Operation Management

QUESTION BANK

1. Explain forecasting methods

2. Explain classification of inventory
3. Calculate a and b constants for the given no of births in previous years and cycles
so

Year 1 2 3 4 5 6 7 8

No of births (*103) 40 48 66 78 92 105 125 140

Cycles sold during the

30 32 40 52 79 79 90 100
year (* 102)

6. The annual demand for the comp[any is 25,000 pcbs and each costing of pc bios
Rs 1000/- and ordering cost is of Rs 200/- and inventory cost is Rs 100/-.Calculate
Equivalent order quantity, no of order, duration of order, total annual cost of the
inventory and total cost.
7. Calculate the forecasting for the month January and February from the given
below table
Month Jan Feb Mar April May June July August Sept Oct Nov Dec

X Sales
90 111 99 89 87 54 104 102 95 114 103 113
in unit

8. Explain classification of production systems

9. Define productivity and explain factors affecting productivity
10. With a neat sketch explain break even analysis concept
11. Explain graphical linear analysis
12. the company old fashioned berry pies ltd have fixed cost of 3000/week and
variable cost of 60cents /pie and total sales revenue is of £1.60 lakh calculate the net
profit for £ 12.000 that the bakery should produce 15,000 pies /week

1
 13. The turner X and Y in a company produces 400 job/day and that no of defective
jobs is 40 find the jobs which are defective, Produced by turner Y, Defective and
produced by turner X
14. Explain historical approach of operation management
15. Using SES technique determine the forecast for period 2 through 12 for which the
actual figures are given below. Assume that the first period forecast is equal to actual
demand in that period given α=0.2

Period 1 2 3 4 5 6 7 8 9 10 11 12
Actual
200 211 190 198 210 230 195 200 215 198 200 212
Demand

16. Write a note on classification on forecasting methods

17. A manufacturer of children’s cycle believes that the demand for the cycle is
correlated to the birth of babies in the area during the previous year

Year No of Births in the Cycles sold during

previous year the year
1 40,000 3,000
2 48,000 3,200
3 66,000 4,000
4 78,000 5,200
5 92,000 7,900
6 1,05000 7,900
7 1,25000 9,000
8 1,40,000 1,0000
th
Compute the probable sales of cycles in the 9 year given the no of births in the
previous year as 1, 66, 000
18. List and explain classification of Inventory

19. What is material management and explain the major elements of Material
Management

20. A television company uses 25,000 pcbs per year, each costing Rs 1000/-, it costs Rs
200/- for placing an order and the inventory costs is Rs 100/- per unit per year.
1. How many pcbs should be ordered at a time for maximum economy
2. How many orders should be placed per year
3. What is the duration between each order

2
 4. What is the total annual costs associated with inventory

21. The table below gives the sales record of a firm. Using regression analysis forecast
the sales in the month of January and February next year
Month Jan Feb Mar April May June July Aug Sept Oct Nov Dec
Sales in 90 111 99 89 87 84 104 102 95 114 103 113
units

CHAPTER 1

3
 Operations Management

Introduction to Operations Management

Operations Management

Create operational systems.

Manage (plan, organize, staff, direct and control) the activities relating to the
production of goods and/or services with maximum efficiency (at the lowest
cost) and effectiveness (in the eyes of the customer). Improve those processes
continuously to create competitive advantage.

The Operations System

The operations system transforms inputs into desired goods and services.

4
Operations Management ~ The Context

Operations Management

5
Types of Conversions

Physical
Chemical
Locational
Educational
Entertained

Competitive Priorities for the Operational Function

Price or Cost
Quality Short Run: Conformance, Design
Long Run: Continuous Improvement Thru the Learning Organization
Flexibility Product Mix: make various
Time - Dependability
Speed of Delivery
(Lead Time)
Speed to Market (New Product Development Time)
Service Delivering a comprehensive solution – products & augmenting
services – to the customer’s needs

Theory of Slack Ropes

6
Interfunctional Strategies

Where does price fit in this scenario?

Process Choice, Design, & Analysis

Operational Design components

People… following
Process and Procedures… applying
Technologies and Resources
Drivers of design choice
Characteristics of the Product
Characteristics of Demand
Competitive Priorities driven by corporate strategic analysis
No one best way to deliver a product.
Congruence about design elements is key.

7
Process-Product Matrix

Significant Developments

Division of Labor
Standardized Parts
Scientific Management
Time and Motion Study
Efficiency Improvement
Wage Incentives
Assembly Lines
Motivation and Behavioral Issues
Operations Research
Computers and Information Technology
– Computer Aided Design (CAD)
– Computer Aided Manufacture (CAM)
– Computer Integrated Manufacture (CIM)
Flexible Manufacturing Systems (FMS)
Cellular Manufacturing
JIT, Lean Manufacturing

8
 Total Quality Management, Six Sigma
Mass Customization

The management of systems or processes that create goods and/or provide

services.

Value-Added: The difference between the cost of inputs and the value or price of
outputs.

9
Production of Goods vs Delivery of Services

Production of goods results in a tangible output.

Government (federal, state, local).
Wholesale/retail (clothing, food, appliances, stationery, toys, etc.).
Financial services (banking, stock brokerages, insurance, etc.).
Health care (doctors, dentists, hospitals, etc.).
Personal services (laundry, dry cleaning, hair/beauty, gardening, etc.).
Business services (data processing, e-business, delivery, employment
agencies, etc.). Education (schools, colleges, etc.)

10
Differences Between Goods & Service
Degree of customer contact.
Uniformity of input.
Labor content of jobs.

11
Uniformity of output.
Measurement of productivity.
Production and delivery.
Quality assurance.
Amount of inventory.
Evaluation of work.
Ability to patent design.

12
13
14
 CHAPTER 2
Operations Management models Decision making
Operations Management and Decision Making

Models
Quantitative Approaches
Analysis of Trade-Offs
Systems Approach
Establishing Priorities (Pareto phenomenon)
Ethics

15
The Historical Evolution of OM

The Industrial Revolution

Craft production
Scientific Management
Mass production
Interchangeable parts
Division of labor
The Human Relations Movement
Theory X and Theory Y
Theory Z

Trends in Business

The Internet, e-commerce, and e-business.

Management of technology.
16
 Globalization.
Management of supply chains.
Outsourcing.
Agility.
Ethical behavior.
Operations strategy.
Working with fewer resources.
Revenue management.
Process analysis and improvement, and quality improvement.
Increased regulation and product liability issues.
Lean production

Competitiveness

• Identifying consumer wants and/or needs is a basic input in an

organization’s decision making process, and central to competitiveness.
• Pricing is usually a key factor in consumer buying decisions.
• Advertising and promotion are ways organizations can inform potential
customers about features of their products or services, and attract buyers.
• Product and service design
• Cost
• Location
• Quality
• Quick response

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 • Flexibility
Why Some Organizations Fail

Putting too much emphasis on short-term financial performance at the

expense of research and development.
Failing to take advantage of strengths and opportunities, and/or failing to
recognize competitive threats.
Neglecting operations strategy.

Strategy

Mission: Live a good life.

Goal: Successful career, good income.
Strategy: Obtain a college education.
Tactics: Select a college and a major; decide how to finance college.
Operations: Register, buy books, take courses, study.

Low cost. Outsource operations to third-world countries that have low labor
costs.
Scale-based strategies. Use capital-intensive methods to achieve high output
volume and low unit costs.

18
Specialization. Focus on narrow product lines or limited service to achieve
higher quality.
Flexible operations. Focus on quick response and/or customization.
High quality. Focus on achieving higher quality than competitors.
Service. Focus on various aspects of service (e.g., helpful, courteous,
reliable, etc.).
Economic conditions. These include the general health and direction of the
economy, inflation and deflation, interest rates, tax laws, and tariffs.
Political conditions. These include favorable or unfavorable attitudes toward
business, political stability or instability, and wars.
Legal environment. This includes antitrust laws, government regulations, trade
restrictions, minimum wage laws, product liability laws and recent court
experience, labor laws, and patents.
Technology. This can include the rate at which product innovations are occurring,
current and future process technology (equipment, materials handling), and design
technology.
Competition. This includes the number and strength of competitors, the basis of
competition (price, quality, special features), and the ease of market entry.
Markets. This includes size, location, brand loyalties, ease of entry, potential for
growth, long-term stability, and demographics.
Human resources. These include the skills and abilities of managers and workers;
special talents (creativity, designing, problem solving); loyalty to the
organization; expertise; dedication; and experience.
Facilities and equipment. Capacities, location, age, and cost to maintain or replace
can have a significant impact on operations.
Financial resources. Cash flow, access to additional funding, existing debt burden,
and cost of capital are important considerations.
Customers. Loyalty, existing relationships, and understanding of wants and needs
are important.
Products and services. These include existing products and services, and the
potential for new products and services.
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 Technology. This includes existing technology, the ability to integrate new
technology, and the probable impact of technology on current and future
operations.
Suppliers. Supplier relationships, dependability of suppliers, quality, flexibility, and
service are typical considerations.
Other. Other factors include patents, labor relations, company or product
image, distribution channels, relationships with distributors, maintenance
of facilities and equipment, access to resources, and access to markets.

