Iqra University

Supply Chain Management

And E-Business

1
 SCM Improvement Principles

The
TheSeven
SevenPrinciples
Principlesof
ofSupply
SupplyChain
ChainManagement
Management

 Segment
Segmentcustomers
customersbased
basedupon
uponservice
serviceneeds
needs
 Customize
Customizethe
thelogistics
logisticsnetwork
network
 Listen
Listento
tothe
thesignals
signalsof
ofthe
themarketplace
marketplaceand
andplan
plan “What
“What
“WhatIs”
Is” accordingly “WhatCan
CanBe”
Be”
accordingly
 Differentiate
Differentiateproducts
productscloser
closerto
tothe
theconsumer
consumer
 Source
Sourcestrategically
strategically
 Develop
Developaasupply-chain-wide
supply-chain-widetechnology
technologystrategy
strategy
 Adopt
Adoptchannel
channelspanning
spanningperformance
performancemeasures
measures

2
 The Bullwhip Effect

“The
“Thebullwhip
bullwhipEffect
Effectisisaamajor
majorcause
causeofofhigher
highercosts
costsand
and
inefficiencies
inefficienciesininsupply
supplychains.
chains.ItItdescribes
describeshow
howsmall
smallfluctuations
fluctuations
inindemand
demandat atthe
thecustomer
customerlevel
levelare
areamplified
amplifiedas
asorders
orderspass
passupup
the
thesupply
supplychain
chainthrough
throughdistributors,
distributors,manufacturers,
manufacturers,and
and
suppliers.”
suppliers.”
“As
“Asan
anexample,
example,consider
considerdisposable
disposablediapers.
diapers.Babies
Babiesgenerally
generallyconsume
consume
diapers
diapersatataamore
moreororless
lessconsistent
consistentrate
ratewhen
whenaggregated
aggregatedover
overaalarge
large
group
groupofofcustomers.
customers.Nevertheless,
Nevertheless,order
orderfluctuations
fluctuationsinvariably
invariablybecome
become
considerably
considerablylarger
largeras
asone
onemoves
movesupstream
upstreamininthis
thischain.”
chain.”

Consequencesof
Consequences ofthe
theBullwhip
BullwhipEffect
Effectinclude
includeexcess/
excess/fluctuating
fluctuating
inventories,shortages/stockouts,
inventories, shortages/stockouts,longer
longerlead
leadtimes,
times,higher
higher
transportationand
transportation andmanufacturing
manufacturingcosts,
costs,and
andmistrust
mistrustbetween
between
supplychain
supply chainpartners
partners
3
 Supply Chain upstream Activities

In
Inmost
mostsupply
supplychains,
chains,the
theupstream
upstreamactivities
activitiesrespond
respondto toforecast,
forecast,while
while
somewhere
somewhereon onthe
thedownstream
downstreamside
sidethe
thechain
chainwaits
waitsfor
fororders
ordersto
tobe
be
placed.
placed.Consider
Considerthese
thesetwo
twoformer
formerfast
fastslogans
slogans

••“We
“We do
do itit all
all for
for you!
you! McDonald’s
McDonald’s

••“Have
“Have itit your
your way
way Burger King
Burger King

Build
Buildto
tostock
stock VS
VS Build
Buildto
toOrder
Order

4
INTEGRATING OPERATIONS MANAGEMENT WITH OTHER FUNCTIONS


Customer choices introduce complexity

product variety, demand uncertainty, variable
capacity requirements

Mass customization is replacing mass production in
many industries

There is more opportunity to coordinate activities
because of information systems

Supply chain management has become a critical
aspect of business success

5
SUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E-COMMERCE


Ford motor company did everything from mining to
final assembly of its Model T vehicles in the early
1900s

allowed coordination of all sequentially related
activities for large efficiency gains

very difficult to accommodate product variety or
make model changes

6
 SUPPLY CHAIN MANAGEMENT DECISIONS:
CONFIGURATION OF THE SUPPLY CHAIN


what the product service bundle will include
(manufacturing to stock & manufacturing to order

what portion of bundle will be outsourced

where facilities will be located and capacities

what technologies will be used

how supplier-customer communications will be
handled

the expectations to which suppliers and customers
will be held

8
 SUPPLY CHAIN MANAGEMENT DECISIONS:
COORDINATION OF THE SUPPLY CHAIN


determining when to provide products and services
and in what quantities

ensuring suppliers are able to provide the value
required of them

setting appropriate levels for capacity, inventory
and lead time

communicating demand, performance expectations
and performance results with suppliers and
customers

9
 Supply-Chain Costs as a Percent of Sales

Industry Percent of Sales


All industry 
52%

Automobile 
67%

Food 
60%

Lumber 
61%

Paper 
55%

Petroleum 
79%

Transportation 
62%

11
 Material Costs in
Supply-Chain

Wholesale
8% 9%
COGS
Manufacturing
Payroll
31% Material 83%
Other
11% Dir Wages
58% Retail
Other
16% COGS
13%
Payroll
71%
Other

12
 ORGANIZATION STRUCTURE

SUPPLY CHAIN MANAGEMENT

28
GSCM Mission

The Gillette Company will be as highly

recognised and admired by our customers,
shareholders, and employees for Supply
Chain performance as we are for our
product development and support of global
brands. We will become World Class in
Planning & Executing Product Delivery
from Source to Customer’s Shelf.

1-38
© 2001 The Gillett e Company

29
 ORGANIZATION STRUCTURE – SUPPLY CHAIN MANAGEMENT

Managing Director
Chief Executive

Secretary

CFO/Finance Sales Supply Chain Operation Marketing H. R.

Director Director Director Director Director Director

Procurement Warehouse Production Expediting

Manager Manager Control Manager

Imports R. M. MRP Transportation

Local P. M. MRPM CRM

Contract F. S. Outsource Documentation

30 20
 Procurement Operating Concerns

Procurement:
Activities related to obtaining products and materials from outside
suppliers. Requires performing resource planning, supply sourcing,
negotiation, order placement, inbound transportation, receiving and
inspection, storage and handling, and quality assurance. Includes the
responsibility to coordinate with suppliers in such areas as scheduling,
supply continuity, hedging, and speculation, as well as research
leading to new sources or programs. The primary procurement
objective is to support manufacturing or resale organizations by
providing timely purchasing at the lowest total cost.

