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Quality

Control and Improvement


Chapter 9
Chapter 9 Outline
• Design of Quality Control Systems
• Process Quality Control
• Attribute Control
• Variables Control
• Using Control Charts
• Continuous Improvement
• Six Sigma
• Quality Control in Industry

2
Design of Quality Control
Systems
• Break down production process into
subprocesses and “internal customers.”
• Identify “Critical points” where inspection or
measurement should take place
• Four steps in designing QC systems.

3
Steps in Designing QC Systems
ΠIdentify critical points
• Incoming materials & services
• Work in process
• Finished product or service
 Decide on the type of measurement
• variable
• attribute
Ž Decide on the amount of inspection to be used.
 Decide who should do the inspection

4
Types Of Measurement
• Attribute measurement
–Product characteristic evaluated with a discrete
choice:
• Good/bad, yes/no
• Variable measurement
–Product characteristic that can be measured on a
continuous scale:
• Length, size, weight, height, time, velocity
When the Inspector Finds a
Defect…
1. Containment: Keep the defective items from
getting to the customer
2. Correction: Find the cause of the defect and
correct it.
3. Prevention: Prevent the cause from
happening again.
4. Continuously improve the system.

6
When the Inspector Finds a
Defect e.g. Strap on backpack comes
loose
Containment: pull the bad backpacks from the
line.
Correction: sewing machine misaligned; fix it.
Prevention: why was it misaligned? Find out
and change system to prevent it happening
again.
Continuously monitor and improve system.

7
Process Quality Control
• Basic assumptions (tenets) of Process Quality
Control:
– Every process has random variation in it.
– Production processes are not usually found in a state of
control.
• “State of Control”; what does it mean?
– Unnecessary variation is eliminated.
– Remaining variation is because of random causes.

8
Process Quality Control

• Assignable (special) causes


– Can be identified and corrected
• Common causes
– Occur randomly
– Cannot be changed unless process is redesigned

9
Process Control Chart (Figure
9.1)
y

Time
x
10
Quality Control Chart (Figure
9.2)
Stop the process; look for assignable
UCL cause

CL
Measurement

LCL
Quality

Stop the process; look for assignable


cause
1 2 3 4 5 6
Sample

11
Attributes & Variables
• Attributes are counts, such as the
number (or proportion) of defects in
a sample.
• Variables are measures (mean &
range or standard deviation) of
critical characteristics in a sample.

12
Formulas for SPC (3 Sigma)
• p-Chart

• x-Bar Chart

• R-Chart

13
Issues in Using Control
Charts
• Sample Size
– large enough to detect defectives
– defect rate has time dimension
• How often to sample?
– Depends upon cost
• Control limits vs. product specifications
– Is the process capable of producing to specs?
– Are the specifications appropriate?

14
Continuous Improvement

• Aim of continuous improvement is to reduce


the variability of the product or process
• Techniques for continuous improvement
– Pareto analysis
– Cause-and-effect (fish-bone) diagrams
– Process capability charts

15
Pareto Analysis

Note: 40 percent of the items cause 78.6 percent of


the defects

16
Pareto Diagram (Figure 9.3)

17
Cause-and-effect (Fish-bone,
Ishikawa)diagram (Figure 9.4)

18
Process Capability Index Examples
(Figure 9.5)
frequenc
y

process measure process measure

19
Computation of Cpk (Figure
9.6)
frequenc
y

process measure process measure

20
Six-Sigma Quality
• Pioneered by Motorola in 1988 (Juran claims
credit for the idea).
• 3.4 defects per million
• Sample size rules become unusable
• Most process are 4 sigma, e.g. payroll,
prescriptions, baggage handling, journal
vouchers, restaurant bills.
• Airline fatalities are 6.4 sigma
• IRS tax advice is less than 2 sigma
• Criticism: accepts 3.4 defects/million. Is not zero
defects.

21
Six Sigma Quality
• Process Improvement steps of Six
Sigma (DMAIC):
1. Define
2. Measure
3. Analyze
4. Improve
5. Control

22
Quality Control in Industry
• 75% use process control charts.
• More use of variable (x-bar and R)
charts than attribute (p) charts.
• “The Seven Tools of Quality Control”
(see Figure 9.7)
• Quality control in the service industry
(SERVQUAL)

23
Summary
• Design of Quality Control Systems
• Process Quality Control
• Attribute Control
• Variables Control
• Using Control Charts
• Continuous Improvement
• Six Sigma
• Quality Control in Industry

24
End of Chapter Nine

25
Supply Chain Management

Chapter 10
Chapter 10 Outline
• Definitions and Terminology
• System Interactions
• Coordination in Supply Chain
• Measuring Supply Chain Performance
• Supply Chain Strategies
• Structural Improvement
• Improvement in Infrastructure
• The Internet and Supply Chains
• Virtual Supply Chains

27
Definitions and Terminology
• Supply Chain
• Supply Chain Management
• Distribution Channel
• Demand management
• Logistics management

28
Supply Chain
The sequence of business processes and
information that provides a product or service
from suppliers through manufacturing and
distribution to the ultimate consumer.

29
Supply Chain Management
Planning, design, and control of the flow of
information and materials along the supply
chain in order to meet customer requirements
in an efficient manner, now and in the future.

30
Distribution Channel
The route from the producer forward through the
distributors to the customer

31
Demand Management
• Managing the demand for goods or services
along the supply chain.
• Demand can be managed through such
mechanisms as products, pricing, promotion,
and distribution.

32
Logistics Management
• If broadly defined, it is the same as supply
chain management.
• Narrowly defined, logistics management is
concerned with inbound transportation and
outbound distribution.

33
A Typical Supply Chain

34
System Interactions
(System Dynamics in Supply Chains)

• Supply chain is a highly interactive system.


Decisions in each part of the chain affect the
other parts.
• There is an accelerator (bull whip) effect
• The best way to improve a supply chain is to
reduce the total replenishment time and to feed
back actual demand information to all levels.

