Operations Management

Department of Business Administration
2014-2015 Spring Semester
Operations Management
Lecture Notes
Author:
Assoc. Prof. Dr.
Mustafa
Yzkrmz
March 2015
Kayseri
1
Contents
1 Introduction
1.1
1.2
Course Contents . . . . . . . . . . . . . .
Analytical Approach . . . . . . . . . . . .
1.2.1 A Problem:Service System . . . . .
1.2.2 A Problem:Manufacturing System
2 Inventory Control
2.1
2.2
2.3
Introduction . . . . . . . . . . . .
2.1.1 Inventory Insights . . . .
Economic Order Quantity(EOQ)
2.2.1 Derivation . . . . . . . . .
2.2.2 The Economic Production
Dynamic Lot Sizing . . . . . . .
3 Statistical Inventory Models

3.1
3.2
Terminology . . . . . . . . . .
Statistical Inventory Models .
3.2.1 The Newsboy Model .
3.2.2 The Base Stock Model
3.2.3 The (Q,r) Model . . .
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Lot Model
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4 Material Requirements Planning (MRP)

4.1
MRP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.1.1 Key Insights . . . . . . . . . . . . . . . . . . . . . . . . .
4.1.2 Example . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 Manufacturing Resources Planning (MRP-II)

5.1
MRP-II . . . . . . . . . . . .
5.1.1 Long Range Planning
5.1.2 Intermediate Planning
5.1.3 Short term Planning .
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1
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Contents
CONTENTS
6 JIT (Just-in Time) Revolution

6.1
JIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.1.1 Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.1.2 Implementing JIT . . . . . . . . . . . . . . . . . . . . . .
7 What went wrong?

7.1
What
7.1.1
7.1.2
7.1.3
went wrong? . . . . . . . .
Trouble with Quantitative
Trouble with MRP . . . .
Trouble With JIT . . . .
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Methods
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8 A Science of Manufacturing
8.1
Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . .
8.1.2 System Analysis . . . . . . . . . . . . . . . . . . . . . . .
9 Basic Factory Dynamics

9.1
9.2
9.3
Denitions . . . . . . . . . . . . . .
9.1.1 Denitions and Parameters
9.1.2 HAL Case . . . . . . . . . .
The Penny Fab . . . . . . . . . . .
9.2.1 Best Case . . . . . . . . . .
9.2.2 Worst Case . . . . . . . . .
9.2.3 Practical Worst Case . . . .
Conclusions . . . . . . . . . . . . .
9.3.1 HAL case . . . . . . . . . .
9.3.2 Labor Constrained Systems
9.3.3 Summary . . . . . . . . . .
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Foreword
Dear Students, This document are the lecture prepared for Operations Management, Production Management and Factory Organization classes being taught
in Meliksah University, Dep. of Business Administration. These notes are the
handout styles for the lecture slides and do not include the detailed descriptions.
Therefore, it would not be used solely; without attending classes, referred book
chapters and teachers' descriptions. Moreover, during the classes, other subject
matters may and will be included which are not covered here. Please contact the
author (myuzukirmizi@meliksah.edu.tr), if you need any further explanation.
I wish you all success.
Assoc. Prof. Dr.Mustafa Yzkrmz
Meliksah University
Department of Business Administration
Chapter
Introduction
1.1 Course Contents
Contents
Course Objectives
Production, production types and introduction to planning concepts,
Understanding the importance of planning for production based businesses.
Teach and train students with perspectives and methodologies towards
solutions of planning problems that they will encounter during their professional career.
Course Outcome
Understanding of production types and their properties,
Denition and importance of planning, methods
Denition of demand forecasting, inventory management and dierent inventory management methodologies, master production planning and its
methodologies.
Developing professional perspective for manufacturing and service system
techniques.
Contents
Covered Subjects
Basic Factory Dynamics
Types of Production Systems
Push and Pull Production Systems
1
1.2. Analytical Approach
CHAPTER 1. Introduction
Demand Forecasting
Inventory Control
MRP and JIT
Textbook
[?] [?] [?]
To Achieve
To be successful in this class :
Read lecture materials before coming to class.(Bring your notes.)

Attend the classes.
Take notes "yourself".
Submit the homeworks and projects on due date.
Test yourself with exercise question before the exam.
Do above before the last night of the exam.
Do not learn my oce "after" the exam.
Take the university education seriously.
Study the class planned!
1.2 Analytical Approach

1.2.1 A Problem:Service System
A Problem:
ABC company, headquartered in Ankara, conducts marketing business in Central Anatolia. A salesman, working in the company, visits the below cities and
returns to Ankara everyweek. He asks your help about deciding the visiting
sequence in order to make the total travelling distance minimum. Using the
the distances between cities, what should be the salesman's sequence which
minimizes the total travelling distance?
1. ANKARA-Starting and ending city
2. ANKIRI
3. ORUM
4. KAYSERI
5. KIRSEHIR
6. KONYA
2
7. NIGDE
8. SIVAS
9. YOZGAT
10. KIRIKKALE
Solution Approach
Use some logic:
Go to the nearest city rst

Go to the northern cities rst
Alphabetical order
What can you say about the solution quality?(Can we do it better?)(Optimal)
If the starting and ending city was dierent (say Kayseri), would the
solution be dierent?
If there were 50 cities instead of 10 cities, is your solution method sucient?
Travelling Salesman Problem

This problem is widely known as Travelling Salesman problem(TSP)
Travelling salesman problem is based
Visiting cities on hand once and only once

Returning the starting city.
Minimizing the total distance
Solution
A mathematical modelling approach can be used:

The decision is whether the salesman wil go from one city to another

1, If the salesman goes to j from i'
xij =
0, Otherwise
Given to us:Distances between the cities:
cij : The distance between cities i and j
Formulation
With above decision variable xij and distances cij , problem formulation can
be done as follows:
X
min{
cij xij }
(1.1)
i,jA
Since every city will be visited only once, the sum of entries would be 1(can
be entered only from 1 city) and sum of departures will be 1(can be departed
to only 1 city:
X
xij = 1 , j V
(1.2)
i:(i,j)A
xij = 1 , i V
(1.3)
j:(i,j)A
Subtour elimination
The above formulation can have subtours to eliminate, For every subtour U,
U V and 2 |U | |V | 2 :
X
xij 1
(1.4)
((i,j)A:iU,jV \U )
An alternative :
xi,j |U | 1 , 2 |U | |V | 2
(1.5)
(i,j)A:iU,jU )
1.2.2 A Problem:Manufacturing System

Machine Scheduling Problem
Carpet Weawing Scheduling Depending on design, carpets consist of 5 or 6
dierent colours. In design or colour change, the respective yarns should

be changed. 1 colour change takes at least 2 hrs of worktime with 4
workers.
We have to decide a production plan of orders. An order consist of dierent
design and colour, due time, quality and quantity. This plan also eects
the whole factory as the yarn procurement should be made accordingly.
Single Machine Scheduling

Single machine scheduling with sequence dependent setups turns to Travelling Salesman Problem.
If we make an analogy, every order to be manufactured is the cities that
salesman should visit
Every color change(setup times), the distance between cities
4
Since every order should be manufactured, the total time should be minimized.
Chapter
Inventory Control
2.1 Introduction
2.1.1 Inventory Insights
Background
Inventory plays a key role in the logistical behavior of all manufacturing
systems
Inventory is largest component of logistics
$1.44 Trillion in 2002

Used as the metric for a healthy rm
Inventory Turnover
Inventory Days of Sale
Inventory/Sales Ratio
Source of many programs and initiatives to reduce total inventory investment JIT(Just-in-time), MRP(Material Requirement Planning, TBC(Time
based competition)
How are the results?

Bottomline
Inventory is money
We need inventory to conduct business
Inventory is not bad. Inventory is good.
Inventory is an important tool which, when correctly used, can reduce total
cost and improve the level of service performance in a logistics system.
6
2.1. Introduction
CHAPTER 2. Inventory Control
Figure 2.1: Sector based inventory
Questions to answer
What items to carry as inventory?
Where should these be maintained?
In what form should they be maintained?
How much of each should be held?
Things to consider in the inventory decision.
Benet of having inventory

Total cost of inventory
Potential alternatives for inventory
Dimensions of Inventory Modeling
Demand
Constant vs Variable
Known vs Random
Continuous vs Discrete
Lead Time
Instantaneous
Constant or Variable (deterministic/stochastic)
7
2.2. Economic Order Quantity(EOQ)
Dependence of Items
Independent
Correlated
Indentured
Review Time
Continuous
Periodic
Discounts
None
All Units or Incremantal
Excess Demand
None
All orders are backordered
Lost orders
Substitution
Perishability
None
Uniform with time
Planning Horizon
Single Period
Finite Period
Innite
2.2 Economic Order Quantity(EOQ)

2.2.1 Derivation
Economic Order Quantity(EOQ)
Motivation
A factory is placing orders for a product to its supplier from time to time. There
are
A holding cost per unit i.e. storage, perishing, interest lost...,and

