Introduction Material Management

7/23/2019 Introduction Material Management

1/37


http://www.mdcegypt.com/Pages/Purchasing/Material%20Management/Introduction%20Material%20Management.asp 1/37

Management & Development Center Tuesday, September 01, 2015 10:50:55 PMAbout Us | Our Services | Training | Consulting |

M&DC /

Introduction to Material Management

Contents

1. Introduction to Materials Management

2. Production Planning System

3. Master Scheduling

4. Material Requirements Planning

5. Capacity Management

6. Production Activity Control

7. Purchasing

8. Forecasting

9. Inventory Fundamentals

10. Order Quantities

11. Independent Demand Ordering Systems

12. Physical Inventory and Warehouse Management

13. Physical Distribution

14. Products and Processes

15. Just-in-Time M anufacturing

16. Total Quality Management

1. Introduction to Material Management

1.1 Introduction

Wealth is measured by the output of goods and services produced in a given time.

Goods are physical objects and services are the performance of some useful function.

A productionfunction is needed to transformresourcesintouseful goods.

At eachstagein the development of the final product, valueisadded, thus creatingmore wealth.

To get the most value out of our resources, we design production processes that makeproducts most efficiently.

Once the processes exist, we need to manage the operation so it produces goods mosteconomically.

Managing the operationmeans planning for and controllingthe resourcesused in the

process: labor, capital and material.The major way in which management plans and controls is through the flow ofmaterials the right materials in the right quantities and at the right time.

1.2 Operating Environment

The most important factors affecting the environment in which we operate areGovernment, Economy, Competition, Customersand Quality.

Governmentregulation of business affects the way business is conducted.

Economicconditions influence demand for products or services and availability ofinputs.

Companies face global competition. Transporting materials is less costly today. Globalcommunications are fast, effective and inexpensive.

Customersexpect more from suppliers. Customer selection criteria include a fair price,

quality products and services, reduction in delivery lead-time, better pre and post salesservice, and product and volume and flexibility.

Qualitymust meet or exceed customer expectations.

Definitions

OrderQualifier- Minimum requirements that a supplier must meet to be a

Introduction to Material Management
http://www.mdcegypt.com/Pages/Training.asphttp://www.mdcegypt.com/Pages/Purchasing/Material%20Management/Introduction%20Material%20Management.asphttp://www.mdcegypt.com/Site%20Map.asphttp://www.mdcegypt.com/Pages/Services.asphttp://www.mdcegypt.com/Pages/contact.asphttp://www.mdcegypt.com/Pages/About.asphttp://www.mdcegypt.com/Pages/Consulting%20services.asphttp://www.mdcegypt.com/default.asphttp://www.mdcegypt.com/search.htmlhttp://www.mdcegypt.com/default.asp


2/37



viable competitor

OrderWinners- Competitive Characteristics that persuade a customer tochoose a particular product or service

Delivery LeadTime- Time from the receipt of an order to the delivery ofthe product. (From the customer perspective may include order prep time)

Manufacturing Strategies(Four Lead Time Strategies)

Pull Strategy (The Customer Pulls his needs)

Engineer-To-Order ETO

Designed to customer specificationProducts whose customer specifications require unique engineering designor significant customization. Each customer order requires a costestimate, and special pricing. These orders generally result in a unique setof components, bills of material, and production routingswww.leanmean-manufacturing.com/glossary2.html

Make-To-Order MTO

Standard design, produced only upon order

A manufacturing process s trategy where the trigger to begin m anufactureof a product is an actual customer order or release, rather than a marketforecast. For Make-to-Order products, more than 20% of the value-addedtakes place after the receipt of the order or release, and all necessarydesign and process documentation is available at time of order receipt.

Pull / Push Strategy

Assemble-To-Order ATO

Subassemblies produced, assembled upon order

" A production environment where a product or service can be madeafter receipt of a customer's order. The end item finished product isgenerally a combination of standard components and customdesigned components that meet the unique needs of a specificcustomer. Where options or accessories are pre-stocked prior tocustomer orders, the term assemble-to-order is frequently used."

www.leanmean-manufacturing.com/glossary2.html

Push Strategy (the Company pushes its products to the markets)

Make-To-Stock MTS :

Finished product made prior to order

"Make to Stock - A production environment where end item products

are usually finished before receipt of a customer order. Customerorders are generally filled from finished goods inventories, andproduction orders are used to replenish finished goods inventories"

www.leanmean-manufacturing.com/glossary2.html

Operation Decision Making

Manufacturing Strategy and Lead Time
http://www.leanmean-manufacturing.com/glossary2.htmlhttp://www.leanmean-manufacturing.com/glossary2.htmlhttp://www.leanmean-manufacturing.com/glossary2.html


3/37



1.3 The Supply Chain Concept

The supply chain system contains three Basic Elements:

Supply,

Production

Distribution

Supply chain includesallactivitiesand processes to supply a product or service to afinal customer.

Any number of companies can be linkedinthe supplychain. Sometimes called theValueChain.

The total chain can have any number of supplier/customer relationships.

The chain includes intermediaries such as wholesalers, warehouses, and retailers

Productor services usually flow from supplier to customer and design and demandinformationusuallyflow from customer to supplier

Traditional SC

Traditionally, management focused on internal operating issues, constraints andparameters. Suppliers were considered adversaries.

Conflicts in traditional systems often appear because differing departmentsmaximize departmental objectives without considering the impact to other parts of thesystem.

Growth of SC concept

The first major changeevolved through the explosive growth of Just-in-Time (JIT)concepts. Suppliers were viewedas partners

The growth of the supplychainconcept continues to be influenced by

The explosive growth in computercapability,

Softwareapplications (Enterprise Resource Planning) and the ability to linkcompanies electronically (Internet),

Growth in global competition,Growth in Technology leads to dramatic reductionin productlifecyclesandthe resulting design flexibilityand ability to effectivelycommunicate changesto suppliers and distributors.

The current SC concept

Emphasis was on trustintherelationship, i.e. elimination of receiving inspection,reduction in administrative paperwork replaced with the exchange of electronic data,mutual analysis of cost reductions and shared benefits, and shared product design.

To result an Optimal Performance,the supply chain of activities, from raw materialto final customer, should be managed as an extension of the partnership. This impliesthree critical issues: flowof materials, flow of informationelectronically and fundtransfers. More recently, the new trend is to manage the recovery, recyclingandreuse of material.

The need for SC Integration:

To manage a supply chain, try to efficiently plan material and information flowsto maximize cost efficiency, effectiveness, delivery, and flexibility.

This requires systems integration and reevaluating performance measures. Tomaximize profit, set objectives that provide better customer service, lowestproduction costs, lowest inventory investment, and lowest distribution cost.


4/37



Stress the need to supply customers with what they want when they want it andto keep inventories at a minimum

1.4 What Is Materials Management?

The problem is to balanceconflictingobjectives to minimize the totalof all the costsinvolved (maximize the use of the firms resources) and maximize customer consistentwith the goals of the organization.

This requiressome type of IntegratedMaterialsManagementor LogisticsOrganization responsible for supply, production and distribution. The name we are givingthis function isMaterialsManagement.

Reducing cost contributes directly to profit. Increasing sales increases direct costsof labor and materials so profit does not increase directly.

Manufacturing Planning and Control MPC

is responsible for the planning and control of the flow of materials through themanufacturing process and the primary

MPC activitiesare:

a. Production Planning includes:

Forecasting,

Master planning MPS

Material Requirements Planning MRP

Capacity Pl anning

b. Implementation and control (Production Activity Control)PAC

c. Inventorymanagement

Provide buffer against the differences in demand rates andproduction rates

There are Five Basic Inputs to the manufacturing planning and controlsystem MPC:

ProductDescription(engineering drawings, specifications andbill of material BOM),

Processspecifications,

Standardtime needed to perform operations,

Availablefacilities, and

QuantitiesRequired (independent demand).

Physical Supply / Distribution

Includes all activities involved in transporting goods, from the supplier to thebeginning of the production process, and from the end of the production processto the customer, including:

Transportation,

distributioninventory,

warehousing,

packaging,

materialshandling, and

orderentry.

