CHAPTER 4

CONTROLLING
M AT E R I A L F L O W
 LEARNING OBJECTIVES
• Describe the hierarchical operations planning process in terms of materials
planning (APP, MPS, MRP).
• Understand the use of BOM, Inventory status and MRP computation.
• Describe the limitations of MRP systems, and why organizations are migrating
to integrated ERP systems.
• Understand JIT systems.
• Know how to achieve JIT operations – KANBANS.
• Understand what Lean and Six Sigma are in SCM.
• Compare Lean and Six Sigma.

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MAIN CONTENT

Material Requirements Planning (MRP)

Just In Time (JIT)
Lean and Six-Sigma
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 1 . M AT E R I A L
REQUIREMENTS
PLANNING
(MRP)
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OPERATIONS PLANNING

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Figure: Manufacturing Planning and Control System
MASTER PRODUCTION SCHEDULE
• Based on actual customer orders and predicted demand.
• Indicates When and How many exact end items will be produced.
• Example: The ATV Corporation makes three models: Model A, Model B, and Model C.
ATV’s Master Production Schedule for January and February is as follows

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 BILL OF MATERIALS (BOM)

• Indicates all the raw materials, components, subassemblies, and assemblies

required to produce an item.
• Shows way a final product/parent item is put together from individual components.
• Final product is at lowest level: level 0. Subsequent levels are parent components,
then components.
• Production planners explode BOM for level zero item to determine the number,
due dates, and order dates of subcomponents.

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SKATEBOARD PRODUCT TREE
50 delivered
in week 10
EXAMPLE: THE BOARDSPORTS COMPANY
Demand: 50 Sidewalk Specials in week 10

Component Quantity Lead Time

Sidewalk Special (SS) 1 1 week
Fiberglass board 1 3 weeks
Wheel assembly 2 1 week
Wheel mount stand 1 4 weeks
Wheel 2 1 week
Locknut 2 1 week
Spindle 1 2 weeks
MATERIAL REQUIREMENTS OF SIDEWALK
SPECIAL
Fiberglass boards = 1  number of specials
Wheel assemblies = 2  number of specials
Wheels = 2  number of wheel assemblies
Spindles = 1  number of wheel assemblies
Locknut = 2  number of wheel assemblies
Wheel mount stand = 1  number of wheel assemblies
 MATERIAL REQUIRED TO PRODUCE 50
SS
Fiberglass boards =1  number of specials = 1  50 = 50
Wheel assemblies =2  number of specials = 2  50 = 100
Wheels =2  number of wheel assemblies = 2  100 = 200
Spindles =1  number of wheel assemblies = 1  100 = 100
Locknut = 2  number of wheel assemblies = 2  100 = 200
Wheel mount stand =1  number of wheel assemblies= 1  100
= 100
DELIVERY 50 SIDEWALK SPECIALS IN WEEK 10

Week
1 2 3 4 5 6 7 8 9 10
Sidewalk Specials 50
Date needed 50
Boards Order date 50 3 week lead time
Date needed 100
Wheel assembly Order date 100
Date needed 200
Wheels Order date 200
Date needed 100
Spindles Order date 100
Date needed 100
Mounting stands Order date 100
Date needed 200
Locknuts Order date 200
PART OF A BOM FOR AN ATV

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 INVENTORY STATUS
• Includes inventory records such as an item’s lot-size policy, lead-time, and time-phased data:
o Scheduled/Planned receipts: a committed order awaiting delivery for a specific period.
o Gross requirement: a time-phased requirement prior to considering on-hand inventory
and lead time to obtain the item.
Gross requirement (in period 𝑡) = Customer demand (in period 𝑡) + Backlog (in period 𝑡 − 1)
o On-hand inventory: the inventory at the end of the period.
On-hand inventory (in period 𝑡) = Max{0, On-hand inventory (in period 𝑡 − 1)
+ Scheduled/Planned receipts (in period 𝑡)
– Gross requirement (in period 𝑡)}.
• Be used to determine the quantity available for use in a given period (in MRP system).

