Operations Management 2021/2022 PDF

NOTEBOOK OPERATIONS MANAGEMENT 2021/2022 AUTHOR1 | Vasco Ribeiro Tamen 1 Based on Prof. Ana Sofia Costa´s slides, Isabel Alvim´s notebook and the books Nigel S., Alistair B., Robert J. - Operations Management, (2016, Pearson) an...

NOTEBOOK OPERATIONS MANAGEMENT 2021/2022 AUTHOR1 | Vasco Ribeiro Tamen 1 Based on Prof. Ana Sofia Costa´s slides, Isabel Alvim´s notebook and the books Nigel S., Alistair B., Robert J. - Operations Management, (2016, Pearson) and F. Robert Jacobs, Richard B. Chase - Operations and Supply Chain Management (2018, McGraw Hill) TABLE OF CONTENTS 1. DIRECTING THE OPERATION: STRATEGIC LEVEL............................................. 3 1.1. Introduction to Operations Management.................................................................................... 3 1.2. Operations Performance.............................................................................................................. 7 1.3. Operations Strategy................................................................................................................... 11 1.4. Product and Service Innovation................................................................................................ 16 2. DESIGNING THE OPERATION: ANALYSIS AND DESIGN LEVELS.................. 18 2.1. Process Design.......................................................................................................................... 18 2.2. Layout and Flow....................................................................................................................... 24 3. DELIVER: PLANNING AND CONTROL.................................................................... 31 3.1. Planning and Control................................................................................................................ 31 3.2. Sales & Operations Planning.................................................................................................... 34 3.3. Capacity Planning and Control................................................................................................. 35 3.4. Inventory Planning and Control................................................................................................ 38 3.4.1. Fixed-order quantity model (Q-model)................................................................................................ 40 3.4.2. Fixed-time period model (P-model)..................................................................................................... 42 3.4.3. Comparison.......................................................................................................................................... 43 3.5. Materials Planning and Control................................................................................................ 44 3.6. Lean Operations and JIT........................................................................................................... 47 4. DEVELOPMENT: OPERATIONS IMPROVEMENT................................................. 52 4.1. Quality Management................................................................................................................. 52 4.1.1. Statistical Process Control................................................................................................................... 54 4.1.2. Statistical Process Capability............................................................................................................... 56 4.2. Supply Chain Management....................................................................................................... 59 4.3. Project Management................................................................................................................. 63 4.3.1. Critical Path Method (CPM)................................................................................................................ 64 4.3.2. Program Evaluation and Review Technique (PERT)........................................................................... 66 4.3.3. Time – Cost Models And Project Crashing.......................................................................................... 67 Vasco Ribeiro Tamen | Nº 43238 2 1. DIRECTING THE OPERATION: STRATEGIC LEVEL 1.1. INTRODUCTION TO OPERATIONS MANAGEMENT Operations Management is the set of activities that creates value in the form of goods and services by transforming inputs into outputs. Activities creating goods and services take place in all organizations. Core functions The operations function is one of the three core functions of any organization because it creates and delivers services and products, which is its reason for existing. The other core functions are Marketing and Product/Service Development functions. Vasco Ribeiro Tamen | Nº 43238 3 What Does Operations Management Do? Direct includes understanding relevant performance objectives, setting an operations strategy, and managing innovation and the scope of the operation. Chapters 1 to 5. Design includes the design of the operation and its processes and its resources. Chapters 6 to 9. Delivery includes the planning and controlling of the operation´s activities. Chapters 10 to 15. Develop includes the improvement of the operation over time Chapters 16 to 19. OM Key Decisions 1. Design of goods and services 6. Human resources and job design 2. Managing quality 7. Supply-chain management 3. Process and capacity strategy 8. Inventory management 4. Location strategy 9. Scheduling 5. Layout strategy 10. Maintenance What is the Process Hierarchy? Until now we saw the operations level: all operations are part of a larger supply network which, through the individual contributions of each operation, satisfies end customer requirements. But let’s inside each operation. All operations consist of a collection of processes interconnecting with each other to form a network. In fact, within any operation, the mechanisms that transform inputs into outputs are these processes. Furthermore, within each of these processes is another network of individual units of resources. So, any business, or operation, is made up of a network of processes, and any process is made up of a network of resources. Example: Business that makes television programs and videos Vasco Ribeiro Tamen | Nº 43238 4 How do Operations Processes Differ? Although all operations processes are similar in that they all transform inputs, they do differ in several ways, four of which, known as the four Vs, are particularly important: Volume of their output Variety of their output Variation in the demand Degree of Visibility of the production Variations in Demand relative to Capacity Vasco Ribeiro Tamen | Nº 43238 5 Strategies for matching supply (capacity) and demand: Makes customers wait when Stretch time Vary the service offering to demand is high appeal to new market Stretch labor (temporary segments. Excess capacity when workers, part-time employees, demand is low cross-train employees) Communicate with customers. Stretch facilities and equipment (rent, share) Use reservation systems Differentiate on price Vasco Ribeiro Tamen | Nº 43238 6  1.2. OPERATIONS PERFORMANCE Operations management can either ‘make or break’ any business. In most businesses, it represents the bulk of its assets. The positive effects of a well-run operation include a focus on improvement, the building of ‘difficult to imitate’ capabilities, and an understanding of the processes that are the building blocks of all operations. The negative effects of a poorly run operation include failures that are obvious to customers (and expensive for the organization), a complacency that leads to the failure to exploit opportunities for improvement. Three Levels of Operations Performance We will focus on the operational level, essentially in terms of the performance objectives Assessing performance at a societal level through the idea of the triple bottom line and judging how well an operation is contributing to its general strategic objectives, are clearly important, particularly in the longer term. But running operations at a day-to-day level requires a more tightly defined set of objectives focused on increasing competitiveness. There are five ‘performance objectives: Quality ⟹ Being Right Operations seek to influence the quality of the company’s goods and services. Externally Internally Quality is an important aspect of customer Quality operations both reduce costs and satisfaction or dissatisfaction. increase dependability. Vasco Ribeiro Tamen | Nº 43238 7  Speed ⟹ Being Fast Operations seek to influence the speed with which goods and services are delivered. Externally Internally Speed is an important aspect of customer service. Speed both reduces inventories by decreasing internal throughput time and reduces risks by delaying the commitment of resources. Dependability ⟹ Being on Time Operations seek to influence the dependability of the delivery of goods and services. Externally Internally Dependability is an important aspect of Dependability within operations increases customer service. operational reliability, thus saving them time and money that would otherwise be taken up in solving reliability problems and also giving stability to the operation. Flexibility ⟹ Being Able to Change Operations seek to influence the flexibility with which the company produces