INSTITUTE OF DISTANCE

LEARNING
KNUST
EXECUTIVE MBA/MPA
CEMBA/CEMPA 557
OPERATIONS MANAGEMENT
LECTURE FOUR
BLOCK FOUR – PRODUCTION
PLANNING & SCHEDULING

Unit 11 – Aggregate Production

Planning
Unit 12 – Just-In-Time
Unit 13 – Scheduling and Sequencing
UNIT 11
Aggregate Production
Planning
AGGREGATE PLANNING

Determine the quantity and timing

of production for the immediate
future
 Objective is to minimize cost over
the planning period by adjusting
 Production rates
 Labor levels
 Inventory levels
 Overtime work
 Subcontracting
 Other controllable variables
AGGREGATE PLANNING

Required for aggregate

planning
 A logical overall unit for measuring
sales and output
 A forecast of demand for intermediate
planning period in these aggregate
units
 A method for determining costs
 A model that combines forecasts and
costs so that scheduling decisions can
be made for the planning period
THE PLANNING PROCESS
Long-range plans
(over one year)
Research & Development
New product plans
Capital investment
Facility
location/expansion
Top
executives Intermediate-range plans
(3 to 18 months)
Sales planning
Production planning and
Operations budgeting
managers Setting employment, inventory,
subcontracting levels
Analyzing cooperating plans
Short-range plans
(up to 3 months)
Job assignments
Operations Ordering
managers, Job scheduling
supervisors, Dispatching
foremen Overtime
Part-time help

Responsibility Planning tasks and horizon Figure 13.1

AGGREGATE PLANNING

Quarter 1
Jan Feb Mar
150,000 120,000 110,000

Quarter 2
Apr May Jun
100,000 130,000 150,000

Quarter 3
Jul Aug Sep
180,000 150,000 140,000
AGGREGATE PLANNING
Marketplac
e and
demand Product
decision Research
s and
technology
Process
planning
Demand and
forecasts, capacity
orders decisions Workforce
Raw
Aggregat materials
e available Inventory
plan for on
productio hand
n External
capacity
Master (subcontrac
production
schedule tors)
and MRP
systems

Detailed
work Figure 13.2
schedule
s
AGGREGATE PLANNING

 Combines appropriate resources

into general terms
 Part of a larger production
planning system
 Disaggregation breaks the plan
down into greater detail
 Disaggregation results in a master
production schedule
AGGREGATE PLANNING STRATEGIES
1. Use inventories to absorb changes in
demand
2. Accommodate changes by varying
workforce size
3. Use part-timers, overtime, or idle time
to absorb changes
4. Use subcontractors and maintain a
stable workforce
5. Change prices or other factors to
influence demand
CAPACITY OPTIONS
 Changing inventory levels
 Increase inventory in low
demand periods to meet high
demand in the future
 Increases costs associated with
storage, insurance, handling,
obsolescence, and capital
investment
 Shortages can mean lost sales
due to long lead times and poor
customer service
CAPACITY OPTIONS
 Varying workforce size by
hiring or layoffs
 Match production rate to
demand
 Training and separation costs for
hiring and laying off workers
 New workers may have lower
productivity
 Laying off workers may lower
morale and productivity
CAPACITY OPTIONS
 Varying production rate
through overtime or idle time
 Allows constant workforce
 May be difficult to meet large
increases in demand
 Overtime can be costly and may
drive down productivity
 Absorbing idle time may be
difficult
CAPACITY OPTIONS
 Subcontracting
 Temporary measure during
periods of peak demand
 May be costly
 Assuring quality and timely
delivery may be difficult
 Exposes your customers to a
possible competitor
CAPACITY OPTIONS
 Using part-time workers
 Useful for filling unskilled or low
skilled positions, especially in
services
DEMAND OPTIONS
 Influencing demand
 Use advertising or promotion to
increase demand in low periods
 Attempt to shift demand to slow
periods
 May not be sufficient to balance
demand and capacity
DEMAND OPTIONS
 Back ordering during high-
demand periods
 Requires customers to wait for
an order without loss of goodwill
or the order
 Most effective when there are
few if any substitutes for the
product or service
 Often results in lost sales
DEMAND OPTIONS
 Counterseasonal product and
service mixing
 Develop a product mix of
counterseasonal items
 May lead to products or services
outside the company’s areas of
expertise
AGGREGATE PLANNING OPTIONS
Option Advantages Disadvantages Some Comments
Changing Changes in Inventory holding Applies mainly to
inventory human resources cost may production, not
levels are gradual or increase. service,
none; no abrupt Shortages may operations
production result in lost
changes sales.

