operation management
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Operation Management a complete overviewTRANSCRIPT
Production Operation Production Operation ManagementManagement
Junaid ZamirJunaid Zamir
SP06-BB-0010SP06-BB-0010
What Is Operations Management?What Is Operations Management?
Production is the creation of goods and Production is the creation of goods and servicesservices
Operations management (OM) is the set Operations management (OM) is the set of activities that creates value in the of activities that creates value in the
form of goods and services by form of goods and services by transforming inputs into outputstransforming inputs into outputs
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Organizing to Produce Goods and Organizing to Produce Goods and ServicesServices
Essential functions:Essential functions: Marketing – generates demandMarketing – generates demand Production/operations – creates the Production/operations – creates the
productproduct Finance/accounting – tracks how well Finance/accounting – tracks how well
the organization is doing, pays bills, the organization is doing, pays bills, collects the moneycollects the money
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Why Study OM?Why Study OM?
OM is one of three major functions (marketing, OM is one of three major functions (marketing, finance, and operations) of any organizationfinance, and operations) of any organization
We want (and need) to know how goods and We want (and need) to know how goods and services are producedservices are produced
We want to understand what operations We want to understand what operations managers domanagers do
OM is such a costly part of an organizationOM is such a costly part of an organization
What does it coversWhat does it covers
PlanningPlanning OrganizingOrganizing StaffingStaffing LeadingLeading ControllingControlling
Basic Management FunctionsBasic Management Functions
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Design of goods and servicesDesign of goods and services What good or service should we offer?What good or service should we offer? How should we design our products and How should we design our products and
services? services?
Managing qualityManaging quality How do we define quality?How do we define quality? Who is responsible for quality?Who is responsible for quality?
areas it coversareas it covers
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Process designProcess design What process will the product require?What process will the product require? What equipment and technology is What equipment and technology is
necessary for these processes?necessary for these processes? Location strategyLocation strategy
Where should we put the facility?Where should we put the facility? On what criteria should we base the On what criteria should we base the
location decision?location decision?
areas it coversareas it covers
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Layout strategyLayout strategy How should we arrange the facility?How should we arrange the facility? How large must the facility be to meet our How large must the facility be to meet our
plan?plan? Human resources and job designHuman resources and job design
How do we provide a reasonable work How do we provide a reasonable work environment?environment?
How much can we expect our employees How much can we expect our employees to produce?to produce?
areas it coversareas it covers
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Supply chain managementSupply chain management Should we make or buy this component?Should we make or buy this component? Who are our suppliers and who can integrate Who are our suppliers and who can integrate
into our e-commerce program?into our e-commerce program? Inventory, material requirements planning, and Inventory, material requirements planning, and
JITJIT How much inventory of each item should we How much inventory of each item should we
have?have? When do we re-order?When do we re-order?
areas it coversareas it covers
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New Trends in OMNew Trends in OM
Global focusGlobal focus Just-in-time performanceJust-in-time performance Supply chain partneringSupply chain partnering Rapid product developmentRapid product development Mass customizationMass customization Empowered employeesEmpowered employees Environmentally sensitive productionEnvironmentally sensitive production
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Productivity ChallengeProductivity Challenge
Productivity is the ratio of outputs (goods and Productivity is the ratio of outputs (goods and services) divided by the inputs (resources services) divided by the inputs (resources
such as labor and capital)such as labor and capital)
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Measurement ProblemsMeasurement Problems
Quality may change while the quantity Quality may change while the quantity of inputs and outputs remains of inputs and outputs remains constantconstant
External elements may cause an External elements may cause an increase or decrease in productivityincrease or decrease in productivity
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Productivity VariablesProductivity Variables
LaborLabor - contributes 10% of the - contributes 10% of the annual increaseannual increase
CapitalCapital - contributes about 38% - contributes about 38% of the annual increaseof the annual increase
ManagementManagement - contributes - contributes about 52% of the annual about 52% of the annual increaseincrease
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What is Forecasting?What is Forecasting?
Its is the art and science of predicting a future Its is the art and science of predicting a future events.events.
It uses historical data to predict future.It uses historical data to predict future.
It deals in areas ofIt deals in areas of ProductionProduction InventoryInventory Personnel'sPersonnel's
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Short-range forecastShort-range forecast Generally forGenerally for less than 3 monthsless than 3 months Used for planning purchases, job schedulingUsed for planning purchases, job scheduling
Medium-range forecastMedium-range forecast For 3 months to 3 yearsFor 3 months to 3 years Sales and production planning, budgetingSales and production planning, budgeting
Long-range forecastLong-range forecast 33++ years years New product planning, research and developmentNew product planning, research and development
Forecasting Time HorizonsForecasting Time Horizons
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Distinguishing DifferencesDistinguishing Differences
Medium/long rangeMedium/long range forecasts deal with more forecasts deal with more comprehensive issues and support comprehensive issues and support management decisions regarding planning management decisions regarding planning and products, plants and processesand products, plants and processes
Short-termShort-term forecasts tend to be more accurate forecasts tend to be more accurate than longer-term forecaststhan longer-term forecasts
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Product Life CycleProduct Life Cycle
Product design Product design and development and development criticalcritical
Frequent product Frequent product and process and process design changesdesign changes
Process Process modificationsmodifications
High production High production costscosts
Limited modelsLimited models
Research & Research & developmentdevelopment
Forecasting Forecasting criticalcritical
Product and Product and process process reliabilityreliability
Competitive Competitive product product improvements improvements and optionsand options
Increase abilityIncrease ability
StandardizatioStandardizationn
minor changesminor changes
Increasing Increasing stability of stability of processprocess
Product Product improvement improvement and cost and cost cuttingcutting
Little product Little product differentiatiodifferentiationn
Cost Cost minimizationminimization
commonalitycommonality
Introduction Growth Maturity Decline
2020
Types of ForecastsTypes of Forecasts
Economic forecastsEconomic forecasts Address business cycle – inflation rate, Address business cycle – inflation rate,
money supply, housing starts, etc.money supply, housing starts, etc.
