MOS 3330 Slides 2024 PDF

MOS 3330 Course Overview 1. Introduction 2. Supply Chain Management Test 1 3. Inventory Management Formula Sheet 4. Forecasting Formula...

MOS 3330 Course Overview 1. Introduction 2. Supply Chain Management Test 1 3. Inventory Management Formula Sheet 4. Forecasting Formula Sheet 5. Aggregate Planning Formula Sheet 6. Material Requirements Planning Formula Sheet Test 2 7. Enterprise Resource Planning 8. Process and Product Design 9. Just-In-Time Systems 10. Quality Formula Sheet Final 11. Statistical Process Control Formula Sheet 12. Total Quality Management MOS 3330: OM Introduction 1 1 INTRODUCTION TO OPERATIONS MANAGEMENT Learning Objectives: 1. What is Operations Management (OM) 2. Why study OM 3. Goods vs. services 4. Trends in OM MOS 3330: OM Introduction 2 2  1. What is Operations Management (OM)? Organizational view Manufacturing or Service Organization Marketing Operations Finance Sales Facilities Credits Advertising Production Disbursements Sales promotion Inventory control Funds management Market research Quality assurance Capital requirements Purchasing Engineering Support functions: Human Resources, Information Technology, Administration MOS 3330: OM Introduction 3 3 Process view Operations: Transformation of inputs into finished goods and services Inputs Transformation Raw materials Physical (ex. Manufacturing) Supplies Locational (ex. Deliveries) Outputs Employee skills Exchange (ex. Retail) Finished goods Facilities Physiological (ex. Healthcare) Services Capital Psychological (ex. Entertainment) Equipment Informational (ex. Education) Operations Management: Planning, design, coordination and execution of operations-related activities MOS 3330: OM Introduction 4 4  Strategic view Environmental Scan & Market Analysis Internal Audit Mission & Vision Corporate Strategy Future direction Competitive priorities Operations Strategy Cost Quality Time Flexibility High Fast Customization Low Consistent On-time Volume MOS 3330: OM Introduction 5 5 2. Why Study OM? At the core of all organizations Interrelated with other areas’ activities Contribution to the overall corporate strategy 25% of all Canadian jobs are in goods-producing sector Operations managers manage:  Production/service  Technology  People  Projects  Strategy MOS 3330: OM Introduction 6 6  3. Goods vs. Services Service is:  Usually intangible and “consumed” right after serving  High customer interaction  Often customized and cannot be stored for future use Service, compared to producing goods, is more:  Labour intensive, knowledge based, difficult to automate, difficult to measure service quality and productivity  Total productivity = Output / Input  In many cases, distinction is not clear-cut  For example, fast food, computer  Service as a distinguishing factor for a manufacturing firm MOS 3330: OM Introduction 7 7 MOS 3330: OM Introduction 8 8  SUPPLY CHAIN MANAGEMENT Learning Objectives: 1. Supply chains 2. Supply chain related subjects 3. Bullwhip effect 4. Supply chain strategies 5. Supplier relationships MOS3330: Supply Chain Management 9 9 1. Introduction  Supply chain: A network of facilities, functions, and activities involved in producing and delivering products or services, from suppliers to customers  Supply chain management: (i) coordination of the movement of goods through the supply chain, and (ii) control of information such as sales data, sales forecasts, promotions, and inventory levels MOS3330: Supply Chain Management 10 10  1.1 Traditional View of Supply Chains Suppliers Manufacturers Wholesalers Retailers Customers Distributors Information Flow Goods Flow Revenue Flow MOS3330: Supply Chain Management 11 11 1.2 Network View of Supply Chains Tablets Pharmaceutical Chemicals Capsules products Active Formulation Packaging Distributor Ingredients Bottles, caps Printed labels Pharma. & materials products Tier 1 suppliers Primary Secondary Retail (e.g., for Packaging) Packaging Packaging Pharmacy = direct suppliers Blank Pharma. labels products Tier 2 suppliers (e.g., for Packaging) Label Customer = suppliers who supply Manufacturer to tier 1 suppliers MOS3330: Supply Chain Management 12 12  1.3 e-Supply Chains Logistics Supply Data Customers Data Customer Data Production Data Suppliers Logistics Providers Contract Manufacturers Information Flow Goods Flow MOS3330: Supply Chain Management 13 13 2. Supply Chain Subjects  Logistics  Purchasing  Sourcing  Bullwhip effect  Sustainable  Other subjects (mention only)  Information management: accuracy, timing  Globalization: foreign business practices and regulations  e-Commerce  Radio Frequency Identification (RFID) MOS3330: Supply Chain Management 14 14  2.1 Logistics  Shipping and delivery: transportation cost, mode, lead time, traffic management  Highway flexibility  Rail or water high volume at low cost  Pipeline high volume at low cost  Air fast  Distribution management  Facility location (where/how many facilities?): proximity to customers, business climate, quality of labour, infrastructure  Positioning of inventory (where/how many to hold?)  Third-party logistics (3PL)  Outsourcing freight consolidation and distribution activities  International business MOS3330: Supply Chain Management 15 15 2.2 Purchasing  Ordering and receiving materials: materials of correct quality, in correct quantity, at good price, and on time  Purchasing cycle: 1. Purchasing receives the requisition 2. Purchasing selects a supplier 3. Purchasing places the order with the vendor 4. Monitoring orders 5. Receiving orders  Interface with accounting, engineering, & legal teams  Develop a supplier base: select, evaluate & maintain Sourcing MOS3330: Supply Chain Management 16 16  2.3 Sourcing  Selecting suppliers  Price, quality, services, location, inventory policy, flexibility  Supplier selection strategies Single Sourcing Multiple Suppliers - Quantity discount - Competitive pricing - More responsive - Spreading risks - Frequent deliveries - Low dependence - High quality - Volume flexibility - Better relations - Easier to test new supplier - Support just-in-time - Not enough capacity - Order is too small - Government regulations - High ordering cost MOS3330: Supply Chain Management 17 17 3. Bullwhip Effect Increasing distortion of information along the supply chain  Customer demand gets distorted as information reaches suppliers Contributing factors  Batch ordering, high ordering cost, free return policy  Promotions, pricing that leads to forward buy  No visibility of end demand, inaccurate forecast  Long lead time, localized reaction  Mistrust, conflict of interest MOS3330: Supply Chain Management 18 18  Bullwhip Effect Source: Johnson & Pike (1999) Grocery store order size Distribution centre order size Central warehouse order size MOS3330: Supply Chain Management 19 19 3.1 Implications of the Bullwhip Effect Loss of volume breaks Higher finished goods Higher freight costs Lower inventory & Higher raw material inventory revenues warehousing costs Supplier Raw material schedule Customer Increased expediting variability switching safety stock Manufacturer Distributor