Introduction to Materials Management, 9th edition By Stephen N Chapman Solution Manual by Ace Test Banks

Online Instructor’s Manual to accompany

Introduction to Materials Management Ninth Edition Stephen N. Chapman Ann K. Gatewood J. R. Tony Arnold Lloyd M. Clive

Contents INTRODUCTION TO MATERIALS MANAGEMENT

CHAPTER 1: INTRODUCTION TO MATERIALS MANAGEMENT

ANSWERS TO PROBLEMS

CASE STUDY 1.1 TEACHING NOTES

MULTIPLE CHOICE QUESTIONS

CHAPTER 2: PRODUCTION PLANNING SYSTEM

ANSWERS TO PROBLEMS

CASE STUDY 2.1 TEACHING NOTES

CASE STUDY 2.2 TEACHING NOTES

MULTIPLE CHOICE QUESTIONS

CHAPTER 3: MASTER SCHEDULING

ANSWERS TO PROBLEMS

CASE STUDY 3.1 TEACHING NOTES

CASE STUDY 3.2 TEACHING NOTES

CASE STUDY 3.3 TEACHING NOTES

MULTIPLE CHOICE QUESTIONS

CHAPTER 4: MATERIAL REQUIREMENTS PLANNING

ANSWERS TO PROBLEMS

CASE STUDY 4.1 TEACHING NOTES

CASE STUDY 4.2 TEACHING NOTES

MULTIPLE CHOICE QUESTIONS

CHAPTER 5: CAPACITY MANAGEMENT

ANSWERS TO PROBLEMS

CASE STUDY 5.1 TEACHING NOTES

MULTIPLE CHOICE QUESTIONS

CHAPTER 6: PRODUCTION ACTIVITY CONTROL ANSWERS TO PROBLEMS

84 84

iii

CASE STUDY 6.1 TEACHING NOTES

CASE STUDY 6.2 TEACHING NOTES

CASE STUDY 6.3 TEACHING NOTES

MULTIPLE CHOICE QUESTIONS

CHAPTER 7: FUNDAMENTALS OF SUPPLY CHAIN MANAGEMENT

102

ANSWERS TO PROBLEMS

102

CASE STUDY 7.1 TEACHING NOTES

102

MULTIPLE CHOICE QUESTIONS

103

CHAPTER 8: PURCHASING

107

ANSWERS TO PROBLEMS

107

CASE STUDY 8.1 TEACHING NOTES

107

CASE STUDY 8.2 TEACHING NOTES

109

CASE STUDY 8.3 TEACHING NOTES

111

MULTIPLE CHOICE QUESTIONS

112

CHAPTER 9: FORECASTING

120

ANSWERS TO PROBLEMS

120

CASE STUDY 9.1 TEACHING NOTES

125

CASE STUDY 9.2 TEACHING NOTES

126

MULTIPLE CHOICE QUESTIONS

128

CHAPTER 10: INVENTORY FUNDAMENTALS

133

ANSWERS TO PROBLEMS

133

CASE STUDY 10.1 TEACHING NOTES

137

MULTIPLE CHOICE QUESTIONS

140

CHAPTER 11 : ORDER QUANTITIES

146

ANSWERS TO PROBLEMS

146

CASE STUDY 11.1 TEACHING NOTES

151

MULTIPLE CHOICE QUESTIONS

155

CHAPTER 12: INDEPENDENT DEMAND ORDERING SYSTEMS ANSWERS TO PROBLEMS

161 161

CASE STUDY 12.1 TEACHING NOTES

168

MULTIPLE CHOICE QUESTIONS

171

CHAPTER 13: PHYSICAL INVENTORY AND WAREHOUSE MANAGEMENT

180

ANSWERS TO PROBLEMS

180

CASE STUDY 13.1 TEACHING NOTES

182

MULTIPLE CHOICE QUESTIONS

185

CHAPTER 14: PHYSICAL DISTRIBUTION

192

ANSWERS TO PROBLEMS

192

CASE STUDY 14.1 TEACHING NOTES

193

CASE STUDY 14.2 TEACHING NOTES

195

MULTIPLE CHOICE QUESTIONS

197

CHAPTER 15: PRODUCTS AND PROCESSES

206

ANSWERS TO PROBLEMS

206

CASE STUDY 15.1 TEACHING NOTES

208

MULTIPLE CHOICE QUESTIONS

209

CHAPTER 16: LEAN PRODUCTION

215

ANSWERS TO PROBLEMS

215

CASE STUDY 16.1 TEACHING NOTES

216

CASE STUDY 16.2 TEACHING NOTES

218

MULTIPLE CHOICE QUESTIONS

219

CHAPTER 17: TOTAL QUALITY MANAGEMENT

225

ANSWERS TO PROBLEMS

225

CASE STUDY 17.1 TEACHING NOTES

226

MULTIPLE CHOICE QUESTIONS

229

INTRODUCTION TO MATERIALS MANAGEMENT CHAPTER 1: INTRODUCTION TO MATERIALS MANAGEMENT ANSWERS TO PROBLEMS 1.1

Sales

100%

Cost of manufacturing

60%

Other costs Profit (percent of Sales)

30%

