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introduction to the apics cpim learning system thousands of employers around the world use the apics certified in production and inventory management cpim designation to determine if prospective employees have the needed knowledge and skills to manage production and inventory operations effectively and efficiently being effective means adding value to the organization in part by understanding its overall and operations strategies and then implementing tactics that help those strategies to succeed cpims also add value when they find ways to streamline operations and make them more efficient this can directly improve the organization s profitability while some people will use this apics cpim learning system to help study for the cpim exam others will use it as a means of self improvement or because they work in a complementary field and want to know just the basics part 1 of the learning system presents range of audiences part 2 of the course adds the depth that those working directly in the field will desire note that the two parts of the learning system mirror the two parts of the cpim exam earning the cpim designation requires passing both parts of the exam regardless of how you are using either or both parts of this course larger supply chain manufacturers might be suppliers to other manufacturers so suppliers are also a direct focus of this course the larger functions of physical supply to organizations and physical distribution of completed work are addressed at a lower level of detail if organizations want to remain viable in today s global competitive markets they need to integrate with the larger supply chain better collaboration with internal and external parties provides more value to the ultimate customer at a lower total cost than more conventional adversarial relationships can provide both parts 1 and 2 address how manufacturers can integrate with the greater supply chain but the primary focus remains on production and inventory control learners with a strong interest in managing the broader supply chain might be interested in the apics certified supply chain professional cscp designation while those more interested in specializing in logistics physical supply and physical distribution might want to pursue the apics certified logistics transportation and distribution cltd designation information on these designations can be found on the apics website wwwapicsorg apics cpim learning system part 1 part 1 of the apics cpim learning system contains one module which presents the basics of supply chain management part 1 of the learning system does not follow the same structure as the exam from the online resource center module 1 basics of supply chain management bscm section a of this module starts by introducing the supply chain management environment and it shows how manufacturing fits within this highly interconnected system and helps it thrive since organizations choose many different ways to compete and succeed operations strategies directly flow from and support corporate strategy section b explores how these strategies direct the choice of manufacturing environment such as assembletoorder manufacturing process type such as
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manufacturing fits within this highly interconnected system and helps it thrive since organizations choose many different ways to compete and succeed operations strategies directly flow from and support corporate strategy section b explores how these strategies direct the choice of manufacturing environment such as assembletoorder manufacturing process type such as batch processing and manufacturing process layout such as cellular manufacturing the section closes with overviews of the processes of manufacturing planning and control and lean manufacturing section c provides an overview of continuous improvement philosophies improvements can make the organization more effective at achieving or redirecting its strategy they can also reduce costs and thus improve profits and organizational viability however organizations that maintain even a profitable and effective status quo are actually moving backward because the competition will be improving their own efficiencies and effectiveness improvement therefore cannot be a onetime event but must be continuous the continuous improvement philosophies discussed in this section such as lean total quality management and six sigma are not easy programs to implement or sustain getting a positive return on investment from them requires every person in the organization to be involved and committed the overviews here will help give programs as well as how to ensure their success emphasis on reduction of waste including unneeded inventory it also addresses how this methodology which evolved from justintime manufacturing can be used for continuous improvement section e addresses demand management which is how manufacturers determine how much demand there is for their demand that cannot be satisfied within the available lead time sections f through h of this module explore how to perform the core functions of conventional manufacturing planning and control which start with master planning and proceed to material requirements planning with checks on capacity at each point at which the process becomes more detailed after reading these sections you will be able to manually calculate the master production schedule for most practitioners this is performed by a computer system but the only how the system itself works the sections also explore the practical options schedulers have to adjust schedules and compare and contrast how lean manufacturing performs each of the core functions material requirements planning purchasing is covered at this point as the need for materials from external inputs requires ordering the goods in advance in addition to the basic functions and participants in purchasing the strategic role of procurement in integrated supply chain management is addressed sections j and k address inventory management and this includes planning inventory levels in the overall system to achieve organizational strategy for required service levels as well as managing inventory at the more detailed item levels the sections also show how lean manufacturing approaches inventory ordering section l covers execution and control the other output of material requirements planning since proper execution and control of a manufacturing operation requires an understanding of the theory of constraints this concept is introduced and then referred to as execution is scheduled implemented and controlled a focus of
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inventory ordering section l covers execution and control the other output of material requirements planning since proper execution and control of a manufacturing operation requires an understanding of the theory of constraints this concept is introduced and then referred to as execution is scheduled implemented and controlled a focus of this area is the options available to prioritize execution schedules to account for issues or optimize efficiency section m provides an overview of physical distribution inventories in the distribution system transportation and warehousing these are the parts of the supply chain that often form the intermediate customer for a manufacturing operation as distribution centers order the goods using their distribution requirements planning systems it is vital that manufacturers understand how this system works so they can make choices that result in the lowest total cost to the final customer rather than making choices that create immediate benefit final price will result in fewer sales and thus lower profits for each party in the chain the needs of transportation and other logistics parties should be taken into account from the start section a introduction to supply chain management after completing this section students will be able to show how manufacturing fits within and supports the larger supply chain describe how organizations become crossfunctional to enable tradeoff resolution and external integration identify manufacturing objectives and the role of materials management understand the internal and external influences that shape the organization s strategy including mandates for corporate social responsibility such as the united nations global compact link strategy to the manufacturing business plan and strategic tactical and operational performance measures organizations and the functional areas within them used to be able to turn a profit despite difficulties in communicating demand and product design needs to other parties purchasers and supplier sales staff were the only contact point between a manufacturer and a supplier organization the purchaser was charged with negotiating the lowest price and best delivery options for materials and the seller was charged with getting the highest price and most convenient delivery options given these opposing interests it was natural to view this as an adversarial relationship with winners and losers eventually evolved into lean changed all of this innovators such as toyota worked with their suppliers as trusted partners and sold the idea that the entities connected in a supply chain from the earliest destiny toyota s competitors may have scoffed when they heard that toyota was eliminating sacrosanct duties such as the receiving and inspection of incoming subassemblies but they took notice when toyota s vehicles sold for a lower price point yet had higher quality concepts of supply chain management have been successfully applied the supply chain embodies sharing cost savings among partners such as finding ways to reduce ordering costs or the setup costs for a customer s operations sharing savings encourages innovation and helps build trust similarly first organizational departments and then organizational entities began to see the need to involve other parties in the design of
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cost savings among partners such as finding ways to reduce ordering costs or the setup costs for a customer s operations sharing savings encourages innovation and helps build trust similarly first organizational departments and then organizational entities began to see the need to involve other parties in the design of products and services from the earliest stages their voices helped relate the actual needs of customers to multiple tiers of suppliers while suppliers manufacturers and distribution functions ensured that products were designed for efficient manufacture and transportation the result was a product that could sell for less while providing more value from the customer s perspective another revolution that brought about supply chain management was the computer manual methods of scheduling were replaced by computerized production scheduling computerized systems evolved from openloop scheduling of orders which made a simplifying assumption of infinite capacity to closedloop scheduling which asked if there was enough capacity to produce what was needed became the core module in enterprise resources planning erp systems software systems for running business transactions erp systems kept expanding by adding modules for various functional departments the departments finally had a shared database that could coordinate formerly disconnected activities and provide a holistic view of the impact of tradeoffs between the conflicting needs erp and the growth of electronic methods of transmitting data such as electronic data interchange edi allowed organizations to replace slow paperbased forms with rapid information exchange both internally and with their trading partners information thus replaces inventory information on product demand received in a timely fashion allows organizations to greatly reduce inventories because the actual need is known sooner this trend continues with internet linkages between external organizations through erp or other advanced systems such as cloudbased applications that are hosted remotely supply chains are becoming necessary due to the relentless pace of globalization and technology the life cycle of products from research and development through growth and eventual decline is shrinking rapidly as manufacturers develop faster ways to scale up production and communicate design and marketing changes to suppliers and distributors competition is only a mouse click away so no organization has only local competitors any longer organizations need to focus on what they do best called core competencies and allow others to specialize in other supply chain tasks whenever they can be done faster cheaper andor better thus the trends of competitor can devise a superior supply chain in this manner given this need for integration into a greater supply chain the topics in this section start by explaining the supply chain environment and strategy to thrive in their environment corporate strategy is not tactical decisions that either bring the strategy to fruition or cause it to wither and die this section also explores other considerations such as complying with corporate social responsibility mandates topic 1 the manufacturing supply the supply chain management environment manufacturers form the core of a supply chain that stretches from the most upstream raw materials through various tiers of suppliers
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it to wither and die this section also explores other considerations such as complying with corporate social responsibility mandates topic 1 the manufacturing supply the supply chain management environment manufacturers form the core of a supply chain that stretches from the most upstream raw materials through various tiers of suppliers and then through a downstream distribution function which may include retailers until it reaches the final customer who could be an individual or an organization a manufacturer may have multiple supply chains to reflect differences in source materials or production or distribution methods the apics dictionary 16th edition defines a supply chain as the global network used to deliver products and services from information physical distribution and cash while the supply chain concept is oriented toward producers of products even pure service organizations will have suppliers and customers and thus will form a supply chain as well the dictionary defines the service industry as follows broadest sense all organizations except farming mining and manufacturing includes retail trade wholesale trade transportation and utilities finance insurance and real estate construction professional personal and social services and local state and federal governments management might be called supply chain managers operations managers or materials managers or they might have more focused job titles organizations might have supply chain managers who have a broader focus or other job roles that focus on production and inventory control regardless of how the organization does it both the overall supply chain and production and inventory control need management the dictionary defines supply chain management as follows the design planning execution control and monitoring of supply chain activities with the objective of creating net value building a competitive infrastructure leveraging worldwide logistics synchronizing supply with demand and measuring performance globally exhibit 11 shows how a supply chain is composed of various entities that each have upstream partners toward the raw materials end of the chain and downstream partners toward the final customer exhibit 11 supply chain the dictionary defines upstream and downstream as follows upstream used as a relative reference within a firm or supply supplier downstream used as a relative reference within a firm or customer the exhibit shows that a supply chain provides certain distinct functions such as supply consolidation manufacturing distribution wholesale and retail these are called echelons an echelon can contain many entities that are serving that particular supply chain may not have or need a particular echelon if an echelon adds more value than it costs then it is value added and should be part of the chain if it consumes more value than it adds it should be eliminated transportation costs by more than the cost of the warehouse the next thing to realize is that a supply chain is always centered on supplier to an auto plant for example a graphic would show your suppliers upstream and perhaps even their suppliers further upstream and the auto plant would be your downstream business tobusiness b2b customer a supply chain can have a large
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realize is that a supply chain is always centered on supplier to an auto plant for example a graphic would show your suppliers upstream and perhaps even their suppliers further upstream and the auto plant would be your downstream business tobusiness b2b customer a supply chain can have a large number of suppliercustomer relationships within it while a given organization might own more than one echelon vertically integrated organizations like henry ford s ownership of ocean shipping lines and ore mines for proven more efficient to excel at a few things and then work with others who excel at their own specialties the bottom of the exhibit shows that directtocustomer interactions could occur beginning from any echelon point such as a computer graphics card supplier selling graphics cards directly to end customers through a website many supply chains provide more than one path for selling products or services there are three primary flows that need to be managed from the perspective of an entire supply chain rather than being individually optimal but ineffective overall flow of information flow of cash flow of materials and services the primary flow of materials and services is from left to right as including the important distribution function that adds value by making goods and services available at the point of demand product returns flow in the opposite direction returns of products returns in the supply chain there can also be b2b returns across the supply chain the graphic shows that returns could be initiated from any upstream point such as a manufacturer making a freight claim distribution center returning unsold inventory as allowed by contract point is that this system often needs some investment in planning and forward supply chain reverse logistics may also play a role in product s life for example samsung provides a box for shipping back empty toner cartridges so they can be reused in the phones that are traded in are often remanufactured by adding new external cases and sold again as goods flow downstream payments for the goods flow upstream for the most part refunds are obviously the exception in addition information flows between partners in both directions information on demand and design or other product requirements flows primarily upstream but this could become more of a collaboration or conversation and go in both directions similarly information on manufacturing capacity or inventory might flow both ways forming a supply chain forming a supply chain first requires internally orienting the organization to become more crossfunctional only after that step can the organization integrate externally becoming a crossfunctional organization becoming a crossfunctional organization requires increasing the first let s look at the current state for many organizations functionally oriented organizations organizations historically have been functionally oriented organized into departments such as research and development purchasing production distribution and marketing and sales these departments have often been compared to grain silos each in its own walledin world not only has communication between such departments been slow and formal but each department
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organizations historically have been functionally oriented organized into departments such as research and development purchasing production distribution and marketing and sales these departments have often been compared to grain silos each in its own walledin world not only has communication between such departments been slow and formal but each department has been given a strong this impacts other departments because the incentives of these departments have often been in opposition optimizing one has invariably created problems for the others resulting in tradeoffs and the system overall has become suboptimal exhibit 12 shows the objectives of some key functional areas and gives some examples of the lessthanoptimal results exhibit 12 tradeoffs in functionally oriented organizations functional objectives counterproductive results functional objectives counterproductive results purchasing lowest price sufficient supplies quantity discounts quality inventory buffers inventory increased by bulk orders operations materials available reduced setup reduced cost per unit and high maximized labor utilization stable production schedules safety stocks inventory increased by long runs few changeovers risk of stockouts of other items buffer inventories for high utilization high inventory less responsive to order changes functional objectives counterproductive results distribution lowest shipping full truckloads inventory available low transportation costs warehouse costs or fewer warehouses but higher transportation safety stocks marketing maximized sales satisfied customers flexible product safety stocks high inventory in distribution system orders change instability finance maximized profit rapid cash flow minimized assets promotion of customer service and production efficiency stocks or other inventory engineering innovative designs quality materials conflict with lowprice purchasing functional objectives counterproductive results planning stable schedules reduced less production flexibility missed opportunities redundancyresilience key tradeoffs from an operations manufacturing andor service provision perspective include interactions with salesmarketing and with finance sales and marketing s highest priority will be customer service which often results in requests for expedited orders or changes in what is being produced with little notice honoring these requests by interrupting current production orders will reduce production efficiency not honoring them may affect customer service sales and marketing could also desire high production flexibility which will increase setup costs and reduce economies of scale other ways to provide a high level of customer service include maintaining high inventories andor a distribution network with facilities near each market for rapid delivery these choices create significant inventory infrastructure and labor costs finance s highest priority is to minimize inventory and physical assets since assets on the books are money tied up in the system that cannot be used for other purposes such assets usually require having raised money through expensive means such as debt financing or owner investment reducing inventory or having a less extensive distribution network will impact customer service unless more creative strategy another finance priority is to have high production efficiency to minimize costs which reinforces the goals of operations except when a focus on shortterm cost cutting hinders longterm goals or customer service crossfunctional organizations taking a crossfunctional view of the internal organization essentially means applying the concepts of supply chain management to the internal
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to have high production efficiency to minimize costs which reinforces the goals of operations except when a focus on shortterm cost cutting hinders longterm goals or customer service crossfunctional organizations taking a crossfunctional view of the internal organization essentially means applying the concepts of supply chain management to the internal organizational structures incentives and metrics it may also involve strategiclevel analyses of what adds value and what does not add value in a supply chain this can be called a value chain analysis defined in the apics dictionary 16th edition as deliver its products and services starting from the origination point and continuing through delivery to the final customer effectively changing organizational structures to become more cross functional often takes the form of focusing more on process flows than on functional areas when processes are considered to be more important than the functions that perform them organizations gain an overall systems perspective which helps to ensure that each aspect of all costs into account start with research and development and then include procurement management production distribution and marketing and sales including order management clearly this process as defined goes inefficiencies and the need to optimize the overall process organizations have found it necessary to develop a method of getting these departments to act as one this unifying role was initially called materials management and is now more commonly called logistics management and the function is called logistics the dictionary defines logistics as follows supply chain management that controls the forward and reverse movement handling and storage of goods between origin and of obtaining producing and distributing material and product in where it has greater usage its meaning can also include the movement of personnel supply chain managers take the concept of a unifying role beyond even the boundaries of logistics the most senior supply chain manager might have some degree of authority over an entire process for example this role could ensure that product design ease of production and distribution similarly a person in this position could ensure that overall inventory targets are maintained when appropriate a unifying role such as this might also work with other support functions such as finance information systems or human resources to ensure that the needs of the overall process come first often supply chain managers will also be involved in risk management from an organization andor supply chain perspective because they have the bigpicture perspective that risk management requires the dictionary defines risk management as follows the identification assessment and prioritization of risks followed minimize monitor and control the probability andor impact of unfortunate events or to maximize the realization of opportunities risk management is needed in supply chains because these are complex systems that are often streamlined to the point where a failure in any part could create a supply disruption this in turn can lead to dissatisfied or lost customers identifying analyzing and creating plans for how to address risks can often be less costly than simply reacting to events after
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systems that are often streamlined to the point where a failure in any part could create a supply disruption this in turn can lead to dissatisfied or lost customers identifying analyzing and creating plans for how to address risks can often be less costly than simply reacting to events after they occur insurance is a good example of a valueadded risk tool other examples include geographic diversification to reduce the risk of disruption from severe weather and other regional events redundancy to allow for different plants and getting supply from multiple sources rather than just one investing in resilience does have a cost tradeoff however in part because it can reduce economies of scale for example a dedicated plant when unifying roles such as that of a supply chain manager are added it is vital that the organization clearly designate a chain of command for production and inventory control this way any planners and other professionals will understand how to direct their concerns or challenge these decisions when needed production and inventory control professionals will know their processes and current issues best and need to be able to provide input into any larger discussions there is also a real risk in this type of organizational structure of having the two boss problem where a given individual is given conflicting commands from different managers conversely if the supply chain management position is given no real authority it streamlining and end result effectiveness crossfunctional organizations also need crossfunctional person s performance review for example equipment andor staff utilization could be assessed alongside changes in inventory levels this would provide a disincentive to building up inventory just to keep becoming a crossfunctional organization will not eliminate the tradeoffs discussed earlier but the players involved will better understand the total impact of their decisions and might therefore agree on a third way that balances all parties needs some of the methods discussed later in this text such as sales and operations planning for mediumterm balancing and master scheduling for short term balancing help to achieve this consensus path between inventory and other customer service costs and production efficiency some organizations will be able to implement systems discussed later such as lean manufacturing or apply the theory of constraints to execution to achieve better results for many of these objectives simultaneously integrating externally any big idea like externally integrating with other organizations in your supply chain will be difficult to implement and sustain given the see the end in mind and then help other organizations in your supply chain to make this happen this is called the channel master orchestrator or nucleus firm and it often falls to the organization with the most brand awareness or sheer size to take up this role manufacturers might take on this role especially if they have influence with suppliers due to their purchasing volume or with retailers because their products contribute strongly to sales or profits in other cases product designers who outsource their manufacturing will be channel
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or sheer size to take up this role manufacturers might take on this role especially if they have influence with suppliers due to their purchasing volume or with retailers because their products contribute strongly to sales or profits in other cases product designers who outsource their manufacturing will be channel masters large retailers or online sellers might instead have the most influence especially if they also control the distribution function just looking at a supply chain graphic will not indicate the after raising awareness of the benefits of supply chain management the channel master works to integrate communications to the degree allowed by the current level of trust between the organizations without information sharing there is no supply chain management trust is not earned quickly however and conventional wisdom will oppose sharing what some will see as information that needs to be kept secret to maintain a competitive advantage the organizations will have to develop policies and strategies for developing this trust and sharing more information over time the types of information to start with include that on demand and orders and on promotions and marketing campaigns a key benefit of sharing information is that it will allow the network of organizations to avoid major problems of supply failing to match demand oversupply or undersupply failing to communicate demand or promotion information and forecasting based only on your immediate customers orders can create a situation called the bullwhip effect which is a major problem that supply chain management is intended to solve the apics dictionary 16th edition defines the bullwhip effect as follows an extreme change in the supply position upstream in a supply chain generated by a small change in demand downstream in the supply chain inventory can quickly move from being backordered to being excess this is caused by the serial nature of communicating orders up the chain with the inherent transportation delays of moving product down the chain the bullwhip effect can be eliminated by synchronizing the supply exhibit 13 shows how the bullwhip effect becomes a major problem exhibit 13 bullwhip effect briefly when a retailer has some minor fluctuation in demand it might order a little more than the average demand after a stockout or not shift between minimum and maximum orders then the distributor may also continue this trend of wide swings in orders sales promotions that are not communicated can exacerbate this effect because they and their suppliers this encourages an overall increase in inventory and results in very difficult production schedules for manufacturers also give customers an incentive to order more next time for safety communicating information on actual demand rather than orders as well as planned promotions or increases in safety stock can prevent this occurrence or lessen its effect methods discussed later such as vendormanaged inventory can also mitigate this effect other key elements for success in forming a cohesive supply chain include developing an understanding of the needs of partners both upstream and downstream sharing cost savings fairly equally
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stock can prevent this occurrence or lessen its effect methods discussed later such as vendormanaged inventory can also mitigate this effect other key elements for success in forming a cohesive supply chain include developing an understanding of the needs of partners both upstream and downstream sharing cost savings fairly equally participating in risks and rewards and finding ways to measure the total supply chain costs flexibility strategic effectiveness and other metrics metrics will be discussed later in this section topic 2 introduction to manufacturing the previous topic addressed supply chain management as a way of competitive here we drill down to core functions within the supply chain manufacturing and materials management these vital processes create value for customers the remainder of this topic shows how organizations consider the environment in which they operate and then decide upon an overall strategy which is further refined into an operations manufacturing or service strategy or manufacturing business model role of manufacturing and materials management as a professional working primarily in production and inventory your organization in your supply chain and in your larger community role of manufacturing value is far less than that of a sheet of steel or a gold ring since a consumer would need to develop expensive infrastructure and numerous skills to make something useful out of the raw materials manufacturing adds value to society by transforming raw materials and labor into products and services that are in demand the component or service like fast delivery based on the available organization can provide more perceived value or sell the good for less than these alternatives and for more than its own cost it will make a profit this profit is a measure of the value that the organization has added and the completed sale proves that the customer has perceived this value that is value is what customers organizations create wealth for their owners and workers and indirectly for society through this transformation process the wealth output of goods and services over a given period of time a nation s natural resources are merely potential sources of wealth since most require further processing and services to make them available at the point of demand in a form that can satisfy this demand similarly the workers and the right facilities and equipment is another potential source of wealth that is realized when this capacity is utilized because wealthier nations have higher standards of living manufacturing plays an important role in society conversely organizations that fail to turn a profit are destroying wealth when a good or service costs more than customers are willing to pay the wrong thing may have been produced in the first place or the process and supply chain used to produce and deliver the good may have had steps that added cost but not value linking operational choices back to strategy can improve the odds that the right thing is being produced methods discussed in this learning system such as lean and its emphasis on eliminating waste
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chain used to produce and deliver the good may have had steps that added cost but not value linking operational choices back to strategy can improve the odds that the right thing is being produced methods discussed in this learning system such as lean and its emphasis on eliminating waste can help in determining how to retain only those elements of a process that add value in the eyes of the customer materials management which is used here to mean the subset of supply chain management more directly related to manufacturing and inventory control is a discipline designed to ensure that value is being created in the manufacturing process materials management and related terms production and inventory management professionals are often called materials managers logistics managers or operations managers they can also be called supply chain managers but in this text we will reserve that term for a larger role that not only manages materials but also coordinates the overall system by collaborating with support functions and external organizations the apics dictionary 16th edition defines operations management as follows transform inputs into finished goods and services 2 a field of study that focuses on the effective planning scheduling use and control of a manufacturing or service organization through the study of concepts from design engineering industrial engineering management information systems quality management production management inventory management accounting and other functions as they affect the operation materials management is a useful general term for this role because controlled the dictionary defines materials management as the grouping of management functions supporting the complete cycle of material flow from the purchase and internal control of finished product good or service in a given time period to satisfy the organization s strategy this process will consume capital labor and materials capital investments generally refer to infrastructure such as property portion of this cost is charged back to a given process in the form of overhead labor and materials that are directly used in a process are these resources regulates the process itself this involves getting the right resources to the right place at the right time to accomplish a task if they arrive early there is a cost for this if they arrive late there is an even larger cost scheduling and controlling the timing and use of resources will therefore be the difference between an efficient between profit and loss or failure for the organization materials manager has a second major responsibility which is to ensure meeting a predetermined level of customer service the dictionary defines customer service as follows for a materials manager customer service primarily means the second definition the ability to fulfill demand within a predefined amount of time organizational strategy shaped in part by customer expectations will define the targets for customer service customer expectations for delivery can be expressed as demand lead time which the dictionary defines as specifically materials managers perform two major organizational functions term that encompasses highlevel planning master scheduling material requirements planning mrp and
