Chapter 1: Introduction to operations management
o
o
Scientific Management (Taylor)
Human Relations movement
o job enlargement
o job enrichment
Management Science
Computer age
(80’
s)
Just-in-time (JIT)
Total Quality management (TQM)
Business Process Reengineering
o
o
Japan
o
o
o
90’
s
o Flexibility
o Time-based competition
o Supply Chain management
Chapter 2: Operations Strategy and Competitiveness
Business Strategy
define long-range
plan for company
Marketing strategy
Operational strategy
Finance strategy
Develops a plan for
operations function
Business Strategy – serves as an overall guide for development operation strategy
Operations strategy competitive properties:
Quality - being competitive
Time
– being fast
Flexible – being able to change
Cost
– being productive
Environmental Scanning
(Market trends, opportunities &
threads)
Business
Strategy
Mission
(Statement, what business an
organization is in (customers, core
belief))
Core competences
(Unique strengths)
Develop operations strategy
Business Strategy
Operations Strategy
Design Operations Function
(Competitive properties)
Developed to focus on identified
competitive properties
Structure – facilities, technology
Infrastructure: Planning & Control
system, workers, pay, quality
Find a trade-off between the competitive priorities.
Decide which competitive priorities to focus on:
Order qualifiers: company has to meet if it wants to do business
Order winners: company6 win order in the market
Strategic role technology
Can be used by companies to gain a competitive advantage and should be acquired to
support company’
s chosen competitive priorities
Types:
Product technology
Process technology
Information technology
Productivity - measure how efficiently organization converts inputs into outputs
Total Productivity – computed as ratio of output to all organizational inputs
Partial Productivity – computed as a ratio of output to only one input
Multifactor productivity – computed as a ratio of output to several inputs
Total Productivity
Output
All inputs
Partial Productivity
Output or Output
Labor
machines
e.g. Labor productivity =
(Total productivity)
Multifactor Productivity
Output
or
Output
Labor + machines
Labor + capital + energy
3 officers x 5 loans/day
24 labor-hours
Notes
Trends in OM – Service sector is growing
Service / Manufacturers – Technology is not only technology but also regulations etc.
OM decisions
o
o
strategic decisions
tactical decisions
Chapter 3: Product Design and Process Selection
Service design – Process of establishing all characteristics of the service (incl. physical,
sensual and psychological benefits)
Product Design Process
Idea
Development
Product Screening
Preliminary
Design & Testing
Final Design
Idea development
Benchmarking: process of studying the practices of companies considered “best in class”
and comparing your company’
s performance against theirs
benchmark against a company completely different line of business also possible
Reverse engineering: process of disassembling a product to analyze its design features
Early supplier involvement (ESI): Involving suppliers in the early stages of product
design
Product screening
After product idea is developed it is evaluated to determine its likelihood of success.
Issues like Operations, Marketing and Finance will be explored.
Break-even analysis: technique used to compute the amount of goods a company would
need to sell to cover its costs. Useful tool at product screening stage!
Fixed costs: costs a company incurs regardless of how much it produces
Variable costs: costs that vary directly with the amount of units produced
Total cost
F + (VC) Q
F = fixed cost
VC = variable cost per
unit
Q = number of units
sold
Revenue
Total cost = total
revenue
Break-even
quantity (QBE)
F + (VC) Q = (SP) Q
F
SP - VC
(SP) Q
SP = Selling price
per unit
Preliminary Design & Testing
Prototypes are built and tested. For service companies this may entail testing the offering
on a small scale and working with customers to refine the service offering
Final Design
The final specifications are then translated into specific processing instructions to
manufacture the product.
Product design must support the business strategy
Factors impacting product design
Design for manufacture (DFM): guidelines to follow in order to produce a product easily
and profitably (design simplification, design standardization)
Product life cycle: a series of stages that products pass through in their lifetime
1. Introduction
2. Growth
3. Maturity
4. Decline
Concurrent Engineering: approach that brings together multifunction teams in early
phase of product design in order to simultaneously design the product and the processes
Remanufacturing: concept of using components of old products in production new ones
Process selection
Production processes
o Intermittent operations (variety of products with different processing
requirements in lower volumes) / project processes & batch processes!
o Repetitive Operations (used to produce one or a few standardized products in
high volume) / line processes & continuous process!
Intermittent operations; tend to organize their resources by grouping similar processes
together and having product routed through facility based on their needs. Provide great
flexibility but have high material handling costs and challenge scheduling resources.
Repetitive operations; arrange resources in sequence to allow for an efficient buildup of
product. Highly efficient but inflexible.
Design Process
Product
design
Low
Production
design
Process
High
Project
process
Batch
process
Product
Standardiz
ation
Variety
Line
processes
Low
Continuous
processes
High
Low
Product Volume
High
Designing processes
Process flow analysis – technique used for evaluating a process with goal of improving its
design
Process flowchart – viewing sequence of steps involved in producing product. Tool for
seeing totality of operation and for identifying potential problem areas.
Bottleneck – longest task in process
Make-to-stock strategy – produces standard products / services for immediate
sale/delivery
Assemble-to-order strategy – produces standard components that can be combined to
customer specifications
Make-to-order strategy – produces products to customer specifications after order
received
Process performance metrics: Measurements of different process characteristics that
tell how a process is performing
Measure
1. throughput time
2. process velocity =
Throughput time
Value-added time
3. productivity =
Output
Input
4. utilization =
Time a resource used
Rime a resource available
5. efficiency =
Actual output
Standard output
Definition
Average amount of time product takes to
move through system
Measure of wasted time in system
Measure how well company use its resources
Proportion of time a resource is actually used
Measure performance relative to a standard
Linking product design and process selection
Decision
Intermittent operations
Product design
early stage of product life cycle
Competitive priorities delivery, flexibility, quality
Facility layout
resources grouped by function
Product strategy
make-to-order/assemble-to-order
Vertical integration
low
Repetitive operations
later stage in life cycle
cost & quality
resources arranged in line
make-to-stock
high
Product design – focus on producing products in different stage of product life cycle
Products are in case of intermittent operations for general purpose and can be adapted to
needs of product
Vertical integration – the larger the number of processes performed by company in chain
from raw materials to product delivery, the higher the vertical integration
Technology decisions
Advancements in technology have had the greatest impact on process design decisions.
It significantly enhances products and process design.
Information technology
Automation
E-manufacturing
ERP – enterprise
resource planning
FMS – flexible
manufacturing system
GPS – global positioning
systems
NC – numerically
controlled machine
CAD – computer-aided
design
CIM – computerintegrated
manufacturing
RFID – radio frequency
identification
Designing services
More complexities than manufacturing (services produce intangible product and high
degree customer contact).
Different service designs include substituting technology for people, getting customer
involved, and high customer attention approach.
The higher the degree of Labor Intensity the lower the degree of service standardization.
Low labor intensity/low degree customer contact: warehouses, distribution centers etc.
High Labor intensity/high degree customer contact: restaurant, schools, hospitals etc.
Chapter 4: E-commerce and Supply Chain Management
E-commerce – use of Internet and web to transact business
E-business – transactions and processes within organization
Types of E-commerce
B2B (Business-to-Business) E-commerce: companies sell to other business
Evolution:
1970’
s - begins with Automated order entry system
Method using telephone models to send digital orders to suppliers
late 1970’
s – electronic data interchange (EDI)
Form of computer-to-computer communications that enables sharing
business documents
mid-1990’
s – electronic storefronts
Online-catalogs of products made available to general public by singl
supplier
late 1990’
s – Net marketplaces
Suppliers and buyers conduct trade in single Internet-based environment
Benefits B2B E-commerce
Lower procurement administrative costs
Low-cost access to global suppliers
Lower inventory investment due price transparency and reduced response times
Better product quality because increased cooperation between buyers and sellers
B2C (Business-to-Customer) E-commerce: on-line business try reach individual consumer
Different models to generate revenue
Advertising revenue – Provides users with info on services and products and
provides an opportunity to advertise
Subscription revenue model – web site that charges subscription fee for access
Transaction fee model – company receives fee for executing transaction
Sales revenue model – means of selling goods, info, or services directly to cust.
Affiliate revenue model – companies receive referral fee for directing business to
an affiliate
C2C (Customer-to-Customer) E-commerce: Consumers sell to each other with the help of
an on-line market maker
P2P (Peer-to-Peer) E-commerce: Users are linked and so are able to share files and
computer resources without a common server
M-commerce: Access is provided to anyone, anytime, anywhere, using wireless devices
Supply Chain
Network of all activities involved in delivering a finished product to customer
Supply Chain Management – Coordinates and manages all activities of supply chain. It
provides streamlined communications between suppliers and company, thus reducing
purchasing lead time (lower inventory levels). Improved communications also improve
demand-forecasting accuracy (reduces uncertainty). Lower inventory levels mean lower
costs while maintaining customer service levels. Improved demand forecast accuracy also
contributes to development of better staffing plans (lower personnel costs, lower
inventory costs, improved customer services)
Company supply chain structure has three components:
1. External suppliers
2. Internal processes
3. External distributors
1. External suppliers
Tier one supplier / tier two supplier …… (Tier one – provides directly to processing
facility)
2. Internal processes
Internal functions are for example:
Processing, purchasing, production, planning and control, quality assurance and
Shipping
3. External distributors
Logistics includes traffic management (responsible for arranging the method of shipment
for both incoming and outgoing products or materials)
Distribution management – responsible for movement of material form manufacturer to
customer
Bullwhip effect
Inaccurate or distorted demand information created in supply chain. The more levels that
exist, the more possible distortion. Variability results from updating demand estimates at
each level, order batching, price fluctuations, and rationing.
Counteracting bullwhip effect:
o Product demand information available from final seller to all levels supply chain
o Eliminate order batching; Lower ordering costs eliminate need for batch orders.
o Stabilize prices; Discourage forward buying
o Eliminate gaming; Manufacturers can allocate products in proportion to past sales
Factors affecting SCM
The power is shifted from suppliers to consumers
o consumer expectations and competition (customer demand better service)
o better product quality
o quick response at reasonable price
o ability to return merchandise
o New markets have crated global marketplace
o Evolution of on-line marketplaces changed the way companies do business
Additional factor for global Supply Chains
Greater geographical distances between members of SC causing greater uncertainty in
delivery times. This result in increased investment in pipeline inventory (e.g. carry
additional safety stock) and exacerbates (verergert) bullwhip effect.
o Forecasting accuracy is often poorer
o Fluctuating exchange rates further complicate global supply change
o Many possible infrastructure issues that company may face
o inadequate transport
o limited telecommunication capabilities
o uncertain power continuity
o low skill levels of workers
o poor supply availability
Vertical integration
How much of supply chain is actually owned or operated by manufacturing company
Organizations determine appropriate level of vertical integration based on corporate
objectives. Standardized products higher levels of integration than customized products.
Insource – processes / activities completed in-house
Outsource – processes / activities completed by suppliers
Make-or-buy decisions are based on financial / strategic criteria. Companies outsource
activities that are not part of core competencies
Backward integration – owning or controlling sources of raw materials and components
Forward integration – owning or controlling channels of distribution
Insourcing vs outsourcing decisions
In-house when:
The product or service is critical to company’
s success or
The product or service I one of company’
s core competencies or
Is it something company must do to survive?
Total cost buying product
TCBuy = FCBuy + (VCBuy x Q)
TC = total annual cost of buying
FC = fixed annual costs associated with buying
VC = variable costs per unit
Q = quantity of units
Total cost making item in-house
TCMake = FCMake + (VCMake x Q)
Role of purchasing
Ethics is in Supply Management an ongoing concern. Institute for Supply Management
has established set of principles and standards to guide purchasing employees.
How many suppliers?
Operations like make-to-order products deals with single supplier.
It can improve quality of finished product by ensuring consistency of input materials.
On other hand, multiple suppliers reduce risk of disrupted supply. Further, it is easier to
support changing quantity requirements (flexibility of volume). Government regulations
may require use of multiple suppliers for some operations as well.
