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Modern Approach To Operations 



 

 
 
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Slide 3: THIS PAGE IS BLANK
Slide 5: Copyright © 2005 New Age International (P) Ltd., Publishers Published by New Age International (P) Ltd., Publishers All rights reserved. No part of this ebook may be reproduced in any form, by photostat, microfilm, xerography, or any other means, or incorporated into any information retrieval system, electronic or mechanical, without the written permission of the publisher. All inquiries should be emailed to rights@newagepublishers.com ISBN (10) : 81-224-2326-1 ISBN (13) : 978-81-224-2336-5 PUBLISHING FOR ONE WORLD NEW AGE INTERNATIONAL (P) LIMITED, PUBLISHERS 4835/24, Ansari Road, Daryaganj, New Delhi - 110002 Visit us at www.newagepublishers.com
Slide 6: Preface While teaching the course on ‘Production Operations Management (POM)’ to my students in India and abroad, I have felt a huge shortage of books and relevant materials on this subject. The books available are mostly written with Western world perspective. The examples included in those books are not very relevant to the students of developing countries. This has motivated me to write this book which is based on my own teaching experiences and the feed back of my students. The book includes the background, the core concepts, and the models of POM. It is readable, comprehensive, and contemporary in its approach. The concepts of Operations Management have been delivered to the readers in a simple, straightforward manner, and without mincing the words to avoid dilution of the materials itself. The layout of the book has been organized to give the readers a sense of flow: (i) Beginning with fundamentals of Production systems, Productivity, Location of plant, layout issues; (ii) Core issues of POM like Forecasting, Operations planning, Purchasing systems and steps involved in it, Inventory models, and MRP, Quality control, TQM, Project Management; and finally (iii) the attention is focused to modern concepts on the subject like JIT, OPT, Automation, etc. This makes the book more comprehensive in nature. Adequate number of solved problems have been included to give the readers a chance to enhance the learning process. Examples from local industries, agriculture sector, services (banking, airlines, hotels, transport, etc.) have been included to make the chapters interesting and palatable to the students’ taste. I thank my students and colleagues for their constructive comments in making the book more useful. Lastly, I always believe in ‘kaizen’—the continuous improvement process in everything I do and this goes with this book as well. I invite the readers, therefore, to send their comments and suggestions to improve this book in its next edition. RAM NARESH ROY, PhD ram_roy1959@yahoo.com
Slide 7: THIS PAGE IS BLANK
Slide 8: Contents Preface (v) 1 PRODUCTION SYSTEMS AND OPERATIONS MANAGEMENT 1.0 1.1 1 1.2 1.3 1.4 Introduction.................................................................................................................. 1 Related Issues of Operations Management ............................................................... 1 1.1.1 Production Function ...................................................................................... 1 1.1.2 Productivity .................................................................................................... 2 1.1.3 Difference between Production and Productivity ........................................ 2 1.1.4 Effectiveness .................................................................................................. 3 1.1.5 Efficiency ........................................................................................................ 3 Operations Function in Organizations ....................................................................... 4 1.2.1 Manufacturing Operations Vs Service Operations ..................................... 5 1.2.2 Types of Production System .......................................................................... 7 Role of Models in Operations Management ............................................................. 10 1.3.1 Types of Models in Production Operations Management (POM) ............. 10 1.3.2 Mathematical Models in Production and Operations Management ........ 11 1.3.3 Modeling Benefits ........................................................................................ 11 Classifying Problems ................................................................................................. 11 1.4.1 Uncertainty of Outcomes ............................................................................ 11 1.4.2 Maximum Rule ............................................................................................ 13 1.4.3 Interdependence Among Decisions ............................................................ 14 2 LOCATION OF PRODUCTION AND SERVICE FACILITIES 2.0 2.1 2.2 2.3 17 2.4 Introduction................................................................................................................ 17 Reasons for Location Changes ................................................................................. 17 General Factors Influencing Location ...................................................................... 18 2.2.1 Rural and Urban Sites Compared .............................................................. 20 General Procedures for Facility Location................................................................. 21 2.3.1 Preliminary Screening ................................................................................ 21 2.3.2 Selection of Exact Site ................................................................................. 22 Some Other Facility Location Models ...................................................................... 23 2.4.1 Simple Median Model .................................................................................. 23 2.4.2 Center of Gravity (GRID) Model ................................................................ 26 2.4.3 Linear Programming (LP) ........................................................................... 27 2.4.4 Simulation .................................................................................................... 33 2.4.5 Break Even Analysis ................................................................................... 33 ( vii )
Slide 9: ( viii ) 3 LAYOUT PLANNING 3.0 3.1 3.2 36 3.3 3.4 3.5 3.6 Introduction................................................................................................................ 36 Effects of a Plant Layout .......................................................................................... 36 Factors Affecting Layout .......................................................................................... 37 3.2.1 Types of Industries ...................................................................................... 37 3.2.2 Types of Production System ........................................................................ 37 3.2.3 Type of Product ............................................................................................ 38 3.2.4 Volume of Production .................................................................................. 38 Systematic Layout Planning (SLP) .......................................................................... 38 Other Approaches to Plant Layout ........................................................................... 41 3.4.1 Principles of Plant Layout ........................................................................... 43 3.4.2 Types of Flow Patterns ................................................................................ 43 Types of Layout ......................................................................................................... 43 3.5.1 Fixed Position Layout .................................................................................. 45 3.5.2 Process-Oriented or Functional Layout ..................................................... 46 3.5.3 Repetitive and Product-Oriented Layout ................................................... 51 3.5.4 Office Layout ................................................................................................ 55 3.5.5 Retail Layout ............................................................................................... 56 3.5.6 Warehousing and Storage Layouts ............................................................ 57 3.5.7 Combination Layout .................................................................................... 57 Material Handling ..................................................................................................... 57 3.6.1 Principles of Material Handling ................................................................. 58 3.6.2 Simplified Version of Principles of Material Handling ............................. 59 3.6.3 Material Handling Equipment ................................................................... 59 3.6.4 Relationship Between Material Handling and Factory Building Design or Layout.......................................................................................... 60 4 PURCHASING SYSTEMS AND VENDOR RATING 4.0 4.1 4.2 4.3 62 4.4 4.5 Introduction................................................................................................................ 62 Functions of Material Management ......................................................................... 62 Objectives of Materials Management ....................................................................... 62 Purchasing or Procurement Function ...................................................................... 63 4.3.1 Objectives of Purchasing Department ....................................................... 63 4.3.2 Activities, Duties and Functions of Purchasing Department ................... 63 4.3.3 Centralized and Decentralized Purchasing Organizations ...................... 64 Modes of Purchasing Materials................................................................................. 65 4.4.1 Spot Quotations ........................................................................................... 65 4.4.2 Floating the Limited Inquiry ...................................................................... 65 4.4.3 Tender .......................................................................................................... 65 Steps in One Complete Purchasing Cycle ................................................................ 66 4.5.1 Some Questions Related to Purchase ......................................................... 66 4.5.2 Tender Procedure ........................................................................................ 67
Slide 10: ( ix ) 4.6 4.7 4.8 Vendor Rating ............................................................................................................ 73 What is Expected of a Better Buyer ......................................................................... 74 Some Working Definitions ........................................................................................ 74 4.8.1 Quality Index (QI) ....................................................................................... 75 4.8.2 Delivery Reliability Index (DRI) ................................................................. 75 4.8.3 Flexibility Index (FI) ................................................................................... 76 4.8.4 Price Performance Index (PPI) ................................................................... 77 4.8.5 Frequency of Rating .................................................................................... 78 4.8.6 Use of the Indices ........................................................................................ 78 Stores and Material Control...................................................................................... 78 4.9.1 Requirements of a Material Control System ............................................. 79 Stores Management ................................................................................................... 79 4.10.1 Functions of Stores Department and the Duties of the Storekeeper ....... 79 4.10.2 Location and Layout of Stores .................................................................... 80 4.10.3 Advantages of Centralization of Stores ...................................................... 80 4.10.4 Advantages of Decentralization of Stores .................................................. 81 4.9 4.10 5 OPERATIONS PLANNING AND CONTROL 5.0 5.1 5.2 5.3 82 Introduction................................................................................................................ 82 Benefits of Better Operations Planning and Control .............................................. 83 Main Functions of OPC ............................................................................................. 83 5.2.1 Some Specific Activities of OPC.................................................................. 83 Detailed Functions of OPC ........................................................................................ 84 5.3.1 Planning Phases .......................................................................................... 84 5.3.2 Routing or Sequencing ................................................................................ 84 5.3.3 Loading or Assignment ............................................................................... 86 5.3.4 Scheduling .................................................................................................... 89 5.3.5 Sequencing and Dispatching Phase ........................................................... 93 5.3.6 Controlling or Follow-up Phase .................................................................. 98 6 INVENTORY CONTROL 6.0 6.1 6.2 100 6.3 6.4 Introduction.............................................................................................................. 100 Purpose of Inventories ............................................................................................. 100 Objective of Inventory Management ...................................................................... 101 6.2.1 Requirements for Effective Inventory Management ............................... 101 6.2.2 Inventory Counting Systems .................................................................... 102 6.2.3 A Perpetual Inventory System ................................................................. 102 6.2.4 Ordering Cycle System .............................................................................. 103 6.2.5 Demand Forecasts and Lead-Time Information...................................... 104 6.2.6 Inventory Cost Information ...................................................................... 104 Types of Inventory Control Techniques ................................................................. 105 6.3.1 Qualitative Techniques ............................................................................. 105 6.3.2 Quantitative Techniques or Models ......................................................... 108 Stocking of Perishables ........................................................................................... 125
Slide 11: (x) 7 MATERIAL REQUIREMENT PLANNING 7.0 7.1 7.2 130 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 Introduction.............................................................................................................. 130 Need for Materials Planning ................................................................................... 130 7.1.1 Terms Used in MRP .................................................................................. 131 Basic MRP Concepts ................................................................................................ 131 7.2.1 Independent Demand ................................................................................ 132 7.2.2 Dependent Demand ................................................................................... 132 7.2.3 Lumpy Demand ......................................................................................... 132 7.2.4 Lead Time of Item ..................................................................................... 132 7.2.5 Common Use Items ................................................................................... 133 7.2.6 Time Phasing ............................................................................................. 133 Factor Affecting the Computation of MRP ............................................................. 134 7.3.1 Production Structure ................................................................................. 134 7.3.2 Lot Sizing ................................................................................................... 135 7.3.3 Recurrence of Requirements within Planning Horizon .......................... 136 Objectives of MRP System ...................................................................................... 137 Prerequisites and Assumptions of MRP ................................................................. 138 7.5.1 Prerequisites .............................................................................................. 138 7.5.2 Assumptions ............................................................................................... 138 Inputs to MRP .......................................................................................................... 139 7.6.1 Master Production Schedule (MPS) ......................................................... 139 7.6.2 Bill of Material (BOM) ............................................................................... 140 7.6.3 Inventory Record File ................................................................................ 141 MRP Outputs ........................................................................................................... 142 7.7.1 Primary Outputs ........................................................................................ 143 7.7.2 Secondary Outputs .................................................................................... 143 MRP Logic in Brief .................................................................................................. 143 7.8.1 A Sample of Management Information (Output) from MRP .................. 144 7.8.2 Limitations and Advantages of MRP ....................................................... 152 Manufacturing Resource Planning (MRP II) ......................................................... 152 MRP Implementation .............................................................................................. 154 7.10.1 An Inventory Control System ................................................................... 154 7.10.2 A Production and Inventory Control System ........................................... 154 7.10.3 A Manufacturing Resource Planning System .......................................... 154 How Can Industry Benefit From MRP? ................................................................. 156 8 JUST-IN-TIME APPROACH 8.0 8.1 160 Introduction.............................................................................................................. 160 History of Relations Between Management and Workers .................................... 161 8.1.1 Adaptation to New Production Environment .......................................... 161 8.1.2 The Kanban Control .................................................................................. 161 8.1.3 JIT Today ................................................................................................... 162 8.1.4 JIT Application Profile .............................................................................. 163
Slide 12: ( xi ) 8.2 8.3 Keys to Successful JIT Implementation ................................................................. 165 8.2.1 The Kanban System .................................................................................. 166 Japanese Vs American Management ..................................................................... 169 8.3.1 Downsides of Japanese Management ....................................................... 169 8.3.2 JIT Manufacturing System Overview ...................................................... 170 8.3.3 The Seven Wastes in JIT........................................................................... 172 8.3.4 Value-Added Manufacturing .................................................................... 172 How Japanese Manufacturing Ideally Works? ...................................................... 173 8.4.1 Stockless Production.................................................................................. 173 Comparison of MRP and JIT ................................................................................... 174 8.5.1 Push Vs Pull System ................................................................................. 174 Requirements for Successful Implementation of JIT ............................................ 175 Goals of JIT Manufacturing System ....................................................................... 176 8.7.1 Important Aspects in JIT Manufacturing ................................................ 178 8.7.2 Advantages and Disadvantages of JIT ..................................................... 179 Theory of Constraints (TOC) ................................................................................... 181 8.8.1 Systems Thinking ...................................................................................... 181 8.8.2 Five Focusing Steps of TOC ...................................................................... 182 8.8.3 The Five Layers of Resistance .................................................................. 183 8.8.4 Quantifying the Improvement .................................................................. 183 TOC Tools ................................................................................................................. 183 8.9.1 Current Reality Tree (CRT) ...................................................................... 183 8.9.2 Conflict Resolution Diagram (CRD) or Evaporating Cloud .................... 184 8.9.3 Future Reality Tree (FRT) ........................................................................ 185 8.9.4 Prerequisite Tree (PRT) ............................................................................ 186 8.9.5 Transition Tree (TT) .................................................................................. 187 8.4 8.5 8.6 8.7 8.8 8.9 9 PROJECT MANAGEMENT 9.0 9.1 9.2 188 9.3 9.4 9.5 9.6 9.7 9.8 Introduction.............................................................................................................. 188 Some Terms Related to Network Planning ............................................................ 188 CPM and PERT Model............................................................................................. 191 9.2.1 Time Estimates in PERT........................................................................... 192 9.2.2 Algorithm Used in Calculating Critical Path .......................................... 193 Variability of Activity Times ................................................................................... 194 Probability of Completing a Project by a Given Date ............................................ 195 Project Crashing and Time-Cost Trade-off ............................................................ 196 Resource Leveling .................................................................................................... 208 9.6.1 Heuristic Methods ..................................................................................... 208 Resource Leveling of Project Schedules ................................................................. 209 Project Delay ............................................................................................................ 213
Slide 13: ( xii ) 10 QUALITY CONTROL 10.0 10.1 215 10.2 10.3 10.4 10.5 10.6 10.7 Introduction.............................................................................................................. 215 Inspection ................................................................................................................. 215 10.1.1 Types of Inspection .................................................................................... 215 10.1.2 Purpose of Inspections ............................................................................... 216 Some Quality Related Terms .................................................................................. 216 Statistical Quality Control (SQC) ........................................................................... 216 Acceptance Sampling ............................................................................................... 217 10.4.1 Where do we use Sampling ? .................................................................... 217 10.4.2 Advantages and Disadvantages of Acceptance Sampling ....................... 217 10.4.3 Representative Sample ............................................................................. 217 Sampling Plans ........................................................................................................ 218 10.5.1 Single Sampling Plan (SSP) ...................................................................... 218 10.5.2 Double Sampling Plan (DSP) .................................................................... 219 10.5.3 Sequential or Multiple Sampling Plan ..................................................... 221 Process Variability and Control .............................................................................. 221 Control Charts ......................................................................................................... 222 10.7.1 The p-Chart ................................................................................................ 223 10.7.2 The c-Chart ................................................................................................ 225 10.7.3 Steps in Constructing S-Chart .................................................................. 226 10.7.4 Steps in Constructing the X Chart .......................................................... 227 Use of Computers in Quality Control ..................................................................... 233 10.8 11 TOTAL QUALITY MANAGEMENT AND ISO-9000 11.0 11.1 11.2 234 11.3 11.4 11.5 What is TQM? .......................................................................................................... 234 TQM Need Commitment ......................................................................................... 234 Various Approaches to TQM ................................................................................... 235 11.2.1 Deming’s Approach to TQM ...................................................................... 235 11.2.2 Juran’s Approach to TQM ......................................................................... 236 11.2.3 Crosby’s Approach to TQM ....................................................................... 237 11.2.4 Feigenbaum’s Approach to TQM .............................................................. 238 11.2.5 Ishikawa’s Approach to TQM .................................................................... 239 Some Quality and TQM Related Terms ................................................................. 240 Relationship Between ISO 9000 and Quality ........................................................ 248 Relationship Between ISO 9000 and TQM ............................................................ 248 11.5.1 Principles of ISO 9000 ............................................................................... 249 11.5.2 Benefits of ISO 9000 .................................................................................. 249 12 LINEAR PROGRAMMING 12.0 12.1 12.2 251 Introduction.............................................................................................................. 251 The LP Formulation and Underlying Assumptions .............................................. 251 The General LP Formulation .................................................................................. 253
Slide 14: ( xiii) 12.2.1 Graphical Solution of 2-Variables LP ....................................................... 254 12.2.2 A 2-Var LP with a Unique Optimal Solution ........................................... 254 Different Forms of Linear Programs ...................................................................... 255 The Assignment Problem ........................................................................................ 264 Transportation Problem .......................................................................................... 267 12.5.1 Transportation Algorithm (Modi Method) ............................................... 271 12.3 12.4 12.5 13 METHODS ENGINEERING 13.0 13.1 13.2 273 13.3 Introduction.............................................................................................................. 273 Objective of Work Study .......................................................................................... 273 Tools and Techniques of Work Study .................................................................... 274 13.2.1 Method Study ............................................................................................. 274 13.2.2 Work Measurement (Time Study) ............................................................ 283 Standardization ....................................................................................................... 293 13.3.1 What is a Standard? .................................................................................. 293 13.3.2 Examples of Standards ............................................................................. 294 13.3.3 What is Conformity Assessment? ............................................................. 294 13.3.4 Standards Development, Acceptance/Implementation ........................... 294 13.3.5 Benefits of Standards to Industry ............................................................ 295 13.3.6 Benefits of Standards to Government ...................................................... 295 13.3.7 Benefits of Standards to Consumers ........................................................ 296 13.3.8 Cardinal Principles of International Standardization ............................ 296 14 MECHANIZATION, AUTOMATION AND PRODUCTIVITY 14.0 14.1 298 14.2 14.3 14.4 14.5 Introduction.............................................................................................................. 298 Assembly Line .......................................................................................................... 298 14.1.1 History of the Assembly Line .................................................................... 298 14.1.2 History of Moving Assembly Line ............................................................. 299 14.1.3 Pre Industrial Revolution ......................................................................... 299 14.1.4 Industrial Robot ......................................................................................... 299 Postal Mechanization/Early Automation ............................................................... 299 The Age of Automation ............................................................................................ 300 14.3.1 Automation................................................................................................. 302 14.3.2 Social Issues of Automation ...................................................................... 303 14.3.3 The Automated Workplace ........................................................................ 303 Productivity Improvement Stories ......................................................................... 305 14.4.1 Story of US Agriculture ............................................................................. 305 14.4.2 Automation Improves Productivity in a Tire Company .......................... 305 14.4.3 Automation Sends Productivity Soaring .................................................. 306 14.4.4 Story of Increased Productivity in Photographic Industry .................... 309 Automation Systems Today .................................................................................... 310
Slide 15: ( xiv ) 15 VALUE ANALYSIS AND VALUE ENGINEERING 15.0 15.1 312 15.2 15.3 15.4 15.5 15.6 Introduction.............................................................................................................. 312 Some Basic Concepts ............................................................................................... 312 15.1.1 Definition of Value ..................................................................................... 312 15.1.2 Reasons Behind Poor Value ...................................................................... 313 15.1.3 Types of Values .......................................................................................... 313 15.1.4 Types of Functions ..................................................................................... 313 Value Tests ............................................................................................................... 313 Steps in Value Analysis ........................................................................................... 314 Examples of Value Engineering ............................................................................. 318 15.4.1 Some Simple Case Studies of VE.............................................................. 318 Value Engineering and Simplification Analysis .................................................... 319 15.5.1 The Primary Questions ............................................................................. 319 15.5.2 The Secondary Questions .......................................................................... 320 15.5.3 Checklist ..................................................................................................... 321 Benefits of Value Engineering ................................................................................ 327 Index ......................................................................................................................... 328
Slide 16: Production Systems and Operations Management 1.0 INTRODUCTION 1 In any manufacturing system, the job of an Operations Manager is to manage the process of converting inputs into the desired outputs. Therefore, Operations Management can be defined as the management of the conversion process, which converts land, labor, capital, and management inputs into desired outputs of goods and services. It is also concerned with the design and the operation of systems for manufacture, transport, supply or service. 1.1 RELATED ISSUES OF OPERATIONS MANAGEMENT Some of the related issues of Operations management are production function, productivity, productivity measurements, types of production systems, production modeling, and so on. They all are discussed in this chapter. 1.1.1 PRODUCTION FUNCTION Production is an organized activity of transforming raw materials into finished products. It is an intentional act of producing something useful. In production systems we have different resources as input. The inputs are processed in a series of operations. The sequence, number, and type of operations (mechanical, chemical, electrical, assembly, inspection, transportation, etc) are specified for each input. The output of the system will be complete parts products, chemicals etc. Production function shows the relationship between the input and the output of an organization. By the study of production function the maximum output which can be achieved with given inputs, or say resources with a given state of technology is determined. The production function can be represented by the simple mathematical equation which relates the outputs as the function of inputs , that is Y = f (X1, X2, …., Xn) Where Y = units of output, which is the function of the quantity of two or more inputs X1 = unit of labor, and X2 = unit of machinery, and so on. Some quantities of production are assumed as fixed, that is not varying with change of output, such quantities never enter in the equation. 1
Slide 17: 2 A Modern Approach to Operations Management 1.1.2 PRODUCTIVITY It is a very comprehensive concept, both in its aim and also in its operational content. It is a matter of common knowledge that higher productivity leads to a reduction in cost of production, reduces the sales price of an item, expands markets, and enables the goods to compete effectively in the world market. It yields more wages to the workers, shorter working hours and greater leisure time for the employees. In fact the strength of a country, prosperity of its economy, standard of living of the people and the wealth of the nation are very largely determined by the extent and measure of its production and productivity. By enabling an increase in the output of goods or services for existing resources, productivity decreases the cost of goods per unit, and makes it possible to sell them at lower prices, thus benefiting the consumers while at the same time leaving a margin for increase in the wages of the workers. Productivity can be defined in many ways. Some of them are as follows: • Productivity is nothing but the reduction in wastage of resources such as labor, machines, materials, power, space, time, capital, etc. • Productivity can also be defined as human endeavor (effort) to produce more and more with less and less inputs of resources so that the products can be purchased by a large number of people at affordable price. • Productivity implies development of an attitude of mind and a constant urge to find better, cheaper, easier, quicker, and safer means of doing a job, manufacturing a product and providing service. • Productivity aims at the maximum utilization of resources for yielding as many goods and services as possible, of the kinds most wanted by consumers at lowest possible cost. • Productivity processes more efficient works involving less fatigue to workers due to improvements in the layout of plant and work, better working conditions and simplification of work. In a wider sense productivity may be taken to constitute the ratio of all available goods and services to the potential resources of the group. 1.1.3 DIFFERENCE BETWEEN PRODUCTION AND PRODUCTIVITY As discussed earlier, production is an organized activity of transforming raw materials into finished products which have higher value. Production of any commodity or service is the volume of output irrespective of the quantity of resources employed to achieve the level of output. Production in an industry can be increased by employing more labor, installing more machinery, and putting in more materials, regardless of the cost of production. But increase of production does not necessarily mean increase in productivity. Higher productivity results when we put in production system an element of efficiency with which the resources are employed. The combined input of a number of factors such as land, materials, machines, capital, and labor gives an output in an industry. The ratio between output and one of these factors of input is usually known as productivity of the factor considered. Productivity may also be considered as a measure of performance of the economy as a whole. Mathematically, Productivity = Output Value/Input Value Factor Productivity = Output due to the factor/ Input factor employed An example to illustrate the difference between production and productivity follows: For instance, 50 persons employed in an industry may be producing the same volume of goods over the same period
Slide 18: Production Systems and Operations Management 3 as 75 persons working in another similar industry. Productions of these two industries are equal, but productivity of the former is higher than that of the latter. In order to assure that productivity measurement captures what the company is trying to do with respect to such vague issues as customer satisfaction and quality, some firms redefined productivity as Productivity = Effectiveness or value to customer/Efficiency or cost to producer As it has been said so many times productivity measurement is the ratio of organizational outputs to organizational inputs. Thus productivity ratios can be — Partial productivity measurement — Multi-factor productivity measurement — Total productivity measurement Partial Productivity Measurement Partial productivity measurement is used when the firm is interested in the productivity of a selected input factor. It is the ratio of output values to one class of input. Outputs Outputs Outputs PPM = or or Labor Input Material Input Capital Multi-factor Productivity Measurement This productivity measurement technique is used when the firm is interested to know the productivity of a group of input factors but not all input factors. Outputs Outputs MFPM = or Labor + Capital Labor + Material Total (Composite) Productivity Measures A firm deals about composite productivity when it is interested to know about the overall productivity of all input factors. This technique will give us the productivity of an entire organization or even a nation. Outputs Goods and services provide TPM = or Inputs All resources Used The above measurement techniques can be grouped into two popular productivity measurement approaches the first uses a group-generated model and is called normative productivity measurement methodology. The second is less participative in that one model can be modified to fit any organization scheme. It is called multi-factor productivity measurement model. 1.1.4 EFFECTIVENESS It is the degree of accomplishment of the objectives that is: How well a set of result is accomplished? How well are the resources utilized? Effectiveness is obtaining the desired results. It may reflect output quantities, perceived quality or both. Effectiveness can also be defined as doing the right things. 1.1.5 EFFICIENCY This occurs when a certain output is obtained with a minimum of inputs. The desired output can be increased by minimizing the down times as much as possible (down times are coffee breaks, machine failures, waiting time, etc). But as we decrease down times the frequency of occurrence of defective products will increase due to fatigue. The production system might efficiently produce defective (ineffective) products. Efficiency can be defined as doing things right. Operational efficiency refers to a ratio of outputs to inputs (like land, capital, labor, etc.)
Slide 19: 4 A Modern Approach to Operations Management Example 1.1. Management of a hotel is concerned with labor efficiency, especially when labor is costly. To determine how efficient labor is in a given situation, management sets an individual standard, a goal reflecting an average worker’s output per unit of time under normal working conditions. Say that the standard in a cafeteria is the preparation of 200 salads per hour. If a labor input produces 150 salads per hour, how efficient is the salad operation ? Labor efficiency = Labor Outputs 150 salads = × 100% = 75% Labor Input 200 salads So, compared with the standard, this operation is 75% efficient in the preparation of salads. 1.2 OPERATIONS FUNCTION IN ORGANIZATIONS The operations system of an organization is the part that produces the organization’s products. In some organizations the product is a physical good (refrigerators, breakfast cereal), while in others it is a service (insurance, health care for the old people). However, these organizations have something in common as shown in Figure 1.1. They have a conversion process, some resource inputs into that process, the outputs resulting from the conversion of the inputs, and information feedback about the activities in the operations system. Once goods and services are produced, they are converted into cash (sold) to acquire more resources to keep the conversion process alive. Example 1.2. On a farming situation, the inputs are: land, equipment, labor, etc and the outputs are: corn, wheat, milk, fruits, and so on. Adjustments needed Random fluctuations Monitor output Inputs • Land • Labor • Capital Conversion process Outputs • Management • • Goods Services Comparison: Actual Vs desired Figure 1.1 For all operations, the goal is to create some kind of value-added, so that the outputs are worth more to consumers than just the sum of the individual inputs. Some of the examples of input, conversion process, and output are shown in Table 1.1. Students are advised to collect some inputs and outputs of some of the industries visited by them. The random fluctuations in Figure 1.1 consist of unplanned or uncontrollable influences that cause the actual output to differ from the expected output. Random fluctuations can arise from external sources (fire, floods, earthquake, lightening, or even some diseases like SARS), or they can result from internal problems (defects in materials and equipment, human error). In fact, fluctuations are the rule rather than the exception in
Slide 20: Production Systems and Operations Management 5 production system and reducing fluctuations (variations) is a major task of management. It may be noted that SARS (Severe Acute Respiratory Syndrome) has affected all aspects of life (airlines, tourism, schools, industries, etc.) in many countries especially in China. Table 1.1 Input Elements Materials Data Energy Variable cost Conversion process Transformation Machines Interpretation Skill Fixed cost Output Useful products Products Knowledge Services Revenue An unit of output normally needs several types of inputs. The inputs account for most of the variable cost of production. Conversion process/facilities are associated with fixed cost, and the output produces the revenue. Any system is a collection of interacting components. Each component could be a system unto itself in a descending order of simplicity. Systems are distinguished by their objectives; the objective of one system could be to produce a component which is to be assembled with other components to achieve the objective of a larger system. 1.2.1 MANUFACTURING OPERATIONS Vs SERVICE OPERATIONS A conversion process that includes manufacturing (or production) yields a tangible output: a product. In contrast, a conversion process that includes service yields an intangible output: a deed, a performance, an effort. For example, Mesfin Industries produces a lot of tangible products, whereas Ethiopian Airlines provides air transport services to passengers which is an intangible output. 1.2.1.1 Distinguishing Between Manufacturing and Service Operations Generally the following characteristics are used to distinguish between manufacturing and service operations: • Tangible and intangible nature of output • Consumption of output • Nature of work (jobs) • Degree of customer contact • Customer participation in conversion • Measurement of performance Put simply, the manufacturing is characterized by tangible outputs (products), outputs that customers consume over time, jobs that use less labor and more equipment, little customer contact, no customer participation in the conversion process (in production), and sophisticated methods for measuring production activities and resource consumption as products are made. Service, on the other hand, is characterized by intangible outputs, outputs that customers consume immediately, jobs that use more labor and less equipment, direct customer contact, frequent customer participation in the conversion process, and elementary methods for measuring conversion activities and resource consumption. However, some service is equipment-based like Computer software services, Internet services, telephone services, etc. Some service is people-based like tax accounting services, hair styling, and golf instruction.
Slide 21: 6 A Modern Approach to Operations Management Let’s see the customers’ participation aspects in conversion process. In service operations, managers sometimes find it useful to distinguish between output and throughput types of customer participation. Output is a generated service, throughput is an item going through the process. In a pediatrics clinic the output is the medical service to the child, who by going through the conversion process, is also a throughput. Same is the case with the students undergoing training in Addis Ababa University. At a fast-food restaurant, in contrast, the customer does not go through the conversion process. The outputs are burgers, pizzas, and French fries served in a hurry (both goods and services), while the throughputs are the food items as they are prepared and converted. The customer is neither a throughput nor an output. Both the clinic and the restaurant provide services, even though the outputs and throughputs differ considerably. We will use the term operations to include both manufacturing and service in this book. 1.2.1.2 Historical Background of Production and Operations Management For over two centuries, operations management has been recognized as an important factor in economic development of a country. POM has passed through a series of names like: manufacturing management, production management, and operations management. All of these describe the same general discipline. The traditional view of manufacturing management began in the 8th century when Adam Smith recognized the economic benefits of specialization of labor. He recommended breaking jobs down into subtasks and reassigning workers to specialized tasks in which they become highly skilled and efficient. In the early 20th century, Fredrick W. Taylor implemented Smith’s theories and crusaded for scientific management in the manufacturing sectors of his day. From then until about 1930, the traditional view prevailed, and many techniques we still use today were developed. A brief sketch of thee and other contributions to manufacturing management is given in Table 1.2. Table 1.2. Historical summary of Operations Management Date (approx) 1776 1799 1832 1900 1900 1901 1915 1927 1931 1935 Contribution Specialization of labor in manufacturing Interchangeable parts, cost accounting Division of labor by skill; assignment of jobs by skill; basics of time study Scientific management; time study and work study developed; dividing planning and doing of work Motion study of jobs Scheduling techniques for employees, machines, jobs in manufacturing Economic lot sizes for inventory control Human relations; the Hawthorne studies Statistical inference applied to product quality; quality control charts Statistical sampling applied to quality control; inspection sampling plans Contributor Adam Smith Eli Whitney and others Charles Babbage Frederick W. Taylor Frank B. Gilbreth Henry L. Gantt F. W. Harris Elton Mayo Walter A. Shewhart H. F. Dodge and H. G. Romig
Slide 22: Production Systems and Operations Management 7 P. M. S. Blacket and others John Mauchly and J. P. Eckert George B. Dantzig, William Orchard Hays, and others A. Charnes, W. W. Cooper, H. Raiffa, and others Sperry Univac L. Cummings, L. Porter, and others W. Skinner J. Orlicky and O. Wright W. E. Deming and J. Juran 1940 1946 1947 Operations research applications in World War II Digital computer Linear programming 1950 Mathematical programming, nonlinear and stochastic processes 1951 1960 1970 Commercial digital computer; large-scale computations available Organizational behavior; continued study of people at work Integrating operations into overall strategy and policy Computer applications to manufacturing, scheduling, and control, material requirements planning (MRP) Quality and productivity applications from Japan; robotics, computer-aided design and manufacturing (CAD/CAM) 1980 Production management became the more widely accepted term from 1930s through the 1950s. As Frederick Taylor’s work became more widely known, managers developed techniques that focused on economic efficiency in manufacturing. Workers were ‘put under a microscope’ and studied in great detail to eliminate wasteful efforts and achieve greater efficiency. At this same time, however, management also began discovering that workers have multiple needs, not just economic needs. Psychologists, sociologists, and other social scientists began to study people and human behavior in the work environment. In addition, economists, mathematicians, and computer scientists contributed newer, more sophisticated analytical approaches. With the 1970’s emerges two distinct changes in our views. The most obvious of these, reflected in the new name-operations management-was a shift in the service and manufacturing sectors of the economy. As the service sector became more prominent, the change from ‘production’ to ‘operations’ emphasized the broadening of our field to service organizations. The second, more subtle change was the beginning of an emphasis on synthesis, rather than just analysis, in management practices. These days, organizational goals are more focused to meet consumers’ needs throughout the world. Quality concepts like TQM, ISO-9000, Quality function deployment, etc. are all examples of this attitude of management. 1.2.2 TYPES OF PRODUCTION SYSTEM There are eight types of production which may be classified in three or four broad groups according to the quantities of production involved [Samuel Eilon]. They are shown in Figure 1.2 in terms of product variety and production volume—the figure is self explanatory. 1. Job Shop Production system which has the following features : (a) A small number of items produced only once, (b) A small number of items produced intermittently when the need is felt, (c) A small number of items produced periodically at known time interval.
