Summaries - Logistics and Operations Management

 Operations
Part I – Introduction Management: Ongoing, day-to-day
implementation of the strategies and plans developed
through operations strategy.
WHAT IS OPERATIONS MANAGEMENT?
Operations Management Main Aspects (5 P´s): Major
Operations Management allows to: Systematic Approach to
strategic and tactical areas where manufacturing seek operations
Organize and Optimize Processes; Business Education;
consulting – People, Processes, “Parts”, Planning, Plants.
Career Opportunities; Cross-Functional Applications (not
limited to one specific department within an organization).
THE OPERATIONS SYSTEM

PRODUCTION & OPERATIONS MANAGEMENT  Birth of System: What are the business objectives; Strategy
vs objectives; Project Management.
Study of concepts, procedures and techniques used by
managers in all types of organizations whose aim is to get the  Product Design and Selection Process (Products vs.
day-to-day work done quickly, efficiently, without errors and at Services): Design and Development; What is the process?;
low cost. It’s applied: Managing Technology.
 Designing the System: What capacity do we need?; Where
⮩ Industrial Management: production of quantified goods to install the facilities?; What is the best Layout?.
or tangible products (automobiles, electronics, food  System Management - the day to day: Managing the supply
products, and clothing). Manufacturing Industry: chain; Management of purchasing and supplier; Forecasts;
Production can be stored; No contact with the consumer; Planning process; Materials Management; Scheduling; Just-
High Lead times; Big Installations; Capital intensive; In-Time (JIT).
Quality easily measurable.  Improving the System: Just-In-Time; Synchronized
⮩ Services Management: productions of goods or services Production; Total Quality Management; Total Preventive
that are difficult to quantify and that are based on Maintenance.
experiences and interactions (healthcare, education,
consulting, and hospitality). Services: Production cannot EMERGING MODEL: INDUSTRY AS A SERVICE
BUSINESS
be stored; Direct contact with the consumer; Fast
response times; Smaller installations; Intensive human CORE services: The customer requires that factory goods are
resources; Quality difficult to measure. produced correctly, on time and with competitive prices that
meet their needs. These are commonly summarized as the
classic performance objectives: Quality, Flexibility, Speed,
Price.

Value Added Services: Makes the life of the customer easier.

Types:

 Information: The department grabs the data, and after

some manipulation provides a quality data sheets and
videotapes documenting the actual product testing and
field quality performance to field sales and service
 Corporate Strategy: It involves making decisions about the personnel.
overall direction of the company, including its portfolio of  Problem Solving: Is the ability to help internally and
businesses (whether it should diversify into new markets or external groups to solve problems.
industries, form partnerships, or divest certain businesses).  Sales Support: Is the ability to enhance sales and
 Finances Strategy: It includes decisions related to capital marketing efforts by demonstrating the equipment or
structure, financing options, and investment priorities. Aims production systems the company is trying to sell.
to ensure the organization has the necessary financial  Post-Sale Support: The ability to replace the defective
resources. parts quickly or to replenish stocks quickly to avoid
 Operations Strategy: It involves making decisions about stockouts.
the design and management of the organization's operations
Which advantages arise from the Value-added service?
and processes. Aims to optimize the efficiency and
Differentiates the organization from its competitors; Build
effectiveness of the organization's core processes, such as
relationships that bind customers to the organization in a
production, supply chain, and service delivery.
positive way.
 Market Strategy: It involves understanding the external
environment, market dynamics, customer needs, and
OPERATIONS MANAGEMENTS PERSPECTIVES
competition.
As a production function: It focuses on the processes and 3. Warehousing: Low inventory; Reduced transportation costs;
activities involved in producing goods or delivering services Quick refilling capability.
efficiently and effectively.
4. Customers: Short order lead time (time it takes to complete a
As a Profession: Professionals in operations management play process or task from its initiation to its completion); High in
key roles in managing and optimizing an organization's stock; Enormous variety of products; Low prices.
operations. What we do in Operation Management
Profession: Supervise, lead, guide different teams, take ⮩ Must deal with: Conflicting objectives of different
decision, work in a project, reduce waste, eliminate the root of entities. Dynamic system evolve over time: Variations
the problem (contamination). Responsible for a variety of over time in customers demand and suppliers
activities: planning to scheduling, quality and personal. The capabilities; Matching demand-supply difficult;
operations managers has to: Manage a cost center; To be Different levels of inventory and backorders.
efficient in decisions ranging from the short term to long term;
Technology Manager; Assign tasks; Responsible for the CAN FORECASTING HELP?
production flow and its associated financial flow; Control of Forecasting (prediction) is always wrong. The longer the
operations in time and costs; Connection between corporate forecast horizon the worse the forecast.
goals and operational; Managing complexity. He also needs
to: Plan; Lead; Organize; Manage Human Resources;
UNCERTAINTY AND RISK FACTORS
Motivate; Control.
Demand is not the only source of uncertainty, such as:
SUPPLY CHAIN MANAGEMENT Transportation times; Components availability; Environmental
disasters. Recent trends make things more uncertain:
Focuses on the efficient and effective management of the flow
Outsourcing.
of goods, services, information, and finances from the point of
origin to the point of consumption. Supply chain management is
a set of approaches concerned with the efficient integration of HOW TO DEAL WITH UNCERTAINTY?
suppliers, factories, warehouses, and stores so that products are Pull Systems (Just-In-Time (JIT)): respond to customer demand
produced and distributed: In the right quantities; To the right and reduce the risk of overproduction. Help organizations adapt
locations; At the right time. To: Minimize total system cost; to demand fluctuations and reduce excess inventory when
Maximization customer service requirements. The goal is demand is uncertain.
efficiency and cost-effectiveness across the entire system
(Total system wide costs); Multiple levels of activities Risk Pooling: By aggregating demand from multiple locations
(Strategic, Tactical, Operational). or products, organizations can achieve a more stable and
predictable demand pattern.
WHAT IS A SUPPLY CHAIN?
Centralization: Consolidation of certain functions or activities
Flow of products and services of: Raw materials manufacturers; in a central location
Intermediate products manufacturers; End product
manufacturers; Between wholesalers, distributors and Retailers. Postponement: Delays certain customization or assembly
Connected by transportation and storage activities; Integrated processes until customer demand is known.
through information, planning and activities; And min cost and
Strategic Alliances: Include partnerships with suppliers,
max service levels.
distributors, or competitors, and help spread risk and enhance
access to resources.
STRATEGIES FOR SUPPLY CHAIN MANAGEMENT

The process of finding the best system wide strategy global → Collaborative Forecasting: Sharing information and data with
key supply chain partners, incorporating insights.
Systems Approach.

