Project and Production Management Module 9 Tactical Decisions and Review Prof Arun Kanda & Prof S.G. Deshmukh, Department of Mechanical Engineering, Indian

Project and Production Management

Module 9

Tactical Decisions and Review

Prof Arun Kanda & Prof S.G. Deshmukh, Department of Mechanical Engineering,Indian Institute of Technology, Delhi

module 9:Tactical Decisions and Review

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MODULE 9: Tactical Decisions and Review

1.Basic Inventory Principles

2.Inventory Modeling

3.Material Requirements Planning

4.Job shop scheduling

5.Course Summary and Review

6. Illustrative Examples

7. Self Evaluation Quiz

8. Problems for Practice

9. Further exploration


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1. Basic Inventory Principles


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FUNCTIONS OF INVENTORIES

Inventories are Idle Resources maintained in various forms:

- Raw materials- Purchased & manufactured parts- Subassemblies- Finished productsSince inventories represent a sizable

investment in a logistic system, we must be aware of the functions they perform



FIVE CATEGORIES OF STOCKSPIPELINE stock (in process stock, in transit stock)

CYCLE stocks (batch production owing to - economies of scale - technological requirements)

SEASONAL stocks ( time varying requirements of an item)

SAFETY stocks (supply and demand uncertainties, lead time uncertainties)

Stocks held for OTHER REASONS (- decoupling stages of production - price, quantity discounts, - speculation)



INVENTORY RELATED COSTS • Procurement cost

Cost/order generally fixed (not dependent on order qty)

• Costs associated with existence of inventories

(supply exceeds demand) Cost/unit/unit time i C (i = inventory carrying cost rate)

• Costs associated with stock outs (demand exceeds supply) (cost/unit) (cost/unit/unit time)



PROCUREMENT COSTS

Procurement cost Cost of goods

Cost/order generally fixed Ordering cost

(not dependent on order qty)

- Administrative component

- Handling

- Transportation

- Inspection of arrivals



INVENTORY HOLDING COSTS

Costs associated with existence of inventories (supply exceeds demand) Cost/unit/unit time i C (i = inventory carrying cost rate)

- Storage and handling - Interest on tied up capital - Property taxes - Insurance - Spoilage - Obsolescence - Pilferage



SHORTAGE COSTS

Costs associated with stock outs

(demand exceeds supply)

(cost/unit) (cost/unit/unit time)

- Additional costs of special order

- Backorder, if possible

- Loss of customer goodwill

- Lost sales



SELECTIVE INVENTORY CONTROL

In a large number there are

Typical organisations deal with a large variety of stocked items

PARETO’s Law

(10,000 – 100,000 …is not uncommon)Depending on rankings of• VALUE ((Annual demand X unit price)) ABC Analysis

(Always Better Control)• CRITICALITY (Vital, Essential, Desirable) VED Analysis

• USAGE FREQUENCY FSN Analysis(Fast moving, Slow moving, Non moving)

Based on product characteristics, suitable policies can be chosen

USAGE FREQUENCY

significant few insignificant many

A B C

N

S

F

V

E

D



ABC ANALYSIS

5-10% items account for about 75% value15-20% items account for about 15% valueBalance items account for about 10% value (or A class ≥ 6 items average annual usage C class ≤ 0.5 items average annual usage B in between)

Where, Average Annual usage= ofitemsoTotayeartialTotalMater

.ln/cos

25

50

75

90100

25 50 75 10010

Percent of number of inventory items

A

B

C

Pe

rce

nt

of

av

era

ge

in

ve

nto

ry i

nv

es

tme

nt



OBJECTIVE OF ABC ANALYSIS:Rationalization of Ordering Policies

EQUAL TREATMENT TO ALLItem no. Annual Consumption

Value (Rs.)

Number of Orders

Value per order Average inventory

1

2

3

60,000

4,000

1,000

4

4

4

15,000

1,000

250

7500

500

125

Total Inventory: Rs. 8125

PREFERENTIAL TREATMENT on basis of ABC analysis

1

2

3

60,000

4,000

1,000

8

3

1

7,500

1,333

1,000

3750

667

500

Total Inventory Rs 4917

The optimum no of orders can be arrived at by using models of inventory control eg. EOQ

Q* =icdo2

time

inve

ntor

y

Ann

ual c

ost

Q*

Total cost

carriage

ordering

DETERMINATION OF REORDER POINTReorder point = Max. reasonable demand during lead time

= expected demand during lead time + safety stock

(usually pre specified by management)

K= 0; risk of shortage = 50% service level = 50%K= 0; risk of shortage = 15.87% service level = 84.13% K= 0; risk of shortage = 2.28% service level = 97.72% K= 0; risk of shortage = 0.13% service level = 99.87%

Higher safety stock

A class items have relatively low service levels (0.8 or so)- Lower safety stocks- Tighter control & efficient expediting

B class items handled routinely with service levels of 0.95 or so

C class items should be present in ample supply, minimum records, controls, procedure very high service levels (0.95 to 0.98)

Prob. of stockout

Total demand in lead timexL + kLxL

kL



POLICY IMPLICATIONS OF SELECTIVE INVENTORY CONTROL

ABC analysisA class items need continuous rigourous control

(use of mathematical models justified)

B class items – relaxed control (periodic review)

C class items – simple rules of thumb

V class items call for a high level of service

E class items call for medium level of service

D class items call for tolerable level of service

jointly determine service levels

FSN analysisFast most inventory models apply to this class

Slow ( spare parts etc)

Non – moving (dead stock) (optimal stock disposal rules)

VED analysis

% riskOf shortage

(min)

(max)

ABC

VED



A SAMPLE SET OF SERVICE LEVELS FORDIFFERENT CATEGORIES OF ITEMS

V E D

A 0.80 0.75 0.6

B 0.95 0.90 0.85

C 0.99 0.97 0.95

V E D

A 0.7 0.6 0.5

B 0.9 0.8 0.7

C 0.95 0.9 0.85

High cost ofstockout

Low cost ofstockout

dec

reas

ing

dec

reas

ing

decreasing

decreasing



OBJECTIVE OF INVENTORY MANAGEMENT SYSTEM

An inventory system consists of a set of rules and procedures that allow

for routine decisions on when & how much to order of each item needed

in the manufacturing or procurement process,

which call attention to the non-routine situations, the rules do not cover &

which provide managers with the necessary information to make these

decisions effectively.

