Production Systems in Off-Site
Construction
By Dr Mohammed Arif – licensed under the Creative Commons
Attribution – Non-Commercial – Share Alike License
http://creativecommons.org/licenses/by-nc-sa/2.5/
1
Production Systems in offsite Construction
Contents
Section(1) ............................................................................................................................ 4
Manufacturing Systems .................................................................................................. 4
Product Complexity ........................................................................................................ 4
Customer Delivery Expectations and Strategic Stocks of Finished Goods ................... 4
Market Characteristics, Anticipation Stocks and Annual Production Plans ................... 6
Physical Considerations .................................................................................................. 6
Section(2) ............................................................................................................................ 7
Facilities Planning and Layout Design ........................................................................... 7
Capacity Planning ........................................................................................................... 7
Measures of Capacity ...................................................................................................... 7
Capacity Strategies.......................................................................................................... 8
Capacity Cushions .......................................................................................................... 8
Timing and Sizing Expansion ......................................................................................... 8
Linking Capacity with Other Decisions .......................................................................... 9
Capacity Planning Process .............................................................................................. 9
Location Planning ........................................................................................................... 9
Dominant Factors .......................................................................................................... 10
Secondary Factors ......................................................................................................... 10
Location Planning Internationally................................................................................. 11
Techniques for Location Planning ................................................................................ 11
Layout Planning ............................................................................................................ 12
Section(3) .......................................................................................................................... 13
Forecasting and Inventory Management ....................................................................... 13
Forecasting ................................................................................................................ 13
Steps in Forecasting .................................................................................................. 14
Inventory Management ............................................................................................. 14
Requirements for Efficient Inventory Management System ........................................ 16
Economic Order Quantity ............................................................................................. 17
Economic Production Quantity ..................................................................................... 17
Quantity Discounts........................................................................................................ 17
2
CASE STUDY .............................................................................................................. 20
REFERENCES ............................................................................................................. 20
3
Production Systems in offsite Construction
By
Dr.Mohammed Arif
School of Built Environment
University of Salford
Section(1)
Manufacturing Systems
Manufacturing systems are the glue which holds together the various components which
enable an enterprise to deliver its products or end items to its ultimate consumer in a
timely manner in conformance with his or her expectation and at reasonable price. The
kinds of systems are not merely mechanical systems, nor just the construction systems
required, nor the information systems that tie together orders, drawings, specifications,
reports and the mountain of information needed to document a constructed home. The
systems are all this and more. They include the materials, manpower, machines,
processes and process information necessary to activate a static collection of resources.
By definition, these are all intertwined and interdependent and there is, hence, no simple
linear way to describe a system, let alone convey, the true essence of the depth of its
comprehensiveness. Thus, the material which follows can only be a starting point in
what must be a career-long pursuit.
We orient this module by tracing the development of alternative manufacturing systems
in an effort to help students develop an understanding of the premises underlying those
systems. This is the key to identifying the elements which best fit the manufacturing and
business environment surrounding the Manufactured Housing Industry.
Product Complexity
Product complexity is best expressed in terms of the size and numbers “levels” in the bill
of material (BOM) or product structure. The bill of material is simply a list of items and
their quantity used in constructing or manufacturing the higher level item or “parent”. A
single level bill of material simply shows one level downwards; whereas a multi-level bill
slows all levels from end item tracing upstream through purchased or raw material which
denote the end of the chain. In computer based systems all bills are stored as single level
bills and linked as needed whenever tasks require viewing of multi-level bills. However,
the ways in which these bills are structured is not purely a product design consideration
and may depend upon the construction system employed as well as the manufacturing
strategy.
Customer Delivery Expectations and Strategic Stocks of Finished Goods
The form of manufacturing system is greatly influenced by the decisions made regarding
the stock points for finished goods inventory. The level in the product structure where
4
stocks are held affects delivery time and product configuration flexibility. Three
fundamental choices are described below.
Make-to-Stock Approach. Manufacturing firms with line flows tend to use a make-tostock strategy, in which the firms hold items in stock for immediate delivery, thereby
minimizing customer delivery times. The strategy is feasible because line flow firms
produce high volumes of relatively few standardized products, for which they can make
reasonably accurate forecasts. This strategy is also applicable to situations in which the
firm is producing a unique product for a specific customer if the volumes are high
enough. For example, a company producing a valve for a family of faucets would have
enough volume to operate a production line specifically for that valve and carry a stock of
the finished product for scheduled shipments to the factory. Many consumer staples are
produced to stock and distributed through the supply chain. This system of production is
referred to as a “push” system since goods are pushed through the supply chain to satisfy
anticipated customer need.