goods and services. Externally Internally Product/service flexibility can produce new Flexibility can help speed up response products and services times, save time wasted in changeovers, and maintain dependability. Mix flexibility can produce a wide range or mix of products and services. Delivery flexibility. can produce products and services at different times. Volume flexibility can produce different quantities or volumes of products and services. Costs ⟹ Being Productive Operations seek to influence the cost of the company’s goods and services. Externally Internally Low costs allow organizations to reduce their Cost performance is helped by good price to gain higher volumes or, alternatively, performance in the other performance increase their profitability on existing volume objectives. levels. Vasco Ribeiro Tamen | Nº 43238 8 To sum up all external and internal benefits of performance objectives: A useful way of representing the relative importance of performance objectives for a product or service is polar diagrams. The closer the line is to the common origin, the less important is the performance objective to the operation. They can also be used to indicate the difference between different products and services produced by an operation or process. Consider the example below: How can we measure operations performance? Having defined the three levels of operations performance, any business will need to measure how well, or badly, it is doing. Vasco Ribeiro Tamen | Nº 43238 9 The most common performance measures for each operations performance level are: How do Performance Objectives trade-off against each other? Trade-offs are the extent to which improvements in one performance objective can be achieved by sacrificing performance in others. The efficient frontier concept is a useful approach to articulating trade-offs and distinguishes between repositioning performance on the efficient frontier and improving performance by overcoming trade-offs. All performance objectives, to some extent, Focusing on one (or a narrow set of) are trade-offs against each other performance objective(s) can enable superior performance in that/those objectives. Vasco Ribeiro Tamen | Nº 43238 10  1.3. OPERATIONS STRATEGY Corporate strategy sets the objectives for the different businesses which make up a group of businesses. Business strategy sets the objectives for each business and how it positions itself in its marketplace. Functional strategy set the objectives for each function’s contribution to its business strategy. Operations strategy concerns the pattern of strategic decisions and actions which set the role, objectives, and activities of the operation. Strategic decisions are those decisions that are widespread in their effect on the organization to which the strategy refers, define the position of the organization relative to its environment, and move the organization closer to its long-term goals. Example of Operations Decisions: Facilities: location, size, specialization. Capacity requirements: quantities, times, types. Technology: equipment, automation, connections. Vertical integration: degree of use of suppliers/distributors Labor: level of specialization, wage policies, employment security. Quality: defect prevention, monitoring, intervention. Perspectives on operations strategy Vasco Ribeiro Tamen | Nº 43238 11 The ‘top-down’ perspective views strategic decisions at several levels. It starts with a business strategy and then goes down and translates into an operation strategy, marketing strategy, etc. The ‘bottom-up’ view of operations strategy sees overall strategy as emerging from day-to-day operational experience. A ‘market requirements’ perspective of operations strategy sees the main role of operations as satisfying markets. Operations performance objectives and decisions should be primarily influenced by a combination of customers’ needs and competitors’ actions. The ‘operations resources’ perspective of operations strategy is based on the resource-based view (RBV) of the firm and sees the operation’s core competencies (or capabilities) as being the main influence on operations strategy. Operations capabilities are developed partly through the strategic decisions taken by the operation. It determines what a company can do to catch the market opportunities. 2 types of competitive factors Depending on what customers value, the company will have to adapt its operations strategy. Different customer needs will imply different competitive dimensions or different performance objectives. Competitive factors Performance objectives If the customers value… Then, the operations will need to excel at... Low price ⟹ Cost High quality ⟹ Quality Fast delivery ⟹ Speed Reliable delivery ⟹ Dependability Innovative products and services ⟹ Flexibility (products/services) Wide range of products and services ⟹ Flexibility (mix) The ability to change the timing or ⟹ Flexibility (volume and/or delivery) quantity of products and services Winner Factors These factors will make the company win business – they are the competitive priorities, that will help the company to win orders in the market. Vasco Ribeiro Tamen | Nº 43238 12  Qualifying Factors Those competitive priorities (factors) that the company must meet if it wants to do business in a specific industry. Performance has to be above a certain level to be considered by customers but providing more of the same factor will not translate into a higher benefit. Consider the example below: How can operations strategy form the basis for operations improvement? An operations strategy can provide the foundation for improvement by achieving a fit between an operation’s market requirements and its operations capabilities. A ‘line of fit’ diagram is a conceptual model intended to illustrate some ideas around the concept of strategic improvement. Vasco Ribeiro Tamen | Nº 43238 13 During improvement, it may not be possible to maintain a balance between market requirements and operations performance. When markets expect something that the operation cannot deliver, or when operations have capabilities that cannot be exploited in the market, there are strategic risks deriving from the deviation from the ‘line of fit’. Point X – Company will need to improve and increase its operations capability, or the company will need to change its target segment. Point Y – Company should understand that the market requirements do not need me to offer these features, so I will downgrade those features to get back to the line of fit. Importance – performance matrix Used for a company to understand which areas should be improved. It positions competitive factors according to their importance and the operation’s success at achieving them to determine relative improvement priorities. In short, it defines what the market wants and what the company needs to deliver. To evaluate the importance and performance of each competitive factor we use the following 1 – 9 scale: Vasco Ribeiro Tamen | Nº 43238 14 Consider the following example from page 96 of the book Nigel S., Alistair B., Robert J. - Operations Management, (2016, Pearson): EXL assigns a score to each competitive factor using the 1–9 scale to create its matrix: Vasco Ribeiro Tamen | Nº 43238 15  1.4. PRODUCT AND SERVICE INNOVATION Innovation, Design & Creativity are intimately related. Stages of product/service design Concept generation transformation of an idea for a product/service into a concept that captures its nature of it and provides an overall specification for its design. The focus should be on the customers: product design should follow the customers' need and desires dynamic. If their preferences change, the producers also need to adapt. However, there are some constraints (financial, human, or even technology) that delay in time to market innovations. This not only reduces and delays revenues but also increases the costs of development. Screening the concept involves examining its feasibility, acceptability, and vulnerability to ensure that it is a relevant addition to the company’s portfolio. Preliminary design involves the identification of all the component parts of the product or service and the way they fit together. To get to the preliminary design and concept it is common to use a design funnel which progressively reduces the number of possibilities until the final design is reached. Vasco Ribeiro Tamen | Nº 43238 16  Design evaluation and improvement involve re-examining the design to see if it can be done in a better way (i.e., more cheaply, or easily). A typical technique used here is Quality Function Deployment (QFD) or House of Quality. It is a formal articulation of how the company sees the relationship between the requirements of the customer (the whats) and the design characteristics of the new product (the hows). It hears the Voice of the Customer (VOC) and the Voice of the Producer (Engineer) at the same time. Voice of the customer: Compare existing products Identify customer needs ⟹ Prioritize those needs ⟹ based on those needs ⇓ Voice of the producer: DESIGN PROCESS Compare existing products Identify design attributes ⟹ ⟹ ⇑ based on those attributes The output of the first house of quality will be considered the input of the second one and so on. Prototyping and final design involve providing the final details which allow the product or service to be