The objective of a well designed procedure should be the minimization

of the costs incurred in the inventory system, attaining at the same time

the customer service level specified by the company policies.

1

2

3



STRUCTURE OF A TYPICAL COMPUTERISED

INVENTORY MANAGEMENT SYSTEM

Basic sub systems or modules:-

• Transactions and file maintenance module

• Decision rules module

• System integrative module

• System-management interaction and evaluation module



TRANSACTIONS ANDFILE MAINTENANCE MODULE

Book keeping of inventory control – Entry, auditing, control and processing of inventory transactions

NECESSITY: Continuous updating to provide accurate information on -Available stock (on hand and on order)-Customer order status-Cost of items-Delivery lead times-Source of acquisition-Ordering restrictions- …

DEVELOPMENT: mainly the area of data processing.



THE DECISION RULES MODULEThis is concerned with the fundamental components of inventory

planning and control procedures aimed at answering when and how

much to order of each item to maintain inventories at the right level.

A forward looking system should include forecasting capabilities safety

stocks (to account for unavoidable in accuracies) decision rules are

needed to guarantee some desired level of customer service.

EOQ, q* =icdo2

Use EOQ and continuous monitoring

Order in lots of 3 months demand if stock at hand is less than ROP

Order in lots of 6 months demand if stock on hand is less than ROP

A-class C-classB-class

ITEM



SYSTEM INTEGRATIVE MODULE

The various items being controlled, depending on their

inherent characteristics require specific degree of

management attention and service levels that can be

achieved by using some appropriate stock policy

Decision rules Distinct inventory policies



SYSTEM MANAGEMENT INTERACTION AND EVALUATION MODULE

Intended to provide management with such information as to permit evaluation Evaluation of operating performance Identify problem areasAllow for management selection of policy

variables (system parameters)



SUMMARY & CONCLUSIONS

- Omnipresence of inventories (‘necessary evil’)

- Nature of inventory related costs

- Principles of selective inventory management

ABC analysis

VED analysis

FSN analysis

- Ordering rules and reorder point determination

- Policy implications of selective inventory management

- Features of a computerized inventory management system

- Relevance ? – independent vs. dependent demand systems

- MRP vs. conventional inventory management



2. Inventory Modelling



LOT SIZING

- When to order ?- How much to order ?

Decision variables are Order quantity, q per lot Maximum backorder level, b (in class III, IV)

Reorder point

Lead time

Order qty., q

NO

BA

CK

LO

GG

ING

PURCHASE

Inv.

I



PRODUCTION

q

Inv.

II

LOT SIZING





LOT SIZING



q

bBA

CK

LO

GG

ING

Inv.

III



LOT SIZING



b

Inv.

IV



ANALYSIS

BROAD APPRAOCH

(1) Identify the cost components in each cycle (of length t)

(2) Express costs in terms of decisions variables (order qty, q and backorder level, b)

(3) Develop annual cost by multiplying (1) by number of cycles/year

(4) Optimize to find q*, b*

Carrying cost Shortage cost Set up or order cost



VARIATIONS IN THE LOT-SIZE FORMULE

WITHOUT BACKLOGGING

02

1

3 *b,

CdC

*q

C = unit cost (Rs/piece)C1 = i X C = carrying cost (Rs/unit/time)C2 = shortage/backlogging cost (Rs/unit/time)C3 = order cost (Rs/order)





012

1

3

*b,

)p/d(CdC

*q





b

WITH BACKLOGGING

2

21

1

32C

CCC

dC*q

21

1

CC*qC

*b





b

2

21

1

3

12

CCC

)p/d(CdC

*q

21

1 1CC

)p/d(*qC*b



1. Demand fixed at constant rate of d units/unit time

2. Replenishments made when inventory reaches zero level so that no shortages occur.

3. Fixed lot size q.

4. Infinite replenishment rate

5. Lead time is known

6. The unit carrying cost, c, is constant Rs/unit/unit time.

7. The replenishment cost, C3 is constant Rs/Order.

ASSUMPTIONS inCLASSICAL LOT-SIZE SYSTEM



SENSITIVITY STUDIES ON CLASSICAL LOT-SIZE MODEL

AN

NU

AL

CO

ST

S

LOT SIZE qq1

q*

q2

TC

TCmin

Total cost

Carrying cost

Order cost

221 iCqqC

qdC3

q

Inv.Level

Avg

. In

ven

tory

= q

/2

qdCqC

)q(K31

2

1

32CdC

*q 312 CdCTCmin

Sensitivity Q = bq*, b > 0

b 0.5 0.8 0.9 1.0 1.1 1.2 1.5 2.0

TC/TCmin 1.250 1.025 1.006 1.000 1.005 1.017 1.083 1.29

bb

)b(TC

TCbmin 2

121 2

1



EOQ WITH QUANTITY DISCOUNTS

Total annual cost = dCCqdq

C 312

Annual usage

Example

Annual demand = 5000 partsOrder cost = Rs 49Inventory carrying cost = Re 1 per part/year

7001

4950002

)(EOQ

Discount schedule

Order quantity Unit cost/part

0 – 999

1000 – 2499

2500 – over

Rs 5

Rs 4.85

Rs 4.75



TOTAL ANNUAL COSTS for THREE ORDERING POLICIESORDER

QTY.ANNUAL HOLDING

COSTANNUAL

ORDER COST

PURCHASE COST

TOTAL

700

1000

2500

350

500

1250

350

245

98

25,000

24,250

23,750

25,700

24,995

25,098

OPERATING AT A LOT-SIZE of 1000 rather than EOQ of 700 is WARRANTED HERE

ANNUALCOSTS

q700 2500

25,700

TAC(Rs 5)

