<Operations Management> Study Guide Pg 1 of 122 Study Guide OPERATIONS MANAGEMENT Content This module deals with the use of operations strategy to build value chains and competitive advantage. It provides participants with frameworks to address both the design and the management of operations. The designing framework covers forecasting, the design of goods and services, managing quality, process strategy, capacity planning, and location and layout. The managing operations framework covers supply-chain management, inventory management, materials requirements planning and ERP, project management, JIT and lean systems, and maintenance and reliability. Module Aims The aims of this module are to: 1. Understand the principles of production, operations and supply chain management in organizations. 2. Recognize the practical concerns in managing operations processes and value chain activities.
Transcript
<Operations Management> Study Guide
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Study Guide
OPERATIONS MANAGEMENT
Content
This module deals with the use of operations strategy to build value chains and
competitive advantage. It provides participants with frameworks to address both the
design and the management of operations. The designing framework covers
forecasting, the design of goods and services, managing quality, process strategy,
capacity planning, and location and layout. The managing operations framework
Benchmarking is another ingredient in an organisation’s TQM program.
Benchmarking involves selecting a demonstrated standard of products, services, costs
or practices that represent the very best performance for processes or activities very
similar to your own.
The idea is to develop a target at which to shoot and then develop a standard or
benchmark against which to compare your performance.
The steps for developing benchmarks are:
Determine what to benchmark
Form a benchmark team
Identify benchmarking partners
Collect and analyse benchmarking information
Take action to match or exceed the benchmark
In ideal situation, you find one or more similar organisations that are leaders in the
particular areas you want to study. Then you compare yourself (benchmark yourself)
against them.
4.3.5 Just-in-Time (JIT)
The philosophy behind just-in-time (JIT) is one of continuous improvement and
enforced problem solving. JIT systems are designed to produce or deliver goods just
as they are needed. JIT is related to quality in three (3) ways:
(1) JIT cuts the cost of quality
This occurs because scrap, rework, inventory investment and damage costs are
directly related to inventory on hand. Because there is less inventory on hand with
JIT, costs are lower. Additionally, inventory hides bad quality whereas JIT
immediately exposes bad quality.
(2) JIT improves quality
As JIT shrinks lead time, it keeps evidence of errors fresh and limits the number of
potential sources of error. JIT creates, in effect, an early warning system for quality
problems, both within the firm and with vendors.
(3) Better quality means less inventory and a better, easier-to-employ JIT
system
Often the purpose of keeping inventory is to protect against poor production
performance resulting from unreliable quality. If consistent quality exists, JIT allows
firms to reduce all the costs associated with inventory.
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4.4 Quality Control Seven (7) Tools
There are a number of tools that an organisation can use for problem solving and
process improvement. The tools aid in data collection an interpretation, and provide
the basis for decision making. The following tools are known as seven basic quality
tools:
Tool Application
1. Check sheets Tool for Generating Ideas
2. Scatter diagrams Tool for Generating Ideas
3. Cause and effect diagrams Tool for Generating Ideas
4. Pareto diagrams Tool for Organising Data
5. Flowcharts Tool for Organising Data
6. Histograms Tool for Identifying Problems
7. Statistical Process Control (SPC) charts. Tool for Identifying Problems
Figure 4.2 The 7 Tools of Quality Control (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
th ed, pg 204)
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The concept behind the seven basic tools came from Kaoru Ishikawa (left), a
renowned quality expert from Japan. According to Ishikawa, 95% of quality-related
problems can be resolved with these basic tools. The key to successful problem
resolution is the ability to identify the problem, use the appropriate tools based on the
nature of the problem, and communicate the solution quickly to others. Inexperienced
personnel might do best by starting with the Pareto chart and the cause and effect
diagram before tackling the use of the other tools. Those two tools are used most
widely by quality improvement
4.4.1 Check Sheet
Check sheets help organize data by category. They show how many times each
particular value occurs, and their information is increasingly helpful as more data are
collected. More than 50 observations should be available to be charted for this tool to
be really useful. Check sheets minimize clerical work since the operator merely adds a
mark to the tally on the prepared sheet rather than writing out a figure (below). By
showing the frequency of a particular defect (e.g., in a molded part) and how often it
occurs in a specific location, check sheets help operators spot problems.
4.4.2 Scatter Diagrams
A scatter diagram shows how two variables are related and is thus used to test for
cause and effect relationships. It cannot prove that one variable causes the change in
the other, only that a relationship exists and how strong it is. In a scatter diagram, the
horizontal (x) axis represents the measurement values of one variable, and the vertical
(y) axis represents the measurements of the second variable.
4.4.3 Cause-and-Effect Diagram
The cause and effect diagram is sometimes called an Ishikawa diagram after its
inventor. It is also known as a fish bone diagram because of its shape. A cause and
effect diagram describes a relationship between variables. The undesirable outcome is
shown as effect, and related causes are shown as leading to, or potentially leading to,
the said effect. This popular tool has one severe limitation, however, in that users can
overlook important, complex interactions between causes. Thus, if a problem is
caused by a combination of factors, it is difficult to use this tool to depict and solve it.
A fish bone diagram displays all contributing factors and their relationships to the
outcome to identify areas where data should be collected and analyzed. The major
areas of potential causes are shown as the main bones, e.g., Materials, Methods,
Operators and Machines (above). Later, the sub-areas are depicted. Thorough analysis
of each cause can eliminate causes one by one, and the most probable root cause can
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be selected for corrective action. Quantitative information can also be used to
prioritize means for improvement, whether it is for machine, design, or operator.
Figure 4.3 The Cause and Effect Diagram (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
th ed, pg 205)
4.4.4 Pareto Analysis
Pareto analysis is a technique for focusing attention on the most important areas. The
Pareto concept, named after the 19th
century Italian economist Vilfredo Pareto, is that
a relatively few factors generally account for a large percentage of the total cases (eg.
complaints, defects, problems). The ideas is to classify the cases according to degree
of importance, and focus on resolving the most important, leaving the less important.
Often referred to as the 80-20 rule, the Pareto concept states the approximately 80%
of the problems come from 20% of the items. For instance, 80% of machine
breakdowns come from 20% of the machines, and 80% of the product defects come
from 20% of the causes of defects.
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Figure 4.4 The Pareto Chart (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
th ed, pg 206)
4.4.5 Flowcharts
Flowcharts describe a process in as much detail as possible by graphically displaying
the steps in proper sequence. A good flowchart should show all process steps under
analysis by the quality improvement team, identify critical process points for control,
suggest areas for further improvement, and help explain and solve a problem.
By breaking down the process into a series of steps, the flowchart simplifies the
analysis and gives some indication as to what event may be adversely impacting the
process.
4.4.6 Histogram
The histogram plots data in a frequency distribution table. What distinguishes the
histogram from a check sheet is that its data are grouped into rows so that the identity
of individual values is lost. Commonly used to present quality improvement data,
histograms work best with small amounts of data that vary considerably. When used
in process capability studies, histograms can display specification limits to show what
portion of the data does not meet the specifications.
After the raw data are collected, they are grouped in value and frequency and plotted
in a graphical form (left). A histogram's shape shows the nature of the distribution of
the data, as well as central tendency (average) and variability. Specification limits can
be used to display the capability of the process.
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4.4.7 Statistical Process Control (SPC) Charts
A control chart displays statistically determined upper and lower limits drawn on
either side of a process average. This chart shows if the collected data are within
upper and lower limits previously determined through statistical calculations of raw
data from earlier trials.
The construction of a control chart is based on statistical principles and statistical
distributions, particularly the normal distribution. When used in conjunction with a
manufacturing process, such charts can indicate trends and signal when a process is
out of control. The center line of a control chart represents an estimate of the process
mean; the upper and lower critical limits are also indicated. The process results are
monitored over time and should remain within the control limits; if they do not, an
investigation is conducted for the causes and corrective action taken. A control chart
helps determine variability so it can be reduced as much as is economically justifiable.
In preparing a control chart, the mean upper control limit (UCL) and lower control
limit (LCL) of an approved process and its data are calculated. A blank control chart
with mean UCL and LCL with no data points is created; data points are added as they
are statistically calculated from the raw data.
Figure 4.5 The Statistical Process Control (SPC) Chart (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
th ed, pg 208)
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Review Questions
1. Quality has at least three categories of definitions; identify them. Provide a brief
explanation of each.
2. Identify the four costs of quality. Which one is hardest to evaluate? Explain.
3. Identify the major concepts of TQM. 4. How is source inspection related to employee empowerment? 5. What steps can be taken to develop benchmarks?
6. Explain how just-in-time processes relate to the quality of an organization's outputs.
7. Identify the five steps of DMAIC. 8. _________ is the Japanese word for the ongoing process of incremental
improvement. 9. Explain how a Pareto chart can identify the most important causes of errors in a
process.
10. Perform a Pareto analysis on the following information:
11. Construct a cause-and-effect diagram showing why a student might be dissatisfied with the cafeteria. 12. ________ are graphical presentations of data over time that show upper and lower control limits for processes we want to control.
Reason for unsatisfying stay at hotel Frequency
Unfriendly staff 6 Room not clean 2 Room not ready at check-in 3 No towels at pool 33 No blanket for pull-out sofa 4 Pool water too cold 3 Breakfast of poor quality 16 Elevator too slow or not working 23 Took too long to register 7 Bill incorrect 3
Total 100
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Lesson 5 : Process Strategy and Capacity Planning
Learning Outcomes:
At the end of this lesson, students should be able to:
1. Discuss the major process decisions and position each process on a volume-
variety product-process matrix.
2. Configure operations into work flows and layouts.
3. Define process reengineering and process improvement.
4. Distinguish between design capacity, effective capacity and efficiency.
5. Identify a systematic approach to capacity planning.
5.1 Process Strategy
A process strategy (or transformation) strategy is an organisation’s approach to
transforming resources into goods and services. The objective of a process strategy is
to build a production process that meets customer requirements and product
specifications within cost and other managerial constraints. The process selected will
have a long-term effect on the efficiency and flexibility of production, as well as on
cost and quality of the goods produced. Therefore, much of a firm’s operations
strategy is determined at the time of this process decision.
