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Operation Management


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Operation Management a complete overview

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Operation Management

  1. 1. Production Operation Management Junaid Zamir SP06-BB-0010
  2. 2. Chapter 1 – Operations and Productivity
  3. 3. What Is Operations Management? Production is the creation of goods and services Operations management (OM) is the set of activities that creates value in the form of goods and services by transforming inputs into outputs
  4. 4. Organizing to Produce Goods and Services <ul><ul><li>Essential functions: </li></ul></ul><ul><ul><ul><li>Marketing – generates demand </li></ul></ul></ul><ul><ul><ul><li>Production/operations – creates the product </li></ul></ul></ul><ul><ul><ul><li>Finance/accounting – tracks how well the organization is doing, pays bills, collects the money </li></ul></ul></ul>
  5. 5. Why Study OM? <ul><li>OM is one of three major functions (marketing, finance, and operations) of any organization </li></ul><ul><li>We want (and need) to know how goods and services are produced </li></ul><ul><li>We want to understand what operations managers do </li></ul><ul><li>OM is such a costly part of an organization </li></ul>
  6. 6. What does it covers <ul><li>Planning </li></ul><ul><li>Organizing </li></ul><ul><li>Staffing </li></ul><ul><li>Leading </li></ul><ul><li>Controlling </li></ul>Basic Management Functions
  7. 7. <ul><li>Design of goods and services </li></ul><ul><ul><li>What good or service should we offer? </li></ul></ul><ul><ul><li>How should we design our products and services? </li></ul></ul><ul><li>Managing quality </li></ul><ul><ul><li>How do we define quality? </li></ul></ul><ul><ul><li>Who is responsible for quality? </li></ul></ul>areas it covers
  8. 8. <ul><li>Process design </li></ul><ul><ul><li>What process will the product require? </li></ul></ul><ul><ul><li>What equipment and technology is necessary for these processes? </li></ul></ul><ul><li>Location strategy </li></ul><ul><ul><li>Where should we put the facility? </li></ul></ul><ul><ul><li>On what criteria should we base the location decision? </li></ul></ul>areas it covers
  9. 9. <ul><li>Layout strategy </li></ul><ul><ul><li>How should we arrange the facility? </li></ul></ul><ul><ul><li>How large must the facility be to meet our plan? </li></ul></ul><ul><li>Human resources and job design </li></ul><ul><ul><li>How do we provide a reasonable work environment? </li></ul></ul><ul><ul><li>How much can we expect our employees to produce? </li></ul></ul>areas it covers
  10. 10. <ul><li>Supply chain management </li></ul><ul><ul><li>Should we make or buy this component? </li></ul></ul><ul><ul><li>Who are our suppliers and who can integrate into our e-commerce program? </li></ul></ul><ul><li>Inventory, material requirements planning, and JIT </li></ul><ul><ul><li>How much inventory of each item should we have? </li></ul></ul><ul><ul><li>When do we re-order? </li></ul></ul>areas it covers
  11. 11. New Trends in OM <ul><li>Global focus </li></ul><ul><li>Just-in-time performance </li></ul><ul><li>Supply chain partnering </li></ul><ul><li>Rapid product development </li></ul><ul><li>Mass customization </li></ul><ul><li>Empowered employees </li></ul><ul><li>Environmentally sensitive production </li></ul>
  12. 12. Productivity Challenge Productivity is the ratio of outputs (goods and services) divided by the inputs (resources such as labor and capital)
  13. 13. Measurement Problems <ul><li>Quality may change while the quantity of inputs and outputs remains constant </li></ul><ul><li>External elements may cause an increase or decrease in productivity </li></ul>
  14. 14. Productivity Variables <ul><li>Labor - contributes 10% of the annual increase </li></ul><ul><li>Capital - contributes about 38% of the annual increase </li></ul><ul><li>Management - contributes about 52% of the annual increase </li></ul>
  15. 15. Chapter 4 – Forecasting
  16. 16. What is Forecasting? <ul><li>Its is the art and science of predicting a future events. </li></ul><ul><li>It uses historical data to predict future. </li></ul><ul><li>It deals in areas of </li></ul><ul><ul><li>Production </li></ul></ul><ul><ul><li>Inventory </li></ul></ul><ul><ul><li>Personnel's </li></ul></ul>
  17. 17. <ul><li>Short-range forecast </li></ul><ul><ul><li>Generally for less than 3 months </li></ul></ul><ul><ul><li>Used for planning purchases, job scheduling </li></ul></ul><ul><li>Medium-range forecast </li></ul><ul><ul><li>For 3 months to 3 years </li></ul></ul><ul><ul><li>Sales and production planning, budgeting </li></ul></ul><ul><li>Long-range forecast </li></ul><ul><ul><li>3 + years </li></ul></ul><ul><ul><li>New product planning, research and development </li></ul></ul>Forecasting Time Horizons
