MODULE 1A Bird view of Production System Research Plant Marketing Engineering & Engineering department Department Development Department Customer Materials In Management Division Production Target Market Department Raw (shop floor) Vendor/ Materials Suppliers Stores Quality Factory Assurance Sales Management Department Department & Liasioning Management Customer Human Information Finance System Support Resource Department Department Department Department
Introduction • Production and operations management (POM) is the management of an organization’s production system. • A production system takes inputs and converts them into outputs. • The conversion process is the predominant activity of a production system. • The primary concern of an operations manager is the activities of the conversion process.Todays Factors Affecting POM • Global Competition • U.S. Quality, Customer Service, and Cost Challenges • Computers and Advanced Production Technology • Growth of U.S. Service Sector • Scarcity of Production Resources • Issues of Social ResponsibilityDifferent Ways to Study POM • Production as a System • Production as an Organization Function • Decision Making in POM
Production as a System Production System Conversion Inputs Outputs Subsystem Control SubsystemInputs of a Production System • External – Legal, Economic, Social, Technological • Market – Competition, Customer Desires, Product Info. • Primary Resources – Materials, Personnel, Capital, UtilitiesConversion Subsystem • Physical (Manufacturing) • Location Services (Transportation) • Exchange Services (Retailing) • Storage Services (Warehousing) • Other Private Services (Insurance) • Government Services (Federal, State, Local)
Outputs of a Production System • Direct – Products – Services • Indirect – Waste – Pollution – Technological AdvancesProduction as an Organization Function•U.S. companies cannot compete using marketing, finance,accounting, and engineering alone.•We focus on POM as we think of global competitiveness, becausethat is where the vast majority of a firm’s workers, capital assets, andexpenses reside.•To succeed, a firm must have a strong operations function teamingwith the other organization functions.Decision Making in POM•Strategic Decisions•Operating Decisions•Control DecisionsStrategic Decisions•These decisions are of strategic importance and have long-termsignificance for the organization.•Examples include deciding:–the design for a new product’s production process–where to locate a new factory–whether to launch a new-product development plan
Operating Decisions•These decisions are necessary if the ongoing production of goodsand services is to satisfy market demands and provide profits.•Examples include deciding:–how much finished-goods inventory to carry–the amount of overtime to use next week–the details for purchasing raw material next monthControl Decisions•These decisions concern the day-to-day activities of workers, qualityof products and services, production and overhead costs, andmachine maintenance.•Examples include deciding:–labor cost standards for a new product–frequency of preventive maintenance–new quality control acceptance criteriaWhat Controls the Operations System?•Information about the outputs, the conversions, and the inputs is fedback to management.•This information is matched with management’s expectations•When there is a difference, management must take corrective actionto maintain control of the systemWhat is Operations Management?Defined Operations management (OM) is defined as the design, operation,and improvement of the systems that create and deliver the firm’sprimary products and services
Why Study Operations Management? Systematic Approach to Org. Processes Business Education Operations Career Opportunities Management Cross-Functional Applications•The Future of Operations–Outsourcing everything–Smart factories–Talking inventory–Industrial army of robots–What’s in the box–Mass customization–Personalized recommendations–Sign here, please
Operations Management Decision Types•Strategic (long-term)•Tactical (intermediate-term)•Operational planning and control (short-term)What is a Transformation Process?Defined A transformation process is defined as a use of resources totransform inputs into some desired outputs Transformations•Physical--manufacturing•Location--transportation•Exchange--retailing•Storage--warehousing•Physiological--health care•Informational--telecommunications
Core Services Performance Objectives Quality Operations Flexibility Speed Management Price (or cost Reduction)The Importance of Operations Management•Synergies must exist with other functional areas of the organization•Operations account for 60-80% of the direct expenses that burden afirm’s profit.
The Basics of Operations Management•Operations Management–The process of managing the resources that are needed to producean organization’s goods and services.–Operations managers focus on managing the “five Ps” of the firm’soperations:•People, plants, parts, processes, and planning and control systems.The Production System•Input–A resource required for the manufacture of a product or service.•Conversion System–A production system that converts inputs (material and humanresources) into outputs (products or services); also the productionprocess or technology.•Output–A direct outcome (actual product or service) or indirect outcome(taxes, wages, salaries) of a production system.
Types of Production system Manufacturing System Service System Intermittent ProductionContinuous Production Batch Production Job Production Mass production( Flow) Processing ProductionBasic Types of Production Processes•Intermittent Production System–Production is performed on a start-and-stop basis, such as for themanufacture of made-to-order products.•Mass Production–A special type of intermittent production process using standardizedmethods and single-use machines to produce long runs ofstandardized items.
Mass Customization–Designing, producing, and delivering customized products tocustomers for at or near the cost and convenience of mass-produceditems.–Mass customization combines high production volume with highproduct variety.–Elements of mass customization:•Modular product design•Modular process design•Agile supply networksContinuous Production Processes–A production process, such as those used by chemical plants orrefineries, that runs for very long periods without the start-and-stopbehavior associated with intermittent production.–Enormous capital investments are required for highly automatedfacilities that use special-purpose equipment designed for highvolumes of production and little or no variation in the type of outputs.Mass Production System (Flow)Continuous Production•Anticipation of demand•May not have uniform production•Standardized Raw material•Big volume of limited product line•Standard facility- high standardization.•Fixed sequence of operation•Material handling is easier•High skilled operator not required•More Human problem is foreseen•Huge investment.•High raw material inventory.
