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CHAPTER 44
THE ENTERPRISE (PRODUCTION SYSTEMS)
44.1 INTRODUCTION Marketing Engineering
44.2 AXIOMATIC DESIGN OF SYSTEMS Finance Procurement and Purchasing
44.3 ENTERPRISE SYSTEM DESIGN Accounting Production Planning
PRINCIPLES 44.5 HUMAN RESOURCES (PERSONNEL) and Control
44.4 FUNCTIONAL AREAS IN THE DEPARTMENT Inventory Control
PRODUCTION SYSTEM Research and Development

& 44.1 INTRODUCTION

In Chapter 1, the basic idea of manufacturing processes and manufacturing systems was
presented. The manufacturing processes make or assemble products, whereas the manu-
facturing systems integrate the processes and people (with their operations) into selected
sequences to produce entire products. We can detail and name the basic processes (casting,
forming, machining, etc.) and the operations (transportation, inspection, storage). We can
categorize the manufacturing systems by the physical characteristics (e.g., job shop, flow
shop, linked cells), but categorizing the enterprise is more difficult, even though many such
systems exist. Enterprises, or production systems, are mostly collections of subsystems
organized in some way to service the manufacturing system and interface with the cus-
tomer. The enterprise managers aid the manufacturing system in an attempt to produce
products (goods) to meet delivery schedules at a target cost that maximizes profit.
This chapter will discuss the enterprise, or what is called the production system,
and describe how it ‘‘controls’’ the manufacturing system.
To understand the production system or enterprise, compare the university football
program to manufacturing. The athletic department can be equated to the production
system. The athletic department does many things for the football team (and other teams
as well) to help it get ready to play (or produce), but it never carries the ball. So it is that
the production system serves the manufacturing system and the individual processes but
does not actually make products. The people in the production system may design
the product (even choose the color scheme), purchase materials and supplies for the
products, plan the implementation of the product into the manufacturing system, sell the
products, forecast demand, maintain inventories, hire and fire workers, pay employees,
and communicate with the customers.
Our view is that production systems are mostly collections of people-driven sub-
systems devised to service the manufacturing system. Their objective is to aid the
manufacturing systems in producing products to meet delivery schedules at a target
cost that maximizes profit.
Defining an enterprise system this way is the result of understanding that the
external customer (i.e., marketplace) that actually buys a company’s goods generates
income and ultimately profit. This perspective with respect to the interface between
manufacturing and the enterprise also recognizes that the manufacturing system repre-
sents the beating heart of that enterprise. A football team running plays is analogous to
a manufacturing system producing its goods. In football, the enterprise system com-
prises coaches, managers, ticket agents, vendors, announcers, and so on—people who
support the team but do not play on the field.

1230
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SECTION 44.2 Axiomatic Design of Systems 1231

The traditional enterprise can be divided into three layers of people:

The task-oriented workforce who make the goods.

The middle management and engineers who collect and process information and
logistics related to the operation of the company.

The top management who control the decisions and directions of the enterprise.
There is a new player now—digit technology (DT). DT has taken away all the jobs
and tasks related to information and logistics. Thus, it is now easy for companies to be
global and do business all over the world. The lean revolution is resulting in many multi-
functional and interdisciplinary jobs, a reduction in middle management, and fewer jobs
with higher productivity and decision-making authority at the lower levels, resulting in
companies with fewer organizational levels with worldwide customer bases and supply
chains. This requires the employees to create and implement new solutions to problems
using the DT applications and then reproduce known solutions using DT as needed.

& 44.2 AXIOMATIC DESIGN OF SYSTEMS

Manufacturing systems can be designed. However, many scholars and many engineers
do not take this view. They tend to look at systems mostly as optimization problems.
The systems are assumed to preexist. Axiomatic design teaches that most optimization
problems are the result of coupled designs, wherein the key functional requirements
interact. When a design is uncoupled, optimization is not necessary.
Systems should be designed to achieve certain functional requirements (FRs).
The physical manifestation of a system is achieved when the functional requirements
are uncoupled, which simply means there is no interaction between the FR—that is, the
FRs are independent.
However, many traditional notions of business strategy are contrary to the con-
cept of uncoupling to the detriment of the system design. Most business-strategy litera-
ture views systems in terms of optimization, not design, problems. Optimization
advocates that a business should choose between lost cost and high quality. For exam-
ple, in the mass production system, if a company tried to reduce defect levels below
around 2% (the acceptable quality level), the reaction was that cost increased. In this
design, cost and quality are coupled.
The system design approach, however, might define low unit cost and superior
quality as the functional requirements of a system design. A system design would then
determine how to achieve these functional requirements through the selection of design
parameters (DPs). DPs define a means to achieve the FRs. The choice of design param-
eters renders uncoupler functional requirements. In many cases, the trade-offs that
business strategists have identified can be explained in terms of path dependency in the
design. Path dependency means that one solution can affect the achievement of multi-
ple FRs. For example, a company with a faulty manufacturing system design may be the
lowest cost producer but may not be achieving the FRs related to safety or quality. If the
functional requirements of safety (or quality) are not consistently achieved, it makes no
difference that the company is a low-cost producer.
An example of a coupler design is shown by the following two FRs:
FR-1: Reduce cost DP-1: Reduction in direct labor by automation
% %

!!
FR-2: Rapid delivery DP-2: Inventory reduction
The above is a simple example of a coupled design. The relationship of the FRs
relative to the DPs is given by


FR-1 x x DP-1
¼
FR-2 x x DP-2
The design is coupled. As DP-1 is changed, its effect on FR-1 and FR-2 is
unpredictable. Likewise, DP-2 affects FR-1 and FR-2 in an unpredictable way. This
situation immediately leads one to attempt to define the coefficients of the relationship
matrix. Once the coefficients are known, one can begin to solve for the DP-1 and DP-2.
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1232 CHAPTER 44 The Enterprise (Production Systems)

Optimization deals with coupled designs. In some cases, coupled designs lead to
unwanted, negative, or unpredictable results. The best design is uncoupled: one DP
affects only one FR. The relationship of the single DP to the single FR is one-to-one,
and the DP satisfies the FR in a known and unambiguous way. No optimization is
required when a design is uncoupled and the FRs are independent through the selection
of the DPs. A new design could be
FR-1: Reduce cost DP-1: Waste and motion reduction

% %
!
FR-2: Rapid delivery DP-2: System design to eliminate five delays


FR-2 x o DP-2
¼
FR-1 x x DP-1

In this case, the design is partially coupled. The independence of the FRs can be
achieved, but only if the DPs are implemented in a proper sequence or context. The
path’s dependent design indicates that it may be useless to eliminate wasted motion in a
system where the throughput time delays are not reduced. Reducing the delays that
compose throughput time most certainly will reduce cost.
Naturally, the best path of action would be an uncoupled design with independent
FRs, but this is difficult to achieve.