100% 55% 30%

90% 10%

85% 15%

Therefore a 10% reduction in the cost of manufacturing would produce a 50% increase in profit. 1.2

Profit

0.15 = Sales

Sales – (direct costs + overhead) Sales – (0.60 × Sales + 0.30) 0.45 = 1.125 = 112.5% 0.4

To increase profits from 10% to 15% takes a 12.5% increase in sales but only a 5% decrease in costs. Good materials management can have a direct impact on profit. Note the cost of overhead has been left unchanged in this problem. 1.3

Weekly cost of goods sold

$16,000,000 50

$320,000

Value of 8 weeks’ WIP

8 × $320,000

$2,560,000

Value of 6 weeks’ WIP

5 × $320,000

$1,600,000

$960,000

Reduction in WIP 1.4

Weekly cost of goods sold

$30,000,000 50

$600,000

Value of 12 weeks’ WIP

10 × $600,000 =

$6,000,000

Value of 5 weeks’ WIP

5 × $600,000 =

$3,000,000

20% × $3,000,000 =

$600,000

Reduction in WIP Annual saving

1 .

1.5

Using $1 million as the units: Sales

$20.0

As a % of sales 100%

Direct material

$6.4

32%

Direct labor

6.6

33%

Overhead

Profit

30%

95% 5%

a. From the above we can say: (in millions or M$) Sales

= direct material + direct labor + overhead + profit (needs to be 2M$) = .32(sales) + .32(sales) + .33(sales) + 6 M$+ 2.0 M$

.35 (Sales) = 8 M$ Sales

= 22.86 M$ = 22.86 × $1,000,000 = $22,860,000

Therefore, there must be a $2.86 million increase in sales. b. To increase profit by $1,000,000 there must be a $1,000,000 reduction in cost. Therefore, direct material must be reduced by $1,000,000. It therefore takes 2.86 times the sales dollars to obtain the profit that would be realized in material reductions. c. As for b. Direct labor would have to be reduced by $1,000,000.

CASE STUDY 1.1 TEACHING NOTES Fran’s Flowers

Fran’s Flowers is a good case to use early in a course of study, because it illustrates two important areas (service design and operations strategy) in a case format that is completely qualitative, and therefore less threatening to some student as they make their first entrance into materials management. It can also be used to start students thinking about the quantitative aspects of materials management, both from a data gathering and data analysis aspect, as one of the direct case questions (#2) asks students to consider the data collection needs as well as how they would suggest using this data. This presents a good opportunity (usually at the conclusion of the primary analysis) to have an open, “brainstorming” discussion. This can be used not only to start student thinking about quantitative analysis, but can be used as an “icebreaker” to allow student to feel comfortable about open class discussions. The Problem

Fran clearly stated that she intended to focus on the specialty make-to-order flower arrangements. Clearly in such a business the major operational focus should be on artistic capability, flexibility, design, and close communication with the customer. The volume would be fairly small, but the margin on each order would be fairly large. The order-winning aspects of such a business would clearly be availability, design, and flexibility.

2 .

