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Tutoring Fundamentals of OM
Operations Management
Dr. Alice Rondini
D. Alice Rondini Università degli Studi di Bergamo – Riproduzione Riservata 1
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Agenda
Università degli Studi di Bergamo – Riproduzione Riservata 2
Introduction to production systems
Representation and classification of production systems
Production costs
Inventory management
Production Planning and Control
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Agenda
Introduction to production systems
• Production systems: objectives
• Production systems: generalities
• Production systems: operating conditions
Representation and classification of production systems
Production costs
Inventory management
Production Planning and Control
Università degli Studi di Bergamo – Riproduzione Riservata 3
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The production system
A production system is traditionally defined as a system that uses resources to transform
inputs into desired outputs.
Università degli Studi di Bergamo – Riproduzione Riservata 4
Resources
to transform
Materials
Information
Customers
Staff and facilities/
equipment
Transformation
resources
INPUT Production process OUTPUT
Goods
and services
Environment
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Production System: objectives
Università degli Studi di Bergamo – Riproduzione Riservata 5
(HW)
Technological
choices
Choices of
management
tools/instruments
(SW)
Organisational
Choices
PRODUCTION
SYSTEM
OBJECTIVES
1. Productivity
2. Flexibility
3. Quality
4. Service
Performance
Internal External
Operating
Conditions
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Production system: objectives
Università degli Studi di Bergamo – Riproduzione Riservata 6
Internal
PerformancesExternal Performances
Productivity QualityCustomer
serviceFlexibility
Capital Project Pre and after sale Product
Labor Conformity Timeliness Mix
Materials Reliability Punctuality Volume
Plant/equipment Maintenability Regularity Plan
Technical
supportAvailability
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It is possible also to measure the productivity of individual factors:
Productivity of capital:
Productivity of labor:
Productivity of materials:
These monetary indicators are built on budgetary data and have a very low diagnostic value
Productivity
Università degli Studi di Bergamo – Riproduzione Riservata 7
PQ
K L M
0
PQ
KK 0
PQ
LL 0
PQ
MM 0
The productivity can be expressed as:
Q0 represents the output of the production system, expressed in monetary units (sales + Inventories -
Inventories initials),
K is the cost of capital, L is the cost of labor, M is the cost of materials
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Overall Equipment Effectiveness (OEE)
OEE is an indicator to measure the effectiveness of the production plants
OEE = (A * S) * (Rv * Rq) * Rc
Availability
Efficiency
Quality
Availability takes into account the time loss due to failure and set-up
Quality takes into account the time loss due to scrap production
Efficiency takes into account the time loss due to low plant utilization and low production rate
Università degli Studi di Bergamo – Riproduzione Riservata 8
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Production System objectives: Quality
Università degli Studi di Bergamo – Riproduzione Riservata 9
Quality
Project Conformity Reliability MaintainabilityTechnical support
Quality is the set of properties
and characteristics of a
particular product or service
that can satisfy the customer's
expressed or unexpressed
needs (ISO-UNI)
Characteristic of a
project to adjust
optimally to
market
expectations
Ability to deliver
products in
accordance with
the design
specifications
The ability of a
product / process to
maintain its
functional
properties
The ability of a
product / process
to recover the
operating
characteristics,
after having lost
them
The ability of a
production system to
provide an effective
technical support to
the use and
maintenance of
products
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Production System objectives: Service
Università degli Studi di Bergamo – Riproduzione Riservata 10
Service
Pre and after sale
Readiness (timeliness)
Punctuality Regularity Availability
Ability of a production
system to meet customer
needs in relation to extrinsic
characteristics of the product
/ service
Customer’s
support
processes/
services before
and after the
sale of the
product / service
Ability to
provide what
is required in
a short time
Ability to
minimize the
number and
size of orders
that are
delivered late
Predictability
of delivery
times
Ability to adapt
the delivery
times to not
ordinary
customer's
requests
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The Production System objectives: Flexibility
Università degli Studi di Bergamo – Riproduzione Riservata 11
Flexibility
ProductMix
(operational)
Volume
(elasticity)
Plan (management)
Ability to
introduce a new
product in a
short time and
with a low cost
Ability to produce
a mix of products
at short
changeover times
and with low costs
Ability to change
the production
volume without
significant changes
in the unit cost of
production
Ability to change
rapidly the
production plan to
deal with changes /
emergencies
The capacity of the production
system to respond to external
(exogenous) and internal
(endogenous) changes with
short and inexpensive
transients
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The production system: operating conditions
Università degli Studi di Bergamo – Riproduzione Riservata 12
(HW)
Technological
choises
Choice of
management
tools/instruments
(SW)
Organisational
Choises
Performance
Internal External
Operating
conditions
These conditions
describe the operating
characteristics of the
production system
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Operating conditions of a production system
Università degli Studi di Bergamo – Riproduzione Riservata 13
These are fundamental values that summarize the status of a
production system in different units of measurement
Set-up time
Lead Time
WIP (Work In Process)
Operating condition = state of a process that can influence a
given performance
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Set-up time
Università degli Studi di Bergamo – Riproduzione Riservata 14
It refers to the time required to get a machine, a device or a plant ready to produce a new
product (different from the previous produced and for which the equipment was set).
