What is vertical integration?

 Vertical (or horizontal) integration means that

the assets that were previously held by two
firms are combined into a single firm.
 The result is either joint ownership or the sale
of one firm’s assets to the other.
Market Imperfections
Upstream and downstream firm
 Downstream firm
 Monopolist with no costs
 Sets price to its market (mark-up over marginal
costs)
 Upstream firm
 Monopolist
 Sets input price to downstream firm anticipating
impact on demand
Vertical Integration
 Suppose upstream and downstream firms are
commonly owned
 Best internal transfer price is based on
upstream marginal cost, c.
 Market price set so that MR = c.

 Maximises joint profits

Impact on Profits
$

PS
PI
Downstream
Profit
c+t Downstream Marginal
Upstream Cost
Profit
c
Joint Marginal
Cost
Marginal Demand
Revenue
QS QI
Performance Over time

Vertical Integration External Sourcing

 Deep vehicle- specific Global supply opportunities

Ex Ante knowledge base  Opportunity for well-defined

 Less knowledge of system- performance contracts
Contracting
specific technology
Opportunities  Difficult to enforce specific
performance criterion

Continuing authority
  Hard to enforce contracts
Ex Post relationship allows for after key requirements have
Renegotiation Outcomes redirection
 Potential for learning
been met
 Fewer continuing
relationships
Quality definitions……
 Fitness for purpose or use.
 It is conformance to requirement.
 It should be aimed at the needs of the customer-
present and the future.
 It is the total composite of product and service
characteristics of
marketing,engineering,manufacturing etc.
 It is the degree of excellence at an acceptable price
and control of variability at an acceptable cost.
Quality characteristics..
 Technical----length,breadth,diameter…

 Time based items—product life ,reliability..

 Psychological—smell ,beauty, taste..

 Contractual---safety,guarantee,warranty…

 Ethical—loyalty ,honesty, integrity,

Quality control…
It may be defined as that industrial
management technique or group of
techniques by means of which products of
uniformly acceptable quality are
manufactured.

Also it can be defined as the systematic control

of variables in manufacturing process which
affects the excellence of the end product.
Objectives of quality control..
 Adherence to organization’s quality policy.
 To decide the std.of quality of a customer accepted
product.
 Preparation of quality plan in accordance with the stated
objectives.
 Verification of the standards of the predetermined
quality.
 To take different measures to improve the standard of
quality.
 To develop quality consciousness in the various sections
of the unit.
 To reduce the wastage of the raw materials, men,
money and material.
Product Vs. Service quality
dimensions.
TQM
QA.Dpt
TQC
QA Dpt.

QC.Dept
Activity SQC.

QC.
Devpt

Forman
verfn.
operator
inspection

1890 1920 1940 1960 1980 1990

Time
Statistical Quality Control
A quality control system performs inspection, testing
and analysis to conclude whether the quality of each
item is as per the laid quality standard or not. It is so
called when statistical techniques are employed to
control quality or to solve quality control problems.
SQC makes inspection more reliable and at the same
time less costly. Its main objective is to control the
quality of the outgoing products.
SQC….
Using statistical techniques,SQC collects and analyses
data in assessing and controlling product quality.
The fundamental basis of SQC is the theory of
probability. According to this, the dimensions of the
components made on the same batch and in one batch
vary from component to component. This may be due
to the inherent machine characteristics or due to the
environmental conditions. On analysis it is clear that
SQC utilizes the following scientific techniques.
SQC…
 Sampling inspection.

 Analysis of the data

 Control charting.
Sampling Inspection.
A sample is defined as the no. of items or component parts, drawn
from a lot, drawn from a lot batch or population for the purpose of
inspection.
Inspection –any item or component or product is required to perform
certain functions. The act of checking whether a component
actually does so or not is called inspection.
Sampling is an act of drawing samples from a batch on random
basis. Sampling depends on statistical probability and so
samples must be taken from all sides and different depths.
Sampling inspection…
It is a technique to determine whether a lot or
population should be rejected or accepted on
the basis of the no. of defective parts found in
a random sample drawn from the lot.
If the no. of defective parts exceeds a
predetermined value\ level the lot is rejected.
Sampling inspection
advantages….
@Involves less amount of inspection to achieve
predetermined degree of certainty about the
quality.
@It assumes less time, less expensive
@Operating efficiency remains high.
@It is more accurate.
@Rejection of a complete batch on the basis of
a sample pressurizes for improvement.
Classification of sampling
inspection..

Sampling by attributes

Sampling by variables

Sampling inspection
Sampling by lot

Continuous sampling
 Classification of sampling
inspection plans.

Acceptance / rejection
1. Attribute
Sampling 2. Variables

inspection
Rectification plans
plans

A
t
t
r
i
b
Classification of sampling
inspection plans.
Single
 Attribute
 Variables
Double

Multiple

Sequential
Acceptance sampling…….
Acceptance sampling by inspection by attribute (yes /
no) is used to differentiate between a defective and
a non defective part and the part is rejected or
accepted without using quantitative methods.

Attribute inspection is very important and very popular.

The parts can be inspected in an isolated place
away from the production floor.
Acceptance sampling……
• Attribute inspection is used where
components are either defective or non
defective.
• Secondly it is very difficult and costly to
measure the quality characteristics of a
product.
• Thirdly attributes inspection finds application
where the manufacturer does not see any
need to measure the exact job dimensions.
Steps involved in acceptance
sampling.
1.Select a sampling plan—The first thing is to fix the proportion
defective which will decide whether to accept a lot or to reject it.
2.Determine the operating characteristic curve for the chosen
sampling plan—In a single sampling plan involves two parameters-
the sample size– the acceptance number ; and a batch is rejected
or accepted depending upon the criteria whether the number of
defective components ‘d’ in a sample (of n components) is more
than the acceptance number (a) or not.
3.Sampling by variables– When inspection is carried out by
measuring the parameters \ quality characteristics of a product
(length,thickness,weight)it is called inspection by variables.
Sampling plans.
Sampling plans using attributes or variables are..
# Single sampling plan

# Double sampling plan

# Multiple sampling plan

# Sequential sampling plan

SINGLE SAMPLING PLAN
In this plan a lot is accepted or rejected on the basis of a single
sample drawn from that lot.
Here a sample made up of “n” units is inspected.
Method
Draw a single sample of size “n” .The sample size may either be
calculated or found from the table.
Inspect the sample and find the number of defective components.
If defective pieces exceed the acceptance number C,the lot is
rejected and vice versa.
In case the lot is rejectes,inspect each and every pieces of the lot
and replace the defective parts and correct the defective parts.
Characteristics of single
sampling.
 It is easy to design, explain and administer.
 It is a practical type of sampling since only one
sample at a time is considered.
 It involves a lowest cost of training and supervising
employees, transporting and sorting.
 It accurately estimates lot quality.
 It is very economical
 It involves bigger sample size.
 It involves less record keeping.
Double sampling plan.
If it is not possible to decide the fate of the lot
on the basis of the first sample, a second
sample ,is drawn out of the same lot and the
decision whether to accept or to reject the lot
is taken on the basis of the combined result
of the first and second samples.
Double sampling plan
procedure.
Given C1and C2 as acceptance number,C2 > C1
Inspect sample of size n1
Count defective parts ,K1

If K1>c1
If c1<k1<c2 If k1<c1

Draw another sample of size,n2

Now total sample is n1+n2

. i I
Reject
i thef lot Inspect & say defective parts are k1+k2
Accept the lot

If (k1+k2)>c2 If (k1+k2)<=c2
Characteristics of double sampling plan

It is more expensive to administer than single

sampling plan
It involves less inspection.
It permits a smaller first sample than the sample
size of the corresponding sampling plan
This involves more overheads.
It involves more record keeping than a single
sampling plan.
Multiple sampling plan
This plan accepts or rejects a lot upon the results
obtained from several samples.
Multiple sampling plan smaller first sample than
others.
It is comparatively difficult to design and explain.
It is very expensive to maintain.
It involves more record keeping.
It requires lower total inspection
Multiple sampling plan
procedure..
Inspect the first sample
Count the no. of defects found & if this no. is

Very small Very large.

Border & undeceive
Draw and inspect the second sample
If the no. of defects in the first &
second sample combined are

Very small Border & undeceive Very large

Draw and inspect the third sample
Count the no. of defective pieces
in all the 3 samples & if this no. is
Accept the lot
Reject the lot
Very small undeceive
Very large
Draw & inspect a 4th sample & so on
Sequential sampling plan.
=It is the one in which sample size is increased by one piece at a
time till the sample becomes large enough & contain sufficient
no. of defective pieces to decide intelligently whether to accept
the lot or to reject it.
=It is easy to design, but expensive to administer than other
sampling methods.
=Sample results are analyzed much faster than others since sample
size are increased one by one.
=Sampling cost are least
=Overhead cost is maximum
Quality Definitions

 Acceptance quality level (AQL)

Acceptable fraction defective in a lot

 Lot tolerance percent defective (LTPD)

Maximum fraction defective accepted in a lot
Operating Characteristic (OC)
Curve
The operating characteristic curve represents a
sampling plan, the graph of the probability of
accepting a shipment as a function of the quality of
the shipment.
If shipment is of high quality, a good sampling plan
yields a high probability of accepting the shipment. If
shipment is of poor quality (high percentage
defective), the plan yields a low probability of
accepting the shipment.
Operating Characteristic Curve
1.00
1−α = {
0.05
Probability of acceptance, Pa

0.80

OC curve for n and c

0.60

0.40

0.20

β = 0.10 {
0.02 0.04 0.06 0.08 0.10 0.12 0.14 0.16 0.18 0.20

AQL
Percent defective LTPD 34
Average Outgoing Quality
(AOQ)
 Theexpected number of defective items
passed on to the customer

 The average outgoing quality limit (AOQL)

is the maximum point on the AOQ curve
AOQ Curve

0.015
AOQL

Average 0.010
Outgoing
Quality
0.005

0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10
AQL LTPD
(Incoming) Percent Defective

36
Elementary quality problem
solving tools…
Pareto analysis
Quality costs are not uniformly distributed.
A-B-C or pareto analysis is a systematic and structured
approach to distinguishing between the ‘vital’ few and
the ‘trivial’ many. In any quality improvement process,
data will form the basis for decisions and actions, and a
thorough recording system is essential. If the symptoms
of defective outputs are identified and recorded, it will be
possible to determine what percentage can be attributed
to any symptom, and the probable result will be that the
bulk of the rejection derive from a few of the
symptoms .To improve the quality,
The major symptoms must be attracted first. This analysis
of data to identify the major problems is known as Pareto
analysis.