Once those characteristics have been developed, a discussion of the importance of location can be initiated. In the make-to-order business location could be expected to be insignificant, as the case indicates when it discusses how Fran and Miguel usually visit the clients to obtain the order, rather than the other way. In such a situation it really doesn’t matter where she locates as long as she has space to store the flowers and make the arrangements. Some student will immediately jump on the now-obvious mistake that Fran made. She selected a location in a highly visible strip mall. In such a location it should be expected that people will walk in a flower shop with the idea of making spot purchases of flowers. In other words, she selected a location without considering the strategic impacts. It might have worked out without a problem if she would have just turned away the customers wanting the spot purchases, but the financial benefits of such an apparently easy sale was too appealing. As soon as Fran started accommodating those walk-in customers, she had evolved into two separate businesses with two separate operational strategy models. The walk-in business was, of course, a make-to-stock business with all the typical characteristics of such a business. The contrasts are summarized on the following table. Such a table can be easily developed during the class discussion to enable all students to clearly see the contrast in the service businesses: Make-to-order

Make-to-stock

Price

Not sensitive

Sensitive—order winner

Location

Not sensitive

Critical

Design

Order winner

Standardized

Skill level

Very high

Fairly low

Volume

Very low

Higher

Variety of design

Each one different

More standard

Operational focus

Close customer contact

Standardized, low-cost

Inventory

Can order as needed

High—standard arrangements

Not only has she gotten herself into a dual business situation (of which she originally had no interest in and has minimal managerial skills to run), but now customers in the make-to-stock business are trying to force her to move even more away from her core. The consideration to have the shop open longer, open a second location, and become part of a national delivery service will pull her away from her central business focus even more. Approaches

There are really three basic approaches that appear to make sense, although some students will come up with logical variations on these three: Do nothing—This is always an alternative, and is frequently the least desirable one for a number of reasons. It would continue the problems outlined in the case and quite likely cause erosion of her business, as it appears she cannot give proper attention to either business under the current circumstances.

3 .

Expand the Make-to-Stock business—Given that she apparently has a good location, this business could be attractive if run effectively. Fran, however, does not consider that business as the one most attractive to her. She just prefers to use her design talents on the make-to-order. One method to allow for effective expansion is to hire a full-time, experienced person to completely take over the make-to-stock business. This person could be evaluated on a profit basis, but be given almost free reign to expand the business in any direction that will prove profitable. Fran could then concentrate her efforts on the make-to-stock, and it is highly likely that having both businesses be successful, allowing for at least some synergistic effects as customer for one business would, under the right circumstances, buy from Fran if they have a need for flowers for another purpose. Eliminate the Make-to-Stock business—One potential problem with the expansion of the maketo-stock business is the potential large amount of capital needed (this, in fact, should be one of the data items students should mention for case question #2). Eliminating this business would allow her to concentrate on her core business, with less need for capital. The largest problem with this is the potential loss of profitability with the make-to-stock business, and she still has the location issue. If she wants to maintain the present location, she should take steps to clearly identify the nature of the business to possible walk-in customers. Given that the strip mall is popular, however, the lease costs may be higher that she should have to pay given that location is not very important to the make-to-order business. She might be better off financially to seek a location with a lower cost. Location, again, is not critical in the make-to-order business. Conclusion

Another opportunity for discussion is presented as students debate these options, or may, in fact, create others. This discussion can be again used to bring in the data questions. You may wish to ask the students the criteria they should use to make the final decision. Much of these criteria will probably be dependent on gathering certain information. You may or may not wish to spend much time on the implementation question. Such a discussion tends to be less interesting to students and more “mechanical” in nature, but if you wish to use the case to have students think about the detailed design issues for a service business you may want to spend some time with it. This case was based on a real situation in a real flower shop. You may wish to inform the students that the real “Fran” decided to use her skills and desires to concentrate on the make-to-order business, but the potential for the walk-in business was too attractive to eliminate, especially given her location. She hired an experienced retail manager to manage the walk-in business as a profit center. The manager was given permission to manage that business in any fashion they wished, but part of their compensation was based on profit-sharing, giving the manager plenty of incentive to make the store profitable. Fran and Miguel worked in the back room, but could serve as advisors to the walk-in business as requested by the new manager. Fran and the new manager would meet on a regular basis to discuss the overall business and look at flower needs, constantly trying to evaluate the possibility of different approaches to combine needs for flowers and minimize the overall cost of purchasing stock. As of the writing of this case the approach appeared to be working.

