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Basics Of Supply Chain Management
Session 1
Introduction to Supply Chain Management
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Customer Expectations
Characteristics that provide value to the customer
Price Quality Delivery Pre- and post-sale service Flexibility (product and volume)
1-7
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Customer Expectations (cont.)
Order qualifiersCompetitive characteristics needed to be a viable competitor
Order winnersCompetitive characteristics that cause customers to choose firm’s products and services
1-8
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Lead Time
“A span of time required to perform a process”—APICS Dictionary
Delivery lead time “The time from the receipt of a customer order to the
delivery of the product”—APICS Dictionary
Cumulative lead time “The longest planned length of time to accomplish the
activity in question”—APICS Dictionary
1-11
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Manufacturing Strategies
Make-to- Stock
Design
Inventory Manufacture Assemble Ship
Delivery Lead Time
Manufacture Inventory Assemble Ship
Manufacture Assemble Inventory Ship
Purchase Manufacture Assemble ShipEngineer-to-Order
Make-to- Order
Assemble- to-Order
Delivery Lead Time
Delivery Lead Time
Delivery Lead Time
Reprinted with permission, J.R. Tony Arnold, Introduction to Materials Management, Prentice-Hall.
1-12
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Conflicts in Traditional Supply Systems
FinanceMarketing Operations
This implies
Inventory investment
TraditionalObjective
Customer service
Production efficiency
Increase profit and cash flow, reduce investment
Increase revenue Reduce manufacturing cost
82 5
93 6
71 4
1-18
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Manufacturing Processes
ContinuousProduction
RepetitiveProduction
Product Layout
Intermittent Production(Job Shop)
Process Layout Project Layout
Manufacturing Processes
1-21
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Characteristics of Product Layout
Limited range of similar products Dedicated workstations Sufficient demand Capital intensive
1-23
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Advantages of Product Layout
Little work-in-process inventory Short throughput and manufacturing lead
times Lower unit cost
1-24
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Characteristics of Process Layout
Intermittent lot production Many different parts processed at
workstations General-purpose machinery Similar types of skills and equipment in
each department Work moves only to required stations
1-26
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Characteristics of Process Layout
Relatively easy to change product or volume
Complex and expensive production and inventory control
High work-in-process inventory levels Longer lead times
1-27
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Characteristics of Project Layout
Used for large, complex projects Project remains in one location for
assembly Avoids cost of moving the product
1-29
Basics of Supply Chain Management
Session 2
Forecasting
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Capacity Management Techniques
CapacityRequirements
Planning (CRP)
Priority Management Techniques
ResourcePlanning
(RP)
ProductionPlan
Rough-CutCapacity
Planning (RCCP)
MasterProductionSchedule
Material Requirements
Planning (MRP)
Production Activity Control
(PAC) Operation Sequencing
Input/Output Control
Planning and Control Hierarchy
At each level, there are three questions:
What are the priorities?
What capacity is available?
How can differencesbe resolved?
1-32
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Manufacturing Resource Planning (MRP II)
“A method for the effective planning of all resources of a manufacturing company”
—APICS Dictionary
Objective: to integrate the resources of an organization
1-33
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Sources of Demand
All sources of demand must be identified:
Customers Spare parts Promotions Intracompany Other
2-4
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
What Should Be Forecast?
Business plan Market direction 2 to 10 years
Sales and operationsplanning
Product lines andfamilies
1 to 3 years
Master productionschedule
End item andoption
Months
Forecast Time FrameLevel
2-8
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Principles of Forecasting
Forecasts Are rarely 100% accurate over time Should include an estimate of error Are more accurate for product lines and
families Are more accurate for nearer periods of
time
2-9
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Qualitative Techniques
Are based on intuition and informed opinion
Tend to be subjective Are used for business planning and
forecasting for new products Are used for medium-term to long-term
forecasting
2-11
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Quantitative Techniques
Based on historical data usually available in the company
Assume future will repeat past
2-12
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Extrinsic Techniques
Based on external indicators Useful in forecasting total company
demand or demand for families of products
2-13
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Intrinsic Quantitative Techniques
Month SalesJanuary 92February 83March 66April 74May 75June 84July 84August 81September 75October 63November 91December 84January ?