produced. The outcome of this stage is a fully developed specification for the package of products and services, as well as a specification for the processes that will make and deliver them to customers. Vasco Ribeiro Tamen | Nº 43238 17 2. DESIGNING THE OPERATION: ANALYSIS AND DESIGN LEVELS 2.1. PROCESS DESIGN Process design and product/service design are interrelated Process Types There are different ‘process types defined by the volume and variety of ‘items’ they process: Manufacturing Process Types Project Processes (e.g., major construction site) Complex and large-scale projects Customized products Careful coordination of the wide range of activities Defined start and finish: time, quality, and cost objectives. Jobbing processes (Job-shop) (e.g., tailors, craftsman) Very small quantities: ‘one-offs’, or only a few required. Specially made. High variety, low repetition. Skill requirements are usually very broad. Skilled jobber, or team, complete whole product. Vasco Ribeiro Tamen | Nº 43238 18 Batch Processes (e.g., each batch of cake) Higher volumes and lower variety than for jobbing. Standard products, repeating demand. But can make specials. Specialized, narrower skills. Repeat all the different tasks and all the processes. Mass (line) processes (e.g., Pepsi, automobile) Higher volumes than batch. Standard, repeat products. Repetitive and predictable activities. Low and/or narrow skills. Continuous processes (e.g., electricity, paper making companies) Extremely high volumes and low variety: often single product. Standard, repeat products. Highly capital-intensive with a predictable flow. Difficult and expensive to start and stop the process. Vasco Ribeiro Tamen | Nº 43238 19  Service Process Types Process types go by different names depending on whether they produce products or services. Professional service (e.g., consultant) High levels of customer (client) contact. Clients spend considerable time in the service process. High levels of customization with service processes being highly adaptable. Contact staff is given high levels of discretion in servicing customers. People-based rather than equipment-based. Service shops (e.g., staff in a shop) Medium levels of volumes of customers. Medium, or mixed, levels of customer contact. Medium, or mixed, levels of customization. Medium, or mixed, levels of staff discretion. Mix of front and back-office activities. Mass service (e.g., account managers in a bank) High levels of volumes of customers. Low to medium levels of customer contact. Low, or mixed, levels of customization. Low, or mixed, levels of staff discretion. Staff following defined procedures. Most value-added in the back office. Product-Process Matrix There is a fit line between the volume variety position of the company and on the other side the advantage that we need to deliver to the market. This line means a lower cost position for the company. If preferences are the same, offering variety will imply more costs. Vasco Ribeiro Tamen | Nº 43238 20  This line of fit adapts the characteristics required for the process, with the type of process that the company is employing. Positions above the line are solutions that involved more flexibility than the one that is needed. Below the line, we are serving too little flexibility to a market that has high variety, probably this will be more costly. Flow Charts Used to document the detailed steps in a process. This diagram describes the activities that are needed but also the sequence of those activities and who will be in charge of them. There are mapping symbols that suggest how we are going to design the sequence of the activities. Inside a flow chart, there are many flow charts, i.e., many levels of the process. Consider the example of a sandwich shop: Vasco Ribeiro Tamen | Nº 43238 21 Sometimes, we can include more information on our flowchart: a line of visibility (separates back offices from front offices); a line of interaction (separating those operations in which we are interacting with the customer: asking, giving, delivering, talking, etc). Make-to-stock Process Make-to-order Process The product is made, then it is stored. We It is activated in response to an actual order build an inventory of finished goods and then from customers. We only start making the we will serve that stock of finished goods to products when we have a demand in place. the customer (deliver). The stock is activated When we receive an order. Then, we deliver to meet the forecasted demand and customers the product. are served from this stock level. Example: McDonalds A buffer is a storage area where the output of one stage is placed, and stage 2 picks the inputs it needs to process from this buffer area. Stage 1: upstream activity – closer to supply. Stage 2: downstream activity – closer to customers and delivery. The buffer will prevent two situations: Blocking: situation in which the speed of stage 1 is higher than stage 2. Consequently, the employee of stage 1 needs to stop working, to hand the output of its stage to the next stage. Starving: situation in which the speed of stage 1 is lower than stage 2. Thus, the employee from activity 2 must stop because no products are coming. ⇓ Vasco Ribeiro Tamen | Nº 43238 22  Bottleneck Stage that is the slowest, the one that limits the capacity of the process. It occurs when the limited capacity of a process implies either the work will be pilled, or resources will be idled because the capacity is not even redistributed along the process. Therefore, Bottleneck will dictate the rate at which the whole process will operate (reduce efficiency). Process Variability There are two main reasons for process variability: Arrival variability: Variability in the demand for processing (variation in the inter-arrival times of units to be processed) Variability in the times taken to perform Notice that reducing variability allows higher utilization without long waiting times. Consider the following example: Going to the dentist where each appointment lasts for 10min 10 1 One customer every 30min ⟹ Utilization of resources = 30 = 3 ⟹ No waiting! 10 1 One customer every 20min ⟹ Utilization of resources = 20 = 2 ⟹ No waiting! 10 One customer every 10min ⟹ Utilization of resources = 10 = 1 ⟹ No waiting! This means the faster the customers’ arrival; the more waiting is involved, and the longer the queue. If there were no variability, we would not have a waiting list… Vasco Ribeiro Tamen | Nº 43238 23  2.2. LAYOUT AND FLOW It involves deciding the physical positioning of our resources, facilities, machines, equipment, and tools, among others. It is also responsible for the appearance of all these resources and, for the allocation of tasks. In short, companies need to decide about the distribution of all workers, machines, and facilities. The decision the company takes regarding layouts will affect the flow of customers, materials, and information. In the end, we want to have a smooth flow considering: Material handling equipment Capacity and space requirements Environment and aesthetics Flow of material, people, and information Cost of moving between various work areas Layout Types Most practical layouts are derived from four basic layout types: 1) Fixed-position layout Advantages Disadvantages Very high mix and product flexibility Very high unit costs Product or customer not moved or Scheduling space and activities disturbed can be difficult High variety of tasks for staff Can mean much movement of equipment and staff Example: Factory 2) Functional Layout Advantages Disadvantages High mix and product flexibility Low facilities utilization Relatively robust in the case of Can have very high work-in- disruptions progress or customer queuing Relatively easy supervision of Complex flow can be difficult transforming resources to control Vasco Ribeiro Tamen | Nº 43238 24 Example: Library 3) Cell Layout Advantages Disadvantages Gives a compromise between cost Can be costly to rearrange the and flexibility for relatively high- existing layout variety operations Can require more equipment Fast throughput Can give lower equipment Potential good staff motivation utilization Example: Shop-within-a-shop 4) Line Layout Advantages Disadvantages Low unit costs for high volume Can have low mix flexibility Gives opportunities for the Not very robust if there is specialization of equipment disruption Materials or customer movement Work can be very repetitive is convenient Example: Paper Manufacturing Operation Vasco Ribeiro Tamen | Nº 43238 25  5) Mixed Layout Combine elements of more than one type of layout. Example: Restaurant Volume vs Variety of layout types Relationship between process types and layout Vasco Ribeiro Tamen | Nº 43238 26 Other Considerations The way the operations look (operations environment) Impact on Staff Impact on Customers Different objectives for customer environments How is the decision process? The main goal is to achieve a layout in which every person, employee, or machine is allowed to contribute the maximum to the transformation process. Design Techniques The detailed design of the layout depends on the type of layout chosen: Fixed position: resource location analysis Cell layout: product flow analysis Functional layout: flow charts (when costs are important) and relationship charts (when the relationship is important) Line layout: assembly line balancing techniques Analytical analysis of Functional Layout Effectiveness of a Functional Layout = ∑ ∑ 𝑭𝒊𝒋 × 𝑫𝒊𝒋 × 𝑪𝒊𝒋 𝐹𝑖𝑗 : flow in loads per period of time from work center 𝑖 to 𝑗 𝐷𝑖𝑗 : distance between i and j 𝐶𝑖𝑗 : If costs are different to and from different centers The lower the effectiveness score, the better. Usually, the higher the flow rate, the shorter the line connecting the work centers (or the closer). Vasco Ribeiro Tamen | Nº 43238 27  Flow charts Relationship charts Analytical analysis of Line Layout Throughput time (TH): the time we have, or the elapsed time, between an input arriving at the process and the output being delivered to the customer/distributor. All of this throughput time is not productive, because many times, within our process, there are waiting times, and these waiting times are also counted for the throughput time and will increase the amount of time that the unit of product is moving through our process. Cycle Time (CT): Average time between completion of units. 