If company wants to integrate its supply chain, partnering or using single supplier makes
sense.
Partners share information, risks, technologies and opportunities. Impact, intimacy and
vision are critical to successful partnering. Impact means attaining higher levels of
productivity and competitiveness. Impact comes from reducing duplication and waste,
leveraging core competencies and creating new opportunities. Vision is shared objective.
Benefits of partnering – ESI (Early supplier involvement) Involvement of critical suppliers
in new product design
Characteristics Partnership Relations:
o Long-term orientation
o Strategic in nature
o Share information
o Share risk / opportunities
o Share common vision
o Share short= and long-term plans
o Driven by end customer expectations
Information sharing
Technology like bar coding, EDI and point-of-sale (POS) terminals have improved
demand data collection and has greatly reduced cost of developing a common database
for SCM.
Role of Warehouses
Three roles:
1. Transportation consolidation
2. Product mixing or blending
3. Service
Warehouses
1. Consolidate less-than-truckload (LTL) quantities into truckload (TL) quantities.
2. Realize product mixing that adds value for customers because warehouse groups
items and ships them directly to customer.
3. Improve customer service by placing goods closer to customer in order to reduce
response time or by customizing basic products before they are shipped to
customer.
Crossdocking – Eliminates storage and order-picking functions of distribution warehouse
Types of crossdocking:
1. Manufacturing – receiving and consolidating inbound suppliers and materials to
support JIT manufacturing
2. Distributor – receiving and consolidating inbound products from different vendors
into multi-SKU pallet
3. Transportation – Consolidation of LTL shipments to gain economies of scale
4. Retail – sorting product from multiple vendors onto outbound truck headed for
specific stores
Advantages crossdocking:
1. retailer reduces inventory holding costs (replacing inventory with info and
coordination)
2. consolidate shipments to achieve truckload quantities and significantly reduce
company’
s inbound transportation costs
RFID – new wireless technology designed to make order tracking easier
Measuring SC performance
In addition to regular performance (ROI, profitability, market share, etc.) a company
must also measure activities that reflect objectives of SC (on-time delivery, customer
service levels, inventory investment, etc.)
Current trends SCM
Most advance in e-commerce with regart to SCM is use of electronic marketplaces. Net
marketplaces are classified by types of goods supplied (direct or indirect) and types of
purchases made (contractual or spot) E-distributors are most common form of net
marketplace.
E-distributors – independently owned net marketplaces having catalogs representing
thousands of suppliers designed for spot purchases
E-purchasing – companies connect on-line MRO suppliers to businesses who pay fees to
joint the market, usually for long-term contractual purchasing
VCM (Value Chain Management) A firm’
s purchasing or selling processes are automated
Exchanges – marketplace focuses on spot requirement of large firms in single industry
Industry consortia – Industry-owned markets enable buyers to purchase direct inputs
from limited set of invited suppliers
Chapter 5: Total Quality Management (TQM)
TQM – an integrated effort designed to improve quality performance at every level of
organization
Customer defined quality – meaning of quality as defined by customer
TQM is different from the old concept of quality because its focus is on serving
customers, identifying causes of quality problems and building quality into production
process.
Defining Quality
Most common quality definition in manufacturing is Conformance; the degree to which a
product characteristic meets preset standards.
Quality definition in service organization is difficult. Since a service is experienced
perceptions can be highly subjective. Including courtesy (hoffelijkheid), friendliness of
staff, promptness in resolving complaints and atmosphere.
Cost of quality
Quality has many other costs:
1. Quality control costs; prevention costs & Appraisal costs
2. Quality failure costs; internal & external failure costs.
Prevention costs – costs incurred in process of preventing poor quality form occurring
Appraisal costs – costs incurred in process of uncovering defects (e.g. cost of quality
inspection or product testing etc)
Internal failure costs – costs associated with discovering poor product quality before
products reaches customer
External failure costs – costs associated with quality problems that occur at customer site
The earlier defects are found, the less costly they are to correct
External failure costs tend to be particularly high for service organizations since customer
spends much time in service delivery systems and fewer opportunities to correct.
Evolution of TQM
Meaning of quality for businesses changed dramatically in late 1970’
s. Before quality was
still viewed as something that needed to be inspected and corrected. However many U.S.
industries lost market share to foreign competition. To survive, companies had to make
major changes in their quality programs. Quality began to have strategic meaning.
The term used for today’
s new concept of quality is TQM.
Taguchi is known for applying a concept called design of experiment to product design. It
is based on developing robust design that results in a product that can perform over a
wide range of conditions.
He also stated that the smaller the variation around the target, the better the quality.
Loss function – costs of quality increase as a quadratic function as conformance values
move away from the target.
Philosophy of TQM
The focus is on identifying root causes of quality problems and correcting them at the
source. 7 Features of TQM combine to create the TQM philosophy:
o customer focus, continuous improvement, employee empowerment, use of quality
tools, product design, process management, and managing supplier quality.
Quality is customer driven. The company’
s focus is on its customers to identify and meet
customer needs.
Continuous improvement (kaizen). Philosophy of never-ending improvement. Two ways:
1. Plan-do-study-ac cycle (A diagram that describes the activities that needs to be
performed to incorporate continuous improvement into operation);
2. Benchmarking (Studying the business practices of other companies for purposes
of comparison).
Employee empowerment. empower all employees to seek out quality problems and
correct them. It places great emphasis on teamwork as well. One of the most common
types of teams is quality circle – A team of volunteer production employees and their
supervisors who meet regularly to solve quality problems.
Use of quality Tools. 7 problem-solving tools are used in managing quality (tools of
quality control):
1. cause-and-effect diagram;
2. flowchart;
3. checklist;
4. control charts (Chart used to evaluate whether a process is operating within set
expectations) Important tool!;
5. scatter diagrams (how 2 variables are related to each other);
6. pareto analysis;
7. histogram.
Product design. Quality function deployment (QFD) is a tool used to translate customer
needs into specific engineering requirements.
House of quality – resulting matrix when requirements are numerically scored based on
importance, scores translated into specific product characteristics and evaluation are be
made of how the product compares with its main customers.
Reliability - probability that a product, service or part will perform as intended.
Rs = (R1) (R2)…(Rn)
Rs = reliability of product or system
R1….n = reliability of components 1 through n
Rs = .95 + ((.9) x (1-.95)) = .995
Original
.95
.9
Backup
Process Management
A quality product comes from a quality process. Quality at the source – the belief that it
is best to uncover the source of quality problems and eliminate it.
Managing Supplier Quality
TQM extends the concept of quality to suppliers and ensures that they engage in same
quality practices.
Quality awards and standards
Malcolm Baldrige Award is given to companies to recognize excellence in quality
management. These criteria have become a standard for companies that seek to improve
quality. ISO 9000 is a certification based on a set of quality standards. Its goal is to
ensure that quality is built into production processes.
Why TQM efforts fail
o Lack of a genuine quality culture;
o Lack of top management support and commitment;
o Over- and under-reliance on statistical process control (SPC) methods.
Chapter 7: Just-In-Time and Lean Systems
JIT philosophy – get right quantity of goods at right place at right time
JIT-waste – anything that does not add value
Developed by Toyota Motor Company in mid-1970’
s
Philosophy JIT
JIT is a philosophy based on elimination of waste. Another way to view JIT is to think of it
as a philosophy of value-added manufacturing.
Defining beliefs of JIT:
o Broad view of operations;
o Simplicity;
o Continuous improvement;
o Visibility;
o Flexibility.
Broad view of organization
Tasks/procedures are important only if they meet company’
s overall goals. Everyone
work toward same goal, which is serving customer.
Simplicity
JIT is build on simplicity – the simpler solution the better
Continuous improvement (kaizen)
Major aspect of JIT philosophy is emphasis on quality. Continuous improvement in every
aspect of operation is cornerstone of this philosophy.
Visibility
Part of JIT philosophy is to make all waste visible. Problems must be visible to be
identified and solved.
Flexibility
A company can quickly adapt to the changing needs of its customers. JIT was based on
need for survival, and survival means being flexible in order to adapt to changes in
environment (e.g. able to make changes in volume of a product produced / produce wide
variety of products).
Elements of JIT
JIT
Manufacturing
Total Quality
Management
Respect for
people
JIT Manufacturing
The element of JIT that focuses on production system to achieve value-added
manufacturing
The manufacturing process in JIT starts with a final assembly schedule (master
production schedule – usually fixed for few months into future). Same amount of each
product is produced in same order every day.
The JIT-coordination system relies on cards (kanban) to pull needed products through
the production system. The system enables right quantities of parts to arrive when they
are needed precisely where they are needed. Low inventory costs are realised because of
the quantity which is needed will be produced immediately.
Key elements of JIT manufacturing are:
o Pull system and kanban production (specifies what is needed);
o Small lot sizes and quick setups;
o Uniform plant loading;
o Flexible resources;
o Streamlined layout.
Push systems (traditional) anticipate future demand and produce in advance. Setup costs
are high in traditional systems.
Total Quality Management
TQM – Integrated effort designed to improve quality performance at every level of
organization; it permeates (doordringt) every activity and function. Traditional quality
control systems use concept of acceptable quality level (AQL).
The concepts of continuous improvement and quality at the source are integral
parts that allow for continual growth and the goal of identifying the causes of quality
problems:
o Quality at the source – uncovering root cause of a quality problem;
o Continuous improvement goes beyond JIT manufacturing; It includes
improvement worker skills, supplier quality and relationships even performance of
management.
Respect for people
JIT considers people to be the organization’
s most important resource. All employees are
highly valued members of organization. Workers are empowered to make decisions and
are rewarded for their efforts. Team efforts make possible cross-functional and multilayer
coordination.
“Example gratia”:
o Managers spend time on production floor;
o JIT believes in developing long-term relationships with suppliers in partnership
format.
JIT Manufacturing
Kanban production
A card specifies the exact quantity of product that needs to be produced. Kanban is
attached to a container.
To control movement of empty and full containers, 2 types of cards: production &
withdrawal cards.
Formula to compute number of kanbans needed:
N = DT + S
C
N = number of kanbans or containers
D = Demand rate at using workstation
T = Time it take to receive an order from previous workstation (lead time)
C = Size of container
S = Safety stock (protect against variability / uncertainty)
Demand (D) and lead time (T) have to be in same time units!
Variation of Kanban Production
Actual cards do not exist in many facilities; may be as empty place on the floor (kanban
square)
Kanban can also be used to coordinate delivery of goods by suppliers (supplier kanbans).
Suppliers bring filled containers to the point of usage and at same time pick up empty
container.
Small lot sizes and quick steps
Principal way of eliminating inventory and excess processing while increasing flexibility is
through small-lot production. Production companies have to reduce setup time. The goal
is to achieve single setups. One approach is separate setup into two components:
o Internal setups – Internal setups require machine to be stopped for setup;
o External setups - External setups can be performed while machine is still running.
Almost all setups in traditional manufacturing systems are internal. With JIT much of
setup process has been converted to external setups.
Uniform Plant Loading
Sudden increases/decreases will be eliminated by JIT through making adjustments
(aanpassingen) as small as possible and setting a production plan that is frozen; uniform
plant loading.
Uniform plant loading – a constant production plan for a facility with a given planning
horizon (e.g. 1 month)
Flexible resources
Key element of JIT is having flexible resources. One aspect is relying on general-purpose
equipment capable of performing a number of different functions. General-purpose
equipment provides flexibility of operations and eliminates waste of space (e.g. all-in-one
copier, printer & scanner).
Another element; Multifunction workers – capable of performing more than 1 job
Facility layout
JIT also relies on cell manufacturing – placement of dissimilar machines and equipment
together to produce a family of products with similar processing requirements.