Processing Production System•Extended form of mass production system•F.G of one stage is fed to next stage•More automatic machines•One basic raw material is transferred into several products at severalstages.•Less highly skilled workers required•More human problems foreseen•Highly standardized systemBatch Production System•Highly specialized Human resource is required•Highly specialized multi tasking machines•Machines are shared.•Production in batches•Production lots are based on customer demand or order.•No single sequence of operation•Finished goods are heterogeneousCustom built / job order production system•Highly specialized Human resource is required•Highly specialized multi tasking machines•Machines are shared•Raw material is not standardized•Process is not standardized•No scope for repetition of production
Comparative study of different production systemsType Mass/ Flow Process Job BatchParameterPer unitHigh Low High Highmanf.costSize & Large V. Large Small MediumCapital Less High Low HighInvest.Flexibility No No More MoreTechnical Less Less High Highability SkillsOrgn. Line staff Line staff Functional FunctionalStructureIndustrial Automobile Chemical Construction Consumerapplication Sugar Petroleum Bridges prod. Refinery Milk proces.SPM M/c. ToolsCompetitiveness, Strategy, and ProductivityCompetitiveness:How effectively an organization meets the wants and needs ofcustomers relative to others that offer similar goods or servicesBusinesses Compete Using Marketing•Identifying consumer wants and needs•Pricing•Advertising and promotion
Businesses Compete Using Operations•Product and service design•Cost•Location•Quality•Quick responseBusinesses Compete Using Operations•Flexibility•Inventory management•Supply chain management•ServiceWhy Some Organizations Fail•Too much emphasis on short-term financial performance•Failing to take advantage of strengths and opportunities•Failing to recognize competitive threats•Neglecting operations strategyWhy Some Organizations Fail•Too much emphasis in product and service design and not enoughon improvement•Neglecting investments in capital and human resources•Failing to establish good internal communications•Failing to consider customer wants and needs
Mission/Strategy/Tactics Mission Strategy Tactics How does mission, strategies and tactics relate to decision making and distinctive competencies?Strategy • Strategies – Plans for achieving organizational goals • Mission – The reason for existence for an organization • Mission Statement – Answers the question “What business are we in?” • Goals – Provide detail and scope of mission • Tactics – The methods and actions taken to accomplish strategies
Planning and Decision Making Mission Goals Organizational Strategies Functional Goals Operations Finance Strategies Marketing Strategies Strategies Tactics Tactics Tactics Operating procedures Operating procedures Operating proceduresStrategy and Tactics • Distinctive CompetenciesThe special attributes or abilities that give an organization acompetitive edge. – Price – Quality – Time – Flexibility – Service – Location
Examples of Distinctive U.S. first-class postage Price Low Cost Motel-6, Red Roof Inns High-performance design Sony TV Quality or high quality Consistent Lexus, Cadillac quality Pepsi, Kodak, Motorola Rapid delivery On-time Express Mail, Fedex, Time delivery One-hour photo, UPS Variety Burger King Flexibility Volume Supermarkets Superior customer Disneyland Service service Nordstroms Location Convenience Banks, ATMsOperations Strategy•Operations strategy – The approach, consistent with organizationstrategy, which is used to guide the operations function.Strategy Formulation•Distinctive competencies•Environmental scanning•SWOT•Order qualifiers•Order winners
Strategy Formulation•Order qualifiers–Characteristics that customers perceive as minimum standards ofacceptability to be considered as a potential purchase•Order winners–Characteristics of an organization’s goods or services that cause itto be perceived as better than the competitionKey External Factors•Economic conditions•Political conditions•Legal environment•Technology•Competition•MarketsKey Internal Factors•Human Resources•Facilities and equipment•Financial resources•Customers•Products and services•Technology•SuppliersQuality and Time Strategies•Quality-based strategies–Focuses on maintaining or improving the quality of an organization’sproducts or services–Quality at the source
•Time-based strategies–Focuses on reduction of time needed to accomplish tasksOperations Strategy and Competitiveness•Operations Strategy•A Framework for Operations Strategy•Meeting the Competitive Challenge•Productivity Measurement Operations Strategy – Strategic Alignment Customer Needs Corporate Strategy Alignmen t Core Operations Strategy Competencie s Decision s Processes, Infrastructure, and Capabilities 3
Operations Priorities • Cost • Quality • Delivery Speed (Also, New Product Introduction Speed) • Delivery Flexibility • Greenness • Delivery Reliability • Coping with Changes in Demand • Other Product-Specific Criteria
A Framework for Organizational Strategy Customer Needs Strategic New and Current Products Vision Performance Priorities and Requirements Quality, Dependability, Service Speed, Flexibility, and Enterprise Capabilities Operations & Supplier Capabilities Technology Systems People R&D CIM JIT TQM Distribution Support Platforms Financial Management Human Resource Management Information Management 8OPERATIONS STRATEGY OBJECTIVES u TRANSLATE MARKET REQ’M’TS TO SPECIFIC OPERATIONS PRIMARY MISSIONS u ASSURE OPERATIONS IS CAPABLE TO ACCOMPLISH PRIMARY MISSION.1) SEGMENT MARKET BY PRODUCT GROUPS2) IDENTIFY PRODUCT REQUIREMENTS3) DETERMINE ORDER WINNERS AND QUALIFIERS4) CONVERT ORDER WINNERS INTO SPECIFIC PERFORMANCEREQMTS
DEVELOPING PRODUCTION AND OPERATION STRATEGY Economic Corporate Mission Dis -advantage in Legal Social capturing market Political Assessment Distinctive Competencies Business Strategy of business condition Or Weaknesses Competition Market Product / Service Plans Hi-tech Analysis MachinesLow prod. cost Skilled HRDelivery performance Competitive prioritiesHigh quality products &service Cost, Time, Quality & AutomationCustomer service & FlexibilityFlexibility Worn out Prod. System Production / operation Strategy Positioning the production system Product / service plans Process and technology plans Strategic allocation of resources Facility Plan, Capacity Plan, Location and Layout.Elements of operation strategy Positioning the production systemA. Product FocusedB. Process Focused • Product / Service plans • Out sourcing plans • Process technology plans • Strategic allocation of resources • Facility plans*Capacity plans*Location*Layout
ProductivityA measure of the effective use of resources, usually expressed as theratio of output to input Productivity ratios are used for Planningworkforce requirements Scheduling equipmentfinancial analysisMIT Commission on Industrial Productivity1985 Recommendations - Still Very Accurate Today•Less emphasis on short-term financial payoffs and invest more inR&D.•Revise corporate strategies to include responses to foreigncompetition.–greater investment in people and equipment•Knock down communication barriers within organizations andrecognize mutuality of interests with other companies and suppliers.MIT Commission on Industrial Productivity1985 Recommendations•Recognize that the labor force is a resource to be nurtured, not just acost to be avoided.•Get back to basics in managing production/ operations.–Build in quality at the design stage.–Place more emphasis on process innovations rather than focusingsole attention on product innovations - dramatically improve costs,quality, speed, & flex.