A setup cost associated per order i.e. documentation, carrying...
What would be the optimal order quantity to reduce the costs?
8
Assumptions
Production is instantaneous.
Delivery is immediate.
Demand is deterministic.
Demand is constant over time.
A production/order run incurs a constant setup cost.
Products can be analyzed singly.
Notation
TC Total cost
D Demand rate(in units per year)
c Unit production cost
A Constant setup(ordering) cost
h Holding cost(per unit per year); if the holding cost consists of entirely of
interest on money tied up in inventory, then h = i c, where i is an
annual interest rate.
Q Lot size(in units); this the decision variable

Inventory versus time in the EOQ model
Derivation of EOQ
T C = inventory + setup + production
Q
D
T C = h + A + cD
2
Q
hQ A
Y (Q) =
+ +c
2D Q
r
2AD
Q =
h
This square-root formula is well-known economic order quantity(EOQ)(also referred as economic lot size)
A Simple Example
Annual demand of widgets is 2,000. The cost of ordering is $500. Widgets are
procured for $50 each and are sold for $95 each. Holding cost is estimated to
be 25%.
What is the EOQ, Total Cost, and Cycle Time?
Q* = 400 units TC* = $105,000 / year T* = 0.20 years or 73 days
A Bank Example
A bank wants to decide the replenishment period for an ATM. The money
loading process costs 300 TL. The customers withdraws daily 2000 TL from
this ATM. The annual interest rate for the bank is 20%.
Annual demand:365 2000 = 730, 000
A=300,h=0.20
Q = 46, 797 Replenishment in every 23 days.
The key insight of EOQ

There is a tradeo between lot size and inventory
Sensitivity
Holding and setup costs are fairly insensitive to lot size
If we use a lot size slightly dierent than Q , the increase in the holding plus
setup cost will not be large.
T otalCostperunit = Holding + Setup

hQ
A
Y = Y (Q ) =
+
2D
Q
r
2Ah
Y =
D
AnnualCost = 2ADh
0
0
T C(Q )
1 Q
Q
=
[
]
+
T C(Q )
2 Q
Q0
10
Sensitivity
Sensitivity
What is our demand estimate was o?
So, for D' = 2000 units/year, if the actual demand was:
Summary of EOQ
There is a direct trade o between lot size and total inventory
Total cost is relatively insensitive to changes
Very robust with respect to changes in:

Q ;rounding of order quantities
D ;errors in forecasting
11
2.3. Dynamic Lot Sizing
h, A, c ;errors in cost parameters

Thus, EOQ is widely used despite its highly restrictive assumptions
2.2.2 The Economic Production Lot Model

The Economic Production Lot Model
This model extends the EOQ model in a way that;
The replenishment is not instantaneous, but, instead there is nite but

constant and deterministic production rate(P).
Quantity produced: Q
Time to produce: Q/P
Amount demanded: Q
PD
Maximum inventory: Q Q
PD
Average Inventory: 12 [Q Q
P D]
AD h(1 D/P )Q
+
+ Dc
Q
2
s
2AD
Q =
h(1 D/P )
Y (Q) =
which is identical to EOQ except that h has been replaced by h(1 D/P ).
2.3 Dynamic Lot Sizing

Dynamic Lot sizing
In this models, the assumption of constant demand is relaxed. This model

considers the problem of deterministic production lot sizes when demand is
deterministic but varies with time and all of the assumptions for the EOQ
models are valid.
We use a planning horizon and demand happens in discrete periods, which
could correspond to days, weeks or months, depending on the system.
12
Notation
t A time period(t = 1, . . . , T , T:planning horizon)
Dt Demand in period t
ct Unit production cost in period t
At Setup(order) cost in period t
ht Holding cost to carry a unit of inventory from period t to period t+1
It Inventory left over at the end of period t
Qt The lot size in period t
The main problem is to satisfy all demand at minimal cost. The decision
variable is the lot sizeQt
Example
Lot-for-lot solution
Fixed order quantity solution
EOQ solution
Silver-Meal solution
Optimal algorithms(Wagner-Whitin procedure and integer programming);will
not be covered
Silver-Meal Method
A "near optimal" heuristic which builds order quantities by taking a
marginal analysis approach.
EOQ creates "leftovers" which increase total cost unnecessarily.
A better approach is to order "whole periods worth" of stock.
At rst, increasing the buy quantity saves money because order costs
are reduced since fewer buys are made. Eventually, though, large order
quantities will begin to increase total costs as holding costs rise.
The idea is, should the rst buy cover period 1, periods 1 and 2, periods
1, 2, and 3, and so forth.
13
The procedure considers each potential buy quantity sequentially and calculates the "average cost per period covered" as the sum of the ordering
and holding costs divided by the number of periods.
"Add the next period's demand to the current order quantity unless the
average cost per period covered would not be reduced."
Comment on optimal solutions

Optimal solutions trade-o ordering and holding costs across time periods
based on the certainty of the demand schedule.
In practice, the procedure would be re-run each month, with a new month
added on the end, and the old month eliminated.
Only the most immediate orders would be placed; the later orders would
be held.
In this sort of "rolling horizon" application, short-term look-ahead procedures like Silver-Meal typically can out-perform the "optimal" approaches,
particularly if updates are made to demand forecasts within the planning
horizon.
14
Chapter
Statistical Inventory Models

3.1 Terminology
Inventory Costs
Inventory Cost
Opportunity Cost
Storage and space costs

taxes and insurance
Cost of obsolescence
Shortage Cost Cost of lost sales, overtime payments

Ordering Cost Cost of preparing and placing orders
Terminology
Demand
Lead time and replenishment rate Lead time is the interval time between
the order is placed and received in the inventory. Replenishment rate is

the rate at which the inventory builds up.
Reorder level The inventory level at which orders are placed for replenishing
the inventory.
Safety stock The inventory that is carried to prevent stock-out.

Statistical Inventory Models
Up to now, demand was known.
In these models the demand is random.
Newsboy Model A single replenishment, only issue is determining the appropriate quantity.
15
3.2. Statistical Inventory Models
CHAPTER 3. Statistical Inventory Models
Base stock Model For determining the reorder point

(Q,r) model The issue is determining the appropriate quantity and re-order
point.
3.2 Statistical Inventory Models

3.2.1 The Newsboy Model
The Newsboy Model
Simitci
Think about a boy who sells simit in the city center. He purchases a certain
amount of simit from bakery, and tries to sell them during the day. The demand
is random. He discards the leftovers(or sells them at a clearance price).
How many simits should he buy in the beginning of the day?
X Demand in units, random variable

G(x) = P (x X ) cumulative distribution function of the demand
co Cost per unit left over after demand is realized
cs Cost per unit of shortage
Q Order/production quantity in unit; this is the decision variable

The Newsboy Model
If we order Q units and the demand is X units,
If overage(Q>X) happens, then the number of leftover units is Q-X, shortage is 0.

If shortage(Q<X) happens, then the leftovers is 0.
Total Cost= Cost of overage + Cost of shortage
(Q x)g(x)dx + cs
Y (Q) = co
0
(x Q)g(x)dx
Q
= co P (x Q) + cs P (x Q) == co G(Q) + cs (1 G(Q)) =
cs
G(Q ) =
co + cs
Example:Simitci
Assume that the boy buys simits for 25 kurus from bakery and sells them at
50 kurus. He sells the leftovers at the end of the day for 10 kurus. His daily
demand is normally distributed with 100 units with a standard deviation of 10.
How many simits should he buy in the beginning of the day?
co = 15, cs = 25
16

G(Q) =
cs
25
=
= 0.625
co + cs
15 + 25
Look up from the normal table for 0.625 > Z=0.32
Z=
Q
Q 100
=
= 0.32
10
Q = 103.2
3.2.2 The Base Stock Model

The Base Stock Model
Appliance Store
Consider an appliance store that sells a particular model of a refrigerator. Because the space is limited and the manufacturer makes frequent deliveries, the
store nds it practical to order replacement refrigerator each time one is sold.
But, delivery takes sometime, and the store must carry some stock in order to
meet customer demands promptly.
How much stock should the store carry?
Demands occur one at a time.

Any demand not lled from stock is backordered.
Replenishment lead times are xed and known.
There is no setup cost associated with placing an order.
There is no constraint on the number of orders that can be placed per
year.

l Replenishment lead time(in years)
X Demand during replenishment lead time(units), a random variable
G(x) = P (x X) Cumulative distribution function of demand during lead time.
= E(X) Mean demand(in units ) during lead time
h Inventory cost per unit per year

b Backordering cost per unit per year
r Reorder point(in units), this is the decision variable
R = r + 1 Base stock level
s = r Safety stock level
17
Example:Appliance Store
Suppose from past experience the mean(average) demand is 10 units per month and replenishment
lead time is 1 month. Therefore, mean demand during the lead time is 10 units. Further suppose
that we model the demand using Poisson distribution.
p(k) = P rob(demandduringleadtime = k) =
k e
10k e10
=
k!
k!
Example:Appliance Store
What is the probability of having exactly 5 units of demand in 1 month?
What is the probability of having 5 or less of demand in 1 month?
How many units should we carry to achieve 95% of service level(ll rate)?
How many unit should we carry to achieve 95% of service level if the
demand is normally distributed with mean of 10 and standard deviation
of 3?
If there is cost of carrying inventory and backordering, then:
G(R ) =
b
h+b
If b = 100 and h = 200,
Should we carry more or less than the average demand?