& 44.3 ENTERPRISE SYSTEM DESIGN PRINCIPLES

The enterprise system design (ESD) is based on four principles as outlined here. A
principle can be defined as an accepted or professed rule of action or conduct, an axiom,
or even a doctrine.
ESD-P1: One’s thinking creates a system design. System designs are all around us.
Every service business, organization, manufacturing company, industry, government
entity, and school is the result of a system design. Most of the time, these organizations
operate based on implicit knowledge and tacit assumptions and have not actually been
designed by any one person. The design that exists may have evolved over years and
may represent the thinking or mental model of many people, based on conclusions
assumed to be true about a system’s behavior and performance.
Many systems evolve or change behavior based on the way they are measured, but
many behaviors within systems are the result of using measures of the wrong parame-
ters or placing the wrong emphasis of using measures of parameters to manage and
operate a business.
The measured parameters are often based on tradition and result in coupled sys-
tem designs. These measures may not be aligned to achieve the objectives or FRs of the
system design. Stressing the use of measures to drive a business often leads to poor per-
formance by the business enterprise. Instead, the need is to design and to emphasize—
through measures—the relationships (FRs and DPs) necessary to achieve the desired
business objectives.
Organizations that evolve based on tacit assumptions and coupled designs often
work at cross purposes to achieving their true objectives. Many people in an organiza-
tion may understand the right thing to do even though the existing measures and the
management-accounting approach dictate otherwise. The FR–DP relationships within
the enterprise should be designed first, and then the organizational structure aligned to
focus on successfully achieving the FRs.
ESD-P2: A system design expresses the relationship(s) between the FRs and DPs.
Functional requirements state what a system must achieve—that is, its objective. How-
ever, an objective must not be confused with means. DPs are the means by which FRs are
achieved. For example, a common functional requirement for a system may be superior
quality (zero defects). The design parameters may be control charts (to track process per-
formance), histograms (to measure process capability) or poka-yokes (to prevent defects).
It is a mistake to view DPs as goals (i.e., as FRs). A classic example of a DP being
thought of as an FR is the use of information technology in manufacturing. A company
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SECTION 44.3 Enterprise System Design Principles 1233

invests heavily in computers, CAD, and CIM. In many cases, computerization of the
enterprise becomes the FR. Instead, computers should be a DP to solve a business FR.
ESD-P3: Effective system designs are uncoupled. An uncoupled design expresses
how a set of DPs should achieve a set of FRs. An uncoupled design is the result of
achieving design independence. Path-dependent designs are partially coupled. These
designs are acceptable and may be unavoidable. Lean production is the name given to a
partially coupled (or path-dependent) system design developed by Toyota (called the
Toyota Production System) and its vice president for manufacturing, Taiichi Ohno.
Using the term lean to express a system design is a superficial expression of enter-
prise system design accomplishments. Furthermore, in trying to become lean, a com-
pany may cut inventory or people. Many imitators of lean have often missed this point
(it is a design problem) and instead have focused on implementing tools such as the 5 Ss
(5 S methods for housekeeping and organizing the factory floor, poka-yokes, and cells
without first defining the FRs of a stable manufacturing system design. The physical
manifestation of a system design changes as the FRs and DPs change. The development
of uncoupled system designs is a difficult task, but an organization that recognizes and
nurtures an uncoupled design will have superior long-term performance.
ESD-P4: True cost reduction is a result of a stable system design. The first step in
the transformation to lean is to recognize what it means to become lean and to recog-
nize why so many companies are not lean. The reason that most companies are not lean
begins with how cost is viewed. There are two key points regarding the view of cost:
1. Focusing only on the end results of a system (low cost) does not reduce cost. The key
is to focus on what a system must achieve and on the relationships and activities that
are necessary to achieve the desired results.
2. Reducing the unit cost for an operation does not reduce total cost (Cochran, 1999).
The unit-cost-reduction equation focuses on the reduction of cost of each operation
(i.e., turning, grinding, washing, assembly) individually. The approach incorrectly
focuses on reducing each operation’s unit cost. It incorrectly assumes that total cost
is reduced by minimizing the sum of each operation’s unit cost, as if each operation is
stand-alone and unrelated to other operations. This thinking is shown by
X
n
TC ¼ ðOP1 Þ
i¼1

DL þ OVHD
Unit cost ðOP1 Þ ¼ þ MTL
n
where

OP1 ¼ unit cost ($/piece)

DL ¼ direct labor ($/shift)
MTL ¼ material ($/piece)
OVHD ¼ overhead based on DL hours ($/shift)
n ¼ number of parts/shift
This approach does not reduce the complexity of the flow of the parts through a
manufacturing system. It also does not focus on whether the manufacturing system can
produce products at the pace of customer demand. This costing approach leads to
departmental, mass-production-oriented plant designs. It also creates flow complexity
between plants because certain operations might be outsourced to other plants that
appear to have a lower unit cost for a particular operation or run at ‘‘optimal speeds’’
that produce excess inventory (i.e., overproduce).
Furthermore, the manufacturing engineers are forced to design either high-speed
(increase n) or highly automated (decrease DL) machines (or lines) to reduce the unit
cost ($/piece) of each operation by the unit-cost (OP1) equation. The unit-cost equation
always points to paying lower labor rates to reduce the unit cost of each manufacturing
operation.
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1234 CHAPTER 44 The Enterprise (Production Systems)

TABLE 44-1 Six Functional Requirements for a Stable System Design

FR-1 Right Quantity Produce the right quantity every shift.
FR-2 Right Mix Produce the right mix of products to meet the variety in demand.
FR-3 Right Quality Produce and ship perfect quality every day (zero defects).
FR-4 Robust Perform FR-1, FR-2, FR-3 in the face of variation in the system or
disturbances outside the system.
FR-5 Rapid Problem Solving Identify problems quickly and resolve problems in a standardized
way. Continuously improve the system.
FR-6 Safe, Ergonomically Sound Manufacture in a safe, humane (bright, clean, quiet) environment
with ergonomically sound processes.

These six FRs define the system design requirements. This system design can tolerate disturbances and
problems (FR-4) to a certain degree. When that is exceeded, the people who are part of the system design
know exactly what to do (FR-5) and respond in a standard way.
A system design defines how these requirements are achieved. System design connects the means of
achievement (the activities or work) with the functional requirements or needs that a system must meet.
These connections include the people within.
A stable system is robust (FR-4). The system is able to achieve its FRs even if variation is present. This
variation may be due to incoming defects from the supplier, process fallout within the company or machine
downtime. These sources of variation can be modeled as disturbances that affect the systems operation.
A robust system design compensates for variation up to some preestablished limit.
So, FR-5 means that people must immediately react to a problem condition with respect to achieving FRs-1
through 4. An electronics supplier for Toyota, for example, has the system design parameter of reacting to a
problem condition in just 10 s or less.
FR-6 requires that all work must be done in a safe, clean, quiet, bright, properly ventilated, and heated or
cooled environment that is ergonomically sound. The environment should be one that the system designers
themselves would work in day after day.
From an operating perspective, cost cannot be reduced until a system at least achieves the six FRs.
What are the implications of these FRs on the operational system design?
For example, in a lean manufacturing system, a cell not producing the right quantity (or at the right pace)
would immediately be identified and the problem condition for not producing at the right pace isolated. The
supervisory/leadership team would immediately invoke a countermeasure to correct this problem.
Management would not simply look at reports a day later to determine that a problem condition had occurred.
A shipment to the customer at the end of shift would not be delayed due to the problem on the line that, in
this case, could not be fixed. The right quantity would be shipped to the customer, even though the right
quantity had not been made during the shift. Yet, the team would know immediately during the day about
the problem condition and would make every effort to catch up and rectify the problem. The manufacturing
system was robust enough to meet the customer’s FRs in the presence of internal variation. This robust
design is accomplished through the design of the manufacturing and subassembly cells. In the next section,
an example of a cell will be detailed. It will be shown that a linked-cell system design is the physical
manifestation of the six FRs.

