Summaries - Logistics and Operations Management

THE OPERATIONS SYSTEM

Part I – Introduction
 Birth of System: What are the business objectives; Strategy vs
WHAT IS OPERATIONS MANAGEMENT? objectives; Project Management.
 Product Design and Selection Process (Products vs. Services): Design
Operations Management allows to: Systematic Approach to Organize
and Development; What is the process?; Managing Technology.
and Optimize Processes; Business Education; Career Opportunities;
 Designing the System: What capacity do we need?; Where to install
Cross-Functional Applications (not limited to one specific department
the facilities?; What is the best Layout?.
within an organization).
 System Management - the day to day: Managing the supply chain;
PRODUCTION & OPERATIONS MANAGEMENT
Management of purchasing and supplier; Forecasts; Planning
process; Materials Management; Scheduling; Just-In-Time (JIT).
Study of concepts, procedures and techniques used by managers in all  Improving the System: Just-In-Time; Synchronized Production; Total
types of organizations whose aim is to get the day-to-day work done Quality Management; Total Preventive Maintenance.
quickly, efficiently, without errors and at low cost. It’s applied:
EMERGING MODEL: INDUSTRY AS A SERVICE BUSINESS
⮩ Industrial Management: production of quantified goods or tangible
products (automobiles, electronics, food products, and clothing). CORE services: The customer requires that factory goods are produced
Manufacturing Industry: Production can be stored; No contact correctly, on time and with competitive prices that meet their needs.
with the consumer; High Lead times; Big Installations; Capital These are commonly summarized as the classic performance objectives:
intensive; Quality easily measurable. Quality, Flexibility, Speed, Price.
⮩ Services Management: productions of goods or services that are Value Added Services: Makes the life of the customer easier. Types:
difficult to quantify and that are based on experiences and
interactions (healthcare, education, consulting, and hospitality). ✓ Information: The department grabs the data, and after some
Services: Production cannot be stored; Direct contact with the manipulation provides a quality data sheets and videotapes
consumer; Fast response times; Smaller installations; Intensive documenting the actual product testing and field quality
human resources; Quality difficult to measure. performance to field sales and service personnel.
✓ Problem Solving: Is the ability to help internally and external
groups to solve problems.
✓ Sales Support: Is the ability to enhance sales and marketing
efforts by demonstrating the equipment or production systems
the company is trying to sell.
✓ Post-Sale Support: The ability to replace the defective parts
quickly or to replenish stocks quickly to avoid stockouts.

Which advantages arise from the Value-added service? Differentiates the

organization from its competitors; Build relationships that bind customers
to the organization in a positive way.
 Corporate Strategy: It involves making decisions about the overall
direction of the company, including its portfolio of businesses OPERATIONS MANAGEMENTS PERSPECTIVES
(whether it should diversify into new markets or industries, form
partnerships, or divest certain businesses). As a production function: It focuses on the processes and activities
 Finances Strategy: It includes decisions related to capital structure, involved in producing goods or delivering services efficiently and
financing options, and investment priorities. Aims to ensure the effectively.
organization has the necessary financial resources.
As a Profession: Professionals in operations management play key roles
 Operations Strategy: It involves making decisions about the design in managing and optimizing an organization's operations. What we do in
and management of the organization's operations and processes. Operation Management Profession: Supervise, lead, guide different
Aims to optimize the efficiency and effectiveness of the teams, take decision, work in a project, reduce waste, eliminate the root
organization's core processes, such as production, supply chain, and of the problem (contamination). Responsible for a variety of activities:
service delivery. planning to scheduling, quality and personal. The operations managers
 Market Strategy: It involves understanding the external environment, has to: Manage a cost center; To be efficient in decisions ranging from
market dynamics, customer needs, and competition. the short term to long term; Technology Manager; Assign tasks;
 Operations Management: Ongoing, day-to-day implementation of the Responsible for the production flow and its associated financial flow;
strategies and plans developed through operations strategy. Control of operations in time and costs; Connection between corporate
goals and operational; Managing complexity. He also needs to: Plan; Lead;
Operations Management Main Aspects (5 P´s): Major strategic and
Organize; Manage Human Resources; Motivate; Control.
tactical areas where manufacturing seek operations consulting – People,
Processes, “Parts”, Planning, Plants.
SUPPLY CHAIN MANAGEMENT
Focuses on the efficient and effective management of the flow of goods, Pull Systems (Just-In-Time (JIT)): respond to customer demand and
services, information, and finances from the point of origin to the point reduce the risk of overproduction. Help organizations adapt to demand
of consumption. Supply chain management is a set of approaches fluctuations and reduce excess inventory when demand is uncertain.
concerned with the efficient integration of suppliers, factories,
warehouses, and stores so that products are produced and distributed: Risk Pooling: By aggregating demand from multiple locations or products,
In the right quantities; To the right locations; At the right time. To: organizations can achieve a more stable and predictable demand pattern.
Minimize total system cost; Maximization customer service requirements.
Centralization: Consolidation of certain functions or activities in a central
The goal is efficiency and cost-effectiveness across the entire system
location
(Total system wide costs); Multiple levels of activities (Strategic, Tactical,
Operational). Postponement: Delays certain customization or assembly processes until
customer demand is known.
WHAT IS A SUPPLY CHAIN?
Strategic Alliances: Include partnerships with suppliers, distributors, or
Flow of products and services of: Raw materials manufacturers;
competitors, and help spread risk and enhance access to resources.
Intermediate products manufacturers; End product manufacturers;
Between wholesalers, distributors and Retailers. Connected by Collaborative Forecasting: Sharing information and data with key supply
transportation and storage activities; Integrated through information, chain partners, incorporating insights.
planning and activities; And min cost and max service levels.
Part II
STRATEGIES FOR SUPPLY CHAIN MANAGEMENT

The process of finding the best system wide strategy global → Systems OPERATIONS MANAGEMENT STRATEGY
Approach.
OPERATIONS STRATEGY
Management must focus on: Global Optimization; Managing Uncertainty.

WHY IS GLOBAL OPTIMIZATION SO HARD?

CONFLICTING OBJECTIVES IN SUPPLY CHAIN

1. Supplier: Stable volume requirements; Flexible delivery time; Little

variation in mix (types); Large quantities.

2. Manufacturing: Long run production; High quality; High productivity;

Low production cost. Corporate level strategy: Is the highest level of strategy. It sets the long-
term direction and scope for the whole organization. If the organization
3. Warehousing: Low inventory; Reduced transportation costs; Quick comprises more than one business unit, this strategy will be concerned
refilling capability. with what those businesses should be, how resources will be allocated
between them, and how relationships between the various business units
4. Customers: Short order lead time (time it takes to complete a process and between the corporate center and the business units should be
or task from its initiation to its completion); High in stock; Enormous managed. Organizations often express their strategy in the form of a
variety of products; Low prices. corporate mission or vision statement.