 Pareto analysis

% of rejects
attribute to
a symptom

A B
C D
E F H
G
Symptoms of assignable causes of bad work
Fishbone Diagram
It is a schematic model of quality problems and
their causes and by a quality circle. The
following diagram represents the fishbone of
a production department.
The different parameters are provided and
these the fishbone diagram is stressing on
the quality problems of the production
department.
 Fishbone Diagram
Measurement Human Machines

Faulty testing equipment Poor supervision Out of adjustment

Incorrect specifications Lack of concentration Tooling problems

Improper methods Inadequate training Old / worn

Quality
Inaccurate Problem
temperature
Defective from vendor Poor process
control
design
Ineffective quality
Not to specifications management
Dust and
Dirt Material- Deficiencies
handling problems in product design

Environment Materials Process

40
ISO 9000 Categories

 ISO 9001 ~ Suppliers and Designers

 ISO 9002 ~ Production

 ISO 9003 ~ Inspection and Test

 ISO 9004 ~ Quality Management

Conceptual frame work of ISO
9000 Stds.
ISO stands for the international organization for
standardization, set up with the objective to promote
the development of standards and related
activities ,for facilitating international exchanges of
goods and services.
ISO 9000 standards developed in 1987,relate to
quality systems. It has evolved from the
standardization of quality assurance system
standards of several nations all over the world.
Characteristics of ISO 9000

• It can be implemented in any type and size of

organization.
• It is independent of the product, size and
country.
• It has international acceptance and recognition.
• It ensures consistent improvement in quality.
Prerequisites for implementing
ISO 9000 quality system.
For effectively implementing ISO 9000 quality systems, any
organization must meet the following requirements.
1.Development of quality awareness.
2.Imparting education & training to employees.
3.Introduction of motivation and incentive plans.
4.Development of measuring instruments.
5.Development of planning schemes for implementation.
6.All the employees of the organization must work with strong will
and faith to make the quality system a grand success.
Procedure of ISO 9000
certification
 Quality awareness training
 Form task force
 Analyze existing practices and corrective action
 Design and develop standard procedures.
 Prepare documentation.
* Quality manual.
* Quality procedures.
* Work instructions.
 Implement the quality system.
 Quality auditing
 Preliminary audit by Third party
 Apply for accreditation
 Maintain the system.
Dimensions of Product Quality

1. Performance
basic operating characteristics

2. Features
“extra” items added to basic features

3. Reliability
probability product will operate over time
4. Conformance
meeting pre-established standards

5. Durability
life span before replacement

6. Serviceability
ease of getting repairs, speed & competence of
repairs
7. Aesthetics
look, feel, sound, smell or taste

8. Safety
freedom from injury or harm

9. Other perceptions
subjective perceptions based on brand name,
advertising, etc
Dimensions of Service Quality
1. Time & Timeliness
customer waiting time, completed on time

2. Completeness
customer gets all they asked for

3. Courtesy
treatment by employees
4. Consistency
same level of service for all customers

5. Accessibility & Convenience

ease of obtaining service

6. Accuracy
performed right every time

7. Responsiveness
reactions to unusual situations
Dimension Automobile Auto Repair

1. Performance Everything works, fit & All work done, at agreed

finish price
Ride, handling, grade of Friendliness, courtesy,
materials used Competency, quickness
2. Aesthetics Interior design, soft touch
Clean work/waiting area

3. Special featuresGauge/control placementLocation, call when ready

Convenience Cellular phone, CD Computer diagnostics
High tech player
 Dimensions of Quality (contd.)
Dimension Automobile Auto Repair
4. Safety Antilock brakes, airbags Separate waiting area

5. Reliability Infrequency of breakdowns Work done correctly,

ready when promised

6. Durability Useful life in miles, resistance

Work holds up over
to rust & corrosion time

7. Perceived Top-rated car Award-winning service

quality department

8. Service afterHandling ofcomplaints and/or

Handling of complaints
sale requests for information
Determinants of Quality

 Quality of design
 Capability of production (M/C, equip.,labor)
 Quality of conformance
 Ease of use
 After sales service quality
 The Meaning of Quality

Producer’s Perspective Consumer’s Perspective

Quality of
Quality of Design
Conformance
Production • Conformance to • Quality Marketing
specifications characteristics
• Cost • Price

Fitness for
Consumer Use
54
Deming’s 14 Points
1. Create constancy of purpose
2. Adopt philosophy of prevention
3. Cease mass inspection
4. Select a few suppliers based on quality
5. Constantly improve system and workers
6. Institute worker training in SPC

55
7. Install leadership among supervisors
8. Eliminate fear among employees
9. Eliminate barriers between departments
10. Eliminate slogans
11. Remove numerical quotas
12. Enhance worker pride
13. Institute vigorous education programs on quality
improvement
14. Implement these 13 points (Just do it !)

56
The P-D-C-A Cycle

Plan
Identify problem.
Develop plan for
Act improvement.
Do
Institutionalize
Implement plan
improvement.
on test basis
Continue cycle.

Check
Is the plan working?

57
Total Quality Management

1. Customer defined quality

2. Top management leadership
3. Quality as a strategic issue
4. All employees responsible for quality
5. Continuous improvement
6. Shared problem solving
7. Statistical quality control
8. Training & education for all employees
TQM Throughout The
Organization
 Marketing, sales, R&D
 Engineering

 Purchasing

 Personnel

 Management

 Packing, storing, shipping

 Customer service
Strategic Implications Of TQM

 Quality is key to effective strategy

 Clear strategic goal, vision, mission

 High quality goals

 Operational plans & policies

 Feedback mechanism

 Strong leadership
TQM In Service Companies

 Inputs are similar to manufacturing

 Processes & outputs are different
 Services tend to be labour intensive
 Quality measurement is harder
 Timeliness is an important measure
 TQM principles definitely apply to services!
Employees & Quality
Improvement

 Employee suggestions
 Quality circles
 Problem solving teams
 Process improvement teams
 Self-managed work teams

62
The Quality Circle Process
Organization
8-10 members
Same area
Moderator Training
Presentation Group processes
Implementation Data collection
monitoring Problem analysis

Problem ID
Solution List alternatives
Problem results Consensus
Problem analysis Brainstorming
Cause & effect
Data collection &
analysis
63
Seven Quality Control Tools

1. Pareto analysis
2. Flowcharts
3. Check sheets
4. Histograms
5. Scatter diagrams
6. Control charts
7. Fishbone diagram
 Chart
Pareto

Percent from each cause

10
20
30
40
50
60
70

0
Po
o
W rD
ro es
ng ig
di n
(64)

m
D e ens
fe io
ct n
(13)

ive s
M pa
ac r ts
hi
ne
(10)

ca
O l
pe ibra
ra tio
to
(6)

r e ns
De rro
fe rs
ct
(3)

ive
m
Causes of poor quality

Su at
r fa er
ce ia
ls
(2)

ab
ra
sio
ns
(2)
Flowchart
Check Sheet

COMPONENTS REPLACED BY LAB

TIME PERIOD: 22 Feb to 27 Feb 1998
REPAIR TECHNICIAN: Bob

TV SET MODEL 1013

Integrated Circuits ||||
Capacitors |||| |||| |||| |||| |||| ||
Resistors ||
Transformers ||||
Commands
CRT |
Histogram
40
35
30
25
20
15
10
5
0 1 2 6 13 10 16 19 17 12 16 20 17 13 5 6 2 1
Scatter Diagram

.
Control Chart
27

24
UCL = 23.35
21
Number of defects

18 c = 12.67

15

12

6
LCL = 1.99
3

2 4 6 8 10 12 14 16
Sample number
ISO 9000 Categories

 ISO 9001 ~ Suppliers and Designers

 ISO 9002 ~ Production

 ISO 9003 ~ Inspection and Test

 ISO 9004 ~ Quality Management

Supply Chain & Value Chain Definitions
SUPPLY CHAIN
flow of materials, information, payments, and services
from raw material suppliers, through factories and
warehouses, to the end customers.

DEMAND CHAIN
the process of taking orders.

SUPPLY CHAIN MANAGEMENT (SCM)

to plan, organize, and coordinate all the supply chain’s
activities.
 Benefits of SCM

Reduces This Contribut

positively es to
uncertai affects
nty & overall
inventory
risks in increase
levels, cycle
the time, in
supply business profitabili
chain. processes & ty &
customer competiti
service. ve
advantag
e.
Components of Supply Chain
 Components of Supply Chain

Upstream Supply Chain

 Organization’s first tier suppliers & their
suppliers.
Internal Supply Chain
 Processes used by an organization to transform
their inputs to outputs.
Downstream Supply Chain
 Processes involved in delivering the product to
the final customers.
 The Supply Chain

 Involves the life of a product from ‘dirt to dust’.

 Involves movement of tangible & intangible inputs.

 Can come in all shapes and sizes and may be fairly complex.

 Can be bi-directional and involve the return of products

(reverse logistics)

 The flow of goods, services, information & financial resources

must be followed with an increase in value.
Sources of Supply Chain Problems

UNCERTAINTY POOR
COORDINATION
 In demand  With Internal
units and
forecast business partners
 In delivery  Ineffective
times & customer
production service
delays  High inventory
costs, loss of
revenue & extra
cost for expediting
services.
 The Bull Whip Effect
 The most persistent SCM problem.

 Erratic shifts in orders up & down the supply chain.

 Distributor orders fluctuate because of poor demand forecast, price

fluctuation, order batching & rationing with supply chain.

 Example: Porter & Gamble’s distortion in SCM for manufacturing of

disposable diapers.

 Avoidable with proper interorganizational EC.

 EDI, Extranets & Groupware technology
 Solutions to Supply Chain Problems

 Vertical Integration
 Purchasing & managing the supply source.

 Building Inventories
 “Insurance” against supply chain shortages.
 Main problem: It is difficult to correctly
determine inventory level for each product
& part. This can be costly.
 Two Tools for Reducing Supply Chain Problems

 Supply Chain Teams

 “Teams of tightly integrated business that work
together and serve the customers”

 Measurements & Metrics

 Use of IT for measuring areas in need of
improvement. For example;

 Delivery on time
 Quality at unloading area
 Cost performance
 Lead time for procurement
 COMPUTERIZED SYSTEMS & S.C.M.
PHASE 1: 1950s - 60s, the first software programs to support the
supply chain arrive.

PHASE 2: Development of the Material Requirement Protocol

(MRP).

PHASE 3: Enhanced MRP known as Material Resource Planning

become available.

PHASE 4: Enterprise Resource Planning (ERP) integrates

transaction processing activities.

PHASE 5: Extended ERP/SCM software.

COMPUTERIZED SYSTEMS & S.C.M.
 Value Chain Integration

“The process by which multiple enterprises within a shared

market channel collaboratively plan, implement, and
manage (electronically as well as physically) the flow of
goods, services, and information along the entire chain in
a manner that increases customer-perceived value.“
Value Chain Integration
 Enterprise Resource Planning

ERP = Process of planning MAIN OBJECTIVE of ERP

& managing all resources
& their use in the entire
enterprise.


Leading ERP software
producers to integrate all
departments & functions
SAP, Oracle, J.D. Edwards,
across a company onto a
Computer Associates,
single computer system.
People Soft
 Functions of ERP
 Provides a single interface for managing routine
manufacturing activities.

 Facilitates customer interaction & manages

relationships with suppliers & vendors.

 Forces discipline & organization around business.

 Supports administrative activities.