Retailer Schedule Poor Stockouts Small changes demand and late Shipments & planning orders Shipping b/w Warehouses Productivity loss Higher WIP Inventory Poor service & longer lead time Higher shipping costs Order of consequences MOS3330: Supply Chain Management 20 20  3.2 Solutions to the Bullwhip Effect Traditional “solution” = increase inventory Modern approach Examine the contributing factors Improve the supply chain metrics Understand the supply chain relationships: interdependent, systemic and goal sharing  Improve coordination, communication & collaboration MOS 3330: Supply Chain Management 21 21 4. Supply Chain Strategies Physical proximity  75% of Honda’s suppliers are located within 150 miles of its Marysville plant in Ohio Plant-direct shipping: from the manufacturer to retailer  Pampers to Wal-Mart, Dell Computer Cross-docking: goods move from one loading dock to another without being stored as an inventory  Wal-Mart distribution centres Receiving Put away Replenish Picking Staging Shipping STORAGE CROSS DOCK DIRECT SHIP MOS 3330: Supply Chain Management 22 22   Postponement: customize products as late as possible  Distribution centres performing assembly, packaging, etc.  Vendor-managed inventory: let the vendor manage ordering, warehousing, shipping, and placing products  IKEA, music CDs at department stores  Virtual integration: allow suppliers to access critical information in real time  Retail Link at Wal-Mart: Point-of-Sales (POS) data shared with its suppliers  Vertical integration: control the most or all of a supply chain  McDonald’s in Russia  CPFR  See the next slide MOS 3330: Supply Chain Management 23 23 5. Supplier Relationships: CPFR  Collaborative Planning, Forecasting, and Replenishment  Process where trading partners share and discuss planning, forecasting, and replenishment information in order to work in partnership from a single forecast  Share forecast through the CPFR process  Share replenishment data through the supplier schedule  Guidelines for information sharing  Operating agreement  Voluntary Inter-Industry Commerce Standards (VICS)  Builds collaborative and strategic relationships MOS 3330: Supply Chain Management 24 24  Business Relationships Open market - Multiple suppliers - Price based decisions environment - Short term decisions - Adversarial - Fewer suppliers - Longer term contracts Cooperative - Move away from price-based purchase criteria - Win-win relationship - Joint planning - Open exchange of information Collaborative - Technology sharing - Strategic relationship Future: mass collaboration at the industry level? MOS 3330: Supply Chain Management 25 25 6. Sustainability in Supply Sustainability: Reduced use of resources, and harm to the environment, so that the future is not threatened. Supply chain sustainability: refers to companies’ efforts to consider the environmental and human impact of their products’ journey through the supply chain, from raw materials sourcing to production, storage, delivery and every transportation link in between. Sustainable Supply Chain Management: Supply chain management focuses on the speed, cost and reliability of operations, while sustainable supply chain management adds the goals of upholding environmental and societal values. This means addressing global issues such as climate change, water security, deforestation, human rights, fair labor practices and corruption. MOS 3330: Supply Chain Management Introduction 26 26  Key words in sustainability Biodegradable: Something capable of decaying into its basic components. Carbon emissions: Pollution released into the atmosphere from carbon dioxide and carbon monoxide; often produced by motor vehicles. Carbon footprint: The amount of carbon dioxide produced by your lifestyle. Climate change: Significant change in climate including temperature, precipitation, or wind that lasts for an extended period. Compostable: Decomposition of organic material within a specific time frame. Eco-friendly: Environmentally minded actions that cause minimal harm to the earth. Fair trade: Principles of fair treatment, wages, and safe working conditions for workers. Greenwashing: Misrepresenting something as being “green” when it’s not environmentally sound. Recyclable: Items that can either be reused or broken down and converted into new products. Renewable energy: Electricity from replenishable sources such as geothermal, hydropower, solar, and wind. MOS 3330: Supply Chain Management 27 27 Examples of sustainability in supply chains A road builder moved away from buying asphalt based only on the price – result was a cut in shipping distance and related carbon emissions by 40%. A fast-food company redesigned its packaging – eliminated literal tons of waste. A grocery store in Canada launched using refillable packaging for products such as ice cream, sauces, snacks, pet food, and toothpaste – reducing plastic waste. And when delivering products using route optimization to help ensure efficient customer deliveries. A car producer with a plant the size of about 60 football fields assembling some 375,000 cars each year and employing 5,500 people transformed its automotive assembly plant into a zero- landfill factory - lowering waste generation by 60% since 2000. MOS 3330: Supply Chain Management Introduction 28 28  6. Benefits from Supply Chain Improvement  Lower inventory  Shorter cycle time  Lower total cost  Higher service levels  Stronger relationship with supply chain members MOS 3330: Supply Chain Management 29 29 MOS 3330: Supply Chain Management 30 30  INVENTORY MANAGEMENT Learning Objectives: 1. Purposes of inventory 2. Inventory control systems 3. Inventory costs 4. Formula EOQ models Sheet 5. Safety stock MOS 3330: Inventory Management 31 31 1. Introduction Inventory: A stock of items or materials held to satisfy eventual demand  Raw materials, purchased parts and supplies  Work-in-process (partially completed) products  Finished goods  Rework items  Tools, machinery, and equipment  Labour MOS 3330: Inventory Management 32 32   Types of inventory based on different purposes  Anticipation inventory to meet demand forecast (e.g., seasonality)  Safety stock  buffer to protect against uncertainties  Lot-size inventory  result of batch ordering  Pipeline inventory  in transit  Hedge inventory  to protect against future events (e.g., price increase of raw materials)  Maintenance, Repair and Operating (MRO) inventory  to minimize disruptions to general operations and maintenance  Decoupling  work-in-process items waiting for the next step MOS 3330: Inventory Management 33 33 Why keep inventory?  Buffer against expected & unexpected changes  Faster customer service  Economies of scale (production, purchasing)  Not to be dependent on suppliers Why is too much inventory bad?  