1000

TAC(Rs 4.85)

TAC(Rs 4.75)

25,098

24,995



AN EXAMPLE ILLUSTRATING SHIFT OF EOQs

991Quantity

100 and over2Rs

tcosUnit

Re 1

D = 250/yrC3 = Rs 5/orderi = 20%

79220

525022

)(.XX

)Rs(EOQ 112120

525021

)(.XX

)Rs(EOQ

IN THIS CASE A LOT SIZE OF 112 RESULTS IN MINIMUM COST

ANNUALCOSTS

qEOQ=79 112100



DETERMINISTIC SINGLE ITEM MODEL

NOTATION

d = demand rate (units per unit time)P = production rate (unit per unit time)Q = order/production quantityT = cycle lengthB = maximum backorder level permittedImax = maximum on-hand inventory levelC = unit item costC1 = inventory carrying cost in Rs/unit/unit time = iCC2 = shortage cost in Rs/unit/unit time (back logged demand)C2 = shortage cost/unit short independent of time (lost sales)C3 = set up cost per order/batch

t1 t2

tp

t3 t4

t

Imax

0

-b

Rate of fall, dRate of rise p-d



Cycle time t = q/d

Time to produce a lot, tp = q/p max. inventory, Imax =

t1 = time for backorder b to be cleared once production starts

t2 = time for inventory level to build up from zero to Imax

t3 = time for inventory level to drop to zero from Imax at constant demand, d

t4 = time for backlog b to buildup at a demand rate, d

dpb

dpImax

db

dImax

b)dp(pq

b)pd

(q 1



COSTS/CYCLE

During (t2 + t3) there is inventory andcarrying costs = ½ Imax (t2 + t3) c1

During ( t1 + t4) there is shortage cost = ½ b (t1 + t4) C2 + C’2 b

Ordering / replenishment cost per cycle = C3

Notice that

)dp(dp

bddp

b)tt(

11

41

)dp(dp

Iddp

I)tt( axmaxm

11

32

bpd

qI& axm

1

t1 t2 t3 t4



AVERAGE ANNUAL COSTS K (q, b)

K (b, q) = t

Ctb

'Ct

ttbC

tttI

Caxm 3

241

232

122

Substituting for t, (t1 + t4), (t2 + t3) & Imax in terms of q, b we obtain

K (b, q) =

qdC

qbd'C

)p/d(qbC

)p/d(qb)p/d(qC 32

221

12121 2



OPTIMAL RESULTSAnnual cost is K (b, q)

The solution of these simultaneous equations yields the optimum values q* and b* as follows:

0

bK

qK

2

21

2111

3

)()/1(

2*

)'( 2

2

C

CC

CCCpdC

dCq

dC

21

21 1CC

)p/d)(d'C*qC(*b

and



FAST vs SLOW MOVING ITEMSSlow moving items• Low level of demand• Frequent periods of no usage

Likely to be between 50-100 units/yr

Peterson & Silver (1979) recommend classifying items according to demand over the replenishment lead time:

An expected lead time demand of 10 units or larger puts the item in the fast mover’s class, while an expected lead time demand of less than 10 units defines a slow mover

Thresholds difficult to define [ depend on item nature]



CONTINUOUS (PERPETUAL) REVIEW SYSTEM WITH REPLENISHMENT ORDER QTY. Q AND REORDER LEVEL R

Amt. of inventory on hand

Reorder level, R

Safety stock (s s)

Avg. lead time usage (U)

Amt. used during Lead time







U1 U2U3

Q

LT1

LT2

LT3

QOrder qty, Q

Time



COMPUTATIONS FOR RU = Lead time demand

LT = Lead time (working days)

D = daily demand

Z is obtained from the NORMAL TABLES based on

• A pre specified stockout probability, P

• Optimal stockout frequency based on costs of shortage and carrying inventory

LT__

d_

U_

2)d_

)(VarLT(LT__

)Vard()U(Var

)U(Varu

uZUR

)u,U(N 2

Z Probability of stockout

either

or



EXAMPLE (p305, ch. 10)Per unit holding cost = Re 1/yrOrdering policy : 4 times a yrPre specified service level : 1 stockout/3 yrs

SQ/yr = 0.33

LEAD Times from SUPPLIER

Order

placed

1/7 2/3 3/16 4/6 5/2 6/2

Order received 1/18 2/21 4/20 4/28 5/20 6/23

Lead times

Calendar days

Working days

11

7

18

12

35

25

22

16

18

14

21

15

Month/day



Similar data on demands for last six months yield

EXAMPLE (p305, ch. 10)

d = 40 units/day

Var (d) = 30 (units/day)2

LT = 7 + 12 +25 + 16 + 14 + 156

= 14.83 days

Var (LT) = (7 – 14.83)2 + (12 – 14.83)2 + …

6 -1= 34.97 (day)2

(contd.)



EXAMPLE (contd.)

