Iqra University

Supply Chain Management And E-Business E-

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SCM Improvement Principles

The Seven Principles of Supply Chain Management 

Segment customers based upon service needs  Customize the logistics network
³What Is´ 

Listen to the signals of the marketplace and plan
accordingly

³What Can Be´ 

Differentiate products closer to the consumer  Source strategically  Develop a supply-chain-wide technology strategy  Adopt channel spanning performance measures

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The Bullwhip Effect
³The bullwhip Effect is a major cause of higher costs and inefficiencies in supply chains. It describes how small fluctuations in demand at the customer level are amplified as orders pass up the supply chain through distributors, manufacturers, and suppliers.´ ³As an example, consider disposable diapers. Babies generally consume diapers at a more or less consistent rate when aggregated over a large group of customers. Nevertheless, order fluctuations invariably become considerably larger as one moves upstream in this chain.µ Consequences of the Bullwhip Effect include excess/ fluctuating inventories, shortages/stockouts, longer lead times, higher transportation and manufacturing costs, and mistrust between supply chain partners 3

Consider these two former fast slogans ‡³We do it all for you! McDonald¶s ‡³Have it your way Build to stock VS Burger King Build to Order 4 .Supply Chain upstream Activities In most supply chains. the upstream activities respond to forecast. while somewhere on the downstream side the chain waits for orders to be placed.

demand uncertainty. variable capacity requirements Mass customization is replacing mass production in many industries There is more opportunity to coordinate activities because of information systems Supply chain management has become a critical aspect of business success  5 .INTEGRATING OPERATIONS MANAGEMENT WITH OTHER FUNCTIONS     Customer choices introduce complexity product variety.

SUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E-COMMERCE E-  Ford motor company did everything from mining to final assembly of its Model T vehicles in the early 1900s allowed coordination of all sequentially related activities for large efficiency gains very difficult to accommodate product variety or make model changes   6 .

economies of scale. need for focus in operations Supply chain improvements Just in Time (JIT) manufacturing Lean production    7 .SUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E-COMMERCE E-   Other factors leading to division of supply chains technology.

SUPPLY CHAIN MANAGEMENT DECISIONS: CONFIGURATION OF THE SUPPLY CHAIN       what the product service bundle will include (manufacturing to stock & manufacturing to order what portion of bundle will be outsourced where facilities will be located and capacities what technologies will be used how supplier-customer communications will be supplierhandled the expectations to which suppliers and customers will be held 8 .

SUPPLY CHAIN MANAGEMENT DECISIONS: COORDINATION OF THE SUPPLY CHAIN     determining when to provide products and services and in what quantities ensuring suppliers are able to provide the value required of them setting appropriate levels for capacity. performance expectations and performance results with suppliers and customers 9 . inventory and lead time communicating demand.

cost or service redesigning the product service bundle to make it easier to provide or of greater value to the customer 10 .SUPPLY CHAIN MANAGEMENT DECISIONS: IMPROVEMENT OF THE SUPPLY CHAIN     installing Enterprise Resource Planning (ERP) systems or other information technologies streamlining the channels of supply changing technologies or planning systems to improve quality. lead time.

SupplySupply-Chain Costs as a Percent of Sales Industry        Percent of Sales        All industry Automobile Food Lumber Paper Petroleum Transportation 52% 67% 60% 61% 55% 79% 62% 11 .

Material Costs in SupplySupply-Chain Wholesale 8% 9% Manufacturing 31% 11% 58% Material Dir Wages COGS Payroll 83% Other Other Retail 13% 16% COGS Payroll 71% Other 12 .

freight. customs and political issues 13 . or shipping channels. and currency rates Able to use the latest computer and transmission technologies to schedule and manage the shipment of parts in and finished products out Staffed with local specialists to handle duties. import duties. distribution.Global Supply-Chain Issues Supply- Supply chains in a global environment must be:    Flexible enough to react to sudden changes in parts availability. trade.

SupplySupply-Chain Strategies    Plans to help achieve company mission Affect long-term competitive position longStrategic options Many suppliers Few suppliers Keiretsu network Vertical integration Plan Virtual company      © 1995 Corel Corp. 14 .

play one supplier against another Develop long-term ³partnering´ arrangements with a few suppliers longwho will work with you to satisfy the end customer Vertically integrate. buy the actual supplier Keiretsu .SupplySupply-Chain Strategies Negotiate with many suppliers.have your suppliers become part of a company coalition Create a virtual company that uses suppliers on an as-needed basis. as-      15 .

Many Suppliers Strategy 

      

Many sources per item Adversarial relationship ShortShort-term Little openness Negotiated, sporadic PO¶s High prices Infrequent, large lots Delivery to receiving dock
© 1995 Corel Corp.

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Few Suppliers Strategy 

      

1 or few sources per item Partnership (JIT) LongLong-term, stable OnOn-site audits & visits Exclusive contracts Low prices (large orders) Frequent, small lots Delivery to point of use

© 1995 Corel Corp.

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Tactics for Close Supplier Relationships

Tactic 


Results 

Reduce total number of suppliers Certify suppliers

Average 20% reduction in 5 years Almost 40% of all companies surveyed were themselves currently certified About 60% ask for this About 54% do this Almost 80% claim to do this About 50% claim this    

Ask for JIT delivery from key suppliers Involve key suppliers in new product design Develop software linkages to suppliers   

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Vertical Integration Strategy     Ability to produce goods previously purchased  Setup operations  Buy supplier MakeMake-buy issue Major financial commitment Hard to do all things well Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Finished Goods (Customers) 19 .

Forms of Vertical Integration Iron Ore Silicon Farming Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Finished Goods (Customers) Steel Integrated Circuits Flour Milling Automobiles Distribution Circuit Boards System Computers Watches Calculators Dealers Baked Goods 20 .

calculators Baked Goods Flour Milling Silicon Farming 21 .Vertical Integration Can be Forward or Backward Vertical Integration Raw material (suppliers) Backward Integration Current Transformation Forward Integration Finished goods (customers) Examples of Vertical Integration Iron ore Steel Automobiles Distribution System Dealers Integrated Circuits Circuit boards Computers. watches.

Keiretsu Network Strategy   Japanese word for µaffiliated chain¶ System of mutual alliances and crosscross-ownership  Company stock is held by allied firms  Lowers need for short-term profits short-  Links manufacturers. distributors. suppliers. & lenders  µPartnerships¶ extend across entire supply chain 22 .

Also known as hollow corporations.Virtual Companies   Companies that rely on a variety of supplier relationships to provide services on demand. or network corporations 23 .

only until opportunity is met © 1995 Corel Corp. designing  May be long or short-term short Usually. editing. 24 .   Each contributes core competencies Typically provide services  Payroll. faxes. Internet etc.Virtual Company Strategy  Network of independent companies  Linked by technology  PC¶s.

Managing the Supply-Chain Supply-  Options:          Postponement Channel assembly Drop shipping Blanket orders Invoiceless purchasing Electronic ordering and funds transfer Stockless purchasing Standardization Internet purchasing (e-procurement) (e25 .

Managing the Supply-Chain .Other Options Supply-      Establishing lines of credit for suppliers Reducing bank ³float´ Coordinating production and shipping schedules with suppliers and distributors Sharing market research Making optimal use of warehouse space 26 .

