Operations Management Fundamentals

SnNo Topic Ref Chap Slide

1 Introduction to Operations Research 2A 3
2 Project Management 3 Separate
3 Strategic Design of Products & Processes 4, 6, 9, 9A 16
4 Planning and Scheduling 16, 18, 19 81
5 Lean Operations 12, 20 104

2
Introduction to Operations Research

3
A Simple Linear Programming Problem
Banana Leaf Restaurant
Product Unit Profit Resources Required/Unit (mins)
(Rupees) Kitchen Cook
Idly 5 3 4
Dosa 10 5 3
Resource Availability 60 60

From restaurant’s viewpoint what is the best product-mix?

4
A Simple Integer Programming Problem
Warehouse Location
Markets-> 1 2 3 4 5
Demand 15 25 10 15 20
Unit Cost of delivery from warehouse located at
2 15 10 20 15 25
5 15 25 15 20 10

Where should the warehouse be located?

5
Popular Operations Research Problems
1. Linear Programming Problem
 General LPPs
 Transportation Problem
 Assignment Problem
 Scheduling and Network Optimization Problems
2. Integer Programming Problems
3. Mixed Integer Programming Problems
4. Non-Linear Programming Problems
5. Dynamic Programming Problems

6
Elements of an OR Problem
1. Decision Variables
2. Objective Function
3. Constraints

7
Banana Leaf Problem: Formulation
Let,
x1 – No. of Idlies to be produced x2 – No. of Dosas to be produced
Z – Profit

Objective Function : Max Z = 5x1 + 10x2

Subject to :
(1) 3 x1 + 5 x2 <= 60 Kitchen
(2) 4 x1 + 3 x2 <= 60 Cook
(3) x1 >= 0 x2 >= 0 Non-negativity

Optimal solution: Z = 120 with x1 = 0, x2 = 12

8
Banana Leaf Problem: Graphical Solution
20

18

16

14
Con 1
12
Con 2
x2

10 Z = 100
Z = 110
8
Z = 120
6

0
0 5 10 15 20
x1

9
Banana Leaf Problem: Solution
Objective Value: 120
Variable Value Coefficient allowable range to stay optimal
Current Minimum Maximum
x1 0 5 -infin 6
x2 12 10 8.33 infin
Constraint Slack/Surplus Shadow Price Minimum Maximum
(1) 60 0 2 0 100
(2) 60 24 0 36 infin

10
Sensitivity Analysis
 Objective function coefficients need not be certain, could be in a
range
 Need to produce all products?
 Opportunity cost of resources?

Typical Sensitivity Analyses:

1. Coefficient allowable range for objective function to stay optimal
2. Reduced costs
3. Shadow prices and their range

11
 Refinery Optimization Problem: Question
Crude A B C Demand
Price/Ltr
(Ltrs)
Cost/brl (Crude+Refining) 2700 2400 2100
Distillate Outputs (ltrs/brl)
Petrol 55 45 35 30 41000
Diesel 30 35 50 25 40000
Kerosene 45 35 30 20 30000
Others 10 20 15 15 15000
Total 140 135 130
Total refining capacity = 1000 Barrels
What is the optimum mix of crude that the refinery should refine in order to maximize
its profit?

12
 Refinery Optimization Problem: Solution
Crude A B C Demand
Price/Ltr
(Ltrs)
Cost/brl (Crude+Refining) 2700 2400 2100
Rev/brl 3450 3225 3125
Profit/brl 750 825 1025
Distillate Outputs (ltrs/brl)
Petrol 55 45 35 30 41000
Diesel 30 35 50 25 40000
Kerosene 45 35 30 20 30000
Others 10 20 15 15 15000
Total 140 135 130
Total refining capacity = 1000 Barrels
What is the optimum mix of crude that the refinery should refine in order to maximize
its profit?
13
Refinery Optimization Problem: Solution
Let, Z indicate the profit
Objective Function : Max Z = 750A + 825B + 1025C
Subject to :
(1) 55A + 45B + 35C >= 41000 Demand of petrol
(2) 30A + 35B + 50C >= 40000 Demand of diesel
(3) 45A + 35B + 30C >= 30000 Demand of kerosene
(4) 10A + 20B + 15C >= 15000 Demand of others
(5) A + B + C <= 1000 Refinery capacity constraint
(6) A, B, C >= 0 Non-negativity constraints

Optimal solution: Z = 930,000 with A = 200, B = 200 and C = 600

14
Refinery Optimization Problem: Solution
Objective Value: 930,000
Variable Value Coefficient allowable range to stay optimal
Current Minimum Maximum
Crude A 200.00 750.00 625.00 1225.00
Crude B 200.00 825.00 -infinite 887.50
Crude C 600.00 1025.00 900.00 infinite
Constraint Slack/Surplus Shadow Price Minimum Maximum
(1) 41000 0 -15.83 35000.00 43571.43
(2) 40000 3000 -0.00 -infinite 43000.00
(3) 30000 4000 -0.00 -infinite 34000.00
(4) 15000 0 -8.33 13500.00 18000.00
(5) 1000 0 1704.17 970.25 1063.16