  18. 18. Distinguishing Differences <ul><li>Medium/long range forecasts deal with more comprehensive issues and support management decisions regarding planning and products, plants and processes </li></ul><ul><li>Short-term forecasts tend to be more accurate than longer-term forecasts </li></ul>
  19. 19. Product Life Cycle Product design and development critical Frequent product and process design changes Process modifications High production costs Limited models Research & development Forecasting critical Product and process reliability Competitive product improvements and options Increase ability Standardization minor changes Increasing stability of process Product improvement and cost cutting Little product differentiation Cost minimization commonality Introduction Growth Maturity Decline
  20. 20. Types of Forecasts <ul><li>Economic forecasts </li></ul><ul><ul><li>Address business cycle – inflation rate, money supply, housing starts, etc. </li></ul></ul><ul><li>Technological forecasts </li></ul><ul><ul><li>Predict rate of technological progress </li></ul></ul><ul><ul><li>Impacts development of new products </li></ul></ul><ul><li>Demand forecasts </li></ul><ul><ul><li>Predict sales of existing products and services </li></ul></ul>
  21. 21. Forecasting Approaches <ul><li>Used when situation is vague and little data exist </li></ul><ul><ul><li>New products </li></ul></ul><ul><ul><li>New technology </li></ul></ul><ul><li>Involves intuition, experience </li></ul><ul><ul><li>e.g., forecasting sales on Internet </li></ul></ul>Qualitative Methods
  22. 22. Forecasting Approaches <ul><li>Used when situation is ‘stable’ and historical data exist </li></ul><ul><ul><li>Existing products </li></ul></ul><ul><ul><li>Current technology </li></ul></ul><ul><li>Involves mathematical techniques </li></ul><ul><ul><li>e.g., forecasting sales of color televisions </li></ul></ul>Quantitative Methods
  23. 23. Qualitative Approaches <ul><li>Delphi method </li></ul><ul><ul><li>Panel of experts make forecasts </li></ul></ul><ul><li>Sales force composite </li></ul><ul><ul><li>Forecasting technique based on salespersons estimates of expected sales. </li></ul></ul><ul><li>Consumer Market Survey </li></ul><ul><ul><li>Input from potential customers </li></ul></ul>
  24. 24. Quantitative Approaches <ul><li>Naive approach </li></ul><ul><ul><li>Assumes demand in next period is the same as demand in most recent period </li></ul></ul><ul><li>Moving averages </li></ul><ul><ul><li>It is a series of airthmatic means used to monitor little or no trend </li></ul></ul><ul><li>Weighted moving average </li></ul><ul><ul><li>Used when trend is present </li></ul></ul>
  25. 25. <ul><li>Form of weighted moving average </li></ul><ul><ul><li>Weights decline exponentially </li></ul></ul><ul><ul><li>Most recent data weighted most </li></ul></ul><ul><li>Requires smoothing constant (  ) </li></ul><ul><ul><li>Ranges from 0 to 1 </li></ul></ul><ul><ul><li>Subjectively chosen </li></ul></ul><ul><li>Involves little record keeping of past data </li></ul>Exponential Smoothing
  26. 26. Exponential Smoothing New forecast = Last period’s forecast + a ( Last period’s actual demand – Last period’s forecast ) F t = F t – 1 + a( A t – 1 - F t – 1 ) where F t = new forecast F t – 1 = previous forecast a = smoothing (or weighting) constant (0 ≤ a ≤ 1)
  27. 27. <ul><li>Forecasting obtained by observing response variable at regular time periods </li></ul>Time Series Forecasting
  28. 28. <ul><li>Persistent, overall upward or downward pattern </li></ul><ul><li>Changes due to population, technology, age, culture, etc. </li></ul><ul><li>Typically several years duration </li></ul>Trend Component
  29. 29. <ul><li>Regular pattern of up and down fluctuations </li></ul><ul><li>Due to weather, customs, etc. </li></ul><ul><li>Occurs within a single year </li></ul>Seasonal Component
  30. 30. <ul><li>Repeating up and down movements </li></ul><ul><li>Affected by business cycle, political, and economic factors </li></ul><ul><li>Multiple years duration </li></ul><ul><li>Often causal or associative relationships </li></ul>Cyclical Component 0 5 10 15 20
  31. 31. <ul><li>Unsystematic, fluctuations </li></ul><ul><li>Due to random variation or unforeseen events </li></ul><ul><li>Short duration and nonrepeating </li></ul>Random Component M T W T F
  32. 32. Chapter 5 – Design of Goods and Services
  33. 33. <ul><li>The good or service the organization provides society </li></ul><ul><li>Top organizations typically focus on core products </li></ul><ul><li>Customers buy satisfaction, not just a physical good or particular service </li></ul><ul><li>Fundamental to an organization's strategy with implications throughout the operations function </li></ul>Product Decision