Slide 23: 8 A Modern Approach to Operations Management 2. Batch Production which has the following characteristics : (a) A batch of items produced only once, (b) A batch of items produced at irregular intervals when a need is felt, (c) A batch of items produced periodically at known intervals to satisfy the continuous demand. 3. Continuous Production which consists of (a) Mass production (b) Flow production Continuous Volume Mass Batch Job shop Product variety Figure 1.2. Different Types of Production Systems. 1.2.2.1 Job Production This is the oldest method of production on a very small scale. It is also popularly known as ‘job-shop or Unit’ production. With this method individual requirements of consumers can be met. Each job order stands alone and may not be repeated. Some of the examples include manufacturing of aircrafts, ships, space vehicle, bridge and dam construction, ship building, boilers, turbines, machine tools, things of artistic nature, die work, etc. Some of the features of this system are as follows: • This system has a lot of flexibility of operation, and hence general purpose machines are required. • Generally no automation is used in this system, but computer-aided-design (CAD) is used. • It deals with ‘low volume and large variety’ production. It can cater to specific customer order, or job of one kind at a time. • It is known for rapid value addition. Advantages • Low risk of loss to the factory adopting this type of production. Due to flexibility, there is no chance of failure of factory due to reduction in demand. It can always get one or the other job orders to keep it going. • Requires less money and is easy to start. • Less or no management problem because of very small work force. Disadvantages • For handling different types of jobs, only workers with multiple skills are needed. This increases the labor cost.
Slide 24: Production Systems and Operations Management 9 • Low equipment utilization. • As the raw materials are purchased in less quantity, the cost of material procurement is more. 1.2.2.2 Batch Production The batch production system is generally adopted in medium size enterprises. Batch production is a stage in between mass production and job-shop production. As in this system, two or more than two types of products are manufactured in lots or batches at regular interval, which justifies its name the ‘batch production system’. It has the following features: • A batch production turns into flow production when the rest period vanishes. In flow production, the processing of materials is continuous and progressive. • Batch production is bigger in scale than job production, but smaller than that of mass production. • Material handling may be automated by robots as in case of CNC machining centers. • A medium size lots (5 to 50) of same items is produced in this system. Lot may be produced once in a while or on regular interval generally to meet the continuous customer demands. • Plant capacity generally is higher than demand. Advantages • It is flexible in the sense that it can go from one job to another with almost zero cost. It needs general purpose machine having high production rate. • If demand for one product decreases then production rate for another product may be increased, thus the risk of loss is very less. • Most suitable for computer-aided-manufacturing (CAM). Disadvantages • As the raw materials to be purchased are in smaller quantity than in case of mass production, the benefits of discount due to large lot purchasing is not possible. • It needs specially designed jigs and fixtures. 1.2.2.3 Continuous Production In this, the production activity continues for 24 hours or on three shifts a day basis. A steel plant, for example, belongs to this type. It is impossible to stop the production process on a short notice without causing a great damage to its blast furnace and related equipment. Other examples include bottling plant, soft drink industry, fertilizer plant, power plant, etc). Mass production and Flow production belong to continuous type only. They are explained below: Mass production: In this type, a large number of identical items is produced, however, the equipment need not be designed to produce only this type of items. Both plant and equipment are flexible enough to deal with other products needing the same production processes. For example, a highly mechanized press shop that can be utilized to produce different types of components or products of steel metal without the need of major changes. Flow production: In this type, the plant, its equipment, and layout have been chiefly designed to produce a particular type of product. Flexibility is limited to minor modifications in layout or design of models. Some famous examples are automobiles, engines, house-hold machinery, chemical plants, etc. If the management decides to switch over to a different type of product, it will result in extensive change in tooling, layout, and equipment.
Slide 25: 10 A Modern Approach to Operations Management Continuous production, in general, has the following features: • It is very highly automated (process automation), and highly capital intensive. Items move from one stage to another automatically in a continuous manner. • It has a fixed or hard automation which means there is very less or no flexibility at all. Layout of the plant is such that it can be used for only one type of product. Each machine in the system is assigned a definite nature of work. • To avoid problem of material handling, use of cranes, conveyors etc. are made. • Work-in-process (WIP) inventory in this system is zero. Advantages • It gives better quality, large volume but less variety of products. • Wastage is minimum. • As the raw materials are purchased on a large scale, higher margin of profit can be made on purchase. • Only a few skilled, and many semi-skilled workers are required. This reduces the labor cost substantially. Disadvantages • During the period of less demand, heavy losses on invested capital may take place. • Because all the machines are dedicated and special purpose type, the system is not changeable to other type of production. • Most of the workers handle only a particular operation repetitively, which can make them feel monotonous. • As this type of production is on the large scale, it cannot fulfill individual taste. 1.3 ROLE OF MODELS IN OPERATIONS MANAGEMENT The context in which we use the term mathematical modeling refers to the creation of mathematical representations of management problems and organizations in order to determine outcomes of proposed courses of action. In spite of their utility, we must recognize that models cannot duplicate the real environment completely. However, this shortcoming should not be taken as a negative feature in a strict sense. In fact, it can be desirable, because it clears away extraneous elements and frills, and concentrates on the core problem. The modeling process can give us a simplified version of the situation with clear visibility of major factors. 1.3.1 TYPES OF MODELS IN PRODUCTION OPERATIONS MANAGEMENT (POM) In operations management, we use several types of models of varying levels of sophistication. 1.3.1.1 Verbal Models Verbal or written models express in words the relationships among variables. Verbal models are descriptive. Suppose a passing motorist asks you to give directions to the nearest gas station. If you tell him the way, you are giving a verbal model. If you write the directions in words (not pictures), you are giving a descriptive model. 1.3.1.2 Schematic Models Schematic models show a pictorial relationship among variables. If you give the passing motorist a map showing the way to the nearest gas station, you would be giving a schematic model. Charts and
Slide 26: Production Systems and Operations Management 11 diagrams are also schematic; they are very useful for showing relationships among variables, as long as all the legends, symbols, and scales are explained. 1.3.1.3 Iconic Models Iconic models are scaled physical replicas of objects or processes. Architectural models of new buildings and highway engineering replicas of a proposed overpass system are iconic models. 1.3.1.4 Mathematical Models Mathematical models show functional relationships among variables by using mathematical symbols and equations. In any equation, x, y, and similar symbols are used to express precise functional relationships among the variables. 1.3.2 MATHEMATICAL MODELS IN PRODUCTION AND OPERATIONS MANAGEMENT Optimization: Operations managers often use models to help analyze problems and suggest solutions. To assist, they find it helpful to use an algorithm, a prescribed set of steps (a procedure) that attains a goal. In optimization models, for example, we want to find the best solution (the goal), and an optimization algorithm identifies the steps for doing so. In operations management we strive for optimization algorithms as aids in problem solving. Heuristics: In other cases, a heuristic approach is used. A heuristic is a way (a strategy) of using rules of thumb or defined decision procedures to attack a problem. In general, when we use heuristics we do not expect to attain the best possible solution to a problem; instead, we hope for a satisfactory solution quickly. Formally developed heuristic procedures are called heuristic algorithms. They are useful for problems for which optimization algorithms have not yet been developed. 1.3.3 MODELING BENEFITS The extensive use of models, especially schematic and mathematical models, is sometimes questioned by students and practitioners of POM. Using models often requires making questionable assumptions, applying hard-to-get cost and other data, and figuring in future events that are not easily predicted. Even so, the knowledge gained from working with models and attempting to apply them can yield valuable insights about a particular problem and what types of decisions are required. Simply recognizing the decision points can be a major step forward in many situations. Moreover, by using models, managers can recognize • Variables that can be controlled to affect performance of the system • Relevant costs and their magnitudes, and • The relationship of costs to variables, including important tradeoffs among costs. 1.4 CLASSIFYING PROBLEMS Since the operations analyst comes across different types of problems, it is a good idea to classify them into some groups. This will make it easier to select models and criteria to use in the analysis. There can be two ways of classifying problems: by the degree to which the outcome is uncertain, and by the degree to which the decisions are independent. 1.4.1 UNCERTAINTY OF OUTCOMES When we know for sure what the outcome of each decision will be, we are dealing with a problem under control of certainty. When a decision has more than one possible outcome and we know the
Slide 27: 12 A Modern Approach to Operations Management likelihood of each outcome, we are dealing with a problem under conditions of risk. Finally, when a decision has more than one possible outcome and we do not know the likelihood of each outcome, we are dealing with a problem under conditions of uncertainty. Some examples may clarify these conditions of certainty, risk, and uncertainty. Example1.3. (Certainty) A chain of supermarkets is going to open a new store at one of four possible locations. Management wishes to select the location that will maximize profitability over the next ten years. An extensive analysis was performed to determine the costs, revenues, and profits for each alternative. The results are shown below. Table 1.3 Location 1 2 3 4 10 year annual profit ($ millions) 0.70 0.95 0.60 0.84 Management has a high degree of confidence in these figures. The decision criterion (profit) has been explicitly identified and accurately calculated for each alternative. Management’s strategy is to select the alternative with the highest criterion value, in this case location 2. Solution. Under conditions of certainty, the best location is easily identified. Location 2 clearly yields the highest profit. Example 1.4. (Risk) Further analysis of the supermarket chain’s problem reveals that the profit associated with each location is not known for sure. Management is convinced that the ten-year profitability of each location will depend upon regional population growth. Therefore management cannot predict the outcome with certainty. Three possible rates of population growth were identified: low, medium, and high. The profitability ($ millions) associated with each location and each rate of population growth was calculated, as shown below. Table 1.4 Rate of population growth Location 1 2 3 4 Probability (p) Low (5% or less) 0.3 million $ 0.2 0.4 0.6 0.2 Medium (above 5% but below 10%) 0.8 million $ 0.6 0.5 0.7 0.3 High (10% or more) 0.9 million $ 1.1 0.6 0.8 0.5 The figures at the bottom of the table gives the probability (likelihood) of each rate of population growth. Decision strategy in this situation is more difficult than it is under conditions of certainty. Solution. Under conditions of risk, the choice is not so easy. We do not know which location will be best because the rate of future population growth is not known for certain. In analyzing this situation, the data need to be arranged differently (see Table 1.4). The table arranged like this is called a matrix. Which alternative is the best? If population growth turns out to be low, then location 4 is the best (0.6 million $). If growth is medium, then location 1 is the best (0.8 million $), and if the growth is high, then location 2 is the best (1.1 million $). In the analyst’s language, the three rates of population growth are called states of nature.
Slide 28: Production Systems and Operations Management 13 Table 1.5. Calculation of Expected Value in $ million Alternative 1 2 3 4 p Low 0.3 0.2 0.4 0.6 0.2 Medium 0.8 0.6 0.5 0.7 0.3 High 0.9 1.1 0.6 0.8 0.5 Expected Value (Profit) (.3*.2) + (.8*.3) + (.9*.5) = .75 (.2*.2) + (.6*.3) + (1.1*.5)= .77 (.4*.2) + (.5*.3 + (.6*.5) = .53 (.6*.2) + (.7*.3 + (.8*.5) = .73 A concept of expected value has been applied to our problem (Table 1.5). The expected value is highest for alternative 2 ($ .77 million). If management faced this situation many times and always chose alternative 2, its average profit would be higher than for any other alternative. Example 1.5. (Uncertainty) Even further analysis has cast doubt on the probability of the rates of population growth. New management doesn’t know the probabilities of low, medium, or high growth, and is faced with a problem under conditions of uncertainty. Obviously, strategy is much harder to come by in this case. Solution. We discuss three approaches from a set of several options that analysts use in the situation of uncertainty: maximax, maximin, and principles of insufficient reason. (i) The maximax is an optimistic approach. Here the analyst considers only the best outcome for each alternative regardless of probability. Looking at Table 1.4 and ignoring the probability row, the outcomes that would be considered are: $.9 million for alternative1, $1.1 million for alternative 2, $.6 million for alternative 3, and $.8 million for alternative 4. Among these, alternative 2 gives the best profit, and thus selected in this situation. (ii) The second approach is maximin - a pessimistic approach. Here, the analyst considers only the worst outcome for each alternative and selects the ‘best of the worst’. In Table 1.4, the outcomes to be considered are: $.3 million for alternative1, $.2 million for alternative 2, $.4 million for alternative 3, and $.6 million for alternative 4. The best of these is alternative 4. (iii) The third approach, the principles of insufficient reason, assumes that since we know absolutely nothing about the probabilities of any state of nature, we should treat each with equal probability, calculate the expected values accordingly, and choose the alternative whose expected value is highest. Using this approach, we would select alternative 4. Table 1.6. Calculation of Expected Value in $ million Alternative 1 2 3 4 p Low 0.3 0.2 0.4 0.6 0.33 Medium 0.8 0.6 0.5 0.7 0.33 High 0.9 1.1 0.6 0.8 0.33 Expected Value (Profit) (.3*.33) + (.8*.33) + (.9*.33) = .660 (.2*.33) + (.6*.33) + (1.1*.33)= .627 (.4*.33) + (.5*.33 + (.6*.33) = .495 (.6*.33) + (.7*.33 + (.8*.33) = .693 1.4.2 MAXIMIN RULE (WEATHER PROBLEM) A person needs to go to his office. The two possible states of weather are: (A) it may rain, (B) it might shine. The following threes possible strategies for the person are: X: go without protection, Y: go with an umbrella, Z: go with an umbrella and a rain coat. The pay-off matrix is given as follows:
Slide 29: 14 A Modern Approach to Operations Management Table 1.7. Pay-off matrix Strategy X (No Protection) Y (Umbrella) Z (Umbrella + Coat) A (Rain) – 10 5 12 B (Shine) 10 1 –5 Decide on the basis of (i) Maximin , and (ii) Maximax what decision the person should take under the given situation? Solution. (i) Decision based on Maximin rule Strategy X Y Z Minimum satisfaction for strategy – 10 1 –5 (ii) Decision based on Maximax rule Strategy X Y Z Max. satisfaction for the strategy 10 5 12 12 (The person will go with umbrella and coat) Maximum of these maxima 1 (the person will go with umbrella) Maximum of these minima 1.4.3 INTERDEPENDENCE AMONG DECISIONS A second way to classify problems relates to the number of decision stages that must be considered. At one extreme are single-stage (or static) problems; at the other are multistage (or sequential) problems. Static problems entail essentially ‘one-time-only’ decisions. Decisions concerning inventory, ‘makevs-buy’, product mix, and location of new facility are often treated as static problems. Our supermarket chain example was treated this way. To simplify the situation, the decision is treated as if it were independent of other decisions. Multistage problems, on the other hand, entail several sequential decisions related to one another. The outcome of the first decision affects the attractiveness of choices at the next decision stage, and so on down the line at each decision point. With multistage problems, the concern is not how to get the best outcome at any single stage but how to make a series of choices that will finally result in the best overall set of outcomes from beginning to end. Some of the examples of multistage problems are encountered by operation managers in project management, capacity planning, and aggregate scheduling. UNSOLVED PROBLEMS 1.1 The labor output standard for an Insurance claims office is 150 claims processes per day. So far this week, 160, 125, 140, and 100 claims have been processed daily. The claims backlog is building up. Prepare a graph of daily efficiency. What does the graph indicate?
Slide 30: Production Systems and Operations Management 15 1.2 The manager of a bottling plant came to work early on Friday, having been out of town throughout the week. Before others arrived, he checked the daily labor efficiency report for the bottling plant. He finds that daily efficiency was 102 % on Monday, 94 % on Tuesday, and 87 % on Wednesday. Going to the assistant manager’s desk, he found that on Thursday employees worked 96 hours and bottled 1,025 cases. The standard for labor output is 12.5 cases per hour. What, if any, questions should the manager ask when employees arrive on Friday ? 1.3 A company is thinking to purchase a used truck. Its useful service life is estimated to be 3 years with a probability of 0.1; 4 years with a probability of 0.4; 5 years with a probability of 0.3; and 6 years with a probability of 0.2. what is the expected useful life of the used truck? 1.4 A cab company is considering three makes of autos-A,B, or C-to add to its taxi fleet The daily operating cost of each make depends on daily usage rate (demand) as shown here: Make Low A B C $100 190 150 Daily Usage Rate Moderate $200 200 190 High $300 220 230 Which make is best according to the principles of insufficient reason? If the probabilities of low, moderate, and high usage are .5, .2, and.3, respectively, which make has the highest expected value? 1.5 Four alternative manufacturing methods are being considered for a new product. Profitability, which depends on method of manufacture and level of consumer acceptance, is anticipated as shown here. Manufacturing Method Low 1 2 3 4 Probability $100 175 250 100 .25 Projected Consumer Acceptance Moderate $200 300 300 300 .35 High $300 400 350 400 .20 Very high $600 500 425 450 .20 (a) What is the best manufacturing method according to each of these approaches? • Expected value • Maximin • Maximax • Insufficient reason (b) Which manufacturing method should be selected and why? 1.6 A glass factory is experiencing a substantial backlog, and the management is considering three courses of action: (A) arrange for subcontracting, (B) begin overtime production, or (C) construct new facilities. The correct choice depends largely upon future demand, which may be low, medium, or high. By consensus, the management ranks the respective probabilities as 0.1, 0.5, and 0.4. A cost analysis reveals the effect upon profits that is shown in Table 1.
Slide 31: 16 A Modern Approach to Operations Management Profit ($000) If demand is Low (p = 0.1) A = Arrange for subcontracting B = Begin overtime production C = Construct new facilities 10 – 20 – 150 Medium (p = 0.5) High (p = 0.4) 50 60 20 50 100 200 (a) State which course of action would be taken under a criterion of (i) maximax, (ii) maximin, (iii) maximum probability, and (iv) maximum expected value. (b) Show this decision situation schematically in the form of a decision tree.
Slide 32: 2 Location of Production and Service Facilities 2.0 INTRODUCTION The problem of how many facilities to have and where they should be located is encountered by service and product organization in both the public and private sectors. Banks, restaurants, recreation agencies, and manufacturing companies are all concerned with selecting sites that will best enable them to meet their long-term goals. Since the operation managers fixes many costs with the location decision, both the efficiency and effectiveness of the conversion process are dependent upon location. This chapter will examine the facilities location issues in details by taking into account the reasons for location changes and the factors affecting the selection of location. We shall also discuss the procedure for facility location and related issues in the sections to follow. 2.1 REASONS FOR LOCATION CHANGES Different situations for location change could be (i) a new plant is just being started, (ii) a new branch of an existing plant is to be located, or (iii) a new location for an existing plant is being sought. In addition to the need for greater capacity, there are other reasons for changing or adding locations: • Changes in resources may occur. The cost or availability of labor, raw materials, and supporting resources (such as subcontractors) may change. • The geography of demand may shift. As product markets change, it may be desirable to change facility location to provide better service to customers. • Some companies may merge, making facilities location redundant. • New products may be introduced, changing the availability of resources and markets. • Political and economic conditions may change. Location decision should be based on long range policy and forecasts, e.g. company’s expansion policy, anticipated diversification of products, changing markets, changing sources of raw materials, etc. Other decisions to be made before a plant selection/construction are: (a) products or services to be made or offered in the plant, (b) type of equipment required, (c) type of structure needed, and (d) location of the plant. 17
Slide 33: 18 A Modern Approach to Operations Management 2.2 GENERAL FACTORS INFLUENCING LOCATION The factors to be taken into account depend on the type of industry to be located. Thus the factors important for locating a steel plant may be different from the factors to be considered in locating a computer assembly plant. However, the general factors affecting the location of plant or facility are as mentioned below. Proximity to Good Highways This consists of the quality of highway system, its relationship to markets, raw materials, and labor supply. It is obvious that availability of inter state super highways makes the suburbs, small communities, and country easily accessible. Abundant Labor Supply It is always preferable to locate the plant in an area where skilled, semi-skilled, an unskilled labor are available. This explains why the glass and bangles industries are located in Firozabad (India) where skilled manpower in this field are available. The same reasons are true for carpets industry in Mirzapur, and silk sarees in Kanziwaram. It is also desirable to have no labor problem. Location of facility will also depend on the prevalent wage rate, facilities for labor, history of relationship between trade-union and management in the area under consideration. Rural labors can be hired at lower wages and Steel industry needs a lot of rural labor. Perhaps this is why most of the steel plants in India are located in rural areas. Proximity to Markets Plant should be located nearer to the consumers’ market. Plants related to cement, bricks, roofing, and gypsum board are located nearer to the market. However, for those companies producing items like fountain pens, jewelry, and watches in which the costs of materials and labor are high, shipping costs are of secondary importance, and the location of plant is not on the basis of proximity of markets. For many firms it is extremely important to locate the plant near customers. Specially, service organizations, like drugstores, restaurants, post offices, or barbers, find proximity to market as the primary location factor. Manufacturing firms find it useful to be close to customers when transporting finished goods is expensive or difficult (perhaps because they are bulky, heavy, or fragile). Further, with the trend toward JIT production, suppliers want to locate near users to speed up deliveries. Availability of Suitable Land and Land Cost Cost of land is usually a minor factor in the location of a plant. In the communities that are interested in attracting new plants, land may be offered at a reduced price or at no cost, which may influence some plants to locate there. Adequate Water Supply Water is necessary for almost all kinds of plants. However, some plants heavily depend on water supply. For example, thermal power plant, Hydroelectric power plant, steel plant need lots of water for its day to day operation. This needs the plant to be located nearer to the water sources like lake or river. Nearness to Raw Materials and Suppliers In general, bulky or perishable products manufacturing companies are located near to the source of the raw materials. For example, food processing industry should be located nearer to canning factories, meat packing plants and creameries. Firms locate near their suppliers because of the perishability of raw materials and products, and transportation costs. Bakeries, dairy plants, and frozen seafood processors deal with perishable raw materials, so they often locate themselves close to suppliers.
Slide 34: Location of Production and Service Facilities 19 The Guiding principle in such cases is ‘weight losing’. If the raw material loses a lot of weight in processing, then the plant should be located nearer to the source of raw materials. Another principle is ‘weight balancing’ i.e. relative cost of transporting raw materials must be weighed against the cost of shipping the finished products. Thus, steel industry should be located near the coal and iron ore supply. Most of the steel plants in India are located in the region where coal, iron ores, and other raw materials are available. Tata steel, and steel plants under SAIL are also examples to justify this guidelines. Nearness to an Existing Plant It is advisable to keep the new plant reasonably close to the parent plant. Thus the truck assembly plant can be kept close to a steel plant because the two plants can act as complementary to each other. Product of one becomes the raw materials for the other. Again one can see why Telco and Tata steel in Jamshedpur are located nearer to each other. This way, executive supervision and staff consultations can be made common and cost reduction will be possible. Engineers and executives can make frequent trips to do the consultation and supervision work. Transportation Some companies find it desirable to be located near the seaport or near one of the inland waterways to take advantage of the lower cost of transporting materials (e.g., coal, iron ore, petroleum products, etc.) by boat, barge, or ship. Access to railroad or trucking facilities is also desirable. Power Supply It is desirable to have power supply at low cost for the operation of the plant. Cost of power supply per unit is generally cheaper in rural location than its urban counterpart. Some companies prefer to maintain their own standby power station. Water Disposal and Pollution Anti-pollution law should be followed to avoid water pollution. Waste materials dumped into the rivers or stream may create problems for new company needing a supply of fresh and pure water. For example, companies manufacturing antibiotics, steel, chemicals, and those using radioactive materials are confronted with waste disposal problems. Some of the examples related to environment issues include: three mile island (USA), Cello field (UK), Chernobyl (USSR), and Union carbide (India). Most countries have laws to prevent the companies from dumping the industrial wastes into rivers. Some of the site related problems in India that have surfaced in media are: Mathura oil refinery vs The Taj Mahal, Barauni oil refinery vs The Ganges river, Paradip port vs Cyclone effect, Narmada dam vs environmental issues. Similarly, the environment issues in Mugher Cement Plant in Addis Ababa (Ethiopia) calls for relocation of this plant or convert the plant into an environment friendly one. Taxes Kinds and amounts of taxes (e.g., excise duty, sales tax, income tax, etc.) levied by a state should also be considered in locating a plant. The kinds of taxes and the basis for fixing them should be investigated before hand. Some states and territories offer tax exemption for a stipulated period of time to attract the investors to set up their plants to produce certain priority products. Climate Companies requiring controlled temperature, humidity, and ventilation should consider the climatic factor while locating the plant. For example, textile factories in India needing high humidity are located in Maharashtra, Gujarat, etc which are near the sea coast and have adequate humidity for the textile mills. Even the choice of the executives may affect the plant location. Similarly, companies interested
Slide 35: 20 A Modern Approach to Operations Management in manufacturing computer components may be interested in a place with moderate climate and dust free environment. National Defense Industry related to defense or military hardware should be located on the basis of national defense interest and may preferably be away from the country’s borders. Community Administration and Attitude Local authorities and people should be willing to have the plant located in their area. Community should also provide the necessary municipal services, e.g. police and fire protection, maintenance of streets, waste disposal, etc. Worker attitude may also differ from country to country, region to region, and small town to city. Worker views about turnover, unions, and absenteeism are all relevant factors. Schools, Churches, Parks, and Residential Area It makes sense to pick up a town or locality that will provide the best services and living conditions for their employees and their families. Excellent schools, parks, hospitals, residential areas, etc. should be desirable. Space for Future Expansions Demand of products is dynamic in nature. It may be required to increase the production capacity of the plant in future if the demand increases or change the product altogether if the demand is very low. Thus, there should be an adequate space for future expansion or diversification of the plant. 2.2.1 RURAL AND URBAN SITES COMPARED It has been seen above that some points are favorable in rural site, and some are good in an urban site. None of them is entirely good or bad from all points of view. A comparison between a rural and a urban sites with respect to various factors can be done as shown in Table 2.1. Table 2.1. Comparison of Rural and Urban sites Urban site (located in city) Very well connected by rail, roads, and air. Provides good market for the final products. Labor force with right kind of skill may be available. Power and water available in adequate quantity. Good hospitals, marketing centers, schools, banks, recreation clubs, etc. are available. Training centers available for all kinds of labor force. Services of experts, specialists available from other companies or consultants. Ancillary units available to support the main plant. Land for the building is limited and costly. Rural site (located in village) Just the opposite. Rural sites are not easily accessible. Products need to be transported to some nearby markets. Mostly labor force of low skill or no skill are available. Water may be adequate but one may not be lucky with the power supply. Almost nothing of this sort exists on rural site. No such facility exists here. Can’t think of such facility in rural sites. This may exist in rural sites too. Land is cheaper and available in plenty.
Slide 36: Location of Production and Service Facilities 21 Taxes are low. Expansion and diversification will not be challenged by land availability. Labor cost is cheap. This problem is not so acute in rural sites because the labor union may not be as right conscious as their urban counterparts. Local taxes are high. Expansion of industry may be difficult. Labor cost is high. Union labor problems related may be more, employeremployees relation not good. A compromising solution will be to go for sub-urban site which has good points of both rural and urban locations. 2.3 GENERAL PROCEDURES FOR FACILITY LOCATION Location of a plant or an organization can be seen as a two step decision. First, one has to select a region, and second a choice of a site has to be made within the region. The first step depends on the plant’s long-term strategies like technological, marketing, resource mobilization, and financial strategies. However, the choice of a site within a region can be decided by comparing the relative availability and costs of required resources like: power, transport, labor, water, land, raw materials, in alternative sites. While comparing various sites, one has to take into account both tangible and intangible costs (climate, labor relations, community support, recreational facility, and presence of good schools, etc.) related to the sites. These are all discussed subsequently under the headings: preliminary screening, and selection of exact site. 2.3.1 PRELIMINARY SCREENING It consists of decision about: (a) zone to which the plant should belong, (b) region in which it should be placed, and (c) the exact site where the plant be erected. A preliminary screening to identify feasible sites begins the planning process. For some kinds of facilities, particular environmental or labor considerations are crucial. Breweries, for example, need an adequate supply of clear water. Aircraft manufacturers must be located near a variety of subcontractors; and basic aluminum producers need electrical power and aluminum ores. 2.3.1.1 Sources of Information After identifying several key location requirements (outlined in Section 2.2), management starts looking for alternative locations that are consistent with these requirements. The possible sources of information could be: local chambers of commerce and industries, local communities, relevant ministries, Government agencies, and trade journals. The data available with these wings could be geographic breakdowns of labor availability, population, transportation facilities, types of commerce, and similar information. 2.3.1.2 Detailed Analysis Once the preliminary screening narrows down the alternative sites to just a few, more detailed analysis begins. At each potential site a labor survey may be conducted to assess the local skills. Community response can be obtained by survey. Community response is important, for example, in deciding where to locate a nuclear reactor, recreation area, commercial bank, state prison, or restaurant. Among the many considerations, each company must identify which ones are most pertinent for their location strategies.
Slide 37: 22 A Modern Approach to Operations Management 2.3.2 SELECTION OF EXACT SITE Different sites should be compared on the basis of various factors by asking relevant questions on each issues. Some of them are discussed below: Transportation facilities • Is the location easily accessible by vehicles from the main highways? • Are the railroad facilities sufficient for quick receipt and shipment of goods? • Can a railroad siding be made available? Availability of water, power, gas and sewerage • Is water available in sufficient quantity and of required quality? • Is adequate power available or not? • Is gas and sewer system adequate to the plant’s needs? Soil characteristics • Is the bearing capacity of soil suitable to support the building and equipment? • Will the soil provide adequate drainage? Drainage • Will the area drain away all surface water so that the buildings or work area will not be flooded? Parking space • Is adequate space available to provide for employees and visitors’ vehicles parking? Space for expansion • Is enough space available for future expansion of the plant? Accessibility by workers • Can the sites be reached by public transport ? • Is the road and street network suitable for speedy entrance and exit of employees during rush hours or emergency? Cost of land • Does the cost of land justify the selected site for the intended product? • Can the location be shifted to some cheaper site with similar facilities? Existing buildings • Are the existing buildings suitable for company’s operation on rent or final purchase basis? 2.3.2.1 Factors Ratings Factor ratings are used to evaluate location alternatives because (i) their simplicity helps decide why one site is better than another; (ii) they enable managers to bring diverse locational considerations into the evaluation process; and (iii) they foster consistency of judgment about location alternatives. The following steps are involved in factor rating: • Develop a list of relevant factors. • Assign a weight to each factor to indicate its relative importance (weights may total 1.00). • Assign a common scale to each factor (e.g., 0 to 100 points), and designate any minimums. • Score each potential location according to the designated scale, and multiply the scores by the weights. • Total the points for each location, and choose the location with the maximum points.
Slide 38: Location of Production and Service Facilities 23 Example 2.1. A glass company is evaluating four locations A, B, C, and D for a new plant and has weighted the relevant factors as shown in Table 2.2. Scores have been assigned with higher values indicative of preferred conditions. Using these scores, develop a qualitative factor comparison for the four locations. Table 2.2 A Relevant Factor Production cost Raw material supply Labor availability Cost of living Environment Markets Totals Assigned weight 0.33 0.25 0.20 0.05 0.02 0.15 1.00 Score 50 70 55 80 60 80 Weighted score 16.5 17.5 11.0 4.0 1.2 12.0 62.2 B Score Weighted score 40 80 70 70 60 90 13.2 20.0 14.0 3.5 1.2 13.5 65.4 Score 35 75 60 40 60 85 C Weighted score 11.55 18.75 12.00 2.00 1.20 12.75 58.25 Score score 30 80 45 50 90 50 D Weighted 9.9 20.0 9.0 2.5 1.8 7.5 50.7 Weighted scores are computed by multiplying the scores with the assigned weight (for example, 50 ×.33 = 16.50) and the totals are scored by summing those products. On the basis of this data, B is the best location, and thus selected. 2.3.2.2 Cost Analysis Estimates should also be made for all the costs entering into the operation of the plant in each of the locations. This cost will include: initial cost, cost of raw materials, cost of manufacturing, cost of distribution. Revenues and costs are both affected by facility location. A technique called breakeven analysis can be used to relate the costs and revenue to facility location. This is discussed later in section 2.4.5. 2.4 SOME OTHER FACILITY LOCATION MODELS Various quantitative models are used to help determine the best location of facilities. Sometimes, models are tailor-made to meet the specific circumstances of a unique problem. In New York City, for example, a mathematical model was developed to find the best locations of fire companies. There are some general models that can be adapted to the needs of a variety of systems. In the next section, we briefly introduce three types of models that have been applied to the location problem. They are (a) simple median model, (b) center of gravity model, (c) linear programming, and (d) simulation. All these models focus on transportation costs, although each considers a different version of the basic problem. 2.4.1 SIMPLE MEDIAN MODEL Suppose we want to locate a new plant that will annually receive shipments of raw materials from two sources: F1 and F2. The plant will create finished goods that must be shipped to two distribution
Slide 39: 24 A Modern Approach to Operations Management warehouses, F3 and F4. Given these four facilities (Figure 2.1), where should we locate the new plant to minimize annual transportation costs for this network of facilities? The Model The simple median model (SMM) can help answer this question. This model considers the volume of loads transported on rectangular paths. All movements are made in east-west or north-south directions; diagonal moves are not considered. The SMM provides an optimal solution. This is discussed with the help of Figure 2.1 and the Table 2.3. Let Li = Loads to be shipped annually between each existing facility Fi, and Ci = Cost to move a load one distance unit to or from Fi. Di = Distance units between facility Fi and the new plant. Then, the total transit cost is the sum of the products CiLiDi for all i. Total cost of transportation = Σ CiLiDi i =1 n (2.1) y 60 F3 (40, 60) 50 F3 (30, 50) 40 F2 (10, 40) 60 – y0 30 F1 (20, 30) 20 Proposed new plant (x0, y0) 10 20 10 40 – x0 x 30 40 50 60 0 Figure 2.1. Sources of raw materials and distribution warehouses. Table 2.3. Data related to Ci, Li and Di Fi F1 F2 F3 F4 Total Li 755 900 450 500 2605 Ci $1 1 1 1 (Xi , Yi) of Fi (20, 30) (10, 40) (30, 50) (40, 60)
Slide 40: Location of Production and Service Facilities 25 Since all loads must be on rectangular paths, distance between each existing facility and the new plant will be measured by the difference in the x-coordinates and the difference in the y-coordinates (Figure 2.1). If we let (x0, y0) be the coordinates of a proposed new plant, then Di = | x0 – xi | + | y0 – yi | (2.2) Notice that we calculate the absolute value of the differences, because distance is always positive. We could have written Eqn.(2.2) as Di = | xi – x0 | + | yi – y0 | (2.3) Our goal is to find values for x0 and y0 for the new plant that result in minimum transportation costs. We follow three steps: 1. Identify the median value of the loads Li moved. 2. Find the x-coordinate of the existing facility that sends (or receives) the median load. 3. Find the y-coordinate value of the existing facility that sends or receives) the median load The x and y coordinates found in steps 2 and 3 define the new plant’s best location. Example 2.2. (Application of the SMM Model) Let us apply the three steps to the data in Table 2.3. • Identify the median load. The total number of loads moved to and from the new plant will be 2,605. If we think of each load individually and number them from 1 to 2,605, then the median load number is the ‘middle’ number—that is, the number for which the same number of loads fall above and below. For 2,605 loads, the median load number is 1,303, since 1302 loads fall above and below load number 1,303. If the total number of loads were even we would consider both ‘middle’ numbers. • Find the x-coordinate of the median load. First we consider movement of loads in the x-direction. Beginning at the origin of Figure 2.1 and moving to the right along the x-axis, observe the number of loads moved to or from existing facilities. Loads 1-900 are shipped by F2 from location x = 10. Loads 901-1,655 are shipped by F1 from x = 20. Since the median load falls in the interval 901-1,655, x = 20 is the desired x-coordinate location for the new plant. • Find y-coordinate of the median load. Now consider the y-direction of load movements. Begin at the origin of Figure 2.1 and move upward along the y-axis. Movements in the y direction begin with loads 1-755 being shipped by F1 from location y = 30. Loads 756-1,655 are shipped by F2 from location y = 40. Since the median load falls, in the interval 756-1,655, y = 40 is the desired ycoordinate for the new plant. • The optimal plant location, x = 20 and y = 40, results in minimizing annual transportation costs for this network of facilities. The calculation is shown in Table 2.4. Remarks: • First, we have considered the case in which only one new facility is to be added. • Second, we have assumed that any point in x-y coordinate system is an eligible point for locating the new facility. The model does not consider road availability, physical terrain, population densities, or any other considerations. • The task of blending model results with other major considerations to arrive at a location choice is managerial task.