15
Strategic Design of Products &
Processes

16
World Class Business Organisations
What makes a manufacturing or service firm WORLD CLASS?

It is one that competes on

 cost
 quality
 delivery and
 flexibility

Examples:
Global: Dell Computers, Singapore Airlines, Toyota, Wal-Mart
Indian: Asian Paints, HLL, IT firms, ICICI Bank, Airtel,
Reliance Industries, L&T

17
R&D Expenses: A Comparison
Gross domestic expenditure on R&D (GERD) as % of
GDP (Sources: OECD STI Outlook '08, '10, UNESCO Science Report
2010)
4

USA
Japan
2
OECD
EU27
China
1 India

0
1996 1998 2000 2002 2004 2006 2008
Year

19
 GERD leaders in 2006
Rank Nation GERD (% of GDP)
Total Business Government
1. Israel 4.65 3.64 1.01
2. Sweden 3.73 2.79 0.89
3. Finland 3.45 2.46 0.87
4. Japan 3.39 2.62 0.55
5. Korea 3.23 2.49 0.74
Total OECD 2.26 1.56 0.66
EU-27 1.76 1.11 0.61
China 1.42 1.01 0.35
India 0.71 0.11 0.60
Source: OECD ST&I Outlook 2008
ASCI Study: 80% of Indian firms reported zero spend on R&D

20
 Patents per million population
Rank Nation Patents (per mi. pop.)
1995 2005 Growth (Annl: 1997-2004)
1. Japan 75.31 117.21 6%
2. Switzerland 103.82 107.56 4%
3. Sweden 83.66 81.01 -1%
4. Germany 58.53 76.38 4%
5. Netherlands 47.98 66.94 6%
OECD 31.95 42.97 3%
EU-27 31.18 37.52 3%
China 0.02 0.27 44%
India 0.01 0.12 43%
Source: OECD ST&I Outlook 2008

21
 Scientific articles per million population
Rank Nation Articles (per mi. pop.) Country share of
1995 2005 world (in 2005)
1. Switzerland 1019.6 1166.4 1.2%
2. Sweden 1052.1 1108.7 1.4%
3. Denmark 827.9 930.1 0.7%
4. Finland 798.2 917.2 0.7%
5. Israel 1035.4 910.4 0.9%
OECD 450.4 493.3 81.4%
EU-27 410.3 477.4 33.1%
China 7.5 31.8 5.9%
India 10.3 13.3 2.1%
Source: OECD ST&I Outlook 2008

22
R&D personnel per thousand employed (2006)
Rank Nation Researchers Others Per capita GDP (PPP)
(IMF 2008)
1. Finland 16.6 7.3 $ 36,320
2. Sweden 12.6 5.2 $ 37,334
3. Japan 11.1 3.5 $ 34,116
4. New Zealand 10.5 3.6 $ 27,083
5. Denmark 10.2 5.9 $ 37,304
China 1.6 0.4 $ 5,970
India 0.3 - $ 2,780
Source: OECD ST&I Outlook 2008

23
 Innovations and the society
 Innovations drive productivity and wages

 Innovations create new products and services (increases choice to buyers)

 above two help expand consumption

 thus, innovations a must for strong economic growth, international stature

 transformation to a knowledge society

 increases share of skilled labour force in total labour force

 “employment” vis-à-vis “quality employment”

 a more egalitarian society?

 a more entrepreneurial society?

24
 Innovations and the firm
 response to competitive markets
 cutting costs (through process innovations)
 increasing variety (through product innovations)
 innovations lead to greater economic stability
 lesser competitive pressures
 greater uniqueness in products/processes
 lesser monotony in jobs
 change is a day-to-day event in innovative firms
 greater job stability and satisfaction?
 annual targets versus daily targets?
 employee retention

25
 Innovation Types
 Product

– Process (there is always a better way of doing things)

– Marketing

– Organizational

26
Sustaining vs.disruptive
innovation
Sustaining:
focus on better product that can be sold with greater margin

Disruptive:
brings to the market simpler, more convenient, cheaper product that
at the beginning appeals to new or unattractive customers

27
New market disruption
 products compete with non-consumption.
 more affordable and simpler to use by new users (e.g.: PC,
transistor radio, moped, immersion rod)
 as their performance improves, they become good enough for
the mainstream market with all the consequences
 there has to be sufficient number of less skilled or less affluent
people who can own and use the technology that was formerly
available only to more skilled or more affluent people

28
Low-end disruption
 focuses on the low end of the mainstream market (mini-mills,
discount retail stores, Korean/Chinese/Indian car makers)
 there are customers happy to purchase a cheaper product with less
(but good enough) performance
 it is possible to create a business model making money at lower
price per unit sold.