Management must focus on: Global Optimization; Managing Part II

Uncertainty.
OPERATIONS MANAGEMENT STRATEGY
WHY IS GLOBAL OPTIMIZATION SO HARD?
OPERATIONS STRATEGY
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.
 Strategy decisions affects: Capacity Requirements (lead-
time, responsiveness, operating costs); Facilities (location, size
and specialization); Technology (equipment, automation);
Vertical integration (supplier's degree of utilization); Human
resources (skill level, salary policies, training requirement);
Quality (defect prevention, monitoring, target quality);
Production planning (basic policies, centralization, decision
rules); Materials management (ordering policies, decision
rules, centralization); Organization (structure, control systems,
Corporate level strategy: Is the highest level of strategy. It prices, importance of groups); Sourcing (suppliers' selection,
sets the long-term direction and scope for the whole relationship/cooperation).
organization. If the organization comprises more than one
business unit, this strategy will be concerned with what those CORPORATE VS OPERATIONAL STRATEGY
businesses should be, how resources will be allocated
Strategy Process: Customer Needs (More Product) ->
between them, and how relationships between the various
Corporate Strategy (Increase Org Size to capture a larger
business units and between the corporate center and the business
portion of the market) -> Operations Strategy (Increase
units should be managed. Organizations often express their
Production Capacity) -> Decisions on Processes and
strategy in the form of a corporate mission or vision
Infrastructure (Build New Factory).
statement.
There are five operations performance objectives or competitive
Business level strategy: Is concerned with how a particular
dimensions:
business unit should compete within its industry. What its
strategic aims and objectives should be. A business unit’s ⮩ Cost -The ability to produce at low cost
strategy may be constrained by a lack of resources or
⮩ Quality - The ability to produce in accordance with
strategic limitations placed upon it by the corporate center. In
specification and without error
single business organizations, business level strategy is
synonymous with corporate level strategy. ⮩ Speed - The ability to do things quickly in response to
customer demands; short lead times between when a
Functional level strategy: The bottom level of strategy is the customer orders a product or service and deliver it
one of the individual function (operations, marketing, finance, ⮩ Efficacy – guarantee that the good or service is done
etc.). These strategies are concerned with how each function ⮩ Flexibility - The ability to change operations and can
contributes to the business strategy, what their strategic comprise the ability to: change the volume of production,
objectives should be and how they should manage their change the time taken to produce, change the mix of
resources in pursuit of those objectives. different products or services produced, to innovate and
introduce new products and services.
How can we evaluate the operations strategy? Consistency
(Between the operations strategy and business strategy; MAY MORE THAN ONE OF THESE OBJECTIVES
Between operations strategy and the other functional strategies; COEXIST WITHIN COMPANIES?
Between the different decision areas of operations strategy) and
Contribution to competitive advantage (Enable operations to set Hayes and Wheelwright’s four-stage model – categorize
priorities that enhance competitive advantage; Highlight different types of organizations based on their attitude
opportunities for operations to complement the business towards their operations.
strategy).
I.Minimize the company negative aspects - internal
neutrality: Operations managers never have the time to focus
STEPS THAT FOLLOW OPERATIONAL STRATEGY on a consistent set of performance objectives -> The
DEFINITION
operations function is internally focused and reactive. They
Understand the implications of the corporate strategy at the are viewed as a ‘necessary evil’. The best that the organization
operational level. Define the operational objectives and the hopes for is that operations ‘don’t screw up’. Do not
control measures of success (KPI - Key Performance introduce confusion - do not make a mess. Use of external
Indicator). Determine the operational resources needs experts to take strategic decisions.
(materials, subcontracts, new contracts with the suppliers…) II. Keeping at the level of its competitors – external
and required skills (manpower with the required skill, neutrality: Organization manages its operations by seeking to
equipment, capacities…). Designing the appropriate operating emulate those of its competitors -> The operations function
system (ex. Specific aspects, training, scheduling…). tries to be as good as the competition. Such an organization is
Implementation of the scheduling objectives → To do what is likely to benchmark its operations against its competitors.
needed, when is needed. Control and supervise the progress by Adopt best practice in its industry so that it does not hold the
analyzing the measures defined. organization back. Use of investment as the only way to
became competitive. The best that such an approach can
 achieve is to match the operations performance of its Less Important factors: Have very limited importance and its
competitors. performance does not influence the buying decision.
III. Support the corporate strategy – internal coverage:
Organization has an operations strategy that is linked to and OPERATIONS STRATEGY FRAMEWORK
derived from its business strategy -> The operations function
Main Objectives to Developing an Operations Strategy:
seeks to provide credible support for the organization’s
Identify the competitive dimensions based in costumers needs
business strategy (be consistent with strategic objectives).
(normally obtained from the market) → Translate them into a
An operations strategy will be developed which will be
specific performance requirements for the operations → Make
derived from, and support, the corporate strategy. Be
plans to ensure that the operations capability in the firm are
consistent with strategic objectives - being among the best.
sufficient to accomplish them.
Sustainable planning.
IV.Aiming to maintain competitive advantages – external
coverage: Organization is radically different to one at any STEPS IN DEVELOPING AN OPERATIONS STRATEGY
of the other stages. Organization uses its operations The steps to prioritizing these objectives are the following:
excellence as the basis for its business strategy → An
operations-based strategy. -> The operations function: 1. Segment the market according to the product group.
Provides the basis of competitive advantage; Will be seen as 2. Identify product requirements, demand patterns, and
the means of exceeding customer expectations by delighting profit margins of each group.
the customer; Will be managed proactively to drive the 3. Determine order winners and qualifiers for each
business strategy of the organization (strategic planning group.
'visionary‘); Are at the forefront of developments in best 4. Convert order winners into specific performance
practice. requirements.

The Sandcone Model: Multiple Dimensions from Ferdows and STRATEGY IMPLEMENTATION
Meyer
After a strategy is defined the work only begins: Strategy can be
hard to understand; Strategy can be to general, or unrealistic;
Areas and persons may interpret the same strategy differently.

WHAT IS PRODUCTIVITY?

Productivity is a common measure on how well resources are

being used. In the broadest sense, it can be defined as the
following ratio:

They emphasize that efforts to further enhance quality should

continue whilst commencing efforts to build dependability. ⮩ Outputs: profit, goods produced, clients served…
Similarly, actions on quality and dependability need to continue ⮩ Partial: One single input (ex. man-power or capital or
whilst building flexibility. Finally efforts to reduce costs take energy or materials,…)
place alongside continuing efforts to improve quality, ⮩ Multi-factor: More then one input (ex. Man-power +
dependability and flexibility. They claim that operational Capital)
capabilities developed in this way are more likely to endure than ⮩ Global: All the relevant inputs
individual capabilities developed at the expense of others.
Relative measure: to be meaningful, it needs to be compared
STRATEGIC PRIORITIES with something else. Can use industry data, when available (e.g.
different stores). Over time within the same operation.
Marketing oriented dimension

Order Winners factors: Is a criterion that differentiates the PRODUCTIVITY - EFFICIENCY - EFFECTIVENESS
products or services from those of another firm. Depending
Efficiency: measures the relationship between the use of
from the situation, may be any dimension presented earlier. Is
resources (inputs) and the resultant outputs (e.g. use
an important determinant for business success – causes
fewer/better the resources).
business distinction from a competitor.
↑ Productivity ⮩ ↑ Efficiency
Order Qualifiers factors: Is a screening criterion that permits a
firm’s products to even be considered as possible candidate Effectiveness: measures the degree of achievement (ex.
for purchase. Not being the determining factors although minimize the waiting time).
important and should have an appropriate priority.
 Product development - Set balance/priorities among the
Part III following factors:

