Session 13

Review 1



D 0 8 5 4
Supply Chain : Manufacturing and Warehousing

Review 1 : Session 1 until 6
Bina Nusantara University
Session 1 :
The Role of Operations Management and its connection to
corporate strategy
Bina Nusantara University
Manufacturing Matters
• A question that is being debated and has been debated
by economist for the past 20 years is

the importance of a strong manufacturing base.

Precisely, the shift in jobs from the manufacturing sector
to service sector.

Is a strong manufacturing based important for the health
of company ?
Bina Nusantara University
4 Source : Production and Operations Analysis 4
Edition, Steven Nahmias
McGraw Hill International Edition
A Framework for Operations Strategy

• ( Porter, 1990 ) indicated the two dimensions of
a. Lower Cost
b. Product Differentiation

Reference is the classical literature on competitiveness
claims that firms position themselves strategically in the
marketplace along one of the mentioned two
Bina Nusantara University
5 Source : Production and Operations Analysis 4
Edition, Steven Nahmias
McGraw Hill International Edition
Session 2 :
The Role of Operations Management and its connection to
corporate strategy
Bina Nusantara University
Classical View of Operations Strategy
The traditional view treats most strategic issues in the
context of a single plant rather than the entire firm.

The broad issues in “ A Framework for Operations Strategy “
relate to operations strategy on the firm level.
The classical view of Operations Strategy relates to the
following issues :
 Time Horizon
 Focus
 Evaluation
 Consistency

Bina Nusantara University
7 Source : Production and Operations Analysis 4
Edition, Steven Nahmias
McGraw Hill International Edition
Competing in a Global Marketplace

• International competitiveness has become a national
obsession. Each country is trying to enhance their
standard of living is eroding while it seems to improve

• In his excellence study of international competitiveness,
Porter ( 1990) poses the following questions :
Why does one country become the home base for
successful international competitors in an industry ?
Bina Nusantara University
8 Source : Production and Operations Analysis 4
Edition, Steven Nahmias
McGraw Hill International Edition
Session 3 :
Economic Order Quantity and its variation
Bina Nusantara University
• The fundamental inventory problem can be succinctly
described by two questions :
1. When should an order be placed ?
2. How much should be ordered ?

• The complexity of the resulting model depends upon the
assumptions one makes about the various parameters
of the system.
• The major distinction is between
a. Inventory Control Subject to Known Demand
b. Inventory Control Subject to Unknown Demand

Bina Nusantara University
10 Source : Production and Operations Analysis 4
Edition, Steven Nahmias
McGraw Hill International Edition
Economic Order Quantity and its variation
• The EOQ Model ( Economic Order Quantity Model )
is the simplest and most fundamental of all inventory

It describes the most important trade-off between
Fixed Order Costs and Holding Costs.

And is the basis for the analysis of more complex systems.
Bina Nusantara University
11 Source : Production and Operations Analysis 4
Edition, Steven Nahmias
McGraw Hill International Edition
Order Quantity
Annual Cost
Order (Setup) Cost Curve
Order Quantity (Q*)
Bina Nusantara University
The Economic Order Quantity Model
• Assumptions:

– 1. Production is instantaneous. There is no capacity
constraint and the entire lot is produced simultaneously.
– 2. Delivery is immediate. There is no time lag between
production and availability to satisfy demand.
– 3. Demand is deterministic. There is no uncertainty about
the quantity or timing of demand.
– 4. Demand is constant over time. In fact, it can be
represented as a straight line, so that if annual demand is
365 units this translates into a daily demand of one unit.
– 5 A production run incurs a constant setup cost.
Regardless of the size of the lot or the status of the factory,
the setup cost is the same.
– 6. Products can be analyzed singly. Either there is only a
single product or conditions exist that ensure reparability of
• D = Demand rate (in units per year).
• c = Unit production cost, not counting setup or inventory
costs (in dollars per unit).
• A = Constant setup (ordering) cost to produce
(purchase) a lot (in dollars).
• h = Holding cost
• Q = Lot size (in units); this is the decision variable
Session 4 :
The newsvendor model and its applications.
Bina Nusantara University
Newsvendor model implementation steps
• Gather economic inputs:
– selling price,
– production/procurement cost,
– salvage value of inventory
• Generate a demand model to represent demand
– Use empirical demand distribution
– Choose a standard distribution function
• the normal distribution,
• the Poisson distribution.
• Choose an objective:
– maximize expected profit
– satisfy a fill rate constraint.
• Choose a quantity to order.
Session 5 :
Probabilistic inventory models, service levels and safety
Bina Nusantara University
A Probabilistic Inventory Model.
• Probabilistic lead-time demand (D

