Lecture 4

MATERIAL FLOW SYSTEMS

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Outline
Optimization

Just-in-Time production strategy

Course summary

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Optimization
There are many solutions to a problem.

Some solutions are better than others.

Pre-requisite: Attractiveness of each solution can be evaluated. Minimize cost

Challenge: Too many alternatives to consider. Large number of designs/plans

Examples:
Designing factory floor layout. Brute force approach
Designing transportation plan. too time consuming

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 Transportation Problem
City 1 City 2 City 3 City 4 Supply
Farm A $25 $35 $36 $60 15 tons
Farm B $55 $30 $25 $25 6 tons
Farm C $40 $50 $80 $90 14 tons
Farm D $30 $40 $66 $75 11 tons
Demand 10 tons 12 tons 15 tons 9 tons

Task: Find a cost efficient transportation plan

 Greedy Approach
City 1 City 2 City 3 City 4 Supply City 1 City 2 City 3 City 4 Supply

Farm A $25 $35 $36 $60 15 Farm A 10 5 15

Farm B $55 $30 $25 $25 6 Farm B 6 6

Farm C $40 $50 $80 $90 14 Farm C 5 9 14

Farm D $30 $40 $66 $75 11 Farm D 7 4 11

Demand 10 12 15 9 Demand 10 12 15 9

Total cost = 10 X $25 + 5 X $35 + … + 9 X $90 = $2,329

Question: Is this a good transportation plan?
 Solution Improvement
City 1 City 2 City 3 City 4 Supply City 1 City 2 City 3 City 4 Supply

Farm A $25 $35 $36 $60 15 Farm A 10

1 5 9 15

Farm B $55 $30 $25 $25 6 Farm B 6 6

Farm C $40 $50 $80 $90 14 Farm C 9 5 9 14

Farm D $30 $40 $66 $75 11 Farm D 7 4 11

Demand 10 12 15 9 Demand 10 12 15 9

Total cost = 1 X $25 + 5 X $35 + … + 4 X $66 = $2,194 < $2,329

Question: Is this the best transportation plan?
Linear Programming
Cost function:
City 1 City 2 City 3 City 4 Supply
25𝑥𝑥𝐴𝐴𝐴 + 35𝑥𝑥𝐴𝐴2 + ⋯ + 75𝑥𝑥𝐷𝐷𝐷
Farm A xA1 xA2 xA3 xA4 15

Farm B xB1 xB2 xB3 xB4 6

Supply constraint:
Farm C xC1 xC2 xC3 xC4 14

𝑥𝑥𝐴𝐴𝐴 + 𝑥𝑥𝐴𝐴2 + 𝑥𝑥𝐴𝐴3 + 𝑥𝑥𝐴𝐴4 ≤ 15 Farm D xD1 xD2 xD3 xD4 11

Demand 10 12 15 9

Demand constraints: MS Excel has a Solver function

to help find the best solution
𝑥𝑥𝐴𝐴𝐴 + 𝑥𝑥𝐵𝐵𝐵 + 𝑥𝑥𝐶𝐶𝐶 + 𝑥𝑥𝐷𝐷𝐷 = 10 for a simple problem like this.

How do we know if answer is correct?

HW 3
• Problem requirements met?
Qn 2
• Solution makes sense?
 Simulation Optimization
When problem involves uncertain parameters, it may be necessary to
construct a simulation to evaluate different solutions.

How can we obtain a good solution under such a setting?

1. Find a solution by considering a simplified problem (e.g., no uncertainty)

2. Evaluate the performance of that solution with simulation

3. Perform solution improvement by identifying areas of improvement

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Simulation Optimization
Consider a service process consisting of two stages.
Information on the processing time of each service staff is listed below:

Time (min) A B C D E F
Mean 12 15 9 17 20 8
S.D. 16 12 4 10 2 20

How can we do the assignment? 5 + 4 + 6.7 + 3.5 + 3 + 7.5 ÷ 2 = 14.9

A B C D E F
Rate (hr-1) 5 4 6.7 3.5 3 7.5
Process 1 2 1 2 1 2

Use simulation to check customer’s average waiting time at both stages.

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 JIT
Optimization Summary
Determine how the solutions will be evaluated (e.g., cost, WIP).