DESIGN OF PRODUCTS AND PROCESSES  Product Performance: Can satisfy the costumer need?
 Speed of development: How much time is necessary to go
THE PROCESS OF DESIGN to the market?
General Principles: Conception and development of  Product cost: Total costs, including production cost.
products/services; Selection of the process.  Expenses for the development program: Development
cost
Goal - satisfy the customers requirements: Is necessary the
applicability of the operational strategies efficiently (e.g. cost, Conception to production: the product’s functional
quality, flexibility, effectiveness, speed). It includes not only the characteristics must be analyzed before the production (Keep it
products/services but also the processes. A small change in the simple).
product specification can cause a huge additional complexity
Frequency of changes in production: How many times do the
into the process. This is avoided if products development and
firms intend to change the product? This is associated with the
processes are treated simultaneously.
corporate strategy.
Process Design is a transformation activity:
Opportunity of changes in the conception: The sooner the
 Input: technical information, market information… better (a more accurate prototype, less cost associated).
 Transformation: the process itself → design activity
Concurrent/ Simultaneous Engineering: The concept
 Output: final design with quality, efficacy, flexibility,
involves product planning which includes all departments
low cost.
within an organization and customer representatives. The goal is
The process design can be characterized by the 4 C´s: to share information to make the design, development, and
production of the product more streamlined and make the
 Creativity – creating something new or change an product meet final customer expectations and needs. With the
existing one. introduction of suppliers and customers gets a Concurrent
 Complexity – associated with a high number of Engineering.
decisions, from a high group of variables and parameters.
 Commitment – to balance multiple requirements, which ⮩ Which are the benefits from it?
sometimes must have trade-offs. o Increases the ability to launch new products → Gain
 Choice – Involves a choice between many different time.
solutions, from the most generic into the most specific. o Costs reduced associated with new products
development.
Other aspects that Influence the process design are: o Faster identification of problems in development.

1. Environmental Aspects (defined by laws): Sources of

PRELIMINARY CONCEPTION
Material; Amount and Energy Sources; Number and
types of effluents (Waste, recycle); Lifetime of the The conception and development of products has the next
product; End of life of the product (Waste? Disposal? phases:
Recycle? Landfill?).
2. Volume vs. Variety: Low-volume operations processes 1. Generating ideas: from marketing using surveys,
often have a high variety of products and services. competitor information, group analysis.
High-volume operations process often have a narrow 2. Product selection: product characteristics definition,
variety of products and services. screening by marketing, finance, operations.
3. Preliminary conception: define styles, parts, power.
THE PROCESS OF DESIGN: CONCEPTION AND 4. Evaluation and improvement: Can be improved? Its
DEVELOPMENT viable?
5. Final conception and prototype: output = final specified
The challenge is: Conception of new products should allow a
product.
quick introduction into the market while satisfying the
costumer. Phases of development: The Concept; The Package; The
Process.
Product conception has two aspects to consider:
Before the process selection, it’s necessary to know which
 Industrial Project / Conception → Designed for the
materials are necessary to make the product → Bill of
costumer: Satisfy the customer needs) (Good appearance;
Materials (BOM):
Easy to use).
 Conception of the Product → Production (Simple and
suitable for the production; Low costs; Reliable).
 1. Specify the components of the products/services: structure  State-Task Networks - describes the relationships
of the product: assembly order → bill of materials and between the various operations (tasks) and materials
material tree. (states), which belong to the process:
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.
PROCESS REPRESENTATION
Process Flow: specific path followed by the materials Another way to consider the customer in designing a product is
(chemicals, components, people) across the productivity the “value” they see in the product → Value Engineering, Value
process. Analysis, Quality Function Deployment (QFD).

There are several representations to the process flow →

VALUE ANALYSIS AND VALUE ENGINEERING
Organizational graphs for the productivity process.
VA /VE have the purpose to simplify product and process →
 Simple flow diagram: 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

 Assembly drawings (Gozinto); is used to analyze the product specification, if are equal to
 Assembly charts: what is shown in the production document.

Value Engineering is performed before the production stage; is

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:
 Operation and route sheet;
 Process Flowchart: ⮩ 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 function are identified and try to reduce at
minimum the number of secondary functions → reduce
costs.
⮩ Creativity: brainstorming
 ⮩ Evaluation and selection of groups of ideas: ideas analyze PROCESS SELECTION - MANUFACTURE
to forwarder implementation.
It involves a series of strategic decisions to decide which
⮩ Previous studies
process should be used or implemented.
⮩ Implementing decision
⮩ Implementation - Development - Release Process: Set of operations (tasks) that transform raw materials
into finished products.
QUALITY FUNCTION DEPLOYMENT (QFD)
Organization of the production system: Operational;
A more formal approach is the QFD, which gets the Voice of Structural; Relationship with the customer.
the Customer into the design specification of the product. It
uses inter-functional teams, like marketing, design, engineering, OPERATIONAL SYSTEM
manufacturing.
The classification is based on the type of operations that largely
Objective: Reduce costs by ensuring quality and customer dominate production:
satisfaction.
Continuous Production: Processes that are high volume and
It involves: List of customer requirements; Definition of low variety; Products produced in an endless flow →
technical specifications or project requirements (How can it be Transformation process and Manufacturing process. Production
done?); Comparison between the product and the competitors; of large quantities of product; Small range of products;
Correlation Matrix – assign priorities to customer Specialized Equipment (allocated to a single task); Workforce
requirements and associate them to their level of importance semi-specialized; Inflexible flow of materials characterized by a
(Strong, medium, weak…). tight control of operations.

Repetitive Production: Repetitive processes → Products

produced in large amounts; Sequential production of each
DESIGNING FOR THE CUSTOMER: THE HOUSE OF product through the same series of operations; Highly
QUALITY automated process; Inflexible flow of materials; Workforce
semi-specialized.
Matrix or tool used to translate customer requirements into
specific engineering or design characteristics. It helps ensure Batch Production: Processes that treat batches of products
that the final product aligns with customer desires and together, and where each batch has its own process route. →
preferences. Production of small quantities of products with high quality;
High range of different products; 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 range of products; Equipment and workforce depending
on the product with different levels of specialization; Flexible
production (high uncertainty level); Rigorous planning and
control.

STRUCTURE - LAYOUT

Describes the physical configuration of the productive process,

which is organized to ensure: Quality, Cost minimization,
Operational flexibility, Proper handling of materials.
Quality Function Deployment analyze may be characterized
Three types of configurations describe the most common
in 4 steps:
structures: Process-oriented structure (Job Shop, batch
production); Product-oriented Structure (Flow Shop,
continuous production); Intermediate Structure.

PROCESS-ORIENTED STRUCTURE.: JOB SHOP,

BATCH

Organization of the resources based on the process: For jobs

and For departments → By function. All products share
functions (operations) in common. Demands: High level of
supervision with high level of specialization; Good technical
knowledge.
 ONE EMPLOYEE AND SEVERAL EQUIPMENT
How to reduce the material flows? Generation of cells per
process.