33
 Purchasing

Factors increasing the importance of purchasing today:


Tremendous impact of material costs on profit (60-
70% of each sales Rupee is paid to material suppliers)

Popularity of just-in-time manufacturing (supply
deliveries must be exact in timing, quantity, and
quality)

Increasing global competition (growing competition
for scarce resources, and a geographically “stretched-
out” supply chain)

34
 Mission of Purchasing
“The mission of purchasing is to sense
the competitive priorities necessary for
each major product/service (low
production costs, fast and on-time
deliveries, high quality /services, and
flexibility) and to develop purchasing
plans for each major product/service
that are consistent with operations
strategies”
35
 Mission of Purchasing


Develop purchasing plans for each major product or
service that are consistent with operations strategies:

Low production costs

Fast and on-time deliveries

High quality products and services

Flexibility

36
 Purchasing Management


Maintain data base of available, qualified suppliers

Select suppliers to supply each material

Negotiate contracts with suppliers

Act as interface between company and suppliers

Provide training to suppliers on latest technologies

37
 Purchasing vs. Procurement


Purchasing is normally associated with a functional
activity

Procurement/Sourcing should be viewed as a strategic
activity for the business.

38
 Purchasing vs. Sourcing (cont’d)

Purchasing Mentality Sourcing Mentality

One contract at a time Continual Improvement
Win-lose Win-win
Immediate returns Long-term perspective
Secretive Trusting
Current needs can be met Strategic fit exists
Lowest purchase price Total cost of ownership
Multiple suppliers Supply-base reduction
Infrequent interaction Frequent interaction
Criticism Constructive evaluations
Buyer-sales relationship Cross-functional relationship
Safety in numbers Safety in knowledge
Quality inspected Quality at source
Inventory as safeguard Information as safeguard

39
 Importance of Sourcing


In the average manufacturing firm purchased goods
and services account for 55% of every sales Dollar

Direct labor costs account for only about 10% of the
sales dollar

41
 Procurement’s Potential Payoff


Beginning Position

Sales $100,000,000

Purchases(55%) 55,000,000

Labor (15%) 15,000,000

Other (22%) 22,000,000

Pre-tax profit (8%) 8,000,000

42
 Procurement’s Potential Payoff

Reduce Increase Reduce labor

purchase cost sales by 68% cost by 36%
by 10%
Sales $100,000,000 $168,000,000 $100,000,000

Purchases 49,500,000 92,400,000 55,000,000

Labor 15,000,000 25,200,000 9,600,000

Other 22,000,000 36,960,000 22,000,000

Pre-tax 13,500,000 13,440,000 13,400,000

Profit

43
Major Categories for the Components of Total Cost of Ownership
Pre-transaction Components
1. Identifying need
2. Investigating sources
3. Qualifying sources
4. Adding supplier to
internal systems
5. Educating :
•supplier in firm’s operations
•firm in supplier’s operations
Total Cost of Ownership
Post-transaction Components
Transaction Components
1. Line fallout
1. Price
2. Defective finished goods
2.Order placement/ preparation
rejected before sale
3. Delivery/ transportation
3. Field failures
4. Tariffs/ duties
4. Repair/ replacement in field
5. Billing/ payment
5. Customer goodwill/ reputation
6. Inspection
of firm
7. Return of parts
6. Cost of repair parts
8. Follow-up and correction
7. Cost of maintenance and repairs
44
 Major Trends in Procurement


Fewer sources of supply will be used

Buyers will be more concerned with final customer satisfaction

Buyers will focus on “lead supplier” relationships

Buyers will drive shorter cycle times

Design engineers and buyers will be part of sourcing teams

Global sourcing will increase

e-procurement will have a major impact-not all of it will be
positive for supply chain integration

buying exchanges

auction sites

45
E-Chemicals

46
 Advantages of Centralized Purchasing


Buying in large quantities - better prices

More clout with suppliers - greater supply continuity

Larger purchasing department - buyer specialization

Combining small orders - less order cost duplication

Combining shipments - lower transportation costs

Better overall control

47
 Purchasing Process

From any department,

Material Requisition
to purchasing
From purchasing,
Request for Quotations
to potential suppliers
Based on quality, price,
Select Best Supplier lead time, dependability
From purchasing,
Purchase Order to selected supplier
From supplier, to receiving,
Receive and Inspect Goods quality control, warehouse

48
 Content of Material Requisition


Requisition no.

Requisition date

Item master code

Description of material or content

Used in product

Unit of measure

Specification

Lead time

Sourcing data :supplier or producer

Mode of transport

Economic order lot size (packing unit)

Shelf life restriction

Material handling requirement (control temperature)

Documents to accompany with the material

49
 Content of Material Requisition


Item master code

Quality control analysis days (quarantine)

Reorder quantity

Maximum inventory

Standard price

Duty and sales tax and other border crossing charges data

Clearing agent or mode of transportation while handling
locally

Certificate of origin

Labeling specification

Any special handling restriction etc.

Required date

Authorized signature etc.
50
 Content of Material Requisition


Item master code

Capital goods

Equipment, machinery, installation, parts,
subassembly

Method of delivery

Maintenance, pre-post, after sales service,
annual preventive, accidental,

Financial package, (supplier credit, leasing,
consignment sales, wet leasing etc.)

Insurance

Commissioning, trial,
51
 Content of quotation- invitation


Will be address to the enlisted supplier

Date of quotation

Deadline for the quotation to be received

All the details as mentioned on the companies master data

Financial and payments procedure

Method of payment

Term of payment

Negotiable documents

Companies bankers (L/C, Contract, Usance,)

Bullet delivery, or partial shipment allowed

Penalty clause

Margin or deposit with the tender or bank guarantee

Insurance

Title of good transfer
52
 Content of quotation- invitation

Tentative date of intimation or opening of quotation.

Is it a revolving contract or one time delivery

Condition for the visit of site

Specimen samples

Condition for the approval of sample etc.

Capital goods

Turn key

Installation

Training

After sale service

Maintenance contract

Free maintenance period

Pregnancy period before the delivery

Supplier credit 53

Leasing facility etc.
 Selection of supplier –sourcing

Bench mark for spread sheet analysis

Lead time

Location of sourcing site

Local

Imports

In-house configuration,

Outsourcing

Importing in bulk or mix

Term offered

Price (rupees, usd, euro, sterling)

Credit (local L/C, contract, letter of aware ness

Loading and unloading

Transportation

Insurance

Freight collect, freight prepaid 54
 Selection of supplier –sourcing


Bench mark for spread sheet analysis

Term offered (more)

Lot size

Negotiation documentation charges

L/c opening commission on beneficiary accounts

Accessibility (quick response, emergency, replenishment

Past experience

Credibility –financial, data from the contemporaries

Maintenance service post delivery

After sale service

Turn key ---projects

Implementation, installation, trial commissioning , etc.

Configuration, source key, parachute clause, divorce, notice period
etc.
55
 Purchase order


Date of order

Purchase order number

Reference (indent number or confirmation)

Maximum detail from item master code.