  34. 34. Product Strategy Options <ul><li>Differentiation </li></ul><ul><ul><li>Shouldice Hospital </li></ul></ul><ul><li>Low cost </li></ul><ul><ul><li>Mobile Phones </li></ul></ul><ul><li>Rapid response </li></ul><ul><ul><li>Wal-mart </li></ul></ul>
  35. 35. Product Life Cycle Product design and development critical Frequent product and process design changes Process modifications High production costs Limited models Research & development Forecasting critical Product and process reliability Competitive product improvements and options Increase ability Standardization minor changes Increasing stability of process Product improvement and cost cutting Little product differentiation Cost minimization commonality Introduction Growth Maturity Decline
  36. 36. New Product Opportunities <ul><li>Understanding the customer </li></ul><ul><li>Technological change </li></ul><ul><li>Political/legal change </li></ul><ul><li>Market practice, professional standards, suppliers, distributors </li></ul><ul><li>Developing new products faster can result in a competitive advantage </li></ul>
  37. 37. Quality Function Deployment <ul><li>Identify customer wants </li></ul><ul><li>Identify how the good/service will satisfy customer wants </li></ul><ul><li>Relate customer wants to product hows </li></ul><ul><li>Evaluate competing products </li></ul><ul><li>Compare performance to desirable technical attributes </li></ul>
  38. 38. Manufacturability and Value Engineering <ul><li>Benefits: </li></ul><ul><ul><li>Reduced complexity of products </li></ul></ul><ul><ul><li>Additional standardization of products </li></ul></ul><ul><ul><li>Improved functional aspects of product </li></ul></ul><ul><ul><li>Improved job design and job safety </li></ul></ul><ul><ul><li>Improved maintainability (serviceability) of the product </li></ul></ul><ul><ul><li>Robust design </li></ul></ul>
  39. 39. Issues for Product Development <ul><li>Robust design </li></ul><ul><li>Modular design </li></ul><ul><li>Computer-aided design (CAD) </li></ul><ul><li>Computer-aided manufacturing (CAM) </li></ul><ul><li>Virtual reality technology </li></ul><ul><li>Value analysis </li></ul><ul><li>Environmentally friendly design </li></ul>
  40. 40. Defining The Product <ul><li>First definition is in terms of functions </li></ul><ul><li>specifications are developed during the design phase </li></ul><ul><li>Manufactured products will have an engineering drawing </li></ul><ul><li>Bill of material (BOM) lists the components of a product </li></ul>
  41. 41. <ul><li>Engineering drawing </li></ul><ul><ul><li>Shows dimensions </li></ul></ul><ul><li>Bill of Material </li></ul><ul><ul><li>Lists components, quantities and where used </li></ul></ul><ul><ul><li>Shows product structure </li></ul></ul>Product Documents
  42. 42. Service Design <ul><li>Service typically includes direct interaction with the customer </li></ul><ul><ul><li>Increased opportunity for customization </li></ul></ul><ul><ul><li>Reduced productivity </li></ul></ul><ul><li>Cost and quality are still determined at the design stage </li></ul><ul><ul><li>Delay customization </li></ul></ul><ul><ul><li>Modularization </li></ul></ul><ul><ul><li>Reduce customer interaction, often through automation </li></ul></ul>
  43. 43. Chapter 6 – Managing Quality
  44. 44. Defining Quality The totality of features and characteristics of a product or service that bears on its ability to satisfy stated or implied needs American Society for Quality
  45. 45. Quality and Strategy <ul><li>Managing quality supports differentiation, low cost, and response strategies </li></ul><ul><li>Quality helps firms increase sales and reduce costs </li></ul><ul><li>Building a quality organization is a demanding task </li></ul>
  46. 46. The Flow of Activities Organizational Practices Leadership, Mission statement, Effective operating procedures, Staff support, Training Yields: What is important and what is to be accomplished Quality Principles Customer focus, Continuous improvement, Benchmarking, Just-in-time, Tools of TQM Yields: How to do what is important and to be accomplished Employee Fulfillment Empowerment, Organizational commitment Yields: Employee attitudes that can accomplish what is important Customer Satisfaction Winning orders, Repeat customers Yields: An effective organization with a competitive advantage
  47. 47. Different Views <ul><li>User-based – better performance, more features </li></ul><ul><li>Manufacturing-based – conformance to standards, making it right the first time </li></ul><ul><li>Product-based – specific and measurable attributes of the product </li></ul>