The set-up is linked, depending on every single situation and technology, for example to the
need to change tools (in machining), to make washing (in chemical production), to make
adjustments, etc..
The set-up entails a waste of productive time: the larger is the size of the set-up, the
higher is the waste of productive time.
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Lead Time
Università degli Studi di Bergamo – Riproduzione Riservata 15
In the most general sense the Lead Time is the time required to carry out an
operation or a set of operations
- Lead Time of supply: interim between the need for raw materials and the instant when
raw materials ordered are in the warehouse.
- Lead Time in storage: interim between when the material is placed in the warehouse
and when it is withdrawn
- Process Lead Time: interim between when you know about an order of production and
the related raw materials are available in the warehouse, and when the finished products
are stocked in the final warehouse.
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Lead time vs. Cycle Time
Cycle time = max time spent at any station
1 2 3
4 min 5 min 4 min
Process Lead time = 4 + 5 + 4 = 13
Cycle time = max (4, 5, 4) = 5
ciclo
rateT
TH1
Università degli Studi di Bergamo – Riproduzione Riservata 16
Throughput rate= The number of flow units going through the business process per unit time
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WIP- Work in Process
Università degli Studi di Bergamo – Riproduzione Riservata 17
WIP optimizes the use of machines, but it hides the problems of the factory, immobilizes the materials
and takes up space.
Before removing it, it is important to measure it.
To do so it is necessary to know:
the product structure (Bill of Materials)
the amount of each component (coefficient of use)
its relative value
the time of production / supply
the lot size
the delivery date
WIP (Work In Process): can be defined as the amount of materials that are involved in the
production process as raw materials, semi-finished or finished products. The WIP can also be
measured as hours of work conferred to the materials
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Agenda
Introduction to production systems
Representation and classification of production systems
• Representation of a production system
• 3 axes classification
• Wortman classification
Production costs
Inventory management
Production Planning and Control
Università degli Studi di Bergamo – Riproduzione Riservata 18
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Representation of a Production System
Università degli Studi di Bergamo – Riproduzione Riservata 19
There are three ways to represent a production system:
1. STRUCTURAL APPEARANCE
2. PROCESS FLOWCHARTING
3. PROCEDURAL ISSUES
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Structural appearance
Università degli Studi di Bergamo – Riproduzione Riservata 20
It statically describes the physical set of units of a production system
The representation adopted is the layout. It represents on a map the allocation of all the technological
resources that are part of a production system.
It gives an idea of the physical layout of the various operating stations in the system.
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Process Flowcharting
Università degli Studi di Bergamo – Riproduzione Riservata 21
Process flowcharting is the use of a diagram to present the major elements of a process. It can be qualitative or quantitative.
It highlights the logical sequence of all the phases of a production system
It is an ideal methodology to analyze a process.
These basic elements can include:
• tasks or operations• flows of materials or customers• decision points• storage areas or queues.
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Process Flowchart Symbols (ASME)
Università degli Studi di Bergamo – Riproduzione Riservata 22
Operations
Inspection
Transportation
Delay
Storage
D
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The procedural aspect
Università degli Studi di Bergamo – Riproduzione Riservata 23
It emphasizes the operationalaspects, describing the variousfunctions and activities thatconstitute the operatingprocedure.