Material Management Objectives

Maximize service and minimize cost.The objective is to be able to deliver whatcustomers want, when and where they want it, and do so at minimum cost.

To achieve this objective, materials management must make trade-offs between thelevel of customer service and the cost of providing that service.

As a rule, costs rise as the s ervice level increases, and materials management mustfind that combination of inputs to maximize service and minimize cost.

Material Management can do much to improve a company's profit

P/L Statement


5/37



P/L After a 10% reduction in materials and 5% in direct labor

60% increase in profit

To get the same increase by increasing sales

Profit = Sales- (Direct Material+ Direct Labor + 200,000)

160,000 = Sales - 0.5 Sales - 0.2 Sales - 200,000

360,000= 0.3 Sales

Sales = 360000/ 0.3 = $ 1,200,000

Direct Material = 1,200,000 x 0.5 = $ 600,000

Direct Labor = 1,200,000 x 0.2 = $ 240,000

2. Production Planning System

2.1 Introduction

A good planning s ystem must answer four questions of priority and capacity:

What are we going to make?

What does it take to make it?


6/37



What do we have?

What do we need?

Priority

As established by the marketplace, relates to what products are needed, how m any areneeded, and when they are needed.

Capacity

is the capability of manufacturing to produce goods and services (deliverables). Itdepends on company resources and the availability of material from suppliers.

2.2 Manufacturing Planning and Control System

The Five major levelsin the manufacturing planning and control system are:

1. Strategic Business Plan

2. Production Plan (sales and operations plan) SOP

3. Master Production Schedule MPS

4. Material Requirements Plan MRP

5. Purchasing and Production Activity Control PAC

Each level varies in

Purpose

Timespan (planning horizon)

Levelofdetail

Planning cycle (Frequency).

At each level, three questions m ust be answered:

What are the priorities --- how much of what is to be produced and when?

What is the available capacity --- what resources do we have?

How can differencesbetweenprioritiesand capacity be resolved?

Strategic Business Plan

It is senior managements statement of the broad direction of the firm, major goals andobjectives the company expects to achieve over the next two to ten years or more.

It is based on long-range forecasts and provides a framework that sets the goals andobjectives for further planning by marketing, finance, engineering andproduction/operations. The level of detail is not high.

It is concerned with general market and production requirements. It is often stated indollars rather than units.

Production Plan (PP)

Given the objectives set by the strategic business plan, production management isconcerned with the following:

The quantities of each product group or familythat must be produced ineach period,

The desired inventorylevels,

The resourcesof equipment, labor, and material needed in each period

The availabilityof the resourcesneeded.

For effective planning, there must be a balance between priority and capacity.

The planninghorizon is usually sixt o 18monthsand is reviewed perhaps each

monthor quarter.

Master Production Schedule (MPS)

MPSbreaksdownthe productionplan to show, for eachperiod, the quantityofeachenditem to be made.

Inputs to the MPS are

The productionplan,

the forecast for individualenditems,

salesorders,

inventories, and

existingcapacity.

The level of detail for the MPS is higher than for the production plan.

The planninghorizonusually extends from threeto18months but primarilydepends on the purchasingand manufacturingleadtimes.

Master scheduling describes the process of developing a master production schedule

The term master production schedule is the end result of the process.

Plans are reviewedand changed weeklyor monthly.


7/37



Material Requirements Plan (MRP)

MRP is a planforthe productionand purchaseof the components and/or servicesused in making the items in the MPS.

The MRP establishes when the components and services are needed to make eachend item.

The level of detail is high.

The planninghorizonis similart o MPS, extending from 3 to 18 months.

Purchasing and Production Activity Control (PAC)

PACrepresents the implementationand controlphase (executionphase).

Purchasing is responsible for establishing and controlling the flow of raw materials intothe factory.

PAC is responsible for planningand controlling the flowof workthrough the factory.

The planninghorizonis veryshort

The level of detail is high.

Capacity Management

At each level in the manufacturing planning and control system, the priority planmust be tested against the available resources and capacity of the manufacturingsystem.

The basic process is one of calculating the capacity needed to manufacture the priorityplan and of finding methods to make that capacity available.

If the capacity cannot be made available when needed then the plans must bechanged.

2.3 Sales and Operations Planning (SOP)

SOPis a process for continually revising the strategic business plan and coordinatingplans of the various departments.

SOP is a cross-functional business plan that involves sales and marketing, productdevelopment, operations, and senior management.

Operations represents supply, marketing represents demand.

The SOP is the forum in which the production plan is developed and a dynamic processin which the company plans are updated on a regular basis, at least monthly.

SOP ha several benefits:

Means of updating Strategic business plan

Means of managing change rather than reacting to change

Ensure that various department plans are realistic, coordinated and support thebusiness plan


8/37



Better management of production, inventory and backlog

2.4 Manufacturing Resource Planning (MRP II)

MRP II is a master game plan for all departments in the company and works from the topdown with feedback from the bottom up

This fully integrated planning and control system is called a manufacturing resourceplanning, or MRP II, system.

The phrase MRP II is used to distinguish the manufacturing resource plan (MRP II)from the materials requirement plan (MRP).

2.5 Enterprise Resource Planning (ERP)

Enterprise Resource Planning (ERP) is an accounting oriented information system foridentifying and planning the enterprise---wide resources needed to make, ship, andaccount for customer orders.

ERP encompasses the total company and MRP II is manufacturing.

2.6 Making the Production Plan

Based on the market plan and available resources, the production plan sets the limits orlevels of manufacturing activity for some time in the future.

The production plan sets the general levels of production and inventories over theplanning horizon.

Its prime purpose is to establish production rates that will accomplish the objective of thestrategic business plan, including inventory levels, backlogs (unfilled customer orders),market demand, customer service, low-cost plant operation, labor relations, and so on.

The plan must extend far enough in the future to plan for the labor, equipment, facilities,and material needed to accomplish it.

Establishing Product Groups

For planning purposes, a common unit or small number of product groups based onsimilarity of manufacturing processes is what is needed.

Manufacturing is concerned more with the demand for the specific kinds of capacityneeded to make the products than with the demand for the product.

Capacity is the ability to produce goods and services.

It means having the resources available to satisfy demand.

Capacity can be expressed as the time available or as the number of units or dollarsproduced in a given period.

The demand for goods must be translated into the demand for capacity.

This requires identifying product groups, or families, of individual products based onthe similarity of manufacturing process.

Usually the following can be varied to adjust capacity:

People can be hired and laid off, overtime and short time can be worked, andshifts can be added or removed.

Inventory can be built up in slack periods and sold or consumed during highdemand.

Work can be subcontracted or extra equipment leased.

Manufacturing management is responsible for determining the least-cost alternativeconsistent with the goals and objectives of the business.

Basic Strategies

Three or four basic strategies can be used in developing a production plan:

Chase (demand matching) strategy producing the amount demanded at anygiven time Inventory levels remain stable while production varies to meetdemand.


9/37



Productionleveling continually producing an amount equal to theaverage demand. Companies calculate their total demand over the timespan of the plan and, on the average, produce enough to meet it.Production leveling means the company will use its resources at a levelrate and produce the same amount each day it is operating. Theadvantage is that it results in a smooth level of operation that avoids thecosts of changing production levels. The disadvantage is that inventorybuild up during periods of low demand

Subcontracting means producing at the level of minimum demand andmeeting any additional demand through subcontracting. Costsassociated with excess capacity are avoided, and because production isleveled, there are no costs associated with changing production levels.The main disadvantage is that the cost of purchasing may be greaterthan if the item were made in the plant

Hybrid strategy is a combination of the other three strategies.Production management is responsible for finding the combination ofstrategies that minimizes the sum of all costs involved, providing thelevel of service required, and meeting the objectives of the finance andmarketing plans.