Slide 41: 26 A Modern Approach to Operations Management Table 2.4. Calculation of total cost for optimal plant location (x = 20, y = 40) Fi F1 F2 F3 F4 xi of Fi 20 10 30 40 yi of Fi 30 40 50 60 | 20 – xi | 0 10 10 20 | 40 – yi | 10 0 10 20 Di = | x0 – xi | + | y0 – yi | 10 10 20 40 Li 755 900 450 500 Ci $1 1 1 1 Ci Li Di 7,550 9,000 9,000 20,000 $45,550 Total transportation cost = ΣCiLiDi , where (i = 1 to 4) = 2.4.2 CENTER OF GRAVITY (GRID) MODEL This method assumes that the distribution cost is a function of the volumes shipped and the rectilinear distances (i.e., X and Y coordinates). The distances in each of the X and Y coordinates are averaged, using the volumes as weights. The resultant coordinates then constitute the center of gravity for that grid. If Xc = X coordinate of the center of gravity Yc = Y coordinate of the center of gravity Vi = volume of goods transported to or from each of i destination Xi = distances traveled by the goods in X direction Yi = distances traveled by the goods in Y direction Then, Xc = Σ Vi Xi / ΣVi (2.4) and Yc = Σ Vi Yi / ΣVi (2.5) Once determined, the Xc, Yc coordinates constitute a starting point for a new site. Locations in that vicinity may then be evaluated, changes suggested, and perhaps some recalculations done before the final choice is made. Example 2.3. Table 2.5 shows eight market locations to which a manufacturer of wooden windows expects to ship its products. The shipment volumes, X and Y coordinates of the locations are shown in Table 2.5. Using the center of gravity method, (a) find the Xc and Yc coordinates, and (b) suggest a possible warehouse location. Table 2.5 Market Area A B C D E F G H Vi (tonne) 8 20 12 10 30 20 40 30 170 Xi (km) 2.5 3 6.5 11 11 10 13 12 Yi (km) 10 5 8 10 8 4 3.5 2
Slide 42: Location of Production and Service Facilities 27 Solution. The solution is shown in Table 2.6 Table 2.6 Market Area Vi (ton) Xi (km) Yi (km) A B C D E F G H 8 20 12 10 30 20 40 30 170 2.5 3.0 6.5 11 11 10 13 12 10 5 8 10 8 4 3.5 2 Vi Xi (t-km) 20 60 78 110 330 200 520 360 1678 Vi Yi (t-km) 80 100 96 100 240 80 140 60 896 Xc = ΣVi Xi / ΣVi = 1678/170 = 9.87 km Yc = Σ Vi Yi / ΣVi = 896/170 = 5.3 km (a) Thus, Xc = 9.87 kms and Yc = 5.3 kms (b) Looking at the various coordinates in Table 2.6, we feel that (Xc = 9.87 and Yc = 5.3 ) are very close to F, suggesting that it may be good to have the distribution center located here. 2.4.3 LINEAR PROGRAMMING (LP) LP model may be helpful after the initial screening phase has narrowed the feasible alternative sites. The remaining candidates can then be evaluated, one at a time, to determine how well each would fit with existing facilities, and the alternative that leads to the best overall system (network) performance can be identified. Most often, overall transportation cost is the criterion used for performance evaluation. A special type of linear programming called the distribution or transportation method is particularly useful in location planning. The linear programming model differs from the simple median model in two fundamental ways: (i) Number of alternative sites. The simple median model assumes that all locations are eligible to be the new location. The linear programming model, in contrast, considers only a few locations preselected from preliminary feasibility studies. (ii) Direction of transportation movements. The simple median model assumes that all shipments move in rectangular patterns. The linear programming model does not assume so. Transportation adds no value to a good other than place utility. However, the transportation costs for raw materials and finished goods are often significant and merit special analysis. Before deciding on a plant location, management may want to know which plants will be used to produce what quantities and to which distribution warehouses all quantities should be shipped. If the location problem can be formulated as one of minimizing a transportation cost, subject to satisfying overall supply and demand requirements, the transportation linear-programming (LP) method may be useful. The transportation model is a variation of the standard linear-programming approach and assumes the following: 1. The objective is to minimize total transportation costs. 2. Transportation costs are a linear function of the number of units shipped.
Slide 43: 28 A Modern Approach to Operations Management 3. All supply and demand are expressed in homogeneous units. 4. Shipping costs per unit do not vary with the quantity shipped. 5. Total supply must equal total demand. • If demand is larger than supply, create a dummy supply and assign a zero transportation cost to it so that excess supply is absorbed. • If supply is larger than demand, create and assign a zero transportation cost to it so that excess supply is absorbed. The Heuristic Model To use the transportation (also called distribution) linear-programming format, (i) the demand requirements and supply availabilities are formulated in a rectangular matrix. (ii) The transportation costs between the supply and demand points are placed in the upper corner of each cell. (iii) Supply is then allocated to meet demand by placing entries, which express the number of units shipped from a supply source to a demand destination, into the cells. (iv) The solution procedure is an iterative one that begins with an initial solution that is feasible, but not necessarily optimal. (v) The solution is progressively tested and improved upon until an optimal solution is reached. The optimal solution satisfies demand at the lowest total cost. Several methods of obtaining initial and optimal solutions have been developed: Initial Solutions 1. Minimum cost (intuitive) method 2. Northwest corner method 3. Vogel’s approximation method (VAM) Optimal Solutions 1. Stepping-stone method 2. Modified distribution MODI) The minimum cost method works well for simple problems, but VAM is likely to yield a better initial solution, which is often also the optimal solution. VAM works by sequential zeroing in on the most cost-advantageous row-and-column combinations. The northwest-corner method does not usually yield as good an initial solution as VAM, but it is extremely easy to apply. VAM is useful for hand calculation of relatively large-scale problems. However, most large problems are solved by computer, and numerous computer programs are available, so VAM is not covered in the examples that follow. The MODI method is well-suited to computer applications. It is a modified stepping-stone algorithm that uses index numbers to systematically reach an optimum solution. Example-2.4 uses the northwestcorner method for the initial solution and the stepping-stone method for the final solution. Example 2.4. (Distribution linear-programming methods or DLP) A company has production plants at A, B, and C, all of which manufacture similar products for the housing market. The products are currently distributed through plants at X and Y. The company is considering adding another distribution plant at Z, and has developed the transportation costs in dollars per unit, shown in Table 2.7.
Slide 44: Location of Production and Service Facilities 29 Table 2.7 Production Plants A B C Cost to ship to distribution Plant at X $ 10 12 8 Y $ 14 10 12 Z $8 12 10 The production capacities at A, B, C are 20, 30, and 40 unit loads per week respectively. Management feels that a plant at Z could absorb 20 units per week, with X and Y claiming 40 and 30 units per week respectively. Determine the optimal distribution arrangement and cost if the Z site is selected. Solution. We will use the north-west corner (NWC) method for the initial allocation and the stepping-stone method for the final solution. Table 2.9 shows supply on the horizontal rows, demand on the columns, and unit transportation cost ($) in the small boxes of the matrix. The initial allocation by the NWC method is made as follows: • Assign as many units as possible to the NW-corner cell AX from the total available in row A. Given the 20 units available in row A and the 40 unit demand in column X, the maximum number of units that can be assigned to cell AX is 20. This is shown in the circle as initial allocation. Table 2.8. Initial solution to DLP matrix Production Plants A X [10] Y [14] Z [08] Supply (units) 20 20 B [12] [10] [12] 30 20 C [08] 10 [12] [10] 40 20 Demand (units) 40 30 20 20 90 • Assign additional units of supply from row B (or other rows) until the demand in column X is satisfied. This requires 20 additional units in cell BX and leaves 10 units of B’s unassigned. • Assign remaining units to BY. Since this does not satisfy demand in column Y, an additional 20 units are allocated from row C to CY. • Continue down from the NW corner until the whole supply has been allocated to demand. The initial assignment is completed by assigning the 20 units remaining in row C to cell CZ. • Check allocations to verify that all supply and demand conditions are satisfied. Since all row and column totals agree, the initial assignment is correct. Also, see that the number of entries should satisfy (R + C – 1), where R is number of rows, and C is number of columns. Here, R + C – 1 = 3 + 3 – 1 = 5 which is satisfied here. The transportation cost for this arrangement is given as TC1 = (20 × 10) + (20 × 12) + (10 × 10) + (20 × 12) + (20 × 10) = $ 980 (2.6)
Slide 45: 30 A Modern Approach to Operations Management An optimal solution can be obtained by following a stepping-stone approach: • It requires calculation of the net monetary gain or loss that can be obtained by shifting an allocation from one supply source to another. The important rule to keep in mind is that every increase (or decrease) in supply at one location must be accompanied by a decrease (or increase) in supply at another. The same holds true for demand. Thus there must be two changes in every row or column that is changed - one change increasing the quantity and one change decreasing it. This is easily done by evaluating reallocations in a closed-path sequence with only right-angle turns permitted and only on occupied cells. • A cell must have an initial entry before it can be reduced in favor of another, but empty (or filled) cells may be skipped over to get to a corner cell. It is better to proceed systematically, evaluating each empty cell. When any changes are made, cells vacated earlier must be rechecked. This is because moves are restricted to occupied cells. Every time a vacant cell is filled, one previously occupied cell must become vacant. The initial and (continuing) number of entries is always maintained at (R + C – 1). When a move causes fewer entries (for example, when two cells become vacant at the same time but only one is filled), a ‘zero’ entry must be retained in one of the cells to avoid the situation of degeneracy. • The zero entry (0) assigned to either cell should ensure that a closed path exists for all filled cells. The cell with the zero entry is then considered to be an occupied and potentially usable cell. If a cell evaluation reveals an improvement potential in a given cell, but no units are available because of a zero entry in the path to that cell, the zero (zero units) should be transported to the vacant cell, just as any other units would be shipped. Then the matrix should be reevaluated. Improvements may still be possible until the zero entries are relocated to where evaluations of all vacant cells are greater than or equal to 0. • The criterion for making a reallocation is simply the desired effect upon costs. The net loss or gain is found by listing the unit costs associated with each cell (which is used as a corner in the evaluation path) and then summing over the path to find the net effect. Signs alternate from + to – depending upon whether shipments are being added or reduced at a given point. A negative sign on the net results indicates that cost can be reduced by making the change. The total savings are limited to the least number of units available for reallocation at any negative cell on the path. Application of the model From Table 2.8, Filled cells are: AX, BX, BY, CY and CZ, and Empty cells are: AY, AZ, BZ, and CX. We will evaluate the empty cells one by one. Evaluate cell AY: From Table 2.8a, Path: AY – BY – BX – AX – AY Cost = +14 – 10 + 12 – 10 = + 6 (cost increase), thus, make no change. Table 2.8a Production Plants A B C Demand (units) 40 20 20 [12] [08] 20 30 10 [10] [12] 20 20 90 [12] [10] 30 40 X [10] + Y [14] Z [08] Supply (units) 20
Slide 46: Location of Production and Service Facilities 31 Evaluate cell CX: From Table 2.8b, Path: CX – BX – BY – CY – CX Cost = + 8 – 12 + 10 – 12 = – 6 (cost savings). Therefore, this is a potential change. Evaluate remaining empty cells to see if other changes are more profitable. Table 2.8b Production Plants A B C Demand (units) 40 20 20 [12] + [08] 20 30 10 [10] [12] 20 20 90 [12] [10] 30 40 X [10] + Y [14] Z [08] Supply (units) 20 Evaluate cell AZ: From Table 2.8c, Path: AZ – CZ – CY – BY – BX – AX – AZ Cost = + 8 – 10 + 12 – 10 + 12 – 10 = + 2 (cost increase). Thus, no change is needed. Table 2.8c Production Plants A B C Demand (units) 40 20 20 [12] [08] 20 30 10 [10] [12] 20 20 90 [12] [10] 30 40 X [10] Y [14] + Z [08] Supply (units) 20 Evaluate cell BZ: From Table 2.8d, Path: BZ – CZ – CY – BY – BZ Cost = + 12 – 10 + 12 – 10 = + 4 (cost increase). Thus, we will make no change. Table 2.8d Production Plants A B C Demand (units) 40 20 20 [12] [08] 20 30 10 [10] [12] 20 20 90 + [12] [10] 30 40 X [10] Y [14] Z [08] Supply (units) 20
Slide 47: 32 A Modern Approach to Operations Management Summary of evaluation: AY = + 6, CX = – 6, AZ = + 2, and BZ = + 4 Therefore, cell CX presents the best opportunity for improvement. For each unit from C reallocated to X and from B reallocated to Y, a $6 savings results. Change the maximum number available in the loop (20) for a net savings of $6 × 20 = $120. The maximum number will always be the smallest number in the cells where shipments are being reduced, that is, cells with negative coefficients. The crossed circles with numbers above in Table 2.9 represents that changes have been made. Note that cells BX and CY have both become vacant (a degenerate situation), so a zero has been assigned to one of the vacant cells (BX) to maintain R + C – 1 requirement of 5. Table 2.9. Revision of matrix Production Plants A 0 B C Demand (units) 40 20 20 20 [12] [08] 20 30 30 10 [10] [12] 20 20 90 [12] [10] 30 40 X [10] Y [14] Z [08] Supply (units) 20 Because a reallocation was made, the empty cells are again evaluated for further improvement as shown below: Cell AY: AY – BY – BX – AX = + 6 (no change) Cell CY: CY – CX – BX – BY = + 6 (no change Cell AZ: AZ – CZ – CX – AX = – 4 (possibility for savings) Cell BZ: BZ – CZ – CX – BX = – 2 (possibility for savings) Let’s redraw Table 2.9 as Table 2.9a. Cell AZ has the greatest potential for improvement. Note that the loop evaluating cell BZ has zero (Table 2.10a) units available for transfer from cell BX, so no reallocation could take place without first locating another route to BZ. This would be done by relocating the zero. However, in this example cell AZ offers the best improvement, so we capitalize upon the opportunity to load cell AZ. Table 2.9a. Revision of matrix Production Plants X [10] A B C Demand (units) 40 30 20 0 20 [12] [08] 30 [10] [12] 20 20 90 [12] [10] 30 40 Y [14] Z [08] Production capacity or Supply (units) 20 A reallocation of 20 units to cell AZ results in the matrix shown in Table 2.10. Note that a zero has again been retained in one of the vacated cells CZ to satisfy the R + C – 1 constraint. Further evaluation of the cells
Slide 48: Location of Production and Service Facilities 33 indicates that no additional savings are possible. The optimal solution is finally shown in Table 2.10. The transportation cost for this allocation is: TC2 = (40 × 8) + (30 × 10) + (20 × 8) = $ 780 Net savings = DTC = TC2 – TC1 = $ (980 – 780) = $ 200 per week Table 2.10. Optimal solution Production Plants A B C Demand (units) 40 30 0 40 [12] [08] 30 [10] [12] 0 20 X [10] Y [14] 20 Z [08] [12] [10] Supply (units) 20 30 40 90 (2.7) 2.4.4 SIMULATION Although many quantitative models are available to deal with location problems, many real world problems are more complex than our examples. Some systems have multiple sources shipping to numerous plants; they in turn ship finished goods to warehouses from which further shipments are made to retailers. Multi-echelon (multilevel) production distribution systems such as these pose formidable problems. Even with the simplest revision of this system, adding or deleting one network component, the combinatorial aspects of the problem make it computationally difficult. More realistically, we may want to consider more drastic changes, such as total revision of the warehousing network. With problems of this complexity, no optimal solution is possible. Instead, approximation techniques like computer simulation are used. 2.4.5 BREAK EVEN ANALYSIS In break even charts, the total cost (fixed costs + variable costs), and revenue are plotted against the output (either in units, dollar volume, or % of capacity). Such a graphical portrayal of revenue and costs, as a function of the output is called ‘break even chart’. Example 2.5. A businessman is thinking of opening a factory in one of these places in Ethiopia: Nazereth, Debre Zeit, or on the outskirt of Addis Ababa to produce high quality electronic components for computer. He has gathered data on fixed cost and variable cost as given in Table 2.11. Table 2.11 Per unit costs Location Addis Ababa Debre Zeit Nazereth Fixed cost/year $ 200,000 180,000 170,000 Material $ 0.20 0.25 1.00 Variable labor $0.40 0.75 1.00 Overhead $0.40 0.75 1.00
Slide 49: 34 A Modern Approach to Operations Management (a)Represent the costs graphically. (b)Over what range of annual volume is each location going to have a competitive advantage? (c) What is the volume at the intersection? Solution. (a) Let Q = quantity of components to be produced per year, then the total cost equations for all these sites can be written as shown in Table 2.12. Table 2.12 Location Addis Ababa Debre Zeit Nazereth Fixed cost/year $200,000 180,000 170,000 Material cost $0.20 0.25 1.00 Labor cost $0.40 0.75 1.00 Overhead $0.40 0.75 1.00 Variable cost/unit $1.00 $1.75 $3.00 Total Cost Equation = 200,000 + 1.0Q = 180,000 + 1.75Q = 170,000 + 3.0Q A graph of the total cost for all these locations have been shown in Figure 2.2. (b) & (c). From Figure 2.2, we see that the cost line for Nazereth and Debre Zeit cross each other. At this point of intersection the total cost for both will be equal. Thus, 180,000 + 1.75Q = 170,000 + 3.0Q or, 1.25 Q = 10,000 or, Q = 8,000 We see from the Figure 2.2 that below 8000 units of production, Nazereth ensures a lower total cost than Debre Zeit, and vice-versa for production more than 8000 units. Break Even Analysis 300000 250000 200000 Total cost ($) Addis Ababa 150000 Debre Zeit Nazereth 100000 50000 0 Addis Ababa Debre Zeit Nazereth 1 200000 180000 170000 2 205000 188750 185000 3 215000 206250 215000 4 230000 232500 260000 Units of Components Figure 2.2. Break Even Charts.
Slide 50: Location of Production and Service Facilities 35 Similarly, the cost line for Debre Zeit and Addis Ababa cross each other. At this point of intersection the total cost for both will be equal. Thus 200,000 + 1.0Q = 180,000 + 1.75Q or, 0.75Q = 20,000 or, Q = 26,666 So, we see from the figure that between 8000 units and 26,666 units of production, Debre Zeit has an advantage. Note. It has been assumed that delivery and intangible factors are constant regardless of the decision.
Slide 51: 3 Layout Planning 3.0 INTRODUCTION Decisions about layout are made only periodically, but since they have long-term consequences, they must be made with careful planning. The layout design affects the cost of producing goods and delivering services for many years into the future. The design of layouts begins with a statement of the goals of the facility. Layouts are designed to meet these goals. After initial designs are developed, improved designs are sought. This can be a tedious and cumbersome task because the number of possible designs is so large. For this reason, quantitative and computer-based models are often used. Plant layout is defined as the most effective physical arrangement of machines, processing equipment, and service departments to have the best co-ordination and efficiency of man, machine and material in a plant. It is the spatial arrangement of physical resources used to create the product. It also means how the space needed for material movement, storage, indirect labor, etc is arranged in a factory. For a factory which is already in operation, this may mean the arrangement that is already present. However, for a new factory this means the plan of how the machines, equipment, etc will be arranged in the different sections or shops. These should be arranged in such a way that material movement cost, cost of storage in between processes, the investment on machines and equipment etc should be optimal and the product is as cheap as possible. Need to plan a layout can emerge due to various reasons. Some of them could be • Need to make minor changes in present layout due to method improvement, new type of inspection plan, and new type of product, • Need to rearrange the existing layout due to marketing and technological change, • Re-allocating the existing facilities due to new location, or • Building a new plant. 3.1 EFFECTS OF A PLANT LAYOUT A good layout will result in the following: • Material handling and transportation is minimized and efficiently controlled. • The movements made by workers are minimized. 36
Slide 52: Layout Planning 37 • Waiting time of the semi-finished products is minimized. • Bottlenecks and point of congestion are eliminated (by line balancing) so that raw material and semi-finished goods move faster from one workstation to another. • Overall satisfaction & simplification which will result in full utilization, minimum delay and congestion, ease in maintenance, and low manufacturing time. • Increased production, safer working conditions, well ventilated rooms, clean environment, • Increased flexibility for changes in product design, future expansion, and optimal use of space. • A good layout provides maximum satisfaction to the employees, management, and share holders. • Suitable spaces are allocated to production centers and service centers. • Working conditions are safer, better (well ventilated rooms, etc.) and improved. • There will be improved work methods and reduced production cycle time. • There is an increased productivity, better product quality, and reduced capital cost. In other words, the layout design must consider how to achieve the following: • Higher utilization of space, equipment, and people. • Improved flow of information, materials, and people. • Improved employee morale and safer working conditions. • Improved customer/client interaction. • Flexibility to change the layout that exists anytime. 3.2 FACTORS AFFECTING LAYOUT Layouts are affected by types of industry, production systems, types of products, volume of production, and types of manufacturing processes used to get the final products. They are elaborated below. 3.2.1 TYPES OF INDUSTRIES Synthetic process based industry: In this, two or more materials are mixed to get a product, e.g. cement is obtained from the combination of limestone and clay. Analytic process based industry: It is opposite of synthetic process. Here, the final products are obtained as a result of breaking of material into several parts. For example, the petroleum products are obtained from the fractional distillation (breaking process) of the crude oil. Conditioning process based industry: Here, the form of raw material is changed into the desired products, e.g. jute products in the jute industry, or the milk products in the dairy farm. Extractive process based industry: By applying heat, desired product is extracted from the raw material, e.g. Aluminum from bauxite, and steel from iron ores. 3.2.2 TYPES OF PRODUCTION SYSTEM Continuous Production They are characterized by standardized, high-volume, capital-intensive products made to store in inventory, by small product mix; by special purpose equipment; and by continuous product flow.
Slide 53: 38 A Modern Approach to Operations Management Job Shop Production This is characterized by made-to-order, low volume, labor-intense products; by a large product mix; by general purpose equipment; by interrupted product flow; and by frequent schedule changes. The system should be flexible, which needs general purpose machines and highly skilled workers. Example: space vehicle, aircraft, special tools and equipment, prototype of future products. Batch Production They are characterized by medium size lots of the same type of item or product and has the following other features: • lot may be produced once or on regular interval • generally to meet continuous customer demand • plant capacity generally higher than demand • general purpose machine but having higher production rate • specially designed jigs and fixtures • most suitable for CAM Example: industrial equipment, furniture, house-hold appliances, machine shop, casting, plastic molding, press work-shop, etc. 3.2.3 TYPE OF PRODUCT Whether the product is heavy or light, large or small, liquid or solid, etc. 3.2.4 VOLUME OF PRODUCTION Whether the production is in small quantity, or in lots or batches, or in huge quantity (mass production). To deal with a plant layout for any kind of production situation, one has to step forward in a systematic and scientific manner. In the following section, one such method called Systematic Layout Planning is discussed in brief. A detailed treatment on this topic is a subject of another course called Plant Design. 3.3 SYSTEMATIC LAYOUT PLANNING (SLP) SLP is a systematic approach to layout planning that was developed by Richard Muther and Associates. The steps of SLP are shown in Figure 3.1. As seen from the figure, one has to collect all data related to the current and forecasted production. Sometimes, it may be possible that 3 to 5 types of products account for 70 to 80 % of the total sales volume. The balance 20 to 30% can be grouped in such a way that only a few product groups need to be considered. Each product group and its respective volume for a projected horizon [Turner et al] should be listed. The projected horizon depends on how frequently the product or market changes, but a projection for each product for the next 5 years is sufficient. Any other information relevant to the layout should be included in the general comments. The basic input data or information needed for making layout can be remembered by the following letters: P — Product and type characteristic of the material needed for this Q — Quantity of each type of product R — Route i.e. sequence of operation & machines needed for completing these operations
Slide 54: Layout Planning 39 — Supporting activities like moving the material from one work place or machine to another and maintenance etc. T — Timing as to how many times in the year and how quickly the products are to be made. 1. Having collected all the data, one can go for Step 1 of the SLP procedure called the preparation of the process charts. This chart depicts the flow of material graphically through the plant. If the products are few, one can make separate operations process chart for each. But, if there are many products, a multi-product process chart may be used. An ‘operation chart’ shows only the operations and inspection. But a ‘flow process chart’ shows operations, inspections, transportations, delays and storages. These charts are thoroughly discussed under the topic ‘Work Study’ in any Industrial Engineering Book. Input data and activities S 1. Flow of materials 2. Activity relationship 3. String diagram 4. Space requirements 5. Space available 6. Space relationship diagram 7. Modifying considerations 8. Practical limitations 9. Develop layout alternatives 10. Evaluation Figure 3.1. Systematic Layout Planning Procedure.
Slide 55: 40 A Modern Approach to Operations Management In some cases, for example a job shop, it will be difficult to represent all the flows with a few charts. So, one can go for a ‘From-To Chart’ in such situations. This chart shows the number of trips from one area to another area and is based on historical data or proposed production. The trips can be attached suitable weights depending on production volume or the degree of difficulty. Table 3.1 shows a ‘From-To Chart’ for an office situation. The number indicates the number of trips made by the person from one place to another. Based on these charts (flow chart, and From-To Chart), one can construct the layouts. But, sometimes, these charts are not enough. There may be some areas where the product flow is non-existent, and some in which the flow sequence differs for each of the many products. In such cases, one has to go for ‘activity relationship diagram’. Table 3.1. From-To Chart of an Office From\To Chairman Secretary Computer center Staff room — Total Chairman — 20 10 8 — Secretary 8 — 5 10 — Computer center 5 2 — 25 — Staff room 3 4 2 — — — — — Total In short, the following tools are used in the layout preparation phase: • Graphic and schematic analysis: Perhaps the most common layout planning tools are templates—two dimensional cutouts of equipment drawn to scale. • Operation Process Chart (OPC): operations, and inspections only • Flow Process Chart (FPC): operations, inspections, transports, delays, and storage. • Multiple-product Chart (MPC): • From-To Chart (FTC): 2. An ‘activity relationship diagram (ARD)’ shows the desired closeness of departments and areas within the plant. It reflects the fact that not all important relationships can be shown by Table 3.2. A set of closeness ratings for ARD Letter A E I O U X Closeness Absolute necessary Especially important Important Ordinary closeness O K Unimportant Not desirable product flows. Table 3.2 shows a set of closeness ratings proposed by Muther [Turner et al]. For any paired combination, an A rating indicates that it is absolutely necessary to locate the two areas adjacent to each other. On the other hand, an X rating shows that keeping two areas adjacent to each other is not
Slide 56: Layout Planning 41 desirable. For example, a machining center and the conference room can be straightaway given an X rating to avoid their being placed together. To decide about the closeness ratings, it is a good idea to involve all the stake-holders in future layout. They can be asked to give ratings and finally an average closeness rating can be decided. 3. Step 3 consists of using the information generated in Steps 1 and 2 to prepare a string diagram showing near optimal placement of the facilities without considering the space constraints. The placement is done by trial and error. Usually, the areas with an A closeness are shown first and are connected with 4 straight lines, then E with 3 straight lines, and so on. When an activity has to be close to several other areas, it can be stretched out or distorted. The areas may be moved around and interchanged until a final acceptable arrangement is obtained. It is helpful to imagine the straight lines as stretched rubber bands and the jagged lines as coiled springs representing varying attraction and repulsion forces. So, an A rating would imply 4 rubber bands pulling the areas together while an I rating would imply only 2 rubber bands [Turner et al]. Many diagrams and arrangements will have to be made before a good layout is obtained. Normally, two or more alternatives are developed. Space will have to be added and some modifications made, but the overall picture should not change much. Thus, step 3 is supposed to be the most creative and important one. 4. Step 4 may be called the ‘adjustment step’. Here the adjustment must be made for space needs as related to space availability; so, the space requirements have to be determined. This can be done through calculations, adjustments of past areas, intuition or estimates. 5. Once these space requirements are known, it is necessary to consider the space available. In some cases, since the layout must fit into the existing buildings, the space available is highly restricted. In other cases, the capital budget is the main restriction, and, therefore, the space availability may be less restricted. In any case, one has to balance the space requirements and the space availability before going to step 6. 3.4 OTHER APPROACHES TO PLANT LAYOUT Some authors [Heizer J. and Render B.] see the plant layout problem as a set of steps or phase as discussed below: Phase-1 Location of area where the facilities are to be laid out. It is not necessary that the area be a completely new one. It may even be the existing layout of the plant. Phase-II Planning the general overall layout. This provides a block arrangement and the basic flow pattern for the area. It also gives an idea about the size, the relationship, and configuration of each major activity, department, and area. Phase-III Preparation of detailed layout plans. It includes planning where each piece of machinery, computer, and equipment will be placed. Phase-IV Installation. This involves both planning the installation and physically placing and hooking up the equipment.
Slide 57: 42 A Modern Approach to Operations Management The layout planner concentrates on Phase-II and III. Phase-I and IV are not part of the layout planning engineer’s project. The layout plan depends on basic input data or factors of layout. For every layout the following three considerations are important: (a) Relationships: It means the closeness desired between various activities or sections where different functions are performed. For example, Figure 3.2a shows that maximum material moves from foundry section to milling, next is between pressing to milling, and so on. This means foundry should be closed to milling, milling should be closed to press, press closed to milling but also nearer to foundry and packing. Foundry Milling Packing Press Figure 3.2. (a) Relationship diagram. (a) Space: It is the area needed for the performance of every function satisfactorily as shown in Figure 3.2 (b). The total area needed by different sections = (A + B + C + D) m2 Foundry 2 Am Milling 2 Bm Press 2 Cm Packing 2 Dm Figure 3.2. (b) Space required for various sections. (c) Adjustment: It consists of arranging the activity areas in the actual plan of the building of the same area. For example, the total area needed is (A + B + C + D) square meter and based on the existing building space a possible layout plan is as shown in Figure 3.3. Foundry A Press C Packing D Milling B Figure 3.3. A possible layout plan.
Slide 58: Layout Planning 43 3.4.1 • • • • • • PRINCIPLES OF PLANT LAYOUT Principle of overall integration (of man, materials, machine, supporting activities, etc) Principle of minimum distance between operations Principle of flow (arranging machines according to the sequence of operations) Principle of cubic space Principle of satisfaction and safety Principle of flexibility of rearrangement at a minimum cost. 3.4.2 TYPES OF FLOW PATTERNS I- flow or line flow: U-flow: L-flow: S-flow: O-flow: I + U-flow: Figure 3.4. Types of Basic Flow. Apart from this, one can combine this basic flows to get various combinations like (S + L) and (O + U), and so on. 3.5 TYPES OF LAYOUT Layout decisions include the best placement of machines (in production settings), offices and furniture (in office settings), or service centers (in hospitals or department stores). We will discuss the following layouts in this chapter: 1. Fixed position layout: addresses the layout requirements of large, bulky projects such as ships and buildings.