Equipment in a work cell is usually arranged in a U shape, with worker placed in center of
U. Advantages:
1. Use of cells provides production efficiency with flexibility to produce a variety of
different products;
2. U shape allows workers to have easy reach and flexibility;
3. Worker satisfaction is higher because of ability to perform a variety of tasks.
TQM
Strategy of quality improvement:
1. define quality as seen by customer;
2. translate customer needs into measurable terms;
3. measure quality on an ongoing basis;
4. set improvement targets and deadlines;
5. develop systematic method for improvement.
Product versus process
In JIT the quality of product is distinguished from quality of process. A faulty product is a
result of a faulty process. So, process needs to be corrected in order to address the root
cause of problem.
Quality at the source
Jidoka – authority given to workers to stop production line if a quality problem is
detected
JIT systems usually operate with 7 h. of production and 1 h. for problem solving and
working with teams; called undercapacity scheduling.
To help workers identify quality problems, JIT relies on visual signals:
o kanban control
o colour coding etc.
Poka-yoke – foolproof devices or mechanisms that prevent detects from occurring
The device could be a clamp (klem) that can be placed only in a certain way.
Preventive maintenance
To avoid unexpected machine stoppages, costs are significantly higher than regular
inspection. Preventive maintenance is designed to keep machines operational.
Work environment
Order and simplicity are considered highly important – it creates a calm, clear mind
environment. It is easy to see if something out of order.
Respect for people
JIT relies on cross-functional worker kills, ability of workers to perform many different
tasks on many different machines.
Participation by all employees is vital to success of JIT. JIT uses a style of management
called bottom-round management. Decisions are discussed at all levels. It’
s very slow
but achieves consensus among all involved.
Everyone work together; Quality circles popular – small teams of employees that
volunteer to solve quality problems. Meetings are usually weekly and attempt to develop
solution to problems and share them with management.
Lifetime employment
Toady lifetime employment comprises relatively small percentage of total workforce. But
a company must do certain things to reduce employee insecurity and encourage trust
and openness. Some possibilities:
o Commit policy of making no layoffs as result of productivity improvements;
o If company performs well, workers will share in rewards through bonuses.
Role of management
o responsible for creating JIT culture;
o serve as coaches and facilitators;
o develop incentive system that rewards workers for their efforts;
o develop employee skills necessary to function in JIT environment;
o ensure that workers receive multifunctional training;
o facilitate teamwork.
Supplier relationships
o suppliers viewed as external factory;
o use of single-source suppliers;
o long-term supplier relationships developed;
o suppliers locate near customer;
o stable delivery schedules;
o cost and information sharing.
Single-source supplier – suppliers that supply entire family of parts for one manufacturer
Benefits of JIT
1. reduction in inventory
3. improved quality
5. reduced space requirements
7. shorter lead times
2.
4.
6.
8.
lower production costs
increased machine utilization
greater flexibility
increased productivity
Implementing JIT
To implement JIT successfully a company does not need sophisticated systems;
What is needed are:
o Correct attitude
o
o
employee involvement
continuous improvement
Some changes need to be implemented before others:
Make quality improvements -> reorganize workplace -> reduce setup times -> reduce lot
sizes and lead times -> implement layout changes -> switch to pull production ->
develop relationship with suppliers.
Implementation is never complete, because improving performance is a never-ending
task. As new problems become visible, they must be solved before further reductions in
inventory are made.
JIT in services
JIT is equally applicable in service organizations, particularly with the push toward timebased competition and the need to cut costs.
JIT success is dependent on interfunctional coordination and effort. Marketing must work
closely with customers to define customer-driven quality. IS must design a powerful
information system. Engineering must develop equipment with low setups and design
jobs with foolproof devices. Finance must monitor financial improvements with realistic
expectations. Accounting must develop appropriate costing mechanisms.
Chapter 8: Forecasting
Principles of forecasting
1. Forecasts are rarely (zelden) perfect. Goal: generate good forecasts on the
average over time and keep forecast errors as low as possible;
2. Forecasts are more accurate for groups or families of items rather than individual
items;
3. Forecasts are more accurate for shorter than longer time horizons.
Steps
1.
2.
3.
4.
5.
in forecasting process
Decide what to forecast;
Evaluate and analyze appropriate data;
Select and test forecasting model;
Generate forecast;
Monitor forecast accuracy.
Types forecasting methods
Qualitative methods
1.
Based on human judgment, opinions;
Characteristi
subjective & nonmathematical
cs
2. Strengths
Can incorporate latest changes in
environment and “inside information”
3.
Weaknesses
Can bias forecast and reduce forecast
accuracy
Qualitative methods ->
Quantitative methods
Based on mathematics;
quantitative in nature
Consistent & Objective; able to
consider much info and data at
once
Often quantifiable data are not
available.
often used for long-period expectations
generate forecast based on subjective opinion forecaster
Qualitative methods
Type
Characteristics
Executive
Group managers come up
opinion
with forecast
Market
Uses surveys and interviews
Strengths
Good for strategic or
new-product forecasting
Good determinant
Weaknesses
One person’
s can
dominate
Can be difficult to
research
Delphi
method
to identify customer
preferences
Seeks to develop consensus
(overeenstemming) among
group of experts
customer preferences
develop good
questionnaire
Excellent for forecasting
long-term product
demand, technical
changes & scientific
advances
Time consuming
to develop
Quantitative methods
Time series models
Causal models
Quantitative Forecasting models
Type
Description
Time series Models
Naïve
Uses last period’
s
actual value
Simple mean
Simple moving
average
Weighted moving
Average
Ft+1 = ? CtAt
Exponential
smoothing
Trend adjusted
exponential
smoothing
Linear trend line
Seasonal indexes
Causal Models
Linear regression
Strengths
Weaknesses
Simple & Easy to
use
Only good if data
change little from
period to period
Requires carrying
lot of data
Important to select
proper moving
average
Uses average of
past data
Method in which
only n of most
recent observations
are averaged
Method where n of
most recent
observations are
averaged and past
observations
Weighted average
procedure with
weight declining
exponentially as
data become older
An exponential
smoothing model
with separate
equations for
forecasting level
and trend
Technique uses
least squares
method to fit
straight line to past
data over time
Computes
percentage amount
by which data for
each season are
above / below mean
Good for level
pattern
Only good for level
pattern
Uses least square
method to model
linear relationship
Good for level
pattern; allows
placing different
weight on past
demands
Proved excellent
forecast results for
short to medium
length forecasts
Selection of weight
required good
judgement
Proved good results
for trend data
Only for data with
trend
Easy to use and
understand
Data should display
clear trend over
time
Simple and logical
procedure for
computing
seasonality
Make sure
seasonality is
actually present
Easy to understand;
provides good
forecast accuracy
Make sure linear
relationship is
present
Choice of alpha is
critical
Multiple regression
between 2 variables
Similar to linear
regression, but
models the
relationship of
multiple variables
with variable begin
forecast
Powerful tool in
forecasting when
multiple variables
are considered
Significantly
increases data and
computational
requirements
Time series models
Types of data patterns:
o Level of horizontal: data fluctuate around constant mean (e.g. product in mature
stage);
o Trend: pattern which data exhibit increasing/decreasing values of time;
o Seasonality: pattern that regularly repeats itself and is constant in length;
o Cycles: Data patterns created by economic fluctuations.
Random variation cannot be predicted.
Forecasting Level or Horizontal Pattern
Naïve method
Simple mean / average
Ft + 1 = At
Ft = forecast next period, t + 1
At = actual value current period, t
t = current time period
Ft+1 = ? At
N
Smaller number of
observations? more
Simple moving average (SMA) is
responsive forecast to
similar to simple average except not
changes in demand
taking average of all data but most
recent periods
Ft+1 = ? CtAt
Ct = weight placed on actual
e.g. = (.25)AMay +
Weighted Moving Average
value period t
(.25)AJune + (.5)AJuly
At = actual value in period t
Ft + 1 = aAt + (1 - a)Ft
Most frequently used
At = actual value current
Exponential smoothing model
period t
forecasting
techniques
Ft = forecast current period t
a = smoothing coefficient
Small a? Low influence to actual data! Even more stable and less variation!
Forecasting Trend
Trend-Adjusted Exponential smoothing
S = exponentially smoothed average
T = exponentially smoothed trend
a = smoothing coefficient of level
ß = smoothing coefficient trend
Step 1: Smoothing level of
series
St = aAt + (1-a)(St-1 + Tt-1)
Step 2: Smoothing Trend
Tt = ß(St-St-1) + (1- ß)Tt-1
Step 3: Forecast
Incl. Trend
FITt+1 = St +Tt
Linear Trend Line
Technique that computes forecast with trend. Useful for computing forecast when data
display a clear trend over time.
Y = a + bX
Step 1: computer parameter b
Step 2: compute parameter a
Y = forecast for period X
X = number of time periods from X = 0
Step 3: generate linear trend line
Step 4: Generate a forecast
Forecasting Seasonality
Seasonal index – percentage amount by which data for each season are above/below the
mean
Step
Step
Step
Step
Step
1:
2:
3:
4:
5:
calculate average demand each quarter / season
compute seasonal index for every season
calculate average demand per season next year
multiply next year’
s average seasonal demand by each seasonal index
multiply next year’
s average seasonal demand by each seasonal index
Causal models
Linear Regression
Procedure that models a straight-line relationship between two variables
Correlation Coefficient
Statistic that measures the direction and strength of the linear relationship between 2
variables
Multiple Regression
Is an extension of linear regression. It develops a relationship between 1 dependent
variable and multiple independent variables.
Measuring Forecast Accuracy
Forecast error = difference between forecast and actual value for a given period.
Et = forecast error for period t
Et = At – Ft
At = actual value for period t
Ft = forecast for period t
MAD = Mean absolute deviation
MSE = Mean squared error
MAD is based on absolute values
Comparing different forecasting models? MSE
Tracking signal
Forecast bias = persistent tendency for a forecast to be over/under actual value of data
Tracking signal = tool used to monitor the quality of a forecast
Selecting right forecast model
4 factors:
1. amount and type of data available;
2. degree of accuracy required;
3. length of forecast horizon;
4. Patterns present in data.
Chapter 9: Capacity planning and facility location
Capacity planning
Capacity – maximum output rate that can be achieved by a facility
Capacity planning is deciding on the maximum output rate of a facility
Measuring available capacity
o Design capacity – maximum output rate under ideal conditions
o
Effective capacity – maximum output rate under normal conditions
Calculating capacity:
(How well capacity is used)
actual output
effective capacity
actual output
design capacity
Best operating level: volume of output that results in lowest average unit cost
Economies of scale – condition in which the average costs of a unit produced is reduced
as the amount of output is increased
Diseconomies of scale – condition in which the cost of each additional unit made
increases
Focused factories – facilities that are small, specialized, and focused on a narrow set of
objectives
Making capacity planning decisions
Step 1: Identify capacity requirements;
Forecasting capacity
Capacity cushions – (additional capacity added to regular capacity
requirements to provide greater flexibility)
Strategic implications
Step 2: Develop capacity alternatives;
3 options:
Do nothing;
Expand large now;
Expand small now with option to add later.
Step 3: Evaluate capacity alternatives.
Decision Trees
to choose between capacity planning alternatives managers may use decision trees,
which are a modelling tool used to evaluate independent decisions that must in
sequence.
Procedure for drawing a decision tree: work from left to right with the indicate chance
events. To solve a decision tree; work from right to left to give the EV (Weighted average
of chance events, where each chance event is given a probability of occurrence).
e.g. EV = 0.3 (€80.000) + 0.7 (€200.000) = € 164.000
Location analysis
Location analysis is deciding on the best location for a facility
Factors affecting location decisions: proximity to sources of supply, to customers, to
source of labour, community considerations, site considerations, quality-of-life issues,
other considerations.
Globalization – process of locating facilities around the world.
Capacity planning and location analysis decisions are often made simultaneously because
the location of a facility is usually related to its capacity. When a business decides to
expand, it usually also addresses the issue of where to locate. These decisions are very
important because they require long-term investments in buildings and facilities, as well
as a sizable financial outlay.