Cost (ties up working capital, may deteriorate or get stolen)  Need for storage space  Need for labour (material handling, transfer)  Complacency General objective: To keep enough inventory to meet customer demand and be cost efficient Main operational concerns: When to order and how many to order MOS 3330: Inventory Management 34 34  2. Inventory Control Systems Different ways of determining when & how many to order  Q system  fixed quantity  P system  fixed time period  ABC system MOS 3330: Inventory Management 35 35 2.1 Q System vs. P System Q System P System  Reorder a fixed quantity (Q)  Reorder after a fixed time period whenever the inventory falls to (P) or below a reorder point (R)  Periodic review system: reviews the inventory periodically  Continuous review system: reviews the inventory each time a withdrawal occurs  Order quantity (Q) varies Q = (Target inventory level) –  Time between orders varies (Current inventory level) Compare in terms of record keeping system, administration cost, responsiveness to demand variability, average inventory level, and ease to combine orders to the same supplier MOS 3330: Inventory Management 36 36  2.2 ABC System  An inventory classification system in which a small percentage of items (A-level) account for most of the inventory value Level % of units % of dollar value (e.g., annual volume x unit cost) A 5-15 70-80 B 30 15 C 50-60 5-10 Step 1: Classify products into ABC categories Step 2: Apply a different inventory policy to each category MOS 3330: Inventory Management 37 37 Inventory Management Policy (Example) A items B items C items  High priority  Moderate priority  Low priority  Tight control with  Moderate control  Simple control regular review with regular attention  Carefully  Order quantities or  Large inventories, determined Q, order points reviewed visual review frequent deliveries, quarterly continuous review  Batch updating of  Simplified  Very accurate and inventory records counting, annual detailed inventory review records, update monthly MOS 3330: Inventory Management 38 38  3. Inventory Management Costs  Ordering (set-up) cost: Fixed cost incurred whenever a replenishment order is placed, regardless of the quantity  Requisition and purchase ordering, transportation and shipping, receiving and storage, inspection, accounting and auditing costs  Holding (carrying) cost: Cost to keep one item in inventory for a period of time (usually one year)  $ per unit per period or % of a unit cost/price  Rent, heating, cooling, lighting, security, record keeping costs  Interest on loans, depreciation, obsolescence, spoilage  Shortage (stockout) cost: Cost of not being able to meet customer demand  Loss of sales, loss of future sales, loss of production, penalties  Backorder: the order is filled from the next shipment MOS 3330: Inventory Management 39 39 4. Economic Order Quantity (EOQ) Models  For managing anticipation inventory  Mathematical model for determining order quantity and when to reorder Assumptions:  Demand is independent, known, and constant  Supply is certain and received all at once in a batch  Replenishment lead time is known and constant  Lead time: Time between order placed and order received  Cost information is fixed and constant  No shortages and no back orders MOS 3330: Inventory Management 40 40  EOQ Inventory Model: Order cycle time Formula Sheet = (No. of days in a year) / (No. of orders) Annual demand (D) Order qty (Q) Average daily demand (d) Inventory Level Reorder point (R) R=dL Formula Sheet 0 Lead Lead Time time time (L) (L) Order Order Order Order Placed Received Placed Received MOS 3330: Inventory Management 41 41 4.1 Basic Model Total annual inventory management cost (TC) = (Annual ordering cost) + (Annual holding cost) = (Ordering cost)(No.of orders)+(Holding cost)(Average inv.)  TC = CO (D/Q) + CH (Q/2) Formula Sheet EOQ objective: to minimize TC  EOQ = (2DCO / CH)½ Formula Sheet Annual cost ($) Total Cost Minimum Holding Cost = CHQ/2 total cost Ordering Cost = CoD/Q Order Quantity (Q) EOQ MOS 3330: Inventory Management 42 42  Example 1: Western Jeans Company (WJC) purchases denim from Huron Textile Mills. WJC uses 36,000 yards of denim per year. The cost of ordering denim from Huron is $500 per order. It costs Western $0.40 per yard annually to hold a yard of denim in inventory. a) What is the total inventory cost if each order is for 6000 yards? b) What is the total inventory cost if denim is ordered every month? c) Calculate the optimal order quantity and the total annual inventory cost. MOS 3330: Inventory Management 43 43 4.2 Economic Production Quantity (EPQ) Model An order is received gradually, not all at once Common when inventory user is also the producer Inventory is depleted while it is being replenished Inventory level Demand Replenishment rate (d) rate (p-d) Maximum inventory level Q-(Q/p)d Average Q inventory level (1-d/p) 2 Begin order End Time receipt order Production Usage only receipt & usage MOS 3330: Inventory Management 44 44  Total annual inventory cost (TC) = (Annual set-up cost) + (Annual holding cost) = (Set-up cost)  (No. of production runs) + (Holding cost)  (Average inventory)  TC = CO (D/Q) + CH (Q/2)(1 – d/p) Formula Sheet d = daily demand rate p = daily production rate, where p > d Optimal production quantity: EPQ = {(2DCO)/[CH(1 – d/p)]}½ Formula Sheet Length of production run = Q/p Formula Sheet Max. inventory level = Q(1 – d/p) Formula Sheet MOS 3330: Inventory Management 45 45 Example 2: Western Jeans Company (WJC) produces and sells its own jeans. The cost of setting up the production process to make jeans is $150. The annual holding cost is $0.75 per pair, and the annual demand is 10,000 pairs. The manufacturing facility operates 311 days a year and produces 150 pairs of jeans per day. a) What is the length of production run? b) What is the maximum inventory level? MOS 3330: Inventory Management 46 46  5. Managing Safety Stock Safety stock: Buffer added to on-hand inventory to protect from demand/supply variability during the lead time EOQ model considers only anticipation inventory and says nothing about safety stock General objective: to minimize shortage costs  Method 1: % of annual demand as safety stock  Simplistic but common  Method 2: Satisfy a specified service level  Service level: The probability that the inventory available during lead time will meet demand  Service level method includes demand behaviour and probability of stockout in consideration MOS 3330: Inventory Management 47 47 Q Average Reorder demand point (R) during LT Safety Safety Stock Stock 0 Lead Lead Time Between time (L) time (L) receipt & order (P) MOS 3330: Inventory Management 48 48  FORECASTING Learning Objectives: 1. Qualitative vs. quantitative methods 2. Forecasting process 3. Time series methods Formula Sheet 4. Forecast error measures Formula Sheet MOS 3330: Forecasting 49 49 1. Introduction  Forecasting: A method for translating past experience and present events into predictions of the future  Forecasting in OM  Strategic: future products and markets  Planning: product demand  Forecasting horizon  Long-range (longer than 2 years) for strategy  Mid-range (weekly/monthly for up to 2 years) for planning  Short-range (hourly/daily for up to several months) for scheduling  Forecasting is important because  It is a starting point for business planning  All business decisions will follow the result of forecasting  “Bad” forecast