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑇𝑖𝑚𝑒 𝐶𝑇 = 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑂𝑢𝑡𝑝𝑢𝑡 1 𝑂𝑢𝑡𝑝𝑢𝑡 𝑟𝑎𝑡𝑒 = 𝑇𝐻 𝑅𝑎𝑡𝑒 = Rate at which units emerge from the process 𝐶𝑇 Example: Suppose you had to produce 600 units in 80 hours to meet the demand requirements of a product. What is the cycle time to meet this demand requirement? What is the output rate? 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑇𝑖𝑚𝑒 60 𝑚𝑖𝑛𝑢𝑡𝑒𝑠 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟 ∗ 80 ℎ𝑜𝑢𝑟𝑠 𝐶𝑇 = = = 8 𝑚𝑖𝑛𝑢𝑡𝑒𝑠 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑂𝑢𝑡𝑝𝑢𝑡 600 1 𝑇𝐻 𝑅𝑎𝑡𝑒 = ≈ 0.125 𝑢𝑛𝑖𝑡𝑠 ⇒ 12,5% 𝑜𝑓 𝑢𝑛𝑖𝑡 𝑖𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑖𝑛 𝑜𝑛𝑒 𝑚𝑖𝑛𝑢𝑡𝑒 8 Useful Time (UT): Time to complete one operation Idle Time (IT): Time spent waiting to use viable equipment. 𝐼𝑇 = 𝐶𝑇 × 𝑛 − 𝑈𝑠𝑒𝑓𝑢𝑙 𝑇𝑖𝑚𝑒(𝑈𝑇) Where 𝑛 is the minimum integer number which makes 𝐶𝑇 × 𝑛 ≥ 𝑈𝑇. Vasco Ribeiro Tamen | Nº 43238 28 Consider the following example from ex. 2 of the workbook: 𝑪𝑻 = 𝟔𝟎 𝒔𝒆𝒄 𝐼𝑇𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛 𝐴 = 60 − 45 = 15 𝑠𝑒𝑐 𝐼𝑇𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛 𝐸 = 60 × 2 − 94 = 26 𝑠𝑒𝑐 Duplicates operation 𝐸 in 𝐸1 and 𝐸2 with 𝐼𝑇 = 26 Work in Progress (WIP): Units waiting to be processed. 𝑇𝐻 𝑳𝒊𝒕𝒕𝒍𝒆´𝒔 𝑳𝒂𝒘: 𝑇𝐻 = 𝑊𝐼𝑃 ∗ 𝐶𝑇 ⟺ 𝐶𝑇 = 𝑊𝐼𝑃 Consider the following example: Need to mark 500 exams in 5 days (working 7 hours a day). Takes 1 hour to mark an exam. What is the cycle time? 𝑇𝐻 = 𝑊𝐼𝑃 × 𝐶𝑇 ⟺ 1 ℎ𝑜𝑢𝑟 = 500 𝑒𝑥𝑎𝑚𝑠 × 𝐶𝑇 1 ⟺ 𝐶𝑇 = = 0.07 ℎ𝑜𝑢𝑟𝑠 500 ∑ 𝑇𝑎𝑠𝑘𝑠 𝑇𝑖𝑚𝑒 Number of working stations: 𝑁𝑊𝑆 = 𝐶𝑇 How many markers are needed? ∑ 𝑇𝑎𝑠𝑘𝑠 𝑇𝑖𝑚𝑒 1 ℎ𝑜𝑢𝑟 𝑁𝑊𝑆 = = = 14.29 ≈ 15 𝑚𝑎𝑟𝑘𝑒𝑟𝑠 𝐶𝑇 0.07 ∑ 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 𝑇𝑖𝑚𝑒𝑠 Line Efficiency (LE): 𝐿𝐸 = 𝑁𝑊𝑆 × 𝐶𝑇 Balancing Loss (BL): 𝐵𝐿 = 1 − 𝐿𝐸 Balance the line, i.e., organize the work across the different workstations, to prevent a bottleneck. Decide which tasks are going to each station. Example: Consider a manufacturer of specialty cakes, which has recently received an order from a supermarket chain for a specialty cake. The manufacturer decided that the volumes required by the supermarket warrant a special production line to satisfy this order. The initial order from the supermarket is for 5000 cakes a week and the number of hours worked by the factory is 40 per week. a) Calculate the required cycle time 60 𝑚𝑖𝑛𝑢𝑡𝑒𝑠 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟 × 40 ℎ𝑜𝑢𝑟𝑠 𝐶𝑇 = 5000 = 0.48 𝑚𝑖𝑛𝑢𝑡𝑒𝑠 ⟹ 1 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑒𝑣𝑒𝑟𝑦 0.48 𝑚𝑖𝑛 Vasco Ribeiro Tamen | Nº 43238 29  b) Do a precedence diagram: Diagram representing the ordering of the elements which comprise the total work content of the product or service. c) Calculate the number of stages (round it up to the higher integer number). ∑ 𝑇𝑎𝑠𝑘𝑠 𝑇𝑖𝑚𝑒 1.68 𝑁𝑊𝑆 = = = 3.5 ≈ 4 𝑠𝑡𝑎𝑔𝑒𝑠 𝐶𝑇 0.48 d) Balance the line by assigning specific tasks to the stages We start from the left to the right in the precedence diagram. We do not want to exceed the cycle time. We will include activities as long as the cycle time is not exceeded. When we have ties or more than one possible choice and we only have room for one, we should include the shorter one. These idle times suggest that, if the company maintains this rhythm it will be able to produce a new unit every 0,47min. 𝐼𝑇 = 𝐶𝑇 × 𝑛 − 𝑈𝑠𝑒𝑓𝑢𝑙 𝑇𝑖𝑚𝑒(𝑈𝑇) ⇒ Since none of the stages have 𝑈𝑇 > 𝐶𝑇 ⟹ 𝑛 = 1 𝐼𝑇 = (0.47 − 0.42) + (0.47 − 0.36) + (0.47 − 0.47) + (0.47 − 0.43) = 0.2 𝑚𝑖𝑛 ∑ 𝐼𝑇 𝐵𝑎𝑙𝑎𝑛𝑐𝑖𝑛𝑔 𝐿𝑜𝑠𝑠 = = 10% = 1 − 𝐿𝐸 𝑁𝑊𝑆 × 𝐶𝑇 However, the number of working stations desired should be aligned with the goal: Minimize Investment: Duplicate only the operation with 𝑈𝑠𝑒𝑓𝑢𝑙 𝑇𝑖𝑚𝑒 > 𝐶𝑇 Maximize Efficiency: Duplicate as many operations as possible just to min 𝑁𝑊𝑆 Examples in the book F. Robert Jacobs, Richard B. Chase - Operations and Supply Chain Management (2018, McGraw Hill) page 176 Vasco Ribeiro Tamen | Nº 43238 30 3. DELIVER: PLANNING AND CONTROL 3.1. PLANNING AND CONTROL Planning is deciding what activities should take place in the operation, when they should take place and what resources should be allocated to them. Control is understanding what is happening in the operation and analysing if there is a significant deviation from what should be happening. If there is, change resources to affect the operation’s activities. Planning and Control Activities Scheduling The main objective of scheduling correctly is to: Meet due dates Minimize WIP inventory Minimize lead times Maximize machine and/or labor utilization Minimize setup times Forward Scheduling: when businesses complete manufacturing their items as soon as possible before the due date. They start processing when a job is received. Backward Scheduling: when businesses make their items at the last possible available period before the due date. They begin by scheduling the job’s last activity on the due date. Loading Finite loading: considers the actual amount of each resource that will be available. Historically, this approach could not be used in practice because it required excessive amounts of computer time to develop a schedule. Furthermore, many individuals have argued that all the time and effort required to develop a schedule with finite loading could end up being wasted because of unforeseen changes to the plan. Infinitive loading: ignores capacity limitations when developing the schedule. Vasco Ribeiro Tamen | Nº 43238 31  Sequencing Priority rules: Decision rules to allocate the relative priority of jobs at a work center. The appropriate rule depends on the objective mentioned above. Consider the application of common rules to the following problem: Anthony is a supervisor of LegalCopy, a copying service. Five customers submitted their orders at the beginning of the week. All jobs require only a color copy machine. Decide on the processing sequence. FIFO - First in, first out 𝑇𝑜𝑡𝑎𝑙 𝐹𝑙𝑜𝑤 𝑇𝑖𝑚𝑒 = 3 + 7 + 9 + 15 + 16 = 50 𝑑𝑎𝑦𝑠 50 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐹𝑙𝑜𝑤 𝑇𝑖𝑚𝑒 = = 10 𝑑𝑎𝑦𝑠 5 0+1+2+6+14 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐿𝑎𝑡𝑒𝑛𝑒𝑠𝑠 = 5 = 4,5 𝑑𝑎𝑦𝑠 LIFO - Last in, first out DD - Due date 𝑇𝑜𝑡𝑎𝑙 𝐹𝑙𝑜𝑤 𝑇𝑖𝑚𝑒 = 1 + 4 + 8 + 10 + 16 = 39 𝑑𝑎𝑦𝑠 39 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐹𝑙𝑜𝑤 𝑇𝑖𝑚𝑒 = 5 = 7,8 𝑑𝑎𝑦𝑠 0+0+2+3+7 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐿𝑎𝑡𝑒𝑛𝑒𝑠𝑠 = 5 = 2,4 𝑑𝑎𝑦𝑠 SOT - Shortest Operating (processing) time 𝑇𝑜𝑡𝑎𝑙 𝐹𝑙𝑜𝑤 𝑇𝑖𝑚𝑒 = 1 + 3 + 6 + 10 + 16 = 36 𝑑𝑎𝑦𝑠 36 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐹𝑙𝑜𝑤 𝑇𝑖𝑚𝑒 = 5 = 7,2 𝑑𝑎𝑦𝑠 0+0+1+4+7 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐿𝑎𝑡𝑒𝑛𝑒𝑠𝑠 = = 2,4 𝑑𝑎𝑦𝑠 5 STR - Slack Time Remaining 𝑇𝑜𝑡𝑎𝑙 𝐹𝑙𝑜𝑤 𝑇𝑖𝑚𝑒 = 1 + 4 + 8 + 14 + 16 = 43 𝑑𝑎𝑦𝑠 43 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐹𝑙𝑜𝑤 𝑇𝑖𝑚𝑒 = = 8,6 𝑑𝑎𝑦𝑠 5 0+0+2+5+9 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐿𝑎𝑡𝑒𝑛𝑒𝑠𝑠 = 5 = 3,2 𝑑𝑎𝑦𝑠 Vasco Ribeiro Tamen | Nº 43238 32 Types of planning Strategic Planning: Long-range, focusing on a horizon greater than one year. Usually performed annually. Aligns the Strategic goals: Cost reduction Production technology Quality Tactical Planning: Intermediate range, focusing on a period from 3 to 18 months. Usually performed weekly, monthly, or quarterly. Develops the aggregate planning: An aggregate plan is based on the corporate strategic plan (i.e., long-run plan), it will translate what the business wants to achieve into specific plan output logistics – inventory levels for the intermediate range. Workforce capacity Inventory levels Production capacity Operational Planning: Short-range, focusing on a period of 1 to 6 days. Usually performed daily or weekly. Implements the tactical goals at an operational level. Decomposes the Master Production Schedule in a detailed way Scheduling and Control Planning & Control are activities that link the supply and the demand. The supply depends on the demand placed by customers. Operations will need to make decisions (such as nr. of units in stock or how many workers should be employed) to fulfill the demand. After implementation, we should monitor accurately and correct deviations. Vasco Ribeiro Tamen | Nº 43238 33  3.2. SALES & OPERATIONS PLANNING Sales and operations planning (i.e. aggregate planning) is a process that helps firms provide better customer service, lower inventory, shorten customer lead times, stabilize production rates, and give top management a handle on