Operation and supply management
Problems with this approach:
- Each month may not have the same amount of productive time: August for example has a period of
holiday, so a lower capacity
- A capacity level which seems adequate may only be able to supply products after the dd for them
has occurred: ex. if the period of under capacity occurs at the beginning of the year there is no
inventory to respond to the dd The cumulative representation of the dd reveals more info. It
shows that altought the peak of total dd is in September, the peak
of dd for productive days is in august. The dd per productive day is
more relevant to operation managers bc productive days represent
the time element capacity.
For any capacity plan to meet dd as it occurs, its cumulative
production line must always lie above the cumulative dd line.
When cumulative dd equals the cumulative capacity it means that I
finished the inventory. If dd > capcity, I am not able to meet the dd.
If dd < capacity, I have inventory.
LESSON 4: INVENTORY PLANNING AND CONTROL (CH.12)
WHAT IS INVENTORY?
Inventory = stored accumulation of material resources in a transformation system.
Inventory is just of transformed resources: raw materials, finished good, working process.
THE ROLES OF INVENTORY
Holding Inventory allow to respond quickly to an over-dd (speed), to be flexible (volume) and to hold
quality. Producing more allows also to reduce costs and it protects the firm from stock outs (dependability).
TYPES OF INVENTORY
The reasons for an imbalance between the rates of supply and dd at different points lead to different types
5 different type of inventory: they fulfill different functions.
1) Cycle inventory
It occurs bc one or more stages in the process cannot supply all the items it produces simultaneously. (in
I produce cycle inventory whenever I work in batches; why? Bc when I produce a batch I have a number of
identical products (100 red bikes, 100 yellow bikes,…).
The customer ask me just one bike but bc I have technical constraint that force me to produce I batches I
am forced to produce 100 red bikes even if my customer is asking only for 1. The bikes will be there until
some people ask bikes.
A baker for example produces in batches. I produce a batch of A, then I switch to B and finally in C. Bread
have different shapes, ingredients,… so the baker is forced to produce a batch.
The higher is the batch that I produce, the higher is the average inventory. If dd is constant over time, also
the inventory is constant over time. The average level of inventory is half queue.
Shorter batches will mean lower level of inventory.
2) Buffer inventory (safety inventory)
Its purpose is to compensate for the unexpected fluctuations in supply and dd.
Buffer or safety inventory is the inventory of materials, final products, working process that deal with
floating dd. I don’t know if tomorrow the dd is 12, 8 or 10. There is a variation that I cannot predict. The
part of inventory that I keep to meet the unpredictable dd is called buffer inventory.
EX. a retail can never forecast dd perfectly and it will order goods from its suppliers such that there is
always a certain amount of most items in stock.
3) De-coupling inventory
It is there to separate two different processes. It is useful in process layout: each area can be scheduled to
work relatively independently in order to max the utilization and efficiency of the equipment and staff.
It creates the opportunity for independent scheduling and processing speeds between process stages.
In a process layout I have a workshop (paint) and another (press).
The press workshop supply the metal to paint workshop. The press is an internal supplier, and paint is
internal customer. To separate the two different process I have an inventory of pieces of metal that I have
pressed and wait to be painted. If the two processes are separated by the de-coupled inventory, the press
workshop stops working and the paint workshop works. They can also work at different rates: the first has
a capacity of 100 units/hour and the second 50 u/h. Thanks to the inventory they keep working at different
rate, but given the fact that the press is faster, the inventory between the two will increase more and more.
4) Anticipation inventory
I keep this inventory to satisfy the dd that is predictable. It is used when dd fluctuations are large but
relatively predictable or when supply variations are significant (ex. freezing of seasonal food).
For ex. If a produce the pandoro I know that I have to start in November in order to satisfy the dd. Of
course there is a part of dd that I cannot predict, and I will cover it with buffer inventory.
I can predict the seasonality for example.
5) Pipeline inventory
Goods sold to the customer but not yet available to the customer. This inventory exists bc goods cannot be
transported immediately between the point of supply and the point of dd.
It’s important to define it bc I have responsibilities on the pipeline inventory. It exists also within processes
where the layout is geographically spread out.
DISADVANTAGES OF HOLDING INVENTORY
Inventory ties up money, in the form of working capital, which is unavailable for other uses
Storage costs: leasing, space, maintain appropriate conditions,…
It can be damaged / deteriorated /lost
It could be hazardous to store (ex. inflammable items) requiring specific facilities
It uses space
Administrative and insurance costs
When I manage the inventory I have to do some decisions (day-to-day tasks):
- How much to order?
How much components I have to buy from the supplier (optimal quantity, called economic order
- When to order? When should I buy from the supplier? (timing deicion). At what point in time should
the replenishment order be placed?
- How to control the system? What procedures/routines should be installed to make these decisions?
Different priorities for different stock items? How stock information should be stored?
THE VOLUME DECISION: HOW MUCH TO ORDER?
In making this decision we balance 2 sets of costs: holding the stock and order the items.
Stock holding costs = working capital costs; costs
that I have to sustain in order to keep my
inventory in my warehouse. In order to keep the
inventory I have to pay something. The higher is
the inventory, the higher is the working capital
and the higher will be the cost related to the
Holding costs are:
1. working capital costs: The working capital costs are the interests that I have to pay on cash spent to
buy the raw inventory that I have. The inventory absorbs cash but is doesn’t produce any cash.
Inventory always means financial costs. In order to reduce the period between “buy inventory” and
“sell product” I need to produce just in time, keep inventory near the dd
2. storage costs: renting, heating, lighting warehouse, insurance,…
3. obsolescence risk costs or deterioration
4. Stock out costs: misjudgment of the order quantity, we fail to supply the customer who will run
away if he’s external, or will cause problems of inefficiency/idle if he’s internal.
5. Operating inefficiency costs: a lean process would be better.
Ordering costs are
1. placing the order: every time an order is placed, a nb of transaction are needed. Costs ex. keep
info, pay supplier delivery,…
2. price discount costs: extra costs for small order rather than bigger which have a discount
Inventory profiles chart, the variation of the inventory level
Inventory profile = visual representation of the inventory level over time.
The picture shows a simplified inventory profile for one particular stock item in a retail operation. Every
time an order is placed, Q items are ordered. The replenishment order arrives in one batch instantaneously.
Demand for the item is then steady and perfectly predictable at a rate of D units per month. When demand
has depleted the stock of the items entirely, another order of Q items instantaneously arrives, and so on.
Under these circumstances:
The average inventory = Q/2 (because the two shaded areas in Fig. are equal)
The time interval between deliveries = Q / D
The frequency of deliveries = the reciprocal of the time interval = D / Q
THE ECONOMIC ORDER QUANTITY (EOQ)
How much should I order?
EOQ = approach to decide how much of any particular item should I order when stock needs replenishing.