Technological forecastsTechnological forecasts Predict rate of technological progressPredict rate of technological progress Impacts development of new productsImpacts development of new products
Demand forecastsDemand forecasts Predict sales of existing products and Predict sales of existing products and
servicesservices
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Forecasting ApproachesForecasting Approaches
Used when situation is vague and little data Used when situation is vague and little data existexist New productsNew products New technologyNew technology
Involves intuition, experienceInvolves intuition, experience e.g., forecasting sales on Internete.g., forecasting sales on Internet
Qualitative Qualitative MethodsMethods
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Forecasting ApproachesForecasting Approaches
Used when situation is ‘stable’ and historical Used when situation is ‘stable’ and historical data existdata exist Existing productsExisting products Current technologyCurrent technology
Involves mathematical techniquesInvolves mathematical techniques e.g., forecasting sales of color e.g., forecasting sales of color
televisionstelevisions
Quantitative Quantitative MethodsMethods
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Qualitative ApproachesQualitative Approaches
Delphi methodDelphi method Panel of experts make forecastsPanel of experts make forecasts
Sales force compositeSales force composite Forecasting technique based on Forecasting technique based on
salespersons estimates of expected sales.salespersons estimates of expected sales.
Consumer Market SurveyConsumer Market Survey Input from potential customersInput from potential customers
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Quantitative ApproachesQuantitative Approaches
Naive approachNaive approach Assumes demand in next period is the same Assumes demand in next period is the same
as demand in most recent periodas demand in most recent period
Moving averagesMoving averages It is a series of airthmatic means used to It is a series of airthmatic means used to
monitor little or no trendmonitor little or no trend
Weighted moving averageWeighted moving average Used when trend is present Used when trend is present
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Form of weighted moving averageForm of weighted moving average Weights decline exponentiallyWeights decline exponentially Most recent data weighted mostMost recent data weighted most
Requires smoothing constant Requires smoothing constant (()) Ranges from 0 to 1Ranges from 0 to 1 Subjectively chosenSubjectively chosen
Involves little record keeping of past dataInvolves little record keeping of past data
Exponential SmoothingExponential Smoothing
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Exponential SmoothingExponential Smoothing
New forecast =New forecast = Last period’s forecastLast period’s forecast+ + aa ((Last period’s actual demand Last period’s actual demand
– – Last period’s forecastLast period’s forecast))
FFtt = F = Ft t – 1– 1 + + a(a(AAt t – 1– 1 - - F Ft t – 1– 1))
wherewhere FFtt == new forecastnew forecast
FFt t – 1– 1 == previous forecastprevious forecast
aa == smoothing (or weighting) smoothing (or weighting) constant constant (0 (0 ≤≤ a a ≤≤ 1) 1)
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Forecasting obtained by observing response Forecasting obtained by observing response variable at regular time periodsvariable at regular time periods
Time Series ForecastingTime Series Forecasting
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Persistent, overall upward or downward Persistent, overall upward or downward patternpattern
Changes due to population, technology, Changes due to population, technology, age, culture, etc.age, culture, etc.