3975640 29734831430 ,)().().)(()U(Var

08304330

..

nyr/SO

3593831440 .).)((U Units demanded per lead time

523739756 .,u Units per lead time

Desired SO/yr = 0.33 (as stated earlier)

P = desired probability of stockout per order cycle

From tables Z = 1.39

SS = 1.39 (237.5) = 330.1

R = 593.3 + 330.1 = 923.4

Z

0.083

Order cycles/yr = 4 (given) = n



IMPROVING RELIABILITY OF LEAD TIME

Safety stock = 1.39 (21.09) = 29 ( compared to 330 earlier)

R = 622 (compared to 923 earlier)

Inventory lowered by 301 units

Annul savings = Rs 1 X 301 = Rs 301

Thus it is worthwhile to improve reliability of lead time

If var (LT) = 0

Then var (U) = 30 X 14.83 = 444.9

u = 444.9 = 21.09 units per lead time

(compared to the original 237.5)



OPTIMAL STOCKOUT FREQUENCY AND IMPLIED BACKORDER COSTS

Cost of shortage X Optimal SO/yr = Inventory carrying cost

Shortage cost = Rs 10

Z = 1.96 (from normal tables)

R* = 593.3 + 1.96(237.5) = 593.3 + 465.5 = 1058.8

For R = 926

SO/yr = C1/shortage cost

0.33 = 1/shortage cost

CB = 1/0.33 = Rs 3 (implied shortage cost)

optimal SO/yr = 1/10 = 0.10

P* = SO/yr = 0.01 = 0.025n 4



INVENTORY CONTROL POLICIESCONTINUOUS REVIEW SYSTEMS

• (S, Q) policy – when available inventory reaches level s, order Q • (s, S) policy – when available inventory becomes equal to or less

than s, order upto level S

PERIODIC REVIEW SYSTEMS• (nQ, s, R) policy – If at a review time the available inv. < s, an amt. nQ is ordered (n=1,2,3) n is such that after the order is placed, the avail. Inv. Reaches a level

in (s, s+Q)• (S, R) policy – At each review time a sufficient qty. is ordered

to bring the level of ave. inv. upto S.• (s, S, R) policy – If at a review time, the available inv. < s a

sufficient qty. is ordered to bring level upto S, otherwise no order is placed

Available inventory = inventory on hand + amount on order - Units back ordered



Lead time

Reorder point

Avg.Lead time consumption

Reserve stock

Safety stock

Demand uncertainties

Lead time uncertainties

Sto

ck

Avg. demand for maximum delay

Probability of delay

a) Avg. demand during avg. lead time (buffer)

b) Variations in demand during avg. lead time, depending on service level (reserve stock)

a) Avg. demand during delivery delays (safety stock)

)LXD(

)kx( LD



EXAMPLEFor the following data work out the costs under both• A continuous review, fixed order qty (Q system)• A periodic review, variable order qty (P system)• Avg. annual demand = 20,000 units• Std. deviation of demand per week = 50 units• Unit price = Rs 10• Ordering cost = Rs 100• Inventory carrying cost rate = 20%• Avg. lead time = 4 weeks• Max. delay = 3 week• Probability of delay = 0.31• Service level = 95% (prob. Of stockout during lead

time = 5%)



Q systemunits 1414

x).(x,x

qty Order 1020

100000202

Safety Reserve Buffer point reorder

units 1540 4 x 52

20,000 time lead during demand avg. Buffer

time lead during demand of deviation std. x k stock Reserve units 164 50) x 4( 1.64

delay of yprobabilit x delay max during demand Avg. stock Safety

units .x.x)3 x 20,000

( 358310115431052

units 2062 358 164 1540 point Reorder

time

S2062

Stock level

Q = 1414

Lead time = 4 weeks1.64

Mean,

0.95



P system

wks.3.7 weeks52 x,

years,Demand

EOQ periodReview

000201414

000201414

Can be rounded off to either 3 or 4 weeks depending on cost consideration

3 weeks1733 Rs 100 Rs x

352

cost ordering Annual

1,154 Rs .xxx17.3320,000

cost carrying inventory Annual 2001021

Total inv. Cost = 1733 + 1154 = Rs 2887



4 weeks1300 Rs 100 x

452

cost ordering Annual

1,154 Rs .xxx13

20,000 cost carrying inventory Annual 20010

21

Total inv. Cost = 1300 + 1154 = Rs 2840

Review period is 4 weeks

Desired inventory level = Buffer + Reserve + safety = 3668

units 3080 8 x52

20,000 Buffer

units 230 1.64 x 50 x 8 Reserve

units 350 0.31 x 3 x )(20,000/52 Safety

P system module 9:Tactical Decisions and Review


SAFETY STOCK DETERMINATIONIssues

1) What is the optimal level of protection ?How often do we tolerate running out of stock ?

Tradeoff between holding costs & shortages

2) What reorder level should we set to achieve to achieve this theoretically optimal protection ?

Practical question answered through statistics.

Chosen reorder level

Distribution of lead time demand

Prob. Of stockout



SUMMARY

The EOQ formula with sensitivity analysis was discussedMany variations of the lot size formula with and without backlogging for purchase and production situations were consideredQuantity discounts were exploredThe P & Q policies for inventory control were comparedSafety stock determination in inventory systems was considered



3. Material Requirements Planning



WHAT MRP DOES ?

•Dependent demand•lumpy

MRP

DETAILED SCHEDULE FOR

RAW MATERIALS &

COMPONENTS

USED IN THE END PRODUCTS

MASTER SCHEDULE

FOR END ITEMS



Independent Demand:

• Demand unrelated to demand of other products (end products, spare parts)

• Usually forecast• Conventional inventory control (EOQ,

Wagner/Whitin) applicable.

INDEPENDENT VS DEPENDENT DEMAND



.

Dependent Demand:Demand directly related to demand of some

other product (components, raw materials, subassemblies)

• Requirements derived from delivery schedule of end items.

• MRP is the appropriate tool for planning & control of manufacture inventories raw materialsWIPComponent partsSubassemblies

INDEPENDENT VS DEPENDENT DEMAND



LUMPY DEMAND

CONTINUOUS DEMANDAssumed in economic lot size formula

LUMPY DEMANDTYPICAL OF MRP APPLICATIONS(raw materials, components sub-assemblies consumed in Large increments corresponding to a certain batch of final product)

TIME

Avg.rate ofdemand

Inv.LEVEL

TIME

Inv.LEVEL t1 t2 t3 t4 t5 t6



LEAD TIMES

In MRP, lead times are used to determine starting dates for assembling final products and subassemblies, for producing

component parts, and for ordering raw materials.