How many units should we carry?
Insights from the Base Stock Model

1. Reorder point controls the probability of stockouts by establishing safety
stock
2. To achieve a given service level(ll rate), the required base stock level(hence
the safety stock) will be increasing function of both mean and standard
deviation of demand during replenishment lead time.
3. Base stock levels are similar to kanbans in multistage production systems
18
Figure 3.1: Net inventory and inventory position versus time in the (Q, r) model
with Q = 4, r = 4
3.2.3 The (Q,r) Model

The (Q,r) Model
Consider a maintenance manager who must stock spare parts to facilitate equipment repairs. Demand for parts is a function of machine breakdowns and therefore unpredictable(i.e. random). unlike base stock model, there is a cost to place
a purchasing order, and one-at-a time replenishment is impractical. There is also
a cost to carry inventory.
How much stock should the maintenance manager carry? What should be
the order quantity, and when should he give orders?
There is a xed cost associated with a replenishment,or,

There is a constraint on the number of replenishment orders per year.
The (Q,r) Model

Costs in (Q,r) Model
Fixed setup cost
Stockout cost:A cost each time a demand cannot be lled from stock.
Backorder cost:Charging a penalty that is proportinal to the length of
time a customer order waits to be lled.(Alternative to stockout)
Holding cost
19
Solution:Backorder Cost Approach

The optimal reorder quantity Q r
Q =
2AD
h
Q is same as the EOQ formula
The optimal reorder point r
b
b+h
b annual unit backorder cost (in dollars per unit of backorder per year);
G(r ) =
X
,
Look up for Z , using Z =
solve for X.
Solution:Stockout Cost Approach

The optimal reorder quantity Q r
Q =
2AD
h
Q is same as the EOQ formula
The optimal reorder point r

G(r ) =
kD
kD + hQ
b annual unit backorder cost (in dollars per unit of backorder per year);
X
,
Look up for Z , using Z =
solve for X.
Example
The maintenance manager has collected historical data, and the demand for a
part is 14 units per year. The unit cost of the part is 150 TL. The rm uses an
interest rate od 20%. It takes 45 days to receive a replenishment order. The cost
of placing a purchase order is about 15 TL. The annualized cost of a backorder
is about 100 TL. The cost for stockout event is 40 TL. The manager has chosen
to model demands using Poisson distribution.
D=14 units per year c=150 TL/unit h=150 20% = 30 TL Average demand
14
during the replenishment lead time = 365
45 = 1.726 A=15 TL b=100 TL
We will use either this or: k=40 TL, but not both
Example:Backorder Cost Approach

r
2AD
2(15)(14)
Q =
=
= 3.7 4
h
30
In Poisson distribution, the mean and the variance are equal, and it can be
approximated to Normal distribution as mean: = 1.726, standart deviation: =
1.726 = 1.314.
b
100
G(r ) =
=
= 0.769
b+h
100 + 30
Z = 0.736 = X
= X1.726
x = r = 2.693 3
1.314
r
This policy (Q = 4, r = 3)
20
Example:Stockout Cost Approach

r
2AD
2(15)(14)
Q =
=
= 3.7 4
h
30
In Poisson distribution, the mean and the variance are equal, and it can be
approximated
to Normal distribution as mean: = 1.726, standart deviation: =
1.726 = 1.314.
r
G(r ) =
Z = 0.929 =
kD
40(14)
=
= 0.824
kD + hQ
40(14) + 30(4)
X1.726
1.314
x = r = 2.946 3
This policy (Q = 4, r = 3)
(Q,r)insights
Cycle stock increases as replenishment frequency decreases.
Safety stock provides a buer against stockouts
21
Chapter
Material Requirements Planning

(MRP)
4.1 MRP
4.1.1 Key Insights
Material Requirements Planning(MRP)
Given the complexity of inventory control, utilization of computers as
natural
Experimented rst in 1960's by Joseph Orlicky, IBM
MRP has become the principal production control paradigm in US
Very widely used, any manufacturing manager must be familiar
Its successor, manufacturing resources planning(MRP-II)
Key Insights
Independent Demand Finished Products
Dependent Demand Components
Since demand for components are a function of demand for nal product, It
makes no sense to independently forecast dependent demands.By working backwards from a nal product, the demand of components are derived.
MRP is push system
It computes schedules of what should be started(or pushed) into the line. This
is contrast to pull system as in Toyota system.
22
4.1. MRP
CHAPTER 4. Material Requirements Planning (MRP)
Assumptions
Known deterministic demands.
Fixed, known production leadtimes.
Innite capacity.
Idea is to "back out" demand for components by using leadtimes and bills
of material.
MRP Procedure
Netting: net requirements against projected inventory
Lot Sizing: planned order quantities
Time Phasing: planned orders backed out by leadtime
BOM(Bill of Materials) Explosion: gross requirements for components
Inputs
Master Production Schedule (MPS): due dates and quantities for all top
level items
Bills of Material (BOM): for all parent items

Inventory Status: (on hand plus scheduled receipts) for all items
Planned Leadtimes: for all items
Inputs
4.1.2 Example
Example:Stool
Stool
Base (1)
Legs (4)
Bolts (4)
Seat (1)
Bolts (2)
23
4.1. MRP
Figure 4.1: MRP Inputs and procedure
Figure 4.2: Stool
24
4.1. MRP
Figure 4.3: Stool Bill of Materials
Example:Stool
Indented BOM
Stool
Base (1)
Legs (4)
Bolts (4)
Seat (1)
Bolts (2)
Graphical BOM
Note: bolts are treated at lowest level in which they occur for MRP calculations. Actually,
they might be left o BOM altogether in practice.
Example:Stool
Item: Stool (Leadtime = 1 week)
Week
Gross Reqs
120
Sched Receipts
Proj Inventory
20
20
20
20
20
Net Reqs
-100
100
Planned Orders
100
Example:Stool
25
-100
4.1. MRP
Table 4.1: Item: Base (Leadtime = 1 week)

Week
Gross Reqs
-100
-100
100
Sched Receipts
Proj Inventory
-100
Net Reqs
100
Planned Orders
100
Table 4.2: Item: Legs (Leadtime = 2 weeks)

Week
Gross Reqs
-200
-200
-200
200
0
200
Net Reqs
Planned Orders
400
Sched Receipts
Proj Inventory
-200
200
200
Example:Stool
Terminology
Level Code: lowest level on any BOM on which part is found
Planning Horizon: should be longer than longest cumulative leadtime for
any product
Time Bucket: units planning horizon is divided into
Lot-for-Lot: batch sizes equal demands (other lot sizing techniques, e.g.,
EOQ or Wagner-Whitin can be used)
Pegging: identify gross requirements with next level in BOM (single pegging) or customer order (full pegging) that generated it. Single usually
used because full is dicult due to lot-sizing, yield loss, safety stocks, etc.
More Terminology
Firm Planned Orders (FPO's): planned order that the MRP system does
not automatically change when conditions change; can stabilize system
Service Parts: parts used in service and maintenance; must be included in
gross requirements
26
4.1. MRP
Order Launching: process of releasing orders to shop or vendors; may

include ination factor to compensate for shrinkage
Exception Codes: codes to identify possible data inaccuracy (e.g., dates
beyond planning horizon, exceptionally large or small order quantities,
invalid part numbers, etc.) or system diagnostics (e.g., orders open past
due, component delays, etc.)
Lot Sizing in MRP

Lot for lot ; "chase" demand
Fixed order quantity method ; constant lot sizes
EOQ ; using average demand
Fixed order period method ; use constant lot intervals
Part period balancing ; try to make setup-ordering cost equal to holding
cost
Silver-meal; "near optimal" method
Wagner-Whitin ; "optimal" method
Lot-for-lot
t
10
Dt
20
50
10
50
50
10
20
40
20
30
LL
20
50
10
50
50
10
20
40
20
30
A = 100, h = 1
D = 300
Lot-for-Lot: $1000
Fixed Order Quantity (using EOQ):

t
10
Total
Dt
Qt
20
77
50
10
77
50
50
77
10
20
40
77
20
30
300
308
Setup
Holding
100
51
41
58
38
57
100
7
74
100
24
Total
100
21
$400
$371
$771
27
4.1. MRP
r
Q=
2AD
=
h
2 100 300
= 77
1
Fixed Order Period (FOP): 3 periods

t
10
Total
Dt
Qt
20
80
50
10
50
110
50
10
20
80
40
20
30
30
300
308
Setup
Holding
100
60
10
60
10
60
20
100
0
$400
$220
100
0
100
0
Total
$620
Safety Stock and Safety Lead Time

