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Michal Kavan
storing, transporting, cutting). To insure that the desired outputs are obtained,
measurements are taken at various points in the transformation process (feedback)
and then compared to previously established standards to determine if corrective
action is needed (control).
2.4 Other Functions
There are a host of other supporting functions that interface with operations,
finance, and marketing. Among them are accounting and purchasing. Depending on
the nature of the organization, there may also be personnel, product design and
development, industrial engineering, and maintenance.
Review Questions:
How would you define management? Does your definition differ from the one
offered in this book? Explain.
What are the managerial functions?
How do the required managerial skills differ in the organizational hierarchy?
In what fundamental way are the basic goals of all managers at all levels and in
all kinds of enterprises the same?
What are some of the characteristics of excellent companies (according to Peters
and Waterman)? Do the companies you know have these characteristics?
What are the differences between productivity, effectiveness, and efficiency?
How would you define entrepreneurship?
What does entrepreneurship imply?
What are several problems managing innovation?
What kind of resources are required to make a change in each component?
Why do management analysis and practice require a system approach (Models)?
Briefly describe the term Marketing Management, Production/Operations
Management, Purchasing, Personnel, Public relations, Industrial engineering,
Maintenance).
Describe the Pareto phenomenon and tell why it is important in problem solving.
Identify the three major functional areas of business organizations and briefly
describe how they interrelate.
Describe the operations function and the nature of the operations managers job.
Identify some of the current trends in operations management.
Contrast the terms mass production and job shop. What kinds of products does
each system produce?
1.
2.
3.
4.
Delphi technique
Outside opinion
Quantitative:
Time series:
Naive
Moving averages
values.
Exponential smoothing
Associative models:
Simple regression
Multiple regression
MAn =
Where
i =
n
Ai
i 1
n
Age of the data (i = 1,2,3 )
Number of periods in the moving average
Actual value with age i
Exponential Smoothing:
Exponential Smoothing is a sophisticated weighted averaging method that is
still relatively easy to use and understand. Each new forecast is based on the
previous forecast plus a percentage of the difference between that forecast and the
actual value of the series at that point. That is:
= Smoothing constant
At-1 = Actual demand or sales for period t-1
Trend Equation:
A linear trend equation has the form
yt = a + bt
where:
yt
a
b
The coefficients of the line, a and b, can be computed from historical data using
these two equations:
n ty t y
y b t
b=
a=
2
2
n t t
n
where:
n = Number of periods
y = Value of the time series
equation of a straight line that minimizes the sum of squared vertical deviations of
data points from the line.
Correlation measures the strength and direction of relationship between two
variables. Correlation can range from -1,0 to + 1,0. A correlation of +1,0 indicates
that changes in one variable are always matched by changes in the other; a
correlation of -1,0 indicates that increases in one variable are matched by decreases
in the other; and a correlation close to zero indicates little linear relationship between
two variables. The correlation between two variables can be computed using the
equation:
r =
n xy x y
n x 2 x n y 2 y
2
Actal forecast
( Actual forecast )
n 1
The sample standard deviation, s, equals the square root of MSE. From a
computational standpoint, the difference between these two measures is that one
weights all errors evenly (MAD) and the other weights errors according to their
squared values (MSE).
Forecasts can be monitored using either tracking signals or control charts. A
tracking signal focuses on the ratio of cumulative forecast error to the corresponding
value of MAD:
Tracking signal =
( Actual Forecast )
MAD
The resulting values are compared to predetermined limits. These are based
on judgment and experience and often range from 3 to 8. We shall use limits of
4 for the most part. These are roughly comparable to three standard deviation
limits. Values within the limits suggest but do not guarantee that the forecast is
performing adequately. After an initial value of MAD has been computed, MAD can
be updated using exponential smoothing:
MADt = MADt-1 + (Actual - Forecastt - MADt-1)
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The control chart approach involves setting upper and lower limits for
individual forecast errors (instead of cumulative errors, as is the case with a tracking
signal). The limits are multiples of the square root of MSE. This method assumes the
following:
a) Forecast error are randomly distributed around a mean of zero.
b) The distribution of errors is normal.