Operations Strategy

Strategic OM Decision Areas

20
Productivity

21
 Chapter 3
MPS, RCCP, MRP, CRP, & ERP

Manufacturing Resource Planning

Core MRP

Aggregate Versus Detailed Forecasts (Review)

Use aggregate forecasts for planning medium-range overall production

levels.
High long-range forecast accuracy Detail not needed for planning long-
range resource use (labor, inventory, etc.)
Use detailed forecasts for initial detailed short-range Master Production
Schedule (MPS) Detailed forecasts reasonably accurate for this time frame
Need product-specific detail for MPS

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Master Production Schedule
From The Aggregate Plan To The MPS

• Suppose that Export TVs, Inc. has the following production plan for
the next six months:

Month J F M A M J
TVS 12000 12000 15000 15000 15000 18000

• If they make three models, the MPS for January might look like:
MPS 1-Jan 8-Jan 15-Jan 22-Jan
31” 2000 1000 0 1000
33” 1000 1000 0 2000
36” 0 1000 3000 0
Planning Horizon

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The Master Production Schedule

An MPS starts with a forecast and a beginning inventory balance.

Period 1 2 3 4 5 6

Product X
Forecast 5 10 8 5 6 8

Projected Available Balance 20

Net Requirements

MPS

Planned Order Release

Period 1 2 3 4 5 6

Product Y
Forecast 7 2 10 13 5 5

Projected Available Balance 12

Net Requirements

MPS

Planned Order Release

• Inventory is projected forward until a shortage, or “net requirement,”

occurs

Period 1 2 3 4 5 6

Product X
Forecast 5 10 8 5 6 8
Projected Available Balance 20 15 5
Net Requirements 3
MPS
Planned Order Release

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 Period 1 2 3 4 5 6

Product Y
Forecast 7 2 10 13 5 5
Projected Available Balance 12
Net Requirements
MPS
Planned Order Release

• Production is scheduled to be completed (the MPS is a planned finish

time) to cover the shortfall

Period 1 2 3 4 5 6

Product X
Forecast 5 10 8 5 6 8

Projected Available Balance 20 15 5 5

Net Requirements 3

MPS 8

Planned Order Release

Period 1 2 3 4 5 6

Product Y
Forecast 7 2 10 13 5 5

Projected Available Balance 12

Net Requirements

MPS

Planned Order Release

25
• A planned start time – the “planned order release” is determined based
on lead time (here it is one period)

Period 1 2 3 4 5 6

Product X
Forecast 5 10 8 5 6 8

Projected Available Balance 20 15 5 5

Net Requirements 3

MPS 8

Planned Order Release 8

Period 1 2 3 4 5 6

Product Y
Forecast 7 2 10 13 5 5

Projected Available Balance 12

Net Requirements

MPS

Planned Order Release

• The process continues until the product is scheduled

Period 1 2 3 4 5 6

Product X
Forecast 5 10 8 5 6 8

Projected Available Balance 20 15 5 5 0 8 0

Net Requirements 3 6

MPS 8 14

Planned Order Release 8 14

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 Period 1 2 3 4 5 6

Product Y
Forecast 7 2 10 13 5 5

Projected Available Balance 12

Net Requirements

MPS

Planned Order Release

• The other product is scheduled the same way

Period 1 2 3 4 5 6

Product X
Forecast 5 10 8 5 6 8

Projected Available Balance 20 15 5 5 0 8 0

Net Requirements 3 6

MPS 8 14

Planned Order Release 8 14

Period 1 2 3 4 5 6

Product Y
Forecast 7 2 10 13 5 5

Projected Available Balance 12 5 3 13 0 5 0

Net Requirements 7 5

MPS 20 10

Planned Order Release 20 10

• To check the feasibility of the MPS, we need to check the capacity

requirements

27
 Period 1 2 3 4 5 6

Product X
Forecast 5 10 8 5 6 8
Projected Available Balance 20 15 5 5 0 8 0
Net Requirements 3 6
MPS 8 14
Planned Order Release 8 14
Period 1 2 3 4 5 6

Product Y
Forecast 7 2 10 13 5 5
Projected Available Balance 12 5 3 13 0 5 0
Net Requirements 7 5
MPS 20 10
Planned Order Release 20 10

THE "ROUGH-CUT" ROUTING

Product Workcenter CLH/Setup DLH/Unit

X W1 10 1.00
W2 0 0.70

Y W1 5 0.75

Product Workcenter CLH/Setup DLH/Unit

X W1 10 1.00
W2 0 0.70

Y W1 5 0.75

Period 1 2 3 4 5 6
Product X-planned Order Release 0 8 0 14 0 0
Product Y-planned Order Release 0 20 0 10 0 0

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 Period

Workcentre Part 1 2 3 4 5 6
W1 X 0 18 0 24 0 0
Y 0 20 0 12.5 0 0
Total 0 38 0 36.5 0 0

W2 X 0 5.6 0 9.8 0 0

Total 0 43.6 0 46.3 0 0

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 Chapter 4- Material Requirements Planning

Master Schedule

o Master schedule: One of three primary inputs in MRP; states which end
items are to be produced, when these are needed, and in what quantities.
o Cumulative lead time: The sum of the lead times that sequential
phases of a process require, from ordering of parts or raw materials to
completion of final assembly.
Bill-of-Materials

• Bill of materials: One of the three primary inputs of MRP; a listing of

all of the raw materials, parts, subassemblies, and assemblies needed to
produce one unit of a product.
• Product structure tree: Visual depiction of the requirements in a bill
of materials, where all components are listed by levels.
• BOM's show how parts are combined to create product
Representation may be graphical or “indented text”
Low-level Coding

Determines order of MRP calculations

• Each BOM level is assigned a number
• Products are at level 0
• Each part is assigned the number of the lowest level at
which it appears in any BOM
• Calculate plans for level 0 first, then level 1, etc. . . .

30
 X Y LEVEL 0

A B (2) A LEVEL 1

A LEVEL 2

Inventory Records
Inventory Records: One of the three primary inputs of MRP; includes
information on the status of each item by time period
Accuracy: is extremely important in that accuracy will determine the
success of the production runs.

Vertical Linkage Of MRP Records

• Objective: find material plans [planned order releases] for all parts
• Data requirements
MPS
BOMs
Inventory records file
• Gross requirements are ultimately derived from MPS
– But in calculations, the gross requirements for a part depend only on
the planned order releases of the parent parts

MRP Processing
Gross requirements (demand)
Schedule receipts (open orders)
Projected on hand
Net requirements
Planned-order receipts

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 Planned-order releases

MRP Outputs
Planned orders - schedule indicating the amount and timing of future
orders.
Order releases - Authorization for the execution of planned orders.
Changes - revisions of due dates or order quantities, or cancellations of
orders.

The MRP Record

Objective is to determine future purchasing or production schedule for
component part Gross Requirements – demand for part
Scheduled Receipts – planned completion times for batches of
parts which have been already ordered
Period 1 2 3 4 5 6
Gross Requirements 10 0 30 10 20 25
Scheduled Receipts 30
Projected Available Balance 15 5 35 5
Net Requirements 0 0 0
Planned Order Receipts 0 0 0
Planned Order Release 0 0 0

32
Planned Order Receipt – planned completion times for batches of parts which
have not yet been ordered Planned Order Release– planned start times for
batches of parts which have not yet been ordered

Period 1 2 3 4 5 6
Gross Requirements 10 0 30 10 20 25
Scheduled Receipts 30
Projected Available Balance 15 5 35 5 25 5 10
Net Requirements 0 0 0 5 0 20
Planned Order Receipts 0 0 0 30 0 30
Planned Order Release 0 30 0 0 0 0

• During Period 1:
– 10 units are disbursed

Period 2 3 4 5 6 7

Gross Requirements 0 30 10 20 25 5

Scheduled Receipts 30

Projected Available Balance 5 35 5 25 5 10 5

Net Requirements 0 0 5 0 20 0

Planned Order Receipts 0 0 30 0 30 0

Planned Order Release 30 0 30 0 0 0

– The scheduled receipt is completed

Period 2 3 4 5 6 7
Gross Requirements 0 30 10 20 25 5
Scheduled Receipts
Projected Available Balance 35 35 5 25 5 10 5
Net Requirements 0 0 5 0 20 0
Planned Order Receipts 0 0 30 0 30 0
Planned Order Release 30 0 30 0 0 0

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 – The planned order release is released

Period 2 3 4 5 6 7
Gross Requirements 0 30 10 20 25 5
Scheduled Receipts 30
Projected Available Balance 35 35 5 25 5 10 5
Net Requirements 0 0 5 0 20 0
Planned Order Receipts 0 0 30 0 30 0
Planned Order Release 0 0 30 0 0 0

MRP Example
–Start with MPS for products X and Y

Product X: LT=1
Period 1 2 3 4 5 6
Master Production Schedule 8 14
Planned Order Release 0 8 0 14 0 0

Product Y: LT=1
Period 1 2 3 4 5 6
Master Production Schedule 20 10
Planned Order Release 0 20 0 10 0 0

Planned order releases for X serve as basis for gross requirements for part B

Product X: LT=1
Period 1 2 3 4 5 6
Master Production Schedule 8 14
Planned Order Release 0 8 0 14 0 0

Part B: LT=1; EOQ=25

Period 1 2 3 4 5 6
Gross Requirements 0 16 0 28 0 0

Part B’s record is then completed

Part B: LT=1; EOQ=25

Period 1 2 3 4 5 6
Gross Requirements 0 16 0 28 0 0

34
 Scheduled Receipts
Projected Available Balance 19 19 3 3 0 0 0
Net Requirements 0 0 0 25 0 0
Planned Order Receipts 0 0 0 25 0 0
Planned Order Releases 0 0 0 0 0 0

