OM0008 – Advanced Production Planning & Control

8/6/2019 OM0008 Advanced Production Planning & Control

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Name Anil Kumar Joshi

Roll No. 520949950

Course & Semester Master of Business Administration MBA Semester 4

Subject Name & CodeOM0008 Advanced Production Planning & Control

Book ID: B1162

Assignment No. Set 1 & 2

LC name & Code NIPSTec LTD. 1640

Date of Submission 14.05.2011

Session


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Assignment Set 1

1. To optimize and ensure smooth production, Production Planning and Controlworks as an integrated system. Explain briefly how this integrated working will benefit the

manufacturing unit.

Solution:Computer Integrated Manufacturing, CIM, is the terminology used to describe the completeautomation of a manufacturing plant. All of the processes function under computer control withdigital information tying them together. The breakdown of most of the different computercontrolled processes is as follows:

y CAD, computer-aided designy CAM, computer-aided manufacturingy CAPP, computer-aided process planningy CNC, computer numerical control machine toolsy DNC, direct numerical control machine toolsy FMS, flexible machining systemsy ASRS, automated storage and retrieval systemsy AGV, automated guided vehiclesy use of robotics and automated conveyancey computerized scheduling and production controly and a business system integrated by a common data base. (Upton, 1994)The heart of CIM is CAD/CAM. Computer-aided design (CAD) and computer-aidedmanufacturing (CAM) systems reduce cycle times in the business. CAD/CAM is a hightechnology integrating tool between design and manufacturing. CAD creates similar geometries

for quick retrieval. A simple example, if you need to draw a part with a 3/8 in hole in a certainlocation, the draftsman can click on circle, put in the radius, enter the location coordinates anddone. No more measuring for a center of the circle and using a compass while first setting it atjust the right diameter, etc. Imagine the ease of a more sophisticated drawing. CAD also allowsdesigners to portray the electronic drawings or images in two dimensions, like a standard blueprint, or as a three dimensional component which can be rotated as it is viewed on acomputer screen.

Software programs can analyze and test CAD designs before a prototype is made. The softwareallows engineers to predict stress points on a part and the effects of loading.

Once the part has been designed electronically, the graphics can be used by CAM programmersto program the tool path to machine the part from the raw material. The CAM program is thenintegrated with a CNC machine and the cutting program is produced.

The CAD graphics can also be used to design tools and fixtures. It can also be used forinspections by coordinate measuring machines (CMM). The more a CAD design is used, themore time is saved in the overall process.


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Flexible manufacturing system (FMS) is an arrangement of machines connected by a transportsystem. Work is carried to the machines on pallets by the transporter. This makes for accurate,fast and automatic startup. A central computer controls the machines, the transporter, anddownloads the machining program. (Upton, 1994)

Now, add CAD and CAM withF

MS and the CIM concept is well under way. But it alsoincludes assembly, scheduling, and delivery. Here is an example of these three concepts underthe CIM umbrella from Computer Integrated Manufacturingby James Morrison, Motorola, forexample, has been using a computer-integrated process since 1988. A Motorola salesrepresentative takes an order, say for 150 black Bravo pagers to be delivered on May 17, typesthe order into a laptop computer, specifies the unique code that causes each pager to beep andrequests delivery in two weeks. The order zips over phone lines to a mainframe computer in anew factory in Boynton Beach, Fla. The computer automatically schedules the 150 pagers forproduction May 15, orders the proper components, and, on the day after assembly, informs theshipping docks to express-mail them to Pacific Telesys Group (the company that ordered thepagers) in California." (Morrison, 2003)

There are some issues regarding CIM. It is not a panacea for all companies. Existing equipmentand software can be incompatible with each other leading to expensive updates or replacements.Another issue is programming extensive logic to produce optimal schedules and part sequence. Itis hard to replace the human mind in reacting to a dynamic day-to-day manufacturing scheduleand changing priorities.

CIM is an operational tool that can be slowly introduced into the areas that make sense for eachcompany. The end must justify the means. But CIM can provide a new dimension to competing.It can quickly introduce new customized high quality products and deliver them withunprecedented lead times. Businesses can make quick decisions and manufacture products withhigh velocity. (Computer Integrated Manufacturing, 1999)

SourcesComputer Integrated Manufacturing. (1999). Rockford Consulting Group. Retrieved onSeptember 10, 2006 from http://www.rockfordconsulting.com/cim.htmMorrison, James L. (2003). Computer Integrated Manufacturing. Retrieved on September 10,2006 from http://horizon.unc.edu/projects/OTH/1-2_tech1.aspUpton, David M. (1994).A Flexible Structure For Computer-Controlled Manufacturing Systems.Retrieved on September 10, 2006 fromhttp://www.people.hbs.edu/dupton/papers/organic/WorkingPaper.html#HDR1.1%20%20%20%203%20139Student Activity

Technology Assessment New technology is exciting and usually thought of as wonderful. But we as citizens need toremember that technology issues need to be carefully weighed against the impact they have onindividuals, society and the environment.


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Products need to be carefully designed Consumers need to make wise choices Citizens, through government regulations, must balance the trade-offs and therisks of future technological progress for the betterment of all people

With each technological development there are pros and cons. Research a favorite product(have product approved by instructor first) and describe 5 positive or negative qualities of theproduct.

First, describe its:1. purpose2. function3. materials it was made from4. or the processes used in its manufactureThen list 5 of its pros or 5 of its cons. They may be environmental, personal, social, legal, orethical. Back up at least two of your pros or cons with evidence you found on the internet listing

the URL address as well.Here is an example of what you should produce:

20 oz. plastic bottle

It is a container to hold liquids. It is made from polyethylene terephthalate (PET) and isproduced through either a one-step or two-step molding process.Positives

1. Allows soda manufactures to make a profit.Proof: From the website http://container-recycling.org/mediafold/newsrelease/plastic/1998-11plastic.htm - What is fueling the growth of the 20-ounce no-return plastic bottle? "The answeris simple," said Pat Franklin, Executive Director of CRI. "Profits! The single-serve plastic bottlebrings a profit of $5.34 for the bottler and $8.86 per case for the retailer. A bottler has to sell 26cases of cans for every single case of 20-ounce plastic bottles to make the same dollar profit."