the business. This must occur at an aggregate level (at the level of major groups of products) and the detailed individual product level In this chapter, we will focus on the aggregate operations plan: which translates annual and quarterly business plans into broad labour and output plans for the intermediate term. Production Planning System Plans for meeting demand. Trade-offs involved include workers employed, work hours, inventory, and shortages. Inputs: Strategies Costs 1) Chase strategy (variable workforce) Hiring and laying off employees Match the order rate by hiring and laying off employees. Must have a pool of easily trained Training new applicants applicants to draw on 2) Stable workforce (variable work hours) Idle Time Costs Vary the number of hours worked through flexible Overtime Costs work schedules or overtime 3) Level strategy (stable workforce, work hours) Inventory maintenance costs Demand changes are absorbed by fluctuating Unmet delivery times inventory levels, order backlogs, and lost sales 4) Subcontracting Higher quality Desirable to accommodate demand fluctuations. Unless the relationship with the supplier is strong, Higher workforce a manufacturer can lose some control over Higher materials costs schedule and quality. Pure strategy: when just one of the approaches is used to absorb demand fluctuations Mixed strategy: when two or more of the approaches are used Vasco Ribeiro Tamen | Nº 43238 34  3.3. CAPACITY PLANNING AND CONTROL Capacity in the static, physical sense means the scale of an operation, i.e., how much we can produce. But this may not reflect the operation’s processing capability, so we must incorporate a time dimension appropriate to the use of assets. Check the following example of capacity measures: Strategic Decision of Capacity It is a strategic decision since it will affect their ability to satisfy demand in the long term. When we do not have the capacity that demand requires (capacity lags), customers will not all get the product We might lose sales and our comparative advantage. If we have too much capacity (capacity leads), probably we will have idle times and costs in excess on the machines and staff. To face this strategic problem, we should try to smooth out the lags and leads with inventories strategies. When we have a capacity lead, we use this additional capacity to produce extra units of inventory which we will use to satisfy demand when we have a lag. This strategy uses the unneeded capacity to meet demand with the inventory that was built previously. On the other hand, we should not only consider the demand side but also the costs. Capacity must deal with fixed costs. When we increase capacity, we increase 𝐹𝐶 since the extra units that we will be producing to smooth out the lags and leads will increase inventory cost. Therefore, Break-even analysis is relevant to determine the capacity level. Objective of Capacity Management To provide an ‘appropriate’ amount of capacity at any point in time. The ‘appropriateness’ of capacity planning in any part of the operation can be judged by its effect on: Costs Revenue Working capital Service level, in terms of Quality, Speed, Dependability, and Flexibility. Vasco Ribeiro Tamen | Nº 43238 35 Capacity Level Process of Decision Making When measuring capacity, operations managers should consider the Design capacity: the theoretical capacity of an operation that one of its technical designers had in mind when they commissioned it. 𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡 𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡 Utilization Rate = 𝑈 = 𝐷𝑒𝑠𝑖𝑔𝑛 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 Efficiency Rate = 𝐸 = 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 Theory of constraints (TOC) Constraint is any condition that limits the performance of a system and restricts its output. Every process has one or more constraints that limit it from higher performance. Typical constraints: Physical (machine, labor, workstation capacity, material shortages, space or quality), Market (demand is less than capacity) Managerial (policy, metrics, or mindsets that create constraints that delay the workflow) Bottleneck: any resource whose capacity is less than the demand placed upon it. Therefore, any system can produce only as much as its critical constrained resource, the bottleneck. Capacity-constrained resource (CCR): any resource whose utilization is close to capacity and could be a bottleneck if it is not scheduled carefully This theory suggests that we should use synchronous manufacturing where all phases of the production system should work synchronously and together to achieve the company's objectives. Managing constraints is the key to achieving throughput and efficiency while maximizing the continuity of the flow! The main goals of the theory are to: Deliberate process for identifying and overcoming constraints Optimize scheduling by maximizing the utilization of bottlenecks in the process Focus not only on the efficiency of individual processes but also on the bottlenecks that constrain the system as a whole Assumptions: Every organization has a set of processes working together to achieve a common goal (for the author, the goal of every company is to make money) Every process has a [single] constraint that limits it from higher performance Vasco Ribeiro Tamen | Nº 43238 36 5 TOC steps: Step 1: Identify the bottleneck(s)/constraint(s) Look at your production plan as a whole and determine which resource is preventing you from achieving better performance. Step 2: Exploit the bottleneck(s) Create schedules that maximize the throughput of the bottleneck(s). Plan production to keep constraints working at 100%. Step 3: Subordinate everything else to the bottleneck(s) Other activities must be subordinated to the actions taken to fix the bottleneck at hand. It May require sub-optimization in other areas Upstream operations must provide only what the constraint can handle Downstream operations will only receive what the constraint can put out Step 4: Elevate the bottleneck(s) When we are working with the bottleneck at 100% and that is still constraining, then we need to consider whether to purchase additional capacity (new machine, better-trained employee) Step 5: Evaluate whether solving the current bottleneck(s) created other bottlenecks. Do not allow inertia Drum: The Pace Setting Resource - constraint, the bottleneck Buffer: The amount of protection in front of the resource Rope: The scheduled release of material to be in line with the Drum’s schedule. If the 3rd station is the drum, before that, the capacity is higher. We need to control the bottleneck. If this bottleneck is not controlled, then a lot of inventory will accumulate in front of the bottleneck, and we do not want to have that we have limited space. Vasco Ribeiro Tamen | Nº 43238 37  3.4. INVENTORY PLANNING AND CONTROL Inventory depends on the rate of incoming inputs. If the rate at which we receive work-in-process is higher than the rate at which we deliver output or working process to the market, or the next department, the inventory level will increase. It increases because supply and demand are different. Managers need to balance Customer Satisfaction vs Cost to serve Inventory costs vs Cost of stock outs Transportation costs vs Fulfilment speed Inventory Management The main goal for inventory management is to minimize the costs involved in stocks while being able to be effective: we need to satisfy the customer on an internal and external level. All the transformed resources can constitute an inventory or a stock that the company will hold for more or less time. The inventory always corresponds to stored material resources, customers, or info – that are held in a transformation system. We need to manage the level of raw materials, work-in-progress, and finished products. To do so we need: Purchasing management: Receiving orders; Selecting suppliers; Supply management; Receiving materials Production control: Inventory flow along with the production Distribution: Stocking and Transporting Why avoid inventories? Vasco Ribeiro Tamen | Nº 43238 38 When to order? How much quantity? Minimize costs while satisfying customers (internal and external) based on the knowledge of: Bill of materials (BOM) (discussed in the next chapter) Demand: We also need to know which demand we are facing. Independent Demand (Demand for the final end-product or not related to other items) Dependent Demand (Derived demand items for parts, subassemblies, raw materials, etc) Inventory Costs Ordering costs: include all the costs that we face when placing an order next to a supplier (e.g., administrative costs: the more orders we place, the more total ordering cost). Storage costs/holding costs: involved costs of storage facilities, warehouse facilities, insurance for the units they have, depreciation, and taxes, among others. Shortage costs/stock out: harder to quantify. If customers are external, having stock-outs can mean that we do not have sales. If we think about internal customers, stockouts can lead to idle time in the next stage or inefficiencies. The simpler models involved the two first types of costs, not this last one. Inventory Control Not all stocks are equally important: 𝑈𝑠𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒 = 𝑈𝑠𝑎𝑔𝑒 𝑟𝑎𝑡𝑒 × 