Part A’s gross requirements depend on planned order releases for X, Y, and B

Product X: LT=1
Period 1 2 3 4 5 6
Planned Order Release 0 8 0 14 0 0

Product Y: LT=1
Period 1 2 3 4 5 6
Planned Order Release 0 20 0 10 0 0

Part B: LT=1; EOQ=25

Period 1 2 3 4 5 6
Planned Order Release 0 0 25 0 0 0

Part A: LT=1; EOQ=40

Period 1 2 3 4 5 6
Planned Order Release 0 28 25 24 0 0

Part A’s record is then completed

Part A: LT=1; EOQ=40

Period 1 2 3 4 5 6
Gross Requirements 0 28 25 24 0 0
Scheduled Receipts 40
Projected Available Balance 16 56 28 3 19 19 19
Net Requirements 0 0 0 21 0 0
Planned Order Receipts 0 0 0 40 0 0
Planned Order Releases 0 0 40 0 0 0

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 MRP Planning

Benefits of MRP
Low levels of in-process inventories
Ability to track material requirements
Ability to evaluate capacity requirements
Means of allocating production time

Requirements of MRP
Computer and necessary software
Accurate and up-to-date
Master schedules
Bills of materials
Inventory records

MRP II
Expanded MRP with and emphasis placed on integration
Financial planning
Marketing
36
 Engineering
Purchasing
Manufacturing

Capacity Requirements Planning

• Capacity requirements planning: The process of determining short-

range capacity requirements.
• Load reports: Department or work center reports that compare known and
expected future capacity requirements with projected capacity availability.
• Time fences: Series of time intervals during which order changes are
allowed or restricted.

Capacity Requirements Planning

• Should be used as a final check on the MPS More accurate than RCCP
May be too expensive for routine "what-if" analysis

37
 • Determine incremental run times and setup times for each part in each
workcenter
• Apply incremental run times and setup times from (1) to planned order
releases to determine capacity requirements per period for each
workcenter

The Routing
The routing for a product or part lists
• Where it is processed
• Resources needed
−Per batch or per setup
−Per unit after workcenter is setup
Product Workcenter Operation # CLH/Setup DLH/Unit
X W1 10 10 1.0
W2 20 0 0.50
Y W1 10 5 0.75
B W2 10 0 0.20

Capacity Requirements Planning

The routing is applied to the planned order releases to obtain the capacity plan

Product Workcenter Operation # CLH/Setup DLH/Unit

X W1 10 10 1.0
W2 20 0 0.50
Y W1 10 5 0.75
B W2 10 0 0.20

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 Period 1 2 3 4 5 6
Planned Order Release -Product X 0 8 0 14 0 0
Planned Order Release -Product Y 0 20 0 10 0 0
Planned Order Release – Part B 0 0 25 0 0 0
W1 Capacity Required – Product X 0 18 0 24 0 0
W1 Capacity Required – Product Y 0 20 0 12.5 0 0
W1 Capacity Required 0 38 0 36.5 0 0
W2 Capacity Required – Product X 0 4 0 7 0 0
W2 Capacity Required – Part B 0 0 5 0 0 0
W2 Capacity Required 0 4 5 7 0 0
Total Capacity Required 0 42 5 43.5 0 0

Other Considerations

Safety Stock
Lot sizing
• Lot-for-lot ordering
• Economic order quantity
• Fixed-period ordering
• Part-period model

39
 Enterprise Resource Planning

Enterprise resource planning (ERP): An expanded effort to integrate

standardized recordkeeping that will permit information sharing throughout
the organization

Enterprise resource planning

Kanban

Where did this come from and what is it?

Japanese word for “signal” or page 700

Team Exercises

THE ROUGH-CUT PLAN

40
The routing is applied to the planned order releases to obtain the capacity plan

Product Workcenter CLH/Setup DLH/Unit

X W1 10 1.0
W2 0 0.70

Y W1 5 0.75

Period 1 2 3 4 5 6
Product X-planned Order Release 0 15 0 46 0 0
Product Y-planned Order Release 0 0 37 0 15 0

Period

Workcentre Part 1 2 3 4 5 6
W1 X
Y
Total
W2 X
Total

The MRP Record

Complete the following MRP Record and indicate in the record that the next
order has been released but not received.
Economic Order Quantity = ???

Period 1 2 3 4 5 6
Gross Requirements 66 58 72 58 60 70
Scheduled Receipts
Projected Available Balance 160

41
 Net Requirements
Planned Order Receipts
Planned Order Releases

MRP Exercise

Product X: LT = 3
Product Y: LT = 3
Part A: LT = 1; EOQ = 40
Part B: LT = 1; EOQ = 25

Master Production Schedule

Period 1 2 3 4 5 6
Product X 0 10 5
Product Y 0 30 10
Part A 70
Part B 40
Beginning

Balance

CRP Exercise

Using your answers form the MRP Exercise determine the CRP using the
figures below.

Part Workcenter Operation # DLH/Setup DLH/Unit

X W1 10 10 1.00
W2 20 0 0.50
Y W1 10 5 0.75
B W2 10 0 0.20

Period 1 2 3 4 5 6
Planned Order Release -Product X
Planned Order Release -Product Y
Planned Order Release – Part B
W1 Capacity Required – Product X
W1 Capacity Required – Product Y
W1 Capacity Required
W2 Capacity Required – Product X
42
 W2 Capacity Required – Part B
W2 Capacity Required
Total Capacity Required

Further concepts in MRP, ERP and DRP

Overview

• Global Company Profile: Wheeled Coach

• Dependent Demand
• Dependent Inventory Model Requirements Master Production
Schedule Bills of Material Accurate Inventory Records Purchase
Orders Outstanding Lead Times for Components
• MRP Structure
• MRP Management MRP Dynamics MRP and JIT
• Lot-Sizing Techniques
• Extensions of MRP Material Requirements Planning II (MRP II)
Closed-Loop MRP

Capacity Planning

• MRP In Services Distribution

Resource Planning (DRP)
• Enterprise Resource Planning
(ERP) oAdvantages and
Disadvantages of ERP Systems
ERP in the Service Sector
• MRP Structure
• MRP Management oMRP
Dynamics oMRP and JIT
43
 • Lot-Sizing Techniques
• Extensions of MRP oMaterial
Requirements Planning II (MRP
II) Closed-Loop MRP Capacity
Planning
• MRP In Services Distribution
Resource Planning (DRP)
• Enterprise Resource Planning
(ERP) Advantages and
Disadvantages of ERP Systems
ERP in the Service Sector
Learning Objectives

When you complete this chapter you should be able to:

1. Develop a product structure
2. Build a gross requirements plan
3. Build a net requirements plan
4. Determine lot sizes for lot-for-lot, EOQ, and PPB
5. Describe MRP II
6. Describe closed-loop MRP
7. Describe ERP

Wheeled Coach

• Largest manufacturer of ambulances in the world

• International competitor
• 12 major ambulance designs o18,000 different inventory items
6,000 manufactured parts 12,000 purchased parts
• Four Key Tasks Material plan must meet both the requirements of
the master schedule and the capabilities of the production facility

44
 Plan must be executed as designed Minimize inventory
investment Maintain excellent record integrity

Benefits of MRP
1. Better response to customer orders
2. Faster response to market changes
3. Improved utilization of facilities and labor
4. Reduced inventory levels

Dependent Demand
1. The demand for one item is related to the demand for another item
2. Given a quantity for the end item, the demand for all parts and
components can be calculated
3. In general, used whenever a schedule can be established for an item
4. MRP is the common technique

Effective use of dependent demand inventory models requires the following

1. Master production schedule
2. Specifications or bill of material
3. Inventory availability
4. Purchase orders outstanding
5. Lead times

Master Production Schedule (MPS)

• Specifies what is to be made and when
• Must be in accordance with the aggregate production plan
• Inputs from financial plans, customer demand, engineering, supplier
performance
• As the process moves from planning to execution, each step must be
tested for feasibility
• The MPS is the result of the production planning process
45
 • MPS is established in terms of specific products
• Schedule must be followed for a reasonable length of time
• The MPS is quite often fixed or frozen in the near term part of the plan
• The MPS is a rolling schedule
• The MPS is a statement of what is to be produced, not a forecast of
demand

The Planning Process

Aggregate Production Plan

46
Master Production Schedule (MPS)

Can be expressed in any of the following terms:

• A customer order in a job shop (make-to-order) company
• Modules in a repetitive (assemble-to-order or forecast) company
• An end item in a continuous (stock-to-forecast) company

Focus for Different Process Strategies

MPS Example

For Nancy’s Specialty Foods

47
Bills of Material
• List of components, ingredients, and materials needed to make product
• Provides product structure Items above given level are called parents Items
below given level are called children

Bills of Material Example

48
Bills of Material

• Modular Bills oModules are not final products but components that can be
assembled into multiple end items Can significantly simplify planning and
scheduling
• Planning Bills (Pseudo Bills) Created to assign an artificial parent to the BOM
Used to group subassemblies to reduce the number of items planned and
scheduled
o Used to create standard “kits” for production
• Phantom Bills Describe subassemblies that exist only temporarily Are part of
another assembly and never go into inventory
• Low-Level Coding
o Item is coded at the lowest level
at which it occurs oBOMs are
processed one level at a time

Accurate Records

• Accurate inventory records are absolutely required for MRP (or any
dependent demand system) to operate correctly
• Generally MRP systems require 99% accuracy
• Outstanding purchase orders must accurately reflect quantities and
scheduled receipts