Also, if capacity planning and location analysis are not done properly, a business will not
be able to meet customer demands or may find that it is losing customers due to lack of
proximity to the market.
Procedure for making location decisions
Step 1: identify dominant location factors;
Step 2: develop location alternatives;
Step 3: evaluate location alternatives.
Several tools can be used to facilitate location analysis. Factor rating is a tool that helps
managers evaluate qualitative factors. The load-distance model and center of gravity
approach evaluate the location decision based on distance. Break=even analysis is used
to evaluate location decisions based on cost values. The transportation method is an
excellent tool for evaluating the cost impact of adding sites to the network of current
facilities.
Factor rating – procedure that can be used to evaluate multiple alternative locations
based on number of selected factors
Load-distance model – procedure for evaluating location alternatives based on distance
Computing the Load-Distance Score for Springfield
City
Load
Distance
ld
Cleveland
15
20.5
307.5
Columbus
10
4.5
45
Cincinnati
12
7.5
90
Dayton
4
3.5
14
Total
Load-Distance Score(456.5)
Computing the Load-Distance Score for Mansfield
City
Load
Distance
ld
Cleveland
15
8
120
Columbus
10
8
80
Cincinnati
12
20
240
Dayton
4
16
64
Total
Load-Distance Score(504)
ld score = ? lijdij (lij load between locations | dij distance between locations)
Centre of gravity approach - This approach requires that the analyst find the center of
gravity of the geographic area being considered
Computing the Center of Gravity for Matrix Manufacturing
Location
Cleveland
Columbus
Cincinnati
Dayton
Coordinates
Load
(X,Y)
(11,22)
(10,7)
(4,1)
(3,6)
(li)
15
10
12
4
41
Total
lixi
165
165
165
165
325
liyi
330
70
12
24
436
Computing the Center of Gravity for Matrix Manufacturing
?
?
li Xi 325
Break-even analysis
X
c.g.
?
?
?used
7.9 ; Yc.g. ?
Remember the break even equations
li
41
for calculation total cost of each location and
for calculating the breakeven quantity Q.
? lY
? l
i
i
i
?
436
? 10.6
41
Total cost = F + cQ
Total revenue = pQ
Break-even is where Total Revenue = Total Cost
Transportation Method
The transportation method of linear programming can be used to solve specific location
problems
Chapter 10: Facility layout
Layout planning is determining the best physical arrangement of resources within a
facility. Proper layout planning is highly important for the efficient running of a business.
Otherwise, there can be much wasted time and energy, as well as confusion.
Two broad categories of operations:
1. Intermittent processing systems
2. Continuous processing systems
Types of layouts:
1. Process layouts:
? Group similar resources together (hospital)
2. Product layouts:
? Designed to produce a specific product efficiently (assembly line)
3. Hybrid layouts:
? Combine aspects of both process and product layouts (grouped technology
or grocery stores (kruidenierswinkels) – Commonly used
4. Fixed-Position layouts:
? Product is to large to move; e.g. a building
Characteristics of process and product layouts:
Process Layouts
Products:
large #, different
Resources:
general purpose
Facilities:
more labor intensive
Flexibility: greater relative to market
Processing
Rates:
slower
Handling costs:
high
Space requirements: higher
Product Layouts
small #, efficiently
specialized
more capital intensive
lower relative to market
faster
low
lower
Process layouts provide much flexibility and allow for the production of many products
with differing characteristics. Product layouts, on the other hand, provide great efficiency
when producing one type of product.
Design process layouts
The steps in designing a process layout are:
1. Gathering info about space needs, space availability and closeness requirements
of departments; (table 10-2 & 10-3)
2. Developing a block plan or schematic of the layout;
3. Developing a detailed layout.
Another tool to provide info about importance of proximity (nabijheid) is a REL chart
(table 10-3).
REL chart – table that reflects opinions of managers with regard to importance of having
any two departments close together
Step 2: Develop block plan
o using trial and error (when a layout problem is small in scope)
o using decision support tools
Trial and error; measure effectiveness? load-distance model
Load-distance model used to compare relative effectiveness of different layouts
Load-distance score
(Rectilinear distance – shortest distance between 2 locations using north- south and
east- west movements)
Using decision support tools
2 popular software packages: ALDEP and CRAFT.
The best way to use these is to consider the software solution as a starting point in
developing a final layout.
Step 3: Develop a detailed layout
We begin to consider exact sizes and shapes of departments and work centers. We also
focus on specific work elements such as desks, cabinets and so on.
Special cases of process layout
Warehouse layouts
Layout Considerations:
o Primary decision is where to locate each department relative to the dock;
o Departments can be organized to minimize “ld” totals (load distance);
o Departments of unequal size require modification of the typical ld
calculations to include a calculation of the “ratio of trips to area needed”
e.g. Backpacks – trips to and from dock: 160, but area needed: 2 (160/2=80)
o The usage of “Crossdocking” (see Ch.4) modifies the traditional warehouse
layouts; more docks, less storage space, and less order picking.
Office layouts
Office Layout Considerations:
o Human interaction and communication are the primary factors in designing
office layouts;
o One key layout trade-off is between proximity and privacy;
o Open concept offices promote understanding & trust;
o Flexible layouts incorporating “office landscaping”help to solve the privacy
issue in open office environments.
Designing product layouts
Line balancing – process of assigning tasks to workstations in a product layout in order to
achieve a desired output and balance the workload among stations
Design product layouts
o Step 1: Identify tasks & immediate predecessors
o
o
o
o
o
Step
Step
Step
Step
Step
2:
3:
4:
5:
6:
Determine the desired output rate
Calculate the cycle time
Compute the theoretical minimum number of workstations
Assign tasks to workstations (balance the line)
Compute efficiency, idle time & balance delay
Step 1: Identify tasks & immediate predecessors
Precedence diagram: visual representation of the precedence relationships between tasks
Immediate predecessor – task must be performed immediately before another task
Step 2: Determine desired output rate
Output rate – number of units we wish to produce over a specific time period
Step 3: Determine cycle time
Cycle time – maximum amount of time workstation has to complete its assigned tasks
o
The amount of time each workstation is allowed to complete its tasks
Cycle time (sec./unit) ?
o
available time ?sec./day ? 60 min/hr x 60 sec/min
?
? 60 sec./unit
desired output ?units/hr ?
60 units/hr
Limited by the bottleneck task (the longest task in a process):
Maximum output ?
available time
3600 sec./hr.
?
? 72 units/hr, or pizzas per hour
bottleneck task time 50 sec./unit
Bottleneck task – the longest task in a process
Step 4: compute theoretical minimum number of stations
Theoretical minimum number of stations: number of workstation on a line to achieve
100% efficiency
TM ?
? ?task times ? ?
cycle time
165 seconds
? 2.75, or 3 stations
60 sec/station
? t = sum of task times needed to complete 1 unit
C = cycle time
Always round up (no partial workstations)
Step 5: Assign task to workstation (balance the line)
1. Start at the first station & choose the longest eligible task following
precedence relationships
2. Continue adding the longest eligible task that fits without going over the
desired cycle time
3. When no additional tasks can be added within the desired cycle time, begin
assigning tasks to the next workstation until finished
W o rk s ta tio n
1
2
3
E lig ib l e t a s k
A
B
C
D
E, F, G
E , F
F
H
I
T a s k S e le c te d
A
B
C
D
G
E
F
H
I
T a s k tim e
50
5
25
15
15
12
10
18
15
Id le tim e
10
5
35
20
5
48
38
20
5
Step 6: Compute efficiency and balance delay
o Efficiency (%) is the ratio of total productive time divided by total time
Efficiency (%) ?
?
t
NC
?
165 sec.
?100? ? 91.7%
3 stations x 60 sec.
N = number of workstations
o
Balance delay (%) is the amount by which the line falls short of 100%
Balance delay ? 100% ? 91.7% ? 8.3%
Other considerations
o Shape of the line (S, U, O, L):
? Share resources, enhance communication & visibility, impact location of
loading & unloading
o Paced versus un-paced lines (paced, products is physically attached to line)
? Paced lines use an automatically enforced cycle time
o Single or mixed-model lines (single-model line designed to produce only one
version of product
Hybrid layouts
Hybrid layouts have advantages over other layout types because they combine elements
of both process and product layouts to increase efficiency
An example of hybrid layouts is group technology or cell layouts. Group technology is he
process of creating groupings of products based on similar processing requirements. Cells
are created for each grouping of products, resulting in a more orderly flow of products
through facility
o One of the most popular hybrid layouts uses Group Technology (GT) and a
cellular layout
o GT has the advantage of bringing the efficiencies of a product layout to a
process layout environment
Process flows after use of GT cells
Chapter 11: Work system design
Designing a work system is part of developing a operating strategy
Work
o
o
o
System design involves:
job design;
methods or process analysis
work measurement
Job Design
3 Additional factors in job design
1. technical feasibility, job must be physically and mentally doable;
2. economic feasibility, cost of job should be less than the value it adds;
3. behavioural feasibility, degree to which the job is intrinsically satisfying to
employee
Eliminating Employee Boredom
o Job enlargement, horizontal expansion by increasing scope of work;
o Job enrichment, vertical expansion by increased worker responsibility;
o Job rotation (adds direct value for company because of improved flexibility).
Team Approaches to Job design
Another option for job design is:
o Problem-solving teams, small groups, trained in problem-solving techniques;
o Special-purpose teams, Highly-focused, short-term teams addressing issues
important to management and labor;
o Self-directed teams, Team members work through consensus to plan, manage, &
control their assigned work flow.
Alternative workplace brings work to the worker rather than the worker to the workplace
(made possible by technologies).
Method Analysis - Study how a job is done
Advantages:
? Can distinguish between value-added & non-value-added steps;
? Revise the procedure to improve productivity;
? After improvement, must revise the new standard operating procedure;
? Follow-up to insure that changes actually improve the operation.
Work Measurement – Determines how long it should take to do a job
Work measurement techniques are used to set a standard time for a specific job.
Standard time is the length of time it should take a qualified worker using appropriate
process and tools to complete a specific job allowing time for personal, fatigue, and
unavoidable delays.
Used to determine standard times and are usually based on time studies. Standard times
are used for:
Product costing;
Tracking employee performance;
Scheduling and planning required resources.
Setting Standard Times
A time Study is a technique for developing a standard time based on actual observation
of the operator.
Procedure for a time study:
1. Choose the job for time study;
2. Tell worker whose job you will be studying;
3. Break job into easily recognizable units;
4. Calculate number of cycles you must observe;
5. Time each element, record the times, and rate worker’
s performance;
6. Compute normal time;
7. Computer standard time.
? ? z ?? s ? ?
n ? ? ? ?? ? ?
? ? a ?? x ? ?
Step 4 – need to know how many cycles / observe the worker
to ensure the results you want.
Start by making small number of observations so that we can
determine the sample mean (avg. x) and standard deviation (s).
z = confidence level -> table.
a = accuracy level -> normally = 5% (0.05)
Step 5 – shows mean observed time
Average of the observation times for each of the work elements.
Performance rating factor (PRF)
Subjective estimate of a worker’
s pace relative to a normal
work pace
?
?
?
?
?
n: number of observations
z: provides desired
statistical confidence
(e.g.: 1.96 for 95%)
s: observed standard
deviation in time required
to complete the task
element
a: desired accuracy or
precision
x-bar: the mean observed
time to complete the task
Frequency of Occurrence (F)
How often the work element must be done each cycle. most elements done very cycle. If
an element is done once every 5 cycles, F = 0.2
Step 6 – compute normal time
o NT=(OT)(PRF)(F)
The normal time (NT) is the mean observed time multiplied by the performance rating
factor (PRF)
Allowance factor – amount of time the analyst allows for personal, fatigue (moeheid),
and unavoidable delays. 2 Ways:
AFJOB = 1 + PFD (jobs have different allowance factors)
AFTime Worked ?