2. RecyclableProof - From the website http://en.wikipedia.org/wiki/Recycling_of_PET_Bottles - Recyclingcompanies will further treat the post-consumer PET by shredding the material into smallfragments. These fragments still contain residues of the original content, shredded paper labelsand plastic caps. These are removed by different processes, resulting in pure PET fragments, or


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"PET flakes". PET flakes are used as the raw material for a range of products that wouldotherwise be made of polyester. Examples include polyester fibres, a base material for theproduction of clothing, pillows, carpets, etc., polyester sheet, strapping, or back into PET bottles.3. Lightweight4. Non breakable5.

Recloseable6. Alternate individual serving size of soda without the aluminum/ Alzheimer's scare

Proof - From the website http://www.straightdope.com/classics/a1_216a.html Aluminum issuspected of playing a role in Alzheimer's disease, a form of degenerative senile dementiathought to afflict 5-10 percent of all persons over 65. Victims of Alzheimer's have been found tohave four times the normal concentration of aluminum in their brain cells. Aluminum is knownto be a neurotoxin that can cause brain damage if you're exposed to it in sufficiently largeamounts. The question is whether chronic exposure to small amounts can affect you. Despite lotsof research, we still don't know. But several studies have shown that people exposed to higher-than-average amounts of aluminum tend to have higher rates of Alzheimer's.Technology Assessment Rubric

CATEGORY 4 3 2 1Amount ofInformation At least 5

answers4 answers 3 answers 2 or less answers

Quality ofInformation

Informationclearly relates tothe main topicand has 2 withsupportingevidence.

Informationclearly relates tothe main topicand has 1 withsupportingevidence.

Informationrelates to themain topic andbut no supportingevidence.

Information haslittle or nothing todo with the maintopic.

Sources All sources are

accuratelydocumented inthe desiredformat.

All sources are

accuratelydocumented, butare nothyperlinked.

Sources not

properly listed.

No sources.

Internet Use Successfully usessuggested internetlinks to findinformation andnavigates withinthese sites easilywithout

assistance.

Usually able touse suggestedinternet links tofind informationand navigateswithin these siteseasily without

assistance.

Occasionally ableto use suggestedinternet links tofind informationand navigateswithin these siteseasily without

assistance.

Needs assistanceor supervision touse suggestedinternet linksand/or to navigatewithin these sites.

Standards

Standard #4: Students will develop an understanding of the cultural, social, economic, and political effects of o [4.I] Making decisions about the use of technology involves weighing the trade-offs betweenthe positive and negative effects.o [4.J] Ethical considerations are important in the development, selection, and use of


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technologies.

Standard #6: Students will develop an understanding of the role of society in the developmentand use of technology.o [6.H] The decision whether to develop a technology is influenced by societal opinions and

demands, in addition to corporate cultures.

Standard #13: Students will develop abilities to assess the impact of products and systems.o [13.J] Collect information and evaluate its quality.o [13.K] Synthesize data, analyze trends, and draw conclusions regarding the effect oftechnology on the individual, society, and the environment.


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2. List the various elements of Flexible Manufacturing System and explain each ofthem briefly.

Solution:

FLEXIBLE MANUFACTURING SYSTEMS (FMS)Introduction

In the middle of the 1960s, market competition became more intense.During 1960 to 1970 cost was the primary concern. Later quality became a priority. As themarket became more and more complex, speed of delivery became something customer alsoneeded.

A new strategy was formulated: Customizability. The companies have to adapt to theenvironment in which they operate, to be moreflexible in their operations and to satisfy differentmarket segments (customizability).

Thus the innovation ofFMS became related to the effort of gaining competitive advantage.

First of all, FMS is a manufacturing technology.

Secondly, FMS is a philosophy. "System" is the key word. Philosophically, FMS incorporates asystem view of manufacturing. The buzz word for todays manufacturer is "agility". An agilemanufacturer is one who is the fastest to the market, operates with the lowest total cost and hasthe greatest ability to "delight" its customers. FMS is simply one way that manufacturers are ableto achieve this agility.

An MIT study on competitiveness pointed out that American companies spent twice as much on product innovation as they did on process innovation. Germans and Japanese did just theopposite.

In studying FMS, we need to keep in mind what Peter Drucker said: "We must become managersof technology not merely users of technology".

Since FMS is a technology, well adjusted to the environmental needs, we have to manage itsuccessfully.

1. Flexibility concept. Different approachesToday flexibility means to produce reasonably priced customized products of high quality thatcan be quickly delivered to customers.


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Different approaches to flexibility and their meanings are shown Table 1.