  48. 48. Implications of Quality <ul><li>Company reputation </li></ul><ul><ul><li>Perception of new products </li></ul></ul><ul><ul><li>Employment practices </li></ul></ul><ul><ul><li>Supplier relations </li></ul></ul><ul><li>Product liability </li></ul><ul><ul><li>Reduce risk </li></ul></ul><ul><li>Global implications </li></ul><ul><ul><li>Improved ability to compete </li></ul></ul>
  49. 49. Key Dimensions of Quality <ul><li>Performance </li></ul><ul><li>Features </li></ul><ul><li>Reliability </li></ul><ul><li>Conformance </li></ul><ul><li>Durability </li></ul><ul><li>Serviceability </li></ul><ul><li>Aesthetics </li></ul><ul><li>Perceived quality </li></ul><ul><li>Value </li></ul>
  50. 50. Costs of Quality <ul><li>Prevention costs - reducing the potential for defects </li></ul><ul><li>Appraisal costs - evaluating products, parts, and services </li></ul><ul><li>Internal failure - producing defective parts or service before delivery </li></ul><ul><li>External costs - defects discovered after delivery </li></ul>
  51. 51. TQM <ul><li>Total Quality is a description of the culture , attitude and organization of a company that strives to provide customers with products and services that satisfy their needs. It covers entire organization, from supplier to customer </li></ul><ul><li>Requires commitment by managements toward excellence in all aspects of products and services that are important to the customer </li></ul>
  52. 52. Seven Concepts of TQM <ul><li>Continuous improvement </li></ul><ul><li>Six Sigma </li></ul><ul><li>Employee empowerment </li></ul><ul><li>Benchmarking </li></ul><ul><li>Just-in-time (JIT) </li></ul><ul><li>Taguchi concepts </li></ul><ul><li>Knowledge of TQM tools </li></ul>
  53. 53. Continuous Improvement <ul><li>Represents continual improvement of all processes </li></ul><ul><li>Involves all operations and work centers including suppliers and customers </li></ul><ul><ul><li>People, Equipment, Materials, Procedures </li></ul></ul>
  54. 54. Six Sigma <ul><li>Two meanings </li></ul><ul><ul><li>Statistical definition of a process that is 99.9997% capable, 3.4 defects per million opportunities (DPMO) </li></ul></ul><ul><ul><li>A program designed to reduce defects, lower costs, and improve customer satisfaction </li></ul></ul>
  55. 55. Employee Empowerment <ul><li>Getting employees involved in product and process improvements </li></ul><ul><li>Techniques </li></ul><ul><ul><li>Build communication networks that include employees </li></ul></ul><ul><ul><li>Develop open, supportive supervisors </li></ul></ul><ul><ul><li>Move responsibility to employees </li></ul></ul>
  56. 56. Quality Circles <ul><li>Group of employees who meet regularly to solve problems </li></ul><ul><li>Trained in planning, problem solving, and statistical methods </li></ul><ul><li>Very effective when done properly </li></ul>
  57. 57. Benchmarking <ul><li>Determine what to benchmark </li></ul><ul><li>Form a benchmark team </li></ul><ul><li>Identify benchmarking partners </li></ul><ul><li>Collect and analyze benchmarking information </li></ul><ul><li>Take action to match or exceed the benchmark </li></ul>
  58. 58. Just-in-Time (JIT) <ul><li>Relationship to quality: </li></ul><ul><li>JIT cuts the cost of quality </li></ul><ul><li>JIT improves quality </li></ul><ul><li>Better quality means less inventory and better, easier-to-employ JIT system </li></ul>
  59. 59. Taguchi Concepts <ul><li>Engineering and experimental design methods to improve product and process design </li></ul>
  60. 60. Tools of TQM <ul><li>Tools for Generating Ideas </li></ul><ul><ul><li>Check sheets </li></ul></ul><ul><ul><li>Scatter diagrams </li></ul></ul><ul><ul><li>Cause-and-effect diagrams </li></ul></ul><ul><li>Tools to Organize the Data </li></ul><ul><ul><li>Pareto charts </li></ul></ul><ul><ul><li>Flowcharts </li></ul></ul><ul><li>Tools for Identifying Problems </li></ul><ul><ul><li>Histogram </li></ul></ul><ul><ul><li>Statistical process control chart </li></ul></ul>
  61. 61. Inspection <ul><li>Involves examining items to see if an item is good or defective </li></ul><ul><li>Detect a defective product </li></ul><ul><ul><li>Does not correct deficiencies in process or product </li></ul></ul><ul><ul><li>It is expensive </li></ul></ul><ul><li>Issues </li></ul><ul><ul><li>When to inspect </li></ul></ul><ul><ul><li>Where in process to inspect </li></ul></ul><ul><ul><li>It is necessary for both services and good industry. </li></ul></ul>
  62. 62. Chapter 11 – Supply Chain Management
  63. 63. The Supply Chain Supply chain management is the integration of the activities that procure materials and services, transform them into intermediate goods and the final product, and deliver them to customers
