Introduction to Operational Management Part 2

QualityControl and Improvement

Chapter 9

9-2

Chapter 9 Outline

• Design of Quality Control Systems• Process Quality Control• Attribute Control• Variables Control• Using Control Charts• Continuous Improvement• Six Sigma• Quality Control in Industry

9-3

Design of Quality Control Systems

• Break down production process into subprocesses and “internal customers.”

• Identify “Critical points” where inspection or measurement should take place

• Four steps in designing QC systems.

9-4

Steps in Designing QC Systems

Identify critical points• Incoming materials & services• Work in process• Finished product or service

Decide on the type of measurement • variable • attribute

Decide on the amount of inspection to be used. Decide who should do the inspection

Types Of Measurement

• Attribute measurement–Product characteristic evaluated with a discrete choice:

• Good/bad, yes/no

• Variable measurement–Product characteristic that can be measured on a continuous scale:

• Length, size, weight, height, time, velocity

9-6

When the Inspector Finds a Defect…

1. Containment: Keep the defective items from getting to the customer

2. Correction: Find the cause of the defect and correct it.

3. Prevention: Prevent the cause from happening again.

4. Continuously improve the system.

9-7

When the Inspector Finds a Defect e.g. Strap on backpack comes loose

Containment: pull the bad backpacks from the line.

Correction: sewing machine misaligned; fix it.

Prevention: why was it misaligned? Find out and change system to prevent it happening again.

Continuously monitor and improve system.

9-8

Process Quality Control

• Basic assumptions (tenets) of Process Quality Control:– Every process has random variation in it.– Production processes are not usually found in a state of

control.

• “State of Control”; what does it mean?– Unnecessary variation is eliminated.– Remaining variation is because of random causes.

9-9

Process Quality Control

• Assignable (special) causes– Can be identified and corrected

• Common causes– Occur randomly– Cannot be changed unless process is redesigned

9-10

Process Control Chart (Figure 9.1)

x

y

Time

Upper control limit (UCL)

Center line (CL)

Lower control limit (LCL)

Average + 3 standard deviations

Quality measurement

average

Average - 3 standard deviations

9-11

Qua

lity

Me a

sure

men

t

UCL

LCL

CL

1 2 3 4 5 6Sample

Quality Control Chart (Figure 9.2)

Stop the process; look for assignable cause

Stop the process; look for assignable cause

9-12

Attributes & Variables

• Attributes are counts, such as the number (or proportion) of defects in a sample.

• Variables are measures (mean & range or standard deviation) of critical characteristics in a sample.

9-13

Formulas for SPC (3 Sigma)

• p-Chart

• x-Bar Chart

• R-Chart

(1 )3 p ppn

RDLCL 3 RDUCL 4

RAx 2

9-14

Issues in Using Control Charts• Sample Size

– large enough to detect defectives– defect rate has time dimension

• How often to sample?– Depends upon cost

• Control limits vs. product specifications– Is the process capable of producing to specs?– Are the specifications appropriate?

9-15

Continuous Improvement

• Aim of continuous improvement is to reduce the variability of the product or process

• Techniques for continuous improvement– Pareto analysis– Cause-and-effect (fish-bone) diagrams– Process capability charts

9-16

Pareto AnalysisTable 9.2

Defect Items# of

DefectivesPrecent

DefectiveCumulative Percentage

Loose connections 193 46.8% 46.8%Cracked connectors 131 31.8% 78.6%Fitting burrs 47 11.4% 90.0%Improper torque 25 6.1% 96.1%O-rings missing 16 3.9% 100.0%Total 412 100.0%

Note: 40 percent of the items cause 78.6 percent of the defects

9-17

Pareto Diagram (Figure 9.3)

0

50

100

150

200

250

Looseconnections

Crackedconnectors

Fitting burrs Improper torque O-rings missing

# of

Def

ectiv

es

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

Perc

enta

ge

9-18

Cause-and-effect (Fish-bone, Ishikawa) diagram (Figure 9.4)

Looseconnections

W orkers

M ateria lconnectors

Inspection Tools

ContentNuts

K nowledgeFatigue

Training

Hose

Size

Surface defect

SizeSm allLarge

Judgment

Measurem entM easuring

tools Errors

Inspector

Experience

Tra ining

W earAdjustm ent

Torque

Air pressure

9-19

Process Capability Index Examples (Figure 9.5)fr

eque

ncy

process measure process measure

9-20

Computation of Cpk (Figure 9.6)fr

eque

ncy

process measure process measure

9-21

Six-Sigma Quality• Pioneered by Motorola in 1988 (Juran claims credit for the

idea).• 3.4 defects per million• Sample size rules become unusable• Most process are 4 sigma, e.g. payroll, prescriptions, baggage

handling, journal vouchers, restaurant bills.• Airline fatalities are 6.4 sigma• IRS tax advice is less than 2 sigma• Criticism: accepts 3.4 defects/million. Is not zero defects.

9-22

Six Sigma Quality

• Process Improvement steps of Six Sigma (DMAIC):

1. Define2. Measure3. Analyze4. Improve5. Control

9-23

Quality Control in Industry

• 75% use process control charts.• More use of variable (x-bar and R) charts than

attribute (p) charts.• “The Seven Tools of Quality Control” (see

Figure 9.7)• Quality control in the service industry

(SERVQUAL)

9-24

Summary

• Design of Quality Control Systems• Process Quality Control• Attribute Control• Variables Control• Using Control Charts• Continuous Improvement• Six Sigma• Quality Control in Industry

9-25

End of Chapter Nine

Supply Chain Management

Chapter 10

10-27

Chapter 10 Outline• Definitions and Terminology• System Interactions• Coordination in Supply Chain• Measuring Supply Chain Performance• Supply Chain Strategies• Structural Improvement• Improvement in Infrastructure• The Internet and Supply Chains• Virtual Supply Chains

10-28

Definitions and Terminology

• Supply Chain• Supply Chain Management• Distribution Channel• Demand management• Logistics management

10-29

Supply Chain

The sequence of business processes and information that provides a product or service from suppliers through manufacturing and distribution to the ultimate consumer.

10-30

Supply Chain Management

Planning, design, and control of the flow of information and materials along the supply chain in order to meet customer requirements in an efficient manner, now and in the future.

10-31

Distribution Channel

The route from the producer forward through the distributors to the customer

10-32

Demand Management

• Managing the demand for goods or services along the supply chain.

• Demand can be managed through such mechanisms as products, pricing, promotion, and distribution.

10-33

Logistics Management

• If broadly defined, it is the same as supply chain management.

• Narrowly defined, logistics management is concerned with inbound transportation and outbound distribution.

10-34

A Typical Supply Chain

10-35

System Interactions(System Dynamics in Supply Chains)

• Supply chain is a highly interactive system. Decisions in each part of the chain affect the other parts.

• There is an accelerator (bull whip) effect• The best way to improve a supply chain is to

reduce the total replenishment time and to feed back actual demand information to all levels.

10-36

Widget Example (Figure 10.2): Retail Level

10-37

Widget Example (Figure 10.2): Wholesale Level

10-38

Widget Example (Figure 10.2): Factory Level

10-39

Coordination in the Supply Chain

• Need for coordination both within firms and across firms

• Supply chains must be managed across organizational boundaries.