Make-to-Order Approach Manufacturers with flexible flows tend to use a make-toorder approach. This strategy provides a high degree of customization, which is a
competitive priority for these firms. Because most products, components and assemblies
are custom-made, the production process has to be flexible to accommodate the variety.
Examples of products suited to the make-to-order strategy are specialized medical
equipment, castings, and expensive site-built homes. Production does not begin until
there is a firm specific customer order in hand. Hence, this is sometimes called a “pull”
system, as materials are pulled through the system to satisfy a customer demand.
Assemble-to-Order / Finish to Order Approach. In manufacturing, clever design
permits an assemble-to-order approach to producing many products from relatively few
components, after customer orders are received. This is appropriate for this situation
because high-volume components and assemblies can be produced with a line flow
strategy, whereas low-volume components and assemblies can be produced with a
flexible flow strategy. The assemble-to-order approach typically addresses both
competitive priorities: customization and fast delivery time. Assemblies and components
are held in stock until a customer’s order arrives. Then the specific product needed is
assembled from the appropriate components and assemblies. Stocking finished products
may be economically prohibitive either because the numerous possible options make
forecasting relatively inaccurate or storing completed items requires an inordinate amount
of costly storage space. For example, prefab homes may be produced as non-volumetric
units which are then assembled on site and for which for which the customer chooses
among color and trim options.
There is a trade-off consideration in deciding the level in the bill of material at which to
stock items. Going deeper into the bill and stocking at lower levels reduces inventory
costs but increases lead times and hence customer delivery times.
5
Market Characteristics, Anticipation Stocks and Annual Production
Plans
A key issue is the seasonality of demand and its impact on the planning of production.
There are two polar opposite choices with an unlimited spectrum of policies between
them.
Level Production Approaches involve the determination of a year round uniform rate of
production that will create inventory in low periods so that it is available in peak demand
periods to satisfy customer needs. The inventory is costly and can require extensive
storage space but keeps a steady trained productive workforce.
Chase Production Approaches simply vary the workforce to match demand by
changing the length of the workweek or by hiring and firing as needed. This minimizes
inventory associated costs but results in high training and workforce related costs.
Combination Approaches mitigate between these two extremes and often result in the
preferred solution with several different rates “locked-in” for some portion of the year.
Interactions with previously discussed aspects of manufacturing systems include
considerations such as:
Availability of storage space may limit consideration of level approaches.
Availability of financing may limit consideration of level approaches.
Choice of construction system can affect storage space availability
Company Labour Relations Agreements or desire to tap work force skills for
systems improvements may limit applicability of Chase Approaches
Physical Considerations
There are several physical considerations important in the selection of a manufacturing
system. First it must be understood that planning systems which seek to set detailed
goals should be distinguished from control systems which seek to ensure that detailed
goals are met. For example, planning systems aim to ensure that the correct quantities
and mix of components are in the parts flow to meet anticipated demand. Control
systems aim to assure that these components are dispatched and assembled in a timely
manner to satisfy customer orders.
Focus on economies of scale or economies of scope is a major strategic issue that
can be best understood in the context of lean manufacturing discussed in a section
below. The relevant point here is that equipment selection and physical
arrangement affects choices in control system.
6
The type of infrastructure choice is key. Information based control or visual
control systems are very different in terms of the kinds of investment,
management skills, and managerial philosophy they require for success.
Section(2)
Facilities Planning and Layout Design
For all major off-site construction manufacturers, the decision to build their factory
involves three major components. The first major element of this decision is the capacity
planning, the second element is the location planning and the third element is the layout
design of the factory. This learning package deal with all three of these elements of the
manufacturer and candidates taking this learning package will be able to analyze and
make decisions related to the planning of the capacity, selection of the factory location,
and the design of the factory layout.
Capacity Planning
Case Study
With the current situation in the US housing market and possibility of a similar trend in
the UK market, manufacturers related to the construction industry face a dilemma.