Lead Times

•The time required to purchase, produce, or assemble an item For

production – the sum of the order, wait, move, setup, store, and run

49
 times oFor purchased items – the time between the recognition of a
need and the availability of the item for production

Time-Phased Product Structure

MRP Structure

50
 Determining Gross Requirements

• Starts with a production schedule for the end item – 50 units of Item A
in week 8
• Using the lead time for the item, determine the week in which the order
should be released – a 1 week lead time means the order for 50 units
should be released in week 7
• This step is often called “lead time offset” or “time phasing”
• From the BOM, every Item A requires 2 Item Bs – 100 Item Bs are
required in week 7 to satisfy the order release for Item A
• The lead time for the Item B is 2 weeks – release an order for 100 units
of Item B in week 5
• The timing and quantity for component requirements are determined
by the order release of the parent(s)
• The process continues through the entire BOM one level at a time –
often called “explosion”
• By processing the BOM by level, items with multiple parents are only
processed once, saving time and resources and reducing confusion
• Low-level coding ensures that each item appears at only one level in
the BOM
Gross Requirements Plan

51
Net Requirements Plants

Determining Net Requirements

• Starts with a production schedule for the end item – 50 units of Item A
in week 8

52
 • Because there are 10 Item As on hand, only 40 are actually required –
(net requirement) = (gross requirement - on- hand inventory)
• The planned order receipt for Item A in week 8 is 40 units – 40 = 50 -10
• Following the lead time offset procedure, the planned order release for
Item A is now 40 units in week 7
• The gross requirement for Item B is now 80 units in week 7
• There are 15 units of Item B on hand, so the net requirement is 65 units
in week 7
• A planned order receipt of 65 units in week 7 generates a planned
order release of 65 units in week 5
• A planned order receipt of 65 units in week 7 generates a planned
order release of 65 units in week 5
• The on-hand inventory record for Item B is updated to reflect the use
of the 15 items in inventory and shows no on-hand inventory in week 8
• This is referred to as the Gross-to-Net calculation and is the third basic
function of the MRP process

Net Requirements Plan

The logic of net requirements

Gross Requirements Schedule

53
MRP Planning Sheet

Safety Stock
• BOMs, inventory records, purchase and production quantities may not
be perfect
• Consideration of safety stock may be prudent
• Should be minimized and ultimately eliminated
• Typically built into projected on-hand inventory

54
MRP Management
• MRP is a dynamic system
• Facilitates replanning when changes occur
• System nervousness can result from too many changes
• Time fences put limits on replanning
• Pegging links each item to its parent allowing effective analysis of
changes

MRP and JIT

• MRP is a planning system that does not do detailed scheduling
• MRP requires fixed lead times which might actually vary with batch
size
• JIT excels at rapidly moving small batches of material through the
system

Finite Capacity Scheduling

• MRP systems do not consider capacity during normal planning cycles
• Finite capacity scheduling (FCS) recognizes actual capacity limits
• By merging MRP and FCS, a finite schedule is created with feasible
capacities which facilitates rapid material movement

Small Bucket Approach

1. MRP “buckets” are reduced to daily or hourly oThe most common
planning period (time bucket) for MRP systems is weekly
2. Planned receipts are used internally to sequence production
3. Inventory is moved through the plant on a JIT basis
4. Completed products are moved to finished goods inventory which
reduces required quantities for subsequent planned orders
5. Back flushing based on the BOM is used to deduct inventory that was
used in production

55
Balanced Flow
• Used in repetitive operations
• MRP plans are executed using JIT techniques based on “pull”
principles
• Flows are carefully balanced with small lot sizes

Supermarket
• Items used by many products are held in a common area often called a
supermarket
• Items are withdrawn as needed
• Inventory is maintained using JIT systems and procedures
• Common items are not planned by the MRP system

Lot-Sizing Techniques
• Lot-for-lot techniques order just what is required for production based
on net requirements May not always be feasible If setup costs are high,
lot-for-lot can be expensive
• Economic order quantity (EOQ)EOQ expects a known constant
demand and MRP systems often deal with unknown and variable
demand
• Part Period Balancing (PPB) looks at future orders to determine most
economic lot size
• The Wagner-Whitin algorithm is a complex dynamic programming
technique Assumes a finite time horizon Effective, but computationally
burdensome

56
 Lot-for-Lot Example

1 2 3 4 5 6 7 8 9 10
Gross requirements 35 30 40 0 10 40 30 0 30 55
Scheduled receipts
Projected on hand 35 35 0 0 0 0 0 0 0 0 0
Net requirements 0 30 40 0 10 40 30 0 30 55
Planned order receipts 30 40 10 40 30 30 55
Planned order releases 30 40 10 40 30 30 55

Holding cost = $1/week; Setup cost = $100;

Lead time = 1 week
No on-hand inventory is carried through the system
Total holding cost = $0
There are seven setups for this item in this plan
Total setup cost = 7 x $100 = $700

EOQ Lot Size Example

1 2 3 4 5 6 7 8 9 10
Gross requirements 35 30 40 0 10 40 30 0 30 55
Scheduled receipts
Projected on hand 35 35 0 43 3 3 66 26 69 69 39
Net requirements 0 30 0 0 7 0 4 0 0 16
Planned order receipts 73 73 73 73
Planned order releases 73 73 73 73

Holding cost = $1/week; Setup cost = $100; Lead time

= 1 week Average weekly gross requirements = 27;
EOQ = 73 units
57
 Annual demand = 1,404
Total cost = setup cost + holding cost
Total cost = (1,404/73) x $100 + (73/2) x ($1 x 52 weeks)
Total cost = $3,798
Cost for 10 weeks = $3,798 x (10 weeks/52 weeks) = $730

PPB Example

1 2 3 4 5 6 7 8 9 10
Gross requirements 35 30 40 0 10 40 30 0 30 55
Scheduled receipts
Projected on hand 35
Net requirements
Planned order receipts
Planned order releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week EPP = 100 units

58
 PPB Example
1 2 3 4 5 6 7 8 9 10
Gross requirements 35 30 40 0 10 40 30 0 30 55
Scheduled receipts
Projected on hand 35 35 0 50 10 10 0 60 30 30 0
Net requirements 0 30 0 0 0 40 0 0 0 55
Planned order receipts 80 100 55
Planned order releases 80 100 55

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week EPP = 100 units

Lot-Sizing Summary

For these three examples

59
Wagner-Whitin would have yielded a plan with a total cost of $455

• In theory, lot sizes should be recomputed whenever there is a lot size or

order quantity change
• In practice, this results in system nervousness and instability
• Lot-for-lot should be used when low-cost JIT can be achieved
• Lot sizes can be modified to allow for scrap, process constraints, and
purchase lots
• Use lot-sizing with care as it can cause considerable distortion of
requirements at lower levels of the BOM
• When setup costs are significant and demand is reasonably smooth, PPB,
Wagner-Whitin, or EOQ should give reasonable results

Extensions of MRP
• Closed-Loop MRP oMRP system provides input to the
capacity plan, MPS, and production planning process
• Capacity Planning oMRP system generates a load report
which details capacity requirements oThis is used to drive
the capacity planning process oChanges pass back through
the MRP system for rescheduling

Material Requirements Planning II

• Once an MRP system is in place, inventory data can be augmented by
other useful information oLabor hours oMaterial costs oCapital costs
oVirtually any resource
• System is generally called MRP II or Material Resource Planning

60
Closed-Loop MRP System

61
62
Resource Requirements Profile

It is also possible to split lots 6 and 11 and move them earlier in the schedule.
This would avoid any potential problems with late orders but would increase
inventory holding cost.

Smoothing Tactics
1. Overlapping Sends part of the work to following operations
before the entire lot is complete Reduces lead time
2. Operations splitting Sends the lot to two different machines for
the same operation Shorter throughput time but increased
setup costs
3. Order or lot splitting Breaking up the order into smaller lots
and running part ahead of schedule

63
MRP in Services
• Some services or service items are directly linked to demand for other
services
• These can be treated as dependent demand services or items
Restaurants
Hospitals
Hotels

Smoothing Tactics

(a) Product Structure Tree

MRP in Services

(b) Bill of Materials

Part Description Quantity Unit of Unit cost

Number Measure
10001 Veal picante 1 Serving —

64
 20002 Cooked linguini 1 Serving —
20003 Prepared veal 1 Serving —
and sauce
20004 Spinach 0.1 Bag 0.94
30004 Uncooked linguini 0.5 Pound —
30005 Veal 1 Serving 2.15
30006 Sauce 1 Serving 0.80

(c) Bill of Labor for Veal Picante

Work Center Operation Labor Type Labor Hours

Setup Time Run Time
1 Assemble dish Chef .0069 .0041
2 Cook linguini Helper one .0005 .0022
3 Cook veal & sauce Assistant Chef .0125 .0500

Distribution Resource Planning (DRP)

Using dependent demand techniques through the
supply chain Expected demand or sales
forecasts become gross requirements
Minimum levels of inventory to meet customer service levels
Accurate lead times
Definition of the distribution structure

Enterprise Resource Planning (ERP)

• An extension of the MRP system to tie in customers and
suppliers
1. Allows automation and integration of many business processes
2. Shares common data bases and business practices
3. Produces information in real time

65
• Coordinates business from supplier evaluation to customer invoicing
• ERP modules include
1. Basic MRP
2. Finance
3. Human resources
4. Supply chain management (SCM)
5. Customer relationship management (CRM)