Building the part complete (either fabricated or assembled) in a single-piece flow cell
reduces flow complexity and total cost. The lean manufacturing system design approach
puts capacity in place in accordance with the system design principles of building a part
complete, rapid problem-detection time (ability to distinguish abnormal condition from
normal condition to facilitate problem identification and resolution), and system robust-
ness to produce the right quantity and right mix. These principles guide the definition of
the six functional requirements for stable system design (see Table 44-1). Manufacturing
cost cannot be reduced until the manufacturing system is designed to be stable.
System design must start with the recognition that the internal and external custom-
ers of a manufacturing system are of primary importance to a system design. Table 44-2
lists some functional requirements that Honda considered in designing its manufacturing
systems.
The FRs that a major lean automaker must take into account refers to dealing
with its two customers. Clearly, there will be conflicts among the factors, which must be
resolved through compromise by the leadership. Leadership must understand how the
system works to be able to manage it and teach others how it works. Systems comprise
relationships. System designers define the relationships with a system. The key is to rec-
ognize whether the relationships are incomplete, redundant, coupled, uncoupled, or
path dependent. Coupled relationship can never achieve the desired results.
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SECTION 44.4 Functional Areas in the Production System 1235

TABLE 44-2 Internal and External Customer Design Factors

Designing the system for the internal customer recognizes these factors:
Factor Requirement for manufacturing system design—the
manufacturing engineer
Safety Design ergonomically safe equipment to meet all safety
standards
Reliability in equipment Consistent and durable
Quality of job and plant environment Easy to operate, no dirty, unpleasant, labor-intensive work;
fail-safe designs
Maintainability Easy to maintain and simple
Robustness to variation Pull, standard work-in-process, standard work
Responsibility Feedback from customers/users involved in decision making
during implementation
Service Technical support and training materials
Continuous improving Determine normal from abnormal

Designing the system for the external customer recognizes these factors:
Factor Requirement for manufacturing system design—the
manufacturing engineer
Attractiveness or style Fit and finish appearance, new technology and features,
improvements and innovation
Quality High accuracy and precision; reliable, durable, and
maintainable
Cost/price Low initial cost, good operating cost, and long warranty
Delivery/predictable output Standardized work; mixed-model, small-lot manufacturing;
and quick startup for new models
Flexibility Model changes easy to do

& 44.4 FUNCTIONAL AREAS IN THE PRODUCTION SYSTEM

Production systems should serve and support the manufacturing processes and manu-
facturing systems by providing and transmitting information, energy, knowledge, skills,
and services to the plant areas, the company’s suppliers, and its customers. Tradition-
ally, the enterprise includes the following departments or functional areas shown sche-
matically in Figure 44-1:

Marketing and sales department.

Finance and accounting (not shown).

Manufacturing system (where goods are produced).

Manufacturing engineering (designs processes and systems to make goods).

Personnel or human resources (HR).

Research and development (not shown).

Design engineering (designs the product).

Purchasing and procurement.

Production planning and control (scheduling the manufacturing system).

Information technology.

Inventory control.

Quality control (Chapter 36) testing (Chapter 43) and inspection.

Plant engineering or maintenance.

In most companies, the people working in these areas are called staff or indirect
labor to distinguish them from the line personnel who work in the manufacturing sys-
tem. Although production systems have no standard design, they are usually arranged
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1236 CHAPTER 44 The Enterprise (Production Systems)

Design engineering

Aggregate planning Market analysis

and scheduling
Purchasing

Inventory control
Personnel procurement (ITR)

Manpower control

Labor Manpower
Quality control
supply training

Production
planning and control
Materials
vendors Materials
inventory

Plant and In-process Finish goods

Receiving
equipment inventory inventory
inspection
suppliers

Input Output Final

Service inspection
suppliers Manufacturing
system

Manufacturing In-process
engineering inspection

Plant
engineering
FIGURE 44-1 Classical
Shipping
production system showing (distribution)
inclusion of manufacturing Marketing External
system and most of the major advertising and promotion customers
Sales
functional elements.

functionally like the job shops they were initially designed to ‘‘control.’’ To connect the
functional areas, informal lines of communication (information flows) are developed.
For example, for the job shop, production planning and control is responsible for sched-
uling the workers and determining what jobs will be done, when they are started, in
what sequence, and who will do them. Because the early factories were job shops, much
of what exists in the production system evolved to control the job shop. Figure 44-2
shows the typical digital technology links for a job shop just in the areas of production
control. This network for communication can become complex. Most managerial work-
ers are in the production system, except for foremen, line supervisors, and manufactur-
ing managers.
Often, production workers view the services of quality control, production control,
and inventory control with distrust. Production workers may not understand how control
charts monitor their processes or how a computer program called materials requirement
planning system can control the work-in-process (WIP). An adversarial relationship
often develops between the people in the manufacturing system and the people in the
production system. Computerizing this function merely complicates the problem. One of
the most important differences between the lean production system and the mass-
production system is that, in the former, the key functions of the production system are
infused into the manufacturing system. The critical control functions not only serve
the manufacturing system but also become an integral operational part in the making of
the product. Thus, there is an ongoing movement to restructure the production system
into cross-functional teams, usually organized around product lines or value streams. In
this chapter, the more traditionally organized production system is presented.
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SECTION 44.4 Functional Areas in the Production System 1237

Manufacturing
Sales and engineering
Personnel Purchasing
order entry (process plans)

Long-range Short-range
Demand
capacity requirements
forecasting
planning planning

Production
planning and
control department
Shop scheduling
Inventory
monitoring and
control ?
control

Purchased
parts and raw
materials
Job shop manufacturing system
make/inspect/assembly

Receiving
raw materials Shipping
inventory In-process inventory storage facility

FIGURE 44-2 The digital technology production planning and control area of the job shop is
quite extensive.

MARKETING
The chief activities of marketing are forecasting sales, advertising, and estimating
future demand for existing products. Selling the product is the primary interest of mar-
keting. Promotional work, a highly specialized activity, involves advertising and cus-
tomer relations. Customer service is a critical function for any manufacturing company.
Thus, marketing provides information and services concerning the following:
1. Sales forecast of future demand for existing products.
2. Sales order data.
3. Customer quality requirements.
4. Customer reliability requirements.
5. New products or modifications for existing products.
6. Customer feedback on products.
7. Customer service (repair or replacement of defective products).
There is no piece of information that is more vital to a company, or harder to come
by accurately, than future demand. This information is required to effectively plan how
much should be produced and to schedule production when changes in demand are pre-
dicted. The faster the manufacturing system can respond to changes in product demand
(for both existing and new products), the better, because the quick response reduces the
need to develop accurate long-range forecasts. Short-range forecasts are more accurate
than long-range forecasts.
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1238 CHAPTER 44 The Enterprise (Production Systems)

Sales order information is central to production planning and control. Products

are either made to stock (finished-goods inventory) or made to fill customer orders.
Therefore, the orders determine how much, when, and what kinds of products or ser-
vices must be produced.
Marketing develops information on new products or new uses for old products.
This information usually goes to research and development or to product design engi-
neers. Marketing also gathers customer feedback on existing products. The marketing
department, which is in direct customer contact, gathers complaints about product
performance and communicates them to design and/or manufacturing. Often, long-
time users identify product characteristics that create problems in its use. Clearly, cus-
tomers want superior-quality products that give them reliable service. In this sense,
quality and reliability are related, but they are functionally different. Quality is con-
cerned with the prevention of defects and the conformance to specifications at the
time the product is made or sold. Reliability is concerned with the performance of the
product over time, while in service with the customer. In general, a superior-quality
product is more reliable if the design is good. Failures of products that are well made
but perform badly because of faulty design occur infrequently but are usually spectac-
ular and newsworthy.

