Item Inventory Management
Order review methods (selection of proper method is influenced by nature of demand, level of demand, and stability of demand over time, the value and classification of an item):
- Statistical, by using probabilistic techniques, based on triggering the replenishment order when inventory reaches a fixed level or when a fixed interval of time has elapsed. Best used with independent-demand items that have a minimum variability of usage. The method assumes that future customer demand will closely resemble past demand.
Fixed reorder point: when inventory reaches predetermined level; equals sum of projected demand (finished goods, spare parts, MRO items, other manufacturing supplies) through the replenishment lead-time plus the safety stock
Visual Review where a physical review of the stock on hand is used, one of common methods is Two-bin system for low-value items with short lead-times such as screws: the inventory is kept in 2 containers and the active container is used to satisfy demand. When the active container becomes empty the replenishment order is placed. The second container has enough inventory to cover the expected demand through lead-time plus SS.
Min-Max where Min is reorder point and the maximum is the reorder point plus ordering quantity
Kanban is the system that will send a signal called Kanban to authorize the movement of material or product from the supplying location to consuming location. Kanban can also be used to signal the authorization to produce additional product (limiting inventory buildup up to the number of kanbans).
Time-phased order point based on principle that ordering will occur in time to receive material when the available stock balance reaches the SS level. It uses MRP logic for independent demand items where lot sizes are needed to determine the right quantity to order once MRP has determined a requirement for an item.MRP is best used for raw materials while time phased order point is best used for independent parts such as field warehouses or service parts.
Periodic order quantity review system/time based order system/fixed-interval order system – inventory is reviewed on a fixed time interval and a replenishment order is placed at the time for the difference between the current inventory and the target inventory
Statistical order point system work best in MTS environment where the orders are filled from stock and demand is smooth. Companies that have erratic demand e.g. MTO, ATO should use MRP system to plan their inventory levels and replenishment orders
Order Point = (Demand * Lead Time) + Safety Stock
- Deterministic, based on fact that characteristics such as demand, date and physical characteristics are known. No uncertainty is included in the model
Material Requirements Planning attempting to replenish inventory just before the additional supply is needed
Time-phased MRP begins with MPS which determines quantity of all material required to produce those items, as well as the date that the materials are required. Time-phased MRP is accomplished by exploding the BOM and offsetting requirements by the appropriate lead-times. MRP system uses NEED DATE to maintain priority control and is most critical (due date and need date coincide at order release and separate over time). The start date is only a function of the lead time.
There are MRP Net change systems (transaction driven) and MRP regenerative systems triggered by time (e.g. running the MRP system once a week). Not only the frequency of the re-planning cycle distinguishes these two types of MRP systems but also the technique used: net change systems replan only the parts/bills of materials that have changed while regenerative systems are time based for replanning all parts/bills of material. In a net change MRP system “system nervousness” refers to the constant revision of planner actions and this is a negative attribute of net change MRP system along with inefficient data processing and reduced purging of errors requiring stricter discipline. Interlevel equilibrium refers to net change MRP where the system rebalances and explodes down from the changed item (partial explosion)
In an MRP environment allocation refers to an unfilled or uncashed stockroom requisition which MRP deducts from the on-hand balance in performing the gross to net calculation. MRP system control orders in a planned status. Open orders and firm planned orders are controlled by the user. MRP will only give messages to re-prioritize (firm planned orders do not become an open order within lead times of the part without planner intervention!). Time-phased order point applies MRP logic and time phasing to independent items but MRP systems combine the calculation of dependent demand for components and the element of time (time phasing). Time phasing is a technique of expressing future demand, supply, and inventories by time period.
Some general principles to remember about time-phased MRP:
- Materials plan must extend over a long enough period to cover the longest lead-time of any component in a single-level BOM and the sum of the lead-times in a multi-level bill
- Materials plan should be revised frequently in order to react to changes in demand or supply
- The shorter the time period used, the more effective the materials plan will be
- Maintaining planned order priority is not responsibility of MRP system user since MRP system will maintain it based on due dates
Lot-Sizing Techniques
Are chosen based on economics, overall timing, quantities, and the pattern of demand
Objective is to balance the costs of carrying inventory (vary with level inventory) with the cost of ordering inventory (vary with no. of orders placed). Cost of inventory is not only a cost of purchased material but it’s also a cost of warehousing, manufacturing setup, insurance, interest, obsolescence and more.
