PRODUCTION SYSTEMS
Operations Management refers to the direction and control of the processes that transform inputs into finished goods and services. It is the process whereby resources, flowing within a defined system, are combined and transformed in a controlled manner to add value in accordance with policies communicated by management. The definition includes some key terms: Resources, System, Transformation and Value adding activities. Resources: Resources include human, material and capital inputs to the production process. Human resources are the key assets of the organization. Human work must always be taken to a higher level, leaving physical tasks that can be done by machines for the machines. By utilizing the intellectual capabilities of people rather than limiting them to mindless tasks, managers can multiply the value of their employee’s input by many times. Material resources include physical facilities (viz machines, equipment etc.), raw materials, components etc. Capital resources include money, bonds, shares etc. It is a store of value which is used to regulate the flow of other resources. Systems: Systems are arrangement of components designed to achieve objectives according to plans. For example, our cultural environment includes numerous economic and social systems. There is a monetary system that facilitates exchange of goods; there is a transportation system to facilitate movement of goods quickly and efficiently to different
1
destinations. Business organizations are subsystems of larger social system. Business systems, in turn contain various subsystems viz personnel, finance, engineering, operations etc. Operations Management follows a system approach. The systems approach to Operations Management recognizes the hierarchical nature of subsystems but places strong emphasis on the integrative nature of management responsibilities. If the subsystem goals are pursued independently, optimization will not result. For example, unless the production and marketing department (groups) cooperate closely, the firm may be increasing production of one product while vigorously promoting a different one. A consistent and integrative approach only leads to optimization of overall system goals. Transformation and Value Adding Activities: Resources are combined and transformed in a controlled manner means that the resources are converted to goods/services such that they have higher value than the original input. The transformation process applies some form of technology to the inputs. The effectiveness of the production factors in the transformation process can be assessed by the Productivity Index. Productivity is defined as the ratio of value of output to the cost of inputs.
Productivity = Value of Output / Cost of Inputs
Suppose the value of services generated by a group of computer operators in a day is Rs. 20,000/- and the total operational costs are Rs 12,000/-. The
2
productivity index is 1.67 (= 20,000/12,000). A firm’s overall ratio must be greater than 1, if it is to remain profitable. The role of Operations Management is to improve the efficiency of transformation activities and better this ratio. The major activities under Operations Management are depicted in Figure 1.1.
Transformation Activities of Operations Management
3
MANUFACTURING AND SERVICE SYSTEMS
The top investment motive for manufacturing organizations is consolidation of operations and integration of processes and systems. But in service organizations, the top motive is to meet the demand for high quality service from customers. This is a reflection of the major difference between the operational orientations of manufacturing and service organizations. In manufacturing, the customer does not interact directly with the production process. However, in services, the customer is directly involved with the production process. In general, manufacturing operations have a process or internal focus where process efficiency is of paramount importance. Service operations, on the other hand, have a customer or external focus where production and marketing are inseparable. The following are the main points of difference between the two types of business.
4
a) Simultaneous Production and Consumption In the service sector, there is simultaneous production and consumption of the service. For example in a restaurant, production and consumption of the service are taking place at the same time. This is very different from a manufacturing situation. In most manufacturing operations, there are inventories between each stage of production, and a finished goods inventory which can be increased or decreased as demand fluctuates. b)
Tangibility
Manufactured product has a size and a shape. It can be touched, seen, and is tangible in nature. In a service business, the atmosphere, the attitude and the feelings that are part of the whole experience are intangible, but are critical aspects of the service. How a customer is treated in a restaurant or when traveling in an airplane etc, are all important parts of the service delivery, which is part of the product. Because many services include intangible aspects, it is difficult to quantify and measure. With a physical product, which comes off the production line, we can look at it, subject it to testing, examine it for defects, and easily measure whether or not it meets the specifications. How do we measure whether or not a person had a positive experience in a restaurant or other service business? From a manager's point of view, clearly this is important, but unlike with the manufacturing business, it is much more difficult to know if you are meeting customer expectations.
c)
Storage/Buffer System
5
After a product has been manufactured, it may go to a retail outlet inventory. If the demand suddenly decreases, that inventory is the buffer between production and the demand. The product will stay in the inventory and can be sold later. The same is not true in service sector. For example, if there are too many seats on an airline which are unreserved, and the flight takes off without passengers, those seats are gone. The unreserved seats can not be saved for later use. d)
Variability in Quality
This has a lot to do with the fact that many of the important aspects of service are intangible. How does the waiter serve a customer on a particular day? How does the lawyer or accountant serve the client versus how they served him yesterday or on another day? There can be considerable variability due to human nature and how people are feeling at different points in time, the pressure they are under or how they are treated by their employer. It is much more difficult to get consistency in delivering a service than in producing a physical product in a manufacturing system where there are detailed specifications and tight quality control. e)
Peripheral Components
In the service business, it is important to recognize that, for the product being offered, there are both substantive and peripheral components. For example, in a restaurant, the substantive components would be the food. The peripheral components would include such things as the comfort, the ambiance, etc. Service business has to take into account both substantive and peripheral aspects with nearly equal importance. In manufacturing sector, peripheral component is relatively less important.
6
f)
Simultaneous Operations and Marketing
In service business, marketing and operations are very closely linked because production and consumption take place at the same time. The people that are involved in the production of the service are actually marketing the service while they are delivering it. Many employees are both production workers and sales/marketing staff as they perform their duties. Manufacturing versus Service Organizations
g)
Delivery Location
7
In a service industry, generally the customer has to come to the service delivery location. For example, for a haircut the customer has to go to the barber’s shop. For meal, the customer has to go to the restaurant. With electronic service, there is a whole new world of service businesses from which the customer is able to access the service. These services, which are different from the traditional ones, can be used right at user’s home. h)
Difficulty in Quality Control
As a consequence of the inability to accurately measure what the service business is accomplishing in the delivery of its service, quality control is a much greater challenge. With tremendous emphasis on quality in business today, many businesses are being certified under international standards. In service businesses, it is much more difficult to achieve quality control and maintain consistency because of the measurement problems which exist.
PRODUCTION SYSTEMS
The part of manufacturing organization which produces the product is called its Production System. It is defined as the collection of people, equipment and procedures organized in a specific manner to accomplish the manufacturing operations of a company. Production system signifies the manner in which production of products is carried out. It determines the type of plant layout to be used in the manufacturing unit. There are different types of production systems i.e. there are different ways in which production of products can be done. For example, in one type of
8
production system, products are produced only in very limited numbers according to the demand and specifications given by the customers, and in another, products are produced in very large quantities and of the same type. The type of ‘production system’ to be used in a manufacturing enterprise depends upon the variety of products it caters to and the production volume of each type of product.
Relationship between Product Variety and Production Quantity: There is an inverse correlation between product variety and production quantity offered by a manufacturing firm. When product variety is high, production quantity tends to be low and vice-versa. Manufacturing organizations tend to specialize in a combination of product variety and production volume that lie somewhere inside the shaded band.
Relation between Product Variety and Production Volume
9
Product Variety: Products are different but the extent of differences may be small or large. The terms ‘Hard product variety’ and ‘soft product variety’ are used to explain these differences in product variety. Hard Product Variety: Hard product variety signifies that the difference in products being produced by a manufacturing firm is substantial. In case of assembled products, hard product variety means that the different products have either low proportion of common parts or no common parts. The total ‘Product Mix’ of a company refers to hard product variety. For example, if a manufacturing enterprise produces both calculators and watches, it is catering to hard product variety. Soft Product Variety: Soft product variety signifies that there are small differences only in the products being manufactured by the manufacturing firm. In case of assembled products, there would be high number of common parts in different products, if the variety is soft. Products belonging to the same product line constitute soft product variety. 10
For example, if a
manufacturing enterprise is producing only different models of scientific calculators, it is dealing with soft variety.
Types of Production Systems: Production Systems used in manufacturing organizations are of the following main types:
1) Job Shop Production System (Low Production Facility) 2) Batch Type Production System (Medium Production Facility) 3) Mass Production System (High Production Facility)
Job Shop Production System
This production system is also referred to as ‘Make to Order Production Business’ or ‘Low Production Facility’. In this type of production system, products are made in limited quantity /low production volume (sometimes only one product of a particular type would be made) to meet specific customer requirements. This production system caters to customized (dedicated and specialized) products after receiving specifications from the customers. The products made are generally very complex. Examples include boilers, airplanes, space vehicles, ships, special purpose machines, railway locomotives etc. Customer orders are generally special and repeat orders may never occur. This production system requires general purpose equipment and highly
11
skilled labour. It has maximum flexibility to deal with hard (wide) product variety. Job Shop production system makes use of process (functional) type of layout. The parts of large and complex products are made in large modules at different locations and then completed modules are brought together for final assembly. Each module is prepared using a process type layout. In process layout, the equipment is arranged according to function or type. This layout is referred to as process or functional layout because specific functions, such as casting, welding, milling, painting etc are performed in one location for various products. Different parts each requiring a different sequence of operations is routed through the departments in a particular order needed for their processing.
Project Production System: There is a special case under Job Shop production system called Project Production System. This production system comes into picture in case of very complex and large manufacturing items, e.g. constructing a dam, building a ship, building a house etc. In these situations, job is carried out at the site of work rather than the factory. All resources of production such as tools, material, labour, energy etc reach the site itself. Managerial skills, subcontractors and all supplies etc are brought to the job site. Project production system makes use of Fixed Position type of layout.
Layout used in Project Production System
12
The main characteristic features of Job Shop Production System are as follows: 1) This production system is used in organizations manufacturing customized and dedicated products only as per the specifications provided by the customer. 2) The production system caters to huge product variety. Each product type may be unique requiring a different set and sequence of processes. 3) Production lot size is generally very small. 4) Manufacturing firms based on this production system make use of process (functional) layout. For the special case of Project Production System, layout used is fixed position type. 5) Repeat customer order for a particular product type is rare. 6) Production machines, equipment, tooling etc. are general purpose. They are flexible to meet specific customer orders which vary from time to time.
13
7) The general purpose machinery and tools carry a lot of unproductive time during operations. Main constituents of unproductive time are set-up time (time consumed in mounting the tools each time to start an operation) and part loading time (time consumed in loading the work at a loading/unloading station and in mounting the work into a fixture etc). Because the work is not repetitive in nature, special tooling, fixtures etc. are in limited use. 8) Highly skilled labour is required to handle the equipment, as product variety is extremely large. Operators take each job as a challenge because of its uniqueness. 9) Full potential of the workers is utilized. Operators become more skilled and competent as each new job is unique and provides learning opportunity. 10)
Scope of improving the production techniques is limited because there
is hardly any repetitive work. If work is repetitive in nature, one can learn from previous experience and mistakes. 11)
Scheduling function is difficult because of the large variety of
products. Sequencing requirements for each product variety is different and has to be individually arranged. 12)
This production system has the advantage of being flexible in nature
and capable of meeting any manufacturing demand resulting from changes in the marketplace.
Batch Type Production System
14
Batch production system is also referred to as ‘Medium Production Facility’. This is the most commonly used production system in the industrial sector. In this system, the products are made in batches or groups. All products in a batch (group) are exactly identical and require the same sequence of production operations. Production facilities are prepared for a particular product, and a batch of that product is manufactured. After one batch has been processed, the facilities are changed over for the next type of product and then its batch is processed. The changeover between production runs takes time called ‘Set-up time’ or ‘Changeover time’. It is the time required to change machine settings, tooling, fixtures etc. and to set up and reprogram the machinery for the next product variety. This time signifies lost production time (unproductive time) because no production is done during this period. Batch production system can be used for manufacturing organizations catering to moderate variety of products with each type to be made in medium volume lots. In batch type production, orders of each type of product are frequently repeated. So this production system is chosen when a company has a relatively stable line of products each of which is to be provided in periodic batches. Batch production system makes use of a process type of layout. This production system is sometimes referred to as Standardized Job Shop Production System. This is because, in this system, product variety is relatively lesser and production quantity relatively more (because of repeated orders) as compared to conventional Job Shop Production System.
15
Examples of batch production system include firms making components that feed an assembly line, ancillary units producing parts, components and subassemblies for large scale industry, furniture production etc. In the service sector, examples include classroom teaching, theatres etc.
The main characteristic features of Batch Production System are as follows: 1. Most commonly used production system. 2. Used in manufacturing organizations dealing with moderate product variety, with each type of product to be produced in medium production lots. 3. Repeat customer orders for each product type being produced are generally there. 4. Production lot size is medium and in batches. This may be despite continuous orders from customers. Since product variety is also medium, therefore switchover from one product (batch) type to another is essential. Hence there are shorter production runs. 5. Production equipment is general purpose but capable of higher production volume (than those used in Job Shop Production System). For example, instead of engine lathe, turret lathes capable of holding several tools and thus higher production rate can be used. 6. Specially designed fixtures etc can be used along with machine tools to reduce set-up time.
16
7. Skill of workers should be relatively high but can be lower than required in Job Shop. 8. Higher set up costs because of frequent changes in the set-up.
A special case arises under Batch Production System when product variety being catered to by the manufacturing firm is soft product variety only. In this case, extensive changeovers between one product style and next product style are not required. Since product variety is soft, the different products have a large number of parts as common. What is done now is that, all similar parts of all different products are grouped into common families called Part Families. Each part family has in it, parts with nearly same features requiring similar production operations. The production system under such situations is called ‘Cellular Manufacturing’. The production is carried out in ‘Cells’. Each cell consists of production facilities required for a particular part family. Each part family goes to its particular cell created specifically for that part family. In that cell, all machines, equipments, tools etc that are required for the production of parts comprising that part family are present. Similarly other part families are sent to their respective cells. In other words, it can be said that, each cell is designed to produce a limited variety of part configurations and the cell specializes in the production of a given set of similar parts or products, according to the principle of Group Technology. This layout is called ‘Cellular Layout’.
Mass Production System
17
Mass production system is also referred to as ‘High Production Facility’. This production system is used when manufacturing of continuous identical products is to be done. Manufacturing organizations using mass production system cater to very small product variety but the production lot size is extremely high. Materials generally move linearly from one operation to the next according to a fixed sequence. Production machines are equipped with specialized tools arranged in sequence and the parts or assemblies are physically moved through the sequence to complete the product. Product layout is used in which machines are arranged in one long line. Work can generally be moved between machines (workstations) through powered conveyors. At each machine, a small amount of total work is completed on each unit of product. Examples include assembly line of bikes etc, appliances, fast food restaurants etc.
The main characteristic features of Mass Production System are as follows: 1. Particularly suited for high demand items. 2. Used when product variety is very low and this may be one of its kind. 3. Production lot size is very high and production rate is continuous. 4. Special purpose tools and equipment are used. 5. Skill of workers may be moderately low as repetitive work on same machines is needed. 6. This production system represents make to stock situation where standard products are held in inventory so that they are ready to be delivered when the customer places an order.
18
There is a special case under Mass Production System called Continuous (or Process) Production System. In this special case, the flow of output is continuous, unlike discrete parts production systems. Continuous Production System represents an extremely high volume standardized production with rigid line flows. It gets its name because of the manner in which material moves through the process in this production system. Usually one prime material (raw material such as a liquid, a powder etc) moves continuously through the facility without stopping. Such a system generally requires on line control and continuous system monitoring. Examples of manufacturing sectors using continuous production system include food processing units, petroleum refineries, pharmaceutics industries, chemical processing units, steel plants, electricity generation plants etc.
Requirements of different Production Systems
19
Comparison of different Production Systems
20
PLANT LAYOUT
21
Layout determines the manner in which materials and other inputs (like people, equipment and information) flow through the operations in a manufacturing facility. Plant layout refers to the arrangement of physical facilities such as machinery, equipment, furniture etc. with in the organization in such a manner so as to have quickest flow of material at the lowest cost and with the least amount of handling in processing the product from the receipt of material to the shipment of the finished product. Plant layout ideally involves allocation of space and arrangement of equipment in such a manner that overall operating costs are minimized. The overall objective of plant layout is to design a physical arrangement that most economically meets the required output – quantity and quality.
Significance of Layout: The significance of having the correct plant layout is evident from the fact that relatively small changes in the position of a machine in a manufacturing plant can affect the flow of materials considerably. This in turn can affect the costs and effectiveness of the overall manufacturing operation. Getting it wrong can lead to inefficiency, inflexibility, large volumes of inventory and work in progress, high costs and unhappy customers. Changing a layout can be expensive and difficult, so it is best to get it right the first time.
Some of the well known definitions of plant layout are as follows.
22
 Plant layout is a floor plan for determining & arranging the desired machines & equipment of a plant whether established or contemplated in the one best place to permit the quickest flow of material at the lowest cost and with the least amount of handling in processing the product from the receipt of raw material to the shipment of finished product.  Plant layout is placing the right equipment, coupled with the right method, in the right place to permit the processing of a product unit in the most effective manner through the shortest possible distance and in the shortest possible time.  Plant layout is a plan of, or the act of planning, an optimum arrangement of industrial
facilities, including personnel, storage space, material
handling equipment and other supporting services along with the design of the best structure to contain these facilities.
Objectives of Good Plant Layout
The objectives or general requirements from a good plant layout are as follows: i) A good plant layout should ensure that flow of materials and information is properly channeled to fit best the objectives of the operation. This generally means minimizing the distance traveled by materials. ii) Layout should provide for a well ventilated, well lit and, and wherever possible, pleasant working environment. iii) Supervision and communication should be assisted by the location of staff and communication equipment.
23
iv) All machines, plant and equipment should be easily accessible for cleaning and maintenance. Dangerous processes should not be accessible without authorization. Fire exists should be clearly marked with uninhibited access. Pathways should be clearly defined and not cluttered. v) Layout should make best use of the total space available (including height as well as floor space). This usually means minimizing the space for a particular process. vi) Layouts need to be changed periodically.
Future needs (such as
expansion) should be taken into account when designing the layout. vii)
A good layout can help in avoiding delays in production because
material moves progressively from one workstation to the next towards its completion with a minimum of interruption, and interference.
TYPES OF PLANT LAYOUT
The type of plant layout to be used in an organization depends upon the production system being used (Job Shop, Batch or Mass Production System). On this basis, layouts are of four main types: i)
Fixed Position Layout
ii)
Process Layout
iii) Cellular Layout iv) Product Layout
Fixed Position Layout: This layout is also referred to as Static Layout. In this type, the product being produced is generally very huge and complex.
24
The major product being produced is fixed at one location and the resources required for producing the product, i.e. equipment, labour, power, materials etc. are moved to that location. All facilities are brought and arranged around one work center. This type of layout is not relevant for small scale manufacturing sector. Manufacturing organization based on Project type production system (very high product variety, extremely low production volume) tend to adopt fixed position layout. Examples of facilities using this layout include construction of houses, dams, specialized boilers, ships etc.
Process Layout: This layout is also referred to as Functional layout. In this type, similar manufacturing processes are located together to improve utilization (e.g. all type of welding at one place as a department, all grinding at another and so on). Manufacturing organizations based on Batch type production system (moderate product variety, medium production lot size) tend to adopt this type of layout. Ancillary units performing jobbing operations for different large scale manufacturing units tends to adopt a process layout. Here routing is complex because different products will follow different routes in manufacturing organization.
Cellular Layout: In cellular layout, the materials and information entering the operation are pre-selected to move to a Cell where all the machines required to process those resources (Part Families) are located. After being processed in the cell, the part-finished products may go on to another cell. In effect, the cellular layout brings some order to the complexity of flow that characterizes process layout. This type of layout can be used when
25
organization is catering to moderate product variety but which is soft (means different parts of various products can be categorized into part families). Thus, batch operations (medium variety and volume) can adopt cellular layout if dealing with soft product variety.
Product Layout: This layout is also referred to as Line layout. This involves locating the machines and equipment such that each product follows a prearranged route through a series of processes. The products flow along a line of processes, which is clear, predictable and relatively easy to control. An example is automobile assembly or electrical appliances assembly line, where almost all variants of the same model require the same sequence of processes. Continuous operations (low variety/high volume) adopt a product layout.
Fixed Position Layout
In this type of layout, the product being produced is fixed at one location. The resources required to produce it (i.e. equipment, labour and components etc.) are moved to that location. All facilities are brought and arranged around one work center. This is generally the case when due to size, shape and other characteristic constraints, the products can not be moved and thus the machine and operators move around the product. Examples include construction of a building, assembly of ships etc.
26
Figure 1.5: Fixed Position Layout Arrangement
Advantages: The fixed position layout provides the following benefits: a) It saves time and cost involved in the movement of work from one workstation to another. b) The layout is flexible as changes in job design and operation sequence can be easily incorporated. c) It is more economical when several orders in different stages of progress are being executed simultaneously. d) Adjustments can be made to meet shortage of materials or absence of workers by changing the sequence of operations.
Disadvantages: The fixed position layout suffers from the following drawbacks: a) Production period being very long, capital investment is very heavy. b) Very large space is required for storage of material and equipment near the product.
27
c) As several operations are often carried out simultaneously, there is possibility of confusion and conflicts among different workgroups.
Application and Suitability: This layout is suitable when following conditions exist: a) Manufacture of bulky and heavy products such as locomotives, ships,
boilers, generators, aircraft and space ship manufacturing etc. b) Construction of buildings, flyovers, dams etc.
Process Layout
Process layout has all operations of similar nature grouped together in the same part of the manufacturing plant. For example, separate area may exist for sawing, turning, grinding, and milling etc. In this layout, the component being worked on travels from area to area according to an established sequence of operations through which it must be put, and where proper machines are located for each. This layout is most appropriate for nonrepetitive, intermittent type of production. It is particularly useful when the quantities to be produced are less in number or the product is not standardized. Thus it is generally used in plants where small quantities of large variety (range) of products are to be manufactured i.e. best for jobbing production.
28
The grouping of machines according to the process can be done keeping in mind the following principles: a) The distance between departments should be as short as possible for avoiding long distance movement of materials. b) The departments should be in sequence of operations (if possible). c) The arrangement should be convenient for inspection and supervision.
Advantages: The process layout provides the following benefits: a) High degree of machine utilization, as a machine is not blocked for a single product but can be used for multiple products. b) Change in output design and volume can be more easily adapted to the output of variety of products. c) Breakdown of one machine does not result in complete work stoppage. d) Supervision can be more effective and specialized. e) There is a greater flexibility of scope for expansion.
Process Layout Arrangement
29
Disadvantages: The process layout suffers from the following limitations: a) Material handling costs are high due to backtracking. b) Skilled labour is required resulting in higher cost. c) Time gap or lag in production is higher. d) Work in progress inventory is high needing greater storage space. e) More frequent inspection is needed which results in costly supervision.
Applications and Suitability: The process layout is suitable when following conditions exist: a) Manufacturing organization is dealing with moderate variety to be produced in medium production lots. b) There are frequent changes in design and style of product. c) Job shop type of work is done. d) Service organizations like hospitals, libraries etc make use of this layout.
1.5.3 Cellular Layout
Cellular layout can be used when manufacturing organizations are catering to moderate product variety but essentially the product variety is soft in nature. Soft product variety means that different products have a large number of common parts. Common parts of different products are clubbed and classified into different families called Part Families. All parts present in one part family require almost similar production operations and hence
30
similar machinery, tooling, equipment and other resources. So, in this type of layout, there are different Cells. One cell caters to requirements of one part family. This cell would contain all machines, equipment etc required for processing that particular part family. Similarly second cell is created for meeting production needs of second part family and so on. Thus in this layout, dissimilar machines are grouped into cells and each cell functions like product layout. This layout reduces the material handling costs and simplifies machine changeovers. It reduces in-process inventory and facilitates automation of production operations but reduces flexibility. Cells are a compromise between flexibility of process layout and simplicity of product layout. They are best used when a predictable variety of products have to be produced. The extent and nature of cells depends primarily on the processing resources to be located in each cell. A cell might include, for example, two machines that are frequently needed to perform a given transformation (like a milling machine and a drill, for facing and drilling metal blocks); alternatively a cell might provide all specialist equipments and services needed to perform specialized heat treatment.
Cellular Layout Arrangement
31
The detailed design of cell layouts is difficult, because cells are a compromise between process and product layout. In process layout, the focus is on the location of various processes in the factory. With product layout, the focus is on the requirements of the product. Cell layout must consider both. One method is to find which processes naturally group together. This involves examining each process and asking which other processes might also be needed for a typical product. For example, when making furniture, if all parts that need hole drilling in them also need those holes to be countersunk, then it makes sense to locate drilling and countersinking machines in the same cell. Another method is to design the cells around product families (as discussed earlier). The families indicate the characteristics of similar products, such as size, shape and material that determine their processing requirements. Cells can then be designed to co-locate the necessary processes for different product families.
Process Layout versus Cellular Layout 32
Advantages: The cellular layout provides the following benefits: a) Reduced material handling costs. b) Shorter flow time in production. c) Simplified production planning (men, material etc). d) Overall performance often increases because of lowered production costs
& improvement in on-time delivery.
Disadvantages: The cellular layout has following drawbacks. a) Reduced manufacturing facility. b) Expensive investment in creation of cells.
Application and Suitability: This layout is suitable when following conditions exist:
33
a) Organization is producing products with common characteristics which usually require similar machines & settings. b) Widely used in metal fabricating, computer chip manufacturing and assembly work.
Product Layout
Product layout is used when manufacturing organization is catering to extremely low product variety (say, only one or two specialized products are being manufactured) but production volume is extremely high. Product layout involves arranging the various manufacturing processes to fit the sequence required by the product. In this layout, the machines and equipments (which are generally specialized and dedicated) are arranged in one line depending upon the sequence of operations required for the product. The materials move form one workstation to another sequentially without any backtracking or deviation. The machines are grouped in one sequence. The materials are fed into the first machine and finished goods travel from machine to machine (generally automatically through powered conveyors etc.), the output of one machine becoming input of the next (for example, in a paper mill, bamboos are fed into the machine at one end and paper comes out at the other end). The raw material moves very fast from one workstation to other stations with minimum work in progress, storage and material handling.
34
Product Layout Arrangement
The grouping of machines is done keeping in mind the following general principles: a) All machine tools, other items of equipment etc. must be placed at the point demanded by the sequence of operations. b) There should be no points where one line crosses another line. c) All the operations including assembly, testing, packing etc. must be included in the line.
Advantages: The product layout provides the following benefits: a) Low cost of material handling, due to straight and short route and
absence of backtracking. b) Smooth and uninterrupted operations. c) Continuous flow of work. d) Optimum use of floor space. e) Shorter processing time and quicker output. f) Less congestion of work in the process. g) Simple and effective inspection of work and simplified production
control. 35
h) Lower cost of manufacturing per unit.
Disadvantages: The product layout suffers from following drawbacks: a) High initial capital investment in special purpose machinery. b) Heavy overhead charges. c) Breakdown of one machine can hamper the whole production process. d) Lesser flexibility as specially laid out for particular product.
Application and Suitability: This layout is suitable when following conditions exist: a) Mass production of standardized products. b) Operation time for different processes is more or less equal. c) Reasonably stable demand for the product i.e. repeat orders are generally
there.
Product-Quantity Analysis in different Layouts
36
PRODUCTION PLANNING AND CONTROL
Production activity constitutes the transformation of material into a desirable output. It consists of a series of sequential operations to produce the product which is acceptable to the customer. Production is an organized activity having specific objectives. The efficiency of production system is stated in terms of its ability to produce products in required quantity with specified quality at predetermined cost and predetermined time using the most economical method. To achieve this target, management must use some tools of planning and control. Production Planning and Control (PPC) is a tool available to the management to achieve the stated objectives. Any production system is encompassed by four main factors: quantity of products to be produced,
37
quality desired, time (delivery schedule) and cost of product. These factors govern the production system of which Production Planning & Control is the brain. Production Planning starts with the analysis of given data i.e. demand of product, delivery schedule etc. and on the basis of the information available, a scheme of utilization of firm’s resources (men, material, machines etc) is worked out to obtain the target in the most economical manner. Once the production plan is prepared, manufacturing operations are started and continued (execution of plan) in line with the details given in the plan. Production Control comes into action if there is any deviation between planned and actual production. Corrective action is taken, if necessary, using control techniques to achieve the targets set as per the plan. Thus, Production Planning and Control can be defined as the ‘direction and co-ordination of firm’s resources towards attaining predefined goals’. It helps to achieve un-interrupted flow of materials through the production line by making the materials available at the right time and in required quantity. Some of the well known definitions of PPC are given as follows:
1)
Production Planning and Control is the set of functions concerned with the effective utilization of limited resources and the management of material flow through these
resources, so as to satisfy customer
demands and make profits. 2)
Production Planning & Control (PPC) can be defined as the direction, coordination of company’s resources and also exercising the control on the company’s activities towards the achievement of desired goals in
38
the most efficient way. Control is the brain of production planning responsible to make available right inputs at the right time. 3)
Production Planning and Control is defined as the sequence of operations to transform the given materials into desired products by analysis of given set of data and formulation of a scheme for utilization of available resources with aid of control mechanism that provides feed back information regarding the progress of work to achieve the desired targets efficiently.