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strategy shaped in part by customer expectations will define the targets for customer service customer expectations for delivery can be expressed as demand lead time which the dictionary defines as specifically materials managers perform two major organizational functions term that encompasses highlevel planning master scheduling material requirements planning mrp and execution control along with the related checks on available capacity logistics materials managers are responsible for incoming physical supply and outgoing physical distribution they monitor and control purchasing warehouses and raw materials workin process and finished goods inventories these functions are discussed in more detail later in this module objectives of manufacturing the seven rights of logistics define the objectives of manufacturing right time the right place and the right cost and at the right quality level note how this encapsulates the two major responsibilities of materials management to use organizational resources wisely and to meet the targeted level of customer satisfaction wise use of resources is an internal goal related to efficiency and cost while the remainder of the rights refer to the external goal of meeting customer expectations prohibitively expensive because it would require expensive investments such as large amounts of safety stock or unused manufacturing capacity therefore organizations determine what percentage of the time they will risk a stockout or other type of customer service failure in order to balance customer service against profitable and sustainable operations the role of materials manager is therefore an act of balancing organizational resources against demand in a profitable and feasible manner the rest of this topic explores how organizations plan to achieve these objectives it starts by examining the business environment business environment input to organizational strategy because organizational strategy drives operations strategy it is vital to learn about not only the organization s chosen strategy but also what forces exist that make that strategy prudent the business environment is broken down here into external forces or those outside of one s control that shape strategy and internal forces or those within one s control that guide strategy external forces shaping strategy organizations operate in an environment that contains numerous external forces beyond their direct control these forces must be container among other innovations the internet makes it easy to find conduct many business communications at very low cost the shipping container and oceangoing containerships have reduced the cost of transportation to the point where most goods can be sold in blessing because the firm can market its products and services industries have only local competition today each nation has its own regulations related to business operations or buying and selling goods within its borders all relevant laws and regulations must be understood and plans for ensuring and proving compliance must be made common areas of regulation include product safety worker and job seeker rights environmental protection anticorruption and legal liability understanding and complying with these regulations will help the organization stay in in some instances supranational organizations have made navigating regulatory and legal differences between countries easier joining a
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must be made common areas of regulation include product safety worker and job seeker rights environmental protection anticorruption and legal liability understanding and complying with these regulations will help the organization stay in in some instances supranational organizations have made navigating regulatory and legal differences between countries easier joining a trade bloc or treaty helps to standardize international trade regulations and requirements to that end the world trade for economic cooperation and development oecd all have their own standards and regulations for trade shipping and other shared economic concerns the economy will also influence demand or lack of demand for the organization s products and services some organizations diversify to include products that sell well in tough economies the economy will also influence market wages and the availability of qualified workers longterm demographic shifts can influence demand for particular impacts worker availability and cost and skill levels customer and internal forces guiding strategy organizations also have a number of internal forces within their own control that help guide their strategy however in choosing the types of customers they want to market to and the types of products they will produce to satisfy those customers requirements organizations accept the fact that the customers will have expectations that are only partially controllable by the organization that guides how they want to be perceived and how they choose to act the governance style and policies that result from the organization s mission and vision statements are sometimes called corporate social responsibility an international framework that can be adopted for corporate social responsibility is the united nations global compact which will be the oecd also issue their own corporate governance guidance or regulations customer expectations and corporate social responsibility are discussed next customer expectations price become a baseline for competitors in that field customer expectations can take the form of rapid design product requirements prices specific lead times the time from order to arrival quality delivery frequency dependability product and volume flexibility and aesthetics two terms from marketing can help explain why these expectations seem to be ever increasing minimum customer expectations for lead times or other specifics are called order qualifiers defined in the apics dictionary 16th edition as follows those competitive characteristics that a firm must exhibit to be a seek to compete on characteristics other than price but in order a good example of an order qualifier that applies to almost any product is a certain minimum level of quality organizations unable to meet minimum requirements such as these will not be considered further failure to meet minimum requirements or unwanted features are sometimes called order disqualifiers organizations know this and so develop strategies that they hope will provide them with these minimum requirements in some areas while differentiating themselves from the competition in other areas to provide a competitive advantage if the customer s criteria for selection align better with the qualities offered by this product and its related services than with those offered by the alternatives then the product
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these minimum requirements in some areas while differentiating themselves from the competition in other areas to provide a competitive advantage if the customer s criteria for selection align better with the qualities offered by this product and its related services than with those offered by the alternatives then the product becomes an order winner the dictionary defines order winners as follows those competitive characteristics that cause a firm s customers to choose that firm s goods and services over those of its competitors order winners can be considered to be competitive advantages for the firm order winners usually focus on one rarely more than two of the following strategic initiatives pricecost quality delivery speed delivery reliability product design flexibility aftermarket service and image or a combination of price product features quality and related services that customers will see as a superior value two forces keep order winners from remaining permanently at the top first different customer groups will have different priorities and thus different ideas of what is best value second new products features and services like a faster processor or rapid delivery quickly move from the category of order winners and into the category of order qualifiers as competitors also adopt them this helps explain why product life cycles are shrinking especially for innovative products life cycles are discussed in the next section corporate social responsibility within the constraints of laws and regulations organizations can choose how they want to operate in their given environments some will do the minimum required to maintain compliance others will voluntarily elect to live by a higher set of standards corporate social responsibility refers to voluntary efforts to balance the needs of the organization to make a profit and stay in business against the needs and expectations of society areas of particular concern for policy development include human rights labor practices the environment for example organizations might take back products at the end of their life cycle and then extract expensive or toxic materials from them states this is mandated by law for electronics or products containing certain hazardous substances an even less costly option would be to design products that avoid using toxic materials when possible in another example an organization might use only postconsumer recycled paper to reduce deforestation while possibly saving money on raw materials similarly investing in led lighting will reduce electricity usage and total costs in the long run these examples show that there can be some quick wins available to materials managers looking to comply with corporate social responsibility mandates look for projects that provide simultaneous economic and social benefits the basic idea behind corporate social responsibility is sustainability the apics dictionary 16th edition defines sustainability as an organizational focus on activities that provide present benefit without compromising the needs of future generations an organization that chooses to emphasize sustainability will work toward responsible economic growth that benefits the society within which it operates by providing fair wages equal opportunities for return for these investments it may
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an organizational focus on activities that provide present benefit without compromising the needs of future generations an organization that chooses to emphasize sustainability will work toward responsible economic growth that benefits the society within which it operates by providing fair wages equal opportunities for return for these investments it may achieve a strategic advantage in the form of increased worker and customer loyalty positive press because there is a cost to develop and implement a social responsibility policy many organizations turn to standards or frameworks to help ensure that policies are complete practical to understand one such framework is the united nations global compact the dictionary defines this compact and its management model as follows united nations global compact a voluntary initiative whereby companies embrace support and enact within their sphere of influence a set of core values in the areas of human rights labor standards the environment and anticorruption un global compact management model a framework for guiding companies through the process of formally committing to assessing defining implementing measuring and communicating the united nations global compact and its principles organizations that get board approval and have their chief executive become a signatory to the un global compact voluntarily pledge to adhere to 10 universal principles related to human rights labor environmental protection and anticorruption exhibit 14 reproduces these principles verbatim with permission from the un global compact exhibit 14 un global compact 10 principles un global compact 10 principles human rights businesses should support and respect the protection of internationally proclaimed human rights and make sure that they are not complicit in human rights abuses labour businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining the effective abolition of child labour and occupation un global compact 10 principles environment businesses should support a precautionary approach to environmental challenges undertake initiatives to promote greater environmental encourage the development and diffusion of environmentally friendly technologies anticorruption businesses should work against corruption in all its forms including extortion and bribery voluntarily complying with such a program may help prevent nations from developing regulations that are costly to comply with organizations that commit to these principles in policy and action not only improve their public image but also often find that they have lower risks such as for corruption which makes the organization more stable in the eyes of investors and thus a more attractive the most visible partner in the network for this reason the global compact stresses the need to ensure that suppliers are compliant with these principles or are making reasonable progress in that direction when suppliers are located in countries with low labor costs compliance becomes both more vital and more difficult to ensure the un global compact management model assists with incorporating the 10 principles into strategy and daily operations within an organization and with its suppliers the model is practical and scalable and includes a feedback loop to ensure continuous commit this first step is undertaken by company
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more difficult to ensure the un global compact management model assists with incorporating the 10 principles into strategy and daily operations within an organization and with its suppliers the model is practical and scalable and includes a feedback loop to ensure continuous commit this first step is undertaken by company leaders including management and the board of directors they commit governance structures such as board approval processes culture strategy and daily operations assess in this step the organization assesses its current state in terms of risks and opportunities related to human rights labor analysis considers financial costs or potential gains as well as other hardertoquantify positive and negative impacts and then weights these benefits and costs this helps the organization prioritize areas for improvement based on the largest net gains create or refine the organization s strategy and related policies goals and metrics this step defines the end results up front so implement in this step the new strategy is transformed into tactics such as capital improvement projects to provide any necessary capacity and resources worker engagement and its suppliers or distributors plans for assessing compliance and action plans for dealing with missed goals note that suppliers or other partners who choose not to comply with these policies or cannot become compliant within a reasonable amount of time measure this is a monitoring and controlling step this involves adjusting metrics to ensure that there is a way to determine also important to adjust metrics used in individual team and external provider performance assessments so that everyone has an incentive to work toward the committed goals investment in corporate social responsibility comes from engaging with local communities the workforce the press and other stakeholders helps the organization to celebrate its successes and improve its reputation since communication includes listening a vital part of this step is listening to these various stakeholders to identify goals for continuous improvement the intent is that the learning generated by the feedback loop should create an upward spiral of progress in terms of further refinements the un global compact management model has three key elements that need to be in place for this type of effort to succeed governance transparency and engagement the first step highlights the need for corporate governance which includes the tone at the board of directors transparency is provided when goals and specific metrics for success are shared so that stakeholders can make a reasonable assessment of the organization s activities and progress engagement is embodied in the final step but it is important that this engagement be ongoing so that the organization forms lasting relationships these relationships can often be an important source of information on customer expectations once an organization understands the environment in which it will these inputs and develop a strategy metrics are also discussed next because they are how strategies are implemented compete win customers grow or sustain its market share and satisfy its stakeholders the apics dictionary 16th edition defines a strategic plan as follows the
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understands the environment in which it will these inputs and develop a strategy metrics are also discussed next because they are how strategies are implemented compete win customers grow or sustain its market share and satisfy its stakeholders the apics dictionary 16th edition defines a strategic plan as follows the mission goals and objectives of an organization generally includes an organization s explicit mission goals and objectives and the specific actions needed to achieve those goals and objectives competitive advantage can be provided in many different ways such product differentiation which the dictionary defines as nonprice basis such as availability durability quality or reliability plan the dictionary defines a business plan in part as follows profit objectives usually accompanied by budgets a projected balance sheet and a cash flow source and application of funds statement a business plan is usually stated in terms of dollars and grouped by product family the business plan is then translated into synchronized tactical functional plans through the production planning process or the sales and operations planning process although frequently stated in different terms dollars versus units these tactical plans should agree with each business details organization strategy and financing tactics exhibit 15 shows an example of an integrated measurement model it is shown here because it starts with organizational strategy organization these priorities are used to determine what is important exhibit 15 integrated measurement model note how the overall strategy is broken down into divisional strategic objectives a division business unit or segment is a major line of business that tracks its own profits and losses separately for example a mining division or a manufacturing division objectives at this level need to balance various priorities so four perspectives akin to the perspectives of the balanced scorecard are shown here this strategy financial objectives are sometimes more shortterm such as meeting nearterm cost reduction goals while customer business process and continuous improvement goals tend to help the division note that the balanced scorecard is addressed in more detail a little later in this topic at the next level down are functional area strategies including the operations strategy eg manufacturing strategy or service organization operations strategy and related highlevel performance objectives speed dependability flexibility quality and cost are often basic ways to categorize the ways priorities can be shaped organizations might work to be order qualifiers in all of these categories but due to inherent tradeoffs they generally cannot be order winners for more than one or possibly two of these meaning that they need to specialize in the areas that the strategy dictates will produce a competitive advantage the other areas then are provided to the degree possible that allows them to support the area of specialization exhibit 16 shows some ways to describe each of these functional area performance objectives from the perspective of manufacturing along with examples of how they might create tradeoffs exhibit 16 categories of functional area performance objectives category description tradeoff category description tradeoff time to market eg fast research
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of specialization exhibit 16 shows some ways to describe each of these functional area performance objectives from the perspective of manufacturing along with examples of how they might create tradeoffs exhibit 16 categories of functional area performance objectives category description tradeoff category description tradeoff time to market eg fast research and development short lead times high output per time period andor fast delivery faster equipment may be less flexible emphasizing speed increases cost dependability resilience promise fulfillment ontime delivery neither early nor late andor products that wear and tear may require unused capacity or plantequipment redundancy to provide resilience from service disruptions eg natural disasters or other investment in continuous improvement these add cost flexibility agility volume quickly or change what is being produced without significant disruption more flexible organizations may be less able to maximize economies of scale than same thing for example crosstraining employees means they are less specialized quality fitness for use note that there are many ways to define quality see section c for example equipment that can operate within tight specification limits might limit speed or flexibility quality investments increase shortterm costs but tend to reduce longterm costs ability to provide goods at lowest price versus the competition organizations need to have a competitive price but often cannot lead in this and other areas simultaneously manufacturing will settle on a mix of priorities that promote the overall strategy and these will in turn guide selection of detailed goals and performance measures at lower and lower levels one way to ensure that metrics link back to higherlevel goals is to select just a few critical metrics that can be proven to directly link back to strategy little later it is also important to note that tying objectives to metrics is an important part of making sure that objectives are smart which abbreviation for organizational goals that are specific measurable achievableattainable relevantrealistic and timely the idea is that these goals are useful only if they can translate strategy into actual results and this is possible only if the objectives have all of the smart qualities specific and measurable goals are vital qualities there is no way of objectively identifying whether vague or unmeasurable goals are successful or unsuccessful what is called a success might also be changed arbitrarily achievableattainable goals are important because unrealistic goals tend to demoralize people and thus have unintended negative side effects goals must be relevantrealistic irrelevant goals distract users from working toward the actual strategic priorities thus the need for a limited set need to be achieved during the indicated time horizon such as during planning period perform a whatif analysis or other type of simulation to determine whether the strategy will be profitable the dictionary defines a whatif analysis as the process of evaluating alternate strategies by answering the consequences of changes to forecasts manufacturing plans inventory levels and so forth these types of simulations can also be used to evaluate tactical and operational decisions there are two other important points
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be profitable the dictionary defines a whatif analysis as the process of evaluating alternate strategies by answering the consequences of changes to forecasts manufacturing plans inventory levels and so forth these types of simulations can also be used to evaluate tactical and operational decisions there are two other important points to note about exhibit 15 first each part of the organization needs to link back to the organization s strategy or that strategy will fail to be realized second objectives and metrics are set at each level of management from strategic workstations and so on these points are discussed more next tactics and operations must link back to strategy example manufacturing might choose to enact a strategy of being a lowcost leader for the supply of intermittently needed items by deciding to become the most flexible agile player in the market this would mean that they can maketoorder by scaling up production fast enough to meet demand and then do it again for a different order they will emphasize speed and flexibility as their operational priorities so they can change over equipment quickly and do not have to produce large inventories of multiple lowdemand items if these operational decisions have a lower total cost than competitors can achieve the strategy will be effective metrics measure performance and enable control performance measurement involves determining a set of metrics and the targets or goals for those metrics and then collecting measurements and comparing results to the targets to determine relative levels of success it also serves to motivate individuals and provide managers with the information needed to control activities or steer them back on course as exhibit 15 implied performance measurement occurs at various organizational levels and these measurements need to be interrelated the lowerlevel measures might be summed to the higher levels such as aggregating costs or two or more metrics might be combined in some way to form a composite metric in this way the metrics help form the links between three levels of management strategic strategy sets the longterm direction of the organization performance measurements at this level relate to longterm goals such as profitability productivity learning and growth and market share tactical tactics turn strategy into discrete mediumterm plans the apics dictionary 16th edition defines tactical plans as the set of functional plans eg production plan sales plan marketing plan synchronizing activities across functions that specify production levels capacity levels staffing levels goals and objectives to support the organization s strategic performance measurements at the tactical level show progress toward mediumterm goals needed to realize the strategy this might include budgets production plans and manufacturing metrics like inventory turnover or perfect orders organization performance measurements at this level relate to daily work progress manufacturing metrics might include utilization efficiency and work center cycle times metrics can determine the extent to which strategy is being realized the case metrics related to efficiency will show that certain targets were missed if instead the metrics show that efficiency goals were met
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relate to daily work progress manufacturing metrics might include utilization efficiency and work center cycle times metrics can determine the extent to which strategy is being realized the case metrics related to efficiency will show that certain targets were missed if instead the metrics show that efficiency goals were met but overall revenue goals are off nonetheless this would point to either a poor strategy or poor marketing welldesigned metrics and targets will motivate individuals and teams to work toward operational goals which in turn will help achieve tactical and then strategic goals poorly designed metrics might motivate individuals and teams to optimize their own goals at the expense of the goals of other areas or other parts of the supply metrics need three things to be useful first there needs to be a performance criterion which is the metric itself and could be a ratio second there needs to be a target value or goal which is called a performance standard the dictionary defines a performance standard as follows in a performance measurement system the accepted targeted the third thing needed is an actual result or measurement the result is then compared to the standard to determine relative performance one way to design metrics to ensure that they support the overall performance indicators key performance indicators kpis the apics dictionary 16th edition defines a key performance a financial or nonfinancial measure that is used to define and assess progress toward specific organizational goals and departmental or strategic business unit performance measures a metric used to measure the overall performance or state of affairs scor level 1 metrics are considered kpis an organization can measure many things measuring too few things can result in some goals not being tracked or managed and this things complicates and slows decision making kpis help focus organizational efforts and provide critical links to strategy kpis should be set at strategic tactical and operational levels the bullets on the strategic tactical and operational levels above provide good examples of kpis that might be selected the main point is that the metrics selected as kpis should relate directly to the priorities set in the strategy such as helping the organization to become the lowcost leader note that this model can be extended to the entire supply chain partners who then set their individual strategies and tactics to work toward this shared goal in addition kpis can be rolled up to show total supply chain costs total inventory in the network total lead time and so on these metrics become available only if each supply chain partner agrees to share its summary costs and other metrics the benefit can be a faster cheaper more efficient network that benefits each participant as well as the ultimate customer measured across the supply chain is to use scor metrics which were mentioned in the kpi definition scor metrics have several levels of increasing specificity with level 1 being the most general or aggregated level the dictionary defines the supply chain
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benefits each participant as well as the ultimate customer measured across the supply chain is to use scor metrics which were mentioned in the kpi definition scor metrics have several levels of increasing specificity with level 1 being the most general or aggregated level the dictionary defines the supply chain operations reference scor model in part as follows the standard crossindustry diagnostic tool for supply chain management the scor model describes the business activities associated with satisfying a customer s demand which include plan source make deliver return and enable use of the model includes analyzing the current state of a company s processes and goals quantifying operational performance and comparing company performance to benchmark data scor has developed members have formed industry groups to collect best practices information that companies can use to evaluate their supply chain performance additional information on scor can be found in the online additional resources balanced scorecard another tool for ensuring that performance measurement links back to strategy is the balanced scorecard the apics dictionary 16th edition defines the balanced scorecard as follows a list of financial and operational measurements used to evaluate organizational or supply chain performance the dimensions of the balanced scorecard might include customer perspective business process perspective financial perspective and innovation and learning perspectives it formally connects overall objectives strategies and measurements each dimension has goals and measurements organizations have conventionally measured performance using financial results but the authors of the balanced scorecard kaplan and norton believed that this led to shortterm management at the expense of longterm goals while the financial perspective remains vital to measure and manage kaplan and norton added three other perspectives to help organizations focus on the long term the customer perspective helps organizations stay focused on their customers changing needs the business process perspective helps organizations measure the cost and efficiency of their processes and continually improve the innovation and learning perspective helps spur investment in future growth and workforce maturity organizations might customize these categories to suit their needs the scorecard itself is a simple tool listing the kpis related to each strategic kpi would have several tactical kpis linked to it and each tactical kpi would have several operational kpis management would goal a metric a target and an actual result for a given time period or set of periods some organizations set multiple goals such as a goal and a stretch goal or good better and best goals scorecards can also be used to monitor and control specific areas such as work centers or supplier performance exhibit 17 provides an abridged example of a balanced scorecard exhibit 17 balanced scorecard example measure target actual customer perspective meet customer delivery promises plant xyz delivery performance measure target actual meet customer quality expectations number of floor failure centers innovation and learning perspective economic downturns downside supply chain adaptability scor metric orders orders workforce flexes to relieve bottlenecks percent crosstrained in business process perspective maximize plant xyz capacity bottleneck work center 02 utilization minimize
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xyz delivery performance measure target actual meet customer quality expectations number of floor failure centers innovation and learning perspective economic downturns downside supply chain adaptability scor metric orders orders workforce flexes to relieve bottlenecks percent crosstrained in business process perspective maximize plant xyz capacity bottleneck work center 02 utilization minimize need for workin process rework number of units needing rework financial perspective maximize plant xyz efficiency overall plant efficiency minimize finished goods inventory a items inventory carrying business model manufacturing business model given a set of strategic objectives to satisfy manufacturing will develop a business model that should be capable of achieving those objectives a business model serves to express in greater detail how the organization s strategy will provide a competitive advantage different types of customers often have different needs and priorities so the business model identifies major groups of customers and the product and service parameters that will be needed to satisfy them the model also indicates how product and process design stages should proceed so that new products can be made efficiently a major part of process design will be related to the inputs and outputs finally any support services offered to customers are also specified each of these elements of the operations business model is discussed next defining customers and productservice parameters a customer segment is a grouping of customers who have similar needs or requirements broad customer segments might include industrial institutional government and consumer types industrial customers might have different groupings based on their priorities some industrial customers will value short lead times while others will value low price the most consumer segments are often divided further into market segments which could be based on customer demographics purchasing history or even profitability to the organization organizations may choose to have multiple products and processes that can satisfy segments with very different priorities or they may develop a brandname product and a generic equivalent to satisfy different types of customers once specific customer segments are defined their needs and priorities are defined this may involve different product positioning quality versus price for different segments and thus possibly different product designs or different packaging this leads to another important decision for products how many product lines should the organization have and how many product variants should there be the answers to these questions relate to profitability and market share as well as production feasibility and inventory costs different product lines may enable marketing to different customer segments and thus potentially increase market share having multiple lines of products will complicate production and often increases inventory costs the net profit of each alternative needs to be studied and the business model will propose the alternative that should generate the highest profit for the organization in today s markets few products are just products anymore rather they are productservice packages related services that manufacturing can influence include lead time product availability responsiveness to changes in customer orders and shipping options organizational policy will control some additional services such
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generate the highest profit for the organization in today s markets few products are just products anymore rather they are productservice packages related services that manufacturing can influence include lead time product availability responsiveness to changes in customer orders and shipping options organizational policy will control some additional services such as availability of trade credit returns policy and product servicing availability providing different service levels in some of these areas might be enough of a differentiator to satisfy different customer segments this might mean different targets for customer service metrics such as percentage of time items are available versus on if a stockout were to occur another way to vary productservice packages would be to allow some customers to have more flexibility in order timing than others as was the case with having multiple product lines building more or less flexibility into operations has a cost that needs to be accounted for the product parameters that the organization will allow will have a strong influence over which manufacturing environments eg make tostock processes and types the organization will use these are designing products and processes product parameters it needs to provide the next step is to develop the products and the associated processes that will align with the strategy and thus satisfy customer requirements in terms of each of the seven rights of logistics the right combination of priorities in terms of cost quality lead time and so on will provide value to a given customer segment identifying the needs of this segment related to a particular product may involve techniques such as the voice of the customer which is a way of gathering direct input from consumers regarding their needs and experiences for b2b customers this may take the form of various types of requirements from needs to be satisfied with the means left up to the organization to detailed engineering specifications to be followed precisely customers may also participate in collaborative product design methods tooling equipment materials and process steps must also be determined in some cases a product prototype is developed first other products fullscale production can be designed at the same time the product is being designed getting engineers manufacturing professionals and others involved early on in a product and process design can help avoid needing to rework the designs later design rework not only adds significant expense but also greatly delays the time to market for the product opening the door for competitors to gain market share this is sometimes called participative designengineering or current engineering defined in the apics dictionary 16th edition as follows functional areas of the firm in the product design activity suppliers and customers are often also included the intent is to such a process should ensure that the final design meets all the needs of the stakeholders and should ensure a product that can be quickly brought to the marketplace while maximizing quality and minimizing costs a good product and process design needs to be costeffective the specified quality level
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to such a process should ensure that the final design meets all the needs of the stakeholders and should ensure a product that can be quickly brought to the marketplace while maximizing quality and minimizing costs a good product and process design needs to be costeffective the specified quality level to meet goals for costs formerly most profit margins for products were determined by summing up fixed costs and variable costs the dictionary defines these costs as follows fixed cost an expenditure that does not vary with the production volume for example rent property tax and salaries of certain personnel variable cost an operating cost that varies directly with a materials consumed sales commissions after determining the fixed and variable costs sales volume was estimated and a markup over cost was added today marketing generally determines a target price based on a study of price and projected sales volume higher prices generally reduce sales to find the pricevolume combination that maximizes profit the organization then works backward to determine the maximum cost that can be borne organizations usually perform a makeorbuy decision at this point to determine which components or products would be best to make or outsource the dictionary defines makeorbuy decision as follows it from an outside supplier factors to consider in the decision include costs capacity availability proprietary andor specialized knowledge quality considerations skill requirements volume more efficient processes in other cases outsourcing will be the best choice the dictionary defines outsourcing and a related term subcontracting as follows outsourcing the process of having suppliers provide goods and services that were previously provided internally outsourcing involves substitution the replacement of internal subcontracting sending production work outside to another manufacturer while the customer requirements define the necessary level of quality after the initial process and product designs are complete it is important to circle back to determine if any cost reduction choices will impact quality the materials that will be used as inputs the training levels of staff and the equipment used to perform the processing will dictate the level of control production will have over a given process ensuring that the requisite level of quality will be provided will also help control costs and ensure ontime production because scrap and rework consume resources but produce no usable end products the dictionary defines scrap as material outside of specifications and possessing characteristics that make rework impractical ontime production with low waste also leads to better customer satisfaction as orders are more likely to be filled on time once a process is developed that can provide the right quality level at the right level of efficiency to maintain desired profit margins it is important to doublecheck that the process can accommodate all other planning parameters these parameters include not only necessary throughput or production volume but also order quantity modifiers for expected levels of scrap or for products consumed in quality testing there may also be modifiers for predetermined levels of inventory buffers or safety stock or for maintaining