- For stable demand Economic Order Quantity (EOQ) and fixed-order quantity
- For dynamic demand lot-for lot, fixed-period (periods-of-supply) quantity and period order quantity
Lot-for-Lot commonly used in JIT environments where planned orders are equal to the net requirements in each period
Carrying costs: opportunity costs (rate of return), storage facility, cost of stocking and handling, taxes and insurance, obsolescence or spoilage, thefts
Ordering costs: placing purchase orders to buy material from a vendor or associated with ordering a manufactured lot from the plant (order receipt clerical cost + order preparation cost + set-up cost)
Unit cost: partially triggering carrying and ordering costs, consists of the purchase price of raw material or component from supplier or manufacturing cost of the unit
Total cost for order lot size = carrying cost + order cost
Annual ordering cost calculation = (annual projected usage/lot size) * cost per order
Annual carrying cost calculation = (lot size/2) * unit cost * carrying rate (% of unit cost), based on assumption that average inventory is one-half of lot size that typically provides sufficient accuracy
EOQ – statistical inventory control tool that uses a fixed-order quantity rule to specify the number of units to be ordered each time an order is placed; balances cost of ordering with cost of storage being rather push inventory system where the acquisition of inventory is initiated in anticipation of future demand, not in reaction to present demand
EOQ is to minimize total inventory cost
EOQ is based on following assumptions: demand is linear with random variation, the ordering cost is independent of the quantity ordered, the lead-time is constant and known, the formula can handle only one type of item at a time, orders arrive in single batch
EOQ disadvantages: considering fixed annual demand with no moment in time when exactly demand occurs; should rather consider carrying and ordering costs as contributors to total; assuming all inputs like cost of ordering and cost of item don’t fluctuate with economy
EOQ calculation 
A Annual Usage in units; S Ordering cost in $; i Annual inventory carrying cost as decimal;C unit cost
POQ Period Order Quantity – uses EOQ model to calculate net requirements for a given number of periods (variable order quantity)
POQ = planning periods per year/no. of orders per year, where
no. of order per year = annual requirements/EOQ
Safety Stock Techniques
SS is a quantity of stock to keep in inventory to protect against unexpected fluctuations in supply and demand (it’s not planned to be used), the relationship between customer service level and safety stock in an integral piece of the organization. In order to reduce SS you would need to reduce variability of supply and demand OR the level of service desired OR the time covered
- Fixed quantity SS
Introduction phase with no historical demand data to predict future demand, when quality and delivery reliability for a new item are not known, phase-out stage where risk of ending up with obsolete inventory
- Time period SS
By multiplying projected usage by SS time period
- Statistical SS based on mathematical calculation using standard deviation or mean absolute deviation of demand forecast errors (based on historical deviation of actuals from planned usage)
standard deviation = 1,25 mean absolute deviation
safety stock = 1 sigma (50% + 34% = 84% service level)
safety stock = 2 sigma 99% service level
safety stock = 3 sigma 99,94% service level
safety factor = no. of sigma that provides you desired service level (for 84% service level safety factor is 1) defined by the number of periods without a stockout
Factors to consider when selecting SS technique:
Primary ->nature of demand (dependent/independent), degree of variability in supply & demand
When forecast interval doesn’t equal replenishment lead-time SS needs to be adjusted by Beta Factor (lead-time divided by forecast interval). The higher the beta (forecast interval is less than the replenishment lead-time), the higher the amount of SS on hand as the level of uncertainty related to fluctuations in lead-time increases
Safety lead time offsets the planned order receipt date from the net requirement date by the duration of the safety lead time. Safety lead time should be used when the timing of an order is uncertain. Safety stock would be used when quantity is uncertain.
Inventory Control Techniques
Inventory Valuation Methods:
Financially Inventory is included in the balance sheet as an asset. Actual Cost (when customer owned), Average Cost (when cost of unit is volatile over time), FIFO, LIFO, Replacement (inventory cost based on a projected cost to replace items), Standard cost (typically annual inventory cost based on predetermined rates for direct material, labor, and overhead)
FIFO is inventory valuation technique where inventory is valued based on the latest products to enter inventory; used during inflation results in lowest cost of goods sold and highest net income
LIFO – used during inflation produces the highest cost of goods sold and lowest net income
Methods of verifying inventory balances:
Audits – determining accuracy level (spot-check balances)
Periodic Inventory – normally annual/semi-annual/quarterly, done to satisfy owners and auditors that the financial value of the inventory is properly stated, also an opportunity to correct any inaccuracies in the records
Cycle counting–taking inventories on sample of specific items at regular intervals. The count frequency is set by the number of items in inventory and the desired level of control. ABC classification is frequently used to set the frequency count. An effective cycle-counting program incorporates procedures to identify and eliminate the root causes of errors. Cycle counting is not an annual physical inventory.
Inventory tracking
A combination of item identification and location is referred to as a stockkeeping unit (SKU) in many industry segments and is used for inventory control
Item Identification –> 3 things to know:
What items are there in inventory?
What are the locations at which each item is stored?