Need and Objectives of PPC
The present techno-economic scenario emphasizes on competitiveness in manufacturing. To be in competition, industries have to streamline the production activities and attain maximum utilization of their resources to enhance productivity. PPC serves as a useful tool to coordinate the activities of production system by proper planning & control. An effective PPC system is required because of the following reasons:
1. To effectively utilize the resources of the manufacturing enterprise. To systematically plan for production activities to achieve high efficiency in production of goods. 2. To organize the production facilities (machines, men, materials etc.) to achieve stated production objectives with regards to quality, quantity and cost of product.
39
3. To coordinate with other departments for production related issues to achieve uninterrupted production flow. This is important for meeting varied demands of customers and the committed delivery schedule. 4. To help the company to supply good quality products to the customers on a continuous basis at competitive rates. 5. To be able to make adjustments due to changes in demand and rush orders.
Components of PPC
There are two main areas or components of Production Planning and Control as follows: 1) Production Planning: This includes analysis of data (inputs) considering the variable future so that a scheme can be chalked for utilizing the resources in an optimized manner such that desired target of the production system may be achieved economically. 2) Production Control: This includes time-phased supervision of all the relevant activities with the aid of some pre-decided mechanism that feeds-back the progress of work at different stages. On the basis of feedback, subsequent adjustments and modifications are made in the process to achieve the entire production as per plan.
PRODUCTION PLANNING
40
Production planning is a pre-production activity. It is the pre-determination of manufacturing requirements with regards to manpower, materials, machines, production processes etc. Apart from planning the resources, it also organizes the production. It establishes the production program and schedule to meet the targets. Production planning includes functions such as design of production system, demand forecasting, aggregate planning, master production scheduling, material and manufacturing resource planning, routing, scheduling, capacity planning etc. However, it is not always possible to achieve the entire production as per the production plan. There can be several factors which affect the production system and because of which there is a deviation of actual output from the scheduled (i.e. production plan). Some of these factors are: i) Non availability of material due to shortage or other reasons. ii) Plant equipment and machine breakdown. iii) Changes in demand and rush orders. Changes in priority of orders. iv) Unexpected activities inside the organization which disturb the normal working. These include labour problems like absenteeism, strike etc. v) Lack of coordination and communication between various functional areas of business. Because of the above mentioned reasons there can be deviations between actual and planned production. Thus the need of production control function arises.
PRODUCTION CONTROL
41
Production Control means the control of production processes, inventories, product quality and cost. Production Control reviews the progress of work and takes corrective steps to ensure that programmed production takes place. This phase works on a feedback system. If there is an error at any stage, information must be conveyed to control so that necessary action can be taken immediately. Production Control consists of two distinct parts:  Progress Reporting  Corrective Action
Progress Reporting
Progress Reporting consists of the following activities: a) Evaluation of actual performance against anticipated performance so that corrective action can be taken. b) Cost accounting so that correct costing can be reported. Progress report contains information on following: i) Job Identification: Job identification can be reported by work order number, operation number, job number etc. ii) Time Report: Time Report provides details regarding variation in time of accomplishment and the reasons for the variation. iii) Spoilage: The details of extent of spoilage, rejection etc.
42
iv) Operator Identification: It can be by job card, job number etc.
Reporting can follow any of the following methods: a) According to Fixed Time Interval: Evaluation of performance of production process by reporting information about the process at some fixed interval. This interval can be on hourly basis or on daily basis etc. To make the system more effective, this period should be short. b) According to Work Accomplishment: It is generally applicable to long time operations and the report is submitted as soon as the work is accomplished. c) Compromise of Both: In many organizations, both the systems are used depending on the shop and activity.
Progress Reporting can be done using the following three methods: a) Written system: It is the most commonly used reporting method. The information is transmitted by filling a form. b) Oral system: It includes the use of telephones etc. In this system, reporting is very quick and any type of objection can be removed immediately. c) Electronic system: This system is used, where the production rate is very high and the amount of data to be conveyed is also very large.
Corrective Action
43
This is the last step of production planning and control. Even with utmost care taken to prepare a production plan, when the planning is put into practice, some adjustments have to be made on the basis of feedback. These adjustments call for corrective action either in the production plan or in the performance standard. It is for this reason that while loading the facilities, a certain portion of the plant capacity is reserved for unexpected occurrences. Production Control is a wide spread activity and includes function such as dispatching, expediting, inspection etc. There are three basic ways by which production control group can make corrective actions in the planned schedule. a) Schedule Flexibility: While assigning an activity to a facility, certain amount of flexibility should be left to compensate for unexpected events. b) Schedule Modification- This includes modifications in the established plan to suit the new conditions. Schedule modification is necessary when unexpected events occur which disturb the production process. c) Capacity Modification- There are many ways to modify the capacity of the existing facility (changing the layout, changing production process etc.).
FUNCTIONS OF PPC
The most important function of Production Planning and Control is to achieve improved industrial performance through increased productivity, increased quality and overall profitability as a result of effective planning. When a manufacturing plant produces required quantity of specified quality
44
at the required time by using the most economic methodology, it maximizes its efficiency. Planning & Control are the two principal activities and can coexist with coordination, motivation & leadership. The main functions of Production Planning and Control are: Production planning and programming. Product analysis and routing. Scheduling and loading. Authorization & production. Follow-up. These functions are explained in more detail by dividing them into the following areas: a) Material Function: This Production Planning and Control function ensures availability of raw materials, components, parts etc. in required quantity and at scheduled time to ensure the correct start and end of each operation to get uninterrupted production. This function includes preparing and finalizing specifications of materials, delivery dates, standardization (variety reduction), make and buy decisions etc.
b) Production method: This function is concerned with the selection of the best method for production of goods. Developing specifications for processes and determination of sequence of operations is an important function of Production Planning and Control.
45
c) Process Planning (Routing): It is concerned with the selection of path or route which the raw material should follow to get transformed into finished product. It includes: i) Defining the layout. ii) Breaking down of complete operation to define individual operations in details. iii) Process sheet/route sheet development. iv) Finding the set up time and process time (standard time) for each operation using work measurement technique. v) Determination of lot size. vi) Determine the type and quality of material.
d) Scheduling: Scheduling deals with preparation of machine loads and fixing the start and completion dates for each operation. Machines have to be loaded according to their capability of performing a given task and delivery dates promised to the customer. This function includes: i) Loading each machine as per its capacity. ii) Determining the start and completion time for each operation. iii) Coordinating with sales department regarding delivery schedules.
e) Dispatching: This is the execution phase of planning. It is the process of setting production activities in motion through release of orders and instructions. It is authorizing the start of production activities by releasing materials, components, tools, fixtures and instruction sheets to the operator. The various activities under this function are as follows: i) Designating definite work to definite machine. 46
ii) To get required materials issued from store. iii) To make jigs and fixtures available at correct point of use. iv) To release necessary work orders to authorize timely start of operations. v) To record start and finish time of each job on each machine or by each man.
f) Expediting: This is a production control tool that keeps a close observation on the progress of work. It is a logical step after dispatching and is called Follow Up or Progress. This function can be divided into three parts i.e. follow up of material, follow up of work in progress, follow up of assembly. It has the following functions to perform: i) To identify the bottlenecks, interruptions, delays etc which cause disruptions in production schedule. ii) To prepare an action plan in the light of above. iii) To check that production rate is in line as per the schedule.
g) Inspection: This function is important both for execution of current plans and for future planning. Inspection reveals the limitations of the production system with respect to methods, processes etc. which is very useful for evaluation phase. Inspection and quality control ensure that the actual specifications obtained are in conformance with the desired.
h) Evaluation: Evaluation means thorough analysis of all the factors influencing production planning and control. This function helps to
47
identify weak areas and to corrective action required with respect to preplanning and planning. The success of this step depends on effective data collection and analysis. The corrective actions taken as a result of evaluation help in improving methods, down time etc.
SOURCES OF INFORMATION FOR PPC
The effectiveness of production planning and control depends to a great extent on the accuracy of information it gets from other departments. The following information is vital to the success of PPC function in an organization. The information required and their sources of information are shown in Table 1.3.
Information Sources of PPC
48
BENEFITS OF EFFECTIVE PLANNING AND CONTROL
49
Effective production planning and production control can lead to the following advantages: 1. Benefits to Customers a) Reasonable value would be charged from customers. b) Deliveries of goods would be as per schedules.
2. Effective Production Control a) Helps in making production time predictable. b) Reduces production control expenses through better planning. c) Paces rate of production. d) Reduces conflict among workers through effective planning and control.
3. Quality Control and Waste Reduction a) Minimizing the wastes, scrap and rework flow. b) Minimizing the rectification hours. c) Reduces cost of inspection.
4. Benefits in Capital Investment a) Standardization and simplification. b) Utilization of idle hours of machines.
5. Benefits to Workers a) Higher morale and team spirit. b) Higher job satisfaction. 50
c) Working at maximum efficiency.
QUESTIONS
1. Draw a neat labeled diagram to highlight the scope of Operations Management and the various transformation activities under it. 2. Product line of a manufacturing enterprise generally refers to soft product variety. Comment. With a neat labeled diagram, show the relation between product variety and production volume offered by firms. 3. In which production system is the scope of improvement of production techniques minimum? Justify the answer. 4. Batch production system can be referred to as Standardized Job Shop production system. Comment. 5. With the help of neat labeled diagrams and taking a suitable example, show the difference in the arrangements used in Process and Cellular layouts. 6. Explain the difference between the manufacturing and service sector in terms of the significance to be attached to the peripheral components. 7. What is the need of Production Control? Briefly discuss the different methods used for Progress Reporting. 8. Discuss the role of expediting function in production control.
51
9. What is a continuous production system? How is it different from a conventional mass production system? 10.Elaborate on the information requirements for effective planning and control.
DEMAND FORECATING
INTRODUCTION
Any manufacturing organization, before making an investment in the inputs, (machines, material, men etc) needs to have answers to the following questions: What should be the capacity of the plant? How much workforce is required? What volume of production lot size is to be produced? What level of inventory is to be kept? Which production system is to be used? What amount of capital is required? The answers to these questions depend upon the future demand of products manufactured by the organization. Thus demand forecasting is needed. For a new plant, forecasts are required to make plant capacity decisions, plant location decisions and layout decisions. For an existing plant, forecasts are important because the needs (and thus demand) of the market keeps on
52
changing. In order to respond more quickly and accurately to the market changes, forecasting is important. Forecasting reduces the cost of adjusting the operations in response to unexpected deviations by specifying the future demand. Some well known definitions of Demand Forecasting are listed as follows: Demand forecasting means, to foresee what products the customers prefer, in what quantity and by what time or during which period. According to American Marketing Association, ‘forecasting is an estimate of sales in physical units for a specified future period under proposed marketing plan or program and under the assumed set of economic and other forces outside the organization for which the forecast is made’. Forecasting is the process of estimating future events by casting forward past data. The past data is systematically combined in a pre-determined way to obtain the estimate of the future. Demand forecasting is the first major activity in planning. It carefully studies past data as well as present scenario and estimates the occurrence, timing and magnitude of future events.
APPLICATIONS OF FORCASTING
Forecasts are necessary for planning, scheduling and controlling the production system to facilitate effective and efficient output of goods/services. The following are the main uses and applications of forecasting:
53
A) Planning Functions i) Forecasts are needed to make plant capacity decisions, location and layout decisions. ii) Forecasts are needed to design/redesign the processes to meet demand. For example, the degree of automation to be incorporated in production processes depends upon future product demand. Once process design and equipment investment decisions have been made for an anticipated volume, mangers are locked into a facility of specified capacity. Thereafter wide variations between actual and anticipated demand can result in excessive operating costs. iii) Forecasts help in deciding a strategy for marketing. Further, sales forecasts indicate when a company should start planning for new products. iv) Forecasting is the basis for preparing budgets, purchasing schedule etc.
B) Scheduling and Controlling Functions Accurate demand forecasts are very important to use the existing conversion (production) system in the best possible manner. Forecasts are the main inputs required for aggregate planning and production scheduling. They help in scheduling the production activities to ensure optimum utilization of plant’s capacity and production resources. i) Accurate forecasts are the basis to prepare a production program i.e. production lot sizes, production rates to be used etc.
54
ii) Forecasts helps in determining present and future workforce levels (manpower requirement planning, sales force planning, overtime decisions etc). iii) Forecasts help in material planning, to take up replenishment action for making the materials available in right quantity at the right time. iv) Forecasts are needed for proper inventory management and control.
Scope of Demand Forecasting
55
FORECASTING AND PREDICTION
In operations management, the term forecasting has a specific meaning and is distinguished from the broader concept of prediction. The following are the main points of difference between the two.
Forecasting versus Prediction
56
COST AND ACCURACY OF FORECASTING
Forecasting activity involves two types of costs: i) Cost of increased activity. ii) Cost of decreased activity (Opportunity Cost) Cost of increased activity means cost of data collection, analysis, reporting, control, purchase of softwares, training of manpower etc. This cost depends upon the forecasting technique used. More sophisticated is the technique, more would be the costs of it implementation and maintenance and more would be the cost of forecasting. But this will also lead to increase in accuracy of forecasting results. Cost of decreased activity (or Opportunity Cost) is the revenue lost by the organization, because of unplanned labour, unplanned material or
57
underutilized capacity. Lesser is the forecasting activity, more would be this cost. Theoretically there is an optimum level of forecasting activity (cost/accuracy trade off), where total cost involved in forecasting is minimum. In reality, this level is difficult to be found. Cost and Accuracy of Forecasting
FACTORS AFFECTING DEMAND
There are several factors which affect the demand of product over time. These factors fall under two categories:
58
a) External Factors b) Internal Factors External Factors: External factors are issues which affect the demand of product but are beyond the control of management of the organization. These factors include changes in government regulations ( for example, suppose a company produces coal with sulphur content but a new government regulation bans the use of sulphur based coal in thermal power plants; this regulation will affect the demand of coal of that manufacturer), changes in customer taste which can change quickly (e.g. fashion clothing), changes in consumer’s image of a product (for example, demand of tobacco based products in regions with high literacy rates has considerably decreased as people understand the ill effects of tobacco consumption), competitors’ action regarding prices, promotion campaigns, new additions etc. Also, natural calamities like drought, earth quakes, floods etc. are important external factors affecting demand. Internal Factors: Internal factors affecting the demand of product are those issues which are in the control of management. These include decisions regarding changes in product design, packaging design, promotion campaigns, sales person incentives, expansion/ contraction in target market areas etc. Management must carefully consider the timing of demand to effectively utilize the firm’s resources and production facilities. It should not try to produce for peak demand during peak demand periods, because it would be very costly. To avoid such a situation, companies generally make promotions or price incentive schemes to encourage customers to make purchases either before or after the traditional times of peak demand. For
59
example, telephone companies encourage customers to make S.T.D calls during non-office hours by offering lower rates in early morning/late evenings. In this way demand is spread more evenly throughout the day. Another strategy used by companies to even out demand is to manufacture complementary
products
that
have
different
seasonal
demand.
Complementary products are those which require nearly similar production resources for manufacturing but have different seasonal demand
e.g. a
company producing engines both for tractor lawn movers (demand more in summers) and for snowmobiles (demand more in winters), or a garment factory producing both woolens (jackets, pullovers) and cotton clothes (tshirts, shorts).
TYPES OF FORECASTS BASED ON METHODOLOGY Depending upon the methodology employed, forecasting techniques are classified into two major categories:
a) Qualitative Methods b) Quantitative Methods Quantitative Methods (Judgment Methods): These forecasting methods are based on the estimates and opinions and are generally used when historical data pertaining to past sales is not present or when forecasting for a very distant future is to be done. These methods translate the estimates and opinions of managers, experts, consumer surveys, sales force estimates etc. into quantitative estimates of future demand. Examples of these methods
60
include Delphi Method, Executive Opinion, Market Research, Sales Force Estimates etc.
Forecasting Techniques based on Methodology
Quantitative Methods: These methods are used when past historical data pertaining to sales of the product is available. There are two main methods under this category: i) Causal Methods ii) Time Series Methods Causal Methods (Econometric/Explanatory Methods): In causal methods, a cause and effect relationship is established between a dependent variable and independent variable. Dependent variable is the past sales of product whose future demand is to be forecasted. Independent variable(s) are factors which can effect the demand of the product like amount spent on promotion campaigns, economic conditions, competitor’s actions and so on (for example, demand for cement would depend upon the projected growth in the construction industry; sales of washing machines in a city would depend
61
upon population of the city, purchasing power of residents etc). Examples of these methods include Regression Analysis method, Econometric models etc. Time Series Analysis (Extrapolative Methods): These methods are based on the idea that data related to past sales (demand) of the product can be used to forecast the future demand because what has happened in the past will continue in the future also. Time series analysis assumes that demand of product over time has a characteristic pattern. This technique identifies the characteristic pattern in the historic data (past sales of product) and extrapolates it into the future. Examples of this method include Simple Moving Averages, Weighted Moving Averages, and Exponential Smoothing etc.
TYPES OF FORECASTS BASED ON TIME HORIZON Any manufacturing organization uses a number of operational plans ranging to different planning periods (horizons). It has short range plans for current operations (e.g. number of specific products to be produced in the next month) and long range plans for distant future (e.g. decisions regarding capacity additions). As a result, organizations require different forecasts for different time spans or horizons. The horizon of the forecast must match the decision which is to be made on its basis e.g. for decisions dealing with activities over the next 2-3 months, a forecast of one month horizon would be useless. There should be a proper match between decision time, forecast horizon and forecasting accuracy. On the basis of time horizon, forecasts are of three main types:
62
a) Short Range Forecasts b) Medium Range Forecasts c) Large Range Forecasts Short Range Forecasts: The time horizon for short range forecasts is upto 3 months into the future. The forecast may be for a particular season, a few days to few weeks, or few months. Here managers are interested in forecasts of individual products. These forecasts are required to guide current operations (scheduling decisions, purchasing decisions, overtime decisions etc). Short range forecasts must be accurate because there is little time to react to errors. Time series methods are generally used for these forecasts. Causal methods can be used but these methods are more expensive and require time to be developed. Managers can rarely wait for development of causal models even if they are more accurate. Judgement methods are used if historical data on past sales is not available (e.g. a new product). Medium Range Forecasts: The time horizon for medium range forecasts is about three months to two years into the future. Here, forecasting is more comprehensive/aggregate in nature. A total sale in number of units of similar products (products in groups/family) is typically forecasted. These forecasts are required for sales planning (monthly production plans), sales force planning, inventory planning, plant capacity decisions etc. For these forecasts, causal methods are generally used. Studies on regression, correlation, inflation etc. are used. But in case there is no historic data, judgment methods are used. Time series methods don’t yield accurate results for medium range forecasts. The assumption of time series analysis that
63
existing patterns in data will continue in the future also may be true for short range but is less accurate over longer time horizons.
Forecasting Techniques based on Time Horizon
Long Range Forecasts: The time horizon for long range forecasts is more than two years into the future. Forecasts are generally developed for total sales in rupees or some common units of measurement viz megawatts, barrels etc. These forecasts are not made for individual products as it is difficult to foresee and model events of such distant future because of economic uncertainties, technological changes etc. Studies related to technological breakthroughs, economic studies, market surveys etc. are used to make judgmental estimates of the future event. These forecasts are required for plant location decisions, capacity planning (investment planning), R&D planning (New Product Development), sales and
64
advertisement budgets, process redesign decisions etc. Judgment methods and causal methods are generally used. Causal methods when used have to be modified in the light of managerial experience and views.
CAUSAL FORECASTING METHODS Causal methods are also known as Econometric or Explanatory methods of forecasting. These methods are used when historical data is available and from this data, a functional relationship can be identified between the factor to be forecasted (dependent variable) and other factors which affect the sales of the product i.e. value of the dependent variable (independent variables, examples include population in a region, expenditure on promotion campaign for the product, government regulations regarding the product etc). These relationships are expressed in mathematical terms and can be very complex. Causal methods are mostly used for medium range forecasting. They are generally not used for short range forecasts. These can be used for long range forecasting but results should be modified in the light managerial experience and opinions.
Linear Regression Method
Many causal methods are available, the best known and most common being Linear Regression Method (also known as Method of Least Squares). This method can be used when there are only two variables, one dependent variable (to be forecasted) and the other independent affecting the dependent variable. The two variables must have a linear functional relationship i.e. a 65
linear equation should be able to adequately describe the data. The appropriateness of the linear function should always be checked first. This can be done by simply graphing the data and observing whether a straight line would provide a satisfactory fit. The other way is to find Pearson’s coefficient of correlation (r) between the variables. If the correlation coefficient for the variables is close to unity, there exists a linear relationship between the variables and thus, this method can be used. In this method, the two variables are related to each other by the regression equation; Y=a+bX
---------------- (i)
The actual relation between the two variables is the plotted data. To this data, best fit line obtained from the regression equation is fitted (Y= a + bX). The objective of linear regression analysis is to find values of ‘a’ and ‘b’ that minimize the sum of squared deviations of the actual data points from the graphed line. The line is called best fit line because it minimizes the sum of squares of vertical deviations separating the observed values of the dependent variable from the fitted line. Y=a+bX
Ft+1 = a + bXt+1
Ft+1 = Forecast for the period t+1 (i.e. value of dependent variable) X t+1 = Value of independent variable in the period t+1 Coefficients ‘a’ and ‘b’ are constants; a = intercept value for the vertical axis b = slope of the line
66
Figure 2.5: Method of Least Squares
Value of ‘a’ and ‘b’ can be found from the following equations: Y = na + bX
-------------- (ii)
XY = aX + bX2
--------------
(iii) n = total count of data (sample size) To calculate values of a and b: If independent variable is in terms of time, the following method & steps should be used: i) Designate the middle period of the data series as X = 0. This is done so as to have equal number of plus periods and minus periods and thus to make, X = 0 (if the time series i.e. data set, consists of odd number of years, the middle value of the time series is taken as zero i.e. origin to make X = 0. If time series consists of even number of periods, the mid 67
way period between the two middle periods, is taken as origin, to make X = 0). ii) Find X (which should become 0) and XY iii) From step (ii), X = 0, then from equations (ii) and (iii); Y = na + bX
Y = na + 0
a = Y/ n XY = aX + bX2 b=
XY = a. 0 + bX2
XY X2
If X 0, then solving equations (ii) and (iii); Y . X 2 X . XY a N X 2 ( X ) 2 b
N XY X . Y N X 2 ( X ) 2
iv) Find the value of Y (demand to be forecasted) for a given value of X.
TIME SERIES ANALYSIS Demand forecasting is a challenging work. It is a difficult job because the future demand for products/services can vary greatly. However, this job can become slightly easier if the demand (past sales) of the product tends to follow a pattern which is predictable over a period of time. Such patterns are generally referred to as Time Series. Time series is defined as a set of
68
observations of some variable over time. To be more specific, the repeated observations of demand of a product in their order of occurrence form a pattern called Time Series. Time Series method assumes that what has happened in the past (sales of product in past periods) will continue in the future also (future demand of product). For this reason, Time Series methods are also as Extrapolative methods of forecasting Time series analysis assumes that demand of product over time has a characteristic pattern e.g. the weekly demand of haircuts at a local barber’s shop remains quite stable from week to week, with daily demand being maximum on Sundays and minimum on Tuesdays. Similarly the demand for rain coats and umbrellas would be maximum during rainy seasons of the year. Time series methods identify the underlying pattern in the historical data (past sales of product) and extrapolates it into the future. Time series process of forecasting seems like driving while looking only through a rear view mirror. These methods perform well when time horizon for forecasting is small (for short range forecasting). Most demand time series can have one or more of the five patterns: Horizontal, Trend, Seasonal, Cyclical and Random pattern or components.
HORIZONTAL PATTERN: This component of demand refers to fluctuation of data about a constant mean e.g. demand of cooking gas, petrol, diesel, etc. in a city remains nearly constant from month to month during a year. Another example of horizontal pattern is sales of product when it is in its maturity stage.
69
Demand Time Series with Horizontal Pattern
TREND: This component of demand refers to a sustained increase or decrease in demand from one period to the next e.g. if the average monthly demand for a product has increased 10-15% in each of the past few years, it reflects an upward trend. Sales of product in its growth or decline stage of product life cycle has a trend component in demand series.
Demand Time Series with Trend Pattern
70
Different Types of Trend Patterns
SEASONAL: This component pertains to repeatable patterns of increases or decreases of demand depending upon time of day, week, month or season. The variations in demand are caused by climatic conditions (seasons), social customs, festivals and so on e.g. sale of air conditioners or heaters is more in a particular season, sale of woolen/cotton clothes is more in a particular season, sale of paints is maximum near festival of Diwali. 71
Demand Time Series with Seasonal Pattern
CYCLIC PATTERN: The cylindrical component of demand is similar to the seasonal component except that seasonality occurs at regular intervals and is of constant length, whereas cyclic component varies both in time and duration of occurrence. Cyclical patterns represent less predictable gradual increases or decreases in demand over longer period of time (years/decades). Cyclic patterns arise because of two major influences: i) Business Cycles ii) Product Life Cycle Figure 2.9: Demand Time Series with Cyclical Pattern
Business cycle includes factors which can cause economy to go from expansion to recession and vice-versa and hence affect the demand of product. Such factors include events like elections, political turmoil in 72
neighboring nations, boom in economy because of enormous development in industrial/service sectors, situations of war, natural calamities etc. Further, the different stages of product life cycle also affect the demand of product but their effect is also difficult to estimate. Cyclical component is present in most economic data viz GNP, industrial sale of major appliances etc. RANDOM PATTERN: This variation in demand is inevitable and can not be forecasted. This pattern arises because of unforeseen chance causes which can not be predicted. Time series of a product may comprise of any combination of the above mentioned five types of patterns (components of demand). The time series is usually tabulated or graphed that readily conveys the behaviour of subject variable. Every demand time series has atleast two patterns hidden in it, one essentially being random pattern.
Time Series with Horizontal Component Consider a demand time series which is having no trend, seasonal or cyclical pattern(s) in it. The time series has only horizontal and random component of demand in it. It is known that not much can be done about the random variations present in the demand time series and thus the focus should be on the horizontal pattern. Horizontal pattern along with random pattern signifies that data in the time series clusters about a mean value. As a result, for all methods of forecasting for demand having only horizontal and random patterns, forecast for any period in the future is obtained by computing average of the time series. The average effectively smoothens out
73
fluctuations in random errors (average/mean reduces the chances of being mislead by gross fluctuations that may occur in any single period) while preserving the general pattern of time series.