⮩ Must deal with: Conflicting objectives of different entities. Business level strategy: Is concerned with how a particular business unit
Dynamic system evolve over time: Variations over time in should compete within its industry. What its strategic aims and objectives
customers demand and suppliers capabilities; Matching demand- should be. A business unit’s strategy may be constrained by a lack of
supply difficult; Different levels of inventory and backorders. resources or strategic limitations placed upon it by the corporate center.
In single business organizations, business level strategy is synonymous
CAN FORECASTING HELP? with corporate level strategy.
Forecasting (prediction) is always wrong. The longer the forecast horizon Functional level strategy: The bottom level of strategy is the one of the
the worse the forecast. individual function (operations, marketing, finance, etc.). These strategies
are concerned with how each function contributes to the business
UNCERTAINTY AND RISK FACTORS strategy, what their strategic objectives should be and how they should
Demand is not the only source of uncertainty, such as: Transportation manage their resources in pursuit of those objectives.
times; Components availability; Environmental disasters. Recent trends
How can we evaluate the operations strategy? Consistency (Between
make things more uncertain: Outsourcing.
the operations strategy and business strategy; Between operations
strategy and the other functional strategies; Between the different
HOW TO DEAL WITH UNCERTAINTY? decision areas of operations strategy) and Contribution to competitive
advantage (Enable operations to set priorities that enhance competitive
advantage; Highlight opportunities for operations to complement the not introduce confusion - do not make a mess. Use of external experts
business strategy). to take strategic decisions.
II. Keeping at the level of its competitors – external neutrality:
STEPS THAT FOLLOW OPERATIONAL STRATEGY DEFINITION Organization manages its operations by seeking to emulate those of
its competitors -> The operations function tries to be as good as the
Understand the implications of the corporate strategy at the operational
competition. Such an organization is likely to benchmark its operations
level. Define the operational objectives and the control measures of
against its competitors. Adopt best practice in its industry so that it
success (KPI - Key Performance Indicator). Determine the operational
does not hold the organization back. Use of investment as the only way
resources needs (materials, subcontracts, new contracts with the
to became competitive. The best that such an approach can achieve
suppliers…) and required skills (manpower with the required skill,
is to match the operations performance of its competitors.
equipment, capacities…). Designing the appropriate operating system
III. Support the corporate strategy – internal coverage: Organization has
(ex. Specific aspects, training, scheduling…). Implementation of the
an operations strategy that is linked to and derived from its business
scheduling objectives → To do what is needed, when is needed. Control
strategy -> The operations function seeks to provide credible support
and supervise the progress by analyzing the measures defined. for the organization’s business strategy (be consistent with strategic
objectives). An operations strategy will be developed which will be
Strategy decisions affects: Capacity Requirements (lead-time,
derived from, and support, the corporate strategy. Be consistent with
responsiveness, operating costs); Facilities (location, size and
strategic objectives - being among the best. Sustainable planning.
specialization); Technology (equipment, automation); Vertical integration
IV. Aiming to maintain competitive advantages – external coverage:
(supplier's degree of utilization); Human resources (skill level, salary
Organization is radically different to one at any of the other stages.
policies, training requirement); Quality (defect prevention, monitoring,
Organization uses its operations excellence as the basis for its
target quality); Production planning (basic policies, centralization, decision
business strategy → An operations-based strategy. -> The
rules); Materials management (ordering policies, decision rules,
centralization); Organization (structure, control systems, prices, operations function: Provides the basis of competitive advantage; Will
importance of groups); Sourcing (suppliers' selection, be seen as the means of exceeding customer expectations by
relationship/cooperation). delighting the customer; Will be managed proactively to drive the
business strategy of the organization (strategic planning 'visionary‘);
CORPORATE VS OPERATIONAL STRATEGY Are at the forefront of developments in best practice.

Strategy Process: Customer Needs (More Product) -> Corporate The Sandcone Model: Multiple Dimensions from Ferdows and Meyer
Strategy (Increase Org Size to capture a larger portion of the market) -
> Operations Strategy (Increase Production Capacity) -> Decisions on
Processes and Infrastructure (Build New Factory).

There are five operations performance objectives or competitive

dimensions:

⮩ Cost -The ability to produce at low cost

⮩ Quality - The ability to produce in accordance with specification and
without error
⮩ Speed - The ability to do things quickly in response to customer
demands; short lead times between when a customer orders a They emphasize that efforts to further enhance quality should continue
product or service and deliver it whilst commencing efforts to build dependability. Similarly, actions on
⮩ Efficacy – guarantee that the good or service is done quality and dependability need to continue whilst building flexibility. Finally
⮩ Flexibility - The ability to change operations and can comprise the efforts to reduce costs take place alongside continuing efforts to
ability to: change the volume of production, change the time taken improve quality, dependability and flexibility. They claim that operational
to produce, change the mix of different products or services capabilities developed in this way are more likely to endure than individual
produced, to innovate and introduce new products and services. capabilities developed at the expense of others.

MAY MORE THAN ONE OF THESE OBJECTIVES COEXIST STRATEGIC PRIORITIES

WITHIN COMPANIES?
Marketing oriented dimension
Hayes and Wheelwright’s four-stage model – categorize different types
of organizations based on their attitude towards their operations. Order Winners factors: Is a criterion that differentiates the products or
services from those of another firm. Depending from the situation, may
I. Minimize the company negative aspects - internal neutrality: Operations be any dimension presented earlier. Is an important determinant for
managers never have the time to focus on a consistent set of business success – causes business distinction from a competitor.
performance objectives -> The operations function is internally
focused and reactive. They are viewed as a ‘necessary evil’. The best Order Qualifiers factors: Is a screening criterion that permits a firm’s
that the organization hopes for is that operations ‘don’t screw up’. Do products to even be considered as possible candidate for purchase. Not
being the determining factors although important and should have an THE PROCESS OF DESIGN
appropriate priority.
General Principles: Conception and development of products/services;
Less Important factors: Have very limited importance and its Selection of the process.
performance does not influence the buying decision.
Goal - satisfy the customers requirements: Is necessary the applicability
OPERATIONS STRATEGY FRAMEWORK of the operational strategies efficiently (e.g. cost, quality, flexibility,
effectiveness, speed). It includes not only the products/services but also
Main Objectives to Developing an Operations Strategy: Identify the the processes. A small change in the product specification can cause a
competitive dimensions based in costumers needs (normally obtained huge additional complexity into the process. This is avoided if products
from the market) → Translate them into a specific performance development and processes are treated simultaneously.
requirements for the operations → Make plans to ensure that the
operations capability in the firm are sufficient to accomplish them. Process Design is a transformation activity:

✓ Input: technical information, market information…

STEPS IN DEVELOPING AN OPERATIONS STRATEGY
✓ Transformation: the process itself → design activity
The steps to prioritizing these objectives are the following: ✓ Output: final design with quality, efficacy, flexibility, low cost.

1. Segment the market according to the product group. The process design can be characterized by the 4 C´s:
2. Identify product requirements, demand patterns, and profit margins
of each group. ✓ Creativity – creating something new or change an existing one.
3. Determine order winners and qualifiers for each group. ✓ Complexity – associated with a high number of decisions, from
4. Convert order winners into specific performance requirements. a high group of variables and parameters.
✓ Commitment – to balance multiple requirements, which
STRATEGY IMPLEMENTATION sometimes must have trade-offs.
✓ Choice – Involves a choice between many different solutions,
After a strategy is defined the work only begins: Strategy can be hard from the most generic into the most specific.
to understand; Strategy can be to general, or unrealistic; Areas and
persons may interpret the same strategy differently. Other aspects that Influence the process design are:

WHAT IS PRODUCTIVITY? 1. Environmental Aspects (defined by laws): Sources of Material;

Amount and Energy Sources; Number and types of effluents
Productivity is a common measure on how well resources are being
(Waste, recycle); Lifetime of the product; End of life of the
used. In the broadest sense, it can be defined as the following ratio:
product (Waste? Disposal? Recycle? Landfill?).
2. Volume vs. Variety: Low-volume operations processes often
have a high variety of products and services. High-volume
operations process often have a narrow variety of products and
services.
⮩ Outputs: profit, goods produced, clients served…
⮩ Partial: One single input (ex. man-power or capital or energy or THE PROCESS OF DESIGN: CONCEPTION AND DEVELOPMENT
materials,…)
⮩ Multi-factor: More then one input (ex. Man-power + Capital) The challenge is: Conception of new products should allow a quick
⮩ Global: All the relevant inputs introduction into the market while satisfying the costumer.