35
Widget Example (Figure 10.2): Retail Level

36
Widget Example (Figure 10.2): Wholesale
Level

37
Widget Example (Figure 10.2): Factory Level

38
Coordination in the Supply
Chain
• Need for coordination both within firms and
across firms
• Supply chains must be managed across
organizational boundaries.
• Parallel between supply chain and quality
improvement

39
Measuring Supply Chain
Performance (1)
• Delivery—on time delivery of entire orders.
• Quality
– Customer satisfaction
– Customer loyalty
• Time
– Total replenishment time
– Cash to cash cycle
• Days in inventory + days in accts receivable-days in
accounts payable

40
Measuring Supply Chain
Performance (2)
• Flexibility
– Time to change volume or product mix by a certain
percentage
– Maximum percentage of change in volume or
product mix in fixed time perion
• Cost
– Total delivered cost
– Value added or productivity

41
Supply Chain Strategies
• Functional products—commodity-like
– Efficient, low cost supply chain
• Innovative products
– Flexible, fast supply chain
• Firms should sort their products and apply the
appropriate strategies

42
Structural Improvement
Basic Ways to Improve Supply Chain Structure:
– Change structure
• Capacity, Facilities, Process technology, vertical
integration
– Change infrastructure
• People, Information systems, Organization, Production
and inventory control, Quality control systems

43
Forms of Structural Change in
a Supply Chain
• Forward and Backward Integration
• Major process simplification
• Changing the configuration of factories,
warehouses, or retail locations
• Major product redesign
• Outsourcing logistics to a third party.

44
Improvement in
Infrastructure
• Cross-functional teams
• Partnerships with suppliers and customers
• Set-up time reduction to reduce lot sizes
• Integrated information systems
• Cross-docking—keeps goods out of the
warehouses.

45
The Internet and Supply
Chains
• Fundamental processes in supply chains:
– Order placement
– Order fulfillment
• e-Procurement and its types
• Potential problems with e-Procurement

46
Processes for e-Procurement (Figure
10.3)
REQUEST

Requirem Selection Requisitio Approval


ent n

BUY
Requisitio Source Negotiate Contract
n
SUPPLY

Confirm Process Ship Invoice


Order

PAYMENT
Receive Deliver Match Pay

47
Types of e-procurement

• On-line catalogs listing products, prices, etc.


• Third-part auctions—reverse auctions
• Private exchanges to connect suppliers

48
Problems with e-
procurement
• Too much focus on technology; not enough on
systems
• Insufficient concern about value to both
partners
• Fragmented efforts within and across
companies
• Record accuracy and data security issues

49
Virtual Supply Chains
• “Virtual Companies”:
– Highly flexible—no fixed assets
– Successful in highly dynamic environment
– Made feasible by computers and the Internet
– May lead to “hollow corporations” or shell
companies
• Virtual Supply Chain consists of at least one
virtual company that coordinates all activities
of the supply chain

50
Summary
• Definitions and Terminology
• System Interactions
• Coordination in Supply Chain
• Measuring Supply Chain Performance
• Supply Chain Strategies
• Structural Improvement
• Improvement in Infrastructure
• The Internet and Supply Chains
• Virtual Supply Chains

51
End of Chapter Ten

52
Forecasting

Chapter 11
Chapter 11 Outline
• A Forecasting Framework
• Qualitative Forecasting Methods
• Time-Series Forecasting
• Moving Average
• Exponential Smoothing
• Forecast Errors
• Advanced Time-Series Forecasting
• Causal Forecasting Methods
• Selecting a Forecasting Method
• Collaborative Planning, Forecasting and
Replenishment
54
A Forecasting Framework
• Focus of the chapter is on the forecasting
of demand for output from the operations
function.
– Demand may differ from sales
• Difference between forecasting and
planning
– Forecasting: what we think will happen
– Planning: what we think should happen
• Forecasting application in various decision
areas of operations (capacity planning,
inventory management, others)
55
Use of Forecasting: Operations
Decisions

56
Use of Forecasting: Marketing &
Finance

57
‘Qualitative’ Forecasting Methods
• Based upon managerial judgment
when there is a lack of data. No
specific model.
• Major methods:
– Delphi Technique
– Market Surveys
– Life-cycles Analogy
– Informed Judgment (naïve models)

58
Time-Series Forecasting
• Components of time-series data:
– Trend—general direction (up or down)
– Seasonality—short term recurring cycles
– Cycle—long term business cycle
– Error (random or irregular component)
• “Decomposition” of time-series
– Data are broken into the four components
• Moving Averages
• Exponential Smoothing

59
Moving Average
• Assumes no trend, seasonal or
cyclical components.
• Simple Moving Average:

• Weighted Moving Average:

60
Moving Average
Compute three period moving average (number of periods is the decision of the forecaster)

Period Actual Demand Forecast


1 10
2 18
3 29
4 19

(10+18+29)/3 = 19
Period 5 will be (18+29+actual for period 4)/3

61
Time-Series Data Plot

Note: The more periods, the smoother the forecast.

62
Exponential Smoothing
• The new average is computed from the
old average:

• The value of the smoothing constant (







63
Simple Exponential Smoothing

• The forecast:

F=forecast of demand (both this period


and next)
D = actual demand (this period)
t = time period
• No trend, cyclical or seasonal
components.
64
Exponential Smoothing-
calculation
• Facts:
– September forecast for sales was 15
– September actual sales were 13
– Alpha ( α) is 0.2
– What is the forecast for October?
• Calculation
– October Forecast = September
forecast + α(September actual-
September forecast)
=15+0.2(13-15)=15+0.2(-2)=15-
65
Forecast Errors
• Cumulative Sum of Forecast Error
(CFE) and Mean Error (ME)
• Mean Square Error (MSE)
• Mean Absolute Deviation (MAD)—
measure of deviation in units.
• Mean Absolute Percentage Error
(MAPE)
• Tracking Signal (TS)—relative
measure of bias
66
Forecast Errors: Formulas

Cumulative sum Mean Absolute


of Percentage
Forecast Errors Error

Mean Square Tracking Signal


Error

Mean Absolute
Deviation Mean
Error

67
Tracking Signal

Analogous to control charts in quality


control, viz. if there is no bias, its values
should fluctuate around zero.
Is a relative measure, i.e. the numbers mean
the same for any forecast.