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 EXAMPLE
• Suppose a master schedule shows that the company plans to make 10 tables in
February with leadtime 4 weeks. It obviously needs 10 tops and 40 legs ready
for assembly at the beginning of February.These are the gross requirements.

• The company needs 40 table legs by the beginning of February, but if it already
has 8 in stock and an order of 10 that is due to arrive in January, should they
order? How many?

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 INDEPENDENT VS. DEPENDENT DEMAND
• Independent Demand
o Final products: automobiles,
televisions, tables.
o Demand often occurs at
constant rate.
• Dependent Demand
o Raw materials, components,
and subassemblies.
o Demand often occurs in lumps.

→ MRP is designed when lumps in demand are known.

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 MATERIAL REQUIREMENTS PLANNING
• Be a software-based production planning and inventory control system used by
manufacturing firms for computing dependent demand and timing requirements.
• Be used to calculate the exact quantities, need dates, and planned order releases
for components and subassemblies needed to manufacture the final products listed
on the MPS.
• MRP begins the computation process by first obtaining the requirements of the final
product (Level 0 item on the BOM) from the MPS to calculate the requirements of
Level 1 components and then working its way down to the lowest level components,
taking into account existing inventories and the time required for each processing
step.

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 MRP COMPUTATION
• To compute a dependent demand, it requires:
o the independent demand information (the demand for the final product) from the MPS.
o parent–component relationships from the BOM.
o the inventory status of the final product and all of its components.
• Based on the information, the net requirements of the final product and components are computed
Net requirements (in period 𝑡) = Gross requirements (in period 𝑡) – On-hand inventory (period 𝑡 − 1)
– scheduled receipts (in periods  𝑡).
• The net requirements are offset with appropriate lead times to ensure orders are released on time,
called planned order releases, the most important output of the MRP.

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 MRP COMPUTATIONS: ORDER LOT
SIZE
• Fixed Order Quantity (FOQ):

• Periodic Order Quantity (POQ):

• Lot-for-Lot Order Quantity (L4L):

EXAMPLE
• Semple-Brown assemble kitchen tables using bought-in parts of four
legs and a top. These have lead times of two and three weeks
respectively, and assembly takes a week. The company receives orders
for 20 tables to be delivered in week 5 of a planning period and 40
tables in week 7. It has current stocks of 2 complete tables, 40 legs and
22 tops.When should it order parts?
 EXAMPLE
• The orders give the following production schedule for
finished tables – shown as the gross requirements for
level 0 items. Subtracting the current stock of finished
tables gives the net requirements
Level 0 – kitchen tables
Week 1 2 3 4 5 6 7
Gross Requirement 20 40
Opening Stock 2
Net Requirements
Start Assembly
Scheduled Completion
 Example
• The ‘scheduled completion’ shows the number of units that
become available in a week, which is the number started the lead
time earlier.
• Find gross requirements
– For level 1 items – which are legs and tops. In week 4 there is a
net requirement of 18 tables, which translates into a gross
requirement of 18 × 4 = 72 legs and 18 × 1 = 18 tops.
– So we can find the gross requirements for level 1 materials as:
• legs: 18 × 4 = 72 in week 4, and 40 × 4 = 160 in week 6
• tops: 18 in week 4, and 40 in week 6.
 Example

• Subtracting the stock on hand from these gross

requirements gives the net requirements. To make sure the
parts arrive on time, they must be ordered the lead time in
advance – which is 2 weeks for legs and 3 weeks for tops.

Level 1 –legs
Week 1 2 3 4 5 6 7
Gross Requirement 72 160
Opening Stock 40
Net Requirements
Place order
Scheduled deliveries
 Example
Level 1 –tops
Week 1 2 3 4 5 6 7
Gross Requirement 18 40
Opening Stock 22
Net Requirements
Place order
Scheduled deliveries

There are no more of levels material, so we can finalize the time tables of events
as
• Week 2: order 32 legs
• Week 3: order 36 tops
• Week 4: order 160 legs and assemble 18 tables
• Week 6: assemble 40 tables
Level 0 – kitchen tables
Week 1 2 3 4 5 6 7
Gross Requirement 20 40
Opening Stock 2 2 2 2 2
Net Requirements 18 40
Start Assembly 18 40
Scheduled Completion 18 40