Financial terms

Delivery date

Method of shipment

Lot size

Partial shipment

Maintenance contract

Freight and other charges

Margin, advance, guarantee, l/c contract, letter of awareness
commitment, other terms and conditions,

Documentation required
56
 Purchase order


Authorized

Any special term (pre-shipment samples, quality
control specification, standards,)

Validation data

Shelf life

Guarantee

Insurance condition

Any special mode of handling

Loading unloading

Freight etc.
57
 Allegations of improper Behaviour by Buyer


In exchange for cash and gifts, allowing supplier to
store tools and park vehicles on company property
and awarding contracts to suppliers without bidding.

Accepting gifts such as expensive perfumery, cloths,
dinners, function cards, foreign trips, liquor, gift
coupon during festivals and holidays season.

Accepting on sharing basis indenting commission
within or outside the country

Bid rigging, accepting bribes, theft and tax evasion,
and accepting large sums of cash.
58
 Allegations of improper Behaviour by Buyer


Payment processing on receipt of kickback

Approval of product quality on receipt of kickback

Accepting less quantity of goods in exchange of
bribes

Accepting lot of bribes in acceptance enlistment of
approved suppliers or contractors

Benami Transaction through their own respective
companies

Opening their own respective buying houses or
agency and making the purchases from them.
59
 Guidelines for Ethical Behaviour in Purchasing


The National Association for Purchasing Managers
(NAPM) has developed a set of three principles and
12 standards to help guide ethical behaviour in
purchasing. These are the principles:

Loyalty to your organization

Justice to those with whom you deal

Faith in your profession

From these principles are derived the NAPM
standards of purchasing practice (domestic and
international)
60
 Guidelines for Ethical Behaviour in Purchasing


Avoid the intent and appearance of unethical or
compromising practice in relationships, actions, and
communications

Demonstrate loyalty to the employer by diligently following
the lawful instructions of the employer, using reasonable
care and only authority granted.

Refrain from any private business or professional activity
that would create a conflict between personal interests and
the interests of the employer

Refrain from soliciting or accepting money, loans, credits, or
prejudicial discounts, and the acceptance of gifts,
entertainment favours, or services from present or potential
suppliers that might influence or appear to influence
purchasing decisions.
61
 Guidelines for Ethical Behaviour in Purchasing


Handle confidential or proprietary information
belonging to employers or suppliers with due care
and proper consideration of ethical and legal
ramifications and governmental regulation

Promote positive supplier relationships through
courtesy and impartiality in all phases of the
purchasing cycle.

Refrain from reciprocal agreements that restrain
competition

Know and obey the letter and spirit of laws
governing the purchasing function and remain alert
to the legal ramifications of purchasing decisions.
62
 Guidelines for Ethical Behaviour in Purchasing


Encourage all segments of society to participate by
demonstrating support for small, disadvantaged, and
minority-owned businesses.

Discourage purchasing involvement in employers
sponsored programs of personal purchases that are
not business related.

Enhance the proficiency and stature of the purchasing
profession by acquiring and maintaining current
technical knowledge and the highest standards of
ethical behavior

Conduct international purchasing in accordance with
the laws, customs, and practices of foreign countries
63
 Buyers’ Duties


Know the market for their commodities

Understand the laws.... tax, contract, patent..…

Process purchase requisitions and quotation requests

Make supplier selections

Negotiate prices and conditions of sale

Place and follow-up on purchase orders

Maintain ethical behavior

64
 Make-or-Buy Analysis

Considerations in make-or-buy decisions:


Lower cost - purchasing or production?

Better quality - supplier or in-house?

More-reliable deliveries - supplier or in-house?

What degree of vertical integration is desirable?

Should distinctive competencies be outsourced?

65
 Make/Buy Considerations

Reasons for Making Reasons for Buying

1. Maintain core competencies 1. Frees management to deal
and protect personnel from with its primary business
layoff 2. Lower acquisition cost
2. Lower production cost 3. Preserve supplier
3. Unsuitable suppliers commitment
4. Assure adequate supply 4. Obtain technical or
management ability
5. Utilize surplus labor and
make a marginal 5. Inadequate capacity
contribution

66
 Make/Buy Considerations - Continued

Reasons for Making Reasons for Buying

6. Obtain desired quantity 6. Reduce inventory costs
7. Remove supplier collusion 7. Ensure flexibility and
8. Obtain a unique item that alternate source of supply
would entail a prohibitive 8. Inadequate managerial or
commitment from the technical resources
supplier 9. Reciprocity
9. Protect proprietary design or 10. Item is protected by patent or
quality trade secret
10. Increase or maintain size of
company
67
 Example: Make-or-Buy

A firm manufactures a product that contains a

part requiring heat treatment. An analyst is trying to
decide whether it is more economical to buy the heat
treating service or perform the treatment in house.
Pertinent data is shown on the next slide.
If part quality and delivery performance are about
the same for the two alternatives, which alternative
should be selected?

68
 Example: Make-or-Buy

Purchase
Heat-Treat Heat-Treat
In-House Service
Number of parts annually 5,000 5,000
Fixed cost per year $25,000 $0
Variable cost per part $13.20 $17.50

69
 Example: Make-or-Buy


Compute the total cost for each alternative
TC = FC + vQ
TC1 = FC1 + v1Q = 25,000 + 13.20(5,000) = $91,000
TC2 = FC2 + v2Q = 0 + 17.50(5,000) = $87,500
The firm should buy the heat-treating service (the
second alternative).
continued

70
 Example: Make-or-Buy

The analyst has assumed that 5,000 parts per year

will require heat treatment. By how many parts can
the firm’s requirements increase or decrease before
in-house heat treating is more economical? Should
the analyst rethink his/her decision?

71
 Example: Make-or-Buy


Compute the break-even parts quantity
FC1 + v1Q = FC2 + v2Q
Q = (FC1 - FC2)/(v2- v1)
Q = (25,000 – 0)/(17.50 – 13.20)
Q = 5,814
If the firm’s annual parts requirement increases
by 814 (about 16%) or more, in-house heat treatment
would be more economical. The analyst should give
the decision more thought.
72
 Logistics


Logistics usually refers to management of:

the movement of materials within the factory

the shipment of incoming materials from suppliers

the shipment of outgoing products to customers

73
 Movement of Materials within Factories

The typical locations from/to which material is moved:

Incoming Receiving Quality

Warehouse
Vehicles Dock Control

Work Other Work Finished

Packaging
Center Centers Goods

Shipping Outgoing
Shipping
Dock Vehicles

74
 Shipments To and From Factories


Traffic

Traffic departments routinely examine shipping
schedules and select:

shipping methods

time tables

ways of expediting deliveries

Traffic management is a specialized field requiring
technical training in Department of Transportation
(DOT) and Interstate Commerce Commission
(ICC) regulations and rates.