2
1
(jobs are similar and same allowance factors)
1 ? PFD
PFD = percentage allowance adjustment based on job time / time worked
Step 7 – compute standard time
o ST ? (NT)(AF)
NT = Normal time
AF = Allowance Factor
Other Time Series methods
o Elemental time data, for typical work elements from previously completed time
studies can be stored in a data base for use on future similar studies.
o Predetermined time data (e.g. MTM and MTS), is a larger database of valid
work element times used to set standards for common job elements
o Reach, grasp, move, engage, insert, turn, etc.
o Work Sampling, technique for estimating the proportion of time a worker
spends on an activity. Commonly used method!
Work Sampling
Involves random observations of a worker to determine the proportion of time spent on
each activity.
?
Step 1 – We need to estimate the number of observations needed to provide an
estimate with 97% confidence (z=2.17), and the resulting estimate will be within
5% of its true value. We use
? ? 2.17 ?
?z? ?
n ? ? ? p?1 ? p ? ? ?
? 0.5?1 ? 0.5? ? 470.89 observations
? 0.05 ?
?e?
2
?
2
Step 2 – Based on the first 30 observations the secretary was making travel
reservations 6 times (6 out of 30 observations = 0.2). With this new estimate,
recalculate the sample size needed.
2
?
? 2.17 ?
n? ?
? 0.2?1 ? 0.2? ? 302 observations
? 0.05 ?
Final Step – After making the 302 observations, the secretary was making
reservations 60 times or 19.9%. This estimate can now be used to make the
decision on savings that might result by consolidating this task with an in house
travel agency
Compensation
o Compensation is the third part of work system design
o Time-based plans (day pay) versus output-based systems (incentive pay)
o Group incentive plans: profit sharing & gain sharing
? Plans put part of a worker’
s salary at risk
? Does the compensation system undermine teamwork?
? Does plan prevent free-riders not doing their fair share?
? Does the incentive plan encourage workers to support the long-term health
of the organization?
Worker compensation systems are time-based or output-based and can be based on
individual or group performance. Time-based pays the worker on the number of hours
worked. Output-based pays the worker on the number of units completed.
Learning curves - show the rate of learning that occurs when an employee repeats the
same task over time
T x Ln = time required to perform a task the nth time
T = the time required to perform the task the first time
L = the rate of learning
n = the number of times the task has doubled
E.g. When the number of times the task is repeated doubles, the time per task reduces.
With an 85% learning curve rate, the 2nd time a task is done will take 85% of the 1st time.
The 4th time will take 85% of the 2nd.
If an employee took 12 hours to complete an initial task, how long will the 16th time take (4th
doubling)?
Hours for 16th task ? 12 x (.85)4 ? 6.26 hours
Chapter 12: Inventory Management
Types of inventory:
o raw materials;
o components;
o Work-in-process (WIP);
o Finished Goods; (products sold to customers)
o Distribution Inventory; (finished goods in the distribution inventory)
o Maintenance, repair & operating (MRO).
Inventory has several uses:
o Anticipation or seasonal inventory;
o Safety stock: buffer demand fluctuations;
o Lot-size or cycle stock: take advantage of quantity discounts;
o Pipeline or transportation inventory;
o Speculative or hedge inventory protects against some future event, e.g. labor
strike;
o Maintenance, repair, and operating (MRO) inventories.
Inventory management objectives
o Provide desired customer level;
o % of orders shipped on schedule; does not capture value;
o % of line items shipped on schedule; does not capture € value;
o % of dollar volume shipped on schedule; recognize differences in both lineitems and € value (e.g. 20 orders €400, shipped €395 = 395/400 = 98 %
service level.
o Provide cost-efficient operations;
o Buffer stock for smooth production flow; (WIP) inventory to buffer
operations;
o Maintain a level work force; no seasonal demands, e.g. no costs of
overtime;
o Allowing longer production runs (lower setup costs) & quantity discounts.
o Minimized inventory related investments.
o Inventory turnover; measure minimum inventory investment;
Annual costs of goods sold
Average inventory in dollars
o Weeks (or days) of supply.
Average inventory on hand in dollars
Average weekly usage in dollars
(the higher the number, the more effectiveness inventory)
Inventory investment is measured in inventory turnover and/or level of supply.
Inventory performance is calculated as inventory turnover or weeks, days to supply.
Relevant Inventory costs
These costs include:
Item costs
Holding costs ->
Ordering costs ->
Shortage costs ->
1. Capital costs;
2. Storage costs;
3. Risk costs.
Fixed costs for placing a order
Costs related to additional paperwork,
shipping expense and intangible cost of
lost customer goodwill
Calculating annual holding cost rate =
(% of capital cost + storage cost + risk cost) x average inventory
Shortage costs
Back order – delaying delivery to the customer until item becomes available
Lost sale – Occurs when customer is not willing to wait for delivery
Determining order quantities
Stock-Keeping Unit (SKU) = an item in a particular geographic location
Some common approaches in ordering:
Lot-for-Lot
Order exactly what is needed
Fixed-order
quantity
Min-max system
Order n periods
Order a predetermined amount each time an order is placed (Q
system)
When on-hand inventory falls below predetermined minimum, order a
quantity that take inventory back to predetermined maximum
Order enough to satisfy demand for the next n periods
Smaller lot sizes give a company flexibility and shorter response times. The key to
reducing order quantities is to reduce ordering or setup times.
Mathematical models for determining order quantity
3 Mathematical models:
? Economic Order Quantity (EOQ or Q System)
? An optimizing method used for determining order quantity and reorder
points;
? Part of continuous review system which tracks on-hand inventory each
time a withdrawal is made.
? Economic Production Quantity (EPQ);
? A model that allows for incremental product delivery.
? Quantity Discount Model.
? Modifies the EOQ process to consider cases where quantity discounts are
available.
? EOQ = continuous review system
EOQ Assumptions:
? Demand is known & constant - no safety stock is required
? Lead time is known & constant
? No quantity discounts are available
? Ordering (or setup) costs are constant
? All demand is satisfied (no shortages)
? The order quantity arrives in a single shipment
Reorder point
R = dL
d = avg. daily demand
L = Lead time (days)
Calculating Inventory
Total annual cost = annual ordering cost + annual holding costs
TC = total annual / inventory cost
D = annual demand
? D? ? Q?
2DS
Q = quantity to be ordered
TCQ ? ?? ?? S ? ? ? H; and Q ?
H
? Q? ? 2 ?
H = holding cost
S = ordering or setup cost
Calculating EOQ
Q?
D = annual demand
S = ordering or setup cost
H = holding cost
2DS
(Kennen!)
H
After calculating the Economic Order Quantity and the Total annual cost of Inventory you
can calculate the difference between Ordering and Inventory!
? EPQ
When entire replenishment order arrives not at one time
Total cost:
TC = total annual cost
D = annual demand
?D ? ?I
?
TC EPQ ? ?? S ?? ? ? MAX H ?
Q = quantity to be ordered
?
?Q ? ? 2
H = holding cost
S = ordering or setup cost
? d?
I MAX ? Q?? 1 ? ??
? p?
Maximum inventory:
d=avg. daily demand rate
p=daily production rate
(d could also be weekly demand)
(p could also be weekly production)
Calculating EPQ
EPQ ?
2DS
? d?
H?? 1 ? ??
? p?
EPQ Problem: HP Ltd. Produces its premium plant food in 50# bags. Demand is 100,000
lbs. per week and they operate 50 wks. each year and HP can produce 250,000 lbs. per
week. The setup cost is $200 and the annual holding cost rate is $.55 per bag. Calculate
the EPQ. Determine the maximum inventory level. Calculate the total cost of using the
EPQ policy.
EPQ ?
2DS
? d?
H?? 1 ? ??
? p?
?D ?
TC EPQ ? ?? S
? ?? ?
I MAX ? QQ?? 1? ?
?
? I MAX ?
d?? ? 2 H ??
?
p ??
EPQ ?
2(50)(100,000)(200)
? 77,850 Bags
? 100,000 ?
.55? 1 ?
?
? 250000 ?
? 5,000,000 ?
? 46,710 ?
TC ? ?
? ??200 ? ? ? ?
? ?.55? ? $25,690
? ?? ?2 46 , 710
? bags
? ?? 1? 100 , 000
?MAX77,?850
77 , 850
I
?
250 , 000 ?
? Quantity Discount Model
EOQ model assumes no quantity discounts are available. This model modifies the EOQ
process to consider cases where quantity discounts are available.
?D ? ?Q ?
TC QD ? ?? S ?? ? ? H ?
?Q ? ? 2 ?
? PD
Quantity Discount Procedure:
? Calculate the EOQ at the lowest price;
? Determine whether the EOQ is feasible at that price;
o Will the vendor sell that quantity at that price?
? If yes, stop – if no, continue;
? Check the feasibility of EOQ at the next higher price;
?
?
?
?
Continue until you identify a feasible EOQ;
Calculate the total costs (including total item cost) for the feasible EOQ model;
Calculate the total costs of buying at the minimum quantity required for each of
the cheaper unit prices;
Compare total cost of each option & choose the lowest cost alternative.
Quantity Discount Example: Collin’
s Sport store is considering going to a different hat
supplier. The present supplier charges $10 each and requires minimum quantities of 490
hats. The annual demand is 12,000 hats, the ordering cost is $20, and the inventory
carrying cost is 20% of the hat cost, a new supplier is offering hats at $9 in lots of 4000.
Who should he buy from?
?
EOQ at lowest price $9. Is it feasible?
EOQ$9 ?
2(12,000)(20)
? 516 hats
$1.80
?
Since the EOQ of 516 is not feasible, calculate the total cost (C) for each price to
make the decision
12,000
?$20? ? 490 ?$2? ? $10?12,000? ? $120,980
2
490
12,000
C$9 ?
?$20? ? 4000 ?$1.80? ? $9?12,000? ? $101,660
4000
2
C$10 ?
?
4000 hats at $9 each saves $19,320 annually. Space?
Determining safety stock levels
R = reorder point in units
D = daily demand in units
R = dL + SS L = lead time in days
SS = safety stock in units
Order-cycle service level – probability that demand during lead time will not exceed onhand inventory
SS = zs dL z = number of standard deviations
s dL = standard deviation of demand during lead time in units
A 95% service level (stockout risk of 5%) has a Z=1.645
Periodic review system
Determine quantity of an item has on hand at specified, fixed-time intervals to know the
size of replenishment order.
Advantages are:
? No need for a system to continuously monitor item;
? Items ordered from the same supplier can be reviewed on the same day saving
purchase order costs.
Disadvantages:
? Replenishment quantities (Q) vary;
? Order quantities may not quality for quantity discounts;
? On the average, inventory levels will be higher than Q systems-more stockroom
space needed.
Place an order = Target inventory level – quantity on hand; Q = TI - OH
It’
s similar as the min-max system. The difference is that with periodic review system,
time between orders is constant with varying quantities ordered.
Two major decisions to be made concern time between orders and target inventory level.
Alternative to base TBO (Time between orders) on the economic order quantity
calculation (EOQ).
TI = target inventory level in units
D = average period demand in units
RP = review period
L = lead time
SS = Safety stock
Target inventory level (TI)
TI = d(RP + L) + SS
SS = zs RP+L
z = number of standard deviations
s RP+L = standard deviation of demand during review period and lead
time and is calculated as:
calculating s RP+L
->
?
? RP ? L ? ?
RP ? L
?
P System: an auto parts store calculated the EOQ for Drive Belts at 236 units and wants
to compare the Total Inventory Costs for a Q vs. a P Review System. Annual
demand (D) is 2704, avg. weekly demand is 52, weekly s is 1.77 belts, and lead time is
3 weeks. The annual TC for the Q system is $229; H=$97, S=$10.
?
Review Period
?
Target Inventory for 95% Service Level
RP ?
Q
236
x52 ? 5wks
x 52weeks ?
D
2704
TI ? d(RP ? L) ? SS ? d(RP ? L) ? zs RP ?
?
?
?
?
