Manufacturing Business

Overview
 10 Decision Areas of Operations
Management
• Quality
• Goods & service design
• Process & capacity design
• Location selection
• Layout design
• Human resource and job design
• Supply-chain management
• Inventory
• ERP Scheduling
• Maintenance
Managing
Inventory
 Overview
• What is an inventory system and why hold stock?
• Textbook prescriptions versus reality and variety?
• Independent versus Dependent Demand
• Inventory types, flows, costs
• Re-order quantities, EOQ & calculations
• Safety stocks & service levels
• Review systems
• Discounts and staged deliveries
• JIT
• ABC Analysis
• Stock taking
• Make or buy

 What is Inventory?
• Stock of materials
• Stored capacity
• Examples
 What is Inventory ?

What they cost ? Inventory Costs

Finnished goods
Inventory
Cost
Subassembly
inventory

Waiting for payment

Time
Raw materials and packing
parts inventory
manufacturing
 The Functions of Inventory
• Provide a stock of goods to meet anticipated
customer demand and provide a “selection” of
goods
• Decouple suppliers from production and
production from distribution
• Allow one to take advantage of quantity discounts
• To provide a hedge against inflation
• To protect against shortages due to delivery
variation
• To permit operations to continue smoothly with
the use of “work-in-process”
 What is an Inventory System?

Inventory


• the stock of any item or resource used in an

organization: raw materials, finished
products, component parts, supplies and
work-in-process.


An inventory system


• policies and controls for monitoring levels of

inventory
• Information system that records transactions
and enables analysis of stock requirements
and levels/quantities, costs etc
•
Inventory Types

§Raw-materials, components and sub-assemblies

§Work-in-progress or in-transit
§Finished-goods
§
In the warehouse, awaiting shipment, in delivery
vehicles, in tanks, on shelves, in the stores
§Strategic inventory
§Scrap & re-work
 Independent vs. Dependent
Demand
Independent Demand (not related
to other items or final end-product)

Dependent Demand
(derived from component
parts, sub-assemblies,
raw materials, etc.)
 Dependent versus Independent
Demand

Materials With Materials With

Item
Independent Demand Dependent Demand

Demand
Company Customers Parent Items
Source
Material Finished Goods
Spare Parts WIP & Raw Materials
Type
Method of
Forecast & Booked Calculated
Estimating Exploading BOM
Customer Orders
Demand
Planning
Forecast MRP
Method
Why hold stock?
• Provide flexibility
– minimum delay in supplying customers
– a good range
• Protect against uncertainties
• Enable economic purchasing
• Anticipate changes in demand or supply
– Buffers to feed processes and enable
efficient scheduling
– Strategic stock holdings
 Inventory Models
• Fixed order quantity models
– Economic order quantity
– Production order quantity
– Quantity discount
• Probabilistic models
• Fixed order period models
 EOQ Model
When To Order
Inventory Level
Optimal Average
Order Inventory
Quantity (Q*/2)
(Q*)

Reorder
Point
(ROP)

Time
Lead Time
 Fixed Period Model
When to Order?
Inventory Level Target maximum

Time
Period Period Period
 Costs of Inventory

• Ordering costs
– purchase order & office, shipping and/or set up
• Holding Costs
– tied up capital (item value), staff & equipment,
obsolescence, perishability, shrinkage, insurance
& security, m2 - m3 (rent/lease), audit.
• Cost of being out of stock, cancelling an order
• Scrap and re-working
annual costs
= holding cost factor %
average value of stockholding

e.g. 25% or 2p in £ per month of stock

 EOQ Aim = Cost Minimisation
Holding + ordering costs = total cost curve.
Find Qeoq inventory order point to minimise total costs.

