INSTITUTE OF DISTANCE

LEARNING
KNUST
EXECUTIVE MBA/MPA
CEMBA/CEMPA 557
OPERATIONS MANAGEMENT

LECTURE FOUR
BLOCK FOUR PRODUCTION
PLANNING & SCHEDULING
11 Aggregate Production
Planning
Unit 12 Just-In-Time
Unit 13 Scheduling and Sequencing
Unit

UNIT 11
Aggregate Production
Planning

AGGREGATE PLANNING

Determine the quantity and timing of

production for the immediate future
Objective is to minimize cost over the
planning period by adjusting
Production rates
Labor levels
Inventory levels
Overtime work
Subcontracting
Other controllable variables

AGGREGATE PLANNING

Required for aggregate planning

A logical overall unit for measuring sales
and output
A forecast of demand for intermediate
planning period in these aggregate units

A method for determining costs

A model that combines forecasts and costs
so that scheduling decisions can be made
for the planning period

THE PLANNING PROCESS

Long-range plans
(over one year)
Research & Development
New product plans
Capital investment
Facility location/expansion
Top
executives

Operations
managers

Intermediate-range plans
(3 to 18 months)
Sales planning
Production planning and budgeting
Setting employment, inventory,
subcontracting levels
Analyzing cooperating plans

Short-range plans
(up to 3 months)
Operations
managers,
supervisors,
foremen
Responsibility

Job assignments
Ordering
Job scheduling
Dispatching
Overtime
Part-time help
Planning tasks and horizon

Figure 13.1

AGGREGATE PLANNING

Jan
150,000

Quarter 1
Feb
120,000

Apr
100,000

Mar
110,000
Quarter 2
May
130,000

Jul
180,000

Jun
150,000
Quarter 3
Aug
150,000

Sep
140,000

AGGREGATE PLANNING
Marketplace
and
demand

Demand
forecasts,
orders

Product
decisions

Process
planning and
capacity
decisions

Research
and
technology

Workforce
Aggregate
plan for
production

Master
production
schedule and
MRP
systems

Detailed
work
schedules

Raw
materials
available
External
capacity
(subcontractor
s)

Inventory
on
hand

Figure 13.2

AGGREGATE PLANNING

Combines appropriate resources into

general terms

Part of a larger production planning system

Disaggregation breaks the plan down into
greater detail

Disaggregation results in a master

production schedule

AGGREGATE PLANNING STRATEGIES

1. Use inventories to absorb changes in demand
2. Accommodate changes by varying workforce
size
3. Use part-timers, overtime, or idle time to absorb
changes
4. Use subcontractors and maintain a stable
workforce
5. Change prices or other factors to influence
demand

CAPACITY OPTIONS

Changing inventory levels

Increase inventory in low demand
periods to meet high demand in the future
Increases costs associated with storage,
insurance, handling, obsolescence, and
capital investment
Shortages can mean lost sales due to long
lead times and poor customer service

CAPACITY OPTIONS

Varying workforce size by hiring or

layoffs
Match production rate to demand
Training and separation costs for hiring
and laying off workers

New workers may have lower

productivity
Laying off workers may lower morale
and productivity

CAPACITY OPTIONS

Varying production rate through

overtime or idle time
Allows constant workforce
May be difficult to meet large increases in
demand

Overtime can be costly and may drive down

productivity
Absorbing idle time may be difficult

CAPACITY OPTIONS

Subcontracting
Temporary measure during periods of
peak demand
May be costly
Assuring quality and timely delivery may
be difficult
Exposes your customers to a possible
competitor

CAPACITY OPTIONS

Using part-time workers

Useful for filling unskilled or low skilled
positions, especially in services

DEMAND OPTIONS

Influencing demand
Use advertising or promotion to increase
demand in low periods
Attempt to shift demand to slow periods
May not be sufficient to balance demand
and capacity

DEMAND OPTIONS

Back ordering during highdemand periods

Requires customers to wait for an
order without loss of goodwill or
the order
Most effective when there are few
if any substitutes for the product
or service
Often results in lost sales