Ordering Lead Time:(for purchased parts)

Initiation of purchase requisition

Receipt of item from vendor(off shelf / fabricate)

Manufacturing Lead Time:

Place order Item deliveredProcess part through sequence of machines as given on route sheet (operation + non-productive times)



• The master production schedule and other

order data.

• The bill of materials file. (The product

structure)

• The inventory record file.

INPUTS TO MRP module 9:Tactical Decisions and Review


COMMON USE ITEMS

MRP collects the common use items from different products to effect economics in ordering the raw materials and manufacturing the components/sub assemblies

C1 C2 C3 Cn

P1 P2 P3 PN

BASIC RAW MATERIAL

COMPONENTS

PRODUCTS



STRUCTURE OF AN MRP SYSTEM

Gross &Net requirementsreport

Capacity vsLoad report

Shop floorPlanningreport

Production OrderStatus & exceptionsreport

ServiceParts

requirements

Salesforecasts

Customerorders

Inventorytransactions

MasterProductionschedule

Engg.changes

InventoryRecord

file

MRPPROCESSOR

Bill ofMaterials

file

OUT PUTREPORTS

…


MASTER PRODUCTION SCHEDULE

(a) What end products are to be produced?

(b) How many of each product to be produced?

(c) When the products are to be ready for shipment?

TYPICAL INFORMATION IN MPS:

DEMANDOften excluded from MPS, since it does not include

end product demand.

Demand for individual component Parts (for repair and service)

Firms customer orders

Forecasted demand

Week no 6 7 8 9 10

Product P1 50 100

Product P2 70 80 25

Etc.



BILL OF MATERIALS (BOM) FILE

C1 C2 C3 C4 C5 C6

S1 S2

P1

(1) (2)

(1) (4) (1) (2) (2) (1)

Level 0(product)

Level 1(sub-assemblies)

Level 2(raw materials)

Sub assembly S1 is the PARENT of components C1, C2 & C3. Any engg. Changes affecting product

structure must be fed to BOM file.



• Accurate current data on inventory status

• Generally computerized (item master file)

• Lead times must be established in inventory

Record file

INVENTORY RECORD FILE

• INVENTORY TRANSACTIONS (issue, arrivals, order placement/realization) MUST BE KEPT CURRENT

OrderingLead time

ManufacturingLead time

Purchasingrecords

ProcessRoutesheets



INPUTS FOR MRP EXAMPLE

C1 C2 C3 C4 C5 C6

S1 S2

P1

(1) (2)

(1) (4) (1) (2) (2) (1)C4 C6 C7 C2 C8

S3 S4

P2

(1) (1)

(1) (4) (2) (2) (1)

M4

PRODUCT STRUCTURE FOR PRODUCTS P1 & P2

MasterProductionSchedule

Initial inventory status for M4

Assembly Manufacturing Ordering

P1 = 1

P2 = 1

S2 = 1

S3 = 1

C4 = 2 M4 = 3

Lead times (in weeks)

258070P2

10050P1

109876Week

PLANNED ORDER RELEASESNET REQUIREMENTS

90ON HAND40SCHEDULED RECEIPTS

GROSS REQUIREMENTSITEM RAW MATERIAL M4

654321PERIOD

50

BASIC MRP LOGIC

Input MPS, BOM, Inventory Status, Lead timesDo Parts ExplosionOffset requirements by lead timesNetting of requirements from Gross by considering availabilitiesLot sizing of net requirements for procurement or production



PERIOD 1 2 3 4 5 6 7 8 9 10

ITEM PRODUCT P150 100GROSS REQUIREMENTS

SCHEDULED RECEIPTS

ON HAND 0

NET REQUIREMENTS 50 100

PLANNED ORDER RELEASES 50 100

ITEM PRODUCT P270 80 25GROSS REQUIREMENTS

SCHEDULED RECEIPTS

ON HAND 0

NET REQUIREMENTS 70 80 25

PLANNED ORDER RELEASES 70 80 25



PERIOD 1 2 3 4 5 6 7 8 9 10

ITEM SUB ASSEMBLY S2100 200GROSS REQUIREMENTS

SCHEDULED RECEIPTS

ON HAND

NET REQUIREMENTS 100 200

PLANNED ORDER RELEASES 100 200

ITEM SUB ASSEMBLY S370 80 25GROSS REQUIREMENTS

SCHEDULED RECEIPTS

ON HAND

NET REQUIREMENTS 70 80 25




PERIOD 1 2 3 4 5 6 7 8 9 10

ITEM COMPONENT C470 280 25 400GROSS REQUIREMENTS

SCHEDULED RECEIPTS

ON HAND

NET REQUIREMENTS 70 280 25 400

PLANNED ORDER RELEASES 70 280 25 400

ITEM RAW MATERIAL M470 280 25 400GROSS REQUIREMENTS

SCHEDULED RECEIPTS 40

ON HAND 50 90 20

NET REQUIREMENTS -20 260 25 400




1. Order release notice, to place orders that have been

planned by the MRP system

2. Reports showing planned orders to be released in future

periods.

3. Rescheduling notices, indicating changes in due dates for

open orders.

4. Cancellation notices, including cancellation of open orders

because of changes in the master schedule

5. Reports on inventory status.

MRP OUTPUT REPORTSPrimary Outputs:



1. Performance reports of various types – costs, item usage,

actual vs planned lead times and other measures of

performance.

2. Exceptions reports showing – deviations from schedule,

overdue orders, scrap, and so on.

3. Inventory forecasts indicating projected inventory levels

(both aggregate inventory as well as item inventory) in

future periods.

MRP OUTPUT REPORTSSecondary Outputs



1. Reduction in inventory (30-50% in WIP)

2. Improved customer service (late orders reduced by 90%)3. Quicker response to changes in demand and master

schedule.