68
Advanced Time-Series
Forecasting

• Adaptive exponential smoothing


– Smoothing coefficient () is varied
• Box-Jenkins method
– Requires about 60 periods of past data

69
Time Series vs. Causal
Models
• Time series compares data being
forecast over time, i.e. Time is the
independent variable or x- axis or x-
variable.
• Causal models compare data being
forecast against some other data set
which the forecaster may think is a
cause of the forecasted data, e.g.
population size causes newspaper
sales. 70
Causal Forecasting Models
• The general regression model:

• Other forms of causal model:


– Econometric
– Input-output
– Simulation models

71
Example of Time Series
YtModel
=a+

Dt = actual sales
Ft = forecasted sales
t = time period (e.g. year)

F7 = 117.87 + 1.66 (7) = 129.47 = sales forecast for next year

72
Example of Causal Model
Yt = a +

Dt = actual sales in year t


Ft = forecasted sales
It = median family
income (000’s)

F7 = 38.23 + 2.397 (7) = 128.34 = sales forecast for next year (year 7)

73
Selecting a Forecasting
Method
• User and system sophistication
– People reluctant to use what they don’t
understand
• Time and resources available
– When is forecast needed?
– What is value of forecast?
• Use or decision characteristics, e.g.
horizon
• Data availability and quality
• Data pattern
74
Forecast Horizons and
Forecast Accuracy
• The longer the forecast horizon, the
less accurate the forecast
• Long lead times require long forecast
horizons
• Lean, responsive companies have the
goal of decreasing lead times so they
are shorter than the forecast horizon
Collaborative Planning,
Forecasting and Replenishment
• Aim is to achieve more accurate
forecasts
• Share information in the supply chain
with customers and suppliers.
• Compare forecasts
– If discrepancy, look for reason
– Agree on consensus forecast
• Works best in BtoB with few
customers
76
Summary
• A Forecasting Framework
• Qualitative Forecasting Methods
• Time-Series Forecasting
• Moving Average
• Exponential Smoothing
• Forecast Errors
• Advanced Time-Series Forecasting
• Causal Forecasting Methods
• Selecting a Forecasting Method
• Collaborative Planning, Forecasting and
Replenishment
77
End of Chapter Eleven

78
Facilities and Aggregate
Planning
15
Chapter 12
Due
Date!
Chapter 12 Outline
• Facilities Decisions
• Facilities Strategy
• Aggregate Planning Definition
• Planning Options
• Basic Strategies
• Aggregate Planning Costs
• Example of Costing
• Sales and Operations Planning

80
Hierarchy of Capacity Decisions

Facilities
Facilities
decisions decisions

Aggregate
planning
Aggregate
Planning

Scheduling
Scheduling

0 6 12 18 24
Months
Planning Horizon

81
Definition of “Capacity”

Capacity is defined as the maximum output


that can be produced over a given period of
time.

•Primarily determined by
– Physical assets
– Labor availability
•Nominal capacity
– Subtracts downtime, shift breaks, etc.
– Is the actual capacity that should be used in
82
Facilities Decisions
• How much total capacity is needed?
• How large should each unit of
capacity be?
• When is the capacity needed?
• What type of facilities/capacity are
needed?

83
Factors Affecting Facilities
Strategy
• Predicted demand
• Cost of facilities
• Likely behavior of competitors
• Business strategy
• International considerations

84
How Much?: Strategies for
“Capacity Cushion”
• Try not to run out (e.g.
utilities)
• Build to average forecast
• Maximize utilization at
bottlenecks
– Reduce rejects and rework
– Reduce throughput time
85
How Large?
What is “Optimum” Unit
Size?
• Economies of scale

• Diseconomies of scale

86
When?
Timing of Facility Additions
• Preempt the competition
• Wait-and-see strategy

87
What Type?
Types of Facilities
• Product-focused (55%) - computers,
chain saws, dishwashers
• Market-focused (30%) - electricity,
bakeries
• Process-focused (10%) - computer
chips
• General purpose (5%) – several
products and processes.

88
Aggregate Planning
Characteristics
• A time horizon of about 12 months
• An aggregated level of demand for one or
few categories of product
• The possibility of changing both supply
and demand
• A variety of management objectives
• Facilities that are considered fixed (cannot
be expanded or reduced)

89
Planning Options
• Options for managing
demand.
– influencing demand from
customers
– delivering orders as promised
• Options for managing
supply
– delivering what is promised
90
Options for Influencing
(Managing) Demand
• Pricing
• Advertising and promotion
• Backlog or reservations (shifting
demand)
• Development of complementary
products

91
Options for Influencing
(managing) Supply
• Hiring and layoff of employees
• Using overtime and undertime
• Using part-time or temporary labor
• Carrying inventory
• Outsourcing or Subcontracting
• Making cooperative arrangements

92
Basic Production Strategies
• “Level” strategy (constant
work force, use inventory as
buffer)
• “Chase” strategy (produce to
demand, vary workforce)

93
Level Load Strategy

• Deliver products and


services at a constant rate

• Avoid making changes to


operations

5
-27
Chase Strategy

• Produce only what you sell


• Produce products or services just-
in-time
• If there are no sales—do not
produce
• Typical for services

5
-29
Comparison of Chase versus Level
Strategy

96
Aggregate Planning Costs
• Hiring and firing costs (chase)
• Overtime and undertime costs
(chase)
• Subcontracting costs (chase)
• Part-time labor costs (chase)
• Inventory-carrying costs (level)
• Cost of stockout or back order (level)
97
Underlying Purpose of S&OP
• The underlying purpose of Sales
and Operations Planning is to
balance demand and supply.
• Monthly ‘time buckets’ over a
rolling 12 month horizon.
• Based on families of products
• Input into detailed planning and
scheduling
98
Inputs to S&OP
•Input Responsibility
•Demand Forecast Marketing
•Market intelligence Marketing
•Actual sales Sales
•Capacity information Manufacturing
•Management targets Management
•Financial requirements Finance
•New product information R&D

•New process information Process

engineering
•Workforce availability Human resources
99
S&OP Outputs
• Output Responsibility
• Sales plan Marketing and sales
• Production plan Manufacturing
• Inventory plan (MTS) Management
• Backlog plan (MTO) Management
• Purchasing plan Purchasing
• Financial plan Finance
• Engineering plan Engineering
• Workforce plan Human resources
100
Iterative Nature of S&OP
(made possible by concurrent planning)
1. Develop production plan.
2. Check implications for
inventory/backlog plan.
3. If necessary, adjust production plan.
4. Check against resource plan and
availability.
5. If necessary, adjust production plan.
6. Recheck against inventory/backlog and
resources.
101
Summary
• Facilities Decisions
• Facilities Strategy
• Aggregate Planning Definition
• Planning Options
• Basic Strategies
• Aggregate Planning Costs
• Example of Costing
• Sales and Operations Planning

