Chapter 5-9 POM

Chapter 5
Capacity Planning
© Copyright 2018, Vietnam Logistics Research

and Development Institute
• Objectives:
– Discuss the concept of capacity planning
– Relate how MRP logic uses the dependent demand relationship to
drive component order releases date and due dates

Planning versus control
– Planning the future allows an organisation to commit itself to longer-
term expenditure which will be required to ensure that it can cope with
the future.
– When the plan is implemented many things may go wrong and thus
control is required to try to cope with whatever changes have occurred.
– Control is about making the necessary measurements and changes to
allow the operation to meet its objectives – the objectives set by the
plan.

Reconciling demand with supply

• Concept of Aggregate Planning
– Aggregate planning: Intermediate-range capacity planning, usually
covering 2-12 months

• Concept of Aggregate Planning

• Major Inputs to Aggregate Planning

• Costs of Aggregate Planning
– Hiring / firing
– Overtime / undertime
– Inventory carrying - obsolescence,
deterioration
– Subcontracting
– Part time or temporary labor
– Stock-out or back orders - “forgone future profits”

Aspects of performance affected
by capacity planning and control
– Costs will be affected by the balance between capacity and demand.
– Revenues will also be affected by the balance between capacity and demand, but in the
opposite way.
– Working capital will be affected if an operation decides to build up finished goods
inventory prior to demand.
– Quality of goods or services might be affected by a capacity plan which involved large
fluctuations in capacity levels.
– Speed of response to customer demand could be enhanced, either by the build-up of
inventories or by the deliberate provision of surplus capacity to avoid queuing.
– Dependability of supply will also be affected by how close demand levels are to capacity.
– Flexibility, especially volume flexibility, will be enhanced by surplus capacity.

• Independent & Dependent Demand
– Independent demand is influenced by market conditions outside the
control of operations
• e.g. Finished goods inventories and spare parts for replacement
usually have independent demand
– Dependent demand is related to the demand for items that are
subassemblies or components parts to be used in the production of
finished goods

• Independent & Dependent Demand

• Overview of MRP
– Computer-based information system that translates masterschedule
requirements for end items into time-phased requirements for
subassemblies, components, and raw materials
– MRP generates purchase orders and work orders for items, based on
forecasts and actual orders, and so is a dependent demand system.

MRP-involved stages
– Demand Management: this involves generating customer order and sales forecasts for the
products and also the physical distribution of the finished items.
– Master production schedule: this provides the main input into the MRP system and is a
statement of time-phase records of each end product, current and expected demand, and
available stocks.
– Bills of Materials (BOM) and inventory records: the MRP system takes the master production
schedule together with BOM for the products and the inventory records of all existing
component parts and effectively explodes the top level demand through bills of materials, taking
into account inventory and lead-times at each level in order to generate:
● purchase orders
● works orders and
● material plans.

• Material Requirement Planning (MRP)

• Master Production Schedule
– It is also referred as the Master Production Schedule (MPS), states
which end items to be produced, when they are needed, and in what
quantities

• Bill of Materials (BOM)
– One of the three primary inputs of MRP; a listing of all of the raw
materials, parts, subassemblies, and assemblies needed to produce
one unit of a product.

• Bill of Materials
– Product structure tree
– Visual depiction of the requirements in a bill of materials, where all
components are listed by levels

• Bill of Materials
– Product Structure Tree

• MRP Processing
– Gross requirement
– Scheduled receipts
– Projected on hand
– Net requirement
– Planned-order receipts
– Planned-order release

• Example
A computer firm produces laptops has received 2 orders as follow :
Each laptops consists of 2 USB ports and 4 memory chips. The USB
are made by the firm,and fabrication takes one week. The memory
chips are ordered, and lead time (LT) is two weeks. There is a
scheduled receipt of 80 memory in (at the beginning of) week 1.
Product structure tree :
Determine the size and timing of planned- order releases necessary

to meet delivery requirement.
• Example

• MRP Outputs
– Planned orders
• Schedule indicating the amount and timing of future orders
• Order releases - Authorization for the execution of planned orders
• Changes - revisions of due dates or order quantities, or
cancellations of orders

• Implementation of MRP
– Implementation Planning
– Adequate computer support
– Accurate data
– Management support
– User knowledge

Chapter 6
Inventory Management

• Objectives:
– Learn the functions of inventory and classify them using ABC
analysis
– Apply the EOQ model
– Discuss key activities in shop-floor control inn continuous, repetitive
and job shop operations
– Explain the Key Performance Indicators (KPI)

• Importance of Inventories
– Impact :
• Customer service
• Marketing
• Sales
• Operations
• Finance
• Production