• Parallel between supply chain and quality improvement

10-40

Measuring Supply Chain Performance (1)

• Delivery—on time delivery of entire orders.• Quality

– Customer satisfaction– Customer loyalty

• Time– Total replenishment time– Cash to cash cycle

• Days in inventory + days in accts receivable-days in accounts payable

10-41

Measuring Supply Chain Performance (2)

• Flexibility– Time to change volume or product mix by a certain

percentage– Maximum percentage of change in volume or

product mix in fixed time perion• Cost

– Total delivered cost– Value added or productivity

10-42

Supply Chain Strategies

• Functional products—commodity-like– Efficient, low cost supply chain

• Innovative products– Flexible, fast supply chain

• Firms should sort their products and apply the appropriate strategies

10-43

Structural Improvement

Basic Ways to Improve Supply Chain Structure:– Change structure

• Capacity, Facilities, Process technology, vertical integration

– Change infrastructure• People, Information systems, Organization, Production

and inventory control, Quality control systems

10-44

Forms of Structural Change in a Supply Chain

• Forward and Backward Integration• Major process simplification• Changing the configuration of factories,

warehouses, or retail locations• Major product redesign• Outsourcing logistics to a third party.

10-45

Improvement in Infrastructure

• Cross-functional teams• Partnerships with suppliers and customers• Set-up time reduction to reduce lot sizes• Integrated information systems• Cross-docking—keeps goods out of the

warehouses.

10-46

The Internet and Supply Chains

• Fundamental processes in supply chains:– Order placement– Order fulfillment

• e-Procurement and its types• Potential problems with e-Procurement

10-47

Processes for e-Procurement (Figure 10.3)

Requirement Selection Requisition Approval

REQUEST

Requisition Source Negotiate Contract

BUY

Confirm ProcessOrder Ship Invoice

SUPPLY

Receive Deliver Match PayPAYMENT

10-48

Types of e-procurement

• On-line catalogs listing products, prices, etc.• Third-part auctions—reverse auctions• Private exchanges to connect suppliers

10-49

Problems with e-procurement

• Too much focus on technology; not enough on systems

• Insufficient concern about value to both partners

• Fragmented efforts within and across companies

• Record accuracy and data security issues

10-50

Virtual Supply Chains

• “Virtual Companies”:– Highly flexible—no fixed assets– Successful in highly dynamic environment– Made feasible by computers and the Internet – May lead to “hollow corporations” or shell

companies• Virtual Supply Chain consists of at least one

virtual company that coordinates all activities of the supply chain

10-51

Summary• Definitions and Terminology• System Interactions• Coordination in Supply Chain• Measuring Supply Chain Performance• Supply Chain Strategies• Structural Improvement• Improvement in Infrastructure• The Internet and Supply Chains• Virtual Supply Chains

10-52

End of Chapter Ten

Forecasting

Chapter 11

11-54

Chapter 11 Outline• A Forecasting Framework• Qualitative Forecasting Methods• Time-Series Forecasting• Moving Average• Exponential Smoothing• Forecast Errors• Advanced Time-Series Forecasting• Causal Forecasting Methods• Selecting a Forecasting Method• Collaborative Planning, Forecasting and Replenishment

11-55

A Forecasting Framework• Focus of the chapter is on the forecasting of demand

for output from the operations function.– Demand may differ from sales

• Difference between forecasting and planning– Forecasting: what we think will happen– Planning: what we think should happen

• Forecasting application in various decision areas of operations (capacity planning, inventory management, others)

• Forecasting uses and methods (See Table 11.1)

11-56

Use of Forecasting: Operations Decisions

TimeHorizon

AccuracyRequired

Number ofForecasts

ManagementLevel

ForecastingMethod

Processdesign Long Medium Single or few Top Qualitative

or causalCapacityplanning,facilities

Long Medium Single or few Top Qualitativeand causal

Aggregateplanning Medium High Few Middle Causal and

time series

Scheduling Short Highest Many Lower Time series

Inventorymanagement Short Highest Many Lower Time series

11-57

Use of Forecasting: Marketing & Finance

TimeHorizon

AccuracyRequired

Number ofForecasts

ManagementLevel

ForecastingMethod

Long-rangemarketingprograms

Long Medium Single or few Top Qualitative

Pricingdecisions Short High Many Middle Time series

New productintroduction Medium Medium Single Top Qualitative

and causalCostestimating Short High Many Lower Time series

Capitalbudgeting Medium Highest Few Top Causal and

time series

11-58

‘Qualitative’ Forecasting Methods

• Based upon managerial judgment when there is a lack of data. No specific model.

• Major methods:– Delphi Technique– Market Surveys– Life-cycles Analogy– Informed Judgment (naïve models)

11-59

Time-Series Forecasting

• Components of time-series data:– Trend—general direction (up or down)– Seasonality—short term recurring cycles– Cycle—long term business cycle– Error (random or irregular component)

• “Decomposition” of time-series– Data are broken into the four components

• Moving Averages• Exponential Smoothing

11-60

• Assumes no trend, seasonal or cyclical components.

• Simple Moving Average:

• Weighted Moving Average:

Moving Average

NDDDA Nttt

t11 ......

tt AF 1

11211 ...... NtNtttt DWDWDWAF

11-61

Moving Average

Period Actual Demand Forecast

1 10

2 18

3 29

4 19

(10+18+29)/3 = 19

Period 5 will be (18+29+actual for period 4)/3

Compute three period moving average (number of periods is the decision of the forecaster)

11-62

Time-Series Data Plot

Note: The more periods, the smoother the forecast.

11-63

• The new average is computed from the old average:

• The value of the smoothing constant () is a choice. It determines how much the calculation smooths out the random variations. Its value can be set between zero (0) and one (1). Normally it is in the 0.1 to 0.2 range.

Exponential Smoothing

11 ttt ADA

11-64

Simple Exponential Smoothing

• The forecast:

F=forecast of demand (both this period and next)D = actual demand (this period)t = time period

• No trend, cyclical or seasonal components.• Note: we are adjusting Ft to get Ft+1

tttt FDFF 1

11-65

Exponential Smoothing-calculation

• Facts:– September forecast for sales was 15– September actual sales were 13– Alpha ( α) is 0.2– What is the forecast for October?

• Calculation– October Forecast = September forecast +

α(September actual-September forecast)=15+0.2(13-15)=15+0.2(-2)=15-0.4=14.6

11-66

Forecast Errors• Cumulative Sum of Forecast Error (CFE) and

Mean Error (ME)

• Mean Square Error (MSE)• Mean Absolute Deviation (MAD)—measure of

deviation in units.

• Mean Absolute Percentage Error (MAPE)• Tracking Signal (TS)—relative measure of bias

11-67

Forecast Errors: Formulas

t

n

=1i

e = CFE Cumulative sum ofForecast Errors

nt

n

=1i

e = MSE

2Mean Square Error

n

|e| = MAD

t

n

=1iMean Absolute

Deviation

n

|De|

= MAPE t

tn

=1i

100Mean AbsolutePercentage Error

MAD

e = TS

t

n

=1iTracking Signal

nt

n

=1i

e = MEMean Error

11-68

Tracking Signal

Analogous to control charts in quality control, viz. if there is no bias, its values should fluctuate around zero.