75
 Shipments To and From Factories


Distribution

Distribution, or physical distribution, is the
shipment of finished goods through the
distribution system to customers.

A distribution system is the network of shipping
and receiving points starting with the factory and
ending with the customers.

76
 Shipments To and From Factories


Distribution Requirements Planning

DRP is the planning for the replenishment of
regional warehouse inventories.

DRP uses MRP-type logic to translate regional
warehouse requirements into central distribution-
center requirements, which are then translated into
gross requirements in the MPS at the factory.

77
 Shipments To and From Factories


Distribution Requirements Planning

Scheduled receipts are previously-placed orders that
are expected to arrive in a given week

Planned receipt of shipments are orders planned, but
not yet placed, for the future

Projected ending inventory is computed as:

Previous week’s projected ending inventory

+ Planned receipt of shipments in current week

+ Scheduled receipt of shipments in current week

-- Forecasted demand in current week
78
 Shipments To and From Factories


DRP Time-Phased Order Point Record

Region. Warehouse #1 LT = 1 Week

Std. Quantity = 50 SS = 10 -1 1 2 3 4 5
Forecasted demand (units) 30 40 30 40 40
Scheduled receipts 50
Projected ending inventory 60 80 40 10 20 30
Planned receipt of shipments 50 50
Planned orders for shipments 50 50

79
 Example: DRP

Products are shipped from a company’s main

distribution center (adjacent to the factory) to two
regional warehouses. The DRP records on the next
two slides show – for the two regional warehouse –
the forecasted demand, scheduled receipts, and last
week’s projected ending inventories for a single
product.
The third upcoming slide shows – for the main
distribution center – scheduled receipts and last
week’s projected ending inventory for the same
product. Complete the DRP records.
80
 Example: DRP


DRP Record for Regional Warehouse #1

Region. Warehouse #1 LT = 1 Week

Std. Quantity = 100 SS = 50 -1 1 2 3 4 5
Forecasted demand (units) 80 100 80 60 100
Scheduled receipts 100
Projected ending inventory 200
Planned receipt of shipments
Planned orders for shipments

81
 Example: DRP


DRP Record for Regional Warehouse #2

Region. Warehouse #2 LT = 2 Week

Std. Quantity = 200 SS = 80 -1 1 2 3 4 5
Forecasted demand (units) 100 200 200 240 200
Scheduled receipts 200
Projected ending inventory 220
Planned receipt of shipments
Planned orders for shipments

82
 Example: DRP


DRP Record for Main Distribution Center

Main Distrib. Center LT = 1 Week

Std. Quantity = 500 SS = 200 -1 1 2 3 4 5
Gross Requirements (units)
Scheduled receipts 500
Projected ending inventory 250
Planned receipt of shipments
Planned orders for shipments

83
 Example: DRP


Completed DRP Record for Regional Warehouse #1

Region. Warehouse #1 LT = 1 Week

Std. Quantity = 100 SS = 50 -1 1 2 3 4 5
Forecasted demand (units) 80 100 80 60 100
Scheduled receipts 100
Projected ending inventory 200 220 120 140 80 80
Planned receipt of shipments 100 100
Planned orders for shipments 100 100

84
 Example: DRP


Completed DRP Record for Regional Warehouse #2

Region. Warehouse #2 LT = 2 Week

Std. Quantity = 200 SS = 80 -1 1 2 3 4 5
Forecasted demand (units) 100 200 200 240 200
Scheduled receipts 200
Projected ending inventory 220 320 120 120 80 80
Planned receipt of shipments 200 200 200
Planned orders for shipments 200 200 200

85
 Example: DRP


DRP Record for Main Distribution Center

The “gross requirement” ( in row 1) for any week
is determined by summing the “planned orders for
shipment” for the same week at the two regional
warehouses

These gross requirements at the MDC are input to
the master production schedule in the factory

In other words, the timing and quantities of
production in the factory are linked to the timing
and quantities of demand at the regional
warehouses

86
 Example: DRP


Completed DRP Record for Main Distribution Center

Main Distrib. Center LT = 1 Week

Std. Quantity = 500 SS = 200 -1 1 2 3 4 5
Forecasted demand (units) 200 300 200 100
Scheduled receipts 500
Projected ending inventory 250 550 250 550 450 450
Planned receipt of shipments 500
Planned orders for shipments 500

87
 Shipments To and From Factories


Distribution Resource Planning

Distribution resource planning extends DRP so
that the key resources of warehouse space,
workers, cash, and vehicles are provided in the
correct quantities at the correct times.

88
 Analyzing Shipping Decisions


The “Transportation Problem”

Problem involves shipping a product from several
sources (ex. factories) with limited supply to
several destinations (ex. warehouses) with demand
to be satisfied

Per-unit cost of shipping from each source to each
destination is specified

Optimal solution minimizes total shipping cost and
specifies the quantity of product to be shipped
from each source to each destination
89
 Example: Minimizing Shipping Costs

Pacer produces computer monitors in its three

factories and ships them to five regional warehouses.
The factory-to-warehouse shipping costs per monitor
are:
Warehouse
Factory A B C D E
1 $2.10 $4.30 $3.60 $1.80 $2.70
2 4.90 2.60 3.50 4.50 3.70
3 3.90 3.60 1.50 5.80 3.30
continued
90
 Example: Minimizing Shipping Costs

The factories have the following capacities

(monitors produced per month): 1 = 10,000;
2 = 20,000; and 3 = 10,000.
The warehouses need at least these numbers of
monitors per month: A = 5,000; B = 10,000; C =
10,000; D = 5,000; and E = 10,000.
Use the POM Software Library to solve this
transportation problem.

91
 Example: Minimizing Shipping Costs


Solution
Warehouse
Factory A B C D E
1 5,000 0 0 5,000 0
2 0 10,000 0 0 10,000
3 0 0 10,000 0 0
Total monthly shipping cost = $97,500
(Note: all warehouse demand is satisfied
and no factory’s capacity is exceeded.)
92
 Innovations in Logistics


New developments affecting logistics include:

All-freight airports

Inter-modal shipping

In-transit rates

Consolidated shipments

Air-freight and trucking deregulation

Advanced logistics software

93
 Warehousing


Warehousing is the management of materials while
they are in storage.

Warehousing activities include:

Storing

Dispersing

Ordering

Accounting

94
 Warehousing


Record keeping within warehousing requires a stock
record for each item that is carried in inventories.

The individual item is called a stock-keeping unit
(SKU).