FINANCE
Finance functions involve management of the company’s assets. For the production sys-
tem, finance provides information and services concerning the following elements:
1. Internal capital financing.
2. Budgeting.
3. Investment analysis.
Internal financing includes the review of budgets for operating sections, evaluation
of proposed capital investments for production facilities, and preparation of finan-
cial statements such as balance sheets or profit-and-loss (or income-and-expense)
statements.
Periodically, the manufacturing manager, as well as other managers, must submit
budgets of expected financial requirements and expenditures to the finance depart-
ment. The decisions made during budget preparation and the discussions of budget
adjustments have a significant impact on the manufacturing system’s operation. One of
the strongest criticisms of the American system is that decision makers know little
about manufacturing processes or systems and therefore make poor investment deci-
sions. Few MBA programs have courses in manufacturing processes or manufacturing
(lean) systems design. Very few undergraduate business students take courses in manu-
facturing processes. Managers may not really understand what the company does. How-
ever, American managers usually do have problem-solving and decision-making skills
for handling investment alternatives that require knowledge of such concepts as rate of
return, depreciation, sinking funds, payback periods, and compound interest. Managers
must have the financial expertise to understand the complex and constantly changing
tax structure, tax regulations, and tax court decisions that affect the company’s capital
investment decisions.
Therefore, an enterprise run by a financial system that does not understand manu-
facturing as a system may result in the long-term demise of a business. On the other
hand, manufacturing must take a systems viewpoint before costs can be reduced. MBA
programs and management accounting practices in industry are based on the premise
that total cost can be reduced by minimizing the cost of each operation. That is, the
traditional cost reduction approach tries to optimize bits and pieces of the system to
achieve unit cost reduction. In contrast, lean manufacturing is a system design that
meets the requirements of internal and external customers. Cost is reduced once the
requirements of these two customers are consistently met. The relationships within the
system to meet the requirements of the system are emphasized. Wasted work and pro-
cess delay are systematically removed, resulting in reduced cost.
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SECTION 44.4 Functional Areas in the Production System 1239

ACCOUNTING
The accounting department maintains the company’s financial records. Money is used
to keep score, so to speak. Accounting also provides the data needed for decision mak-
ing. For the production system, accounting provides information and services on the
following:
1. Cost accounting.
2. Special reports.
3. Data processing.
Cost-accounting information indicates the level of performance of various depart-
ments and the cost of the products being manufactured. Unit-cost data (cost of materi-
als, direct labor, and overhead) help the company to establish prices. Most American
companies view this classical equation as follows:

Unit cost þ Profit ¼ Sales price

What is wrong with this point of view? Lean manufacturing systems have a different
point of view. The first step in the transformation to lean is to recognize what it means
to become lean and to recognize why so many companies are not lean. The reason most
companies are not lean begins with how cost is viewed. There are two key points regard-
ing the view of cost:
1. Focusing only on the end results of a system (low cost) does not reduce cost. The key
is to focus on what a system must achieve and on the relationships and activities that
are necessary to achieve the desired results.
2. Reducing the unit cost for an operation does not reduce total cost. The unit-cost-
reduction equation focuses on the reduction of cost of each operation (e.g., turning,
grinding, washing, assembly) individually. The approach incorrectly focuses on
reducing each operation’s unit cost. It incorrectly assumes that total cost is reduced
by minimizing the sum of each operation’s unit cost, as if each operation is stand-
alone and unrelated to other operations.
This approach does not reduce the complexity of the flow of the parts through a
manufacturing system (i.e., the job shop). It also does not focus on whether the manu-
facturing system can produce products at the pace of customer demand. This costing
approach leads to departmental, mass-production-oriented plant designs. It also creates
flow complexity between plants because certain operations might be outsourced to
other plants that appear to have a lower unit cost for a particular operation or run at
‘‘optimal speeds’’ that produce excess inventory (i.e., overproduce).
Furthermore, the manufacturing engineers are forced to design either high-speed
or highly automated machines (or lines) to reduce the unit cost ($/piece) of each opera-
tion by the unit-cost equation. The unit-cost equation always points to paying lower
labor rates to reduce the unit cost of each manufacturing operation.
Building the part complete (either fabricated or assembled) in single-piece flow
manufacturing cells reduces flow complexity and total cost. The lean manufacturing
system design approach puts capacity in place in accordance with the system design
principles of building a part complete, rapid problem-detection time (ability to distin-
guish abnormal condition from normal condition to facilitate problem identification
and resolution), and system robustness to produce the right quantity and right mix.
So the right way to view cost is:
Sales price  Total cost=unit ¼ Profit
This simple equation tells us that the marketplace and the customer dictate the sales
price. The only way to maintain or improve profits is to reduce the total cost per unit.
To make this work, the system must be continually improved and optimized.
The purchasing (procurement) department uses manufacturing cost data in
analyzing whether a product should be manufactured by the company (in-house) or
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1240 CHAPTER 44 The Enterprise (Production Systems)

purchased from a vendor (the classic make-or-buy decision). Accounting also produces
special reports that monitor the status of the scrap and rework levels, raw-material
inventories, work-in-process inventories, finished-goods inventories, direct labor hours
and overtime, and so on. These reports provide quantitative measures of performance
(measurable parameters), which can be compared with the original plans (estimates).
These functions are largely useless unless the system design viewpoint is employed
wherein systems-level performance measures are used.
In large companies, the accounting department often controls the data-processing
equipment. In companies that use computers for problem solving instead of for record
keeping, data processing is a separate function.
& 44.5 HUMAN RESOURCES (PERSONNEL) DEPARTMENT
The human resources (HR) department (sometimes referred to a the personnel depart-
ment) typically represents workers, one of the key physical elements of the manufactur-
ing system, and provides information and services concerning the following:
1. Recruitment.
2. Training.
3. Labor relations.
4. Safety.
Although the HR department may not hire people directly, it assists the company
managers by recruiting, screening, and testing potential employees for jobs in both the
manufacturing and the production systems. It also handles the details of terminations
and department transfers.
The human resources department can also assist in training people. For example,
in the area of safety, industrial accidents are both costly and disruptive to the workforce
and production schedules. By working closely with the personnel department, manage-
ment develops and institutes programs that can minimize safety problems. If the com-
pany has a union, the HR department will handle labor relations, grievances, collective
bargaining, and problems with the shop stewards and union officials.

RESEARCH AND DEVELOPMENT

Research and development (R&D) involves invention or discovery and innovation and
their development in terms of achievable ends, such as new materials, products, processes,
tools, and techniques. Many industries show the impact of R&D on their manufacturing
systems. For example, for many years, the wood-products industry’s manufacturing system
produced only lumber products. In recent years, R&D efforts have produced new prod-
ucts and processes for making plywood, particle board (from wood chips), gardening
mulch (from bark), laminated beams and panels, and chemicals (from wood).
The people in the manufacturing system work with R&D on ideas on the manufac-
ture of new products and processes and on the implementation of new-process technology.
Modern companies understand that unique process technology can provide a significant
competitive edge in the marketplace. One of the secrets of the success of lean manufactur-
ing is the development of proprietary processes in the lean manufacturing cells. Often,
R&D also provides ideas for product improvement and may answer questions on econom-
ical uses of by-products and waste products from manufacturing operations.

