Masters in Business Administration-MBA

Semester IV
OM0008 – Advanced Production Planning &
Control – 2 Credits
Book ID: B1162
Assignment Set-1 (30 Marks)
Note: Each question carries 10 Marks. Answer all the questions.

1. To optimize and ensure smooth production, Production Planning and Control

works 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 complete

automation of a manufacturing plant. All of the processes function under computer control with

digital information tying them together. The breakdown of most of the different computer

controlled processes is as follows:

 CAD, computer-aided design

 CAM, computer-aided manufacturing

 CAPP, computer-aided process planning

 CNC, computer numerical control machine tools

 DNC, direct numerical control machine tools

 FMS, flexible machining systems

 ASRS, automated storage and retrieval systems

 AGV, automated guided vehicles

 use of robotics and automated conveyance

  computerized scheduling and production control

 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-aided

manufacturing (CAM) systems reduce cycle times in the business. CAD/CAM is a high

technology 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 certain

location, the draftsman can click on circle, put in the radius, enter the location coordinates and

done. No more measuring for a center of the circle and using a compass while first setting it at

just the right diameter, etc. Imagine the ease of a more sophisticated drawing. CAD also allows

designers 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 a

computer screen.

Software programs can analyze and test CAD designs before a prototype is made. The software

allows 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 programmers

to program the tool path to machine the part from the raw material. The CAM program is then

integrated 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 for

inspections by coordinate measuring machines (CMM). The more a CAD design is used, the

more time is saved in the overall process.

Flexible manufacturing system (FMS) is an arrangement of machines connected by a transport

system. 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, and

downloads the machining program. (Upton, 1994)

Now, add CAD and CAM with FMS and the CIM concept is well under way. But it also

includes assembly, scheduling, and delivery. Here is an example of these three concepts under

the CIM umbrella from Computer Integrated Manufacturing by James Morrison, “Motorola, for

example, has been using a computer-integrated process since 1988. A Motorola sales

representative takes an order, say for 150 black Bravo pagers to be delivered on May 17, types

the order into a laptop computer, specifies the unique code that causes each pager to beep and

requests delivery in two weeks. The order zips over phone lines to a mainframe computer in a

new factory in Boynton Beach, Fla. The computer automatically schedules the 150 pagers for

production May 15, orders the proper components, and, on the day after assembly, informs the

shipping docks to express-mail them to Pacific Telesys Group (the company that ordered the

pagers) in California." (Morrison, 2003)

There are some issues regarding CIM. It is not a panacea for all companies. Existing equipment

and 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. It

is hard to replace the human mind in reacting to a dynamic day-to-day manufacturing schedule

and changing priorities.

CIM is an operational tool that can be slowly introduced into the areas that make sense for each

company. 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 with

unprecedented lead times. Businesses can make quick decisions and manufacture products with

high velocity. (Computer Integrated Manufacturing, 1999)

Sources

Computer Integrated Manufacturing. (1999). Rockford Consulting Group. Retrieved on

September 10, 2006 from http://www.rockfordconsulting.com/cim.htm

Morrison, James L. (2003). Computer Integrated Manufacturing. Retrieved on September 10,

2006 from http://horizon.unc.edu/projects/OTH/1-2_tech1.asp

Upton, David M. (1994). A Flexible Structure For Computer-Controlled Manufacturing Systems.

Retrieved on September 10, 2006 from

http://www.people.hbs.edu/dupton/papers/organic/WorkingPaper.html#HDR1.1%20%20%20%2

03%20139

Student Activity

Technology Assessment

New technology is exciting and usually thought of as wonderful. But we as citizens

need to remember that technology issues need to be carefully weighed against the
impact they have on individuals, society and the environment.

 Products need to be carefully designed

 Consumers need to make wise choices

 Citizens, through government regulations, must balance the trade-

offs and the risks 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 the product.

