MGT 302

What does a master schedule indicate?

the planned delivery time for the PSB a company sells

Master scheduling goal with capacity requirements

attempts to keep capacity requirements as level as possible from week to week

Effects of high/low capacity

o Heavy use of capacity can lead to problems with worker morale, equipment failure, quality, and customer service, as well as reduce efficiency
o Low use of capacity leads to low productivity and can influence worker morale, customer service, and quality

What is the master schedule an important link between?

A company and its customers and suppliers

What does each company's long term competitiveness depend on?

the effectiveness of the entire supply chain as much as on its internal operations

Why is master scheduling a critical activity?

because it is one of the strongest points of linkage between companies, as well as the various functions of a single company

Time difference between aggregate plan and master schedule

- Decisions have a shorter planning horizon than aggregate planning
o Aggregate plan is typically revised monthly based on a 6 - 18 month planning horizon
o Master schedules are typically revised at least once a week with more emphasis on agreement about

Freeze window

fixed period of time at the beginning of the schedule for which the master schedule is final and not subject to revision
o Established on the master schedule

What does master scheduling require of the aggregate plan

Disaggregation
o Aggregate plans set the stage for the execution of a master schedule by making funds available for the tools to meet periodic surges in demand
o Thus, the level of demand accommodated in the master schedule needs to match the level of dem

What type of decision is master scheduling?

a material decision

What does master scheduling rely on

detailed product service buddle demand forecasts
Capacity planning decisions, ranging from aggregate resource planning to detailed capacity plans
Material planning and capacity planning decisions must be synchronized with both each other and with demand p

What is the goal in master scheduling?

create a material plan that is feasible in light of capacity considerations, which are dependent upon material requirements

How do material decisions result in actual capacity allocations?

Loading decisions
Dispatching decisions

Loading Decisions

choices made to help assign work to resources

Dispatching Decisions

o choices that determine the sequence in which work will be completed

Correlation between the aggregate plan and the master schedule

the total monthly demand for the items shown on a master schedule should be close to the demand anticipated in the corresponding aggregate plan
This must occur

Make to Order forecasts

forecast is based largely on customer orders expected over the near term
o Freeze window should include the entire lead time so there will be no chance of canceling or changing an order once processing has begun

Lead Time

the duration between placing and receiving an order

Make to Stock forecasts

demand shown on the master schedule is based on the forecasted rates of demand for the various product service bundles
� Freeze window on the master schedule should be at least as long as the tie suppliers need to respond to purchase orders

What is a critical consideration in building a master schedule that will satisfy customers?

the number and frequency of orders or product service bundles that can be accommodated
The level of uncertainty in demand forecasts, and the impact of scheduling decisions on the firm's competitive priorities

When is a MTS approach good fit for companies?

If demand forecast is reasonably certain, companies that emphasize low cost and high quality of conformance and provide mass produced, standardized PS bundles

Decoupling point

Buffer between the producer and the customer
Provided by the finished goods inventory
system can operate independently of individual customer's demand patterns
Placing inventory between two work centers, or between a customer and a supplier, allowing them

What does independence from customer demand patterns allow?

allows the company to choose efficient scheduling alternatives, to order inputs and produce outputs with less frequency, and to level the firm's output rates over time
� Allows the use of dedicated, specialized equipment that is capable of meeting high qu

What is the downside of independence from customer demand patterns?

lack of operational flexibility and limited ability to rapidly respond to changes in customer preferences

Three different types of capacity decisions that may be a factor in master scheduling

Aggregate planning
- Least detail
Rough-Cut Capacity Planning
Detailed Capacity planning
- Most detail

Rough Cut Capacity Planning

Process that verifies the feasibility of master schedules
Relies on overall estimates of capacity requirements

Sense of feasibility provided by rough-cut capacity planning

gives only a general sense of the schedule's feasibility
Master schedule that looks feasible based on rough cut capacity planning might not be feasible because of the processing requirements associated with various components and subassemblies

Detailed Capacity Planning

check constructed once a detailed materials plan has been done and a procurement plan for the components and subassemblies completed
Closed Loop Planning

Closed loop planning

process in which information from detailed capacity planning is used to level (and ensure the feasibility of) the master schedule
Business needs highly sophisticated planning and control systems to engage in this

Planning in Make-to-Order Companies

o Master schedule is built by incrementally adding orders onto an existing schedule
o Planners cannot just add new orders indiscriminately - they must first check to see if there is adequate capacity for the order
o Master schedule attempts to add the ord

Forward Scheduling

if time is an issue, the order is added as early as possible in the hopes that it can be built within a satisfactory period
Scheduling from a due date

Planning in Make to Stock Companies

Backward Scheduling
o When all of the anticipated demand has been scheduled, the rough cut capacity planning can be done

Backward Scheduling

determine from the forecast when a stock of outputs will be needed, then place orders on the master schedule so as to ensure the availability of outputs by that time

Independent Demand Inventory

Inventory that is addressed by the master schedule
o Material that the firm produces for sale
o Some or all of this type of demand must be forecast

Dependent Demand Inventory

material that goes into the PSB
o Demand can be calculated once the master schedule has been agreed upon

Negative Aspects of Inventory

o Prohibits meaningful feedback on the quality of the product service bundle because of the long delay between the creation of an item and its use
o Hide operational problems that might be solved if they were discovered
o Financial cost represents lost op

Positive aspects of Inventory

Allows Decoupling
Two separate value-adding processes can each operate in the most efficient manner, based on local considerations
Allows producers to set aside material for later use by customers, and customers to receive immediate delivery of in-stock i

What does the "right" inventory level depend on?

the level of uncertainty surrounding demand, the potential for system disruptions, and the characteristics of the operating system
o The greater the degree of uncertainty and greater potential for system disruptions, the more inventory is required to effe

How can uncertainty surrounding demand be estimated for the short term?