2-14
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Moving Average Forecasting
Can be used to filter out random variation. Longer periods smooth out random
variation. If a trend exists, it is hard to detect. Manual calculations can be cumbersome
when dealing with more periods.
2-16
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
periods all for sales Average
sales average Period =index Seasonal
Seasonality
Measures the amount of seasonal variation of demand for a product
Relates the average demand in a particular period to the average demand for all periods
2-20
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Seasonal Sales
Average Salesfor All Periods
2-22
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Visual
Planning and Control
At each level we must answer these questions:
What are the demand priorities?
What capacity is required?
What capacity is available?
3-2
Production Plan
Business Plan
Master Production Schedule
Planning
Execution
Material Requirements
Plan
Production Activity Control and Purchasing
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Typical Characteristics of the Production Plan
12-month time horizon Fluctuating or seasonal demand Plan made for product families Variety of management objectives
3-4
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
3-5
Developing a Production Plan
Three basic strategies can be used: Match/chase Level Combination/hybrid
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Production
Demand
J F M A M J J A S O N D
3-6
Chase Strategy
Period
Un
its
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Chase Strategy
Advantages: Stable inventory Varied production to meet sales requirements
Disadvantages: Costs of hiring, training, overtime, and extra shifts Costs of layoffs and impact on employee morale Possible unavailability of needed work skills Maximum capacity needed
3-7
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
J F M A M J J A S O N D
Time
Dem
and
Demand
Production
Reprinted with permission, J.R. Tony Arnold, Introduction to Materials Management, Prentice-Hall.
3-8
Level Production Strategy
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Level Production Strategy (cont.)
Advantage: Smooth, level production avoids labor and
capitol costs of demand matching
Disadvantage: Buildup of inventory Requires a more accurate forecast
3-9
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
J F M A M J J A S O N D
Time
Dem
and
Demand
Production
Reprinted with permission, J.R. Tony Arnold, Introduction to Materials Management, Prentice-Hall.
3-10
Combination Strategy
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Combination Strategy (cont.)
Produces at or close to full capacity for some part of the cycle
Produces at a lower rate (or does not produce) during the rest of the cycle
Makes use of available capacity, yet limits inventory buildup and inventory carrying costs
3-11
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
3-12
Make-to-Stock Production Plan
Goods are put into inventory and sold from inventory
Used when Demand is constant and predictable Only a few product options exist Delivery times are shorter than time
needed to make the product
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Make-to-Stock Production Plan
Information needed Forecast by time period for the planning
horizon Opening inventory Desired ending inventory
3-13
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Visual
Resource Requirements Planning
The production plan must be compared with existing resources
Are required resources available? If not, how will differences be reconciled?
3-20
Basics of Supply Chain Management
Session 3
Master Planning
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Master Production Schedule
States requirements for individual end items and options by date and quantity
Constrained by and supports the production plan
“Disaggregates” the production plan
3-22
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Objectives of Master Scheduling
Maintain desired level of customer service Make best use of resources Keep inventories at desired level
3-23
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Visual
Relationship to the Production Plan
3-25
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Visual
Rough-Cut Capacity Planning
Rough-cut capacity planning checks whether critical resources are available to support the preliminary master schedule
A resource bill shows the time required for individual items on a critical resource
3-29
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
The MPS
The MPS is not A sales forecast A wish list A final assembly schedule
The MPS should be The anticipated build schedule Realistic and achievable
3-31
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
On hand = 200 units
Available-to-Promise (ATP)
Period 1 2 3 4 5 6
Customer orders 160 20 20 60
MPS scheduledreceipts 200 200 200
Available-to-promise
3-33
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Planning Horizon
The planning horizon is the amount of time the master schedule extends into the future
This is normally set to cover a minimum of cumulative lead time plus time for lot sizing low-level components and for capacity changes of primary work centers
—APICS Dictionary
3-34
Basics of Supply Chain Management
Session 4
Material Requirements Planning (MRP)
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Objectives of MRP
To determine the materials required–What is required–How much is required–When it is required