Stock records are running accounts that show:

On-hand balance

Receipts and expected receipts

Disbursements, promises, and allocations

95
 Inventory Accounting


In the past, inventory accounting was based on:

periodic inventory accounting systems -- periodic
(end-of-day) updating of inventory records

physical inventory counts -- periodic (end-of-year)
physical counting of all SKUs at one time

Today, more and more firms are using:

perpetual inventory accounting systems -- real-time
updating of records as transactions occur

cycle counting -- ongoing (daily or weekly) physical
counting of different SKUs
96
 Example: Cycle Counting

A company is implementing a cycle-counting

program. Class A items will be counted monthly,
Class B items will be counted quarterly, and Class C
items will be counted semi-annually.
5% of the firm’s inventory items are classified as
Class A, 20% are Class B, and 75% are Class C. If
the firm has 16,000 different SKUs (unique inventory
items), how many will need to be counted daily?
Assume 200 days per year are available for cycle
counting.

97
 Example: Cycle Counting

Number
Number of Counts
Class of Items per Item Total Counts
of Item per Class per Year per Year
A 800 12 9,600
B 3,200 4 12,800
C 12,000 2 24,000
Total 16,000 46,400

98
 Example: Cycle Counting


Number of Inventory Items Counted Daily
Total counts per year
=
Number of available days per year
= 46,400/200 = 232 items per day

99
 Example: Cycle Counting

The cycle-counting personnel must count 232

inventory items per day. If the average cycle-counter
can count 24 items per day, how many counters are
needed?

Number of Cycle-Counting Personnel Required
Number of items counted per day
=
Number of items per day per counter
= 232/24 = 9.67 or 10 counters

100
 Top Selling Supply Chain Management Software


In 1980 a young engineer in Dallas named Sanjiv Sidhu saw a
business opportunity in the scientific observation that even the
smartest people can only juggle as many as nine variables when
making decisions. With that in mind he developed computer
software for shop-floor managers based on artificial intelligence
and advanced simulation models. Found in 1988 i2 Technologies
Inc., develops software for factories to manage the delivery of
components and the shipment of products. (www.i2.com)

1999 Information Week magazine, Product of the year awards.
I2 Technologies “Rhythm software owns 13 percent of the
market for supply chain management software with more than
800 customer companies worldwide, including Compaq, Dell,
Ford, General Motors, Coca-Cola, Black and Decker, IBM, and
Texas Instruments. The software helps companies to better
manage inventories and manufacturing capacities by using
101
 Software ---continued

Simulation models instead of the rules of thumb that have
traditionally been applied to managing plants. The Rhythm
software also includes applications for product

Product life cycle management

Supply planning,

Demand planning, demand fulfillment,

Financial and operations planning,

And customer relationship management

A typical $ 1 billion-a-year manufacturer carrying $250
million inventory can comfortably cut inventory to less than
$100 million with better supply chain management. According
to Mr. Sidhu the savings come from reduced borrowing, lower
storage costs, and reduced risk of damage or obsolescence,.
Companies can then reinvest much of the money in product
development or building efficiencies.
102
 Expediting


Expediting is the focusing of one or more person’s
attention on a particular order or batch of materials
for the purpose of speeding up the order through all
or part of the entire supply chain. De-expediting
means slowing down an order. Expediting or de-
expediting is necessary usually because unforeseen
events have caused an order for materials or products
to be late or early. Some of these sort of events are:

A customer increased the quantity of products
ordered. The expanded order quantity now exceeds
finished goods inventory, and additional products
must be quickly produced.
103
 Expediting


A Supplier fails to ship an order for materials when
promised. Emergency shipping procedures must be
employed in order to get the parts in house in time to avoid
a stockout or disruption of the production processes.

Parts being processed in heat-treat have encountered
technical difficulties. The batch must be quickly transferred
ahead of other materials if the annealing process is not to
be delayed.

After a special order for an electric generator has been
started in production, the customer calls and wants to delay
the shipment for three weeks. The work in process should
be slowed and rescheduled so that the product is completed
when the customer wants it shipped.

104
 Expediting


Expediting most often is necessary because of the uncertainties
presents in production systems; customer demand, material
delivery times; and in-house processing times are but a few of
these uncertainties. Material management must be flexible enough
to accommodate these uncertainties by reacting quickly when the
unexpected happens. Expediting is periodically performed by all
materials management employees, and this activity helps make
supply chains flexible.

Expediting completes the materials cycle that proceeds from
acquisition of materials to the delivery of finished goods into
customer’s hands. The means to change procedures, override
policy, make telephone calls and collect past favours, devise quick
solutions as they occur, and other tactics of expediting are some
of the important ways that managers made materials systems work
effectively and get the right quantity of the right material to the
right place at the right time.
105
 Measuring the Performance Materials Managers


Level and value of in-house inventories

Percentage of orders delivered on time

Number of stockouts

Annual cost of materials

Annual cost of transportation

Annual cost of warehouse

Number of customer complaints

Other factors

106
Material Management Performance In Multinational Companies

Performance Criteria All Companies Multinational

• Number of supplier for each items 34 5
• Number of purchasing agent RS 100 mln. 5.4 2.2
• Cost of purchasing as % of purchases 3.3% 0.8%
• Time required to perform an evaluation 3 weeks 0.4 week
• Time required to place an order 6 weeks 2.4 minut
• Percentage of late deliveries 33% 2%
• Percentage of defects 1.5% 0.0001%
• Number of material stockout per year 400 4

107
 E-Business & Supply Chain Management


Internet has grown and evolved, more and more
companies have become involved in e-business.

E-business refers to using the Internet to conduct or
facilitate business transaction, such as sales,
purchasing, communication, inventory management,
customer service, submitting orders, and checking the
status of orders.

E-transaction among companies are referred to as
business to business (B2B) transaction or e-
commerce. As the Internet continues to evolve, more
e-business applications will undoubtedly be
developed.
108
 E-Business & Supply Chain Management

In the last few years e-business has had a significant impact on
supply chain management activities (E-trucking) E-cargo
management, E documentation

Boston Consulting Group has conducted the research and
according to them E-business market at the moment is 1
billion but by the end of 2003 2.0 trillion.

Internet based e-commerce is steadily replacing EDI systems
that were popular in 1980 and 1990. EDI systems allow two
companies to electronically conduct business transactions with
each other, but they require special computer software and
hardware and are typically much more expensive.

