The Production System

Definition:
The set of resources and procedures
involved in converting raw material into
products and delivering them to
customers
Production and delivery of products are
central to the firm
Functions have value only if they enhance
the ability to do this profitably
1

Value-Added-Process
The difference between the cost of inputs
and the value or price of outputs.
Value added
Inputs
Land
Labor
Capital

Transformation/
Conversion
process

Outputs
Goods
Services

Feedback

Control
Feedback

Feedback

Production Objectives
High
Profitability
Low
Costs

High
Sales

Low Unit
Costs
High
Throughput

High
Utilization

Less
Variability

Quality
Product

High Customer
Service

Low
Inventory

Short
Cycle Times

Fast
Response

Low
Utilization

Production and Inventory ControlIntroduction (4)

Many
products

High
Inventory

More
Variability

Raw Material

Production Activity
and Information Flows
Forecasting

Fabrication
Plant

Administrative Functions
(Purchasing, Payroll,
Finance, Accounting)

Strategic Planning
Assembly
Plant
Finished
Products

Distribution
Center

Marketing
Aggregate Production
Planning
Disaggregation
Production Scheduling

Retailer
Shop Floor Control
Customer
a) Product Flow

b) Decision Hierarchy

Product Design
Process Planning
Manufacturing Support
(Facilities Planning,
Tool Management,
Quality Control,
Maintenance)
c) Support Functions

Characteristics of services

Intangibility
Inseparability
Perishability
Variability

Difference between
physical goods and
services
Physical goods
Services
Tangible

intangible

Homogeneous

heterogeneous

Production and distribution are

separated from consumption

Production, distribution and

consumption are simultaneous
processes

A thing

An activity or process

processed in factory

produced in the buyer-seller interaction

Customers do not participate in the

production process

Customers participate in production

Can be kept in stock

Cannot be kept in stock

Transfer of ownership

No transfer of ownership

METHODS OF PRODUCTION
The methods of production can be of
the following types:
1. Intermittent or interrupted
production
a. Job Production
b. Batch Production
2. Mass and process production

JOB PRODUCTION

In this type of production, every job

is different from the other in terms of
type, cost, efforts, consumption of
materials or specifications.

This is used when one item at a time

is produced. Examples include:
Bridge building
Office blocks

ADVANTAGES
Reaching the target customers
requirements
Special training to labor
Best suitable for pull system of demand
DISADVANTAGES
XTime taking
X Large scale economies cannot be
realized
X Costliest
X Division of labor is not possible

BATCH PRODUCTION

All the products manufactured under a

batch are similar in terms of type, cost,
efforts, consumption of materials or
specifications.

This is when the same product is made for

a while, then production is switched to
another product. They will return to the
production of the first product again later
on.
Examples include:
Bakers
Clothing manufacturers
Pharmaceuticals

 ADVANTAGES
cost of product design per unit is low
Economies of production
Flow of materials can be continuous
Automation and mechanization
DISADVANTAGES

X Varying customer demands

MASS PRODUCTION

This is also called flow production. The

production can be undertaken on large
and specialized machines and processes.

This is when goods are mass made

continuously on a production line.
Examples include:
Cars
Hardware
Electric Lamp

 ADVANTAGES
Mechanization and division of labour
Large scale economies
Minimum material handling costs
DISADVANTAGES
X Special care
X Idle machinery may result in wastage
of resources
X Bottle necks

Process Type
One principal raw material
transformed in to several products at
different stages of operations
Example-Petroleum refining,heavy
chemicals

19

Product Development

Market Research
Design a prototype
Production of Prototype
Design work for product
Development Work
Production
Evaluation
20

Inputs

Production System
Decision Hierarchy
Process

Long Range Economic Forecasts

Financial Choices

Strategic
Planning

Processing Technologies/Efficiency
Machine Schedules

Aggregate
Production
Planning

Production Levels
Workforce Levels
Current Inventory Status
Changeover Times and Costs
Item Forecasts

Disaggregation

Outputs

Operating Facilities
Product Line (Families)
Technologies

Years

Production Level
Workforce Level
Family Inventories

Months

Master Production Schedule

(MPS) - Final Assembly by item
Item Inventories

Weeks

Bill of Materials
Process Plans

Production
Scheduling

Job Priorities
Order Releases
Machine Schedules

Shop Floor
Control

Labor Status
Machine Status
Job Priorities
Order Releases
Machine Schedules

Length of
Planning
Horizon

Machine Priorities
Job Status
Labor Reporting
Material Handling Tasks
Load/Prices/Unload Authorization