In effect, the square root of MSE is an estimate of the standard deviation of the
distribution of errors. That is:
s = MSE .
Selection of a forecasting technique involves choosing a technique that will
serve the intended purpose at an acceptable level of cost and accuracy.
1.
2.
3.
4.
5.
6.
7.
8.
Review Questions:
Outline the steps in the forecasting process.
What are the main advantages that quantitative techniques for forecasting have
over qualitative techniques? What limitations do quantitative techniques have?
What is the purpose of establishing control limits for forecasts?
Outline the features common to all forecasts.
Describe at least four qualitative forecasting techniques and the advantages and
disadvantages of each.
What advantages does exponential smoothing have over moving averages as a
forecasting tool?
How does the number of periods in a moving average affect the responsiveness
of the forecast?
What factors enter into the choice of a value for the smoothing constant in
exponential smoothing?
Logistics:
Logistics refers to the movement of materials within a production facility and to
incoming and outgoing shipments of goods and materials.
The numerous instances of materials movement include:
From incoming vehicles to receiving.
From receiving to storage.
From storage to the point of use (e.g., work center, office, maintenance).
From one work center to the next, or to temporary storage.
From the last operation to final storage.
From storage to packaging/shipping.
From shipping to outgoing vehicles.
Movement of materials must be coordinated to arrive at the appropriate destinations
at appropriate times. Care must be taken so that items are not lost, stolen, or
damaged during movement.
Traffic management overseeing the shipment of incoming and outgoing goods.
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Bar codes patterns of black lines and white spaces that can be read by scanning
devices, containing a variety of information.
Distribution is the shipping of goods from the company through a distribution system
to warehouses, retail customers, or final customers.
Review Questions:
Just-in-Time Systems
Just-in-time (JIT) is a system of lean production used mainly in repetitive
manufacturing, in which goods move through the system and tasks are completed
just in tie to maintain the schedule. Such systems require very little inventory
because successive operations are closely coordinated.
Lean systems require that sources of potential disruption to the even flow of
work eliminated. High quality is stressed because problems with quality can disrupt
the process. Quick, low-cost setups; special layouts; allowing work to be pulled
through the system rather than pushed through; and a spirit of cooperation are all
important features of lean systems. So, too, are problem solving aimed at reducing
disruptions and making the system more efficient, and an attitude of working toward
continual improvement.
Key benefits of JIT / lean systems are reduced inventory levels, high quality,
flexibility, reduced lead times, increased productivity and equipment utilization,
reduced amounts of scrap and rework, and reduced space requirements.
JIT differs in many ways from traditional systems The benefits of JIT systems
have attracted the attention of Czech manufacturers, causing many to consider
converting their operations to JIT. In doing so, careful attention must be given to
obtaining the support of top management, achieving a cooperative spirit throughout
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the organization, reducing setup times, and establishing good relationships with a
small number of vendors.
The JIT approach was developed at the Toyota Motor Company of Japan by
Mr. Taiichi Ohno (vice president of manufacturing) and several of his colleagues.
The development of JIT in Japan was probably influenced by the fact that Japan is a
crowded country with few natural resources. JIT systems are designed to achieve a
smooth flow of production using minimal inventories. The systems are fairly flexibly,
with a high degree of worker participation in problem solving, continuous
improvement, and attention to detail. However, the most important aspect of a JIT
system is that quality is built into the system.
High quality is a prerequisite for this system; no other element is as critical.
The key elements of the system are these:
a) Production smoothing.
b) High quality levels.
c) Low inventories.
d) Small lot sizes.
e) Quick, low-cost setups.
f) Layout.
g) Preventive maintenance and repair.
h) Multifunctional workers.
i) A cooperative spirit.
j) Few, reliable suppliers.
k) A pull system of moving goods.
l) Continual improvement.
m) Problem solving.