  64. 64. Supply Chain Management <ul><li>Transportation vendors </li></ul><ul><li>Credit and cash transfers </li></ul><ul><li>Suppliers </li></ul><ul><li>Distributors </li></ul><ul><li>Accounts payable and receivable </li></ul><ul><li>Warehousing and inventory </li></ul><ul><li>Order fulfillment </li></ul><ul><li>Sharing customer, forecasting, and production information </li></ul>
  65. 65. Make-or-Buy Decisions <ul><li>Maintain core competence </li></ul><ul><li>Lower production cost </li></ul><ul><li>Unsuitable suppliers </li></ul><ul><li>Assure adequate supply (quantity or delivery) </li></ul><ul><li>Utilize surplus labor or facilities </li></ul><ul><li>Obtain desired quality </li></ul><ul><li>Remove supplier collusion </li></ul><ul><li>Obtain unique item that would entail a prohibitive commitment for a supplier </li></ul><ul><li>Protect personnel from a layoff </li></ul><ul><li>Protect proprietary design or quality </li></ul><ul><li>Increase or maintain size of company </li></ul>Reasons for Making
  66. 66. Make-or-Buy Decisions <ul><li>Frees management to deal with its core competence </li></ul><ul><li>Lower acquisition cost </li></ul><ul><li>Preserve supplier commitment </li></ul><ul><li>Obtain technical or management ability </li></ul><ul><li>Inadequate capacity </li></ul><ul><li>Reduce inventory costs </li></ul><ul><li>Ensure alternative sources </li></ul><ul><li>Inadequate managerial or technical resources </li></ul><ul><li>Reciprocity </li></ul><ul><li>Item is protected by a patent or trade secret </li></ul>Reasons for Buying
  67. 67. Outsourcing <ul><li>Transfers traditional internal activities and resources of a firm to outside vendors </li></ul><ul><li>Firms outsource information technology, accounting, legal, logistics, and production </li></ul>
  68. 68. Supply Chain Strategies <ul><li>Negotiating with many suppliers </li></ul><ul><li>Long-term partnering with few suppliers </li></ul><ul><li>Virtual companies that use suppliers on an as needed basis </li></ul>
  69. 69. Vertical Integration Figure 11.2 Baked goods Computers Watches Calculators Dealers Finished goods (customers) Circuit boards Distribution systems Forward integration Flour milling Integrated circuits Automobiles Current transformation Steel Backward integration Farming Silicon Iron ore Raw material (suppliers) Vertical Integration Examples of Vertical Integration
  70. 70. Virtual Companies <ul><li>Rely on a variety of supplier relationships to provide services on demand </li></ul><ul><li>Fluid organizational boundaries that allow the creation of unique enterprises to meet changing market demands </li></ul><ul><li>Exceptionally lean performance, low capital investment, flexibility, and speed </li></ul>
  71. 71. Vendor Selection <ul><li>Vendor evaluation </li></ul><ul><ul><li>Find potential vendors </li></ul></ul><ul><ul><li>Determine the likelihood of them becoming good suppliers </li></ul></ul><ul><li>Vendor Development </li></ul><ul><ul><li>Training </li></ul></ul><ul><ul><li>Engineering and production help </li></ul></ul><ul><ul><li>Establish policies and procedures </li></ul></ul>
  72. 72. Vendor Selection <ul><li>Negotiations </li></ul><ul><ul><li>Cost-Based Price Model - supplier opens books to purchaser </li></ul></ul><ul><ul><li>Market-Based Price Model - price based on published, auction, or indexed price </li></ul></ul><ul><ul><li>Competitive Bidding - used for infrequent purchases but may make establishing long-term relationships difficult </li></ul></ul>
  73. 73. Distribution Systems <ul><li>Trucking </li></ul><ul><ul><li>Moves the vast majority of manufactured goods </li></ul></ul><ul><li>Railroads </li></ul><ul><ul><li>Capable of carrying large loads </li></ul></ul><ul><li>Airfreight </li></ul><ul><ul><li>Fast and flexible for light loads </li></ul></ul><ul><ul><li>May be expensive </li></ul></ul><ul><li>Waterways </li></ul><ul><ul><li>Typically used for bulky, low-value cargo </li></ul></ul>
  74. 74. Distribution Systems <ul><li>Pipelines </li></ul><ul><ul><li>Used for transporting oil, gas, and other chemical products </li></ul></ul>
  75. 75. Chapter 12 – Inventory Management
  76. 76. Inventory <ul><li>One of the most expensive assets of many companies representing as much as 50% of total invested capital </li></ul><ul><li>Operations managers must balance inventory investment and customer service </li></ul>
  77. 77. Functions of Inventory <ul><li>To separate various parts of the production process </li></ul><ul><li>To save firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers </li></ul><ul><li>To take advantage of quantity discounts </li></ul><ul><li>To hedge against inflation </li></ul>