First, describe its:

1. purpose

2. function

3. materials it was made from

4. or the processes used in its manufacture

Then list 5 of its pros or 5 of its cons. They may be environmental, personal,
social, legal, or ethical. 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 is produced 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 answer is simple,"
said Pat Franklin, Executive Director of CRI. "Profits! The single-serve plastic bottle
brings a profit of $5.34 for the bottler and $8.86 per case for the retailer. A bottler
has to sell 26 cases of cans for every single case of 20-ounce plastic bottles to make
the same dollar profit."

2. Recyclable

Proof - From the website

http://en.wikipedia.org/wiki/Recycling_of_PET_Bottles - Recycling
companies will further treat the post-consumer PET by shredding the
material into small fragments. These fragments still contain residues of the
original content, shredded paper labels and plastic caps. These are removed
by different processes, resulting in pure PET fragments, or "PET flakes".
PET flakes are used as the raw material for a range of products that would
otherwise be made of polyester. Examples include polyester fibres, a base
material for the production of clothing, pillows, carpets, etc., polyester
sheet, strapping, or back into PET bottles.

3. Lightweight

4. Non breakable

5. Recloseable

6. 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 is suspected of playing a role in Alzheimer's disease, a form of
degenerative senile dementia thought to afflict 5-10 percent of all persons over
65. Victims of Alzheimer's have been found to have four times the normal
concentration of aluminum in their brain cells. Aluminum is known to be a
neurotoxin that can cause brain damage if you're exposed to it in sufficiently
large amounts. The question is whether chronic exposure to small amounts can
affect you. Despite lots of 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 1
Amount of
Information At least 5 4 answers 3 answers 2 or less answers
answers
Quality of Information Information Information Information has
Information clearly relates to clearly relates to relates to the little or nothing to
the main topic and the main topic and main topic and but do with the main
has 2 with has 1 with no supporting topic.
supporting supporting evidence.
evidence. evidence.
Sources All sources are All sources are Sources not No sources.
accurately accurately properly listed.
documented in the documented, but
desired format. are not
hyperlinked.
Internet Use Successfully uses Usually able to use Occasionally able Needs assistance
suggested suggested to use suggested or supervision to
internet links to internet links to internet links to use suggested
find information find information find information internet links
and navigates and navigates and navigates and/or to navigate
within these sites within these sites within these sites within these sites.
easily without easily without easily without
assistance. assistance. assistance.

Standards

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

• Standard #6: Students will develop an understanding of the role of society in the
development and 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 of
technology on the individual, society, and the environment.
2. List the various elements of Flexible Manufacturing System and explain
each of them 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 the
market became more and more complex, speed of delivery became something customer also
needed.

A new strategy was formulated: Customizability. The companies have to adapt to the
environment in which they operate, to be more flexible in their operations and to satisfy different
market segments (customizability).

Thus the innovation of FMS 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 a
system view of manufacturing. The buzz word for today’s manufacturer is "agility". An agile
manufacturer is one who is the fastest to the market, operates with the lowest total cost and has
the greatest ability to "delight" its customers. FMS is simply one way that manufacturers are able
to 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 the
opposite.

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

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

1. Flexibility concept. Different approaches

Today flexibility means to produce reasonably priced customized products of high quality that
can be quickly delivered to customers.

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

  Table 1
 

Approach Flexibility meaning

Manufacturing   The capability of producing different parts without major

retooling 
    A measure of how fast the company converts its process (es)
from making an old line of products to produce a new product 
    The ability to change a production schedule, to modify a part,
  or to handle multiple parts

Operational  The ability to efficiently produce highly customized and

unique products

Customer  The ability to exploit various dimension of speed of delivery

Strategic  The ability of a company to offer a wide variety of products to

its customers

Capacity  The ability to rapidly increase or decrease production levels or

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 flexibilities

 Machine flexibility - the ease with which a machine can process various operations
 Material handling flexibility - a measure of the ease with which different part types can
be transported and properly positioned at the various machine tools in a system
 Operation flexibility - a measure of the ease with which alternative operation sequences
can be used for processing a part type

