SYNTHESE

POUR LE
BASICS




















Extrait de INTRODUCTION TO MATERIALS MANAGEMENT (5
e
édition)
de J.R. TONY ARNOLD et STEPHEN N. CHAPMAN



MANAGER EN LOGISTIQUE ET GESTION DE PRODUCTION
PROMOTION 2003 – 2004

GUILLOT LIONEL
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CONTENTS


1 INTRODUCTION TO MATERIALS MANAGEMENT ______________________________________ 6
1.1 INTRODUCTION _______________________________________________________________ 6
1.2 OPERATING ENVIRONMENT ___________________________________________________ 6
1.3 THE SUPPLY CHAIN CONCEPT _________________________________________________ 7
1.4 MATERIALS MANAGEMENT ___________________________________________________ 8
1.5 SUPPLY CHAIN METRICS _____________________________________________________ 10
2 PRODUCTION PLANNING SYSTEM___________________________________________________ 10
2.1 INTRODUCTION ______________________________________________________________ 10
2.2 MANUFACTURING PLANNING AND CONTROL SYSTEM_________________________ 11
2.3 SALES AND OPERATIONS PLANNING (SOP)_____________________________________ 13
2.4 MANUFACTURING RESOURCE PLANNING (MRP II) _____________________________ 14
2.5 ENTERPRISE RESOURCE PLANNING (ERP) _____________________________________ 14
2.6 MAKING THE PRODUCTION PLAN_____________________________________________ 15
3 MASTER SCHEDULING_____________________________________________________________ 18
3.1 INTRODUCTION ______________________________________________________________ 18
3.2 RELATIONSHIP TO PRODUCTION PLAN _______________________________________ 19
3.3 DEVELOPING A MASTER PRODUCTION SCHEDULE ____________________________ 19
3.4 PRODUCTION PLANNING, MASTER SCHEDULING AND SALES __________________ 21
4 MATERIAL REQUIREMENTS PLANNING _____________________________________________ 23
4.1 INTRODUCTION ______________________________________________________________ 23
4.2 BILLS OF MATERIAL _________________________________________________________ 25
4.3 MATERIAL REQUIREMENT PLANNING PROCESS_______________________________ 27
4.4 USING THE MATERIAL REQUIREMENTS PLANNING____________________________ 31
5 CAPACITY MANAGEMENT __________________________________________________________ 33
5.1 INTRODUCTION ______________________________________________________________ 33
5.2 DEFINITION OF CAPACITY____________________________________________________ 33
5.3 CAPACITY PLANNING ________________________________________________________ 34
5.4 CAPACITY REQUIREMENTS PLANNING (CRP) __________________________________ 35
5.5 CAPACITY AVAILABLE _______________________________________________________ 36
5.6 CAPACITY REQUIRED (LOAD) _________________________________________________ 37
5.7 SCHEDULING ORDERS ________________________________________________________ 38
5.8 MAKING THE PLAN___________________________________________________________ 39
6 PRODUCTION ACTIVITY CONTROL __________________________________________________ 39
6.1 INTRODUCTION ______________________________________________________________ 39
6.2 DATA REQUIREMENTS________________________________________________________ 41
6.3 ORDER PREPARATION________________________________________________________ 43
6.4 SCHEDULING_________________________________________________________________ 43
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6.5 LOAD LEVELING _____________________________________________________________ 45
6.6 SCHEDULING BOTTLENECKS _________________________________________________ 45
6.7 THEORY OF CONSTRAINTS (TOC) AND DRUM-BUFFER-ROPE ___________________ 47
6.8 IMPLEMENTATION ___________________________________________________________ 48
6.9 CONTROL ____________________________________________________________________ 48
6.10 PRODUCTION REPORTING____________________________________________________ 50
7 PURCHASING______________________________________________________________________ 51
7.1 INTRODUCTION ______________________________________________________________ 51
7.2 ESTABLISHING SPECIFICATIONS______________________________________________ 53
7.3 FUNCTIONAL SPECIFICATION DESCRIPTION __________________________________ 54
7.4 SELECTING SUPPLIERS _______________________________________________________ 56
7.5 PRICE DETERMINATION______________________________________________________ 57
7.6 IMPACT OF MATERIAL REQUIREMENTS PLANNING ON PURCHASING __________ 59
7.7 SOME ORGANIZATIONAL IMPLICATIONS OF SUPPLY CHAIN MANAGEMENT ___ 60
8 FORECASTING ____________________________________________________________________ 61
8.1 INTRODUCTION ______________________________________________________________ 61
8.2 DEMAND MANAGEMENT______________________________________________________ 61
8.3 DEMAND FORECASTING ______________________________________________________ 62
8.4 CHARACTERISTICS OF DEMAND ______________________________________________ 62
8.5 PRINCIPLES OF FORECASTING________________________________________________ 63
8.6 COLLECTION AND PREPARATION OF DATA ___________________________________ 63
8.7 FORECASTING TECHNIQUES__________________________________________________ 63
8.8 SOME IMPORTANT INTRINSIC TECHNIQUES___________________________________ 64
8.9 SEASONALITY________________________________________________________________ 65
8.10 TRACKING THE FORECAST ___________________________________________________ 65
9 INVENTORY FUNDAMENTALS ______________________________________________________ 68
9.1 INTRODUCTION ______________________________________________________________ 68
9.2 AGGREGATE INVENTORY MANAGEMENT _____________________________________ 68
9.3 ITEM INVENTORY MANAGEMENT_____________________________________________ 68
9.4 INVENTORY AND THE FLOW OF MATERIAL ___________________________________ 69
9.5 SUPPLY AND DEMAND PATTERNS _____________________________________________ 69
9.6 FUNCTIONS OF INVENTORIES_________________________________________________ 69
9.7 OBJECTIVES OF INVENTORY MANAGEMENT __________________________________ 70
9.8 INVENTORY COSTS ___________________________________________________________ 72
9.9 FINANCIAL STATEMENTS AND INVENTORY ___________________________________ 73
9.10 ABC INVENTORY CONTROL___________________________________________________ 76
10 ORDER QUANTITIES _____________________________________________________________ 77
10.1 INTRODUCTION ______________________________________________________________ 77
10.2 ECONOMIC-ORDER QUANTITY (EOQ) _________________________________________ 78
10.3 VARIATIONS OF THE EOQ MODEL ____________________________________________ 80
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10.4 QUANTITY DISCOUNTS _______________________________________________________ 81
10.5 USE OF EOQ WHEN COSTS ARE NOT KNOWN __________________________________ 81
10.6 PERIOD-ORDER QUANTITY (POQ) _____________________________________________ 82
11 INDEPENDENT DEMAND ORDERING SYSTEMS _____________________________________ 82
11.1 INTRODUCTION ______________________________________________________________ 82
11.2 ORDER POINT SYSTEM _______________________________________________________ 83
11.3 DETERMINING SAFETY STOCK________________________________________________ 84
11.4 DETERMINING SERVICE LEVELS______________________________________________ 86
11.5 DIFFERENT FORECAST AND LEAD-TIME INTERVALS __________________________ 86
11.6 DETERMINING WHEN THE ORDER POINT IS REACHED_________________________ 87
11.7 PERIODIC REVIEW SYSTEM___________________________________________________ 88
11.8 DISTRIBUTION INVENTORY___________________________________________________ 89
12 PHYSICAL INVENTORY AND WAREHOUSE MANAGEMENT___________________________ 90
12.1 INTRODUCTION ______________________________________________________________ 90
12.2 WAREHOUSING MANAGEMENT _______________________________________________ 91
12.3 PHYSICAL CONTROL AND SECURITY__________________________________________ 95
12.4 INVENTORY RECORD ACCURACY_____________________________________________ 95
13 PHYSICAL DISTRIBUTION ________________________________________________________ 99
13.1 INTRODUCTION ______________________________________________________________ 99
13.2 PHYSICAL DISTRIBUTION SYSTEM___________________________________________ 100
13.3 INTERFACES ________________________________________________________________ 101
13.4 TRANSPORTATION __________________________________________________________ 102
13.5 LEGAL TYPES OF CARRIAGE_________________________________________________ 104
13.6 TRANSPORTATION COST ELEMENTS_________________________________________ 105
13.7 WAREHOUSING _____________________________________________________________ 107
13.8 PACKAGING_________________________________________________________________ 110
13.9 MATERIALS HANDLING______________________________________________________ 110
13.10 MULTI-WAREHOUSE SYSTEMS_______________________________________________ 111
14 PRODUCTS AND PROCESSES _____________________________________________________ 113
14.1 INTRODUCTION _____________________________________________________________ 113
14.2 NEED FOR NEW PRODUCTS __________________________________________________ 113
14.3 PRODUCT DEVELOPMENT PRINCIPLES_______________________________________ 114
14.4 PRODUCT SPECIFICATION AND DESIGN ______________________________________ 116
14.5 PROCESS DESIGN____________________________________________________________ 117
14.6 FACTORS INFLUENCING PROCESS DESIGN ___________________________________ 117
14.7 PROCESSING EQUIPMENT ___________________________________________________ 118
14.8 PROCESS SYSTEMS __________________________________________________________ 118
14.9 SELECTING THE PROCESS ___________________________________________________ 120
14.10 CONTINUOUS PROCESS IMPROVEMENT (CPI)_________________________________ 121
15 JUST-IN-TIME MANUFACTURING ________________________________________________ 126
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15.1 INTRODUCTION _____________________________________________________________ 126
15.2 JUST-IN-TIME PHILOSOPHY__________________________________________________ 127
15.3 WASTE______________________________________________________________________ 127
15.4 JUST-IN-TIME ENVIRONMENT________________________________________________ 129
15.5 MANUFACTURING PLANNING AND CONTROL IN A JIT ENVIRONMENT ________ 134
15.6 LEAN PRODUCTION _________________________________________________________ 139
15.7 WHICH TO CHOOSE: MRP (ERP), KANBAN OR THEORY OF CONSTRAINTS?_____ 140
16 TOTAL QUALITY MANAGEMENT _________________________________________________ 141
16.1 WHAT IS QUALITY?__________________________________________________________ 141
16.2 TOTAL QUALITY MANAGEMENT (TQM) ______________________________________ 142
16.3 QUALITY COST CONCEPTS___________________________________________________ 144
16.4 VARIATION AS A WAY OF LIFE_______________________________________________ 145
16.5 PROCESS CAPABILITY_______________________________________________________ 146
16.6 PROCESS CONTROL _________________________________________________________ 148
16.7 SAMPLE INSPECTION________________________________________________________ 150
16.8 ISO 9000 (VERSION 1994) ______________________________________________________ 151
16.9 BENCHMARKING____________________________________________________________ 151
16.10 JIT, TQM AND MRP II ________________________________________________________ 152
17 ANNEXES_______________________________________________________________________ 153
17.1 SCHEMA MANUFACTURING PLANNING AND CONTROL SYSTEM (MPC) ________ 153
17.2 BOUCLE MRP II______________________________________________________________ 154
17.3 INDEX_______________________________________________________________________ 155



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1 INTRODUCTION TO MATERIALS MANAGEMENT


1.1 INTRODUCTION

There are many stages between the extraction of resource material and the final
consumer product. At each stage in the development of the final product, value is
added thus creating more wealth. This conversion process is called manufacturing or
production. Once the processes exist, we need to manage their operation to produce
most economically:
- Planning for and controlling the resources and the flow of materials


1.2 OPERATING ENVIRONMENT

Operating environment is affected by many factors. The most important are:
- Government: Regulation applies to such areas as the environment, safety,
product liability and taxation;
- Economy: General economic conditions influence the demand for a
company products or service and the availability of inputs;
- Competition: Manufacturing companies find foreign competitors selling in
their markets even though they themselves may not be selling in foreign
markets;
- Customers: Some of the characteristics expect in the products are a fair
price, high quality, delivery lead time, better pre-sale and after-sale service,
product and volume flexibility;
- Quality: Successful companies provide quality that exceeds customers’
expectations;
- Order qualifiers: Supplier must meet set minimum requirements to be
considered a viable competitor. But it’ s not enough to win;
- Order winners: Competitive characteristics that persuade a customer to
choose products.

Understanding these two orders is important to drive the manufacturing
strategy. Order winners and qualifiers will change based on product life cycle
(introduction, growth, maturation and decline).

Manufacturing strategy:

Delivery lead time: Time from receipt of an order to the delivery of the
product. Customers want delivery lead time to be as short as possible. 4 Strategies to
achieve this:
- Engineer-to-order,
- Make-to-order,
- Assemble-to-order,
- Make-to-stock.

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1.3 THE SUPPLY CHAIN CONCEPT

There are 3 phases to the flow of materials:
- Supply,
- Production,
- Distribution.

There are all members of the same supply chain.

Historical perspective:

In the past, those entities were often viewed as business entities only. The first
major change can be traced to the explosive growth in Just-in-Time (JIT) concepts
originally developed by Toyota in the 1970s. Suppliers were viewed as partners as
opposed to adversaries. The success of each was linked to the success of the other.
Many of the formal boundary mechanisms were changed or eliminated altogether:
- Mutual analysis for cost reduction,
- Mutual product design,
- Formal paper-based systems gave way to electronic data interchange and
informal communication methods.

The growth of the SC concept

As the 1980s gave way to the 1990s:
- Explosive growth in computer capability => ERP, Internet. The ability to
have the information rapidly has become a competitive necessity;
- There has been a large growth in global competition and many companies
are forcing to find a new ways in the marketplace;
- There has been a growth in technological capabilities for products and
processes, forcing companies to not only become more flexible in design,
but also to communicate changes and needs to suppliers and distributors;
- Many companies have new approaches to inter-organizational
relationships;
Dominant flow of demand and design information
Dominant flow of products and services
Physical
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- More and more companies are subcontracting, keeping only their most core
competencies as internal activities.

Current supply chain concept

To result in optimal performance for customer service and cost, it’ s felt that
the supply chain of activities should be managed as an extension of the partnership.
This implies many issues but 3 critical ones include:
- Flow of materials;
- Flow of information, mostly electronically;
- Fund transfers.

To manage a supply chain, one must not only understand the network of
suppliers and customers along the chain, but must also try to efficiently plan material
and information flows along each chain to maximize cost efficiently, effectiveness,
delivery, and flexibility. This clearly implies a highly integrated information system
and a different set of performance measures. Overall, the key to managing such a
concept is with rapid flows of accurate information and increase organizational
flexibility.

Conflicts in traditional systems

In the past, each system made decisions that were best for itself, overall
company objectives suffered. To get the most profit, a company must have at least 4
main objectives:
- Provide best customer service,
- Provide lowest production costs,
- Provide lowest inventory investment,
- Provide lowest distribution costs.

These objectives create conflict among the marketing, production and finance
departments. Marketing’ s objective is to maintain and increase revenue, finance must
keep investment and cost low and production must keep its operating costs as low as
possible. The problem is to balance conflicting objectives to minimize the total of all
the costs involved and maximize customer service. Rather than having the planning
and control of these functions spread among marketing, production and distribution,
they should occur in a single area of responsibility.


1.4 MATERIALS MANAGEMENT

Materials management is a coordinating function responsible for planning
and controlling materials flow. Its objectives are as follows:
- Maximize the use of resources,
- Provide the required level of customer service.

Materials management can do much to improve a company’ s profit. Reducing
cost contributes directly to profit. Materials management can reduce costs by being
sure that the right materials are in the right place at the right time and the resources are
properly used. There are several ways of classifying this flow of material.
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Manufacturing Planning and Control (MPC)

MPC is responsible for the planning and control of the flow of materials
though the manufacturing process. The primary activities carried out are as follows:
- Production planning: it must establish correct priorities (what is needed
and when) and make certain that capacity is available to meet these
priorities. It will involve:
o Forecasting,
o Master planning,
o Material requirements planning,
o Capacity planning;
- Implementation and control: These are responsible for putting into action
and achieving the plans made by production planning. These are
accomplished though Production Activity Control and Purchasing;
- Inventory management: They are part of the planning process and provide
a buffer against the differences in demand rates and production rates.
Inventory management can not operate apart from purchasing.

Inputs to the manufacturing planning and control system

There are 5 basics inputs to it:
- Product description shows how the product will appear at some stage of
production with the bill of materials. This document does 2 things:
o Describes the components used to make the product,
o Describes the subassemblies at various stages of manufacture;
- Process specifications describe, step by step the manufacturing of the end
product with the route sheet or in a routing file. These give information as:
o Operations required to make the product,
o Sequence of operations,
o Equipment and accessories required,
o Standard time required to perform each operation;
- Time needed to perform operations is usually expressed in standard time
and is obtained from the routing file;
- Available facilities: Manufacturing planning and control must know what
resources will be available to process work;
- Quantities required: This information will come from forecasts,
customers orders, orders to replace finish-goods inventory and the MRP.

Physical Supply/Distribution

It includes all the activities involved in moving goods from the supplier to the
beginning of process and from the end of process to the consumer. They are as
follows: Transportation, Distribution inventory, Warehousing, Packaging, Material
handling and Order entry.

Materials management must plan the priorities to meet the marketplace sets
demand. Capacity is the ability of the system to produce or deliver goods. Priority and
capacity must be planned and controlled to meet customer demand at minimum cost.


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1.5 SUPPLY CHAIN METRICS

A metric is a verifiable measure stated in either quantitative or qualitative
terms defined with respect to a reference point. Metrics give us:
- Control by superiors,
- Reporting of data to superiors and external groups,
- Communication,
- Learning,
- Improvement.
Metrics communicate expectations, identify problems, direct a course of action
and motivate people. Companies cannot waiting to react until the order cycle is
completed and feedback from customers is received.

Production control works in a demanding environment shaped by 6 major
challenges:
- Customers that are never satisfied,
- A supply chain that is large and must be managed,
- A product life cycle that is getting shorter and shorter,
- A vast amount of data,
- An emphasis on profits margins that are more squeezed,
- An increasing number of alternatives.

Metrics link strategy to operations. There is a difference between measurement
and standards. A performance measure must be both quantified and objective and
contain at least to parameters (by example number of orders on a span of time).
Transforming company policies into objectives creates performance
standards. Each goal should have target values. The necessary steps in implementing
such a program are:
- Establish company goals and objectives,
- Define performance,
- State the measurement to be used,
- Set performance standards,
- Educate the user,
- Make sure the program is consistently applied.
Today the focus is on continuous improvement and an increase in standards
(quality, cost, reliability, innovation, effectiveness and productivity).


2 PRODUCTION PLANNING SYSTEM


2.1 INTRODUCTION

Manufacturing is complex. Some firms make a few different products while
others make many products. However, each uses a variety of processes, machinery,
equipment, labor skills and material. To be profitable, a firm must organize all these
factors to make the right goods at the right time at top quality and do as so
economically as possible. It is essential to have a good planning and control system. It
must answer 4 questions:
- What are we going to make?
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- What does it take to make it?
- What do we have?
- What do we need?
These are questions of priority and capacity:
- Priority relates to what products are needed, how many are needed and
when they are needed. The marketplace establishes the priorities.
Manufacturing is responsible for devising to satisfy the market demand if
possible;
- Capacity is the capability of manufacturing to produce goods and services.
In the short run, capacity is the quantity of work that labor and equipment
can perform in a given time.

In the long and short run, manufacturing must devise plans to balance the
demands with its resources and capacity. For long-range decisions, such as the
building of new plants or the purchase of new equipment, the plans must be made for
several years. For planning production over the next few weeks, the time span will be
days or weeks.


2.2 MANUFACTURING PLANNING AND CONTROL SYSTEM

There are 5 levels in the manufacturing planning and control (MPC) system:
- Strategic business plan,
- Production plan (sales and operations plan),
- Master production schedule,
- Materiel requirements plan,
- Purchasing and production activity control.

Each level varies in purpose, time span and level of detail. Since each level is
for different time span and purposes, each differs in the following:
- Purpose of the plan,
- Planning horizon: the time span from now to some time in future for which
plan is created,
- Level of detail: the detail about products require for the plan,
- Planning cycle: the frequency with which the plan is reviewed.

At each level, 3 questions must be answered:
- What are the priorities: how much of what is to be produced and when?
- What is the available capacity: what resources do we have?
- How can differences between priorities and capacity be resolved?

The first 4 levels are planning levels. The result of the plans is authorization to
purchase or manufacture what is required. The final level is when plans are put into
action through production activity control and purchasing.

The Strategic Business Plan (SBP)

The strategic business plan is a statement of the major goals and objectives the
company expects to achieve over the next 2 to 10 years or more. It is a statement of
the broad direction and show the kind of business the firm wants to do in the future.
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The plan gives general direction about how the company hopes to achieve these
objectives. It is based on long-range forecasts and includes participation from
marketing, finance, production and engineering:
- Marketing is responsible for analysing the marketplace and deciding the
firm’ s response;
- Finance is responsible for deciding the sources and uses of funds available
to the firm;
- Production must satisfy the demands of the marketplace. It does so by
using resources and materials as efficiently as possible;
- Engineering is responsible for research, development and design. It must
work with marketing and production for products that will sell in the
marketplace and can be made most economically.
The development of the SBP is the responsibility of senior management. Each
department produces its own plans to achieve the objectives set by the SBP. These
plan will be coordinated with one another and with the SBP.

The level of detail is not high. It is concerned with general market and
production requirements (total market for major product groups) and not sales of
individual items.
Strategic business plans are usually reviewed every six months to 1 year.

The Production Plan (PP)

Given the objectives set by SBP, production management is concerned with the
following:
- The quantities of each product group that must be produced in each period;
- The desired inventory levels;
- The resources of equipment, labor, and material needed in each period;
- The availability of the resources needed.

The level of detail is not high. The production plan will show major product
groups or families.
Production planners must devise a plan to satisfy market demand within the
resources available to the company. For effective planning, there must be a balance
between priority and capacity.
Along with the market and financial plans, the PP is concerned with
implementing the strategic business plan. The planning horizon is usually 6 to 18
months and is reviewed each month or quarter.

The Master Production Schedule (MPS)

The master production schedule is a plan for the production of individual end
items. It breaks down the PP to show, for each period, the quantity of each end item to
be made. Inputs to the MPS are PP, the forecast for individual end items, sales orders,
inventories and existing capacity.
The level of detail is higher. The MPS is developed for individual end items.
The planning horizon usually extends from 3 to 18 months but depends on the
purchasing and manufacturing lead times (see chapter 3). Usually the plans are
reviewed and changed weekly or monthly.

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The Material Requirements Planning (MRP)

The material requirements planning is a plan for the production and purchase
of the components used in making the items in the MPS. It shows the quantities
needed and when manufacturing intends to make or use them.
The level of detail is high. The MRP establishes when the components and
parts are needed to make each end item.
The planning horizon is at least as long as the combined purchase and
manufacturing lead times. It usually extends from 3 to 18 months.

Purchasing and Production Activity Control (PAC)

Purchasing and production activity control use the MRP to decide the purchase
or manufacture of specific items. Purchasing and PAC represent the implementation
and control phase of MPC system. Purchasing is responsible for establishing and
controlling the flow of raw materials into the factory. PAC is responsible for planning
and controlling the flow of work through the factory.
The planning horizon is very short, from a day to a month. The level of detail is
high since it is concerned with individual components, workstations and orders. Plans
are reviewed and revised daily.

Capacity management

At each level in the MPC system, the priority plan must be tested against the
available resources and capacity of the manufacturing system. If the capacity cannot
be made available when needed, then the plans must be changed. There can be no
valid, workable PP unless this is done.
Over several years, machinery, equipment and plants can be added to or taken
away from manufacturing. However, in the time spans involved from PP to PAC,
these kind of changes cannot be made. Some changes, such as changing the number of
shifts, working overtime, subcontracting the work, can be accomplished in these time
spans.


2.3 SALES AND OPERATIONS PLANNING (SOP)

The SBP integrates the plans of all departments in an organisation and is
normally updated annually. However, these plans should be updated as time
progresses so that the latest forecasts and market and economic conditions are taken
into account. SOP is a process for continually revising the SBP and coordinating plans
of the various departments. SOP is a cross-functional business plan that involves sales
and marketing, product development, operations and senior management. While
operations represent supply, marketing represents demand. The SOP is the forum in
which the production plan is developed. SOP is a dynamic process, updated on a
regular basis, usually monthly. The process starts with the sales and marketing
departments. The updated marketing is then communicate to manufacturing,
engineering and finance which adjust their plans. If these departments find they cannot
accommodate the new marketing plan, then the marketing plan must be adjusted.
SOP is medium range. SOP has several benefits:
- It provides a means of updating the SBP as conditions change;
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- It provides a means of managing change. The SOP forces management to
look at the economy at least monthly and places it in a better position to
plan changes;
- Planning ensures the various department plants are realistic, coordinated
and support the SBP;
- It provides a realistic plan that can achieve the company objectives;
- It permit better management of production, inventory and backlog.


2.4 MANUFACTURING RESOURCE PLANNING (MRP II)

Because of the large amount of data and the number of calculations needed, the
MPC system will probably have to be computer based. The system is intended to be a
fully integrated planning and control system that work from the top down and has
feedback from the bottom up. If priority plans have to be adjust at any of the planning
levels because of capacity problems, those changes should be reflected in the levels
above. Thus, there must be feedback throughout the system.
The SBP incorporates the plans of marketing, finance and production.
Marketing must agree that its plans are realistic and attainable. Finance must agree that
the plans are desirable from a financial point of view and production must agree that it
can meet the required demand. The MPC system is a master game plan for all
departments in the company. This fully integrated planning and control system is
called a manufacturing resource planning or MRP II.
Marketing and production must work together on a weekly and daily basis to
adjust the plan as changes occur.


2.5 ENTERPRISE RESOURCE PLANNING (ERP)

As MRP systems evolved, they tended to take advantage of 2 changing
conditions:
- People in most companies had become at least comfortable, but often very
familiar with the advantages in speed, accuracy and capability of integrated
computer-based management systems;
- Movement toward integration of knowledge and decision making in all
aspects of direct and indirect functions and areas that impact materials flow
and materials management. This integration not only included internal
functions but also included the upstream activities in supplier information
and the downstream activities of distribution and delivery. That movement
of integration is what is now recognised as supply chain management.
The development of Information Technologies (IT) system matched that need.
As these system became both larger in scope and integration when compared to MRP
and MRP II, they were given a new name: Enterprise Resource Planning or ERP.
Many ERP systems are capable of allowing managers to share data between the
firms, meaning that these managers can potentially have visibility across the complete
span of the supply chain.
While the power and capability of these highly integrated ERP systems is
extremely high, there are also some large costs involved. Many of the best systems are
expensive to buy and the large data requirements tend to make the system expensive,
time consuming and generally difficult to implement for many firms.
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2.6 MAKING THE PRODUCTION PLAN

Based on the market plan and available resources, the PP sets the limits or
levels of manufacturing activity for some time in future. It integrates the capabilities
and capacity of the factory with the market and financial plans to achieve business
goals. Its prime purpose is to establish production rates that will accomplish the
objectives of the SBP. The plan must extend far enough in the future to plan for the
labor, equipment, facilities and material needed. This is a period of 6 to 18 months and
is done in monthly or sometimes weekly periods. With the time spans involved and the
uncertainly of demand over long periods, the detail would not be accurate or useful
and the plan would be expensive to create. For planning purposes, a common unit or
small number of product groups is what is needed.

Establishing product groups

Firms that make a single product can measure their output directly by the
number of units they produce. Many companies make several different products.
Product groups need to be established. Thus, firms need to establish product groups
based on the similarity of manufacturing processes. Manufacturing must provide the
capacity to produce the goods needed.
Capacity is the ability to produce goods and services. For the time span of a
PP, it can be expressed as the time available in a given period.
Over the time span of the PP, large changes in capacity are impossible or very
difficult to accomplish in this period. However, some things can be altered and it is the
responsibility of manufacturing management to identify and assess them. Usually the
following can be varied:
- People can be hired and laid off, overtime and short time can be worked
and shifts can be added or removed;
- Inventory can be built up in slack periods and sold or used in periods of
high demand;
- Work can be subcontracted or extra equipment leased.
Each alternative has its associated benefits and costs. Manufacturing
management is responsible for finding the least-cost alternative consistent with the
goals and objectives of the business.

Basic strategies

There are 3 basic strategies that can be used in developing a production plan:
- Chase (demand matching) strategy: it means producing the amounts
demanded at any given time. Inventory levels remain stable while
production varies to meet demand. In these cases, the company must have
enough capacity to be able to meet the peak demand. Companies have to
hire and train people for the peak periods and lay them off when the peak is
past. They have to put on extra shifts, overtime. All these changes add cost.
The advantage to the chase strategy is that inventories can be kept to a
minimum. The costs associated with carrying inventories are avoided.

- Production leveling: it is continually producing an amount equal to the
average demand. Sometimes demand is less than the amount produced and
a inventory builds up. At other time, demand is greater and inventory is
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used up. The advantage of a production leveling strategy is that it results in
a smooth level of operations that avoids the costs of changing production
levels. Firms do not need to have excess capacity to meet peak demand.
The disadvantage is that inventory will build up in low demand periods.
This inventory will cost money to carry. For some products for which
demand is very seasonal some form of production leveling is necessary.
The costs of idle capacity, of hiring, training and laying of are severe if a
company employs a chase strategy.

- Subcontracting: as a pure strategy, subcontracting means always
producing at the level of minimum demand and meeting any additional
demand through subcontracting. The major advantage of this strategy is
cost. Costs associated with excess capacity are avoided and there are no
costs associated with changing production levels. The main disadvantage is
that the cost of purchasing (item cost, purchasing, transportation and
inspection costs) may be greater than if the items were made in the plant.
There are several other factors that may be considered. Firms may
manufacture to keep confidential processes within the company, to
maintain quality levels and a workforce.

- Hybrid strategy: the three strategies discussed so far are pure strategies.
There are many possible hybrid or combined strategies a company may use.
Each will have its own set of cost characteristics. Production manager is
responsible for finding the combination of strategies that minimize the sum
of all costs involved, providing the level of service required and meeting
the objectives of the financial and marketing plans.

Developing a Make-to-stock Production Plan

Generally firms make to stock when:
- Demand is fairly constant and predictable,
- There are few product options,
- Delivery times demanded by marketplace are much shorter than the time
needed to make the product,
- Product has a long shelf life.

The information needed to make a PP is as follows:
- Forecast by period for the planning horizon,
- Opening inventory,
- Desired ending inventory,
- Any past-due customers orders.
The objective in developing a PP is to minimize the costs of carrying
inventory, changing production levels and stocking out.

This section develops a plan for leveling production and one for chase strategy:
- Level production plan. Following is the general procedure:
o Total the forecast demand for the planning horizon,
o Determine the opening inventory and the desired ending inventory,
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o Calculate the total production required as follows:
Total Production = total forecast + back orders + ending inventory
- opening inventory,
o Calculate the production required each period by dividing the total
production by the number of periods,
o Calculate the ending inventory for each period.

- Chase strategy. Products are perishable and the company cannot built
inventory for sale later. They must use a chase strategy and make only
enough to satisfy demand in each period.

Developing a Make-to-Order Production Plan

In a make-to-order environment, manufacturers wait until an order is received
from a customer before starting to make the goods. Very expensive items are usually
made to order. Generally firms make to order when:
- Goods are produced to customer specification,
- The customer is willing to wait while the order is being made,
- The product is expensive to make and to store,
- Several product options are offered.

Assembled-to-order. Where several options exist and where the customer is
not willing to wait until the product is made, manufacturers produce and stock
standard component parts. When they receive an order, they assemble the component
parts from inventory according to the order. Since the components are stocked, the
firm needs only time to assemble before delivering to the customer.

The following information is needed to make a PP for make-to-order products:
- Forecast by period for the planning horizon,
- Opening backlog of customer orders,
- Desired ending backlog.

Backlog (queue). In a make-to-order environment, a company has a backlog of
unfilled customer orders. The backlog normally will be for delivery in the future and
does not represent orders that are late or past due.

Level production plan. Following is a general procedure for developing a
level PP:
- Total the forecast demand for the planning horizon,
- Determine the opening backlog and the desired ending backlog,
- Calculate the total production required as follows:
Total Production = total forecast + opening backlog – ending backlog,
- Calculate the production required each period by dividing the total
production by the number of periods,
- Spread the existing backlog over the planning horizon according to due
date per period.
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Resource planning

Once the preliminary production plan is established, it must be compared to the
existing resources of the company. This step is called resource requirements planning
or resource planning. 2 questions must be answered:
- Are the resources available to meet the PP?
- If not, how will the difference be reconciled?

A tool often used is the resource bill. This shows the quantity of critical
resources needed to make one average unit of the product group. For instance, suppose
the labor normally available in a period is 1600 hours. The priority plan requires 1735
hours, a difference of 135 hours or about 8.4%. Extra capacity must be find or the
priority plan must be adjusted.


3 MASTER SCHEDULING


3.1 INTRODUCTION

After PP, the next step in the MPC process is to prepare a Master Production
Schedule (MPS). The MPS is a vital link in the production planning system:
- It forms the link between production planning and what manufacturing will
actually build;
- It forms the basis for calculating the capacity and resources needed;
- The MPS drive the MRP. As a schedule of items to be built, the MPS and
bills of material determine what components are needed from
manufacturing and purchasing;
- It keeps priorities valid. The MPS is a priority plan for manufacturing.

The MPS works with end items. It breaks down the PP deals into the
requirements for individual end items, in each family, by date and quantity. The PP
limits the MPS. Therefore the total of the items in the MPS should not be different
from the total shown on the PP. within this limit, its objective is to balance the demand
(priorities) with the availability of materials, labor, and equipment (capacity).
The end items are assembled from component and sub-component parts. The
MRP system plans the schedule for these components. Thus the MPS drives the MRP.
The MPS is a plan for manufacturing. The MPS forms a vital link between
sales and production as follows:
- It makes possible valid order promises. The MPS is a plan of what is to be
produced and when. As such, it tells sales and manufacturing when goods
will be available for delivery;
- It is a contract between marketing and manufacturing.

The information needed to develop an MPS is provided by:
- The PP,
- Forecasts for individual end items,
- Actual orders received from customers and for stock replenishment,
- Inventory levels for individual end items,
- Capacity restraints.
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3.2 RELATIONSHIP TO PRODUCTION PLAN

A PP is developed for a family of several items. The next step is to forecast
demand for each item in the product family. With this data, the master scheduler must
now devise a plan to fit the constraints. The term “master production schedule” refers
to the last line of the matrix. The term “master schedule” refers to the process of
arriving at that line. Thus the total matrix is called a master schedule.


3.3 DEVELOPING A MASTER PRODUCTION SCHEDULE

The objectives in developing an MPS are as follows:
- To maintain the desired level of customer service by maintaining finished-
goods inventory levels or by scheduling to meet customer delivery
requirements;
- To make the best use of material, labor and equipment;
- To maintain inventory investment at the required levels.

To reach this objectives, there are 3 steps in preparing a MPA:
- Develop a preliminary MPS,
- Check the preliminary MPS against available capacity,
- Resolve differences between the preliminary MPS and available capacity.

Preliminary Master Production Schedule

To show the process of developing a MPS, an example is used that assumes the
product is made to stock, an inventory is kept and the product is made in lots. This
process of building an MPS occurs for each item in the family. If the total planned
production of all items in the family and the total ending inventory do not agree with
the PP, some adjustment to the individual plans must be made so the total production
is the same.
Once the preliminary mater production schedules are made, they must checked
against the available capacity. This process is called rough-cut capacity planning.

Rough-CUT Capacity Planning (RCCP)

Rough-cut capacity planning checks whether critical resources are available to
support the preliminary master production schedules. Critical resources include
bottleneck operations, labor and critical materials. Here the resource bill is for a single
product. As before, the only interest is in bottleneck work centers and critical
resources.

Resolution of differences

The next step is to compare the total time required to the available capacity of
the work center. If available capacity is greater than the required capacity, the MPS is
workable. If not, methods of increasing capacity have to be investigated. Is it possible
to adjust the available capacity with overtime, extra workers, routing through other
work centers or subcontracting? If not it will be necessary to revise the MPS.
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Finally, the MPS must be judged by 3 criteria:
- Resource use: is the MPS within capacity restraints in each period of the
plan? Does it makes the best use of resources?
- Customer service: will due dates be met and will delivery performance be
acceptable?
- Cost: is the plan economical, or will excess costs be incurred for overtime,
subcontracting, expediting or transportation?

Master Schedule Decisions

The MPS should represent as efficiently as possible what manufacturing will
make. If too many items are included, it will lead to difficulties in forecasting and
managing the MPS. In each of the manufacturing environments, master scheduling
should take place were the smallest number of product options exists.

Make-to-stock products. A limited number of standard items are assembled
from many components. The MPS is usually a schedule of finished-goods items.
Make-to-order products. Many different end items are made from a small
number of components. The MPS is usually a schedule of the actual customer orders.
Assembled-to-order products. Many end items can be made from
combinations of basic components and subassemblies. It is easier if production is
planned at the level of subassemblies.
Final assembly schedule (FAS). This last step, assembly to customer order, is
generally planned using a final assembly schedule. The final assembly takes place
only when a customer order is received. The FAS schedules customer orders as they
are received and is based on the components planned in the MPS.
Engineer to order. This is a form of make-to-order products. The product is
designed before manufacturing based on the customer’ s very special needs.


Planning Horizon

The planning horizon is the time span for which plans are made. It must cover
a period at least equal to the time required to accomplish the plan. For master
production scheduling, the minimum planning horizon is the longest cumulative or
end-to-end lead time (LT). The planning horizon is usually longer for several reasons.
The longer the horizon, the greater the visibility and the better management’ s ability
to avoid future problems or to take advantage of special circumstances.
As a minimum, the planning horizon for a final assembly schedule must
include time to assemble a customer’ s order. It does not need to include the time
Make-to-Stock Make-to-Order Assemble-to-Order
End
Product
Raw
Material
End
Product
Raw
Material
End
Product
Raw
Material
MPS
MPS
MPS
FAS FAS
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necessary to manufacture the components. That time will be included in the planning
horizon of the MPS.


3.4 PRODUCTION PLANNING, MASTER SCHEDULING AND SALES

The production plan reconciles total forecast demand with available resources.
It is not concerned with the detail of what will actually be made. It is intended to
provide a framework in which detailed plans can be made in the MPS.
The MPS is built from forecasts and actual demands for individual end items.
the PP and the MPS uncouple the sales forecast from manufacturing by establishing a
manufacturing plan. Together, they attempt to balance available resources with
forecast demand. However, they are not a sales forecast, nor are they necessarily what
is desired. The MPS is a plan for what production can and will do. It is the point at
which manufacturing and marketing must agree what end items are going to be
produced. Manufacturing is committed to making the goods; marketing to selling the
goods. However the MPS is not meant to be rigid. Demand changes, problems occur
in production and sometimes components are scarce. These events may make it
necessary to alter the MPS. Changes must be made with the full understanding and
agreement of sales and production. The MPS provides the basis for making changes
and a plan on which all can agree.

The MPS and Delivery Promises

In a make-to-stock environment, customer orders are satisfied from inventory.
However, in make-to-order or assemble-to-order environments, demand is satisfied
from productive capacity. In either case, sales and distribution need to know what is
available to satisfy customer demand. As orders are received, they consume the
available inventory or capacity. Any part of the plan that is not consumed by actual
customer orders is available to promise to customers. In this way, the MPS provides a
realistic basis for making delivery promises.
Using the MPS, sales and distribution can determine the available to promise
(ATP). The ATP is calculated by adding scheduled receipts to the beginning inventory
and then subtracting actual orders scheduled before the next schedule receipt. A
schedule receipt is an order that has been issued either to manufacturing or to a
supplier. This method assumes that the ATP will be sold before the next scheduled
receipt arrives. It is there to be sold and the assumption is that it will be sold. If it is
not sold, whatever is left forms an on-hand balance available for the next period.

Projected Available Balance

Our calculations so far have based the projected available balance on the
forecast demand. Now there are also customer orders to consider. Customer orders
will sometimes be greater than forecast and sometimes less. Projected available
balance is now calculated based on whichever is the greater. The projected available
balance (PAB) is calculated in one of 2 ways, depending on whether the period is
before or after the demand time fence. The demand time fence is the number of
periods, beginning with period 1, in which changes are not excepted due to excessive
cost cause by schedule disruption.
PAB = prior period PAB or on-hand balance + MPS – customer orders
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This process ignores the forecast and assumes the only effect will be from the
customers orders. Any new orders will have to be approved by senior management.
For periods after the demand time fence, forecast will influence the PAB so it is
calculated using the greater of the forecast or customer orders.
PAB = prior period PAB or on-hand balance + MPS – greater of customer
orders or forecast

Time Fences

At each of the stages of a bill of material, the company commits itself to more
cost and fewer alternatives. Therefore the cost of making a change increases and the
company’ s flexibility decreases as production gets closer to the delivery time.
Changes to the MPS will occur:
- Customers cancel or change orders;
- Machines break down or new machines are added, changing capacity;
- Suppliers have problems and miss delivery dates;
- Processes create more scrap than expected.

A company wants to minimize the cost of manufacture and also be flexible
enough to adapt to changing needs. Changes to production schedules can result in the
following:
- Cost increases due to re-routing, rescheduling, extra setups, expediting and
buildup of work-in-process inventory;
- Decreased customer service. A change in quantity of delivery can disrupt
the schedule of other orders;
- Loss of credibility for the MPS and the planning process.

Changes that are far off on the planning horizon can be made with little or no
cost or disruption to manufacturing. To help in the decision-making process,
companies establish zones divided by time fences. The zones and time fences are:
Frozen zone. Capacity and material are committed to specific orders. Since
changes would result in excessive costs, reduced manufacturing efficiency and poor
customer service, senior management’ s approval is usually required to make changes.
The extend of the frozen zone is defined by the demand time fence. Within the
demand time fence, demand is usually based on customer orders, not forecast.
Slushy zone. Capacity and material are committed to less extend. This is an
area for tradeoffs that must be negotiated between marketing and manufacturing.
Materials have been ordered and capacity established; these are difficult to change.
However, changes in priorities are easier to change. The extent of the slushy zone is
defined by the planning time fence. Within this time fence the computer will not
reschedule MPS orders.
Liquid zone. Any change can be made to the MPS as long as it is within the
limits set by the PP. Changes are routine and are often made by the computer program.

Changes to the MPS will occur. They must be managed and decisions made
with full knowledge of the costs involved.
FROZEN SLUSHY LIQUID
Due
Date
Demand
Time Fence
Planning
Time Fence
0
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Error management

Errors in customer orders occur all the time and require constant attention. 3
general types of errors occur:
- Wrong product or specification,
- Wrong amount,
- Wrong shipping date.
They require different responses, reengineering or alteration, negotiation of
partial shipment or expediting of shipment.


4 MATERIAL REQUIREMENTS PLANNING


4.1 INTRODUCTION

Material requirements planning (MRP) is the system used to avoid missing
parts. It establishes a schedule (priority plan) showing the components requires at each
level of the assembly and based on lead times, calculates the time when these
components will be needed.

Nature of demand

There are 2 types of demand: independent and dependent. Independent demand
is not related to the demand for any other product. It must be forecast. However, since
dependent demand is directly related to the demand for higher-level assemblies or
products, it can be calculated. MRP is designed to this calculation.
An item can have both a dependent and an independent demand. Dependency
can be horizontal or vertical. The dependency of a component on its parent is vertical.
However, components also depend on each other (horizontal dependency). If one
component is going to be a week late then the final assembly is a week late. The other
components are not needed until later. Planners are concerned with horizontal
dependency when a part is delayed or there is a shortage, for then other parts will have
to be rescheduled.

Objectives of MRP

MRP has 2 major objectives: determine requirements and keep priorities
current.
Determine requirements. The material requirements plan’ s objective is to
determine what components are needed to meet the MPS and, based on lead time, to
calculate the periods when the components must be available. It must determine the
following:
- What to order,
- How much to order,
- When to order,
- When to schedule delivery.

Keep priorities current. The demand for, and supply of, components changes
daily. Customers enter or change orders. In this ever-changing world, a MRP must be
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able to keep plans current. It must be able to add and delete, expedite, delay and
change orders.

Linkages to other MPC functions

The MPS drives the MRP. The MRP is a priority plan for the components
needed to make the products in the MPS. The plan is valid only if capacity is available
when needed to make the components and the plan must be checked against available
capacity. The process of doing so is called capacity requirements planning (CRP) and
is discussed in the chapter 5.
MRP drives , or is input to, Production Activity Control (PAC) and purchasing.
MRP plans the release and receipt dates for orders. PAC and purchasing must plan and
control the performance of the orders to meet the due dates.

The computer

Most companies need to keep track of thousands of components in a world of
changing demand, supply and capacity. Computers are incredibly fast, accurate and
ideally suited for the job at hand. With their ability to store and manipulate data and
produce information rapidly, manufacturing now has a tool to use modern
manufacturing planning and control systems properly. The computer software
program that organizes and maintains the bills of material structures and their linkages
is called a bill of material processor.

Inputs to the MRP system

There are 3 inputs to MRP system:
- Master Production Schedule,
- Inventory records,
- Bills of material.

Master Production Schedule (MPS). The MPS is a statement of which end
items are to be produced, the quantity of each and the dates they are to be completed.
It drives the MRP system by providing the initial input for the items needed.

Inventory records. When a calculation is made to find out how many are
needed, the quantities available must be considered.
There are 2 kinds of information needed. The first is called planning factors
and includes information such as order quantities, lead times, safety stock, and scrap.
It is needed to plan what quantities to order and when to order for timely deliveries.
The second kind of information is on the status of each item. The MRP system needs
to know how much is available, how much is allocated and how much is available for
future demand. The type of information is dynamic and changes with every transaction
that takes place.
These data are maintained in an inventory record file, also called a part master
file or item master file. Each item has a record and all the record together form the file.
Bills of material. The bill of material is one of the most important documents
in a manufacturing company.
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4.2 BILLS OF MATERIAL

The American Production and Inventory Control Society (APICS) defines a
bill of material as a listing of all the subassemblies, intermediates, parts and raw
materials that go into making the parent assembly showing the quantities of each
required to make an assembly. There are 3 important points:
- The bill of material shows all the parts required to make one of the item;
- Each part or item has only one part number. Thus if a particular numbers
appears on two different bills of material, the part so identified is the same;
- A part is defined by its form, fit or function. If any of these change, then it
is not the same part and it must have a different part number.

The bill of material shows the components that go into making the parent. It
does not show the step or process used to make the parent or the component. That
information is recorded in a routing file (see chapters 5 & 6).

Bills of material structure

Different departments in a company use bills of material for a variety of
purposes. Although each user has individual preferences for the way the bill should be
structured, there must be only one structure and it should be designed to satisfy most
needs. Following are some important formats for bills:

Product tree. The product tree is a convenient way to think about bills of
material but it is seldom used except for teaching and testing.

Parent-component relationship. The product tree and the bill of material
shown in figure are called single-level structure. An assembly is considered a parent
and the items that comprise it are called component items. unique part numbers have
also been assigned to each part. This make identification of the part absolute.

Multilevel bill. Multilevel bills are formed as logical grouping of parts into
subassemblies based on the way the product is assembled. It is the responsibility of
manufacturing engineering to decide how the product is to be made: the operations to
be performed, their sequence and their grouping. The subassemblies created are the
result of this.
One convention used with multilevel bills of material is that the last items on
the tree are all purchased items. Generally, a bill of material is not complete until all
branches of the product structure tree end in a purchase part.
Each level in the bill of material is assigned a number starting from the top and
working down. The top level, or end product level, is level 0 and its components are
level 1.

X
D B C A
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Multiple bill. A multiple bill is used when companies usually make more than
one product and the same components are often used in several products. This is
particularly true with families of products.

Single-level bill. A single-level bill of material contains only the parent and its
immediate components. The computer stores information describing the product
structure as a single-level bill. A series of single-level bills is needed to completely
define a product. Using this method, the information has to be stored only once.
There are several advantages to using single-level bills including the following:
- Duplication of records is avoided;
- The number of records and, in computer system, the file size is reduced;
- Maintaining bills of material is simplified. If there is a change, the change
need be made in only one place.

Indented bill. A multilevel bill of material can also be shown as an indented
bill of material. This bill uses indentations as a way of identifying parents from
components.

Summarised parts list. It lists all the parts needed to make one complete
assembly. The part list is produced by the product design engineer.

Planning bill. A major use of bills of material is to plan production. Planning
bills are an artificial grouping of components for planning purposes. They are used to
simplify forecasting, master production scheduling and material requirements
planning. They do not represented buildable products but an average product.
Supposed a company manufactured tables with 3 different leg styles, 3 different sides
and 3 different tops. For planning purposes, the 27 bills can be simplified by showing
the percentage split for each type of component on one bill.
The percentage usage of components is obtained from a forecast or past usage.
X
D B C A
G F B E
Level 0
Level 1
Level 2
Table
Tops Legs Sides Common
Parts
100 %
Leg A
40 %
Leg B
35 %
Leg C
25 %
Side A
55 %
Side B
30 %
Side C
15 %
Top A
45 %
Top B
30 %
Top C
25 %
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Where-used and pegging

Where-used report. A listing of all the parents in which a component is used
is called a where-used report. This has several uses such as implementing an
engineering change or when material are scarce or in costing a product.
Pegging report. A pegging report is similar to a where-used report. However,
the pegging report shows only those parents for which there is an existing requirement
whereas the where-used report shows all parents for a components.

Uses for bill of material

Some major uses are as follows:
- Product definition. The bill specifies the components needed to make the
product;
- Engineering change control. Product design engineers sometimes change
the design of a product and the components used. The changes must be
recorded and controlled. The bill provides the method for doing so;
- Service parts. Replacement parts needed to repair a broken component are
determined from the bill of material;
- Planning. Bills of material define what materials have to be scheduled to
make the end product. They define what components have to be purchased
or made to satisfy the MPS;
- Order entry. When a product has a very large number of options, the order-
entry system very often configures the end product bill of materials. The
bill can also be used to price the product;
- Manufacturing. The bill provides a list of the parts needed to make or
assemble a product;
- Costing. The bill provides not only a method of determining direct material
but also a structure for recording direct labor and distributing overhead.

This list is not complete. There is scarcely a department of the company that
will not use the bill at some time. Maintaining bills of material and their accuracy is
extremely important.


4.3 MATERIAL REQUIREMENT PLANNING PROCESS

The purpose of MRP is to determine the components needed, quantities and
due dates so items in the MPS are made on time. This section studies the basic MRP
techniques for doing so. These techniques will be discussed under the following
headings:
- Exploding and offsetting,
- Gross and net requirements,
- Releasing orders,
- Low-level coding and netting.


Exploding and offsetting

Product tree contains another necessary piece of information: lead times (LT).
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Lead time. Lead time is the span of time needed to perform a process. In
manufacturing, it includes time for order preparation, queuing, processing, moving,
receiving and inspecting, and any expected delays.

Exploding the requirements. Exploding is the process of multiplying the
requirements by the usage quantity and recording the appropriate requirements
throughout the product tree.

Offsetting. Offsetting is the process of placing the exploded requirements in
their proper periods based on lead time. For example, if 50 units of A are required in
week 5, the order to assemble the As must be released in week 4 and 50 Bs and 50 Cs
must be available in week 4.

Planned orders. If it is planned to received 50 of part A in week 5 and the lead
time to assemble an A is one week, the order will have to be released and production
started not later than week 4. Thus, there should be a planned order receipt for 50 in
week 5 and a planned order release for that number in week 4.

Gross and net requirements

The previous section assumed that no inventory was available for the As or
any of the components. Often inventory is available and must be included when
calculating quantities to be produced. If for instance there are 20 As in stock, only 30
need to be made.
Net requirements = Gross requirement - Available inventory

The planned order release of the parent becomes the gross requirement of the
component.

Released orders

In many cases, requirements change daily. A computer-based MRP system
automatically recalculates the requirements for subassemblies and components and re-
creates planned order releases to meet the shifts in demand.
Planned order releases are just planned; they have not been released. It is the
responsibility of the material planner to release planned orders, not the computer.
Since the objective of the MRP is to have material available when it is needed
and not before, orders for material should not be released until the planned order
release date arrives.
Releasing an order means that authorization is given to purchasing to buy the
necessary material or to manufacturing to make the component.
Before a manufacturing order is released, component availability must be
checked. The computer program checks the component inventory records to be sure
A LT: 1 week
B LT: 2 weeks C LT: 1 week
B LT: 1 week E LT: 1 week
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that enough material is available and , if so, to allocate the necessary quantity to that
work order. If the material is not available, the computer program will advise the
planner of the shortage.
When the authorization to purchase or manufacture is released, the planned
order receipt is canceled and a schedule receipt is created in its place. When a
manufacturing order is released the computer will allocate the required quantities of a
parent’ s components to that order. This does not mean the components are withdrawn
from inventory but that the projected available quantity is reduced. They will stay in
inventory until withdrawn for use.

Scheduled receipts. Scheduled receipts are orders placed on manufacturing or
on a vendor and represent a commitment to make or buy. For an order in a factory,
necessary materials are committed and work-center capacity allocated to that order.
For purchased parts, similar commitments are made to the vendor. The schedule
receipts row shows the quantities ordered and when they are expected to be completed
and available.

Open orders. Scheduled receipts on the MRP record are open orders on the
factory or a vendor and are the responsibility of purchasing and of production activity
control. When the goods are received into inventory and available for use, the order is
close out and the scheduled receipt disappears to become part of the on-hand
inventory.

Net requirements. The calculation for net requirements can now be modified
to included scheduled receipts.

Net requirement = Gross requirement –Scheduled receipt –Available inventory

Week 1 2 3 4
Gross requirements 50 250 100 50
Scheduled receipts 200
Projected available 150 100 50 150 100
Net requirements 50
Planned order Receipt 200
Planned order Release 200
LT: 2 weeks, Order quantity: 200

Basic MRP record

Figure shows a basic MRP record. There are several points that are important:
- The current time is the beginning of the first period;
- The top row shows periods, called time buckets. These are often a week
but can be any length of time convenient to the company;
- The number of periods in the record is called the planning horizon, which
shows the number of future periods for which plans are being made. It
should be at least as long as the cumulative product lead time. Otherwise,
the MRP system is not able to release planned orders of items at the lower
level at the correct time;
- An item is considered available at the beginning of the time bucket in
which it is required;
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- The quantity shown in the projected on-hand row is the projected on-hand
balance at the end of the period;
- The immediate or most current period is called the action bucket. A
quantity in the action bucket means that some action is needed now to
avoid a future problem.

Capacity Requirements Planning

As occurred in the previous planning levels, the MRP priority plan must be
checked against available capacity. At the MRP planning level, the process is called
capacity requirements planning (CRP). If the capacity is available, the plan can
proceed. If not, either capacity has to be made available or the priority plans changed
(see chapter 5).

Low-level coding and netting

A component may reside on more than one level in a bill of material. The
process of collecting the gross requirements and netting can be simplified by using
low-level codes. The low-level code is the lowest level on which a part resides in all
bills of material. Every part has only one low-level code.





Low-level codes are determined by starting at the lowest level of a bill of
material and, working up, recording the level against the part. Once the low-level
codes are obtained, the net requirements for each part can be calculated using the
following procedure:
- Starting at level 0 of the tree, determine if any of the parts on that level
have a low-level code of 0. If so, those parts occur at no lower level and all
the gross requirements have been recorded. These parts can, therefore, be
netted and exploded down to the next level, that is, into their components.
If the low-level code is greater than 0, there are more gross requirements
and the part is not netted;
- The next step is to move down to level 1 on the product tree and to repeat
the routine follow in step 1. since B has a low-level code of 1, all
requirements for B are recorded and it can be netted and exploded. The bill
of material for B shows that is made from a C and a D. part C has a low-
level code of 2, which tell us there are further requirements for C and at this
stage they are not netted;
- Moving down to level 2 on the product tree, we find that part Chas a low-
level code of 2. this tell us that all gross requirements for Cs are accounted
for and that we can proceed and determine its net requirements. Looking at
its bill of material, we see that it is purchased part and no explosion is
needed.

Part Low-level code
A 0
B 1
C 2
D 2
A
B C
D C
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The low-level codes are used to determine when a part is eligible for netting
and exploding. In this way, each part is netted and exploded only once.

Multiple bills of material

Most companies make more than one product and often use the same
components in many of their products. The MRP system gathers the planned order
releases from all parents and creates a schedule of gross requirements for the
components. The same procedure used for a single bill of material can be used when
multiple products are being manufactured. All bills must be netted and exploded level
by level as was done for a single bill.
Scrap is usually stated as a scrap allowance. With a scrap allowance of 15 %
the process would be required to make:
net requirements x ( 1 – 0.15 )


4.4 USING THE MATERIAL REQUIREMENTS PLANNING

The people who manage the MRP system are planners. They are responsible
for making detailed decisions that keep the flow of material moving into and out of the
factory. In many companies where there are thousands of parts to manage, planners
are usually organise into logical groupings based on the similarity of parts of supply.
The basic responsibilities of a planner are to:
- Launch (release) orders to purchasing or manufacturing;
- Reschedule due dates of open (existing) orders as required;
- Reconcile errors and try to find their cause;
- Solve critical material shortages by expediting or re-planning;
- Co-ordinate, with other planners, MPS, PAC and purchasing to resolve
problems;
The material planners work with 3 types of orders: planned, released and firm.

Planned orders. Planned orders are automatically scheduled and controlled by
the computer. As gross requirements, projected available inventory and schedule
receipts change, the computer recalculates the timing and quantities of planned order
releases. The MRP program recommends to the planner the release of an order when
the order enters in the action bucket but does not release the order

Released orders. Releasing or launching a planned order is the responsibility
of the planner. When released, the order becomes an open order to the factory or to
purchasing and appears on the MRP record as a schedule receipt. It is then under the
control of the planner, who may expedite, delay or even cancel the order.

Firm planned orders. The computer-based MRP system automatically
recalculates planned orders as the gross requirements change. At times, the planner
may prefer to hold a planned order firm against changes in quantity and time despite
what the computer calculates. This might be necessary because of future availability of
material or capacity or special demands on the system. The planner can tell the
computer that the order is not to be changed unless the planner advises the computer to
do so. The order is firmed or frozen against the logic of the computer.
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However, the computer does print action or exception messages suggesting that
the planner should act and what kind of action might be appropriate.

Exception messages. If the manufacturing process is under control and the
MRP system is working properly, the system will work according to plan. However,
sometimes there are problems that need the attention of the planner. A good MRP
system generates exception messages to advise the planner when some event needs
attention. Following are some examples of situations:
- Components for which planned orders are in the action bucket and which
should be considered for release;
- Open orders for which the timing or quantity of scheduled receipts does not
satisfy the plan. Perhaps a scheduled receipt is timed to arrive too early or
late and its due date should be revised;
- Situations in which the standard lead times will result in late delivery of a
zero-level part.

Transaction messages. Transaction messages mean that the planner must tell
the MRP software of all actions taken that will influence the MRP records. Otherwise,
the records will be inaccurate and the plan will become unworkable.

Managing the material requirements plan

The planner receives feedback from many sources such as:
- Suppliers’ actions through purchasing;
- Changes to open orders in the factory such as early or late completions or
differing quantities;
- Management action such as changing the MPS.
The planner must evaluate this feedback and take corrective action if
necessary. The planner must consider 3 important factors in managing the MRP:

Priority. Priority refers to maintaining the correct due dates by constantly
evaluating the true due date need for released orders and, if necessary, expediting or
de-expediting.

Week 1 2 3 4 5
Gross requirements 150 50 100 150 200
Scheduled receipts 300
Projected available 150 50 0 200 50 150
Net requirements 150
Planned order Receipt 300
Planned order Release 300
LT: 3 weeks, Order quantity: 300

What will happen if the gross requirements in week 2 are changed from 50
units to 150?

Week 1 2 3 4 5
Gross requirements 150 150 100 150 200
Scheduled receipts 300
Projected available 150 50 - 100 100 250 50
Net requirements 50
Planned order Receipt 300
Planned order Release 300
LT: 3 weeks, Order quantity: 300
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There is a shortage of 100 units in week 2 and that the planned order release in
week 2 is now in week 1. what can the planner do? One solution is to expedite the
schedule receipt of 300 units from week 3 to week 2. If this is not possible, the extra
100 units wanted in week 2 must be rescheduled into week 3. also there is now a
planned order release in week 1 and this order should be released.

Bottom-up re-planning. Action to correct for changed conditions should
occur as low in the product structure as possible. Suppose the part in the previous
example is a component. If the 300 units cannot be expedited into week 2, the planned
order release and net requirement of the parent must be changed.

Reducing system nervousness. Sometimes requirements change rapidly and
by small amounts, causing the MRP to change back and forth. The planner must judge
whether the changes are important enough to react to and whether on order should be
released. One method of reducing system nervousness is firm planned orders.


5 CAPACITY MANAGEMENT


5.1 INTRODUCTION

At each level, manufacturing develops priority plans to satisfy demand.
However, without the resources to achieve the priority plan, the plan will be
unworkable. Capacity management is concerned with supplying the necessary
resources. This chapter looks more closely at the questions of capacity: what it is, how
much is available, how much is required and how to balance priority and capacity.


5.2 DEFINITION OF CAPACITY

Capacity is defined as the capability of a worker, machine, work center, plan or
organization to produce output per period of time. Capacity is a rate of doing work,
not the quantity of work done.
2 kinds of capacity are important: capacity available and capacity required.
Capacity available is the capacity of a system or resource to produce a quantity of
output in a given time period. Capacity required is the capacity of a system or
resource needed to produce a desired output in a given time. A term closely related to
capacity required is load. This is the amount of released and planned work assigned to
a facility for a particular time period. It is the sum of all the required capacities.
Capacity management is the function of establishing, measuring, monitoring
and adjusting limits or levels of capacity in order to execute all manufacturing
schedules. As with all management processes, it consists of planning and control
functions.
Capacity planning is the process of determining the resources required to
meet the priority plan and the methods needed to make that capacity available. It takes
place at each level of the priority planning system. These priority plans cannot be
implemented, however, unless the firm has sufficient capacity to fulfil the demand.
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Capacity planning links the various production priority schedules to manufacturing
resources.
Capacity control is the process of monitoring production output, comparing it
with capacity plans and taking corrective action when needed. It will be examined in
chapter 6.


5.3 CAPACITY PLANNING

Capacity planning involves calculating the capacity needed to achieve the
priority plan and finding ways of making that capacity available. If the capacity
required cannot be met, the priority plans have to be changed.
Priority plans are usually stated in units of product or some standard unit of
output. Capacity can sometimes be stated in the same units. If there is no common
unit, capacity must be stated as the hours available. The process of capacity planning
is as follows:
- Determine the capacity available at each work center in each time period;
- Determine the load at each work center in each time period:
o Translate the priority plan into the hours of work required at each
work center in each period time,
o Sum up the capacities required for each item on each work center to
determine the load on each work center in each time period;
- Resolve differences between available capacity and required capacity.
This process occurs at each level in the priority planning process, varying only
in the level of detail and time spans involved.

Planning levels

Resource planning involves long-range capacity resources requirements and is
directly linked to production planning. Typically , it involves translating monthly,
quarterly or annual product priorities from the production plan into some total measure
of capacity, such as gross labor hours. Resource planning involves changes in
manpower, capital equipment, product design or other facilities that take a long time to
acquire and eliminate.
Rough-cut capacity planning (RCCP) takes capacity planning to the next
level of detail. The MPS is the primary information source. The purpose of RCCP is to
check the feasibility of the MPS, provides warning of any bottlenecks, ensure
utilization of work centers and advise vendors of capacity requirements.
Capacity requirements planning is directly linked to the MRP. Since this
type of planning focuses on component parts, greater detail is involved than in RCCP.
It is concerned with individual orders at individual work centers and calculates work
center loads and labor requirements for each time period at each work center.
The various capacity plans relate only to their level in the priority plan, not to
subsequent capacity planning levels.
After the plans are completed, production activity control and purchasing must
be authorized to process or implement shop orders and purchase orders.


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5.4 CAPACITY REQUIREMENTS PLANNING (CRP)

The CRP occurs at the level of the MRP. Planned orders from the MRP and
open shop orders (schedule receipts) are converted into demand for time in each work
center in each time period. This process takes into consideration the lead times for
operations and offsets the operations at work centers accordingly. In considering open
shop orders, its accounts for work already done on a shop order. Capacity planning is
the most detailed, complete and accurate of the capacity planning techniques. Because
of the detail, a great amount of data and computation are required.

Inputs

The inputs need for a CRP are open shop orders, planned order releases,
routings, time standards, lead times and work center capacities. This information can
be obtained from the following:
- Open order file,
- MRP,
- Routing file,
- Work center file.

Open order file. An open shop order appears as a scheduled receipt on the
MRP. It is released order for a quantity of a part to be manufactured and completed on
a specific date. The open order file is a record of all the active shop orders. It can be
maintained manually or as a computer file.

Planned order releases. Planned order releases are determined by the
computer’s MRP logic based upon the gross requirements for a particular part. They
are inputs to the CRP process in assessing the total capacity required in future time
periods.

Routing file. A routing is a path that work follows from work center to work
center as it is completed. Routing is specified on a route sheet or, in a computer-based
system, in a route file. A routing file should exist for every component manufactured
and contain the following information:
- Operations to be performed,
- Sequence of operations,
- Work centers to be used,
- Possible alternate work centers,
- Tooling needed at each operations,
- Standard times: setup times and run times per piece.

Work center file. A work center is composed of a number of machines or
workers capable of doing the same work. A work center file contains information on
the capacity and move, wait and queue times associated with the center.
The move time is the time normally taken to move material from one
workstation to another. The wait time is the time a job is at a work center after
completion and before being moved. The queue time is the time a job waits at a work
center before being handled. Lead time is the sum of queue, setup, run, wait, and
move times.

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Shop calendar. Another piece of information needed is the number of working
days available. The Gregorian calendar has some serious drawbacks for manufacturing
planning and control. The months do not have the same number of days, holidays are
spread unevenly throughout the year and the calendar does not work on a decimal
base. How many working days do we really have?
Because of this problem, it is desirable to develop a shop calendar.


5.5 CAPACITY AVAILABLE

Capacity available is the capacity of a system or resource to produce a
quantity of output in a given time period. It is affected by the following:
Product specifications. If the product specifications change, the work content
(work required to make the product) will change, thus affecting the number of units
that can be produced.
Product mix. Each products has its own work content measured in the time it
takes to make the product. If the mix of products being produced changes, the total
work content for the mix will change.
Plant and equipment. This relates to the methods used to make the product. If
the method is changed – for example a faster machine is used - the output will change.
Work effort. This relates to the speed or pace at which the work is done. If the
workforce changes pace, perhaps producing more in a given time, the capacity will be
altered.

Measuring capacity

Units of output. If the variety of products is not large, it is often possible to
use a unit common to all products. However, if a variety of products is made, a good
common unit may not exist. In this case, the unit common to all products is time.

Standard time. Using time-study techniques, the standard time for a job can
be determined – that is the time it would take a qualified operator working at a normal
pace to do the job. It provides a yardstick for measuring work content and a unit for
stating capacity. It also used in loading and scheduling.

Levels of capacity

Capacity needs to be measured on at least 3 levels:
- Machine or individual worker,
- Work center,
- Plant, which can be considered as a group of different work centers.

Determining capacity available

There are 2 ways of determining the capacity available: measurement and
calculation. Demonstrated (measured) capacity is figured from historical data.
Calculated or rated capacity is based on available time, utilization and efficiency.

Rated capacity = Available time x Utilization x Efficiency

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Available time. The available time is the number of hours a work center can
be used. The available time depends on the number of machines, the number of
workers and the hours of operation.
Utilization. The available time is the maximum hours we can expect from the
work center. However it is unlikely this will be attained all the time. Downtime can
occur due to machine breakdown, absenteeism, lack of materials and all those
problems that cause unavoidable delays. The percentage of time that the work center is
active compared to the available time is called work center utilization:




Utilization can be determined from historical records or by a work sampling
study.

Efficiency. The workers might be working at a faster or slower pace than the
standard working pace, causing the efficiency of the work center to be more or less
than 100 %.



Demonstrated capacity

One way to find out the capacity of a work center is to examine the previous
production records and to use that information as the available capacity of the work
center. Notice that demonstrated capacity is average, not maximum, output.


5.6 CAPACITY REQUIRED (LOAD)

Capacity requirements are generated by the priority planning system and
involve translating priorities, given in units of product or some common units, into
hours of work required at each work center in each period time. The level of detail, the
planning horizon and the techniques used vary with each planning level. In this text,
we will study the MRP/CRP level.
Determining the capacity required is a two-step process. First, determine the
time needed for each order at each work center; then, sum up the capacity required for
individual orders to obtain the load.

Time needed for each order

The time needed for each order is the sum of the setup and the run time. The
run time is equal to the run time per piece multiplied by the number of pieces in order.

Load

The load on a work center is the sum of the required times for all planned and
actual orders to be run on the work center in a specific period. The steps in calculating
load are as follows:
Hours actually worked
Available hours
Utilization =

x 100 %
Actual rate of production
Standard rate of production
Efficiency =

x 100 %
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- Determine the standard hours of operation time for each planned and
released order for each work center by time period;
- Add all the standard hours together for each work center in each period.
The result is the total required capacity (load) on that work center for each
time period of the plan.

The load must be now compared to the available capacity. One way of doing
this is with a work center load report.

Work center load report

The work center load report shows future capacity requirements based on
released and planned orders for each time period of the plan.
Loads for all weeks can be calculated and recorded on a load report:

Week 20 21 22 23 24 Total
Released load 51.5 45 30 30 25 181.5
Planned load 100.5 120 100 90 100 510.5
Total load 152 165 130 120 125 692
Rated capacity 140 140 140 140 140 700
(Over)/Under capacity (12) (25) 10 20 15 8

The report shows released and planned load, total load, rated capacity and
(over)/under capacity. This type of display gives information used to adjust available
capacity or to adjust the load by changing the priority plan. In this example, weeks 20
and 21 are overloaded, the balance are under-loaded and the cumulative load is less
than the available. For the planner, this shows there is enough total capacity over the
planning horizon and available capacity or priority can be juggled to meet the plan.


5.7 SCHEDULING ORDERS

Most orders are processed across a number of work centers, and it is necessary
to calculate when orders must be started and completed on each work center so the
final due date can be met. This process is called scheduling.

Back scheduling. The usual process is to start with the due date and using the
lead times to work back to find the start date for each operation. This process is called
back scheduling. To schedule, we need to know for each order:
- The quantity and due date;
- Sequence of operations and work centers needed;
- Setup and run times for each operation;
- Queue, wait and move times;
- Work center capacity available (rated or demonstrated),

The information needed is obtained from the following:
- Order file. Quantities and due dates;
- Route file. Sequence of operations, work centers needed, setup time and
run time;
- Work center file. Queue, move and wait times and work center capacity.
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The process is as follows:
- For each work order, calculate the capacity required (time) at each work
center;
- Starting with the due date, schedule back to get the completion and start
dates for each operation.