DEMAND OPTIONS

Counterseasonal product and

service mixing
Develop a product mix of
counterseasonal items
May lead to products or services
outside the companys areas of
expertise

AGGREGATE PLANNING OPTIONS

Option

Advantages

Disadvantages

Some Comments

Changing
inventory
levels

Changes in
Inventory
human
holding cost
resources are
may increase.
gradual or
Shortages may
none; no abrupt result in lost
production
sales.
changes

Applies mainly to
production, not
service,
operations

Varying
workforce
size by
hiring or
layoffs

Avoids the costs Hiring, layoff,

of other
and training
alternatives
costs may be
significant

Used where size

of labor pool is
large

Table 13.1

AGGREGATE PLANNING OPTIONS

Option

Advantages

Disadvantages

Some Comments
Allows flexibility
within the
aggregate plan

Varying
production
rates
through
overtime or
idle time

Matches
seasonal
fluctuations
without hiring/
training costs

Overtime
premiums; tired
workers; may
not meet
demand

Subcontracting

Permits
flexibility and
smoothing of
the firms
output

Loss of quality
Applies mainly in
control;
production
reduced profits; settings
loss of future
business

Table 13.1

AGGREGATE PLANNING OPTIONS

Option

Advantages

Disadvantages

Some Comments

High turnover/
training costs;
quality suffers;
scheduling
difficult

Good for
unskilled jobs in
areas with large
temporary labor
pools

Using parttime
workers

Is less costly
and more
flexible than
full-time
workers

Influencing
demand

Tries to use
Uncertainty in
excess
demand. Hard
capacity.
to match
Discounts draw demand to
new customers. supply exactly.

Creates
marketing
ideas.
Overbooking
used in some
businesses.

Table 13.1

AGGREGATE PLANNING OPTIONS

Option

Advantages

Disadvantages

Some Comments

Back
ordering
during
highdemand
periods

May avoid
overtime.
Keeps capacity
constant.

Customer must
be willing to
wait, but
goodwill is lost.

Allows flexibility
within the
aggregate plan

Counterseasonal
product
and service
mixing

Fully utilizes
resources;
allows stable
workforce

May require
skills or
equipment
outside the
firms areas of
expertise

Risky finding
products or
services with
opposite
demand
patterns

Table 13.1

METHODS FOR AGGREGATE PLANNING

A mixed strategy may be the best

way to achieve minimum costs

There are many possible mixed

strategies
Finding the optimal plan is not
always possible

MIXING OPTIONS TO
DEVELOP A PLAN

Chase strategy
Match output rates to demand forecast
for each period
Vary workforce levels or vary production
rate

Favored by many service organizations

MIXING OPTIONS TO
DEVELOP A PLAN

Level strategy
Daily production is uniform
Use inventory or idle time as buffer
Stable production leads to better quality
and productivity

Some combination of capacity

options, a mixed strategy, might be
the best solution

GRAPHICAL AND CHARTING METHODS

Popular techniques
Easy to understand and use

Trial-and-error approaches that do

not guarantee an optimal solution
Require only limited computations

GRAPHICAL AND CHARTING METHODS

1. Determine the demand for each period.
2. Determine the capacity for regular time,
overtime, and subcontracting each period.
3. Find labor costs, hiring and layoff costs, and
inventory holding costs.
4. Consider company policy on workers and
stock levels.
5. Develop alternative plans and examine their
total costs.

PLANNING EXAMPLE 1
Production
Days
22

Month
Jan

Expected Demand
900

Feb
Mar
Apr
May
June

700
800
1,200
1,500
1,100

18
21
21
22
20

6,200

124

Demand Per Day

(computed)
41

39
38
57
68
55

Table 13.2

Average
requirement

Total expected demand

Number of production days

6,200
=
= 50 units per day
124

PLANNING EXAMPLE 1
Production rate per working day

Forecast demand

70
60

Level production using average

monthly forecast demand

50
40
30

Jan

22
Figure 13.3

Feb

18

Mar

21

Apr

21

May

22

June

20

= Month
= Number of
working days

PLANNING EXAMPLE 1
Cost Information
Inventory carrying cost

$ 5 per unit per month

Subcontracting cost per unit

$10 per unit

Average pay rate

$ 5 per hour ($40 per day)