102
End of Chapter Twelve

103
Scheduling Operations

Chapter 13
Chapter 13 Outline
• Batch Scheduling
• Gantt Charting
• Finite Capacity Scheduling
• Theory of Constraints
• Priority Dispatching Rules
• Infinite Capacity Loading
• Planning and Control Systems

105
Synonyms

• Shop Floor Control


• Scheduling Operations
• Production Activity Control
(PAC)
• Detailed Planning and
Scheduling (DPS)
106
Batch Scheduling
• Very complex scheduling
environment
• Can be thought of as “Network of
Queues”
• Customers spend most of their time
waiting
• Closely related to MRP (See chapter
16)

107
Batch Processing
Move-queue-work-wait-
move
move

move move move


queue WS 1 wait queue WS 2 wait

move
move

Work is done according to work order

108
Difficulties Of Batch/Job
Shop Scheduling
• Variety of jobs processed
• Different routing and
processing requirements of
each job
• Number of different orders in
the facility at any one time
• Competition for common
Responsibilities of
Production Control
• Loading
– Check availability of material,
machines & labor
• Sequencing
– Release work orders to shop &
issue dispatch lists for
individual machines
• Monitoring
– Maintain progress reports on
each job until it is complete
Gantt Charting
• Developed by Henry Gantt in 1917
• Related concepts:
– Makespan – total time to complete a set
of jobs
– Machine utilization – percent of make
span time a machine (or person) is used.
• Used primarily to monitor progress of
jobs

111
Job Data for Scheduling
Example

112
Scheduling Example
In what sequence should the jobs be done?
Job 5 Job 2 Job 4

Process A Process C
Job A
1 C

Process B

Job 3 B

113
Where is the bottleneck?
Total Machine times for the five jobs:
– Machine A: 15 hours
– Machine B: 12 hours
– Machine C: 16 hours
C appears to be the bottleneck.
But! A is used for every job; C is not.
Either one could determine makespan.

114
Gantt Chart for Example

115
Finite Capacity Scheduling
• Finite capacity scheduling loads
jobs onto work stations being
careful not to exceed the
capacity of any given station.
• Done at the detailed planning
and scheduling (DPS) level
• Part of the loading responsibility.

116
Theory of Constraints (TOC)
• Proposed by Goldratt in The Goal
(1983)
• Goal is to make money.
• Key elements of “goals” according to
TOC:
– Throughput—what is made and sold
– Inventory—raw materials
– Operating expenses—cost of conversion
• Production does not count until it is
sold!
117
Theory of Constraints
(TOC)
• A constraint is anything that is
slowing down production—a
bottleneck.
– A machine or workstation
– The market
– Procurement system
• The bottleneck determines the
capacity of the system.
• Implication: the operations
manager should focus on the
bottleneck to increase capacity
and throughput (and make more 118
Priority Dispatching Rules
• What are priority dispatching
rules?
– If you have more than one job waiting
at a work station, how do you select
which one to process next? The
criterion you use for selecting the
next job is your dispatching rule.
• In front office services, the most
common rule is “first come, first
served.”
• Part of the sequencing 119
Priority Dispatching Rules
• Commonly used in manufacturing:
– MINPRT (Minimum Processing Time or SPT,
shortest processing time) This rule minimizes
total waiting time.

– Critical Ratio (Minimizes average lateness)

• Commonly used in services:


– FCFS (First Come, First Served)

120
Infinite Capacity Loading

•“Infinite capacity loading” loads jobs onto


work centers without regard for the total
capacity of the work center.
•If the capacity for any given work center has
been exceeded, the schedule must be changed.
•This is generally done at the MRP level before
detailed scheduling and planning

121
Infinite capacity loading example: time
lines

Time line for job 1


Due date
A Move/Wait B Move/Wait C
(2 hrs) (4 hrs) (3 hrs) (4 hrs) (4 hrs)
Day 1 Day 2 Day 3

Time line for job 2 Due date

C (6 hrs) Move/Wait A (4 hrs)


(4 hrs)
Day 1 Day 2 Day 3

122
Infinite Capacity Loading example
Work center A Work center B Work center C
Hours scheduled

1 2 3 1 2 3 1 2 3
Day Day Day

123
Planning and Control
Systems
• What delivery date do I promise?
• How much capacity do I need?
• When should I start on each
particular activity or task?
• How do I make sure that the job is
completed on time?
• Advanced Planning & Scheduling
(APS)

124
Summary
• Batch Scheduling
• Gantt Charting
• Finite Capacity Scheduling
• Theory of Constraints
• Priority Dispatching Rules
• Infinite Capacity Loading
• Planning and Control Systems

125
End of Chapter Thirteen

126
Project Planning & Scheduling
Chapter 14
Chapter 14 Outline
• What is a “project”?
• Objectives and tradeoffs
• Planning and Control in Projects
• Scheduling Methods
• Constant-Time Networks
• PERT Method
• CPM Method
• Use of Project Management Concepts

128
What is a “Project”?
• Unique item - often a single unit.
• Often located on one place. The unit
does not move during production.
• Resources are brought to the project.
• May be of any size, although we
focus on large projects.

129
Examples of Projects

• A wedding • New product


• A divorce introduction
• Building • Open or close a
construction facility
• Bridge construction • Make a movie
• Build aircraft carrier • Fund raising
• R&D project campaign
• Audit • Ad campaign
• Software installation
130
Objectives and Tradeoffs

Due Date!