The typical instrument is theFlow-Chart
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3-axis classification
Università degli Studi di Bergamo – Riproduzione Riservata 24
Nature of the process
Technological Axis
Demand Fulfillment
Market Axis
Production methods
Repetitive
Single
Unitary Lot-size Continuous
Production on
forecasting
Production
to order
Production
Process
Plants
Manufacturing
Assembly
Management Axis
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Technological Axis
Università degli Studi di Bergamo – Riproduzione Riservata 25
Process plants Production
Technological
characteristics
‒ Irreversible chemical and
physical changes
‒ Bound technological cycle
‒ High relevance and criticality of
technological process
parameters
‒ High automation
‒ Physical and morphological changes can be irreversible (manufacturing) or not (assembling)
‒ Technological cycle not bound
Cost structure ‒ High plant and automation costs
‒ Low labor costs‒ High energy and maintenance
costs
‒ Manufacturing: high fixed cost and
variable labor costs
‒ Assembly: low fixed costs and high
labor costs
Example Steel, paper, cement, chemical pharmaceutical
Manufacturing: machining (turning,
milling,…)
Assembly: automotive, household
appliance
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Market Axis
Università degli Studi di Bergamo – Riproduzione Riservata 26
Production based on
forecasting
Production based on
orders (repetitive)
Production based on
orders (single)
Lead time Higher than the time
customers are willing
to wait
Lower than the time
customers are willing to
wait
Lower than the time
customers are willing to
wait
Products
characteristics
‒ Standard products‒ High and regular
demand volume
‒ Catalogue products: high range of products, but repetitiveconsumption
‒ Production starts after customer order
‒ Infinitive range of products: customersdefine the products features
‒ No repetitive consumption
‒ Design and engineering starts after the customer order
Example Grocery, householdappliance
Machinery Boat, industrial plants,
custom-made suit
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Management Axis
Università degli Studi di Bergamo – Riproduzione Riservata 27
Unitary production (one
of a kind production)
Lot-size production Continue
manufacturing
production
Characteristics ‒ Production of the exact
amount requested by
the customer
‒ Product consumption
not repetitive and not
predictable
‒ Not relevant set up cost
‒ The lot-size does not
depend directly on the
amount requested by the
customer, but it is based
on the characteristics of
the production/logistics
system
‒ Set up between two lots
‒ Product consumption is
repetitive
‒ The remaining quantity is
stored in the warehouse
for future order
‒ Single product
Example Boat, industrial plants,
custom-made suit
Printing, painting, textile,machining
Automotive, foundry
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Wortmann Classification
Università degli Studi di Bergamo – Riproduzione Riservata 28
FORNITORI
CLIENTI
MTS
ATO
MTO
PTO
ETO
Production based on Forecast
Production based on Order
CODP - Customer Order Decoupling Point
ENGINEER - PURCHASE - MAKE - ASSEMBLY - DELIVERY
SU
PP
LIE
RS
CU
ST
OM
ER
S
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Agenda
Introduction to production systems
Representation and classification of production systems
Production costs
Inventory management
Production Planning and Control
Università degli Studi di Bergamo – Riproduzione Riservata 29
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Classification of costs
Università degli Studi di Bergamo – Riproduzione Riservata 30
COSTS
VARIABLE FIXED/STATIONARY
− Change according to
volume variation − Do not change at the volume
variation (within limits)
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Variable costs
Università degli Studi di Bergamo – Riproduzione Riservata 31
Variable costs are:
the cost of the raw materials
the cost of direct material of consumption
labor costs (if flexible)
the cost of energy
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Fixed costs
Università degli Studi di Bergamo – Riproduzione Riservata 32
Fixed costs are:- the cost of planned maintenance- the cost of fixed direct workforce (not flexible)- the depreciation of equipment- factory overheads
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Agenda
Introduction to production systems
Representation and classification of production systems
Production costs
Inventory management
Production Planning and Control
Università degli Studi di Bergamo – Riproduzione Riservata 33
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Inventory Management
Università degli Studi di Bergamo – Riproduzione Riservata 34
- In the forecasting management the demand is not known a priori with
certainty, but it is sure only when it occurs.
- The demand shall be considered as a random variable. To ensure the
presence of material, it is necessary to have stocks.
Stock = any tangible goods (with the exception of building, plants and
transports) bought by the company and stored in a warehouse waiting to be
used.
