Chapter 6 Supply Planning and Cash – Optimizing the Supply Chain


Supply Planning and Cash

Supply planning is the next component of the business planning process. This is where the supply chain determines the requirements for best way to achieve the demand plan for both service and financial results.

Supply Chain Objectives

Business Objective


Supply Chain Objective

Drive revenue


Support/grow customers


Deliver on time/defect free


Strong product portfolio

Time to launch new products


Provide high quality

The profit and loss (P&L)


Minimize costs

Manufacturing costs


Increase utilization, reduce overtime

Logistics costs


Reduce expedited freight

Materials costs


Reduce direct material cost

Manage balance sheet


Working capital


Reduce inventory

Supply planning is a continuous cycle (as shown below), but most supply chain problems are related to the fact that capacity is finite. The chart illustrates the options for leveling a schedule and the plusses and minuses involved.

For starters, let’s define the terminology of supply planning. Here are some factors that affect capacity:


Manpower—maximum amount of time available

Machine availability—maximum amount of time that machines can operate

Size and volume—limits to the operating capacity of, and materials available to, machinery

Budgetary constraints

Health and safety constraints

Maintenance program constraints.

Capacity planning and capacity control include these definitions:


Load—amount of work (most often expressed in hours) that must be carried out to meet outstanding orders

Capacity—manufacturing capability of a production facility under specified operating conditions

Output—rate at which work is completed or taken from a production facility.

The basic data for capacity planning are:


Run time—time needed to perform or run the operation

Setup time—time taken to prepare for the operation

Conveyance—time taken to move material from one work center to the next, or from one location to the next

Queue time—waiting or sleep time

Route sheet—preferred order in which the operations are carried out.



When it comes to manufacturing there are two different types of planning activities:


1.Factory scheduling—putting in place specific calls of action, to include the tracking of what actually happens, keeping system records accurate, highlighting where the schedules are missed and the rescheduling of production based on changing conditions

2.Material planning—looking out beyond orders, getting the operation ready for what is expected to come.


Manufacturing lead time is the elapsed time through the manufacturing process, from the time that raw material is dispensed until when the product is available for shipment from the production site. It begins when the manufacturing site receives a signal to produce and ends when finished goods are available for shipment.

Manufacturing has no shortage of inputs because everyone thinks they are an expert, but there are three types of manufacturing:


1.Make-to-stock, which uses a bill of material (BOM) expressed in end-use part number/catalogue number terms

2.Make-to-order, which is based on the customer’s order. Definitions of products are typically completed just prior to production

3.Assemble-to-order, which specifies components via a planning BOM and utilizes inventory buffers. Flexibility is provided through hedging inventory.

Manufacturing plays a key role in the following areas:


Creating products with value

Providing input for plant capacity on machine, labor, and suppliers

Meeting schedule attainment and adherence

Controlling quality through yield and scrap

Managing cost per unit and units produced per hour (output)

Supervising raw and work-in-progress (WIP) inventories including programs for their reduction

Communication and escalation of issues:

oSupplier performance

oQuality and productivity issues.

In addition, creating an environment of simplified flows, material availability, and schedule stability builds a credible process for customers and employees alike. Understanding the key elements of lead times, quality, and costs allows a business to better grasp their response times, take the nervousness out of the system, and help the business grow to the desired size, as shown in figure 6.1.


Figure 6.1 The complete flow of the supply chain with manufacturing

Figure 6.1 illustrates the flow of the supply chain with manufacturing.

Particular attention should be paid to where the process pauses and sleeps. In most cases, this is non–value-added time and is typically greater than 50 percent. Similar to the supply chain outside the four walls of the factory, creating clean flows inside the four walls of a plant should be a primary target of the manufacturing leaders, as seen in the figure 6.2.


Figure 6.2 Supply chain within manufacturing

Workflows must be balanced or the Takt time (the average time between the start of production of one unit and the start of production of the next unit) will increase to the time of the longest work station, thereby creating sleep (or idle) time. These potential bottlenecks rule the throughput and inventory of the overall system, so schedules should be based on all anticipated constraints.

The inputs required for properly balancing a production line are:


Takt time

The number of stages required

Variations with task

Workstation layout.

Dr. Eliyahu Goldratt of MIT developed and taught The Theory of Constraints.1

The Theory of Constraints

Balance flow and not capacity, as capacity can never be really balanced

Utilization of a non-bottleneck work center should not be determined by its potential, but by constraints in the system

Time lost in a bottleneck is time lost forever: It can never be made up

Time saved at a bottleneck is an illusion

Bottlenecks govern both throughput and inventory in the system

Schedules should be based on a view of all the constraints at any one time and not based on lead times that arise from schedules that cannot anticipate bottlenecks

Materials Management

Materials management is the coordinated effort between planning, sourcing, and suppliers to develop replenishment methods that provide for the highest availability at the lowest cost. The goal is to consistently deliver material availability with low inventories. This is achieved by the use of standard definitions, work, and tools through partnerships and clear signals, with answers to following questions:


How much is needed?

When is it needed?