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can accommodate all other planning parameters these parameters include not only necessary throughput or production volume but also order quantity modifiers for expected levels of scrap or for products consumed in quality testing there may also be modifiers for predetermined levels of inventory buffers or safety stock or for maintaining a certain percentage of unused capacity implemented using project management this is because unlike in ongoing operations creating new designs rearranging plant layouts and other necessary tasks are temporary endeavors that require specialized crossfunctional teams project management is uniquely suited to building unique processes while getting only what is in scope done so as to control cost and schedule project management is organize manufacturing designing materials flow materials flow design involves determining how materials will flow into through and out of the manufacturing process from acquisition to use and eventual distribution materials flow may also need to account for reverse logistics returns endoflife disposal or remanufacture acquisition designs may decide how much information from demand management to share with suppliers so they can order their own materials in advance and acquisition also needs to encompass materials planning and procurement materials flow during manufacturing encompasses scheduling and production scheduling must be designed to produce items as close to when the customer needs the product as the lead time will allow to avoid inventory storage costs especially costs arising from order cancellations production processes need to be designed to accommodate materials flows such as by minimizing their handling and the distances they need to travel to promote efficiency the needs of distribution and specialized reverse logistics functions must subjects are addressed in more detail later but do need to be planned during design stages designing customer service and support we defined customer service earlier as fulfilling the right products and quantities at the right price time place and quality in addition to metrics for measuring success in these areas customer service also means talking to customers such as providing pre and postsale service the apics dictionary 16th edition defines service as follows sometimes used to describe those activities that support the production or distribution functions in any organization such as customer service and field service for consumers this may require a call center dell computer has designed its returns policy to require customers to call their call center prior to authorizing any returns this allows customer service properly thus preventing many returns in the first place organizations with only b2b customers may not need a call center but could instead authorize sales staff supply chain managers or others such as master schedulers to maintain relationships with b2b customers these communications could be initiated by either party for example a customer could call to resolve design issues or a production scheduler might call about upcoming production issues the idea is to communicate soon enough to allow both parties to make their priorities known or find alternatives true twoway communication can improve customer loyalty while providing the organization with information on customer requirements for
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to resolve design issues or a production scheduler might call about upcoming production issues the idea is to communicate soon enough to allow both parties to make their priorities known or find alternatives true twoway communication can improve customer loyalty while providing the organization with information on customer requirements for continuous improvement organizations can improve customer service communications using customer relationship management crm which is a philosophy of putting the customer first but there is also software of the same name that helps with account and order management in a shared database so anyone who has contact with a customer will be able to more later anticorruption in united nations global compact 1 balanced scorecard 1 bullwhip effect 1 business environment 1 business plan 1 channel master 1 corporate social responsibility 1 crm customer relationship management 1 crossfunctional organizations 1 customer expectations 1 customer forces affecting strategy 1 customer relationship management 1 customer segments 1 customer support 1 demand lead time 1 downstream supply chain partners 1 echelons in supply chains 1 enterprise resources planning 1 environment in united nations global compact 1 erp enterprise resources planning 1 external integration 1 fixed cost 1 flows in supply chains 1 functionally oriented organizations 1 human rights in united nations global compact 1 integration external 1 kpis key performance indicators 1 labour in united nations global compact 1 life cycle of products 1 makeorbuy decision 1 manufacturing business model 1 manufacturing objectives 1 manufacturing planning and control 1 materials flow designing 1 materials management 1 metrics balanced scorecard 1 operationallevel performance metrics 1 operations link with strategy 1 order qualifiers 1 order winners 1 participative designengineering 1 performance measurement 1 performance standard 1 process design 1 product life cycle 1 productservice packages 1 productservice parameters 1 reverse logistics 1 risk management 1 salesmarketing function 1 scor supply chain operations reference model 1 service industries 1 smart objectives 1 strategiclevel performance metrics 1 strategic plan 1 strategy customer forces affecting 1 external forces affecting 1 internal forces affecting 1 link with operations 1 link with tactics 1 supply chain management supply chain managementglobalization 1 supply chain managementtechnology 1 supply chain operations reference model 1 supply chains tacticallevel performance metrics 1 tactical plans 1 technology and supply chain management 1 un global compact management model 1 united nations global compact 1 upstream supply chain partners 1 value chain analysis 1 variable cost 1 whatif analysis 1 section b manufacturing design planning and control after completing this section students will be able to differentiate among manufacturing environments eg maketo order process types eg intermittent and layouts eg cellular give a bigpicture view of manufacturing planning and control mpc show how enterprise resources planning erp systems have this section explores how manufacturing fits into the organizational strategies introduced in the last section and how strategy drives the choice of manufacturing environment type and layout as well as other considerations such as complying with corporate social responsibility mandates it also provides a highlevel view of conventional manufacturing
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have this section explores how manufacturing fits into the organizational strategies introduced in the last section and how strategy drives the choice of manufacturing environment type and layout as well as other considerations such as complying with corporate social responsibility mandates it also provides a highlevel view of conventional manufacturing planning and control the discussion of manufacturing planning and control is brief because the details are addressed in later sections but it will serve to the section concludes with a discussion of the evolution of computerized production scheduling from openloop to closedloop scheduling it looks which asks if there is enough capacity to produce what it is needed and how this became the core module in enterprise resources planning erp systems software systems for running business transactions topic 1 manufacturing environments and process choices strategy to gain competitive advantage which includes selecting customer segments and productservice attributes and designing products and processes to make those products prior to or at the same time as these decisions are being made the organization needs to decide what type of manufacturing process and overall philosophy it will follow the apics dictionary 16th edition defines these terms as follows manufacturing process the series of operations performed upon a state of further completion manufacturing processes can be arranged in a process layout product layout cellular layout or fixed position layout manufacturing processes can be planned to support maketostock maketoorder assembletoorder and so forth manufacturing philosophy the set of guiding principles driving forces and ingrained attitudes that helps communicate goals plans conscious and subconscious behavior within the manufacturing organization these process and philosophy choices are translated into decisions on the manufacturing environment process type and process layout to use for each product line exhibit 18 shows an overview of the manufacturing environments and process choices discussed in this topic it is structured as a volumevariety matrix because these choices all range on a scale from high variety low volume to low variety high volume exhibit volume variety matrix the exhibit shows that manufacturing environments process types and process layouts are all interrelated to some degree based on the volume of production that is needed versus the variety of items that need to be manufactured variety might also be described as the degree of customer influence over design the high variety low volume end of the scale for example has engineertoorder eto such as building construction which is typically run using the project project management process type and a fixed position layout meaning that the thing being made generally stays in one place with eto in particular variety might best be described as a high degree of customer influence over the design which produces items to sell from inventory a gas refinery could use a continuous manufacturing process type as the materials flow without stopping through the refinement process with a productbased layout that is designed to work with only a limited range of products the other options will be discussed later but note that the environments
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from inventory a gas refinery could use a continuous manufacturing process type as the materials flow without stopping through the refinement process with a productbased layout that is designed to work with only a limited range of products the other options will be discussed later but note that the environments and process choices have some overlap where hybrid systems might be developed exhibit 18 also shows a few other scales customer lead time tends to be very long for high variety low volume production often because engineering designs need to be made this lead time gets shorter and shorter as variety is reduced and volume is increased items that can be sold from stock have only ordering and shipping time as their lead time as one might expect in building unique items or items in small repetitive and are divided up into efficient groupings there are three general categories of process types related to process frequency project intermittent and flow projects have project scheduling which means they proceed on their own custom schedules intermittent processes include work center and batch process types and these are items best made in lots or batches flow processes include line and continuous manufacturing and these are processes that ideally never stop such as a bottling line external influences organizational strategy the operations business plan and customer and product characteristics will determine which combination of these elements will be the most efficient and effective for a given product or product line in some cases however there may be more than one acceptable way to proceed in which case senior operations management will need to determine the costs and benefits of provide the best longterm return on investment manufacturing environments process types and process layouts are discussed next manufacturing environments manufacturing environments also called production environments or manufacturing strategies are fundamental choices for manufacturing the different environments result in different lead times for customers as well as different inventory costs because some create inventory in advance while others only purchase or build what the customer has already ordered the optimum environment is based on volume variety and lead time as is discussed next the nature of the products being produced may also how products are best manufactured is with a product flow analysis also covered below afterward the discussion turns to product life cycles new life cycle phase basic environments differentiated by volume variety and lead exhibit 19 again shows the relationship of product variety to product volume but lists just the basic manufacturing environments plus a hybrid method mass customization each term is defined a little later the key point here is that the interplay of volume and variety strongly impacts the low cost per unit because the high volume will justify investments in specialized manufacturing equipment that can operate at a faster rate than more generalized equipment manufacturing environments variety in addition to the basic product characteristics lead time is another strong differentiator for manufacturing environment the apics dictionary 16th edition defines delivery lead
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unit because the high volume will justify investments in specialized manufacturing equipment that can operate at a faster rate than more generalized equipment manufacturing environments variety in addition to the basic product characteristics lead time is another strong differentiator for manufacturing environment the apics dictionary 16th edition defines delivery lead time as the time from the may also include some time on their end to prepare the order once the decision to purchase has been made but the supplier cannot control this component of lead time exhibit 110 shows the basic elements that add to lead time in each of the basic manufacturing environments note that raw materials inventory includes purchased components and wip inventory is workinprocess inventory which includes manufactured components that will later be assembled lead time per manufacturing environment summing the lead time for each component results in a cumulative lead time that needs to be compared to the customer s requested or expected delivery date which could be immediate as in the case of retail while customers desire the shortest lead time possible their expectations can be managed based on the types of activities eg design work that are necessary to make the product variety they desire the dictionary defines many types of lead times including the following supplier lead time the amount of time that normally elapses order is shipped procurement lead time the time required to design a product modify or design equipment conduct market research and obtain all necessary materials lead time begins when a decision has been made to accept an order to produce a new product and ends when production commences purchasing lead time the total lead time required to obtain a purchased item included here are order preparation and release time supplier lead time transportation time and receiving inspection and putaway time manufacturing lead time the total time required to manufacture an item exclusive of lowerlevel purchasing lead time for maketo order to the production process and shipment to the final customer release of an order to the production process and receipt into inventory included are order preparation time queue time setup time run time move time inspection time and putaway time one basic determinant of necessary lead time is the level of involvement the customer requires during design manufacturing or assembly but product volume and variety also play a strong role lowvolume items are costprohibitive to produce in advance and so often require longer lead times similarly customized items or allowing for design flexibility will require longer lead times while standardized items will shorten lead another influence on lead time is proximity to the customer which is why some auto parts manufacturers locate their plants right next to the auto plant that uses the parts a distribution network with a distribution center near customers is another way to provide flexibility in the manufacturing model chosen while still satisfying customer lead time expectations lead times and the volumevariety impact are discussed more next as part of the apics dictionary 16th
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auto plant that uses the parts a distribution network with a distribution center near customers is another way to provide flexibility in the manufacturing model chosen while still satisfying customer lead time expectations lead times and the volumevariety impact are discussed more next as part of the apics dictionary 16th edition defines engineertoorder as follows products whose customer specifications require unique engineering design significant customization or new purchased materials each customer order results in a unique set of part numbers bills of material and routings engineertoorder is used for items so high on the variety scale high customer influence over design and so low on the volume scale that they are often unique these items require extensive lead times the significant design lead time often involves a backandforth dialogue between the customer and the supplier or a design firm once designs are finalized there is additional lead time for the purchasing of materials for manufacturing assembly and shipping if applicable also add to lead custom prosthetic the dictionary defines maketoorder as follows a production environment where a good or service can be made after receipt of a customer s order the final product is usually a combination of standard items and items customdesigned to meet the special needs of the customer where options or accessories are stocked before customer orders arrive the term assembletoorder is frequently used maketoorder produces nothing until a customer order is received the exhibit 110 shows that delivery lead time for maketoorder includes production assembly and shipping so lead time is still fairly long in some cases some components might be custom designed and this would add some lead time for design generally however this would not produced to custom dimensions is one example a highend guitar is another assembletoorder is much more common than maketoorder these days often when people say maketoorder what they really mean or what is really being done is assembletoorder the dictionary defines assembled after receipt of a customer s order the key components bulk semifinished intermediate subassembly fabricated customer order receipt of an order initiates assembly of the customized product this strategy is useful where a large number of can be assembled from common components assembletoorder builds standard components based on forecasts but waits to assemble or complete the processing of the components until actual customer orders are received the dictionary defines components as follows the raw material part or subassembly that goes into a higherlevel assembly compound or other item this term may also include packaging materials for finished items assembly might include putting components together or completing finish work such as painting depending on what is actually being done during the assembly stage ato is sometimes called buildtoorder finishto order or even packagetoorder the latter is defined a bit later assembletoorder is often made more economical through a process called modularization the dictionary defines modularization as follows and variety permits product development cost reductions by using the same items to build a variety of finished goods this is
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finishto order or even packagetoorder the latter is defined a bit later assembletoorder is often made more economical through a process called modularization the dictionary defines modularization as follows and variety permits product development cost reductions by using the same items to build a variety of finished goods this is the first step in developing a planning bill of material process since the components are in inventory the lead time is short consisting only of assembly and shipping this results in lower inventory costs than a maketostock environment because the components can be made into a wide variety of end products that if all built would require significantly more inventory overall assembletoorder also reduces risk because varieties that are not in demand will never be produced ato is best when variety is low to medium and volume is medium to high customers will be involved in assembly decisions only motorcycles are an example another example would be a laptop ordered online from a manufacturer eg dell or apple the dictionary defines maketostock as follows finished before receipt of a customer order customer orders are typically filled from existing stocks and production orders are used to replenish those stocks maketostock produces items for inventory based on forecasts of may indirectly influence designs of future products or product enhancements this strategy entails high inventory costs an example is shirts hybrids and subtypes in addition to these basic environments a number of terms have been used to describe efforts to achieve the benefits of more than one method or remove the limitations of a method often these methods require more mature supply chain management networks and may involve advanced production methods or flexible equipment and flexible workers these environments include mass customization configuretoorder postponement and packagetoorder mass customization is an attempt to serve markets that desire both high volume and high variety the dictionary defines mass customization as follows the creation of a highvolume product with large variety whose possible end items an example is a personal computer order in which the customer specifies processor speed memory size hard disk size and speed removable storage device characteristics and in mass customization customers get some degree of customization while manufacturing produces the products at near the same cost as that of a highvolume process mass customization is usually considered to among previously manufactured or purchased options lead times can however be longer than for ato dell uses mass customization to build computers waiting to order components from its suppliers until orders are received thus adding purchasing lead time to delivery lead time dell keeps lead times short and costs low by getting rapid deliveries of just the needed components from suppliers who bear the cost of holding the inventory configuretoorder has the same lead time as maketoorder because the customer chooses a unique combination of features and options early in the manufacturing process unlike assembletoorder the components generally based on established designs components common to all would be considered a type of mass customization
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cost of holding the inventory configuretoorder has the same lead time as maketoorder because the customer chooses a unique combination of features and options early in the manufacturing process unlike assembletoorder the components generally based on established designs components common to all would be considered a type of mass customization postponement as follows a product design or supply chain strategy that deliberately delays final differentiation of a product assembly production packaging tagging etc until the latest possible time in the process this shifts product differentiation closer to the consumer to reduce the anticipatory risk of producing the wrong product the practice eliminates excess finished goods in the supply chain sometimes referred to as delayed differentiation postponement is an assembletoorder strategy that often performs final assembly in a distribution center because the assembly usually does not require specialized equipment or extensive manufacturing expertise this may involve putting a countryspecific power supply in a unit or labeling for a specific language it could also involve shipping units by air with no individual packaging and adding the bulky packaging at the distribution center which is what hewlett packard does to the degree that high a type of mass customization packagetoorder is a type of assembletoorder that uses postponement to delay packaging items produced and stored in bulk until orders for specific package sizes are received the dictionary defines packageto order as follows packaged after receipt of a customer order the item is common across many different customers packaging determines the end product product flow analysis vati analysis a product flow analysis indicates the logical flow of manufacturing processes as raw materials are transformed into finished goods while the results of this analysis do not require using a particular manufacturing environment process type and layout the logical flow of materials may be an influencing factor and so is introduced here product flow analysis a product flow analysis is often called a vati analysis because there are four basic conceptual flows that materials transformation processes can materials flow through the process exhibit 111 shows these flows graphically exhibit product analysis analysis the apics dictionary 16th edition defines a vati analysis in part as follows flow of parts and products from raw materials to finished products logical product structure once the general parts flow is determined the system control points gating operations convergent points divergent points constraints and shipping points can be identified and managed the flows are as follows with excerpts from the definition in quotation two or more products that diverge rather than being interrelated later product expands into a number of different products as it flows through divergent points in its routings for example an organization that harvests trees might make various types of lumber aplants various raw materials are transformed in their own more final materials for example complex products assembled from dominated by converging points many raw materials are fabricated and assembled into a few finished products tplants raw materials are transformed using a single logical flow production line but at
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of lumber aplants various raw materials are transformed in their own more final materials for example complex products assembled from dominated by converging points many raw materials are fabricated and assembled into a few finished products tplants raw materials are transformed using a single logical flow production line but at some point a limited number of basic units t a t logical structure consists of numerous similar finished products assembled from common assemblies subassemblies and iplants this is a basic linear flow for operations that use a production line or continuous flow process to produce one type of flows where resources are shared between different products and organizations that make multiple products might use several of these product life cycle impact on manufacturing environment manufacturers that maketostock for a fastselling item will likely be able to profitably bear the cost of inventory while that item is selling well at some point however the item may no longer be strongly in demand due to for example changing consumer tastes continuing to build inventories of items only sporadically in demand can quickly become unprofitable rather than discontinue the product the organization may maketoorder environment this is one example of why manufacturing needs to understand a product s life cycle so it can develop appropriate through predictable life stages the apics dictionary 16th edition defines the product life cycle as follows ie the stages that a product passes through from introduction through growth maturity and decline 2 the time from initial which a product can be produced and marketed profitably most product life cycle versions have these phases introduction organizations usually need to spend a lot on distribution sales are very low during this phase and the organization generally incurs losses rather than making a profit many products fail before they get to the next stage highlighting the importance of needing good information on customer requirements growth successful products gain market share rapidly for example as retailers start carrying the product this phase puts a lot of stress on manufacturing and distribution to scale upward or downward quickly if demand differs from what was projected during development and quality or delivery service levels could suffer if economies of scale can be generated unit costs drop rapidly and high profits result at least until competitors enter the market and force prices down however other competitors exit the market if their designs are proven less scalable thus product designs tend to stabilize during this phase maturity the product is no longer new and many customers have already bought it or the market may be saturated with competitors further reducing profit margins sales can still be steady for a long period when sales volumes are sufficient products might be enhanced to keep them profitable for longer or to allow time for replacement products to be developed this could take the form of price reductions or additional services such as faster or more reliable delivery alternatives or changing tastes profits might still be made in this phase
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products might be enhanced to keep them profitable for longer or to allow time for replacement products to be developed this could take the form of price reductions or additional services such as faster or more reliable delivery alternatives or changing tastes profits might still be made in this phase but this usually requires changing to a less expensive production environment such as maketoorder there may be an ongoing need for spare parts or service other products must be strategy may be needed in some versions of the life cycle phase exhibit 112 shows how these phases play out over time in relation to the relative level of sales note the types of manufacturing environments that work best with each life cycle phase the duration of the cycle or a given phase will vary between products innovative products tend to have shorter life cycles staple products can have very long life cycles in addition broad categories tend to have longer life cycles than specific categories for example all automobiles all minivans a specific model of minivan and a specific year s model will each have very different life cycle durations product life manufacturing environments note that these recommended manufacturing environments will work well for some products but not for others some items in decline must still be madetostock but inventory levels might be adjusted far downward here are a few other points about exhibit 112 engineertoorder for the introduction phase refers primarily to prototypes maketoorder may work well in the introduction and growth phases until the volume demanded becomes high enough to switch to a different method if this strategy is pursued the organization needs a plan in place to transition to assembletoorder or maketostock quickly enough to satisfy demand maketostock works well in the growth and maturity stages but quickly becomes unprofitable in decline where assemble or make toorder are again recommended when feasible to allow this phaseout period to be of sufficient duration while remaining profitable manufacturing process types next we ll look at general categories of manufacturing process types that include the five types shown in the volumevariety matrix in exhibit 18 project work center batch line and continuous project process type buildings ships aircraft and other large complex deliverables are produced using project manufacturing whenever the product is primarily management techniques are recommended project management and a key project management tool for scheduling called a gantt chart are defined in the apics dictionary 16th edition as follows coordinating the organizing planning scheduling directing controlling monitoring and evaluating of prescribed activities to ensure that the stated objectives of a project manufactured good or service are achieved gantt chart the earliest and bestknown type of planning and control chart especially designed to show graphically the relationship between planned performance and actual performance over time named after its originator henry l gantt the chart is used for 1 machine loading in which one horizontal line is used to represent capacity and another to represent load against that capacity or
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chart especially designed to show graphically the relationship between planned performance and actual performance over time named after its originator henry l gantt the chart is used for 1 machine loading in which one horizontal line is used to represent capacity and another to represent load against that capacity or 2 monitoring job progress in which one horizontal line represents the production schedule and another parallel line project management has two key elements that differentiate it from normal operations it is timedelimited and it produces unique deliverables all projects need an end date and specialized teams form unique meaning that they require custom designs and in the case of buildings need to be adapted to their environment project management can efficiently manage costs and schedules by ensuring that the project manager controls the scope what will and will not be done this process type uses a fixed position layout discussed later intermittent process types work center and batch the dictionary defines intermittent production as a form of manufacturing in which the jobs pass through the functional departments in lots and each lot may have a different routing intermittent process types are useful when there are many product design variants that have different process requirements and therefore have unbalanced workflows between work centers both equipment and workers need to be flexible enough to perform this varied type of work in other words general purpose equipment is often needed instead of specialized units order quantities are also typically variable meaning that some job runs will be longer than others the time from when an order starts work to when it is complete is often very long and this combination of unbalanced workflows differentsized orders and long throughput times typically makes scheduling production called production activity control and inventory control complex it is difficult to schedule equipment capacities and bottlenecks can form in different places issues with scheduling or capacity control result in a high amount of workinprocess inventory these processes typically require longer lead times in part because of extensive materials handling benefits include the flexibility to change order quantities or orders quickly intermittent processes might use fixed position functional or cellular layouts as discussed later two types of intermittent manufacturing are work center and batch work center the work center process type also called job shop or intermittent manufacturing is organized around similar processes and usually involves smaller lots or batches work centers are production areas that a different work area products are routed between work centers in odd patterns depending on what process needs to be done next the emphasis in planning is to have fast changeovers with skilled flexible the batch process type also called batch flow or lot manufacturing is a version of intermittent manufacturing for higher production volume lots optimized to minimize distances traveled between workstations the emphasis in planning is to have longer production runs and fewer changeovers flow process types line and continuous as we move into the higher volume lower variety end of the
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manufacturing is a version of intermittent manufacturing for higher production volume lots optimized to minimize distances traveled between workstations the emphasis in planning is to have longer production runs and fewer changeovers flow process types line and continuous as we move into the higher volume lower variety end of the scale flow manufacturing takes over the dictionary defines flow terminology as follows flow processing in process systems development work flows from one workstation to another at a nearly constant rate and with no delays when producing discrete geometric units the process is called repetitive manufacturing when producing nongeometric units over time the process is called continuous manufacturing a physicalchemical reaction takes place in the continuous flow process flow shop a form of manufacturing organization in which machines and operators handle a standard usually uninterrupted material flow the operators generally perform the same operations production shop or is said to have a continuous manufacturing layout the plant layout arrangement of machines benches assembly lines etc is designed to facilitate a product flow some process industries chemicals oil paint etc are extreme examples of flow shops each product though variable in material specifications uses the same flow pattern through the shop manufactured in bulk flow manufacturing has standardized products work centers are arranged in the sequence in which they will be used so the product flows directly from work center to work center the time it takes to move between work centers is the same by design so processing is constant the equipment used is more specialized allowing higher volumes but less variety to be produced the equipment is usually designed to make only specific products and new products will require new equipment the capacity of the line is fixed and difficult to alter the material flow between workstations is often automated meaning that workinprocess inventory wip inventory means that lead times are short this makes production activity control and inventory management straightforward these processes can make only a limited range of products but the process generates large economies of scale a family of products that enough demand to justify the large capital investment often organizations can reduce labor costs to compensate for the much larger capital expense flow processes use a productbased layout as discussed later two types of flow processes include line and continuous the line process type also called repetitive flow or line flow is used when the products being produced are discrete units like cans of soda or cars the dictionary defines some related terms as follows discrete manufacturing the production of distinct items such as automobiles appliances or computers repetitive manufacturing the repeated production of the same discrete products or families of products repetitive methodology minimizes setups inventory and manufacturing lead times by using production lines assembly lines or cells work orders are no longer necessary production scheduling and control are based on production rates products may be standard or assembled from assembly line an assembly process in which equipment and work production line a series of