Demand Time Series with Horizontal Component
These types of time series can be forecasted by the following methods: a) Simple Moving Averages Method b) Weighted Moving Averages Method c) Exponential Smoothing Averages Method
a) Simple Moving Averages Method (SMA): This is the simplest Time Series method which can be used for demand time series of products having mainly horizontal pattern of demand. Ft+1
= forecast for the next period (for period ‘t+1’)
Dt
= most recent period’s (i.e. current period) actual demand
n
= number of past periods for which demand values are taken to calculate the average (called order of moving average)
Dt-n+1 = Demand in the nth period in the past
74
D Dt 1 ...... Dt n 2 Dt n 1 Ft+1 = t
n
For the next period (i.e. ‘t+2’ period), after the demand is known in the period ‘t+1’ (i.e. Dt+1), the average is recalculated (again with the most recent ‘n’ demands) by adding the most recent actual demand (i.e. D t+1) and deleting the oldest demand (i.e. Dt-n+1) D D t D t 1 ...... D t n 2 Ft 2 t 1 n
In this way, for any period’s forecast, the n most recent demands are used, every time including the latest actual demand and excluding the oldest, as we move from one period to next. As a result the average also keeps on changing from period to period and hence the name ‘Moving Average’ is given to this technique. This method calculates a rolling average for a constant period. How to select the value of ‘n’: Selecting the value of ‘n’ means, deciding how many periods of past data are to be considered to compute the average i.e. forecast for the next period. The value of ‘n’ should be very carefully selected. It is difficult to select the value of ‘n’ and there is conflicting effect of different period lengths (i.e. large versus small values of ‘n’). Large value of ‘n’ should be taken when the demand time series (past sales data) shows that the demand of product remains stable. By taking large value of ‘n’ (i.e. by including more periods of the past data to compute the average), the forecast obtained is less susceptible to random variations and there is greater smoothening of random patterns. The limitation with high value of ‘n’ is that if the demand of product has a trend, the forecast 75
obtained would lag behind this trend. Small value of ‘n’ should be taken when demand of product is not stable (i.e. there is a component of trend in demand time series or the demand pattern is changing). Small value of ‘n’ gives a more oscillating response (less smooth) but there is a closer following of the trend by the forecast (e.g. if the value of ‘n’ is 1, it means only one past period i.e. most recent demand value is taken and it is the forecast for future). Thus, if the demand time series is stable, select a high value of ‘n’. If the demand time series shows a trend, a low value of ‘n’ should be considered. The effect of high and low value of ‘n’ is shown for a time series with trend in the following figure.
Effect of Sample Size on Moving Average Forecast
The graph in Figure 2.11 shows actual demand of product over a period of time, the forecast calculated using a three month average (n = 3) and the forecast using a nine month moving average (n = 3). It can be noticed that forecast based on nine month moving average gives a smoother output (as it eliminates random variations) but lag behinds the actual demand ( of
76
trend). On the other hand, forecast based on three month moving average (i.e. low value of n) gives a fluctuating/oscillating output but responds better in following the trend. Why the name simple moving average:
In this method, for each new
forecasting period, fresh average is computed by excluding the oldest demand value and including the most recent demand value. As a result, the data and hence the average computed changes from (moves from) period to period and hence the name. The term simple signifies that the weightage associated with each demand value taken to compute the average is the same. The weightage associated with each demand value is equal to ‘1/n’ as shown in the following equation: Ft 1
Dt Dt 1 Dt 2 ...... Dt n 1 n 1 n
1 n
1 n
1 n
Ft 1 D t D t 1 D t 2 ....... D t n 1 So in a three month moving average, weightage associated with each demand value used to calculate the average is 1/3. Similarly, for a five period moving average, the weightage associated with each demand value is 1/5.
b)
Weighted Moving Average Method (WMA): In Simple Moving
Average (SMA) method, each demand value has the same weightage (1/n) in computing the average. In the Weighted Moving Average method (WMA), each demand value is assigned a specific weight depending upon its relative importance in influencing the forecasted demand. For example, if the demand time series shows a slight trend, the most recent demand in the time
77
series would have more influence on the future demand (to be forecasted) as compared to an older demand value in the time series. As a result different weights can be associated with different demand values of time series. The sum of all the weights has to be equal to unity. So in weighted moving average method, demands of all the periods are not equally weighted. Ft 1 wt Dt wt 1Dt 1 wt n 1Dt n 1 n
w 1 i 1
i
The value of a weight would always be between 0 and 1. Value of weights can be selected suitably. This method compensates for some trend or seasonality by carefully fitting the weights. How to Select Weights: Experience and trial & error are the simplest ways to choose weights for different demands in the time series. As a general rule, the most recent demand is the most important indicator of what to expect in the future, and therefore, it should get higher weighting. However, if the data are seasonal, weights should be established accordingly. Limitations of Simple/Weighted Moving Average Method: These methods suffer from the following main drawbacks: 1.
There is a need to continually carry a large amount of historical data. All individual elements of data have to be kept stored as every new forecast involves adding most recent demand data and deleting the oldest data. Data storage requirements can be extremely high when regular forecasts for large number of items is to be made.
2.
These methods do not provide good forecasts if demand data reflects considerably trend or seasonal components. It is because these
78
methods only average the past data. The forecast obtained will generally lag behind the trend.
c) Simple Exponential Smoothing Method (ESF) Exponential Smoothing Forecast method is a form of weighted moving average that calculates average of a time series by giving recent demands more weightage than earlier demands. It is the most frequently used formal forecasting technique because of its simplicity and the small amount of data needed to support it. It is an integral part of virtually all computerized forecasting programs and is used widely in ordering inventory in retail firms, wholesale companies etc. Unlike the WMA method, which requires ‘n’ periods of demand and ‘n’ weights, ESF requires only three items of data: most recent actual demand, forecast calculated in the last period (i.e. most recent forecast), and a smoothing parameter ‘’ whose value lies between 0 and 1. Exponential Smoothing Forecast is the weighted average of most recent demand (demand of the current period ‘t’ is designated as D t) and forecast calculated in the last period (forecast calculated in last period ‘(t-1)’ is the forecast for the current period ‘t’ and is designated as Ft). So, Exponential Smoothing Forecast is given as; Ft 1 Dt (1 ) Ft
---------
------ (a) here, Ft+1 = exponential smoothing forecast for the next period Dt = most recent actual demand
79
Ft = forecast calculated in last period (t-1) for the current period (most recent forecast) = smoothing parameter or smoothing constant. The weight associated with most recent demand is and so the weight of most recent forecast is (1- ). This is because sum of the weights is always unity. Equation (a) can be rewritten as follows: Ft 1 Ft ( Dt Ft )
------------
--- (b) From equation (b), ESF can be defined as the sum of forecast calculated in the last period and a portion of the difference between most recent actual demand and forecast calculated last period. In other words, forecast for the next period (ESF) is the sum of forecast calculated last period and a portion of forecast error.
Why the name Exponential Smoothing: Exponential Smoothing is a weighted moving average technique. This technique assigns more weight to recent demands as compared to older demands. If the formula for ESF is expanded, it would be realized that the weights assigned to historical demands decay exponentially. ESF Ft 1 D t (1 )Ft
80
D t (1 )[D t 1 (1 )Ft 1 ] D t (1 )D t 1 (1 ) 2 [D t 2 (1 )Ft 2 ] D t (1 )D t 1 (1 ) 2 D t 2 (1 ) 3 Ft 2 (1 ) 0 D t (1 )1 D t 1 (1 ) 2 Ft 2 ........
Suppose = 0.20 Ft 1 0.20Dt 0.16Dt 1 0.128Dt 2 0.1028Dt 2
It can be seen that weight associated with most recent demand is maximum (0.20) and the weightage decreases exponentially as the demand values become older (0.16, 0.128, 0.1028 respectively in the example above).
Weight allocation to Demands in ESM Method
Selecting the value of Smoothing Constant (): The value of smoothing parameter or smoothing constant () dictates how much emphasis is to be given to the most recent demand levels. It can have any value between 0 and 1. If alpha () is assigned a high value, say as high as 1, each forecast would reflect a total adjustment to the most recent demand. Ft 1 Ft (D t Ft ), if 1 Ft 1 Ft D t Ft )
Ft 1 D t Forecast would be equal to value of most recent period’s actual
demand. 81
A high value of smoothing parameter () gives more emphasis (or weightage) to recent demands in deciding the forecast for the next period. High values of alpha () should be used when substantial changes are likely to occur e.g. forecasts of product relates to fashion, style etc. New product introductions, promotion campaign periods, anticipated recession periods also demand high value of alpha. High value of alpha makes the forecast more responsive to changes in the underlying average or fluctuations in demand. Low value of alpha gives less weightage to most recent demand value and as a result all past demands are weighted nearly uniformly. Low value of alpha should be used when the demand is relatively stable, but the random variations are high. In a demand time series, if only random and horizontal patterns are present, and there is hardly any trend, seasonal or cyclical component, a low value of smoothing parameter should be used. Forecasts based on a large value of alpha fluctuate quite a bit, whereas forecasts based on a small value of alpha are smoother and fluctuate less. Exponential smoothing forecasting is useful for time series having horizontal and random patterns where demand fluctuations are typically random and sporadic. The value of alpha is kept low (generally in the range 0.005 – 0.30) to smoothen the forecast. The exact value depends upon the response to demand that is best for individual firm. A satisfactory value of alpha can generally be determined by trial and error testing of different values to find one that results in the best fit (least forecast error) when used on past data. If past data is not available, one can begin with some value of as 0.2 or 0.3, and monitor the performance of ES model for a few periods. Changes can be made in the value of alpha, if 82
required. Another alternative is to find value of that approximates a length of moving average, which is appropriate. If this alternative is used, alpha is given as follows:
2 n 1
-------
-------- (c) Suppose a firm feels that for its product’s forecast, a seven period moving average would give a good forecast. If this firm is to use ESF to forecast its product’s demand, the value of smoothing parameter to be used will be;
2 = 0.25 7 1
Value of Initial Forecast for ESF: In ESF method, forecast for the next period is given by Ft 1 Ft (D t Ft )
To calculate Ft+1, value of Ft (i.e. forecast calculated in the last period) is required. If the exponential smoothing forecast method is being used for the first time by a firm, Ft is called Initial Forecast. There are two methods to obtain this initial forecast. (i)
Use last period’s actual demand as the initial forecast.
(ii)
If historical data is available, consider some periods of recent demand (depending upon the nature of time series) and find the average of demands of these periods. Treat this average as the initial forecast.
83
Advantages and limitations of Exponential Smoothing Forecasts: The exponential smoothing forecasting technique offers some advantages over Simple Moving Average and Weighted Moving Average methods: i) The method is simple and has relatively less data storage requirements. This is important for companies which have to make large number of forecasts in short intervals of time. ii) In most of the applications, the most recent occurrences are more indicative of the future than those in the more distant past. So the importance or weightage associated with demand data diminishes as the past becomes more distant. When this premise is valid, ESF method is the most logical and easiest method to use. The major limitation of this method has been listed as follows: i) This method, as any other method based on averages, will provide a forecast lagging behind the actual demand if there is a trend/seasonal pattern in the demand of product.
Time Series with Trend Component In this section, the Trend Adjusted Exponential Smoothing method is being described. Let us consider a demand time series that has a trend component. If trend is present, the simple Exponential Smoothing forecast has to be modified; otherwise the forecast will always be above or below the actual demand. Let us explain this with an example. Suppose the sales of product reflect a steady increase of 10 units per period. The company is using, say Simple Exponential Smoothing Forecast with ď Ą = 0.3. Even if the first forecast is perfect, the forecast will severely lag behind the actual demand. 84
Simple ESF for Time Series with Trend Component
It can be seen from the above example, that simple exponential smoothing forecast lags behind the actual demand values if the time series contains a trend. To improve the forecast, we have to calculate an estimate of the trend and modify the Simple Exponential Smoothing Forecast (SESF). The forecast is then called Trend Adjusted Exponential Smoothing Forecasting (TAESF). In TAESF, forecast for the next period is given as: TAESF Fˆt 1 Tt 1 ; ‘^’ (hat) signifies that forecast includes the trend
component. here, Fˆt 1 Dt (1 )( Fˆt Tt ) Tt 1 ( Ft 1 Fˆt ) (1 )Tt
Fˆ t 1 = exponentially smoothed average of the series for the next period (t +1
period). Tt+1 = exponentially smoothed trend of the series for next period (t +1 period). = smoothing constant for average.
85
= smoothing constant for trend. As is the case with smoothing parameter (), the approximate value of can be found out by experimentation. Often, analysts systematically adjust values of and and finalize the values corresponding to which forecasting error is least with the past data. High value of parameter is more responsive to recent changes in trend (a high value of is used when more emphasis on latest trend is to be given). Low value of is used when trend is not well established. Low values of give more smoothing of the trends.
Time Series with Seasonal Component Regular repeated movements (upward or downward) in demand measured in time periods of less than one year (hours, days, weeks, months, or quarters) are called ‘Seasons’. For example, the arrival of customers at a restaurant may be at peak between 8:00 -10:00 p.m. Here the seasonal pattern lasts for a day, and each hour of the day is a season. The arrival of customers at a saloon may be at peak on Sundays and lowest on Tuesdays. Here the seasonal pattern lasts a week and each day of the week is a season. Various methods are available for forecasting time series with seasonal pattern. One of the commonly used methods is ‘Multiplicative Season Method’. This method involves the following steps: This method is being explained in steps and with an example. Consider a product whose demand is seasonal. Suppose the seasonal pattern lasts for one year having seasons of one month.
86
i) Average Demand per Season: For each year, calculate the average demand per season. This is equal to annual demand divided by number of seasons per year. Average Demand per Season =
Annual Demand Number of Seasons per Annum
Suppose annual demand for a product is 6000 units in a particular year, and each month is a season, then Average Demand per Season =
6000 500 units 12
ii) ‘Seasonal Index’: For each season of different years, divide the actual demand for a season by the average demand for the season. This ratio is called ‘Seasonal Index’. Seasonal Index indicates the level of demand of a season relative to the average demand. Suppose, in a particular year, actual demand for the month of March = 400 units Average demand for March (per season, calculated in step (i) = 500 units S.I. =
Actual Demand for a Season Average Demand for that Season
400 0.8 500
This means March’s demand is 20% below the average demand per month. iii) ‘Average Seasonal Index’: For each season, calculate the ‘Average Seasonal Index’ using results from step (ii). Average Seasonal Index for a season is obtained by adding the seasonal indices of that season for
87
different years and dividing by the number of years for which seasonal indices are taken. Average Seasonal Index =
Sum of Seasonal Indices for different years Number of years
Suppose, past data for the last three years is being considered. Further suppose that values of Seasonal Index for the month of April in these three years was 1.14, 1.18 and 1.04 respectively. So, the Average Seasonal Index for April =
1.14 1.18 1.04 1.12 3
iv) Use a suitable time series method to determine the projected Annual Demand for the forecasted year. Dividing this ‘Annual Demand’ with the ‘Number of Seasons’ per annum to find the ‘Average Demand per Season’. Calculate each Season’s Forecast by multiplying ‘Average Seasonal Index’ ‘Average Demand per Season’. Suppose, annual demand projected for the forecasted year is 4800 units. So, average demand per season is 400 units (= 4800/12). Further, average seasonal index for April is 1.12 (calculated in step (iii). Forecasted demand for April = Average Demand per Season * Average Seasonal Index = 400 * 1.12 = 448 units
QUALITATIVE FORECASTING Qualitative methods of forecasting or Judgment methods are based on estimates and opinions about future demand of products and services. These 88
methods are used when either historical data is not available (e.g. in case of new products) or is not useful in forecasting future demand (e.g. when technology is expected to change, or when forecasting is to be done for a very distant future and thus causal/time series method won’t yield good forecasts). Judgment methods collect opinions and estimates of future demand from individuals who are expected to have knowledge of current activities and future plans. These individuals know what people think about a product and how they shall behave in the near future. The most immediate knowledge of demand trends and customer plans is with marketing and sales representatives/managers etc. of the company. So judgmental methods consider the opinions of managers, experts and estimates of consumer surveys, sales force etc. to forecast future demand. These methods are generally useful for long range forecasting for activities like facilities decisions, capacity (investment) planning, process redesign decisions etc. (i.e. long range strategic decisions). Judgment methods are also used to modify forecasts generated by quantitative methods; e.g. when causal methods are used for long range forecasting tasks, forecasts obtained are always modified in the light of managerial experience and opinions. Following are some of the commonly used judgment techniques: Sales Force Estimates (Grass Roots Method) This method is based on the assumption that the persons who are closest to the customer or the end use of the product are the best ones to know about its future demand. This assumption may not always be true but in most cases it holds good.
89
Employees in the sales force of the company (Sales Executives, Marketing Executives etc.) are periodically asked to give estimates of future demand they expect in their territory or region. The estimates obtained at the bottom level are summed up to obtain estimates at the district level. To these estimates of district level, safety stocks and effects of ordering quantity sizes (EOQ) are added. This gives forecasts at territory/regional level. Forecasts of different regions are added to obtain forecast at the state level and those for states are added to obtain estimates at the national level. In this way forecast for the products is obtained. Sales Force Estimates are very useful for inventory management decisions, sales force staffing decisions, distribution decisions etc. But this technique suffers from the following limitations: a) Individual biases of the sales people can cause errors in forecasts. Some people are more optimistic whereas others are more cautions. Such biases lead to forecasting errors. b) Sales people may not always be able to detect the difference between what a customer wants (a wish list) and what a customer actually needs (a necessary purchase). c) If individual sales (targets) are used as a performance measure, sales people will deliberately underestimate so that targets get meted and hence their performance looks good. Also, the sales people may work hard only until they reach their required minimum sales.
90
Executive Opinion Method This method takes in to account the opinions, experience and technical knowledge of one or more manager level employees to arrive at a single forecast. This method can be used for projecting demand of new products, for which sales force estimates won’t give accurate results. It can also be used to modify an existing sales forecast to account for unusual circumstances viz new sales promotion scheme, unexpected national/ international events. This method is also used for technological forecasting. This method suffers from following limitations: i) This method can be costly as it takes valuable managers’ time. ii) The results of forecasts can become inaccurate and hence non-useful if managers are allowed to modify a forecast without collectively agreeing to the changes. For example, suppose Sales and Marketing manager observes the sales force estimate (forecasting figure) and feeling more optimistic than the sales force estimate, increases the forecast to ensure availability of enough product. On receiving this forecast, the production manager, further increases the forecast to avoid being blamed for not meeting customer demand. Final forecast obtained (after these modifications by different managers) would be much higher than actual demand. Managers will start blaming each other for the extra inventory created. So the key to success in such techniques is not a series of modifications but consensus among managers and executives on a single forecast.
Panel Consensus
91
Panel Consensus involves employees from different levels of management. Open meetings are held where free exchange of ideas takes place between employees from variety of positions in the organization. Limitation of this open style can be that the higher level employees in the organization may impose their view point on the lower level and the latter may not feel free to reflect their true beliefs. For example, a marketing executive may know more about the immediate future demand of a product but may not come up with his estimate because of a much different estimate given by the Senior Works Manager.
Market Research Market Research is a systematic approach for determining customer interest in a product or service by creating and testing hypothesis through data gathering surveys. It includes the following steps: Designing a questionnaire that requests economic and other information from each person interviewed (respondent). Deciding the means of carrying out the survey. It can be through telephone, e-mail, personal interview etc. Selecting a representative sample size to survey. This should include a random selection within the market area of the proposed product. Analyzing the collected information and making allowances for economic and competitional factors not included in the questionnaire. Market Research may be used for forecasting demand for short, medium and long term. Accuracy can be good for the short term but is more longer terms.
92
Delphi Method The Delphi method was developed in 1950’s to overcome the limitation of Panel Consensus method where free exchange of views amongst participants is generally not possible because of their different ranks. If a low level employee has a different estimate or view point on the forecast of product than his superior, he may not speak up to refute a much different estimate given by his superior. To overcome this problem, the Delphi technique conceals the identity of the individuals participating in the study. As a result, everyone’s view point/estimate is weighted equally. Thus Delphi method is defined as a forecasting process of gaining consensus from a group of experts while maintaining their anonymity. The method involves the following steps: i) A coordinator (or facilitator) designs and prepares a questionnaire to obtain estimate (forecast) of future demand of the product. ii) A panel of experts is identified and formed to participate in the study. The participants
(experts) are knowledgeable people (can be both from
inside and outside the organization) from diverse backgrounds who are experts on some aspect of the problem but no one is expert on the entire problem. The members of the group may not even know who else is participating. Anonymity is important so that no member of the group tries to dominate the proceedings and decisions made by the panel. iv) The questionnaire is distributed to each of the experts, generally through mail. Each expert individually goes through the questionnaire, provides response about the forecast he feels for the product. He also provides the facts and view points in support of his forecast.
93
iv) The respondents (experts) send back the filled questionnaires back to the coordinator. The coordinator goes through all the responses and prepares a comprehensive summary. This summary includes statistical summary of the responses and also the arguments given in support of the responses. v) The comprehensive report along with some new questions is sent to the same group of experts for the next round. The key feature is that the participants after going through the report have the freedom to modify their previous responses. The responses are again sent back to the coordinator by the experts. vi) Again the feedback is received by coordinator and steps (iv) and (v) are repeated until a consensus is reached. The Delphi technique is usually able to obtain a satisfactory result in three rounds. The time required is a function of number of participants, amount of work involved, and their speed of responding. The main areas of application of this technique are as follows: To develop long range forecasts of product demand. To develop sales forecast of new products. For Technological Forecasting. For example, to forecast market penetration of solar electric energy by the year 2015. The key to the success of Delphi method lies in the coordinator and experts. The coordinator must be talented enough to synthesize diverse and wide ranging statements and arrive at both a structured set of questions and a forecast. The main advantages of this technique are as follows: 94
i) Direct interpersonal relations are avoided in this method. As a result, there are neither any conflicts nor any member is able to dominate the group. ii) Since the group is anonymous, the group members tend to respond to the questions and support their responses freely. iii) This method obtains a consensus and not a compromise. The resultant forecast is a pooled judgment, in which both the range of opinion and the reasons for the difference of opinion can be seen.
ADJUSTMENTS IN FORECASTS Forecasting process is not simply identifying and using a method to compute a numerical estimate of what will be the demand in future, it is rather a continuing process that requires constant monitoring and adjustment. There are several reasons because of which forecast errors occur and there arises a need to make adjustments to forecasts. Some of reasons are discussed as follows:
i) Customers often make secret plans, or plan which manufacturing firm is not party to, or no plans at all. ii) Changes in customer’s behaviour can occur for a number of reasons. The main reasons can be technology changes, dissatisfaction with product or service or changes in competitors' behaviour (which the company should know or at least anticipate).When these changes are not effectively recognized, errors occur.
95
iii) Often, an imperfect source is used to make forecasts when better sources are available. Sometimes the best source is used but the best information is not extracted from that source. Further, over reliance on one source without confirmation from other sources can give rise to local distortions of the information. Conversely, if too many inaccurate sources are used they may incorrectly weight the resulting forecast. iv) Communication links may not have been established or are not established reliably, such that the resulting forecast is based on incomplete or partially out of date information. Changes of plan or environmental changes can of course happen. If good communications links are established these will be picked up. v) Information lags can lead to using old information where newer information is available, so that the new trend is spotted later. Communication of decisions being omitted or delayed, e.g. a promotion campaign is an important factor causing forecasting error. vi) There are a number of sales strategies (rather, malpractices) that cause demand distortion (e.g. offers such as three products for price of two, off season sales etc). vii)
Over-dependence on computer models for forecasting can lead to the
following
type of problems:
a. Inaccurate models (not recognizing demand patterns such as seasonality or trend, or unusual demand). b. Over complex models. viii) Forecasting errors occur when business cycle or product life cycle of product is not suitably recognized. ix) Error can occur due to the difficulty of collecting the data on a timely or
96
reliable basis (without lack in coordination in company). x) The natural variation due to common causes also results in forecasting errors.
Implications of Forecast Errors The obvious implication of forecasting error is an over or under reaction to the latest trend. This gives rise to the risk of i)Missing the market ii) Lost sales iii) Dissatisfied customers iv) Obsolescence, out of shelf life stock v) Wasted expenditure or spending too early vi) Stock (Accumulated Inventory) vii) Large product recalls caused by stock building.
Figure 2.12 Implications of Forecast Errors
Under Estimate
Over Estimate
Lost Sales
Obsolescence
Missing the Market
Out of Shelf Life
Dissatisfied Customers
Larger Product Recalls
97
Elements of a Good Forecast The essential elements or attributes of a good forecast are discussed as follows: i) Timely: Forecasting is done for some time period that what will happen in future. The long-range planning for facilities, re-layout of exiting facilities, building new plants, new product development, and research require a longer time horizon. The technique of forecasting does not change with change in the length of time covered by a forecast, but the accuracy and reliability of the results decrease as time period covered (Time Horizon) increases. ii) Accurate: The degree of accuracy of forecasts depend upon consistency of historic data and the length of horizon for which forecasting is being done. To make a good forecast detailed analysis of part’s demand pattern over time and selection of forecasting technique is required. iii) Meaningful:
The forecast should give valuable information when
actually planning of facilities is to be done. iv) Written: The forecast should be well written and documented. A written forecast gives better chance of everyone using the same forecast and provides an objective basis for evaluating the forecast against actual. v) Simple: The forecast should be simple to use and understand.
FORECASTING ACCURACY AND MONITORING
98
Forecasts are never completely accurate and will always deviate from the actual demand. This difference between the actual demand and the forecast is known as Forecast Error.
Generally, a forecast is compared with the
actual outcome (demand) at a single time-point and a summary of forecast errors is constructed over a collection of such time-points. The quality and accuracy of the forecasting technique is assessed by this difference or using proportional error (discussed later). Monitoring the Forecasting System: All forecasting systems need to be regularly monitored for error magnitude and bias (Cumulative Forecast Error). The following are the techniques for monitoring of forecasts:
Mean Absolute Deviation: Mean Absolute Deviation (MAD) is one of the most popular and simpler to use measures of Forecast Error. MAD is an average of the differences between the actual demand and the forecasted value calculated over a number of forecasting periods. It is computed by the following formula.
MAD
=
Actual OutputForecast Value
n
Here, n = total number of periods
MAD has been explained with the help of following example. 99
The following table shows data of forecasting analysis performed by a firm. Calculate the Mean Absolute Deviation.
PERIOD
DEMAND
FORCAST
ERROR
Dt
Ft 0.30
Dt Ft
ABSOLUTE ERROR Dt Ft
1
37
37
-
-
2
40
37
3.00
3.00
3
41
37
3.10
3.10
4
37
38.83
-1.83
1.83
5
45
38.28
6.72
6.72
6
50
40.29
9.69
9.69
7
43
43.2
-0.20
0.20
8
47
43.14
3.86
3.86
9
56
44.3
11.7
11.7
10
52
47.81
4.19
4.19
11
55
49.06
5.94
5.94
12
54
50.84
3.15
3.15
100
Total
557
MAD
49.32
53.38
Dt Ft n
= 53.39/11 = 4.85
Smaller is the value of MAD, more accurate is the forecast.
Mean Absolute Percent Error: Mean Absolute Percent Error (MAPE) measures the absolute error as a percentage of demand rather than per period. It eliminates the problem of interpreting the measures of accuracy relative to the magnitude of the demand and forecast values, as MAD does. MAPE
=
Actual Output Forecast Value n
Demand)
MAPE = 53.39/557*100= 9.6%
101
*(100/Cumulative
Mean Squared Error: Mean Squared Error (MSE) is the average of the squared forecast errors of different periods for the historical data. The forecasting method which minimizes this mean squared error is selected.
MSE
( Actual
2
Forecast)
= n
Mean Squared Error is explained further with the following example: The following table shows the actual sales and the forecasts for the corresponding periods. Calculate the Mean Squared Error, Standard deviation, Mean Absolute Deviation, and Mean Absolute Percent Error for the given data.
Month Demand Forecast Error Absolute Error, (t)
(Dt)
(Ft)
(Et)
Error
Absolute
Squared,
Percent
(Et2)
Error
(|Et|) (│Et / Dt)*(100))
1
200
225
-25
25
625
12.5
2
240
220
20
20
400
8.3
102
3
300
285
15
15
225
5
4
270
290
-20
20
400
7.4
5
230
250
-20
20
400
8.7
6
260
240
20
20
400
7.7
7
210
250
-40
40
1600
19.0
8
275
240
35
35
1225
12.7
TOTAL
-15
195
5275
81.3
Cumulative Forecast Error (Bias):
CFE= -15
Average Forecast Error (Mean Bias): Mean Squared Error:
Standard Deviation:
= 27.4
Mean Absolute Deviation: Mean Absolute Percentage Error: MAPE = 81.3/8 =10.16%
Tracking Signal Tracking Signal indicates if the forecast is consistently biased high or low. Forecasts can go out of control and start providing inaccurate estimates for 103
several reasons, including a change in trend, unanticipated appearance of a cycle, an irregular variation such as unseasonable weather, a promotional campaign, new competitors, or a political event that distracts consumers etc (other factors, as discussed earlier). Tracking Signal is computed by dividing the Cumulative Deviation by the Cumulative Mean Absolute Deviation (MAD):
The tracking signal is recomputed each period, with updated, ‘running’ values of Cumulative Error and MAD. The movement of the tracking signal is compared to control limits. As long as the tracking signal is within these limits, the forecast is in control.