Typically several years duration Typically several years duration
Trend ComponentTrend Component
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Regular pattern of up and down Regular pattern of up and down fluctuationsfluctuations
Due to weather, customs, etc.Due to weather, customs, etc. Occurs within a single year Occurs within a single year
Seasonal ComponentSeasonal Component
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Repeating up and down movementsRepeating up and down movements Affected by business cycle, political, and Affected by business cycle, political, and
economic factorseconomic factors Multiple years durationMultiple years duration Often causal or Often causal or
associative associative relationshipsrelationships
Cyclical ComponentCyclical Component
00 55 1010 1515 2020
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Unsystematic, fluctuationsUnsystematic, fluctuations Due to random variation or unforeseen eventsDue to random variation or unforeseen events Short duration and Short duration and
nonrepeating nonrepeating
Random ComponentRandom Component
MM TT WW TT FF
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The good or service the organization provides The good or service the organization provides societysociety
Top organizations typically focus on core Top organizations typically focus on core productsproducts
Customers buy satisfaction, not just a Customers buy satisfaction, not just a physical good or particular servicephysical good or particular service
Fundamental to an organization's strategy Fundamental to an organization's strategy with implications throughout the operations with implications throughout the operations functionfunction
Product DecisionProduct Decision
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Product Strategy OptionsProduct Strategy Options
DifferentiationDifferentiation Shouldice HospitalShouldice Hospital
Low costLow cost Mobile PhonesMobile Phones
Rapid responseRapid response Wal-martWal-mart
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Product Life CycleProduct Life Cycle
Product design Product design and development and development criticalcritical
Frequent product Frequent product and process and process design changesdesign changes
Process Process modificationsmodifications
High production High production costscosts
Limited modelsLimited models
Research & Research & developmentdevelopment
Forecasting Forecasting criticalcritical
Product and Product and process process reliabilityreliability
Competitive Competitive product product improvements improvements and optionsand options
Increase abilityIncrease ability
StandardizatioStandardizationn
minor changesminor changes
Increasing Increasing stability of stability of processprocess
Product Product improvement improvement and cost and cost cuttingcutting
Little product Little product differentiatiodifferentiationn
Cost Cost minimizationminimization
commonalitycommonality
Introduction Growth Maturity Decline
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New Product OpportunitiesNew Product Opportunities
1.1. Understanding the customerUnderstanding the customer
2.2. Technological changeTechnological change
3.3. Political/legal changePolitical/legal change
4.4. Market practice, professional standards, Market practice, professional standards, suppliers, distributorssuppliers, distributors
5.5. Developing new products faster can result in a Developing new products faster can result in a competitive advantagecompetitive advantage
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Quality Function DeploymentQuality Function Deployment
Identify customer wantsIdentify customer wants Identify how the good/service will satisfy Identify how the good/service will satisfy
customer wantscustomer wants Relate customer wants to product howsRelate customer wants to product hows Evaluate competing productsEvaluate competing products Compare performance to desirable technical Compare performance to desirable technical
attributesattributes
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Manufacturability andManufacturability and Value Engineering Value Engineering
Benefits:Benefits: Reduced complexity of productsReduced complexity of products Additional standardization of productsAdditional standardization of products Improved functional aspects of productImproved functional aspects of product Improved job design and job safetyImproved job design and job safety Improved maintainability (serviceability) of Improved maintainability (serviceability) of
the productthe product Robust designRobust design
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Issues for Product DevelopmentIssues for Product Development
Robust designRobust design Modular designModular design Computer-aided design (CAD)Computer-aided design (CAD) Computer-aided manufacturing (CAM)Computer-aided manufacturing (CAM) Virtual reality technologyVirtual reality technology Value analysisValue analysis Environmentally friendly designEnvironmentally friendly design
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Defining The ProductDefining The Product
First definition is in terms of functionsFirst definition is in terms of functions specifications are developed during specifications are developed during
the design phasethe design phase Manufactured products will have an Manufactured products will have an
engineering drawingengineering drawing Bill of material (BOM) lists the Bill of material (BOM) lists the
components of a productcomponents of a product
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Engineering drawingEngineering drawing
Shows dimensionsShows dimensions
Bill of Material Bill of Material
Lists components, quantities and where Lists components, quantities and where usedused
Shows product structureShows product structure
Product DocumentsProduct Documents
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Service DesignService Design
Service typically includes direct interaction Service typically includes direct interaction with the customerwith the customer Increased opportunity for Increased opportunity for
customizationcustomization Reduced productivityReduced productivity
Cost and quality are still determined at the Cost and quality are still determined at the design stagedesign stage Delay customizationDelay customization ModularizationModularization Reduce customer interaction, often Reduce customer interaction, often
through automationthrough automation
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Defining QualityDefining Quality
The totality of features and The totality of features and characteristics of a product or characteristics of a product or
service that bears on its ability to service that bears on its ability to satisfy stated or implied needssatisfy stated or implied needs
American Society for QualityAmerican Society for Quality
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Quality and StrategyQuality and Strategy
Managing quality supports Managing quality supports differentiation, low cost, differentiation, low cost, and response strategiesand response strategies
Quality helps firms increase Quality helps firms increase sales and reduce costssales and reduce costs
Building a quality Building a quality organization is a demanding organization is a demanding tasktask
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The Flow of ActivitiesThe Flow of Activities