Figure 5.1 : Process selected must fit with Volume and Variety (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
In summary, the main characteristics of Mass Customisation are:
The rapid, low-cost production of goods and service to satisfy increasingly
unique customer desires
Combines the flexibility of a process focus with the efficiency of a product
focus
5.3 Importance of Capacity Planning
An organization determines its long-term capabilities through capacity
planning. Capacity planning is done with respect to:
o Demand of the products or services
o Technology of equipment and processes to make and deliver those
products and services
o The competitive environment
Invariably, the plans are to deliver the products or services on time, at the
right price and the right quality.
Capacity is expressed in two ways:
Design capacity – maximum output rate designed
Effective capacity – what is actually used is the effective capacity –
this is determined by real demand minus allowances, like planned
maintenance.
The lack of capacity results in loss of customers while overcapacity is
wasteful. How does one find the balance? A systematic approach to plan
capacity to find the balance is important, and it must be recognized early that
this not a pure science. It must be done continuously, through some hard
decisions to expand and contract, in order that a firm will be able to have the
intended capacity to serve its customers’ needs.
One needs to start from three basic questions, namely,
1. What type of capacity is needed?
2. How much capacity is needed?
3. When must the capacity be made available?
If one can get answers to the questions, the next phase is to take steps to plan
the capacity.
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Steps of Capacity Planning Process:
estimate the level of future capacity needs
evaluate the present capacity and facilities and identify the gaps
identify the alternatives to close the gaps
carry out financial analysis of each alternative
assess the qualitative factors of each alternative
select the best alternative at the least cost and optimal utilization of
resources that meets the firm’s goals
implement the choice
monitor results
5.4 Capacity planning for a service firm
The questions the service firm must ask itself and the steps that follow
subsequently may not be any different from what has been described so far.
However, the nature of the products makes capacity planning for a factory
more finite than that for a service firm.
Services being intangible and perishable pose difficulties to capacity
planning, like how near should the premises be located to potential customers?
Other considerations will be whether the capacity is for the peak period and if
that is done, what to do with excess capacity during the lull period?
For example how many cash register queues ought to be planned to service a
supermarket’s potential customers, in order to keep the waiting time
reasonable. What happens to the 10 a.m. to 12 noon or 3 p.m. to 6 p.m.
periods when few people visit the supermarkets? Would re-assigning the jobs
to cash registers’ attendants to the stores be acceptable to them? Otherwise,
what can be done to this idle capacity?
Capacity planning here focuses on speed of delivery and reduction of
customer waiting time. Managing demand may need to be part of the capacity
management strategy.
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Review Questions
1. Name the four basic process strategies; describe them in a complete sentence or
two each.
2. Why is equipment utilization in process-focused service industries often low? 3. Compare an intermittent process to a continuous process on the basis of variety,
volume, equipment utilization, and inventory.
4. How are modules useful in manufacturing processes? 5. What is mass customization? 6. What is Dell Computer's source of competitive advantage? In a short paragraph,
explain some of the steps Dell has taken to develop this advantage.
7. What is the fundamental distinction between design capacity and effective
capacity? Provide a brief example. 8. Why is the capacity decision important? 9. A good capacity decision requires that it be tightly integrated with the
organization's strategy and investments. But there are other "considerations" to making a good capacity decision. Name them. Describe each in a sentence or two.
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Lesson 6 : Location and Layout Strategies
Learning Outcomes:
At the end of this lesson, students should be able to:
1. Understand how goods-producing and service location decisions differ.
2. Explain how to apply the factor-rating method, locational break-even analysis,
center of gravity, and transportation model methods.
3. Distinguish between the various types of layout, including fixed-position, process-
orientated, office, retail, warehouse and process-orientated layouts.
6.1 General procedure
Location decision plays a key part in the strategic planning process of the production
systems design. It is usually based on profit potential – for minimizing costs or
maximizing revenue – or a combination of cost and speed of delivery, and is,
generally, to maximize the benefit of the location to the organization.
Depending on size and nature or scope of its operations, an organization may adopt
either an informal or formal approach to location decision. The formal approach is
adopted by large established companies which already operate in more than one
location and would generally consist of the following steps :
What are the evaluation criteria – is it for increased revenues or community
service ?
What are the important factors – market locations or raw materials ?
What other alternatives of location ?
o Identify the general region for a location
o Identify a small number of community alternatives
o Identify site alternatives among the community alternatives
Evaluate the alternatives and make a selection
6.2 Factors that affect location decisions
Depending on the type of business, and whether manufacturing or service, certain
factors may rank in importance over others. Some of the factors that affect location
decisions can be classified into three levels :
1. Regional Factors
2. Community Consideration
3. Site-related Factors
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6.2.1 Regional Factors
The primary regional factors involve:
Location of raw materials or supplies
Firms locate near / at source of raw materials out of necessity, perishability of
materials, and to reduce transportation costs.
Location of markets
Beside climate, tax and monetary incentives proximity to markets serve as part of
firms’ competitive strategies to reduce distribution costs and increase convenience to
consumers.
Labour factors
For labour-intensive organizations, availability of labour is very important. Skills and
worker attitudes of potential employees are factors that impact upon labour costs.
Climate and Taxes
Climate and taxes also affect location decision-making, beside low-cost energy or
labour. Weather conditions can cause delayed deliveries and work disruptions due to
inability of employees to get to work, and policies on business and personal income
taxes are major factors that either attract or reduce attractiveness to companies.
6.2.2 Community Considerations
Although new businesses may mean sources of future tax revenues and new job
opportunities, firms whose activities that will pollute the environment or lessen the
quality of life are generally unwelcome by communities. Firms, on the other hand,
determine the desirability of a community by :
Size of the community
Attitude of the community toward them
Availability of facilities for its workers and managers to live in, such as :
o Facilities for education, shopping, religious worship, and recreation
o Transportation
o Quality of police, fire and medical services
Cost
Availability of utilities
Environmental regulations
Governmental incentives
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6.2.3 Site-related Factors
Sites are long-term commitments. Primary considerations are site-related factors,
land costs aside, such as:
Suitability for type of business, especially for heavy manufacturing or erection of
large buildings – soil conditions, load factors, drainage rates
Size, architectural features and regulations governing room for future expansion,
current utility, sewer capacities
Parking facilities for employees, customers, access roads for trucks, or rail spurs
Zoning restrictions – industrial parks for light manufacturing or assembly,
warehouse operations, customer service facilities
Proximity to, and size of airport / rail stations for firms whose executives are
required to travel frequently
6.3 Methods of evaluating location alternatives
There are four major methods in location alternatives evaluation:
Factor-Rating Method
Centre-of-Gravity Method
Locational Cost-Profit-Volume Analysis
Transportation Model
We shall consider only Factor-Rating Method and Centre-of-Gravity Method here.
6.3.1 The Factor-Rating Method
Also known as Factor-Weighting Method, Factor Rating Method is widely used
because of its easy-to-understand format. It provides a mechanism for combining
diverse factors by assigning a range of point values to major factors affecting a set of
possible sites. The factors of each site are then rated and given a point value from its
assigned range. The site with the highest total points would be selected.
To develop a factor rating, the following procedure is used :
1. Develop a list of relevant factors called critical success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for each location
6. Recommend the location with the highest point score
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Alternatively, managers may prefer to establish minimum thresholds for composite
scores, that is, alternatives can be rejected without further consideration if they fail to
meet that minimum. However, should none of the alternatives meet the minimum,
either additional alternatives must be identified and evaluated or the minimum
threshold must be re-evaluated.
6.3.2 Centre of Gravity Method
The Centre of Gravity method is often used to locate intermediate or distribution
warehouses. This technique locates single facilities by considering existing facilities,
the distances between them, and the volumes of goods to be shipped. By using a map
that is accurately drawn to scale with the locations of existing facilities indicated, a
coordinate is then overlaid on the map to determine relative locations. Once the
coordinate system is in place, the coordinates of each destination can be determined.
In a simple calculation, inbound and outbound transportation costs are assumed equal
and special shipping costs for less than full loads are excluded.
6.3.3 Locational Break-Even Analysis
This method of cost-volume analysis is used for industrial locations
Three steps in the method
1. Determine fixed and variable costs for each location
2. Plot the cost for each location
3. Select location with lowest total cost for expected production volume
6.4 Facilities Layout
Layout refers to the configuration of departments, work centres, and equipment that
facilitates the movement of work, be it customers or materials, through the system.
In Manufacturing / Service, layout refers to that part of the process design involving
the physical layout, or arrangement, of all machines, equipment, and work-stations
used in the operating environment for delivering tangible products or services to
customers. In supply chain, layout refers to that part of the process design that
facilitates flow of materials, or information for timely delivery of the goods or
services to the client.
Layout planning is needed both in design of new facilities and redesign of existing
facilities to improve situations due to :
inefficient operations – high cost, bottlenecks
accidents or safety hazards
changes in design of products / services
introduction of new products / services
changes in environmental or other legal requirements
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morale problems – lack of face-to-face contact
changing markets, needs or new technology
Layout decisions are important as they
have a significant impact on the cost and efficiency of operations – poor
layout design can adversely affect system performance
involve long-term commitments – hence mistakes are difficult to overcome
require substantial investments of money and effort – already costly in itself
both in terms of labour, materials, and time, facility layout becomes doubly
costly in re-organizing an existing arrangement as it would entail
o direct cost of re-organization
o expense of curtailing operations during the changeover
6.4.1 Product-oriented layout
Product layouts are arranged to correspond to the technological processing
requirements of products that are highly standardized. As each item follows the same
sequence and move quickly from operation to operation, product layouts achieve a
smooth and rapid flow of large volumes of goods or customers through a system,
hence the term, “production line”.
6.4.2 Process-oriented layout
Process layouts feature departments that group item-processing or service-provision
by similar operations to handle discontinuous workflow (referred to as intermittent
processing). As process layouts are designed to handle varied processing
requirements, equipment are arranged by type rather than by processing sequence.
Use of general-purpose equipment can also provide the flexibility to handle a wide
range of processing requirements. Machine shops and hospitals are examples of
process layouts in manufacturing and service environments, respectively.