Days-Shift

Real Time
Minutes

21

Products, Processes, and

Layouts
PRODUCTS
PROCESSES
LAYOUTS
Make-to-stock
standardized
commodities

Assemble-to-order
modular

Make-to-order
custom

Engineer-to-order
one-of-kind

Continuous
process industries
repetitive mfg

Hybrid, FMS,
CAM, CIM

Job-Shop(Intermittent)

high volume,
low variety

low volume,

Product Layout

Cellular Layout

medium variety

low volume,

Process Layout

high variety

Special Project

low volume,
low variety

Fixed Position
22

Layout Goals

Use space efficiently

Efficient personnel movement
Maximum equipment utilization
Convenient / safe work environment
Simplify repair / maintenance
Smooth flow of work

23

Types of Production
Systems

There are four basic types of production

systems:
1. Process
2. Product
3. Cellular
4. Fixed positions

24

Fixed Position Layout

The product or project remains
stationary, and workers, materials, and
equipment are moved as needed.
Examples: Home building, ship and
aircraft buiding, drilling for oil

25

Process Layout
Similar

processes (or processes with similar needs)

are located together
By grouping similar processes utilization of resources
is improved
Customers, products, patients move through the
processes according to their needs
Different products = different needs = different routes
Complex flow pattern in the operation
Examples:
Supermarkets, hospitals
26

Process Layouts
Milling
Assembly
& Test

Grinding

Drilling

Plating

Process Layout products travel

to dedicated process centers
6-27

Product Layout
Sometimes

called line layout, flow line or assembly

line
Parts follow a specified route the sequence of
workstations matches with the sequence of required
operations
Work Flow is clear, predictable, easy to control
Examples:
Car assembly, paper manufacture, self-service canteen

28

Product Layout
Raw
materials
or customer

Station
1

Station
Station
22

Station
Station
33

Material

Material

Material

Material

and/or
labor

and/or
labor

and/or
labor

and/or
labor

Station
Station
44

Finished
item

Used for Repetitive or Continuous Processing

6-29

Cellular Layouts

machines are grouped into a cell that can process

items that have similar processing requirements
Based on Group technology which involves
grouping items with similar design or manufacturing
characteristics into part families

Could

be considered as mini product layouts

Can improve and simplify a functional/process
layout
Flexible
Duplicates some resources

6-30

Part families
Part families with similarity
in manufacturing process

Part families with similarity

in shape

Original Process Layout

Assembly

7
8

5
2

12

10
3

11
Raw materials

Cellular Layout

Assembly
8

10

12
11

Cell 1

Cell 2

Cell 3
7

A B C
Raw materials

Comparison of Product
and Process Layouts
Product

Workers
Inventory

Storage space
Material
handling
Aisles
Scheduling
Layout decision
Goal

Advantage

Limited skills
Low in-process, high
finished goods
Small
Fixed path (conveyor)
Narrow
Line balancing (Easier)
In-line, U-type
Equalize work at each
station
Efficiency

Process

High skills
High in-process, low
finished goods
Large
Variable path (forklift)
Wide
Dynamic (More difficult)
Functional
Minimize material
handling cost
Flexibility

Product Volume and Variety

Cellular

Quantity

Product
Layouts
Fixed
Position
Layouts

Mixed Layouts

Process Layouts

Number of Different Products

35

Product Flow Control

Batch

Processing (Process Layout)

From a couple to several thousands identical parts

A batch for each different part type
Move together through the production system
May split for material handling or to reduce processing
time
Examples are clothing, furniture production

Repetitive

or Flow processing (Product Layout)

Continuous chemicals, foods, pharmaceuticals

Discrete car, refrigerator production

36

Setup Costs Affect The

Batch Size
Cost and time to set up production
facilities to manufacture a specific
product affect the batch size.
When changeover time (setup time)
and cost are large, the size of batch
is kept large.
Large batch sizes result in high
inventory cost.
37