This approach search to find the best balance between the adv and disadv oh holding stock.
policies for an item. Plan A, represented by the unbroken line, involves
Ex. two alternative order-quantity
ordering in quantities of 400 at a time. Demand in this case is running at 1,000 units per year. Plan B,
represented by the dotted line, uses smaller but more frequent replenishment orders. This time only 100
are ordered at a time, with orders being placed four times as often. However, the average inventory for
plan B is one-quarter of that for plan A.
To find out if the plan minimizes the total costs of stocking items, we need:
- C total cost of holding one unit in stock for a period of time (working capital costs + storage costs +
If the Ch increases, holding inventory is more costly. It costs me more to keep a unit of product in
my warehouse for an year.
My Ch increases when I have to change my physical layout/warehouse. The most important cost of
keeping inventory is the working capital cost. The working capital costs are the financial costs that
I have sustain to keep inventory and I still to cash from inventory. I have paid but I don’t have the
cash yet ) I pay an interest or a dividend). Some money are blocked in the inventory. If the interest
rate increases (more cost to borrow money) it becomes more costly to keep inventory.
- C total cost of placing an order (cost of placing the order + price discount costs)
o Total cost = holding costs + ordering costs
Holding costs =
Ordering costs = +
Total cost = C =
Minimization for Q (first differential) and equal to 0 :
Ch = 1 £ per item; Co = 20 £ per order
When the order quantity is low, the holding costs are low but the order cost are high bc the orders have to
be placed very frequently. After a point, however, the decrease in ordering costs slows, whereas the
increase in holding costs remains constant and the total cost starts to increase. In this case the EOQ = 200.
PAG 378 ES Libro
Why if the unitary order cost increase, EOQ increases as well.
If the dd increases I need more inventory.
GRADUAL REPLACEMENT – THE ECONOMIC BATCH QUANTITY (EBQ) MODEL
How much of a product should I produce internally?
This quantity is called economic batch quantity.
This decision is made upon an efficient quantity: I decide a volume that reduce the cost of total inventory.
EBQ = minimum cost batch quantity. Also known as the economic manufacturing quantity (EMQ) or
production order quantity (POQ).
Provided the rate at which the parts are made and put in inventory (P) is higher than the rate of demand
(D), then the inventory will increase. After the production of one batch, the machine will be reset and the
dd will continue to deplete (esaurire) the inventory level until production of the next batch begins.
Such a profile is typical for cycle inventories supplied by batch processes, where items are produced
internally and intermittently.
Two processes for make the bread: shape and bake. Bake is internal customer, while shape is internal
supplier. They are both internal processes. The bake workshop has a demand (d) equal to the pieces of
bread that it asks to internal supplier in terms of hours. The shape produce little p, that is the number of
piece of bread that it produces in 1hour.
p > d, so the internal production is major than the internal dd. We want to know the optimal batch that the
supplier has to produce before switch to another form.
3 shapes: ciabatte, mantovana, filoncino.
How many ciabatte I have to do before switching to mantovane and then filoncini? I cal this Q economic
The batch will be equal for all the types of bread.
The factor that determines how much to produce is the switching cost. If it cost a lot to switch from one
shape to the other, the ideal batch will be higher! If the switch is flexible, the ideal batch is lower.
The changing costs are similar to the ordering costs in the formula of the EOQ.
Inventory Inventory Inventory
in ciabatte in mantovane in filoncini
P = rate at parts are being made (p indicates the hourly rate)
D = rate at which dd is depleting the inventory (d indicates the hourly rate)
M = maximum stock level at the moment in which batch production is completed. Than inventory will
decrease at the rate D. Total cost = holding cost + order cost
Derivate, equate to zero
Ch is the same of EOQ.
Co are not transportation costs, because I have an internal process. The cost that really matter, is that of
In order to reduce the EBQ I have to reduce the ordering cost. This is key in lean management.
Denominator is always positive. Otherwise we have a negative batch (impossible).
If the switching costs is very high, the baker will have the same type of bread. There is a mismatch between
what the customer wants at what the baker produces.
If the true costs of stock holding are taken, the real EOQ is much smaller:
Reducing the cost of ordering can reduce the EOQ further:
Exercise on EBQ
We have a plant that produces bottles of water and it produces 3 different types/formats of bottles. The
demand for each of these 3 types is reasonably constant and 50.000 bottles/month and a month has 160
production hours. The filling process is 1.200 bottles/hr and it takes 2 hr to clean and reset between
different batches. The costs of these changeovers is calculated at 250 €/hr. Stock holding costs at
0,1 €/bottle/month. Find the EBQ.
RESPONDING TO CRITICISMS OF EOQ
With the EOQ model it was necessary to make assumptions:
- Stability of dd
- FIxed and identifiable ordering costs
- Holding costs expressed as a linear function
They are relatively true but they pose limits to the model: for example the assumption of a stedy dd is
erratic for a wide range of operation’s inventory problems (ex. bookseller can adopt an EOQ type ordering
policy for dictionaries, but the dd pattern could be erratic for the other books).
For what concerns the costs, the EOQ can create problems with specific orders. EOQ models need in any
case to be confronted with actual facilities. The real costs of stock in operations are not as assumed in EOQ
Models are descriptive and should not be used as prescriptive devices.
Some critics would argue that it fails to ask the right question. Rather than asking the EOQ question of
‘What is the optimum order quantity?’, operations managers should really be asking, ‘How can I change the
operation in some way so as to reduce the overall level of inventory I need to hold?’ The EOQ approach
may be a reasonable description of stock-holding costs but should not necessarily be taken as a strict
prescription over what decisions to take.
Is cost minimization the appropriate objective of inventory management?
Many organizations (such as supermarkets and wholesalers) make most of their revenue and profits simply
by holding and supplying inventory. Because their main investment is in the inventory it is critical that they
make a good return on this capital, by ensuring that it has the highest possible ‘stock turn’ and/or gross
profit margin. Alternatively they may also be concerned to maximize the use of space by seeking to
maximize the profit earned per square metre. The EOQ model does not address these objectives.
THE TIMING DECISION: WHEN TO PLACE AN ORDER
If I order too early I will have inventory, if I order too late I will be in stock out. This is the trade off.
2 different approaches: 1) CONTINUOUS REVIEW
I continuously check the level f
inventory until this level reach a
point that I call re-order point; when
I reach this point I place the order.
The ROP (re-order point), is the
point at which stock will fall to zero
minus the order lead time.
Alternatively we can define the ROL
(re-order level), level which the
inventory wil have reached when a replenishment order needs to be placed.
I start with an inventory of pasta of 400. In a week, it becomes 300. I set that when I reach 200 kilos, I re-
place the order. The second weak is called re-order point. The 200 is called re-order level.
The replenishment lead time is the time that takes to my supplier to supply me the pasta. The past arrives
at the 4 week, when I replace my inventory.
The batch that arrives each time is called the EOQ (economic order quantity). The batch here is 400.
I know everything: the dd (100 per week), the order lead time (2 weeks), EOQ, re-order level (200)
The 200 should cover 2 weeks.
