Operations Management

Kiran J Mathew
Asst Professor
SCMS Cochin School of Business
Material Requirement Planning (MRP)
• Material Requirements Planning (MRP) is a • Why Is MRP important?
standard supply planning system to help
businesses, primarily product-based • Ordering too much inventory, which increases
manufacturers, understand inventory carrying costs and ties up more cash in inventory
requirements while balancing supply and demand. overhead that could be used elsewhere.
Businesses use MRP systems, which are subsets of • Inability to meet demand because of insufficient
supply chain management systems, to efficiently raw materials, resulting in lost sales, canceled
manage inventory, schedule production and deliver contracts and out-of-stocks.
the right product—on time and at optimal cost.
• Disruptions in the production cycle, delaying sub-
• A Material Requirements Planning (MRP) system assembly builds that result in increased production
accelerates the manufacturing production process costs and decreased output.
by determining what raw materials, components
and subassemblies are needed, and when to • MRP Inputs
assemble the finished goods, based on demand
and bill of materials (BOM). It does this by asking • Demand
three main questions: • Bill of materials (BOM)
• What is needed? • Inventory
• How much is needed? • Master production schedule
• When is it needed by?
• A bill of materials (BOM) is an
extensive list of raw materials,
components, and instructions
required to construct,
manufacture, or repair a product
or service.
• A bill of materials usually
appears in a hierarchical format,
with the highest level displaying
the finished product and the
bottom level showing individual
components and materials.
Manufacturing Resource Planning (MRP II)
• Manufacturing Resource Planning (MRP • The following are a small sampling of
II) is an integrated information system some popular MRP II software providers
used by businesses. Manufacturing • IQMS
Resource Planning (MRP II) evolved from • Fishbowl
early Materials Requirement Planning • FactoryEdge
(MRP) systems by including the • Prodsmart
integration of additional data, such as
employee and financial needs. • abas
• Oracle Netsuite Manufacturing Edition
• MRP II is a computer-based system that • Epicor
can create detailed production schedules • S2K Enterprise
using real-time data to coordinate the
arrival of component materials with
machine and labor availability. MRP II is
used widely by itself, but it's also used as
a module of more extensive enterprise
resource planning (ERP) systems.
• MRP I vs. MRP II • MRP II systems are still in wide use by
manufacturing companies today and can either be
• For all intents and purposes, MRP II has effectively found as stand-alone solutions or as part of an
replaced MRP I software. Most MRP II systems enterprise resource planning (ERP) system.
deliver all of the functionality of an MRP system. Enterprise Resources Planning (ERP) software
But in addition to offering master production systems are regarded as the successors of MRP II
scheduling, bill of materials (BOM), and inventory software.
tracking, MRP II provides functionality within
logistics, marketing, and general finance. • ERP suites include applications well outside the
scope of manufacturing. These can include
• MRP I included the following three major everything from human resources and customer
functionalities: relationship management to enterprise asset
• master production scheduling management.
• bill of materials
• inventory tracking
• MRP II includes those three, plus the following:
• machine capacity scheduling
• demand forecasting
• quality assurance
• general accounting
Production Planning
& Control
• What to produce – Product planning,
Product design
• How to produce – Material planning,
Process Planning, Tool/Equipment
planning
• Where to produce – Facilities
planning, Capacity planning,
subcontracting
• When to produce – Production
scheduling, Machine loading
• Who will produce – Manpower
planning
• How much to produce – Qty planning,
Economic batch size
Production planning is concerned with deciding in advance what is to be
produced, when to be produced, where to be produced and how to be
produced. It involves foreseeing every step in the process of production so as
to avoid all difficulties and inefficiency in the operation of the plant.
Production planning has been defined as the technique of forecasting or
picturing ahead every step in a long series of separate operations, each step
to be taken in the right place, of the right degree, and at the right time, and
each operation to be done at maximum efficiency.