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Inventory Management
Università degli Studi di Bergamo – Riproduzione Riservata 35
Manage inventory means:
- Decide what to order
- Decide how much to order
- Decide when to order
Example of methods:
- Reorder point: an order of a fixed quantity (EOQ) is placed when the stock reaches the reorder point
- Fixed Time-Period: an order of a variable quantity is placed in pre-determined intervals (such as a week or a month)
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Reorder Point
0 Lead
timeOrder
Placed
Order
Received
TimeLead
timeOrder
Placed
Order
Received
Inve
nto
ry L
eve
l
Reorder point
Order qty
Università degli Studi di Bergamo – Riproduzione Riservata 36
Main assumptions
-Demand is known with certainty
-Demand is relatively constant over
time
-No shortages are allowed
-Lead time for the receipt of orders
is constant
-The order quantity is received all at
once
-Economic Order Quantity (EOQ)
fixed quantity ordered
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Reorder point: the EOQ Cost Curves
Università degli Studi di Bergamo – Riproduzione Riservata 37
Ordering Cost
Order Quantity
Annual
cost ($)
Slope = 0
Minimum
total cost
Optimal order
Total Cost
Carrying Cost
The Economic Order Quantity (EOQ) is the quantity that minimizes the total cost
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Reorder Point With A Safety Stock
Safety stock: extra stock that is maintained to mitigate risk of stock-out (inventory shortage)
due to uncertainties in supply and demand.
Reorder point
0
Inve
nto
ry le
ve
l
Time
Safety stock
LT LT
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Fixed time period
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Agenda
Introduction to production systems
Representation and classification of production systems
Production costs
Inventory management
Production Planning and Control
• Aggregate Production Planning (APP)
• Master Production Schedule (MPS)
• Material Requirement Planning (MRP)
• Scheduling
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Production Planning and Control: tasks
Università degli Studi di Bergamo – Riproduzione Riservata 41
Make available all the information needed to:
Efficiently and effectively manage the flow of materials
Optimize the use of manpower and machinery
Coordinate internal activities with suppliers in order to get what
is needed
Communicate with customers to find the market needs
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Production Planning and Control: objectives
Università degli Studi di Bergamo – Riproduzione Riservata 42
To allow deliveries respecting the planned Lead Time
To ensure punctuality and timeliness in delivery
To keep the values of storage within acceptable limits
To ensure high utilization of machines, equipment, workforce
and materials
Planning takes into account materials and production resources
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Levels of PPC
There are 5 levels of PPC, each of them
have different:
Objective
Planning horizon: the amount of time the
company will look into the future
Time bucket: planning defines what to
do in different "time periods" in the
planning horizon
Detail level
Planning frequencyDetail Scheduling
Material Requirement Plan (MRP)
Master Production Schedule (MPS)
Aggregate Production Planning (APP)
Strategic Business Plan
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Detail level of PPC
Università degli Studi di Bergamo – Riproduzione Riservata 44
Detail level
Planning horizon
Scheduling Labor, Materials, Machines
Strategic Business Plan production line
Aggregate Production Planning (APP) product family
Master Production Schedule – MPS specific product
Material Requirements Planning – MRP
product components
Production
control
At each level it must be defined:
The "priority" for what, how and when you
have to produce
The required and available capacity
How the differences between demand and
capacity can be solved
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Characteristics of the PPC steps
Università degli Studi di Bergamo – Riproduzione Riservata 45
Phase Input Output Horizon Constraints Objectives
Aggregate
Production
Planning
(APP)
Strategy
Target sales
Product Families
Production budget Many Years /
Multi years
Production
capacity
Staff
resources
Predisposition of the
necessary resources
(plants, MO, MP)
Make or Buy decisions
Material
Production
Scheduling
(MPS)
Data on:
Orders acquired
Sales Forecasting
Macro-cycles
Resources
Availability
Costs
Principal Plan
Production- Master
Production Schedule
(MPS)
6 – 12
months
Production
capacity
Staff
resources
Outsourcing
Stocks
Customer Satisfaction
Containment of
production costs
Resource Usage level
Minimization of fixed
assets
Material
Requirement
Plan
MPS
Stocks
WIP
Loops
Plan purchases /
production timed
7 – 30 days Resource Minimization of costs
Scheduling Time production Launches into
production
Detailed plan
activities
Plan staff
1 – 7 days Resource Punctuality
Quality
Production
control
Actual results of
production
Cost information
Reports, progress
indicators,
performance and cost
Various (at
will)
//// Progress Control
Assessment and
Diagnosis
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Levels of PPC