ERP and MRP

66
67
68
Enterprise Resource Planning (ERP)
• ERP can be highly customized to meet specific business requirements
• Enterprise application integration software (EAI) allows ERP systems
to be integrated with oWarehouse management oLogistics oElectronic
catalogs oQuality management
• ERP systems have the potential to
• Reduce transaction costs
• Increase the speed and accuracy of information
• Facilitates a strategic emphasis on JIT systems and integration

Advantages of ERP Systems

1. Provides integration of the supply chain, production, and
administration
2. Creates commonality of databases
3. Can incorporate improved best processes
69
 4. Increases communication and collaboration between business units and
sites
5. Has an off-the-shelf software database
6. May provide a strategic advantage

Disadvantages of ERP Systems

1. Is very expensive to purchase and even more so to customize
2. Implementation may require major changes in the company and its
processes
3. Is so complex that many companies cannot adjust to it
4. Involves an ongoing, possibly never completed, process for
implementation
5. Expertise is limited with ongoing staffing problems

SAP’s ERP Modules

70
ERP in the Service Sector

ERP systems have been developed for health care, government, retail
stores, hotels, and financial services
Also called efficient consumer response (ECR) systems
Objective is to tie sales to buying, inventory, logistics, and production

71
 Chapter 5-
Overview of Operations Planning

Overview

Production-Planning Hierarchy
Aggregate Planning
Master Production Scheduling
Types of Production-Planning and Control Systems
Wrap-Up: What World-Class Companies Do

Production Planning Hierarchy

72
Production Planning: Units of Measure

73
Capacity Planning, Aggregate Planning, Master Schedule, and Short-Term
Scheduling

Relationships Between OM Elements

74
Why Aggregate Planning Is Necessary

• Fully load facilities and minimize overloading and underloading

• Make sure enough capacity available to satisfy expected demand
75
 • Plan for the orderly and systematic change of production capacity to meet the
peaks and valleys of expected customer demand
• Get the most output for the amount of resources available

Inputs

A forecast of aggregate demand covering the selected planning horizon (6-18

months)
The alternative means available to adjust short- to medium-term capacity, to
what extent each alternative could impact capacity and the related costs
The current status of the system in terms of workforce level, inventory level and
production rate

Outputs

A production plan: aggregate decisions for each period in the planning horizon
about Projected costs if the production plan was implemented

Medium-Term Capacity Adjustments

Workforce level
Hire or layoff full-time workers
Hire or layoff part-time workers
Hire or layoff contract workers
Utilization of the work force
Overtime
Idle time (undertime)
Reduce hours worked
Inventory level
Finished goods inventory
Backorders/lost sales
Subcontract
76
Comparison of Aggregate Planning Methods

Method Advantages Limitations

Graphical • Simple, easy to use and understand • Many solutions; solution need not
be optimal

Linear Provides optimal solution • Mathematical functions must be

Programming •• Popular in many industries linear, and deterministic -- not
• Sensitivity & dual analysis provide useful necessarily a realistic assumption
information
•
Sensitivity & dual analysis provide

• useful information Constraints

readily added

Linear •• Provide optimal solution Incorporates some non-standard

Decision Handle non-deterministic demand costs
Rules •• Skilled personal required

• Quadratic model not always

realistic

• Values of variables are

unconstrained

• Feasible solution is optimal if it

exists - not guaranteed

Management •• Simple, easy to use and understand •• Solution need not be optimal
Coefficients Attempts to duplicate manager’s decision- • Assumes past decisions are good
Model • making process Built on individual’s invalidate
Simplest, least disruptive, easiest to model
implement

Simulation • Places no restrictions on mathematical •• No optimal solution guaranteed

structure or cost functions Can Often a long, costly, process
• test many relationships

77
Pure Strategies for the Informal Approach

Matching Demand
Level Capacity
Buffering with inventory
Buffering with backlog
Buffering with overtime or subcontracting

Matching Demand Strategy

Capacity (Production) in each time period is varied to exactly match the

forecasted aggregate demand in that time period
Capacity is varied by changing the workforce level
Finished-goods inventories are minimal
Labor and materials costs tend to be high due to the frequent changes

Developing and Evaluating the Matching Production Plan

Production rate is dictated by the forecasted aggregate demand

Convert the forecasted aggregate demand into the required workforce level
using production time information
The primary costs of this strategy are the costs of changing workforce levels
from period to period, i.e., hirings and layoffs

Level Capacity Strategy

Capacity (production rate) is held level (constant) over the planning horizon
The difference between the constant production rate and the demand rate is
made up (buffered) by inventory, backlog, overtime, part-time labor and/or
subcontracting

78
Developing and Evaluating the Level Production Plan

Assume that the amount produced each period is constant, no hirings or layoffs
The gap between the amount planned to be produced and the forecasted demand
is filled with either inventory or backorders, i.e., no overtime, no idle time, no
subcontracting
The primary costs of this strategy are inventory carrying and backlogging costs
Period-ending inventories or backlogs are determined using the inventory
balance equation:

Aggregate Planning Example

A small manufacturing company with 200 employees produces umbrellas. The

company produces the following three product lines: 1) the Executive Line, 2) the
Durable Line and 3) the Compact line, as shown in the below

79
Aggregate Planning Example: Demand for Executive Umbrellas

10000
10000
8000
8000 7000
5500 6000
6000
4500
4000
2000
0
Jan Feb Mar Apr May Jun
Number of working days:
Jan: 22
Feb: 19
Mar: 21
Apr: 21
May: 22
Jun: 20

Aggregate Planning Example: Cost Information for Executive Umbrellas

Materials $5.00 /unit

Holding costs $1.00 /unit/month

Marginal cost of stockout $1.25 /unit/month

Hiring & training cost $200.00 /worker

Layoff costs $250.00 /worker

Labor hours required 0.15 hrs/unit

Straight time labor cost $8.00 /hr

Beginning inventory 250 units

Productive hours 7.25 hrs/worker/day

Paid straight hours 8 hrs/day

80
Beginning # of workers 7 workers

Aggregate Planning Example:

Determining Straight Labor Costs and Output for Executive Umbrellas

Aggregate Planning Example - Chase Strategy for Executive Umbrellas

• Objective: Adjust workforce level so as to

eliminate the need to carry inventory from
period to period
• 4,500 units is the demand in January (any
combination of firm orders and forecast
• 250 is the starting inventory position
• 4,250 = 4,500 – 250
• 3.997 = 4,250 / 1,063.33
• 7 = workforce level at the beginning of
January
• 3 = 7 – 4 = workers fired
• 4 = workforce level at end of January
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Chase Strategy
Jan Feb Mar Apr May Jun

Demand 4,500 5,500 7,000 10,000 8,000 6,000

Beginning inventory 250 0 0 0 0 0
Net requirements 4,250 5,500 7,000 10,000 8,000 6,000
Beginning # of workers 7 4 6 7 10 8

Required workers 4 6 7 10 8 6
Workforce adjustment -3 2 1 3 -2 -1

Production quantity 4,250 5,500 7,000 10,000 8,000 6,000

Ending inventory 0 0 0 0 0 0

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 Chapter – 6: LEAN SYSTEMS

The recent globalization of businesses has resulted in highly demanding customers. This
has created intense pressure on companies to meet and exceed customers’ expectations
more effectively and efficiently than their competitors, and still remain profitable to
survive and grow. We know that profit is a sales price minus cost. If companies believe
that the sales price of their product/service is broadly determined by the customers (or
market), then the only option to make profit is to reduce costs. However, the key
ingredients of cost such as labour, material, etc are roughly comparable among all the
competitors aiming for a market. Hence, the excess cost that sabotages the prospects of a
company amidst competitors is due to the production method employed.

The Two Types of Production Systems:

1. Push production system –The system is based on sales forecasts. It relies upon batch
production and holds finished goods inventory to respond to customers’ needs. This
system consumes a lot of space, involves high costs of overheads and wastes, and
invites risks of obsolescence.
• Demand forecasts are prepared using past data and available information about the
future, and a multi-period schedule of sales forecast/plan is prepared. These
forecasts are compared with finished goods inventory available and a Master
Production Schedule (MPS) is developed. An MPS, and the outputs of MRP and
CRP, provide the basis for detailed schedules for all work-stations (to procure raw
materials or make items).
• Each work-station produces as per MPS. Queues and in-process/finished goods
inventory are a part of the system. MPS pushes forward the product through
subsequent stages of manufacture and assembly regardless of sales. Hence the
name PUSH system
• A lot of planning is required in a push system to coordinate production of a large
number of parts (say, as in an automobile). Traditionally, large inventories of parts

83
 are maintained at all these stages to safeguard against the lapses in coordination
(Just In Case system)
• This approach involves guessing customer demand, duration for completing the
job, etc.
which, if goes wrong, results in excess or shortage of inventory. If the quality of
forecasts is good, Push system produces just right quantities of products at right
time
2. Pull production system - produces and moves one piece at a time, with production
volume, pace and mix derived from customer demand. This system aims for total
elimination of different wastes, and full utilization of material, labour and equipment,
thus leading to lower production cost. This system is popular as Toyota Production
System (TPS)
• Pull system works opposite to that of Push system. In Push system, the MPS
pushes the product down the production line (regardless of sales). In Pull system,
the customer demand pulls the product from upstream production line
• It is an attempt to move the discrete units of solid products through the production
line in much the same way as liquid/gas flows in a continuous process industry,
although it is an ideal. The objective here is to achieve a flow of one-piece at a
time from one process to the next, that too when the next process asks for it (Just-
In-Time concept). In effect, the batch quantity to be one. This system effectively
facilitates the journey towards the ultimate goals of a production system namely,
zero waste, lowest possible cost, shortest lead time and defect-free production
• This is what the Toyota Production System (TPS) has demonstrated to the world.
The system was earlier referred to as JIT system. Of late, together with many
more improvements, it is known as Lean system