The objective in developing a production plan is to minimize the costs of carryinginventory, changing production levels, and stocking out (not supplying the customerwhat is wanted when it is wanted). The information needed to make a production planis as follows: forecast by period for the planning horizon, opening inventory, desiredending inventory, and any past-due customer orders (back orders).

Developing a Make-to-Stock Production Plan

Products are made and put into inventory before an order is received. Sale anddelivery are made from inventory.

Make to stock when

demand is fairly constant and predictable,

there are few product options,

delivery times demanded by the marketplace are much shorter than the timeneeded to make the product, and

product has a long shelf life.

Level production plan

The general procedure for developing a plan for level production is total the forecast

demand for the planning horizon, determine the opening inventory and the desiredending inventory,

calculate the total production required

(Total Production = total forecast + back orders + ending inventory openinginventory), calculate the production required each period by dividing the totalproduction by the number of periods, and calculate the ending inventory foreach period.


10/37



Example on Level production plan

Opening Inventory = 100

Required End Inventory = 80

Equal Number of working days/month

No Back orders

Forecast as in the table below

Inventory carrying cost = $5 per unit

Required

Production per period

Ending Inventory per period

Total Carrying cost

Answer

Total Production Required = 600 + 80 -100 = 580 Unit

Production/ period = 580 / 5 = 116 Unit / month

Ending Inventory after each period = Opening Inventory + Production -Demand

Ending Inventory after the first period = 100 + 116 - 110 = 106 Unit

Ending Inventory after the second period = 106 + 116 - 120 = 102 Unit

Total Carrying cost = (106+102 +88 +84 +80) x 5 = $2300

1.Level

Period 1 2 3 4 5 Total

Forecast 110 120 130 120 120 600

Production 116 116 116 116 116 580

Ending Inventory 100 106 102 88 84 80 460

Invent Carrying Cost 530 510 440 420 400 2300

Chase strategy

Example on Chase production plan

Opening Inventory = 100

Required End Inventory = 80

Production level in the period before the first period = 100

Cost of changing production level= $20 per unit

2. Chase

Period 1 2 3 4 5 Total

Demand 110 120 130 120 120 600

Production 100 90 120 130 120 120 580

Change in Production 10 30 10 10 0 60

Ending Inventory 100 80 80 80 80 80 400

Invent Carrying Cost 400 400 400 400 400 2000

Change in Production Cost 200 600 200 200 0 1200

Total Cost 600 1000 600 600 400 3200

The required production at a period = Demand - (Inventory the periodbefore- required Inventory this period)

The required production in the first period = 100 - (100- 80) = 90 Unit

Developing a Make-to-Order Production Plan

Wait until an order is received from a customer before starting to make the goods.Make to order environment has backlog of unfilled customer orders instead of aninventory of finished goods.

The backlog will be for delivery in the future and does not represent orders that are lateor past due.

Firms make to order when:

goods are produced to customer specification,

the customer is willing to wait while the order is being made,

the product is expensive to make and to store, and

several product options are offered.

Assembletoorder

Where several product options exist and where the customer is not willing to wait untilthe product is made, manufacturers produce and stock standard component parts.

When an order is received, they assemble the component parts from inventory.

Since the components are stocked, the firm needs only time to assemble before


11/37



delivering the product.

Assemble to order is a subset of m ake t o order.

To make a production plan, one will need

a forecast by period for the planning horizon,

an opening backlog of customer orders and

desired ending backlog.

To develop a level production plan,

total forecast demand for the planning horizon,

determine the opening backlog and the desired ending backlog,

Calculate total production required

Total production = total forecast + opening backlog ending backlog),

calculate the production required each period, and

spread the existing backlog over the planning horizon according to duedate per period.

Example

Opening Backlog = 100

Expected Demand = 100 per Week

Required Ending Backlog = 80

Answer

Total production = Total forecast + Opening backlog Ending backlog)

Total Production Required = 500+ 100 - 80 = 520

Weekly production = 520 / 5 = 104

Projected backlog = Old backlog + Forecast - Production

Projected backlog week 1 = 100 + 100 - 104 = 96

Projected backlog week 1 = 96 + 100 - 104 = 92

Make-To-Order Period 1 2 3 4 5 Total

Forecast 100 100 100 100 100 500

Planned Production 104 104 104 104 104 520

Projected Backlog 100 96 92 88 84 80 440

Resource Planning

Once the preliminary production plan is established, it must be compared to theexisting resources of the company.

If enough capacity to meet the production plan cannot be made available, the planmust be changed.

Resource bill shows the quantity of critical resources (materials, labor, and bottleneckoperations) needed to make one average unit of the product group.

3. Master Scheduling

a. Introduction

Master production sc hedule MPS is the nextstepin MPC the manufacturing planningand control process

MPS is a means of Communication, a Link orContract between Marketing andManufacturing.

The MPS report includes an ATPAvailable to Promisefigure to enable realistic,achievable delivery promises to be made to customers.

It is a plan of what is to be produced and when

It is an agreed upon plan between marketing and manufacturing.

The MPS is a PriorityPlanfor Manufacturing.It is not meant to be rigid. Itis the basis to make changes that are consistentwith the demands of the marketplace and the capacity of manufacturing.

It breaks down the PP into the Requirements for Individual End Items, in eachfamily, by date and quantity.


12/37



The sum of all Family MPSitems must equal the agreed SOP Sales and OperationsPlan for that Family over each planning period (normally a month or 4 week period).

MPS application usually depends on production environment (MTS, ATO, andMTO)

The MPSdrivesthe Material Requirements Plan MRP

Items planned at the MPS level are explodedby MRP to produce the detail material andcapacity requirements.

As a s chedule of items to be built, the MPSand BOMBills Of Material determine whatcomponentsare neededfrom manufacturing and purchasing.

b. Definitions

The MPS is a line on the master schedule grid (MPS Matrix) that reflects theanticipated build schedule for those items assigned to the master scheduler.

The master scheduler maintains this schedule, and in turn, it becomes a set ofplanning numbers that drivesMRP Material Requirements Planning.

It represents what the company plansto produce expressed in specificconfigurations, quantities, and dates.

The MPSis nota sales item forecastthat represents a statement of demand.

The MPSmust take into account the forecast, the productionplan, and otherimportant considerations such as backlog, availabilityof material, availability ofcapacity, and managementpolicies and goals. (APICS)

c. MPS Objectives

MPS Objective isto Balance theDemand (Priorities) setbythemarketplace witht heavailability of materials, labor, and equipment (Capacity) ofmanufacturing.

The Objective in developing an MPS are:

to Maintain the desiredlevelof CustomerServiceby

maintaining finished-goods InventoryLevels or

by Schedulingto meet customer delivery requirements,

to make the bestuseof material, labor, and equipment, and

to maintain inventoryinvestmentat the requiredlevels.

Constraints the plan must be within the capacity of manufacturing, and be within theguidelines of the production plan.

d. Purpose of MPS

Development of Master Production Schedule (MPS)

Projectsinventory/backlog levels

Drives detailedscheduling & planning

Orderpromising

Assistsin assigning job prioritiesonfacilityfloor

e. Inputs for MPS

The InformationNeeded to develop an MPS is provided by:

The Production Plan PP,

Forecastsfor individual enditems,

ActualOrdersreceived from customers and for stock replenishment,InventoryLevelsfor individual end items, and

CapacityRestraints

InventoryLeveland Targets(for MTS)

BacklogLevels and Targets(for ATO)

TimeFencepolicies

Interplantand intra-plantorders

Servicepartsordersand forecasts

DistributionRequirements

Planning Bills Of Materials BOM

Actual productionand supplylevels

f. Outputs

Master Production Schedule MPS

Project Inventory levels PAB(for MTS)

ProjectedBacklog levels (for ATO)


13/37



Future availability of products ATP

Information for promising future customer orders

Relationship to Production Plan

See examples on pages 46 through 49.

The three steps in preparing an MPS are to develop a preliminary MPS, to check thepreliminary MPS against available capacity, and to resolve differences between thepreliminary MPS and capacity availability (rough-cut capacity planning). (see example onpage 50)

Rough-cutcapacityplanning checks whether critical resources (bottleneck operations,labor, and critical materials) are available to support the preliminary master productionschedules. The process is similar to resource requirements planning used in theproduction planning process, except we now work with a product and not a family orproducts. The resourcebill is for a single product (figure 3.2).