  (b) System flexibilities

 Volume flexibility - a measure of a system’s capability to be operated profitably at

different volumes of the existing part types
 Expansion flexibility - the ability to build a system and expand it incrementally
  Routing flexibility - a measure of the alternative paths that a part can effectively follow
through a system for a given process plan
 Process flexibility - a measure of the volume of the set of part types that a system can
produce without incurring any setup
 Product flexibility - the volume of the set of part types that can be manufactured in a
system with minor setup

 
(c) Aggregate flexibilities

 Program flexibility - the ability of a system to run for reasonably long periods without
external intervention
 Production flexibility - the volume of the set of part types that a system can produce
without major investment in capital equipment
 Market flexibility - the ability of a system to efficiently adapt to changing market
conditions

2. Seeking benefits on flexibility

Today’s manufacturing strategy is to seek benefits from flexibility. This is only feasible when a
production system is under complete control of FMS technology. Having in mind the Process-
Product Matrix you may realize that for an industry it is possible to reach for high flexibility by
making innovative technical and organizational efforts. See the Volvo’s process structure that
makes 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 for flexible processes to permit rapid low cost switching from one product
line to another. This is possible with flexible workers whose multiple skills would develop the
ability to switch easily from one kind of task to another.

As main resources, flexible processes and flexible workers would create flexible plants as plants
which can adapt to changes in real time, using movable equipment, knockdown walls and easily
accessible and re-routable utilities.

3. FMS- an example of technology and an alternative layout

The idea of an FMS was proposed in England (1960s) under the name "System 24", a flexible
machining system that could operate without human operators 24 hours a day under computer
control. From the beginning the emphasis was on automation rather than the "reorganization of
workflow".

Early FMSs were large and very complex, consisting of dozens of Computer Numerical
Controlled machines (CNC) and sophisticate material handling systems. They were very
automated, very expensive and controlled by incredibly complex software. There were only a
limited 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 flexible
manufacturing cells (FMC).

Today two or more CNC machines are considered a flexible cell and two ore more cells are
considered a flexible manufacturing system.

Thus, a Flexible Manufacturing System (FMS) consists of several machine tools along with
part and tool handling devices such as robots, arranged so that it can handle any family of parts
for which it has been designed and developed.

Different FMSs levels are:

Flexible Manufacturing Module (FMM). Example: a NC machine, a pallet changer and a part
buffer;

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 Automated
Tool 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

  Advantages

 Faster, lower- cost changes from one part to another which will improve capital
utilization
 Lower direct labor cost, due to the reduction in number of workers
 Reduced inventory, due to the planning and programming precision
 Consistent and better quality, due to the automated control
 Lower cost/unit of output, due to the greater productivity using the same number of
workers
 Savings from the indirect labor, from reduced errors, rework, repairs and rejects

  Disadvantages
  Limited ability to adapt to changes in product or product mix (ex. machines are of limited
capacity and the tooling necessary for products, even of the same family, is not always
feasible in a given FMS)
 Substantial pre-planning activity
 Expensive, costing millions of dollars
 Technological problems of exact component positioning and precise timing necessary to
process a component
 Sophisticated manufacturing systems

FMSs complexity and cost are reasons for their slow acceptance by industry. In most of the cases
FMCs are favored.

3. Explain briefly production processes and characteristics that facilitates

achieve set goals 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. There are
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 for the football shirts to be
made and then sold.

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

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

How does the production process work?

There are four main areas to the factory:

 Intake and Storage - receives the raw materials - meat, vegetables and so on.
 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 for
use in other meals; meat may be minced or stored in chunks. Access from the low risk area to
the next, high-risk area is impossible without going through the hygiene routine. This is to
prevent staff in one area from moving through to another and risking possible contamination or
compromising hygiene.
 High Care and Assembly - the cooking and manufacturing process proper - in this section the
meals are all prepared and packaged.
 Packaging and Distribution - the outer sleeves are placed on the products. They are boxed,
palletised and placed into lorries for delivery.