Successful Supply-Chain Management Requires: Supply-    A mutual agreement on goals Trust Compatible organizational cultures 27 .

ORGANIZATION STRUCTURE SUPPLY CHAIN MANAGEMENT 28 .

GSCM Mission The Gillette Company will be as highly recognised and admired by our customers. 1-38 © 2001 The Gillett e Company 29 . and employees for Supply Chain performance as we are for our product development and support of global brands. We will become World Class in Planning & Executing Product Delivery from Source to Customer¶s Shelf. shareholders.

Director Transportation Local P.ORGANIZATION STRUCTURE ± SUPPLY CHAIN MANAGEMENT Managing Director Chief Executive Secretary CFO/Finance Director Procurement Manager Imports Sales Director Warehouse Manager Supply Chain Director Production Control R. M. Operation Director Expediting Manager MRP Marketing Director H. Outsource Documentation 30 0 . M. MRPM CRM Contract F. S. R.

31 . Requires performing order receipt and processing. handling return merchandise. Includes the responsibility to coordinate with marketing planning in such areas as pricing. and outbound transportation within a supply chain.Market Distribution Operating Concerns Market Distribution: Activities related to providing customer service. deploying inventories. storage and handling. delivery standards. The primary market distribution objective is to assist in revenue generation by providing strategically desired customer service levels at the lowest total cost. promotional support. customer service levels. and life-cycle support.

handling. 32 . transportation. Requires master schedule planning and performing work-in-process storage. and supporting manufacturing operations. scheduling.Manufacturing Support Operating Concerns Manufacturing Support: Activities related to planning. and time phasing of components. Includes the responsibility for storage of inventory at manufacturing sites and maximum flexibility in the coordination of geographic and final assemblies postponement between manufacturing and market distribution operations.

receiving and inspection. Requires performing resource planning. order placement. hedging. and quality assurance. 33 . as well as research leading to new sources or programs. supply sourcing. inbound transportation. supply continuity. Includes the responsibility to coordinate with suppliers in such areas as scheduling. negotiation.Procurement Operating Concerns Procurement: Activities related to obtaining products and materials from outside suppliers. The primary procurement objective is to support manufacturing or resale organizations by providing timely purchasing at the lowest total cost. storage and handling. and speculation.

and quality)  Increasing global competition (growing competition for scarce resources.Purchasing Factors increasing the importance of purchasing today:  Tremendous impact of material costs on profit (60(6070% of each sales Rupee is paid to material suppliers)  Popularity of just-in-time manufacturing (supply just-indeliveries must be exact in timing. quantity. and a geographically ³stretched³stretchedout´ supply chain) 34 .

Mission of Purchasing ³The mission of purchasing is to sense the competitive priorities necessary for each major product/service (low production costs. high quality /services. fast and on-time deliveries. and flexibility) and to develop purchasing plans for each major product/service that are consistent with operations strategies´ 35 .

Mission of Purchasing  Develop purchasing plans for each major product or service that are consistent with operations strategies: Low production costs Fast and on-time deliveries onHigh quality products and services Flexibility     36 .

Purchasing Management      Maintain data base of available. qualified suppliers Select suppliers to supply each material Negotiate contracts with suppliers Act as interface between company and suppliers Provide training to suppliers on latest technologies 37 .

Procurement   Purchasing is normally associated with a functional activity Procurement/Sourcing should be viewed as a strategic activity for the business. 38 .Purchasing vs.

Purchasing vs. Sourcing (cont¶d) Purchasing Mentality One contract at a time Win-lose Immediate returns Secretive Current needs can be met Lowest purchase price Multiple suppliers Infrequent interaction Criticism Buyer-sales relationship Safety in numbers Quality inspected Inventory as safeguard Sourcing Mentality Continual Improvement Win-win Long-term perspective Trusting Strategic fit exists Total cost of ownership Supply-base reduction Frequent interaction Constructive evaluations Cross-functional relationship Safety in knowledge Quality at source Information as safeguard 39 .

Supplier Development Through Procurement

The Marketing Viewpoint Supplier
Marketing Initiative

Purchaser
Purchasing Response

The Procurement Viewpoint Supplier
Procurement Initiative Marketing Response 40

Purchaser

Importance of Sourcing  

In the average manufacturing firm purchased goods and services account for 55% of every sales Dollar Direct labor costs account for only about 10% of the sales dollar

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Procurement¶s Potential Payoff 

Beginning Position Sales $100,000,000 Purchases(55%) 55,000,000 Labor (15%) 15,000,000 Other (22%) 22,000,000 PrePre-tax profit (8%) 8,000,000 
   

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Procurement¶s Potential Payoff

Reduce purchase cost b 10% ales Purchases Labor Other Pre-tax Profit
$100,000,000 4 , 00,000 15,000,000 22,000,000 13,500,000

I crease Reduce labor sales b 68% cost b 36%
$168,000,000 2,400,000 25,200,000 36, 60,000 13,440,000 $100,000,000 ,000,000 ,600,000 22,000,000 13,400,000

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Major Categories for the Components of Total Cost of Ownership

Total Cost of Ownership

Pre-transaction Components 1. Identifying need . Investigating sources . Qualifying sources . Adding supplier to internal systems 5. Educating : ‡supplier in firm¶s operations ‡firm in supplier¶s operations

Transaction Components 1. Price .Order placement/ preparation . Delivery/ transportation . Tariffs/ duties 5. Billing/ payment 6. Inspection 7. Return of parts 8. Follow-up and correction

Post-transaction Components 1. Line fallout . Defective finished goods rejected before sale . Field failures . Repair/ replacement in field 5. Customer goodwill/ reputation of firm 6. Cost of repair parts 7. Cost of maintenance and repairs

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Major Trends in Procurement 

     

Fewer sources of supply will be used Buyers will be more concerned with final customer satisfaction Buyers will focus on ³lead supplier´ relationships Buyers will drive shorter cycle times Design engineers and buyers will be part of sourcing teams Global sourcing will increase e-procurement will have a major impact-not all of it will be impactpositive for supply chain integration 


buying exchanges auction sites

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E-Chemicals 46 .

less order cost duplication Combining shipments .greater supply continuity Larger purchasing department .lower transportation costs Better overall control 47 .Advantages of Centralized Purchasing       Buying in large quantities .better prices More clout with suppliers .buyer specialization Combining small orders .

Purchasing Process Material Requisition Request for Quotations Select Best Supplier Purchase Order Receive and Inspect Goods From any department. price. warehouse 48 . to selected supplier From supplier. dependability From purchasing. quality control. to purchasing From purchasing. to receiving. to potential suppliers Based on quality. lead time.

Requisition date Item master code Description of material or content Used in product Unit of measure Specification Lead time Sourcing data :supplier or producer Mode of transport Economic order lot size (packing unit) Shelf life restriction Material handling requirement (control temperature) Documents to accompany with the material            49 .Content of Material Requisition    Requisition no.