29
Design and Quality Management

30
Product or Service Design Activities
 Translate customer wants and needs into product and
service requirements
 Refine existing products and services
 Develop new products and services
 Formulate quality goals
 Formulate cost targets
 Construct and test prototypes
 Document specifications

31
 Design Management
 Major factors in design strategy
 Cost
 Quality
 Time-to-market
 Customer satisfaction
 Competitive advantage
 All these factors are strongly inter-linked
 Close to 90% of eventual cost incurred in producing a
product/service is decided before production starts (i.e. in design
phase)
 A poor design process could imply high eventual cost incurred in
production, low quality, high time-to-market, low customer
satisfaction and low competitive advantage
 Significant proportion of new product/service launches are
unsuccessful 32
Standardization
 Standardization
 Extent to which there is an absence of variety in a product,
service or process
 Standardized products are immediately available to customers
 Standardization types
 Part standardization
 Product standardization
 Process standardization
 Procurement standardization

33
Advantages of Standardization
 Fewer parts to deal with in inventory & manufacturing
 Design costs are generally lower
 Reduced training costs and time
 More routine purchasing, handling, and inspection procedures
 Orders can be fulfilled from inventory
 Opportunities for long production runs and automation
 Need for fewer parts justifies increased expenditures on perfecting
designs and improving quality control procedures.

34
Disadvantages of Standardization

 Designs may be frozen with too many imperfections

remaining.
 High cost of design changes increases resistance to
improvements.
 Decreased variety results in less consumer appeal.

35
Mass Customization
 A strategy of producing standardized goods or services,
but incorporating some degree degree of customization
 Delayed differentiation
 Modular design

36
Delayed Differentiation
 Producing but not quite completing a product or service until
customer preferences or specifications are known

37
Modular Design
Modular design is a form of standardization in which component parts
are subdivided into modules that are easily replaced or interchanged.
 components could change without causing any change in other
components
 modular design enables to assemble system more easily, from
“plug and play” components whose interfaces are well
understood
 modular architecture makes it easy for many companies to
innovate components without worrying about possible impact on
other parts of the system
 modular design allows:
 easier diagnosis and remedy of failures
 easier repair and replacement
 simplification of manufacturing and assembly

38
Modular Design
Case 1: No Modularity
Keyboards and Monitors are designed separately for each
computer and design does not allow inter-changeability.
No. of products = 8
No. of parts = 8 Computers + 8 Keyboards + 8 Monitors = 24

Case 2: Modular Design

Interface between Computer and accessories like keyboard and
monitor is standardised
No. of products: 8
No. of parts = 8 Computers + 1 Keyboard + 1 Monitor = 10

39
 Modular Design Permits
1. High addition in product variety without substantial increase in
number of parts
2. Easiness in assembly operations
3. Better materials management
4. Better product quality
5. Better product maintenance
6. Better spare parts management

The scope of modular design is dictated by the product architecture

40
Product architecture

Hierarchy of connections between disparate functions

within a system

 Integral architecture
 Modular architecture

41
Integral Architecture

System

Component Component
A B

Component
C

42
Integral Architecture
 changing one component requires changes in all other parts of the
system, because the relationships between the parts are not clearly
understood
 can be best managed through internal processes

43
Modular Architecture

System

Component Component
A B

Component
C

44
 Robust Design
Maintaining consistent performance over a range of conditions,
regardless of variations in the way:

- product is manufactured

- product is used

45
Shorten Time to Market
Longer the time to market:
 higher the project cost
 higher the production cost of product
 greater the likelihood of customer disinterest
 lesser the chance of it being hidden from competitors
 lesser probability of successful product launch

Strategies to shorten time to market:

• Use standardized components and modular design
• Use technology
• Use concurrent engineering

46
 The Process Life Cycle
 Manufacturing cost/unit

Job shop Batch Assembly Continuous

line Flow

Start-up Rapid growth Maturation Commodity

Time 

47
What is Quality?

Fitness for use (Juran)

Conformance to requirements (Crossby)

Doing it right the first time, every time (Japanese)

Customer’s perception of the degree to which the product or

service meets his or her expectations

No business process in the world is error free. Better quality

essentially refers to lesser probability of failing/falling short on
customer expectations.

48
Quality and Profitability
Superior quality implies
 Stronger customer loyalty
 More repeat purchases
 Lesser vulnerability to price wars
 Better margins?

49
 Quality, Productivity and Profitability
Sales = 100, Unit Revenue = 100, Unit Scrap Value = 10
Lower Quality Higher Quality
a. Defect Rate 10% 1%

b. Unit Prdtn Cost 78 85

c. Saleable units (for 10000 production)
d. Scrap units (for 10000 production)
e. Revenue (for 10000 production)
f. Production Cost (b x 10000)
g. Surplus (e – f)
h. Surplus/Unit Sale (g / c)
i. Surplus/Unit Production (g / 10000)
j. Unit prod. cost of saleable units (f / c)

50
 Quality, Productivity and Profitability
Sales = 100, Unit Revenue = 100, Unit Scrap Value = 10
Lower Quality Higher Quality
a. Defect Rate 10% 1%

b. Unit Prdtn Cost 78 85

c. Saleable units (for 10000 production) 9000 9900
d. Scrap units (for 10000 production) 1000 100
e. Revenue (for 10000 production) 910000 991000
f. Production Cost (b x 10000) 780000 850000
g. Surplus (e – f) 130000 141000
h. Surplus/Unit Sale (g / c) 14.44 14.24
i. Surplus/Unit Production (g / 10000) 13.00 14.10
j. Unit prod. cost of saleable units (f / c) 86.67 85.85

51
Operations Perceptions of Quality

Quality of Design:
Intention of designers to include or exclude certain features in a
product or service.
It can also be described as ability of a product/service as designed to
satisfy or exceed customer requirements.
Design includes design of product/service as well as their
process/delivery system.