Production Choices
Make-to-stock
Number of units of each product are kept on hand at all times
Quick delivery to customers upon receipt of an order
When delivery response time is a key competitive factor
Limited number of products manufactured repeatedly
An idea what customers will want
Allows to schedule production in advance
Make-to-order
Only produce items after they have been ordered
Production system must respond quickly
Products have high degree of customization
Shelf life of products is short
Assemble-to-order
Customers have influence on the design
They can select various options from predesigned subassemblies

38

Time Horizon in Production

Planning
Static Vs. Dynamic
Environments
Models used
for production planning are
either static or dynamic
Static

Constant through time

Assume same plan acceptable in each period
for the foreseeable future

Dynamic
Explicitly consider changes in demand and
resource availability to determine what should
be done through time over a planning horizon
Require stochastic data
Require great effort to build and solve
39

The Role of Inventory

Inventory consists of physical items moving
through the production system
Originates with shipment of raw material and
parts from the supplier
Ends with delivery of the finished products to
the customer
Costs of storing inventory accounts for a
substantial proportion of manufacturing cost
Often 20% or more

Optimal level of inventory

Allows production operations to continue smoothly

A common control measure is Inventory

Turnover

40

Inventory Turnover
The ratio of annual cost of goods sold to
average inventory investment.
It indicates how many times a year the
inventory is sold.
Higher the ratio, the better, because it implies
more efficient use of resources.
Higher the profit margin and longer the
manufacturing lead time, the lower the
inventory turns.
Example: Supermarkets (low profit margins)
have a fairly high turnover rate
41

Inventory Definitions and

Decisions

Batch or order size, Q

Batch size is the number of units released to the

shop floor to be produced

Reorder point, r
Specifies the timing for placing a new order

Inventory Position
Inventory Position = Inventory On Hand + On Order Backorders

Units on order
Have been ordered but not yet arrived

Backorders
Items promised to customers but not yet shipped
New units are shipped out to cancel backorders
42

Types of Inventory
Raw Materials
Essential to the production process
Often kept in large quantities on site

Finished Goods
Completed products awaiting shipment to customers

Work-in-Process (WIP)
Batches of semi finished products currently in
production
Batches of parts from time of release until finished
goods status

Pipeline
Goods in transit between facilities
Raw materials being delivered to the plant
Finished goods being shipped to warehouse or
customer

43

Types of Inventory

44

Justification of Inventory
Inventory

will always exist

Competitive pressure to supply common products
quicker than they can be produced imply finished
goods inventory must be kept near the customer
Price breaks are common when large quantities of
material and parts are purchased
We may store inventory in periods of low demand and
consume them in periods of large demand to smooth
production rate (seasonal demand)
Speculation

45

Inventory Costs and

Tradeoffs
Holding inventory is costly
In constructing economic models
for choosing the optimal levels of
inventory, trade of the costs
caused by:
1. Ordering or set up of machines
2. Investing and storing the goods
3. Shortages (not having inventory
available when needed)
46

Ordering Costs
A fixed

ordering cost can be associated with each

replenishment when parts are ordered from suppliers

Identifying the need to order

Execute the order
Prepare the paperwork
Place the order
Delivery cost fixed component
Receiving inspection
Transportation to place of use
Storage

47

Setup Costs
For

parts produced in-house, we must:

Check status of raw material

Possibly place an order
Create route sheets with instructions for each stage of
the production process
Store routing data in a database
Check routing data for compatibility with shop status
and engineering changes
Make routing instructions with raw material
Deliver to production workers
Machine set up
48

Inventory Carrying Costs

Carrying

inventory incurs a variety of costs

Space heated and cooled

Move inventory occasionally because it blocks access
to other goods
Construct and maintain information system to track
location
Pay taxes based on value
Insurance costs
Some will be lost, damaged, or perished
Cost of capital invested in inventory

49

Shortage Costs
When

customer demands an out of stock item

May decide to wait for delivery - backorders

May cancel the order lost sales
May look elsewhere next time lost customer
May pay expedite charges

Within

the plant, if material is unavailable to start

production

Work center may lack work

Schedule may have to be modified
Completion of products may be delayed
Result in late deliveries or lost sales
50

Information Flow for Various

Production Systems
Order Entry

Raw
Material

a. Materials Requirements Planning (MRP)