50          . Required date Authorized signature etc.Content of Material Requisition    Item master code Quality control analysis days (quarantine) Reorder quantity Maximum inventory Standard price Duty and sales tax and other border crossing charges data Clearing agent or mode of transportation while handling locally Certificate of origin Labeling specification Any special handling restriction etc.

installation. accidental.Content of Material Requisition  Item master code Capital goods Equipment. preannual preventive.        51 . consignment sales. parts. (supplier credit. trial. Financial package.) Insurance Commissioning. after sales service. wet leasing etc. leasing. subassembly Method of delivery Maintenance. machinery. pre-post.

invitation quotation     Will be address to the enlisted supplier Date of quotation Deadline for the quotation to be received All the details as mentioned on the companies master data Financial and payments procedure Method of payment Term of payment Negotiable documents Companies bankers (L/C.) Bullet delivery.Content of quotation. Contract. Usance. or partial shipment allowed Penalty clause Margin or deposit with the tender or bank guarantee Insurance Title of good transfer          52 .

         53 . Is it a revolving contract or one time delivery Condition for the visit of site Specimen samples Condition for the approval of sample etc.invitation quotation      Tentative date of intimation or opening of quotation.Content of quotation. Capital goods Turn key Installation Training After sale service Maintenance contract Free maintenance period Pregnancy period before the delivery Supplier credit Leasing facility etc.

sterling) Credit (local L/C. letter of aware ness Loading and unloading Transportation Insurance Freight collect. usd. InOutsourcing Importing in bulk or mix Term offered Price (rupees. contract. euro.Selection of supplier ±sourcing  Bench mark for spread sheet analysis Lead time Location of sourcing site Local Imports In-house configuration. freight prepaid              54  .

source key. notice period etc. parachute clause. 55        . emergency. Configuration. installation. divorce.Selection of supplier ±sourcing       Bench mark for spread sheet analysis Term offered (more) Lot size Negotiation documentation charges L/c opening commission on beneficiary accounts Accessibility (quick response. etc. data from the contemporaries Maintenance service post delivery After sale service Turn key ---projects ---projects Implementation. replenishment Past experience Credibility ±financial. trial commissioning .

other terms and conditions. 56 Documentation required . advance. l/c contract. guarantee. Financial terms Delivery date Method of shipment Lot size Partial shipment Maintenance contract Freight and other charges Margin.Purchase order              Date of order Purchase order number Reference (indent number or confirmation) Maximum detail from item master code. letter of awareness commitment.

standards.) Validation data Shelf life Guarantee Insurance condition Any special mode of handling Loading unloading Freight etc.Purchase order          Authorized Any special term (pre-shipment samples. quality (precontrol specification. 57 .

gift coupon during festivals and holidays season. Accepting on sharing basis indenting commission within or outside the country Bid rigging. function cards. Accepting gifts such as expensive perfumery. cloths. and accepting large sums of cash. 58 . dinners. liquor. accepting bribes. foreign trips.Allegations of improper Behaviour by Buyer     In exchange for cash and gifts. theft and tax evasion. allowing supplier to store tools and park vehicles on company property and awarding contracts to suppliers without bidding.

59 .Allegations of improper Behaviour by Buyer       Payment processing on receipt of kickback Approval of product quality on receipt of kickback Accepting less quantity of goods in exchange of bribes Accepting lot of bribes in acceptance enlistment of approved suppliers or contractors Benami Transaction through their own respective companies Opening their own respective buying houses or agency and making the purchases from them.

Guidelines for Ethical Behaviour in Purchasing   The National Association for Purchasing Managers (NAPM) has developed a set of three principles and 12 standards to help guide ethical behaviour in purchasing. These are the principles: Loyalty to your organization Justice to those with whom you deal Faith in your profession From these principles are derived the NAPM standards of purchasing practice (domestic and international)    60 .

credits. actions. and communications Demonstrate loyalty to the employer by diligently following the lawful instructions of the employer. using reasonable care and only authority granted. and the acceptance of gifts. 61 . loans.Guidelines for Ethical Behaviour in Purchasing     Avoid the intent and appearance of unethical or compromising practice in relationships. or services from present or potential suppliers that might influence or appear to influence purchasing decisions. Refrain from any private business or professional activity that would create a conflict between personal interests and the interests of the employer Refrain from soliciting or accepting money. entertainment favours. or prejudicial discounts.

Guidelines for Ethical Behaviour in Purchasing     Handle confidential or proprietary information belonging to employers or suppliers with due care and proper consideration of ethical and legal ramifications and governmental regulation Promote positive supplier relationships through courtesy and impartiality in all phases of the purchasing cycle. 62 . Refrain from reciprocal agreements that restrain competition Know and obey the letter and spirit of laws governing the purchasing function and remain alert to the legal ramifications of purchasing decisions.

disadvantaged. customs. and minorityminority-owned businesses. Discourage purchasing involvement in employers sponsored programs of personal purchases that are not business related.Guidelines for Ethical Behaviour in Purchasing     Encourage all segments of society to participate by demonstrating support for small. Enhance the proficiency and stature of the purchasing profession by acquiring and maintaining current technical knowledge and the highest standards of ethical behavior Conduct international purchasing in accordance with the laws. and practices of foreign countries 63 .

. patent. tax.Buyers¶ Duties        Know the market for their commodities Understand the laws. contract....« Process purchase requisitions and quotation requests Make supplier selections Negotiate prices and conditions of sale Place and follow-up on purchase orders followMaintain ethical behavior 64 .

Make-orMake-or-Buy Analysis Considerations in make-or-buy decisions: make-or Lower cost .purchasing or production?  Better quality .supplier or in-house? in More-reliable deliveries .supplier or in-house? Morein What degree of vertical integration is desirable?  Should distinctive competencies be outsourced? 65 .

2.Make/Buy Considerations Reasons for Making 1. 4. 2. Maintain core competencies and protect personnel from layoff Lower production cost Unsuitable suppliers Assure adequate supply Utilize surplus labor and make a marginal contribution 4. Frees management to deal with its primary business Lower acquisition cost Preserve supplier commitment Obtain technical or management ability Inadequate capacity 66 . 3. 5. Reasons for Buying 1. 5. 3.

10. 7. Reasons for Buying 6. 7. 9.Make/Buy Considerations . 8. Obtain desired quantity Remove supplier collusion Obtain a unique item that would entail a prohibitive commitment from the supplier Protect proprietary design or quality Increase or maintain size of company 8.Continued Reasons for Making 6. Reduce inventory costs Ensure flexibility and alternate source of supply Inadequate managerial or technical resources Reciprocity Item is protected by patent or trade secret 67 . 9. 10.

If part quality and delivery performance are about the same for the two alternatives. which alternative should be selected? 68 .Example: Make-or-Buy Make-or- A firm manufactures a product that contains a part requiring heat treatment. An analyst is trying to decide whether it is more economical to buy the heat treating service or perform the treatment in house. Pertinent data is shown on the next slide.

000 $13.000 $25.Example: Make-or-Buy Make-or- Number of parts annually Fixed cost per year Variable cost per part HeatHeat-Treat In-House In5.000 $0 $17.20 Purchase Heat-Treat HeatService 5.50 69 .

000 + 13. continued 70 .000 TC2 = FC2 + v2Q = 0 + 17.000) = $91.50(5.20(5.000) = $87.500 The firm should buy the heat-treating service (the heatsecond alternative).Example: Make-or-Buy Make-or-  Compute the total cost for each alternative TC = FC + vQ TC1 = FC1 + v1Q = 25.

