Quantitative Approaches 51 4. Trend Projection Illustration in graph Correlation Technique How strong is the linear relationship between the variables? Coefficient of correlation, r, measures degree of association Values range from -1 to +1
Quantitative Approaches 52 4. Trend Projection Correlation Technique
The Aggregate Planning in Operations 53 Aggregate plan is concerned with determining the quantity and timing of production for the immediate future, often 3 to 18 months ahead. Aggregate planning purpose is to meet the forecast demand and minimize the cost of production.
The Concept of Aggregate Planning The objective of aggregate planning is to meet to meet forecast demand and minimize costs over the planning period. Effective aggregate planning entails: 1. A logical overall unit for measuring sales and outputs. 2. A forecast demand for the intermediate planning period in aggregate terms. 3. A method for determining costs. 4. A model that combines forecasts and costs to enable scheduling decisions to be made for the planning period. 54
Questions to consider in Aggregate Planning Should inventories be used to absorb changes in demand during the planning period? Should changes be accommodated by varying the size of the workforce? Should part-times be used, or should overtime and idle time absorb fluctuations? Should subcontractors be used on fluctuating orders so a stable workforce can be maintained? Should prices or other factors be changed to influence demand? 55
Aggregate Planning Strategy 1.Changing inventory levels 2.Varying workforce size by hiring or layoffs 3.Varying production rates through overtime or idle time 4.Subcontracting 5.Using part-time workers (1) Capacity options 1.Influencing demand 2.Back ordering during high-demand periods 3.Counter-seasonal product and service mixing (2) Demand options 1.Chase strategy 2.Level-scheduling strategy (3) Mixed options 56
WORK MEASUREMENT 57 CHAPTER
58 Definition : The application of techniques designed to establish the time for a qualified worker to carry out specified jobs at a defined level of performance defined rate of working. Work measurement concerned with the length of time it takes to complete a task assigned to a specific job. Work measurement involves the estimation of the amount of human effort needed to produce a unit of a specified output from an operation. Definition of Work Measurement
59 The amount of time that is usually taken by a well-trained worker, operating under normal working conditions, to produce one unit of the output is referred to as work standard. Conditions in Work Standard Time taken by a welltrained worker Operating under normal working conditions
60 1. Manpower Planning ✓ Work measurement data is used for manpower planning as it provide information about the number of hours required to carry out the work. ✓ It helps a manager to estimate the number and type of workers needed to the job. This is to ensure no staff redundancy. 2. Production Planning and Scheduling ✓ Work measurement data can be used to set production standard. ✓ Work measurement data can helps in scheduling where to determine the starting and finishing time for each job. Importance of Work Measurement WORK MEASUREMENT 1. Manpower planning 2. Production planning and scheduling 3. Estimation production costs 4. Basis of incentives 5. Training for employees
61 3. Estimating Production Costs ✓ Work measurement data helps a manager to estimate the cost of production as it gives the management the accurate data on production time. ✓ This data helps the manager to estimate the cost of labor. 4. Basis for Incentives ✓ Work measurement data can be used to create incentive scheme for employees and this scheme is to motivate employees to work hard. ✓ The company can identify the efficient workers and reward them with a higher wage rate. 5. Training of employees ✓ Work measurement data helps manager to train employees, especially the newly hires. ✓ It helps a manager to divide the whole job into small elements. ✓ It gives details on how to do each element, the time taken for each element, the machines and tools involved in each element, and other information used to train the employees. Importance of Work Measurement
62 Time study methods in measuring work standard involves direct observation of a task using a stopwatch or other chronometric device to record the time taken to accomplish the task. There are three concepts of time in time study: TIME STUDY Methods Observed Time • It is the time in which an operator is being observed, usually using a stopwatch, while a job is being performed. Basic (Normal) Time • It is the time that a qualified worker takes to complete a job at a normal work pace under normal working condition. Standard Time • It is the time that a qualified worker takes to complete a task, taking into consideration some allowances.