Overtime pay rate

Labor-hours to produce a unit
Cost of increasing daily production rate
(hiring and training)
Cost of decreasing daily production rate
(layoffs)
Table 13.3

$ 7 per hour
(above 8 hours per day)
1.6 hours per unit
$300 per unit
$600 per unit

PLANNING EXAMPLE 1
Cost Information
Production at
Month carry
50 Units
Inventory
cost per Day

Monthly
Demand Inventory
Ending
Forecast $ 5Change
per unit per Inventory
month

Subcontracting
cost
per unit
Jan
1,100

900
Feb pay rate 900
700
Average
Mar
1,050
800
Overtime pay rate
Apr
1,050
1,200
Labor-hours
to produce
May
1,100 a unit
1,500
Cost of increasing daily production rate
June
1,000
1,100
(hiring and training)
Cost of decreasing daily production rate
(layoffs)

$10 +200
per unit

200
$ 5 per
hour ($40 per
day)
+200
400
+250
650
$ 7 per
hour
(above 8 hours per day)
-150
500
1.6 hours per unit
-400
100
$300 per unit
-100
0
1,850
$600 per unit

Total units of inventory carried over from one

month to the next = 1,850 units
Table 13.3
Workforce required to produce 50 units per day = 10 workers

PLANNING EXAMPLE 1
Monthly
Costs
Calculations
Cost Information
Production at
Demand
Inventory
Ending
Month carry
50
Units
Forecast
Inventory
$ 5Change
perunits
unit per
month
Inventory
cost per Day $9,250
Inventory
carrying
(= 1,850
carried
x $5
unit)
$10
per unit
Subcontracting
cost
per unit
Jan
1,100
900 per
+200
200
Regular-time
labor
49,600
x $40per
per
$ 5 workers
per
hour ($40
day)
Feb pay rate
900
700 (= 10
+200
400
Average
x+250
124 days) 650
Mar
1,050
800 day
$ 7 per
hour
Overtime pay rate
(above 8 hours per day)
Other
Apr costs (overtime,
1,050
1,200
-150
500
hiring, layoffs,
1.6 hours per unit
Labor-hours
to produce
a unit
May
1,100
1,500
-400
100
subcontracting)
0
Cost of increasing daily production rate
$300 per unit
June
1,000
1,100
-100
0
Total
cost
$58,850
(hiring
and training)
1,850
Cost of decreasing daily production rate $600 per unit
(layoffs)

Total units of inventory carried over from one

month to the next = 1,850 units
Table 13.3
Workforce required to produce 50 units per day = 10 workers

PLANNING EXAMPLE 1
7,000

Cumulative demand units

6,000
5,000
4,000

Reduction
of inventory
Cumulative level
production using
average monthly
forecast
requirements

3,000

2,000

Cumulative forecast
requirements

1,000

Excess inventory

Jan

Figure 13.4

Feb

Mar

Apr

May

June

PLANNING EXAMPLE 2
Production
Days
22

Month
Jan

Expected Demand
900

Feb
Mar
Apr
May
June

700
800
1,200
1,500
1,100

18
21
21
22
20

6,200

124

Demand Per Day

(computed)
41

39
38
57
68
55

Table 13.2

Minimum requirement = 38 units per day

PLANNING EXAMPLE 2
Production rate per working day

Forecast demand

70
Level production
using lowest
monthly forecast
demand

60
50
40
30

Jan

22

Feb

18

Mar

21

Apr

21

May

22

June

20

= Month
= Number of
working days

PLANNING EXAMPLE 2
Cost Information
Inventory carrying cost

$ 5 per unit per month

Subcontracting cost per unit

$10 per unit

Average pay rate

$ 5 per hour ($40 per day)

Overtime pay rate

Labor-hours to produce a unit
Cost of increasing daily production rate
(hiring and training)
Cost of decreasing daily production rate
(layoffs)
Table 13.3

$ 7 per hour
(above 8 hours per day)
1.6 hours per unit
$300 per unit
$600 per unit