How many of the items are there at each storage location?
Automated identification methods: bar coding, radio frequency tags, magnetically encoded documents, direct machine interfaces
Categories of inventory: operating (used in near future), excess (exceeding target of operating inventory), surplus (exceeding target of operating and excess with possibility of being used within cumulative lead-time of products), inactive (not likely to be used in foreseeable future), obsolete
Desirable Characteristics of Material Planning Process
Design Characteristics – features, functions and capabilities present to support the goals and strategies of the firm
- Specify planning horizon that should be dictated by cumulative lead-time
- Size of planning period (daily/weekly/shift)
- Planning display increment (not smaller than planning increment)
Bucketless system when system uses daily planning increments/ bucketed system when a time increment utilized is other than daily
Most popular method of detailed material planning is material requirements planning (MRP->used in production of wide variety of products in job shop environment or moderate range of products in a repetitive manufacturing layout) however there are some alternatives such as process flow scheduling or project management or advanced planning and scheduling (APS). APS determine the optimal schedule by eliminating constraints whether they are material, capacity, tooling, machine, labor etc. Detailed planning methods are aligned with the organization’s product variety, demand fulfillment approach and product facilities layout.
Project scheduling techniques: program evaluation and review technique (PERT) or critical path method (CPM)
Performance Characteristics – speed and frequency at which alternative courses of action can be evaluated
Operation Characteristics – ease of use of the design and performance features
Desirable features in MRP:
- Ability to freeze plan (quantity or timing) by creating firm planned order (FPO)
- Flexibility in specifying replenishment lead-times
Planned lead-time based on historical averages
Scheduled lead-time calculated for actual order
Actual lead-timeis a fact, may vary greatly from planned lead-time
- Number and type of lot-sizing techniques supported by the system
Discrete (plan to reach stock of 0 before next replenishment) vs non-discrete (like EOQ typically have leftover stock prior to next order)
Important is allowance for modifiers (order multiple e.g. eggs purchase) and constraints (order min/max)
- Methods available to manage engineering changes
Effective immediately, date effectivity, specified inventory levels, specified lot or serial number
- Planning for loss of material
Shrinkage refers to a loss of the parent and all the components required to build the parent (shrinkage>scrap)
Scrap is specified for a component and stored in BOM file
Formula for Scrap Factor -> adjusted gross requirements = unadjusted gross requirements/(1-scrap factor)
Scrap factor increases the gross requirements of a given component
Yield is expected usable output
Scrap factor + yield factor = 100%
Shrinkage factor = (100% – yield factor)/yield factor= scrap factor/yield factor
When the parent item has a specified yield factor, the gross requirements for all components are factored by the appropriate shrinkage factor
Performance characteristics of MRP plans
Frequency of reviewing MRP plans: regeneration MRP or net change MRP (only recalculation of plans of items experiencing change since last MRP update). With the every material plan change efficient MRP software should allow a planner to effectively identify courses of action, evaluate them and implement changes + analyze impact of any proposed change prior to their implementation (what-if scenario).
Optional characteristics are: presentation of information, action messages and maintaining parameters.
Action messages report can separate the list into 2 reports
Mechanics of detailed MRP
MRP Steps (check MPR overview)
- Initiate the MRP planning grip
Finished goods -> independent demand -> forecast of DRP (Distrib.Req.Plan.) calculation
Components and subassemblies -> gross requirements calculated in the MRP bill of material explosion process
The source of component’s gross requirement can be determined with MRP pegging capabilities
- Project the on-hand inventory
If PAB<Safety stock then Net requirements = Safety Stock – PAB
- Plan additional supply orders
In substep1 which is ‘determining the planned lot size’ ‘lot-for-lot’ is used when item is expensive, item has short shelf life, item is used infrequently, or manufacturer is implementing just-in-time or lean manufacturing practices
In substep2 which is ‘determining the release date for supply order’ offsetting is process of calculating release date by subtracting the lead-time for planned order receipt date (in quantity dependent lead-time run time per unit is multiplied by order size to calculate run time per order + other lead-time elements like queue, setup, wait, and move
In substep3 which is ‘recalculate the PAB’
- Replan all affected components (this step can be modified with the application of product structure scrap factors, product structure offset, or engineering change control)
Product Structure Offsets are used to delay the timing of gross requirements for a component when it’s not required until later in manufacturing process; can be expressed as fixed offset in days or as a percentage of parent’s lead-time
Engineering change control determines if the timing of a gross requirement is applicable for a component by specifying date effectivity (date effectivity in DEI, date effectivity out DEO)
Maintaining the Validity of Material Plans
MRP process creates a plan to balance the demand and supply. Next to that system recommends actions to maintain the priorities of the plan (determined through the use of due dates) but it’s up to system user to apply those actions and even override system recommendation based on information that was not available in the system.