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inventory and manufacturing lead times by using production lines assembly lines or cells work orders are no longer necessary production scheduling and control are based on production rates products may be standard or assembled from assembly line an assembly process in which equipment and work production line a series of pieces of equipment dedicated to the manufacture of a specific number of products or families note that there is also a flow process type called batch flow which starts out in large batches of material that are transformed into discrete end items such as a batch of candy that starts in liquid form and ends as distinct items this differs from the intermittent batch process type in continuous the continuous process type also called continuous flow is used when the products being produced are liquids liquid metals as in a foundry or bulk solids like flour or pet food the dictionary defines continuous production as follows a production system in which the productive equipment is organized product this term denotes that material flow is continuous during are seldom changed manufacturing process layouts process to best produce everything the operation needs to produce layouts correspond with particular process types for the most part but there may be times when a process type will switch to a different layout for a portion of a process the layouts are discussed next starting with high variety low volume layouts and moving toward low variety high volume layouts fixed position layout the apics dictionary 16th edition defines fixedposition manufacturing as follows similar to project manufacturing this type of manufacturing is mostly used for large complex projects where the product remains in one location for its full assembly period or may move from location to location after considerable work and time are spent on it examples of fixedposition manufacturing include shipbuilding or aircraft assembly for which the costs of frequent movement of the product are very high a fixed position layout is used with project manufacturing to manufacture items that cannot be moved or are uneconomical to move frequently the product remains in place and workers and equipment are moved into place as needed some components might still be made elsewhere and shipped to the production site the layout thus avoids the cost of moving the product exhibit 113 illustrates this layout exhibit position layout functional layout a functional layout also called a process or job shop layout organizes work centers by function the dictionary defines some functional layout terms as follows functional layout a facility configuration in which operations of a similar nature or function are grouped together an organizational structure based on departmental specialty eg saw lathe mill heat treat press organized by function each job follows a distinct routing through the shop 2 a type of manufacturing process used to produce items to each customer s specifications production operations are designed fixed plant locations using generalpurpose equipment each work center thus specializes in a given type of activity and will have the specialized
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each job follows a distinct routing through the shop 2 a type of manufacturing process used to produce items to each customer s specifications production operations are designed fixed plant locations using generalpurpose equipment each work center thus specializes in a given type of activity and will have the specialized skill sets and equipment needed to perform those activities however the work centers need to be flexible enough to handle a variety of tasks within their area of specialization various products are routed to a customized sequence of workstations as exhibit 114 shows the most frequently produced products product line a may have the most efficient path through the layout while others may follow more convoluted paths this layout can be used with either of the intermittent manufacturing process types it is an economical choice when there is not enough production volume to justify setting up an assembly line functional layout cellular layout a cellular layout also called work cells or cellular manufacturing is a hybrid of a functional layout and a productbased layout discussed next that places sequential steps adjacent to one another so one unit or a small batch can be processed from start to finish with no waiting at each station thus no workinprocess inventory accumulates and lead times shrink significantly the dictionary defines cellular manufacturing and some related terms as follows cellular manufacturing a manufacturing process that produces families of parts within a single line or cell of machines controlled by operators who work only within the line or cell work cell dissimilar machines grouped together into a production unit to produce a family of parts having similar routings nesting the act of combining several small processes to form one larger process this layout is used extensively in lean to enable fast repetitive processing of small batches or single units cellular layouts can be used in intermittent environments that need to grouped into product families in this case each family gets its own custom production line called a work cell work centers with multiple identical pieces of equipment might be split up so that each line has materials handling distances and factory floor space in other cases a large high capacity or generalized piece of equipment might be replaced by smaller lower capacity equipment or more specialized equipment exhibit 115 shows how the functional layout example from exhibit 114 might be rearranged into a cellular layout note how each product line uses nesting to produce dedicated work cells exhibit cellular layout close proximity to allow for some of the benefits of a functional layout such as shared storage of tools and dies even in this case each cell would still likely have dedicated equipment so that no wip inventory accumulates since locating like work centers nearby may not always be than one place some work centers may need to be split up or smaller equipment acquired to prioritize flow when all equipment is dedicated to a single cell the equipment in each work cell is effectively
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no wip inventory accumulates since locating like work centers nearby may not always be than one place some work centers may need to be split up or smaller equipment acquired to prioritize flow when all equipment is dedicated to a single cell the equipment in each work cell is effectively one work center to control which greatly simplifies production activity control and scheduling since each part produced is immediately used by the next step in the line quality issues will be detected before multiple units are produced with the same issue also cellular layouts are designed to accommodate onepiece flow discussed later in conjunction with lean this means that only items that are actually ordered get produced so these layouts tend to reduce finished goods inventories the work center files might still list those similar work centers as alternate centers for emergency increases in capacity u shape the dictionary defines ulines as follows production lines shaped like the letter u the shape allows workers to easily perform several nonsequential tasks without much walk time the number of workstations in a uline is usually determined by line balancing ulines promote communication because many things no longer needed at the end of the process such as empty bins will be where they need to be to repeat the process many u cells can also be located along a single trunk line to allow for a common area for materials handling the workers at various pieces of equipment will also be near enough to communicate with each other or move between stations without wasted motion productbased layout the fixed position and functional layouts might be considered process based layouts and the cellular layout is a hybrid that could be called a productfamily layout with the productbased layout also called a product layout or an assembly line the focus is more specialized for a particular product the dictionary defines a product layout as follows limited range of similar products focusedfactory production is also a productbased layout is a dedicated flow that minimizes materials handling between work centers by placing each workstation in the proper sequence this results in little buildup of wip inventory exhibit 116 of very similar products exhibit product layout productbased layouts are used with either type of flow system line or continuous to maximize efficiency lowest cost per unit but their high degree of specialization requires large capital expenditures that need to be justified by large volumes topic 2 manufacturing planning and control this topic gives an overview of the conventional method of providing this course manufacturing planning and control mpc is formally defined a little later available resources to best satisfy customer demand these resources include materials and available equipment and worker capacity mpc includes priority and capacity planning priority relates to demand and is accomplished in production using sales and operations planning master scheduling and material requirements planning capacity relates to supply and is accomplished using resource planning roughcut capacity planning and capacity requirements planning exhibit 117 below shows
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and worker capacity mpc includes priority and capacity planning priority relates to demand and is accomplished in production using sales and operations planning master scheduling and material requirements planning capacity relates to supply and is accomplished using resource planning roughcut capacity planning and capacity requirements planning exhibit 117 below shows how these systems are arranged to balance each other at successive levels of detail the overall goal of priority and capacity planning is to balance demand against resources most efficient manner it also involves scheduling the purchase and delivery dates of raw materials and components capacity refers to considering what it will take to produce the demanded products factoring in the materials and capacity already on hand versus those that must be acquired manufacturing planning also involves considering how to produce goods and order materials while staying within the guidelines of inventory policies control is used to ensure that the plans are being executed correctly control in manufacturing is primarily accomplished by adjusting the timing of orders and the release of input resources control includes inventory management to ensure that there is just the right amount of inventory in the right place at the right time the apics dictionary 16th edition defines manufacturing planning a closedloop information system that includes the planning functions of production planning sales and operations planning master production scheduling material requirements planning and capacity requirements planning once the plan has been accepted as realistic execution begins the execution functions include input output control detailed scheduling dispatching anticipated delay reports department and supplier and supplier scheduling closedloop means that capacity constraints are considered when planning and controlling manufacturing closedloop material requirements planning is defined a little later exhibit 117 shows how the manufacturing control detail increases while the time horizon shrinks let s walk through this diagram and informally define the components we will save the formal definitions for the sections in which these components are discussed in greater detail note that strategic planning considered to be an input to manufacturing planning and control rather than a part of it strategy and the manufacturing business plan which is must meet the graphic conveys that the organization s plans face pressure from two directions the demand side and the supply side the demandside pressures are motivated to ensure that all demand is satisfied to maximize revenue the supplyside pressures are a push back based on capacity or what is feasible to do given available or planned resources the center is priority planning where decisions are made on how to meet demand to the extent possible manufacturing planning and control in the form of quantities required these quantities come from forecasting demand management and distribution requirements planning drp addressed in detail in section actual orders can be provided from downstream customers for example orders from distribution centers dcs through drp note that these orders are shown being provided at the master schedule level but any orders already in the system at earlier planning phases will also be shows this
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in detail in section actual orders can be provided from downstream customers for example orders from distribution centers dcs through drp note that these orders are shown being provided at the master schedule level but any orders already in the system at earlier planning phases will also be shows this as an arrow up to demand planning and an arrow from there to sop demand management is used to prioritize this demand when necessary demand management also estimates the impact of marketing activities on demand consensus opinions of demand from the supply strategic planning level this is in the form of totals such as total projected sales revenues using this and other information the organization sets its strategic sales goals and forms a manufacturing business plan at the next level down manufacturing planning and control meets the supply side of the organization demand information in the aggregate product families or total units is used to perform master planning the apics dictionary 16th edition defines master planning as a group of business processes that includes the following activities demand management which includes forecasting and order servicing production and resource planning and master scheduling which includes the master schedule and the roughcut capacity master planning begins with sales and operations planning which is an executivelevel decisionmaking process where the supply demand and financial sides of the organization agree on a consensus plan for production plan a consensus set of numbers that the supply side of the organization commits to produce and the demand side marketing and sales agrees to set as their sales goals resource planning occurs at this point as well which is the first of several capacity management activities that grow more detailed and shorter in time horizon from this first longterm bigpicture capacity check at this level capacity management takes the form of planning for longterm capacity needs such as adding or reducing plants equipment and staffing the next level of master planning is master scheduling this is planning over a shorter time horizon and the demand information provided is now maketoorder environment components in an assembletoorder environment or finished goods in a maketostock environment the second level of capacity planning roughcut capacity planning takes place at this point this is a check to see if bottleneck work centers and other key resources will have sufficient capacity once any adjustments are made the output of master scheduling is a master production schedule for each product the schedule indicates what will be made in each time period of the planning horizon continuing down now we begin the detailed planning and scheduling needed to meet the master production schedule this involves material requirements planning mrp which uses bills of material and other and components that need to be used from inventory or purchased mrp also calculates when to purchase or release these items so they will arrive on time this is a highly detailed activity and the third level of capacity planning capacity requirements planning occurs at this point this capacity
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other and components that need to be used from inventory or purchased mrp also calculates when to purchase or release these items so they will arrive on time this is a highly detailed activity and the third level of capacity planning capacity requirements planning occurs at this point this capacity check looks at all resource capacities not just bottlenecks the result of this process is a finalized material requirements plan the bottom level is where planning ends and execution takes over the material requirements plan results in purchasing wherever resources are not sufficient purchasing includes sourcing ordering and scheduling deliveries the parts of the material requirements plan that will be produced inhouse become inputs to production activity control pac processes which will involve scheduling scheduling can be used to adjust when certain orders are released for production or final assembly this allows shop floor management to finetune production efficiency accommodate expedited orders or compensate for delays material shortages or quality issues capacity control is the fourth level of capacity management and is used here to control work center capacity some key points about this system are as follows planning occurs from the top down meaning that every planning and control activity links back to the manufacturing business plan the exhibit includes this as part of strategy and ultimately to strategic it is a closedloop system meaning that it incorporates feedback in the long medium and short terms and execution can be adjusted based on events before or during production it is an iterative system meaning that plans start out in a rough state and are refined by revisiting them multiple times as they become more and more detailed and shorter and shorter in time horizon the system balances tradeoffs to find the optimum result for all stakeholders including the supply side the demand side and finance this crossfunctional collaboration takes place not only during sales and operations planning but also during master scheduling and later during production activity control as priorities and scheduling systems can also be used to coordinate the activities of multiple plants or multiple supply chain partners the dictionary defines advanced planning and scheduling aps as follows techniques that deal with analysis and planning of logistics and manufacturing during short intermediate and longterm time periods aps describes any computer program that uses advanced mathematical algorithms or logic to perform optimization or simulation on finite capacity scheduling sourcing capital planning resource planning forecasting demand management and others these techniques simultaneously consider a range of constraints and business rules to provide realtime planning and scheduling decision support availabletopromise and capable topromise capabilities aps often generates and evaluates multiple scenarios management then selects one scenario to systems are 1 demand planning 2 production planning 3 production scheduling 4 distribution planning and 5 transportation planning the supply side is concerned with capacity in terms of feasibility and availability while the demand side is concerned with prioritizing the timing and order of work especially to satisfy demand from the most important customers
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planning 2 production planning 3 production scheduling 4 distribution planning and 5 transportation planning the supply side is concerned with capacity in terms of feasibility and availability while the demand side is concerned with prioritizing the timing and order of work especially to satisfy demand from the most important customers or those with the most acute needs hierarchy exhibit 118 interrelates the manufacturing planning and control components just introduced to the manufacturing environments and the strategic tactical and operational planning elements of the business hierarchy introduced earlier exhibit 118 mpc components and business hierarchy horizon frequency detail level process validation strategic annually summary business planning financing tactical 18 months monthly aggregate resource planning weekly subassembly materials master scheduling rccp operational 10 weeks intense most intense work orders purchase orders scheduling this exhibit shows how business planning horizons shrink as planning becomes more detailed and intense note that the horizons shown are for illustrative purposes and could differ depending on the industry note also manufacturing environment for the validation column note the addition of financing as a validation step which would be where the financial merits of the overall strategy are assessed and approved or lowest operational level encompasses production activity control as well it is important to understand how conventional manufacturing planning and control systems have evolved over the past several decades because this history provides a great deal of information on the current strengths and weaknesses of these systems manufacturing planning and control is extraordinarily complex and involves balancing tradeoffs and constraints in multiple areas so manufacturers above a certain size generally require computer systems to do these calculations for most organizations this means having an enterprise resources planning erp the apics dictionary 16th edition defines enterprise resources framework for organizing defining and standardizing the business processes necessary to effectively plan and control an organization advantage an erp system provides extensive databanks of information including master file records repositories of cost and sales financial detail analysis of product and customer hierarchies and historic and current transactional data set of business processes for leveraging internal knowledge the second part of the definition indicates that the system helps the organization impact of transactions from every functional area of the organization in real time and avoids problems like having multiple redundant records that are out of synch for example hr might update the shop floor calendar to reflect the next year s holiday schedule and the calendar would then be used to schedule production erp systems started out decades ago from a manufacturing core the pressing need was to provide a way to balance supply against demand in the most efficient way in other words to provide manufacturing planning the first iteration of manufacturing planning and control systems involved openloop mrp controlling the timing and release of materials into a production process these early systems made a simplifying assumption that there was infinite capacity thus the open loop they established a priority plan for when specific quantities of components would be needed
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of manufacturing planning and control systems involved openloop mrp controlling the timing and release of materials into a production process these early systems made a simplifying assumption that there was infinite capacity thus the open loop they established a priority plan for when specific quantities of components would be needed so that purchasing and production planning could occur and mrp stages to ensure feasibility and this feedback loop defined the major advancement of these systems called closedloop mrp which the dictionary defines as follows a system built around material requirements planning that includes the additional planning processes of production planning sales and operations planning master production scheduling and capacity requirements planning once this planning phase is complete and the plans have been accepted as realistic and attainable the execution processes come into play these processes include the manufacturing control processes of inputoutput capacity measurement and detailed scheduling and dispatching as well as anticipated delay reports from both the plant and suppliers supplier scheduling and so on the term closed loop implies not only that each of these processes is included in the overall system but also closedloop mrp linked the production plan to the master production provided information to mrp and production activity control so planners and controllers could view and adjust start dates due dates and quantities of work orders that were already released closedloop mrp provided data to finance so they could calculate cost data and better perform financial accounting still these systems were not highly integrated with other functions the third iteration manufacturing resource planning called mrp ii to avoid confusion with material requirements planning further integrated production finance and marketing the dictionary defines manufacturing resource planning mrp ii as follows manufacturing company ideally it addresses operational planning in units and financial planning in dollars and has a simulation capability each linked together business planning production planning sales and operations planning master production scheduling material requirements planning capacity requirements planning and the execution support systems for capacity and material output from these systems is integrated with financial reports such as the business plan purchase commitment report shipping budget and inventory projections in dollars manufacturing resource planning is a direct outgrowth and extension of closedloop mrp mrp ii allowed accurate order promising marketing and production were able to collaborate on a weekly or daily basis to adjust due dates or order quantities to better reflect actual demand or adjust the priority plans to reflect capacity shortages first at the master production schedule level and then at the material requirements planning level not only did these systems increase the level of operational reporting for better accounting all transactions conducted by production marketing and finance updated the same records and required these functions to work together for example mrp ii was the first iteration that allowed sales and operations planning to arrive at a consensus supply and demand plan starting in the 1990s and evolving continuously ever since organizational software systems have come to be called enterprise resources planning systems
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required these functions to work together for example mrp ii was the first iteration that allowed sales and operations planning to arrive at a consensus supply and demand plan starting in the 1990s and evolving continuously ever since organizational software systems have come to be called enterprise resources planning systems as they integrate more and more modules for different business functions including human resources research and development seamlessly integrate all business functions using a single shared database from a manufacturing perspective a key advancement has upstream suppliers and downstream distribution centers and customers using electronic data interchange edi the dictionary defines this as the paperless electronic exchange of trading documents such as purchase orders shipment authorizations advanced shipment notices and invoices using standardized document formats for example orders from a distribution center for resupply now go through a distribution requirements planning module and these orders are automatically included in the plant s gross requirements for master scheduling since erp has this single source of data it allows information technology departments to manage the data to ensure accuracy such as by correcting errors and removing redundancies policies related to data security and so on are called data governance the dictionary defines data governance as follows the overall management of data s accessibility usability reliability and security used to ensure data record accuracy while all parts of an erp system need to ensure data record accuracy from a manufacturing perspective maintaining the integrity of the data used for manufacturing planning and control is often considered the adage garbagein garbageout gigo expresses the fact that a fast system with poor inputs will have nonsensical outputs and just help make erroneous decisions faster data governance also includes securing sensitive data and ensuring that example hr can view salaries but other users cannot securing data while sharing agreedupon information with outside parties is another advancement of modern erp systems a downside to this highly developed system is that if the organization chooses to reengineer its business processes eg to lean expensive and timeconsuming some newer versions of erp software advanced planning and scheduling systems 1 aps advanced planning and scheduling systems 1 assembly line 1 batch process type 1 capacity management 1 cellular layout 1 cellular manufacturing 1 closedloop material requirements planning 1 continuous process type 1 continuous production 1 control customer involvement in design manufacturing assembly 1 customer lead time 1 decline phase in product life cycle 1 delivery lead time 1 demand demandside activities in manufacturing planning and control 1 discrete manufacturing 1 edi electronic data interchange 1 electronic data interchange 1 fixed position layout 1 fixedposition manufacturing 1 flow processing 1 flow process types 1 flow shop 1 functional layout 1 gantt chart 1 growth phase in product life cycle 1 intermittent process types 1 intermittent production 1 introduction phase in product life cycle 1 life cycle of products 1 line process type 1 manufacturing cellular 1 manufacturing discrete 1 manufacturing environments manufacturing environmentsproduct life cycle 1 manufacturing lead time 1 manufacturing
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chart 1 growth phase in product life cycle 1 intermittent process types 1 intermittent production 1 introduction phase in product life cycle 1 life cycle of products 1 line process type 1 manufacturing cellular 1 manufacturing discrete 1 manufacturing environments manufacturing environmentsproduct life cycle 1 manufacturing lead time 1 manufacturing philosophy 1 manufacturing planning and control manufacturing processes 1 manufacturing process layouts 1 2 manufacturing process types 1 2 manufacturing repetitive 1 manufacturing resource planning 1 mass customization 1 master planning 1 master production schedule 1 master scheduling 1 material requirements planning 1 2 maturity phase in product life cycle 1 pac production activity control 1 procurement lead time 1 product flow analysis 1 life cycle 1 productbased layout 1 production activity control 1 production line 1 production plans 1 project management 1 project process type 1 purchasing lead time 1 rccp roughcut capacity planning 1 repetitive manufacturing 1 resource planning 1 roughcut capacity planning 1 sales and operations planning 1 strategic planning 1 supplier lead time 1 supplyside activities in manufacturing planning and control 1 variety and manufacturing environments 1 vati analysis 1 volume and manufacturing environments 1 volumevariety matrix 1 work cell 1 work center process type 1 section c quality and continuous improvement after completing this section students will be able to express the objectives of total quality management tqm define quality and the cost of quality review the core concepts of tqm including management commitment performance measurement employee involvement and develop products that prioritize customer quality requirements show how to use the following quality control tools flowcharts causeandeffect diagrams control charts statistical process control check sheets histograms pareto charts scatter diagrams root cause analysis and benchmarking show how the define measure analyze improve and control dmaic process in six sigma is used to guide improvement projects describe uses of continuous improvement for improving products review the steps in continuous process improvement the first topic in this section addresses total quality management tqm and other quality tools it first defines quality and the cost of quality and then it reviews the core elements of tqm the topic also presents what are called the basic seven tools of quality eg histograms pareto processes record quality data determine root causes of quality issues and prioritize how to resolve them it also addresses quality function deployment statistical process control spc root cause analysis and benchmarking the next topic presents the basic concepts of six sigma which is a quality methodology that like lean discussed in the next section requires organizations to embrace its concepts within the organizational complex systems and products that need every component to integrate and function correctly it also provides a methodology for implementing improvements applied to product and process improvements the steps in continuous process improvement are described and the topic also outlines characteristics common to many continuous improvement methodologies continuous improvement differs from other types of organizational improvement initiatives in that it involves small manageable improvements that can be planned and implemented in relatively short
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product and process improvements the steps in continuous process improvement are described and the topic also outlines characteristics common to many continuous improvement methodologies continuous improvement differs from other types of organizational improvement initiatives in that it involves small manageable improvements that can be planned and implemented in relatively short periods of time these types of improvements give organizations quick wins that build on one another organizations will still use large projects and project management to plan and implement major methodology such as lean designing a new product and its production process or building a new plant and designing its process flows while necessary these types of major change initiatives are not discussed in this section continuous improvement is necessary even if an organization is running these types of large projects topic 1 total quality management and other quality tools the apics dictionary 16th edition defines total quality management a term coined to describe japanesestyle management approaches to quality improvement since then total quality management tqm approach to longterm success through customer satisfaction tqm improving processes goods services and the culture in which they work the methods for implementing this approach are found in teachings of such quality leaders as philip b crosby w edwards deming armand v feigenbaum kaoru ishikawa jm juran and genichi taguchi this topic first defines quality and the cost of poor quality and it then addresses the objectives and core concepts of tqm after that we ll look including quality function deployment the basic seven tools of quality statistical process control root cause analysis and benchmarking quality the apics dictionary 16th edition defines quality as follows defined through five principal approaches 1 transcendent quality based on a product attribute 3 userbased quality is fitness for an acceptable price also quality has two major components 1 quality of conformance quality is defined by the absence of defects customer satisfaction with a product s characteristics and features first and foremost quality is defined by customer requirements and perceptions customer requirements are shaped primarily by quality of design and this captures fitness for use meaning that the product needs responsibility of manufacturing organizations and it is within their sphere of control marketing usually determines requirements and operations implements them customer perceptions are not entirely controllable by manufacturing since they are based on relative assessments of what can be obtained from competitors at a similar price perceptions are also based on quality of conformance however such as any past service failures customers have experienced like receiving defective units and manufacturing can control this operations distribution and customer service each play a role let s briefly review the principal approaches to quality from the definition transcendent quality this is what most people think of when asked to define quality but it is actually very difficult to define precisely and involves opinions productbased quality this relates to the grade of the product for example a lowcost item or a luxury version with many features the design should fit the targeted customer
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most people think of when asked to define quality but it is actually very difficult to define precisely and involves opinions productbased quality this relates to the grade of the product for example a lowcost item or a luxury version with many features the design should fit the targeted customer segment and organizational strategy for sales volumes even lowgrade items can be high quality should perform its features its aesthetics its conformance to specifications and its services eg speed consistency availability and competence of services it will also be based on other elements such as warranty price and perceived quality from a performance perspective this includes the following subsets reliability this is performance consistency and how long the unit lasts durability this is resistance to wear and tear manufacturingbased quality this is conformance to requirements responsibility marketing and branding exhibit 119 shows the product development cycle which is a cyclical process used to capture customer requirements and ensure that they are incorporated into new products and product improvements the exhibit shows how quality needs to be added between each phase of the cycle perceptions development cycle with each step cost of poor quality achieving high levels of quality requires a significant investment of time and money however tqm and the many quality gurus mentioned in more expensive option in the long term this is because poor quality has numerous costs the apics dictionary 16th edition defines the cost of poor quality also called the cost of quality and a synonym quality costs cost of poor quality the costs associated with performing a task incorrectly andor generating unacceptable output these costs would include the costs of nonconformities inefficient processes and lost opportunities quality costs the overall costs associated with prevention activities and the improvement of quality throughout the firm before during and after production of a product costs of controlling quality costs of failure these as follows external failure costs the costs related to problems found after the product reaches the customer this usually includes such costs internal failure costs the cost of things that go wrong before the product reaches the customer internal failure costs usually include rework scrap downgrades reinspection retesting and process losses external failure costs are the most significant and expensive failures because they can impact customer perceptions and loyalty these costs include warranty costs reverse supply chain costs product recall costs lost customers and field service costs the dictionary defines field service as follows after the sale or during the lease field service may also include training and implementation assistance ranking second in significance are internal failure costs these costs are also quite expensive because they require rework and can impact customers directly in terms of longer lead times or incomplete quantities being shipped internal failure costs also include scrap and spoilage these problems occur while the goods are still in production or in storage in an organization with little investment in prevention failure costs might make up 80 percent or more of the total costs