Stay Meet
within
the the
Deadline--
budget schedule
Meet
the
specification
s 131
Project Management Stages

Planning

Control
Scheduling

Execution

132
Planning Activities &
Decisions
• Identify the project customer
• Establish the end product or service
• Set project objectives
• Estimate total resources and time
required
• Decide on the form of project
organization
• Make key personnel appointments
• Define major tasks required

133
Scheduling Activities &
Decisions
• Develop a detailed work-
breakdown structure
• Estimated time required for each
task
• Sequence tasks in proper order
• Develop a start/stop time for each
task
• Develop detailed budget for each
134
Execution & Control
• Monitor actual time, cost, and
performance
• Compare planned to actual figures
• Determine whether corrective action
is needed
• Evaluate alternative corrective
actions
• Take appropriate corrective actions

135
Execution and Control
What are ‘corrective actions?’
When one or more activities threaten
the time, cost, or performance of the
project, a corrective action is
necessary:

• Redefine the activity (e.g. split the


activity).
• Add resources to the activity.
• Shift resources from one activity to
another
136
Scheduling Methods
• Gantt Charts
– Shown as a bar charts
– Do not show precedence relations
– Visual & easy to understand
• Network Methods
– Shown as a graphs or networks
– Show precedence relations
– More complex, difficult to understand
and costly than Gantt charts

137
Gantt Chart Project Example (Figure
14.1)

138
Constant-Time Networks
• Activity times are assumed to be constant
• Activities are represented by nodes in the
network
• Arrows show the precedence relationships
• Notations used in calculating start and
finish times:
– ES(a) = Early Start of activity a
– EF(a) = Early Finish of activity a
– LS(a) = Late Start of activity a
– LF(a) = Late Finish of activity a
139
‘Write a Business Report’
Table 14.3

140
Network Diagram for ‘Write a Business
Plan’ (Figure 14.2)

A D

141
Forward Pass for ‘Write a Business
Plan’ (Figure 14.3)
1 3

B
0 1 4 9

A D

ES EF
1 4

142
Calculating ES, EF, LS, LF, and
Completion Time
Forward Pass:
ES (a) = 0 for the starting
activity
EF (a) = ES (a) + t
(a)*
ES (a) = max [EF (all predecessors of
a)]
Project completion time = max [EF(all ending
activities)]
Backward pass:
LF (a) = min [LS (all successors of a)]
LS (a) = LF -
t(a)*
* t (a) denotes the duration of activity
a
143
Backward Pass for ‘Write a Business
Plan’ (Figure 14.4)
1 3

B
0 1 4 9
2 4

A D

0 4 9
ES EF 1 1 4

C
LS LF
1 4

144
Critical Path
• Critical Path = longest path in the
network
– All activities for which ES=LS and EF=LF
– Length of critical path is equal to the
project completion time
– If there is any delay on the critical path,
the project will be delayed (unless one
takes ‘corrective actions’)

145
Slack Times

• Slack time equals amount of time a


path may be delayed without delaying
the project
– Paths not on the critical path have slack
– Slack = LS-ES or LF-EF

146
Precedence and times for Opening a New
Office (Table 14.4)

147
Network for ‘Open a New Office’
(Figure 14.5)
1 6

2
1 6
6
0 8
1 4
1 7
2 5
1 5 6
6
0 4 5 6 8
1 5
1 2 4 ES EF
2
3 4
LS LF
2 3
3 5

148
PERT
• Program Evaluation Review Technique
• Used under conditions of uncertainty
in activity times
• Requires three time estimates for
each activity
– Optimistic
– Most likely
– Pessimistic
• Times distributed according to beta
149
PERT Activity Times
• Estimate three times for each activity

• Compute mean completion time for each


activity:

150
PERT Activity Times
• Compute the variance for each activity:

• Assumes pessimistic and optimistic times


cover six standard deviations

151
PERT Activity Times
• If T = total completion time of the project,
then

and

152
CPM
• Critical Path Method
• Used under conditions of certainty in
activity times
• Requires one time estimate for each
activity
• Looks at time/cost trade-offs
– Normal activity time
– Normal cost
– Crash time
– Crash cost
153
Time-Cost Relationship in CPM
Crash Cost

Cost

Normal Cost

Crash Normal
Time Time Time

154
Use of Project Management
Concepts
• Scheduling is only part of a complete
approach to project management
• Trade-off between sophistication and
cost of methods
• Choice between constant time, PERT,
CPM or more advanced techniques
• Choice of project management
software packages

155
Summary
• What is a “project”?
• Objectives and tradeoffs
• Planning and Control in Projects
• Scheduling Methods
• Constant-Time Networks
• PERT Method
• CPM Method
• Use of Project Management Concepts

156
End of Chapter Fourteen

157
Independent-Demand
Inventory
Chapter 15
Chapter 15 Outline
• Introduction
• Purpose of Inventories
• Inventory Cost Structures
• Independent versus Dependent Demand
• Economic Order Quantity
• Continuous Review System
• Periodic Review System
• Using P and Q System in Practice
• ABC Inventory Management

159
Introduction
• Inventory: a stock of materials used
to facilitate production or to satisfy
customer demand.
• Types of inventory
– Raw materials (RM)
– Work in process (WIP)
– Finished goods (FG)
– Maintenance, repair & operating
supplies (MRO)
160
A Material-Flow Process
Productive Process

Work in
process

Vendors Raw Work in Finished Customer


Materials process goods
Work in
process

161
A Water Tank Analogy for Inventory

Inventory
Supply Level
Rate

Inventory
Level

Demand
Rate 162
Purpose of Inventories (1)
• To protect against uncertainties
– in demand (finished goods, MRO)
– supply (RM, MRO)
– lead times (RM/PP or WIP)
– schedule changes (WIP)
• To allow economic production and
purchase (as in discounts for
buying RM/PP in bulk)

163
Purpose of Inventories (2)
• To cover anticipated changes in
demand (as in a level strategy) or
supply
– finished goods
– RM/PP
• To provide for transit (pipeline
inventories)
– RM/PP
– finished goods
– WIP (independence of operations)
164
Inventory Cost Structures (1)

• Item or SKU cost


– Expressed as cost per unit or SKU.
Gets into LIFO and FIFO issues.
– Problem can be compounded by
quantity discounts.

165
Inventory Cost Structures (2)

• Ordering (or setup) cost


– Paperwork, worker time (ordering)
– worker time, downtime (setup)
– Typically expressed as a fixed cost per
order or setup.