To establish and maintain priorities
4-4
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Inputs to MRP Process
MPS
MRP
Planning Data
Bill of Material
Inventory Status
4-5
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Description: TablePart Number: 100Part Number Description Quantity Required Unit of Measure
306 Wooden legs 4 EA433 Wooden ends 2 EA711 Wooden sides 2 EA025 Table top 1 EA822 Hardware 1 Kit
Bill of Materials
A bill of material lists all the components needed to make one assembly
Each part has a unique part number
4-6
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Visual
Bill of Materials
Single Level
Multilevel
B a se3 00
T op0 25
H a rd w a reK it
8 22
T a b le1 00
L e gs3 06
L e g B o lts3 26
F ra m e3 57
B a se3 00
B o a rds0 31
G lue0 75
T op0 25
H a rd w a reK it 8 22
T a b le1 00
4-7
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Visual
Where-Used and Pegging Data
Where-Used Lists all the parents in which a component is used, whether there is a demand for the parent or not
Pegging Shows the parents creating the demand for components, the quantities needed, and when
Uses where-used logic to identify current sources of demand
May be single-level or full-level
4-9
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
The MRP Process
Determines What is needed How much is needed When to order
Involves MPS data Bills of material Inventory status Planning data
4-10
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Lead Time, Exploding, and Offsetting
Lead time: The time from when an order is placed until the part is ready for use
Exploding: Multiplying the parent requirements by the usage quantity through the product tree
Offsetting: Placing the requirements in their proper time periods based on lead time
4-11
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Gross and Net Requirements
Available inventory must be taken into account
Net requirements = gross requirements – available inventory
Example:Gross requirements 50 units
Available inventory – 20 units
Net requirements 30 units
4-14
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Visual
Basic MRP Record
Lead time: 2 weeks
ItemNumber
Week
1 2 3 4 5Gross requirements 35
Scheduled receipts 20
Projected available 10 10 30 30 30 0
Net requirements 5
Planned order receipt 5
Planned order release 5
4-17
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Using the Material Requirements Plan
The MRP logic will–Gross, net, offset, and explode requirements–Create planned orders–Keep priorities current
The software can provide action or exception messages
4-19
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Using the Material Requirements Plan
Planner’s actions include the following: Releasing planned orders Rescheduling open orders Changing order quantities Working with others to solve problems
4-20
Basics of Supply Chain Management
Session 5
Capacity Management and Production Activity Control
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Capacity Management
Planning and controlling resources needed to meet production objectivesPlanning: Determining resources
needed to meet the priority planSelecting methods to make that capacity available
Controlling: Monitoring output, comparing with the plan, and taking corrective action
Capacity management occurs at each planning level
5-3
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Defining Capacity
The capability of a system to perform its expected function
The capability of a worker, machine, work center, plant, or organization to produce output per time period
5-5
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Capacity Planning Process
Determine the capacity available Translate the released and planned orders
into capacity required Sum up capacities required for each work
center Resolve differences between available
capacity and required capacity
5-6
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Determining Capacity Available
Capacity available is“The capability of a system or resource to produce a quantity of output in a particular time period”
—APICS Dictionary
Available capacity can be calculated or measured
To calculate available capacity, identify Available time Utilization Efficiency
5-7
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Visual
Available Time
Available time: depends on the number of machines, number of workers, and hours of operation
Number of machines (or number of workers) × hours of operation
What is the weekly available time for a work center that has four machines and works eight hours a day for five days a week?
5-8
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Utilization
Utilization: Percentage of the time that the work center is active
Example: Work center is available 120 hours a week, but actually produces goods for 90 hours
100% hours Available
orkedactually w Hours nUtilizatio
utilization 75% 100% 120
90=×
5-9
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Efficiency
Efficiency: Actual output rated againststandard output
Example: A work center is utilized 100 hours per week and produces 110 standard hours of work
%100workedactually Hours
workof hours Standard×
efficiency %110%100100110
=×=
5-10
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Rated Capacity
Rated capacity = available time x utilization x efficiency
Example: A work center consists of three machines and is operated eight hours a day for five days a week. Past utilization has been 75%, and efficiency has been 110%.