Varying Avoids the costs Hiring, layoff, and Used where size of
workforce of other training costs labor pool is large
size by hiring alternatives may be
or layoffs significant

Table 13.1
AGGREGATE PLANNING OPTIONS
Option Advantages Disadvantages Some Comments
Varying Matches seasonal Overtime Allows flexibility
production fluctuations premiums; tired within the
rates through without hiring/ workers; may not aggregate plan
overtime or training costs meet demand
idle time

Sub- Permits flexibility Loss of quality Applies mainly in

contracting and smoothing of control; reduced production
the firm’s output profits; loss of settings
future business

Table 13.1
AGGREGATE PLANNING OPTIONS
Option Advantages Disadvantages Some Comments
Using part- Is less costly and High turnover/ Good for unskilled
time workers more flexible training costs; jobs in areas with
than full-time quality suffers; large temporary
workers scheduling labor pools
difficult

Influencing Tries to use Uncertainty in Creates marketing

demand excess capacity. demand. Hard to ideas.
Discounts draw match demand to Overbooking
new customers. supply exactly. used in some
businesses.

Table 13.1
AGGREGATE PLANNING OPTIONS
Option Advantages Disadvantages Some Comments
Back ordering May avoid Customer must be Allows flexibility
during high- overtime. Keeps willing to wait, within the
demand capacity but goodwill is aggregate plan
periods constant. lost.

Counter- Fully utilizes May require skills Risky finding

seasonal resources; allows or equipment products or
product and stable workforce outside the firm’s services with
service areas of expertise opposite demand
mixing patterns

Table 13.1
METHODS FOR AGGREGATE PLANNING

 A mixed strategy may be the

best way to achieve minimum
costs
 There are many possible mixed
strategies
 Finding the optimal plan is not
always possible
MIXING OPTIONS TO
DEVELOP A PLAN

 Chase strategy
 Match output rates to demand
forecast for each period
 Vary workforce levels or vary
production rate
 Favored by many service
organizations
MIXING OPTIONS TO
DEVELOP A PLAN
 Level strategy
 Daily production is uniform
 Use inventory or idle time as buffer
 Stable production leads to better
quality and productivity
 Some combination of capacity
options, a mixed strategy, might
be the best solution
GRAPHICAL AND CHARTING METHODS

 Popular techniques
 Easy to understand and use
 Trial-and-error approaches that
do not guarantee an optimal
solution
 Require only limited
computations
GRAPHICAL AND CHARTING METHODS

1. Determine the demand for each period

2. Determine the capacity for regular time,
overtime, and subcontracting each
period
3. Find labor costs, hiring and layoff costs,
and inventory holding costs
4. Consider company policy on workers
and stock levels
5. Develop alternative plans and examine
their total costs
PLANNING EXAMPLE 1
Month Expected Demand Production Days Demand Per Day
(computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

Table 13.2
Average Total expected demand
requiremen =
Number of production days
t
6,200
= = 50 units per day
124
 PLANNING EXAMPLE 1
Forecast demand
Production rate per working day

70 – Level production using

average monthly forecast
60 – demand

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
Figure 13.3 working days
PLANNING EXAMPLE 1
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
Overtime pay rate $ 7 per hour
(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