can lead to a significant increase in cost MOS 3330: Forecasting 50 50  2. Types of Forecasting Methods  Qualitative: based on opinions or judgement of knowledgeable persons  Executive opinions, panel of experts  Market survey, focus group  Delphi method: to develop a consensus among experts  Quantitative: based on numerical data and mathematical models  Causal methods: based on a known or perceived relationship between the factor to be forecasted and other external or internal factors linear regression  Time series methods MOS 3330: Forecasting 51 51 Qualitative vs. Quantitative Qualitative Quantitative  Subjective  Objective  Can incorporate a variety of  Can incorporate large a volume information of information  Do not require numerical  Do not have to rely on few data individuals  Results may be biased  Numerical data may not be available  Results may be conflicting  Mathematical models may be too simplistic MOS 3330: Forecasting 52 52  1. Identify the purpose 3.Forecasting 2. Collect historical data Process 3. Examine data (plot) 4. Select appropriate models 5. Compute forecasts for historical data and check forecast accuracy 7b. Adjust No parameters 6. Is accuracy acceptable? or select new Yes model 7a. Forecast over planning horizon 8. Include qualitative information 9. Monitor results MOS 3330: Forecasting 53 53 4. Time Series Forecasting Methods  Based on statistical analysis of historical data  Time series: a set of observed values measured over successive time periods  Assumptions: (i) past demand is a predictor of future demand, and (ii) record of past demand is available  Time series demand behaviour  Average  stable over time  Trend  general increase or decrease in average demand  Seasonality  short-term periodic behaviour due to time of day, day of week, month, season, etc.  Cycle  long-term periodic behaviour due to product life cycles  Random variation  any remaining variability that cannot be explained; virtually unpredictable MOS 3330: Forecasting 54 54  Average Seasonal Pattern Cycle Demand Demand Demand Time Time Time Trend Trend with Seasonal Pattern Demand Demand Random movement Time Time MOS 3330: Forecasting 55 55 5. Time Series Forecasting Models Naïve Simple moving average Weighted moving average Exponential smoothing Adjustment for seasonality Data used in Examples 1-5: Period (t) Jan(1) Feb(2) Mar(3) Apr(4) May(5) Jun(6) Jul(7) Aug(8) Demand (Dt) 12 18 22 20 24 20 18 16 MOS 3330: Forecasting 56 56  5.1 Naïve Model Relies only on demand in the current period Short-term Sensitive to random variation Ft+1 = Dt Formula Sheet Ft+1 = forecast for period t+1 (or for any future period) Dt = actual demand in the most current period t Example 1: Use the naïve model to forecast demand for September. How about for October?  When would be a good idea to use the naïve model? MOS 3330: Forecasting 57 57 5.2 Simple Moving Average  Relies on the recent past  Smooth out random variations  Useful for stable demand Ft+1 = (Dt + Dt–1 +  + Dt–(N–1))/N Formula Sheet N = total number of periods used in calculation  Sensitivity to random variation depends on N  N is subjective Example 2: Use a 3-period moving average to forecast demand for Sept.  What happens to a seasonal effect if this model is used? MOS 3330: Forecasting 58 58  5.3 Weighted Moving Average  Weights represent the varying amounts of influence of past demand on forecast  Weights also reflect fluctuations in the demand data Ft+1 = Wt Dt + Wt–1 Dt–1 +  + Wt–(N–1) Dt–(N–1) Formula Sheet Wt = weight applied to period t’s demand  Weights are non-negative and sum to 1  Most common: most current demand has most influence  Weights and N are subjective Example 3: Suppose W8 = 0.7, W7 = 0.2, and W6 = 0.1. Use a weighted 3- period moving average to forecast demand for September. MOS 3330: Forecasting 59 59 5.4 Exponential Smoothing  A special case of weighted moving average  Requires minimal amount of data (but includes all past data) Ft+1 =  Dt + (1 – ) Ft Formula Sheet  = smoothing parameter (0 (Dem = 50)  Do not use OT/Sub  Revised TP = 60+0+0 = 60  Revised Inv = 10+6050 = 20 TC = (3600+600+1000) + 60 + 0 = $5260 MOS 3330: Aggregate Planning 83 83 Example 2b: Modify 1b – use hiring/firing to eliminate overtime and subcontracting  Start from Example 1b  Determine the level of workforce that would eliminate the need for overtime and subcontracting  For TP = 120 (from Example 1b), the workforce level of 120/2 = 60 would eliminate the need for OT/Sub TC = 7200 + 1980 + 6000 = $15180 MOS 3330: Aggregate Planning 84 84  Example 2c: Modify 1c – the target inventory level at the end of period 6 is 10 units  Start from Example 1c, where the ending inventory for period 6 = 48  To achieve the target = 10, we need to reduce inventory by 38 units  In order to reduce inventory, we need to reduce production, starting from period 6 and work your way up  Period 6: eliminate 3 from Sub & 20 from OT Total reduction in production  Period 5: eliminate 3 from Sub & 12 from OT = 3+20+3+12 = 38 units  Need to revise TP and Inv in periods 5&6 TC = (3600+1320+240) + 320 + 0 = $5480 MOS 3330: Aggregate Planning 85 85 5. Capacity Planning  Do we have enough capacity?  If enough, are we operating at the best operating level (for example, volume of output that results in the lowest average unit cost)?  Measuring capacity  Design capacity: Maximum output rate under ideal conditions Utilizationdesign =(actual output rate)/(design capacity)  Effective capacity: Maximum output rate under normal conditions Utilizationeffective =(actual output rate)/(effective capacity)  Capacity shortage  Should we outsource or expand?  If expanding, when to increase capacity and by how much? MOS 3330: Aggregate Planning 86 86  Capacity expansion strategies: When to increase capacity Capacity lead Average capacity Capacity lag strategy strategy strategy Capacity Capacity Units Units Units Capacity Time Time Time By how much? Units One-step Incremental expansion Expansion strategy strategy Time MOS 3330: Aggregate Planning 87 87 MOS 3330: Aggregate Planning 88 88  MATERIAL REQUIREMENTS PLANNING (MRP) Learning Objectives: 1. What MRP is and does Formula Sheet 2. Inputs and outputs of MRP 3. Scheduling basics 4. Scheduling sequencing rules MOS 3330: MRP 89 89 1. Introduction Items Production Planning Capacity Planning Resource level Product lines or Aggregate Resource families Production Plan Requirements Plan Plants Individual Master Production Rough-Cut Critical work products Schedule (MPS) Capacity Plan centers Capacity Req’ts All work Components MRP Plan (CRP) centers Manufacturing Shop Floor Input/Output Individual operations Schedule Control machines MOS 3330: MRP 90 90  Aggregate plan provides a framework for shorter-term production and capacity decisions  Disaggregation: The process of breaking an aggregate plan into more detailed plans Material Requirements Planning (MRP): Computerized inventory and production control system that determines the requirements of dependent demand inventory  Introduced in the 1960s  Dependent demand inventory = parts, components, raw materials  Determine