Level 1 –legs
Week 1 2 3 4 5 6 7
Gross Requirement 72 160
Opening Stock 40 40 40 40
Net Requirements 32 160
Place order 32 160
Scheduled deliveries 32 160

Level 1 –tops
Week 1 2 3 4 5 6 7
Gross Requirement 18 40
Opening Stock 22 22 22 22 4 4
Net Requirements 36
Place order 36
Scheduled deliveries 36
MRP COMPUTATION
WITHOUT
NET REQUIREMENTS
AND
PLANNED ORDER
RECEIPTS

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MRP COMPUTATION
WITH
NET REQUIREMENTS
AND
PLANNED ORDER
RECEIPTS

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 BENEFITS OF MRP
• Higher inventory turnover.
• Better customer service – limit delays caused by shortages of materials.
• More reliable and faster delivery times.
• Less time spent on expediting and emergency orders.
• Ability to track material requirements.
• Ability to evaluate capacity requirements.
• Ability to plan other logistics activities.
• Availability of production information providing visibility for schedulers to plan ahead.

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 ISSUES OF MRP
• Reduces the flexibility to deal with changes.
• Needs a lot of detailed and reliable information.
• Becomes very complex.
• Does not recognize capacity and other constraints.
• Be expensive and time consuming to implement.
• Risks: quantity & lead time.
• Capacity limit.

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ENTERPRISE RESOURCE PLANNING SYSTEMS
• By the end of the twentieth century,
the global business environment has
changed. Additional tasks are
required and the existing MRP
systems could not handle these
added tasks.
• To deal with the tasks, ERP systems
that operated from a single,
centralized database were
engineered to replace the existing
MRP systems.

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EXAMPLE AGGREGATE PLANNING
• A furniture factory has to work 20 working days per month and 8 hours per
day. Each worker can produce 50 units per period. Company needs to make an
aggregate plan for the forecasted.

Spare transport that is not used 200 $/unit

Shortage of transport 500 $/unit
Cost of moving employees to this function
from other jobs 300 $/employee
Cost of moving an employee from
this function to other jobs 500 $/employee
Number of employee 150 Employees
Number of unit per employee 50 Units
Regular-time cost of employee 4 $/hour
 Month 1 2 3 4 5 6 Total
Forecasting
30000 7000 20000 35000 18000 25000 135000
demand
Supply rate 22500 22500 22500 22500 22500 22500 135000
Cummulative
supply
Unused supply

Shortage

Cost of unused
supply
Cost of shortage

Number of
employee used

Cost of moving
employees

Regular-time cost
of employees
Total cost 10768000
2. JUST IN TIME
(JIT)

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 PRINCIPLES OF JUST-IN-TIME
• Just-in-time (JIT) systems organize materials to arrive just as they are needed.
• By coordinating supply and demand, they eliminate stocks/inventory of raw
materials and work in progress.
• JIT’s view of stock:
o Stocks are held to cover short-term mismatches between supply and demand.
o These stocks serve no useful purpose – they only exist because poor co-ordination
does not match the supply of materials to the demand.
o To improve operations, the reasons for differences between supply and demand are
needed to be found, and the differences are needed to be solved.

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STOCK LEVELS
WITH
DIFFERENT
TYPES OF
CONTROL

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 WIDER EFFECTS OF JIT
• Quality: Organizations have defined some arbitrary level of acceptable quality,
such as, ‘we will accept one defect in a hundred units’. JIT recognizes that all
defects have costs, and it is better to find the cause and make sure that no defects
are produced (supporting the view of total quality management).
• Suppliers: JIT relies totally on its suppliers – so it supports the view of customers
and suppliers working closely together in long-term partnerships pursuing common
objectives.
• Batch size: Operations often use large batch sizes, as they reduce set-up costs
and disruptions. But if demand is low, the products made in large batches sit in
stock for a long time. JIT looks for ways of reducing the batch size so that it more
closely matches demand.