Slide 59: 44 A Modern Approach to Operations Management 2. Process-oriented layout: deals with low-volume, high-variety production (called as ‘Jobshop’ or intermittent production). 3. Product-oriented: seeks the best personnel and machine utilization in repetitive or continuous production. 4. Office layout: positions workers, their equipment, and spaces/offices to provide for movement and information. 5. Retail layout: allocates shelf space and responds to customer behavior. 6. Warehouse layout: addresses trade-offs between space and material handling. The first three are called the basic layouts. They are differentiated by the types of work flows they entail; the work flow, in turn, is dictated by the nature of the product. Services have work flows, just as manufacturing do. Often the work flow is paper, information, or even the customers. The right layout for an organization will improve productivity, the quality of the product or service, and delivery rates. Because only a few of these layouts can be modeled mathematically, layout and design of physical facilities are still something of an art. However, a good layout requires to determine the following: • Material handling equipment: Managers must decide about equipment to be used, including conveyors, cranes, automated storage and retrieval systems (AS/RS), and automatic guided vehicles (AGV) to deliver and store material. • Capacity and space requirements: Only after knowing about the personnel, machines, and equipment to be arranged, we can proceed with layout work. In the case of office work, operations managers must decide about the space requirements for each employee. It may be a 6x6 feet cubicle plus allowance for hallways, aisles, rest rooms, cafeterias, stairwells, elevators, and so forth, or it may be spacious executive offices and conference rooms. Management must also give consideration to safety needs, and other conditions like noise, dust, fumes, temperature, and ventilation. • Environment and aesthetics: Layout should also consider the windows, planters, and height partitions to allow air flow, reduce noise, privacy, etc. • Flows of information: Communication is very important to any company and must be facilitated by the layout. This issue may need decisions proximity as well as decisions about open spaces versus half-height dividers versus private offices. • Cost of moving between various work areas: There may be need to maintain certain areas next to each other. For example, the movement of molten steel is more difficult than the movement of cold steel. Table 3.3 summarizes the differences among basic layouts. Table 3.3 Aspect of the conversion process Product Layout Type Product-oriented standardized product, large volume, stable rate of output Process-oriented diversified products using common operations, varying volumes, varying rate of output Fixed position made-to-order, low volume
Slide 60: Layout Planning 45 straight line of product; same sequence of operations for each unit able to perform routine, repetitive tasks at fixed pace; highly specialized large; schedule materials and people, monitor and maintain work predictable, flow, systematized and often automated variable flow; each order (product) may require unique sequence of operations primary skilled craftsmen; able to perform without close supervision and be moderately adaptable perform tasks of scheduling, materials handling, and production and inventory control flow variable; handling often duplicated little or no flow; equipment and resources brought to site as needed great flexibility required; work assignments and locations vary schedule and coordinate skillfully flow variable, often low; may require heavy duty, general purpose handling equipment variable inventories and frequent tie-ups because production cycle is long small output per unit space if conversion is on site general purpose, mobile equipment and processes relatively low fixed costs; high unit labor and materials costs Work flow Human skills Support staff Material handling Inventory high turnover of raw material and work-inprocess inventories efficient utilization, large output per unit space large investment in specialized equipment and processes relatively high fixed cost; low unit costs for direct labor and materials low turnover of raw material and WIP inventories; high raw materials inventories small output per unit space; large WIP requirements general purpose, flexible equipment and processes relatively low fixed costs; high unit costs for direct labor, materials and materials handling Space utilization Capital ments require- Product cost 3.5.1 FIXED POSITION LAYOUT In this, the major part of the product remains in a fixed place. All the tools, machines, workers and smaller pieces of materials are brought to it and the product is completed with the major part staying in one place. Very heavy assemblies (e.g. ship, aircraft, cranes, rail coaches, highway, a bridge, a house, an oil well, etc) requiring small and portable tools are made by this method. The techniques to deal with fixed-position layout are not well developed and are complicated by three factors: • There is limited space at virtually all sites. • At different stages in the construction process, different materials are needed; therefore, different items become critical as the project develops. • The volume of materials needed is dynamic. For example, the rate of use of steel panels for the hull of a ship changes as the project progresses.
Slide 61: 46 A Modern Approach to Operations Management Because problems with fixed-position layouts are so difficult to solve on-site, an alternative strategy is to complete as much of the project as possible off-site. This approach is used in the ship-building industry when standard units (e.g., pipe-holding brackets) are assembled on a nearby assembly line (a product-oriented facility). Some ship-buildings are also experimenting with group technology to group components. Advantages • very easy and cheap to arrange. • can be easily changed if product design is changed. • since the worker work at one place, the supervision is easy. • Cost of transporting heavy materials is reduced. • Responsibility for quality is easily fixed on the worker or group of workers which make the assembly. Limitations • such components which need only small and portable tools can be made by this method. • skilled workers, complicated jigs and fixtures are required. 3.5.2 Process-oriented or Functional Layout It is a layout that deals with low-volume, high-variety production. In this type, all the machines and equipment of the same type are grouped together in one section or area or department. For example, all welding equipment are kept in one section; all drilling machines in other; all lathes in third section, and so on. It is used in intermittent (discontinuous) type of production. Figure 3.5 shows the movements of two different jobs through different departments according to their sequence of operations. It is most efficient when making products with different requirements or when handling customers, patients, or clients with different needs. Foundry shop Grinding shop Drilling shop Brazing shop Polishing shop Inspection Press shop Heat treatment shop Painting shop Milling shop Packing shop Finished products Raw materials ] Figure 3.5. Process layout. In this job-shop environment, each product or each small group of products undergoes a different sequence of operations. A good example of process layout is a hospital or clinic. Patients with their own needs, requires routing through admissions, laboratories, operating rooms, radiology, pharmacies, nursing beds, and so on. Equipment, skills, and supervisions are organized around these processes. Advantages • different products can be made on the same machine, so the number of machines needed is reduced. This gives lots of flexibility with less capital needed.
Slide 62: Layout Planning 47 • • • • • When one machine goes out of order, the job can be done on other similar machines. When a worker is absent, another worker of the same section can do the job. A worker becomes more skilled and can earn more money by working harder on his machine. Varieties of job make the work more interesting for the workers. Layout is flexible with respect to the rate of production, design and methods of production. Limitations • General purpose equipment requires high labor skills, and WIP inventories are higher because of imbalances in the production processes. • This layout needs more space. • Automation of material handling is extremely difficult. • Completion of a product takes more time due to difficult scheduling, changing setups, and unique material handling. Total production cycle time is more also due to long distances and waiting time. • Raw material has to travel longer distances, thus the material handling cost is high. • Needs more inspection and coordination. 3.5.2.1 Approach to Process Layout When designing a process layout, the most common tactic is to arrange departments or work centers so that the costs of material handling is minimum. For this, departments with large flows of parts or people between them should be placed next to one another. Material handling costs in this approach depend on: • The number of loads or people to be moved between two departments during some period of time, and • The distance linked costs of moving loads or people between departments. Cost is considered to be a function of distance between departments. The objective function can be written as follows: Minimize cost = Σ n i =1 j =1 Σ Xij Cij n (3.1) where n = total number of work centers or departments i, j = individual departments Xij = number of loads moved from department i to department j Cij = cost to move a load between department i to department j. The term Cij combines distance and other costs into one factor. We thereby assume that the difficulty of movement is equal and the pickup and setdown costs are constant. The steps in this approach can be understood by the following example. Example 3.1. A company management wants to arrange the six departments of its factory in a way that will minimize interdepartmental material handling costs. They make an initial assumption (to simplify the problem) that each department is 20 × 20 feet and that the building is 60 feet long and 40 feet wide. The process layout procedure that they follow involves six steps:
Slide 63: 48 A Modern Approach to Operations Management Step-1: Construct a ‘from-to-matrix’ showing the flow of parts or materials from department to department (Table 3.4). Table 3.4 Department Assembly (1) Painting (2) Machine shop (3) Receiving (4) Shopping (5) Testing (6) Assembly α Painting 50 α Machine shop 100 30 α Receiving 0 50 20 α Shopping 0 10 0 50 α Testing 20 0 100 0 0 α Step-2: Determine the space requirements for each department (Figure-3.5 shows the available plant space). Step-3: Develop an initial schematic diagram showing the sequence of departments through which parts must move. Try to place departments with a heavy flow of materials or parts next to one another (Figure-3.6). Step-4: Determine the cost of this layout by using the material handling cost equation: Cost = Σ n i =1 j =1 n Σ Xij Cij For this problem, the company assumes that a forklift carries all interdepartmental loads. The cost of moving one load between adjacent departments is estimated to be $1. Moving a load between nonadjacent departments costs $2. Thus, looking at Table 3.4, we see that the handling cost between departments 1 and 2 is $50 (i.e., $1 × 50 loads), the handling cost between departments 1 and 3 is $200 (i.e., $2x100 loads), and the handling cost between departments 1 and 6 is $40 (i.e., $2 × 20 loads), and so on. The total cost for this layout is shown in Table 3.5. Room 1 Room 1 Room 1 Assembly Dept (1) Painting Dept (2) Machine Shop Dept (3) 40¢ Receiving Dept (4) Shipping Dept (5) Testing Dept (6) Room 4 Room 5 60¢ Room 6 Figure 3.6. Building Dimensions and a Possible Layout.
Slide 64: Layout Planning 49 Table 3.5 Movement Route 1-2 1-3 1-6 2-3 2-4 2-5 3-4 3-6 4-5 Total cost Cost for route ($) 1 × 50 = 50 2 × 100 = 200 2 × 20 = 40 1 × 30 = 30 1 × 50 = 50 1 × 10 = 10 2 × 20 = 40 1 × 100 = 100 1 × 50 = 50 570 100 1 50 2 20 10 30 3 50 20 100 4 50 5 6 Figure 3.7. Interdepartmental flow graph with number of loads per week. Step-5: By trial and error, try to improve the layout shown in Figure-3.6 to establish a reasonably good arrangement of departments. By looking at both the flow graph (Figure 3.7) and the cost calculations, it is obvious that placing departments 1 and 3 together seem desirable. They are presently nonadjacent, and due to the high volume of flow between them the material handling cost is high. One possibility is to exchange the position of 1 and 2. Doing this will change the cost which is shown in Table 3.6. 30 1 10 50 20 20 4 50 5 6 100 50 2 100 3 Figure 3.8. Second flow graph with number of loads per week.
Slide 65: 50 Table 3.6 Movement Route 1-2 1-3 1-6 2-3 2-4 2-5 3-4 3-6 4-5 Total cost A Modern Approach to Operations Management Cost for route ($) 1 × 50 = 50 1 × 100 = 100 1 × 20 = 20 2 × 30 = 60 1 × 50 = 50 1 × 10 = 10 2 × 20 = 40 1 × 100 = 100 1 × 50 = 50 480 This change, of course, is just one of the many possible combinations. For a six-department problem, the possible combination is 6! = 6 × 5 × 4 × 3 × 2 × 1 = 720. In layout problems, we seldom find the optimal solution and will have to be satisfied with a ‘reasonable’ one reached after a few trials. I wonder, if the manager of this company is satisfied with this layout. If not, then we will have to try a few steps more to find a layout which is less expensive than the present one. Room 1 Room 1 Room 1 Painting Dept (2) Receiving Dept (4) Room 4 Assembly Dept (1) Shipping Dept (5) Room 5 60¢ Machine Shop Dept (3) 40¢ Testing Dept (6) Room 6 Figure 3.9. Feasible Layout for the company. 3.5.2.2 Computer Software for Process Layout The graphic approach discussed is good for smaller layout problems but not for larger problems where say 20 departments are involved. In the case of 20 departments more than 600 trillion different configurations are possible. Luckily, computer software is available to deal with layout problems consisting of 40 departments. The most popular one is CRAFT (Computerized Relative Allocation of Facilities Technique). It’s a program that produces ‘good’ but not always the ‘optimal’ solutions. CRAFT is a search technique that examines the alternative layouts systematically to reduce the total material handling cost. Other software packages include Automated Layout Design Program (ALDEP), Computerized Relationship Layout Planning (CORELAP), and Factory Flow.
Slide 66: Layout Planning 51 3.5.3 REPETITIVE AND PRODUCT-ORIENTED LAYOUT This is also called assembly line layout because it was first used for assembling automobiles in the USA. This layout is organized around products or families of similar high-volume, low-variety products. In this type of layout, one product or one type of product is produced in a given area. This is used in case of repetitive and continuous production or mass production type industries. The machines and equipment are arranged in the order in which they are needed to perform operations on a product. The raw material is taken at one end of the line and goes from one operation to the next very rapidly with little material handling required. This layout assumes that: • Volume of production is adequate for high equipment utilization. • Product demand is stable enough to justify high investment in specialized equipment. • Product is standardized or approaching a phase of its life cycle that justifies investment in specialized equipment. • Supplies of raw materials and components are adequate and of uniform quality (adequately standardized) to ensure that they will work with the specialized equipment. Advantages • Material handling cost is minimum. • Labor does the same type of operations always, so he becomes specialized and does the job very quickly. • Since the labor has to do only one type of job, he can be easily trained. • Control of product becomes very easy. • Reduced WIP inventories, so cost of storage of materials between operations is less. • Less space is required. • Smooth and continuous work flow. • Rapid throughput or product completion time is less. Limitations • Not good if the product is changed, no flexibility. • Difficult to have load balance. • Very costly because separate machines are needed to do the same operation on different products. • If one machine in the line fails or if one operator in the line is absent then the output is immediately affected. • Specialized and strict supervision. Finished products Press Mill Heat treatment Grind Paint Inspection Packing Prod-A Drill Braze Paint Inspect and pack Prod-B Raw materials Cast Grind Mill Figure 3.6. Product Layout.
Slide 67: 52 A Modern Approach to Operations Management Two types of product layout are fabrication and assembly lines. The fabrication line builds components (viz. car tires, parts of a refrigerator, etc.) on a series of machines. An assembly line puts the fabricated parts together at a series of workstations. Both are repetitive processes, and in both cases, the line must be ‘balanced’- that is, the time spent to perform work on one machine must equal or ‘balance’ the time spent to perform work on the next machine in the fabrication line. Assembly lines can be balanced by moving tasks from one individual to another. The central problem then in product layout planning, is to balance the output at each workstation on the production line so that it is nearly the same, while obtaining the desires amount of output. A well-balanced assembly line has the advantage of high personnel and facility utilization and equity between employees’ work loads. 3.5.3.1 Assembly-line Balancing Line-balancing is done to minimize imbalance between machines or personnel while meeting a required output from the line. For this, the management must know the tools, equipment, and work methods used. Then the time needed for each assembly task (e.g. drilling a hole, tightening a nut, or painting a part) must be determined. Management also needs to know the precedence relationship among the activities (i.e. the sequence in which different tasks must be performed). Example-3.2 shows how to turn these task data into a precedence diagram. Example 3.2. We want to develop a precedence diagram for an electrostatic copier that requires a total assembly time of 66 minutes. Table 3.7 and Figure 3.7 give the tasks, assembly times, and sequence requirements for the copier. Table 3.7. Precedence data Task A B C D E F G H I Performance time (minutes) 10 11 5 4 12 3 7 11 3 Total time = 66 Preceding activity — A means B cannot be done before A. B B A C, D F E G, H
Slide 68: Layout Planning 5 10 A 11 B 4 D 3 F H E 12 11 C 7 G 3 I 53 Figure 3.7 Once we have constructed a precedence chart summarizing the sequences and performance times, we will concentrate on grouping tasks into job stations so that we can meet the specified production rate. This will consist of the following steps: • Calculate the cycle time - the maximum time that the product is available at each workstation if the production rate is to be achieved. Cycle time = (Production time available per day/Units required per day) • Compute the minimum number of workstations. minimum number of workstations = Σ Time for task i / Cycle time i =1 n (3.2) where n = number of assembly tasks. • Balance the line by assigning specific assembly tasks to each workstation. An efficient balance is one that will complete the required assembly, follow the specified sequence, and keep the idle time at each workstation to a minimum. A formal method to do this is: n Identify a master list of tasks. n Eliminate the tasks that have been assigned. n Eliminate the tasks whose precedence relationship has not been satisfied. n Eliminate the tasks for which inadequate time is available at the workstation. n Use one of the line-balancing heuristics described in Table 3.8. The five choices are: (i) longest task time, (ii) most following tasks, (iii) ranked positional weight, (iv) shortest time task, and (v) least number of following tasks. It is to be noted that heuristics provide solutions, but they do not guarantee an optimal solution. Table 3.8. Layout Heuristics for Assembly-line Balancing (i) Longest task time, (ii) Most following tasks, (iii) Ranked positional weight, From the available tasks, choose the one with the largest time. From the available tasks, choose the one with the largest number of following tasks. From the available tasks, choose the one for which the sum of the times for each following task is longest. From example 3.3, we see that the ranked positional weight of task C = 5(C) + 3(F) + 7(G) + 3(I) = 18; task D = 4(D) + 3(F) + 7(G) + 3(I) = 17. Therefore, C would be selected first. From the available tasks, choose the one with the shortest task time. From the available tasks, choose the one with the least number of subsequent tasks. (iv) Shortest time task, and (v) Least number of following tasks.
Slide 69: 54 A Modern Approach to Operations Management Example 3.3. On the basis of the precedence diagram and activity times given in Example-3.2, the firm determines that there are 480 productive minutes of work available per day. Furthermore, the production schedule requires that 40 units be completed as output from the assembly line each day. Thus: Cycle time (in minutes) = 480 minutes/40 units =12 minutes /unit Minimum number of workstations = total task time/cycle time = 66/12 = 5.5 or 6 stations. 5 10 A 11 B 4 D 3 F H E 12 11 C 7 G 3 I Figure 3.8 Use the most following tasks heuristic to assign to workstations. Figure 3.8 shows one solution that does not violate the sequence requirements and that group tasks into six stations shown by six different colors. To obtain this solution, activities with the most following tasks were moved into workstations to use as much of the available cycle time of 12 minutes as possible. Workstation 1 2 3 4 5 6 • • • • Tasks included in the workstation A B E C, D, F H G, I Time (minutes) 10 11 12 12 11 10 The first workstation consumes 10 minutes and has an idle time of 2 minutes. The second workstation uses 11 minutes, and the third consumes the full 12 minutes. The fourth workstation groups three small tasks and balances perfectly at 12 minutes. The fifth has 1 minute of idle time, and the sixth (consisting of tasks G and I) has 2 minutes of idle time per cycle. Total idle time for this solution is 6 minutes per cycle. We can calculate the balance efficiency for Example 3.3 as follows: Efficiency = Σ task times/(actual no. of workstations) × (assigned cycle time) (3.3) Efficiency = 66 minutes/(6 stations × 12 minutes) = 66/72 = 91.7 % If we open a seventh workstation (for whatever reason), will decrease the efficiency of the balance to 78.6%. Efficiency = 66 minutes/(7 stations × 12 minutes) = 66/84 = 78.6 %
Slide 70: Layout Planning 55 3.5.4 OFFICE LAYOUT The main difference between office and factory layouts is the importance placed on information. However, in some office environments, just in manufacturing, production relies on the flow of material. Office layout deals with grouping of workers, their equipment, and spaces/offices to provide for comfort, safety, and movement of information. We should note two major trends in case of office layout. First, technology, such as cellular phones, beepers, faxes, the Internet, home offices, laptop computers, and PDAs, allows increasing layout flexibility by moving information electronically. The technological change is altering the way offices function. Second, virtual companies create dynamic needs for space and services. These two changes require fewer office employees on-site. Even though the movement of information is increasingly electronic, analysis of office layouts still requires a task-based approach. Managers, therefore, examine both electronic and conventional communication patterns, separation needs, and other conditions affecting employee effectiveness by using a tool called relationship chart shown in Figure 3.9. 1. President 2. Chief Technology Officer 3. Engineers’ area 4. Secretary 5. Office entrance 6. Central files 7. Equipment cabinet 8. Photocopy equipment 9. Storage room 1 O A I O I A A X U O O U E E X Not desirable A U X U E A I I E E O I I O U U 2 U 3 A 4 I 5 I 6 U 7 O 8 O 9 I O A E Value CLOSENESS Absolutely necessary Especially important Important Ordinary OK Unimportant Figure 3.9. Office Relationship Chart. This chart, prepared for an office of software engineers, indicates that the chief technology officer must be (1) near the engineers’ area, (2) less near the secretary and central files, and (3) not at all near the photocopy or storage room. General office-area guidelines allot an average of about 100 square feet per person (including corridors). A major executive is allotted about 400 square feet, and a conference room area is based on 25 square feet per person, up to 30 people. By making effective use of the vertical dimension in a workstation, some office designers expand upward instead of outward. This keeps each workstation unit (what designers call the ‘footprint’) as small as possible [Heizer and Render].
Slide 71: 56 A Modern Approach to Operations Management 3.5.5 RETAIL LAYOUT Retail layouts are based on the idea that sales and profitability vary directly with customer exposure to products. Thus, most retail managers try to expose customers to as many products as possible. Studies show that the greater the rate of exposure, the greater the sales and the higher the return on investment. The following ideas are helpful for determining the overall arrangement of many stores: • Locate the high-draw items around the periphery of the store. Thus, we tend to find dairy products on one side of a supermarket and bread and bakery products on another. • Use prominent locations for high-impulse and high-margin items such as house-wares, beauty aids, and shampoos. • Distribute what are known in the trade as ‘power items’—items that may dominate a purchasing trip— to both sides of an aisle, and disperse them to increase the viewing of other items. • Use end aisle locations because they have a very high exposure rate. • Convey the mission of the store by careful selection in the positioning of the lead-off department. For instance, if prepared foods are part of the mission, position the bakery up front to appeal to convenience-oriented customers. Once the overall layout of a retail store has been decided, products need to be arranged for sale. Many considerations go into this arrangement. However, the main objective of retail layout is to maximize profitability per square foot of floor space (or, in some stores on linear foot of shelf space). Big-ticket, or expensive, items may yield greater dollar sales, but the profit per square foot may be lower. Computerized programs are available to assist managers in evaluating the profitability of various merchandising plans. An additional, and somewhat controversial, issue in retail layout is called slotting. Slotting fees are fees manufacturers pay to get their goods on the shelf in a retail store or supermarket chain. The result of massive new-product introductions, retailers can now demand up to $ 25,000 to place an item in their chain. During the last decade, marketplace economics, consolidations, and technology have provided retailers with this leverage. The competition for shelf space is advanced by POS systems and scanner technology, which improve management and inventory control. Many small firms question the legality and ethics of slotting fees, claiming the fees stifle new products, limit their ability to expand, and cost consumers money. 3.5.5.1 Servicescapes Although the main objective of retail layout is to maximize profit, there are other aspects of the service that managers need to consider. Professor Mary Jo Bitner conceived the term servicescape to describe the physical surroundings in which the service is delivered and how the surroundings have a humanistic effect on customers and employees. She believes that in order to provide a good service layout, a firm must consider these three elements: • Ambient conditions, such as lighting, sound, smell, and temperature. All of these affect workers and customers and can affect how much is spent and how long a person stays in the building. For example, fine-dinning restaurant with linen tablecloths, candlelit atmosphere, and light music. • Spatial layout and functionality, which involve customer circulation path planning, aisle characteristics (such as width, direction, angle, and shelf-spacing), and product grouping. • Signs, symbols, and artifacts encourage shoppers to slow down and browse. For example, greeter at the door, flower vases at the approach to the office.
Slide 72: Layout Planning 57 3.5.6 WAREHOUSING AND STORAGE LAYOUTS The objective of warehouse layout is to find the optimum trade-off between handling cost and costs of warehouse space. So, the management’s task is to maximize the utilization of the ‘cubic space’ of the warehouse—that is, utilize its full volume while maintaining low material handling costs, which is defined as all the costs related to the incoming transport, storage, and outgoing transport of materials to be warehoused. The cost also includes equipment, people, material, supervision, insurance, and depreciation. Effective warehouse layouts also minimize the damage and spoilage of material within the warehouse. The variety of items stored and the number of items ‘picked’ affect the optimum layout. A warehouse storing a few items leads itself to higher density than a warehouse storing a variety of items. Modern warehousing management uses automated storage and retrieval systems (ASRS). It can improve the productivity by an estimated 500% over manual methods. An important component of warehouse layout is the relationship between the receiving/unloading area and the shipping/loading area. Facility design depends on the type of supplies unloaded, what they are unloaded from (trucks, rail cars, barges, etc), and where they are unloaded. 3.5.6.1 Cross-Docking Cross-docking means to avoid placing materials or supplies in storage by processing them as they are received. In a manufacturing facility, product is received directly to the assembly line (JIT). In a distribution center, labeled and presorted loads arrive at the shipping dock for immediate rerouting, thereby avoiding formal receiving, stocking/storing, and order-selection activities. Because these activities do not add any value to the product, their elimination is 100% cost savings. Although, crossdocking reduces product handling, inventory, and facility costs, it requires both (i) tight scheduling and (ii) that shipments received include accurate product identification, usually with bar codes so that they can be quickly moved to the proper shipping dock (Heizer and Render). 3.5.7 COMBINATION LAYOUT Now a days it’s difficult to find any one form of layout in its 100 percent purity. In factories, where first the products are manufactured and then assembled, this method is mostly used. Often a combination of layouts must be used. Typically, a process layout is combined with a product layout. 3.6 MATERIAL HANDLING Material Handling is an inseparable part of plant layout. Methods study, plant layout, and material handling are all components of the design of a production facility. There are more than 430 different types of material handling equipment, and each type is represented by 6 to 10 major manufacturers. Material Handling (MH) is the handling of materials. The extent of MH activity in a company depends on the type of company, its product, the size of the company, the value of the product, the relative importance of handling to the enterprise, etc. According to Material Handling Society, MH is the art and science involving the movement, packaging and storing of substances in any form. In industries, various products are manufactured. During manufacture, materials move from • one operation to another • one machine to another
Slide 73: 58 A Modern Approach to Operations Management • one department to another • one workstation to another • stores to workstation • workstation to stores, and so on. Although, MH is an unproductive work, it is an essential and unavoidable activity in an industrial environment. MH cost is an overhead cost which must be kept as low as possible to get the maximum profit. MH cost can vary from 20 to 60 % of the total production cost. A component may be handled 50 times or more before it becomes part of the final product. it is also estimated that 35 to 40 % of the plant accidents are due to bad method of material handling. 3.6.1 PRINCIPLES OF MATERIAL HANDLING These are narrated as follows: 1. Orientation principle: Study the problem thoroughly before preliminary planning to identify existing methods and problems, physical and economic constraints, and to establish future requirements and goals. 2. Planning principle: Establish a plan to include basic requirements, desirable options, and the consideration of contingencies for all material handling and storage activities. 3. Systems principle: Integrate those handling and storage activities that are economically viable into a coordinated system of operations, including receiving, inspection, storage, production, assembly, packaging, warehousing, shipping, and transportation. 4. Unit load principle: Handle product in as large a unit load as possible. 5. Space utilization principle: Make effective utilization of all cubic space. 6. Standardization principle: Standardize handling methods and equipment wherever possible. 7. Ergonomic principle: Recognize human capabilities and limitations by designing material handling equipment and procedures for effective interaction with the people using the system. 8. Energy principle: Include energy consumption of the material handling systems and material handling procedures when making comparisons or preparing economic justifications. 9. Ecology principle: Use material handling equipment and procedures that minimize adverse effects on the environment. 10. Mechanization principle: Mechanize the handling process where feasible to increase efficiency and economy in the handling of materials. 11. Flexibility principle: Use methods and equipment that can perform a variety of tasks under a variety of operating conditions. 12. Simplification principle: Simplify handling by eliminating, reducing, or combining unnecessary movements and/or equipment. 13. Gravity principle: Utilize gravity to move material wherever possible, while respecting limitations concerning safety, product damage, and loss. 14. Safety principle: Provide safe material handling equipment and methods that follow existing safety codes and regulations in addition to accrued experience. 15. Computerization principle: Consider computerization in material handling and storage systems, when circumstances warrant, for improved material and information control. 16. System flow principle: Integrate data flow with physical material flow in handling and storage. 17. Layout principle: Prepare an operation sequence and equipment layout for all viable system solutions, then select the alternative system that best integrates efficiency and effectiveness.
Slide 74: Layout Planning 59 18. Cost principle: Compare the economic justification of alternative solutions in equipment and methods on the basis of economic effectiveness as measured by expense per unit handled. 19. Maintenance principle: Prepare a plan for preventive maintenance and scheduled repairs on all material handling equipment. 20. Obsolescence principle: Prepare a long-range and economically sound policy for replacement of obsolete equipment and methods with special consideration to after-tax lifecycle costs. 3.6.2 SIMPLIFIED VERSION OF PRINCIPLES OF MATERIAL HANDLING 1. Eliminate material handling as much as possible by proper layout. 2. Make accurate and complete analysis of the present and future costs of MH. 3. Use various techniques to develop the MH system in plant. 4. Avoid handling of materials by the direct labor specially skilled ones. 5. Avoid using handling equipment below its capacity. 6. Move materials in containerized units (e.g., small milk tins in a box, small cups and plates in a tray, or soft drink bottles in a crate) rather than as a single item. 7. Move materials at a higher speeds and in larger quantity. 8. Use the space effectively for storing and moving materials. 9. Use gravity flow of materials wherever possible. 10. Reduce the distance traveled by materials by proper layout. 11. Avoid backtracking of materials. 12. Avoid rehandling of materials which may spoil the quality (like non-sticking utensils, etc). 13. Choose the right type of MH equipment: • For small items (soaps, tea bags, tooth pastes, etc.) - Use boxes. • For medium size items (boxes, cartons, tins, etc.) - Use hand trucks. • For large size items ( lathe machine components, auto parts, etc) - Use overhead cranes. 14. Standardize the MH equipment. 15. Combine the movement and storage of materials. 16. Combine the movement and operations to be performed on materials. 17. Provide safety in the plant while handling materials. 18. Avoid unnecessary mixing of materials. 19. Maintain the MH equipment regularly to avoid breakdowns. 20. Keep gangway clean. 21. Create a separate organization for MH. 22. Train the operators in MH. 23. Plan MH for overall economy. 3.6.3 MATERIAL HANDLING EQUIPMENT 1. Conveyors • Belt conveyors—airport baggage handling • Chain/cable conveyors—coal mines • Gravity roller conveyors—power plant coal handling system
Slide 75: 60 A Modern Approach to Operations Management • Live roller conveyors—Petroleum companies • Elevating conveyors—fertilizer factories • Screw/spiral conveyors—cement factories • Pipeline conveyors • Chutes 2. Cranes • Fixed cranes—steel factory • Travelling cranes—turbine shop • Electric hoist—automobile factories • Winches and capstans 3. Mobile • Industrial vehicles • Fixed platform type • Lift platform type—to transport bricks, books, etc. • Fork lift trucks • Motor vehicles or trucks—to transport petroleum products • Rail road cars or goods train—to transport coal, ores, sheet, rods, etc. • Cargo ships—to carry oil, food supply, etc. • Cargo planes—to transport passengers’ baggage, equipment, etc. 3.6.4 RELATIONSHIP BETWEEN MATERIAL HANDLING AND FACTORY BUILDING DESIGN OR LAYOUT • MH and plant layout are very closely related. An effective layout involves least material handling and less costly MH equipment. It also allows material handling without any loss of time, with minimum delays and least back-tracking. • The total number of movements and the distances moved in one step are also reduced considerably in a properly designed plant layout. • In a poorly planned layout, the width of aisle or sub-aisle, and ceiling heights may be inadequate to accommodate MH equipment. • In a well designed plant layout, MH is minimized. Space requirements are considerably reduced. Material movements are much faster and more economical. Bottlenecks and points of congestion are reduced. Machines and workers do not remain idle due to lack of materials. Production line flow becomes smooth. • For minimum MH, the location of store rooms, tool rooms, lavatories, offices, test floors, shipping, wrapping centers, etc should be judiciously made. In making equipment layout, the following points should be taken into account: • Provide aisles (passages) wide enough to accommodate the latest types of mobile MH equipment. • Keep work at a convenient working level. • To conserve floor space, use overhead means of conveying and storage. • Plan first operations nearer to the point of receiving. • Use yard storage if materials do not need protection from weather.
Slide 76: Layout Planning 61 • Provide proper lights and ventilation in MH area. • Consider mechanical assistance when workmen • Must lift more than 36 kgs, or a female worker has to lift more than 18 kgs of load. • Must handle the same materials for more than 30 minutes. • Must move materials for a distance of over 50 feet. • Are exposed to unusual safety hazards. REFERENCE 1. H B Maynard Industrial Engineering Hand Book. 2. Philip E. Hicks, Industrial Engineering and Management: A New Perspective, McGraw-Hill International Editions, 1994.
Slide 77: 4 Purchasing Systems and Vendor Rating 4.0 INTRODUCTION Most manufacturing organisations spend more than 60% of their money for materials, i.e., materials soak up a substantial portion of the capital invested in an industrial concern. This emphasizes the need for adequate materials management and control because even a small saving in materials can reduce the production cost to a significant extent and thus add to the profits. Materials Management may be thought of as an integrated functioning of the different sections of a company dealing with the supply of materials and other related activities so as to obtain maximum co-ordination and optimum expenditure on materials etc., used in an industrial concern. 4.1 FUNCTIONS OF MATERIAL MANAGEMENT The material management functions consist of the following: • Materials planning. • Procurement or purchasing of materials. • Receiving and warehousing. • Storage and store-administration. • Inventory control. • Standardization, Simplification and Value-analysis. • External transportation (i.e., traffic shipping, etc.) and material handling (i.e., internal transportation). • Disposal of scrap surplus and obsolete materials. 4.2 OBJECTIVES OF MATERIALS MANAGEMENT The main objectives of material management are: • To minimize materials cost. • To procure and provide materials of desired quality when required ,at the lowest possible overall cost of the concern. 62
Slide 78: Purchasing Systems and Vendor Rating 63 • To reduce investment tied in inventories for for use in other productive purposes and to develop high inventory turnover ratios. • To purchase, receive, transport (i.e., handle) and store materials efficiently and to reduce the related costs. • To trace new sources of supply and to develop cordial relations with them in order to ensure continuous material supply at reasonable rates. • To cut down costs through simplification, standardization, value analysis, import substitution, etc. • To report changes in market conditions and other factors affecting the concern, to the concern. • To modify paper work procedure in order to minimize delays in procuring materials. • To conduct studies in areas such as quality, consumption and cost of materials so as to minimize cost of production. • To train personnel in the field of materials management in order to increase operational efficiency. 4.3 PURCHASING OR PROCUREMENT FUNCTION The purchasing department occupies a vital and unique position in the organisation of an industrial concern because purchasing is key to the success of a modern manufacturing concern. • Mass production industries, since they rely upon a continuous flow of right materials, demand for an efficient purchasing division. • The purchasing function is a liaison agency which operates between the factory organisation and the outside vendors on all matters of procurement. • Purchasing implies—procuring materials, supplies, machinery and services needed for production and maintenance of the concern. 4.3.1 OBJECTIVES OF PURCHASING DEPARTMENT The objectives of purchasing department are: • To procure right material • To procure material in right quantities. • To procure material of right quality. • To procure from right and reliable source and vendor. • To procure material economically, i.e., at right or reasonable price. • To receive and deliver materials • At right place, and • At right time 4.3.2 ACTIVITIES, DUTIES AND FUNCTIONS OF PURCHASING DEPARTMENT They are enumerated as follows: • Keep records-indicating possible materials and their substitutes. • Maintain records of reliable sources of supply and price of materials. • Review material specifications with an idea of simplifying and standardizing them. • Making contacts with right sources of supply.