6.4.3 Fixed-Position layout
Fixed-position layouts arise out of necessity, due to the nature of the project (such as
building a house), weight, size or bulk that make movement of the product
undesirable or extremely difficult. In such an arrangement, workers, materials and
equipment are moved about as needed while keeping the items that are being worked
on stationary.
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6.4.4 Cellular Layout
Cellular layouts group workstations into “cells”, determined by operations that are
needed to be performed for a set of similar items or part families with similar
processing requirements. Since all parts follow the same route, machines are arranged
to handle all of the operations necessary for a “family” of similar parts, with minor
variations allowed.
6.4.5 Warehouse and Storage layout
Objective is to optimize trade-offs between handling costs and costs associated with
warehouse space
Maximize the total “cube” of the warehouse – utilize its full volume while
maintaining low material handling costs
They require important considerations of :
Frequency of order
Correlations between items
Number and widths of aisles
Height of storage racks, rail and / or truck loading / unloading
Need for periodic physical count of stored items
6.4.6 Service or Retail layout
Allocates shelf space and responds to customer behavior
Such as department stores, supermarkets, specialty stores – take into account:
Presence of customers
Opportunity to influence sales volume and customer attitudes
Traffic patterns and traffic flow
6.4.7 Office layout
It consists of grouping of workers, their equipment, and spaces to provide comfort,
safety, and movement of information.
Two trends are influencing the transformations of office layouts:
Increasing use of electronic communications – replacing flow of paperwork
Open-concept to create an image of openness with use of low-rise partition.
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Review Questions
1. State the fundamental objective of a firm's location strategy. How is this basic
objective carried out by industrial or goods-producing firms; how does that differ for service firms?
2. Identify five factors that affect location decisions at the site level. 3. "Proximity" or closeness implies that a firm should locate "close" to something.
What are the three kinds of proximity described in the text? What are the basic conditions under which each is appropriate? What kinds of firms are likely to use each of these?
4. Identify the four major quantitative methods for solving location problems. 5. What kinds of location decisions are appropriate for use of center-of-gravity
analysis? What variable is being optimized in this analysis? 6. Using the factor ratings shown below, determine which location alternative should
be chosen on the basis of maximum composite score.
7. A telecommunications firm is planning to lay fiber optic cable from several community college distance learning sites to a central studio, in such a way that the miles of cable are minimized. Some locations require more than one set of cables (these are the loads). Where should the studio be located to accomplish the objective?
College Map Coordinate (x, y) Load
A (2,10) 3 B (6,8) 2 C (4,9) 4 D (9,5) 1 E (8,1) 3 F (3,2) 2 G (2,6) 1
8. Identify the seven fundamental layout strategies. Describe the use of each one very briefly. 9. What are the advantages and disadvantages of product layouts?
Circuit boardsCircuit boardsDistribution Distribution
systemssystemsForward integration
Flour millingIntegrated
circuitsAutomobiles
Current transformation
SteelSteelBackward integration
FarmingFarmingSiliconSiliconIron oreIron oreRaw material Raw material (suppliers)(suppliers)
Vertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical IntegrationVertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical Integration
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7.5 Vendor Selection
For those goods and services a firm buys, vendors must be selected. Vendor selection
considers numerous factors, such as strategic fit, vendor competence, delivery, and
quality performance. Because a firm may have some competence in all areas and may
have exceptional competence in only a few, selection can be challenging.
Procurement policies also need to be established. Those might address issues such as
percent of business done with any one supplier or with minority businesses.
We now examine vendor selection as a three-stage process
Vendor evaluation
Vendor Development
Negotiations
7.5.1 Vendor evaluation
The first stage of vendor selection, vendor evaluation, involves finding potential
vendors and determining the likelihood of them becoming good suppliers. This phase
requires the development of evaluation criteria such as those criteria shown in figure
7.2. However, both the criteria and the weights selected vary depending on the
supply chain strategy being implemented.
Figure 7.3 : Weighted Approach to Vendor Selection (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
The selection of competent suppliers is critical. If good suppliers are not selected,
then all other supply-chain efforts are wasted. As firms move towards using fewer
long-term suppliers, the issues of financial strength, quality management, research,
technical ability, and potential for a close long-term relationship play an increasingly
important role. These attributes should be noted in the evaluation process.
7.5.2 Vendor Development
The second stage of vendor selection is vendor development. Assuming that a firm
wants to proceed with a particular vendor, how does it integrate this supplier into its
system? The buyer makes sure the vendor has an appreciation of quality
requirements, product specifications, schedules and delivery, the purchaser’s payment
system, and procurement policies. Vendor development may include everything from
training, to engineering and production help, to procedures for information transfer.
7.5.3 Negotiations
Regardless of the supply chain strategy adopted, negotiations regarding the critical
elements of the contractual relationship must take place. These negotiations often
focus on quality, delivery, payment, and cost. We will look at three types of
negotiation strategies:
(a) Cost-Based Price Model The supplier opens books to the purchaser. The contract price is then based on time
and materials or on a fixed cost with an escalation clause to accommodate changes in
the vendor’s labor and materials costs.
(b) Market-Based Price Model The price is based on a published, auction, or indexed price. Many commodities
(agriculture products, paper, metal, etc) are priced this way.
(c) Competitive Bidding – When suppliers are not willing to discuss costs,
competitive bidding is often appropriate. It is used for infrequent purchases and may
make establishing long-term relationships difficult.
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7.6 Logistics Management
Procurement activities may be combined with various shipping, warehousing, and
inventory activities to form a logistics system. The objective of logistics management
is to obtain efficient operations through the integration of all material acquisition,
movement, and storage activities. When transportation and inventory costs are
substantial on both the input and output sides of the production process, an emphasis
on logistics may be appropriate.
When logistics issues are significant or expensive, many firms opt for outsourcing the
logistics function.
Logistics companies often have the tracking technology that reduces transportation
losses and support delivery schedules that adhere to precise delivery time windows.
This allows competitive advantage to be gained through reduced costs and improved
customer service
7.6.1 Distribution Systems
Trucking
Moves the vast majority of manufactured goods
Chief advantage is flexibility
Railroads
Capable of carrying large loads
Little flexibility though containers and piggybacking have helped with this
Airfreight
Fast and flexible for light loads
May be expensive
Waterways
Typically used for bulky, low-value cargo
Used when shipping cost is more important than speed
Pipelines
Used for transporting oil, gas, and other chemical products
7.6.2 Third-Party Logistics
Supply chain managers may find that outsourcing logistics is advantageous in driving
down inventory investment and costs while improving delivery schedule and speed
through the use of third part logistics (3PL) companies.
Specialised logistics firms support this goal by coordinating the supplier’s inventory
system with the service capability of the delivery firm. Examples of 3PL are FedEx,
DHL & UPS.
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Review Questions
1. _______________ is the management of activities that procure raw materials, transform those materials into intermediate goods and final products, and deliver the products through a distribution system.
2. The supply chain strategy of ____________ increases the willingness to participate in JIT. 3. ___________ is developing the ability to produce goods or services previously purchased or actually buying a supplier or a distributor. 4. As the firm strategies vary from low-cost to response to differentiation, how does this impact the criteria used for selection of a supply chain strategy?
5. Transferring to external vendors a firm’s activities that have traditionally been internal is known as _________.
6. Of the three stages of vendor selection, the stage at which criteria, weights, and scores allow a numeric comparison is ______________.
7. A company is about to select a vendor for the outsourcing of all of its engineering,
environmental, and CAD requirements. It has identified four criteria critical to the
selection. These criteria, and their importance weights, appear below. Three firms,
A, C, and E, have indicated that they are interested in this position. The company
has scored each of the three candidates on these criteria, using a 1-10 scale, where
10 is best. Candidate A scored 7, 7, 7, and 5 on the four criteria. Candidate C
scored 9, 4, 8, and 6. Candidate E scored 5, 10, 10, and 7. Which vendor has the
highest composite score?
Criterion Weight
Engineering expertise .40
Financial and managerial strength .20
Integrity .15
Staff experience and qualifications .25
8. What are the three negotiation strategies? Briefly describe each of them.
9. _____________ is an approach that seeks efficiency of operations through the integration of all material acquisition, movement, and storage activities.
10. What advantages may result from effectively outsourcing the logistics function to a third party?
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Lesson 8 : Inventory Management
Learning Outcomes:
At the end of this lesson, students should be able to:
1. Determine the items deserving most attention and tightest inventory control.
2. Calculate the economic order quantity and apply it to various situations.
3. Determine the order quantity and reorder point for a continuous review inventory
control system.
4. Determine the review interval and target inventory level for a periodic review
inventory control system.
5. Define the key factors that determine the appropriate choice of an inventory
system.
8.1 Importance of Inventory Management
Inventory management is among the most important operations management functions
because inventory requires a great deal of capital and affects the delivery of goods to
customers. Inventory management has an impact on all business functions, particularly
operations, marketing and finance. Inventories provide customer service, which is of
vital interest to marketing. Finance is concerned with the overall financial picture of the
organisation, including funds allocated to inventory. And operations need inventories to
assure smooth and efficient production.
There are, however, conflicting inventory objectives within the firm. The finance
function generally prefers to keep the level of inventories low to conserve capital,
marketing prefers high levels of inventories to enhance sales, while operations prefers
adequate inventories for efficient production and smooth employment levels. Inventory
management must balance these conflicting objectives and manage inventory levels in the
best interests of the firm as a whole.
8.2 Reasons for holding inventory
8.2.1 To meet anticipated customer demand
A customer can be a person who walks in off the street to buy a new laptop, handphone.
These inventories are referred to as anticipation stocks because they held to satisfy
expected (i.e. average) demand.
8.2.2 To smooth production requirement
Firms that experience seasonal pattern in demand often build up inventories during pre-
season periods to meet overly high requirement during seasonal periods. These
inventories are aptly named as seasonal inventories
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8.2.3 To decouple operations
Historically, manufacturing firms have used inventories as buffers between successive
operations to maintain continuity of production that would otherwise be disrupted by
events such as breakdowns of equipment and accidents that cause a portion of the
operation to shut down temporarily. The buffers permit other operations to continue
temporarily while the problem is being solved. Similarly, firms have used buffers of raw
materials to insulate production from disruptions in deliveries from suppliers, and
finished goods inventory to buffer sales operations from manufacturing disruptions.