A car manufacturer purchases windscreen wipers in batches of 3,000. the average daily demand is 500 and
the lead time is 4 days. Assuming the use of continuous review with no safety stock, what is the reorder
However this assumes that both the dd and the order lead time are perfectly predictable. But in the real
world, both dd and the order lead time fluctuate.
In these circumstances it is necessary to make the replenishment order somewhat earlier than would
be the case in a purely deterministic situation. This will result in, on average, some stock still being in the
inventory when the replenishment order arrives. This is buffer (safety) stock. The earlier the replenishment
order is placed, the higher will be the expected level of safety stock (s) when the replenishment order
arrives. But because of the variability of both lead time (t) and demand rate (d), there will sometimes be a
higher-than-average level of safety stock and sometimes lower. The main consideration in setting safety
stock is not so much the average level of stock when a replenishment order arrives but rather the
probability that the stock will not have run out before the replenishment order arrives.
From t1 to t2 the level will be different than before, so I will reach the re order level before because my dd
is steeper. In this 2 case I have to take an extra inventory because if not I go in extra stock.
The principle is balancing the cost of being in stock-out and the additional costs associated with higher
inventories (safety stock).
There is a distribution of the dd and I have to take into account it.
The lead-time usage distribution is a combination of the distributions which describe lead-time variation
and the dd rate during the lead time.
In this case, the first replenishment order arrived after t1, resulting in a lead-time usage of d1. The second
replenishment order took longer, t2, and demand rate was also higher, resulting in a lead-time usage of d2.
The third order cycle shows several possible inventory profiles for different conditions of lead-time usage
and demand rate. ES. Pag 386 libro
I have to consider the dd not as a deterministic variable but as a stochastic variable. We assume that the dd
is normally distributed around a mean (mu) and a standard error.
The probability of my being in stock out (not serve my customer) is 10%. 90% of probability to serve my
Given the service level (z) I find the re-order level that is: ROL = (average dd)*(lead time) + B.
Z is parameter related to service level. B =
ROL = re-order level = ?
More difficult than before bc here I have a stochastic dd.
ROL = (average dd) *(order lead time) + …
This is the part of the dd that is deterministic
ROL = … + B
The safety stock B is equal to z (a number related to the service level – if I want a high service level, z will be
high; if I want a low service level I will keep low safety stock) times (standard deviation of the dd – a
variable dd has a standard deviation very high).
If the high I have to keep high safety stock. The higher is the service level that I want to have, the higher
is the safety stock.
A sandwich company has an average hourly demand for 223 prawn sandwiches, a 2-hour lead time and a
normally distributed demand pattern with standard deviation of 45. The company wants a service level of
95% (z value = 1.65). What is the re-order point in this situation?
2) PERIODIC REVIEW APPROACH
Rather than ordering at a predetermined ROL, the periodic approach orders at a fixed and regular time
interval. SO the stock level could be found at the end of every month for ex.
T0, T1, T2 is the beginning of the month. I plan the re-order the first of the next year, without caring about
the level of the inventory. Very simple method.
How much do I order?
Here I order at different quantities, because the previous level of inventory influence the order. The
quantity in T1 is different from T2 and T3.in T1 there is an order that keep the inventory at the max level
(Qm). But obviously the order arrives after, when the some inventory is sold (during t1).
The replenishment order placed at t1 must be able to cover for the dd which occurs until T2 and t2.
How can I calculate how frequently I place the order?
I use the demand and the EOQ Numbers of orders = D/EOQ
Optimum time interval between orders = t = EOQ/D
When I choose the two approaches (continuos, periodic)?
- Continuous : when I have higher value products (it is expensive)
- Periodic: when I have low value product (it is not expensive)
When the supplier dictates quantity that I cannot change (Q is fixed = the supplier said me how much it can
deliver each time) I adopt the conituos method. So situation when batches are fixed by the supplier.
When the supplier does not fix the batch but fix the time (a supply a week), it is a periodic apprioach.
Example of periodic approach: buy two products at the same time, for example the toner and the printer
(complements). I cannot adopt the continuous bc the time of place the order is different.
SYSTEMS OF RE-ORDERING
(How to control my inventory).
Keep in track the level of inventory is important also in the continuous approach; in the periodic approach
is less important bc I place the order every week.
TWO BINS (BOXES) METHOD
The operator is front of him has two boxes. In the first one there is a quantity of items, in the second one
there is a quantity of items equal to the re-order level.
In this case is visible when I reach the re-order level: when the first finishes. Very simple to use.
Three bins method (not very used). Sometimes the safety inventory is stored in a third bin, so it is clear
when dd is exceeding that which was expected.
There are other systems that we call just-in-time but they work differently.
ANALYSIS AND CONTROL SYSTEM
SKU = stock keep in unit = every item that has its own code in the inventory. Each code has an SKU, an item
that I have to match.
Which codes are the most important in terms of the value that I have.
INVENTORY PRIORITIES : THE ABC SYSTEM
SO, I do and ABC analysis (or pareto analysis).
In any inventory which contains more than one stocked item, some items will be more important to the
organization than others. Some, for example, might have a very high usage rate, so if they ran out many
customers would be disappointed. Other items might be of particularly high value, so excessively high
inventory levels would be particularly expensive.
One common way of discriminating between different stock items is to rank them by the usage value (their
usage rate multiplied by their individual value). Items with a particularly high usage value are deemed to
warrant the most careful control, whereas those with low usage values need not be controlled quite so
rigorously. Generally, a relatively small proportion of the total range of items contained in an inventory will
account for a large proportion of the total usage value. This phenomenon is known as the Pareto law,
sometimes referred to as the 80/20 rule.
It’s adopted when you decide a priority. You dedicate more attention to things more important.
CLASS A ITEMS: The analysis sais us that the 20% of the items make the 80% of the value.
CLASS B ITEMS: The next 30% accounts for 10% of the value.
CLASS C ITEMS: 50% accounts for 10%.
Example: supermarket ES. PAG 390 Libro
For the A item I have to manage the inventory very carefully. For A item it’s important to min inventory
costs and min the risk to be in stock out.
For A item I will choose the continuous review approach.
Example: retailer Alì adopt a periodic review approach for the items that are less value. For pasta they place
big order for reducing the risk to be in stock out. They are increasing the holding costs, the inventory costs.
Adopting a continuous review approach is too expensive in this case but in the case of A items I can adopt
Although annual usage and value are the two criteria most commonly used to determine a stock
classification system, other criteria might also contribute towards the (higher) classification of an item:
- Consequence of stock-out. High priority might be given to those items which would seriously delay
or disrupt other operations, or the customers, if they were not in stock.
- Uncertainty of supply. Some items, although of low value, might warrant more attention if their
supply is erratic or uncertain.
- High obsolescence or deterioration risk. Items which could lose their value through obsolescence or
deterioration might need extra attention and monitoring.
Monetary value can also be used to measure the absolute level of inventory at any point in time. This
would involve taking the number of each item in stock, multiplying it by its value (usually the cost of
purchasing the item) and summing the value of all the individual items stored. This is a useful measure of
the investment that an operation has in its inventories but gives no indication of how large that
investment is relative to the total throughput of the operation. To do this we must compare the total
number of items in stock against their rate of usage.