There are 2 reports from MRP run:
- Schedule
- Exception report (list of work orders that past their release date, material that is past its issue date, orders that should be closed but are still open)
Low Level Code– is determined by the lowest level in any bill of material planned by the MRP process (end item is level 0). It is used in MRP process to verify that all requirements are identified prior to planning an item (ensures that an item is not specified as a component anywhere in its product structure and the netting and replenishment planning is done only one time after all of its requirements have been identified). The MRP system accumulates the requirements at the highest levels and works down each level of the bill of materials. When it reaches the low level code assigned to the part at the lowest level in the structure, it accumulates the total requirements. It then nets out the inventory and adds in the scheduled receipts to project a net requirement. This net requirement is used to plan the orders to balance supply and demand. Low-level codes are assigned by the MRP system and maintained by the software.
When the order, accepted by user, is processed then it changes the planned order into a released order and corresponding planned order receipt into a scheduled receipt (The scheduled receipt = open order)
MRP planner can use different techniques to manage expectations such as low-level coding, pegging, firm planned orders
Five steps analysis prior to order release:
- verify the situation
- identify potential solutions
- determine where to resolve the situation
- negotiate the solution
- report the actions
Planning Parameters
Safety stock, lot-size, lead-time, shop calendar
What-if Analysis
Changes in demand (top-down changes) changes in MPS, FCT, new customer, or to existing order
Changes in supply (bottom-up changes) changes in inventory, unplanned scrap, firm planned orders, or in supply order schedule
Detailed Capacity Planning Characteristics and Techniques
The matched pairs of Priority and Capacity Planning steps are:
- Production Planning (S&OP) & Resource Planning
- Master Production Scheduling and RCCP
- MRP and CRP
- Production Activity Control and Input/Output Control
The diagram above shows the priority and capacity planning flow where material planning process is validated by the detailed planning process. Long-range planning must precede mid-range efforts, and mid-range efforts must precede those in short range. For example RCCP is performed during the development of MPS with the overall result feeding the material requirements plan. The processes performed at each level are integrated with feedback where there are significant deviations from the plans. The processes are interactive and performed on a regular basis. A priority plan and capacity plan are produced at each level and the plans must be feasible before they are released to next level. At each level the capacity activities are similar but there are some distinctions in terms of time period, inputs, outputs, and in the detail of the resource management method. At RP and RCCP level capacity is planned without regard for available capacity. Available capacity is IMPERATIVE at the detailed capacity planning level. RCCP accesses capacity needs for all key resources including components and raw materials, finance, labor, machine time, storage, and others (the material constraints will be an input to RCCP). This is the highest level of planning at which management can confirm that the schedule is feasible. CRP translates orders released by MRP into work center commitments per time period. Other capacities are checked including available warehouse space, adjustments for scrap, and material and component availability.
Factors to consider affecting requirements for the detailed capacity planning process:
- Production type (one-of-a-kind or project production, batch production, repetitive production, mass production, mass customization)
- Workflow control (project control, order control, flow control)
- Flexibility (categories: design changeover, product mix, volume, modification, rerouting, material)
Capacity flexibility: qualitative (determines whether capacity can be used for a variety of purposes or only for a specific purpose) and quantitative (determines the flexibility of capacity over time). Common units of capacity include standard labour hours, standard machine hours and pieces.