PLANNING EXAMPLE 2
Cost Information
Inventory carry cost

In-house cost
production
Subcontracting
per unit
Average pay rate
Overtime pay rate

$ 5 per unit per month

= 38$10
units
per day
per unit
x 124
days
$ 5 per
hour ($40 per day)
= 4,712
units
$ 7 per
hour

Labor-hours
to produce aunits
unit
Subcontract

(above 8 hours per day)

1.6 hours
per unit
6,200
- 4,712

=
Cost of increasing daily production rate
$300 per
unit
=
1,488
units
(hiring and training)
Cost of decreasing daily production rate
(layoffs)
Table 13.3

$600 per unit

PLANNING EXAMPLE 2
Cost Information
Inventory carry cost

In-housecost
production
Subcontracting
per unit
Average pay rate
Overtime pay rate

$ 5 per unit per month

= 38$10units
per day
per unit
x 124
$ 5 perdays
hour ($40 per day)
= 4,712
$ 7 perunits
hour

Costs Subcontract
Labor-hours
to produce a unit
units

(above 8 hours per day)

1.6 hours
per unit
Calculations
6,200
- 4,712

=
Regular-time
labor
$37,696
(=
7.6 workers
Cost
of increasing
daily production
rate
$300
per
unit x $40 per
=
1,488
units
(hiring and training)
day x 124 days)

Cost
of decreasing daily production
unitx $10 per
Subcontracting
14,880rate (= $600
1,488per
units
(layoffs)

unit)

Table 13.3

Total cost

$52,576

PLANNING EXAMPLE 3
Production
Days
22

Month
Jan

Expected Demand
900

Feb
Mar
Apr
May
June

700
800
1,200
1,500
1,100

18
21
21
22
20

6,200

124

Demand Per Day

(computed)
41

39
38
57
68
55

Table 13.2

Production = Expected Demand

Production rate per working day

PLANNING EXAMPLE 3
Forecast demand and
monthly production

70
60
50
40
30

Jan

22

Feb

18

Mar

21

Apr

21

May

22

June

20

= Month
= Number of
working days

PLANNING EXAMPLE 3
Cost Information
Inventory carrying cost

$ 5 per unit per month

Subcontracting cost per unit

$10 per unit

Average pay rate

$ 5 per hour ($40 per day)

Overtime pay rate

Labor-hours to produce a unit
Cost of increasing daily production rate
(hiring and training)
Cost of decreasing daily production rate
(layoffs)
Table 13.3

$ 7 per hour
(above 8 hours per day)
1.6 hours per unit
$300 per unit
$600 per unit

PLANNING EXAMPLE 3
Basic
Production
Cost
Inventory carrying
cost (demand x
Daily
Forecast
Prod
1.6 hrs/unit x
Subcontracting
cost
per
unit
Month
(units)
Rate
$5/hr)

Cost Information

Extra Cost of
Extra Cost of
$ 5 perDecreasing
unit per month
Increasing
Production
Production
$10
per
unitcost) Total Cost
(hiring cost)
(layoff

41

$ 7,200

$ 5 per hour
day)
($40 per$ 7,200

Feb
700
Overtime
pay rate39

5,600

Mar
800 to produce
38
6,400
Labor-hours
a unit

$1,200
$ 7 per hour
6,800
(= 2 x $600)
(above 8 hours per day)
$600
7,000
1.6 hours
per
unit
(= 1 x
$600)

Jan
900 rate
Average
pay

$5,700$300 per unit

Cost
rate
Apr of increasing
1,200
57daily production
9,600

(=
19
x $300)
(hiring and training)
$3,300
Cost
rate
$600 per unit
May of decreasing
1,500
68 daily production
12,000

(= 11 x $300)
(layoffs)
June

Table 13.3

1,100

55

8,800
$49,600

15,300
15,300

$7,800
(= 13 x $600)

16,600

$9,000

$9,600

$68,200

COMPARISON OF THREE PLANS

Cost

Plan 1

Plan 2

Inventory carrying

$ 9,250

Regular labor

49,600

37,696

49,600

Overtime labor

Hiring

9,000

Layoffs

9,600

Subcontracting

$58,850

$52,576

$68,200

Total cost

Plan 2 is the lowest cost option

Plan 3
$

Table 13.5

MATHEMATICAL APPROACHES
Useful for generating strategies
Transportation Method of Linear
Programming
Produces an optimal plan