000 parts per year will require heat treatment. By how many parts can the firm¶s requirements increase or decrease before in-house heat treating is more economical? Should inthe analyst rethink his/her decision? 71 .Example: Make-or-Buy Make-or- The analyst has assumed that 5.

FC2)/(v2. The analyst should give the decision more thought.814 If the firm¶s annual parts requirement increases by 814 (about 16%) or more.000 ± 0)/(17.20) Q = 5.Example: Make-or-Buy Make-or-  Compute the break-even parts quantity breakFC1 + v1Q = FC2 + v2Q Q = (FC1 . in-house heat treatment inwould be more economical.v1) Q = (25.50 ± 13. 72 .

Logistics  Logistics usually refers to management of: the movement of materials within the factory the shipment of incoming materials from suppliers the shipment of outgoing products to customers    73 .

Movement of Materials within Factories The typical locations from/to which material is moved: Incoming Vehicles Receiving Dock Quality Control Warehouse Work Center Other Work Centers Packaging Finished Goods Shipping Shipping Dock Outgoing Vehicles 74 .

     75 .Shipments To and From Factories  Traffic Traffic departments routinely examine shipping schedules and select: shipping methods time tables ways of expediting deliveries Traffic management is a specialized field requiring technical training in Department of Transportation (DOT) and Interstate Commerce Commission (ICC) regulations and rates.

Shipments To and From Factories  Distribution Distribution. is the shipment of finished goods through the distribution system to customers. Distribution. or physical distribution.   76 . A distribution system is the network of shipping and receiving points starting with the factory and ending with the customers.

which are then translated into gross requirements in the MPS at the factory. DRP uses MRP-type logic to translate regional MRPwarehouse requirements into central distributiondistributioncenter requirements.   77 .Shipments To and From Factories  Distribution Requirements Planning DRP is the planning for the replenishment of regional warehouse inventories.

Forecasted demand in current week        78 . but not yet placed.Shipments To and From Factories  Distribution Requirements Planning Scheduled receipts are previously-placed orders that previouslyare expected to arrive in a given week Planned receipt of shipments are orders planned. for the future Projected ending inventory is computed as: Previous week¶s projected ending inventory + Planned receipt of shipments in current week + Scheduled receipt of shipments in current week -.

Quantity = 50 SS = 10 Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments 2 40 3 30 4 40 5 40 79 .Shipments To and From Factories  DRP Time-Phased Order Point Record TimeWeek -1 1 30 50 60 80 40 10 50 20 50 50 30 50 Region. Warehouse #1 LT = 1 Std.

The third upcoming slide shows ± for the main distribution center ± scheduled receipts and last week¶s projected ending inventory for the same product. and last week¶s projected ending inventories for a single product. scheduled receipts. The DRP records on the next two slides show ± for the two regional warehouse ± the forecasted demand.Example: DRP Products are shipped from a company¶s main distribution center (adjacent to the factory) to two regional warehouses. 80 . Complete the DRP records.

Warehouse #1 LT = 1 Std.Example: DRP  DRP Record for Regional Warehouse #1 Week -1 1 80 100 200 Region. Quantity = 100 SS = 50 Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments 2 100 3 80 4 60 5 100 81 .

Example: DRP  DRP Record for Regional Warehouse #2 Week -1 1 200 220 Region. Quantity = 200 SS = 80 Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments 2 3 4 5 100 200 200 240 200 82 . Warehouse #2 LT = 2 Std.

Center LT = 1 Std. Quantity = 500 SS = 200 Gross Requirements (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments 2 3 4 5 83 .Example: DRP  DRP Record for Main Distribution Center Week -1 1 500 250 Main Distrib.

Example: DRP  Completed DRP Record for Regional Warehouse #1 Week -1 1 80 100 200 220 120 140 100 100 100 80 80 100 Region. Warehouse #1 LT = 1 Std. Quantity = 100 SS = 50 Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments 2 100 3 80 4 60 5 100 84 .

Quantity = 200 SS = 80 Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments 2 3 4 5 100 200 200 240 200 85 .Example: DRP  Completed DRP Record for Regional Warehouse #2 Week -1 1 200 220 320 120 120 200 200 200 80 80 200 200 200 Region. Warehouse #2 LT = 2 Std.

the timing and quantities of production in the factory are linked to the timing and quantities of demand at the regional warehouses    86 .Example: DRP  DRP Record for Main Distribution Center The ³gross requirement´ ( in row 1) for any week is determined by summing the ³planned orders for shipment´ for the same week at the two regional warehouses These gross requirements at the MDC are input to the master production schedule in the factory In other words.

Center LT = 1 Std.Example: DRP  Completed DRP Record for Main Distribution Center Week -1 1 500 250 550 250 550 450 450 500 500 Main Distrib. Quantity = 500 SS = 200 Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments 2 3 4 5 200 300 200 100 87 .

Shipments To and From Factories  Distribution Resource Planning Distribution resource planning extends DRP so that the key resources of warehouse space. workers. and vehicles are provided in the correct quantities at the correct times.  88 . cash.

warehouses) with demand to be satisfied PerPer-unit cost of shipping from each source to each destination is specified Optimal solution minimizes total shipping cost and specifies the quantity of product to be shipped from each source to each destination    89 . factories) with limited supply to several destinations (ex.Analyzing Shipping Decisions  The ³Transportation Problem´ Problem involves shipping a product from several sources (ex.

Example: Minimizing Shipping Costs Pacer produces computer monitors in its three factories and ships them to five regional warehouses.50 3.10 $4.60 3.60 1.80 $2.30 continued 90 .60 $1.80 3.70 4. The factory-to-warehouse shipping costs per monitor factory-toare: Factory 1 2 3 Warehouse A B C D E $2.50 5.90 3.30 $3.90 2.70 3.50 4.

D = 5. C = 10.000. and E = 10.000.000.000.000.Example: Minimizing Shipping Costs The factories have the following capacities (monitors produced per month): 1 = 10. 2 = 20.000. B = 10. The warehouses need at least these numbers of monitors per month: A = 5. and 3 = 10. 91 .000.000. Use the POM Software Library to solve this transportation problem.

000 3 0 0 10.Example: Minimizing Shipping Costs  Solution Warehouse Factory A B C D E 1 5.000 0 0 5.000 0 0 Total monthly shipping cost = $97.) 92 .000 0 2 0 10.500 (Note: all warehouse demand is satisfied and no factory¶s capacity is exceeded.000 0 0 10.

Innovations in Logistics  New developments affecting logistics include: AllAll-freight airports InterInter-modal shipping In-transit rates InConsolidated shipments AirAir-freight and trucking deregulation Advanced logistics software       93 .

Warehousing   Warehousing is the management of materials while they are in storage. Warehousing activities include: Storing Dispersing Ordering Accounting     94 .