Table 13.3
PLANNING EXAMPLE 1
Month Production at Demand Monthly Ending
Cost Information
50 Units per Day Forecast Inventory Inventory
Inventory carry cost Change
$ 5 per unit per month
Jan
Subcontracting 1,100
cost per unit 900 $10 +200
per unit 200
Feb pay rate 900
Average 700 +200
$ 5 per 400
hour ($40 per day)
Mar pay rate1,050
Overtime 800 +250
$ 7 per hour 650
(above 8 hours per day)
Apr 1,050 1,200 -150 500
Labor-hours to produce a unit 1.6 hours per unit
May 1,100 1,500 -400 100
Cost of increasing daily production rate $300 per unit
June and training)
(hiring 1,000 1,100 -100 0
Cost of decreasing daily production rate $600 per unit 1,850
(layoffs)
Total units of inventory carried over from one
Table 13.3 month to the next = 1,850
units
Workforce required to produce 50 units per day = 10
workers
PLANNING EXAMPLE 1
Month Production at Demand Monthly Ending
Cost Information
Costs Calculations
50 Units per Day Forecast Inventory Inventory
Inventory
Inventorycarry cost
carrying $9,250 (= 1,850 Change
$ 5 per unit per
units monthx $5
carried
Jan
Subcontracting 1,100
cost per unit 900 per $10unit)
+200
per unit 200
Regular-time
Feb pay rate
Average labor
900 49,600
700 (= 10
$ 5 workers
+200
per x $40
hour ($40 per
400
per day
day)
x 124 days)
Mar pay rate1,050
Overtime 800 +250
$ 7 per hour 650
Other (above 8 hours per day)
Aprcosts (overtime,
1,050 0
1,200 -150 500
hiring, layoffs,
Labor-hours to produce a unit 1.6 hours per unit
May
subcontracting) 1,100 1,500 -400 100
Cost of increasing daily production rate $300 per unit
June
Total cost
(hiring 1,000
and training) 1,100
$58,850 -100 0
Cost of decreasing daily production rate $600 per unit 1,850
(layoffs)
Total units of inventory carried over from one
Table 13.3 month to the next = 1,850
units
Workforce required to produce 50 units per day = 10
workers
 PLANNING EXAMPLE 1
7,000 –

6,000 –
Reduction
Cumulative demand units

of inventory
5,000 –
Cumulative level
4,000 – production using
average monthly
3,000 – forecast
requirements
2,000 –

1,000 – Cumulative forecast

requirements
–
Excess inventory

Jan Feb Mar Apr May June

Figure 13.4
PLANNING EXAMPLE 2
Month Expected Demand Production Days Demand Per Day
(computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

Table 13.2

Minimum requirement = 38 units per day

 PLANNING EXAMPLE 2
Forecast demand
Production rate per working day

70 –
Level production
60 – using lowest
monthly forecast
demand
50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
PLANNING EXAMPLE 2
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
Overtime pay rate $ 7 per hour
(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

Table 13.3
PLANNING EXAMPLE 2
Cost Information
Inventory carry cost $ 5 per unit per month
In-house
Subcontracting production
cost per unit = 38$10units
per unitper day
Average pay rate x $124 days
5 per hour ($40 per day)
Overtime pay rate = 4,712 units
$ 7 per hour
(above 8 hours per day)

Subcontract
Labor-hours units=
to produce a unit 6,200 - 4,712
1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training) = 1,488 units
Cost of decreasing daily production rate $600 per unit
(layoffs)

Table 13.3
PLANNING EXAMPLE 2
Cost Information
Inventory carry cost $ 5 per unit per month
In-house
Subcontracting production
cost per unit = 38$10units
per unitper day
Average pay rate x $124 days
5 per hour ($40 per day)
Overtime pay rate = 4,712 units
$ 7 per hour
(above 8 hours per day)
Costs Subcontract
Labor-hours units= 6,200
to produce a unit - 4,712
Calculations
1.6 hours per unit
Regular-time
Cost labor
of increasing $37,696
daily production rate (= $300
7.6 workers
per unit x $40 per
(hiring and training) = 1,488
day x 124units
days)
Cost of decreasing daily production
Subcontracting 14,880 rate (= $600
1,488per unitx $10 per
units
(layoffs)
unit)
Table 13.3
Total cost $52,576
PLANNING EXAMPLE 3
Month Expected Demand Production Days Demand Per Day
(computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

Table 13.2

Production = Expected Demand

 PLANNING EXAMPLE 3
Production rate per working day

Forecast demand
and monthly
70 – production

60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
PLANNING EXAMPLE 3
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
Overtime pay rate $ 7 per hour
(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

Table 13.3
PLANNING EXAMPLE 3
Month Forecast Daily Basic Extra Cost of Extra Cost of Total Cost
Cost Information
(units) Prod Production Increasing Decreasing
Rate Cost (demand Production Production
Inventory carrying costx 1.6 hrs/unit x $ 5
(hiring cost) per (layoffper
unit cost)month
$5/hr)
Subcontracting cost per unit $10 per unit
Average
Jan pay
900 rate 41 $ 7,200 — $ 5 per hour
—($40 per day)
$ 7,200
Feb
Overtime 700
pay rate 39 5,600 — $1,200
$ 7 per hour 6,800
(= 2 x $600)
(above 8 hours per day)
Mar 800 38 6,400 — $600 7,000
Labor-hours to produce a unit 1.6 hours
(= 1per unit
x $600)