– Types of Inventories
– Raw materials & purchased parts
– Partially completed goods called Work In
Progress (WIP)
– Finished-goods inventories
• Manufacturing firms
• Merchandise
(retail stores)

– Replacement parts, tools, & supplies
– Goods-in-transit to warehouses or customers

• Reasons to Hold Inventories
– To meet anticipated demand
– To smooth production requirements
– To decouple operations
– To protect against stock-outs
– To take advantage of order cycles
– To help hedge against price increases
– To permit operations
– To take advantage of quantity discounts

• Inventories Costs
– Holding (carrying) costs:
• Cost to carry an item in inventory for a
Length of time (usually a year)
– Ordering costs:
• Costs of ordering and receiving inventory
– Shortage costs:
• Costs when demand exceeds supply

• ABC Classification System
– Classifying inventory according to some measure
of importance and allocating control efforts accordingly
• A - very important
• B - moderate important
• C - least important
– Also known as 80/20 Rule (Pareto rule)
• A - 20% items, 80% dollar usage
• B - 30% items, 15% dollar usage
• C - 50% items, 5% dollar usage

• ABC Classification System

• Economic Order Model (EOQ) Model

– The Inventory Cycle

– The Inventory Cycle

– Cost Minimization Goal

– Deriving the EOQ
• Using calculus, we take the derivative of the total cost function and
set the derivative (slope) equal to zero and solve for Q
• The total cost curve reaches its minimum where the carrying and
ordering costs are equal

– A telecommunication manufacturing plant uses approximately 64,000
integrated circuit (IC) chips every year. Annual holding cost is $6 per
chip and ordering cost is $120. Determine the optimal order quantity.
• Answer :
Demand, D = 64,000 chips per year
Ordering cost, S = $120
Holding cost, H = $6 per unit per year
Optimal order quantity,
Qo = √(2DS/H)
= √(2 x 64000 x 120) / 6
= 1600 chips

– A local distributor for a well-known tyre company expects to sell
approximately 9,600 steel-belted radial tyres of a certain size and
tread design next year. Annual carrying cost is $16 per tyre, and
ordering cost is $75.
a. What is the EOQ ?
b. How many times per year does the store reorder ?
c. What is the total annual cost if the EOQ quantity is ordered ?

– Case Study:
• Suppose you are working in an electronic-components supplying
firm that stocks up thousand of printed circuit boards (PCB) sold to
regional computers shops. Mr Sam, your general manager, wonder
how much money could be saved annually if EOQ were used
instead of the firm’s present rule of thumb. He instructs you, the
inventory analyst, to conduct an analysis of one component only
(Part ID: ES1011, sound card) to see if significant savings might
result from using the EOQ.

– Case Study:
• You gather these information from accounting department:
Demand (D) is 10,000 PCB per year, Q = 400 PCB per order
(present order quantity), holding cost (H) is $10.00 per PCB per
year, and ordering cost
(S) = $15.50 per order

The Quantity Discount Model

• Fixed Order Quantity & Fixed Order Period Models
– Fixed Order Quantity Model

– Safety Stock : reduces risk of stock-out during lead time

– Fixed Order Period Model

– Fixed Order-Period Model
• Orders are placed at fixed time intervals
• Order quantity for next interval?
• Suppliers might encourage fixed intervals
• May require only periodic checks of inventory levels
• Risk of stock-out

Chapter 7
JIT Manufacturing and
Supply Chain Management

• Objectives
– Understand why Just-In-Time manufacturing is important, how it
relates to Supply Chain Management
– Able to define JIT and how it affects process flow design and its close
proximity with total quality control

Synchronization, ‘lean’
and ‘just-in-time’
• ‘Lean synchronization aims to meet demand instantaneously, with perfect quality and
no waste’ – could also be used to describe the general concept of ‘lean’, or ‘just-in-time’
(JIT).
• The concept of ‘lean’ stresses the elimination of waste, while ‘just-in-time’ emphasizes
the idea of producing items only when they are needed.
• But all three concepts overlap to a large degree, and no definition fully conveys the full
implications for operations practice.

Just-in-time
planning & control
• Aim: The aim of a just-in-time (JIT) approach is to produce goods and services exactly
when they are needed, with perfect quality and no waste, and is a philosophy of
manufacturing embodying a collection of tools and techniques.
• Usage: It is a technique associated with large industries such as the automotive

industry, but it has also been usefully applied to smaller-scale, low-volume organisations
as well.