Although, this is a cyclical phenomena, and repeats itself every 10-15 years, it adds a
further level of complexity for capacity planners of the manufacturers. A similar cycle,
with a shorter time span, is observed in the tourism and airline industry. Among the
airlines, when the market is booming they are forced to order newer aircraft and upgrade
their fleet. However, the turn-around time for the aircraft manufacturers is 2-4 years,
depending on the type of aircraft, and often by the time planes are delivered to the
airlines, the downturn of the industry has started. As a result, airlines are left with major
financial liabilities associated with making payments for these aircrafts, and have excess
unutilized capacity. So airlines have to plan and think really hard before placing an
order. At the time of placing an order, if the forecasted demand is not certain or is
considered only a “small blip” in the radar, then airlines do have the option of leasing
aircrafts, and meeting the excess demand through leased aircraft. All these problems
apply to the manufactured industry as well, and as in the airline industry they have
similar choices.
Measures of Capacity
In order to do a comprehensive analysis of a capacity plan, we have to analyze multiple
measures of capacity. There are two types of capacity measure, output measures and
input measures. Output measures are the measures that express the final output or
production capacity of a manufacturing plant. For example, output of a modular house
7
making plant could be 2 modules an hour. Input capacity measures indicate the available
capacity, for example on a house painting workstation in a manufactured housing plant,
capacity can be measured using the number of painters available. Some of the matrices
for measuring capacity are as follows:
1. Utilization: This is the measure of degree to which equipment, space or labour is
currently being used, and is expressed as a percentage: Utilization = (Avg. Output
Rate/Max. Capacity)X100
2. Peak Capacity: This is the maximum output that a process or facility can achieve
under ideal conditions. Peak capacities are achieved for short durations only
through overtime and extra shifts and cannot be sustained for a long a period of
time. Therefore, firms use peak capacity to meet short term rise in demands of
their products.
3. Effective Capacity: The maximum output that a process or firm can economically
sustain under normal conditions is called the effective capacity. Effective
capacity assumes normal working hours and conditions, with no addition in
labour hours through extra hiring or overtime.
Based on these definitions we can define two types of Utilization; Peak
Utilization and Effective Utilization. The only difference between the two being
the value in the denominator. In case of peak utilization, the denominator is the
maximum peak capacity, and in case of effective utilization, the denominator is
the maximum effective capacity.
Capacity Strategies
There are three major capacity strategies: capacity cushions, timing and sizing expansion,
and linking capacity with other decisions.
Capacity Cushions
Average utilization rates for facilities and equipments should not get to 100%, a cushion
of 15-20% is recommended. When the average utilization starts approaching 100%, then
it is a signal that either the capacity needs to be increased or the order acceptance needs to
be lowered. This cushion is also necessary to take into account periodic maintenance and
repair of equipments.
Timing and Sizing Expansion
The second issue in capacity strategies is to assess the time and the size of expansion.
There are two types of strategies: the expansionist strategy which involves large
infrequent jumps in the capacity, and the wait and see strategy which involves smaller,
more frequent jumps. The expansionist strategy is a more risky strategy however if you
are looking for a first mover advantage in a business or you are in a business where your
frequent presence can have an impact, then expansionist strategy is a way to go.
However, if you are risk averse and not sure about the forecast then wait and see strategy
is more suitable.
8
Linking Capacity with Other Decisions
Capacity decisions should also be linked to strategies and operations throughout the
organisation. Some of the areas where this linking has to take place are as follows:
a. Competitive priorities: A change in competitive priorities can mean need for
faster deliveries and a higher capacity cushion to react quickly to uneven demand.
b. Quality management: A better quality management system will mean a lower
rejection rate, and therefore a lower amount of cushion to obtain the kind of yield
demanded by the market conditions.
c. Capital investment: A higher investment in newer, more expensive facilities and
technology can mean a lower cushion to get the maximum return on investment.
d. Resource flexibility: A less flexible workforce, in terms of ability to work longer
hours or skills can mean having a larger cushion for capacity planners.
e. Inventory: A decision to go with Just In Time versus significant on hand
inventory will mean the difference in the amount of cushion planned by the
capacity planners.
f. Scheduling: The ability to have a more stable atmosphere in terms of the demand
will mean smaller cushion. Whenever, the demand is not certain there is a need
for more cushion.
Capacity Planning Process
A simple capacity planning process will involve the following four major steps.