Quality of Conformance:
Ability of manufactured product to consistently uphold the
requirements as set in the product design

52
Costs of Quality
Failure Costs - costs incurred by defective parts/products or faulty
services.
 Internal Failure Costs
 Costs incurred to fix problems that are detected before the
product/service is delivered to the customer.
 External Failure Costs
 All costs incurred to fix problems that are detected after the
product/service is delivered to the customer.

53
Costs of Quality (continued)

 Appraisal Costs
 Costs of activities designed to ensure quality or uncover
defects
 Prevention Costs
 All TQ training, TQ planning, customer assessment,
process control, and quality improvement costs to
prevent defects from occurring
 Additional investment in design of product and process to
ensure that the other three costs of quality are bare
minimum

54
 Concurrent Engineering
Traditional Engineering Concurrent Engineering

PD PD

Engg: Engg:

Manf: Manf:

Time Taken: 8 units 5 units

(in above illustration)
PD Product Development (Product Design)
Engg: Engineering (Process, Facilities and Manf. Resources Design)
Manf: Refers to the production trials and testing before manufacturing goes full-
stream

Arrows indicate information flow

55
 Benefits of Concurrent Engineering
 Early and complete understanding of customer needs
 Shorter time for product launch owing to overlaps among activities
(PD, Engineering and Manufacturing) as well as time compression
of the activities
 Better product features and production processes
 Few product changes after product launch

56
Total Quality Management

It refers to an integrated approach by management to focus all

functions and levels of an organization on quality and continuous
improvement

Functions: All, not just production

Levels: Top to Bottom, not just the bottom

57
 Summary: Impact of Design
Changes
Average Design Superior Design
Product Development Cost 80 95
Corrections after product launch Yes Negligible
Corrections Cost 50 5
Total Development Cost 130 100
Impact on revenue Average High
Competitive Advantage High

Toyota is a classic example of the above. A consistent industry leader on

- cost (efficiency) - quality - flexibility - delivery

58
Quality Control

59
Quality of Conformance
Quality of Conformance

100% Inspection Statistical Quality Control (SQC)

Products Processes

Acceptance Sampling Statistical Process Control

(AS) (SPC)

60
Sampling Plans
 Acceptance Sampling (AS): Form of inspection applied to lots or
batches of items before or after a process, to judge conformance
with predetermined standards
 Sampling Plans: Plans that specify lot size, sample size, number
of samples, and acceptance/rejection criteria
 Single-sampling
 Double-sampling
 Multiple-sampling

61
SPC: Process Variability and Quality
Control
- All processes are variable
- Process variability makes exact replication of a process very difficult
- Product/service quality is a function of process variability
- quality declines as process outcome moves away from target value
- Process variability owing to:
- random variation (natural variations in the output of a process, created
by countless minor factors. Unavoidable and function of process
technology)
- assignable variation (A variation whose source can be identified , and,
hence an avoidable variation)
- Challenge is to get the process outcome in as narrow a range as possible
that is fully acceptable to the customers (consistency, reliability, etc.)

62
SPC: Control Charts
Statistical Process Control (SPC) monitors a process to check when the
variability is consequential or harmful
 process is under control if variability is only owing to randomness
 process is not under control if variability is owing to both causes
 essence of SPC is to assure that the output of a process is random so
that future output will be random.
Control Charts are used to monitor processes
 Purpose: to monitor process output to see if it is random
 A time ordered plot representative sample statistics obtained from an
on going process (e.g. sample means)
 Upper and lower control limits define the range of acceptable random
variation

63
SPC: Control Charts
 Each control chart has a Lower Control Limit (LCL) and an Upper Control
Limit (UCL)
 The process mean is indicated by the Center Line (CL)
 If variability is only owing to randomness
 observations would be randomly distributed on both sides of CL
 99.73% of the observations would be between LCL and UCL
 if above two not satisfied, then variability owing to both random and
assignable causes. Process is then not in control.
 Nonrandom Patterns in Control charts
 Trend - Mean shift
 Cycles - Too much dispersion
 Bias

64
Control Chart

Abnormal variation Out of

due to assignable sources control
UCL

Mean
Normal variation
due to chance
LCL
Abnormal variation
due to assignable sources

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Sample number

65
Use of Control Charts
 At what point in the process to use control charts
 What size samples to take
 What type of control chart to use
 Variables
 Attributes

66
SPC: Control Chart Types
Variables Control Charts:
example - weight of chocolate bar (continuous)
- X-bar chart
- R chart

Attributes Control Charts:

Used where a characteristic is monitored not by measuring it, but rather
by classifying or tallying it.
- p chart
- c chart