The JIT philosophy
JIT is a philosophy founded on doing the simple things well, or gradually doing
them better, and on squeezing out waste every step of the way.
• Core principles:
– The elimination of waste: the removal of any activity which does not add value
(seven types of waste)
– The involvement of everyone: JIT is a ‘total system’ approach which aims to
pull together everyone in a system
– Continuous improvement: the JIT objective, which, being an ideal, aims to
promote continuous improvement through an organisation.

JIT tools
JIT comprises a collection of tools for reducing waste.
• Basic working practices, such as the use of standards, fair personnel policies and
working practices, flexibility of responsibilities, autonomy, ‘line stop’ authority (allowing
people to stop the process if problems occur) and an improvement in problem solving,
data gathering and personal development.
• Design for manufacture: fostering a close relationship between design and operations
to ensure that what is designed can be made well.
• Operations focus: focusing on simplicity, repetition and experience.

JIT tools
• Small simple machines: using several small machines instead of one large general
purpose machine as small machines may perform more reliably, are easy to maintain,
and produce better quality over time. Small machines are also easier to move and
modify.
• Layout and flow: layout techniques can be used to promote the smooth flow of
materials, of data, and of people in the operation. Long complex process routes may
cause large quantities of inventory and slow the process, both of which are contrary
to JIT principles.
• Total productive maintenance (TPM): TPM aims to eliminate the variability in
operations processes which result from unplanned breakdowns.

JIT tools
• Set-up reduction (SUR): set-up times can be reduced by a variety of methods, such
as cutting out time taken to search for tools and equipment, the pre-preparation of
tasks which delay change-overs, and the constant practice of set-up routines, all of
which contribute to the elimination of waste.
• Total people involvement: total people involvement is concerned with providing
people with the training and support to take full responsibility for all aspects of their
work, including dealing directly with suppliers, measurement and reporting, process
improvements, budgets and plans, and dealing directly with customers and their
problems.
• Visibility: problems, quality projects and operations checklists are made visible by
displaying them locally so that they can easily be seen and understood by all staff.

JIT planning & control
techniques
• Kanban control: kanban is the Japanese for card or signal. It is sometimes called the
‘invisible conveyor’ which controls the transfer of materials between the stages of an
operation. In its simplest form, it is a card used by a customer stage to instruct its supplier
stage to send more materials. This is a key signal to produce and ensures that production
only takes place when items are required, in the quantity in which they are required.
• Levelled scheduling: this activity attempts to equalise the mix of products or services made
each day to create a simple and repetitive cycle. This makes control easier and more
visible.
• Synchronisation: many companies make a wide variety of parts and products, not all of
them with sufficient regularity to warrant levelled scheduling. Synchronisation dictates that
parts need to be classified according to the frequency with which they are demanded and
tries to make production as regular and predictable as possible.
Seven types of waste
• Over-production: Producing more than is immediately needed by the next process in the
operation is the greatest source of waste according to Toyota.
• Waiting time: Equipment efficiency and labour efficiency are two popular measures which
are widely used to measure equipment and labour waiting time, respectively. Less obvious
is the amount of waiting time of items, disguised by operators who are kept busy
producing.
• Transport: Moving items around the operation, together with the double and triple handling
of WIP, does not add value. Layout changes which bring processes closer together,
improvements in transport methods and workplace organization can all reduce waste.

Seven types of waste
• Process: The process itself may be a source of waste. Some operations may only exist
because of poor component design, or poor maintenance, and so could be eliminated.
• Inventory: All inventory should become a target for elimination. However, it is only by
tackling the causes of inventory that it can be reduced.
• Motion: An operator may look busy but sometimes no value is being added by the work.
Simplification of work is a rich source of reduction in the waste of motion.
• Defectives: Quality waste is often very significant in operations. Total costs of quality are
much greater than has traditionally been considered, and it is therefore more important to
attack the causes of such costs.

The operation of the single-card
kanban system of pull control

Levelled scheduling
& mixed modelling

Levelled scheduling
& mixed modelling

The 5 Ss
• Sort (Seiri) – eliminate what is not needed and keep what is needed.
• Straighten (Seiton) – position things in such a way that they can be easily reached
whenever they are needed.
• Shine (Seiso) – keep things clean and tidy; no refuse or dirt in the work area.
• Standardize (Seiketsu) – maintain cleanliness and order – perpetual neatness.
• Sustain (Shitsuke) – develop a commitment and pride in keeping to standards.