1. Estimate Future Capacity Requirements: The forecast of long term capacity needs
is forecasts of demand, productivity, competition and technological change that
extend well into the future. This forecast needs to be revisited periodically.
2. Identify Gaps: A capacity gap is any difference between the projected demand
and current capacity. Identifying those gaps well into the future require planning
and accurate estimation.
3. Develop Alternatives: The next step is to assess strategies to deal with the
capacity gaps. The alternatives could be using the cushion, or increasing the
capacity through the addition of more machines or labour or if the demand surge
seems like a temporary phenomena then looking at the possibility of outsourcing.
4. Evaluate Alternatives: The alternatives developed then need to evaluated through
quantitative and qualitative techniques taking a more comprehensive look at the
impact on the overall capacity strategy.
Location Planning
With the advent of modern communication tools physical proximity to your consumer in
services and smaller products is not a major driver. Still, despite this growth in
technology location is a big issue for manufacturers producing products like houses.
Managers and planners have to analyze many factors when assessing the desirability of a
location. Some of these factors are proximity to customers and suppliers, labour costs,
9
and transportation costs. The factors influencing the location selection decisions can be
broken down into two categories: dominant factors and secondary factors.
Dominant Factors
The dominant factors can be divided into six categories. Those categories are:
1. Labour climate
2. Proximity to customers
3. Quality of life for employees
4. Proximity to suppliers
5. Proximity to parent company’s facility
6. Taxes and real estate costs
A favourable labour climate is perhaps the most important factor in location decisions for
labour intensive firms such as house manufacturers. Labour climate is affected by factors
such as wage rates, training requirements, and general social attitude towards work,
worker productivity, available skills, and union influences.
Proximity to consumers is very important due to the implications on transportation costs.
This factor becomes even more important when the size of the final product is large and
bulky.
A manufacturer cannot ignore the quality of life for the families of the employees outside
of work. Having a safe place to stay with facilities like good school, access to
recreational facilities etc, play a major role in satisfaction with the quality of life among
the employees
Proximity to suppliers has a two-fold effect on the overall bottom-line of the
manufacturer. The cost of transporting the raw material is low which brings down the
cost of the final product. But the proximity to the manufacturer also helps in maintaining
a just in time inventory system. This helps in reducing the overall inventory costs.
Sometimes not all functions can be duplicated and it is important to use the common
facilities at the parent company. Proximity to parent company, in such cases becomes
very important.
Real estate costs and taxes by local authorities can be a significant cost to a company.
These costs and taxes are not only for establishing the factory but the real estate costs for
the houses where the employees will be living
Secondary Factors
The secondary factors to be considered for location planning can include ability to
expand, construction costs, existing transport infrastructure and available modes of
10
transportation, insurance costs, competition for the workforce, local zoning and pollution
ordinances, and attitude of community towards their kind of business.
Location Planning Internationally
There are several other factors one has to consider when planning a new location in
another country. Some of those factors are: political stability, local laws and regulations,
local taxes and duties, cultural factors, and connectivity with the outside world. Ferdows
(1997), has divided the foreign factories into six types.
1. Offshore Factory: These types of factories are established to produce specific
items, at a low cost, which are then later exported. This offshore site has very
little development or engineering work.
2. Source Factory: These are also low cost alternative production sites, but
operations managers in these factories have a greater control over procurement,
production planning, process planning and design decisions.
3. Server Factory: These factories are setup at international location to deal with the
risks of high tariffs, reduction in taxes, minimization of logistics costs, and
exposure to fluctuating foreign exchange rates.
4. Contributor Factory: These are server factories with additional responsibilities of
product design, process engineering, and supplier selection.
5. Outpost Factory: The primary role of these factories is to gather intelligence about
customer preference, and competitor strategy. However, to justify their existence
they also do some production or assembly.
6. Lead Factory: These types of factories create new process, products and
technologies for the entire organisation. Operations managers for these factories
have a key role in the choice of suppliers and the type of development work.
Techniques for Location Planning
There are some quantitative approaches that can be used to select the best site from a
group of sites, these techniques are:
1. Weighting the site criteria
2. Break-even analysis
3. Centre of gravity method
Weighting the site criteria
In this method first the major site criteria are listed, these criteria could be cost, labour
availability, transport etc. Once all these criteria are listed, they are assigned weights (A)
according to their importance. A score (S) for each site along all the criteria is then
assigned, and then an overall weight (AXS) which is the sum of all the weights times
score is calculated. The site with the highest overall weight is then selected as the site of
choice.