U. S. Competitiveness Drivers•Product/Service Development - NPD–Teams speed development and enhance manufacturability•Waste Reduction (LEAN/JIT Philosophy)–WIP, space, tool costs, and human effort•Improved Customer-Supplier Relationships–Look for Win-Win! Taken from Japanese Keiretsu•Early Adoption of IT Technology Including–PC Technology – WWW - ERPSProductivity Outputs Productivity = Inputs • Partial measures – output/(single input) • Multi-factor measures – output/(multiple inputs) • Total measure
– output/(total inputs) Productivity Growth Productivity Growth = Current Period Productivity – Previous Period Productivity Previous Period ProductivityExamples of Partial Productivity Measures Labor Units of output per labor hour Units of output per shift Productivity Value-added per labor hour Machine Units of output per machine hour Productivity machine hour Capital Units of output per dollar input Dollar value of output per dollar input Productivity Energy Units of output per kilowatt-hour Dollar value of output per kilowatt- Productivity hour
Factors Affecting Productivity Capita Qualit l y Technolog Managemen y tOther Factors Affecting Productivity•Standardization•Quality•Use of Internet•Computer viruses•Searching for lost or misplaced items•Scrap rates•New workers•Safety•Shortage of IT workers•Layoffs•Labor turnover•Design of the workspace•Incentive plans that reward productivity
Improving Productivity•Develop productivity measures•Determine critical (bottleneck) operations•Develop methods for productivity improvements•Establish reasonable goals•Get management support•Measure and publicize improvements•Don’t confuse productivity with efficiency
MODULE 2Typical Phases of Product Development•Planning•Concept Development•System-Level Design•Design Detail•Testing and Refinement•Production Ramp-upEconomic Analysis of Project Development Costs•Using measurable factors to help determine:–Operational design and development decisions–Go/no-go milestones•Building a Base-Case Financial Model–A financial model consisting of major cash flows–Sensitivity Analysis for “what if” questions Designing for the Customer House of Quality Ideal Quality Function Customer Value Analysis/ Deployment Value Product Engineering
Designing for the Customer: Quality Function Deployment•Interventional teams from marketing, design engineering, andmanufacturing•Voice of the customer•House of QualityDesigning for the Customer: Value Analysis/Value Engineering•Achieve equivalent or better performance at a lower cost whilemaintaining all functional requirements defined by the customer–Does the item have any design features that are not necessary?–Can two or more parts be combined into one?–How can we cut down the weight?–Are there nonstandard parts that can be eliminated?Design for Manufacturability•Traditional Approach–“We design it, you build it” or “Over the wall”Concurrent Engineering–“Let’s work together simultaneously”Design for Manufacturing and Assembly•Greatest improvements related to DFMA arise from simplification ofthe product by reducing the number of separate parts:•During the operation of the product, does the part move relative to allother parts already assembled?•Must the part be of a different material or be isolated from other partsalready assembled?•Must the part be separate from all other parts to allow thedisassembly of the product for adjustment or maintenance?
Measuring Product Development Performance Performance Measures DimensionTime-to-market Freq. of new products introduced Time to market introduction Number stated and number completed Actual versus plan Percentage of sales from new products Productivity Engineering hours per project Cost of materials and tooling per project Actual versus plan Quality Conformance-reliability in use Design-performance and customer satisfaction Yield-factory and fieldProduct Design • Standard parts • Modular design • Highly capable production systems • Concurrent engineeringProcess Design
• Small lot sizes • Setup time reduction • Manufacturing cells • Limited work in process • Quality improvement • Production flexibility • Little inventory storage Benefits of Small Lot Sizes Reduces inventory Less rework storage Less space Problems are more apparent Increases product flexibility Easier to balance operationsProduction Flexibility•Reduce downtime by reducing changeover time•Use preventive maintenance to reduce breakdowns•Cross-train workers to help clear bottlenecks•Use many small units of capacity•Use off-line buffers•Reserve capacity for important customers
Quality Improvement•Autonomation–Automatic detection of defects during production•Jidoka–Japanese term for autonomationPersonnel/Organizational Elements•Workers as assets•Cross-trained workers•Continuous improvement•Cost accounting•Leadership/project managementManufacturing Planning and Control•Level loading•Pull systems•Visual systems•Close vendor relationships•Reduced transaction processing•Preventive maintenancePull/Push Systems•Pull system: System for moving work where a workstation pullsoutput from the preceding station as needed. (e.g. Kanban)•Push system: System for moving work where output is pushed to thenext station as it is completed
Kanban Production Control System•Kanban: Card or other device that communicates demand for workor materials from the preceding station•Kanban is the Japanese word meaning “signal” or “visible record”•Paperless production control system•Authority to pull, or produce comesfrom a downstream process.Kanban Formula DT(1+X) N = CN = Total number of containersD = Planned usage rate of using work centerT = Average waiting time for replenishment of parts plus average production time for a container of partsX = Policy variable set by management - possible inefficiency in the systemC = Capacity of a standard container
Product and Service Design • Major factors in design strategy – Cost – Quality – Time-to-market – Customer satisfaction – Competitive advantageProduct and service design – or redesign – should beclosely tied to an organization’s strategyProduct or Service Design Activities•Translate customer wants and needs into product and servicerequirements•Refine existing products and services•Develop new products and services•Formulate quality goals•Formulate cost targets•Construct and test prototypes•Document specificationsReasons for Product or Service Design•Economic•Social and demographic•Political, liability, or legal•Competitive•Technological
Objectives of Product and Service Design•Main focus–Customer satisfaction•Secondary focus–Function of product/service–Cost/profit–Quality–Appearance–Ease of production/assembly–Ease of maintenance/serviceDesigning For OperationsTaking into account the capabilities of the organization in designinggoods and servicesLegal, Ethical, and Environmental Issues•Legal–Product liability–Uniform commercial code•Ethical–Releasing products with defects•Environmental–EPARegulations & Legal Considerations•Product Liability - A manufacturer is liable for any injuries ordamages caused by a faulty product.•Uniform Commercial Code - Products carry an implication ofmerchantability and fitness.