Total Cost
Cost

Holding
Costs

Ordering Costs

Qeoq
Order Quantity (Q)
 Economic Order Quantity
(EOQ) Assumptions
• Single product line
• Demand rate: recurring, known, constant
• Lead time: constant , known
• No quantity discounts - stable unit cost
• No stock-outs allowed
• Items ordered/produced in a lot or batch
• Batch received all at once
• Holding cost is linear based on average stock
level
• Fixed order + set up cost
How Much Safety Stock?
Cost vs. safety level
Depends on:
§Uncertainty: demand & lead time
§cost of
§being out of stock
§carrying inventory
§increasingly better service
Service level policy
§% confidence of not hitting a stock-out situation
 ABC - 20/80 Principle and
Inventory Control
Items not of equal importance:
–£ invested & profit 100
potential

Cumulative Percentage
–Sales/usage volume 90

of Inventory Value
–stock-out penalties
Control expensive items closely.
70
“A” items – review frequently C
Review “B” & “C” items frequently. B
A
Pareto - 20/80 Principle 0 15 45 100
Identify inventory items based on % of total £ Cumulative %
value. “A” items top 20 %, “B” next 40 %,
"C" the lower 20%.
Stock Check

• Book stock vs physical stock

• Stock valuation – wastage & shrinkage
• Audit stock security systems
• Organising the stock check
• Internal & external audit
– Segmentation of duties
 Purchasing
• Acquisition of goods & services
• Activities
– Help decide whether to make or buy
– Identify sources of supply
– Select suppliers & negotiate contracts
– Control vendor performance
• Importance
– Major cost center
– Affects quality of final product
 Objectives of the Purchasing
Function

• Help identify the products and services that can

be best obtained externally; and
• Develop, evaluate, and determine the best
supplier, price, and delivery for those products
and services
The Purchasing Focus

Materials Management Supply Management

-High transportation cost -High costs
-High inventory costs -Scarcity: national or
international
Purchasing
Management
-Commodity items
-Standard products

Source Management
-Unique items
-Custom-made items
-High technology items
Materials Management

• Integrates all materials functions

– Purchasing
– Inventory management
– Production control
– Inbound traffic
– Warehousing and stores
– Incoming quality control

• Objective: Efficient, low cost operations

Manufacturing styles continuum

As En
se gi
Ba M m M ne
C tch ake b ake er
on R le -to
pr ep - to -to - to
t in oc et -s -o -o -o
uo iti t o rd r d rd
es ve ck er er er
us s

Process Discrete
(Ref. Gartner Group)
Manufacturers’ Pain Points

• Globalization
• Long lead times
• Too much or too little inventory
• Low utilization of manufacturing resources
• Inability to flex to personalized, changing
demand
• Inefficient use of working capital
Key Business Strategies

• Introduce new products as fast as

possible
• Reduce cycle time in the quote-to-cash
process
• Optimize the supply chain
• Optimize inventory costs
 Typical Manufacturing
Requirements
• Develop a Manufacturing Prototype
• Product Specifications
• Design Approval
• Manufacturing Schedule
• Capacity
• Master Scheduling/Material Requirement
Planning
• Purchasing
• Material Control
Discrete Manufacturing
Do You Know...

What to Build?


When and Where to Build It?



How to Make It?



Where to Buy Components?




Requirements for Effective Use of
Dependent Demand Inventory Models

Effective use of dependent demand

inventory models requires that the
operations manager know the:
– master production schedule
– specifications or bills-of-material
– inventory availability
– purchase orders outstanding
– job orders outstanding
– lead times
 Bill-of-Material
• List of components & quantities needed to
make product
• Provides product structure (tree)
– Parents: Items above given level
– Children: Items below given level

• Shows low-level coding

– Lowest level in structure item occurs
– Top level is 0; next level is 1 etc.
 Time-Phased Product
Structure
Must have D and E
Start completed here so
production can begin on B
production of D
1 week 2 weeks to
D produce

2 weeks B
E
A
2 weeks 1 week
2 weeks E
1 week
G 3 weeks C
1 week F
D

1 2 3 4 5 6 7 8
 Terminology
• MRP—Material Requirements Planning
• MRP II—Manufacturing Resources Planning
• DRP—Distribution Requirements Planning
• ERP—Enterprise Resource Planning
• SCM—Supply Chain Management
• JIT—Just In Time
• CRP - Capacity Requrements Planning
• RCCP - Rough Cut Capacity Planning
What is a forecast?

 forecasts represent demands you expect

•Items
•Dates
•Quantities
 What do we mean by
Master Schedule ?