𝐼𝑛𝑑𝑖𝑣𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒. The higher the usage value, the more the item is controlled. We can get a higher usage value by having a more expensive product or more frequent control. We need to take greater care to monitor those valuable items. Pareto law or 80/20 rule: aphorism which asserts that 80% of outcomes (or outputs) result from 20% of all causes (or inputs) for any given event. In business, a goal of the 80-20 rule is to identify inputs that are potentially the most productive and make them the priority. For instance, once managers identify factors that are critical to their company's success, they should focus on those factors. Models for Inventory Management There are different models for inventory management to answer volume and timing decisions: Single-period model: when a company makes a one-time purchase of an item Multi-period model Fixed-order quantity model (Q-model) Fixed-time period model (P-model) Vasco Ribeiro Tamen | Nº 43238 39  3.4.1. FIXED-ORDER QUANTITY MODEL (Q-MODEL) This is a model in which the quantity to order is fixed but the time between orders varies since it depends on the demand. When do we order? When our inventory drops to a specific level of inventory, reorder point! Assumptions Constant & Uniform Demand throughout the period, no safety stock required Constant Lead time (time from ordering to receipt) Constant Price per unit of product Inventory holding cost is based on average inventory Constant ordering or setup costs All demands for the product will be satisfied (No shortages or backorders) Safety Stocks (𝑆𝑆) Safety stock is inventory that is carried to prevent stock-outs. In the Q-model, they are not required since it is assumed that demand is constant and uniform. However, to approximate the model to reality we introduce some variability in demand. After the reorder point, during the lead time, the demand may be higher than expected consuming some (or all) of the safety stock. So, companies choose to keep safety stocks as a buffer against demand variability. Hence, safety stock determinations are based on demand forecasts and assumed to follow a normal distribution. These computations are not intended to eliminate all stock-outs, just most of them, therefore we should decide what service level we want to provide. Vasco Ribeiro Tamen | Nº 43238 40 Service Level (𝑍) 𝑺𝒆𝒓𝒗𝒊𝒄𝒆 𝑳𝒆𝒗𝒆𝒍 = 𝒁 = 𝑷(𝑵𝒐𝒕 𝑺𝒕𝒐𝒄𝒌𝒊𝒏𝒈 𝒐𝒖𝒕) Customer sensitivity regarding stock-outs varies from one product to another, the optimum service level being specific to each product individually. The target service level can be defined as a trade-off between the cost of inventory and the cost of stock-outs. Analytical Analysis Reorder Point = 𝑅 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐷𝑒𝑚𝑎𝑛𝑑 × 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒 + 𝑆𝑎𝑓𝑒𝑡𝑦 𝑆𝑡𝑜𝑐𝑘 𝑅 = 𝑑 × 𝐿 + 𝑆𝑆 Safety Stock = 𝑆𝑆 = 𝑆𝑒𝑟𝑣𝑖𝑐𝑒 𝐿𝑒𝑣𝑒𝑙 × √𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒 × 𝐷𝑎𝑖𝑙𝑦 𝐷𝑒𝑚𝑎𝑛𝑑 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑆𝑆 = 𝑍 × √𝐿 × 𝜎𝑑 Holding cost per unit = 𝐻 = 𝑖 × 𝐶 , where 𝑖 is the holding cost (%) Total Cost = 𝑷𝒖𝒓𝒄𝒉𝒂𝒔𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 + 𝑶𝒓𝒅𝒆𝒓𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 + 𝑯𝒐𝒍𝒅𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 ⟺ 𝐷 𝑄 𝑇𝐶 = 𝐷×𝐶 + ×𝑆 + ( + 𝑆𝑆) × 𝑖 ∙ 𝐶 𝑄 2 Where 𝐷 = Annual demand in units 𝑆 = Setup or ordering cost 𝐶 = Cost per unit 𝐻 = Holding cost per unit = 𝑖 × 𝐶 𝑄 = Quantity to be ordered 𝑆𝑆 = Safety Stock Economic Order Quantity: Optimal Level Quantity 𝑑 𝑇𝐶 𝐷∙𝑆 𝐻 2∙𝐷∙𝑆 min 𝑇𝐶 ⟺ 𝑑𝑄 = 0 ⟺ − 𝑄2 + 2 = 0 ⟺ 𝐸𝑂𝑄 = √ 𝐻 Vasco Ribeiro Tamen | Nº 43238 41  3.4.2. FIXED-TIME PERIOD MODEL (P-MODEL) This is a model where the time between orders is constant, but the order quantity varies. In this p-model, instead of monitoring the inventory level until a critical quantity, we order at certain intervals of time (e.g., every friday morning). Order quantity to return inventory to target level varies based on existing inventory less safety stock at the time inventory is counted.. Before implementation, management must decide: 𝑃: Replenishment period, i.e., the time between orders 𝑍: Service level, i.e., the probability of satisfying customer demand Analytical Analysis Target Units = 𝑇 = 𝐴𝑣𝑒. 𝐷𝑎𝑖𝑙𝑦 𝐷𝑒𝑚𝑎𝑛𝑑 × (𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒 + 𝑅𝑒𝑣𝑖𝑒𝑤 𝑃𝑒𝑟𝑖𝑜𝑑) + 𝑆𝑎𝑓𝑒𝑡𝑦 𝑆𝑡𝑜𝑐𝑘 𝑇 = 𝑑 × (𝐿 + 𝑃) + 𝑆𝑆 Safety Stock = 𝑆𝑆 = 𝑆𝑒𝑟𝑣𝑖𝑐𝑒 𝐿𝑒𝑣𝑒𝑙 × √𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒 + 𝑅𝑒𝑣𝑖𝑒𝑤 𝑃𝑒𝑟𝑖𝑜𝑑 × 𝐷𝑒𝑚𝑎𝑛𝑑 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑆𝑆 = 𝑍 × √𝐿 + 𝑃 × 𝜎𝑑 Order Quantity= 𝑄 = 𝑇𝑎𝑟𝑔𝑒𝑡 𝑈𝑛𝑖𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑛 𝐻𝑎𝑛𝑑𝑠 = 𝑇 − 𝐼𝑜 Holding cost per unit = 𝐻 = 𝑖 × 𝐶 , where 𝑖 is the holding cost (%) Total Cost = 𝑷𝒖𝒓𝒄𝒉𝒂𝒔𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 + 𝑶𝒓𝒅𝒆𝒓𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 + 𝑯𝒐𝒍𝒅𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 ⟺ 𝑑×𝑃 𝑇𝐶 = 𝐷×𝐶 + 𝑛×𝑆 + ( + 𝑆𝑆) × 𝑖 ∙ 𝐶 2 Where 𝐷 = Annual demand in units 𝑆 = Setup or ordering cost 𝐶 = Cost per unit 𝐻 = Holding cost per unit = 𝑖 × 𝐶 𝑄 = Quantity to be ordered 𝑆𝑆 = Safety Stock 2 × 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑛𝑒𝑤 𝑜𝑟𝑑𝑒𝑟 2×𝑆 Time between orders: 𝑇𝐵𝑂 = √𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 ×𝐷𝑒𝑚𝑎𝑛𝑑 = √𝐻 ×𝐷 Vasco Ribeiro Tamen | Nº 43238 42 3.4.3. COMPARISON Vasco Ribeiro Tamen | Nº 43238 43  3.5. MATERIALS PLANNING AND CONTROL Master Production Schedule (MPS): Time-phased plan specifying how many and when the firm plans to build each product or services. ⇓ Master Requirements Planning (MRP): dependent demand system that provides time scheduling information specifying when each of the materials, parts, and components should be ordered or produced and its quantity to satisfy known and forecast sales orders. Goal: keep stock levels as low as possible While ensuring no shortages either of parts and components for production or of finished products for customers Bill of Materials (BOM): a diagram that describes the existing relationship between the different materials (process and quantities) Using the logic of the bill of materials (BOM) and inventory records, the production schedule is ‘exploded’ (called the MRP netting process) to determine how many sub-assemblies and parts are required, and when they are required. Consider the following example: Given the product structure tree for “A” and the lead time and demand information below, provide a materials requirements plan that defines the number of units of each component and when they will be needed. Vasco Ribeiro Tamen | Nº 43238 44 Considering Spares = 𝑆𝑝, To have 50 units of A (plus spares) we need: Part B = 4 𝐴 + 20 𝑆𝑝 = 4 × 50 + 20 𝑆𝑝 = 200 + 20 𝑆𝑝 Part C= 2 𝐴 = 2 × 50 = 100 Part D = 2 𝐵 + 3 𝐶 + 15 𝑆𝑝 = 2 × (200 + 20 𝑆𝑝) + 3 × 100 + 15 𝑆𝑝 = 520 + 55 𝑆𝑝 Part E = 1 𝐵 = 200 + 20 𝑆𝑝 Part F 2 𝐶 = 2 × 100 = 200 First, the number of units of “A” are scheduled backward to allow for their lead time (𝐿 = 1). So, in the materials requirement plan below, we have to place an order for 50 units of “A” on the 9th day to receive them on day 10. Next, we need to start scheduling the components that makeup “A”. In the case of component “B”, we need 4 B’s for each A. Since we need 50 A’s, that means 200 B’s. And again, we back the schedule up for the necessary 2 days of lead time. Finally, repeating the process for all components, we have the final materials requirements plan: Development of MRP MRP II systems, most known as ERP (Enterprise Resource Planning). the latest development from the original planning and control approach known as materials requirements planning (MRP). They integrate many processes that are related to MRP, but which are located outside the operation’s function. Vasco Ribeiro Tamen | Nº 43238 45 ERP integrates information from all parts of the organization: Vasco Ribeiro Tamen | Nº 43238 46  3.6. LEAN OPERATIONS AND JIT The key principle of lean is relatively straightforward to understand; it means moving towards the elimination of all waste to continuously develop an operation that is faster, more dependable, produces higher quality products and services and, above all, operates at low cost. What to eliminate? ⟹ Non-value-adding activities How to define value? ⟹ Willingness to pay Lean Principles Eliminate waste: reduce all kinds of waste. Defects Transportation Over-production Inventory Waiting Motion Non-used talent Excess processing Involve everyone: Sharing of responsibility, training of workers, and greater motivation of workers. Continuous improvement: Specify value: can only be defined by the ultimate customer Identify the value stream: exposes the enormous amounts of waste. Make only what the customer has ordered Create flow: reduce batch size and WIP Seek perfection: continuously improve quality and eliminate waste Lean Production Goal: Achieving high-volume production with minimal inventories ⇓ Just-in-Time (JIT) Philosophy A powerful strategy for improving operations. Materials arrive where and only when they are needed. Requires a meaningful buyer-supplier relationship. Objectives: Produce only the products the customer wants Produce products only at the rate that the customer wants them Produce with perfect quality Produce with a minimum lead time Implementation Issues Reduce sources of variability Supplier management: conflict vs. cooperation; how to share the pains & gains Physical distances: between plants and workstations Cooperative efforts among manufacturing, marketing, purchasing, and engineering Vasco Ribeiro Tamen | Nº 43238 47 JIT as a Pull System Supplies and components are ‘pulled’ through the system to arrive where and when they are needed. Here the customer starts the process, pulling an inventory item from Final Assembly. Then sub-assembly work is pulled forward by that demand. The process continues throughout the entire production process and supply chain. Everything is triggered by the customer. Supplier partnerships exist when a supplier and purchaser work together to remove waste and drive down costs. Four goals are: Removal of unnecessary activities Removal of in-transit inventory Removal of in-plant inventory Improved quality and reliability Vasco Ribeiro Tamen | Nº 43238 48 How to eliminate Waste? 