If available capacity is greater than the required capacity, the MPS is workable. If not,methods of increasing capacity have to be investigated (overtime, additional workers,routing through alternate work centers, or subcontracting). If not, revise the MPS.

MPS is judged by three criteria: resource use, customer service, and cost. Does it makethe best use of resources? Will due dates be met and will delivery performance beacceptable? Is the plan economical, or will excess costs be incurred for overtime,subcontracting, expediting, or transportation?

The MPS should represent as efficiently as possible what manufacturing will make. If toomany items are included, it will lead to difficulties in forecasting and managing the MPS.In each of the manufacturing environments --- make to stock, make to order, andassemble to order --- master scheduling should take place where the smallest number of

product options exists (see figure 3.3).The last step, assembly to customer order, is generally planned using a final assemblyschedule. It is used when there are many options and difficult to forecast whichcombination the customers will want.

The planninghorizon is the time span which covers a period at least equal to the timerequired to accomplish the plan (see figure 3.5). The planning horizon is usually longerbecause the longer the horizon, the greater the visibility and the better managementsability to avoid future problems or to take advantage of special circumstances. As aminimum, the planning horizon for a final assembly schedule must include time toassemble a customers order. It does not need to include the time necessary tomanufacture the components. That time will be included in the planning horizon of theMPS.

Production Planning, Master Scheduling, and Sales

The production plan reconciles total forecast demand with available resources.

The MPS is built from forecasts and actual demands for individual end items. Itreconciles demand with the production plan and with available resources to produce aplan that manufacturing can fulfill. The MPS is a plan for what production can and will do.

In a make-to-stock environment, customer orders are satisfied from inventory. However,in make-to-order or assemble-to-order environments, demand is satisfied from productivecapacity. Sales and distribution need to know what is available to satisfy customerdemand. As orders are received, they consume the available inventory or capacity. Anypart of the plan that is not consumed by actual customer orders is available to promise tocustomers.

Availabletopromise(ATP) is that portion of a firms inventory and planned productionthat is not already committed and is available to the customer (see examples on 57, 58 &59). The ATP is calculated by adding scheduled receipts to the beginning inventory andsubtracting actual orders scheduled before the next scheduled receipt.

Ascheduledreceipt is an order that has been issued either to manufacturing or to a

supplier. If customer orders are greater than the scheduled receipts, then the previousATP is reduced by the amount needed.

Projectedavailablebalance(PAB) is calculated based on the larger of actual customerorders and the forecast. The PAB is calculated in one of two ways, depending on whetherthe period is before or after the demand time fence. For periods before the demand timefence:

PAB = prior period PAB or on-hand balance + MPS customer orders

For periods after the demand time fence, forecast will influence the PAB so it iscalculated using the greater of the forecast or customer orders.

PAB = prior period PAB + MPS greater of customer orders or forecast

The demandtimefence is the number of periods, beginning with period 1, in whichchanges are not excepted due to excessive cost caused by schedule disruption.

The planning horizon must be at least as long as the cumulative lead-time for the productstructure. The cost of making a change increases and the companys flexibility

decreases as production gets closer to the delivery time. Far off changes can be madewith minimal cost or disruption to manufacturing, but the nearer to delivery date, the moredisruptive and costly changes will be.

Changes to the MPS will occur due to customer order cancellation or change, changingcapacity, supplier problems, and excessive process scrap.

Changes to production schedules can result in cost increases due to rerouting,rescheduling, extra setups, expediting, and buildup of WIP inventory decreased


14/37



customer service and loss of credibility for the MPS and the planning process. Changesto the MPS must be managed and decisions made with full knowledge of the costsinvolved.

Frozenzone capacity and materials are committed to specific orders, changes resultin excessive costs, and so senior management approval is required to make changes.The extent of the frozen zone is defined by the demandtimefence.

Slushyzone capacity and materials are committed to less extent. Sales andmanufacturing negotiate changes. The extent of the slushy zone is defined by theplanningtimefence.

Liquidzone Any change can be made to the MPS as long as it is within the limits setby the production plan.

4. Material Requirements Planning

Introduction

Materialrequirementsplanning(MRP) establishes a schedule (priority plan) showingthe components required at each level of the assembly and, based on lead times,calculates the time when these components will be needed.

The two types of demand are independentanddependent. Independent demand is notrelated to the demand for any other product. Master production schedule items areindependent demand items. Since independent demand is not related to the demand forany other assembly or product, it must be forecast. Dependent demand is directly relatedto the demand for higher level assemblies or products and can be calculated. MRP is

designed to do this calculation.An it em c an have both dependent and independent demand. A service or replacementpart may have both.

Dependency can be both horizontal and vertical as illustrated in figure 4.1, Product Tree.Planners are concerned with horizontal dependency when a part is delayed or there is ashortage and other parts will have to be rescheduled.

Material requirements planning has two major objectives: determine requirements andkeep priorities current. The material requirements plans objective is to determinecomponents are needed to meet the master production schedule and, based on lead-time, to calculate the periods when the components must be available. It must determinewhat to order, how much to order, when to order, and when to schedule delivery. Thedemand for, and supply of, components change daily. It must be able to add and delete,expedite, delay, and change orders

The master production schedule drives the material requirements plan. The MRP is apriority plan for the components needed to make the products in the MPS. The plan isvalid only if capacity is available when needed to make the components, and the planmust be checked against available capacity. Material requirements planning drives, or isinput to, production activity control (PAC) and purchasing. MRP plans the release andreceipt dates for orders. PAC and purchasing must plan and control the performance ofthe orders to meet the due dates.

The three inputs to the MRP system are the master production schedule, the inventoryrecordsand the billsofmaterial. There are two kinds of inventory records needed. Thefirst is called planningfactorsand includes information such as order quantities, leadtimes, safety stock, and scrap which do not change frequently. The second kind ofinformation necessary is on the status of each item: how much is available, how much isallocated, and how much is available for future demand. These are maintained in aninventory record file or item master file.

Bills of Material

The billofmaterial is a listing of all the subassemblies, intermediates, parts and raw

materials that go into making the parent assembly showing the quantities of eachrequired to make an assembly. It does not show the steps or process used to make theparent or the components (routing). The bill of material shows all the parts required tomake one of the items. Each part or item has only one part number and the part numberis unique to that part. A part is defined by its form, fit or function.

ProductTree see figure 4.4

Singleand Multilevelbills see figures 4.4 & 4.5. One convention used with multilevelbills of material is that the last items on the tree are all purchased items. Each level inthe bill of material is assigned a number starting with zero at the top and working down.

An ass embly is considered a parent, and the items that comprise it are called itscomponents.

A multiplebillis used when companies usually make more than one product, and thesame components are often used in several products.

A single-levelbillof material contains only the parent and its immediate components.The computer stores information describing the product structure as a single-level bill. Aseries of single-level bills is needed to completely define a product. These can bechained together to form a multilevel, or indented, bill. There are several advantages tousing single-level bills including the following: duplication of records is avoided, thenumber of records and, in computer systems, the file size is reduced by avoidingduplication or records, and maintaining bills of material is simplified.

In an indented bill of material, the components of the parent table are listed flush left andtheir components are indented (see figure 4.8).


15/37



Summarizedpartslist is a BOM listing all the parts needed to make one completeassembly (see figure 4.3).

Planningbills are an artificial grouping of components for planning purposes. They areused to simplify forecasting, master production scheduling, and material requirementsplanning. They do not represent buildable products but an average product (see figure4.9).

A listing of all t he parents in which a component is used is called a where-used report.Where-usedreports give the parents for a component whereas the bill gives thecomponents for a parent. A pegging report is similar to a where-used report. The peggingreportshows only those parents for whom there is an existing requirement.