11
Break-even analysis
This technique is used when the costs can be determined with some certainty. The
process of conducting breakeven analysis starts with calculating the fixed and variable
costs for each location. Then the potential productivity and projected profits from each
site are obtained, and the location with the shortest break-even point is selected.
Centre of gravity method
This is a technique that is used to locate facilities like a primary central distribution centre
for a group of plants or secondary distribution centres. The method takes into account
both the volume of material shipped and the distance between them. The process starts
with assigning the X and Y axis to all the secondary distribution centres/ manufacturing
facilities (Xi, Yi) and then the quantity for each centre (Qi) is calculated. The X and Y
coordinates for the centre of gravity (Xc, Yc) are determined using the following
relationship:
Xc = (∑XiQi)/∑Qi
Yc = (∑YiQi)/∑Qi
Layout Planning
Layout planning deals with the actual physical arrangements of fixtures, tools, and
workstations on the manufacturing floor. Layout planning has to work very closely with
process planning in order to fully address all the issues and provide maximum benefits to
the organization. Some of the major types of layouts are:
1. Process Layout
2. Product Layout
3. Fixed-position Layout
4. Hybrid Layout
Process Layout
This type of layout is used for low-volume, high variety production requirements where
the production manager has to organize the resources around the process. In this type of
layout, grouping workstations by functions achieves the objective of high variety, and
low-volume production.
Product Layout
This kind of layout is seen in production lines dedicated to a product. The entire layout is
designed around product and its flow through the process. Product layouts are common in
high volume kinds of production processes
Fixed position layout
In this arrangement the product is fixed in a place; workers along with their tools and
equipment come to the product to work on it. This type of layout is used when the
12
product is particularly massive or difficult to move as in aircraft, ships, locomotives, and
huge vessels.
Hybrid Layout
Quite often the flow strategy combines elements of both a product layout and a process
layout. This kind of layout is called the hybrid layout. In this kind of layout some
portions of the facility are arranged in a process layout and others are arranged in a
product layout format.
Section(3)
Forecasting and Inventory Management
Forecasting
A forecast is a prediction of the future. Forecast helps managers and planners by
reducing some of the uncertainty, thereby enabling them to make more meaningful plans.
Forecasts are used in pretty much every department of an organization. Forecasts are the
basis for budgeting and planning for capacity, sales, production and inventory, personnel,
purchasing etc. Forecasts enable managers anticipate the future so they can plan
accordingly. Table 1 summarizes the use of forecasting from different functions of an
organization.
Functions
Use of Forecast
Accounting
Cost/profit estimates
Finance
Cash flow and funding
Human Resources
Hiring/recruiting/training
Marketing
Pricing, promotion, strategy
MIS
IT/IS systems, services
Operations
Schedules, MRP, workloads
Product/service design
New products and services
Table 1: Use of Forecast (Stevenson, 2004)
There are two major uses of forecasts, the first one is to plan the system and the second
one is to plan the use of the system. Planning the system involves long range plan about
the types of products and services to offer, what facilities and equipment to have, where
to locate and so on. Planning the use of the system refers to short range and intermediate
range planning about the system, which can involve tasks such as workforce levels,
inventory levels, purchasing and production plans, as well as budgeting and scheduling.
Forecasting is lot more than predicting demand; it can also be used for predicting profits,
revenues, costs, productivity, energy consumption, interest rates etc.
13
Forecasting could be qualitative and quantitative. In this learning package we will cover
both qualitative and quantitative forecasting techniques. The overview of all these
techniques will give students the ability to apply them in real life scenarios in the future.
Steps in Forecasting
Forecasting process can be divided into six major steps:
1. Determine the purpose of the forecast: Establishing the purpose of the forecast,
where will it be used, how will it be used and who will use it is a very important.
This will determine the level of detail required for the forecast and the level of
accuracy necessary.
2. Establishing a time horizon: The accuracy of a forecast decreases as the time
horizon of the forecast increases. Therefore, a reasonable time horizon has to be
set for a forecast.
3. Select a forecasting technique: Every forecasting technique has a different
advantage and disadvantage. Therefore, it is important to select the most
appropriate technique for the purpose.
4. Gather and analyze data: In order to forecast, data must be gathered and analyzed.
Therefore, it is important to identify any assumptions and document them.
