Production Planning: Maximizing Efficiency and Reliability

Production planning is often regarded as a well-established concept – an integral part of any manufacturing operation. However, in an age of uncertainty, variability, and increasing customer demands for speed and flexibility, it’s time to rethink where we go from here.

This article explores the core elements of modern production planning, the tools that support it, and how organizations can overcome common challenges to achieve continuous improvement and long-term success.

Understanding production planning

In the current highly dynamic and competitive industrial landscape, the ability to align production with real market demand is more important than ever. Traditional forecast-based production systems often lead to excess inventory, lengthy lead times, and wasted resources. Meanwhile, pull-based production planning approaches emphasize agility, efficiency, and responsiveness to customer needs.

What is production planning?

Production planning is the process of defining a strategy and organizing and scheduling all aspects of manufacturing to ensure that products are produced efficiently and on time. At its core, production planning determines what needs to be produced, when, how much, and using which resources. It aligns supply with demand by translating customer needs into specific manufacturing actions.

In a lean environment, this planning follows a pull strategy, where production is triggered by actual demand. This approach helps reduce overproduction, minimize inventory, and improve responsiveness.

Production planning includes three core stages:

• Planning strategy selection – Defining MTO or MTS per product.
• Capacity planning – Ensuring resource allocation.
• Execution planning – Defining specific production orders and sequences.

Each stage is interconnected and critical for a smooth manufacturing flow.

Why it matters for competitive industries

In industries where lead time, cost, and product availability are key differentiators, production planning plays a vital role in maintaining competitiveness. An optimized production plan enables:

• Fast response to market demand, especially when product variety is high.
• Lower working capital, through reduced inventory and better alignment between production and sales.
• Improved service levels by ensuring on-time delivery with minimal waste.
• Efficient use of resources by planning the capacity based on takt time.

Furthermore, competitive industries often deal with seasonal demand or sales volatility. A solid planning system allows either adjusting capacity or intelligently managing inventory to meet peaks without causing delays, stockouts, or excess inventory.

Developing the production plan

Effective production planning involves a series of interrelated decisions — from selecting the appropriate planning strategy to defining capacity requirements and coordinating daily production activities. This section explores the core components of production planning — from defining the appropriate planning strategy and forecasting capacity needs to structuring execution and leveraging digital tools like MRP and APS to enable informed decision-making and operational agility.

Planning strategy and its impact on inventory management

Choosing between Make to Order (MTO) and Make to Stock (MTS) is one of the most critical decisions in production planning strategy, as it determines how a company aligns its operations with customer demand.

• Make to Order (MTO) means that the product will not be available in the finished goods inventory at the time of the order. Instead, production starts only after a customer order is received, which implies a waiting period for the customer. This approach is most suitable for products with low order frequency or high customization, commonly referred to as low runners.
• Make to Stock (MTS) means that the product is ready for immediate delivery when the order arrives. Items are produced in advance and kept in inventory. This strategy fits high runners, products that are ordered frequently and at high volume. Because demand is more predictable, the risk of holding inventory is lower.

According to product quantity analysis, high runners are ideal candidates for MTS, while low runners are better suited for MTO. However, the final decision depends on the company’s commercial strategy. In some cases, it may be more advantageous to plan all products as MTS, even low runners, if immediate availability is essential for the customer.

Because demand patterns and product portfolios change over time, this strategic choice must be revisited regularly — at least once a year. An effective planning strategy not only enhances service levels but also has a substantial impact on inventory levels, thereby influencing both operational efficiency and financial performance.

Capacity planning: Forecasting demand and resource allocation

Capacity planning is the second step within the production planning process. Its purpose is to ensure that the organization has the right amount of people, machines, and logistics capacity to meet expected demand.

This planning relies on two types of information about market needs: demand forecasts and fixed customer orders. Forecasts provide a forward-looking view of expected volumes, while fixed orders represent confirmed requirements that must be fulfilled within a specific timeframe.