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

Advantages: Low stock levels (JIT); Low waiting time; High

process speed – easy control.; Production of high amounts

Disadvantages: Low flexibility level

INTERMEDIATE STRUCTURE

Combines the previous approaches – Mix productivity flow.

Characterized by: FLEXIBLE MANUFACTORING
SYSTEMS (FMS). Where the following techniques are used: LAYOUT SELECTION
One employee and several machines; Group technology.
It involves determining the physical arrangement of resources,
workstations, equipment, and other elements within a facility to
GROUP TECHNOLOGY
optimize operational efficiency, productivity, safety, and
Aggregates dissimilar machines onto work centers to work on workflow. The choice of layout can significantly impact an
products families that follows a common sequence of steps. organization's performance, cost structure, and customer
Identify dominant flow patterns of parts families for locating satisfaction.
or relocating the processes. Physically grouping machines and
product process into cells.
 Techniques for development: Cut-and-try (evaluates the cost
of different strategies and decides which to use); Linear
programming (models the problem and solves it).

CUT-AND-TRY

Pure strategies:

⮩ 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
Part IV training.
⮩ Stable workforce & variable working hours: Stable
AGGREGATE PLANNING workforce level resorting to flexible hours and overtime
when demand increases. Associated costs: Costs of non-
Each level of planning serves a different purpose and addresses productive/idle time; Cost of overtime.
different time frames within the organization's overall planning ⮩ Subcontracting: Subcontracting production when in
process:
higher demand periods. Associated costs: Quality and parts
cost.
 Strategic Planning: focuses on the long-term goals and
direction of the organization. It involves defining the Mixed strategies: more flexibility, small modifications can
organization's mission, vision, values, and strategic result in dramatically lower costs - Usually obtained using
objectives. mathematical formulations (Linear programming) or heuristic
 Tactical Planning: bridges the gap between strategic rules.
planning and day-to-day operations. It focuses on medium-
term planning and outlines how the organization will OPERATIONS RESEARCH / MANAGEMENT SCIENCE
implement its strategic goals.
 Operational Planning: focused on the short-term and day- Scientific approach to decision making, which seeks to
to-day activities required to meet the tactical objectives. It determine how best to design and operate a system, usually
involves detailed planning and execution of routine tasks. under conditions requiring the allocation of scarce resources.

What is aggregate planning? A plan for capacity and Building a model: Determine what the decision maker wants to
production, in the intermediate term, to satisfy current and know → Define the appropriate decision variable, reflecting the
future demand. It involves developing, analyzing, and needs → Formulate an objective function computing
maintaining a approximate schedule of the overall operations of benefits/costs → Formulate mathematical constraints indicating
an organization. the interaction between the different variables.

⮩ No discrimination between different products and PROBLEM STATEMENT FOR LINEAR

services PROGRAMMING AGGREGATE PLANNING MODEL
⮩ Reconciles the supply of capacity with the level of Given: A planning horizon t = 1, 2,…T. The demand forecast in
demand each time period 𝑡. The inventory holding cost per unit. The
⮩ Medium-term capacity planning backordering cost. The hiring cost. The layoff cost. The cost of
labor per hour. The initial workforce size. The productivity –
What we want to determine: The optimal combination that units produced per worker per time period, or equivalent. The
minimizes costs; Balance capacity and demand in a way that initial inventory size.
optimizes resource utilization, minimizes costs, and ensures the
efficient delivery of products or services: Workforce level, Determine for each time period in the planning horizon:
Production rate, Inventory level.
⮩ The workforce level: computing the number of workers
Costs sources: Production; Labor; Changes in production hired and layoff.
(hiring, training, lay off); Inventory holding; Backordering ⮩ The production level: determining the production during
(When an order is placed for a product or service that cannot
regular time, overtime and subcontracted.
currently be fulfilled; Companies often face a substantial risk of
⮩ The inventory level: considering inventory and
order cancellations when products are backordered.).
backorders.
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

Common extension of the transportation problem: A set of

TRANSPORTATION METHOD
sources are given to supply commodities. A set of destinations
TRANSPORTATION PROBLEM have known demands. A set of points are used as transshipment
points. The commodities may be rerouted through the
transshipment points. The objective is to transport commodities
PROBLEM STATEMENT from sources to destination through transshipment points at
Given: The capacity of each source node; The demand of each minimum costs.
destination node; The cost of shipping one unit from source
node to destination node.

Determine for each time period in the planning horizon: The

optimal flux of commodities from source node to destination
node.
 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 STRATEGIES
optimal flux of commodities from source node to transshipment Make-to-stock: The production is planned based on the
node, and from transshipment node to destination node. capacity installed and the firm holds product in stock for
immediate delivery. MPS is developed based on the final
So as to: Minimize costs while meeting demand. products.

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
AGGREGATE PLANNING
customer orders and committed inventory) from the
Aggregate Planning using Transportation Method: Meet correspondent previous period is enough to satisfy the order.
demand; Minimize costs; Fixed capacities; Deterministic
demand; Linear relationship between costs and variables. ⮩ If it’s enough: Accept the order and update customers’
orders. Update projected on-hand inventory and ATP from
MASTER PRODUCTION SCHEDULING; the affected periods.
CAPACITY REQUIREMENT PLANNING ⮩ If it’s not enough: Reject the order.

MASTER PRODUCTION SCHEDULING (MPS) MPS flexibility depends on several factors: Production lead
time; Delivery times of components to a specific end item;
Consider the aggregate plan for the first trimester of a company
Customer/company relationship; Capacity installed; Manager’s
producing two computer models:
reluctance or willingness to make changes.
Time fences - A period of time having some specification level Goals: Right materials; Right time; Right amount; Right price;
of opportunity to make changes. Each firm has its own time Right sources. Main Activities: Procurement, Production
fences: Control; Marketing; Manufacturing; Distribution.

 Frozen: no changes to MPS allowed

PROCUREMENT: MANAGING ACQUISITION PROCESS
 Moderate: may allow some changes in some products
 Flexible: allows almost any variation in products, with the Efficient procurement strategies/practices: Right quantity
remain capacity provision and quality of materials for production or providing services.
Can lead to cost savings. Involves establishing and maintaining
The Master production scheduling: A time plan specifying relationships with suppliers, which can allow a stable supply of
how many items the firm plans to build and when; Connects the materials, timely deliveries, and consistent quality. Optimize
aggregated planning with the materials requirements planning; inventory levels and minimize inventory holding costs. Risk
Differentiates between products; Can deal with end items or management (mitigation the impact of disruptions).
components depending on the firm strategy. Innovation.