8.2.4 To prevent against stockouts
Delayed deliveries and unexpected increases in demand increase the risk of shortages.
Delay can occur because of weather conditions, supplier stock-outs, deliveries of wrong
materials, quality problems, and so on. The risk of shortages can be reduced by holding
safety stocks, which are stocks in excess of average demand to compensate for
variabilities in demand and lead time.
8.2.5 To take advantage of order cycles
To minimise purchasing and inventory costs, a firm often buys in quantities that exceed
immediate requirements. This necessitates storing some or all of the purchased amount
for later use. Similarly, it is usually economical to produce in large rather small
quantities. Again, the excess output must be stored for later use. Thus, inventory storage
enables a form to buy and produce in economic lot sizes without having to try to match
purchases or production with demand requirement in the short run. This results in
periodic orders, order cycles. The resulting stock is known as cycle stock.
8.2.6 To hedge against price increases
Occasionally a firm will suspect that a substantial price increase is about to occur and
purchase larger-than-normal amounts to beat the increase. The ability to store extra
goods also allows a firm to take advantages of price discounts for larger orders.
8.2.7 To permit operations
The fact that production operations take a certain amount of time (i.e. they are not
instantaneous) means that there will generally be some work-in-process (WIP) inventory.
In addition, intermediate stocking of goods – including raw materials, semi-finished items
and finished goods at production sites, as well as goods stored in warehouses – leads to
pipeline inventories throughout a production-distribution system.
8.2.8 To take advantage of quantity discount
Suppliers may give discounts on large orders.
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8.3 Relationship between cost and inventory
Three basic costs are associated with inventories : holding, ordering and shortage costs.
8.3.1 Holding or carrying cost
Cost to carry an item in inventory for a length of time, usually a year.
This cost is related to store the items physically. Costs includes interest, insurance, taxes,
depreciation, obsolescence, deterioration, spoilage, breakage, pilferage (stealing) and
warehousing costs (heat, light, rent, security). They also include opportunity costs
associated with having funds that could be used elsewhere tied up in inventory.
Holding costs are stated in either of two ways : as a percentage of unit price or as a dollar
amount per unit. Typical annual holding costs range from 20-40% of the value of an
item. In other words, to hold a $100 item in inventory for one year could cost from $20
to $40.
8.3.2 Ordering cost
Cost of ordering and receiving inventory. They are the costs that vary with the actual
placement of an order. Besides shipping costs, they include determining how much is
needed, preparing invoices, shipping costs, inspecting goods upon arrival for quality and
quantity, and moving the goods to temporary storage. Ordering costs are generally
expressed as a fixed dollar amount per order, regardless of order size.
When a firm produces it own inventory instead of ordering it from a supplier, the costs of
machine setup (eg. preparing equipment for the job by adjusting the machine, changing
cutting tools) are analogous to ordering costs. That is, they are expressed as a fixed
charge per production run, regardless of the size of the run
8.3.3 Shortage cost
The shortage cost result when demand exceeds the supply of inventory on hand. These
costs can include the opportunity cost of not making a sale, loss of customer goodwill,
late charges, and similar costs. Furthermore, if the shortage occurs in an item carried for
internal use (eg. to supply an assembly line), the cost of lost production or downtime is
considered a shortage cost. Such costs can easily run into hundreds of dollars a minute or
more. Shortage costs are sometimes difficult to measure, and they may be subjectively
estimated.
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8.4 ABC Classification System
In inventories, a few items usually account for most of the inventory value as measured
by dollar usage. Thus, one can manage these few items intensively and control most of
the inventory value.
In inventory work, the items are usually divided into these three classes : A, B and C.
Class A typically contains about 20% of the items and 80% of the dollar usage. It
therefore represents the most significant few.
At the other extreme, class C contains 50% of the items and only 5% of the dollar usage.
These items contribute very little of the dollar value of inventory.
In the middle is class B, with 30% of the items and 15% of the dollar usage.
The classification of inventory in this way is often called ABC analysis or the 80-20 rule
(Pareto rule)
The table 8.1 is an example of an inventory with 10 items. In this case, items 3 and 6
account for a great deal of the dollar usage (73.2%). On the other hand, items 1, 5, 7, 8
and 10 are low in dollar usage (10.5%)
Table 8.1 Annual usage of items by dollar value :
Item Annual Demand Unit Cost Annual $ usage % of $ usage
1 5,000 $1.50 $7,500 2.9
2 1,500 $8.00 $12,000 4.7
3 10,000 $10.50 $105,000 41.2
4 6,000 $2.00 $12,000 4.7
5 7,500 $0.50 $3,750 1.5
6 6,000 $13.60 $81,600 32.0
7 5,000 $0.75 $3,750 1.5
8 4,500 $1.25 $5,625 2.2
9 7,000 $2.50 $17,500 6.9
10 3,000 $2.00 $6,000 2.4
Total $254,725 100.0
The ABC principle, therefore, applies to this small example. The percentages in each
category are summarised in Table 8.2
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Table 8.2 ABC Classification
Class Item Numbers % of total items % of total $ usage
A 3, 6 20 73.2
B 2, 4, 9 30 16.3
C 1, 5, 7, 8, 10 50 10.5
Total 100 100.0
The designation of three classes is arbitrary; there could be any number of classes. Also,
the exact percentage of items in each class will vary from one inventory to the next. The
important factors are the two extremes: a few items which are significant and a large
number of items which are relatively insignificant.
Most of the dollar usage in inventory (80%) can be controlled by closely monitoring the
A items (20%). For these items, a tight control system including continuous review of
stock levels, less safety stock, and close attention to record accuracy might be used.
On the other hand, looser control might be used for C items. A periodic review system
could be used to consolidate orders from the same supplier, and less record accuracy
might be sufficient. The B items require an intermediate level of attention and
management control.
With computerised systems, a uniform level of control is sometimes used for all items.
Nevertheless, the management of inventories still requires the setting of priorities, and the
ABC concept is often useful in doing this.
8.5 Economic Order Quantity (EOQ) Model
The question of how much to order is frequently determined by using an Economic Order
Quantity (EOQ) model. EOQ model is used to identify a fixed order size that will
minimise the sum of the annual cost of holding inventory and ordering inventory.
Assumptions for the EOQ model :
1) Only one product is involved
2) Annual demand requirements are known
3) Demand is spread evenly throughout the year so that the demand rate is reasonably
constant
4) Lead time does not vary
5) Each order is received in a single delivery
6) There are no quantity discount
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Figure 8.1 Economic Order Quantity (EOQ) Model
Annual carry cost is computed by multiplying the average amount of inventory on hand
by the cost to carry one unit for one year, even though any given unit would not
necessarily be held for a year. The average inventory is simply half of the order quantity.
The amount on hand decreases steadily from Q units to 0, for average of (Q+0)/2, or Q/2.
Using the symbol H to represent the average annual carrying cost per unit, the total
annual carrying cost is
Annual carrying cost = (Q/2) x H
Where Q = Order quantity in units
H = Holding (carrying) cost per unit
Annual ordering cost is a function of the number of orders per year and the ordering cost
per order :
Annual ordering cost = (D/Q) x S
Where D = Demand, usually in units per year
S = Ordering cost
Order Size, Q = 700 units Usage rate = 100 units/day Lead time = 2 days Re-order point = 200 units (2 day’s supply)
Q=700 units
Reorder point =200 units
Quantity on hand
Usage rate = 100 units/day
Day
Receive
order
Receive
order
Receive
order
Place order
Place order
Lead time = 2 days
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Figure 8.2 Cost Components of Economic Order Quantity (EOQ) Model
The total annual cost associated with carrying and ordering inventory when Q units are
ordered each time is
Total Cost = Annual carrying cost + Annual ordering cost
TC = (Q/2)H + (D/Q)S
The total cost curve is U-shaped and it reaches its minimum at the quantity where
carrying and ordering costs are equal. An expression for the optimal order quantity, Qo
can be obtained using calculus. The result is the formula :
Differentiate TC with respect to Q
d TC / d Q = d (QH/2) + d (D/Q) S = H/2 – DS/Q2
Setting the result equal to zero, and solving for Q
0 = H/2 – DS/Q2
Annual Cost
Order Quantity
Annual Cost
Annual Cost
Order Quantity
Order Quantity
(Q/2)H
(D/Q)S
TC = (Q/2)H + (D/Q)S
A. Carrying costs linearly related to order size
B. Ordering costs are inversely and
nonlinearly related to order size
C. The total cost curve is U-shaped.
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Q2
= (2DS)/H
Q = √ (2DS/H)
The minimum total cost is then found by substituting Qo for Q, thus
Qo = √ (2DS/H)
Example :
A telecommunication manufacturing plant uses approximately 64,000 integrated circuit
(IC) chips every year. Annual holding cost is $6 per chip and ordering cost is $120.
Determine the optimal order quantity.
Answer :
Demand, D = 64,000 chips per year
Ordering cost, S = $120
Holding cost, H = $6 per unit per year
Optimal order quantity,
Qo = √ (2DS/H)
= √ (2 x 64000 x 120) / 6
= 1600 chips
8.6 Fixed Order Quantity System & Fixed Order Period System
The fixed order period model is used when orders must be placed at fixed time interval
(weekly, twice a month, etc) : The timing of order is set. The question, them at each
order point is, how much to order? Fixed period ordering systems are widely used by
retail businesses. If demand is variable, the order size will tend to vary from cycle to
cycle. This is quite different from an EOQ approach in which the order size generally
remains fixed from cycle to cycle, while the length of the cycle varies (shorter if demand
is above average, and longer if demand is below average).