166
Inventory Cost Structures (3)
• Carrying (or holding) cost:
– Cost of capital (market rate or internal rate
of return)
– Cost of storage (building, utilities,
insurance, handling)
– Cost of obsolescence, deterioration, and
loss (shrinkage)
– Management cost (record keeping,
counting)
• Typically expressed as a percentage of
SKU cost. Average in U.S. is estimated
to be 35 percent per year.
• Businesses often use only cost of capital
(understatement). 167
Inventory Cost Structures (4)
How the 35 percent carrying cost is distributed
• Cost of Capital—9-20 percent
• Obsolescence—2-5 percent
• Storage—2-5 percent
• Material Handling—1-3 percent
• Shrinkage—1-3 percent
• Taxes & Insurance—1-3 percent
Source: Mark Williams, APICS Instructor Listserv, 22 January 2001

168
Inventory Cost Structures (5)
• Stock out cost (back order or lost
sales)
– record maintenance
– lost income
– customer dissatisfaction
– Typically expressed as a fixed cost per
backorder or as a function of aging of
backorders.

169
Two Forms of Demand (1)
• Independent demand (this
chapter)
– finished goods, spare parts, MRO
– based on market demand
– requires forecasting
– managed using ‘replenishment
philosophy’, i.e. reorder when reach
a pre-specified level.

170
Two Forms of Demand (2)
• Dependent demand (next two
chapters)
– parts that go into the finished
products, RM/PP or WIP
– dependent demand is a known
function of independent demand
– calculate instead of forecast
– Managed using a ‘requirements
philosophy’, i.e. only ordered as
needed for higher level components
or products.
171
Independent versus Dependent
Demand

A pattern plus random influences ‘Lumpy’ because of production lots

172
Economic Order Quantity
(EOQ)
• Developed in 1915 by F.W. Harris
• Answers the question ‘How much do I
order?’
• Used for independent demand items.
• Objective is to find order quantity (Q) that
minimizes the total cost (TC) of managing
inventory.
• Must be calculated separately for each
SKU.
• Widely used and very robust (i.e. works
well in a lot of situations, even when its
assumptions don’t hold exactly). 173
Economic Order Quantity (EOQ)
Basic Model Assumptions

• Demand rate is constant, recurring, and


known.
• Lead time is constant and known.
• No stockouts allowed.
• Material is ordered or produced in a lot
or batch and the lot is received all at
once
• Costs are constant
– Unit cost is constant (no quantity discounts)
– Carrying cost is a constant per unit (SKU)
– Ordering (setup) cost per order is fixed
• The item is a single product or SKU. 174
EOQ Lot Size Choice
• There is a trade-off between
frequency of ordering (or the size of
the order) and the inventory level.
– Frequent orders (small lot size) lead to a
lower average inventory size, i.e. higher
ordering cost and lower holding cost.
– Fewer orders (large lot size) lead to a
larger average inventory size, i.e. lower
ordering cost and higher holding cost.

175
EOQ Inventory Levels
(‘sawtooth model’)

Order
Interval
On Hand

Lot size = Average Inventory


Q Level = Q/2

Time

176
Notations and measurement
units in EOQ
D = Demand rate, units per year
S =Cost per order placed, or setup
cost, dollars per order
C =Unit cost, dollars per unit
i = Carrying rate, percent of value per
year
Q = Lot size, units
TC= total of ordering cost plus
carrying cost
177
Cost Equations in EOQ
Ordering cost = (cost per order) x
orders per year) = SD/Q

Carrying cost per year = (annual


carrying rate) x (unit cost) x average
inventory = iCQ/2

Total annual cost (TC) = ordering cost


per year + carrying cost per year =
178
Total Cost of Inventory

179
TC and EOQ
TC = ordering cost + holding cost
= S*(D/Q) + iC*(Q/2)

EOQ =





180
EOQ Example
Sales = 10 cases/week S = $12/order
i = 30 pct/year C = $80/case
_________
EOQ = SD)/iC = SQRT[(2*12*10*52)/(80*.3)]

= SQRT[12,480/24] = 22.8 cases/order


TC = ordering cost + holding cost
= S*(D/Q) + iC*(Q/2) = 10(520/22.8) + 24 * 11.4
= 228.70 + 273.60 = $547.28/year
If order 22 cases instead, TC = $547.64; if 23, TC = $547.30
181
EOQ Example

182
Continuous Review System
• Relax assumption of constant
demand. Demand is assumed to be
random.
• Check inventory position each time
there is a demand (i.e continuously).
• If inventory position drops below the
reorder point, place an order for the
EOQ.
• Also called fixed-order-quantity or Q
system (the fixed order size is EOQ).
183
A Continuous Review (Q)
System

R = Reorder Point
Q = Order
Quantity
L = Lead time
184
A Continuous Review (Q)
System
Amount to order = EOQ
Order when inventory position = reorder point.
Reorder point = lead time * demand/period
= R = lead time demand (when demand is
constant)
Reorder point is independent of EOQ!
EOQ tells how much to order.
Reorder point tells when to order.
185
Service Level
• When demand is random, the reorder
point must take into account the
service level or fill rate.
• Service level has many definitions:
– Probability that all orders will be refilled
while waiting for an order to arrive.
– Percentage of demand filled from stock
in a time period.
– Percentage of time the system has stock
on hand.
186
Probability Distribution of Demand over Lead
Time

m = mean demand R = Reorder s = Safety


point stock

187
Periodic Review System (1)
• Instead of reviewing continuously, we
review the inventory position at fixed
intervals. For example, the bread
truck visits the grocery store on the
same days every week.
• Also known as “P system”, “Fixed-
order-interval system” or “Fixed-
order-period system”

188
Periodic Review System (2)
• Each time we review the inventory,
we either order or don’t. The
decision depends upon our reorder
point.
• The amount we order may be fixed,
or may be the amount needed to
bring us up to a target (T).

189
A Periodic Review (P)
System

190
Time Between Orders (P) and
Target Level (T) Calculation

Where:
T = target inventory level
m’ = average demand over P+L
s’ = safety stock

191
Using P and Q System in
Practice
• Use P system when orders must be
placed at specified intervals.
• Use P systems when multiple items
are ordered from the same supplier
(joint-replenishment).
• Use P system for inexpensive items.