Management Coefficients Model

Model built around managers experience
and performance

Other Models
Linear Decision Rule
Simulation

TRANSPORTATION METHOD
Sales Period
Mar
Apr
May
800
1,000
750

Demand
Capacity:
Regular
Overtime
Subcontracting
Beginning inventory

700
50
150
100

700
50
150
tires

700
50
130

Costs
Regular time
Overtime
Subcontracting
Carrying

$40
$50
$70
$2

per tire
per tire
per tire
per tire

Table 13.6

TRANSPORTATION EXAMPLE
Important points
1. Carrying costs are $2/tire/month. If goods
are made in one period and held over to
the next, holding costs are incurred

2. Supply must equal demand, so a dummy

column called unused capacity is added
3. Because back ordering is not viable in this
example, cells that might be used to satisfy
earlier demand are not available

TRANSPORTATION EXAMPLE
Important points
4. Quantities in each column designate the
levels of inventory needed to meet demand
requirements

5. In general, production should be allocated

to the lowest cost cell available without
exceeding unused capacity in the row or
demand in the column

TRANSPORTATION
EXAMPLE

Table 13.7

MANAGEMENT COEFFICIENTS MODEL

Builds a model based on managers
experience and performance
A regression model is constructed to
define the relationships between
decision variables

Objective is to remove inconsistencies

in decision making

OTHER MODELS
Linear Decision Rule
Minimizes costs using quadratic cost curves
Operates over a particular time period

Simulation
Uses a search procedure to try different
combinations of variables
Develops feasible but not necessarily optimal
solutions

SUMMARY OF AGGREGATE PLANNING

METHODS
Techniques

Solution
Approaches

Important Aspects

Graphical/charting
methods

Trial and error

Simple to understand and

easy to use. Many solutions;
one chosen may not be
optimal.

Transportation
method of linear
programming

Optimization

LP software available; permits

sensitivity analysis and new
constraints; linear functions
may not be realistic

Management
Heuristic
coefficients model

Simple, easy to implement;

tries to mimic managers
decision process; uses
regression
Table 13.8

AGGREGATE PLANNING IN SERVICES

Controlling the cost of labor is critical
1. Close scheduling of labor-hours to
assure quick response to customer
demand
2. Some form of on-call labor resource

3. Flexibility of individual worker skills

4. Individual worker flexibility in rate of
output or hours

FIVE SERVICE SCENARIOS

Restaurants
Smoothing the production process
Determining the workforce size

Hospitals
Responding to patient demand

FIVE SERVICE SCENARIOS

National chains of small service

firms
Planning done at national level and
at local level

Miscellaneous services
Plan human resource requirements

Manage demand

LAW FIRM EXAMPLE

(2)
Best Case
(hours)

(3)
Likely
Case
(hours)

(4)
Worst
Case
(hours)

(5)
Maximum
Demand in
People

(6)
Number of
Qualified
Personnel

Trial work
Legal research
Corporate law
Real estate law
Criminal law

1,800
4,500
8,000
1,700
3,500

1,500
4,000
7,000
1,500
3,000

1,200
3,500
6,500
1,300
2,500

3.6
9.0
16.0
3.4
7.0

4
32
15
6
12

Total hours
Lawyers needed

19,500
39

17,000
34

15,000
30

(1)
Category of
Legal Business

Table 13.9

FIVE SERVICE SCENARIOS

Airline industry
Extremely complex planning
problem
Involves number of flights, number
of passengers, air and ground
personnel
Resources spread through the entire
system

YIELD MANAGEMENT
Allocating resources to customers at
prices that will maximize yield or revenue
1. Service or product can be sold in
advance of consumption
2. Demand fluctuates
3. Capacity is relatively fixed