Two ways to doing this:
1. calculate the amount of time the inventory would last, subject to normal demand, if it were not
replenished. This is sometimes called the number of weeks’ (or days’, months’, years’, etc.) cover of
2. calculate how often the stock is used up in a period, usually one year. This is called the stock turn
or turnover of stock and is the reciprocal of the stock-cover.
Inventory turnover = D/I
Stock cover = I/D
A stock cover too short means that we have not too much inventory. A stock cover too long means that we
have a too long inventory.
The inventory makes sense if you compare the inventory with the dd.
Since we are measuring a a certain time, the inventory can be higher bc of a peak of dd (seasonality to
INVENTORY INFORMATION SYSTEMS
What the system sais us is the historical inventory?
Most inventories of any significant size are managed by computerized systems. Common functions of
- Updating stock records: every time a transaction takes place, the position, status and value of the
stock changes. This info is important for operations managers who can determine their current
- Generating orders: how much to order? When? The computer calculate the quantity through the
- Generating inventory reports: help managers monitor inventory control performance.
- Forecasting: the inventory control system can compare actual dd against forecast and adjust the
forecast in the light of actual levels of dd.
PROBLEMS WITH INVENTORY SYSTEM
Computer based inventory systems are based on the perpetual inventory principle.
This is the simple idea that stock records are (or should be) automatically updated every time that items are
recorded as having been received into an inventory or taken out of the inventory. So,
opening stock level + receipts in − dispatches out = new stock level
any errors in recording these transactions and/or handling inventory can lead to discrepancies between the
recorded and actual inventory, and these errors are perpetuated until physical stock checks are made.
Causes of errors:
- keying errors: entering the wrong product code
- quantity errors: a mis-count of items put into or taken from stock
- damaged or deteriorated inventory not recorded as such, or not correctly deleted from the records
when it is destroyed
- the wrong items being taken out of stock, but the records not being corrected when they are
returned to stock
- delays between the transactions being made and the records being updated
- items stolen from inventory (common in retail environments, but also not unusual in industrial and
LESSON 5: ENTREPRISE RESOURCE PLANNING ERP (CH. 14)
Planning requires a series of interrelated decisions about the volume (quantity) and the timing of materials
needed. This is the basis of the foundation concept for ERP called materials requirement planning (MRP).
WHAT IS ENTERPRISE RESOURCE PLANNING (ERP)?
ERP = a complete enterprise wide business solution. The ERP system consists of software support modules
1) marketing and sales 8) process design and development
2) field service 9) manufacturing
3) product design and development 10) quality
4) production and inventory control 11) human resources
5) procurement 12) finance and accounting
6) distribution 13) information services
7) industrial facilities management
Integration between the modules is stressed without the duplication of information.
It is a software based on an integrated data base, so I adopt it in order to avoid the duplication of data. I
have a database feed and feeded by the different functions.
ERP systems allow decisions and databases from all parts of the organization to be integrated so that the
consequences of decisions in one part of the orga are reflected in the planning and control systems of the
rest of the organization.
It is the orga’s central nervous system: ERP integrates info from all parts of the orga. All the function should
have always the updated information.
Benefits of ERP:
There is visibility, the different function communicates better bc the software communicates across
It introduces some procedures, some standards in the firm
It should introduce best practices: focusing on business-process-based changes is an effective
mechanism for making all parts more efficient
There is better sense of control of operations that will form the basis for continuous improvement
It improves communication with suppliers, customer and business partners giving more accurate
and timely info
It is capable of integrating whole supply chains including suppliers’ suppliers and customers’
So better communication, within the firm and between the firms and other external partners. Better
processes, because everything or most of the process are standardized.
Other cool features of the ERP:
It is based on a client–server architecture; that is, access to the information systems is open
to anyone whose computer is linked to central computers.
It can include decision support facilities which enable operations decision makers to include the
latest company information.
It is often linked to external extranet systems, such as the electronic data interchange (EDI)
systems, which are linked to the company’s supply chain partners.
It can be interfaced with standard applications programs which are in common use by most
managers, such as spreadsheets etc.
Often, ERP systems are able to operate on most common platforms such as Windows or UNIX, or
Linux. ES. pag 440 Libro
But the integration of several database is difficult to achieve in practice.
Issues of ERP
The adoption of ERP can be very expensive
- The software can cost a lot
- To implement the software is costly: train people, pay consultant, change my procedures
Attempting to get new systems and databases to talk to old systems can be very problematic
Problems of compatibility with the current business process and practices
Problems in installation process: big bang (the day when I change the whole system); gradual
substitution (by introducing a module at the time)
Problems in organizational aspect (change management process). We should consider not only
technical aspects but also this. It requires the commitment of the firm that communicates to the
top of the organization.
ERP CHANGES THE WAY COMPANIES DO BUSINESS
The major problem to adopt ERP is the compatibility with the current business process. So, it is important
to define if ERP fits with it.
If the processes does not fits, the company can:
- Change the process to fit with ERP
- Change the ERP software in order to fit with the processes
Both these options involves costs and risks. Change the process for example can entail new errors, and
adapting the software can slow down the project and introduce dangerous software bugs in the system. It
would make it difficult to upgrade the software later on.
Why did companies invest in ERP?
Some are attract to turn the information systems into a “smooth running and integrated machine” which
increases efficiency. Some others invest in ERP only not to be in disadvantage with competitors.
Perhaps the most important justification in adopting ERP is the potential it gives the organization to link
with the outside world. For example it is much easier for an operation to move into internet-based trading
if it can integrate its external Internet systems into its internal ERP systems.
However when ERP has been created, there was not such a spread e-commerce phenomenon, so it is not
so allowance for the need to communicate with internet –based communication channels.
Anyway now, the ERP system must be related with the company web-site bc suppliers and customers want
to read information over there.
Therefore web-integrated ERP systems are often complex and need periodic maintenance. This can means
that every time the ERP system is taken offline for maintenance, the web site also goes offline. So
companies configure their ERP and e-commerce links in such a way that they can be decoupled so that the
ERP can be periodically shut down without affecting the company’s web presence.
SUPPLY CHAIN ERP
The step beyond is integrating all the ERP and similar systems along the supply chain. This is very
complicated, bc not only different ERP systems have to communicate, but they have also to integrate with
other types of systems.
For example marketing uses CRM systems and it is too difficult integrate them with ERP.
Anyway, even if there are complications and costs, the benefits are a lot: the costs of communication
between supply chain partners could be reduced, potential to avoid errors is significant, transparency.
However one blocked information can block all the information system all along the chain.
IMPLEMENTATION OF ERP SYSTEM
Integrating lots of functions into a single system it very difficult and the majority of times it entails a change
in the way people do their job.
One of the key issues in ERP implementation is what CSFs should be managed to increase the chances of a
successful implementation. In this case CSFs are those things that the orga must get right in order for the
ERP system to work effectively.