5. Prepare the forecast: Once the data is collected, it is important to choose the
appropriate technique and prepare the forecast.
6. Monitor the forecast: Once the future trends are forecasted it is important to
monitor the forecast and document the difference between forecasted data and
actual performance. This error can be taken into account, in order to improve
future forecast.
Inventory Management
Companies need to rely on effective inventory management for their success. Any kind
of company, irrespective of their nature of business needs to have an effective inventory
management system. Inventory of a company include the office supplies, raw material
and purchased parts, partially completed goods, finished goods inventory, replacement
parts, tools, and goods in transit to warehouses or customers. Inventory serve several
important purposes for any company, some of them are as follows:
1. To meet the forecasted customer demand:
Whenever a customer walks in and places an order, then he/she will have an
expectation of having the order served within a reasonable time. In order to
respond to these customers, companies rely on forecasted demand and maintain
inventory levels of finished goods at a certain level in order to meet their demand
within a reasonable timeframe.
2. To smoothen the production requirements:
Almost every kind of business experiences seasonal trends in demand. In order to
meet the higher demands during peak season, companies build-up inventory
14
during off-peak demand season and store the finished goods for the peak demand
season.
3. To decouple operations:
Manufacturing firms have used inventories as buffers between in order to address
requirements for periods when there are breakdowns on production floors. The
inventory levels ensure that production continues while equipment is serviced or
repaired and customer orders are met. Inventory of raw materials also ensure that
production continues in the event of disruption of supplies from the suppliers.
However, inventories represent company’s tied up capital, therefore all companies
attempt to minimize the inventory they carry at any given time.
4. To prevent against stockouts:
Sometimes due to unexpected increase in demand, weather conditions, supplier
stockout, delivery delays, wrong or bad quality material and so on, the overall
production is effected and it is important to maintain a buffer stock which helps to
address demands during the periods of these uncertain and unpredictable events.
5. To take advantage of order cycles:
To minimize purchase and inventory costs, a firm generally has to buy in
quantities that exceed immediate requirements. This results in the need to store
some of these products for later use. Similarly sometimes it is economical to
produce in larger quantities. In this case as well, the excess products have to be
stored somewhere for later use. This storage of inventory enables a firm to buy
and produce in quantities often referred to as “economic order quantities”, without
having to match purchase or production with demand requirements in the short
run. This result in periodic orders also called order cycles. The resulting stock is
known as cycle stock.
6. To hedge against price increase:
Occasionally there is a speculation that the prices will go up, so firms buy in
larger than needed quantities. This ability to buy and store the extra quantities
also allows a firm to take advantage of price discounts for larger orders.
7. To permit operations:
The fact that the production process itself is not instantaneous, there is bound to
be inventory in the pipeline at different stages on the production floor. This
inventory of raw materials and semi finished goods allows companies to produce
and replenish the stocks periodically.
Both overstocking and understocking are not good for production. Understocking results
in missed deliveries, lost sales and dissatisfied customers. Whereas, overstocking results
in unnecessary amount of funds tied up in inventory; a fund that can be used elsewhere
more effectively. There are two major objectives of inventory management, the first one
is to maintain a level of customer satisfaction and the other one is to minimize the cost of
storing the inventory, often referred to as the carrying cost. The overall objective of
15
inventory management is to achieve a level of customer satisfaction while keeping the
inventory costs reasonable. In order to achieve both these objectives, the managers have
to make two major decisions: the size of the order and its timing.
One of the matrices used for measuring the effectiveness of inventory management is
called the inventory turnover ratio. This is the ratio of annual cost of goods sold to
average inventory investment. Generally, the higher the ratio the better it is because that
implies more efficient use of the inventory.
Requirements for Efficient Inventory Management System
To have an effective inventory management system, a company should have the
following (Stevenson, 2004):
1. Inventory tracking system:
There are two major types of inventory tracking systems, one is called the
periodic system where a count of items in the inventory is made periodically
(weekly, monthly or quarterly) and then decision on when to order and how much
to order is taken. The second is called the perpetual system. In this kind of
system a continuous tracking of inventory is carried out through an IT system
which updates a database, every time the point of sale system (cash register)
records a sale. Once the inventory level reaches a minimum amount, an order for
more goods is placed with the supplier. One advantage of this system is the
continuous monitoring and control of inventory, however, one of the
disadvantages is the cost of installing and managing an IT system, to be used for
tracking the inventory.