Slide 79: 64 A Modern Approach to Operations Management • • • • • • • • • • • Procure and analyze quotations. Place and follow up purchase orders. Maintain records of all purchases. To make sure through inspection that right kind (i.e., quantity, quality, etc.) of materials To act as liaison between the vendors and different departments of the concern such as production, quality control, finance, maintenance, etc. To check if the material has been purchased at right time and at economical rates. To keep an uninterrupted supply of materials so that production continues with least capital tied inventories. To prepare purchasing budget. To prepare and update the list of materials required by different departments of the organization within a specified span of time. To handle subcontracts at the time of high business activity. To ensure that prompt payments are made to the vendors in the interest of good public relations. 4.3.3 CENTRALIZED AND DECENTRALIZED PURCHASING ORGANIZATIONS The problem of centralizing or decentralizing the purchase activities arises in large organizations— particularly in multi-plant industries. 4.3.3.1 Advantages of Centralized Purchasing The centralization of purchasing • Almost invariably makes for more efficient ordering of materials • Forms a basis to gin bargaining advantage • Eliminates duplication of efforts • Helps procuring uniform and consistent materials • Simplifies purchasing procedure • Simplifies the payment of invoices; and • Permits a degree of specialization among buyers. • Disadvantages of Centralized Purchasing • Centralized purchasing is little slower and more cumbersome than decentralized purchasing. 4.3.3.1.1 Applications of Centralized Purchasing • For concerns using few materials whose quality and availability are vital to the success of the concern. • For purchasing small items of fairly high value such as tool bits, grinding wheels, dial gauges, etc., as well as those for which bigger quantity discounts can be obtained. 4.3.3.2 Advantages of Decentralized Purchasing • Improved efficiency. • Faster procurement of materials. • Control over purchases is no longer remote. • Decentralized operations are more flexible. 4.3.3.2.1 Disadvantages of Decentralized Purchasing • Where different plants of a large organisation require quite different types of materials.
Slide 80: Purchasing Systems and Vendor Rating 65 • Where branch plants require heavy and bulky items such as oil products, fuels, paints, etc. • Where purchases are to be made within the local community to promote better public relations. 4.4 MODES OF PURCHASING MATERIALS Purchase of materials can be done by one of the following methods: 4.4.1 SPOT QUOTATIONS In this method, the purchaser can go to the market, collect at least three quotations (for purchasing one material) from different suppliers, and based on the price and other terms and conditions take a spot decision to go for the purchase deal. Then he can pay the cash and buy the material or commodity. In this method, the vendor quoting the least price generally gets the attention of the buyer. 4.4.2 FLOATING THE LIMITED INQUIRY: • In this method, the purchaser sends letters to some of his known or registered vendors to supply the price and other details of the items to be purchased. • After getting replies from vendors, the quotations are opened and a comparative statement is prepared. This helps the decision maker to have a glance before taking the final decision. • Comparative statement is analyzed in the light of the following factors: • Price of the item or material • Material specifications and quality • Place of delivery • Delivery period • Taxes, etc. • Terms of payment • Validity of tender • Guarantee period. 4.4.3 TENDER A tender or bid or quotation is in the form of a written letter or published document in the newspapers. The aim is to find the price for procuring some items or materials or to get a work done within the desired period within certain specified conditions. 4.4.3.1 TYPES OF TENDER The tenders may be of the following three types: Single tender: Here, the tender is invited from one reliable supplier only. Single tender is called under the following cases: • proprietary items • high quality items • C-class items such as rulers, clips, pins, pencils, erasers, etc. Open tender: This is also called press tender because it is generally published in Newspapers, trade journals, etc. for the purchase of desired materials. • it is open to everybody, any vendor can furnish the quotations. • Open tender can catch the attention of a large number of vendors.
Slide 81: 66 A Modern Approach to Operations Management • A vendor is supposed to deposit an earnest money along with the tender information. This is required to ensure that the vendor does not back out from the rates quoted by them. Closed tender: It is where the contract can only be awarded to one single supplier or consortium of suppliers 4.5 STEPS IN ONE COMPLETE PURCHASING CYCLE These steps are: 1. Recognition of need, receipt and analysis of purchase requisition. 2. Selection of potential sources of supply. 3. Making request for quotations. 4. Receipt and analysis of quotations. 5. Selection of right source of supply. 6. Issuing the purchase order. 7. Follow-up and expediting the order. 8. Analyzing receiving reports and processing discrepancies and rejections. 9. Checking and approving vendor’s invoices for payment. 10. Closing completed orders. 11. Maintenance of records and files. 4.5.1 SOME QUESTIONS RELATED TO PURCHASE What are the different tender notice types? The tender notices have different ‘document types’. These document types are determined by the procedure that should be followed before a contract can be awarded. The most common notice types are listed below: Invitation to Tender Notice—Open procedure: This applies when a purchase authority has a procedure in place which will definitely lead to the award of a contract. The procedure is open because all interested parties are invited to tender. Invitation to Tender Notice—Restricted procedure: This applies when a purchase authority has a procedure in place which will definitely lead to the award of a contract. The procedure is restricted because suppliers are first invited to express an interest and tenders are only invited from those firms that have qualified against certain criteria. Invitation to Tender Notice—Negotiated procedure: This applies when a purchase authority has a procedure in place which will definitely lead to the award of a contract. The procedure is negotiated because the purchase authority may only consult suppliers of their choice and negotiate the terms of the contract with one or more of them. The negotiated procedure should only be used in exceptional circumstances, for example, in extreme urgency or perhaps in situations where it is difficult to define exact requirements. Prior-information Notice: These are released by public sector organizations only. They give prior information about requirements that are expected to be awarded in future. Normally an Invitation to Tender Notice relating to any of the requirements listed will be published at a later date. However it is clear that not all awarding authorities follow the proper procedures so the Tenderers Direct advise that interested suppliers should contact the purchase authority regardless of the type of tender notice published.
Slide 82: Purchasing Systems and Vendor Rating 67 Periodic Indicative Notice: These are published by utilities as opposed to public sector organizations. They come in two main forms: (a) With call for competition or (b) Without call for competition. The former invites interested suppliers to contact the purchase authority and enter into a competitive process. The second acts rather like the Prior Information Notice above, merely informing the marketplace of expected future requirements. Qualification Notice: These are published only by Utilities as opposed to public sector organizations. They invite potential suppliers to pre qualify under certain criteria to enable them to be invited to bid for contracts at a future date. Contract Award Notice: This is published by the purchase authority after the award of a contract. It provides the date the contract was awarding, the name of the successful supplier(s) and the value of the contract (unless omitted for reasons of confidentiality). Earnest Money: It is demanded from the supplier who quotes the tender to prevent him from backing out from his promised rates for the supply of the materials. Security Deposit: Once a vendor is selected on the basis of his quotation, he is asked to make a security deposit so that if he fails to supply the items in time or of inferior quality, the security deposit can be forfeited. 4.5.2 TENDER PROCEDURE The tender procedure varies from one nation to another in a small way. We have taken three examples to illustrate this fact. EXAMPLE 1: The European Agency for Reconstruction uses standard EC procedures concerning tenders. Here are the basic steps: 1. For each of the Republic of Serbia, Kosovo, and the Republic of Montenegro—and for the former Yugoslav Republic of Macedonia (fYROM)—the Agency devises an annual program outlining its general strategy and work program in the different sectors (energy, agriculture etc.). 2. This program is submitted to the European Commission for approval, and then to the Agency’s Governing Board. 3. The Agency then prepares detailed Financing Proposals for each of the key sectors of operation, presenting the work to be undertaken in each sector and setting a budget. 4. These Financing Proposals are submitted to the European Commission, to the Governing Board and also to the ‘CARDS’ Committee for approval. 5. The Agency then prepares Terms of Reference for each individual project to be implemented in the framework of the Financing Proposal. 6. Once the Terms of Reference (TOR) for a project are ready, (depending on its financial value) the Agency puts it out for tender, by publishing an announcement on the Europeaid site and in the printed version of the Official Journal of the European Communities. 7. The Agency tenders for three categories of contracts: Service, Supply and Works. 8. There are several types of tender procedures: international open tender, restricted international tender, open local tender and simplified procedure. What type of tender is announced is dependent on the value of the contract. This will be stated clearly on the relevant page of the Europeaid site, along with instructions as to how to participate in the tender. 9. Throughout the project’s implementation, and after its completion, the Agency carries out regular project evaluation and monitoring.
Slide 83: 68 A Modern Approach to Operations Management 4.5.3 EXAMPLE 2: PURCHASE PROCEDURE IN OSAKA GAS CO., JAPAN READS AS FOLLOWS: 1. Preliminary Procedure. If you wish to supply products to Osaka Gas for the first time, please apply to the Purchasing Department. In doing so, please describe your company’s financial status, the product(s) you wish to provide us and the terms of supply. These details should be provided by using a brochure or company profile statements explaining the company’s financial position, and brochures on the product(s) and technical data. It is important that you can explain the advantage of your products to Osaka Gas in the light of our basic purchase policies, and the benefits that a business relationship with your company could bring to Osaka Gas. You may be required by Osaka Gas to submit Japanese translation of the foregoing documents if such documents are not prepared in Japanese. Information and data on your company and your product(s) will be stored and managed in our files as “Products and Suppliers”. The information will be used for selecting the companies to which we ask to submit estimates. Should it be the first time you wish to supply materials or equipment for which Osaka Gas has clearly defined purchase conditions, such as delivery time and product specifications, we conduct a preliminary examination of your company and the product(s) you wish to supply, and make a comprehensive evaluation based on the following criteria: • Necessity of the product(s). • Whether the product(s) can satisfy the standards set by Osaka Gas regarding quality, performance, reliability, safety, price, delivery reliability, and compatibility with existing facilities, as well as the company’s financial condition, supply capacity, facility capacity, technological capacity, maintenance and service systems. The merit of establishing a business relationship with the new supplier will also be considered. • Information for the preliminary examination can be in any format as long as it provides sufficient data for evaluating the above criteria. However, if deemed necessary, Osaka Gas may request additional information, product samples and/or explanation. After passing the preliminary examination, the information and data on your company and products will be stored and managed in our files as ‘Companies from Which Estimates Can Be Requested’, to be used in selecting those companies to which we ask to submit estimates. The results of the preliminary examination are available upon request, although any information considered confidential by Osaka Gas will be excluded. 2. Details of purchasing procedure. The specifications and number/quantity and delivery of equipment, devices and materials are determined by the department(s) that will be using the product(s) or materials. The Purchasing Department conducts purchase activities based on purchase requests submitted by the/these department(s). The Purchasing Department, at its sole discretion, selects companies from which estimates will be sought. Suppliers are selected from the files of “Companies with Previously Established Business Relationships”, “Companies from Which Estimates Can Be Requested” and “Products and Suppliers”. Selection is made by comprehensivly evaluating such factors as the quality and performance of the equipment, device(s) or materials to be purchased, compatibility with existing facilities, degree of reliability, product requirements including safety, delivery time, the scale of the order, after-sale service and the company’s previous business record. As a rule, Osaka Gas asks several companies to submit estimates. However, only one company may be specified for estimate submission in such special cases as those concerned with industrial property rights, those requiring maximum levels of safety that only one specific supplier can ensure, cases where only one specific supplier can assure compatibility with existing facilities, or in case of urgency.
Slide 84: Purchasing Systems and Vendor Rating 69 As a rule, when requesting an estimate from a company that it has selected, Osaka Gas will set out a specification from listing Osaka Gas’s requirements in respects of quality, performance standard, size, inspection and method of inspection. The selected companies will be asked to submit cost estimates and specifications to Osaka Gas prior to a specified date. Specification sheets submitted by potential suppliers at their own expense are checked by the Purchasing Department and the department(s) that will be using the product(s), in order to determine whether the required standards are met by the product(s). All products must pass this examination. During this process, Osaka Gas may request additions or changes to the specifications. After valid cost estimates and specifications have been comprehensively evaluated in respect of price, technical requirements, etc. Osaka Gas will commence negotiation with the company with the most attractive proposal to discuss the amount of the contract and other terms and conditions. The selection of such a company shall be made by Osaka Gas at its sole discretion. Contract terms and conditions will be decided upon mutual agreement. The business will be established upon conclusion of a contract, in the form of a written document if necessary. The obligations and liabilities of Osaka Gas arise only when such contract is concluded. Delivery dates specified in the contract must be strictly observed. Precise details of the delivery schedule will be agreed between the supplier and the relevant department(s) of Osaka Gas. Delivered equipment, device(s) or materials must pass inspections conducted by the relevant department(s) of Osaka Gas. When deemed significant, an interim inspection may be conducted during the manufacturing process. Payment will be made according to the payment terms specified in the contract. 3. Other information. (i) This “Guide to Business Transactions with Osaka Gas” explains the basic policies of the purchasing activities by Osaka Gas and does not have any legally binding power. The legal obligations of Osaka Gas arise only when a valid purchasing contract is concluded between a supplier and Osaka Gas and the terms and conditions of such a contract supersede the statements made hereunder in case of conflict. (ii) Osaka Gas and the supplier shall keep information made available through business under strict control and neither party shall reveal any confidential information to a third party, without the other party’s written consent. (iii) If the delivery of equipment, device(s) or materials is made later than the date specified in the contract, Osaka Gas may demand indemnity for the damages or losses incurred. (iv) The contract between a supplier and Osaka Gas shall be governed by the laws of Japan and in the event a dispute arises in respect of the contract or any other matter, it shall be determined in accordance with Japanese law. (v) Each Supplier, who concluded a contract with Osaka Gas, shall be responsible for observing all of the governmental regulations applicable to it or the transaction with Osaka Gas and shall indemnify and hold harmless Osaka Gas from and against any liability, damage, loss, cost, expense, suit or proceeding incurred by Osaka Gas in connection with such supplier’s breach of the foregoing governmental regulations. 4.5.4 EXAMPLE 3 (PURCHASE PROCEDURE IN MAHARASHTRA STATE ELECTRICITY BOARD), INDIA FOLLOWS THE FOLLOWING PROCEDURES 1. Purchases are made by inviting Public/Global Tenders.
Slide 85: 70 A Modern Approach to Operations Management 2. Tender Advertisement: (a) Advertisement of Tender Notices are published for wide publicity in English News paper in following areas: Mumbai/Pune/Ahmedabad, Delhi/Calcutta, Madras. (b) It is also given in Regional News Papers as below: Area Language Mumbai Gujarati Nagpur Hindi Nasik/Aurangabad Marathi (c) Tender Document: It is a standard document and consists of: • Instruction to Tenderers. • General Terms & Conditions of Tender. • Special Terms & Conditions • Schedule of requirement, prices and break up of prices. • Questionnaire to Tenderer. • Technical Specification, if applicable. • Price Variation Formula, if applicable. (d) Following important information is given in Advertisement. • Tender No. • Description of Material. • Estimated Amount. • Tender Fee. • Due date & Time (Hrs.) for submission of tender. • Due date & Time (Hrs.) for opening of tender. • The aspects like reservation of item for SSI Sector and material requirement with ISI mark are indicated. • The tender documents are supplied in triplicate. (e) The address for issue, receipt and opening of tender is: Office of the Technical Director (Stores) Maharashtra State Electricity Board, 1st floor, Prakashgad, Prof. Kanekar Marg, Bandra (E), Mumbai - 400 051 3. Opening of Tenders: (i) The tenders are opened in presence of the representatives of the tenderers and MSEB (Maharashtra State Electricity Board) Officers. The details like prices, delivery period and terms and conditions related to the evaluation of offers such as Excise duty, Sales tax etc. are read out at the item of tender opening. (ii) Annexure “C” regarding acceptance of matching with lowest acceptable rate submitted along with officers is read out. 4. Opening of Annexure B “C” (Regarding Matching Rate): Confirmation for acceptance of the order at the lowest acceptable rate in Annexure “C” (forrn enclosed with the tender documents) is required to be submitted in a separate sealed cover duly
Slide 86: Purchasing Systems and Vendor Rating 71 Superscribing Tender No. and Due date and Time of submission on or before 3 p.m. on the same date of the next month of tender opening or earlier as prescribed in the tender document when required. 5. Evaluation of Tenders: (i) Distribution of Material—The offer not in conformity with standardized terms and conditions of the tender in toto are not evaluated. Compliance of qualifying requirements wherever specified is also checked. No correspondence is made with the tenderer about deviations in their offer. (ii) EHV and Generation Material, Post Tender negotiation with tenderers for withdrawal of Technical/Commercial deviations in offer are permitted without affecting original prices and ranking of tenderers. After receipt of technical evaluation report form indenting department the purchase Proposal is prepared and submitted to Competent authority for decision. Factory of New Tenderers are inspected by our Inspection Wing. After receipt of decision purchase orders are placed by respective Purchase Groups, IMPORTANT GENERAL TERMS AND CONDITIONS A. Earnest Money Deposit (EMD): 1. The Tenderer should pay E.M.D. along with Tender. 2. The Tender without payment of E.M.D. are summarily rejected unless • Tenderer is having a valid Permanent Bank Guarantee of Rs. Five Lakh (Rs. 500,000) with Central Purchase Agency of the Board, • Tenderer is exempted on account of statutory directives as below: (a) All Government and Semi Government Institutions under Government of Maharashtra and Zilla Parishad in Maharashtra and fully owned undertaking of any State Government and Government of India (for the item manufactured by such institutions/units). (b) SSI Unit permanently registered with the Directorate of Industries, Maharashtra only for the items mentioned in their Permanent Registration Certificate. (c) SSI Unit registered with National Small Industries Corporation (NSIC) and Small Industries Services Institute of Government of India only for the items manufactured by them. 3. If exempted from payment of E.M.D., Documentary evidence should be produced. New firms should get the B.G. approved from Bank. Guarantee Section before due date of submission of Tender, in prescribed form of the Board. 4. E.M.D. should be 3% of the offered value upto Rs. 1,75,000/- and thereafter, 1% of the balance offered value. The maximum E.M.D. payable against the tender shall be limited to Rs. Five lakhs. B. Security Deposit. The tenderer should agree for payment of Security Deposit. The supplier shall pay Security Deposit within 15 days from the date of receipt of order at the rate for 10% of the value of the order unless having valid permanent Bank Guarantee of Rs. 5 Lakhs with MSEB. For SSI units in Maharashtra Security Deposit applicable is 3% of the order value subject to maximum of Rs. 50000/-. For orders value upto Rs. 50000/- in case of by SSI units and Rs. 25000/- in case of Register suppliers on the list of Development Commissioner (Industry) and Stores Purchase Officer no security deposit is payable. SSI Units having industries outside of Maharashtra State are not eligible for exemption in Security deposit.
Slide 87: 72 A Modern Approach to Operations Management C. Prices: The prices should be quoted only on FOR Destination basis for supplies at various places in Maharashtra inclusive excise duty, sales tax, Risk in transit, freight and other charges if any showing the break up. D. Validity: The tenderer should keep the offer valid for acceptance upto and including last date of calendar month, covering the date of completion of 180 days from the date of opening of tender and shall also agree to extend the period of validity required by the Board. E. Payment: The tenderer should accept Boards prescribed payment terms of 100% payment within 60 days from the date of receipt of entire lot by A/C payee cheque. F. Liquidated Damages: Tenderer should accept Board’s terms for liquidated damages for late delivery. In case the materials are not delivered within the period stipulated in the order liquidated damages @1/2% per week or part of week on the price subject to a maximum of Cumulative ceiling of 10% on the contract value. G. Delivery period: It is mandatory on the part of the tenderer to quote the delivery on the monthly basis. The offer shall be rejected if the commencement period and rate of delivery per month are not indicated by the tenderer. Delivery period is reckoned from the date if issue of Letter of Award. H. Sample: Wherever applicable/ required as per tender details sample should be submitted with the offer failing offer is rejected. I. Post Tender Deviations: In case of EHV and Generation material post Tender negotiation with Tenderers for withdrawal of Technical and Commercial deviations in the offer are permitted without affecting original prices and ranking of the tenderer. ALERTS • Postponement of due date of submission and opening • Change in Technical Specification • Deleted Items • Added Items • Short Tender Notice • Change in Quantity • Cancellation of Tender • Prepone of due date of submission of Annexure “C” • Corrigendum • Validity extension desired upto__________ PRICE VARIATION Payment to the suppliers are made as per rates accepted in the order. However, to account for changes in Market conditions, exchange rates in currencies, Basic prices of some metals etc., concept of payment on Price Variation basis has seen accepted by M.S.E.B. for this purpose price variation formula is introduced for some of the items like Oil, Salt, Conductor, Cables, Transformers, Switchgears etc. Sample P.V. formulae are enclosed in Annexure ‘A’. 1. Weather proof Cable 2. H.T. and L.T. Stay Sets 3. G.I. Pins 4. XLPE Aluminum Cables
Slide 88: Purchasing Systems and Vendor Rating 73 5. PVC insulated cables 6. Power Transformers of rating above 8 MVA for voltages upto and including 245KV 7. Auto Transformers above 8 MVA and 245 KV 8. Switchgear and Control Gear 9. Transformer Oil Technical specifications: While procuring the material detailed specifications of the items is given separately alongwith Tender Documents. However, some Guaranteed Technical Specifications in case of some important items are enclosed in Annexure “B”. 1. Transformers 2. Isolators 3. Insulators 4. A.C.S.R. Conductor 5. Item Rates Items purchased by the C.P.A. are required to be dispatched to our Major Stores/Stores Centers spread all over Maharashtra. However in few cases some of the items (400 KV material) are directly required to be dispatched to sub station/Power Station sites. The stores section is working under Deputy Chief Engineer (Store Management), Dharavi, Mumbai. 4.6 VENDOR RATING A supplier or vendor rating system is a continuous management process, designed to measure, evaluate and improve supplier performance, enabling companies to make informed future sourcing decisions. In plain terms, the Vendor Rating system checks to what extent a supplier does what he agreed to do like quality, delivery reliability, flexibility and the price. As to Quality it compares the delivery to the agreed requirements (specifications). Quality problems may appear at incoming inspection or at any later stage. It would be helpful to develop a Quality Index, which lays down the relative number of quality problems a supplier has, in relation to the total number of deliveries he makes. In effect, a supplier or vendor rating system will allow a company to benchmark their supplier’s performance against the performance of similar suppliers serving the company. Often online, the process can also be used to provide extremely important and useful feedback to suppliers in order to identify action plans and improvement opportunities. Rating systems are often designed to meet the specific objectives and priorities of the business with suppliers being measured against a standardized and weighted points scale. To establish Delivery Reliability, the date, a delivery is made should be checked against the agreed date. Once again the number of problematic deliveries in relation to the total number, could be expressed in an index namely the Delivery Reliability Index. Flexibility as we define it here, measures how good the supplier is at shortening the agreed lead time when asked. For instance, if the company requires a supplier to deliver a week earlier than initially agreed, is he flexible enough to accommodate the company? Of course a supplier with a 6 week lead time can more easily nudge off one week than another one who has already brought down his lead time
Slide 89: 74 A Modern Approach to Operations Management to 10 days. Therefore, in any calculation of flexibility, the lead-time itself plays an important part. A measure for flexibility could be the Flexibility Index. 4.7 WHAT IS EXPECTED OF A BETTER BUYER You’re expected to solicit bids ... negotiate for lower costs and better service ... know exactly what should be included in contracts ... and come up with innovative cost-cutting ideas. But, probably the toughest part of your job is trying to squeeze the hours you need out of your busy schedule to keep up with the changes in the purchasing industry. There’s no question that it’s time consuming to explore new avenues for finding the best vendors and suppliers ... to keep abreast of the most up-to-date value analysis (VA) techniques ... and to check out current cost-saving ideas. 4.8 SOME WORKING DEFINITIONS Every company has its own culture and a technical vocabulary. Technical vocabularies tend to differ somewhat from one company to another. However, for the purpose of calculating the above mentioned Indices and in order to avoid misunderstandings, we should define exactly what we mean by the technical terms used in the definitions and equations. These definitions should be properly conveyed to the concerned vendor so as to make sure that the company and the vendor are talking about the same things. Some of the technical vocabularies are given below: Schedule is the agreed quantity of a commodity that has to be delivered by an agreed date. Creation Date is the date on which a schedule is entered into the company’s Procurement Management System. Vendor Lead Time (VLT) is the previously agreed fixed period between the date the supplier receives the order and delivery. Agreement Date is the date, on which the supplier has agreed to deliver, mentioned on the purchase order. Promise Date is the date on which the supplier promises to deliver. Receiving Date is the date on which the company actually receives the goods. First Price is the price quoted by the vendor for the first purchase of the current evaluation period or for the last purchase of the previous evaluation period. (per product family) Last Price is the price quoted by the vendor for the last purchase of the current evaluation period. (per product family) Average Price is the average price quoted by the vendor for all the purchases during the current evaluation period. (per product family) Lowest Price is the lowest price quoted by any vendor for products supplied during the current evaluation period.(per product family) The purchase order should mention the agreement date, adjusted for transport time according to the local conditions. The supplier should confirm this date by sending back an order confirmation. On-Time Delivery is when the Receiving Date = the Promise Date = the Agreement Date.
Slide 90: Purchasing Systems and Vendor Rating 75 4.8.1 QUALITY INDEX (QI) The QI is calculated on a monthly basis, per supplier and per product family for all commodities received in the course of that particular month. It reflects the results of inspection, re-inspection and complaint handling. QI = 1000 – (R1 + R2) * 500 where, R1 = (the number of problematic schedules) / (the total number of schedules) Problematic schedules are: • Schedules refused at income inspections, • Items refused at re-inspections, • Complaints formulated by internal or external customers. The problematic schedules are only taken into account for as far as the supplier can be held accountable for the problem. (decision of the Quality Manager) R2 = A monthly average of the rejection ratios = (the number of initially rejected items in schedule)/(the total number of items in that schedule) For schedules up for re-inspection and for complaints, the rejection ratio would always be 1 by definition. Depending on how delivered schedules are grouped and entered into the formula, the monthly index can be calculated per supplier or per product family or per department. EVALUATION Once the quality performance is measured and the index calculated over a certain period (monthly, quarterly) it has to be assessed in terms of what the company’s internal customers expect from this relationship. The QI is evaluated as: Quality Index QI at least 995 QI from 990 to 994 QI from 950 to 989 QI from 900 to 949 QI less than 900 Assessment relationship Excellent Very Good Good Reasonable Poor 4.8.2 DELIVERY RELIABILITY INDEX (DRI) DRI is calculated on a monthly basis, per supplier and per product family, for all commodities received during that month. Three Dates play important role in the calculation of the index: the initial Agreement Date mentioned on the purchase order, the possibly altered Promise Date and the actual Receiving Date of the goods. At the time when the order is placed, Agreement Date and Promise Date are identical, as the supplier promises to deliver on the agreed date. When the supplier notifies that he won’t be able to make the Agreement Date, he will propose a new Promise Date. The Promise Date is no longer identical to the Agreement Date. It is possible
Slide 91: 76 A Modern Approach to Operations Management however that the new Promise Date is caused by a change in specifications, or that it benefits our internal customer. In that case the Agreement Date is changed along with the Promise Date. DRI = (Rating * Factor)/100 where, Rating = the quantified difference between the Promise Date and the Receiving Date. Factor = the quantified difference between the Promise Date and the Agreement Date. Quantifying the differences consists in attributing a number of points in function of the number of days that separate the different dates. The maximum of points i.e. 100 is attributed to a Just-In-Time (JIT) delivery. The RATING is the average number of points for all deliveries made in that particular month. The quantification is as follows: (notice that early delivery is penalized only a trifle less gravely than late). RATING Difference in days Points < 35 1 EARLY – 21 to – 34 10 – 14 to – 20 70 – 7 to – 13 90 JIT – 6 to +6 100 + 7 to + 13 80 LATE + 14 to + 20 50 + 21 to + 34 10 > 35 1 The FACTOR is the average number of points for all deliveries made in that particular month. The quantification is as follows: FACTOR Diff. in days Points < 35 100 EARLY – 21 to – 34 100 – 14 to – 20 100 – 7 to – 13 100 JIT – 6 to +6 100 + 7 to +13 80 LATE + 14 to + 20 50 + 21 to 10 >35 1 EVALUATION Once the delivery reliability is quantified and the index calculated over a certain period (monthly, quarterly) it has to be assessed in terms of what the company’s internal customers expect from the relationship. The DRI is evaluated as: Delivery Reliability Index DRI = 100 DRI from 95 to 99 DRI from 90 to 94 DRI from 80 to 89 DRI less than 80 Assessment relationship Excellent Very Good Good Reasonable Poor 4.8.3 FLEXIBILITY INDEX (FI) The FI is calculated on a monthly basis, per supplier and per product family for all commodities received in the course of that particular month. It reflects the flexibility contained in short lead-times and the ability to perform even faster.
Slide 92: Purchasing Systems and Vendor Rating 77 FI = FI1 + FI2 where, FI1 = (number of schedules requested and delivered faster than VLT * X) /(number of schedules received) X being 10 in case the VLT is 1 week. X being 20 in case the VLT is more than one week. FI2 quantifies the VLT for all the schedules delivered by a supplier in a certain period (different commodities often having different VLTs) according to the matrix below and takes the average. Average VLT in weeks FI2 Average VLT in weeks FI2 0 100 6 40 1 90 7 30 2 80 8 20 3 70 9 10 4 60 >=9 0 5 50 EVALUATION Once the average VLT is quantified and the “faster than VLT” deliveries registered, the Flexibility Index for a certain period is known. It has to be assessed in terms of what the company’s internal customers expect from this relationship. The FI is evaluated as: Flexibility Reliability Index FI at least 80 FI from 60 to 79 FI from 40 to 59 FI from 20 to 39 FI less than 20 Assessment relationship Excellent Very Good Good Reasonable Poor 4.8.4 PRICE PERFORMANCE INDEX (PPI) PI is calculated on a monthly basis, per supplier and per product family, for all commodities received during that month. Four Prices play an important role in the calculation of the index: the initial First Price, the Final Price, the Lowest Price and the Average Price of the goods. CALCULATION PPI = (P1 * P2) * 100 where, P1 = ratio of Lowest Price to the Average Price P2 = ratio of First Price to the Final Price EVALUATION Once the price performance is quantified and the index calculated over a certain period (monthly, quarterly) it has to be assessed in terms of what the company’s internal customers expect from the relationship.
Slide 93: 78 A Modern Approach to Operations Management The PI is evaluated as: Price Performance Index PPI ≥ 125 PPI from 110 to 124 PPI from 100 to 109 PPI from 85 to 99 PPI less than 85 Assessment relationship Excellent Very Good Good Reasonable Poor 4.8.5 FREQUENCY OF RATING If the company has a very diverse and large vendor base, it might not be possible to rate each and every vendor on a monthly basis. In such a case the company is presented with two options. Firstly the company can increase the duration of the evaluation period; with staggered evaluations for different vendors. Secondly the company can classify the vendors on some criterion into three classes and the rate vendors in each of the class on different frequencies. The first method is more suited when the company does not want to keep continuous monitoring of its vendors, whereas the second method is more suited when the company would like to track vendor performance on a preferential basis. Frequency of Rating Matrix Monthly Class A Items Class B Items Class C Items ü ü ü Quarterly Half Yearly Yearly 4.8.6 USE OF THE INDICES To monitor progress and to identify problem areas, an overall survey of indexes could be plotted out on a monthly basis. Buyers and Suppliers can look into performance surveys, grouped per supplier and per product family. Each purchasing officer/executive gets a survey of the performance of suppliers in his/her area, prompting him / her to undertake corrective action where necessary. Corrective action may either focus internally on the company itself (fine-tune agreements, revise specifications) or externally on the supplier (audit his quality system, compare notes with other units of the company, search for alternative sources) or on both (initiate improvement plans together). When assessing suppliers, all indices should be taken into account and compared to the performances of other suppliers within the same product family i.e. the BENCHMARKING REPORT. Hence, after Vendor Rating Benchmarking is the next step. http://www.indiainfoline.com/bisc/omvr8.html 4.9 STORES AND MATERIAL CONTROL Materials and supplies constitute the most important assets in most of the business enterprises. The success of the business, besides other factors, depends to a great extent on the efficient storage and material control.
Slide 94: Purchasing Systems and Vendor Rating 79 • Material pilferage, deterioration of materials and careless handling of stores lead to reduced profits. • Even losses can be incurred by concerns in which the store-room is available to all employees without check as to the qualities and purpose for which materials are to be used. 4.9.1 REQUIREMENTS OF A MATERIAL CONTROL SYSTEM • Proper coordination of departments such as purchase, receiving, testing, storage, accounting, etc. • Making economy in purchase and use of materials. • Operating an internal check to verify all transactions involving materials, supplies, equipment, etc. • Storing materials and supplies properly in a safe place. • Operating a system of perpetual inventory to find at any time the amount and value of each kind of material in stock. • Setting of quantity standards. • Operating a system to see that right material is available to department at the time of its need. • Keeping proper records of all material transactions. 4.10 STORES MANAGEMENT Stores management ensures: • That the required material never goes out of stock ; • That no material is available in (much) excess than required • To purchase materials on the principle of economic order quantity so that the associated costs can be minimized; and • To protect stores against damage, theft, etc. This can be achieved by the following: • A proper purchasing practice (i.e., when to order materials). • An adequate procedure of receipt and issue of materials. • Proper methods of storing materials. • An effective system of physical control of materials. • A proper method of keeping store records. 4.10.1 FUNCTIONS OF STORES DEPARTMENT AND THE DUTIES OF THE STOREKEEPER They are given as follows: • To receive materials, goods and equipment, and to check them for identification. • To receive parts and components which have been processed in the factory. • To record the receipt of goods. • To correct positioning of all materials and supplies in the store. • To maintain stocks safely and in good condition by taking all precautions to ensure that they do not suffer from damage, pilfering or deterioration. • To issue items to the users only on the receipt of authorized stores requisitions.