– mean µ

– standard deviation o

– probability distribution fcn. P(D
) / density fcn. f(D
– cumulative distribution fcn. F(D
= P(lead-time demand
• Continuous review (Q, R) system (<=> (s, Q) system)
– fixed order size Q
– order point R (or s), i.e., variable order period
• Demand during stock-out periods is backlogged
D s
Determination of the order point R ?
3 alternative models:
1. Specified probability of no stockout during lead time
| service level:
2. Specified proportion of demand satisfied from inventory
on hand
P service level:
3. Cost minimization
shortage cost
( ) ( ) | > = s R F R D P
| |
| |
> ÷
short units of #
Point , R
Safety Stock (SS)
Inventory Level
Lead Time
Probabilistic Models
When to Order
Session 6 :
Probabilistic inventory models, service levels and safety
Bina Nusantara University
Service Levels in (Q,R) Systems
• In many circumstances, the penalty cost, p, is difficult to estimate.
• For this reason, it is common business practice to set inventory
levels to meet a specified service objective instead.
1) Type 1 service: Choose R so that the probability of not stocking out
in the lead time is equal to a specified value.
– Appropriate when a shortage occurrence has the same consequence
independent of its time and amount.
2) Type 2 service: Choose both Q and R so that the proportion of
demands satisfied from stock equals a specified value.
– In general, | is interpreted as the fill rate.
Solution to (Q,R) Systems
with Type 1 Service Constraint
F(R) = o ÷probability demand is satisfied
Set Q = EOQ =
•For type 1 service, if the desired service level
is α then one finds R from F(R)= α and
•Specify o, which is the proportion of cycles in
which no stockouts occur.
• This is equal to the probability that demand
is satisfied.

Solution to (Q,R) Systems
with Type 2 Service Constraint

• Type 2 service requires a complex iterative solution procedure to
find the best Q and R

• However, setting Q=EOQ and finding R to satisfy n(R) = (1-β)Q
(which requires Table A-4) will generally give good results
Average Stockouts per Cycle
Average Demand per Cycle
= 1 ÷ |,
n(R) = 1÷ | ( )Q
Why Safety Stock?
• Safety Stock: Average level of the net stock just before a
replenishment arrives

• Pressure for higher safety stocks
– Increased product variety and customization
– Increased demand uncertainty
– Increased pressure for product availability

• Pressure for lower safety stocks
– Short product life cycles
The ABC Inventory Classification System
The ABC classification, devised at General Electric during the 1950s, helps a
company identify a small percentage of its items that account for a large
percentage of the dollar value of annual sales. These items are called Type A
 Adaptation of Pareto’s Law
• 20% of the people have 80% of the wealth (in 1897 Italy)

 Since most of our inventory investment is in Type A items, high
service levels will result in huge investments in safety stocks.

 Tight management control of ordering procedures is essential for
Type A items.
Review 2 : Session 7 until 12

Bina Nusantara University
Session 7 :
Production flows for discrete-part manufacturing and their
Bina Nusantara University
Production Flow and Discrete Manufacturing
•Business Process Flow
–Create planned independent requirements
–Run MRP at plant level
–Purchase (convert purchase requisition to purchase order, then post goods receipt)
–Release production orders for sub-assembly production
–Confirm and withdraw raw material
–Create production order for final assembly
–Assign batch number in production order
–Check capacity for the final assembly
•If final assembly is done internally
–Release assembly orders
–Pick Components
–Confrim assebly activities
Production Flow and Discrete Manufacturing
•Option 2:
•If final assembly is done externally
•Create subcontracting purchase order (external process)
•Transfer stock to subcontractor storage
•Release Assembly Orders
•Post goods receipt for subcontracting order
•Complete the production order for final assembly technically
Session 8:
“Make-or-Buy” Decisions and Capacity planning
Bina Nusantara University
• “Make-or-Buy decisions compare the cost of
producing a component or providing the service
internally with the cost of purchasing the component
or service from an external supplier” Probert (1995),
identifies 3 levels of a make-buy decision:-
• Strategic – affects the shape & capabilities of the
• Tactical – deals with issues of temporary imbalances
of capacity
• Component – decisions usually made at the design
• Outsourcing:-
• “possibly a wider term than make-buy and the two terms can be
used synonymously, but is the strategic use of resources to
perform activities traditionally handled by internal staff & their
resources (it is a) management strategy by which an
organisation outsources major non-core functions to
specialised, efficient service providers”
• Source: Outsourcing Institute on
• “may be distinguished from outsourcing in that the latter
involves the total restructuring of an enterprise around core
competences and outside relationships. Whatever the degree
of outsourcing enterprises must retain certain core capabilities.
Outsourcing is a strategic long term decision, Subcontracting
is a tactical, short term approach.
• Source: Lysons & Gillingham (2003)
Levels of decision making
• Operational Strategies are concerned with: -short term
• The integration of resources, processes, people and
• The implementation of corporate strategies
Session 9 :
Aggregate Planning
Bina Nusantara University
Aggregate Planning