1) Visual managing Designed to create a visual workplace that is self-explaining, self- ordering, and self-improving. We set it up through visual controls, which reflect the performance simply and easily. Everyone can tell if things are going well or bad! 2) 5S Sort (seiri): Eliminate what is not needed and keep what is needed Straighten (seiton): Position things in such a way that they can be easily reached whenever they are needed Shine (seiso): Keep things clean and tidy; no refuse or dirt in the work area Standardize (seiketsu): To prevent setbacks in the first three pillars, maintain cleanliness and order. Sustain (shitsuke): Develop a commitment and pride in keeping to standards 3) Kanbans Kanban is the Japanese word for a card. The card is an authorization for the next container of material to be produced. A sequence of kanbans pulls material through the process 4) Leveled scheduling Process frequent small batches rather than a few large batches. Make and move small lots so the level schedule is economical. Consider the example below: Over eight days, need to make 1200 of A; 400 of B; 400 of C Averaging both the volume and the production sequence of different model types on a mixed- model production line. Every day is the same. Easy to notice if falling behind schedule! Vasco Ribeiro Tamen | Nº 43238 49  5) Layouts Lean Layouts that allow a production level with the least possible inventory and that minimize distance. U-Shaped layouts where workers move between sections, improving worker communication and cross-training workers. Promote a stable flow of materials, workers, and information in operations Large lots and long production lines with single-purpose machinery are being replaced by smaller flexible cells – cell manufacturing Using several small machines rather than one large one allows simultaneous processing, is more robust, and is more flexible. Delivering smaller quantities more often can reduce inventory levels and so its costs. 6) Kaizen Gradual, orderly, and continuous improvement! Vasco Ribeiro Tamen | Nº 43238 50 Barrier to Lean Implementing Lean Can Be Difficult Because it is counterintuitive from a Traditional Paradigm: Buying multiple small machines rather than one big machine that offers economies of scale. Shutting down equipment when maximum inventory levels are reached. Using standards to continuously improve. Company culture plays a big part in the how-to No step-by-step procedure Vasco Ribeiro Tamen | Nº 43238 51 4. DEVELOPMENT: OPERATIONS IMPROVEMENT 4.1. QUALITY MANAGEMENT The degree to which the product meets the needs by which it was acquired The producers should be able to objectively measure the quality of their offerings (desired quality vs. actual quality). High quality puts costs down and revenue up Cost of Quality = Cost of not corresponding to customer’s requirements = 𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝑐𝑜𝑠𝑡𝑠 + 𝐹𝑎𝑖𝑙𝑢𝑟𝑒 𝑐𝑜𝑠𝑡𝑠 = (𝑃𝑟𝑒𝑣𝑒𝑛𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡𝑠 + 𝐴𝑝𝑝𝑟𝑎𝑖𝑠𝑎𝑙 𝑐𝑜𝑠𝑡𝑠) + (𝐼𝑛𝑡𝑒𝑟𝑛𝑎𝑙 𝐹𝐶 + 𝐸𝑥𝑡𝑒𝑟𝑛𝑎𝑙 𝐹𝐶) Prevention: planning, implementation, and maintenance of the quality system: market research, process design, quality audits, training of personnel in charge of quality control Appraisal: conformity assessment of products and raw materials: inspection and testing, cost of calibration and maintenance of inspection equipment, cost of products destroyed in tests... Internal failures: scrap, reprocessing of products, cost of ascertaining the cause of defects, cost of selling at a lower price due to defective product... External failures: response to warranties/complaints, returns, cost of receiving and repairing/replacing defective products, fines for a product not fulfilling promised or contracted performance Total Quality Management (TQM) Customer focus Teamwork with employee involvement and empowerment Continuous process improvement Strategically based obsession with quality Scientific approach and long-term commitment Vasco Ribeiro Tamen | Nº 43238 52 Step 1: Define the quality characteristics ⟹ What to measure? Step 2: Decide how to measure each quality characteristic ⟹ Variables or Attributes Consider the example: Step 3: Set quality standards for each quality characteristic⟹ Acceptable Limits Consider the example: Package with 15 gr. We must be within ± 5 percent of the weight advertised on the box. Upper Limit = 16.8 gr A defect or nonconformity is a quality characteristic that does not meet a pre-defined Lower Limit = 15.2 gr specification Step 4: Control quality against those standards ⟹ % Conformity or nonconformity (defective) Consider the last example: We have 1000 boxes of cereal and find that they weight an average of 15,875 gr with a standard deviation of 0,529 gr. What percentage of boxes is outside the specification limits? 𝑋 – 𝑀𝑒𝑎𝑛 15,2 – 15,875 𝑍 = = = − 1,28 𝑆𝑡𝑑.𝐷𝑒𝑣. 0,529 𝑃(𝑋 < 15,2) = 𝑃(𝑍 < −1,28) = 1 − 𝑃(𝑍 < 1,28) = 0,10 Approximately, 10 percent of the boxes have less than 15,2 gr of cereal in them! Step 5: Find and correct causes of poor quality Step 6: Continue to make improvements Vasco Ribeiro Tamen | Nº 43238 53  4.1.1. STATISTICAL PROCESS CONTROL Variance always exists. It is important to understand its causes: Common: fluctuates in a natural/expected/stable pattern of chance, small variation. The process is in a ‘state of statistical control. Just continue to monitor the quality. Assignable: When variation is large in magnitude, beyond expected/ natural. The process is in a ‘state of out of control’. Identify and correct these special causes, preventing the occurrence of defectives. How do we know if the variation in process performance is “Natural” in terms of being a result of random causes, or is indicative of some “Assignable” causes in the process? ⇓ Statistical Process Control The chances of measurement points deviating from the average are predictable in a normal distribution. According to the Central Limit Theorem, a process “in control” follows a Normal Distribution, characterized by the average (center) and the standard deviation (spread). What is a Process “in control”? One process is “in control” when it is within the upper and lower control limit. Usually, Control limits at 3 standard deviations of the plotted statistic: 𝐶𝐿 = 𝑆𝑡𝑎𝑡𝑖𝑠𝑡𝑖𝑐’𝑠 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 ± 3 × 𝜎𝑠𝑡𝑎𝑡𝑖𝑠𝑡𝑖𝑐 4.1.1.1. CONTROL CHARTS Vasco Ribeiro Tamen | Nº 43238 54 Variable Charts 1) Decide on the quality characteristic(s) to monitor (𝑋) 2) Decide sample size, frequency, and who controls/registers the results 3) For each sample calculate the average (𝑋̅) and the ranges (𝑅̅) 𝑅̅ = 𝑋𝑀𝑎𝑥 − 𝑋𝑀𝑖𝑛 4) Calculate the centerline: 𝑋̿: average of subgroup averages 𝑅̿: average of subgroup ranges 5) Calculate the control limits, based on the control chart table figures. 𝑈𝑝𝑝𝑒𝑟 𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝐿𝑖𝑚𝑖𝑡𝑅̅ = 𝑈𝐶𝐿𝑅̅ = 𝐷4 ∙ 𝑅̅ 𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝐿𝑖𝑚𝑖𝑡𝑋̅ = 𝐶𝐿𝑋̅ = 𝑋̿ ± 𝐴2 ∙ 𝑅̅ 𝐿𝑜𝑤𝑒𝑟 𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝐿𝑖𝑚𝑖𝑡𝑅̅ = 𝐿𝐶𝐿𝑅̅ = 𝐷3 ∙ 𝑅̅ where 𝑋̿: average of subgroup averages 𝑅̿: average of subgroup ranges 𝑋̅: average of the ith subgroup 𝑅̅: range of the ith subgroup Process estimates after the process is “in control”: 𝑅 𝜇̂ = 𝑋̿ 𝜎̂ = 𝑑2 6) Build the chart, plot the sample values, and conclude Attribute Charts p charts track the percentage of nonconforming items in each sample. Sample sizes are large, usually 100 pieces or more. 𝑇𝑜𝑡𝑎𝑙 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐷𝑒𝑓𝑒𝑐𝑡𝑖𝑣𝑒𝑠 𝑝̅ = 𝑇𝑜𝑡𝑎𝑙 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑂𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 𝑝̅ (1 − 𝑝̅ ) 𝑆𝑝 = √ 𝑛 𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝐿𝑖𝑚𝑖𝑡𝑝̅ = 𝐶𝐿𝑝̅ = 𝑝̅ ± 𝑧 ∙ 𝑆𝑝 (Usually 𝑧 = 3) np charts track the number of nonconforming items in each sample. Easier to use than the p chart because the percentage of defective items does not have to be calculated, but all the samples must be the same size, 𝑛. 