Università degli Studi di Bergamo – Riproduzione Riservata 46
Detail Scheduling
Material Requirement Plan (MRP)
Master Production Schedule (MPS)
Aggregate Production Planning (APP)
Strategic Business Plan
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Aggregate Production Plann (APP)
Università degli Studi di Bergamo – Riproduzione Riservata 47
The aggregate production plan (APP) shows in aggregate terms the
mission that the production has to achieve to meet the overall company
objectives
The APP is not the forecast of the demand, but the forecast of the
production
The APP provides the input to the following MPS: the sum of the detailed
MPS should match the APP
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Aggregate Production Planning (APP)
Università degli Studi di Bergamo – Riproduzione Riservata 48
It provides the production plan that fulfils the market demand, minimizing costs and taking into account the following company constraints:
- Regular production capacity
- Overtime production capacity
- Stocks
- External production capacity
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Outputs
Università degli Studi di Bergamo – Riproduzione Riservata 49
- A production plan: aggregate decisions for each time bucket in the planning horizon about- workforce level
- inventory level
- production rate
- Projected costs if the production plan was implemented
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Pure Chase and Pure Level Strategies
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Levels of PPC
Detail Scheduling
Material Requirement Plan (MRP)
Master Production Schedule (MPS)
Aggregate Production Planning (APP)
Strategic Business Plan
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The Master Production Schedule
Università degli Studi di Bergamo – Riproduzione Riservata 52
The master production schedule (MPS) specifies which products have to be produced in the different time buckets of the planning horizon, in which quantity and when they have to be available in the warehouse
Objectives:
- Minimize costs
- Verify production capacity
- Facilitate order negotiation (ATP - Available To Promise)
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Not confirmed
Customer orders
Salesforecasting
Formulation
MPSMPS
Stock
Confirmed
Customer orders
Demand
The master schedule (MPS)
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Example of an MPS
Università degli Studi di Bergamo – Riproduzione Riservata 54
Time bucket 1 2 3 4 5 6
Forecasted
demand75 50 30 40 70 20
Customer
order80 45 40 50 50 5
Project
Available50 70 20 80 30 60 40
MPS 100 100 100
ATP 25 10 45
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Levels of PPC
Detail Scheduling
Material Requirement Plan (MRP)
Master Production Schedule (MPS)
Aggregate Production Planning (APP)
Strategic Business Plan
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MRP Inputs & Outputs
Università degli Studi di Bergamo – Riproduzione Riservata 56
Material
Requirements
Planning
Master Production Schedule
Planned Order Releases
Work Orders Purchase Orders Rescheduling Notices
BOM
Lead timeInventory
Computerized production planning system that aims at defining:- What to produce/order
- How much to produce/order
- When produce/order
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Example of MRP
Università degli Studi di Bergamo – Riproduzione Riservata 57
Time bucket 1 2 3 4 5 6 7 8
Gross requirements 0 50 80 10 0 60 10 25
Availability (stock) 15 (15) (15) 0 0 0 0 0 0
Scheduled receipts 0 0 0 0 0 0 0 0
Net requirements 0 35 80 10 0 60 10 25
Lot size 0 35 80 10 0 60 10 25
Planned order
releases35 80 10 0 60 10 25 0
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Levels of PPC
Università degli Studi di Bergamo – Riproduzione Riservata 58
Detail Scheduling
Material Requirement Plan (MRP)
Master Production Schedule (MPS)
Aggregate Production Planning (APP)
Strategic Business Plan
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Scheduling
The scheduling specifies what, how much, when and where to produce considering:- A single lot of a single product in a single machine
- Very short time horizon (1 week)
- Short time bucket (day or hour)
- Data: planned production order (MRP), resource availability, current state of the production system
It is the last stage of planning before production occurs
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Objectives in Scheduling
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- Minimize average lateness
- Minimize average flowtime
- Minimize number of late jobs
- Maximize machine or labor utilization
- Minimize idle time
- Minimize work-in-process inventory
- Minimize set up time
- …
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Critical aspects
Università degli Studi di Bergamo – Riproduzione Riservata 61
Big quantity of technological and management data to consider
Uncertainty of the work dataVariability (es. product versions, urgencies, ecc.)
Unforeseeable factors (es. breakdown)
Hazardous factors (es. manufacture time, rendering, ecc.)
Difficulty in defining the objectives Is it better to aim at efficiency (es. saturation of machineries, reduced WIP, ...) or at
efficacy (reduced time of completion, minimizing of delays…)?