• Aggregate planning, which might also be called
Macro Production Planning,
address the problem of deciding :
– how many employees the firm should retain,
– and for a manufacturing firm,
• The quantity and the mix of products to be
• Macro production planning is not limited to
manufacturing firms.
• Macro production planning strategies are a fundamental
part of the firms’s overall business strategy.
Bina Nusantara University
37 Source : Production and Operations Analysis 4
Edition, Steven Nahmias
McGraw Hill International Edition
Aggregate Planning

• The methodology of aggregate planning in this topic
requires the assumption that
– Demand is deterministic , or known in advance.
• This assumption is made to simplify the analysis and
allow us to focus on the systematic or predictable
changes in the demand pattern, rather than on the
unsystematic or random changes.
• The goal of the analysis is to determine the number of
workers that should be employed each period and the
number of aggregate units that should be produced each
Bina Nusantara University
38 Source : Production and Operations Analysis 4
Edition, Steven Nahmias
McGraw Hill International Edition
Aggregate Planning

• The objective is to minimize costs of production, payroll,
holding and changing size of the workforce. The cost of
making changes are generally referred to as smoothing
• Most of the aggregate planning models discuss in this
topic assume that all costs are linear functions.
This means that the cost of hiring an additional worker is
the same as the cost of hiring the previous worker,
the cost of holding and additional unit of inventory is the
same as the cost of holding the previous unit of
Bina Nusantara University
39 Source : Production and Operations Analysis 4
Edition, Steven Nahmias
McGraw Hill International Edition
Hierarchy of
Production Decisions
Long-range Capacity Planning
Planning Horizon
Aggregate planning: Intermediate-range capacity
planning, usually covering 2 to 12 months.
Long range
Now 2 months 1 Year
Aggregate Planning Strategies
• Should inventories be used to absorb changes in demand during
planning period?
• Should demand changes be accommodated by varying the size of
the workforce?
• Should part-timers be used, or should overtime and/or machine idle
time be used to absorb fluctuations?
• Should subcontractors be used on fluctuating orders so a stable
workforce can be maintained?
• Should prices or other factors be changed to influence demand?
Why Aggregate Planning Is Necessary
• Fully load facilities and minimize overloading and
• Make sure enough capacity available to satisfy expected
• Plan for the orderly and systematic change of production
capacity to meet the peaks and valleys of expected
customer demand
• Get the most output for the amount of resources
Session 10 :
MRP explosion for multi-stage production systems
Bina Nusantara University
Resource Requirements Planning
Master Production
Scheduling (MPS)
Material Requirements
Planning (MRP)
Capacity Requirements
Planning (CRP)
Adapted from Operations Management by Gaither & Frazier – South-Western
Material Requirements Planning (MRP)
Adapted from Operations Management by Gaither & Frazier – South-Western
Materials Requirements Planning (MRP)
• Computer based system
• Explodes Master Schedule (MPS) into required amounts
of raw materials and subassemblies to support MPS
• Nets against current orders and inventories to develop
production and purchased material ordering schedules
Adapted from Operations Management by Gaither & Frazier – South-Western
Objectives of MRP
• Improve customer service
• Reduce inventory investment
• Improve plant operating efficiency
Adapted from Operations Management by Gaither & Frazier – South-Western
Order Changes

Elements of MRP
Planned Order
Transaction Data
Bill of
Materials File
Status File
Orders and

Inputs Outputs
Adapted from Operations Management by Gaither & Frazier – South-Western
Session 11 :
Lot sizing, shop floor scheduling
Bina Nusantara University
Lot Sizing, Shop Floor Schedule
• Lot Sizing & Lean Manufacturing Strategy

Why Small Lots?
• Small lot production (ideally one piece) is an
important component of many Lean Manufacturing
strategies. Lot size directly affects inventory and
scheduling. Other effects are less obvious but equally
important. Small lots reduce variability in the system
and smooth production. Small lots also enhance
quality in many ways.
Bina Nusantara University
• The Lean Manufacturing literature gives little
guidance on lot sizing other than statements such as:
"the lot size should be one" or "lot sizing is irrelevant."
• This series of papers examines the lot sizing problem in
Lean Manufacturing. It offers a rational alternative to
the slogans and edicts.
• The effects of small lots differ somewhat between Make
To Order (MTO) and Make To Stock (MTS)
environments but they are important in either situation.