67
 SPC: Control Chart Application
Control To Monitor Control Limits
Chart

X-bar Process central tendency based on UCL = X  A2 R

estimated process mean LCL = X  A2 R

R Process variability based on UCL = D4 R

estimated process range LCL = D3 R

p Proportion or fraction of process UCL  p  z p 1  p  n

LCL  p  z p 1  p  n
in a category

c Count or number or occurences UCL  c  z c

LCL  c  z c

68
Mean and Range Charts

(process mean is
shifting upward)
Sampling
Distribution

UCL

x-Chart Detects shift

LCL

UCL

Does not
R-chart
detect shift
LCL

69
Mean and Range Charts

Sampling
Distribution (process variability is increasing)

UCL

Does not
x-Chart
LCL
reveal increase

UCL

R-chart Reveals increase

LCL

70
SPC: Control Chart Construction and
Usage
- Construction
- sample pre- full scale production (trial production) data collected in
ideal production environment (variability only owing to randomness)
is used for determining the control chart parameters (central line,
control limits, etc.)
- these observations are not plotted in the control chart

- Usage (during full scale production)

- sample observations collected are plotted chronologically
- monitor whether observations are randomly distributed on both sides
of the central line
- raise alert when observations exceed the control limits or distribution
not random

71
Assignment 5: SPC Control Chart Construction
Data
Sample
Observation 1 2 3 4 5
1 12.11 12.15 12.09 12.12 12.09
2 12.10 12.12 12.09 12.10 12.14
3 12.11 12.10 12.11 12.08 12.13
4 12.08 12.11 12.15 12.10 12.12
x
R

72
SPC Control Chart Construction:
Illustration
Data
Sample
Observation 1 2 3 4 5
1 12.11 12.15 12.09 12.12 12.09
2 12.10 12.12 12.09 12.10 12.14
3 12.11 12.10 12.11 12.08 12.13
4 12.08 12.11 12.15 12.10 12.12
x 12.10 12.12 12.11 12.10 12.12
R 0.03 0.05 0.06 0.04 0.05

x = 12.11
R = 0.046

73
 Process Capability
 Tolerances or specifications
 Range of acceptable values established by engineering design or
customer requirements
 Process variability
 Natural variability in a process
 Process capability
 Process variability relative to specification

74
Process Capability & 6-Sigma Limits
Process Capability describes how capable the process is in producing output that
conforms to design requirements. It is determined by Process Capability Index, an
index that compares the natural variability of a process to customer/engineering
specifications

Process Capability Index,

C p USL-LSL

6

Cp = 1.00 implies a rejection rate of 0.27 %

Cp = 2.00 implies a rejection rate of 2 parts per billion statistically

Motorola six-sigma allocates 4.5 sigma for random variability and 1.5 sigma for
mean shift
Thus the Motorola six sigma implies a rejection rate of 3.4 parts per million (PPM)

75
 Process Capability
Lower Upper
Specification Specification

A. Process variability
matches specifications
Lower Upper
Specification Specification

B. Process variability
Lower Upper
well within specifications Specification Specification

C. Process variability
exceeds specifications
76
 3 Sigma Vs 6 Sigma
6 Sigma curve

LSL USL

3 Sigma curve

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

In a 3 sigma process the values are widely spread along the center line,
showing the higher variation of the process. Whereas in a 6 Sigma
process, the values are closer to the center line showing
77
less variation in the process.
 Amount of process shift allowed
1.5 SD 1.5 SD

LSL USL

SD = 1

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

78
 Perfection 99.7% 99.9% 99.99966%
 Incorrect drug prescriptions 54,000 4,000 1 every 25 years
each year
 Unsafe drinking water; 2 1 1 second every
hours per month 16 years
 Missed landings each day at 5 2 1 in 10 years at
London’s Heathrow airport all U.S. airports
 Incorrect surgical operations 1,350 500 1 in 20 years
per week
 Newborn babies dropped by 10,000 3,000 10
doctors and nurses each year
 Lost mail per hour 54,000 4,000 1

Sigma Level 4.3 4.6 6

79
 Cost of quality at various levels of Sigma

Sigma Defect rate(PPM) Cost of quality Competitive level

6 3.4 <10%
World
5 233 10-15% Class

4 6210 15-20%
Industry
20-30% Average
3 66807

2 308537 30-40%
Non
>40% Competitive
1 6,90000

80
Planning and Scheduling

81
 Why Planning and Scheduling?
1. Supply Side: Constant usage of all the resources for ensuring most
efficient production (efficiency = output/input)
This has been the long-standing fixation of traditional operations.
It often manifests as the obsessive high utilization pursuit of many
CEOs/firms.
2. Demand Side: Produce what is required by the market (effectiveness)
However, market demand is very volatile on quantity, variety, timing,
etc.
Capacity designed for peak demand, at all stages of the chain, would
make cost of production exorbitant (efficiency vs effectiveness conflict)
Planning and Scheduling is the means of addressing this conflict

82
 The Production Planning Framework
Exhibit
Exhibit14.1
14.1 Process planning
Long
range Strategic capacity planning

Intermediate Forecasting
& demand Sales and operations (aggregate) planning
range management
Sales plan Aggregate operations plan
Manufacturing
Services
Master scheduling