Numerical Problems: 1. In a three period weighted moving average, the most recent demand value is assigned a weight of 0.6, the second most recent period’s demand is given a weight of 0.3 and the third demand is assigned a
104
weight of 0.1. The demand in the corresponding periods are 50, 48, 45 units respectively. Find the forecast for the next period. Solution: The weighted moving average forecast is given by the following equation: Ft 1 wt Dt wt 1Dt 1 wt 2 Dt 2
= 0.6 x 50 + 0.3 x 48 + 0.1 x 45
Ft+1 = 49 units
2. Compute a three week moving average forecast for the arrival of patients in week 4. The number of arrivals in the past three weeks is: Week
Number of Patients
1
400
2
380
3
411
b) If actual number of patient arrival in week 4 is 415, what are the estimates for week 5? Solution:
Ft 1
=
D t t 1 .... D t ( n 1) n 411 380 400 397 3
105
So, forecast for Week 4 is 397 patients. b) D4th week = 415 Ft 2
415 411 380 402 3
So, forecast for Week 5 is 402 patients.
3. The past data pertaining to the load on a machines in a manufacturing firm is provided in the table below: Month
Load
(of year
(Hours)
2008) June
585
July
610
August
675
September
750
October
860
November
970
a) Compute the load on the machine centers using fifth moving average for the month of December 2008. Also compute a weighted three month average for December 2008 where the weights are 0.5 for latest month, 0.3 and 0.2 for other months respectively. Solution:
106
a) Five months moving average: Ft 1
970 860 750 675 610 773 Hours 5
b) Three months weighted average: Ft 1 wt .Dt wt 1 .Dt 1 wt 2 .Dt 2
= 970 * 0.5 + 860 * 0.3 + 750 * 0.2 = 893 Hours QUESTIONS
11.How does forecasting help in better scheduling for optimum utilization of firm’s production resources? 12.Prediction does not contain error analysis. Comment. 13.Describe the areas of application of medium range forecast. Which type of forecasts (among short, medium and long range forecasts) need to be most accurate and why? 14.With the help of a suitable example, explain the effect of sample size on simple moving forecast. 15.Explain with the help of a numerical example (taking smoothing parameter = 0.3), why exponential smoothing gets its name. 16.A firm uses simple exponential smoothing with = 0.1 to forecast demand. The forecast for the week of February was 500 units, whereas actual demand turned out to be 450 units. Forecast the demand for the week of Feb 8. 17.Discuss the main limitations of Panel Consensus method which can effect its accuracy.
107
18.Discuss the main benefits of the Delphi technique. 19.What are the main areas of application of Forecasting Error analysis? 20.What is the difference between mean bias and MAPE?
AGGREGATE PLANNING The first major activity in production planning is Demand Forecasting. Forecasts provide information regarding the anticipated demand of products of the company for a specific future period. Having obtained the demand figures, company has to decide the manner in which production should be carried out to meet this future demand. How production should be carried out means, what strategy is to be used for production. There can be several strategies which the company can adopt to meet demand requirements. For example, one strategy can be to vary the production rate in different planning periods according to the demand in those periods. This strategy will call for varying the work force size according to demand in a period i.e. say January’s forecasted demand is more than February’s demand. Under this situation, production rate followed and workforce size used would be more in January than in February. Another strategy can be not to vary production rate from period to period but to use a constant and high production rate throughout the planning horizon. In this production strategy, the production rate, workforce size would remain stable. Here, the company will accumulate inventories in periods where production is more than demand and will use these inventories in periods where production is less than demand. In the first production strategy, there are costs involved in hiring (when demand is more, workforce has to be increased) and laying off employees but there are no inventory costs. In the second strategy, since
108
workforce size is stable, there are no hiring and laying off costs but because of inventories, carrying and storage costs are there. Manufacturing firm’s can develop several other alternatives or production strategies to meet demand (in the above example, only two alternatives were discussed). The cost involved with each of the alternatives is found out and the production strategy (i.e. aggregate production plan) with the lowest operating cost is selected. This entire process is called ‘Aggregate Planning’ and the selected alternative is called ‘Aggregate Plan’.
NEED OF AGGREGATE PLANNING When sales forecast has been obtained, planners are concerned with making the best possible use of company’s resources in meeting the demand. The expected demand over time is generally irregular and fluctuating and in order to meet it, the planners control the input variables that effect supply. These input variables are controlled and changed according to the demand requirements. The input variables (controllable variables) include labour (changing Employment Levels, by increasing or decreasing the number of employees according to demand; Overtime, Part Time etc.), material (by storing and depleting Inventories; Subcontracting etc.) and capital inputs (by increasing Capital invested in equipment, tooling etc.). The input variables can be controlled and varied in different ways and constitute several production strategies or production plans through which demand requirements can be met. The plan which meets the demand requirements at the least cost keeping in view the corporate philosophy and other
109
managerial inputs is the Aggregate Plan. Here, it can be noted that to prepare an aggregate plan, the following main inputs are required: Demand forecast figures for the planning horizon Corporate policies and objectives Managerial inputs from other departments The main objective of Aggregate Planning is to produce a production strategy that meets the anticipated demand making the best possible use of company’s resources. In aggregate planning, the time horizon (total future period for which planning is done) is of intermediate range (generally, between 6 months to 18 months). This planning horizon is divided into smaller planning periods of months (or seasons, weeks etc). Thus, production planning for an intermediate range of time is called Aggregate Planning. Some commonly used definitions of Aggregate Planning are as follows: i) Aggregate Planning is the process of deciding the production strategy to be followed by the company for an intermediate time horizon to meet forecasted demand. ii) Aggregate Plan is a statement of company’s production rates, workforce levels, inventory holdings etc. based on estimates of customer requirements and capacity limitations. iii) Aggregate Planning is the process of planning the quantity and timing of output over the intermediate time horizon (6-18 months into the future). The physical plant and equipment capacity is fixed over this horizon and
110
the demand requirements are to be met by strategies like changing employment levels, adjusting inventory levels etc. iv) Aggregate Plans are medium range production plans. Based on the broad, long term goals of a company, the aggregate plan specifies how the company will work for the next year or so (whatsoever is the planning horizon) towards those goals within existing equipment and capacity constraints. v) The process of determining the output levels of product groups over the coming six to eighteen months on a monthly (or quarterly or weekly basis, whatsoever is the planning period) is called Aggregate Planning. A manufacturing firm’s aggregate plan is called ‘Production Plan’ and generally focuses on production rates, workforce levels, and inventory holdings where as a service firm’s aggregate plan is called a ‘Staffing Plan’ and generally focuses on staffing and other labour related factors. Why the name Aggregate Planning In Aggregate Planning, the planning horizon is typically about a year or so, although it can vary. So in this planning process, company prepares a production plan, for say, a year into the future. The planners divide this time horizon into intervals called Planning Periods. In aggregate planning, the company looks at this time in aggregates or groups of periods viz. months, quarters, seasons etc rather than more detailed units (smaller time periods) viz. hours, shifts, days etc. In practice, planning periods reflect a balance between the need for a limited number of decision points to reduce planning complexity and
111
 flexibility to adjust output rates and workforce levels when demand forecast exhibits seasonal variations. Further in aggregate planning, planners do not take into account such details as how many units of each specific type color or model of products is to be produced. Planners look at the products at a very broad level by dividing all different products into product families. A product family would contain all different products which require the same set of production resources and facilities e.g. a company is producing twelve different models of cycles in five different colors. In aggregate planning, planners group these different products into two broad families: a) Normal Cycles and b) Gear Cycles. The aim during aggregate planning is just to see what type of load is going to come on the production facilities and prepare a production strategy for meeting that load with the best use of company’s resources. As discussed earlier, during aggregate planning the time horizon is broken down into bigger planning periods (aggregate periods). Further, products are aggregated into a set of relatively broad families avoiding too much detail. For these reasons, the production planning of intermediate time horizon is referred to as Aggregate Planning.
INPUTS FOR AGGREGATE PLAN The process of aggregate planning requires three main inputs. i) Demand Forecast: Demand Forecast figures in different planning periods of the planning time horizon. ii) Corporate Policies and Objectives: Aggregate planners must keep in mind the company philosophy and policies while preparing different
112
production strategies to select the aggregate plan. For example, if the company’s policy is to have a stable work force throughout, a production strategy (aggregate plan) calling for hiring or laying off employees to respond to fluctuating demand requirements would be a useless plan which would not be accepted by management. iii) Managerial Inputs from different departments: Aggregate planners can prepare a useful production plan only when they collect all relevant information from different departments. For example, suppose planners prepare a production (aggregate) plan of working at a constant very high production rate without taking information from the production department regarding current machine and work force capacities, the plan would be of little or no use if current capacities are less than those given in the plan. The following managerial inputs (as shown in figure) are necessary for aggregate planning.
Managerial Inputs for Aggregate Plan
Production
Distribution & Marketing
Customer Needs Demand Forecasts Competitor’s Behaviour
Current Machine Capacities Plans for Future Capacities Work Force Capacities Current Staffing Level
Materials
Accounting & Finance
Supplier Capabilities Storage Capacity Material Availability
Cost Data Financial Condition of the Company
AGGREGATE PLAN
113 Engineering
Human Resources
New Products
Labour Market
Generally, different functional areas have conflicting objectives for the use of organization’s resources. The objectives are as follows : (a)
Minimize Changes in Production Rates: Frequent changes in production rates cause problems in coordinating supply of materials and often require line rebalancing.
114
(b)
Minimize Changes in Workforce Levels: Frequent changes in workforce levels (size) cause, among other problems, decreased productivity because new employees need time to become fully productive.
(c)
Minimize Inventory Investments: Accumulation of inventory of end products means blocked capital which could have been used for other more productive investments.
(d)
Maximize Customer Service: Maximizing customer service will often demand more changes in production rates according to customer demand requirements, more changes in workforce levels to meet demand, and more inventory accumulation for instant delivery. To arrive at an acceptable production (aggregate) plan, these conflicting objectives have to be balanced.
REACTIVE AGGREGATE PLANNING STRATEGIES In aggregate planning, the planners prepare different production strategies to meet the fluctuations in future demand. These strategies involve controlling the three main input variables viz labour (increasing/decreasing employment levels; or use of overtime/part time workers), materials (storing and depleting inventories; backordering; sub contracting etc.) and or capital inputs (making additions in equipment, tooling etc.) Each input variable can be controlled and varied in a couple of ways to meet the projected demand. These different ways constitute different production strategies or reactive alternatives. Each of each production strategies is called ‘Pure Aggregate Planning Strategy’ because each is based on controlling only one input
115
variable and that too in a unique manner. These are called ‘Reactive Alternatives’ because they simply respond to the fluctuating forecasted demand. The other alternatives (discussed later) are proactive or aggressive alternatives. These tend to change the fluctuating demand pattern to more even or uniform demand throughout the planning horizon. Table 3.1 shows six different pure aggregate planning strategies reactive alternatives). The different reactive aggregate planning strategies have been discussed as follows:
Strategy 1: Employment Adjustment or Workforce Adjustment
The first aggregate planning strategy (i.e. production strategy or aggregate plan) is to vary the workforce size in proportion to the demand. This includes hiring and laying- off employees in proportion to the demand. Hiring of employees is used in periods in which demand increases and layoff is done in planning periods in which demand decreases. The use of this strategy can be attractive if the workforce required by the manufacturing firm is largely unskilled or semiskilled and the labour pool available is large. However, for a particular company, the size of qualified labour pool may limit the number of new employees that can be hired at any one time. Also, if new employees are hired, they must be trained, and the capacity of training facilities might limit the number of new employees that can be hired at any one time. Laying-off employees is also difficult in some companies because of contractual reasons (union problems). But there are certain industries in
116
which laying-off is a normal practice without any problem; examples include tourism, agriculture etc. Pure Aggregate Planning Reactive Strategies PURE AGGREGATE PLANNING STRATEGIES (REACTIVE ALTERNATIVES) S. N o
Strategy
1
2.
EMPLOY MENT OVERTIM E and UNDERTI ME
3.
Vary the Workfo rce Size
Use Overti me and
Carry Incur Use Adju Large Stock Subcont st Invent out ractors Plant ories Costs Capa city
YES
Undert ime ---
---
---
---
---
---
YES
---
---
---
---
---
---
YES
---
---
---
---
---
YES
---
---
---
---
---
YES
---
---
---
---
---
YES
INVENTO RIES 4.
5.
6.
BACK ORDERS SUB CONTRA CTING PLANT CAPACIT Y
---
-----
Strategy 2: Work Force Utilization
117
The second production strategy is an alternative to ‘Work Force Adjustment’ strategy. ‘Work Force Utilization’ strategy maintains a stable workforce but uses Overtime & Undertime when demand fluctuates. Overtime is used when demand increases and undertime is used in slack demand periods. Overtime means that workers work longer than the stipulated normal time and receive additional pay for the extra hours. Overtime is used to satisfy output requirements that can’t be completed on regular time. However, overtime is expensive (overtime rate is typically 150% of normal wage rate). Moreover, workers do not want to work a lot of overtime for an extended period of time. Also excessive overtime can lead to decline in quality and productivity. Undertime means that workers don’t work productively for their regular stipulated time. For example, they don’t work productively for eight hours per shift or six day per week. Undertime occurs when labour capacity for a period exceeds that period’s demand requirements and this excess labour capacity can’t or should not be used productively to build up inventory or satisfy customer’s orders earlier than delivery dates already promised. This is generally the case with customized products whose specifications are unknown or customers don’t like to have what has been produced in advance because it doesn’t meet their exact requirements. Undertime can be of two types: Paid Undertime and Unpaid Undertime.
118
Examples of Unpaid Undertime is when part-time employees (temporary workers) are paid only for the hours or days worked. They remain in the factory premises for full time but are paid only for the period for which they have actually worked. They are generally not put to work, if workload is light and work only when asked to. Perhaps they work only during the peak times of the day or peak days of the week. An example of Paid Undertime is when employees are kept on payrolls even during very light workload periods. In this case, employees work for full day (on all working days), receive full salary but are not productive because of light workloads. Companies use paid undertime during slack periods particularly with highly skilled, hard to replace employees or when there are obstacles in laying off workers. The disadvantages of paid undertime include cost of paying for work not performed and lower productivity.
Strategy 3: Inventories
This production strategy means to have a constant workforce and level of production but carry sufficient amount of inventory to absorb all demand fluctuations. This strategy is mostly used by plants facing seasonal demands. They stock (build) the inventories during light demand periods and use them during heavy demand periods. This strategy can not be used by service industries because services can’t be stocked.
Strategy 4: Backlogs, Backorders and Stock-out
119
Manufacturing firms can be divided in two major classes depending upon how specifications are incorporated into the product.  Firms based on Make to Order Approach: These firms take the inputs regarding specifications of the product directly from the customers. These specifications are mentioned in the customer order. It is only after receiving the order from the customer that production can start. These firms can not provide immediate delivery of products and there is always a lead time between order received and delivery of products to the customer.  Firms based on Make to Stock Approach: These firms decide specifications of product by themselves taking into account potential customer needs. They manufacture the products based on demand forecast figures and keep products ready in advance even before customer orders are received. So the firms based on this approach should always have products ready in stock (inventories) and have to provide immediate delivery when customer order is received. For example, firms manufacturing consumer goods like electrical appliances, vehicles etc all are based on make to stock approach.
The fourth production strategy (aggregate planning approach) is to Backorder or to maintain a Backlog. Firms based on make–to-order strategy use Backlogs and firms based on make-to stock approach make use of Backorders. Let us discuss the difference between the two terms. Backlog is an accumulation of customer orders that have been promised for delivery at some future date. Firms based on make-to-order strategy receive
120
customer orders. They do not promise immediate delivery and impose some lead time between order received and delivery date. Firms can allow the backlogs to grow during periods of high demand and then reduce them during periods of low demand. Backlog strategy is generally used by firms which make customized products or provide customized service. Companies keep on increasing the size of backlogs during periods of high demand and vice-versa. In this manner backlogs are used as a strategy to meet fluctuating demand. Backlogs reduce the uncertainty of future production requirements because lead time is available. Backlogs can become a competitive disadvantage, if they become too big. This is because large backlogs mean longer delivery times. If a company is based on make-to-stock approach, it can’t use Backlog strategy because customer wants immediate delivery and does not permit any lead time between order placed and delivery obtained. Here, poor customer service takes the form of Backorders and Stockouts, rather than large Backlogs. Backorder is an order that the customer expected to be filled immediately but reluctantly asks that it be delivered as soon as possible. The customer order is fulfilled at a later date than was required by the customer. The main characteristic is that though the customer is not pleased with the delay, but the order is not lost. In case the order is lost because the customer goes elsewhere, the situation is called a ‘stockout’. A Backorder adds to next period’s requirements i.e. increases future requirements but a stockout does not.
121
Generally, Backorders and Stockouts should be avoided because they lead to dissatisfied customers. Planned stockouts may be used, but only when the expected loss in sales and customer goodwill is less than the cost of using other production strategies or adding the capacity needed to satisfy demand.
Strategy 5: Subcontracting
In this strategy, a third party (some other manufacturing party) called a Subcontractor can be used to overcome short term fluctuations in demand, for example during peaks demand periods. Subcontractors can provide parts, components, subassemblies or even the entire product. If subcontractor can provide items of good quality at acceptable price, such arrangement can become permanent.
Strategy 6: Plant Capacity
In this strategy, plant capacity is adjusted by adding new machines, adjusting tooling and equipment capacities etc. to meet the increased demand.
Every aggregate planning strategy has some benefits and costs associated with it. The costs are largely a function of adjusting to increased or decreased demand. The operating costs involved in the implementation of different reactive alternatives are shown in Table 3.2.
122
AGGRESIVE AGGREGATE PLANNING STRATEGIES
The aggregate planning strategies discussed in the previous section are called reactive strategies as all of them only respond according to the forecasted demand pattern. These strategies do not tend to change the demand pattern and only react according to the fluctuations in the pattern. However, to meet seasonal or volatile demand using only reactive alternatives can be costly. Another approach called ‘aggressive production strategies’ or aggressive alternatives’ can be used to reduce the costs. Aggressive Alternatives tend to modify or change the demand patterns to even out fluctuations in the forecasted demand pattern. These alternatives or actions are specified
Costs involved in Reactive Aggregate Planning Strategies S.
N
Productio
Cost of Adjusting to
Cost of Adjusting to
n
Increased Demand
Decreased Demand
Strategy
o 1.
Employm ent Adjustme nt
a)
Hiring
cost
of
new a) Loss
employees. Includes cost of
of
manpower.
advertisement, b) Decreased selection process, morale.
123
skilled
employee
maintaining
(Workfor ce Adjustme nt)
additional c) Cost of laying off. This
records. New employees
includes cost of exit
require
interviews,
extensive
gratuity,
training and extra time to
unemployment benefits
achieve
etc.
productivity
levels. b) Use of less skilled and efficient workers may hit quality and productivity. 2.
Workforc
a)
Cost
of
premium.
e
wages
Utilizatio
overtime
a)
Overtime are
Fixed
cost
of
underutilized workers.
generally
150% of regular time
n
wages. Some companies even have to give 200% rate
for
working
overtime on Sundays and holidays. 3.
Inventori es
a)
Capital cost of carrying the inventory.
b) Cost
of
a)
Pilferage obsolescence
promotion
or of
the
existing inventories.
campaigns etc to dispose b) Increased
stock
off inventories or shift
requires large storage
demand to slack periods.
space and hence large storage
124
and
warehousing costs. c) Insurance costs 4.
Backorde
a)
of goodwill because of
rs &
Subcontr
---
dissatisfied customers.
Stockouts 5.
Cost of lost sales or loss
a)
Cost
of
additional
premium i.e. amount by
acting
which
---
subcontracting
cost is greater than inhouse
manufacturing
cost. b) Decreased
quality
control. 6.
Plant Capacity
a)
Cost of investment in new facilities.
b) Cost
of
a)
Fixed
cost
of
underutilized facilities. overloaded b) Obsolescence
facilities leading to more
deterioration
scrap, maintenance etc.
facilities.
and of
by marketing managers in the marketing plan. Some of the commonly used aggressive production strategies are discussed as follows:
Strategy 1: Complementary Products
125
Complementary products are products which have same resource requirements but different demand cycles (means periods of their peak demand are different). For example, a company producing engines only for snowmobiles (having demand mainly in winters) can also produce engines for lawn mover machines (mainly required in summers), making requirements for major component engines reasonably uniform throughout the year.
Strategy 2: Creative Pricing In creative pricing, promotional campaigns are designed to increase the sales of product in periods when low demands are expected. The name creative pricing is given because these promotional campaigns generally relate to price discounts. Examples include heavy price discounts given by companies in slack periods or other offers during off-peak periods etc.
Strategy 3: Vacation Schedule In this strategy, the firm ‘shuts down’ its production during a couple of slots (generally for a week, twice a year) during the year in periods when demands are low. This period is called ‘vacation’ and is used for activities other than production (viz. maintenance of machinery, installing new equipment etc) but also to reduce inventory. Employees might be required to take all or part of their allowed vacation time during this period. Use of this strategy depends on whether the employers can mandate the vacation schedule of its employees. In any case, employees may be strongly
126
discouraged to take vacation during peak periods or encouraged to take vacations when part-time workers are easily available.
CHASE AND LEVEL STRATEGY
Managers often combine different alternatives (both reactive and aggressive) in various ways to arrive at an acceptable aggregate plan. A large number of aggregate plans are possible by combining different alternatives. There are two broad strategies which are useful starting points in searching for the best plan. These strategies are a a) Chase Strategy b) Level Strategy Chase Strategy: In chase strategy, production rate is varied in a manner that it chases the forecasted demand in every planning period. This strategy matches demand either by  Changing the workforce level.  Changing the output rate. Changing the workforce level makes use of only one reactive alternative i.e. Workforce Adjustment. Using hiring and layoffs, the workforce level matches demand. The second method, changing the output rate, makes use of additional reactive alternatives like overtime, undertime, vacations, subcontracting etc.
127
Level Strategy: A level strategy matches demand during the planning horizon either by  maintaining a constant workforce level  maintaining a constant output rate during the planning horizon. Maintaining a constant workforce level consists of not hiring or lay-off of workers, using undertime during slack periods and overtimes during peak periods, using subcontractors and/ or using inventories. Maintaining a constant output (production) rate includes building inventories, using backorders to adjust the timing of production requirements, planning overtime as needed to maintain a level output rate etc. Generally, a pure chase or a pure level strategy does not produce the best acceptable aggregate plan. A mixed strategy generally gives best results.
Steps in Aggregate Planning Process
GRAPHICAL METHOD TO CHOOSE AGGREGATE PLAN 128
Generally, using only one pure reactive strategy is never economical. It is always practical to use a mixture of two or three pure strategies. Graphical planning method can generally be used to evaluate different alternatives. It involves the following steps. 1) Draw a Cartesian graph, taking cumulative production days for the entire
planning horizon on X-axis and cumulative demand (forecast) on the Yaxis. 2) Plot over it in dotted form, the average production rate required to meet
this demand over the planning horizon. (Average Production Rate = Cumulative Demand/Cumulative Production Days) 3) Now select a production planning strategy, keeping in mind, the demand
forecasting figures in each period, managerial inputs from other departments and corporate policies and objectives. According to this selected production strategy, calculate and plot the proposed output for each period. 4) Compare the expected (forecasted) demand and the proposed output.
Identify the periods of excess inventory and inventory shortages. 5) Calculate the cost incurred in implementing this plan. 6) Modify the plan by repeating steps 3, 4 and 5. Choose the most
economical plan from amongst different alternatives obtained through this step.
Numerical Problems on Aggregate Planning:
129
1) Demand forecast figures for the product of a company are shown in the table below: Mon Ja
Fe
M
n
b
ar
r
Fore 22
90
21
39
0
6
21
22
th
cast
0
Days 22
18
Ap May Ju Ju n 616
22
l
Au
Se
O Nov
D
g
p
ct
ec
70
37 220
20
11
0
8
0
5
20
21
20
23
22
95
26 0
19
20
Avai lable
Suppose the company wishes to follow the average production rate (having a constant workforce size, no overtime or undertime, no subcontractors, and no capacity additions) to meet demand of each period. What safety stock should be present at the beginning of January month to follow a plan in which inventory changes will accommodate all fluctuations in demand? Also provide the ending inventories for each planning period. Solution: Total demand of products forecasted for the year = 3500 units (given) Total production days available during the year = 250 (given) Average production rate to be followed to meet this anticipated demand = 3500/250 Average Production Rate = 14 units/day
130
*Maximum (negative) Ending Inventory in any planning period is taken as the safety stock that must be added at the beginning. For this reason, 556 units (maximum negative ending inventory) has been taken as safety stock in the beginning in last column, and this safety stock has been added in each planning period. 2) Demand forecast figures for the product of a company are shown in the table below:
131
Mon Ja
Fe
M
n
b
ar
r
Fore 22
90
21
39
0
6
21
22
th
cast
0
Days 22
18
Ap May Ju Ju n 616
22
Au
Se
O Nov
D
g
p
ct
ec
l
70
37 220
20
11
0
8
0
5
20
21
20
23
22
95
26 0
19
20
Avai lable There are two aggregate plans out of which one is to be selected. The first plan is based on chase strategy in which demand is met by varying the size of workforce and results in hiring and laying off costs of Rs. 16,000/-. The second plan is based on level strategy where constant average production rate is followed and demand is met through inventory adjustments. The product cost is Rs. 100 per unit of product. The inventory carrying cost per unit per year is 20% of product cost. The inventory storage cost is based on maximum inventory and is Rs. 2/- per unit. Solution: Aggregate Plan I: Varying the Employment Level Operating Cost of Plan 1 = Rs. 16000/-
--
----------- ( I )
Aggregate Plan II: Inventories In this plan production rate is constant and equal to average production rate. Average Production Rate = 3500/ 250 = 14 units/ day
132
Unit cost of Product = Rs. 100/Inventory carrying cost per unit per year = 20% of product cost = .20/100 * 100 = Rs. 20/- per year Inventory carrying cost per unit per month = 20/12 = Rs. 1.67/- per unit per month
Month
Januar
Produ Producti Dem ction
on with
Days
Average Forec
22
18
April
Ending
Change
Inventor
Inventory
y
with
and
Producti
ast
Safety
on
for
Stock
Rate
the
added
Mont
(+566
h
units)*
22x14=
220
308-220=
18x14=
21
22
294
308
88
+88 90
252
ary March
Ending
308
y Febru
Inventory
210
396
4
252-90=
88+162=
566+250=8
+162
250
16
+84
84+250=
566+334=9
334
00
246
566+246=8
-88
133
566+88=65
10 May
22
308
616
-308
-62
566-62=504
June
20
280
700
-420
-482
566-482=84
July
21
294
378
-84
-566
566-566=0
August
22
308
220
+88
-478
566-478=88
Septe
20
280
200
+80
-398
566398=168
mber Octobe
23
322
115
+207
-191
191=375
r Novem
566-
19
266
95
+171
-20
566-20=546
20
280
260
+20
0
566-0=566
ber Decem ber =250
=35 00
(Inventory carried in different months is 654, 816, 900, 812, 504, 84, 0, 88, 168, 375, 546, and 566 units respectively. All these units of different months have been carried for a month’s period in inventory during the year)
134
Therefore, total number of units that have been carried in inventory for a month’s period (in the given year) = 654+816+900+ 812+ 504+ 84+0+ 88+ 168+ 375+ 546+ 566 = 5513 units Inventory carrying cost per year = (Inventory carrying cost per unit per month) * (number of units carried in inventory for a month’s period during the year) = 1.67 * 5513 = Rs. 9207/-
------------------ (a)
Inventory storage cost is based on maximum inventory requirement. Maximum inventory is in the month of March and is 900 units. Inventory storage cost per year = (Inventory storage cost per unit) * (Maximum inventory in a month during the year) = 2 * 900 = Rs. 1800/-
Total cost involved in inventory =
------------------ (b)
(Inventory carrying cost per year) +
(Inventory storage cost per year) = 9207 + 1800 = Rs. 11, 007/Operating cost of Plan II = Rs. 11,007/-
--------
----------- (II) Aggregate Plan (II) would be selected as the operating cost involved is less.