One of the most important impacts of the Internet and e-
business in supply chain management is the availability of
instantaneous information. Information like pricing, location
of materials, status of shipments, and availability of parts
throughout the supply chain.
109
 E-Business & Supply Chain Management


E-mail system has allowed immediate follow up and have
reduced the operational cost of supply chain

www.mysap.com (as a platform for various companies to
conduct supply chain transaction

Direct sales to customer through web

Function likes warehousing, procurement, shipping,
transportation system, material handling system all have
change

Package carriers such as FedEx, UPS, Time Matters, DHL,
TCS experienced substantial increase in the number of
packages they deliver for companies due to the growth of e-
business
110
 EMS Timeline Future?
Total Supply Chain
More Design/Profit
2000 Sales: Demand Creation
Superior IT Services
SUNW: $19.2B, CSCO $21.5B, Optics
SLR $17B, SCI $8,3B Software Coding
MEMS

2001 China
1997 – 1998 granted entry
IPO’s Late 1980’s: Asian Fiscal Crisis WTO
SUNW (1986)
SLR (1989) 1996 Telecom 1999 – 2000
1990 Sales: Act Internet Bubble
SUNW $2.5B
CSCO $70MM
SLR $205MM 2001 Recession
SCI $1.2B 1991 Recession
Japan Recession
2000
Y2K

1990
1980
1980’s IBM hires SCI Emergence of modern N. American EMS Model
(“Space Craft Inc.”) for 1st
PC program
Emergence of Outsourcing Non-Core Competencies as Mega-Trend – “Globalization”

111
 Top 25 OEM’s

Annual Sales (millions) Annual COGS %

Customer 2001 2000 1999 2001 2000 1999 COGS
Siemens 78,623 71,982 72,234 52,930 57,409 49,039 100%
Sony 55,119 63,657 56,888 50,362 57,995 50,509 100%
Matsushita 50,438 65,161 66,932 34,917 44,289 47,132 100%
Hewlett-Packard 44,211 49,507 43,808 32,430 34,633 29,710 100%
Fujitsu 49,254 49,793 48,298 30,286 32,382 30,240 100%
GE 125,679 128,051 110,932 29,387 30,508 26,456 30%
Toshiba 42,378 56,445 49,812 29,359 39,382 36,674 100%
NEC 47,407 50,093 46,224 28,487 32,135 35,481 100%
Dell 31,168 31,888 25,265 25,476 25,205 19,891 100%
Compaq 33,554 42,383 38,525 25,065 31,010 28,396 100%
IBM 85,866 88,396 87,548 24,945 25,857 24,730 50%
Motorola 30,004 37,580 32,022 20,364 22,741 19,060 100%
Lucent/Ascend/Stratus 20,519 26,160 27,865 17,022 16,334 14,851 100%
Nokia 27,763 28,517 19,910 16,759 16,960 11,714 100%
Alcatel 22,567 29,486 23,184 15,839 19,696 15,137 100%
Ericsson 22,955 29,222 25,593 15,832 17,945 13,935 100%
Johnson Controls 18,791 17,291 16,585 15,632 14,215 13,716 100%
Nortel 17,531 28,586 22,217 14,446 19,594 12,679 100%
Honeywell 23,652 25,023 23,735 13,834 13,812 13,334 80%
Raytheon 16,867 16,895 17,201 10,938 10,269 10,388 80%
Xerox 16,502 18,701 19,567 9,732 10,062 10,543 100%
Boeing 58,198 51,321 57,993 9,481 8,491 9,977 20%
Emerson Electronics 14,855 15,921 14,386 8,955 9,572 8,622 100%
Lockheed Martin 23,990 25,329 25,530 8,650 9,099 9,158 40%
Cisco 18,290 23,920 15,005 8,523 7,950 4,996 100%
112
 Top 25 EMS Players

Annual Revenue (millions)

EMS 2001 2000 1999
Solectron 16,149 16,884 8,948
Flextronics 12,923 1,124 3,219
Celestica 10,004 9,752 5,297
SCI Systems (acquired by Sanmina) 8,713 9,146 7,225
Samina 4,974 4,538 1,217
Jabil Circuit 4,086 3,998 2,433
Elcoteq Network 1,740 2,060 752
Manufacturers Service Ltd. 1,522 1,758 921
Venture Manufacturing 1,431 844 576
Benchmark Electronics 1,277 1,705 878
SYNNEX Information Technology 1,475 1,505 1,482
Unversal Scientific Industrial 1,372 1,400 932
ACT Manufacturing 1,186 1,371 696
Plexus 900 877 492
Viasystems 784 665 168
Omni Industries 400 812 380
VOGT Electronic 420 430
PEMSTAR 696 567 400
MCMS 350 611 441
SMTC Maufacturing 612 783 452
Teradyne Connection Systems 390 500 278
Saturn Electronics & Engineering 433 498 257
Electronics Manufacturing Service 389 447 370
Finmek Electornics Group 366 421
Kimball Electronics Manufacturing Service 319 367 336
113
Supply Chain Management

Production Planning

114
 Overview


Production-Planning Hierarchy

Aggregate Planning

Master Production Scheduling

Types of Production-Planning and Control Systems

Wrap-Up: What World-Class Companies Do

115
 Production Planning Hierarchy

Long-Range Capacity Planning

Aggregate Planning

Master Production Scheduling

Production Planning and Control Systems

Pond Draining Push Pull Focusing on

Systems Systems Systems Bottlenecks

116
 Production Planning Horizons

Long-Range
Long-Range Capacity Planning
(years)

Medium-Range
Aggregate Planning
(6-18 months)
Short-Range
Master Production Scheduling
(weeks)

Production Planning and Control Systems Very-Short-Range

(hours - days)

Pond Draining Push Pull Focusing on

Systems Systems Systems Bottlenecks
117
 Production Planning: Units of Measure

Entire
Long-Range Capacity Planning
Product Line

Product
Aggregate Planning
Family
Specific
Master Production Scheduling
Product Model

Production Planning and Control Systems Labor, Materials,

Machines

Pond Draining Push Pull Focusing on

Systems Systems Systems Bottlenecks
118
 Production Planning in Manufacturing
Planning Units of
Horizon Measure Description
Executives such as vice-president of operations make long-
Long-Range Entire Long Range range plans for (1) facilities – plant locations, layouts, size and
(years) product lines: Capacity capacities; (2) major supplier plans and amount of vertical
e.g., all Ford Planning integration; (3) processing plans – new production technology,
trucks. new production processes, new systems of automation.

Medium- Range Product Division operations managers make plans for (1)
(6-18 months) family: e.g. Aggregate employment – layoffs, hiring, recalls, vacations, overtime,
Ford F-series Planning part-time employees; (2) inventories; (3) utilities; (4) facility
trucks/ modifications; (5) material – supply contracts.

