chapter 9 manufacturing

This chapter is about the inventory control method that Apple uses

coordinate the supply of the parts used to build the iPhone on its

Page 266

assembly lines. Many of the components are made in manufacturing plants in China, India, and Taiwan. Most of the iPhone are made in assembly plants in China, but Apple also makes them in India, Brazil, and Vietnam. Precise coordination with all its suppliers is needed to keep the assembly plants operating efficiently. If even a single component is not available at some point in time, Apple cannot build an iPhone. Material requirements planning, the topic of this chapter, is key to this coordination.

Enterprise resource planning (ERP)

is a computer system that integrates application programs in accounting, sales, manufacturing, and the other functions in a firm.

• Production planning (PP)

• supports both discrete and process manufacturing processes and includes the material requirements planning (MRP) application, which is the topic of this chapter.

• Quality management (QM)

• plans and implements procedures for inspection and quality assurance. It is integrated with the procurement and production processes so that the user can identify inspection points both for incoming materials and for products during the manufacturing process.

• Material management (MM)

• covers all tasks within the supply chain, including purchasing, vendor evaluation, invoice verification, and material use planning. It also includes inventory and warehouse management.

• Plant maintenance (PM)

• supports the activities associated with planning and performing repairs and preventive maintenance. Completion and cost reports are available, and maintenance activities can be managed and measured.

material requirements planning (MIRP),

which is the key piece of logic that ties the production functions together from a material planning and control view. MRP has been installed almost universally in manufacturing firms, even those considered small companies. The reason is that MRP is a logical, easily understandable approach to the problem of determining the number of parts, components, and materials needed to produce each end item. MRP also provides the schedule specifying when each of these items should be ordered or produced.

Determining the number of dependent demand items needed is essentially

straightforward multiplication process. If one part A takes five parts of B to make it, then five parts of A require 25 parts of B. The basic difference in independent demand covered in L Chapter 11 and dependent demand covered in this chapter is as follows: If part A is sold outside the firm, the amount of part A that we sell is uncertain. We need to create a forecast using past data or do something like a market analysis. Part A is an independent item. However, part B is a dependent part and its use depends on part A. The number of B needed is simply the number of A times five. As a result of this type of multiplication, the requirements of other dependent demand items tend to become more and more lumpy as we go further down into the product creation sequence. Lumpiness means that the requirements tend to bunch or lump rather than having an even dispersal. This is also caused by the way manufacturing is done. When manufacturing occurs in lots (or batches), items needed to produce the lot are withdrawn from inventory in quantities (perhaps all at once) rather than one at a time.

Material requirements planning (MRP) Def

The logic for determining the number of parts, components, and materials needed to produce a product.

Where MRP Can Be Used

MRP is most valuable in industries where a number of products are made in batches using the same productive equipment. The list in L Exhibit 9.2 includes examples of different industry types and the expected benefit from MRP. As you can see in the exhibit, MRP is most valuable to companies involved in assembly operations and least valuable to those in fabrication. One more point to note: MRP does not work well in companies that produce a low number of units annually.

Especially for companies producing complex, expensive products requiring advanced research and design, experience has shown that lead times tend to be too long and too uncertain, and the product configuration too complex. Such companies need the control features that network scheduling techniques offer. These project management methods are covered in

Assemble-to- Stock

Combines multiple component parts into a finished product, which is then stocked in inventory to satisfy

customer demand. Examples: watches, tools, appliances.

Make-to-stock

Items are manufactured from purchased materials rather than assembled from parts. These are standard stock

LoW

items carried in anticipation of customer demand. Examples: piston rings, electrical switches.

Assemble-to-Order

A final assembly is made from standard options that the customer chooses. Examples: trucks, generators, motors. High

Low

Make-to-order

Items are manufactured from purchased materials to customer order. These are generally industrial orders.

Examples: bearings, gears, fasteners.

Engineer-to-order

Items are fabricated or assembled completely to customer specification. Examples: turbine generators, heavymachine tools.

Process

Includes industries such as foundries, rubber and plastics, specialty paper, chemicals, paint, drug, food

processors.

master production schedule

Generally, the master production schedule (MIPS) deals with end items (typically finished goods items sold to customers) and is a major input to the MRP process.

If the end item is quite large or expensive, however, the master schedule may schedule major sub assemblies or components instead.

All production systems have limited capacity and limited resources. This presents a challenging job for the master scheduler. Although the aggregate plan provides the general range of production each week by product group, the master scheduler must specify exactly what is to be produced for each individual item within the group. These decisions are made while responding to pressures from various functional areas such as the sales department (meet the customer's promised due date), -finance (minimize inventory), management (maximize productivity and customer service, minimize resource needs), and manufacturing (have level schedules and minimize setup time).