Schedule (order due date) flexibility – MTS is always more schedule flexible than MTO due to e.g. large financial penalties for late delivery
- Business objectives (different for firms trying to gain competitive advantage on the basis of delivery speed/reliability rather than on the basis of price – first one would keep capacity buffer to maximize delivery speed while second one would minimize operating costs)
Techniques:
Horizontal loading – focuses on entire-shop orders where the highest priority shop order or job is scheduled in all of its work centers, then the job with the next highest priority, and so on
Vertical Loading – focuses on scheduling one work center, job by job
a) Infinite loading (accumulate the capacity required without regard to the capacity available) appropriate where there is higher level of capacity flexibility than order/schedule flexibility
- Order-oriented infinite loading (achieving high level of delivery reliability) example: CRP
Steps are: schedule the remaining operations for all orders, accumulate the load for a work center for the first time period, repeat step2 for the remaining time periods for work center, repeat steps2 and 3 for the remaining work centers, prepare load profiles and present the imbalances for resolution, take necessary actions to resolve significant imbalances
- Order-wise infinite loading (form of horizontal loading, loads the orders individually on an order-by-order basis, after receipt and after completion of each operation, typically used in a situation where there a few high-value orders being processed at one time, focusing on determining a feasible schedule for each order)
b) Finite loading (accumulate capacity required only up to the capacity available, never exceed capacity, objectives are to keep resources highly utilized and minimize delays in meeting committed days; because work is only accumulated to the designated capacity limit and the resolution of imbalances is frequently done programmatically the data and rules for determining the capacity available and capacity required and the rules for resolving imbalances must be more precise for finite loading methods)there are most appropriate when there is more schedule flexibility than capacity flexibility (for MTS environment where delivery date to distribution center or customer is less important
- Order-oriented (the orders are scheduled in priority sequence; the rule is to load operations that already started and with short LT despite reaching limit, move operations to the next period with avail. cap, unloading orders where due date is not flexible enough so it frees up capacity in work centers for other prioritized orders)
- Order-wise
- Constraint-oriented (order-oriented approach where the orders are planned around bottlenecks and constraints – most common is drum-buffer-rope DBR
Drum – refers to the drumbeat or pace of production. It represents the master schedule for the operation, which is focused around the pace of throughput as defined by the constraint
Buffer – is established to ensure that the constraint is never starved for inventory. It is often referred to as a ‘time buffer’ because it represents the amount of time that the inventory in the buffer protects the constraint from disruptions
Rope – is a communication process from the constraint to the gating operation that checks or limits material released into the system to support the constraint
- Operations-oriented/operations sequencing (this method produces a set of projected completion times for all operations and projected queue levels by period for each work center aiming to minimize the delay to individual operations)
Load-oriented order release (LOOR) to achieve high level of capacity utilization and low level of work-in process inventory by releasing only those orders that can be processed without excessive queues.
Capacity-oriented materials management (CORMA) for firms producing MTS and MTO using same resources and apply product mix rule to balance better capacity resources (stock orders are released earlier than needed which allows for sequencing to reduce setups and use stock orders as fillers)
Rate-Based scheduling is typically used with a line layout and repetitive production and the factors considered are cumulative production figures and pull signals (pull signals are a form of infinite loading in the short to intermediate term).
3 commonly used network planning techniques that support detailed capacity planning for projects (network defines tasks, resources required, estimated duration of each task, relationships or dependencies among the tasks):
- Critical path method (CPM) uses a single estimate of the most likely duration for each activity based on infinite loading of the resources
- Program evaluation review technique (PERT) uses a weighted average of the optimistic, most likely, and pessimistic estimates for the duration of each task, also based on infinite loading of the resources
- Critical Chain method applies the Theory of Constraints to project management. The constraining resources are loaded to finite capacity and the remaining tasks are scheduled
Each of techniques starts by making forward and backward scheduling passes through the network:
The forward scheduling pass determines the earliest technically feasible start and end dates for each task while the backward scheduling pass determines the latest start and finish date that will result in on-time completion of the project. The difference between the early and late start dates is referred to as slack time. Slack time positive = start of operation may be delayed by that amount of time without affecting the completion date for the project. Slack time negative = project is behind schedule.
Process flow scheduling (PFS) is a general framework for scheduling flow manufacturing plants.
3 principles of PFS are:
- Scheduling calculations that are guided by the process structure are developed by progressively moving from cluster to cluster and iteratively building a feasible schedule (gantt charts are commonly used to virtually display schedules for process units. Line graphs are used for displaying inventory levels over time
- Process clusters are scheduled using processor-dominated scheduling (first proposing a trial gantt chart for the process and then checks inventories for feasibility – this technique facilitates scheduling equipment in economic run lengths and the use of low-cost production sequences and minimizing setup time; used for stages of production that are capacity constrained) or material-dominated scheduling (first develops a material schedule and then checks the process for feasibility – schedules are dictated by the target minimum and maximum inventory levels)
- Process trains (which are another representation of the flow of materials through a process industry manufacturing system) are scheduled using forward-flow scheduling (scheduling proceeds forward through the process train in the same direction as the material flow), reverse-flow scheduling (the scheduling begins with a cluster in the last stage and proceeds backward through the process train) or mixed-flow scheduling (scheduling begins with a constraint in the process to the outer clusters). Within this process train equipment that performs a basic manufacturing step such as mixing or packaging is called a process unit. Process units are combined into stages and stages are combined into process trains.
Alignment of techniques – infinite loading
Alignment of techniques – finite loading
Basic Techniques of Detailed Capacity Planning Process
Available capacity – is a measure of the expected output of a resource
Capacity planning is 3 step procedure: determine available capacity, determine required capacity, accumulate required capacity. There is one most commonly used technique for detailed capacity planning (used to test the feasibility of the detailed priority plans)– capacity requirements planning (CRP)
Productivity factor = utilization * efficiency (actual output of production compared to the actual input of resources)
Available capacity = shifts per day * hours per day * days per period * productivity factor
Available capacity can be based either on the rated capacity or the demonstrated capacity.