• In MTO environments, the ability to make smaller lots economically
makes it practical to accept smaller orders. This can open new
market segments or eliminate middlemen from the logistics
• One of our former clients restructured the entire vinyl siding
industry when they achieved reliable delivery of small lots directly
to retail outlets.
• In an MTS environment, small lots translate directly to smaller
inventories. Inventory carrying costs are significant and are
discussed further below. In fast-changing fashion or technology
markets, obsolete inventory may make the difference between profit
and loss. Smaller lots often enable conversion from MTS to MTO.
• Many factories that deliver to their customers in MTO operate
intermediate processes in MTS. The MTS discussion applies to
those intermediate and upstream operations.
Scheduling via Lot Sizing
• Case: TJ International – Parallam Product

• Issues:
–Press is bottleneck
–12 hour changeover time to switch widths (12”, 14”, 16”, 19”)
–Many products made from each width, but less 14”/16” than
–Currently try to run at least a week between changeovers
–Seasonal demand: inventory build up in off-season

• Problem: determine run sequence each month

Lathe/Clip Press Saw
Scheduling via Lot Sizing
• Notation:

• Problem: choose lot sizes for the month to meet
demand as “efficiently” as possible.
variable) (decision product for (parts) size lot
product for (hr) time setup
product of (parts/hr) rate production
product for (parts/hr) demand hourly
product for th) (parts/mon demand monthly
n utilizatio desired
hours/day days/month available hours
i x
i s
i p
i d
i D
× = =
Session 12 :
Pull systems and the Just-in-Time Philosophy
Bina Nusantara University
Pull systems and the Just-in-Time Philosophy

Bina Nusantara University
Push and Pull Control System

• Push System
Once production is completed in one stage, produced units are pushed to the next stage.

• Pull System
Only when production is requested by the next stage, production is started in the stage.
1 3 2
• MRP (Materials Requirements Planning)
– MRP is the basic process of translating a production schedule for an end product (MPS
or Master Production Schedule) to a set of requirements for all of the subassemblies
and parts needed to make that item.
– MRP is the classic push system. The MRP system computes production schedules for
all levels based on forecasts of sales of end items. Once produced, subassemblies are
pushed to next level whether needed or not.

• JIT (Just-In-Time)
– Derived from the original Japanese Kanban system developed at Toyota. JIT seeks to
deliver the right amount of product at the right time. The goal is to reduce WIP (work-
in-process) inventories to an absolute minimum.
– JIT is the classic pull system. The basic mechanism is that production at one level only
happens when initiated by a request at the higher level. That is, units are pulled through
the system by request.

Push and Pull Control System
• MRP (Materials Requirements Planning)
– Terminologies
• Master Production Schedule (MPS) : Planned production quantities by
time period out into the future for every end item.
• Bill of Materials (BOM) : A bill of materials for a particular inventory
items (parent) shows all of its immediate components and their numbers
per unit of the parent.
• Level Coding : To provide a systematic framework for exploding back
the implications on all components of a given schedule for final assembly
• Lead Times (Offsetting) : The time that elapses from when the purchase
order is issued until the moment when the material is physically present
ready for the operation.
Push and Pull Control System
– Information Required for MRP Implementation
• Master Production Schedule out to the planning horizon
• Inventory status of each item including possible backorders
• Timing of and quantities involved in any outstanding or planned
replenishment orders
• Forecasts (which can be partially or entirely firm customer
orders) of demand for each component, subject to direct customer
demand, by time period out to the planning horizon
• All relevant bills of materials and associated level codes
• Production or procurement lead times (offsets) for each operation
• Possible scrap allowances for some operations
Push and Pull Control System
– Explosion Calculus
• The explosion calculus is a set of rules for converting the master
production schedule to a requirements schedule for all
subassemblies, components, and raw materials necessary to
produce the end item.
• There are two basic operations comprising the explosion
• Time phasing : requirements for lower level items must be
shifted backwards by the lead time required to produce the items
• Multiplication : a multiplicative factor must be applied when
more than one subassembly is required for each higher level item.
Push and Pull Control System

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