84
Toyota Production System:

The primary goal of TPS house is the Simultaneous achievement of Highest quality
(perfection..!), Lowest cost and Shortest lead time. All issues relating to Quality, Cost
and Lead time are addressed through two powerful weapons namely JIT and Jidoka. They
are also called as two pillars of TPS House.
• JIT consists of three main parts. They are known as JIT purchasing, JIT
manufacturing and JIT delivery. The aim of JIT is to produce and deliver finished
goods just in time to be sold, subassemblies just in time to be assembled into
finished goods, fabricated parts just in time to go into final assemblies, and
purchase materials just in time to be transformed into fabricated parts.
Each company has its own level of JIT, which also undergoes improvement over time
(monthly, weekly, daily or even hourly). Tighter JIT system spawns plenty of benefits
to the company. JIT approach creates a pull system, and kanban (signboard, card,
chit, e-signal, message, etc.) constitutes an essential element in maintaining this pull
system.
• Jidoka or Autonomation (Intelligent Automation) aims to prevent defective items
being passed onto next workstation. Humans make mistakes. But machines can be
designed to eliminate many of them.Devices namely Poka yoke (fool-proofing)
are mounted on machines for automatic shut-off and to notify the supervisor when
either the machine has completed its task or something abnormal (breakdown,
defect production, tool ware-out,etc.) has happened in the production process.
With this system, in a single worker can supervise as many as 20-30 machines
simultaneously. These devices are used both in component production as well as
in automated assembly lines.

85
 In manual assembly (the most common mode) lines, every worker has the right (and
also obligation) to stop the production line when a problem is identified or even
suspected at his workstation. This helps fixing the problem at the source before a
defective is produced. Visual controls aid Jidoka (Target v/s actual production,
Yellow light to call for help, and Red light for line stop)
Foundation of TPS House is built with Heijunka, Standardization of components and
work methods, and Kaizen.
• Heijunka - Consistency in volume, variety and sequence of items produced in a
given time period (say, daily). In other words, a leveled production schedule for a
mix of products so that each product is available in some quantity all the time
• Standardization of components and methods - Use of value analysis, method study
and work measurement help to arrive at best design of products and work
procedures which are standardized, so that every workers’ job is done in a
consistent and repeatable manner, and in tune with takt time
• Kaizen implies Continuous improvement effort. Everyone in the company
constantly strives to improve the system through his/her effort to eliminate Muri
(anything excess than necessary), Muda (any type of waste) and Mura (any
unevenness).Muda (non-value added) exists everywhere and the customer is not
willing to pay for it. Kaizen aims to eliminate all types of wastes (eg. transport,
inventory, motion, waiting, overproduction, over processing and defects, etc.).
This calls for questioning all the assumptions behind the present way of
processing and striving to perfect them
Stability - The Philosophy (the Guiding principles) that has provided the much needed
stability to TPS is two pronged.
• Continuous improvement: (i) Being aware of the challenges to realize long-term
vision (ii) Kaizen through constant innovations and (iii) Going to the workplace
(Genchi Genbutsu) to see the facts for oneself and make right decisions and create
consensus
• Respect for people: (i) taking responsibility for other people in reaching their
objectives, and to build mutual trust (ii) Develop individuals through team
approach to problem solving
86
How Pull method of material flow works?
The concepts of JIT and Jidoka developed during 1930s got dismantled due to WW-II.
Demand for goods in Japan’s post-war economy were low and the concept of economies
of scale through mass production (as was in the case of Ford Motors) had little relevance.
Following the WW-II, Taiichi Ohno, the then Ex-VP of Toyota revived, refined and
rigorously implemented the concepts of JIT and Jidoka. Ohno, having visited the
American supermarkets, observed that shelves are refilled as items are withdrawn
(pulled) by customers. He realized that production scheduling can be better, if done in the
way as the shelves are refilled in the supermarket, especially when overproduction was
not desirable. Thus the concept of Pull came into being in production areas. In a pull
system, a very small amount of inventory buffer is maintained between any two work
stations for lead time usage at successor work station, or to cushion against any irregular
supply. The worker at the next work station goes back to the previous station and takes
only that many parts which he needs for then. The worker at the previous station now
produces the exact number of parts for replenishing those that were taken away the next
station’s worker. Thus the previous station’s worker produced almost Just-In-Time when
the part was needed by the next workstation. If the output is not taken, the previous
station’s worker simply stops producing. He does not produce unnecessarily, i.e, neither
over- nor under-production. Necessary quantity’ is not defined by the MPS, but by shop-
floor demands.
Conceptually, customer is linked to assembly to fabrication to suppliers with series of
pull loops. As pull signals flow in one direction, product flows in the opposite direction.
Each operation that uses pull within the company becomes customer and supplier
respectively to its previous and next operations.
PUSH system PULL System
Production: Approximate Production: Accurate and Precise
Anticipated Usages Actual Usages
Large lots production Small lot production
High inventories Low inventories
87
Lot of waste, a lesser concern Elimination of waste, a serious concern
Management by firefight Management by sight
Poor communication Better communication
To work with smaller buffer inventories, the manufacturing system must be very
responsive and flexible, demand for end-products should be stabilized, concern to quality
should be utmost, and suppliers’ responsiveness is a must. Japanese (to be specific,
Toyota) discovered that if they wanted to make their manufacturing system responsive,
they needed to cut lot sizes (relating to both production and procurement)

Small Lot Size

But cutting lot sizes call for frequent change-over of setups (or orders) and result in
higher set-up (or ordering) costs. This conflict between carrying and set-up (or ordering)
costs is resolved by classical Economic lot size (or EOQ) approach by the Western
industry.Before Japanese (especially, Toyota) questioned, the set-up time (or ordering
cost) was taken for granted as unalterable. They strived very hard to drive down the
change-over (or purchase order) costs- We will discuss how Japanese did it later. This
enabled a significant reduction in lot sizes, and set the JIT into motion.

When lot size drops all the way to one-piece-at-a-time (however, any reduction in lot size
would be helpful) the scrap and quality improvements are maximum. If a worker makes
88
only one part and passes it to the next worker immediately, the first worker soon hears if
the part does not fit in any of the next stations. Thus defects are discovered quickly and
their sources can be attacked before the next part is produced. Greater quality and less
scrap or rework saves material, rework-labour and time, etc. improving productivity. If
parts are made and moved in large lots, by the time the next workstation finds a defective,
several defectives could already be present in the lot. Hence less quality and more scrap.
The first worker who quickly learns about the effect of his workmanship will naturally
become motivated to improve. Worker’s awareness of defect causation is heightened.
This awareness of problems and their causes aid the workers, supervisors, engineers to
generate ideas for:
• Controlling defects
• Improving JIT delivery performance (say, handling delays)
• Cutting setup time which helps reduction in lot size further
Often, even when lot size is reduced drastically, still some buffer inventory is maintained
between workstations to cushion the irregularities in the part-feeder processes. Japanese
do not accept the buffer principle as they think buffer inventory hides all flow- and
quality-related problems. Instead of adding it at the point of irregularities, they
deliberately remove it to expose the work force to consequences. In response, workers
and supervisors rally to root out the causes of irregularity at its source so that it won’t
recur. Each time the cause of irregularity is corrected, the Japanese production managers
remove some more buffer stock. Workers are never allowed to settle into a comfortable
pattern. Rather the pattern becomes one of continually perfecting the production process.
Reduction in buffer, greater awareness of problem areas and correction lead to smoother
output rates.
The way MURI, MUDA and MURA (very popular in Japan for their significance and
symbolic brevity) are attacked can be seen in the above JIT cause-effect chain. MURI:
Means Excess (Eg. Producing in large lot -EOQ- when it can be reduced to one-piece).
MUDA: Means Waste (Eg. Production of even one defective item is a waste, let alone %
defectives).MURA: Means Unevenness (Eg. Buffer stock implies unevenness in
production flow is accepted. The rational approach is to reduce buffer and expose the
systems to variability, and then deal with it)
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Quick Setups:
Several processes defy production in small lots. Large setups can be as long as a day or
more. Hence, companies are reluctant to change setup before they produce the part in a
big lot from the setup made. On the other hand, having several dedicated lines for each
part may be expensive. Hence, engineers at Toyota worked to simplify and quicken the
die changing process. Shigeo Shingo, a consultant hired by Ohno was able to reduce the
setup time of a 1000-ton press from 6 hours to 3 minutes using the concept of SMED
Seven steps to SMED
1. Observe the current method of changeover
2. Separate the INTERNAL and EXTERNAL activities: Internal activities are those that
can only be performed when the process is stopped, while External activities can be
done when the operation is on. For example, fetch tools for next operation before the
machine stops, setup of fixture, centering dies
3. Convert (where possible) Internal activities into External ones : Eg. pre-heating of dies
4. Streamline the remaining internal activities - Simplifying/ eliminating adjustments,
coding settings, standardizing tools and materials, using quick locating and clamping
devices, guides/rails to move heavy dies, simplified tools, etc. Shigeo Shingo rightly
observed that it's only the last turn of a bolt that tightens it - the rest is just movement.
Apply motion and time study principles
5. Streamline the External activities, so that they are of a similar scale to the Internal ones
- properly organizing work place, locating items near to the point of use, keeping
machines, tools and dies in good condition
6. Document the new procedure and actions so that they are repeatable. Videotaping the
process of setup with each improvement
7. Do it all again: Train the operators, add more people if needed. Practice and perfect.
For each iteration of the above process, a 45% improvement in set-up times should be
expected, so it may take several iterations to be less than ten minute time
The aim is for Single digit setuptime (less than 10 minutes), and then One-touch setup.
This can be done through better planning, process redesign, and product redesign.