Capacity required = Setup time + Run time (no. of units * hours per unit)
The following measurements of capacity are the ones most frequently used:
- Theoretical capacity – max output capacity allowing no adjustments
- Scheduled or available hours – amount of hours that resource is available to produce a quantity of output in a particular time period
- Rated capacity is the expected output capacity of a resource
- Demonstrated capacity is the proven capacity calculated from actual performance data
- Maximum demonstrated capacity is the highest amount of actual output produced in the past when all efforts have been made to optimize resources
When determining the rated capacity we need to consider definition of resource, number of units, scheduled hours, resource productivity
Among different approaches towards scheduling work (Rate-base scheduling, Network Scheduling, Operations Scheduling) operations scheduling is typically used with order control of the flow of work. Also referred to as lead-time scheduling because it develops the schedule for the order by calculating the lead-time. Operation scheduling methods are:
- Backward scheduling (ending with latest possible end date, capacity is flexible)
- Forward scheduling (start with earliest possible start date, capacity is not flexible)
- Central-point scheduling/bottleneck scheduling (used when a single constraint or bottleneck exists, bottleneck is referred to as the central point; the operation at the bottleneck and those that follow can be scheduled using forward scheduling from that date; the operation preceding the one at the bottleneck operation can be scheduled using backward scheduling from that date)
- Probable scheduling (when slack time is taken into account to increase or decrease lead-time; slack can be determined by comparing the forward and backward scheduling)
Probable scheduling takes the earliest start and the latest completion dates and calculates a factor that is used to adjust the interoperation times and, therefore, the schedule. This factor is referred to as a lead-time stretching factor which is numerical factor by which the non-technical interoperation times and the administrative times are multiplied. The calculation of stretching factor is trial-end-error process. An acceptable stretching factor has been found when the slack after applying the factor approaches zero.
Detailed capacity planning typically develops a time-phased plan of the available and required capacity for each resource. The exception is when a product layout and rate-based planning are used. In this case, the available and required capacity only need to be determined when one or the other is planned to be changed. The work must be sequenced and scheduled before the capacity required at a resource in a period can be determined. The elements of lead-time include:
Administration lead-time is the time between the recognition of need for a replenishment order and the release of manufacturing order to stock
Pick lead-time is the time to pull and stage the materials and move to operations
Queue time is the time an order waits at a work center before that operation is started. Typically, queue time is the longest lead-time element
Setup time is the time required to prepare the resource to perform the specified operation
Run time is the time to complete an operation on an item after the setup has been completed
Wait time is the time after the completion of one process until the item is moved to the next operation
Move time is the time spent moving the item from one operation to the next
Operation time determines the capacity required at the work center
Interoperation time includes queue, wait and move
When orders and operations are scheduled assuming infinite capacity, the sequencing of the work in the scheduling process doesn’t affect the scheduled completion dates or the capacity required. When orders and operations are scheduled assuming finite capacity, the sequencing of the work in the scheduling process significantly affects the scheduled completion dates or the capacity required.
A constraint is any element or factor that prevents a system from achieving a higher level of performance with respect to its objective. Constraints can be physical, such as machine center or lack of material. Or they can be managerial, such as policies and procedures. A secondary constraint, such as tooling, can constrain the capacity of another resource e.g. mold under repair needed on machine that is temporarily constrained.
Capacity Requirements Planning
Most used order-oriented technique for infinite loading, typically linked to MRP as priority planning tool but can be used with other priority planning techniques. It’s 4 steps process: schedule work, accumulate load, create a load profile, resolve imbalances. Normally CRP is based on backward scheduling when there is little or no schedule flexibility and some degree of capacity planning flexibility. Inputs to CRP are: cap available, open orders (scheduled receipts), planned orders.
Load Profile Based on Planned and Released Orders – the capacity required may be broken down into the amount required for planned, released, and open orders displayed on chart with mix changes over time.
The way to resolve imbalances is to add capacity where there is an overload and to drop or deactivate capacity where there is an underload. Imbalances may also be resolved by shifting the capacity required using alternate work centers, alternate operations or routings. In CRP the decision-making on how to resolve imbalances residues with individuals who may have knowledge that cannot be incorporated into the scheduling system. CRP schedules are approximations and need tracking the actual progress, and it won’t work with significant amount of backlog (then the load for first period doesn’t make sense)
Methods for Product Layout
Product Layout (Process flow/Production Line) used to manufacture discrete products and support repetitive manufacturing (consumer electronics, some packaged foods, personal computers manufactured to stock), mass customization (automobiles, boats and motorcycles), and continuous production environments (oil, steel, brewery products)
When continuous production is used process industries frequently break the production process into stages, so that the capacity within a stage can be balanced. Inventory buffers are used between the stages and capacity planning is simplified because all stations in a process have similar capacities, so the plan needs to be tested against each stage. Once a plan is determined to be feasible, capacity planning only needs to be done when there is a change in volumes or in the process capacity.