Is a relative measure, i.e. the numbers mean the same for any forecast.

11-69

Advanced Time-Series Forecasting

• Adaptive exponential smoothing– Smoothing coefficient () is varied

• Box-Jenkins method– Requires about 60 periods of past data

11-70

Time Series vs. Causal Models

• Time series compares data being forecast over time, i.e. Time is the independent variable or x- axis or x-variable.

• Causal models compare data being forecast against some other data set which the forecaster may think is a cause of the forecasted data, e.g. population size causes newspaper sales.

11-71

Causal Forecasting Models

• The general regression model:

• Other forms of causal model:– Econometric– Input-output– Simulation models

xbay ˆ

11-72

Example of Time Series Model

t D t F t

1 120 119.522 124 121.183 119 122.844 124 124.55 125 126.156 130 127.817 129.47

Intercept (a) 117.8667Slope (b) 1.657143

Yt = a + b(t)

F7 = 117.87 + 1.66 (7) = 129.47 = sales forecast for next year

Dt = actual sales

Ft = forecasted sales

t = time period (e.g. year)

11-73

Example of Causal Model

I t D t F t

34.6 120 121.1535.7 124 123.7936.3 119 125.2235.2 124 122.5935.7 125 123.7936.4 130 125.4637.6 128.34

Intercept (a) 38.23094Slope (b) 2.396514

Yt = a + b(t)

F7 = 38.23 + 2.397 (7) = 128.34 = sales forecast for next year (year 7)

Dt = actual sales in year t

Ft = forecasted sales

It = median family income (000’s)

11-74

Selecting a Forecasting Method

• User and system sophistication– People reluctant to use what they don’t understand

• Time and resources available– When is forecast needed?– What is value of forecast?

• Use or decision characteristics, e.g. horizon• Data availability and quality• Data pattern• Don’t force the data to fit the model!

Forecast Horizons and Forecast Accuracy

• The longer the forecast horizon, the less accurate the forecast

• Long lead times require long forecast horizons• Lean, responsive companies have the goal of

decreasing lead times so they are shorter than the forecast horizon

11-76

Collaborative Planning, Forecasting and Replenishment (CPFR)

• Aim is to achieve more accurate forecasts• Share information in the supply chain with

customers and suppliers.• Compare forecasts

– If discrepancy, look for reason– Agree on consensus forecast

• Works best in BtoB with few customers

11-77

Summary• A Forecasting Framework• Qualitative Forecasting Methods• Time-Series Forecasting• Moving Average• Exponential Smoothing• Forecast Errors• Advanced Time-Series Forecasting• Causal Forecasting Methods• Selecting a Forecasting Method• Collaborative Planning, Forecasting and Replenishment

11-78

End of Chapter Eleven

Facilities and Aggregate Planning

Chapter 1215

Due Date!

12-80

Chapter 12 Outline

• Facilities Decisions• Facilities Strategy• Aggregate Planning Definition• Planning Options• Basic Strategies• Aggregate Planning Costs• Example of Costing• Sales and Operations Planning

12-81

Hierarchy of Capacity Decisions

Facilitiesdecisions

Aggregateplanning

Scheduling

0 6 12 18 24Months

Planning Horizon

Scheduling

Facilitiesdecisions

AggregatePlanning

12-82

Definition of “Capacity”

Capacity is defined as the maximum output that can be produced over a given period of time.

•Primarily determined by– Physical assets– Labor availability

•Nominal capacity– Subtracts downtime, shift breaks, etc.– Is the actual capacity that should be used in planning

12-83

Facilities Decisions

• How much total capacity is needed?• How large should each unit of capacity be?• When is the capacity needed?• What type of facilities/capacity are needed?

12-84

Factors Affecting Facilities Strategy

• Predicted demand• Cost of facilities• Likely behavior of competitors• Business strategy• International considerations

12-85

How Much?: Strategies for “Capacity Cushion”

• Try not to run out (e.g. utilities)• Build to average forecast• Maximize utilization at bottlenecks

–Reduce rejects and rework–Reduce throughput time

12-86

How Large?What is “Optimum” Unit Size?

• Economies of scale

• Diseconomies of scale

12-87

When?Timing of Facility Additions

• Preempt the competition

• Wait-and-see strategy

12-88

What Type?Types of Facilities

• Product-focused (55%) - computers, chain saws, dishwashers

• Market-focused (30%) - electricity, bakeries• Process-focused (10%) - computer chips• General purpose (5%) – several products and

processes.

12-89

Aggregate Planning Characteristics

• A time horizon of about 12 months• An aggregated level of demand for one or few

categories of product• The possibility of changing both supply and demand• A variety of management objectives• Facilities that are considered fixed (cannot be

expanded or reduced)

12-90

Planning Options• Options for managing demand.

– influencing demand from customers–delivering orders as promised

• Options for managing supply–delivering what is promised–managing capacity & other

resources

12-91

Options for Influencing (Managing) Demand

• Pricing

• Advertising and promotion

• Backlog or reservations (shifting demand)

• Development of complementary products

12-92

Options for Influencing (managing) Supply

• Hiring and layoff of employees• Using overtime and undertime• Using part-time or temporary labor• Carrying inventory• Outsourcing or Subcontracting• Making cooperative arrangements

12-93

Basic Production Strategies

• “Level” strategy (constant work

force, use inventory as buffer)

• “Chase” strategy (produce to

demand, vary workforce)

Level Load Strategy

• Deliver products and services at a constant rate

• Avoid making changes to operations

5-27

Chase Strategy

• Produce only what you sell• Produce products or services just-in-time• If there are no sales—do not produce• Typical for services

5-29

12-96

Comparison of Chase versus Level Strategy

Chase Demand Level CapacityLevel of labor skill required Low HighJob discretion Low HighCompensation rate Low HighWorking conditions Sweatshop PleasantTraining required per employee Low HighLabor turnover High LowHire-fire cost High LowError rate High LowAmount of supervision required High LowType of budgeting and forecasting required Short-run Long-run

12-97

Aggregate Planning Costs

• Hiring and firing costs (chase)• Overtime and undertime costs (chase)• Subcontracting costs (chase)• Part-time labor costs (chase)• Inventory-carrying costs (level) • Cost of stockout or back order (level)

12-98

Underlying Purpose of S&OP

• The underlying purpose of Sales and Operations Planning is to balance demand and supply.

• Monthly ‘time buckets’ over a rolling 12 month horizon.