Table 1

Approach Flexibility meaning

Manufacturing y The capability of producing different parts without majorretoolingy A measure of how fast the company converts its process (es)from making an old line of products to produce a new producty The ability to change a production schedule, to modify a part,or to handle multiple parts

Operational y The ability to efficiently produce highly customized andunique products

Customer y The ability to exploit various dimension of speed of deliveryStrategic y The ability of a company to offer a wide variety of products

to its customers

Capacity y The ability to rapidly increase or decrease production levelsor to shift capacity quickly from one product or service to another

So, what is flexibility in manufacturing?While variations abound in what specifically constitutes flexibility, there is a general consensus

about the core elements. There are three levels of manufacturing flexibility.(a) Basic flexibilitiesy Machine flexibility - the ease with which a machine can process various operationsy Material handling flexibility - a measure of the ease with which different part types canbe transported and properly positioned at the various machine tools in a systemy Operation flexibility - a measure of the ease with which alternative operation sequencescan be used for processing a part type

(b) System flexibilitiesy Volume flexibility - a measure of a systems capability to be operated profitably atdifferent volumes of the existing part typesy Expansion flexibility - the ability to build a system and expand it incrementallyy Routing flexibility - a measure of the alternative paths that a part can effectively followthrough a system for a given process plany Process flexibility - a measure of the volume of the set of part types that a system canproduce without incurring any setupy Product flexibility - the volume of the set of part types that can be manufactured in asystem with minor setup


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(c) Aggregate flexibilitiesy Program flexibility - the ability of a system to run for reasonably long periods withoutexternal interventiony Production flexibility - the volume of the set of part types that a system can producewithout major investment in capital equipmenty Market flexibility - the ability of a system to efficiently adapt to changing marketconditions

2. Seeking benefits on flexibilityTodays manufacturing strategy is to seek benefits from flexibility. This is only feasible when aproduction system is under complete control ofFMS technology. Having in mind the Process-Product Matrix you may realize that for an industry it is possible to reach for high flexibility bymaking innovative technical and organizational efforts. See the Volvos process structure thatmakes cars on movable pallets, rather than an assembly line. The process gains in flexibility.Also, the Volvo system has more flexibility because it uses multi-skill operators who are not

paced by a mechanical line.So we may search for benefits from flexibility on moving to the job shop structures.Actually, the need is forflexible processes to permit rapid low cost switching from one productline to another. This is possible with flexible workers whose multiple skills would develop theability to switch easily from one kind of task to another.As main resources, flexible processes and flexible workers would createflexible plants as plantswhich can adapt to changes in real time, using movable equipment, knockdown walls and easilyaccessible and re-routable utilities.

3. FMS- an example of technology and an alternative layoutThe idea of an FMS was proposed in England (1960s) under the name "System 24", a flexiblemachining system that could operate without human operators 24 hours a day under computercontrol. From the beginning the emphasis was on automation rather than the "reorganization ofworkflow".

Early FMSs were large and very complex, consisting of dozens of Computer NumericalControlled machines (CNC) and sophisticate material handling systems. They were veryautomated, very expensive and controlled by incredibly complex software. There were only alimited number of industries that could afford investing in a traditional FMS as described above.Currently, the trend in FMS is toward small versions of the traditional FMS, called flexiblemanufacturing cells (FMC).

Today two or more CNC machines are considered a flexible celland two ore more cells areconsidered a flexible manufacturing system.

Thus, a Flexible Manufacturing System (FMS) consists of several machine tools along withpart and tool handling devices such as robots, arranged so that it can handle any family of partsfor which it has been designed and developed.Different FMSs levels are:


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Flexible Manufacturing Module (FMM). Example: a NC machine, a pallet changer and a partbuffer; Flexible Manufacturing (Assembly) Cell(F(M/A)C). Example: Four FMMs and an AGV(automated guided vehicle);Flexible Manufacturing Group (FMG). Example : Two FMCs, a FMM and two AGVs which

will transport parts from a Part Loading area, through machines, to a Part Unloading Area;Flexible Production Systems (FPS). Example : A FMG and a FAC, two AGVs, an AutomatedTool Storage, and an Automated Part/assembly Storage;Flexible Manufacturing Line (FML). Example : multiple stations in a line layout and AGVs.

4. Advantages and disadvantages of FMSs implementation

Advantagesy Faster, lower- cost changes from one part to another which will improve capitalutilizationy Lower direct labor cost, due to the reduction in number of workersy

Reduced inventory, due to the planning and programming precisiony Consistent and better quality, due to the automated controly Lower cost/unit of output, due to the greater productivity using the same number ofworkersy Savings from the indirect labor, from reduced errors, rework, repairs and rejectsDisadvantagesy Limited ability to adapt to changes in product or product mix (ex. machines are of limitedcapacity and the tooling necessary for products, even of the same family, is not always feasiblein a given FMS)y Substantial pre-planning activityy Expensive, costing millions of dollarsy Technological problems of exact component positioning and precise timing necessary toprocess a componenty Sophisticated manufacturing systemsFMSs complexity and cost are reasons for their slow acceptance by industry. In most of the casesFMCs are favored.


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3. Explain briefly production processes and characteristics that facilitates achieve setgoals that are to be analyzed by planners for synchronous production.

Solution:

The way that businesses create products and services is known as the production process. Thereare three main parts to the production process as can be seen in the diagram below:

A firm must purchase all the necessary inputs and then transform them into the product(outputs) that it wishes to sell. For example a football shirt manufacturer must buy the fabric,pay someone for a design, invest in machinery, rent a factory and employ workers in order forthe football shirts to be made and then sold.

How well-organised a firm is at undertaking this transformation process will determine itssuccess. This is known as the productive efficiency of a firm and it will want to be as efficientas possible in transforming its inputs into outputs (i.e. using the minimum number of inputs aspossible to achieve a set amount of output). This will reduce the cost per unit of production andallow the firm to sell at a lower price.

Ultimately, the objective of the production process is to create goods and services that meetthe needs and wants of customers. The needs and wants of customers will be met if a businesscan produce the correct number of products, in the shortest possible time, to the best quality andall at a competitive price.

How does the production process work?There are four main areas to the factory:

y Intake and Storage - receives the raw materials - meat, vegetables and so on.y Low Risk Preparation and Storage - the raw materials are processed and then stored.For example, potatoes may be peeled - some will be used for making into mash, others sliced foruse in other meals; meat may be minced or stored in chunks. Access from the low risk area to thenext, high-risk area is impossible without going through the hygiene routine. This is to prevent


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staff in one area from moving through to another and risking possible contamination orcompromising hygiene.

y High Care and Assembly - the cooking and manufacturing process proper - in thissection the meals are all prepared and packaged.

y Packaging and Distribution - the outer sleeves are placed on the products. They areboxed, palletised and placed into lorries for delivery.