𝐶𝑒𝑛𝑡𝑟𝑎𝑙 𝐿𝑖𝑛𝑒 = 𝑛 ∙ 𝑝0 𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝐿𝑖𝑚𝑖𝑡 = 𝐶𝐿 = 𝑛 ∙ 𝑝0 ± 3 ∙ √𝑛 ∙ 𝑝0 ∙ (1 − 𝑝0 ) Usually, 𝑝 = 𝑝0. If the sample size is variable, 𝑛 is the average sample size Vasco Ribeiro Tamen | Nº 43238 55  4.1.2. STATISTICAL PROCESS CAPABILITY Specification limits are the values between which products or services should operate (desired performance of your process). Usually set by customer requirements. These are different than the control limits. Control Limits represent how your process performs. Therefore, they let you assess whether your process is stable. While Specification limits allow you to assess how capable your process is of meeting customer requirements. Process capability index, 𝐶𝑃 , is a measure of how ‘capable’ the process is to meet customer requirements; compares process limits to specification limits: 𝐶𝑃 < 1 ⟹ Process is not capable of meeting specs 𝑈𝑆𝐿 − 𝐿𝑆𝐿 𝐶𝑃 = 𝐶𝑃 = 1 ⟹ Process is marginally capable 6×𝜎 𝐶𝑃 > 1 ⟹ Process is capable of meeting specs Is the process centered between the specification limits? 𝑈𝑆𝐿 − 𝜇 𝜇 − 𝐿𝑆𝐿 𝐶𝑃𝐾 = min [ , ] 3×𝜎 3×𝜎 Vasco Ribeiro Tamen | Nº 43238 56 Comparison: 𝐶𝑃 does not take process centering into account 𝐶𝑃 is a measure of potential capability, not actual capability Summary Vasco Ribeiro Tamen | Nº 43238 57 Vasco Ribeiro Tamen | Nº 43238 58  4.2. SUPPLY CHAIN MANAGEMENT Supply-chain is a term that describes how organizations (suppliers, manufacturers, distributors, and customers) are linked together. Supply chain management is the management of the interconnection of organizations that relate to each other through upstream and downstream linkages between the processes that produce value to the ultimate consumer in the form of products and services. Remember the operational level performance objectives: [Page 7-9] Lean vs Agile Supply networks Supply chains with different end objectives need managing differently. Lean supply networks ⟹ Efficiency Agile supply networks ⟹ Responsiveness and Flexibility Functional products require lean supply chain management; Innovative products and services require agile supply chain management. Vasco Ribeiro Tamen | Nº 43238 59 Different supply chain policies match the different market requirements implied by functional and innovative products. Operation´s Structure and Scope When deciding on the structure, you should try to balance the risk and criticality of the product: Nº alternative suppliers Exit barriers Risk Switching costs Cost of making products in-house Volume purchased Impact on business growth Criticality % of the total purchase cost Vasco Ribeiro Tamen | Nº 43238 60 Supply chain vulnerability: an exposure to serious disturbance, arising from risks within the supply chain as well as risks external to the supply chain. Causes: Financial Crises War Pandemics Unexpected Accidents Natural Disasters Check the example: Logistics Logistics deals with the forward and reverse flow and storage of goods and services between the point of origin and the point of consumption to meet customers’ requirements. Reverse Logistics is everything that concerns returns; maintenance, remanufacturing and packing issues; or unsold goods. Vasco Ribeiro Tamen | Nº 43238 61  Bullwhip Effect Supply chain phenomenon describing how small fluctuations in demand at the retail level can cause progressively larger fluctuations in demand at the wholesale, distributor, manufacturer, and raw material supplier levels. Red Queen Effect Refers to the increased pressure to adapt faster just to survive, which is driven by an increase in the evolutionary pace of rival technology solutions Vasco Ribeiro Tamen | Nº 43238 62  4.3. PROJECT MANAGEMENT A project is a set of activities with a defined start point and a defined end state, which pursues a defined goal and uses a defined set of resources. Each project has its own work breakdown structure in terms of tasks, sub-tasks, and work packages. Activities are defined within the context of the work breakdown structure and are pieces of work that consume time. We can use network diagrams which are a visual representation of the workflow of a project. There are two main ones: Activity on Arrow (AOA) Activity on Node (AON) In the first diagram type, we usually introduce dummy activities (an imaginary activity that does not consume any resource and time, used to maintain the logic of a network). Consider the example: In this chapter, we will use network-planning methods and explain the most common techniques to organize a project and its activities to optimize efficiency: Cost, Time, and Quality. Vasco Ribeiro Tamen | Nº 43238 63  4.3.1. CRITICAL PATH METHOD (CPM) In the critical path method, the manager identifies all the activities required to complete the project, the relationships between these activities, and the order in which they need to be completed. CPM assumes that the amount of time needed to finish a task, 𝑡, is known with certainty (𝒕 is fixed); therefore, the diagram shows only one number for the time needed to complete each activity. Early Times Early start (ES) is the earliest time it takes for an activity to begin. The assumption is that all preceding activities begin at their earliest possible start time. The ES of an activity is the sum of the time of all preceding activities on that path. When an activity has more than one preceding activity, the early start of that activity depends on the early finish of the longest duration or the activity with the longest ES time. Early finish (EF) = 𝐸𝑆 + 𝑡 Late Times Late start (LS) is a delay in the start of an activity. The latest time an activity can begin without delaying the project completion time. Late finish (LF): The delay in the late start of an activity resulting in the late finish of that activity should be such as not to delay the project completion time. How to compute them? We start by computing the early times. Then we use a backward induction/movement. We assume that for the last activity in the critical path, 𝐸𝐹 = 𝐿𝐹 and then 𝐿𝐹 − 𝑡 = 𝐿𝑆. When an activity has more than one preceding activity, the path with the shortest total LS time is taken as the LF of the preceding activity or activities. Each node should be represented in the following format: Vasco Ribeiro Tamen | Nº 43238 64 Consider the following example: Step 1: Construct a network diagram reflecting the precedence relationships, using the techniques explained above. Label each node with the initial time and final time. To obtain those values we start by computing the early times from the initial node. Then, we compute the late times, starting from the end! Slack Time: The time that an activity can be delayed without delaying the entire project; the difference between the late and early start times of activity. Step 2: Determine the critical path. The sequence(s) of activities in a project that form the longest chain in terms of their time to complete. If any one of the activities in the critical path is delayed, then the entire project is delayed. It is possible for there to be multiple critical paths in a project. Consider each sequence of activities that runs from the beginning to the end of the project. In this case, there are two paths: A – B – D = 1 + 2 + 1 = 4 weeks ⟹ Critical Path! A – C – D = 1 + 1 + 1 = 3 weeks If any activity along the critical path is delayed, then the entire project will be delayed. Vasco Ribeiro Tamen | Nº 43238 65  4.3.2. PROGRAM EVALUATION AND REVIEW TECHNIQUE (PERT) The PERT helps managers identify critical tasks and assess how delays in certain activities will affect operations or production. In contrast with CPM, PERT was developed to handle uncertain time estimates. PERT assigns three-time estimates for each activity: an optimistic time for completion, the most probable time, and a pessimistic time. These estimates allow managers to anticipate delays and potential problems and schedule accordingly. Three Activity Time Estimates 𝑎 = Optimistic time: The minimum reasonable period in which the activity can be completed. 𝑚 = Most likely time: The best guess of the time required. 𝑏 = Pessimistic time: The maximum reasonable period the activity would take to be completed. 𝑎 + 4𝑚 + 𝑏 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑇𝑖𝑚𝑒 𝑜𝑓 𝑜𝑛𝑒 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = 𝐸𝑇 = 6 This is based on the beta statistical distribution and weights the most likely time (𝑚) four times more than either the optimistic time (𝑎) or the pessimistic time (𝑏). 𝑏−𝑎 2 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒𝑠 𝑜𝑓 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑡𝑖𝑚𝑒𝑠 = 𝜎 2 = ( ) 6 To determine the probability of completing the project on a given date, based on the application of the standard normal distribution: 𝐷 − 𝑇𝐸 𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑎 𝑛𝑒𝑤 𝑐𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑡𝑖𝑜𝑛 𝑑𝑎𝑡𝑒 = 𝑃 𝑧 < 2 √∑ 𝜎𝐶𝑃 ( ) Where, 𝐷: Desired completion date for the project 𝑇𝐸 : Expected completion time for the project = 𝑆𝑡𝑎𝑟𝑡 𝐷𝑎𝑡𝑒 + ∑ 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑇𝑖𝑚𝑒𝑠𝐶𝑃 2 √∑ 𝜎𝐶𝑃 : Sum of the variances along the critical path Vasco Ribeiro Tamen | Nº 43238 66  4.3.3. TIME – COST MODELS AND PROJECT CRASHING In practice, project managers are as much more concerned with the cost to complete a project as with the time to complete the project. Extension of the CPM that considers the trade-off between the time required to complete an activity and the cost. This is often referred to as crashing2 the project. Now, for each activity, we will have the following costs and times: Normal cost (NC): the lowest expected activity costs. Normal time (NT): the time associated with each normal cost. Crash time (CT): the shortest possible activity time. Crash cost (CC): the cost associated with each crash time. Step 1: Construct a network diagram. Step 2: Determine the critical path.