• Based on families of products• Input into detailed planning and scheduling

12-99

Inputs to S&OP•Input Responsibility•Demand Forecast Marketing•Market intelligence Marketing•Actual sales Sales•Capacity information Manufacturing•Management targets Management•Financial requirements Finance•New product information R&D•New process information Process engineering•Workforce availability Human resources

12-100

S&OP Outputs• Output Responsibility• Sales plan Marketing and sales• Production plan Manufacturing• Inventory plan (MTS) Management• Backlog plan (MTO) Management• Purchasing plan Purchasing• Financial plan Finance• Engineering plan Engineering• Workforce plan Human resources

12-101

Iterative Nature of S&OP(made possible by concurrent planning)

1. Develop production plan.

2. Check implications for inventory/backlog plan.

3. If necessary, adjust production plan.

4. Check against resource plan and availability.

5. If necessary, adjust production plan.

6. Recheck against inventory/backlog and resources.

7. Continue (go to 5) until you meet all constraints.

12-102

Summary

• Facilities Decisions• Facilities Strategy• Aggregate Planning Definition• Planning Options• Basic Strategies• Aggregate Planning Costs• Example of Costing• Sales and Operations Planning

12-103

End of Chapter Twelve

Scheduling Operations

Chapter 13

13-105

Chapter 13 Outline

• Batch Scheduling• Gantt Charting• Finite Capacity Scheduling• Theory of Constraints• Priority Dispatching Rules• Infinite Capacity Loading• Planning and Control Systems

13-106

Synonyms

• Shop Floor Control• Scheduling Operations• Production Activity Control (PAC)• Detailed Planning and Scheduling

(DPS)

13-107

Batch Scheduling

• Very complex scheduling environment• Can be thought of as “Network of Queues”• Customers spend most of their time waiting• Closely related to MRP (See chapter 16)

13-108

Batch ProcessingMove-queue-work-wait-move

WS 1 WS 2

Work is done according to work order

waitmove

queue

move

movewaitqueue

move

movemove

Difficulties Of Batch/Job Shop Scheduling

• Variety of jobs processed• Different routing and processing

requirements of each job• Number of different orders in the

facility at any one time• Competition for common resources

Responsibilities of Production Control Department

• Loading– Check availability of material, machines

& labor• Sequencing

– Release work orders to shop & issue dispatch lists for individual machines

• Monitoring– Maintain progress reports on each job

until it is complete

13-111

Gantt Charting• Developed by Henry Gantt in 1917• Related concepts:

– Makespan – total time to complete a set of jobs– Machine utilization – percent of make span time a

machine (or person) is used.• Used primarily to monitor progress of jobs

13-112

Job Data for Scheduling Example

JobWork center/Machine Hours

DueDate

1 A/2, B/3, C/4 3

2 C/6, A/4 2

3 B/3, C/2, A/1 4

4 C/4, B/3, A/3 4

5 A/5, B/3 2

13-113

Scheduling Example

Process A Process C

Job 1 AC

B

Process B

Job 3

In what sequence should the jobs be done?Job 5 Job 2 Job 4

13-114

Where is the bottleneck?

Total Machine times for the five jobs:– Machine A: 15 hours– Machine B: 12 hours– Machine C: 16 hours

C appears to be the bottleneck.But! A is used for every job; C is not.Either one could determine makespan.

13-115

Gantt Chart for Example

13-116

Finite Capacity Scheduling

• Finite capacity scheduling loads jobs onto work stations being careful not to exceed the capacity of any given station.

• Done at the detailed planning and scheduling (DPS) level

• Part of the loading responsibility.

13-117

Theory of Constraints (TOC)

• Proposed by Goldratt in The Goal (1983)• Goal is to make money.• Key elements of “goals” according to TOC:

– Throughput—what is made and sold– Inventory—raw materials– Operating expenses—cost of conversion

• Production does not count until it is sold!

13-118

Theory of Constraints (TOC)• A constraint is anything that is slowing

down production—a bottleneck.– A machine or workstation– The market– Procurement system

• The bottleneck determines the capacity of the system.

• Implication: the operations manager should focus on the bottleneck to increase capacity and throughput (and make more money).

13-119

Priority Dispatching Rules• What are priority dispatching rules?

– If you have more than one job waiting at a work station, how do you select which one to process next? The criterion you use for selecting the next job is your dispatching rule.

• In front office services, the most common rule is “first come, first served.”

• Part of the sequencing responsibility

13-120

Priority Dispatching Rules

• Commonly used in manufacturing:– MINPRT (Minimum Processing Time or SPT, shortest

processing time) This rule minimizes total waiting time.

– Critical Ratio (Minimizes average lateness)

• Commonly used in services:– FCFS (First Come, First Served)

13-121

Infinite Capacity Loading

•“Infinite capacity loading” loads jobs onto work centers without regard for the total capacity of the work center.•If the capacity for any given work center has been exceeded, the schedule must be changed.•This is generally done at the MRP level before detailed scheduling and planning

13-122

Infinite capacity loading example: time lines

A(2 hrs)

Move/Wait(4 hrs)

B(3 hrs)

Move/Wait(4 hrs)

C(4 hrs)

Day 1 Day 2 Day 3

Due date

Move/Wait(4 hrs) A (4 hrs)

Day 1 Day 2 Day 3

Due date

C (6 hrs)

Time line for job 1

Time line for job 2

13-123

Infinite Capacity Loading example

6543 J ob 221

J ob 1 J ob 1Hou

rs sc

hedu

led

Work center A

654321 J ob 1

Work center B

654321 Job 1

Job 2

Work center C

1 2 3Day

1 2 3Day

1 2 3Day

13-124

Planning and Control Systems

• What delivery date do I promise?• How much capacity do I need?• When should I start on each particular activity

or task?• How do I make sure that the job is completed

on time?• Advanced Planning & Scheduling (APS)

13-125

Summary

• Batch Scheduling• Gantt Charting• Finite Capacity Scheduling• Theory of Constraints• Priority Dispatching Rules• Infinite Capacity Loading• Planning and Control Systems

13-126

End of Chapter Thirteen

Project Planning & Scheduling

Chapter 14

14-128

Chapter 14 Outline• What is a “project”?• Objectives and tradeoffs• Planning and Control in Projects• Scheduling Methods• Constant-Time Networks• PERT Method• CPM Method• Use of Project Management Concepts

14-129

What is a “Project”?

• Unique item - often a single unit.• Often located on one place. The unit does not

move during production.• Resources are brought to the project.• May be of any size, although we focus on large

projects.

14-130

Examples of Projects

• A wedding• A divorce• Building construction• Bridge construction• Build aircraft carrier• R&D project• Audit

• New product introduction

• Open or close a facility

• Make a movie• Fund raising

campaign• Ad campaign• Software installation

14-131

Objectives and Tradeoffs

Meet thespecifications

Meet theDeadline--schedule

Due Date!

Stay withinthe budget

14-132

Project Management Stages

Planning

Scheduling

Execution

Contro l

14-133

Planning Activities & Decisions

• Identify the project customer• Establish the end product or service• Set project objectives• Estimate total resources and time required• Decide on the form of project organization• Make key personnel appointments• Define major tasks required• Establish a budget

14-134

Scheduling Activities & Decisions

• Develop a detailed work-breakdown structure

• Estimated time required for each task• Sequence tasks in proper order• Develop a start/stop time for each task• Develop detailed budget for each task• Assign people to tasks

14-135

Execution & Control

• Monitor actual time, cost, and performance• Compare planned to actual figures• Determine whether corrective action is

needed• Evaluate alternative corrective actions• Take appropriate corrective actions

14-136

Execution and ControlWhat are ‘corrective actions?’