The bill of material is one of the most widely used documents in a manufacturingcompany. Some of those uses are: product definition, engineering change control,

service parts, planning, order entry, manufacturing and costing. Maintainingbillsofmaterialandtheiraccuracyisextremelyimportant.

Material Requirements Planning Process

Lead-timeis the span of time needed to perform a process. In manufacturing it includestime for order preparation, queuing, processing, moving, receiving, and inspecting.

Explodingis the process of multiplying the requirements by the usage quantity andrecording the appropriate requirements throughout the product tree.

Offsetting is the process of placing the exploded requirements in their proper periodsbased on lead-time.

Plannedorderis a suggested order quantity, release date, and due date created by theplanning systems logic when it encounters net requirements in processing MRP.

Plannedorderreceiptis the quantity planned to be received at a future date as a resultof a planned order release. Plannedorderreceiptsdifferfromscheduledreceiptsinthattheyhavenotbeen released.

Plannedorderrelease is derived from planned order receipts by taking the plannedreceipt quantity and offsetting by the appropriate lead-time.

Net requirements = gross requirements available inventory

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

Planned order releases are just planned they have not been released. It is theresponsibility of the planner to release planned orders. Releasinganordermeans thatauthorization is given to purchasing to buy the necessary material or to manufacturing tomake the component. When the authorization to purchase or manufacture isreleased, the planned order receipt is canceled, and a scheduled receipt is createdin its place. Scheduled receipts are orders placed on manufacturing or on a vendor andrepresent a commitment to make or buy. When a manufacturing order is released thecomputer will allocatethe required quantities of a parents components to that order. This

does not mean the components are withdrawn from inventory but that the projectedavailable quantity is reduced. The allocated quantity of components is still in inventorybut they are not available for other orders.

Scheduled receipts on the MRP record are openorders on factory or a vendor and arethe responsibility of purchasing and or production activity control. When the goods arereceived into inventory and available for use, the order is closed out, and the scheduledreceipt disappears to become part of the on-hand inventory.

The calculation for netrequirementscan now be modified to include scheduled receipts.Net requirements = gross requirements scheduled receipts available inventory

Review and understand figure 4.15 and the six points listed on pages 90 & 91.

The MRP priority plan must be checked against available capacity. At the MRP planninglevel, the process is called capacity requirements planning (CRP). If the capacity isavailable, the plan can proceed. If not, either capacity has to be made available or thepriority plans changed.

A component may reside on more than one level in a bill of material. If this is the c ase, itis necessary to make sure that all gross requirements for that component have beenrecorded before netting takes place. The process of collecting the gross requirementsand netting can be simplified by using low-level codes. The low-level code is the lowestlevel on which a part resides in all bills of material. Low-levelcodesare determined bystarting at the lowest level of a bill of material and, working up, recording the level againstthe part. Review example 4.17 and the procedure for calculating the net requirements onpages 92 & 93. The low-level codes are used to determine when a part is eligible fornetting and exploding. In this way, each part is netted and exploded only once. The sameprocedure used for a single bill of material can be used when multiple products are beingmanufactured. All bills must be netted and exploded level by level as was done for asingle bill.

Scrap is usually stated as a scrap allowance

In-depth MRP Explanation ( See also http://www.me.umist.ac.uk/mrp/index.htm )

MRP Exploding, netting and offsetting

The following information comes from Basics of Supply Chain Management byLarry Frendenall of Clemson University. It helps to begin with the BOM tounderstand the connection it has with MRP planning A bill of materials(BOM) highest item is the end item that is scheduled by the MPS. This end itemis always placed at the top of the BOM in what is designated as level 0 . TheBOM is basically the list of ingredients to manufacture the end item. It is read in
http://www.me.umist.ac.uk/mrp/index.htm


16/37



descending order beginning with level 0. To make 1 A , we need 2 Bs and 1 C (notice the numbers given in the brackets next to the letter inside the circle ) . Aswe read down the BOM we often use the terminology of parent child. In the BOMan item which is composed of one or more components is referred to as the parentof those components. The components are , of course , referred to as the children.In this BOM both B and C are children are children of the A. B is itself a parent ofD and E who are its children. To make 1 B , we need to have 1 D and 2 Es. Finally, to make each E we need to have 3 Fs. C, D and F do not have any children inthis BOM , because they are purchased outside of the firm. That does not meanthat they are simple parts. For example , C could be a master cylinder for a brakeassembly that we purchase from someone else.

MRP Logic

MRP planning starts with the end item as given in the MPS, and determines whenthat item must be started to be completed on time. That date is then used to asthe order due date for the next level in the BOM. The logic works backwards untilit reaches the end of the BOM. This is illustrated with a Gantt chart in Figure 2.

The Gantt chart shows that before one step in the process can begin, other stepsneed to be done completely. For example , before A can begin , both B and Chave to be completed and waiting in the shop. The Gantt chart also shows that for

A to be completed on t ime, F has to be in s tock and ready now, because there isno time left in the schedule for delays.

The construction of the materials requirements plan is illustrated in Figure 3 forend item A. Note the 100 of item A are required in period 5 and there is none onhand right now and none is scheduled to be received , so the Projected On Handin period 1 is 0. Since there is no Gross Requirements for A until period 5 , theProjected On Hand stays at 0 until then , when it becomes a negative 100 or(100). To have enough A in period 5 , we need to have a Planned Order Receipt for

A in period 5 . Since item A has a 1 week lead time this means t hat we need t ohave a Planned Order Release in period 4. So, we schedule 100 to be released inperiod 4.

As shown in Figure 4 , this MRP explosion continues down through the BOM untilit releases and quantity needed for each item in the BOM are calculated. It is veryimportant to note that the MRP explosion is hierarchical. This means thateverything on level 1 is calculated before anything is calculated for level 2. etc. So, in Figure 4 the gross requirements for B and C are calculated before therequirements for lower level items such as D. Since 2 Bs are needed for each A ,there is a gross requirement for 200 B in period 4. Following the logic described for

A , this results in a gross requirement for 200 B in period 3. In a similar manner wecalculate the gross requirement for C in period 4 , which is 100 , since we onlyneed 1 C for each A. The gross requirement for D is based on the planned orderrelease of its parent B. So , the gross requirement for D in period 3 is 200. Sincethere are 100 D in stock , the planned order release for D is just 100 in period 2 .In a similar manner we calculate the gross requirements for item E , based on theplanned order releases of its parent B. E had a scheduled receipt of 100 in period2 , which was subtracted from the gross requirements of 200 in period 3. Thiscombined with the planned receipt of 100 in period 3 combined to give a plannedon-hand of 0 items of E in inventory in period 3. As shown in the BOM , E is theparent of F, so Es planned order release becomes the gross requirements of F. Fhas a gross requirement of 300 in period 2 , since 3 F are required for every E.Since 200 F are on hand and 100 more will be received in period 2 , there is no netrequirement for F in period 2.

Using the Material Requirements Plan

The basic responsibilities of a planner are to:

(1) Launch (release) orders to purchasing or manufacturing.

(2) Reschedule due dates of open (existing) orders as required.

(3) Reconcile errors and try to find their cause.

(4) Solve critical material shortages by expediting or re-planning.

(5) Coordinate with other planners, master production schedulers, production activitycontrol, and purchasing to resolve problems.

The material planner works with three types of orders: planned, released, and firm.

Planned orders are automatically scheduled and controlled by the computer. As grossrequirements, projected available inventory, and scheduled receipts change, thecomputer recalculates the timing and quantities of planned order releases. The MRPprogram recommends to the planner the release of an order when the order enters theaction bucket but does not release the order.

Releasing, or launching, a planned order is the responsibility of the planner. Whenreleased, the order becomes an open order to the factory or to purchasing and appears onthe MRP record as a scheduled receipt. It is then under the control of the planner, whomay expedite, delay, or even cancel the order.

The computer-based MRP system automatically recalculates planned orders as the grossrequirements change. At times, the planner may prefer to hold a planned order firmagainst changes in quantity and timer despite what the computer calculates. This mightbe necessary because of future availability or material or capacity or special demands onthe system. The planner can tell the computer that the order is not to be changed unlessthe planner advises the computer to do so. The order is firmed or frozen against thelogic of the computer. One method of reducingsystemnervousness is firm plannedorders.