In other words, production planning involves looking ahead, anticipating
bottlenecks and identifying the steps necessary to ensure smooth and
uninterrupted flow of production. It determines the requirements for
materials, machinery and man-power; establishes the exact sequence of
operations for each individual item and lays down the time schedule for its
completion.
• Key Takeaways
• Production planning describes in detail how a company’s products and
services will be manufactured.
• A production plan defines the production targets, required resources and
overall schedule, together with all the steps involved in production and their
dependencies.
• A well-designed production plan helps companies deliver products on time,
reduce costs and respond to problems.
• Technology has made it easier for small and midsize companies in multiple
industries to use production planning to optimize operations.
Production Planning KPIs
• Key performance indicators (KPIs) are important • Production rate.
metrics that help companies track the health of
their production processes. • This is typically measured as the number of units
produced during a specific period. Comparing the
• Downtime. actual production rate for each process with the
planned rate can help businesses identify strengths
• This metric tracks the percentage of time that and weaknesses and begin to address problems.
production is not occurring during scheduled
operating hours. Causes include machine • Overall equipment effectiveness (OEE).
breakdowns, tool adjustments and accidents. Less
downtime the better. • This is a measure of overall manufacturing
productivity that accounts for quality, performance
• Setup time. and availability. The formula for OEE is:
• Also referred to as changeover time, this is the • OEE = Quality x performance x availability
amount of time it takes to switch between jobs.
Setup time impacts overall productivity because • Quality is typically measured as the percentage of
production is halted during these periods. parts that meet quality standards. Performance is
Designing production schedules to minimize how fast a process is running compared to its
changeover time can increase efficiency maximum speed, which is expressed as a
percentage. Availability is the percentage of
uptime during a company’s scheduled operating
hours.
• Rejection rate.
• This is the number or percentage of products
that failed to pass quality checks. Depending
on the nature of the product and the
problem, it may be possible to salvage some
rejected items by reworking them, while
others may need to be scrapped.
• On-time orders.
• Production delays can be costly both in terms
of money and reputation. Generating
products on schedule means you’re less likely
to need costly expedited shipping or other
emergency measures to meet deadlines. And
delivering orders on time helps keep
customers happy, which means they’re more
likely to keep doing business with your
company.
Production Control Process
• The production control process varies from industry to • Dispatching
industry and even business to business. That said, there are
some fundamental steps that are common in any production • At this point, production begins. The implementation of the
control process. They are as follows. scheduled activities and routing is executed. There are two
types of dispatching. One is called centralized in which orders
• Routing are done by a specific authority. The other is decentralized,
which means the order is done by those business units that
• The first step of any production control process is the are involved in the production.
definition of your operation, from beginning to end. This
includes what raw materials you’ll need for production, other • Expediting or Follow-Up
resources, such as labor and equipment, the needed
quantity, quality expectations and where the production will • This is when monitoring production is focused on finding
take place. This process is to determine the most efficient issues, such as faults or defects in the product, bottlenecks in
and cost-effective step-by-step manufacturing the production and so forth. One way this is done is by
process through scheduling. measuring variance, which is the difference between
the plan and the actual progress. This helps catch issues by
• Scheduling evaluating the effectiveness of production and keeps
production on schedule.
• Routing, as noted, leads to scheduling. This is the time-
related part of the work, dealing with when what will happen • Inspection
and for how long. The manufacturing schedule is sequenced
in order of priority and has a start and finish date for each • Though not always included in the production control
task. This is the timetable of the production process. process, it’s still recommended that there are periodic audits
to make sure that best practices are being followed. This
ensures that the production is following required industry
standards.
Types of Production Control Systems
• Make to Stock (MTS) • Engineer to Order (ETO)
• This is where products are made in • Here, the product is designed and engineered
anticipation of demand from customers. The according to customer specifications before
finished product is stocked in inventory and it’s manufactured. These are very customized
customer orders are fulfilled off the shelf. The and complex products. The variety of the
advantage is that delivery is immediate and finished product is limited and many
costs are low, which grows the business. manufacturing processes are employed in
Products tend to be standard and production small, medium and large products that go to
lines are dedicated to producing large industries such as refineries, chemical and
volumes. power plants, automotive, buildings and
more.