Material requirements planning

Weekly workforce and

Order scheduling customer scheduling
Short
range Daily workforce and customer scheduling
83
 Types of Forecasts
 Qualitative (Judgmental)

 Quantitative

 Time Series Analysis

 Exponential Smoothing

 Causal Relationships

 Simulation

84
 Components of Demand
 Average demand for a period of time

 Trend

 Seasonal element

 Cyclical elements

 Random variation

 Autocorrelation

85
 Finding Components of Demand
Seasonal
Seasonalvariation
variation

x
x x Linear
Linear
x x
x x Trend
x Trend
Sales

x
x x x
x
x
xx
x xx x x
x
x
x x x x x x
x x x x x x
x x x
x xxxxx
x
x x

1 2 3 4
Year
86
Realities of Production Planning and Scheduling
Imagine traveling by car from Mumbai Airport to Nariman Point (say 20 kms)
 If your car were the only vehicle in the 20 kms stretch and assuming no
signal and other impediments, you could make the trip in 15 mins.
 However, that would imply poor resource utilization (of the roads).
 Production systems like roads are designed for high utilization and
throughput (utilization and throughput conflict when job variety is high).
 Each traffic signal indicates end of a travel stage and beginning of the next.
 Each stream served at the signal is equivalent to a batch order. More the
streams at a signal, more the time to clear the signal.
 Traffic Police’s Desire: Uniform and constant traffic throughout the day
 Fixed schedule
 High utilization as well as throughput

87
Realities of Production Planning and Scheduling
 Reality: Negligible traffic for about 8 hours (slack season), moderate traffic
for about 12 hours and heavy traffic for about 4 hours (peak sales season)
 Arrival rate greater than 0.9 times the processing rate leads to:
 traffic buildup at the signals (inventory build-up)
 very high traffic buildup, say traffic buildup up to the previous
signal, can affect arrival (production stoppage at previous stage)
 flow will be affected (decrease in throughput)
 more time between consecutive green signals (increase in batch size
and consequent increase in stage lead-time)
 increase in time taken to reach the destination (overall lead-time
increase)
 reaching destination later than planned (delivery delays)

88
Realities of Production Planning and Scheduling
 Express ways are like flow production systems but very costly.
 Total time taken = Travel time of all stages (processing time) +
Waiting time at each signal (waiting time)
 What is the relation between utilization and the waiting time?

89
 Queuing System Cost Tradeoff
Let:

Cw = Cost of one customer waiting in queue for an hour

Cs = Hourly cost per server

C = Number of servers

Total Cost/hour = Hourly Service Cost + Hourly Customer Waiting Cost

Total Cost/hour = Cs C + Cw Lq

Note: Only consider systems where C   , where  


90
Queuing Formulas
Single Server Model with Poisson Arrival and Service Rates: M/M/1

1. Mean arrival rate: 

2. Mean service rate:  
3. Mean number in service:  

4. Probability of exactly “n” customers in the system: Pn   n (1  )
5. Probability of “k” or more customers in the system: P ( n  k )   k

6. Mean number of customers in the system: Ls 


7. Mean number of customers in queue: Lq 

1
8. Mean time in system: Ws 


9. Mean time in queue: Wq 
 

91
Congestion as
  1.0
100

With: 


Then: Ls 
1 
10

8  Ls
6 0 0
0.2 0.25
4
0.5 1
2 0.8 4
0.9 9
0
0.99 99
0 1.0

92
Realities of Production Planning and Scheduling
In short:
 Planning and scheduling is less complicated if utilization levels are
below 90%.
 Production planning and scheduling is less complicated if variety and
number of stages are low and the stages are well-integrated (e.g. mines
to rolling mill part of a steel manufacturer supply chain, oil well to
refinery part of a petroleum firm supply chain).
 It becomes complex as number of stages and variety (number of
different types of jobs) at each stage increases along with decrease in
integration between stages and increase in demand volatility.
 The relevance of supply chain management emanates from this
complexity that most organizations face.

93
The Production Planning Framework

Forecasting (yearly, aggregate)


Aggregate Production Planning or APP (yearly, aggregate)

Master Production Scheduling or MPS (quarterly, families)

Materials Requirement Planning (monthly, SKUs & parts)

Scheduling (monthly, SKUs & parts)

94
 APP of a Car Manufacturer
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Cars (Capacity: 9000)
Forecast Demand 4000 10000 13000 11000
Regular Production 9000 9000 9000 9000
Overtime Production 0 0 1000 1000
End Inventory 5000 4000 1000 0
MPS in Next Slide
SUVs (Capacity: 1000)
Forecast Demand 500 1200 1100 1500
Regular Production 1000 1000 1000 1000
Overtime Production 100 100 100
End Inventory 500 400 400 0

95
 MPS of Cars for Qtr 1
Month 1 Month 2 Month 3
Maruti 800
Forecast Demand 600 800 900
Regular Production 1800 1800 1700
Overtime Production
End Inventory 1200 2200 3000
Maruti Alto
Forecast Demand 400 600 700
Regular Production 1200 1200 1300
Overtime Production
End Inventory 800 1400 2000

96
 Demand Types
 Independent Demand
Demand for various items are unrelated
Example: demand for cars at a car dealer outlet