Examples of production environments that don’t utilize product layout would include job-shop or one-of-a-kind production that would produce a ship, an airplane, or an office building
Line balancing in product layout – process of getting all stations on the line to have similar production rates
Line balancing in steps:
Step1 Determine the required output rate and takt time for the process (req. output/avail. time)
Step2 Calculate the minimum number of workstations required based on takt time of each station (if takt time of one station is less than calculated takt time you need to add one similar station)
Step3 Determine the work elements and the dependencies among them (determine perfect takt time according to which all stations would be working)
Step4 Assign the work elements to the workstations (trial-and-error step)
Uses of Detailed Capacity Planning Process
Outputs of the detailed capacity planning process are: 1 tabular display, 2 load profile, 3 final schedule
Tabular (matrix) display – determine overall requirements of product family or individual item in time buckets
The planned order release related to the master production scheduling process becomes a gross requirement in the material requirements planning process
If the order is generated internally within the organization, the planned order release will be one factor used to calculate the overall load of work center (load profile is key input to the production activity control process)
Upon successful completion of the load profile a final schedule is developed. Work Center load report is one of the two final schedules produced by the CRP. However, as shown below, we may need to revise the schedule of planned manufacturing order releases prior to finalizing the work center load report and revised schedule of planned manufacturing order releases is second of two final schedules.
Safety factors – exist to provide for flexibility within the manufacturing scheduling process, compensate for variability of demand and precision of data and unpredictability of events and also to protect desired level of customer service. Types of SF are:
Safety capacity is planned to provide additional capacity needed to meet supply and demand variability (advantage is no need to keep safety stock)
Surge capacity is capacity available to meet sudden unexpected increases in demand by expanding production with existing personnel and equipment; both safety and surge capacity represent a buffer that increases capacity flexibility
Scheduling capacity includes safety stock and safety lead-time in order to buffer uncertainty in MRP system
Planned utilization indicates how intensively a resource is being used to produce a good or service and considers downtime to allow for unplanned events and provide capacity buffer
Planned efficiency = average of operations (standard hours of work/hours actually worked); adjusted to provide capacity buffer
Productive capacity is the maximum of the output capabilities of a resource or the market demand for that output for a given period of time
Protective capacity is quantifiable capacity that can be made available at a non-constraint work center to protect against fluctuation of the constraint work center
Idle capacity is capacity that is normally not used in a system of linked resources. From a theory of constraints perspective, idle capacity consists of protective capacity and excess capacity
Excess capacity is the output capability at a non-constraint resource that exceeds the productive and protective capacity required
Coordinated resources – goal is to manage capacity and achieve overall goal of providing high level of service to the customer between suppliers, materials management, manufacturing organization, planning organization and sales group
Alternatives for reducing load include: change level of capacity, reschedule orders, split order, subcontract or outsource, change the quantities
Measuring the Performance of Detailed Capacity Planning
One measurement of capacity planning system is the planned and actual workload vs planned and actual capacity.
The underload situation may be approved when:
- Work center may be feeding materials to bottleneck work center (not to create excessive work-in-process at the bottleneck)
- Work center may be devoted to production of MTO items keeping excess capacity to unexpected rush orders
- Work center with left capacity for production of new product
- Work center with left capacity for anticipated demands from potential sales opportunities
Underload implications:
- Increased manufacturing unit costs
- Reduced productivity
- Increased inventory levels in reaction to the under load situation (management overreaction)
Overload implications:
- Increased customer delivery lead-time and reduced customer service
- Increased work-in-process
- Reduced productivity
- Reduced quality levels
- Increased manufacturing costs
Second measurement of capacity planning system is past-due schedule performance. The occurrence of a past-due production order indicates that a failure has occurred in the shop floor execution system or/and detailed capacity planning system (if it’s capacity planning then one or more planning parameters within the system requires calibration). At the minimum the affected past-due order must be rescheduled to a valid future due date and root cause of such failure examined. Analysis of load profile report will assist the planner in evaluating any proposed due date changes. If a potential imbalance exists the planner can explore a number of different options to either increase capacity or decrease workload.