135
MASTER PRODUCTION SCHEDULING The first major activity in production planning is demand forecasting. Here, the anticipated demand requirements of company’s products for the future are obtained. After demand forecasting figures have been obtained, company has to decide how production should be carried out for the coming intermediate period (say, one year into the future) to meet the anticipated demand. This planning to decide the production strategy to be followed for an intermediate future period takes into account forecast figures, corporate policies and managerial inputs from all departments. The process of deciding this production strategy is called Aggregate Planning. After these two planning activities are complete, the next major production planning activity is to prepare the Master Production Schedule (MPS). Master Production Schedule (MPS) breaks the aggregate plan into specific quantities of individual products to be produced in designated time periods (relatively smaller periods as compared to those used in aggregate planning. Periods used in MPS are generally in weeks). MPS breaks the aggregate production plan into specific products schedules i.e. it details how many end items (and of what type) will be produced within specified period (MPS planning periods can be in hours, days, weeks or months, depending upon the firm and its products).
Difference in format used in Aggregate Plan and MPS
136
The following can be noted about MPS from the above table: i) For a particular planning period, the sum of quantities in the MPS is equal to that in the corresponding aggregate plan. ii) Each planning period of aggregate plan (in the example above, planning period is month’s period) is further split into smaller planning periods in MPS (here, split into weeks). The critical function of master production scheduling is to allocate the aggregate production quantities efficiently over its planning periods (e.g. production quantity of 600 units of September month shown in aggregate plan has been allocated as 150, 100, 200 and 150 units respectively in weeks 1, 2, 3 and 4 respectively of this month). This allocation is based on several factors which include : (a) historic demand (b) marketing and promotional considerations (c) lot size of each product type in each period of MPS is decided on the basis of set- up costs, working capital required for production of a lot etc.
137
(d) capacity limitations; this includes labour, machine, storage capacities, availability of spares. It is on the basis of the above mentioned factors that timing and size of MPS quantities is determined. FUNCTIONS OF MASTER PRODUCTION SCHEDULE The main functions performed by master production schedule are described a s follows:
a) Splits Aggregate Plan into more Specific Details Master Production Schedule (MPS) translates the aggregate plan into specific end items. Aggregate production plan takes into account the demand forecasts and customer orders and decides the production strategy to run production operations. It sets a level of operations that roughly balance market demands with the material, labour and equipment capabilities of the firm. Master Production Schedule translates this plan into specific number of end items or modules to be produced in specific time periods. Products are grouped into lot sizes that are economical to produce and realistically load firm’s facilities. MPS should neither, overload nor underload the firm’s facilities. b) Generates Material Requirements Master Production Schedule is the main input for Material Requirement Planning system of the firm. When end items appear on the MPS, it signals the MRP system to purchase/ produce necessary components for meeting delivery schedules. c) Evaluate Alternative Schedules 138
To prepare an acceptable master production schedule, is a trial and error work and rework (iterative) activity. First, a tentative master schedule is proposed (based on historic demand, promotional considerations etc.). Then, the end item requirements are extended into material requirements and capacity requirements to determine how the production system will respond to this proposed master schedule. In case, this schedule is not meeting the requirements, it is revised and new master schedule is prepared. Master Production Schedule (MPS) is revised until a schedule is obtained that satisfies all resource limitations or determines that no alternative schedule can be developed. In the latter case, the aggregate plan will have to be revised to adjust either production requirements or increase authorized resources. d) Results in Effective Utilization of Resources Master Production Schedule (MPS) specifies the end item requirements and thus establishes the load and utilization parameters for labour and available production facilities. To utilize the capacity most effectively, MPS may call for delaying some orders or building others ahead of demand. A good master schedule reflects economic usage of labour and machine capacities. When capacity requirements are not appropriate, master production schedule should be revised. e) Maintains Valid Priorities Master Production Schedule should set valid and right priorities. Priorities can be absolute (i.e. related to how far a job is behind or ahead schedule) or can be relative (i.e. a rank in comparison with other jobs). In either case, they should reflect the true needs i.e. the due date or rank should correspond with the time the order is actually needed. 139
Steps in Master Production Scheduling Process
Planning Horizon and Planning Periods Planning horizon refers to the total time period into the future for which MPS is prepared. Planning period refers to periods into which planning horizon is divided. Figure 3.3 illustrates these two terms. Planning Horizon and Planning Periods of MPS depend upon product type, volume and component lead times.
140
Planning Horizon and Planning Periods
PLANNING HORIZON (ONE YEAR)
Week
1
2
3
54
55
56
Product X
110
25
-
-
40
100
Product Y
40
-
110
100
-
-
PLANNING PERIODS (Time Intervals) Planning horizon can be short, a few weeks or can be long, a year for products with long manufacturing lead times. The planning horizon must extend far enough in advance so that the lead times of all purchased and assembled components are adequately encompassed. Time intervals (Planning periods) of MPS are generally the same as the time intervals (Time Buckets) for the corresponding MRP system.
TYPES OF MASTER PRODUCTION SCHEDULE There are two basic formats used in Master Production Schedule: the first type of format is used for firms based on make to stock approach and the second format is for firms based on make to order approach. Thus, there are two basic types of master schedules. Each type of MPS has been discussed and explained with an example.
141
MPS for Make to Stock Firms: Demand forecasts are the main input for master production schedule of firms based on make to stock strategy. The format used for MPS of such firms is shown as follows:
MPS for firms based on Make to Stock Strategy
The MPS shown in the above figure is using a planning horizon of roughly a quarter of a year (here, 13 weeks) and the planning periods are in weeks. MPS is said to have three portions namely Firm, Flexible and Open portion. ‘Firm’ portion of the MPS is in the very immediate future. No changes or revisions can be made to the production quantities listed in this portion. This is because this portion encompasses minimum lead times necessary for components. For quantities listed in this portion, orders have been placed for materials, components etc required or they have reached, routing and scheduling functions have been completed. Thus production quantities listed in ‘firm’ portion are practically freezed and no changes are accepted. In the example shown in Figure 3.4, period up to sixth week is being considered as firm portion. As each week passes, seventh week is advanced to the ‘firm’ portion.
142
The portion beyond the ‘firm’ portion up to the planning horizon is called ‘flexible’ portion. If some production quantities listed in the ‘firm’ portion could not be completed, they are passed to the ‘flexible’ portion. Changes in the early parts of ‘flexible’ portion should be discouraged. The portion of MPS beyond the planning horizon is termed as ‘open’ portion. This portion can accommodate changes as it is away at a very distant future and the time available is more than component lead times. It is this portion where trial-and-error work and rework activities are taking place to decide on lot sizes, valid priorities and other details. After the MPS has been prepared and accepted, it must be kept up to date. This means processing change orders as quickly as possible, rescheduling past due orders, and incorporating new orders into the schedule. MPS for Make to Order Firms: The master schedule for firms based on make to order approach is shown in Figure 3.5. Consider a company producing customized products of five different types. Suppose the plant capacity is 60 standard hours per day.
MPS for manufacturing organizations based on Make to Order Strategy
143
Numerical Problems on Master Production Scheduling (MPS): 1) A manufacturing firm produces electric blenders in lots of 90 units. Considering initial inventory (blenders’ already in stock) to be 60 units and demand forecast figures as shown the given table, develop a tentative master schedule for the given product. Production Run = 90
Week 1
2
3
4
5
6
7
8
9
10
Sales Force Estimate
40
15 30 40
60
40
50
--
--
--
Interplant Forecast
15
40 35 15
--
10
--
50
55 50
Initial Inventory = 60
Solution:
144
Production Run = 90 Initial Inventory = 60
Week
1
2
3
4
5
6
7
8
9
10
Total Forecast
55
55
65
55
60
50
50
50
55
50
Beginning Inventory
60
5
40
65
10
40
80
30
70
15
Production-Run
-
90
90
-
90
90
-
90
-
90
Ending Inventory
5
40
65
10
40
80
30
70
15
55
The function of MPS is to provide information regarding units of product to be produced in different planning periods to meet demand forecast figures. The above table shows that production (production runs) needs to be carried out in week 2, 3, 5, 6, 8 and 10. Hence the MPS is as follows:
Week
1
2
3
4
5
6
7
8
9
10
Production Required
-
90
90
-
90
90
-
90
-
90
2) The anticipated demand for a product produced by M/S Nanda & Sons is shown in the table below. The on-hand inventory for the product at the
145
beginning of the planning period is 40 units. Further the management has decided to keep a reserve amount of 30 units on hand as safety stock for periods of unusually heavy demand. (ending inventory should not drop below 30 units in any planning period).Develop a tentative master production schedule for the given data.
Production Run = 50
Week 1
2
3
4
5
6
7
8
9
10
10 20 25
20
15
10
10 20
15
10
Initial Inventory = 40
Demand Forecast
Solution:
Here, care has to be taken that ending inventories do not fall below 30 in any period.
Initial Inventory = 40
Week 1
2
3
4
5
6
7
8
9
10
10 20 25
20
15
10
10 20
15
10
Production Run = 50 Requirements
146
Beginning Inventory
40 30 60
35
65
50
40 30
60
45
Production Required
--
--
50
--
--
--
50
--
--
Ending Inventory
30 60 35
65
50
40
30 60
45
35
50
From the above table, the MPS is as follows: Week
1
2
3
4
5
6
7
8
9
10
Production Required
--
50
--
50
--
--
--
50
--
--
3) Sai Enterprises produces three types of products (X, Y, and Z) on receiving customer orders. The standard hours per unit of product and the proposed delivery schedule over the next five weeks are as shown in the following table. The capacity of the plant is 620 standard hours per week.
Standard Hours
Demand, Units/Period 1
2
3
4
5
Product
/ Unit
X
10
8
10
10
8
10
Y
60
4
8
2
---
2
Z
30
10
6
--
30
20
147
Prepare a tentative master production schedule for the given organization in make-toorder format. Also suggest the changes and recommendations to better utize the organization’s capacity.
Solution:
Produ ct
Period and Demand
Standard hrs/unit
1
2
3
4
5
X
8
10
10
8
10
10
Y
4
8
2
-
2
60
Z
10
6
-
30
2
30
620
760
220
980
820
Load
Cumulative Load = 3400
Capaci ty
620
620
620
148
620
620
Cumulative Capacity = 3100
The Master Production Schedule above shows that roughly 10% overloading is there. Either overtime can be used in periods 2, 4 and 5 or work from periods 2, 4 and 5 can be scheduled to period 3.
MATERIALS REQUIREMENTS PLANNING Materials Requirement Planning system (MRP System) is the function of operations management which ensures that all resources needed to produce finished products are available in the requisite quantity at the right time. In other words, MRP system keeps track of all materials, components and subassemblies required for the final product and ensures their availability when needed.
Independent Demand and Dependent Demand Independent Demand of a manufacturing organization is the demand whose value is influenced only by market conditions or other factors but does not depend upon demand of other items produced by the organization or held in its inventory. Independent demand is determined through demand forecasting, customer orders etc. The demand of different type of end items (finished products) produced by an organization comprises its independent demand. Dependent Demand of a company means demand, whose magnitude depends upon the demand of other items held in inventory. Let us explain the difference between independent and dependent demand with the help of an example. Suppose an organization produces different types of cycles. The demand of each type of cycle (each type of finished product) is independent demand. Demand of each type of cycle is influenced
149
by market conditions and/or other factors etc but does not depend upon any other type of cycles or components etc held in inventory. On the other hand, demand of components, subassemblies and other parts of the bicycle like pedals, frames, wheel rims etc is a function of demand of finished cycles demanded.
Suppose we wish to know the demand of pedals for some
period. The demand of pedals would depend upon the demand of cycles in which these pedals are used and also on the number of cycles which are already in inventory (to know the number of pedals already in stock).
Terms used in MRP System Parent: End product (finished good) manufactured from one or more components is called a parent, for example a cycle, a car etc. Component: It is an item which goes through one or more manufacturing operations and becomes a part of one or more parents, for example in the case of a cycle (parent), the pedals and rims are the components. The same type of pedals, rims etc. can be used in different models and hence can have more than one parents. Demand of parents is example of independent demand and demand of components is an example of dependent demand. Independent demand can be met effectively only when dependent demand is met effectively (i.e. when dependent demand items are available at the right time). It is here that Material Requirement Planning (MRP) system comes into picture. MRP system ensures availability of dependent demand items according to the need. MRP is a computerized information system which helps in managing dependent demand inventories and schedule replenishment orders.
150
Benefits of MRP System i) Material Requirement Planning (MRP system) calculates the (dependent) demand of components from the production schedule (MPS) of their parents and provides a better forecast of component requirements. This helps in ensuring availability of components, parts etc. at the right time, helps in reducing their inventory levels, better utilization of labour and capacity and ultimately better customer service. ii) Material Requirement Planning (MRP system) provides information on whether the tentative MPS prepared is practically feasible or needs a revision. Master Production Schedule gives information on how many products of which type have to be made in what period of time, what priority is to be followed etc. MRP takes this information and finds out what materials (to be purchased), what parts, components, subassemblies etc. (to be purchased or manufactured in-house) would be needed in different periods. It compares this entire requirement with available inhouse capacity, supplier limitations, and tells whether the given schedule can be met or needs a revision. Only when MPS meets all capacity constraints, supplier constraints, can it be accepted and MRP plays an important role in it. iii) MRP system automatically updates the dependent demand and inventory replenishment schedules of components when the production schedule of parent items change. The MRP system alerts the planners whenever action is needed on any component.
INPUTS FOR MRP SYSTEM 151
There are three main inputs required for preparing a material requirement plan
(MRP system). These inputs have been described as follows:
a) Bill of Materials b) Master Production Schedule c) Inventory Record Database
a) Bill of Materials Bill of material is a record of all the components of an item, the parentcomponent relationships, and the usage quantities derived from engineering and
process
design
considerations.
Parent-component relationship explains as to which component goes to which subassembly (immediate parent) etc. to make the end product. Further, usage quantities refer to the number of each component that goes into its immediate parent. The information provided by bill of materials is being explained with the help of the following wooden chair example. Parent-component relation and usage quantities for the chair example
152
The following can be noted about the finished product A (chair) and its various parts. A: only a parent and not a component. B, C and H: Both parent and component. For example, part B is component of finished product A and is parent to parts F and G. D, E, F, G, I, J are only components. From the inventory point of view, the following terms are important: END ITEM (A): It is the final product (finished good) sold to the customer. It is a parent and not a component. In accounting statements, inventory of end items is classified as finished good inventory. INTERMEDIATE ITEMS (B, C, and H): These are items having at least one component and at least one parent. Inventory of these items whether completed or on shop floor is classified as work in progress (WIP). Intermediate items are made from one or more type of components. SUBASSEMBLY: It is an intermediate item made by assembling more than one type of components. In the chair example; B, C and H are Intermediate Items. B, C are Subassemblies but H is not. Inventory of subassemblies is classified as WIP. PURCHASED ITEMS: These items come from the supplier. These have a number of components and one or more parents. Inventory is considered as raw materials.
Part Commonality (Modularity or Standardization of Parts)
153
The degree to which a component has more than one immediate parents so that same item appears at several places in the BOM of a product or the same item appears in the BOM of several products. Part Commonality increases the volume and repeatability of some items and results in several advantages like interchangeability, ease of maintenance, ease of availability, and reduction in inventory cost because of less variety.
b) Master Production Schedule The second main input required to prepare material requirements plan (MRP system) is MPS. MPS breaks the ‘aggregate plan’ into specific quantities of individual products to be produced in designated time periods. Let us consider that MRP is to be prepared for a firm producing three main type of products: Wooden Chair, Wrought Iron Chair, and Rocking Chair. The MPS for the firm is as follows:
MPS of the manufacturing organization for the chair example
c) Inventory Record The third and final input required to prepare MRP is ‘Inventory Record’. Inventory record are prepared from inventory transactions which include 154
receiving the scheduled receipts, adjusting due dates for schedules receipts, releasing new orders, canceling orders, withdrawing inventory etc. By recording these transactions, we obtain the inventory record database. Inventory Record divides the future time horizon into time intervals called ‘Time Buckets’. Time buckets can be in hours, days, weeks etc. depending upon planning periods being used in the corresponding MPS. Inventory Record shows an item’s, Lot Size Policy, Lead Time and other time phased data. The purpose of inventory record is to keep track of inventory levels and component replenishment needs. The time phased information contained in the inventory record consists of: Gross Requirements Scheduled Receipts Projected On Hand Inventory Planned Receipts Planned Order Releases Each of these terms (involved in time phased information) has been explained taking example of seat subassembly C. Gross Requirement: Gross Requirement is the total demand of an item (in different time buckets) derived from all parent production plans. It also includes the demand that is otherwise not accounted for; for example demand of replacement parts for units already sold. Suppose, seat subassembly ‘C’ is used in two parents (two types of finished products) namely wooden chair and rocking chair. Further suppose it is decided that seat assembly is to be produced in lots of 230 units and lead time is 2 weeks.
155
Gross requirement of the item, seat subassembly C is derived from the master production schedule requirements of its parents (MPS of wooden chair and rocking chair) taking care of the parent窶田omponent relationship and the usage requirements.
Inventory status record for seat subassembly in chair example
Scheduled Receipts: Scheduled receipts are also called Open Orders. Scheduled receipts are orders that have been placed (before the current inventory status record is computed) but yet not completed/received. In the inventory record example (shown above), one order of 230 units of item C is due in week 1. As item C has a lead time of 2 weeks, inventory planner would have released this order two weeks ago. For Purchased Items: Here, items contained in the scheduled order can be in one of the several stages: being processed by the supplier, being transported to the purchaser, being inspected by the receiving department etc. For In-House items: Here, items contained in the scheduled order can be in one of the several stages: being processed on the shop floor, being moved to the next processing work station, waiting for processing at a workstation etc. 156
Projected on-hand Inventory: Projected on-hand inventory is the inventory available in each planning period (each time bucket, here each week) after the gross requirements have been met. Beginning Inventory: Beginning inventory is the on-hand inventory available at the time when record (MRP record) is computed. In the example discussed here, beginning inventory is 37 units. Projected
Beginning
Scheduled
inventory
= Inventory in period ‘t’ (Inventory onin
period ‘t’
hand at the end of
on-hand
+
Gross
or Planned - Requirements Receipts of week ‘t’ in week ‘t’
week ‘t-1’)
The projected on-hand calculation includes the consideration of planned receipts (these are orders yet not released to the shop floor/ supplier). In any week, there will never be both a scheduled receipt and a planned receipt. In the example above, planned receipts are all zero. The on-hand inventory calculations for each week are: Week 1: 37 + 230 – 150 = 117 Week 2: 117 + 0 – 0 = 117 Week 3: 117 + 0 – 0 = 117 Week 4: 117 + 0 – 120 = -3 (negative inventory) Week 5: -3 + 0 – 0 = -3 Week 6: -3 + 0 –150 = -153 Week 7: -153 + 0 –120 = -273
157
Week 8: -273 + 0 –0 = -273
In week 4, the on-hand inventory projected is negative (shortage of 3 units is indicated). This condition signals the need for a planned receipt to arrive in week 4.
Planned Receipts: The function of planned receipts is to keep projected on hand inventory balance from dropping below zero. To find out the periods (here, weeks) requiring a planned receipt, the projected on hand inventory in every period is calculated until a shortage appears in any of the periods. In this period, a planned receipt is added, and this addition should increase the inventory balance to zero or above. Continue projecting till the next shortage occurs. This shortage signals the need for second planned receipt. This process is repeated until the end of planning horizon by proceeding column by column through the MRP record filling in planned receipts as needed and completing the projected on hand inventory row. Figure 3.10 MRP for seat subassembly in chair example
158
In the example above, in week 4, the gross requirement was 120 but on-hand inventory was only 117. As a result a planned receipt is required in week 4. Since the lead time of the component is 2 weeks, the order for this planned receipt must have been released two weeks earlier i.e. in Week 2. Similarly, in week 7, gross requirement is 120 whereas on-hand inventory is only 77 units. So a planned receipt of 230 units is required in week 7 and for that order will have to be released in week 5. So the new projected on-hand inventory for week 7 would be (77 + 230 – 120 = 187 units). Planned Order Releases: A planned order release indicates the time (planning period) when an order for a specified quantity of an item is to be issued. Planned Order Release time = Planned receipt date – lead time For the example here, a planned receipt is required in week 4; so Planned Order Release = Planned receipt date – lead time of item = 4th week – 2 weeks = 2nd week So, planned order would be released in 2nd week to obtain planned receipt in week 4.
PERFORMANCE OF MRP SYSTEM There are several factors which affect the performance of a MRP system. The important factors have been discussed as follows: i)
Planning Lead Time
ii)
Lot Sizing Rules
159
iii)
Safety Stock
Planning Lead Time Planning lead time is an estimate of the time between placing an order for an item and receiving it in inventory. Accuracy in the planning lead time is important for any MRP system. If an item arrives in inventory sooner than needed, inventory holding costs increase. On the other hand, if an item arrives later, stock-out costs have to be incurred. Items can be either purchased items or items built in-house. For purchased items, planning lead time is the time allowed for receiving a shipment from supplier after the order has been placed, including the normal time to place the order. Generally, the purchasing contract stipulates the delivery date. For items manufactured in-house, the planning lead time consists of estimates for set-up time process time, material handling between operations, and waiting time. Each of these times must be estimated for every operation along the item’s route. Waiting time means waiting time for material handling equipment or a machine to perform a particular operation. Waiting time is generally more difficult to estimate as compared to set-up time, process time etc. This time is more predictable if product routing is more standardized (product layouts) but is less predictable in flexible flow facilities (process layout etc).
Lot Sizing Rules Lot sizing rule for an item estimates the timing and size of its order quantities. Lot sizing rule has to be assigned to each item before planned
160
order releases and planned receipts can be computed. Lot sizing rules determine the number of set-ups required and the inventory holding costs for each item. There are three main lot size rules: a) Fixed Order Quantity rule (FOQ rule) b) Periodic Order Quantity rule (POQ rule) c) Lot for Lot rule (L4L rule)
Fixed Order Quantity Rule (FOQ rule):
Fixed Order Quantity rule
maintains the same order quantity each time an order is placed. The order quantity (lot size) can be decided on the basis of following factor  equipment capacity limits, as when a full lot must be loaded into a furnace at one time.  for purchased items, factors that can be considered for deciding lot size are truckload capacity, minimum purchase quantity, economic order quantity etc. In the example discussed in the last section, Fixed Order Quantity rule has been followed and lot size quantity taken was 230 units.
Periodic Order Quantity Rule (POQ): The Periodic Order Quantity rule allows a different order quantity for each order but tends to issue the order at predetermined time intervals such as every two weeks etc. The order quantity equals the amount of item needed during the predetermined time between orders and must be large enough to prevent shortages. In other words, order is placed in such a manner (quantity) that it covers the gross requirements of not only the planned receipt week but also some subsequent weeks. Each order covers gross requirements of P subsequent weeks, where 161
P
EOQ or Average lot size desired or any other applicable lot size average weekly demand
POQ lot size to arrive = Total in period ‘t’
gross - Projected
on-
requirements for ‘P’
hand
periods
at the end of
including
period ‘t’
inventory
period ‘t-1’
In the example shown in figure 3.10; suppose in the given example, rather than FOQ rule, POQ rule is used with P= 3. The first order is required in week 4, where on-hand inventory becomes negative. The first planned order using P = 3 will be; POQ lot size to arrive = Total in the 4th week
gross - Projected
on-
requirements for P = 3
hand
periods
at the end of 3rd
including
period‘t’ i.e. total gross
inventory
week.
requirements for 4th, 5th, and 6th week =
(120 + 0 + 150) – (117)
= 153 units MRP for seat subassembly in chair example with POQ Lot Sizing Rule
162
At the end of week 4, projected on-hand inventory is 150 units (117 + 153 – 120 = 150 units). In week 5, inventory is still 150 units (as no gross requirements in this week). Then in week 6, projected on-hand inventory becomes 0 (150 + 0 – 150 = 0 units). So the next planned receipt is required in week 7. The lot size required in week 7 is 120 units (there are only two weeks worth of gross requirements to end the planning horizon: week 7 and week 8; therefore required lot is of size = 120 (for week 7) + 0 (for week 8) =
120
units.
Here, it should be remembered that POQ rule does not mean that order has to be placed every ‘P’ periods. It rather means than whenever a planned order release is made, it takes care of gross requirements of ‘P’ successive periods.
Lot for Lot Rule: It is a special case of POQ rule in which the lot size ordered covers the gross requirements of a single period (in other words it means P = 1). This lot sizing rule minimizes inventory levels. The rule ensures that the planned order is just large enough to prevent a shortage in a single period it covers.
163
L4L
lot
size
to = Gross Requirements for - Projected
arrive in week ‘t’
week ‘t’
hand
on-
inventory
at the end of week t-1 At the end of week t, projected on hand inventory combined with the new order will equal zero. MRP for seat subassembly in chair example with L4L Lot Sizing Rule
Selection of Lot Sizing Rule: The choice of lot sizing rule decides the inventory costs, set-up/ordering costs etc. Different lot sizing rules differ from each other in one or more of these costs. Let us explain this with the help of seat subassembly example discussed in earlier sections. In the given example, all the three rules come into effect in week 4 with the requirement of first planned receipt. For the first three weeks (week 1, 2, and 3, inventory is same with all the rules). A comparison of the projected onhand inventory averaged from Week 4 (when first planned receipt comes) to
164
Week 8 (end of planning horizon) is shown:
FOQ Rule: Average
Inventory = (227 + 227 + 77 + 187 + 187)/5 = 181 units
POQ Rule:
Average Inventory = (150 + 150 + 0 + 0 + 0)/5 = 60 units L4L Rule: Average Inventory = (0 + 0 + 0 + 0 + 0)/5 = 0 units The following points can be noted about different lot sizing rules from the above analysis: FOQ rule generates high average inventory because it creates high ‘Inventory Remnants’. Inventory Remnant means inventory that is carried forward but is too small to prevent a shortage. Inventory remnants occur because FOQ does not match the requirements exactly (Inventory Remnant is that lowest inventory balance of any week during FOQ, which even if decreased from every weekly inventory balance, the inventory of each week will still be positive). In the example discussed here, the first planned receipt comes in week 4 (of 230 units). Second planned receipt comes in week 8. For week 4, there were 117 units as onhand inventory balance at the end of week 3. Similarly, for week 7, there were 77 units as the inventory at the week 6. Now, out of 117 units & 77 units, since 77 units is the smaller value, it is the inventory remnant. It is being called remnant because 77 units were available as on-hand inventory in week 6 but could not avoid shortage of its subsequent period (week 7). Further, even if this remnant is decreased from inventory balances of week 6, week 5, week 4 (i.e. up to when first order was placed), still on hand inventory would be positive. So in this case, the inventory remnant is 77 units which would be carried in inventory for three weeks (week 4, 5, 6) beginning with the receipt of first planned order in week 4. Though Inventory Remnants increase inventory levels,
165
but these stabilize the production process by buffering unexpected scrap losses, capacity bottle necks, inaccurate inventory records and unstable gross requirements etc.  POQ rule reduces the amount of average inventory levels because it does a better job of matching the order quantities to requirements. It varies the lot size to be ordered as the requirements increase or decrease.