4. Greater productivity

5. Reduced set up and product changeover costs

6. Better machine utilization

7. Increased sales and reductions in sales price.

BENEFITS OF MRP module 9:Tactical Decisions and Review


EVOLUTION OF MRP

Manufacturing ResourcePlanning

• Links up the closed loop MRP system with the financial systems of the company

(Links functions-Capacity planning-Inventory management-Shop floor control-MRP)

Improved computational efficiency of computers

Unrealistic M/c schedules, ignoring plant capacities

Not only plans priorities but provides feedback to executing the priority plan

AN IMPROVED ORDERING METHOD

PRIORITY PLANNING

CLOSED LOOP MRP

MRP II



Uses closed loop MRP Integrated System has MRP, Capacity planning, shop

floor, control, vendor scheduling etc. MRP system used to help plan sales, engg, production,

purchasing, etc

No shortage lists of override the production schedules.

System has MRP, capacity planning shop floor control, but no vendor scheduling

Used as a production control system

Needs help from shortage list

Inventory higher than need be

FOR CLASSES OF MRP USERSClass A (most advanced)

Class B



System used for inventory Ordering rather than scheduling

Scheduling by shortage list

Master schedule over loaded

MRP working in the data processing department only

Inventory records are poor

Master schedule, if it exists at all is overstated and

mismanaged

Relies on shortage list & expediting rather than MRP

FOR CLASSES OF MRP USERSClass C

Class D (beginner)



IT IS AN OPERATIONAL & FINANCIAL SYSTEM Company wide, Sales, Production, Engineering,

inventories, cash flows

All operating data expressed in money terms

IT IS A SIMULATOR

“What if” questions Simulate probable outcomes of alternative production

plans and management decisions.

ADDITIONAL FUNCTIONS OF MRP II



SUMMARY

Dependent vs Independent DemandMRP is useful for planning requirements of components and parts knowing end item demandMajor inputs to MRP include Master Production Schedule, BOM, Inventory and Lead TimesThe MRP logic goes through Explosion, Offsetting, Netting and Lot sizing



SUMMARY (Contd)

Major benefits of MRP include improved planning, lesser inventories, shorter lead times

However MRP does not integrate cost functions in different departments

MRPII (Manufacturing Resource Planning)

links the financial functions across the organization



4. Job Shop Scheduling



NATURE OF JOB PRODUCTION

Variety of jobs producedBoth nature and demand of jobs is unpredictableConsists of general purpose machinesEach job depending on its technological requirements, demands processing on machines in a certain orderJobs queue before machines or there may be idle machines



OBJECTIVES IN JOB SHOP SCHEDULING

Minimize total processing time or makespan

Minimize mean flow time

Minimize idle time of machines

Minimize mean lateness/earliness

Minimize mean tardiness

Minimize number of tardy jobs

Minimize mean queue time

Minimize the number of jobs in the system



COMPLEXITY OF THE PROBLEM

With n jobs to be processed on m machines the number of possible sequences is (n!)mn 5 10 15 20

m 2 4 5 5

(n!)m 14400 1,73x1026 3.8x1060 8.5x1091



PRELIMINARY DEFINITIONS

A job shop is characterised byNo of jobs (n)Number of Machines (m)Pattern of arrival of jobs (static/dynamic)Objective of scheduling(minimise

inventory, makespan, maximum tardiness, lateness…)

Sequencing rule (FCFS, LIFO, SPT, LPT, EDD ...)



DEFINITIONS-I

Job arrivaltime, ai

Start ofprocessing

Completiontime ,Ci

Waiting time, wi

Processing time, ti

Flow time, Fi = wi + ti = Ci - ai = Time job spends on the shop floor, waiting and being processed



DEFINITIONS II

Job arrivaltime, ti

Start ofProcessing

Completiontime, Ci

Due Date, di

Job lateness, Li = Ci- di (could be positive or negative)Job earliness, Ei = max (0, -Li)Job tardiness, Ti = max (0, Li)





N/1 PROBLEM

All sequences for the n/1 problem have the same makespan

Therefore other objectives are relevantmean flowtimeaverage inventorymean latenessmean completion time



RELATIONSHIP BETWEEN F AND OTHER VARIABLES

Fi = Ci -ai = wi + tiLi = Ci - diFrom these equations it is easy to see that a sequence that minimises mean F also simultaneously minimisesmean Completion timesmean Waiting timesmean Lateness



INVENTORY VARIATION FOR AN ARBITRARY N/1 SEQUENCE

Inventory

1 2 3 n-1 n

Job under process (Total Time T)

n

n-1

n-2

2

1

Avg inventory = [nt1+ (n-1)t2 + … 1 tn]/TAvg inventory I = Area /TSumming horizontal strips:Area = F1 + F2 + … +Fn= n avg Flow timeThus T(avg inventory) = n (avg flow time)



SPT vs LPT

n

T

LPT

SPT

LPT maximizes what SPT minimises



SPT RULE

Thus the rule that minimizes mean flow time also minimises the mean inventoryIt is seen that the SPT (Shortest Processing Time Rule) minimisesmean inventory mean flow timemean waiting timemean completion timemean lateness



AN EXAMPLE

Six jobs with processing times

4, 8 5, 9, 2 and 6 respectively

Due dates 10, 8, 12, 15, 9 and 20 respectively

Solution

The SPT sequence is 5(2), 1(4), 3(5), 6(6), 2(8) , 4(9)



EXAMPLE (Contd)

The SPT sequence is 5(2), 1(4), 3(5), 6(6), 2(8) , 4(9)

Completion (Flow Times) are

2, 6, 11, 17, 25, 34

Due Dates are job (due date)

5(9), 1(10), 3(12), 6(20), 2(8) , 4(15)