63 Formula in Time Study methods TIME STUDY Methods
64 Formula in Time Study methods TIME STUDY Methods
65 * PFD= personal needs, fatigue, delays Answer : Step 1: Calculate the Basic (Normal) time = 3.27 90 100 @ = 3.27 x 0.9 = 2.943 minutes Step 2 : Then calculate Standard Time = 2.943 1 −0.13 = 3.38 minutes TIME STUDY Methods The average observed time for a repetitive work cycle in a direct time study was 3.27 minutes. The worker’s performance was rated by the analyst at 90%. The company uses a PFD allowance factor of 13%. What is the standard time for this task? Example 5.1
66 Answer : Calculate Standard Time = (0.73+2.56+1.01) 1 −0.16 = 4.3 1 −0.16 = 5.12 minutes TIME STUDY Methods The ABC Company uses a standard data system to set time standards. One of the time study analysts listed the three work elements for a new task to be performed in the shop and then determined the normal time values to be 0.73 minutes, 2.56 minutes, and 1.01 minutes. The company uses a PFD allowance factor of 16%. Determine the standard time for the task. Example 5.2
67 1. Compute the allowance factor 2. Calculate the normal time for the process. 3. Calculate the standard time to complete one unit of the product. 4. Compute the daily output per worker. 5. How many workers are needed to produce 1350 units per week? TIME STUDY Methods The following data represents the time study observations for the process of producing furniture. It is the practice of this company to allow workers a 40-minutes coffee break and 25 minutes of personal time per day. (Assuming an 8-hour and 6 day’s work week) Example 5.3 Job elemen t Observation Times (Minute) Performance Rating (%) 1 2 3 4 5 A 41 42 48 41 21 119 B 21 12 22 27 29 105 C 29 32 38 37 39 98
68 TIME STUDY Methods Job element Observation Times (Minute) Performance Rating (%) 1 2 3 4 5 A 41 42 48 41 21 119 B 21 12 22 27 29 105 C 29 32 38 37 39 98 Answer: 1. Allowance Factor (AF) = 40+25 8 60 = 0.135 @ 13.5%
69 TIME STUDY Methods Job element Observation Times (Minute) Performance Rating (%) 1 2 3 4 5 A 41 42 48 41 21 119 B 21 12 22 27 29 105 C 29 32 36 37 34 98 Answer: 2. To calculate Normal Time, you also need to calculate Average observed time (AOT) Job Average Observed Time (AOT) = 100 0. AOT Basic (Normal) Time (NT) = NT A 41 + 42 + 48 + 41 4 43 43 119 100 51.17 B 21 + 22 + 27 + 29 4 24.75 24.75 105 100 25.988 C 29 + 32 + 36 + 37 + 34 5 33.6 33.6 98 100 1.316 Total NORMAL TIME (NT) 78.474
70 TIME STUDY Methods Answer: 3. Calculate Standard Time = (1 −) = 78.474 (1 −0.135) = 90.7 minutes 4. Calculate Daily Output per worker = ℎ ( ) = 8 60 90.7 = 5.29 minutes 5. Calculate Number of Worker needed to produce 1350 units per week. = = 1350 /6 5.29 = 42.53 @ 43workers needed
71 INVENTORY MANAGEMENT Chapter
72 Definition of Inventory Management The term inventory includes raw materials inventory, work-in-progress inventory, finished packaging, spares and other stock in order to meet an unexpected demand or distribution in the future. Inventory also defined as goods on hand or any stock of economic resources at a given point of time, in anticipation of satisfying a future demand for them.
73 Functions of Inventory Management • Inventory is necessary when the demand and supply of goods are irregular. A sufficient level of inventory is required to avoid unnecessary loss of sales. 1. To provide a selection of goods for anticipated demand and separate the firm from fluctuations in demand. • A manufacturing process may involve several processes. Having sufficient inventory may prevent work stoppage and smoothen the running of the manufacturing cycle. 2. To separate (decouple) various parts of the production process. • Suppliers often offer discounts for large orders. Thus, firms may buy more and increase inventory to take advantage of the discounts. 3. To take advantage of discounts. • Firms will buy more and increase their inventory when the price of raw materials is low or when the price of the materials is expected to increase in the future. 4. To hedge against price increase.