Short-Range A specific
Master Factory operations managers make plans for master
(several weeks product
Production production schedules – the quantity and timing of the
to a few model: e.g.,
Scheduling production of finished goods and end items.
months) Ford F-150

Resources required to make Factory operations managers make plans for (1) production
Production schedules of parts and assemblies to be manufactured; (2)
specific product model: e.g. labour Planning &
hours, materials and components , Control schedules of purchased materials; (3) shop-floor schedules –
production capacities. Systems machine changeovers, batch movements; (4) workforce
schedules.

Pond- Push Pull Focusing on

Draining Systems Systems Bottlenecks
Systems (MRP) (JIT) (TOC)
Used in all types of Used in all types of Used in all types of Used in all types of
production. Best for production, but more production, but most production, but more
products with truly benefits obtained in job successful applications are 119
benefits obtained in job
random demand. shops in repetitive manufacturing shops.
 Why Aggregate Planning Is Necessary


Fully load facilities and minimize overloading and
under loading

Make sure enough capacity available to satisfy
expected demand

Plan for the orderly and systematic change of
production capacity to meet the peaks and valleys of
expected customer demand

Get the most output for the amount of resources
available

120
 Inputs


A forecast of aggregate demand covering the selected
planning horizon (6-18 months)

The alternative means available to adjust short- to
medium-term capacity, to what extent each
alternative could impact capacity and the related costs

The current status of the system in terms of
workforce level, inventory level and production rate

121
 Outputs


A production plan: aggregate decisions for each
period in the planning horizon about

workforce level

inventory level

production rate

Projected costs if the production plan was
implemented

122
Master Production Scheduling (MPS)

125
Types of Production-Planning
and Control Systems

140
 Types of Production-Planning and Control Systems


Pond-Draining Systems

Push Systems

Pull Systems

Focusing on Bottlenecks

141
 The Pond-Draining Approach to Production Planning and Control
Suppliers

Produce Parts, Subassemblies

Assemble Finished Products

Customers
142
 Pond-Draining Systems


Emphasis on holding inventories (reservoirs) of
materials to support production

Little information passes through the system

As the level of inventory is drawn down, orders are
placed with the supplying operation to replenish
inventory

May lead to excessive inventories and is rather
inflexible in its ability to respond to customer needs

143
 Push Systems


Use information about customers, suppliers, and
production to manage material flows

Flows of materials are planned and controlled by a
series of production schedules that state when batches
of each particular item should come out of each stage
of production

Can result in great reductions of raw-materials
inventories and in greater worker and process
utilization than pond-draining systems

144
 The MRP System
Orders
Orders/ /
Forecast
Forecastof
of
Service Parts Inventory
Inventory
Service Parts
Transactions
Transactions
Data
Data

Inventory
Status File Changes
Changesto
to
Planned Orders
Planned Orders

Planned
PlannedOrder
Order
Primary
Master MRP
Master
Production
MRPSystem
System Outputs
Schedule
Schedule
Production
Schedule
Schedule
Planning
PlanningReports
Reports
Secondary
Performance
Performance
Bills
Billsof
of Reports
Outputs Reports
Material
MaterialFile
File
Exception
Exception
Reports
Reports
145
Inputs MRP Computer Program Outputs
 Material Requirements Planning (MRP)
PEOPLE

Master
1. WHAT WE PLAN TO DO
Schedule

Bills of
PEOPLE Material & MRP Inventory PEOPLE
Routing

2. HOW WE DO IT 3. WHAT WE HAVE DONE

ACTION 4. WHAT WE NEED TO DO

What - When
How Much • MANUFACTURING
• PURCHASING

PEOPLE
146
 Bill of material for the chair (BOM)

Back Cushion
Adjuster mechanism

Seat Cushion
Base Unit

Wheels

O f f ic e C h a ir

B a c k C u s h io n C h a ir F r a m e S e a t C u s h io n F a ste n e rs (8 )

A d ju s t e r M e c h a n i s m B a s e U n it W h e e ls ( 5 ) F a ste n e rs (3 )
147
 The MRP Technique


This is proactive manner of inventory
management

This technique fundamentally explodes the end
product demand obtained from the Master
Production Schedule for a specified product
structure (which is taken from Bill of Material)
into a detailed schedule of purchase orders or
production orders taking into account the
inventory on hand.

MRP is a simple logic but the magnitude of data
involved in a realistic situation makes it
computationally cumbersome.
148
 The MRP Technique

Forecast End-Item Requirements

Net The Requirements Against
On-Hand & Open Orders

Plan The Start-Date (Based on
Manufacturing Lead Time) PEOPLE

Master
Schedule


Order The Component Items (Based
PEOPLE
Bills of
Material &
Routings
MRP Inventory PEOPLE

on Purchasing Lead Time)

ACTION
What - When

149 How Much

PEOPLE
 Advantage of MRP

•Reduction of inventory
•Reduction in production and delivery
lead times by improving co-ordination
and avoiding delays
•making commitments more realistic
•Increased efficiency

150
 Closed Loop MRP


In 1970 this system of MRP was evolved by modifying the
MRP system and incorporating the capacity of organization in
to account.

Capacity of the organization was taken into consideration
through incorporation of CRP (Capacity Requirement
Planning)

This created a feed back loop from the CRP module to MPS
(Master Production Schedule)

It is a series of functions not merely material requirement
planning

It contains tools to address both priority and capacity and to
support both planning and execution

It has provisions for feedback from the execution functions
back to the planning functions.
151
 The Capacity Requirements Planning Process
Start
Change MPS, TRIAL
Change MPS, TRIAL
MASTER Rough - Cut
Reschedule MASTER Rough - Cut
Reschedule PRODUCTION Capacity
Orders
OrderstotoLevel
Level PRODUCTION Capacity
Load SCHEDULE
Load SCHEDULE Planning
Planning
MPS SCHEDULE
MPS SCHEDULE
Planned Order
Planned
Release Order
for All
Release
Materials All
for
No Materials
Determine
Determine
Can Routing Routing for
Be Charged to
Yes Routing forAll
Orders, Work All
Improve Orders, Work
Centre
Centre
Assignments
Capacity? Assignments

Convert Lots of
Convert Lots
Materials into of
Materials
Labour into
and/or
Labour and/or
Machine Load at
Machine Load at
Work Centers
Work Centers

Labour and/or
LabourLoad
Machine and/or
Machine Load
Schedules
Schedules
No

Is
Can Capacity be No Capacity
Economically Available?
Changed? I

Yes Yes
Plan Overtime, Routing Plans,
Plan Overtime, Routing Plans,
Standby Machines, Overtime and
Standby Machines, Overtime and
Subcontracting,
Subcontracting,
Firm Up the MPS
Firm Up the MPS Subcontracting
Subcontracting 152
etc. Plans
etc. Plans
 Issues in MRP