 Dependent Demand
Demand for any one item is a direct result of the need for some
other item, usually a higher-level item of which it is part
Example: demand for tires in a car assembly

97
Material Requirement Planning (MRP)
It is a technique for determining QUANTITY and TIMING for the
acquisition of dependent items needed to satisfy MPS requirements

Steps in MRP Inputs

1. Exploding Bill of Material (BOM)

2. Netting MPS, Beginning inventory

3. Lot sizing Lot-sizing rule

4. Offsetting Procurement/Production lead-time

98
MRP: Developments beyond MRP
Closed-Loop MRP
Information from MRP and other modules are fed back to ensure that the
schedules are feasible

Manufacturing Resource Planning (MRP II)
| Distribution Requirements Planning (DRP)
 
Enterprise Resource Planning (ERP)

99
Typical Scheduling and Control Functions
 Allocating orders, equipment, and personnel
 Determining the sequence of order performance
 Initiating performance of the scheduled work
 Shop-floor control

100
Work-Center Scheduling Objectives
 Meet due dates

 Minimize lead time

 Minimize setup time or cost

 Minimize work-in-process inventory

 Maximize machine utilization

101
Priority Rules for Job Sequencing
1. First-come, first-served (FCFS)
2. Shortest operating time (SOT)
3. Earliest due date first (DDate)
4. Slack time remaining (STR) first
5. Slack time remaining per operation (STR/OP)
(Due date - Current date)
6. Critical ratio (CR) Number of days remaining

7. Last come, first served (LCFS)

8. Random order or whim

102
 Example of Job Sequencing: First-Come
First-Served
Jobs (in order Processing Due Date
Suppose
Supposeyouyouhave
havethe
thefour
four of arrival) Time (days) (days hence)
jobs
jobsto
tothe
theright
rightarrive
arrivefor
for A 4 5
processing
processingon onone
onemachine
machine B 7 10
C 3 6
D 1 4
What
Whatis
isthe
theFCFS
FCFSschedule?
schedule? Do
Doall
allthe
thejobs
jobsget
getdone
doneon
ontime?
time?
Answer: FCFS Schedule No,
No,Jobs
JobsB,
B,C,
C,
Jobs (in order Processing Due Date Flow Time and
andDDare
are
of arrival) Time (days) (days hence) (days) going
goingto
tobe
belate
late
A 4 5 4
B 7 10 11
C 3 6 14
D 1 4 15

103
Lean Production

104
Lean Production

 Lean Production 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)
 Lean Production also involves the elimination of waste in
production effort
 Lean Production also involves the timing of production
resources (i.e., parts arrive at the next workstation “just in
time”)

105
 Here
Herethe
thecustomer
customerstarts
starts
the
theprocess,
process,pulling
pullingan
an Pull System
inventory
inventoryitem
itemfrom
from
Final
FinalAssembly…
Assembly…
Then
Thensub-
sub-
assembly Fab Vendor
assemblywork
workisis
pulled
pulledforward
forwardbyby
that
thatdemand…
demand… Sub
Fab Vendor
Customers
Final
Assembly

The Sub Fab Vendor

Theprocess
processcontinues
continues
throughout
throughoutthe
theentire
entire
production
productionprocess
processand
and
supply
supplychain
chain Fab Vendor
106
Features of Lean Production

WHAT IT IS WHAT IT DOES

• Management philosophy • Attacks waste

• Exposes problems and bottlenecks
• “Pull” system though the plant
• Achieves streamlined production

WHAT IT REQUIRES WHAT IT ASSUMES

• Employee participation
• Industrial engineering/basics • Stable environment
• Continuing improvement
• Total quality control
• Small lot sizes

107
The Toyota Production System

 Based on two philosophies:

1. Elimination of waste

2. Respect for people

108
Elimination of Waste
1. Focused factory networks
2. Group technology
3. Quality at the source
4. JIT production
5. Uniform plant loading
6. Kanban production control system
7. Minimized setup times

109
Minimizing Waste: These
Thesearearesmall
smallspecialized
specialized
Focused Factory plants
plantsthat
thatlimit
limitthe
therange
range
Networks of
ofproducts
productsproduced
produced
(sometimes
(sometimesonlyonlyone
onetype
typeof
of
product
productforforan
anentire
entire
facility)
facility)

Some
Someplants
plantsin
in
Japan
Japanhave
haveas
as
Coordination few
fewas
as30
30and
and
System Integration as
asmany
manyasas
1000
1000employees
employees

110
 Minimizing Waste: Group Technology
Note
Notehow
howthe
theflow
flowlines
linesare
aregoing
goingback
backand
andforth
forth
 Using
UsingDepartmental
DepartmentalSpecialization
Specializationfor
forplant
plantlayout
layoutcan
cancause
causeaalot
lotofof
unnecessary
unnecessarymaterial
materialmovement
movement

Saw Saw Saw Grinder Grinder

Heat Treat

Lathe Lathe Lathe Press Press Press

111
 Minimizing Waste: Group Technology
 Revising
Revisingby
byusing
usingGroup
GroupTechnology
TechnologyCells
Cellscan
canreduce
reducemovement
movementand
andimprove
improve
product flow
product flow

Grinder
1 2
Saw Lathe Lathe Press

Heat Treat

Grinder
Saw Lathe A B Lathe Press

112
Minimizing Waste: Uniform Plant Loading
(heijunka)
Suppose
Supposeweweoperate
operateaaproduction
productionplant
plantthat
thatproduces
producesaasingle
single
product.
product. The
Theschedule
scheduleofofproduction
productionfor
forthis
thisproduct
productcould
couldbe
be
accomplished
accomplishedusing
usingeither
eitherof
ofthe
thetwo
twoplant
plantloading
loadingschedules
schedules
below.
below.