Because MRP is deterministic, uncertainty and randomness should be taken
into account. Safety stock and safety lead time can be used as protection.
Item: A (Leadtime = 2 weeks, Order Quantity =50)
Week
Gross Reqs
Sched Receipts
Proj Inventory
Net Reqs
Planned Orders
40
Week
Gross Reqs
Sched Receipts
Proj Inventory
Net Reqs
Planned Orders
20
40
50
30
20
30
10
10
-20
20
20
50
40
20
40
50
30
20
30
10
10
-20
30
20
50
10
Problems in MRP
Capacity Infeasibility
Long planned lead times
System nervousness
28
Safety Stock = 20 units
4.1. MRP
Nervousness
Item A (Leadtime = 2 weeks, Order Interval = 5 weeks)

Week
Gross Reqs
Sched Receipts
Proj Inventory
Net Reqs
Planned Orders
1
2
2
24
3
3
4
5
5
1
6
3
7
4
8
50
28
26
-1
1
-6
5
-7
1
-10
3
50
-14
4
-64
50
14
Component B (Leadtime = 4 weeks, Order Interval = 5 weeks)

Week
Gross Reqs
Sched Receipts
Proj Inventory
Net Reqs
Planned Orders
0
2
1
14
14
2
6
50
-48
48
48
Nervousness
Item A (Leadtime = 2 weeks, Order Interval = 5 weeks)

Week
Gross Reqs
Sched Receipts
Proj Inventory
Net Reqs
Planned Orders
1
2
23
3
3
4
5
5
1
6
3
7
4
8
50
28
26
-5
5
-6
1
-9
3
-13
4
-63
50
63
Component B (Leadtime = 4 weeks, Order Interval = 5 weeks)

Week
Gross Reqs
Sched Receipts
Proj Inventory
Net Reqs
Planned Orders
14
16
47*
2
63
-47
47
Note: Small reduction in requirements caused large change in orders and

made schedule infeasible
Reducing Nervousness
Reduce Causes of Plan Changes:
Stabilize MPS (e.g., frozen zones and time fences)

Reduce unplanned demands by incorporating spare parts forecasts
into gross requirements
29
4.1. MRP
Use discipline in following MRP plan for releases

Control changes in safety stocks or leadtimes
Alter Lot-Sizing Procedures:
Fixed order quantities at top level

Lot for lot at intermediate levels
Fixed order intervals at bottom level
Use Firm Planned Orders:
Planned orders that do not automatically change when conditions

change
Managerial action required to change a FPO
30
Chapter
Manufacturing Resources
Planning (MRP-II)
5.1 MRP-II
Material Requirements Planning(MRP)
Oers a systematic method for planning and procuring materials
Ideas are simple and easily implemented
Some problems remain:

Capacity infeasibility
Uncertainty
Long planned lead times
System nervousness
Manufacturing Resources Planning(MRP-II)

Addresses shortcomings of MRP
Also brings together other functions of manufacturing managements systems
Additional functions

Demand management
Forecasting
Capacity planning
Master production scheduling
Rough-cut capacity planning
Capacity requirements planning
31
5.1. MRP-II
CHAPTER 5. Manufacturing Resources Planning (MRP-II)
Figure 5.1: MRP-II Hierachy
Dispatching
Input/output control
Evolved to ERP systems
MRP-II Hierarchy
5.1.1 Long Range Planning

Long Range Planning
Involves three functions:
Resource planning
Aggregate planning
Forecasting
The length of time horizon for long-range planning is 6 months to 5 years.
The frequency of re-planning varies from once per month to once per year.
The degree of detail is typically at the part family level(End items with similar
demand and production characteristics.)
Functions
Forecasting
This function seeks to predict demand in the future. Long-range forecasting is important to
determine what are the capacity, tooling and personnel requirements. Short-term forecasting
converts the long range forecast into shorter term forecasts of individual end items.
Resource Planning
This is the process of determining capacity requirements over the long term. Decisions such
as building a new plant or to expand the existing one are the part of the capacity planning
function. An important output of resource planning is projected available capacity over the
32
5.1. MRP-II
long-term planning horizon. This information is fed as a parameter to the aggregate planning
function.
Aggregate planning
This is used to determine levels of production, stang, inventory, overtime, and so on over
the long term. The level of detail is typically by month and for part families.
5.1.2 Intermediate Planning

Intermediate Planning
These are the bulk of the production planning functions:
Demand Management
Rough-cut capacity planning(RCCP)
Master production scheduling(MPS)
Material requirements planning(MRP)
Capacity requirements planning(CRP)
Job release
Demand Management
Converts long-term aggregate forecast into detailed forecast while tracking individual customer orders. The output is a set of actual customer orders plus a
forecast of anticipated orders.
Master Production Scheduling
Outputs the master production schedule which is a fundamental input to MRP.

This function works with rough-cut capacity planning to ensure the capacity
feasibility of the MPS
Rough-cut capacity planning (RCCP)
It is used to provide a quick capacity check of a few critical resources to ensure the feasibility
of the master production schedule. Although more detailed than aggregate planning, RCCP is
less detailed than capacity requirements planning (CRP), which is another tool for performing
capacity checks after the MRP processing. RCCP makes use of a bill of resources for each
end item on the MPS. The bill of resources gives the number of hours required at each critical
resource to build a particular end item. These times include not only the end item itself but
all the exploded requirements as well.
Example
Process Center Part A Part A1

21
1 hr
0.5 hr
Capacity of the center is 65 hrs.
Part A2
1 hr
33
Part B
2 hrs
5.1. MRP-II

Planner determines what to do:
Adjust MPS by changing due dates

Adjust capacity by adding resource or overtime
RCCP provides an optimistic estimate
Does not perform any netting(inventory is not considered).

Periods must be long enough(no osetting)
It can be rough
MRP
MRP
Materials requirement planning module of MRP-II is identical to the MRP procedure. The
output planned order release, and these are released to shop oor by the job release function.
Capacity requirements planning (CRP)
It provides a more detailed capacity check on MRP-generated production plans than RCCF.
Necessary inputs include all planned order releases, existing WIP positions, routing data,
as well as capacity and lead times for all process centers. In spite of its name, capacity
requirements planning does not generate nite capacity analysis. Instead, CRP performs
what is called innite forward loading. CRP predicts job completion times for each process
center, using given xed lead times, and then computes a predicted loading over time. These
loadings are then compared against the available capacity, but no correction is made for an
overloaded situation.
Capacity requirements planning (CRP)

Example
Capacity:400, lead time 3 days

400 units just released, 500 units have been there for 1 day, 350 units have been there 2 days
34
5.1. MRP-II
5.1.3 Short term Planning

Short term control
Once a job order is released , it has to be tracked on the shop oor. This
is called Production activity control or shop oor control.
Provides routing/standard time information
Sets planned start times
Can be used for prioritizing/expediting
Can perform input-output control (compare planned with actual throughput)
Modern term is MES (Manufacturing Execution System), which represents
functions between Planning and Control.
Job dispatching
Main Rule
Develop a rule for arranging the queue in front of each workstation that will
maintain due date integrity while keeping machine utilization high and manufacturing times low.
Shortest processing times(SPT)

Earliest due date(EDD)
Least Slack: Due date minus the remaining process time minus current
time
Least slack per remaining operation
Critical ratio: Due date minus current time / hrs of work remaining
35
5.1. MRP-II
Input/output control
Input/Output Control. Input/output (I/O) control was rst suggested by

Wight (1970) as a way to keep lead times under control. I/O control works in
the following way:
1. Monitor the WIP level in each process center.
2. If the WIP goes above a certain level, then the current release rate is too
high, so reduce it.
3. If it goes below a specied lower level, then the current release rate is too
low, so increase it.
4. If it stays between these control levels, the release rate is correct for the
current conditions.
Enterprise Resource Planning -ERP

Enterprise Resource Planning -ERP
ERP
Advantages:
integrated functionality
consistent user interfaces
integrated database
single vendor and contract
unied architecture
unied product support
Disadvantages:
incompatibility with existing systems

long and expensive implementation
incompatibility with existing management practices
loss of exibility to use tactical point systems
36
5.1. MRP-II
long product development and implementation cycles

long payback period
lack of technological innovation
37
Chapter
JIT (Just-in Time) Revolution

6.1 JIT
6.1.1 Concepts
Origins of JIT
Japanese rms, particularly Toyota, in 1970's and 1980's
Taiichi Ohno and Shigeo Shingo
Geographical, economic and cultural roots
Japanese objectives
"catch up with America" (within 3 years of 1945)

small lots of many models
Japanese motivation
Japanese domestic production in 1949 - 25.622 trucks, 1.008 cars

American to Japanese productivity ratio - 9:1
Era of "slow growth" in 1970's
Toyota Production System
Pillars:
1. just-in-time, and
2. autonomation, or automation with a human touch
Practices:
setup reduction (SMED)
worker training
38
6.1. JIT
CHAPTER 6. JIT (Just-in Time) Revolution
vendor relations
quality control
foolproong (baka-yoke)(automatically detect problems)
....many others
Supermarket Stimulus
Customers get only what they need
Each workstation is customer of another. They acquire the required materials

from upstream workstations precisely as needed.
Stock replenished quickly
Just-in-time ow requires a very smoothly operating system.