Key manufacturing capacity planning activities include:

• Calculating takt time to align production pace with market demand
• Defining the required capacity for assembly lines, machines, supermarkets, and logistics resources

This step culminates in the creation of a production-logistics contract — a documented agreement that specifies the production and logistic requirements for a defined planning period. This contract serves as a coordination mechanism between commercial, production, and logistics, ensuring operational readiness and stability.

Execution planning

Execution planning is the final step in production planning, where strategic plans are translated into real production actions. It answers the question: what will be produced, when, and in what quantity?

There are typically three types of production orders:

• MTO final customer orders – produced after order receipt.
• MTS replenishment orders – triggered by consumption and calculated using a pull planning model that defines reorder level and batch size.
• Special MTS customer orders – large volume orders with extended lead times.

Once all orders are defined, they are consolidated into a production order list. The next step is to convert customer and replenishment orders into Kanban signals, which are then placed in the logistics box. This box distributes the Kanban cards based on the start of the production day and aligns the monthly workload in accordance with the capacity defined in the logistics-production contract. The cards are then transferred to the leveling box—a visual scheduling tool that manages the production sequence and sets the Takt Time for each line. From there, the standardized logistics operator takes the cards to the sequencer in the correct order for the production lines, ensuring a smooth, efficient, and balanced workflow.

MRP and APS

Modern production planning relies on digital systems to manage complexity and ensure real-time decision-making. Two key tools are:

• MRP (Material Requirements Planning) – A system that calculates material needs based on the production plan and lead times. It ensures that all components and raw materials are available when needed, avoiding delays or excess stock.
• APS (Advanced Planning and Scheduling) – A more advanced system that optimizes production schedules based on constraints such as machine availability, changeover times, and labor shifts. APS enables finite capacity scheduling, improving responsiveness and utilization.

While MRP offers a strong foundation for planning what is needed and when, APS builds on this by adding intelligent capabilities for sequencing and allocating production in dynamic environments.

Enhancing production through strategic tools

Modern production systems rely not only on well-defined planning processes but also on strategic tools that enhance efficiency, responsiveness, and overall performance. These tools support organizations in aligning operations with real-time demand, reducing variability, and continuously improving their processes.

From digital platforms that provide real-time insights into production performance to Lean practices that drive waste reduction, these tools help build a resilient and agile production environment.

Lean principles and continuous improvement

At the heart of any high-performing production system are the lean principles of manufacturing — focused on maximizing value while minimizing waste. Tools like 5S, standard work, visual management and problem solving are used to create a culture of continuous improvement on the shop floor.

Applying Lean enables organizations to:

• Identify and eliminate non-value-adding activities.
• Improve process stability and standardization.
• Empower teams to solve problems at the root cause level.

Continuous improvement is not a one-time initiative but a systematic mindset that promotes daily refinement of processes, leading to long-term gains in productivity, quality, and employee engagement.

Smooth workflow and lower waste

Production leveling, known in Japanese as Heijunka, is one of the core pillars of the lean system. Its main goal is to smooth out demand variability, creating a more stable, predictable, and efficient production flow. A leveled production system enables the use of a fixed group of operators and helps reduce the bullwhip effect — a phenomenon in supply chains where small fluctuations in customer demand cause increasingly larger variations upstream, from retailers to suppliers.

Production leveling involves repeating each product in a constant time cycle, a concept referred to as EPE – Every Product Every. The EPE metric measures the frequency at which each product is produced. For example, an EPE of one day means that all product references are manufactured at least once per day. This repetition stabilizes the production rhythm and reduces the need for finished goods inventory.

Reducing the EPE is a strategic objective: the lower the EPE, the higher the production flexibility and the lower the inventory needed to maintain service levels. Achieving this requires more frequent changeovers, which is only feasible through fast setup times — hence the importance of SMED (Single-Minute Exchange of Dies). When changeover time approaches zero, large batches are no longer necessary. Ideally, production should aim for one-piece flow and one-piece scheduling.