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To achieve smooth flow in lean system, many fundamental elements such as small lots,
flexible resources (people, machinery, layout), high quality, Jidoka, kanban, standardized
components and work methods, automated production must be in place.
Further to sustain the pull created in lean system, elements such as leveled production,
kaizen, close supplier ties, lean culture are needed

Flexible resources:
Flexible resources allow the system to more readily adapt to unanticipated changes in
demand.Flexibility comes from Cellular layouts, Flexible machinery, and Multifunctional
workers. Equipment and routines are organized to enable each operator to simultaneously
handle multiple machines. Use of limit switches, jigs and fixtures, special tools, fool-
proof devices, quickly changeable tools and dies, etc. with the machines enabled each
worker in Toyota to handle as many as 17 machines (on an average of 5-10 machines)
Cellular Layout:The concept was pioneered by an US engineer in 1920s. But Ohno’s
inspired application not only improved flexibility but also greatly improved system
effectiveness. A cell is a group of dissimilar machines arranged to process a family of
parts with similar processing requirements. Work is moved within the cell ideally one
unit at a time from one process to the next by a worker as he or she walks around the cell
in a prescribed path. Cell layouts are usually L or U shaped resembling a mini assembly
line. Cellular layouts, especially U-shaped cells, are commonly used in lean
manufacturing environments to create workplace efficiency and flexibility. These layouts
ensure the shortest part movement distance, allow for sharing of work, provide a
foundation for one piece flow, and reduce the amount of floor space required. The teams
in cells are motivated and highly productive. The cycle time in a cell is determined by the
time the worker takes to complete his path through the cell attending to various machines
. Hence, regardless of the variety of parts being produced in a cell the operator cycle time
remains constant (as worker’s path remains the same). The operator cycle time is to be
synchronized with takt time (Takt time is the rate at which the production should take
place, which of course is matched with the rate of customer demand).Changes in takt
time (or production volume) can be affected by adding or subtracting the workers in the
cell or modifying their paths in the cell.
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Due to similarity of parts produced in a cell, setup changeover requirements are less, and
hence lot sizes that move downstream can be reduced
Flexible machinery: GPMs (rather than commercially available SPMs) are used with
necessary modification to suit the requirement. Often firms use their own tool makers to
build the needed machines. Such machines may be special purpose, light weight, easily
movable and low cost too. Eg. Small presses. The machines built in-house may also be fit
with necessary fixtures and dies so that there are no settings or adjustments
Multifunctional Workforce: Pull system runs only the parts that are needed, thus freeing
a good amount of time for constructive activities that will make the job and working
conditions better. The shut down time is be spent on activities such as Preventive
maintenance, Quality improvements, House-keeping, Training, and Continuous
improvement.Job allotment to operators changes frequently (may be every week); so
every operator is required to master multiple jobs. The flexibility available with resources
facilitates the Pull system.

Consistent High Quality:

High quality is a must for lean systems to operate, because there is no extra inventory to
buffer against defectives. The system neither has any scope nor provide any room for
scrap or rework.Smaller lot - Increases awareness and early detection of quality
problems. Unquality can be quickly detected when a worker inspects the first and last
pieces of a smaller batch, or makes a piece and uses it too for further operation. The
source of problems can be traced and remedied before producing many defectives.
Philosophy - Do it Right at the First time, and Every time
Visual Control:Quality problems are made visible. Visible instruction for workers and
machine action and a direct feedback on the results of that action. Examples of visual
control include: kanban, tool boards, andons; process control charts, standard operation
sheets; machines and stock points painted in different colours; clearly marked material
handling routes; demonstration and instructional stands near machines; display of quality
performance and awards; and on-going quality improvement projects.
Jidoka (Work/Line Stop): Jidoka is one of the two pillars of the Toyota Production
System along with just-in-time. Jidoka is enabling machines and authorizing operators to
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stop work or production line when they detect or suspect any abnormality in the work
centre or system. This enables operations to build-in quality at each process and to
separate men and machines for more efficient work. Ohno believed that ‘Never passing-
on’ a defective part to the next station is the key for ‘zero defects’. For this to happen: (i)
All equipment are fitted with fool-proofing devices called poka-yoke and (ii) workers (i.e
champions of quality) are assigned this responsibility and are given the appropriate
authority (Jidoka). Whenever there is abnormality in the functioning of an equipment
such as tool ware, chip clog, etc resulting in unquality product production, the poka yoke
senses it and stops the equipment. It can also stop production when the required quantity
is produced. Flash lights (called Andons) are located at each work station and on Andon
boards that could be viewed from anywhere in the plant. Andon boards display (LED)
the daily target, actual achievement, serial numbers of work stations (yellow and red
rows), etc. Whenever, a worker encounters a problem or even suspects one, he acts
(pressing a button/pulling a cord/thread, etc) which cause his workstation’s number to
flash on andon boards. Green light for normal operation, Yellow for calling help and Red
for line stoppage. A flashing andon quickly summons supervisor, maintenance people,
engineers and even co-workers to solve the problem at its root-level.Jidoka is sometimes
called autonomation, meaning “automation with human intelligence” . In fact, the
production system is scheduled for less than its capacity to allow for such stoppages. All
Jidoka drills are recorded and solutions for these problems are deliberated during the time
remaining after production

Kanban:
The use of kanbans enable exercising
greater control over the pull process
in the shop floor. Kanban means
‘Card’ (signaling card). A kanban is
attached to container that moves
back and forth between the source
and destination stations. There is
exactly one kanban per container. Containers for each specific part are standardized, and
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they are always filled with the same (ideally, small) quantity. Kanban card contains
information such as
Card number, Part number, Part name, Brief description of the part, Container type and
Capacity, Preceding (where it comes from) and Succeeding stations (where it goes to),
etc.
If the kanban is to move between supplier and customer companies, then additional
information such as supplier code, supplier name, number of trips/day, dock where the
goods are to be delivered, Group code, Route detail, etc, is indicated. The information on
kanban does not change. Kanban does not make the schedule of production. They only
authorize the production or withdrawal of goods. Most sophisticated is Dual kanban
system:
Production kanban: authorizes production of goods (container quantity) and
Withdrawal kanban: authorizes withdrawal of movement of container full of goods

No parts are made unless

there is a production
kanban to authorize
production. If no
production kanban are in
the “in box” at a work
center, the process remains
idle, and workers
perform other assigned
activities. This rule enforces the “pull” nature of
the process control. When the processes are closely and tightly linked other types of
kanbans such as Kanban square area, Kanban rack, a
flashing light, electronic or verbal message are used. Signal Kanbans are used when
inventory between the processes is still necessary.
Supplier kanban: The supplier brings the ordered material directly to the point of use and
then picks up the empty container with kanban (if any) to fill and return later. If there are

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more suppliers and large number of kanbans, then kanban mailbox can also be used. The
number of kanbans required to control production of an item can be calculated by:
No. of kanbans = (Ave. demand during lead time + safety stock)/ Container size

Problem 1. Masaru fills, caps and labels syrup bottles. He is to process an average of 160
bottles per hour through his cell. Every container attached with a kanban holds 10 bottles.
It takes 30 minutes to receive new bottles from the previous cell. The factory uses a
safety stock factor of 10%. How many kanbans should circulate between these cells
Solution: N = [(160 x 0.5) + 8] / 10 = 8.8 Kanbans
Having 8 containers would result in lesser inventory at the cell and exposes problems in
the cell, thus forcing the cell to improve its processes.

Standardized Components and Work methods:

Use of standardized component parts and methods of operation are encouraged. They
reduce the non-value adding design elements and process elements to a minimum, and
improve the consistency and efficiency in operations. The applications of value analysis
and work-study techniques are widely seen in this effort.
Standardized Work: The Toyota Production System organizes all jobs around human
motion and creates an efficient production sequence without any "Muda." Work
organized in such a way is called standardized work. It consists of three elements:
1. Takt-Time
2. Working Sequence and
3. Standard In-Process Stock
Standardized work will define the most efficient methods to produce product using
available equipment, people and materials. It depicts the key process points, operator
procedures, production sequence, safety issues, and quality checks.
Automated Production:
Effective lean production systems use both manual and automated processes - the task is
to determine the appropriate type of automation. The process industries are ultimate in
efficiency and productivity due to the: (i) continuous flow of products (gases, liquids,
paint, pallets, powder, petrochemicals, steel, etc) in the system; (ii) high degree of
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automation managed by a network of computers and (iii) minimum human
inconsistencies.
The output in nonprocess industries is discrete units which (unlike the stuff that flows)
can be produced, prioritized, inspected, counted, stored, etc. The production and
assembly system are generally labour intensive, often forced to use buffer inventory
between stations, and subject to human inconsistencies, all contributing to its lesser
efficiency.It is the intention of lean management approach to make discrete unit
production (not only assembly stage but also all fabrication and subassembly stages) into
a continuous flow production system, i.e., much like continuous processing in process
industry. This, often requires the discrete unit production shops to move stage-by-stage
through various plant configurations (before becoming continuous flow/repetitive
production system.) These stages are (stages may also be skipped):
• Job-shop fabrication
• Dedicated production line
• Physically merged production processes
• Mixed-model processing
• Automated production lines
Automated dedicated assembly lines may be common (eg. automobile body welding).
But, automated mixed model assembly line, automated subassembly and fabrication
shops/cells are not. Japanese extensively use psuedo-robots (less flexible-pick and place
type) that aid a lot when the buffer between the work stations is being reduced.
When all efficiency improvement aid are provided to the worker, but he still is unable to
cope with problems, best option is to automate a part of his work.However, mixed model
production calls for flexible robots which can be programmed to change parameters
depending upon the next model.CAD/CAM compress planning lead time so that the
product quickly gets ready for manufacture. Robots and automated machine tools quickly
make consistently good quality products, with no buffer or waste thus compressing
manufacturing lead time. Automatic quality control (poka yoke) is an aid towards JIT
system