5.8 MAKING THE PLAN

The next step is to compare the load to available capacity to see if there are
imbalances and if so to find possible solutions.
There are 2 ways of balancing capacity available and load: alter the load or
change the capacity available. Altering the load means shifting orders ahead or back so
the load is levelled. If orders are processed on other work stations, the schedule and
load on the other work stations have to be changed as well. It may also mean that other
components should be rescheduled and the MPS changed.
For these reasons, changing the load may not be the preferred course of action.
In the short run, capacity can be adjusted. Some ways that this may be done are as
follows:
- Schedule overtime or under-time;
- Adjust the level of the workforce by hiring or laying off workers. The
ability to do so will depend on the availability of the skills required and the
training needed;
- Shift workforce from under-loaded to overloaded work centers;
- Use alternate routings to shift some load to another work center;
- Subcontract work when more capacity is needed or bring in previously
subcontract work to increase required capacity.

The result of CRP should be a detailed workable plan that meets the priority
objectives and provides the capacity to do that. Ideally, it will satisfy the MRP and
allow for adequate utilization of the workforce, machinery and equipment.


6 PRODUCTION ACTIVITY CONTROL


6.1 INTRODUCTION

Production activity control (PAC) is responsible for executing the MPS and the
MRP. At the same time, it must make good use of labor and machines, minimize
work-in-process inventory and maintain customer service.
The MRP authorizes PAC:
- To release work orders to the shop for manufacturing;
- To take control of work orders and make sure they are completed on time;
- To be responsible for the immediate detailed planning of the flow of orders
through manufacturing, carrying out the plan and controlling the work as it
progresses to completion;
- To manage day-to-day activity and provide the necessary support.

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Planning

The flow of work through each of the work centers must be planned to meet
delivery dates, which means PAC must do the following:
- Ensure that the required materials, tooling, personnel and information are
available to manufacture the components we needed;
- Schedule start and completion dates for each shop order at each work
center so the scheduled completion date of the order can be met. This will
involve the planner in developing a load profile for the work centers.

Implementation

Once the plans are made, PAC must put them into action by advising the shop
floor what must be done. Usually instructions are given by issuing a shop order. PAC
will:
- Gather the information needed by the shop floor to make the product;
- Release orders to the shop floor as authorized by the MRP. This is called
dispatching.

Control

Once plans are made and shop orders released, the process must be monitored
to learn what is actually happening. The results are compared to the plan to decide
whether corrective action is necessary. PAC will do the following:
- Rank the shop orders in desired priority sequence by work center and
establish a dispatch list based on this information;
- Track the actual performance of work orders and compare it to planned
schedules. Where necessary, PAC must take corrective action by re-
planning, rescheduling or adjusting capacity to meet final delivery
requirements;
- Monitor and control work-in-process, lead times and work center queues;
- Report work center efficiency, operation times, order quantities and scrap.

Manufacturing systems

The relative importance of these functions will depend on the type of
manufacturing process. Manufacturing processes can be conveniently broken down
into 3 categories:
- Flow manufacturing,
- Intermittent manufacturing,
- Project manufacturing.

Flow manufacturing. It is concerned with the production of high-volume
standard products. If the units are discrete (e.g., cars), the process is usually called
repetitive manufacturing and if the goods are made in a continuous flow (e.g.,
gasoline), continuous manufacturing. There are 4 major characteristics to flow
manufacturing:
- Routings are fixed and work centers are arranged according to the routing.
The time taken to perform work at one work center is almost the same as
any other work center in the line;
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- Work centers are dedicated to producing a limited range of similar
products. Machinery and tooling are especially designed to make the
specific products;
- Material flows from one workstation to another using some form of
mechanical transfer. There is little buildup in work-in-process inventory
and throughput times are low;
- Capacity is fixed by the line.

PAC concentrates on planning the flow of work and making sure that the right
material is fed to the line as stated in the planned-schedule. Since work flows from one
workstation to another automatically, implementation and control are relatively
simple.

Intermittent manufacturing. It is characterized by many variations in product
design, process requirements and order quantities. This kind of manufacturing is
characterized by the following:
- Flow of work through the shop is varied and depends on the design of a
particular product. As orders are processed, they will take more time at one
workstation than an another. The work flow is not balanced;
- Machinery and workers must be flexible enough to do the variety of work.
Machinery and work centers are usually grouped according to the function
they perform (e.g., all lathes in one department);
- Throughput times are generally long. Scheduling work to arrive just when
needed is difficult, the time, taken by an order at each work center and
work queues, varies causing long delays in processing. Work-in-process
Inventory is often large;
- The capacity required depends on the particular mix of products being built
and is difficult to predict.

PAC in intermittent manufacturing is complex. Planning and control are
typically exercised using shop orders for each batch being produced.

Project manufacturing. It usually involves the creation of one or a small
number of units (e.g., large shipbuilding). Because the design of a product is often
carried out or modified as the project develops, there is close coordination between
manufacturing, marketing, purchasing and engineering.


6.2 DATA REQUIREMENTS

PAC must have a data or information system from which to work. The files
contained in the databases are of 2 types: planning and control.

Planning files

4 planning files are needed: item master file, product structure file, routing file
and work center master file.

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Item master file. There is one record in it for each part number. The file
contains all of the pertinent data related to the part. For PAC, this includes the
following:
- Part number, a unique number assigned to a component;
- Part description;
- Manufacturing lead time;
- Quantity on hand;
- Quantity available;
- Allocated quantity;
- On-order quantities, the balance due on all outstanding orders;
- Lot-size quantity.

Product structure file (bill of material file). It contains a list of single-level
components and quantities needed to assemble a parent.

Routing file. It contains a record for each part manufactured. For each product,
this file contains a step-by-step set of instructions describing how the product is made.
It gives details of the following:
- The operations required to make the product and the sequence in which
those operation are performed;
- A brief description of each operation;
- Equipment, tools and accessories needed for each operation;
- Setup times;
- Run times;
- Lead times for each operation.

Work center master file. It collects all of the relevant data on a work center.
For each work center, it gives details on the following:
- Work center number,
- Capacity,
- Number of shifts worked per week,
- Number of machine hours per shift,
- Number of labor hours per shift,
- Efficiency,
- Utilisation,
- Queue time,
- Alternate work centers, work centers that may be used as alternatives.

Control files

Control in intermittent manufacturing is exercised through shop orders and
control files that contain data on these orders. There are generally 2 kinds of files: the
shop order master file and the shop order detailed file.

Shop order master file. Each active manufacturing order has a record in it.
The purpose is to provide summarized data on each shop order such as the following:
- Shop order number, a unique number identifying the shop order;
- Order quantity;
- Quantity completed;
- Quantity scrapped;
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- Quantity of material issued to the order;
- Due date, the date the order is expected to be finished;
- Priority, a value used to rank the order in relation to others;
- Balance due, the quantity not yet completed;
- Cost information.

Shop order detail file. Each shop order has a detail file that contains a record
for each operation needed to make the item. Each record contains the following:
- Operation number;
- Setup hours, planned and actual;
- Run hours, planned and actual;
- Quantity reported complete at that operation;
- Quantity reported scrapped at that operation;
- Due date or lead time remaining.


6.3 ORDER PREPARATION

PAC is responsible for planning and preparing order’ s release to the shop
floor. The order should be reviewed to be sure that the necessary tooling, material and
capacity are available. Tooling is not generally considered in MRP program, so at this
stage, material availability must be checked. Checking capacity availability is a two-
step process. First, the order must be scheduled to see when the capacity is needed,
and second, the load on work centers must be checked in that period.


6.4 SCHEDULING

The objectives of scheduling is to meet delivery dates and to make the best use
of manufacturing resources. It involves establishing start and finish dates for each
operation required to complete an item. To develop a reliable schedule, the planner
must have information on routing, required and available capacity, competing jobs and
manufacturing lead times at each work center involved.

Manufacturing lead time (MLT)
.
MLT is the time normally required to produce an item in a typical lot quantity.
Typically, MLT consists of 5 elements:
- Queue time, amount of time the job is waiting before operation begins;
- Setup time, time required to prepare the work center for operation;
- Run time, time needed to run the order through the operation;
- Wait time, amount of time the job is before being moved to the next work
center;
- Move time, transit time between work centers.

QUEUE SETUP WAIT RUN
MOVE
QUEUE SETUP WAIT RUN
Work center Next work center
ORDER
RELEASE
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The total MLT will be the sum of order preparation and release plus the MLTs
for each operation. Setup time and run time are straightforward and determining them
is the responsibility of the industrial engineering department. Queue, wait and moves
times are under the control of manufacturing and PAC.
The largest of the 5 elements is queue time. In an intermittent manufacturing
operation, it accounts for 85%-95% of the total lead time. If the number of orders
waiting to be worked on (load) is reduced, so is the queue time, the lead time and
work-in-process. Increasing capacity also reduces queue. PAC must manage both the
input of orders to the production process and the available capacity to control queue
and work-in-process.
Cycle time is the length of time from when material enters a production
facility until it exits. A synonym is throughput time.

Scheduling techniques

There are many techniques to schedule shop orders through a plant, but all of
them require an understanding of forward and backward scheduling as well as finite
and infinite loading.
Forward scheduling assumes that material procurement and operation
scheduling for a component start when the order is received, whatever the due date.
The result is completion before the due date which usually results in a buildup of
inventory. This method is used to decide the earliest delivery date for a product and
how long it will take to complete a task. The technique is used for purposes such as
developing promise dates for customers or figuring out whether an order behind
schedule can be caught.
Backward scheduling. The last operation on the routing is scheduled first and
is scheduled for completion at the due date. Previous operations are scheduled back
from the last operation. Work-in-process inventory is reduced, but because there is
little slack time in the system, customer service may suffer. Backward scheduling is
used to determine when an order must be started.
Infinite loading. It does not consider the existence of other shop orders
competing for capacity at these work centers. It assumes infinite capacity will be
available. Notice the over and under load.
Finite loading assumes there is a defined limit to available capacity at any
workstation. If there is not enough capacity available at a workstation because of other
shop orders, the order has to be scheduled in a different period time. The load is
smoothed so there is no overload condition.

Operation overlapping

In operation overlapping, the next operation is allowed to begin before the
entire lot is completed on the previous operation. This reduces the total manufacturing
lead times.
An order is divided into at least 2 lots. When the first lot is completed on
operation A, it is transferred to operation B.
SU LOT 1 LOT 2
Operation A
Operation B
T
SU LOT 1 LOT 2
T
Transit Time
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In figure, it is assumed operation B cannot be set up until the first lot is
received, but this is not always the case. If the lots are sized properly, there will be no
idle time at operation B. The manufacturing lead time is reduced by the overlap time
and the elimination of queue time.
Operation overlapping is a method of expediting an order, but there are some
cost involved. First, move costs are increased, especially if the overlapped operations
are not close together. Second, it may increase the queue and lead time for other
orders. Third, it does not increase capacity but potentially reduces it if the second
operation is idle waiting for parts from the first operation.
The problem is deciding the size of the sub-lot. If the run time per piece on
operation B is shorter than on A, the first batch must be large enough to avoid idle
time on operation B.

Operation splitting

Operation splitting is a second method of reducing MLT. The order is split into
2 or more lots and run on 2 or more machines simultaneously. If the lot is split in 2 or
more, although an additional setup is occurred.
Operation splitting is practical when:
- setup time is low compared to run time,
- a suitable work center is idle,
- it is possible for an operator to run more than one machine at a time.
The last condition often exists when a machine cycles through its operation
automatically, leaving the operator time to set up a other machine. The time to unload
and load must be shorter than the run time per piece.


6.5 LOAD LEVELING

Load report tells PAC what the load is on the work center.

Week 18 19 20 21 22 23 Total
Released load 105 100 80 30 0 0 315
Planned load 60 80 130 80 350
Total load 105 100 140 110 130 80 665
Rated capacity 110 110 110 110 110 110 660
(Over)/Under capacity 5 10 (30) 0 (20) 30 (5)

There is a capacity shortage in week 20 of 30 hours. This means there was no
point in releasing all of planned orders that weeks. Perhaps some could be released in
week 18 or 19 and perhaps some overtime could be worked to help reduce the capacity
crunch.


6.6 SCHEDULING BOTTLENECKS

In intermittent manufacturing, it is almost impossible to balance the available
capacity of the various workstations with the demand for their capacity. As a result,
some workstations are overloaded and others are under-loaded. The overloaded
workstations are called bottlenecks.
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Throughput. It is the total volume of production passing through a facility.
Bottlenecks control the throughput of all products processed by them. If work centers
feeding bottlenecks produce more then the bottleneck can process, excess work-in-
process inventory is built up. Work centers fed by bottlenecks have their throughput
controlled by bottleneck and their schedules should be determined by that of the
bottleneck.

Some bottleneck principles. Since bottlenecks control the throughput of a
facility, some important principles should be noted:
- Utilization of a non-bottleneck resource is not determined by its potential,
but by another constraint of the system;
- Using a non-bottleneck 100% of the time does not produce 100%
utilization;
- The capacity of the system depends on the capacity of the bottleneck;
- Time saved at a non-bottleneck saves the system nothing;
- Capacity and priority must be consider together. Suppose 2 styles of
product are made on a bottleneck. During setup, nothing is produce which
reduces the capacity of the system. Ideally, the company would run one
style of product for 6 months then switch over to the second style.
However, customers wanting the 2nd style might not be willing to wait 6
months. A compromise is needed whereby runs are as long as possible but
priority (demand) is satisfied;
- Loads can and should be split. Rather than waiting until the batch are
produced before moving it to the next work center, the manufacturer can
move a sub-lot. The process batch size and the transfer batch size are
different. Thus, delivery to the next work center is matched to usage and
work-in-process inventory is reduced;
- Focus should be on balancing the flow through the shop. The key is
throughput that ends up in sales.

Managing bottlenecks. Since bottlenecks are so important to the throughput
of a system, scheduling and controlling them is extremely important. The following
must be done:
- Establish a time buffer before each bottleneck. A time buffer is an
inventory (queue) place before each bottleneck. The time buffer should be
only as long as the time of any expected delay caused by feeding
workstations. In this way, the time buffer ensures that the bottleneck will
not be shut down for lack of work and this queue will be held at a
predetermined minimum quantity;
- Control the rate of material feeding the bottleneck. A bottleneck must be
fed at a rate equal to its capacity so the time buffer remains constant. The
first operation in the sequence of operations is called a gate operation;
- Do everything to provide the needed bottleneck capacity. Anything that
increases the capacity of the bottleneck, increases the capacity of the
system;
- Adjust loads. This is similar to previous item but puts emphasis on
reducing load on a bottleneck by using such things as using alternate work
centers and subcontracting. These may be more costly than using the
bottleneck, but utilization of non-bottlenecks and throughput of the total
system is increased, resulting in more company sales and increased profits;
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- Change the schedule. Do this as a final resort, but it is better to be honest
about delivery promises.

Once the bottleneck is scheduled according to its available capacity and the
market demand it must satisfy, the non-bottleneck resources can be scheduled.
Any disturbances in the feeding operations are absorbed by the time buffer and
throughput is not affected.


6.7 THEORY OF CONSTRAINTS (TOC) AND DRUM-BUFFER-ROPE

The previous section was developed by Eliyahu M. Goldratt in his theory of
constraints. Each process has a specific capacity to produce the given defined output
for the operation, and that every virtually every case, there is one process that limits or
constrains the throughput from the entire operation.

The total operation is constrained by process 3 at 4 per hour. Increased
efficiency and utilization in processes 1 and 2 will only increase inventory – not sales.

Manage the constraints

Some of the more noteworthy include focusing on balancing the flow through
the shop, time lost at a bottleneck is time lost to the whole system but time lost at a
non-constraint is a mirage, and transfer batches do not have to be the same size as
process batches.

Improve the process

Once a constraint has been identified, there is a five-step process that is
recommended to help improve the performance of the operation:
- Identify the constraints. This implies the need to examine the entire process
to determine which process limits the throughput. The concept does not
limit this process examination to merely the operational processes;
- Exploit the constraint. Find methods to maximize the utilization of the
constraint toward productive throughput;
- Subordinate everything to the constraint. Effective utilization of the
constraint is the most important issue;
- Elevate the constraint. This means to find ways to increase the available
hours of constraint, including more of it;
- Once the constraint is a constraint no longer, find the new one and repeat
the steps.

PROCESS 1
Capacity =
5 per hour
PROCESS 2
Capacity =
7 per hour
PROCESS 3
Capacity =
4 per hour
PROCESS 4
Capacity =
9 per hour
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Scheduling with the theory of constraints

Even the scheduling system developed for the TOC has its own specific
approach. It is often described as Drum-Buffer-Rope:
- Drum. The drum of the system refers to the drumbeat or pace of
production. It represent the master schedule for the operation, which is
focused around the pace of throughput as defined by the constraint;
- Buffer. Since it is so important that the constraint never be starved for
needed inventory, a time buffer is often established in front of the
constraint;
- Rope. The analogy is that the rope pulls production to the constraint for
necessary processing. While this may imply a Kanban-type pull system, it
can be done by a well-coordinated release of material into the system at the
right time.


6.8 IMPLEMENTATION

Implementation is arrived at by issuing a shop order to manufacturing
authorizing them to proceed with making the item. A shop packet is usually compiled
which contains the shop order and whatever other information is needed by
manufacturing. It may include any of the following:
- Shop order showing the shop order number, the part number, name,
description and quantity;
- Engineering drawings;
- Bills of materials;
- Route sheets showing the operations to be performed, equipment and
accessories needed, material to use and the setup and run times;
- Material issue tickets that authorize manufacturing to get the required
material from stores;
- Tools requisitions authorizing manufacturing to withdraw necessary tooling
from the tool crib;
- Job tickets for each operation to be performed. The worker can log on and
off the job using the job ticket and it then becomes a record of that
operation;
- Move tickets that authorize and direct the movement of work between
operations.


6.9 CONTROL

Once work orders have been issued to manufacturing, their progress has to be
controlled. Performance has to be measured and compared to what is planned. If what
is actually happening varies significantly from what was planned, either the plans have
to be changed or corrective action must be taken to bring performance back to plan.
The largest component of lead time is queue. If queue can be controlled,
delivery dates can be met. In environment of intermittent operations, it is almost
impossible to balance the load over all the workstations. Queue exists because of this
erratic input and output.
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To control queue and meet delivery commitments, PAC must:
- Control the work going into and coming out of a work center. This is
generally called input/output control;
- Set the correct priority of orders to run at each work center.

Input/output control

The input/output control system is a method of managing queues and work-in-
process lead times by monitoring and controlling the input to, and output from a
facility. It is designed to balance the input rate in hours with the output rate.
The input rate is controlled by the release of orders to the shop floor. If the rate
of input is increased, queue, work-in-process and lead times increase. The output rate
is controlled by increasing or decreasing the capacity of a work center.

Input/output report. To control input and output, a plan must be devised
along with a method for comparing what actually occurs against what was planned.
This information is shown on an input/output report. The values are in standard hours.

Period 1 2 3 4 5 Total
Planned input 38 32 36 40 44 190
Actual input 34 32 32 42 40 180
Cumulative variance -4 -4 -8 -6 -10 -10

Planned output 40 40 40 40 40 200
Actual output 32 36 44 44 36 192
Cumulative variance -8 -12 -8 -4 -8 -8

Planned backlog 32 30 22 18 18 22
Actual backlog 32 34 30 18 16 20

Cumulative variance is the difference between the total planned for a given
period and the actual total for that period. It is calculated as follows:
Cumulative variance = previous cumulative variance + actual – planned

Backlog is the same as queue and expresses the work to be done in hours. It is
calculated as follows:
Planned backlog = previous planned backlog + planned input – planned output

Planned and actual inputs monitor the flow of work coming to the work center.
Planned and actual outputs monitor the performance of the work center. Planned and
actual backlogs monitor the queue and lead time performance.

Operation sequencing

Operation sequencing is a technique for short-term planning of actual jobs to
be run in each work center based on capacities and priorities. Priority, in this case, is
the sequence in which jobs at a work center should be worked on.

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Dispatching. It is the function of selecting and sequencing available jobs to be
run at individual work centers. The dispatch list is the instrument of priority control. It
normally includes the following information and is updated and published at least
daily:
- Plant, department and work center;
- Part number, shop order number, operation number and operation
description of job at the work center;
- Standard hours;
- Priority information;
- Jobs coming to the work center.

Dispatching rules. The ranking of jobs for the dispatch list is created through
the application of priority rules. There are many rules, none is perfect or will satisfy all
objectives. Some commonly used rules are:
- First come, first served (FCFS). Jobs are performed in the sequence in
which they are received. This rule ignores due dates and processing time;
- Earliest job due date (EDD). Jobs are performed according to their due
dates. Due date are considered, but processing time is not;
- Earliest operation due date (ODD). Jobs are performed according to their
operation due dates. Due dates and processing time are taken into account.
- Shortest process time (SPT). Jobs are sequenced according to their process
time. This rule ignores due dates, but it maximizes the number of jobs
processed. Orders with long process times tend to be delayed.

One other rule that should be mentioned is called critical ratio (CR).
Lead time remaining includes all elements of manufacturing lead time and
expresses the amount of time the job normally takes to completion.
CR less than 1 (actual time less than lead time): Order is behind schedule.
CR equal to 1 (actual time equal to lead time: Order is on schedule.
CR greater than 1 (actual time greater than lead time): Order is ahead of schedule.
CR zero or less (today’s date greater than due date): Order is already late.

Dispatching rules should be simple to use and easy to understand.


6.10 PRODUCTION REPORTING

Production reporting provides feedback of what is actually happening on the
plant floor. PAC needs this information to establish proper priorities and to answer
questions regarding deliveries, shortages and the status of orders. Once the data are
collected, they must be sorted and appropriate reports produced. Types of information
needed for the various reports include:
- Order status;
- Weekly input/output by department or work center;
- Exception reports on such thing as scrap, rework and late shop orders;
- Inventory status;
Due date – present date
Lead time remaining
CR =

Actual time remaining
Lead time remaining
=

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- Performance summaries on order status, work center and department
efficiencies and so on.


7 PURCHASING


7.1 INTRODUCTION

If purchasing is carried out effectively, all departments in the company are
involved. Obtaining the right material, in the right quantities with the right delivery
(time and place), from the right source and at the right price are all purchasing
functions.
The purchasing department has the major responsibility for locating suitable
source of supply and for negotiating price. Input from other departments is required in
finding and evaluating sources of supply and to help the purchasing department in
price negotiation. Purchasing is everyone’s business.

Purchasing and profit leverage

On the average, manufacturing firms spend about 50% of their sales dollar in
the purchase of raw materials, components and supplies. This give the purchasing
function tremendous potential to increase profits.


Income statement Income statement
(sales increases 10%)
Income statement
(reduced purchase cost)
Sales 100 110 100
Cost of good sold
Purchases (50%) 50 55 (-2%) 49
Other expenses (40%) 40 - 90 44 - 99 40 - 89
Profit before tax 10 11 11
If the firm can reduce the cost of purchases from $50 to $49, a 2% reduction, it
would gain the same 10% increase in profits.

Purchasing objectives

Missed deliveries can create havoc for manufacturing and sales, but purchasing
can reduce problems for both areas, further adding to profit. The objectives of
purchasing can be divided into 4 categories:
- Obtaining goods and services of the required quantity and quality,
- Obtaining goods and services at the lowest cost,
- Ensuring the best possible service and prompt delivery by the supplier,
- Developing and maintaining good supplier relations and developing
potential suppliers.

To satisfy these objectives, some basic functions must be performed:
- Determining purchasing specifications: right quality, right quantity and
right delivery (time and place);
- Selecting supplier (right source);
- Negotiating terms and conditions of purchase (right price);
- Issuing and administration of purchase orders.
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Purchasing cycle

The purchasing cycle consists of the following steps:
- Receiving and analyzing purchase requisitions;
- Selecting suppliers. Finding potential suppliers, issuing requests for
quotations, receiving and analyzing quotations, and selecting the right
supplier;
- Determining the right price;
- Issuing purchase orders;
- Following up to assure delivery dates are met;
- Receiving and accepting goods;
- Approving supplier’s invoice for payment.

Receiving and analyzing purchase requisition. At a minimum, the purchase
requisition contains the following information:
- Identify of originator, signed approval and account to which cost is
assigned;
- Material specification;
- Quantity and unit of measure;
- Required delivery date and place;
- Any other supplemental information needed.

Selecting suppliers. For routine items, a list of approved suppliers is kept. If
the item has not been purchased before, a search must be made. If the order is a small
value or for standard items, a supplier can be found in a catalogue, trade journal, ...

Requesting quotations. For major items, it is usually desirable to issue a
request for quotation. This is a written inquiry that is sent to enough suppliers to be
sure competitive and reliable quotations are received. After the quotations are
analyzed. For items where specifications can be accurately written, the choice is
probably made on price, delivery and terms of sale. For items where specifications
cannot be accurately written, the items quoted will vary. The quotations must be
evaluated for technical suitability. The final choice is a compromise between technical
factors and price. Usually both the issuing and purchasing departments are involved in
the decision.

Determining the right price. The purchasing department is also responsible
for price negotiation and will try to obtain the best price from the supplier.

Issuing a purchase order. A purchase order is a legal offer to purchase. Once
accepted by the supplier, it becomes a legal contract for delivery of the goods
according to the terms and conditions specified in the purchase agreement. The
purchase order is prepared from the purchase requisition or the quotations and from
any other information needed.

Following up and delivery. The supplier is responsible for delivering the
items ordered on time. The purchasing department is responsible for ensuring that
suppliers do deliver on time. If there is doubt, purchasing must find out in time to take
corrective action. This might involve expediting transportation, alternate source of
supply, working with the supplier to solve its problems or rescheduling production.
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The purchasing department is also responsible for working with the supplier on
any changes in delivery requirements.

Receiving and accepting goods. When the goods are received, the receiving
department inspects the goods to be sure the correct ones have been sent, are in the
right quantity and have not been damaged in transit. If the goods are received
damaged, the receiving department will advise the purchasing department and hold the
goods for further action.
A copy of the receiving report is then sent to the purchasing department noting
any variance or discrepancy from the purchase order. If the order is considered
complete, the receiving department closes out its copy of the purchase order and
advises the purchasing department. If it is not, the purchase order is held open
awaiting completion.

Approving supplier’s invoice for payment. When the supplier’s invoice is
received, there are 3 pieces of information that should agree: the purchase order, the
receiving report and the invoice. All discounts and terms of the original purchase order
must be checked against the invoice. It is the job of purchasing department to verify
these and resolve any differences. Once approved, the invoice is sent to accounts
payable for payment.


7.2 ESTABLISHING SPECIFICATIONS

In purchasing an item or a service from a supplier, several factors are included
in the package bought. These must be considered when specifications are being
developed and can be divided into 3 broad categories:
- Quantity requirements,
- Price requirements,
- Functional requirements.

Quantity requirements

The quantity is important because it will be a factor in the way the product is
designed, specified and manufactured. If the demand was for only one item, it would
be designed to be made at least cost or a suitable standard item would be selected.
However, if the demand were for several thousand, the item would be designed to take
advantage of economies of scale, thus satisfying the functional needs at a better price.

Price requirements

The economic value placed on the item must relate to the use of the item and
its anticipated selling price.

Functional requirements

Functional specifications are concerned with the end use of the item and what
the item is expected to do. By their very nature, functional specifications are the most
important of all categories and govern the others.
In many cases, the real need has both practical and aesthetic elements to it.
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Functional specifications and quality. Functional specifications are
intimately tied to the quality of a product or a service. There are many definitions of
quality, but they all center on the idea of user satisfaction. On this basis, it can be said
that an item has the required quality if it satisfies the needs of the user.
There are 4 phases to providing user satisfaction:
- Quality and product planning,
- Quality and product design,
- Quality and manufacturing,
- Quality and use.

The basic quality level is thus specified by senior management according to
their understanding of the needs and wants of the marketplace. The success of the
product depends on how well they do this.
The result’s of the firm’s market studies is a general specification of the
product outlining the expected performance, appearance, price and sales volume of the
product. If the product is what the customer wants, well designed, well made and well
serviced, the quality is satisfactory.


7.3 FUNCTIONAL SPECIFICATION DESCRIPTION

Functional specification can be described in the following ways or by a
combination of them:
- By brand;
- By specification of physical and chemical characteristics, material and
method of manufacture, and performance;
- By engineering drawings;
- Miscellaneous.

Description by brand

Description by brand is most often used in wholesale or retail businesses but it
also used extensively in manufacturing, under the following circumstances:
- Items are patented or the process is secret;
- The supplier has special expertise that the buyer does not have;
- The quantity bought is so small that is not worth the buyer’s effort to
develop specifications;
- The supplier, through advertising or direct sales effort, has created a
preference on the part of the buyer’s customers or staff.
When buying by brand, the customer is relying on the reputation and integrity
of the supplier. Branded items, as a group, usually have price levels that are higher
than non-branded items. The other major disadvantage to specifying by brand is that it
restricts the number of potential suppliers and reduce competition.
Description by specification

Whatever method is used, description by specification depends on the buyer
describing in detail exactly what is wanted:
- Physical and chemical characteristics,
- Material and method of manufacture,
- Performance.
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Whatever the method of specification, there are several characteristics to
description by specification:
- To be useful, specifications must be carefully designed. If they are too
loosely drawn, they may not provide a satisfactory product. If they are too
detailed and elaborate, they are costly to develop, are difficult to inspect
and may discourage possible suppliers;
- Specifications must allow for multiple sources and for competitive bidding;
- They provide a standard for measuring and checking the material supplied;
- Not all items lend themselves to specification;
- An item described by specification may be more suitable and a great deal
more expensive, than a supplier’s standard product;
- If the specifications are set by the buyer, they will be used only where there
is sufficient volume of purchases to warrant the cost or where it is not
possible to describe what the buyer wanted in any other way.

Sources of specifications. There are 2 major sources of specifications:
- Buyer specifications,
- Standard specifications.

Buyer specifications. Buyer-developed specifications are usually expensive
and time-consuming to develop. Companies do not use this method unless there is no
suitable standard specification available or unless the volume of work makes it
economical to do so.

Standard specifications. Standard specifications have been developed as a
result of much study and effort by governmental and non-governmental agencies.
They usually apply to raw or semi-finished products, component part or the
composition of material.
There are several advantages to using standard specifications. First, they are
widely known and accepted and, because of this, are readily available from most
suppliers. Second, because they are widely accepted, manufactured and sold, they are
lower in price than non-standard items. Finally, because they have been developed
with input from a broad range of producers and users, they are usually adaptable to the
needs of many purchasers.

Engineering drawings

Drawings are a major method of specifying what is wanted and are widely used
because often there is no other way to describe the configuration of parts or the way
they are to fit together. They are produced by the engineering design department and
are expensive to produce, but given an exact description of the part required.

Miscellaneous

The method of description is a communication with the supplier. How well it is
done will affect the success of the purchase and sometimes the price paid.


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7.4 SELECTING SUPPLIERS

Once the decision is made about what to buy, the selection of the right supplier
is the next most important purchasing decision. A good supplier is one that has
technology to make the product to the required quality, has the capacity to make the
quantity needed and can run the business well enough to make a profit and still sell a
product competitively.

Sourcing

There are 3 types of sourcing: sole, multiple and single.
- Sole sourcing implies that only one supplier is available because of patents,
technical specifications, raw material, location and so forth.
- Multiple sourcing is the use of more than one supplier for an item. The
potential advantages are that competition will result in lower price and
better service and that there will be a continuity of supply. In practice there
is a tendency toward a adversarial relationship between supplier and
customer.
- Single sourcing is a planned decision by the organization to select one
supplier for an item when several sources are possible. It is intended to
produce a long-term partnership.

Factors in selecting suppliers

Function, quantity, service and price are what the supplier is expected to
provide and are the basis for selection and evaluation. Considering this there are
several factors in selecting a supplier.

Technical ability. The buyer will depend upon the supplier to provide product
improvements that will enhance or reduce the cost of the buyer’s products. Sometimes
the supplier can suggest changes in product specification that will improve the product
and reduce the cost.

Manufacturing capability. Manufacturing must be able to meet the
specifications for the product consistently while producing as few defect as possible.
The supplier must have a good quality control program, competent and capable
manufacturing personnel and good manufacturing planning and control system to
ensure timely delivery.

Reliability. If the relationship is to continue, there must be an atmosphere of
mutual trust and assurance that the supplier is financially strong enough to stay in
business.

After-sales service. If the product is of a technical nature or likely to need
replacement parts or technical support, the supplier must have a good after-sales
service. This should include a good service organization and inventory of service
parts.

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Supplier location. Sometimes it is desirable that the supplier be located near
the buyer, or at least maintain an inventory locally. A close location helps shorten
delivery times and means emergency shortages can be delivered quickly.

Other considerations. Sometimes other factors such as credit terms, reciprocal
business and willingness of the supplier to hold inventory for the buyer should be
considered.

Price. The supplier should be able to provide competitive prices. In a modern
business environment, the type of relationship between the supplier and the buyer is
crucial to both. The supplier can rely on future business and the buyer will have an
assured supply of quality product, technical support and product improvement. Both
parties understand the problems of the other and can work together to solve problems
to their mutual advantage.

Identifying suppliers

One major responsibility of the purchasing department is to continue to
research all available source of supply. Some aids for identifying sources of supply
follow:
- Salespersons of the supplier company,
- Catalogues,
- Trade magazines,
- Trade directories,
- Information obtained by the salespeople of the buyer firm.

Final selection of supplier

Some factors in evaluating potential suppliers are quantitative and a dollar
value can be put on them. Other factors are qualitative and demand some judgement to
determine them. The challenge is finding some method of combining these 2 major
factors that will enable a buyer to pick the best supplier. One method is the ranking
method, described next:
- Select those factors that must be considered in evaluating potential
suppliers;
- Assign a weight to each factor. This weight determine the importance of
the factor in relation to the other factors. Usually a scale of 1 to 10 is used;
- Rate the suppliers for each factor. Suppliers are rated on their ability to
meet the requirements of each factor. Again, usually a scale of 1 to 10 is
used;
- Rank the suppliers. For each supplier, the weight of each factor is
multiplied by the supplier rating for that factor. The supplier rankings are
then added to produce a total ranking. The suppliers can then be listed by
total ranking and the supplier with the highest ranking chosen.

7.5 PRICE DETERMINATION

In the average manufacturing company, purchases account for about 50% of
the cost of goods sold and any savings made in purchase cost has a direct influence on
profits.
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Basis for pricing

The term “fair price” is sometimes used to describe what should be paid for an
item. One definition of a fair price is one that is competitive, gives the seller a profit
and allows the buyer ultimately to sell at a profit. Sellers who charge too little to cover
their costs will not stay in business. To survive, they may attempt to cut costs by
reducing quality and service. In the end, both the buyer and seller must be satisfied.
Prices have an upper and lower limit. The market decides the upper limit. The
seller sets the lower limit.
One widely used method of a analyzing costs is to break them down into fixed
and variable costs. Fixed costs are costs incurred no matter the volume of sales.
Variable costs are those directly associated with the amount produced or sold.

Total cost = fixed cost + (variable cost per unit) x (number units)
The sum of the fixed and variable costs is labelled total cost on the graph. The
3
e
line represents the sales revenue. When this line intercepts the total cost line,
revenue equals total cost and profit is zero. This is called the break-even point. When
the volume is less than this point, a loss is incurred; when the volume is greater, a
profit is realized.











Price negotiation

Prices can be negotiated if the buyer has the knowledge and the clout to do so.
Skill and careful planning are required for the negotiation to be successful. It also
takes a great deal of time and effort, so the potential profit must justify the expense.
One important factor in the approach to negotiation is the type of product.
There are 4 categories:
- Commodities. Price is set by market supply and demand and can fluctuate
widely. Negotiation is concerned with contracts for future prices;
- Standard products. Since the items are standard and the choice of suppliers
large, prices are determined on the basis of listed catalog prices. There is
not much room for negotiation except for large purchase;
- Items of small value. The prime objective should be to keep the cost of
ordering low. Firms will negotiate a contract with a supplier that can supply
SALES VOLUME
D
O
L
L
A
R
S
Fixed cost
Total cost
Revenue
Loss
Profit
Break-even
Point
Total cost
Number of units
Unit (average) cost =

Fixed cost
Number of units
+ Variable cost per unit

=
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many items and set up a simple ordering system that reduces the cost of
ordering;
- Made-to-order items. This category includes items made to specification or
on which quotations from several sources are received. These can generally
be negotiated.


7.6 IMPACT OF MATERIAL REQUIREMENTS PLANNING ON
PURCHASING

Purchasing can be separated into 2 types of activities: procurement and
supplier scheduling and follow-up. Procurement includes the function of establishing
specifications, selecting suppliers, price determination and negotiation. Supplier
scheduling and follow-up is concerned with the release of orders to suppliers, working
with suppliers to schedule delivery and follow-up. The goals of the supplier
scheduling are the same as those of PAC: to execute the MPS and the MRP, ensure
good use of resources, minimize work-in-process inventory and to maintain the
desired level of customer service.

Planner/buyer concept. Purchasing issues purchase orders based on the MRP.
When plans change, as they invariably do, the production planner must advise the
buyer of the change and the buyer must advise the supplier. To improve the
effectiveness of the planner/buyer activity, many companies have combined the 2
functions of buying and planning.
Planner/buyer do the material planning for the items under their control,
communicate the schedule to their suppliers, follow up, resolve problems and work
with other planners and the master schedule when delivery problems arise. The
planner/buyer is responsible for:
- Determining material requirements,
- Developing schedules,
- Issuing shop orders,
- Issuing material releases to suppliers,
- Establishing delivery priorities,
- Controlling orders in the factory and to suppliers,
- Handling all the activities associated with the buying and production
planning functions,
- Maintaining close contact with supplier personnel.

Because the role of production planning and buying are combined, there is a
smoother flow of information and material between the supplier and the factory.

Contract buying. Usually a MRP system generates frequent orders for
relatively small quantities. It is costly, inefficient and sometimes impossible to issue a
new purchase order for every weekly requirement. The alternative is to develop a
long-term contract with a supplier and to authorize releases against the contract. Often
the supplier is given a copy of the MRP so they are aware of future demands. The
buyer then issues a release against the schedule. Again contract buying can be
managed by a planner/buyer.

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Supplier responsiveness and reliability. Suppliers must be highly flexible
and reliable so they can react quickly to changes in schedules.

Contract buying assures suppliers a given amount of business and commits
them to allocating that amount of their capacity to customer. Suppliers are more
responsive to customer needs. Because customers know the capacity will be available
when needed, they can delay ordering until they are more sure of their requirements.

Close relationship with suppliers. Contract buying and the need for supplier
flexibility and reliability mean the buyer-supplier relationship must be close and
cooperative.
The planner/buyer and the supplier counterpart (often the production’s
production planner) must work on a weekly basis to ensure both parties are aware of
any changes in material requirements or material availability.

Electronic data interchange (EDI). EDI enables customers and suppliers to
electronically exchange transaction information such as purchase orders, invoices and
MRP information.

Vendor-managed inventory. In this concept, a supplier maintains an
inventory of certain items in the customer facility. The supplier owns the inventory
until the customer actually withdraws it for use, after which the customer then pays it
for that use. The customer does not have to order any of the inventory, as the supplier
is responsible for maintaining an adequate supply in the facility for customer use.

Internet. There are 3 variations of network used: internet, intranet and
extranet. The internet is most commonly used and is open to the general public. The
intranet is an internal net that is normally used within the boundaries of a company. It
may stretch across many manufacturing sites or even countries. Much of the data
shared in this environment is considered sensitive. Extranet is an intranet shared by 2
or more companies. Each participating company moves certain data outside of a
private intranet to the extranet, making it available only to the companies sharing the
extranet.


7.7 SOME ORGANIZATIONAL IMPLICATIONS OF SUPPLY CHAIN
MANAGEMENT

Organizations that alter their perspective away from traditional purchasing
toward supply chain management must recognize that their perspective toward
managing the entire organization must also change. For instance, they find the
following:
- Their cost focus has altered dramatically. Often decisions are not based on
just product price, but instead on total cost and value. To accomplish this
changed perspective, organization have adopted techniques of process
analysis, value stream analysis and mutual (between the company and their
suppliers) value analysis;
- Decision making has changed from the “I say and you do” to a mutually
advantageous decision. This implies very long supplier contracts;
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- Information sharing has changed from simply giving out information about
the order to the perspective of sharing some important information about
the business itself;
- Measurement systems look at all aspects of the supply chain and not just
supplier performance;
- There is a growth in electronic business. This implies using the internet
more for handling business information flows and transactions.

Savings can be substantial

There are many advantages associated with an effective supply chain
perspective. Some of these savings include:
- More effective product specification, allowing for efficient product
substitutions and product specifications focused on fitness of use;
- Better of leveraging of volume discounts and supplier consolidation;
- Long-term contracts with efficient communication systems, significantly
reducing the administrative cost of ordering and order tracking;
- More effective use of techniques such as electronic business.


8 FORECASTING


8.1 INTRODUCTION

Most firms cannot wait until orders are actually received before they start to
plan what to produce. Forecasting is inevitable in developing plans to satisfy future
demand. Many factors influence the demand. Some major factors are as follows:
- General business and economic condition;
- Competitive factors;
- Market trend such as changing demand;
- The firm’ s own plans for advertising, promotion, pricing and product
changes.


8.2 DEMAND MANAGEMENT

Demand management is the function of recognizing and managing all
demands for products. It occurs in the short, medium and long term. In the log term,
demand projections are needed for strategic business planning of such things as
facilities. In the medium term, the purpose is to project aggregate demand for
production planning. In the short run, demand management is needed for items and is
associated with master production scheduling.
If material and capacity resources are to be planned effectively, all sources of
demands must be identified. Demand management includes 4 major activities:
- Forecasting,
- Order processing,
- Making delivery promises,
- Interfacing between manufacturing planning and control and the
marketplace.
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Order processing occurs when a customer’s order is received. The product
may be delivered from finished goods inventory or it may be made or assembled to
order. If goods are sold from inventory, a sales order is produced authorizing the
goods to be shipped from inventory. If the product is made or assembled to order, the
sales department must write up a sales order specifying the product. A copy stating the
terms and conditions of acceptance is sent to the customer. Another copy, sent to the
master planner, is authorization to go ahead and plan for manufacture. He must know
what to produce, how much, and when to deliver.


8.3 DEMAND FORECASTING

Forecasts depend upon what is to be done. They must be made for the strategic
business plan (SBP), the production plan (PP) and the master production schedule
(MPS). The purpose, planning horizons and level of detail vary for each (see ch. 2).
SBP: The strategic business plan’ s purpose is to provide time to plan for those
things that take long to change.
PP: For manufacturing, it means forecasting those items needed for production
planning, such as budgets, labor planning, long lead time, procurement items and
overall inventory levels.
MPS: Forecasts are made for individuals items as found on a master production
schedule, individual item inventory levels, raw materials and component parts,...


8.4 CHARACTERISTICS OF DEMAND

Demand patterns

A pattern is the general shape of a time series. Pattern shows that actual
demand varies from period to period. There are 4 reasons to this:
- Trend: The trend can be level, having no change from period to period, or
it can rise or fall;
- Seasonality: Each year’ s demand fluctuating depending on the time of
year;
- Random variation: It occurs where many factors affect demand during
specific periods and occur on a random basis;
- Cycle: Over a span of several years, wavelike increases and decreases in
the economy influence demand. Forecasting of cycles is a job for
economists.

Stable versus dynamic

The demand pattern that retain the same general shape are called stable and
those that do not are called dynamic. Dynamic change can affect the trend, seasonality
or randomness of the demand. The more stable the demand, the easier it is to forecast.

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Dependent versus independent demand

A product is independent when is not related to the demand for any other
product. Dependent demand for a product occurs where the demand for the item is
derived from that of a second item. Requirements for dependent demand are calculated
and for independent demand need be forecast.


8.5 PRINCIPLES OF FORECASTING

Forecasts have 4 major characteristics:
- Forecasts are usually wrong,
- Every forecast should include an estimate of error,
- Forecasts are more accurate for families or groups,
- Forecasts are more accurate for nearer time periods.


8.6 COLLECTION AND PREPARATION OF DATA

To get good data, 3 principles of data collection are important:
- Record data in the same terms as needed for the forecast. There are 3
dimensions to this:
o If the purpose is to forecast demand on production, data base on
demand, not shipments, are needed,
o The forecast period should be the same as the schedule period,
o The items forecast should be the same as those controlled by
manufacturing. A better approach is to forecast total demand of
items and the percentage of the total that requires each option;
- Record the circumstances relating to the data;
- Record the demand separately for different customer groups.


8.7 FORECASTING TECHNIQUES

There are 3 categories of forecasting techniques:
- Qualitative techniques are projections based on judgement, intuition and
informed opinions. Such techniques are used to forecast general business
trends and the potential demand for large families of products over an
extended period of time. Qualitative techniques are seldom appropriate to
production and inventory forecasting.
For a new product, techniques of market research and historical analogy
might be used. Another method is to test-market a product;
- Extrinsic forecasting techniques are projections based on external
indicators which relate to the demand for a product (sales of bricks are
proportional to housing starts. These are called economic indicators).
Extrinsic forecasting is most useful in forecasting the total demand for a
firm’ s product or for families of products. It is used most often in business
plan and production plan than the forecasting of individual end items;
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- Intrinsic forecasting techniques use historical data to forecast. They are
often used as input to master production scheduling where end-item
forecasts are needed for the planning horizon of the plan.

8.8 SOME IMPORTANT INTRINSIC TECHNIQUES

Rules, based on a single month or past period, are of limited use when there is
much random fluctuation in demand. Usually methods that average out history are
better because they dampen out some effects of random variation. Such a simple
average would not be responsive to trends or changes in level of demand. A better
method would be to use a moving average.
It is the best to forecast the average demand rather than second-guess what
the effect of random fluctuation will be. A forecast should include an estimate of error.

Moving averages

One simple way to forecast is to take the average demand for the last three or
six periods and use that figure as the forecast for the next period. At the end of the
next period, the first-period demand is dropped and the latest-period demand added to
determine a new average to be used as a forecast. If a longer period is used, the
forecast does not react as quickly. The fewer months included in the moving average,
the more weight is given to the latest information and the faster the forecast reacts to
trends. However, the forecast will always lag behind a trend.

Moving averages are best used for forecasting products with stable demand
where there is a little trend or seasonality. They are also useful to filter out random
fluctuation. One drawback to using moving averages is the need to retain several
periods of history for each item to be forecast.

Exponential smoothing

It is not necessary to keep months of history to get a moving average.
Therefore, the forecast can be based on the old calculated forecast and the new data.
This formula puts as much weight on the most recent month as on the old average. If
this does not seem suitable, less weight could be put on the latest actual demand and
more weight on the old forecast. One advantage to exponential smoothing is that the
new data can be given any weight wanted. The weight given to latest demand is called
a smoothing constant (α). It is always expressed as a decimal from 0 to 1.0.

New forecast = (α) (latest demand) + (1 - α) (previous forecast)

Generally, it has been found satisfactory for short-range forecasting. It is not
satisfactory where the demand is low or intermittent. Exponential smoothing will
detect trend, although the forecast will lag actual demand if a definitive trend exists.
A problem exists in selecting the best alpha factor. Using past actual demand,
forecasts are made with different alpha factors to see which one best suits the
historical demand pattern for particular products.


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8.9 SEASONALITY

Many products have a seasonal or periodic demand pattern.

Seasonal index

A useful indication of the degree of seasonal variation for a product is the
seasonal index. This index is an estimate of how much the demand during the season
will be above or below the average demand for product. The formula is:
The average demand for all periods is a value that average out seasonality. This
is called the deseasonalized demand.

Seasonal forecasts

The equation for developing seasonal indices is also used to forecast seasonal
demand. If a company forecasts average demand for all periods, the seasonal indices
can be used to calculate the seasonal forecasts

Seasonal demand = (seasonal index) (deseasonalized demand)

Deseasonalized demand

If comparisons are made between sales in different periods, they are
meaningless unless deseasonalized data are used. The equation to calculate
deseasonalized demand is derived from the previous seasonal equation and is:

The rules for forecasting with seasonality are:
- Only use deseasonalized data to forecast,
- Forecast deseasonalized demand not seasonal demand,
- Calculate the seasonal forecast by applying the seasonal index to the base
forecast.


8.10 TRACKING THE FORECAST

Tracking the forecast is the process of comparing actual demand with the
forecast.

Period average demand
Average demand for all periods
Seasonal index =

Deseasonalized demand
Period average demand
Season index =

Actual seasonal demand
Seasonal index
Deasonalized demand =

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Forecast error

Forecast error is the difference between actual demand and forecast demand.
Error can occur in 2 ways:
- Bias: This exists when the cumulative actual demand varies from the
cumulative forecast. This means the forecast average demand has been
wrong. The forecast should be changed to improve its accuracy.
The purpose of tracking the forecast is to be able to react to forecast error
by planning around it or by reducing it. Often there are exceptional one-
time reasons for error. These reasons relate to the discussion on collection
and preparation of data and the need to record the circumstances relating to
the data;
- Random variation: In a given period, actual demand will vary about the
average demand. The difference are random variations.

Mean absolute deviation (MAD)

Forecast error must be measured before it can be used to revise the forecast or
to help in planning. One way to measure the variability is to calculate the total error
ignoring the plus and minus signs and take the average. This is called mean absolute
deviation:
- Mean implies a average,
- Absolute means without reference to plus and minus,
- Deviation refers to the error.

Normal distribution

A graph of the number of times (frequency) actual demand is of a particular
value produces a bell-shaped curve. This distribution is called a normal distribution.
There are 2 important characteristics to normal curves:
- The central tendency or average,
- The dispersion or spread. The greater the dispersion, the larger the standard
deviation.

The mean absolute deviation is an approximation of the standard deviation and
is used because it is easy to calculate and apply.
From statistics we know that the error will be within:
- ± 1 MAD of the average about 60% of the time,
- ± 2 MAD of the average about 90% of the time,
- ± 3 MAD of the average about 98% of the time.

Uses of mean absolute deviation

Bias exists when cumulative actual demand varies from forecast. The problem
is in guessing whether the variance is due to random variation or bias. If the variation
is due to random variation, the error will correct itself and nothing should be done to
adjust forecast. However, if the error is due to bias, the forecast should be corrected.
Sum of absolute deviations
Number of observations
MAD =

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Under normal circumstances, the actual period demand will be within ± 3
MAD of the average about 98% of the time. If actual period demand varies from the
forecast by more than 3 MAD, we can be about 98% sure that the forecast is in error.
A tracking signal can be used to monitor the quality of the forecast. One of the
simpler is based on comparison of the cumulative sum of the forecast errors to the
MAD:
Contingency planning: Suppose a forecast will be 100 units and that capacity is
110 units. MAD of actual demand about the forecast historically has been calculated at
10 units. This means there is a 60% chance that actual demand will be between 90 and
110 units and a 40% they will not. With this information, manufacturing management
might be able to devise a contingency plan to cope with the possible extra demand.

Safety stock: The data can be used as a basis for setting safety stock (see
chapter 11).

P/D Ratio

Because of the inherent error in forecasts, companies who rely on them can run
into a variety of problems. A more reliable way of producing is the use of P/D ratio:
- P or production lead time is the stacked lead time for a product. It
includes time for purchasing of raw materials to arrive, manufacturing,
assembly, delivery and sometimes the design of product;
- D or demand lead time is the customer’ s lead time. It is the time from
when a customer places on order until the goods are delivered.

The traditional way to guard against inherent error in forecasting is to include
safety stock in inventory. One other way is to make more accurate predictions. There
are 5 ways to move in this direction:
- Reduce P time;
- Force a match between P and D:
o Make the customer’ s D time equal to your P time. This is common
with custom products,
o Sell what you forecast. This will happen while you control the
market;
- Simplify the product line. The more variety in the product line, the more
room for error;
- Standardize products and processes. This means that customization occurs
close to final assembly. The basic components are identical or similar;
- Forecast most accurately. Make forecasts using a well thought out, well
controlled process.


Algebraic sum of forecast errors
MAD
Tracking signal =

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9 INVENTORY FUNDAMENTALS


9.1 INTRODUCTION

Financially, inventories are very important to manufacturing companies. On
the balance sheet, they usually represent from 20% to 60% of total assets. As
inventories are used, their value is converted into cash, which improves cash flow and
return on investment. There is a cost for carrying inventories, which increases
operating costs and decreases profits. Good inventory management is essential.
Inventory must be considered at each of the planning levels and is thus part of
PP, MPS and MRP. PP is concerned with overall inventory, MPS with end items and
MRP with component parts and raw material.


9.2 AGGREGATE INVENTORY MANAGEMENT

Aggregate inventory management deals with managing inventories according
to their classification (raw material, WIP and finished goods) and the function they
perform rather than at the individual item level. It is financially oriented and is
concerned with the costs and benefits of carrying the different classifications of
inventories. As such, aggregate inventory management involves:
- Flow and kinds of inventory needed,
- Supply and demand patterns,
- Functions that inventories perform,
- Objectives of inventory management,
- Cost associated with inventories.


9.3 ITEM INVENTORY MANAGEMENT

Management must establish decision rules about inventory items so the staff
responsible for inventory control can do their job effectively. These rules include the
following:
- Which individual inventory items are most important,
- How individual items are to be controlled,
- How much to order at one time,
- When to place an order.
This chapter will study aggregate inventory management and some factors
influencing inventory management decisions, which include:
- Types of inventory based on the flow of material,
- Supply and demand patterns,
- Functions performed by inventory,
- Objectives of inventory management,
- Inventory costs.


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9.4 INVENTORY AND THE FLOW OF MATERIAL

There are many way to classify inventories. One often used classification is
related to the flow of materials into, through and out of a manufacturing organization:
- Raw materials. These are purchased items received which have not
entered the production process. They include purchased materials,
component parts and subassemblies;
- Work-in-process (WIP). Raw materials that have entered the
manufacturing process and are being worked on or waiting to be work on;
- Finished goods. The finished products of the production process that are
ready to be sold as completed items. they may be held at a factory or
central warehouse or at various points in the distribution system;
- Distribution inventories. Finished goods located in the distribution
system;
- Maintenance, repair and operational supplies (MROs). Items used in
production that do not become part of product.


9.5 SUPPLY AND DEMAND PATTERNS

Demand for most products is neither sufficient nor constant enough to warrant
setting up a line-flow system and these products are usually made in lots or batches.
Work moves in lots from one workstation to another as required by the routing. By the
nature of the system, inventory will build up in raw materials, work-in-process and
finished goods.


9.6 FUNCTIONS OF INVENTORIES

In batch manufacturing, the basic purpose of inventories is to decouple supply
and demand. Inventory serves as a buffer between:
- Supply and demand,
- Customer demand and finished goods,
- Finished goods and component availability,
- Requirements for an operation and the output from the preceding operation,
- Parts and materials to begin production and the suppliers of materials.
Inventories can be classified according to the function they perform.

Anticipation inventory

Anticipation inventory are built up in anticipation of future demand. They are
built up to help level production and to reduce the costs of changing production rates.

Fluctuation inventory (safety stock)

Fluctuation inventory is held to cover random unpredictable fluctuations in
supply and demand or lead time. Its purpose is to prevent disruptions in manufacturing
or deliveries to customers. Safety stock is also called buffer stock or reserve stock.

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Lot-size inventory

Items purchased or manufactured in quantities greater than needed immediately
create lot-size inventories. They are sometimes called cycle stock. It is the portion of
inventory that depletes gradually as customer’s orders come in and is replenished
cyclically when supplier’s orders are received.

Transportation inventory

Transportation inventories exist because of the time needed to move goods
from one location to another. They are sometimes called pipeline or movement
inventories. The average amount of inventory in transit is:
I is the average annual inventory in transit, t is transit time in days and A is
annual demand. Notice that the transit inventory does not depend upon the shipment
size. The only way to reduce the inventory in transit, and its cost, is to reduce the
transit time.

Hedge inventory

Some products are traded on a world-wide market. The price for the product
fluctuates according to world supply and demand. If buyers expect prices to rise, they
can purchase hedge inventory when prices are low.

Maintenance, repair and operating supplies (MRO)

MROs are items used to support general operations and maintenance but which
do not become directly part of a product.


9.7 OBJECTIVES OF INVENTORY MANAGEMENT

A firm wishing to maximize profit will have at least the following objectives :
- Maximum customer service,
- Low-cost plant operation,
- Minimum inventory investment.

Customer service

In inventory management, the term is used to described the availability of
items when needed an is a measure of inventory management effectiveness.
Inventories help to maximize customer service by protecting against
uncertainty. Demand and lead time to get an item are often uncertain, possible
resulting in stockouts and customer dissatisfaction. For these reasons, it may be
necessary to carry extra inventory, called safety stock.

tA
365
I =

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Operating efficiency

Inventories help make a manufacturing operation more productive in 4 ways:
- Inventories allow operations with different rates of production to operate
separately and more economically;
- To level production, build anticipation inventory for sale in the peak
periods. This would result in the following:
o Lower overtime costs,
o Lower hiring and firing costs,
o Lower training costs,
o Lower subcontracting costs,
o Lower capacity required.
By leveling production, manufacturing can continually produce an amount
equal to the average demand. The advantage of this strategy is that the costs
of changing production levels are avoided;
- Inventories allow manufacturing to run longer production runs, which
results in the following:
o Lower setup cost per item. The cost to make a lot depends upon the
setups cost and the run costs. The setup costs are fixed, but the run
costs vary with the number produced. If larger lots are run, the setup
costs are absorbed over a larger number and the average unit cost is
lower,
o An increase in production capacity due to production resources
being used a greater portion of the time for processing as opposed to
setup. If larger quantities are produced at one time, there are fewer
setups required to produce a given annual output and thus more
time is available for producing goods. This is most important with
bottleneck resources. Time lost on setup on these resources is lost
throughput and lost capacity;
- Inventories allow manufacturing to purchase in larger quantities, which
results in lower ordering costs per unit and quantity discounts.

But all of this at a price. The problem is to balance inventory investment with
the following:
- Customer service. The higher the inventory level, the higher customer
service will be;
- Costs associated with changing production levels. Excess equipment
capacity, overtime, hiring, training and layoff costs will be higher if
production fluctuates with demand;
- Cost of placing orders. Lower inventories can be achieved by ordering
smaller quantities more often, but this practise results in higher annual
ordering costs;
- Transportation costs. Goods moved in small quantities cost more to move
per unit than those moved in large quantities. However, moving large lots
implies higher inventory.

Someone once said that the only good reason for carrying inventory beyond
current needs is if it costs less to carry it than not.


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9.8 INVENTORY COSTS

The following costs are used for inventory management decisions :
- Item cost,
- Carrying costs,
- Ordering costs,
- Stockout costs,
- Capacity associated costs.

Item cost

Item cost is the price paid for purchase item, which consists of the cost of the
item and any other costs associated in getting the item into the plant. The inclusive
cost is often called the landed price. For an item manufactured in-house, the cost
includes direct material, direct labor and factory overhead.

Carrying costs

Carrying costs include all expenses incurred by the firm because of the volume
of inventory carried. As inventory increases, so do these costs. They can be broken
down into 3 categories:
- Capital costs. Money investment in inventory is not available for other uses
and as such represents a lost opportunity cost;
- Storage costs. Storing inventory requires spaces, workers and equipment.
As inventory increases, so do these costs;
- Risk costs. The risk in carrying inventory are:
o Obsolescence, loss of product value resulting from change or
technological development;
o Damage, inventory damaged while being held or moved;
o Pilferage, goods lost, strayed or stolen;
o Deterioration, inventory that rots or dissipates in storage or whose
shelf life is limited.

The carrying cost is usually defined as a percentage of the dollar value of
inventory per unit of time (usually one year). Textbooks tend to use a figure of 20-
30% in manufacturing industries. This is realistic in many cases but not with all
products.

Ordering costs

Ordering costs are those associated with placing an order either with the
factory or a supplier. The annual cost of ordering depends upon the number of orders
placed in a year. Ordering costs in a factory includes the following:
- Production control costs. The annual cost and effort expended in
production control depend on the number or orders placed, not on the
quantity ordered. The costs incurred are those of issuing and closing orders,
scheduling, loading, dispatching and expediting;
- Setup and teardown costs. Every time an order is issued, work centers have
to set up to run the order and tear down the setup at the end of the run;
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- Lost capacity cost. Every time an order is placed at a work center, the time
taken to set up is lost as productive output time. It is particularly important
and costly with bottleneck resources;
- Purchase order cost. Every time a purchase order is placed, costs are
incurred to place the order. These costs include order preparation, follow-
up, expediting, receiving, authorizing payment ant the accounting cost of
receiving and paying the invoice. The annual cost of ordering depends upon
the number of orders placed.

The annual cost of ordering depends upon the number of orders placed in a
year. This can be reduced by ordering more at one time. However, this drives up the
inventory level and the annual cost of carrying inventory.

Stockout costs

If demand during the lead time exceeds forecast, we can expect a stockout. A
stockout can potentially be expensive because of back-order cost, lost sales and
possibly lost customers.

Capacity-associated costs

When output levels must be changes, there may be costs for overtime, hiring,
training, extra shifts and layoffs. These capacity-associated costs can be avoided by
leveling production. However, this builds inventory in the slack periods.


9.9 FINANCIAL STATEMENTS AND INVENTORY

The 2 major financial statements are the balance sheet and the income
statement.

Balance sheet

An asset is something that has value and is expected to benefit the future
operation of the business. An asset may be tangible such as cash, inventory, machinery
and buildings, or may be intangible such as accounts receivable or a patent.
Liabilities are obligations or amount owed by the company. Accounts payable,
wages payable and long-term debt are examples of liabilities.
Owner’s equity is the difference between assets and liabilities. Owner’ s
equity is created either by the owners investing money in the business or through the
operation of the business when it earns a profit. It is decreased when owners take
money out of business or when the business loses money.
The accounting equation. The relationship between assets, liabilities and
owner’s equity is expressed by the balance sheet equation:

Assets = liabilities + owner’s equity

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Balance sheet. The balance sheet is usually shown with the assets on the left
side and the liabilities and owner’s equity on the right side as follows :

Assets Liabilities
Cash $100,000 Notes payable $5,000
Accounts receivable $300,000 Accounts payable $20,000
Inventory $500,000 Long-term debt $500,000
Fixed assets $1,000,000 Total liabilities $525,000

Owner’s equity
Capital $1,000,000
Retained earnings $375,000
Total assets $1,900,000
Total liabilities and
Owner’s equity
$1,900,000

Capital is the amount of money the owners have invested in the company.
Retained earnings are increased by the revenues a company makes and
decreased by the expenses incurred. The summary of revenues and expenses is shown
on the income statement.

Income statement

Income (profit). The primary purpose of a business is to increase the owner’s
equity by making a profit. For this reason owner’s equity is broken down into a series
of account, called revenue accounts, which show what increased owner’s equity and
expense accounts, which show what decreased it.

Income = revenue – expenses

Revenue comes from the sale of goods or services. Payment is sometimes
immediate in the form of cash, but often is made as a promise to pay at a later date,
called an account receivable.
Expenses are the costs incurred in the process of making revenue. They are
usually categorized into the cost of goods sold and general and administrative
expenses.
Cost of goods sold are costs that are incurred to make the product. They
include direct labor, direct material and factory overhead.
General and administrative expenses include all other costs in running a
business (e.g. insurance, advertising, property taxes,…).
The following is a example of an income statement:

Revenue $1,000,000
Cost of goods sold
Direct labor $200,000
Direct material $400,000
Factory overhead $200,000 $800,000
Gross margin (profit) $200,000
General and administrative expenses $100,000
Net income (profit) $100,000

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Cash flow analysis

When inventory is purchased as raw material, it is recorded as an asset. When
it enters production, it is recorded as work-in-process inventory and, as it is processed,
its value increases by the amount of direct labor applied to it and the overhead
attributed to its processing. When the goods are ready for sale, they do not become
revenue until they are sold. However, the expenses incurred in producing the goods
must be paid for. This raises another financial issue: businesses must have the cash to
pay their bills. Cash is generated by sales and the flow of cash into a business must be
sufficient to pay bills as they become due. Businesses develop financial statements
showing the cash flows into and out of business. This type of analysis is called cash
flow analysis.

Financial inventory performance measures

Finance wants as little inventory as possible and needs some measure of the
level of inventory. Total inventory investment is one measure, but in itself does not
relate to sales. 2 measures that do relate to sales are the inventory turns ratio and days
of supply.

Inventory turns. A convenient measure of how effectively inventories are
being used is the inventory turns ratio:
The calculation of average inventory can be complicated and is a subject for
cost accounting.

Days of supply. Days of supply is a measure of the equivalent number of days
of inventory on hand, based on usage. The equation to calculate it is:

Methods of evaluating inventory

There are 4 methods accounting uses to cost inventory: first in first out, last in
first out, average cost and standard cost. There is no relationship with the actual
physical movement of actual items in any of the methods. Whatever method is used is
only to account for usage.

First in first out (FIFO). In rising prices, replacement is at a higher than the
assumed cost. This method does not reflect current prices and replacement will be
understated. The reverse is true in a falling price market.

Last in first out (LIFO). In rising prices, replacement is at the current price.
The reverse is true in a falling price market. However, the company is left with an
inventory that may be grossly understated in value.

Annual cost of goods
sold
Average inventory in dollars
Inventory turns =

Inventory on hand
sold
Average daily usage
Days of supply =

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Average cost. This method assumes an average of all prices paid for the
article. The problem with this method in changing price is that the cost used is not
related to the actual cost.

Standard cost. This method uses cost determined before production begins.
The cost includes direct material, direct labor and overhead. Any difference between
the standard cost and the actual cost is stated as a variance.


9.10 ABC INVENTORY CONTROL

Control of inventory is exercised by controlling individual items called stock-
keeping-units (SKUs). 4 questions must be answered:
- What is the importance of the inventory item?
- How are they to be controlled?
- How much should be ordered at one time?
- When should an order be placed?

The ABC inventory classification system answers the first two questions by
determining the importance of items and thus allowing different levels of control
based on the relative importance of items.
Usually this is based on annual dollar usage, but other criteria may be used.
The ABC principle is based on Pareto’s law.
As applied to inventories, it is usually found that the relationship between the
percentage of items and the percentage of annual dollar usage follows a pattern in
which:
- A About 20% of the items account for about 80% of the dollar usage,
- B About 30% of the items account for about 15% of the dollar usage,
- C About 50% of the items account for about 5% of the dollar usage.

This type of distribution can be used to help control inventory.

Steps in making an ABC analysis:

- Establish the items characteristics that influence the results of inventory
management,
- Classify items into groups based on the established criteria,
- Apply a degree of control in proportion to the importance of group.

The procedure for classifying by annual dollar usage is as follows:
- Determine the annual usage for each item;
- Multiply the annual usage of each item by its cost to get its total annual
dollar usage;
- List the items according to their annual dollar usage;
- Calculate the cumulative annual dollar usage and the cumulative
percentage of items;
- Examine the annual usage distribution and group the items into A, B and C
groups based on percentage of annual usage.

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Control based on ABC classification

Using the ABC approach, there are 2 general rules to follow:
- Have plenty of low-value items. carrying extra stock of C items adds little
to the total value of the inventory. C items are really only important if there
is a shortage of one of them;
- Use the money and control effort saved to reduce the inventory of high-
value items. A items are extremely important and deserve the tightest
control and the most frequent review.

Different controls used with different classifications might be the following:
- A items: high priority. Tight control including complete accurate records,
regular and frequent review by management, frequent review of demand
forecasts and close follow-up and expediting to reduce lead time;
- B items: medium priority. Normal controls with good records, regular
attention and normal processing;
- C items: lowest priority. Simplest possible control – make sure they are
plenty. Simple or no records; perhaps use a two-bin system or periodic
review system. Order large quantities and carry safety stock.


10 ORDER QUANTITIES


10.1 INTRODUCTION

The objectives of inventory management are to provide the required level of
customer service and to reduce the sum of all costs involved. To achieve these
objectives, 2 basic questions must be answered:
- How much should be ordered at time?
- When should an order be passed?
Management must establish decision rules. Lacking any better knowledge,
decisions rules are often made based on what seems reasonable. Unfortunately, such
rules do not always produce the best results.

Stock-keeping unit (SKU)

Control are exercised through individual items in a particular inventory. These
are called a stock-keeping unit (SKU). 2 white shirts in the same inventory but of
different sizes would be 2 different SKUs. The same shirt in 2 different inventories
would be 2 different SKUs.

Lot-size decision rules

Lot, or batch, is a quantity produced together and sharing the same production
costs and specifications. Following are some common decision rules for determining
what lot size to order at one time.

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Lot-for-lot. The lot-for-lot rule says to order exactly what is needed. This
technique requires time-phased information such as provided by a MRP or a MPS.
Since items are ordered only when needed, this system creates no unused lot-size
inventory. Because of this, it is the best method for planning “A” items and is also
used in a just-in-time environment.

Fixed-order quantity. Fixed-order quantity rules specify the number of units
to be ordered each time an order is placed for an individual item or SKU. The
advantage is that it is easily understood. The disadvantage is that it does not minimize
the costs involved.
A variation on this rule is the min-max system. In this system, an order is
placed when the quantity available falls below the order point. The quantity ordered is
the difference between the actual available at the time of order and the maximum.

Order “n” periods supply. Rather than ordering a fixed quantity, inventory
management can order enough to satisfy future demand for a given period of time.

Costs

Ideally, the ordering decision rules used will minimize the sum of the cost of
ordering and the cost of carrying. The best known system is the economic-order
quantity.


10.2 ECONOMIC-ORDER QUANTITY (EOQ)

Assumptions

The assumptions on which the EOQ is based are as follows:
- Demand is relatively constant and is known,
- The items is produced or purchased in lots and not continuously,
- Order preparation costs and inventory-carrying costs are constant and
known,
- Replacement occurs all at once.

The assumptions are usually valid for finished goods whose demand is
independent and fairly uniform. However, there are many situations where the
assumptions are not valid (e.g. made-to-order items, shelf life of the product is
short,…). In MRP, the lot-for-lot decision rule is often used, but there are also several
rules that are variations of the EOQ.

Development of the EOQ formula

Under the assumptions given, the quantity of an item in inventory decreases at
a uniform rate. The vertical lines represent stock arriving all at once as the stock on
hand reaches zero. The quantity of units in inventory then increases instantaneously by
Q, the quantity ordered.
Order quantity
2
Average lot size inventory =

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the number of order per year is rounded neither up nor down.

Relevant costs. The relevant cost are as follows:
- Annual cost of placing orders,
- Annual cost of carrying inventory.

As the order quantities increases, the average inventory and the annual cost of
carrying inventory increase, but the number of orders per year and the ordering cost
decrease. The trick is to find the particular order quantity in which the total cost of
carrying inventory and the cost of ordering will be a minimum.

A = annual usage in units
S = ordering cost in dollar per order
i = annual carrying cost rate as a decimal of a percentage
c = unit cost in dollars
Q = order quantity in units

Annual ordering cost = numbers of orders x cost per order
Annual carrying cost = average inventory x cost of carrying one unit for 1 year
= average inventory x unit cost x carrying cost
Total annual cost = annual ordering costs + annual carrying costs
Ideally, the total cost will be a minimum. For any situation in which the annual
demand (A), the cost of ordering (S) and the cost of carrying inventory (i) are given,
the total cost will depend upon the order quantity (Q).