Intake and Storage:

Large quantities of raw materials arrive at the factory every day, for example, potato deliveries can
come in 2-3 times a day and amount to 140 tons a week. On arrival they are checked and tagged. The
purpose of the tagging is to ensure that every ingredient can be traced - where it came 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 a particular product, its origin and the
ingredients that went to make it are all fully traceable at every stage in the process.

If raw materials do not meet the correct standards they are withdrawn or 'quarantined'. Around 2% of
the intake may be unsuitable for one reason or another - marks on
the potatoes, for example - and is classed as wastage. Kettleby
Foods have 3 main suppliers of potatoes ranging from Lincolnshire
to Ireland and the main supplier of meat comes from Yorkshire.

Low Risk Preparation and Storage

The production-planning department decide on the quantity of

ingredients needed for the range of products it has to produce to
satisfy the orders being placed by Tesco. A batch of 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. It takes around
20 minutes to cook ½ ton of potatoes. This process allows the raw materials to be consolidated into pre-
defined amounts.

Image: Potatoes, washed and cleaned, being loaded into the cooker.

Having been prepared, the raw materials are then batched up and stored in the high care storage area
before being used in the preparation of the meals themselves.

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

High Care and Assembly

The raw materials are stored in the high care storage after cooking and are subject to regular checks to
ensure that quality is maintained. Batches of cooked minced meat, for example, have a shelf life of 48
hours in the cold store, whereas other raw materials such as sauces may have a shelf life of up to 7 days
depending on their type and method of packaging. Meat based products 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 450 raw ingredients make up the inputs to get
to the pre-packaging stage before they get blended into the final product. Platform chefs are involved in
the cooking of the food and many are experienced 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 catering trade.

An important feature of the planning and production process is the lead-time; this is the time taken
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 having to be cooled. Such
processes have to be carefully monitored to ensure that proper hygiene procedures 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 to them 2-3 times a
day.

The ingredients must then be put together to make the actual final product. This process is done partly
through automation and partly through manual labour. The machinery needed to do this is expensive.
One piece cost £600,000 alone! Some machines have programmable systems to be able to vary what it
does. For example, the way mashed potato is laid onto cottage pie or a chicken and broccoli pie may be
different in terms of the 'patterning' it makes. Tesco, who in turn may 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 pounds each time!
The manual work can be quite tedious. Tasks include selecting portions of meat such as chicken from a
bin and loading it into the individual trays. The portions are each weighed and an indicator console tells
the worker whether the weight is correct for the product concerned. Too low and the company could
risk breaking the law, too high and again they might be not meeting legislation but also the cost would
rise!

Image: Staff weigh out the required amount of meat to put into the Lancashire Hot Pot. The meat is put
into the trays along with the other ingredients before being passed down the production line 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 that checks are
made to ensure that the whole process has been done properly. Substandard products are removed from
the production line and checks are made to ensure that no foreign bodies have got into the product. The
trays pass through a metal detector, for example! All products are checked for their weight and if they
are within the allowed tolerances they pass through to the packaging and distribution area - if not they
are rejected. Kettleby Foods use statistical process control (SPC) to check for rejects. SPC is a
statistical device to monitor the variations in product quality and process in relation to its targets.

Image: Chicken and Broccoli Pies pass through the watchful eyes of a quality checker before having
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 wastage
throughout. This is not wastage through negligence of the staff but natural wastage that occur as
raw materials are processed. For example, if a ton of potatoes are cooked and mashed, you will
not get a ton of mashed potato at the other end. When planning the production numbers
therefore the planning team must try to calculate the variance between what they start with and
what they end up with. The diagram below serves to illustrate this point.

Kettleby Foods: Material Variance Flow

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

 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 involve some form of wastage along the way - this is the 'processed stock
variance'.

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

 Finally, the products will be put into the relevant meals and packaged - the wastage
from this 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 up and
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 to the stores
themselves.