But, who holds inventory?
Auto-Activated Loom Stimulus

Automatically detect problems and shut down
Foolproong
Automation with a human touch: machines that are both automated, so
that one worker can operate many machines
Toyota from an inconsequential player in the automotive market in 1950 to one
of the largest automobile manufacturers in the world by the 1990s,
Zero Inventories
Metaphorical Writing:
The Toyota production wrings water out of towels that are already dry.
There is nothing more important than planting "trees of will". - Shingo 1990
5W = 1H (what,when, where, who, why, how)
- Ohno 1988
Platonic Ideal:
Zero Inventories connotes a level of perfection not ever attainable in a production

process. However, the concept of a high level of excellence is important because
it stimulates a quest for constant improvement through imaginative attention
to both the overall task and to the minute details.
- Hall 1983
39
6.1. JIT
The Seven Zeros

Zero Defects: To avoid delays due to defects. (Quality at the source)
Zero (Excess) Lot Size: To avoid "waiting inventory" delays. (Usually stated
as a lot size of one.)
Zero Setups: To minimize setup delay and facilitate small lot sizes.
Zero Breakdowns: To avoid stopping tightly coupled line.
Zero (Excess) Handling: To promote ow of parts.
Zero Lead Time: To ensure rapid replenishment of parts (very close to the
core of the zero inventories objective).
Zero Surging: Necessary in system without WIP buers.

The Environment as a Control
Constraints or Controls?
machine setup times
vendor deliveries
quality levels (scrap, rework)
production schedule (e.g. customer due dates)
product designs
Impact: the manufacturing system can be made much easier to manage by
improving the environment.
6.1.2 Implementing JIT

Implementing JIT
Production Smoothing:
relatively constant volumes

relatively constant product mix
Mixed Model Production (heijunka):

10,000 per month (20 working days)

500 per day (2 shifts)
250 per shift (480 minutes)
1 unit every 1.92 minutes
40
6.1. JIT
Implementing JIT (cont.)

Production Sequence:
Mix of 50% A, 25% B, 25% C in daily production of 500 units

0.5 x 500 = 250 units of A
0.25 x 500 = 125 units of B
0.25 x 500 = 125 units of C
Products should be sequenced on the line such that these proportions are maintained as uniformly as possible.
A .. B .. A .. C .. A .. B .. A .. C .. A .. B .. A .. C .. A .. B .. A .. C
Inherent Inexibility of JIT

Sources of Inexibility:
Stable volume
Stable mix
Precise sequence
Rapid (instant?) replenishment
Measures to Promote Flexibility:

Capacity buers
Setup reduction
Cross training
Plant layout
Capacity Buers
Problems:
JIT is intrinsically rigid (volume, mix, sequence)
No explicit link between production and customers
How to deal with level production quota shortfalls
Buer Capacity:
Protection against quota shortfalls
Regular ow allows matching against customer demands
Two shifting: 4 - 8 - 4 - 8 (4-hour down periods)
Contrast with WIP buers found in MRP systems
41
6.1. JIT
Setup Reduction
Motivation:
Small lot sequences not feasible with large setups.
Internal vs. External Setups:

External - performed while machine is still running
Internal - performed while machine is down (not producing)
Approach:
1. Separate the internal setup from the external setup
2. Convert as much as possible of the internal setup to the external setup
3. Eliminate the adjustment process
4. Abolish the setup itself (e.g., uniform product design, combined production, parallel machines)
Cross Training
Adds exibility to inherently inexible system
Allows capacity to oat to smooth ow
Reduces boredom and fatigue
Fosters appreciation for overall picture
Increase potential for idea generation
Keep multiple skills sharp
Workforce Agility
Cross-Trained Workers:
oat where needed
appreciate line-wide perspective
provide more heads per problem area
Shared Tasks:
can be done by adjacent stations
reduces variability in tasks, and hence line stoppages/quality problems
42
6.1. JIT
Plant Layout
Promote ow with little WIP
Facilitate workers stang multiple machines
U-shaped cells

Maximum visibility
Minimum walking
Flexible in number of workers
Facilitates monitoring of work entering and leaving cell
Workers can conveniently cooperate to smooth ow and address problems
Layout for JIT

Cellular Layout:
Proximity for ow control, material handling, oating labor, etc.
May require duplication of machinery (decreased utilization?)
cells?
logical
Advanced Material Handling:
Avoid large transfer batches

Close coordination of physically separate operations
Focused Factories
Pareto Analysis:
Small percentage of sku(stock keeping units)'s represent large percentage of volume
Large percentage of sku's represent little volume but much complexity
Dedicated Lines:
for families of high runners
few setups
little complexity
Job Shop Environment:
for low runners
many setups
poorer performance, but only on smaller portion of business
43
6.1. JIT
44
6.1. JIT
Total Quality Management

Origins: Americans (Shewhart, Deming, Juran, Feigenbaum)
Fertility of Japan:
Japanese abhorrence for wasting scarce resources
The Japanese innate resistance to specialists (including QA)
Integrality to JIT:
JIT requires high quality to work
JIT promotes high quality
identication of problems and of their sources
facilitates rapid detection of problems
pressure to improve quality (do it right the rst time)
Total Quality Management (cont.)

Principles:
Process Control (SPC)

Easy-to-See Quality (put quality on display)
Insistence on Compliance (quality rst, output second)
Line Stop
Correcting One's Own Errors (no rework loops)
100 Percent Check (not statistical sampling)
Continual Improvement
Housekeeping
Small Lots
Vendor Certication
Total Preventive Maintenance
45
6.1. JIT
Kanban
Denition:
A "kanban" is a sign-board or card in Japanese and is the name of the ow

control system developed by Toyota.
Role:
Kanban is a tool for realizing just-in-time. For this tool to work fairly well, the
production process must be managed to ow as much as possible. This is really
the basic condition. Other important conditions are leveling production as much
as possible and always working in accordance with standard work methods. Ohno 1988
Push vs. Pull: Kanban is a "pull system"
Push systems schedule releases

Pull systems authorize releases
One-Card Kanban
Two-Card Kanban
46
6.1. JIT
MRP vs JIT
The Lessons of JIT
The production environment itself is a control
Operational details matter strategically
Controlling WIP is important
Speed and exibility are important assets
Quality can come rst
Continual improvement is a condition for survival
47
Chapter
What went wrong?

7.1 What went wrong?
7.1.1 Trouble with Quantitative Methods
American Manufacturing Trouble in 1980s
Slowdown in productivity growth
Severe decline in market share in various markets
Widespread perception of inferior quality
Persistently large trade decit
Our task is not to x the blame for the past, but to x the course for the future.
- John F. Kennedy
Practices
Conventional American operations management practices employed between World War

II and 1990 can be roughly grouped into three schools of thought:
1. Scientic management
It is characterized by a rational, deductive, quantitative, modeling-oriented view of manufacturing systems. The original scientic management movement of the early 20th century
spawned the quantitative methods for inventory control, scheduling, forecasting, aggregate
planning, and many other manufacturing functions.
2. Material requirements planning
It is characterized by a central computerized planning approach to production control and

integration. As more functions were incorporated into the system, the original MRP evolved
into manufacturing resources planning (MRP II) and then into enterprise resources planning
(ERP).
48
7.1. What went wrong?
CHAPTER 7. What went wrong?
Practices
3. Just-in-time
It is characterized by a low-inventory, ow-oriented focus on the manufacturing

environment. The original emphasis on Japanese kanban methods expanded
into the broader view of lean manufacturing. JIT was also the impetus for total
quality management, which both was part of JIT and evolved into a separate
movement.
While each of these certainly oers good ideas, none has been consistently
successful in elevating rms to the level required to thrive in the competitive
environment of the next century.
Causes
Cultural factors
Governmental policies
Poor product design
Marketing mistakes
Counterproductive nancial strategies
Poor operations management
Trouble with Quantitative Methods

Cultural Factors
1. Faith in the scientic method, which runs deep in the American soul,
has motivated academics and practitioners to emphasize methods that
are precise, quantitative, and high-technology. Taylor, with his shoveling
formulas, clearly took this approach, as did the developers of the inventory
control methods.
2. The frontier ethic, which glories wide-open spaces, rugged individualism,
and sweeping adventure, is fundamentally in conict with an attitude of
careful husbanding of resources. This, coupled with the almost total lack
of serious global competition in the rst half of the 20th century, led many
of the best and brightest in America to shun operations for more exciting
careers in marketing, nance, or other elds.
Combined Eect
Top management out of OM loop
Sophisticated techniques for narrower and narrower problems
49
The emphasis on marketing and nance took top management out of the loop
as far as operations were concerned. This caused responsibility to devolve to
middle managers, who lacked the perspective to see operations management in
a strategic context. As a result, middle managers and the academic research
community that supported them approached operations from an extremely narrow, reductionist perspective. Given this, our scientic bent led us to devote
tremendous energy to applying increasingly sophisticated techniques to increasingly irrelevant problems.
Evidences from EOQ

