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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
Production/Operations Management
Dr. Eliot Elfner
St. Norbert College
Spring 2008
SCM – Maintain
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
Key issues addressed byphysical supply:
•ACQUIRE –From whom and when should materials be ordered or produced?–What criteria should be used to evaluate suppliers?
•MAINTAIN–How much, when and where should material be stored?
•TRANSFORM–When and how should inputs be converted into outputs
•LOGISTICS–By what transportation mode and particular transport service should materials be transported?
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
Inventory
• Stock of items held to meet future demand
• Inventory management answers two questions
– How much to order– When to order
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
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Types of Inventory
• Raw materials• Purchased parts and supplies• Labor• In-process (partially completed)
products• Component parts• Working capital• Tools, machinery, and equipment• Finished goods
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Reasons To Hold Inventory
• Meet unexpected demand• Smooth seasonal or cyclical
demand• Meet variations in customer
demand• Take advantage of price discounts• Hedge against price
increases• Quantity discounts
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
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Inventory Costs
• Carrying Cost– cost of holding an item in inventory
• Ordering Cost– cost of replenishing inventory
• Shortage Cost– temporary or permanent loss of
sales when demand cannot be met
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
Inventory Costs
• Ordering cost: cost incurred each time an order is placed with a supplier or production is ordered with its own shop.
• Setup costs: cost involved in changing over a machine to produce a different part or item.
• Holding cost: cost associated with maintaining an item in inventory until it is used or sold.
• Stockout or shortage cost: occurs when the demand for an item exceeds its supply.
• Item cost: becomes relevant if a quantity discount is available.
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
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• Warehouse Space
• Material Handling Costs
• Opportunity Costs
• Insurance - Property and Goods
• Property Taxes
• Administrative Expenses
• Shrinkage and Obsolescence
Inventory Management
Costs of Having an Inventory
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
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Good inventory management is important to all because..
• Inventories represent a major commitment of monetary resources
• Inventories affect virtually all aspects of a company’s daily operations
• Inventories are a major competitive weapon for many companies
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
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Types of Inventory Items
• Independent demand items are finished goods or parts that are shipped as end items to customers - EOQ Models
• Dependent demand items are raw materials, component parts, or subassemblies that are used in the production of a finished product - MRP/ERP Models
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
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Inventories are typically measured in three ways:
Average aggregate inventory value: used to accumulate total value of all items held in inventory on the average, over some time period.
Weeks of supply: computed by dividing average aggregate inventory held, by sales per week at cost.
Inventory turns: computed by dividing annual sales at cost, by average aggregate inventory value maintained during the year.
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
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Inventory ManagementTypes of Materials to be Managed
• Raw Materials
• Supplies
• Partially Manufactured Goods
• Finished Components for Final Assembly
• Finished Products Ready for Shipment
• Materials in Transit
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
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Objectives of Inventory Management
• Buffer Internal Routine Activities from Outside Variability
• Never Run Out of Anything• Never Have Much of Anything on Hand• Never Pay More for Material than
Necessary (i.e. - take quantity discounts)
CONFLICTING GOALS
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
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Prioritizing Inventory Management - ABC Analysis• Based on the Pareto Malfeasance
Curve
• Uses the “80-20” Rule– 80% of the cost of Inventory
Management Will be the Result of 20% of the Items in the Inventory
– Based on Different Valuations of Items in the Inventory
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Prioritizing Inventory Management - ABC Analysis• “A” Items - The Vital Few - 80% of
Inventory Value
– Require extensive Systems of Inventory Management (MRP, JIT, etc.)