Sets due dates for production orders, which impacts on: Services or products delay free, with quality, and reduced costs.
Capacity planning and Materials planning.
1 - Identification of needs: Buying, reordering; Stakeholders;
CAPACITY REQUIREMENT PLANNING (CRP) Product or service specifics. 2 - Sourcing: Check vendors;
Research: reputation, speed, quality, reliability, prices. 3 –
Aims to guarantee that there is enough capacity when and where Selection. 4 - Negotiation: Request quotes. 5 – Ordering. 6 –
it is necessary, to fulfil the planned production; Allows the Tracking. 7 - Receiving: Inspection. 8 – Payments.
manager to analyze the needs in terms of capacity required by
the MPS; Allows a more detailed view over the production
PRODUCTION CONTROL: MANAGING MATERIALS
schedule, avoiding errors and providing knowledge on the ALONG PRODUCTION PROCESS
capacity being used.
Standardization of production processes, evaluation of
Steps: processes performance and development of corrective
functions; Point out inefficiencies, weaknesses and
1. Compute the available capacity in each shortcomings; Provision of resources (materials, labor,
area/section/department of production. equipment, etc.); Organize schedule (sequence and timing of
2. Compute the capacity required according to the each production task): Manage production lead times, Meet
planned production (MPS). customer delivery deadlines, Optimize resource utilization
3. Compute the capacity required by the orders already in (Increase productivity; Minimize waste and production costs);
process. Ensure coordination of operations, smoother flow of materials
4. Analyze capacity available vs capacity required. and work-in progress; Inspection and quality checks of semi-
finished and finished goods.
Part V
MARKETING: LINK BETWEEN MANUFACTURING
MATERIAL MANAGEMENT AND OUTSIDE WORLD

Why is material management important? Distribution Identification of a market opportunity → meet customer
planning and control; Logistics management; Meeting material needs effectively: Marketplace analysis; Customer behavior;
requirements; Inventory management; Controlling and Served markets; Supplied products; Customer service levels;
Coordinating material flows; Maximize use of resources; Research (ex: customer preferences, products’ features,
Providing the required level of customer service; Ensure trends..); Target customers (Buying habits; Products of use;
continuity of supply; Reduce material costs; Improve inventory Opinions); Pricing and promotion strategies.; Forecasting (ex:
turnover; Ensure continuity of quality; Build and maintain good future demand); Customer orders’ processing.
supplier relationships.
MANUFACTURING: PRODUCTION
Not enough material → Less production levels; Due date
Meet demand; Cover production costs; Ensure quality; Fulfil
issues/deadlines; Stockouts/shortages → Low service level;
customer requirements; Factory stockroom operation; Finished
Profit opportunity loss. Too much material → Fulfil orders/
good warehousing. The Production Process depends on:
Meet demand; Generate stock → High inventory costs; Capital Demand characteristics and Level of customization
opportunity loss.
o Make-to-stock: Demand forecasts; Low demand
Material management involves planning and execution of
uncertainty; Anticipated production and storage.
supply chains to meet the material requirements of a
o Make-to-order: Customization; Production after orders;
company: controlling and regulating the flow of material
Low inventory levels; High waiting times.
while simultaneously assessing variables like demand, price,
availability, quality, and delivery schedules.
 o Make-to-assemble: Production and storage of standard IMPORTANCE OF MATERIALS
components; Final assembly based on orders; Fast
Material management requires: Suitable review of each
customization; Low demand uncertainty.
material stock; Consider each materials’ importance and
dependence; Ensure accurate records of available stocks.
DISTRIBUTION OF THE FINAL PRODUCTS
Three groups of materials within companies: High-cost
Transportation (Move products from manufacturing sites to
items, Lower cost items, Meaningless cost items.
distribution points or customers); Distribution of inventory
(Distribute stock of finished products to fulfil customer orders); Two methods that should work in conjunction with other
Warehouses (Establish strategic sites; Determine the number; systems - ABC Inventory planning and Cycle counting:
Organization of layouts; Define receiving and storage methods); Efficient material management, Controlling costs, Accurate
Material Handling (Appropriate equipment; Loading, inventory records. Contributes to: Streamlines operations;
unloading, transportation of goods); Packaging. Overall organizational success.

MATERIALS WHY INVENTORY?

To maintain independence of operations → set-up time

reduction; To meet variation in product demand → uncertainty;
Categories Types Importance
To allow flexibility in production scheduling; To provide a
safeguard for variation in raw material delivery time; To take
MATERIAL’S CATEGORIES advantage of economic purchase-order size. Inventory:
Raw materials: Initial substances/ components necessary to Control; Planning; Accuracy; Costs; Trade-offs.
produce the finished good.
INVENTORY CONTROL
Work in Process materials: Components/assemblies that are
needed for a final product in manufacturing. Helps minimizing costs while ensuring customer
satisfaction: Holding costs, setup (production) costs, ordering
Final products: Fully finished products, ready for sale to final costs, shortage costs.
customers; Items in manufacturing plants, warehouses, and
retail outlets awaiting distribution to the final customers. Requires knowledge on: Type of materials involved:
Dependent demand materials; Independent demand materials.
Production process: Process description; State-task Network
TYPES OF MATERIALS
(product/tasks recipe); Bill of Materials - BOM.
Dependent demand materials: Demand is driven by the need
for components/assemblies (required for finished products); PROCESS DESCRIPTION
Need is a function of market demand and on decisions related
with production process (production or assembly requirements Characterized by the operations sequence, processing time and
of a finished good); Inventory management - Depends on all the materials involved (steps, resources, timelines, etc).
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 on/influenced by Customers
STATE TASK NETWORK
preferences, Confirmed customer orders, Forecasts, Estimates
and market trends, Historical data (actual sales orders). Graphical representation of the sequence of tasks to create the
Decisions: How much to order? When to order? How to control final product.
the system?
 BILL OF MATERIALS (BOM) Continuous process; Eliminate (annual) inventory counting
with interruption of all operations/tasks; Timely detection and
Relationship between components/raw materials, not only in
correction of problems; Smoother operations; Reduced
terms of process and amounts/ quantities to produce the final
counting errors; Errors found – check records; Storeroom
product).
personnel physically count a part of the total number of items
each (day); Decision: Which items should we count? When? By
whom? Class A items should be counted more frequently…?

ABC Analysis + Cycle Counting Method:

Inputs: number of items, available counting resources, counting

frequency based on ABC Analysis.

Lower-level coding: each item is placed at the lowest level at ABC Count Frequency: Decide counting frequency of each
which it appears in the structure hierarchy → easier to category: multiply the respective number of SKUs per category
summarize the nº of items. by the desired frequency to establish total counts; Divide the
total counts by the number of count days (assuming one year).
INVENTORY PLANNING
When to count: At the end of the business day; Prior to start of
If the annual usage of items in inventory is listed according
day; Over the weekend; During slowest shift.
to monetary units: shows that a small number of items account
for a large capital volume; large number of items account for a When to produce a cycle count? Regular intervals; Special
small capital volume. occasions (When an order is placed, When an order is received,
When a specified number of transactions have been occurred,
Classification in three groups:
When an error occurs).
⮩ Materials A: 15 to 20% of items; 70 to 80% of capital
INVENTORY COSTS
volume → Rigorous control (weekly orders)
⮩ Materials B: 20 to 30% of items; 15 to 20% of capital Item costs - price you pay for the item: Material, labor,
volume → Less Rigorous control overhead (manufactured in house), transportation, customs,
insurance.
⮩ Materials C: 50 to 65% of items; 5 to 10% of capital
volume → No control (Order once a year and keep in Carrying/Holding costs - volume related: Capital, storage,
inventory) obsolescence, damage, lost or stolen goods, deterioration.