Unrealistic Assumptions:
xed, known setup cost
constant, deterministic demand
instantaneous delivery
single product or no product interactions
Ill Eects:
Ineciency in lot-sizing
Wasted eort in trying to t model
Myopic perspective about lot-sizing
Missed importance of setup reduction
Missed value of splitting move lots
Evidences from Scheduling

2 & 3 machine min makespan problem (Johnson 1954)
Virtually no applications
Mathematically challenging
Hundreds of follow-on papers
At this time, it appears that one research paper (that by Johnson) set a wave
of research in motion that devoured scores of person-years of research time on
an intractable problem of little practical consequence.
- Dudek Panwalkar, Smith, 1992
50
New Emphasis
Hayes,Wheelwright, and Clark 1988, Harvard Business School:
Even tactical decisions like the production lot size (the number of components or subassemblies
produced in each batch) and department layout have a signicant cumulative impact on performance
characteristics. These seemingly small decisions combine to aect signicantly a factory's ability
to meet the key competitive priorities (cost, quality, delivery, exibility, and innovativeness) that
are established by its company's competitive strategy. Moreover, the fabric of policies, practices,
and decisions that make up the manufacturing system cannot easily be acquired or copied. When
well integrated with its hardware, a manufacturing system can thus become a source of sustainable
competitive advantage.
Dertouzos, Lester,and Solow 1989 Massachusetts Institute of Technology:
For too long business schools have taken the position that a good manager could manage anything,
regardless of its technological base.... Among the consequences was that courses on pr9duction or
operations management became less and less central to business-school curricula. It is now clear
that this view is wrong. While it is not necessary for every manager to have a science or engineering
degree, every ma ager does need to understand how technology relates to the strategic positioning
of the rm ...
The Bottom Line

The quantitative models spawned by scientic management are useful for
understanding and solving subproblems.
But they can be dangerous if confused with the manufacturing system
itself.
Systems analysis is a powerful problem-solving tool that oers much promise
as the basis for a balanced approach to continual improvement
7.1.2 Trouble with MRP

Trouble with MRP
MRP Successes:
Number of MRP systems in America grew from a handful in the early
1960's, to 150 in 1971
APICS MRP Crusade in 1972 spurred number of MRP systems in the
U.S. as high as 8000
In 1984, 16 companies sold $400 million in MRP software
In 1989, $1.2 billion worth of MRP software was sold to American industry, constituting just under one-third of the entire American market for
computer services
By late 1990's, ERP was a $10 billion industry (ERP consulting even
bigger); SAP was world's fourth largest software company
Surveys of MRP Users

1980 Survey of Over 1,100 Firms:
much less than 10% of U.S. and European companies recoup MRP investment within two
years
1982 Survey of 679 APICS Members:
9.5% regarded their companies as being Class A users
51
60% reported their rms as being Class C or Class D users

This from an APICS survey of materials managers
1986 Survey of 33 S. Carolina MRP Users:
Similar responses to 1982 survey

Average eventual
investment in hardware, software, personnel, and training for an MRP system was
$795,000 with a standard deviation of $1,191,000
APICS Explanations
1. Lack of top management commitment,
2. Lack of education of those who use the system,
3. An unrealistic master production schedule,
4. Inaccurate data, including bills of material and inventory records.
The Fundamental Flaw of MRP

... an MRP system is capacity-insensitive, and properly so, as its function is
to determine what materials and components will be needed and when, in order
to execute a given master production schedule. There can be only one correct
answer to that, and it cannot therefore vary depending on what capacity does or
does not exist.
- Orlicky 1975
But, lead times do depend on loading when capacity is nite

Incentive to inate lead times
Result is increased congestion, increased WIP, decreased customer service
Historical Interpretation of MRP

MRP is the quintessential American production control system
When Scientic Management (developed here) met the computer (developed here), MRP was the result
Unfortunately, the computer that Scientic Management met was a computer of the 1960's
Insucient RAM to process parts simultaneously

Fixed leadtimes allow transaction based system
52
MRP Patches
MRP II provides planning hierarchy and data management features
CRP is the sin of MRP repeated over and over
Approaches like closed-loop MRP either:
wait for WIP explosion to modify releases, or

fail to consider PAC in plan
ERP extended MRP to supply chains but did not by itself change underlying paradigm
Can MIS save MRP?
wide variety of commercial approaches to MES

interface between planning and execution still critical
7.1.3 Trouble With JIT

Trouble With JIT
The collection of ideas, priorities, and techniques that became collectively

known as just-in-time (JIT) contains many creative and powerful insights.
$64,000 Question: Is JIT a system, and, if so, is it transportable?
Answers:
"Unquestionably" and "Yes" -Schonberger, Hall, Monden
"Maybe not" and "To a limited extent" -Hayes
Conjecture:
JIT is a system of beliefs, but a collection of methods
Romantic versus Pragmatic JIT

Romantic JIT:
An aesthetic ideal
Simplicity in the extreme
Almost trivial to implement
Phrased in stirring rhetoric
Pragmatic JIT:
setup time reduction (SMED)
plant layout (e.g., U-shaped cells)
quality-control
preventive maintenance
design for manufacturability
many others
53
Mortals Emulating Genius

Persistence: Toyota took 25 years to reduce setups from 2-3 hours to 3
minutes.
Environmental Factors: Harder to address than direct procedures.

Some people imagine that Toyota has put on a smart new set of clothes, the
kanban system, so they go out and purchase the same outt and try it on. They
quickly discover that they are much too fat to wear it.
- Shingo
Prioritization: Systems view is rst thing to get lost.

Deliberate obfuscation? If the U.S. had understood what Toyota was
doing, it would have been no good for us. - Ohno
A Matter of Perspective
Policies conict
Romantic JIT bans the t-word (Schonberger)
Japanese originators creatively balanced objectives
subtly, implicitly
pursued policies across functions
context-specic procedures
Dangers of lack of perspective
management by slogan
inventory is the root of all evil
water and rocks analogy
eort wasted on chubchiks (e.g., unnecessary setup reduction)

failure to coordinate eorts (e.g., cells running large batches of parts)
Where from Here?
Problems with Traditional Approaches:
QM (quantitative methods) has stressed math over realism
MRP is fundamentally awed, in the basics, not the details
JIT is a collection of methods and slogans, not a system
Reality:
manufacturing is large scale, complex, and varied
continual improvement is essential
no "technological silver bullet" can save us
54
New Trends
Trends in Manufacturing
6 an improvement methodology w/ training program
Lean philosophy promotes the right incentives
IT (SCM and ERP) provide data to make decisions
MISSING A SCIENTIFIC FRAMEWORK
relationships of between cycle time, production rate, utilization, inventory,
WIP, capacity, variability in demand, variability in manufacturing process
Where from Here?

What Can We Hope For?
Better Education
basics
intuition
synthesis
Better Tools
descriptive models
prescriptive models
integrated framework
Discussions
In which of the following situations would you expect MRP/JIT to work well? To work
poorly?
a. A fabrication plant operating at less than 80 percent of capacity with relatively stable
demand
b. A fabrication plant operating at less than 80 percent of capacity with extremely lumpy
demand
c. A fabrication plant operating at more than 95 percent of capacity with relatively stable
demand
d. A fabrication plant operating at more than 95 percent of capacity with extremely lumpy
demand
e. An assembly plant that uses all purchased parts and highly exible labor (i.e., so that
eective capacity can be adjusted over a wide range)
f. An assembly plant that uses all purchased parts and xed labor (i.e., capacity) running
at more than 95 percent of capacity
55
Chapter
A Science of Manufacturing
8.1 Objectives
8.1.1 Introduction
Objectives, Measures, and Controls
I often say that when you can measure what you are speaking about, and express
it in numbers, you know something about it; but when you cannot express it in
numbers, your knowledge is of a meager and unsatisfactory kind; it may be the
beginning of knowledge, but have scarcely, in your thoughts, advanced to the
stage of Science, whatever the matter may be.
- Lord Kelvin
Why a Science of Manufacturing?