• Make to Order (MTO)
• Products for these systems are made to • Assemble to Order (ATO)
specifications that are provided by customers. • Manufacturers stock sub-assembly parts in
Production doesn’t begin until receipt of the this system only assembling the parts into the
customer order. Variety is limited by the type final product when a customer places an
and capability of processes and production order. Companies must be able to assemble
tends to be small. and deliver products quickly.
Material Management with ERP tool
• Enterprise Resource Planning (ERP) offers a comprehensive • 3. Stock Quantity Updates: Accurate inventory management
platform to manage and monitor various aspects of material is crucial for preventing stock-outs and overstocking. ERP
management. systems automatically update stock quantities as goods move
through the supply chain, providing real-time visibility into
• How ERP software streamlines material management and inventory levels. This information is essential for demand
enhances overall operational efficiency forecasting, order fulfillment, and maintaining lean inventory
• 1. Revise Material Rate: Fluctuations in raw material prices practices.
can significantly impact production costs. ERP systems • 4. Material Rate History Check: ERP systems maintain a
facilitate real-time tracking of material rates, enabling historical record of material rates, enabling organizations to
organizations to adjust pricing strategies swiftly and optimize analyze trends over time. This helps in negotiating better
procurement decisions. By integrating historical cost data and terms with suppliers, identifying cost-saving opportunities,
real-time market information, ERP systems empower and ensuring that procurement decisions align with
businesses to make informed decisions about material budgetary considerations.
sourcing and pricing.
• 5. Integration with IoT, Project Management, Scheduling
• 2. Conversion from Raw Material Stocks to Finished Apps, and Finance Software: Modern ERP solutions often
Goods: ERP systems offer a holistic view of inventory levels integrate with other technological tools such as Internet of
and production processes. This allows for accurate planning Things (IoT) devices, project management applications,
and scheduling, ensuring there is a provision for raw project scheduling tools, and finance software. This
materials to be converted into finished goods in a seamless integration ensures a seamless flow of data across
and timely manner. Integrated data streams provide insights departments, enhancing communication, collaboration, and
into production capacity, enabling organizations to allocate decision-making. For example, IoT devices can provide real-
resources effectively and meet customer demands. time data on equipment performance and condition, allowing
for proactive maintenance and reduced downtime.
Crucial Documents through ERP
• ERP systems also assist in generating crucial • Goods Issue Note (GIN): When materials are
documents that streamline material management issued for production, ERP systems generate GINs,
processes: ensuring proper documentation and accurate
inventory tracking.
• Work Order: ERP systems automate the creation of
work orders, detailing tasks, materials required, • Resource Requirements List: ERP systems provide
and timelines for production. This ensures that the a clear overview of resource requirements for
manufacturing process adheres to established specific projects, aiding in resource allocation and
standards and timelines. capacity planning.
• Purchase Requisition: ERP systems facilitate the • Material Reconciliation Report: ERP systems
generation of purchase requisitions, streamlining generate reconciliation reports that help reconcile
the procurement process by automating the actual material usage with planned usage. This
request for necessary materials and supplies. assists in identifying discrepancies and potential
wastage.
• Goods Received Note (GRN): ERP systems
generate GRNs upon receiving materials, verifying • Supplier Comparisons: ERP systems facilitate the
the quantity and quality of incoming goods. This comparison of suppliers based on the lowest price
step is essential for accurate inventory updates and quoted, assisting in making informed procurement
quality control. decisions.
Vendor Selection Criteria
• What is a Vendor? • Ability to supply all the products required or the complete
A vendor offers goods/services for sale, especially to solution.
someone next in the economic chain. A vendor can work, This is particularly necessary when you are looking for a one
both as a seller (or a supplier) and a manufacturer. The of business solution. You may also be attempting to
general term used for describing a supplier/seller of goods is rationalize the number of vendors you are dealing with or
called a vendor. wish to purchase a product line from one vendor only.