Can easily formulate as a solvable optimization problem (e.g.,

transportation problem, operator assignment):

MS Excel can help to find the optimal solution

Cannot easily formulate as a solvable optimization problem (e.g., work

center layout, stochastic problem):
1. Find starting solution (greedy approach, simplify problem)
2. Improve the solution by making small changes

Non-optimal good solutions suffices in practice:

- Cost functions and constraints approximate real world conditions.
- Optimal solutions provide little buffer and can perform poorly under real world conditions.
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Six Sigma
◦ All work are processes that can be defined, measured, analysed, improved
and controlled.

◦ Output that do not adhere to specifications are considered as defects. The

term six sigma is based on the idea of having a defect level of no more than
3.4 defects per million opportunities (DPMO).

◦ The above goal is achieved by driving down variability in the process.

 Taguchi’s Loss

Any deviation from the target value, even if it is within specifications, is

undesirable:

2
Loss = 𝑥𝑥 − 𝑇𝑇

2
Expected Loss = 𝑉𝑉𝑉𝑉𝑉𝑉 𝑋𝑋 + 𝜇𝜇 − 𝑇𝑇

Based on Taguchi’s loss function, quality depends on: Taguchi’s loss is also
◦ Whether process is centred applicable to
◦ Process variability waiting time.
Lean Manufacturing
Six Sigma focuses on reducing variability.

Lean Manufacturing focuses on reducing waste:

◦ Overproduction: Excessive finished inventory Reducing
◦ Excess inventory: Excessive raw materials and WIP variability can
◦ Waiting: Time spent idling reduce waiting
time and WIP.
◦ Transport: Movement of products
◦ Motion: Movement of equipment and manpower
◦ Over or incorrect processing: Excessive processing time Push or Pull
◦ Defects: Requiring inspection and resulting in rework Production

Lean Six Sigma combines concepts from both process improvement programs.
Push Production System
General approach
◦ Demand is forecasted.
◦ Production level is set based on forecasted demand
◦ Jobs scheduled based on resource availability and completion date requirements

Unable to quickly respond to changing demand

Results in excessive inventory

Pull Production System
Production is initiated by customer order.

Many fast-food restaurants employ a pull

production system:
◦ Customer places an order
◦ Order is conveyed to kitchen
◦ Kitchen starts to make order (or queue job if busy)
◦ Kitchen passes completed job to counter staff
◦ Counter staff passes order to customer

“Pull” does not have

Burgers are sometimes prepared before
to be from confirmed
customer orders. Why?
customer orders.
Lean and Pull Production
The pull production system is often advocated under lean manufacturing.

Overproduction: Avoid excessive finished inventory by triggering

production only when required.

Excess Inventory:
◦ Avoid excessive raw materials by ordering them only when required.
◦ Avoid excessive WIP by limiting the amount of WIP at each stage of the
production process.

Waiting: Short cycle time is required for pull systems, which motivates
companies to reduce waiting time (and WIP).
Just-in-Time
JIT strategy aims to keep raw materials and WIP at a minimal.
Is this a good strategy? To answer this, ask “why carry inventory?”
Why carry 600 beef patties when average burger sales is 200 per day?
Why carry 12,000 rubber tires when production rate is 1,000 cars a
week?

Reasons:
A. Quality variability (unserviceable stock)
B. Supply variability (delay in delivery)
C. Ordering costs (EOQ model) Lecture 2
D. Demand variability (newsvendor problem)
E. Production variability (varying process time) Lecture 3

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A. & B. Quality/Supply Variability
The following approaches can help reduce quality and supply
variability:

Select suppliers with strong quality programs to ensure minimal

defects.

Share information with suppliers.

Demand forecast

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P&G Case Study
Babies consume diapers at a relatively steady rate... Month to month, the
number of babies and the number of diapers that their parents purchase from
Kmart, Safeway, or the local convenience store remain roughly the same.

Despite the steady rate of demand among babies, [there were] dramatic
fluctuations in retailers' orders to wholesalers.

Excerpts from: Whang and Lee: Eliminating the Bullwhip Effect in Supply Chains 19
P&G Case Study
Wholesaler

Image from: The Bullwhip Effect in Supply Chains 20

P&G Case Study
Babies consume diapers at a relatively steady rate... Month to month, the
number of babies and the number of diapers that their parents purchase from
Kmart, Safeway, or the local convenience store remain roughly the same.

Despite the steady rate of demand among babies, [there were] dramatic
fluctuations in retailers' orders to wholesalers.