74 Types of Inventory Raw Material Work-in-progress Maintenance/ Repair/ Operating (MRO) Finished Goods
75 Types of Inventory
76 Types of Inventory
77 Techniques for Managing an Inventory System Operation managers need to establish a proper system in managing inventory, so that there is a balance between inventory management and customer service. There are four techniques of inventory management that can be used by operations managers: ABC analysis ABC analysis is a method that divides onhand inventory into three classifications, based on annual dollar volume. The principles of this method is that the approach used to monitor inexpensive inventory is divided into; Class A (annual dollar volume is high), Class B (annual dollar volume is medium), Class C (low annual dollar volume). Record Accuracy Cycle Counting Control of Service Inventories Accurate records are a critical ingredient in production and inventory systems. Record accuracy allows the organization to focus on those items that are needed rather than settling for being sure that everything is in the inventory. Cycle counting refers to a continuing audit where it helps company to maintain a good record keeping system of its inventory Applicable techniques that can be used to control service inventories include: • Good personnel selection, training and discipline • Tight control on incoming shipments • Effective control on all goods leaving facility
78 Economic Order Quantity (EOQ) Model The most widely used and traditional means for determining how much to order in a continuous system is the EOQ model, It is also referred to as the economic lot size model. The EOQ model is to determine the optimal order size that minimizes total inventory costs. The model formula is derived under a set of simplifying and restrictive assumptions, as follows: i. Demand is known with certainty and is constant over time ii. No shortages are allowed iii. Lead time for the receipt of orders is constant iv. The order quantity is received all at once.
79 Economic Order Quantity (EOQ) Model Economic Order Quantity (EOQ) Formula 1. Optimal Order Quantity / Economic Order Quantity EOQ @ Q* = 2. Number of order (per year) N = ∗ = 3. Time Between Orders T = 4. Daily demand d = 5. Reorder point Rop = d x L (without safety stock) Rop = (d x L) + Ss (with Safety stock) **L : Lead days
80 Economic Order Quantity (EOQ) Model Economic Order Quantity (EOQ) Formula 6. Total Annual Inventory Cost TAIC = PD + [( ) ] + [( 2 ) ℎ ] TAIC = PD + [( ) ] + [( 2 + ) ℎ ] Indication: √ S = Co = Setup / Ordering cost √ D = Annual demand / sales / production √ EOQ = Q = Economic Order Quantity / Optimal Order Quantity √ Ch = Holding Cost / Carrying cost √ PD = Price x Annual demand
81 Economic Order Quantity (EOQ) Model Example 6.1 Following are the information given by Syarikat Sepadu Sdn Bhd. Annual Demand = 1095 units Ordering Cost = RM5.00 per order Holding Cost = RM1.25 per unit per year Cost per unit = RM12.50 Daily demand = 1095 / 365days Lead time = 3 days Calculate: i. The Economic Order Quantity ii. Reorder Point iii. Total Cost Answer: 1. EOQ = = . = = 93.59 @ 94 units
82 Economic Order Quantity (EOQ) Model Example 6.1 Answer: 2. Rop = d x L = 1095 365 x 3 = 9 units 3. TAIC = PD + [( ) ] + [( 2 ) ℎ ] = (12.50 x 1095) + [( 1095 94 ) 5 ] + [( 94 2 ) 1.25 ] = 13687.50 + 58.24 + 58.75 = RM 13,804.49
83 Economic Order Quantity (EOQ) Model Example 6.2 Items purchased from a vendor cost RM20 each, and the forecast for next year’s demand is 1000 units. If it costs RM5 every time an order is placed for more units and the carrying cost is RM4 per unit per year. Lead days for order is 4 days and the company practiced safety stock of 50 units. Calculate: i. Quantity should be ordered each time ii. Reorder point iii. Number of order per year iv. Time between order v. The total cost for the year Answer: 1. EOQ = = = = 50 units 2. Rop = d x L = 1000 365 x 4 = 10.96 @ 11 units
84 Economic Order Quantity (EOQ) Model Example 6.2 Answer: 3. N = = = 20 times 4. T = = 365 11 =33days 5. TAIC = PD + [( ) ] + [( 2 + ) ℎ ] = (20 x 1000) + [( 1000 50 ) 5 ] + [( 50 2 + 50) 4 ] = 20000 + 100 + 300 = RM 20,400