  78. 78. Types of Inventory <ul><li>Raw material </li></ul><ul><ul><li>Purchased but not processed </li></ul></ul><ul><li>Work-in-process </li></ul><ul><ul><li>Undergone some change but not completed </li></ul></ul><ul><ul><li>A function of cycle time for a product </li></ul></ul><ul><li>Maintenance/repair/operating (MRO) </li></ul><ul><ul><li>Necessary to keep machinery and processes productive </li></ul></ul><ul><li>Finished goods </li></ul><ul><ul><li>Completed product awaiting shipment </li></ul></ul>
  79. 79. ABC Analysis ABC analysis is a business term used to define an inventory categorization technique often used in material management. Analysis of a range of items which have different levels of significance and should be handled or controlled differently.
  80. 80. ABC Analysis <ul><li>When carrying out an ABC analysis, inventory items are valued with the results then ranked. </li></ul><ul><ul><li>&quot;A class&quot; inventory will typically contain items that account for 80% of total value, or 20% of total items. </li></ul></ul><ul><ul><li>&quot;B class&quot; inventory will have around 15% of total value, or 30% of total items. </li></ul></ul><ul><ul><li>&quot;C class&quot; inventory will account for the remaining 5%, or 50% of total items. </li></ul></ul>
  81. 81. Record Accuracy <ul><li>Accurate records are a critical ingredient in production and inventory systems </li></ul><ul><li>Allows organization to focus on what is needed </li></ul><ul><li>Necessary to make precise decisions about ordering, scheduling, and shipping </li></ul><ul><li>Incoming and outgoing record keeping must be accurate </li></ul><ul><li>Stockrooms should be secure </li></ul>
  82. 82. Holding, Ordering, and Setup Costs <ul><li>Holding costs - holding cost  is money spent to keep and maintain a stock of goods in storage (rent, space, insurance and security) </li></ul><ul><li>Ordering costs - the costs of placing an order and receiving goods </li></ul><ul><li>Setup costs - cost to prepare a machine or process for manufacturing an order </li></ul>
  83. 83. Cycle Counting <ul><li>Items are counted and records updated on a periodic basis </li></ul><ul><li>Often used with ABC analysis to determine cycle </li></ul><ul><li>Has several advantages </li></ul><ul><ul><li>Eliminates shutdowns and interruptions </li></ul></ul><ul><ul><li>Eliminates annual inventory adjustment </li></ul></ul><ul><ul><li>Trained personnel audit inventory accuracy </li></ul></ul><ul><ul><li>Allows causes of errors to be identified and corrected </li></ul></ul><ul><ul><li>Maintains accurate inventory records </li></ul></ul>
  84. 84. Independent Versus Dependent Demand <ul><li>Independent demand - the demand for item is independent of the demand for any other item in inventory </li></ul><ul><li>Dependent demand - the demand for item is dependent upon the demand for some other item in the inventory </li></ul>
  85. 85. Inventory Models for Independent Demand <ul><li>Basic economic order quantity </li></ul><ul><li>Production order quantity </li></ul><ul><li>Quantity discount model </li></ul>
  86. 86. Basic EOQ Model <ul><li>The ordering cost is constant. </li></ul><ul><li>The rate of demand is constant </li></ul><ul><li>The lead time is fixed </li></ul><ul><li>The purchase price of the item is constant i.e no discount is available </li></ul><ul><li>The replenishment is made instantaneously, the whole batch is delivered at once. </li></ul>Economic order quantity  is the level of inventory that minimizes the total inventory holding costs and ordering costs. Assumptions :
  87. 87. Reorder Points <ul><li>Inventory level of an item which signals the need for placement of a replenishment order., taking into account the consumption of the item during order lead time and the quantitu required for safety stock. </li></ul>
  88. 88. Production Order Quantity Model Used when units are produced and sold simultaneously
  89. 89. Production Order Quantity Model Inventory level Time Demand part of cycle with no production Part of inventory cycle during which production (and usage) is taking place t Maximum inventory
  90. 90. Quantity Discount Models <ul><li>Reduced prices are often available when larger quantities are purchased </li></ul>TC = S + H + PD D Q Q 2
  91. 91. Safety Stock <ul><li>Use safety stock to achieve a desired service level and avoid stockouts </li></ul>ROP = d x L + ss
  92. 92. Chapter 13 – Aggregate Planning
  93. 93. Aggregate Planning Aggregate planning  is an operational activity which does an aggregate plan for the productions process, in advance of 2 to 18 months, to give an idea to management as to what quantity of materials and other resources are to be procured and when .