If the variability in demand among babies was small, why was there such a
marked variability in demand from retailers?

And why was it even more extreme among wholesalers placing orders to
manufacturers?

Excerpts from: Whang and Lee: Eliminating the Bullwhip Effect in Supply Chains 21
P&G Case Study
Sales estimates and forecasting are usually done separately by retailers,
manufacturers, and suppliers.

When retailers notice a slight increase in demand for diapers, say, besides
putting in an order with the wholesaler to replace the diapers sold, they may
order extra in case the small upturn in sales indicates a trend.

The wholesaler gets the order, sees an uptick in diaper orders, and makes
its own forecasts.

When a manufacturer tries to interpret orders coming from the wholesaler,

the perceived increase in demand can become further exaggerated: the
bullwhip effect.

Excerpts from: Whang and Lee: Eliminating the Bullwhip Effect in Supply Chains 22
Increasing Variability
Increase in sales observed
Increased demand (e.g., more residents having babies)
One off thing (e.g., random fluctuation) When will this consumer be
buying toilet papers again?
I Don’t Know!

Should I increase my order quantity?

Cost of holding inventory Increase order quantity
Cost of loss sales

What happens if it turns out that there is no increase in subsequent sales?

Delay my next order Individual actors making rational
Reduce next order quantity decisions at a local level may lead
to a highly suboptimal system.

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Whang and Lee (1995)
Instead of having each company myopically optimize its own
inventory, companies need to look at the whole supply chain."

Companies have to start cooperating and sharing data that has

traditionally been considered proprietary.

Retailers must tell manufacturers exactly how various items are

selling.

This gives the manufacturers necessary data for making sound

plans for the future.

Excerpts from: Whang and Lee: Eliminating the Bullwhip Effect in Supply Chains 24
A. & B. Quality/Supply Variability
The following approaches can help reduce quality and supply
variability:

Select suppliers with strong quality programs to ensure minimal

defects.

Share information with suppliers.

Demand forecast
Production schedule

Form a long-term business relationship with suppliers.

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 Recall from EOQ model
that lower order costs

C. Ordering Costs results in lower inventory

The following approaches can help reduce ordering costs:

Ordering cost = Transport cost + Admin cost

Locate manufacturing facility near supplier

Streamline ordering process (e.g., online ordering system)

Form a long-term business relationship with suppliers.

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Partnership with Suppliers
Is having one supplier or multiple suppliers desirable?

What are the advantages of having only one supplier?

Economies of scale
 Cost (ordering cost, item unit cost)
 Customer service (e.g., troubleshooting, urgent request)
Standardized process
Standardized parts

What are the disadvantages of having only one supplier?

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Renesas Case Study
One of the largest custom-made microchip makers in the world.

Estimated global market share: Above 40%.

One of its main plant was damaged in the tsunami of March 2011.

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Renesas Case Study
A typical car is equipped with 50 to 100 micro chips, which control
many parts ranging from the brakes, engines, steering, airbags, air
conditioning equipment, navigation and audio systems, to a number
of sensors inside the vehicles.

Some 20,000 to 30,000 different auto parts make up a car and even
if one single auto part is missing, production has to be stopped until
that particular part arrives at the assembly line.

There was a severe shortage [of particular microchips] when

Renesas shut down one of its main plants near Tohoku.

Excerpts from: http://www.bbc.com/news/business-13421065 29

Renesas Case Study
For the first time ever, almost all the Japanese carmakers had to
idle most of their plants, not only in Japan but also globally, and stay
that way for months.

Even after restarting production, capacity utilization has been

staying - and will be staying - at less than 50% for more than six
months, or until the end of 2011. For some plants, it is less than 20%.

Based on the extremely tight "just-in-time" production system, a

typical Japanese carmaker has an inventory of certain parts for up to
about six hours, and sometimes for just six minutes.

Excerpts from: http://www.bbc.com/news/business-13421065 30

Partnership with Suppliers
Is having one supplier or multiple suppliers desirable?

What are the advantages of having only one supplier?

Economies of scale
 Cost (ordering cost, item unit cost)
 Customer service (e.g., troubleshooting, urgent request)
Standardized process
Standardized parts

What are the disadvantages of having only one supplier?

Supply Disruption

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 Automobile manufacturers
face chip shortages again.