Finney and Corbett distinguish between broad strategic CSFs and more project specific tactical CSFs.
The implementation must be considered, obviously, at the entreprise level. Therefore there will be many
different stakeholders to consider at the same time. That is why implementing ERP system is always going
to be an exercise in change management.
Some other issues that are underestimated:
The total cost
The time and effort
The resources from business and IT function
The necessity of level of outside expertise
The changes required
MATERIALS REQUIREMENTS PLANNING (MRP) – (CH. 14)
We now focus on the production module, the MRP (material requirement plan).
The basic aim of this module is to decide the volume and timing of materials flow in dependent dd
The first inputs to materials requirements planning are customer orders and forecast dd.
We start with the dd and on the base of this dd we calculate all the requirements of all the components
needed to satisfy the dd. Our time horizon is probably two months and our unit of analysis is one week (we
plan the production on a weekly bases). The dd is either the forecast or the actual orders of the customers.
Starting from this dd we use a backward approach: all the requirements are derived from and dependent
on, this dd information.
The main input is the master production schedule (MPS). It is fed by two things, forecast dd and customer
orders. Using these 2 info and some assumptions I build my MPS.
Using info from the bill of materials and the info in the inventory records, I produce the outputs which are
the purchase orders, workers orders and material plans.
MASTER PRODUCTION SCHEDULE (MPS)
Let’s start from the MPS.
MPS = it forms the main input to materials requirements planning (MRP) and contains a staetement of the
volume and timing of the end-products to be made.
It drives all the production and supply activities that eventually will come together to form
the end-products. It is the basis for the planning and utilization of labour and equipment,
and it determines the provisioning of materials and cash.
I always start from the dd. The total dd is the sum of forecasted dd and actual orders. The more distant is
the point in the future that I am considering, the higher is the part of total dd given by the forecasted dd
and lower is the part given by the actual order (and vice
Ex. dd of next week, probably this dd is given by order that I
already received. If I consider the dd of July, then the dd will
be given by forecasted dd.
The process of MRP1
Explode the master production schedule.
Identify what parts and assemblies are required.
Check whether the required parts and assemblies are available.
For every part or assembly that is required, but not available, identify when work needs to be
started for it to be made available by its due date.
Generate the appropriate works and purchase orders.
Repeat the process for the next level of the bill of materials.
THE MPS RECORD
The dd row includes sales orders and forecasts. The MPS row defines how many finished items need to be
completed and available in each week to satisfy dd.
How to calculate a MPS?
Example: first approach “chase” approach
30 washing machines. The first week I plan to sell 10 washing machines, so the inventory will be 20. It is so
until there will be 0 in my inventory.
In the 4 week I do not have washing machine in the inventory, so I have to produce 10.
In the 5 week I have a dd of 15 washing machines, so I have to produce 15 washing machines.
The MPS sais me what I have to produce and when. I know that I have to produce 10 units, by the end of
the 4 week and so on.
After the 4 week I produce exactly what I need.
The MPS is chasing dd and so adjusting the provision of resources.
1 year: 30 – 10 + 11 = 31
Example: chase the dd. Each week I produce the same amount of the dd ( sp MPS = 10, 10, 10, 15,…). My
level of inventory will not change over time.
Example: second approach “level” MPS
I want to produce the same amount each week, I want to level my production to smooth out peaks and
troughs. It generates more inventory than the previous approach.
I have to produce a quantity that satisfies my dd each week.
I sum the entire dd, minus 30, divided by 9 = 11.
(10 + 10 + 10 + 10 + 15 + 15+ 15 + 20 + 20 -30)/9 = 11
Example: level MPS including “available to promise record” ATP
What I can promise to deliver to my customer. It shows the maximum that is still available in any one week,
against which sales orders can be loaded.
First of all I calculate the MPS, in this case I adopt a level MPS (produce 11 each week). I level my
production, I calculate the availability as before.
The sales orders are the orders already received from my customer.
Even if we do not have an MPS the first week, we have a ATP.
How is an ATP calculated?
On hand inventory + MPS in the first week – sales orders: 30 + 11 – 10 = 31
ATP (i) = MPS (i) + until the next MPS
Example of ATP: a plant its production (MPS) with batches of 30 unitswith a safety stock of 10 units. The
forecast and sales orders for the next 5 weeks are provided in the following table. On hand inventory of
finished product is 10 units. Compute MPS and ATP
We can produce batches of 30 units at the time.
THE BILL OF MATERIALS
The MPS sais when we need to have the final product finished in order to satisfy the dd.
This is a push approach because the requirements are calculated on the base of forecast of the sales.
Everything is pushed by forecast.
Calculate the MPS in just a first step. The product is more complex!
In order to produce 30 bottles of water I have to produce the bottle, the cup, the plastic. We have to better
scheduling everything and better
- How many bottles I need and when?
- How much cups I need and when?
- How much water and when?
The information of the quantity and the structure of the product is given by the bill of material.
The bill of material give the structure of the product. The “board game” is the level of the whole product
but the bill has other levels:
- The first level gives me the materials that I have to assemble together to have the final product,
some are created by the firm, some others are bought out
- The second level gives me the components that I have to buy from external suppliers, components
to create the “box base assembly” which is created inside the firm
So I buy everything except the “box base assembly”, but for it I will buy all that is in the second level.
referred to components that I internally produce.
Ex. the lead time for part B is 2 weeks (the moment I order B and the moment I receive it)
Part D LT = 1 week (moment that I lunch the batch and moment I produce it are 1 week).
Purchasing time = referred to components that I purchase externally
The MPS is related only to the product.
The MPS of the final products drives all the requirements of the first level.
Written exercise: components structure 1,2,3 (in blu)
MRP NETTING PROCESS
The master production schedule is ‘exploded’, examining the implications of the schedule through the bill
of materials, checking how many sub-assemblies and parts are required. Before moving down the bill of
materials to the next level, MRP checks how many of the required parts are already available in stock.
It then generates ‘works orders’, or requests, for the net requirements of items. These form the schedule
which is again exploded through the bill of materials at the next level down. This process continues until
the bottom level of the bill of materials is reached.
MRP CAPACITY CHECKS
The MRP process needs a feedback loop to check whether a plan was achievable and whether it has
actually been achieved. Closing this planning loop in MRP systems involves checking production plans
against available capacity and, if the proposed plans are not achievable at any level, revising them All but
the simplest MRP systems are now closed-loop systems. They use three planning routines to check
production plans against the operation’s resources at three levels.
Resource requirements plans (RRPs) – involve looking forward in the long term to predict
the requirements for large structural parts of the operation, such as the numbers, locations
and sizes of new plants.
Rough-cut capacity plans (RCCPs) – are used in the medium-to-short term, to check the
master production schedules against known capacity bottlenecks, in case capacity constraints
are broken. The feedback loop at this level checks the MPS and key resources only.
Capacity requirements plans (CRPs) – look at the day-to-day effect of the works orders
issued from the MRP on the loading individual process stages.