Available time =
Rated capacity =
5-12
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Visual
Demonstrated Capacity
Proven capacity calculated from actual performance data
Example: Over the previous four weeks, a work center produced 110, 140, 120, and 130 standard hours of work. What is the demonstrated capacity?
Demonstrated weekly capacity = standard hours/week
5-14
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Load
Generated by the priority planning system (MRP)
Translates the priorities, given in units, into time required at each work center in each time period
Takes place at each planning level
5-15
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Lead-Time Elements
Queue Setup Run Wait Move
Lead Time
Queue Time waiting before operation begins
Setup Time getting ready for operation
Run Time performing operation
Wait Time waiting after operation ends
Move Time physically moving between operations
Adapted from Material and Capacity Requirements Planning Certification Review Course, 1993, APICS
5-18
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Scheduling Orders
To determine when orders should be started and completed on each work center
Calculate operation time required at each work center
Operation time = setup time + run time Allow for queue, wait, and move times
5-19
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Production Activity Control
5-24
Production Plan
Planning
Implementcontrol Purchasing
Production Activity Control
MasterProduction Schedule
MaterialsRequirements
Planning
Capacity Control
Input/Output
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Objectives of PAC
Execute the MPS and MRP Optimize use of resources Minimize work in process Maintain customer service
5-25
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
PAC Functions
Plan Ensure resources are available Schedule start and completion dates
Execute Gather relevant shop order information Release shop orders
Control Establish and maintain order priority Track actual performance Monitor and control WIP, lead times, and queues Report work center performance
5-26
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Visual
Scheduling and Loading Techniques
Forward scheduling: Activities are schedule from a start date with the completion date of an order computed
Backward scheduling: Activities are scheduled back from the due date
Infinite loading: Assumes capacity is infinite at any work center
Finite loading: Assumes there is a definite limit to capacity at any work center
5-30
Basics Of Supply Chain Management
Session 6
Inventory Fundamentals
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
What Is Inventory?
“…Those stocks or items used to support production,…supporting activities,…and customer service…”
—APICS Dictionary
6-3
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Visual
Reasons for Carrying Inventory
The only good reason for carrying inventory beyond current needs is if it costs less to carry it than not.
Inventory allows the company to operate with different production rates and batch sizes throughout the supply, production, and distribution system.
DecouplesDemand from Supply
Customer demand from Finished goods
Finished goods from Component availability
Output of one operation from Output of preceding operation
Materials to begin production from Suppliers of materials
6-7
Basics of Supply Chain Management, Version 2.1 — August 2001
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Functions of Inventory
Anticipation Fluctuation Lot size Transportation Hedge
6-8
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Visual
Inventory Objectives
Best customer service Low-cost plant operation Minimum inventory investment
6-9
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Visual
Basic Problem
Balance cost of carrying inventory with costs of not carrying inventory
–Customer service–Changing production levels–Placing orders
Sum of the cost of carrying inventory and the cost of not carrying inventory should be as low as possible
6-10
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Visual
Inventory Costs
Item costs Carrying costs Ordering costs Stockout costs Capacity-related costs
6-11
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Visual
Item Costs
Cost of item and all costs to get item into the plant
Product Transportation Customs duties Insurance Direct material, direct labor, and factory
overhead
6-12
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Visual
Carrying Costs
Carrying costs can be broken down into three categories
– Capital costs Money tied up in inventory– Storage costs Space, personnel, and
equipment– Risk costs Obsolescence, damage,
pilferage, insurance, and deterioration
These costs increase with the amount of inventory carried
6-13
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Ordering Costs
Costs of placing an order with the factory or outside supplier
Costs include Production control Setup and teardown Lost capacity Purchase order
6-15
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Stockout Costs
If demand during the lead time exceeds forecast and available inventory, we can expect a stockout, causing
Backorder costs Lost sales costs Lost customer costs
6-17
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Visual
Capacity-Related Costs
Costs of changing production levels–Overtime/undertime–Hiring–Layoff–Training–Shift premiums
Can be avoided by leveling production(but may build inventory)
6-18
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Visual
AssetsLiabilitiesOwners’ equity
RevenuesExpenses
Balance sheet accounts
Income statement accounts
Accounting Systems
Accounting systems classify activities of a company into five types of accounts.