Confusion in Industry:
too many "revolutions"
management by buzzword
sales glitz over substance
Confusion in Academia:
high-powered methodology applied to non-problems
huge variation in what is taught
Example of Other Fields:

Civil Engineering-statics, dynamics
Electrical Engineering - electricity and magnetism
Many others
56
8.1. Objectives
CHAPTER 8. A Science of Manufacturing
Why Science?
Science oers precision.
Science oers intuition.
Science facilitates synthesis of disparate perspectives by providing a unied
framework
Example:Automobile Design
Requirements:
Mass of car of 1000 kg
Acceleration of 2.7 meters per second squared (zero to 60 in 10 seconds)
Engine with no more than 200 Newtons of force
Can we do it?
F = ma
200N t 6= (1000kg)(2.7m/s2 ) = 2, 700N t.
N o way
Example:Factory Design
Requirements:
3,000 PCBs per week to meet demand.
With an average cycle time (delay between job release and completion) of
not more than one week, to maintain responsiveness,
No overtime (workweek of 40 hours), to keep costs low.
Can we do it?
W ho knows?
57
8.1. Objectives
58
8.1. Objectives
Factory Tradeo Curves

Denition
A manufacturing system is an objective-oriented network of processes through
which entities ow.
-Deuermeyer (1994)
objective relates to making money,but much more

processes include the usual physical processes (cutting, grinding, welding, etc.), but can
also include other steps that support the direct manufacturing processes (order entry,
kitting, shipping, maintenance, etc.).
Entities include not only the parts being manufactured, but also the information that is
used to control the system.
Flow the ow of the entities through the system describes how materials and information
are processed. Management of this ow is a major part of a manufacturing manager's
job.
Network It is important to recognize that a manufacturing system is a network of interacting

parts.
Goals of a Science of Manufacturing

Tools:
descriptive models (ie simulation)
prescriptive models (mathematical models, optimization)
solution techniques
Terminology:
rationalize buzzwords
recognize commonalities across environments
Perspective:
basics
intuition
synthesis
59
8.1. Objectives
The Nature of Science

Purpose:
The grand aim of all science is to cover the greatest number of empirical facts
by logical deduction from the smallest number of hypothesis or axioms.
- Albert Einstein
Steps:
1. Observation.
2. Classication.
3. Theoretical Conjecture.
4. Experimental verication/refutation.
5. Repeat.
8.1.2 System Analysis

Systems Analysis
Denition: Systems analysis is a structured approach to problem-solving

that involves
60
8.1. Objectives
1. Identication of objectives (what you want to accomplish), measures (for

comparing alternatives), and controls (what you can change).
2. Generation of specic alternatives.
3. Modeling (some form of abstraction from reality to facilitate comparison
of alternatives).
4. Optimization (at least to the extent of ranking alternatives and choosing
"best" one).
5. Iteration (going back through the process as new facets arise).
System Analysis Paradigm

General Measures and Objectives
Fundamental Objective:
elementary starting point

source of agreement
example - make money over the long-term
Hierarchy of Objectives:
more basic objectives that support fundamental objective

closer to improvement policies
Tradeos:objectives conict
we need models
Hierarchical Objectives
61
8.1. Objectives
Corporate Measures and Objectives

Fundamental Objective:
Maximize the wealth and well-being of the stakeholders over the long term.
Financial Performance Measures:

1. Net-prot: P rof it = Revenue Costs
2. Return on investment.ROI =
P rof it
Asset
Components:
1. Revenue.
2. Expenses.
3. Assets.
Plant Measures and Objectives

Measures:
Throughput: product that is high quality and is sold.
Costs: Operating budget of plant.
Assets: Capital equipment and WIP.
Objectives:
Maximize prot.
Minimize unit costs.
Tradeos: we would like (but can't always have)

Throughput
Cost
Assets
62
8.1. Objectives
Tactical and Strategic Tools:Production Planning Example
Labor cost is $20 per hour (including benets, etc.). The plant runs an
average of 21 days per month with two shifts or 16 hours per day for a total of
336 hours per month.
How many of A and B should be produced to make the highest prot?
Systems Analysis Tools

Process Mapping:
identify main sequence of activities

highlight bottlenecks
clarify critical connections across business systems
Workshops:
structured interaction between various parties

many methods: Nominal Group Technique, Delphi, etc.
roles of moderator and provocateur are critical
Systems Analysis Tools (cont.)
Conjecture and Refutation:
promotes group ownership of ideas

places critical thinking in a constructive mode
everyday use of the scientic method
Modeling:
always done with specic purpose

value of model is its usefulness
modeling is an iterative process
63
8.1. Objectives
The Need for Process Mapping
Example: North American Switch Manufacturer 10-12 week leadtimes in

spite of dramatically reduced factory cycle times:
10% Sales
15% Order Entry
15% Order Coding
20% Engineering
10% Order Coding
15% Scheduling
5% Premanufacturing and Manufacturing
10% Delivery and Prep
Conclusion: Lead time reduction must address entire value delivery system.
Process Mapping Activities
Purpose: understand current system by
identifying main sequence of activities

highlighting bottlenecks
clarifying critical connections across business system
Types of Maps:
Assembly Flowchart: diagram of activities to assembly product.

Process Flowchart: diagram of how pieces of system interrelate in an organization.
Relationship Map: diagram of specic steps to accomplish a task, without

indication of functions or subsystems.
Cross-Functional Process Map: diagram of specic steps to accomplish a

task organized by function or subsystem responsible for the step.
Sample Assembly Flowchart

Process Flowchart for Order Entry
Sample Relationship Map
Sample Cross-Functional Process Map
64
8.1. Objectives
65
8.1. Objectives
66
8.1. Objectives
Conclusions
Science of Manufacturing:
important for practice

provides a structure for OM education
Systems Approach:
one of the most powerful engineering tools

a key management skill as well (e.g., re-engineering)
Modeling:
part, but not all, of systems analysis

key to a science of manufacturing
more descriptive models are needed
67
Chapter

9.1 Denitions
Physics should be explained as simply as possible, but no simpler.
Albert Einstein
In the previous section, we argued that manufacturing management needs

a science of manufacturing.
In this section, we begin the process of eshing out such a science by
examining some basic behavior of production lines.
9.1.2 HAL Case

HAL Case
Large Panel Line: produces unpopulated printed circuit boards
Line runs 24 hr/day (but 19.5 hrs of productive time)
Recent Performance:

Throughput = 1,400 panels per day (71.8 panels/hr)

WIP = 47,600 panels
CT = 34 days (663 hr at 19.5 hr/day)
customer service = 75% on-time delivery
Is HAL productive?
What data do we need to decide?
68
9.1. Denitions
CHAPTER 9. Basic Factory Dynamics
HAL - Large Panel Line Processes

Lamination (Cores): press copper and prepreg into core blanks
Machining: trim cores to size
Internal Circuitize: etch circuitry into copper of cores
Optical Test and Repair (Internal): scan panels optically for defects
Lamination (Composites): press cores into multiple layer boards
External Circuitize: etch circuitry into copper on outside of composites
Optical Test and Repair (External): scan composites optically for defects
Drilling: holes to provide connections between layers
Copper Plate: deposits copper in holes to establish connections
Procoat: apply plastic coating to protect boards
Sizing: cut panels into boards
End of Line Test: nal electrical test
HAL Case - Science?

External Benchmarking
other plants may not be comparable
Internal Benchmarking
capacity data: what is utilization?
but this ignores WIP eects
Need relationships between WIP, TH, CT, service!

Denitions
Workstations: a collection of one or more identical machines.
Parts: a component, sub-assembly, or an assembly that moves through the
workstations.
End Items: parts sold directly to customers; relationship to constituent parts

dened in bill of material.
Consumables: bits, chemicals, gasses, etc., used in process but do not become
part of the product that is sold.
Routing: sequence of workstations needed to make a part.

Order: request from customer.
Job: transfer quantity on the line.
69
9.1. Denitions
Denitions (cont.)
Throughput (TH): for a line, throughput is the average quantity of good
(non-defective) parts produced per unit time.
Work in Process (WIP): inventory between the start and endpoints of a

product routing.
Raw Material Inventory (RMI): material stocked at beginning of routing.

Crib and Finished Goods Inventory (FGI): crib inventory is material held
in a stockpoint at the end of a routing; FGI is material held in inventory
prior to shipping to the customer.
Cycle Time (CT): time between release of the job at the beginning of the
routing until it reaches an inventory point at the end of the routing.
Factory Physics
Denition: A manufacturing system is a goal-oriented network of processes
through which parts ow.
Structure: Plant is made up of routings (lines), which in turn are made up of

processes.
Focus: Factory Physics is concerned with the network and ows at the routing
(line) level.
Parameters
Descriptors of a line:
1) Bottleneck Rate (rb ): Rate (parts/unit time or jobs/unit time) of the process center having the highest long-term utilization.
2) Raw Process Time (T0 ): Sum of the long-term average process times of
each station in the line.
3) Congestion Coecient (): A unitless measure of congestion.