MULTIPLE CHOICE QUESTIONS 1.

Select the best answer to the following: a. traditionally the supply-production-distribution functions have reported to different departments b. the supply, production and distribution functions are part of a total system 4 .

c. materials flow into an organization, are processed in some way and distributed to the consumer d. all the above are correct e. none of the above is correct 2.

Manufacturing is important to the economy because: a. it generates wealth b. it supports service industries c. it adds value to products d. all of the above e. none of the above

Which of the following is the best statement about the operating environment in which operations management functions? a. Most organizations do not need to worry about competition b. Customers are more demanding c. Government regulation is not important for companies d. Price is more important than quality e. None of the above is true

Which of the following statements is best regarding order winners? a. They persuade a company’s customers to choose its product b. They are the same in every market c. They are the same as order qualifiers, only better d. They are present in every product e. All the above are true

Which of the following strategies has the shortest delivery lead time and the least customer input? a. Engineer-to-order b. Make-to-order c. Assemble-to-order d. Make-to-stock

Which of the following statements is best? a. The supply chain includes all activities and processes to provide a product or service to a customer. b. Material in the supply chain usually flows from producer to customer c. The supply chain contains only one supplier d. All of the above are true e. a and b only are true

Companies A and B supply company C, which supplies customers D and E. Which of the following statements is best? a. The supply chain for company A includes B, C, D, and E b. The supply chain for company B includes A, C, D and E 5 .

c. The supply chain for company C includes A, B, D, and E d. All the above are true 8.

Which of the following statements is best? a. The basic elements of a supply chain are supply, production, and distribution b. The elements of a supply chain are interdependent c. Design information generally flows from customer to supplier d. All the above are true

Which of the following is the best statement about the environment in which operations management functions? a. Most organizations do not need to worry about competition b. World-wide competition is not significant for most companies c. Government regulation is not important for companies d. Customers are more demanding e. None of the above is true

10.

If a firm wishes to maximize profit, which of the following objectives are in conflict? I.

Maximize customer service

II. Minimize production costs III. Minimize inventory costs IV. Minimize distribution costs a. all the above b. none of the above c. I and II only d. I and III only e. II and III only 11.

Which of the following statements is best? I.

The conflict between marketing, finance and production centers on customer service, disruption to production, and inventory levels

II. Marketing’s objectives can be met with higher inventories III. Finance’s objectives can be met with higher inventories IV. Production’s objectives can be met with higher inventories a. all of the above are true b. I and II only c. I, II, and III only d. I, II, and IV only e. II, III, and IV only 12.

Which of the following is normally a major activity of materials management? I.

Manufacturing planning and control

II. Physical supply/distribution 6 .

a. both I and II b. neither I nor II c. I only d. II only 13.

The objective of materials management is to: I.

Provide the required level of customer service

II. Maximize the use of the firm's resources a. I only b. II only c. I and II d. neither I nor II 14.

Which of the following is/are primary activities of manufacturing planning and control? I.

Production planning

II. Implementation and control III. Inventory management a. I and II only b. II and III only c. I and III only d. all the above are primary activities 15.

Which of the following is (are) input(s) to manufacturing planning and control? a. Product description b. Process description c. Available facilities d. Quantities to be produced e. All the above are inputs

16.

Which of the following is NOT an activity of physical supply/distribution? a. Transportation b. Factory inventory c. Warehousing d. Packaging e. Materials handling

17.

Materials management can be considered a balancing act because: I.

there are trade-offs between customer service and the cost of providing the service

II. priority and capacity must be balanced a. neither I nor II b. I only c. II only d. I and II 7 .

18.

If the cost of manufacturing (direct labor and materials) is 50% of sales and profit is 15% of sales, what would the profit percentage be if the direct costs of manufacturing was reduced from 50% to 47%? a. 3% b. 6% c. 12% d. 15% e. 18%

19.

Which of the following are generally considered overall objectives of an organization? I.

Providing good customer service

II. Maintaining low levels of inventory investment III. Optimizing use of resources IV. Providing sufficient return on investment a. I and II only b. I, II, and III only c. I, III, and IV only d. all the above 20.