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longer lead times or incomplete quantities being shipped internal failure costs also include scrap and spoilage these problems occur while the goods are still in production or in storage in an organization with little investment in prevention failure costs might make up 80 percent or more of the total costs of poor quality costs of controlling quality two basic methods for detecting the need for quality improvements include quality control and quality assurance in many quality circles the basic difference is that quality control measures conformance to standards or requirements such as product specifications while quality assurance measures conformance to process policy or procedure an example of quality assurance using this definition could be the degree to which a worker follows the required procedure of placing a template overlay over a part before adding components as marked on the template the apics dictionary 16th edition defines quality control as the process of measuring quality conformance by comparing the actual with a standard for the characteristic and taking corrective however as the dictionary definition of quality assurancecontrol indicates there are many interpretations of these terms and they are often treated as synonyms whatever they are called at your organization both conformance to specifications and process conformance need to be measured appraised and failures in conformance reduced in occurrence prevented to one degree or another thus the costs of controlling quality include appraisal costs and prevention costs appraisal costs include costs for inspections calibration of equipment product testing and quality audits while necessary to some degree recall that lean considers these to be a form of waste because perfect quality goods should not need inspection note that by definition inspection occurs on finished goods to determine if they meet all specifications lean still does quality control at the work center level inspection can also occur for incoming raw materials or components but these are the finished goods of suppliers from a tqm standpoint prevention costs need to become the highest priority because these measures reduce product and process variability the dictionary defines prevention costs in part as follows the costs caused by improvement activities that focus on the reduction of failure and appraisal costs typical costs include education quality training and supplier certification prevention costs also include preventive maintenance quality planning statistical process control discussed later in this topic and the cost of devoting time to various types of continuous improvement or longer improvement projects the dictionary defines preventive maintenance the activities including adjustments replacements and basic cleanliness that forestall machine breakdowns the purpose is to ensure that production quality is maintained and that delivery schedules are met in addition a machine that is well cared for will last longer and cause fewer problems the theory is that increasing investment in prevention will increase the total cost of poor quality over the short term because failure costs will not immediately go down over the long term however as multiple rounds of continuous improvement are applied the cost of failure will shrink dramatically
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fewer problems the theory is that increasing investment in prevention will increase the total cost of poor quality over the short term because failure costs will not immediately go down over the long term however as multiple rounds of continuous improvement are applied the cost of failure will shrink dramatically and the cost of appraisal will also shrink as less is needed thus investing in quality has a longterm positive return on investment success through customer satisfaction as it applies to the products and services provided to the customer this objective can be translated as meeting all required product and service specifications a bell shaped curve demonstrates the central tendency most processes exhibit with a mean average value as the center and the values above and below are the standard deviations or probabilities where variations occur samples of products that measure conformance to specifications may have tall and narrow bell curves and these will have little variation from the mean those with fat and wide bell curves will have significant variation this will be illustrated later in this topic but the point here is that within specifications or conformance to requirements might be specified as say plus or minus three standard deviations thus made to specifications indicates only that the specification is within the upper and lower limits of what the organization has determined to be acceptable some specifications may be quite near these outside limits when it comes to products being sent to industrial customers that need to integrate with other components several components that are all within specifications but off in different directions could cause problems with final assembly therefore another objective of tqm is to ensure that variation is minimized to the degree possible tall and narrow bell curves given the nature of the process the costs involved in increasing tqm relies on certain core concepts many of which will be familiar because they have already been introduced this includes management commitment making quality part of the organizational culture ensuring that all employees are involved and are empowered to implement quality initiatives and continuous improvement and partnering with suppliers to provide quality at the source the role of management as champions tqm s reliance on performance measurement employee involvement and empowerment and focus on the customer are discussed more next management champions have a chance to succeed management must champion the effort and develop organizational strategy mission statements and vision statements in ways that inspire a sustained effort toward desired levels of quality tqm needs to become part of the organizational culture cultures are very difficult to change and will revert to old ways if change management is not carefully planned and sustained change management is discussed more in part 2 of these materials management also needs to fund investments in prevention since these initiatives often do not show results in terms of reduced costs or increased market share for long periods of time owners or investors could question the expense management must also ensure that quality
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more in part 2 of these materials management also needs to fund investments in prevention since these initiatives often do not show results in terms of reduced costs or increased market share for long periods of time owners or investors could question the expense management must also ensure that quality becomes part of people s daily routines for example by checking in on quality initiatives during a regular meeting performance measurement performance measurement quality function deployment and the many quality tools discussed later in this topic can be used to measure performance note however that some of the most important costs of poor quality are difficult to measure most notably the cost of lost customers customer levels and market share increase and decrease for customer loyalty and customer satisfaction can be attributed to quality versus investments in marketing changing tastes environmental factors involvement and empowerment tqm is everyone s responsibility and this means that everyone needs to commit not only to doing their jobs well but also to improving their jobs this might include crosstraining employees to perform other jobs training on quality tools or teaching general problemsolving and root cause analysis skills it may involve developing quality teams or cells that can directly work with suppliers or internal or external customers to learn about their requirements and perceptions it also requires giving employees a sense of ownership over the quality of processes under their control as discussed previously customers can be internal or external meaning that a customer by this definition is simply someone who uses your outputs as inputs to their own processes thus internal customers might include the next work center or other functional area such as finance or shipping and receiving external customers include not only the ultimate customer but also intermediate customers such as distribution centers getting to know these customers helps employees learn about and identify with their customers needs customer needs include the following quality flexibility agility meaning the ability to be flexible in quantity delivery capacity or specifications as well as adaptable to changing requirements and environments dependability resilience service speed lead time stability meaning low variability in specifications or performance measures obviously customers desire high quality flexibility dependability service speed and stability with short lead times and low cost but the combination that the customer finds acceptable depends on perceptions offering over time customers tend to expect improvements in each of these areas only following a rigorous quality methodology or other continuous improvement philosophy can simultaneously improve most or all of these things ie minimize tradeoffs quality function deployment qfd the apics dictionary 16th edition defines quality function a methodology designed to ensure that all the major requirements of through the resulting product design process and the design and operation of the supporting production management system qfd product and what the product is capable of delivering qfd often quality function deployment helps organizations manage tradeoffs between various customer needs when developing or improving products consider the example of an organization that
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resulting product design process and the design and operation of the supporting production management system qfd product and what the product is capable of delivering qfd often quality function deployment helps organizations manage tradeoffs between various customer needs when developing or improving products consider the example of an organization that makes commercial doors we will use this example throughout these sections making a door thicker will make it more resistant to breakins and it will insulate better but it will also be heavier and more expensive and will need sturdier hardware qfd not only helps ensure that actual customer requirements are considered it weighs the consequences of various engineering responses to those requirements it also looks at how a product s specifications and features compare to those of the competition so the organization can remain competitive relative to evolving customer priorities quality function deployment is a type of value analysis defined in the dictionary as follows the systematic use of techniques that identify a required function establish a value for that function and finally provide that function at the lowest overall cost focuses on the functions of an item rather than the methods of producing the present product design first step in the process is to determine these customer requirements which is done using the voice of the customer voc after collecting this information the next step is to construct a house of quality the apics dictionary 16th edition defines the voice of the customer actual customer descriptions in words for the functions and features customers desire for goods and services in the strict definition as related to quality function deployment qfd the term customer indicates the external customer of the supplying entity gather information on customer requirements for product functions and features as well as related services such as fast delivery voc might competitors products if customers have experience with them it may require interviewing customers or using surveys surveys could have sections with structured responses eg requiring the customer to make a selection from a 1 5 range called a likert scale however for true voc collection surveys should also allow unstructured responses such as including blank fields for responding to general questions once customer attributes are gathered the results are compiled and a house house of quality a structured process that relates customerdefined attributes to the product s technical features needed to support and generate these attributes this technique achieves this mapping by means of a six step process 1 identification of customer attributes 2 identification of supporting technical features 3 correlation of the customer attributes with the supporting technical features 4 assignment of priorities to the customer requirements and technical features 5 evaluation of competitive stances and competitive products and 6 identification of those technical features to be used quality function deployment qfd process and forces designers to consider customer needs and the degree to which the proposed designs satisfy these needs exhibit 120 shows a house of quality the first step in building the house
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and competitive products and 6 identification of those technical features to be used quality function deployment qfd process and forces designers to consider customer needs and the degree to which the proposed designs satisfy these needs exhibit 120 shows a house of quality the first step in building the house is to enter customer needs and wants often called whats in the quality is to translate these wants into a balanced set of technical product then entered in the customer importance area next to the customer needs and wants for example easy graffiti removal might be a top priority in the numerical ranking of customer needs exhibit quality existing and competing products that analysis appears in the far right next technical requirements or the counterparts to customer needs and wants are identified in the rectangle immediately above the relationship matrix in the middle this provides a technical response for each what the technical requirements are called hows because they represent bottom of the house the corresponding target engineering values are entered these are the engineering characteristics that will provide the technical capability in question for the vandalproofing column this might thickness of this vandalproofing material for each row listing a customer want there should be a corresponding technical requirement this will be the house is used to indicate where a different technical requirement might support or conflict with the given customer want using for example a plus or minus sign finally the various technical requirements are compared with one another directly and assigned a plus or minus sign or neither in the roof of the house also called a correlation matrix it shows the relationship between the hows by indicating additional areas of supporting or conflicting requirements the point is to ensure that all tradeoffs are recognized in the design effort throughout the entire process when a customer need is recognized the product or service design processes react to and support that need to the degree possible that reflects customer priorities while minimizing tradeoffs and that omits features that are not in demand this will keep costs lower while maintaining or increasing customer satisfaction basic seven tools of quality b7 the apics dictionary 16th edition defines the basic seven tools of tools that help organizations understand their processes in order to improve them the tools are the causeandeffect diagram also known as the fishbone diagram or the ishikawa diagram check sheet flowchart histogram pareto chart control chart and scatter diagram each of these tools is discussed next note that we also introduce the larger concept of statistical process control spc when we discuss control charts because a control chart is a primary tool used in spc the resolve a problem our door manufacturer is having with too many doors being returned check sheets the dictionary defines a check sheet in part as follows a simple datarecording device the check sheet is designed by the user to facilitate the user s interpretation of the results check sheets are often confused with
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our door manufacturer is having with too many doors being returned check sheets the dictionary defines a check sheet in part as follows a simple datarecording device the check sheet is designed by the user to facilitate the user s interpretation of the results check sheets are often confused with data sheets and checklists check sheets are used to record the number of times a particular type of are simply data that can be interpreted using other tools such as a pareto chart or they can be used to calculate basic statistics such as defects per operator over a given time period exhibit 121 shows an example of a check sheet used for recording reasons for product returns of various styles of instock doors exhibit tallying reasons returns pareto charts the dictionary defines a pareto chart as follows exhibit 122 shows how the results of many check sheets compiled over time have resulted in certain percentages of types of reasons for returns which are ranked from most to least common per pareto chart rules note that while both dented and broken doors were tallied on the check sheet here they are combined into the category of poorly packaged doors exhibit pareto 80 percent part of the pareto 8020 rule of thumb but this is 40 percent of the causes shown two fifths however the other category might contain a large number of infrequent causes if the other category contained for example six causes then the first two causes would be 20 percent two tenths regardless of the precise number of causes the pareto terminology the remaining number would be called the trivial many the chart shows that addressing the first two problems will resolve the majority of product returns thus giving the highest return on investment for improvement initiatives later in this course you will learn how pareto analysis is used in abc decisionmaking related to quality module 4 section d causeandeffect diagrams the dictionary defines a causeandeffect diagram in part as follows ishikawa diagram because kaoru ishikawa developed it and the fishbone diagram because the complete diagram resembles a fish skeleton the diagram illustrates the main causes and subcauses leading to an effect symptom example the purpose of the diagram is to brainstorm possible root causes of a symptom in this case freight claim returns related to poor packaging that resulted in damaged product being received exhibit effect diagram categories of causes to explore and the following are commonly used because they are fairly comprehensive in terms of the possible sources of variation in a process note that the examples included in parentheses below are possible sources of manufacturing variation environment dust temperature changes humidity lighting people operator training level of experience materials poorquality or highly variable materials measurement miscalibrated tools giving the wrong result consistently or wide variation in measurements the wrong things being measured methods flawed process steps or flow between steps machine poorly maintained equipment or the wrong equipment next brainstorming participants add potential root causes
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level of experience materials poorquality or highly variable materials measurement miscalibrated tools giving the wrong result consistently or wide variation in measurements the wrong things being measured methods flawed process steps or flow between steps machine poorly maintained equipment or the wrong equipment next brainstorming participants add potential root causes under the appropriate categories perhaps adding subsets of these smaller bones as needed participants keep going until all potential causes have been listed the use of the categories helps ensure that participants are thorough since this is a brainstorming exercise there are no bad ideas complex as needed to list all potential causes once all potential causes have been listed the next step is to narrow the list down to just those items that the group agrees are the most likely root causes or are at least worth exploring further there may be more than one root cause continuous improvement efforts can then be directed to those areas flowcharts the dictionary defines flowchart and process flow diagram a synonym flowchart the output of a flowcharting process a chart that shows the operations transportation storages delays inspections and so on related to a process flowcharts are drawn to better understand processes process flow diagram a graphical and progressive representation of the various steps events and tasks that make up an operations process provides the viewer with a picture of what actually occurs flowcharts use commonly accepted symbols ovals to represent process boundaries or terminators rectangles or sometimes circles to represent operations diamonds to represent decision points and so on other symbols may be used depending on the type of chart some charts list operation times as well as the process flow another type is a cross functional swimlane flowchart where functional areas are shown in rows or columns so that it is easy to see which department does which part of a process this might show where interdependencies or inefficiencies exist among departments manufacturer flowchart in this example the process starts when the completed unit is received from manufacturing first the initial packaging is added then it is shrink wrapped the diamond represents a decision point where inspection occurs if the packaging is rejected the process loops back for rework if studying flowcharts might reveal ways to improve a process for example perhaps inspection did not occur previously and this is the tobe state perhaps inspection occurred at the wrong point such as after the with packaging alignment histograms the dictionary defines a histogram in part as follows a graph of contiguous vertical bars representing a frequency axis the pictorial nature of the histogram lets people see patterns work center over various periods histograms are simply vertical bar frequency instead histograms visualize the actual data such as per time exhibit 125 shows a histogram of the number of dents found on products returned because they were dented it shows that most units were in the range of two to three dents with fewer or more dents being less frequent this information
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visualize the actual data such as per time exhibit 125 shows a histogram of the number of dents found on products returned because they were dented it shows that most units were in the range of two to three dents with fewer or more dents being less frequent this information might be used to show that multiple areas of packaging histogram statistical process control spc and control charts the dictionary defines statistical process control spc as follows operation often used interchangeably with statistical quality control although statistical quality control includes acceptance sampling as well as statistical process control we introduce a few concepts of statistical process control next including process capability how spc differs from product inspections and causes of variation control charts are discussed after that process capability the dictionary defines process capability as follows the ability of the process to produce parts that conform to engineering specifications process capability relates to the inherent variability of a process that is in a state of statistical control all processes have some variation with processes that are said to be in control the amount of variation will be small in outofcontrol processes quality exhibit 126 shows two bell curves one tall and narrow low variation from the mean and one short and wide significant variation from the mean note the lower specification limit lsl and upper specification limit usl these are the cutoff points that the organization has selected as acceptable tolerance levels for variation in the given specification for the product the dictionary defines tolerance as allowable departure from a nominal value established by design engineers that is deemed acceptable for the functioning of the good or service over its life cycle specification results falling inside these limits called within the doorway are considered acceptable results falling outside the limits are rejected and require rework or become scrap specification limits are fall inside the limits within specifications while the process with great variation will have many rejects many results outside specifications curves with specification limits two other terms need to be introduced at this point as well these are formally defined a little later upper control limits ucl and lower control either end of the bell curve it is important to differentiate between control limits and specification limits customer andor engineering and are product specifications these specifications are independent of the process used to produce them sometimes called the voice of the customer observations of standard deviations and are process specifications these determine the degree to which the process is capable of producing results that are within specifications these are sometimes called the voice of the process in exhibit 126 the tall narrow curve shows that this process is capable of producing results within specification limits the vast majority of the time however the short and wide curve shows that this process is incapable many rejected units in other words note that there is a link in the additional resources that further clarifies the distinction between specification limits and control
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of producing results within specification limits the vast majority of the time however the short and wide curve shows that this process is incapable many rejected units in other words note that there is a link in the additional resources that further clarifies the distinction between specification limits and control limits recall how the histogram of dents on products showed a central tendency of two to three dents with variation on either side that example shows how actual data sets are used to create bell curves a bell curve is more formally called a normal distribution because it takes samples actual data observation points and generates a pattern that smooths out normalizes the actual results the distribution to generalize how this pattern would look for the entire population all possible results most manufacturing processes that are operating under controlled conditions will exhibit a bell curve and most naturally occurring processes will show a similar distribution around the mean such as the distribution of student grades around the average result extrapolation of data into these curves helps show two things more easily than studying difference between the largest and smallest observed values or the width of the curve the standard deviation shows how tall and narrow or short and wide the curve is range and standard deviation are also called the spread to indicate the level of variability the dictionary defines spread as follows variability of an action often measured by the range or standard deviation of a particular dimension the greek symbol σ sigma is used to represent a standard deviation standard deviations indicate the likelihood of where a result will fall under the curve a result will fall within what constitutes one standard deviation does not change however one standard deviation can be expressed as a certain number of units if this value is large the process will have wide variation if it is small the process will have narrow variation the same thing can be done with anything being measured such as the diameter of a shaft in millimeters returning to the example of dented products fewer dents are always good so there would be no lower specification limit it would be zero there would be only an upper specification limit too many dents which a process that would have upper and lower specification limits exhibit 1 for door closers these cylinders need to be very precise to provide the right hydraulic pressure without leaking too small or failing to fit in the housing too large exhibit statistical process control with shift established however the current actual observations tell a different story here the mean has shifted to about 60035 millimeters the results example of something that should be investigated further shift in mean and some other finer points related to statistical process control are addressed primarily in part 2 of these materials out of control is defined as outside control limits the control limits for this example are 5994 mm to 6006 mm so this process is
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be investigated further shift in mean and some other finer points related to statistical process control are addressed primarily in part 2 of these materials out of control is defined as outside control limits the control limits for this example are 5994 mm to 6006 mm so this process is designed to operate well within process cannot stay in control and avoid some other issues such as a equipment statistical process control versus product inspection earlier we noted that lean considers product inspection to be a form of waste this is because inspection of finished goods detects only defects in other words failure to conform to a particular specification limit well after its occurrence at this point determining the root cause of the defect and isn t preventive statistical process control on the other hand monitors manufacturing processes against statistical control limits such detects when processes are getting out of control corrective action can be taken as a preventive measure against defects spc therefore adds value for the customer in terms of less variability and shorter lead times causes of variation the apics dictionary 16th edition defines two types of causes of variation common causes random causes causes of variation that are inherent in a process over time they affect every outcome of the process and everyone working in the process assignable cause special cause a source of variation in a process that can be isolated especially when its significantly larger magnitude or different origin readily distinguishes it from random causes of variation common causes are based on chance and thus random variation is inevitable the dictionary defines random variation as a fluctuation in data that is caused by uncertain or random occurrences examples of common causes include those listed earlier under the six categories of the causeandeffect chart identifying common causes by category can help because people can design a process to minimize their impact such a process will have a taller and narrower bell curve shifted from its statistical mean it is a good sign that there will be an assignable cause such as a worn part or a miscalibrated instrument similarly if the overall range of variation increases over time this may also have an assignable cause tool the control chart control charts the apics dictionary 16th edition defines a control chart in part as follows a graphic comparison of process performance data with predetermined computed control limits the process performance data usually consists of groups of measurements selected in the regular sequence of production that preserve the order the primary process as opposed to random variations while the bell curves shown earlier have the mean at the center and the limits to the left and right control charts are turned sideways so they can show results over time as well as lower and upper control limits control charts are used to visualize and measure process variation exhibit 128 and exhibit 129 show two types of control charts developed for the same exhibit showing sample exhibit showing
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control charts are turned sideways so they can show results over time as well as lower and upper control limits control charts are used to visualize and measure process variation exhibit 128 and exhibit 129 show two types of control charts developed for the same exhibit showing sample exhibit showing sample distinguish it from the mean of an entire population such as the sample output of a work center often a sample consists of several units three the chart samples rather than individual observations are used because samples tend to be faster at revealing changes in variations also the sampling process might destroy the product or there may be too many an control chart will show the population mean at the center and the lines to show upward or downward movement note the upper control limit ucl and lower control limit lcl in exhibit 128 the dictionary defines a control limit as follows a statistically determined line on a control chart upper control limit or lower control limit if a value occurs outside this limit the process unlike the specification limits discussed earlier these limits are established by statistical observation of variability rather than being arbitrary control limits are typically set at plus or minus three standard deviations from the mean thus if the process is in control the samples will fall within the control limits 997 percent of the time the specification customer and engineering requirements note that the histogram in exhibit 127 shows the individual measurements against their specification limits of 5990 to 6010 millimeters whereas the control chart shows the sample averages against their statistically calculated control limits of 5994 to 6006 millimeters in this case the specification limits for the product fall outside the control limits for the process note that exhibit 127 only shows results from days 10 through 18 in the control charts shown in exhibit 128 and exhibit 129 the second half of the time period being charted thus the histogram was created just to study the area where the shift in mean occurred basically a method of showing the range of variation that exists in the samples these readings are gathered by measuring each unit of the small sample of three to nine units exhibit 130 shows the first two days shown in the charts above excerpt hydraulic cylinder example lowest diameter is 5994 millimeters the range is calculated by subtracting the lowest value from the highest value or 6005 millimeters 5994 millimeters 0011 millimeters this is recorded on the rchart for that time period the same range is calculated for day 2 even though limit for the rchart is 00205 millimeters which is determined by calculating the maximum range that can be found within three standard samples greater than 00205 millimeters would imply that there is such a samples would be desirable exhibit 129 go outside their respective control limits the process can be said to be in control based on these criteria however the upward trend in cylinder diameters indicates
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be found within three standard samples greater than 00205 millimeters would imply that there is such a samples would be desirable exhibit 129 go outside their respective control limits the process can be said to be in control based on these criteria however the upward trend in cylinder diameters indicates that this process should be reviewed note that the rchart does not show this shift in mean this is why studying both types of charts is important they show different information the r chart instead shows when the samples have too much variation a third type of control chart is a pchart a pchart is a percentage chart that can be used to show percentages of sample averages exhibiting a given characteristic as tracked over time if the same data was used from the prior example the pchart would closely resemble the prior chart but rather than a numeric scale it would display a percentage variation from the mean on the side the upper and lower control limits would also chart would follow the same pattern since the percentages would be calculated using the same source data between samples but the resulting percentages will take this into account and still be comparable to illustrate this take another scenario where sample sizes might vary considerably for example a control chart can be used to track the number of nonconforming units in total in this case since the number of rejects can be determined precisely without sample size exhibit 131 shows a pchart for the number of defective door closers per week ie those rejected during the manufacturing process exhibit defective closers remainders were fiveday workweeks during the short weeks fewer closers were produced so the output units will differ across weeks due to variations such as this viewing just the total number of defects in units would be deceptive in a pchart however each week s percentage is individually calculated based on its unique sample size in the time period in this way the defect rate can be comparable across weeks the upper control limit is again determined statistically here based on three standard deviations from the mean in this case the defects are well within tolerance however the upper specification limit might be set at a lower rate this example has no lower control limit because zero defects is always desirable scatter diagrams the dictionary defines a scatter chart also called a scatter diagram or scatterplot in part as follows a graphical technique to analyze the relationship between two variable to make the prediction the graph will show possible relationships although two variables might appear to be related they might not be those who know most about the variables must make that evaluation particular day of the month and it shows that this level rose steadily throughout the month a trend line was added to show this general increase exhibit scatter diagram this type of analysis might be made for example if the causeandeffect analysis considered a possible root cause
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make that evaluation particular day of the month and it shows that this level rose steadily throughout the month a trend line was added to show this general increase exhibit scatter diagram this type of analysis might be made for example if the causeandeffect analysis considered a possible root cause of poor packaging to be overworked employees further study could determine whether more poorly packaged doors were shipped at the end of the month however if the packaging itself was simply not robust enough given the hard handling of thirdparty package services the real root cause would be the quality of the packaging and this scatter diagram would be showing a coincidence rather than a real causeandeffect situation root cause analysis the dictionary defines root cause analysis as analytical methods to determine the core problems of an organization process product market and so forth root cause analysis can take many forms but in general it requires developing critical thinking skills and asking lots of questions rather than assuming that one knows the answers already it may involve brainstorming as the description of the causeandeffect analysis tool how and where another example is the five whys which the dictionary defines as follows five times when confronted with a problem by the time the answer to identified benchmarking the apics dictionary 16th edition defines benchmarking in part as follows comparing products processes and services to those of another organization thought to have superior performance the benchmark while the basic seven tools of quality look inward to determine quality levels benchmarking looks to external examples of excellence there are many external places to look including competitors in the same industry as well as organizations that perform a particular process excellently even though they are different otherwise competitors are often the best subjects for benchmarking manufacturing processes because the nature of the manufacturing process will likely be similar if the process differs improve or to reengineer organizations in other industries may have such different processes that manufacturing benchmarks will be unrealistic however other processes such as customer service and the like can take inspiration from the best in class for that function which might occur in any industry benchmarks can also be international standards for example conformance to the iso 9001 quality management standard here are the basic steps in benchmarking step in continuous process improvement as discussed earlier 2 select a benchmark organization functional area or standard this selection process was discussed above 3 evaluate the benchmark target this may require gathering information from multiple sources since the target may not be forthcoming with information especially if it is a competitor there will likely be a variety of publicly available information from white papers to articles but site visits and original research such as questionnaires or interviewing individuals may be needed in some cases each company can benchmark the other company in a mutual learning agreement focus groups of customers and suppliers might also be formed process this comparison has two parts first