what is required, how much is required, and when it is required MOS 3330: MRP 91 91 2. MRP System Overview Master Production Inventory Product Schedule (MPS) Master File Structure File 1. Explosion: disassembly of the end product into its components 2. Netting: (Net requirements) = (Gross reqts) – (On- hand inventory) – (Quantity on order) Formula Sheet 3. Offsetting: order release is offset by production or delivery lead time 4. Lot sizing: determine the batch size to be purchased or produced Planned Order Releases Work Orders Purchase Orders Action Notices MOS 3330: MRP 92 92  2.1 Master Production Schedule (MPS)  States the requirements for individual end items by date and quantity Aggregate Production Plan Month Jan Feb Mar Apr Days 21 19 23 20 Plan 21,000 19,000 23,000 20,000 MPS for April Week 1 2 3 4 Prod X 2,000 4,000 5,000 2,500 Prod Y 3,000 1,000 2,500 Totals 5,000 5,000 5,000 5,000 MPS is Not MPS should be  a sales forecast  anticipated build schedule  a wish list  realistic and achievable  a final assembly schedule  may not be feasible MOS 3330: MRP 93 93 2.2 Inventory Master File Description Inventory Policy Item Board Lead time 2 Item no. 7341 Annual demand 5,000 Item type Manuf. Holding cost 1 Product/sales class Ass’y Ordering/setup cost 50 Value class B Safety stock 25 Buyer/planner RSR Reorder point 39 Vendor/drawing 07142 EOQ 316 Phantom code N Minimum order qty 100 Unit price/cost 1.25 Maximum order qty 500 Pegging Y Multiple order qty 100 LLC3 Policy code 3 Physical Inventory Usage/Sales On hand 100 YTD usage/sales 1,100 Location W142 MTD usage/sales 75 On order 50 YTD receipts 1,200 Allocated 75 MTD receipts 0 Cycle 3 Last receipt 8/25 Difference -2 Last issue 10/5 MOS 3330: MRP 94 94  2.3 Product Structure File Clipboard Clip Assembly Rivet Board (1) (2) (1) Top Clip Bottom Clip Pivot Spring Pressboard Finish (1) (1) (1) (1) (1) (2oz.) Sheet Sheet Spring Iron Metal Metal Steel Rod (8 in2) (8 in2) (10 in.) (3 in.) Bill of material (BOM): lists which and how many items that go into a product MOS 3330: MRP 95 95 Example 1: Based on the product structure diagram on the previous slide: a) How much spring steel is needed to fill an order of 500 clipboards if on-hand inventory = 0? (Explosion & netting) b) How much sheet metal is needed to fill an order of 1000 clipboards if on-hand inventory = 7000? (Explosion & netting) c) In order to produce 1000 clipboards, subassembly takes 1 day and final assembly takes 1 day. For b), when should an order for sheet metal be placed if 1000 clipboards are needed by April 11? Order lead time = 5 days. (Offsetting) d) In b), if the order lot size is 2000, how much would you order? (Lot sizing) MOS 3330: MRP 96 96  3. MRP as an Analysis Tool  MRP is not a demand planning tool  Input quantities are production quantities, not demand  Production plan derived from aggregate production planning  MRP is deterministic  All input numbers are known  Problems show up as the action notices  Main MRP problem = shortage of components/finished goods  MRP is a simulation tool  Can estimate the production outcome identifies potential shortage before actual production  Does not solve problems on its own requires human input  Solution examples: to purchase or produce more ahead of time; to move some jobs forward (expediting) or backward (de-expediting)  Can show how the change in MRP input (i.e., a potential solution) affects MRP output shows whether or not the solution would work MOS 3330: MRP 97 97 4. Production Scheduling  Allocation of resources to accomplish specific tasks  Last stage of planning before production  Scheduling objectives  Meet customer due dates  Minimize job lateness, response time, completion time, overtime, idle time, and work-in-process inventory  Maximize labour or equipment utilization  Scheduling performance measures  Job flow time: total time a job spends in the shop incl. waiting, setup  Makespan: total time to finish a batch of jobs  Average number of jobs in the system: measure of WIP inventory  Job lateness: ahead of, on, or behind the schedule  Job tardiness: how long after the due date the job is completed MOS 3330: MRP 98 98  4.1 High Volume vs. Low Volume High Volume Production Low Volume Production  Length of a production run,  Coordination difficulty from flow schedule, line balancing having a variety of orders, tasks & process requirements  Bottleneck: an operation with the lowest effective capacity  Loading: assigns jobs to work centres according to  Optimized Production performance efficiency, skill Technology (OPT): a technique requirements, and job priority used to schedule bottleneck systems  Sequencing: determines the sequence in which jobs  Theory of Constraints (TOC): a assigned to a work centre are to management philosophy that be processed extends the concepts of OPT MOS 3330: MRP 99 99 4.2 Sequencing Rules  First come first served (FCFS)  Last come first served (LCFS)  Earliest due date first (EDD): min. tardiness  Shortest processing time first (SPT): min. average flow time  Longest processing time first (LPT) “Formulas” for Scheduling Performance Measures: Job flow time = (waiting time) + (processing time) Formula Sheet Makespan = finish time for the last job Formula Sheet Avg.# jobs in the system=(all jobs job flow ime)/(makespan) Formula Sheet Job lateness = all jobs (finish time  due time) Formula Sheet Job tardiness = only late jobs (finish time  due time) Formula Sheet 10 MOS 3330: MRP 0 100  Example 2: A hospital lab has one MRI, and 5 patients need scheduling. Job: A B C D E Processing time (hrs): 4 7 2 6 3 Pickup time (hrs from now): 6 12 7 16 8 Avg. Flow time Tardiness Tardi- Sequence flow =wait+process =finish-due ness time FCFS LCFS EDD SPT LPT MOS 3330: MRP 101 101 4.3 Other Types of Operations Scheduling Scheduling in services  Complicated because demand is often variable and difficult to forecast  Service scheduling: appointments, reservations, posted schedules, backlogs  Staff scheduling: peak demand, floating, on-call, seasonal, part- time Maintenance scheduling  Repair scheduling  Preventative maintenance MOS 3330: MRP 102 102  ENTERPRISE RESOURCE PLANNING (ERP) Learning Objectives: 1. What is ERP 2. Historical development of ERP 3. ERP enablers 4. Implementation issues 5. Project management basics MOS 3330: ERP 103 103 1. Introduction Enterprise Resource Planning (ERP): Software with integrated modules for controlling and coordinating business processes of an entire enterprise Manufacturing information systems as the origin: MRP 1960s MRP + CRP 1970s MRP II 1980s ERP 1990s to present MOS 3330: ERP 104 104  2. Information Systems  A collection of components that work together to provide desired information in the proper format at an appropriate time  ERP is one type of IS Software People Data Hardware Information Procedures Information Technology MOS 3330: ERP 105 105  ERP is one type of transaction processing systems  Maintain a huge volume of transaction records  sales, purchases, customers, creditors, banking  ERP is one type of information reporting systems  Provide various reports  Provide