The terms push and pull are used to describe two different systems for moving
work through a production process. In a push system, when work is finished at a
workstation, the output is pushed to the next station; or, in the case of the final
operation, it is pushed on to final inventory. Conversely, in a pull system, control of
moving the work rests with the following operation; each workstation pulls the output
from the preceding station as it is needed; output of the final operation is pulled by
customer demand or the master schedule.
Thus, in a pull system, work is moved in response to demand from the next
stage in the process, whereas in a push system, work is pushed on as it is
completed, with no regard for whether the next station is ready for the work.
Consequently, work may pile up at workstations that fall behind schedule, say,
because of equipment failure or the detection of a problem with quality.
Just-in-time, Lean Manufacture, World-Class Manufacturing all these
labels describe excellence in manufacturing. Precise and universally accepted
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definitions of these terms are hard to come by. But there is general agreement that
all these concepts have eight objectives in common, at least:
1) Low inventory
2) Short throughput time
3) Reliable delivery performance
4) Rapid response capability
5) Low reject and rework percentages
6) Committed trained workforce
7) Customer focus
8) Continuous improvement.
Very few companies achieve all of these objectives, though many are
striving to do so. Normally they find that by addressing one of them they are
impacting on another. So the pace of change increases. The point is to make a
deliberate start. Just-in-Time in factory can be introduced and developed by the
following eight efforts:
Reduce the lead time - the time it takes from launching the batch of work into
the first operation queue to the time it is available for sale to the customer.
Reduce the batch size - the number of items that travel together through the
factory.
Reduce work in progress - the number of batches available to be worked
on at all the operations in the factory.
Dont launch a batch of work until you have to
Minimize the distance between operations - the distance a batch travels on its
journey through the factory.
Make operators responsible for their work quality - rather than leaving it to a
separate quality control section.
Integrate testing into the production process.
Make labor, processes and machines available when and where the work is capacity availability and machine reliability.
All these efforts are geared to creating smooth flow in the factory.
In some systems the Kan Ban linkage is between the slowest operation
(bottleneck), no matter where it is, and the release of a batch to the first operation
in the production system. The principle is based on bottleneck or constraint
management theory. Its guiding rule: If you identify the slowest operation, the
capacity upstream and downstream of that slowest operation will be greater than
the bottleneck. Consequently, the system can deliver to or consume from the
bottlenecks at a faster rate than the bottleneck can consume or deliver. So the
imperative is clear: as the bottleneck limits the throughput of the system it must
work to maximum utilization and must never be starved of work. If you release into
the system at the consumption rate of the bottleneck, then there will always be
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work for it. Batch reduction and bottleneck focus are crucial. But they can be
enhanced by space compression!
These control principles are simple in essence. But they are complex in
application. They require in-depth treatment in their own right and will be the
subject of a later video.
Kanban is a Japanese term that means signal or visible record. When a
worker needs materials or work from the preceding station, he or she uses a kanban
card to communicate this. In effect, the kanban card is the authorization to move or
work on parts. In kanban systems, no part or lot can be moved or worked on without
one of these cards. The system works this way:
A kanban card is affixed to each container. When a workstation needs to
replenish its supply of parts, a worker goes to the area where these parts are stored
and withdraws one container of parts. Each container holds a predetermined quantity.
The worker removes the kanban card from the container and posts it in a designated
spot where it will be clearly visible, and the worker then moves the lot to the
workstation. The posted kanban is then picked up by a stock person who replenishes
the stock with another container, and so on down the line.
Demand for parts triggers a replenishment, and parts are supplied as usage
dictates. Similar withdrawals and replenishments occur all the way up and down the
line from vendors to finished-goods inventories, all controlled by kanbans. In fact, if
supervisors decide the system is too loose because inventories are building up, they
may decide to withdraw some kanbans, thereby tightening the system. Conversely, if
the system seems too tight, additional kanbans may be introduced to bring the
system into balance.