Comparison of different Lot Sizing Rules
166
 L4L rule minimizes the amount of average inventory levels as it exactly matches the order quantities to the production requirements. It also varies the lot size to be ordered as the requirements increase or decrease. But this rule also maximizes the number of orders placed. This rule is most applicable to expensive items (so that their inventory is minimum) or items with small ordering/ set up costs. This is the only lot sizing rule for make to order, low volume items.  The POQ rule & L4L rule tie the lot sizing decision very closely to the production requirements. As a result these rules are able to avoid
167
inventory remnants. But on the other hand with reduced/ no inventory remnants, instability is introduced. For Example rush orders in finished products will not be taken up effectively because with no inventory remnants in MRP system, components required will not be available.
SAFETY STOCKS If there is uncertainty with regards to either future gross requirements, or the timing and the size of scheduled receipts, or the amount of scrap generated during production, the manufacturing firm must keep some safety stock of its dependent demand items. If the causes of uncertainness can be eliminated, safety stock levels can be reduced and ultimately removed. Generally, safety stock is kept for end items and purchased items to protect against fluctuating customer orders, unreliable suppliers of components etc. Safety stocks can be incorporated in the MRP logic by scheduling a planned receipt whenever the projected on–hand inventory balance drops below the desired safety stock level (some minimum positive number of units, rather than zero as discussed in the example in earlier sections).
MATERIALS REQUIREMENT PLANNING EXPLOSION Material Requirement Planning (MRP) translates the Master Production Schedule (MPS) of finished products into requirements of all subassemblies, components and raw materials needed to produce parent items. Consider the seat assembly (C). The MRP record of this intermediate item can be obtained using MPS of its parent (wooden chair), Bill of Materials (for parent-component relationship and usage requirements) and Inventory
168
Record database. The MRP records of the components of seat sub-assembly; Frame, Cushion, Frame Board is obtained with the explosion of MRP record of their parent, seat subassembly (C). MRP record of the components implies, determining the timing and size of gross requirements for each component and the planned order release schedule for each component. These can be determined by MRP explosion. Suppose the following data has been given: For Frame: Use FOQ of 300 units For Cushion: Use L4L For Frame Boards: Use FOQ of 1500 units. Components have no independent demand for replacement etc. Parent-component relation and usage quantities for seat subassembly example
169
The MRP record of Seat Subassembly is shown in figure (1). Now let us see the MRP record of its components viz. seat frame, seat cushion and seat frame boards. We need to determine the timing and size of gross requirements for each component and the planned order release schedule for each component The point to be remembered is that gross requirements of a component come from planned order releases of its immediate parent. Suppose a planned receipt of 230 units of seat subassembly is required in week 4. Seat subassembly has a lead time of 2 weeks. So to get planned receipt of 230 units in week 4,
MRP records of parent and its components (Seat Subassembly Example)
170
planned order release will have to be done in week 2. Now if order of 230 units for seat subassembly has been placed in week 2 and planned receipt is required by week 4, order can be completed only if all components required for seat subassembly are available in week 2. So from week 2 onwards processing would be done on components and planned receipt would become available in week 4. This means 230 units of seat cushion (component of seat subassembly) should be present in week 2. Thus gross 171
requirement of cushion is 230 units in week 2, which comes from planned order release date of its parent. Similarly 2nd planned order release of seat subassembly would provide data on gross requirement of cushion. Based on this logic, gross requirements of all components is obtained and filled in their respective tables. The figure below shows the MRP record generated for seat subassembly (C) and all its components.
CAPACITY PLANNING Before products can flow into the market, someone must design and invest in the facilities required to produce them. Manufacturing systems often produce standardized products in larger volumes. The plant and machinery have a finite capacity and constitute fixed costs that must be borne by the product produced. Variable cost is added as labor is employed to combine or process the raw materials and other components. The physical product is thus the store of the value added during the production process. Service system represents more uncertainty with respect to both capacity and costs. Services are often produced and consumed in the presence of the customer, and there is little or no opportunity to store value, as in a finished goods inventory. As a result, capacity of service instates like hospitals, restaurants etc must be sufficiently flexible to accommodate a highly variable demand. Capacity is the rate of productive capability of a facility. Capacity is usually expressed as volume of output per time period. Capacity should always be sufficient to meet customer demand. Capacity Planning is the first step when an organization decides to produce more or a new product.
172
Relationship of Capacity and Location Decisions: Often decision about capacity is inseparable from decisions about location. Capacity depends upon demand and demand often depends upon location. Commercial banks, for example, simultaneously expand capacity and demand by building branch banks. Decision about the size and location of the branch are made according to projections about neighboring population density and growth, geographic locations of market segments, transportation flows, and the location of competitors.
Design Capacity: Preliminary estimates of capacity typically come from long-range forecasts that may project demands as much as 5 or 10 years into the future. Long-range projections allow enough lead time for construction of major facilities. The design capacity of a facility is the planned rate of output of goods or services under normal or full scale, operating conditions. For example, a college may need enough classrooms and staff to accommodate 10,000 students. The uncertainty of future demand is one of the most perplexing problems facing new facility planners. Steel companies are uncertain of the demands of the steel from automobile manufacturers. Universities are uncertain of the future enrollment, and hospital administrators hope that everyone doesn’t become ill at the same time. Although some trends in demand may be evident, seasonal and cyclical often generate swings in demand and random events often cause fluctuations. Organizations do not necessary plan for enough capacity to satisfy all their immediate demand. For example, if an airline maintains
173
enough regular capacity to meet its (holiday) peak demands, its airplanes and personnel would not be utilized effectively during the remainder of the year.
System Capacity: System capacity is the maximum output of a specific product or product mix that the manufacturing system (of workers and machine) is capable of producing as an integrated whole. It is typically less than or equal to the design capacity of the individual facilities because the system may be limited by the product mix, quality specifications or the current balance of equipment and labor. System Efficiency is defined as the ratio of Actual Output to the System Capacity.
Measures of Capacity: No single capacity measure is applicable to all type of situations. Restaurants measure capacity as the number of customers that can be served per day; a theatre measures capacity as the number of seats available per show. In general, capacity can be expressed in either of the two ways: i) Output Measures
ii) Input Measures
Output measures are generally used for line flow process. Output measures are best utilized when the firm provides a relatively small number of standardized products and services. For example, an automobile company has stated its capacity as 100,000 units per year. As the amount of customization and variety in the product mix becomes excessive, output based capacity measures become less useful. Here, input measures are more appropriate. Input measures are more appropriate for 174
flexible flow processes. For example, in a photocopy shop, capacity can be measured in machine hours or the number of machines. Just as product mix can complicate output capacity measures so too can demand complicate input measures. Demand which invariably is expressed as an output rate must be converted to an input measure. Only after making these conversions a manager can compare demand requirements and capacity on an equivalent basis. For example, a manager at a photocopy centre must convert its annual demand of copies from different clients to the number of machines required. A discrepancy between the capacity of an organization and the demand of its customers results in inefficiency, either in under-utilized resources or unfulfilled customers. The goal of capacity planning is to minimize this discrepancy. Better utilization of existing capacity can be accomplished through improvements in overall equipment effectiveness (OEE). Capacity can be increased through introducing new techniques, equipment and materials, increasing the number of workers or machines, increasing the number of shifts, or acquiring additional production facilities.
Utilization: Capacity planning requires knowledge of current capacity and its utilization. Utilization is the degree to which equipment, space, or labor is currently being used, and is expressed as a percentage.
Utilization (%) = (Average Output Rate/ Maximum Capacity) * 100
175
The greatest difficulty in calculating utilization lies in defining Maximum Capacity. Two definitions of maximum capacity are useful: Peak Capacity and Effective Capacity. Peak Capacity: The maximum output that a process or facility can achieve under ideal conditions is called Peak Capacity. When capacity is measured relative to equipment alone, the appropriate measure is Rated Capacity. Peak Capacity can be sustained only for a short time. Effective Capacity: The maximum output that a process or a firm can economically sustain under normal conditions is its Effective Capacity. In other words, Effective Capacity is the greatest level of output that a firm can reasonably sustain by using realistic employee work schedules and the equipment currently in place.
Capacity Planning: It is the process of determining the production capacity needed by an organization to meet changing demands for its products. Capacity Planning is concerned with defining long and short term capacity needs of the organization and determining how these will be satisfied. It is the task of calculating how much output is needed from an organization’s manufacturing facilities and/or those of its suppliers in order to meet production targets. Capacity Requirement Planning (CRP) compares the load with capacity and determines whether the planned output from the master schedule and MRP can be achieved. Capacity Planning is a long term strategic decision that establishes a firm’s overall level of resources. It extends over a time horizon long enough to obtain those resources. Inadequate capacity can result in lose of potential 176
customers and limit growth. Excess capacity can drain organization’s resources because the organization is paying for more land, equipment, larger building than what is actually required and thus prevents investment in more lucrative ventures. Some important terms used in explaining Capacity Planning are Load and Capacity Control. These have been defined as follows:
Load: Load is the amount of work that must be carried out to meet all outstanding orders. It is generally expressed in hours of work required to be done in a stipulated time period (man hours, machine hours etc.). Output is the rate at which work is completed or taken from a production facility. Comparing load with capacity is also a useful general indicator of the planned utilization of a production facility.
Capacity Control: Capacity Control is closely associated with Capacity Planning. It is the task of comparing planned (or forecast) output with output actually achieved, and taking corrective action if output falls significantly below planned levels. This usually means increasing capacity by adding more staff or work centers, or working overtime or by decreasing the load. The less preferable alternative of adjusting the master production schedule is widely considered to be a last resort. Priority planning is the process of specifying batch quantities and their start and finish dates for all items that need to be manufactured or procured. Priority control is the process of ensuring that the right things are manufactured.
177
Loading methods: Work centers (machines) can be loaded on either a finite or infinite basis. A work centre is said to be finitely loaded if the loading is within the work centre’s capacity constraints or limitations. The work centre is said to be infinitely loaded if the loading disregards the work centre’s capacity constraints.
CAPACITY PLANNING DECISIONS
The various decisions involved during Capacity Planning are shown in Figure 3.16. These range from long-term capacity decisions down to shortterm shop floor monitoring and control decisions. The source of data changes as one move down this hierarchy. Resource Planning takes its capacity requirements from the Aggregate Production Plan and Demand Forecast figures, Rough-cut Capacity Planning uses Master Production Schedule as the source of its information, Capacity Requirements Planning and the remainder of these shorter-term planning modules take their loading data from the Material Requirements Plan. The main steps in Capacity Planning are to identify the capacity requirements for the present and the future, develop and evaluate various capacity alternatives. Capacity alternatives are evaluated by determining the predicted impact on cost, profit and customer service. Thus, the steps involved in Capacity Planning comprise of the following general steps: i) Assessing existing capacity. ii) Forecasting capacity needs.
178
iii) Identifying alternative ways to modify capacity. iv) Evaluating alternatives on financial, economical, technological basis. v) Selecting the most suitable capacity alternative.
Capacity Planning Decisions
Capacity Planning Strategies: There are three main strategies namely; Lead Strategy, Lag Strategy, and Match Strategy.
179
A)
Lead strategy: This involves adding capacity in anticipation of an increase in demand. Lead strategy is an aggressive (proactive) strategy with the goal of attracting customers away from the competitors. The possible disadvantage of this strategy is excess inventory (if anticipated demand does not come out to be actually there) which can be costly and often wasteful.
Expansion of capacity involves time, cost, benefits and risks. It also avoids risk of losing future business, beats inflation and precludes incurring higher cost of building. It is risky because the demand may not materialize leading to gross under-utilization of assets. Cost per unit of output is higher when demand is lower than the optimum capacity and also when the demand exceeds the optimum level as the additional output is realized by excessive overtime. One-step expansion reduces the risk of not meeting demand and avoids frequent decisions regarding capacity additions. But disadvantages include higher risk of capacity mismatch, higher cost of obsolescence and idle or under-utilized capacity.
Figure 3.17 Lead Strategy with One Step Extension
180
If there are incremental changes in capacity as shown in the figure below, then increase in capacity will bring down the cost per unit to a minimum level. Beyond this optimum level, a further increase in capacity would again increase the cost.
Lead Strategy with Incremental Expansion
B)
Lag strategy: This involves adding capacity only after the organization is running at full capacity or beyond due to increase in demand. This is a
181
more conservative strategy. It decreases the risk of waste, but it may result in the loss of possible customers (potential lost sales).
Lead Strategy with Incremental Expansion
C)
Match Strategy: It involves adding capacity in small amounts in response to changing demand in the market. This is a more moderate strategy.
Moderate Strategy with Incremental Expansion
182
FUTURE CAPACITY NEEDS Capacity requirement can be evaluated from the two extreme perspectives: a) Short term capacity needs b) Long term capacity needs Long Term Capacity Planning: Long term capacity planning is concerned with accommodating major changes that affect the overall level of output in the longer term. Decisions to develop new product lines and expand existing facilities are examples of long term capacity decisions, and take a long time to implement-often more than a year. Long term capacity planning relates primarily to strategic issues involving firm's major production facilities. In addition, long-term capacity issues are interrelated with location decisions. Long-term capacity planning may evolve when short-term changes in capacity are insufficient. For example, if the firm's addition of a third shift to its current two-shift plan still does not produce enough output, and subcontracting arrangements cannot be made, one feasible alternative is to add capital equipment and modify the layout of the plant (long-term actions). It may even be desirable to add additional plant space or to construct a new facility (long-term alternatives). Short Term Capacity Planning: Short term capacity planning is concerned with issues of scheduling, labor shifts, and balancing the resource capacities. The goal of short-term capacity planning is to handle unexpected shifts in demand in an efficient economic manner. The time frame for short-term planning is frequently only a few days but may run as long as six months. Alternatives for making short-term changes in capacity are fairly numerous and can even include the decision to not meet demand at all. The easiest and
183
most commonly used method to increase capacity in the short term is working on overtime. This is a flexible and inexpensive alternative. While the firm has to pay one and a half times the normal labor rate, it foregoes the expense of hiring, training, and paying additional benefits. When not used abusively, most workers appreciate the opportunity to earn extra wages. If overtime does not provide enough short-term capacity, other resourceincreasing alternatives are available. These include adding shifts, employing casual or part-time workers, using subcontracting etc. Firms can also increase capacity by improving the use of their resources. The most common alternatives in this category include worker cross training and overlapping or staggering shifts. Most manufacturing firms inventory some output ahead of demand so that any need for a capacity change is absorbed by the inventory buffer. From a technical perspective, firms may initiate a process design intended to increase productivity at work stations. Manufacturers can also shift demand to avoid capacity requirement fluctuation by backlogging etc. Service firms accomplish the same results through scheduling appointments and reservations. Creative Pricing during off-peak seasons is another option. ROUGH CUT CAPACITY PLANNING Rough Cut Capacity Planning evaluates a tentative master production schedule (MPS) with respect to available productive capacity. Rough cut capacity planning verifies that adequate capacity is available to meet the requirements of master schedules. It is an approximate type of capacity planning using some load profiles defined for the product families, focused on key or critical work centers, lines, departments, suppliers etc. For rough-
184
cut capacity planning, key or critical resources are ones that are important, although not necessarily constant bottlenecks. RCCP is a long-term capacity planning tool used to balance required and available capacity, and to negotiate changes to the master schedule and/or available capacity. Changes in master schedules can be made by changing master schedule dates or scheduled quantities. Changes in capacity can be made by changing available capacity by adding or removing shifts, using overtime or subcontracted labor, and adding or removing machines. RCCP is a gross capacity planning technique that does not consider scheduled receipts or onhand inventory quantities when calculating capacity requirements. Rough cut capacity plans are therefore a statement of the capacity required to meet gross production requirements mentioned in the tentative MPS.
RCCP Techniques: There are three main techniques or procedures for Rough Cut Capacity Planning: a) Capacity Planning using Overall Factors (CPOF) b) Bill of Capacity c) Resource Profiles
Capacity Planning using Overall Factors (CPOF): This technique requires three data inputs: the MPS; the time the total plant requires to produce one ‘typical’ product; and the historical proportion of total plant time required by each key resource. If there is more than one product family, a typical part time is required for each family. The ‘typical’ component time is multiplied
185
by the MPS quantity to obtain the total time required in the entire plant to meet the MPS. This time is then apportioned among the key resources by multiplying the total component time by the historical proportion of time used at each resource. Capacity using overall factors is a simple, manual approach to capacity planning that is based on the master production schedule and production standards that convert required units of finished goods into historical loads on each work center.
Bill of Capacity: This technique is also known as bill of labor or bill of resources approach. It uses more detailed data on the time standards for each product at the key resources. The bill of labor can be perhaps most easily understood as a listing-by item or part number-of the amount of significant labor required to produce that item. It is not intended to be a routing; it is merely a means of estimating the capacity requirements. Capacity requirements can be determined by multiplying the number of units required by the MPS by the time needed to produce each.
Resource Profiles: This technique is the same as bills of capacity approach, except that the lead times are included so that workloads fall into the correct periods. The resource profile technique is the most detailed rough cut approach, though not as detailed as full-blown capacity requirements planning (CRP). It is similar to the bill of labor method in that it requires time standard data, but it also requires the lead times necessary to perform certain tasks. CAPACITY REQUIREMENTS PLANNING 186
Capacity Requirements Planning (CRP): CRP is a kind of planning management method to check and ratify the capacity with regards to materials requirement. Materials requirement planning‘s (MRP) object is materials, which is concrete and visual; capacity requirement planning’s (CRP) object is capacity, which is abstract and changeable according to working efficiency, ratio of being on duty and ratio of good equipment. Capacity requirement planning transforms materials requirement to capacity requirement, estimates the usable capacity and makes sure the adoptable measures, in order to harmonize the relation between capacity requirement and usable capacity. Capacity requirement planning transforms the capacity requirement brought by production order form under MRP into the burden of every work center in every period. CRP uses information from one of the previous rough-cut methods, plus MRP outputs on existing inventories and lot sizing. The result is a tabular load report for each work center or a graphical load profile for helping plant-production requirements. CRP indicates where capacity is inadequate or idle, allowing for imbalances to be corrected by shifts in personnel or equipment or the use of overtime or added shifts. Capacity Requirement Planning (CRP) is a medium range capacity planning tool as shown in Figure 3.21. Scope of Capacity Requirements Planning
187
There are two types of loading in CRP: Finite and Infinite Loading. In finite loading, planners consider the total capacity of a work centre and do not load it beyond its capacity constraints and limitations. A work centre is said to be infinitely loaded if the loading disregards the work centre’s capacity constraints or limitations. A planner can decide whether delaying the order release, subcontracting the job, splitting the job into several smaller jobs, routing through an alternative work centre, or authorizing overtime will best eliminate the over/under load on the work centre and still get the job done on time. MANPOWER REQUIREMENT PLANNING
188
The main objective of Manpower Requirement Planning is ‘Getting the right people in the right jobs at the right time.’ Today, in this increasingly global labor market, borders are fading and individuals can move more freely to find work. This has forced organizations to take a more strategic view of managing their workforce. These outcomes can be achieved through four broad themes: Inform, Attract, Develop and Retain. This same framework can be applied at a micro level by an employer or industry sector in developing a strategic workforce plan. Workforce planning is a systematic process for identifying and addressing the gaps between the workforce of today and the human resource needs of tomorrow. It provides the foundation for strategic human resource decisions. As with any planning, this process draws together program management, human resources, budgeting, and program staff. Manpower Requirement Planning is used to plan for future labor needs, changes and challenges. It examines the current workforce and takes a strategic look at what the future workforce demands will be to develop a human resources plan of action. It inolves identifying, assessing, developing and sustaining employee workforce skills required to successfully accomplish business goals and priorities while balancing the needs and expectations of employees. Through this process, organizations gain insight into their workforce capacity and labor needs so they can make strategic human resources decisions and take purposeful, timely action towards developing their people. Essentially, strategic workforce planning is identifying gaps between the labor demand of an organization and the available workforce supply, leading to strategies used to close those gaps.
189
Workforce
planning
requires
strong
management
leadership
and
cooperative, supportive efforts of staff in several functional areas. Strategic planning, budgeting, and human resources staff are key players in workforce planning. Human resources staff provides tools for identifying needed competencies and for building the future workforce through strategic recruitment, training, development, and retention techniques. Although there is no universally accepted method for developing a strategic workforce plan, most workforce planning models include the following elements: Current Workforce Profile,
Environmental Scan,
Future Workforce Demands,
Workforce Gap Analysis, Strategy Development.
QUESTIONS
1. What is the role of aggregate planning in a manufacturing firm? Explain
with an example. 2. Name some pure reactive aggregate strategies which manufacturing firms
can use. Explain the workforce adjustment strategy. 3. What is the difference between paid and unpaid undertime? Explain with
the help of examples. 4. Discuss the various costs associated with inventories and subcontracting
strategy when demand increases and decreases. 5. Why aggressive aggregate strategies are better as compared to reactive
strategies? 6. Explain the difference between a chase and level strategy. 190
7. Discuss the various functions of a master production schedule. 8. For firms based on make-to-stock strategy, discus the general format
used for the MPS. Explain the characteristic features of the different portions of the MPS.
Week Initial inventory = 40 Production run = 50
Customer forecast
1
2
3
4
5
10 5
5 Service forecast 10 15 10 10 Domestic
191
5
10
6
7
8
9
10
5 10 10 15 10
10
orders
5
5
5
International orders
9. Shown below is the expected demand for bank card machine keyboards
manufactured at a plant. The firm produces in lots of 50 units and currently has 40 units on hand. It plans to keep a reserve amount of 30 units on hand as safety stock (SS) for periods of unusually heavy demand. Develop a tentative master schedule for the keyboards (in other words, one that doesn’t allow ending inventories to drop below 30 units).
10. What is an Open Order in the context of MRP systems? Discuss the
various stages where the item may be present when in an open order.
192
11. Define and state the importance of Lot Sizing rules? Explain the lot
sizing rule generally applied to extremely expensive items. 12. With a neat labeled block diagram explain the scope of Capacity
Requirement Planning.
Production Control Every manufactured product has some planning associated with it. For manufacturing systems, this is technically referred to as Process Planning. One of the first tasks of manufacturing personnel when they receive new drawings is to develop the process plan. Process Planning determines how a product will be produced or a service will be provided. It decides which components will be made in-house and which will be purchased from a supplier; selects processes and specific equipment; develops and documents the specifications for manufacture and delivery. Process planning encompasses the activities and functions to prepare a detailed set of plans and instructions to produce a part. The planning begins with engineering drawings, specifications, parts or material lists and a forecast of demand. The results of the planning include the following: 
Routing function, which specifies the operations and their sequences, work centers, standards, tooling and fixtures.

Process Plans which provide more detailed, step-by-step work instructions including dimensions related to individual operations, machining parameters, set-up instructions, and quality assurance checkpoints.

Fabrication and assembly drawings to support manufacture (as opposed to engineering drawings to define the part). 193
MAKE OR BUY DECISIONS In the past, manufacturing firms did not want to be dependent on others and used to control the production of virtually all their component parts, including the source of raw materials. But today, outsourcing is more common as manufacturing firms partner with a number of suppliers to provide products and services to their customers. For process planning, firms have to decide which items will be purchased from an outside supplier and which will be produced in-house. This first-cut sourcing decision is called make-or-buy. Make-or-buy decision rests on an evaluation of the following factors. i)
Cost: The primary condition in most make-or-buy decisions is answer to the question: whether it would be cheaper to make the item or buy it? In other words, whether to perform the service in-house or subcontract it out?
ii)
Capacity: Companies that are operating at less than full capacity usually manufacture components in-house rather than buying them. Sometimes the available capacity is not sufficient to make all the components, so choices have to be made. The stability of demand is also important.
iii)
Quality: The capability to provide quality parts consistently is an important consideration in the make-or-buy decision.
iv)
Speed: Sometimes components are purchased because a supplier can provide goods sooner than the manufacturer. The smaller supplier is often more flexible and can adapt quickly to design and technology changes.
194
v)
Reliability: Suppliers need to be reliable in both the quality and the timing of what they supply. Unexpected delays in shipment or partially filled orders because of quality rejects can have severe bad effects.
vi)
Expertise: Companies that are especially good at making or designing certain items may want to keep control over their production. For example, automobile firms might outsource many of their component parts, they need proprietary control over major components such as engines, transmissions etc.
PROCESS PLANS The set of documents containing details with regards to manufacturing and delivery specifications is called a Process Plan. It includes information on the following: a) Blueprints: Detailed drawing of product design. b) Bill of Material: A list of the materials and parts that go into a product. c) Assembly Chart or Product Structure Diagram: A schematic diagram that shows how various parts combine to form the final product (parentcomponent relationship and usage requirements). d) Operations Process Chart: A list of operations to be performed in fabricating part, along with the time required completing each operation, specific tools, fixtures, and gauges needed, and how the machine is to be set up and operated. e) Routing Sheet: An ordered list of machines or workstations that shows where a part is to be sent for its next operation.
195
Figure 4.1 Scope of Process Planning
PRODUCTION CONTROL
Production Control helps to regulate an orderly flow of input material and co-ordinate all production activities in the most effective way through functions like Routing, Scheduling, Dispatching and Evaluation to accomplish the objective of producing desired product/ item in right quantity of desired quality at required time and place by the best and cheapest method. This helps to achieve increased production efficiency. Production Control consists of following four functions:
196
Routing: connected with where the work is to be done. Scheduling: connected with when the work is to be done. Dispatching: connected with starting the work in the plant. Follow-up or Progress Reporting: collection of information on the progress of work.
ROUTING Routing means determination of the route (path) to be followed by each part/component (item) being transformed from input/raw material into final product. Routing involves determination of the necessary sequence of operations which must be done on the material to make the product. Routing is specified on a route sheet which identifies the operations to be performed with their sequence and materials; tolerances, tools and time allowances. Following questions decide how the job is routed.  If a job has a number of operations which can be done in different orders, which ordering should be used?  If an operator has choice of many machines with different process time and machine time, which machine should be chosen?  Should a job be sent to the flexible manufacturing cell or be done by an expert on a manual all purpose machine? In situations where only one single part/product is produced by a fixed set of machines, routing becomes automatic or mechanized. In continuous production systems with line type or product type layout, no managerial
197
effort is required for routing though different sets of machines. For different types of products to be manufactured, like in intermittent production system, routing becomes a complex task. Routing of production order contains complete information of the product to be manufactured, complete details of each operation to be performed, material required, the set up time and standard time needed for completing the job/product.
Routing Procedure Routing procedure involves the following major activities. i)
An analysis of the product to determine what to make and what to buy.
ii)
Determining the quality and type of material.
iii)
Determining the manufacturing operations and their sequence.
iv)
Determination of lot sizes.
v)
Determination of Scrap Factors.
vi)
Organization of production control forms.
vii)
An analysis of cost of the article.
These factors have been briefly discussed in the following sections.
Make and Buy Decision The product is analyzed to determine its component parts and decision is made whether to manufacture all its parts in-house or to purchase them from
198
outside. For example a bicycle company may decide to manufacture all its parts/components by itself or buy some of them like chains, tyres, tubes etc from outside. The decision to make or to buy is in view some factors which have already been discussed in Section 4.2.
Quality, Quantity and Type of Material After proper analysis of the product, the quality and quantity of materials required is determined and the ‘Bill of Materials’ is prepared. Bill of Materials (BOM) describes all the components/parts (purchased and to be manufactured) at every level of manufacturing process. Bill of Materials is a listing of all the assemblies, intermediates, parts and raw material that go into a parent assembly showing the quantity of each required to make that assembly. From BOM, the quantity of material required for each part is derived and accordingly can be procured. Some firms prepare separate lists for finished components and raw materials. To know how much material is to be purchased or procured the amount of materials in the stores (Beginning Inventory) should be known. A typical format used for preparing Bill of Materials is shown in Figure
Determining Manufacturing Operations and Sequence
The next step in routing function of the product is to determine the operations involved in manufacturing of each of its parts, sub-assemblies and assemblies. These operations are then analyzed to determine their
199
sequence. The routing decision establishes the operations necessary for processing the product and lists them in their sequence on Route Sheet or Operation Sheet.
Figure Bill of Materials Format
Determination of Lot Size
Routing function can also contribute in determining the number of units to be produced in one lot. In firms based on make-to-order strategy, lot size is generally equal to order quantity. On the other hand, in firms based on
200
make-to-order as in case of standardized, mass production items, the lot size is generally determined by the economic order quantity. These quantities are of course affected by other factors such as availability of capacity and other production resources.