At the distribution stage, the central depot will have the information about which stores will require
what quantities and therefore which depots will need what. The palletised meals are sent to the main
depot, which selects or 'picks' what each regional Tesco depot requires and then distributes 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 passing through
to the distribution area. Here they have the sleeves put onto them, are boxed up and placed 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 significant source
of manufacturing cost is attributable to material handling. The sources of material handling cost include
equipment, labor, work-in-process, and floor space. One approach to reduce 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 quantitative modeling 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 techniques drawn from scheduling, layout planning, material handling, and
computer simulation.
 Masters in Business Administration-MBA
Semester IV
OM0008 – Advanced Production Planning &
Control – 2 Credits
Book ID: B1162
Assignment Set-2 (30 Marks)

Note: Each question carries 10 Marks. Answer all the questions.

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 200 2008
7
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. Hence
the middle year i.e. 2003 will be with the code ‘0’and all other are progressive on negative and
positive side as shown.

Year Year coded Supply (Tons) Y XY

1998 (-)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 the
value 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

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

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

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 should hold
in its inventory given a set cost of production, demand rate and other variables. This is done to
minimize variable inventory costs. The full equation is as follows:  

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

Despite the equation's relative simplicity by today's standards, it is still a core algorithm in
the 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 large
inventories. It is therefore apparent that some balance or trade-off or compromise is needed in
deciding how much inventory to hold, and therefore how much inventory to order. There are
costs of holding inventory and there are costs of re-ordering inventory and these two costs need
to 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 or
holding a unit of inventory in stock. All other costs such as, for example, the purchase cost of the
inventory itself, are constant and therefore not relevant to the model.

Cost Components

Annual Usage/Demand: Expressed in units this is generally the easiest part of the equation. You
simply input your forecasted annual usage.

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

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 and
vendor 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 the
orders and not the quantities ordered. For example in your receiving department the time spent
checking in the receipt, entering the receipt and doing any other related paperwork would be
included while the time spent repacking materials, unloading trucks, and delivery to other
departments would likely not be included. If you have inbound quality inspection where you
inspect a percentage of the quantity received you would include the time to get the specs and
process the paperwork and not include time spent actually inspecting, however if you inspect a
fixed 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 the
purchase 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 vendor
invoices would be included in order cost. 

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

It is extremely difficult to associate inbound freight costs with order costs in an automated EOQ
program and I suggest it only if the inbound freight cost has a significant effect on unit cost and
its 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, time
associated with picking and issuing components excluding time associated with counting and
handling specific quantities, all production scheduling time, machine set up time, and inspection
time. Production scrap directly associated with the machine setup should also be included in
order cost as would be any tooling that is discarded after each production run. There may be
times when you want to artificially inflate or deflate set up costs. If you lack the capacity to meet
the production schedule using the EOQ you may want to artificially increase set up costs to
increase lot sizes and reduce overall set up time. If you have excess capacity you may want to
artificially decrease set up costs, this will increase overall set up time and reduce inventory
investment. The idea being that if you are paying for the labor and machine overhead anyway it
would 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 however
you can include the other costs such as the costs of phone calls, faxes, postage, envelopes, etc. 

Carrying cost (Inventory Holding Costs): Also called Holding cost, carrying cost is the cost
associated with having inventory on hand. It is primarily made up of the costs associated with the
inventory investment and storage cost. For the purpose of the EOQ calculation, if the cost does
not change based upon the quantity of inventory on hand it should not be included in carrying
cost. 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 of
the carrying cost. If you did not borrow on the inventory however have loans on other capital
items, you can use the interest rate on those loans since a reduction in inventory would free up
money that could be used to pay these loans. If by some miracle you are debt free you would
need 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, you
would 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 be
included.

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 average
inventory to determine a storage cost percentage for the EOQ calculation. This tends to include
costs that are not directly affected by the inventory levels and does not compensate for storage
characteristics. Carrying costs for the purpose of the EOQ calculation should only include costs
that are variable based upon inventory levels. 