The purpose of the materials management concept is: I.

to manage materials in a production operation

II. to have purchasing support the needs of production III. to have production support the needs of purchasing a. II and III only b. I and II only c. I, II, and III d. I and III only 21.

Making a pizza at a fast-food restaurant would be considered a form of: a. engineer-to-order b. assemble-to-order c. make-to-stock d. make-to-order e. none of the above

22.

Metrics in a supply chain are: a. governed by the International Metric Commission b. measurements of performance c. a charge passed on to customers d. not used on transportation e. do not apply to the supply chain

8 .

23.

Performance measures in a supply: a. should be objective b. are viewed mostly by finance c. must be measurements of one parameter only d. concentrate on cost only e. are not used once a process is automated

24.

Which statement is best? a. Performance standards are set by the supplier b. Performance standards set the goal c. Performance measurements show how well you did d. Both b and c are correct e. None of the above applies to the supply chain

25.

Savings in the supply chain mostly are the result of: a. members in the chain sharing information b. being able to ship in larger quantities c. members having clout with suppliers d. sticking with local competition e. cutting cost after the design phase

26.

Postponement is best described as: a. delaying payment to a supplier until the goods have been sold b. delaying the removal of inventory until the last possible moment c. reducing inventory from RM when the parent item is produced d. changing the BOM after the old components have been used up

27.

Postponement is best used with items that: a. have a long lead time and many product configurations b. are standardized and have short lead times c. experience a yield that you won’t know until the product is complete d. suppliers with poor delivery performance

28.

A channel master in a supply chain a. initiates integration of a supply chain b. is the final customer in a supply chain c. is the largest member of a supply chain d. controls the raw material supplies in a supply chain

29.

The term that describes eliminating waste throughout a company is: a. Kaizen b. lean Production c. theory of Constraints d. process Control 9 .

30.

If the manufacturing lead time of an item is reduced by 50% the work in process inventory: a. does not change b. is reduced by approximately 70% c. is reduced by approximately 50% d. more information is needed for this problem

Answers

10 .

CHAPTER 2: PRODUCTION PLANNING SYSTEM ANSWERS TO PROBLEMS 2.1 2.2

opening inventory + production – demand

500 + 700 – 800 = 400 units

19 + 20 + 21 = 60

420 ÷ 60 = 7 units

22 + 21 + 20 = 63

25,200 ÷ 63 = 400 units

Month 1 production

19 × 7 = 133 units

Month 2 production

20 × 7 = 140 units

Month 3 production

21 × 7 = 147 units

Month 1 production

22 × 400 = 8800 units

Month 2 production

21 × 400 = 8400 units

Month 3 production

20 × 400 = 8000 units

Ending inventory Total working days Average daily production

2.3

Total working days Average daily production

2.4

2.5

2.6 Period

Forecast

780

820

1030

1400

1000

880

Planned production

1000

720

900

870

470

590

Planned inventory

500

2.7 Period

Total

Forecast demand

100

120

125

130

115

110

700

Planned production

130

780

130

140

145

160

180

Planned inventory

100

Total production

700 + 180 – 100 =

780 units

Period production

780 ÷ 6

130 units

2.8 Period

Total

Forecast demand

1300

1200

800

600

800

900

5600

Planned production

875

5250

125

−200

−125

150

225

200

Planned inventory

550

11 .

Total production = 5600 + 200 –550 = 5250 units Period production = 5250 ÷ 6 = 875 units 2.9 Period

Total

Forecast demand

Planned production

−2

Planned inventory

a. 15 units b. period 1, minus 2 c. 17 units, ending inventory = 8 units 2.10 a. There is a stockout of 1 unit in period one. The cost will be: Stockout cost: 2 × $500 = $1000 Carrying cost: 5 × $60

Total cost:

= $1300

c. Total period inventory

300

= 0 + 7 + 8 + 8 = 23 units = $60 × 23 = $1380

The cost will be

Since there are no stockouts this will be the total cost of the plan. 2.11 a. Total production

= 530 + 130 – 100 = 560

b. Daily production

= 560/70 = 8 units

c. The monthly production for May = 168 units d. The ending inventory for May Month

= 153 units

May

Jun

Jul

Aug

Total

Working days

Forecast demand

115

125

140

150

530

Planned production

168

152

160

560

153

180

200

130

Jan

Feb

Mar

Apr

May

Jun

Total

120

Planned inventory

100

2.12 Month Working days

12 .