Relative measure: to be meaningful, it needs to be compared with Product conception has two aspects to consider:
something else. Can use industry data, when available (e.g. different
✓ Industrial Project / Conception → Designed for the costumer:
stores). Over time within the same operation.
Satisfy the customer needs) (Good appearance; Easy to use).
✓ Conception of the Product → Production (Simple and suitable for
PRODUCTIVITY - EFFICIENCY - EFFECTIVENESS the production; Low costs; Reliable).
Efficiency: measures the relationship between the use of resources
Product development - Set balance/priorities among the following
(inputs) and the resultant outputs (e.g. use fewer/better the resources).
factors:
↑ Productivity ⮩ ↑ Efficiency
✓ Product Performance: Can satisfy the costumer need?
Effectiveness: measures the degree of achievement (ex. minimize the ✓ Speed of development: How much time is necessary to go to the
waiting time). market?
✓ Product cost: Total costs, including production cost.
✓ Expenses for the development program: Development cost
Part III
Conception to production: the product’s functional characteristics must
DESIGN OF PRODUCTS AND PROCESSES be analyzed before the production (Keep it simple).
Frequency of changes in production: How many times do the firms PROCESS REPRESENTATION
intend to change the product? This is associated with the corporate
Process Flow: specific path followed by the materials (chemicals,
strategy.
components, people) across the productivity process.
Opportunity of changes in the conception: The sooner the better (a
There are several representations to the process flow → Organizational
more accurate prototype, less cost associated).
graphs for the productivity process.
Concurrent/ Simultaneous Engineering: The concept involves product
✓ Simple flow diagram:
planning which includes all departments within an organization and
customer representatives. The goal is to share information to make the
design, development, and production of the product more streamlined
and make the product meet final customer expectations and needs. With
the introduction of suppliers and customers gets a Concurrent
Engineering. ✓ Assembly drawings (Gozinto);
✓ Assembly charts:
⮩ Which are the benefits from it?
o Increases the ability to launch new products → Gain time.
o Costs reduced associated with new products development.
o Faster identification of problems in development.

PRELIMINARY CONCEPTION

The conception and development of products has the next phases: ✓ Operation and route sheet;
✓ Process Flowchart:
1. Generating ideas: from marketing using surveys, competitor
information, group analysis.
2. Product selection: product characteristics definition, screening by
marketing, finance, operations.
3. Preliminary conception: define styles, parts, power.
4. Evaluation and improvement: Can be improved? Its viable?
5. Final conception and prototype: output = final specified product.

Phases of development: The Concept; The Package; The Process.

Before the process selection, it’s necessary to know which materials are ✓ State-Task Networks - describes the relationships between
necessary to make the product → Bill of Materials (BOM): the various operations (tasks) and materials (states), which
belong to the process:
1. Specify the components of the products/services: structure of the
product: assembly order → bill of materials and material tree.
2. Define the process to achieve the package: Simple flow charts;
Process graphs → process representation.

THE BILL OF MATERIALS (BOM)

Diagram which defines the relation between the different materials,

regarding their level in the process and their quantities.

ANALYSIS/EVALUATION AND IMPROVEMENT

To analyze and try to improve the preliminary design there is several

techniques:

✓ Taguchi Methods: deals with robust design → Use a combination

of statistical methods and engineering, which allows the reduction
of many hypothesis. The best design for Taguchi is related with
lowest cost but maintaining the product specification and high
quality. His methodology is related with the concept of Total Quality
Management.
Another way to consider the customer in designing a product is the
“value” they see in the product → Value Engineering, Value Analysis,
Quality Function Deployment (QFD).

VALUE ANALYSIS AND VALUE ENGINEERING

VA /VE have the purpose to simplify product and process → achieving

better performance at lower costs, by eliminating unnecessary costs
while all function requirement are maintained; improve quality; innovate
and improve communication. → LOOP between them.

Value Analysis deals with products already in production and is used to

analyze the product specification, if are equal to what is shown in the
production document.

Value Engineering is performed before the production stage; is Quality Function Deployment analyze may be characterized in 4 steps:
considered a cost-avoidance method (e.g., reduction of number of parts,
cheaper materials, process simplification…).

Applicable through the creation of multidisciplinary teams involves the

following phases:

⮩ Guidance: identify parameter consider the firm goals, firm

constraints, deadlines, market product position.
⮩ Information: preparation, costs information, production, competitor.
⮩ Functional Analysis: each function associated with the product is
analyzed, and changes are suggested. Principal and secondary PROCESS SELECTION - MANUFACTURE
function are identified and try to reduce at minimum the number
of secondary functions → reduce costs. It involves a series of strategic decisions to decide which process should
⮩ Creativity: brainstorming be used or implemented.
⮩ Evaluation and selection of groups of ideas: ideas analyze to Process: Set of operations (tasks) that transform raw materials into
forwarder implementation. finished products.
⮩ Previous studies
⮩ Implementing decision Organization of the production system: Operational; Structural;
⮩ Implementation - Development - Release Relationship with the customer.

OPERATIONAL SYSTEM
QUALITY FUNCTION DEPLOYMENT (QFD)
The classification is based on the type of operations that largely dominate
A more formal approach is the QFD, which gets the Voice of the
production:
Customer into the design specification of the product. It uses inter-
functional teams, like marketing, design, engineering, manufacturing.
Continuous Production: Processes that are high volume and low variety;
Objective: Reduce costs by ensuring quality and customer satisfaction. Products produced in an endless flow → Transformation process and
Manufacturing process. Production of large quantities of product; Small
It involves: List of customer requirements; Definition of technical range of products; Specialized Equipment (allocated to a single task);
specifications or project requirements (How can it be done?); Workforce semi-specialized; Inflexible flow of materials characterized by
Comparison between the product and the competitors; Correlation a tight control of operations.
Matrix – assign priorities to customer requirements and associate them
to their level of importance (Strong, medium, weak…). Repetitive Production: Repetitive processes → Products produced in
large amounts; Sequential production of each product through the same
series of operations; Highly automated process; Inflexible flow of
materials; Workforce semi-specialized.
DESIGNING FOR THE CUSTOMER: THE HOUSE OF QUALITY
Batch Production: Processes that treat batches of products together, and
Matrix or tool used to translate customer requirements into specific where each batch has its own process route. → Production of small
engineering or design characteristics. It helps ensure that the final product quantities of products with high quality; High range of different products;
aligns with customer desires and preferences. Multi-task equipment (allocated to several tasks); Workforce flexible;
Flexible flow of materials requiring an optimized management.
Production per Project: Production of large scale of products; Small Advantages: Low stock levels (JIT); Low waiting time; High process
range of products; Equipment and workforce depending on the product speed – easy control.; Production of high amounts
with different levels of specialization; Flexible production (high uncertainty
level); Rigorous planning and control. Disadvantages: Low flexibility level

STRUCTURE - LAYOUT INTERMEDIATE STRUCTURE

Describes the physical configuration of the productive process, which is Combines the previous approaches – Mix productivity flow.
organized to ensure: Quality, Cost minimization, Operational flexibility, Characterized by: FLEXIBLE MANUFACTORING SYSTEMS (FMS).
Proper handling of materials. Where the following techniques are used: One employee and several
machines; Group technology.
Three types of configurations describe the most common structures:
Process-oriented structure (Job Shop, batch production); Product- GROUP TECHNOLOGY
oriented Structure (Flow Shop, continuous production); Intermediate
Aggregates dissimilar machines onto work centers to work on products
Structure.
families that follows a common sequence of steps. Identify dominant flow
PROCESS-ORIENTED STRUCTURE .: JOB SHOP, BATCH patterns of parts families for locating or relocating the processes.
Physically grouping machines and product process into cells.
Organization of the resources based on the process: For jobs and For
departments → By function. All products share functions (operations) in
ONE EMPLOYEE AND SEVERAL EQUIPMENT
common. Demands: High level of supervision with high level of
specialization; Good technical knowledge. How to reduce the material flows? Generation of cells per process.