Annual demand
Order quantity
Number of order per year =

1 2 3 4
200
100 Q = Lot size
TIME (weeks)
UNITS
IN
STOCK
A
Q
=

x S
Q
2
=

x c x i
A
Q
=

x S
Q
2
+

x c x i
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Economic-order quantity formula

The EOQ occurred at an order quantity in which the ordering costs equal the
carrying costs.
Carrying costs = ordering costs
This value for the order quantity is the economic-order quantity.

How to reduce lot size

Looking at the EOQ formula, there are 4 variables. The EOQ will increase as
the annual demand (A) and the cost of ordering (S) increase and it will decrease as the
cost of carrying inventory (i) ant the unit cost (c) increase.
The annual demand is a condition of the marketplace and is beyond the control
of manufacturing. The cost of carrying inventory (i) is determined by the product itself
and the cost of money to the company. As such, it is beyond the control of
manufacturing.
The unit cost (c) is either the purchase cost of the SKU or the cost of
manufacturing the item. Ideally both costs should be as low as possible. In any event,
as the unit cost decreases, the EOQ increases.
The cost of ordering (S) is either the cost of placing a purchase order or the
cost of placing a manufacturer order. The cost of placing a manufacturing order is
made up from production control costs and setup costs. Anything that can be done to
reduce these costs reduce the EOQ.
Just-in-time manufacturing emphasizes reduction of setup time. There are
several reasons why this is desirable and the reduction of order quantities is one.


10.3 VARIATIONS OF THE EOQ MODEL

There are several modifications that can be made to the basic EOQ model to fit
particular circumstances. 2 that are often used are the monetary unti to lot-size model
and the noninstantaneous receipt model.

Monetary unit lot size

The EOQ can be calculated in monetary units rather than physical units. The
same EOQ formula given can be used with:
A
D
= annual usage in dollars
S = ordering cost in dollars
I = carrying cost rate as a decimal of a percent

Q
2
x c x i =
A
Q
x S
2AS
ic
EOQ =
2A
D
S
i
EOQ =
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10.4 QUANTITY DISCOUNTS

When material is purchased, suppliers often give a discount on orders over a
certain size. The buyer must decide whether to accept the discount and, in doing so,
must consider the relevant costs:
- Purchase cost,
- Ordering costs,
- Carrying costs.

It can be said that taking the discount results in the following:
- There is a saving in purchase cost,
- Ordering costs are reduced because fewer orders are placed since larger
quantities are being ordered,
- Inventory –carrying costs rise because of the larger order quantity.

The buyer must weigh the first 2 against the last and decide what to do. What
count is the total cost. Depending on the figures, it may or may not be best to take the
discount.


10.5 USE OF EOQ WHEN COSTS ARE NOT KNOWN

The EOQ formula depends upon the cost of ordering and the cost of carrying
inventory. In practise, these costs are not necessarily known or easy to determine.
For a family of items, the ordering costs (S) and the carrying costs (c) are
generally the same for each item.
The ratio 2S/i must be the same for all items in the family. For convenience,
let:
Then
Therefore
See exercise page 270 with:

2A
D
S
i
Q =
2S
i
K =
A
D
Q = K
Annual demand
Orders per year
Q =

A
D

N
=
A
D

N
K =
A
D


N
K =
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10.6 PERIOD-ORDER QUANTITY (POQ)

The EOQ attempts to minimize the total cost of ordering and carrying
inventory and is based on the assumption that demand is uniform. Often demand is not
uniform, particularly in MRP and using the EOQ does not produce a minimum cost.
The period order quantity lot-size rule is based on the same theory as the EOQ.
It uses the EOQ formula to calculate an economic time between orders. This is
calculated by dividing the EOQ by the demand rate. This produce a time interval for
which orders are placed. Instead of ordering the same quantity (EOQ), orders are
placed to satisfy requirements for the calculated time interval. The number of orders
placed in a year is the same as for an EOQ, but the amount ordered each time varies.
Thus, the ordering cost is the same but , because the order quantities are determined by
actual demand, the carrying cost is reduced.

Practical considerations when using the EOQ

Lumpy demand. The EOQ assumes that demand is uniform and
replenishment occurs all at once. When this is not true, the EOQ will not produce the
best results. It is better to use the period-order quantity.

Anticipation inventory. Demand is not uniform and stock must be built ahead.
It is better to plan a buildup of inventory based on capacity and future demand.

Minimum order. Some suppliers require a minimum order. This minimum
may be based on the total order rather than an individual items. often these are C items
where the rule is to order plenty, not an EOQ.

Transportation inventory. Carriers give rates based on the amount shipped. A
full load costs less per ton to ship than a part load. This is similar to the price break
given by suppliers for large quantities. The same type of analysis can be used.

Multiples. Sometimes, order size is constrained by package size. In these case,
the unit used should be the minimum package size.


11 INDEPENDENT DEMAND ORDERING SYSTEMS


11.1 INTRODUCTION

If stock is not reordered soon enough, there will be a stockout and a potential
loss in customer service. However, stock ordered earlier than needed will create extra
inventory. The problem then is how to balance the costs of carrying extra inventory
against the cost of a stockout.
EOQ
Average weekly usage
Period-order quantity =

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In industry there are many inventories that involve a large investment and
where stockout costs are high. Controlling these inventories requires effective reorder
systems. 3 basic systems are used to determine when to order:
- Order point system,
- Periodic review system,
- Material requirements planning.
The first two are for independent demand items; the last is for dependent
demand items.


11.2 ORDER POINT SYSTEM

When the quantity of an item on hand in inventory falls to a predetermined
level, called an order point, an order is placed. The quantity ordered is usually pre-
calculated and based on economic-order-quantity concepts.
Using this system, an order must be placed when there is enough stock on hand
to satisfy demand from the time the order is placed until the new stock arrives (called
the lead time). Demand during any one lead-time period probably varies from the
average demand. Statistically, half the time the demand is greater than average and
there is stockout. If it necessary to provide some protection against stockout, safety
stock can be added. The item is ordered when the quantity on hand falls to a level
equal to the demand during the lead time plus the safety stock:

OP = DDLT + SS

OP = order point, DDLT = demand during lead time, SS = safety stock









Figure shows the relationship between safety stock, lead time, order quantity
and order point. With the order point:
- Order quantities are usually fixed;
- The order point is determined by the average demand during the lead time.
If the average change in the order point, effectively there has been a change
in safety stock;
- The intervals between replenishment are not constant but vary depending
on the actual demand during the reorder cycle;
- Average inventory = order quantity/2 + safety stock = Q/2 + SS.


Lead time
Q = Order
quantity
TIME
UNITS
IN
STOCK
Safety stock
Order point
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11.3 DETERMINING SAFETY STOCK

Safety stock is intended to protect against uncertainty in supply and demand.
Uncertainty may occur in 2 ways: quantity uncertainty and timing uncertainty.
Quantity uncertainty occurs when the amount of supply and demand varies. Timing
uncertainty occurs when the time of receipt of supply or demand differs from than
expected.
There are 2 ways to protect against uncertainty: carry extra stock, called safety
stock, or order earlier, called safety lead time. Both result in extra inventory, but the
methods of calculation are different. Safety stock is the most common way of
buffering. The SS required depends on the following:
- variability of demand during the lead time;
- frequency of reorder;
- service level desired;
- length of a lead time. The longer the lead time, the more safety stock has to
be carried to provide a specified service level. This is one reason it is
important to reduce lead time.

Variation in demand during lead time

Actual demand varies from forecast for 2 reasons: bias error in forecasting the
average demand and random variations in demand about average. It is the latter with
which we are concerned in determining safety stock. Some method of estimating the
randomness of item demand is needed.

Variation in demand about the average

Suppose a history of weekly demand for a particular item shows an average
demand. As expected, most of the demand are around it. A smaller number would be
farther away from it and still fewer would be farthest away. If the weekly demands are
classified into groups or ranges about the average , a picture of the distribution of
demand about the average appears.

Normal distribution. The pattern of demand distribution about the average
will differ for different products and markets. Some method is needed to described the
distribution: its shape, center and spread. As long as the demand conditions remain the
same, we can expect the pattern to remain very much the same. If the demand is
erratic, so is, the demand pattern, making it difficult to predict with any accuracy.
The most common predictable pattern is called a normal curve or bell curve.
The normal distribution has most of the value s clustered near a central point with
progressively fewer results occurring away from the center. It is symmetrical about
this central point in that is spreads out evenly on both sides.
The normal curve is described by 2 characteristics. One relates to its central
tendency, the average, and the other to the variation, or dispersion, of the actual values
about the average.

Average or mean. The average or mean value is at the high point of the
curve. It is the central tendency of the distribution. The symbol is x. It is calculated by
adding the data ( x) and dividing by the total number of data (n).
x = ( x) / n
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Dispersion. The variation, or dispersion, of actual demands about the average
refers to how closely the individual values cluster around the mean. It can be measure
in several ways:
- As a range of the maximum minus the minimum value;
- As the mean absolute deviation (MAD), which is a measure of the average
forecast error;
- As a standard deviation.

Standard deviation (sigma)

The standard deviation is a statistical value that measures how closely the
individual values cluster about the average. It is represented by σ. It is calculated as
follows:
- Calculate the deviation for each period by subtracting the actual demand
from the forecast demand;
- Square each deviation;
- Add the squares of the deviations;
- Divide the value in previous step by the number of periods to determine the
average of squared deviations;
- Calculate the square root of the value calculated in the previous step. This
is the standard deviation.

It is important to note that the deviations in demand are for the same time
intervals as the lead time.
From statistics, we can determine that:
- The actual demand will be within ± 1σ of the forecast average
approximately 68% of the time,
- The actual demand will be within ± 2σ of the forecast average
approximately 98% of the time,
- The actual demand will be within ± 3σ of the forecast average
approximately 99.88% of the time.

Determining the safety stock and order point

One property of the normal curve is that is symmetrical about the average.
Safety stocks are needed to cover only those periods in which the demand during the
lead time is greater than the average. Thus, a service level of 50% can be attained with
no safety stock.
As stated earlier, we know from statistics that the error is within ± 1σ of the
forecast about 68% of the time. Suppose the standard deviation of demand during the
lead time is 100 units and this amount is carried as safety stock. This much safety
stock provides protection against stockout for 34% of the time that actual demand is
greater than expected. In total, there is enough safety stock to provide protection for
the 84% of the time (50% + 34%) that a stockout is possible.
The service level is a statement of the percentage of time there is no stockout.
It means being able to supply when a stockout is possible and a stockout is possible
only at the time an order is to be placed.

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Safety factor. The service level is directly related to the number of standard
deviation provided as a safety stock and is usually called the safety factor. Note that
the service level is the percentage of order cycles without a stockout.
















11.4 DETERMINING SERVICE LEVELS

Stockouts cost money for the following reasons:
- Back-order costs,
- Lost sales,
- Lost customers.

In some markets, customer service is a major competitive tool and a stockout
can be very expensive. In others, it may not be a major consideration. Usually the
decision about what the service level should be is a senior management decision and is
part of the company’s corporate and marketing strategy.
The only time it is possible for a stockout to occur is when stock is running low
and this happens every time an order is to be placed. Therefore, the chances of a
stockout are directly proportional to the frequency of the reorder. The more often stock
is reordered, the more often there is a chance of a stockout. When the order quantity is
increased, exposure to stockout decreases. The safety stock needed decreases, but
because of the larger order quantity, the average inventory increases.
It is the responsibility of management to determine the number of stockouts per
year that are tolerable. Then the service level, safety stock and order point can be
calculated.


11.5 DIFFERENT FORECAST AND LEAD-TIME INTERVALS

Records of actual demand and forecasts are normally made on a weekly or
monthly basis for all items regardless of what the individual lead times are. It is
impossible to measure the variation in demand about average for each of the lead
times. Some method of adjusting standard deviation for the different time intervals is
needed.
Service level (%) Safety factor
50 0.00
75 0.67
80 0.84
85 1.04
90 1.28
94 1.56
95 1.65
96 1.75
97 1.88
98 2.05
99 2.33
99.86 3.00
99.99 4.00
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As the lead times increases, the standard deviation increases. However, it will
not increase in direct proportion. As the time interval increases, there is a smoothing
effect, and the longer the time interval, the more smoothing take place.
The following adjustment can be made to the standard deviation or the safety
stock to compensate for differences between lead-time interval (LTI) and forecast
interval (FI). While not exact, the formula gives a good approximation:

Sigma for LTI = (sigma for FI) x

The preceding relationship is also useful where there is a change in the LTI.

New safety stock = (old safety stock) x



11.6 DETERMINING WHEN THE ORDER POINT IS REACHED

There must be some method to show when the quantity of an item on hand has
reached the order point. There are many systems, but they all are inclined to be
variations or extensions of 2 basic systems: the two-bin system and the perpetual
inventory system.

Two-bin system

A quantity of an item equal to the order point quantity is set aside and not
touched until all the main stock is used up. When this stock needs to be used, the
production control or purchasing department is notified and a replenishment order is
placed.
The two-bin system is a simple way of keeping control of C items. Because
they are of low value, it is best to spend the minimum amount of time and money
controlling them. However, they do need to be managed. When it is out of stock, C
item becomes an A item.

Perpetual inventory record system

A perpetual inventory record is a continual account of inventory transaction
as they occur. At any instant, it holds an up-to-date record of transactions. At a
minimum, it contains the balance on hand, but it may also contain the quantity on
order but not received, the quantity allocated but not issue and the available balance.

426 254 SCREW Order
quantity: 500
Order
Point: 100
Date Ordered Received Issued On hand Allocated Available
01 500 500
02 500 400 100
03 500 500
04 400 100 0 100
05 500 600 0 600

An inventory record contains variable and permanent information.
LTI

FI
new interval

old interval
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Permanent information is shown at the top of figure. Although not absolutely
permanent, this information does not change frequently. It includes data as follows:
- Part number, name, and description;
- Storage location;
- Order point;
- Order quantity;
- Lead time;
- Safety stock;
- Suppliers.

Variable information is information that changes with each transaction and
includes the following:
- Quantities ordered: data, order numbers and quantities;
- Quantities received: data, order numbers and quantities;
- Quantities issued: data, order numbers and quantities;
- Balance on hand;
- Quantities allocated: data, order numbers and quantities;
- Available balance.

The information depends of the needs of company and the particular
circumstances.


11.7 PERIODIC REVIEW SYSTEM

Using the periodic review system, the quantity ordered is usually
predetermined at specified, fixed-time intervals and an order is placed. Thus the
review period is fixed and the order quantity is allowed to vary. The quantity on hand
plus the quantity ordered must be sufficient to last until the next shipment is received.
That is, the quantity on hand plus the quantity ordered must equal the sum of the
demand during the lead time plus the demand during the review period plus the safety
stock.

Target level or maximum-level inventory

This sum of quantities is called the target level or maximum-level inventory:

T = D(R + L) + SS
Where
T = Target (maximum) level inventory,
D = Demand per unit of time,
L = Lead-time duration,
R = Review period duration,
SS = Safety stock.

The order quantity (Q) is equal to the maximum-inventory level (T) minus the
quantity on hand (I) at the review period:

Q = T – I

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The periodic review system is useful for the following:
- Where there are many small issues from inventory and posting transactions
to inventory records are very expensive. Supermarkets and retailers are in
this category.
- Where ordering costs are small. This occurs when many different items are
ordered from the one source. A regional distribution center may order most
of all of its stock from a central warehouse.
- Where many items are ordered together to make up a production run or fill
a truckload. A good example of this regional distribution center that orders
a truckload once a week from a central warehouse.


11.8 DISTRIBUTION INVENTORY

Distribution inventory includes all the finished goods held anywhere in the
distribution system. The purpose of holding inventory in distribution centers is to
improve customer service by locating stock near the customer and to reduce
transportation costs by allowing the manufacturer to ship full loads rather than partial
loads over long distances (see chapter 13).
The objectives of distribution inventory management are to provide the
required level of customer service, to minimize the costs of transportation and
handling, and to be able to interact with the factory to minimize scheduling problems.
Distribution systems vary considerably, but in general they have a central
supply facility that is supported by a factory, a number of distribution centers and
customers. The customers may be the final consumer or some intermediary in the
distribution chain.
Although the demand from customers may be relatively uniform, the demand
on central supply is not, because it is dependent on when the distribution centers place
replenishment orders. In turn, the demand on the factory depends on when central
supply places orders.
The distribution system is the factory’s customer and the way the distribution
system interfaces with the factory has a significant effect on the efficiency of the
factory operations.
Distribution inventory management systems can be classified into
decentralized, centralized and distribution requirements planning.

Decentralized system

In a decentralized system, each distribution center first determines what it
needs and when, and then places orders on central supply.
The advantage of the decentralized system is that each center can operate on its
own and thus reduce communication and coordination expense. The disadvantage is
the lack of coordination and the effect this may have on inventories, customer service
and factory schedules. Because of these deficiencies, many distribution systems have
moved toward more central control.
A number of ordering systems can be used, including the order point and
periodic review systems. The decentralized system is sometimes called the pull system
because orders are placed on central supply and pulled through the system.

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Centralized system

In a centralized system, all forecasting and order decisions are made centrally.
Stock is pushed out into the system from central supply. Distribution centers have no
say about what they receive.
Different ordering systems can be used, but generally an attempt is made to
replace the stock that has been sold and to provide for special situations such as
seasonality or sales promotions. These systems attempt to balance the available
inventory with the needs of each distribution center.
The advantage of these systems is the coordination between factory, central
supply and distribution centers. The disadvantage is the inability to react to local
demand, thus lowering the level of service.

Distribution requirements planning

Distribution requirements planning is a system that forecasts when the various
demands will be made by the system on central supply. This gives central supply and
the factory the opportunity to plan for the goods that will actually be needed and when.
It is able both to respond to customer demand and coordinate planning and control.
The system translates the logic of MRP to the distribution system.

Distribution center A
Part 5678

Distribution center B
Part 5678
Week 1 2 3 Week 1 2 3
Planned order release 200 200 Planned order release 100


Central Supply
Part 5678
Lead Time: 2 weeks
Order quantity: 500
Week 1 2 3
Gross requirements 200 100 200
Scheduled receipts
Projected available 400 200 100 400
Planned order release 500


12 PHYSICAL INVENTORY AND WAREHOUSE
MANAGEMENT


12.1 INTRODUCTION

Because inventory is stored in warehouses, the physical management of
inventory and warehousing are intimately connected. In some cases, inventory may be
stored for an extended time. In other situations, inventory is turned over rapidly and
the warehouse functions as a distribution center.
In a factory, stores performs the same functions as warehouses and contain raw
materials, WIP inventory, finished goods, supplies and possibly repair parts. Since
they perform the same functions, stores and warehouses are treated alike.
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12.2 WAREHOUSING MANAGEMENT

The objective of a warehouse is to minimize cost and maximize customer
service. To do this, efficient warehouse operations perform the following:
- Provide timely customer service,
- Keep track of items so they can be found readily and correctly,
- Minimize the total physical effort and thus the cost of moving goods into
and out of storage,
- Provide communication links with customers.

The cost of operating a warehouse can be broken down into capital and
operating costs. Capital costs are those of space and materials handling equipment.
The space needed depends on the peak quantities that must be stored, the methods of
storage and the need for ancillary space for aisles, docks, offices,…
The major operating cost is labor and the measure of labor productivity is the
number of units that an operator can move in a day. This depends on the type of
material handling equipment used, the location and accessibility of stock, warehouse
layout, stock location system and the order-picking system used.

Warehouses activities

Operating a warehouse involves several processing activities and the efficient
operation of the warehouse depends upon how well these are performed. These
activities are as follows:
- Receive goods. The warehouse accepts goods from outside transportation
and accepts responsibility for them. This means the warehouse must:
o Check the goods against an order and the bill of lading,
o Check the quantities,
o Check for damage and fill out damage reports if necessary,
o Inspect goods if required;
- Identify the goods. Items are identified with the appropriate SKU number
and the quantity received recorded;
- Dispatch goods to storage; goods are sorted and put away;
- Hold goods. Goods are kept in storage and under proper protection until
needed;
- Pick goods. Items required from stock must be selected from storage and
brought to a marshalling area;
- Marshall the shipment. Goods making up a single order are brought
together and checked for omissions or errors. Orders records are updated;
- Dispatch the shipments. Orders are packaged, shipping documents prepared
and goods loaded on the right vehicle,
- Operate an information system. A record must be maintained for each item
in stock showing the quantity on hand, quantity received, quantity issued
and location in warehouse.

In various ways, all these activities take place in any warehouse. The
complexity depends on the number of SKUs handled, the quantities of each SHU and
the number of orders received and filled. To maximize productivity and minimize cost,
warehouse management must work with the following:
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- Maximum use of space. Usually the largest capital cost is for space. This
means not only floor space but cubic space;
- Effective use of labor and equipment. Material handling equipment
represents the second largest capital cost and labor the largest operating
cost. There is a trade-off between the two in that labor costs can be reduced
by using more materials handling. Warehouse management will need to:
o Select the best mix of labor and equipment to maximize the overall
productivity of the operation,
o Provide ready access to all SKUs. This requires a good stock
location system and layout,
o Move goods efficiently. Most of the activity that goes on in a
warehouse is material handling: the movement of goods into and
out of stock locations.

Several factors influence effective use of warehouses. Some are:
- Cube utilization and accessibility,
- Stock location,
- Order picking and assembly,
- Packaging.

Cube utilization and accessibility

Goods are stored not just on the floor, but in the cubic space of the warehouse.
Space is also required for aisles, receiving and shipping docks, offices and
order picking and assembly. In calculating the space needed for storage, some design
figure for maximum inventory is needed. Space is needed for 3000 pallets. If pallets
are stacked 3 high, 1000 pallet positions are required. A pallet is a platform usualyy
measuring 48” x 40” x 4”.

Pallet positions. Since the storage area is 48” deep, the 40” side is placed
along the wall. The pallets cannot be placed tight against one another; a 2” clearance
must be allowed between them so they can be moved. This then leaves room for (120’
x 12”)/42” = 34.3 or 34 pallet positions along each side of the aisles.

Accessibility. Accessibility means being able to get at the goods wanted with a
minimum amount of work. For example, if no other goods had to be moved to reach
an SKU, the SKU would be 100% accessible. As long as all pallets contain the same
SKU there is no problem with accessibility.

Cube utilization. Suppose items are stacked along a wall. There will be
excellent accessibility for all items except item 9, but cube utilization is not maximize.
Cube utilization is the use of space horizontally and vertically. There is room for 30
Aisle
120’
4’
4’
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pallets , but only 21 places are being used for a cube utilization of 70%. Some method
must be devised to increase cube utilization and maintain accessibility.

One way is to install tiers of racks so lower pallets can be removed without
disturbing the uppers ones. This represents a trade-off between the capital cost of the
racking and the savings in the operating cost of extra handling.

Stock location

There is no single universal stock location system suitable for all occasions, but
there are a number of basis systems that can be used. Which system, or mix of
systems, is used depends on the type of good stored, the type of storage facilities
needed, the throughput and the size of orders. Whatever the system, management must
maintain enough inventory or safety and working stock to provide the required level of
customer service, keep track of items so they can be found easily.
The following are some basic systems of locating stock:
- Group functionally related items together. Group together items similar in
their use. If functionally related items are ordered together, order picking is
easier. Warehouse personnel become familiar with the location of items;
- Group fast-moving items together. If fast-moving items are placed close to
the receiving and shipping area, the work of moving them in and out of
storage is reduced. Slower moving items can be placed in more remote
areas of the warehouse;
- Group physically similar items together. Physically similar items often
require their own particular storage facilities and handling equipment;
- Locate working stock and reserve stock separately. Relatively small
quantities of working stock, stock from which withdrawals are made, can
be located close to the marshalling and shipping area whereas reserve
stock used to replenish the working stock can be located more remotely.
This allows order picking to occur in a compact area and replenishment of
the working stock in bulk by pallet or container load.

There are 2 basic systems for assigning specific locations to individual stock
items: fixed location and floating location. Either system may be used with any of the
above location systems.

Fixed locations. In a fixed –location system, an SKU is assigned a permanent
location(s) and no other items are stored there. This system makes it possible to store
and retrieve items with a minimum of record keeping. However, fixed-location
systems usually have poor cube utilization. Fixed-location systems are often used in
small warehouses where space is not a premium, where throughput is small and where
there are a few SKUs.

Floating location. In a floating-location system, goods are stored wherever
there is appropriate space for them. The same SKU may be stored in several locations
at the same time and different locations at different time. The advantage of this system
is to improve cube utilization. However, it requires accurate and up-to-date
1 1 2 3 4
1 1 2 3 4 10
1 1 2 3 4 5 6 7 8 9
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information on item location and the availability of empty storage space so items can
be put away and retrieved efficiently. Modern warehouses using floating-location
system are usually computer based. The computer assigns free locations to incoming
items and direct the order picker to the right location. Thus, cube utilization and
warehouse efficiency are greatly improved.

Point-of-use storage. Sometimes, particularly in repetitive manufacturing and
in a JIT environment, inventory is stored close to where it will be used. There a several
advantages to point-of-use storage:
- Materials are readily accessible to users,
- Material handling is reduced or eliminated,
- Central storage costs are reduced,
- Material is accessible at all times.
This method is excellent as long as inventory is kept low and operating
personnel can keep control of inventory records. Sometimes C items are issued as
floor stock where manufacturing is issued a large quantity which is used as needed.
Inventory records are adjusted when the stock is issued, not when it is used.

Central storage. As opposed to point-of-use storage, central storage contains
all inventory in one central location. There are several advantages:
- Ease of control;
- Inventory record accuracy is easier to maintain;
- Specialized storage can be used;
- Reduced safety stock, since users do not need to carry their own safety
stock.

Order picking and assembly

Once a order is received, the items on the order must be retrieved from the
warehouse, assembled and prepare for shipment. There are several systems that can be
used to organize the work, among which are the following:
- Area system. The order picker circulates throughout the warehouse
selecting the items on the order. The items are then taken to the shipping
area. The order is self-marshalling in that when the order picker is finished,
the order is complete. This system is generally used in small warehouses
where goods are stored in fixed locations;
- Zone system. The warehouse is broken down into zones and order pickers
work only in their own area. An order is divided up by zone and each order
picker selects those items in their zone and sends them to marshalling area
where the order is assembled for shipment. Zones are usually established
by grouping related parts together. Parts may be related because of the type
of storage needed or because they are often ordered together. A variation of
the zone system is to have the order move to the next zone rather than to
marshalling area.
- Multi-order system. This system is the same as the zone system except that,
rather than handling individual orders, a number of orders are gathered
together and all the items divided by zone. The items are then sent to the
marshalling area where they are sorted to individual orders for shipment.

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Area system is simple to manage and control, but as the warehouse throughput
and size increase, it becomes unwieldy. The zone systems break down the order-filling
process into a series of smaller areas that can be better managed individually. The
multi-order system is probably most suited to the situation in which there are many
items or many small order with few items.

Working stock and reserve stock. In addition to the above systems, reserve
stock and working stock may be separated. The working stock is located close to the
shipping area so the work in picking is reduced. A separate workforce is used to
replenish the working stock from the reserve stock.


12.3 PHYSICAL CONTROL AND SECURITY

Because inventory consists of tangible things, items have a nasty habit of
becoming lost, strayed or stolen. What is needed is a system that make it difficult for
people to make mistakes or be dishonest. There are several elements that help:
- A good-part numbering system (see chapter 4);
- A simple, well-documented transaction system. When goods are received,
issued or moved in any way, a transaction occurs. There are 4 steps in any
transaction:
o Identify the item. When receiving an item, the purchase order, part
number and quantity must be properly identified. When goods are
stored, the location must be accurately specified. When issued, the
quantity, location and part number must be recorded;
o Verify quantity. Quantity is verified by a physical count of the item
by weighing or measuring. Sometimes standard-sized containers are
useful in counting;
o Record the transaction. Before any transaction is physically carried
out, all information about the transaction must be recorded;
o Physically execute the transaction. Move the goods in, about or out
of the storage area.

Limited access. Inventory must be kept in a safe, secure place with limited
general access. It should be locked except during the working hours. This is less to
prevent theft than to ensure people do not take things without completing the
transaction steps.

A well-trained workforce. Not only should the stores staff be well trained in
handling and storing material and in recording transactions, but other personnel who
interact with stores must be trained to ensure transactions are recorded properly.


12.4 INVENTORY RECORD ACCURACY

These 3 pieces of information must be accurate : part description, quantity and
location. Accurate inventory records enable firms to:
- Operate an effective materials management system. If inventory records
are inaccurate, gross-to-net calculations will be in error;
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- Maintain satisfactory customer service. If records show the item is in
inventory when is not, any order promising it will be in error;
- Operate effectively and efficiently. Planners can plan, confident that the
parts will be available;
- Analyze inventory. Any analysis of inventory is only as good as the data it
is based on.

Inaccurate inventory records will result in:
- Lost sales;
- Shortages and disrupted schedules;
- Excess inventory;
- Low productivity;
- Poor delivery performance;
- Excessive expediting, since people will always be reacting to a bad
situation rather than planning for the future.


Causes of inventory record errors

Some examples of causes of inventory record error are:
- Unauthorized withdrawal of material;
- Unsecured stockroom;
- Poorly trained personnel;
- Inaccurate transaction recording. Errors can occur because of inaccurate
piece counts, unrecorded transactions, delay in recording transactions,
inaccurate material location and incorrectly identified parts;
- Poor transaction recording systems. When computer is used, errors are
usually the fault of human input to the system. The documentation
reporting system should be designed to reduce the likelihood of human
error;
- Lack of audit capability. Some program of verifying the inventory counts
and location is necessary. The most popular one today is cycle counting.

Measuring inventory record accuracy

Inventory accuracy ideally should be 100%. Banks and other financial
institutions reach this level. What is the inventory accuracy?

Tolerance. To judge inventory accuracy, a tolerance level for each part must
be specified. For some items, this may mean no variance; for others, it may be very
difficult or costly to measure and control 100% accuracy. For these reasons, tolerance
are set for each item. Tolerance is the amount of permissible variation between an
inventory record and a physical count.
Tolerance are set on individual items based on value, critical nature of the item,
availability, lead time, ability to stop production, safety problems or the difficulty of
getting precise measurement.

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Part number
Inventory
record
Shelf count Tolerance
Within
tolerance
Outside
tolerance
1 100 105 ± 5% X
2 100 100 ± 0% X
3 100 98 ± 3% X
4 100 97 ± 2% X
5 100 102 ± 2% X
6 100 103 ± 2% X
7 100 99 ± 3% X
8 100 100 ± 0% X
9 100 97 ± 5% X
10 100 99 ± 5% X
Total 1000 1000


Auditing inventory records

Errors occur, and they must be detected so inventory accuracy is maintained.
There are 2 basic methods of checking the accuracy of inventory records: periodic
(usually annual) counts of all items and cyclic (usually daily) counts of specified
items. It is important to audit record accuracy, but it is more important to audit system
to find the causes of record inaccuracy and eliminate them. Cycle counting does this;
periodic audits tend not to.

Periodic (annual) inventory. The primary purpose of a periodic (annual)
inventory is to satisfy the financial auditors. To planners, the physical inventory
represents an opportunity to correct any inaccuracies in the records.
The responsibility for taking the physical inventory usually rests with the
materials manager who should ensure that a good plan exists and it is followed. There
are 3 factors in good preparation:
- Housekeeping. Inventory must be sorted and the same parts collected
together so they can easily be counted;
- Identification. Part must be clearly identified and tagged with part numbers.
This can, and should, be done before the inventory is taken;
- Training. Those who are going to do the inventory must be properly
instructed and trained in taking inventory.

Process. Taking a physical inventory consists of 4 steps:
- Count items and record the count on a ticket left on the item;
- Verify this count by counting or by sampling;
- When the verification is finished, collect the tickets and list the items in
each department;
- Reconcile the inventory records for differences between the physical count
and inventory dollars. If major discrepancies exist, they should be checked
immediately.

Taking an annual physical inventory has several problems. Usually the factory
has to be shut down, thus losing production; labor and paperwork are expensive; the
job is often done hurriedly and poorly since there is much pressure to get it done and
the factory running again. In addition, the people doing the inventory are not used to
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the job and are prone to making errors. As a result, more errors often are introduced
into the records than are eliminated.
Because of these problems, the idea of cycle counting has developed.

Cycle counting. Cycle counting is a system of counting inventory continually
throughout the year. Physical inventory counts are scheduled so that each item is
counted on a predetermined schedule. Depending on their importance, some items are
counted frequently throughout the year whereas others are not. The idea is to count
selected items each day.
The advantages to cycle counting are:
- Timely detection and correction of problems. The purpose of the count is
first to find the cause of error and to correct the cause so the error is less
likely to happen again;
- Complete or partial reduction of lost production;
- Used of personnel trained and dedicated to cycle counting. Cycle counters
are also trained to identify problems and to correct them.

Count frequency. The number of times an item is counted in a year is called its
count frequency. For an item, the count frequency should increase as the value of the
item and the number of transactions increase. Several methods can be used to
determine the frequency. 3 common ones are:
- ABC method. Inventories are classified according to the ABC system.
Some rule is established for count frequency. For example, A items might
be counted weekly or monthly; B items, bimonthly or quarterly; and C
items, biannually or once a year. On this basis, a count schedule can be
established;
- Zone method. Items are grouped by zones to make counting more efficient.
The system is used when a fixed-location system is used, or when WIP or
transit inventory is being counted;
- Location audit system. In a floating-location system, because of human
error, these location may not be 100% correct. If material is mislocated,
normal cycle counting may not find it. In using location audits, a
predetermined number of stock locations are checked each period.

A cycle counting program may include all these methods. The zone method is
ideal for fast-moving items. if a floating-location system is used, a combination of
ABC and location audit is appropriate.

When to count. Cycle counts can be scheduled at regular intervals or on special
occasions. Some selection criteria are:
- When an order is placed. Items are counted just before an order is placed.
This has the advantage of detecting errors before the order is placed and
reducing the amount of work by counting at a time when stock is low;
- When an order is received. Inventory is at its lowest level;
- When the inventory record reaches zero. Again, this method has the
advantage of reducing work;
- When a specified number of transactions have occurred. Errors occur when
transactions occur. Fast-moving items have more transactions and are more
prone to error;
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- When a error occurs. A special count is appropriate when an obvious error
is detected. This may be a negative balance on the stock record or when no
items can be found although the record shows some in stock.


13 PHYSICAL DISTRIBUTION


13.1 INTRODUCTION

Physical distribution is the movement of materials from the producer to the
consumer. It is the responsibility of the distribution department, which is part of an
integrated materials management or logistics system.

The movement of material is divided into 2 functions: physical supply and
physical distribution. Physical supply is the movement and storage of goods from
suppliers to manufacturing. Physical distribution is the movement and storage of
finished goods from the end of the production to the customer. The particular path in
which the goods move (through distribution centers, wholesalers and retailers) is
called the channel of distribution.

Channels of distribution

Sometimes a company delivers directly to its customers, but often it uses other
companies or individuals to distribute some or all of its products to the final consumer.
These companies or individuals are called intermediaries.
There are really 2 related channels involved. The transaction channel is
concerned with the transfer of ownership. Its function is to negotiate, sell and
contract. The distribution channel is concerned with the transfer or delivery of the
goods or services. The same intermediary may perform both functions, but not
necessarily.
Physical distribution is vital in our lives. Usually, manufacturers, customers
and potential customers are widely dispersed geographically. If manufacturers serve
only their local market, they restrict their potential for growth and profit. By extending
Dominant flow of demand and design information
Dominant flow of products and services
Physical
Distribution
Manufacturing
Planning and
Control
Physical
Supply
S
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L
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R
C
O
S
T
U
M
E
R
MANUFACTURER DISTRIBUTION
SYSTEM
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its market, a firm can gain economies of scale in manufacturing, reduce the cost of
purchases by volume discounts and improve its profitability. However, to extend
markets requires a well-run distribution system. Distribution adds place value and time
value by placing goods in markets where they are available to the consumer at the time
it wants them.
The specific way in which materials move depends upon many factors. For
example:
- The channels of distribution that the firm is using;
- The types of markets served. Market characteristics such as the geographic
dispersion of the market, the numbers of customers and the size of orders;
- The characteristics of the product;
- The type of transportation available to move the material.
All are closely related.


13.2 PHYSICAL DISTRIBUTION SYSTEM

The objective of distribution management is to design and operate a
distribution system that attains the required level of customer service and does that at
least cost. To reach this objective, all activities involved in the movement and storage
of goods must be organized into an integrated system.

Activities in the physical distribution system

In a distribution system, 6 interrelated activities affect customer service and the
cost of providing it:
- Transportation. Transportation involves the various methods of moving
goods outside the firm’s buildings. For most firms, it is the single highest
cost in distribution, usually accounting for 30% to 60% of distribution
costs. Transportation adds place value to the product;
- Distribution inventory. Distribution inventory includes all finished goods
inventories at any point in the distribution system. In cost terms, it is the
second most important item in distribution, accounting for 25% to 30% of
the cost of distribution. Inventories create time value by placing the
product close to the customer;
- Warehouses (distribution centers). Warehouses are used to store
inventory. The management of warehouses makes decisions on site
selection, number of distribution centers, layout and methods of receiving,
storing and retrieving goods;
- Materials handling. Materials handling is the movement and storage of
goods inside the distribution center. The type of materials handling
equipment used affects the efficiency and cost of operating the distribution
center. Materials handling represents a capital cost;
- Protective packaging. Goods moving in a distribution system must be
contained, protected and identified. In addition, goods are moved and
stored in packages and must fit into dimension of the storage spaces and the
transportation vehicles;
- Order processing and communication. Order processing includes all
activities needed to fill customer orders. Many intermediaries are involved
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in the movement of goods and good communication is essential to a
successful distribution system.

Total-cost concept

The objective of distribution management is to provide the required level of
customer service at the least total system cost. What happens to one activity has an
effect on other activities, total system cost and the service level. Management must
treat the system as a whole and understand the relationship among the activities.


Rail
(10 days)
Air
(1 day)
Transportation cost 200 1000
In-transit inventory-carrying cost
($10/day)
1000 100
Total 1200 1100

There are 2 related principles illustrated here:
- Cost trade-off. The cost of transportation increased with the use of air
transport, but the cost of carrying inventory decreased. There was a cost
trade-off between the 2;
- Total cost. By considering all of the costs and not just any one cost, the
total system cost is reduced. Note also that even though no cost is attributed
to it, customer service is improved by reducing the transit time. The total
cost should also reflect the effect of the decision on other departments, such
as production and marketing.

In this section, the emphasis is on the costs and tradeoffs incurred and on
improvement in customer service. Generally, but not always, an increase in customer
service requires an increase in cost, which is one of the major tradeoffs.


13.3 INTERFACES

There are several important interfaces among physical distribution and
production and marketing.

Marketing

Although physical distribution interacts with all departments in a business, its
closest relationship is probably with marketing.
The marketing mix is made up of product, promotion, price and place and the
latter is created by physical distribution. Marketing is responsible for transferring
ownership. Physical distribution has the responsibility of meeting the customer service
levels established by marketing and the senior management of the firm.
Physical distribution contributes to creating demand. Prompt delivery, product
availability and accurate order filling are important competitive tools in promoting a
firm’s products. The distribution system is a cost, so its efficiency and effectiveness
influence the company’s ability to price competitively.

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Production

There are many factors involved in selecting a site for a factory, but an
important one is the cost and availability of transportation for a raw materials to the
factory and the movement of finished goods to the marketplace. Sometimes, the
location of factories is decided largely by the sources and transportation links of raw
materials. This is particularly true where the raw materials are bulky and of relatively
low value compared to the finished product.
Although the demand from customers may be relatively uniform, the factory
reacts to the demand from the distribution centers for replenishment stock. The
distribution system is the factory’s customer and the way that the distribution system
interfaces with the factory will influence the efficiency of factory operations.


13.4 TRANSPORTATION

Transportation is a major contributor to the economic and social fabric of a
society and aids economic development of regional areas.
The carriers of transportation can be divided into 5 basic modes:
- Rail;
- Road, including trucks, buses and automobiles;
- Air;
- Water, including ocean-going, inland and coastal ships;
- Pipeline.
Each mode has different cost and service characteristics. These determine
which method is appropriate for the types of goods to be moved.

Costs of carriage

To provide transportation service, any carrier must have certain basic physical
elements. These elements are ways, terminals and vehicles. Each results in a cost to
the carrier and, depending on the mode and the carrier, may be either capital (fixed) or
operating (variable) costs. Fixed costs are costs that do not change with the volume of
goods carried. The purchase cost of a truck is a fixed cost. However, many costs of
operation, such as fuel, maintenance and driver’s wages, depend on the use made of
the truck. These are variable costs.
Ways are the paths over which the carrier operates. The nature of the way and
how it is paid vary with the mode. They may be owned and operated by the
government or by the carrier or provided by the nature.
Terminals are places where carriers load and unload goods to and from
vehicles and make connections between local pickup and delivery service and line-
haul service. Other functions performed at terminals are weighing; connections with
other routes and carriers; vehicle routing, dispatching and maintenance; and
administration and paperwork. The nature, size and complexity of the terminal varies
with the mode and size of the firm and the types of good carried. Terminals are
generally owned and operated by the carrier but, in some special circumstances, may
be publicly owned and operated.
Vehicles of various types are used in all modes except pipelines. They serve as
carrying and power units to move the goods over the ways. The carrier usually owns
or leases the vehicles, although sometimes the shipper owns or leases them.
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Rail

Railways provide their own ways, terminals and vehicles, all of which
represent a large capital investment. This means that most of the total cost of operating
a railway is fixed. Thus, railways must have a high volume of traffic to absorb the
fixed costs.
Therefore, railways are best able to move large volumes of bulky goods over
long distances. Rail speed is good over long distances, the service is generally reliable
and trains are flexible about the goods they can carry. Train service is cheaper than
road for large quantities of bulky commodities moved over long distances.

Road

Trucks do not provide their own ways but pay a fee to the government as
license, gasoline and other taxes and tolls for the use of roads. Terminals are usually
owned and operated by the carrier but may be either privately owned or owned by the
government. If owned, they are a major capital expense. However, in comparison to
other modes, the cost of a vehicle is small. This means that for road carriers most of
their costs are operating (variable) in nature.
Trucks can provide door-to-door service. They are particularly suited to
distribution of relatively small-volume goods to a dispersed market.

Air

Air transport requires an airway system that includes air traffic control and
navigation systems. These systems are usually provided by the government. Carriers
pay a user charge that is variable cost to them. Terminals include all of the airport
facilities, most of which are provided by the government. However, carriers are
usually responsible for providing their own cargo terminals and maintenance facilities,
either by owning or renting the space. The aircraft are expensive and are the single
most important cost element for the airline. Since operating costs are high, airlines’
costs are mainly variable.
The main advantage of air transport is speed of service, especially over long
distances. Most cargo travels in passenger aircraft and thus many delivery schedules
are tied to those of passenger service. Transportation cost for air cargo is higher than
for a other modes. For these reasons, air transport is most often suitable for high-value,
low-weight cargo or for emergency items.

Water

Waterways are provided by nature or by nature with assistance of the
government. The carrier thus has no capital cost in providing the ways but may have to
pay a fee for using the waterway.
Terminals may be provided by the government but are increasingly privately
owned. The carrier will pay a fee to use them. Thus, terminals are mainly a variable
cost. Vehicles are either owned or leased by the carrier and represent the major capital
or fixed cost to the carrier.
The main advantage of water transport is cost. Operating costs are low and,
since the ships have a relatively large capacity, the fixed costs can be absorbed over
large volumes. Ships are slow and are door-to-door only if the shipper and the
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consignee are on the waterway. Therefore, water transportation is most useful for
moving low-value, bulky cargo over relatively long distances where waterways are
available.

Pipelines

Pipelines are unique among the modes of transportation in that they move only
gas, oil and refined products on a widespread basis. Capital costs for ways and
pipelines are high and are borne by the carrier, but operating costs are very low.


13.5 LEGAL TYPES OF CARRIAGE

Carriers are legally classified as public (for hire) or private (not for hire). In the
latter , individuals or firms own or lease their vehicles and use them to move their own
goods. Public transport, on the other hand, is in the business of hauling for others for
pay. All mode of transport have public and for-hire carriers.
For hire carriers are subject to economic regulation by federal, state or
municipal governments. Economic regulation has centered on 3 areas:
- Regulation of rates,
- Control of routes and service levels,
- Control of market entry and exit.

Private carriers are not subject to economic regulation but, like public carriers,
are regulated in such matters as public safety, license fees and taxes.

For hire

A for-hire carrier may carry goods for the public as a common carrier or under
contract to a specified shipper.
Common carriers make a standing offer to serve the public. This means that
whatever products they offer to carry will be carried for anyone wanting their service.
They can carry only those commodities they are licensed to carry.
Common carriers provide the following:
- Service available to the public,
- Service to designated points or in designated areas,
- Scheduled service,
- Service of a given class of movement or commodity.

Contract carriers haul only for those with whom they have a specific formal
contract of service, not the general public. Contract carriers offer a service according
to a contractual agreement signed with a specific shipper. The contract specifies the
character of the service, performance and charges.

Private

Private carriers own or lease their equipment and operate it themselves. This
means investment in equipment, insurance and maintenance expense. A company
normally only considers operating its own fleet if the volume of transport is high
enough to justify the capital expense.
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Service capability

Service capability depends on the availability of transportation service, which
in turn depends on the control that the shipper has over the transportation agency. The
shipper must go to the marketplace to hire a common carrier and is subject to the
schedules and regulations of that carrier. Least control is exercised over common
carriers. Shippers can exercise most control over their own vehicles and have the
highest service capability with private carriage.

Other transportation agencies

There are several transportation agencies that use the various modes or
combinations of the modes. They all provide a transportation service, usually as a
common carrier. They may own the vehicles, or they may contract with carriers to
move their goods. Usually, they consolidate small shipments into large shipments to
make economic loads.


13.6 TRANSPORTATION COST ELEMENTS

There are 4 basic cost elements in transportation. Knowledge of these costs
enables a shipper to get a better price by selecting the right skipping mode:
- Line haul,
- Pickup and delivery,
- Terminal handling,
- Billing and collecting.
Goods move either directly from the shipper to the consignee or through a
terminal. In the latter, they are picked up in some vehicle suitable for short-haul local
travel. They are then delivered to a terminal where they are sorted according to
destination and loaded onto highway vehicles for travel to a destination terminal.
There they are again sorted, loaded on local delivery trucks and taken to the consignee.

C
O
N
S
I
G
N
E
E
T
E
R
M
I
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A
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T
E
R
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P
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Local Local Full load
long distance
Full load
shipments
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Line-haul costs

When goods are shipped, they are sent in a moving container that has a weight
and a volume capacity. The carrier has basic costs to move this container, which exit
whether the container is full or not. These costs vary with the distance travelled, not
the weight carried. For example, if for a given commodity, the line-haul costs is $3 per
mile and the distance is 100 miles, the total line-haul cost is $300. if the shipper sends
50,000 pounds the total line-haul is the same as if 10,000 pounds is sent. However, the
line-haul costs (LHC) per hundred weight (cwt.) is different.

LHC / cwt. = 300 / 500 (for 50,000 lb.)
= $0.60 per cwt.
LHC / cwt. = 300 / 100 (for 10,000 lb.)
= $3.00 per cwt.

Thus, the total line-haul cost varies with the cost per mile and the distance
moved. However, the line-haul cost per hundred weight varies with the cost per
mile, the distance moved and the weight moved.

The carrier has 2 limitations or capacity restrictions on how much can be
moved on any one trip: the weight limitation and the cubic volume limitation of the
vehicle. With some commodities, their density is such that the volume limitation is
reached before the weight limitation. If the shipper wants to ship more, a method of
increasing the density of the goods must be found. This is one reason that some
products are made so they nest and others are shipped in an unassembled state.

Pickup and delivery costs

Pickup and delivery costs are similar to line-haul costs except that the cost
depends more on the time spent than on the distance travelled. The carrier will charge
for each pickup and the weight picked up. If a shipper is making several shipments, it
will be less expensive if they are consolidated and picked up on one trip

Terminal handling costs

Terminal-handling costs depend on the number of times a shipment must be
loaded, handled and unloaded. If full truckloads are shipped, the goods do not need to
be handled in the terminal but can go directly to the consignee. If part loads are
shipped, they must be taken to the terminal, unloaded, sorted and loaded onto a
highway vehicle. At the destination, the goods must be unloaded , sorted and loaded
onto a local delivery vehicle.
The basic rule for reducing terminal-handling costs is to reduce handling effort
by consolidating shipments into fewer parcels.

Billing and collecting costs

Every time a shipment is made, paperwork must be done and an invoice made
out. Billing and collecting costs can be reduced by consolidating shipments and
reducing the pickup frequency.

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Total transportation costs

The total cost of transportation consists of line-haul, pickup and delivery,
terminal-handling and billing and collecting costs. To reduce shipping costs, the
shipper needs to do the following:
- Decrease line-haul costs by increasing the weight shipped;
- Decrease pickup and delivery cost by reducing the number of pickups. This
can be done by consolidating and increasing the weight per pickup;
- Decrease terminal-handling costs by decreasing the number of parcels by
consolidating shipments;
- Decrease billing and collecting costs by consolidating shipments.

For any given shipment, the line-haul costs vary with the distance shipped.
However, the other costs are fixed. The total cost for any given shipment thus has a
fixed cost and a variable cost associated with it. In the latter, the cost per mile for short
distances far exceeds that for longer distances.
The rate charged by a carrier will also vary with the commodity shipped and
will depend upon the following:
- Value. A carrier’s liability for damage will be greater the more valuable the
item;
- Density. The more dense the item, the greater the weight that can be
carried in a given vehicle;
- Perishability. Perishable goods often require special equipment and
methods of handling;
- Packaging. The method of packaging influences the risk of damage and
breakage.

In addition, carriers have 2 rate structures, one based on full loads called
truckload (TL) or carload (CL) and one based on less than truckload (LTL) and less
than carload (LCL). For any given commodity, the LTL rates can be up to 100%
higher than the TL rates. The basic reason for this differential lies in the extra pickup
and delivery, terminal-handling and billing and collection costs. Truckers, airlines and
water carriers accept less than full loads but usually the railways do not accept.


13.7 WAREHOUSING

This section is concerned with the role of warehouses in a physical distribution
system. Warehouses include plant warehouses, regional warehouses and local
warehouses. They may be owned and operated by the supplier or intermediaries such
as wholesalers, or may be public warehouses. The service functions warehouses
perform can be classified into 2 kinds:
- The general warehouse where goods are stored for long periods and where
the prime purpose is to protect goods until they are needed. There is
minimal handling, movement and relationship to transportation. It is also
the type used for inventories accumulated in anticipation or seasonal sales;
- The distribution warehouse has a dynamic purpose of movement and
mixing. Goods are received in large-volume uniform lots, stored briefly,
and then broken down into small individual orders of different items
required by the customer. The emphasis is on movement and handling
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rather than on storage. This type of warehouse is widely used in
distribution systems.
Warehouses represent an interruption in the flow of material and thus add cost
to the system. Items should be warehoused only if there is an offsetting benefit gained
from storing them.

Role of warehouses

Warehouses serve 3 important roles: transportation consolidation, product
mixing and service.

Transportation consolidation. Transportation costs can be reduced by using
warehouses. This is accomplished by consolidating small (LTL) shipments into large
(TL) shipments. Consolidation can occur in both the supply and distribution systems.
Transportation consolidation in physical distribution is sometimes called break-bulk,
which means the bulk (TL) shipments from factories to distribution centers are broken
down into small shipments going to local markets.


Product mixing. Product mixing deals with the grouping of different items
into an order and the economies that warehouses can provide in doing this. When
customers place orders, they often want a mix of products that are produced in
different locations.

SUPPLIER A
SUPPLIER B
SUPPLIER C
WAREHOUSE FACTORY
LTL
Shipments TL
Shipments
(A,B,C)
FACTORY A
FACTORY B
FACTORY C
WAREHOUSE
M
A
R
K
E
T
LTL
Shipments
TL
Shipments
PHYSICAL SUPPLY SYSTEM
PHYSICAL DISTRIBUTION SYSTEM
MANUFACTURER A
DISTRIBUTION
CENTER
CUSTOMER
Y
MANUFACTURER B
MANUFACTURER C
CUSTOMER
Y
Product B
Product A
Product C
Product
A,B,C
Product
A,B,C
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Service. Distribution centers improve customer service by providing place
utility. Goods are positioned close to markets so the markets can be serve more
quickly.

Warehousing and transportation costs

The particular shipping pattern will depend largely upon the following:
- Number of customers,
- Geographic distribution of the customers,
- Customer order size,
- Number and location of plants and distribution centers.
Suppliers have little or no control over the first 3 but do have some control
over the last. With respect to transportation, it then becomes a question of the cost of
serving customers direct from the central distribution center or from the regional
distribution center.

Market boundaries

A company can now supply customers in other locations directly from the
factory or through the distribution center. The question is to decide which locations
should be supplied from each source. The answer is the source that can service the
location at least cost.
Laid-down cost (LDC) is the delivered cost of product to a particular
geographic point. The delivered cost includes all costs of moving the goods from A to
B.
LDC = P + T x X
Where:
P = Product costs,
T = Transportation cost per mile,
X = Distance.
The product cost includes all costs in getting the product to the supply location
and storing it there (TL cost to point B, inventory cost at B,...).

Market boundary. The market boundary is the line between 2 or more
supply sources where the laid-down cost is the same. There are 2 sources of supply: A
and B. Y marks the market boundary between A and B, where the LDC from A is the
same as B. Assume the product cost at A is $100 and product cost from B is $100 plus
the TL transportation from A to B and inventory carrying costs at B ($10 per unit).
Transportation costs from either A or B are $0.40 per unit per mile:

LDC
A
= LDC
B
100 + 0.40X = 110 + 0.40 (100-X)
X = 62.5 Miles

100
Miles
X
Miles
100-X
Miles
A Y B
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Effect on transportation costs of adding more warehouses

Generally, as more distribution centers are added to the system, we can expect
the following:
- The cost of truckload shipments to the distribution centers to increase,
- The cost of LTL shipments to customers to decrease,
- The total cost of transportation to decrease.

As expected, the major savings is from the addition of the first few distribution
centers. Eventually, as more distribution are added, the saving decrease. The number
of customers served by additional distribution centers decreases and the volume that
can be shipped TL to the additional distribution centers is less than to the first ones.


13.8 PACKAGING

The basic role of packaging in any industrial organization is to carry the goods
safely through a distribution system to the customer. The package must do the
following:
- Identify the product,
- Contain and protect the product,
- Contribute to physical distribution efficiency.

For consumer products, the package may also be an important part of the
marketing program. The package serves as a means of identifying the product in a way
not possible from its outward appearance. The package must be robust enough to
protect and contain the product through all phases of distribution.

Unitization

Unitization is the consolidation of several units into large units, called unit
loads, so there is less handling. A unit load is a load made up of a number of items, or
bulky material, arranged or constrained so the mass can be picked up or moved as a
single unit too large for manual handling. Material handling costs decrease as the size
of the unit load increases. One of the most common is the pallet. Loaded with
packages, it forms a cube that is a unit load.
Thus, to get the highest cube utilization, consideration must be given to the
dimensions of the product, the carton, the pallet, the vehicle and the warehouse.


13.9 MATERIALS HANDLING

Some objectives of materials handling are as follows:
- To increase cube utilization by using the height of the building and by
reducing the need for aisle space as much as possible;
- To improve operating efficiency by reducing handling. Increasing the load
per move will result in fewer moves;
- To improve the service level by increasing the speed of response to
customer needs.

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For convenience, materials handling equipment can be grouped into 3
categories:
- Conveyors are devices that move material horizontally or vertically
between 2 fixed points. They are expensive, create a fixed route and occupy
space continuously. They are used only where there is sufficient throughput
between fixed points to justify their cost;
- Industrial trucks are vehicles powered by hand, electricity, or propane.
Industrial trucks are more flexible than conveyors in that they can move
anywhere there is a suitable surface and no obstructions. They do not
occupy space continuously. For these reasons, they are the most often-used
form of material handling in distribution centers and in manufacturing;
- Cranes and hoists can move materials vertically and horizontally to any
point within their area of operation. They use overhead space and are used
to move heavy or large items. Within their area of operation, they are very
flexible.


13.10 MULTI-WAREHOUSE SYSTEMS

We want to know what happens to the service level as more distribution
centers are added to the system. To make valid comparisons, we must freeze the sales
volume. We can then compare the costs as we add distribution centers to the system.

Transportation costs

Generally, as more distribution centers are added to a system, we expect the
following:
- The cost of TL shipments increases,
- The cost of LTL shipments decreases,
- The total cost of transportation decrease.
The major savings are made with the addition of the first distribution centers.
Eventually, as more distribution centers are added, the marginal savings decrease.

Inventory-carrying cost

The average inventory carried depends on the order quantity and the safety
stock. The total SS will be affected by the number of warehouses in the system. For
the same SKU, the standard deviation varies approximately as the square root of the
ratio of the different annual demands. Suppose that the average demand is 1000 units
and, for a service level of 90%, the safety stock is 100 units. If the 1000 units is
divided between 2 distribution centers each having a demand of 500 units, the safety
stock in each is:

SS = 100 = 71 units

Thus, with a constant sales volume, as the number of distribution centers
increases, the demand on each decreases. This causes an increase in the total safety
stock in all distribution centers.

500

1000
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Warehousing costs

The space needed depends on the amount of inventory carried. As we have
seen, as more distribution centers are added to the system, more inventory has to be
carried, which requires more space.
In addition, there will be some duplication of non-storage space such as
washrooms and offices. So as the number of distribution increases, there will be a
gradual increase in distribution center space costs.
Operating costs depend largely on the number of distribution center increases.
Operating costs depend largely on the number of units handled. Since there is no
increase in sales, the total number of units handled remains the same, as does the cost
of handling. However, the non-direct supervision and clerical costs increase.

Material handling costs

There will be a little change in materials handling costs as long as the firm can
ship units loads to the distribution center. However, if the number of distribution
centers increases to the point that some non-unitized loads are shipped, materials
handling costs increase.

Packaging costs

Per-unit packaging costs will remain the same, but since there will be more
inventory, total packaging costs will rise with inventory.

Total system cost

Figure shows graphically how the cost of transportation, warehousing,
materials handling inventory and packaging behave as distribution centers are added to
the system. Up to a point, total cost decrease and then start to increase. It is the
objective of logistics to determine this least-cost point.














System service capability

The service capability of the system must also be evaluated. One way of
assessing this is by estimating the percentage of the market served within a given
period.
Total cost
Transportation cost
Inventory cost
Warehouse cost
Materials handling cost
Packaging cost
NUMBER OF WAREHOUSES
C
O
S
T

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Number of warehouses Market reached in day (%)
1 30
2 70
3 87
10 95

As expected, the service level increases as the number of distribution centers
increases. The first distribution center is built to serve the best market, the next to
serve the second best market and so on. Let us assume that a study has been made of a
system of 1 to 10 distribution centers and the costs are as shown in figure:

Cost Number of locations
1 2 3 10
Transportation 8000 6000 5000 4500
Warehousing 500 600 700 900
Materials handling 1000 1000 1100 1400
Inventory 400 425 460 700
Packaging 100 100 100 100
Total cost $10,000 $8,125 $7,360 $7,600

A three-distribution center system would provide the least total cost. Figures
show that by moving from 3 to 10 distribution centers, the one-day service level
increases by 8%. Management must decide which system to select. The decision must
be based on adequate analysis of the choices available and a comparison of the
increase in costs and service level.


14 PRODUCTS AND PROCESSES


14.1 INTRODUCTION

The way products are designed determines the processes that are available to
make them. The product design and the process determine the quality and cost of
product. Quality and cost determine the profitability of the company.


14.2 NEED FOR NEW PRODUCTS

Products have a limited life span. A product passes through several stages,
known as the product life cycle, beginning with its introduction and ending with its
disappearance from the marketplace. The life cycle may take months or years to
complete depending on the products and the market.
SALES
PROFIT
TIME
Introduction Growth Maturity Decline
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Introduction phase. This phase is the most expensive and risky stage. To get
customer acceptance of the product the firm will usually spend heavily an advertising
and sales promotion, hoping these costs will be recovered in future sales. If the
introduction fails the firm loses money, a fact that underlines the importance of
thoroughly researching a new product before introducing it.

Growth phase. In this phase, sales of successful product increase at a rapid
rate. The increased sales volume and the lower unit cost cause profits to increase
rapidly. However, entrance of competitors into the market forces price down, possibly
reducing the firm’s sales. At this point profit are squeezed.

Maturity or saturation phase. Nearly everyone interested in the product has
sampled or owns the product and sales begin to level off. The market is saturated.
Price competition is often severe and profits start to decline.
Decline phase. Sales drop off as customers begin to lose interest in the product
or to buy improved versions from competitors. Companies will look for ways to
maintain profitability. Generally, there are 3 ways in which this can be done:
- Introduce new products,
- Improve existing products,
- Improve the methods of production.
Depending on the firm’s resources they may do these things through their own
research and development by copying competitor’s products, or by relying on
customers, or suppliers to do the research and development work for them.


14.3 PRODUCT DEVELOPMENT PRINCIPLES

There are 2 conflicting factors to be considered in establishing the range of
product to supply:
- If the product line is too narrow, customers may be lost;
- If the product line is too wide, customers may be satisfied, but operating
costs will increase because of the lack of specialization.

Sales organizations want to offer product variety to consumers. Operating, on
the other hand, would like to produce as few products as possible and make them in
long runs. Somehow the needs of sales and the economics of production must be
balanced. Usually this balance can be obtained with good programs of:
- Product simplification,
- Product standardization,
- Product specialization.

Simplification

Simplification is the process of making something easier to do or make. The
emphasis is not in cutting out products simply to reduce variety, but to remove
unnecessary products and variations.
As well as reducing the variety of parts, product design can often be simplified
to reduce operations and material costs.

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Standardization

In product design, a standard is a carefully established specification covering
the product’s material, configuration, measurements and so on. Thus, all products
made to a given specification will be alike and interchangeable.
Another aspect of standardization is the way parts fit together. If the design of
assemblies are standardized so various models or products are assembled in the same
way, then mass production is possible.

Modularization. Modularization uses standardized parts for flexibility and
variety. By standardizing one component parts, a manufacturer can make a variety of
finished goods, one of which will probably satisfy the customer.

Specialization

Specialization is concentration of effort in a particular area or occupation. In
product specialization, a firm may produce and market only one or a limited range of
similar products. With a limited range of products, productivity can be increased and
costs reduced by:
- Allowing the development of machinery and equipment specially designed
to make the limited range of products quickly and cheaply,
- Reducing the number of setups because of fewer task changes,
- Allowing labor to develop speed and dexterity because of fewer task
changes.
Specialization is sometimes called focus and can be based either on product
and market or on process.

Product and market focus. Product and market focus can be based on
characteristics such as customer grouping, demand characteristics or degree of
customization.

Process focus. Process focus is based on the similarity of process.

Focused factory. Currently there is a trend toward more specialization in
manufacturing whereby a factory specializes in a narrow product mix for a niche
market. Generally, focus factories are thought to produce more effectively and
economically than more complex factories, the reason being that repetition and
concentration in one area allows the workforce and management to gain the
advantages of specialization.
Specialization has the disadvantage of inflexibility.

In summary, simplification is the elimination of the superfluous and is the first
step toward standardization. Standardization is establishing a range of standars that
will met most needs. Finally, specialization is concentration in a particular area and
therefore implies repetition, which cannot be arrived at without standard products or
procedures.
Reducing part variety will create savings in raw material, work-in-process and
finished goods inventory. It will also allow long production runs, improve quality
because there are fewer parts and improve opportunities for automation and
mechanization. Such a program contributes significantly to reducing cost.
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14.4 PRODUCT SPECIFICATION AND DESIGN

Products must be designed to be:
- Functional,
- Capable of low-cost processing.

Functional. Product design engineers design the product to meet the market
specifications. Engineers establish the dimensions, configuration and specifications so
the item, if properly manufactured, will perform as expected in the marketplace.

Low-cost processing. The product must be designed so it can be made at least
cost. Usually, many different designs will satisfy functional and appearance
specifications. The job then is to pick the design that will minimize manufacturing
cost. Poor design can add cost to processing in several ways:
- The product and its components may be designed to make using the most
economical methods impossible;
- Parts may be designed so excessive material has to be removed;
- Parts may be designed so operations are difficult;
- Lack of standardized components may mean batches of work have to be
small;
- Product design can influence indirect costs such as producing planning,
purchasing, inventory management and inspection. The effort required to
plan and control the flow of material and the operations will be greater, and
more costly, in the case of using non-standard parts.

Simultaneous engineering

To design products for low-cost manufacture requires close coordination
between product design and process design, which is called simultaneous
engineering. Often a team is made up of people from product design, process design,
quality assurance, production planning and inventory control, purchasing, marketing,
field service and others who contribute to, or are affected by, the delivery the product
to customer. This group works together to develop the product design so it meets the
needs of the customer and can be made and delivered to the customer at low cost.
There are several advantages to this approach:
- Time to market is reduced. The organization that gets its products to market
before the competition gains a strong competitive advantage;
- Cost is reduced. Involving all stakeholders early in the process means less
need for costly design changes later;
- Better quality. Because the product is designed for ease of manufacture,
and ease of maintaining quality in manufacture, the number of rejects will
be reduced. Because quality is improved, the need for after-sales services is
reduced;
- Lower total system cost. Because all groups affected by the product design
are consulted, all concerns are addressed.


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14.5 PROCESS DESIGN

Operation management is responsible for producing and services the customer
wants, when wanted, with the required quality, at minimum cost and maximum
effectiveness and productivity. Processes are the means by which operations
management reaches these objectives.
A process is a method of doing something, generally involving a number of
steps or operations. Process design is the developing and designing of the steps.

Nesting. Another way of looking at the hierarchy of processes is the concept of
nesting. Small processes are linked to form a larger process. Level 0 shows a series of
steps, each of which may have its own series of steps.




14.6 FACTORS INFLUENCING PROCESS DESIGN

5 basic factors must be considered when designing a process.

Product design and quality level. The product’s design determines the basic
processes needed to convert the raw materials and components into the finished
product. The process designer can usually select from a variety of different machines
or operations to do the job. The type of machine or operation selected will depend
upon the quantity to be produced, the available equipment and the quality level
needed. The process designer must be aware of the capabilities of machines and
processes and select those that will meet the quality level at least cost.

Demand patterns and flexibility needed. If there is variation in demand for a
product, the process must be flexible enough to respond to these changes quickly.
Flexible processes require flexible equipment and personnel capable of doing a
number of different jobs.

Quantity/capacity considerations. Both product and process design depend
on the quantity needed. The quantity needed and the process determine the capacity
needed.

LEVEL 0
LEVEL 1
Classes of activity
Page 124.
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Customer involvement. Chapter 1 discussed 4 manufacturing strategies.
Process design will depend on which strategy is chosen.

Make or buy decision. A manufacturer has the alternative of making parts in-
house or of buying them from an outside supplier. A decision has to be made about
which items to make and which to buy. While cost is the main determinant, factors
such as the following are usually considered:
Reasons to make in-house:
- Can produce for less cost than a supplier,
- To utilize existing equipment to fullest extent,
- To keep confidential processes within control of the firm,
- To maintain quality,
- To maintain workforce.
Reasons to buy out:
- Requires less capital investment,
- Uses specialized expertise of suppliers,
- Allows the firm to concentrate on its own area of specialization,
- Provides known and competitive prices.


14.7 PROCESSING EQUIPMENT

Processing equipment can be classified in several ways, but for our purposes
one of the most convenient is the degree of specialization of machinery and
equipment.

General-purpose machinery. General-purpose machinery can be used for a
variety of operations can do work on a variety of products within its machine
classification.
Special-purpose machinery. Special-purpose machinery is designed to
perform specific operations on one work piece or a small number of similar work
pieces.

General-purpose machinery is generally less costly than special-purpose
machinery. However, its run time is slow and, because it is operated by humans, the
quality level tends to be lower than when using special-purpose machinery. Special-
purpose machinery are less flexible but can produce parts much quicker.


14.8 PROCESS SYSTEMS

Based on material flow, processes can be organized in 3 ways:
- Flow,
- Intermittent,
- Project (fixed position).

The system used will depend on the demand for the item, range of products and
the ease or difficulty of moving material. All 3 systems can be used to make discrete
units (e.g. automobiles, textbooks) or non-discrete products (e.g. gasoline, paint).

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Flow processes

Workstations needed to make the product, or family of similar products, are
grouped together in one department and are laid out in sequence needed to make the
product. In flow processing, work flows from one workstation to another at a nearly
constant rate and with no delays. There is some form of mechanical method of moving
goods between workstations. If the units are discrete, flow manufacturing is called
repetitive manufacturing. If not, it is called continuous manufacturing. Flow process
layout is sometimes called product layout because the system is set up for a limited
range of similar products.
Demand for the family of products has to be large enough to justify setting up
the line economically. If sufficient demand exists, flow systems are extremely efficient
for several reasons:
- Workstations are designed to produce a limited range of similar products,
so machinery and tooling can be specialized;
- Because material flows from one workstation to the next, there is a very
little build-up of WIP inventory;
- Because of the flow system and the low WIP inventory, lead times are
short;
- In most cases, flow system substitute capital for labor and standardize what
labor there is into routine tasks.
Because it is so cost-effective, this system of processing should be used
wherever and to whatever extent it can be.

Intermittent processes

In intermittent manufacturing, goods are not made continuously but are
made at intervals in lots. Workstations must be capable of processing many different
parts. Usually, workstations are organized into departments based on similar types of
skills or equipment. Work moves only to those workstations needed to make the
product and skips the rest. This result in a jumbled flow pattern.
Intermittent processes are flexible. They can change from one part or task to
another more quickly than can flow processes.
Control of work flow is managed through individual work orders for each lot
being made. Because of this and the jumbled pattern of work flow, manufacturing
planning and control problems are severe.

Provided the volume of work exists to justify it, flow manufacturing is less
costly than intermittent manufacturing. There are several reasons for this:
- Setup cost are low;
- Since work centers are designed for specific products, run costs are low;
- Because products move continuously from one workstation to the next,
WIP inventory will be low;
- Costs associated with controlling production are low because work flows
through the process in a fixed sequence.
But the volume of specific parts must be enough to use the capacity of the line
and justify the capital cost.

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Project (fixed position) processes

Project, or fixed position manufacturing is mostly used for large complex
projects such as locomotives ships or buildings. Project manufacturing has little
advantage except it avoids the very high cost of moving the product from one
workstation to another.

There are many variations and combinations of these 3 basic types of
processes. Companies will try to find the best combination to their particular products.


14.9 SELECTING THE PROCESS

Generally, the larger the volume to be produced, the greater the opportunity to
use special-purpose processes. Often the capital cost for such machinery or for special
tools or fixtures is high. Capital costs are called fixed costs and the production, or run
costs are called variable costs.