192
Using P and Q Systems in
Practice
• P may be easier to use since levels
are reviewed less often.
• P requires more safety stock since
may only order at fixed points.
• P is more likely to run out since
cannot respond to increases in
demand immediately
• Either may be more costly: P in
safety stock, Q in monitoring cost.
193
Service Level versus Inventory Level (Figure
15.10)

194
ABC Inventory Management
(1)
• Based on “Pareto” concept (80/20
rule) and total usage in dollars of
each item.
• Classification of items as A, B, or C
based on usage.
• Purpose is to set priorities on effort
used to manage different SKUs, i.e.
to allocate scarce management
resources.
195
ABC Inventory Management
(2)
• ‘A’ items: 20% of SKUs, 80% of dollars
• ‘B’ items: 30 % of SKUs, 15% of dollars
• ‘C’ items: 50 % of SKUs, 5% of dollars
• Three classes is arbitrary; could be any
number.
• Percents are approximate.
• Danger: dollar use may not reflect
importance of any given SKU!

196
Annual Usage of Items by Dollar Value (Table
15.4)

197
ABC Chart for Table 15.4

A B C

198
Managing A items:
Diamonds

199
Summary
• Introduction
• Purpose of Inventories
• Inventory Cost Structures
• Independent versus Dependent Demand
• Economic Order Quantity
• Continuous Review System
• Periodic Review System
• Using P and Q System in Practice
• ABC Inventory Management

200
End of Chapter Fifteen

201
Materials Requirements
Planning
Chapter 16
Chapter 16 Outline
• Definition of MRP Systems
• MRP versus Order-Point Systems
• MRP Example
• MRP Elements
• Operating an MRP System
• The Successful MRP System

203
Introduction to MRP
• Used to manage dependent demand
items
– Raw materials and purchased parts
– Work in process (WIP)
• Driven by the master schedule
(which is driven by S&OP).
• End items ‘exploded’ into all
components using bill of materials
(BOM)
• Schedule offset based on lead times
• Is the heart of a larger ERP system 204
Definitions of MRP Systems
• Developed by Joe Orlicky at IBM,
1975.
– IBM 370 was the first computer with
the capacity to handle MRP
calculations
• Types of MRP:
– Type I. An inventory control system (MRP)
– Type II. Manufacturing Resource Planning
system (MRPII)
– Type III. Enterprise Resource Planning (ERP)

205
Definitions of MRP Systems
Three principal functions of MRP
(Orlicky):
• Inventory
– Order the right part
– Order in the right quantity
– Order at the right time
• Priorities
– Order with the right due date
– Keep the due date valid
• Capacity
– A complete load
– An accurate (valid) load
– An adequate time span for visibility of future load
206
Closed Loop MRP System
Firm orders from Forecast of
S & OP Demand
n Customers
n Sister plants
n Stock
replenishment Master Rough-cut
schedule capacity
Engineering Design
changes
MRP Parts Inventory
Explosion
BO
Inv.

Purchase Shop Orders

Capacity

Shop-floor
Raw Materials
Vendors Operations Product

TR 16-
4-6
Comparison of MRP & Order-Point
Systems

208
MRP Elements
• Inputs
1. Master Schedule
2. Bill of Materials (BOM)
3. Inventory Records
• Capacity Planning (feasibility)
• Planned Order Releases (outputs)
– Purchasing (buy)
– Shop Floor Control (make)

209
MRP Inputs
1. Master schedule
2. Product structure file (bill of
materials or BOM)
1. Parts & subassemblies contained in
product
2. Sequence of operations
3. Inventory master file
1. Item master information
2. Balances & ordering information
16-
1. Master Schedule
• Quantities derived from S&OP
production plan (product groups)
[input]
• Drives MRP process with a schedule of
finished products (actual items by
week) [output]
• Quantities may consist of a
combination of customer orders &
demand forecasts
• Quantities represent what needs to be
16-
2. MRP Example of BOM

212
BOM (Product Structure)
Table (End Item)
1 week

Leg Assembly Top (1)


(1) 2 weeks

Short Rails Long Rails Legs (4)


(2) (2) 1 week

213
Indented BOM
Level Code Component
0 Table (end-item)
1 Leg assembly (1)
2 Short rails (2)
2 Long rails (2)
2 Legs (4)
1 Top(1)

214
3. Inventory (item master)
File
“Permanent” information may include:
– Description – Assemblies in
– Part number which item is used
– Part name – Shelf life
– Safety stock – Batch control
– Item classification requirements
– Cost – Substitutes
– Yield – Suppliers and their
ratings
– Lead time
– Unit of measure
– Group to which (SKU)
item belongs
215
Inventory Status File
Changing information includes:
Quantities
− Ordered
− Received
− Issued
− Allocated
− Previously allocated that have been issued
Dates ordered, received, issued, and allocated
Shipping, production, and purchase numbers
On-hand balance & Available balance
Batch identification (e.g. lot number)

216
MRP Example
The Alpha Beta Company
A B
BOM L L
Level (LLC)=0
T=3 T=2

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


L L L
Level (LLC)=1
T=4 T=2 T=2
Inventory Position

Item On Hand Scheduled Receipts Lot Size MPS


A 10 0 1 100, period 8
B 5 0 1 200, period 6
C 140 0 150 ---
D 200 250, period 2 250 ---

16-
MRP Matrices For A & B

16-
Origin of Requirements

• At Level Zero: gross requirements


come from the master production
schedule (MPS)
• Below level zero: gross
requirements come from planned
order releases for the next level
above.
• Net requirements are gross
requirements plus scheduled
receipts minus inventory on-hand 219
MRP Matrices For C & D

16-
Alpha Beta Planned Order
Release Report
Period Item Quantity
1 C 150
2 D 250
3 D 250
4 B 195
5 A 90

16-
Operating an MRP System
• Should MRP carry “safety stock”?
• How much “safety stock” should be
carried?
• Issue of “safety lead time”
• Danger of “informal” system driving out
the “formal” system
• Expansion of MRP to other functions
(finance, HRM, etc.) of business

222
Operating a Successful MRP
System
• Accurate Inventory Records
• Stable master production schedule
• Realistic master production schedule
• Good control of engineering change
orders (impacts BOM)
• Good interface with capacity
planning (CRP)
• Reports that are useful
223
Elements of Successful MRP
Implementation
• Allow enough time (18 months
minimum)
• Put materials people in charge of
cross-functional team (not IS or
accountants)
• Train everyone and train them again!
• Top Management support

224
Summary
• Definition of MRP Systems
• MRP versus Order-Point Systems
• MRP Example
• MRP Elements
• Operating an MRP System
• The Successful MRP System