6-20
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Visual
Balance Sheet Equation
Assets = Liabilities + Owners’ equity
Assets Anything of value
Liabilities Amounts owed
Owners’ equity What is left over after liabilities are paid
6-21
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Visual
Cash Flow Analysis
The inflow and outflow of cash in the business over a given period of time
To survive, a business must have the cash available to pay its bills
6-26
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Cash Flow
Inventory State Effect on Cash Flow
Raw material Cash outflowWork in process Cash outflowFinished goods Cash outflowAccounts receivable paid Cash inflow
6-27
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Visual
Inventory Turns
A measure of how effectively inventory is being used
Example
Annual cost of goods sold = $1,000,000
Average inventory = $500,000
dollars ininventory Averagesold goods of cost Annual
turnsInventory =
2500,000
1,000,000turnsInventory ==
6-28
Basics Of Supply Chain Management
Session 7
Inventory Management
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
How Much to Order at One Time
Management will want to Minimize sum of all costs involved Maximize customer service
Management has to make decision rulesMethods of deciding how much to order at one time:
Lot-for-lot Fixed order quantity Economic order quantity
7-3
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Visual
Lot-for-Lot
Only required amount is ordered No unused lot-size inventory is created Is used
–For dependent demand items–For expensive components (A items)–In a Just-in-Time (JIT) environment
7-4
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Visual
Fixed-Order Quantity
Specific amount is ordered each time an order is placed
Is quick and simple Is often made on the basis of what seems
reasonable Does not always produce the best results
7-5
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Visual
Economic Order Quantity
Assumes that Demand is relatively constant and known Items are produced or purchased in lots or
batches Order preparation costs and inventory
carrying costs are constant and known Replacement occurs all at once
7-6
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Average Inventory and Number of Orders Per Year
Weekly demand = 100 units; order quantity is 200 units
Reprinted with permission, J.R. Tony Arnold, Introduction to Materials Management, 3rd edition, Prentice-Hall, 1998
units 100 = 2
200 =
2quantity Order
=inventory size lot Average
yearper orders 26 = 200
52 x 100 =
quantity Orderdemand Annual
= yearper orders of Number
7-7
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Order Quantity
If the order quantity (Q) increases Annual cost of carrying increases Annual cost of ordering decreases
We want an order quantity where the sum of these two costs is a minimum.
7-8
ordering of cost x Qdemand Annual
= ordering of cost Annual
carrying of cost x cost unit x 2Q
= carrying of cost Annual
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
iC2AS
= EOQ
Economic Order Quantity Formula
Where
A = Annual usage in units
S = Ordering cost in dollars
i = Annual inventory carrying cost as a decimal
C = Unit cost
7-10
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Visual
units 200 = $5 x 0.2
$20 x units 1,000 x 2 = EOQ
Economic Order Quantity Formula
For example, if
A = 1,000 units
S = $20 per order
i = 20% = 0.2
C = $5 per unit
7-11
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Visual
When to Place an Order
If an order is placed late, there is the possibility of a stockout
If an order is placed early, there will be extra inventory and cost
A system is needed to tell when to order Common systems include
– Order point system– Periodic review system– Materials requirements planning
7-14
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Visual
Order Point System
Order point = demand during lead time + safety stockOP = DDLT + SS
Reprinted with permission, J.R. Tony Arnold, Introduction to Materials Management, Prentice-Hall.