Fixed costs. Costs that do not vary with the volume being produced. Purchase
costs of machinery and tools and setup costs are considered fixed costs.

Variable costs. Costs that vary with the quantity produced. Direct labor (labor
used directly in the making of the product) and direct material (material used directly
in the product) are the major variable costs.

Let: FC = Fixed cost,
VC = Variable cost per unit,
x = Number of units to be produced,
TC = Total cost,
UC = Unit (average) cost per unit,

Total cost = Fixed cost + (Variable cost per unit)(Number of units produced)
TC = FC + VCx

Unit cost = (Total cost) / (Number of units produced) = TC / x

A company has 2 methods for making an item:

Method A Method B
Fixed cost 2,000 20,000
Variable unit cost 3 1
Total cost 2,000 + 3x 20,000 + 1x
Unit (average) cost (2,000 + 3x) / x (20,000 + 1x) / x

While the total cost for both methods increases as more units are produced, the
total cost for method A increases faster until, at some quantity, the total cost for
method B becomes less than for method A.
Similarly, the unit cost for both method decreases as more units are produced.


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Cost equalization point (CEP)

Knowing the quantity beyond which the cost of using method B becomes less
than for method A enables us to decide easily which process to use to minimize the
total cost. This quantity is called the cost equalization point (CEP) and is the volume
for which the total cost (and unit cost) of using one method is the same as another.
From the preceding calculations we can say:
- If the volume is less than the CEP, the method with the lower fixed cost
will cost less;
- If the volume is greater then the CEP, the method with the greater fixed
cost will cost less.

Variable costs can be reduced by substituting machinery and equipment for
direct labor. This increases the fixed cost and decreases the variable costs. But to
justify this economically the volume must be high enough to reduce the total or unit
cost of production.

Increasing volume

The volume of components can be increased without increasing sales by a
program of simplification and standardization. If a subassembly or component part can
be standardized for use in more than one final product, then the volume of the
subassembly or part is increased without an increase in the total sales volume. Thus,
more specialized and faster-running processes can be justified and the cost of
operations reduced.


14.10 CONTINUOUS PROCESS IMPROVEMENT (CPI)

Continuous process improvement consists of a logical set of steps and
techniques used to analyze processes and to improve them.

Improving productivity. CPI is a low-cost method of designing or improving
work methods to maximize productivity. The aim is to increase productivity by better
use of existing resources. CPI is concerned with removing work content, not with
spending money on better and faster machines. CPI aims to do the right things an to do
them efficiently.

VOLUME
C
O
S
T
METHOD A
METHOD B
COST EQUALIZATION
POINT
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People involvement. Process improvement is not solely the responsibility of
industrial engineers. Everyone in the workforce must be given the opportunity to
improve the processes they work with. Techniques that help to analyze and improve
work are not complicated and can be learned. Indeed, the idea of continuous
improvement is based on the participation of operators and improvement in methods
requiring relatively little capital.

Teams. One of the features of CPI is team involvement. The members of the
team should be all those who are involved with the process. Teams are successful
because of the emphasis placed on people.
CPI can still effectively carried out by the individuals.

The 6 steps in CPI

The CPI is based on the scientific method. The 6 steps are as follows:
- Select the process to be studied,
- Record the existing method to collect the necessary data in a useful form,
- Analyze the recorded data to generated alternative improved methods,
- Evaluates the alternatives to develop the best method of doing the work,
- Install the method as standard practise by training the operator,
- Maintain the new method.

Select the process

This depends on the ability to recognize situations that have good potential for
improvement.

Observe. Any situation can be improved but some have better potential than
others. Indicators that show areas most needing improvement include:
- High scrap, reprocessing, rework and repair costs;
- Backtracking of material flow caused by poor plant layout;
- Bottlenecks;
- Excessive overtime;
- Excessive manual handling of materials, both from workplace to workplace
and at the workplace;
- Employee grievances without true assignable causes.

Select. The purpose of CPI is to improve productivity, to reduce operating,
product or service costs. In selecting jobs or operations for method improvement, there
are 2 major considerations: economic and human.

Economic considerations. The cost of the improvement must be justified. The
cost of making the study and installing the improvement must be recovered from the
savings in a reasonable time. 1 to 2 years is a commonly used period.

The human factor. The resistance to change, by both management and
worker, must always be remembered. Working situations characterized by high
fatigue, accident hazards, absenteeism and dirty and unpleasant conditions should be
identified and improved. Sometimes it is difficult to give specific economic
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justification for such improvements, but the intangible benefits are extensive and
should weigh heavily in selecting studies.

Pareto diagrams. Pareto analysis can be used to select problems with the
greatest economic impact. It separates the vital few from the trivial many. The steps in
making a Pareto analysis are as follows:
- Determine the method of classifying the data: by problem, cause,
nonconformity and so forth;
- Select the unit of measure;
- Collect data for an appropriate time interval, usually long enough to include
all likely conditions;
- Summarize the data by ranking the items in descending order according to
the select unit of measure;
- Calculate the total cost;
- Calculate the percentage for each item;
- Construct a bar graph showing the percentage for each item and a line
graph of the cumulative percentage.
Note that Pareto analysis does not report what the problems are, only where
they seems to occur.

Cause-and-effect diagram. Sometimes called fishbone or an Ishikawa
diagram, the cause-and-effect diagram is a very useful tool for identifying root
causes. It is best used by a group or a team working together. The steps in developing
a fishbone diagram are:
- Identify the problem to be studied and state it in a few words;
- Generate some ideas about the main causes of the problem. Usually all
probable root causes can be classified into 6 categories: materials,
machines, people, methods, measurement and environment;
- Brainstorm all possible causes for each of the main causes;
- Once all the causes have been listed, try to identify the most likely root
causes and work on these.

Record

To be able to understand what to record, it is necessary to define the process
being studied. The following must be determined to properly define the process:
- The process boundaries. Starting and ending points form the boundaries of
the process;
- Process flow. This is a description of what happens between the starting
and ending points;
- Process inputs and outputs. The things, that are changed by processes, are
called inputs and they may be physical or information. Outputs are the
result of what goes on in the process;
- Components are the resources used in changing inputs to outputs. They are
composed of people, methods and equipment;
- Customer. Processes exist to serve customers and customers ultimately
define what a process is supposed to do;
- Suppliers are those who provide the inputs. They may be internal to the
organization or external;
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- Environment. The process is controlled or regulated by external and
internal factors. The external factors are beyond control and include
customers’ acceptance of the process output, competitors and government
regulation. Internal factors are in the organization and can be controlled.

The record of the present method also provides the basis for both the critical
examination and the development of an improved method.

Classes of activity. All activities can generally be classified into 1 of 6 types.
There are 6 universally used symbols for these activities.

Operation. The main step in process, method or procedure.
Usually the part, material or product is modified during the
operation;

Inspection. An inspection for quality or a check for quantity;

Movement. The movement of workers, material, equipment or
information from place to place;

Storage. A controlled storage from which material is issued or
received;

Delay. A delay in the sequence of events;

Decision. Where a decision is made.

Following are descriptions of some of the various charting techniques.

Operations process charts. Operations process charts record in sequence
only the main operation and inspections. They are useful for preliminary investigation
and give a bird’s-eye view of the process. The description, and sometimes the time, for
each operation are also shown. An operation process chart would be used to record
product movement.
Process flow diagram. A process flow diagram shows graphically and
sequentially the various steps, events and operations that make up a process. It
provides a picture, in the form of a diagram, of what actually happens when a product
is made or a service performed.

Analyze

Examination and analyze are the key steps in CPI. This step involves analyzing
every aspect of the present method and evaluating all proposed possible methods.

Find the root cause. Often symptoms are what we see and it is difficult to
trace back to the root cause. To find the root causes you must have a questioning
attitude (what, why, when, how, where and who).
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3 approaches can help in examining:
- A questioning attitude. This implies an open mind, examining the facts as
they are, not as they seem, avoiding preconceived ideas and avoiding hasty
judgements;
- Examining the total process to define what is accomplished, how and why.
The answers will determine the effectiveness of the total process;
- Examining the parts of the process. Activities can be divided into 2 major
categories: those in which something is happening to the product (worked
on, inspected or moved) and those in which nothing constructive is
happening to the product (delay or storage). In the first category, value is
added only when the part is being worked on. Setup, put away and move
add cost to the product but do not increase its value. The goal is to
maximize the productivity of these operations.

Develop

When developing possible solutions, there are 4 approaches to take to help
develop a better method:
- Eliminate all unnecessary work;
- Combine operations wherever possible. Thus materials handling will be
reduced, space saved and the throughput time reduced. This is a major
thrust of JIT manufacturing;
- Rearrange the sequence of operations for more effective results. If
sequences are changed, then possibly they can be combined;
- Simplify wherever possible by making the necessary operations less
complex. If the questioning attitude is used, then complexity should be
reduced.

Principles of motion economy. There are several principles of motion
economy, among which are the following:
- Locate materials, tools, and workplace within normal working areas and
pre-position tools and materials;
- Locate the work done most frequently in the normal working areas and
everything else within the maximum grasp areas;
- Arrange work so motions of hands, arms, legs and so on are balanced by
being made simultaneously, in opposite directions, and over symmetrical
paths. Both hands should be working together and should start and finish at
the same time. The end of one cycle should be located near the start of the
next cycle;
- Conditions contributing to operator fatigue must be reduced to a minimum.
Provide good lightning, keep tools and materials within maximum working
areas, provide for alternate sitting and standing at work and design
workplaces of proper height to eliminate stooping.

Human and environmental factors. These include safety, comfort,
cleanliness and personal care; so provision must be made for lightning, ventilation and
heating, noise reduction, seating and stimulation.
Methods improvement is based on the concepts of scientific management. Job
design is an attempt to provide more satisfying meaningful jobs and to use the
worker’s mental and interpersonal skills. These improvements include the following:
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- Job enlargement expands a worker’s job by clustering similar or related
tasks into one job. This is called horizontal enlargement;
- Job enrichment adds more meaningful, satisfying and fulfilling tasks. The
job not only includes production operations but many setup, scheduling,
maintenance and control responsibilities;
- Job rotation trains workers to do several jobs so they can be moved from
one job to another. This is called cross training.
All these factors help to produce a more motivated and flexible workforce.

Install

So far, the work done by the analyst has been planning. Now the plans must be
put into action by installing the new method. In planning the installation, consideration
must be given to the best time to install, the method of installing and the people
involved. Then the analyst needs to be sure that equipment, tooling, information and
the people are all available. At installation time, a dry run will show whether all
equipment and tooling are working properly.
Training the operator is the most important part of installation. If the operator
has been involved in designing the method change, this should not be difficult. The
worker will be familiar and comfortable with the change and will probably feel some
sense of ownership.

Learning curve. Over time, as the operator does the task repetitively, speed
will increase and errors decrease. This process is known as the learning curve.
Depending on the task, a worker may progress through the learning curve in a few
minutes or, for high-skill jobs, several months or years.

Maintain

Maintaining is a follow-up activity that has 2 parts. The first is to be sure that
the new method is being done as it should be. This is most critical for the first few
days and close supervision may be necessary. The second is to evaluate the change to
be sure that the planned benefits are accomplished. If not, the method must be
changed.


15 JUST-IN-TIME MANUFACTURING


15.1 INTRODUCTION

Just-in-time manufacturing (JIT) is a philosophy that relates to the way a
manufacturing company organizes and operates its business. It is the very skillful
application of existing industrial and manufacturing engineering principles.


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15.2 JUST-IN-TIME PHILOSOPHY

JIT is defined in many ways, but the most popular is the elimination of all
waste and continuous improvement of productivity. Waste means anything other than
the minimum amount of equipment, parts, space, material and workers’ time
absolutely necessary to add value to the product. The long-term result of eliminating
waste is a cost-efficient, quality-oriented, fast-response organization that is responsive
to customer needs.

Adding value

Value to the user is having the right parts and quantities at the right time and
place. Value satisfies the actual and perceived needs of the customer and does it at a
price the customer can afford and considers reasonable. Another word for this is
quality. Quality is meeting and exceeding customers’ expectations. If any part of the
chain does not add value for the customer, there is waste.

Adding value to a product does not mean adding cost. Many activities increase
cost without adding value and, as much as possible, these activities should be
eliminated.


15.3 WASTE

Anything in the product cycle that does not add value to the product is waste.

Waste caused by poor product specification and design

Management is responsible for establishing policies for the market segments
the company wishes to serve and for deciding how broad or specialized the product
line is to be. These policies affect the costs of manufacturing. In addition, the greater
the diversity of products, the more complex the manufacturing process becomes and
the more difficult it is to plan and control.

Component standardization. Parts standardization has many advantages in
manufacturing. It creates larger quantities of specific components that allow longer
production runs. This, in turn, makes it more economical to use more specialized
machinery, fixtures, and assembly methods. Standardization reduces the planning and
control effort needed, the number of items required and the inventory that has to be
carried.
The product should be designed so it can be made by the most productive
process with the smallest number of operations, motions and parts includes all of the
features that are important to the customer.
MARKETPLACE
(CUSTOMER)
MARKET
RESEARCH
PRODUCT
DESIGN
MANUFACTURING
ENGINEERING
MANUFACTURING
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Waste caused in manufacturing

First manufacturing engineering must design a system capable of making the
product. They do so by selecting the manufacturing steps, machinery and equipment,
and by designing the plant layout and work methods. Manufacturing must then plan
and control the operation to produce the goods. This involves manufacturing planning
and control, quality management, maintenance and labor relations.
Toyota has identified 7 important sources of waste in manufacturing. The first
4 relate to the design of the manufacturing system and the last 3 to the operation and
management of the system:
- The process. The best process is one that has the capability to consistently
make the product with an absolute minimum of scrap, in the quantities
needed and with the least cost added;
- Methods. Waste is added if the methods of performing tasks by the
operators caused wasted movement, time or effort;
- Movement. Moving and storing components adds cost but not value;
- Product defects. Defects interrupt the smooth flow of work. If the scrap is
not identified, the next workstation receiving it will waste time trying to
use the defective parts or waiting for good material;
- Waiting time. There are 2 kinds of waiting time: that of the operator and
that of material. If the operator has no productive work to do or there are
delays in getting material or instructions, there will be waste;
- Overproduction. Overproduction is producing products beyond these
needed for immediate use. When this occurs, raw materials and labor are
consumed for parts not needed, resulting in unnecessary inventories.
Because of the extra inventory and WIP, overproduction adds confusion,
tends to bury problems in inventory and often leads to producing
components that are not needed instead of those that are. Machines and
operators do not always need to be fully utilized;
- Inventory. Inventory costs money to carry and excess inventory adds extra
cost to the product.

Let us look at the role inventory plays in each of these steps. If there are large
quantities of inventory to work through the system, it takes longer and is more costly
before the engineering changes reach the marketplace. Lower inventories improve
quality. If the batch size had been 100 instead of 1000, it would have moved through
the system more quickly and been detected earlier.
Also if WIP inventory is reduced, less space is needed in manufacturing,
resulting in cost savings.
If batch size is reduced, the queue and lead time will be reduced. Forecast are
more accurate for nearer periods of time. Reducing lead time improves forecast
accuracy and provides better order promising and due-date performance.

Poke-yoke (fail safe)

Poke-yoke implies the concept of removing faults at the first instance and
making a process or product “foolproof”. Shingo argued that statistical quality control
does not prevent defects. He differentiated between errors and defects; errors will
always be made, but defects can be prevented. Corrective action should take place
immediately after a mistake is made, which implies 100% inspection as soon as an
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action occurs. This action can take 1 of 3 forms: successive check, self-check and
source inspection. Successive check inspection is done by the next person, in the
process, who passes the information back to the worker who just performed the
operation who can then make any needed repair. Self-check is done by the worker and
can be used on all items where a sensory perception is sufficient. Source inspection
also is done by the individual worker who, instead of checking for defects, checks for
errors that will cause defects.
Poke-yoke tries to change either the process or its resources, thus eliminating
the need to rely on human experience and knowledge. Examples include the
following:
- Use colour-coded parts,
- Put a template over an assembled component to show operators where
specific parts go,
- Use counters to tell an operator how many operations have been performed,
- Have one prong larger that the other so the electric plug will fit only one
way.


15.4 JUST-IN-TIME ENVIRONMENT

Many elements are characteristic of a JIT environment. These can be grouped
under the following headings:
- Flow manufacturing,
- Process flexibility,
- Total quality management,
- Total productive maintenance,
- Uninterrupted flow,
- Continuous process improvement,
- Supplier partnerships,
- Total employee involvement.

Flow manufacturing

Repetitive manufacturing is the production of discrete units on a flow basis.
Work flows from one workstation to the next at a relatively constant rate and often
with some materials handling system to move the product. Because work centers are
arranged in the sequence needed to make the product, the system is not suitable for
making a variety of different products. Therefore, the demand for the family of
products must be large enough to justify economically setting up the line. Flow
systems are usually very cost effective.

Work cells. Companies with this kind of product line usually organize their
production on a functional basis by grouping together similar or identical operations.
This type of production produces long queues, high WIP inventory, long lead times
and considerable materials handling.
Usually this kind of layout can be improved. This can be done by grouping
products together into product families. Products will be in the same family if they use
common work flow or routing, materials, tooling, setup procedures and cycle times.
Workstations can then be set up in miniature flow lines or work cells.
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Parts can now pass one by one , or in very small lots, from one workstation to
the next. This has several benefits:
- Queue and lead times going through the cell are reduced drastically;
- Production activity control and scheduling are simplified. The cell has only
1 work center to control as opposed to 5 in conventional system;
- Floor space needed is reduced;
- Feedback to preceding operations is immediate. If there is a quality
problem, it will be found out immediately.
For work cells to be really effective, product design and process design must
work together so parts are designed for manufacture in work cells. Component
standardization becomes even more important. Work cells are sometimes called
cellular manufacturing.

Process flexibility

Process flexibility is desirable so the company can react swiftly to changes in
the volume and mix of their products. To achieve this, operators and machinery must
be flexible and the system must be able to be changed over quickly from one product
to another.

Machine flexibility. To achieve machine flexibility, it often makes more
sense to have 2 relatively inexpensive general-purpose machines than 1 large,
expensive special-purpose piece of equipment. Smaller general-purpose machines can
be adapted to particular jobs with appropriate tooling. Having 2 instead of one makes
it easier to dedicate one to a work cell. Ideally, the machinery should be low-cost and
movable.

Quick changeover. Quick changeover requires short setup times. Short setup
times also have the following advantages:
- Reduced economic-order quantity. The economic lot size depends on the
setup cost. Reductions in setup of even greater magnitude are possible. The
general opinion is that setup can be cut 50% by organizing the work and
having the right tools and fixtures available when needed. This is
accomplished by organizing the preparation, streamlining the setup and
eliminating adjustments;
- Reduce queue and manufacturing lead time. Reducing setup time reduces
the order quantity and queue and lead times;
- Reduce WIP inventory. If the order quantity is reduced, the WIP is
reduced. This free up more space, allowing work centers to be moved
closer together, thus reducing handling costs and promoting the creation of
work cells;
- Improved quality. When order quantities are small, defects have less time
to be buried. Because they are more quickly and easily exposed, their cause
will more likely be detected and corrected;
- Improved process and material flow. Inventory acts as buffer, burying
problems in processes and in scheduling. Reducing inventory reduces this
buffer and exposes problems in the production process and in the materials
control system. This gives an opportunity to correct the problems and
improve the process.

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Operator flexibility. To achieve operator flexibility people should not only
be trained in their own jobs, but should also be cross-trained in other skills and in
problem-solving techniques.

Total quality management

Total quality management is the subject of chapter 16. this section will focus
on quality from the point of view of manufacturing.
Quality is important for 2 reasons. If quality is not present in what is supplied
to the customer and the product is defective, the customer will be dissatisfied. If a
process products scrap, it creates disrupted schedules that delay supplying the
customer, increases inventory or causes shortages, waste time and effort on work
centers and increases the cost of the product.
Quality at any work center should meet or exceed the expectations ot the next
step in the process. For manufacturing, quality does not mean inspecting the product to
segregate good from bad parts. Manufacturing must ensure that the process is capable
of producing the required quality consistently and with as close to 0 defect as possible.
Daily monitoring can best be done by the operator. If defects are discovered, the
process should be stopped and the cause of the defects corrected.

Quality at the source. Quality at the source means doing it right the first
time and, if something does go wrong, stopping the process and fixing it. People
become their own inspectors, personally responsible for the quality of what they
produce.

Total productive maintenance

Unfortunately, breakdowns occur only when a machine is in operation,
resulting in disrupted schedules, excess inventory and delayed deliveries. For a
process to continue to produce the required quality, machinery must be maintained in
excellent condition. This can best be achieved through a program of preventive
maintenance. Preventive maintenance starts with daily inspections, lubrication and
cleanup. Since operators usually understand how their equipment should feel better
than anyone else, it makes more sense to have them handle this type of regular
maintenance.
Total productive maintenance takes the ideas of total preventive maintenance
one step further. Total productive maintenance is preventive maintenance plus
continuing effort to adapt, modify and refine equipment to increase flexibility, reduce
material handling and promote continuous flow.

Uninterrupted flow

Ideally, material should flow smoothly from one operation to the next with no
delays. The concept should be the goal in any manufacturing environment. Several
conditions are needed to achieve uninterrupted flow of materials: uniform plant
loading, a pull system, valid schedules and linearity.

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Uniform plant loading. Uniform plant loading means that the work done at
each workstation should take about the same time. In repetitive manufacturing, this is
called balancing the line. The result will be no bottlenecks and no buildup of WIP
inventory.

Pull system. The pull system starts at the end of the line and pulls product
from the preceding operation as needed. The preceding operation does not produce
anything unless a signal is sent from the following operation to do so. The system for
signaling demand depends on the physical layout and conditions in the plant. The most
well-known system is the Kanban system. The details vary, but it is basically a two-
bin, fixed-order-quantity, order-point system. A small inventory of parts is held at the
user operation, for example, 2 bins of parts. When one bin is used up, it is sent back to
the supplier operation and is the signal for the supplier operation to make a container
of parts. The bins are a standard size and hold a fixed number of parts. This system
also makes the counting and control of WIP inventory much easier.

Valid schedules. There should be a well-planned valid schedule. The schedule
sets the flow of materials coming into the factory and the flow of work through
manufacturing. To maintain an even flow, the schedule must be level. The same
amount should be produced each day. Furthermore, the mix of products should be the
same each day.
Suppose a company makes a line of dog clippers composed of 3 models. The
demand for each is 500, 600 and 400 per week, respectively, and the capacity of the
assembly line is 1500 per week. The company can develop the schedule shown in
figure:
Week
On
hand
1 2 3
Economy 0 1500
Standard 600 1500 300
Deluxe 800 1200
Total 1400 1500 1500 1500

This will satisfy demand and will be level based on capacity. However,
inventory will build up and, if there is no safety stock, a variation in demand will
create a shortage. For example, if there is a surge in demand for deluxe in week 1,
none may be available for sale in week 2.
Alternate schedule:
Week
On
hand
1 2 3
Economy 0 500 500 500
Standard 600 600 600 600
Deluxe 800 400 400 400
Total 1400 1500 1500 1500

With this schedule, inventory is reduced and the ability to respond to changes
in model demand increases. The number of setups increases, but this is not a problem
if setup times are small. The idea can be carried further by making some of each
model each day. If demand shifts between models, the assembly line can respond
daily. This is called mixed-model scheduling. The scheduled is leveled, not only for
capacity, but also for material.

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Linearity. The emphasis in JIT is on achieving the plan – no more, no less.
This concept is called linearity and is usually reached by scheduling to less than full
capacity. If there are problems during the shift, there is extra time so the scheduled can
be maintained. If there is time left over after the units are produced, it can be spent on
jobs such as cleanup, lubricating machinery, getting ready for the next shift or solving
problems.

Continuous process improvement

This topic is an element in both JIT and TQM and is discussed in chapter 14.
elimination of waste depends on improving processes continuously.

Supplier partnerships

If good schedules are to be maintained and the company is to develop a JIT
environment, it is vital to have good, reliable suppliers. They establish the flow of
materials into the factory.

Partnering. Partnering implies a long-term commitment between 2 or more
organizations to achieve specific goals. The relationship with them should be one of
mutual trust and cooperation. There are 3 key factors in partnering:
- Long-term commitment. This is necessary to achieve the benefits of
partnering. It takes time to solve problems, improve processes and build the
relationship need;
- Trust. Trust is needed to eliminate an adversarial relationship. In many
cases the parties have access to each other’s business plans and technical
information;
- Shared vision. All partners must understand the need to satisfy the
customer. Goals and objectives should be shared so that there is a common
direction.
If properly done, partnering should be a win-win situation. The benefits to the
buyer include the following:
- The ability to supply the quality needed all the time so there will be no
need for inbound inspection. This implies that the supplier will have, or
develop, an excellent process quality improvement program;
- The ability to make frequent deliveries on a JIT basis. This implies that the
supplier becomes a JIT manufacturer;
- The ability to work with the buyer to improve performance, quality and
cost. Suppliers need to have that assurance so they can plan their capacity
and make the necessary commitment to a single customer.

In return, the supplier has the following benefits:
- A greater share of the business with long-term security,
- Ability to plan more effectively,
- More competitive as a JIT supplier.

Supplier selection. The factors to be considered when selecting suppliers were
technical ability, manufacturing ability, reliability, after-sales service and supplier
location. In a partnership there are other considerations based on the partnership
relationship. They include the following:
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- The supplier has a stable management system and is sincere in
implementing the partnership agreement,
- There is no danger of the supplier breaching the organization’s secrets,
- The supplier has an effective quality system,
- The supplier shares the vision of customer satisfaction and delighting the
customer.

Supplier certification. Once the supplier is selected, the next step is a
certification process that begins after the supplier has started to ship the product.
Organization can set up their own criteria for supplier certification. This emphasizes
the absence of defects both in product and non-product categories and a good
documentation system, such as the ISO 9000 system.

Total employee involvement

A successful JIT environment can be achieved only with the cooperation and
involvement of everyone in the organization.
Instead of being receivers of orders, operators must take responsibility for
improving processes, controlling equipment, correcting deviations and becoming
vehicles for continuous improvement. Their jobs include not only direct labor but also
a variety of traditionally indirect jobs such as preventive maintenance, some setup,
data recording and problem solving.
The role of management must change. Traditionally, management has been
responsible for planning, organizing and supervising operations. Many of their
traditional duties are now done by line workers. Managers and supervisors must
become coaches and trainers, develop the capability of employees and provide
coordination and leadership for improvements.


15.5 MANUFACTURING PLANNING AND CONTROL IN A JIT
ENVIRONMENT

Manufacturing planning and control is governed by, and must work with, the
manufacturing environment. Figure shows the relationship:

JIT MANUFACTURING
MANUFACTURING
PLANNING AND CONTROL
PROCESS DESIGN
Forecasting
Master Planning
Material Requirements Planning
Capacity Management
Production Activity Control
Purchasing
Flow Manufacturing
Process flexibility
Total Quality Management
Uninterrupted flow
Total Employee Involvement
Supplier Partnerships
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This section will study the effect a JIT environment has on manufacturing
planning and control.
The complexity of the manufacturing process, the number of finished items and
parts, the levels in the bill of material and the lead times have made the planning and
control problems either simple or complex. If anything can be done to simplify these
factors, the planning and control system will be simpler.
JIT process is not primarily a planning and control system. It is a philosophy
and a set of techniques for designing and operating a manufacturing plant. Planning
and control are still needed in JIT manufacturing.

Forecasting

The major effect that JIT has on forecasting is shortened lead time. If lead
times are short enough that production rates can be matches to sales rates, forecasting
for the MPS become less important.

Production planning

The JIT process has the potential for reducing long-lead-time purchase, but
more importantly, it provides an environment in which the supplier and buyer can
work together to plan the flow of material.

Master production scheduling

Several scheduling factors are influenced by JIT manufacturing:
- MPS tries to level capacity and JIT tries to level the schedule based on
capacity and material flow;
- The shorter lead times reduce time fences and make the MPS more
responsive to customer demand. Whether the company builds to a seasonal
demand or to satisfy promotion, a forecast is still necessary. Planning
horizons can also be reduced;
- The JIT system requires a stable schedule to operate. This principle is
supported by using time fences. If lead times can be reduced through JIT
practises, the time fences can be reduced;
- Traditionally, weekly time buckets are used. Because of reduced lead times
and schedule stability, it is possible to use daily buckets in JIT
environment.

Material requirements planning

MRP plans the material flow based on the bill of material, lead times and
available inventory. JIT practises will modify this approach in several ways:
- The MRP time buckets are usually one week. As lead times are reduced
and the flow of material improved, these can be reduced to daily buckets;
- In a pure JIT environment, there is no inventory on hand and the order
quantity logic is to make exactly what is needed. Therefore, there is no
netting required. If the lead times are short enough, component production
occurs in the same time bucket as the gross requirement and no offsetting is
required;
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- Bills of material can frequently be flattened in a JIT environment. With the
use of work cells and the elimination of many inventory transactions, some
levels in bill of material become unnecessary.

Both MRP and JIT are based on establishing a material flow. In a repetitive
manufacturing environment, this is set by the model mix and the flow rate. However,
many production situations do not lend themselves to level scheduling and the pull
system. Some examples are as follows:
- Where the demand pattern is unstable,
- Where custom engineering is required,
- Where quality is unpredictable,
- Where volumes are low and occur infrequently.

Capacity management

Capacity control focuses on adjusting capacity daily to meet demand. Leveling
should make this task easier, but so will the JIT emphasis on cutting out waste and
problems that cause ineffective use of capacity. Linearity, the practise of scheduling
extra capacity, will improve the ability to meet priority schedules.

Inventory management

If order quantities are reduced and annual demand remains the same, more
work orders and more paperwork must be tracked and more transactions recorded. The
challenge is to reduce the number of transactions that have to be recorded. One system
used is called backflushing or post-deduct.
Material flows from raw material to finished goods. In a post-deduct system,
raw materials are recorded into WIP. When work is completed and becomes finish
goods, the WIP inventory is relieved by multiplying the number of units completed by
the number of parts in the bill of material. The system works if the bills of material are
accurate and if the manufacturing lead times are short.

The impact on effective lot sizing

MRP is often called a push system. The trigger for the entire plan is the
projection of the final product need, as represented by the MPS. Part of the difficulty
with MRP is that often the plans are not effective because of problems or changes,
including:
- Changes in customer requirements, both in timing and quantity;
- Supplier delivery problems, including timing, quantity and quality;
- Inaccurate databases that can make the plans invalid , depending on the
nature of the inaccurate data;
- Production problems: absenteeism in the workforce, productivity and/or
efficiency problems, machine downtime, quality problems, poor
communication.

The pull system

The pull system was developed as an alternative to classical push MRP. The
underlying concept is to react to the final customer order and produce only what is
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needed to satisfy demand and then only when it is needed. Essentially, this system is
much the same as the basic reorder point system used for independent inventory.
The major reason reorder points normally do not work well in a dependent
inventory environment is a significant violation of the assumption of relatively
constant demand that allows a reorder point to work well in some independent
inventory environments. The lot-sizing problem with dependent inventory often results
in either a crisis shortage or a replenishment of stock well before it is actually needed.
The critical conditions causing the problem are the large lot sizes and the long lead
times, both of which are major targets of JIT waste reduction.
The standard EOQ model helps determine the most economical lot size. A
fundamental assumption of this model is that the 2 major costs involved are known
and relatively fixed. While this is relatively true with holding cost, it is not true with
order cost. If the order cost is equipment setup, then a major JIT effort is to reduce this
setup cost. If it is a purchased item, the major effort is to work with suppliers to reduce
the cost and time of purchase order and delivery. With this efforts, the order cost curve
is driven downward and to the left, as in the figure.
This implies the economic order quantities and the reorder points are very
small, meaning that we will be ordering frequently, but in very small batches.

The downside of the change. Given that the overall customer demand has not
diminished, we will need to order batches to be built much more frequently since each
batch is smaller in size. Each time the inventory of a given batch gets close to the
reorder point, we risk a stockout if the demand during the replenishment lead time
exceeds expectations:

The kanban system

The developers of the JIT concepts utilized a simple card system called
Kanban. The system works very simply. The kanban signal, often a piece of
cardboard, identifies the material to which it is attached. The information on the
kanban will often include:
- Component part number and identification,
- Storage location,
TOTAL COST
C
O
S
T
HOLDING COST
ORDER COST
EOQ QUANTITY
Normal EOQ/ROQ pattern
JIT Kanban pattern
Q
U
A
N
T
I
T
Y
Exposures to stockouts
TIME
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- Container size,
- Work center (or supplier) of origin.

How it works. The following figure illustrate the use of what is often called a
two-card kanban system. The 2 types of cards are a production card (authorizing
production of whatever part number is identified on the card in the quantity specified)
and a withdrawal card (authorizing the movement of the identified material).
At the start of the process there is no movement, since all the cards are attached
to full containers. It is only when a card is unattached that activity is allowed. In this
way the number of cards will clearly limit the inventory authorized to be at any
location.






At some point, a downstream process needs some of the parts produced by
work center 2. They take a container of the material, leaving the work center 2
production card with the center (step 1). This illustrates 2 additional rules of the
system: all material movement is in full containers and kanban cards are attached to a
work center. The unattached production card is the signal to start the work center 2
production to replace the container that was taken (step 2). To do that work they need
raw material, which is in the containers in front of the work center with the move
cards attached (step 3). When that material is used, the raw material container is now
empty and the associated move card is unattached (step 4). It authorizes movement of
material to replace the material that was used. That material is found in the “finished
goods” section of work center 1 (step 6). The operator will now move the material and
place the move card on the container as proof of the authorization to move the material
(phase 6). Before doing so, however, it must remove the production card that had first
authorized its production (phase 5). That represents another critical rule for kanban:
every container with material must have one, but only one, card attached. This process
continues upstream even to the suppliers, who can also receive the kanban move cards
as a signal for their next shipment to the facility (steps 7, 8, 9).

Production and movement of material are only authorized purely as a reaction
to the utilization of material for production downstream. Also cards only circulate
within and between work centers:
Work
center 1
Work
center 1
Production flow
Raw
material 1
Finished
production
Raw
material 2
Finished
production
Work
center 1
Work
center 1
Production flow
Raw
material 1
Finished
production
Raw
material 2
Finished
production
Z
1
3
4
ó
b
7
ß
9
Work
center 1
Work
center 1
Production flow
Raw
material 1
Finished
production
Raw
material 2
Finished
production
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Kanban rules. Even though there are no formal schedules in a Kanban system,
there is a fairly important set of rules. Those rules are summarized:
- Every container with parts shall have one, but only one, kanban;
- There will be no partial containers stored. Every container will be filled,
empty or in the process of being filled or emptied. This rule make inventory
accounting easy;
- There will be no production or movement without an authorization in the
form of an unattached kanban card.

Cards alternatives. Some of the alternative methods include:
- Single card systems. The single card is the production card, with the empty
container serving as the move signal;
- Colour-coding of containers;
- Designated storage spaces;
- Computer systems, often with bar coding serving as the signal generator.

Using the kanban system for process improvement

Because the kanban system allows for a controlled inventory of relatively small
containers, there is a great opportunity for using the system to promote continual
process improvement. Removal of one kanban card will remove one container and
since the containers are small, so too will be the impact of the removal. The important
aspect of this is that some process problem will ultimately emerge, signaling the next
target for JIT process improvement efforts.
This is not an easy approach to implement. That is certainly not a natural action
for most people and the performance evaluation system needs to be altered to reflect
this type of activity.


15.6 LEAN PRODUCTION

Lean production is a concept that has evolved from JIT concepts over the past
several years. As is often the case when fundamental concepts are not fully
understood, the JIT concepts were viewed by many manufacturers as invalid or
inappropriate for their particular production environment. There was some attempt to
correct this position when some JIT experts attempted to define 2 types of JIT. The
first, called “big JIT”, referred to the overall philosophy. The second, called “little
JIT”, referred to the pull production scheduling system, generally controlled by
kanban.
Lean production implies understanding and correctly implementing the major
enterprise-wide philosophical approach used to integrate the system toward an
ultimate goal of maximized customer service with minimal system waste.
The organization must be managed as a system instead of as a set of relatively
disjointed activities.
Since the time that lean manufacturing was introduced, many manufacturers
have successfully implemented at least some of the concepts. Many were companies
that were unsuccessful in their first attempt under the original JIT system. In many
cases, the major difference between their early failure and later success is primarily
that people now understand the forced system perspective more completely and are
making the appropriate organizational changes to make it work.
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15.7 WHICH TO CHOOSE: MRP (ERP), KANBAN OR THEORY OF
CONSTRAINTS?

There are certain production and business environments in which one may
provide better benefits and another may not work as well. This brings to light the
importance of understanding the business environment and developing a specific
production strategy to best meet the needs of customers in that environment.

MRP (ERP)

Where it works best. Because of the forward-looking nature of the system,
MRP can be very effective in an environment with a great deal of variability and
uncertainty. For example, it can handle variability of demand as well as, or better than,
most other systems and tends to be quite effective in dealing with product design
changes and process changes.

Where is not as effective. MRP has one major disadvantage. It is highly data
dependent. It is not only critical to have a lot of data, but the data needs to be both
accurate and timely on an on-going basis. The burden on the infrastructure can be high
and costly. If the environment has a great deal of stability in product design, process
and customer demand, the process can often be run just as effectively, or perhaps even
more effectively, by using a system not so data-intensive.

JIT (Kanban)

Where it works best. In JIT approach, most of the recommendations fall under
the categories of eliminating or reducing the process uncertainties and making
production more stable and predictable. This makes sense when it is realized that
kanban is a very reactive system. Very little is planned ahead. Instead, kanban causes
replacement of material used in a totally reactive mode. Product design can cause a
real problem in a kanban system. For these reasons a kanban works best in a highly
stable and predictable environment
.
Where is not as effective. Kanban can quickly fail in a highly volatile
environment because of the reactive nature of the system. Volatility in customer
demand, processing problems and extensive changes in product designs make it very
difficult for a kanban system to work effectively.

Theory of constraints (drum-buffer-rope)

Where it works best. Since the TOC system has as its basis the identification
and effective management of a constraint, it assumes that such a constraint can be
identified and will be a constraint long enough to be managed effectively. In
operations where that is the case, the concepts of TOC can bring great benefits to
managing the process, as has been proved in many operations.

Where is not as effective. TOC may not be as effective where the constraint
cannot be easily identified or managed. Much like JIT and kanban, TOC probably
works more effectively in a more stable demand environment.

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Hybrid systems

Kanban and MRP. The combination of these 2 systems is becoming quite
common. Once the MRP has the material and resources lined up, however, kanban is
used as an execution system, bringing with it the characteristics of rapid response to
customer order and reduced inventory levels throughout the process.

JIT and TOC. JIT often promotes process improvements throughout the
system, but as TOC teaches, there is almost always one process that constrains the
overall throughput. This implies the TOC approach can help prioritize the areas of
improvement and JIT principles can help with this improvement.


16 TOTAL QUALITY MANAGEMENT


16.1 WHAT IS QUALITY?

Quality means user satisfaction : that goods or service s satisfy the needs and
expectations of the user.
To achieve quality according to this definition, we must consider quality and
product policy, product design, manufacturing and final use of the product.

Quality and product policy. A product or service is a combination of tangible
and intangible characteristics that a company hopes the customer will accept and be
willing to pay a price for. Product planning must decide the market segment to be
served, the level of performance expected, the price to be charged and must estimate
the expected sales volume.

Quality and product design. Product designers must build into the product the
quality level described in the general specification. They determine the materials to be
used, dimensions, tolerances, product capability and service requirements.

Quality and manufacturing. At the least, manufacturing is responsible for
meeting the minimum specifications of the product design. Quality in manufacturing
means that , at a minimum, all production must be within specification limits and the
less variation from the nominal the better the quality.

Quality and use. Customers do not care why a product is defective, but they
care if it is defective. If the product has been well conceived, well designed, well
made, well price and well serviced, then the quality is satisfactory. If the product
exceeds the customer’s expectations, that is superb quality.
Quality has a number of dimensions, among which are the following:
- Performance. Performance implies that the product or service is ready for
the customer’s use at the time of sale. 3 dimensions to performance are
important: reliability, durability and maintainability.
o Reliability means consistency of performance. It is measured by the
length of time a product can be used before it fails;
o Durability refers to the ability of a product to continue to function
even when subjected to hard wear and frequent use;
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o Maintainability refers to being able to return a product to operating
after it has failed;
- Features. These are secondary characteristics;
- Conformance. Meeting established standards or specifications. This is
manufacturing’s responsibility;
- Warranty. An organization’s public promise to back up its products with a
guarantee of customer satisfaction;
- Service. Service is an intangible generally made up of a number of things
such as availability, speed of service, courtesy and competence of
personnel;
- Aesthetics. Aesthetics means pleasing to the senses;
- Perceived quality. Total customer satisfaction is based on the complete
experience with an organization, not just the product;
- Price. Customers pay for value in what they buy. Value is the sum of the
benefits the customer receives and can be more than the product itself. All
the dimensions listed above are elements of value.

These dimensions are not necessarily interrelated. A product can be superb in
one or a few dimensions and average or poor in others.


16.2 TOTAL QUALITY MANAGEMENT (TQM)

TQM is an approach to improving both customer satisfaction and the way
organizations do business. It is based on the participation of all members of an
organization in improving processes, products, services and the culture they work in.
TQM is both a philosophy and a set of guiding principles that lead to a continuously
improving organization.

Basic concepts. There are 6 basic concepts in TQM:
- A committed and involved management directing and participating in the
quality program;
- Focus on the customer. This means listening to the customer so goods and
services meet customer needs at a low cost;
- Involvement of the total workforce. It means training all personnel in the
techniques of product and process improvement and creating a new culture.
It means empowering people;
- Continuous process improvement. Processes can and must be improved to
reduce cost and increase quality;
- Supplier partnering. A partnering rather than adversarial relationship must
be established;
- Performance measures. Improvement is not possible unless there is some
way to measure the results.

Management commitment

If senior is not committed and involved, then TQM will fail. These managers
must start the process and should be the first to be educated in the TQM philosophy
and concepts. They should form a quality council whose purpose is to establish a clear
vision of what is to be done, develop a set of long-terms goals and direct the program.
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As well, the council must establish quality statements that include a vision,
mission and quality policy statement. The quality policy statement is a guide for all in
the organization about how products and services should be provided.

Customer focus

Total quality management implies an organization that is dedicated to
delighting the customer by meeting or exceeding customer expectations.
There are 2 types of customers, external and internal. Each person or operation
in a process is considered a customer of the preceding operation. Customers have 6
requirements of their suppliers:
- High quality level;
- High flexibility to change such things as volume, specifications and
delivery;
- High service level;
- Short lead times;
- Low variability in meeting targets;
- Low cost.
Customers expect improvement in all requirements.

Employee involvement

In a TQM environment, people come to work not only to do their jobs but also
to work at improving their jobs. To gain employee commitment to the organization
and TQM requires the following:
- Training. People should be trained in their own jobs skills and , where
possible, cross-trained in other related jobs. As well, they should be trained
to use the tools of continuous improvement, problem solving and statistical
process control;
- Organization. The organization must be designed to put people in close
contact with their suppliers and customers, internal or external;
- Local ownership. People should feel ownership of the processes they work
with. This results in a commitment to make their processes better and to
continuous improvement. They should be empowered.

Empowerment means giving people the authority to make decisions and take
action in their work areas without getting prior approval. Giving people the authority
to make decisions motivates them to accomplish the goals and objectives of the
organization and to improve their jobs.

Teams. A team is a group of people working together to achieve common
goals or objectives. Good teams can move beyond the contribution of individual
members so that the sum of their total effort is greater than their individual efforts.
Working in a team requires skill and training.

Continuous process improvement

See chapter 14.

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Suppliers partnerships

See chapter 15.

Performance measures

To determine how well an organization is performing, its progress must be
measured. Performance measures can be used to:
- Discover which process needs improvement,
- Evaluate alternative processes,
- Compare actual performance with targets so corrective action can be taken,
- Evaluate employee performance,
- Show trends.
There is no point in measuring something that does not give valid and useful
feedback on the process being measured. There are many basic characteristics that can
be used to measure the performance of a particular process or activity, such as the
following:
- Quantity;
- Cost;
- Time/delivery;
- Quality. There are 3 dimensions to quality measurements:
o Function,
o Aesthetics,
o Accuracy.

Performance measures should be simple, easy for users to understand, relevant
to the user, visible to the user, preferably developed by the user, designed to promote
improvement and few in number.
Measurement is needed for all types of process:
- Customer. Number of complaints, on-time delivery, dealer or customer
satisfaction;
- Production. Inventory turns, scrap or rework, process yield, cost per unit,
time to perform operations;
- Suppliers. On-time delivery, rating, quality performance, billing accuracy;
- Sales. Sales expense to revenue, new customers, gained or lost accounts,
sales per square foot.


16.3 QUALITY COST CONCEPTS

Quality costs fall into 2 broad categories: the cost of failure to control quality
and the cost of controlling quality.

Costs of failure

The costs of failing to control are the costs of producing material that does not
meet specification. They can be broken down into:
- Internal failure costs. The costs of correcting problems that occur while
the goods are still in the production facility. Such costs are scrap, rework
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and spoilage. These costs would disappear if no defects existed in the
product before shipment;
- External failure costs. The costs of correcting problems after goods or
services have been delivered to the customer. They include warranty costs,
field servicing of customer goods and all the other costs associated with
trying to satisfy customer complaints. External failure costs can be the most
costly of all if the customer loses interest in a company’s product. These
costs would also disappear if there were no defects.

Costs of controlling quality

The costs of controlling quality can be broken down into:
- Prevention costs. The costs of avoiding trouble by doing the job right in
the first place. They include training, statistical process control, machine
maintenance and quality planning costs.
- Appraisal costs. The costs associated with checking and auditing quality in
the organization. They include product inspection, quality audits, testing
and calibration.
Investment in prevention will improve productivity by reducing the cost of
failure and appraisal.


16.4 VARIATION AS A WAY OF LIFE

It is really a question of how much variability there is. If we plotted the number
of shafts of each diameter, we would probably get a distribution as a histogram.

Chance variation. In nature or any manufacturing process, we can expect to
find a certain amount of chance variation that is inherent in the process. This
variation comes from everything influencing the process, but is usually broken down
into the following 6 categories:
- People. Poorly trained operators tend to be more inconsistent compared
with well-trained operators;
- Machine. Well-maintained machines tend to give more consistent output
than a poorly maintained, sloppy machine;
- Material. Consistent raw materials give better results than poor quality;
- Method. Changes in the method of doing a job will alter the quality;
- Environment. Changes in temperature, humidity, dust and so on can affect
some processes;
- Measurement. Measuring tools that may be in error can cause incorrect
adjustments and poor process performance.
If a connection can be found between variation in the product and variation in
one of its 6 sources, then improvements in quality are possible.

Assignable variation. A tool may shift, a gauge may move, a machine wear or
an operator make a mistake. There is a specific reason for these causes of variation,
which is called assignable variation.

Statistical control. As long as only chance variation exits, the system is said to
be in statistical control. If there is an assignable cause of variation, the process is not
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in control and is unlikely to produce a good product. The objective of statistical
process control is to detect the presence of assignable causes of variation. Statistical
process control, then, has 2 objectives:
- To help select processes capable of producing the required quality with
minimum defects,
- To monitor a process to be sure it continues to produce the required quality
and no assignable cause for variation exists.

Patterns of variability

The output of every process has a unique pattern that can be described by its
shape, center and spread.

Shape. A bell-shaped curve is called a normal curve and is commonly
encountered in manufacturing processes that are running under controlled conditions.

Center. The normal distribution has most results clustered near one central
point, with progressively fewer results occurring away from this center. The center of
the distribution can be calculated as follows:
Let x = sum of all observations
N = number of observations
µ = arithmetic mean (average or center)

Then µ = x / N

Spread. To evaluate a process, we must know not only what the center is, but
also something about the spread or variation. In statistical process control there are 2
methods of measuring this variation, the range and the standard deviation:
- range. The range is simply the difference between the largest and smallest
values in the sample;
- standard deviation. The standard deviation may be thought of as the
average spread around the center. A distribution with a high standard
deviation is fatter than one with a low standard deviation. Higher quality
products have little variation. See chapter 11 to the measurement. We know
that:
o µ ± 1σ = 68.3 percent of observations,
o µ ± 2σ = 95.4 percent of observations,
o µ ± 3σ = 99.7 percent of observations.


16.5 PROCESS CAPABILITY

Tolerances are the limits of deviation from perfection and are established by
the product design engineers to meet a particular design function. In statistical process
control the lower specification limit (LSL) is the minimum acceptable level of
output. The upper specification limit (USL) is defined as the maximum acceptable
level of output. Both the USL and the LSL are related to the product specification and
are independent of any process. One process, having a narrow spread (low sigma), will
produce product within the specification limits. The other process having a wide
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spread (high sigma), will produce defects. The first process is said to be capable, the
second is not.










Besides spread there is another way a process can produce defects. If there is a
shift in the mean, defects will be produce:











In summary:
- The capability of the process is not related to the product specification
tolerance;
- A process must be selected that can meet the specifications;
- Processes can produce defects in 2 ways, by having too big a spread or by a
shift in the mean.

Process capability index (C
p
)

The process capability index combines the process capability and the tolerance
into one index. It assumes the process is centered. As well, the index assumes if a
process produces 99.7% good parts, it is capable. Thus the ± 3σ or 6σ is used in the
calculation :
Cp = (USL-LSL) / 6σ

If the capability index is greater than 1.00, the process is capable of producing
99.7% of parts within tolerance and is said to be capable. The larger the capability
index the fewer the rejects and the greater the quality.

The process capability index indicates whether process variation is satisfactory,
but it does not measure whether the process is centered properly.

USL LSL MEAN
Unacceptable
Unacceptable
USL LSL
SHIFT
OF
MEAN
Unacceptable
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C
pk
Index

This index measures the effect of both center and variation at the same time.
The C
pk
Index is the less of:

(USL – Mean) / 3σ or (Mean – LSL) / 3σ

The greater the C
pk
the further the 3σ limit is from the specification limit and
the fewer rejects there will be. Interpretation of the C
pk
is as follows:
C
pk
value Evaluation
Less than + 1 Unacceptable process. Part of process distribution is out of
specification.
+ 1 to + 1.33 Marginal process. Process distribution barely within
specification.
Greater than Acceptable process. Process distribution is well within
1.33 specification.


16.6 PROCESS CONTROL

Process control attempts to prevent the production of excessive defects by
showing when the probability is high there is an assignable cause for variation. Once a
stable process is established, the limits of the resulting pattern variation can be
determined and will serve as a guide for future production. When variation exceeds
these limits, it shows a high probability that there is an assignable cause.

Control charts

Run charts. By example, samples are taken every half hour and measured. The
average of the samples is then plotted on a chart. This is called a run chart. While it
gives a visual description of what is happening with the process, it does not distinguish
between system (chance) variation and assignable cause variation.

X and R chart. A control chart for averages and ranges (X and R chart)
tracks the 2 critical characteristics of a frequency distribution: the center and the
spread. Small samples are taken on a regular basis over time and the sample averages
and range plotted. The range is used rather than standard deviation because it is easier
to calculate. Samples are used in control charts rather than individual observations
because average values will indicates a change in variation much faster.











Upper Control Limit
Nominal Value
RANGE
Upper Control Limit
Lower Control Limit
Nominal Value
AVERAGE OF X
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Control limits

Figure shows 2 dotted lines, the upper control limit (UCL) and the lower
control limit (LCL). These limits are established to help in assessing the significance
of the variation produced by the process. They should not be confused with
specification limits.
Control limits are set so that there is a 99.7% probability that if the process is
in control, the sample value will fall within the control limits. When this situation
occurs, the process is considered to be in statistical control and there is no assignable
cause of variation. The process is stable and predictable. However, when assignable
causes of variation exist, the variation will be excessive and the process is said to be
out of control.
As explained earlier, 2 types of changes can occur in a process:
- A shift in the mean. This might be caused by worn tool or a guide that has
moved. This will be show up on the X portion of part;
- A change in the spread of the distribution. If the range increases but the
sample averages remain the same, we might expect this kind of problem. It
might be caused by a gauge or tool becoming loose, or by some part of the
machine becoming worn. This will show up on the R portion of the chart.

Control charts for attributes

An attribute refers to quality characteristics that either conform to specification
or do not. Either the part is within tolerance or is not. These characteristics cannot be
measured but they can be counted. Attributes are usually plotted using a proportion
defective or p-chart.

Other quality control tools

These include:
- Pareto charts. These charts are merely histograms that are organized in
such a way as to show the highest bar first and all others in descending
order from high to low. This approach allows one to easily focus on the
most important issues;
- Checksheets. Once an issue of interest has been determined, the source of
the complaints is listed as they occur. Whenever a complaint reason is
repeated, a check is put beside the reason. Overtime the number of checks
should show clearly the major source of complaint, thereby allowing action
to focus on that major source;
- Process flowcharts. These charts show in detail the steps required to
produce a product or service. Once the specific tasks are identified, data
can be collected about these tasks to determine bottlenecks or other types of
problems that can be corrected to improve the process involved.;
- Scatterplots. These merely show the relationship between 2 variables of
interest. For each case, we would obtain a measure of the 2 variables. We
could then plot the measures of the first variable on the horizontal axis and
the measures of the second variable on the vertical axis. Plotting many
scores would then provide an indication whether there is a relationship and
also the possible strength of that relationship;
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- Cause and effect (fishbone) diagrams. These diagrams are used to plot
out all the potential causes for an identified problem. The potential causes
can be researched to find the root cause and correct it.


16.7 SAMPLE INSPECTION

Traditional inspection inspects the batch of parts after they are made and on the
basis of the inspection, accepts or rejects the batch. There are 2 inspection procedures,
100% and acceptance sampling:
- 100% acceptation means testing every unit in the lot. This is appropriate
when the cost of inspection is less than the cost of any loss resulting from
failure of the parts;
- acceptance sampling consists of taking a sample of a batch of product and
using it to estimate the overall quality of the batch. Based on the results of
the inspection a decision is made to reject or accept the entire batch. There
is a chance that a good batch will be rejected or a bad batch will be
accepted. Sampling inspection is necessary under conditions.

Reasons for sampling inspection. There are 4 reasons for using sample
inspection:
- Testing the product is destructive;
- There is not enough time to give 100% inspection to a batch of product;
- It is too expensive to test all of the batch;
- Human error is estimate to be as high as 3% when performing long-term
repetitive testing. There are good reasons to have a representative sample
taken of a batch rather than to hazard this high an error.

Conditions necessary for sampling inspection. The use of statistical
sampling depends on the following conditions:
- All items must be produced under similar or identical conditions;
- A random sample of the lot must be taken;
- The lot to be sampled should be an homogeneous mixture;
- The batches to be inspected should be large.

Sampling plans

Sampling plans are designed to provide some assurance of the quality of goods
while taking costs into consideration. Lots are defined as good if they contain no more
than a specified level of defects, called the acceptable quality level (AQL).
Selecting a particular plan depends on 3 factors.

Consumer’s risk. The probability of accepting a bad lot is called the
consumer’s risk. The consumer will want to be sure that the sampling plan has a low
probability of accepting bad lots.

Producer’s risk. The probability of rejecting a good lot is called the
producer’s risk. The producer will want to ensure that the sampling plan has a low
probability of rejecting good lots.

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Cost. Inspection cost money. The objective is to balance the consumer’s risk
and the producer’s risk against the cost of the sampling plan. The larger the sample,
the smaller the producer’s and consumer’s risks and the more the likelihood that good
batches will not be rejected and poor batch accepted. However, the larger the sample
size, the greater the inspection cost.


16.8 ISO 9000 (VERSION 1994)

Besides being a requirement for doing business in Europe, customers
throughout the world have come to expect a quality standard and to demand ISO 9000
certification.
The standards are intended to prevent non-conformities during all stages of
business functions. Originally they were written for contractual situations between
suppliers and customers in which the supplier would develop a quality system that
conformed to the ISO standards and was satisfactory to the customer. The customer
would then audit the system for acceptability. Because of this, a third party registration
system was created.
Third party registration system. A third party, called a registrar, assesses the
adequacy of the supplier’s quality system. When the system conforms to the registrar’s
interpretation of the applicable ISO 9000 standard, the registrar issues a certificate of
registration. The registrar continues to survey the supplier and makes full
reassessments every 3 or 4 years.

ISO 9000 series standards

Its purpose is to standardize quality terms and definitions and use those terms
to demonstrate a supplier’s capability of controlling its processes.
The ISO 9000 (version 1994) consists of 5 standards. ISO 9000 explains the
basic quality concepts, defines key terms and provides guidelines for selecting, using
and modifying ISO 9001, 9002 and 9003. ISO 9004 provides guidance in
implementing a quality system. ISO 9001 provides a model for quality assurance in
design, production, installation and servicing. ISO 9002 provides a model for quality
assurance in production and installation. ISO 9003 provides a model for quality in
final inspection.

ISO 9000 elements

There are 20 ISO 9000 elements that describe what is required in each of the
areas. ISO 9000 places emphasis on all internal processes, especially manufacturing,
sales, administration and technical support. It provides stability in the business system
and occurs at the beginning of the quality evolution.


16.9 BENCHMARKING

Benchmarking is a systematic method by which organizations can compare
their performance in a particular process to that of a best-in-class organization, finding
out how that organization achieves those performance levels and applying them to
their own organization.
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The steps in benchmarking are:
- Select the process to benchmark. This is much the same as the first step in
the CPI;
- Identify an organization that is best-in-class in performing the process you
want to study. This may mot be a company in the same industry;
- Study the benchmarked organization. Information may be available
internally, be in the public domain, or may require some original research.
Original research includes questionnaires, site visits and focus groups.
Questionnaires are useful when information is gathered from many sources.
Site visits involved meeting with the best-in-class organization. Many
companies select a team of workers to be on a benchmark team. Focus
group are panels that may be composed of groups such as customers,
suppliers or benchmark partners, brought together to discuss the process;
- Analysing the data. What are the differences between your process and the
benchmark organization? There are 2 aspects to this. One is comparing the
process and the other is measuring the performance of those processes
according to some standard.


16.10 JIT, TQM AND MRP II

Although the purposes of MRP II, JIT and TQM are different, there is a close
relationship among them. JIT is a philosophy that seeks to eliminate waste and focuses
on decreasing non-value-added activities by improving processes and reducing lead
time. TQM places emphasis on customer satisfaction and focusing the whole company
to that end. While JIT seems to be inward looking and TQM outward looking, they
both have many of the same concepts. Both emphasize management commitment,
CPI, employee involvement and supplier partnerships. Performance measurement is
necessarily a part of process improvement in both JIT and TQM.
MRP II is primarily concerned with managing the flow of materials into,
through and out of an organization. It is planning and execution process that must
work with existing processes, be they good or bad. JIT is directed toward process
improvement and lead time reduction and TQM is directed toward customer
satisfaction. Thus both JIT and TQM are part of the environment in which MRP II
must work. Improved processes, better quality, employee involvement and supplier
partnerships can only improve the effectiveness of MRP II.
PLAN DO
MRP II
Plan labor,
material and
resources
JIT
Produce
goods and
services
CUSTOMER
Sets the standard
and produces
demand
TQM
Meets or exceeds customer expectations

17 ANNEXES


17.1 SCHEMA MANUFACTURING PLANNING AND CONTROL
SYSTEM (MPC)


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17.2 BOUCLE MRP II


MANUFACTURING RESOURCE PLANNING (MRP II)
C
l
o
s
e
d

l
o
o
p

M
R
P
STRATEGIC BUSINESS
PLAN (SBP)
DETAILED SALES
PLAN (DSP)
MASTER PRODUCTION
SCHEDULE (MPS)
MATERIELS REQUIREMENTS
PLAN (MRP)
PRODUCTION ACTIVITY
CONTROL (PAC)
SALES and OPERATIONS PLAN
MARKETING
PLAN (MP)
PRODUCTION
PLAN (PP)
RESOURCE
OK?
Yes
No
RESOURCE
OK?
Yes
No
PURCHASING
PERFORMANCE MEASURES
F
E
E
D
B
A
C
K
F
E
E
D
B
A
C
K
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17.3 INDEX