Slide 95: 80 A Modern Approach to Operations Management • • • • • • • • To record and update receipts and issue of materials. To check the bin card balances with the physical quantities in the bins. To make sure that stores are kept clean and in good order. To prevent unauthorized persons from entering the stores. To make sure that materials are issued promptly to the users. To plan store for optimum utilization of the cubic space (i.e., length, breadth and height). To ensure that the required materials are located easily. To initiate purchasing cycle at the appropriate time so that the materials required are never out of stock. • To coordinate and cooperate to the full extent with the purchasing, manufacturing, inspection and production planning and control departments. 4.10.2 LOCATION AND LAYOUT OF STORES Following points need to be taken care of: • Location of the stores should be carefully decided and planned so as to ensure maximum efficiency. • The best location of stores is one that minimizes total handling costs and other costs related to stores operation and at the same time provides the needed protection for stored items and materials. • Store location depends upon the nature and value of the items to be stored and the frequency with which the items are received and issued. • In general, stores are located close to the point of use. Raw materials are stored near the first operation, in-process materials close to the next operation, finished goods near the shipping area and tools and supplies in location central to the personnel and equipment served. • All departments should have easy access to the stores and especially those which require heavy and bulky materials should have stores located nearby. • In big industries having many departments, stores department possibly cannot be situated where it is convenient to deliver materials to all departments and at the same time be near the receiving department ; thus it becomes often necessary to set up sub-stores conveniently situated to serve different departments. This leads to the concept of decentralized stores. • In decentralized stores system, each section of the industry (e.g., foundry, machine shop, forging, etc.) has separate store attached with it; whereas in centralized stores system, the main store located centrally fulfills the needs for each and every department. 4.10.3 ADVANTAGES OF CENTRALIZATION OF STORES Centralized store results into the following benefits: • Better supervision and control. • It requires less personnel to manage and thus involves reduced related costs. • Better layout of stores. • Inventory checks facilitated. • Optimum (minimum) stores can be maintained. • Fewer obsolete items. • Better security arrangements can be made.
Slide 96: Purchasing Systems and Vendor Rating 81 4.10.4 ADVANTAGES OF DECENTRALIZATION OF STORES • Reduced material handling and the associated cost. • Convenient for every department to draw materials, etc. • Less risk by fire or theft. • Less chances of production stoppages owing to easy and prompt availability of materials, etc. • An idea about the disadvantages of centralized and decentralized stores can be had from the advantages of decentralized and centralized stores.
Slide 97: 5 Operations Planning and Control 5.0 INTRODUCTION Production is an organized activity of converting raw materials (RM) into useful products. Production activity takes place in a wide range of manufacturing and service sectors. Production system requires the optimal utilization of natural resources like men (labor), money, machine, materials, and time. Thus, it is essential that before starting the work of actual production, production planning is done in order to anticipate possible difficulties, and decide in advance as to how the production should be carried out in a best and economical way. Operation and Production are sometimes used as synonyms but in reality operation is a more comprehensive term, whereas production is a special type of operation in industrial context. Operation could be a fighting a war or a literacy drive among masses or poverty eradication from society and so on. Here is a couple of definitions of Operations Planning and Control (OPC). Production, or Operations Planning and Control (OPC) is concerned with implementing the plans, i.e., the detailed scheduling of jobs, assigning of workloads to machines (and people), and the actual flow of work through the system. Operations Planning and Control (OPC) philosophy is: “First plan your work, then work your plan”. Before starting any work, planning is necessary for the effective utilization of available resources. Planning is the determination phase of production management. Operations planning is concerned with the determination, acquisition and arrangement of all facilities necessary for the future operations, whereas Operations control is concerned with the implementation of a predetermined operations plan or policy and the control of all aspects of operations according to such a plan or policy. It is also called ‘Production Planning and Control (PPC)’ in manufacturing sector. Formally OPC or PPC can be defined as the process of planning the production in advance, setting the exact route of each item, fixing the starting and finishing date for each item, giving production orders to shop and lastly following up the progress of products according to orders. It is also called the ‘nerve center’ of the factory. 82
Slide 98: Operations Planning and Control 83 5.1 BENEFITS OF BETTER OPERATIONS PLANNING AND CONTROL The benefits of a better OPC are summarized in three groups as follows: (i) Benefits to Consumers/Investors. Better planning leads to increased productivity in the firm, efficient deliveries of the products at proper time, more products available to the consumers at cheaper price, and better quality. This means more values for the consumers’ money and more satisfaction from the products. This also means lots of profit margin to the investors who in turn can recycle more money back to the production system, which will improve the efficiency and productivity of the plant, and thus the cycle may go on. (ii) Benefits to Producers, Employees, Community and Share-holders. Better planning means that the firm can earn more money and in turn can pay better wages to its employees. There will not be any interrupted employment as it was in older days, when there used to be none or very little scientific planning. This will lead to job security, improved working conditions and thus increased satisfaction among the employees. This will also keep the employees highly motivated for more productive work. To the investors or the share-holders there is a security of money and an adequate return in the form of dividends. The Government may get lots of revenue by way of taxes and the community may get more economic and social stability, better infrastructure. (iii) Benefits to The Nation. The Nation gains economic, political and social stability, a better image on the global front, and increased say in the global policy. It also brings security and prosperity to the nation. 5.2 MAIN FUNCTIONS OF OPC The following are the key functions of Operations Planning and Control: (a) Release orders to the system in accordance with the priority plan. Priority means control over the status of jobs and work activities by specifying the order in which materials or jobs are assigned to work centers. (b) Assign jobs to specific work centers (including machine loading, or shop loading). These activities are also called ‘short-run capacity planning’. (c) Provide sequencing priorities to specify the order in which jobs are to be processed. This function may also include the dispatching function, which is the actual authorization for the work to begin. (d) Control the manufacturing lead time by tracking and expediting jobs if required. (e) Monitor the priority status of jobs via summary, scrap, rework, and other reports. (f) Monitor the capacity status of facilities via input/output reports of workload versus capacity. The input/output controls are also referred to as ‘short-run capacity control’. The sequencing, tracking, expediting, and status control activities mentioned in (c, d, e, and f) are popularly associated with the term shop floor controls [Joseph G. Monks]. Different techniques (such as: graphical, charting, computer algorithms) have been developed to help accomplish the above functions. Some of these techniques will be discussed later in this chapter. 5.2.1 SOME SPECIFIC ACTIVITIES OF OPC Typical activities in OPC are to • Forecast the demand for an existing product and find out the demand of a new product. Also estimate in advance the cost of a new product.
Slide 99: 84 A Modern Approach to Operations Management • Plan for capacity required to meet production needs. Ensure utilization of capacity, equipment and other facilities. • Schedule production activities with respect to the resources like labor, machines, working hours, etc. Fix the starting and finishing dates for each item. • Plan for materials (to be available in right time and in right quantity). Maintain appropriate inventories in the correct location. • Prepare route sheet, and schedules for production and machine loading. • Issue orders for various activities to be performed. • Simplify the activities and standardize the methods. • Track materials, labor, machines, customer orders and other resources. Direct and coordinate the company’s resources towards the achievement of desired goals in the most efficient manner. • Communicate with customers and suppliers on specific issues. Respond when things go wrong and unexpected problems arrive. • Meet customers’ requirements in a dynamic environment. • Give production orders to shops, and • Follow up the progress of products according to orders. 5.3 DETAILED FUNCTIONS OF OPC These are being discussed in a detailed manner under the following titles. These functions consist of the following: Planning, Routing, Scheduling, Dispatching, Follow up, and Inspection. 5.3.1 PLANNING PHASES Planning is affected by type of product - larger or smaller size, seasonal, analytical or synthetic, type of manufacturing systems - continuous, job shop, or batch production. Planning phase consists of the following: • Investigation about the complete details and requirements of the product to be manufactured. • Estimation of future demand (forecasting) • Planning the design, quality and quantity of the product to be manufactured, and the sequence of operations • Determination of material requirement, its quantity and quality, equipment and its capacity, manpower need, and transportation needs • Detailed drawing of components and their assemblies • Information about the stores and delivery times • Information about the equipment, their capacity and specifications • Information regarding standard times for the product • Information about the market conditions • Type of workers employed and their salaries 5.3.2 ROUTING OR SEQUENCING Sequencing procedures seek to determine the best order for processing a set of jobs through a set of facilities. Two types of problems can be identified. First, the static case, in which all jobs to be processed
Slide 100: Operations Planning and Control 85 are known and are available, and in which no additional jobs arrive in the queue during the exercise. Second, the dynamic case, which allows for the continuous arrival of jobs in the queue. Associated with these two cases are certain objectives. In the static case the problem is merely to order a given queue of jobs through a given numbers of facilities, each job passing through the facilities in the required order and spending the necessary amount of time at each. The objective in such a case is usually to minimize the total time required to process all jobs: the throughput time. In the dynamic case the objective might be to minimize facility idle time, to minimize work in progress or to achieve the required completion or delivery dates for each job. Sequencing procedures are relevant primarily for static cases. Several simple techniques have been developed for solving simple sequencing problems, for example the sequencing of jobs through two facilities, where each job must visit each facility in the same order. Fairly complex mathematical procedures are available to deal with more realistic problems, but in all cases either a static case is assumed or some other simplifying assumptions are made. Route or sequencing depends on the nature and type of industries as discussed below: 5.3.2.1 Continuous Industry In this type of industry, once the route is decided in the beginning, generally no further control over the route is needed. The raw material enters the plant, moves through different processes automatically till it gets final shape, e.g. soft drink bottling plant, brewery, food processing unit, etc. 5.3.2.2 Assembly Industry Such industries need various components to be assembled at a particular time. So, it is necessary that no component should fail to reach at the proper time and proper place in required quantity, otherwise the production line will be held up, resulting in wastage of time and production delay (e.g. assembly of bike, scooter, car, radio, type writer, watch, etc). If all batches visit the same sequence of workstations, the system is called a flow shop. In these industries much attention is paid for routing. A work-flow sheet for every component is prepared which gives full information about the processes, machines and the sequence in which parts will reach at the particular place and time. This type of routing needs a good technical knowledge, so the staff of the production control department must be qualified and experienced one. 5.3.2.3 Job-shop Industry This is also called sequencing and scheduling situation with many products. The general job shop problem is to schedule production times for N jobs on M machines. At time 0, we have a set of N jobs. For each job we have knowledge of the sequence of machines required by the job and the processing time on each of those machines. Due dates may also be known. The objective may be to minimize the makespan for completion of all jobs, minimizing the number of tardy jobs or average tardiness, minimizing the average flow time, or achieving some weighted combination of these criteria. This problem is very complex and difficult to solve. On each of the M machines there are N! possible job orderings making a total of (N!)M possible solutions. For just 10 jobs on 5 machines there are over 6x1031 choices. Some techniques of optimization like Dynamic programming, and Branch and bound have been attempted to do scheduling in random or job shop environment. However, we will try to look at some other options with some examples. Since such industries always handle different types of products, so after receiving the manufacturing orders, the planning dept has to prepare each time the detailed drawing and planning. This will indicate the proper sequence of routes for the job. In a job shop, each part type has its own
Slide 101: 86 A Modern Approach to Operations Management route. These individual routes may be carefully planned by an experienced process planner. So, in such industries the PPC dept should be an expert in massive planning work. Because of the variety of product requirements, job shops must be designed for higher flexibility. Batches must be free to move between any pair of workstations, and normally should be processed in any order. Individual workstations must be capable of performing a wide variety of tasks. Expertise should be process related rather than product related. Job shops tend to be based on process layout. It is observed that in a job shop, jobs spend 95 percent of their time in nonproductive activity. Much of this time is spent waiting in the queue. The remaining 5 percent is divided between lot setup and processing. Many facilities do not produce high enough volumes of a particular parts to justify products layout. Random batch arrival rates and processing times mean variability in resource requirements through time. The complexities of scheduling and engineering change orders in this environment aggravate the problem. One solution could be to use the group technology (GT) approach to classify product similarities that will allow medium volume/variety facilities to implement multiple product layouts. However, this approach will not be of much use in case of highly customized job shop, where each customer needs a specific feature in the product. Thus, even though the job shop production system is less efficient, it has a place in the existing environment. 5.3.3 LOADING OR ASSIGNMENT It means assignment of job to a facility, viz: machine, men, dept, etc. Assigning a subject to a teacher is loading. Loading should be done at the higher level. Frequently, when attempting to decide how orders are to be scheduled onto available facilities, one is faced with various alternative solutions. For example, many different facilities may be capable of performing the operations required on one customer or item. Operations management must then decide which jobs are to be scheduled onto which facilities in order to achieve some objective, such as minimum cost or minimum throughput time. One simple, rapid, but approximate method of facility/job assignment is best described by means of an example shown in Figure 5.1. Week Number 11 12 13 14 15 16 17 18 19 20 Scheduling Engineering release Procurement Receipt of materials Assembly of tools Fabrication of body Assembly Inspection and shipment Week Number Work 22 Center 23 24 2 4 5 7 (a) (b) Figure 5.1 Example 5.1. A company must complete five orders during a particular period. Each order consists of several identical products and each can be made on one of several facilities. Table-5.1 gives the operation time for each product on each of the available facilities. The available capacity for these facilities for the period in question is: A = 100 hours, B = 80 hours, and C = 150 hours.
Slide 102: Operations Planning and Control 87 Table 5.1. Operation Time Per Item on Each facility Order No (i) 1 2 3 4 5 Capacity (hr) % use No. of Items per order, Qi 30 25 45 15 10 Operation time per item on facility j (hours) A 5.0 1.5 2.0 3.0 4.0 OPT 150 37.5 90 J3 45 40 100 90 Ij 1.0 0 0 0.2 1.0 B 4.0 2.5 4.0 2.5 3.5 OPT 120 62.5 J2 180 37.5 35 80 78 Ij 0.60 0.67 1.00 0 0.75 C 2.5 4.0 4.5 3.5 2.0 OPT 75 J1 100 202.5 52.5 J4 20 J5 150 98 Ij 0 1.67 1.25 0.40 0 OPT—Order Processing Time (hour) The index number for a facility is a measure of the cost disadvantage of using that facility for processing, and is obtained by using this formula: Ij = (Xij – Ximin) / Ximin where Ij = Index number for facility j Xij = Operation time for item i on facility j Ximin = Minimum operation time for item i For order 1: IA = (5.0 – 2.5)/2.5 = 1.0 IB = (4.0 – 2.5)/2.5 = 0.6 IC = (2.5 – 2.5)/2.5 = 0 Table 5.2 shows the index numbers for all facilities and orders. Using Table 5.2 and remembering that the index number is a measure of the cost disadvantage of using that facility, we can now allocate orders to facilities. • The best facility for order 1 is C (IC = 0); the processing time for that order (75 hours) is less than the available capacity. We can therefore schedule the processing of this order on this facility. • Facility A is the best facility for order 2, but also the best for order 3. Both cannot be accommodated because of limitations on available capacity, so we must consider the possibility of allocating one of the orders to another facility. The next best facility for order 2 is facility B (IB = 0.67) and for order 3 the next best facility is also facility B (IB = 1 ). Because the cost disadvantage on B is less for order 2, allocate order 2 to B and 3 to A as shown in the table. • The best facility for order 4 is B but there is now insufficient capacity available on this facility. The alternatives now are to reallocate order 2 to another facility or to allocate order 4 elsewhere. In the circumstances it is better to allocate order 4 to facility C. • Finally order 5 can be allocated to its best facility, namely, facility C. Example 5.3. Suppose there are three machines and 6 jobs need operation on them. All machines are capable of doing the operation but the time of operation varies from machine to machine. Assign the jobs so that (i) the overall operation time is minimum, (ii) the capacity of each machine is not exceeded.
Slide 103: 88 Table 5.2 Job no Machine-1 1 2 3 4 5 6 Capacity (hr) % Use 10 8 12 15 12 11 30 100 (30) J1 J2 J3 Ij 0 0 0 0 0 0 0 A Modern Approach to Operations Management Operation time on machine (hours) Machine-2 12 16 15 17 15 13 30 100 J6 (30) 46 J4 Ij 0.2 1.0 0.25 0.13 0.25 0.18 30 (14) Machine-3 15 10 17 20 14 J5 Ij .50 .25 .42 .33 .16 .36 The solution is superimposed on the Table 5.2. Index no = (Time for non-optimal machine)/Time for the best machine Example 5.4. A piece of mining equipment requires the manufacturing times shown in Table 5.3. Each of the activities must be done sequentially, except that steel fabrication can begin 2 weeks after purchasing begins, and the hydraulics and electrical activities can be done concurrently. Construct a Gantt chart for this job. Table 5.3 Activity Engineering Purchasing Steel fabrication Hydraulics Weeks 3 3 1 2 Activity Electrical Control Field test Packaging Weeks 4 1 2 1 Solution: The Gantt Chart is drawn in Table 5.4. The chart shows the different activities along with their respective durations. Table 5.4 Week Number Engineering Purchasing Steel fabrication Hydraulic Electrical Control Field test Packaging 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Slide 104: Operations Planning and Control 89 5.3.4 SCHEDULING It is the time phase of loading. It is assignment of job to a facility specifying the particular sequence of the work and the time of actual performance. Examples of scheduling include: railway time-table, examination schedule, the time table for teaching various subjects. Scheduling should be done at relatively lower level of the organization. Scheduling activities are highly dependent on the type of the production system and the output volume delivered by the system. Scheduling activities differ in (a) High-volume system (b) Intermediate-volume system, and (c) Low-volume Systems High-Volume (flow) Systems They make use of specialized equipment that routes work on a continuous basis through the same fixed path of operations, generally at a rapid rate. The problems of order release, dispatching, and monitoring are less complex than in low-volume, make-to-order systems. However, material flows must be well coordinated, inventories carefully controlled, and extra care taken to avoid equipment breakdowns, material shortages, etc. to avoid production-line downtime. Intermediate-volume (flow and batch) Systems They utilize a mixture of equipment and similar processes to produce an intermittent flow of similar products on the same facilities. The sequencing of jobs and production-run lengths are of significant concern to schedulers, as they attempt to balance the costs of changeover time against those of inventory accumulations. Low-Volume (batch or single job) Systems They use general-purpose equipment that must route orders individually through a unique combination of work centers. The variable work-flow paths and processing time generates queues, work-in-process inventories, and capacity utilization concerns that can require more day-to-day attention than in the high- or intermediate-volume systems. Figure 5.2 gives a summary of some of the important characteristics of high-, intermediate-, and low-volume systems. There may be some overlapping in classifications. For example, some intermittent operations are much like job shops, whereas some low-volume operations are done in batches. And job shops often exist within continuous systems. The table also gives some comparative data for projects.
Slide 105: 90 High Volume Type of prduction system Continuous (flow operations) A Modern Approach to Operations Management Intermediate Volume Intermittent (flow and batch operations) · Mixture of equipment · Similar sequence for each batch Low Volume Job Shop (batch or single jobs) · General-purpose equipment · Unique sequence for each job Project (single jobs) · Sepecialized Key characteristics equipment · Same sequence of operations unless guided by microprocessors and robots Design concerns · Line balancing · Changeover time and cost Operational concerns · Mixture of equipment Unique sequence and location for each job · Line and workermachine balance · Changeover time and cost · Worker-machine balance · Capacity utilization · Job sequencing · Work-center loading · Work flow and work in process · Allocating resources to minimize time and cost · Meeting time schedule · Meeting budgeted costs · Resource utilization · Material · Material and shortages equipment · Equipment problems · Set-up costs breakdowns · Quality problems and run lengths · Product mix · Inventory and volume accumulations (run-out times) Figure 5.2. Characteristics of Scheduling Systems. 5.3.4.1 Scheduling Strategies Scheduling Strategies vary among firms and range from very detailed scheduling to no scheduling at all. A cumulative schedule of total workload is useful for long-range planning of approximate capacity needs. However, detailed scheduling of specific jobs on specific equipment at times far in future is often impractical—because of inevitable changes. For continuous systems, detailed schedules (production rates) can often be firmed as the master schedule is implemented. For job shop operations, schedules may be planned based on the estimated labor and equipment (standard hour) requirements per week at key work centers. When detailed scheduling is desirable, capacity is sometimes allocated to specific jobs as late as a week, or a few days, before the actual work is to be performed. One of the goals of agile manufacturing activities is to enhance the system’s ability to respond very quickly to such customer needs. However, detailed scheduling is not always used; some firms simply rely on priority decision rules like first come, first served. Order Release Order release converts a need from a planned-order status to a real order in the shop or with a vendor by assigning it either a shop order or purchase order number. Well-designed scheduling and control systems release work at a reasonable rate that keeps unnecessary backlogs from the production floor. Releasing
Slide 106: Operations Planning and Control 91 all available jobs as soon as they are received from customers is a common cause of increased manufacturing lead times and excess work in process (WIP). Figure 5.3 illustrates how the order release function creates a scheduled receipt. As the shop day and current calendar day coincide, the plannedorder release takes place. The order quantity is deleted (from the MRP planned-order release row), and a shop order for that amount is added to the dispatch list, along with a start and due date priority. The order quantity is then reentered (on the MRP form) as a scheduled receipt on the listed due date. 1 Weeks Part M30 LT = 2 weeks Shop day 205 Gross requirements Receipts On hand at end of period Planned-order release 100 ORDER RELEASE 100 2 3 4 220 210 215 1 Weeks Part J27 LT = 1 week Shop day 205 Gross requirements Receipts On hand at end of period Planned-order release 300 ORDER RELEASE 2 3 4 220 210 215 300 DISPATCH LIST: WORK CENTER 7 PART NO J27 M30 LOT SIZE 300 100 DATE START DUE 205 207 210 215 Figure 5.3. Relationship between planned-order releases and dispatch list. 5.3.4.2 Techniques of Scheduling (a) Master Scheduling (MS): It shows the dates on which important production items are to be completed. It’s a weekly or monthly break-up of the production requirements for each product. Whenever any order is received, it is accommodated first in the MS considering the availability of the machine and labor. It helps production manager for advance planning & to have check over the production rate and efficiency.
Slide 107: 92 A Modern Approach to Operations Management (b) Shop Manufacturing Schedule: After preparing the MS, shops schedules (SS) are prepared. It assigns a definite period of time to a particular shop for manufacturing products in required quantity. It shows how many products are to be made, and on what day or week. (c) Backward or Reverse Scheduling: External due date considerations will directly influence activity scheduling in certain structures. The approach adopted in scheduling activities in such cases will often involve a form of reverse scheduling with the use of bar or Gantt charts. A major problem with such reverse or ‘due date’ scheduling is in estimating the total time to be allowed for each operation, in particular the time to be allowed for waiting or queuing at facilities. Some queuing of jobs (whether items or customers) before facilities is often desirable since, where processing times on facilities are uncertain, high utilization is achieved only by the provision of such queues. Operation times are often available, but queuing times are rarely known initially, The only realistic way in which queuing allowances can be obtained is by experience. Experienced planners will schedule operations, making allowances which they know from past performances to be correct. Such allowances may vary from 50 per cent to 2000 per cent of operation times and can be obtained empirically or by analysis of the progress of previous jobs. It is normally sufficient to obtain and use allowances for groups of similar facilities or for particular departments, since delays depend not so much on the nature of the job, as on the amount of work passing through the departments and the nature of the facilities. Operations schedules of this type are usually depicted on Gantt or bar charts. The advantage of this type of presentation is that the load on any facility or any department is clear at a glance, and available or spare capacity is easily identified. The major disadvantage is that the dependencies between operations are not shown and, consequently, any readjustment of such schedules necessitates reference back to operation planning documents. Notice that, in scheduling the processing of items, total throughput time can be minimized by the batching of similar items to save set-up time, inspection time, etc. (d) Forward Scheduling: For a manufacturing or supply organization a forward scheduling procedure will in fact be the opposite of that described above. This approach will be particularly relevant where scheduling is undertaken on an internally oriented basis and the objective is to determine the date or times for subsequent activities, given the times loran earlier activity, e.g. a starting time. In the case of supply or transport organizations, the objective will be to schedule forward from a given start date, where that start date will often be the customer due date, e.g. the date at which the customer arrives into the system. In these circumstances, therefore, forward scheduling will be an appropriate method for dealing with externally oriented scheduling activities. Example 5.5. A job is due to be delivered at the end of 12th week. It requires a lead time of 2 weeks for material acquisition, 1 week of run time for operation-1, 2 weeks for operation-2, and 1 week for final assembly. Allow 1 week of transit time prior to each operation. Illustrate the completion schedule under (a) forward, and (b) backward scheduling methods. Solution: The solution is shown in Figure 5.4.
Slide 108: Operations Planning and Control FORWARD SCHEDULING Start by scheduling raw material and work Obtain raw material Operation 1 Operation 2 Final assembly Required due date 93 Time period 1 2 3 4 5 6 7 8 9 10 11 12 Obtain raw material Operation 1 Operation 2 Final assembly BACKWARD SCHEDULING Start by schedudling due date required and work Today’s date Operation time Transit or queue time Figure 5.4. Forward and Backward Scheduling. (e) Optimized Production Technique (OPT): OPT was developed in Israel. It recognizes the existence of bottlenecks through which the flow gets restricted. It consists of modules that contain data on products, customer orders, work center capacities, etc., as well as algorithms to do the actual scheduling. A key feature of the program is to simulate the load on the system, identify bottleneck (as well as other) operations, and develop alternative production schedule. OPT is guided by the following rules: • Balance flow, not capacity. • The level of utilization of a non-bottleneck is not determined by its own potential but some other constraint in the system. • An hour lost at a bottle-neck is an hour lost for the total system. • An hour saved at a non-bottle-neck is a mirage. • Bottlenecks govern both throughput and inventories. • The transfer batch may not, and often should not , be equal to the process batch. • The process batch should be variable, not fixed. • Move material as quickly as possible through the non-bottleneck work center till it reaches the bottle-necks, where the work is scheduled for maximum efficiency (large batches), thereafter the work moves faster. • Batch is of two types: transfer batch should be as small as possible (ideally 1), and the Process batch is larger. OPT has some similarities with materials requirement planning (MRP). It can be considered an extension of MRP: MRP can be used to form the basis of a system for computer-aided scheduling and inventory control, to which can be added the OPT approach for the identification of bottlenecks and the maximization of throughputs. 5.3.5 SEQUENCING AND DISPATCHING PHASE Sequencing activities are closely identified with detailed scheduling, as they specify the order in which jobs are to be processed at the various work centers. Dispatching is concerned with starting the
Slide 109: 94 A Modern Approach to Operations Management processes. It gives necessary authority to start a particular work, which has already been planned under ‘routing’ and ‘scheduling’. For starting the work, essential orders and instructions are given. Therefore, the definition of dispatching is ‘release of orders and instructions for starting of the production for an item in accordance with the ‘route sheet’ and schedule charts’. Dispatching functions include: • Implementing the schedule in a manner that retains any order priorities assigned at the planning phase. • Moving the required materials from stores to the machines, and from operation to operation. • Authorizing people to take work in hand as per schedule • Distributing machine loading and schedule charts, route sheet, and other instructions and forms. • Issuing inspection orders, stating the type of inspection at various stages. • Ordering tool-section to issue tools, jigs and fixtures. 5.3.5.1 Dispatching or Priority Decision Rules Job shops generally have many jobs waiting to be processed. The principal method of job dispatching is by means of priority rules, which are simplified guidelines (heuristics) to determine the sequence in which jobs will be processed. The use of priority rule dispatching is an attempt to formalize the decisions of the experienced human dispatcher. Most of the simple priority rules that have been suggested are listed in Table 5.6. Some of the rules used job assignment are: first come, first served (FCFS), earliest due date (EDD), longest processing time (LPT), and preferred customer order (PCO). These rules can be classified as: Static or Dynamic. Static rules do not incorporate an updating feature. They have priority indices that stay constant as jobs travel through the plant, whereas dynamic rules change with time and queue characteristics. Table 5.6. Standard Dispatching Rules Rule SPT EDD FCFS FISFS S/RO Covert LTWK LWKR MOPNR Least Total Work Least Work Remaining Most Operations Remaining Full form Shortest processing time Earlier Due Date First Come, First Served First in System, First Served Slack per Remaining Operation Description of the rule Select a job with minimum processing time. Select a job which is due first. Select a job that has been in workstations queue the longest. Select a job that has been on the shop floor the longest. Select a job with the smallest ratio of slack to operations remaining to be performed. Order jobs based on ratio-based priority to processing time. Select a job with smallest total processing time (SPT). Select a job with smallest total processing time for unfinished operations. Select a job with the most operations remaining in its processing sequence.
Slide 110: Operations Planning and Control 95 Select a job with the most total processing time remaining. Select a job at random. Select a job whose subsequent machine currently has the shortest queue. MWKR RANDOM WINQ Most Work Remaining Random Work in Next Queue LTWK and EDD (assuming due dates are fixed) are static rules. LWKR is dynamic, since the remaining processing time decreases as the job progresses through the shop, i.e. through time. Slackbased rules are also dynamic. Slack = due date – current time – remaining work Rules can also be classified as myopic or global. Myopic rules look only at the individual machine, whereas global rules look at the entire shop. SPT is myopic whereas WINQ is global. 1. Job slack (S): This is the amount of contingency or free time, over and above the expected processing time, available before the job is completed at a predetermined date (to), i.e. S = to – tl – Σaj , where ti = present date (e.g. day or week number, where ti < to), Σaj = sum of remaining processing times. Where delays are associated with each operation, e.g. delays caused by inter-facility transport, this rule is less suitable, hence the following rule may be used. 2. Job slack per operation, i.e. S/N, where N = number of remaining operations. Therefore where S is the same for two or more jobs, the job having the most remaining operations is processed first. 3. Job slack ratio, or the ratio of the remaining slack time to the total remaining time, i.e. S/(t0 – t1). In all the above cases, where the priority index is negative the job cannot be completed by the requisite date. The rule will therefore be to process first those jobs having negative indices. 4. Shortest imminent operation (SIO), i.e. process first the job with the shortest processing times. 5. Longest imminent operation (LIO). This is the converse of SIO. 6. Scheduled start date. This is perhaps the most frequently used rule. The date at which operations must be started in order that a job will meet a required completion date is calculated, usually by employing reverse scheduling from the completion date, e.g. Xi = t0 – Σaj or, Xi = to – Σ(ai + fi) where, Xi = scheduled start date for an operation, fi = delay or contingency allowance. Usually some other rule is also used, e.g. first come, first served, to decide priorities between jobs having equal Xi values. 7. Earliest due date, i.e. process first the job required first. 8. Subsequent processing times. Process first the job that has the longest remaining process times, i.e. Σai or, in modified form, Σ(ai + .fi).
Slide 111: 96 A Modern Approach to Operations Management 9. Value. To reduce work in progress inventory cost, process first the job which has the highest value. 10. Minimum total float. This rule is the one usually adopted when scheduling by network techniques. 11. Subsequent operation. Look ahead to see where the job will go after this operation has been completed and process first the job which goes to a ‘critical’ queue, that is a facility having a small queue of available work, thus minimizing the possibility of facility idle time. 12. First come, first served (FCFS). 13. Random (e.g. in order of job number, etc.). Rules 12 and 13 are random since, unlike the others, neither one depends directly on job characteristics such as length of operation or value. Priority rules can be classified further as follows: 1. Local rules depend solely on data relating to jobs in the queue at any particular facility. 2. General rules depend on data relating to jobs in the queue at any particular facility and/or data for jobs in queues at other facilities. Local rules, because of the smaller amount of information used, are easier and cheaper to calculate than general (sometimes called global) rules. All of the above rules with the exception of rule 11 are local rules. One further classification of rules is as follows: • Static rules are those in which the priority index for a job does not change with the passage of time, during waiting in anyone queue. • Dynamic rules are those in which the priority index IS a function of the present time. Rules 4, 5, 6, 7, 8, 9, 10, 11, 12 and 13 are all static, whereas the remainders are dynamic. Perhaps the most effective rule according to present research is the SIO rule, and, lore particularly, the various extensions of this rule. Massive simulation studies have shown that, of all ‘local’ rules, those based on the SIO rule are perhaps the most effective, certainly when considered against criteria such as minimizing the number of Jobs in the system, the mean of the ‘completion distribution’ and the throughput time. be SIO rule appears to be particularly effective in reducing throughput time, the ‘truncated SIO’ and the ‘two-class SIO’ rules being perhaps the most effective derivatives, having the additional advantage of reducing throughput time variance and lateness. The ‘first come, first served’ priority rule has been shown to be particularly beneficial in reducing average lateness, whereas the ‘scheduled start date and total float’ rule has been proved effective where jobs are of the network type. Example 5.6. Let the current time is 10. Machine B has just finished a job, and it is time to select its next job. Table 5.7 provides information on the four jobs available. For each of the dispatching rules discussed in Table 5.6, determine the corresponding sequence.