L
TI ? 52 units ?5 ? 3? ? ?1.645? 1.77 5 ? 3 ? 416 ? 8 ? 424 belts
Average On-Hand
OHavg= TI-dL=424-(52belts)(3wks) = 268 belts
Annual Total Cost (P System)
52
?$10? ? 268 ?$.97? ? 115 ? 130 ? $245
2
5
Annual Cost Difference ? $245 ? $229 ? ? $16
TCp ?
Comparison of continuous review systems and periodic review system
CRS has no review period and a smaller average inventory investment. PRS means less
work because inventory balances are only reviewed and updated periodically.
Single-period inventory model
Designed for use with products that are highly perishable (bederfelijk)
Characteristics single-period model:
1. Sold at regular price only during single-time period;
2. Demand is highly variable but follows a known probability distribution;
3. Salvage (berging) value of these products is less than its original cost.
Inventory decisions about perishable products (like newspapers) can be made using the
single-period inventory model. The expected payoff is calculated to assist the quantity
decision.
SPI Model Example: Tee shirts are purchase in multiples of 10 for a charity event for $8
each. When sold during the event the selling price is $20. After the event their salvage
value is just $2. From past events the organizers know the probability of selling different
quantities of tee shirts within a range from 80 to 120
Payoff
Table
Prob. Of Occurrence .20
.25
.30
.15
.10
Customer Demand 80
90
100 110 120
Profit
# of Shirts Ordered
80
$960 $960 $960 $960 $960 $960
90
$900 $1080 $1080 $1080 $1080 $1040
Buy 100
$840 $1020 $1200 $1200 $1200 $1083
110
$780 $ 960 $1140 $1320 $1320 $1068
120
$720 $ 900 $1080 $1260 $1440 $1026
Sample calculations:
Payoff (Buy 110)= sell 100($20-$8) –((110-100) x ($8-$2))= $1140
Expected Profit (Buy 100)= ($840 X .20)+($1020 x .25)+($1200 x .30) +
($1200 x .15)+($1200 x .10) = $1083
ABC Inventory Classification
A method for determining level of control and frequency of review of inventory items
4 steps for an ABC inventory analysis
1. Calculate annual dollar usage for each item;
2. List items in descending order based on annual dollar usage;
3. Calculate cumulative annual dollar volume;
4. Classify items into groups.
Justifying smaller order quantities
? JIT or “Lean Systems”would recommend reducing order quantities to the lowest
practical levels
? Benefits from reducing Q’
s:
? Improved customer responsiveness (inventory = Lead time)
? Reduced Cycle Inventory
? Reduced raw materials and purchased components
? Justifying smaller EOQ’
s:
2DS
Q?
?
H
Reduce Q’
s by reducing setup time (S).
Inventory record accuracy
2 Methods are available for checking inventory record accuracy:
1. Periodic counting;
2. Cycle counting.
Periodic counting (physical counting) – disadvantages: The job is often rushed and is
done by employees not trained for checking inventory. Inventory record errors are
increased rather than reduced.
Cycle counting – counting inventory throughout the year: Series of mini-physical
inventories done daily. A-items are counted most frequently.
Cycle counting is a method for maintaining accurate inventory records. Determining what
and when to count are major decisions.
Chapter 13: Aggregate Planning / Production Planning
The Aggregate (complexe) Plan identifies the resources needed by operations to support
the marketing Plan.
The aggregate plan is usually updated and reevaluated monthly by the operations group.
Sales and operations planning integrates plans from all functional areas and regularly
evaluates company performance. Engineering plan support the research and
development of new products introduced in marketing plan and subsequently planned for
in the aggregate plan.
Master Production Schedule (MPS)
The anticipated production schedule for the company expressed in specific configurations,
quantities, and dates.
Types of aggregate plans
Level Aggregate Plans – planning approach > same quantity each time period.
Inventory & backorders used to absorb demand fluctuations:
? Maintains a constant workforce
? Sets capacity to accommodate average demand
? Often used for make-to-stock products like appliances
? Disadvantage - builds inventory and/or uses back orders
Chase Aggregate Plans – planning approach > varies production to meet demand:
? Produces exactly what is needed each period
? Sets labor/equipment capacity to satisfy period demands
? Disadvantage - constantly changing short term capacity
Hybrid Aggregate Plans - options using various combinations of inventory,
backorders, and capacity to achieve cost and customer service objectives:
? Uses a combination of options
? Options should be limited to facilitate execution
? May use a level workforce with overtime & temps
? May allow inventory buildup and some backordering
? May use short term sourcing
Aggregate Planning Options
Demand based options – respond to demand fluctuations through inventory /
backorders, of by shifting demand pattern
? Reactive: uses finished goods inventories and backorders for fluctuations
Proactive: shifts the demand patterns to minimize fluctuations e.g. early
bird dinner prices at a restaurant
Capacity based options – allow to change its current operating capacity
? Uses overtime, undertime, subcontracting, hiring, firing, and part-timers –
cost and operational implications
?
Overtime – Work beyond normal operation hours that usually require a premium be paid
to workers. Expensive option and should only be used short-term.
Undertime – condition occurring when there are more people on the payroll than are
needed to produce planned output.
Both options -> Cost of labor per unit increases
Evaluating current situation
When considering different options, it’
s important to evaluate current situation in terms
of point of departure, magnitude of the change, and duration of the change.
? Point of departure, percentage of normal capacity is currently using;
? Magnitude of the change, relative size of the change is needed;
? Duration of the change.
Point of departure – if operating at 100% of normal capacity and need to increase
capacity by 10% -> simple option such as overtime
Magnitude of change – smaller changes are easier to implement such are increasing
workforce
Duration of change – if duration is a brief seasonal surge, hiring temporary workers
makes sense
Developing Aggregate Plan (AP)
Step 1- Choose strategy: level, chase, or Hybrid
Step 2- Determine the aggregate production rate
Step 3- Calculate the size of the workforce
Step 4- Test the plan as follows:
? Calculate Inventory, expected hiring/firing, overtime needs
? Calculate total cost of plan
Step 5- Evaluate performance: cost, service, human resources, and operations
Strategies exist that can smooth demand patterns and capacity can be changed by using
short term measures like OT (overtime) and UT (undertime). AP’
s are developed using a
5 step process starting with a desired option and ending with evaluations of costs and
customer service.
Aggregate plans for companies with tangible products (Plans A, B, C, D)
Problem Data
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
A
Cost Data
Regular time labor cost per hour
Overtime labor cost per hour
Subcontracting cost per unit (labor only)
Back order cost per unit per period
Inventory holding cost per unit per period
Hiring cost per employee
Firing cost per employee
Capacity Data
Beginning workforce (employees)
Beginning inventory (units)
Production standard per unit (hours)
Regular time available per period (hours)
Overtime available per period (hours)
B
$12.50
$18.75
$125.00
$25.00
$10.00
$800.00
$500.00
90
0
8
160
40
Demand Data (units)
Period
Period
Period
Period
Period
Period
Period
Period
1
2
3
4
5
6
7
8
1920
2160
1440
1200
2040
2400
1740
1500
Total Number of Periods
8
? Plan A: Level aggregate plan using inventories and back orders
First calculate the level production rate (14400/8=1800)
D
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
E
F
G
H
I
J
K
L
M
5
2040
8760
1800
9000
-240
240
0
6
2400
11160
1800
10800
360
0
360
7
1740
12900
1800
12600
300
0
300
8
1500
14400
1800
14400
0
0
0
Total
14400
Plan A: Level Aggregate Plan, Using Inventories and Backorders
Compute Level Production Rate
Total Demand
Less: Beginning Inventory
Total Net Demand
Average Demand Per Period
14400
0
14400
1800
Compute Workforce Needed
Units per Employee per Period
Employees Required
Number to Hire
Number to Fire
20
90
0
0
<-- Production Rate for Level Plan
Period
Detailed Plan Computations
Demand (units) (net of beg. Inventory)
Cumulative demand (units)
Period production (units)
Cumulative production (units)
Cum.Dem. Minus Cum.Prod.
Ending Inventory (units)
Backorders (units)
Cost Calculations for Plan A
Regular time labor cost
Overtime labor cost
Inventory holding cost
Back order cost
Hiring cost
Firing cost
Total Cost
1
1920
1920
1800
1800
120
0
120
2
2160
4080
1800
3600
480
0
480
3
1440
5520
1800
5400
120
0
120
4
1200
6720
1800
7200
-480
480
0
$1,440,000
$0
$7,200
$34,500
$0
$0
$1,481,700
Plan A Evaluation
? Back orders were 13.9% of demand (1380)
? Worst performance was period 2 at 21% of demand
? Marketing will not be satisfied at these levels
? Workable plan for operations
? No employees hired or fired, no overtime or undertime needed, and output
is constant
? No human resource problems are anticipated
?
Plan B: Level plan using inventories but no back orders
Plan B Evaluation
? Plan B costs $240K (16%) more than plan A and has ending inventory of 7980
units
? To be fair, Plan B built 1920 additional units ($192K) which will be sold later
? Plan B costs $2.58 more per unit (2.5%)
14400
720
1380
?
?
Marketing satisfied by 100% service level
Workable Operations and HR plan- hire 12, no OT or UT, and level production
?
Plan C
?
?
?
Plan C: Chase aggregate plan using hiring and firing
Evaluation
Costs an additional $2 per unit more than Plan B
Marketing is satisfied again by 100% service level
From Operations and HR standpoint, not easy to implement:
? Need space, tools, equipment for up to 120 people in period 6 and only
have 60 people in period 4
? High training costs and potential quality problems
? Low morale likely due to poor job security
? Plan D: Hybrid plan using initial workforce and overtime as needed
This is basically a level plan using OT to avoid backorders
D
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
E
F
G
H
I
J
K
L
M
6
2400
1680
1800
0
120
7
1740
1620
1800
0
180
8
1500
1320
1800
0
480
Total
14400
Plan D: Hybrid Aggregate Plan, Using Initial Workforce and Overtime as Needed
Compute Regular Time Production Rate
Number of Employees
Units per Employee per Period
Regular Time Production per Period
90
20
1800
Detailed Plan Computations
Total Demand in Period
Net Demand After Inventory Considered
Regular Time Production
Overtime Production Needed
Ending Inventory
Cost Calculations for Plan C
Regular time labor cost
Overtime labor cost
Inventory holding cost
Back order cost
Hiring cost
Firing cost
Total Cost
Period
1
1920
1920
1800
120
0
2
2160
2160
1800
360
0
3
1440
1440
1800
0
360
4
1200
840
1800
0
960
5
2040
1080
1800
0
720
$1,440,000
$72,000
$28,200
$0
$0
$0
$1,540,200
Plan D Evaluation
? Cost is only $.61 (.6%) more than Plan A with a reasonable increase in ending
inventory (+1440)
? Marketing is satisfied as well with 100% service level
? Not difficult for Operations to implement
? Does not need excessive overtime
? Uses overtime in just periods 1 and 2 (7%, 20%)
? Aggregate Plan Objective: Keep customer service high and costs low
Aggregate Plans for Service Companies with Non-Tangible Products- Plans E, F, G
Problem Data
14400
480
2820
N
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
A
Cost Data
Regular time labor cost per hour
Overtime labor cost per hour
Subcontracting cost per unit (labor only)
Hiring cost per employee
Firing cost per employee
B
$8.00
$12.00
$60.00
$250.00
$150.00
Capacity Data
Beginning workforce (employees)
Service standard per call (hours)
Regular time available per period (hours)
Overtime available per period (hours)
60
4
160
24
Demand Data (calls)
Period
Period
Period
Period
Period
Period
Period
Period
1
2
3
4
5
6
7
8
2400
1560
1200
2040
2760
1680
1320
2400
Total Number of Periods
8
Plan E - Level aggregate Plan with No Back Orders, No tangible product
Any demand not satisfied is lost to competitors, so company must meet all demand. It is
likely that high undertime will lower employee morale. When we use overtime, we reduce
undertime.