What goes Where and

When!
Check critical resources
Critical items
Rough cut capacity
planning
 MPS - Master Production Schedule

 Statement of supply to meet the demand of

MDS
 Defines the anticipated build schedule for
critical items
 Smooths production to utilise capacity to
drive material requirement
 Order promising, linking production plans to
manufacturing by : items, dates &
quantities
 Master Production Schedule
• Shows items to be produced
– End item, customer order, module

• Derived from aggregate plan

• Example
Item/Week Oct 3 Oct 10 Oct 17 Oct 24

Drills 300 200 310 300

Saws 300 450 310 330

Material Requirements Planning
(MRP)
• Manufacturing computer information system
• Determines quantity & timing of dependent demand
items
1 2 3 4 5
Gross Requirements 2 20 25 15
Scheduled Receipts 5 30
Available 25 23 33 33 8
Net Requirements 7
Planned Order Receipts 7
Planned Order Releases 7
 Enterpise Resource Planning

BOM Demand history

Forecast
Single/
Multi Org
Sales orders

Sales
MDS - Master Demand Schedule
Single/

Finance
Multi Org
ATP/CTP

MPS RCCP Items

BOM
Engineering Inventory

BOM/Routings Items

MRP CRP
Transactions

Purchasing Manufacturing
Value Proposition

• Lower Costs
– Improve Cycle Time & Throughput

– Lower Inventories

– Reduce Procurement Expense

– Improve Quality

– Reduce Working Capital Requirements

 MRP Benefits

• Increased customer satisfaction due to

meeting delivery schedules
• Faster response to market changes
• Improved labor & equipment utilization
• Better inventory planning & scheduling
• Reduced inventory levels without reduced
customer service
Structure of the MRP System
Master Production
BOM
Schedule
(Bill-of-Material) MRP by period report

Lead Times
MRP by date report
(Item Master File) MRP
Program
s Planned orders report
Inventory Data

Purchase requirements

Purchasing data
Exception reports
MRP and JIT

• MRP - a planning and scheduling

technique with fixed lead times
• JIT - a way to move material
expeditiously
• Integrating the two:
– Small bucket approach and back flushing
– balanced flow approach
 Just-in-Time

approach to inventory management & control in which

inventories are acquired & inserted in production at
exact time when needed.
Requirement

• Accurate production & inventory information

system
• Highly efficient purchasing
• Reliable suppliers
• Efficient inventory-handling system
 Extensions of
MRP

• Closed loop MRP

• Capacity planning - load reports
• MRP II - Manufacturing Resources
Planning
• Enterprise Resource Planning
Extensions to MRP
Enterprise Resource
Planning
 MRP II with ties to customers and
suppliers
Distribution Resource Planning

• DRP requires:
– Gross requirements, which are the same as
expected demand or sales forecasts
– Minimum levels of inventory to meet customer
service levels
– Accurate lead times
– Definition of the distribution structure
Supply Chain Planning
Typical Strategic Planning
Questions

• How do you balance long term demand with supply?

• When should you expand existing supply sources
(plants, distribution centers, storage facilities)?
• How do you evaluate outsourcing opportunities?
• Should you close exiting distribution centers, modes,
lines or any other assets?
• How do you integrate new businesses and evaluate
new markets (consolidation and divestiture)?
• What is the most effective approach for budget and
contingency planning?