Standardization•Standardization–Extent to which there is an absence of variety in a product, serviceor process•Standardized products are immediately available to customersAdvantages of Standardization•Fewer parts to deal with in inventory & manufacturing•Design costs are generally lower•Reduced training costs and time•More routine purchasing, handling, and inspection procedures•Orders fallible from inventory•Opportunities for long production runs and automation•Need for fewer parts justifies increased expenditures on perfectingdesigns and improving quality control procedures.Disadvantages of Standardization•Designs may be frozen with too many imperfections remaining.•High cost of design changes increases resistance to improvements.•Decreased variety results in less consumer appeal.•Mass customization:–A strategy of producing standardized goods or services, butincorporating some degree degree of customization–Delayed differentiation–Modular designDelayed Differentiation•Delayed differentiation is a postponement tactic–Producing but not quite completing a product or service untilcustomer preferences or specifications are known
Modular DesignModular design is a form of standardization in which component partsare subdivided into modules that are easily replaced or interchanged.It allows:–easier diagnosis and remedy of failures–easier repair and replacement–simplification of manufacturing and assemblyReliability•Reliability: The ability of a product, part, or system to perform itsintended function under a prescribed set of conditions•Failure: Situation in which a product, part, or system does notperform as intended•Normal operating conditions: The set of conditions under which anitem’s reliability is specifiedImproving Reliability • Component design • Production/assembly techniques • Testing • Redundancy/backup • Preventive maintenance procedures • User education • System designProduct Design•Product Life Cycles•Robust Design•Concurrent Engineering•Computer-Aided Design•Modular Design
Robust Design: Design that results in products or services thatcan function over a broad range of conditionsTaguchi Approach Robust Design•Design a robust product–Insensitive to environmental factors either in manufacturing or inuse.•Central feature is Parameter Design.•Determines:–factors that are controllable and those not controllable–their optimal levels relative to major product advancesDegree of Newness•Modification of an existing product/service•Expansion of an existing product/service•Clone of a competitor’s product/service•New product/serviceDegree of Design ChangeType of DesignNewness of theNewness to theChange organization marketModification Low LowExpansion Low LowClone High LowNew High HighPhases in Product Development Process
1. Idea generation 2. Feasibility analysis 3. Product specifications 4. Process specifications 5. Prototype development 6. Design review 7. Market test 8. Product introduction 9. Follow-up evaluation Idea Generation Supply chain based Ideas Competitor based Research basedReverse Engineering
Reverse engineering is the dismantling and inspecting of acompetitor’s product to discover product improvements.Research & Development (R&D) • Organized efforts to increase scientific knowledge or product innovation & may involve: – Basic Research advances knowledge about a subject without near-term expectations of commercial applications. – Applied Research achieves commercial applications. – Development converts results of applied research into commercial applications.Manufacturability • Manufacturability is the ease of fabrication and/or assembly which is important for: – Cost – Productivity – QualityDesigning for Manufacturing Beyond the overall objective to achievecustomer satisfaction while making a reasonable profit is:Design for Manufacturing (DFM)The designers’ consideration of the organization’s manufacturingcapabilities when designing a product.The more general term design for operations encompasses servicesas well as manufacturingConcurrent EngineeringConcurrent engineering is the bringing together of engineering designand manufacturing personnel early in the design phase.Computer-Aided Design
• Computer-Aided Design (CAD) is product design using computer graphics. – increases productivity of designers, 3 to 10 times – creates a database for manufacturing information on product specifications – provides possibility of engineering and cost analysis on proposed designsProduct design • Design for manufacturing (DFM) • Design for assembly (DFA) • Design for recycling (DFR) • Remanufacturing • Design for disassembly (DFD) • Robust designRecycling•Recycling: recovering materials for future use•Recycling reasons–Cost savings–Environment concerns–Environment regulationsService Design•Service is an act•Service delivery system–Facilities–Processes–Skills•Many services are bundled with products•Service design involves
–The physical resources needed–The goods that are purchased or consumed by the customer–Explicit services–Implicit services•Service–Something that is done to or for a customer•Service delivery system–The facilities, processes, and skills needed to provide a service•Product bundle–The combination of goods and services provided to a customer•Service package–The physical resources needed to perform the serviceDifferences between Product and Service Design•Tangible – intangible•Services created and delivered at the same time•Services cannot be inventoried•Services highly visible to customers•Services have low barrier to entry•Location important to servicePhases in Service Design•Conceptualize•Identify service package components•Determine performance specifications•Translate performance specifications into design specifications•Translate design specifications into delivery specificationsService Blueprinting
•Service blueprinting–A method used in service design to describe and analyze aproposed service•A useful tool for conceptualizing a service delivery systemMajor Steps in Service Blueprinting•Establish boundaries•Identify steps involved•Prepare a flowchart•Identify potential failure points•Establish a time frame•Analyze profitabilityCharacteristics of Well Designed Service Systems•Consistent with the organization mission•User friendly•Robust•Easy to sustain•Cost effective•Value to customers•Effective linkages between back operations•Single unifying theme•Ensure reliability and high qualityChallenges of Service Design•Variable requirements•Difficult to describe•High customer contact•Service – customer encounter
Quality Function Deployment•Quality Function Deployment–Voice of the customer–House of qualityQFD: An approach that integrates the “voice of the customer” into theproduct and service development process.Operations Strategy 1. Increase emphasis on component commonality 2. Package products and services 3. Use multiple-use platforms 4. Consider tactics for mass customization 5. Look for continual improvement 6. Shorten time to marketShorten Time to Market 1. Use standardized components 2. Use technology 3. Use concurrent engineeringProcess Selection
• Variety – How much • Flexibility – What degree • Volume – Expected outputProcess Types • Job shop – Small scale • Batch – Moderate volume • Repetitive/assembly line – High volumes of standardized goods or services • Continuous – Very high volumes of non-discrete goodsProcess designThe complete delineation and description of specific steps in theproduction process and the linkage among the steps that will enablethe production system to produce products of the • desired quality • required quantity • at required time • at the economical costExpected by the customer
Process Design Product Idea Feasibility Studies Interrelationship of Product and Process Design Design Product Process Design Advanced Product Planning Organizing the process flow Advanced Design Relation of process Design to Production Process Design process FlowProduct evaluation and improvement Evaluating the Process Design Product use and support To Produce and Market New ProductsTypes of Process • Project • Job Shop • Batch • Assembly line • Continuous
Production Technology • The method or Technique used in Converting the Raw material into SFG or FG Economically, Effectively and efficiently is termed as Production Technology.The Selection of Technology • Time • Cost • Type of Product • Volume of production • Expected Productivity • Technical Complexity involved • Degree of Human skill required • Degree of Quality required • Availability of Technology • The Degree of Obsolescence expected.
MODULE 3Facility Planning • Long range capacity planning, • Facility location • Facility layoutStrategic Capacity PlanningDefined • Capacity can be defined as the ability to hold, receive, store, or accommodate. • Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size.Capacity Utilization • Capacity utilization rate = Capacity used Best operating level • Capacity used – rate of output actually achieved • Best operating level – capacity for which the process was designed
Best Operating LevelAverageunit costof output Underutilization Overutilization Best Operating Level VolumeExample of Capacity Utilization • During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate? • Answer: Capacity utilization rate = Capacity used . Best operating level = 83/120 =0.69 or 69%
Economies & Diseconomies of Scale Economies of Scale and the Experience Curve working 100-unitAverage plantunit cost 200-unitof output plant 400-unit 300-unit plant plant Diseconomies of Scale start working Volume
The Experience Curve As plants produce more products, they gain experience in the best production methods and reduce their costs per unit. Cost or price per unit Total accumulated production of unitsCapacity Focus • The concept of the focused factory holds that production facilities work best when they focus on a fairly limited set of production objectives. • Plants Within Plants (PWP) (from Skinner) – Extend focus concept to operating levelCapacity Flexibility • Flexible plants • Flexible processes
• Flexible workers Capacity Planning: Balance Stage 1 Stage 2 Stage 3 Units per 6,000 7,000 4,500 month Maintaining System BalanceCapacity Planning • Frequency of Capacity Additions • External Sources of CapacityDetermining Capacity Requirements • Forecast sales within each individual product line. • Calculate equipment and labor requirements to meet the forecasts. • Project equipment and labor availability over the planning horizon.