Lateness values are

-7, -4, -1, -3, 17, 19



RESULTS

SPT sequence: 5 1 3 6 2 4

Mean Flow time: 95/6 =15.833

Average Inventory : (6*95)/(6*34)= 2.794

Mean Lateness: 21/6 =3.5

Mean Tardiness: 36/6 =6

Mean Earliness: 15/6 =2.5



Task Processing time

Due date

Slack time

1 5 15 10

2 8 10 2

3 6 15 9

4 3 25 22

5 10 20 10

6 14 40 26

7 7 45 38

8 3 50 47

EXAMPLE 2 module 9:Tactical Decisions and Review


Rule Objective

Mean Flow Time

Weighted Mean Flow time

Mean Lateness

Maximum Tardiness

No of Tardy jobs

Mean Tardiness

SPT MFT,AVG INV,

23.9 29.0 -3.6 22 4 7.8

WSPT WMFT 27.0 27.5 -0.5 36 4 10.6

EDD Max job lateness/tardiness

32.0 31.7 4.5 9 6 5. 0

Hodgson No of tardy jobs

29.1 29.9 1.6 36 2 9.0

SLACK Mean tardiness (heuristic)

32.1 31,1 4.6 9 6 5,0



n/2 PROBLEM

n job 2 machine

Flowshop

Different sequences now have different completion times (makespan)

Therefore unlike the n/1 problem minimizing the makespan is a legitimate objective

Johnson’s Rule is commonly used to solve the problem

A B



AN EXAMPLE

Time on M/c A Time on M/c B

Job1 10 2

Job2 5 7

Job3 4 10

Job 4 12 8

Job 5 9 6



JOHNSON’S SEQUENCE

M/c A

M/c B



n/3 FLOWSHOP

Notion of dominance

M/c A

M/c B

M/c C

1 10 4 5

2 12 6 2

3 8 8 5

4 9 7 4

5 14 3 8



n/3 FLOWSHOP

When Dominance does not exist

M/c A

M/c

B

M/c

C

1 10 8 6

2 4 6 9

3 8 4 4

4 6 2 8

5 5 8 3



COMPUTATIONSM/c A+B M/c B+C

1

2

3

4

5



COMPUTATIONSM/c A+B M/c B+C

1

2

3

4

5



2/m/JJOBSHOP



PRACTICAL SOLUTIONS TO JOBSHOP TRAINING

Priority Dispatching Rules FCFS SPT EDD SLACK RANDOM LRPT (Least Remaining Processing Time) S/OPR (Min Ratio oof job slack time to the number of

operations remaining LCFS DS (Least Dynamic Slack) DS/PT Minimum ratio of Dynamic Slack to remaining

Processing Time



SUMMARY AND CONCLUSIONS

The complexity of Job Shop Scheduling

n/1 problem

n/2 flow shop problem

n/ 3 problem

2/m/job shop

General job shops

Simulation



5. Course Summary and Review



PROJCT MANAGEMENT (CONTENTS)

A. PROJECT MANAGEMENT (19 Lectures)a.1 Project conception and appraisal ( 5 lectures)Concept of a project, historical perspective, various issues: Time, cost, Quality, Project Identification and Screening: Various methods and frameworks, Factors for project appraisal, Criteria for project selection, Financial measures, some examplesa.2 Project Planning ( 4 lectures)Project representation, network concepts, Consistency and Redundancy in Project Networks, Activity on arc representation, concept of scheduling, Critical Path Method, Basic Scheduling with A-O-A, Activity on node representation, Basic Scheduling with A-O-N Networksa.3 Project crashing and Resource considerations ( 5 lectures )Probabilistic Scheduling: Uncertainty and probabilistic considerations in project, PERT, Three-estimate approach, Project Scheduling with Probabilistic Activity Times, Heuristic approach for Linear Time-Cost Tradeoffs in Projects, Resource Profiles and leveling, Limited Resource Allocationa.4 Project Implementation:( 5 lectures ) Considerations in implementation, Project Monitoring and Control with PERT / Cost, Behavioral and human issues, Team Building, Desirable attributes of project leader, computers in project management , Project Completion, Review



PRODUCTION MANAGEMENT(CONTENTS)b.1 Strategic decisions in production management (5 lectures )

Concept of a production system, historical perspectives on production system, a generalized model of production system, Concept of a life cycle, various stages in life cycle, implications for managerial decision making vis-à-vis life cycle, Financial Evaluation Of Production Related Decisions: Typical Performance Measures of a Production System, Criteria such as net present value, rate of return, Financial Evaluation of Capital Decisions, concept of a decision tree, evaluation of riskb.2 Product and process selection ( 4 lectures )Designing Products and Services: Factors for New product/service introduction, product mix decisions using linear programming approach, stochastic product mix decisionsb.3 Facility Location and Layout ( 4 lectures )Considerations in Plant Location, various models for location (gravity etc.), Process Layouts, Product Layouts, comparison of process and product layout, concept of Assembly Line Balancing, heuristic approaches for assembly line balancing (rank position weight etc.), Cellular Layoutsb.4 Production planning over the short Term Horizon ( 4 lectures )Demand Forecasting, various methods for forecasting (qualitative and quantitative), Aggregate Production Planning (APP), models for APPb.5 Tactical decisions and review (5 lectures )Inventory: necessity, and costs involved, deterministic inventory models, Dependant demand systems, Material Requirements Planning, Scheduling of Job Shops, various heuristics for scheduling, course review



Project and Production Management

Project Conception and AppraisalProject Management: An OverviewProject Identification and ScreeningProject Appraisal: Part IProject Appraisal: Part IIProject Selection



Project Management

Project PlanningProject Representation

Consistency and Redundancy in Project Networks

Basic Scheduling with A-O-A Networks

Basic Scheduling with A-O-N Networks



Project Management

Project Crashing and ResourcesProject Scheduling with Probabilistic Activity TimesLinear Time-Cost Tradeoffs in Projects: A Heuristic ApproachResource Profiles and levelingProject crashing with multiple objectivesLimited Resource Allocation



Project Management

Project ImplementationProject Monitoring and Control with PERT / Cost

Team Building and Leadership in Projects

Organizational and behavioral issues

Computers in project management

Project Completion and Review



Project & Production Management

Project Conception and AppraisalProject Management: An OverviewProject Identification and ScreeningProject Appraisal: Part IProject Appraisal: Part IIProject Selection