Organizational PracticesLeadership, Mission statement, Effective operating procedures, Staff support, TrainingYields: What is important and what is to be
accomplished
Quality PrinciplesCustomer focus, Continuous improvement, Benchmarking, Just-in-time, Tools of TQMYields: How to do what is important and to be
accomplished
Employee FulfillmentEmpowerment, Organizational commitmentYields: Employee attitudes that can accomplish
what is importantCustomer SatisfactionWinning orders, Repeat customersYields: An effective organization with
a competitive advantage
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Different ViewsDifferent Views
User-based – better performance, User-based – better performance, more featuresmore features
Manufacturing-based – conformance Manufacturing-based – conformance to standards, making it right the first to standards, making it right the first timetime
Product-based – specific and Product-based – specific and measurable attributes of the product measurable attributes of the product
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Implications of QualityImplications of Quality
Company reputationCompany reputation Perception of new productsPerception of new products Employment practicesEmployment practices Supplier relationsSupplier relations
Product liabilityProduct liability Reduce riskReduce risk
Global implicationsGlobal implications Improved ability to competeImproved ability to compete
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Key Dimensions of QualityKey Dimensions of QualityKey Dimensions of QualityKey Dimensions of Quality
PerformancePerformance FeaturesFeatures ReliabilityReliability ConformanceConformance
DurabilityDurability ServiceabilityServiceability AestheticsAesthetics Perceived qualityPerceived quality ValueValue
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Costs of QualityCosts of Quality
Prevention costs - reducing the Prevention costs - reducing the potential for defectspotential for defects
Appraisal costs - evaluating Appraisal costs - evaluating products, parts, and servicesproducts, parts, and services
Internal failure - producing Internal failure - producing defective parts or service before defective parts or service before deliverydelivery
External costs - defects discovered External costs - defects discovered after delivery after delivery
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TQMTQM
Total Quality is a description of the Total Quality is a description of the cultureculture, , attitudeattitude and and organizationorganization of a company of a company that strives to provide customers with that strives to provide customers with products and services that satisfy their products and services that satisfy their needs. It covers entire organization, from needs. It covers entire organization, from supplier to customersupplier to customer
Requires commitment by managements Requires commitment by managements toward excellence in all aspects of toward excellence in all aspects of products and services that are important products and services that are important to the customerto the customer
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Seven Concepts of TQMSeven Concepts of TQM
Continuous improvementContinuous improvement Six SigmaSix Sigma Employee empowermentEmployee empowerment BenchmarkingBenchmarking Just-in-time (JIT)Just-in-time (JIT) Taguchi conceptsTaguchi concepts Knowledge of TQM toolsKnowledge of TQM tools
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Continuous ImprovementContinuous Improvement
Represents continual improvement of all Represents continual improvement of all processes processes
Involves all operations and work centers Involves all operations and work centers including suppliers and customersincluding suppliers and customers People, Equipment, Materials, People, Equipment, Materials,
ProceduresProcedures
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Six SigmaSix Sigma
Two meaningsTwo meanings Statistical definition of a process Statistical definition of a process
that is 99.9997% capable, 3.4 that is 99.9997% capable, 3.4 defects per million opportunities defects per million opportunities (DPMO)(DPMO)
A program designed to reduce A program designed to reduce defects, lower costs, and improve defects, lower costs, and improve customer satisfactioncustomer satisfaction
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Employee EmpowermentEmployee Empowerment
Getting employees involved in product and process Getting employees involved in product and process improvementsimprovements
TechniquesTechniques Build communication networks Build communication networks
that include employeesthat include employees Develop open, supportive supervisorsDevelop open, supportive supervisors Move responsibility to employeesMove responsibility to employees
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Quality CirclesQuality Circles
Group of employees who meet regularly Group of employees who meet regularly to solve problemsto solve problems
Trained in planning, problem solving, and Trained in planning, problem solving, and statistical methodsstatistical methods
Very effective when done properlyVery effective when done properly
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BenchmarkingBenchmarking
Determine what to Determine what to benchmarkbenchmark
Form a benchmark teamForm a benchmark team Identify benchmarking Identify benchmarking
partnerspartners Collect and analyze Collect and analyze
benchmarking informationbenchmarking information Take action to match or exceed Take action to match or exceed
the benchmarkthe benchmark
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Just-in-Time (JIT)Just-in-Time (JIT)
Relationship to quality:Relationship to quality:
JIT cuts the cost of qualityJIT cuts the cost of quality JIT improves qualityJIT improves quality Better quality means less Better quality means less
inventory and better, easier-to-inventory and better, easier-to-employ JIT systememploy JIT system
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Taguchi ConceptsTaguchi Concepts
Engineering and experimental design Engineering and experimental design methods to improve product and methods to improve product and process designprocess design
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Tools of TQMTools of TQM
Tools for Generating IdeasTools for Generating IdeasCheck sheetsCheck sheetsScatter diagramsScatter diagramsCause-and-effect diagramsCause-and-effect diagrams
Tools to Organize the DataTools to Organize the DataPareto chartsPareto chartsFlowchartsFlowcharts
Tools for Identifying ProblemsTools for Identifying ProblemsHistogramHistogramStatistical process control chartStatistical process control chart
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InspectionInspection
Involves examining items to see if an Involves examining items to see if an item is good or defectiveitem is good or defective
Detect a defective productDetect a defective product Does not correct deficiencies in Does not correct deficiencies in
process or productprocess or product It is expensiveIt is expensive
IssuesIssues When to inspectWhen to inspect Where in process to inspectWhere in process to inspect
It is necessary for both services It is necessary for both services and good industry.and good industry.