Intake and Storage:Large quantities of raw materials arrive at the factory every day, for example, potato deliveriescan come in 2-3 times a day and amount to 140 tons a week. On arrival they are checked andtagged. The purpose of the tagging is to ensure that every ingredient can be traced - where itcame from, what happened to it in the factory and which product it went into. This enables the business to be able to maintain its quality control and identify problems and to withdraw products if problems do occur at a later stage. For example, if a customer complains about aparticular product, its origin and the ingredients that went to make it are all fully traceable atevery stage in the process.

If raw materials do not meet the correct standards they are withdrawn or 'quarantined'. Around2% of the intake may be unsuitable for one reason or another - marks on the potatoes, forexample - and is classed as wastage. Kettleby Foods have 3 main suppliers of potatoes rangingfrom Lincolnshire to Ireland and the main supplier of meat comes from Yorkshire.

Low Risk Preparation and Storage

The production-planning department decide on the quantityof ingredients needed for the range of products it has toproduce to satisfy the orders being placed by Tesco. A batchof ingredients will then be prepared, for example, 3 batches

of meat will be earmarked for cooking for Cottage Pies.Potatoes may be cooked in 250kg, 500kg or 1 ton batches. Ittakes around 20 minutes to cook ton of potatoes. Thisprocess allows the raw materials to be consolidated into pre-defined amounts.Image: Potatoes, washed and cleaned, being loaded into thecooker.Having been prepared, the raw materials are then batched upand stored in the high care storage area before being used inthe preparation of the meals themselves.

Image: Ingredients stored in batches ready to move to thecooking process area.

High Care and Assembly

The raw materials are stored in the high care storage after cooking and are subject to regularchecks to ensure that quality is maintained. Batches of cooked minced meat, for example, have ashelf life of 48 hours in the cold store, whereas other raw materials such as sauces may have ashelf life of up to 7 days depending on their type and method of packaging. Meat based products


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are stored in large metal vats, whereas some sauces are packed in sealed pasteurised plastic bags- the bags, however, are specially designed to ensure that they cannot split or burst. Around 450raw ingredients make up the inputs to get to the pre-packaging stage before they get blended intothe final product. Platform chefs are involved in the cooking of the food and many areexperienced in the catering trade. Most have an HND.

Image: The cook pans where the various foods are cooked. Computer systems monitor the time,temperature and status of the products. The chefs working here are all experienced in the cateringtrade.

An important feature of the planning and production process is the lead-time; this is the timetaken from order to final manufacture and the product being ready to deliver. For Cottage Pies,the lead-time is around 5 hours. Three hours of that time is taken up by the cooked meat havingto be cooled. Such processes have to be carefully monitored to ensure that proper hygieneprocedures are adhered to - this again helps to ensure that the final product is safe to eat.Tesco will generally place an order at 6am. They expect the order to be fulfilled and in their

depots by the next day. There are 10 depots around the country and deliveries are being made tothem 2-3 times a day.

The ingredients must then be put together to make the actual final product. This process is donepartly through automation and partly through manual labour. The machinery needed to do this isexpensive. One piece cost 600,000 alone! Some machines have programmable systems to beable to vary what it does. For example, the way mashed potato is laid onto cottage pie or achicken and broccoli pie may be different in terms of the 'patterning' it makes. Tesco, who in turnmay be interpreting the results of its own market research, may demand the patterning. To re-programme the software to change the patterning costs Kettleby Foods several thousand poundseach time!

The manual work can be quite tedious. Tasks include selecting portions of meat such as chickenfrom a bin and loading it into the individual trays. The portions are each weighed and anindicator console tells the worker whether the weight is correct for the product concerned. Toolow and the company could risk breaking the law, too high and again they might be not meetinglegislation but also the cost would rise!

Image: Staff weigh out the required amount of meat to put into the Lancashire Hot Pot. The meatis put into the trays along with the other ingredients before being passed down the productionline for the next stage.

The trays with the meat then have the relevant sauce, vegetables and potato, etc added to them -mostly by machine. They are then wrapped in the film. It is important, however, at this stage thatchecks are made to ensure that the whole process has been done properly. Substandard productsare removed from the production line and checks are made to ensure that no foreign bodies havegot into the product. The trays pass through a metal detector, for example! All products arechecked for their weight and if they are within the allowed tolerances they pass through to thepackaging and distribution area - if not they are rejected. Kettleby Foods use statistical process


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control (SPC) to check for rejects. SPC is a statistical device to monitor the variations in productquality and process in relation to its targets.

Image: Chicken and Broccoli Pies pass through the watchful eyes of a quality checker beforehaving the potato topping added by machine. The staff member can add additional pieces of

broccoli by hand if they spot that more is needed.

Wastage

During the production process, the company has to be aware that there will be wastagethroughout. This is not wastage through negligence of the staff but natural wastage that occur asraw materials are processed. For example, if a ton of potatoes are cooked and mashed, you willnot get a ton of mashed potato at the other end. When planning the production numbers thereforethe planning team must try to calculate the variance between what they start with and what theyend up with. The diagram below serves to illustrate this point.

Kettleby Foods: Material Variance Flow

yWhen stock arrives at the factory, it has to be checked. The quantity received may bedifferent from that ordered - this is the 'intake stock variance'.

y Once arrived, the stock is processed. This may involve sorting meat, packing sauces,sorting potatoes and so on. The preparation of raw materials in the low risk area will involvesome form of wastage along the way - this is the 'processed stock variance'.

y The products then go off for cooking. In this process there will again be some loss - a tonof minced meat put into the ovens will not result in a ton of cooked meat coming out the otherend, fat will be drained off the meat, for example. This gives the 'cooked unprepped stockvariance'.

y Finally, the products will be put into the relevant meals and packaged - the wastage fromthis process is referred to as the 'assembly usage variance'.