Slide 112: Operations Planning and Control 97 Table 5.7. Available Jobs for Example 5.5 Operation (machine, pij) Job 1 2 3 4 Arrival to system 10 0 0 0 Arrival at B 10 5 9 8 Due Date 30 20 10 25 1 (B, 5) (A, 5) (C, 3) (E, 6) 2 (A, 1) (B, 3) (D, 2) (B, 4) 3 (D, 6) (C, 2) (B, 2) (C, 4) Solution: pij = processing time for job i on machine j SPT: Looking at machine B, we find that jobs (1, 2, 3, 4) have processing times of (5, 3, 2, 4). Placing jobs in increasing order of processing time results in the job sequence {3, 2, 4, 1}. So load job 3 on machine B. EDD: Jobs (1, 2, 3, 4) have due dates (30, 20, 10, 25) respectively. Arranging in increasing order of the due dates, we have the job sequence (3, 2, 4, 1), which means job 3 should be loaded next on machine B. FCFS: Jobs arrived at machine B at times (10, 5, 9, 8). Placing earliest arrivals first, we obtain the job sequence (2, 3, 4, 1). Example 5.7. (i) Sequence the jobs given in Table 5.7 by the following priority rules: (a) FCFS (First Come First Served), (b) EDD (Earliest Due Date), (c) LS (Least Slack), (d) SPT (Shortest Processing Time), and (e) LPT (Longest Processing Time). (ii) Compare the effectiveness of FCFS and SPT rules in terms of (a) Average completion time, (b) Average job lateness, (c) Average no. of jobs at work centers Table 5.7a Job A B C D E Due dates (DD) (days) 8 3 7 9 6 Process time (PT) (days) 7 4 5 2 6 LS = DD – PT 1 –1 2 7 0 Solution: The solution is shown in Tables 5.7a, 5.7b, and 5.7c below. Tables 5.7b Job 1st 2nd 3rd 4th 5th FCFS A=8 B=3 C=7 D=9 E=6 EDD B=3 E=6 C=7 A=8 D=9 LS = EDD – PT B = -1 E=0 A=1 C=2 D=7 SPT D=2 B=4 C=5 E=6 A=7 LPT A=7 E=6 C=5 B=4 D=2
Slide 113: 98 A Modern Approach to Operations Management Tables 5.7c. Sequencing of Jobs as per Different Rules FCFS Priority rule Job sequence PT Flow time (FT) = cumulative time 7 11 16 18 24 76 Due date Days late Job (DD) = FT – DD sequence PT Flow time Due date Days late (FT) = (DD) = FT – DD A B C D E 7 4 5 2 6 24 8 3 7 9 6 0 8 9 9 18 44 D B C E A 2 4 5 6 7 24 2 6 11 17 24 60 9 3 7 6 8 0 3 6 11 16 36 Tables 5.7d. Effectiveness of FCFS and SPT Average completion time (days) FCFS SPT 76/5 = 15.2 60/5 = 12 Average lateness (days) 44/5 = 5.8 36/5 = 7.2 Average no. of jobs at WC = ΣFT/ΣPT 76/24 = 3.2 jobs 60/24 = 2.5 jobs Remark SPT is better than FCFS 5.3.5.2 Forms Used in Dispatching Work orders: are issued to departments to commence the desired lot of products. Time card: is given to each operator in which the time taken by each operation and other necessary operations are given. Inspection tickets: are sent to the inspection department, which shows the quality of the work required, and stages at which inspection is to be carried out. Afterwards these are returned with the inspection report and quantity rejected. Move tickets: are used for authorizing the movement of the material from store to shops, and from operation to operation. Tool and equipment tickets: authorizes the tool department that new tools, jigs, fixtures and other equipment may be issued to shops. 5.3.6 CONTROLLING OR FOLLOW-UP PHASE After dispatching production orders to various shops, it is necessary to regulate the progress of job through various processes. For this purpose, a follow up section is formed. The function of follow-up section is to report daily the progress of work in each shop in a prescribed format and to investigate the causes of deviation from the planned performance. This section sees that production is being performed as per schedule and tries to expedite it. 5.3.6.1 Purpose of Controlling Material: should reach the shop in required time so that production could be started as per schedule. Job progress: the follow up section sees that a particular product is passing through all its operation from raw material to final shape as per schedule.
Slide 114: Operations Planning and Control 99 Assembly: follow up section sees that all the parts should be ready for assembly purpose in actual quantities at required time. Causes of delay includes: • Error in routing, scheduling and dispatching • Shortage and delay of material supply • Equipment breakdown • Lack of proper tools, gauges, jigs and fixtures, etc. UNSOLVED PROBLEMS 1. Shown below are due dates (number of days until due) and process time remaining (number of days) for five jobs that were assigned a letter as they arrived. Sequence the jobs by priority rules: (i) FCFS, (ii) EDD (earliest due date), (iii) LS (least slack), (iv) SPT (shortest processing time), and (v) LPT (longest processing time). Job A B C D E Due date (days) 9 8 5 7 3 Process time (days) 6 5 8 9 7
Slide 115: 6 Inventory Control 6.0 INTRODUCTION An inventory is a list of items or goods. Inventory and stock control are used interchangeably in business circle. There are various types of inventory depending upon the context or situations. For example, inventory in a library means the list of books, journals, periodicals, furniture, fans, etc. A typical firm carries different kinds of inventories such as: raw materials and purchased parts; partially completed goods called work-in-process (WIP); finished-goods or merchandise in retail stores; replacement parts, tools, and supplies; and goods-in-transit to warehouses or customers (called pipeline inventory). Generally a firm has about 30 percent of its current assets and as much as 90 percent of its working capital invested in inventory. Because inventories may represent a significant portion of total assets, a reduction of inventories can result in a significant increase in return on investment (ROI)—a ratio of profit after taxes to total assets. In this chapter we will discuss the purpose of inventories, basic requirements of inventory management, different models of inventory control, and other related issues. 6.1 PURPOSE OF INVENTORIES Before discussing different issues related to inventory control, we should discuss: what is the purpose of holding stocks in the first place? Inventories serve the following purposes: To meet anticipated demand. These inventories are referred to as anticipation stocks because they are held to satisfy expected demand. Examples of this type of demand are stereo systems, tools, or clothing. To smooth production requirements. Firms that experience seasonal patterns in demand often build up inventories during off-season periods to meet overly high requirements during certain seasonal periods. These inventories are aptly named seasonal inventories. Companies that process fresh fruits and vegetables deal with seasonal inventories. So do stores that sell greeting cards, skis, snowmobiles, or Christmas trees. To decouple components of the production-distribution system. The inventory buffers permit other operations to continue temporarily while machine breakdowns are resolved. Similarly, buffers of raw materials are used to insulate production from disruptions in deliveries from suppliers. Finished good inventories are used to buffer sales operations from manufacturing disruptions. By recognizing 100
Slide 116: Inventory Control 101 the cost and space needed, companies start to realize the elimination of disruptions can greatly decrease the need for the inventory buffers decoupling operations. To protect against stock-outs. Delayed deliveries and unexpected increases in demand increase the risk of shortages. Delay can occur because of weather conditions, traffic congestion, supplier stock-outs, deliveries of wrong materials, quality problems, and so on. The risk of shortage can be reduced by holding safety or buffer stock, which are stocks in excess of average demand to compensate for variability in demand and lead time. Lead time is the time elapsed between the placement of order and its delivery. To take advantage of order cycles. Inventory storage enables a firm to buy and produce in economic lot size in order to minimize purchasing and inventory costs without having to try to match purchase or production with demand requirements in the short run. This results in periodic orders, or order cycles. The resulting stock is known as cycle stock. In some cases, it is also practical or economical to group orders and/or to order at fixed intervals. To hedge against price increases or to take advantage of quantity discounts. Materials purchased in larger quantities may be cheaper due to discounts and lower transport cost. Paper work and inspection of incoming goods are often simplified when larger quantities are ordered. However, the downside to this is that a huge sum of money is tied up in dormant goods, more space is occupied, more material handling cost is involved, and losses due to deterioration and obsolescence can occur [Samuel Eilon]. To ensure against scarcity of materials and permit operations. Work-in-process and pipeline inventories allow the smooth operations throughout a production-distribution system. 6.2 OBJECTIVE OF INVENTORY MANAGEMENT The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs within reasonable limits. In this context, a decision maker must make two fundamental decisions: the timing of the order and size of orders (i.e., when to order and how much to order). The performance of inventory management can be measured in the following terms: Customer satisfaction: This is measured by the number and quantity of backorders and/or customer complaints. If the customers’ complaints are less then the customer satisfaction is high and vice-versa. Inventory turnover: This is the ratio of annual cost of goods sold to average inventory investment. It is a widely used measure. The turnover ratio indicates how many times a year the inventory is sold. The higher the ratio, the better, because that implies more efficient use of inventory. It can be used to compare companies in the same industry. Days of inventory on hand: The expected number of days of sales that can be supplied from existing inventory. A balance is desirable: a higher number of days might imply excess inventory, while a lower number might imply a risk of running out of stock. 6.2.1 REQUIREMENTS FOR EFFECTIVE INVENTORY MANAGEMENT These requirements are: • A system to keep track of the inventory on hand and on order. That is to find out how much we have, and how much we should have based on stock-level fluctuations, rate of demands, etc. Then take steps to close the gap between the two.
Slide 117: 102 A Modern Approach to Operations Management • A reliable forecast of demand that includes an indication of possible forecast error. • Knowledge of lead times and lead time variability. • Reasonable estimates of inventory holding costs, ordering costs, and shortage costs. • A classification system for inventory items. To answer these issues, we will discuss some common stock control systems in the subsequent sections. 6.2.2 INVENTORY COUNTING SYSTEMS Inventory counting systems can be periodic or perpetual. Under a periodic inventory system, a physical count of items in inventory is made at periodic intervals (e.g., weekly, monthly) in order to decide how much to order for each item. Examples are small retailers. This system allows placing orders for many items at the same time. However, there is a lack of control between reviews and there is a need to protect against shortage between review periods by carrying extra stock. 6.2.3 A PERPETUAL INVENTORY SYSTEM It is also known as a continual system which keeps track of removals from inventory on a continuous basis. When the amount on hand reaches a predefined minimum, a fixed quantity Q is ordered. The system provides continuous monitoring of inventory withdrawals and the setting of optimal order quantity. However, there is an added cost for record keeping and physical count is still needed to verify inventory records. Discrepancy could occur due to errors, pilferage, spoilage, and other factors. Examples are bank transactions, supermarkets, discount stores, and department stores. Perpetual systems range from a very simple one (e.g., two-bin system) to a very sophisticated one. 6.2.3.1 A Two-Bin System A two-bin system is a very elementary and most commonly used system. It is also called the min-max system. The items are divided into two bins: the first one is for satisfying the current demand, while the second one is to satisfy the demand during the replenishment period. Items are withdrawn from the first bin until its contents are exhausted. It is then time to reorder by using the order card placed at the bottom of the first bin. The second bin contains enough stock to satisfy expected demand until the order is filled, plus an extra cushion of stock that will reduce the chance of stock-out if the order is late or if usage is greater than expected. Bin-2 Bin-1 When the ordered batch arrives, the level of the second bin is restored to its original high value, and the balance is put in the first bin from which the current demand is fulfilled again. This division into bins may be either physical or just on the paper. Advantages: • It is simple, reliable, and easy to explain and operate, • There is no need to record each withdrawal from inventory. Disadvantages: • The reorder card may not be turned in for a variety of reasons (e.g., misplaced, the person responsible forgets to turn it in),
Slide 118: Inventory Control 103 • Absence of adequate data on stock levels and consumption rates. This affects the evaluation of batch sizes for orders. All these problems can be reduced by suitable classification of items into slow, medium, and fast moving. Perpetual systems can be either batch or on-line based. In batch systems, inventory records are collected periodically and entered into the system. In on-line system, the transactions are recorded immediately. The advantage of on-line systems is that they are always up-to-date. In batch systems, a sudden surge in demand could result in reducing the amount of inventory below the reorder point between the periodic read-ins. Frequent batch collections can reduce the problem. These days, most firms use computerized checkout systems that reads a universal product code (UPC), or bar code, printed on an item tag or on package. A typical UPC or bar code has 11 or 12 digits. A zero on the left identifies an item as a grocery item. The next five digits indicate the manufacturer. The last five digits identify the item. Small packaged items, like candy and gum, have six digits for identifying the item. Figure 6.1. Bar Code. Other usage of bar code includes the printout of price and quantity, part counting and monitoring, and for the automation of routing, scheduling, sorting, and packaging. 6.2.4 ORDERING CYCLE SYSTEM It is based on periodic reordering of all items. With every cycle the stock of each item is brought up to its level, which is dependent on the length of the cycle, the replenishment period, and the consumption rate. When the replenishment period and demand rate do not change, the reorder quantity obviously increases with the cycle time, so that short cycles are required if rapid turnover of stock is desirable [Samuel Eilon]. Advantages over Two Bin System • All orders for replenishment are issued at the same time. • Ordering mechanism is regular and not subject to sporadic arrivals of warning signals from the store. Disadvantage: • Usually more stock is held when this system is adopted than with the 2-bin system. Following variations of ordering cycle system are possible: (i) All items one cycle • All the items are replenished in every cycle. This is useful when the number of items is not too large, and the differences in demand are not very significant.
Slide 119: 104 A Modern Approach to Operations Management • However, in this system the average stock level tends to increase with the number of items. (ii) Multicycles • The items are divided into groups and each group has its own ordering cycle, independent of the other groups. The groups are formed either by selecting goods that to be ordered from the same vendor or by taking items with similar demand characteristics. • The system is adopted when the stores have to deal with a large number of items. 6.2.5 DEMAND FORECASTS AND LEAD-TIME INFORMATION Inventories are used to satisfy demand requirements, so it is essential to have reliable estimates of demand and the lead time (the time between submitting an order and receiving it). The greater the potential variability, the greater the need for additional stock to reduce the risk of shortage between deliveries. Knowledge of actual sales from point-of-sales (POS) systems can greatly enhance forecasting and inventory management in real time. 6.2.6 INVENTORY COST INFORMATION Three basic costs associated with inventory management are: holding or inventory carrying cost, ordering or set-up cost, and shortage cost. Holding or carrying costs relate to having the items physically in storage. Costs include the cost due to interest, insurance, taxes, depreciation, obsolescence, deterioration, spoilage, pilferage, breakage, and warehousing costs (heat, light, rent, security). They also include opportunity costs associated with having funds which could be used elsewhere tied up in inventory. Note that it is the variable portion of these costs that is pertinent. The significance of the various components of holding cost depends on the type of item involved, although taxes, interest, and insurance are generally based on the dollar value of the inventory. Items that are easily concealed (e.g., pocket cameras, transistor radios, calculators) or fairly expensive (cars, TVs) are prone to theft. Fresh seafood, vegetables, meats and poultry products, and baked goods are subject to rapid deterioration and spoilage. Dairy products, salad dressings, medications, batteries, and film also have limited shelf lives. Holding costs are stated in either of the two ways: as a percentage of unit price or as a dollar amount per unit. In any case, typical annual holding costs range from 20 percent to 40 percent of the value of an item. In other words, to hold a $100 item for one year could cost from $20 to $40. Ordering costs are the costs of ordering and receiving inventory. They are the costs that vary with the actual placement of an order. These include determining how much is needed, preparing invoices, shipping costs, inspecting goods upon arrival for quality and quantity, and moving the goods to temporary storage. Ordering costs are generally expressed as a fixed dollar amount per order, regardless of order size. When a firm produces its own inventory instead of ordering it from a supplier, the costs of machine setup (e.g., preparing equipment for the job by adjusting the machine, changing cutting tools) are analogous to ordering costs; that is, they are expressed as a fixed charge per production run or setup cost, regardless of the size of the run. Shortage costs result when demand exceeds the supply of inventory on hand. These costs can include the opportunity cost of not making a sale, loss of customer good will, late charges, and similar costs. Furthermore, if the shortage occurs in an item carried for internal use (e.g., to supply an assembly line), the cost of lost production or downtime is considered a shortage cost. Such cost can easily run
Slide 120: Inventory Control 105 into hundreds of dollars a minute or more. Shortage costs are sometimes difficult to measure, and they may be subjectively estimated. 6.3 TYPES OF INVENTORY CONTROL TECHNIQUES Inventory can be controlled by these two techniques: (a) Qualitative techniques, (b) Quantitative techniques. 6.3.1 QUALITATIVE TECHNIQUES They consist of selective control methods based on Pareto 80-20 principle, which states that there are a critical few and trivial many. According to this all the items of an industry are classified into some broad groups on certain basis and the attention is paid to their control accordingly. It is not practical to monitor inexpensive items with the same intensity of care as very expensive items. Some of the popular classifications selective control techniques are as follows: • ABC classification • FSN classification • VED classification 6.3.1.1 ABC classification ABC stands for ‘always better control’. The items on hand are classified into A, B, and C types on the basis of the value in terms of capital or annual dollar usage (i.e., dollar value per unit multiplied by annual usage rate), and then allocates control efforts accordingly. Thus, the items with high value and low volume are kept in A-type, items with low value and high volume are kept in C-type, and the items with moderate value and moderate volumes belong to the B-type. A-type items are given the maximum attention while ordering for purchase, and C-type the least. B-type gets the moderate attention. Typically, three classes of items are called: A (very important), B (moderately important), and C (least important). The actual number of categories varies from organization to organization, depending on the extent to which a firm wants to differentiate the control efforts. With three classes of items, A items generally account for about 15 to 20 percent of the number of items in inventory but about 60 to 70 percent of the dollar usage. At the other end of the scale, C items might account for about 60 percent of the number of items but only about 10 percent of the dollar usage of an inventory. The distribution of these three types are shown in Figure 6.2. High A Items Annual dollar volume of items B Items Low Few Number of items C Items Many Figure 6.2. Classification of Items.
Slide 121: 106 A Modern Approach to Operations Management A type items should receive close attention through frequent reviews of amounts on hand and control over withdrawals to make sure that customer service levels are attained. The C type items should receive lesser control (e.g. two-bin systems, bulk orders), and the B type items should have controls that lie between the two extremes. Example 6.1. ABC Analysis. A computer hardware company has organized its 10 items on an annual dollarvolume basis. Details like item numbers, their annual demand, unit cost, annual dollar volume, and percentage of the total represented by each item are shown in Table 6.1. Solution: The items are classified as A, B, and C In the Table 6.1 and the same is shown graphically in the accompanied figure. Table 6.1. ABC Analysis of 10 Items Item no. % of no. of items stocked (2) 20% Annual volume (Units) (3) 1000 500 30% 1550 350 1000 50% 600 2000 100 1200 250 8550 Unit cost ($) (4) 90.00 154.00 17.00 42.86 12.50 14.17 0.60 8.50 0.42 0.60 90,000 77,000 26,350 15,001 12,500 8,502 1,200 850 504 150 $232,057 38.8% 33.2% 11.3% 6.4% 5.4% 3.7% 0.5 % 0.4 % 0.2 % 0.1 % 100% 5% 23% 72% A A B B B C C C C C Annual $ volume = (3) × (4) % of annual Combined Dollar volume % Class (1) 1 2 3 4 5 6 7 8 9 10 ABC Curve: % of Items Vs % of Values 120 100 % of values 80 60 40 20 0 0 50 % of Items 100 150
Slide 122: Inventory Control 107 Note that C type items are not necessarily unimportant; incurring a stock-out of C items such as the nuts and bolts used to assemble manufactured goods can result in a costly shutdown of an assembly line. However, due to the low annual dollar volume of C items, there may not be much additional cost incurred by ordering larger quantities of some items, or ordering them a bit earlier. 6.3.1.2 FSN Classification In this method, the items are classified according to the rate of consumption. Thus, the materials can be fast (F), slow (S) and non-moving types (N). F-type materials get the maximum attention, and the Ntype the minimum for their control and procurement. Let us apply this concept in our kitchen as they say charity begins at home. Let the different items in our home be: rice, pulses, salt, sugar, tea, vegetables, fruits, medicine, cosmetics, shaving blades, wound plasters, and dry-fruits. According to FSN, they can be classified as F = Rice, pulse, salt, sugar, tea are consumed almost daily at relatively faster rate and they need more attention to avoid stock-out situation in the house specially if some unexpected guests happen to drop in from somewhere. S = Fruit, dry fruits are consumed at a moderate speed and need moderate attention. N = Medicine, shaving blades, wound plasters, cosmetics are consumed at a very negligible rate and need less attention. They can be bought once and can be consumed leisurely when need arises. The same concept can be extended to industrial or war situation. For example, the bullets are fast moving items but a nuclear bomb is almost a non-moving item. In fact it may never be used but it consumes lot of revenue. Such items are sometimes called insurance items as they ensure a kind of deterrent and may prevent a war between two nations just by their presence. 6.3.1.3 VED Classification The materials are classified according to its criticality in the production system. Thus, materials can be vital (V), essential (E) and desirable (D) types. Maximum attention is paid to the procurement and control of vital items and less to the desirable ones. It is so because the lack of vital items can bring the production of the plant down and the plant will run into losses. For example, based on VED classification, the 1000 items of a steel plant can be classified as V = 200—Much attention is given to the vital items. E = 300—Moderate attention is given to these items. D = 500—Less attention is given to these items. The three broad techniques discussed above can be extended to have the following classifications as shown in Tables 6.2a and 6.2b. Table 6.2a. Combination of ABC and FSN F A B C AF BF CF S AS BS CS N AN BN CN
Slide 123: 108 A Modern Approach to Operations Management Table 6.2b. Combination of part of Table 6.2a and VED V AF AS BF AFV ASV BFV E AFE ASE BFE D AFD ASD BFD The types shown in bold fonts need more attention than the others in the above two Tables. 6.3.2 QUANTITATIVE TECHNIQUES OR MODELS They can be split into two types depending on the demand rate and the nature of demand as shown in Table 6.3. • Deterministic models, and • Probabilistic or non-deterministic models. 6.3.2.1 Deterministic Models In this the demand of an item is known and fixed, but in probabilistic models the demand of an item is not known (stochastic). Under the deterministic situation, we have the following models of inventory control: Table 6.3. Types of Inventory Models DEMAND RATE Same for each period Known, constant NATURE OF DEMAND Random variable having probability distribution Static Deterministic Varies from one period to another Dynamic Deterministic Static Probabilistic Dynamic Probabilistic 6.3.2.1.1 Basic EOQ Model The materials can be either produced or purchased. In both situations, however, one needs to know the following: • How much to produce in one time? • How much to procure (order) in one time? The answer to this depends on the total-cost of production or total cost of purchase of items: • What are the cost of production or purchase them? There are three types of costs in purchasing: Material cost, Order placement cost or set up cost in production situation, Inventory carrying cost (it includes the cost of insurance, transportation, taxes, storage, obsolescence, etc ). In this basic model we have the situation where: The company orders from an outside supplier. The outside supplier delivers to the purchasing plant precisely the quantity it asks for; and it passes that stock onto its customers (either external customers, or internal customers within the same company (e.g. if ordering raw materials for use in the production process). This model makes the following assumptions:
Slide 124: Inventory Control 109 • Stock is used up at a constant rate (R units per year). • Fixed set-up cost Co for each order—often called the order cost. • No lead time between placing an order and arrival of the order (instantaneous replenishment). • Variable stock holding cost Ch per unit per year. • No safety stock is maintained. Then we need to decide Q, the amount to order each time, often called the economic order quantity (EOQ) or lot size. With these assumptions the graph of stock level over time takes the form shown in Figure 6.3. ABC Curve: % of Items Vs % of Values 120 100 % of values 80 60 40 20 0 0 50 % of Items Figure 6.3. Basic EOQ Model. 100 150 Consider drawing a horizontal line at Q/2 in the above diagram. If we were to draw this line then it is clear that the times when stock exceeds Q/2 are exactly balanced by the times when stock falls below Q/2. In other words we could equivalently regard the above diagram as representing a constant stock level of Q/2 over time. Hence we have: Annual holding cost = Ch(Q/2) (6.1) where Q/2 is the average (constant) inventory level Annual order cost = Co(R/Q) (6.2) where (R/Q) is the number of orders per year So total annual cost, TC = Ch(Q/2) + Co(R/Q) (6.3) Total annual cost is the function that we want to minimize by choosing an appropriate value of Q. Note here that, obviously, there is a purchase cost associated with the R units per year. However this is just a constant as R is fixed so we can ignore it here. The diagram in Figure 6.4 illustrates how these two components (annual holding cost and annual order cost) change as Q, the quantity ordered, changes. As Q increases holding cost increases but order
Slide 125: 110 A Modern Approach to Operations Management cost decreases. Hence the total annual cost curve is as shown below - somewhere on that curve lies a value of Q that corresponds to the minimum total cost. Total cost Cost Order cost Holding cost Order quantity Q Figure 6.4. Variation of Costs With Q. We can calculate exactly which value of Q corresponds to the minimum total cost by differentiating total cost with respect to Q and equating to zero. d(TC)/dQ = Ch/2 – CoR/Q² = 0 for minimization which gives Q² = 2CoR/Ch Hence the best value of Q (the amount to order = amount stocked) is given by Q = (2RCo/Ch)0.5 (6.4) and this is known as the Economic Order Quantity (EOQ) Comments This formula for the EOQ is believed to have been first derived in the early 1900’s and so EOQ dates from the beginnings of mass production/assembly line production. To get the total annual cost associated with the EOQ we have from Eq. 6.3 that Total annual cost = Ch(Q/2) + Co(R/Q) so putting Q = (2RCo/Ch)0.5 into this we get the total annual cost as TC = Ch((2RCo/Ch)0.5/2) + Co(R/(2RCo/Ch)0.5) = (RCo Ch/2)0.5 + (RCo Ch/2)0.5 TC = (2RCoCh)0.5 (6.5) 0.5 which means that when ordering the optimal (EOQ) Hence total annual cost is (2RCoCh) quantity we have that total cost is proportional to the square root of any of the factors (R, Co and Ch) involved. So, if we were to reduce Co by a factor of 4 we would reduce total cost by a factor of 2 (note the EOQ would change as well). This, in fact, is the basis of Just-in-Time (JIT), to reduce (continuously) Co and Ch so as to drive down total cost.
Slide 126: Inventory Control 111 To return to the issue of management costs being ignored for a moment the basic justification for this is that if we consider the total cost curve shown above, then assuming we are not operating a policy with a very low Q (JIT) or a very high Q—we could argue that the management costs are effectively fixed for a fairly wide range of Q values. If this is so then such costs would not influence the decision as to what order quantity Q to adopt. Moreover if we wanted to adopt a more quantitative approach we would need some function that captures the relationship between the management costs we incur and our order quantity Q—estimating this function would certainly be a non-trivial task. Example 6.2. A retailer expects to sell about 200 units of a product per year. The storage space taken up in his premises by one unit of this product cost at $20 per year. If the cost associated with ordering is $35 per order what is the economic order quantity given that interest rates are expected to remain close to 10% per year and the total cost of one unit is $100. Solution: We use the EOQ formula, EOQ = (2RCo/Ch)0.5 Here R = 200 units, Co = $ 35 and the holding cost Ch is given by 1600 1400 1200 1000 Total cost Cost Note: total cost curve usually flat near EOQ 800 600 400 200 0 0 5 10 15 20 Order quantity Q Order cost Holding cost 25 30 35 40 Figure 6.5. Variation of Costs With Q. Ch = $20 (direct storage cost per unit per year) + $100 × 0.10 (this term indicates the money interest lost if one unit sits in stock for one year) i.e. Ch = $30 per unit per year Hence EOQ = (2RCo/Ch)0.5 = (2 × 200 × 35/30)0.5 = 21.602 units But as we must order a whole number of units we have: EOQ = 22 We can illustrate this calculation by reference to the Fig - 6.5 which shows order cost, holding cost and total cost for this example. With this EOQ we can calculate our total annual cost from the equation Total annual cost = Ch(Q/2) + Co(R/Q) Hence for this example we have that Total annual cost = (30 × 22/2) + (35 × 200/22) = 330 + 318.2 = $ 648.2
Slide 127: 112 A Modern Approach to Operations Management Note: If we had used the exact Q value given by the EOQ formula (i.e. Q = 21.602) we would have had that the two terms relating to annual holding cost and annual order cost would have been exactly equal to each other i.e. holding cost = ordering cost at EOQ point (or, referring to the diagram above, the EOQ quantity is at the point associated with the Holding Cost curve and the Order Cost curve intersecting). i.e. (ChQ/2) = (CoR/Q) so that Q = (2RCo/Ch)0.5 In other words, as in fact might seem natural from the shape of the Holding Cost and Order Cost curves, the optimal order quantity coincides with the order quantity that exactly balances Holding Cost and Ordering Cost. Note however that this result only applies to certain simple situations. It is not true (in general) that the best order quantity corresponds to the quantity where holding cost and ordering cost are in balance. Note the appearance here of the figure of 20,000 relating to material cost. This is calculated from using 200 units a year at a unit cost of £100 each. Strictly, this cost term should have been added to the total annual cost equation [Ch(Q/2) + Co(R/Q)] we gave above. We neglected it above as it was a constant term for this example and hence did not affect the calculation of the optimal value of Q. However, we will need to remember to include this term below when we come to consider quantity discounts. Example 6.3. Suppose, for administrative convenience, we ordered 20 and not 22 at each order —what would be our cost penalty for deviating from the EOQ value? With a Q of 20 we look at the total annual cost = (ChQ/2) + (CoR/Q) = (30 × 20)/2 + (35 × 200/20) = 300 + 350 = $650 Hence the cost penalty for deviating from the EOQ value is $650 – $648.2 = $1.8 Note that this is, relatively, a very small penalty for deviating from the EOQ value. This is usually the case in inventory problems i.e. the total annual cost curve is flat near the EOQ so there is only a small cost penalty associated with slight deviations from the EOQ value (see the diagram above). This is an important point. Essentially we should note that EOQ gives us a rough idea as to how many we should be ordering each time. After all our cost figures (such as cost of an order) are likely to be inaccurate. Also it is highly unlikely that we will use items at a constant rate (as the EOQ formula assumes). However, the EOQ model provides a systematic and quantitative way of getting an idea as to how much we should order each time. If we deviate far from this EOQ then we will most likely be paying a large cost penalty. Extensions to EOQ In order to illustrate extensions to the basic EOQ calculation we will consider the following examples: Example 6.4. A company uses 12,000 components a year at a cost of 5 cents each. Order costs have been estimated to be $5 per order and inventory holding cost is estimated at 20% of the cost of a component per year. Note here that this is the sort of cheap item that is a typical non-JIT item. What is the EOQ ? Solution: Here R = 12,000 units, Co = $ 5 and as the inventory holding cost is 20% per year the annual holding cost per unit Ch = cost per unit × 20% = $0.05 × 0.2 per unit per year = 0.01. Hence EOQ = (2RCo/Ch)0.5 = (2 × 12000 × 5/0.01)0.5 = 3464 units. Example 6.5. If orders must be made for 1, 2, 3, 4, 6 or 12 monthly batches what order size would you recommend and when would you order? Solution: Here we do not have an unrestricted choice of order quantity (as the EOQ formula assumes) but a restricted choice as explained below. This is an important point—the EOQ calculation gives us a quantity to order, but often people are better at ordering on a time basis e.g. once every month. In other words we need to move from a quantity basis to a time basis. For example the EOQ quantity of 3464 has an order interval of (3464/12000) = 0.289 years, i.e. we order once every 52(0.289) = 15 weeks. Would you prefer to order once every 15 weeks or every 4 months? Recall here that we saw before that small deviations from the EOQ quantity lead to only small cost changes.
Slide 128: Inventory Control 113 Hence if orders must be made for 1, 2, 3, 4, 6 or 12 monthly batches the best order size to use can be determined as follows. Obviously when we order a batch we need only order sufficient to cover the number of components we are going to use until the next batch is ordered - if we order less than this we will run out of components and if we order more than this we will incur inventory holding costs unnecessarily. Hence for each possible batch size we automatically know the order quantity (e.g. for the 1- monthly batch the order quantity is the number of components used per month = R/12 = 12000/12 = 1000). As we know the order quantity we can work out the total annual cost of each of the different options and choose the cheapest option. The total annual cost (with an order quantity of Q) is given by (ChQ/2) + (Co R/Q) as shown in Table 6.4. Table 6.4. Total Annual Cost Batch size option Monthly 2-monthly 3-monthly 4-monthly 6-monthly 12-monthly Order quantity Q 1000 2000 3000 4000 6000 12000 Total annual cost 65 40 35 35 40 65 The least cost option therefore is to choose either the 3-monthly or the 4-monthly batch. In fact we need not have examined all the options. As we knew that the EOQ was 3464 (associated with the minimum total annual cost) we have that the least cost option must be one of the two options that have order quantities nearest to 3464 (one order quantity above 3464, the other below 3464) i.e. either the 3-monthly (Q = 3000) or the 4-monthly (Q = 4000) options. This can be seen from the shape of the total annual cost curve in Figure 6.6. The total annual cost for these two options could then be calculated to find which was the cheapest option. 100 90 80 70 Total annual cost 60 50 40 30 Option 20 10 0 0 2000 4000 6000 8000 10000 12000 EOQ Option Figure 6.6. Total Annual Cost Curve.
Slide 129: 114 A Modern Approach to Operations Management Example 6.6. If the supplier offers the following quantity discount structure what effect will this have on the order quantity? Order quantity 0 — 4,999 5,000—9,999 10,000—19,999 20,000 and above Cost (per unit) $0.05 $0.05 less 5% $0.05 less 10% $0.05 less 15% For example, if we were to order 6000 units we would only pay 0.95(0.05) for each of the 6000 units, i.e. the discount would be given on the entire order. Solution: Here, as mentioned above, we need to remember to add to the total annual cost equation [Ch(Q/2) + Co(R/Q)] a term relating to R multiplied by the unit cost, as the cost of a unit is now no longer fixed but variable (unit cost = a function f(Q) of the order quantity Q). Hence our total annual cost equation is Ch(Q/2) + Co(R/Q) +R[f(Q)] It is instructive to consider what changes in this equation as we change the order quantity Q. Obviously R and Co remain unchanged, however, Q and f(Q) change. So what about Ch? Well, it can remain constant or it can change. You need to look back to how you calculated Ch. If it included money tied up then, as the unit cost f(Q) alters with Q, so too does the money tied up. 700 680 Combined cost curve 0% Total annual cost (including material) 660 640 5% 620 600 580 560 540 520 500 0 5000 10000 15000 20000 25000 Order quantity Q Figure 6.7. Discontinuous Total Annual Cost Curve. 10% 15% The effect of these quantity discounts (breaks in the cost structure) is to create a discontinuous total annual cost curve as shown in Figure 6.7 with the total annual cost curve for the combined discount structure being composed of parts of the total annual cost curves for each of the discount costs.