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The Supply ChainThe Supply Chain
Supply chain management is the Supply chain management is the integration of the activities that procure integration of the activities that procure materials and services, transform them materials and services, transform them into intermediate goods and the final into intermediate goods and the final
product, and deliver them to customersproduct, and deliver them to customers
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Supply Chain ManagementSupply Chain Management
1.1. Transportation vendorsTransportation vendors
2.2. Credit and cash transfersCredit and cash transfers
3.3. SuppliersSuppliers
4.4. Distributors Distributors
5.5. Accounts payable and receivableAccounts payable and receivable
6.6. Warehousing and inventoryWarehousing and inventory
7.7. Order fulfillmentOrder fulfillment
8.8. Sharing customer, forecasting, and Sharing customer, forecasting, and production informationproduction information
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Make-or-Buy DecisionsMake-or-Buy Decisions
1.1. Maintain core competenceMaintain core competence
2.2. Lower production costLower production cost
3.3. Unsuitable suppliersUnsuitable suppliers
4.4. Assure adequate supply (quantity or delivery)Assure adequate supply (quantity or delivery)
5.5. Utilize surplus labor or facilitiesUtilize surplus labor or facilities
6.6. Obtain desired qualityObtain desired quality
7.7. Remove supplier collusionRemove supplier collusion
8.8. Obtain unique item that would entail a prohibitive Obtain unique item that would entail a prohibitive commitment for a suppliercommitment for a supplier
9.9. Protect personnel from a layoffProtect personnel from a layoff
10.10. Protect proprietary design or qualityProtect proprietary design or quality
11.11. Increase or maintain size of companyIncrease or maintain size of company
Reasons for MakingReasons for Making
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Make-or-Buy DecisionsMake-or-Buy Decisions
1.1. Frees management to deal with its core Frees management to deal with its core competencecompetence
2.2. Lower acquisition costLower acquisition cost
3.3. Preserve supplier commitmentPreserve supplier commitment
4.4. Obtain technical or management abilityObtain technical or management ability
5.5. Inadequate capacityInadequate capacity
6.6. Reduce inventory costsReduce inventory costs
7.7. Ensure alternative sourcesEnsure alternative sources
8.8. Inadequate managerial or technical resourcesInadequate managerial or technical resources
9.9. ReciprocityReciprocity
10.10. Item is protected by a patent or trade secretItem is protected by a patent or trade secret
Reasons for BuyingReasons for Buying
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OutsourcingOutsourcing
Transfers traditional internal Transfers traditional internal activities and resources of a firm to activities and resources of a firm to outside vendorsoutside vendors
Firms outsource information Firms outsource information technology, accounting, legal, technology, accounting, legal, logistics, and productionlogistics, and production
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Supply Chain StrategiesSupply Chain Strategies
Negotiating with many suppliersNegotiating with many suppliers
Long-term partnering with few Long-term partnering with few supplierssuppliers
Virtual companies that use Virtual companies that use suppliers on an as needed basissuppliers on an as needed basis
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Vertical IntegrationVertical Integration
Figure 11.2Figure 11.2
Raw material (suppliers)Raw material (suppliers)Iron oreIron ore SiliconSilicon FarmingFarming
Backward integrationBackward integrationSteelSteel
Current transformationCurrent transformationAutomobilesAutomobiles Integrated circuitsIntegrated circuits Flour millingFlour milling
Forward integrationForward integration Distribution systemsDistribution systems Circuit boardsCircuit boards
Finished goods Finished goods (customers)(customers) DealersDealers Computers Watches Computers Watches
CalculatorsCalculators Baked goodsBaked goods
Vertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical Integration
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Virtual CompaniesVirtual Companies
Rely on a variety of supplier Rely on a variety of supplier relationships to provide services on relationships to provide services on demanddemand
Fluid organizational boundaries that Fluid organizational boundaries that allow the creation of unique enterprises allow the creation of unique enterprises to meet changing market demandsto meet changing market demands
Exceptionally lean performance, low Exceptionally lean performance, low capital investment, flexibility, and speedcapital investment, flexibility, and speed
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Vendor SelectionVendor Selection
Vendor evaluationVendor evaluation Find potential vendorsFind potential vendors
Determine the likelihood of them Determine the likelihood of them becoming good suppliersbecoming good suppliers
Vendor DevelopmentVendor Development TrainingTraining
Engineering and production helpEngineering and production help
Establish policies and proceduresEstablish policies and procedures
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Vendor SelectionVendor Selection
NegotiationsNegotiations Cost-Based Price Model Cost-Based Price Model - supplier - supplier
opens books to purchaseropens books to purchaser
Market-Based Price ModelMarket-Based Price Model - price - price based on published, auction, or based on published, auction, or indexed priceindexed price
Competitive BiddingCompetitive Bidding - used for - used for infrequent purchases but may make infrequent purchases but may make establishing long-term relationships establishing long-term relationships difficultdifficult
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Distribution SystemsDistribution Systems
TruckingTrucking
Moves the vast majority of Moves the vast majority of manufactured goodsmanufactured goods
RailroadsRailroads
Capable of carrying large loadsCapable of carrying large loads
AirfreightAirfreight
Fast and flexible for light loadsFast and flexible for light loads
May be expensiveMay be expensive
WaterwaysWaterways
Typically used for bulky, low-value Typically used for bulky, low-value cargocargo
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Distribution SystemsDistribution Systems
PipelinesPipelines Used for transporting oil, gas, Used for transporting oil, gas,
and other chemical productsand other chemical products
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InventoryInventory
One of the most expensive assets One of the most expensive assets of many companies representing as of many companies representing as much as 50% of total invested much as 50% of total invested capitalcapital
Operations managers must balance Operations managers must balance inventory investment and customer inventory investment and customer serviceservice
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Functions of InventoryFunctions of Inventory
1.1. To separate various parts of the production To separate various parts of the production processprocess
2.2. To save firm from fluctuations in demand and To save firm from fluctuations in demand and provide a stock of goods that will provide a provide a stock of goods that will provide a selection for customersselection for customers
3.3. To take advantage of quantity discountsTo take advantage of quantity discounts
4.4. To hedge against inflationTo hedge against inflation
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Types of InventoryTypes of Inventory
Raw materialRaw material Purchased but not processedPurchased but not processed
Work-in-processWork-in-process Undergone some change but not completedUndergone some change but not completed A function of cycle time for a productA function of cycle time for a product
Maintenance/repair/operating (MRO)Maintenance/repair/operating (MRO) Necessary to keep machinery and processes Necessary to keep machinery and processes
productiveproductive
Finished goodsFinished goods Completed product awaiting shipmentCompleted product awaiting shipment
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ABC AnalysisABC Analysis
ABC analysis is a business term used to define an inventory categorization technique often used in material management.