• “B” Items - 15 - 20% of Inventory Value
– Often included in the “A” Item Control Systems
• “C” Items - The Trivial Many - The Rest – Control based on never running out
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“C” Item Inventory Control Methods (Simple)
• Inventory Turnover Goals
• Dollar Limits
• Time Limits
• Fixed Ordering Times
• Fixed Ordering Quantities
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
Types of InventoryControl Systems
• Continuous review systems(each time a withdrawal is made from inventory, the remaining quantity of the item is reviewed to determine whether an order should be placed)• Periodic review systems(the inventory of an item is reviewed at fixed time intervals, and an order Is placed for the appropriate amount)
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Continuous Review and Periodic Review Systems
Continuous ReviewSystem Advantages
• Lower Safety Stock• Fixed lot sizes may
make it easier to obtain quantity discounts
• Individual review of items is used and this may be very desirable for expensive items
Periodic Review System Advantages
• Less time consuming and expensive to maintain
• Allows combining orders to the same supplier
• Inventory record keeping costs can be reduced
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
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“B” Level Inventory Management
• Independent vs. Dependent Demand
• Concerned with Questions of “How Much” and “When”
• EOQ, ELS, and Quantity Discount Models
• Concern w/Suboptimization/Releasing Capital
• Safety Stock
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“B” Level Inventory Management
Disadvantages• Cost of Accurate Data• Dynamic Nature of Inventory
Systems• Best suited to “B” Level,
Independent Demand Items• Assumes Constant, Steady Demand• Sub-Optimizes• Other Management Methods
Overlap-MRP
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
Inventory Costs
• Ordering cost: cost incurred each time an order is placed with a supplier or production is ordered with its own shop.
• Setup costs: cost involved in changing over a machine to produce a different part or item.
• Holding cost: cost associated with maintaining an item in inventory until it is used or sold.
• Stockout or shortage cost: occurs when the demand for an item exceeds its supply.
• Item cost: becomes relevant if a quantity discount is available.
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
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Inventory models give answers to two questions:
When should an order be placed or a new lot be manufactured?
ROP
How much should be ordered or purchased?
EOQ/ELS
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Components ofInventory Costs
• Purchase Price
• Inventory Ordering Costs
• Inventory Carrying Costs
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• Insurance
• Interest
• Spoilage
• Obsolescence
• Material Handling
• Etc.
Components of InventoryCarrying Costs
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Inventory Cost Model
• Total Cost = Annual Purchase Costs+ Annual Ordering Costs+ Annual Carrying Costs
• A Function of Ordering Quantity
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Quantitative Model
TC = Total CostsPC = Annual Purchasing CostsOC = Annual Ordering CostsCC = Annual Carrying CostsTC = PC + OC + CC
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Assumptions Of BasicEOQ Model
• Demand is known with certainty
• Demand is relatively constant over time
• No shortages are allowed
• Lead time for the receipt of orders is constant
• The order quantity is received all at once
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
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The Inventory Order Cycle
Demand rate
0 TimeLead time
Order Placed
Order Received
Inve
nto
ry L
eve
l
Reorder point, ROrder qty, Q
Lead time
Order Placed
Order Received
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EOQ Cost Model
CO - cost of placing order D - annual demand
CC - annual per-unit carrying cost Q - order quantity
Annual ordering cost = COD/Q
Annual carrying cost = CCQ/2
Total cost = COD/Q + CCQ/2
TCCoD
QCcQ
TCQ
CoD
Q
Cc
CoD
Q
Cc
QoptCoDCc
2
2 2
02 2
2
2
2
2
2
min
2
optc
opt
o
c
oopt
c
o
co
QC
Q
DCTC
C
DCQ
C
DCQ
QC
Q
DC
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EOQ Model Cost Curves
Total Cost
Ordering CostCoD/Q
Order QuantityQ
Annualcost ($)
Minimumtotal cost
Optimal order Qopt
Carrying CostCcQ/2
Slope = 0
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EOQ Example
CC = $0.75 per yard CO = $15 D = 10,000 yards
Number of
Order cycl
orders per year =D
Qopt
e time =311
D / Qopt60.2 store days
10 0002 000
5
3115
,,
QoptCoDCc
yards
2
2 150 10 0000 75
2 000
( )( , )( . )
,
TCCoDQopt
CcQoptmin
( )( , ),
( . )( , )
$750 $1,
2
150 10 0002 000
0 75 2 0002
750 500
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EOQ With Noninstantaneous Receipt
Q(1-d/p)
Inventorylevel
(1-d/p)Q2
Time0
Orderreceipt period
BeginOrderreceipt
EndOrderreceipt
Maximuminventory level
Averageinventory level
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EOQ With Noninstantaneous Receipt
Max inv level = Q -Qp
1-dp
Avg inv level =12
1-dp
1-dp
Total carrying cost = 1-dp
1-dp
1-dp
d Q
QQ
CoQ
TCCoD
QCoQ
QoptCoD
Cc
2
2
2
2
p = production rate d = demand rate
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Production Quantity Example
CC = $0.75 per yard CO = $15 D = 10,000 yards
d = 10,000/311 = 32.2 yards per day p = 150 yards per day
QoptCoD
Cc
2
2 150 10 000
0 75
1-dp
1-32.2150
= 2,256.8 yards
( )( , )
.