Chapter 8
Productivity, Work Methods &
Measurement

• Objectives:
– Productivity
– Work and work methods
– Work measurement and work standards

Stakeholder groups in
operations management

Typical stakeholders’
performance objectives

Typical stakeholders’

Top management’s performance
objectives for operations

The five operations performance
objectives
• Quality: to satisfy your customers by providing error-free goods and services which
are ‘fit for their purpose’.
• Speed: minimizing the time between a customer asking for goods or services and the
customer receiving them in full.
• Dependability: to keep the delivery promises which have been made.
• Flexibility: being able to change far enough and fast enough to meet customer
requirements.
• Cost: to produce goods and services at a cost which enables them to be priced
appropriately for the market while still allowing for a return to the organization.

The five operations performance
objectives
• Quality • Flexibility
– Quality reduces costs – Flexibility speeds up response
– Quality increases dependability – Flexibility saves time
• Speed – Flexibility maintains dependability
– Speed reduces inventories • Cost: Keeping operations costs down

– Speed reduces risks – Improving productivity
• Dependability – Cost reduction through internal

effectiveness
– Dependability saves times
– Dependability saves money
– Dependability gives stability

Productivity

External and internal effects on
performance objects

The polar representation of

• Productivity, Work Methods and Measurement
– Productivity is the ratio of output (goods and services) divided by the
inputs (resources, such as labor and capital)
– The improvement can be achieved in two ways:
• A reduction in inputs while output remains constant
• An increase in output while input remains constant

– Production is the making of goods and services
– High production may imply only that more people are working and
that employment levels are high (low unemployment), but it does not
imply high productivity

– Measurement of productivity is an excellent way to evaluate a
country’s ability to provide an improving standard of living for its
people
– Only through increase in productivity can the standard of living
improve
– Moreover, only through increases in productivity can labor, capital
and management receive additional payments. If returns to labor,
capital or management are increased without increased productivity,
prices rise

– On the other hand, downward pressure is placed on prices when
productivity increases, because more is being produced with the
same resources


– Productivity measures of individual resources can then be related to
the amount of output produced against the amount of input used

– Example 1
– Six hundred customers have visited a mobile phone shop in
one week. There are four sales representative employed by the
shop. Assuming equal distribution of work, what is the productivity of
individual sales representative?
– We can use the above ratio to determine productivity for each sales
representative:

– National productivity – this is where the productivity of different
nations are measured and compared, expressed in terms of % of
exports by each country per annum
– Industry productivity – this is where the productivity of different
industrial sectors is measured

– Statistical comparisons are then made of their relative performance,
expressed in terms of output per employee per hour, is a useful way
for individual companies in a particular sector to
compare their performance with the industry average.

– Organizational productivity – this is where productivity of a particular
organization is measured. It is usually measured in monetary terms
and expressed as the ratio of the output sold to the costs of inputs
(e.g. labor, materials, equipment) used to produce that output. The
total factor productivity ratio is obtained by dividing total output by
the total of labor, materials, and capital inputs. Therefore we have, for
total factor productivity:

– Various ways that the productivity of a resource or operation can be
improved
1. Increasing the working speed by improving the output from the
operation whilst utilizing the same amount of input
2. Improving the working methods by obtaining the same output from
the operation using less input
3. Reducing cost and wastage by increasing output from the
operation whilst reducing the input to the operation

– Operations managers are responsible for improving productivity and
reducing operating costs
– They should look regularly in a systematic and critical way at the
resources under their control in order to find where they can be used
more efficiently:
• People
• Equipment
• Materials
• Space
• Money
•Time
– People: the efficiency, utilization and effectiveness of the workforce,
within an operation can be improved with sound
planning, motivation, innovating new work methods, and by raising
people awareness through effective training and empowerment

– Equipment: the utilization, efficiency and availability of equipment and
machines can be improved through effective capacity planning and
control, simplifying operations and efficient management of
maintenance activities

– Materials: the availability and utilization of materials can be
improved through efficient planning and control of materials and
effective sourcing and management of the supply chain

– Space: efficient use of available space can be made through better
layout design and organization of productive resources

– Money: the amount of working capital allocated to an operation in the
form of stock, consumable and services can be optimized through
sound budgetary planning and control, structural and
improvement decisions

– Time: people being late for work or absenteeism can be reduced
through listening to employees’ concerns, better communication,
motivation, development of their skills and recognition and appropriate
reward for their efforts and outstanding contribution

Productivity, Work Methods and Measurement
– Productivity in manufacturing and service operations can be
influenced by two types of activities:
• those, which add value to the end produce or the end service
• those, which waste resources and fail to add value to the end
product

– Of course, value here refers to all those features or specifications in
a product or a service that a customer is paying for, all or those
service characteristics, which will satisfy specific needs of the
consumer in the public sector organizations




• Productivity, Work Methods & Measurement

Chapter 9
Quality Control & Quality Management

Objectives:
– Understand quality and discuss the cost of quality
– Discuss the concept of Total Quality Management
– Relate the significance and the application of Six Sigma
– Summarize the relevance of ISO 9000, ISO 14000 to a business
organization

Importance of quality

The operation’s view of quality
• Quality is defined as ‘consistent conformance to customers’ expectations’.