By using MAD, MFE, and MSE

Inventory in MTS companies

Hold inventories of raw materials, WIP, or finished goods

Inventory in MTO companies

Likely to stock only commonly used raw materials, as the more flexible operating systems typically require less inventory

Relationship between uncertainty of demand, operational flexibility, and buffers like inventory:

Where the operating system is not very flexible and demand is uncertain, or the potential for system disruption is significant, companies tend to use buffers of inventory, capacity, or lead time
Buffering the operating system with inventory allows a firm

What can carrying too much inventory lead to?

greater uncertainty and a greater need for capacity, lead time, or inventory buffers

Inventory in operationally flexiblle firms

o When operational flexibility is sufficient to accommodate the levels of uncertainty a firm faces, there is less need for standby inventory, capacity, and lead time

Most common inventory models

o Fixed order interval models
o Several variations of the fixed order quantity model
o ABC Analysis

ABC Analysis

Form of pareto analysis - 20% of inventory items account for 08% of the value
Analysis distinguishes between highly important inventory items and those that are less important
B/c demand patterns change, items can switch classes

A" Inventory Items

require tight control policies and close managerial scrutiny, including frequent policy review and cycle counting - a periodic audit of inventory quantities to ensure accuracy
� Designated either because they are critical items or because they represent a

B" Inventory Items

of moderate importance, receive less frequent managerial attention than A items

C" Inventory Items

reserved for items that are inexpensive, infrequently used, or do not otherwise significantly impact customer satisfaction

Fixed Order Quantity Model

basic model for determining the timing and quantity of orders for independent demand inventory items
� Graph illustrates a fixed quantity ordering system with constant demand and lead time
� Time to place an order is when inventory has been reduced to reo

Order Interval

time between orders; identical to the time between receipts of successive shipments

What is necessary to use a reorder-point based inventory model?

Manager must have a perceptual record of on hand inventory, such that he or she is aware when the reorder point has been reached

Which items is the Fixed Order Quantity model most applicable for?

A" b/c not all inventory items are vital enough to warrant close scrutiny

Short lead time in the Fixed Order Quantity Model

� If the lead time is shorter than the length of an order interval, then an order should be placed when the amount of inventory on hand will exactly cover the demand during the lead time
� R = Ld, where R = the reorder point, L = lead time in days, and d

Long lead time in the Fixed Order Quantity Model

� If the lead time is longer than the length of an order interval, then an order should be placed when the amount of inventory on hand or on order (called the book inventory or inventory position) will exactly cover the demand during the lead tie
� Becaus

Variables relevant to the inventory model

Q = order quantity
D = annual demand
d = daily demand
L = lead time
H = the cost to hold one unit for 1 year
S = the cost to place an order

Average Inventory

Q/2

Number of orders per year

D/Q

Annual Holding Cost

[Q/2] * H

Annual Ordering Cost

[D/2] * S

Total cost function to minimize an order cost

o If the purchase cost per unit is not a function of the order size, the relevant annual total cost function to minimize in an order sizing decision is simply the sum of the annual holding and annual ordering costs:
TC = [Q/2]
H + [D/Q]
S

Demand Rate

amount of inventory used in a given time

Economic Order Quantity

Cost minimizing order quantity is the amount that perfectly balances annual order costs and annual holding cost
EOQ = [ (2DS)/H ] ^ (1/2)

Fixed Order Quantity with Price Discounts

o Because cost is now a function of the quantity ordered, we need to consider purchase costs in our order sizing decision
o C represents price
o Annual Purchase Cost = C * D
o The appropriate annual total cost function to minimize is:
TC = [(Q/2)
H ] + [

Why is the total cost curve not continuous in the Fixed Order Quantity with Price Discounts model?

B/c of price breaks
Monotonic decreasing function at quantities less than the EOQ and monotonic increasing function at quantities greater than the EOQ

Monotonic Decreasing

move farther to the right on the horizontal axis, the value of the function on the vertical axis only decreases

Monotonic Increasing

move farther to the right on the horizontal axis, the value of the function on the vertical axis only increases

Fixed Order Quantity with Variable Demand and Lead Times

o Fixed Order Quantity Model assumed that demand and lead time were constant
o In reality, the demand for independent demand items is rarely constant
o Lead times might be known, but they frequently vary
o Managers usually do not set the reorder point at

What do managers do to accommodate uncertainty of demand and lead ties

added safety stock to the on hand inventory, which makes the reorder point the sum of the safety stock and the expected demand during lead time

Stockout

Zero inventory balance
Chance of stockout decreases when safety stock is added/increased

What does Safety Stock protect against

Stockout
o Protects against shortages that could occur due to higher demand rates or unusually long lead times
Can be statistically determined

Why does the level of available inventory need constant monitoring?