Project PlanningProject RepresentationConsistency and Redundancy in Project NetworksBasic Scheduling with A-O-A NetworksBasic Scheduling with A-O-N Networks

Project Crashing and ResourcesProject Scheduling with Probabilistic Activity TimesLinear Time-Cost Tradeoffs in Projects: A Heuristic ApproachResource Profiles and levelingProject crashing with multiple objectivesLimited Resource Allocation

Project ImplementationProject Monitoring and Control with PERT / CostTeam Building and Leadership in ProjectsOrganizational and behavioral issuesComputers in project managementProject Completion and Review



Production Management

Strategic Decisions in Production ManagementIntroduction to Production Systems and a Generalized Model of ProductionLife cycle of a Production System and Major managerial DecisionsPerformance Measures of a Production SystemFinancial Evaluation of Capital Decisions Decision Trees and evaluation of risk




Product and Process SelectionIntroducing New Products and Services I

Introducing new products and services II

Product Mix Decisions




Facility Location and LayoutPlant Location

Process Layouts

Product Layouts and Assembly Line Balancing

Cellular Layouts




Production Over the Medium Term HorizonDemand Forecasting: General considerations

Models for forecasting

Aggregate Production Planning I

Aggregate Production Planning II




Production Over the Medium Term HorizonDemand Forecasting: General considerations

Models for forecasting

Aggregate Production Planning I

Aggregate Production Planning II




Tactical Decisions over the Short Term HorizonInventory considerations and various factors

Inventory modeling

Material Requirements Planning`

Scheduling of Job Shops

Course summary and review



WHAT IS A PROJECT?

PURPOSEAn undertaking or venture to accomplish some objective or goal

STRUCTURE A set of interrelated jobs whose accomplishment leads to the completion of the project

COMPONENTSJobs or activities consume time and resources and are governed by precedence relations



PROJECTS AS AGENTS OF CHANGE

State A

State B

Alternative Projects(Paths)



FEATURES OF PROJECTS

Well defined collection of jobs

Generally non-repetitive, one time effort

Jobs interrelated through precedence

Jobs otherwise independent



PROJECT FEATURES (Continued)

Jobs consume time and resources

Coordination needed between

individuals, groups & organisations

Constant pressure of conformance to

time/cost /performance goals



A Project as a Production SystemMass production

Batch Production

Job Production

Q

Quantity to be Made

P (No. of Products or “VARIETY”)

Projects

1



LIFE CYCLE OF A PROJECT

Selection of the project

Project Planning Scope of work & network development

Basic Scheduling

Time Cost tradeoffs

Resource Considerations in projects

Project Implementation

Project Completion and Audit



Motivation in Introducing New Products

To satisfy need

For profit



CONTRIBUTION TO NEW PRODUCT IDEAS

Sales and Marketing (close touch with customer)

Top management (Active listener to visitor and customer feedback)

Production department (limited to production ease and economics)

Research and Development (prompted by new developments in materials & technology)



GENERATION OF NEW PRODUCT IDEAS

Brain storming (preferably by interdisciplinary team)

Team apprised of Company objectives & long term goals Current economic scenario Preferred field of activity (expertise) Approximate budget for new product

Each one generates ideas which are recorded without criticism or evaluation



EVALUATION OF NEW PRODUCT IDEAS

The evaluation of the new product ideas could be done on a number of criteria Likely demand and pattern of growth Ease of raw material availability Availability of Production technology Competition and likely market share Likely revenues and costs of operation The product life cycle

An example to illustrate this process is taken up next



AN EXAMPLE OF SCREENING OF IDEAS

Idea/

factor

Demand Competition

Ease of Raw Mtl

Cost of processing

Likely profit

Score

Computer peripherals

6 3 6 5 6 26

Fast food 8 6 9 7 5 35

Fashion clothing

4 5 7 4 4 24

Soaps and detergents

9 2 7 6 4 28Each factor evaluated on a scale of 1(least desirable) – 10 (most desirable)



Undesirable outputs

Economic/Social/Political

Environment -dynamic -uncertain

Transformation

FEED BACK

INPUT(S) OUTPUT(S)

-Men

-Machines

-Materials

-Money

-Information

-Energy ----------

Useful Goods or Services

(Effluents, Fumes etc.)

A PRODUCTION SYSTEM AS AN INPUT-OUTPUT SYSTEM



AN EXAMPLE OF SCREENING OF IDEAS

Idea/

factor

Demand Competition

Ease of Raw Mtl

Cost of processing

Likely profit

Score

Computer peripherals

6 3 6 5 6 26

Fast food 8 6 9 7 5 35

Fashion clothing

4 5 7 4 4 24

Soaps and detergents

9 2 7 6 4 28Each factor evaluated on a scale of 1(least desirable) – 10 (most desirable)



CUSTOMER NEEDS AND DESIRES

Desires Natural, as hunger,

shelter, love and security

Generated by exposure to circumstances and temptations

(as in advertisements on media, TV,neighbour)

Needs When a desire becomes

strong enough and warrants fulfilment, it becomes a need.

Customer demand is based on real or artificially generated needs

Needs are constantly changing



MORTALITY OF IDEAS

Screening Economic evaluation Development Testing Commercialization Number

of ideas

Time

35-40 ?

3-24 months ?



Price Quality

COMPETITION

Reduced Customerlead times satisfaction

NEW CHALLENGES IN PRODUCTION

• More producers• Demanding customers

Greater variety



PRODUCTION AS A PART OF THE SUPPLY CHAIN

Transformation process

Vendors Warehouses Retailers



CONCLUSIONS

This course has focussed on the Life Cycle issues in Projects and Production Systems

The Strategic, Operational and Tactical Issues in Projects and Production Systems have been discussed

The approach has been on conceptual issues as well as modelling of key processes and decisions







Documents

Project and Production Management Module 9 Tactical Decisions and Review Prof Arun Kanda & Prof S.G. Deshmukh, Department of Mechanical Engineering, Indian