MRP does print action or exceptionmessagessuggesting that the planner should act


17/37



and what kind of action might be appropriate. Transactionmessagesmean that theMRP software must be told of all actions taken that will influence the MRP records, suchas receiving orders, releasing orders, etc.

Planners receive feedback from many sources and must evaluate this feedback and takecorrective action if necessary.

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

5. Capacity Management

Introduction

Without the resources to achieve the priority plan, the plan will be unworkable. Capacitymanagement is concerned with supplying the necessary resources.

Definition of Capacity

Capacity is the amount of work that can be done in a specified time period. It is thecapability of a worker, machine, work center, plan, or organization to produce output perperiod of time. Capacity is a rate of doing work, not the quantity of work done.

Capacityavailable is the capacity of a system or resource to produce a quantity ofoutput in a given time period. Capacity required is the capacity of a system or resourceneeded to produce a desired output in a given time period. Load is the amount of releasedand planned work assigned to a facility for a particular timer period. It is the sum of all therequired capacities (see figure 5.1).

Capacitymanagementis responsible for determining the capacity needed to achieve thepriority plans as well as providing, monitoring, and controlling that capacity so the priorityplan can be met. It is the function of establishing, measuring, monitoring, and adjustinglimits or levels of capacity in order to execute all manufacturing schedules. Capacityplanningis the process of determining the resources required to meet the priority planand the methods needed to make that capacity available. Capacity control is the processof monitoring production output, comparing it with capacityplans, and taking correctiveaction when needed.

Capacity Planning

Capacity planning involves calculating the capacity needed to achieve the priority planand finding ways of making that capacity available. Priority plans are usually stated insome standard unit of output. If there is no common unit, capacity must be stated as the

hours available. The priority plan must then be translated into hours of work required andcompared to the hours available. The process of capacity planning is as follows:

a. Determine the capacity available at each work center in each time period.

b. Determine the load at each work center in each time period.

Translate the priority plan into hours of work required at each workcenter in each time period.

Sum up the capacities required for each item on each work center todetermine the load on each work center in each time period.

c. Resolve differences between available capacity and required capacity. Ifpossible, available capacity should be adjusted to match the load.Otherwise, the priority plans must be changed to match the availablecapacity.

Resourceplanninginvolves long-range capacity resource requirements and is directlylinked to production planning. Resource planning involves changes in manpower, capitalequipment, product design, or other facilities that take a long time to acquire andeliminate.

Rough-cutcapacityplanning takes capacity planning to the next level of detail. Themaster production schedule is the primary information source. The purpose of rough-cutcapacity planning is to check the feasibility of the MPS, provide warnings of anybottlenecks, ensure utilization of work centers, and advise vendors of capacityrequirements.

Figure 5.2 shows the relationship between the different levels of priority planning andcapacity planning.

Capacity Requirements Planning (CRP)

It is the process of determining in detail the amount of labor and machine resourcesneeded to achieve the required production. Planned orders from the MRP and open shoporders (scheduled receipts) are converted into demand for time in each work center ineach time period. This process takes into consideration the lead times for operations andoffsets the operations at work centers accordingly.

The inputs needed for a CRP are open shop orders, planned order releases, routings,time standards, lead times, and work center capacities contained in the computer files.


18/37



A routing is the path that work follows from work center to work center as it is completed.A routingfileshould exist for every component manufactured and contains theoperations to be performed, the sequence of operations, the work centers to be used, thepossible alternate work centers, the tooling needed at each operation, and standard times(setup and run times) per piece.

A workcenterfilecontains information on the capacity and move, wait, and queue timesassociated with the center. The movetime is the time normally taken to move materialfrom one workstation to another. The waittime is the time a job is at a work center aftercompletion and before being moved. The queuetime is the time a job waits at a workcenter before being handled. Lead-time is the sum of queue, setup, run, wait, and movetimes.

Another piece of information needed is the number of working days available. Understand

shopcalendar in figure 5.4.

Capacity Required (Load)

Determining the capacity required is a two-step process. First, determine the timeneeded for each order at each work center then, sum up the capacity required forindividual orders to obtain the load. The time needed for each order is the sum of thesetup time and the run time. The run time is equal to the run time per piece multiplied bythe number of pieces in the order (see examples page 127 & 128).

The load on a work center is the sum of the required times for all the planned and actualorders to be run on the work center in a specified period. The steps in calculating load areas follows (see example page 129):

a. Determine the standard hours of operation time for each planned and releasedorder for each work center by time period.

b. Add all the s tandard hours t ogether for each work c enter in each period. The resultis the total required capacity (load) on that work center for each timer period of theplan.

The workcenterloadreportshows future capacity requirements based on released andplanned orders for each time period of the plan. The term overcapacity means that thework center is overloaded and the term undercapacity means the work center is underloaded (see figures 5.5 & 5.6).

Scheduling Orders

Schedulingis defined as a timetable for planned occurrences. Backscheduling is theprocess of starting with the due date and, using the lead times, working back to find thestart date for each operation. The process is as follows (see example page 131 & figures5.8 & 5.9):

a. For each work order, calculate the capacity required (time) at each work center.\

b. Starting with the due date, schedule back to get the completion and start dates foreach operation.

Making the Plan

Compare the load to the available capacity to see if there are imbalances and if so, tofind possible solutions. There are two ways of balancing capacity available and load: alterthe load, or change the capacity available. Altering the load means shifting orders aheador back so the load is leveled. In the short run, capacity can be adjusted. Some waysthat this may be done are schedule overtime or under time, adjust the level of theworkforce by hiring or laying off workers, shift workforce from under loaded to overloadedwork centers, use alternate routings to shift some load to another work center, andsubcontract work when more capacity is needed or bring in previously subcontractedwork to increase required capacity.

6. Production Activity Control

Introduction

Productionactivitycontrol(PAC)is responsible for executing the master productionschedule and the material requirements plan. At the same time, it must make good useof labor and machines, minimize work-in-process inventory, and maintain customerservice.

The material requirements plan authorizes PAC: to release work orders to the shop formanufacturing, to take control of work orders and make sure they are completed on time,to be responsible for the immediate detailed planning of the flow of orders throughmanufacturing, and to manage day-to-day activity and provide the necessary support.The activities of the PAC system can be classified into planning, implementation, andcontrol functions.

The flow of work through each work center must be planned. PAC must ensure that therequired resources are available to manufacture the components as needed and developa load profile for each work center to ensure the timely completion of orders by thescheduled date.

Next we implement the plan. PAC will gather the information needed by the shop floor tomake the product and release orders to the shop floor as authorized by the materialrequirements plan (dispatching).


19/37



Monitor the process and determine the necessary corrective action. PAC will rank theshop orders in desired priority sequence by work center and establish a dispatch list,track actual performance to plan and take corrective action by replanning, rescheduling,or adjusting capacity to meet delivery.

Understand the characteristics and differences between flow, intermittentand projectmanufacturing (see pages 143 and 144).

Data Requirements

To plan the processing of materials through manufacturing, PAC must have the followinginformation: What and how much to produce. When parts are needed so the completiondate can be met. What operations are required to make the product and how long the

operations will take. What the available capacities of the various work centers are.

PAC must have data, usually stored in databases, to drive the information systems.These database files are of two types, planning and control.

The four planning files needed are the item master file, product structure file (bill ofmaterial file), routing fileand workcenterfile. The item master file contains all of thepertinent data related to each part number. The product structure or BOM file containssingle-level BOMs listing components and quantities needed to assemble a parent. Itforms a basis for a picklist. A routing exists for each part number and consists of aseries of operations and instructions required to make the item. The work center masterfile collects relevant data on a work center.

The two control files are the shopordermasterfileand the shoporderdetailfile.Each active manufacturing order has a record in the shop order master file to monitorproduction performance for each shop order. The shop order detail file contains theperformance record for each operation.