Packaging and Distribution

In the packaging and distribution area, the product has the sleeve put over it. It is then boxed upand placed onto pallets. The pallets are then moved to the lorries to go to the distribution depot.Once there, the products will be 'picked' for distribution to the 10 Tesco depots and from there tothe stores themselves.

At the distribution stage, the central depot will have the information about which stores willrequire what quantities and therefore which depots will need what. The palletised meals are sentto the main depot, which selects or 'picks' what each regional Tesco depot requires and thendistributes those items. Once at the regional depots, the meals are transported to the stores

themselves.

Image: The final product goes through a metal detector and weighing machine before passingthrough to the distribution area. Here they have the sleeves put onto them, are boxed up andplaced onto pallets to be distributed to the main depot for 'picking'.

One of the goals of a manufacturing system is to minimize the cost of production. A significantsource of manufacturing cost is attributable to material handling. The sources of material


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handling cost include equipment, labor, work-in-process, and floor space. One approach toreduce material handling cost is through the implementation of synchronous manufacturing with just-in-time production. Although, the concept of a synchronous manufacturing is known,techniques to design and plan such systems are yet to be formalized. In this paper, a quantitativemodeling framework for the design and analysis of a synchronous manufacturing system with

just-in-time production is presented. The approach is composed of principles and techniquesdrawn from scheduling, layout planning, material handling, and computer simulation.


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Assignment Set 2

1. From the supply data given below develop a linear regression equation with the help of a

least square method and calculate the constants a and b in the regression equation. Also

forecast a trend value for the year 2009 and 2015

Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

supply 4 5 8 12 10 9 14 16 16 20 22

Solution: From the above table the supply is a function of the time and it is for successive years.In this type the time period are coded in a way that the total of all these 11 years is zero. Hencethe middle year i.e. 2003 will be with the code 0and all other are progressive on negative andpositive side as shown.

Year Year coded Supply (Tons) Y XY1998 (-)5 4 (-)20 25

1999 (-)4 5 (-)20 16

2000 (-)3 8 (-)24 9

2001 (-)2 12 (-)24 4

2002 (-)1 10 (-)10 1

2003 0 9 0 0

2004 (+)1 14 (+)14 1

2005 (+)2 16 (+)32 4

2006 (+)3 16 (+)48 9

2007 (+)4 20 (+)80 16

2008 (+)5 22 (+)110 25

? =0 ?=136 ?=186 ? z=110

To find the constant a and b, we use the straight line equation Y=[a + b . X]Where Y=demand i.e. Supply, and a Y-intercept, b=slope and X= Time period

a= [?] / ?= [136]/110=12.36

b= [? ?]=186/110=1.960

Therefore Y=[12.36+1.960.X] is the linear equation for this supply positions

Now we can calculate the supply for the future years of 2009 and 2015 as follows.

The year 2009 is next year in the above table and hence its code for X will be (+) 6 and hence thevalue for Y will be equal to [12.36+1.960*6] =22.5

Therefore the fore cast for the year 2009 will be 22.5 Tons


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Similarly the year 2015 will be 12th year from the middle year i.e.2003 and hence for the year2015 = [12.36+1.690*12]=32.64

Therefore the forecast for the year 2015 will be 32.64 Tons.


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2. What is meant by Economic Order Quantity? Explain with the help of a sketch the

relationship matrix of EOQ with annual inventory cost, annual inventory carrying cost,

and annual ordering costs?

Solution:An inventory-related equation that determines the optimum order quantity that a company shouldhold in its inventory given a set cost of production, demand rate and other variables. This is doneto minimize variable inventory costs. The full equation is as follows:

Where:S = Setup costsD = Demand rateP = Production costI = Interest rate (considered an opportunity cost, so the risk-free rate can be used)Investopedia explains Economic Order Quantity - EOQThe EOQ formula can be modified to determine production levels or order interval lengths, andis used by large corporations around the world, especially those with large supply chains andhigh variable costs per unit of production.

Despite the equation's relative simplicity by today's standards, it is still a core algorithm inthe software packages that are sold to the largest companies in the world.

What is EOQ

Inventory is held to avoid the nuisance, the time and the cost etc. of constant replenishment.However, to replenish inventory only infrequently would necessitate the holding of very largeinventories. It is therefore apparent that some balance or trade-off or compromise is needed indeciding how much inventory to hold, and therefore how much inventory to order. There arecosts of holding inventory and there are costs of re-ordering inventory and these two costs needto be balanced. The purpose of the EOQ model is to minimise the total costs of inventory.

The important costs are the ordering cost, the cost of placing an order, and the cost of carrying orholding a unit of inventory in stock. All other costs such as, for example, the purchase cost of theinventory itself, are constant and therefore not relevant to the model.

Cost ComponentsAnnual Usage/Demand: Expressed in units this is generally the easiest part of the equation. Yousimply input your forecasted annual usage.

Order Cost: Also known as purchase cost or set up cost, this is the sum of the fixed costs thatare incurred each time an item is ordered. These costs are not associated with the quantityordered but primarily with physical activities required to process the order.