Allows: Inventory reduction; Workforce reduction; Reduction of

JOB SHOP
preparation time (Reduce setup times); Reduction of production time;
Common in industries where production processes are described by: Reduce material handling; Allow high level of automation.
Same operations in the production of different products; Production of
low quantities; Diversification of products; Flexible resources; High use of PRODUCT-PROCESS MATRIX
equipment (Ex: Traditional molding industry → different from each other,
Classifies production processes based on the characteristics of the
but using the same functions/operations).
product being produced and the production process itself. This
Advantages: High flexibility; Low downtime/idle time. classification helps organizations make decisions about process design,
automation, and resource allocation. The product-process matrix typically
Disadvantage: Low process speed; High levels of stock; High preparation consists of four categories or quadrants, each representing a different
time (setup time); High investment. combination of product and process characteristics.

PRODUCT-ORIENTED STRUCTURE: FLOW SHOP, CONTIN PROD

Characteristics: Organization of the resources based on the product

(linear base); Duplication of operations: avoids competition between the
products in terms of resources; Different production lines independent
from the remaining.

FLOW SHOP
Common in industries where production processes are described by:
Continuous and repetitive production; Production of high amounts; Small
range of products; Highly specialized resources; High capital associated
to the resources (Ex: Cars production, carwash).
 What we want to determine: The optimal combination that minimizes
costs; Balance capacity and demand in a way that optimizes resource
utilization, minimizes costs, and ensures the efficient delivery of products
or services: Workforce level, Production rate, Inventory level.

Costs sources: Production; Labor; Changes in production (hiring, training,

lay off); Inventory holding; Backordering (When an order is placed for a
product or service that cannot currently be fulfilled; Companies often
face a substantial risk of order cancellations when products are
backordered.).

Techniques for development: Cut-and-try (evaluates the cost of different

LAYOUT SELECTION
strategies and decides which to use); Linear programming (models the
It involves determining the physical arrangement of resources, problem and solves it).
workstations, equipment, and other elements within a facility to optimize
operational efficiency, productivity, safety, and workflow. The choice of CUT-AND-TRY
layout can significantly impact an organization's performance, cost
Pure strategies:
structure, and customer satisfaction.
⮩ Level capacity: Keep activities level constant. Stable workforce with
stable production rate, using stock to respond to higher demand
levels and accumulating inventory in times of low demand.
Associated costs: Backordering costs; Inventory costs.
⮩ Chase strategy: Adjust the production capacity to fit fluctuations in
demand by hiring and laying off employees as demand fluctuates.
Associated costs: Hiring, lay-off and training.
⮩ Stable workforce & variable working hours: Stable workforce level
resorting to flexible hours and overtime when demand increases.
Associated costs: Costs of non-productive/idle time; Cost of
overtime.
⮩ Subcontracting: Subcontracting production when in higher demand
periods. Associated costs: Quality and parts cost.

Mixed strategies: more flexibility, small modifications can result in

dramatically lower costs - Usually obtained using mathematical
Part IV formulations (Linear programming) or heuristic rules.

AGGREGATE PLANNING OPERATIONS RESEARCH / MANAGEMENT SCIENCE

Each level of planning serves a different purpose and addresses different Scientific approach to decision making, which seeks to determine how
time frames within the organization's overall planning process: best to design and operate a system, usually under conditions requiring
the allocation of scarce resources.
 Strategic Planning: focuses on the long-term goals and direction of
the organization. It involves defining the organization's mission, vision, Building a model: Determine what the decision maker wants to know →
values, and strategic objectives. Define the appropriate decision variable, reflecting the needs →
 Tactical Planning: bridges the gap between strategic planning and Formulate an objective function computing benefits/costs → Formulate
day-to-day operations. It focuses on medium-term planning and mathematical constraints indicating the interaction between the different
outlines how the organization will implement its strategic goals. variables.
 Operational Planning: focused on the short-term and day-to-day
activities required to meet the tactical objectives. It involves detailed PROBLEM STATEMENT FOR LINEAR PROGRAMMING
planning and execution of routine tasks. AGGREGATE PLANNING MODEL

What is aggregate planning? A plan for capacity and production, in the Given: A planning horizon t = 1, 2,…T. The demand forecast in each
intermediate term, to satisfy current and future demand. It involves time period 𝑡. The inventory holding cost per unit. The backordering
developing, analyzing, and maintaining a approximate schedule of the cost. The hiring cost. The layoff cost. The cost of labor per hour. The
overall operations of an organization. initial workforce size. The productivity – units produced per worker per
time period, or equivalent. The initial inventory size.
⮩ No discrimination between different products and services
Determine for each time period in the planning horizon:
⮩ Reconciles the supply of capacity with the level of demand
⮩ Medium-term capacity planning
 ⮩ The workforce level: computing the number of workers hired and Given: The capacity of each source node; The demand of each
layoff. destination node; The cost of shipping one unit from source node to
⮩ The production level: determining the production during regular destination node.
time, overtime and subcontracted.
Determine for each time period in the planning horizon: The optimal flux
⮩ The inventory level: considering inventory and backorders.
of commodities from source node to destination node.
So as to: Minimize costs while meeting demand
So as to: Minimize costs while meeting demand.

LINEAR PROGRAMMING AGGREGATE PLANNING MODEL

Feasible solution property:

⮩ A transportation problem has a feasible solution if and only if the

sum of the capacity of each source equals the sum of the demand
in each destination:

⮩ If total capacity > total demand: add a dummy demand node for
the unused capacity
⮩ If total demand > total capacity: add a dummy source node for the
unmet demand

HEURISTIC SOLUTION : LOWEST COST METHOD

Used to reach an initial feasible and acceptable solution: 1 - Setup the

table. 2 - Select the cell with lowest cost (i,j). 3 - Assign to that cell as
many units as possible without exceeding the supply of row i or demand
of column j. 4 - When a supply or demand gets exhausted cross the
corresponding row, column or both. 5 - Repeat steps 2 to 4 for the
remaining not crossed out cells until all units have been allocated

THE TRANSSHIPMENT PROBLEM

TRANSPORTATION METHOD Common extension of the transportation problem: A set of sources are
given to supply commodities. A set of destinations have known demands.
TRANSPORTATION PROBLEM A set of points are used as transshipment points. The commodities may
be rerouted through the transshipment points. The objective is to
PROBLEM STATEMENT transport commodities from sources to destination through
transshipment points at minimum costs.
 The MPS defines the quantity of each product to be produced during
the production horizon established in aggregate planning. A resampling
of time into smaller intervals and the disaggregation of products’ families
is considered.
PROBLEM STATEMENT

Given: The capacity of each source node. The demand of each

destination node. The cost of shipping one unit from source node to
transshipment node. The cost of shipping one unit from transshipment
node to destination node.

Determine for each time period in the planning horizon: The optimal flux STRATEGIES
of commodities from source node to transshipment node, and from Make-to-stock: The production is planned based on the capacity installed
transshipment node to destination node. and the firm holds product in stock for immediate delivery. MPS is
developed based on the final products.
So as to: Minimize costs while meeting demand.
Make-to-order: The production is driven by the customer. This strategy
provides a high degree of customization. Most of end items are custom-
made. MPS is not developed.

Assemble-to-order: Approach for producing end products with many

options from relatively few major assemblies and components, after
customers’ orders are received. MPS is developed based on the
components involved.