LEAN MANAGEMENT (Ch. 15,18)
The most difficult part in lean management is maintain the transformation of the processes over time. It’s a
radical change in the behavior of all the people within the firm.
Lean operations, lean philosophy, lean management, lean approach are all synonymous.
The key principle of lean operations is to move towards the elimination of all waste in order to develop an
operation that is faster and more dependable, produces higher quality products and services and above all
operates at low cost.
So, the aim of lean management is to:
1) Reduce the costs (more efficient)
2) Increase the quality
3) Reduce the time
What is new, is that in lean I achieve these 3 objectives simultaneously. The three objectives are
complements. Traditionally they are seen in trade off. Example: I can reduce the cost if I reduce the quality;
I reduce the time if I increase the costs (by new machines).
If I am able to reduce the waste I am able to reduce the costs, increase quality and decrease time
simultaneously for lean.
Waste = MUDA (Japan word)
Lean management in fact comes from the Toyata production system (TPS).
The challenge of lean is to
1. Perceive the waste
2. Identify its root causes
3. Eliminate it (if I eliminate the causes the wastes won’t appear in the future).
The traditional approach assumes that each stage in the process will place its output in an inventory that
buffers that stage from the next one downstream in the process. The buffer is there in order to isolate the
operations: if A stops to work, B can continue. The greater is the inventory, the higher is the isolation
degree between the operations.
This insulation means inventory and higher TT bc items spend time waiting in the buffer inventories.
But the biggest issue is that if a problem occurs in A, some time passes before we observe it and we
thought that there is a problem in the entire system.
In lean management, the items are processed and then passed directly to the next stage “just in time” for
them to be processed further. Problems in the operations are noted immediately and they are solved by
everyone. This increases efficiency.
Anyway in lean every stoppage will affect the whole process. This leads to a lower capacity utilization, at
least in ST.
Waste is defined as an activity that does not add value
We need a framework to identify wastes. There are 7 types of wastes defined by Taichi Ohno (Toyota).
The most dangerous waste is
1) Overproduction: produce more than requested; produce ahead; produce something different from
what my customer wants. Producing more than is needed by the next step of the process.
By overproducing I produce all the other wastes.
2) Waiting time: the man that waits the machine, wait for approval, monitor the machine.
3) Transportation: when I move around my plant goods, items, materials, components. For example a
work lift to move a pallet. The driver of the work lift is not adding any value: the customer doesn’t
pay more bc I have a good work lift.
4) Process: activities that do not add value to the product, means controls/audits/set-ups,.. I have to
test the product to see in the product is good, but this is a waste.
5) Inventory: financial costs; I have paid my suppliers but I still receive the cash from my sales. This
negatively impact on Cash Flow.
6) Defective goods: quality waste.
7) Motion: components that are far away from the machine/copier, documents, that are out of reach.
If I have all visible, I do not waste time to keep an object.
Waste walk (video): the management take a walk in the plant to identify the wastes. But you have to know
what wastes have to be considered.
- Inventory: warehouse where there is waste of excessive inventory. It means we have overproduced
- Waste of transportation: the worker is not adding value to the goods he’s transporting
- Waste of waiting: workers who are talking and they seem not to be sure of what to do
- Waste of motion
- Waste of processes: the worker is doing a quality check, probably he’s cleaning the piece. Also the
cleaning activity does not add any value. If we do differently the things we do, we can avoid this
- Waste of defects
- Waste of overproduction: produce pieces that
Everything should be visible in lean management, just seeing
your plant. Making the problem visible is the most important
step of the problem solving.
You have to see the problems to solve them.
Example of the boat at the rocks: reduce the level of inventory (waster) to reveal the operation’s problems.
Why mass production is not longer the best choice?
The increasing speed of change in the business environment requires flexible firms. Customer desires
become more and more individual.
The greater global competition boots firms to have:
- Higher efficiency
- Increased innovation and process speed
- Higher flexibility within processes
- Higher quality requirements
Why lean production is better?
Example of a table lean: What is most difficult
is to SUSTAIN this
History of lean
The term lean has been identified by 3 scholars who studied why Toyota was better than other automotive
companies. In 1980 they published a book where the term lean is defined.
Lean = Toyota was doing things only with the necessary.
5 years later the book “lean thinking” introduced what lean is and the 5 principles of lean.
Productivity gap between USA and Japan at the beginning of 80’s
5 PRINCIPLES OF LEAN
1. DEFINE VALUE
2. MAPPING VALUE
5. PERFECTION (KAIZEN in Japanese)
Better explanation in “Lean Thinking summary”
When you start a process you have to define the value from the point of view of the customer. Waste is
what the customer won’t pay for. So we identify the wastes putting the head of the customer. You define
value from the customer viewpoint.
So, we should answer the question, “what is the customer looking for?”
- Quick responses to requests of modifications?
Ex. mcdonald’s : the most important value for the customer is the time. In Zara the customer wants cheap
This is a strategy element bc each firm can answer this question differently.
In order to identify the value, I ask:
1. Why is this necessary for the customer?
2. Which processes would not be noticed by the customer if we did not do them?
3. The more we do of this activity, the happier is the customer and he pays me for that?
Mapping value (VSM = value stream mapping)
Map the sequence of activities that you are doing to produce a product or the service. You map the activity
that you are doing currently and you identify the waste.
You identify the activities that create values, activities necessary but which not increase value and
You will improve the value adding activities, minimize the necessary and remove the unnecessary activities.
Map: value stream mapping.
From the raw material to the final product.
Mapping the production flow:
Continuous flow means make one, move one. From the logic of EBQ/EOQ to one piece flow. You should
not produce in batches because your production never stops.
Our plan should be a line.
The problem is that is not possible to create flow. The
problem of connecting two activities is the inventory
and the synchronization of workers.
The plant should produce only on the base of the requirement of the customers. We should produce only
according to the dd, when it’s needed. You do not produce anything until your customer triggers a need.
This means to subordinate production upon the arrival of the customer demand.
Nothing is produced by the upstream provider until the downstream customer signals a need.
Ex. mcdondald’s: between the kitchen and the casher there is inventory. The kitchen starts produce one
bigmac when one part of inventory is consumed. So the customer does not have to wait. So we never
produced anything if it is not asked from the dd.
So we go from a push logic to a pull logic
The most difficult to implement.
The perfection aim is joined to continuous improvement (kaizen).
We should never be happy about our plant.
But the improvement is not a random way, there should be a continuous improvement. We want to
improve each process, each day.
How to pursue perfection? Breakthrough improvement assumes that the main vehicle of
improvement is major and dramatic change in the way the
Ex: new efficient machine in a factory, redesign of a computer
based hotel reservation system, introduction of an improved
degree programme at university.
Such improvements are expensive and they usually involves
changes in technology. In the picture, the squared line would
represent the planned breakthrough improvements but the
waved line is more representative of what actually occurs.