To determine an acceptable, feasible schedule to be released to the shop, trial master production schedules are run through the MRP program, which is described in the next section. The resulting planned order releases (the detailed production schedules) are checked to make sure,that resources are available and that the completion times are reasonable. What appears to be a feasible master schedule may turn out to require excessive resources once the required materials, parts, and components from lower levels are determined. If this does happen (the usual case), the master production schedule is then modified with these limitations and the MRP program is run again.

To ensure good master scheduling, the master scheduler (the human being) must

• Include all demands from product sales, warehouse replenishment, spares, and interplant requirements.

• Never lose sight of the aggregate plan.

• Be involved with customer order promising.

• Be visible to all levels of management.

• Objectively trade off manufacturing, marketing, and engineering conflicts.

Master production schedule (MPS)

time-phased plan specifying how many end items the firm plans to build, and when.

Time Fences

maintain a reasonably controlled flow through the production system. Unless some operating rules are established and adhered to, the system could be chaotic and filled with overdue orders and constant expediting.

Exhibit 9.4 shows an example of a master production schedule time fence. Management defines time fences as periods of time having some specified

Page 271

level of opportunity for the customer to make changes. (The customer may be the firm's own marketing department, which may be considering product promotions, broadening variety, or the like.) Note in the exhibit that, for the next eight weeks, this particular master schedule is frozen. Each firm has its own time fences and operating rules. Under these rules, frozen could be defined as anything from absolutely no changes in one company to only the most minor of changes in another. Slushy may allow changes in specific products within a product group so long as parts am available. Liquid may allow almost any variations in products, with the provisions that capacity remains about the same and that there are no long lead time items involved.

available to promise

for items that are master scheduled. This feature identifies the difference between the number of units currently included in the master schedule and firm customer orders. For example, assume the mastel schedule indicates that 100 units of the Model 538 mattress are going to be made during week 7. If firm customer orders now indicate that only 65 of those mattresses have actually been sold, the sales group has another 35 mattresses "available to promise" for delivery during that week. This can be a powerful tool for coordinating sales and production

Available to promise Def

A feature of MRP systems that identifies the difference between the number of units currently included in the master schedule and the actual (firm) customer orders.

Each facet of L Exhibit 9.5 is detailed in the following sections, but essentially the MRP system

works as follows: The master production schedule states the number of items to be produced during specific time periods. A bill-of-materials file identifies the specific materials used to make each item and the correct quantities of each. The inventory records file contains data such as the number of units on-hand and on-order. These three sources-master production schedule, bill-of-materials file, and inventory records file-become the data sources for the material requirements program, which expands the production schedule into a detailed order scheduling plan for the entire production sequence.

Demand for Products

Product demand for end items comes primarily from two main sources. The first is known customers who have placed specific orders, such as those generated by sales personnel, or from interdepartment transactions. These orders usually carry promised delivery dates. There is no forecasting involved in these orders-simply add them up. The second source is the aggregate production plan (described in ( Chapter 8). The aggregate plan reflects the firm's strategy for meeting demand in the future. The strategy is implemented through the detailed master production schedule.

bill-of-materials (BOM),

file contains the complete product description, listing not only the materials, parts, and components but also the sequence in which the product is created. This BOM file is one of the three main inputs to the MRP program. (The other two are the master schedule and the inventory records file.)

The BOM file is often called the product structure file or product tree because it shows how a product is put together. It contains the information to

Page 273

identify each item and the quantity used per unit of the item of which it is a part.

Bill-of-materials (BOM) Def

The complete product description, listing the materials, parts, and components, and also the sequence in which the product is created.

modular bill-of-materials

is the term for a buildable item that can be produced and stocked as a subassembly. It is also a standard item with no options

Page 274

within the module. Many end items that are large and expensive are better scheduled and controlled as modules (or subassemblies). It is particularly advantageous to schedule subassembly modules when the same subassemblies appear in different end items. For example, a manufacturer of cranes can combine booms, transmissions, and engines in a variety of ways to meet a customer's needs. Using a modular bill-of-materials simplifies the scheduling and control and also makes it easier to forecast the use of different modules. Another benefit in using modular bills is that if the same item is used in a number of products, then the total inventory investment can be minimized.

A super bill-of-materials

includes items with fractional options. (A super bill can specify, for example, 0.3 of a part. What that means is that 30 percent of the units produced contain that part and 70 percent do not.) Modular and super bills-of-materials are often referred to as planning bills-of-materials since they simplify the planning process.

Low-Level Coding

If all identical parts occur at the same level for each end product, the total number of parts and materials needed for a product can be computed easily. Consider product L shown in L Exhibit 9.7A. Notice that item N, for example, occurs both as an input to L and as an input to M. Item,N, therefore, needs to be lowered to level 2 (L' Exhibit 9.7B) to bring all Ns to the same level. If all identical items are placed at the same level, it becomes a simple matter for the computer to scan across each level and summarize the number of units of each item required.