When one or more activities threaten the time, cost, or performance of the project, a corrective action is necessary:

• Redefine the activity (e.g. split the activity).• Add resources to the activity.• Shift resources from one activity to another

Resources = people, equipment, money

14-137

Scheduling Methods

• Gantt Charts– Shown as a bar charts– Do not show precedence relations– Visual & easy to understand

• Network Methods– Shown as a graphs or networks– Show precedence relations– More complex, difficult to understand and costly

than Gantt charts

14-138

Gantt Chart Project Example (Figure 14.1)Week

No. 1 2 3 4 5 6 7 8

1 Lease the site

2 Hire the workers

3Arrange for the Furnishings

4 Install the furnishings

5 Arrange for the phones

6 Install the phones

7 Move into the Office

14-139

Constant-Time Networks

• Activity times are assumed to be constant• Activities are represented by nodes in the network• Arrows show the precedence relationships• Notations used in calculating start and finish times:

– ES(a) = Early Start of activity a– EF(a) = Early Finish of activity a– LS(a) = Late Start of activity a– LF(a) = Late Finish of activity a

14-140

‘Write a Business Report’Table 14.3

Immediate Duration

Activity Description Predecessors Days

A Decide on Topic None 1

B Collect Data A 2

C Search the Internet A 3

D Write the Report B and C 5

14-141

Network Diagram for ‘Write a Business Plan’ (Figure 14.2)

A

B

D

C

14-142

Forward Pass for ‘Write a Business Plan’ (Figure 14.3)

A

B

D

C

0 1

1 3

4 9

1 4ES EF

14-143

Calculating ES, EF, LS, LF, and Completion Time

ES (a) = 0 for the starting activityEF (a) = ES (a) + t (a)*ES (a) = max [EF (all predecessors of a)]Project completion time = max [EF(all ending activities)]

* t (a) denotes the duration of activity a

LF (a) = min [LS (all successors of a)]LS (a) = LF - t(a)*

Forward Pass:

Backward pass:

14-144

Backward Pass for ‘Write a Business Plan’ (Figure 14.4)

A

B

D

C

0 1

1 3

4 9

1 4ES EF

LS LF

0 1

2 4

4 9

1 4

14-145

Critical Path

• Critical Path = longest path in the network– All activities for which ES=LS and EF=LF– Length of critical path is equal to the project

completion time– If there is any delay on the critical path, the project

will be delayed (unless one takes ‘corrective actions’)

14-146

Slack Times

• Slack time equals amount of time a path may be delayed without delaying the project– Paths not on the critical path have slack– Slack = LS-ES or LF-EF

14-147

Precedence and times for Opening a New Office (Table 14.4)

Immediate Activity Computed

Activity Description Predecessors Time Slack

1 Lease the site None 1 0

2 Hire the workers 1 5 0

3 Arrange for the Furnishings 1 1 1

4 Install the furnishings 3 2 1

5 Arrange for the phones 1 1 3

6 Install the phones 4,5 1 1

7 Move into the Office 2,6,4 2 0

14-148

Network for ‘Open a New Office’ (Figure 14.5)

1

2

43ES EF

LS LF

765

1 6

1 6

0 1

0 1

1 2

4 5

1 2

2 3

6 8

6 8

3 5

4 5

5 6

2 4

14-149

PERT

• Program Evaluation Review Technique• Used under conditions of uncertainty in activity

times• Requires three time estimates for each activity

– Optimistic– Most likely– Pessimistic

• Times distributed according to beta distribution

14-150

PERT Activity Times

• Estimate three times for each activity

• Compute mean completion time for each activity:

64 pmo

e

TTTT

14-151

PERT Activity Times

• Compute the variance for each activity:

• Assumes pessimistic and optimistic times cover six standard deviations

2

6var

op

i

TT

14-152

PERT Activity Times

• If T = total completion time of the project, then

and

pathcritical

eTTE

pathcritical

iT varvar

14-153

CPM• Critical Path Method• Used under conditions of certainty in activity

times• Requires one time estimate for each activity• Looks at time/cost trade-offs

– Normal activity time– Normal cost– Crash time– Crash cost

14-154

Time-Cost Relationship in CPM

Crash Cost

Cost

Normal Cost

Crash

Time

Normal

TimeTime

14-155

Use of Project Management Concepts

• Scheduling is only part of a complete approach to project management

• Trade-off between sophistication and cost of methods

• Choice between constant time, PERT, CPM or more advanced techniques

• Choice of project management software packages

14-156

Summary

• What is a “project”?• Objectives and tradeoffs• Planning and Control in Projects• Scheduling Methods• Constant-Time Networks• PERT Method• CPM Method• Use of Project Management Concepts

14-157

End of Chapter Fourteen

Independent-Demand Inventory

Chapter 15

15-159

Chapter 15 Outline• Introduction• Purpose of Inventories• Inventory Cost Structures• Independent versus Dependent Demand• Economic Order Quantity• Continuous Review System• Periodic Review System• Using P and Q System in Practice• ABC Inventory Management

15-160

Introduction

• Inventory: a stock of materials used to facilitate production or to satisfy customer demand.

• Types of inventory– Raw materials (RM)– Work in process (WIP)– Finished goods (FG)– Maintenance, repair & operating supplies (MRO)

15-161

A Material-Flow Process

Work inprocess

Work inprocess

Work inprocess

Finishedgoods

RawMaterials

Vendors Customer

Productive Process

15-162

A Water Tank Analogy for Inventory

Supply RateInventory Level

Demand Rate

Inventory Level

15-163

Purpose of Inventories (1)• To protect against uncertainties

– in demand (finished goods, MRO)– supply (RM, MRO)– lead times (RM/PP or WIP)– schedule changes (WIP)

• To allow economic production and purchase (as in discounts for buying RM/PP in bulk)

15-164

Purpose of Inventories (2)

• To cover anticipated changes in demand (as in a level strategy) or supply– finished goods– RM/PP

• To provide for transit (pipeline inventories)– RM/PP– finished goods– WIP (independence of operations)

15-165

Inventory Cost Structures (1)

• Item or SKU cost– Expressed as cost per unit or SKU. Gets into

LIFO and FIFO issues. – Problem can be compounded by quantity

discounts.

15-166

Inventory Cost Structures (2)

• Ordering (or setup) cost– Paperwork, worker time (ordering)– worker time, downtime (setup)– Typically expressed as a fixed cost per order or

setup.

15-167

Inventory Cost Structures (3)• Carrying (or holding) cost:

– Cost of capital (market rate or internal rate of return)– Cost of storage (building, utilities, insurance, handling)– Cost of obsolescence, deterioration, and loss

(shrinkage)– Management cost (record keeping, counting)

• Typically expressed as a percentage of SKU cost. Average in U.S. is estimated to be 35 percent per year.

• Businesses often use only cost of capital (understatement).

15-168

Inventory Cost Structures (4)How the 35 percent carrying cost is distributed

• Cost of Capital—9-20 percent• Obsolescence—2-5 percent• Storage—2-5 percent• Material Handling—1-3 percent• Shrinkage—1-3 percent• Taxes & Insurance—1-3 percent

Source: Mark Williams, APICS Instructor Listserv, 22 January 2001

15-169

Inventory Cost Structures (5)• Stock out cost (back order or lost sales)

– record maintenance– lost income– customer dissatisfaction– Typically expressed as a fixed cost per backorder

or as a function of aging of backorders.