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papers to articles but site visits and original research such as questionnaires or interviewing individuals may be needed in some cases each company can benchmark the other company in a mutual learning agreement focus groups of customers and suppliers might also be formed process this comparison has two parts first the processes are compared and analyzed using flowcharts and other quality tools this will provide information on how a process might be done differently second performance measurements are calculated and compared for example which company has better inventory turnover determining why this is can provide information on processes to improve achieving the benchmark metric also provides the apics dictionary 16th edition defines six sigma as follows a methodology that furnishes tools for the improvement of business processes the intent is to decrease process variation and improve product quality six sigma has much in common with lean and many organizations implement them together in lean six sigma which focuses on both problem solving and process improvement the dictionary defines lean a methodology that combines the improvement concepts of lean and six sigma it uses the seven wastes of lean and the dmaic process from six sigma and awards recognition of competence through judo style belts this topic briefly reviews the objectives of six sigma addresses its methodology and goes over its continuous improvement process called to achieve low product return rates by systematically reducing variation in all manufacturing and business processes to no more than 34 defects per million opportunities this number 34 defects per million is based on six sigmas standard deviations in each direction from the mean of a process six standard deviations in each direction from the mean is lower specification limits see the prior topic will create a doorway that is twice as wide as the vast majority of the process spread the three sigma control limits note that an opportunity for an error could be a failure of any specification so a single product with many specifications and many related services eg delivery lead time billing with their own specifications would represent potentially hundreds of opportunities for errors six sigma methodology corporation which developed complex systems that required very low rates to achieve these unprecedented levels of quality bill smith a reliability engineer at motorola developed a combined approach for process improvement and problem solving based partly on lean methodologies management and it requires employee involvement and empowerment at all levels managers at middle levels need to translate the goals and guidelines provided by executives into process goals and performance measures even more than total quality management six sigma is evidencebased meaning that organizations need to develop more precise ways of measurement to align with their much higher goals for process improvement problemsolving projects master black belts are trainers in six sigma and usually have completed largescale costsaving projects of over 1000000 black belts are project managers who have extensive six sigma training and usually have managed costsaving projects of over 100000 green belts are project
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much higher goals for process improvement problemsolving projects master black belts are trainers in six sigma and usually have completed largescale costsaving projects of over 1000000 black belts are project managers who have extensive six sigma training and usually have managed costsaving projects of over 100000 green belts are project managers who have completed six sigma training and may have completed a costsaving project saving at least 10000 six sigma has the following major concepts begin with the customer s needs in mind while we have already addressed the first two of these points to some degree the third point can benefit from some illustration take a fivestep process where each step is controlled at the level of three standard deviations or three sigma assume also that each process step will the prior topic since three sigma is 997 percent 03 percent of the percent yield multiplying the yields of each successive operation produces the net yield 0997 0997 0997 0997 0997 098509 or 98509 percent which means that 1491 percent of the inputs 99999 percent the net yield after five processes is still 099995 or 99995 percent so at this level of quality only 0005 percent of the many industries such as the airline industry or the automotive industry need very high levels of quality due to product liability however even industries in which this level of precision would be costprohibitive and their quality the apics dictionary 16th edition defines the define measure analyze improve control dmaic process as follows a six sigma improvement process composed of five stages 1 determine the nature of the problem 2 measure existing performance and commence recording data and facts that offer information about the underlying causes of the problem 3 study monitor the process until the solutions become ingrained before dmaic can be applied to improve a process a prior step is sometimes added recognize recognition means that there is evidence of variation in the output of a process this then leads to the five steps 1 define define starts with the customer identifying the customer s problems caused by the variation in output it also involves defining the process and its elements and outputs finally it involves defining improvement goals along with the monetary or other benefits that promote investing in the project 2 measure measure the process and collect all data needed to understand the process 3 analyze determine correlation or causeandeffect between the 4 improve plan an improvement project that will address the customer s problem and minimize variations in the process that lead 5 control control the process to ensure that the improvements last over the long term two other steps are sometimes added standardize and integrate standardize involves documenting the process and training operators to ensure that it becomes the new standard integrate involves implementing the process change topic 3 continuous improvements of products and processes the apics dictionary 16th edition defines continuous improvement the act of making incremental regular improvements and upgrades as the definition states
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involves documenting the process and training operators to ensure that it becomes the new standard integrate involves implementing the process change topic 3 continuous improvements of products and processes the apics dictionary 16th edition defines continuous improvement the act of making incremental regular improvements and upgrades as the definition states continuous improvement can apply to products or continuous process improvement cpi which the dictionary defines a neverending effort to expose and eliminate root causes of problems smallstep improvement as opposed to bigstep improvement the japanese term kaizen means continuous improvement and it refers to these focused improvements that can be conducted as part of ongoing operations and show results quickly such as within a week or continuous improvement objectives general objectives of any type of continuous improvement are to make the product or the process more effective do the right things andor efficient do the things right these objectives can be expressed as improving quality and productivity and eliminating waste the end results therefore can include better quality and thus higher customer satisfaction and perhaps greater market share reducing cost and thus increasing profits and removing waste in the form of unneeded product features services or process steps thus getting more done with existing resources and avoiding the need for additional capital investments rather than just being nice to do continuous improvement is necessary for competitive survival because competitors will also be improving their products and features processes and services production and more customers or better profit margins will be seen as indispensable contributors to value continuous product improvement continuous improvement applied to products involves a cyclical process of determining market requirements designing the product and the production process manufacturing selling and then looping back to market requirements as customers react to the product for example by expressing satisfaction or dissatisfaction feedback also includes how market shares can provide updated information on a product s market qualifiers and market winners market requirements can include price for quality the topic on total quality management and other quality tools earlier in this section described techniques that can be used to gather customer feedback and to ensure that quality is considered in product design is implemented during manufacturing and packaging processes and is proven by conformance to requirements other tools discussed in to implement product improvements incremental product improvements typically require planning and control at a higher level than just manufacturing planning and control because the stakeholders in product changes are numerous and changes could impact multiple areas production and inventory control professionals may be vital contributors to these changes manufacturing contributes production expertise on improvements to products and manufacturing equipment designs to ensure that production is efficient and effective this could include changes that would allow reductions in setup times or the number of setups the number of parts waste scrap or other variability easier component integration or ways to reduce inventory levels such as by delaying product differentiation in other stakeholders will also provide expertise on issues related to product design
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changes that would allow reductions in setup times or the number of setups the number of parts waste scrap or other variability easier component integration or ways to reduce inventory levels such as by delaying product differentiation in other stakeholders will also provide expertise on issues related to product design customers or their sales and marketing representatives could indicate how product changes might affect customer requirements and expectations designers and engineers in research and development production equipment can be altered or how a change might impact quality logistics and supply chain management professionals might evaluate whether a product change could maintain or reduce lead times continuous process improvement continuous process improvement is also a team effort but in many cases these improvements can be focused on just small parts of a production or inventory control process reducing setup times or the incremental improvements that production and inventory control professionals can directly plan and implement on their own therefore it is important to learn about the many different types of continuous improvement methodologies and tools so the right ones can be applied continuous process improvement steps the continuous process improvement steps an organization might use checkaction pdca cycle defined in section d topic 2 another uses the following steps observation or on the results of tools such as pareto or root cause analysis it could be an economic priority identified for example by 2 gather and compile data on the asis state this may include a inputs outputs routings and boundaries of the process lists of the components used and information on suppliers customers and environmental factors 3 analyze the data and produce a tobe state this may involve developing one or more alternatives by breaking problems down into smaller chunks searching for root causes and calculating potential results such as for throughput investment and operating expense 4 select the best method among alternatives this involves finding the method that minimizes waste to the degree possible at this stage perhaps one that simplifies tasks combines operations when feasible finds a more efficient sequence or performs some tasks in parallel rather than sequentially it may also involve proposing improvements 5 implement train the operators involved revise policies procedures and other documents as needed to ensure that the new method becomes standard practice 6 sustain the new method this involves monitoring and controlling also involves gathering evidence of how well or poorly the new method is working and giving credit to innovators for successful improvements commonalities among continuous improvement methodologies continuous improvement can be done using lean philosophies and tools or as part of combinations of these andor other methods not addressed here these and other continuous process improvement methods share many common characteristics including the following ensuring employee involvement and empowerment sustaining continuous improvement ensuring employee involvement and empowerment continuous improvement is a team effort that needs to involve scope of these teams may differ depending on the scope of teams are used when possible to ensure that the changes can be
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characteristics including the following ensuring employee involvement and empowerment sustaining continuous improvement ensuring employee involvement and empowerment continuous improvement is a team effort that needs to involve scope of these teams may differ depending on the scope of teams are used when possible to ensure that the changes can be accomplished quickly and effectively the apics dictionary 16th edition defines employee involvement and empowerment as follows employee involvement ei the concept of using the experience creative energy and intelligence of all employees by treating them with respect keeping them informed and including them and their ideas in decisionmaking processes appropriate to their areas of expertise employee involvement focuses on quality and productivity improvements employee empowerment the practice of giving nonmanagerial employees the responsibility and the power to make decisions regarding their jobs or tasks it is associated with the practice of transfer of managerial responsibility to the employee empowerment allows the employee to take on responsibility for tasks normally associated with staff specialists examples include allowing the employee to make scheduling quality process design or purchasing decisions employee involvement means that all parts of the organization are involved and contribute to constructive change executives set the tone and create a culture of ongoing change readiness managers provide training and ensure that new methods are implemented correctly and are sustained over time workers view their jobs as not only getting assigned tasks done but also improving the tasks themselves or eliminating unnecessary steps they may also have responsibilities to perform preventive maintenance do setups record data and solve problems empowerment requires managers to delegate certain duties to you think managers still need to carefully explain expectations so that employees know what results need to be achieved but they then give workers both power and responsibility over areas in which they have expertise in some cases process engineers or other technical people may still need to be involved in other cases changes will impact other functional areas or work centers and managers will need to help coordinate with affected stakeholders however in general managers take on the role of teachers small teams of workers remain accountable to achieve results but do not need prior approval to plan and implement incremental improvements when decision making is conducted at lower levels decisions can be made more quickly and by the person who best understands the nature place faster when empowered employees work directly with customers for example they can also provide better and more responsive service because the customer s problem is their problem the worker can often provide an immediate solution such as offering a replacement product empowered employees tend to be better workers because they take ownership over their work and gain a sense of meaning from the autonomy that independent decision making provides empowerment can also reduce frustration because employees can omit steps that add no value since other employees are likewise involved and empowered any negative side effects of a change are noticed quickly and further adjustments can be made
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a sense of meaning from the autonomy that independent decision making provides empowerment can also reduce frustration because employees can omit steps that add no value since other employees are likewise involved and empowered any negative side effects of a change are noticed quickly and further adjustments can be made managers have more time to add value in other ways such as analyzing results or providing coaching continuous process improvement methods focus on the customer as the ultimate definer of quality recall that one definition of quality indicates that quality is defined by customer perceptions and what the customer is willing to pay for customers define the difference between what is value added versus waste another important aspect of the focus on the customer addressed more elsewhere is that there are internal and external customers internal customers such as workers at a downstream work center depend on receiving quality input materials or services sustaining continuous improvement all continuous improvement methodologies emphasize the need for continuous improvement to be an ongoing cycle this is the continuous in continuous improvement because this is smallstep improvement it is sustainable by design while large exhaustive projects may be needed on occasion these cannot be conducted without respite they tend to disrupt ongoing operations and often require taking persons away from their regular duties however smaller improvements can be built into the regular course of operations and regular job duties in this way continuous improvement can be a neverending quest to find the root causes of the next problem once the last one is resolved appraisal costs 1 assignable causes of variation 1 basic seven tools of quality 1 causeandeffect diagrams 1 check sheets 1 common causes of variation 1 continuous improvement continuous improvementemployee involvementempowerment 1 continuous improvementfocusing on customer 1 continuous improvementproducts 1 continuous process improvement 1 2 control costscontrolling quality 1 costspoor quality 1 define measure analyze improve control dmaic process 1 dmaic define measure analyze improve control process 1 external failure costs 1 failure costs 1 field service 1 five whys 1 internal failure costs 1 lower specification limit 1 lsl lower specification limit 1 management champions 1 manufacturingbased quality 1 pareto charts 1 performance measurement 1 prevention costs 1 preventive maintenance 1 process capability 1 process flow diagrams 1 product development cycle 1 productbased quality 1 qfd quality function deployment 1 quality basic seven tools of 1 function deployment 1 random causes of variation 1 root cause analysis 1 scatter diagrams 1 spc statistical process control 1 special causes of variation 1 specification limits 1 standard deviation 1 statistical process control 1 total quality management 1 2 transcendent quality 1 upper specification limit 1 userbased quality 1 usl upper specification limit 1 value analysis 1 valuebased quality 1 section d lean after completing this section students will be able to explain the philosophy and methods of lean production including its and worker empowerment to ensure quality its foundations of standardization and operational stability and its culture of continuous improvement and employee
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1 value analysis 1 valuebased quality 1 section d lean after completing this section students will be able to explain the philosophy and methods of lean production including its and worker empowerment to ensure quality its foundations of standardization and operational stability and its culture of continuous improvement and employee involvement show how lean production systems and other quality systems their culture including employee involvement and supplier partnerships review lean tools and techniques that can be used to implement continuous improvement including hoshin planning kaizen events or blitzes value stream mapping pokayoke and the five ss lean is addressed in detail in this section to provide the principles upon which this method is based note that some parts of the discussion of contrast lean against traditional manufacturing planning and control the second topic in this section addresses the continuous improvement components of lean building on the continuous improvement discussion topic 1 lean the apics dictionary 16th edition defines lean production as follows amount of all the resources including time used in the various valueadding activities in design production supply chain management and dealing with customers lean producers employ highly flexible increasingly automated machines to produce volumes of products in potentially enormous variety lean production contains and support processes mass production was a revolutionary concept that vastly increased efficiency in comparison to craft production historically most things were standardization so that parts were interchangeable thus allowing ease of assembly this innovation helped henry ford develop the assembly line that is moving the part instead of the worker ford also reduced the number of tasks a worker needed to do and plant work became highly repetitive even mindnumbing furthermore management systems devised at this time tended to treat workers as interchangeable parts frequent layoffs and other abuses led to adversarial managementlabor relations the formation of unions was one side effect management accounting became standardized in this mass production era its highest priority was maximizing output to lower cost per unit in order to justify the expense of large highvolume equipment but this resulted in management motivation toward long runs of large batches these in turn equipment failures due to a strong motivation to keep equipment running nonstop low worker morale and low respect for workers resulted in many preventable or known errors not being reported to management these were some of the negative side effects of mass production that eiji toyoda of toyota motor company observed when touring a detroit ford plant in 1950 toyota was struggling with the need to lay off employees and they had very little investment capital while they did lay off a quarter of their workforce they guaranteed lifetime employment for the remainder with pay strongly oriented toward seniority in exchange for doing whatever work needed doing and a commitment to help the organization continually improve because they could not invest in large equipment they developed a faster system for changeovers of tools and dies so they could use their smaller equipment competitively from these first changes
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toward seniority in exchange for doing whatever work needed doing and a commitment to help the organization continually improve because they could not invest in large equipment they developed a faster system for changeovers of tools and dies so they could use their smaller equipment competitively from these first changes in culture and process over the course of 30 years a revolutionary toyota engineer taiichi onho developed what is now called lean production the objectives of lean are to make only those products and services customers actually want match the production rate to the demand rate make products and services with perfect quality make products and services with the shortest possible lead times include only features actually in demand excluding all else keep labor equipment materials and inventory continually in motion with no waste or unnecessary movement build worker learning and growth into each operational activity this system has spread to multiple industries including service achieve these goals we will look at one major difference between objectives of lean are accomplished pull rather than push pull rather than push conventional manufacturing planning and control is designed to push material out in accordance with the production schedule based on the forecast or actual orders the apics dictionary 16th edition defines a push system as follows schedule planned in advance 2 in material control the issuing of field warehouse inventories where replenishment decision making is centralized usually at the manufacturing site or central supply facility the most costly negative side effect of a push system is that it promotes overproduction of parts or finished goods especially when using conventional accounting systems that put a high value on equipment utilization the dictionary defines a pull system as follows withdrawal of inventory as demanded by the using operations material is not issued until a signal comes from the user 3 in distribution a system for replenishing field warehouse inventories where replenishment decisions are made at the field warehouse several points in the supply chain a supply chain can move from push to pull at different locations and the point where push becomes pull is important and is discussed more later house of lean the house of lean also called the house of toyota is ohno s framework that uses the metaphor of a house with a foundation two pillars and a roof forming a space within a culture ohno s philosophy is that organizations and individuals wanting the benefits of lean must see support pillar cannot stand exhibit 133 shows this lean framework production note that many of the concepts shown in one part of this framework also apply to other parts for example standardized work is part of standardization but it also promotes operational stability and kanban a system used to generate pull signals is also part of just in time total productive maintenance is used to maintain equipment to promote workers maintain their own equipment the roof eliminate waste the roof of the house lists the goals that lean should achieve focus
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operational stability and kanban a system used to generate pull signals is also part of just in time total productive maintenance is used to maintain equipment to promote workers maintain their own equipment the roof eliminate waste the roof of the house lists the goals that lean should achieve focus on lowest cost and using the shortest lead time possible by eliminating forms of waste if work is defined as motion that creates value then motion that creates no value is not work it is waste the apics dictionary 16th edition defines waste and a few related lean terms in part as follows task with unique characteristics requiring special management control waste production can usually be planned and somewhat controlled scrap is typically not planned and may result from the same production run as waste muda waste in lean manufacturing costs are reduced by reducing waste within system mura a japanese word meaning unevenness or variability muri a japanese word meaning strain or overburden shingo s seven wastes shigeo shingo a pioneer in the japanese justintime philosophy identified seven barriers to improving manufacturing they are the waste of overproduction waste of waiting waste of transportation waste of stocks waste of motion waste of making defects and waste of the processing itself these are discussed more in the exhibit below along with an eighth waste that was added later unused people skills waste is any activity that is not value added and its root cause is often unevenness variability or overburdened processes or persons that is mura and muri create muda variability can result in scrap or rework for example overburdening processes or employees can also create waste because the process will lack stability people could omit process steps fail to maintain equipment or make errors since waste is what isn t value added the key question is what is value added value is defined by customers both internal and external determining what is valued requires two things understanding who the customers are and understanding what they value one good test of what shaped in a certain way or to have certain properties such as high tensile strength would anyone pay more for the cost of long wait times reworked parts or unneeded inventory holding costs differentiating value from waste involves separating the result from the process for example customers might value having a reliable product that is not likely to fail thus they value quality but they do not care how that quality is achieved one example of this is finished goods inspection this timeconsuming task is considered a form of waste in lean because the final work should already be perfect and need no inspection quality will have been achieved earlier in the process exhibit 134 shows eight forms of waste that workers and managers need exhibit 134 forms of waste description examples processing process scrap wrong tools or equipment overprocessing movement transportation excess or unneeded movement storage in inventory before need materials handling distance longer than needed methods
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achieved earlier in the process exhibit 134 shows eight forms of waste that workers and managers need exhibit 134 forms of waste description examples processing process scrap wrong tools or equipment overprocessing movement transportation excess or unneeded movement storage in inventory before need materials handling distance longer than needed methods motion wasted operator time or effort actions that manual lifting if forklift is best unnecessary walking searching for tools product defects meeting specifications repair rework scrap replacement inspection waiting time queuing delays equipment failure workers waiting for supplies or work overproduction making more components or finished goods than required producing despite no orders resources needed elsewhere excess inventory fill orders unnecessary safety stock obsolete inventory unused people skills knowledge shop floor worker opinions unsolicited lack of training or empowerment lean identifies these forms of waste in regular continuous improvement genbutsu in japanese the dictionary defines these terms as follows gemba the place where humans create value the real workplace genchi genbutsu a japanese phrase meaning to visit the shop floor to observe what is occurring these concepts are akin to the management philosophy called management by walking around lean listens to workers and then works to redesign or eliminate processes steps policies or plans that are not value added so that everything left is value added the lean philosophy is that each time this is done and redone there will be benefits in lower cost shorter lead times and better quality pillar one just in time dictionary 16th edition defines in part as follows the primary elements of just in time are to have only the required inventory when needed to improve quality to zero defects to reduce lead times by reducing setup times queue lengths and lot sizes to incrementally revise the operations themselves and to accomplish these activities at minimum cost then grew to encompass a larger more comprehensive system some organizations use just jit but lean proponents encourage full adoption of the entire philosophy the main concept is to order just what is needed and work with a core set of trusted suppliers to have these smaller lots delivered reliably and in perfect quality for manufacturing jit encompasses pull systems as just discussed plus two other important manufacturing concepts that keep workinprocess inventory low and ensure short lead times takt time and onepiece flow with kanban takt time the dictionary defines takt time as follows sets the pace of production to match the rate of customer demand and becomes the heartbeat of any lean production system computed as the available production time divided by the rate of customer demand for example assume demand is 10000 units per day 084 minutes per unit this takt time means that a unit should be planned to exit the production system on average every 084 minutes while conventional manufacturing planning and control also sets a pace for production usually this is the rate at which a bottleneck work center can produce units addressed later in section l as part of the
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a unit should be planned to exit the production system on average every 084 minutes while conventional manufacturing planning and control also sets a pace for production usually this is the rate at which a bottleneck work center can produce units addressed later in section l as part of the discussion of the theory of constraints takt time synchronizes production with the rate of customer demand rather than production rate requirements takt time can be extended to the entire supply chain this is called heijunka which the dictionary defines as follows in justintime philosophy an approach to level production throughout the supply chain to match the planned rate of end product sales onepiece flow and kanban onepiece flow also called oneatatime flow is a philosophy that the optimum batch size for a component or product is one unit since this is counterintuitive for organizations that work with larger batches to generate economies of scale this method requires removing the constraints that keep small or individual unit batches from being economical a critical change is to develop process flexibility which includes flexible equipment and flexible people the dictionary defines several terms related to this flexibility product mix the proportion of individual products that make up mean drastic changes in the manufacturing requirements for certain types of labor and material quick changeover the ability to shorten machine setups between different machine operation requirements to increase process flexibility highest concentration is on first reducing external setup time then on internal setup issues this reduces economic order quantity queue and manufacturing lead times and workinprocess inventory it improves quality process and material flows process flexibility the design of the manufacturing system including operators and machinery that allows quick changeovers to necessary tool in lean and just in time operator flexibility training machine workers to perform tasks outside their immediate jobs and in problemsolving techniques to improve process flexibility this is a necessary process in developing a fully crosstrained workforce an immediate benefit provided by quick changeovers is a reduction in lead time reducing lead time using lean or by improving lead time in conventional systems can provide a number of other benefits there will be a direct and immediate reduction in product cost because setup time is a direct cost it can eventually reduce lot sizes and thus order quantities because setup time will not be as large a component in the tradeoff analysis between the cost of setups and other costs reducing lot sizes will also eventually improve quality because defects will have less chance to be replicated across as many units by reducing lot sizes wip inventory and queues orders awaiting production at a work center will be reduced because the total centers is partly a factor of the order size when less inventory is held between work centers it will be easier to establish cellular layouts because the work centers can be physically nearer to each other when it comes to process flexibility equipment selection in lean favors having two smaller
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centers is partly a factor of the order size when less inventory is held between work centers it will be easier to establish cellular layouts because the work centers can be physically nearer to each other when it comes to process flexibility equipment selection in lean favors having two smaller machines rather than one big one because they can be used simultaneously in different processes another process flexibility is developing equipment and processes that enable quick changeovers in other words in minutes rather than in hours worker flexibility involves worker attitudes and training workers need to multiple skills gives them the ability to get the job done the result will be the ability to quickly change product mix or volume to meet changes in demand another change is to manufacturing process layout switching to a cellular layout discussed in section b means that equipment is inventory waiting as multiple lines feed to it the equipment will be cellular layouts so there is little movement delay onepiece flow with cellular layouts and fast changeovers enables one of the objectives of lean keep labor equipment materials and inventory continually in motion with no waste or unnecessary movement this is called continuous flow production not to be confused with the continuous manufacturing process type used for processing liquids and the like progresses back from process to process as each prior step comes into demand keeping the whole cell productive yet with little wip inventory and thus short lead times how is this actually done on the shop floor lean uses a system of signals called kanbans the dictionary defines kanban as follows a method of justintime production that uses standard containers or lot sizes with a single card attached to each it is a pull system in which work centers signal with a card that they wish to withdraw parts from feeding operations or suppliers the japanese word kanban loosely translated means card billboard or sign but other signaling devices such as colored golf balls have also been used the term is often used synonymously for the specific scheduling system developed and used by the toyota corporation in japan that each work center produces only what is demanded note that the supermarket in the graphic is an inventory approach that keeps and restocks inventories of items needed for a work center so they are easy for employees to pick much as a person takes milk from a cooler in a grocery store and an employee keeps the spot restocked exhibit system kanban starts with a demand signal received at work center 2 operation from the component inventory location the inventory is in a bin with a kanban attached operator 2 detaches this kanban and empty bins are stored board a kanban on this board tells the operator for work center 1 that an additional part of this type needs to be made this is called a kanban trigger the trigger could also be an empty bin or empty designated floor space instead of
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and empty bins are stored board a kanban on this board tells the operator for work center 1 that an additional part of this type needs to be made this is called a kanban trigger the trigger could also be an empty bin or empty designated floor space instead of an actual card places it on an empty bin used to hold that part operator 1 then produces one unit of that component or the number that would be considered a full bin pulling materials from the supermarket container which has a kanban attached to the proper location component inventory thus restocking that location note that this is a simplified process showing a onecard kanban system the dictionary lists the following types of kanban systems onecard kanban system a kanban system where only a move card is employed typically the work centers are adjacent therefore no production card is required in many cases squares located between work centers are used as the kanban system an empty square signals the supplying work center to produce a standard twocard kanban system a kanban system where a move card and production card are employed the move card authorizes the replenishment kanban relies on rules for example each bin container or designated floor space has only one kanban although a bin could be designed to have more than one part into storage for ease of tracking inventory only a kanban can authorize any production or inventory movement pillar two jidoka jidoka which can be translated as automation with a human mind is all about empowering shop floor workers to take ownership of the quality of their processes and to help the organization to improve the apics dictionary 16th edition defines jidoka as the japanese term for the practice of stopping the production line when a defect occurs the automation part is a reminder that automation can do many things better than people and thus should be used to the degree possible but humans are also good at raising questions and making insights the and will make errors unless the process is refined to prevent those errors while the betterknown jit pillar is about short lead times low inventory and producing what is demanded jidoka is about not making junk workers are not only authorized and able to stop the production line they root cause of that defect eg equipment in need of maintenance or calibration rather than turning out defective part after defective part the processes are improved to include pokayoke mistakeproofing which jidoka also separates operator activities from equipment activities meaning that some things are best corrected using automation and others are best corrected using training or training aids if a sensor can be used to detect whether a part is correctly aligned this allows the operator to focus on other things that sensors cannot detect the line stoppage thus becomes automated which is generally preferred over way of showing operators whether processes are operating correctly the dictionary defines an andon as a