• Flexibility to allow changes in orders or product lines.
• 12 vendor selection criteria All businesses need to change their orders sometimes – if
your vendor heavily penalizes you for doing this – perhaps
• Prices. they are not the one for you and you need to move on with
Discounts on the price list are always negotiable, but they are selecting a vendor.
an important part of selecting a vendor.
• Substantial catalogue of products or range of services.
• Years in business This not only indicates an established vendor of size, but also
You need to know that the company is established and ready means that you have flexibility in your ordering. As your
to service your requirements. business grows, you can keep with the same vendor. It also
• Ability to constantly supply products or services. means that you are able to minimize the number of vendors
You need your products and services on a regular basis. A you are dealing with.
vendor that has supply issues will affect your ability to supply • Appropriate supply of internal experts that can answer
your customers and this is an important factor when questions you may have.
selecting a vendor. Again, this is very pertinent if you are purchasing a high value
service, but we all need experts at some time or other.
• Testimonials and references.
These are valuable if you can check that the
vendor is reliable and as they purport to be.
• Sustainability and financial stability.
The last thing you want is to have to change your
vendors very quickly because one of them has
gone out of business.
• Delivery times.
You need to know that deliveries can be made
where and when you want them. The number of
deliveries per week or month may also be
important to you.
• Terms of business.
Payment terms are particularly important as they
impact upon your cash flow.
• Customer service.
Always an important part of any relationship. What
is the availability of ordering and help staff? Are
they cordial, professional and easy to contact.
Vendor Retention
• Vendor loyalty and retention are crucial for any organization • Negotiate fairly and transparently
that relies on external suppliers, partners, or contractors to
deliver quality products or services. Having a strong and • You need to negotiate fair and transparent terms and
lasting relationship with your vendors can help you reduce conditions with your vendors, taking into account their
costs, increase efficiency, improve customer satisfaction, and needs, capabilities, and value. You should not try to squeeze
gain a competitive edge. the lowest price or the shortest deadline from your vendors,
as this will damage your trust and reputation. Instead, you
• Communicate clearly and regularly should aim for a win-win situation
• You need to communicate your expectations, goals, feedback, • Provide feedback and recognition
and appreciation to your vendors regularly and clearly. This
will help you avoid misunderstandings, resolve issues, and • Feedback helps your vendors improve their performance,
align your vision. identify their strengths and weaknesses, and address any
problems or concerns. Recognition shows your vendors that
• Pay on time and accurately you appreciate their efforts, achievements, and innovations.
• A simple but effective way to maintain vendor loyalty and • Collaborate and innovate
retention is to pay on time and accurately.
• Collaboration means that you work together with your
vendors as partners, not as adversaries. You share
information, ideas, and resources, and support each other's
goals and interests. Innovation means that you explore new
opportunities, challenges, and solutions with your vendors,
and embrace change and creativity.
Material Management in JIT (Just In Time)
Manufacturing
• [Link] • Just In Time method prevents a company from
k&t=4s using excessive inventory and smoothens
production operations if a specific task takes longer
• Just-in-time also known as JIT is an inventory than expected or a defective part is discovered in
management method whereby labour, material the system. This is also one of the main reason why
and goods (to be used in manufacturing) are re- the companies (which are opted for JIT) invest in
filled or scheduled to arrive exactly when needed preventive maintenance; when a part/equipment
in the manufacturing process. breaks down, the entire production process stops.
• JIT is a manufacturing management process. It was • SIX principles in relation to JIT
first developed and applied in the Toyota
manufacturing plants in order to meet consumer • Reduce buffer inventory.
demands with minimum delays.
• Try for zero inventory
• Taiichi Ohno of Japan is referred to as the father of
Just In Time. • Search for reliable suppliers.
• Reduce lot size and increase the frequency of
orders.
• Reduce purchasing cost.
• Improve material handling.