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 WIDER EFFECTS OF JIT
• Lead times: Long lead times encourage high stocks, as they have to cover
uncertainty until the next delivery. JIT aims for small, frequent deliveries with short
lead times.
• Reliability: JIT is based on continuous, uninterrupted production, so all operations
must be reliable. If, say, equipment breaks down, managers must find the reasons
and make sure it does not happen again.
• Employees: Some organizations still have a friction between ‘managers’ and
‘workers’. JIT argues that this is a meaningless distinction, as the welfare of
everyone depends on the success of the organization. All employees should be
treated fairly and equitably.
• JIT is not just a way of minimizing stocks. By coordinating all activities, it increases
efficiency and eliminates waste.

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ACHIEVING JUST-IN-TIME OPERATIONS
• Push and pull systems

• Kanbans

• Benefits and disadvantages of JIT

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 PUSH AND PULL SYSTEMS
• The success of JIT is not solely based on its idea of organizing activities at
just the time they are needed, but on its description of how to achieve this.
It works by ‘pulling’ materials through the process.
• When one operation finishes work on a unit, it passes a message back to
the preceding operation to say that it needs another unit to work on.
• The preceding operation only passes materials forward when it gets this
request.
 KANBANS (看板 )
• JIT needs some way of organizing the flow of materials that are pulled through the
process.
• The simplest system moves materials between two stages in containers.
• When a second stage needs some materials, it simply passes the empty container
back to the previous stage as a signal to fill it.
• KANBANS are cards that control the flow of materials through JIT operations.
– They arrange the ‘pull’ of materials through a process.
– There are several ways of using kanbans. The most common system uses two
distinct types of card, a production kanban and a conveyance kanban.
 Kanban Cards
Production Kanban:
signals the need to
produce more parts.

Conveyance Kanban (also

a “Move" or a “Withdrawal”
kanban): signals the need
to withdraw parts from one
work center and deliver
them to the next work
center.
EXAMPLE:
CONVEYANCE KANBAN CARD

Part number to produce: M471-36 Part description: Valve Housing

Lot size needed: 40 Container type: RED Crate

Card number: 2 of 5 Retrieval storage location: NW53D

From work center: 22 To work center: 35

EXAMPLE:
PRODUCTION KANBAN CARD
Part number to produce: M471-36 Part description: Valve Housing

Lot size needed: 40 Container type: RED crate

Card number: 4 of 5 Completed storage location: NW53D

From work center: 22 To work center: 35

Materials required:
Material no. 744B Storage location: NW48C
Part no. B238-5 Storage location: NW47B
What is Kanban? Kanban
Explained with a Coffee Cup

https://www.youtube.com/watch?v
=Lib1vFmfCng
SINGLE-CARD KANBAN SYSTEM
Receiving post
Kanban card for Storage
product 1 area
Kanban card for
product 2

Empty containers

Assembly line 1

O2

Fabrication
cell
O1 O3
Assembly line 2

Full containers
O2
SINGLE-CARD KANBAN SYSTEM
Receiving post
Kanban card for Storage
product 1 area
Kanban card for
product 2

Empty containers

Assembly line 1

O2

Fabrication
cell
O1 O3
Assembly line 2

Full containers
O2
SINGLE-CARD KANBAN SYSTEM
Receiving post
Kanban card for Storage
product 1 area
Kanban card for
product 2

Empty containers

Assembly line 1

O2

Fabrication
cell
O1 O3
Assembly line 2

Full containers
O2
SINGLE-CARD KANBAN SYSTEM
Receiving post
Kanban card for Storage
product 1 area
Kanban card for
product 2

Empty containers

Assembly line 1

O2

Fabrication
cell
O1 O3
Assembly line 2

Full containers
O2
SINGLE-CARD KANBAN SYSTEM
Receiving post
Kanban card for Storage
product 1 area
Kanban card for
product 2

Empty containers

Assembly line 1

O2

Fabrication
cell
O1 O3
Assembly line 2

Full containers
O2
SINGLE-CARD KANBAN SYSTEM
Receiving post
Kanban card for Storage
product 1 area
Kanban card for
product 2