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be used to detect whether a part is correctly aligned this allows the operator to focus on other things that sensors cannot detect the line stoppage thus becomes automated which is generally preferred over way of showing operators whether processes are operating correctly the dictionary defines an andon as a sign board with signal lights used to make workers and management aware of a quality quantity or process problem another way workers prevent mistakes is by taking ownership over the maintenance of their equipment called total productive maintenance which is discussed later the foundation standardization and operational stability the foundation or base of the house of lean includes standardization and operational stability leveling standardized work reducing variability avoiding overburdening processes or employees and kaizen a form of improvement discussed in the next topic are the main tools that lean organizations use to reduce variation and allow work to be harmonious rather than in a constant state of emergency total productive maintenance see below and heijunka already discussed are important examples of how operational stability are achieved leveling involves scheduling actual orders on the shop floor shop floor idle equipment is allowed to be idle to prevent overproduction standardized work includes many things such as standardizing processes so that there is less to learn standardizing measurement gauges and sorting simplifying standardizing scrubbing and sustaining called the five ss or 5s also addressed in the next topic it could also involve standardizing parts that are common to more than one product so there are fewer types of parts and so that equipment tools and dies can be more specialized and operators need less training total productive maintenance the dictionary defines total productive maintenance tpm as follows preventive maintenance plus continuing efforts to adapt modify and refine equipment to increase flexibility reduce material handling and promote continuous flows it is operatororiented maintenance with activities preventive is the key word in this definition waiting until equipment breaks down can cause costly line shutdowns since equipment can break down only when it is in use also worn parts will increase the chances that production will be outside of tolerances since delays and poor quality output directly affect customer service a better way is to do daily maintenance and schedule more significant maintenance while devoting time to the longterm maintenance requires taking time from what would be available for daily processing there will be far less equipment downtime and the flow of products will be uninterrupted which results in stability and satisfied customers operators know their equipment best they know when it sounds like it is maintain their own equipment makes sense and is empowering applying lubricating oils or keeping the workspace clean and everything overhauls but the operator should observe or assist with these tasks rather than responding only to emergencies skilled technicians will have time for process improvements the center culture of involvement and continuous improvement a house of lean that is built correctly creates a culture of continuous improvement with a high degree
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but the operator should observe or assist with these tasks rather than responding only to emergencies skilled technicians will have time for process improvements the center culture of involvement and continuous improvement a house of lean that is built correctly creates a culture of continuous improvement with a high degree of respect for people in terms of both designing processes so they are safe and maintaining and improving morale the beginning of this topic looked at how toyota promised not to lay off employees if they promised to do whatever work needed doing and help the organization improve this work culture has come to dominate japanese businesses which have a high number of lifetime employees while this may not work in every nation the idea that workers are valued assets needs to become part of organizations culture giving workers real responsibility for quality setting high anywhere these practices show the concepts of employee involvement a final note on lean while the benefits of lean can be quite profound it requires training and departmental coordination to be successful also it will not work in some manufacturing environments such as those that have too much variability in what is being demanded it usually takes many years to fully implement lean those organizations that have the right fit for lean and are willing to embrace it wholeheartedly have seen such significant gains that it has become a worldwide phenomenon part of the reason for introducing lean early in this module is so that after we activity we can show how lean achieves similar results in a different way topic 2 lean for continuous improvement lean production systems were introduced in the prior topic and subsequent sections will address how lean differs regarding various parts of the manufacturing planning and control process refer to those areas for information on lean functionality lean cannot be successful without quality and continuous improvement might be stopped repeatedly to resolve issues as they are identified with a goal of preventing the issues from recurring in this way the process eventually moves much faster and more smoothly than it would have if only workarounds or quick fixes were used ensuring total quality in processes materials and components is the first thing that needs to be addressed when transitioning to a lean environment other aspects of lean such as reducing or eliminating buffer inventories would quickly run into problems without first ensuring high quality this topic starts by looking at some lean philosophies related to continuous improvement it then discusses specific tools and techniques used in lean to ensure that continuous improvements are planned and implemented correctly these tools can be used not only at organizations that choose to implement lean in its entirety they can also inspire better continuous improvement methods at conventional manufacturing planning and control organizations implementing continuous improvement using lean methodologies lean uses employee involvement and empowerment and supplier partnerships in promoting continuous improvement involvement and worker empowerment involvement and worker empowerment are implemented in many
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lean in its entirety they can also inspire better continuous improvement methods at conventional manufacturing planning and control organizations implementing continuous improvement using lean methodologies lean uses employee involvement and empowerment and supplier partnerships in promoting continuous improvement involvement and worker empowerment involvement and worker empowerment are implemented in many ways in lean for example jidoka automation with a human mind allows workers to execute a line stop when the first error or bad part is detected this is the lean philosophy of getting it right the first time rather than trying to fix a defect later this and other aspects of involvement and worker empowerment in lean result in quality at the source defined in the apics dictionary 16th edition as follows a producer s responsibility to provide 100 percent acceptable quality or eliminate shipping or receiving quality inspections and line stoppages as a result of supplier defects upstream internal supplier ie a worker at an upstream work center work center operators and in fact all types of workers are empowered and responsible for their own inspections related to quality inspections that are best done by machine are automated using for example sensors and this could trigger an automated line stop other inspections are better done by the operator and manual line stops would be part of this worker s training along with how to make repairs this involvement and empowerment can have a large impact on results inventory and providing ultimate quality to the customer lead times are reduced because there is less scrap and rework and less waiting for good parts at the next work center wip inventory is less because less safety stock needs to be held before work centers which in turn can help further reduce lot sizes in addition to the lot size reduction from quick changeovers quality is then better for customers both in terms of service by reducing lead times and in terms of fewer defective products being sent out employee empowerment and involvement have introduced a shift in management philosophy from one that was directive to one that involves coaching lean also emphasizes learning from those with experience which the dictionary defines as a japanese word meaning teacher or one with experience supplier partnerships another lean philosophy that relates to continuous improvement is close supplier partnerships the apics dictionary 16th edition defines a supplier partnership as the establishment of a working relationship with a supplier the concept of quality at the source includes receiving supplier components with 100 percent quality the supplier is simply an upstream work center and therefore also needs to get it right the first time continuous improvement applied to supply relationships may take the form of improving communications for example using collaborative planning sharing information on technological improvements or prompt notification of quality issues the result should be a reduced need for inspection from the supplier s perspective better quality at the source will better enable small frequent deliveries at low enough cost to remain profitable which
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communications for example using collaborative planning sharing information on technological improvements or prompt notification of quality issues the result should be a reduced need for inspection from the supplier s perspective better quality at the source will better enable small frequent deliveries at low enough cost to remain profitable which can in turn earn the supplier a greater share of the customer s business and longerterm contracts that provide stability also in most lean supply chains cost savings are shared among the supplier lean organization andor other supply chain partners rather gain in profitability lean tools and techniques there are a number of lean tools that enable continuous improvement here we ll look at hoshin planning kaizen events kaizen blitzes value stream mapping pokayoke and the five ss note that these tools may apply to more than just continuous improvement in lean hoshin planning the apics dictionary 16th edition defines hoshin and hoshin planning hoshin a japanese word meaning statement of objectives hoshin planning breakthrough planning a japanese strategic planning process in which a company develops up to four vision statements that indicate where the company should be in the next five years company goals and work plans are developed based on the vision statements periodic audits are then conducted to monitor progress it is as strategy deployment hoshin planning shows not only where the needed to adapt to changes in the environment hoshin planning uses the plandocheckaction cycle to ensure that critical results are achieved defines plandocheckaction pdca as follows a fourstep process for quality improvement in the first step plan a plan is carried out preferably on a small scale in the third step check the effects of the plan are observed in the last step action be predicted the plandocheckaction cycle is sometimes referred to as the shewhart cycle because walter a shewhart discussed the concept in his book statistical method from the viewpoint of quality control or as the deming circle because w edwards deming introduced the concept in japan and the japanese subsequently called it the deming circle exhibit 136 illustrates the cyclical nature of the pdca process exhibit action process this process helps ensure that learning is applied and it requires a certain degree of mindfulness and introspection to ensure that one does not slip into unthinking routines the japanese term for this is hansei which the dictionary defines as a japanese word meaning reflection hoshin planning takes place on all time horizons executives use pdca cycles of three to five years for strategy operational managers use cycles of one year for tactics and operations managers and production coordinators may use semiannual monthly or weekly pdca cycles kaizen events kaizen blitzes lean uses kaizen another term for continuous improvement and often implements the changes using kaizen events kaizen blitzes the apics dictionary 16th edition defines these terms as follows kaizen the japanese term for improvement refers to continuing improvement involving everyone managers and workers in manufacturing kaizen relates to finding and eliminating waste in
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another term for continuous improvement and often implements the changes using kaizen events kaizen blitzes the apics dictionary 16th edition defines these terms as follows kaizen the japanese term for improvement refers to continuing improvement involving everyone managers and workers in manufacturing kaizen relates to finding and eliminating waste in machinery labor or production methods team during the week of cell implementation the kaizen event is an implementation arm of a lean manufacturing program kaizen blitz a rapid improvement of a limited process area for example a production cell part of the improvement team consists of eliminate nonvalueadded work and to immediately implement the area work team and the development of the team s problemsolving skills are additional benefits kaizen event and kaizen blitz are basically synonyms but if they are treated as different the main difference would be whether the improvement initiative is proactive event or reactive blitz the idea is back together in a better way these initiatives can be planned events to analyze a small part of a process in order to identify and implement specific problems that need to be fixed quickly needed on a voluntary basis a lean word to describe this is jishuken which the dictionary defines as a japanese word meaning voluntary study groups value stream mapping the apics dictionary 16th edition defines value stream and value stream mapping as follows value stream the processes of creating producing and delivering the value stream consists of suppliers support personnel and technology the service producer and the distribution channel may businesses value stream mapping a lean production tool to visually understand the flow of materials from supplier to customer that includes the current process and flow as well as the valueadded reduction of waste decrease flow time and make the process flow more efficient and effective value stream mapping is used to produce asis current state and tobe future state value stream maps these are basically flowcharts designed to determine how to make a process lean they use special symbols to differentiate between productive versus idle time push versus pull processes takt time and cycle time and other lean concepts the time line shows valueadded versus nonvalueadded time so that areas improvements a link in the online additional resources value stream basic manufacturing process the tobe map might identify how to reduce wait times how to move part of the process to a pull process the asis exhibit stream pokayoke the apics dictionary 16th edition defines pokayoke mistakeproof mistakeproofing techniques such as manufacturing or setup product defect for example in an assembly operation if each correct part is not used a sensing device detects that a part was unused and shuts down the operation thereby preventing the assembler from moving the incomplete part to the next station or beginning another operation pokayoke is used to continuously improve a process often as a reaction to a mistake made in the process shigeo shingo coiner of the term differentiated between errors and defects he proposed that errors
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preventing the assembler from moving the incomplete part to the next station or beginning another operation pokayoke is used to continuously improve a process often as a reaction to a mistake made in the process shigeo shingo coiner of the term differentiated between errors and defects he proposed that errors can reduce opportunities for error whenever an error occurs pokayoke is used to analyze why the error occurred and then redesign the process to make that error hard to repeat this could be to use a template to ensure installed in only one way eg rather than upside down to colorcode operations have been done inspection is needed to detect errors as soon as possible and to ensure that the correction can occur immediately this may be a successive the equipment rather than the part to detect when errors may lead to product defects the apics dictionary 16th edition defines the five ss 5s as follows five terms beginning with s used to create a workplace suitable for lean production sort simplify scrub standardize and sustain sort means to separate needed items from unneeded ones and remove the latter simplify means to neatly arrange items for use scrub means to clean up the work area standardize means to sort simplify and scrub daily sustain means to always follow the first four ss sometimes referred to by the japanese equivalents seiri seiton seiso seiketsu and shitsuke the adage have a place for everything and keep everything in its place maintaining a clean and orderly work center will improve productivity and tripping over objects would be prevented if the objects are properly exhibit 138 summarizes the lean tools discussed in this topic and lists some of their key benefits exhibit 138 lean continuous improvement tools lean tool description and benefit hoshin planning lean s planning methodology for strategy deployment by aligning resources in support of goals and removing obstacles in the path as they arise kaizen events kaizen blitzes focused improvement events conducted with ad hoc together in a better way this can help make planned incremental improvements or quickly fix something in stream mapping specialized flowcharts that identify a process using lean concepts such as push versus pull takt time and areas of waste the asis flowchart provides better flowchart helps identify specific improvements and pokayoke mistake proofing that can be done in product or process design to eliminate the chances of an error from recurring errors cannot be prevented but defects can be because pokayoke is preventing the same error from repeating sort the needed items from the unneeded and eliminate the latter simplify by neatly arranging items for how they are used scrub clean the work area standardize sorting simplifying and scrubbing so they occur on a daily basis sustain the first four ss over time 5s makes the workspace more efficient and safer overall continuous improvement continuous improvementemployee involvementempowerment 1 continuous improvementlean 1 flexibility genchi genbutsu 1 lead time leancontinuous improvement 1 leanemployee involvementempowerment 1 leanpull systems 1
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simplifying and scrubbing so they occur on a daily basis sustain the first four ss over time 5s makes the workspace more efficient and safer overall continuous improvement continuous improvementemployee involvementempowerment 1 continuous improvementlean 1 flexibility genchi genbutsu 1 lead time leancontinuous improvement 1 leanemployee involvementempowerment 1 leanpull systems 1 leanpush systems 1 manufacturing process layouts 1 mass production 1 onecard kanban system 1 onepiece flow 1 operatorworker flexibility 1 pdca plandocheckaction cycle 1 plandocheckaction cycle 1 process flexibility 1 product pull systems 1 push systems 1 quality quick changeovers 1 shingo s seven wastes 1 standardized work 1 supplier partnerships 1 takt time 1 total productive maintenance 1 tpm total productive maintenance 1 twocard kanban system 1 value stream 1 value stream mapping 1 2 section e demand management after completing this section students will be able to show how demand management works at strategic tactical and operational levels to recognize and manage demand including shaping and prioritizing demand and synchronizing supply with demand observe demand over time to identify seasonality trend cycle and random variation characteristics recognize the inherent strengths and weaknesses in forecasting follow a basic forecasting process that includes visualizing data in chart form selecting a forecasting horizon and a forecast method preparing data including removing seasonality as needed use seasonal indexes to adjust average demand for seasonality interpret information on forecast bias and forecast error used in safety stock calculations exhibit 139 revisits the manufacturing planning and control graphic introduced earlier manufacturing control demand activities this section addresses the demand side which is shown in the box bordered with a dashed line on the left of the exhibit the demand side includes sales marketing and customer relationship management functions professionals in these areas are responsible for developing demand forecasts or estimates of what will be demanded in the future strategy and manufacturing business plans such as the acquisition mediumterm production planning at the product family level shortterm master scheduling at the unit level forecasts are not used for material requirements planning the requirements for materials are instead calculated based on the master production schedule while it is unlikely that production and inventory control professionals will develop demand forecasts it should be obvious that if this input is wrong strategic sales goals longterm asset development production plans or master schedules could also be wrong the consequences of being managers to understand how their demandside counterparts are producing these forecasts and the level of confidence they have in them so that the materials managers can interpret the forecasts correctly and ask for more information or challenge assumptions as appropriate some organizations use forecasts to a greater degree than others engineertoorder organizations may not forecast much except at the strategic level and to determine capital equipment requirements in addition to strategiclevel forecasting maketoorder environments may enable orders to be produced within an acceptable lead time similarly assembletoorder organizations may use forecasts to determine which components to produce in advance of orders maketostock in stock but also to ensure
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the strategic level and to determine capital equipment requirements in addition to strategiclevel forecasting maketoorder environments may enable orders to be produced within an acceptable lead time similarly assembletoorder organizations may use forecasts to determine which components to produce in advance of orders maketostock in stock but also to ensure that those products are distributed to the right locations orders from customers such as distribution centers are these manufacturing environments recall that orders from drp are reflected in the aggregate information provided through demand manufacturing environments that rely less on forecasting and more on orders to provide the foundation needed to evaluate forecasts and use them wisely this section starts with some basic concepts related to the overall process of demand management characteristics of demand types sources and patterns of demand and basic principles of forecasting the section reviews the basic steps in the forecasting process and some common methods of forecasting are compared to help show their best uses and advantages and disadvantages the section closes with a few methods that are used to track the accuracy of forecasts over time topic 1 demand management processes the apics dictionary 16th edition defines demand management as follows support the marketplace it involves prioritizing demand when supply is lacking proper demand management facilitates the planning and process of planning executing controlling and monitoring the design pricing promotion and distribution of products and services to bring about transactions that meet organizational and individual three critical functions within demand management include marketing management customer relationship management and demand planning marketing management marketing management is based on marketing strategy which is defined in the apics dictionary 16th edition as follows business and marketing objectives in a particular market includes marketing expenditures marketing mix and marketing allocation marketing strategy links back to organizational strategy and helps determine what products and services the market actually wants marketing management involves implementing this strategy using marketing tools such as advertising trade discounts and sales force incentives to generate demand since marketing management also involves prioritizing demand demandside professionals have levers at their disposal to balance supply and demand when there is a mismatch if demand outstrips supply for a given product demandside professionals can adjust prices or quoted lead times increasing a price for example will result in products going to those customers who are willing to pay more and thus the priority goes to those customers it could also be used to give customers an incentive to choose an alternative product that is in surplus increasing the quoted lead time can also enable meeting more of with some products one or both of these levers are not really an option such as for commodity products where consumers are highly sensitive to price increases even when there is room to use these levers overuse of them to balance supply and demand could result in customers going to the competition so demandside professionals often want the supply side to correct imbalances using production flexibility andor inventory holding economically feasible
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are highly sensitive to price increases even when there is room to use these levers overuse of them to balance supply and demand could result in customers going to the competition so demandside professionals often want the supply side to correct imbalances using production flexibility andor inventory holding economically feasible option and this is discussed more in section f as part of the negotiation between demand and supplyside professionals called sales and operations planning in the case of inventory holding marketing management might provide input on the best place for locating determine promote and prioritize demand is called the marketing mix or customer the four ps are product price place and promotion product includes product and service design to determine the combination of features that will make products into order qualifiers and some competitive differentiators that will hopefully make them into order winners order qualifiers and order winners were introduced in section a topic 2 product decisions also include selecting brand names varieties sizes grades eg basic or deluxe light or heavy duty return and warranty policies and service levels note that grade differs from quality since even lowgrade products should be produced with high price involves determining the price at which the product will make the highest profit which is a combination of both the profit margin and the number of units sold at a given price since higher prices usually tend to reduce units sold this is especially true for commodities but some premiumpriced items differ marketing and operations may work together to determine how their fixed and variable costs interrelate in what is called a costvolumeprofit analysis which will help determine a combination of sales price and sales volumes that should be profitable exhibit 140 shows the results of such an analysis comparing total costs and revenues against unit sales in thousands of units 000s exhibit volume profit analysis note that two curves are compared the total cost curve and the total sales revenue curve the total cost curve starts at 500000 in this case variable costs related to units sold the dictionary defines a total cost curve as follows 1 in costvolumeprofit breakeven analysis the total cost curve is composed of total fixed and variable costs per unit multiplied by the number of units provided breakeven quantity occurs where the total cost curve and total sales revenue curve intersect 2 in inventory costs of acquiring and carrying the item the total sales revenue curve starts at 0 with no sales and for each 1000 units sold moves up steadily as more revenue is earned the idea dictionary as follows intersection of the total revenue and total cost curves in this example the breakeven point is 16667 units this can be calculated using the breakeven point formula which starts by setting revenue equal to total cost where revenue is the unit price times the number of units and total cost is the fixed cost plus the variable cost number of units the formula solves for number of
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units this can be calculated using the breakeven point formula which starts by setting revenue equal to total cost where revenue is the unit price times the number of units and total cost is the fixed cost plus the variable cost number of units the formula solves for number of units in this example above this sales level the organization will be profitable below it there will be a loss note that the total sales revenue curve is based on an assumption of sales prices increasing prices will make this curve rise more quickly and shift the breakeven point but because higher prices could reduce unit sales there will be an optimum price that maximizes profit at an acceptable level of risk the risk of a loss note also that this type of analysis can be used for other purposes such as an inventory cost analysis marketing may also decide to use market penetration pricing accepting a loss called a loss leader or low margins to gain market share alternatively the organization could use price skimming which is setting a high price when you are the only game in town and then dropping the price when competitors enter the market price also involves setting credit terms trade discounts and allowances for example discounts to compensate for quality or delivery issues place includes both where to sell products and what lead times to offer decisions include selection of sales channels such as online or retail setting inventory policy for distribution inventories and determining what delivery modes will be offered at various combinations of speed flexibility and dependability promotion includes sales promotions advertising sales incentives for salespersons or retailers campaign management and public relations customer relationship management crm organizations that prioritize responding to customer needs as part of their strategy are called marketdriven organizations this may take the well as possibly developing twoway relationships with customers which is called customer relationship management the apics dictionary 16th edition defines customer relationship management crm as follows a marketing philosophy based on putting the customer first involves marketing decision support in contrast to enterprise resources planning information to understand and support existing and potential customer needs includes account management catalog and order entry payment processing credits and adjustments and other functions customer relationship management is an externalfacing activity that may be performed by multiple persons at an organization who come into contact with customers including sales marketing customer service and supply chain management professionals for businesstobusiness b2b organizations or organizations that work with supply chain partners such as distribution centers wholesalers or retailers crm involves building and maintaining relationships with individuals at these organizations as well as providing order management which is discussed below crm for consumers involves not only order management but also collecting feedback on existing or desired products and services using tools such as the voice of the customer discussed in section c maintaining relationships increases customer loyalty which in turn increases market share customers tend to become more profitable the longer
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for consumers involves not only order management but also collecting feedback on existing or desired products and services using tools such as the voice of the customer discussed in section c maintaining relationships increases customer loyalty which in turn increases market share customers tend to become more profitable the longer they remain customers because the initial marketing expense is spread out over more purchases crm helps an organization and its customers become more successful together closer collaboration on product designs can make products and services better fit customer customers businesses can lead to better solutions for them and greater loyalty to the organization a closer relationship can also help sales and marketing design more effective promotions such as websites that suggest additional purchases based on customer analytics order management order management sometimes called customer order management is a will need to do order management while crm is a business philosophy system for use by those who have contact with customers a key feature history of all interactions with that customer so they can interact with the customer in an informed manner here are some of the important ways excellent customer service and operations efficiency order entry and tracking this needs to be accurate and tracking should be available on demand by the customer minimizing entry time directly reduces lead times order promising the system should link to erp to show actual inventory or production status so customers can be given accurate promises of delivery dates and quantities setting realistic expectations promotes customer satisfaction customer service customer service will handle inquiries and complaints and authorize returns or repairs documentation and reporting order management releases electronic or paper records including shipping documentation invoices and sales orders a sales order is used internally to authorize production planning or design and engineering in some cases the customer also receives a copy of the sales order stating terms and conditions of acceptance reporting includes information for sales history customer service history and accounting demand planning the apics dictionary 16th edition defines demand planning as follows the process of combining statistical forecasting techniques and judgment to construct demand estimates for products or services both high and low volume lumpy and continuous across the supply chain from the suppliers raw materials to the consumer s needs items can be aggregated by product family geographical location product life cycle and so forth to determine an estimate of consumer demand for finished products service parts and services numerous forecasting models are tested and combined with judgment from marketing sales distributors warehousing service parts and other functions actual sales are compared to forecasts provided by various models and judgments to determine the best integration of techniques and judgment to minimize forecast error demand planning is basically forecasting and forecast tracking however source of demand is actual orders from internal or external customers internal customers could be other plants or subsidiaries or owned distribution centers external customer orders include those from distribution centers wholesalers retailers and customers organizations that use consignment
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forecast error demand planning is basically forecasting and forecast tracking however source of demand is actual orders from internal or external customers internal customers could be other plants or subsidiaries or owned distribution centers external customer orders include those from distribution centers wholesalers retailers and customers organizations that use consignment hold inventories at customer locations so demand planning will also recognize demand from these sources consignment is addressed more in section i topic 2 topic 2 characteristics of demand what is demand demand is what the market or customer base is requesting when demand exceeds supply sales will be less than demand when retail shelves are empty any number of customers may stockout is just one example of why demand is often hard to estimate own products plus all other competitive equivalents andor substitute products estimating total market demand can be useful for example when an organization wants to form a strategy to expand its market share since demand for one s own products is more useful for medium and especially shortterm forecasting and production planning in this text demand will refer to demand for one s own products this topic explores some of the characteristics of demand including the difference between independent and dependent demand and patterns of demand independent versus dependent demand independent demand originates from sources outside of the control of the organization while dependent demand originates from internal sources or sources the organization can control often independent demand will be for items that the organization sells as individual units and dependent demand will be for the materials used to make those units independent demand is determined using forecasts and order management the material requirements planning process the apics dictionary 16th edition defines independent and dependent demand as follows independent demand the demand for an item that is unrelated to the demand for other items demand for finished goods parts required for destructive testing and service parts requirements are examples of independent demand dependent demand demand that is directly related to or derived from the billofmaterial structure for other items or end products such demands are therefore calculated and need not and should not be forecast a given inventory item may have both dependent and independent demand at any given time for example a part may service part list of all the parts or ingredients that comprise a single unit items can be subject to both independent and dependent demand consider the parts sold to auto parts stores would be forecasted and the dependent demand for pumps used in vehicle assembly would be calculated using the bill of material and other inputs the two sources of demand would then be summed to determine the net requirements for water pumps independent demand comes from a number of internal and external sources forecasting end customers finished goods and service parts replenishment orders interplant demand or intercompany transfers eg between subsidiaries internal use research and development quality control destructive testing marketing use forecasts are addressed later in this section the