Plan F – Hybrid with Initial Workforce and OT as Needed
D
E
F
G
H
I
J
26 Plan F: Hybrid Aggregate Plan Using Initial Workforce and Overtime as Needed
27
28 Detailed Plan Computations
Period
1
2
3
4
5
6
29
30
Demand (calls)
2400
1560 1200 2040 2760 1680
31
Service hours needed
9600
6240 4800 8160 11040 6720
32
Regular time hours of capacity
9600
9600 9600 9600 9600 9600
33
Overtime hours needed
0
0
0
0
1440
0
34
Undertime hours
0
3360 4800 1440
0
2880
35
36 Cost Calculations for Plan F
37
Regular time labor cost
$614,400
38
Overtime labor cost
$17,280
$631,680
39
Total Cost
Costs reduced by $77K and undertime to an average of 20%
Cost per service call reduced to $41.13 (-$5.02)
K
L
M
7
1320
5280
9600
0
4320
8
2400
9600
9600
0
0
Total
15360
61440
76800
1440
16800
Plan G - Chase Plan with Hiring and Firing
Total cost reduced by $114K over Plan F, utilization improved to 100%, and cost per
service call now $33.72 (-$7.41)
Workforce fluctuates from 30-69 people- morale problems
Solution? Compare smaller permanent workforce, more OT??
The Aggregate plan must balance several perspectives:
1. Costs;
2. Customer service;
3. Organizational effectiveness;
4. Workforce Moral.
Difference between AP’
s for manufacturers and service companies involve the advantage
of using inventories to absorb demand changes.
Master Production Schedule (MPS)
Shows how many products or services are planned for each time period, based on the
resources authorized in the aggregate plan. The master scheduler develops the schedule
based on available capacity.
Demand management includes a company’
s forecasting, order entry and so forth. It
captures all activities that use manufacturing capacity. The aggregate plan supports the
marketing plan.
Role of the mps
Aggregate plan:
? Specifies the resources available (e.g.: regular workforce, overtime,
subcontracting, allowable inventory levels & shortages)
Master production schedule:
? Specifies the number & when to produce each end item (the anticipated build
schedule)
? Disaggregates the aggregate plan
The authorized MPS is a critical input into the MRP system. The MPS tells the MRP system
what the company plans to build and when.
Master Scheduling Objectives
The Master Scheduler must:
? Maintain the desired customer service level
? Utilize resources efficiently
? Maintain desired inventory levels
The Master Schedule must:
? Satisfy customer demand
? Not exceed Operation’
s capacity
? Work within the constraints of the Aggregate Plan
Developing an MPS
The MPS system logic calculates when replenishment quantities are needed. MPS records
are summed to show the total proposed workload.
The MPS specifies the products to be built in each time period. The schedule feasibility is
checked against rough-cut capacity.
MPS record
Projected Available = beginning inventory + MPS shipments - forecasted demand
Rough-Cut capacity planning (RCCP)
Process of converting the master production schedule into requirements for key
resources such as direct labor and machine time
This workload is compared against demonstrated capacity.
Demonstrated capacity – proven capacity calculated from actual performance data
Capacity planning using overall planning factors (CPOPF) is a simple, rough-cut capacity
planning technique. It develops a planning factor for each critical resource based on
historical data.
Procedure for using CPOPF:
1. determine planning factors:
Direct Labor Planning Factor ?
Total DL hours building model
number of units built
2. calculate workload generated by this schedule;
3. calculate total capacity needs for each resource for each time period;
4. calculate individual workcenter capacity needs based on historical percentage
allocation.
Step 2:
Step 3:
Step 4:
Evaluating and accepting the MPS
To evaluate the MPS:
In terms of customer service, promised customer delivery dates are met
For effective se of resources, enough capacity is available to meet schedule
In terms of cost, the MPS will be compared with the aggregate plan.
If MPS needs add. resources, company not achieve objectives in marketing
Before you go on
The master scheduler uses a rough-cut capacity planning technique to calculate whether
the company has the capacity to meet the proposed MPS.
If the proposed MPS is feasible, it is evaluated in terms of customer service, effective use
of resources, and inventory investment.
If the proposed MPS is accepted, it becomes the authorized MPS. If capacity is
insufficient, either the MPS is modified or capacity is expanded.
Using the MPS
Order promising – process of making order delivery commitments
Available-to-promise (ATP) – uncommitted portion of a company’
s inventory and planned
production, maintained in the MPS to support order promising.
?
Master schedulers use Available-to-Promise system logic when promising order
delivery dates to customers.
ATPAction Bucket = (beginning inventory + MPS shipment) less (customer orders before
next replenishment). Available in period 1.
ATP=MPS shipment – Customer orders between current MPS shipment and next
scheduled replenishment in periods 3,5,7,8, & 11.
Week
1
2
3
4
5
6
7
8
9
10
11
12
Forecast
50
50
50
50
75
75
75
75
50
50
50
50
Customer orders
35
25
25
20
0
15
0
0
10
0
0
10
60
10
85
35
85
10
60
110
60
10
85
35
Projected available
Available-to-promise
MPS
BI
110
50
80
110
125
115
115
125
125
125
125
125
Using ATP records
ATP records show how much inventory is available to satisfy customer demand, so your
company bases its delivery promises to customers on these records.
Example of Revising the ATP MPS Record: A customer calls marketing willing to purchase
200 units if they can be delivered in period 5. The two tables below show how the system
logic would first slot the 200 into period 5 and then how the order would be allocated
across periods 1, 3, and 5 and adjusting the ATP row.
Stabilizing the MPS
Minimize the number of changes made to an authorized MPS b3ecasue each proposed
change can affect the feasibility of the MPS
Demand time fence – establishes that point of time in the future inside of which changes
to the MPS must be approved by a higher authority. Changes are kept to a minimum.
Planning time fence – Establishes a point of time in the future inside of which changes
must be made by the master scheduler, and changes outside of which can be changes by
system planning logistic.
Time fence policies stabilize the MPS. Authorization to make changes to a schedule
depend on the time frame. Changes within frozen, slushy, and liquid portions of the MPS
require defined authorization levels.
Chapter 14: Resource Planning
Backward scheduling – starts with due date for an order and works backward to
determine the start date for each activity
Enterprise Resource Planning (ERP) – Information System designed to integrate internal
and external members of the supply chain.
Share customer sales data with the supply chain to help with global replenishment
(aanvulling)
ERP Modules
Finance and accounting
? Investment, cost, asset, capital, and debt management
? Budgets, profitability analysis, and performance reports
Sales and marketing
? Handles pricing, availability, orders, shipments, & billing
Production and materials management
? Process planning, BOM, product costing, ECN’
s, MRP, allocates resources,
schedules, PO’
s, & inventory
Human resources
? Workforce planning, payroll & benefits, & org. charts
Evolution of ERP
First generation ERP
? Managed all internal business activities
Second Generation ERP
? Systems focused on decision-making
? SCI capability allows collection of intelligence along the entire supply chain
? ASP suppliers set-up and run systems for others
SCM (Supply Chain Management) systems complement (aanvullen) ERP systems
SCI (Supply Chain Intelligence) is having capability of collecting business intelligence
along the supply chain
?
First generation ERP systems (MPR) managed manufacturing activities only.
Second generation systems or SCM –software incorporated the supply chain. The
current trend is integrating e-commerce and ERP.
Benefits of ERP
? Tangible benefits from ERP include control of operations and a host of information
to manage all financial aspects of a business.
Material Planning Systems
? MRP (Material requirements planning) systems are designed to calculate material
requirements from dependent demand items. MRP uses backward scheduling to
determine activity start dates.
? The objective of MRP are to determine quantity and timing of material
requirements to keep schedule priorities updated and valid. It’
s also helpful in
maintaining priorities.
? MRP needs three inputs: the authorized MPS, the BOM file, and the inventory
records file.
BOM file – Bill Of Material; list subassemblies, component parts, and raw materials
?
?
Once the MPS has been input, MRP checks inventory availability. If a need is
determined, MRP checks the BOM file for material needed, then generates planned
orders.
MRP output includes actions notices to release planned orders, reschedule orders,
or adjust due dates.
Types of demand
Independent demand -> demand for finished products
x Needs to be forecasted
Dependent demand -> demand derived from finished products
Bill of
material
file
MPS
system
MRP system
Inventory
records
file
Objectives of MRP
? Determines the quantity and timing of
material requirements
? Determines what to order
(checks BOM), how much to
order (lot size rules), when to
place the order (need date
minus lead time), and when to
schedule delivery (on date
needed)
? Maintain priorities
? In a changing environment,
MRP reorganizes priorities to
keep plans current and viable
Lot for lot (L4L) means a replenishment order quantity for the exact amount needed to
satisfy the requirements for that period
Part of the MRP-system is developing a time-phased schedule that shows future demand,
supply, and inventories by time period
Authorized MPS - From the authorized MPS, we calculate when we need to have
replenishment orders of CD cabinets; when we need a new MPS order.
Table 14-1 Initial MPS Record for CD Cabinet
Item: CD Cabinet
Lot size rule: FOQ=100
Lead time: 1 week
Gross Requirements:
Projected Available:
MPS
80
1
25
55
2
25
30
3
25
5
4
25
-20
5
30
6
30
7
30
8
30
9
35
10
35
11
35
12
35
5
30
50
6
30
20
7
30
90
100
8
30
60
9
35
25
10
35
90
100
11
35
55
12
35
20
Table 14-2 Updated MPS Record for CD Cabinet
Item: CD Cabinet
Lot size rule: FOQ=100
Lead time: 1 week
Gross Requirements:
Projected Available:
MPS
80
1
25
55
2
25
30
3
25
5
4
25
80
100
MRP-Inputs; Inventory records
System checks the inventory record for each BOM item to see if inventory is available or
if a replenishment order is needed to build the cabinets.
The MRP-system checks the gross requirements for each period, compares that with the
inventory available.
MRP Explosion process
Action Notices
- Indicate items that need a production planner’
s attention
- Are created when a planned order needs to be released, due dates need to be
adjusted, or when there is insufficient lead time for normal replenishment
- Often require planners to rush or expedite orders
Action Bucket:
- Is the current period where we take actions such as releasing, rescheduling, or
cancelling orders
- A positive quantity in current period’
s planned order row means that an order
must be released
Comparison of lot size rules
? Different lot sizing rules (FOQ, Period Q, L4L) generate different order quantities
and order frequencies.
Example Comparing Lot Size Rules: Three common lot sizing rules used within MRP
Systems are fixed order quantity (FOQ), lot for lot (L4L), and period order quantity
(POQ). Cost comparison is based on Inventory holding costs ($0.10 per period) and
ordering cost ($25 per order). In this example POQ is best at $133.50.
Table 14-10 Inventory Records Comparing Lot Size Rules
Table 14-10a Inventory Record Using Fixed-Order Quantity
Item: CD Cabinet
Lot Size Rule: FOQ=144
Lead Time: 1 week
Gross requirements
Scheduled receipts
Projected available
Planned orders
0
1
0
2
25
3
25
4
40
5
40
6
0
7
60
8
60
9
60
10
0
11
60
12
60
13
60
Holding $
Order $
0
144
119
94
54
14
14
144
98
38
122
122
62
2
144
86
82.50
100.00
Table 14-10b Inventory Record Using Lot-for-Lot
Item: CD Cabinet
Lot Size Rule: L4L
Lead Time: 1 week
Gross requirements
Scheduled receipts
Projected available
Planned orders
0
1
0
2
25
3
25
4
40
5
40
6
0
7
60
8
60
9
60
10
0
11
60
12
60
13
60
Holding $
Order $
0
25
0
25
0
40
0
40
0
0
60
0
60
0
60
0
0
60
0
60
0
60
0
0.00
250.00
Table 14-10c Inventory Record Using Period Order Quantity
Item: CD Cabinet
Lot Size Rule: POQ=4 periods
Lead Time: 1 week
Gross requirements
Scheduled receipts
Projected available
Planned orders
0
1
0
2
25
3
25
4
40
5
40
6
0
7
60
8
60
9
60
10
0
11
60
12
60
13
60
Holding $
Order $
0
130
105
80
40
0
0
180
120
60
0
0
180
120
60
0
58.50
75.00
Role of Capacity Requirements Planning (CRP)
Rough Cut Capacity Example: The CRP module uses data from MRP. We calculate
workloads for critical work centers based on open shop orders and planned shop orders.