7-15
Qu
anti
ty
LT
OPSS
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Order Point Formula—Example
Demand = 100 units per weekLead time = 4 weeksSafety stock = 100 unitsOP = DDLT + SS
= 100 (4) + 100= 500
Place an order when 500 units are on hand
7-16
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Visual
Order Point
Order quantities are usually fixed Order point is determined by the average demand
during the lead time Intervals between replenishments are not
constant
Order point = Demand during lead time + safety stock
7-17
stocksafety 2quantity Order
inventory Average
Basics of Supply Chain Management, Version 2.1 — August 2001
Visual
Safety Stock
Safety stock is used to prevent a stockout The amount of safety stock carried
depends on– Variability of demand during the lead time– Frequency of ordering– Desired service level– Length of the lead time– Ability to forecast and control lead times
7-19
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Service Levels
The cost of carrying safety stock plus the cost of a stockout should be a minimum
Costs of a stockout:– Cost of backorder– Cost of lost sales– Cost of lost customers
All are difficult to calculate Management should state the number of
stockouts per year that is tolerable
7-20
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Determining When to Order
Two basic systems
Two-bin system
Perpetual inventory record system
7-21
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Visual
Figure reprinted with permission, J.R. Tony Arnold, Introduction to Materials Management, second edition, Prentice-Hall, 1996
Periodic Review System
The quantity of an item on hand is determined at fixed intervals and an order is placed.
Review intervals are fixed Order quantities vary
7-23
TARGET LEVEL
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Cycle Counting
Inventory is counted continually throughout the year
Some items are counted each day All items are counted a predetermined
number of times a year depending on their importance
Cycle counting uses trained and dedicated personnel
7-30
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Cycle Counting
Purpose: To identify items in errorand eliminate causes of error
Advantages Timely detection and correction of
problems Little or no loss of production Identification and elimination of causes of
error
7-31
Basics of Supply Chain Management
Session 8
Physical Distribution
Basics of Supply Chain Management, Version 2.1 — August 2001
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Concept of ABC Inventory Control
A small number of items will represent the most critical values.
ABC inventory control separates the most significant items from the less important.
It is used to determine the degree and level of control required.
8-3
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Visual
ABC Classification
A Items 20% of the items account for80% of the total dollar usage
B Items 30% of the items account for15% of the total dollar usage
C Items 50% of the items account for5% of the total dollar usage
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ABC Process
Establish the item characteristics that influence the results of inventory management:
Annual dollar usage Scarcity of material Quality problems
Classify items into groups based on the criteria established
Apply a degree of control in proportion to the importance of the group
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Example of ABC Analysis
Annual Annual Part Number Unit Usage Unit Cost $ Usage
1 1,100 $ 2 $ 2,200 2 600 40 24,000 3 100 4 400 4 1,300 1 1,300 5 100 60 6,000 6 10 25 250 7 100 2 200 8 1,500 2 3,000 9 200 2 40010 500 1 500
Total $38,250
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Control Based on ABC Classification
Two general rules to follow Have plenty of low-value items. Use control effort saved to reduce the inventory of
A items.
A items: Tight control
B items: Normal control
C items: Simplest possible control
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Physical Distribution
The physical supply and distribution system depends on many factors, including
Channels of distribution Types of markets served
– Geographic dispersion– Number of customers– Size of orders
Characteristics of the product Type of transportation available
All are interrelated
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Physical Distribution Activities
Transportation Distribution inventory Warehousing Materials handling Protective packaging Order processing and communication
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Warehousing
Benefits: Provides a place to store and protect inventory Reduces transportation costs Improves customer service levels
Objectives: To provide timely customer service To keep track of items To minimize cost To provide communication links with customers
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Warehousing
Activities: Receive, identify, and store goods Pick, group, and load goods for shipment Dispatch the shipment Operate an information system
Complexity depends on Number of stockkeeping units (SKUs) Quantity of each SKU Number and frequency of receipts and shipments
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Warehouse Management Objectives
Optimize use of space Make effective use of labor and equipment
– Select the best mix of labor and equipment– Provide ready access to all items– Perform efficient movement of goods
These efforts depend on Stock location Order picking and assembly Packaging
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Stock Location Objectives
To provide the required customer service To keep track of where items are stored To minimize effort to receive, put away,
and retrieve items
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Stock Location
Two basic systems Fixed location Floating (random) location
The system used depends on Type of goods being stored Type of storage facilities needed Throughput Size of orders
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Unitization
Unitization is the consolidation of several units into larger units for fewer handlings
Unit load: Made up of a number of items or bulky material, so arranged or confined that the mass can be picked up or moved as a single unit
Examples: Pallets, sheets, racks, containersUnitization can be successive:
There should be some dimensional relationship among the primary package, the carton, the unit load, the vehicle, and the warehouse.