Renesas Case Study See CNA news clip

(8 Mar 2020) on
Why was Renesas the sole supplier? Singapore’s
food security under
LumiNUS multimedia
Matsuo (2015) Section 4.3.3. offers two possible reasons:

Multi-supplier system is
High requirements (quality, price) generally suboptimal.

Non-standardized products (embedded software is company specific)

Sourcing from
Select supplier with Select supplier who
multiple suppliers
low supply place you in high
may not be
disruption risk priority
straightforward.

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D. Demand Variability
The following approaches can help reduce demand variability:

Understand your clients (e.g., just in case argument).

Improve demand forecast

Data collection system Lecture 2
Demand modeling
Stopping panic buying
Look at your pricing strategy.
Purchase limits

Restore confidence

Peer pressure

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Whang and Lee (1995)
 When manufacturers offer bargains, retailers
stockpile inventory and don't order again for months.

This is not the way to keep the supply chain running

smoothly.

The logic behind an "everyday low price" is that it

promotes steady, regular purchases at all levels, from
the retailer to the wholesaler to the manufacturer,
rather than sporadic shopping binges, which are at the
root of the bullwhip effect.

Excerpts from: Whang and Lee: Eliminating the Bullwhip Effect in Supply Chains 34
SMRT (2013 – 2017)
Crowded MRT trains during peak periods

Free Pre-Peak Travel: Free travel on the rail network for commuters
who end their journey before 7.45am on weekdays at 18 designated
MRT stations in the city area.

From 24 Jun 2013 to 29 Dec 2017.

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SMRT (2013 – 2017)
The objective of the trial is to encourage commuters who are able and
willing to make changes to their travel schedule, to travel earlier into the
city area before the peak hour. This would help spread out the morning
peak hour crowds to the pre-peak period, and ease the crowding situation
on city-bound stretches of the MRT network.

Data of commuters show that about 7% of commuters have shifted out of

the morning peak period since the introduction of Free Pre-Peak Travel. This
has resulted in a more even distribution of morning rail ridership.

The ratio of morning peak (8am-9am) to pre-peak (7am-8am) travel (based

on commuters exiting from the designated stations) has fallen from 2.7 to
2.1. Capacity during the pre-peak period remains adequate.
D. Demand Variability
The following approaches can help reduce demand variability:

Understand your clients.

Improve demand forecast

Data collection system Lecture 2
Demand modeling

Look at your pricing strategy. Pricing can influence demand

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E. Production Variability
The following approaches can help reduce production variability:

Have a strong quality improvement program to reduce rework.

Ensure employees are well-trained.

Ensure employees are equipped with the right tools.

Perform time and motion studies to identify improvement areas.

Have a strong preventive maintenance program to reduce breakdowns.

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 Just-in-Time
JIT is a production strategy that is interested in minimizing inventory (including WIP).

This is achieved by addressing the following:

A. Quality variability
B. Supply variability
C. Ordering costs
D. Demand variability
E. Production variability

The following are ideal for a JIT system:

Reliable and supportive supplier
Low ordering costs
Predictable demand
Low rework and machine breakdowns
Well-trained and well-equipped employees

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Summary
Inventory
◦ Why do we keep them?
◦ Why are they undesirable?
◦ Optimal inventory level: Balancing between different costs
◦ Reducing variability is key to reducing inventory (raw, WIP, finished)

Factory dynamics (flow of jobs in an assembly line)

◦ Measuring performance
◦ Relationship between the different performance measures
◦ There is no free lunch (High TH/utilization implies high WIP)
◦ High TH and high utilization is only possible under low variability
◦ Downstream processes are affected by upstream processes

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Summary
Finding a good design/plan/assignment
◦ Performance measure must be clear
◦ Deterministic problem:
◦ Greedy algorithm => Good starting solution -> Solution Improvement
◦ Linear program
◦ Stochastic problem: Simplify -> Simulate -> Improve

Modelling uncertain demand/time

◦ Use of probability distributions (e.g., binomial, Poisson, normal)
◦ Using historical data to fit distributions

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Admin matters
HW (online submission)
◦ HW2 due tonight 11:59pm
◦ HW3 due 16 Apr 11:59pm

Project
◦ Report and Video due by 16 April 11:59pm
◦ Submit softcopy via IVLE submission folder (one per group)

Exam
◦ Online exam (via Zoom and LumiNUS)
◦ 50 MCQ, 2 hours
◦ Open book exam
◦ Required to log into Zoom and turn on video camera
◦ Required to remain for the whole duration of the exam