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water pumps independent demand comes from a number of internal and external sources forecasting end customers finished goods and service parts replenishment orders interplant demand or intercompany transfers eg between subsidiaries internal use research and development quality control destructive testing marketing use forecasts are addressed later in this section the remaining sources represent actual orders and this demand is differentiated from forecasted demand by calling it actual demand replenishment orders come from downstream business customers such as distribution centers a distribution requirements planning drp system would be used to automatically include replenishment orders and interplantintercompany orders in the gross requirements of the master scheduling system the dictionary defines interplant demand as follows customer order it is usually handled by the master production scheduling system in a similar manner internal use items and end customer orders would enter the erp system through order management as discussed in the last topic demand patterns when demand is recorded over time and then visualized in chart form patterns and trends may become apparent exhibit 141 shows an example of demand mapped over the course of four years exhibit demand patterns when demand data are visualized they may tell a story several observations can be made about the patterns of demand for products seasonality the apics dictionary 16th edition defines seasonality as a predictable repetitive pattern of demand measured within a year where demand grows and declines these are calendarrelated patterns that can appear annually quarterly monthly weekly daily andor hourly the key point about seasonality is that it repeats over the analysis period and thus can be isolated from other sources of variation and removed temporarily so that it will not influence forecasting trend the dictionary defines trend as a general upward or downward movement of a variable over time eg demand process attribute trends can also be flat if demand data are put into a program such as microsoft excel both a chart and a trend can be automatically calculated trends can be influenced to varying degrees internally by things like promotions and externally by things outside one s control such as an economic cycle cycle cycles usually refer to the wavelike patterns observed in the growth and recession trends of the economy over years unlike seasonality economic cycles do not repeat over a predictable period of time so this type of forecasting is left to economists another example of a cycle that could influence a trend is a product s life random variation random variation is any variation left over after seasonality and trends have been accounted for random variation reflects that customers vary when where and in what quantities they buy products the level of variation can differ greatly if random variation is small forecasting will be fairly accurate if it is large errors will be high as the description of random variation indicates some demand patterns will be more volatile than others some products and services like staples eg rice have stable demand patterns meaning that they are predictable stable
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variation is small forecasting will be fairly accurate if it is large errors will be high as the description of random variation indicates some demand patterns will be more volatile than others some products and services like staples eg rice have stable demand patterns meaning that they are predictable stable demand patterns may have fairly steady trends predictable seasonality and minimal random variation products with stable demand patterns can be forecasted with low error so maketostock manufacturing environments can be used profitably products and services with dynamic demand patterns such as innovative products may have shifting trends no seasonality or seasonality that shifts unpredictably andor a high degree of random variation that masks trends and seasonality in these cases forecasting is trying to find only the base average demand for use in planning more flexible manufacturing strategies may be needed another option might be to find ways to make a dynamic demand pattern more stable eg communicate better to reduce or eliminate the bullwhip effect exhibit 142 shows demand for two different products the dotted lines organization s production flexibility or the expected minimum and maximum levels of demand for an item in the first chart the magnitude of the shifts from the average level stay within these limits but in the second chart they are more volatile and exceed capacity limitations or expectations of normal demand fluctuations in addition while the first chart shows seasonality the second chart has no discernible seasonal pattern so the average is the most useful information for forecasting however averages can be misleading as is shown later exhibit stable versus dynamic demand topic 3 forecasting the apics dictionary 16th edition defines the terms forecast and forecasting as follows constructed using quantitative methods qualitative methods or a or intrinsic internal factors various forecasting techniques attempt random seasonal and trend forecasting the business function that attempts to predict sales appropriate quantities in advance this topic first looks at the time horizons used in forecasts which are related to the forecasts purpose forecasting principles are laid out after that followed by the basic steps in the forecasting process the topic then reviews forecasting techniques using a running example forecast horizon and purpose from the perspective of manufacturing planning and control forecasts are used as inputs at strategic tactical and operational planning levels looking at the strategic and manufacturing business plan levels time horizons determine total sales volume for the organization in dollars so the organization can acquire or divest capital assets and prepare to enter longterm financial goals that the organization s functions will work to achieve at the tactical level forecasting is conducted using aggregate information on product families for a time horizon of one to three years aggregate level forecasts here are an input to the sales and operations planning process and the output will be a single set of demand numbers that demand professionals agree to generate in terms of sales supply professionals agree to produce and finance professionals agree will be financially profitable
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three years aggregate level forecasts here are an input to the sales and operations planning process and the output will be a single set of demand numbers that demand professionals agree to generate in terms of sales supply professionals agree to produce and finance professionals agree will be financially profitable this information is used to plan budgets and labor requirements as well as to acquire items that have long lead times at the operational level forecasting is conducted using itemlevel information over the time horizon required for master scheduling which lead times required for ordering receiving and using all materials and resources needed to produce the requested items plus a little extra time to give planners some leeway the reason why forecasting starts at the highest level of aggregation total sales dollars and moves to more and more detailed levels is based forecasting principles forecasts try to guess the future based on information available today bullwhip effect can lead to a great deal of variability in orders from the downstream supply chain this leads to the first principle of forecasting forecasts are wrong most of the time rather than deciding just to guess rather than forecast however the important thing to take away from this observation is to accept that forecasts are not expected to be accurate this leads to the second principle of forecasting always be sure there is an estimate of forecast reliability or error rates for each forecast error you will not know how much confidence to place in the forecast much forecast confidence is often expressed as plus or minus a maximum value per period wider ranges equate to lower confidence levels and more dynamic demand patterns narrower ranges equate to higher confidence and stable demand patterns these estimates are generated using statistics related to how far and how often actual demand varies from the average demand the last two principles of forecasting relate to improving accuracy the third principle forecasts are more accurate for product families than for individual items since there is a certain amount of variability in sales of an individual product when products that can be produced variability is reduced while this doesn t sound like it would always work statistically it significantly improves forecast reliability it also makes sense from a macroeconomic view for example say that there is a certain amount of demand for a particular type of soda which is produced on one continuous flow line however individuals might buy cans fountain drinks 12packs or twoliter bottles depending on current significantly more accurate than forecasts for each product once the total amount to produce is determined more detailed forecasting done to decide how to break this total amount down into percentages for each unit type the fourth principle goes back to the forecast horizon and why forecasting and planning start out broad but get progressively shorter and more detailed forecasting is more accurate in the near term than in the long term the forecast horizon principle makes sense as
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into percentages for each unit type the fourth principle goes back to the forecast horizon and why forecasting and planning start out broad but get progressively shorter and more detailed forecasting is more accurate in the near term than in the long term the forecast horizon principle makes sense as you can better guess what will happen tomorrow than what will happen in a year more things could change over longer horizons this is a key reason why organizations want to shorten their longest lead times and thus shorten master planning horizons forecasting process here are the basic steps in the forecasting process 1 determine purpose for example it could be to determine demand for production capacity requirements or staffing levels 2 set level of aggregation and units of measure specify total sales in units or dollars product families products or skus stock keeping 3 select horizon and planning bucket the horizon can be long medium or shortterm the planning bucket is the period being forecasted for example quarterly monthly weekly daily horizon right a longterm horizon years or quarters usually uses total sales in dollars mediumterm quarters or months uses product families in units and shortterm weeks or days uses products or skus in 4 gather and visualize the data collect the data and organize them using the planning bucket chosen then put the data in chart form to reveal trends seasonality or random variation visualizing helps in selecting the right forecasting technique methods may work best for the combination of purpose aggregation time horizon data availability trend and where the data fall on the stabledynamic continuum qualitative and quantitative forecasting methods are described later seasonality it should be temporarily removed prior to forecasting 7 test the forecast using historical data since periods in the past already have actual results you can forecast using say june data to produce a july forecast and then compare it to what actually happened in july 8 forecast after making adjustments as needed start using the before preparing reports that include ranges of confidence levels operations planning process is used to get everyone to agree to plan and execute using the same forecast numbers this is called a one number system 10 continuously improve monitor error levels and set policies for when error levels are too high when they are refine communications data or processes and techniques forecasting techniques are discussed a little later but first let s look more closely at the importance of data collection and preparation collecting and preparing data for forecasting collecting data on demand involves collecting information on customer requests rather than just tracking sales or shipments tracking when things were shipped is important but the organization should also track when the customer wanted it to be shipped since this provides information on demand for that period thus estimating total demand for a given period might involve adding the following net sales sales minus returns backorders requests that could not be fulfilled due to rejected lead time or
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also track when the customer wanted it to be shipped since this provides information on demand for that period thus estimating total demand for a given period might involve adding the following net sales sales minus returns backorders requests that could not be fulfilled due to rejected lead time or price requests that had to be filled from other plants or locations the apics dictionary 16th edition defines a backorder as follows immediate or past due demand against an item whose inventory is insufficient to satisfy the demand following some basic data collection and preparation principles will help ensure that forecasts are useful data collection and preparation principles one principle of data collection is that the data should be collected in the format in which they will be used in forecasting forecasts of demand for production need to use demand estimates rather than ship dates or sales recall that forecasts are made to estimate market or organizational demand and therefore customer requests or ship dates provide incomplete information for forecasting similarly if the time bucket will be weekly then collecting monthly data will be insufficient the dictionary defines a time bucket as follows a number of days of data summarized into a columnar or rowwise display for example a weekly time bucket contains all the relevant data for an entire week weekly time buckets are considered to be the largest possible at least in the near and medium term to permit effective mrp material requirements planning if a particular product family is used to plan production because for example the items share a cellular layout then this family should be used for forecasting the dictionary defines a product family as follows a group of products or services that pass through similar processing steps have similar characteristics and share common equipment overlapping product lines that are produced in one factory and often used in production planning or sales and operations planning since forecasting at the master scheduling level will project demand for individual units data on demand for the various options or individual units should also be collected usually rather than preparing individual assembledtoorder in different ways a best practice is to forecast total demand for the family and then forecast the percentage of that total that will require each option or component this is called a planning bill and assembletoorder motorcycle can have a basic or deluxe engine stereo seat handlebars tires and rims six choices with two options each and producing this many unit forecasts would be timeconsuming and fruitless rather the percentage of the total that requires each option or component would be forecasted resulting in 12 component forecasts one forecast per option these component forecasts would allow the assembly schedule could wait until actual orders come in events related to the data this includes regular events such as sales promotions or price changes as well as unusual or onetime events such as extreme weather or labor disruptions promotions should cause an increase in demand and data on
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the assembly schedule could wait until actual orders come in events related to the data this includes regular events such as sales promotions or price changes as well as unusual or onetime events such as extreme weather or labor disruptions promotions should cause an increase in demand and data on this will help marketing assess the data or the results might be adjusted to account for this similarly the impact of onetime events that cause a spike or drop in demand might be adjusted or smoothed out prior to forecasting separating demand by customer segment is another important data preparation principle demand from distribution centers wholesalers retailers and individuals might be in very different quantities and have very different timing summing the demand from these segments prior to forecasting might produce misleading results consider our earlier example of the organization that makes commercial doors most of the doors are madetoorder but the organization manufactures some immediate sale we will concentrate on only these maketostock doors at this point and only on product family a a series of instock vandalproof allglass commercial doors exhibit 143 shows demand from the two major market segments that purchase these doors segment a is made up of large retailers that order in large lots twice a year segment b is made up of small businesses building contractors that order monthly grouping dissimilar segments issues note that the demand from segment a sums to 12000 units while the demand for segment b sums to 3878 units averaging segment b s demand by dividing 3878 by 12 months results in 323 units per month which might be useful for production planning however adding the 12000 units of demand for segment a to this results in 15878 units divided by 12 or 1323 units per month using this average for planning would mask the lumpiness of demand that actually exists some organizations might do this to produce to a level schedule and make about 1300 units per month the actual number would differ based on opening and closing inventories as is shown later but they would not have enough units for the first large order unless they had inventory from the prior year and would have significant inventory buildup in other periods for simplicity we will assume that the door manufacturer has point forward we will focus on just segment b demand another principle of data preparation is that if seasonality exists it must be removed prior to forecasting and then added back in prior to interpreting the results removing seasonality is done using a process called deseasonalization which results in a seasonal index this process is discussed more next deseasonalization seasonal index and seasonal forecasts exhibit 144 shows a chart of actual demand for product family a segment b by quarters across a threeyear period note the downward sloping dotted trend line and the solid line for average demand over the entire period the longterm quarterly average is 1000 units per quarter clearly there is strong seasonality
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shows a chart of actual demand for product family a segment b by quarters across a threeyear period note the downward sloping dotted trend line and the solid line for average demand over the entire period the longterm quarterly average is 1000 units per quarter clearly there is strong seasonality in these data visualizing seasonality intrinsic timeseries forecasting is discussed a little later but the basic idea is to project forward what happened in the past while visually you can see that after quarter 5 the demand level should drop intrinsic forecasts would predict demand to keep rising in the next quarter similarly after quarter 7 the forecast would indicate that demand would keep falling even though you can see that it should rise this is why seasonality needs to be removed deseasonalizing and only added back after forecasting deseasonalization forecasting and adding back seasonality have these 1 calculate the period average demand here the quarterly average q1 this is 1422 units 1351 units 1388 units3 1387 units period average demands and divide by the number of periods this all periods is 1387 units 1016 units 677 units 920 units4 1000 units 3 calculate the seasonal index for each period 4 calculate deseasonalized demand 5 forecast using the deseasonalized data specific forecasting methods are discussed later 6 apply the proper seasonal index to the deseasonalized data the example shows a deseasonalized threequarter moving average example are discussed later in the topic exhibit 145 shows the data that were used to create the chart in exhibit 144 there are three years of quarterly data and the quarter average number of years these quarterly averages were then summed to 4000 units and the average demand for all periods was found by dividing that dividing each quarterly average by the average demand for all periods 1000 units note how the seasonal indexes will sum to the number of periods 4000 which helps in verifying that the calculations are correct calculating seasonal a seasonal index provides information on how much each seasonal period s demand has varied from the average demand in the past and the index is therefore used to estimate how much seasonal demand will vary from average demand in a future seasonal period a seasonal index value less than 10 means that the period s demand is less than the average a value greater than 10 shows that the period s demand is greater than average which applies seasonality to a forecast of average demand per period assume that the organization forecasts the annual demand for year 4 to be 3756 units dividing this into quarters results in 37564 939 units per quarter to apply seasonality multiply each quarter s seasonal index by the average quarterly demand note results are rounded y4 quarter 1 forecast 1387 939 1302 units sum of quarterly forecasts 3756 units seasonality will be revisited when we look at intrinsic forecasting forecasting techniques exhibit 146 provides an overview of the various forecasting techniques discussed next the major
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index by the average quarterly demand note results are rounded y4 quarter 1 forecast 1387 939 1302 units sum of quarterly forecasts 3756 units seasonality will be revisited when we look at intrinsic forecasting forecasting techniques exhibit 146 provides an overview of the various forecasting techniques discussed next the major split is between qualitative forecasting which uses judgment and expertise and quantitative forecasting which uses mathematics these methods can be used individually or sometimes in combination such as using quantitative forecasting but adjusting the results qualitatively forecasting techniques qualitative methods qualitative techniques forecast probable events based on human judgment experience intuition and educated guesses rather than math while they lack scientific precision they are often used in volatile situations or when there are no historical data available such as for a new product or to create a strategiclevel forecast where the long time horizon creates significant uncertainty and historical data would not be highly useful qualitative methods are also considered useful in modifying a quantitative forecast based on things like assumptions about the economy or competitor actions for example when creating the sales forecast sales representatives use their best judgment of the impact that competitor and other business information will have on sales additional advantages are that these forecasts can be developed quickly and at little expense while informed opinion is better than flipping a coin these methods tend used this is in part because qualitative forecasts depend on the relevant salespersons but possibly also executives who are too removed from the actual marketplace so results can vary widely this is true even when a qualitative method is used to adjust a quantitative method bias is another risk we will learn more about measuring forecast bias later but with a qualitative method this could be due to optimism or aggressive consistency in the level of accuracy in these types of forecasts over time organizations work to improve these types of forecasts by conducting market research or test marketing or studying similar or competitor products using a similar product as a proxy should be explored as a possibility prior to resorting to a pure qualitative forecast this type of forecasting a common judgmentbased method is called forecasting by historical analogy a technique based on identifying a sales history that is analogous to a present situation such as the sales history of a similar product and using that past pattern to predict future sales another method of making these methods more reliable is to ask persons who are providing opinions to provide a best case expected case and worst case estimate and to then average these responses in some way team of experts or other stakeholders use their detailed knowledge of products customers forecasting methods historical error rates and the market to generate a forecast or more frequently to adjust the quantitative forecast stakeholders may include senior management salespersons marketing committees customer service representatives and others tracking these adjustments separately from any quantitative component will help in determining whether these modifications are
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customers forecasting methods historical error rates and the market to generate a forecast or more frequently to adjust the quantitative forecast stakeholders may include senior management salespersons marketing committees customer service representatives and others tracking these adjustments separately from any quantitative component will help in determining whether these modifications are increasing or decreasing in accuracy and in showing whether they are introducing bias by being consistently high or low one judgmental technique used is panel consensus as defined by the dictionary panel consensus is a judgmental forecasting technique by which a committee sales force or group of experts arrives at a sales estimate panel consensus is related to the delphi method the delphi method discussed more in part 2 is defined in the apics dictionary 16th edition as follows a qualitative forecasting technique where the opinions of experts are used to develop the next so that convergence of the experts opinions is obtained quantitative methods extrinsic forecasting the dictionary defines extrinsic forecasting method as follows a forecast method using a correlated leading indicator for example estimating furniture sales based on housing starts extrinsic forecasts tend to be more useful for large aggregations such as total company sales than for individual product sales extrinsic forecasting is a type of quantitative forecasting that works to find a link between information that is externally available and demand if there is a link it is called correlation note that correlation implies a relationship but not necessarily a causeandeffect relationship since some third thing may cause both the best information that can be used is leading indicators which the dictionary defines as follows a specific business activity index that indicates future trends for example housing starts is a leading indicator for the industry that supplies builders hardware these economic or demographic indicators tend to be among the first types of data that can show a change in a trend for example governments and industry associations compile economic information on housing starts or applications to build new housing since this is the first thing done when building housing it correlates to how much roofing ordered and so on other examples of economic leading indicators include orders for durable goods or capital equipment similarly demographic information on birth rates age distributions income and education levels or ethnicity may help provide information on changing study of extrinsic data may show a statistical relationship between one or more leading indicators and demand it may be positively correlated meaning as the indicator rises so does demand conversely negative correlation would mean that as the indicator rises demand falls by a certain amount the key point is that extrinsic forecasting is often the planning at the total company demand or product family level because correlation is a macroeconomic observation simple and multiple regression analysis are common examples of extrinsic forecasting with the difference being whether one or several indicators are used determining the inputs to these methods requires statistical analysis comparing the organization s historical demand levels against data on the
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family level because correlation is a macroeconomic observation simple and multiple regression analysis are common examples of extrinsic forecasting with the difference being whether one or several indicators are used determining the inputs to these methods requires statistical analysis comparing the organization s historical demand levels against data on the indicators over time which will result in the input data needed for a simple formula as well as some statistics like the relative level of correlation between the indicator and demand indicators in total sales quantitative methods intrinsic time series forecasting the apics dictionary 16th edition defines intrinsic forecast method as a forecast based on internal factors such as an average of past sales intrinsic or time series forecasting uses internal information such individual products these techniques assume that the nearterm past is when seasonality is removed intrinsic methods can indeed be reasonably accurate much of the time they can be used to project a current trend forward however any time series that is a series of demand data points over a number of past periods will lag a change in a trend because the series will always continue forward as if the trend had from the prior period will simply repeat for example that last june s results will be this june s results or last month s deseasonalized results will be next month s deseasonalized results this is called naive forecasting these basic models will be off by a lot when random variation has occurred in the prior period since they will repeat that spike exponential smoothing are primarily intended to smooth out the effects of any random variations to allow the basic trend to be projected forward this tends to result in a safer forecast the methods differ on how much or how little they lag a trend versus how much or how little they smooth out random variation faster response to a trend change will result in less smoothing out of random variation and vice versa the discussion of moving averages and exponential smoothing uses the example started earlier in exhibit 144 and exhibit 145 the data were visualized and seasonal indexes were calculated already so the next deseasonalized demand when calculating deseasonalized data for a time series the process uses the same deseasonalizing steps discussed earlier only now the historical data will be deseasonalized by dividing each period s actual demand by its proper eg quarterly seasonal index exhibit 147 shows deseasonalized deseasonalized demand for example year 1 quarter 1 had 1422 units of actual demand and dividing this by 1387 results in 1025 units of deseasonalized demand these units are then used in the forecasting techniques discussed below deseasonalization process can be omitted in that case the following forecasting methods will be useful for smoothing out random variations that still exist moving averages a moving average is simply the average of a certain number of past always used common examples include three and sixperiod moving averages as you forecast the next period you drop
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that case the following forecasting methods will be useful for smoothing out random variations that still exist moving averages a moving average is simply the average of a certain number of past always used common examples include three and sixperiod moving averages as you forecast the next period you drop the oldest period and add the most recent period for example in a threemonth moving average january february and march demand would be summed and demand would be similarly calculated except that now the amounts for february march and april demand would be used the general formula for moving averages is as follows note that an example is provided of a threequarter moving average forecast both three and sixquarter moving averages note that the calculations then the results are multiplied by the appropriate seasonal index to produce the actual forecast you divide to remove seasonality and then multiply to add it back both methods start by testing the method using historical data and then forecast the first quarter of year 4 the three quarter method requires three quarters of data so the first results are in the fourth quarter and the sixquarter method starts in the seventh quarter another thing to realize about this and later exhibits showing the running forecast example is that these amounts are calculated in a spreadsheet and that the spreadsheet does not round numbers before making the next calculation even though it is formatted to display rounded numbers therefore some numbers may not appear to round to exactly the right number they do however round to what is shown when none of the prior calculations are rounded first interested learners can download this spreadsheet from the additional resources average forecasting quarter method the first step is to calculate the deseasonalized forecast as follows 965 916 9673 9493 the exhibit shows rounding to the nearest unit to apply the seasonal index and produce a useful result this number is multiplied by the seasonal index on the left 1387 x 9493 1317 units rounded similarly for the sixquarter method it is 1021 1022 1001 965 916 9676 982 the seasonal index make for somewhat different results the forecast can be directly compared to the prior quarter 1 results of 1422 1351 and 1388 units and look appropriate which method is better that depends on how much you want to smooth out random variation versus minimize a lag in a trend using more periods will smooth out random variation more but also lag a change in a trend more conversely using fewer periods will lag a trend a little less but also smooth out less random variation need to assemble data from multiple periods the next method uses data only from the prior period so the data requirements are simplified exponential smoothing exponential smoothing gives more weight to the most recent demand information because it is based on three things the last period s actual demand the last period s forecast result and a smoothing constant weighting for
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data only from the prior period so the data requirements are simplified exponential smoothing exponential smoothing gives more weight to the most recent demand information because it is based on three things the last period s actual demand the last period s forecast result and a smoothing constant weighting for how much to weight the prior actual demand versus the forecast demand it is also sometimes called a smoothing constant because it is used to smooth out random variation to a specific degree the equation for exponential smoothing is as follows along with an example that sets alpha at 03 latest demand and previous forecast values are shown in the next exhibit since the second half of the equation uses 1 minus alpha this means actual demand and 70 percent on the last forecast the lower the alpha is less weight is put on actual demand the more exponential smoothing will smooth out random variation but it will also lag a trend more and forecast will not reflect this spike as much as the 03 version however maybe that spike was actually not temporary and people will start buying more of the product even after the ad campaign finishes this would be a placing less weight on actual demand lower alpha values increases lags in trend to follow a trend more closely but smooth random variation less a higher alpha would be used exhibit 149 shows the results of exponential smoothing for the same example used previously for both historical data plus the y4 q1 forecast the exhibit shows the results of using a 03 smoothing constant as well exponential smoothing note that exponential smoothing requires a prior actual and a prior here rather than being calculated here is how the y4 q1 forecasts were calculated note that an additional decimal place is shown in the all of the other historical test forecasts were similarly calculated choosing the right alpha can make a big difference in forecast accuracy and often the right one is found by running simulations with different alphas or by using trial and error both the automated and manual methods compare the forecast against actual results over time to find the best alpha an advantage of using a smoothing constant that is basically 0145 it could also be adjusted to account for known temporary events or other onetime dips or spikes in the data other observations common to all intrinsic methods one thing to note about intrinsic methods in general is that none of them really work well for longerterm forecasting because you rapidly run out of actual data for example if we wanted to forecast year 4 quarter 2 the actual data for year 4 quarter 1 for moving average or exponential smoothing and so the forecasts would quickly become less useful instead the procedure is to wait until the next period when the actual results come in and then forecast for the future period at that time thus forecasting would be done one day week
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1 for moving average or exponential smoothing and so the forecasts would quickly become less useful instead the procedure is to wait until the next period when the actual results come in and then forecast for the future period at that time thus forecasting would be done one day week month quarter or year at a time depending on the time bucket years exhibit 147 showed that annual demand was 4122 4000 and 3878 units and a threeyear moving average would average this out at 4000 units this is lagging the downward trend since if the trend continues without change next year would be 3756 units demand went downward might be done at this point by following the trend line or using year 4 forecast at 3720 units due to qualitative information about the competition and other factors a seasonal forecast could be applied by dividing the annual units by the number of periods and then multiplying each period by its respective seasonal index if management had a reason to believe instead that the trend would change say to start heading upward these adjustments could also be made qualitatively how did these methods fare we will answer that question in the next topic on tracking the forecast topic 4 tracking the forecast the primary objective for tracking forecast error rates and calculating related metrics is to generate information that can be used to improve forecasting methods data collection and preparation methods and so on over time an improved forecast will have a narrower range of forecast error forecasters and users of forecasts use information on forecast accuracy to understand demand characteristics variation and stability another important objective is to help people determine how much reliance they should place on the forecast as was discussed in the prior the main reason given so far for wrong forecasts is customer unpredictability another potential reason is human error or bias on the part of forecasters salespersons can provide overly optimistic forecasts or deliberately low forecasts to make it easier to achieve goals while bias in this sense can exist we will show below that bias has a very specific definition when it comes to forecast error after discussing the difference between bias and random variation we will address additional ways to measure error including the mean absolute deviation and the tracking signal the topic then discusses some ways to apply error rate information such as calculating how much safety stock to have for a given service level because of the issues with forecasting organizations are working to become less reliant on forecasts and more reliant on actual demand information provided by downstream supply chain partners the organization is in effect moving more toward a pull structure the pull of demand and away from the push of production based on forecasts this is discussed last in this topic bias versus random variation exhibit 150 revisits the forecast from the prior topic here we show only the most recent six quarters because these have forecasts
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