3 Ways to Provide Supply Chain Intelligence
1) Use an enhanced ERP package that includes business
intelligence capabilities

2) Integrate the ERP with business intelligence software from

a specialized vendor such as Brio, Cognus, or Comshare.

3) Create a “best of breed” system by using components

from several vendors that will provide the required
capabilities.
 Purchasing Function
 The prime function of purchasing is that
of being sensitive to the external supply
market situation and also of feeding back
this information to the other functions of
the organization.
 It is usually understood to be get the
right quantity of material of the right
quality, at the replace from the right
source and at the right cost.
 Purchasing function
continues….
Any way the main requirements can be summarized as

Good value
Reliable schedules
Minimized investments.
Efficient administration
Efficient utilization……
 Objectives….
 To ensure availability of proper quantities of materials for
smooth functioning of the production dept.
 To procure materials at reasonably low costs for the company
 To ensure supply of quality materials.
 To supply the proper sources of materials.
 To provide details of various substitute materials.
 To develop good procedures and systems for purchasing
department.
 To co-ordinate with other functional departments to achieve
continuity of information flow.
 VENDOR RATING

Even though a prior evaluation is necessary, vendors

who are in the regular list should be periodically
apprised for their performance. This performance
appraisal, which is a continuous monitoring exercise,
is termed as vendor rating. It can be rated on the
following characteristics.
 Characteristics

1. Delivery
2. Quality
3. Price
4. Capability in meeting other emergencies.
In vendor rating systems usually weightage
should be given to the various characteristics
and on this basis different parameters are
measured.
 VENDOR RELATIONS…

Another important objective in purchasing management is

that of maintaining good relationship with vendors.
A good vendor is an asset to the company, just customer
goodwill is considered important, a good relationship
with vendor should be treated. Here the relationship are
as follows..
a) By helping vendors in terms of stress and strain with
financial aids.
b) Maintaining a healthy relationship by fair negotiations.
 VENDOR SELECTION.
1. The production capabilities of the vendor.

 capacity to manufacture

 possibility of future expansion

 Understanding or knowledge of the vendor

regarding the buying company and it needs.
 VENDOR SELECTION.
2. The financial soundness of the company

The vendor company’s capital structure

Its profitability record

Expansion plans of the company

 VENDOR SELECTION.

3. Technical capabilities

Whether the required machines are of required quality?

Whether the staffs are of technically skilled?

Whether the company maintains proper quality control?

 VENDOR SELECTION.

4.Other considerations.

What are the working conditions in the vendor company?

How are the industrial relations in the vendor company?

Whether there id any disruption of the supply of the material?

 Planning and contr ol

Operations planning hierarchy

It is the subsystem responsible for the
conversion of design data to work instruction.
It can also be defined as the intermediate stage
between designing the product and
manufacturing it.
It is also a staff activity.
Information required to planning
•Quality of work to be done along with the product specification.

•Quality of work to be performed.

•Availability of equipments,tools,personnels.

•Sequence in which operations will be performed.

•Standard time for each operation.

•When the operations will be performed?

Planning hierarchy…

Preparation of work drawings

Decision to make or buy.
Selection of manufacturing process
Machine capacity and equipment selection
Selection of materials
Selection of tools and equipments
Preparation of documents and route sheets
Core Services

Quality

Basic &
Cost Delivery
Essential

Flexibility

The Classic Performance Objectives of the

Manufacturing Functions.
Production Response

Demand – Firm Customer Orders

Tactical orders from sales
Inventory Build up
‘Stock sales’

All have one characteristics

Varies from month to month

Or some times quarter to quarter..
Production Response

The manufacturing mangers problem

Produce high quality products

At low costs
When the market needs them
At required levels of customizations
Demand Example

Month Forecast Month Forecast

Jan 450 Jul 350
Feb 400 Aug 400
Mar 350 Sep 400
Apr 300 Oct 500
May 300 Nov 550
Jun 350 Dec 550
The average demand is 408 units per
month.
Varies from a min of 300 and max of 550
Or there is a variation of - 25% to + 35%
The production dilemma

Inventory
Too high??? The president will shout.
Too low??? The Marketing guys…

Labour levels
Vary ??? The union guys…..
Constant?? Costs, discipline…
Demand Management

Basic Problem: establish an interface between the

customer and the plant floor, that supports both
competitive customer service and workable production
schedules.

Issues:
Customer Lead Times: shorter is more competitive.
Customer Service: on-time delivery.
Batching: grouping like product families can reduce lost
capacity due to setups.
Interface with Scheduling: customer due dates are are
an enormously important control in the overall
scheduling process.
Aggregate planning (AP):

Developing an intermediate-
range plan that effectively uses
company resources to meet
future projected demand.
Alternatives for Changing Supply
 Overtime/Under time
 Hiring/Firing of Personnel
 Temporary/Part-time Personnel
 Subcontracting
 Adjusting Inventories
 Adjusting Lead Times
Aggregate planning (AP)

Determine overall levels

of
-Production
-Workforce
-Inventory
to meet future demand
at minimum cost
Inputs and Outputs to
Aggregate Production
Planning
Capacity Strategic Company
Constraints Objectives Policies

Demand Financial
Aggregate Constraints
Forecasts
Production
Planning

Size of
Workforce Units or dollars
Production Inventory subcontracted,
per month Levels backordered, or
(in units or $) lost
Aggregate planning (AP)

Forecast for
The coming period

Decisions for
The current The Decision
The coming
state Process
period

Costs:
Payroll, hiring, firing
Added shift, changeover
Overtime
Inventory holding, shortage,
Backorder costs etc
Time Horizon of AP

Long range
Intermediate
Short range
range
Now 2 months 1 Year

AP is done within the boundaries of long-range

plans & decisions (e.g. facility size, layout,
process selection, capacity etc)

AP sets boundaries for short-range planning

decisions (e.g. operations scheduling, worker
assignment etc)
Techniques for AP

Informal or Trial-and-Error techniques

most commonly used in practice

Mathematical Techniques
Linear Programming

Simulation
Pure Level Strategy

Demand
-I
Units

+I
Production

Time
Purchase Strategy

Demand
Units

Production

Time
 Materials
Requirements
Planning

( MRP – I )
 Independent Demand
Demand

Stable demand

Time
Amount on hand

Safety stock

Time
 Demand
Dependent Demand

• needed just prior to when

“Lumpy” demand
they are needed for
production
•Demand is lumpy
Time
Amount on hand

•Little or no safety
stock

Time
 The logic behind MRP

Procurement of
raw material D Fabrication
of part E
Subassembly A
Procurement of
raw material F Final assembly
Procurement of and inspection
part C
Procurement of
part H
Procurement of
raw material G Subassembly B

1 2 3 4 5 6 7 8 9 10 11
The MRP Question…

When should procurement,

fabrication assembly start so as to
complete end items on time
 Purpose of an MRP System

Inventory
Order the right part.
Order the right quantity.
Order at the right time.
Priorities
Order with the right due date.
Keep the due date valid.
Capacity
Plan for a complete load.
Plan for an accurate load.
Plan for an adequate time to view
future load.

15-4
MRP Defined

Materials requirements planning

(MRP) is the logic for determining
the number of parts, components,
and materials needed to produce
a product.
Material requirement plan

MRP
converts the production plan
for final products
into requirements for
component items and raw
materials:
What is needed
When is needed
How much is needed
MRP features

MRP provides time scheduling

information specifying when each of the
materials, parts, and components should
be ordered or produced.
Dependent demand drives MRP.
MRP is a software system.
Developing MRP – the logic
Three Key Inputs are needed:
1. Product Structure Tree
2. Lead times
3. Demand
Lead Times
Product Structure Tree for Assembly A A 1 day
B 2 days
A C 1 day
D 3 days
E 4 days
F 1 day
B(4) C(2)
Demand
Day 10 50 A
D(2) E(1) D(3) F(2) Day 8
Day 6
20 B (Spares)
15 D (Spares)
Master Production Schedule
(MPS)
Time-phased plan specifying how
many and when the firm plans to build
each end item.
Aggregate Plan
(Product Groups)

MPS
(Specific End Items)
Types of Time Fences

Frozen
No schedule changes allowed within this window.
Moderately Firm
Specific changes allowed within product groups as long as
parts are available.
Flexible
Significant variation allowed as long as overall capacity
requirements remain at the same levels.
 Example of Time
Fences
Moderately
Frozen Firm Flexible

Capacity
Forecast and available
capacity
Firm Customer Orders

8 15 26

Weeks
Material Requirements Planning
System
Based on a master production schedule, a
material requirements planning system:
Creates schedules identifying the specific
parts and materials required to produce end
items.
Determines exact unit numbers needed.
Determines the dates when orders for those
materials should be released, based on lead
times.
Secondary MRP Reports
Planning reports, for example,
forecasting inventory requirements
over a period of time.
Performance reports used to
determine agreement between actual
and programmed usage and costs.
Exception reports used to point out
serious discrepancies, such as late or
overdue orders.
MRP Scheduling Terminology
Gross Requirements

On-hand

Net requirements

Planned order receipt

Planned order release

MRP Example
Item On-Hand Lead Time (Weeks)
X X 50 2
A 75 3
B 25 1
A(2) B(1) C 10 2
D 20 2

C(3) C(2) D(5)

Requirements include 95 units (80 firm orders and 15 forecast) of X in
week 10 plus the following spares:
Spares 1 2 3 4 5 6 7 8 9 10
A 12
B 7
C 10
D 15
Benefits of MRP

Low levels of in-process inventories

Ability to track material requirements
Ability to evaluate capacity requirements
Means of allocating production time
Requirements of MRP

 Computer and necessary software

 Accurate and up-to-date inputs (master
schedules,BOM,inventory records)
 Integrity of data
Manufacturing Resource Planning
(MRP II)

Goal: Plan and monitor all resources

of a manufacturing firm (closed
loop):
manufacturing
marketing
finance
engineering
Simulate the manufacturing system
 Market Master
Master
Finance Manufacturing production
Demand productionschedule
schedule

Adjust master schedule

Marketing
Production
plan MRP

Rough-cut Capacity
capacity planning planning
Adjust
production plan
Yes No Requirements No Yes
Requirements
Problems? schedules Problems?
schedules
Elements Of Project
Management
Project team
individuals from different departments
within company
Matrix organization
team structure with members from
different functional areas depending on
skills needed
Project manager
leader of project team
Project Planning
Statement of work
- written description of goals
- work & time frame of project

Activities require labour, resources & time

Precedence relationship shows

sequential relationship of project activities
Project Planning
Statement of work
- written description of goals
- work & time frame of project

Activities require labour, resources & time

Precedence relationship shows

sequential relationship of project activities
Simplified Project Network

Construct forms Pour concrete

1 2 3
Elements Of Project Planning

Define project objectives

Identify activities
Establish precedence relationships
Make time estimates
Determine project completion time
Compare project schedule objectives
Determine resource requirements to meet
objective
Project Control

Two phases: 1. planning

2. control

Work breakdown structure

(WBS)
Determines
subcomponents, activities
& tasks
A Gantt Chart
Month
0  2  4  6  8  10
Activity