After the MPS is defined, we determine if we can accept new incoming

orders. To add a new order to the system we need to check if ATP
(Available to Promise - quantity of a product that is available for sale to
customers after accounting for existing customer orders and committed
inventory) from the correspondent previous period is enough to satisfy
AGGREGATE PLANNING
the order.
Aggregate Planning using Transportation Method: Meet demand;
Minimize costs; Fixed capacities; Deterministic demand; Linear ⮩ If it’s enough: Accept the order and update customers’ orders.
relationship between costs and variables. Update projected on-hand inventory and ATP from the affected
periods.
MASTER PRODUCTION SCHEDULING; ⮩ If it’s not enough: Reject the order.
CAPACITY REQUIREMENT PLANNING
MPS flexibility depends on several factors: Production lead time; Delivery
MASTER PRODUCTION SCHEDULING (MPS) times of components to a specific end item; Customer/company
Consider the aggregate plan for the first trimester of a company relationship; Capacity installed; Manager’s reluctance or willingness to
producing two computer models: make changes.
Time fences - A period of time having some specification level of PROCUREMENT: MANAGING ACQUISITION PROCESS
opportunity to make changes. Each firm has its own time fences:
Efficient procurement strategies/practices: Right quantity and quality of
 Frozen: no changes to MPS allowed materials for production or providing services. Can lead to cost savings.
Involves establishing and maintaining relationships with suppliers, which
 Moderate: may allow some changes in some products
can allow a stable supply of materials, timely deliveries, and consistent
 Flexible: allows almost any variation in products, with the remain
quality. Optimize inventory levels and minimize inventory holding costs.
capacity provision
Risk management (mitigation the impact of disruptions). Innovation.
The Master production scheduling: A time plan specifying how many
Services or products delay free, with quality, and reduced costs.
items the firm plans to build and when; Connects the aggregated
planning with the materials requirements planning; Differentiates 1 - Identification of needs: Buying, reordering; Stakeholders; Product or
between products; Can deal with end items or components depending service specifics. 2 - Sourcing: Check vendors; Research: reputation,
on the firm strategy. speed, quality, reliability, prices. 3 – Selection. 4 - Negotiation: Request
quotes. 5 – Ordering. 6 – Tracking. 7 - Receiving: Inspection. 8 –
Sets due dates for production orders, which impacts on: Capacity
Payments.
planning and Materials planning.

CAPACITY REQUIREMENT PLANNING (CRP) PRODUCTION CONTROL: MANAGING MATERIALS ALONG

PRODUCTION PROCESS
Aims to guarantee that there is enough capacity when and where it is
Standardization of production processes, evaluation of processes
necessary, to fulfil the planned production; Allows the manager to analyze
performance and development of corrective functions; Point out
the needs in terms of capacity required by the MPS; Allows a more
inefficiencies, weaknesses and shortcomings; Provision of resources
detailed view over the production schedule, avoiding errors and providing
(materials, labor, equipment, etc.); Organize schedule (sequence and
knowledge on the capacity being used.
timing of each production task): Manage production lead times, Meet
Steps: customer delivery deadlines, Optimize resource utilization (Increase
productivity; Minimize waste and production costs); Ensure coordination
1. Compute the available capacity in each of operations, smoother flow of materials and work-in progress;
area/section/department of production. Inspection and quality checks of semi-finished and finished goods.
2. Compute the capacity required according to the planned
production (MPS).
MARKETING: LINK BETWEEN MANUFACTURING AND OUTSIDE
3. Compute the capacity required by the orders already in WORLD
process.
Identification of a market opportunity → meet customer needs
4. Analyze capacity available vs capacity required.
effectively: Marketplace analysis; Customer behavior; Served markets;
Supplied products; Customer service levels; Research (ex: customer
Part V preferences, products’ features, trends..); Target customers (Buying
habits; Products of use; Opinions); Pricing and promotion strategies.;
MATERIAL MANAGEMENT
Forecasting (ex: future demand); Customer orders’ processing.
Why is material management important? Distribution planning and
control; Logistics management; Meeting material requirements; MANUFACTURING: PRODUCTION
Inventory management; Controlling and Coordinating material flows;
Meet demand; Cover production costs; Ensure quality; Fulfil customer
Maximize use of resources; Providing the required level of customer
requirements; Factory stockroom operation; Finished good warehousing.
service; Ensure continuity of supply; Reduce material costs; Improve
The Production Process depends on: Demand characteristics and Level
inventory turnover; Ensure continuity of quality; Build and maintain good
of customization
supplier relationships.
o Make-to-stock: Demand forecasts; Low demand uncertainty;
Not enough material → Less production levels; Due date
Anticipated production and storage.
issues/deadlines; Stockouts/shortages → Low service level; Profit o Make-to-order: Customization; Production after orders; Low
opportunity loss. Too much material → Fulfil orders/ Meet demand; inventory levels; High waiting times.
Generate stock → High inventory costs; Capital opportunity loss. o Make-to-assemble: Production and storage of standard
components; Final assembly based on orders; Fast customization;
Material management involves planning and execution of supply chains
Low demand uncertainty.
to meet the material requirements of a company: controlling and
regulating the flow of material while simultaneously assessing variables
like demand, price, availability, quality, and delivery schedules. DISTRIBUTION OF THE FINAL PRODUCTS
Transportation (Move products from manufacturing sites to distribution
Goals: Right materials; Right time; Right amount; Right price; Right sources. points or customers); Distribution of inventory (Distribute stock of finished
Main Activities: Procurement, Production Control; Marketing; products to fulfil customer orders); Warehouses (Establish strategic sites;
Manufacturing; Distribution. Determine the number; Organization of layouts; Define receiving and
storage methods); Material Handling (Appropriate equipment; Loading, Controlling costs, Accurate inventory records. Contributes to: Streamlines
unloading, transportation of goods); Packaging. operations; Overall organizational success.

MATERIALS WHY INVENTORY?

To maintain independence of operations → set-up time reduction; To

meet variation in product demand → uncertainty; To allow flexibility in
Categories Types Importance production scheduling; To provide a safeguard for variation in raw
material delivery time; To take advantage of economic purchase-order
MATERIAL’S CATEGORIES size. Inventory: Control; Planning; Accuracy; Costs; Trade-offs.
Raw materials: Initial substances/ components necessary to produce the
INVENTORY CONTROL
finished good.
Helps minimizing costs while ensuring customer satisfaction: Holding
Work in Process materials: Components/assemblies that are needed for
costs, setup (production) costs, ordering costs, shortage costs.
a final product in manufacturing.
Requires knowledge on: Type of materials involved: Dependent demand
Final products: Fully finished products, ready for sale to final customers;
materials; Independent demand materials. Production process: Process
Items in manufacturing plants, warehouses, and retail outlets awaiting
description; State-task Network (product/tasks recipe); Bill of Materials -
distribution to the final customers. BOM.

TYPES OF MATERIALS
PROCESS DESCRIPTION
Dependent demand materials: Demand is driven by the need for
Characterized by the operations sequence, processing time and all the
components/assemblies (required for finished products); Need is a materials involved (steps, resources, timelines, etc).
function of market demand and on decisions related with production
process (production or assembly requirements of a finished good);
Inventory management - Depends on production requirements and it’s
Complex: Delivery capacity, Lead times, Delivery schedules, Logistical
processes, Transit timelines between entities, Periodic reviews of
inventory levels, Counting and audits of inventory.

Independent demand materials: Direct demand, based on the need for

finished good; Need is a function of market demand - Demand for these
items is unrelated to each other or the scheduling of activities; Based STATE TASK NETWORK
on/influenced by Customers preferences, Confirmed customer orders,
Graphical representation of the sequence of tasks to create the final
Forecasts, Estimates and market trends, Historical data (actual sales
product.
orders). Decisions: How much to order? When to order? How to control
the system?

BILL OF MATERIALS (BOM)

Relationship between components/raw materials, not only in terms of

IMPORTANCE OF MATERIALS
process and amounts/ quantities to produce the final product).
Material management requires: Suitable review of each material stock;
Consider each materials’ importance and dependence; Ensure accurate
records of available stocks.

Three groups of materials within companies: High-cost items, Lower

cost items, Meaningless cost items.

Two methods that should work in conjunction with other systems - ABC
Inventory planning and Cycle counting: Efficient material management,
Lower-level coding: each item is placed at the lowest level at which it When to count: At the end of the business day; Prior to start of day;
appears in the structure hierarchy → easier to summarize the nº of Over the weekend; During slowest shift.
items.
When to produce a cycle count? Regular intervals; Special occasions
INVENTORY PLANNING (When an order is placed, When an order is received, When a specified
number of transactions have been occurred, When an error occurs).
If the annual usage of items in inventory is listed according to monetary
units: shows that a small number of items account for a large capital INVENTORY COSTS
volume; large number of items account for a small capital volume.
Item costs - price you pay for the item: Material, labor, overhead
Classification in three groups: (manufactured in house), transportation, customs, insurance.