ENGINEERING
Engineering functions are usually staff functions in the production system, providing
information and services on the following:
1. Product design engineering or design.
2. Manufacturing engineering.
3. Industrial engineering.
4. Plant engineering.
5. Quality engineering.
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SECTION 44.5 Human Resources (Personnel) Department 1241

Product Design Engineering. In discussing design, the relationship of design to man-
ufacturing must be reviewed. Through recognition of the systems approach, the design
engineering stage can save many dollars and much time later in manufacturing, inspec-
tion, assembly, packaging, and even distribution and marketing. Let’s examine some of
the simpler aspects of designing for manufacture or assembly, sometimes referred to as
producibility.
Traditionally, a design will often develop in three phases. In the conceptual or idea
phase, the designer conceives of an idea for a device that will accomplish some function.
This stage establishes the functional requirements that must be met by the device. The
functional requirements should be independent, and cost must be considered at this
phase. In the second, functional-design stage, the product is designed so that it will
achieve the functional requirements established in the conceptual stage. Often, more
than one prototype will be made, suggesting alternative ways in which the functions can
be met. At this stage, the designer is usually more concerned with materials than with
processes and may ignore the fact that the designed configuration cannot be produced
economically utilizing the material being considered.
The third phase of design is called production design. Although attention should
also be given to the appearance of the product at this stage, particularly if sales appeal is
important, the major emphasis is on providing a design that can be manufactured and
assembled economically. The design engineer must, of course, know that certain manu-
facturing processes and operations exist that can manufacture the desired product.
However, merely knowing that feasible processes exist is not sufficient. The designer
must also know their limitations, relative costs, and process capabilities (accuracy, tol-
erance requirements, etc.) to design for manufacture (DFM). If maximum economy is
to be achieved, the designer should be aware of the intimate relationship between
design details and production operations.
It is extremely important that the relationship between manufacturing (including
assembly) and design be given careful consideration throughout the design phase.
Changes can be made for pennies in the design room that might cost hundreds or thou-
sands of dollars later in the factory. This type of consideration should be an integral and
routine part of planning for manufacturing. Having the design engineers make a work-
ing prototype of each new model before final production drawings are made is one
approach. If the model performs in accordance with the conceptual requirements, a sec-
ond model is made using, insofar as possible, the same manufacturing and assembly
methods that will be used for actual production. Any design changes that will permit
easier and more economical production are incorporated into this second model. If the
second model meets the functional requirements of the engineering design group, it is
sent to the drafting room, where production drawings are made. This practice elimi-
nates product details that are costly to produce and the need for a lot of design changes
after a part has gone into production.
The designer plays a key role in determining what processes and equipment must
be used to manufacture and assemble the product, although often indirectly. Clearly,
one of the ways in which the designer can indirectly determine the process is through
the selection of material. For fax machines were traditionally made from zinc die cast-
ings. Suppose, however, that the designer specifies a composite chassis to be made from
fiber-reinforced plastic; then a form-molding process is needed instead of a die-casting
machine. The designer specifies a particular joining process when calling for a welded
joint. These kinds of direct relationships are pretty obvious. However, other equipment
and processes may be specified just as certainly in not so obvious ways.
One of the most common ways in which equipment and processes may be speci-
fied indirectly is through dimensional tolerances placed on a drawing. If a tolerance of
0.0002 in. is shown, a grinding operation may be specified just as definitely as if the word
grind were placed on the drawing. Designers often fail to realize this fact and specify
unnecessarily close tolerances; expensive and unnecessary operations result. However,
important part requirements may be ignored in manufacturing if dimensions and toler-
ances are poorly defined. Designers should realize that the dimensions and tolerances
they place on a drawing may have implications and results far beyond what they
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1242 CHAPTER 44 The Enterprise (Production Systems)

anticipated. Design details are directly related to the processing—making the process-
ing easy, difficult, or impossible and affecting the cost and/or quality.
Through this kind of DFM thinking, design engineering prepares the product
design for the customer. If the product is proprietary, the manufacturer is responsible
for developing and designing the product. The product design is documented with com-
ponent drawings, specifications, and a bill of materials that defines how many of each
component go into the product. Initial designs may be based on information from
R&D. Prototypes or computer simulations are often used for testing and demonstrating
product capability and ease of assembly. Manufacturing engineering should be con-
sulted on matters of producibility. In a further step sometimes referred to as value engi-
neering, engineers look for design changes that could reduce production costs while
maintaining quality or function. Manufacturing cost estimates are prepared at this point
to help determine the market situation for the product.
Upon completion of the design and fabrication of the prototype, company man-
agement reviews the design and decides whether to manufacture the item. Engineering
management must review and approve the product’s design. Many companies call this
an engineering release.
Corporate management must review and approve the product’s general suitabil-
ity. This second decision represents an authorization to produce the item. The design
process material selection factors, manufacturing considerations, materials substitu-
tions, and product liability were also discussed in Chapter 10.
Manufacturing Engineering. Manufacturing engineers (MfEs)1 address the design,
planning, and management of all manufacturing processes and systems. Using the spec-
ifications, the process of manufacturing engineering plans the manufacture of the prod-
uct, determining which machine tools, operations, workers, cutting tools, workholding
devices, and other manufacturing system components should be used to meet quality,
cost, delivery, and functional requirements. Manufacturing engineers work with the
product designers on production producibility [design for manufacturing and assembly
(DFMA)]. Once manufacturing has begun, changes to the product design can be expen-
sive. These changes are usually called ECOs—engineering change orders.
Manufacturing engineering may also design individual processes, design or mod-
ify machine tools, design tooling and specifications (workholding devices and cutting
tools and dies), specify the sequence of production processes and operations (process
planning), and solve processing problems on the plant floor.
Other duties of the MfE may include the responsibility for the design of tools, jigs,
and fixtures to produce the product. Just as the engineer who is concerned with manu-
facturing must understand the operation, functionality, and capability of machine tools
but almost never designs them, similarly he or she should have a thorough understand-
ing of the basic principles of jigs and fixtures so as to utilize them effectively. In large
companies, the design of the tooling is left to the tool design specialists. In most compa-
nies, the manufacturing engineer makes recommendations on new machine tools, cut-
ting tools, workholding devices, and material-handling equipment.
After the product is in production, manufacturing problems invariably arise, and
because of the functional design and operation of the existing system (the job shop), the
manufacturing engineer has the responsibility for solving them. A typical scenario
might entail poor-quality materials being received from a vendor and accepted (in
error). Use of these poor-quality materials causes fixtures to work improperly, produc-
ing defective parts and resulting in components that cannot be assembled. Assembly
workers, on incentive pay, will sacrifice quality for the sake of the piece rate, and the
company will ship defective products. Finding the cause of such problems is part of the
manufacturing engineer’s job and is sometimes called troubleshooting or firefighting.
The actual causes of problems may not be eliminated because of the pressure to keep
on schedule. Because the causes are not eliminated, the defects keep coming back
(in greater numbers) when material shortages occur in the system. Manufacturing engi-
1
Authors’ designation for manufacturing engineers to distinguish them from mechanical engineers, who use
the abbreviation ME.
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SECTION 44.5 Human Resources (Personnel) Department 1243