Not uniform Jan. Units Feb. Units Mar. Units Total

1,200 3,500 4,300 9,000
or

Uniform Jan. Units Feb. Units Mar. Units Total

3,000 3,000 3,000 9,000
How
Howdoes
doesthe
theuniform
uniformloading
loadinghelp
helpsave
savelabor
laborcosts?
costs?
113
Minimizing Waste: Inventory Hides Problems

Example: By
Machine
identifying defective
downtime items from a vendor
early in the
Scrap Vendor production process
Work in delinquencies Change the downstream work
orders
process is saved
queues Engineering design Design
(banks) redundancies backlogs

Example: By
Paperwork Inspection Decision identifying defective
backlog backlogs backlogs work by employees
upstream, the
downstream work is
saved 114
Minimizing Waste: Kanban Production Control
Systems
This puts the
system back
Once the Production kanban is
Withdrawal were it was
received, the Machine Center
kanban before the item
produces a unit to replace the
was pulled
one taken by the Assembly Line
people in the first place

Storage Storage
Machine Part A Part A Assembly
Center
Line

Production kanban
Material Flow
The process begins by the Assembly Line
people pulling Part A from Storage Card (signal) Flow
115
Determining the Number of Kanbans Needed

 Setting up a kanban system requires determining the number

of kanbans cards (or containers) needed
 Each container represents the minimum production lot size
 An accurate estimate of the lead time required to produce a
container is key to determining how many kanbans are
required

116
 The Number of Kanban Card Sets
Expected demand during lead time  Safety stock
k
Size of the container

DL(1  S )

C
k = Number of kanban card sets (a set is a card)
D = Average number of units demanded over some time
period
L = lead time to replenish an order (same units of time as
demand)
S = Safety stock expressed as a percentage of demand
during leadtime
C = Container size

117
Example of Kanban Card Determination:
Problem Data

 A switch assembly is assembled in batches of 4 units from an

“upstream” assembly area and delivered in a special
container to a “downstream” control-panel assembly
operation
 The control-panel assembly area requires 5 switch assemblies
per hour
 The switch assembly area can produce a container of switch
assemblies in 2 hours
 Safety stock has been set at 10% of needed inventory

118
 Example of Kanban Card Determination:
Calculations

Expected demand during lead time Safety stock

k 
Size of the container

DL (1 S ) 5(2)(1.1)
   2.75, or 3
C 4

Always round up!

119
Toyota Production System’s Four Rules

1. All work shall be highly specified as to content, sequence,

timing, and outcome
2. Every customer-supplier connection must be direct, and
there must be an unambiguous yes-or-no way to send
requests and receive responses
3. The pathway for every product and service must be simple
and direct
4. Any improvement must be made in accordance with the
scientific method, under the guidance of a teacher, at the
lowest possible level in the organization

120
Lean Implementation Requirements: Design
Flow Process

 Link operations
 Balance workstation capacities
 Redesign layout for flow
 Emphasize preventive maintenance
 Reduce lot sizes
 Reduce setup/changeover time

121
Lean Implementation Requirements: Total
Quality Control

 Worker responsibility

 Measure SQC

 Enforce compliance

 Fail-safe methods

 Automatic inspection

122
Lean Implementation Requirements:
Stabilize Schedule

 Level schedule

 Underutilize capacity

 Establish freeze windows

123
Lean Implementation Requirements:
Kanban-Pull

 Demand pull

 Backflush

 Reduce lot sizes

124
Lean Implementation Requirements: Work
with Vendors

 Reduce lead times

 Frequent deliveries

 Project usage requirements

 Quality expectations

125
Lean Implementation Requirements:
Improve Product Design

 Standard product configuration

 Standardize and reduce number of parts

 Process design with product design

 Quality expectations

126
Lean Implementation Requirements:
Concurrently Solve Problems

 Root cause

 Solve permanently

 Team approach

 Line and specialist responsibility

 Continual education

127
Lean Implementation Requirements: Measure
Performance

 Emphasize improvement

 Track trends

128
Lean in Services (Examples)

 Organize Problem-Solving Groups

 Upgrade Housekeeping

 Upgrade Quality

 Clarify Process Flows

 Revise Equipment and Process Technologies

129
Lean in Services (Examples)

 Level the Facility Load

 Eliminate Unnecessary Activities

 Reorganize Physical Configuration

 Introduce Demand-Pull Scheduling

 Develop Supplier Networks

130
 Thank You
and
Best Wishes!!

131