⮩ Materials A: 15 to 20% of items; 70 to 80% of capital volume → Carrying/Holding costs - volume related: Capital, storage, obsolescence,
Rigorous control (weekly orders) damage, lost or stolen goods, deterioration.
⮩ Materials B: 20 to 30% of items; 15 to 20% of capital volume →
Ordering costs - not quantity dependent: Preparation, follow-up,
Less Rigorous control
expediting, receiving, authorizing payment, and the accounting cost of
⮩ Materials C: 50 to 65% of items; 5 to 10% of capital volume → receiving and paying the invoice, control, setup.
No control (Order once a year and keep in inventory)
Shortage costs: Waiting time, cancellations, opportunity → Trade-off
ABC INVENTORY PLANNING between carrying stock to satisfy demand and the costs resulting from
stockout.
How to control items with different importance? Material Management
should consider: Capacity-associated cost: Overtime, hiring, training, layoffs.

⮩ Materials A: Accurate forecast; Senior level involvement; Rigorous INVENTORY TRADEOFFS

control
⮩ Materials B: Approximate forecast; Middle level involvement; Low Inventories: Reduced holding and depreciation costs; Easier
Moderate degree of control organization; More usable cash (interest rates); More space; Avoid
⮩ Materials C: No forecast; Junior level involvement; Relaxed degree spoilage, damage and obsolescence; Avoid taxes, insurance and
of control shrinkage (wastes and theft).

High Inventories: Setup cost reduction; Lower shipping/transportation

INVENTORY ACCURACY
costs; Decrease risk of stockout; Increase customer satisfaction/service;
Accurate inventory information is crucial to the success of inventory Lower ordering cost (Supplier price discount); Deal with uncertainty and
management (Where is our stock? How much stock is in the delays.
warehouse?): Inventory reductions; Reduce audits; Better customer
service; Prevent stockouts, shortages.; Control quality of inventory. INVENTORY MANAGEMENT: DEPENDENT DEMAND ; MATERIAL
REQUIREMENT PLANNING (MRP)
Methods: Paper/computerized systems; Assign responsibility to specific
Dependent Demand is characterized by: A high degree of complexity.
employees; Secure inventory behind locked doors; Cycle counting
Depends on the production requirements. Allows greater fluidity of the
(Physically count a part of the total number of items each day).
production process. This type of inventory treatment has evolved over
time: Reorder point system (ROP) → Material Requirement Planning
CYCLE COUNTING
(MRP) → Production synchronized – JIT (Just in time)..
Continuous process; Eliminate (annual) inventory counting with
interruption of all operations/tasks; Timely detection and correction of MATERIAL REQUIREMENT PLANNING (MRP)
problems; Smoother operations; Reduced counting errors; Errors found
Master Production Schedule (MPS) → Time plan specifying how many
– check records; Storeroom personnel physically count a part of the
times and when the firms plans to build; Product differentiation; Sets due
total number of items each (day); Decision: Which items should we
dates for production orders, which impacts on: 1. Capacity planning 2.
count? When? By whom? Class A items should be counted more
Materials planning.
frequently…?
Capacity Requirement Planning (CRP) → Guarantee that there is enough
ABC Analysis + Cycle Counting Method:
capacity when and where it’s necessary, to fulfil the planned production;
Inputs: number of items, available counting resources, counting frequency Allows the manager to analyze the needs in terms of capacity required
based on ABC Analysis. by the MPS; More detailed view over the production schedule, avoiding
errors and providing knowledge on the capacity being used.
ABC Count Frequency: Decide counting frequency of each category:
multiply the respective number of SKUs per category by the desired Material Requirements Planning (MRP) → software system; Mean for
frequency to establish total counts; Divide the total counts by the number determining the number of parts, components, and materials needed to
of count days (assuming one year). produce a product; provides time scheduling information, specifying
when each material, parts, and components should be ordered or quantity, is equal to the demand for that specific period,
produced; Dependent demand drives MRP. ensuring that there is no excess or shortage of inventory).

Based on a Master Production Schedule (MPS), the Bill of Materials and When MRP has information feedback from its module outputs →
Inventory Records, a Material Requirements Planning system (MRP): Closed-loop MRP
Creates schedules identifying the specific parts and materials required to
produce end items; Determines exact unit numbers needed; Determines ISSUES WITH MRP
the dates when orders for those materials should be released, based on
Capacity infeasibility: MRP assumes infinite capacity; Need to combine with
lead times.
CRP to ensure the MPS is capacity feasible.
MRP TERMINOLOGY Long lead times: Uses pessimistic lead times to account for uncertainty;
Gross Requirements (GR) – Total amount required for a particular item Leads to higher inventory levels.
(MPS + external customer orders). Typically, are scheduled in weekly
System nervousness: Small changes in MPS result in large changes in
time buckets
planned order releases.
Scheduled receipts (SR) – Materials already planned to be received from
MANUFACTURING RESOURCE PLANNING (MRP II)
supplier and/or production (purchased orders scheduled to arrive)
MRP II is a game that plan and monitor all resources of a manufacturing
Available inventory /Projected on hand/ available balance (PAB) –
firm (using the closed-loop MRP system to generate the financial figures):
inventory available coming from the previous period.
Manufacturing; Marketing; Finance; Engineering ↔ ERPs (Enterprise
PAB(t) = PAB(t-1) + PORp(t-1) + SR(t-1) - GR(t-1) Resource Planning).

Net requirements (NR) = Gross requirements – Available inventory - Simulate the manufacturing system (Job releases and dispatching).
Scheduled receipts + safety stock ---> Uncertainty
INVENTORY MANAGEMENT: INDEPENDENT DEMAND ;
Planned order receipt (PORp) - orders that should be received to meet CONTINUOUS AND PERIODIC MODELS
the requirements (depend on the net requirements and on the
INVENTORY MANAGEMENT FOR INDEPENDENT DEMAND
production policy).
How to achieve lower costs, while satisfying the customer? → Inventory
Planned order release (PORl) – indicates when the order should be
management systems: Volume decision: How much to order?; Timing
launched into production, considering the lead time. It is the planned order
decision: When to order?
receipt offset by the lead time.
FIXED-ORDER QUANTITY MODEL (Q-MODEL) VS. FIXED-TIME
PERIOD MODEL (P-MODEL)

PLANNING FACTORS FOR THE MRP Fixed-order quantity or reorder point system or Continuous models (Q-
models): Fixed quantities (Q) are ordered: Define Q to minimize total
Lead time (LT): Determines the amount of time allowed to get the item
costs; Order is initiated when a specified reorder level (R) occurs (when
into stock once the order is issued.; If the item is manufactured in–house,
inventory reaches a defined reorder point); Target level can be reached
the LT depends on setup time, process time, material handling time,
at any time depending on demand; Inventory must be continuously
move time between operation and waiting time in queue (Those times
monitored.
must be estimated for every operation along the item’s routing).
Fixed-time period models or Periodic analysis models (P-models): This
Production Strategies: Lot size rules (minimize inventory levels)
model is limited to placing orders at the end of a predetermined period;
 Static lot sizing rules: Procedures to maintain the same order An order is made P in P periods of time; There is no fixed quantity; The
quantity each time an order is issued. counting of the inventory should take place at the review period.
o Fixed order quantity (FOQ): the lot size is predetermined,
fixed quantity. FIXED ORDER QUANTITY (Q -MODELS)

 Dynamic rules: Allow different order quantities for each order When inventory drops to a predetermined amount (R), an order is
issued. Must be large enough to prevent shortages (falling below released for a fixed quantity of units (Q): Fixed order quantity, variable
the safety stock), but no larger over a specified number of weeks. time between orders; On-hand inventory balance serves as order trigger
o Periodic Order Quantity (POQ): The lot size equals the total (R); Perpetual inventory count (often continuously).
of the needs for P weeks.
o Lot for lot (L4L): we order/produce what we need, with How much to order (Q) - basic model is the economic order quantity
none carry over into next period → P=1 (one week). (Lot- (EOQ): Minimize sum of the relevant costs.
for-lot is an inventory management strategy where a
company orders or produces only what is needed for a When should we order? R is determined for a preferred customer
specific period, and no excess is carried over into the next service level according to: Rate of demand; Length of order lead time
period. In this strategy, the order quantity, or production (L); Variability of demand and lead time.
 CONTINUOUS REVIEW (Q-MODELS)

Selecting the reorder point (R) when demand is certain: Assuming certain
demand and lead time - Reorder point equals the expected demand
during lead time (no added allowance for safety stock); New order arrives
just when inventory drops to zero; Same time between orders (TBO)
for each cycle.