AnqIois SiqIe 08 Fronce SiqIe F Thème Chopifre Poqe
A8C invenfory confroI 0esfion de sfock ovec mefhodes A8C Invenfories 9 7o
AcfuoI cosfs Coüf ocfueI Cosfs 7 b8
Aqqreqofe Ieod fime DeIoi cumuIe Times
Anficipofion invenfories Sfock d´ onficipofion Invenfories 9 o9
AssembIed-fo-order ATO AssembIoqe ò Io commonde Monufocfurinq I,Z,3 o,I7,Z0
AssembIy Iine Liqne d´ ossembIoqe Monufocfurinq o 40
Assef Acfif FinonfioI sfofemenfs 9 73
AvoiIobIe invenfory Sfock disponibIe Invenfories
AvoiIobIe-fo-promise ATP DisponibIe ò Io venfe Invenfories 3 ZI
Averoqe cosf per unif Coüf moyen unifoire Cosfs 7 b8
Averoqe demond Demonde moyenne Demonds 8 o4
8ockfIush Posf-deducfion Invenfories Ib I37
8ockIoq Cornef de commondes Demonds Z I7
8ockorder Commonde en reford Demonds
8ockword scheduIinq JoIonnemenf omonf ScheduIinq o 44
8oIonce sheef 8iIon FinonfioI sfofemenfs 9 73
8ofch Lof Monufocfurinq
8ofch processinq Producfion disconfinue Monufocfurinq
8ios CumuI des ecorfs obsoIus enfre Ies previsions ef Io demonde moyenne Demonds 8 oo
8iII of moferioI 8OM MomencIofure 8OM 4 Zb
8Ionkef orders Commonde ouverfe Demonds
8offIeneck 0ouIef ScheduIinq o 4b
8offom-up repIonninq PepIonificofion oscendonfe ScheduIinq 4 33
8uffer Sfock fompon Invenfories o 48
8usiness pIon PIon d´enfreprise PIonninq Z II
Copocify Copocife Copocify Z,b II,33
Copocify ovoiIobIe Copocife disponibIe Copocify b 33
Copocify monoqemenf 0esfion des ressources Copocify b 33
Copocify required 8esoin en copocife Copocify b 33
Copocify requiremenfs pIonninq CPP PIonificofion des besoins en copocife Copocify b 34
Corryinq cosf Toux de possession de sfock Cosfs 9 7Z
Cosh fIow Copocife d´oufofinoncemenf FinonfioI sfofemenfs 9 7b
CeIIuIor monufocfurinq (work ceIIs) Fobricofion en ceIIeuIe independonfe Monufocfurinq Ib IZ9
Chonqeover Chonqemenf de serie Monufocfurinq
Chose (demond mofchinq) mefhod Sfrofeqie de producfion qui coIIe ò Io demonde Demonds Z Ib,I7
CIose-Ioop MPP 8oucIe MPP PIonninq
Compefifive onoIysis AnoIyse concurrenfieIIe 7
Componenf Composonf 8OM 4 Zb
Consiqnmenf Sfock consiqne Invenfories
Consfroinf Confroinfe ScheduIinq o 47
Confinuous fIow (producfion) FIux confinue Monufocfurinq I4 II9
ConfroI chorf Corfe de confrôIe CuoIify Io I49
Cosf of (poor) quoIify Coüf de non quoIife Cosfs Io I4b
Cosf of qoods soId Coüf de revienf du produif des venfes FinonfioI sfofemenfs 9 74
CumuIofive Ieod fime DeIoi cumuIe Times
Cusfomer service Service cIienf CuoIify 9 70
Cusfomer service rofio Toux de service Demonds
CycIe Comporfemenf de Io demonde sur pIusieurs onnees Demonds 8 oZ
CycIe counfinq Invenfoire fournonf Invenfories IZ 98
CycIe sfock Lof d´ochof ou de fobricofion recompIefonf Ie sfock Invenfories 9 70
CycIe fime Temps de cycIe Times o 44
DecoupIinq DecoupIoqe Invenfories
Demond Demonde Demonds 8 oZ
Demond monoqemenf 0esfion de Io demonde Demonds 8 oI
Demond puII FIux fire Monufocfurinq Ib I3I
Demond fime fence 8orne de demonde Demonds 3 ZZ
Demonsfrofed (meosured) copocify Copocife demonfree (hisforique) Copocify b 37
Dependenf demond Demonde dependonfe Demonds 4 Z3
Direcf Iobor Coüf moin d´æuvre direcfe MOD Cosfs 9 74
Direcf moferioI Coüf mofière direcfe Cosfs 9 74
MOTS-CLES DU 8ASICS
SYNTHESE BASICS GUILLOT Lionel - ISERPA MLI
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Discrefe monufocfurinq Producfion discrèfe Monufocfurinq Ib IZ9
Dispofchinq Ordonnoncemenf ScheduIinq o b0
Disfribufion invenfory Sfock de disfribufion Invenfories 9 o9
Disfribufion requiremenfs pIonninq DPP PIonificofion des besoins de disfribufion PIonninq II 90
Disfribufion resources pIonninq DPP II PIonificofion des ressources de disfribufion PIonninq
Disfribufor Disfribufeur/concessionnoire Disfribufion
Due dofe Dofe d´echeonce Times
Economic order quonfify EOC Cuonfife economique Invenfories I0 78
Efficiency Efficience Copocify b 37
EIecfronic dofo inferchonqe EDI EIecfronic dofo inferchonqe Demonds 7 o0
EmpIoyee empowermenf PesponsobiIisofion du personneI CuoIify Io I44
EmpIoyee invoIvemenf EI ImpIicofion du personneI CuoIify Io I44
Enqineer-fo-order ETO Concepfion ò Io commonde Monufocfurinq I o
Expedife Chosse de pièces 7
Expenses Depenses FinonfioI sfofemenfs 9 74
ExpIode ExpIoser une nomencIofure pour Ie C8M ScheduIinq 4 Z8
ExponenfioI smoofhinq Lissoqe exponenfieI Demonds 8 o4
Exfrinsic forecosf Prevision exfrinsèque Demonds 8 o3
Feedbock Pemonfee d´ informofions PIonninq
FiII rofe Toux de service Demonds
FinoI ossembIy scheduIe FAS Proqromme d´ossembIoqe finoI ScheduIinq 3 Z0
Finished qoods Produifs finis Invenfories 9 o9
Finish-fo-order FTO AssembIoqe ò Io commonde Monufocfurinq
Finife forword scheduIinq JoIonnemenf ovoI ò copocife finie ScheduIinq o 44
Finife Ioodinq Chorqemenf ò copocife finie ScheduIinq o 44
FirmpIonned Order FPO Ordre ferme ScheduIinq 4 3I
Fixed order quonfify FOC Cuonfife fixe Invenfories I0 78
FIexibIe monufocfurinq sysfem FMS Sysfème de fobricofion fIexibIe Monufocfurinq Ib I30
FIowmonufocfurinq fIux confinu Monufocfurinq Ib IZ9
FIowshop fIux confinu Monufocfurinq I4 II9
FIucfuofion invenfory Sfock fompon pour Io couverfure des erreurs de previsions Invenfories 9 o9
Forecosf error Erreur de prevision Demonds 8 oo
Forecosfinq Prevision Demonds 8 oZ
FormuIo Peceffe de fobricofion Monufocfurinq
Forword scheduIinq JoIonnemenf ovoI ScheduIinq o 44
Frozen zone Zone qeIee Demonds 3 ZZ
0eneroI ond odminisfrofive expenses Frois qeneroux ef odminisfrofifs FinonfioI sfofemenfs 9 74
0ross morqin Morqe 8rufe FinonfioI sfofemenfs 9 74
0ross requiremenfs 8esoins brufs ScheduIinq 4 Z8
IdIe fime Temps d´orrêf mochine (foufes couses)
Income sfofemenf Compfe de resuIfof FinonfioI sfofemenfs 9 74
Indenfed biII MomencIofure ò indenfofion 8OM 4 Zo
Independenf demond Demonde independonfe Demonds 4 Z3
Infinife Ioodinq Copocife infini ScheduIinq o 44
Infinife scheduIinq PIonificofion ò copocife infini ScheduIinq o 44
Inpuf/oufpuf confroI PiIofoqe des fIux de chorqes ScheduIinq o 49
Inspecfion ConfrôIe quoIifofif CuoIify Io IbI
Infermiffenf producfion Producfion por infermiffence Monufocfurinq o 4I
InferpIonf demond Demonde inferusine Demonds
Infronsif invenfory Sfock en fronsif Invenfories 9 70
Infrinsic forecosf Prevision infrinsèque Demonds 8 o4
Invenfory Sfock Invenfories 9 o9
Invenfory od¡usfmenfs PequIorisofion informofique des sfocks Invenfories
Invenfory confroI Moîfrise des sfocks Invenfories
Invenfory issues Sorfie de sfock Invenfories
Invenfory monoqemenf 0esfion des sfocks Invenfories I 9
Invenfory refurns Pefour en sfock Invenfories
Invenfory furnover Toux de rofofion des sfocks Invenfories 9 7b
Invenfory furns Toux de rofofion des sfocks Invenfories 9 7b
Ifemmosfer record Fiche orficIe Invenfories o 4Z
Job cosfinq Coüf moin d´æuvre direcfe Cosfs 9 74
Job order Ordre de fobricofion OF ScheduIinq o 4Z
Job shop AfeIier foncfionneI Monufocfurinq
SYNTHESE BASICS GUILLOT Lionel - ISERPA MLI
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Job shop Ioyouf ImpIonfofion foncfionneIIe Monufocfurinq
Job shop scheduIinq PIonificofion ofeIier Monufocfurinq
Jusf-in-fime JIT Jusfe ò femps JAT Monufocfurinq Ib IZ7
Ionbon Ionbon Monufocfurinq Ib I38
Leod fime DeIoi fofoI d´ obfenfion Times b 3b
Leodinq indicofor Indicofeur de fufure fendonce Demonds
Leod-fime offsef DecoIoqe enfre recepfion ef Ioncemenf de I´ordre ScheduIinq 4 Z8
LeveI of service Miveou de service CuoIify
LeveI producfion pIon (IeveI scheduIe) Sfrofeqie ò producfion niveIee Monufocfurinq Z Io
LiobiIifies Deffes FinonfioI sfofemenfs 9 73
Line monufocfurinq (ossembIy Iine) Liqne d´ ossembIoqe Monufocfurinq o 40
Liquid zone Zone Iibre Demonds 3 ZZ
Lood Chorqe ScheduIinq b 37
Lood IeveIinq MiveIIemenf de Io chorqe ScheduIinq o 4b
Lof Lof Monufocfurinq
Lof confroI Moifrîse des Iofs Monufocfurinq
Lof size ToiIIe de Iof Monufocfurinq I0 77
Lof-for-Iof LFL Lof pour Iof Invenfories I0 78
Lof-size invenfory Lof d´ochof ou de fobricofion recompIefonf Ie sfock Invenfories 9 70
Low-IeveI code Code de pIus bos niveou 8OM 4 30
Moinfenonce, repoir ond operofinq suppIies MPOs ArficIes ne renfronf pos dons Io composifion finoI d´un produif Invenfories 9 70
Moke-fo-order MTO Fobricofion ò Io commonde Monufocfurinq I o
Moke-fo-sfock MTS Fobricofion pour Ie sfock Monufocfurinq I o
Monufocfurinq Ieod fime MLT Temps de fobricofion Times o 43
Monufocfurinq process Procede de fobricofion Monufocfurinq I4 II8
Monufocfurinq resource pIonninq MPP II Monoqemenf des ressources de producfion PIonninq Z I4
Morkef driven Peponse ò Io demonde du cIienf Demonds
Morkef shore Porf de morche Demonds
Morkefinq reseorch Efude de morche Demonds Z IZ
Mosfer pIonninq PIon direcfeur PIonninq Z
Mosfer producfion scheduIe MPS Proqromme direcfeur de producfion PDP PIonninq 3 I8
Mosfer scheduIe Proqromme direcfeur de producfion PDP PIonninq 3 I8
MoferioI monoqemenf 0esfion des mofières ScheduIinq 4 3Z
MoferioI requiremenfs pIonninq MPP CoIcuI des besoins nefs C8M PIonninq 4 Z3
Meon obsoIufe deviofion MAD Moyenne des ecorfs obsoIus enfre Io prevision ef Io demonde Demonds 8 oo
Move fime Temps de fronsferf enfre Z posfes Times b 3b
Movinq overoqes Moyennes mobiIes Demonds 8 o4
MuIfiIeveI biII of moferioI MomencIofure ò pIusieurs niveoux 8OM 4 Zb
MuIfisourcinq MuIfisource (fournisseurs) Invenfories 7 bo
Mef requiremenfs 8esoins nefs ScheduIinq 4 Z9
MormoI disfribufion Disfibufion seIon Io Ioi normoIe Sfofisfics 8,II oo,84
Offseffinq DecoIoqe pour Ie C8M 8OM 4 Z8
On-hond boIonce Sfock disponibIe Invenfories
Open order Ordre Ionce ScheduIinq 4 Z9
Operofion Operofion Monufocfurinq I4 IZ4
Order enfry VoIidofion de commonde cIienf Demonds
Order poinf Poinf de commonde Invenfories II 83
Order promisinq Promesse de commonde Demonds
Order quoIifiers Avonfoqe quoIifionf Demonds I o
Order quonfify Cuonfife de commonde Invenfories I0 77
Order winners Avonfoqe qoqnonf Demonds I o
Orderinq cosfs Coüf de possofion de commondes Cosfs 9 7Z
Overheod Coüf indirecf Cosfs 9 74
Owner´s equify Copifoux propre FinonfioI sfofemenfs 9 73
Pockoqe-fo-order PTO Condifionner ò Io commonde Monufocfurinq
Pockinq ond morkinq EmboIIer ef efiqueffer Disfribufion
Porenf ifem ArficIe porenf 8OM 4 Zb
Peqqinq Cos d´empIoi dynomique 8OM 4 Z7
Peqqinq reporf Idenfificofion de I´oriqine des besoins 8OM 4 Z7
Performonce meosuremenf sysfem Sysfème de mesure de performonce CuoIify I I0
Periodic (onnuoI) invenfory Invenfoire periodique Invenfories IZ 97
PerpefuoI invenfory record Invenfoire permonenf Invenfories II 87
PhysicoI disfribufion Disfribufion physique Disfribufion I3 99
SYNTHESE BASICS GUILLOT Lionel - ISERPA MLI
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PhysicoI invenfory Sfock physique Invenfories
PipeIine invenfory Sfock en fronsif Invenfories 9 70
PIonned order Ordre previsionneI ScheduIinq 4 Z8
PIonned order receipf Pecepfion d´ordre previsionneI ScheduIinq 4 Z8
PIonned order reIeose Loncemenf d´ordre previsionneI ScheduIinq 4 Z8
PIonninq biII Mocro-nomencIofure (fomiIIe de produifs) 8OM 4 Zo
PIonninq horizon Horizon de pIonificofion ScheduIinq 4 Z9
PIonninq fime fence 8orne de pIonificofion Demonds 3 ZZ
Priorify confroI 0esfion des priorifes ScheduIinq
Process Procede Monufocfurinq I4 II7
Process Ioyouf ImpIonfofion en foncfion des procedes Monufocfurinq
Producf differenfiofion Sfrofeqie de differenfiofion de produifs/concurrence Demonds
Producf fomiIy FomiIIe de produifs PIonninq
Producf Ioyouf ImpIonfofion en foncfion des procedes Monufocfurinq I4 II9
Producf Iife cycIe CycIe de vie du produif Demonds I4 II3
Producf free MomencIofure ò romificofions 8OM 4 Zb
Producfion ocfivify confroI PAC PiIofoqe ofeIier PIonninq o 39
Producfion Ieod fime DeIoi de producfion Times
Producfion Iine Liqne de producfion Monufocfurinq o 40
Producfion pIon PP PIon indusfrieI PIonninq Z Ib
Producfion pIonninq PeoIisofion du PIC PIonninq Z Ib
Producfivify Producfivife Copocify b 37
Profif Morqe FinonfioI sfofemenfs 9 74
Profif morqin Morqe neffe FinonfioI sfofemenfs 9 74
Pro¡ecfed ovoiIobIe invenfory (boIonce) Sfock disponibIe previsionneI Invenfories
PuII (sysfem) FIux fire Monufocfurinq Ib I3I
Purchose order Ordre d´ochof ScheduIinq
Purchose requisifion Demonde d´ochof ScheduIinq
Purchosinq Achof 7
Push (sysfem) FIux pousse Monufocfurinq
CuoIify CuoIife CuoIify Io I4Z
CuoIify of fhe source 8on du premier coup CuoIify Ib I3I
CuoIify confroI 0esfion de Io quoIife CuoIify Io I49
Cueue fime Affenfe en omonf d´un posfe Times b 3b
Pondomvoriofion Voriofion oIeofoire Demonds 8 oo
Pondom-Iocofion sforoqe Sfockoqe oIeofoire Invenfories
Pofed copocify Copocife coIcuIee Copocify b 3o
PowmoferioI Mofières premières Invenfories 9 o9
Peceipf Pecepfion Invenfories 7 b3
Peceivinq reporf Popporf de recepfion Invenfories 7 b3
Pecord occurocy Mesure de Io precision des soisies CuoIify
Pemonufocfurinq Peprise Monufocfurinq
Peorder poinf Poinf de commonde Invenfories II 83
Peorder quonfify PecoIcuI de Io quonfife de commonde Invenfories
Pepefifive monufocfurinq Fobricofion en serie Monufocfurinq o 40
PepIenishmenf Ieod fime DeIoi de reopprovisionnemenf ScheduIinq
Pequesf for quofofions Demonde de devis Demonds 7 bZ
Pequired copocify 8esoin en copocife Copocify b 33
Pequiremenfs expIosion ExpIosion des besoins 8OM 4 Z8
Pequisifion Auforisofion de sorfie moqosin Invenfories
Pesource biII Mocro-qomme PIonninq
Pesource pIonninq PIonificofion qIoboIe des chorqes Copocify b 34
Pevenues Peceffes FinonfioI sfofemenfs 9 74
Pouqh-cuf copocify pIonninq PCCP Verificofion qIoboIe des chorqes Copocify b 34
Poufinq 0omme PIonninq b 3b
Pun fime Temps operofoire Times
Sofefy sfock Sfock de securife Invenfories 9 o9
SoIes ond operofions pIonninq SOP PIon indusfrieI ef commercioI PIC PIonninq Z I3
SoIes pIon PIon commercioI PIonninq
ScheduIed receipf Pecepfion prevue ScheduIinq 4 Z9
ScheduIinq JoIonnemenf ScheduIinq
SeosonoI index Index de soisonnoIife Demonds 8 ob
SeosonoIify SoisonnoIife Demonds 8 oZ
SYNTHESE BASICS GUILLOT Lionel - ISERPA MLI
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Service indusfry Secfeur ferfioire Demonds
Service porfs Produifs de subsfifufion Invenfories
Service porfs demond 8esoin en pièce de rechonqe 7
Sefup PèqIoqe Monufocfurinq
Sefup Ieod fime DeIoi de rèqIoqe Times
Shop coIendor CoIendrier indusfrieI Copocify b 3b
Shop order 8on de frovoiI ScheduIinq
SimuIofion SimuIofion ScheduIinq
SinqIe-IeveI biII of moferioI MomencIofure ò un niveou 8OM 4 Zo
SinqIe-source suppIier Fournisseur unique Invenfories 7 bo
SIushy zone Zone de neqociofion Demonds 3 ZZ
Sfondord cosfs Coüfs sfondords Cosfs 9 7o
Sfondord hour (fime) Temps sfondord Times b 3o
Sforf dofe Dofe de debuf Times
SfofisficoI process confroI SPC Moîfrise sfofisfique des procedes MSP CuoIify Io I47
Sfockkeepinq unif SIU Code d´un orficIe pour une zone de sfockoqe Invenfories I0 77
Sfockouf cosfs Coüfs de rupfure de sfock Cosfs 9 73
Sfrofeqic pIon PIon sfrofeqique PIonninq Z II
Subconfrocfinq Sous-froifonce ScheduIinq Z Io
Summorized porfs Iisf MomencIofure en Iisfe d´ orficIes 8OM 4 Zo
SuppIier Fournisseur Invenfories I 7
SuppIier Ieod fime DeIoi de Iivroison fournisseur Times
SuppIier porfnerinq (porfnership) Porfenoriof fournisseur CuoIify Ib I34
SuppIy choin SuppIy choin 7
Throuqhpuf VoIume fofoI de producfion Copocify o 4o
Throuqhpuf fime Temps de cycIe Times o 44
Time buckef Periode de femps offichee du C8M ScheduIinq 4 Z9
Time fence 8orne de pIonificofion Times
TofoI Iine-houI cosf Coüf forfoifoire de fronsporf en foncfion de Io disfonce Cosfs I3 I0o
TofoI producfive moinfenonce TPM Moinfenonce fofoIe CuoIify Ib I3I
TofoI quoIify monoqemenf TCM Monoqemenf fofoI de Io quoIife CuoIify Io I4Z
Trockinq siqnoI SiqnoI de derive Demonds 8 o7
Tronsif fime Temps de fronsif Times
Tronsporfofion invenfory Sfock en fronsif Invenfories 9 70
Trend Tendonce Demonds 8 oZ
Two-bin sysfem Sysfème d´oppros ò deux bocs Invenfories II 87
Unif of meosure Unife de mesure Copocify b 3o
UfiIizofion Toux d´ufiIisofion Copocify b 37
VoIue odded VoIeur o¡oufee Monufocfurinq
Vorionce Vorionce Demonds
Vendor Vendeur Disfribufion
Vendor-monoqed invenfory Sfock deporfe Invenfories 7 o0
VisuoI review sysfem 0esfion visueIIe des sfocks Invenfories
Woif fime Temps d´offenfe en ovoI d´ un posfe Times b 3b
Worehousinq Enfreposoqe Disfribufion IZ,I3 9I,I07
Wosfe 0ospiIIoqe CuoIify Ib IZ7
Where-used Iisf Lisfe des cos d´empIois sfofiques 8OM 4 Z7
Work ceII CeIIuIe independonfe Monufocfurinq Ib IZ9
Work cenfer Cenfre de Chorqes Monufocfurinq o 4Z
Work order WO Ordre de fobricofion ScheduIinq o 4Z
Work-in-process WIP Encours de reoIisofion Invenfories 9 o9

SYNTHESE BASICS

GUILLOT Lionel - ISERPA MLI 09/09/05

CONTENTS
1 INTRODUCTION TO MATERIALS MANAGEMENT ______________________________________ 6 1.1 1.2 1.3 1.4 1.5 2 2.1 2.2 2.3 2.4 2.5 2.6 3 3.1 3.2 3.3 3.4 4 4.1 4.2 4.3 4.4 5 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 6 6.1 6.2 6.3 6.4 INTRODUCTION _______________________________________________________________ 6 OPERATING ENVIRONMENT ___________________________________________________ 6 THE SUPPLY CHAIN CONCEPT _________________________________________________ 7 MATERIALS MANAGEMENT ___________________________________________________ 8 SUPPLY CHAIN METRICS _____________________________________________________ 10 INTRODUCTION ______________________________________________________________ 10 MANUFACTURING PLANNING AND CONTROL SYSTEM _________________________ 11 SALES AND OPERATIONS PLANNING (SOP)_____________________________________ 13 MANUFACTURING RESOURCE PLANNING (MRP II) _____________________________ 14 ENTERPRISE RESOURCE PLANNING (ERP) _____________________________________ 14 MAKING THE PRODUCTION PLAN _____________________________________________ 15 INTRODUCTION ______________________________________________________________ 18 RELATIONSHIP TO PRODUCTION PLAN _______________________________________ 19 DEVELOPING A MASTER PRODUCTION SCHEDULE ____________________________ 19 PRODUCTION PLANNING, MASTER SCHEDULING AND SALES __________________ 21 INTRODUCTION ______________________________________________________________ 23 BILLS OF MATERIAL _________________________________________________________ 25 MATERIAL REQUIREMENT PLANNING PROCESS_______________________________ 27 USING THE MATERIAL REQUIREMENTS PLANNING ____________________________ 31 INTRODUCTION ______________________________________________________________ 33 DEFINITION OF CAPACITY ____________________________________________________ 33 CAPACITY PLANNING ________________________________________________________ 34 CAPACITY REQUIREMENTS PLANNING (CRP) __________________________________ 35 CAPACITY AVAILABLE _______________________________________________________ 36 CAPACITY REQUIRED (LOAD) _________________________________________________ 37 SCHEDULING ORDERS ________________________________________________________ 38 MAKING THE PLAN ___________________________________________________________ 39 INTRODUCTION ______________________________________________________________ 39 DATA REQUIREMENTS________________________________________________________ 41 ORDER PREPARATION ________________________________________________________ 43 SCHEDULING_________________________________________________________________ 43

PRODUCTION PLANNING SYSTEM___________________________________________________ 10

MASTER SCHEDULING _____________________________________________________________ 18

MATERIAL REQUIREMENTS PLANNING _____________________________________________ 23

CAPACITY MANAGEMENT __________________________________________________________ 33

PRODUCTION ACTIVITY CONTROL __________________________________________________ 39

2

SYNTHESE BASICS 6.5 6.6 6.7 6.8 6.9 6.10 7 7.1 7.2 7.3 7.4 7.5 7.6 7.7 8 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 9 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 10 10.1 10.2 10.3

GUILLOT Lionel - ISERPA MLI 09/09/05

LOAD LEVELING _____________________________________________________________ 45 SCHEDULING BOTTLENECKS _________________________________________________ 45 THEORY OF CONSTRAINTS (TOC) AND DRUM-BUFFER-ROPE ___________________ 47 IMPLEMENTATION ___________________________________________________________ 48 CONTROL ____________________________________________________________________ 48 PRODUCTION REPORTING ____________________________________________________ 50 INTRODUCTION ______________________________________________________________ 51 ESTABLISHING SPECIFICATIONS______________________________________________ 53 FUNCTIONAL SPECIFICATION DESCRIPTION __________________________________ 54 SELECTING SUPPLIERS _______________________________________________________ 56 PRICE DETERMINATION ______________________________________________________ 57 IMPACT OF MATERIAL REQUIREMENTS PLANNING ON PURCHASING __________ 59 SOME ORGANIZATIONAL IMPLICATIONS OF SUPPLY CHAIN MANAGEMENT ___ 60 INTRODUCTION ______________________________________________________________ 61 DEMAND MANAGEMENT______________________________________________________ 61 DEMAND FORECASTING ______________________________________________________ 62 CHARACTERISTICS OF DEMAND ______________________________________________ 62 PRINCIPLES OF FORECASTING________________________________________________ 63 COLLECTION AND PREPARATION OF DATA ___________________________________ 63 FORECASTING TECHNIQUES __________________________________________________ 63 SOME IMPORTANT INTRINSIC TECHNIQUES___________________________________ 64 SEASONALITY ________________________________________________________________ 65 TRACKING THE FORECAST ___________________________________________________ 65 INTRODUCTION ______________________________________________________________ 68 AGGREGATE INVENTORY MANAGEMENT _____________________________________ 68 ITEM INVENTORY MANAGEMENT_____________________________________________ 68 INVENTORY AND THE FLOW OF MATERIAL ___________________________________ 69 SUPPLY AND DEMAND PATTERNS _____________________________________________ 69 FUNCTIONS OF INVENTORIES_________________________________________________ 69 OBJECTIVES OF INVENTORY MANAGEMENT __________________________________ 70 INVENTORY COSTS ___________________________________________________________ 72 FINANCIAL STATEMENTS AND INVENTORY ___________________________________ 73 ABC INVENTORY CONTROL___________________________________________________ 76 ORDER QUANTITIES _____________________________________________________________ 77 INTRODUCTION ______________________________________________________________ 77 ECONOMIC-ORDER QUANTITY (EOQ) _________________________________________ 78 VARIATIONS OF THE EOQ MODEL ____________________________________________ 80

PURCHASING______________________________________________________________________ 51

FORECASTING ____________________________________________________________________ 61

INVENTORY FUNDAMENTALS ______________________________________________________ 68

3

1 14.7 13.8 13.3 14.10 MULTI-WAREHOUSE SYSTEMS _______________________________________________ 111 14.8 12 12.4 11.7 14.2 13.6 13.3 12.6 11 11.4 13 13.2 11.8 14.4 14.1 13.6 11.5 10.2 12.5 11.7 11.5 13.2 14.3 11.3 13.SYNTHESE BASICS 10.ISERPA MLI 09/09/05 QUANTITY DISCOUNTS _______________________________________________________ 81 USE OF EOQ WHEN COSTS ARE NOT KNOWN __________________________________ 81 PERIOD-ORDER QUANTITY (POQ) _____________________________________________ 82 INDEPENDENT DEMAND ORDERING SYSTEMS _____________________________________ 82 INTRODUCTION ______________________________________________________________ 82 ORDER POINT SYSTEM _______________________________________________________ 83 DETERMINING SAFETY STOCK________________________________________________ 84 DETERMINING SERVICE LEVELS______________________________________________ 86 DIFFERENT FORECAST AND LEAD-TIME INTERVALS __________________________ 86 DETERMINING WHEN THE ORDER POINT IS REACHED_________________________ 87 PERIODIC REVIEW SYSTEM___________________________________________________ 88 DISTRIBUTION INVENTORY___________________________________________________ 89 PHYSICAL INVENTORY AND WAREHOUSE MANAGEMENT___________________________ 90 INTRODUCTION ______________________________________________________________ 90 WAREHOUSING MANAGEMENT _______________________________________________ 91 PHYSICAL CONTROL AND SECURITY__________________________________________ 95 INVENTORY RECORD ACCURACY _____________________________________________ 95 PHYSICAL DISTRIBUTION ________________________________________________________ 99 INTRODUCTION ______________________________________________________________ 99 PHYSICAL DISTRIBUTION SYSTEM ___________________________________________ 100 INTERFACES ________________________________________________________________ 101 TRANSPORTATION __________________________________________________________ 102 LEGAL TYPES OF CARRIAGE_________________________________________________ 104 TRANSPORTATION COST ELEMENTS _________________________________________ 105 WAREHOUSING _____________________________________________________________ 107 PACKAGING_________________________________________________________________ 110 MATERIALS HANDLING______________________________________________________ 110 PRODUCTS AND PROCESSES _____________________________________________________ 113 INTRODUCTION _____________________________________________________________ 113 NEED FOR NEW PRODUCTS __________________________________________________ 113 PRODUCT DEVELOPMENT PRINCIPLES_______________________________________ 114 PRODUCT SPECIFICATION AND DESIGN ______________________________________ 116 PROCESS DESIGN ____________________________________________________________ 117 FACTORS INFLUENCING PROCESS DESIGN ___________________________________ 117 PROCESSING EQUIPMENT ___________________________________________________ 118 PROCESS SYSTEMS __________________________________________________________ 118 SELECTING THE PROCESS ___________________________________________________ 120 JUST-IN-TIME MANUFACTURING ________________________________________________ 126 13.1 12.9 15 GUILLOT Lionel .6 14.1 11.10 CONTINUOUS PROCESS IMPROVEMENT (CPI)_________________________________ 121 4 .4 13.4 10.5 14.9 14 14.

5 15.5 16.6 16. KANBAN OR THEORY OF CONSTRAINTS?_____ 140 TOTAL QUALITY MANAGEMENT _________________________________________________ 141 WHAT IS QUALITY?__________________________________________________________ 141 TOTAL QUALITY MANAGEMENT (TQM) ______________________________________ 142 QUALITY COST CONCEPTS___________________________________________________ 144 VARIATION AS A WAY OF LIFE _______________________________________________ 145 PROCESS CAPABILITY _______________________________________________________ 146 PROCESS CONTROL _________________________________________________________ 148 SAMPLE INSPECTION ________________________________________________________ 150 ISO 9000 (VERSION 1994) ______________________________________________________ 151 BENCHMARKING ____________________________________________________________ 151 ANNEXES_______________________________________________________________________ 153 SCHEMA MANUFACTURING PLANNING AND CONTROL SYSTEM (MPC) ________ 153 BOUCLE MRP II______________________________________________________________ 154 INDEX_______________________________________________________________________ 155 16.3 15.8 16.3 16.2 15.2 17.4 15.1 16.ISERPA MLI 09/09/05 INTRODUCTION _____________________________________________________________ 126 JUST-IN-TIME PHILOSOPHY__________________________________________________ 127 WASTE ______________________________________________________________________ 127 JUST-IN-TIME ENVIRONMENT________________________________________________ 129 MANUFACTURING PLANNING AND CONTROL IN A JIT ENVIRONMENT ________ 134 LEAN PRODUCTION _________________________________________________________ 139 WHICH TO CHOOSE: MRP (ERP).3 GUILLOT Lionel .7 16.9 17 17.1 15.4 16.7 16 16.6 15.2 16.SYNTHESE BASICS 15. TQM AND MRP II ________________________________________________________ 152 5 .10 JIT.1 17.

Government: Regulation applies to such areas as the environment. This conversion process is called manufacturing or production. . . maturation and decline). Order winners and qualifiers will change based on product life cycle (introduction. .Quality: Successful companies provide quality that exceeds customers’ expectations. Understanding these two orders is important to drive the manufacturing strategy.Assemble-to-order. .SYNTHESE BASICS GUILLOT Lionel . 4 Strategies to achieve this: . .Competition: Manufacturing companies find foreign competitors selling in their markets even though they themselves may not be selling in foreign markets. product liability and taxation.Make-to-stock. The most important are: . But it’ s not enough to win. Customers want delivery lead time to be as short as possible.Make-to-order.Engineer-to-order.2 OPERATING ENVIRONMENT Operating environment is affected by many factors. value is added thus creating more wealth. growth.ISERPA MLI 09/09/05 1 INTRODUCTION TO MATERIALS MANAGEMENT 1. At each stage in the development of the final product. . high quality. .Economy: General economic conditions influence the demand for a company products or service and the availability of inputs. . we need to manage their operation to produce most economically: . 6 . better pre-sale and after-sale service. product and volume flexibility.Planning for and controlling the resources and the flow of materials 1. Once the processes exist.Customers: Some of the characteristics expect in the products are a fair price. .Order winners: Competitive characteristics that persuade a customer to choose products. Manufacturing strategy: Delivery lead time: Time from receipt of an order to the delivery of the product.Order qualifiers: Supplier must meet set minimum requirements to be considered a viable competitor.1 INTRODUCTION There are many stages between the extraction of resource material and the final consumer product. safety. delivery lead time.

. . Suppliers were viewed as partners as opposed to adversaries. Internet. .There has been a growth in technological capabilities for products and processes. . .3 THE SUPPLY CHAIN CONCEPT There are 3 phases to the flow of materials: .There has been a large growth in global competition and many companies are forcing to find a new ways in the marketplace. The ability to have the information rapidly has become a competitive necessity.Supply. The success of each was linked to the success of the other.Explosive growth in computer capability => ERP. Many of the formal boundary mechanisms were changed or eliminated altogether: .Production.Mutual product design. forcing companies to not only become more flexible in design.Many companies have new approaches to inter-organizational relationships. those entities were often viewed as business entities only.Formal paper-based systems gave way to electronic data interchange and informal communication methods. .Distribution. but also to communicate changes and needs to suppliers and distributors. . S U P P L I E R Physical Supply MANUFACTURER DISTRIBUTION SYSTEM C O S T U M E R Manufacturing Planning and Control Physical Distribution Dominant flow of products and services Dominant flow of demand and design information Historical perspective: In the past.Mutual analysis for cost reduction.SYNTHESE BASICS GUILLOT Lionel .ISERPA MLI 09/09/05 1. 7 . The first major change can be traced to the explosive growth in Just-in-Time (JIT) concepts originally developed by Toyota in the 1970s. The growth of the SC concept As the 1980s gave way to the 1990s: . There are all members of the same supply chain.

. overall company objectives suffered. Overall. 8 . The problem is to balance conflicting objectives to minimize the total of all the costs involved and maximize customer service. it’ s felt that the supply chain of activities should be managed as an extension of the partnership.Provide lowest distribution costs. . . a company must have at least 4 main objectives: . finance must keep investment and cost low and production must keep its operating costs as low as possible. Conflicts in traditional systems In the past. keeping only their most core competencies as internal activities. delivery. 1. Reducing cost contributes directly to profit.ISERPA MLI 09/09/05 - More and more companies are subcontracting. Marketing’ s objective is to maintain and increase revenue. . they should occur in a single area of responsibility. one must not only understand the network of suppliers and customers along the chain. the key to managing such a concept is with rapid flows of accurate information and increase organizational flexibility.4 MATERIALS MANAGEMENT Materials management is a coordinating function responsible for planning and controlling materials flow.Flow of information.Provide lowest production costs. There are several ways of classifying this flow of material.SYNTHESE BASICS GUILLOT Lionel . . . Materials management can do much to improve a company’ s profit. mostly electronically.Provide best customer service. Current supply chain concept To result in optimal performance for customer service and cost. This clearly implies a highly integrated information system and a different set of performance measures. effectiveness. Materials management can reduce costs by being sure that the right materials are in the right place at the right time and the resources are properly used.Provide the required level of customer service. and flexibility. production and distribution. This implies many issues but 3 critical ones include: . production and finance departments.Fund transfers. Rather than having the planning and control of these functions spread among marketing. These objectives create conflict among the marketing.Provide lowest inventory investment.Flow of materials. To manage a supply chain. each system made decisions that were best for itself. To get the most profit. Its objectives are as follows: .Maximize the use of resources. but must also try to efficiently plan material and information flows along each chain to maximize cost efficiently.

This document does 2 things: o Describes the components used to make the product. . .Production planning: it must establish correct priorities (what is needed and when) and make certain that capacity is available to meet these priorities.Quantities required: This information will come from forecasts. The primary activities carried out are as follows: .SYNTHESE BASICS GUILLOT Lionel . Material handling and Order entry. . Inputs to the manufacturing planning and control system There are 5 basics inputs to it: . . Physical Supply/Distribution It includes all the activities involved in moving goods from the supplier to the beginning of process and from the end of process to the consumer. It will involve: o Forecasting. Capacity is the ability of the system to produce or deliver goods.Product description shows how the product will appear at some stage of production with the bill of materials. o Describes the subassemblies at various stages of manufacture.Inventory management: They are part of the planning process and provide a buffer against the differences in demand rates and production rates.ISERPA MLI 09/09/05 Manufacturing Planning and Control (MPC) MPC is responsible for the planning and control of the flow of materials though the manufacturing process.Implementation and control: These are responsible for putting into action and achieving the plans made by production planning. Distribution inventory.Process specifications describe. They are as follows: Transportation. o Capacity planning. These give information as: o Operations required to make the product. These are accomplished though Production Activity Control and Purchasing. 9 . Priority and capacity must be planned and controlled to meet customer demand at minimum cost. o Material requirements planning. o Standard time required to perform each operation. orders to replace finish-goods inventory and the MRP. Inventory management can not operate apart from purchasing. Packaging.Time needed to perform operations is usually expressed in standard time and is obtained from the routing file. Materials management must plan the priorities to meet the marketplace sets demand.Available facilities: Manufacturing planning and control must know what resources will be available to process work. o Equipment and accessories required. . . step by step the manufacturing of the end product with the route sheet or in a routing file. customers orders. Warehousing. o Master planning. o Sequence of operations.

Metrics give us: .ISERPA MLI 09/09/05 1. . direct a course of action and motivate people. . machinery. identify problems. Metrics link strategy to operations.Make sure the program is consistently applied. . innovation.What are we going to make? 10 .Improvement.A supply chain that is large and must be managed. . However. It is essential to have a good planning and control system.Establish company goals and objectives.Educate the user. .A vast amount of data. Each goal should have target values. The necessary steps in implementing such a program are: . 2 PRODUCTION PLANNING SYSTEM 2. Some firms make a few different products while others make many products. It must answer 4 questions: .An increasing number of alternatives.An emphasis on profits margins that are more squeezed. .Learning.5 SUPPLY CHAIN METRICS A metric is a verifiable measure stated in either quantitative or qualitative terms defined with respect to a reference point. There is a difference between measurement and standards. To be profitable.Control by superiors.A product life cycle that is getting shorter and shorter. reliability. A performance measure must be both quantified and objective and contain at least to parameters (by example number of orders on a span of time). cost.Customers that are never satisfied.State the measurement to be used.Communication.Set performance standards. Transforming company policies into objectives creates performance standards.1 INTRODUCTION Manufacturing is complex. effectiveness and productivity). .Define performance. . . labor skills and material. Metrics communicate expectations. a firm must organize all these factors to make the right goods at the right time at top quality and do as so economically as possible. . . Production control works in a demanding environment shaped by 6 major challenges: . equipment.Reporting of data to superiors and external groups. . . each uses a variety of processes. Today the focus is on continuous improvement and an increase in standards (quality. .SYNTHESE BASICS GUILLOT Lionel . Companies cannot waiting to react until the order cycle is completed and feedback from customers is received.

such as the building of new plants or the purchase of new equipment.What do we have? . The result of the plans is authorization to purchase or manufacture what is required. .Planning cycle: the frequency with which the plan is reviewed. manufacturing must devise plans to balance the demands with its resources and capacity. .Master production schedule.Production plan (sales and operations plan). Manufacturing is responsible for devising to satisfy the market demand if possible. In the short run. the plans must be made for several years.ISERPA MLI 09/09/05 .Materiel requirements plan. .Strategic business plan.SYNTHESE BASICS GUILLOT Lionel . In the long and short run. .Priority relates to what products are needed. 3 questions must be answered: .Planning horizon: the time span from now to some time in future for which plan is created.Capacity is the capability of manufacturing to produce goods and services.What are the priorities: how much of what is to be produced and when? . . Each level varies in purpose. 2. time span and level of detail.How can differences between priorities and capacity be resolved? The first 4 levels are planning levels.What is the available capacity: what resources do we have? . . the time span will be days or weeks.What does it take to make it? . capacity is the quantity of work that labor and equipment can perform in a given time.Purpose of the plan. The Strategic Business Plan (SBP) The strategic business plan is a statement of the major goals and objectives the company expects to achieve over the next 2 to 10 years or more. Since each level is for different time span and purposes. . The final level is when plans are put into action through production activity control and purchasing. It is a statement of the broad direction and show the kind of business the firm wants to do in the future. . At each level. For long-range decisions.2 MANUFACTURING PLANNING AND CONTROL SYSTEM There are 5 levels in the manufacturing planning and control (MPC) system: .Purchasing and production activity control. how many are needed and when they are needed. The marketplace establishes the priorities.Level of detail: the detail about products require for the plan. 11 . For planning production over the next few weeks. each differs in the following: .What do we need? These are questions of priority and capacity: .

sales orders. The Production Plan (PP) Given the objectives set by SBP. The MPS is developed for individual end items. 12 . development and design. the PP is concerned with implementing the strategic business plan.The desired inventory levels. These plan will be coordinated with one another and with the SBP. It is based on long-range forecasts and includes participation from marketing. . inventories and existing capacity. The production plan will show major product groups or families.Engineering is responsible for research.Finance is responsible for deciding the sources and uses of funds available to the firm. .The resources of equipment. The planning horizon is usually 6 to 18 months and is reviewed each month or quarter. Strategic business plans are usually reviewed every six months to 1 year.ISERPA MLI 09/09/05 The plan gives general direction about how the company hopes to achieve these objectives. . Inputs to the MPS are PP. Along with the market and financial plans. production management is concerned with the following: . for each period. production and engineering: . finance. Each department produces its own plans to achieve the objectives set by the SBP. . The development of the SBP is the responsibility of senior management. It does so by using resources and materials as efficiently as possible. labor. and material needed in each period.The quantities of each product group that must be produced in each period. The level of detail is not high.Marketing is responsible for analysing the marketplace and deciding the firm’ s response. It must work with marketing and production for products that will sell in the marketplace and can be made most economically.Production must satisfy the demands of the marketplace. . The Master Production Schedule (MPS) The master production schedule is a plan for the production of individual end items. . the forecast for individual end items. For effective planning. Usually the plans are reviewed and changed weekly or monthly. the quantity of each end item to be made. Production planners must devise a plan to satisfy market demand within the resources available to the company. The level of detail is higher.SYNTHESE BASICS GUILLOT Lionel . The planning horizon usually extends from 3 to 18 months but depends on the purchasing and manufacturing lead times (see chapter 3). The level of detail is not high. It is concerned with general market and production requirements (total market for major product groups) and not sales of individual items. there must be a balance between priority and capacity. It breaks down the PP to show.The availability of the resources needed.

The planning horizon is at least as long as the combined purchase and manufacturing lead times. Capacity management At each level in the MPC system. the priority plan must be tested against the available resources and capacity of the manufacturing system.3 SALES AND OPERATIONS PLANNING (SOP) The SBP integrates the plans of all departments in an organisation and is normally updated annually. in the time spans involved from PP to PAC. While operations represent supply. However. operations and senior management. workstations and orders.ISERPA MLI 09/09/05 The Material Requirements Planning (MRP) The material requirements planning is a plan for the production and purchase of the components used in making the items in the MPS. The planning horizon is very short. marketing represents demand. usually monthly.It provides a means of updating the SBP as conditions change. However. these plans should be updated as time progresses so that the latest forecasts and market and economic conditions are taken into account. equipment and plants can be added to or taken away from manufacturing.SYNTHESE BASICS GUILLOT Lionel . 2. then the marketing plan must be adjusted. SOP is a cross-functional business plan that involves sales and marketing. The updated marketing is then communicate to manufacturing. can be accomplished in these time spans. The level of detail is high. Purchasing and Production Activity Control (PAC) Purchasing and production activity control use the MRP to decide the purchase or manufacture of specific items. Over several years. product development. Purchasing and PAC represent the implementation and control phase of MPC system. subcontracting the work. The level of detail is high since it is concerned with individual components. There can be no valid. If the capacity cannot be made available when needed. Plans are reviewed and revised daily. engineering and finance which adjust their plans. It shows the quantities needed and when manufacturing intends to make or use them. machinery. SOP is medium range. The MRP establishes when the components and parts are needed to make each end item. SOP has several benefits: . If these departments find they cannot accommodate the new marketing plan. It usually extends from 3 to 18 months. such as changing the number of shifts. PAC is responsible for planning and controlling the flow of work through the factory. 13 . then the plans must be changed. working overtime. SOP is a process for continually revising the SBP and coordinating plans of the various departments. Some changes. from a day to a month. The process starts with the sales and marketing departments. these kind of changes cannot be made. The SOP is the forum in which the production plan is developed. Purchasing is responsible for establishing and controlling the flow of raw materials into the factory. workable PP unless this is done. updated on a regular basis. SOP is a dynamic process.

there are also some large costs involved. 14 . meaning that these managers can potentially have visibility across the complete span of the supply chain. The SBP incorporates the plans of marketing. 2. Many of the best systems are expensive to buy and the large data requirements tend to make the system expensive. they tended to take advantage of 2 changing conditions: . those changes should be reflected in the levels above. The system is intended to be a fully integrated planning and control system that work from the top down and has feedback from the bottom up. there must be feedback throughout the system. Marketing must agree that its plans are realistic and attainable. The development of Information Technologies (IT) system matched that need.4 MANUFACTURING RESOURCE PLANNING (MRP II) Because of the large amount of data and the number of calculations needed. As these system became both larger in scope and integration when compared to MRP and MRP II. . inventory and backlog. It provides a realistic plan that can achieve the company objectives.SYNTHESE BASICS GUILLOT Lionel . 2. time consuming and generally difficult to implement for many firms. accuracy and capability of integrated computer-based management systems. they were given a new name: Enterprise Resource Planning or ERP. but often very familiar with the advantages in speed. The MPC system is a master game plan for all departments in the company. If priority plans have to be adjust at any of the planning levels because of capacity problems. Thus. That movement of integration is what is now recognised as supply chain management. Marketing and production must work together on a weekly and daily basis to adjust the plan as changes occur. The SOP forces management to look at the economy at least monthly and places it in a better position to plan changes.Movement toward integration of knowledge and decision making in all aspects of direct and indirect functions and areas that impact materials flow and materials management. Many ERP systems are capable of allowing managers to share data between the firms. While the power and capability of these highly integrated ERP systems is extremely high.People in most companies had become at least comfortable. This integration not only included internal functions but also included the upstream activities in supplier information and the downstream activities of distribution and delivery. Planning ensures the various department plants are realistic. This fully integrated planning and control system is called a manufacturing resource planning or MRP II. the MPC system will probably have to be computer based.ISERPA MLI 09/09/05 - It provides a means of managing change.5 ENTERPRISE RESOURCE PLANNING (ERP) As MRP systems evolved. Finance must agree that the plans are desirable from a financial point of view and production must agree that it can meet the required demand. It permit better management of production. coordinated and support the SBP. finance and production.

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GUILLOT Lionel - ISERPA MLI 09/09/05

2.6 MAKING THE PRODUCTION PLAN
Based on the market plan and available resources, the PP sets the limits or levels of manufacturing activity for some time in future. It integrates the capabilities and capacity of the factory with the market and financial plans to achieve business goals. Its prime purpose is to establish production rates that will accomplish the objectives of the SBP. The plan must extend far enough in the future to plan for the labor, equipment, facilities and material needed. This is a period of 6 to 18 months and is done in monthly or sometimes weekly periods. With the time spans involved and the uncertainly of demand over long periods, the detail would not be accurate or useful and the plan would be expensive to create. For planning purposes, a common unit or small number of product groups is what is needed. Establishing product groups Firms that make a single product can measure their output directly by the number of units they produce. Many companies make several different products. Product groups need to be established. Thus, firms need to establish product groups based on the similarity of manufacturing processes. Manufacturing must provide the capacity to produce the goods needed. Capacity is the ability to produce goods and services. For the time span of a PP, it can be expressed as the time available in a given period. Over the time span of the PP, large changes in capacity are impossible or very difficult to accomplish in this period. However, some things can be altered and it is the responsibility of manufacturing management to identify and assess them. Usually the following can be varied: - People can be hired and laid off, overtime and short time can be worked and shifts can be added or removed; - Inventory can be built up in slack periods and sold or used in periods of high demand; - Work can be subcontracted or extra equipment leased. Each alternative has its associated benefits and costs. Manufacturing management is responsible for finding the least-cost alternative consistent with the goals and objectives of the business. Basic strategies There are 3 basic strategies that can be used in developing a production plan: - Chase (demand matching) strategy: it means producing the amounts demanded at any given time. Inventory levels remain stable while production varies to meet demand. In these cases, the company must have enough capacity to be able to meet the peak demand. Companies have to hire and train people for the peak periods and lay them off when the peak is past. They have to put on extra shifts, overtime. All these changes add cost. The advantage to the chase strategy is that inventories can be kept to a minimum. The costs associated with carrying inventories are avoided. Production leveling: it is continually producing an amount equal to the average demand. Sometimes demand is less than the amount produced and a inventory builds up. At other time, demand is greater and inventory is

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used up. The advantage of a production leveling strategy is that it results in a smooth level of operations that avoids the costs of changing production levels. Firms do not need to have excess capacity to meet peak demand. The disadvantage is that inventory will build up in low demand periods. This inventory will cost money to carry. For some products for which demand is very seasonal some form of production leveling is necessary. The costs of idle capacity, of hiring, training and laying of are severe if a company employs a chase strategy. Subcontracting: as a pure strategy, subcontracting means always producing at the level of minimum demand and meeting any additional demand through subcontracting. The major advantage of this strategy is cost. Costs associated with excess capacity are avoided and there are no costs associated with changing production levels. The main disadvantage is that the cost of purchasing (item cost, purchasing, transportation and inspection costs) may be greater than if the items were made in the plant. There are several other factors that may be considered. Firms may manufacture to keep confidential processes within the company, to maintain quality levels and a workforce. Hybrid strategy: the three strategies discussed so far are pure strategies. There are many possible hybrid or combined strategies a company may use. Each will have its own set of cost characteristics. Production manager is responsible for finding the combination of strategies that minimize the sum of all costs involved, providing the level of service required and meeting the objectives of the financial and marketing plans.

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Developing a Make-to-stock Production Plan Generally firms make to stock when: - Demand is fairly constant and predictable, - There are few product options, - Delivery times demanded by marketplace are much shorter than the time needed to make the product, - Product has a long shelf life. The information needed to make a PP is as follows: - Forecast by period for the planning horizon, - Opening inventory, - Desired ending inventory, - Any past-due customers orders. The objective in developing a PP is to minimize the costs of carrying inventory, changing production levels and stocking out. This section develops a plan for leveling production and one for chase strategy: - Level production plan. Following is the general procedure: o Total the forecast demand for the planning horizon, o Determine the opening inventory and the desired ending inventory,

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o Calculate the total production required as follows: Total Production = total forecast + back orders + ending inventory - opening inventory, o Calculate the production required each period by dividing the total production by the number of periods, o Calculate the ending inventory for each period. Chase strategy. Products are perishable and the company cannot built inventory for sale later. They must use a chase strategy and make only enough to satisfy demand in each period.

Developing a Make-to-Order Production Plan In a make-to-order environment, manufacturers wait until an order is received from a customer before starting to make the goods. Very expensive items are usually made to order. Generally firms make to order when: - Goods are produced to customer specification, - The customer is willing to wait while the order is being made, - The product is expensive to make and to store, - Several product options are offered. Assembled-to-order. Where several options exist and where the customer is not willing to wait until the product is made, manufacturers produce and stock standard component parts. When they receive an order, they assemble the component parts from inventory according to the order. Since the components are stocked, the firm needs only time to assemble before delivering to the customer. The following information is needed to make a PP for make-to-order products: - Forecast by period for the planning horizon, - Opening backlog of customer orders, - Desired ending backlog. Backlog (queue). In a make-to-order environment, a company has a backlog of unfilled customer orders. The backlog normally will be for delivery in the future and does not represent orders that are late or past due. Level production plan. Following is a general procedure for developing a level PP: - Total the forecast demand for the planning horizon, - Determine the opening backlog and the desired ending backlog, - Calculate the total production required as follows: Total Production = total forecast + opening backlog – ending backlog, - Calculate the production required each period by dividing the total production by the number of periods, - Spread the existing backlog over the planning horizon according to due date per period.

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It keeps priorities valid.It is a contract between marketing and manufacturing.Forecasts for individual end items. Therefore the total of the items in the MPS should not be different from the total shown on the PP. suppose the labor normally available in a period is 1600 hours.The PP.Are the resources available to meet the PP? .4%. The MPS is a priority plan for manufacturing. The MPS is a plan for manufacturing. . For instance. . a difference of 135 hours or about 8. within this limit. 18 . and equipment (capacity).1 INTRODUCTION After PP. .It forms the basis for calculating the capacity and resources needed. The MPS is a plan of what is to be produced and when.SYNTHESE BASICS GUILLOT Lionel . The priority plan requires 1735 hours. . how will the difference be reconciled? A tool often used is the resource bill. This step is called resource requirements planning or resource planning. Extra capacity must be find or the priority plan must be adjusted. . The MPS works with end items. The information needed to develop an MPS is provided by: .ISERPA MLI 09/09/05 Resource planning Once the preliminary production plan is established. by date and quantity. its objective is to balance the demand (priorities) with the availability of materials.It forms the link between production planning and what manufacturing will actually build. The MPS forms a vital link between sales and production as follows: . This shows the quantity of critical resources needed to make one average unit of the product group.Actual orders received from customers and for stock replenishment. . The PP limits the MPS.If not. in each family. The MRP system plans the schedule for these components. the MPS and bills of material determine what components are needed from manufacturing and purchasing.It makes possible valid order promises.The MPS drive the MRP. The MPS is a vital link in the production planning system: . Thus the MPS drives the MRP. The end items are assembled from component and sub-component parts. labor.Inventory levels for individual end items. . 2 questions must be answered: . As such.Capacity restraints. it tells sales and manufacturing when goods will be available for delivery. As a schedule of items to be built. the next step in the MPC process is to prepare a Master Production Schedule (MPS). It breaks down the PP deals into the requirements for individual end items. 3 MASTER SCHEDULING 3. it must be compared to the existing resources of the company. .

.ISERPA MLI 09/09/05 3. Here the resource bill is for a single product.Develop a preliminary MPS. Preliminary Master Production Schedule To show the process of developing a MPS. . As before. Resolution of differences The next step is to compare the total time required to the available capacity of the work center. The term “master production schedule” refers to the last line of the matrix. If available capacity is greater than the required capacity. labor and equipment.To maintain the desired level of customer service by maintaining finishedgoods inventory levels or by scheduling to meet customer delivery requirements. . the MPS is workable. Thus the total matrix is called a master schedule. Is it possible to adjust the available capacity with overtime.To make the best use of material. an inventory is kept and the product is made in lots.To maintain inventory investment at the required levels. Rough-CUT Capacity Planning (RCCP) Rough-cut capacity planning checks whether critical resources are available to support the preliminary master production schedules. labor and critical materials.Resolve differences between the preliminary MPS and available capacity. Critical resources include bottleneck operations. The term “master schedule” refers to the process of arriving at that line. there are 3 steps in preparing a MPA: .2 RELATIONSHIP TO PRODUCTION PLAN A PP is developed for a family of several items. This process is called rough-cut capacity planning. they must checked against the available capacity. This process of building an MPS occurs for each item in the family. some adjustment to the individual plans must be made so the total production is the same.Check the preliminary MPS against available capacity. routing through other work centers or subcontracting? If not it will be necessary to revise the MPS. the only interest is in bottleneck work centers and critical resources. If the total planned production of all items in the family and the total ending inventory do not agree with the PP. 19 . If not. an example is used that assumes the product is made to stock. extra workers. 3.SYNTHESE BASICS GUILLOT Lionel .3 DEVELOPING A MASTER PRODUCTION SCHEDULE The objectives in developing an MPS are as follows: . . With this data. the master scheduler must now devise a plan to fit the constraints. To reach this objectives. Once the preliminary mater production schedules are made. The next step is to forecast demand for each item in the product family. methods of increasing capacity have to be investigated.

SYNTHESE BASICS GUILLOT Lionel . Engineer to order. The FAS schedules customer orders as they are received and is based on the components planned in the MPS. The product is designed before manufacturing based on the customer’ s very special needs. Make-to-Stock End Product MPS Make-to-Order End Product FAS Assemble-to-Order End Product FAS MPS MPS Raw Material Raw Material Raw Material Planning Horizon The planning horizon is the time span for which plans are made. Assembled-to-order products. subcontracting. The planning horizon is usually longer for several reasons.Cost: is the plan economical. It must cover a period at least equal to the time required to accomplish the plan. This last step. or will excess costs be incurred for overtime. the planning horizon for a final assembly schedule must include time to assemble a customer’ s order. As a minimum. A limited number of standard items are assembled from many components. it will lead to difficulties in forecasting and managing the MPS. assembly to customer order. the greater the visibility and the better management’ s ability to avoid future problems or to take advantage of special circumstances. The MPS is usually a schedule of finished-goods items. The longer the horizon. Make-to-order products. expediting or transportation? Master Schedule Decisions The MPS should represent as efficiently as possible what manufacturing will make. For master production scheduling. It does not need to include the time 20 . Many different end items are made from a small number of components. The final assembly takes place only when a customer order is received. In each of the manufacturing environments. is generally planned using a final assembly schedule. Make-to-stock products. If too many items are included. The MPS is usually a schedule of the actual customer orders.ISERPA MLI 09/09/05 Finally. Many end items can be made from combinations of basic components and subassemblies. Final assembly schedule (FAS). the MPS must be judged by 3 criteria: . It is easier if production is planned at the level of subassemblies.Resource use: is the MPS within capacity restraints in each period of the plan? Does it makes the best use of resources? . master scheduling should take place were the smallest number of product options exists. the minimum planning horizon is the longest cumulative or end-to-end lead time (LT). This is a form of make-to-order products.Customer service: will due dates be met and will delivery performance be acceptable? .

sales and distribution need to know what is available to satisfy customer demand. That time will be included in the planning horizon of the MPS.SYNTHESE BASICS GUILLOT Lionel . Customer orders will sometimes be greater than forecast and sometimes less. in make-to-order or assemble-to-order environments. The projected available balance (PAB) is calculated in one of 2 ways. If it is not sold. The ATP is calculated by adding scheduled receipts to the beginning inventory and then subtracting actual orders scheduled before the next schedule receipt. Projected Available Balance Our calculations so far have based the projected available balance on the forecast demand. The MPS provides the basis for making changes and a plan on which all can agree. the MPS provides a realistic basis for making delivery promises. Manufacturing is committed to making the goods. This method assumes that the ATP will be sold before the next scheduled receipt arrives.ISERPA MLI 09/09/05 necessary to manufacture the components. depending on whether the period is before or after the demand time fence. However the MPS is not meant to be rigid. Using the MPS. they attempt to balance available resources with forecast demand. As orders are received. beginning with period 1. demand is satisfied from productive capacity. However. Changes must be made with the full understanding and agreement of sales and production. they are not a sales forecast. PAB = prior period PAB or on-hand balance + MPS – customer orders 21 . It is intended to provide a framework in which detailed plans can be made in the MPS. nor are they necessarily what is desired. The MPS and Delivery Promises In a make-to-stock environment. problems occur in production and sometimes components are scarce. marketing to selling the goods. 3. Together. It is the point at which manufacturing and marketing must agree what end items are going to be produced. The MPS is built from forecasts and actual demands for individual end items. It is not concerned with the detail of what will actually be made. It is there to be sold and the assumption is that it will be sold. The demand time fence is the number of periods. Projected available balance is now calculated based on whichever is the greater. A schedule receipt is an order that has been issued either to manufacturing or to a supplier. However. In this way. the PP and the MPS uncouple the sales forecast from manufacturing by establishing a manufacturing plan. Any part of the plan that is not consumed by actual customer orders is available to promise to customers. These events may make it necessary to alter the MPS. In either case. in which changes are not excepted due to excessive cost cause by schedule disruption.4 PRODUCTION PLANNING. customer orders are satisfied from inventory. they consume the available inventory or capacity. sales and distribution can determine the available to promise (ATP). The MPS is a plan for what production can and will do. Demand changes. whatever is left forms an on-hand balance available for the next period. MASTER SCHEDULING AND SALES The production plan reconciles total forecast demand with available resources. Now there are also customer orders to consider.

Suppliers have problems and miss delivery dates. PAB = prior period PAB or on-hand balance + MPS – greater of customer orders or forecast Time Fences At each of the stages of a bill of material. . . Changes to production schedules can result in the following: . A company wants to minimize the cost of manufacture and also be flexible enough to adapt to changing needs. expediting and buildup of work-in-process inventory. forecast will influence the PAB so it is calculated using the greater of the forecast or customer orders. rescheduling. Since changes would result in excessive costs.Decreased customer service. demand is usually based on customer orders.SYNTHESE BASICS GUILLOT Lionel . Capacity and material are committed to less extend. Changes that are far off on the planning horizon can be made with little or no cost or disruption to manufacturing. Within this time fence the computer will not reschedule MPS orders.ISERPA MLI 09/09/05 This process ignores the forecast and assumes the only effect will be from the customers orders. A change in quantity of delivery can disrupt the schedule of other orders. . To help in the decision-making process.Processes create more scrap than expected. the company commits itself to more cost and fewer alternatives. Changes to the MPS will occur: .Customers cancel or change orders. Therefore the cost of making a change increases and the company’ s flexibility decreases as production gets closer to the delivery time. extra setups. For periods after the demand time fence. companies establish zones divided by time fences. Materials have been ordered and capacity established. senior management’ s approval is usually required to make changes. The extent of the slushy zone is defined by the planning time fence. The zones and time fences are: Frozen zone.Machines break down or new machines are added. LIQUID Planning Time Fence 22 SLUSHY Demand Time Fence FROZEN 0 Due Date .Cost increases due to re-routing. Any new orders will have to be approved by senior management. not forecast. changes in priorities are easier to change. The extend of the frozen zone is defined by the demand time fence. reduced manufacturing efficiency and poor customer service. Capacity and material are committed to specific orders. Changes are routine and are often made by the computer program. changing capacity. This is an area for tradeoffs that must be negotiated between marketing and manufacturing.Loss of credibility for the MPS and the planning process. . However. They must be managed and decisions made with full knowledge of the costs involved. . Changes to the MPS will occur. Within the demand time fence. Any change can be made to the MPS as long as it is within the limits set by the PP. Liquid zone. Slushy zone. these are difficult to change.

They require different responses. . Nature of demand There are 2 types of demand: independent and dependent. negotiation of partial shipment or expediting of shipment.When to order. 3 general types of errors occur: . The material requirements plan’ s objective is to determine what components are needed to meet the MPS and. components also depend on each other (horizontal dependency). MRP is designed to this calculation.How much to order.1 INTRODUCTION Material requirements planning (MRP) is the system used to avoid missing parts. However.SYNTHESE BASICS GUILLOT Lionel . .What to order. Objectives of MRP MRP has 2 major objectives: determine requirements and keep priorities current. The demand for. The dependency of a component on its parent is vertical. since dependent demand is directly related to the demand for higher-level assemblies or products. .Wrong product or specification. reengineering or alteration. calculates the time when these components will be needed.ISERPA MLI 09/09/05 Error management Errors in customer orders occur all the time and require constant attention. to calculate the periods when the components must be available. components changes daily. An item can have both a dependent and an independent demand. based on lead time.Wrong shipping date. .When to schedule delivery. However. If one component is going to be a week late then the final assembly is a week late. It establishes a schedule (priority plan) showing the components requires at each level of the assembly and based on lead times. It must determine the following: . Independent demand is not related to the demand for any other product. It must be forecast. Determine requirements. 4 MATERIAL REQUIREMENTS PLANNING 4. The other components are not needed until later. . Dependency can be horizontal or vertical. Planners are concerned with horizontal dependency when a part is delayed or there is a shortage.Wrong amount. Keep priorities current. a MRP must be 23 . for then other parts will have to be rescheduled. it can be calculated. and supply of. In this ever-changing world. Customers enter or change orders.

Production Activity Control (PAC) and purchasing. safety stock. 24 . MRP drives . The MRP is a priority plan for the components needed to make the products in the MPS. With their ability to store and manipulate data and produce information rapidly. Master Production Schedule (MPS). MRP plans the release and receipt dates for orders. manufacturing now has a tool to use modern manufacturing planning and control systems properly. supply and capacity. The bill of material is one of the most important documents in a manufacturing company. Linkages to other MPC functions The MPS drives the MRP. The computer Most companies need to keep track of thousands of components in a world of changing demand. accurate and ideally suited for the job at hand. The second kind of information is on the status of each item. PAC and purchasing must plan and control the performance of the orders to meet the due dates. The first is called planning factors and includes information such as order quantities. lead times. delay and change orders. It drives the MRP system by providing the initial input for the items needed.ISERPA MLI 09/09/05 able to keep plans current. Inventory records. how much is allocated and how much is available for future demand. Inputs to the MRP system There are 3 inputs to MRP system: . also called a part master file or item master file. . It must be able to add and delete.SYNTHESE BASICS GUILLOT Lionel . The plan is valid only if capacity is available when needed to make the components and the plan must be checked against available capacity. expedite. There are 2 kinds of information needed. The process of doing so is called capacity requirements planning (CRP) and is discussed in the chapter 5. It is needed to plan what quantities to order and when to order for timely deliveries. The MPS is a statement of which end items are to be produced. These data are maintained in an inventory record file. Bills of material. . the quantities available must be considered. When a calculation is made to find out how many are needed. Each item has a record and all the record together form the file.Master Production Schedule.Bills of material. The MRP system needs to know how much is available. and scrap. the quantity of each and the dates they are to be completed. The computer software program that organizes and maintains the bills of material structures and their linkages is called a bill of material processor. The type of information is dynamic and changes with every transaction that takes place. Computers are incredibly fast.Inventory records. or is input to.

Thus if a particular numbers appears on two different bills of material. The subassemblies created are the result of this.SYNTHESE BASICS GUILLOT Lionel . Generally. The bill of material shows the components that go into making the parent. Each level in the bill of material is assigned a number starting from the top and working down. X A B C D Parent-component relationship. their sequence and their grouping. Multilevel bills are formed as logical grouping of parts into subassemblies based on the way the product is assembled. the part so identified is the same. This make identification of the part absolute. The top level. intermediates. or end product level.2 BILLS OF MATERIAL The American Production and Inventory Control Society (APICS) defines a bill of material as a listing of all the subassemblies.A part is defined by its form. The product tree and the bill of material shown in figure are called single-level structure. An assembly is considered a parent and the items that comprise it are called component items. It does not show the step or process used to make the parent or the component. It is the responsibility of manufacturing engineering to decide how the product is to be made: the operations to be performed. Multilevel bill. The product tree is a convenient way to think about bills of material but it is seldom used except for teaching and testing.ISERPA MLI 09/09/05 4. . There are 3 important points: . there must be only one structure and it should be designed to satisfy most needs.Each part or item has only one part number. unique part numbers have also been assigned to each part. One convention used with multilevel bills of material is that the last items on the tree are all purchased items. then it is not the same part and it must have a different part number. That information is recorded in a routing file (see chapters 5 & 6).The bill of material shows all the parts required to make one of the item. Bills of material structure Different departments in a company use bills of material for a variety of purposes. parts and raw materials that go into making the parent assembly showing the quantities of each required to make an assembly. If any of these change. 25 . Following are some important formats for bills: Product tree. a bill of material is not complete until all branches of the product structure tree end in a purchase part. Although each user has individual preferences for the way the bill should be structured. is level 0 and its components are level 1. . fit or function.

the 27 bills can be simplified by showing the percentage split for each type of component on one bill. in computer system. They do not represented buildable products but an average product. The part list is produced by the product design engineer. A multilevel bill of material can also be shown as an indented bill of material. A series of single-level bills is needed to completely define a product. master production scheduling and material requirements planning. the file size is reduced. This is particularly true with families of products.SYNTHESE BASICS GUILLOT Lionel . 3 different sides and 3 different tops. Indented bill. Using this method. Summarised parts list. The computer stores information describing the product structure as a single-level bill. This bill uses indentations as a way of identifying parents from components. A single-level bill of material contains only the parent and its immediate components. A major use of bills of material is to plan production.The number of records and. A multiple bill is used when companies usually make more than one product and the same components are often used in several products. They are used to simplify forecasting.ISERPA MLI 09/09/05 Level 0 X Level 1 A B C D Level 2 E B F G Multiple bill. . If there is a change. Planning bills are an artificial grouping of components for planning purposes.Maintaining bills of material is simplified. For planning purposes. Planning bill. the change need be made in only one place. . There are several advantages to using single-level bills including the following: . the information has to be stored only once. It lists all the parts needed to make one complete assembly.Duplication of records is avoided. The percentage usage of components is obtained from a forecast or past usage. Single-level bill. Table Common Parts 100 % Legs Leg A 40 % Leg B 35 % Leg C 25 % 26 Sides Side A 55 % Side B 30 % Side C 15 % Tops Top A 45 % Top B 30 % Top C 25 % . Supposed a company manufactured tables with 3 different leg styles.

. the pegging report shows only those parents for which there is an existing requirement whereas the where-used report shows all parents for a components.3 MATERIAL REQUIREMENT PLANNING PROCESS The purpose of MRP is to determine the components needed.Engineering change control.SYNTHESE BASICS GUILLOT Lionel . These techniques will be discussed under the following headings: . Pegging report. This has several uses such as implementing an engineering change or when material are scarce or in costing a product. . . . The changes must be recorded and controlled. .Exploding and offsetting. This section studies the basic MRP techniques for doing so. Product design engineers sometimes change the design of a product and the components used.ISERPA MLI 09/09/05 Where-used and pegging Where-used report. . Replacement parts needed to repair a broken component are determined from the bill of material. Bills of material define what materials have to be scheduled to make the end product. the orderentry system very often configures the end product bill of materials. This list is not complete. The bill provides the method for doing so.Service parts. A listing of all the parents in which a component is used is called a where-used report. However. There is scarcely a department of the company that will not use the bill at some time.Product definition. Exploding and offsetting Product tree contains another necessary piece of information: lead times (LT).Gross and net requirements. The bill specifies the components needed to make the product.Low-level coding and netting. .Releasing orders. 4.Costing. The bill can also be used to price the product.Manufacturing. quantities and due dates so items in the MPS are made on time. A pegging report is similar to a where-used report.Planning. The bill provides a list of the parts needed to make or assemble a product. . 27 . The bill provides not only a method of determining direct material but also a structure for recording direct labor and distributing overhead. . Maintaining bills of material and their accuracy is extremely important. Uses for bill of material Some major uses are as follows: .Order entry. When a product has a very large number of options. They define what components have to be purchased or made to satisfy the MPS.

It is the responsibility of the material planner to release planned orders. if 50 units of A are required in week 5. Offsetting. Planned order releases are just planned. Gross and net requirements The previous section assumed that no inventory was available for the As or any of the components. queuing. Net requirements = Gross requirement . If for instance there are 20 As in stock. component availability must be checked.ISERPA MLI 09/09/05 E LT: 1 week B LT: 1 week Lead time. Exploding the requirements. the order will have to be released and production started not later than week 4. moving. and any expected delays. A computer-based MRP system automatically recalculates the requirements for subassemblies and components and recreates planned order releases to meet the shifts in demand. the order to assemble the As must be released in week 4 and 50 Bs and 50 Cs must be available in week 4. Exploding is the process of multiplying the requirements by the usage quantity and recording the appropriate requirements throughout the product tree. orders for material should not be released until the planned order release date arrives. If it is planned to received 50 of part A in week 5 and the lead time to assemble an A is one week. only 30 need to be made. receiving and inspecting. In manufacturing. Lead time is the span of time needed to perform a process. Releasing an order means that authorization is given to purchasing to buy the necessary material or to manufacturing to make the component. there should be a planned order receipt for 50 in week 5 and a planned order release for that number in week 4.Available inventory The planned order release of the parent becomes the gross requirement of the component. Thus. Since the objective of the MRP is to have material available when it is needed and not before. not the computer. processing. Before a manufacturing order is released. Released orders In many cases. requirements change daily. For example. it includes time for order preparation. they have not been released. Offsetting is the process of placing the exploded requirements in their proper periods based on lead time.SYNTHESE BASICS A LT: 1 week B LT: 2 weeks C LT: 1 week GUILLOT Lionel . Planned orders. Often inventory is available and must be included when calculating quantities to be produced. The computer program checks the component inventory records to be sure 28 .

. Net requirements. They will stay in inventory until withdrawn for use. Order quantity: 200 1 50 100 2 250 200 50 3 100 150 50 200 4 50 100 200 Basic MRP record Figure shows a basic MRP record.The number of periods in the record is called the planning horizon. Open orders. Scheduled receipts are orders placed on manufacturing or on a vendor and represent a commitment to make or buy. the MRP system is not able to release planned orders of items at the lower level at the correct time. 29 . the computer program will advise the planner of the shortage. which shows the number of future periods for which plans are being made. called time buckets. necessary materials are committed and work-center capacity allocated to that order. Otherwise. When the authorization to purchase or manufacture is released. Scheduled receipts. For purchased parts. similar commitments are made to the vendor.The top row shows periods. The calculation for net requirements can now be modified to included scheduled receipts. These are often a week but can be any length of time convenient to the company. . There are several points that are important: . The schedule receipts row shows the quantities ordered and when they are expected to be completed and available. When a manufacturing order is released the computer will allocate the required quantities of a parent’ s components to that order.SYNTHESE BASICS GUILLOT Lionel . . Net requirement = Gross requirement –Scheduled receipt –Available inventory Week Gross requirements Scheduled receipts Projected available 150 Net requirements Planned order Receipt Planned order Release LT: 2 weeks. If the material is not available. When the goods are received into inventory and available for use.An item is considered available at the beginning of the time bucket in which it is required. the planned order receipt is canceled and a schedule receipt is created in its place. to allocate the necessary quantity to that work order.ISERPA MLI 09/09/05 that enough material is available and .The current time is the beginning of the first period. the order is close out and the scheduled receipt disappears to become part of the on-hand inventory. This does not mean the components are withdrawn from inventory but that the projected available quantity is reduced. if so. It should be at least as long as the cumulative product lead time. Scheduled receipts on the MRP record are open orders on the factory or a vendor and are the responsibility of purchasing and of production activity control. For an order in a factory.

we see that it is purchased part and no explosion is needed. since B has a low-level code of 1. the MRP priority plan must be checked against available capacity. Capacity Requirements Planning As occurred in the previous planning levels. The immediate or most current period is called the action bucket. A quantity in the action bucket means that some action is needed now to avoid a future problem. The process of collecting the gross requirements and netting can be simplified by using low-level codes. there are more gross requirements and the part is not netted. recording the level against the part. the net requirements for each part can be calculated using the following procedure: . all requirements for B are recorded and it can be netted and exploded. The low-level code is the lowest level on which a part resides in all bills of material. the plan can proceed. The bill of material for B shows that is made from a C and a D. A B C C Part A B C D Low-level code 0 1 2 2 D Low-level codes are determined by starting at the lowest level of a bill of material and. 30 . be netted and exploded down to the next level.The next step is to move down to level 1 on the product tree and to repeat the routine follow in step 1. that is.Starting at level 0 of the tree. . Looking at its bill of material. If so. If the low-level code is greater than 0. those parts occur at no lower level and all the gross requirements have been recorded. therefore. Every part has only one low-level code.SYNTHESE BASICS GUILLOT Lionel . Low-level coding and netting A component may reside on more than one level in a bill of material.ISERPA MLI 09/09/05 - The quantity shown in the projected on-hand row is the projected on-hand balance at the end of the period. into their components. If the capacity is available. determine if any of the parts on that level have a low-level code of 0. These parts can. either capacity has to be made available or the priority plans changed (see chapter 5). this tell us that all gross requirements for Cs are accounted for and that we can proceed and determine its net requirements. part C has a lowlevel code of 2. If not.Moving down to level 2 on the product tree. working up. which tell us there are further requirements for C and at this stage they are not netted. the process is called capacity requirements planning (CRP). At the MRP planning level. . Once the low-level codes are obtained. we find that part Chas a lowlevel code of 2.

The basic responsibilities of a planner are to: . They are responsible for making detailed decisions that keep the flow of material moving into and out of the factory. the order becomes an open order to the factory or to purchasing and appears on the MRP record as a schedule receipt. PAC and purchasing to resolve problems.Reconcile errors and try to find their cause. with other planners. the planner may prefer to hold a planned order firm against changes in quantity and time despite what the computer calculates. In this way. the computer recalculates the timing and quantities of planned order releases. released and firm. When released.15 ) 4. The MRP program recommends to the planner the release of an order when the order enters in the action bucket but does not release the order Released orders.4 USING THE MATERIAL REQUIREMENTS PLANNING The people who manage the MRP system are planners. Planned orders.Co-ordinate. The MRP system gathers the planned order releases from all parents and creates a schedule of gross requirements for the components. It is then under the control of the planner. With a scrap allowance of 15 % the process would be required to make: net requirements x ( 1 – 0. . 31 . The same procedure used for a single bill of material can be used when multiple products are being manufactured. The computer-based MRP system automatically recalculates planned orders as the gross requirements change. . The order is firmed or frozen against the logic of the computer.Launch (release) orders to purchasing or manufacturing. Firm planned orders.SYNTHESE BASICS GUILLOT Lionel . At times. . This might be necessary because of future availability of material or capacity or special demands on the system. each part is netted and exploded only once.Reschedule due dates of open (existing) orders as required. planners are usually organise into logical groupings based on the similarity of parts of supply. The material planners work with 3 types of orders: planned.Solve critical material shortages by expediting or re-planning. . who may expedite.ISERPA MLI 09/09/05 The low-level codes are used to determine when a part is eligible for netting and exploding. delay or even cancel the order. Multiple bills of material Most companies make more than one product and often use the same components in many of their products. Planned orders are automatically scheduled and controlled by the computer. As gross requirements. Releasing or launching a planned order is the responsibility of the planner. In many companies where there are thousands of parts to manage. The planner can tell the computer that the order is not to be changed unless the planner advises the computer to do so. MPS. projected available inventory and schedule receipts change. All bills must be netted and exploded level by level as was done for a single bill. Scrap is usually stated as a scrap allowance.