– Conformance implies that there is a need to meet a clear specification.
– Consistent implies that conformance to specification is not an ad hoc event
but that the product or service meets the specification because quality
requirements are used to design and run the processes that produce products
and services.
– Customers’ expectations implies that the product or service must take the
views of customers into account, which may be influenced by price.

Customers’ view of quality
• Past experiences, individual knowledge and history will all shape customers’
expectations.
• Each customer may perceive a product or service in different ways.
• Quality needs to be understood from a customer’s point of view because, to the
customer, the quality of a particular product or service is whatever he or she
perceives it to be.
• Also customers may be unable to judge the ‘technical’ specification of the service or
product and so use surrogate measures as a basis for their perception of quality.

Reconciling the operation’s and the
customer’s views of quality
• The operation’s view of quality is concerned with trying to meet customer expectations.
• The customer’s view of quality is what he or she perceives the product or service to be.
• To create a unified view, quality can be defined as the degree of fit between customers’
expectations and customer perception of the product or service.

Diagnosing quality problems

Conformance to specification
• Step 1: Define the quality characteristics of the product or service.

• Step 2: Decide how to measure each quality characteristic.
• Step 3: Set quality standards for each quality characteristic.
• Step 4: Control quality against those standards.
• Step 5: Find and correct causes of poor quality.
• Step 6: Continue to make improvements.

Total quality management (TQM)
• TQM is ‘an effective system for integrating the quality development, quality maintenance and
quality improvement efforts of the various groups in an organization so as to enable production
and service at the most economical levels which allow for full customer satisfaction’.
• TQM is a philosophy of how to approach the organization of quality improvement. This totality
includes:
– meeting the needs and expectations of customers;
– covering all parts of the organization;
– including every person in the organization;
– examining all costs which are related to quality, especially failure costs and getting things ‘right first
time’;
– developing the systems and procedures which support quality and improvement (ISO 9000, ISO
14000);
– developing a continuous process of improvement.
TQM means meeting the needs &
expectations of customers
• TQM is ‘an effective system for integrating the quality development, quality maintenance and
quality improvement efforts of the various groups in an organization so as to enable production
and service at the most economical levels which allow for full customer satisfaction’.
• TQM is a philosophy of how to approach the organization of quality improvement. This totality
includes:
– meeting the needs and expectations of customers;
– covering all parts of the organization;
– including every person in the organization;
– examining all costs which are related to quality, especially failure costs and getting things ‘right first
time’;
– developing the systems and procedures which support quality and improvement (ISO 9000);
– developing a continuous process of improvement.

TQM means covering all parts of the
organization
• Internal customer or supplier: errors in the service provided within an organization will
eventually affect the product or service which reaches the external customer.
• Service-level agreements: are formal definitions of the dimensions of service and the
relationship between two parts of an organization.
– The type of issues which would be covered by such an agreement could include
response times, the range of services, dependability of service supply, and so on.
– Boundaries of responsibility and appropriate performance measures could also be
agreed.

TQM means all costs of quality are
considered
• Prevention costs are those costs incurred in trying to prevent problems, failures and errors
from occurring in the first place.
• Appraisal costs are those costs associated with controlling quality to check to see if
problems or errors have occurred during and after the creation of the product or service.
• Internal failure costs are failure costs associated with errors which are dealt with inside the
operation.
• External failure costs are those which are associated with an error going out of the
operation to a customer.
Getting things ‘right first time’

The relationship between quality costs

The TQM quality cost model

The ISO 9000 approach
• ISO 9000 (2000) took a ‘process’ approach that focused on outputs from any operation’s
process rather than the detailed procedures in previous version of ISO 9000
• Four other principles of ISO 9000 (2000):
– Quality management should be customer-focused.
– Quality performance should be measured.
– Quality management should be improvement-driven.
– Top management must demonstrate their commitment to maintaining and continually
improving management systems.

Success factors for
implementing TQM
DO NOT EXPECT FAST PAY-OFFS FROM TQM IMPLEMENTATION
• A quality strategy.
• Top management support.
• A steering group.
• Group-based improvement.
• Success is recognised.
• Training is the heart of quality improvement.


Chapter 5-9 POM

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Chapter 5

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Determine the size and timing of planned- order releases necessary

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• Usage: It is a technique associated with large industries such as the automotive

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