ECONOMIC ORDER QUANTITY (EOQ)

Which is the lot size that minimizes the total cost? If we take the
derivative of the total cost expression (in order of Q) and set this equal
to zero, we obtain the Economic Order Quantity (EOQ):

PERIODIC MODEL, P

Inventory level is reviewed periodically at regular intervals; An appropriate

quantity is ordered after each review; Variable order quantity, fixed time
between orders; Time serves as order trigger; Periodic count.

Process: when a predetermined amount of time has elapsed, a physical

inventory count is taken. Based upon the number of units in stock at
that time, OH, and a target inventory of T units, an order is placed for
Q = (T - OH) units.
EOQ is the quantity that minimizes the annual total cost (inventory, order
and purchase annual cost) based on the following assumptions: Demand
PERIODIC REVIEW (P -MODELS)
for product is constant and known with certainty; There are no
constraints on the size of each lot; The only two relevant costs are the Analyses the inventory conditions from periods of P to P, placing an
inventory holding cost and the fixed cost per lot for ordering or setup; order, which vary from period to period, depending on the usage rates
Decisions for one item can be made taken independently of decisions (how much is needed at the review moment to reach a target level of
for other items; There is no uncertainty in the lead time or supply. EOQ inventory (T)) - That quantity is between the required inventory (T) and
is optimal when the five assumptions are satisfied. the existent value (I).

Selecting the reorder point when demand is uncertain: Known average

demand and lead time: Need for safety stock; Reorder point = Average
demand during lead time + Safety stock; The greater the safety stock,
the less likely a stockout. Order a fixed quantity Q whenever the
inventory falls below the reorder point R; The order is received after a
certain time, Lead time (not instantaneous); Inventory increases when an
order is received; During the lead time period, there is a higher probability
of stockout.

Real decision: safety stock level (B) → must be maintained to provide

some level of protection against stocking out - Trade-off between
Selecting the time between reviews (P):
benefits vs costs of holding safety stock; B depends on the required
service level; The greater the safety stock, the sooner the order is P is defined based on a convenient system or through the value of the
placed; Demand during lead time is normally distributed. average time between orders considering the EOQ:

⮩ Where it is assumed 52 weeks of work and D is defined as annual

requirements.
 ADVANTAGES OF EACH MODEL Then the Total Cost (TC) became:

Advantages of P-model: Replenishments are made at fixed time intervals;

The order quantity change between review periods; Can combine
different quantity orders to the same supplier; Perpetual inventory
system (means the records are always up-to-date) not mandatory.

Advantages of Q-model: Periods of supply might be different for each

item and order quantity is the same → holding cost decrease; More
Part VI
suited for quantity discounts or capacity limitations >> using fixed lot size;
LEAN MANUFACTURING
Lower safety stock than P model, because: P+L  L.
LEAN SYSTEMS
PRICE-BREAK MODEL
Continuous improvement toward perfection; Elimination of waste;
Q/P models assume that: The cost per unit is constant to any order Efficient low-cost production; Produce only the amount necessary for a
quantity; The process of new orders is continuing → Price-break model given moment; Reduced use of facilities, equipment, material and human
resources; Respect for people: Motivated employees use their skills to
The price break is the minimum quantity needed to get a discount. actively improve their working environment; Reduces: Inventory; Need
Quantity discount: Price incentives to purchase large quantities. for space; Costs; Lead time; Increases: Quality; Efficiency; Flexibility;
Productive capacity; Excellent relationship with the suppliers; More
The Total Cost is defined as:
efficient HR; Focus on activities that add value; Limitations: sudden
changes in demand, uncertainty in demand or raw-materials availability,
lack of time.

1) ELIMINATE WASTE

VALUE STREAM MAPS (VSM)

A chart with the process data: Timings (processing, waiting, cycle);

Quality (number of rejections); Inventory; Resources (Number of people;
Space; Distance travelled).
The value of the economic order quantity depends on the unitary price:
VSM allow to visualize: All the interactions; All the flows of information
and materials; Supplies a common base and language to refer to the
process.

Define the EOQ (method): Helps to identify: The restrictions of the process - capacity that doesn’t
meet the demand; Waste and its source/origin.
1. Beginning with the lowest price, calculate the EOQ for each price
level (Each subsequent EOQ is smaller than the previous one, Tips for VSM: Involve the entire team; Get involved in the process; Use
because iPj gets larger). Verify if it is feasible, if not use the price post-its and ultimately draw the flow charts → it’s a dynamic process;
immediately above until reach a feasible value which is between Use symbols that characterize the process and are simultaneously
the order quantity bounds. understood by everyone involved.
2. If the EOQ for the lowest price is feasible, this is the best lot size
to order. Otherwise, go to step 3. Important concepts for VSM: Cycle time (sum of time related to
3. Calculate the total cost for each prices level. Use the EOQ quantity processing tasks that add value); Takt time (time between satisfied
when feasible. Otherwise, use the price break quantity for that level. orders); Lead time (receiving the order → delivery to customer).
The quantity with the lowest total cost is the best lot size to order.
Lead time includes: Processing time (Reduce the number of steps or
improve the efficiency); Displacement time (Reduce the distances,
ECONOMIC PRODUCTION QUANTITY (EPQ)
simplify the movements, standardize the paths/routes); Waiting time
EPQ is the optimum lot size that is to be manufactured in a production (Improve the standards and adjust capacity); Setup time (Usually makes
unit to avoid unnecessary blockage of funds and excess storage cost. the stronger impact).
This production quantity is adequate to ensure uninterrupted work.
VALUE STREAM MAPS (VSM): METHOD
If a material is supplied and consumed at the same time by the same
firm, and production rate > demand rate. For example: the company 1. Define the value and the process focusing on the client: Identify the
generates its own inventory and uses part of that material to supply its tasks and flows that add or don’t add value → waste
own productive system. a. Activity that adds value → emphasize
⮩ Reflects what the client wants
EOQ: Ordering from a third party; EPQ: Manufacture in-house. ⮩ Correctly performed
 b. Activity that doesn’t add value minimal inventory; Steady flow of materials, information, and workers in
⮩ Necessary waste: doesn’t add value but cannot be the manufacture operations.
eliminated → Minimize. (Ex: laws, campaigns, …)
U-Shaped Production Cells: Better visibility; More communication and
⮩ Pure waste → Eliminate (Consumes resources and
teamwork; Lower handling cost; Fewer operator requirements; Higher
adds no value to the client’s eye; Ex: waiting time,
productivity; Lower WIP (Work in Progress); Less space; Faster
inventory, reprocessing, accidents, …)
response to changing demand.
2. Characterize the current state of the process: Data Collection -
resources, timings, quality level Manufacture cells reduce: Inventory; Labor; Processing time; Handling;
3. Determine opportunities for improvement by analyzing the chart Require high level of automation.
4. Identifying bottlenecks: Brainstorming to avoid waste and add value
5. Characterize the VSM for the new proposal 4) PULL SYSTEM
6. Devise an action plan to implement the new proposal
Pull method to workflow: Demand activates production of the product -
Operates only if the downstream system requires it; There is no
3MU
inventory; Fulfill customers’ demand within an acceptable amount of time;
Muda: activities that take resources but do not add value Good for firms with highly repetitive processes and well-defined
workflows of standardized items; JIT inventory management. Companies
1. Overproduction – produces more product than necessary.
only make enough product to fulfill orders; Smooth and constant flow;
2. Waiting Time – waiting for materials, information, people…
Minimizes inventory, reprocessing, and waste; Agile, flexible and of quick
3. Transporting – transportation of materials, information, or people.
response to the consumer.
4. Inventory – more materials or more information than necessary.
5. Processing waste – process more than necessary. Push: Production of the item begins in advance of customer needs;
6. Unnecessary movement – of employees, of information… Produce enough product to meet the forecast demand and sell the
a. Point-of-Use (POU): Aggregate materials/components into goods to the consumer; Results in more inventory and more batches of
one single package/location so as to reduce the defective product.
displacement as much as possible.
7. Defective Outputs – errors, failures, forcing to reprocess to 5) KANBANS
correct.
Mura: Inconsistency - To locate the process inequities, you need to
8. Wasted employee creativity – Loss of opportunity for
visualize your workflow → Kanban
improvement by not listening to the employees.
Kanban: Visual method of operationalizing a Pull planning and control
Muri: Overwork related with people and machines
strategy - Based on a card used by the operation client to instruct the
⮩ Team overworking operation supplier to initiate the production
⮩ Causes: Excess demand; Lack of training; Lack of
Different types of Kanbans:
communication; Lack of tools and adequate equipment
⮩ Possible solutions: Jidoka; Standardization; Team workflow ⮩ Production Kanban: signals the beginning of production of a batch
mapping: define work limits; Gemba walks of components or products
⮩ Top management must remain in contact with the reality at ⮩ Removal Kanban: authorizes the removal of material from a given
Gemba container
⮩ Transparency ⮩ Transportation Kanban: authorizes the removal of material from a
⮩ Motivated workers given point
⮩ Supply Kanban: tells the supplier that it’s time to send material
Mura: waste of inequity or inconsistency
Advantages: Simple visual system; Effective and inexpensive; Reduces
HOW TO IDENTIFY WASTE? inventory and decreases stock-outs; Improves lead times; Improves the
quality of the service.
Involve everyone; Shared responsibility, staff training and greater worker
motivation; Teamwork; Self-discipline; Quality circles; Empowerment.
6) SMALL LOTS