Uniform Workstation Loads (heijunka):

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The flow of production created by pull system, kanban, small lots of high quality, flexible
resources and jidoka can be maintained only if the production is relatively steady. Hence,
there is a need to smoothen the production requirement at the final assembly. Otherwise,
kanbans of some parts will circulate very quickly at some times and very slowly at others.
Variations of ± 10% is can be absorbed.
How to reduce variability?
1. More accurate forecasts to guard against unexpected demand
• Sales division (eg. Toyota) conducts a survey twice a year
• Monthly production schedules are developed 2 months in advance
• Review plans 1 month in advance and again 10 days in advance
• Daily production are finalized 4 days in advance (Freeze windows) of actual
production(by then orders from dealers are firm)
• Changes in model mix can be communicated to the assembly line just the previous
evening. Kanbans will take care this change in the rest of the system
2. Level the demand across planning horizon:
• Demand is divided into small increments of time and spread out as evenly as
possible so that same amount of each item is produced each day and
• The item production is mixed throughout the day in very small quantities. Produce
roughly the same mix of products each day, using a repeating sequence
• Daily production is arranged in the same ratio as monthly demand and jobs are
distributed as evenly as possible across a day’s schedule
• At least some quantity of every item is produced daily and some quantity is
always available to meet variation in demand. Meet demand fluctuations through
end item inventory rather than through fluctuations in production level
Problem 2. SMS automobile company makes cars, SUVs and vans on a single assembly
line. December’s forecast is for 220 vehicles. SUVs sell at twice the rate of cars and
thrice that of vans. Assuming 20 working days in the month, how should the vehicles be
produced to have smoother production?
Solution:
Daily breakdown = 220/20 = 11 vehicles

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Daily sequence (batched): S S S S S S C C C
V V Daily sequence (Mixed): S C S V S C S
VSCS
Continuous Improvement (Kaizen):
Kaizen – Change for the Better or Continuous improvement. It is associated with, among
others:
- Improve quality of product/service
- Eliminating waste (Muda)
- Improving process efficiency and effectiveness
- Improving morale of employees
Quality is everybody’s responsibility, not just of QC dept. Every employee at every level
participates and contributes ideas to improve the processes and environment. Workers
voluntarily spot quality problems, stop operation if needed, trace the source of unquality,
get together to analyze processes and generate ideas for improvement and adjust their
working routines(Upward communication). Kaizen can be better achieved by finding
root causes of problems. To find root cause of a problem – Ask WHYs until the
underlying cause is identified
Anticipate/identify the problem, analyze the root causes, develop alternative solutions,
choose the best one, measure the work content, standardize the method and monitor
adherence to it. The knowledge of industrial engineering (method study, work
measurement, value analysis, Quality management tools, etc) is very helpful in bringing
about kaizen. Conceptually kaizen focuses on small but continuous improvements. Easy
to implement, Not a big change for people to resist, People enjoy the implementation as it
is their ideas. Kaizen relies on the human resource rather than capital investments.
Continuous improvement process will make sure the system is always getting updated

Close Supplier Ties :

Lean Supplying :Suppliers’ support is essential for the success of lean. Suppliers need to
be not just reliable, but synchronized with their customers requirement too. Strong long-
term working relationships with a select group of suppliers located close-by to the
customer would enable delivering in smaller quantities several times a day.
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 1. Long-term supply contracts (typically 3-5years or life of the product): Suppliers
are chosen based on their ability to meet delivery schedules with high quality and
reasonable cost, and willingness to adapt to customer’s requirement
2. Synchronized production: With longer-term contracts suppliers can focus on fewer
customers. Guaranteed steady demand allows supplier’ production system to
synchronize with that of customer. Customer may also provide engineering and
quality management help
3. Supplier certification: Several stages - Supplier’s products, production facilities,
quality systems, logistic resources are examined by the customer. Statistics of
each shipment are checked. After about 6 months of no problems, the supplier is
certified. Only then the goods from the supplier is considered for exemption from
incoming quality inspection. However, any cost of line stop/product recall due to
defective supply may also be recovered from supplier
4. Mixed loads and frequent deliveries: Smaller quantities of variety of goods from
several suppliers makeup a truck load and are delivered directly at the point of use
in customer’s plant, several times a day. Several suppliers share local warehouses.
Precise delivery schedules are drawn and adhered to
5. Standardized, sequenced delivery: Using standardized containers, and exchanging
filled ones with empty ones speeds up the delivery. If deliveries are made directly
to the assembly line, they are sequenced in the order of assembly
6. Locating in close proximity to the customer: For frequent deliveries, the suppliers
need to be closer to the customer. If the distance prohibits daily delivery, suppliers
may establish small warehouses near to the customer, which they may also share
with other suppliers. These warehouses can also serve as load switching points for
JIT deliveries to different customers
7. Close relationships b/w buyers and suppliers' QC people. Suppliers helped to meet
quality requirement
Suppliers with stringent quality standards could forego incoming inspection and goods
could be delivered right at the assembly line even without being counted, inspected,
tagged or stacked. Suppliers encouraged to package in exact quantities. No overage or
underage is acceptable. Suppliers who try to meet the increasing demands of lean
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customer without being themselves would have to overrun with inventory, very high
production and distribution costs. Suppliers are encouraged to reduce their production lot
sizes
Lean Purchasing: Japanese JIT buyers rely more on performance specifications and less
on design specifications, giving more room for supplier to innovate. Delay due to spec-
clarification is avoided. Japanese JIT purchase agreements involve minimum paper
work, and may specify (in addition to price and specifications) an overall quantity to be
delivered during a period of several months. Purchase agreement specifies that delivery is
to be made either as per the long-term production schedule or release of kanban (which
may be directly from work centre to supplier). Quantities to be delivered may vary from
delivery to delivery, but fixed for whole contract term

Preventive Maintenance and TPM:

Machines need maintenance. Maintenance is undertaken,
(i) when a machine breaks down (Breakdown maintenance): Breakdown can be very
expensive due to lost production, idle workers and supervisors, damaged tools and
products, missed deadlines, accidents, etc. Often, cost of up-keeping a broken down
machine is much higher than preventing the breakdown.
(ii) at predetermined times to prevent equipment from breaking down (Preventive
maintenance): The history of failures of a machine (type, frequency, time b/w
failures, repair time, cost, etc) can be used to mathematically workout a preventive
maintenance schedule. PM includes keeping records on each machine’s usage, careful
analysis to determine the frequency and schedule of PM, case reports after PM, etc.
But in spite of the PM, breakdown cannot fully prevented. Hence, what Lean system
needs is Total Productive Maintenance (TPM).
TPM is a combination of preventive maintenance and TQC (worker empowerment, zero
defects, QC tools, etc). TPM requires management to take a broader and strategic view of
maintenance activities. Workers take daily care of their machines and the work
environment. They clean, oil and grease their machines, adjust the settings, do minor
repair, collect and interpret the maintenance and operating data, etc.
As a part of TPM, 5–S approach is also widely used.
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 The S Goal Eliminate or Correct
SEIRI (Sort) Keep only what you Unwanted tools, inventory, supplies,
need parts, fixtures, displays, items blocking
aisles, stacked in corners, etc
SEITON (Set A place for Non-availability of an item when needed,
in order) everything and unsafe environment, pre-positioning tools
everything in its
place
SEISO (Shine Cleaning and looking Floors, walls, stairs, equipment, tool
for ways to keep clean trays, display boards, tools and materials
and organized
SEIKETSU Maintaining and Unavailable information, check-lists,
(Standardize monitoring the first standards, prescribed limits
three
S’s
SHISUKE Sticking to the rules Number of workers without 5-S training,
(Sustain) inability to locate anything within 30
seconds, Number of 5-S inspections not
performed

The Benefits of Lean Production:

Lean provides a wide range of benefits such as:
• Reduced inventory
• Improved quality
• Lower costs
• Reduced space requirements
• Shorter lead times
• Increased productivity
• Greater flexibility
• Better relations with suppliers
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 • Simplified scheduling and controlling activities
• Increased capacity
• Better use of human resources
• More product variety

Limitations of Lean:
• Not appropriate for all types of organizations
• Companies with high variability of demand (takt time breaks down), large variety
of lowvolume products (too many kanbans) or custom-engineered products (no
kanbans) find serious deficiencies in this approach.
• Lean gets derailed when unexpected changes in demand or supply occur (eg. Fire,
strike, natural calamities, etc. at supplier’s place)
• Hence, companies should assess risk and uncertainty in their businesses and adapt
lean practices accordingly

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