Otherwise. . expediting or de-expediting. . Order quantity: 300 1 150 50 2 50 0 3 100 300 200 4 150 50 5 200 150 150 300 300 What will happen if the gross requirements in week 2 are changed from 50 units to 150? Week Gross requirements Scheduled receipts Projected available 150 Net requirements Planned order Receipt Planned order Release LT: 3 weeks. Transaction messages mean that the planner must tell the MRP software of all actions taken that will influence the MRP records. However. Exception messages.Components for which planned orders are in the action bucket and which should be considered for release.Changes to open orders in the factory such as early or late completions or differing quantities.ISERPA MLI 09/09/05 However. Transaction messages.Suppliers’ actions through purchasing. . If the manufacturing process is under control and the MRP system is working properly. Managing the material requirements plan The planner receives feedback from many sources such as: . Priority refers to maintaining the correct due dates by constantly evaluating the true due date need for released orders and. Order quantity: 300 1 150 50 2 150 . Following are some examples of situations: .SYNTHESE BASICS GUILLOT Lionel . the system will work according to plan. . The planner must evaluate this feedback and take corrective action if necessary.Situations in which the standard lead times will result in late delivery of a zero-level part. sometimes there are problems that need the attention of the planner. A good MRP system generates exception messages to advise the planner when some event needs attention.100 3 100 300 100 4 150 250 50 300 5 200 50 300 32 . if necessary. the computer does print action or exception messages suggesting that the planner should act and what kind of action might be appropriate.Management action such as changing the MPS. Perhaps a scheduled receipt is timed to arrive too early or late and its due date should be revised. the records will be inaccurate and the plan will become unworkable. The planner must consider 3 important factors in managing the MRP: Priority.Open orders for which the timing or quantity of scheduled receipts does not satisfy the plan. Week Gross requirements Scheduled receipts Projected available 150 Net requirements Planned order Receipt Planned order Release LT: 3 weeks.

however. Capacity management is the function of establishing. what can the planner do? One solution is to expedite the schedule receipt of 300 units from week 3 to week 2. It is the sum of all the required capacities. Capacity required is the capacity of a system or resource needed to produce a desired output in a given time. it consists of planning and control functions.ISERPA MLI 09/09/05 There is a shortage of 100 units in week 2 and that the planned order release in week 2 is now in week 1. As with all management processes. Capacity planning is the process of determining the resources required to meet the priority plan and the methods needed to make that capacity available.1 INTRODUCTION At each level. the plan will be unworkable. Bottom-up re-planning. plan or organization to produce output per period of time. also there is now a planned order release in week 1 and this order should be released. Sometimes requirements change rapidly and by small amounts. 5. The planner must judge whether the changes are important enough to react to and whether on order should be released.2 DEFINITION OF CAPACITY Capacity is defined as the capability of a worker. how much is available. causing the MRP to change back and forth. However. Suppose the part in the previous example is a component. Capacity is a rate of doing work. These priority plans cannot be implemented. measuring. not the quantity of work done. monitoring and adjusting limits or levels of capacity in order to execute all manufacturing schedules. One method of reducing system nervousness is firm planned orders.SYNTHESE BASICS GUILLOT Lionel . machine. It takes place at each level of the priority planning system. A term closely related to capacity required is load. Capacity available is the capacity of a system or resource to produce a quantity of output in a given time period. Capacity management is concerned with supplying the necessary resources. Action to correct for changed conditions should occur as low in the product structure as possible. 5 CAPACITY MANAGEMENT 5. work center. This is the amount of released and planned work assigned to a facility for a particular time period. Reducing system nervousness. If the 300 units cannot be expedited into week 2. 2 kinds of capacity are important: capacity available and capacity required. 33 . manufacturing develops priority plans to satisfy demand. unless the firm has sufficient capacity to fulfil the demand. the planned order release and net requirement of the parent must be changed. without the resources to achieve the priority plan. the extra 100 units wanted in week 2 must be rescheduled into week 3. If this is not possible. This chapter looks more closely at the questions of capacity: what it is. how much is required and how to balance priority and capacity.

Typically . greater detail is involved than in RCCP.SYNTHESE BASICS GUILLOT Lionel .ISERPA MLI 09/09/05 Capacity planning links the various production priority schedules to manufacturing resources. varying only in the level of detail and time spans involved. Capacity requirements planning is directly linked to the MRP.Resolve differences between available capacity and required capacity. provides warning of any bottlenecks. such as gross labor hours. 34 . Resource planning involves changes in manpower. The process of capacity planning is as follows: . the priority plans have to be changed. not to subsequent capacity planning levels. ensure utilization of work centers and advise vendors of capacity requirements. The MPS is the primary information source. capital equipment. quarterly or annual product priorities from the production plan into some total measure of capacity. . This process occurs at each level in the priority planning process. After the plans are completed. Capacity can sometimes be stated in the same units.Determine the capacity available at each work center in each time period. Priority plans are usually stated in units of product or some standard unit of output. The various capacity plans relate only to their level in the priority plan. Planning levels Resource planning involves long-range capacity resources requirements and is directly linked to production planning. If the capacity required cannot be met. Capacity control is the process of monitoring production output.Determine the load at each work center in each time period: o Translate the priority plan into the hours of work required at each work center in each period time. comparing it with capacity plans and taking corrective action when needed. 5. Since this type of planning focuses on component parts. It will be examined in chapter 6. It is concerned with individual orders at individual work centers and calculates work center loads and labor requirements for each time period at each work center.3 CAPACITY PLANNING Capacity planning involves calculating the capacity needed to achieve the priority plan and finding ways of making that capacity available. . it involves translating monthly. The purpose of RCCP is to check the feasibility of the MPS. o Sum up the capacities required for each item on each work center to determine the load on each work center in each time period. capacity must be stated as the hours available. production activity control and purchasing must be authorized to process or implement shop orders and purchase orders. product design or other facilities that take a long time to acquire and eliminate. If there is no common unit. Rough-cut capacity planning (RCCP) takes capacity planning to the next level of detail.

routings.SYNTHESE BASICS GUILLOT Lionel . This information can be obtained from the following: . An open shop order appears as a scheduled receipt on the MRP. . wait. Work center file. setup. .Sequence of operations. Inputs The inputs need for a CRP are open shop orders. The queue time is the time a job waits at a work center before being handled. It can be maintained manually or as a computer file.Work center file. planned order releases.4 CAPACITY REQUIREMENTS PLANNING (CRP) The CRP occurs at the level of the MRP. . Planned orders from the MRP and open shop orders (schedule receipts) are converted into demand for time in each work center in each time period. The wait time is the time a job is at a work center after completion and before being moved. Planned order releases. lead times and work center capacities. Open order file. The open order file is a record of all the active shop orders. A work center file contains information on the capacity and move.Standard times: setup times and run times per piece. and move times. . A routing is a path that work follows from work center to work center as it is completed. . run. 35 . This process takes into consideration the lead times for operations and offsets the operations at work centers accordingly.Open order file. its accounts for work already done on a shop order.Possible alternate work centers. wait and queue times associated with the center. It is released order for a quantity of a part to be manufactured and completed on a specific date. Lead time is the sum of queue. in a computer-based system. . . Planned order releases are determined by the computer’s MRP logic based upon the gross requirements for a particular part. In considering open shop orders.MRP.ISERPA MLI 09/09/05 5.Work centers to be used. A routing file should exist for every component manufactured and contain the following information: . a great amount of data and computation are required. Routing is specified on a route sheet or.Tooling needed at each operations. in a route file. Capacity planning is the most detailed.Routing file. complete and accurate of the capacity planning techniques. Routing file. time standards. The move time is the time normally taken to move material from one workstation to another.Operations to be performed. A work center is composed of a number of machines or workers capable of doing the same work. They are inputs to the CRP process in assessing the total capacity required in future time periods. . Because of the detail.

holidays are spread unevenly throughout the year and the calendar does not work on a decimal base. the capacity will be altered. the work content (work required to make the product) will change. if a variety of products is made.SYNTHESE BASICS GUILLOT Lionel . Standard time. Rated capacity = Available time x Utilization x Efficiency 36 . Another piece of information needed is the number of working days available. This relates to the speed or pace at which the work is done. the standard time for a job can be determined – that is the time it would take a qualified operator working at a normal pace to do the job. However. a good common unit may not exist. If the product specifications change. The months do not have the same number of days. If the workforce changes pace. This relates to the methods used to make the product. Work effort. thus affecting the number of units that can be produced.Plant. utilization and efficiency. Product mix. How many working days do we really have? Because of this problem. If the mix of products being produced changes. If the method is changed – for example a faster machine is used .the output will change. the unit common to all products is time. Levels of capacity Capacity needs to be measured on at least 3 levels: . the total work content for the mix will change. Calculated or rated capacity is based on available time. Using time-study techniques. . perhaps producing more in a given time. If the variety of products is not large.5 CAPACITY AVAILABLE Capacity available is the capacity of a system or resource to produce a quantity of output in a given time period. Determining capacity available There are 2 ways of determining the capacity available: measurement and calculation. It provides a yardstick for measuring work content and a unit for stating capacity. Plant and equipment. it is often possible to use a unit common to all products. In this case. The Gregorian calendar has some serious drawbacks for manufacturing planning and control. It also used in loading and scheduling. which can be considered as a group of different work centers. . Demonstrated (measured) capacity is figured from historical data.Machine or individual worker. Measuring capacity Units of output. Each products has its own work content measured in the time it takes to make the product. It is affected by the following: Product specifications.ISERPA MLI 09/09/05 Shop calendar.Work center. it is desirable to develop a shop calendar. 5.

However it is unlikely this will be attained all the time. given in units of product or some common units. The run time is equal to the run time per piece multiplied by the number of pieces in order.SYNTHESE BASICS GUILLOT Lionel . The workers might be working at a faster or slower pace than the standard working pace. Downtime can occur due to machine breakdown. the number of workers and the hours of operation. absenteeism. The available time is the maximum hours we can expect from the work center. The steps in calculating load are as follows: 37 . Determining the capacity required is a two-step process. causing the efficiency of the work center to be more or less than 100 %. Time needed for each order The time needed for each order is the sum of the setup and the run time. not maximum. The level of detail. we will study the MRP/CRP level. into hours of work required at each work center in each period time. Actual rate of production Efficiency = Standard rate of production x 100 % Demonstrated capacity One way to find out the capacity of a work center is to examine the previous production records and to use that information as the available capacity of the work center. Utilization can be determined from historical records or by a work sampling Efficiency. sum up the capacity required for individual orders to obtain the load. Notice that demonstrated capacity is average.6 CAPACITY REQUIRED (LOAD) Capacity requirements are generated by the priority planning system and involve translating priorities. First. Utilization. In this text. the planning horizon and the techniques used vary with each planning level. determine the time needed for each order at each work center. The available time depends on the number of machines. Load The load on a work center is the sum of the required times for all planned and actual orders to be run on the work center in a specific period. then. The available time is the number of hours a work center can be used. output. The percentage of time that the work center is active compared to the available time is called work center utilization: Utilization = Hours actually worked x 100 % Available hours study.ISERPA MLI 09/09/05 Available time. lack of materials and all those problems that cause unavoidable delays. 5.

total load. Add all the standard hours together for each work center in each period. The information needed is obtained from the following: . weeks 20 and 21 are overloaded. Sequence of operations. 5. setup time and run time.5 692 700 8 The report shows released and planned load. . One way of doing this is with a work center load report. This process is called back scheduling.Order file.7 SCHEDULING ORDERS Most orders are processed across a number of work centers.Queue. The result is the total required capacity (load) on that work center for each time period of the plan. In this example.Work center capacity available (rated or demonstrated).5 152 140 (12) 21 45 120 165 140 (25) 22 30 100 130 140 10 23 30 90 120 140 20 24 25 100 125 140 15 Total 181. Quantities and due dates. .Sequence of operations and work centers needed. This type of display gives information used to adjust available capacity or to adjust the load by changing the priority plan.Work center file. To schedule. . and it is necessary to calculate when orders must be started and completed on each work center so the final due date can be met.Route file. rated capacity and (over)/under capacity.5 510.The quantity and due date. we need to know for each order: .5 100. move and wait times and work center capacity.ISERPA MLI 09/09/05 - Determine the standard hours of operation time for each planned and released order for each work center by time period. this shows there is enough total capacity over the planning horizon and available capacity or priority can be juggled to meet the plan.SYNTHESE BASICS GUILLOT Lionel . . This process is called scheduling. The usual process is to start with the due date and using the lead times to work back to find the start date for each operation. . Loads for all weeks can be calculated and recorded on a load report: Week Released load Planned load Total load Rated capacity (Over)/Under capacity 20 51.Setup and run times for each operation. 38 . wait and move times. Work center load report The work center load report shows future capacity requirements based on released and planned orders for each time period of the plan. The load must be now compared to the available capacity. Queue. the balance are under-loaded and the cumulative load is less than the available. For the planner. Back scheduling. . work centers needed.

Subcontract work when more capacity is needed or bring in previously subcontract work to increase required capacity.Schedule overtime or under-time. Some ways that this may be done are as follows: . Altering the load means shifting orders ahead or back so the load is levelled.Use alternate routings to shift some load to another work center.To manage day-to-day activity and provide the necessary support. If orders are processed on other work stations. capacity can be adjusted. In the short run. changing the load may not be the preferred course of action. 6 PRODUCTION ACTIVITY CONTROL 6. it must make good use of labor and machines.ISERPA MLI 09/09/05 The process is as follows: .To take control of work orders and make sure they are completed on time.1 INTRODUCTION Production activity control (PAC) is responsible for executing the MPS and the MRP. There are 2 ways of balancing capacity available and load: alter the load or change the capacity available.Adjust the level of the workforce by hiring or laying off workers. . machinery and equipment. carrying out the plan and controlling the work as it progresses to completion. The MRP authorizes PAC: . 5. For these reasons.8 MAKING THE PLAN The next step is to compare the load to available capacity to see if there are imbalances and if so to find possible solutions.To release work orders to the shop for manufacturing. . 39 . calculate the capacity required (time) at each work center. the schedule and load on the other work stations have to be changed as well.Starting with the due date.To be responsible for the immediate detailed planning of the flow of orders through manufacturing.For each work order. schedule back to get the completion and start dates for each operation.Shift workforce from under-loaded to overloaded work centers. . . At the same time. minimize work-in-process inventory and maintain customer service. . . . The result of CRP should be a detailed workable plan that meets the priority objectives and provides the capacity to do that. The ability to do so will depend on the availability of the skills required and the training needed. It may also mean that other components should be rescheduled and the MPS changed.SYNTHESE BASICS GUILLOT Lionel . it will satisfy the MRP and allow for adequate utilization of the workforce. . Ideally.

gasoline). . .Rank the shop orders in desired priority sequence by work center and establish a dispatch list based on this information. Usually instructions are given by issuing a shop order.Flow manufacturing. Implementation Once the plans are made. This is called dispatching. This will involve the planner in developing a load profile for the work centers.ISERPA MLI 09/09/05 Planning The flow of work through each of the work centers must be planned to meet delivery dates..Track the actual performance of work orders and compare it to planned schedules. There are 4 major characteristics to flow manufacturing: .SYNTHESE BASICS GUILLOT Lionel . Control Once plans are made and shop orders released. 40 . It is concerned with the production of high-volume standard products. PAC must put them into action by advising the shop floor what must be done. The time taken to perform work at one work center is almost the same as any other work center in the line.Release orders to the shop floor as authorized by the MRP. Manufacturing processes can be conveniently broken down into 3 categories: . operation times.Monitor and control work-in-process.g. Flow manufacturing. continuous manufacturing.. Manufacturing systems The relative importance of these functions will depend on the type of manufacturing process. tooling.Routings are fixed and work centers are arranged according to the routing.Report work center efficiency. PAC will: .g. . . lead times and work center queues. the process is usually called repetitive manufacturing and if the goods are made in a continuous flow (e.Schedule start and completion dates for each shop order at each work center so the scheduled completion date of the order can be met. cars). which means PAC must do the following: . order quantities and scrap. Where necessary. The results are compared to the plan to decide whether corrective action is necessary. . personnel and information are available to manufacture the components we needed.Ensure that the required materials. PAC must take corrective action by replanning. .Intermittent manufacturing. rescheduling or adjusting capacity to meet final delivery requirements.Project manufacturing. PAC will do the following: . If the units are discrete (e. .Gather the information needed by the shop floor to make the product. the process must be monitored to learn what is actually happening.

SYNTHESE BASICS GUILLOT Lionel . 41 . Project manufacturing. Material flows from one workstation to another using some form of mechanical transfer. Machinery and work centers are usually grouped according to the function they perform (e.2 DATA REQUIREMENTS PAC must have a data or information system from which to work.. Work-in-process Inventory is often large. 6. product structure file. Planning files 4 planning files are needed: item master file.ISERPA MLI 09/09/05 - Work centers are dedicated to producing a limited range of similar products. Planning and control are typically exercised using shop orders for each batch being produced.Flow of work through the shop is varied and depends on the design of a particular product. The work flow is not balanced. The files contained in the databases are of 2 types: planning and control. varies causing long delays in processing. process requirements and order quantities. There is little buildup in work-in-process inventory and throughput times are low. PAC in intermittent manufacturing is complex. It usually involves the creation of one or a small number of units (e. Because the design of a product is often carried out or modified as the project develops. . marketing.g. all lathes in one department).Throughput times are generally long. purchasing and engineering. routing file and work center master file. . the time. PAC concentrates on planning the flow of work and making sure that the right material is fed to the line as stated in the planned-schedule. It is characterized by many variations in product design. Scheduling work to arrive just when needed is difficult. large shipbuilding). Capacity is fixed by the line. Since work flows from one workstation to another automatically. they will take more time at one workstation than an another.Machinery and workers must be flexible enough to do the variety of work.The capacity required depends on the particular mix of products being built and is difficult to predict. This kind of manufacturing is characterized by the following: . Machinery and tooling are especially designed to make the specific products. there is close coordination between manufacturing.. Intermittent manufacturing. As orders are processed. taken by an order at each work center and work queues.g. implementation and control are relatively simple. .

Work center number.Part description.Lead times for each operation.Number of shifts worked per week.Equipment. .Number of labor hours per shift. .Queue time. a unique number assigned to a component. For each product. Routing file.Allocated quantity. . Work center master file. It collects all of the relevant data on a work center. the balance due on all outstanding orders. Product structure file (bill of material file).Run times. . There are generally 2 kinds of files: the shop order master file and the shop order detailed file.Utilisation. . . It gives details of the following: . Each active manufacturing order has a record in it.Alternate work centers. . For PAC. 42 . .Capacity. The purpose is to provide summarized data on each shop order such as the following: . It contains a record for each part manufactured. . . For each work center. The file contains all of the pertinent data related to the part. . . .Order quantity.Efficiency.Quantity completed.Number of machine hours per shift. Shop order master file.Part number. work centers that may be used as alternatives.ISERPA MLI 09/09/05 Item master file. It contains a list of single-level components and quantities needed to assemble a parent.Quantity scrapped.The operations required to make the product and the sequence in which those operation are performed.SYNTHESE BASICS GUILLOT Lionel . . this includes the following: .A brief description of each operation. .Lot-size quantity. tools and accessories needed for each operation. it gives details on the following: . .Shop order number.Manufacturing lead time.On-order quantities. . . There is one record in it for each part number. . Control files Control in intermittent manufacturing is exercised through shop orders and control files that contain data on these orders. .Quantity on hand.Setup times. .Quantity available. a unique number identifying the shop order. this file contains a step-by-step set of instructions describing how the product is made. . .

.Due date or lead time remaining. To develop a reliable schedule. the planner must have information on routing. 6. time required to prepare the work center for operation. required and available capacity.Quantity reported complete at that operation. First. material availability must be checked. . . amount of time the job is waiting before operation begins. transit time between work centers.Run hours. Due date.Run time.3 ORDER PREPARATION PAC is responsible for planning and preparing order’ s release to the shop floor. . Typically. Manufacturing lead time (MLT) . . Shop order detail file. Tooling is not generally considered in MRP program. and second. planned and actual. .Operation number.Wait time.Move time. MLT consists of 5 elements: .4 SCHEDULING The objectives of scheduling is to meet delivery dates and to make the best use of manufacturing resources. time needed to run the order through the operation.Setup time. the quantity not yet completed. the load on work centers must be checked in that period. Priority. .SYNTHESE BASICS GUILLOT Lionel . so at this stage. Balance due. It involves establishing start and finish dates for each operation required to complete an item. a value used to rank the order in relation to others.Queue time. 6. Each shop order has a detail file that contains a record for each operation needed to make the item. MLT is the time normally required to produce an item in a typical lot quantity. Checking capacity availability is a twostep process. ORDER RELEASE QUEUE SETUP RUN WAIT MOVE QUEUE SETUP RUN WAIT Work center Next work center 43 . Cost information. amount of time the job is before being moved to the next work center. the order must be scheduled to see when the capacity is needed.Setup hours. planned and actual. .ISERPA MLI 09/09/05 - Quantity of material issued to the order. . the date the order is expected to be finished. material and capacity are available. The order should be reviewed to be sure that the necessary tooling. Each record contains the following: .Quantity reported scrapped at that operation. competing jobs and manufacturing lead times at each work center involved.

Operation overlapping In operation overlapping. PAC must manage both the input of orders to the production process and the available capacity to control queue and work-in-process. Previous operations are scheduled back from the last operation. It assumes infinite capacity will be available. wait and moves times are under the control of manufacturing and PAC. Backward scheduling. the lead time and work-in-process. Backward scheduling is used to determine when an order must be started. This method is used to decide the earliest delivery date for a product and how long it will take to complete a task. If the number of orders waiting to be worked on (load) is reduced. but because there is little slack time in the system. The technique is used for purposes such as developing promise dates for customers or figuring out whether an order behind schedule can be caught.SYNTHESE BASICS GUILLOT Lionel . Scheduling techniques There are many techniques to schedule shop orders through a plant. Finite loading assumes there is a defined limit to available capacity at any workstation. it is transferred to operation B. Notice the over and under load. The largest of the 5 elements is queue time. A synonym is throughput time. Increasing capacity also reduces queue. Work-in-process inventory is reduced. but all of them require an understanding of forward and backward scheduling as well as finite and infinite loading. the next operation is allowed to begin before the entire lot is completed on the previous operation. the order has to be scheduled in a different period time. If there is not enough capacity available at a workstation because of other shop orders. In an intermittent manufacturing operation. so is the queue time. Setup time and run time are straightforward and determining them is the responsibility of the industrial engineering department. Queue. The last operation on the routing is scheduled first and is scheduled for completion at the due date. it accounts for 85%-95% of the total lead time. When the first lot is completed on operation A. Cycle time is the length of time from when material enters a production facility until it exits. This reduces the total manufacturing lead times. customer service may suffer. The load is smoothed so there is no overload condition.ISERPA MLI 09/09/05 The total MLT will be the sum of order preparation and release plus the MLTs for each operation. The result is completion before the due date which usually results in a buildup of inventory. An order is divided into at least 2 lots. whatever the due date. Forward scheduling assumes that material procurement and operation scheduling for a component start when the order is received. Operation A SU LOT 1 T SU LOT 2 T LOT 1 Transit Time LOT 2 Operation B 44 . It does not consider the existence of other shop orders competing for capacity at these work centers. Infinite loading.

45 . This means there was no point in releasing all of planned orders that weeks. Perhaps some could be released in week 18 or 19 and perhaps some overtime could be worked to help reduce the capacity crunch. it is almost impossible to balance the available capacity of the various workstations with the demand for their capacity. but this is not always the case.it is possible for an operator to run more than one machine at a time. If the lots are sized properly. it may increase the queue and lead time for other orders. but there are some cost involved. The order is split into 2 or more lots and run on 2 or more machines simultaneously.5 LOAD LEVELING Load report tells PAC what the load is on the work center. The problem is deciding the size of the sub-lot. Operation overlapping is a method of expediting an order. leaving the operator time to set up a other machine.6 SCHEDULING BOTTLENECKS In intermittent manufacturing. As a result.SYNTHESE BASICS GUILLOT Lionel . move costs are increased. Operation splitting is practical when: . it is assumed operation B cannot be set up until the first lot is received.setup time is low compared to run time. 6. Second. Week Released load Planned load Total load Rated capacity (Over)/Under capacity 18 105 105 110 5 19 100 100 110 10 20 80 60 140 110 (30) 21 30 80 110 110 0 22 0 130 130 110 (20) 23 0 80 80 110 30 Total 315 350 665 660 (5) There is a capacity shortage in week 20 of 30 hours. . especially if the overlapped operations are not close together. there will be no idle time at operation B.a suitable work center is idle. First. . Operation splitting Operation splitting is a second method of reducing MLT.ISERPA MLI 09/09/05 In figure. although an additional setup is occurred. The overloaded workstations are called bottlenecks. The manufacturing lead time is reduced by the overlap time and the elimination of queue time. Third. If the run time per piece on operation B is shorter than on A. it does not increase capacity but potentially reduces it if the second operation is idle waiting for parts from the first operation. The last condition often exists when a machine cycles through its operation automatically. the first batch must be large enough to avoid idle time on operation B. If the lot is split in 2 or more. 6. some workstations are overloaded and others are under-loaded. The time to unload and load must be shorter than the run time per piece.

Utilization of a non-bottleneck resource is not determined by its potential. scheduling and controlling them is extremely important. increases the capacity of the system. nothing is produce which reduces the capacity of the system. Ideally. Work centers fed by bottlenecks have their throughput controlled by bottleneck and their schedules should be determined by that of the bottleneck. . A compromise is needed whereby runs are as long as possible but priority (demand) is satisfied. The first operation in the sequence of operations is called a gate operation. It is the total volume of production passing through a facility. some important principles should be noted: . During setup. The process batch size and the transfer batch size are different. Suppose 2 styles of product are made on a bottleneck. The following must be done: . .Capacity and priority must be consider together. Some bottleneck principles. excess work-inprocess inventory is built up. The key is throughput that ends up in sales. . Anything that increases the capacity of the bottleneck. resulting in more company sales and increased profits. This is similar to previous item but puts emphasis on reducing load on a bottleneck by using such things as using alternate work centers and subcontracting. The time buffer should be only as long as the time of any expected delay caused by feeding workstations.Control the rate of material feeding the bottleneck. A bottleneck must be fed at a rate equal to its capacity so the time buffer remains constant.ISERPA MLI 09/09/05 Throughput. .The capacity of the system depends on the capacity of the bottleneck.Using a non-bottleneck 100% of the time does not produce 100% utilization. If work centers feeding bottlenecks produce more then the bottleneck can process. .Time saved at a non-bottleneck saves the system nothing. customers wanting the 2nd style might not be willing to wait 6 months. the time buffer ensures that the bottleneck will not be shut down for lack of work and this queue will be held at a predetermined minimum quantity. . but by another constraint of the system. . Bottlenecks control the throughput of all products processed by them. Rather than waiting until the batch are produced before moving it to the next work center.Adjust loads.SYNTHESE BASICS GUILLOT Lionel .Do everything to provide the needed bottleneck capacity. .Loads can and should be split. These may be more costly than using the bottleneck. Since bottlenecks are so important to the throughput of a system. but utilization of non-bottlenecks and throughput of the total system is increased. In this way. A time buffer is an inventory (queue) place before each bottleneck. . Thus.Establish a time buffer before each bottleneck. the company would run one style of product for 6 months then switch over to the second style.Focus should be on balancing the flow through the shop. However. Managing bottlenecks. the manufacturer can move a sub-lot. 46 . Since bottlenecks control the throughput of a facility. delivery to the next work center is matched to usage and work-in-process inventory is reduced.

but it is better to be honest about delivery promises. This means to find ways to increase the available hours of constraint.SYNTHESE BASICS GUILLOT Lionel . The concept does not limit this process examination to merely the operational processes. there is a five-step process that is recommended to help improve the performance of the operation: .Exploit the constraint. . . Increased efficiency and utilization in processes 1 and 2 will only increase inventory – not sales.Subordinate everything to the constraint. and transfer batches do not have to be the same size as process batches. PROCESS 1 Capacity = 5 per hour PROCESS 2 Capacity = 7 per hour PROCESS 3 Capacity = 4 per hour PROCESS 4 Capacity = 9 per hour The total operation is constrained by process 3 at 4 per hour. the non-bottleneck resources can be scheduled.Identify the constraints. Any disturbances in the feeding operations are absorbed by the time buffer and throughput is not affected. Improve the process Once a constraint has been identified. find the new one and repeat the steps. time lost at a bottleneck is time lost to the whole system but time lost at a non-constraint is a mirage. 47 . Each process has a specific capacity to produce the given defined output for the operation. Manage the constraints Some of the more noteworthy include focusing on balancing the flow through the shop. Effective utilization of the constraint is the most important issue.Elevate the constraint.Once the constraint is a constraint no longer. . including more of it.ISERPA MLI 09/09/05 - Change the schedule.7 THEORY OF CONSTRAINTS (TOC) AND DRUM-BUFFER-ROPE The previous section was developed by Eliyahu M. This implies the need to examine the entire process to determine which process limits the throughput. . Do this as a final resort. Once the bottleneck is scheduled according to its available capacity and the market demand it must satisfy. Goldratt in his theory of constraints. Find methods to maximize the utilization of the constraint toward productive throughput. there is one process that limits or constrains the throughput from the entire operation. 6. and that every virtually every case.

. The worker can log on and off the job using the job ticket and it then becomes a record of that operation. If queue can be controlled. Since it is so important that the constraint never be starved for needed inventory. description and quantity.9 CONTROL Once work orders have been issued to manufacturing. If what is actually happening varies significantly from what was planned. it can be done by a well-coordinated release of material into the system at the right time.Drum. equipment and accessories needed. While this may imply a Kanban-type pull system. a time buffer is often established in front of the constraint.Engineering drawings. 48 . Queue exists because of this erratic input and output. . . their progress has to be controlled. It may include any of the following: . material to use and the setup and run times. 6.Tools requisitions authorizing manufacturing to withdraw necessary tooling from the tool crib.Material issue tickets that authorize manufacturing to get the required material from stores. delivery dates can be met. It is often described as Drum-Buffer-Rope: .Bills of materials. name.Route sheets showing the operations to be performed.Job tickets for each operation to be performed.Shop order showing the shop order number. . The analogy is that the rope pulls production to the constraint for necessary processing. either the plans have to be changed or corrective action must be taken to bring performance back to plan. 6. . which is focused around the pace of throughput as defined by the constraint. . Performance has to be measured and compared to what is planned.Rope. A shop packet is usually compiled which contains the shop order and whatever other information is needed by manufacturing. the part number. .8 IMPLEMENTATION Implementation is arrived at by issuing a shop order to manufacturing authorizing them to proceed with making the item. In environment of intermittent operations.SYNTHESE BASICS GUILLOT Lionel . The drum of the system refers to the drumbeat or pace of production. .ISERPA MLI 09/09/05 Scheduling with the theory of constraints Even the scheduling system developed for the TOC has its own specific approach. it is almost impossible to balance the load over all the workstations. It represent the master schedule for the operation. The largest component of lead time is queue.Move tickets that authorize and direct the movement of work between operations. .Buffer.

Input/output control The input/output control system is a method of managing queues and work-inprocess lead times by monitoring and controlling the input to. Period Planned input Actual input Cumulative variance Planned output Actual output Cumulative variance Planned backlog Actual backlog 32 32 1 38 34 -4 40 32 -8 30 34 2 32 32 -4 40 36 -12 22 30 3 36 32 -8 40 44 -8 18 18 4 40 42 -6 40 44 -4 18 16 5 44 40 -10 40 36 -8 22 20 Total 190 180 -10 200 192 -8 Cumulative variance is the difference between the total planned for a given period and the actual total for that period. Planned and actual outputs monitor the performance of the work center. and output from a facility. queue. 49 .Set the correct priority of orders to run at each work center. . The input rate is controlled by the release of orders to the shop floor. Planned and actual backlogs monitor the queue and lead time performance. work-in-process and lead times increase.Control the work going into and coming out of a work center. It is calculated as follows: Cumulative variance = previous cumulative variance + actual – planned Backlog is the same as queue and expresses the work to be done in hours. The output rate is controlled by increasing or decreasing the capacity of a work center. Operation sequencing Operation sequencing is a technique for short-term planning of actual jobs to be run in each work center based on capacities and priorities. Priority. To control input and output. This information is shown on an input/output report. It is designed to balance the input rate in hours with the output rate. It is calculated as follows: Planned backlog = previous planned backlog + planned input – planned output Planned and actual inputs monitor the flow of work coming to the work center. in this case.SYNTHESE BASICS GUILLOT Lionel . The values are in standard hours. Input/output report. PAC must: . If the rate of input is increased.ISERPA MLI 09/09/05 To control queue and meet delivery commitments. a plan must be devised along with a method for comparing what actually occurs against what was planned. is the sequence in which jobs at a work center should be worked on. This is generally called input/output control.

Jobs are sequenced according to their process time. There are many rules.10 PRODUCTION REPORTING Production reporting provides feedback of what is actually happening on the plant floor. 6. .SYNTHESE BASICS GUILLOT Lionel .Earliest operation due date (ODD). . Due date – present date Actual time remaining CR = = Lead time remaining Lead time remaining Lead time remaining includes all elements of manufacturing lead time and expresses the amount of time the job normally takes to completion. department and work center.ISERPA MLI 09/09/05 Dispatching. operation number and operation description of job at the work center. shortages and the status of orders. Due date are considered. CR less than 1 (actual time less than lead time): Order is behind schedule. CR equal to 1 (actual time equal to lead time: Order is on schedule. Some commonly used rules are: . Jobs are performed according to their due dates. . none is perfect or will satisfy all objectives. CR greater than 1 (actual time greater than lead time): Order is ahead of schedule. The dispatch list is the instrument of priority control. CR zero or less (today’s date greater than due date): Order is already late. Dispatching rules. One other rule that should be mentioned is called critical ratio (CR).Standard hours.Inventory status.Order status. .Jobs coming to the work center. 50 . This rule ignores due dates and processing time.Priority information.Plant. Types of information needed for the various reports include: . . . Jobs are performed in the sequence in which they are received. . shop order number. rework and late shop orders.Exception reports on such thing as scrap. first served (FCFS). Due dates and processing time are taken into account. It is the function of selecting and sequencing available jobs to be run at individual work centers.Weekly input/output by department or work center.Part number. . Orders with long process times tend to be delayed. but it maximizes the number of jobs processed. PAC needs this information to establish proper priorities and to answer questions regarding deliveries. The ranking of jobs for the dispatch list is created through the application of priority rules. It normally includes the following information and is updated and published at least daily: .First come. . Jobs are performed according to their operation due dates. Once the data are collected. but processing time is not.Earliest job due date (EDD). they must be sorted and appropriate reports produced.Shortest process time (SPT). This rule ignores due dates. Dispatching rules should be simple to use and easy to understand. .

.Obtaining goods and services of the required quantity and quality.Selecting supplier (right source). Input from other departments is required in finding and evaluating sources of supply and to help the purchasing department in price negotiation. but purchasing can reduce problems for both areas. 51 . Income statement Sales Cost of good sold Purchases (50%) Other expenses (40%) Profit before tax 100 50 40 Income statement Income statement (sales increases 10%) (reduced purchase cost) 110 100 55 44 (-2%) 49 40 . work center and department efficiencies and so on.Determining purchasing specifications: right quality. To satisfy these objectives.SYNTHESE BASICS GUILLOT Lionel . it would gain the same 10% increase in profits. . Purchasing and profit leverage On the average. Obtaining the right material.Obtaining goods and services at the lowest cost. right quantity and right delivery (time and place).Issuing and administration of purchase orders. . further adding to profit. manufacturing firms spend about 50% of their sales dollar in the purchase of raw materials. . components and supplies.1 INTRODUCTION If purchasing is carried out effectively.99 11 . from the right source and at the right price are all purchasing functions. a 2% reduction. The purchasing department has the major responsibility for locating suitable source of supply and for negotiating price. some basic functions must be performed: .89 11 If the firm can reduce the cost of purchases from $50 to $49. . in the right quantities with the right delivery (time and place). Purchasing is everyone’s business.Ensuring the best possible service and prompt delivery by the supplier. The objectives of purchasing can be divided into 4 categories: .Negotiating terms and conditions of purchase (right price). 7 PURCHASING 7.ISERPA MLI 09/09/05 - Performance summaries on order status.Developing and maintaining good supplier relations and developing potential suppliers. all departments in the company are involved. This give the purchasing function tremendous potential to increase profits. .90 10 . Purchasing objectives Missed deliveries can create havoc for manufacturing and sales.

Receiving and analyzing purchase requisitions. After the quotations are analyzed.ISERPA MLI 09/09/05 Purchasing cycle The purchasing cycle consists of the following steps: . it is usually desirable to issue a request for quotation. issuing requests for quotations. receiving and analyzing quotations. If the item has not been purchased before. delivery and terms of sale. Determining the right price.Material specification. . .Identify of originator. . 52 . the choice is probably made on price. trade journal. For major items. The supplier is responsible for delivering the items ordered on time. Issuing a purchase order. Finding potential suppliers. . alternate source of supply. The purchasing department is responsible for ensuring that suppliers do deliver on time. Receiving and analyzing purchase requisition. the items quoted will vary. . Once accepted by the supplier. working with the supplier to solve its problems or rescheduling production. For items where specifications cannot be accurately written. The quotations must be evaluated for technical suitability. a list of approved suppliers is kept.Quantity and unit of measure.Following up to assure delivery dates are met. a supplier can be found in a catalogue. A purchase order is a legal offer to purchase. and selecting the right supplier. If there is doubt. This is a written inquiry that is sent to enough suppliers to be sure competitive and reliable quotations are received. The purchasing department is also responsible for price negotiation and will try to obtain the best price from the supplier. The final choice is a compromise between technical factors and price. . If the order is a small value or for standard items. it becomes a legal contract for delivery of the goods according to the terms and conditions specified in the purchase agreement.Determining the right price. Selecting suppliers. . This might involve expediting transportation. . the purchase requisition contains the following information: . signed approval and account to which cost is assigned. Requesting quotations. . . At a minimum. a search must be made.Receiving and accepting goods.Issuing purchase orders..Selecting suppliers. purchasing must find out in time to take corrective action.Required delivery date and place. For routine items..Any other supplemental information needed.SYNTHESE BASICS GUILLOT Lionel . Following up and delivery. Usually both the issuing and purchasing departments are involved in the decision. The purchase order is prepared from the purchase requisition or the quotations and from any other information needed. . For items where specifications can be accurately written.Approving supplier’s invoice for payment.

the receiving department closes out its copy of the purchase order and advises the purchasing department.ISERPA MLI 09/09/05 The purchasing department is also responsible for working with the supplier on any changes in delivery requirements. When the goods are received. specified and manufactured. Quantity requirements The quantity is important because it will be a factor in the way the product is designed. Functional requirements Functional specifications are concerned with the end use of the item and what the item is expected to do. the receiving report and the invoice.Quantity requirements. the real need has both practical and aesthetic elements to it.SYNTHESE BASICS GUILLOT Lionel . the invoice is sent to accounts payable for payment. the receiving department will advise the purchasing department and hold the goods for further action. All discounts and terms of the original purchase order must be checked against the invoice. Receiving and accepting goods. If the goods are received damaged. thus satisfying the functional needs at a better price. Price requirements The economic value placed on the item must relate to the use of the item and its anticipated selling price. By their very nature. several factors are included in the package bought. it would be designed to be made at least cost or a suitable standard item would be selected. are in the right quantity and have not been damaged in transit. the receiving department inspects the goods to be sure the correct ones have been sent.Price requirements.Functional requirements. if the demand were for several thousand. 7. If it is not. 53 . A copy of the receiving report is then sent to the purchasing department noting any variance or discrepancy from the purchase order. Once approved.2 ESTABLISHING SPECIFICATIONS In purchasing an item or a service from a supplier. . Approving supplier’s invoice for payment. In many cases. the item would be designed to take advantage of economies of scale. These must be considered when specifications are being developed and can be divided into 3 broad categories: . If the demand was for only one item. the purchase order is held open awaiting completion. there are 3 pieces of information that should agree: the purchase order. functional specifications are the most important of all categories and govern the others. It is the job of purchasing department to verify these and resolve any differences. When the supplier’s invoice is received. If the order is considered complete. However. .

the quality is satisfactory.The quantity bought is so small that is not worth the buyer’s effort to develop specifications. under the following circumstances: .By brand. 7. If the product is what the customer wants.Performance. material and method of manufacture. . . On this basis. There are 4 phases to providing user satisfaction: . .3 FUNCTIONAL SPECIFICATION DESCRIPTION Functional specification can be described in the following ways or by a combination of them: .By engineering drawings. Functional specifications are intimately tied to the quality of a product or a service. .ISERPA MLI 09/09/05 Functional specifications and quality. . The result’s of the firm’s market studies is a general specification of the product outlining the expected performance. Branded items. as a group. through advertising or direct sales effort. . Description by specification Whatever method is used. usually have price levels that are higher than non-branded items.Quality and manufacturing. . description by specification depends on the buyer describing in detail exactly what is wanted: . well designed. There are many definitions of quality. the customer is relying on the reputation and integrity of the supplier. .The supplier has special expertise that the buyer does not have.Quality and product design. When buying by brand. and performance. Description by brand Description by brand is most often used in wholesale or retail businesses but it also used extensively in manufacturing.Physical and chemical characteristics.Material and method of manufacture. The success of the product depends on how well they do this. has created a preference on the part of the buyer’s customers or staff. The basic quality level is thus specified by senior management according to their understanding of the needs and wants of the marketplace. . it can be said that an item has the required quality if it satisfies the needs of the user. price and sales volume of the product.SYNTHESE BASICS GUILLOT Lionel . but they all center on the idea of user satisfaction. The other major disadvantage to specifying by brand is that it restricts the number of potential suppliers and reduce competition.Quality and use.The supplier. 54 . well made and well serviced.Quality and product planning. .By specification of physical and chemical characteristics. . appearance.Miscellaneous.Items are patented or the process is secret.

There are several advantages to using standard specifications. manufactured and sold. are difficult to inspect and may discourage possible suppliers. There are 2 major sources of specifications: .ISERPA MLI 09/09/05 Whatever the method of specification.Specifications must allow for multiple sources and for competitive bidding. If they are too loosely drawn. they are costly to develop. they may not provide a satisfactory product. there are several characteristics to description by specification: . specifications must be carefully designed. they will be used only where there is sufficient volume of purchases to warrant the cost or where it is not possible to describe what the buyer wanted in any other way.They provide a standard for measuring and checking the material supplied. . because of this. Companies do not use this method unless there is no suitable standard specification available or unless the volume of work makes it economical to do so. Standard specifications have been developed as a result of much study and effort by governmental and non-governmental agencies. Engineering drawings Drawings are a major method of specifying what is wanted and are widely used because often there is no other way to describe the configuration of parts or the way they are to fit together. because they are widely accepted.SYNTHESE BASICS GUILLOT Lionel . If they are too detailed and elaborate.Buyer specifications. . they are widely known and accepted and. Buyer specifications. but given an exact description of the part required.Standard specifications.To be useful.Not all items lend themselves to specification. because they have been developed with input from a broad range of producers and users. How well it is done will affect the success of the purchase and sometimes the price paid. Sources of specifications. .If the specifications are set by the buyer. than a supplier’s standard product. . Finally. they are lower in price than non-standard items. component part or the composition of material. Second. They usually apply to raw or semi-finished products. . Miscellaneous The method of description is a communication with the supplier. First. they are usually adaptable to the needs of many purchasers. are readily available from most suppliers. Buyer-developed specifications are usually expensive and time-consuming to develop. Standard specifications.An item described by specification may be more suitable and a great deal more expensive. . They are produced by the engineering design department and are expensive to produce. 55 .

In practice there is a tendency toward a adversarial relationship between supplier and customer. This should include a good service organization and inventory of service parts. The potential advantages are that competition will result in lower price and better service and that there will be a continuity of supply.Multiple sourcing is the use of more than one supplier for an item. quantity. . A good supplier is one that has technology to make the product to the required quality.Sole sourcing implies that only one supplier is available because of patents. Manufacturing capability. Sometimes the supplier can suggest changes in product specification that will improve the product and reduce the cost. The buyer will depend upon the supplier to provide product improvements that will enhance or reduce the cost of the buyer’s products. If the product is of a technical nature or likely to need replacement parts or technical support. After-sales service.Single sourcing is a planned decision by the organization to select one supplier for an item when several sources are possible. there must be an atmosphere of mutual trust and assurance that the supplier is financially strong enough to stay in business. . Reliability. Sourcing There are 3 types of sourcing: sole. technical specifications. raw material. multiple and single. Technical ability. location and so forth. the supplier must have a good after-sales service.SYNTHESE BASICS GUILLOT Lionel . competent and capable manufacturing personnel and good manufacturing planning and control system to ensure timely delivery.4 SELECTING SUPPLIERS Once the decision is made about what to buy. 56 .ISERPA MLI 09/09/05 7. It is intended to produce a long-term partnership. Factors in selecting suppliers Function. The supplier must have a good quality control program. has the capacity to make the quantity needed and can run the business well enough to make a profit and still sell a product competitively. If the relationship is to continue. . the selection of the right supplier is the next most important purchasing decision. Manufacturing must be able to meet the specifications for the product consistently while producing as few defect as possible. service and price are what the supplier is expected to provide and are the basis for selection and evaluation. Considering this there are several factors in selecting a supplier.

The supplier should be able to provide competitive prices. described next: .Trade directories.Salespersons of the supplier company.Rate the suppliers for each factor. For each supplier. . Other considerations. The suppliers can then be listed by total ranking and the supplier with the highest ranking chosen. Identifying suppliers One major responsibility of the purchasing department is to continue to research all available source of supply. Sometimes it is desirable that the supplier be located near the buyer. In a modern business environment. The challenge is finding some method of combining these 2 major factors that will enable a buyer to pick the best supplier. . . . The supplier rankings are then added to produce a total ranking. reciprocal business and willingness of the supplier to hold inventory for the buyer should be considered.Trade magazines. technical support and product improvement. .Rank the suppliers. This weight determine the importance of the factor in relation to the other factors. Final selection of supplier Some factors in evaluating potential suppliers are quantitative and a dollar value can be put on them.Information obtained by the salespeople of the buyer firm. Both parties understand the problems of the other and can work together to solve problems to their mutual advantage. . or at least maintain an inventory locally.Select those factors that must be considered in evaluating potential suppliers. Other factors are qualitative and demand some judgement to determine them. .Catalogues.Assign a weight to each factor. Price.ISERPA MLI 09/09/05 Supplier location. Usually a scale of 1 to 10 is used. Again. Suppliers are rated on their ability to meet the requirements of each factor. Sometimes other factors such as credit terms.SYNTHESE BASICS GUILLOT Lionel . purchases account for about 50% of the cost of goods sold and any savings made in purchase cost has a direct influence on profits. 7. Some aids for identifying sources of supply follow: . the weight of each factor is multiplied by the supplier rating for that factor.5 PRICE DETERMINATION In the average manufacturing company. One method is the ranking method. usually a scale of 1 to 10 is used. A close location helps shorten delivery times and means emergency shortages can be delivered quickly. the type of relationship between the supplier and the buyer is crucial to both. 57 . The supplier can rely on future business and the buyer will have an assured supply of quality product.

so the potential profit must justify the expense. revenue equals total cost and profit is zero. One widely used method of a analyzing costs is to break them down into fixed and variable costs. When the volume is less than this point. It also takes a great deal of time and effort. prices are determined on the basis of listed catalog prices. a profit is realized. Negotiation is concerned with contracts for future prices. Sellers who charge too little to cover their costs will not stay in business. Total cost = fixed cost + (variable cost per unit) x (number units) Unit (average) cost = = e Total cost Number of units Fixed cost Number of units + Variable cost per unit The sum of the fixed and variable costs is labelled total cost on the graph. Variable costs are those directly associated with the amount produced or sold. D O L L A R S Break-even Point Revenue Total cost Loss Profit Fixed cost SALES VOLUME Price negotiation Prices can be negotiated if the buyer has the knowledge and the clout to do so. When this line intercepts the total cost line. Prices have an upper and lower limit. Skill and careful planning are required for the negotiation to be successful.Items of small value. To survive. when the volume is greater. This is called the break-even point. There are 4 categories: . The market decides the upper limit. Firms will negotiate a contract with a supplier that can supply 58 . The 3 line represents the sales revenue. both the buyer and seller must be satisfied. The seller sets the lower limit. In the end. .ISERPA MLI 09/09/05 Basis for pricing The term “fair price” is sometimes used to describe what should be paid for an item. One definition of a fair price is one that is competitive.Commodities. gives the seller a profit and allows the buyer ultimately to sell at a profit. . Fixed costs are costs incurred no matter the volume of sales.SYNTHESE BASICS GUILLOT Lionel . a loss is incurred. There is not much room for negotiation except for large purchase. One important factor in the approach to negotiation is the type of product. Since the items are standard and the choice of suppliers large. they may attempt to cut costs by reducing quality and service. Price is set by market supply and demand and can fluctuate widely. The prime objective should be to keep the cost of ordering low.Standard products.

The planner/buyer is responsible for: . price determination and negotiation.Maintaining close contact with supplier personnel. .Developing schedules.6 IMPACT OF MATERIAL REQUIREMENTS PLANNING ON PURCHASING Purchasing can be separated into 2 types of activities: procurement and supplier scheduling and follow-up. Because the role of production planning and buying are combined. Procurement includes the function of establishing specifications. ensure good use of resources. The alternative is to develop a long-term contract with a supplier and to authorize releases against the contract. as they invariably do.Establishing delivery priorities. . Made-to-order items.Issuing shop orders.SYNTHESE BASICS GUILLOT Lionel . many companies have combined the 2 functions of buying and planning. minimize work-in-process inventory and to maintain the desired level of customer service. follow up. resolve problems and work with other planners and the master schedule when delivery problems arise. Planner/buyer concept. . Often the supplier is given a copy of the MRP so they are aware of future demands. Planner/buyer do the material planning for the items under their control. When plans change. working with suppliers to schedule delivery and follow-up. . 59 . the production planner must advise the buyer of the change and the buyer must advise the supplier. communicate the schedule to their suppliers. Again contract buying can be managed by a planner/buyer. Purchasing issues purchase orders based on the MRP.ISERPA MLI 09/09/05 - many items and set up a simple ordering system that reduces the cost of ordering. . 7. To improve the effectiveness of the planner/buyer activity. Contract buying.Handling all the activities associated with the buying and production planning functions. Supplier scheduling and follow-up is concerned with the release of orders to suppliers. inefficient and sometimes impossible to issue a new purchase order for every weekly requirement. there is a smoother flow of information and material between the supplier and the factory. selecting suppliers.Issuing material releases to suppliers. Usually a MRP system generates frequent orders for relatively small quantities. It is costly. The goals of the supplier scheduling are the same as those of PAC: to execute the MPS and the MRP.Determining material requirements.Controlling orders in the factory and to suppliers. . . These can generally be negotiated. This category includes items made to specification or on which quotations from several sources are received. The buyer then issues a release against the schedule.

Close relationship with suppliers. Often decisions are not based on just product price. Contract buying and the need for supplier flexibility and reliability mean the buyer-supplier relationship must be close and cooperative.SYNTHESE BASICS GUILLOT Lionel . after which the customer then pays it for that use. but instead on total cost and value. Electronic data interchange (EDI). For instance. In this concept. invoices and MRP information. value stream analysis and mutual (between the company and their suppliers) value analysis. The intranet is an internal net that is normally used within the boundaries of a company. The planner/buyer and the supplier counterpart (often the production’s production planner) must work on a weekly basis to ensure both parties are aware of any changes in material requirements or material availability. Contract buying assures suppliers a given amount of business and commits them to allocating that amount of their capacity to customer. they can delay ordering until they are more sure of their requirements. The supplier owns the inventory until the customer actually withdraws it for use. .7 SOME ORGANIZATIONAL IMPLICATIONS OF SUPPLY CHAIN MANAGEMENT Organizations that alter their perspective away from traditional purchasing toward supply chain management must recognize that their perspective toward managing the entire organization must also change. The customer does not have to order any of the inventory.ISERPA MLI 09/09/05 Supplier responsiveness and reliability. Much of the data shared in this environment is considered sensitive. Each participating company moves certain data outside of a private intranet to the extranet. The internet is most commonly used and is open to the general public. 7. EDI enables customers and suppliers to electronically exchange transaction information such as purchase orders. making it available only to the companies sharing the extranet. 60 . organization have adopted techniques of process analysis. they find the following: . Vendor-managed inventory. intranet and extranet. There are 3 variations of network used: internet. Internet. It may stretch across many manufacturing sites or even countries. To accomplish this changed perspective. This implies very long supplier contracts. as the supplier is responsible for maintaining an adequate supply in the facility for customer use. Extranet is an intranet shared by 2 or more companies. a supplier maintains an inventory of certain items in the customer facility. Suppliers must be highly flexible and reliable so they can react quickly to changes in schedules.Their cost focus has altered dramatically.Decision making has changed from the “I say and you do” to a mutually advantageous decision. Suppliers are more responsive to customer needs. Because customers know the capacity will be available when needed.

Demand management includes 4 major activities: .Forecasting. demand management is needed for items and is associated with master production scheduling. .Market trend such as changing demand. all sources of demands must be identified. .The firm’ s own plans for advertising. the purpose is to project aggregate demand for production planning. significantly reducing the administrative cost of ordering and order tracking.Order processing.SYNTHESE BASICS GUILLOT Lionel . 8 FORECASTING 8.More effective use of techniques such as electronic business. Many factors influence the demand. .Making delivery promises. .General business and economic condition. pricing and product changes. Some major factors are as follows: . promotion.Interfacing between manufacturing planning and control and the marketplace. demand projections are needed for strategic business planning of such things as facilities.More effective product specification. 8. There is a growth in electronic business. It occurs in the short. . In the short run.2 DEMAND MANAGEMENT Demand management is the function of recognizing and managing all demands for products. In the medium term. Savings can be substantial There are many advantages associated with an effective supply chain perspective.Long-term contracts with efficient communication systems. Measurement systems look at all aspects of the supply chain and not just supplier performance. allowing for efficient product substitutions and product specifications focused on fitness of use. medium and long term. In the log term. Some of these savings include: . .1 INTRODUCTION Most firms cannot wait until orders are actually received before they start to plan what to produce. Forecasting is inevitable in developing plans to satisfy future demand.Better of leveraging of volume discounts and supplier consolidation. This implies using the internet more for handling business information flows and transactions. . .ISERPA MLI 09/09/05 - Information sharing has changed from simply giving out information about the order to the perspective of sharing some important information about the business itself.Competitive factors. 61 . If material and capacity resources are to be planned effectively. .

. . the sales department must write up a sales order specifying the product.Random variation: It occurs where many factors affect demand during specific periods and occur on a random basis. long lead time. The product may be delivered from finished goods inventory or it may be made or assembled to order. procurement items and overall inventory levels. or it can rise or fall.3 DEMAND FORECASTING Forecasts depend upon what is to be done. There are 4 reasons to this: . PP: For manufacturing. Pattern shows that actual demand varies from period to period. Stable versus dynamic The demand pattern that retain the same general shape are called stable and those that do not are called dynamic. the easier it is to forecast. SBP: The strategic business plan’ s purpose is to provide time to plan for those things that take long to change. seasonality or randomness of the demand. They must be made for the strategic business plan (SBP). Forecasting of cycles is a job for economists. The purpose..4 CHARACTERISTICS OF DEMAND Demand patterns A pattern is the general shape of a time series. individual item inventory levels. Another copy. and when to deliver. If goods are sold from inventory. MPS: Forecasts are made for individuals items as found on a master production schedule. He must know what to produce.. the production plan (PP) and the master production schedule (MPS). wavelike increases and decreases in the economy influence demand. planning horizons and level of detail vary for each (see ch. 8. 2). 62 . The more stable the demand. 8. raw materials and component parts. having no change from period to period. . A copy stating the terms and conditions of acceptance is sent to the customer. sent to the master planner.SYNTHESE BASICS GUILLOT Lionel . is authorization to go ahead and plan for manufacture.Trend: The trend can be level. how much..Cycle: Over a span of several years. a sales order is produced authorizing the goods to be shipped from inventory.Seasonality: Each year’ s demand fluctuating depending on the time of year. Dynamic change can affect the trend. If the product is made or assembled to order. it means forecasting those items needed for production planning. labor planning. such as budgets.ISERPA MLI 09/09/05 Order processing occurs when a customer’s order is received.

Another method is to test-market a product. not shipments. . . A better approach is to forecast total demand of items and the percentage of the total that requires each option. It is used most often in business plan and production plan than the forecasting of individual end items. Dependent demand for a product occurs where the demand for the item is derived from that of a second item.7 FORECASTING TECHNIQUES There are 3 categories of forecasting techniques: . techniques of market research and historical analogy might be used. Such techniques are used to forecast general business trends and the potential demand for large families of products over an extended period of time.Record data in the same terms as needed for the forecast. . 8.Record the demand separately for different customer groups. Requirements for dependent demand are calculated and for independent demand need be forecast.6 COLLECTION AND PREPARATION OF DATA To get good data.Every forecast should include an estimate of error. Qualitative techniques are seldom appropriate to production and inventory forecasting.5 PRINCIPLES OF FORECASTING Forecasts have 4 major characteristics: . o The forecast period should be the same as the schedule period.SYNTHESE BASICS GUILLOT Lionel . These are called economic indicators).Extrinsic forecasting techniques are projections based on external indicators which relate to the demand for a product (sales of bricks are proportional to housing starts. 3 principles of data collection are important: .Qualitative techniques are projections based on judgement.ISERPA MLI 09/09/05 Dependent versus independent demand A product is independent when is not related to the demand for any other product. . data base on demand. 63 .Forecasts are more accurate for nearer time periods.Forecasts are usually wrong. intuition and informed opinions. o The items forecast should be the same as those controlled by manufacturing. For a new product. 8. . are needed. Extrinsic forecasting is most useful in forecasting the total demand for a firm’ s product or for families of products. There are 3 dimensions to this: o If the purpose is to forecast demand on production. 8. .Record the circumstances relating to the data.Forecasts are more accurate for families or groups.

are of limited use when there is much random fluctuation in demand. It is the best to forecast the average demand rather than second-guess what the effect of random fluctuation will be. At the end of the next period. Usually methods that average out history are better because they dampen out some effects of random variation.8 SOME IMPORTANT INTRINSIC TECHNIQUES Rules. If a longer period is used. The fewer months included in the moving average.α) (previous forecast) Generally. the more weight is given to the latest information and the faster the forecast reacts to trends. One drawback to using moving averages is the need to retain several periods of history for each item to be forecast.0. Moving averages One simple way to forecast is to take the average demand for the last three or six periods and use that figure as the forecast for the next period. although the forecast will lag actual demand if a definitive trend exists. Using past actual demand. The weight given to latest demand is called a smoothing constant (α). One advantage to exponential smoothing is that the new data can be given any weight wanted. less weight could be put on the latest actual demand and more weight on the old forecast. based on a single month or past period. A problem exists in selecting the best alpha factor. forecasts are made with different alpha factors to see which one best suits the historical demand pattern for particular products. 64 . A forecast should include an estimate of error. Such a simple average would not be responsive to trends or changes in level of demand. 8. It is not satisfactory where the demand is low or intermittent. New forecast = (α) (latest demand) + (1 . This formula puts as much weight on the most recent month as on the old average. Exponential smoothing It is not necessary to keep months of history to get a moving average. If this does not seem suitable.SYNTHESE BASICS GUILLOT Lionel . the forecast can be based on the old calculated forecast and the new data. the forecast does not react as quickly. However. the forecast will always lag behind a trend. Moving averages are best used for forecasting products with stable demand where there is a little trend or seasonality.ISERPA MLI 09/09/05 - Intrinsic forecasting techniques use historical data to forecast. A better method would be to use a moving average. it has been found satisfactory for short-range forecasting. They are often used as input to master production scheduling where end-item forecasts are needed for the planning horizon of the plan. Therefore. the first-period demand is dropped and the latest-period demand added to determine a new average to be used as a forecast. It is always expressed as a decimal from 0 to 1. Exponential smoothing will detect trend. They are also useful to filter out random fluctuation.

ISERPA MLI 09/09/05 8. they are meaningless unless deseasonalized data are used. . Seasonal index A useful indication of the degree of seasonal variation for a product is the seasonal index. This index is an estimate of how much the demand during the season will be above or below the average demand for product. 8. This is called the deseasonalized demand. Season index Seasonal forecasts The equation for developing seasonal indices is also used to forecast seasonal demand. the seasonal indices can be used to calculate the seasonal forecasts Seasonal demand = (seasonal index) (deseasonalized demand) Deseasonalized demand If comparisons are made between sales in different periods.SYNTHESE BASICS GUILLOT Lionel . The equation to calculate deseasonalized demand is derived from the previous seasonal equation and is: Deasonalized demand = Actual seasonal demand Seasonal index = Period average demand Deseasonalized demand The rules for forecasting with seasonality are: . . The formula is: Seasonal index = Period average demand Average demand for all periods The average demand for all periods is a value that average out seasonality. 65 .Only use deseasonalized data to forecast.9 SEASONALITY Many products have a seasonal or periodic demand pattern. If a company forecasts average demand for all periods.10 TRACKING THE FORECAST Tracking the forecast is the process of comparing actual demand with the forecast.Forecast deseasonalized demand not seasonal demand.Calculate the seasonal forecast by applying the seasonal index to the base forecast.

This distribution is called a normal distribution. . These reasons relate to the discussion on collection and preparation of data and the need to record the circumstances relating to the data. The forecast should be changed to improve its accuracy.± 2 MAD of the average about 90% of the time. If the variation is due to random variation. The mean absolute deviation is an approximation of the standard deviation and is used because it is easy to calculate and apply. actual demand will vary about the average demand. . Mean absolute deviation (MAD) Forecast error must be measured before it can be used to revise the forecast or to help in planning. The problem is in guessing whether the variance is due to random variation or bias.± 1 MAD of the average about 60% of the time. The purpose of tracking the forecast is to be able to react to forecast error by planning around it or by reducing it. the forecast should be corrected. This means the forecast average demand has been wrong.± 3 MAD of the average about 98% of the time. Uses of mean absolute deviation Bias exists when cumulative actual demand varies from forecast. From statistics we know that the error will be within: .The dispersion or spread.The central tendency or average. The difference are random variations. However.Bias: This exists when the cumulative actual demand varies from the cumulative forecast.Deviation refers to the error. This is called mean absolute deviation: . The greater the dispersion. 66 . One way to measure the variability is to calculate the total error ignoring the plus and minus signs and take the average. MAD = Sum of absolute deviations Number of observations Normal distribution A graph of the number of times (frequency) actual demand is of a particular value produces a bell-shaped curve.Absolute means without reference to plus and minus. . .ISERPA MLI 09/09/05 Forecast error Forecast error is the difference between actual demand and forecast demand. if the error is due to bias. Error can occur in 2 ways: . Often there are exceptional onetime reasons for error. the error will correct itself and nothing should be done to adjust forecast.Mean implies a average. .SYNTHESE BASICS GUILLOT Lionel .Random variation: In a given period. the larger the standard deviation. . There are 2 important characteristics to normal curves: .

It includes time for purchasing of raw materials to arrive.Reduce P time. A tracking signal can be used to monitor the quality of the forecast. 67 . There are 5 ways to move in this direction: . companies who rely on them can run into a variety of problems. If actual period demand varies from the forecast by more than 3 MAD. Make forecasts using a well thought out.Force a match between P and D: o Make the customer’ s D time equal to your P time. This is common with custom products. MAD of actual demand about the forecast historically has been calculated at 10 units.Standardize products and processes. . The basic components are identical or similar. delivery and sometimes the design of product. the more room for error. Safety stock: The data can be used as a basis for setting safety stock (see chapter 11). This means that customization occurs close to final assembly. manufacturing. One other way is to make more accurate predictions. . .Forecast most accurately. assembly.Simplify the product line. A more reliable way of producing is the use of P/D ratio: .ISERPA MLI 09/09/05 Under normal circumstances. . manufacturing management might be able to devise a contingency plan to cope with the possible extra demand. With this information. the actual period demand will be within ± 3 MAD of the average about 98% of the time. o Sell what you forecast. we can be about 98% sure that the forecast is in error. This will happen while you control the market. The more variety in the product line. This means there is a 60% chance that actual demand will be between 90 and 110 units and a 40% they will not. well controlled process. It is the time from when a customer places on order until the goods are delivered.D or demand lead time is the customer’ s lead time. . The traditional way to guard against inherent error in forecasting is to include safety stock in inventory. One of the simpler is based on comparison of the cumulative sum of the forecast errors to the MAD: Tracking signal = Algebraic sum of forecast errors MAD Contingency planning: Suppose a forecast will be 100 units and that capacity is 110 units.SYNTHESE BASICS GUILLOT Lionel . P/D Ratio Because of the inherent error in forecasts.P or production lead time is the stacked lead time for a product.

Supply and demand patterns. 9. Inventory must be considered at each of the planning levels and is thus part of PP. WIP and finished goods) and the function they perform rather than at the individual item level.2 AGGREGATE INVENTORY MANAGEMENT Aggregate inventory management deals with managing inventories according to their classification (raw material.How individual items are to be controlled. .Objectives of inventory management.Which individual inventory items are most important. There is a cost for carrying inventories.Supply and demand patterns. As inventories are used. . their value is converted into cash. . . . inventories are very important to manufacturing companies.Functions performed by inventory.Flow and kinds of inventory needed.ISERPA MLI 09/09/05 9 INVENTORY FUNDAMENTALS 9.Cost associated with inventories. MPS with end items and MRP with component parts and raw material. On the balance sheet. aggregate inventory management involves: . which increases operating costs and decreases profits.SYNTHESE BASICS GUILLOT Lionel . This chapter will study aggregate inventory management and some factors influencing inventory management decisions. they usually represent from 20% to 60% of total assets. It is financially oriented and is concerned with the costs and benefits of carrying the different classifications of inventories. These rules include the following: . MPS and MRP.How much to order at one time. 68 . . As such. . Good inventory management is essential.Types of inventory based on the flow of material. . .1 INTRODUCTION Financially.Functions that inventories perform.Objectives of inventory management. 9.3 ITEM INVENTORY MANAGEMENT Management must establish decision rules about inventory items so the staff responsible for inventory control can do their job effectively. which improves cash flow and return on investment. PP is concerned with overall inventory. which include: . . .Inventory costs.When to place an order.

Anticipation inventory Anticipation inventory are built up in anticipation of future demand. Its purpose is to prevent disruptions in manufacturing or deliveries to customers.6 FUNCTIONS OF INVENTORIES In batch manufacturing. The finished products of the production process that are ready to be sold as completed items. . component parts and subassemblies. One often used classification is related to the flow of materials into.SYNTHESE BASICS GUILLOT Lionel . they may be held at a factory or central warehouse or at various points in the distribution system.Supply and demand. By the nature of the system.Parts and materials to begin production and the suppliers of materials.Requirements for an operation and the output from the preceding operation. They are built up to help level production and to reduce the costs of changing production rates.5 SUPPLY AND DEMAND PATTERNS Demand for most products is neither sufficient nor constant enough to warrant setting up a line-flow system and these products are usually made in lots or batches. . Finished goods located in the distribution system. . Raw materials that have entered the manufacturing process and are being worked on or waiting to be work on. These are purchased items received which have not entered the production process.Maintenance. through and out of a manufacturing organization: . Safety stock is also called buffer stock or reserve stock. Inventory serves as a buffer between: . .Distribution inventories.Finished goods. repair and operational supplies (MROs). Items used in production that do not become part of product.Customer demand and finished goods. inventory will build up in raw materials. . work-in-process and finished goods. 9. .Raw materials.4 INVENTORY AND THE FLOW OF MATERIAL There are many way to classify inventories. 9. .Work-in-process (WIP). Fluctuation inventory (safety stock) Fluctuation inventory is held to cover random unpredictable fluctuations in supply and demand or lead time. Work moves in lots from one workstation to another as required by the routing. 69 . .ISERPA MLI 09/09/05 9. They include purchased materials.Finished goods and component availability. the basic purpose of inventories is to decouple supply and demand. Inventories can be classified according to the function they perform.

the term is used to described the availability of items when needed an is a measure of inventory management effectiveness.SYNTHESE BASICS GUILLOT Lionel . t is transit time in days and A is annual demand. . Hedge inventory Some products are traded on a world-wide market. They are sometimes called cycle stock. possible resulting in stockouts and customer dissatisfaction. . and its cost.ISERPA MLI 09/09/05 Lot-size inventory Items purchased or manufactured in quantities greater than needed immediately create lot-size inventories. For these reasons. It is the portion of inventory that depletes gradually as customer’s orders come in and is replenished cyclically when supplier’s orders are received. 70 . The average amount of inventory in transit is: I = tA 365 I is the average annual inventory in transit. They are sometimes called pipeline or movement inventories. called safety stock. they can purchase hedge inventory when prices are low.7 OBJECTIVES OF INVENTORY MANAGEMENT A firm wishing to maximize profit will have at least the following objectives : .Maximum customer service. is to reduce the transit time. 9. Maintenance. Transportation inventory Transportation inventories exist because of the time needed to move goods from one location to another. Notice that the transit inventory does not depend upon the shipment size. Demand and lead time to get an item are often uncertain. If buyers expect prices to rise. it may be necessary to carry extra inventory. Inventories help to maximize customer service by protecting against uncertainty.Low-cost plant operation. The only way to reduce the inventory in transit. repair and operating supplies (MRO) MROs are items used to support general operations and maintenance but which do not become directly part of a product.Minimum inventory investment. Customer service In inventory management. The price for the product fluctuates according to world supply and demand.

This is most important with bottleneck resources. The setup costs are fixed. o Lower hiring and firing costs.Inventories allow manufacturing to run longer production runs.Customer service. The higher the inventory level. By leveling production.Costs associated with changing production levels.Inventories allow manufacturing to purchase in larger quantities. If larger quantities are produced at one time. .ISERPA MLI 09/09/05 Operating efficiency Inventories help make a manufacturing operation more productive in 4 ways: . . o Lower training costs. moving large lots implies higher inventory. The problem is to balance inventory investment with the following: . manufacturing can continually produce an amount equal to the average demand. which results in the following: o Lower setup cost per item. o Lower capacity required. Someone once said that the only good reason for carrying inventory beyond current needs is if it costs less to carry it than not. o Lower subcontracting costs. If larger lots are run. but this practise results in higher annual ordering costs. there are fewer setups required to produce a given annual output and thus more time is available for producing goods. The advantage of this strategy is that the costs of changing production levels are avoided. . Time lost on setup on these resources is lost throughput and lost capacity. Goods moved in small quantities cost more to move per unit than those moved in large quantities. . This would result in the following: o Lower overtime costs. . overtime. 71 . the higher customer service will be. Lower inventories can be achieved by ordering smaller quantities more often. training and layoff costs will be higher if production fluctuates with demand. build anticipation inventory for sale in the peak periods. the setup costs are absorbed over a larger number and the average unit cost is lower. But all of this at a price. The cost to make a lot depends upon the setups cost and the run costs. . but the run costs vary with the number produced.Cost of placing orders. hiring.Inventories allow operations with different rates of production to operate separately and more economically. However.Transportation costs. Excess equipment capacity.SYNTHESE BASICS GUILLOT Lionel . which results in lower ordering costs per unit and quantity discounts.To level production. o An increase in production capacity due to production resources being used a greater portion of the time for processing as opposed to setup.