Design house and

obtain financing

Lay foundation

Order and receive

materials

Build house

Select paint

Select carpet

Finish work
    
1 3 5 7 9
Month
PRECEDENCE DIAGRAMING
Network procedures are based upon a system that
identifies and schedules key events into
precedence-related patterns.
Since the events are interdependent, proper
arrangement helps in monitoring the
independent activities and in evaluating project
progress.
The basic concept is known as the critical path
method (CPM).
PRECEDENCE DIAGRAMING
The Project Network

Network consists of branches & nodes

Node

1 2 3

Branch
Project Network For A House

3
Lay foundation Dummy
0
2 Build Finish
3 1 house work
1 2 4 6 7
3 1
Design house Order and 1
and obtain receive Select 1 Select
financing materials paint carpet
5
Critical Path
A path is a sequence of connected
activities running from the start to the end
node in a network

The critical path is the path with the longest

duration in the network

A project cannot be completed in less than

the time of the critical path
Concurrent Activities

3
Lay foundation
Lay Dummy
foundation
2 3
2 4

Order material
Order material
Incorrect Correct
precedence precedence
relationship relationship
 PERT Example
Equipment testing
and modification
2 6
Final
Equipment Dummy debugging
installation

System
Training
1 3 5 7 9
System Manual System
development Testing changeover
System
Testing
Job Dummy
Position training
recruiting

Orientation
4 8
Project Crashing

Crashing reduces project time by

expending additional resources
Crash time is the amount of time an
activity is reduced
Crash cost is the cost of reducing an
activity’s time
The goal of crashing is to reduce a
project’s duration at minimum cost
Time-Cost Relationship

Crashing costs increase as

project duration decreases
Indirect costs increase as
project duration increases
Project length should be
reduced as long as crashing
costs are less than indirect costs
Time-Cost Trade-off

Minimum cost = optimal project time Total cost

Cost ($)

Indirect cost

Direct cost

Crashing Time
Project Duration
Work methods

Work
measurement
Work measurement
Work measurement methods are used to determine
the most efficient means of performing a given
task so as to set reasonable standards for
performance.

The Operation Manager uses job design

techniques to structure the work so that it will
be conducive to both the physical and
behavioural needs of the workmen.
Job Design
Definition: The function of specifying the work
activities of an individual or group in an
organizational settings.
It involves clarifying/specifying:
Who? What? How? When? Where? Why?
Sounds simple, but not easy!
Workmen do not always agree !?
Plus, the modern trend is adding to the complexity:
QC by operatives
Cross training for multi skills
Employee involvement, empowering
Impact of IT, ‘temporary workers, ‘Automation’
Organizational commitment to give a rewarding career..
Job Enrichment
Horizontal
Job Enlargement
More related tasks performed
More ‘whole’ of a task rather
than an insignificant ‘element’

Vertical
Job Enrichment
More depth and involvement
‘Freedom’ to plan, schedule..
Exercise more skills.

Used to be seen separately in the past

But now-a-days the term Job Enrichment
Covers both Enrichment and Enlargement.
Job Enrichment – Socio Technical
Research points to the need that:
Individual or group requires a logically integrated
pattern of work activities that incorporates the
following job design principles:
Optimum task variety
Optimum skill variety
Feed Back
Task Identity
Task Autonomy
Method study..
-Purpose: eliminate delays, unnecessary activities
to find more efficient ways of doing the work.
Basic procedure : Observe the work, document,
construct suitable chart, and creatively and
critically examine the charts for improvement.
Different types of charts are prepared depending
upon the specific instance being prepared.
Operation charts
Worker – Machine Charts
SIMO Charts
Multiple Activity Charts
Needs special skills, and is done by the Industrial
Engineering Dept or outside consultants.
Time study (Work measurement)
Purpose: To set time standards.
Why have standards?
Schedule work
Allocate capacity
Set objective standards for the operator
Benchmark for improvement
Bidding for new contracts
Incentive schemes..
Methods: Time study with chronometer,
Elemental standard time data
Predetermined motion time data
Work sampling
Needs special skills, and is done by the Industrial
Engineering Dept or outside consultants.
Work Sampling
The purpose of sampling is to estimate what proportion of a worker’s
time is devoted to work activities. It has the following procedure.
# Decide what activities are defined as “working"," Not working"
comprises all activities not specifically defined as “working”
#Observe the worker at selected intervals, record whether a person is
working or not.
# Calculate the portion P of time a worker is working as :
P = No. of observations during which working occurred
Total number of observations

This calculation can then be used as a performance standard.

Time standards.
A quantitative criterion established as a basis for
comparison in measuring or judging output.
The terms “time standards” ,”labor standards”
‘production standards”etc.areinterchangeably used.
This is simply the output expected from an average
worker under average working conditions for a given
time period.
It is the concept of a ‘fair day’s” work.
Hence a standard for workers at the lowest level within
the organization is expressed in terms of time
allowed per unit of output. Or output required per unit
of time.
 The maintenance function
The Maintenance function facilitates
Optimal use of capital equipment
Through actions such as
Repair, Replacement, Service,
modification of components or machinery
so that ,these will continue to operate at
optimum efficiency and availability.
 The Bath-tub curve

The typical distribution of failure rate or

probability of failure as a function of the
‘time to failure’
Follows the Bath-Tub Curve.
et a Rer uli a F

Time to failure
The Concept of reliability
Closely related to the failure stats:

Definition:
The probability of an equipment or plant to
give satisfactory performance in a
particular period of time under specific
operating conditions:
Depends on:
Design of the equipment or machine
Preventive maintenance..
Preventive Maintenance
Planned Maintenance

Consists of:
Usual care of equipment
(lubrication, cleaning etc)
Periodic inspection and overhaul
Contingent work done when down
Condition monitoring
Preventive Maintenance –
Benefits
Reduction in:

Down time, production loss

Major repairs
Rejects
Inventory costs
Accidents
Crisis in management
Break down maintenance
A break down is defined as the point in time when a
components function ceases. The consequence of a
break down can be prioritized in following groups.

1. High costs for production losses or maintenance to

correct break down.
2. Personal or environmental damage.
3. Preserve value.
Total Productive Maintenance
(TPM)
Breakdown maintenance
- repairs to make failed machine
operational
Preventive maintenance
- system of periodic inspection &
maintenance to keep machines operating
TPM combines preventive maintenance
& total quality concepts
TPM requires management
to ...
Design products that can be easily
produced on existing machines
Design machines for easier operations,
changeover, and maintenance
Train & retrain workers to operate
machines
Purchase machines that maximize
productive potential
Design a preventive maintenance plan
spans the life of the machine
Visual Control
Tool board Visual kanbans

Work station Library shelf

How
to

sensor

30-50 Machine controls

Good Better Best

© 1998 by Prentice-Hall Inc

Russell/Taylor Oper Mgt 2/e Ch 15 - 32
The strategy hierarchy
Example Questions

What Businesses
Corporate Strategy should we be in?

Business Business
Strategy Strategy How should we
compete?

Where should
Functional Functional Functional
our operating
Strategy Strategy Strategy
units be?
What competitive advantage are
you seeking?
Lowest price/cost
Highest quality
Product/service performance, tolerances,
purity
Customer service
Most dependable
Product or service
Delivery or availability
Field service/repair
What competitive advantage are
you seeking?
Most flexible
Broad product line
Customized products
Fast response/delivery times
Most innovative
New products
Latest technologies
Order “Winners” versus
“Qualifiers”

Some more important than others

Qualifier - an entry ticket
Winner - single most important
attribute to the customer
Strategic Operations Decisions

Strategy in Operations
Pattern of Decisions : Explicit or Implicit
Always have one (good or bad!)
Certain choices are common to many
operations
Examining generic decisions helps define
operations strategy …
Distinct, but not independent of, other
strategic choices (financial, marketing,
strategy)
Operations Choices

Structural Infrastructural
Capacity Workforc
Facilities e Quality
Technolo Work
gy Sourcing Organizatio
Control
n
1. Capacity
How much capacity to provide
Above, below or to the forecast?
How should it be provided?
In large or small chunks?
Using overtime? Extra shifts?
By expanding capacity/facilities?
2. Facilities
A few large facilities versus many small
ones
Specialize (focus) by
Product/service?
Process stages?
Product or service characteristics
Geographic region
Location
Near markets? Low cost materials? Low cost
labour? Skilled labour?
3. Process Technology
Labour intensive versus automated
Usually, labour more flexible
Automation: higher output, lower cost
Purchase versus make in-house
May not want to share proprietary technology
Skill building
Will making it in-house blur your focus?
Follower or leader in process technology?
Which processes?
Dependence versus alliance?
Will you make it or buy it?
Cost
Skill building
Dependence
Independent versus captive
How much of their business do you want
to be?
Do you want to control them?
Will you be at arm’s length or form
partnerships?
 4. Sourcing

Will you make it or buy it?

Cost
Skill building
Dependence
Independent versus captive
How much of their business do you want
to be?
Do you want to control them?
Will you be at arm’s length or form
partnerships?
5.Workforce

Selection and training

Selection criteria
How and what will you train people?
How will you keep them?
Overtime and lay-offs
Do you keep people in a downturn?
Will your people rely on overtime?
6. Quality

Quality systems
How will you assure quality?
Will you test it in? Emphasize “DIRFT”?
What systems will you use? SPC?
How will you involve people?
Roles and responsibilities
Central, quality “department”
Distributed quality awareness
Company Motto:
“Quality ….. Or
7. Work Scheduling and
Control
Type of inventory (services too …)
Raw material
Work-in-process
Finished Goods
“Pull” system versus “Push” system
Can use a mix
MRP as a “push” system
Kanban as a “pull” system
Both try to be “Just-in-time”!
8. Organization

Control systems and structures

How will you control it?
Staff versus line choices
At what level do people become “staff”?
Compensation and incentive policies
Profit sharing? Bonus? Piece rate?
Shift premiums?
Key features of a good operations
strategy - “a checklist”
Consistent competitive strategy
Excelling on the order winners - meeting
the qualifiers
Externally consistent
Fit with the way you want to compete
Internally consistent
All the pieces fit together
e.g., quality and workforce
Capacity and process technology
Basic productivity definitions
Total output
Partial productivity = Single input (i.e. labour)

Total-factor productivity = Net output

(Labour + capital)
inputs

Total Output
Total productivity = Total sum of inputs
 The cyclic effects of low
productivity growth
• Higher unit labour 1
• Higher machinery cost
• Higher interest rate Higher 2
• Higher material/energy cost prices for
goods and
• More inflation 6 services
• Decline in capital Low rate of 0
investment productivity Decline 3
• Increased unemployment growth in sales
• Poor standard of living
volume

5 • Reduced plant capacity 4

• Further decline in
• Reduced employment
productivity --- loss of sales
• Reduced research and
revenues and low output
development
“Focused Operations”
Means:
Doing a few things very well
(rather than a lot of things less well)
Concentrating attention and
resources on the things that are really
important to the business:
Products
Process Technologies
Competitive Priorities
Focused Operations

Breaking up facilities that are trying to

do too much (and separating into
several focused facilities)
divisions within a plant/office
separate facilities within a building
complex
separate locations
Operations Strategy