information for managers Management Information Systems (MIS)  ERP is not a functional (departmental) information system; it consists of all key functional modules  Accounting  accounts receivable/payable, payroll records, budgeting, financial planning  HR  personal data, job skills, training history, pay rates, insurance, vacation days, sick leave time  Marketing  sales orders, buying trends, customer databases, product information, advertising records MOS 3330: ERP 106 106  3. MRP + CRP (1970s) MRP ensures that material requirements are met Capacity Requirements Planning (CRP): checks for the availability of labour and/or machine hours  CRP identifies capacity overload and underload  CRP does not solve problems on its own Human intervention required for deciding:  Overtime or reduce work load  Push back a job or pull ahead a job MOS 3330: ERP 107 107 4. MRP II (1980s)  Manufacturing Resource Planning (MRP II): Extension of MRP that plans all resources needed for running a business  MRP + CRP + Finance + Marketing  Finance  access to accurate reliable operations numbers  Sales  less trouble shooting, more selling, able to promise  HR  easier to assess performance measures  Limitations  Limited functional integration  Often limited to one location  No supply chain capabilities MOS 3330: ERP 108 108  5. ERP (Since 1990s)  To create the information linkages that integrate the processes and structures within a supply chain  MRP II + Supply Chain Management + Global Presence Finance Customers Suppliers Operations Sales & ERP & Logistics Marketing HR MOS 3330: ERP 109 109 5.1 ERP Technological Enablers (Building Blocks)  Advancement in electronic communication  For example, technology behind e-mails and e-bulletin boards  Electronic data  Bar codes and electronic scanning  Advancement in computer-to-computer data sharing  Electronic Data Interchange (EDI): Computer-to-computer exchange of business documents in a standard format  Electronic Funds Transfer (EFT): Computer-to-computer exchange of funds  Data conversion software  Internet  e-commerce; shared databases; cloud storage MOS 3330: ERP 110 110  5.2 ERP Mixed Results in the 1990s Popularity of ERP systems soared after an introduction of SAP’s ERP software, R/3, in 1994 Other big ERP vendors: Oracle, Microsoft, Deltek, and Sage Success/Benefits Nightmare in the 1990s  Cisco Systems, Kodak  FoxMeyer Drug bankruptcy  Lower inventory levels  Law suits (Boeing, Dow Chemical,  Lower workforce costs Mobil Europe, Hershey, Kellog’s)  On-time completions  Dell Computer scrapping SAP’s  Better coordination among ERP software different functional areas  1999 survery  40% partial  Better communication implementation, 20% scrapped  Better data integrity MOS 3330: ERP 111 111 5.3 ERP Implementation Issues Technical:  Handling large amounts of data  Inaccurate data, loss of data  Insufficient training  Lack of understanding of what ERP is or does Behavioural:  Lack of support by management  Lack of commitment by employees  Coordination difficulty among different functions  Ownership claim problem (too much vs. too little)  Unrealistic expectations, unrealistic promises  Not understanding the underlying needs  Changing habits MOS 3330: ERP 112 112  6. Project Management  Project: one-at-a-time product exactly to customer specifications  Project management: application of knowledge, skills, and techniques to project activities in order to meet stakeholder needs  Project manager must  Balance scope, time, cost and quality  Manage multiple stakeholders with differing needs  Satisfy identified requirements (needs) & unidentified requirements (expectations)  Project life cycle 1. Concept  identify the need for the project 2. Feasibility analysis  evaluate costs, benefits, and risks 3. Planning  decide who does what and how long 4. Execution  do the project 5. Termination  end the project MOS 3330: ERP 113 113 Topics Covered By Project Management Institute:  Scope  Human resources See next 3 slides  Time  Cost  Quality  Risk  Procurement  Communications  Integration MOS 3330: ERP 114 114  6.1 Project Scope Management  To ensure that the project includes all the work required, and only the work required, for successful completion  Project scope  work that must be done for delivering a product  Product scope  features and functions of a product or service  Scope planning  Product description, formal recognition of business need  Constraints and assumptions  Scope definition  Cost, time and resource estimates, how to measure performance, and clear responsibility assignments  Scope change control  How to deal with scope changes, corrective action, and lessons learned MOS 3330: ERP 115 115 6.2 Project Human Resource Management  Organizational planning  Project roles, responsibilities, and reporting relationships  Communication planning  Distribution structure, record keeping structure  Status and progress reporting, expectations  Staff acquisition  What skills are required from which individuals or groups, when and how long  Team development  Training, meetings, “war room” MOS 3330: ERP 116 116  6.3 Project Time Management Time Tracking Tools  Gantt chart: visual representation of a schedule over time  Load chart: shows the planned workload and idle times  Progress chart: shows planned and actual progress  Project management software (for example, Microsoft Project) Time Estimate Techniques  Critical Path Method (CPM): identify the critical path using a network diagram with deterministic time estimates  Critical path: a set of activities that would cause an overall project delay if any of them is late  Program Evaluation and Review Technique (PERT): probabilistic time estimates MOS 3330: ERP 117 117 MOS 3330 118 118  PROCESS AND PRODUCT DESIGN Learning Objectives: 1. Process types 2. Facility layout types 3. Manufacturing technology 4. Product design basics MOS 3330: Process & Product Design 119 119 1. Introduction Process: How to transform input into output Classification by  Type of product flow (fixed position, jumbled flow, line flow, continuous flow)  Approach to customer orders (make-to-order, make-to-stock, assemble-to-order)  Amount of customization  Our focus  demand volume vs. product standardization (product variety; the level of customization) MOS 3330: Process & Product Design 120 120  2. Classification by Volume and Standardization Intermittent Product Standardization operations Low Project Repetitive Batch operations process Mass process Continuous High process Low High Product Volume MOS 3330: Process & Product Design 121 121  Project: one-at-a-time product exactly to customer specifications  Batch: small quantity of products in batches based on actual or expected customer orders  Mass: large volume of a standardized product, assembly line format  Continuous: continually produce a very high volume of a fully standardized product Intermittent Repetitive Product variety Great Small Approach to customer orders Make-to-order Make-to-stock Product flow Jumbled Line Type of equipment General purpose Specialized Degree of automation Low High Critical resources Labour Capital