Analysis of a range of items which have different levels of significance and should be handled or controlled differently.
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When carrying out an ABC analysis, inventory When carrying out an ABC analysis, inventory items are valueditems are valued with the results then ranked.
"A class" inventory will typically contain "A class" inventory will typically contain items that account for 80% of total value, items that account for 80% of total value, or 20% of total items.or 20% of total items.
"B class" inventory will have around 15% "B class" inventory will have around 15% of total value, or 30% of total items.of total value, or 30% of total items.
"C class" inventory will account for the "C class" inventory will account for the remaining 5%, or 50% of total items.remaining 5%, or 50% of total items.
ABC AnalysisABC Analysis
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Record AccuracyRecord Accuracy
Accurate records are a critical ingredient Accurate records are a critical ingredient in production and inventory systemsin production and inventory systems
Allows organization to focus on what is Allows organization to focus on what is neededneeded
Necessary to make precise decisions Necessary to make precise decisions about ordering, scheduling, and shippingabout ordering, scheduling, and shipping
Incoming and outgoing record keeping Incoming and outgoing record keeping must be accuratemust be accurate
Stockrooms should be secureStockrooms should be secure
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Holding, Ordering, and Setup Holding, Ordering, and Setup CostsCosts
Holding costs - Holding costs - holding costholding cost is money spent is money spent to keep and maintain a stock of goods in to keep and maintain a stock of goods in storagestorage (rent, space, insurance and security)
Ordering costs - the costs of placing an order Ordering costs - the costs of placing an order and receiving goodsand receiving goods
Setup costs - cost to prepare a machine or Setup costs - cost to prepare a machine or process for manufacturing an orderprocess for manufacturing an order
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Cycle CountingCycle Counting
Items are counted and records updated Items are counted and records updated on a periodic basison a periodic basis
Often used with ABC analysis Often used with ABC analysis to determine cycleto determine cycle
Has several advantagesHas several advantages Eliminates shutdowns and interruptionsEliminates shutdowns and interruptions
Eliminates annual inventory adjustmentEliminates annual inventory adjustment
Trained personnel audit inventory accuracyTrained personnel audit inventory accuracy
Allows causes of errors to be identified and Allows causes of errors to be identified and correctedcorrected
Maintains accurate inventory recordsMaintains accurate inventory records
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Independent Versus Independent Versus Dependent DemandDependent Demand
Independent demand - the Independent demand - the demand for item is independent demand for item is independent of the demand for any other of the demand for any other item in inventoryitem in inventory
Dependent demand - the Dependent demand - the demand for item is dependent demand for item is dependent upon the demand for some upon the demand for some other item in the inventoryother item in the inventory
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Inventory Models for Inventory Models for Independent DemandIndependent Demand
Basic economic order quantityBasic economic order quantity
Production order quantityProduction order quantity
Quantity discount modelQuantity discount model
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Basic EOQ ModelBasic EOQ Model
The ordering cost is constant.The ordering cost is constant.
The rate of demand is constantThe rate of demand is constant
The lead time is fixedThe lead time is fixed
The purchase price of the item is constant i.e no discount is The purchase price of the item is constant i.e no discount is
availableavailable
The replenishment is made instantaneously, the whole batch The replenishment is made instantaneously, the whole batch
is delivered at once.is delivered at once.
Economic order quantityEconomic order quantity is the level of is the level of inventory that minimizes the total inventory inventory that minimizes the total inventory holding costs and ordering costs.holding costs and ordering costs.
Assumptions :
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Reorder PointsReorder Points
Inventory level of an item Inventory level of an item which signals the need for which signals the need for placement of a replenishment order., placement of a replenishment order., taking into account taking into account the consumption of the item the consumption of the item during order lead time and during order lead time and the quantitu required for safety the quantitu required for safety stock.stock.
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Production Order Quantity Production Order Quantity ModelModel
Used when units are produced Used when units are produced and sold simultaneouslyand sold simultaneously
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Inve
nto
ry l
evel
Inve
nto
ry l
evel
TimeTime
Demand part of cycle Demand part of cycle with no productionwith no production
Part of inventory cycle during Part of inventory cycle during which production (and usage) which production (and usage) is taking placeis taking place
tt
Maximum Maximum inventoryinventory
Production Order Quantity ModelProduction Order Quantity Model
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Quantity Discount ModelsQuantity Discount Models
Reduced prices are often available when Reduced prices are often available when larger quantities are purchasedlarger quantities are purchased
TC = S + H + PDTC = S + H + PDDDQQ
QQ22
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Safety StockSafety Stock
Use safety stock to achieve a desired Use safety stock to achieve a desired service level and avoid stockoutsservice level and avoid stockouts
ROP ROP == d x L d x L + + ssss
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Aggregate PlanningAggregate Planning
Aggregate planningAggregate planning is is an operational activity which does an an operational activity which does an aggregate plan for the productions process, in aggregate plan for the productions process, in advance of 2 to 18 months, to give an idea advance of 2 to 18 months, to give an idea to management as to what quantity of to management as to what quantity of materials and other resources are to be materials and other resources are to be procured and whenprocured and when.