Example of Capacity RequirementsA manufacturer produces two lines of mustard, Fancy Fine andGeneric line. Each is sold in small and family-size plastic bottles.The following table shows forecast demand for the next four years. Year: 1 2 3 4FancyFineSmall (000s) 50 60 80 100Family (000s) 35 50 70 90GenericSmall (000s) 100 110 120 140Family (000s) 80 90 100 110Example of Capacity Requirements: Equipment and LaborRequirements Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200Three 100,000 units-per-year machines are available for small-bottleproduction. Two operators required per machine.Two 120,000 units-per-year machines are available for family-sized-bottle production. Three operators required per machine.
Importance of Capacity Decisions 1. Impacts ability to meet future demands 2. Affects operating costs 3. Major determinant of initial costs 4. Involves long-term commitment 5. Affects competitiveness 6. Affects ease of management 7. Globalization adds complexity 8. Impacts long range planningCapacity • Design capacity – maximum output rate or service capacity an operation, process, or facility is designed for • Effective capacity – Design capacity minus allowances such as personal time, maintenance, and scrap • Actual output – rate of output actually achieved--cannot exceed effective capacity. Efficiency and Utilization Actual output Efficiency = Effective capacity Actual output Utilization = Design capacity
Both measures expressed as percentages Determinants of Effective Capacity • Facilities • Product and service factors • Process factors • Human factors • Operational factors • Supply chain factors • External factorsStrategy Formulation • Capacity strategy for long-term demand • Demand patterns • Growth rate and variability • Facilities – Cost of building and operating • Technological changes – Rate and direction of technology changes • Behavior of competitors • Availability of capital and other inputsKey Decisions of Capacity Planning 1. Amount of capacity needed 2. Timing of changes 3. Need to maintain balance 4. Extent of flexibility of facilitiesCapacity cushion – extra demand intended to offset uncertainty
Steps for Capacity Planning 1. Estimate future capacity requirements 2. Evaluate existing capacity 3. Identify alternatives 4. Conduct financial analysis 5. Assess key qualitative issues 6. Select one alternative 7. Implement alternative chosen 8. Monitor resultsMake or Buy 1. Available capacity 2. Expertise 3. Quality considerations 4. Nature of demand 5. Cost 6. RiskDeveloping Capacity Alternatives 1. Design flexibility into systems 2. Take stage of life cycle into account 3. Take a “big picture” approach to capacity changes 4. Prepare to deal with capacity “chunks” 5. Attempt to smooth out capacity requirements
6. Identify the optimal operating levelEconomies of Scale • Economies of scale – If the output rate is less than the optimal level, increasing output rate results in decreasing average unit costs • Diseconomies of scale – If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs Evaluating Alternatives Production units have an optimal rate of output for minimal cost. Average cost per Minimum average cost per unit unit Minimu m cost 0 Rate of output
Evaluating Alternatives Average cost per unit Minimum cost & optimal operating rate are functions of size of production unit. Small plant Medium plant Large plant 0 Output ratePlanning Service Capacity • Need to be near customers – Capacity and location are closely tied • Inability to store services – Capacity must be matched with timing of demand • Degree of volatility of demand – Peak demand periodsAssumptions of Cost-Volume Analysis 1. One product is involved 2. Everything produced can be sold 3. Variable cost per unit is the same regardless of volume
4. Fixed costs do not change with volume 5. Revenue per unit constant with volume 6. Revenue per unit exceeds variable cost per unitFinancial Analysis • Cash Flow - the difference between cash received from sales and other sources, and cash outflow for labor, material, overhead, and taxes. • Present Value - the sum, in current value, of all future cash flows of an investment proposal. Calculating Processing Requirements Standard Annual processing time Processing time Product Demand per unit (hr.) needed (hr.) #1 400 5.0 2,000 #2 300 8.0 2,400 #3 700 2.0 1,400 5,800
Location Planning and AnalysisNeed for Location Decisions • Marketing Strategy • Cost of Doing Business • Growth • Depletion of ResourcesNature of Location Decisions • Strategic Importance – Long term commitment/costs – Impact on investments, revenues, and operations – Supply chains • Objectives – Profit potential – No single location may be better than others – Identify several locations from which to choose • Options – Expand existing facilities – Add new facilities – MoveMaking Location Decisions • Decide on the criteria • Identify the important factors • Develop location alternatives
• Evaluate the alternatives • Make selectionLocation Decision Factors1. Regional Factors • Location of raw materials • Location of markets • Labor factors • Climate and taxes2. Community Considerations • Quality of life • Services • Attitudes • Taxes • Environmental regulations • Utilities • Developer support3. Multiple Plant Strategies • Product plant strategy • Market area plant strategy • Process plant strategy4. Site-related Factors • Land • Transportation • Environmental • LegalComparison of Service and Manufacturing Considerations
Manufacturing/Distribution Service/RetailCost Focus Revenue focusTransportation modes/costs Demographics: age,income,etcEnergy availability, costs Population/drawing areaLabor cost/availability/skills CompetitionBuilding/leasing costs Traffic volume/patterns Customer access/parkingEvaluating Locations • Cost-Profit-Volume Analysis – Determine fixed and variable costs – Plot total costs – Determine lowest total costsLocation Cost-Volume Analysis • Assumptions – Fixed costs are constant – Variable costs are linear – Output can be closely estimated – Only one product involvedEvaluating Locations • Transportation Model – Decision based on movement costs of raw materials or finished goods • Factor Rating – Decision based on quantitative and qualitative inputs
• Center of Gravity Method – Decision based on minimum distribution costsFacility LayoutLayout: the configuration of departments, work centers, andequipment, with particular emphasis on movement of work(customers or materials) through the systemImportance of Layout Decisions • Requires substantial investments of money and effort • Involves long-term commitments • Has significant impact on cost and efficiency of short-term operationsThe Need for Layout Decisions Inefficient operations For Example: Changes in the High Cost design Bottleneck of products or s Accident The introduction of s new products or services Safety hazards
The Need for Layout Design Changes in environmenta Changes in volume l of or other legal output or mix of requirements products Morale Changes in problems methods and equipmentBasic Layout Types • Product layouts • Process layouts • Fixed-Position layout • Combination layoutsBasic Layout Types • Product layout – Layout that uses standardized processing operations to achieve smooth, rapid, high-volume flow • Process layout – Layout that can handle varied processing requirements • Fixed Position layout – Layout in which the product or project remains stationary, and workers, materials, and equipment are moved as needed