Order Preparation

Once authorization to process an order has been received, PAC is responsible forplanning and preparing its release to the shop floor. The order should be reviewed to besure that the necessary resources are available. Material and capacity availability mustbe checked. Checking capacity availability is a two-step process. First, the order mustbe scheduled to see when the capacity is needed, and second, the load on work centersmust be checked in that period

Scheduling

The objective of scheduling is to meet delivery dates and to make the best use ofmanufacturing resources. It involves establishing start and finish dates for each operationrequired to complete an item. To develop a reliable schedule, the planner must haveinformation on routing, required and available capacity, competing jobs, and

manufacturing lead times at each work center involved.Manufacturinglead-timeis the time normally required to produce an item in a typical lotquantity and consists of five elements (see pages 148 & 149 and figure 6.3). The largestof the five elements is queue time. PAC is responsible for managing the queue byregulating the flow of work into and out of work centers. PAC must manage both the inputof orders to the production process and the available capacity to control queue and work-in-process.

Cycletime(throughput time)is the length of time from when material enters aproduction facility or operation until it exits.

Forwardschedulingassumes that material procurement and operation scheduling for acomponent start when the order is received, whatever the due date, and that operationsare scheduled forward from this date. The result is completion before the due date, whichusually results in a buildup of inventory (see figures 6.4 & 6.6).

Backward scheduling(figures 6.4 & 6.6) schedules the last operation on the routing firstand is scheduled for completion at the due date. Previous operations are scheduled backfrom the last operation.

Infiniteloadingassumes infinite capacity will be available (figures 6.4 & 6.5).

Finiteloadingassumes there is a defined limit to available capacity at any workstation(figures 6.6 & 6.7).

In operation overlapping, the next operation is allowed to begin before the entire lot iscompleted on the previous operation. This reduces the total manufacturing lead timesbecause the second operation starts before the first operation finishes all the parts in theorder. Increased costs are possible from move costs and the impact of queue and lead-time for other orders.

Operationsplittingis the process of splitting orders into two or more lots and runsimultaneously on two or more machines.

Load Leveling

The load profile for a work center is constructed by calculating the standard hours of

operation for each order in each time period and adding them together by time period(figure 6.10).

Scheduling Bottlenecks

Bottlenecks are overloaded workstations where the required capacity is greater than the


20/37



available capacity. It is a facility, function, department, or resource whose capacity isequal to or less than the demand placed upon it.

Throughput is the total volume of production passing through a facility. Bottleneckscontrol the throughput of all products.

Since bottlenecks control throughput, please review the principles on page 156 and howto manage bottlenecks on page 157.

Theory of Constraints and Drum-Buffer-Rope

The fundamental concept behind Theoryof Constraints, developed by EliyahuM.Goldratt, is that every operation producing a product or service is a series of linked

processes. Each process has a specific capacity to produce the given defined output forthe operation, and that in virtually every case, there is one process that limits orconstrains (bottleneck) the throughput from the entire operation. Focus on balancing theflow through the shop. The time lost at a no constraint is a mirage, and transfer batchesdo not have to be the same size as process batches.

Once constraint has been identified, there is a five-step process that is recommended tohelp improve the performance of the operation. The five steps are: (1) identify theconstraint, (2) exploit the constraint, (3) subordinate everything to the constraint, (4)elevate the constraint, (5) once the constraint is a constraint no longer, find the new oneand repeat the steps.

The scheduling system for Theory of Constraints is described as Drum-Buffer-Rope.The drum of the system refers to the drumbeat or pace of production. It represents themaster schedule for the operation, which is focused around the pace of throughput asdefined by the constraint. Since it is so important that the constraint never be starvedfor needed inventory, a time buffer is often established in front of the constraint. It iscalled a time buffer because it represents the amount of time that the inventory in thebuffer protects the constraint from disruption. The analogy is that the rope pullsproduction to the constraint for necessary processing. The primary focus of thescheduling system is on effective management of the organizations constraint tothroughput and sales.

Orders that do not have all of the necessary resources, tooling, material, and capacity,should not be released because they only cause excess work-in-process inventory andmay interrupt work on orders that can be completed (see figure 6.11).

A shoppacketaccompanies a shop order release to manufacturing. This packet mayinclude the shop order, engineering drawings, bills of material, routing sheets, materialsissue tickets or pick list, tool requisitions, job tickets for each operation to be performed,and move tickets that authorize movement of work between operations.

Once work orders have been issued to manufacturing, their progress has to be controlled.To control progress, performance has to be measured and compared to what is planned.If what is actually happening (what is measured) varies significantly from what wasplanned, either the plans have to be changed or corrective action must be taken to bringperformance back to plan.

PAC must balance the flow of work to and from different work centers. This is to ensurequeue, work-in-process, and lead times are controlled. The input/output control systemis designed to balance the input rate in hours with the output rate. The input rate iscontrolled by the release of orders to the shop floor. The output rate is controlled byincreasing or decreasing the capacity of a work center (see figure 6.12).

To control input and output, a plan must be devised along with a method for comparingwhat actually occurs against what was planned. This information is shown on aninput/outputreport (see figure 6.13). Cumulativevarianceis the difference betweenthe total planned for a given period and the actual total for that period (Cumulativevariance = previous cumulative variance + actual planned). Planned and actualinputs monitor the flow of work coming to the work center. Planned and actual outputsmonitor the performance of the work center. Planned and actual backlogs monitor thequeue and lead-time performance.

Operationsequencing is a technique for short-term planning of actual jobs to be run ineach work center based on capacity and priorities. Control of priorities is exercisedthrough dispatching. Dispatchingis the function of selecting and sequencing available

jobs t o be run at individual work centers. The dispatch list is the instrument of prioritycontrol. Its a listing by operation of all the jobs available to be run at a work center withthe job listed in priority sequence.

The ranking of jobs for the dispatch list is created through the application of priority rules.Some commonly used rules are: (1) first come, first served (FCFS), (2) earliest job duedate (EDD), (3) earliest operation due date (ODD), (4) shortest process time (SPT), and(5) critical ratio (CR = (due date present date) / lead time remaining) (see definitions onpage 166 and examples on pages 166 & 167).

7. Purchasing

Introduction

Purchasing is the process of buying. Obtaining the right material, in the right quantities,with the right delivery (time and place), from the right source, and at the right price are allpurchasing f unctions.

Manufacturing planning and control (MPC) must decide when to order which raw materialsso that marketplace demands can be satisfied. Purchasing is then responsible for placingthe orders and for ensuring that the goods arrive on time. Purchasing has the majorityresponsibility for locating suitable sources of supply and for negotiating prices.


21/37



On the average, manufacturing firms spend about 50% of each sales dollar in thepurchase of raw materials, components, and supplies. This gives the purchasing functiontremendous potential to increase profits through the negotiation of better pricing orservices from suppliers (see example page 177).

The objectives of purchasing can be divided into four categories: (1) Obtaining goods andservices of the required quantity and quality. (2) Obtaining goods and services at thelowesttotalcost, not price. (3) Ensuring the best possible service and prompt deliveryby the supplier. (4) Developing and maintaining good supplier relations and developingpotential suppliers.

To satisfy these objectives, certain basic functions must be performed: (1) Determiningpurchasing specifications right quality, quantity, and delivery (time and place). (2)Selecting supplier (right source). (3) Negotiating terms and conditions of purchase (righttotal cost). (4) Issuing and administration of purchase orders.

The purchasingcycleconsists of the following steps: (1) Receiving and analyzingpurchase requisitions. (2) Finding potential suppliers and selecting the right supplier. (3)Determining the right price. (4) Issuing the purchase orders. (5) Following-up to assuredelivery dates are met. (6) Receiving and accepting goods. (7) Approving suppliersinvoice for payment. (See explanations of each step on pages 178, 179 & 180.)

Establishing Specifications

Three broad categories must be considered when specifications are being developed: (1)Quantity requirements Market demand first determines the quantities needed, but thechallenge is to satisfy the functional needs at a better price. (2) Price requirements Theprice specification represents the economic value that the buyer puts on the item (i.e. theamount the individual is willing to pay). (3) Functional requirements Are concerned withthe end application of the item and what the item is expected to do. Functionalspecifications are intimately tied to the quality of a product or service.