Reasons for using the Fixed Order Period Model
In some cases, a supplier’s policy might encourage orders at fixed intervals. Even when
that is not the case, grouping orders for items from the same supplier can produce savings
in shipping costs. Furthermore, some situations do not readily lend themselves to
continuous monitoring of inventory levels. Many retail operations (eg. small grocery
stores) fall into this category. The alternative for them is to use fixed period ordering,
which requires only periodic checks of inventory level.
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Determining the amount to order
Figures 8.3 and 8.4 provide a comparison of the fixed quantity and fixed period systems.
In the fixed quantity arrangement, orders are triggered by a quantity (ROP), while in the
fixed period arrangement orders are triggered by a time. Therefore, the fixed period
system must have stock-out protection for lead time plus the next order cycle, but the
fixed quantity system needs protection only during lead time because additional orders
can be placed at any time and will be received shortly thereafter. Consequently, there is
greater need for safety stock in the fixed period model than in fixed quantity model.
Both models are sensitive to demand experience just prior to reordering, but in somewhat
different ways. In the fixed quantity model, a higher-than-normal demand causes a
shorter time between orders, whereas in the fixed period model, the result is a larger
order size.
Figure 8.3 Fixed Period Order Model
Quantity
on hand
Time
Receive
order
Receive
order
Place order Place
order
Place order
Receive order
Order quantity
Safety Stock
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Another difference is that the fixed quantity model requires close monitoring of inventory
levels in order to know when the amount on hand has reached the reorder point. The
fixed period model requires only a periodic review (i.e. physical count) of inventory
levels just prior to placing an order to determine how much is needed.
To summarise, good inventory management is often the mark of a well-run organisation.
Inventory levels must be planned carefully, in order to balance the cost of holding
inventory and the cost of providing reasonable level of customer service. Successful
inventory management requires a system to keep track of inventory transactions, accurate
information about demand and lead times, realistic estimates of certain inventory-related
costs, and a priority system for classifying the items in inventory and allocating control
efforts.
Figure 8.4 Fixed Quantity Order Model
Reorder point (ROP)
Quantity on hand
Time
Receive order
Receive order Place
order
Place order
Place order
Receive order
Order quantity
Safety Stock
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Review Questions
1. What are the main reasons that an organization has inventory?
2. Describe ABC inventory analysis in one sentence. What are some policies that may
be based upon the results of an ABC analysis?
3. Your company has compiled the following data on the small set of products that comprise the specialty repair parts division. Perform ABC analysis on the data. Which products do you suggest the firm keep the tightest control over? Explain.
SKU Annual Demand Unit Cost
R11 250 $250
S22 75 $90
T33 20 $60
U44 150 $150
V55 100 $75
4. What are the assumptions of the EOQ model?
5. List the typical components that constitute inventory holding or carrying costs.
6. List the typical cost components that constitute ordering costs in inventory systems. 7. Given the following data: D=65,000 units per year, S = $120 per setup, P = $5 per unit, and I = 25% per year, calculate the EOQ and calculate annual costs following EOQ behavior. 8. What is a reorder point?
9. Lead time for one of Montegut Manufacturing's fastest moving products is 4 days. Demand during this period averages 100 units per day. What would be an appropriate re-order point?
10. Describe the difference between a fixed-quantity and a fixed-period inventory
system?
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Lesson 9 : Materials Requirements Planning and ERP
Learning Outcomes:
At the end of this lesson, students should be able to:
1. Explain how the concept of dependent demand is fundamental to resource planning.
2. Describe a master production schedule (MPS) and the information it provides.
3. Discuss the logic of a material requirements planning (MRP) system.
4. Identify production and purchase orders needed for dependent demand items.
5. Explain how enterprise resource planning (ERP) systems can foster better resource
planning.
9.1 Independent versus Dependent Demand
A crucial distinction in inventory management is whether demand is independent or
dependent.
Independent demand is influenced by market conditions outside the control of operations.
Eg. Finished goods inventories and spare parts for replacement usually have independent
demand.
Dependent demand is related to the demand for items that are subassemblies or
components parts to be used in the production of finished goods.
Therefore, once management receives an order or make a forecast of the demand for the
final product (independent demand), quantities required for all components can be
computed, because all components are dependent items.
9.2 An Overview of MRP
The Material Requirement Planning (MRP) is a dependent demand technique that uses a
bill-of-material (BOM), inventory, expected receipts, and a master production
schedule (MPS) to determine material requirements.
The MRP system is used by many companies and has the following benefits:
1. Better response to customer orders and market changes wins orders and market
share;
2. Improved utilization of facilities and labor yields higher productivity and return of
investment;
3. Reduced inventory levels free up capital and floor space for others use.
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Material Requirement Planning (MRP) is a computer-based information system that
translates the finished product requirements of the master schedule into time-phased
requirements for subassemblies, component parts, and raw materials, working backward
from the due date using lead times and other information to determine when and how
much to order.
MRP is designed to answer three questions :
What is needed ?
How much is needed ?
When is it needed ?
9.2.1 MRP Requirements
The effective use of MRP requires that the operations manager know the following:
1. Master production schedule (what is be made and when)
2. Specifications or bill of material (materials and parts required to make the
product)
3. Inventory availability (what is in stock)
4. Purchase orders outstanding (what is on order, also called expected receipts)
5. Lead times (how long it takes to get various components)
9.2.2 Master Production Schedule (MPS)
The Master Production Schedule (MPS) states which end items to be produced, when
they are needed, and in what quantities.
The quantities in a master schedule come from a number of different sources, including
customer orders, forecasts, and orders from warehouses to build up for seasonal
inventories.
Figure 9.1 : Master Production Schedule (MPS) (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
th ed, pg 564)
Months January February
Aggregate Production Plan 1,500 1,200(Shows the totalquantity of amplifiers)
Weeks 1 2 3 4 5 6 7 8
Master Production Schedule(Shows the specific type andquantity of amplifier to beproduced
240-watt amplifier 100 100 100 100
150-watt amplifier 500 500 450 450
75-watt amplifier 300 100
Months January February
Aggregate Production Plan 1,500 1,200(Shows the totalquantity of amplifiers)
Weeks 1 2 3 4 5 6 7 8
Master Production Schedule(Shows the specific type andquantity of amplifier to beproduced
240-watt amplifier 100 100 100 100
150-watt amplifier 500 500 450 450
75-watt amplifier 300 100
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9.2.3 Bill of Materials
A Bill of Materials (BOM) contains a listing of all of the assemblies, subassemblies,
parts, and raw materials that are needed to produce one unit of finished product. Thus,
each finished product has its own bill of materials.
The listing in the bill of materials is hierarchical; it shows the quantity of each item
needed to complete one unit of the following level of assembly. The nature of this aspect
of a bill of materials is clear when we consider a product structure tree, which provides
a visual depiction of the subassemblies and components needed to assemble a product.
The example below shows how to develop the product structure and “explode” it to reveal
the requirements for each component. A bill of material for item A consists of items B
and C. Items above any level are called parents; items below any level are called
children. By convention, the top level in a BOM is the “0” level
Figure 9.2 : Bill of Materials and Product Structure Tree (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
th ed, pg 565)
Based on the above product structure tree, assuming the demand for “A” is 50 units, we
can “explode” the requirements for the components parts as follow:
Part B: 2 x number of As = (2)(50) = 100
Part C:3 x number of As = (3)(50) = 150
Part D: 2 x number of Bs + 2 x number of Fs = (2)(100) + (2)(300) = 800
Part E: 2 x number of Bs + 2 x number of Cs = (2)(100) + (2)(150) = 500
Product structure for Product structure for ““AwesomeAwesome”” ((AA))
AA
LevelLevel
00
Product structure for Product structure for ““AwesomeAwesome”” ((AA))
AA
LevelLevel
00
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9.2.4 Accurate Inventory Records
Accurate inventory records are absolutely required for MRP (or any dependent
demand system) to operate correctly
Generally MRP systems require 99% accuracy
Outstanding purchase orders must accurately reflect quantities and scheduled receipts
9.2.5 Lead Time for components
The time required to purchase, produce, or assemble an item
For production – the sum of the order, wait, move, setup, store, and run times
For purchased items – the time between the recognition of a need and the
availability of the item for production
Using the example in figure 9.2, when the BOM is modified by adding lead time for each
component, we then have a time-phased product structure. Time is this structure is
shown on the horizontal axis.
Figure 9.3 : Time-phased product structure (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
th ed, pg 568)
|| || || || || || || ||
11 22 33 44 55 66 77 88Time in weeksTime in weeks
FF
2 weeks2 weeks
3 weeks3 weeks
1 week1 week
AA
2 weeks2 weeks
1 week1 week
DD
EE
2 weeks2 weeks
DD
GG
1 week1 week
1 week1 week
2 weeks to 2 weeks to produceproduce
BB
CC
EE
Start production of DStart production of DMust have D and E Must have D and E completed here so completed here so
production can begin production can begin on Bon B
|| || || || || || || ||
11 22 33 44 55 66 77 88Time in weeksTime in weeks
|| || || || || || || ||
11 22 33 44 55 66 77 88Time in weeksTime in weeks
FF
2 weeks2 weeks
3 weeks3 weeks
FF
2 weeks2 weeks
3 weeks3 weeks
2 weeks2 weeks
3 weeks3 weeks
1 week1 week
AA
1 week1 week
AA
2 weeks2 weeks
1 week1 week
DD
EE
2 weeks2 weeks
1 week1 week
DD
EE
2 weeks2 weeks
DD
GG
1 week1 week
2 weeks2 weeks
DD
GG
1 week1 week
1 week1 week
2 weeks to 2 weeks to produceproduce
BB
CC
EE1 week1 week
2 weeks to 2 weeks to produceproduce
BB
CC
EE
Start production of DStart production of DStart production of DStart production of DMust have D and E Must have D and E completed here so completed here so
production can begin production can begin on Bon B
Must have D and E Must have D and E completed here so completed here so
production can begin production can begin on Bon B
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9.3 MRP Structure
Although most MRP systems are computerized, the MRP procedure is straightforward
and can be done manually by hand. A master production schedule (MPS), a bill of
materials (BOM), inventory and purchase records, and lead times for each item are the
ingredients of a material requirement planning (MRP) system.