Warehousing    Record keeping within warehousing requires a stock record for each item that is carried in inventories. The individual item is called a stock-keeping unit stock(SKU). Stock records are running accounts that show: OnOn-hand balance Receipts and expected receipts Disbursements. and allocations    95 . promises.

ongoing (daily or weekly) physical counting of different SKUs     96 .periodic (end-of-year) (end-ofphysical counting of all SKUs at one time Today. inventory accounting was based on: periodic inventory accounting systems -. more and more firms are using: perpetual inventory accounting systems -.real-time realupdating of records as transactions occur cycle counting -.Inventory Accounting   In the past.periodic (end-of(end-of-day) updating of inventory records physical inventory counts -.

20% are Class B. and Class C items will be counted semi-annually. Class B items will be counted quarterly. how many will need to be counted daily? Assume 200 days per year are available for cycle counting. 97 .000 different SKUs (unique inventory items). Class A items will be counted monthly. semi5% of the firm¶s inventory items are classified as Class A. If the firm has 16.Example: Cycle Counting A company is implementing a cycle-counting cycleprogram. and 75% are Class C.

200 12.600 12.Example: Cycle Counting Class of Item A B C Total Number of Items per Class 800 3.400 98 .800 24.000 16.000 46.000 Number of Counts per Item per Year 12 4 2 Total Counts per Year 9.

400/200 = 232 items per day 99 .Example: Cycle Counting  Number of Inventory Items Counted Daily otal ounts per year = Number of available days per year = 46.

67 or 10 counters 100 . If the average cycle-counter cyclecan count 24 items per day.Example: Cycle Counting The cycle-counting personnel must count 232 cycleinventory items per day. how many counters are needed?  Number of Cycle-Counting Personnel Required Cycle- Number of items counted er d y = Number of items er d y er counter = 232/24 = 9.

IBM. Found in 1988 i2 Technologies Inc. Cocaand Texas Instruments.com) 1999 Information Week magazine. including Compaq. Ford. The software helps companies to better manage inventories and manufacturing capacities by using 101 . Dell. Black and Decker. I2 Technologies ³Rhythm software owns 13 percent of the market for supply chain management software with more than 800 customer companies worldwide. develops software for factories to manage the delivery of components and the shipment of products. (www. General Motors.Top Selling Supply Chain Management Software   In 1980 a young engineer in Dallas named Sanjiv Sidhu saw a business opportunity in the scientific observation that even the smartest people can only juggle as many as nine variables when making decisions. Coca-Cola. With that in mind he developed computer software for shop-floor managers based on artificial shopintelligence and advanced simulation models.i2. Product of the year awards..

According to Mr. Financial and operations planning. Companies can then reinvest much of the money in product development or building efficiencies.      102 . demand fulfillment.. and reduced risk of damage or obsolescence. Sidhu the savings come from reduced borrowing. And customer relationship management A typical $ 1 billion-a-year manufacturer carrying $250 billionmillion inventory can comfortably cut inventory to less than $100 million with better supply chain management. Demand planning. The Rhythm software also includes applications for product Product life cycle management Supply planning.Software ---continued ---continued   Simulation models instead of the rules of thumb that have traditionally been applied to managing plants. lower storage costs.

The expanded order quantity now exceeds finished goods inventory.  103 . De-expediting Demeans slowing down an order. Some of these sort of events are: A customer increased the quantity of products ordered. and additional products must be quickly produced.Expediting  Expediting is the focusing of one or more person¶s attention on a particular order or batch of materials for the purpose of speeding up the order through all or part of the entire supply chain. Expediting or dedeexpediting is necessary usually because unforeseen events have caused an order for materials or products to be late or early.

Emergency shipping procedures must be employed in order to get the parts in house in time to avoid a stockout or disruption of the production processes. The batch must be quickly transferred ahead of other materials if the annealing process is not to be delayed. the customer calls and wants to delay the shipment for three weeks. The work in process should be slowed and rescheduled so that the product is completed when the customer wants it shipped. After a special order for an electric generator has been started in production. 104 . Parts being processed in heat-treat have encountered heattechnical difficulties.Expediting    A Supplier fails to ship an order for materials when promised.

Expediting completes the materials cycle that proceeds from acquisition of materials to the delivery of finished goods into customer¶s hands. customer demand. Material management must be flexible enough to accommodate these uncertainties by reacting quickly when the unexpected happens. 105 .Expediting   Expediting most often is necessary because of the uncertainties presents in production systems. material delivery times. and in-house processing times are but a few of inthese uncertainties. devise quick solutions as they occur. and this activity helps make supply chains flexible. override policy. Expediting is periodically performed by all materials management employees. make telephone calls and collect past favours. and other tactics of expediting are some of the important ways that managers made materials systems work effectively and get the right quantity of the right material to the right place at the right time. The means to change procedures.

Measuring the Performance Materials Managers         Level and value of in-house inventories inPercentage of orders delivered on time Number of stockouts Annual cost of materials Annual cost of transportation Annual cost of warehouse Number of customer complaints Other factors 106 .

week .Material Management Performance In Multinational Companies Performance Criteria ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Number of supplier for each items Number of purchasing agent RS 100 mln.5% 00 . minut % 0. Cost of purchasing as % of purchases Time required to perform an evaluation Time required to place an order Percentage of late deliveries Percentage of defects Number of material stockout per year All Companies Multinational 5 5.8% 0. % weeks 6 weeks % 1. 0.0001% 107 . .

108 . and checking the status of orders. more and more companies have become involved in e-business. communication. customer service. more e-business applications will undoubtedly be developed. eE-business refers to using the Internet to conduct or facilitate business transaction. inventory management. submitting orders.E-Business & Supply Chain Management    Internet has grown and evolved. purchasing. E-transaction among companies are referred to as business to business (B2B) transaction or eecommerce. As the Internet continues to evolve. such as sales.

Internet based e-commerce is steadily replacing EDI systems ethat were popular in 1980 and 1990. E documentation Boston Consulting Group has conducted the research and according to them E-business market at the moment is 1 Ebillion but by the end of 2003 2. Information like pricing. EDI systems allow two companies to electronically conduct business transactions with each other.0 trillion. but they require special computer software and hardware and are typically much more expensive. and availability of parts throughout the supply chain. location of materials. One of the most important impacts of the Internet and eebusiness in supply chain management is the availability of instantaneous information. 109 .E-Business & Supply Chain Management     In the last few years e-business has had a significant impact on esupply chain management activities (E-trucking) E-cargo (EEmanagement. status of shipments.

DHL. shipping.mysap. material handling system all have change Package carriers such as FedEx.E-Business & Supply Chain Management      E-mail system has allowed immediate follow up and have reduced the operational cost of supply chain www. procurement. TCS experienced substantial increase in the number of packages they deliver for companies due to the growth of eebusiness 110 .com (as a platform for various companies to conduct supply chain transaction Direct sales to customer through web Function likes warehousing. Time Matters. UPS. transportation system.

5B. CSCO $ 1.5B CSCO $70MM SLR $ 05MM SCI $1. B.´) for 1st PC program Emergence of modern N. B 1997 ± 1998 Asian Fiscal Crisis 1996 Telecom Act 1999 ± 000 Internet Bubble 1991 Recession Japan Recession 000 Y K 001 Recession 1990 1980 1980¶s IBM hires SCI (³Space Craft Inc. SCI $8. SLR $17B. American EMS Model Emergence of Outsourcing Non-Core Competencies as Mega-Trend ± ³Globalization´ 111 . B 001 China granted entry WTO Future? Total Supply Chain More Design/Profit Demand Creation Superior IT Services Optics Software Coding MEMS IPO¶s Late 1980¶s: SUNW (1986) SLR (1989) 1990 Sales: SUNW $ .EMS Timeline 2000 Sales: SUNW: $19.