Breakthrough places high value on creative solutions: it
encourages free thinking and individualism
Continuous improvement (Kaizen)
Kaizen = Kaizen means improvement. Moreover, it means improvement in personal life, home life, social life
and work life. When applied to the workplace, kaizen means continuing improvement involving everyone –
managers and workers alike.’ Approach to improve performance which assumes many
small incremental improvement steps.
Ex: modify a machine, redefine the course to smooth the
study of the students.
Continuous improvement is not concerned with promoting
small improvements per se. It sees small improvements as
having one significant advantage over large ones.
It is important not the rate of improvement, but the
momentum. It doesn’t matter if the improvements are
small, it matters that they occurs.
In the picture the PDCA cycle is repeated to create continuous improvement.
The improvement cycle represents the repeated and cyclical questioning. It starts with the Plan stage,
which involves an examination of the current method or the problem area being studied : this involves
collecting and analyzing data so as to formulate a plan of action which is intended to improve performance.
The next step is Do: this is the implementation stage during which the plan is tried out in the operation (this
stage can involved a mini PDCA cycle).
Next is Check stage where the new implemented solution is evaluated to see whether it has resulted in the
expected performance improvement. Finally there is the Act stage where the change is consolidated or
standardized if it has been successful. If the change has not been successful, the lessons learned are
formalized before the cycle starts again.
Tools to continuous improvement:
1. Input-output analysis
2. Flow charts: used to understand the priority of improvement.
3. Scatter diagrams: to analyze if there is a relationship between two sets of data. It is not necessary a
4. Cause-effect diagrams: method to search for the root causes of problems. They do this by asking
what, when, where, how, and why and add some possible answers.
5. Pareto diagrams: the aim is to distinguish between the vital few issues and the trivial many. Pareto
analysis is based on the phenomenon of relatively few causes explaining the majority of effects. For
example, most revenue for any company is likely to come from relatively few of the company’s
6. Why-why analysis: it starts by stating the problem and asking why that problem has occurred. Once
the reason has been found, I ask why the reason has occurred, and so on until no answer to the
question “why” an be generated.
5 why technique: composed by 5 questions
Q1: Why did the machine stop?
A1: Because the fuse blew due to an overload
Q2: Why was there an overload?
A2: Because the bearing lubrication was inadequate
Q3: Why was the lubrication inadequate?
A3: Because the lubrication pump was not functioning right
Q4: Why wasn’t the lubrication pump working right?
A4: Because the pump shaft was worn out
Q5: Why was the shaft worn out?
A5: Because there was no filter attached where it should be, letting metal-cutting chips in
You do not have to stop at the first answer bc in two weeks you would have the same problem. In the first
question you identified an overload, so you continue in this way.
Perfection and the involvement of everyone
Lean is called the respect for humans system bc it encourages team-based problem solving, job
enrichment, job rotation and multi skilling. The intention is to encourage a high degree of personal
responsibility, engagement and ownership of the job.
The basic working practices are used to implement the “involvement of everyone” principle:
- Quality of working life
- Total people involvement: the staff take more responsibility and they are expected to participate in
activities such recruitment, deal with suppliers/customers, budgeting, review…
The improvement of perfection requires the involvement of everyone. It’s easy to involve the managers
and the supervisor; it’s less easy to involve the operators. I should help the operators and coach the
operators in continuous improvement.
We have to organize in such a way that everyone has the possibility to improve.
Video Visa: what could we observe?
- the operations are transforming the customers. Since the customer is the transformed resources,
he never stops until he goes out. From the moment I enter the shop to that I exit, I transform the
We know that when we can not flow, we should pull. If we have an inventory where there is
inventory, we should pull.
- Perfection bc there is a standard in play in the operations. The standard is the visa. Whenever we
go out of standard (the guy pays in cash) that is a problem and we should stop to sign out the
problem. It’s not possible to improve if we do not have a standard. We have a problem when
something occurs when it goes out of the standard.
Here there is perfection or continuous improvement, or kaizen.
- Value: this is a very focused organization, and it is focused on what the customer wants, means
LEAN PRODUCTION TECHNIQUES
The techniques are something that implement the principle. But they are just techniques. The principles are
and they can be applied to all the firms. What are not universal are the techniques. They are
different bc each firms should find each own techniques. These techniques are context based (based on the
Toyota production system “House”
Techniques organized as a house.
We start with the roof: quality, cost and time. We have to achieve these three performances
simultaneously. By reducing waste, cost, time and increase the quality simultaneously.
Then we have to pillars: just in time and jidoka).
Then there is stability, the foundation of the house. We cannot built a lean house if we do not have stable
processes. We always start to build stability in our processes.
First pillar: Just in time
JIT means getting the right quantity of goods at the right place and the right time. If we want to produce on
the base of this principle we have to produce according to
- Tack time
- creating a single piece flow
- pulling of material from upstream processes
while keeping inventory at minimum, at established levels.
1. improved overall productivity and elimination of waste
2. it reduces inventories to a minimum and it allows saving direct inventory carrying costs
3. cost-effective production while using a minimum amount of facilities, equipment, materials and
4. reduced delivery lead times
5. exposes problems and bottlenecks caused by variability
6. JIT is accomplished through the application of elements that require total employee involvement
How to create JIT? Flow
We can’t introduce JIT if we do not have processes that are CAPABLE and AVAILABLE.
CAPABLE = processes that produce right each time (quality at the source). They are good processes in the
sense that they produce good products and they produce good products each time.
AVAILABLE = processes always available to the operator. In a case of a machine, it should work, it should be
available. It is not a process which works always, but that works whenever it is supposed to work.
Conventional functional layouts create pipeline inventory, delays, movement costs and other forms of
waste. In JIT approach
- The operation are arranged to achieve a logical flow (cell, line)
- Equipment is close together to reduce cost of movement
- Often “U” shaped to increase visibility and teamwork.
These 3 point emphasize simplicity, flow, visibility, morale.
1° technique: Cell layout (circulation pump
Made of different stations where there are
teams of operators. The flow never stops until
the pump is finished. We do not have
inventory that de-couples the stations.
In the cells there are machines, but since the
cells are small we should use small machines
and machines that are closed to each other
(video Toyota where the operator is moving
in the cell).
Advantages of a cell:
- throughput time is low (from the moment that the piece start to be worked, to the moment when I
have a final bumb is low) bc the piece does not wait in inventory.
- Logistic advantage: what I need is put outside the cell. Within the cell there are no obstacle, they
have a free space room.
“The pace” of the flow: Tackt time= available time/ dd
It is the consumption rate of the customer
It is a reference to determine the production rate
We call the tackt time the required cycle time. Not the cycle time, the required cycle time.
The actual cycle time does not depend on the dd. It is the time one product and the following product
(speed). It does not depend on tackt time.
If we have a CT that is higher than the tack time, then we have a problem bc we cannot meet the dd. Vice
versa, we overproduce bc we are faster.
We ant a CT as closed as possible to tackt time (theoretical tackt time higher 10% than CT).
SO the tack time is very important bc on the base of it we organize our operations.