2) FLEXIBLE RESOURCES Require less space; Require less capital investment; Less willing to low
quality; Processes more dependent on each other.
Process flexibility: Machine flexibility (low cost and moveable); Operator
flexibility (cross-training, problem-solving techniques).
7) SMALL SETUPS

3) CELL-LIKE LAYOUTS Single-Minute Exchange of Die (SMED): Method that focuses on the
capacity to quickly convert from one product to another, increasing the
Lean Layouts allow: Different machines, conjoined to produce a family
flexibility of the process; Perform setups in a single-digit time span; Main
of components with similar procedural requirements; To produce with
goal: Reduce setup time.
Transition time can be minimized by: Visual management aims at: Giving visibility to the problems; Help
workers and managers to be in direct contact with reality in Gemba.
⮩ Measuring and analyzing the transition activities: Measure the
transition times and analyze them to improve them. Visual management - Make problems visible: Andons (Flashing signs that
⮩ Separate external and internal activities: External (executed while identify quality problems); Poka-yokes (Prevents the occurrence of
the process is undergoing); Internal (executed while the process is defects/accidents).
standing still)
5S – Housekeeping is a Lean method to optimize workspace and
⮩ Convert internal activities into external: Pre-set activities and
maximize process efficiency:
equipment; make smoother transitions; use easier and faster
equipment for the changes  Step 1: Seiri/Sort (Eliminate unnecessary items from Gemba).
⮩ Perform parallel setup activities or eliminate them  Step 2: Seiton/Arrange (Define a specific place for each item;
⮩ Practice the transitions: experience helps reduce times Fast and easy access; Is something missing?).
 Step 3: Seiso/Sweep (Keep the machinery and the work
Advantages of SMED: Lower Manufacturing Cost (faster changeovers environment neat and tidy; Are we always “cleaning” the same
mean less equipment downtime); Smaller Lot Sizes (faster changeovers thing? What is the underlying purpose? Continuous
enable more frequent product changes); Improved Responsiveness to improvement: determining the source of the problem); It’s a
Customer Demand (smaller lot sizes enable more flexible scheduling); powerful technique to define the source of the problem;
Lower Inventory Levels (smaller lot sizes result in lower inventory levels); Consists of continuously asking Why? until the source is
Smoother Startups (standardized changeover processes improve identified.
consistency and quality).
 Step 4: Seiketsu/Standardize (Define and standardize
procedures; Rapid detection of anomalies; Checklists).
8) LEVELLED AND UNIFORM PRODUCTION
 Step 5: Shitsuke/Self-discipline (Train the workers in the 5Ss;
Heijunka - Maintain a stable production mix and volume over time: Create workers’ Self-discipline; Clarify the applicability of the
Production based on the needs of the clients; Standardized production; new methodologies to the company and to the purpose of
Flexible resources and fixed quantity in the production/distribution the company; Apply positive pressure).
channels; Production by small lots; Reduction of setup times.
10) LEVELLED AND UNIFORM PRODUCTION
Scheduling in large batches: Generates inventory; The production varies
daily. Holistic approach to equipment maintenance that strives to achieve
perfect production: No breakdowns; No small stops or slow running; No
Levelled scheduling: One lot of each item is finished in a single day; Low defects; No accidents.
inventory between operations (reduces the Work in Progress stock);
The same every day; Easier to standardize. Everyone is involved in proactive and preventive maintenance to
maximize operational efficiency of equipment.
Advantages of Heijunka: Low inventory of raw materials, WIP and final
products; Easier planning and control; Easier quality control; 1. Autonomous maintenance: Everyone has the autonomy to clean,
Standardization; Workers know the process better and are easily able inspect and contribute to maintenance of equipment.
to monitor it. 2. Planned maintenance: To avoid breakdowns; Should be done after
regular working hours.
Six Sigma: Aim to provide value to the client (Product quality/service and 3. Quality maintenance: Reduce defective products, reprocessing;
client satisfaction); Identification of the problem; Reduction of variability Increase customer satisfaction.
(Better output of the system); Results in high performance. 4. Focused improvement: Engagement to continuous improvement.
5. Early equipment management: Improving design of new equipment.
Lean and Six Sigma are synergetic (Lean Six Sigma): Lean optimizes 6. Training and education
the flows and eliminates waste; Six Sigma improves the quality of the 7. Safety, health, environment: Avoid work accidents, pollution, and
processes by eliminating variability in all its stages. burnout.
8. TPM in administration
9) QUALITY AT THE SOURCE
11) NETWORK OF SUPPLIERS
Jidoka: Autonomation (Automation + human intelligence); Detect
problems → high quality → avoid redoing work. Supplier performance metrics into operating plans

Advantages: Promotes standardization and involvement; Increases Pressure to: Reduce costs; Improve quality; Responsiveness; Improve on-
organization and efficiency; Avoids unnecessary displacements; Increases time delivery; Go lean.
security; Eliminates unwanted inventory; Low-cost improvements.
5 BASIC PRINCIPLES OF LEAN
Visual management: practical method to determine the current state of
the process. Is it under control? Is there any anomaly? 1 - Define value; 2 - Map Value Steam; 3 – Create Flow; 4 – Establish
Pull; 5 – Pursuit Perfection.