Cost
Apr of increasing
1,200 daily production
57 9,600 rate$5,700$300 per unit
— 15,300
(hiring and training) (= 19 x $300)
May 1,500 68 12,000 $3,300 — 15,300
Cost of decreasing daily production rate $600 per unit
(= 11 x $300)
(layoffs)
June 1,100 55 8,800 — $7,800 16,600
(= 13 x $600)
Table 13.3 $49,600 $9,000 $9,600 $68,200
COMPARISON OF THREE
PLANS
Cost Plan 1 Plan 2 Plan 3

Inventory carrying $ 9,250 $ 0 $ 0

Regular labor 49,600 37,696 49,600

Overtime labor 0 0 0
Hiring 0 0 9,000
Layoffs 0 0 9,600
Subcontracting 0 0 0
Total cost $58,850 $52,576 $68,200

Plan 2 is the lowest cost option Table 13.5

MATHEMATICAL APPROACHES
 Useful for generating strategies
 Transportation Method of Linear
Programming
 Produces an optimal plan
 Management Coefficients Model
 Model built around manager’s
experience and performance
 Other Models
 Linear Decision Rule
 Simulation
TRANSPORTATION METHOD
Sales Period
Mar Apr May
Demand 800 1,000 750
Capacity:
Regular 700 700 700
Overtime 50 50 50
Subcontracting 150 150 130
Beginning inventory 100tires
Costs
Regular time $40 per tire
Overtime $50 per tire
Subcontracting $70 per tire
Carrying $ 2 per tire Table 13.6
TRANSPORTATION EXAMPLE
Important points
1. Carrying costs are $2/tire/month. If
goods are made in one period and
held over to the next, holding costs
are incurred
2. Supply must equal demand, so a
dummy column called “unused
capacity” is added
3. Because back ordering is not viable in
this example, cells that might be used
to satisfy earlier demand are not
available
TRANSPORTATION EXAMPLE
Important points
4. Quantities in each column designate
the levels of inventory needed to
meet demand requirements
5. In general, production should be
allocated to the lowest cost cell
available without exceeding unused
capacity in the row or demand in the
column
 TRANSPORTATI
ON EXAMPLE

Table 13.7
MANAGEMENT COEFFICIENTS
MODEL

 Builds a model based on

manager’s experience and
performance
 A regression model is constructed
to define the relationships
between decision variables
 Objective is to remove
inconsistencies in decision
making
OTHER MODELS
Linear Decision Rule
 Minimizes costs using quadratic cost curves
 Operates over a particular time period

Simulation
 Uses a search procedure to try different
combinations of variables
 Develops feasible but not necessarily
optimal solutions
SUMMARY OF AGGREGATE
PLANNING METHODS
Techniques Solution Important Aspects
Approaches
Graphical/charting Trial and error Simple to understand and easy
methods to use. Many solutions; one
chosen may not be optimal.

Transportation Optimization LP software available; permits

method of linear sensitivity analysis and new
programming constraints; linear functions
may not be realistic

Management Heuristic Simple, easy to implement; tries

coefficients model to mimic manager’s decision
process; uses regression

Table 13.8
 AGGREGATE PLANNING IN
SERVICES
Controlling the cost of labor is critical
1. Close scheduling of labor-hours to
assure quick response to customer
demand
2. Some form of on-call labor resource
3. Flexibility of individual worker skills
4. Individual worker flexibility in rate
of output or hours
FIVE SERVICE SCENARIOS

 Restaurants
 Smoothing the production
process
 Determining the workforce size
 Hospitals
 Responding to patient demand
FIVE SERVICE SCENARIOS

 National chains of small

service firms
 Planning done at national level
and at local level
 Miscellaneous services
 Plan human resource
requirements
 Manage demand
LAW FIRM EXAMPLE

(3) (4) (5) (6)

(1) (2) Likely Worst Maximum Number of
Category of Best Case Case Case Demand in Qualified
Legal Business (hours) (hours) (hours) People Personnel
Trial work 1,800 1,500 1,200 3.6 4
Legal research 4,500 4,000 3,500 9.0 32
Corporate law 8,000 7,000 6,500 16.0 15
Real estate law 1,700 1,500 1,300 3.4 6
Criminal law 3,500 3,000 2,500 7.0 12
Total hours 19,500 17,000 15,000
Lawyers needed 39 34 30