Empty containers

Assembly line 1

O2

Fabrication
cell
O1 O3
Assembly line 2

Full containers
O2

Figure 8.4 – Single-Card Kanban System

SINGLE-CARD KANBAN SYSTEM
Receiving post
Kanban card for Storage
product 1 area
Kanban card for
product 2

Empty containers

Assembly line 1

O2

Fabrication
cell
O1 O3
Assembly line 2

Full containers
O2
 W

W
W

W
MAIN FEATURES OF KANBAN SYSTEMS
• A message is passed backwards to the preceding workstation to start
production, and it only makes enough to fill a container.
• Standard containers are used which hold a specific amount. This amount
is usually quite small, and is typically 10% of a day’s needs.
• The size of each container is the smallest reasonable batch that can be
made, and there are usually only one or two full containers at any point.
• A specific number of containers and kanbans is used.
• The stock of work in progress is controlled by the size of containers and
the number of kanbans.
• Materials can only be moved in containers, and containers can only be
moved when they have a kanban attached. This gives a rigid means of
controlling the amount of materials produced and time they are moved.
• While it is simple to manage, this system makes sure that stocks of work
in progress cannot accumulate.
 ADVANTAGES OF JIT
• Lower stocks of raw materials and work in progress.
• Shorter lead times.
• Shorter time needed to make a product.
• Higher productivity.
• Higher equipment capacity and utilization.
• Less paperwork.
• Higher quality of materials and products.
• Less scrap and wastage.
• Better morale and participation of the workforce.
• Better relations with suppliers.

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 DISADVANTAGES OF JIT
• High risks of introducing completely new systems and operations.
• Initial investment and cost of implementation.
• Long time needed to get significant improvements.
• Reliance on perfect quality of materials from suppliers.
• Inability of suppliers to adapt to JIT methods.
• Need for stable production when demand is highly variable or seasonal.
• Reduced flexibility to meet specific, or changing, customer demands.
• Difficulty of reducing set-up times and associated costs.
• Lack of commitment within the organization.
• Lack of co-operation and trust between employees.
• Problems linking JIT to other information systems, such as accounts.
• Need to change layout of facilities.

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3. LEAN AND
SIX-SIGMA

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 LEAN
• Lean has today replaced use of the term JIT.
• Lean emphasizes the minimization of the amount of all the resources used in the
operations of a company.
• The principle of lean is the elimination of “waste”.
• By eliminating wastes of all sorts in the system, the lean approach lowers labor,
materials, and energy costs of production.
• Lean also emphasizes building exactly the products customers want, exactly when
they need them.

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 PRIMARY OBJECTIVES OF LEAN SYSTEMS
• Produce only the products that customers want.
• Produce products only as quickly as customers want to use them.
• Produce products with perfect quality.
• Produce in the minimum possible lead times.
• Produce products with features that customers want, and no others.
• Produce with no waste of labor, materials, or equipment; designate a purpose for
every movement to leave zero idle inventory.
• Produce with methods that reinforce the occupational development of workers.

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 SIX-SIGMA
• From statistics, the term “sigma” refers to standard deviation of values for the output of a
process and is an indicator of variability.
• The goal is to achieve a process standard deviation that is six times smaller than the range
of outputs allowed by the product’s design specification.
• A primary objective of six-sigma programs is to design and improve products and
processes so that variability is reduced.
• The six-sigma approach is actually a structured process for first identifying sources of
variability and then reducing them.
• This approach is also a broad improvement strategy that includes the concepts and tools of
total quality management , a focus on the customer, performance measurement, and
formal training in quality control methods.

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 COMPARING LEAN AND SIX-SIGMA
• For lean practices to be successful, purchased parts and assemblies, work-in-
process, and finished goods must all meet or exceed quality requirements. One of
the elements of lean is continuous improvement, and these are the areas where
the practice of Six-Sigma can be put to good use in a lean system.
• Lean production is all about reducing waste, while Six-Sigma is all about solving
problems and improving quality. Thus, the two concepts can work together to
achieve better overall firm performance

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