These shop orders are translated into hours of work by work center and by time period.
Table 14-11 show items scheduled for work Center 101.
A
B
C
D
E
1 Table 14-11 Workload for Work Center 101
Run Time
2
Setup
per Unit in
3
Item
Time
Standard
4
Period
Number Quantity
(hours)
Hours
5
6
4
DN100
250
3.0
0.20
7
DP100
250
5.0
0.18
8
DS119
150
2.5
0.30
9
DT136
400
3.5
0.27
10
5
EQ555
1000
8.0
0.08
11
ER616
500
4.0
0.22
12
ES871
100
2.0
0.35
13
6
FA314
250
3.0
0.30
14
FF369
100
1.5
0.12
15
FR766
50
0.5
0.15
16
FS119
200
3.0
0.35
17
FY486
500
6.0
0.27
F
Total
Item
Time
(hours)
53.0
50.0
47.5
111.5
88.0
114.0
37.0
78.0
13.5
8.0
73.0
141.0
G
Weekly
Workload
(hours)
262.0
239.0
313.5
Available capacity = 4 machines x 2 shifts x 10 hours per shift x 5 days per week x
0.85 utilization x 0.95 efficiency
Available capacity = 323.0 standard hours
Workload Graph for Work Center 101: CRP enables a company to evaluate both the
feasibility of the MRP system and how well the company is using its critical work centers.
?
?
The CRP module uses planned orders and open shop orders to see if available
capacity is sufficient to meet schedules.
CRP calculates the workloads at critical work centers by using planned orders
generated by MRP. These planned orders are multiplied by the standard times to
calculate individual work center loads.
Chapter 15 - Scheduling
Scheduling definitions
- Routing:
? The operations to be performed, their sequence, the work centers visited, &
the time standards
- Bottleneck:
? A resource whose capacity is less than the demand placed on it
- Due date:
? When the job is supposed to be finished
- Slack:
? The time that a job can be delayed & still finish by its due date
- Queue:
? A waiting line
High-volume operations
High-volume operations, also called flow operations, can be repetitive operations.
Smaller profit margins so efficiency is important!
Flow operations use fixed routings. Material flows between workstations may be
automated. The workstation or processing point that needs the greatest amount of time
is the system’
s bottleneck.
Low-volume operations
Low=volume or job0shop operations are used for high-quality, customized products.
Companies with low-volume operations use highly skilled employees, general-purpose
equipment, and a process layout. They also use Gantt Charts.
Load charts
- Illustrates the workload relative to the capacity of a resource
- Shows today’
s job schedule by employee
Progress charts:
- Illustrates the planned schedule compared to actual performance
- Brackets show when activity is scheduled to be finished. Note that design and
pilot run both finished late and feedback has not started yet.
?
?
Scheduling techniques depend on volume. High volume is typically done through
line design and balancing. Low volume uses priority rules along with visual
techniques like Gantt charts.
Shop loading can assume infinite or finite loading which is constrained by
predetermined capacity. Loading can be done by using forward or backward
scheduling.
Als er wat bij backward scheduling misgaat, gaat het meteen goed mis!
Scheduling work – work loading
- Infinite (oneindig) loading:
? Ignores capacity constraints,
but helps identify bottlenecks in
a proposed schedule to enable
proactive management
-
Finite loading:
? Allows only as much work to
be assigned as can be done with
available capacity – but doesn’
t
prepare for inevitable slippage
(versluiert problemen; ziekte of machine uitval is immers incidenteel)
Other scheduling techniques
- Forward Scheduling – starts processing immediately when a job is received
- Backward Scheduling – begin scheduling the job’
s last activity so that the job is
finished on due date
Monitoring Work Flow
Input/Output Control - A technique for monitoring the flow of jobs between workcenters.
Monitors how well available capacity is used and provides insight into process problems
Figure 15-6 Input/output report for work center 101
Input Information (in hours)
4
5
Planned Input
800
750
Actual Input
750
780
Deviation
-50
30
Cumulative deviation
0
-50
-20
Output information (in hours)
Planned output
Actual output
Deviation
Cumulative deviation
Backlog (in hours)
Period
6
800
780
-20
-40
7
820
810
-10
-50
8
800
810
10
-40
0
4
800
800
0
0
5
800
750
-50
-50
Period
6
800
780
-20
-70
7
800
850
50
-20
8
800
825
25
5
100
50
80
80
40
25
(The size of the backlog changes when actual input does not equal actual output)
Job sequencing
Which of several jobs should be scheduled first?
Using priority rules is straightforward. Just follow these steps.
1 – Decide which priority rule to use
2 – List all jobs waiting to be processed at workcenter and their job
3 – Using your priority rule, determine which job has highest priority and should
be worked on first
Local priority rules: determines priority based only on jobs at that workstation
Global priority rules: also considers the remaining workstations a job must pass through
Used priority rules:
- First come, first served (FCFS)
- Last come, first served (LCFS)
- Earliest due date (EDD)
- Shortest processing time (SPT)
- Longest processing time (LPT)
- Critical ratio (CR):
? (Time until due date)/(processing time)
- Slack per remaining Operations (S/RO)
? Slack /(number of remaining operations)
Beste resultaat in geval van producten -> korte bewerkingstijd eerst!
?
Scheduling decisions use common priority rules like SPT, EDD, FCFS, and S/RO.
Priority rules need to support organizational objectives.
Measuring Performance
- Job flow time:
? Time a job is completed minus the time the job was first available for
processing; avg. flow time measures responsiveness
? Adding job flow times together / divide by number of jobs
- Average # jobs in system:
? Measures amount of work-in-progress; avg. # measures responsiveness
? Adding job flow times together / makespan
- Makespan:
? The time it takes to finish a batch of jobs; measure of efficiency
- Job lateness (measure of customer service):
-
? Whether the job is completed ahead of, on, or behind schedule;
Job tardiness:
? How long after the due date a job was completed, measures due date
performance
Calculations
Job A finishes on day 10
-
-
Job B finishes
on day 13
Job C finishes
on day 17
Job D ends
on day 20
Calculation mean flow time:
? MFT= (sum job flow times)/ # of jobs
= (10+13+17+20)/4 = 60/4 = 15 days
Calculating average number of jobs in the system:
? Average # Jobs =( sum job flow times)/ # days to complete batch
= (60)/20 = 3 job
Makespan is the length of time to complete a batch
? Makespan = Completion time for Job D minus start time for Job A
= 20 – 0 = 20 days
Lateness and Tardiness are both measures related to customer service
Average tardiness is a more relevant Customer Service measurement as
illustrated below
Example 15-5 Calculating job lateness and job tardiness
Job
A
B
C
D
Completion
Date
10
13
17
20
Due Date
15
15
10
20
Average
Lateness
-5
-2
7
0
0
Tardiness
0
0
7
0
1.75
Positive job lateness values are typically described as job tardiness.
?
Performance measures like mean flow time, job lateness, job tardiness,
makespan, and the average number of jobs in the system measure the
effectiveness of schedules.
Comparing priority rules - SPT vs. S/RO
Performance Measures using SPT
Job
A
B
C
D
E
F
Total
Job Time at
Work Center
301
(days)
3
7
6
4
2
5
27
Due date
(days from now)
15
20
30
20
22
20
Avg. Job Flow
Total Job Flow Time
Makespan
Avg. # Jobs
E done at
A end of
end of day 2 day 5
SPT
Completion
Date
5
27
20
9
2
14
12.83
77
27
2.85
Lateness
(days)
-10
7
-10
-11
-20
-6
-8.3
Tardiness
(days)
0
7
0
0
0
0
1.2
Scheduling
Sequence
2
6
5
3
1
4
D at end F at end of C at end of B done at end
of day 9 day 14
day 20
of day 27
Performance Measures Using S/RO
Job Time
Remaining
at Work
Remaining
Number
Center
Job Time at
Slack of Operations
301
Other Work
Due date
Time
After Work
Job
(days) Center (days) (days from now) (days) Center 301
A
3
6
15
6
2
B
7
8
20
5
4
C
6
5
30
19
3
D
4
3
20
13
2
E
2
7
22
13
3
F
5
5
20
10
3
Total
27
S/RO
2
1
4.75
4.33
3.25
2.5
Scheduling
Sequence
2
1
6
5
4
3
Avg. Job Flow
Total Job Flow Time
Makespan
Avg. # Jobs
Completion Lateness Tardiness
Date
(days)
(days)
10
-5
0
7
-13
0
27
-3
0
21
1
1
17
-5
0
15
-5
0
16.17
-5.0
0.167
97
27
3.59
B done at
A at end F at end of E at end of D at end of C done at end
end of day 7 of day 10 day 15
day 17
day 21
of day 27
The SPT rule always minimizes mean job lateness. Priority rules based on due date are
better at reducing maximum tardiness.
SPT priority rule always minimizes mean job flow time. Since SPT sets priority on getting
several jobs done as quickly as possible, we can expect less work in process or fewer
average jobs in the system.
Sequencing jobs though 2 workcenters
Johnson’
s Rule – a technique for minimizing makespan in a two-stage, unidirectional
process
- Step 1 – List the jobs and the processing time for each activity
- Step 2 – Find the shortest activity processing time among the jobs
? If the shortest Processing time is for a 1st activity, schedule that
job first
? If the shortest processing time is for 2nd activity, schedule that job
last
- Step 2 – Find the shortest activity processing time among the remaining
jobs and schedule as in step 2 above
? Johnson’
s Rule is a effective technique for minimizing makespan when successive
workstations are needed to complete the process.
Johnson’
s Rule Example: Vicki’
s Office Cleaners does the annual major cleaning of
university buildings. The job requires mopping (1st activity) and waxing (2nd activity) of
each building. Vicki wants to minimize the time it takes her crews to finish cleaning
(minimize makespan) the five buildings. She needs to finish in 20 days.
Activity 1
Activity 2
Mopping (days) Waxing (days)
Hall
Adams Hall
1
2
Bryce Building
3
5
Chemistry Building
2
4
Drake Union
5
4
Evans Center
4
2
Johnson's
Activity 1
Activity 2
Sequence
Mopping (days) Waxing (days)
Adams Hall (A)
1
2
Chemistry Building (C)
2
4
Bryce Building (B)
3
5
Drake Union (D)
5
4
Evans Center (E)
4
2
Activity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Mopping A C C B B B D D D D D E E E E
Waxing
A A C C C C B B B B B D D D D E E
Scheduling bottlenecks
- OPT focused on bottlenecks for scheduling & capacity planning
- Definitions:
? Throughput: quantity of finished goods that can be sold
? Process batch: quantity produced at a resource before switching to
another product
? Transfer batch: quantity routed at one time from one resource to the
next
OPT principles
Balance the process rather than the flow
OPT classifies resources as either bottlenecks or nonbottlenecks
Theory of Constraints
?
?
?
OPT principles can be used to schedule bottlenecks. TOC expands OPT into a
continuous improvement philosophy.
Service organizations use different techniques such as appointments,
reservations, and posted schedules for use of service capacity.
Techniques exist for workforce scheduling when a company uses full time
employees, operates 7 days each week, and gives its employees 2 consecutive
days off.
H2……………………………..16, 17
Strategisch………………..tactisch.
JIT, TQM & SCM zijn recente ontwikkelingen. Andere onderwerpen zijn traditioneel
EOQ = alles constant en van buiten af
EPQ = zelf halffabrikaten fabriceren
LT = lead-time
Lot4Lot = bijmaken tot zover nodig
Onafhankelijke vraag -> voorraadbeheer
Afhankelijke vraag -> planning