Strategic Planning Challenges
Examination of trade-offs using Strategic Network
Optimization:
• Inventory pre-build vs. Overtime
• In-house vs. Outsourcing
• Single sourcing vs. Multi-sourcing
• Varying safety stock levels
• Asset rationalization / expansion
• Performing Sensitivity Analysis
• Blending Optimization
• Purchasing cost optimization
Most Supply Chains consist of
many “threads”, each a “chain of
chains”
SO IVE
R
UR L
C E DE
MA KE
SOU KE MA IVER
R CE E DEL
DE E
MAK
E LIV U RC E MAK
DEL SOSOURC
IVER ER
SOURCESO MAKE DELIVER SOURCE MAKE DELIVER SOURCE MAKEIVER DELIVER
UR L
CE ER
DELIV VER SO SOURC DE
K E I UR E M
E MA EL CE E AKE
OU R C M AK E D AK DELIVER
SS
OUR KE MMAK E VER
CE MA E D
E DE E KE
UR
C MAK C MA DEL
SO
E LIV
E O UR CE IVE
DEL S OUR
IVER R S R
ER
SO L I V
SOURCE URCMAKE DELIVER SOURCE MAKE DELIVER SOURCE MAKEDE DELIVER
E
ER S
MA DELIV ER SO OURCE AKE
SOU E K IV UR M M IVER
RCEE MA K E
D EL CE AKE DEL
R C E E
SOU MAK DE
RC MAK DEL
E AKE LI V U M
E AK IVER
M DELIV ER
ER SO OURC E
S
R CE DE
SOURCESOU MAKE DELIVER SOURCE MAKE DELIVER SOURCE MAKELI V DELIVER
ER
ER SOU
DELIV ER SO RCE
K E IV UR
MA EL CE MAK
R C E D E
SOU DEL
KE MA IVER
MA KE
CE DE
O UR LIV
S
Multiple Production ER
Operations within a
Multiple Suppliers Business Multiple Customers
 In the MRP world, a supply-chain
change “ripples” through each linkage
PLAN PLAN
PLAN
PLAN
Entity 6
PLAN PLAN PLAN
En
ity 5 ti
Ent ty
7
MAKE
Entity 4 Entity 8
RCE DE
LIV ...
SOU
... Entity 9
E R
R SOURCE
DELIVE MAKE

Change in Supply
(e.g. machine line breakdown)

➤The impact is felt both up and down the supply chain

➤The change may impact both customer and supplier
supply-chain planning
Supply Chain Management

 Issues
• Global visibility
• Supply chain modeling
• Consolidated material and resource planning
• Fast simulations
• Automatic resolution of constraint violations
• Strategy-driven planning
Global Order Promising

• Supply chain available to promise

• Capable to promise
• Real time constraint based order
promising
• Flexible ATP rules
Supply Chain Modeling

• Patented Supply Chain Modeling

– Supply Chain Bills
– Assignment Sets
– Effective Date Changes
– Graphical Display of Supply Chain Network
• All Locations Including Trading Partners
Online Interactive Simulation

• Simulate Changes to:

– Item Supply and Demand
– Resource Availability
– Order Sources
– Alternate Bills and Routings
– Optimization Objectives
– Demand Priorities
• Compare Scenarios Quantitatively
 The Strategic Importance of
Maintenance and Reliability
• Failure has far reaching effects on a firm’s
– operation
– reputation
– profitability
– customers
– product
– employees
– profits
•
Tactics for
Reliability and Maintenance
• Reliability Tactics
– improving individual components
– providing redundancy
• Maintenance Tactics
– implementing preventive maintenance
– increasing repair capabilities
 Types of Maintenance
Preventive Breakdown
Routine inspection & • Non-routine inspection
servicing
Prevents failures & servicing
Bases for doing • Remedial
Time: Every day • Basis for doing
– Equipment failure
Usage: Every 300
pieces
Inspection: Control
chart deviations
Organizing the
Maintenance Function

• Centralized maintenance department

– Does all maintenance (PM & breakdown)
• Decentralized maintenance department
– Useful if different equipment used in different
areas of company
• Contract maintenance
– Used if little equipment or expertise
• Operator ownership approach
 Market Emphasis (2003)
200
Average
Seats
SAP R3
150 BAAN

Oracle Applications
SSA (BPCS)
100 MFG Pro (QAD)
Compass (WDS)
Prism
JIT (Interactive) JBA
50 Cincom Chess
Infoflo

Discrete 4 Shift MSS Process

Batch
ETO ATO MTS Repetitive Continuous
Repetitive