2. Forecast of demand and lead time:
Inventories are used to satisfy customer demand, therefore it is imperative to have
estimates on the amount as well as timings of demand. In addition it is important
to know how long will it take a supplier to supply the order (lead time). It is also
important to know the seasonal variation in demand in order to maintain
additional stock, in case the delivery is delayed. Several firms use the sales and
customer demand information from the past to forecast the future, using
techniques described earlier in this learning package.
3. Reliable cost information:
There are three major costs that one needs to have a very firm grip on when
making inventory related decisions. The first one is the holding or carrying cost.
This cost includes interest, insurance, depreciation, deterioration, spoilage, and
warehousing costs (power, and rent). The second cost is the ordering cost. This
cost includes the cost of placing an order and receiving inventory. This includes
all the administrative costs of determining the demand, preparing invoices and
sending the order to the vendor. The last is the shortage cost. Shortage cost is the
opportunity cost of not being able to fulfil an order. Planners and managers have
16
to take into account all these costs in order to make a decision about when to
order and how much to order.
4. Inventory classification system:
It is not possible to give equal importance to every kind of product in the
inventory. Some products are more important than others. Therefore, companies
follow a classification system where they classify different products in the
inventory based on the impact it will have, in case it is not available. Based on
this classification system, different levels of inventory are maintained.
Economic Order Quantity
Identification of the Economic Order Quantity (EOQ), is one of the major jobs of any
inventory manager. EOQ is that quantity of order which results in minimizing the annual
costs of holding and ordering. The quantitative model used for EOQ makes some
assumptions, these assumptions are as follows:
1. Only one product is considered in the model
2. Annual demand requirements are known in advance
3. Demand is reasonably constant
4. Lead times are constant
5. Each order is received in single delivery
6. There are no quantity discounts associated with the order
Economic Production Quantity
Production facilities world over use batch mode of production. Even in assembly
operations batches are used. The reason is that sometimes the capacity to produce the
part far exceeds the demand so one needs to accumulate demand and then produce in
batches, if there is no fear of loss of business due to delays for batching. In such cases, it
makes perfect sense to produce in batches. This batch size is called the Economic
Production Quantity (EPQ). As in EOP, EPQ also makes some assumptions, these
assumptions are as follows:
1. Only one item is considered at a time
2. Annual demand is certain and known
3. The usage rate is constant
4. Usage occurs continuously but the production occurs in batches
5. The production rate is constant
6. Lead time does not vary and is known
7. There are no quantity discounts
Quantity Discounts
Quantity discounts are price reductions for large orders offered to customers to tempt
them to buy more. Inventory managers have to weigh in the cost of carrying the goods in
17
larger quantity, fewer numbers of orders and reduced cost of the product. So the total cost
is
Total cost = Carrying cost + Ordering cost + Purchasing cost
= (Q/2)H + (D/Q)S + PD
18
19
CASE STUDY
You are the CEO of a manufacturing company dealing primarily with off-site
construction type manufacturing. During this economic downturn, to everyone’s surprise
you have found that your company is very cash-rich. You want to utilize this cash to start
a new manufacturing facility located somewhere in the Greater Manchester Area. Your
hope is that you will invest in this new facility, and in 2-3 years time when the economy
turns around, and construction sector will be on an upswing and you will be ready to meet
market demand. You want to utilize the next 18 months in planning and commissioning
the new manufacturing facility and developing a production strategy as well as a
production philosophy.
The first decision you have to make and justify is, whether you will go for a push-based
production system or a pull-based production system. Once you have made that decision,
you will have to address the planning of the rest of the production system. As part of this
project you have to make and justify a decision on which one of the two types of above
mentioned production systems you will choose; and based on your choice highlight major
aspects of your production strategy in any three of the areas listed below, using
tools/principles/philosophies/techniques (one each from each of the three areas you
choose) covered in the module:
1.
2.
3.
4.
Manufacturing Systems
Facilities planning and layout design
Logistics and Site Planning
Forecasting and Inventory Management
REFERENCES
Ferdows, K., (March-April 1997). “Making the Most of Foreign Factories”, Harvard
Business Review, 73-88.
Stevenson, W.J., (2004), “Operations Management”, McGraw Hill
20