Throughput time Longer Shorter WIP inventory More Less MOS 3330: Process & Product Design 122 122  3. Process Type and Facility Layout  For intermittent operations  Process layout: groups resources based on similar processes  Warehouse layout, office layout  For repetitive operations  Product layout: groups resources based on products  Arranges resources in sequence (assembly lines)  Hybrid between process and product layouts  Cell layout: grouping of products based on similar requirements (processes)  Fixed-position layout: used when the product is too big and cannot easily be moved (e.g., bridge construction)  Retail layout: allocates space based on customer behaviour MOS 3330: Process & Product Design 123 123 Process layout A 1 4 Radiology Laboratory Lobby B 2 5 Physical Exam room Surgery therapy C 3 6 Product 3 A 1 2 layout A, B, C 1 2 Cell layout 3 5 4 MOS 3330: Process & Product Design 124 124  4. Process Type and Technology Adoption Intermittent operations General Low purpose Product Standardization Group Technology Repetitive operations FMS Focused automation Dedicated High automation Low High Product Volume MOS 3330: Process & Product Design 125 125 Manufacturing Technologies  Group technology  Grouping of dissimilar automated machines to produce a family of parts  Flexible manufacturing system (FMS)  Consists of numerous programmable machine tools connected by an automated material handling system  Robotics  Controlled by a computer; can perform complex tasks  Computer-aided manufacturing (CAM)  Controlling manufacturing through computers  Computer-integrated manufacturing (CIM)  Integration of product design, process planning, and manufacturing through computers MOS 3330: Process & Product Design 126 126  5. Process Selection Cost, volume, product maturity level, labour/technology availability Matching process and corporate strategy Intermittent Repetitive Corporate strategy Customized products Mass market Operations strategy Low volume, customized service High volume Competitive priorities Volume flexibility, customization Low cost Matching process and product product design MOS 3330: Process & Product Design 127 127 6. Product Design Process of defining all of the product’s characteristics General steps in product design 1. Idea development (customer driven, reverse engineering, R&D) 2. Product screening (feasibility study) 3. Preliminary design and testing 4. Final design Faster introduction of new products  Concurrent engineering: Multifunctional team approach to simultaneously design the product and the process  Computer-aided design (CAD): Use of computer graphics to design new products  3D printing: Method of making an object by adding thin layers of materials layer-by-layer based on CAD MOS 3330: Process & Product Design 128 128  JUST-IN-TIME SYSTEMS Learning Objectives: 1. JIT origin and philosophy 2. JIT key elements 3. Implementation issues 4. Job design basics MOS 3330: JIT Systems 129 129 1. Introduction Just-in-time (JIT) manufacturing: To produce only what is needed, when it is needed  JIT inventory, JIT purchasing, lean manufacturing JIT philosophy: Eliminate all waste in the organization JIT system: A management system that aims to improve the manufacturing or service process by eliminating waste MOS 3330: JIT Systems 130 130  1.1 Origin of JIT Systems  In the 1950s, the Japanese were short on capital and space  For Toyota (Taiichi Ohno), to improve performance meant to reduce inventory  Inventory hides problems  Reducing inventory led to reducing all kinds of waste Machine breakdowns Poor Poor vendors Long Poor design Inefficient setups quality layout MOS 3330: JIT Systems 131 131 1.2 Types of Waste Waste: Anything other than the minimum amount of resources that is essential to add value to the product  Process  Waiting time  Scrap  Unplanned  Non-value-added cost  Planned queue  Wrong tools/equipment  Waiting for other parts in batch  Over-production  Methods  Extra inventory  Searching for tools  Inappropriate use of resources  Poor layout  Walking  Inventory  Storage  Movement  Material handling  Capital costs  Receiving  Product defects  Storing  Interrupted flow  Retrieving  Lost capacity  Wait for replacement MOS 3330: JIT Systems 132 132  2. Key Elements of JIT Systems Work cells efficiency within a process, multi-functional workers Pull system coordination between processes  To improve the pull system, reduce the variability associated with supply and demand  To control supply variability  Small lot sizes  Preventive maintenance  High quality  Reliable suppliers  To control demand variability  Uniform loading MOS 3330: JIT Systems 133 133 2.1 Work Cells  Eliminate worker inefficiency increase worker productivity  Operation of a number of different machines highly utilized, multi-functional workers  Cellular facility layout: work is moved within a cell (mostly U shaped) according to a prescribed path  Different from traditional automobile production, which is mass production of standardized products using assembly lines  Flexible machines  Automated, general purpose machines  Quick setup time MOS 3330: JIT Systems 134 134  Work Cell Example Machines Product route Worker 2 Worker Worker 3 1 Exit Cell: grouping of products based on similar requirements MOS 3330: JIT Systems 135 135 2.2 Pull Production System  Improve poor coordination between processes eliminate the need for large inventory  Major problem in automobile manufacturing  Push system: Each workstation produces according to a schedule and “pushes” its completed work to the next workstation  Traditional approach to production; builds inventory  Pull system: Each workstation requests, or “pulls”, items from the previous workstation only when needed  Prevent overproduction and underproduction  Force coordination between processes kanban system MOS 3330: JIT Systems 136 136   Kanban system: A visible production control system which authorizes the production or movement of the next batch of material only when needed  Kanban: a Japanese word for “signal” or “visible record”  Most common form: card, container  Kanbans are not schedules  Work the same way as a fixed-quantity inventory system where order quantity (Q) equals to the reorder point (R)  Only inventory maintained is the amount needed to cover usage until the next order arrives  MRP vs. Kanban  Schedule vs. cue  Complex vs. repetitive  Higher-level vs. shop-level control MOS 3330: JIT Systems 137 137 2.3 Supply Variability #1: Lot Sizes Each kanban “container” represents the production or order lot size Small lot sizes provide many benefits  Better coordination  Better material handling  Reduce average inventory level  Reduce inventory space  Avoid buildup of defective items  Flexibility in reacting to problems Quick set-up is crucial MOS 3330: JIT Systems 138 138  2.4 Supply Variability #2: Machine Breakdowns  Maintenance: To keep facilities and equipment in good working order  Machine downtimes are waste fix fast fixing is also waste  Preventive maintenance: Periodic inspection and maintenance designed to avoid breakdowns  Preventive vs. breakdown maintenance  