An it em has the required quality if it satisfies the needs of the user. There are fourphases to providing user satisfaction: (1) Quality and product planning. (2) Quality andproduct design. (3) Quality and manufacturing. (4) Quality and use.

Functional specifications ultimately are the ones that drive the others. If the product doesnot perform adequately for the price, it will not sell.

Functional Specification Description

Functional specification can be described in the following ways or by a combination ofthem: (1) By brand. (2) By specification of physical and chemical characteristics, materialand method of manufacture, and performance. (3) By engineering drawings. (4)Miscellaneous. (See pages 182, 183 & 184 for explanation.)

Two major sources of specifications: (1) Buyerspecifications are usually expensiveand time consuming to develop. Use only when there is not suitable specificationavailable or unless the volume of work makes it economical to do so. (2) Standard

specifications have been developed by governmental and nongovernmental agencies.

Selecting Suppliers

A good supplier is one that has t he technology t o make the product t o the requiredquality, has the capacity to make the quantities needed, and can run the business wellenough to make a profit and still sell a product competitively.

Three types of sourcing: sole, multiple, and single. Solesourcing implies that only onesupplier is available. Multiplesourcingis the use of more than one supplier for an item.Singlesourcingis a planned decision by the organization to select one supplier for anitem when several sources are available. It is intended to produce a long-termpartnership.

Factors in selecting suppliers: technical ability, manufacturing capability, reliability, after-sales service, supplier location, other soft considerations and price.

Some factors in evaluating potential suppliers are quantitative and other factors arequalitative.

Price Determination

Prices have an upper limit, determined by the market place, and what buyers are willingto pay is based on their perception of demand, supply, and their needs. The lower limit isset by the seller and is determined by the costs of manufacturing and selling the productand profit expectation.

Fixedcostsare costs incurred no matter the volume of sales. Variablecosts are thosedirectly associated with the amount produced or sold. Break-evenpoint is when therevenue equals total cost and profit is zero. When the volume is less than the break-evenpoint, a loss in incurred when the volume is greater, a profit is realized (see figure 7.2).

Through negotiation, the buyer and seller try to resolve conditions of purchase to themutual benefit of both parties. One important factor in the approach to negotiation is thetype of product: commodities, standard products, items of small value and made-to-order

items.

Impact of Material Requirements Planning on Purchasing

Purchasing can be separated into two types of activities: procurement, and supplierscheduling and follow-up. Procurement includes the functions of establishingspecifications, selecting suppliers, price determination, and negotiation. Supplier


22/37



scheduling and follow-up is concerned with the release of orders to suppliers, workingwith suppliers to schedule delivery, and follow-up. The goals of supplier scheduling arethe same as those of production and activity control: to execute the master productionschedule and the material requirements plan, ensure good use of resources, minimizework-in-process inventory, and to maintain the desired level of customer service.

Planner/Buyer concept (see pages 191 & 192).

Usually a MRP system generates frequent orders for relatively small quantities. It iscostly and inefficient to issue a new purchase order for every weekly requirement. Thealternative is to develop a long-term contract with a supplier and to authorize releasesagainst the contract. Often the supplier is given a copy of the MRP so they are aware offuture demands. The buyer then issues a release against the schedule. Contract buyingassures the suppliers a given amount of business and commits them to allocating thatamount of their capacity to the customer.

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

Internet, intranet and extranet (page 193).

8. Forecasting

Introduction

Forecasting is a prelude to planning, an estimate of what conditions will exist over somefuture period.

Demand Management

The prime purpose of an organization is to serve the customer. Marketing focuses onmeeting customer needs, but operations, through materials management, must providethe resources. The coordination of plans by these two parties is demand management.Demand management is the function of recognizing and managing all demands forproducts, including forecasting, order processing, making delivery promises (available-to-promise), and interfacing between manufacturing planning and control and themarketplace.

Demand Forecasting

Forecasts are made for the strategic business plan, the production plan, and the masterproduction schedule.

Characteristics of Demand

The difference between demand and sales is that sales implies what is actually soldwhereas demand shows the need for the item. Sometimes demand cannot be satisfied,and sales will be less than demand.

The pattern shows that actual demand varies from period to period. The four reasons forthis are trend, seasonality, random variation, and cycle (see page 198 & 199).

The shape of demand patterns for some products or services change over time, others

do not. Those that retain the same general shape are called stable and those that do notare called dynamic. The more stable the demand, the easier it is to forecast.

Principles of Forecasting

Forecasts have four major characteristics or principles: (1) Forecasts are usually wrong.

Errors are inevitable and must be expected. (2) Every forecast should include anestimate of error. (3) Forecasts are more accurate for families or groups. (4) Forecasts

are more accurate for nearer time periods. Anything that can be done to reduce lead-time will improve forecast accuracy.

Forecasting Techniques

Forecasts have four major characteristics or principles: (1) Forecasts are usually wrong.

Errors are inevitable and must be expected. (2) Every forecast should include anestimate of error. (3) Forecasts are more accurate for families or groups. (4) Forecasts

are more accurate for nearer time periods. Anything that can be done to reduce lead-time will improve forecast accuracy.

Some Important Intrinsic Techniques

Usually methods that average out history are better because they dampen out someeffects of random variation. It is best to forecast the average demand rather than second-guess what the effect of random fluctuation will be. A forecast of average demand shouldbe made, and the estimate of error applied to it.

See moving average pages 204 & 205. The point is that a moving average always lags a

trend, and the more periods included in the average, the greater the lag will be. On the


23/37



other hand, if there is no trend but actual demand fluctuates considerably due to randomvariation, a moving average based on a few periods reacts to the fluctuation rather thanforecasts the average. Movingaveragesare best used for forecasting products withstable demand when there is little trend or seasonality.

A common f orecasting technique, called exponential s moothing, gives the same resultsas a moving average but without the need to retain as much data and with easier

calculations. The forecast can be basedon the prior old calculated forecast and the newdata (see pages 206 & 207).

The weight given to the latest actual demand is called a smoothingconstantand isrepresented by the Greek letter alpha ( ). It is always expressed as a decimal from 0 to1.0. The formula is: New forecast = ( )(latest demand) + (1- )(previous forecast).

Seasonality

Many products have a seasonal or periodic demand pattern. The seasonal index is an

estimate of how much the demand during the season will be above or below the averagedemand for the product.

Seasonal Index = Period Average Demand / Average Demand for all Periods

The average demand for all periods is a value that averages out seasonality. This iscalled the deseasonalized demand. Seasonal Index = Period Average Demand /Deseasonalized Demand

Tracking the Forecast

Tracking the forecast is the process of comparing actual demand with the forecast.Forecasterroris the difference between actual and forecast demand. Error can occur in

two ways: bias and random variation. Biasexists when the cumulative actual demandvaries from the cumulative forecast. Bias is a systematic error in which the actualdemand is consistently above or below the forecast demand.

Forecast error must be measured before it can be used to revise the forecast or to help in

planning. One way to measure the variability is to calculate the total error ignoring theplus and minus signs and take the average. This is called meanabsolutedeviation(MAD):mean implies an average, absolute means without reference to plus and minus,

and deviation refers to the error (read normal distribution and uses of MAD on pages 216& 217):

MAD = Sum of Absolute Deviations / Number of Observations

9. Inventory Fundamentals

Introduction

All businesses and institutions require inventories. As inventories are used, their value i sconverted into cash, which improves cash flow and return on investment. There is a costfor carrying inventories, which increases operating costs and decreases profits.

Aggregate inventory management involv es: flow and k inds of inventory needed, supplyand demand patterns, functions that inventories perform, objectives of inventorymanagement and costs associated with inventories. In

Date post:	15-Feb-2018
Category:	Documents
Upload:	bodhiswatta
View:	226 times
Download:	0 times

Introduction Material Management

Documents