Increase capacity Short Term: schedule overtime, add extra staff, cancel breaks or reduce scheduled machine downtime
Decrease workload: use outside contractors, use alternative routings/work centers, reschedule other production orders, reduce the order lot size, combine setups or/and reduce machine setup times
The third measurement of capacity planning system is the level of work-in-process (WIP). The amount of WIP in a factory is a direct result of the lead-time within the factory. To control WIP amounts are used input/output control reports where we calculate
Period1 Plan/Act Backlog = Starting Plan/Act Backlog + Plan/Act Input – Plan/Act Output
Plan/Act Backlog after Period1 = Previous Period Plan/Act Backlog + Plan/Act Input – Plan/Act Output
Establishing Relationships with Suppliers
when purchasing performs an analysis to determine whether a product will be manufactured or procured, 2 analysis need to be completed
make-or-buy that concerns material, components, assemblies, services
cost/value analysis to review total cost of ownership (TCO) :
- Direct cost including direct labor and material being major element of the total cost
- Indirect cost including overhead (selling, general, administrative expenses, taxes, insurance)
It’s imperative to consider also post-manufacturing costs in the area of warranty claims, field service, and rejects in the customer network. These components are just as important as competitive pricing received from a supplier.
On top of it two non-financial forms are considered: environmental responsibility and social responsibility (human rights and anti-corruption)
When deciding on a supplier it’s crucial to evaluate their technical ability of the supplier to make the product, manufacturing capability for the current product, reliability from an overall performance perspective, commitment to after-sales services follow up, ability to execute continuous improvement initiatives and location. Next to that terms and conditions need to be outlined in the purchasing agreement: how accounts payable and receivable will be handled, the FOB point, payment terms, holdback terms, penalties for late payment.
Free on Board (FOB) Point refers to place and time that the title transfers from the supplier to the purchaser. If a product is shipped FOB Origin, the buyer acquires the title the moment the material is transferred to the carrier. If the item is shipped FOB Destination, the title and all responsibility is transferred to the buyer when material is delivered to the buyer.
Purchasing approaches: Purchase order (description of item, price, terms of payment, discounts, and freight terms); Kanban or JIT (fixed-order quantity); blanket order(type of purchase order used to purchase a minimum quantity during a specific period, usually a year -> used to reduce lot size by reducing ordering cost); special contracts (e.g. consignment inventory)
Purchasing lead time = order preparation + quoting + supplier lead time + transportation time + stocking time (inspection if necessary)
Supplier-Rating Index to assess suppliers considering quality of the product, delivery reliability, quantity delivered, flexibility, and technical contributions. Factors considered must be quantifiable where weight is assigned to each factor (SUM of weights is 100% so then 1) and depend on overall order-winning characteristics of customer
Project Management
Project Management process
a) Project evaluation and selection (of options)
b) Project planning – developing budget and timeframe
- The statement of work (SOW) – details of what needs to be done
First page of executive summary including scope, benefits, expected results, measurements, resources, risks
- The work breakdown structure (WBS) – list of all work that needs to be completed
- The project schedule – milestones established and dates of completion determined
Estimate the amount of time needed for each activity
Determine the sequence of activities by creating network diagram
Calculate the overall project schedule by using the critical path method (CPM); program evaluation and review technique (PERT) or critical chain method
Depict the schedule using a Gantt or milestone charts
- The responsibility matrix – who is responsible for each action items
- The resource requirements – resources needed to complete project
- The budget – necessary funds and what they are used for
Preliminary cost estimate
Final cost estimate
c) Project implementation – project team and project manager selection
- Selecting the project manager
- Forming the project team
- Team dynamics
- Scheduling the work
- Managing the schedule and budget
d) Project closeout (reforming stage) – verifies that the team met all goals
Capital projects (needing capital investment) are evaluated on following factors:
- Cost/benefit analysis
- Time value of money – the future value of today’s money considering interest
- Present value of future payments – calculation in opposite way to time value of money
- Risk (discount rate used to determine the present value of the future cash flow)
Various methods to determine project’s value
- Simple payback (project investment/cash flow per year)
- Average return on investment (cash flow per year/project investment)
- Net present value (difference between present value of all cash inflows and present value of all cash outflows/costs)
- Internal rate of return
Justification of a project needs to determine what benefits other than financial one project will provide. These other benefits include whether it supports the company’s strategy, whether it has side benefits such as supporting another company initiative, whether it is related to another project, and whether it will provide a sustainable competitive advantage.
CPM – method of estimating the duration of activities most appropriate when there is high level of confidence in the estimated duration
PERT – probabilistic method of estimating the duration of activities using weighted averages of 3 estimates of the duration of an activity: most optimistic, most likely, most pessimistic
For CPM and PERT there may be times when project’s resources need to be planned more closely by using resource requirements planning: unlimited resource planning (optimistic), time-limited resource planning (realistic) or resource-limited resource scheduling (pessimistic)
Critical Chain –considers not only longest chain of tasks to complete the project but also considers the demand for the common resources needed for the project
When no resource constraints then critical chain = critical path