. The costs incurred are those of issuing and closing orders. . The risk in carrying inventory are: o Obsolescence.Production control costs. direct labor and factory overhead.Carrying costs. They can be broken down into 3 categories: . The inclusive cost is often called the landed price. This is realistic in many cases but not with all products. loss of product value resulting from change or technological development. As inventory increases. Money investment in inventory is not available for other uses and as such represents a lost opportunity cost. The carrying cost is usually defined as a percentage of the dollar value of inventory per unit of time (usually one year). not on the quantity ordered. . which consists of the cost of the item and any other costs associated in getting the item into the plant. .ISERPA MLI 09/09/05 9.Ordering costs. Every time an order is issued. Storing inventory requires spaces. goods lost. work centers have to set up to run the order and tear down the setup at the end of the run. o Damage.SYNTHESE BASICS GUILLOT Lionel .Stockout costs. . Ordering costs in a factory includes the following: .Storage costs. so do these costs. Carrying costs Carrying costs include all expenses incurred by the firm because of the volume of inventory carried. so do these costs.8 INVENTORY COSTS The following costs are used for inventory management decisions : . . Item cost Item cost is the price paid for purchase item. workers and equipment. For an item manufactured in-house. strayed or stolen. scheduling.Item cost. The annual cost and effort expended in production control depend on the number or orders placed. loading. As inventory increases. o Deterioration. o Pilferage.Setup and teardown costs.Risk costs.Capital costs. The annual cost of ordering depends upon the number of orders placed in a year. inventory that rots or dissipates in storage or whose shelf life is limited. the cost includes direct material. inventory damaged while being held or moved. Textbooks tend to use a figure of 2030% in manufacturing industries.Capacity associated costs. dispatching and expediting. . Ordering costs Ordering costs are those associated with placing an order either with the factory or a supplier. 72 .

costs are incurred to place the order. However. Every time a purchase order is placed. The annual cost of ordering depends upon the number of orders placed in a year. The relationship between assets.9 FINANCIAL STATEMENTS AND INVENTORY The 2 major financial statements are the balance sheet and the income statement. followup. inventory. A stockout can potentially be expensive because of back-order cost. or may be intangible such as accounts receivable or a patent.ISERPA MLI 09/09/05 - Lost capacity cost. Every time an order is placed at a work center. An asset may be tangible such as cash. These costs include order preparation. The accounting equation. The annual cost of ordering depends upon the number of orders placed.SYNTHESE BASICS GUILLOT Lionel . Accounts payable. receiving. Owner’s equity is the difference between assets and liabilities. Purchase order cost. lost sales and possibly lost customers. These capacity-associated costs can be avoided by leveling production. Balance sheet An asset is something that has value and is expected to benefit the future operation of the business. Owner’ s equity is created either by the owners investing money in the business or through the operation of the business when it earns a profit. This can be reduced by ordering more at one time. wages payable and long-term debt are examples of liabilities. this drives up the inventory level and the annual cost of carrying inventory. there may be costs for overtime. It is decreased when owners take money out of business or when the business loses money. 9. It is particularly important and costly with bottleneck resources. However. machinery and buildings. this builds inventory in the slack periods. the time taken to set up is lost as productive output time. Stockout costs If demand during the lead time exceeds forecast. authorizing payment ant the accounting cost of receiving and paying the invoice. hiring. liabilities and owner’s equity is expressed by the balance sheet equation: Assets = liabilities + owner’s equity 73 . extra shifts and layoffs. Capacity-associated costs When output levels must be changes. Liabilities are obligations or amount owed by the company. we can expect a stockout. expediting. training.

Expenses are the costs incurred in the process of making revenue.000 $500.000 $200.000 $800.000 $375. which show what decreased it.900.000 $500.…). The primary purpose of a business is to increase the owner’s equity by making a profit. They include direct labor. The balance sheet is usually shown with the assets on the left side and the liabilities and owner’s equity on the right side as follows : Assets Cash Accounts receivable Inventory Fixed assets $100.000 $300. called revenue accounts.000.ISERPA MLI 09/09/05 Balance sheet. but often is made as a promise to pay at a later date.900.000. property taxes.000 $525. Retained earnings are increased by the revenues a company makes and decreased by the expenses incurred. The following is a example of an income statement: Revenue Cost of goods sold Direct labor Direct material Factory overhead Gross margin (profit) General and administrative expenses Net income (profit) $1. Payment is sometimes immediate in the form of cash.000 $20.000 $1.000 $100.000 74 . called an account receivable.000 $200. General and administrative expenses include all other costs in running a business (e. advertising. direct material and factory overhead. insurance.000 $100.000 Liabilities Notes payable Accounts payable Long-term debt Total liabilities Owner’s equity Capital Retained earnings Total liabilities and Owner’s equity $5. For this reason owner’s equity is broken down into a series of account.g. which show what increased owner’s equity and expense accounts.000 Capital is the amount of money the owners have invested in the company. They are usually categorized into the cost of goods sold and general and administrative expenses.000 $400.000 $200.000. Income statement Income (profit). Income = revenue – expenses Revenue comes from the sale of goods or services.000 Total assets $1. Cost of goods sold are costs that are incurred to make the product.000 $1. The summary of revenues and expenses is shown on the income statement.SYNTHESE BASICS GUILLOT Lionel .000 $1.

its value increases by the amount of direct labor applied to it and the overhead attributed to its processing. but in itself does not relate to sales. In rising prices. Whatever method is used is only to account for usage. Financial inventory performance measures Finance wants as little inventory as possible and needs some measure of the level of inventory. 2 measures that do relate to sales are the inventory turns ratio and days of supply.SYNTHESE BASICS GUILLOT Lionel . When it enters production. it is recorded as work-in-process inventory and. replacement is at the current price. Inventory turns. In rising prices. Cash is generated by sales and the flow of cash into a business must be sufficient to pay bills as they become due. The reverse is true in a falling price market. as it is processed. Total inventory investment is one measure. Last in first out (LIFO). The reverse is true in a falling price market.ISERPA MLI 09/09/05 Cash flow analysis When inventory is purchased as raw material. they do not become revenue until they are sold. it is recorded as an asset. replacement is at a higher than the assumed cost. The equation to calculate it is: Days of supply = Inventory on hand sold Average daily usage Methods of evaluating inventory There are 4 methods accounting uses to cost inventory: first in first out. However. This raises another financial issue: businesses must have the cash to pay their bills. This method does not reflect current prices and replacement will be understated. Businesses develop financial statements showing the cash flows into and out of business. There is no relationship with the actual physical movement of actual items in any of the methods. average cost and standard cost. A convenient measure of how effectively inventories are being used is the inventory turns ratio: Inventory turns = Annual cost of goods sold Average inventory in dollars The calculation of average inventory can be complicated and is a subject for cost accounting. last in first out. Days of supply. However. When the goods are ready for sale. Days of supply is a measure of the equivalent number of days of inventory on hand. This type of analysis is called cash flow analysis. the company is left with an inventory that may be grossly understated in value. based on usage. the expenses incurred in producing the goods must be paid for. First in first out (FIFO). 75 .

How are they to be controlled? . direct labor and overhead.10 ABC INVENTORY CONTROL Control of inventory is exercised by controlling individual items called stockkeeping-units (SKUs). but other criteria may be used.Calculate the cumulative annual dollar usage and the cumulative percentage of items.Multiply the annual usage of each item by its cost to get its total annual dollar usage.What is the importance of the inventory item? . . Standard cost. Steps in making an ABC analysis: Establish the items characteristics that influence the results of inventory management. The problem with this method in changing price is that the cost used is not related to the actual cost. This method assumes an average of all prices paid for the article.ISERPA MLI 09/09/05 Average cost. Apply a degree of control in proportion to the importance of group.How much should be ordered at one time? .B About 30% of the items account for about 15% of the dollar usage. .Determine the annual usage for each item.C About 50% of the items account for about 5% of the dollar usage. This method uses cost determined before production begins. . it is usually found that the relationship between the percentage of items and the percentage of annual dollar usage follows a pattern in which: . The procedure for classifying by annual dollar usage is as follows: . .List the items according to their annual dollar usage. The cost includes direct material. 9. Usually this is based on annual dollar usage. The ABC principle is based on Pareto’s law. B and C groups based on percentage of annual usage. .When should an order be placed? The ABC inventory classification system answers the first two questions by determining the importance of items and thus allowing different levels of control based on the relative importance of items. Classify items into groups based on the established criteria. Any difference between the standard cost and the actual cost is stated as a variance. 4 questions must be answered: .SYNTHESE BASICS GUILLOT Lionel . As applied to inventories.Examine the annual usage distribution and group the items into A.A About 20% of the items account for about 80% of the dollar usage. . 76 . This type of distribution can be used to help control inventory.

Use the money and control effort saved to reduce the inventory of highvalue items.Have plenty of low-value items. 10 ORDER QUANTITIES 10. Unfortunately. .1 INTRODUCTION The objectives of inventory management are to provide the required level of customer service and to reduce the sum of all costs involved. .ISERPA MLI 09/09/05 Control based on ABC classification Using the ABC approach. . regular and frequent review by management. Order large quantities and carry safety stock. 77 .SYNTHESE BASICS GUILLOT Lionel . or batch. there are 2 general rules to follow: . Simplest possible control – make sure they are plenty. decisions rules are often made based on what seems reasonable. Lot-size decision rules Lot. carrying extra stock of C items adds little to the total value of the inventory. perhaps use a two-bin system or periodic review system. frequent review of demand forecasts and close follow-up and expediting to reduce lead time.C items: lowest priority. Simple or no records. regular attention and normal processing.When should an order be passed? Management must establish decision rules. Tight control including complete accurate records. Different controls used with different classifications might be the following: . These are called a stock-keeping unit (SKU).A items: high priority. 2 basic questions must be answered: . To achieve these objectives. Following are some common decision rules for determining what lot size to order at one time. 2 white shirts in the same inventory but of different sizes would be 2 different SKUs.B items: medium priority. Normal controls with good records. C items are really only important if there is a shortage of one of them. Stock-keeping unit (SKU) Control are exercised through individual items in a particular inventory. such rules do not always produce the best results. The same shirt in 2 different inventories would be 2 different SKUs. is a quantity produced together and sharing the same production costs and specifications. A items are extremely important and deserve the tightest control and the most frequent review. Lacking any better knowledge.How much should be ordered at time? .

Order “n” periods supply. the quantity ordered. Fixed-order quantity rules specify the number of units to be ordered each time an order is placed for an individual item or SKU.2 ECONOMIC-ORDER QUANTITY (EOQ) Assumptions The assumptions on which the EOQ is based are as follows: . The best known system is the economic-order quantity. there are many situations where the assumptions are not valid (e. Rather than ordering a fixed quantity. the quantity of an item in inventory decreases at a uniform rate. The quantity ordered is the difference between the actual available at the time of order and the maximum. Since items are ordered only when needed. Development of the EOQ formula Under the assumptions given. it is the best method for planning “A” items and is also used in a just-in-time environment. This technique requires time-phased information such as provided by a MRP or a MPS.g. In MRP. Costs Ideally.The items is produced or purchased in lots and not continuously.ISERPA MLI 09/09/05 Lot-for-lot. shelf life of the product is short. but there are also several rules that are variations of the EOQ. The quantity of units in inventory then increases instantaneously by Q.Demand is relatively constant and is known. The lot-for-lot rule says to order exactly what is needed. Average lot size inventory = Order quantity 2 78 .SYNTHESE BASICS GUILLOT Lionel . the lot-for-lot decision rule is often used. The advantage is that it is easily understood. . this system creates no unused lot-size inventory. The vertical lines represent stock arriving all at once as the stock on hand reaches zero. The assumptions are usually valid for finished goods whose demand is independent and fairly uniform. an order is placed when the quantity available falls below the order point. In this system. Fixed-order quantity.Replacement occurs all at once. However. . inventory management can order enough to satisfy future demand for a given period of time. The disadvantage is that it does not minimize the costs involved. the ordering decision rules used will minimize the sum of the cost of ordering and the cost of carrying. . 10. A variation on this rule is the min-max system. made-to-order items.Order preparation costs and inventory-carrying costs are constant and known. Because of this.…).

200 UNITS IN STOCK 100 Q = Lot size 1 2 3 4 TIME (weeks) Relevant costs. .Annual cost of placing orders.Annual cost of carrying inventory.ISERPA MLI 09/09/05 Number of order per year = Annual demand Order quantity the number of order per year is rounded neither up nor down.SYNTHESE BASICS GUILLOT Lionel . A S i c Q = annual usage in units = ordering cost in dollar per order = annual carrying cost rate as a decimal of a percentage = unit cost in dollars = order quantity in units Annual ordering cost = numbers of orders x cost per order = A xS Q Annual carrying cost = average inventory x cost of carrying one unit for 1 year = average inventory x unit cost x carrying cost = Q 2 xcxi Total annual cost = annual ordering costs + annual carrying costs = A Q xS + Q 2 xcxi Ideally. but the number of orders per year and the ordering cost decrease. For any situation in which the annual demand (A). the average inventory and the annual cost of carrying inventory increase. The relevant cost are as follows: . the total cost will be a minimum. The trick is to find the particular order quantity in which the total cost of carrying inventory and the cost of ordering will be a minimum. As the order quantities increases. the cost of ordering (S) and the cost of carrying inventory (i) are given. 79 . the total cost will depend upon the order quantity (Q).

The annual demand is a condition of the marketplace and is beyond the control of manufacturing. The cost of ordering (S) is either the cost of placing a purchase order or the cost of placing a manufacturer order. Anything that can be done to reduce these costs reduce the EOQ.SYNTHESE BASICS GUILLOT Lionel . it is beyond the control of manufacturing. The cost of placing a manufacturing order is made up from production control costs and setup costs. Ideally both costs should be as low as possible. EOQ = How to reduce lot size Looking at the EOQ formula. There are several reasons why this is desirable and the reduction of order quantities is one. The unit cost (c) is either the purchase cost of the SKU or the cost of manufacturing the item. Just-in-time manufacturing emphasizes reduction of setup time. 2 that are often used are the monetary unti to lot-size model and the noninstantaneous receipt model. The EOQ will increase as the annual demand (A) and the cost of ordering (S) increase and it will decrease as the cost of carrying inventory (i) ant the unit cost (c) increase. The cost of carrying inventory (i) is determined by the product itself and the cost of money to the company. as the unit cost decreases. As such. 10. Monetary unit lot size The EOQ can be calculated in monetary units rather than physical units. The same EOQ formula given can be used with: AD = annual usage in dollars S = ordering cost in dollars I = carrying cost rate as a decimal of a percent EOQ = 2ADS i 80 .ISERPA MLI 09/09/05 Economic-order quantity formula The EOQ occurred at an order quantity in which the ordering costs equal the carrying costs. In any event. the EOQ increases. there are 4 variables.3 VARIATIONS OF THE EOQ MODEL There are several modifications that can be made to the basic EOQ model to fit particular circumstances. Carrying costs = ordering costs Q 2 xcxi= A xS Q 2AS ic This value for the order quantity is the economic-order quantity.

There is a saving in purchase cost. 10.Ordering costs are reduced because fewer orders are placed since larger quantities are being ordered.Inventory –carrying costs rise because of the larger order quantity. It can be said that taking the discount results in the following: . .Ordering costs. In practise. it may or may not be best to take the discount.4 QUANTITY DISCOUNTS When material is purchased.Carrying costs. . K= Then Q= K Q= Therefore K= AD N AD N AD Annual demand Orders per year = AD N 2S i See exercise page 270 with: K= 81 . the ordering costs (S) and the carrying costs (c) are generally the same for each item. these costs are not necessarily known or easy to determine. . .SYNTHESE BASICS GUILLOT Lionel . What count is the total cost. in doing so. suppliers often give a discount on orders over a certain size. The buyer must decide whether to accept the discount and. For a family of items.Purchase cost. must consider the relevant costs: . Q= let: 2ADS i The ratio 2S/i must be the same for all items in the family. For convenience. The buyer must weigh the first 2 against the last and decide what to do. Depending on the figures.ISERPA MLI 09/09/05 10.5 USE OF EOQ WHEN COSTS ARE NOT KNOWN The EOQ formula depends upon the cost of ordering and the cost of carrying inventory.

the ordering cost is the same but . Thus. there will be a stockout and a potential loss in customer service. The EOQ assumes that demand is uniform and replenishment occurs all at once. not an EOQ. Some suppliers require a minimum order. particularly in MRP and using the EOQ does not produce a minimum cost. The number of orders placed in a year is the same as for an EOQ. Instead of ordering the same quantity (EOQ). but the amount ordered each time varies. Anticipation inventory. Minimum order. The period order quantity lot-size rule is based on the same theory as the EOQ. order size is constrained by package size. because the order quantities are determined by actual demand. Demand is not uniform and stock must be built ahead. the unit used should be the minimum package size. This minimum may be based on the total order rather than an individual items. Often demand is not uniform. Carriers give rates based on the amount shipped. This is similar to the price break given by suppliers for large quantities. This is calculated by dividing the EOQ by the demand rate. orders are placed to satisfy requirements for the calculated time interval. the carrying cost is reduced. often these are C items where the rule is to order plenty.1 INTRODUCTION If stock is not reordered soon enough. It is better to use the period-order quantity. Period-order quantity = EOQ Average weekly usage Practical considerations when using the EOQ Lumpy demand. 82 . stock ordered earlier than needed will create extra inventory. It uses the EOQ formula to calculate an economic time between orders. However.ISERPA MLI 09/09/05 10. Sometimes. the EOQ will not produce the best results. The problem then is how to balance the costs of carrying extra inventory against the cost of a stockout. It is better to plan a buildup of inventory based on capacity and future demand. A full load costs less per ton to ship than a part load. Transportation inventory. This produce a time interval for which orders are placed. Multiples. 11 INDEPENDENT DEMAND ORDERING SYSTEMS 11.SYNTHESE BASICS GUILLOT Lionel . When this is not true.6 PERIOD-ORDER QUANTITY (POQ) The EOQ attempts to minimize the total cost of ordering and carrying inventory and is based on the assumption that demand is uniform. In these case. The same type of analysis can be used.

DDLT = demand during lead time. an order must be placed when there is enough stock on hand to satisfy demand from the time the order is placed until the new stock arrives (called the lead time).Order point system. half the time the demand is greater than average and there is stockout. order quantity and order point.2 ORDER POINT SYSTEM When the quantity of an item on hand in inventory falls to a predetermined level.Order quantities are usually fixed. the last is for dependent demand items. effectively there has been a change in safety stock.Average inventory = order quantity/2 + safety stock = Q/2 + SS. 83 . If the average change in the order point. . The quantity ordered is usually precalculated and based on economic-order-quantity concepts. lead time. . 3 basic systems are used to determine when to order: . The first two are for independent demand items. Using this system.Material requirements planning.ISERPA MLI 09/09/05 In industry there are many inventories that involve a large investment and where stockout costs are high. called an order point. Statistically.The intervals between replenishment are not constant but vary depending on the actual demand during the reorder cycle.Periodic review system.SYNTHESE BASICS GUILLOT Lionel . Controlling these inventories requires effective reorder systems. Demand during any one lead-time period probably varies from the average demand.The order point is determined by the average demand during the lead time. an order is placed. SS = safety stock UNITS IN STOCK Q = Order quantity Order point Safety stock Lead time TIME Figure shows the relationship between safety stock. . With the order point: . The item is ordered when the quantity on hand falls to a level equal to the demand during the lead time plus the safety stock: OP = DDLT + SS OP = order point. . . 11. safety stock can be added. If it necessary to provide some protection against stockout.

a picture of the distribution of demand about the average appears. but the methods of calculation are different. Variation in demand about the average Suppose a history of weekly demand for a particular item shows an average demand. The pattern of demand distribution about the average will differ for different products and markets.length of a lead time. Normal distribution. Both result in extra inventory. . Timing uncertainty occurs when the time of receipt of supply or demand differs from than expected. . Average or mean. or dispersion. Some method of estimating the randomness of item demand is needed. As long as the demand conditions remain the same. As expected. One relates to its central tendency. The normal distribution has most of the value s clustered near a central point with progressively fewer results occurring away from the center. the more safety stock has to be carried to provide a specified service level. The SS required depends on the following: . called safety stock. The normal curve is described by 2 characteristics. most of the demand are around it. The average or mean value is at the high point of the curve. x = ( x) / n 84 . The most common predictable pattern is called a normal curve or bell curve. of the actual values about the average. This is one reason it is important to reduce lead time. we can expect the pattern to remain very much the same. It is calculated by adding the data ( x) and dividing by the total number of data (n). Quantity uncertainty occurs when the amount of supply and demand varies. the demand pattern. There are 2 ways to protect against uncertainty: carry extra stock. Safety stock is the most common way of buffering. making it difficult to predict with any accuracy. The longer the lead time. Variation in demand during lead time Actual demand varies from forecast for 2 reasons: bias error in forecasting the average demand and random variations in demand about average. Uncertainty may occur in 2 ways: quantity uncertainty and timing uncertainty. If the demand is erratic. If the weekly demands are classified into groups or ranges about the average . center and spread. A smaller number would be farther away from it and still fewer would be farthest away.variability of demand during the lead time. so is. The symbol is x. or order earlier.frequency of reorder.service level desired. the average. It is the central tendency of the distribution. It is the latter with which we are concerned in determining safety stock. It is symmetrical about this central point in that is spreads out evenly on both sides.SYNTHESE BASICS GUILLOT Lionel . . Some method is needed to described the distribution: its shape. and the other to the variation.ISERPA MLI 09/09/05 11. called safety lead time.3 DETERMINING SAFETY STOCK Safety stock is intended to protect against uncertainty in supply and demand.

. It means being able to supply when a stockout is possible and a stockout is possible only at the time an order is to be placed. Standard deviation (sigma) The standard deviation is a statistical value that measures how closely the individual values cluster about the average. Suppose the standard deviation of demand during the lead time is 100 units and this amount is carried as safety stock. .Calculate the deviation for each period by subtracting the actual demand from the forecast demand. there is enough safety stock to provide protection for the 84% of the time (50% + 34%) that a stockout is possible. This much safety stock provides protection against stockout for 34% of the time that actual demand is greater than expected. a service level of 50% can be attained with no safety stock. .Calculate the square root of the value calculated in the previous step.As the mean absolute deviation (MAD). From statistics. In total. It is important to note that the deviations in demand intervals as the lead time.ISERPA MLI 09/09/05 Dispersion. It is calculated as follows: . The actual demand will be within ± 2σ of approximately 98% of the time. Safety stocks are needed to cover only those periods in which the demand during the lead time is greater than the average. It is represented by σ. . of actual demands about the average refers to how closely the individual values cluster around the mean. Thus. .As a range of the maximum minus the minimum value. The service level is a statement of the percentage of time there is no stockout. are for the same time the forecast average the forecast average the forecast average 85 .SYNTHESE BASICS GUILLOT Lionel .Square each deviation.Add the squares of the deviations.Divide the value in previous step by the number of periods to determine the average of squared deviations. which is a measure of the average forecast error. . As stated earlier. Determining the safety stock and order point One property of the normal curve is that is symmetrical about the average. This is the standard deviation. It can be measure in several ways: .The actual demand will be within ± 3σ of approximately 99. we know from statistics that the error is within ± 1σ of the forecast about 68% of the time. The variation. we can determine that: The actual demand will be within ± 1σ of approximately 68% of the time. . or dispersion.As a standard deviation.88% of the time.

04 1.56 1.SYNTHESE BASICS GUILLOT Lionel .Lost customers.84 1. the more often there is a chance of a stockout.33 3. customer service is a major competitive tool and a stockout can be very expensive. When the order quantity is increased.65 1.99 Safety factor 0. It is the responsibility of management to determine the number of stockouts per year that are tolerable. the chances of a stockout are directly proportional to the frequency of the reorder. Note that the service level is the percentage of order cycles without a stockout. Service level (%) 50 75 80 85 90 94 95 96 97 98 99 99. the average inventory increases.Back-order costs.86 99. . It is impossible to measure the variation in demand about average for each of the lead times.ISERPA MLI 09/09/05 Safety factor.00 11. but because of the larger order quantity. The more often stock is reordered.05 2.4 DETERMINING SERVICE LEVELS Stockouts cost money for the following reasons: . Usually the decision about what the service level should be is a senior management decision and is part of the company’s corporate and marketing strategy. The safety stock needed decreases.28 1.00 0.88 2.67 0. In others. In some markets. exposure to stockout decreases. Some method of adjusting standard deviation for the different time intervals is needed. The only time it is possible for a stockout to occur is when stock is running low and this happens every time an order is to be placed.Lost sales. 86 . . Therefore. safety stock and order point can be calculated. The service level is directly related to the number of standard deviation provided as a safety stock and is usually called the safety factor. Then the service level. it may not be a major consideration.75 1.5 DIFFERENT FORECAST AND LEAD-TIME INTERVALS Records of actual demand and forecasts are normally made on a weekly or monthly basis for all items regardless of what the individual lead times are.00 4. 11.

but they all are inclined to be variations or extensions of 2 basic systems: the two-bin system and the perpetual inventory system. C item becomes an A item. Two-bin system A quantity of an item equal to the order point quantity is set aside and not touched until all the main stock is used up. 87 . However. When this stock needs to be used. the production control or purchasing department is notified and a replenishment order is placed. it contains the balance on hand. the formula gives a good approximation: LTI Sigma for LTI = (sigma for FI) x FI The preceding relationship is also useful where there is a change in the LTI.SYNTHESE BASICS GUILLOT Lionel . Perpetual inventory record system A perpetual inventory record is a continual account of inventory transaction as they occur. they do need to be managed. As the time interval increases. There are many systems. While not exact. When it is out of stock. the standard deviation increases.6 DETERMINING WHEN THE ORDER POINT IS REACHED There must be some method to show when the quantity of an item on hand has reached the order point. it holds an up-to-date record of transactions. but it may also contain the quantity on order but not received. the quantity allocated but not issue and the available balance. the more smoothing take place. The two-bin system is a simple way of keeping control of C items. new interval New safety stock = (old safety stock) x old interval 11. At a minimum. However. it is best to spend the minimum amount of time and money controlling them. At any instant. it will not increase in direct proportion. Because they are of low value. 426 254 SCREW Date 01 02 03 04 05 Ordered Received Issued Order Order quantity: 500 Point: 100 On hand Allocated Available 500 500 500 400 100 500 100 0 100 600 0 600 500 400 500 An inventory record contains variable and permanent information. there is a smoothing effect.ISERPA MLI 09/09/05 As the lead times increases. The following adjustment can be made to the standard deviation or the safety stock to compensate for differences between lead-time interval (LTI) and forecast interval (FI). and the longer the time interval.

.ISERPA MLI 09/09/05 Permanent information is shown at the top of figure. order numbers and quantities. D = Demand per unit of time. It includes data as follows: . the quantity on hand plus the quantity ordered must equal the sum of the demand during the lead time plus the demand during the review period plus the safety stock. .Storage location. . . The quantity on hand plus the quantity ordered must be sufficient to last until the next shipment is received. . fixed-time intervals and an order is placed.Quantities received: data. Variable information is information that changes with each transaction and includes the following: .Order quantity. . The order quantity (Q) is equal to the maximum-inventory level (T) minus the quantity on hand (I) at the review period: Q=T–I T = D(R + L) + SS 88 . . The information depends of the needs of company and the particular circumstances.Order point. order numbers and quantities. . name. order numbers and quantities. Thus the review period is fixed and the order quantity is allowed to vary. SS = Safety stock.Quantities ordered: data.Balance on hand. Target level or maximum-level inventory This sum of quantities is called the target level or maximum-level inventory: Where T = Target (maximum) level inventory.Available balance. That is. . . this information does not change frequently.Quantities allocated: data. 11.Suppliers.7 PERIODIC REVIEW SYSTEM Using the periodic review system.Lead time. order numbers and quantities.Quantities issued: data.Safety stock. and description. . R = Review period duration.SYNTHESE BASICS GUILLOT Lionel . Although not absolutely permanent.Part number. L = Lead-time duration. the quantity ordered is usually predetermined at specified.

Where ordering costs are small.8 DISTRIBUTION INVENTORY Distribution inventory includes all the finished goods held anywhere in the distribution system. Although the demand from customers may be relatively uniform. Decentralized system In a decentralized system. A regional distribution center may order most of all of its stock from a central warehouse. the demand on central supply is not. 89 . In turn. Because of these deficiencies. The customers may be the final consumer or some intermediary in the distribution chain. The distribution system is the factory’s customer and the way the distribution system interfaces with the factory has a significant effect on the efficiency of the factory operations. Distribution inventory management systems can be classified into decentralized.SYNTHESE BASICS GUILLOT Lionel . The decentralized system is sometimes called the pull system because orders are placed on central supply and pulled through the system. centralized and distribution requirements planning. The purpose of holding inventory in distribution centers is to improve customer service by locating stock near the customer and to reduce transportation costs by allowing the manufacturer to ship full loads rather than partial loads over long distances (see chapter 13). A good example of this regional distribution center that orders a truckload once a week from a central warehouse.ISERPA MLI 09/09/05 The periodic review system is useful for the following: . Distribution systems vary considerably. . 11.Where there are many small issues from inventory and posting transactions to inventory records are very expensive. The objectives of distribution inventory management are to provide the required level of customer service. . customer service and factory schedules. but in general they have a central supply facility that is supported by a factory. A number of ordering systems can be used. The advantage of the decentralized system is that each center can operate on its own and thus reduce communication and coordination expense.Where many items are ordered together to make up a production run or fill a truckload. and to be able to interact with the factory to minimize scheduling problems. The disadvantage is the lack of coordination and the effect this may have on inventories. the demand on the factory depends on when central supply places orders. a number of distribution centers and customers. many distribution systems have moved toward more central control. including the order point and periodic review systems. to minimize the costs of transportation and handling. Supermarkets and retailers are in this category. This occurs when many different items are ordered from the one source. and then places orders on central supply. each distribution center first determines what it needs and when. because it is dependent on when the distribution centers place replenishment orders.

These systems attempt to balance the available inventory with the needs of each distribution center. 90 . The disadvantage is the inability to react to local demand. Distribution center A Part 5678 Week Planned order release Distribution center B Part 5678 Week Planned order release 1 200 2 3 200 1 2 100 3 Central Supply Part 5678 Lead Time: 2 weeks Order quantity: 500 Week Gross requirements Scheduled receipts Projected available 400 Planned order release 1 200 200 500 2 100 100 3 200 400 12 PHYSICAL INVENTORY AND WAREHOUSE MANAGEMENT 12. This gives central supply and the factory the opportunity to plan for the goods that will actually be needed and when. It is able both to respond to customer demand and coordinate planning and control. The system translates the logic of MRP to the distribution system. the physical management of inventory and warehousing are intimately connected. Since they perform the same functions. WIP inventory.1 INTRODUCTION Because inventory is stored in warehouses. In other situations.SYNTHESE BASICS GUILLOT Lionel . supplies and possibly repair parts.ISERPA MLI 09/09/05 Centralized system In a centralized system. The advantage of these systems is the coordination between factory. all forecasting and order decisions are made centrally. central supply and distribution centers. inventory is turned over rapidly and the warehouse functions as a distribution center. Distribution centers have no say about what they receive. In some cases. inventory may be stored for an extended time. finished goods. Different ordering systems can be used. stores and warehouses are treated alike. Distribution requirements planning Distribution requirements planning is a system that forecasts when the various demands will be made by the system on central supply. thus lowering the level of service. but generally an attempt is made to replace the stock that has been sold and to provide for special situations such as seasonality or sales promotions. Stock is pushed out into the system from central supply. stores performs the same functions as warehouses and contain raw materials. In a factory.

Orders are packaged. The cost of operating a warehouse can be broken down into capital and operating costs.… The major operating cost is labor and the measure of labor productivity is the number of units that an operator can move in a day. This means the warehouse must: o Check the goods against an order and the bill of lading.Dispatch the shipments. warehouse layout. . The warehouse accepts goods from outside transportation and accepts responsibility for them.Hold goods. Orders records are updated. efficient warehouse operations perform the following: .Dispatch goods to storage.Marshall the shipment. Items required from stock must be selected from storage and brought to a marshalling area. This depends on the type of material handling equipment used. Warehouses activities Operating a warehouse involves several processing activities and the efficient operation of the warehouse depends upon how well these are performed. the methods of storage and the need for ancillary space for aisles. . To maximize productivity and minimize cost. These activities are as follows: . all these activities take place in any warehouse.ISERPA MLI 09/09/05 12.Keep track of items so they can be found readily and correctly. . Goods are kept in storage and under proper protection until needed.Operate an information system. goods are sorted and put away.SYNTHESE BASICS GUILLOT Lionel .2 WAREHOUSING MANAGEMENT The objective of a warehouse is to minimize cost and maximize customer service. offices. Capital costs are those of space and materials handling equipment. quantity issued and location in warehouse. In various ways. shipping documents prepared and goods loaded on the right vehicle. o Check for damage and fill out damage reports if necessary. warehouse management must work with the following: 91 . Items are identified with the appropriate SKU number and the quantity received recorded.Receive goods. The complexity depends on the number of SKUs handled. stock location system and the order-picking system used. .Pick goods. The space needed depends on the peak quantities that must be stored. . Goods making up a single order are brought together and checked for omissions or errors. quantity received. To do this.Minimize the total physical effort and thus the cost of moving goods into and out of storage. o Check the quantities. . .Provide communication links with customers.Identify the goods. docks. . . the quantities of each SHU and the number of orders received and filled. . A record must be maintained for each item in stock showing the quantity on hand.Provide timely customer service. the location and accessibility of stock. o Inspect goods if required.

SYNTHESE BASICS GUILLOT Lionel . Cube utilization and accessibility Goods are stored not just on the floor. Since the storage area is 48” deep. Suppose items are stacked along a wall. The pallets cannot be placed tight against one another.ISERPA MLI 09/09/05 - Maximum use of space. This then leaves room for (120’ x 12”)/42” = 34. if no other goods had to be moved to reach an SKU.Order picking and assembly. A pallet is a platform usualyy measuring 48” x 40” x 4”. As long as all pallets contain the same SKU there is no problem with accessibility. the SKU would be 100% accessible. Space is needed for 3000 pallets. There is room for 30 92 . Accessibility. . For example. the 40” side is placed along the wall. Cube utilization is the use of space horizontally and vertically. o Provide ready access to all SKUs. . There will be excellent accessibility for all items except item 9. In calculating the space needed for storage. Cube utilization. Several factors influence effective use of warehouses.Stock location. Effective use of labor and equipment. some design figure for maximum inventory is needed. but in the cubic space of the warehouse. This requires a good stock location system and layout. Material handling equipment represents the second largest capital cost and labor the largest operating cost. This means not only floor space but cubic space. a 2” clearance must be allowed between them so they can be moved. Accessibility means being able to get at the goods wanted with a minimum amount of work. Most of the activity that goes on in a warehouse is material handling: the movement of goods into and out of stock locations. offices and order picking and assembly. There is a trade-off between the two in that labor costs can be reduced by using more materials handling.Cube utilization and accessibility. Space is also required for aisles. Warehouse management will need to: o Select the best mix of labor and equipment to maximize the overall productivity of the operation. 1000 pallet positions are required. o Move goods efficiently.3 or 34 pallet positions along each side of the aisles. Usually the largest capital cost is for space. . receiving and shipping docks.Packaging. If pallets are stacked 3 high. Some are: . 120’ 4’ Aisle 4’ Pallet positions. but cube utilization is not maximize.

it requires accurate and up-to-date 93 . keep track of items so they can be found easily.Group fast-moving items together. is used depends on the type of good stored. can be located close to the marshalling and shipping area whereas reserve stock used to replenish the working stock can be located more remotely.Locate working stock and reserve stock separately. or mix of systems. Either system may be used with any of the above location systems. However. If functionally related items are ordered together. Warehouse personnel become familiar with the location of items. Fixed locations.Group physically similar items together. but only 21 places are being used for a cube utilization of 70%. Physically similar items often require their own particular storage facilities and handling equipment. Relatively small quantities of working stock. . Which system. the throughput and the size of orders. goods are stored wherever there is appropriate space for them. Some method must be devised to increase cube utilization and maintain accessibility.Group functionally related items together.SYNTHESE BASICS GUILLOT Lionel . Fixed-location systems are often used in small warehouses where space is not a premium. The advantage of this system is to improve cube utilization. where throughput is small and where there are a few SKUs. . the work of moving them in and out of storage is reduced. This represents a trade-off between the capital cost of the racking and the savings in the operating cost of extra handling. fixed-location systems usually have poor cube utilization. The following are some basic systems of locating stock: . order picking is easier. management must maintain enough inventory or safety and working stock to provide the required level of customer service. Stock location There is no single universal stock location system suitable for all occasions. The same SKU may be stored in several locations at the same time and different locations at different time. There are 2 basic systems for assigning specific locations to individual stock items: fixed location and floating location. If fast-moving items are placed close to the receiving and shipping area. However. an SKU is assigned a permanent location(s) and no other items are stored there. Slower moving items can be placed in more remote areas of the warehouse. Floating location. Group together items similar in their use. In a floating-location system. 1 1 2 3 4 1 1 2 3 4 10 1 1 2 3 4 5 6 7 8 9 One way is to install tiers of racks so lower pallets can be removed without disturbing the uppers ones. This system makes it possible to store and retrieve items with a minimum of record keeping. the type of storage facilities needed. but there are a number of basis systems that can be used. Whatever the system.ISERPA MLI 09/09/05 pallets . In a fixed –location system. . This allows order picking to occur in a compact area and replenishment of the working stock in bulk by pallet or container load. stock from which withdrawals are made.

Order picking and assembly Once a order is received.SYNTHESE BASICS GUILLOT Lionel . The order is self-marshalling in that when the order picker is finished. central storage contains all inventory in one central location. . a number of orders are gathered together and all the items divided by zone. . . Zones are usually established by grouping related parts together.Central storage costs are reduced. The items are then sent to the marshalling area where they are sorted to individual orders for shipment. Sometimes C items are issued as floor stock where manufacturing is issued a large quantity which is used as needed. .Reduced safety stock. rather than handling individual orders.Area system. Parts may be related because of the type of storage needed or because they are often ordered together. assembled and prepare for shipment.Multi-order system.Ease of control. There are several advantages: . As opposed to point-of-use storage. Central storage.Zone system. Point-of-use storage. There a several advantages to point-of-use storage: . not when it is used. The order picker circulates throughout the warehouse selecting the items on the order. inventory is stored close to where it will be used. An order is divided up by zone and each order picker selects those items in their zone and sends them to marshalling area where the order is assembled for shipment. . cube utilization and warehouse efficiency are greatly improved. A variation of the zone system is to have the order move to the next zone rather than to marshalling area. the order is complete. .Inventory record accuracy is easier to maintain. particularly in repetitive manufacturing and in a JIT environment. 94 . This method is excellent as long as inventory is kept low and operating personnel can keep control of inventory records. Sometimes.Specialized storage can be used. The warehouse is broken down into zones and order pickers work only in their own area.ISERPA MLI 09/09/05 information on item location and the availability of empty storage space so items can be put away and retrieved efficiently. among which are the following: . The items are then taken to the shipping area. Inventory records are adjusted when the stock is issued. .Material is accessible at all times.Material handling is reduced or eliminated. the items on the order must be retrieved from the warehouse. This system is the same as the zone system except that. This system is generally used in small warehouses where goods are stored in fixed locations. since users do not need to carry their own safety stock. . There are several systems that can be used to organize the work. Thus. Modern warehouses using floating-location system are usually computer based. The computer assigns free locations to incoming items and direct the order picker to the right location.Materials are readily accessible to users.

part number and quantity must be properly identified. location and part number must be recorded. Working stock and reserve stock. the purchase order. 95 . gross-to-net calculations will be in error. Before any transaction is physically carried out.ISERPA MLI 09/09/05 Area system is simple to manage and control. reserve stock and working stock may be separated. o Physically execute the transaction. a transaction occurs. When goods are received. strayed or stolen. This is less to prevent theft than to ensure people do not take things without completing the transaction steps. There are 4 steps in any transaction: o Identify the item. Limited access. the location must be accurately specified. A separate workforce is used to replenish the working stock from the reserve stock. The working stock is located close to the shipping area so the work in picking is reduced. It should be locked except during the working hours.A good-part numbering system (see chapter 4). In addition to the above systems. When goods are stored. When receiving an item. 12. items have a nasty habit of becoming lost. all information about the transaction must be recorded. The zone systems break down the order-filling process into a series of smaller areas that can be better managed individually.Operate an effective materials management system. Quantity is verified by a physical count of the item by weighing or measuring. o Verify quantity. Inventory must be kept in a safe. The multi-order system is probably most suited to the situation in which there are many items or many small order with few items.3 PHYSICAL CONTROL AND SECURITY Because inventory consists of tangible things. but as the warehouse throughput and size increase. the quantity. about or out of the storage area.4 INVENTORY RECORD ACCURACY These 3 pieces of information must be accurate : part description. issued or moved in any way. What is needed is a system that make it difficult for people to make mistakes or be dishonest. When issued. If inventory records are inaccurate. quantity and location. o Record the transaction. well-documented transaction system. 12. it becomes unwieldy. Accurate inventory records enable firms to: . Not only should the stores staff be well trained in handling and storing material and in recording transactions.SYNTHESE BASICS GUILLOT Lionel . A well-trained workforce. secure place with limited general access. . but other personnel who interact with stores must be trained to ensure transactions are recorded properly. Move the goods in. There are several elements that help: . Sometimes standard-sized containers are useful in counting.A simple.

To judge inventory accuracy. Inaccurate inventory records will result in: . Errors can occur because of inaccurate piece counts. safety problems or the difficulty of getting precise measurement. Planners can plan. . Operate effectively and efficiently.ISERPA MLI 09/09/05 - Maintain satisfactory customer service. since people will always be reacting to a bad situation rather than planning for the future.Unauthorized withdrawal of material. Some program of verifying the inventory counts and location is necessary.Lack of audit capability. . . unrecorded transactions. inaccurate material location and incorrectly identified parts. 96 . Causes of inventory record errors Some examples of causes of inventory record error are: . a tolerance level for each part must be specified. errors are usually the fault of human input to the system. Measuring inventory record accuracy Inventory accuracy ideally should be 100%. Any analysis of inventory is only as good as the data it is based on. The most popular one today is cycle counting. Analyze inventory. What is the inventory accuracy? Tolerance.Inaccurate transaction recording. . For these reasons.Lost sales.Low productivity. critical nature of the item. . tolerance are set for each item. Banks and other financial institutions reach this level. confident that the parts will be available. The documentation reporting system should be designed to reduce the likelihood of human error. delay in recording transactions.Excess inventory. this may mean no variance. . availability.Poor delivery performance. Tolerance are set on individual items based on value. . . When computer is used. for others.Unsecured stockroom.SYNTHESE BASICS GUILLOT Lionel . .Poor transaction recording systems.Poorly trained personnel. lead time. any order promising it will be in error. Tolerance is the amount of permissible variation between an inventory record and a physical count. it may be very difficult or costly to measure and control 100% accuracy. ability to stop production. . For some items.Excessive expediting.Shortages and disrupted schedules. If records show the item is in inventory when is not.

but it is more important to audit system to find the causes of record inaccuracy and eliminate them. To planners. the physical inventory represents an opportunity to correct any inaccuracies in the records.Housekeeping. periodic audits tend not to. collect the tickets and list the items in each department. the people doing the inventory are not used to 97 . Cycle counting does this.Identification. . thus losing production. This can. Taking a physical inventory consists of 4 steps: . The responsibility for taking the physical inventory usually rests with the materials manager who should ensure that a good plan exists and it is followed. There are 3 factors in good preparation: . be done before the inventory is taken. .SYNTHESE BASICS GUILLOT Lionel . . Process. Inventory must be sorted and the same parts collected together so they can easily be counted. Part must be clearly identified and tagged with part numbers. they should be checked immediately. and they must be detected so inventory accuracy is maintained. the job is often done hurriedly and poorly since there is much pressure to get it done and the factory running again. .Training.Verify this count by counting or by sampling.ISERPA MLI 09/09/05 Inventory record 100 100 100 100 100 100 100 100 100 100 1000 Within tolerance X X X X X X X X X Outside tolerance Part number 1 2 3 4 5 6 7 8 9 10 Total Shelf count 105 100 98 97 102 103 99 100 97 99 1000 Tolerance ± 5% ± 0% ± 3% ± 2% ± 2% ± 2% ± 3% ± 0% ± 5% ± 5% X Auditing inventory records Errors occur. In addition. If major discrepancies exist.Count items and record the count on a ticket left on the item. and should. It is important to audit record accuracy. There are 2 basic methods of checking the accuracy of inventory records: periodic (usually annual) counts of all items and cyclic (usually daily) counts of specified items. The primary purpose of a periodic (annual) inventory is to satisfy the financial auditors.Reconcile the inventory records for differences between the physical count and inventory dollars. Taking an annual physical inventory has several problems. labor and paperwork are expensive. . Usually the factory has to be shut down. Periodic (annual) inventory.When the verification is finished. Those who are going to do the inventory must be properly instructed and trained in taking inventory.

the idea of cycle counting has developed. . biannually or once a year. When to count. this method has the advantage of reducing work. Items are grouped by zones to make counting more efficient. the count frequency should increase as the value of the item and the number of transactions increase.Timely detection and correction of problems.Location audit system.When an order is received. Cycle counters are also trained to identify problems and to correct them. bimonthly or quarterly. The zone method is ideal for fast-moving items. more errors often are introduced into the records than are eliminated.When a specified number of transactions have occurred. some items are counted frequently throughout the year whereas others are not. Cycle counting. 3 common ones are: .Complete or partial reduction of lost production.SYNTHESE BASICS GUILLOT Lionel . A cycle counting program may include all these methods. The system is used when a fixed-location system is used. Again. or when WIP or transit inventory is being counted. For example. As a result. .Zone method. Some rule is established for count frequency. Cycle counting is a system of counting inventory continually throughout the year. Some selection criteria are: . This has the advantage of detecting errors before the order is placed and reducing the amount of work by counting at a time when stock is low. because of human error. Several methods can be used to determine the frequency. Cycle counts can be scheduled at regular intervals or on special occasions.ISERPA MLI 09/09/05 the job and are prone to making errors. Inventories are classified according to the ABC system. . In a floating-location system. a count schedule can be established.When the inventory record reaches zero. . these location may not be 100% correct. Inventory is at its lowest level. The purpose of the count is first to find the cause of error and to correct the cause so the error is less likely to happen again. On this basis. . The advantages to cycle counting are: . B items. Errors occur when transactions occur. . and C items.When an order is placed. Because of these problems. Items are counted just before an order is placed. normal cycle counting may not find it. If material is mislocated.Used of personnel trained and dedicated to cycle counting. Count frequency. . For an item. Fast-moving items have more transactions and are more prone to error. The idea is to count selected items each day. a predetermined number of stock locations are checked each period. In using location audits.ABC method. if a floating-location system is used. a combination of ABC and location audit is appropriate. Depending on their importance. Physical inventory counts are scheduled so that each item is counted on a predetermined schedule. 98 . A items might be counted weekly or monthly. The number of times an item is counted in a year is called its count frequency.

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When a error occurs. A special count is appropriate when an obvious error is detected. This may be a negative balance on the stock record or when no items can be found although the record shows some in stock.

13 PHYSICAL DISTRIBUTION
13.1 INTRODUCTION
Physical distribution is the movement of materials from the producer to the consumer. It is the responsibility of the distribution department, which is part of an integrated materials management or logistics system.
S U P P L I E R MANUFACTURER DISTRIBUTION SYSTEM C O S T U M E R

Physical Supply

Manufacturing Planning and Control

Physical Distribution

Dominant flow of products and services Dominant flow of demand and design information

The movement of material is divided into 2 functions: physical supply and physical distribution. Physical supply is the movement and storage of goods from suppliers to manufacturing. Physical distribution is the movement and storage of finished goods from the end of the production to the customer. The particular path in which the goods move (through distribution centers, wholesalers and retailers) is called the channel of distribution. Channels of distribution Sometimes a company delivers directly to its customers, but often it uses other companies or individuals to distribute some or all of its products to the final consumer. These companies or individuals are called intermediaries. There are really 2 related channels involved. The transaction channel is concerned with the transfer of ownership. Its function is to negotiate, sell and contract. The distribution channel is concerned with the transfer or delivery of the goods or services. The same intermediary may perform both functions, but not necessarily. Physical distribution is vital in our lives. Usually, manufacturers, customers and potential customers are widely dispersed geographically. If manufacturers serve only their local market, they restrict their potential for growth and profit. By extending
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its market, a firm can gain economies of scale in manufacturing, reduce the cost of purchases by volume discounts and improve its profitability. However, to extend markets requires a well-run distribution system. Distribution adds place value and time value by placing goods in markets where they are available to the consumer at the time it wants them. The specific way in which materials move depends upon many factors. For example: - The channels of distribution that the firm is using; - The types of markets served. Market characteristics such as the geographic dispersion of the market, the numbers of customers and the size of orders; - The characteristics of the product; - The type of transportation available to move the material. All are closely related.

13.2 PHYSICAL DISTRIBUTION SYSTEM
The objective of distribution management is to design and operate a distribution system that attains the required level of customer service and does that at least cost. To reach this objective, all activities involved in the movement and storage of goods must be organized into an integrated system. Activities in the physical distribution system In a distribution system, 6 interrelated activities affect customer service and the cost of providing it: - Transportation. Transportation involves the various methods of moving goods outside the firm’s buildings. For most firms, it is the single highest cost in distribution, usually accounting for 30% to 60% of distribution costs. Transportation adds place value to the product; - Distribution inventory. Distribution inventory includes all finished goods inventories at any point in the distribution system. In cost terms, it is the second most important item in distribution, accounting for 25% to 30% of the cost of distribution. Inventories create time value by placing the product close to the customer; - Warehouses (distribution centers). Warehouses are used to store inventory. The management of warehouses makes decisions on site selection, number of distribution centers, layout and methods of receiving, storing and retrieving goods; - Materials handling. Materials handling is the movement and storage of goods inside the distribution center. The type of materials handling equipment used affects the efficiency and cost of operating the distribution center. Materials handling represents a capital cost; - Protective packaging. Goods moving in a distribution system must be contained, protected and identified. In addition, goods are moved and stored in packages and must fit into dimension of the storage spaces and the transportation vehicles; - Order processing and communication. Order processing includes all activities needed to fill customer orders. Many intermediaries are involved

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in the movement of goods and good communication is essential to a successful distribution system. Total-cost concept The objective of distribution management is to provide the required level of customer service at the least total system cost. What happens to one activity has an effect on other activities, total system cost and the service level. Management must treat the system as a whole and understand the relationship among the activities.
Rail (10 days) 200 1000 1200 Air (1 day) 1000 100 1100

Transportation cost In-transit inventory-carrying cost ($10/day) Total

There are 2 related principles illustrated here: - Cost trade-off. The cost of transportation increased with the use of air transport, but the cost of carrying inventory decreased. There was a cost trade-off between the 2; - Total cost. By considering all of the costs and not just any one cost, the total system cost is reduced. Note also that even though no cost is attributed to it, customer service is improved by reducing the transit time. The total cost should also reflect the effect of the decision on other departments, such as production and marketing. In this section, the emphasis is on the costs and tradeoffs incurred and on improvement in customer service. Generally, but not always, an increase in customer service requires an increase in cost, which is one of the major tradeoffs.

13.3 INTERFACES
There are several important interfaces among physical distribution and production and marketing. Marketing Although physical distribution interacts with all departments in a business, its closest relationship is probably with marketing. The marketing mix is made up of product, promotion, price and place and the latter is created by physical distribution. Marketing is responsible for transferring ownership. Physical distribution has the responsibility of meeting the customer service levels established by marketing and the senior management of the firm. Physical distribution contributes to creating demand. Prompt delivery, product availability and accurate order filling are important competitive tools in promoting a firm’s products. The distribution system is a cost, so its efficiency and effectiveness influence the company’s ability to price competitively.

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any carrier must have certain basic physical elements. .Rail. including ocean-going. . The carriers of transportation can be divided into 5 basic modes: .SYNTHESE BASICS GUILLOT Lionel .Road. although sometimes the shipper owns or leases them.Water. terminals and vehicles. Fixed costs are costs that do not change with the volume of goods carried.4 TRANSPORTATION Transportation is a major contributor to the economic and social fabric of a society and aids economic development of regional areas.Air. 13. Each results in a cost to the carrier and. buses and automobiles. The distribution system is the factory’s customer and the way that the distribution system interfaces with the factory will influence the efficiency of factory operations. They may be owned and operated by the government or by the carrier or provided by the nature. Other functions performed at terminals are weighing. Vehicles of various types are used in all modes except pipelines. The nature of the way and how it is paid vary with the mode. and administration and paperwork. Costs of carriage To provide transportation service. size and complexity of the terminal varies with the mode and size of the firm and the types of good carried. connections with other routes and carriers. Sometimes. 102 . The carrier usually owns or leases the vehicles.Pipeline. The nature. The purchase cost of a truck is a fixed cost. maintenance and driver’s wages. depend on the use made of the truck. These are variable costs. These determine which method is appropriate for the types of goods to be moved. Ways are the paths over which the carrier operates. including trucks. the location of factories is decided largely by the sources and transportation links of raw materials. inland and coastal ships. These elements are ways. many costs of operation. Terminals are generally owned and operated by the carrier but. However. Each mode has different cost and service characteristics. . Terminals are places where carriers load and unload goods to and from vehicles and make connections between local pickup and delivery service and linehaul service. such as fuel. dispatching and maintenance. Although the demand from customers may be relatively uniform. but an important one is the cost and availability of transportation for a raw materials to the factory and the movement of finished goods to the marketplace. . in some special circumstances. may be publicly owned and operated. vehicle routing.ISERPA MLI 09/09/05 Production There are many factors involved in selecting a site for a factory. may be either capital (fixed) or operating (variable) costs. This is particularly true where the raw materials are bulky and of relatively low value compared to the finished product. the factory reacts to the demand from the distribution centers for replenishment stock. They serve as carrying and power units to move the goods over the ways. depending on the mode and the carrier.

However.SYNTHESE BASICS GUILLOT Lionel . Rail speed is good over long distances. most of which are provided by the government. This means that most of the total cost of operating a railway is fixed. Thus. the fixed costs can be absorbed over large volumes. However. Thus. they are a major capital expense. terminals and vehicles. gasoline and other taxes and tolls for the use of roads.ISERPA MLI 09/09/05 Rail Railways provide their own ways. This means that for road carriers most of their costs are operating (variable) in nature. Terminals may be provided by the government but are increasingly privately owned. These systems are usually provided by the government. Since operating costs are high. Train service is cheaper than road for large quantities of bulky commodities moved over long distances. Terminals are usually owned and operated by the carrier but may be either privately owned or owned by the government. railways must have a high volume of traffic to absorb the fixed costs. Vehicles are either owned or leased by the carrier and represent the major capital or fixed cost to the carrier. carriers are usually responsible for providing their own cargo terminals and maintenance facilities. For these reasons. railways are best able to move large volumes of bulky goods over long distances. The carrier will pay a fee to use them. The aircraft are expensive and are the single most important cost element for the airline. since the ships have a relatively large capacity. low-weight cargo or for emergency items. The carrier thus has no capital cost in providing the ways but may have to pay a fee for using the waterway. The main advantage of water transport is cost. Operating costs are low and. Ships are slow and are door-to-door only if the shipper and the 103 . Trucks can provide door-to-door service. terminals are mainly a variable cost. If owned. Road Trucks do not provide their own ways but pay a fee to the government as license. all of which represent a large capital investment. Transportation cost for air cargo is higher than for a other modes. the cost of a vehicle is small. Terminals include all of the airport facilities. They are particularly suited to distribution of relatively small-volume goods to a dispersed market. in comparison to other modes. Air Air transport requires an airway system that includes air traffic control and navigation systems. airlines’ costs are mainly variable. the service is generally reliable and trains are flexible about the goods they can carry. either by owning or renting the space. Carriers pay a user charge that is variable cost to them. Therefore. Most cargo travels in passenger aircraft and thus many delivery schedules are tied to those of passenger service. The main advantage of air transport is speed of service. Water Waterways are provided by nature or by nature with assistance of the government. especially over long distances. air transport is most often suitable for high-value.

. This means that whatever products they offer to carry will be carried for anyone wanting their service.Control of routes and service levels.Scheduled service. Capital costs for ways and pipelines are high and are borne by the carrier. performance and charges. For hire A for-hire carrier may carry goods for the public as a common carrier or under contract to a specified shipper.ISERPA MLI 09/09/05 consignee are on the waterway. bulky cargo over relatively long distances where waterways are available. state or municipal governments. like public carriers. Contract carriers haul only for those with whom they have a specific formal contract of service. Common carriers make a standing offer to serve the public. Pipelines Pipelines are unique among the modes of transportation in that they move only gas. This means investment in equipment. not the general public. . All mode of transport have public and for-hire carriers. Private Private carriers own or lease their equipment and operate it themselves. . license fees and taxes. are regulated in such matters as public safety. Public transport.Service available to the public. on the other hand. The contract specifies the character of the service. 13. Contract carriers offer a service according to a contractual agreement signed with a specific shipper. For hire carriers are subject to economic regulation by federal.Control of market entry and exit. . is in the business of hauling for others for pay. In the latter .Service of a given class of movement or commodity. Common carriers provide the following: . insurance and maintenance expense. 104 .5 LEGAL TYPES OF CARRIAGE Carriers are legally classified as public (for hire) or private (not for hire). Private carriers are not subject to economic regulation but. A company normally only considers operating its own fleet if the volume of transport is high enough to justify the capital expense.SYNTHESE BASICS GUILLOT Lionel . They can carry only those commodities they are licensed to carry. oil and refined products on a widespread basis. . Economic regulation has centered on 3 areas: .Service to designated points or in designated areas.Regulation of rates. Therefore. water transportation is most useful for moving low-value. individuals or firms own or lease their vehicles and use them to move their own goods. but operating costs are very low.

or they may contract with carriers to move their goods. They may own the vehicles.ISERPA MLI 09/09/05 Service capability Service capability depends on the availability of transportation service. Shippers can exercise most control over their own vehicles and have the highest service capability with private carriage.Terminal handling. Knowledge of these costs enables a shipper to get a better price by selecting the right skipping mode: . . . They all provide a transportation service. loaded on local delivery trucks and taken to the consignee. Full load shipments S H I P P E R Local T E R M I N A L Full load long distance T E R M I N A L Local C O N S I G N E E 105 . Least control is exercised over common carriers. they are picked up in some vehicle suitable for short-haul local travel. usually as a common carrier.Line haul.SYNTHESE BASICS GUILLOT Lionel .6 TRANSPORTATION COST ELEMENTS There are 4 basic cost elements in transportation.Pickup and delivery. The shipper must go to the marketplace to hire a common carrier and is subject to the schedules and regulations of that carrier.Billing and collecting. There they are again sorted. . Usually. 13. In the latter. they consolidate small shipments into large shipments to make economic loads. They are then delivered to a terminal where they are sorted according to destination and loaded onto highway vehicles for travel to a destination terminal. Other transportation agencies There are several transportation agencies that use the various modes or combinations of the modes. Goods move either directly from the shipper to the consignee or through a terminal. which in turn depends on the control that the shipper has over the transportation agency.

) = $0.000 pounds is sent. = 300 / 100 (for 10. The carrier has 2 limitations or capacity restrictions on how much can be moved on any one trip: the weight limitation and the cubic volume limitation of the vehicle. their density is such that the volume limitation is reached before the weight limitation. a method of increasing the density of the goods must be found. However. For example. the line-haul costs (LHC) per hundred weight (cwt. the total line-haul cost varies with the cost per mile and the distance moved. not the weight carried. which exit whether the container is full or not. If full truckloads are shipped. This is one reason that some products are made so they nest and others are shipped in an unassembled state. Billing and collecting costs Every time a shipment is made. unloaded. the total line-haul cost is $300. the distance moved and the weight moved. With some commodities.000 lb.000 pounds the total line-haul is the same as if 10. handled and unloaded. = 300 / 500 (for 50. sorted and loaded onto a highway vehicle. the goods must be unloaded . However. The carrier will charge for each pickup and the weight picked up. The carrier has basic costs to move this container.) = $3. These costs vary with the distance travelled. 106 .SYNTHESE BASICS GUILLOT Lionel . Pickup and delivery costs Pickup and delivery costs are similar to line-haul costs except that the cost depends more on the time spent than on the distance travelled. At the destination. sorted and loaded onto a local delivery vehicle. they are sent in a moving container that has a weight and a volume capacity.60 per cwt. LHC / cwt. paperwork must be done and an invoice made out. Thus. the line-haul costs is $3 per mile and the distance is 100 miles. the line-haul cost per hundred weight varies with the cost per mile. they must be taken to the terminal. The basic rule for reducing terminal-handling costs is to reduce handling effort by consolidating shipments into fewer parcels.) is different. Billing and collecting costs can be reduced by consolidating shipments and reducing the pickup frequency.00 per cwt. If the shipper wants to ship more. if the shipper sends 50. if for a given commodity.ISERPA MLI 09/09/05 Line-haul costs When goods are shipped. If a shipper is making several shipments. it will be less expensive if they are consolidated and picked up on one trip Terminal handling costs Terminal-handling costs depend on the number of times a shipment must be loaded. If part loads are shipped. the goods do not need to be handled in the terminal but can go directly to the consignee. LHC / cwt.000 lb.

the LTL rates can be up to 100% higher than the TL rates. Perishable goods often require special equipment and methods of handling. They may be owned and operated by the supplier or intermediaries such as wholesalers.SYNTHESE BASICS GUILLOT Lionel . Warehouses include plant warehouses. terminal-handling and billing and collecting costs. terminal-handling and billing and collection costs. It is also the type used for inventories accumulated in anticipation or seasonal sales. movement and relationship to transportation. . pickup and delivery.The distribution warehouse has a dynamic purpose of movement and mixing.Perishability. airlines and water carriers accept less than full loads but usually the railways do not accept. The basic reason for this differential lies in the extra pickup and delivery. the cost per mile for short distances far exceeds that for longer distances. The emphasis is on movement and handling 107 . the other costs are fixed. A carrier’s liability for damage will be greater the more valuable the item. For any given shipment.ISERPA MLI 09/09/05 Total transportation costs The total cost of transportation consists of line-haul. The method of packaging influences the risk of damage and breakage.The general warehouse where goods are stored for long periods and where the prime purpose is to protect goods until they are needed. stored briefly.Decrease billing and collecting costs by consolidating shipments. For any given commodity. The total cost for any given shipment thus has a fixed cost and a variable cost associated with it.Density. In addition. the shipper needs to do the following: . or may be public warehouses.Decrease line-haul costs by increasing the weight shipped. To reduce shipping costs. The service functions warehouses perform can be classified into 2 kinds: . .Decrease terminal-handling costs by decreasing the number of parcels by consolidating shipments. one based on full loads called truckload (TL) or carload (CL) and one based on less than truckload (LTL) and less than carload (LCL). In the latter. The more dense the item. and then broken down into small individual orders of different items required by the customer. Truckers. carriers have 2 rate structures. 13.Packaging. There is minimal handling. the greater the weight that can be carried in a given vehicle. This can be done by consolidating and increasing the weight per pickup.7 WAREHOUSING This section is concerned with the role of warehouses in a physical distribution system. . regional warehouses and local warehouses. . . . Goods are received in large-volume uniform lots. The rate charged by a carrier will also vary with the commodity shipped and will depend upon the following: . However. the line-haul costs vary with the distance shipped.Value.Decrease pickup and delivery cost by reducing the number of pickups. .

When customers place orders. Transportation consolidation. This type of warehouse is widely used in distribution systems.C CUSTOMER Y MANUFACTURER B Product B DISTRIBUTION CENTER Product A.C MANUFACTURER C Product C CUSTOMER Y 108 . product mixing and service.C) SUPPLIER B WAREHOUSE FACTORY SUPPLIER C FACTORY A TL Shipments LTL Shipments FACTORY B WAREHOUSE FACTORY C M A R K E T PHYSICAL DISTRIBUTION SYSTEM Product mixing. Warehouses represent an interruption in the flow of material and thus add cost to the system. which means the bulk (TL) shipments from factories to distribution centers are broken down into small shipments going to local markets. Consolidation can occur in both the supply and distribution systems. Transportation consolidation in physical distribution is sometimes called break-bulk. Product mixing deals with the grouping of different items into an order and the economies that warehouses can provide in doing this.B.B. SUPPLIER A LTL Shipments PHYSICAL SUPPLY SYSTEM TL Shipments (A. MANUFACTURER A Product A Product A.B. Items should be warehoused only if there is an offsetting benefit gained from storing them.SYNTHESE BASICS GUILLOT Lionel .ISERPA MLI 09/09/05 rather than on storage. Transportation costs can be reduced by using warehouses. Role of warehouses Warehouses serve 3 important roles: transportation consolidation. they often want a mix of products that are produced in different locations. This is accomplished by consolidating small (LTL) shipments into large (TL) shipments.

The question is to decide which locations should be supplied from each source.. Goods are positioned close to markets so the markets can be serve more quickly. LDC = P + T x X Where: P = Product costs. Warehousing and transportation costs The particular shipping pattern will depend largely upon the following: . where the LDC from A is the same as B. Y marks the market boundary between A and B. 100 Miles A X Miles Y 100-X Miles B Market boundary. Market boundaries A company can now supply customers in other locations directly from the factory or through the distribution center. X = Distance. . Transportation costs from either A or B are $0.). T = Transportation cost per mile. Laid-down cost (LDC) is the delivered cost of product to a particular geographic point. There are 2 sources of supply: A and B.SYNTHESE BASICS GUILLOT Lionel . The delivered cost includes all costs of moving the goods from A to B. The product cost includes all costs in getting the product to the supply location and storing it there (TL cost to point B.Number of customers. Assume the product cost at A is $100 and product cost from B is $100 plus the TL transportation from A to B and inventory carrying costs at B ($10 per unit).40 per unit per mile: LDCA = LDCB 100 + 0.5 Miles 109 .Customer order size. it then becomes a question of the cost of serving customers direct from the central distribution center or from the regional distribution center. Distribution centers improve customer service by providing place utility. The answer is the source that can service the location at least cost.ISERPA MLI 09/09/05 Service.Geographic distribution of the customers. Suppliers have little or no control over the first 3 but do have some control over the last. inventory cost at B. .Number and location of plants and distribution centers.40 (100-X) X = 62. . The market boundary is the line between 2 or more supply sources where the laid-down cost is the same.40X = 110 + 0... With respect to transportation.

the carton. consideration must be given to the dimensions of the product. . it forms a cube that is a unit load. the pallet. As expected.To increase cube utilization by using the height of the building and by reducing the need for aisle space as much as possible. Loaded with packages. The package serves as a means of identifying the product in a way not possible from its outward appearance. called unit loads.Contain and protect the product.Contribute to physical distribution efficiency. Material handling costs decrease as the size of the unit load increases. as more distribution centers are added to the system. or bulky material. the saving decrease.To improve the service level by increasing the speed of response to customer needs. A unit load is a load made up of a number of items.The cost of LTL shipments to customers to decrease. The package must be robust enough to protect and contain the product through all phases of distribution. .Identify the product.The cost of truckload shipments to the distribution centers to increase. Eventually. The package must do the following: . Thus. . Increasing the load per move will result in fewer moves. to get the highest cube utilization. 13.9 MATERIALS HANDLING Some objectives of materials handling are as follows: .8 PACKAGING The basic role of packaging in any industrial organization is to carry the goods safely through a distribution system to the customer. The number of customers served by additional distribution centers decreases and the volume that can be shipped TL to the additional distribution centers is less than to the first ones.ISERPA MLI 09/09/05 Effect on transportation costs of adding more warehouses Generally. as more distribution are added.The total cost of transportation to decrease. the vehicle and the warehouse.To improve operating efficiency by reducing handling. . the package may also be an important part of the marketing program. One of the most common is the pallet. arranged or constrained so the mass can be picked up or moved as a single unit too large for manual handling. For consumer products. so there is less handling. the major savings is from the addition of the first few distribution centers. we can expect the following: . 110 . Unitization Unitization is the consolidation of several units into large units.SYNTHESE BASICS GUILLOT Lionel . . . 13.

as more distribution centers are added to a system. they are the most often-used form of material handling in distribution centers and in manufacturing. Inventory-carrying cost The average inventory carried depends on the order quantity and the safety stock. with a constant sales volume. 13. Transportation costs Generally. they are very flexible. as the number of distribution centers increases.SYNTHESE BASICS GUILLOT Lionel . They are expensive. They do not occupy space continuously. we must freeze the sales volume. If the 1000 units is divided between 2 distribution centers each having a demand of 500 units. or propane. . We can then compare the costs as we add distribution centers to the system. we expect the following: . They are used only where there is sufficient throughput between fixed points to justify their cost. . the safety stock in each is: SS = 100 500 1000 = 71 units Thus. the safety stock is 100 units. as more distribution centers are added. materials handling equipment can be grouped into 3 categories: .The cost of TL shipments increases. the marginal savings decrease. 111 . The major savings are made with the addition of the first distribution centers. the demand on each decreases. create a fixed route and occupy space continuously. for a service level of 90%.The total cost of transportation decrease. This causes an increase in the total safety stock in all distribution centers.10 MULTI-WAREHOUSE SYSTEMS We want to know what happens to the service level as more distribution centers are added to the system.Industrial trucks are vehicles powered by hand.Cranes and hoists can move materials vertically and horizontally to any point within their area of operation. Eventually. For the same SKU. Within their area of operation. the standard deviation varies approximately as the square root of the ratio of the different annual demands.The cost of LTL shipments decreases. For these reasons. The total SS will be affected by the number of warehouses in the system. . .ISERPA MLI 09/09/05 For convenience. electricity. To make valid comparisons. Industrial trucks are more flexible than conveyors in that they can move anywhere there is a suitable surface and no obstructions. Suppose that the average demand is 1000 units and.Conveyors are devices that move material horizontally or vertically between 2 fixed points. They use overhead space and are used to move heavy or large items.

It is the objective of logistics to determine this least-cost point.SYNTHESE BASICS GUILLOT Lionel . more inventory has to be carried. As we have seen. One way of assessing this is by estimating the percentage of the market served within a given period. materials handling inventory and packaging behave as distribution centers are added to the system. Total system cost Figure shows graphically how the cost of transportation.ISERPA MLI 09/09/05 Warehousing costs The space needed depends on the amount of inventory carried. 112 . the non-direct supervision and clerical costs increase. Packaging costs Per-unit packaging costs will remain the same. as does the cost of handling. Up to a point. total cost decrease and then start to increase. there will be a gradual increase in distribution center space costs. as more distribution centers are added to the system. In addition. warehousing. Operating costs depend largely on the number of units handled. the total number of units handled remains the same. there will be some duplication of non-storage space such as washrooms and offices. However. materials handling costs increase. Total cost C O S T Transportation cost Inventory cost Warehouse cost Materials handling cost Packaging cost NUMBER OF WAREHOUSES System service capability The service capability of the system must also be evaluated. total packaging costs will rise with inventory. So as the number of distribution increases. which requires more space. but since there will be more inventory. if the number of distribution centers increases to the point that some non-unitized loads are shipped. Material handling costs There will be a little change in materials handling costs as long as the firm can ship units loads to the distribution center. Operating costs depend largely on the number of distribution center increases. Since there is no increase in sales. However.

1 INTRODUCTION The way products are designed determines the processes that are available to make them. The decision must be based on adequate analysis of the choices available and a comparison of the increase in costs and service level.ISERPA MLI 09/09/05 Market reached in day (%) 30 70 87 95 As expected. The product design and the process determine the quality and cost of product. known as the product life cycle. Quality and cost determine the profitability of the company. 14 PRODUCTS AND PROCESSES 14. the service level increases as the number of distribution centers increases.125 3 5000 700 1100 460 100 $7.000 Number of locations 2 6000 600 1000 425 100 $8. Let us assume that a study has been made of a system of 1 to 10 distribution centers and the costs are as shown in figure: Cost Transportation Warehousing Materials handling Inventory Packaging Total cost 1 8000 500 1000 400 100 $10. The life cycle may take months or years to complete depending on the products and the market.2 NEED FOR NEW PRODUCTS Products have a limited life span. Figures show that by moving from 3 to 10 distribution centers. Introduction Growth Maturity Decline SALES PROFIT TIME 113 . beginning with its introduction and ending with its disappearance from the marketplace. 14. the one-day service level increases by 8%. The first distribution center is built to serve the best market. the next to serve the second best market and so on.600 A three-distribution center system would provide the least total cost.SYNTHESE BASICS Number of warehouses 1 2 3 10 GUILLOT Lionel . Management must decide which system to select. A product passes through several stages.360 10 4500 900 1400 700 100 $7.