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For purchased items these would include the cost to enter the Purchase Order and/or Requisition,any approval steps, the cost to process the receipt, incoming inspection, invoice processing andvendor payment, and in some cases a portion of the inbound freight may also be included in

order cost. It is important to understand that these are costs associated with the frequency of theorders and not the quantities ordered. For example in your receiving department the time spentchecking in the receipt, entering the receipt and doing any other related paperwork would beincluded while the time spent repacking materials, unloading trucks, and delivery to otherdepartments would likely not be included. If you have inbound quality inspection where youinspect a percentage of the quantity received you would include the time to get the specs andprocess the paperwork and not include time spent actually inspecting, however if you inspect afixed quantity per receipt you would then include the entire time including inspecting, repacking,etc. In the purchasing department you would include all time associated with creating thepurchase order, approval steps, contacting the vendor, expediting, and reviewing order reports,you would not include time spent reviewing forecasts, sourcing, getting quotes (unless you get

quotes each time you order), and setting up new items. All time spent dealing with vendorinvoices would be included in order cost.

Associating actual costs to the activities associated with order cost is where many an EOQformula runs afoul. Do not make a list of all of the activities and then ask the people performingthe activities "how long does it take you to do this?" The results of this type of measurement arerarely even close to accurate. I have found it to be more accurate to determine what percentage oftime within the department is consumed performing the specific activities and multiplying thisby the total labor costs for a certain time period (usually a month) and then dividing by the lineitems processed during that same period.

It is extremely difficult to associate inbound freight costs with order costs in an automated EOQprogram and I suggest it only if the inbound freight cost has a significant effect on unit cost andits effect on unit cost varies significantly based upon the order quantity.

In manufacturing the Order cost would include the time to initiate the work order, timeassociated with picking and issuing components excluding time associated with counting andhandling specific quantities, all production scheduling time, machine set up time, and inspectiontime. Production scrap directly associated with the machine setup should also be included inorder cost as would be any tooling that is discarded after each production run. There may betimes when you want to artificially inflate or deflate set up costs. If you lack the capacity to meetthe production schedule using the EOQ you may want to artificially increase set up costs toincrease lot sizes and reduce overall set up time. If you have excess capacity you may want toartificially decrease set up costs, this will increase overall set up time and reduce inventoryinvestment. The idea being that if you are paying for the labor and machine overhead anyway itwould make sense to take advantage of the savings in reduced inventories.

For the most part Order cost is primarily the labor associated with processing the order howeveryou can include the other costs such as the costs of phone calls, faxes, postage, envelopes, etc.


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Carrying cost (Inventory Holding Costs): Also called Holding cost, carrying cost is the costassociated with having inventory on hand. It is primarily made up of the costs associated with theinventory investment and storage cost. For the purpose of the EOQ calculation, if the cost doesnot change based upon the quantity of inventory on hand it should not be included in carryingcost. In the EOQ formula, carrying cost is represented as the annual cost per average on hand

inventory unit. Below are the primary components of carrying cost.

Interest. If you had to borrow money to pay for your inventory, the interest rate would be part ofthe carrying cost. If you did not borrow on the inventory however have loans on other capitalitems, you can use the interest rate on those loans since a reduction in inventory would free upmoney that could be used to pay these loans. If by some miracle you are debt free you wouldneed to determine how much you could make if the money was invested.

Insurance. Since insurance costs are directly related to the total value of the inventory, youwould include this as part of carrying cost.

Taxes. If you are required to pay any taxes on the value of your inventory they would also beincluded.

Storage Costs. Mistakes in calculating storage costs are common in EOQ implementations.Generally companies take all costs associated with the warehouse and divide it by the averageinventory to determine a storage cost percentage for the EOQ calculation. This tends to includecosts that are not directly affected by the inventory levels and does not compensate for storagecharacteristics. Carrying costs for the purpose of the EOQ calculation should only include coststhat are variable based upon inventory levels.

If you are running a pick/pack operation where you have fixed picking locations assigned to eachitem where the locations are sized for picking efficiency and are not designed to hold the entireinventory, this portion of the warehouse should not be included in carrying cost since changes toinventory levels do not effect costs here. Your overflow storage areas would be included incarrying cost. Operations that use purely random storage for their product would include theentire storage area in the calculation. Areas such as shipping/receiving and staging areas areusually not included in the storage calculations, however if you have to add an additionalwarehouse just for overflow inventory then you would include all areas of the second warehouseas well as freight and labor costs associated with moving the material between the warehouses.

Since storage costs are generally applied as a percentage of the inventory value you may need toclassify your inventory based upon a ratio of storage space requirements to value in order toassess storage costs accurately. For example let's say you have just opened a new E-businesscalled "BobsWeSellEverything.com". You calculated that overall your annual storage costs were5% of your average inventory value, and applied this to your entire inventory in the EOQcalculation. Your average inventory on a particular piece of software and on 80 lb. bags ofconcrete mix both came to $10,000. The EOQ formula applied a $500 storage cost to the averagequantity of each of these items even though the software actually took up only 1 pallet positionwhile the concrete mix consumed 75 pallet positions. Categorizing these items would place the


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software in a category with minimal storage costs (1% or less) and the concrete in a categorywith extreme storage costs (50%) that would then allow the EOQ formula to work correctly.

There are situations where you may not want to include any storage costs in your EOQcalculation. If your operation has excess storage space of which it has no other uses you may

decide not to include storage costs since reducing your inventory does not provide any actualsavings in storage costs. As your operation grows near a point at which you would need toexpand your physical operations you may then start including storage in the calculation.

A portion of the time spent on cycle counting should also be included in carrying cost, rememberto apply costs which change based upon changes to the average inventory level. So in cyclecounting you would include the time spent physically counting and not the time spent filling outpaperwork, data entry, and travel time between locations.

Other costs that can be included in carrying cost are risk factors associated with obsolescence,damage, and theft. Do not factor in these costs unless they are a direct result of the inventory

levels and are significant enough to change the results of the EOQ equation.