Table 13.9
FIVE SERVICE SCENARIOS

 Airline industry
 Extremely complex planning
problem
 Involves number of flights,
number of passengers, air and
ground personnel
 Resources spread through the
entire system
YIELD MANAGEMENT
Allocating resources to customers at
prices that will maximize yield or
revenue
1. Service or product can be sold in
advance of consumption
2. Demand fluctuates
3. Capacity is relatively fixed
4. Demand can be segmented
5. Variable costs are low and fixed
costs are high
 YIELD MANAGEMENT
EXAMPLE
Room sales Demand
Curve
Potential customers exist who
100 are willing to pay more than
the $15 variable cost of the
room

Passed-up Some customers who paid

contribution $150 were actually willing
50 to pay more for the room
$ margin
= (Price) x
(50
rooms)
= ($150 - Money left
$15) on the
x (50) table
= $6,750 $15 $150 Price
Variable cost Price Figure 13.5
of room charged for
 YIELD MANAGEMENT
EXAMPLE
Room sales Demand
Curve
Total $ margin =
100 (1st price) x 30 rooms + (2nd price) x 30 rooms =
($100 - $15) x 30 + ($200 - $15) x 30 =
$2,550 + $5,550 = $8,100

60

30

$15 $100 $200 Price

Variable cost Price 1 Price 2 Figure 13.6
of room for room for room
YIELD MANAGEMENT MATRIX
Price
Tend to be fixed Tend to be variable
Quadrant 1: Quadrant 2:
Predictable

Movies Hotels
Stadiums/arenas Airlines
Duration of use

Convention centers Rental cars

Hotel meeting space Cruise lines

Quadrant 3: Quadrant 4:
Unpredictable

Restaurants Continuing care

Golf courses hospitals
Internet service
providers

Figure 13.7
MAKING YIELD MANAGEMENT WORK

1. Multiple pricing structures must

be feasible and appear logical
to the customer
2. Forecasts of the use and
duration of use
3. Changes in demand
UNIT 12
Just-In-Time
JUST-IN-TIME AND
LEAN PRODUCTION
 JIT is a philosophy of continuous
and forced problem solving that
supports lean production
 Lean production supplies the
customer with their exact wants
when the customer wants it
without waste
 Key issues are continual
improvement and a pull system
WASTE REDUCTION

 Waste is anything that does not

add value from the customer
point of view
 Storage, inspection, delay,
waiting in queues, and defective
products do not add value and
are 100% waste
WASTE REDUCTION

 Faster delivery, reduced work-in-

process, and faster throughput
all reduce waste
 Reduced waste reduces room for
errors emphasizing quality
 Reduced inventory releases
assets for other, productive
purposes
VARIABILITY REDUCTION

 JIT systems require managers to

reduce variability caused by both
internal and external factors
 Variability is any deviation from
the optimum process
 Inventory hides variability
 Less variability results in less
waste
CAUSES OF VARIABILITY
1. Employees, machines, and suppliers produce units that
do not conform to standards, are late, or are not the
proper quantity
2. Engineering drawings or specifications are inaccurate
3. Production personnel try to produce before drawings or
specifications are complete
4. Customer demands are unknown
PULL VERSUS PUSH SYSTEMS

 A pull system uses signals to

request production and delivery
from upstream stations
 Upstream stations only produce
when signaled
 System is used within the
immediate production process
and with suppliers
PULL VERSUS PUSH SYSTEMS

 By pulling material in small lots,

inventory cushions are removed,
exposing problems and
emphasizing continual
improvement
 Manufacturing cycle time is
reduced
 Push systems dump orders on the
downstream stations regardless of
the need
 JIT AND COMPETITIVE ADVANTAGE
JIT Requires:

Table 16.1
 JIT AND COMPETITIVE ADVANTAGE
Which Results In:

Which Yields:

Table 16.1
SUPPLIERS

 JIT partnerships exist when a

supplier and purchaser work
together to remove waste and
drive down costs
 Four goals of JIT partnerships are:
 Elimination of unnecessary activities
 Elimination of in-plant inventory
 Elimination of in-transit inventory
 Elimination of poor suppliers
JIT PARTNERSHIPS
Suppliers
Few suppliers
Nearby suppliers
Repeat business with same suppliers
Support suppliers so they become or remain
price competitive
Competitive bidding mostly limited to new
purchases
Buyer resists vertical integration and
subsequent wipeout of supplier business
Suppliers encouraged to extend JIT buying to
their suppliers
Table 16.2
JIT PARTNERSHIPS
Quantities
Share forecasts of demand
Frequent deliveries of small-lot quantities
Long-term contract
Minimal paperwork to release order (EDI or the
Internet)
Little or no permissible overage or underage
Suppliers package in exact quantities
Suppliers reduce production lot sizes