  94. 94. Aggregate Planning <ul><li>Aggregate planning has certain prerequisite inputs which are inevitable. They include: </li></ul><ul><li>Information about the resources and the facilities available. </li></ul><ul><li>Demans forecast for the period for which the planning has to be done. </li></ul><ul><li>Cost of various alternatives and resources. This includes cost of holding inventory, ordering cost, cost of production through various production alternatives </li></ul>
  95. 95. The Planning Process Long-range plans (over one year) Research and Development New product plans Capital investments Facility location/expansion Intermediate-range plans (3 to 18 months) Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans Short-range plans (up to 3 months) Job assignments Ordering Job scheduling Dispatching Overtime Part-time help Top executives Operations managers Operations managers, supervisors, foremen Responsibility Planning tasks and horizon
  96. 96. Aggregate Planning Strategies <ul><li>Use inventories to absorb changes in demand </li></ul><ul><li>Accommodate changes by varying workforce size </li></ul><ul><li>Use part-timers, overtime, or idle time to absorb changes </li></ul><ul><li>Use subcontractors </li></ul><ul><li>Change prices or other factors to influence demand </li></ul>
  97. 97. Aggregate Planning Options Hiring, layoff, and training costs may be significant. Avoids the costs of other alternatives. Varying workforce size by hiring or layoffs Inventory holding cost may increase. Shortages may result in lost sales. Changes in human resources. Changing inventory levels Disadvantages Advantages Option
  98. 98. Aggregate Planning Options Loss of quality control; reduced profits; loss of future business. Permits flexibility and smoothing of the firm’s output. Sub-contracting Overtime premiums; tired workers; may not meet demand. Matches seasonal fluctuations without hiring/ training costs. Varying production rates through overtime or idle time Disadvantages Advantages Option
  99. 99. Aggregate Planning Options Uncertainty in demand. Hard to match demand to supply exactly. Tries to use excess capacity. Discounts draw new customers. Influencing demand High turnover/ training costs; quality suffers; scheduling difficult. Is less costly and more flexible than full-time workers. Using part-time workers Disadvantages Advantages Option
  100. 100. Aggregate Planning Options Customer must be willing to wait, but goodwill is lost. May avoid overtime. Keeps capacity constant. Back ordering during high-demand periods Disadvantages Advantages Option
  101. 101. Summary of Aggregate Planning Methods LP software available; permits sensitivity analysis and new constraints; linear functions may not be realistic. Optimization Transportation method of linear programming Simple to understand and easy to use. Many solutions; one chosen may not be optimal. Trial and error Graphical methods Important Aspects Solution Approaches Techniques
  102. 102. Summary of Aggregate Planning Methods Complex; may be difficult to build and for managers to understand. Change parameters Simulation Important Aspects Solution Approaches Techniques
  103. 103. Yield Management Yield management , also known as  revenue management , is the process of understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits (such as airline seats or hotel room reservations) The challenge is to sell the right resources to the right customer at the right time for the right price.