225
End of Chapter Sixteen

226
Just-In-Time Systems and
Lean Thinking
Chapter 17
Chapter 17 Outline
• Philosophy of JIT • Layout and Equipment
• Elements of a JIT • Effect on Workers
system • Suppliers
• Stabilizing the Master • Implementation of JIT
Schedule • Comparison of JIT and
• The Kanban System MRP
• Reducing Setup Time • Beyond JIT to Lean
and Lot Sizes Thinking

228
Philosophy of JIT
• Modern Roots of JIT (Toyota
Production System, Taiichi Ohno. d.
1990)
• Elements of JIT
• Root of JIT in “repetitive”
manufacturing
• JIT as a technique: to reduce
inventory
• JIT as a philosophy: a comprehensive
229
Elements of JIT
• Small lot sizes (lot size one)
• Use of Kanban system
• Quick changeover (set-ups)
• Multifunction workers
• Efficient layout (linear flow)
• Close relationships with suppliers
• Frequent deliveries from vendors
• Elimination of Waste

230
The Seven Wastes

231
Inventory as Waste
• “If all our suppliers are guessing,
you end up with inventory, which is
the physical embodiment of bad
information.”
–Paul Bell, Dell, Inc. Europe.
• Dell’s inventories fell from 31 days
of parts in 1996 to 6 days in 2000.

Source: Economist, 1 April 2000, p. 57.

232
Elements of JIT as a
Philosophy
Setup Time Small Lot JIT Delivery Suppliers'
Reduction Sizes from Suppliers Quality Level

Product Design Multi-function


Simplicity Workers

Small Group
Equipment &
Facility Layout JIT Problem
Solving

Preventive
Employee
Maintenance
Training

Daily "Pull"
KANBAN Repetitive
Schedule Production
System MPS
Discipline System

233
Kanban System
• A “pull” production system
• A physical (normally visual) control
system
• Normally composed of cards and
containers (production card and
withdrawal card), but can be any
type of signal
• Number of containers

234
The Kanban System
• The Kanban system uses simple cards or
signals to strictly control production
• The basic idea is that no station is
permitted to produce more than is
immediately required by the succeeding
station
• This simple idea prevents the buildup of
inventory
• No computer is required!

17-
The Real Origin Of Kanban
In the 1950s, Ohno visited Detroit to learn about
auto making from the U.S. manufacturers.
He was
Q - not impressed.
R
He visited a supermarket, which they did not
have in Japan, and observed the way they
restocked the shelves.
He used that method as the basis for Kanban.

17-
Kanban System

237
Kanban Cards

238
Reducing Setup Times and Lot
Sizes
• Reducing setup times:
– increases available capacity
– increases flexibility
– reduces inventory
• Reduce setup times and run times
simultaneously to reduce lot sizes and
throughput times
• Single-digit Setup Times (Shigeo Shingo
[d. 1990] or SMED System)
• Small lots require short setups!
239
Traditional Layout
Final
Work Centers
Assembly

Stockrooms

Supplier Supplier
A B

240
JIT Layout
Final
Assembly

Supplier Supplier
A B

241
JIT Layout with Group
Technology Final
Assembly

Line 1

Line 2

Supplier Supplier
A B

242
Effect of JIT on Workers
• Multifunction workers
• Cross-training
• New pay system to reflect skills
variety
• Teamwork
• Suggestion system

243
Suppliers
• Very close relationship with suppliers
• Frequent deliveries demanded from
suppliers
• Sole-sourcing
• Integrated supplier programs
• Deliveries to production line
• No inspection—high quality

244
Features of Integrated Supplier
Programs
• Early supplier selection, preferably in
the design phase
• Family of part sourcing to allow
supplier to take advantage of GT
• Long-term relationships with small
number of suppliers
• Paperwork reduction in receiving and
inspection to reduce costs

245
Implementation of JIT
• Obtain commitment from top management
• Gain the cooperation of workforce
• Start with final assembly line
• Reduce setup times and lot sizes working
backward from the final assembly line
• Balance fabrication rates with final assembly
production rates
• Extend JIT to the suppliers

246
Benefits Of JIT
1. Reduced 8. Better
inventory relations with
2. Improved suppliers
quality 9. Simplified
scheduling and
3. Lower costs control activities
4. Reduced space 10. Increased
requirements capacity
5. Shorter lead 11. Better use of
times human resources
6. Increased 12. More product
17-
Comparison of MRP and JIT
• Pull versus Push production systems
• Situations for comparing MRP and JIT:
– Pure repetitive manufacturing situation; JIT
works best
– A batch process; JIT works well with
cellular manufacturing
– A job shop; MRPII with some elements of
JIT
• MRP assumes the present system is correct
and seeks to make the best of that system.
• JIT seeks to change the system to make it

248
The Traditional Push
System
• In traditional manufacturing, an item is
released for production at a specified
time, with an associated due date
generated by MRP.
• The item moves through a sequence of
operations
• When one operation is finished, the
item is “pushed” to the next operation
• Finally, the product is pushed to
inventory, to meet the demand forecast
17-
The Pull System
• The pull system focuses on the
output of the system rather than the
input.
• Finished products are “pulled” from
the final operation in response to
firm customer orders.
• This leads to a chain reaction, with
each station pulling material from its
preceding station.
• JIT uses the “Kanban” system to
control the flow of material with very
little work-in-process inventory.
17-
Uses of MRP and JIT
JIT JIT
Repetitive (mass)

SYNCRO MRP
MRP
SYNCRO MRP Nonrepetitive
Semirepetitive (batch or job
shop) MRP

Low High
Stability of Master
Schedule
Stability of Bill of Material

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Lean Thinking

• Term coined by Womack, Jones and


Roos in 1990.
• Extends JIT beyond the factory
• Also applies to services
• http://www.lean.org

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Five Elements of Lean
Thinking
• Specify value from the customer’s
point of view
• Create a value stream map and
remove waste
• Flow the product or service through the
system
• Pull the product or service from the
customer
• Strive for perfection
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Summary
• Philosophy of JIT • Layout and Equipment
• Elements of a JIT • Effect on Workers
system • Suppliers
• Stabilizing the Master • Implementation of JIT
Schedule • Comparison of JIT and
• The Kanban System MRP
• Reducing Setup Time • Beyond JIT to Lean
and Lot Sizes Thinking

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End of Chapter Seventeen

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