Slide 130: Inventory Control 115 The order quantity which provides the lowest overall cost will be the lowest point on the Combined Cost Curve shown in the diagram above. We can precisely calculate this point as it corresponds to: • Either an EOQ for one of the discount curves considered separately (note that in some cases the EOQ for a particular discount curve may not lie within the range covered by that discount and hence will be infeasible); • or one of the breakpoints between the individual discount curves on the total annual cost curve for the combined discount structure. We merely have to work out the total annual cost for each of these types of points and choose the cheapest. First the EOQ’s: Discount 0 5% 10% 15% Cost Cost 0.05 0.0475 0.045 0.0425 Ch Cost 0.01 0.0095 0.009 0.0085 EOQ Cost 3464 3554 3651 3757 Inventory 34.64 Infeasible Infeasible Infeasible Material 600 Total 634.64 Note here that we now include material (purchase) cost in total annual cost. The effect of the discount is to reduce the cost, and hence Ch the inventory holding cost per unit per year - all other terms in the EOQ formula (R and Co) remain the same. Of the EOQ’s only one, the first, lies within the range covered by the discount rate. For the breakpoints we have: Order quantity 5,000 10,000 20,000 Cost 0.0475 0.0450 0.0425 Ch 0.0095 0.0090 0.0085 Inventory cost 35.75 51 88 Material cost 570 540 510 Total cost 605.75 591 598 From these figures we can see that the economic order quantity associated with minimum total annual cost is 10,000 with a total annual cost of 591. Note that this situation illustrates the point we made before when we considered the simple EOQ model, namely that it is not true (in general) that the best order quantity corresponds to the quantity where holding cost and ordering cost are in balance. This is because the holding cost associated with Q =10,000 is Ch(Q/2) = 0.009(10000/2) = 45, whilst the ordering cost is Co(R/Q) = 5(12000/10000) = 6. 6.3.2.1.2 EOQ Model with Reorder Point In the basic model, we discussed ‘how much should be ordered’? In this model we will discuss ‘when to order’? The determinant of when to order in a continuous inventory system is the reorder point, the inventory level at which a new order is placed. The following ordering policies are followed: Periodic Review. An ordering policy that requires reviewing the inventory level at fixed points in time to determine how much to order on the basis of the amount of inventory on hand at that time. Continuous Review. An ordering policy that requires reviewing the inventory continuously to determine when the recorder point is reached.
Slide 131: 116 A Modern Approach to Operations Management Economic-Order-Quantity (EOQ) Inventory Model It assumes that the inventory pertains to one and only one item. The inventory is replenished in batches rather than being replaced continuously over time. The demand is deterministic and occurs at a known rate of R units per time period. The lead time L is deterministic and known. Shortages are not allowed. That is, there must always be enough inventory on hand to meet the demand. Ordering occurs in a fixed quantity Q when the inventory reaches a certain reorder point Ro. Implementing this reorder policy therefore requires monitoring the inventory regularly to determine when level Ro is reached. The appropriate values of both Q and Ro are chosen to achieve an overall minimum total cost on the following components: A fixed ordering cost of $ Co per order. A purchase cost of $C per unit regardless of the number of units ordered (no quantity discounts). A carrying rate of i (that is, the holding cost, Ch = iC for each unit in inventory per time period). Shortage costs are irrelevant because shortages are not allowed. Let’s explain this model with Example 6.6. Example 6.7. Determine how and when to place orders for X-ray film for a City Hospital to ensure that the hospital never runs out of stock while keeping the total cost as low as possible. Characteristics of the system: Only one item is being considered: X-ray film. This film is replaced in batches ordered from an out-oftown supplier. Past records indicate that demand has been relatively constant at 1500 films per month and so can be considered deterministic. The supplier has committed to meet orders in 1 week (L = 1 week). Shortages are not allowed, as specified by hospital management. Cost data: A fixed ordering cost of $100 to cover the costs of placing each order, paying delivery charges , etc. A purchase cost of $20 per film with no quantity discount. A carrying rate of 30% per year (i = 0.30) to reflect the cost of storing the film in a special area as well as the opportunity cost of the money invested in the idle inventory. Solution: Annual demand (R or D) R = (1500 films/month ) (12 months/year) = 18,000 films per year Lead Time (L) L = 1 week = 1/52 of a year Annual Carrying Rate i = 0.30 Ordering Cost Co = $100 per order Purchase Cost C = $20 per film Annual Holding Cost (Ch ) Ch = i C = 0.30(20) = $6 per film per year Total Cost Function (a) Total Cost = (Ordering Cost) + (Purchasing Cost) + (Holding Cost) = (Co R/Q) + (C R) + (Q Ch)/2 Computing the Optimal Order Quantity Q = (2RCo/Ch)0.5 = (2 × 18000 × 100/6)0.5 = 774.60 units Annual Cost when Q = 774 Total Annual Cost = (Co R/Q) + (C R) + (Q Ch)/2 = (100 * 18000)/(774) + (20 * 18000) + ( 774 * 6)/2 = 364,647.58
Slide 132: Inventory Control Inventory (Films) Inventory Behavior Q Average Inventory 117 Q/2 0 Q/D Time (Years) Figure 6.8 Annual Cost when Q = 775 Total Annual Cost = (Co R/Q) + (C R) + (Q Ch)/2 = (100 * 18000)/(775) + (20 * 18000) + (775 * 6)/2 = 364,647.58 (b) Average number of orders per period = (demand per period )/(order quantity) = R/Q (c) Time between orders = (order quantity)/(demand per period) = Q/R (d) Determining the Reorder Point Reorder Point (Ro) = demand during the lead time = R L = 18000*(1/52) = 346 Inventory (Films) 1500 1000 Recorder Point L = 1/52 500 0.0 0.025 0.050 0.075 0.10 Time (Years) Figure 6.9
Slide 133: 118 A Modern Approach to Operations Management Results for EOQ Problem The EOQ Model of the City Hospital Ordering Information Item Name X-RAY FILM Item ID 1 Orders/Setups 23.2 Order Size 775 Recorder Point 346 Max Orders Outstanding 1 AGGREGATE INVENTORY VALUES Inventory carrying charge = 30 % Service level = 95 % Total number of items ............................................................. 1 Average working stock investment ($) ................................ 750.00 Cost to order EOQ items ($/yr) ........................................... 2322.58 Average working stock carrying cost ($/yr) ........................ 2325.00 Total cost ($/yr) .................................................................... 4647.58 Number of orders of EOQ item ........................................... 23 Example 6.8 (The EOQ Model with Quantity Discounts). The data related to the City Hospital Problem with Quantity Discounts are as follows: An annual demand of R = 18,000 films per year A lead time of 1 week L = 1/52 year An annual carrying rate of i = 0.30 per year. A fixed ordering cost of Co = $100 per order A purchase cost C based on the number of films ordered as follows: Number Ordered 1—499 500—999 1000 and over Cost Per Unit ($) 20 18 16 Find the EOQ. Solution: An annual holding cost of Ch = i C that now depends on the number of films ordered and the associated unit cost (C). Computing the Optimal Order Quantity Purchase Cost C ($ /Unit) 20 18 16 Number Ordered 1—499 500—999 1000 & over Cost Per Unit ($C) 20 18 16 Q 775 816 866 Best Q 499 816 1000 Total Cost ($) 365,104.21 328,409.08 292,200.00 Average number of orders = R/Q = 18000/1000 = 18 Recorder point (Ro) = RL = 18000*(1/52) = 346.15.
Slide 134: Inventory Control 119 Reorder point (ROP) It is the inventory balance at which a new order is placed. The ROP is reached when the inventory balance = (Expected demand during LT + the safety stock needed to protect against possible excess demand over that expected during the LT) There can be two policies to deal with the reordering issues: (i) Fix the size of the orders, and let the ordering frequency (or the length of time between orders) vary to take care of the fluctuation of the demand. Two bin system: It is used for spare parts management. It is based on fixed order size. In this method, the individual inventories are under constant watch. The stock is physically segregated into two bins. Stock is drawn from one bin until it is empty. When the first bin is empty, a reorder is placed; thereafter the stock is drawn from the second bin. The system is simple to operate and needs a minimum record keeping. (ii) Fix the ordering frequency, and let the size of the orders vary with the demand. In either case, a safety stock must be carried over to meet the unexpected variation in demand during lead time (i.e., between placing and receiving the orders). Safety Stock (SS) in a Fixed Order System Under this system, a fixed quantity of material (fixed lot size) is always ordered. However, the time an order is placed is allowed to vary with fluctuation in usage. The situation is depicted in Figure 6.10. Inventory balance ROP2 Average ROP1 Safety stock Time LT1 LT2 Figure 6.10. Fixed Order System. • Expected inventory balance (I) = (SS + Q/2) = (S + Q/2) • The amount of stock on hand and on order is the maximum amount that will be available for use during the lead time. • A reorder is placed when (Inv. on hand + Orders placed but not received) = (forecast demand over LT + SS over the LT). Example 6.9. Let Co = $10, Ch = $1, R = 5 units, C1 = $2, C2 = $1, and q = 15 First compute Q = (2R Co/Ch)0.5 = (2*5*10/1)0.5 = 10
Slide 135: 120 A Modern Approach to Operations Management Since, Q < q, it is necessary to check whether q is less than q1. The value of q1 is computed as follows: TC1 (Q) = TC2 (q1) RC1 + R Co/Q + Ch Q/2 = RC2 + R Co/q1 + Ch q1/2 ⇒ 5*2 + (5*10)/10 + (1*10)/2 = 5*1 + (5*10)/q1 + (1* q1)/2 ⇒ q12 – 30 q1 + 100 = 0 ⇒ q1 = 26.18 or 3.82 By definition, q1 is selected as the larger value. Since q1 > q, it follows that Q = q = 15, and TC(Q) = T C2 (15) = RC2 + R Co/15 + Ch Q/2 = 5*1 + (5*10)/15 + (1*15)/2 = $15.83. Example 6.10. Production-Order-Quantity (POQ) Inventory Model. A Refrigerator manufacturing Company wants to determine how many and when to produce refrigerators to meet an anticipated demand of 6000 per year at the least total cost. The other details are given below: Production rate of refrigerators, P = 800 refrigerators per month Annual demand of refrigerators, R or D = (6000 units/year) /(12 months/year) = 500 refrigerators per month Lead time, L = 1 week = 1/52 year = 12/52 month = 0.231 month Setup cost of Co = $1000 per production run Value of each refrigerator, C = $250 Carrying rate, i = 0.24 per year = 0.24 /12 per month = 0.02 Monthly holding cost, Ch = i C = 0.02 * 250 = $5 per refrigerator per month. Solution: The model relevant to this situation is depicted in Figure 6.11. Inventory (Refrigerators) Q Average Inventory (P – D)*(Q/P) 1/2(P – D)*(Q/P) Q/P Figure 6.11. POQ Inventory Model. Time (Period) F 2RCo I 0.5 = {(2 × 500 × 1000/{6(800 – 500)/800}] Q= G H (Ch)(P − R)/R JK Average number of orders per period 0.5 = 730.30 units = (demand per period)/(order quantity) = R/Q
Slide 136: Inventory Control 121 Determining the Reorder Point Cycle Time (T) = Time at which the number of units from the production run is used up T = Q/R = 730/500 = 1.46 month t = time at which the previous production is finished t = Q/P = 730/800 = 0.9125 month Reorder point (Ro) = demand of refrigerators during the lead time Ro = LR = (0.231 month)(500 units/month) = 115.5 units = 116 units Inventory (Refrigerators) Recorder Point Next Order Occurs After Production is Finished R 0 Time of Next Order Inventory (Refrigerators) t Time (Months) LT How the Recorder Point Depends on the Lead Time Recorder Point R 0 Time of Next Order L t Time (Months) T Figure 6.12 Computer Output for POQ Problem POQ for Home Appliances ORDERING INFORMATION Item Name Refrigerator Item ID 1 Orders/Setups 8.2 Order Size 730 Recorder Point 116 Max Orders Outstanding 1
Slide 137: 122 A Modern Approach to Operations Management AGGREGATE INVENTORY VALUES Inventory carrying charge = 24 % Total number of items ............................................................ 1 Average working stock investment ($) .................................. 34218.75 Cost to order POQ items ($ / yr) ........................................... 8219.18 Safety stock Safety stock is needed to meet (i) Variation in demand, (ii) Variation in lead time or (iii) Both. The greater the degree of variability present, the larger is the safety stock required. The supply must come in when the stock reaches the safety stock level. Now, the issue is how much safety stock should be held? This situation has been discussed in a separate section. 6.3.2.2 Probabilistic or Non-deterministic Models The models discussed so far are based on the assumption that demand for a product is constant and certain. However, in reality it generally doesn’t happen so. The following inventory models apply when the product demand is not known but can be specified by means of a probability distribution. These types of models are called probabilistic or stochastic models. One of the important objectives of management is to maintain adequate service level in the face of uncertain demand. The service level is the complement of the probability of a stockout. Thus, if the probability of a stockout is 0.05, then the service level is 0.95. Uncertain demand enhances the possibility of a stockout. One way out to reduce stockouts is to hold extra units in inventory which is known as safety stock. It involves adding some units of products as a buffer to the reorder point. We know from the previous discussion: Reorder point = ROP = D × L where D = daily demand or demand during the lead time L = order lead time or number of working days it takes to deliver an order. If we include the safety stock (SS) then the expression becomes ROP = (D × L) + SS The amount of safety stock depends on the cost of incurring a stockout and the cost of holding the extra inventory. Annual stockout cost is computed as follows: Annual stockout costs = the sum of the units short × the probability × the stockout cost/unit x the number of orders per year. Example 6.11. A computer hardware company has found that its reorder point for mouse is 60 units. Its carrying cost per mouse per year is $3, and stockout (or lost sale) cost is $20 per mouse. The store has experienced the following probability distribution for inventory demand during the reorder period. The optimum number of orders per year is 5. How much safety stock should the company keep on hand ? Number of Units 30 40 50 60 (ROP) 70 80 Probability .15 .10 .20 .25 .25 .05
Slide 138: Inventory Control 123 Solution: Given, reorder point = ROP1 = 60 = DL Here the goal is to decide the amount of safety stock that minimizes the sum of the additional inventory holding costs and stockout costs. Annual holding cost = holding cost per unit x units added to the ROP Thus, a safety stock of 20 mice means the new ROP2 = 60 + 20 = 80 units. Change in holding cost = $ 3 × 20 = $ 60 Now let us compute the stockout cost. For any safety stock level, stockout cost is the expected cost of stocking out. We can compute this by the following equation Annual stockout costs = the sum of the units short x the probability of demand at that level × the stockout cost/unit × the number of times per year the stockout can occur (which is the number of orders per year). Then we add stockout costs for each possible stockout level for a given ROP. If SS = 0, and demand during LT = 70, then number of units short = 70 – 60 = 10 If SS = 0, and demand during LT = 80, then number of units short = 80 – 60 = 20 Thus the stockout costs for SS = 0 are = (10 units short)(.25)($20 per stockout)(5 possible stockouts per year) + (20 units short)(.05)($20 per stockout)(5 possible stockouts per year) = $250 + $100 = $350 The following table shows the computations: Safety stock 20 10 0 New ROP 80 units 70 units 60 units Additional holding cost $3 × 20 = $ 60 $3 × 10 = $ 30 $3 × 0 = $ 0 Stockout cost for possible demands of 70 and 80 units. $0 (10)(.05)($20)(5) = $ 50 (10)(.25)($20)(5) + (20)(.05)($20)(5) = $ 350 Total cost $ 60 $ 80 $ 350 So, the safety stock with the lowest total cost is 20 units of mice. Therefore, this safety stock alters the ROP to 60 + 20 = 80 units. Note: when it is difficult to find the cost of stockout, then a manager may decide a policy to keep enough safety stock on hand to meet a prescribed customer service level. The service level, for example, could be to meet 95% of the demand (which means allowing stockouts only 5% of the time). If the demand during lead time is assumed to follow a normal distribution curve, then only mean (µ), and standard deviation (σ) are needed to define the inventory requirements for any given service level. We will use the following formula: ROP = expected demand during LT + Zσ where Z = number of standard deviation σ = standard deviation of demand during LT. Example 6.12. Let the average demand of an item is 300 units/year, or 6 items/week, and the lead time (LT) to procure it from the vendor is 8 weeks. Then • The consumption during LT = demand during lead time × Lead time = 8 × 6 = 48 units. • If demand during LT < 48 units, then the stock level will be more than safety stock (SS). • If demand during LT > 48 units, then stock level will be less than safety stock (SS). • If for some reason, the demand during LT > (48 units + SS), then a stock out occurs. The optimum level of SS is that for which the sum of annual costs of stock holding and stock out is minimum.
Slide 139: 124 A Modern Approach to Operations Management Example 6.13. A Hospital stocks a respiratory kit that whose demand during the reorder period is normally distributed. The average demand during the reorder period is 350 kits, and the standard deviation is 10 kits. The hospital management wants to allow stockouts only 5 % of the time. (i) What is the appropriate value of Z? (ii) How much safety stock should the hospital maintain? (iii) What reorder point should be used? The Figure 6.13 helps in understanding the situation graphically. Probability of no stockout 95% of the time Risk of a stockout (5% of area of normal curve Mean demand 350 Safety stock 0 ROP = ? kits Quantity z Number of standard deviations Figure 6.13. Normal Distribution Curve. Solution: µ = mean demand = 350 kits σ = standard deviation of demand during LT = 10 kits Z = number of standard normal deviates (i) we use the properties of a standard normal distribution curve to find a Z value for an area under the curve of .95 (i.e. 1 – .05). Using a normal Table (see Appendix 2), we find a Z value of 1.65 standard deviation from the mean. (ii) Safety stock = (X – µ) We know that Z = (X – µ)/s Or, the safety stock = (X – µ) = Zσ = 1.65 × 10 = 16.5 units (iii) ROP = expected demand during LT + Zs = 350 kits + 16.5 kits of safety stock = 366.5 or 367 kits Extension The formulas used above assume that an estimate of expected demand during lead times and its standard deviation are available. When data on lead time demand are not available, these formulas cannot be used (Heizer). In that case we need to determine if: (a) Demand (D) is variable and lead time is constant, then ROP = (average daily demand × Lead time in days) + ZsDLT Where σDLT = standard deviation of demand per day = (Lead time × σD)0.5
Slide 140: Inventory Control 125 (b) Only lead time (LT) is variable, then ROP = (daily demand × average Lead time in days) + ZDσLT (c) Both demand and lead time are variable, then ROP = (average daily demand × average Lead time in days) + Z[(average Lead time × σ2D) + (average D)2 σ2LT]0.5 Example 6.14 (Unsolved). 1. A manufacturer gets an order of 24000 units of one of his products for a year. The supply should be instantaneous. The customer does not maintain any buffer stock, so he will not tolerate any shortage in supply. The inventory holding cost is 10% of unit cost and the set up cost of machine, fixture, etc is $ 350 per run. (a) Find the optimum size of production lot for minimum total cost. (b) How many runs will be required for this and the duration of each run? (c) What is the cycle time? Assume the capacity of the equipment as 3000 units per month. Each unit costs $5. 6.4 STOCKING OF PERISHABLES Stocking and replenishment of perishables, when the reordering cycle is used, can present some special problems. At the beginning of a period, the store is stocked to a certain level, and during this period consumption takes place. If we run out of stock before the end of the period, any subsequent demand in that period can obviously not be satisfied. If we stock too much, we run the risk of having a residue in stock at the end of the period. This residue may, in some cases, be a total loss, for example, in cases of newspapers, journals, foodstuff, certain chemicals, pharmaceutical goods, and photographic material. These products are called perishables. They carry their full value throughout the cycle but become virtually worthless beyond a certain deadline. Some products lose a significant part of, but not all, their value when they are carried over the deadline. These may be termed ‘semi-perishables’. Products of this kind may be certain kinds of books, style goods, consumer goods such as household appliances, automobiles, computers, and spare parts. An automobile, for example, will get its full price as long as newer models are not introduced into the market, but after they appear, it becomes ‘an old model’ and has to be sold at a reduced price. Example 6.15. A newspaper can be sold for the full price for one day only. The next day, its news has become stale, and although it carries many features and articles that maintain their value for several days to come, the paper as an article for sale has become valueless. Suppose that a news agent had a full record of the demand (= actual sales + demand that he could not meet) of a certain paper, as shown in Table 6.5; the frequency of the demand could be plotted as in Figure 6.14. The distribution is quite close to the normal one. The average demand was found to be 80 papers a day with a maximum recorded daily demand of 95 and a minimum of 64 papers. Suppose the news agent sells each paper for 10 cents and has to pay 7 cents for each that he orders. Assuming that he cannot return unsold papers, the news agent makes 3 cents on every paper that he sells, he misses an opportunity to gain 3 cents on each paper that he cannot supply, and loses 7 cents on each paper he is unable to sell. How many papers, then, should he order, assuming no periodical demand fluctuations occur?
Slide 141: 126 A Modern Approach to Operations Management Table 6.5. Demand Record for a Daily Newspaper Number of papers 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 Total Frequency of demand 1 0 1 3 3 3 5 10 13 17 22 30 35 44 48 47 50 48 45 44 38 32 24 14 14 12 6 4 1 2 1 1 618 Total number required 64 0 66 201 204 207 350 710 936 1241 1628 2250 2660 3388 3744 3713 4000 3888 3690 3652 3192 2720 2064 1218 1232 1068 540 364 92 186 94 95 49457
Slide 142: Inventory Control 127 Demand frequency for newspapers 60 50 Frequency 40 30 20 10 0 0 50 Daily demand 100 Figure 6.14. Demand Frequency For Newspapers. Solution: Suppose he decided to take the average demand (i.e., 80 papers per day) as his order quantity. Based on this demand, we can analyze the situation as shown in Table 6.6. Table 6.6 Profit and Losses when the order of papers = 80 per day Demand of papers 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 Frequency of demand 1 0 1 3 3 3 5 10 13 17 22 30 35 44 48 47 50 48 Total Number required 64 0 66 201 204 207 350 710 936 1241 1628 2250 2660 3388 3744 3713 4000 3888 Total number sold 64 0 66 201 204 207 350 710 936 1241 1628 2250 2660 3388 3744 3713 4000 3840 Number not supplied 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 × 48 = 48 Leftovers (80 – 64) × 1 =16 0 14 39 36 33 50 90 104 119 132 150 140 132 96 47 0 0
Slide 143: 128 82 83 84 85 86 87 88 89 90 91 92 93 94 95 45 44 38 32 24 14 14 12 6 4 1 2 1 1 3690 3652 3192 2720 2064 1218 1232 1068 540 364 92 186 94 95 A Modern Approach to Operations Management 3600 3520 3040 2560 1920 1120 1120 960 480 320 80 160 80 80 48242 2 × 45 = 90 132 152 160 144 98 112 108 60 44 12 26 14 15 1215 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1198 Summary of policy 1 No. of papers sold = 48,242 Loss due to unsatisfied demand of 1215 papers = 1215 × 0.03 = $36.45 Loss due to 1198 papers = 1198 × 0.07 = $ 83.36 Profit made on the sales = 48,242 × (0.10 – 0.07)= 48,242 × 0.03 = $ 1447.26 Table 6.7. Profit and Losses when the order of papers = 76 per day Demand of papers 64 65 66 67 68 69 70 71 72 73 74 75 76 77 Frequency of demand 1 0 1 3 3 3 5 10 13 17 22 30 35 44 Total Number required 64 0 66 201 204 207 350 710 936 1241 1628 2250 2660 3388 Total number sold 64 0 66 201 204 207 350 710 936 1241 1628 2250 2660 3344 Number not supplied 0 0 0 0 0 0 0 0 0 0 0 0 0 44 Leftovers (76 – 64) × 1 = 12 0 10 27 24 21 30 50 52 51 44 30 0 0
Slide 144: Inventory Control 129 48 47 50 48 45 44 38 32 24 14 14 12 6 4 1 2 1 1 3744 3713 4000 3888 3690 3652 3192 2720 2064 1218 1232 1068 540 364 92 186 94 95 3648 3572 3800 3648 3420 3344 2888 2432 1824 1064 1064 912 456 304 76 152 76 76 46617 96 141 200 240 270 308 304 288 240 154 168 156 84 60 16 34 18 19 2840 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 351 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 Summary of policy 2 No. of papers sold = 46,617 Loss due to unsatisfied demand of 2840 papers = 2840 × 0.03 = $85.20 Loss due to 351 papers = 351 × 0.07 = $ 24.57 Profit made on the sales = 46,617 × (0.10 – 0.07)= 46,617 × 0.03 = $ 1398.51 The example shows how the news agent could affect the total profit by adjusting his order quantity level.
Slide 145: 7 Material Requirement Planning 7.0 INTRODUCTION The inventory model discussed in Chapter-6 presumed that the demand for one item was independent of the demand for another item. For example, EOQ model assumes that the demand of car parts is independent of the demand of car itself. However, in reality the demand for one item may be related to the demand for another item. For example, demand for tires and radiators depends on the number of cars to be produced. For each car to be manufactured, five tires (four plus one standby) are needed. These are situations with ‘dependent demand items’. Materials requirement planning (MRP) deals with this kind of situation effectively. MRP has become a centerpiece for all manufacturing systems. The key to successful production and operations management in a manufacturing company is the balancing of requirements and capacities. It’s that simple and yet very challenging. MRP is a computer based technique to determine the quantity and timing for the acquisition of dependent demand items needed to satisfy the master production schedule (MPS) requirement. It is used for lumpy or erratic demands. Since the control of purchasing depends on the order for the finished products, the technique is said to be one of ‘dependent demand’. 7.1 NEED FOR MATERIALS PLANNING Based on the manner the materials managers react to inventory situation, there could be two types of inventory systems: reactive and planning. MRP systems have replaced the reactive inventory systems in many organization. Managers using reactive systems ask, ‘what should I do now ?’, whereas managers using planning systems look ahead and ask, ‘what will I be needing in the future ? How much and when ?’ Reactive systems are simpler to manage in many respects but have serious drawbacks like high inventory costs and unreliable delivery performance. The planning system is more complex to manage, but it offers numerous advantages. It reduces inventories and their associated costs because it carries only those items and components that are needed—no more and no less. Demand dependency is an important consideration in choosing between reactive and planning systems. It is the degree to which the demand for some item is associated with the demand for another 130
Slide 146: Material Requirement Planning 131 item. In case of independent demand situation, demand for one item is unrelated to the demand for others. whereas, in dependent demand situation, if we know the demand for one item, we can deduce the demand for one or more related items. We don’t need to have large safety stocks for dependent demand items because we usually know exactly how many will be needed. 7.1.1 TERMS USED IN MRP Gross Requirement It is the projected needs for raw materials, components, subassemblies, or finished goods by the end of the period shown. Gross requirement comes from the master schedule (for end items) or from the combined needs of other items. But in MRP it is the quantity of item that will have to be disbursed, i.e. issued to support a parent order (or orders), rather than the total quantity of the end product Scheduled Receipts They are materials already on order from a vendor or in-house shop due to be received at the beginning of the period. Put differently, they are open orders scheduled to arrive from vendors or elsewhere in the pipeline. On Hand or Available The expected amount of inventory that will be on hand at the beginning of each time period. This includes amount available from previous period plus planned order receipts and scheduled receipts less gross requirements. On Hand = Scheduled receipt + Available from previous period – GR Net requirement: The actual amount needed in each time period. Net requirement = gross requirement – total scheduled receipt – on hand NR = (GR – SR – OH) Planned order receipt The quantity expected to be received by the beginning of the period in which it is shown under lot-forlot ordering; this quantity will equal net requirement. Any excess is added to available inventory in next time period. Planned order release It indicates a planned amount to order in each time period; equals planned-order receipts offset by lead time. This amount generates gross requirements at the next level in the assembly or production chain. When an order is executed it is removed from the “planned order-receipt” and planned-order-release row and entered in the “scheduled receipt” row. 7.2 BASIC MRP CONCEPTS Material requirement planning is based on several basic concepts, which are implicitly defined. These concepts are • Independent versus dependent demand • Lumpy demand • Lead time • Common use item • Time phasing.
Slide 147: 132 A Modern Approach to Operations Management 7.2.1 INDEPENDENT DEMAND It exists when a demand for a particular item is unrelated to a demand for other item or when it is not a function of demand of other inventory item. Independent demands are not derivable or calculable from the demand of something else hence they must be forecast. 7.2.2 DEPENDENT DEMAND It is defined as dependent if the demand of an item is directly related to, or derived from the demand of another item or product. This dependency may be “vertical” such as when the component is needed in order to build a subassembly or product, or “horizontal” as in the case of an attachment or owner’s manual shipped with the product in most manufacturing businesses, the bulk of the total inventory is in raw materials, component parts, and subassemblies, all largely subjected to dependent demand. Since such demand can be calculated, and precisely determined from the demand for those items that are its sole causes, it need not and should not, be forecast. The demand for the end product may have to be forecast. But none of the component items, including the raw materials, need be forecast separately. An example can be given for a certain wagon or rail coach manufacturing company. It may have to forecast how many wagons it can sell, and when. Having done that, however, the manufacturing company need not forecast the number of wheels, since each wagon needs four sets of wheels. In dependent demand, there is a material conversion stage, which creates the relationship between raw materials, semi-finished parts, component parts, subassemblies and assemblies. Each of which carries a unique identity (part number) and as such represents an inventory item in its own right that must be planned and controlled. Demand for all these inventory items is being created internally, as a function of the next conversion stage to take place. If one of the assemblies of a gear box is taken as an example. A sheet steel is made into a forging blank which, in turn, is machined into a gear which then becomes one of a number of components used in assembling the gear box - a major component of a transmission. The transmission will be required for the building of some end-product (vehicle), which is also an assembly. MRP is the appropriate technique for determining quantities of dependent demand item. 7.2.3 LUMPY DEMAND Manufacturing is frequently done on an intermittent basis in lots, or models, of one type or another. The components of a finished product are needed only when the product is being manufactured. Thus, there may be large demands on inventory at some times and none at other times, making the demand ‘lumpy’. When the demand occurs in large steps, it is referred to as “lumpy demand.” MRP is an appropriate approach for dealing with inventory situations characterized by lumpy demand. 7.2.4 LEAD TIME OF ITEM The lead-time for a certain job is the time that must be allowed to complete the job from start to finish. In manufacturing, lead-time is divided into ordering lead-time and manufacturing lead-time. An ordering lead time for an item is the time required from initiation of the purchase requisition to receipt of the item from the vendor. In this case if the item is raw material that is stocked by the vendor, the ordering lead time should be relatively short. If the item must be fabricated by the vendor, the lead time may be substantial, perhaps several months. Manufacturing lead time is the time needed to process the part through the sequence of machines specified on the route sheet. It includes not only the operation time but also the non-productive time
Slide 148: Material Requirement Planning 133 that must be allowed. In MRP, lead times are used to determine starting dates for assembling final products and sub-assemblies, for producing component parts and for ordering raw materials. The different individual lead times of inventory item that makes up the product is also another factor that affect material requirements. Because the component item order must be completed before the parent item order that will consume it can be started, the back-to-back lead times of order that the four items consume in the following example may be added up to find the cumulative lead time. If the manufacturing lead times for the four items of a truck are Transmission Gearbox Gear Forging blank A B C D 1 weeks 2 weeks 6 weeks 3 weeks 12 weeks Cumulative lead-time 7.2.5 COMMON USE ITEMS In manufacturing, one raw material is often used to produce more than one component type. And a component type may be used on more than one final product. For example if the product structure in Fig-7.1 is used to manufacture a product X, a component A is required, which needs another component B. Component B also requires other three components among which C requires D and component D requires the other end component E which may be a raw material. It is clearly seen from the other branch of the tree that the end item E is also required to manufacture N, S and T. Hence E is required to manufacture two different components of the finished product X. Similar relations can be shown between the component P and X. MRP collects these common use items from different products to effect economies in ordering the raw materials and manufacturing the components. X A N Z B I P P Q R S P M C D E T E U V W Figure 7.1. Product Structure. 7.2.6 TIME PHASING Time phasing means adding the time dimension to inventory status data by recording and storing the information on either specific dates or planning periods with which the respective quantities are associated.
Slide 149: 134 A Modern Approach to Operations Management The inventory status information was expanded by adding data on requirements (demand) and “availability” (the difference between the quantity required and the sum of on-hand and on-order quantities). Using the classic inventory status equation we can write a+b–c=x where a = quantity on hand b = quantity on order c = quantity required x = quantity available (for future requirements) The quantity required (c) would be derived from customer orders or a forecast, or a calculation of dependent demand. The quantity available (x) has to be calculated. Negative availability signifies lack of coverage and the need to place a new order. Generally, time phasing means developing the information on timing to provide answers to questions like: • When is the quantity on order due to come in, and is it a single order or are there more than one? • When will the stock run out? • When should the replenishment order be completed? • When should it be released? MRP calculates item demand and time-phases for all inventory. 7.3 FACTOR AFFECTING THE COMPUTATION OF MRP The computation of material requirement is affected by the following six factors: 7.3.1 PRODUCT STRUCTURE Product structure imposes the principal constraint on the computation of requirements, due to its content of several manufacturing levels of materials, component parts, and subassemblies. This computation, while arithmetically very simple, requires that a rather involved procedure be followed. A procedure which clearly identifies the structure of the product by using a bill of material with different levels or using parent-child relationship. The product level or manufacturing level is related to the way the product is structured i.e. manufactured. The product structure of making a truck may be represented as shown in Figure 7.2 using parentcomponent relationships concept. The concept of the product level is usually associated with relatively complex assembled products, which contains many (typically six to ten) levels. The computation of net requirement proceeds in the direction from top to bottom of the product structure. We note that this procedure is laborious but it can’t be cut short. The net requirement on parent level must be determined before the net requirement on the component item level can be determined. The downward progression from one product level to another is called an explosion. In executing the explosion, the task is to identify the component of a given parent items and to ascertain the location (address) from where they may be retrieved and processed.
Slide 150: Material Requirement Planning 135 Level 0 X Product (truck) Level 1 A Assembly (Transmission) Level 2 B Subassembly (Gear-box) Level 3 C Gear Level 4 D Semi finished part (forging blank) Level 5 E Raw material (Steel) Figure 7.2. Product Structure for a Truck. 7.3.2 LOT SIZING It is the ordering of inventory items in quantities exceeding net requirements, for the reason of economy, or convenience. In the example given above the parent items A, B, and C have been assumed to be ordered in quantities equal to the respective net requirements for these items. But in reality, the lot sizing, whereever employed, would invalidate this assumption. It is because the gross requirement for a component derives directly from the (planned) order quantity of its parent(s). To illustrate this concept, let us modify the example such that gear C be produced with an order quantities that must be a multiple of 5 (because of some consideration in the gear machining process), the net requirement of 76 will have to be covered by a planned order for 80. This will increase the gross requirement for the forging blank D correspondingly. This computation is illustrated below: Gear C (Parent) Net requirement = 76 Planned-ordered release = 80 which is (76 + 4) to satisfy the condition that the order quantity should be a multiple of 5. Forging (Component) Gross requirement Inventory = 80 = 46 Net requirement = 34 Lot sizing is a particular technique used to determine the order quantities for a given inventory item. The general rule of MRP logic states that: The mutual parent-component relationship of items on contiguous product levels dictates that the net requirement on the parent level, as well as its coverage

   
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