Advantages of Product LayoutFigure 6.4 Product Layout Raw Station Station Station Station Finished materials 1 2 3 4 item or customer Material Material Material Material and/or and/or and/or and/or labor labor labor labor Used for Repetitive or Continuous ProcessingAdvantages of Product Layout • High rate of output • Low unit cost • Labor specialization • Low material handling cost • High utilization of labor and equipment • Established routing and scheduling • Routing accounting and purchasingDisadvantages of Product Layout • Creates dull, repetitive jobs • Poorly skilled workers may not maintain equipment or quality of output • Fairly inflexible to changes in volume • Highly susceptible to shutdowns • Needs preventive maintenance • Individual incentive plans are impractical
Figure 6.7 Process Layout Process Layout (functional) Dept. A Dept. C Dept. E Dept. B Dept. D Dept. F Used for intermittent processing Job Shop or Batch Product Layout Product Layout (sequential) Work Work Work Station 1 Station 2 Station 3 Used for Repetitive Processing Repetitive or ContinuousAdvantages of Process Layouts • Can handle a variety of processing requirements
• Not particularly vulnerable to equipment failures • Equipment used is less costly • Possible to use individual incentive plansDisadvantages of Process Layouts • In-process inventory costs can be high • Challenging routing and scheduling • Equipment utilization rates are low • Material handling slow and inefficient • Complexities often reduce span of supervision • Special attention for each product or customer • Accounting and purchasing are more involvedCellular Layouts • Cellular Production – Layout in which machines are grouped into a cell that can process items that have similar processing requirements • Group Technology – The grouping into part families of items with similar design or manufacturing characteristics Functional vs. Cellular LayoutsDimension Functional CellularNumber of movesmany fewbetweendepartmentsTravel distances longer shorterTravel paths variable fixedJob waiting times greater shorterThroughput time higher lowerAmount of work inhigher lowerprocessSupervision higher lowerdifficultyScheduling higher lowercomplexityEquipment lower higher
utilizationOther Service Layouts • Warehouse and storage layouts • Retail layouts • Office layoutsDesign Product Layouts: Line BalancingLine Balancing is the process of assigning tasks to workstations insuch a way that the workstations have approximatelyequal time requirements.Cycle TimeCycle time is the maximum time allowed at each workstation tocomplete its set of tasks on a unit.Determine Maximum Output OT Output capacity = CT OT = operating time per day D = Desired output rate OT CT = cycle time = D
Determine the Minimum Number of Workstations Required (D)(∑ t)N= OT∑ t = sum of task timesCalculate Percent Idle Time Idle time per cyclePercent idle time = (N)(CT)Efficiency = 1 – Percent idle timeDesigning Process LayoutsInformation Requirements: 1. List of departments 2. Projection of work flows 3. Distance between locations 4. Amount of money to be invested 5. List of special considerations 6. Location of key utilities
Process Layout Millin g Assembl y & Test Grindin g Drillin Platin g gProcess Layout - work travels to dedicated process centers
MODULE 4 (08 Hours)Capacity Management:Job Design, Ergonomics,Methods Study and Work Measurement, Employee Productivity,Learning Curve, Short-term Capacity Planning Aggregate planning and Capacity requirement planning(Problems in Work Measurement and Short term Capacity Planning) Design of Work Systems Job Design, Ergonomics, Methods Study and Work Measurement, Employee Productivity,Job Design • Job design involves specifying the content and methods of job – What will be done – Who will do the job – How the job will bob will be done – Where the job will be done – ErgonomicsDesign of Work Systems • Specialization • Behavioral Approaches to Job Design • Teams • Methods Analysis • Motions Study • Working conditionsJob Design SuccessSuccessful Job Design must be: • Carried out by experienced personnel with the necessary training and background • Consistent with the goals of the organization • In written form • Understood and agreed to by both management and employees
Specialization in Business: AdvantagesTable 7.1 For Management For Labor 1. Simplifies 1. Low education skill 2. High 2 Minimu 3. Low wage responsibilitie 3 Little mental needeDisadvantages For Management: For Labor: 1. Difficult to motivate 1. Monotonous work quality 2. Limited opportunities 2. Worker dissatisfaction, for advancement possibly resulting in 3. Little control over work absenteeism, high 4. Little opportunity for turnover, disruptive self-fulfillment tactics, poor attention to qualityBehavioral Approaches to Job Design • Job Enlargement – Giving a worker a larger portion of the total task by horizontal loading • Job Rotation – Workers periodically exchange jobs • Job Enrichment – Increasing responsibility for planning and coordination tasks, by vertical loading
Motivation and Trust • Motivation – Influences quality and productivity – Contributes to work environment • Trust – Influences productivity and employee-management relationsTeams • Benefits of teams – Higher quality – Higher productivity – Greater worker satisfaction • Self-directed teams – Groups of empowered to make certain changes in their work processMethods Analysis • Methods analysis – Analyzing how a job gets done – Begins with overall analysis – Moves to specific detailsMethods AnalysisThe need for methods analysis can comefrom a number of different sources: • Changes in tools and equipment • Changes in product design or new products • Changes in materials or procedures • Other factors (e.g. accidents, quality problems)Methods Analysis Procedure 1. Identify the operation to be studied 2. Get employee input 3. Study and document current method 4. Analyze the job 5. Propose new methods 6. Install new methods 7. Follow-up to ensure improvements have been achievedAnalyzing the Job • Flow process chart – Chart used to examine the overall sequence of an operation by focusing on movements of the operator or flow of materials • Worker-machine chart – Chart used to determine portions of a work cycle during which an operator and equipment are busy or idle
Figure 7-2 tion nt tion FLOW PROCESS CHART ANALYST PAGE me age pec Job Requisition of petty cash ay D. Kolb 1 of 2 e ra ve Stor Del Ins Mo Op Details of Method Requisition made by department head Put in “pick-up” basket To accounting department Account and signature verified Amount approved by treasurer Amount counted by cashier Amount recorded by bookkeeper Petty cash sealed in envelope Petty cash carried to department Petty cash checked against requisition Receipt signed Petty cash stored in safety boxMotion StudyMotion study is the systematic study of the human motions used to perform an operation.Motion Study Techniques • Motion study principles - guidelines for designing motion-efficient work procedures • Analysis of therbligs - basic elemental motions into which a job can be broken down • Micromotion study - use of motion pictures and slow motion to study motions that otherwise would be too rapid to analyze • ChartsDeveloping Work Methods 1. Eliminate unnecessary motions 2. Combine activities 3. Reduce fatigue 4. Improve the arrangement of the workplace 5. Improve the design of tools and equipment
Working Conditions Temperature & Ventilation Humidity Illumination Color Noise & Work Vibration Breaks Safet Causes of y AccidentsWork Measurement • Standard time • Stopwatch time study • Historical times • Predetermined data • Work Sampling