Customer Needs Corporate Strategy

Alignment

Operations Strategy Core

Competencies

Decisions

Processes, Infrastructure, and Capabilities

3
Operations Priorities
Cost
Quality
Delivery Flexibility
Delivery Speed
Delivery Reliability
Coping with Changes in Demand
Flexibility and New Product Introduction Speed
Other Product-Specific Criteria

4
 A Framework for Manufacturing
Strategy
Customer Needs

Strategic Vision New and Current

Products

Performance Priorities
and Requirements

Quality, Dependability,
Speed, Flexibility, and Price

Enterprise Capabilities
Operations & Supplier Capabilities

Technology Systems People R&D CIM JIT TQM Distribution

Support Platforms
Financial Management Human Resource Management Information Management
 Strategic
Reconciliation

Operations OPERATIONS Market

Resources STRATEGY Requirements

Operations strategy reconciles the requirements of the

market with the capabilities of operations resources
 Customer
Needs

Performance Market
Objectives Positioning

Competitors’
Actions

Required Understanding
performance markets

The market perspective on operations strategy

 Tangible and
Intangible
Resources

Operations Operations
Capabilities Strategy
Decision Areas

Operations
Processes

Understanding Strategic
resources and decisions
processes

The operations resource perspective

on operations strategy
 Tangible and
Customer
Intangible
Needs
Resources

Operations Operations Market

Performance
Capabilities Strategy Positioning
Objectives
Decision Areas

Operations Competitors’
Processes Actions

Understanding Strategic Required Understanding

resources and decisions performance markets
processes

Operations strategy is the strategic reconciliation of market

requirements with operations resources
 Operations Market
Resources Requirements

What you What you What you What you

HAVE DO WANT NEED

to maintain from your

in terms of your operations to to “compete”
operations capabilities help you
capabilities and satisfy “compete” In the market
markets

Strategic
Reconciliation
Four Stages of Service Firm
Competitiveness

Stage I. Available for Service

Reactive, non-performance-based survival

Stage II. Journeyman

Firm neither sought nor avoided
Reliable but uninspired operation

12
 Four Stages of Service Firm
Competitiveness
Stage III. Distinctive Competence Achieved
Reputation for meeting customers’ expectations
Customer-focused operations--management support
Stage IV. World Class Service Delivery
Firm name synonymous with service excellence--focus
on delighting rather than satisfying customers
Continuous learning and improvement of operations

13
 Capacity
Strategy

Configuring Managing
Capacity Capacity Change

Overall Location Timing Magnitude Location of

Type of
Level of of of of changed
Capacity
Capacity Capacity Change Change capacity

Issues in capacity strategy

 Forecast
Availability level of
of capital demand
Cost structure Changes in
of capacity future
increment demand
OPERATIONS Overall level of MARKET
RESOURCES capacity REQUIREMENTS
Uncertainty
Economies
of future
of scale
demand
Flexibility of Consequences
capacity of over/under
provisions supply

Some factors influencing the overall level of capacity

Issues include…..

NUMBER OF
SITES

CAPACITY OF LOCATION OF
EACH SITE EACH SITE

ALLOCATION LONG-TERM
a
OF TASKS CAPACITY
TO EACH SITE CHANGE
STRATEGY
Why is capacity strategy important?

Without an appropriate capacity

strategy operations will always
be struggling to supply markets
in a competitive manner

Getting capacity strategy right is

the starting point for developing
competitive operations
 How should one judge a capacity strategy ?

NUMBER
OF SITES

What
CAPACITY OF LOCATION OF performance
EACH SITE EACH SITE measures will
all these
decisions ?
have a major
ALLOCATION LONG-TERM impact on ?
OF TASKS CAPACITY
TO SITES CHANGE
STRATEGY
Competence can involve
producing a firm’s outputs
Suppliers Retailers

Plants Customers

Customer
Service
Replenishment Orders/ service requests
Orders
How does the firm’s work get done?

What is the business impact?

Consider these processes...
A service process:

Make Airport In-flight Baggage

reservations ticketing
check-in service handling

A product development process:

Product Product Process Production

engineering engineering
sourcing ramp-up
concept
Operational Competency
Challenges
Speeding product development time
Developing production systems to
enable mass customization of products
and services
Managing global production networks
Developing and integrating new
process technologies into existing
production systems
How do we accomplish
operational competence?

Investment
plant ?
equipment
inventory outputs

Costs
materials
? revenue

labor customers
energy FIRM

How we structure things in the above box

determines our operational competence!
Strategic Elements
Infrastructure elements
- work force organization
and skills
Structural elements - customer relations
- capacity - process expertise
- facilities - quality programs
- vertical integration - logistics planning
- technology/equipment

Performance measures
- cost
- quality
- speed
- variety
- service
Capacity Planning
Capacity is the upper limit or ceiling on the load
that an operating unit can handle ➨ how much
we can produce

Planning for capacity:

Long term: deals with overall capacity level. Also
called strategic capacity planning. Ex:
facility size, major expansions

Short term: deals with variations in capacity

requirements (created by demand fluctuations) Ex:
Workforce-production plans
Steps in Strategic Capacity Planning
Calculate current capacity

Estimate long-term changes in demand

and estimate future capacity needs

Identify sources of capacity to meet these

needs

Select among these alternatives

Definitions of Capacity
Design capacity
maximum obtainable output
Effective capacity
Maximum capacity given product mix,
scheduling difficulties, and other doses of
reality. (NORMAL operating conditions)
Actual output
rate of output actually achieved--cannot
exceed effective capacity.
Efficiency and Utilization

Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity
Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day

Actual output 36 units/day

Efficiency = --------------------------------- = -----------------------
40 units/ day
Effective capacity
Utilization = Actual output 36 units/day
= = 72%
Design capacity 50 units/day
Developing Capacity Alternatives

Design flexibility into systems (for future

expansion possibilities)

Understand the product-life-cycle

Prepare to deal with capacity “chunks”

Consider outside sources of capacity -

subcontracting, capacity acquisition
Identify the optimal operating level
Best Operating Level
Given the design capacity of our production unit, there is
an optimal rate of output for minimal cost.
Average cost per unit

Minimum
cost

0
Rate of output
Economies/Diseconomies of Scale
Minimum cost & optimal operating rate are
functions of size of production unit.

Economies of Diseco
Scale nomy.
Average cost per unit

Small
Plant
Mediu Very
m Large Large
Plant Plant Plant

0 Output rate
Comparing Capacity and Demand in a Service
Operation
Customers turned away
Maximum
Poor service capacity
Demand

Optimal
capacity
Idle capacity

Time

7-7
eactive Capacity Strategy

Demand

Volume Plant Capacity

(units)

Unfilled demand

Time

7-11
Learning Curve concept

It is helpful in negotiations. When a task

is done more and more number of
times, the time to complete the task
also gradually reduces with increased
attempts at it. Similarly, when the
number of units produced increases,
the direct labour hours required per
unit decreases, for a variety of
reasons.
Learning Curve concept
The main reasons of learning curve concepts
are……………
+ Workers become more and more skilled at
the specific set of tasks.
+ Improvement in production method and
tooling.
+ Improvement in lay out and flow takes
place.
+ Organizational improvement.
+ Economy of scale, in time etc are achieved.
Learning Curve concept

Avg.
direct
Labour
Hours
Required
Per unit

Number of units produced-

 Make/Buy Decisions
A new product or part, An additional process, some
new service requirements, a new task
Completely new or development/ improvement in the
existing system.
The Question is..
Do we make ourselves in-house ? Or
Do we buy from outside?
That’s the Make/Buy Decision, or Contracting out or
Subcontracting or Outsourcing..
Such decisions are faced routinely almost every day…
Still, a key STRATEGIC DECISION : affects..
Costs, Productivity, Flexibility, Quality,
Competitiveness, Business risks etc
Make/Buy Decisions. Traditionally..
A cost based decision.
Uses marginal costing Compare the cost of
manufacturing and in-house.
For example:
Company ‘A’ manufactures and sells refrigerators. It
makes some of the parts and buys the rest from
outside. The engineering dept feels that it may be
more economical to make a product that is being
purchased at Rs.8.25 per unit. The firm uses
100,000 units a year. The accounting dept says that
fixed costs, labour costs and raw material costs will
increase by 50000, 125000, and 600000 respectively.
Factory overhead, currently Rs.500000 a year will
increase by 12%.
Should the coy make or continue to buy the product?
Make/Buy Decisions Services
Not talking of a ‘Service’ organization.
But, what about the services required by a
manufacturing organization?

Traditionally managed in-house, for ‘control’.

The trend now-a-days is to sub-contract even
services like
Security, Canteen, Transports, Loading, Unloading,
House keeping, utility supplies, Training and
development, Recruitment, Maintenance,
Accounting services etc. !
Six Sigma
Six Sigma is a methodology to manage
process variations that cause defects and
to systematically work towards managing
variation to eliminate those defects
.Defects are defined as unacceptable
deviation from the mean or target. The
objective of Six Sigma is to deliver high
performance, reliability, and value to the
end customer.
Six Sigma
originally definedas a metric for measuring
defects and improving quality, and a
methodology to reduce defect levels
Defects Per (one) Million Opportunities
(DPMO), or put another way, a methodology of
controlling a process to the point of ± six
sigma (standard deviations) from a centerline.
Six Sigma has now grown beyond defect
control.
VALUE ANALYSIS \ VALUE
ENGINEERING

It is a systematic method of thinking

about substitutes.
It is a systematic method of studying in
detail the “value” of the material.
The value could be due to the
functional characteristics of the
product or due to the other
considerations.
VALUE ANALYSIS \ VALUE
ENGINEERING
The value analysis can be divided into
the following steps.

** Information stage
** Functional Analysis
** Brain storming
** Evaluation Phase
** Implementation
VALUE ANALYSIS \ VALUE
ENGINEERING
Information stage
Here all the relevant information
regarding raw material, finished products etc.
are collected in terms of cost.
Functional Analysis
In this stage the functions, that the material
performs are listed in terms of basic functions
and secondary functions.
VALUE ANALYSIS \ VALUE
ENGINEERING
Brain storming
After collecting the different functions and other
relevant information regarding the material ,the
next idea is to think of the various alternatives for
the material. Here the main idea is to encourage
productivity.
Evaluation Phase
The idea generated in each stage is evaluated
again and again so that various substitutes for
analysis are find out.
VALUE ANALYSIS \ VALUE
ENGINEERING
Implementation phase
In this phase the selected substitutes
are analyzed in each of the department for
their implementation.
This type of analysis of the input
material along with the various cost
associated with them are also analyzed in
order to take purchase decisions.
Just-In-Time (JIT) Defined
JIT can be defined as an integrated set
of activities designed to achieve high-
volume production using minimal
inventories (raw materials, work in
process, and finished goods).
JIT also involves the elimination of
waste in production effort.
JIT also involves the timing of
production resources (e.g., parts arrive
at the next workstation “just in time”).
Basic Elements of JIT
1. Flexible resources
2. Cellular layouts
3. Pull production system
4. Kanban production control
5. Small-lot production
6. Quick setups
7. Uniform production
8. Quality at the source
9. Total productive maintenance
10. Supplier networks
Benefits Of JIT
1. Reduced inventory 7. Greater flexibility
2. Improved quality 8. Better relations
3. Lower costs with suppliers
4. Reduced space 9. Simplified
requirements scheduling and
5. Shorter lead time control activities
6. Increased 10. Increased capacity
productivity 11. Better use of
human resources
12. More product
variety
JIT Demand-Pull Logic

Fab Vendor

Sub
Fab Vendor
Customers
Final
Assembly

Sub Fab Vendor

Fab Vendor
The Japanese Approach to
Productivity
Imported technologies
Efforts concentrated on shop floor
Quality improvement focus
Elimination of waste
Respect for people
Waste in Operations
(1) Waste from overproduction
(2) Waste of waiting time
(3) Transportation waste
(4) Inventory waste
(5) Processing waste
(6) Waste of motion
(7) Waste from product defects
Supply Chain Management (SCM)
SCM: Management of the whole process / system by
which companies move materials, components,
finished products to the customers.
Used to be viewed as a standard operational issue. Now
viewed as one of the most important strategic issues.
Supply Chain: network of suppliers, warehouse,
operations, and retail outlets

Distribut.
Storage Manuf. Storage Storage Retailer.