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Distribution Inventory Objectives
To provide the required level of customer service
To minimize the cost of transportation and handling
To interact with the factory to minimize scheduling problems
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Pull System
Each distribution center orders from central supply what it needs when required without regard for
Needs of other distribution centers Available inventory at central supply Production schedule at the factory
Advantage: Allows each center to operate independently
Disadvantages: Lack of coordination, poor customer service, disrupted factory schedules
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Push System
All forecasting and order decisions are made centrally.
Advantage: Coordination among factory, central supply, and the distribution centers
Disadvantage: Difficulty in reacting to local demand
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DRP
Reprinted with permission, J.R. Tony Arnold, Introduction to Materials Management, Prentice-Hall.
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Rail Transportation
Is best able to move large volumes of bulky goods long distances over land
Provides less frequency of departure than trucks Provides good speed of transit over long
distances Provides reliable service Provides flexibility in types of goods carried Is cheaper than road for large quantities of bulky
cargo
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Road Transportation
Has low capital cost compared with rail Provides door-to-door service Provides fast, flexible service Is particularly suited to distribution of small
volume goods to a dispersed market
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Air Transportation
Provides speedy service over long distances
Uses passenger aircraft as well as freight aircraft
Can go anywhere there is a suitable landing strip
Has high cost Is suitable for high-value, low-weight cargo
and for emergency items
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Water Transportation
Has low operating costs per ton-mile
Is slow and usually not door-to-door
Is most useful for moving low-value, bulky cargo over long distances where water routes are available
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Pipeline Transportation
Low operating costs
Impervious to weather
Move large volumes continuously
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Line-Haul Costs
Include fuel, wages, wear and tear Depend on the distance moved, not the
weight moved
Example:
Line-haul cost is $4 per mile, Distance moved is 200 miles
If 3 tons are shipped LHC/ton = =
If 5 tons are shipped LHC/ton = =
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Shipping Costs
Line-haul Depend on the distance moved
Pickup and delivery Depend on the number of pickups and weight
Terminal handling Depend on the number of times a shipment is handled, loaded, and unloaded
Billing and collecting Depend on the number of shipments made
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Total Transportation Costs
To minimize shipping costs Decrease line-haul costs by increasing
weight shipped Consolidate shipments to reduce
–Terminal handling costs–Pickup and delivery costs–Billing and collecting costs
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Session 9
Quality Management and Purchasing
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Total Quality Management (TQM)
“…TQM is a management approach to long-term success through customer satisfaction. TQM is based on the participation of all members of an organization in improving processes, goods, services, and the culture in which they work.”
—APICS Dictionary
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Total Quality Management (TQM)
Key principles and characteristics Customer focus
Meeting or exceeding the user’s expectations Costs of quality
Identifying all the costs associated with quality Taking action
Using problem-solving toolsInvolving the employeeContinuously improving the process
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The Cost/Productivity Advantage
Before AfterImprovement Improvement
Scrap rate 13% 5%Order size 100 100Number produced 115 105Production costs
@ $10 per unit $1,150 $1,050Sales revenue
@ $15 per unit $1,500 $1,500Profit $ 350 $ 450
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Costs of Quality
Costs of failure–Internal–External
Costs of appraisal Costs of prevention
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What Is Quality?
“Conformance to requirements or fitness for use….”
—APICS Dictionary
Better definition:
As a minimum, all parts must be within specification, and the less the variation from the center of the specs, the better.
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Quality Tools
Pareto chart Cause-and-effect diagram Stratification or scatter diagrams Check sheet Histogram Graph and control chart
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Control Charts—Key Points
Filled in by operators, not inspectors Record the average and range of the
process Control limits are set to indicate the normal
variation of the process Control charts do not show product
specifications
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Limitations of Inspection
Is expensive Does not add value for the customer Does not prevent further defects Is not dependable Gives no information at the source
(feedback)
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Purchasing
“The term used in industry and management to denote the function of and the responsibility for procuring materials, supplies, and services.”