How is it to be triggered?

How will it come in?

As illustrated below, the differences between buyers’ and planners’ responsibilities.


Inventory is created to compensate for the differences in timing between supply and demand. The costs of not holding inventory can include lost customers, production delays, uneconomical batch sizes, and missing supplier volume discounts or price advantages.

Inventory can be reduced by shrinking lead times for raw materials and finished goods, as well as by reducing the uncertainty of demand with customers and/or suppliers. Typical costs of carrying inventory are 15 to 45 percent with some of the cost components being:


Cost of money

Warehousing and handling

Inventory losses




Inventory strategy clearly lays out a process to achieve the targeted results and can be based on things such as the voice of the customer (VOC), economic conditions, or market intelligence.

The types of inventory are shown in figure 6.3.


Figure 6.3 Types of inventory

Therefore, the purpose of holding inventory is to maximize service and maintain manufacturing efficiency while minimizing the cost of delivering a product.


Push versus Pull

In a push system of production planning and control, materials resource planning (MRP) looks at the schedule to determine what to produce next. Conversely, a pull system such as a Kanban only looks at the next stage of production to determine what is needed and only produces what is needed. Finally, in a vendor-managed inventory (VMI) system the buyer of a product withdraws it and pays for it at the time of usage (see figure 6.4).


Figure 6.4: Replenishment systems

A supplier replenishment agreement is a way to work with the supply base in accomplishing inventory management that is a win-win for everyone. This agreement contains no provisions addressing important commercial terms such as:





Liability and insurance

Intellectual property and branding

Certifications, qualifications



Liability and indemnification

Rather, these supplements are an arrangement for how material will flow and can easily be inserted into the verbiage on the purchase order (PO).

Finally, for VMI and consignment programs, according to generally accepted accounting rules, a supplier has additional rights for both onsite and offsite locations.


A supplier has the right to remove stock from the location at their own discretion as well as to maintain control of stock levels

They have the right to physically access and count stocks

A supplier may delegate their gatekeeping responsibility to a third party that is under contract, directed, controlled, and paid by them.

While these programs hold the allure of immediate inventory reduction, they can often be fraught with details and extra management. In short, they are not a substitute for doing the work of mapping out value streams and managing the supply chain properly.


Materials Resource Planning (MRP)

Due to the complexity of most operations, businesses have turned to the use of MRP systems to assist in planning. MRP is simply a computer software that assists with the calculations needed to plan manufacturing.

Due to the complexity of most operations, businesses use an MRP system to assist in planning. Its methodology (see the figure) is to:

Explode the master production schedule

Use the BOM to identify parts needed

Check availability of inventory

Identify when work needs to start so that material is available

Generate work orders and POs

Repeat the process for other levels of BOM.

MRP is used for job shop production, complex products, in assemble-to-order environments and for discrete and dependent demand items.

The benefits of using MRP include:


Realistic promising

Controlled inventories

Improved responsiveness and flexibility

Availability of information

Stronger relationships with suppliers

Integrated financial management.

MRP plans production so that the right material is at the right place at the right time. It is a tool for understanding the timing of requirements for an item all the way down to the component level. It applies to all levels of the BOM and uses existing inventories to reduce requirements. MRP is based on dependent demand and allows lead times for ordering, transit, and manufacturing to be taken into account.

Key MRP planning actions include:


Releasing orders and rescheduling due dates of existing open orders

Analyzing and updating system for items such as lot size, lead times, and so on

Reconciling errors

Taking action on potential problems

Using the system to solve shortages

Identifying where improvements are needed.


What Can MRP Do?

Reduce purchasing cost

Improve production schedules

Reduce manufacturing cost

Reduce lead times

Reduce scrap and rework

Raise production quality

Improve communication

Improve plant efficiency

Reduce freight cost

Reduce excess inventory

Reduce inventory levels

Reduce component shortages

Improve shipping performance

Improve customer service

Improve productivity

Simplify and improve accuracy of scheduling

Reduce overtime

Improve supply schedules

Improve calculation of material requirements

Improve competitive position


MRP is the backbone of supply planning because it provides:


Realistic promising, which provides for better customer service

Controlled reduction of inventories, which reduces the use of working capital

Improved responsiveness and flexibility through better forward planning

Enhanced employee involvement through availability of information

Stronger relationships with suppliers

Integrated financial management.


Final Thoughts

It’s been 40 years since I landed at Toyota in Motomachi, Japan. From that experience and the many plants I’ve worked in around the world since, I’ve learned that processes and plant people are the same all over. They love to make things and have great pride in their work with a deep affection for seeing units roll off the line. Whether it’s building hundreds of tractors, hundreds of thousands of cars, or billions of soft gels, capsules, and tablets, the success of the process rests on capacity, labor, and materials.

In the end, it’s all about how well we grasp the situation and whether we effectively plan and manage our way through it. There are no silver bullets, just good, old-fashioned rolling-up-your-sleeves and getting-the-job-done.


1 E. M. Goldratt. 1990. Theory of Constraints (Great Barrington, MA: North River Press).