TCCoD
QCoQ
min
( )( , ), .
( . ) , .
$1,
2
150 10 0002 256 8
0 75 2 256 82
329
1-dp
1-32.2150
Production run = Q/p=2,256.8/150=15.05 yardsNumber of production runs = D/Q=10,000/2,256.8 = 4.43
Max inv level = 1-dp
1-32.2150
Q yards
2 256 8 1722, . ,
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Quantity Discounts
Price per unit decreases as order quantity increases
Order
Size Price
0-99 $10
100-199 $8 (d1)
200+ $6 (d2)
TCCoD
QCoQ
PD
P per unit p
2
rice
D = annual demand
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Economic Order QuantityQuantity Discounts (Solution Procedure)
Step 1: Compute Q for the unit cost associated with each discount category.Step 2: For those Q that are too small to receive the discount price, adjust the order quantity upward to the nearest quantity that will receive the discount price.Step 3: For each order quantity determined in Steps 1 and 2, compute the total annual inventory price using the unit price associated with that quantity. The quantity that yields the lowest total annual inventory cost is the optimal order quantity.
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Quantity Discount Model
Qopt
Carrying cost
Ordering cost
Inve
ntor
y co
st (
$)
Q(d1 ) = 100 Q(d2 ) = 200
TC (d2 = $6 )
TC (d1 = $8 )
TC = ($10 )
Quantity (Q)
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Quantity Discount Example
Order CC = $190 per computer
Size Price CO = $2,500
1-49 $1,400 D = 200
50-89 1,100
90+ 900
QoptCoDCc
2
2 2 500 200190
( , )( )
= 72.5 PCs
TCCoDQopt
CoQopt PDmin
( , )( ).
( )( . )( , )( )
$233,
2
2 500 20072 5
190 72 52
1100 200
784
TCCoD
QCoQ
PD90 22 500 200
90190 90
2900 200
105
( , )( ) ( )( )( )( )
$194, Lowest total cost order quantity
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
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HOMEWORK
• Read Webster, Chapters 6 & 7
• Problems DUE Tue, 4/15 in class– P. 138, Problems 2, a-e and 3, a-e– P. 140, Problem 14
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Material Requirements Planning (MRP) is a production system that was specifically designed to handle dependent demand inventory items.
Dependent Demand Inventory Control
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MRP
• Computerized inventory control & production planning system
• Schedules component items when they are needed - no earlier and no later
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When to Use MRP
• Dependent and discrete items
• Complex products
• Job shop production
• Assemble-to-order environments
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MRP Inputs & Outputs
Master Production Schedule
MaterialRequirements
Planning
Work Orders Purchase Orders Rescheduling Notices
ProductStructure
File
InventoryMaster
File
Planned Order Releases
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MRP Inputs
• Master production schedule
• Product structure file
• Inventory master file
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Master Production Schedule
• Drives MRP process with a schedule of finished products
• Quantities represent production not demand
• Quantities may consist of a combination of customer orders & demand forecasts
• Quantities represent what needs to be produced, not what can be produced
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Level 0
Level 1
Level 2
Level 3
Product Structure Tree
Clipboard
Rivet (2)
Iron Rod (3 in.)