Necessary due to small inventory and high automation  Work environment: Five S’s  Seiri (housekeeping), Seiton (workplace organization), Seiso (clean-up), Seiketsu (keep clean), Shitsuke (discipline) MOS 3330: JIT Systems 139 139 2.5 Supply Variability #3: Quality Consistently high quality products are necessary due to small inventory Quality at the source: uncover the root cause  Andon lights to signal problems  Empowerment: authority given to workers to stop the production line if a problem occurs Preventive  Poka-yoke: devices that are designed to prevent mistakes/defects from happening  Standard parts, modular design: reduce variability Continuous improvement (“kaizen”)  Quality Circle: team-based process improvement  Under-capacity scheduling to deal with problems daily MOS 3330: JIT Systems 140 140  2.6 Supply Variability #4: Suppliers  Need reliable suppliers for on-time, frequent deliveries  Must build long-term, close relationships with few suppliers  Single sourcing: entire family of parts provided by one supplier  JIT II: supplier working in the manufacturer’s plant  Physical proximity is preferred but not necessary  From the supplier’s point of view: Guaranteed, steady demand Advanced notice of volume changes Minimal design changes Lots of requirements Competitive vs. cooperative dilemma “All eggs in one basket” MOS 3330: JIT Systems 141 141 2.7 Demand Variability Cells can deal with changes in product mix and volume to a certain extent  Volume adjustment by a number of workers  Volume adjustment by integrating or separating cells Kanban system can absorb 10% variability in demand by manipulating the number of kanbans  The fewer kanbans, the less production  At Toyota, container size is at most 10% of daily demand Uniform loading: Arrange daily production mix in the same ratio as monthly demand  Always have some quantities of each product  Steady demand on components MOS 3330: JIT Systems 142 142  3. Before and After JIT Before After  Inventory to protect against Reduce inventory problems & uncertainty  Assembly lines Cells  Push manufacturing Pull manufacturing  Tolerate defects Zero defects  Tolerate setup times Reduce setup times  Emphasize work of individuals, Emphasize team-oriented following manager instructions employee involvement  Treats suppliers as independent Suppliers as partners entities MOS 3330: JIT Systems 143 143 4. Benefits of JIT Systems  Reduced inventory  Shorter cycle time  Reduced space  Shorter lead time requirements  Greater flexibility  Improved quality  More product variety  Improved process  Increased productivity  Better use of human  Increased machine resources utilization  Better relations with suppliers  Increased employee participation MOS 3330: JIT Systems 144 144  5. JIT Implementation Issues  All key elements must be present and integrated for the system to work well  Must balance technical and behavioural aspects  Each organization must mould a JIT system to suit its own environment  JIT system requires a fundamental change in the organization  Not suited for  Very high volume  Very low volume, unique products  Highly fluctuating demands or true make-to-order products MOS 3330: JIT Systems 145 145 6. Job Design  Job design: specifies the contents of the job  Automation  Good for repetitive, computational, precise or physical tasks  Not good for people interaction, creativity, multiple variables  Specialization: performing single or limited tasks Management Readily available labour High absenteeism Minimal training High turnover rates Reasonable wage High scrap rates High productivity Grievances filed Minimal credentials Boredom Workers Minimal responsibilities Little growth opportunity Minimal mental effort Little control or initiative Reasonable wage Little intrinsic satisfaction MOS 3330: JIT Systems 146 146   Alternative job designs  Job rotation: shifts workers to different jobs to increase understanding of the total process  Job enlargement: expansion of the job through increasing the scope of the work assigned  Job enrichment: expansion of the job through increasing the worker responsibility  Teams  Problem-solving teams  Special-purpose teams  Self-directed teams  Work measurement  Method analysis: the study of how a job is done  Time study method: sets a standard time based on timed observations of one worker over several cycles MOS 3330: JIT Systems 147 147 MOS 3330: JIT Systems 148 148  QUALITY Learning Objectives: 1. What is quality 2. Formula Quality measures Sheet 3. Costs of quality 4. Process improvement 5. Continuous improvement MOS 3330: Quality 149 149 1. What is Quality? Meaning of Quality: degree of excellence Product based Producer’s perspective Consumer’s perspective Quality of Quality of Fitness for use: Design: Conformance: Degree to which a product Degree to which Degree to which a product satisfies customer’s wants quality conforms to required Value-based: dimensions are specifications Degree to which a product designed into the provides acceptable quality at product a reasonable price American Society for Quality: The totality of features and characteristics that satisfy needs MOS 3330: Quality 150 150  2. Dimensions Of Quality Products Services  Performance: basic characteristics  Time and timeliness  Features: “extra” items  Accessibility and convenience  Conformance: meeting pre-set  Accuracy, competence standards  Reliability: frequency of failure  Completeness  Durability: length of product’s life  Consistency  Serviceability: ease of getting  Courtesy repair  Responsiveness to unusual  Aesthetics: appearance circumstances  Safety: not causing injury or harm  Communication  Perceived quality: reputation &  Security intangibles  Credibility MOS 3330: Quality 151 151 3. Quality Measures Scrap, rework, number of errors, premium shipping cost Product yield: Yield = (#Units to produce)(%Good units) + (#Units to produce)(1  %Good units)(%Reworked) Formula Sheet Quality index: report quality cost relative to some base value (indexing)  Labour index = (Quality cost) / (Direct labour hours) Formula Sheet  Cost index = (Quality cost) / (Production cost) Formula Sheet  Sales index = (Quality cost) / (Sales) Formula Sheet  Production index = (Quality cost) / (Product yield) Formula Sheet  Quality-productivity index=(Product yield)/(Production cost) Formula Sheet MOS 3330: Quality 152 152  4. Costs of Quality  All costs, tangible and intangible, relating to managing the quality of a good or service  Costs of poor quality (failure costs)  Internal failure: costs of scrap, rework, downtime, material losses  External failure: costs of product returns, repairs, recalls, warranty claims, customer complaints, and lost sales costs  As product quality , failure costs   As internal failure costs , external costs may or may not  − why?  Costs of good quality (control costs)  Appraisal: costs of testing and inspection (equipment, operators)  Prevention: costs of preparing and implementing a quality plan (product/process design, training, information costs)  As product quality , appraisal costs  but prevention costs may or may not  − why? MOS 3