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Aggregate planning has certain prerequisite inputs which Aggregate planning has certain prerequisite inputs which
are inevitable. They include:are inevitable. They include:
Information about the resources and the facilities Information about the resources and the facilities
available.available.
Demans forecast for the period for which the planning Demans forecast for the period for which the planning
has to be done.has to be done.
Cost of various alternatives and resources. This Cost of various alternatives and resources. This
includes cost of holding inventory, ordering cost, cost includes cost of holding inventory, ordering cost, cost
of production through various production alternativesof production through various production alternatives
Aggregate PlanningAggregate Planning
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The Planning ProcessThe Planning Process
Long-range plans (over one year)Research and DevelopmentNew product plansCapital investmentsFacility location/expansion
Intermediate-range plans (3 to 18 months)Sales planningProduction planning and budgetingSetting employment, inventory,
subcontracting levelsAnalyzing operating plans
Short-range plans (up to 3 months)Job assignmentsOrderingJob schedulingDispatchingOvertimePart-time help
Top executives
Operations managers
Operations managers, supervisors, foremen
ResponsibilityResponsibility Planning tasks and horizonPlanning tasks and horizon
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Aggregate Planning StrategiesAggregate Planning Strategies
1.1. Use inventories to absorb changes in Use inventories to absorb changes in demanddemand
2.2. Accommodate changes by varying Accommodate changes by varying workforce sizeworkforce size
3.3. Use part-timers, overtime, or idle time to Use part-timers, overtime, or idle time to absorb changesabsorb changes
4.4. Use subcontractorsUse subcontractors
5.5. Change prices or other factors to Change prices or other factors to influence demandinfluence demand
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Aggregate Planning OptionsAggregate Planning Options
OptionOption AdvantagesAdvantages DisadvantagesDisadvantages
Changing Changing inventory levelsinventory levels
Changes in human Changes in human resources.resources.
Inventory holding Inventory holding cost may increase. cost may increase. Shortages may Shortages may result in lost sales.result in lost sales.
Varying Varying workforce size workforce size by hiring or by hiring or layoffslayoffs
Avoids the costs of Avoids the costs of other alternatives.other alternatives.
Hiring, layoff, and Hiring, layoff, and training costs may training costs may be significant.be significant.
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Option Advantages Disadvantages
Varying production rates through overtime or idle time
Matches seasonal fluctuations without hiring/ training costs.
Overtime premiums; tired workers; may not meet demand.
Sub-contracting
Permits flexibility and smoothing of the firm’s output.
Loss of quality control; reduced profits; loss of future business.
Aggregate Planning OptionsAggregate Planning Options
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Option Advantages Disadvantages
Using part-time workers
Is less costly and more flexible than full-time workers.
High turnover/ training costs; quality suffers; scheduling difficult.
Influencing demand
Tries to use excess capacity. Discounts draw new customers.
Uncertainty in demand. Hard to match demand to supply exactly.
Aggregate Planning OptionsAggregate Planning Options
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Option Advantages Disadvantages
Back ordering during high-demand periods
May avoid overtime. Keeps capacity constant.
Customer must be willing to wait, but goodwill is lost.
Aggregate Planning OptionsAggregate Planning Options
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Summary of Aggregate Planning Summary of Aggregate Planning MethodsMethods
TechniquesSolution
Approaches Important Aspects
Graphicalmethods
Trial and error Simple to understand and easy to use. Many solutions; one chosen may not be optimal.
Transportation method of linear programming
Optimization LP software available; permits sensitivity analysis and new constraints; linear functions may not be realistic.
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TechniquesSolution
Approaches Important Aspects
Simulation Change parameters
Complex; may be difficult to build and for managers to understand.
Summary of Aggregate Planning Summary of Aggregate Planning MethodsMethods
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Yield ManagementYield Management
Yield managementYield management, also known as , also known as revenue revenue managementmanagement, is the process of understanding, , is the process of understanding, anticipating and influencing consumer anticipating and influencing consumer behavior in order to maximize revenue or profitsbehavior in order to maximize revenue or profits
(such as airline seats or hotel room reservations)(such as airline seats or hotel room reservations)
The challenge is to sell the right resources to the right customer at the right time for the right price.
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Yield Management MatrixYield Management Matrix
Du
rati
on
of
use
Un
pre
dic
tab
le
Pre
dic
tab
le
Price
Tend to be fixed Tend to be variable
Quadrant 1: Quadrant 2:
Movies HotelsStadiums/arenas Airlines
Convention centers Rental carsHotel meeting space Cruise lines
Quadrant 3: Quadrant 4:
Restaurants Continuing careGolf courses hospitals
Internet serviceproviders
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Chapter 14 – Chapter 14 – Material Material Requirements Requirements Planning (MRP) and Planning (MRP) and ERPERP
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MRPMRP
1.1. Better response to customer ordersBetter response to customer orders
2.2. Faster response to market changesFaster response to market changes
3.3. Improved utilization of facilities and laborImproved utilization of facilities and labor
4.4. Reduced inventory levelsReduced inventory levels
Material Requirements Planning (MRP) is a software based production planning and inventory control system used to manage manufacturing processes.