Table 16.2
JIT PARTNERSHIPS
Quality
Minimal product specifications imposed on
supplier
Help suppliers meet quality requirements
Close relationships between buyers’ and
suppliers’ quality assurance people
Suppliers use poka-yoke and process control
charts

Table 16.2
JIT PARTNERSHIPS
Shipping
Scheduling inbound freight
Gain control by using company-owned or
contract shipping and warehousing
Use of advanced shipping notice (ASN)

Table 16.2
JIT LAYOUT
Reduce waste due to movement
Layout Tactics
Build work cells for families of products
Include a large number operations in a small area
Minimize distance
Design little space for inventory
Improve employee communication
Use poka-yoke devices
Build flexible or movable equipment
Cross train workers to add flexibility
Table 16.3
DISTANCE REDUCTION
 Large lots and long production
lines with single-purpose
machinery are being replaced by
smaller flexible cells
 Often U-shaped for shorter paths
and improved communication
 Often using group technology
concepts
INCREASED FLEXIBILITY

 Cells designed to be rearranged

as volume or designs change
 Applicable in office
environments as well as
production settings
 Facilitates both product and
process improvement
IMPACT ON EMPLOYEES

 Employees are cross trained

for flexibility and efficiency
 Improved communications
facilitate the passing on of
important information about
the process
 With little or no inventory
buffer, getting it right the first
time is critical
REDUCED SPACE AND INVENTORY

 With reduced space, inventory

must be in very small lots
 Units are always moving because
there is no storage
INVENTORY
Inventory is at the minimum level
necessary to keep operations
running
JIT Inventory Tactics
Use a pull system to move inventory
Reduce lot sizes
Develop just-in-time delivery systems with suppliers
Deliver directly to point of use
Perform to schedule
Reduce setup time
Use group technology
Table 16.4
REDUCE VARIABILITY

Inventory level

Process
Scrap downtime

Setup Quality
time problems

Late deliveries
Figure 16.1
REDUCE VARIABILITY

Inventory
level

Process
Scrap downtime

Setup Quality
time problems

Late deliveries
Figure 16.1
 REDUCE LOT SIZES

Q1 When average order size = 200

average inventory is 100
200 –
Inventory

Q2 When average order size = 100

100 –
average inventory is 50

Time

Figure 16.2
REDUCE LOT SIZES
 Ideal situation is to have lot
sizes of one pulled from one
process to the next
 Often not feasible
 Can use EOQ analysis to
calculate desired setup time
 Two key changes
 Improve material handling
 Reduce setup time
LOT SIZE EXAMPLE
D= Annual demand = 400,000 units
d = Daily demand = 400,000/250 = 1,600
per day
p = Daily production rate = 4,000 units
Q= EOQ desired = 400
H= Holding cost = $20 per unit
S = Setup cost (to be determined)
2DS 2DS
Q= Q2 =
H(1 - d/p) H(1 - d/p)

(Q2)(H)(1 - d/p) (3,200,000)(0.6)

S= 2D = 800,000 = $2.40
 LOWER SETUP COSTS

Holding cost
Sum of ordering
and holding costs
Cost

T1
Setup cost curves (S1, S2)
T2
S1
S2

Lot size
Figure 16.3
REDUCE SETUP COSTS

 High setup costs encourage

large lot sizes
 Reducing setup costs reduces lot
size and reduces average
inventory
 Setup time can be reduced
through preparation prior to
shutdown and changeover
 REDUCE SETUP TIMES
Initial Setup Time 90 min —

Separate setup into preparation and actual

setup, doing as much as possible while the
Step 1 machine/process is operating
(save 30 minutes)

60 min —
Move material closer and
Step 2 improve material handling
(save 20 minutes)
45 min —
Standardize and
Step 3 improve tooling
(save 15 minutes)
25 min —
Use one-touch system to
Step 4
eliminate adjustments (save 10
15 min —
minutes)
Training operators and 13 min —
Step 5 standardizing work procedures
Figure 16.4 (savecycle
Repeat 2 minutes)
until —
subminute setup is
achieved
SCHEDULING