132 29.438 65.362 57.062 9.378 56.508 29.135 25.265 33.407 50.701 19.486 23.215 14.119 63.732 10.359 39.543 9.808 49.895 17.051 110.632 14.572 8.382 29.430 34.812 47.920 15.888 25.523 7.507 43.921 14.Top 25 OEM¶s Annual Sales (millions) 2001 2000 1999 78.996 112 .531 28.298 125.234 55.491 8.741 17.888 50.955 9.222 25.383 38.554 42.396 87.023 23.867 16.022 16.158 4.502 18.679 13.388 10.622 9.240 26.525 85.935 13.851 11.932 42.585 17.004 37.930 57.205 25.812 10.446 19.387 30.977 8.945 25.594 13.224 31.865 27.382 28.211 49.329 25.198 51.567 58.481 19.679 128.409 50.289 32.269 9.917 44.593 18.039 50.955 29.060 14.650 9.168 31.334 10.476 25.160 27.005 Annual COGS 2001 2000 52.982 72.093 46.567 29.386 23.161 66.334 16.938 10.290 23.445 49.932 44.730 19.396 24.710 30.990 25.586 22.137 13.481 8.834 13.652 25.364 22.832 17.960 15.010 24.201 16.793 48.456 36.791 17.657 56.633 30.321 57.763 28.945 15.022 20.548 30.099 8.580 32.714 15.487 32.910 22.993 14.509 47.857 20.995 34.891 28.519 26.950 % COGS 100% 100% 100% 100% 100% 30% 100% 100% 100% 100% 50% 100% 100% 100% 100% 100% 100% 100% 80% 80% 100% 20% 100% 40% 100% Customer Siemens Sony Matsushita Hewlett-Packard Fujitsu GE Toshiba NEC Dell Compaq IBM Motorola Lucent/Ascend/Stratus Nokia Alcatel Ericsson Johnson Controls Nortel Honeywell Raytheon Xerox Boeing Emerson Electronics Lockheed Martin Cisco 1999 49.291 16.517 19.696 15.530 18.254 49.623 71.855 15.866 88.735 16.759 16.217 23.674 35.716 12.065 31.839 19.286 32.184 22.

884 8.758 921 1.060 752 1.431 844 576 1.752 5.004 9.400 932 1. Venture Manufacturing Benchmark Electronics SYNNEX Information Technology Unversal Scientific Industrial ACT Manufacturing Plexus Viasystems Omni Industries VOGT Electronic PEMSTAR MCMS SMTC Maufacturing Teradyne Connection Systems Saturn Electronics & Engineering Electronics Manufacturing Service Finmek Electornics Group Kimball Electronics Manufacturing Service Annual Revenue (millions) 2001 2000 1999 16.433 1.297 8.713 9.505 1.277 1.225 4.Top 25 EMS Players EMS Solectron Flextronics Celestica SCI Systems (acquired by Sanmina) Samina Jabil Circuit Elcoteq Network Manufacturers Service Ltd.482 1.219 10.522 1.974 4.372 1.475 1.923 1.740 2.998 2.149 16.086 3.705 878 1.538 1.371 696 900 877 492 784 665 168 400 812 380 420 430 696 567 400 350 611 441 612 783 452 390 500 278 433 498 257 389 447 370 366 421 319 367 336 113 .186 1.146 7.948 12.124 3.217 4.

Supply Chain Management Production Planning 114 .

Overview      ProductionProduction-Planning Hierarchy Aggregate Planning Master Production Scheduling Types of Production-Planning and Control Systems ProductionWrapWrap-Up: What World-Class Companies Do World- 115 .

Production Planning Hierarchy LongLong-Range Capacity Planning Aggregate Planning Master Production Scheduling Production Planning and Control Systems Pond Draining Systems Push Systems Pull Systems Focusing on Bottlenecks 116 .

days) Pond Draining Systems Push Systems Pull Systems Focusing on Bottlenecks 117 .Production Planning Horizons LongLong-Range (years) MediumMedium-Range (6(6-18 months) ShortShort-Range (weeks) LongLong-Range Capacity Planning Aggregate Planning Master Production Scheduling Very-ShortProduction Planning and Control Systems Very-Short-Range (hours .

Materials. Machines Pond Draining Systems Push Systems Pull Systems Focusing on Bottlenecks 118 .Production Planning: Units of Measure Entire Product Line Product Family Specific Product Model LongLong-Range Capacity Planning Aggregate Planning Master Production Scheduling Production Planning and Control Systems Labor.

(3) utilities. size and capacities. (4) workforce schedules.Range (6-18 months) Aggregate Planning Short-Range (several weeks to a few months) Master Production Scheduling Resources required to make specific product model: e. part-time employees. Medium. overtime.g. (4) facility modifications. (3) shop-floor schedules ± machine changeovers. layouts.. Push Systems (MRP) Used in all types of production. (3) processing plans ± new production technology. (2) major supplier plans and amount of vertical integration. hiring. vacations. new production processes.g. Division operations managers make plans for (1) employment ± layoffs. production capacities. Ford F-150 Long Range Capacity Planning Description Executives such as vice-president of operations make longrange plans for (1) facilities ± plant locations. Pull Systems (JIT) Used in all types of production. labour hours. Best for products with truly random demand.g.Production Planning in Manufacturing Planning Horizon Long-Range (years) Units of Measure Entire product lines: e. (2) schedules of purchased materials. recalls. Ford F-series trucks/ A specific product model: e. all Ford trucks. Production Planning & Control Systems Factory operations managers make plans for (1) production schedules of parts and assemblies to be manufactured. PondDraining Systems Used in all types of production. but more benefits obtained in job shops. (2) inventories. materials and components . batch movements. Factory operations managers make plans for master production schedules ± the quantity and timing of the production of finished goods and end items. new systems of automation. Product family: e..g. (5) material ± supply contracts. but most successful applications are in repetitive manufacturing Focusing on Bottlenecks (TOC) Used in all types of production. but more benefits obtained in job shops 119 .

Why Aggregate Planning Is Necessary     Fully load facilities and minimize overloading and under loading Make sure enough capacity available to satisfy expected demand 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 available 120 .

inventory level and production rate 121 .to shortmediummedium-term capacity.Inputs    A forecast of aggregate demand covering the selected planning horizon (6-18 months) (6The alternative means available to adjust short. to what extent each alternative could impact capacity and the related costs The current status of the system in terms of workforce level.

Outputs   A production plan: aggregate decisions for each period in the planning horizon about workforce level inventory level production rate Projected costs if the production plan was implemented    122 .

more       123 . . .MediumMedium-Term Capacity Adjustments    Workforce level Hire or layoff full-time workers fullHire or layoff part-time workers partHire or layoff contract workers Utilization of the work force Overtime Idle time (undertime) Reduce hours worked .