15-170

Two Forms of Demand (1)

• Independent demand (this chapter)– finished goods, spare parts, MRO– based on market demand– requires forecasting– managed using ‘replenishment philosophy’, i.e.

reorder when reach a pre-specified level.

15-171

Two Forms of Demand (2)• Dependent demand (next two chapters)

– parts that go into the finished products, RM/PP or WIP

– dependent demand is a known function of independent demand

– calculate instead of forecast– Managed using a ‘requirements philosophy’,

i.e. only ordered as needed for higher level components or products.

15-172

Independent versus Dependent Demand

A pattern plus random influences ‘Lumpy’ because of production lots

15-173

Economic Order Quantity (EOQ)

• Developed in 1915 by F.W. Harris• Answers the question ‘How much do I order?’• Used for independent demand items.• Objective is to find order quantity (Q) that minimizes

the total cost (TC) of managing inventory.• Must be calculated separately for each SKU.• Widely used and very robust (i.e. works well in a lot of

situations, even when its assumptions don’t hold exactly).

15-174

Economic Order Quantity (EOQ)Basic Model Assumptions

• Demand rate is constant, recurring, and known.• Lead time is constant and known.• No stockouts allowed.• Material is ordered or produced in a lot or batch

and the lot is received all at once• Costs are constant

– Unit cost is constant (no quantity discounts)– Carrying cost is a constant per unit (SKU)– Ordering (setup) cost per order is fixed

• The item is a single product or SKU.

15-175

EOQ Lot Size Choice

• There is a trade-off between frequency of ordering (or the size of the order) and the inventory level.– Frequent orders (small lot size) lead to a lower

average inventory size, i.e. higher ordering cost and lower holding cost.

– Fewer orders (large lot size) lead to a larger average inventory size, i.e. lower ordering cost and higher holding cost.

15-176

EOQ Inventory Levels(‘sawtooth model’)

Time

Lot size = Q

OrderInterval

Average InventoryLevel = Q/2

On

Han

d

15-177

Notations and measurement units in EOQ

D = Demand rate, units per yearS = Cost per order placed, or setup cost,

dollars per orderC = Unit cost, dollars per uniti = Carrying rate, percent of value per yearQ = Lot size, unitsTC= total of ordering cost plus carrying cost

15-178

Cost Equations in EOQ

Ordering cost = (cost per order) x orders per year) = SD/Q

Carrying cost per year = (annual carrying rate) x (unit cost) x average inventory = iCQ/2

Total annual cost (TC) = ordering cost per year + carrying cost per year = SD/Q + iCQ/2

15-179

Total Cost of Inventory

15-180

TC and EOQ

TC = ordering cost + holding cost = S*(D/Q) + iC*(Q/2)

EOQ =

note: Although we have used annual costs, any time period is all right. Just be consistent! The same is true for currency designations.

iCSDQ 2

15-181

EOQ ExampleSales = 10 cases/week S = $12/order

i = 30 pct/year C = $80/case _________

EOQ = 2SD)/iC = SQRT[(2*12*10*52)/(80*.3)]

= SQRT[12,480/24] = 22.8 cases/order

TC = ordering cost + holding cost= S*(D/Q) + iC*(Q/2) = 10(520/22.8) + 24 * 11.4= 228.70 + 273.60 = $547.28/year

If order 22 cases instead, TC = $547.64; if 23, TC = $547.30

15-182

EOQ ExampleTotal Inventory Cost

0

200

400

600

800

13 17 21 24 28 32 36 40

Order Size

Dol

lars

15-183

Continuous Review System• Relax assumption of constant demand.

Demand is assumed to be random.• Check inventory position each time there is a

demand (i.e continuously).• If inventory position drops below the reorder

point, place an order for the EOQ.• Also called fixed-order-quantity or Q system

(the fixed order size is EOQ).

15-184

A Continuous Review (Q) System

R = Reorder PointQ = Order QuantityL = Lead time

15-185

A Continuous Review (Q) SystemAmount to order = EOQ

Order when inventory position = reorder point.

Reorder point = lead time * demand/period

= R = lead time demand (when demand is constant)

Reorder point is independent of EOQ!EOQ tells how much to order.Reorder point tells when to order.

15-186

Service Level

• When demand is random, the reorder point must take into account the service level or fill rate.

• Service level has many definitions:– Probability that all orders will be refilled while

waiting for an order to arrive.– Percentage of demand filled from stock in a time

period.– Percentage of time the system has stock on hand.

15-187

Probability Distribution of Demand over Lead Time

m = mean demand R = Reorder point s = Safety stock

15-188

Periodic Review System (1)

• Instead of reviewing continuously, we review the inventory position at fixed intervals. For example, the bread truck visits the grocery store on the same days every week.

• Also known as “P system”, “Fixed-order-interval system” or “Fixed-order-period system”

15-189

Periodic Review System (2)

• Each time we review the inventory, we either order or don’t. The decision depends upon our reorder point.

• The amount we order may be fixed, or may be the amount needed to bring us up to a target (T).

15-190

A Periodic Review (P) System

15-191

Time Between Orders (P) andTarget Level (T) Calculation

DCiSP 2

'' smT Where:

T = target inventory levelm’ = average demand over P+Ls’ = safety stock

15-192

Using P and Q System in Practice

• Use P system when orders must be placed at specified intervals.

• Use P systems when multiple items are ordered from the same supplier (joint-replenishment).

• Use P system for inexpensive items.

15-193

Using P and Q Systems in Practice

• P may be easier to use since levels are reviewed less often.

• P requires more safety stock since may only order at fixed points.

• P is more likely to run out since cannot respond to increases in demand immediately

• Either may be more costly: P in safety stock, Q in monitoring cost.

15-194

Service Level versus Inventory Level (Figure 15.10)

1.1

2.52.42.32.22.12.01.91.81.71.61.5

1.31.2

1.0

1.4

75%

80%

85%

90%

95%

100%

105%

150 160 170 180 190 200 210 220 230 240 250 260 270 280 290 300Average Inventory Level

Servi

ce Le

vel (%

)

z values

100100

Q

15-195

ABC Inventory Management (1)

• Based on “Pareto” concept (80/20 rule) and total usage in dollars of each item.

• Classification of items as A, B, or C based on usage.

• Purpose is to set priorities on effort used to manage different SKUs, i.e. to allocate scarce management resources.

15-196

ABC Inventory Management (2)

• ‘A’ items: 20% of SKUs, 80% of dollars• ‘B’ items: 30 % of SKUs, 15% of dollars• ‘C’ items: 50 % of SKUs, 5% of dollars• Three classes is arbitrary; could be any number.• Percents are approximate.• Danger: dollar use may not reflect importance of

any given SKU!

15-197

Annual Usage of Items by Dollar Value (Table 15.4)

ItemAnnual Usage in

Units Unit Cost Dollar Usage

Percentage of Total Dollar

Usage1 5,000 1.50$ 7,500$ 2.9%2 1,500 8.00 12,000 4.7%3 10,000 10.50 105,000 41.2%4 6,000 2.00 12,000 4.7%5 7,500 0.50 3,750 1.5%6 6,000 13.60 81,600 32.0%7 5,000 0.75 3,750 1.5%8 4,500 1.25 5,625 2.2%9 7,000 2.50 17,500 6.9%10 3,000 2.00 6,000 2.4%

Total 254,725$ 100.0%

15-198

ABC Chart for Table 15.4

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

3 6 9 2 4 1 10 8 5 7

Item No.