Raw
Material
b. Just-In-Time (KANBAN)

Processor

Infinite Capacity
Inventory Buffer

Finite Capacity
Inventory Buffer

Material Flow
51
Information Flow

KANBAN control
Kanban control uses the levels of buffer
inventories in the system to regulate production.
When a buffer reaches its preset maximum level,
the upstream machine is told to stop producing
that part type. This is often implemented by
circulating cards, the kanbans, between a machine
and the downstream buffer.
The machine must have a card before it can start
an operation. It can then pick raw materials out of
its upstream (or input) buffer, perform the
operation, attach the card to the finished part, and
put it in the downstream (or output) buffer.
52

KANBAN control
Kanban control ensures that
parts are not made except in
response to a demand.
The analogy is to a supermarket:
Only the goods that have been
sold are restocked on the
shelves.
53

Information Flow for Various

Production Systems
Limit on

Total
Inventory

Raw
Material

c. Constant Work-In-Process (CONWIP)

Raw
Material
d. Hybrid CONWIP-KANBAN
Processor

Infinite Capacity
Inventory Buffer

Finite Capacity
Inventory Buffer

Material Flow
54
Information Flow

CONWIP Control
CONWIP stands for Constant Work-In-Process.
a control strategy that limits the total
number of parts allowed into the system at
the same time.
Once the parts are released, they are
processed as quickly as possible until they fill
up the last buffer as finished goods.
Once the consumer removes a part from the
finished goods inventory, the first machine in
the chain is authorized to load another part.
55

CONWIP Control
Like KANBAN, the CONWIP system only
responds to actual demands, so it is still a
``pull'' type system.
But unlike kanban, the buffers for all
downstream machines are empty, except
finished goods, which is full.
This occurs because any part released to
the system will move to finished goods.
New parts will not be released if the
finished goods buffer is full.
56

Inventory is Needed
to Support Production

Recent years claim a goal of zero inventory

But some is necessary to meet needs

Economically practical to maintain some WIP to
facilitate production scheduling
Variability in processing time and job arrival rates

Inventory should not be used to cover

problems

Wasteful practice all too common

Prevents the system from improving
Defects not detected until later

Lean companies

Operate with reliable processes, quick

changeovers, low inventories, small space, low
scrap and rework, closer communication
57

Large Inventories Imply Long

Throughput Times
Throughout time (manufacturing
Lead Time)
The span of time from when the part enters a
system until it leaves

Littles Law I=XT

Relates average throughput time (T) to the
level of average inventory (I) and the
production rate (X) for any stationary process

Stationary process
Probability of being in a particular state is
independent of time
58

To reduce throughput time

Eliminate unnecessary, non-value added
operations:
Reduce waiting time
Reduce transfer time
Reduce quality inspection time
Increase process rates
Reduce batch size

59

Capacity Balancing

Flow In

Flow Out

Desire to have same number of units produced in

each work center
Capacity is measured by number of units that can
be made per time period
Total production is limited by the workstation with
the smallest capacity (bottleneck station)
Excess capacity reduces cycle time

60

Theory of Constraints (TOC)

A management philosophy
developed by Dr. Eliyahu Goldratt.
The goal of a firm is to make
money.

Dr. Eliyahu Goldratt wrote

many books including:
The Goal: A Process of Ongoing
Improvement (sold more than 3
million copies)
It's Not Luck (how to apply TOC in
conflict resolution and marketing)
Critical Chain (how to apply TOC in
project management)

Goldratts Rules of Production

Scheduling
Do not balance capacity balance the
flow
The level utilization of a nonbottleneck
resource is not determined by its own
potential but by some other constraint
in the system
An hour lost at a bottleneck is an hour
lost for the entire system
An hour saved at a nonbottleneck is a
mirage

20-64

Customer-Defined Value
The technical performance or quality
of a product is no longer the primary
determinant of customer value
Customers evaluate other "value factors
such as:

On-time Delivery
After Sale Service
Business expertise
Low price for high quality

Value is what the customer wants and

how much would be paid for it
Eliminate non-value-added operations
the customer will not pay for non-valueadded operations