Figure 9.4 : Structure of the MRP system (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
th ed, pg 568)
Once these ingredients are available and accurate, the next step is to construct a gross
material requirements plan. The gross material requirement plan is a schedule shown
in figure 9.5. It combines a master product schedule (that requires 50 units of final
product “A” in week 8) and the time-phased schedule. It shows when an item must be
ordered from suppliers if there is no inventory on hand or when the production of an item
must be started to satisfy demand for the finished product by a particular date.
Output ReportsOutput Reports
MRP by period report
MRP by date report
Planned order report
Purchase advice
Exception reports
Order early or late or not needed
Order quantity too small or too large
Data FilesData Files
Purchasing data
BOM
Lead times
(Item master file)
Inventory data
Masterproduction schedule
Material requirement
planning programs
(computer and software)
Output ReportsOutput Reports
MRP by period report
MRP by date report
Planned order report
Purchase advice
Exception reports
Order early or late or not needed
Order quantity too small or too large
Output ReportsOutput Reports
MRP by period report
MRP by date report
Planned order report
Purchase advice
Exception reports
Order early or late or not needed
Order quantity too small or too large
Output ReportsOutput Reports
MRP by period report
MRP by period report
MRP by date report
MRP by date report
Planned order report
Planned order report
Purchase advicePurchase advice
Exception reports
Order early or late or not needed
Order quantity too small or too large
Exception reports
Order early or late or not needed
Order quantity too small or too large
Data FilesData Files
Purchasing data
BOM
Lead times
(Item master file)
Inventory data
Data FilesData Files
Purchasing data
BOM
Lead times
(Item master file)
Inventory data
Data FilesData Files
Purchasing data
BOM
Lead times
(Item master file)
Inventory data
Masterproduction schedule
Masterproduction schedule
Masterproduction schedule
Material requirement
planning programs
(computer and software)
Material requirement
planning programs
(computer and software)
Material requirement
planning programs
(computer and software)
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Figure 9.5 : Gross material requirements plan for 50 units of final product “A” (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
th ed, pg 569)
The procedures to work out the gross materials requirements are:
1. Starts with a production schedule for the end item – 50 units of Item A in week 8
2. Using the lead time for the item, determine the week in which the order should be
released – a 1 week lead time means the order for 50 units should be released in week
7
3. This step is often called “lead time offset” or “time phasing”
4. From the BOM, every Item A requires 2 Item Bs – 100 Item Bs are required in week
7 to satisfy the order release for Item A
5. The lead time for the Item B is 2 weeks – release an order for 100 units of Item B in
week 5
6. The timing and quantity for component requirements are determined by the order
release of the parent(s)
7. The process continues through the entire BOM one level at a time – often called
“explosion”
8. By processing the BOM by level, items with multiple parents are only processed
once, saving time and resources and reducing confusion
9. Low-level coding ensures that each item appears at only one level in the BOM
WeekWeek
1 2 3 4 5 6 7 8 Lead Time
A. Required date 50Order release date 50 1 week
B. Required date 100Order release date 100 2 weeks
C. Required date 150Order release date 150 1 week
E. Required date 200 300Order release date 200 300 2 weeks
F. Required date 300Order release date 300 3 weeks
D. Required date 600 200Order release date 600 200 1 week
G. Required date 300Order release date 300 2 weeks
WeekWeek
1 2 3 4 5 6 7 8 Lead Time
A. Required date 50Order release date 50 1 week
B. Required date 100Order release date 100 2 weeks
C. Required date 150Order release date 150 1 week
E. Required date 200 300Order release date 200 300 2 weeks
F. Required date 300Order release date 300 3 weeks
D. Required date 600 200Order release date 600 200 1 week
G. Required date 300Order release date 300 2 weeks
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9.4 Material Requirement Planning II (MRP II)
Once an MRP system is in place, inventory data can be augmented by other useful
information:
Labor hours
Material costs
Capital costs
Virtually any resource
This system is generally called MRP II or Material Resource Planning
9.5 Enterprise Resource Planning (ERP)
The enterprise resource planning (ERP) is an extension of the MRP system to tie in
customers and suppliers, it:
1. allows automation and integration of many business processes
2. shares common data bases and business practices
3. display produces information in real time
The ERP also coordinates business from supplier evaluation to customer invoicing
The ERP modules include:
Basic MRP
Finance
Human resources
Supply chain management (SCM)
Customer relationship management (CRM)
ERP can be highly customized to meet specific business requirements. The Enterprise
application integration software (EAI) allows ERP systems to be integrated with:
Warehouse management
Logistics
Electronic catalogs
Quality management
ERP systems have the potential to:
Reduce transaction costs
Increase the speed and accuracy of information
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Figure 9.6 : MRP and ERP information flows, showing customer relationship
management (CRM), supply chain management (SCM) and finance/accounting. (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
th ed, pg 582)
9.5.1 Advantages of ERP Systems
1. Provides integration of the supply chain, production, and administration
2. Creates commonality of databases
3. Can incorporate improved best processes
4. Increases communication and collaboration between business units and sites
5. Has an off-the-shelf software database
6. May provide a strategic advantage
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9.5.2 Disadvantages of ERP Systems
1. Is very expensive to purchase and even more so to customize
2. Implementation may require major changes in the company and its processes
3. Is so complex that many companies cannot adjust to it
4. Involves an ongoing, possibly never completed, process for implementation
5. Expertise is limited with ongoing staffing problems
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Review Questions:
1. ______________ is a dependent demand technique that uses a bill of material, inventory, expected receipts, and a master production schedule to determine material requirements. 2. What is MRP? Identify four benefits from its use.
3. A(n) ____________ is a timetable that specifies what is to be made and when. 4. What information is necessary for an operations manager to make effective use of a dependent inventory demand model? 5. A(n) ____________ is a listing of the components, their description, and the quantity of each required to make one unit of a product. 6. If the explosion of the bill of material tells MRP how much of each part is needed, how does MRP learn when each of these parts is needed?
7. Consider the following bill of material. Fifty units of Product A are needed. Assuming no on-hand inventory, and no scheduled receipts, explode the bill of material.
A
D
C(3)B(2)
E(2)D
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8. Consider the following bill of material. Fifty units of Product A are needed. Assuming no on-hand inventory, explode the bill of material.
9. Each X requires 2 of component Y and 1 of part W. Each Y requires 10 of Z. Each W requires 3 of Q and 2 of R. Lead times are X = 1 week, Y = 1 week, W = 2 weeks, R = 1 week, Z = 3 weeks, and Q = 3 weeks.
a. Construct the time-phased product structure. b. Construct the bill of material.
10. Describe how MRP II differs from MRP.
11. What does enterprise resource planning (ERP) allow an organization to do?
12. What are the advantages of enterprise resource planning (ERP)? 13. What are the disadvantages of enterprise resource planning (ERP)?
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Lesson 10 : Project Management
Learning Outcomes:
At the end of this lesson, students should be able to:
5. Discuss the business case for a project.
6. Describe a project in terms of a work breakdown structure.
7. Understand the CPM & PERT approaches
8. Understand the use of Gantt charts in project management.
10.1 The importance of Project Management
Project Management is the discipline of organizing and managing resources (e.g.
people) in such a way that the project is completed within defined scope, quality, time
and cost constraints. A project is a temporary and one-time endeavor undertaken to
create a unique product or service, which brings about beneficial change or added
value. This property of being a temporary and one-time undertaking contrasts with
processes, or operations, which are permanent or semi-permanent ongoing functional
work to create the same product or service over and over again. The management of
these two systems is often very different and requires varying technical skills and
philosophy, hence requiring the development of project management.
The first challenge of project management is to ensure that a project is delivered
within defined constraints. The second, more ambitious challenge is the optimized
allocation and integration of inputs needed to meet pre-defined objectives. A project
is a carefully defined set of activities that use resources (money, people, materials,
energy, space, provisions, communication, quality, risk, etc.) to meet the pre-defined
objectives.
The management of projects involves three phases:
1. Planning : This phase include goal setting, defining the project, and team
organisation.
2. Scheduling : This phases related people, money, and suppliers to specific activities
and relates activities to each other.
3. Controlling : Here the firm monitors resources, costs, quality, and budgets. It also
revises or changes plans and shifts resources to meet time and cost demands.
Program Evaluation and Review Technique (PERT) and the Critical Path Method
(CPM) were both developed in the 1950s to help manager schedule, monitor and
control large and complex projects.
10.4.1 The framework of PERT and CPM
Six Steps PERT and CPM:
1. Define the project and prepare the work breakdown structure
2. Develop relationships among the activities - decide which activities must
precede and which must follow others
3. Draw the network connecting all of the activities
4. Assign time and/or cost estimates to each activity
5. Compute the longest time path through the network – this is called the critical
path
6. Use the network to help plan, schedule, monitor, and control the project
Questions PERT & CPM can answer:
1. When will the entire project be completed?
2. What are the critical activities or tasks in the project?
3. Which are the noncritical activities?
4. What is the probability the project will be completed by a specific date?
5. Is the project on schedule, behind schedule, or ahead of schedule?
6. Is the money spent equal to, less than, or greater than the budget?
7. Are there enough resources available to finish the project on time?
8. If the project must be finished in a shorter time, what is the way to accomplish
this at least cost?
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10.4.2 Network diagrams
The first step in a PERT or CPM network is to divide the entire project into
significant activities in accordance with the work breakdown structure (WBS). In this
course, we will introduce the Activity-On-Node (AON) diagram.
Under the AON convention, nodes designate activities. The table below shows six
common activity relationship in networks:
Common Activity 1 Common Activity 2
A comes before B, which comes
before C
A and B must both be completed before C
can start
Common Activity 3 Common Activity 4
B and C cannot begin until A is
completed
C and D cannot begin until both A and B are
completed
Common Activity 5 Common Activity 6
C cannot begin until both A and B are
completed; D cannot begin until B is
completed.
B and C cannot begin until A is completed.
D cannot begin until both B and C are
completed.
(Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 64)
A
C
D B A
B
C
D
A
B
C
D
B
A
C
A
C
B
A B C
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Example : Activity-on-Node at Milwaukee Paper
Activity Description Immediate Predecessors
A Build internal components —
B Modify roof and floor —
C Construct collection stack A
D Pour concrete and install frame A, B
E Build high-temperature burner C
F Install pollution control system C
G Install air pollution device D, E
H Inspect and test F, G
Table 10.1 : Milwaukee paper Manufacturing’s Activities and Predecessors.
(Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th
ed, pg 65)
Figure 10.4 Complete AON Network for Milwaukee Paper
(Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th
ed, pg 67)
G
E
F
H
C A
Start
D B
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10.5 Determining the Project Schedule
Once the project network has been drawn to show all the activities and their
precedence relationships, the next step is to determine the project schedule. That is,
we need to identify the planned starting and ending time for each activity.
To find out how long the project will take, we perform the critical path analysis for
the network. It is necessary to bear in mind that:
The critical path is the longest path through the network
The critical path is the shortest time in which the project can be completed
Any delay in critical path activities delays the project
Critical path activities have no slack time
Forward Pass
Earliest start (ES) = earliest time at which an activity can start, assuming all
predecessors have been completed
Earliest finish (EF) = earliest time at which an activity can be finished
Figure 10.5 Notation used in Nodes for Forward Pass
(Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th
ed, pg 69)
A
Activity Name or Symbol
Earliest Start ES
Earliest
Finish EF
Activity Duration
2
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Begin at starting event and work forward
Earliest Start Time Rule:
If an activity has only a single immediate predecessor, its ES equals the EF of
the predecessor
If an activity has multiple immediate predecessors, its ES is the maximum of
all the EF values of its predecessors
ES = Max {EF of all immediate predecessors}
Earliest Finish Time Rule:
The earliest finish time (EF) of an activity is the sum of its earliest start time
(ES) and its activity time
EF = ES + Activity time
Figure 10.6 Earliest Start and Earliest Finish Time for Milwaukee Paper
(Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th
ed, pg 70)
E
4
F
3
G
5
H
2
4 8 13
15
4
8 13
7
D
4
3 7
C
2
2 4
B
3
0 3
Start
0
0
0
A
2
2 0
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Review Questions
1. What are the three phases of a project? Describe each in a sentence or two.
2. Identify the responsibilities of project managers.
3. _______________ divides a project into more and more detailed components. 4. What is a project organization?
5. Identify and describe briefly each of the purposes of project scheduling.
6. What is the objective of critical path analysis?
7. Explain why the critical path is the longest, not the shortest, path through a network.
8. Briefly discuss what is meant by critical path analysis. What are critical path activities and why are they important?
9. A network consists of the activities in the following list. Times are given in
weeks.
Activity Preceding Time
A -- 8
B -- 3
C A 7
D A, B 3
E C 4
F D 6
a. Draw the network diagram. b. Calculate the ES and EF for each activity. c. What is project completion time?
10. Describe the differences between a Gantt chart and a PERT/CPM network.
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Lesson 11 : JIT and Lean Systems
Learning Outcomes:
At the end of this lesson, students should be able to:
1. Identify the characteristics and strategic advantages of JIT (just-in-time) and lean
systems.
2. Describe how lean systems can facilitate the continuous improvement of processes.
3. Understand kanban systems for creating a production schedule in a lean system.
4. Explain the implementation issues associated with the application of lean systems.
11.1 Just-in-Time, The Toyota Production System and Lean Operations
In this lesson, we will discuss JIT, TPS, and lean operations as approaches to
continuing improvement that drive out waste and lead to world class organizations.
Just-In-Time (JIT) is a philosophy of continuous and forced problem solving
via a focus on throughput and reduced inventory.
The Toyota Production System (TPS) emphasizes continuous improvement,
respect for people, and standard work practices.
Lean production supplies the customer with their exact wants when the
customer wants it without waste. Lean productions are driven by workflow
initiated by the “pull” of the customer’s order.
When implemented as a comprehensive manufacturing strategy, JIT, TPS, and lean
systems can sustain competitive advantage and result in increased overall returns.
If there is any distinction between JIT, TPS & lean operations, it is that:
JIT emphasizes forced problem solving;
TPS emphasizes employee learning and empowerment in an assembly-line
environment;
Lean operations emphasize understanding the customer.
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11.1.1 Eliminate Waste
Waste is anything that does not add value from the customer point of view, examples
are storage, inspection, delay, waiting in queues, and defective products do not add
value and are 100% waste.
Taiichi Ohno, noted for his work on the Toyota Production System (TPS), identified
seven categories of wastes:
1 Overproduction producing more than the customer orders or producing
early
2 Queues idle time, storage and waiting are wastes
3 Transportation moving material between plants or work centres and
handling more than once is waste.
4 Inventory unnecessary raw material, work-in-process (WIP),
finished goods, and excess operating supplies that add no
value is waste
5 Motion movement of equipment or people that adds no value is
waste
6 Over-processing extra work performed on the product that adds no value is
waste.
7 Defective products returns, warranty claims, rework and scrap are wastes.
For over a long period of time, managers have used “housekeeping” for a neat,
orderly, and efficient workplace and as a mean of reducing waste. Operations
managers have included a 5Ss checklist as part of the housekeeping efforts.
The 5 Ss are:
1 Sort/segregate keep what is needed, identify non-value item and
remove them. Getting rid of the non-value items makes
spaces available and usually improves work flow.
2 Simplify/straighten label and display for easy use
3 Shine/sweep clean daily, eliminate all of dirt, contaminations and
clutter.
4 Standardize remove variations from processes by developing
standard operating procedures and checklists.
5 Sustain/self-discipline review work periodically to recognize efforts and
motivate to sustain progress
US managers often add two additional Ss that contribute to establishing and
maintaining a lean workplace:
Safety – build in good safety practices into the above five activities.
Support/maintenance – reduce variability and unplanned downtime and costs.
Integrate daily shine tasks with preventive maintenance.
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11.1.2 Remove Variability
JIT systems require managers to reduce variability caused by both internal and
external factors. Variability is any deviation from the optimum process that delivers
perfect production time, every time. The less variability in a system, results in less
waste in the system. Most variability is created by tolerating waste or by poor
management.
Among the sources of variability are:
1. Incomplete or inaccurate drawings or specifications
2. Poor production processes resulting in incorrect quantities, late, or non-
conforming units
3. Unknown customer demands
Both JIT and inventory reduction are effective tools in identifying causes of
variability
11.1.3 Improve Throughput
Throughput is a measure (in units or time) that it takes to move an order from receipt
to delivery. The time between the arrival of raw materials and the shipping of the
finished order is called manufacturing cycle time.
A technique to increase throughput is a pull system. A pull system pulls a unit to
where it is needed as it is needed. Pull system are a standard tool of JIT systems. Pull
systems use signals to request production and delivery from supplying stations to
stations that have production capacity available. The pull system concept is used both
within the immediate production process and with suppliers. By pulling material in
small lots, inventory cushions are removed, exposing problems and emphasizing
continual improvement, at the same time, the manufacturing cycle time is reduced.
On the other hand, a push system dumps orders on the downstream stations
regardless of the need.
11.2 Just-In-Time (JIT)
With its forced problem solving via a focus on rapid throughput and reduced
inventory, JIT provides a powerful strategy for improving operations. With JIT,
materials arrive where they are needed when they are needed. When good units do
not arrive just as needed, a “problem” has been identified. By driving out waste and
delay in this manner, JIT reduces costs associated with excess inventory, cuts
variability and waste, and improves throughput. JIT is a key ingredient of lean
operations and is particularly helpful in supporting strategies of rapid response and
low cost. Effective JIT requires a meaningful buyer-supplier relationship
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Figure 11.1 JIT contribute to Competitive Advantage. (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
th ed, pg 645)
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11.2.1 JIT Partnerships
A JIT partnership exists when a supplier and purchaser work together with open
communication and a goal to remove waste and drive down costs. Close relationships
and trust are critical to the success of JIT.
Four goals of JIT partnerships are:
Removal of unnecessary activities
Removal of in-plant inventory
Removal of in-transit inventory
Improved quality and reliability
Figure 11.2 Characteristic of JIT Partnerships (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
th ed, pg 646)
11.2.2 Concerns of Suppliers
Successful JIT partnerships require that supplier concerns be addressed. These
concerns include:
1. Diversification – Suppliers may not want to tie themselves to long-term
contracts with one customer. The suppliers’ perception is that they reduce
their risk if they a variety of customers.
2. Scheduling – Many suppliers have little faith in the purchaser’s ability to
produce orders to a smooth, coordinated schedule.
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3. Changes – Engineering or specification changes can create havoc with JIT
because of inadequate lead times for suppliers to implement the necessary
changes.
4. Quality – Capital budgets, processes, or technology may limit quality.
5. Lot sizes – Suppliers may see frequent delivery in small lot sizes as a way to
transfer buyer’s holding costs to suppliers.
11.3 JIT Layout
JIT layout reduces waste due to movement. The movement of material on a factory
floor does not add value. Consequently, managers want flexible layouts that reduce
the movement of both people and material. JIT layouts place material directly in the
location when needed. For instance, an assembly line should be designed with
delivery points next to the line so material need not be delivered first to a receiving
department and then moved again. When a layout reduces distance, firms often save
labor and space and may have the added bonus of eliminating potential areas of
accumulation of unwanted inventory.
The following are a few layout tactics:
11.3.1 Distance Reduction
Large lots and long production lines with single-purpose machinery are being
replaced by smaller flexible cells
Often U-shaped for shorter paths and improved communication
Often using group technology concepts
11.3.2 Increased Flexibility
Cells designed to be rearranged as volume or designs change
Applicable in office environments as well as production settings
Facilitates both product and process improvement
11.3.3 Impact on Employees
Employees are cross trained for flexibility and efficiency
Improved communications facilitate the passing on of important information
about the process
With little or no inventory buffer, getting it right the first time is critical
11.3.4 Reduced Space and Inventory
With reduced space, inventory must be in very small lots
Units are always moving because there is no storage
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11.4 Kanban
One way to achieve small lot sizes is to move inventory through the shop only as
needed rather than pushing it on to the next workstation whether or not the personnel
there are ready for it. As noted earlier, when inventory is moved only as needed, it is
referred to as a pull system, and the ideal lot size is one. The Japanese call this
system kanban. Kanbans allow arrivals at a work centre to match (or nearly match)
the processing time.