Inventory Records

can be quite lengthy. L'

Exhibit 9.8 shows the variety of information contained in the inventory records. The MRP program accesses

the status segment of the record according to specific time periods (called time buckets in MRP slang). These records are accessed as needed during the program

run.

will see, the MRP program performs its analysis from the

top of the product structure downward, calculating requirements level by level. There are times, however, when it is desirable to identify the parent item that caused the material requirement. For example, we may want to know what subassemblies are generating the requirement for a part that we order from a supplier. The MRP program allows the creation of a peg record file either separately or as part of the inventory record file. Pegging requirements allows us to retrace a material requirement upward in the product structure through each level, identifying each parent item that created the demand.

Inventory Transactions File

The inventory status file is kept up to date by posting inventory transactions as they occur. These changes occur because of stock receipts and disbursements, scrap losses, wrong parts, canceled orders, and so forth.

following is a general description of the MRP explosion process:

1. The requirements for level 0 items, typically referred to as "end items," are retrieved from the master schedule. These requirements are referred to as "gross requirements" by the MRP program. Typically, the gross requirements are scheduled in weekly time buckets.

2. Next, the program uses the current on-hand balance together with the schedule of orders that will be received in the future to calculate the "net requirements." Net requirements are the amounts that are needed week by week in the future over and above what is currently on-hand or committed to through an order already released and scheduled.

3. Using net requirements, the program calculates when orders should be received to meet these réquirements. This can be a simple process of just scheduling orders to arrive according to the exact net requirements or a more complicated process where requirements are combined for multiple periods. This schedule of when orders should arrive is referred to as "planned-order receipts."

4. Since there is typically a lead time associated with each order, the next step is to find a schedule for when orders are actually released. Offsetting the planned order receipts by the required lead time does this. This schedule is referred to as the "planned-order release."

5. After these four steps have been completed for all the level zero items, the program moves to level l items.

6. The gross requirements for each level I item are caleulated from the planned-order release schedule for the parenis of eggh level item. Any additional independent demand also needs to be included in the gross requirements.

7. After the gross requirements have been determined, net requirements, planned-order receipts, and planned-order releases are calculated as described in steps

9-4 above

8. This process is then repeated for each level in the bill-of-materials?

Net change systems

Some MRP programs have the option of generating immediate schedules, called net change schedules. Net change systems are "activity" driven, and requirements and schedules are updated whenever a transaction is processed that has an impact on the item. Net change enables the system to reflect in "real time" the exact status of each item managed by the system.

An MRP record is kept for each item managed by the system.

The record contains gross requirements, scheduled receipts, projected available balance, net

Page 280

requirements, planned-order receipts, and planned-order releases data. Gross requirements are the total amount required for a particular item. These requirements can be from external customer demand and also from demand calculated due to manufacturing requirements. Scheduled receipts represent orders that have already been released and that are scheduled to arrive as of the beginning of the period. Once the paperwork on an order has been released, what was prior to that event's "planned" order now becomes a scheduled receipt.

Projected available balance is the amount of inventory expected as of the end of a period. This can be calculated as follows:

Projected available balance, = Projected available balance,-1 - Gross requirementst, + Scheduled receipts, + Planned- order receipts,

net requirement

amount needed when the projected available balance plus the scheduled receipts in a period are not sufficient to cover the gross requirement.

The planned-order receipt is the amount of an order that is required to meet a net requirement in the period.

planned-order release

release is the planned-order receipt offset by the lead time.

Most lot-sizing techniques deal with how

to balance the setup or order costs and holding costs associated with meeting the net requirements generated by the

MRP planning process.

Next, we explain four lot-sizing techniques using a common example.

The lot-sizing techniques presented are lot-for-lot (L4L), economic order quantity (EOQ), least total cost (LTC), and least unit cost (LUC).

Lot-for-lot (LAL) is the most common technique.

• Sets planned orders to exactly match the net requirements.

• Produces exactly what is needed each week with none carried over into future periods.

• Minimizes carrying cost.

• Does not take into account setup costs or capacity limitations.

Economic Order Quantity

we discuss the EOQ model that explicitly balances setup and holding costs (see $ Chapter 11 for the details). In an BOQ model, either fairly constant demand must exist or safety stock must be kept to provide for demand variability. The EOQ model uses an estimate of total annual demand, the setup or order cost, and the annual holding cost.

Least Total Cost

The least total cost (LTC) method is a dynamic lot-sizing technique that calculates the order quantity by comparing the carrying cost and the setup (or ordering) costs for various lot sizes and then selects the lot in which these are most nearly equal.