Perc

ent U

sage

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

Cum

ulat

ive

% U

sage

Percentage of Total Dollar Usage Cumulative Percentage

A B C

15-199

Managing A items:

Diamonds

15-200

Summary• Introduction• Purpose of Inventories• Inventory Cost Structures• Independent versus Dependent Demand• Economic Order Quantity• Continuous Review System• Periodic Review System• Using P and Q System in Practice• ABC Inventory Management

15-201

End of Chapter Fifteen

Materials Requirements Planning

Chapter 16

16-203

Chapter 16 Outline

• Definition of MRP Systems• MRP versus Order-Point Systems• MRP Example• MRP Elements• Operating an MRP System• The Successful MRP System

16-204

Introduction to MRP• Used to manage dependent demand items

– Raw materials and purchased parts– Work in process (WIP)

• Driven by the master schedule (which is driven by S&OP).

• End items ‘exploded’ into all components using bill of materials (BOM)

• Schedule offset based on lead times• Is the heart of a larger ERP system

16-205

Definitions of MRP Systems• Developed by Joe Orlicky at IBM, 1975.

– IBM 370 was the first computer with the capacity to handle MRP calculations

• Types of MRP:– Type I. An inventory control system (MRP)– Type II. Manufacturing Resource Planning system

(MRPII)– Type III. Enterprise Resource Planning (ERP) system

16-206

Definitions of MRP SystemsThree principal functions of MRP (Orlicky):• Inventory

– Order the right part– Order in the right quantity– Order at the right time

• Priorities– Order with the right due date– Keep the due date valid

• Capacity– A complete load– An accurate (valid) load– An adequate time span for visibility of future load

TR 4-6

Firm orders from Customers Sister plants Stock replenishment

Engineering Design changes

BOM

Forecast of Demand

Purchase Orders

Vendors

MRP Parts Explosion

Rough-cutcapacity planning

Capacity planning

Shop Orders

Shop-floor control

Master schedule

S & OP

Closed Loop MRP System

Operations ProductRaw Materials

Inventory Records

Inv. Transactions

16-207

16-208

Attribute MRP Order PointDemand Dependent Independent

Order philosophy Requirements ReplenishmentForecast Based on master schedule Based on past demand

Control concept Control all items ABC

Objectives Meet manufacturing needs Meet customer needsLot sizing Discrete EOQ

Demand pattern Lumpy but predictable Random

Types of inventory Work in process and rawmaterials

Finished goods and spareparts

Comparison of MRP & Order-Point Systems

16-209

MRP Elements• Inputs

1. Master Schedule2. Bill of Materials (BOM)3. Inventory Records

• Capacity Planning (feasibility)• Planned Order Releases (outputs)

– Purchasing (buy)– Shop Floor Control (make)

MRP Inputs

1. Master schedule2. Product structure file (bill of materials or

BOM)1. Parts & subassemblies contained in product2. Sequence of operations

3. Inventory master file1. Item master information2. Balances & ordering information

16-210

1. Master Schedule• Quantities derived from S&OP production plan

(product groups) [input]• Drives MRP process with a schedule of finished

products (actual items by week) [output]• Quantities may consist of a combination of

customer orders & demand forecasts• Quantities represent what needs to be produced,

not what can be produced (infinite capacity planning)

16-211

16-212

2. MRP Example of BOMTop

Leg

Long Rail

Short Rail

16-213

BOM (Product Structure)

Short Rails (2)1 week

Table (End Item)1 week

Long Rails (2)1 week

Legs (4)1 week

Top (1)2 weeks

Leg Assembly (1)1 week

16-214

Indented BOMLevel Code Component

0 Table (end-item)1 Leg assembly (1)2 Short rails (2)2 Long rails (2)2 Legs (4)1 Top(1)

16-215

3. Inventory (item master) File

– Description– Part number– Part name– Safety stock– Item classification– Cost– Yield– Lead time– Group to which item

belongs

– Assemblies in which item is used

– Shelf life– Batch control

requirements– Substitutes– Suppliers and their

ratings– Unit of measure (SKU)

“Permanent” information may include:

16-216

Inventory Status File

Quantities- Ordered- Received- Issued- Allocated- Previously allocated that have been issued

Dates ordered, received, issued, and allocatedShipping, production, and purchase numbersOn-hand balance & Available balanceBatch identification (e.g. lot number)

Changing information includes:

MRP ExampleThe Alpha Beta Company

Inventory Position

Item On Hand Scheduled Receipts Lot Size MPS

A 10 0 1 100, period 8

B 5 0 1 200, period 6

C 140 0 150 - - -

D 200 250, period 2 250 - - -

ALT=3

C(3)LT=4

D(2)LT=2

D(3)LT=2

BLT=2 Level (LLC)=0

Level (LLC)=1

BOM

16-217

MRP Matrices For A & BItem: A LLC: 0 PeriodLot size: 1 LT: 3 PD 1 2 3 4 5 6 7 8Gross requirements 100Scheduled receiptsProjected on hand 10 10 10 10 10 10 10 10 0Net requirements 90Planned order receipts 90Planned order releases 90

Item: B LLC: 0 PeriodLot size: 1 LT: 2 PD 1 2 3 4 5 6 7 8Gross requirements 200Scheduled receiptsProjected on hand 5 5 5 5 5 5 0 0 0Net requirements 195Planned order receipts 195Planned order releases 195

16-218

16-219

Origin of Requirements

• At Level Zero: gross requirements come from the master production schedule (MPS)

• Below level zero: gross requirements come from planned order releases for the next level above.

• Net requirements are gross requirements plus scheduled receipts minus inventory on-hand

MRP Matrices For C & DItem: C LLC: 1 PeriodLot size: 150 LT: 4 PD 1 2 3 4 5 6 7 8Gross requirements 270Scheduled receiptsProjected on hand 140 140 140 140 140 20 20 20 20Net requirements 130Planned order receipts 150Planned order releases 150

Item: D LLC: 1 PeriodLot size: 250 LT: 2 PD 1 2 3 4 5 6 7 8Gross requirements 585 180Scheduled receipts 250Projected on hand 200 200 450 450 115 185 185 185 185Net requirements 135 65Planned order receipts 250 250Planned order releases 250 250

16-220

Alpha Beta Planned Order Release Report

Period Item Quantity1 C 1502 D 2503 D 2504 B 1955 A 90

16-221

16-222

Operating an MRP System

• Should MRP carry “safety stock”?• How much “safety stock” should be carried?• Issue of “safety lead time”• Danger of “informal” system driving out the “formal”

system• Expansion of MRP to other functions (finance, HRM,

etc.) of business

16-223

Operating a Successful MRP System

• Accurate Inventory Records• Stable master production schedule• Realistic master production schedule• Good control of engineering change orders

(impacts BOM)• Good interface with capacity planning (CRP)• Reports that are useful