Compensation • Time-based system – Compensation based on time an employee has worked during a pay period • Output-based (incentive) system – Compensation based on the amount of output an employee produces during a pay periodForm of Incentive Plan • Accurate • Easy to apply • Consistent • Easy to understand • FairCompensation • Individual Incentive Plans • Group Incentive Plans • Knowledge-Based Pay System • Management CompensationLearning Curves • Learning curves: the time required to perform a task decreases with increasing repetitionsLearning Effect
Time per repetition Number of repetitionsLearning with Improvements
Time per unit Average Improvements may create a scallop effect in the curve. TimeApplications of Learning Curves 1. Manpower planning and scheduling 2. Negotiated purchasing 3. Pricing new products 4. Budgeting, purchasing, and inventory planning 5. Capacity PlanningWorker Learning Curves
Time/cycle A (underqualified)s B (average) Standard time C (overqualified) One Training week timeCautions and Criticisms • Learning rates may differ from organization to organization • Projections based on learning curves should be viewed as approximations • Estimates based the first unit should be checked for valid times • At some point the curve might level off or even tip upward • Some improvements may be more apparent than real • For the most part, the concept does not apply to mass productionAggregate Planning • Operations Planning Overview • The hierarchical planning process • Aggregate production planning • Examples: Chase and Level strategiesOperations Planning Overview • Long-range planning – Greater than three year planning horizon – Usually with yearly increments • Intermediate-range planning
– 1 to 3 years – Usually with monthly or quarterly increments • Short-range planning – One year – Usually with weekly increments Strategic Planning Long- range Sales Planning Intermediate- Aggregate Planning range Master Production Scheduling Product/Service Schedule Resource Requirements Planning Workforce & Mat’ls, Capacity, Manpower Customer Scheduling Short- Order Scheduling Daily Workforce & range Production/Purchases Customer SchedulingHierarchical Production Planning
Exhibit 12.2Decision Level Decision Process Forecasts needed Allocates Annual demand by production Corporate item and by region among plants Determines Monthly demand Plant manager seasonal plan by for 15 months by product type product type Determines Monthly demand Shop monthly for 5 months by item production superintendent schedules itemAggregate Planning • Goal: Specify the optimal combination of – production rate (units completed per unit of time) – workforce level (number of workers) – inventory on hand (inventory carried from previous period) • Product group or broad category (Aggregation) • Intermediate-range planning period: 6-18 monthsBalancing Aggregate Demand and Aggregate Production Capacity
10000 Suppose the figure to the 10000 right represents forecast 8000 7000 8000 demand in units. 5500 6000 6000 4500 4000Now suppose this lowerfigure represents the 2000aggregate capacity of the 0company to meet Jan Feb Mar Apr May Jundemand. 10000 9000What we want to do is 8000balance out the production 8000 6000rate, workforce levels, and 6000 4500 4000 4000inventory to make these 4000figures match up. 2000 0 Feb Jan Mar Apr May JunKey Strategies for Meeting Demand • Chase • Level • Some combination of the twoSTRATEGIES ACTIVE WRT DEMAND • USE MARKETING TO SMOOTH DEMAND • EXAMPLES • PRICE • PRODUCT • PLACE • PROMOTIONProactive Demand Management to Equate Supply and Demand
Suppose we have the following unit demand and cost information: Demand/mo Jan Feb Mar Apr May Jun 500 600 650 800 900 800 Days per month 22 19 21 21 22 Materials $100/unit Holding costs $10/unit per mo. Marginal cost of stockout $20/unit per mo. Hiring and training cost $50/worker Layoff costs $100/worker Labor hours required . 4 hrs/unit Straight time labor cost/OT $12.50/18.75/hour Beginning inventory 200 units Productive hours/worker/day 8.00 Paid straight hrs/day 8Capacity Planning • Capacity is the upper limit or ceiling on the load that an operating unit can handle. • The basic questions in capacity handling are: – What kind of capacity is needed? – How much is needed? – When is it needed?Importance of Capacity Decisions 1. Impacts ability to meet future demands 2. Affects operating costs 3. Major determinant of initial costs 4. Involves long-term commitment 5. Affects competitiveness 6. Affects ease of management 7. Globalization adds complexity 8. Impacts long range planningCapacity • Design capacity
– maximum output rate or service capacity an operation, process, or facility is designed for • Effective capacity – Design capacity minus allowances such as personal time, maintenance, and scrap • Actual output – rate of output actually achieved--cannot exceed effective capacity.Efficiency and Utilization Actual outputEfficiency = Effective capacity Actual outputUtilization = Design capacityBoth measures expressed as percentagesEfficiency/Utilization ExampleDesign capacity = 50 trucks/dayEffective capacity = 40 trucks/dayActual output = 36 units/day Actual output = 36 units/day Efficiency = = 90% Effective capacity 40 units/ day Utilization = Actual output = 36 units/day = 72% Design capacity 50 units/dayDeterminants of Effective Capacity • Facilities
• Product and service factors • Process factors • Human factors • Operational factors • Supply chain factors • External factorsStrategy Formulation • Capacity strategy for long-term demand • Demand patterns • Growth rate and variability • Facilities – Cost of building and operating • Technological changes – Rate and direction of technology changes • Behavior of competitors • Availability of capital and other inputsKey Decisions of Capacity Planning 1. Amount of capacity needed 2. Timing of changes 3. Need to maintain balance 4. Extent of flexibility of facilitiesCapacity cushion – extra demand intended to offset uncertaintySteps for Capacity Planning 1. Estimate future capacity requirements 2. Evaluate existing capacity 3. Identify alternatives 4. Conduct financial analysis 5. Assess key qualitative issues 6. Select one alternative 7. Implement alternative chosen 8. Monitor resultsMake or Buy 1. Available capacity 2. Expertise 3. Quality considerations 4. Nature of demand 5. Cost 6. RiskDeveloping Capacity Alternatives 1. Design flexibility into systems
2. Take stage of life cycle into account 3. Take a “big picture” approach to capacity changes 4. Prepare to deal with capacity “chunks” 5. Attempt to smooth out capacity requirements 6. Identify the optimal operating levelEconomies of Scale • Economies of scale – If the output rate is less than the optimal level, increasing output rate results in decreasing average unit costs • Diseconomies of scale – If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costsEvaluating AlternativesFigure 5.3 Production units have an optimal rate of output for minimal cost. Average cost per Minimum average cost per unit unit Minimu m cost 0 Rate of outputEvaluating Alternatives
Figure 5.4 Average cost per unit Minimum cost & optimal operating rate are functions of size of production unit. Small plant Medium plant Large plant 0 Output ratePlanning Service Capacity • Need to be near customers – Capacity and location are closely tied • Inability to store services – Capacity must be matched with timing of demand • Degree of volatility of demand – Peak demand periodsCost-Volume Relationships
C+Amount ($) V t= t o s cos lc le Tota riab C va F tal To C) (V Fixed cost (FC) 0 Q (volume in units)Cost-Volume Relationships
Amount ($) al u e ot en T v re 0 Q (volume in units)Cost-Volume Relationships ue en ofi t Amount ($) v re VC PrT C = a l C+ ot F st TC l co =T T ota + VC FC 3 machines T C C= C +V 2 machines FBreak-Even Problem with Step Fixed Costs 1 machine 0 BEP units Q (volume in units) Quantity Step fixed costs and variable costs.