Variability of demand and lead times
o Because demand is variable, the only way to know when to place an order is to keep a perpetual count of inventory
Makes sense for A items, but not others

What is commonly used to keep track of inventory/alert reorder points

Inventory reserves and two-bin systems

Ways to determine the amount of safety stock to carry

Policy Based Approach
Cost based approach

Service Level

a measure of how well an inventory system meets demand.

Two approaches to determining service level

o Probability that a stock out will not occur during an interval - that all demand during an order interval will be filled from stock
o The probability that a unit of demand will be filled from stock
o Relation: a stock out occurs (measure 1) whether one

Fill Rate

percentage of demand filled from stock

Policy-Based Approach to Setting Safety Stock

� Specifies the maximum allowable probability that there will be a stock out during an order interval
o To do this we must have a probability distribution of demand during lead time

How to develop a probability distribution of demand during lead time

Used in Policy-Based Approach to setting safety stock
Relative frequency distribution based on past history
Use a forecasting system such as simple exponential smoothing to estimate the mean demand during lead time and base the standard deviation on the f

Cost-Based Approach to Setting Safety Stock

� Possible to determine what the probability of a stock out should be in order to balance the cost of carrying extra inventory against the expected cost of stock outs without that extra inventory
� Simplest approach to determining what the reorder point a

Payoff Table

a table describing the economic payoffs for marginal analysis on the reorder point level
o Two Decisions: (1) do not increase and (2) increase)
o Two states of Nature: (1) Unit R + 1 is not needed and (2) Unit R + 1 is needed

Four Cells of a Payoff Table

If unit R+ 1 is not stocked and not needed, then there is no cost
If unit R + 1 is not stocked but is needed, there will be a stock out, which will cost V
If unit R + 1 is stocked but is not needed, then it will have been carried in inventory for the enti

When should the reorder point be increased?

if the expected cost of an increase is less than or equal to the expected cost of no increase:
H (Q/D) ? V
P(Stockout|R) = V
* P(DDLT > R)

Reorder point is set at what value?

the highest value R for which:
P(stock out) = (P(DDLT) > R) < [(H(Q/D))/V] = [HQ/VD]

Fixed Order Quantity with Non-Instantaneous Replenishment

o Fixed Order Quantity Model assumed instantaneous replenishment
But internal orders for parts might not be received all at once

Average Inventory with Non-instantaneous Replenishment

Q[1 - (d/p)] / 2
p is the periodic production rate

Economic Production Quantity

cost minimizing production order quantity
� EPQ = [ 2DS / H(1 - d/p)] ^ (1/2)

Differences between instantaneous and noninstantaneousness replenishment models

really not different
Instantaneous simply means that an order is received before any more stock can be used
� Production rate, p, is really fast relative to usage rate, d
� Makes the ratio d/p close to zero, in which case the formulas for the EOQ and EPQ

Fixed Interval or Periodic Review Models

o With a steady rate of inventory usage, the EOQ may be considered the amount of on hand inventory required for a fixed period
o If demand varies and the order interval is fixed, the quantity that is ordered will vary, depending on the inventory that is o

Fixed Interval or Periodic Review Models Amount to be Ordered

Typically, the amount of inventory on hand immediately after an order is received should be sufficient to last through an entire order interval
Thus, order quantity would be:
� q = average daily demand X (order interval + lead time) + safety stock - on ha

Periodic Review Systems when demand is probabilistic

o When it is possible to determine the optimal length of the review period, T is usually based on the frequency with which a supplier's representative makes delivers
o Issue we deal with here is how to determine the desired stocking level, S, when demand

Main difference between fixed quantity and periodic review models

Safety stock
Fixed Quantity - the safety stock needs to supply stock-out protection for the relatively short time between placing and receiving the order, which is the lead time L
Periodic Review - time between placing orders is fixed not variable, so the

Determining the Desired Stocking Level

S = expected daily demand *( time until the next order plus the time until that order is received) + safety stock
Because some inventory is likely to exist at the time the order is placed, the actual order quantity will be given by:
� Q (order quantity) =

Determining the Safety Stock

Same s in a reorder point system, however the length of time for which the safety stock must provide stock-out protection is different
Desired safety stock can be determined with a policy-based approach or a cost-based approach; the values are identical t

What is happening to optimal order quantities?

o A better understanding of the drawbacks associated with holding large inventories has highlighted hidden costs that were not accounted for in the classical EOQ models
Optimal order quantities are being reduced, and firms are experiencing fewer of the ne

In what time range are optimal order quantities optimal?

only in the short run
Firms need to take a long term focus on improving customer service by reducing their reliance on inventory, which they can do so by reducing potential for disruption in their value-adding systems, by reducing the uncertainty that the