4. Demand can be segmented

5. Variable costs are low and fixed costs
are high

YIELD MANAGEMENT EXAMPLE

Demand
Curve

Room sales

Potential customers exist who are

willing to pay more than the $15
variable cost of the room

100

Passed-up
contribution

Some customers who paid $150

were actually willing to pay
more for the room

50

$ margin
= (Price) x (50
rooms)
= ($150 - $15)
x (50)
= $6,750

Money left on
the table
$15
Variable cost
of room

$150
Price charged
for room

Price
Figure 13.5

YIELD MANAGEMENT EXAMPLE

Demand
Curve

Room sales
100

Total $ margin =
(1st price) x 30 rooms + (2nd price) x 30 rooms =
($100 - $15) x 30 + ($200 - $15) x 30 =
$2,550 + $5,550 = $8,100

60

30

$15
Variable cost
of room

$100
Price 1
for room

$200
Price 2
for room

Price
Figure 13.6

YIELD MANAGEMENT MATRIX

Predictable
Unpredictable

Duration of use

Price
Tend to be fixed

Tend to be variable

Quadrant 1:

Quadrant 2:

Movies
Stadiums/arenas
Convention centers
Hotel meeting space

Hotels
Airlines
Rental cars
Cruise lines

Quadrant 3:

Quadrant 4:

Restaurants
Golf courses
Internet service
providers

Continuing care
hospitals

Figure 13.7

MAKING YIELD MANAGEMENT WORK

1. Multiple pricing structures must be

feasible and appear logical to the
customer
2. Forecasts of the use and duration of
use
3. Changes in demand

UNIT 12
Just-In-Time

JUST-IN-TIME AND
LEAN PRODUCTION

JIT is a philosophy of continuous and

forced problem solving that supports
lean production
Lean production supplies the customer
with their exact wants when the
customer wants it without waste
Key issues are continual improvement
and a pull system

WASTE REDUCTION

Waste is anything that does not add

value from the customer point of view

Storage, inspection, delay, waiting in

queues, and defective products do not
add value and are 100% waste

WASTE REDUCTION

Faster delivery, reduced work-inprocess, and faster throughput all

reduce waste
Reduced waste reduces room for
errors emphasizing quality
Reduced inventory releases assets
for other, productive purposes

VARIABILITY REDUCTION

JIT systems require managers to

reduce variability caused by both
internal and external factors
Variability is any deviation from the
optimum process
Inventory hides variability
Less variability results in less waste

CAUSES OF VARIABILITY
1. Employees, machines, and suppliers
produce units that do not conform to
standards, are late, or are not the
proper quantity
2. Engineering drawings or specifications
are inaccurate
3. Production personnel try to produce
before drawings or specifications are
complete
4. Customer demands are unknown

PULL VERSUS PUSH SYSTEMS

A pull system uses signals to request

production and delivery from upstream
stations
Upstream stations only produce when
signaled
System is used within the immediate
production process and with suppliers

PULL VERSUS PUSH SYSTEMS

By pulling material in small lots,

inventory cushions are removed,
exposing problems and emphasizing
continual improvement
Manufacturing cycle time is reduced

Push systems dump orders on the

downstream stations regardless of the
need

JIT AND COMPETITIVE ADVANTAGE

JIT Requires:

Table 16.1

JIT AND COMPETITIVE ADVANTAGE

Which Results In:

Which Yields:

Table 16.1

SUPPLIERS

JIT partnerships exist when a supplier

and purchaser work together to remove
waste and drive down costs.
Four goals of JIT partnerships are:

Elimination of unnecessary activities

Elimination of in-plant inventory

Elimination of in-transit inventory

Elimination of poor suppliers

JIT PARTNERSHIPS
Suppliers
Few suppliers
Nearby suppliers
Repeat business with same suppliers
Support suppliers so they become or remain price
competitive
Competitive bidding mostly limited to new purchases
Buyer resists vertical integration and subsequent
wipeout of supplier business
Suppliers encouraged to extend JIT buying to their
suppliers
Table 16.2

JIT PARTNERSHIPS

Quantities
Share forecasts of demand
Frequent deliveries of small-lot quantities
Long-term contract
Minimal paperwork to release order (EDI or the
Internet)
Little or no permissible overage or underage
Suppliers package in exact quantities
Suppliers reduce production lot sizes