16-224

Elements of Successful MRP Implementation

• Allow enough time (18 months minimum)• Put materials people in charge of cross-

functional team (not IS or accountants)• Train everyone and train them again!• Top Management support• Accurate records

16-225

Summary

• Definition of MRP Systems• MRP versus Order-Point Systems• MRP Example• MRP Elements• Operating an MRP System• The Successful MRP System

16-226

End of Chapter Sixteen

Just-In-Time Systems and Lean Thinking

Chapter 17

17-228

Chapter 17 Outline• Philosophy of JIT• Elements of a JIT system• Stabilizing the Master

Schedule• The Kanban System• Reducing Setup Time and

Lot Sizes

• Layout and Equipment• Effect on Workers• Suppliers• Implementation of JIT• Comparison of JIT and MRP• Beyond JIT to Lean Thinking

17-229

Philosophy of JIT

• Modern Roots of JIT (Toyota Production System, Taiichi Ohno. d. 1990)

• Elements of JIT• Root of JIT in “repetitive” manufacturing• JIT as a technique: to reduce inventory• JIT as a philosophy: a comprehensive

management system

17-230

Elements of JIT• Small lot sizes (lot size one)• Use of Kanban system• Quick changeover (set-ups)• Multifunction workers• Efficient layout (linear flow)• Close relationships with suppliers• Frequent deliveries from vendors• Elimination of Waste

17-231

The Seven WastesOverproduction: Producing more than the demand for customers resulting in unnecessary inventory, handling, paperwork, and warehouse space.

Waiting Time: Operators and machines waiting for parts or work to arrive from suppliers or other operations.

Transportation: Double or triple movement of materials due to poor layouts, lack of coordination and workplace organization.

Processing: Poor design or inadequate maintenance or processes requiring additional labor or machine time.

Inventory: Excess inventory due to large lot sizes, obsolete items, poor forecasts or improper production planning.

Motion: Wasted movements of people or extra walking to get materials.

Defects: Use of materials, labor and capacity for production of defects, sorting our bad parts or warranty costs with customers.

17-232

Inventory as Waste

• “If all our suppliers are guessing, you end up with inventory, which is the physical embodiment of bad information.” –Paul Bell, Dell, Inc. Europe.

• Dell’s inventories fell from 31 days of parts in 1996 to 6 days in 2000.

Source: Economist, 1 April 2000, p. 57.

17-233

Elements of JIT as a PhilosophySetup TimeReduction

Small LotSizes

JIT Deliveryfrom Suppliers

Suppliers'Quality Level

KANBANSystem

RepetitiveMPS

DailyScheduleDiscipline

"Pull"Production

System

Product DesignSimplicity

Equipment &Facility Layout

Multi-functionWorkers

Small GroupProblemSolving

EmployeeTraining

PreventiveMaintenance

JIT

17-234

• A “pull” production system• A physical (normally visual) control system• Normally composed of cards and containers

(production card and withdrawal card), but can be any type of signal

• Number of containers

Kanban System

CDTn

The Kanban System

• The Kanban system uses simple cards or signals to strictly control production

• The basic idea is that no station is permitted to produce more than is immediately required by the succeeding station

• This simple idea prevents the buildup of inventory• No computer is required!

17-235

The Real Origin Of Kanban

Q - R

In the 1950s, Ohno visited Detroit to learn about auto making from the U.S. manufacturers.

He was not impressed.

He visited a supermarket, which they did not have in Japan, and observed the way they restocked the shelves.

He used that method as the basis for Kanban.

17-236

17-237

Kanban System

17-238

Kanban Cards

17-239

Reducing Setup Times and Lot Sizes• Reducing setup times:

– increases available capacity– increases flexibility– reduces inventory

• Reduce setup times and run times simultaneously to reduce lot sizes and throughput times

• Single-digit Setup Times (Shigeo Shingo [d. 1990] or SMED System)

• Small lots require short setups!

17-240

Traditional Layout

Stockrooms

Supplier A Supplier B

FinalAssemblyWork Centers

17-241

JIT LayoutFinal

Assembly

Supplier A Supplier B

17-242

JIT Layout with Group TechnologyFinal

Assembly

Supplier A Supplier B

Line 1

Line 2

17-243

Effect of JIT on Workers

• Multifunction workers• Cross-training• New pay system to reflect skills variety• Teamwork• Suggestion system

17-244

Suppliers

• Very close relationship with suppliers• Frequent deliveries demanded from suppliers• Sole-sourcing• Integrated supplier programs• Deliveries to production line• No inspection—high quality

17-245

Features of Integrated Supplier Programs

• Early supplier selection, preferably in the design phase

• Family of part sourcing to allow supplier to take advantage of GT

• Long-term relationships with small number of suppliers

• Paperwork reduction in receiving and inspection to reduce costs

17-246

Implementation of JIT

• Obtain commitment from top management• Gain the cooperation of workforce• Start with final assembly line• Reduce setup times and lot sizes working backward from

the final assembly line• Balance fabrication rates with final assembly production

rates• Extend JIT to the suppliers

Benefits Of JIT

1. Reduced inventory 2. Improved quality 3. Lower costs 4. Reduced space

requirements 5. Shorter lead times 6. Increased

productivity 7. Greater flexibility

8. Better relations with suppliers

9. Simplified scheduling and control activities

10. Increased capacity11. Better use of

human resources12. More product

variety17-247

17-248

Comparison of MRP and JIT• Pull versus Push production systems• Situations for comparing MRP and JIT:

– Pure repetitive manufacturing situation; JIT works best– A batch process; JIT works well with cellular

manufacturing– A job shop; MRPII with some elements of JIT

• MRP assumes the present system is correct and seeks to make the best of that system.

• JIT seeks to change the system to make it better.

The Traditional Push System• In traditional manufacturing, an item is released

for production at a specified time, with an associated due date generated by MRP.

• The item moves through a sequence of operations

• When one operation is finished, the item is “pushed” to the next operation

• Finally, the product is pushed to inventory, to meet the demand forecast

17-249

The Pull System• The pull system focuses on the output of the

system rather than the input.• Finished products are “pulled” from the final

operation in response to firm customer orders.• This leads to a chain reaction, with each station

pulling material from its preceding station.• JIT uses the “Kanban” system to control the

flow of material with very little work-in-process inventory.

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Uses of MRP and JIT

JITRepetitive (mass)

SYNCRO MRPSemirepetitive

MRPNonrepetitive(batch or job

shop)

JIT

SYNCRO MRP

MRP

Low HighStability of Master ScheduleStability of Bill of Material

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Lean Thinking

• Term coined by Womack, Jones and Roos in 1990.

• Extends JIT beyond the factory• Also applies to services• http://www.lean.org

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Five Elements of Lean Thinking

• Specify value from the customer’s point of view• Create a value stream map and remove waste• Flow the product or service through the system• Pull the product or service from the customer• Strive for perfection

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Summary• Philosophy of JIT• Elements of a JIT system• Stabilizing the Master

Schedule• The Kanban System• Reducing Setup Time and

Lot Sizes

• Layout and Equipment• Effect on Workers• Suppliers• Implementation of JIT• Comparison of JIT and MRP• Beyond JIT to Lean Thinking

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End of Chapter Seventeen