The top half of L$ Exhibit 9.16 shows the least cost lot size results. The procedure to compute least total cost lot sizes is to compare order costs and holding costs for various numbers of weeks. For example, costs are compared for producing in week 1 to cover the requirements for week 1; producing in week 1 for weeks 1 and

2; producing in week 1 to cover weeks 1, 2, and 3; and so on. For example, for the order in week 1 to cover weeks 1, 2, and 3, the calculation includes a single ordering cost ($47) plus the cost to hold 60 units for one week (60 x $10 x 0.5% × 1 = $3), plus the cost to hold 70 units for two weeks (70 x $10 × 0.5% × 2 = $7). The correct selection is the lot size where the ordering costs and holding costs are approximately equal. In L Exhibit 9.16, the best lot size is 335 because a $38 carrying cost and a $47 ordering cost are closer than $56.75 and $47, respectively ($9 versus $9.75). This lot size covers requirements for weeks 1 through 5. Unlike EOQ, the lot size covers only whole numbers of periods.

Based on the week 1 decision to place an order to cover five weeks,

we are now located in week 6, and our problem is to determine how many weeks into the future we can provide for from here.

Exhibit 9.16 shows that holding and ordering costs are closest in the quantity that covers requirements for weeks 6 through

8. Notice that the holding and ordering costs here are far apart. This is because our example extends only to week 8. If the planning horizon were longer, the lot size planned for week 6 would likely cover more weeks into the future beyond week 8. This brings up one of the limitations of both LTC and LUC (discussed next). Both techniques are influenced by the length of the planning horizon. The bottom half of L Exhibit 9.16 shows the final run size and total cost./

least unit cost (LUC)

method is a dynamic lot-sizing technique that adds the ordering and inventory carrying cost for each trial lot size and divides by the number of units in each lot size, picking the lot size with the lowest unit cost. The top half of L Exhibit 9.17 calculates the unit cost for ordering lots to meet the needs of weeks 1 through 8. Note that the minimum occurred when the quantity 410, ordered in week 1, was sufficient to cover weeks 1 through 6. The lot size planned for week 7 covers through the end of the planning horizon.

Choosing the Best Lot Size

Using the lot-for-lot method, the total cost for the eight weeks is $376; the EOQ total cost is $ 171.05; the least total cost method is $140.50; and the least unit cost is $153.50. The lowest cost was obtained using the least total cost method of $140.50. If there were more than eight weeks, the lowest cost could differ.

The advantage of the least unit cost method is that it is a more complete analysis and would take into account ordering or setup costs that might change as the order size increases. If the ordering or setup costs remain constant, the lowest total cost method is more attractive because it is simpler and easier to compute; yet it would be just as accurate under that restriction.

The key to an effective ERP system is:

Part 1 of 3

Multiple Choice

2.77/2.77

points awarded

Scored

A separate system is used for each department

It uses one shared database for all departments and fictions

It tracks supplier orders

It has additional modules for supply chain management

It uses one shared database for all departments and fictions

The purpose of enterprise resource planning is to support planning and execution systems and the decisions they drive throughout your company.

True or False

True

The best approach to successfully implementing an ERP system is:

art 3 of 3

7112.77

oints awarded

Scored

eBook

Print

References

Multiple Choice

Install software throughout the organization and then switch from the old system

Merge with a company that already has an effective ERP system

Create ERP software that is customized for your company's supply chain

Pilot the program on a small scale and then transfer throughout the organization

Pilot the program on a small scale and then transfer throughout the organization

Which of these provides input to the Material Requirements Plan? (Choose all that apply)

bill of materials

Lead Times

Inventory Records

Master Production Schedule

bill of materials

Lead Times

Inventory Records

Master Production Schedule

Inventory records help determine how many items of material, components, and subassemblies need to be ordered to make the final product.

True or False

True

The Bill of Materials is usually a very simple, straight-forward recipe for making the final product.

True or False

False

The Master Production Schedule breaks down the aggregate production plan, specifying what individual products the factory will make each week.

True or False

True

Time Fences: (choose all that apply)

Check All That Apply

Are derived directly from the aggregate plan.

Provide stability and predictability to factory operations.

Determine when a customer order can be cancelled without penalty.

>

Determine when changes to the MPS can be made.

Determine when changes to the MPS can be made.

Provide stability and predictability to factory operations.

Available-to-Promise: (choose all that apply)

Check All That Apply

Tells the sales force how many products are available to sell.

Coordinates production and sales efforts.

Takes into account current inventory, confirmed orders, and scheduled production.

Helps to determine when production is scheduled.

Tells the sales force how many products are available to sell.

Coordinates production and sales efforts.

Takes into account current inventory, confirmed orders, and scheduled production.

Helps to determine when production is scheduled.