Determination of Scrap Factor
Scrap Factor is the anticipated normal scrap encountered during the course of manufacturing. All components produced at various workstations which do not meet the required standards and hence do not pass the inspection are neglected as scrap. Moreover the total material taken for processing the product does not go into the end product. Thus scrap factor determination is an important part of routing procedure. In determining the scrap factor, it should be known where the scrap is going to occur. Scrap can occur progressively during the fabrication/production of parts, end assembly or can occur all of a sudden after a certain operation or after completion of assembly. If the scrap occurs at one point in the process, a single scrap factor may take care of the anticipated scrap at the point, but when the scrap is progressive, cumulative scrap factor is essential to serve the purpose. It would be better to work out the material requirement backward, starting from the desired level of finished product. The usual practice should be to establish these factors from past experience, to determine the manpower, materials and essential machines/equipment. This scrap factor plays an important role in the determination of manpower requirements and loading of various machines.
201
Providing Necessary Information and Forms
To carry out the routing process as planned, various forms and procedures are required which furnish necessary information for the purpose. The main forms include Production (Manufacturing) Order, Job Ticket, Inspection Ticket, Move Order, Tool Ticket and Equipment Ticket. A typical Production Order form (Manufacturing Order form) is shown in the figure below. The type of form used in a particular department depends upon the nature of part and manufacturing required. Manufacturing Order shown in Figure 4.3 is invariably used in job manufacturing production.
Manufacturing Order Form
202
Job Order Form
203
Tool Order Form
Inspection Report
204
Inspection Report
205
If the manufacturing process is simple, these different forms can be combined into one sheet called the Master Route Sheet. This is a multipurpose sheet and also considerably reduces the paper work.
Analysis of Cost of the Article The answers to the following questions determine the cost involved in manufacturing of the part or item: i)
What type of machinery would be needed?
ii)
How would the parts be transported throughout the manufacturing facility?
iii)
How would the parts be loaded into the machinery?
iv)
How much money will be allocated to automation?
This entire information is given to the cost personnel and a cost per unit consisting of labor, materials and over head costs is developed. This information is sent to sales department and management to incorporate the desired profit into the product cost to determine the selling price of the product.
ROUTING FILE Routing File specifies the machines or workers which are required to complete an order from the MRP plan, specifies the order of operations to be conducted and the length of time which each operation should take.
206
The necessary details of how to manufacture an item are found in its routing file. A typical routing file contains information on the following: a) Operations to be performed. b) Sequence of operations. c) Work centers in which the operations should be performed. d) Possible alternative work centers. e) Tooling needed for each operation. f) Standard time (associated with each operation), set-up times and run times (processing time) per piece. g) Operator’s skill required for the operation. h) Inspection and testing requirements.
The routing file along with standard time estimates completes the basic input data necessary to perform Capacity Resource Planning (CRP). A sample of routing file is shown in Figure 4.8. Routing File Format
207
Standard Routing Documents
The are two important routing documents which specify the process sequence through the plant: a) Route Sheet or Route Card b) Operation Sheet
Route Sheet: A Route Sheet or Route Card lists the manufacturing operations in proper sequence and associated machine tools for each part. It also indicates the department in which a particular operation is to be performed on a part, the
208
department to which the part must go for the next operation. The route sheet travels with the parts which move in batches between the processes from one point in the plant to another. A typical route sheet is shown in Figure 4.9.
Route Sheet Format
Route Sheet Sample
209
Operation Sheet: An Operation Sheet lists the various operations in sequence required for producing a part. Operation Sheets can vary greatly with regards to the details they provide. A simpler operation sheet specifies only the operations and the machines to be used. Machine settings and specifications viz. cutting speed, feed, and depth of cut etc. are left to the discretion of the operator, particularly if the operator is skilled and small quantities of parts are involved. However, in more common operation sheets, complete details are given regarding machine settings and tools. Often, the time analysis for each operation is also included in the sheet. A typical operation sheet is shown in Figure 4.10.
Operation Sheet Format
210
ROUTING IN DIFFERENT PRODUCTION SYSTEMS Routing function varies in nature and function depending on the type of production system being used in the manufacturing firm.
Routing in Job Order Production Systems: Manufacturing organizations based on job order production system have manufacturing facilities arranged according to the process type of layout. Every order is a new and unique in its type and so the operations change from job to job according to varying specifications. Thus the number of operations and their sequence vary considerably. Here, route sheet is prepared for implementation of each order and hence requires a greater amount of work experience. Product passes through a larger area of shop floor and involves significant amount of back tracking. Routing is also subjected to production bottlenecks, waiting and rushing according to the work back logs and the machine loads available. 211
Routing procedure is most difficult and complex for these production systems.
Routing in Batch Production Systems: Batch (Intermittent) type production system based organizations also make use (generally) of process type layout. The operations and their sequence differ from batch to batch. The route sheets require revision whenever production of the batch changes. Routing procedure is still difficult but relatively simpler as compared to job order production.
Routing in Mass (Continuous) Production Systems: These production systems do not present much problem in routing due to product type of layout. Here, machines are arranged according to the sequence of operations to be performed on the components. In view of the standardized products, the number of operations and their sequence can be standardized. The equipment is arranged in sequence with automatic material handling systems. Routing function becomes a routine and a mechanized function. Production requires special attention with regards to route sheets in the following cases:  Interruption in production flow due to certain factors like machine breakdown, power cuts, shortages of materials etc.  When it is necessary to train new personnel in the standard procedures of the job. Routing procedure is simplest in mass or continuous production system based manufacturing organizations. 212
PROGRESS REPORTING
It is not always possible to achieve the entire production as per the production plan. There can be several factors which affect the production system and because of which there is a deviation of actual output from the scheduled (i.e. production plan). Some of these factors are: vi) Non availability of material due to shortage or other reasons. vii)
Plant equipment and machine breakdown.
viii) Changes in demand and rush orders. Changes in priority of orders. ix) Unexpected activities inside the organization which disturb the normal working. These include labour problems like absenteeism, strike etc. x) Lack of coordination and communication between various functional areas of business. xi) Errors in routing, scheduling and dispatching functions. xii)
Lack of proper tools, jigs and fixtures.
Because of the above mentioned reasons there can be deviations between actual and planned production. Progress Reporting is essential to prevent the above delays. It keeps a track of the progress of an order from its first operation till the last where it is converted into the final product. Progress Reporting checks the manufacturing activities systematically so that production may be carried out according to the plan, analyses the performance for shortcomings (if any) and follows up the management in order to apply corrective action to prevent excessive short fall.
213
Thus, Progress Reporting is a function which helps giving early warning in case actual production diverts from planned, thereby making it possible to apply corrective action.
Types of Progress Reports
The progress reporting can be done by the following: When manufacturing within a department is complete, inspection is carried out to check quality and conformity of the product with regards to laid down specifications. The inspection ticket is prepared by the inspector and sent back to the production control department. Based on the information on the ticket, progress of the order is recorded. In this way production department can follow every job. Gantt chart can be used. It consists of a bar chart in which the activities are listed vertically and elapsed time is recorded horizontally. The horizontal axis shows the time scale (desired or required start time and finish time) for each task. Dispatch office can receive information on the status of jobs in several ways. The sources can include returned job tickets, move orders, inspection reports etc. Dispatch office sends this information which serves as report of progress of jobs to the central office. Besides, the above mentioned written reports, foremen tell verbally, if anything unusual turns up. If anything goes wrong (like unusual amount of scrap etc), foremen can pass the information to the production control department.
214
 Manufacturing firms can use a ‘dial’ system for reporting. Dials are similar to telephone dials and required infrastructure for them is spaced around the plant. When a foreman gets an order, he dials in to the production control. Here details regarding, order number, operation number etc are provided. When the order has been completed, the foreman dials out (Tele control is relatively a newcomer among devices to control shop operations with minimum of paper work). Expediting Expediting means determining the current status of a part which is on order (or a production order which is in process) and initiating efforts to speed up operations when failure to meet schedules appears likely. Follow up is the most important part of production control. This step is to ascertain from time to time that the production operations are going on according to the plan. The expeditor (or chaser) observes the production operations with the objective that if anything has been overlooked or not properly executed, it can be set right. This ensures proper coordination of production activities and production plans to take corrective actions, if necessary. In other words, follow up function checks and measures the effectiveness of previous production control functions like: routing, scheduling and dispatching. It regulates the progress of material and parts through the production process. The cause of delays or shortages may also be investigated and an attempt made to prevent their recurrence. This includes physical tracing of the work in the plant and contacting the vendors who provide the outsourced parts. Expeditor (or stock chaser) is a person who locates lost jobs and pushes late jobs through to completion. He attempts to foresee and eliminate further delays. 215
Expediting is a special form of follow up or progress reporting. Expeditors perform the following functions: a) Eliminate particular difficulties which are throwing production off the schedule. b) Speed up the processing of certain orders. Expediting is divided into two categories: (i)
Production operations inside the plant.
(ii)
Supply of parts and materials from outside the plant.
The Inside Expeditor ensures that the material and tools are delivered to their scheduled destination in time. He must be familiar with the plant operations and should use this knowledge to ensure a free flow of tools and materials to the production line. For the parts and assemblies under this control, he must be familiar with the status of the required materials, production tooling, cutting tools and in-process equipment. The Outside Expeditor is usually a sales department representative operating in the plants of vendors. His job is to see that the material and parts flow into the parent plant as required by the production schedule.
216
QUESTIONS
1. What is meant by make-or-buy decisions? Discuss expertise and reliability as factors affecting these decisions. 2. Explain with an example, the function of a Operations Process Chart.
217
3. Discuss the basic difference in the function of Routing, Scheduling and Dispatching. 4. Discuss the main activities involved in the complete routing procedure. 5. Why is scrap factor determination an important part of routing procedure? 6. What is a routing file and discuss the information contained in it? 7. Routing function varies in nature and function depending on the type of production system being used in the manufacturing firm. Comment. 8. Discuss the various reasons because of which follow-up function is needed. 9. Describe some of the common means of progress reporting used in the manufacturing industry. 10.Expediting is a special form of follow up or progress reporting. Discuss the functions performed by expeditors.
SCHEDULING
218
The purpose of shop floor control function is to optimize the utilization of organization’s resources so that overall production objectives are met effectively. Scheduling function involves assignment of dates to specific jobs and operations. Many jobs on the shop floor compete simultaneously for common resources. Machine breakdowns, absenteeism, quality problems, shortages and other uncontrollable factors further complicate the manufacturing environment. Scheduling approach should be simple, unambiguous, and easy to understand. The rules should set tough but realistic goals that are flexible enough to resolve unexpected floor conflicts and allow re-planning, as priorities may continually change. When people trust and use these rules, scheduling becomes a reliable and formal means of communication. Scheduling is defined as the last stage of planning before production occurs. It specifies when labor, equipment and facilities are needed to produce a product or provide a service. Scheduling is the process by which an organization plans the use of time. SCHEDULING METHODS There are several types of scheduling techniques available to schedule a job. The type of technique used depends on the volume of orders, the nature of operations, and/or the overall job complexity. The selection of the technique also depends on the extent of control required over the job while it is being processed. The following are some of the common tools and techniques used in scheduling function. Loading
219
Loading is the process of assigning work to limited resources such that work is performed in the most efficient manner. It generally uses Assignment Method of linear programming to determine allocation. In this method, each facility is assigned to one and only one job so as to optimize the given measure of effectiveness. The main objective is to minimize total cost, time etc. There are five main steps to solve an assignment problem which are discussed as follows: i)
Prepare a Square Matrix: This step will not be required for ‘n x n’ assignment problems. For m x n (m ≠ n) problems, a dummy column or a dummy row (with each element equal to zero), as required, is added to form the square matrix. This matrix is called Effectiveness Matrix.
ii)
Reduce the Matrix: For this, subtract the smallest element in each row from every number in that row. See if there is at least one zero in each row and in each column. If it is so, stop here. If not, subtract the smallest number in every column from every number in that column.
iii)
Check if optimal assignment can be made in the current solution or not. This involve the use of following sub-steps: Sub-step 1: Examine the rows successively until a row with exactly one unmarked zero is found. Mark this zero with the symbol, ‘’. This indicates that an assignment will be made there. Mark ‘x’ all other zeros in the same row showing that they cannot be used for making other assignments. Proceed in this manner until all rows have been examined.
220
Sub-step 2: Next examine each column for single unmarked zero. Mark this zero with the symbol, ‘’ and mark any other zero in its row with the symbol, ‘x’. Draw the minimum number of horizontal and vertical straight lines necessary to cover all zeros in the table. To find the minimum number of lines, the following sub-steps are required. Mark the rows for which assignment has not been made. Mark the columns (not already marked) which have zeros in marked rows. Mark the rows (not already marked) which have assignments in marked columns. Repeat the previous (above) two steps, until no more markings are possible. Draw lines through all unmarked rows and through all marked columns. This gives the minimum number of lines crossing all zeros. If the procedure is correct, there will be as many lines as the number of assignments (i.e. equal to number of rows or the number of columns).
In case number of lines is not equal to
number of assignments to be made, optimal assignment is not possible in the current solution. In this case, further reduction of table is necessary. iv)
Iterate towards Optimality: Examine the elements that do not have a line through them. Select the smallest of these elements and subtract it from all the elements that do not have a line through them. Add this smallest element to every element that lies at the intersection of two
221
lines. Leave the remaining elements of the matrix unchanged. Proceeding in this manner we get a new matrix. v)
Again check, if optimal assignment can be made in the above current feasible solution or not. For this repeat all the sub-steps of step (iii). After repeating the sub-steps, if the number of lines is equal to number of assignments, optimal solution has been obtained. Optimal assignments will always be at the zero locations of the table.
vi)
In case in the above step, optimal solution is not obtained because number of lines is different from number of assignments to be made, again steps (iv) and (v) have to be repeated.
Let us explain the above steps with the help of following example: Example: Four different jobs (J1, J2, J3, and J4) are to be allocated to four different machines (M1, M2, M3, and M4). The set-up costs are assumed to be prohibitively high for changeovers. The cost (in rupees) of producing i th job on jth machine is given in the following matrix):
How should the jobs be assigned to various machines to minimize the total cost? Solution:
222
i)
Prepare a Square Matrix: Since the given matrix is a square matrix, this step is not required.
ii)
Reduce the Matrix: This involves the following sub steps: Sub-step 1: In the effectiveness matrix, subtract the minimum element of each row from all the elements of the row. See if there is at least one zero in each row and in each column. If it is so, stop here. If not, proceed to sub-step 2. Since every column (column 3) does not contain a zero, so sub-step 2 is required. Sub step 2: Now subtract the minimum element of the column not containing a zero element (i.e. column 3) from all the elements of the column.
iii) Check if optimal assignment can be made in the current solution or not.
a) Sub-step 1: Examine the rows successively until a row with exactly one unmarked zero is found. Mark this zero with the symbol, ‘’. This indicates that an assignment will be made there. Mark ‘x’ all other zeros in the same row showing that they cannot be used for making other assignments. Proceed in this manner until all rows have been examined. Here, note that 223
zero in the third row has not been marked with ‘’ because the column (first column) in which this zero is present has already been taken by zero in the first row.
b) Sub-step 2: Next examine each column for single unmarked zero. Mark this zero with the symbol, ‘’ and mark any other zero in its row with the symbol, ‘x’. c) Sub-step 3: In the present example, after following sub-steps 1 and 2, it is found that repetition of these steps is unnecessary. The third row (Row-3) and third column (Column-3) are without any assignment. Hence, proceed as follows, to find the minimum number of lines crossing all zeros.
d) Sub-step 4: Mark the symbol, ‘’ against the rows for which assignment has not been made. In the present example, it is the third row (Row-3).
224
e) Sub-step 5: Mark the symbol, ‘’ against the columns (not already marked) which have zeros in marked rows. Thus the first column (Column-1) is marked with the symbol, ‘’. f) Sub-step 6: Mark the symbol ‘’ against the rows (not already marked) which have assignments in marked columns. Thus the first row (Row-1) is marked with the symbol,’’. g) Sub-step 7: Repeat steps 5 and 6 until no more markings are possible. In the present case, this repetition is not necessary. h) Sub-step 8: Draw lines through all unmarked rows and through all marked columns. This gives the minimum number of lines crossing all zeros. If the procedure is correct, there will be as many lines as the number of assignments. In this example, number of lines is 3 which is not equal to the number of assignments (n = 4). Hence optimal assignment is not possible in the current solution. Further reduction of table is necessary.
iv)
Iterate towards Optimality: Examine the elements that do not have a line through them. Select the smallest of these elements and subtract it from all the elements that do not have a line through them. Add this smallest element to every element that lies at the intersection of two lines. Leave the remaining elements of the matrix unchanged. Proceeding in this manner we get the following matrix:
225
v)
Again check, if optimal assignment can be made in the above current feasible solution or not. For this repeat all the sub-steps (a to h) of step (iii). After repeating the sub-steps, the following is obtained:
Again, the minimum number of lines passing through all zeros are three (not equal to n = 4). So the optimal assignment cannot be made in the current solution.
vi)
Repeat step (iv), i.e. iterate towards optimality followed by step (v). On performing these steps, we get the following:
vii)
Check if Optimal Assignment can be made in the current feasible solution or not. For this, again repeat all the sub-steps (a to h) of step (iii). After repeating the sub-steps, the following is noted. Since there is no row with exactly one unmarked zero, start considering the
226
columns. It is found that there is even no column with single unmarked zero. Therefore, we make assignments arbitrarily in any zero and cross the remaining zeros in the same column as well as the same row. As there is assignment in each row and in each column, optimal assignment can be made in the current solution. Hence optimal assignment policy is: Job J1 should be assigned to machine M1, Job J2 should be assigned to machine M2, Job J3 should be assigned to machine M3, Job J4 should be assigned to machine M4,
Optimum Cost = 5 + 5 + 10 + 3 = 23
The optimal cost with the above assignments is Rs. 23/-.
Gantt Charts The purpose of Gantt chart is to show planned as well as the completed activities against a time scale. These are useful tools to sequence the jobs through shop and provide a graphical summary of job status and loading of operations. These can be used effectively to monitor the progress of work and view the load on workstations. Gantt charts are available in two basic forms:  Job Progress Chart (Activity Progress Chart)
227
Workstation Chart Job Progress Gantt Chart graphically displays the current status of each job or activity relative to its scheduled completion date. In Figure 5.1, the symbol,
represents planned activity (its start date and due date of completion). To show the progress of work done, Gantt charts should be updated regularly. Let us explain this chart with the help of an example. Suppose a manufacturing firm plans to produce 100 units of products per day for all its variants. For Job 32B, 700 units are to be made. The production of ‘32B’ product is started on Day 1 and should be completed on Day 8 (therefore 7 days for production, and hence 7x100 = 700 products). But this job is behind schedule as according to today’s date (sixth day of production), 600 products should have been completed (6x100= 600) but actually (as the diagram shows) only 500 products have been prepared. The graph shows, that for this particular product (Job 32), the company is running behind schedule. For Job 23C, the order of parts is 600 (start date is Day 2 and finished date is Day 8) by assuming 100 parts per day. According to today’s date, 500 parts should have been completed but they have already made more than 500, say 550 parts. Thus for this job, the company is ahead of schedule. Similarly for Job 12A (start date is Day 6 and finish date is Day 12), 100 parts should have been completed till today’s date (Day 7). The graph shows that 100 parts have been made till today, means the company is doing work according to the schedule and they are on schedule.
228
Job Progress Gantt Chart
Gantt Workstation Chart shows the load on the workstations and also the nonproductive time. The chart makes use of two main symbols as shown as follows: Scheduled activity time Nonproductive time
The use of Gantt workstation chart has been explained with the help of the following example of operation theatres at a hospital. The graph shows, for how much time which operating room is given to which person and for how much time operating room is idle. Gantt Workstation Chart
229
Johnson’s Rule Johnson’s Rule is also referred to as Multiple-Dimension Rule. It is an effective technique for minimizing time taken for a group of jobs to be completed (make span). It is useful under the following situations: When two successive workstations are needed to complete the process or When several jobs must be sequenced through two work centers, a company may want to select a sequence that must hold for both work centers. Johnson’s rule can be used to find the sequence that minimizes the total production time through both work centers. The following are some guidelines which are to be followed: Step 1. List the time required to process each job at each machine.
230
Step 2. Set up a one-dimensional matrix to represent the desired sequence. Step 3. Select the smallest processing time at either machine. If that time is on machine I, put the job as near to beginning of sequence (in onedimensional matrix) as possible. If the smallest time occurs on machine II, put the job as near to the end of the sequence (in one dimensional matrix) as possible. Step 4. Remove the job from the list. Step 5. Repeat steps 2-4 until all slots in matrix are filled and all jobs are sequenced. The various steps involved in the use of Johnson’s rule have been explained with the help of following example. Example: There are five jobs, each of which needs processing on machines I and II in the order 1-2. The processing time in hours are given as: Job Machine I
Determine
a
Machine II
A
6
8
B
11
6
C
7
3
D
9
7
E
5
10
will minimize
sequence of these jobs that the total elapsed time ‘T’.
Also find ‘T’ and the idle time for Machine I and II.
231
Solution: The smallest processing time is (3 hours) for Job C on Machine II. Since this machine is second in order, schedule this job near to the end of the matrix. Thus Job C is scheduled as follows to Machine II: C
Remove the sequenced job (Job C) from the list. The reduced set of processing time table is as follows: Job Machine I
Machine II
A
6
8
B
11
6
D
9
7
E
5
10
Now again, find the smallest value. It is 5 hour for Job E on machine I. Thus we schedule Job E on machine I as shown below: E
C
The reduced set of processing times becomes: Job Machine I A
6
Machine II 8
232
B
11
6
D
9
7
There are two equal minimum values: processing time of 6 hours for Job A on machine I and processing time of 6 hours for Job B on machine II. According to given conditions here, Job A is scheduled first and then Job B. E A
B C
Only Job D is left and will be sequenced in the place left. The sequence of jobs will be as follows:
E A D B C The elapsed times for each machine corresponding to the obtained schedule are as shown in the table below:
JOB
MACHINE I
MACHINE II
Idle Time for
Time In
Time Out
Time In
Time Out
Machine II
E
0
5
5
15
5
A
5
11
15
23
0
D
11
20
23
30
0
B
20
31
31
37
1
C
31
38
38
41
1
233
Thus the minimum elapsed time or completion time (T) is 41 minutes Idle Time for Machine I = 41 - 38 = 3 minutes Idle Time for Machine II = 5 + 1 + 1 = 7 minutes Total Idle Time = 3 + 7 = 10 minutes
Graphical Depiction of Job Flow:
Employee Scheduling
Employee Scheduling is a type of scheduling technique that decides the schedule regarding working of the employees. Employee scheduling is of two main types: a) Rotating Schedule: A schedule that rotates employees through a series of workdays or hours.
234
b) Fixed Schedule: A schedule that calls for each employee to work the same days and hours each week. Employee scheduling has been explained with the help of following example: Example: Suppose a service organization operates on all seven days of the week. The requirement of employees on each day of the week is as follows: Day Number of Employe es
Monda Tuesda Wednesd y y ay
6
4
8
Thursd ay
Frida y
Saturd ay
Sund ay
9
10
3
2
Required This organization needs a workforce schedule that provides two consecutive days off (to every employee) and minimizes the amount of total slack capacity. To break ties in the selection of the off days, the scheduler gives preference to Saturday and Sunday if it is one of the tied pairs. If not, he selects one of the tied pairs arbitrarily.
235
Solution: Required Employees
Day
M
No. of Employees Required 2
T
W
Th
F
S
Su
6
4
8
9
10
3
8
9
3
X
Employee 1(Schedule)
X
X
X
X
Requirements 2
5
236
3
7
Employee 2 (Schedule)
X
X
X
X
X Requirements 2
4
Employee 3 (Schedule)
X
2
X
6
X
7
8
3
6
7
3
X
X Requirements 2
3
1
5
X
Employee 4 (Schedule)
X
X
X
X Requirements 1
Employee 5 (Schedule)
3
X X
Requirements 1
1
X
4
X
2
0
6
2
4
5
2
X
3
X
X
X
X
X
Employee 6 (Schedule)
No. of Employees
5
2
0
237
2
3
4
1
0
X Employee 7 (Schedule)
X
1
X
0
X
1
X
2
3
1
2
1
0
1
0
0
X
X
Requirements
Employee 9 (Schedule)
X
X
Requirements 0
Employee 8 (Schedule)
X
0 X X
Requirements
0
Employee 10 (Schedule)
X
0
0
X
0
X
1 X
0
X
0
X
X
So, the final schedule of the employees is as follows:
238
X
Day Number of employees
M
T
W Th
F
S
S
6
4
8
9
10
3
2
7
8
10 10
10
3
2
1
4
2
0
0
0
actually required (R) Number of employees deputed through scheduling (S) Slack = S-R
1
By using this method we can minimize total slack of employees. Slack of Employees = (1+4+2+1+0+0+0) = 8 employees
239
Priority Decision Rules for Sequencing Priority rules or Single-dimension rules are a set of rules to set priority of a job on a single aspect such as arrival time at the workstation, the due date, the processing time etc. The following are the rules which are to be followed before the sequencing of job: a) b) c) d) e) f)
First Come First Served Rule (FCFS) Shortest Processing Time (SPT) Longest Processing Time (LPT) Earliest Due Date (EDD) Least Slack (LS) Critical Ratio (CR)
a) First Come First Served Rule (FCFS): According to this rule, the jobs are processed in order of their arrivals. It is used when the plant is operating at low capacity levels. It allows the shop to operate essentially without sequencing of jobs. It is the easiest rule to apply. The main advantage of this rule is that it appears fair and reasonable to customers, which is very important for service organizations. Restaurants are a good example of the application of this rule. b) Shortest Processing Time (SPT): This rule is most useful when the shop floor is highly congested. It processes first, the job, with the shortest processing time. This rule is best in minimizing job flow and the number of jobs in the system. By completing more jobs quickly, it theoretically satisfies a greater number of customers than the other rules. However, the limitation with this rule is that some long jobs may be completed very late, resulting in a small number of very unsatisfied customers. c) Longest Processing Time (LPT): According to this rule, the job with the longest processing time is processed first. It is usually the least effective
240
method of sequencing. This rule is used if subcontracting is anticipated, so that larger jobs are completed in-house, and smaller jobs are sent out as their due date draws near. d) Earliest Due Date (EDD): According to this rule, the job with the earliest due date is processed first. This rule is widely used by organizations if due dates are very important. e) Least Slack (LS): Slack is defined as the number of days remaining before the due date minus the duration of the job According to this rule, the job with the smallest slack is processed first. f) Critical Ratio (CR): It is the ratio of time period left to the shipping date to the time period needed to complete the job. CR = (Due Date – Today’s Date) / Days required to complete the job CR = Days Remaining / Days Required
g) Covert: This rule computes the ratio of expected delay cost (C) to processing time
(T). According to this rule, the job with the largest
ratio is selected first.
Example: A manufacturing organization wishes to use priority decision rules for sequencing its following jobs. All dates have been translated according to shop calendar days; assume that today is 120.
Job
Production Days Required
Date
241
Date
Order Received
Order Due
A
15
115
200
B
10
120
210
C
25
121
185
D
30
125
230
E
17
125
150
F
20
126
220
The organization operates for five days a week. Determine the sequence in which the jobs should be performed according to each of the priority rules as discussed above. Solution: The sequences according to the priority rules are as follows:
Forward and Backward Scheduling Forward Scheduling: Forward scheduling assumes that procurement of material and operations start as soon as the requirements are known. The events or operations are scheduled from this requirements point of view. Forward scheduling is used in many organizations, such as steel mills and
242
machine tool manufacturers, where jobs are manufactured to customer order and delivery is requested as soon as possible. Forward scheduling is well suited where the supplier is usually behind in meeting schedules. Backward Scheduling: In backward scheduling, the last operation on the routing is scheduled first. Then the rest of the operations are offset one at a time, in reverse order, as they become necessary. Finally, by offsetting the procurement time, the start date is obtained. Backward scheduling is used primarily in assembly type industries. After determining the required scheduled dates for major subassemblies, the schedule uses these required dates
for
each
component
manufacturing
order.