ABC INVENTORY PLANNING Ordering costs - not quantity dependent: Preparation, follow-
up, expediting, receiving, authorizing payment, and the
How to control items with different importance? Material
accounting cost of receiving and paying the invoice, control,
Management should consider:
setup.
⮩ Materials A: Accurate forecast; Senior level involvement; Shortage costs: Waiting time, cancellations, opportunity →
Rigorous control Trade-off between carrying stock to satisfy demand and the
⮩ Materials B: Approximate forecast; Middle level costs resulting from stockout.
involvement; Moderate degree of control
⮩ Materials C: No forecast; Junior level involvement; Capacity-associated cost: Overtime, hiring, training, layoffs.
Relaxed degree of control
INVENTORY TRADEOFFS
INVENTORY ACCURACY
Low Inventories: Reduced holding and depreciation costs;
Accurate inventory information is crucial to the success of Easier organization; More usable cash (interest rates); More
inventory management (Where is our stock? How much stock is space; Avoid spoilage, damage and obsolescence; Avoid taxes,
in the warehouse?): Inventory reductions; Reduce audits; Better insurance and shrinkage (wastes and theft).
customer service; Prevent stockouts, shortages.; Control quality
High Inventories: Setup cost reduction; Lower
of inventory.
shipping/transportation costs; Decrease risk of stockout;
Methods: Paper/computerized systems; Assign responsibility to Increase customer satisfaction/service; Lower ordering cost
specific employees; Secure inventory behind locked doors; (Supplier price discount); Deal with uncertainty and delays.
Cycle counting (Physically count a part of the total number of
items each day). INVENTORY MANAGEMENT: DEPENDENT
DEMAND; MATERIAL REQUIREMENT PLANNING
(MRP)
CYCLE COUNTING
Dependent Demand is characterized by: A high degree of
complexity. Depends on the production requirements. Allows
greater fluidity of the production process. This type of PLANNING FACTORS FOR THE MRP
inventory treatment has evolved over time: Reorder point
Lead time (LT): Determines the amount of time allowed to get
system (ROP) → Material Requirement Planning (MRP) →
the item into stock once the order is issued.; If the item is
Production synchronized – JIT (Just in time)..
manufactured in–house, the LT depends on setup time, process
time, material handling time, move time between operation
MATERIAL REQUIREMENT PLANNING (MRP)
and waiting time in queue (Those times must be estimated for
Master Production Schedule (MPS) → Time plan specifying every operation along the item’s routing).
how many times and when the firms plans to build; Product
differentiation; Sets due dates for production orders, which Production Strategies: Lot size rules (minimize inventory
impacts on: 1. Capacity planning 2. Materials planning. levels)

Capacity Requirement Planning (CRP) → Guarantee that  Static lot sizing rules: Procedures to maintain the same
there is enough capacity when and where it’s necessary, to fulfil order quantity each time an order is issued.
the planned production; Allows the manager to analyze the o Fixed order quantity (FOQ): the lot size is
needs in terms of capacity required by the MPS; More detailed predetermined, fixed quantity.
view over the production schedule, avoiding errors and  Dynamic rules: Allow different order quantities for each
providing knowledge on the capacity being used. order issued. Must be large enough to prevent shortages
(falling below the safety stock), but no larger over a
Material Requirements Planning (MRP) → software system; specified number of weeks.
Mean for determining the number of parts, components, and o Periodic Order Quantity (POQ): The lot size
materials needed to produce a product; provides time equals the total of the needs for P weeks.
scheduling information, specifying when each material, parts, o Lot for lot (L4L): we order/produce what we need,
and components should be ordered or produced; Dependent with none carry over into next period → P=1 (one
demand drives MRP. week). (Lot-for-lot is an inventory management
strategy where a company orders or produces only
Based on a Master Production Schedule (MPS), the Bill of what is needed for a specific period, and no excess
Materials and Inventory Records, a Material Requirements is carried over into the next period. In this strategy,
Planning system (MRP): Creates schedules identifying the the order quantity, or production quantity, is equal
specific parts and materials required to produce end items; to the demand for that specific period, ensuring that
Determines exact unit numbers needed; Determines the dates there is no excess or shortage of inventory).
when orders for those materials should be released, based on
lead times. When MRP has information feedback from its module
outputs → Closed-loop MRP
MRP TERMINOLOGY
ISSUES WITH MRP
Gross Requirements (GR) – Total amount required for a
particular item (MPS + external customer orders). Typically, Capacity infeasibility: MRP assumes infinite capacity; Need to
are scheduled in weekly time buckets combine with CRP to ensure the MPS is capacity feasible.

Scheduled receipts (SR) – Materials already planned to be Long lead times: Uses pessimistic lead times to account for
received from supplier and/or production (purchased orders uncertainty; Leads to higher inventory levels.
scheduled to arrive)
System nervousness: Small changes in MPS result in large
Available inventory /Projected on hand/ available balance changes in planned order releases.
(PAB) – inventory available coming from the previous period.
MANUFACTURING RESOURCE PLANNING (MRP II)
PAB(t) = PAB(t-1) + PORp(t-1) + SR(t-1) - GR(t-1)
MRP II is a game that plan and monitor all resources of a
Net requirements (NR) = Gross requirements – Available manufacturing firm (using the closed-loop MRP system to
inventory - Scheduled receipts + safety stock ---> generate the financial figures): Manufacturing; Marketing;
Uncertainty Finance; Engineering ↔ ERPs (Enterprise Resource Planning).

Planned order receipt (PORp) - orders that should be Simulate the manufacturing system (Job releases and
received to meet the requirements (depend on the net dispatching).
requirements and on the production policy).
INVENTORY MANAGEMENT: INDEPENDENT
Planned order release (PORl) – indicates when the order DEMAND; CONTINUOUS AND PERIODIC MODELS
should be launched into production, considering the lead time.
It is the planned order receipt offset by the lead time.
 INVENTORY MANAGEMENT FOR INDEPENDENT
DEMAND

How to achieve lower costs, while satisfying the customer?

→ Inventory management systems: Volume decision: How
much to order?; Timing decision: When to order?

FIXED-ORDER QUANTITY MODEL (Q-MODEL) VS.

FIXED-TIME PERIOD MODEL (P-MODEL)