MediumMedium-Term Capacity Adjustments   Inventory level Finished goods inventory Backorders/lost sales Subcontract   124 .

Master Production Scheduling (MPS) 125 .

Objectives of MPS    Determine the quantity and timing of completion of end items over a short-range planning horizon. Avoid overloading or underloading the production facility so that production capacity is efficiently utilized and low production costs result. 126 . shortSchedule end items (finished goods and parts shipped as end items) to be completed promptly and when promised to the customer.

20% +/Change Firm Full Open 127 Change Change .5% +/.10% +/.Time Fences  The rules for scheduling 2 -4 weeks 4 -6 weeks 6+ weeks 1 -2 weeks No Change Frozen +/+/+/.

Time Fences  The rules for scheduling: Do not change orders in the frozen zone Do not exceed the agreed on percentage changes when modifying orders in the other zones Try to level load as much as possible Do not exceed the capacity of the system when promising orders. pull it into the earliest possible week without missing the promise.      128 . If an order must be pulled into level load.

planned receipts) Production capacity (output rates. more     129 . due dates) Inventory status (balances. .Developing an MPS    Using input information Customer orders (end items quantity. planned downtime) Schedulers place orders in the earliest available open slot of the MPS . due dates) Forecasts (end items quantity. .

and make the detailed calculations for the MPS     130 .Developing an MPS  Schedulers must: estimate the total demand for products from all sources assign orders to production slots make delivery promises to customers.

131 . The production planner is developing toan MPS for scanners for the next 6 weeks.500 scanners.Example: Master Production Scheduling Arizona Instruments produces bar code scanners for consumers and other manufacturers on a produceproduceto-stock basis. The minimum lot size is 1. There are currently 1.120 scanners in inventory. The estimates of demand for scanners in the next 6 weeks are shown on the next slide. and the safety stock level is 400 scanners.

Example: Master Production Scheduling WEEK 1 CUSTOMERS BRANCH WAREHOUSES MARKET RESEARCH 2 3 4 5 6  Demand Estimates 500 1000 500 200 700 1000 200 300 400 500 300 200 0 50 0 0 0 0 0 10 0 0 0 132 PRODUCTION RESEARCH 10 .

Example: Master Production Scheduling  Computations 1 2 WEEK 3 4 200 500 0 0 5 6 CUSTOMERS BRANCH WAREHOUSES MARKET RESEARCH PRODUCTION RESEARCH TOTAL DEMAND BEGINNING INVENTORY REQUIRED PRODUCTION ENDING INVENTORY 500 1000 500 200 0 10 300 50 0 400 0 0 700 1000 300 10 0 200 0 0 710 1350 900 1120 410 0 410 700 1010 1200 950 560 1160 460 0 1500 1500 1500 1500 950 1250 133 560 1160 460 .

Example: Master Production Scheduling  MPS for Bar Code Scanners WEEK 1 2 3 4 0 5 6 SCANNER PRODUCTION 0 1500 1500 1500 1500 134 .

the effects on the production work centers are checked Rough cut capacity planning identifies under loading or overloading of capacity 135 .RoughRough-Cut Capacity Planning   As orders are slotted in the MPS.

what changes do you recommend? 136 . Does enough capacity exist to execute the MPS? If not. Each printer requires an average of 24 labor-hours.Example: Rough-Cut Capacity Planning Rough- Texprint Company makes a line of computer printers on a produce-to-stock basis for other produce-tocomputer manufacturers. Texprint¶s rough-draft of an MPS for its printers roughis shown on the next slide. levelThis plan provides a weekly capacity of 5. The plant uses a backlog laborof orders to allow a level-capacity aggregate plan.000 laborlaborhours.

Example: Rough-Cut Capacity Planning Rough-  RoughRough-Cut Capacity Analysis WEEK 1 PRODUCTION LOAD CAPACITY UNDER or OVER LOAD 2 3 4 5 TOTAL 1030 100 200 200 250 280 2400 4800 4800 6000 6720 24720 5000 5000 5000 5000 5000 25000 2600 200 200 1000 1720 280 137 .

Some of the production scheduled for week 4 and 5 should be moved to week 1.   138 .Example: Rough-Cut Capacity Planning Rough-  RoughRough-Cut Capacity Analysis The plant is underloaded in the first 3 weeks (primarily week 1) and it is overloaded in the last 2 weeks of the schedule.

.. work with Marketing to understand shifts in demand patterns Produce to order. focus on incoming customer orders Produce to stock ..Demand Management      Review customer orders and promise shipment of orders as close to request date as possible Update MPS at least weekly..... focus on maintaining finished goods levels Planning horizon must be as long as the longest lead time item 139 .....

Types of Production-Planning Productionand Control Systems 140 .

Types of Production-Planning and Control Systems Production-     PondPond-Draining Systems Push Systems Pull Systems Focusing on Bottlenecks 141 .

The Pond-Draining Approach to Production Planning and Control PondSuppliers Produce Parts. Subassemblies Assemble Finished Products Customers 142 .

PondPond-Draining Systems     Emphasis on holding inventories (reservoirs) of materials to support production Little information passes through the system As the level of inventory is drawn down. orders are placed with the supplying operation to replenish inventory May lead to excessive inventories and is rather inflexible in its ability to respond to customer needs 143 .

and production to manage material flows Flows of materials are planned and controlled by a series of production schedules that state when batches of each particular item should come out of each stage of production Can result in great reductions of raw-materials rawinventories and in greater worker and process utilization than pond-draining systems pond- 144 .Push Systems    Use information about customers. suppliers.

The MRP System Orders / Forecast of Service Parts Inventory Transactions Data Inventory Status File Changes to Planned Orders Planned Order Schedule Master Production Schedule MRP System Primary Outputs Secondary Bills of Material File Outputs Planning Reports Performance Reports Exception Reports Inputs MRP Computer Program 145 Outputs .

WHAT WE HAVE DONE ACTION What .Material Requirements Planning (MRP) PEOPLE Master Schedule 1.When How Much 4. WHAT WE NEED TO DO ‡ MANUFACTURING ‡ PURCHASING PEOPLE 146 . WHAT WE PLAN TO DO PEOPLE Bills of Material & Routing MRP Inventory PEOPLE 2. HOW WE DO IT 3.

Bill of material for the chair (BOM) Back Cushion Adjuster mechanism Seat Cushion Base Unit Wheels Office Chair Back Cushion Chair Fram e Seat Cushion Fasteners (8) A djuster M echanism Base U nit W (5) heels Fasteners (3) 147 .

148 .The MRP Technique    This is proactive manner of inventory management This technique fundamentally explodes the end product demand obtained from the Master Production Schedule for a specified product structure (which is taken from Bill of Material) into a detailed schedule of purchase orders or production orders taking into account the inventory on hand. MRP is a simple logic but the magnitude of data involved in a realistic situation makes it computationally cumbersome.

The MRP Technique  Forecast End-Item Requirements EndNet The Requirements Against OnOn-Hand & Open Orders Plan The Start-Date (Based on StartManufacturing Lead Time) PEOPLE Master Schedule    Order The Component Items (Based on Purchasing Lead Time) 149 PEOPLE Bills of Material & Routings MRP Inventory PEOPLE ACTION What .When How Much PEOPLE .