Assumptions of the Model

1. Demand is known and is deterministic, ie. Constant.2. The lead time, ie. The time between the placement of the order and the receipt of theorder is known and constant.3. The receipt of inventory is instantaneous. In other words the inventory from an orderarrives in one batch at one point in time.4. Quantity discounts are not possible, in other words it does not make any difference howmuch we order, the price of the product will still be the same. (for the Basic EOQ-Model)5. That the only costs pertinent to the inventory model are the cost of placing an order andthe cost of holding or storing inventory over timeImportant Note: When calculating the Economic Order Quantity, be aware of the assumptionsmentioned above!

Graphical Solution

If we minimize the sum of the ordering and carrying costs, we are also minimizing the totalcosts. To help visualize this we can graph the ordering cost and the holding cost as shown in thechart below:


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This chart shows costs on the vertical axis or Y axis and the order quantity on the horizontal or Xaxis. The straight line which commences at the origin is the carrying cost curve, the total cost ofcarrying units of inventory. As expected, as we order more on the X axis, the carrying cost lineincreases in a proportionate manner. The downward sloping curve which commences high on theY axis and decreases as it approaches the X axis and moves to the right is the ordering cost

curve. This curve represents the total ordering cost depending on the size of the order quantity.Obviously the ordering cost will decrease as the order quantity is increased thereby causing thereto be fewer orders which need to be made in any particular period of time.

The point at which these two curves intersect is the same point which is the minimum of thecurve which represents the total cost for the inventory system. Thus the sum of the carrying costcurve and the ordering cost curve is represented by the total cost curve and the minimum point ofthe total cost curve corresponds to the same point where the carrying cost curve and the orderingcost curve intersect.

How to calculate

Basic EOQ:The objective is to determine the quantity to order which minimizes the total annual inventorymanagement cost.Thus: Minimize! Total cost per period = inventory holding costs per period + order costsper periodwhere Order Cost = The Number of Orders Placed in the period x Order Costsand Carrying Cost = Average Inventory Level x the Carrying Costs of 1 unit of Stock for oneperiod


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with:y Q = order quantityy A = demand per time period (e.g. Annual Demand)y S = Carrying / Holding Cost of 1 unit of Stock for one periody

P = Order Costand the derivation set to zero we get the following formula:

So we can see that the two cost elements at the economic order quantity are equal, one to theother; (compare with the graphical solution!)If we now isolate the Q, we get the following Basic EOQ-Formula:

Production EOQ:Instead of instantaneous replenishment, we include the finite Production Rate R which leads tothe following formula: (You can see, that production rate must be greater than demand rate, inorder to fulfill the demand!)EOQ = sqrt ( 2 * A * P / (S*(1-A/R))

Backlogging EOQ:By including the Backlogging Cost B, which is the cost of back-logging one unit per period, weget the following formula:EOQ = sqrt (2 * A * P * (S+B) / S * B)

Definition and Explanation:

Economic order quantity (EOQ) is that size of the order which gives maximum economy in purchasing any material and ultimately contributes towards maintaining the materials at theoptimum level and at the minimum cost.In other words, the economic order quantity (EOQ) is the amount of inventory to be ordered atone time for purposes of minimizing annual inventory cost.The quantity to order at a given time must be determined by balancing two factors: (1) the cost ofpossessing or carrying materials and (2) the cost of acquiring or ordering materials. Purchasinglarger quantities may decrease the unit cost of acquisition, but this saving may not be more thanoffset by the cost of carrying materials in stock for a longer period of time.

The carrying cost of inventory may include:y Interest on investment of working capitaly Property tax and insurancey Storage cost, handling costy Deterioration and shrinkage of stocksy Obsolescence of stocks.


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Formula of Economic Order Quantity (EOQ):The different formulas have been developed for the calculation of economic order quantity(EOQ). The following formula is usually used for the calculation of EOQ.

y A = Demand for the yeary Cp = Cost to place a single ordery Ch = Cost to hold one unit inventory for a yeary * =

Example:Pam runs a mail-order business for gym equipment. Annual demand for the TricoFlexers is16,000. The annual holding cost per unit is $2.50 and the cost to place an order is $50.Calculate economic order quantity (EOQ)

Calculation:

Underlying Assumptions of Economic Order Quantity:

1. The ordering cost is constant.2. The rate of demand is constant3. The lead time is fixed4. The purchase price of the item is constant i.e no discount is availableThe replenishment is made instantaneously; the whole batch is delivered at once.


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3. Explain with an example how Production cost could be minimized through proper

scheduling.

Solution:

The economic downturn has forced most companies to find ways to do more with less, but oilproducers are finding themselves in a particularly challenging situation.

As oil is increasingly difficult to locate and recover, production must increase from all reservoirs,including from older fields. Simultaneously, facilities are taking steps to reduce costs or keepoperating budgets flat.

Increased production requirements and cost reduction present oil producers with some majorchallenges. For example, oil producers must determine the best way to balance spare partsavailability and control inventory costs. Additionally, adequately and accurately planning

maintenance can be a challenge. This problem is exacerbated when useful equipment conditiondata is not available. If the information is available, the expertise to properly analyze and react isnot, which can happen as more engineers retire and take decades of experience with them.

Asset management programs are designed to address these issues, while allowing facilities toallocate funds for a planned maintenance spend and remove the uncertainty from operating budgets. The visibility gained into the actual operating conditions in the plant or pipeline,combined with the expertise brought to bear through the program, result in efficiencies andmaximized uptime.

In water injection and pipeline pump applications, asset management programs can help criticalassets continue to help meet oil production demand. Water injection is widely employed to getthe last available drop of oil out of older fields, while pipeline pumps ensure the oil is moving tomarket. If either asset were to experience downtime, it could carry massive financialimplications.

Technology Enables Modern Asset Management ProgramsCondition monitoring is not a new concept, but modern asset management programs go beyondcollecting the data. These programs deliver a comprehensive view of an entire system, includinganalysis and diagnostics, enabling operators to do more with less while increasing visibility topreviously unheard-of levels.