If you are running a pick/pack operation where you have fixed picking locations assigned to each
item where the locations are sized for picking efficiency and are not designed to hold the entire
inventory, this portion of the warehouse should not be included in carrying cost since changes to
inventory levels do not effect costs here. Your overflow storage areas would be included in
carrying cost. Operations that use purely random storage for their product would include the
entire storage area in the calculation. Areas such as shipping/receiving and staging areas are
usually not included in the storage calculations, however if you have to add an additional
warehouse just for overflow inventory then you would include all areas of the second warehouse
as 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 to
classify your inventory based upon a ratio of storage space requirements to value in order to
assess storage costs accurately. For example let's say you have just opened a new E-business
called "BobsWeSellEverything.com". You calculated that overall your annual storage costs were
5% of your average inventory value, and applied this to your entire inventory in the EOQ
calculation. Your average inventory on a particular piece of software and on 80 lb. bags of
concrete mix both came to $10,000. The EOQ formula applied a $500 storage cost to the average
quantity of each of these items even though the software actually took up only 1 pallet position
while the concrete mix consumed 75 pallet positions. Categorizing these items would place the
software in a category with minimal storage costs (1% or less) and the concrete in a category
with 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 EOQ
calculation. 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 actual
savings in storage costs. As your operation grows near a point at which you would need to
expand 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, remember
to apply costs which change based upon changes to the average inventory level. So in cycle
counting you would include the time spent physically counting and not the time spent filling out
paperwork, 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 the
order is known and constant.
3. The receipt of inventory is instantaneous. In other words the inventory from an order
arrives in one batch at one point in time.
4. Quantity discounts are not possible, in other words it does not make any difference how
much 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 and
the cost of holding or storing inventory over time

Important Note: When calculating the Economic Order Quantity, be aware of the assumptions
mentioned above!

Graphical Solution

If we minimize the sum of the ordering and carrying costs, we are also minimizing the total
costs. To help visualize this we can graph the ordering cost and the holding cost as shown in the
chart below:
This chart shows costs on the vertical axis or Y axis and the order quantity on the horizontal or X
axis. The straight line which commences at the origin is the carrying cost curve, the total cost of
carrying units of inventory. As expected, as we order more on the X axis, the carrying cost line
increases in a proportionate manner. The downward sloping curve which commences high on the
Y 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 there
to 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 the
curve which represents the total cost for the inventory system. Thus the sum of the carrying cost
curve and the ordering cost curve is represented by the total cost curve and the minimum point of
the total cost curve corresponds to the same point where the carrying cost curve and the ordering
cost curve intersect.

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How to calculate

Basic EOQ:

The objective is to determine the quantity to order which minimizes the total annual inventory
management cost.
Thus: Minimize! Total cost per period = inventory holding costs per period + order costs
per period

where Order Cost = The Number of Orders Placed in the period x Order Costs

and Carrying Cost = Average Inventory Level x the Carrying Costs of 1 unit of Stock for
one period

with:

 Q = order quantity
 A = demand per time period (e.g. Annual Demand)
 S = Carrying / Holding Cost of 1 unit of Stock for one period
 P = Order Cost

and 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 the
other; (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
to the following formula: (You can see, that production rate must be greater than demand rate,
in order 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,
we get 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 the optimum level and at the minimum cost.

In other words, the economic order quantity (EOQ) is the amount of inventory to be ordered at one 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 of possessing or
carrying materials and (2) the cost of acquiring or ordering materials. Purchasing larger quantities may decrease the
unit cost of acquisition, but this saving may not be more than offset by the cost of carrying materials in stock for a
longer period of time.

The carrying cost of inventory may include:

 Interest on investment of working capital

 Property tax and insurance
 Storage cost, handling cost
 Deterioration and shrinkage of stocks
 Obsolescence of stocks.

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.

 A  =  Demand for the year

 Cp   =  Cost to place a single order
 Ch  =  Cost to hold one unit inventory for a year
 *=×
 Example:

Pam runs a mail-order business for gym equipment.  Annual demand for the TricoFlexers is 16,000.  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 constant
3. The lead time is fixed
4. The purchase price of the item is constant i.e no discount is available

The replenishment is made instantaneously; the whole batch is delivered at once.

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 oil
producers 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 keep
operating budgets flat.