$ BEP 3 T BE 2 C T P C 3 T C 2 T 1 R Quantit Multiple break-even y pointsAssumptions of Cost-Volume Analysis 1. One product is involved 2. Everything produced can be sold 3. Variable cost per unit is the same regardless of volume 4. Fixed costs do not change with volume 5. Revenue per unit constant with volume 6. Revenue per unit exceeds variable cost per unitFinancial Analysis • Cash Flow - the difference between cash received from sales and other sources, and cash outflow for labor, material, overhead, and taxes. • Present Value - the sum, in current value, of all future cash flows of an investment proposal.Calculating Processing Requirements
Standard Annual processing time Processing timeProduct Demand per unit (hr.) needed (hr.) #1 400 5.0 2,000 #2 300 8.0 2,400 #3 700 2.0 1,400 5,800
MODULE 5 (10 Hours)Materials Management:Scope of Materials Management, functions,information systems for Materials Management, Purchasing functions, Stores Management, Inventory Management, Materials requirement planning, Just in Time (JIT) and Enterprise Resource Planning (ERP),(Problems in Inventory Management and Vendor Selection)Inventory ManagementInventory • Types of Inventory Items – Raw materials and purchased parts from outside suppliers. – Components: subassemblies that are awaiting final assembly. – Work in process: all materials or components on the production floor in various stages of production. – Finished goods: final products waiting for purchase or to be sent to customers. – Supplies: all items needed but that are not part of the finished product, such as paper clips, duplicating machine toner, and tools.The Role of Inventory Management • Inventory Management – The process of ensuring that the firm has adequate inventories of all parts and supplies needed, within the constraint of minimizing total inventory costs. • Inventory Costs – Ordering (setup) costs – Acquisition costs – Holding (carrying) costs – Stockout costsInventory Costs • Ordering (Setup) Costs – The costs, usually fixed, of placing an order or setting up machines for a production run. • Acquisition Costs – The total costs of all units bought to fill an order, usually varying with the size of the order. • Inventory-Holding (Carrying) Costs – All the costs associated with carrying parts or materials in inventory.
• Stockout Costs – The costs associated with running out of raw materials, parts, or finished- goods inventory.Basic Inventory Management Systems • ABC Inventory Management • Inventory is divided into three dollar-volume categories—A, B, and C—with the A parts being the most active (largest dollar volume). – Inventory surveillance concentrates most on checking the A parts to guard against costly stockouts. – The idea is to focus most on the high-annual-dollar-volume A inventory items, to a lesser extent on the B items, and even less on the C items.Economic Order Quantity (EOQ) • Economic Order Quantity (EOQ) – An inventory management system based on a simple formula that is used to determine the most economical quantity to order so that the total of inventory and setup costs is minimized. – Assumptions: • Constant per unit holding and ordering costs • Constant withdrawals from inventory • No discounts for large quantity orders • Constant lead time for receipt of ordersThe Economic Order Quantity Model
Controlling For Quality And Productivity • Quality – The extent to which a product or service is able to meet customer needs and expectations. • Customer’s needs are the basic standard for measuring quality • High quality does not have to mean high price. • ISO 9000 – The quality standards of the International Standards Organization. • Total Quality Management (TQM) – A specific organization-wide program that integrates all the functions and related processes of a business such that they are all aimed at maximizing customer satisfaction through ongoing improvements. – Also called: Continuous improvement, Zero defects, Six-Sigma, and Kaizen (Japan) • Malcolm Baldridge Award – A prize created in 1987 by the U.S. Department of Commerce to recognize outstanding achievement in quality control management.Inventory: a stock or store of goods Independent Demand A Dependent Demand B(4 C(2 ) ) D(2 E(1 D(3 F(2 ) ) ) ) Independent demand is uncertain. Dependent demand is certain.
Types of Inventories • Raw materials & purchased parts • Partially completed goods called work in progress • Finished-goods inventories – (manufacturing firms) or merchandise (retail stores) • Replacement parts, tools, & supplies • Goods-in-transit to warehouses or customersFunctions of Inventory • To meet anticipated demand • To smooth production requirements • To decouple operations • To protect against stock-outs • To take advantage of order cycles • To help hedge against price increases • To permit operations • To take advantage of quantity discountsObjective of Inventory Control • To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds – Level of customer service – Costs of ordering and carrying inventoryEffective Inventory Management • A system to keep track of inventory • A reliable forecast of demand • Knowledge of lead times • Reasonable estimates of – Holding costs – Ordering costs – Shortage costs • A classification system
Inventory Counting Systems • Periodic SystemPhysical count of items made at periodic intervals • Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoring current levels of each item • Two-Bin System - Two containers of inventory; reorder when the first is empty • Universal Bar Code - Bar code printed on a label that has information about the item to which it is attached 0 214800 232087768Key Inventory Terms • Lead time: time interval between ordering and receiving the order • Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year • Ordering costs: costs of ordering and receiving inventory • Shortage costs: costs when demand exceeds supply
ABC Classification SystemClassifying inventory according to some measure of importance and allocating controlefforts accordingly.A - very importantB - mod. importantC - least important Hig h A Annual $ value B of items Lo C w Few Man Number of y ItemsCycle Counting • A physical count of items in inventory • Cycle counting management – How much accuracy is needed? – When should cycle counting be performed? – Who should do it?Economic Order Quantity Models • Economic order quantity model • Economic production model • Quantity discount modelAssumptions of EOQ Model • Only one product is involved • Annual demand requirements known • Demand is even throughout the year • Lead time does not vary • Each order is received in a single delivery • There are no quantity discountsThe Inventory Cycle
Profile of Inventory Level Over Time Q UsageQuantity rateon hand Reorder point Time Receive Place Receive Place Receive order order order order order Lead timeTotal Cost Annual Annual Total cost = carrying + ordering cost cost Q DS TC = H + 2 QCost Minimization Goal
The Total-Cost Curve is U-Shaped Q D TC = H+ S 2 Q Annual Cost Ordering Costs Order Quantity QO (optimal order quantity) (Q)Deriving the EOQUsing calculus, we take the derivative of the total cost function and set the derivative(slope) equal to zero and solve for Q. 2DS 2(Annual Demand)(Order or Setup Cost) Q OPT = = H Annual Holding CostMinimum Total Cost The total cost curve reaches its minimum where the carrying and ordering costsare equal. 2DS 2(Annual Demand)(Order or Setup Cost) Q OPT = = H Annual Holding CostEconomic Production Quantity (EPQ) • Production done in batches or lots