Table 16.2

JIT PARTNERSHIPS
Quality
Minimal product specifications imposed on supplier
Help suppliers meet quality requirements
Close relationships between buyers and suppliers
quality assurance people
Suppliers use poka-yoke and process control charts

Table 16.2

JIT PARTNERSHIPS
Shipping
Scheduling inbound freight
Gain control by using company-owned or contract
shipping and warehousing
Use of advanced shipping notice (ASN)

Table 16.2

JIT LAYOUT

Reduce waste due to movement

Layout Tactics
Build work cells for families of products
Include a large number operations in a small area
Minimize distance
Design little space for inventory
Improve employee communication
Use poka-yoke devices
Build flexible or movable equipment
Cross train workers to add flexibility
Table 16.3

DISTANCE REDUCTION
Large lots and long production lines
with single-purpose machinery are
being replaced by smaller flexible
cells
Often U-shaped for shorter paths and
improved communication
Often using group technology
concepts

INCREASED FLEXIBILITY

Cells designed to be rearranged as

volume or designs change

Applicable in office environments as

well as production settings
Facilitates both product and process
improvement

IMPACT ON EMPLOYEES

Employees are cross trained for

flexibility and efficiency
Improved communications
facilitate the passing on of
important information about the
process
With little or no inventory buffer,
getting it right the first time is
critical

REDUCED SPACE AND INVENTORY

With reduced space, inventory must

be in very small lots
Units are always moving because
there is no storage

INVENTORY

Inventory is at the minimum level

necessary to keep operations running
JIT Inventory Tactics
Use a pull system to move inventory
Reduce lot sizes
Develop just-in-time delivery systems with suppliers
Deliver directly to point of use
Perform to schedule
Reduce setup time
Use group technology
Table 16.4

REDUCE VARIABILITY
Inventory level

Process
downtime

Scrap
Setup
time

Quality
problems

Late deliveries
Figure 16.1

REDUCE VARIABILITY

Inventory
level

Process
downtime

Scrap
Setup
time

Quality
problems

Late deliveries
Figure 16.1

REDUCE LOT SIZES

Inventory

200

Q1 When average order size = 200

average inventory is 100

Q2 When average order size = 100

average inventory is 50
100

Time

Figure 16.2

REDUCE LOT SIZES

Ideal situation is to have lot sizes of one

pulled from one process to the next
Often not feasible
Can use EOQ analysis to calculate
desired setup time

Two key changes

Improve material handling
Reduce setup time

LOT SIZE EXAMPLE

D=
d =
p =
Q=
H=
S=

Annual demand = 400,000 units

Daily demand = 400,000/250 = 1,600 per day
Daily production rate = 4,000 units
EOQ desired = 400
Holding cost = $20 per unit
Setup cost (to be determined)
Q=

2DS
H(1 - d/p)

Q2 =

2DS
H(1 - d/p)

(Q2)(H)(1 - d/p)
(3,200,000)(0.6)
S=
=
= $2.40
2D
800,000

LOWER SETUP COSTS

Holding cost

Cost

Sum of ordering and

holding costs

T1
Setup cost curves (S1, S2)
T2
S2

S1

Lot size
Figure 16.3

REDUCE SETUP COSTS

High setup costs encourage large lot

sizes
Reducing setup costs reduces lot size
and reduces average inventory
Setup time can be reduced through
preparation prior to shutdown and
changeover

REDUCE SETUP TIMES

Initial Setup Time

Step 1

90 min

Separate setup into preparation and actual setup,

doing as much as possible while the
machine/process is operating
(save 30 minutes)
Move material closer and
improve material handling
(save 20 minutes)

Step 2

Step 3

Standardize and
improve tooling (save
15 minutes)

Step 4

Step 5
Figure 16.4

Use one-touch system to eliminate

adjustments (save 10 minutes)
Training operators and standardizing
work procedures (save 2 minutes)
Repeat cycle until sub minute
setup is achieved

60 min

45 min

25 min
15 min
13 min

SCHEDULING

Schedules must be communicated

inside and outside the organization
Level schedules

Process frequent small batches

Freezing the schedule helps stability

Kanban

Signals used in a pull system

KANBAN
1.