85 Economic Order Quantity (EOQ) Model Example 6.3 Items purchased from a vendor cost RM40 each, and the forecast for next year’s demand is 20,000 units. If it costs RM15 every time an order is placed for more units and the carrying cost is RM5 per unit per year. Safety stock is 1000 units. Calculate: i. Quantity should be ordered each time ii. The ordering cost iii. The carrying cost iv. The total cost for the year v. The minimum inventory level vi. The maximum inventory level vii. The average inventory level EOQ Model Equations Minimum inventory level (w/o Safety Stock) = 0 Minimum inventory level (with Ss) = Ss Maximum inventory level (w/o Ss) = EOQ Maximum inventory level (with Ss) = EOQ + Ss Average inventory level (w/o Ss) = EOQ / 2 Average inventory level (with Ss) = (EOQ / 2) + Ss
86 Economic Order Quantity (EOQ) Model Example 6.3 Answer: i. Quantity should be ordered each time EOQ = = = 120,000 = 346.4 @ 346 units ii. The ordering cost TOC = ( ) = (20000 346 ) 15 = RM 867.05 iii. The carrying cost TCC = ( 2 + ) ℎ = (346 2 + 1000) 5 = RM 5,865 iv. The total cost for the year TAIC = TOC + TCC = RM 867.05 + 5865 = RM 6,732.05
87 Economic Order Quantity (EOQ) Model Example 6.3 Answer: v. The minimum inventory level ✓ Minimum inventory level (with Ss) = Ss = 1000 units vi. The maximum inventory level ✓ Maximum inventory level (with Ss) = EOQ +Ss = 346 + 1000 units = 1346 units vii. The average inventory level ✓ Average inventory level (with Ss) = (EOQ 2 + Ss) = ( 346 2 + 1000) = 1173 units
88 Quantity Discount Model The quantity discount model assumes that suppliers or distributors often offer quantity discounts to their customers to attract the customers to purchase in large quantities. Price per unit decrease as quantity order increase. TAIC = PD + [( ) ] + [( 2 ) ℎ ] Steps in calculating the quantity discount model: Step 1 = Compute EOQ Step 2 = Find the unit price that matches the EOQ Step 3 = Compute the TAIC using price determined in Step 2 Step 4 = Repeat Step 3 for all lower price breaks Step 5 = Select the order size that has the lowest TAIC.
89 Quantity Discount Model Example 6.4 A company uses 15,000 units of ballpoint pens per annum. The ordering cost is RM17 per order and the annual carrying cost is RM0.30 per unit. The supplier has decided to offer a new price structure to attract a larger order from the company. The new price structure is a shown : Determine the order quantity that will minimize the annual inventory cost. Answer: Step 1 = Compute EOQ EOQ = = . = 1,700,000 = 1303.84 @ 1304 units Quantity Purchased (unit) Price per Unit (RM) 1 – 999 1.00 1000 – 1999 0.90 2000 – 2999 0.80 3000 and above 0.70
90 Quantity Discount Model Answer : Step 2 = Find the unit price that matches the EOQ After the calculation in step 1, EOQ = 1304units. Hence, the unit price matches the EOQ is as followed: Step 3 = Compute the TAIC using price determined in Step 2 TAIC = PD + [( ) ] + [( 2 ) ℎ ] = (0.9x15000) + [(15000 1304 ) 17 ] + [(1304 2 ) 0.3 ] = 13500 + 195.55 + 195.6 = RM 13,891.15
91 Quantity Discount Model Answer : Step 4 = Repeat Step 3 for all lower price breaks TAIC1 = PD + [( ) ] + [( 2 ) ℎ ] = (0.8x15000) + [(15000 2000 ) 17 ] + [(2000 2 ) 0.3 ] = 12000 + 127.5 + 300 = RM 12,427.50 TAIC2 = PD + [( ) ] + [( 2 ) ℎ ] = (0.7x15000) + [(15000 3000 ) 17 ] + [(3000 2 ) 0.3 ] = 10500 + 85 + 450 = RM 11,035 Step 5 = Select the order size that has the lowest TAIC. Decision: The order size that has the lowest TAIC is 3000 units.
92 Just-In-TIme The philosophy behind just-in-time (JIT) is one of continuing improvement and enforced problem solving. JIT systems are designed to produce or deliver goods just as they are needed. Objective of JIT : Practicing JIT, waste can be eliminated by cutting unnecessary inventory and removing non-value added activities from operations. An inventory strategy that companies employ to increase efficiency and decrease waste by receiving or producing goods only when they are needed, thereby reducing inventory costs. Achieve “zero inventory” Precisely meet customer requirements Without wasting resources Immediately meet customer demand
93 Just-In-TIme Advantages and Disadvantages of JIT Advantages 1.Reduce or eliminate setup times 2.Reduce lot sizes 3.Reduce lead times 4.Reduce the number of jobs waiting to be processed at a given machine Disadvantages 1. No safety stock is stored 2. JIT concept is limited. 3. JIT production will not be able to adapt well to sudden increase in volume of demand from the market, since the inventory levels are maintained at much lower level