Advantage of MRP ‡Reduction of inventory ‡Reduction in production and delivery lead times by improving co-ordination and avoiding delays ‡making commitments more realistic ‡Increased efficiency 150 .

Closed Loop MRP       In 1970 this system of MRP was evolved by modifying the MRP system and incorporating the capacity of organization in to account. Capacity of the organization was taken into consideration through incorporation of CRP (Capacity Requirement Planning) This created a feed back loop from the CRP module to MPS (Master Production Schedule) It is a series of functions not merely material requirement planning It contains tools to address both priority and capacity and to support both planning and execution It has provisions for feedback from the execution functions back to the planning functions. 151 .

Work Centre Assignments Convert Lots of Materials into Labour and/or Machine Load at Work Centers Rough . Standby Machines. Overtime and Subcontracting Plans 152 .The Capacity Requirements Planning Process Start Change MPS. Subcontracting. No Is Capacity Available? I Yes Firm Up the MPS Routing Plans. Reschedule Orders to Level Load TRIAL MASTER PRODUCTION SCHEDULE MPS SCHEDULE Planned Order Release for All Materials Yes Determine Routing for All Orders. etc.Cut Capacity Planning No Can Routing Be Charged to Improve Capacity? Labour and/or Machine Load Schedules No Can Capacity be Economically Changed? Yes Plan Overtime.

.... more uncertain the greater the need for safety stock MPS and MRP treated separately from Final Assembly Schedule(FAS) Use Modular Bill of Material 153  Assemble-toAssemble-to-Order Firms   .Issues in MRP  Safety Stock  Use depends on uncertainty of demand.

MRP I to MRP II   MRP I simply exploded demand (MPS) into required materials MRP II became Manufacturing Resource Planning which provides a closed-loop closedbusiness management system     Financial management Shop floor control Operations management Simulation capability 154 .

George Plossl) 155 . capacity requirements planning. production planning. it addresses operational planning in units. It is made up of a variety of functions.Manufacturing Resource Planning II A method for the effective planning of all resources of a manufacturing company. and inventory projections in dollars. master production scheduling. shipping budget. Manufacturing Resources Planning is a direct outgrowth and extension of closed loop MRP (Oliver Wight. sales and operations planning. Ideally. material requirements planning. Output from these systems is integrated with financial reports such as the business plan. purchase commitment report. and has a simulation capability to answer ³what if´ questions. financial planning in dollars. each linked together: business planning. and the execution support systems for capacity and material.

Resource Requirements Planning System Branch Warehouses Customer Orders R&D Market Research Forecast Customer Demand Estimated End Item Demands Needed Production of End Items Inventory Status of End Items Lot-Sizing and Safety Stock Policies Rough-Cut Capacity Planning Modifications to MPS Trial Master Production Schedule (MPS) Modifications to MPS Capacity (CRP) Material Requirements Planning (MRP) Requirements Planning No Materials Available Yes Yes Capacity Economically Available No Master Production Schedule (MPS) Material Requirements Plan Capacity Requirements Plan Purchasing Planning & Control Shop Floor Scheduling & Control 156 .

Inputs and Outputs of a Resource Requirements Planning System Functional Inputs Marketing Short-range demand forecasts Finance/Accounting Cash availability Inventory guidelines Production Capacity constraints Development of MPS Development of MRS Development of CRP Resource Requirements Planning Outputs Marketing End-item production schedule Finance/Accounting End-item production schedule Inventory level schedule Production MPS Work-center production schedules Capacity utilization data Planned material orders Planned material releases Shop-floor plans Engineering New design incorporation data Master Production Schedule (MPS) Engineering Change product designs Keep product structure file current Personnel Employee availability Purchasing Material supply availability Materials Requirements Planning ( MRP) Personnel Employee requirements schedule MIS Database System Inventory status files Product structure files Capacity Requirements Planning (CRP) Purchasing Planned orders Order releases Changes to planned orders MIS Database System Updated inventory status files 157 .

MRP II
TOP MANAGEMENT PLANNING

Business Planning Sales Planning Production Planning Rough Cut Capacity

Forecast & Customer Orders

158

MRP II
TOP MANAGEMENT PLANNING

Business Planning Sales Planning Production Planning Master Production Scheduling Material Requirements Planning Capacity Requirements Planning Rough Cut Capacity

Forecast & Customer Orders

Bills of Material & Inventory
OPERATIONS MANAGEMENT PLANNING

Routings (Operations)

Plan Achievable ?

NO

159

MRP II
TOP MANAGEMENT PLANNING

Business Planning Sales Planning Production Planning Master Production Scheduling Material Requirements Planning Capacity Requirements Planning Rough Cut Capacity

Forecast & Customer Orders

Bills of Material & Inventory
OPERATIONS MANAGEMENT PLANNING

Routings (Operations)

Plan Achievable ?

NO

YES
Purchasing
PLAN EXECUTION

Shop Floor Control

F E E D B A C K

Performance Measurement

160

The MRP II Process Financial Integration Foundation Business Planning OrderSales Planning Forecasting Processing Foundation Accounts Receivable Item Master Strategic Planning Planning Bills General Ledger (Configurable) I N V E N T O R Y Production Planning Master Production Scheduling Rough Cut Capacity Planning Capacity Requirements Planning Bill of Resources Bills of Material Departments Work Centers Routings Operations Management Planning Material Requirements Planning Accounts Payable Purchasing Cost Accounting Production Activity Control Performance Measurement Cost Standards Actuals Operation Execution and Control 161 .

Goals of MRP II       Realization of Company Objectives Control of Business Zero Shortages OnOn-Time Delivery Management of Changes Elimination of Waste 162 .

Benefits of Implementing MRP II  Reduced Inventory Levels Reduced Material Costs Reduced Operating Costs Increased Throughput Improved Customer Service Levels 163     .

and produce only that Raw materials and parts are pulled from the back of the system toward the front where they become finished goods RawRaw-material and in-process inventories approach inzero Successful implementation requires much preparation 164 .Pull Systems     Look only at the next stage of production and determine what is needed there.

Focusing on Bottlenecks    Bottleneck Operations Impede production because they have less capacity than upstream or downstream stages Work arrives faster than it can be completed Binding capacity constraints that control the capacity of the system Optimized Production Technology (OPT) Synchronous Manufacturing    165 .

Synchronous Manufacturing   Operations performance measured by throughput (the rate cash is generated by sales) inventory (money invested in inventory). . more    166 . and operating expenses (money spent in converting inventory into throughput) . .

and rope (information sent upstream of the bottleneck to prevent inventory buildup and to synchronize activities)    167 .Synchronous Manufacturing  System of control based on: drum (bottleneck establishes beat or pace for other operations) buffer (inventory kept before a bottleneck so it is never idle).

168 .WrapWrap-Up: World-Class Practice World-    Push systems dominate and can be applied to almost any type of production Pull systems are growing in use. Most often applied in repetitive manufacturing Few companies focusing on bottlenecks to plan and control production.

WrapWrap-Up: World-Class Practice World-    See materials management as key element in capturing global market share Form partnerships with suppliers Use computers extensively to manage logistics 169 .

End 170 .

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