Material Flow Info Flow (orders)

ROBOTICS

Substitution of human beings in highly repetitive work

situations
1960, 70’s
They are programmable, and can be made ‘intelligent’
Safety and hazard areas
Economics:
Capital cost around 50,000 $
Operation cost around $2 to 5 per hour vs. labour cost of
average $ 20/hour. General Dynamics, T3 Drill, Robots
make 24 to 30 parts per day at no defect with a
spec of 2 inch holes at +/- .005. Manual: 5 to 6
pieces per day at average 10 % defective!!
Accuracy and consistency greatly increased, less
rejections and less inspection and QC necessary.
NC Machines

Numerically controlled machines

Movements of the machines under the control of
a computer
Position control and contour control
Very complex parts can be produced with a single
set up
Machine tool is not tied up for along periods for
set up
However, justified only when the volumes are
sufficiently huge.
CAD/CAM

Computer Aided Design and Manufacturing

Programs are also directly created
3D scaling and modelling
Std parts data bank
Very efficient
Some key advantages
Design
Drafting
Bills of materials
Costing and Estimating
Order Entry
Manufacturing ( automatic tape generation..)
FMS

FLEXIBLE MANUFACTURING SYSTEM

Put together NC machines, some robots and have
an automated material movement system, to
supplement the CAD CAM… we have a Flexible
manufacturing system
The entire system is computer controlled
Highly capital intensive, but extremely flexible,
and very productive and quality conducive. Can
lead to a 10 fold reduction in man power.
GT

Group Technology
Assume we have a small lot process focused
situation. Parts and products are more or less
similar. For such a product family, similar
machines could be grouped together, as in a
process layout, but the parts move as in a line to
enhance the productivity.
This gives flexibility at lower operating cost.
Decision Support System

Management
Management Information Personnel

System
Accounting

Computer Information Production

Data Model results Decisions

Data Reports Marketing
processing

Distribution

Other areas

Quantitative
techniques What -if? analysis
Artificial Intelligence

Neural networks
emulate interconnections in brain

Genetic algorithms
based on adaptive capabilities in nature

Fuzzy logic
simulate human ability to deal with
ambiguity
Advanced Communications

Electronic data interchange (EDI)

Internet, Intranet, Extranet
Wireless communications
Teleconferencing & telecommuting
Bar coding
Virtual reality
Visualization
Manufacturing Technology

Numerically controlled (NC) machines

controlled by punched tape

Computer numerical controlled (CNC)

controlled by attached computer

Direct numerical control (DNC)

a network of NC machines controlled by a
single computer
Flexible Manufacturing Systems
(FMS)

Programmable machine tools

Controlled by common computer network

Combines flexibility with efficiency

Reduces setup & queue times

Flexible Manufacturing System
Computer
control
room
Tools
Conveyor

Pallet

Machine

Load Unload
Parts Finished
Terminal goods
Robots

Programmable manipulators that follow

specified paths
Better than humans for
hostile environments
long hours
consistency

Controller, manipulator, & end effector

Computer Integrated Manufacturing
(CIM)
Integration of design, manufacture & delivery via
computer technology
CAD creates & modifies designs
CAM programmable automation
CAE links functional design to CAD form design
CAPP creates processing instructions for CAM
GT classifies designs to benefit from prior
experience
Components Of CIM
IGES,
CAD CAE GT DFM
PDES

TQM Product
Bar codes, design CAD/CAM
EDI
MRP CAPP
Systems Process
JIT/ mgmt CIM planning Cellular
kanban manuf
DSS/ES/
AI MAP,
LAN, TOP, Manuf STEP
satellites

NC/CNC/ AGV, Automated Cells

FMS Robotics
DNC ASRS inspection & centers
Total Quality Management
1. Customer defined quality
2. Top management leadership
3. Quality as a strategic issue
4. All employees responsible for quality
5. Continuous improvement
6. Shared problem solving
7. Statistical quality control
8. Training & education for all employees
TQM Throughout The
Organization
Marketing, sales, R&D
Engineering
Purchasing
Personnel
Management
Packing, storing, shipping
Customer service
Strategic Implications Of TQM

Quality is key to effective strategy

Clear strategic goal, vision, mission
High quality goals
Operational plans & policies
Feedback mechanism
Strong leadership
TQM In Service Companies

Inputs similar to manufacturing

Processes & outputs are different
Services tend to be labor intensive
Quality measurement is harder
Timeliness is important measure
TQM principles apply to services
Shop Floor Control
Enterprise information systems require data from the
shop floor
Purchasing and MRP - knowledge of inventory levels
Marketing – status of open work orders to respond to
customer inquiries
Accounting - input on worker activity to run payroll
Industrial/Mfg Eng - labor data to develop time
standards
Schedulers - shop status of orders, workers,
machines and tools to produce short-term schedules
Shop Floor Control Functions
Controls the execution of detailed tasks that define the short-
term production schedule
Planning
Scheduling
Converts production plan into detailed plan when each
operation will be performed
Communication protocol
Network for informing and coordinating shop resources
Accumulate data such as marketing, purchasing, accounting,
scheduling, etc for higher level administrative and planning
functions
Shop Floor Control System
 Hierarchical Control Systems
F a cility Parts F ab ricatio n Plan t

D ep artm en t Sh aft Pro d u ctio n G e ar Pro d u ctio n H eat T rea tm e n t Pu rc h as in g …….

W o rkstatio n C N C L a th e C N C Mill G ear H o b b e r A S/R S …….

Eq u ip m en t L o a d /U n lo ad R o b o t T o o l Exch an g er Sp in d le M o to r F o rc e Sen s o r …….

Advancing Technology in Shop
Floor Control Systems

Real-Time
Shop
Management
New Forms of Data Collection

Bar Code Systems

Digital Pictures
Video Images
CAD Drawings
Graphs
Scanned Items
 Typical Manufacturing Typical Manufacturing
without SFC with SFC

Host Host Host Host

Database Computer Database Computer

Work Orders Production

Work Orders
Information

Key Enter
Manufacturing
Production
Process
Information
SFC Real-time
SFC
Database
Analysis

Manufacturing
Process
 Benefits of a Properly Managed
Shop Floor Control System (SFCS)

Higher Productivity
Consistency & Repeatability
Paperless Work Management
Ideal Production System
Easier Integration
Flexibility to accommodate new ideas
and changes
Shop Floor Techniques
Further Classification
Low level scheduling
Scheduling individual workstations (lot
dispatching)
Do not consider entire shop floor condition
High level scheduling
Regulate the daily production rate (lot release)
Closed loop feedback
Control-theoretic policies
Sample Shop Floor Control
System Architecture
Incoming orders

Pre-processing

Feasibility Analysis

Detailed Scheduling

Sequencing

Simulation

Shop floor
Assembly Line Balancing

Decision process of assigning tasks to workstations in a Serial

Production System:

S e r ia l A s s e m b ly L in e ( C y c le T im e = c )

R a w M a t e r1i a l s 2 3 … … … . m F i n is h e d P r o d u c t s
Parallel Assembly Line

Parallel Assembly Line (Cycle Time = mc)

Finished Products

Raw Materials 3

.
.
.
.
.

m
 Enterprise Resource Planning
(ERP) Systems

The Key to Surviving in a Fast Paced Industry

ERP is real time shop managing software
Integrates with popular Windows accounting
software
Immediately provides work-in-progress reports
and up-to-the-minute job history
Allows a wide variation of information to be
gathered
Since the system is very versatile, it is useful to
both small and large job shops
Two-Boundary and Kanban
Both limited (fixed) inventory policies
Two-boundary policy more effective than
Kanban in terms of lower WIP and cycle
time
Reasons-
In Kanban, demand information transmitted
only to adjacent workstation
Kanban attempts to fill up inventory up to its
fixed limit, causing more overall inventory than
the control policy
Tool Management Requires
A design strategy
To coordinate tooling inventory, tool tracking, tool
loading/unloading
A planning strategy:
To ensure that the appropriate tools are available in the
right time in the right quantities
A scheduling strategy:
To account for tool availability and tool changes
A control strategy:
To coordinate tool transfers between machines and tool
cribs
A tool monitoring strategy:
To identify and react to unexpected tool wear and
breakage
Tool Management Classification

Tool management can be classified

into:
Tool-level
Machine-level
System-level issues
 Tool Management Process
Order Delivery
Schedule
Process Planning and
Part Programming

Tool Requirements
Master Production Planning
Planning

Capacity Requirements Planning

Machine Grouping

Scheduling Tool Inventory Control

Machine Loading

Machine Sequencing Tool Allocation to Machines

Tool Placement in Magazine

Process Monitoring
Individual Tool Monitoring

Tool Replacement
Tool Information Requirements
Common tool management database
Data record should be linked to vendors, part types,
machines…
Tools must be monitored for wear to permit planning for
replacement
Continuous monitoring:
Adaptive control to adjust machine speed and feed rates
appropriately
Off-line monitoring:
Increase non-productive times and may result in workpiece
damage.
Flexible Manufacturing
Systems, FMS
Generally Consist of:
Set of computer numerically controlled (CNC) machines
Material handling system
Economically attractive for mass production
Used for low-variety, low volume parts
When Using FMS, The Following Problems Must Be
Solved:
Part type selection problem
Production ratio problem
Resource allocation problem
Loading problem
 Motivations for Technology Policy

Economic Political

Market failure Social needs and missions

Coordination failure Response to challenges of structural adjustment
Lock-in Mercantalism/competitiveness

The disjunction between economic and political motivations is persistent

One can cater to the political dimension but doing so diminishes our ability
to provide an independent reference point to the evolution of technological
and economic systems (both retrospective and prospective)
Moving Forward by Looking Back