 Schedules must be
communicated inside and
outside the organization
 Level schedules
 Process frequent small batches
 Freezing the schedule helps stability

 Kanban
 Signals used in a pull system
 KANBAN

1. User removes a standard

sized container
2. Signal is seen by the
producing department as
authorization to replenish

Signal marker
on boxes

Figure 16.6 Part numbers

mark location
 SCHEDULING SMALL LOTS
JIT Level Material-Use Approach

A A B B B C A A B B B C

Large-Lot Approach

A A A A A A B B B B B B B B B C C C

Time
Figure 16.5
MORE KANBAN

 When the producer and user are

not in visual contact, a card can be
used
 When the producer and user are in
visual contact, a light or flag or
empty spot on the floor may be
adequate
 Since several components may be
required, several different kanban
techniques may be employed
MORE KANBAN

 Usually each card controls a

specific quantity or parts
 Multiple card systems may be used
if there are several components or
different lot sizes
 Kanban cards provide a direct
control and limit on the amount of
work-in-process between cells
MORE KANBAN

 In an MRP system, the schedule

can be thought of as a build
authorization and the kanban a
type of pull system that initiates
actual production
 If there is an immediate storage
area, a two-card system can be
used with one card circulating
between the user and storage area
and the other between the storage
area and the producer
 KANBAN SIGNALS

Kanban Finished Customer

goods order
Work
cell
Ship

Raw Kanban Final Kanban

Material assembly
Supplier
Kanban Kanban
Sub-
Purchased assembly
Parts Kanban
Supplier

Figure 16.7
THE NUMBER OF CARDS
OR CONTAINERS
 Need to know the lead time needed to produce a
container of parts
 Need to know the amount of safety stock needed

Demand during Safety

lead time + stock
Number of kanbans =
Size of container
 NUMBER OF KANBANS EXAMPLE
Daily demand = 500 cakes
Production lead time = 2 days
(wait time +
material handling time +
processing time)
Safety stock = 1/2 day
Container size = 250 cakes

Demand during lead time = 2 days x 500 cakes = 1,000

1,000 + 250
Number of kanbans = 250 =5
ADVANTAGES OF KANBAN

 Allow only limited amount of faulty or delayed material

 Problems are immediately evident
 Puts downward pressure on bad aspects of inventory
 Standardized containers reduce weight, disposal costs,
wasted space, and labor
QUALITY

 Strong relationship
 JIT cuts the cost of obtaining good quality because JIT
exposes poor quality
 Because lead times are shorter, quality problems are
exposed sooner
 Better quality means fewer buffers and allows simpler
JIT systems to be used
JIT QUALITY TACTICS

Use statistical process

control
Empower employees
Build fail-safe methods
(poka-yoke, checklists, etc.)
Expose poor quality with
small lot JIT
Provide immediate feedback
Table 16.6
EMPLOYEE EMPOWERMENT

 Empowered employees bring their knowledge and

involvement to daily operations
 Some traditional staff tasks can move to empowered
employees
 Training, cross-training, and fewer job classifications can
mean enriched jobs
 Companies gain from increased commitment from employees
LEAN PRODUCTION

 Different from JIT in that it is

externally focused on the
customer
 Often called the Toyota
Production System (TPS)
 In practice, JIT, Lean Systems,
and TPS are often essentially the
same
TOYOTA PRODUCTION SYSTEM
 Work shall be completely specified as to content, sequence,
timing, and outcome
 Every customer-supplier connection must be direct
 Product and service flows must be simple and direct
 Any improvement must be made in accordance with the
scientific method at the lowest possible level of the
organization
LEAN SYSTEMS

 Use JIT techniques

 Build systems that help
employees produce perfect parts
 Reduce space requirements
 Develop close relationships with
suppliers
LEAN SYSTEMS

 Educate suppliers
 Eliminate all but value-added
activities
 Develop the workforce
 Make jobs more challenging
 Reduce the number of job
classes
THE 5 S’S

 Sort/segregate
 Simplify/straighten
 Shine/sweep
 Standardize
 Sustain/self discipline
 Safety
 Support/maintenance
SEVEN WASTES

 Overproduction A broader perspective

suggests other resources like
 Queues energy and water are wasted
but should not be

 Transportation
 Inventory
 Motion
 Over-processing
 Defective product
JIT IN SERVICES

 The JIT techniques used in

manufacturing are used in
services
 Suppliers
 Layouts
 Inventory
 Scheduling