  104. 104. Yield Management Matrix Duration of use Unpredictable Predictable Price Tend to be fixed Tend to be variable Quadrant 1: Quadrant 2: Movies Hotels Stadiums/arenas Airlines Convention centers Rental cars Hotel meeting space Cruise lines Quadrant 3: Quadrant 4: Restaurants Continuing care Golf courses hospitals Internet service providers
  105. 105. Chapter 14 – Material Requirements Planning (MRP) and ERP
  106. 106. MRP <ul><li>Better response to customer orders </li></ul><ul><li>Faster response to market changes </li></ul><ul><li>Improved utilization of facilities and labor </li></ul><ul><li>Reduced inventory levels </li></ul>Material Requirements Planning (MRP)  is a software based production planning and inventory control system used to manage manufacturing processes. Benefits
  107. 107. <ul><li>An MRP system is intended to simultaneously meet three objectives: </li></ul><ul><li>Ensure material and products are available for productions and delivery to customers. </li></ul><ul><li>Maintain the lowest possible level of inventory. </li></ul><ul><li>Plan manufacturing activities and purchasing activities. </li></ul>
  108. 108. Dependent Demand <ul><li>The demand for one item is related to the demand for another item </li></ul><ul><li>In general, used whenever a schedule can be established for an item </li></ul><ul><li>MRP is the common technique </li></ul>
  109. 109. Dependent Demand <ul><ul><li>Master production schedule </li></ul></ul><ul><ul><li>Specifications or bill of material </li></ul></ul><ul><ul><li>Inventory availability </li></ul></ul><ul><ul><li>Purchase orders outstanding </li></ul></ul><ul><ul><li>Lead times </li></ul></ul>Effective use of dependent demand inventory models requires the following
  110. 110. Master Production Schedule (MPS) <ul><li>A Master Production Schedule (MPS) is a plan for production, staffing, inventory, etc </li></ul><ul><li>Specifies what is to be made and when </li></ul><ul><li>Inputs from financial plans, customer demand, engineering, supplier performance </li></ul><ul><li>It helps to forecast demand, production costs, inventory costs, lead time, </li></ul><ul><li>The MPS is the result of the production planning process </li></ul>
  111. 111. Master Production Schedule (MPS)
  112. 112. The Planning Process Figure 14.1 Change production plan? Master production schedule Management Return on investment Capital Engineering Design completion Aggregate production plan Procurement Supplier performance Human resources Manpower planning Production Capacity Inventory Marketing Customer demand Finance Cash flow
  113. 113. The Planning Process Is capacity plan being met? Is execution meeting the plan? Change master production schedule? Change capacity? Change requirements? No Execute material plans Execute capacity plans Yes Realistic? Capacity requirements plan Material requirements plan Master production schedule
  114. 114. Focus for Different Process Strategies Stock to Forecast (Product Focus) Schedule finished product Assemble to Order or Forecast (Repetitive) Schedule modules Make to Order (Process Focus) Schedule orders Examples: Print shop Motorcycles Steel, Beer, Bread Machine shop Autos, TVs Lightbulbs Fine-dining restaurant Fast-food restaurant Paper Typical focus of the master production schedule Number of end items Number of inputs
  115. 115. Master Production Schedule (MPS) <ul><li>A customer order in a job shop (make-to-order) company </li></ul><ul><li>Modules in a repetitive (assemble-to-order or forecast) company </li></ul><ul><li>An end item in a continuous (stock-to-forecast) company </li></ul>Can be expressed in any of the following terms:
  116. 116. Bills of Material <ul><li>List of components, ingredients, and materials needed to make product </li></ul><ul><li>Provides product structure </li></ul><ul><ul><li>Items above given level are called parents </li></ul></ul><ul><ul><li>Items below given level are called children </li></ul></ul>
  117. 117. Bills of Material <ul><li>Modular Bills </li></ul><ul><ul><li>Modules are not final products but components that can be assembled into multiple end items </li></ul></ul><ul><ul><li>Can significantly simplify planning and scheduling </li></ul></ul>
  118. 118. Accurate Records <ul><li>Accurate inventory records are absolutely required for MRP (or any dependent demand system) to operate correctly </li></ul><ul><li>Generally MRP systems require 99% accuracy </li></ul><ul><li>Outstanding purchase orders must accurately reflect quantities and scheduled receipts </li></ul>
  119. 119. Lead Times <ul><li>The time required to purchase, produce, or assemble an item </li></ul><ul><ul><li>For production – the sum of the order, wait, move, setup, store, and run times </li></ul></ul><ul><ul><li>For purchased items – the time between the recognition of a need and the availability of the item for production </li></ul></ul>
  120. 120. ERP <ul><li>Enterprise resource planning  ( ERP ) is a company-wide computer software system used to manage and coordinate all the resources, information, and functions of a business from shared data stores. </li></ul>