—APICS Dictionary
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Purchasing Objectives
To obtain goods and services of the quality and quantity needed
To obtain goods and services at the right cost
To ensure the best possible service To identify qualified suppliers and maintain
good relations
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Establishing Specifications
What to buy depends on Quantity Cost considerations What the item should do
–Quality level needed–Those characteristics of product determined
by final use Function, quality, service, and price are
interrelated
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Selecting Suppliers
Factors in selecting suppliers Technical ability Manufacturing capability Reliability After-sales service Location Price Financial stability Management attitude
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Session 10
Just-in-Time Manufacturing
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Define Just-in-Time Manufacturing
What is Just-in-Time manufacturing?
A popular definition:Continuous improvement and the planned elimination of waste
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Value
Value should be defined from the customer’s point of view
Any activity that does not add value from the customer’s point of view is waste
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The Product Cycle
Reprinted with permission, J.R. Tony Arnold, Introduction to Materials Management, Prentice-Hall.
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Waste Caused by Manufacturing
Process Methods Movement Product defects Waiting time
–Planned–Unplanned
Overproduction Inventory
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How Lower Inventories Reduce Waste
Faster response to engineering changes Faster reaction to quality problems Reduced material handling costs Reduced control costs Better visibility
_______________________________________________________________
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Continuous Production
Narrow product line Dedicated equipment Easily automated Work flows along constant path Little inventory Short lead times
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Process Layout
Wide range of product General-purpose machinery Products move in lots or batches Long queues at the work centers High level of work in process Long lead times
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Work Cells
The use of work cells can result in Reduced queue Simplified production activity control Reduced floor space Reduced material movement Immediate feedback
These advantages can lead to Greater production flexibility Smaller lot sizes Improved quality
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Reprinted with permission, J.R. Tony Arnold, Introduction to Materials Management, Prentice-Hall.
Dedicated Production Lines
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Setup Reduction Indirect Benefits
Reduced lot size Reduced queue and manufacturing lead
time Reduced work-in-process inventory Improved quality Improved process and material flow Greater flexibility
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Total Quality Management
Total quality management– Reduces lot size, which will reduce lead
time, which will reduce WIP inventory
Lot sizes are reduced by Lowering fixed costs per batch Decreasing destructive testing Improving yield
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Lead Time Reduction
Smaller lot sizes reduce lead time by reducing
Operation time Queue time Wait and move times
Reduced lead time reduces the average work-in-process inventory
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Preventive Maintenance
Costs associated with performing preventive maintenance
Parts and materials for the service Technician’s time to perform the service Lost production time (planned) while the
machine is out of service
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Preventive Maintenance
Costs associated with not performing preventive maintenance
Damage to other parts and equipment Defective product Unscheduled overtime for repair crews Idle production workers Lost production time; lost capacity Late deliveries to customers
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Total Productive Maintenance
“Preventive maintenance plus continuing efforts to adapt, modify, and refine equipment to increase flexibility, reduce material handling, and promote continuous flows. It is operator-oriented maintenance with the involvement of all qualified employees in all maintenance activities.”
—APICS Dictionary
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Employee Empowerment
“The practice of giving nonmanagerial employees the responsibility and the power to make decisions regarding their jobs or tasks…”
—APICS Dictionary
Broad definition Moving the day-to-day decision-making of a company lower in the
management structure
Narrow definition Giving all employees the authority to stop the production of defective
products
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Employee Involvement
Employee involvement requires cooperation and involvement of everyone
Employee involvement requires that employees be versatile
Workers are responsible for –Performance improvement–Preventive maintenance–Problem solving
Managers must become facilitators
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Manufacturing Planning and Control
Manufacturing planning and control answers these questions:
What are we going to make? What do we need to make it? What do we have? What do we need to get?
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Planning and Control with JIT
JIT simplifies the manufacturing process and the planning and control process:
Forecasting– Shortens lead times at all planning levels
Production planning– Shortens lead times– Improves supplier relations
Master scheduling– Levels material and capacity schedules – Shortens lead times– Encourages schedule stability
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Planning and Control with JIT
Material requirements planning Is date and quantity driven Does not require netting Simplifies and flattens bills of material
Capacity management Levels capacity throughout the plan
Inventory management Reduces inventory Reduces tracking of components Backflushes to relieve inventory
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