neers can find themselves responsible for a system that cannot possibly be controlled,
because of its functional design.
Industrial Engineering. In contrast to other engineers, industrial engineers receive
education and training in probability and statistics, engineering economy, and quality
engineering, so they are usually responsible for determining the number of workers,
machines, and materials needed on the plant floor to turn the ideas developed in R&D,
marketing, and procurement into real products. Industrial engineers look for the
‘‘better way’’ to produce products and services under uncertain conditions and con-
straints, such as the nature of the plant, materials, machines on hand, personnel, and
available capital. The industrial engineering department is responsible for many ele-
ments of the manufacturing system and the production system, including some that
overlap with those of the manufacturing engineer. These include the following:
1. Production methods analysis.
2. Work measurement (time study, motion study, and time standards).
3. Setup reduction (SMED).
4. Safety and ergonomics.
5. Manufacturing system design (factory design), including material handling.
6. Quality engineering (which may be a separate functional group) and Six Sigma.
7. Plant maintenance information.
The modern industrial engineering department—which maybe called the Six
Sigma or lean production department—determines, standardizes, and analyzes the
methods used to produce particular products and services. Motion-study principles, vid-
eotapes and movies, digital simulation, and other techniques are used to determine how
a product or service can best be produced and to develop efficient work methods. In
other words, the sequence of activities as well as the machines, tools, and materials to
be used must all be specified in the job shop environment.
After standardization of the job’s content, information is obtained on how much
time is required to do the job. This information is based on the time required for an
average person to produce a given product or service, using average effort under nor-
mal working conditions. Time standards and studies are used to develop standard times
for the standard methods. The method for a particular job can be analyzed using an
operations analysis sheet, discussed in Chapter 2.
Designing the plant layout and the associated materials-handling equipment falls
to industrial engineering. Plant layout (factory designs) that reduce manufacturing
costs with minimized materials handling and inventory are fundamental to integrated
manufacturing systems.
The profession of the industrial engineer has always been tied to industry. Before
there were factories, craftsmen made tools, wagons, wheels, and horseshoes on a one-
of-a-kind basis. As we moved into the age of iron and steel, it became necessary to pro-
vide power to the metal-cutting machines, and this produced the first factories with
water-powered machine tools (circa 1860). In this era, the concept of interchangeable
parts evolved. This factory design became known as the job shop, or the American
Armory System, to the historian, and it represented the economy of collected processes.
The second factory design was the Ford production system with its moving assembly
line and standardization of measurements leading to true interchangeable parts. The
factory design was called the flow show, and around this time (1913), the first IEs
emerged out of mechanical engineering to measure work and devise better ways to
organize and operate the factory. Over the next 60 yr, the flow shop merged to create
the mass-production system with its division of labor, producing large volumes at low
unit cost. Thus, economy of scale was born. In the late 1970s, a third factory design
evolved based on the work of Taiichi Ohno and the Toyota Motor Company. This
linked-cell factory design produces goods using the economy of scope. It is now known
as the lean production system, a flexible system producing small lots at lot-unit cost with
superior quality and short lead times. The lean production system has spread around
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1244 CHAPTER 44 The Enterprise (Production Systems)

TABLE 44-3 Lean Engineering Tools

The lean engineer is an IE who knows lean manufacturing, has Six Sigma capabilities with a
green (zero waste) mentality.

Lean Tools Six Sigma Tools

Value stream mapping
Green belt requirements

Cellular manufacturingz
Performance measurement/metrics

JIT/Total quality control
Problem solving

Teams
Process capability analysis

Rapid Setup (SMED)
Hypothesis testing

Kanban (pull) and supply chain organ.
Design of experiments

Environmentally sound
Gage R&R

Leveling, Balancing, Sequencing
Reliability

5S and 5 why methods (Jidoka)
ISO 9000 & MBNQA

Autonomation
Quality Function Deployment

Pokayokes and defect prevention
Regression analysis

Waste Elimination (7 wastes)
Root cause analysis

Total Productive Maintenance (TPM)
Variation reduction

One-piece flow (Single-piece flow)

Standard work Seven Quality Tools

Zero waste to landfill
Process mapping

Visual management
Checksheets

Self and serial inspection
Pareto analysis

Leveling final assembly
Cause and effect diagram analysis

Takt Time (cycle time for final assembly)
Scatter diagrams

Line side storage (POUS)
Histograms and Frequency diagrams

Kaizen events for continuous improvement
Variables and attributes control charts with
Process capability analysis

IE Foundation
Process mapping; Production and inventory control; Quality control; Engineering economics; Operation
research; Simulation methods; Human factors; Ergonomics; Probability and statistics; Manufacturing
processes.
z
Cellular Manufacturing involves machine tool design, work holder (tool) design, process design, decoupler design,
poha-yoke design and cutting tool selection.

the world just like the other two factory designs. Evolving out of the revolution is the
profession of lean engineering and a new IE call the lean engineer, who knows the lean
tools (see Table 44-3) along with Six Sigma tools and applies them with a green (zero
waste) mentality. This engineer must redesign the mass system into the lean system.
See Chapters 2 and 29 for a more detailed discussion.
Plant Engineering. Plant engineering, another functional engineering group within
the classical production system, is responsible for in-plant construction and mainte-
nance, meaning machine tool and equipment repair; heating and air-conditioning sys-
tem maintenance; and repair of any other mechanical, hydraulic, or electrical problems
not necessarily related to the manufacturing system. For example, suppose that a new
machine tool were being purchased. Plant engineers would be responsible for seeing to
the installation of the machine.
Quality Engineering. Quality engineering is responsible for ensuring that the quality
of the product and its components meets the standards specified by the designer before,
during, and after manufacturing (Figure 44-3). In-process quality control inspections
are performed at various points throughout the manufacturing system. In the mass-pro-
duction system, materials and parts purchased from outside suppliers are inspected
when they are received. The acceptable quality level (AQL) of this incoming material
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SECTION 44.5 Human Resources (Personnel) Department 1245

Scarp

Vendors
Rework
Reject
Reject

Manufacturing Final Accept

Accept Material
Receiving system product Customer
AQL inputs
inspection QC
(sample 2%
Purchased
goods)
parts
Inprocess
QC

QC reports
Customer reports Contracts
FIGURE 44-3 Classical quality Quality
Techonology Standards
control system typically used in Management
the job shop. Costs Drawings

is traditionally around 2%, which means that the company is willing to accept 2% defec-
tives from their vendors. Historically, many companies have believed that it costs too
much to reduce defectives below this level. In recent years, goals of perfection, zero
defects, and defect rates of parts per million have been the new way of life in the world
of quality. Quality is designed into the product and the processes. Parts fabricated
inside the company may be inspected many times during processing. Final inspection
and testing of the finished product are performed to determine overall functional per-
formance and appearance quality. See Chapters 35 and 36 for additional discussions on
inspection and quality.

PROCUREMENT AND PURCHASING

The procurement and purchasing functions in a company involve primarily the acqui-
sition of specified materials, equipment, services, and supplies of the proper quality, in
the correct quantities, at the best prices, and at the correct time. Many departments are
involved in procurement, purchasing, manufacturing, marketing, finance, accounting,
research and development, and engineering. For production systems, procurement pro-
vides information on vendors, prices, new products, and materials and determines the
delivery schedule for purchased items.