Fixed-order quantity or reorder point system or Continuous

models (Q-models): Fixed quantities (Q) are ordered: Define
Q to minimize total costs; Order is initiated when a specified EOQ is the quantity that minimizes the annual total cost
reorder level (R) occurs (when inventory reaches a defined (inventory, order and purchase annual cost) based on the
reorder point); Target level can be reached at any time following assumptions: Demand for product is constant and
depending on demand; Inventory must be continuously known with certainty; There are no constraints on the size of
monitored. each lot; The only two relevant costs are the inventory holding
cost and the fixed cost per lot for ordering or setup; Decisions
Fixed-time period models or Periodic analysis models (P-
for one item can be made taken independently of decisions for
models): This model is limited to placing orders at the end of a
other items; There is no uncertainty in the lead time or supply.
predetermined period; An order is made P in P periods of time;
EOQ is optimal when the five assumptions are satisfied.
There is no fixed quantity; The counting of the inventory should
take place at the review period. Selecting the reorder point when demand is uncertain:
Known average demand and lead time: Need for safety stock;
FIXED ORDER QUANTITY (Q-MODELS) Reorder point = Average demand during lead time + Safety
When inventory drops to a predetermined amount (R), an stock; The greater the safety stock, the less likely a stockout.
order is released for a fixed quantity of units (Q): Fixed Order a fixed quantity Q whenever the inventory falls below
order quantity, variable time between orders; On-hand inventory the reorder point R; The order is received after a certain time,
balance serves as order trigger (R); Perpetual inventory count Lead time (not instantaneous); Inventory increases when an
(often continuously). order is received; During the lead time period, there is a higher
probability of stockout.
How much to order (Q) - basic model is the economic order
quantity (EOQ): Minimize sum of the relevant costs. Real decision: safety stock level (B) → must be maintained
to provide some level of protection against stocking out -
When should we order? R is determined for a preferred Trade-off between benefits vs costs of holding safety stock; B
customer service level according to: Rate of demand; Length depends on the required service level; The greater the safety
of order lead time (L); Variability of demand and lead time. stock, the sooner the order is placed; Demand during lead time
is normally distributed.
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 The price break is the minimum quantity needed to get a
discount. Quantity discount: Price incentives to purchase large
Inventory level is reviewed periodically at regular intervals; An quantities.
appropriate quantity is ordered after each review; Variable order
quantity, fixed time between orders; Time serves as order The Total Cost is defined as:
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.

PERIODIC REVIEW (P-MODELS)

Analyses the inventory conditions from periods of P to P,
placing an order, which vary from period to period, depending
The value of the economic order quantity depends on the
on the usage rates (how much is needed at the review moment
unitary price:
to reach a target level of inventory (T)) - That quantity is
between the required inventory (T) and the existent value (I).

Define the EOQ (method):

1. Beginning with the lowest price, calculate the EOQ for

each price level (Each subsequent EOQ is smaller than the
previous one, because iPj gets larger). Verify if it is
feasible, if not use the price immediately above until reach
a feasible value which is between the order quantity
bounds.
2. If the EOQ for the lowest price is feasible, this is the best
Selecting the time between reviews (P): lot size to order. Otherwise, go to step 3.
3. Calculate the total cost for each prices level. Use the
P is defined based on a convenient system or through the value EOQ quantity when feasible. Otherwise, use the price
of the average time between orders considering the EOQ: break quantity for that level. The quantity with the
lowest total cost is the best lot size to order.

ECONOMIC PRODUCTION QUANTITY (EPQ)

⮩ Where it is assumed 52 weeks of work and D is defined as
annual requirements. EPQ is the optimum lot size that is to be manufactured in a
production unit to avoid unnecessary blockage of funds and
ADVANTAGES OF EACH MODEL excess storage cost. This production quantity is adequate to
ensure uninterrupted work.
Advantages of P-model: Replenishments are made at fixed
time intervals; The order quantity change between review If a material is supplied and consumed at the same time by the
periods; Can combine different quantity orders to the same same firm, and production rate > demand rate. For example:
supplier; Perpetual inventory system (means the records are the company generates its own inventory and uses part of that
always up-to-date) not mandatory. material to supply its own productive system.
Advantages of Q-model: Periods of supply might be different EOQ: Ordering from a third party; EPQ: Manufacture in-house.
for each item and order quantity is the same → holding cost
decrease; More suited for quantity discounts or capacity Then the Total Cost (TC) became:
limitations >> using fixed lot size; Lower safety stock than P
model, because: P+L  L.

PRICE-BREAK MODEL

Q/P models assume that: The cost per unit is constant to any
order quantity; The process of new orders is continuing → Part VI
Price-break model
LEAN MANUFACTURING
 LEAN SYSTEMS waiting time, inventory, reprocessing, accidents,
…)
Continuous improvement toward perfection; Elimination of 2. Characterize the current state of the process: Data
waste; Efficient low-cost production; Produce only the amount Collection - resources, timings, quality level
necessary for a given moment; Reduced use of facilities, 3. Determine opportunities for improvement by analyzing
equipment, material and human resources; Respect for people: the chart
Motivated employees use their skills to actively improve their 4. Identifying bottlenecks: Brainstorming to avoid waste and
working environment; Reduces: Inventory; Need for space; add value
Costs; Lead time; Increases: Quality; Efficiency; Flexibility; 5. Characterize the VSM for the new proposal
Productive capacity; Excellent relationship with the suppliers; 6. Devise an action plan to implement the new proposal
More efficient HR; Focus on activities that add value;
Limitations: sudden changes in demand, uncertainty in demand
3MU
or raw-materials availability, lack of time.
Muda: activities that take resources but do not add value
1) ELIMINATE WASTE
1. Overproduction – produces more product than
necessary.
VALUE STREAM MAPS (VSM) 2. Waiting Time – waiting for materials, information,
A chart with the process data: Timings (processing, waiting, people…
cycle); Quality (number of rejections); Inventory; Resources 3. Transporting – transportation of materials, information,
(Number of people; Space; Distance travelled). or people.
4. Inventory – more materials or more information than
VSM allow to visualize: All the interactions; All the flows of necessary.
information and materials; Supplies a common base and 5. Processing waste – process more than necessary.
language to refer to the process. 6. Unnecessary movement – of employees, of
information…
Helps to identify: The restrictions of the process - capacity
a. Point-of-Use (POU): Aggregate
that doesn’t meet the demand; Waste and its source/origin.
materials/components into one single
Tips for VSM: Involve the entire team; Get involved in the package/location so as to reduce the displacement
process; Use post-its and ultimately draw the flow charts → as much as possible.
it’s a dynamic process; Use symbols that characterize the 7. Defective Outputs – errors, failures, forcing to reprocess
process and are simultaneously understood by everyone to correct.
involved. 8. Wasted employee creativity – Loss of opportunity for
improvement by not listening to the employees.
Important concepts for VSM: Cycle time (sum of time related
to processing tasks that add value); Takt time (time between Muri: Overwork related with people and machines
satisfied orders); Lead time (receiving the order → delivery to
⮩ Team overworking
customer).
⮩ Causes: Excess demand; Lack of training; Lack of
Lead time includes: Processing time (Reduce the number of communication; Lack of tools and adequate equipment
steps or improve the efficiency); Displacement time (Reduce ⮩ Possible solutions: Jidoka; Standardization; Team
the distances, simplify the movements, standardize the workflow mapping: define work limits; Gemba walks
paths/routes); Waiting time (Improve the standards and adjust ⮩ Top management must remain in contact with the
capacity); Setup time (Usually makes the stronger impact). reality at Gemba
⮩ Transparency
VALUE STREAM MAPS (VSM): METHOD ⮩ Motivated workers
1. Define the value and the process focusing on the client:
Identify the tasks and flows that add or don’t add value → Mura: waste of inequity or inconsistency
waste
a. Activity that adds value → emphasize HOW TO IDENTIFY WASTE?
⮩ Reflects what the client wants Involve everyone; Shared responsibility, staff training and
⮩ Correctly performed greater worker motivation; Teamwork; Self-discipline; Quality
b. Activity that doesn’t add value circles; Empowerment.
⮩ Necessary waste: doesn’t add value but cannot
be eliminated → Minimize. (Ex: laws, 2) FLEXIBLE RESOURCES
campaigns, …) Process flexibility: Machine flexibility (low cost and
⮩ Pure waste → Eliminate (Consumes resources moveable); Operator flexibility (cross-training, problem-
and adds no value to the client’s eye; Ex: solving techniques).
 3) CELL-LIKE LAYOUTS Single-Minute Exchange of Die (SMED): Method that focuses
on the capacity to quickly convert from one product to another,
Lean Layouts allow: Different machines, conjoined to produce increasing the flexibility of the process; Perform setups in a
a family of components with similar procedural requirements; single-digit time span; Main goal: Reduce setup time.
To produce with minimal inventory; Steady flow of materials,
information, and workers in the manufacture operations. Transition time can be minimized by:

U-Shaped Production Cells: Better visibility; More ⮩ Measuring and analyzing the transition activities:
communication and teamwork; Lower handling cost; Fewer Measure the transition times and analyze them to improve
operator requirements; Higher productivity; Lower WIP (Work them.
in Progress); Less space; Faster response to changing demand. ⮩ Separate external and internal activities: External
(executed while the process is undergoing); Internal
Manufacture cells reduce: Inventory; Labor; Processing time;
(executed while the process is standing still)
Handling; Require high level of automation.
⮩ Convert internal activities into external: Pre-set
4) PULL SYSTEM activities and equipment; make smoother transitions; use
easier and faster equipment for the changes
Pull method to workflow: Demand activates production of the ⮩ Perform parallel setup activities or eliminate them
product - Operates only if the downstream system requires it;
⮩ Practice the transitions: experience helps reduce times
There is no inventory; Fulfill customers’ demand within an
acceptable amount of time; Good for firms with highly Advantages of SMED: Lower Manufacturing Cost (faster
repetitive processes and well-defined workflows of standardized changeovers mean less equipment downtime); Smaller Lot
items; JIT inventory management. Companies only make Sizes (faster changeovers enable more frequent product
enough product to fulfill orders; Smooth and constant flow; changes); Improved Responsiveness to Customer Demand
Minimizes inventory, reprocessing, and waste; Agile, flexible (smaller lot sizes enable more flexible scheduling); Lower
and of quick response to the consumer. Inventory Levels (smaller lot sizes result in lower inventory
levels); Smoother Startups (standardized changeover processes
Push: Production of the item begins in advance of customer
improve consistency and quality).
needs; Produce enough product to meet the forecast demand and
sell the goods to the consumer; Results in more inventory and
8) LEVELLED AND UNIFORM PRODUCTION
more batches of defective product.
Heijunka - Maintain a stable production mix and volume
5) KANBANS over time: Production based on the needs of the clients;
Standardized production; Flexible resources and fixed quantity
Mura: Inconsistency - To locate the process inequities, you
in the production/distribution channels; Production by small
need to visualize your workflow → Kanban
lots; Reduction of setup times.
Kanban: Visual method of operationalizing a Pull planning
Scheduling in large batches: Generates inventory; The
and control strategy - Based on a card used by the operation
production varies daily.
client to instruct the operation supplier to initiate the production
Levelled scheduling: One lot of each item is finished in a
Different types of Kanbans:
single day; Low inventory between operations (reduces the
Work in Progress stock); The same every day; Easier to
⮩ Production Kanban: signals the beginning of production
standardize.
of a batch of components or products
⮩ Removal Kanban: authorizes the removal of material Advantages of Heijunka: Low inventory of raw materials,
from a given container WIP and final products; Easier planning and control; Easier
⮩ Transportation Kanban: authorizes the removal of quality control; Standardization; Workers know the process
material from a given point better and are easily able to monitor it.
⮩ Supply Kanban: tells the supplier that it’s time to send
material Six Sigma: Aim to provide value to the client (Product
quality/service and client satisfaction); Identification of the
Advantages: Simple visual system; Effective and inexpensive; problem; Reduction of variability (Better output of the system);
Reduces inventory and decreases stock-outs; Improves lead Results in high performance.
times; Improves the quality of the service.
Lean and Six Sigma are synergetic (Lean Six Sigma): Lean
6) SMALL LOTS optimizes the flows and eliminates waste; Six Sigma improves
the quality of the processes by eliminating variability in all its
Require less space; Require less capital investment; Less willing stages.
to low quality; Processes more dependent on each other.
9) QUALITY AT THE SOURCE
7) SMALL SETUPS
Jidoka: Autonomation (Automation + human intelligence); 5. Early equipment management: Improving design of new
Detect problems → high quality → avoid redoing work. equipment.
6. Training and education
Advantages: Promotes standardization and involvement; 7. Safety, health, environment: Avoid work accidents,
Increases organization and efficiency; Avoids unnecessary pollution, and burnout.
displacements; Increases security; Eliminates unwanted 8. TPM in administration
inventory; Low-cost improvements.
11) NETWORK OF SUPPLIERS
Visual management: practical method to determine the current
state of the process. Is it under control? Is there any anomaly? Supplier performance metrics into operating plans

Visual management aims at: Giving visibility to the problems; Pressure to: Reduce costs; Improve quality; Responsiveness;
Help workers and managers to be in direct contact with reality Improve on-time delivery; Go lean.
in Gemba.
5 BASIC PRINCIPLES OF LEAN
Visual management - Make problems visible: Andons
(Flashing signs that identify quality problems); Poka-yokes 1 - Define value; 2 - Map Value Steam; 3 – Create Flow; 4 –
(Prevents the occurrence of defects/accidents). Establish Pull; 5 – Pursuit Perfection.

5S – Housekeeping is a Lean method to optimize workspace

and maximize process efficiency:

 Step 1: Seiri/Sort (Eliminate unnecessary items from

Gemba).
 Step 2: Seiton/Arrange (Define a specific place for
each item; Fast and easy access; Is something
missing?).
 Step 3: Seiso/Sweep (Keep the machinery and the
work environment neat and tidy; Are we always
“cleaning” the same thing? What is the underlying
purpose? Continuous improvement: determining the
source of the problem); It’s a powerful technique to
define the source of the problem; Consists of
continuously asking Why? until the source is
identified.
 Step 4: Seiketsu/Standardize (Define and standardize
procedures; Rapid detection of anomalies; Checklists).
 Step 5: Shitsuke/Self-discipline (Train the workers in
the 5Ss; Create workers’ Self-discipline; Clarify the
applicability of the new methodologies to the company
and to the purpose of the company; Apply positive
pressure).

10) LEVELLED AND UNIFORM PRODUCTION

Holistic approach to equipment maintenance that strives to

achieve perfect production: No breakdowns; No small stops or
slow running; No defects; No accidents.

Everyone is involved in proactive and preventive maintenance

to maximize operational efficiency of equipment.

1. Autonomous maintenance: Everyone has the autonomy to

clean, inspect and contribute to maintenance of equipment.
2. Planned maintenance: To avoid breakdowns; Should be
done after regular working hours.
3. Quality maintenance: Reduce defective products,
reprocessing; Increase customer satisfaction.
4. Focused improvement: Engagement to continuous
improvement.