Digital solutions and real-time monitoring

Digitalization has transformed the way production is managed. Manufacturing Execution Systems (MES), IoT sensors, and real-time dashboards now provide visibility across the entire production floor, enabling faster and better-informed decisions.

Key benefits of real-time monitoring tools include:

• Early detection of disruptions, such as machine failures or material shortages.
• Live tracking of performance indicators, including OEE, cycle time, and output vs. plan.
• Integration with ERP and APS systems, allowing alignment between planning and execution.

These solutions enable teams to act quickly on deviations, dynamically optimize schedules, and ensure consistent delivery performance.

Practical obstacles and proposed solutions

Even with robust production planning processes in place, organizations often encounter practical obstacles that disrupt execution and compromise performance. These challenges range from fluctuating demand and resource constraints to system inefficiencies and lack of data visibility. Addressing them requires a combination of structured approaches, real-time responsiveness, and a culture of continuous improvement.

Overloading vs. Underutilizing resources

Despite careful capacity planning, real-world demand is rarely stable, it fluctuates due to market dynamics and customer behavior. To respond effectively to these variations, it is essential to establish a clear set of operational rules that help balance available capacity with actual demand.

A practical and robust approach is the use of daily leveling rules, which guide operational decisions based on well-defined priorities. Each day’s plan should begin by allocating existing confirmed orders, both Make to Order (MTO) and Make to Stock (MTS), and then be adjusted using the following logic:

Demand is lower than the contracted capacity:

1. Advance production of MTO orders, when delivery dates allow.
2. If capacity remains underutilized, produce selected MTS items, prioritizing high runners up to their defined maximum stock levels.
3. If still below capacity, halt production for the remaining time, accepting a temporary reduction in working hours.

Demand exceeds available capacity:

1. Postpone some MTO orders, as long as customer delivery commitments are maintained.
2. If the overload persists, delay MTS production, allowing stock levels to approach the minimum.
3. If demand remains too high, expand capacity, for example, by reallocating operators from other areas or using overtime.

This rule-based structure allows teams to react in real time to daily demand changes without compromising system stability. It ensures a smooth production flow, respects operational constraints, and maintains a focus on both efficiency and customer service.

Identifying and resolving bottlenecks

Bottlenecks are the points in a value stream that limit production capacity and compromise overall performance. Identifying and managing these constraints is crucial, as a single underperforming resource can hold back the entire flow, even if all other stations are underutilized.

Bottleneck analysis begins with value stream mapping, which provides a visual overview of the production flow and highlights where restrictions occur. Once identified, the next step is to increase the capacity at the bottleneck. Depending on whether it’s a manual station or a machine, solutions may include improving workplace ergonomics, applying low-cost automation, reducing setup times using SMED, enhancing maintenance to reduce downtime, or even investing in new equipment. In manual lines, line balancing is also crucial, as redistributing tasks more evenly and encouraging mutual support between stations can significantly enhance overall throughput.

Ultimately, addressing bottlenecks is not a one-time fix but part of a continuous improvement mindset. It requires constant monitoring of critical resources and proactive intervention to ensure they don’t become barriers to flow and productivity.

Lack of systematization

One of the most common obstacles to effective production planning is the overreliance on empirical, undocumented knowledge. In many organizations, planning heavily relies on the individual experience of key employees, with rules, constraints, and decisions existing only in their minds — not in the system. This makes the process opaque, hard to replicate, and vulnerable when those individuals are absent. Additionally, operational improvements are often not reflected in the planning model, leading to outdated parameters and missed efficiency opportunities.

To make planning more robust and scalable, it is essential to turn this tacit knowledge into visible, standardized rules that are integrated into the system and accessible to the entire team.

Digital evolution in production planning

Many companies still struggle with modernizing their production planning. They rely on spreadsheets or disconnected systems that make it hard to react quickly to changes in demand or production issues. This leads to poor visibility, delays in decision-making, and lack of coordination between teams.

Another challenge is having data spread across different systems (planning, production, and logistics), which makes it hard to have a clear and complete picture. Even when digital tools exist, they are often underused due to low system integration or lack of training.