User removes a standard sized

container

2.

Signal is seen by the

producing department as
authorization to replenish

Signal marker
on boxes
Figure 16.6

Part numbers
mark location

SCHEDULING SMALL LOTS

JIT Level Material-Use Approach

A A

A A

C C C

Large-Lot Approach

A A A A A A

Time
Figure 16.5

MORE KANBAN

When the producer and user are not in

visual contact, a card can be used
When the producer and user are in
visual contact, a light or flag or empty
spot on the floor may be adequate
Since several components may be
required, several different kanban
techniques may be employed

MORE KANBAN

Usually each card controls a specific

quantity or parts
Multiple card systems may be used if
there are several components or
different lot sizes
Kanban cards provide a direct control
and limit on the amount of work-inprocess between cells

MORE KANBAN

In an MRP system, the schedule can be

thought of as a build authorization and
the kanban a type of pull system that
initiates actual production

If there is an immediate storage area, a

two-card system can be used with one
card circulating between the user and
storage area and the other between the
storage area and the producer

KANBAN SIGNALS

Finished
goods

Kanban

Customer
order

Work
cell
Ship
Raw
Material
Supplier

Kanban

Final
assembly
Kanban

Kanban

Purchased
Parts
Supplier

Kanban

Kanban

Subassembly

Figure 16.7

THE NUMBER OF CARDS

OR CONTAINERS

Need to know the lead time needed to produce a container of

parts
Need to know the amount of safety stock needed

Number of kanbans =

Demand during
Safety
lead time
+ stock
Size of container

NUMBER OF KANBANS EXAMPLE

Daily demand
Production lead time
(wait time +
material handling time +
processing time)
Safety stock
Container size

= 500 cakes
= 2 days

= 1/2 day
= 250 cakes

Demand during lead time = 2 days x 500 cakes = 1,000

Number of kanbans =

1,000 + 250
=5
250

ADVANTAGES OF KANBAN

Allow only limited amount of faulty or delayed material

Problems are immediately evident

Puts downward pressure on bad aspects of inventory

Standardized containers reduce weight, disposal costs, wasted

space, and labor

QUALITY

Strong relationship
JIT cuts the cost of obtaining good quality because JIT exposes
poor quality
Because lead times are shorter, quality problems are exposed
sooner
Better quality means fewer buffers and allows simpler JIT
systems to be used

JIT QUALITY TACTICS

Use statistical process control

Empower employees
Build fail-safe methods (pokayoke, checklists, etc.)
Expose poor quality with small lot
JIT
Provide immediate feedback
Table 16.6

EMPLOYEE EMPOWERMENT

Empowered employees bring their knowledge and involvement to

daily operations

Some traditional staff tasks can move to empowered employees

Training, cross-training, and fewer job classifications can mean

enriched jobs

Companies gain from increased commitment from employees

LEAN PRODUCTION

Different from JIT in that it is externally

focused on the customer
Often called the Toyota Production
System (TPS)
In practice, JIT, Lean Systems, and
TPS are often essentially the same

TOYOTA PRODUCTION SYSTEM

Work shall be completely specified as to content, sequence, timing, and

outcome

Every customer-supplier connection must be direct

Product and service flows must be simple and direct

Any improvement must be made in accordance with the scientific

method at the lowest possible level of the organization

LEAN SYSTEMS

Use JIT techniques

Build systems that help employees
produce perfect parts
Reduce space requirements
Develop close relationships with
suppliers

LEAN SYSTEMS

Educate suppliers
Eliminate all but value-added
activities
Develop the workforce
Make jobs more challenging
Reduce the number of job classes

THE 5 SS

Sort/segregate
Simplify/straighten
Shine/sweep

Standardize
Sustain/self discipline
Safety
Support/maintenance

SEVEN WASTES

Overproduction
Queues

Transportation
Inventory

Motion
Over-processing
Defective product

A broader perspective suggests

other resources like energy and
water are wasted but should not
be

JIT IN SERVICES

The JIT techniques used in

manufacturing are used in services
Suppliers
Layouts
Inventory
Scheduling