What have we learned in the last half century…

Among other things…

1. Innovation is a systemic process

2. Markets may or may not create appropriate variety

3. Knowledge is sticky, even with ICT

4. Globalisation is much more than factor price equalisation

Specifically

These insights have been incorporated into three areas of study:

1. Systems of innovation (national and sectoral)

2. Evolutionary economics and industrial dynamics
3. The new regional economics

Each of these areas of study has contributed to strengthening

the empirical foundations of the economics of technological change

1. Understanding of systemic dysfunctions in innovation systems

2. Analysis of dysfunctions in variety generation and a renewed
emphasis on learning, routines and capabilities
3. Augmenting the rate and direction of technological change by
locating it in geographic and social network spaces
Shortcomings…

Although the new areas have contributed in a meaningful way to policy

analysis (principally through diagnostic tools) our prescriptive toolbox
is limited…

The analysis of specific industries been largely retrospective

• Economists of technological change have never been

comfortable with ‘futurology’ and related pursuits
• Other techniques such as Foresight and participative deliberation
are filling the vacuum
• We are devoting excess attention to macro-economic indicators
Studies of the motives and processes of innovation are being taken
over by other disciplines

• Technology management and related business studies

approaches
• Diminishing attention to ‘social welfare’ as a normative guide
Opportunities (1)

1. Prospective studies of industrial development

• Technological trajectories as articulated by Dosi and by the

‘technology forecasting’ are under-developed

Economists are not getting ‘under the bonnet’ to examine the

engine driving technological change in specific industries --
indicators are preferred to industrial analysis

Trajectories are key features in the innovation system because

they focus the attention of industry on specific bottlenecks and
hurdles

• Linking prospective studies to national income accounting so

that we can say something quantitative about impact
Opportunities (2)

2. The motives to innovate

• The love affair with patents has never been more intense

Patents are not the whole of innovation!

• Firms innovate under pressure – either the pressure created by

diminishing market prospects or the pressure of being left behind as
others benefit from market growth

Industrial dynamics (the demography of industries) offers

important tools for diagnosing this pressure – structure
matters!

• The analysis of ‘technological opportunity’ has fallen by the wayside

and should be revived
Conclusions

Over the past half century the economics of technological change has
made a contribution to policy

There is still a disconnect between the politics and the economics of

technology policy – the Lisbon and Barcelona processes are cases in
point

Ignoring the political impulse to intervene simply means that

others will fill the policy vacuum

To get closer to the centre of the policy stage -- economists concerned

with technological change need to

1. Be willing to say something about the future

2. Improve our ability to analyse the sources of innovation including
reviving technological trajectories and opportunities as concepts
that can be reduced to practice
3. Connect indicators with economic growth accounting
4. Develop a richer account of the motives for innovation
5. Continue to sell social welfare as a meaningful concept for policy
Material Handling

Material handling is the function of

moving the right material to the right
place in the right time, in the right
amount, in sequence, and in the right
condition to minimize production cost.
Goals of Material Handling
The primary goal is to reduce unit costs of
production
Maintain or improve product quality, reduce damage of materials
Promote safety and improve working conditions
Promote productivity
material should flow in a straight line
use gravity! It is free power
move more material at one time
mechanize material handling
automate material handling
Goals of Material Handling
Promote increased use of facilities
Reduce tare weight (dead weight)
Control inventory
Overview of Material Handling
Equipment
Material handling equipment includes:
Transport Equipment: industrial trucks,
Automated Guided vehicles (AGVs),
monorails, conveyors, cranes and hoists.
Storage Systems: bulk storage, rack
systems, shelving and bins, drawer storage,
automated storage systems.
Unitizing Equipment: palletizers
Identification and Tracking systems
Considerations in Material
Handling System Design
1. Material Characteristics

Category Measures
Physical state Solid, liquid, or gas
Size Volume; length, width, height
Weight
Weight per piece, weight per unit
Shape
volume
Condition
Safety risk and risk of Long and flat, round, square, etc.
damage Hot, cold, wet, etc.
Explosive, flammable, toxic; fragile,
etc.
Considerations …cont.

Flow rate
Quantity of
material
moved

Conveyors Conveyors
High AGV train

Manual handling Powered trucks

Low
Hand trucks Unit load AGV

Short Long Move Distance

Considerations …cont.

Plant Layout
Layout Type Characteristics Typical MH Equipment
Fixed – position Large product size, low Cranes, hoists, industrial
production rate trucks

Process Variation in product and

processing, low and Hand trucks, forklift trucks,
medium production rates AGVs

Product
Limited product variety,
high production rate Conveyors for product flow,
trucks to deliver
components to stations.
Principles of Material Handling

. The Planning Principle

Large-scale material handling projects
usually require a team approach.
Material handling planning considers every
move, every storage need, and any delay
in order to minimize production costs.
The plan should reflect the strategic
objectives of the organization as well as
the more immediate needs.
Principles of Material Handling

The systems principle: MH and storage activities

should be fully integrated to form a coordinated,
operational system that spans receiving, inspection,
storage, production, assembly, …, shipping, and the
handling of returns.
Information flow and physical material flow should
be integrated and treated as concurrent activities.
Methods should be provided for easily identifying
materials and products, for determining their
location and status within facilities and within the
supply chain.
 13-295

Operations Consulting

Operations consulting involves

assisting clients in developing
operations strategies (i.e., product
leadership, operational excellence,
customer intimacy, etc.) and in
improving production (and service
delivery) processes.
 13-296

Operations Consulting & the 5 Ps

Plants
Adding and locating new plants
Expanding, contracting, or refocusing
facilities
Parts
Make or buy decisions
Vendor selection decisions
Processes
Technology evaluation
Process improvement and reengineering
 13-297

Operations Consulting & the 5 Ps (Continued)

People
Quality improvement
Setting/revising work standards
Learning curve analysis
Planning and Control Systems
Supply chain management
MRP
Shop floor control
Warehousing and distribution
 13-298

Hierarchy within Consulting Firms

AAway
wayofoflooking
lookingat
atthe
thetypical
typical
consulting
consultingfirm’s
firm’sorganization
organization

Finders
Who
Whofind
findnew
newbusiness
business Partners

Who
Whomanage
managethe
the Minders
business
business Managers

Who
Whoactually
actually Grinders
do
dothe
thework
work Consultants
 13-299

Stages in Operations Consulting Process

1. Sales and proposal development
2. Analyze problem
3. Design, develop and test
alternative solutions
4. Develop systematic performance
measures
5. Present final report
6. Implement changes
7. Assure client satisfaction
8. Assemble learnings from the
study
 13-301

Reengineering

Reengineering is defined as the fundamental

rethinking and radical redesign of business
processes to achieve dramatic improvements in
critical, contemporary measures of performance such
as cost, quality, service, and speed. As a engineering
discipline, reengineering can be applied to any
process in manufacturing and service businesses,
education, and the government.
Business process reengineering (BPR) is focused on
reengineering business processes.
 13-302

Principles of Reengineering

Organize around outcomes, not tasks

Have those who use the output of the process

perform the process

Merge information-processing work into the

real work that produces the information

Treat geographically dispersed resources as

though they were centralized
Inventory

Purchased and manufactured items

that are stored in inventory until they
are needed, used or sold, so as to
run the affairs of operations efficiently.
A large manufacturing company may
have over 100,000 different items to
maintain in inventory
Types of Inventory

Raw materials
Purchased parts and supplies
Work-in-process
Component parts
Tools, machinery, and equipment
Finished goods
Types of Inventory

Manufacturing facility

Supplier Step 1 Step 2 Customer

In-Transit Raw WIP Finished

Material Goods
Reasons To Hold Inventory

Meet unexpected demand

Smooth seasonal or cyclical demand
Meet variations in customer demand
Take advantage of price discounts
Hedge against price increases
Quantity discounts
Why Control Inventory: Cost vs Service
Under-stock: Frequent stock-outs
Lost sales, loss of customer goodwill
➨ Low level of customer service

Over-stock: Excess inventory

Costs of ordering and carrying inventory
increase
Objective: Establish an inventory control
system to find a balance between
cost and service:
Visible Costs of Inventory

Carrying Cost
cost of holding an item in inventory
Ordering Cost
cost of replenishing inventory
Shortage Cost
temporary or permanent loss of sales
when demand cannot be met
Understanding costs

Carrying Cost
• storage costs
• rent/depreciation
• labour
• overheads (e.g. heating, lighting, security)
• money tied up (loss of interest, opportunity cost)
• obsolescence costs
(if left with stock at end of product life)
• stock deterioration
(lose money if product deteriorates whilst held)
Understanding costs
Carrying Cost
Normally denoted as Ci or Ch
Varies based on the average holding.

Inv starts at level of ‘Q’ and reduces to ‘0’ during one cycle.
So, Avg inventory level = (Q+0)/2 or simply Q/2
And
Q Ci
Inv carrying cost = *
2

is the cost of carrying one

Unit of the item for one time period
Understanding costs

Ordering costs
• clerical/labour costs of processing orders
• inspection and return of poor quality products
• transport costs
Handling Costs
Understanding costs
Ordering Cost
Usually denoted by Co

Suppose the annual demand is D.

If you order Q at one time,
D
Number of orders required in one year = Q
And
D Co
The Annual Ordering Cost = *
Q
Understanding costs
Shortage Costs

•Lost Orders
•Penalty?
•Lost Good will
•Strategic Positioning
Disadvantages
•Inefficiency ?!
•Managerial troubles?
•Back Order?
Understanding costs

Shortage Costs
Normally denoted by Cs
Cs is the cost of shortage of one unit.