Kanban is the Japanese word for card. In their efforts to reduce inventory, the
Japanese use systems that ‘pull’ inventory through work centres. They often use a
‘card’ to signal the need for another container of material – hence the name kanban.
The card is an authorization for the next container of material to be produced.
Typically, a kanban signal exists for each container of items to be obtained. An order
for the container is then initiated by each kanban and ‘pulled’ from the producing
department or supplier. A sequence of kanbans “pulls” the material through the plant.
Figure 11.3 Kanban Signals “Pull” Material Through the Production Process. (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
th ed, pg 653)
In figure 11.3, as a customer “pulls” an order from finished goods, a signal (card) is
sent to the final assembly. The final assembly area produces and re-supplies finished
goods. When final assembly needs components, it sends a signal to its suppliers, a
subassembly area and a work cell. These areas supply final assembly. The work cell,
in turn, sends a signal to the raw material supplier, and the subassembly area notifies
the work cell and purchased parts supplier of a requirement.
Work Work cellcell
Raw Raw Material Material SupplierSupplier
KanbanKanban
Purchased Purchased Parts Parts
SupplierSupplier
SubSub--assemblyassembly
ShipShip
KanbanKanban
KanbanKanban
KanbanKanban
KanbanKanban
Finished Finished goodsgoods
Customer Customer orderorder
Final Final assemblyassembly
KanbanKanban
Work Work cellcell
Work Work cellcell
Raw Raw Material Material SupplierSupplier
Raw Raw Material Material SupplierSupplier
KanbanKanbanKanbanKanban
Purchased Purchased Parts Parts
SupplierSupplier
SubSub--assemblyassembly
SubSub--assemblyassembly
ShipShipShipShipShipShip
KanbanKanbanKanbanKanban
KanbanKanbanKanbanKanban
KanbanKanbanKanbanKanban
KanbanKanbanKanbanKanban
Finished Finished goodsgoods
Customer Customer orderorder
Finished Finished goodsgoods
Finished Finished goodsgoods
Customer Customer orderorder
Customer Customer orderorder
Final Final assemblyassembly
Final Final assemblyassembly
KanbanKanbanKanbanKanban
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11.5 Toyota Production System
Toyota Motor’s Eiji Toyoda and Taiichi Ohno are given credit for the Toyota
Production System (TPS). The three core components of TPS are continuous
improvement, respect for people, and standard work practice.
11.5.1 Continuous improvement
Build an organizational culture and value system that stresses improvement of
all processes
It is part of everyone’s job
11.5.2 Respect for people
People are treated as knowledge workers
Engage mental and physical capabilities
Empower employees
11.5.3 Standard work practice
Work shall be completely specified as to content, sequence, timing, and
outcome
Internal and external customer-supplier connection are direct
Product and service flows must be simple and direct
Any improvement must be made in accordance with the scientific method at
the lowest possible level of the organization
11.6 Lean Operations
Lean production can be thought of as the end result of a well-run OM function. While
JIT and TPS tend to have an internal focus, lean production begins externally with a
focus on the customer. Understanding what the customer wants and ensuring
customer input and feedback are starting points for lean production. Lean productions
means identifying customer value by analyzing all the activities required to produce
the product and then optimizing the entire process from the customer’s perspective.
11.6.1 Building a Lean Organization
The transition to a lean system can be difficult. Building an organizational culture
where learning, empowerment, and continuous improvement are the norm is a
challenge. However, organisations that focus on JIT, quality, and employee
empowerment are often lean producers. Such firms drive out activities that do not
add value in the eyes of the customer.
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Lean systems tend to have the following attributes:
Use JIT techniques to eliminate virtually all inventory.
Build systems that help employees produce a perfect part every time.
Reduce space requirements by minimizing travel distance.
Develop partnerships with suppliers, helping them to understand the needs of the
ultimate customer.
Educate suppliers to accept responsibility for satisfying end customer needs.
Eliminate all but value-added activities. Material handling, inspection, inventory,
and rework are the likely targets because they do not add value to the product.
Develop employees by constantly improving job design, training, employee
commitment, teamwork, and empowerment.
Make jobs challenging, pushing responsibility to the lowest level possible.
Build worker flexibility through cross-training and reducing job classifications.
Success requires the full commitment and involvement of managers, employees, and
suppliers. The rewards that lean producers reap are spectacular. Lean producers
often become benchmark performers.
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Review Questions
1. What three things does the Toyota Production System (TPS) emphasize?
2. Identify Ohno's Seven Wastes. Which one of these deals most directly with
distance reductions? 3. What are the 5S's? Why does the list of the 5S's sometimes have seven elements? 4. Define variability within the context of JIT.
5. Identify sources of variability.
6. Differentiate between a push and a pull system. 7. Define manufacturing cycle time in the context of JIT systems. 8. Identify the layout tactics appropriate for a JIT environment. 9. What are the goals of JIT partnerships? 10. What is a kanban?
11. Identify some of the signals that kanban systems use.
12. How are lean operations and the Toyota Production System (TPS) alike? How are
they different? 13. What are the five reasons given by suppliers for their reluctance to enter into JIT
systems? Elaborate on one of these, of your choosing.
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Lesson 12: Maintenance and Reliability
Learning Outcomes:
At the end of this lesson, students should be able to:
1. Explain the strategic importance of maintenance and reliability.
2. Understand the concept of reliability.
3. Understand preventive and breakdown maintenance.
4. Outline the techniques for establishing maintenance policies.
12.1 The Strategic Importance of Maintenance and Reliability
Operations Managers must avoid the undesirable result of equipment failure, because
it can be disruptive, inconvenient and wasteful. Machine and product failures can
have far-reaching effects on an organisation’s operations, reputation, and profitability.
The objective of maintenance and reliability is to maintain the capability of the
system while controlling costs. Good maintenance system removes variability.
Systems must be designed and maintained to reach expected performance and quality
standards.
The interdependency of operator, machine, and mechanic is a hallmark of successful
maintenance and reliability. This is illustrated in figure 12.1.
Figure 12.1 Good maintenance and reliability strategy requires employee involvement
and good procedures. (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
th ed, pg 670)
EEmmppllooyyeeee
IInnvvoollvveemmeenntt Information sharing Skill training Reward system Employee empowerment
e) To minimize the frequency and severity of interruptions to operating
processes.
f) To maximize production and operation capacity from the given equipment
resources.
12.4 Types of Maintenance Policy
There are two main types of maintenance policy. Namely:
12.4.1 Breakdown Maintenance
This is an emergency based policy whereby equipment or component parts will
operate till they fail before repair is carried out. The scheduling is therefore on
emergency or priority basis. The intention is to maximize the life span of the
equipment or component parts and thereby, saving cost. However, the application is
only limited to equipment or component parts where failure has little or no critical
impact on operations.
12.4.2 Preventive Maintenance
This involves performing routine inspections and servicing. The intention is to build
a system that will find potential failures and make changes or repairs that will prevent
failure from occurring.
Formal preventive maintenance may take four different forms. In practice, all four
types of policies often operate together, overlap or coincide. The policies are:
Time based – doing maintenance at regular intervals especially when usage cannot be
easily measured.
Work based – maintenance is determined by usage such as operating hours, volume of
production, etc.
Opportunity based – repair takes place when the equipment or system is not working
to minimize production disruption
Condition based – relies on periodic inspection to determine the condition of wear
and tear.
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12.4.3 Improving Repair Capabilities
The repair capabilities of maintenance department can be increased by:
Well-trained personnel
Adequate resources
Ability to establish a repair plan and priorities
Ability and authority to do material planning
Ability to identify the cause of breakdowns
Ability to design ways to extend the Mean Time Between Failure (MTBF)
12.5 Total Productive Maintenance (TPM)
In automated production environment, an equipment breakdown at one operation will
quickly cause all other downstream operations to fail. Therefore, an extensive
preventive maintenance programme is essential to reduce the frequency and severity
of workflow interruption in these situations.
One of the strategies is to combines total quality management with strategic view of
maintenance from process and equipment design to preventive maintenance. This
will reduce variability through employee involvement and excellent maintenance
records. For such strategy to be successfully implemented, TPM should include:
a) Machines that are reliable, easy to operate and easy to maintain.
b) Emphasis of total cost of ownership when purchasing machines so that service
and maintenance are included in the cost.
c) Appropriate trainings to workers so that they are able to detect, find and
eliminate potential causes of trouble before system failure sets in.
d) Delegating operatives the responsibility for preventing equipment failure by
conducting checks, inspecting, lubricating and adjusting their own equipment.
e) Preventive maintenance plans that utilize the best practices of operators,
maintenance departments and depot service.
<Operations Management> Study Guide
Pg 122 of 122
Review Questions
1. What is the role of people, especially empowered employees, in an effective maintenance strategy? 2. Define reliability.
3. Increasing the number of parts or components in a product tends to reduce its reliability. Why is this true only when adding components in series?
4. A product is composed of a series connection of four components with the following reliabilities. What is the reliability of the system?
Component 1 2 3 4
Reliability .90 .95 .97 .88
5. The diagram below identifies the elements of service as provided by a soft drink vending machine. Each element has an estimate of its own reliability, independent of the others. What is the reliability of the "system"?
Took my
money
.85
Made
wrong
change
.90
Dispensed
wrong
beverage
.95
Dispensed
warm
beverage
.98
Power
failed
.995
Out of
stock
.85
Couldn't
make
change
.98
Wouldn't
take my
dollar bill
.60
6. What is FR(N)? How is it calculated? How are FR(N) and MTBF related? 7. Ten high-intensity bulbs are tested for 100 hours each. One failed at 40 hours; another failed at 70 hours; all others completed the test. Calculate FR(%), FR(N), and MTBF. 8. Define maintenance.
9. What is breakdown maintenance? 10. What is the primary concept of total productive maintenance (TPM)? List the other elements of total productive maintenance.
