demand by using overtime or additional work shifts or by outsourcing certain tasks.
Each of these strategies has business benefits and disadvantages. The demand chase strategy incorporates substantial costs involved with advertising for new employees and training them, morale might suffer if employees are frequently hired and made redundant and severance pay costs might also become prohibitive.
In contrast, the level production strategy can involve substantial added costs associated with increasing inventory levels. Backlogged orders can result in customer dissatisfaction and lower future sales.
The mixed strategy involves costs associated with paying overtime for extra shifts, while outsourcing can have many cost and quality implications.
Planning how to monitor production
A production plan should also address how a company will monitor the effectiveness of its production activities. Without monitoring, areas in which improvements can be made will not be identified. Companies should be able to monitor the following:
- The production status at any given time
- Production levels and whether they are keeping pace with planned schedules
- Shipment amounts and frequencies and whether they are meeting delivery schedules