Flow implementation: the aim is cycle time = tackt time (balancing the line)
When we calculate the tack time to implement the cell we have the problem to put different station
together bc they could have different time.
The dashed line is the tack time, and we observe the imbalance. But each station must have the same time
of the other stations. We should find a good balance between the activities.
Tackt time = 40
Work content = 120
2° technique: small machines
The other physical requirement o a manufacturing cell is to use small machines. The conventional approach
is to purchase large machines to have economy of scales. The concept is that if we are large we are more
Anyway if I have a big machine, it is difficult to set up and change. Moreover they produce large batches,
which lead to inventory.
We have to have smaller machines. Advantages:
- using several small machines allows simultaneous processing
- flexible scheduling options
- easy to move (layout)
- quick set-up
- planned maintenance easier (more robust)
3° technique: SMED
However, whenever I change a part of a plant (a die = ) I do an activity that is waste. The set up is a
necessary activity but is a waste, so I have to reduce as much as possible the set up time.
The bunch of techniques that has been introduced is SMED = single minute exchange die. It is about
increasing productivity by decreasing the time of set up. This time is from the last good product that I have,
to the first good product that I have from the new batches. It is possible that the new products are not
good. So I have to wait for a good one.
I want this time to be as low as possible, so I have to introduce SMED.
Example of car and wheels (Ferrari): what things remarkable?
- Standard work
- SOP standard operating procedures
- 5s = everything at the right place
- All you can do before the car stops, you do: when the car stop you do what you can’t do when the
car is not there.
How to implement SMED?
1. Measure and analyze changeover activities
2. Separate external and internal activities
External activities are performed while the process is continuing
Internal activities are performed while the process is stopped
3. Primary goal is to change all internal activities to external ones
Pre-pare activities or equipment
Make the changeover process flexible
Speed up the required changes of equipment
4. Practice changeover routines
4° technique: production leveling (heijunka)
This is my weekly leveling. Heijunka is the process through which the production volume and mix is
distributed evenly (livellato) over time. An even mix of products let me avoid:
1. Long lead times
2. Increasing inventories
3. Greater opportunity to defects
4. Excessive idle time and/or overtime
My EPE (every part every) 1 week. I am able to produce all the products in one week. The key to reduce the
EPE is reducing the production batches. If I am able to produce the production batches maintaining the
same mix (probably the market requirement batches) in one day for example, I reduce the average
inventory and I am able to respond better to the customer (I produce on Monday what the customer wants
In the example each day has the same production mix as in the other days.
If I am able to reduce the set up costs, the EPE will be of one shift, EPE of 4 hours or one hour.
Example: if I am producing cars: one with the roof and one without. I buy the roof from a supplier. First I
produce all the car without the roof and then I switch to that with the roof. I start requiring the roof only
when I need it (whe I start producing the car with the roof). Probably I will find myself in stock out, bc I do
not have enough roof (inventory). So this is not level production.
I should be able to produce 1 car with a roof, 2 without. This means level my production. In this way I will
reduce the inventory and I level the requirements of the inputs.
So before introducing a pull principle is important to level my production of final product.
5° technique: pull logic/kanban
The use of kanbans is one method of operationalizing pull control.
I go from a push approach to a pull approach. Each stage of the process has to produce a good ONLY if an
information from downstream stage/customer triggers the production.
Stage B produce only if stage C is asking something, so the throughput time will be much lower. In this way
I synchronize the dd with the production and I reduce the first waste which is overproduction.
How do I do this?
I introduce the Kanban.
Request is based on consumption of a controlled inventory:
If I can’t balance the two processes in one line (I can’t flow) I
should introduce a supermarket (controlled inventory)
between process one and process two. The first stage should
produce only if process 2 dd, even if my forecast or my plan
tell me that I should produce (I do not always met the
Kanban: We get reed of the logic of the MRP (where material is pushed according to a schedule) and we
adopt the Kanban logic. Kanban means card and this card contains the information on what I should
produce. Products are pulled through the production process by requests called “Kanban cards”.
Kanban is a simple way to make a pull system working, ie a system to start production (or purchasing) of a
component only when required by the dd Kanban is sent from one production stage to the upstream stage
to signal that components are needed.
I can be also in other forms, such as a plastic markers or a coloured ping pong ball.
Example of Kanban: small card with several information. It is referred to a part/component and so it
contains the number or the production code. It could contain also the picture of the component. The
second information is the quantity: since the box contains more components, the card indicates the
number of components. It is describes the type of container and the equipment that produces this
component: press 12 is the internal supplier. The assembly line is the internal customer.
The supermarket address indicates where I can find this component (the place).
This is an example of supermarket, whit several boxes with their kanban.
Let’s say that we have 3 boxes in the supermarket. The more boxes we have the more kanban we have.
So, what we need to remember about kanban:
1. Card should be attached to a product container and contain essential info (part nb, quantities,…)
2. Each kanban is associated with a specific standard quantity/product
3. Used often with fixed sized container
4. The nb of kanban is associated with the quantity of pipeline inventory
5. A kanban system can work also without tags (e.g. with kanban squares operations are activated
when a specific space is empty)
6. It is an instruction for the preceding process to send more
7. It is a tool for kaizen (continous improvement): Toyota’s rules state that the nb of kanbans should
be reduced over time
8. It is a visual control tool to show up areas of over-production and lack of synchronization
Therefore, the Kanban system controls the logistic/production flow within internal operations and between
internal operations and suppliers and customers.
We can have 3 different types of kanban:
- Move or conveyance kanban
- Production kanban
- Vendor kanban
Two kanban system: Production kanban
Production kanban signals the need for the production of more parts to the upstream production
workstation. It is usually associated with a Kanban system with 2 cards (production and transportation).
We have an assembly line. At the beginning of the line we have some boxes with their kanban: move
A worker take the move kanban and he switches with the production kanban. It send it to the press, this is
the signal that the box should be produced. Each kanban should always be attached to a box. We should
not find a kanban without a box.
The supermarket is the inventory, but it is a controlled inventory bc I have no more than 10 boxes for
example. I produce only when something is consumed. Over time my aim will be to reduce the
supermarket. The nb of kanban should be reduced over time. If I am faster to produce, I need lower nb of
kanban in my supermarket. So if I become faster I can reduce the nb of kanban. It says me how efficient I
am: if I have a lot of kanban I am not efficient; if I have little nb of kanban I am more efficient (cost
reduction, quality improved bc more problems are on the surface – I am able to see them – so I can reduce
One kanban system: move kanban
I have just one kanban. Move kanban signals the required delivery of parts to the next stage of production.
I take the box and take the kanban. I send the box to the press. I have only one kanban that signals. In this
situation I have a kanban that travels without the box.
9 mesi fa
I contenuti di questa pagina costituiscono rielaborazioni personali del Publisher Markuser di informazioni apprese con la frequenza delle lezioni di Operations management e studio autonomo di eventuali libri di riferimento in preparazione dell'esame finale o della tesi. Non devono intendersi come materiale ufficiale dell'università Padova - Unipd o del prof Furlan Andrea.
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