PRODUCTION PLANNING AND CONTROL

Production planning translates sales into forecasts by part number. The authority to
manufacture the product is translated into a master production schedule (MPS), a key
planning document specifying the products to be manufactured, the quantity to be pro-
duced, and the delivery date to the customer (Figure 44-4). The master schedule is con-
verted into purchase orders for raw materials, orders for components from outside
vendors, and production schedules for parts made in the manufacturing system.
Production control personnel try to determine where the parts need to go, when they
need to go, and how many need to go (lot size), so they develop the schedule to ensure
that delivery of the final product meets the customer demand. Because of the complex-
ity of the mass-production system and the job shop, production is not controlled very
well; therefore, many other control functions are needed.
The scheduling periods used in the master schedule are usually months. The mas-
ter schedule must take into account the production capacity of the plant (how much can
be built in a given period of time). The capacity of a job shop is tremendously variable
and is not well controlled. Because of this characteristic, larger quantities of products
are often requested in violation of the master schedule.
Based on the master schedule, individual components and subassemblies that
make up each product are planned. Raw materials are ordered to make the various
components. Purchased parts are ordered from vendors. Planning is a must if the
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1246 CHAPTER 44 The Enterprise (Production Systems)

Aggregate
production plan
Strategic planning Sale orders
Forecast of
and due dates
independent
promised
demand
Business plan
• Objectives • Finished-goods safety stock
• Plant and manpower • Economic production factors
• Materials • Engineering changes
• Cash • Final assembly schedule

Planning Rough capacity

Master production
bills of planning
schedule (MPS)
material confirm key (confirm capacity)
material
availability

Material
End item Planned order by MRP requirements
inventory generation planning

FIGURE 44-4 Master

production schedule indicates Purchased Subassembly Detailed
Other
what products to produce and inventory
parts component capacity
when the products are needed. requirements schedules planning

components and assemblies are to arrive when needed, not months before or, even
worse, days or weeks late. Many companies use a computer software technique called
material requirements planning, which is discussed later in this chapter.
The next task is production scheduling, in which start dates and due dates are
assigned for the various components to be processed through the factory. Many factors
make the scheduling job complex. The number of individual parts can be in the thou-
sands. Each part seems to have its own individual process route through the plant. Parts
are often routed through dozens of separate machines in many different departments.
The number of machines in the shop is limited, and the machines are different; per-
form different operations; and have different features, capacities, and capabilities. In effect,
the orders compete with each other for machines. In addition to these factors, parts become
defective during the processing, cycle times vary, machines break down, and operators
expand job times to fit the time available. All these factors destroy the validity of the plan-
ning schedule and require (in the classical system) huge amounts of resources (lots of people
and paperwork) to manage all the exceptions. Chaos reigns supreme in the large job shop.
Dispatching is a production planning and control function requiring voluminous
paperwork wherein individual orders comprised of order tickets, route sheets, part
drawings, and job instructions are sent to the machine operators or foremen.
Expediters find lost or late materials by tracking the progress of the order against
the production schedule. To speed up late orders, the expediter may rearrange the
order-processing sequence for a certain machine, coax the foreman to tear down
one setup so that another order can be run, or hand-carry parts from one department to
the next just to keep production going. Obviously, the master schedule is disrupted. The
size of the production control department and the number of expediters in a company is
an informal measure of the level of chaos and inefficiency in the production control
system. Much of this chaos is eliminated in the lean production system. The inventory
(WIP) is held in the kanban links between the cells and is maintained at a level to cover
the expected and unexpected problems. In the lean production factory, only final
assembly is scheduled. Upstream processes produce parts based on consumption from
upstream cells or suppliers, receiving information via the kanban system.

INVENTORY CONTROL
The lifeblood of a manufacturing system is its inventory. Inventory represents a major
portion of a manufacturing facility’s valuable assets (i.e., capital). There are three kinds
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SECTION 44.5 Human Resources (Personnel) Department 1247

of inventory: raw materials, work-in-process, and finished goods. For most companies,
however, excess inventory represents idle investment dollars and wasted storage space.
Even though the cost of carrying large inventories is substantial, many reasons are given
for having them:
1. Fluctuation in demand and/or supply.
2. Protection against process breakdowns or stopping production due to a shortage.
3. Replacement parts for lost batches or defective lots.
4. Overproduction in anticipation of future demand.
5. Protection from defective parts.
6. Goods in transport.
7. Just in case they are needed.
8. Quantity purchasing.
Inventory control governs finished goods, raw materials, purchased components,
and work-in-process within the factory. The idea is to achieve a balance between too
little inventory (with possible stockouts of raw materials) and too much inventory (with
investments and storage space tied up).
The utilization of certain parts is dependent on the demand for other parts. For
example, in the building of cars, the demand for tires depends on how many cars are
built. While demand for cars must still be estimated, the demand for tires is known,
based on the demand for cars.
These two types of demand are categorized as independent and dependent. The
first must be ‘‘guessed’’ (forecasted). The second can be computed for scheduling
purposes but not for plant production control. The basis for these computations is a
record of the relationship between the independent demand item (cars) and its
dependent components (tires, horn, windows). This record is the bill of materials
(see Chapter 2).
The product, when finished, is either shipped directly to the customer or stocked
in inventory. Inventory control is used to ensure that enough products of each type are
available to satisfy customer demand. However, competing with this objective is the
company’s desire to minimize its financial investment in inventory. Inventory control
interfaces with marketing and production control because coordination must exist
among the various products’ sales, production, and inventory levels. Although none of
these three functions can operate effectively without information about what the others
are doing, this information is often missing or out of date. The production planning and
control department often does inventory control.
The requirements for a total inventory control system are that it perform the fol-
lowing functions:
1. Analyze and plan inventory requirements.
2. Purchase raw materials and component parts in the amounts needed according to
scheduled usage.
3. Receive and record the receipt of purchased materials.
4. Provide adequate facilities to store raw material, work-in-process, and finished-
goods inventory.
5. Maintain accurate records of inventories on hand and on order.
6. Install realistic controls for materials in stores and for the assuance of materials,
parts, and supplies when needed.
A good inventory control system provides the correct quantity and quality of material
at the correct time. This system also maintains accurate records/control of these
materials.

Inventory Models. In 1915, Ford Harris and R.H. Wilson derived, independently, the
simple lot-size formula. This model states (see Figure 44-5) that
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1248 CHAPTER 44 The Enterprise (Production Systems)

TC
QH
2

Cost
RP
RC
FIGURE 44-5 The economic Q
order quantity (EOQ) model
minimizes the total (annual) cost EOQ
of inventory. Order quantity Q

Total annual cost ¼ Purchase cost þ Order cost þ Holding cost

RC QiP
TC ¼ RP þ þ ð44-1Þ
Q 2
where

R ¼ annual demand (units)

P ¼ unit cost of an item
C ¼ ordering cost per order
H ¼ iP ¼ holding cost per unit per year
Q ¼ lot size or order quantity (units) or conveyance quantity between
departments in a job shop
i ¼ annual holding cost as a fraction of unit cost

To find the value of Q that minimizes the total cost, use

dðTCÞ RC iP
¼ 0 þ ¼0
dQ Q 2
RC iP
2
¼ ð44-2Þ
Q 2
rffiffiffiffiffiffiffiffiffiffi
2RC
Q ¼
iP
The model, called the economic order quantity model, has also been extended to cover
economic production quantity by letting C equal the setup cost. The model assumes that
the setup cost is fixed when, in fact, the setup cost can often be significantly reduced.
Reduction in the setup cost results in a reduction in lot size. The best lot size is then the
smallest lot size that permits a smoothly running manufacturing system.
Many other models have been developed for the inventory process, and many
models and systems have since evolved for stock or inventory replenishment, including
the reorder point model. Figure 44-6 illustrates the relationship between lead time (L),
order size (Q), safety stock (SS), expected demand rate (D), and the reorder point
(ROP). The reorder point is based on how long it takes to obtain parts (lead time) and
how many parts will be used up during this (lead) time.
One of the problems with the reorder point model is the dependence of the model
on usage. The model shows that parts are used linearly. In fact, in batch processing,
utilization of parts is usually uneven, with large spikes or peaks. That is, 200 of an item
may be used in week 2, zero in weeks 3 through 9, and 200 again in week 10. The reorder
point model would cause the system to run out of parts in week 2, precipitating a rush
order for parts that would remain on the shelf unnecessarily until week 10. The model
also breaks down if the average utilization changes. To use the model effectively,
demand must be constantly recalculated.
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SECTION 44.5 Human Resources (Personnel) Department 1249