Modern asset management technology platforms add to and integrate with existing monitoringand communications systems. They use the latest advanced communications and informationmanagement technology, combined with proprietary diagnostic and prognostic algorithms, toenable operators to monitor the system performance in real time (see Figure 1). They are alsoable to use historical data for trending and analysis. Some systems use pump-specific algorithmsto derive information and alerts regarding cavitation detection, aeration detection, conditionmonitoring, automated control and other diagnostic applications. This real-time system view


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enables plants to move from reactive or planned maintenance to strategic, proactive maintenancewith the added benefit of continual process optimization.

Figure 1. Schematic representation of a modern asset management monitoring and control

network using wired and wireless communication to feed an Internet portal.

Reaching beyond the pump system itself, asset management programs can now feed into existingbusiness systems and allow system access anywhere via the Internet. Online portals allow thisinformation to be accessible from any computer, whether it is on a production platform 200 milesoffshore or at a corporate headquarters. Everything from inventory control based on the real-timecondition of equipment and transportation scheduling to preparing for upcoming servicerequirements is possible with the accessibility that asset management systems provide.

Critical Processes Are Ideal for Asset Management Programs

Asset management brings a host of benefits in plant maintenance, optimization, efficiency andoperating cost reduction in any application, but the critical operation of water injection andpipeline pumps make them especially well suited for an asset management program.

Water InjectionAs the drive to extract every last resource from older oil fields increases and new reservoirs aredeeper and increasingly difficult to drill, the size of water injection pumps-and the investmentrequired-increases accordingly. In these applications, 11,000 kW (15,000 hp) and 550 bar (8,000 psi) pumps are becoming common (Figure 2). The cost model for any pump purchase isdependent on the resulting production rates. Asset management programs increase the uptimeand efficiency of a pump while minimizing the life cycle costs, providing an improved return oninvestment.


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Figure 2. A typical ultra high-pressure barrel pump used in water injection applications.Offshore, water injection pumps are isolated from the support teams, equipment and technicalexpertise required for repair if something goes wrong. Days of reduced production can resultfrom a failure as parts are sourced, transportation arranged and maintenance teams scheduled.

With redundancy made impractical due to the pump's size and the premium on space,understanding and predicting equipment issues are critical to maximizing production and uptime.Remotely monitoring these pumps for real-time conditions enables immediate indication andanalysis of any issue, with application-specific algorithms using historical data to determine theduration of operation in the given state. This system enables operators to schedule downtime tomake corrective efforts possible while the pump continues to run, keeping production disruption

to a minimum.

Onshore, multiple pumps may feed a reservoir, and the lead time on repairs might not be as longor the logistics as complicated. However, production reduction due to failed pumps can begreatly minimized through the implementation of a modern asset management program. Alongwith the benefits of scheduling downtime to minimize disruption and ongoing optimization ofthe process, rerates required as the field ages can be completed with an informed view of theoperation of the equipment over time and total accessibility to equipment specifications and testdata.

With a 50,000- to 100,000-barrel-per-day (bpd) field, production losses of 10,000 bpd can result

if a water injection pump goes down unexpectedly. As costs mount quickly, the focus is likely tobe on getting the pump operational as soon as possible, not analyzing the program and makingchanges to improve overall operation. Accordingly, it is important to implement the strategic, proactive maintenance enabled by an effective asset management program before a problemoccurs.


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Pipeline PumpsThe obvious value of asset management in water injection applications is optimizing productionrates. Pipeline pumps, which move the oil to market, are also a major opportunity for bottom-linesavings (see Figure 3). A pipeline is the lifeline for the oil producer, and if it goes down, the

money literally stops flowing.

Figure 3. Pipeline pumps are an excellent opportunity for bottom-line savings using an asset

management program.

The difficulty with pipeline pumps is twofold. First, remote pumping stations are often

monitored, but only for process conditions. Second, they are visited infrequently, so there is noreal-time picture of equipment conditions. Asset management programs add pump conditionmonitoring, diagnostics and analysis to the overall pipeline conditions and can integrate withcurrent systems to provide a real-time view of every critical piece of information along thelength of that pipeline from anywhere in the world.

Seals are a critical component of any pump, and remote monitoring of seal leakage can beintegrated to alert maintenance personnel to correct problems, even before a visual inspectionwould have revealed them.

Monitoring aspects of pump operation like seal condition, suction, discharge and case pressure,

flow, specific gravity, inboard and outboard vibration spectrums and power, combined withpipeline-specific analysis and control algorithms, can predict failure modes as well as equipmentlifetime. Asset management takes pipeline pump maintenance from a reactionary series ofactivities based on the scheduled technician visits to a strategic program to actively optimizepipeline operation, minimize spare-part inventory costs and maximize equipment life cycles.


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Bottom-Line Results

Just as implementing water injection maximizes the field's productivity, to realize maximum lifecycle cost reduction, oil producers should institute comprehensive asset management programs.These programs must include the latest technology in equipment monitoring and diagnosis,

inventory management and data availability.

These programs enable facilities to evolve from reactive planned maintenance to strategic predictive maintenance, minimizing emergency shutdowns, downtime and operating budgetswhile maximizing production and equipment availability, system visibility and the efficiency ofmaintenance resources. Combined with expert knowledge and industry experience, assetmanagement programs are a powerful way to impact the bottom line.

Ian Robbins is the director of technology advantage for the Integrated Solutions Group at

Flowserve and is responsible for the application of advanced technology for effective assetmanagement and pump life cycle cost improvements. He has previously served as Flowserve

director of specialty product & systems for the pump division, where he focused on hydrocarbonupgrading products and systems including delayed coking, coke removal technology and

ebullated bed reactor recirculation pump technology.

Documents

OM0008 – Advanced Production Planning & Control