Zero variability case, = 0.
"Practical worst case," = 1.
"Worst possible case," = W0 .
Note: we won't use quantitatively, but point it out to recognize that lines
with same rb and T0 can behave very dierently.
70
9.2. The Penny Fab
Parameters (cont.)
Relationship:
Critical WIP (W0 ): WIP level in which a line having no congestion would
achieve maximum throughput (i.e., rb ) with minimum cycle time (i.e.,
T0 ).
W0 = rb T0
9.2 The Penny Fab

9.2.1 Best Case
Example:The Penny Fab
Characteristics:
Four identical tools in series.

Each takes 2 hours per piece (penny).
No variability.
CONWIP job releases.
Parameters:
rb = 0.5 pennies/hour
T0 = 8 hours
W0 = 0.5 8 = 4 pennies
alpha = 0 no variability, best conditions
Penny Fab Performance

WIP
TH
CT
T H CT
1
2
3
4
5
6
0
0
0
1
1
1
8
8
8
8
10
12
1
2
3
4
5
6
TH vs. WIP: Best Case

CT vs. WIP: Best Case
71
9.2. The Penny Fab
72
9.2. The Penny Fab
Best Case Performance

Best Case Law:
The minimum cycle time (CTbest ) for a given WIP level, w, is given by

T0 ,
if w W0 ;
CTbest =
w/rb , otherwise.
The maximum throughput (T Hbest ) for a given WIP level, w is given by,

w/T0 , if w W0 ;
T Hbest =
rb ,
otherwise.
Best Case Performance (cont.)
Example: For Penny Fab, rb = 0.5 and T0 = 8, so W0 = 0.5 8 = 4,

8,
if w 4;
CTbest =
2w, otherwise.

w/8, if w 4;
T Hbest =
0.5, otherwise.
which are exactly the curves we plotted.
A Manufacturing Law
Little's Law:
The fundamental relation between WIP, CT, and TH over the long-term is:
W IP = T H CT
parts =
parts
hr
hr
Insights:
Fundamental relationship
Simple units transformation
Denition of cycle time (CT = W IP/T H )
9.2.2 Worst Case

Worst Case
Observation: The Best Case yields the minimum cycle time and maximum
throughput for each WIP level.
Question: What conditions would cause the maximum cycle time and minimum throughput?
73
9.2. The Penny Fab
Experiment:
set average process times same as Best Case (so rb and T0 unchanged)
follow a marked job through system
imagine marked job experiences maximum queueing
TH vs. WIP: Worst Case

CT vs. WIP: Worst Case
Worst Case Performance
Worst Case Law:
The worst case cycle time for a given WIP level, w, is given by,
CTworst = w T0
The worst case throughput for a given WIP level, w, is given by,
T Hworst = 1/T0
Randomness?
None - perfectly predictable, but bad!
9.2.3 Practical Worst Case

Practical Worst Case
Observation: There is a BIG GAP between the Best Case and Worst Case
performance.
74
9.2. The Penny Fab
Question: Can we nd an intermediate case that: divides "good" and "bad"
lines, and is computable?
Experiment: consider a line with a given rb and T0 and:

single machine stations
balanced lines
variability such that all WIP congurations (states) are equally likely
PWC Example - 3 jobs, 4 stations

State
Vector
State
Vector
1
2
3
4
5
6
7
8
9
10
(3,0,0,0)
(0,3,0,0)
(0,0,3,0)
(0,0,0,3)
11
12
13
14
15
16
17
18
19
20
(1,0,2,0)
(0,1,2,0)
(0,0,2,1)
(1,0,0,2)
(0,1,0,2)
(0,0,1,2)
(2,1,0,0)
(2,0,1,0)
(2,0,0,1)
(1,2,0,0)
(0,2,1,0)
(0,2,0,1)
(1,1,1,0)
(1,1,0,1)
(1,0,1,1)
(0,1,1,1)
Practical Worst Case
Let w = jobs in system, N = no. stations in line, and t = process time at

all stations:
CT (single) = (1 + (w 1)/N )t
CT (line) = N [1 + (w 1)/N ]t
75
9.2. The Penny Fab
= Nt + (w 1)t
= T0 + (w 1)/rb
T H = W IP/CT
= [w/(w + W 0 1)]rb
Practical Worst Case Performance
Practical Worst Case Denition: The practical worst case (PWC) cycle time
for a given WIP level, w, is given by,
CTP W C = T0 +
w1
rb
The PWC throughput for a given WIP level, w, is given by,
T HP W C =
w
rb
W0 + w 1
where W0 is the critical WIP.
TH vs. WIP: Practical Worst Case

CT vs. WIP: Practical Worst Case
Penny Fab Two Performance
Penny Fab Two Performance (cont.)
76
9.2. The Penny Fab
77
9.3. Conclusions
9.3 Conclusions
9.3.1 HAL case
Back to the HAL Case - Capacity Data
Process
Rate (p/hr)
Time (hr)
Lamination
Machining
Internal Circuitize
Optical Test/Repair - Int
Lamination - Composites
External Circuitize
Optical Test/Repair - Ext
Drilling
Copper Plate
Procoat
Sizing
EOL Test
192
186
114
151
159
160
151
186
136
117
127
170
4.7
0.5
3.6
1
2
4.3
1
10.2
1
4.1
1.1
0.5
rb , T0
114
33.9
HAL Case - Situation

Critical WIP: rb T0 = 114 33.9 = 3, 869
Actual Values:
CT = 34 days = 663 hours (at 19.5 hr/day)

WIP = 47,600 panels
TH = 71.8 panels/hour
Conclusions:
78
9.3. Conclusions
Throughput is 63% of capacity

WIP is 12.3 times critical WIP
CT is 24.1 times raw process time
HAL Case - Analysis
TH Resulting from PWC with WIP = 47,600?
TH =
w
47, 600
rb =
114 = 105, 4
w + W0 1
47, 600 + 3, 869 1
Much higher than actual TH!
w
rb = 0.63rb
w + W0 1
0.36
0.63
(W0 1) =
(3, 869 1) = 6, 586
w
0.37
0.37
Much lower than actual WIP
Conclusion:Actual system is much worse than PWC.
TH =
HAL Internal Benchmarking Outcome
9.3.2 Labor Constrained Systems

Labor Constrained Systems
Motivation: performance of some systems are limited by labor or a combination of labor and equipment.
Full Flexibility with Workers Tied to Jobs:
WIP limited by number of workers (n)

capacity of line is n/T0
79
9.3. Conclusions
Best case achieves capacity and has workers in "zones"

ample capacity case also achieves full capacity with "pick and run"
policy
Labor Constrained Systems (cont.)

Full Flexibility with Workers Not Tied to Jobs:
TH depends on WIP levels

T HCW (n) T H(w) T HCW (w)
need policy to direct workers to jobs (focus on downstream is eective)
Agile Workforce Systems

bucket brigades
kanban with shared tasks
worksharing with overlapping zones
many others
9.3.3 Summary
Factory Dynamics Takeaways
Performance Measures:
throughput
WIP
cycle time
service
Range of Cases:
best case
practical worst case
worst case
Diagnostics:
simple assessment based on rb , T0 , actual WIP,actual TH
evaluate relative to practical worst case
80

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Department of Business Administration

2014-2015 Spring Semester

3 Statistical Inventory Models

4 Material Requirements Planning (MRP)

5 Manufacturing Resources Planning (MRP-II)

6 JIT (Just-in Time) Revolution

7 What went wrong?

9 Basic Factory Dynamics

1.2. Analytical Approach

To be successful in this class :

Read lecture materials before coming to class.(Bring your notes.)

1.2 Analytical Approach

1.2. Analytical Approach

 Go to the nearest city rst

Travelling Salesman Problem

 Visiting cities on hand once and only once

A mathematical modelling approach can be used:

Given to us:Distances between the cities:

cij : The distance between cities i and j

1.2. Analytical Approach

1.2.2 A Problem:Manufacturing System

dierent colours. In design or colour change, the respective yarns should

Single Machine Scheduling

1.2. Analytical Approach

 $1.44 Trillion in 2002

How are the results?

CHAPTER 2. Inventory Control

Figure 2.1: Sector based inventory

 Benet of having inventory

2.2. Economic Order Quantity(EOQ)

CHAPTER 2. Inventory Control

2.2 Economic Order Quantity(EOQ)

A holding cost per unit i.e. storage, perishing, interest lost...,and

2.2. Economic Order Quantity(EOQ)

CHAPTER 2. Inventory Control

Q Lot size(in units); this the decision variable

2.2. Economic Order Quantity(EOQ)

CHAPTER 2. Inventory Control

The key insight of EOQ

T otalCostperunit = Holding + Setup

2.2. Economic Order Quantity(EOQ)

CHAPTER 2. Inventory Control

So, for D' = 2000 units/year, if the actual demand was:

 Very robust with respect to changes in:

2.3. Dynamic Lot Sizing

CHAPTER 2. Inventory Control

 h, A, c ;errors in cost parameters

2.2.2 The Economic Production Lot Model

The replenishment is not instantaneous, but, instead there is nite but

2.3 Dynamic Lot Sizing

In this models, the assumption of constant demand is relaxed. This model

2.3. Dynamic Lot Sizing

CHAPTER 2. Inventory Control

2.3. Dynamic Lot Sizing

CHAPTER 2. Inventory Control

Comment on optimal solutions

Statistical Inventory Models

Storage and space costs

Shortage Cost Cost of lost sales, overtime payments

the order is placed and received in the inventory. Replenishment rate is

Safety stock The inventory that is carried to prevent stock-out.

3.2. Statistical Inventory Models

CHAPTER 3. Statistical Inventory Models

Go to the nearest city rst

Visiting cities on hand once and only once

dierent colours. In design or colour change, the respective yarns should

$1.44 Trillion in 2002

Benet of having inventory

Very robust with respect to changes in:

h, A, c ;errors in cost parameters

The replenishment is not instantaneous, but, instead there is nite but

There is a xed cost associated with a replenishment,or,

Stabilize MPS (e.g., frozen zones and time fences)

Use discipline in following MRP plan for releases

Fixed order quantities at top level

Planned orders that do not automatically change when conditions