So if the annual shortage is N units,

The Annual shortage cost = Cs * N
Understanding costs

The Total Inventory Costs will be

Total Cost = Carrying Cost +

Ordering Cost +
Shortage Costs
Hidden Costs of Inventory
Longer lead times
Reduced responsiveness
Underlying problems are hidden
rather than being exposed and solved
Quality problems are not identified
immediately
No incentive for improvement of the
process
Two Forms of Demand
Independent demand
finished products
based on market demand
requires forecasting
Dependent demand
parts that go into the finished products
dependent demand is a known function of
independent demand
no forecasting is required
Dependent vs Independent Demand
Dependent: Demand depends on the demands
of other items in inventory
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.
Certain Demand:
Economic Order Quantity(EOQ)

Assumptions:
Annual Demand (Usage) Rate (D) is known
Demand is evenly spread out in a year: demand
rate is constant
Leadtime (LT) is constant and known
Each order arrives in a single delivery
(instantenous delivery assumption)
Purchase price (P) is constant
Objective: Determine the order quantity Q and
reorder point (ROP) that minimize total annual
cost.
 Notice that since demand is certain, the firm knows exactly when it will run out-of stock.
Order Q units exactly a leadtime before inventory on-hand drops to zero.
➨

Profile of Inventory Level Over Time

Q Demand
rate
Inventory
on hand

Reorder
point

Time
Receive Place Receive Place Receive
order order order order order
Lead time
Total Cost Calculation

H= Annual Inventory Holding/Carrying Cost per unit

S= Ordering/Setup Cost per order

Annual Annual
Total cost = carrying + ordering
cost cost

TC = QH + DS
2 Q
The optimal order quantity can be found by taking derivative with respect to Q and setting to 0.
 Optimal Order Quantity Qopt :
2DCo 2(Annual Demand)(Order or Setup Cost)
Q OPT = =
Ci Annual Holding Cost

Reorder Point (ROP):

where
RO P= d ( LT)
LT = Leadtime (in days or weeks)
d = Daily or weekly demand rate
Total Costs with Purchasing Cost (PD)
Cost

Adding Purchasing cost TC with PD

doesn’t change EOQ

TC without PD

Annual purchasing cost=(PD)

0 EOQ Quantity
Example: An office supply store sells floppy
disk sets at a fairly constant rate of 6,000 per
year. The accounting dept. states that it costs Rs.
8 to place an order and annual holding cost are
20% of the purchase price of Rs. 3 per unit. It
takes 4 days to receive an order. Assuming a
300-day year, find:
a) Optimal order size and purchasing frequency
b) Annual ordering cost, annual carrying cost
c) How many orders are given a year and what is
the time between the orders?
The Inventory Order Cycle

Inventory Level Order qty

Reorder point

0 Lead Lead Time

time time
Order Order Order Order
Placed Received Placed Received
Assumptions Of Basic EOQ Model

Demand is known with certainty

Demand is relatively constant over
time
No shortages are allowed
Lead time for the receipt of orders is
constant
The order quantity is received all at
once
Economic Order Quantity

Ordering cost and unit purchase price

decrease with order size
Inventory levels and holding costs
increase with order size
The order quantity that minimizes the
net cost is called the Economic Order
Quantity (EOQ)
 EOQ Model Cost Curves

Slope = 0
Annual Total Cost
cost ($)

Minimum
total cost
Carrying Cost

Ordering Cost

Optimal order Order Quantity

 Q D
Annual Cost TC = H + S
2 Q

Carrying Costs

Ordering Costs

QOpt Order Quantity

(Q)

The total cost is minimized at Qopt where annual carrying and ordering costs are equal.
Production Lot Size

According to traditional thinking,

Setup costs decrease as production
lot or batch size increases
Inventory levels and holding cost
increases as batch size increases
The lot size that minimizes the net
cost is called the Economic
Production Lot (EPL)
Production, Demand and
Inventory
60 Economic Production
50 Production Demand

40
Lot Inventory
Quantity

30 Fluctuating
20 Inventory
10
0
1 2 3 4 5 6 7 8 9 10
Time period
Production and Consumption!

EOQ formula is similar…

2DCo P
Q OPT =
Ci (P - D)

P is the production rate and

D is the rate of demand or consumption
Inventory Control Systems

Fixed-order-quantity system
(Continuous)
constant amount ordered when inventory
declines to predetermined level
Fixed-time-period system (Periodic)
order placed for variable amount after
fixed passage of time
Safety Stock
Stock that is held in excess of expected
demand due to variable demand rate
and/or lead time.
Reorder Point With
A Safety Stock
Inventory level

Reorder point

Safety stock

0
LT LT
Time
ABC Classification System
Most companies have thousands of
inventory items
20% of the items account for 80% of
the cost
Inventories of expensive items should
be controlled closely
It is more cost effective to keep plenty
of inventory of inexpensive items on
hand
ABC Classification Example

Percentage of dollar
Percentage of items
value

A items 10 percent 50 percent

B items 30 percent 40 percent

C items 60 percent 10 percent

ABC Classification System
Classifying inventory items according to: annual dollar usage (unit dollar value x annual usage).
Typical observation:
A small % of items account for a large share of total inventory value ➨ Class A ➨ more frequent review
A large % of items account for a small share of total inventory value ➨ Class C ➨ less frequent review

High
A
A - very important Annual
B - mod. important $ volume B
of items
C - least important Low C
Few Many
Number of Items
Other classifications..
VED
Vital, Essential, Desirable
Normally for spares, because demand does not
Follow any pattern, or the pattern can change
suddenly
FSN
Fast, Slow and Non moving.
When obsolescence is an issue..
SN needs great attention and control
GOLF , SOS, SDE etc.
Fundamental Assumptions of
Traditional Manufacturing
It is expensive to process orders for
purchased items, and quantity
discounts are available
as a result, orders for parts are placed
infrequently, in large quantities
Setups are lengthy and expensive
as a result, large batches of each
product are made
Reducing Inventory

Lean Manufacturers reduce inventory

by reducing ordering or setup costs
This permits frequent, small order or
production quantities
Materials arrive or are produced “Just
In Time”
 JIT Cost Curves

Traditional
Annual
Ordering cost
cost ($)
Carrying Cost

JIT Cost

Optimal Optimal Order Quantity

JIT order order
Traditional Vs. JIT Inventory

Inventory Level Traditional

Average
Inventory
JIT

0 Time
Q-Systems.
The inventory system that is available in the stores waits for material requests from
the production department.

This is based on the aggregate production planning and master production schedule
This request is based on the aggregate production planning and production schedule.

The stores department checks the availability of the material. If the required quantity is
available, it is passed on to the production department for commencing the operation.

Once a withdraw of material takes place, immediate updation of the inventory has to be done. While doing so consideration should be given for the inventory left out after the withdrawal, the material for which order is already placed but the material is
yet to arrive and the borrowings done earlier to meet the earlier material requirements.
Inventory Status = (Inventory on hand + Material already ordered, yet to be received – Borrowings)
The updated inventory status is checked for its nearness with the reorder level. If the available inventory is more than the reorder level, the system gets back to the ideal state. If not, that is the inventory status is less than the reorder level, fresh
orders for purchase of items are issued. The quantum of order will be equal to the EOQ..
Flow chart of Q-System
Q-System continues………….
Inventory Status = (Inventory on hand +Material already
ordered, yet to be received –Borrowings)

The updated inventory status is checked for its nearness

with the reorder level. If the available inventory is more
than the reorder level, the system gets back to the
ideal state. If not,that is theinventory status is less than
the reorder level,fresh orders for purchase of items are
issued. The quantum of order will be equal to the EOQ.
P-Systems.

The time factor is closely monitored

for its nearness to the deadline for
inventory review. Till the review time,
updation is not done. The computation
of order quantity is done as described
in the Q-system. This varies from time
to time, say Q1, Q2 etc.
P-System Flow Chart
Comparison between Q and P-
systems
Objectives of Spare Parts
Management

Customer Facing
• Reliability
• Responsiveness
• Flexibility

Internal Facing
• Cost
• Asset Management

Visibility
System Analysis
unsatisfying performance of Spare Parts Management

Avg. Numver of stockouts

and spares inventory turns per year

600 8
513,9 Avg. Number
7 7
500 6,75 of stockouts
6 per year
400 5,25
5
4,62
300 4,11 272 4 Average
231 spares
216,1
3 inventory
200
2 turns per
101,5 year
100
1

0 0
Aerospace Automotive High-tech M etals/metal Overall
products
System Analysis
• System Structure and Behavior

Adjustment stock
Goal
time
2. Order
Order Rate System
Adjustment
gap Over stock
Order
Received goal
Adjustment
Shipment time 1. Order
System Stock out
Shipment
Rate

stock

time
Model of a Second Order System

• Oscillation Reason: material and information delays

System Analysis
Spare Parts Management: complex dynamic system

Dealer
Part Supplier

Producer

Product Customer
Engineering Marketing
Repair
Center

Procure-
Manufacturing
ment Sales

Field
Service
Warehouse

Logistics
Logistics Strategies

• Transportation
- Expediting
- Outsourcing
- Direct shipment by part supplier

• Inventory
- Forecast Method
- Purchase: design/manufacture for serviceability, VMI
- Inventory: part segmentation (Cost based , Movement based , Criticality based);
virtual inventories
- Outsourcing

• Location
- Warehouse: Centralization/Decentralization; Hub- and Spoke; outsourcing
- Repair Centre: outsourcing, leave it to supplier or customer

• Other:
- alliance, e-Commerce, m-Commerce
Logistics Strategies
• The system becomes more complex.
• Processes and IT systems must be adapted to the strategies.

Part Supplier Dealer

Customer

producer Service
Provider

3PLs
Process Management
• Business Process
four perspectives: deterministic machines; complex dynamic systems; interacting feedback
loops; social constructs.
across functions within a firm - across firms in a supply chain

• Business Process Re-engineering (BPR)

use the power of modern information technology to radically redesign our business
processes in order to achieve dramatic improvements in their performance. (Hammer
1990)

• Business Process Modeling (BPM)

the techniques for charactering and analyzing business processes

• Business Process Management (BPM)

support business processes using methods, techniques, and software to design, enact,
control, and analyze operational processes involving humans, organizations, applications,
documents and other sources of information. ( Aalst, Hofstede, Weske 2003)

• Business Process Outsourcing (BPO)

delegate one or more information technology (IT)-intensive business processes to an
external provider that, in turn, owns, administers and manages the processes based on
defined and measurable performance metrics. (Gartner)
Process Management
BPR - BPM - BPO

Process
Re-engineering
Management
• Radical
• clean slate Lessons from • Total lifecycle
• IT-Led Reality • new/ existing
• Mechanistic processes
• Inspirational • IT-Enabled Business
• Holistic Service Level
• Future
• Systematic Management Process
• Past, present, future Outsourcing

Support

Business
Process
Modeling
Process Management

• Business Process and Strategies

Processes follow strategies.
Strategies follow processes.

• Business Process and IT

enabler, inhibitor, facilitator, implementer, supporter

• Business Process and Organization

Functional, hierarchical structure - process-based, horizontal structure
Individuals manage the boundaries of processes.
Matrix-based organization
Process Management

Business Process Management Procedures

1. Preparation of modeling
2. Strategy and business process framework
3. As-is modeling
4. To-be modeling
5. Organizational structure
6. Implementation
7. Continuous process management
Process Management
Business Process Modeling
• Objectives
Communication, Analysis, Control

• A conceptual Framework for Process Modeling

Curtis et al.(1992)
- Functional, what activities, which data (information) flows;
- Behavioral, when and how;
- Organizational, where and by whom, what physical communication mechanisms and
storage;
- Informational, entities flowing through the process, their structure and relationships.

• Standards proposal
Process Model SCOR 7.0 Supply Chain CouncilAerospace and Defense, Automotive, Chemicals,
Electronics
PIPs RosettaNet Electronics, Semiconductor, Telecommunications,
Logistics
eTom TM Forum Telecommunications

Process graphical IDEF0, EPML, UML, BPMN

Modeling
executable XLANG, WSFL, BPML, BPEL4WL;ebXML BPSS, ebXML BP TC,
WSBPEL; XPDL
Process Management
Logistics Processes in Spare Parts Management

Customer
Order

Order Order Order Order Packaging Shipment Transport

transmit accept prepare execute

Delivery
received

Spare Parts Purchase

Spare Parts Warehouse

Documentation

Ester 1997
Process Management
Processes in Spare parts management

Life-Cycle- Spare Parts Supplier Disposition

Management Production Management /Purchase

Source

Distribution Service Level Order Retour

Management Management Processing Management

Deliver

Impuls 2003