To address these challenges, companies can utilize integrated planning tools, such as APS (Advanced Planning and Scheduling) and MES (Manufacturing Execution Systems). These systems help schedule production based on real constraints and give real-time information from the shop floor.

Adding technologies like AI and predictive analytics can also enhance planning by enabling teams to anticipate problems before they occur. But going digital is not just about technology, it also means updating processes, training people, and managing change.

When done correctly, digital planning brings more speed, flexibility, and control to production, enabling companies to deliver better results with less waste.

Measuring performance and continuous improvement

To ensure production remains efficient, responsive, and aligned with business goals, it is essential to measure performance regularly and use that information to drive continuous improvement. Without consistent measurement, it becomes difficult to identify problems, track progress, or motivate teams.

Performance measurement provides the foundation for structured improvement efforts—offering insights into where the system is working well and where change is needed. When used correctly, it supports informed decisions, promotes accountability, and helps teams stay focused on results.

Key Performance Indicators (KPIs)

To manage and improve production effectively, it is essential to track a set of Key Performance Indicators (KPIs) that reflect both operational performance and service reliability. These indicators help monitor execution, identify deviations, and support data-driven decision-making.

Some of the most relevant KPIs in production environments include:

• Capacity utilization rate – Indicates the percentage of available production capacity that is actually being used within a given period.
• On-Time Delivery (OTD) – Measures the reliability of production in meeting the delivery dates promised to customers. It is a direct indicator of service level and planning effectiveness.
• OEE (Overall Equipment Effectiveness) – Evaluates the overall efficiency of equipment by combining availability, performance, and quality metrics. It provides a clear view of where losses are occurring and where improvements can be made.
• Plan adherence (volume and mix) – Tracks how closely the actual production matches the planned output, both in total volume and in the intended product mix. High adherence indicates strong planning discipline and execution stability.
• Inventory turnover – Measures how often inventory is cycled through over a specific period. A higher turnover indicates efficient inventory management, while a low rate may point to overproduction or poor demand alignment.

These KPIs should be monitored regularly, shared with teams, and directly linked to continuous improvement actions. More than just numbers, they serve as a daily compass to guide operational decisions and highlight opportunities for better performance.

Setting realistic goals and targets

Measuring performance adds more value when there is a clear goal to work towards. Setting realistic and meaningful targets helps align teams and drive motivation. These targets should reflect the company’s strategy, current performance levels, and improvement potential.

Unrealistic or unclear goals can frustrate teams and lead to disengagement. Instead, targets should be:

• Challenging but achievable.
• Time-bound and measurable.
• Aligned with overall business objectives.
• Reviewed and adjusted regularly.

In a continuous improvement culture, targets are not static—they evolve as performance improves. The key is to maintain momentum and celebrate progress while constantly seeking the next opportunity to improve.

Do you still have some questions about production planning?

How does capacity planning fit into production planning?

Capacity planning is a fundamental step within the broader scope of production planning. While production planning covers everything from strategic decisions to execution, capacity planning focuses specifically on ensuring that the necessary resources — people, machines, and logistics — are available to carry out the plan. It aligns operational capabilities with demand, helping to prevent both overload and underutilization, and ensures that production runs smoothly and efficiently.

What is a Master Production Schedule (MPS)?

The Master Production Schedule (MPS) is a high-level plan that defines what finished products will be produced, in what quantity, and when. It translates customer demand and forecasts into a time-phased production schedule and serves as a key input for materials and capacity planning.

MRP systems are useful for capacity planning, but when used for daily execution, they often create imbalances—producing an excess of what isn’t needed and shortages of what is. Therefore, MRP should not be used to drive day-to-day production but rather to support high-level planning.

What is lead time in production planning?

Lead time refers to the total time elapsed from the customer’s order to the delivery of the finished product. It includes all stages of processing, waiting, production, and transport. Managing lead time is essential for meeting delivery deadlines, reducing inventory levels, and increasing production agility. Lean methods focus on reducing lead time by improving flow and eliminating waste.