65

Models to Study Production

Systems
Testing new ideas on full-scale systems is
expensive, time consuming, complex, and
unnecessary
Instead, we build models to visualize and
examine aspects of a system
Models allow us to learn about the system and
test various system designs
For instance, Production System Models allow
us to test the impact of production planning
and inventory control decisions so that
Wrong decisions can be avoided
Distruptions of the real process can be avoided
66

Definition of a Model
A model is a simplified, artificial
representation of reality
Constructed to facilitate off-line
study of real object or system
Flow diagrams
Philosophical (conceptual)
Small-scale prototype
Mathematical
67

Systems and Models

Ways to study a
system

A Systems Perspective
Production system represents a key aspect of the
firm
Must maintain global view of the entire supply
chain from materials through product delivery
Must integrate and cooperate with marketing,
purchasing, quality assurance, accounting,
design engineering, and manufacturing
Instability of the production system may occur:
Misuse of marketing (demand) information
Misunderstanding of the relationship among safety
stock, inventory, and production
Bad production decisions

69

BA 411 Course Topics

Demand Forecasting
Long-Range Capacity Planning
Aggregate Production Planning
Inventory Management
Material Requirements Planning
Scheduling and Sequencing

70

Forecasting
Objective: predict demand for production
planning purposes.
Laws of Forecasting:
1. Forecasts are always wrong!
2. Forecasts always change!
3. The further into the future, the less reliable
the forecast will be!
Forecasting Tools:
Qualitative: Delphi, Analogies
Quantitative: Causal and time series models
Production and Inventory ControlIntroduction (71)

Aggregate Planning
Objective: generate a long-term production plan
that establishes a rough product mix, anticipates
bottlenecks, and is consistent with capacity and
workforce plans.
Issues:
Aggregation: product families and time periods
must be set appropriately for the environment.
Coordination: AP is the link between the high
level functions of forecasting/capacity planning
and intermediate level functions of MRP,
inventory control, and scheduling.
and Inventory Control AnticipatingProduction
Execution:
Introduction (72) AP is virtually always

Capacity/Facility Planning

How much and what kind of physical equipment is

needed to support production goals?
Issues:
Basic Capacity Calculations: stand-alone capacities
and congestion effects (e.g., blocking)
Capacity Strategy: lead or follow demand

Make-or-Buy: vendoring, long-term identity

Flexibility: with regard to product, volume, mix
Speed: scalability,
learning curves
Production and Inventory ControlIntroduction (73)

Inventory Management
How much to order of each material
when orders are placed with either
outside suppliers or production
departments within organizations
When to place the orders
The overall objective of inventory
management is to achieve satisfactory
levels of customer service while
keeping inventory costs within
reasonable bounds by answering these
two questions .

Material Requirement Planning

Objective: Determine all purchase and
production components needed to satisfy the
aggregate/disaggregate plan.
Issues:
Bill of Materials: Determines components,
quantities and lead times.
Inventory Management: Must be coordinated
with inventory.
Production and Inventory ControlIntroduction (75)

Sequencing and Scheduling

Objective: develop a plan to guide the release of
work into the system and coordination with
needed resources (e.g., machines, staffing,
materials).

Methods:
Sequencing:
Gives order of releases but not times.
Scheduling:
Gives detailed
release
times.
Production and
Inventory ControlIntroduction (76)

Review Questions

A Production System is:

a) The set of resources and procedures

involved in converting raw materials into
products and delivering them to customers
b) The set of resources and procedures
involved in converting products into raw
materials and delivering them to
customers
c) The set of resources and procedures
involved in producing a system
d) None of the above
77

Review Questions

Efficient production layout will

result in:

a)
b)
c)
d)
e)

Efficient use of space

Efficient personnel movement
Maximum equipment utilization
Smooth flow of work
All of the above

78

Review Questions

As order quantity increase:

a) Ordering cost increase and holding

cost decrease
b) Ordering cost decrease and holding
cost increase
c) Ordering and holding cost increase
d) Ordering and holding cost decrease
79

Review Questions

Total production is limited by:

a) The workstation with the largest

capacity
b) The workstation with the smallest
capacity
c) The amount of WIP inventory
d) The number of workstations
available
80

Review Questions

Production system models allow us

to:

a) Learn about the system and test various

system designs
b) Test impact of production planning and
control decisions
c) Visualize and examine aspects of a
system
d) All of the above
81

Questions? Comments?

82