Important questions:
What is the impact of halving the batch size?
On lot delay?
On throughput time?
On set-ups?
What is the impact of halving the set-up time?
On throughput time?
Can you identify major contributors to queue time?
How many line items does your manufacturing store carry?
How many products do you produce?
How many customers do you have?
How many suppliers do you have?
What is the total value of purchases of materials and components?
What is the expenditure on the top 10% of your suppliers?
How many suppliers make up this 10%?
What % of total purchases does this represent?
How many times have these suppliers been visited in the last year?
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Inventory Management
Good inventory management is often the mark of a well-run organization. The
models described in this chapter are relevant for instances where demand for
inventory items is independent. Three classes of models are described: EOQ, ROP,
and fixed-interval. These are all appropriate if unused items can be carried over into
subsequent periods. The single-period model is appropriate when items cannot be
carried over.
EOQ models address the question of how much to order. The ROP models
address the question of when to order and are particularly helpful in dealing with
situations that include variations in either demand rate or lead time. ROP models
involve service level and safety stock considerations. When the time between orders
is fixed, the FOI model is useful.
An inventory is a stock or store of goods.
Many firms stock hundreds or even thousands of items. Raw materials,
purchased parts, partially completed items, and finished goods, as well as spare
parts for machines, tools, and other supplies.
Inventories serve a number of important functions. Among the most salient reasons
for holding inventories are the following:
To meet anticipated demand.
To smooth production requirements.
To decouple components of the production-distribution system.
To protect against stock-outs.
To take advantage of order cycles.
To hedge against price increases, or to take advantage of quantity discounts.
To permit operations.
The overall objective of inventory management is to achieve satisfactory levels of
customer service while keeping inventory costs within reasonable bounds. Toward
this end, the decision makers problem is to achieve a balance in stocking, avoiding
both overstocking and under stocking. The two fundamental decisions that must be
made relate to the timing and under stocking. The two fundamental decisions that
must be made relate to the timing and size of orders (i.e., when to order and how
much to order).
To be effective, management must have the following:
A system to keep track of the inventory on hand and on order.
14
15
Q
H
2
The total annual cost (TC) associated with carrying and ordering inventory when Q
units are ordered each time is:
TC =
Where: D
Q
S
H
=
=
=
=
D
Q
H+ Q S
2
Thus, Q0:
1.
2.
dTC dQ
H d ( D / Q ) S H / 2 DS / Q 2
dQ
2
0 = H/2 DS/Q2, so Q2 =
2 DS
H
Q0 =
or
2 DS
H
Q0 =
2 DS
H
p
p u
16
Q0
I
( p u ) and Iprm = max
p
2
The cycle time (the time between orders, or between the beginnings of runs) for the
economic run size is a function of the run size and usage (demand) rate:
Q0
Cycle time =
u
Similarly, the run time (the production time) is a function of the run size and the
production rate:
Run time =
Q0
p
TC =
17
demand =
lead time =
LT
LT
( LT d ) 2 ( d LT ) 2
ROP =
d ( LT ) z
2
LT d2 d LT
2
2
LT d2 d LT
Review Questions:
1. What are the primary reason for holding inventory?
2. What are the requirements for effective inventory management?
3. Briefly describe each of the costs associated with inventory.
4. Contrast independent and dependent demand with respect to inventories.
5. List the major assumptions of the EOQ model.
6. Why isnt price considered explicity in the basic EOQ model? What are
quantity discounts? What three costs enter into the order quantity decision
when discounts are available?
7. What is safety stock, and why is it held?
8. What is meant by the term service level?
9. Generally speaking, how is service level related to the amount of safety
stock held?
10. Describe briefly the A,B,C approach to inventory control.
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