Quantity
Expected

Inventory level
demand

(No. of units)
Order
rate, D
quantity Us
ag
e Maximum
Order cu
rv demand
point e
rate
ROP
Usage
during
lead time

Safety
SS
stock

Lead time
Time
To find ROP
1. Establish lead time.
FIGURE 44-6 Classical 2. Back lead time off from order receipt time.
inventory model for ROP (reorder 3. Go to usage curve.
point) methods. 4. Find order pont on vertical scale.

Manufacturing Resource Planning. To control inventory within the mass system,

a computerized system called material requirements planning (mrp) was developed
(Figure 44-7). Given a schedule showing the expected demand of independent demand
items (a master production schedule) and given the relationship between independent
and dependent demand items (bills of materials), mrp will calculate the quantities of
dependent demand items needed and when they will be needed.

Firm Forecast
orders of
from demand
customers

Master production schedule (MPS)

(Indicates products to produce and
when they are needed

Engineering Bill Inventory status records

design of Parts (Contains on-hand balances, open
changes materials explosion orders, lot sizes, lead times,
(ECOs) (BOM) and safety stocks)

Shop Inventory
orders transactions
Purchase
orders
Material requirements planning Capacity
(Explodes BOM per MPS requirements, planning
nets out inventory levels, offsets
lead times, and issues reports on
1. what to order and how many, Vendors Is
capacity No
2. when to order, Suppliers available?
3. what orders to expedits,
deexpedite, or cancel)
Yes
Work orders
to factory

FIGURE 44-7 Material

requirements planning is a Raw materials Manufacturing
Product
storage system
computerized inventory system
for the job shop.
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1250 CHAPTER 44 The Enterprise (Production Systems)

The potential value of this concept is significant. Suppose that a company has 100
finished goods items, 400 assemblies and subassemblies, and 1000 raw-material items.
Using statistical stock replenishment, it will need to forecast the average demand for
1500 items. Many of these items will have ‘‘lumpy’’ demand, which will cause the stock-
out/expedite/overstock cycle discussed earlier. With mrp, a master production schedule
(MPS) for 100 items must be maintained; the other 1400 items will have their exact
demand computed for every period.
Almost at the same time that mrp was developed, practitioners began to expand the
concept’s scope. Just as bills of materials could establish the usage of dependent materi-
als, other records could be developed to tell the dependent requirements of labor hours,
machine hours, capital, shipping containers—in fact any of the resources required to sup-
port the job shop-flow shop systems. Material requirements planning has become manu-
facturing resource planning (MRP). More recently, management consultants have been
peddling enterprise resource planning (ERP) software, which is responsible for final
scheduling of production, dispatching, and releasing purchase orders. It will also maintain
stock status, monitor output and scrap levels, and compare performance against the plan.
MRP and mrp are good planning techniques. There is no inherent capability to
control and replan. Subsequent sophistication of MRP by adding feedback of actual
results has led to closed-loop manufacturing resource planning (MRP II). Shop floor
control and vendor control systems have been added to the existing software so that
revisions of dates and quantities can be taken into account in the next planning cycle.
The job shop is a complex dynamic manufacturing system. Inventory is its life-
blood. MRP is an attempt to control inventory using computers. Unfortunately, the
MRP systems that have evolved are so complex that very few people in the companies
that use them really understand them. Would you trust a system you did not under-
stand? What is the value of an inventory control system that the majority of users do
not comprehend? What do you do when things go wrong?
What makes a good production/inventory control system? First, everyone who uses
it must understand how it works. It must have accurate information and make accurate
predictions or forecasts. The users of the system must act on the information that the sys-
tem produces. But a word of caution: this inventory control system is not usable in the job
shop. It is meant for a new manufacturing system design (MSD) called lean production.

& KEY WORDS

acceptable quality economic order quantity
level (AQL) model
accounting engineering
axiomatic design engineering change
bill of materials order (ECO)
closed-loop manufacturing engineering release
resource planning enterprise
(MRP II) enterprise resource
coupled design planning (ERP)
customers (internal and enterprise system
external) design (ESD)
design engineering expediters
design for finance
manufacture (DFM) firefighting
design for manufacturing functional
and assembly (DFMA) requirement (FR)
design parameter (DP) human resources (HR)
digital technology (DT) indirect labor
dispatching industrial engineering
inventory
inventory control procurement
lean production production control
line personnel production planning
maintenance production scheduling
make-or-buy decision plant engineering
manufacturing engineering producibility
manufacturing processes production system
manufacturing resource purchasing
planning (MRP) quality control/
manufacturing systems engineering
marketing reorder point model
mass production system research and
master production development (R&D)
schedule (MPS) simple lot-size formula
material requirements staff
planning (mrp) stockout
operations analysis troubleshooting
sheet uncoupled design
optimization value engineering
path dependency work-in-process (WIP)
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& REVIEW QUESTIONS
1. How is the traditional production system organized?
2. The university has a football team (or other athletic team).
Which part of the athletic department represents the produc-
tion system?
3. How has DT changed your life (how do you use it)?
4. What are the major functional elements or departmental
areas of the production system?
5. What is the master production schedule (MPS)?
6. What is MRP, and how is it related (tied to) the MPS?
7. What is the functional objective of production control?
8. What is the function of inventory control?
9. How are inventory levels controlled in the job shop?
10. What is the difference between production control and
inventory control?
11. How does the design of the product influence the design of
the manufacturing system, including assembly and the pro-
duction system?
& PROBLEMS
1. Compare your college or university to a manufacturing/
production system. What are the processes in this manufac-
turing system? What is the product? Who runs the pro-
cesses? Who is the internal customer (the machine tool
operator) in the academic job shop?
2. The classic manufacturing systems are controlled using mrp
and MRP II, ERP, or other such programs for production
Problems 1251
12. Discuss this statement: ‘‘Software (like mrp) can be as costly
to design and develop as hardware and will require long
production runs to recover, even though these costs may be
hidden in the overhead costs.’’
13. Explain how function dictates design with respect to the
design of footwear. Use examples of different kinds of foot-
wear (shoes, sandals, high heels, boots, etc.) to emphasize
your points. For example, cowboy boots have pointed toes so
that they slip into the stirrups easily and high heels to keep
the foot in the stirrup.
14. Most companies, when computing or estimating costs for a
job, will add in an overhead cost, often tying that cost to
some direct cost, such as direct labor. What costs are usually
included in this overhead cost?
15. In lean manufacturing system designs (aka the Toyota produc-
tion system), the quality control is integrated into the design of
the lean shop. How is quality controlled in the job shop?
and inventory control. Explain what these systems are and
why they are called push systems. (Note: This question does
not ask how MRP systems work to control production and/
or inventory, because very few people ever really under-
stand it anyway!)
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