Spring (1)
Spring Steel (10 in.)
Bottom Clip (1)
Top Clip (1)
Pivot (1)
Sheet Metal (8 in2)
Clip Assembly (10)
Sheet Metal (8 in2)
Board (1)
Pressboard (1)
Finish (2oz.)
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The MRP Matrix
Lot size: LT: PD 1 2 3 4 5 6 7 8 9 10Gross requirementsScheduled receiptsProjected on handNet requirementsPlanned order receiptsPlanned order releases
• Item – name or number identifying scheduled item
• LLC– low-level-code; lowest level at which item
appears in a product structure
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Production Planning and Scheduling Framework
ResourcePlanning
AggregateProductionPlanning
DemandForecasting
Rough-cutCapacityPlanning
Master ProductionSchedule
DetailedCapacityPlanning
MaterialRequirements
Planning
Purchasing Shop-FloorControl
Feedback
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
Bill of Material for the Office Chair Example
Level 0
Level 1
Level 2
Back Cushion Seat Cushion Chair Frame Fasteners (8)
Fasteners (3)Wheels (6)Base Unit Adjuster Mechanism
Office Chair
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POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
For all components and subassemblies
MRP systems determine:
• Order Quantities
• Planned order release dates
• Order due dates
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
Operation Setback Chart for Economy Office Chair
1 - Way Adjuster Mechanism
Wheels
Base Unit
Fastener - 1 1/4”
Nylon Back Cushion
Nylon Seat Cushion
Economy Chair Frame
Fastener - 1 1/4”
Period 1 Period 2 Period 3 Period 4 Period 5 Period 6 Period 7 Period 8
Economy Office Chair
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
Issues to be concerned with when using MRP systems:
• Loss of visibility for low level components
• MRP nervousness• Minimum length of the planning
horizon• Freezing the MPS• Lumpiness of demand
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
Lot Sizing Procedures
• Lot for Lot• Fixed Order Quantity• Period Order Quantity• Part Period Balancing
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
Distribution Requirements Planning
• extends the logic of MRP into the physical distribution system.
• is a mechanism for integrating the physical distribution system with the production planning and scheduling system.
• assists in maintaining distribution inventories in field warehouses, distribution centers, etc., by improving the linkages between marketplace requirements and manufacturing activities.
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
Distribution RequirementsPlanning (Con’t)
• helps managers anticipate future requirements and closely match the supply of products to demand, and adjust to changes in the marketplace.
• can yield significant logistics savings through improved planning of transportation, dispatching, etc.
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
Distribution Requirements Planning
• Central coordinating role
• Detailed local information
• Critical link between marketplace, demand forecasting, and master production scheduling
• Generates valuable information for the master scheduling process
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
DRP in Production Planning and Scheduling
Resource Planning
AggregateProduction Planning
DemandForecasting
Distribution Requirements Planning
MasterProductionScheduling Planned
Shipments
Marketplace(Customersand other demandsources)
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Introduction to P/OMIntroduction to Supply Chain ManagementSCM – AcquisitionSCM – MaintainSCM – TransformSCM – DistributeWebster Chapters•Information Technology•Foundations•Demand Management•Supply Management•Inventory Management•Capacity Management•Production Management•Transportation Management•Quality Management
POM Tools•Forecasting•Lean Manufacturing•Project Management•Simulation•Statistical Process Control
Production/Operations Management
Dr. Eliot Elfner
St. Norbert College
Spring 2008
The End – Maintain