Increased production requirements and cost reduction present oil producers with some major
challenges. For example, oil producers must determine the best way to balance spare parts
availability and control inventory costs. Additionally, adequately and accurately planning
maintenance can be a challenge. This problem is exacerbated when useful equipment condition
data is not available. If the information is available, the expertise to properly analyze and react is
not, 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 to
allocate 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 and
maximized uptime.

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

Technology Enables Modern Asset Management Programs

Condition monitoring is not a new concept, but modern asset management programs go beyond
collecting the data. These programs deliver a comprehensive view of an entire system, including
analysis and diagnostics, enabling operators to do more with less while increasing visibility to
previously unheard-of levels.

Modern asset management technology platforms add to and integrate with existing monitoring
and communications systems. They use the latest advanced communications and information
management technology, combined with proprietary diagnostic and prognostic algorithms, to
enable operators to monitor the system performance in real time (see Figure 1). They are also
able to use historical data for trending and analysis. Some systems use pump-specific algorithms
to derive information and alerts regarding cavitation detection, aeration detection, condition
monitoring, automated control and other diagnostic applications. This real-time system view
enables plants to move from reactive or planned maintenance to strategic, proactive maintenance
with 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 existing
business systems and allow system access anywhere via the Internet. Online portals allow this
information to be accessible from any computer, whether it is on a production platform 200 miles
offshore or at a corporate headquarters. Everything from inventory control based on the real-time
condition of equipment and transportation scheduling to preparing for upcoming service
requirements 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 and
operating cost reduction in any application, but the critical operation of water injection and
pipeline pumps make them especially well suited for an asset management program.

Water Injection

As the drive to extract every last resource from older oil fields increases and new reservoirs are
deeper and increasingly difficult to drill, the size of water injection pumps-and the investment
required-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 is
dependent on the resulting production rates. Asset management programs increase the uptime
and efficiency of a pump while minimizing the life cycle costs, providing an improved return on
investment.

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 technical
expertise required for repair if something goes wrong. Days of reduced production can result
from 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 and
analysis of any issue, with application-specific algorithms using historical data to determine the
duration of operation in the given state. This system enables operators to schedule downtime to
make 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 long
or the logistics as complicated. However, production reduction due to failed pumps can be
greatly minimized through the implementation of a modern asset management program. Along
with the benefits of scheduling downtime to minimize disruption and ongoing optimization of
the process, rerates required as the field ages can be completed with an informed view of the
operation of the equipment over time and total accessibility to equipment specifications and test
data.

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 to
be on getting the pump operational as soon as possible, not analyzing the program and making
changes to improve overall operation. Accordingly, it is important to implement the strategic,
proactive maintenance enabled by an effective asset management program before a problem
occurs.

Pipeline Pumps

The obvious value of asset management in water injection applications is optimizing production
rates. Pipeline pumps, which move the oil to market, are also a major opportunity for bottom-line
savings (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 no
real-time picture of equipment conditions. Asset management programs add pump condition
monitoring, diagnostics and analysis to the overall pipeline conditions and can integrate with
current systems to provide a real-time view of every critical piece of information along the
length of that pipeline from anywhere in the world.

Seals are a critical component of any pump, and remote monitoring of seal leakage can be
integrated to alert maintenance personnel to correct problems, even before a visual inspection
would 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 with
pipeline-specific analysis and control algorithms, can predict failure modes as well as equipment
lifetime. Asset management takes pipeline pump maintenance from a reactionary series of
activities based on the scheduled technician visits to a strategic program to actively optimize
pipeline operation, minimize spare-part inventory costs and maximize equipment life cycles.

Bottom-Line Results

Just as implementing water injection maximizes the field's productivity, to realize maximum life
cycle 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 budgets
while maximizing production and equipment availability, system visibility and the efficiency of
maintenance resources. Combined with expert knowledge and industry experience, asset
management 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 asset
management 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 hydrocarbon
upgrading products and systems including delayed coking, coke removal technology and
ebullated bed reactor recirculation pump technology.