.SYNTHESE BASICS GUILLOT Lionel . Operating. Generally. Simplification Simplification is the process of making something easier to do or make. The emphasis is not in cutting out products simply to reduce variety. Growth phase. there are 3 ways in which this can be done: . . . hoping these costs will be recovered in future sales.3 PRODUCT DEVELOPMENT PRINCIPLES There are 2 conflicting factors to be considered in establishing the range of product to supply: . 14. possibly reducing the firm’s sales. 114 . or suppliers to do the research and development work for them. . product design can often be simplified to reduce operations and material costs. a fact that underlines the importance of thoroughly researching a new product before introducing it. However.Product simplification. Decline phase. sales of successful product increase at a rapid rate. but operating costs will increase because of the lack of specialization. entrance of competitors into the market forces price down. The market is saturated. customers may be lost. Depending on the firm’s resources they may do these things through their own research and development by copying competitor’s products. on the other hand. Maturity or saturation phase. Somehow the needs of sales and the economics of production must be balanced. At this point profit are squeezed.If the product line is too narrow. or by relying on customers. would like to produce as few products as possible and make them in long runs. Nearly everyone interested in the product has sampled or owns the product and sales begin to level off.Improve existing products. Usually this balance can be obtained with good programs of: . but to remove unnecessary products and variations.Product specialization. . If the introduction fails the firm loses money.Improve the methods of production. In this phase.Product standardization. To get customer acceptance of the product the firm will usually spend heavily an advertising and sales promotion.Introduce new products.If the product line is too wide. This phase is the most expensive and risky stage. Sales drop off as customers begin to lose interest in the product or to buy improved versions from competitors. Price competition is often severe and profits start to decline. Companies will look for ways to maintain profitability. Sales organizations want to offer product variety to consumers. customers may be satisfied.ISERPA MLI 09/09/05 Introduction phase. The increased sales volume and the lower unit cost cause profits to increase rapidly. As well as reducing the variety of parts.

Another aspect of standardization is the way parts fit together. Currently there is a trend toward more specialization in manufacturing whereby a factory specializes in a narrow product mix for a niche market. Process focus is based on the similarity of process. simplification is the elimination of the superfluous and is the first step toward standardization. .ISERPA MLI 09/09/05 Standardization In product design. focus factories are thought to produce more effectively and economically than more complex factories. a standard is a carefully established specification covering the product’s material. By standardizing one component parts. Specialization Specialization is concentration of effort in a particular area or occupation. Such a program contributes significantly to reducing cost. specialization is concentration in a particular area and therefore implies repetition. If the design of assemblies are standardized so various models or products are assembled in the same way. In product specialization. Specialization has the disadvantage of inflexibility. measurements and so on. then mass production is possible. which cannot be arrived at without standard products or procedures. productivity can be increased and costs reduced by: .Allowing labor to develop speed and dexterity because of fewer task changes. Standardization is establishing a range of standars that will met most needs. Focused factory. . Specialization is sometimes called focus and can be based either on product and market or on process. a manufacturer can make a variety of finished goods. It will also allow long production runs. improve quality because there are fewer parts and improve opportunities for automation and mechanization. Finally. Modularization. one of which will probably satisfy the customer. Reducing part variety will create savings in raw material. all products made to a given specification will be alike and interchangeable.Allowing the development of machinery and equipment specially designed to make the limited range of products quickly and cheaply. work-in-process and finished goods inventory. a firm may produce and market only one or a limited range of similar products. Thus. configuration. Product and market focus. With a limited range of products. demand characteristics or degree of customization. Process focus.SYNTHESE BASICS GUILLOT Lionel .Reducing the number of setups because of fewer task changes. Generally. Product and market focus can be based on characteristics such as customer grouping. the reason being that repetition and concentration in one area allows the workforce and management to gain the advantages of specialization. 115 . In summary. Modularization uses standardized parts for flexibility and variety.

Product design engineers design the product to meet the market specifications. . many different designs will satisfy functional and appearance specifications.The product and its components may be designed to make using the most economical methods impossible. will perform as expected in the marketplace. which is called simultaneous engineering. or are affected by.Functional. and more costly. if properly manufactured. The job then is to pick the design that will minimize manufacturing cost.Capable of low-cost processing. Functional. This group works together to develop the product design so it meets the needs of the customer and can be made and delivered to the customer at low cost. purchasing.Parts may be designed so operations are difficult. Because the product is designed for ease of manufacture. all concerns are addressed. marketing. the number of rejects will be reduced. Involving all stakeholders early in the process means less need for costly design changes later. . Low-cost processing. configuration and specifications so the item. purchasing. There are several advantages to this approach: . The organization that gets its products to market before the competition gains a strong competitive advantage. .Product design can influence indirect costs such as producing planning. Engineers establish the dimensions. quality assurance. . The product must be designed so it can be made at least cost. inventory management and inspection.Better quality. Usually. .Lower total system cost.Time to market is reduced. The effort required to plan and control the flow of material and the operations will be greater.Cost is reduced. field service and others who contribute to. the need for after-sales services is reduced. Often a team is made up of people from product design.SYNTHESE BASICS GUILLOT Lionel . Poor design can add cost to processing in several ways: . the delivery the product to customer. in the case of using non-standard parts. .ISERPA MLI 09/09/05 14. . .Parts may be designed so excessive material has to be removed.4 PRODUCT SPECIFICATION AND DESIGN Products must be designed to be: . 116 . and ease of maintaining quality in manufacture. Simultaneous engineering To design products for low-cost manufacture requires close coordination between product design and process design. production planning and inventory control.Lack of standardized components may mean batches of work have to be small. process design. Because all groups affected by the product design are consulted. Because quality is improved.

Processes are the means by which operations management reaches these objectives.ISERPA MLI 09/09/05 14. Quantity/capacity considerations. at minimum cost and maximum effectiveness and productivity. The type of machine or operation selected will depend upon the quantity to be produced. The quantity needed and the process determine the capacity needed.6 FACTORS INFLUENCING PROCESS DESIGN 5 basic factors must be considered when designing a process. The process designer must be aware of the capabilities of machines and processes and select those that will meet the quality level at least cost. Another way of looking at the hierarchy of processes is the concept of nesting. If there is variation in demand for a product. Product design and quality level. Small processes are linked to form a larger process. The product’s design determines the basic processes needed to convert the raw materials and components into the finished product. Demand patterns and flexibility needed. with the required quality. Flexible processes require flexible equipment and personnel capable of doing a number of different jobs. the process must be flexible enough to respond to these changes quickly. LEVEL 1 14. each of which may have its own series of steps. generally involving a number of steps or operations. Nesting.SYNTHESE BASICS GUILLOT Lionel . the available equipment and the quality level needed. Both product and process design depend on the quantity needed. The process designer can usually select from a variety of different machines or operations to do the job. Level 0 shows a series of steps. 117 . LEVEL 0 Classes of activity Page 124. Process design is the developing and designing of the steps.5 PROCESS DESIGN Operation management is responsible for producing and services the customer wants. A process is a method of doing something. when wanted.

To utilize existing equipment to fullest extent. Specialpurpose machinery are less flexible but can produce parts much quicker.To maintain workforce.g. automobiles. A manufacturer has the alternative of making parts inhouse or of buying them from an outside supplier.Uses specialized expertise of suppliers.Provides known and competitive prices.Requires less capital investment. Chapter 1 discussed 4 manufacturing strategies. . Reasons to buy out: . While cost is the main determinant. textbooks) or non-discrete products (e. Special-purpose machinery. but for our purposes one of the most convenient is the degree of specialization of machinery and equipment. because it is operated by humans. .SYNTHESE BASICS GUILLOT Lionel . .8 PROCESS SYSTEMS Based on material flow.Can produce for less cost than a supplier. Process design will depend on which strategy is chosen.ISERPA MLI 09/09/05 Customer involvement. . 14. Special-purpose machinery is designed to perform specific operations on one work piece or a small number of similar work pieces. paint). General-purpose machinery. 118 . . .Intermittent. However.To maintain quality. range of products and the ease or difficulty of moving material. All 3 systems can be used to make discrete units (e. its run time is slow and. gasoline. .To keep confidential processes within control of the firm.7 PROCESSING EQUIPMENT Processing equipment can be classified in several ways. The system used will depend on the demand for the item. 14. . General-purpose machinery can be used for a variety of operations can do work on a variety of products within its machine classification.Project (fixed position).Flow.g. processes can be organized in 3 ways: . A decision has to be made about which items to make and which to buy. Make or buy decision. factors such as the following are usually considered: Reasons to make in-house: .Allows the firm to concentrate on its own area of specialization. . General-purpose machinery is generally less costly than special-purpose machinery. the quality level tends to be lower than when using special-purpose machinery.

119 .Because of the flow system and the low WIP inventory.SYNTHESE BASICS GUILLOT Lionel . . Control of work flow is managed through individual work orders for each lot being made. . WIP inventory will be low.Costs associated with controlling production are low because work flows through the process in a fixed sequence. it is called continuous manufacturing. workstations are organized into departments based on similar types of skills or equipment. or family of similar products. Flow process layout is sometimes called product layout because the system is set up for a limited range of similar products.Since work centers are designed for specific products. there is a very little build-up of WIP inventory. Intermittent processes are flexible. They can change from one part or task to another more quickly than can flow processes. If not. Work moves only to those workstations needed to make the product and skips the rest.Because products move continuously from one workstation to the next. There is some form of mechanical method of moving goods between workstations.Workstations are designed to produce a limited range of similar products. run costs are low. are grouped together in one department and are laid out in sequence needed to make the product. Workstations must be capable of processing many different parts. so machinery and tooling can be specialized. Because it is so cost-effective. Provided the volume of work exists to justify it. . .ISERPA MLI 09/09/05 Flow processes Workstations needed to make the product. Intermittent processes In intermittent manufacturing. Usually. . If the units are discrete. This result in a jumbled flow pattern. There are several reasons for this: .Because material flows from one workstation to the next. flow systems are extremely efficient for several reasons: . Because of this and the jumbled pattern of work flow. flow manufacturing is called repetitive manufacturing. Demand for the family of products has to be large enough to justify setting up the line economically. But the volume of specific parts must be enough to use the capacity of the line and justify the capital cost.In most cases. In flow processing.Setup cost are low. goods are not made continuously but are made at intervals in lots. lead times are short. flow manufacturing is less costly than intermittent manufacturing. If sufficient demand exists. this system of processing should be used wherever and to whatever extent it can be. work flows from one workstation to another at a nearly constant rate and with no delays. . manufacturing planning and control problems are severe. flow system substitute capital for labor and standardize what labor there is into routine tasks.

000 + 3x 20. = Number of units to be produced. Companies will try to find the best combination to their particular products. Often the capital cost for such machinery or for special tools or fixtures is high. Project manufacturing has little advantage except it avoids the very high cost of moving the product from one workstation to another. at some quantity.000 20. Variable costs. There are many variations and combinations of these 3 basic types of processes. Costs that do not vary with the volume being produced. the larger the volume to be produced. 14.000 + 1x (2.000 + 1x) / x While the total cost for both methods increases as more units are produced. Purchase costs of machinery and tools and setup costs are considered fixed costs. Direct labor (labor used directly in the making of the product) and direct material (material used directly in the product) are the major variable costs. the greater the opportunity to use special-purpose processes. 120 .SYNTHESE BASICS GUILLOT Lionel .000 + 3x) / x (20. = Total cost.9 SELECTING THE PROCESS Generally.ISERPA MLI 09/09/05 Project (fixed position) processes Project. the unit cost for both method decreases as more units are produced. Let: FC VC x TC UC = Fixed cost. Total cost = Fixed cost + (Variable cost per unit)(Number of units produced) TC = FC + VCx Unit cost = (Total cost) / (Number of units produced) = TC / x A company has 2 methods for making an item: Method A Fixed cost Variable unit cost Total cost Unit (average) cost Method B 2. = Unit (average) cost per unit. or fixed position manufacturing is mostly used for large complex projects such as locomotives ships or buildings. Capital costs are called fixed costs and the production. the total cost for method A increases faster until.000 3 1 2. Fixed costs. or run costs are called variable costs. the total cost for method B becomes less than for method A. Costs that vary with the quantity produced. = Variable cost per unit. Similarly.

not with spending money on better and faster machines. From the preceding calculations we can say: .If the volume is less than the CEP. CPI is a low-cost method of designing or improving work methods to maximize productivity. CPI aims to do the right things an to do them efficiently. But to justify this economically the volume must be high enough to reduce the total or unit cost of production. . more specialized and faster-running processes can be justified and the cost of operations reduced.ISERPA MLI 09/09/05 METHOD A C O S T METHOD B COST EQUALIZATION POINT VOLUME Cost equalization point (CEP) Knowing the quantity beyond which the cost of using method B becomes less than for method A enables us to decide easily which process to use to minimize the total cost. Variable costs can be reduced by substituting machinery and equipment for direct labor. 14. Improving productivity.10 CONTINUOUS PROCESS IMPROVEMENT (CPI) Continuous process improvement consists of a logical set of steps and techniques used to analyze processes and to improve them. then the volume of the subassembly or part is increased without an increase in the total sales volume. Thus. This quantity is called the cost equalization point (CEP) and is the volume for which the total cost (and unit cost) of using one method is the same as another. If a subassembly or component part can be standardized for use in more than one final product. CPI is concerned with removing work content. the method with the greater fixed cost will cost less. the method with the lower fixed cost will cost less.SYNTHESE BASICS GUILLOT Lionel .If the volume is greater then the CEP. The aim is to increase productivity by better use of existing resources. This increases the fixed cost and decreases the variable costs. Increasing volume The volume of components can be increased without increasing sales by a program of simplification and standardization. 121 .

The human factor. there are 2 major considerations: economic and human.Backtracking of material flow caused by poor plant layout. The 6 steps in CPI The CPI is based on the scientific method. The 6 steps are as follows: . must always be remembered. Everyone in the workforce must be given the opportunity to improve the processes they work with. One of the features of CPI is team involvement.Excessive manual handling of materials. . The cost of the improvement must be justified. Any situation can be improved but some have better potential than others. The members of the team should be all those who are involved with the process. Teams. . CPI can still effectively carried out by the individuals. reprocessing.Excessive overtime. Select. Teams are successful because of the emphasis placed on people. Observe. Working situations characterized by high fatigue. Economic considerations.ISERPA MLI 09/09/05 People involvement.Employee grievances without true assignable causes. The resistance to change. absenteeism and dirty and unpleasant conditions should be identified and improved.Evaluates the alternatives to develop the best method of doing the work. Indicators that show areas most needing improvement include: . the idea of continuous improvement is based on the participation of operators and improvement in methods requiring relatively little capital.Install the method as standard practise by training the operator. .SYNTHESE BASICS GUILLOT Lionel . by both management and worker. Sometimes it is difficult to give specific economic 122 . . 1 to 2 years is a commonly used period. rework and repair costs. The cost of making the study and installing the improvement must be recovered from the savings in a reasonable time.Select the process to be studied. to reduce operating.Record the existing method to collect the necessary data in a useful form. accident hazards.Bottlenecks.High scrap. Process improvement is not solely the responsibility of industrial engineers. Select the process This depends on the ability to recognize situations that have good potential for improvement. . both from workplace to workplace and at the workplace. . . In selecting jobs or operations for method improvement. . The purpose of CPI is to improve productivity. .Analyze the recorded data to generated alternative improved methods. .Maintain the new method. Indeed. product or service costs. Techniques that help to analyze and improve work are not complicated and can be learned.

usually long enough to include all likely conditions. They are composed of people.Generate some ideas about the main causes of the problem. methods and equipment. . but the intangible benefits are extensive and should weigh heavily in selecting studies. . that are changed by processes. The following must be determined to properly define the process: . 123 . It is best used by a group or a team working together. It separates the vital few from the trivial many.Determine the method of classifying the data: by problem. measurement and environment. Usually all probable root causes can be classified into 6 categories: materials. Sometimes called fishbone or an Ishikawa diagram. try to identify the most likely root causes and work on these.Identify the problem to be studied and state it in a few words.Calculate the percentage for each item.The process boundaries. . . This is a description of what happens between the starting and ending points. . . Pareto analysis can be used to select problems with the greatest economic impact. are called inputs and they may be physical or information.Collect data for an appropriate time interval. . . nonconformity and so forth. . .Summarize the data by ranking the items in descending order according to the select unit of measure. only where they seems to occur. methods. Note that Pareto analysis does not report what the problems are. people. Pareto diagrams. . machines. The things.Calculate the total cost.Customer.ISERPA MLI 09/09/05 justification for such improvements. They may be internal to the organization or external.Components are the resources used in changing inputs to outputs.Process inputs and outputs.Construct a bar graph showing the percentage for each item and a line graph of the cumulative percentage. cause.Process flow. the cause-and-effect diagram is a very useful tool for identifying root causes. . Cause-and-effect diagram. Processes exist to serve customers and customers ultimately define what a process is supposed to do.Select the unit of measure. Outputs are the result of what goes on in the process. . The steps in making a Pareto analysis are as follows: .Once all the causes have been listed.Brainstorm all possible causes for each of the main causes. Starting and ending points form the boundaries of the process. . it is necessary to define the process being studied. The steps in developing a fishbone diagram are: .Suppliers are those who provide the inputs.SYNTHESE BASICS GUILLOT Lionel . Record To be able to understand what to record.

An inspection for quality or a check for quantity. when. Analyze Examination and analyze are the key steps in CPI. The description. equipment or information from place to place. Decision. Storage. Delay. material or product is modified during the operation. Operations process charts record in sequence only the main operation and inspections. method or procedure. where and who). Operations process charts. material. how. The record of the present method also provides the basis for both the critical examination and the development of an improved method. Following are descriptions of some of the various charting techniques. To find the root causes you must have a questioning attitude (what. Classes of activity. and sometimes the time.ISERPA MLI 09/09/05 - Environment.SYNTHESE BASICS GUILLOT Lionel . All activities can generally be classified into 1 of 6 types. This step involves analyzing every aspect of the present method and evaluating all proposed possible methods. It provides a picture. Inspection. The external factors are beyond control and include customers’ acceptance of the process output. Where a decision is made. Operation. Movement. Often symptoms are what we see and it is difficult to trace back to the root cause. in the form of a diagram. 124 . Process flow diagram. A delay in the sequence of events. The process is controlled or regulated by external and internal factors. for each operation are also shown. Find the root cause. why. There are 6 universally used symbols for these activities. competitors and government regulation. The movement of workers. An operation process chart would be used to record product movement. Internal factors are in the organization and can be controlled. events and operations that make up a process. The main step in process. of what actually happens when a product is made or a service performed. A controlled storage from which material is issued or received. They are useful for preliminary investigation and give a bird’s-eye view of the process. Usually the part. A process flow diagram shows graphically and sequentially the various steps.

SYNTHESE BASICS GUILLOT Lionel . so provision must be made for lightning. . Job design is an attempt to provide more satisfying meaningful jobs and to use the worker’s mental and interpersonal skills. . Provide good lightning. how and why. noise reduction. This is a major thrust of JIT manufacturing. There are several principles of motion economy. Develop When developing possible solutions. there are 4 approaches to take to help develop a better method: . The end of one cycle should be located near the start of the next cycle. avoiding preconceived ideas and avoiding hasty judgements. put away and move add cost to the product but do not increase its value. space saved and the throughput time reduced.Locate materials. comfort. Methods improvement is based on the concepts of scientific management.ISERPA MLI 09/09/05 3 approaches can help in examining: . This implies an open mind. . cleanliness and personal care.Examining the parts of the process. ventilation and heating. arms.Conditions contributing to operator fatigue must be reduced to a minimum. Principles of motion economy.Simplify wherever possible by making the necessary operations less complex. and over symmetrical paths. Thus materials handling will be reduced.Examining the total process to define what is accomplished. Human and environmental factors.Combine operations wherever possible. . These include safety.Locate the work done most frequently in the normal working areas and everything else within the maximum grasp areas.Eliminate all unnecessary work. Both hands should be working together and should start and finish at the same time. then complexity should be reduced. then possibly they can be combined. The answers will determine the effectiveness of the total process. The goal is to maximize the productivity of these operations. . among which are the following: . examining the facts as they are. seating and stimulation. tools. in opposite directions. and workplace within normal working areas and pre-position tools and materials. Activities can be divided into 2 major categories: those in which something is happening to the product (worked on. These improvements include the following: 125 . provide for alternate sitting and standing at work and design workplaces of proper height to eliminate stooping.Arrange work so motions of hands. .A questioning attitude. . inspected or moved) and those in which nothing constructive is happening to the product (delay or storage). If sequences are changed. value is added only when the part is being worked on. Setup. keep tools and materials within maximum working areas.Rearrange the sequence of operations for more effective results. . not as they seem. legs and so on are balanced by being made simultaneously. In the first category. If the questioning attitude is used.

Training the operator is the most important part of installation. This is called horizontal enlargement. The worker will be familiar and comfortable with the change and will probably feel some sense of ownership. In planning the installation. the method of installing and the people involved. satisfying and fulfilling tasks. Maintain Maintaining is a follow-up activity that has 2 parts. as the operator does the task repetitively. . If the operator has been involved in designing the method change. The first is to be sure that the new method is being done as it should be. Now the plans must be put into action by installing the new method.Job rotation trains workers to do several jobs so they can be moved from one job to another. Then the analyst needs to be sure that equipment. If not. At installation time. Depending on the task. tooling. a dry run will show whether all equipment and tooling are working properly. 126 . . This is most critical for the first few days and close supervision may be necessary.ISERPA MLI 09/09/05 Job enlargement expands a worker’s job by clustering similar or related tasks into one job. scheduling. This is called cross training.1 INTRODUCTION Just-in-time manufacturing (JIT) is a philosophy that relates to the way a manufacturing company organizes and operates its business. Install So far. speed will increase and errors decrease. This process is known as the learning curve. the work done by the analyst has been planning.SYNTHESE BASICS GUILLOT Lionel . Over time. this should not be difficult. information and the people are all available. a worker may progress through the learning curve in a few minutes or. several months or years. It is the very skillful application of existing industrial and manufacturing engineering principles.Job enrichment adds more meaningful. The second is to evaluate the change to be sure that the planned benefits are accomplished. All these factors help to produce a more motivated and flexible workforce. Learning curve. for high-skill jobs. maintenance and control responsibilities. 15 JUST-IN-TIME MANUFACTURING 15. the method must be changed. The job not only includes production operations but many setup. consideration must be given to the best time to install.

15. Many activities increase cost without adding value and. MARKETPLACE (CUSTOMER) MARKET RESEARCH PRODUCT DESIGN MANUFACTURING MANUFACTURING ENGINEERING Adding value to a product does not mean adding cost. motions and parts includes all of the features that are important to the customer. and assembly methods. Waste means anything other than the minimum amount of equipment. Another word for this is quality. Parts standardization has many advantages in manufacturing. in turn. It creates larger quantities of specific components that allow longer production runs. Component standardization. as much as possible. there is waste. If any part of the chain does not add value for the customer.2 JUST-IN-TIME PHILOSOPHY JIT is defined in many ways.SYNTHESE BASICS GUILLOT Lionel . the greater the diversity of products. parts. The long-term result of eliminating waste is a cost-efficient. these activities should be eliminated. the number of items required and the inventory that has to be carried. the more complex the manufacturing process becomes and the more difficult it is to plan and control. space. These policies affect the costs of manufacturing.ISERPA MLI 09/09/05 15. material and workers’ time absolutely necessary to add value to the product.3 WASTE Anything in the product cycle that does not add value to the product is waste. This. 127 . Value satisfies the actual and perceived needs of the customer and does it at a price the customer can afford and considers reasonable. In addition. The product should be designed so it can be made by the most productive process with the smallest number of operations. but the most popular is the elimination of all waste and continuous improvement of productivity. Adding value Value to the user is having the right parts and quantities at the right time and place. quality-oriented. Standardization reduces the planning and control effort needed. fixtures. Quality is meeting and exceeding customers’ expectations. Waste caused by poor product specification and design Management is responsible for establishing policies for the market segments the company wishes to serve and for deciding how broad or specialized the product line is to be. makes it more economical to use more specialized machinery. fast-response organization that is responsive to customer needs.

If the batch size had been 100 instead of 1000. He differentiated between errors and defects. Forecast are more accurate for nearer periods of time.Product defects.The process. Moving and storing components adds cost but not value. Poke-yoke (fail safe) Poke-yoke implies the concept of removing faults at the first instance and making a process or product “foolproof”. Manufacturing must then plan and control the operation to produce the goods. Defects interrupt the smooth flow of work. and by designing the plant layout and work methods.Overproduction. The first 4 relate to the design of the manufacturing system and the last 3 to the operation and management of the system: . . Toyota has identified 7 important sources of waste in manufacturing. If there are large quantities of inventory to work through the system. tends to bury problems in inventory and often leads to producing components that are not needed instead of those that are.Inventory. When this occurs. the queue and lead time will be reduced. Inventory costs money to carry and excess inventory adds extra cost to the product. Let us look at the role inventory plays in each of these steps. Waste is added if the methods of performing tasks by the operators caused wasted movement.Movement. the next workstation receiving it will waste time trying to use the defective parts or waiting for good material. Because of the extra inventory and WIP. If the operator has no productive work to do or there are delays in getting material or instructions. . less space is needed in manufacturing. . Also if WIP inventory is reduced. errors will always be made. . Shingo argued that statistical quality control does not prevent defects. If batch size is reduced.SYNTHESE BASICS GUILLOT Lionel . resulting in unnecessary inventories. Corrective action should take place immediately after a mistake is made. They do so by selecting the manufacturing steps. it takes longer and is more costly before the engineering changes reach the marketplace. overproduction adds confusion. If the scrap is not identified. time or effort. Lower inventories improve quality. Machines and operators do not always need to be fully utilized. quality management. but defects can be prevented. resulting in cost savings. there will be waste. .Waiting time. This involves manufacturing planning and control. There are 2 kinds of waiting time: that of the operator and that of material.ISERPA MLI 09/09/05 Waste caused in manufacturing First manufacturing engineering must design a system capable of making the product. in the quantities needed and with the least cost added. raw materials and labor are consumed for parts not needed. maintenance and labor relations. The best process is one that has the capability to consistently make the product with an absolute minimum of scrap.Methods. machinery and equipment. which implies 100% inspection as soon as an 128 . . Overproduction is producing products beyond these needed for immediate use. it would have moved through the system more quickly and been detected earlier. Reducing lead time improves forecast accuracy and provides better order promising and due-date performance.

Usually this kind of layout can be improved. . the demand for the family of products must be large enough to justify economically setting up the line.Process flexibility. long lead times and considerable materials handling. Because work centers are arranged in the sequence needed to make the product. Poke-yoke tries to change either the process or its resources.Supplier partnerships. Source inspection also is done by the individual worker who. Examples include the following: .Have one prong larger that the other so the electric plug will fit only one way. Flow manufacturing Repetitive manufacturing is the production of discrete units on a flow basis. tooling. Products will be in the same family if they use common work flow or routing. instead of checking for defects.Uninterrupted flow.Total quality management. Work flows from one workstation to the next at a relatively constant rate and often with some materials handling system to move the product.Put a template over an assembled component to show operators where specific parts go. .Total employee involvement. high WIP inventory. materials. setup procedures and cycle times.4 JUST-IN-TIME ENVIRONMENT Many elements are characteristic of a JIT environment. This type of production produces long queues. Therefore. . This can be done by grouping products together into product families. . Work cells.Continuous process improvement. thus eliminating the need to rely on human experience and knowledge. . 129 . Successive check inspection is done by the next person. the system is not suitable for making a variety of different products. This action can take 1 of 3 forms: successive check. who passes the information back to the worker who just performed the operation who can then make any needed repair. Workstations can then be set up in miniature flow lines or work cells. . checks for errors that will cause defects.SYNTHESE BASICS GUILLOT Lionel . self-check and source inspection.ISERPA MLI 09/09/05 action occurs. Flow systems are usually very cost effective. 15. . These can be grouped under the following headings: .Flow manufacturing.Use counters to tell an operator how many operations have been performed. Companies with this kind of product line usually organize their production on a functional basis by grouping together similar or identical operations.Use colour-coded parts. .Total productive maintenance. . . Self-check is done by the worker and can be used on all items where a sensory perception is sufficient. in the process.

Reductions in setup of even greater magnitude are possible. expensive special-purpose piece of equipment. . If there is a quality problem. . operators and machinery must be flexible and the system must be able to be changed over quickly from one product to another. Work cells are sometimes called cellular manufacturing. Smaller general-purpose machines can be adapted to particular jobs with appropriate tooling. Short setup times also have the following advantages: . it often makes more sense to have 2 relatively inexpensive general-purpose machines than 1 large.Improved quality. allowing work centers to be moved closer together.Reduce queue and manufacturing lead time. This is accomplished by organizing the preparation. The economic lot size depends on the setup cost. the machinery should be low-cost and movable. . The cell has only 1 work center to control as opposed to 5 in conventional system. streamlining the setup and eliminating adjustments. Component standardization becomes even more important. Ideally. This has several benefits: . 130 . . Process flexibility Process flexibility is desirable so the company can react swiftly to changes in the volume and mix of their products. . For work cells to be really effective. or in very small lots.SYNTHESE BASICS GUILLOT Lionel .Reduce WIP inventory. burying problems in processes and in scheduling. This free up more space. from one workstation to the next. Having 2 instead of one makes it easier to dedicate one to a work cell. the WIP is reduced. When order quantities are small. it will be found out immediately.Feedback to preceding operations is immediate. To achieve this. thus reducing handling costs and promoting the creation of work cells. If the order quantity is reduced. Reducing inventory reduces this buffer and exposes problems in the production process and in the materials control system. Quick changeover.Queue and lead times going through the cell are reduced drastically. Quick changeover requires short setup times.Floor space needed is reduced.Improved process and material flow. The general opinion is that setup can be cut 50% by organizing the work and having the right tools and fixtures available when needed.Reduced economic-order quantity.Production activity control and scheduling are simplified. This gives an opportunity to correct the problems and improve the process. defects have less time to be buried. . . Machine flexibility. product design and process design must work together so parts are designed for manufacture in work cells.ISERPA MLI 09/09/05 Parts can now pass one by one . To achieve machine flexibility. Reducing setup time reduces the order quantity and queue and lead times. Inventory acts as buffer. Because they are more quickly and easily exposed. their cause will more likely be detected and corrected.

if something does go wrong. For manufacturing. valid schedules and linearity. Total quality management Total quality management is the subject of chapter 16. Quality at the source means doing it right the first time and. Uninterrupted flow Ideally. Total productive maintenance takes the ideas of total preventive maintenance one step further. This can best be achieved through a program of preventive maintenance. reduce material handling and promote continuous flow. Preventive maintenance starts with daily inspections. 131 . material should flow smoothly from one operation to the next with no delays. For a process to continue to produce the required quality. If quality is not present in what is supplied to the customer and the product is defective. People become their own inspectors. machinery must be maintained in excellent condition. personally responsible for the quality of what they produce. If defects are discovered. Quality at any work center should meet or exceed the expectations ot the next step in the process. excess inventory and delayed deliveries. it makes more sense to have them handle this type of regular maintenance. Daily monitoring can best be done by the operator. Quality is important for 2 reasons. this section will focus on quality from the point of view of manufacturing. Since operators usually understand how their equipment should feel better than anyone else. Quality at the source. breakdowns occur only when a machine is in operation. The concept should be the goal in any manufacturing environment. a pull system. the customer will be dissatisfied. Total productive maintenance Unfortunately. Total productive maintenance is preventive maintenance plus continuing effort to adapt. To achieve operator flexibility people should not only be trained in their own jobs. modify and refine equipment to increase flexibility.ISERPA MLI 09/09/05 Operator flexibility. quality does not mean inspecting the product to segregate good from bad parts. Manufacturing must ensure that the process is capable of producing the required quality consistently and with as close to 0 defect as possible. Several conditions are needed to achieve uninterrupted flow of materials: uniform plant loading. waste time and effort on work centers and increases the cost of the product. it creates disrupted schedules that delay supplying the customer. increases inventory or causes shortages. lubrication and cleanup. the process should be stopped and the cause of the defects corrected. stopping the process and fixing it.SYNTHESE BASICS GUILLOT Lionel . If a process products scrap. resulting in disrupted schedules. but should also be cross-trained in other skills and in problem-solving techniques.

However. but this is not a problem if setup times are small. Valid schedules. the schedule must be level. inventory is reduced and the ability to respond to changes in model demand increases. not only for capacity. The scheduled is leveled. The pull system starts at the end of the line and pulls product from the preceding operation as needed. respectively. A small inventory of parts is held at the user operation. inventory will build up and. The schedule sets the flow of materials coming into the factory and the flow of work through manufacturing. Alternate schedule: Week Economy Standard Deluxe Total On hand 0 600 800 1400 1 500 600 400 1500 2 500 600 400 1500 3 500 600 400 1500 With this schedule. If demand shifts between models. order-point system. The same amount should be produced each day. fixed-order-quantity. The details vary.SYNTHESE BASICS GUILLOT Lionel . if there is a surge in demand for deluxe in week 1. The system for signaling demand depends on the physical layout and conditions in the plant. Furthermore. Uniform plant loading means that the work done at each workstation should take about the same time.ISERPA MLI 09/09/05 Uniform plant loading. The result will be no bottlenecks and no buildup of WIP inventory. The company can develop the schedule shown in figure: Week Economy Standard Deluxe Total On hand 0 600 800 1400 1 1500 1500 1500 1500 300 1200 1500 2 3 This will satisfy demand and will be level based on capacity. The demand for each is 500. The most well-known system is the Kanban system. none may be available for sale in week 2. the mix of products should be the same each day. The bins are a standard size and hold a fixed number of parts. and the capacity of the assembly line is 1500 per week. Suppose a company makes a line of dog clippers composed of 3 models. it is sent back to the supplier operation and is the signal for the supplier operation to make a container of parts. for example. but it is basically a twobin. The idea can be carried further by making some of each model each day. the assembly line can respond daily. but also for material. a variation in demand will create a shortage. There should be a well-planned valid schedule. 2 bins of parts. 600 and 400 per week. In repetitive manufacturing. The number of setups increases. Pull system. When one bin is used up. For example. this is called balancing the line. To maintain an even flow. if there is no safety stock. The preceding operation does not produce anything unless a signal is sent from the following operation to do so. This system also makes the counting and control of WIP inventory much easier. This is called mixed-model scheduling. 132 .

elimination of waste depends on improving processes continuously. . The relationship with them should be one of mutual trust and cooperation.The ability to work with the buyer to improve performance. Partnering. . manufacturing ability. the supplier has the following benefits: . The benefits to the buyer include the following: . Partnering implies a long-term commitment between 2 or more organizations to achieve specific goals. Continuous process improvement This topic is an element in both JIT and TQM and is discussed in chapter 14. getting ready for the next shift or solving problems.SYNTHESE BASICS GUILLOT Lionel . All partners must understand the need to satisfy the customer.The ability to supply the quality needed all the time so there will be no need for inbound inspection. Suppliers need to have that assurance so they can plan their capacity and make the necessary commitment to a single customer. They establish the flow of materials into the factory. .ISERPA MLI 09/09/05 Linearity. If there are problems during the shift. improve processes and build the relationship need. In many cases the parties have access to each other’s business plans and technical information.More competitive as a JIT supplier. They include the following: 133 . There are 3 key factors in partnering: . . In return. Goals and objectives should be shared so that there is a common direction. If there is time left over after the units are produced. no less. This implies that the supplier becomes a JIT manufacturer. This concept is called linearity and is usually reached by scheduling to less than full capacity. quality and cost. .Ability to plan more effectively. . Trust is needed to eliminate an adversarial relationship. reliable suppliers. Supplier partnerships If good schedules are to be maintained and the company is to develop a JIT environment. reliability. This is necessary to achieve the benefits of partnering. If properly done. The factors to be considered when selecting suppliers were technical ability. It takes time to solve problems. or develop. lubricating machinery.Long-term commitment. it is vital to have good. Supplier selection.The ability to make frequent deliveries on a JIT basis. In a partnership there are other considerations based on the partnership relationship. partnering should be a win-win situation. The emphasis in JIT is on achieving the plan – no more. there is extra time so the scheduled can be maintained.A greater share of the business with long-term security. it can be spent on jobs such as cleanup. after-sales service and supplier location.Shared vision.Trust. an excellent process quality improvement program. This implies that the supplier will have.

Supplier certification. Once the supplier is selected. 15. organizing and supervising operations. Traditionally. Organization can set up their own criteria for supplier certification. Figure shows the relationship: JIT MANUFACTURING MANUFACTURING PLANNING AND CONTROL PROCESS DESIGN Forecasting Master Planning Material Requirements Planning Capacity Management Production Activity Control Purchasing Flow Manufacturing Process flexibility Total Quality Management Uninterrupted flow Total Employee Involvement Supplier Partnerships 134 . the next step is a certification process that begins after the supplier has started to ship the product. such as the ISO 9000 system. data recording and problem solving. develop the capability of employees and provide coordination and leadership for improvements. correcting deviations and becoming vehicles for continuous improvement. operators must take responsibility for improving processes.5 MANUFACTURING PLANNING AND CONTROL IN A JIT ENVIRONMENT Manufacturing planning and control is governed by. Many of their traditional duties are now done by line workers. the manufacturing environment. some setup. Instead of being receivers of orders.ISERPA MLI 09/09/05 - The supplier has a stable management system and is sincere in implementing the partnership agreement. Their jobs include not only direct labor but also a variety of traditionally indirect jobs such as preventive maintenance. The supplier has an effective quality system. and must work with. Managers and supervisors must become coaches and trainers. The supplier shares the vision of customer satisfaction and delighting the customer. Total employee involvement A successful JIT environment can be achieved only with the cooperation and involvement of everyone in the organization.SYNTHESE BASICS GUILLOT Lionel . controlling equipment. This emphasizes the absence of defects both in product and non-product categories and a good documentation system. management has been responsible for planning. There is no danger of the supplier breaching the organization’s secrets. The role of management must change.

weekly time buckets are used. Planning horizons can also be reduced. Therefore. lead times and available inventory. a forecast is still necessary. these can be reduced to daily buckets. Master production scheduling Several scheduling factors are influenced by JIT manufacturing: . JIT practises will modify this approach in several ways: .MPS tries to level capacity and JIT tries to level the schedule based on capacity and material flow. . If anything can be done to simplify these factors. but more importantly. Whether the company builds to a seasonal demand or to satisfy promotion.The JIT system requires a stable schedule to operate. the time fences can be reduced. Forecasting The major effect that JIT has on forecasting is shortened lead time.Traditionally. Planning and control are still needed in JIT manufacturing.In a pure JIT environment.ISERPA MLI 09/09/05 This section will study the effect a JIT environment has on manufacturing planning and control. the planning and control system will be simpler. . The complexity of the manufacturing process. there is no inventory on hand and the order quantity logic is to make exactly what is needed. the number of finished items and parts. . it is possible to use daily buckets in JIT environment. component production occurs in the same time bucket as the gross requirement and no offsetting is required. If the lead times are short enough. forecasting for the MPS become less important. Material requirements planning MRP plans the material flow based on the bill of material. Production planning The JIT process has the potential for reducing long-lead-time purchase. If lead times can be reduced through JIT practises. there is no netting required.The shorter lead times reduce time fences and make the MPS more responsive to customer demand. 135 . This principle is supported by using time fences. the levels in the bill of material and the lead times have made the planning and control problems either simple or complex. As lead times are reduced and the flow of material improved. JIT process is not primarily a planning and control system.The MRP time buckets are usually one week. it provides an environment in which the supplier and buyer can work together to plan the flow of material. It is a philosophy and a set of techniques for designing and operating a manufacturing plant. . If lead times are short enough that production rates can be matches to sales rates.SYNTHESE BASICS GUILLOT Lionel . Because of reduced lead times and schedule stability.

the practise of scheduling extra capacity. In a repetitive manufacturing environment. quality problems. raw materials are recorded into WIP. machine downtime. many production situations do not lend themselves to level scheduling and the pull system. some levels in bill of material become unnecessary. One system used is called backflushing or post-deduct.Where volumes are low and occur infrequently. Part of the difficulty with MRP is that often the plans are not effective because of problems or changes. The system works if the bills of material are accurate and if the manufacturing lead times are short. depending on the nature of the inaccurate data. The impact on effective lot sizing MRP is often called a push system. . including timing. Material flows from raw material to finished goods.SYNTHESE BASICS GUILLOT Lionel . . Leveling should make this task easier. quantity and quality. In a post-deduct system. Some examples are as follows: . When work is completed and becomes finish goods. . Linearity. will improve the ability to meet priority schedules.Changes in customer requirements. Both MRP and JIT are based on establishing a material flow. this is set by the model mix and the flow rate. The pull system The pull system was developed as an alternative to classical push MRP. but so will the JIT emphasis on cutting out waste and problems that cause ineffective use of capacity. The trigger for the entire plan is the projection of the final product need. The challenge is to reduce the number of transactions that have to be recorded.Inaccurate databases that can make the plans invalid .Where custom engineering is required. the WIP inventory is relieved by multiplying the number of units completed by the number of parts in the bill of material.Where quality is unpredictable. With the use of work cells and the elimination of many inventory transactions.Production problems: absenteeism in the workforce. more work orders and more paperwork must be tracked and more transactions recorded.Where the demand pattern is unstable. Inventory management If order quantities are reduced and annual demand remains the same. poor communication. both in timing and quantity. The underlying concept is to react to the final customer order and produce only what is 136 .ISERPA MLI 09/09/05 - Bills of material can frequently be flattened in a JIT environment. including: . Capacity management Capacity control focuses on adjusting capacity daily to meet demand. However. as represented by the MPS. productivity and/or efficiency problems. . .Supplier delivery problems. .

it is not true with order cost. 137 . C O S T TOTAL COST HOLDING COST ORDER COST EOQ QUANTITY This implies the economic order quantities and the reorder points are very small. as in the figure. . The information on the kanban will often include: . With this efforts. but in very small batches. Essentially. The kanban signal.Component part number and identification. meaning that we will be ordering frequently. we risk a stockout if the demand during the replenishment lead time exceeds expectations: Q U A N T I T Y Normal EOQ/ROQ pattern JIT Kanban pattern TIME Exposures to stockouts The kanban system The developers of the JIT concepts utilized a simple card system called Kanban. then a major JIT effort is to reduce this setup cost. The downside of the change. identifies the material to which it is attached. If it is a purchased item. A fundamental assumption of this model is that the 2 major costs involved are known and relatively fixed. The critical conditions causing the problem are the large lot sizes and the long lead times. The standard EOQ model helps determine the most economical lot size.SYNTHESE BASICS GUILLOT Lionel . Given that the overall customer demand has not diminished. both of which are major targets of JIT waste reduction.ISERPA MLI 09/09/05 needed to satisfy demand and then only when it is needed. While this is relatively true with holding cost. The system works very simply.Storage location. the order cost curve is driven downward and to the left. The lot-sizing problem with dependent inventory often results in either a crisis shortage or a replenishment of stock well before it is actually needed. this system is much the same as the basic reorder point system used for independent inventory. often a piece of cardboard. The major reason reorder points normally do not work well in a dependent inventory environment is a significant violation of the assumption of relatively constant demand that allows a reorder point to work well in some independent inventory environments. If the order cost is equipment setup. Each time the inventory of a given batch gets close to the reorder point. we will need to order batches to be built much more frequently since each batch is smaller in size. the major effort is to work with suppliers to reduce the cost and time of purchase order and delivery.

Production flow Work center 1 Raw material 1 Finished production Raw material 2 Work center 1 Finished production At some point. since all the cards are attached to full containers. the raw material container is now empty and the associated move card is unattached (step 4). Production flow Work center 1 Raw material 1 Finished production Raw material 2 Work center 1 Finished production Production and movement of material are only authorized purely as a reaction to the utilization of material for production downstream. That represents another critical rule for kanban: every container with material must have one. leaving the work center 2 production card with the center (step 1). Work center (or supplier) of origin. The operator will now move the material and place the move card on the container as proof of the authorization to move the material (phase 6). At the start of the process there is no movement. In this way the number of cards will clearly limit the inventory authorized to be at any location. Also cards only circulate within and between work centers: Production flow Work center 1 Raw material 1 Finished production 138 Raw material 2 Work center 1 Finished production . It authorizes movement of material to replace the material that was used. The unattached production card is the signal to start the work center 2 production to replace the container that was taken (step 2). To do that work they need raw material. however. This illustrates 2 additional rules of the system: all material movement is in full containers and kanban cards are attached to a work center. The 2 types of cards are a production card (authorizing production of whatever part number is identified on the card in the quantity specified) and a withdrawal card (authorizing the movement of the identified material).ISERPA MLI 09/09/05 - Container size. 8. a downstream process needs some of the parts produced by work center 2. but only one. it must remove the production card that had first authorized its production (phase 5). The following figure illustrate the use of what is often called a two-card kanban system. That material is found in the “finished goods” section of work center 1 (step 6). When that material is used.SYNTHESE BASICS GUILLOT Lionel . 9). which is in the containers in front of the work center with the move cards attached (step 3). It is only when a card is unattached that activity is allowed. This process continues upstream even to the suppliers. They take a container of the material. who can also receive the kanban move cards as a signal for their next shipment to the facility (steps 7. card attached. How it works. Before doing so.

In many cases. 15. referred to the overall philosophy. As is often the case when fundamental concepts are not fully understood. .Colour-coding of containers.Designated storage spaces.There will be no partial containers stored. with the empty container serving as the move signal.There will be no production or movement without an authorization in the form of an unattached kanban card. Some of the alternative methods include: . . The second. called “big JIT”. . so too will be the impact of the removal.Computer systems. There was some attempt to correct this position when some JIT experts attempted to define 2 types of JIT. Cards alternatives. . there is a great opportunity for using the system to promote continual process improvement.SYNTHESE BASICS GUILLOT Lionel . but only one. there is a fairly important set of rules. Every container will be filled.Single card systems. many manufacturers have successfully implemented at least some of the concepts. The important aspect of this is that some process problem will ultimately emerge. the major difference between their early failure and later success is primarily that people now understand the forced system perspective more completely and are making the appropriate organizational changes to make it work. kanban. Using the kanban system for process improvement Because the kanban system allows for a controlled inventory of relatively small containers. This is not an easy approach to implement. Even though there are no formal schedules in a Kanban system. Removal of one kanban card will remove one container and since the containers are small.ISERPA MLI 09/09/05 Kanban rules. The single card is the production card. often with bar coding serving as the signal generator. 139 . Since the time that lean manufacturing was introduced. The first. Many were companies that were unsuccessful in their first attempt under the original JIT system. Those rules are summarized: . the JIT concepts were viewed by many manufacturers as invalid or inappropriate for their particular production environment.6 LEAN PRODUCTION Lean production is a concept that has evolved from JIT concepts over the past several years.Every container with parts shall have one. empty or in the process of being filled or emptied. That is certainly not a natural action for most people and the performance evaluation system needs to be altered to reflect this type of activity. generally controlled by kanban. referred to the pull production scheduling system. called “little JIT”. This rule make inventory accounting easy. . signaling the next target for JIT process improvement efforts. The organization must be managed as a system instead of as a set of relatively disjointed activities. Lean production implies understanding and correctly implementing the major enterprise-wide philosophical approach used to integrate the system toward an ultimate goal of maximized customer service with minimal system waste.

Where is not as effective. For these reasons a kanban works best in a highly stable and predictable environment . It is highly data dependent. 140 . by using a system not so data-intensive.SYNTHESE BASICS GUILLOT Lionel . MRP (ERP) Where it works best. Because of the forward-looking nature of the system. Much like JIT and kanban. but the data needs to be both accurate and timely on an on-going basis. If the environment has a great deal of stability in product design. Where is not as effective. JIT (Kanban) Where it works best. This brings to light the importance of understanding the business environment and developing a specific production strategy to best meet the needs of customers in that environment. as has been proved in many operations. It is not only critical to have a lot of data.ISERPA MLI 09/09/05 15. processing problems and extensive changes in product designs make it very difficult for a kanban system to work effectively. KANBAN OR THEORY OF CONSTRAINTS? There are certain production and business environments in which one may provide better benefits and another may not work as well. Volatility in customer demand. Very little is planned ahead. MRP can be very effective in an environment with a great deal of variability and uncertainty. MRP has one major disadvantage. it can handle variability of demand as well as. Instead. TOC probably works more effectively in a more stable demand environment. Kanban can quickly fail in a highly volatile environment because of the reactive nature of the system. In JIT approach. most other systems and tends to be quite effective in dealing with product design changes and process changes. most of the recommendations fall under the categories of eliminating or reducing the process uncertainties and making production more stable and predictable. Since the TOC system has as its basis the identification and effective management of a constraint. Product design can cause a real problem in a kanban system. process and customer demand. the concepts of TOC can bring great benefits to managing the process. it assumes that such a constraint can be identified and will be a constraint long enough to be managed effectively. kanban causes replacement of material used in a totally reactive mode. This makes sense when it is realized that kanban is a very reactive system. TOC may not be as effective where the constraint cannot be easily identified or managed. In operations where that is the case.7 WHICH TO CHOOSE: MRP (ERP). or perhaps even more effectively. Theory of constraints (drum-buffer-rope) Where it works best. The burden on the infrastructure can be high and costly. the process can often be run just as effectively. For example. or better than. Where is not as effective.

among which are the following: . Quality has a number of dimensions. Quality and manufacturing. If the product has been well conceived. manufacturing and final use of the product. durability and maintainability. bringing with it the characteristics of rapid response to customer order and reduced inventory levels throughout the process. o Reliability means consistency of performance. Product designers must build into the product the quality level described in the general specification. well made. Once the MRP has the material and resources lined up. Quality and product design. all production must be within specification limits and the less variation from the nominal the better the quality. o Durability refers to the ability of a product to continue to function even when subjected to hard wear and frequent use. At the least. 16 TOTAL QUALITY MANAGEMENT 16. It is measured by the length of time a product can be used before it fails. we must consider quality and product policy. tolerances. Customers do not care why a product is defective. product design.1 WHAT IS QUALITY? Quality means user satisfaction : that goods or service s satisfy the needs and expectations of the user.Performance. Quality and use. kanban is used as an execution system. If the product exceeds the customer’s expectations. Performance implies that the product or service is ready for the customer’s use at the time of sale. well price and well serviced. at a minimum. JIT and TOC. 141 . This implies the TOC approach can help prioritize the areas of improvement and JIT principles can help with this improvement. Product planning must decide the market segment to be served. The combination of these 2 systems is becoming quite common. A product or service is a combination of tangible and intangible characteristics that a company hopes the customer will accept and be willing to pay a price for.SYNTHESE BASICS GUILLOT Lionel . well designed. Quality in manufacturing means that . there is almost always one process that constrains the overall throughput.ISERPA MLI 09/09/05 Hybrid systems Kanban and MRP. product capability and service requirements. but as TOC teaches. They determine the materials to be used. dimensions. the level of performance expected. To achieve quality according to this definition. however. JIT often promotes process improvements throughout the system. that is superb quality. Quality and product policy. the price to be charged and must estimate the expected sales volume. then the quality is satisfactory. manufacturing is responsible for meeting the minimum specifications of the product design. but they care if it is defective. 3 dimensions to performance are important: reliability.

Continuous process improvement. 142 . Aesthetics means pleasing to the senses. They should form a quality council whose purpose is to establish a clear vision of what is to be done. courtesy and competence of personnel. Value is the sum of the benefits the customer receives and can be more than the product itself. This means listening to the customer so goods and services meet customer needs at a low cost. It means training all personnel in the techniques of product and process improvement and creating a new culture. Price. Meeting established standards or specifications. Perceived quality.Supplier partnering. Management commitment If senior is not committed and involved. Improvement is not possible unless there is some way to measure the results. A partnering rather than adversarial relationship must be established.SYNTHESE BASICS GUILLOT Lionel . not just the product. An organization’s public promise to back up its products with a guarantee of customer satisfaction.Performance measures. TQM is both a philosophy and a set of guiding principles that lead to a continuously improving organization. It is based on the participation of all members of an organization in improving processes.ISERPA MLI 09/09/05 - o Maintainability refers to being able to return a product to operating after it has failed. These dimensions are not necessarily interrelated. Features. then TQM will fail.Focus on the customer. A product can be superb in one or a few dimensions and average or poor in others. services and the culture they work in. speed of service. This is manufacturing’s responsibility. These are secondary characteristics. Total customer satisfaction is based on the complete experience with an organization. . 16. Basic concepts. These managers must start the process and should be the first to be educated in the TQM philosophy and concepts. Aesthetics. . develop a set of long-terms goals and direct the program. Customers pay for value in what they buy. . All the dimensions listed above are elements of value. Warranty. products. . It means empowering people. Service is an intangible generally made up of a number of things such as availability.A committed and involved management directing and participating in the quality program. . Conformance. Service. Processes can and must be improved to reduce cost and increase quality.Involvement of the total workforce.2 TOTAL QUALITY MANAGEMENT (TQM) TQM is an approach to improving both customer satisfaction and the way organizations do business. There are 6 basic concepts in TQM: .

The organization must be designed to put people in close contact with their suppliers and customers. As well.Short lead times. external and internal. . .Low variability in meeting targets. people come to work not only to do their jobs but also to work at improving their jobs. mission and quality policy statement.High service level. 143 .Training. This results in a commitment to make their processes better and to continuous improvement. They should be empowered.High quality level. The quality policy statement is a guide for all in the organization about how products and services should be provided.Low cost. Customers expect improvement in all requirements. . . A team is a group of people working together to achieve common goals or objectives.Organization. Customers have 6 requirements of their suppliers: . There are 2 types of customers.ISERPA MLI 09/09/05 As well. problem solving and statistical process control. Employee involvement In a TQM environment. .Local ownership. . Customer focus Total quality management implies an organization that is dedicated to delighting the customer by meeting or exceeding customer expectations. People should feel ownership of the processes they work with. Giving people the authority to make decisions motivates them to accomplish the goals and objectives of the organization and to improve their jobs. Each person or operation in a process is considered a customer of the preceding operation. cross-trained in other related jobs. Good teams can move beyond the contribution of individual members so that the sum of their total effort is greater than their individual efforts. they should be trained to use the tools of continuous improvement. Empowerment means giving people the authority to make decisions and take action in their work areas without getting prior approval.SYNTHESE BASICS GUILLOT Lionel . . internal or external. Continuous process improvement See chapter 14.High flexibility to change such things as volume. the council must establish quality statements that include a vision. Teams. specifications and delivery. To gain employee commitment to the organization and TQM requires the following: . Working in a team requires skill and training. where possible. People should be trained in their own jobs skills and .

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Suppliers partnerships See chapter 15. Performance measures To determine how well an organization is performing, its progress must be measured. Performance measures can be used to: - Discover which process needs improvement, - Evaluate alternative processes, - Compare actual performance with targets so corrective action can be taken, - Evaluate employee performance, - Show trends. There is no point in measuring something that does not give valid and useful feedback on the process being measured. There are many basic characteristics that can be used to measure the performance of a particular process or activity, such as the following: - Quantity; - Cost; - Time/delivery; - Quality. There are 3 dimensions to quality measurements: o Function, o Aesthetics, o Accuracy. Performance measures should be simple, easy for users to understand, relevant to the user, visible to the user, preferably developed by the user, designed to promote improvement and few in number. Measurement is needed for all types of process: - Customer. Number of complaints, on-time delivery, dealer or customer satisfaction; - Production. Inventory turns, scrap or rework, process yield, cost per unit, time to perform operations; - Suppliers. On-time delivery, rating, quality performance, billing accuracy; - Sales. Sales expense to revenue, new customers, gained or lost accounts, sales per square foot.

16.3 QUALITY COST CONCEPTS
Quality costs fall into 2 broad categories: the cost of failure to control quality and the cost of controlling quality. Costs of failure The costs of failing to control are the costs of producing material that does not meet specification. They can be broken down into: - Internal failure costs. The costs of correcting problems that occur while the goods are still in the production facility. Such costs are scrap, rework

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and spoilage. These costs would disappear if no defects existed in the product before shipment; External failure costs. The costs of correcting problems after goods or services have been delivered to the customer. They include warranty costs, field servicing of customer goods and all the other costs associated with trying to satisfy customer complaints. External failure costs can be the most costly of all if the customer loses interest in a company’s product. These costs would also disappear if there were no defects.

Costs of controlling quality The costs of controlling quality can be broken down into: - Prevention costs. The costs of avoiding trouble by doing the job right in the first place. They include training, statistical process control, machine maintenance and quality planning costs. - Appraisal costs. The costs associated with checking and auditing quality in the organization. They include product inspection, quality audits, testing and calibration. Investment in prevention will improve productivity by reducing the cost of failure and appraisal.

16.4 VARIATION AS A WAY OF LIFE
It is really a question of how much variability there is. If we plotted the number of shafts of each diameter, we would probably get a distribution as a histogram. Chance variation. In nature or any manufacturing process, we can expect to find a certain amount of chance variation that is inherent in the process. This variation comes from everything influencing the process, but is usually broken down into the following 6 categories: - People. Poorly trained operators tend to be more inconsistent compared with well-trained operators; - Machine. Well-maintained machines tend to give more consistent output than a poorly maintained, sloppy machine; - Material. Consistent raw materials give better results than poor quality; - Method. Changes in the method of doing a job will alter the quality; - Environment. Changes in temperature, humidity, dust and so on can affect some processes; - Measurement. Measuring tools that may be in error can cause incorrect adjustments and poor process performance. If a connection can be found between variation in the product and variation in one of its 6 sources, then improvements in quality are possible. Assignable variation. A tool may shift, a gauge may move, a machine wear or an operator make a mistake. There is a specific reason for these causes of variation, which is called assignable variation. Statistical control. As long as only chance variation exits, the system is said to be in statistical control. If there is an assignable cause of variation, the process is not
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in control and is unlikely to produce a good product. The objective of statistical process control is to detect the presence of assignable causes of variation. Statistical process control, then, has 2 objectives: - To help select processes capable of producing the required quality with minimum defects, - To monitor a process to be sure it continues to produce the required quality and no assignable cause for variation exists. Patterns of variability The output of every process has a unique pattern that can be described by its shape, center and spread. Shape. A bell-shaped curve is called a normal curve and is commonly encountered in manufacturing processes that are running under controlled conditions. Center. The normal distribution has most results clustered near one central point, with progressively fewer results occurring away from this center. The center of the distribution can be calculated as follows: Let x = sum of all observations N = number of observations µ = arithmetic mean (average or center) Then µ= x/N

Spread. To evaluate a process, we must know not only what the center is, but also something about the spread or variation. In statistical process control there are 2 methods of measuring this variation, the range and the standard deviation: - range. The range is simply the difference between the largest and smallest values in the sample; - standard deviation. The standard deviation may be thought of as the average spread around the center. A distribution with a high standard deviation is fatter than one with a low standard deviation. Higher quality products have little variation. See chapter 11 to the measurement. We know that: o µ ± 1σ = 68.3 percent of observations, o µ ± 2σ = 95.4 percent of observations, o µ ± 3σ = 99.7 percent of observations.

16.5 PROCESS CAPABILITY
Tolerances are the limits of deviation from perfection and are established by the product design engineers to meet a particular design function. In statistical process control the lower specification limit (LSL) is the minimum acceptable level of output. The upper specification limit (USL) is defined as the maximum acceptable level of output. Both the USL and the LSL are related to the product specification and are independent of any process. One process, having a narrow spread (low sigma), will produce product within the specification limits. The other process having a wide

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The capability of the process is not related to the product specification tolerance.00. Thus the ± 3σ or 6σ is used in the calculation : Cp = (USL-LSL) / 6σ If the capability index is greater than 1. it is capable. the LSL MEAN USL second is not. .7% of parts within tolerance and is said to be capable.ISERPA MLI 09/09/05 spread (high sigma). If there is a shift in the mean.A process must be selected that can meet the specifications. It assumes the process is centered. The first process is said to be capable. the index assumes if a process produces 99. As well. Process capability index (Cp) The process capability index combines the process capability and the tolerance into one index. The larger the capability index the fewer the rejects and the greater the quality.7% good parts. but it does not measure whether the process is centered properly. The process capability index indicates whether process variation is satisfactory.SYNTHESE BASICS GUILLOT Lionel . by having too big a spread or by a shift in the mean. Unacceptable Unacceptable Besides spread there is another way a process can produce defects. defects will be produce: LSL SHIFT OF MEAN USL Unacceptable In summary: . will produce defects. 147 .Processes can produce defects in 2 ways. the process is capable of producing 99. .

+ 1 to + 1. A control chart for averages and ranges (X and R chart) tracks the 2 critical characteristics of a frequency distribution: the center and the spread. it does not distinguish between system (chance) variation and assignable cause variation. The average of the samples is then plotted on a chart. the limits of the resulting pattern variation can be determined and will serve as a guide for future production.33 Marginal process. The range is used rather than standard deviation because it is easier to calculate.6 PROCESS CONTROL Process control attempts to prevent the production of excessive defects by showing when the probability is high there is an assignable cause for variation. Part of process distribution is out of specification. Small samples are taken on a regular basis over time and the sample averages and range plotted. This is called a run chart. 16.SYNTHESE BASICS GUILLOT Lionel . Control charts Run charts. Interpretation of the Cpk is as follows: Cpk value Evaluation Less than + 1 Unacceptable process. Greater than Acceptable process. samples are taken every half hour and measured.ISERPA MLI 09/09/05 Cpk Index This index measures the effect of both center and variation at the same time. The Cpk Index is the less of: (USL – Mean) / 3σ or (Mean – LSL) / 3σ The greater the Cpk the further the 3σ limit is from the specification limit and the fewer rejects there will be. Process distribution is well within 1. Upper Control Limit AVERAGE OF X Nominal Value Lower Control Limit Upper Control Limit RANGE Nominal Value 148 . While it gives a visual description of what is happening with the process. Process distribution barely within specification. Once a stable process is established. it shows a high probability that there is an assignable cause. Samples are used in control charts rather than individual observations because average values will indicates a change in variation much faster. X and R chart. By example.33 specification. When variation exceeds these limits.

These limits are established to help in assessing the significance of the variation produced by the process. These merely show the relationship between 2 variables of interest. This might be caused by worn tool or a guide that has moved. the upper control limit (UCL) and the lower control limit (LCL).ISERPA MLI 09/09/05 Control limits Figure shows 2 dotted lines. These charts are merely histograms that are organized in such a way as to show the highest bar first and all others in descending order from high to low. Overtime the number of checks should show clearly the major source of complaint. we would obtain a measure of the 2 variables. As explained earlier. However. the source of the complaints is listed as they occur. Whenever a complaint reason is repeated. Either the part is within tolerance or is not. data can be collected about these tasks to determine bottlenecks or other types of problems that can be corrected to improve the process involved. we might expect this kind of problem. Attributes are usually plotted using a proportion defective or p-chart. Once the specific tasks are identified. This will be show up on the X portion of part. The process is stable and predictable. We could then plot the measures of the first variable on the horizontal axis and the measures of the second variable on the vertical axis.. For each case. It might be caused by a gauge or tool becoming loose. .Pareto charts. Control limits are set so that there is a 99. thereby allowing action to focus on that major source. the variation will be excessive and the process is said to be out of control. Once an issue of interest has been determined. 2 types of changes can occur in a process: .Checksheets. These charts show in detail the steps required to produce a product or service.A change in the spread of the distribution. Other quality control tools These include: .SYNTHESE BASICS GUILLOT Lionel . when assignable causes of variation exist. or by some part of the machine becoming worn.Process flowcharts. Plotting many scores would then provide an indication whether there is a relationship and also the possible strength of that relationship. . the sample value will fall within the control limits. a check is put beside the reason. .Scatterplots. 149 . They should not be confused with specification limits. the process is considered to be in statistical control and there is no assignable cause of variation. This will show up on the R portion of the chart. This approach allows one to easily focus on the most important issues. When this situation occurs.A shift in the mean. .7% probability that if the process is in control. Control charts for attributes An attribute refers to quality characteristics that either conform to specification or do not. These characteristics cannot be measured but they can be counted. If the range increases but the sample averages remain the same.

Producer’s risk. .The lot to be sampled should be an homogeneous mixture. Sampling inspection is necessary under conditions. Conditions necessary for sampling inspection. . .There is not enough time to give 100% inspection to a batch of product. accepts or rejects the batch.SYNTHESE BASICS GUILLOT Lionel . . . There are 4 reasons for using sample inspection: .All items must be produced under similar or identical conditions. The producer will want to ensure that the sampling plan has a low probability of rejecting good lots. There are good reasons to have a representative sample taken of a batch rather than to hazard this high an error.Testing the product is destructive.Human error is estimate to be as high as 3% when performing long-term repetitive testing.The batches to be inspected should be large. There are 2 inspection procedures. This is appropriate when the cost of inspection is less than the cost of any loss resulting from failure of the parts. These diagrams are used to plot out all the potential causes for an identified problem. called the acceptable quality level (AQL). 150 .7 SAMPLE INSPECTION Traditional inspection inspects the batch of parts after they are made and on the basis of the inspection. Sampling plans Sampling plans are designed to provide some assurance of the quality of goods while taking costs into consideration.100% acceptation means testing every unit in the lot. The probability of rejecting a good lot is called the producer’s risk. Based on the results of the inspection a decision is made to reject or accept the entire batch.It is too expensive to test all of the batch. Consumer’s risk. 16. The consumer will want to be sure that the sampling plan has a low probability of accepting bad lots. . Selecting a particular plan depends on 3 factors. The potential causes can be researched to find the root cause and correct it. Lots are defined as good if they contain no more than a specified level of defects.ISERPA MLI 09/09/05 - Cause and effect (fishbone) diagrams. There is a chance that a good batch will be rejected or a bad batch will be accepted.acceptance sampling consists of taking a sample of a batch of product and using it to estimate the overall quality of the batch.A random sample of the lot must be taken. 100% and acceptance sampling: . The probability of accepting a bad lot is called the consumer’s risk. Reasons for sampling inspection. . The use of statistical sampling depends on the following conditions: .

9002 and 9003. However. using and modifying ISO 9001. ISO 9001 provides a model for quality assurance in design. It provides stability in the business system and occurs at the beginning of the quality evolution. ISO 9003 provides a model for quality in final inspection. 16. Because of this. finding out how that organization achieves those performance levels and applying them to their own organization. ISO 9000 explains the basic quality concepts. The objective is to balance the consumer’s risk and the producer’s risk against the cost of the sampling plan. installation and servicing. Inspection cost money. Originally they were written for contractual situations between suppliers and customers in which the supplier would develop a quality system that conformed to the ISO standards and was satisfactory to the customer. 151 . The larger the sample. ISO 9000 places emphasis on all internal processes. sales. ISO 9000 series standards Its purpose is to standardize quality terms and definitions and use those terms to demonstrate a supplier’s capability of controlling its processes. especially manufacturing. production. The registrar continues to survey the supplier and makes full reassessments every 3 or 4 years. Third party registration system. 16. the registrar issues a certificate of registration. a third party registration system was created. ISO 9000 elements There are 20 ISO 9000 elements that describe what is required in each of the areas. ISO 9004 provides guidance in implementing a quality system.9 BENCHMARKING Benchmarking is a systematic method by which organizations can compare their performance in a particular process to that of a best-in-class organization. assesses the adequacy of the supplier’s quality system. defines key terms and provides guidelines for selecting. administration and technical support. the larger the sample size. The ISO 9000 (version 1994) consists of 5 standards. A third party. customers throughout the world have come to expect a quality standard and to demand ISO 9000 certification. ISO 9002 provides a model for quality assurance in production and installation. The customer would then audit the system for acceptability. called a registrar. The standards are intended to prevent non-conformities during all stages of business functions. When the system conforms to the registrar’s interpretation of the applicable ISO 9000 standard. the greater the inspection cost.SYNTHESE BASICS GUILLOT Lionel .ISERPA MLI 09/09/05 Cost. the smaller the producer’s and consumer’s risks and the more the likelihood that good batches will not be rejected and poor batch accepted.8 ISO 9000 (VERSION 1994) Besides being a requirement for doing business in Europe.

SYNTHESE BASICS

GUILLOT Lionel - ISERPA MLI 09/09/05

The steps in benchmarking are: - Select the process to benchmark. This is much the same as the first step in the CPI; - Identify an organization that is best-in-class in performing the process you want to study. This may mot be a company in the same industry; - Study the benchmarked organization. Information may be available internally, be in the public domain, or may require some original research. Original research includes questionnaires, site visits and focus groups. Questionnaires are useful when information is gathered from many sources. Site visits involved meeting with the best-in-class organization. Many companies select a team of workers to be on a benchmark team. Focus group are panels that may be composed of groups such as customers, suppliers or benchmark partners, brought together to discuss the process; - Analysing the data. What are the differences between your process and the benchmark organization? There are 2 aspects to this. One is comparing the process and the other is measuring the performance of those processes according to some standard.

16.10 JIT, TQM AND MRP II
Although the purposes of MRP II, JIT and TQM are different, there is a close relationship among them. JIT is a philosophy that seeks to eliminate waste and focuses on decreasing non-value-added activities by improving processes and reducing lead time. TQM places emphasis on customer satisfaction and focusing the whole company to that end. While JIT seems to be inward looking and TQM outward looking, they both have many of the same concepts. Both emphasize management commitment, CPI, employee involvement and supplier partnerships. Performance measurement is necessarily a part of process improvement in both JIT and TQM. MRP II is primarily concerned with managing the flow of materials into, through and out of an organization. It is planning and execution process that must work with existing processes, be they good or bad. JIT is directed toward process improvement and lead time reduction and TQM is directed toward customer satisfaction. Thus both JIT and TQM are part of the environment in which MRP II must work. Improved processes, better quality, employee involvement and supplier partnerships can only improve the effectiveness of MRP II.
PLAN DO

MRP II Plan labor, material and resources

JIT Produce goods and services

CUSTOMER Sets the standard and produces demand

TQM Meets or exceeds customer expectations

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17 ANNEXES
17.1 SCHEMA MANUFACTURING PLANNING AND CONTROL SYSTEM (MPC)

SYNTHESE BASICS

GUILLOT Lionel - ISERPA MLI 09/09/05

17.2 BOUCLE MRP II
MANUFACTURING RESOURCE PLANNING (MRP II)

STRATEGIC BUSINESS PLAN (SBP)

SALES and OPERATIONS PLAN MARKETING PLAN (MP) PRODUCTION PLAN (PP)

RESOURCE OK? Yes

No

DETAILED SALES PLAN (DSP)

MASTER PRODUCTION SCHEDULE (MPS)

MATERIELS REQUIREMENTS PLAN (MRP)

Yes

PURCHASING Closed loop MRP

PRODUCTION ACTIVITY CONTROL (PAC)

PERFORMANCE MEASURES

154

FEEDBACK

RESOURCE OK?

No

FEEDBACK

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