BenefitsBenefits
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An MRP system is intended to simultaneously An MRP system is intended to simultaneously meet three objectives:meet three objectives:
Ensure material and products are available for Ensure material and products are available for productions and delivery to customers.productions and delivery to customers.
Maintain the lowest possible level of inventory.Maintain the lowest possible level of inventory. Plan manufacturing activities and purchasing Plan manufacturing activities and purchasing
activities.activities.
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Dependent DemandDependent Demand
The demand for one item is related The demand for one item is related to the demand for another itemto the demand for another item
In general, used whenever a In general, used whenever a schedule can be established for an schedule can be established for an itemitem
MRP is the common techniqueMRP is the common technique
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Dependent DemandDependent Demand
1.1. Master production scheduleMaster production schedule
2.2. Specifications or bill of materialSpecifications or bill of material
3.3. Inventory availabilityInventory availability
4.4. Purchase orders outstandingPurchase orders outstanding
5.5. Lead timesLead times
Effective use of dependent demand Effective use of dependent demand inventory models requires the inventory models requires the followingfollowing
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Master Production Schedule Master Production Schedule (MPS)(MPS)
A Master Production Schedule (MPS) is a A Master Production Schedule (MPS) is a plan for production, staffing, inventory, plan for production, staffing, inventory, etcetc
Specifies what is to be made and whenSpecifies what is to be made and when Inputs from financial plans, customer Inputs from financial plans, customer
demand, engineering, supplier demand, engineering, supplier performanceperformance
It helps to forecast demand, production It helps to forecast demand, production costs, inventory costs, lead time,costs, inventory costs, lead time,
The MPS is the result of the production The MPS is the result of the production planning processplanning process
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The Planning ProcessThe Planning Process
Figure 14.1Figure 14.1
Change production
plan?Master production schedule
ManagementReturn oninvestmentCapital
EngineeringDesigncompletion
Aggregate production
plan
ProcurementSupplierperformance
Human resourcesManpowerplanning
ProductionCapacityInventory
MarketingCustomerdemand
FinanceCash flow
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The Planning ProcessThe Planning Process
Is capacity plan being
met?
Is execution
meeting the plan?
Change master
production schedule?
Change capacity?
Change requirements?
NoNo
Execute material plans
Execute capacity plans
Yes
Realistic?
Capacity requirements plan
Material requirements plan
Master production schedule
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Focus for Different Focus for Different Process StrategiesProcess Strategies
Stock to ForecastStock to Forecast
(Product Focus)(Product Focus)
Schedule finished product
Assemble to Order Assemble to Order or Forecastor Forecast(Repetitive)(Repetitive)
Schedule modules
Make to OrderMake to Order
(Process Focus)(Process Focus)
Schedule orders
Examples: Print shop Motorcycles Steel, Beer, BreadMachine shop Autos, TVs Lightbulbs
Fine-dining restaurant Fast-food restaurant Paper
Typical focus of the Typical focus of the master production master production
scheduleschedule
Number of Number of end itemsend items
Number of Number of inputsinputs
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A customer order in a job shop (make-A customer order in a job shop (make-to-order) companyto-order) company
Modules in a repetitive (assemble-to-Modules in a repetitive (assemble-to-order or forecast) companyorder or forecast) company
An end item in a continuous (stock-to-An end item in a continuous (stock-to-forecast) companyforecast) company
Can be expressed in any of the Can be expressed in any of the following terms:following terms:
Master Production Schedule (MPS)Master Production Schedule (MPS)
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Bills of MaterialBills of Material
List of components, ingredients, List of components, ingredients, and materials needed to make and materials needed to make product product
Provides product structureProvides product structure Items above given level are called Items above given level are called
parentsparents
Items below given level are called Items below given level are called childrenchildren
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Modular BillsModular Bills Modules are not final products but Modules are not final products but
components that can be assembled components that can be assembled into multiple end itemsinto multiple end items
Can significantly simplify planning Can significantly simplify planning and schedulingand scheduling
Bills of MaterialBills of Material
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Accurate RecordsAccurate Records
Accurate inventory records are Accurate inventory records are absolutely required for MRP (or absolutely required for MRP (or any dependent demand system) to any dependent demand system) to operate correctlyoperate correctly
Generally MRP systems require Generally MRP systems require 99% accuracy99% accuracy
Outstanding purchase orders must Outstanding purchase orders must accurately reflect quantities and accurately reflect quantities and scheduled receipts scheduled receipts
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Lead TimesLead Times
The time required to purchase, The time required to purchase, produce, or assemble an itemproduce, or assemble an item For production – the sum of the For production – the sum of the
order, wait, move, setup, store, order, wait, move, setup, store, and run timesand run times
For purchased items – the time For purchased items – the time between the recognition of a need between the recognition of a need and the availability of the item for and the availability of the item for productionproduction
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ERPERP
Enterprise resource planningEnterprise resource planning ( (ERPERP) is a ) is a company-wide computer software system used to company-wide computer software system used to manage and coordinate all the resources, manage and coordinate all the resources, information, and functions of a business from information, and functions of a business from shared data stores.shared data stores.