Safety Stock

Use depends on uncertainty of
demand..... more uncertain the
greater the need for safety stock

Assemble-to-Order Firms

MPS and MRP treated separately
from Final Assembly
Schedule(FAS)

Use Modular Bill of Material
153
 MRP I to MRP II

MRP I simply exploded demand (MPS) into
required materials

MRP II became Manufacturing Resource Planning
which provides a closed-loop business
management system

Financial management

Shop floor control

Operations management

Simulation capability
154
 Manufacturing Resource Planning II

A method for the effective planning of all resources of

a manufacturing company. Ideally, it addresses
operational planning in units, financial planning in
dollars, and has a simulation capability to answer
“what if” questions. It is made up of a variety of
functions, each linked together: business planning,
sales and operations planning, production planning,
master production scheduling, material requirements
planning, capacity requirements planning, and the
execution support systems for capacity and material.
Output from these systems is integrated with financial
reports such as the business plan, purchase
commitment report, shipping budget, and inventory
projections in dollars. Manufacturing Resources
Planning is a direct outgrowth and extension of closed
loop MRP (Oliver Wight, George Plossl)
155
 Resource Requirements Planning System
Branch R&D Market
Warehouses Research

Customer Forecast Customer

Orders Estimated
End Item Demand
Demands

Inventory Needed
Inventory
Status of Needed
Production
Status
End of
Items Production
of End Items
End Items of End Items

Lot-Sizing and Rough-Cut

Lot-Sizing
Safety Stock and Rough-Cut
Capacity
Safety Stock
Policies Capacity
Planning
Policies Planning

Modifica- Trial Master Modifica-

Trial Master
Production
tions to Production tions to
MPS Schedule (MPS) MPS
Schedule (MPS)

Material Capacity
Material
Requirements Capacitys
Requirement
Requirements
Planning (MRP) Planning s
Requirement
Planning (MRP) Planning
(CRP)
(CRP)

No Yes Yes Capacity No

Materials Economically
Available Available

Master Material Capacity

Master
Production Material
Requirements Capacity
Requirements
Production
Schedule (MPS) Requirements
Plan Requirements
Plan
Schedule (MPS) Plan Plan

Purchasing
Purchasing
Planning &
Shop Floor
Shop Floor
Scheduling &
156
Planning
Control & Scheduling
Control &
Control Control
 Inputs and Outputs of a Resource Requirements Planning System
Functional Inputs Resource Requirements Planning Outputs
Marketing
Marketing
Short-range demand forecasts
Master End-item production schedule
Finance/Accounting
Production Finance/Accounting
Cash availability
Inventory guidelines Schedule End-item production schedule
Inventory level schedule
Production
(MPS)
Production
Capacity constraints
MPS
Development of MPS
Work-center production
Development of MRS schedules
Development of CRP Capacity utilization data
Materials Planned material orders
Requirements Planned material releases
Engineering Shop-floor plans
Planning
Change product designs Engineering
Keep product structure file
( MRP)
New design incorporation data
current
Personnel
Employee availability Personnel
Employee requirements schedule
Purchasing
Material supply availability
Capacity
Purchasing
Requirements Planned orders
Planning Order releases
MIS Database System
(CRP) Changes to planned orders
Inventory status files
Product structure files MIS Database System 157
Updated inventory status files
MRP II Business Planning

TOP
MANAGEMENT Sales Planning
PLANNING Forecast &
Customer Orders
Production Planning Rough Cut
Capacity

158
MRP II Business Planning

TOP
MANAGEMENT Sales Planning
PLANNING Forecast &
Customer Orders
Production Planning Rough Cut
Capacity

Master Production
Scheduling
Bills of Material
& Inventory Material
Requirements Planning
OPERATIONS
MANAGEMENT Capacity
PLANNING
Routings Requirements Planning
(Operations)

Plan NO
Achievable ?

159
MRP II Business Planning

TOP
MANAGEMENT Sales Planning
PLANNING Forecast &
Customer Orders
Production Planning Rough Cut
Capacity

Master Production
Scheduling
Bills of Material
& Inventory Material
Requirements Planning
OPERATIONS
MANAGEMENT Capacity
PLANNING F
Routings Requirements Planning
E
(Operations) E
Plan NO D
Achievable ? B
A
YES C
K
Purchasing Shop Floor Control
PLAN
EXECUTION
Performance Measurement 160
 The MRP II Process

Financial Foundation Foundation

Integration Business Planning
Strategic
Planning
Accounts
OrderSales Planning Planning
Receivable Processing Forecasting
Item Bills
Master

Production Planning
I Bill of
Resources
N Master
Rough Cut
General
V Production Capacity Operations
Scheduling
Ledger E Planning Bills of Management
Material
(Configurable)
N Planning
Material Capacity
T Requirements Requirements Departments
O Planning Planning
R Work
Centers
Y
Accounts Routings
Payable
Production Cost
Purchasing Activity Standards Operation
Control Actuals Execution
Cost
Accounting Performance and Control
Measurement
161
 Goals of MRP II

 Realization of Company Objectives

 Control of Business

 Zero Shortages

 On-Time Delivery

 Management of Changes

 Elimination of Waste
162
 Benefits of Implementing MRP II


Reduced Inventory Levels


Reduced Material Costs


Reduced Operating Costs


Increased Throughput

163

Improved Customer Service Levels
 Pull Systems


Look only at the next stage of production and
determine what is needed there, and produce only that

Raw materials and parts are pulled from the back of
the system toward the front where they become
finished goods

Raw-material and in-process inventories approach
zero

Successful implementation requires much preparation

164
 Focusing on Bottlenecks


Bottleneck Operations

Impede production because they have less capacity
than upstream or downstream stages

Work arrives faster than it can be completed

Binding capacity constraints that control the
capacity of the system

Optimized Production Technology (OPT)

Synchronous Manufacturing

165
 Synchronous Manufacturing


Operations performance measured by

throughput (the rate cash is generated by sales)

inventory (money invested in inventory), and

operating expenses (money spent in converting
inventory into throughput)

. . . more

166
 Synchronous Manufacturing


System of control based on:

drum (bottleneck establishes beat or pace for other
operations)

buffer (inventory kept before a bottleneck so it is
never idle), and

rope (information sent upstream of the bottleneck
to prevent inventory buildup and to synchronize
activities)

167
 Wrap-Up: World-Class Practice


Push systems dominate and can be
applied to almost any type of production

Pull systems are growing in use. Most
often applied in repetitive manufacturing

Few companies focusing on bottlenecks
to plan and control production.

168
 Wrap-Up: World-Class Practice


See materials management as key
element in capturing global market share

Form partnerships with suppliers

Use computers extensively to manage
logistics

169
End

170