The basic difference between these two types of scheduling is shown in Figure 5.3. Forward and Backward Scheduling
MATERIALS MANAGEMENT Materials, as discussed earlier, are the raw materials, components, subassemblies and supplies used to produce products and services. The following facts reveal the importance of materials management and hence the need of inventory management and control. 243
Cost involved in materials can account for 50-75% of product cost.
A survey conducted by ‘Directorate of Industrial Statistics’ (of 29 major industries in India) shows that on average, material cost is 64% of the sales value. The remaining 36% is taken up by wages, salaries, overheads, profits and other miscellaneous costs. A significant portion of miscellaneous costs comprises of inventory carrying and storage costs. These include interest charges on the inventory and also physical deterioration and obsolescence of stored material, handling etc. The inventory carrying costs are roughly about 20% of the material cost i.e. 20% of (64% of sales revenue) = 13% of sales revenue. Thus 77% of the sales revenue is only material cost and other associated costs. This hugely significant figure is enough to establish the importance of materials management and thus inventory management and control.
Manufacturing organizations, in the past, have tried to increase their profits by making savings in wages/salaries. The point to be understood is that wages and salaries constitute only, on average, 15-20% of the sales revenue. Moreover trying to reduce them creates labour problems. The better option is savings in materials cost which constitute major share of sales revenue. The potential of savings is more with this option and further it does not cause any labour problems. It involves issues like correct purchasing procedures, warehousing, distribution, inventory control and management etc. Let us explain these two options with the help of an example: Consider an organization with annual turnover crores
244
:
Rs.
10
Material Cost
:
Rs. 6 crores
Profits
:
Rs. 1 crores
:
Rs. 3 crores
Salaries, Wages, Overheads
Management wishes to increase profits to say, Rs. 1.3 crores. Option–1: The manufacturing organization can increase the sales turnover by 30% so that profits get increased by Rs. 0.3 crores. Option–2: The organization can decrease the materials cost by just 5%. This 5% decrease in materials cost would be = 5% of (Material Cost) = 5% of 6 crore = 0.3 crore It can be seen that the result of efforts in reducing material cost by just 5% is equivalent to result of efforts of increasing sales by 30%. Further, increase in sales call for a lot of additional activities like time and expenses on additional production, more pressure on the workers to produce at an accelerated pace, marketing and advertising expenditures etc. Thus the materials management option is better. Now let us formally define the term materials management. Some of the better known definitions have been provided as follows:  Materials Management is a function of operations management which aims for integrated approach towards the management of materials in an industrial undertaking. Its main object is cost reduction and efficient handling of materials at all stages and in all sections of the undertaking. 245
Materials Management function includes several important aspects associated with materials such as purchasing, storage, inventory control, material handling etc.  Materials Management is defined as the function responsible for the coordination of planning, purchasing, transporting, storing and controlling of materials in an optimum manner so as to provide service to the customers at a minimum cost.  Materials Management is the planning, organizing and controlling of flow of materials from the initial purchase through internal operations to the distribution of finalized goods. The major concerns include purchasing, transportation, inventory management, and warehouse distribution.
Objectives of Materials Management The main objective of materials management is to reduce the cost of production so as to increase the profits. The main objectives are as follows: a) To reduce the material costs using scientific methods. Material department can reduce the overall materials cost through an efficient system of buying. Low prices and low possession costs are the main objectives. b) To ensure uniform flow of materials required for production. c) To ensure right quality, right quality of materials at the right place and time. d) To establish and maintain good relations with supplies.
246
e) To efficiently manage and control the inventories so that working capital is released for productive purposes. f) Economy in using the imported items and to find better substitutes.
Functions of Materials Management The various functions to be performed by an efficient materials management system have been described as follows: a) Materials Planning: The success of materials management in an organization depends most importantly on material requirement planning and its timely provisioning. This includes setting up of consumption standards i.e. planning for materials requirements as per master production schedules. Also information is collected all relevant factors like make-buy decisions, laying down the standards and specifications of raw materials to be procured, identifying the sources of supply, checking availability of stock, import substitution etc. To determine the economic order quantity or the economic run length is also a part of this function. b) Purchasing: The purchasing process involves the acquisition of items in exchange for funds. There are different methods of purchasing an item depending upon its type, volume to be purchased, cost of item etc. On this basis, items are classified into three main categories: (i) High Volume Items (ii) Normal Items (iii) Low Value Items. These have been discussed as follows: i) High Volume Items: These items are used continuously and in large volumes in the organization. For these items, the organization can have a fixed supplier, who has agreed for a firm price for a large number of items and has promised to deliver them as per schedule
247
sought by the buyer. The buyer company issues what is called a Blanket Purchase Order to the supplier e.g. a blanket purchase order would enable a producer of bicycles to ensure an annual supply of 12,000 sprockets at a quantity discount price. The buyer would release order as needed to meet the production schedule during the year. ii) Normal Items: These are items for which a number of suppliers are available and it is not easy to select the supplier. A number of factors have to be considered before the supplier can be selected. The factors include price of the item, features offered in the item, ease of use, level of technology, range and capacity of the item, ease of maintenance, delivery reliability of the supplier, octroi terms and other conditions of payment etc. To select the supplier, the buyer advertises (issues) a request for quotation (RFQ) containing details of specifications, volume required, terms of payment etc. Different vendors (suppliers) respond to the RFQ through their bids which provides the detail of specifications of item, details of price, delivery schedule, payment terms etc. On receiving the bids from different suppliers, the buyer organization evaluates vendor offers through a comparative statement. The buyer releases a Purchase Order (P.O) to the selected vendor. iii) Low Value Items: These are items whose cost is very low. The order for such items is not processed at the central level because the low cost of these items does not justify that. So individual departments can obtain supplies of these items from local suppliers without involving the purchase department. These items are purchased through an Open Purchase Order (OPO). Examples include stationary items etc. The functions of the purchasing are discussed as follows:
248
Market research for purchasing i.e. locating and developing sources of supply. Requesting for quotations, preparing comparative statements etc. Selection of suppliers Negotiating for prices and quantity. Entering into a rate contract. Issuing purchase order along with specifications. Providing delivery schedules, other terms and conditions. Follow-up or Orders. Inspection of the purchased material. Payment of bills. Supplier’s performance evaluation. Preparing Materials Budget (Purchase Budget).
c) Store Keeping: Store keeping involves the receipt, custody and issue of materials. Materials are received at stores against purchase orders placed by the purchase section. After being received, they are inspected for quality as per the specifications and physical deterioration. These are now kept in stores in a manner that they require minimum material handling and remain well protected against any damage or loss. Materials are issued to different departments against authorized indents/store issue vouchers. Proper record is maintained for receipt and issue of materials. Store keeping also involves the function of physical verification, salvage and disposal for surplus material/rework/scrap.
249
d) Inventory Control: Inventory control involves the systematic location, storage and recording of items and goods in such a manner that desired degree of service can be made to the operating shops at minimum ultimate cost. Inventory control has following functions to perform: To ensure timely availability of materials and to avoid build up stock. To protect the inventories against physical deterioration, loss, leakage etc. To develop policies, plans and standards essential to achieve inventory control objectives. To determine the economic order quantities (EOQ) and economic run lengths (ERL).
e) Disposal of Surplus, Obsolete and Scrap Items:
This is also an
important function of materials management. Holding surplus items, scrap or obsolete items is a costly affair because it includes inventory carrying costs, cost of periodic stock tasking, cost of maintaining records, cost of security etc. f) Material Economics: The function of materials management also includes Value Analysis, Standardization (variety reduction).
NEED OF INVENTORY Inventory may be defined as any resource (raw material, fuels and lubricants, components, spare parts, tools, maintenance consumables, semifinished products, finished products) that has a certain value and can be used at a later time, when the demand for it arises. Inventory can also be defined as physical stock of items that a business or production enterprise keeps on hand for efficient running of affairs or its production. In simple words 250
inventories refer to the stocks held by the firm. Inventory is defined as the sum of the value of resources stocked at any point of time for the smooth running of the plant. As inventory, the resources are idle. So inventory can be defined as an idle resource of any kind that has an economic value and awaits future use or sale. Inventories are created when the receipt of an item is more than its disbursement. Inventory of an item is depleted when disbursement exceeds receipt. The importance or the purpose of inventories has been describes as follows: a) Economic Lot Inventories: All industrial units purchase some resources from an outside source. Every time an order is placed for stock replenishment, there are certain costs involved called ‘Ordering Cost’. Ordering cost includes paper work cost, cost involved in dispatching, follow up costs to ensure timely supply, costs involved in receiving the order is checking, inspection etc, installation costs charged by the supplier etc. If a manufacturing unit places order for only small quantities which satisfy just its current requirements, time and again it will have to place orders and bear ordering costs each time, thereby making the affair highly uneconomical. Here the role of inventory comes into picture. The purchaser orders quantities beyond the immediate needs and keeps excess of them as inventories. Fixed cost of ordering gets divided amongst a large number of units. Also the supplier gains when he supplies in larger quantities and a portion of this gain can be passed to the purchaser in the form of discounts. When inventories are carried for the above mentioned purpose, they are called Economic Lot Inventories. b) Production Inventories: A major reason to maintain inventories is to keep the production operations going without interruption due to shortages of components, raw materials etc. When inventories are kept with this purpose in mind, they are termed as Production Inventories.
251
There are some other items like supplies (oils, fuels, lubricants etc), spare parts etc that are consumed in the production process but not form a part of the product. These are also kept in excess to run operations smoothly. These production inventories are specifically termed as MRO Inventories (Maintenance, Repair, Operations). c) Fluctuation/ Stabilizing Inventories: It is not always possible to match the timing of production and sales. Inventories are collected because of this time lag. Generally, demands are not accurately forecasted, so some reserve stocks are necessary to avoid stockouts or lost sales. Such inventories are called Fluctuation or stabilizing Inventories. d) Anticipation Inventories: These inventories are required for the following purposes:  To meet seasonal demands. The items are produced and stocked throughout the year to meet high demands during the season.  To meet high demands during periods of promotion programmes launched by the firm.  To meet the demand of periods during temporary shut down. Manufacturing organizations generally shut down production for some period during the year for maintenance/repair/installing new facilities etc. The demand of this period is fulfilled through stocked inventories. When inventories are kept with the above purposes in mind, they are termed as Anticipation Inventories. The following points can be noted for inventories: i) Inventories in a business serve much as the suspension system of an automobile. Ups and down in sales are absorbed by the inventory of 252
finished goods. Inventory also enables a constant rate of production for the manufacturing unit, even when the sources of supply are not too reliable, may be due to power shortage, transport problems etc. ii) Inventories act as a cushion between supply and demand. They take care of the requirements of demand till the next supply arrives. They also take care of the probable delays in supply and the probable variation in demand. iii) Inventories act as cushions against external shocks and between the different stages of planning and scheduling production. They absorb the shocks caused by wrong demand forecasts. When demand fluctuates violently, the production department is often unable to respond quickly to these fluctuations. At such times, demand is met through inventories.
INVENTORY COSTS AND ORDER QUANTITIES The major costs associated with procuring and holding inventories are as follows: a) Ordering/Set-up Costs: If an item is to be purchased from an outside supplier, an order has to be placed. Each order has a fixed cost associated with it called, the Ordering Cost. It includes paper work cost; cost involved in dispatching, follow-up cost to ensure timely supply, cost involved in receiving the order which includes checking, inspection etc. If the item is produced in-house, the term ordering cost is replaced by Set-up Cost. This involves the cost of changing the machine set-up, fixtures etc. b) Holding Costs/Carrying Costs: Holding Cost or Carrying Cost is the cost incurred by a manufacturing organization because of the items and
253
products kept on-hand in inventory. Holding cost is a variable cost and it depends on the number of units contained in the inventory and it changes with it. Holding cost comprises of the following expenses: Interest or Opportunity Costs: Inventories are idle resource but have an economic value. To keep the items in inventory requires capital. Manufacturing organizations either obtain loan on interest to carry inventories or pays cash to carry inventories. In either of the cases, the capital gets blocked in this idle resource (inventories) which otherwise could have been used for more productive purposes. Storage and Handling Costs: Inventories take up storage space and have to be handled in and out of the storage area. If the organization, rents the storage space, it pays for it and so costs are involved. Even if the organization has its own storage area, there is an opportunity cost as the space could haven utilized for a more productive purpose. Insurance and Shrinkage Costs: More inventories mean more Insurance and Shrinkage Costs. Shrinkage involves pilferage or theft, obsolescence, deterioration etc. Pilferage or theft of inventories by employees/customers can be significant in some businesses. Deterioration through physical spoilage/damage results in lost value. Obsolescence occurs when inventory can’t be sold at full value because of model changes, unexpectedly low demand, engineering modifications. Obsolescence is a big expense in retail clothing, where at the end of the season, heavy discounts are given. The annual cost of maintaining one item in inventory typically ranges from 20-40% of the item’s value. ECONOMIC ORDER QUANTITY
254
Managers have conflicting pressures to keep inventories: i) Keep low amount of inventory to avoid excess inventory carrying costs. ii) Keep high amount of inventory to avoid excess ordering/set-up costs. A good starting point to balance these conflicting pressures and determine the best inventory level for an item is to determine its Economic Order Quantity (EOQ). Economic Order Quantity represents the lot size for an item which minimizes the total cost (ordering and holding) involved in its inventory. The expression for EOQ is determined based on the following assumptions: a)
Demand rate for the item is constant and is known with certainty. Also the lead time is known and is constant.
b)
There are no constraints on the size of each lot e.g. there are no restrictions like truckload capacity, material handling limitations etc.
c)
There are two main costs comprising total inventory costs: Holding Costs and Ordering Costs.
d)
Decision regarding order quantity for one item is made independently of decisions of other items (no advantage is gained by combining several different orders going to the same supplier).
e)
Amount received is exactly what was ordered and it arrives all as a whole rather than piece meal.
f)
Purchase costs do not vary with quantity ordered i.e. no discount in price of item if large quantities of item are purchased.
g)
Replenishment is instantaneous at the expiration of lead time.
Determining the EOQ If the EOQ assumptions are followed, inventory behaves as shown below:
255
Figure 5.4 Inventory Behaviour in EOQ Model
The following points can be noted from the above figure: The cycle begins with Q units of item held in inventory, which happens when a new lot is received. During the cycle, inventory is consumed at a constant rate. Because demand is known precisely and lead time is constant, a new lot can be ordered so that inventory falls to 0 exactly when the new lot is received. Because inventory varies uniformly from Q to 0, average inventory equals (Q + 0)/2 = Q/2 throughout.
Total Cost (annual) involved in inventory (TC) is calculated as follows: Total Cost = Annual Holding Cost + Annual Ordering Cost ------- (i) Annual Holding Cost = (Holding Cost per unit)*(Average number of units held in inventory) = H * Q/2
-
------ (ii)
256
Annual Ordering Cost = (Ordering Cost/lot) * (number of orders placed annually) = S * D/Q
--
----- (iii) Substituting values from equation (ii) and (iii) in equation (i), the total cost involved in inventory is given by;
T .C. H .
Q D S. 2 Q
T.C. = Total cost involved in inventory per year (Rs. /yr) H = Holding Cost of carrying one unit in inventory for a year; often calculated as a proportion of items value (Rs. /unit-year) Q= Lot Size (number of units) S = Ordering Cost per order or Set-up Cost per lot (Rs. /order or Rs. /lot or Rs. /set-up) D = Annual Demand of items (units/year) Let us now determine the number of units in a lot (order quantity, ‘Q’) corresponding to which total cost (T.C) in inventory is minimum. T.C. H.
Q D S. 2 Q
Value of Q corresponding to which total cost (T.C) is minimum can be obtained as follows: d(TC) 1 1 0 H. 2 SD 0 dQ 2 Q
H 1 2 .SD 2 Q
Q EOQ
2SD H 2SD H
---------- (a)
257
The above term is referred to as Economic Order Quantity (EOQ) or Economic Lot Size (ELS). It is the lot size which satisfies the total demand at the lowest total cost. It can be noted that purchase price of the item is an important component of total cost, but it does not affect the EOQ. As long as the purchase price does not vary with the quantity ordered, it should not directly effect the decision as to what is the most economical lot size. The other important terms used along with EOQ are as follows: Number of Orders per year: Number of orders per year =
D EOQ
----------- (b)
Time between Orders: Time between orders (TBO) for a particular lot size is the average elapsed time between receiving replenishment orders of Q units. TBOQ
Q Years D
=
Q 56Weeks D
=
Q 365 Days D
-------------- (c)
From Figure 5.6, the following observations can be made: EOQ is that order quantity corresponding to which total cost curve has its minima. It can be seen from the curve that at EOQ, annual ordering cost is equal to annual holding cost.
Total Cost Curve in EOQ Model
258
 If for a lot size, the annual holding cost exceeds the annual ordering cost, it means the lot size (Order Quantity, Q) is too big and needs to be reduced. In Figure 3.6, if the lot size is 390 units, the annual holding cost is much more than the annual ordering cost, and the total cost involved in inventory (T.C) is much more than the minimum possible total cost. Minimum possible total cost would be achieved for a lot size corresponding to which annual holding and ordering costs are equal. In Figure 3.6, for a lot size equal to 75 units, both these costs are equal and hence total cost is minimum. Hence in the figure above, EOQ = 75.  If for a lot size, the annual ordering cost exceeds the annual holding cost, it means the lot size or order quantity is too small and needs to be increased.
ECONOMIC RUN LENGTH When an item is purchased from outside, an ordering cost per order is associated with the inventory of the item. For such items, an economic lot size is calculated called EOQ. EOQ tends to minimize the total cost involved in inventory. EOQ is based on the assumption that supply of the item is instantaneous. The supply begins and ends at one instant and there is no consumption during the supply period. After the supply is received, the item 259
is consumed at some constant demand rate. As the inventory of the item becomes zero, at that instant itself, fresh supply is received and a new cycle begins. This situation (Instantaneous Supply) is depicted in Figure 5.7. Instantaneous Supply in EOQ Model
When a manufacturing organization produces an item in-house rather than purchasing it, ordering cost is replaced by set-up cost and the term, Economic Order Quantity (EOQ) is replaced by the term Economic Run Length (ERL). Economic Run Length (ERL) of an item refers to the lot size of that particular item that should be manufactured with one set-up before switching over to the lot of some other item. When the manufacturing firm is producing the item in-house, it is following some specific production rate. As a result, the item is not being received at one instant (as is the case with a purchased item ordered to an outside supplier) but over a period of time governed by the production rate (p). This is a case of non-instantaneous supply and is depicted in Figure 5.7. The expression for ERL is determined based on the following assumptions: a) The production rate (p) of an item is always greater than its demand rate (d). b) The main characteristic of non-instantaneous supply is that as the item is being produced, a portion of it is being concurrently used or sold. This means, all the items being produced do not go into the inventory and thus reduce the inventory carrying costs.
260
Non-Instantaneous Supply in ERL Model
While calculating the economic run length (ERL), the expression for ordering cost remains the same (as was in the expression for EOQ) but here this cost is replaced by set-up cost. The expression for holding cost changes, because a proportion of the production is consumed and does not go into inventory. Suppose, d = demand rate of the item (units/day) p = production rate of the item (units/day) d/p = proportion of production allocated to daily demand 1-d/p = proportion of production that goes into inventory So the inventory carrying cost is not equal to ‘H’ (as in EOQ) but will be lesser and equal to ‘H (1- d/p)’. If this decreased carrying cost of this reduced level of inventory is taken into account, the expression for Economic Run Length (ERL) in number of units to be produced per production set-up is given as follows: ERL
2SD H (1 d / p)
------------ ( I )
Example: A manufacturing firm requires 25,000 units of an item per year and purchases it from an outside supplier at Rs. 3.40/- per unit. The ordering
261
cost per order is Rs. 50/- and inventory can be carried at a cost of Rs. 0.78/per unit per year. a) How many items should be ordered at a time? b) How many orders per year should be placed? Solution: D = 25,000 units/year P = Rs. 3.40/unit S = Rs. 50/order H = Rs. 0.78 per unit per year
EOQ 
2SD H
EOQ 
2 * 50 * 25000 0.78
= 1790 items So every time this item is ordered, it should be ordered in a lot size of 1790 units. b) Number of orders per year =
D EOQ
=
25000 1790
=14 orders So to meet this annual demand, 14 orders will have to be placed per year. Example: A manufacturing firm produces an item to be used in its finished product. The annual requirement of this item is 72,000 units. For this item, the production rate that can be followed is 400 items per day. The set-up cost is Rs. 7.50/- per set-up. The holding cost is Rs. 1.50/- per item per year. The manufacturing firm does production on 360 days. What is the optimum length of the production run in days? Solution: D = 72,000 units/year P = Rs. 3.40/unit
262
S = Rs. 7.50/set-up H = Rs. 1.50/unit/year p = daily production rate = 400 units/day d = daily production rate = 72,000/360 = 200 units/day
ERL
2SD H (1 d / p)
ERL
2 * 7.5 * 72000 1.5(1 200 / 400)
= 1200 units/run So the economic run length comes out to be 1200 units per set-up or per production run. So the optimum length of the production run in number of days is given as follows: Optimum number of days of the run = 1200/400 = 3days.
COMPUTER APPLICATIONS IN OPERATIONS MANAGEMENT A century ago, records of business transactions and production activities etc were laboriously kept by pen and paper. The first application of machine assistance for record keeping came in the late 1800’s with the introduction of punched cards for data processing. Later, during the first half of this century, motor driven key-actuated accounting machines and calculators were introduced and became widely popular. The first large scale computers came just after World War-II. The subsequent generation of computers reduced in size, increased in speed and memory and provided more versatility.
263
Today, the use of computers has extended to virtually every aspect of production right from the conceptual stage when the idea for a new product is developed till the end when the product is delivered to the customer. The way in which the products are manufactured indicates the extent of changes that are taking place. The integration of CAD (Computer Aided Design), CAM (Computer Aided Manufacturing) and Flexible Manufacturing Systems (FMS) constitute cutting edge production technologies. Some of the main applications of computers in the manufacturing sector are listed as follows: a) Production Control b) Computer Control of Production Processes c) Research and Problem Solving d) Management Information and Integrated Data Processing Systems
 One of the potentially most advantageous uses of computers is in the field of production control. This is because production control activities involve a large number of calculations, sorting and storage of huge quantities of data and printing of considerable volumes of information. All these tasks are well suited to the operating characteristics of the computers, which are devices designed to store and rapidly manipulate vast amount of data. Various kinds of techniques in organizations have been developed to reduce the paper work in organizations through implementing computer system. Care has to be taken that computer can’t be of much help in decision making process. Let us now discuss the various areas of operations management where computer assistance is important.
264
a)
The details of all orders of different products of the manufacturing organization can be stored in the computer. The computer can be programmed to group various orders into different categories and to determine demand trends for each category. From this, it can forecast the anticipated future demand for each product category. Assuming that the current trend patterns continue into the future, such analysis assists in the development of short term production programs and also enables the sales forecast to be monitored in advance indicating which specific product groups are likely to result in a shortfall in sales and for which product groups demand is likely to exceed production capacity. This analysis assists the sales management in determining where the sales efforts would most beneficially be applied (i.e. which products should be pushed). All forecasting techniques and methods (Time Series, Casual Method etc.) make extensive use of computers. Computers can select orders for identical products with similar due date and batch them in order to reduce set-up times.
b)
The details of the raw materials, purchased items, tools, jigs, fixtures etc required to make the finished product and for each manufacturing stage can be retained in a particular file in the computer. The computer can be programmed to use this information for the determination of dates by which purchased material should be obtained and manufacturing stages should commence in order to meet customer requirements. Critical path analysis, line of balance technique etc. can be used to calculate standard costs of manufacturing at each stage.
265
c)
Computers can be programmed to analyze the actual operation times and compare them with standard times. This analysis can be used to focus on points where inefficient work occurs taking into account statistics of machine breakdowns, labor absenteeism, rate of the scrap production etc.
d)
Computers can be used to load future orders into the manufacturing facilities for several weeks ahead with reference to some criterion which management desires viz. minimization of machine idle time or work in progress. Data handled in this manner can be used to estimate realistic delivery times for individual orders and also to assess such factors as the efficiency of manufacturing departments or additional capacity requirements.
e)
Computers can be employed to compare the recorded stock balance of an item with the re-order level; if the stock balance is below the stock level, it can search the files for the supplier’s name and address and raise an order for replenishment. For the simplest system, the re-order level and the order quantity can be specified by a human being. For a more sophisticated system, the computer can be programmed to analyze the demand data for a stock item and to calculate the re-order parameters, on the basis of the analysis without human intervention.
f)
Computers can be extremely helpful in supporting functions like invoicing, progressing of purchased items, stock valuation, analysis of supplier’s performance on the basis of quality, delivery and price, analysis of sales representative’s performances, planned maintenance scheduling and evaluation of maintenance costs.
266
g)
The use of computers for on-line inventory control, material requirement planning, production planning, scheduling and routing of components as per predetermined process-cycles and other online applications using data base files is a very significant application. The speed and accuracy with which the latest status of available stocks and order received, automatic printing of purchase orders to replenish the stocks of items, automatic picking up of correct quantities of the required commodities and packing them have all become possible only through the use of microprocessors and micro-computers. Only computers have made it possible that at any time we can know the status of all the activities of the organization without having to ask all the concerned persons individually.
h)
Managers may use a computer search for the optimal aggregate plan. The computer tries many combinations of workforce levels and output rates for each period in the planning horizon. Although the computer explores many possible combinations of these variables, it does not do so randomly. Very specific rules are built into the search procedures to guide the search in a systematic way. The search continues until no further improvement results or until a specified time of the searching has elapsed. The disadvantage of the computer search is that it may not yield the optimal plan. Although the computer explores and evaluates a large number of plans; it does not examine all possible plans.
i)
The material requirement planning program operates on the inventory file, the mater production schedule, and the bill of materials file. A list of end items needed by time periods is 267
specified by the master schedule, the description of materials and parts needed to make each item is specified by the bill of materials file. The number of units of each item and material which are currently on hand and on order is contained in the inventory status file. The MRP program works on the inventory file (which is segmented into the time period) while continually referring to the bill of materials file to compute the quantities of each item needed. The number of units of each item required is then corrected for onhand amounts, and the net requirement is ‘offset’ (set back in time) to allow for the time needed to obtain the material. To summarize, it can be said that the benefits obtained by the use of computers in the field of production planning and control are enormous. Computer assistance results in reduction in clerical costs, more accurate forecasts, maximization of machine utilization, minimization of work in progress, minimization of total lateness of all jobs, reduction in lead times, reduction of investments in stock and ultimately better manufacturing performance leading to better customer service.
268
QUESTIONS
1. What is the purpose of loading function used during scheduling? Discuss the meaning of effectiveness matrix in the context of loading. 2. Which charts are used to monitor the progress of work and view the load on workstations? Discuss their various types and the function of each. 3. Discuss the various situations under which multi-dimensional rule can be used to advantage? What is this rule popularly known as? 4. Discuss the basic difference between the terms rotating and fixed employee scheduling. 5. With an example, explain the least slack single dimension rule for scheduling of jobs. 6. If the shop floor is highly congested, which priority rule is recommended for scheduling the jobs? 7. Explain the single dimension priority rule for sequencing which seems to be most applicable at a barber’s shop. 8. Discuss the general procedure for the purchase of normal items by a manufacturing enterprise. 9. What is meant by anticipation inventories? Explain the various reasons of keeping them in stock. 10.Under what conditions is an open purchase order issued? Discuss. 11.Discuss the major components of inventory carrying costs. 269
12.Replenishment is instantaneous at the expiration of lead time. What does this statement mean in the context of Economic Order Quantity? 13.During the calculation of economic run length, the carrying cost is relatively less as compared to the carrying cost for an equivalent economic order quantity lot size. Explain. 14.Draw the inventory cost curves for the EOQ model to depict that corresponding to the economic order quantity, the two major costs involved in inventory are equal.
270