Forecast demand

1200

800

900

800

5600

Planned production

900

990

900

855

5400

200

−10

190

145

200

Planned inventory

500

Total production = 5600 + 200 – 500 = 5400 Daily production = 5400 ÷ 120 = 45 units per day There will be a stockout of 10 units in February. 2.13 Total production = 300 + 1080 – 200 = 1180 units Number of weeks available for production = 5.5 Average weekly level production =

1180 = 214.5 units 5.5

The nearest quantity that can be produced is 200 units on two shifts. In the second week there is a shutdown so production in that week that will be only 100 units. Total production so far = 5 × 200 + 100 = 1100 units The balance of 80 units can be made in week four when extra help is available. Opening inventory = 200 units Week

Total

Forecast demand

120

160

240

160

1080

Planned production

200

100

200

280

200

1180

280

220

180

220

260

300

Planned inventory

200

2.14 Ending backlog

= demand + opening backlog – production = 700 + 350 − 900 = 150 units

2.15 Total production

= demand + opening backlog – ending backlog = 3800 + 800 – 100 = 4500 units

Weekly production = 4500 ÷ 6 = 750 units Week

Total

Forecast demand

750

700

550

700

600

500

3800

Planned production

750

4500

800

750

550

500

350

100

Planned backlog

800

2.16 Desired ending backlog = 900 Note: All weekly production amounts determined using standard rounding rules. Total production

demand + opening backlog – ending backlog

6800 + 1300 – 900 = 7200 units

Weekly production =

7200 ÷ 6 = 1200 units 13 .

Week

Total

Forecast demand

1200

1000

1200

1100

6800

Planned production

1200

7200

1300

1100

1000

900

Planned backlog

1300

2.17 Total production

= 112,500 + 9000 – 11,250 = 110,250 units = 110,250 ÷ 75 = 1470 units

Daily production

Number of workers required = 1470/15 = 98 Actual daily production

= 98 × 15 = 1470 units

Month

Working days

Total

Forecast demand

28000

27500

28500

28500 112500

Planned production

29400

35280

17640

27930 110250

12650

20430

9750

9180

Planned inventory 2.18 Total production

11250

= 18100 + 500 – 1000 = 17600

Daily production

= 17600/117 = 150.42 units

Number of workers required = 150.42/8 = 18.8 → 19 workers Actual daily production

= 19 × 8 = 152 units

Month

Working days

Forecast demand

Planned production Planned inventory

1000

117

2800

3000

2800

3300

3000

3200

18100

3040

3648

1824

3344

3040

2888

17784

1340

1988

1012

1056

1096

784

14 .

Total

It is not possible to meet the ending inventory target because of the extra fraction of a worker needed. The only way to do it would be to reduce the number of workers to 18 at some point.

CASE STUDY 2.1 TEACHING NOTES Medina Water Pumps

This case is a fairly simple case to work on analytically, yet can provide the basis for a good discussion about the tradeoffs involved with making a good production plan or Sales and Operations plan. While there are clearly differences in the financial results of the possible plans, there are clearly non-financial issues that can and should be discussed in order to give students a better overall perspective involved with this important planning process. Here are sample solutions to the assignment questions: 1. Developing a level production plan is fairly easy. The total demand for the six months is 4650 units. Since the current inventory is 50 and the target inventory for the end of the six month is 25, we reduce the required production for the six months to 4625 (4650-25). Dividing the 4625 by the six months, we would be required to make 771 pumps per month. Dividing the 771 by 25 (the number of pumps one worker can make in one month), we would need 30.8 workers. Rounding that to 31 workers, we have the following result: -

We need to hire 11 workers (there are currently 20, and we need 31) There is an upfront cost of $1100 ($100 hiring cost for each worker) The monthly production will be 775 (31 workers × 25 pumps per worker) The inventory at the end of month 1 will be 225 (production of 775 plus existing inventory of 50 = 825, then subtract the production of 600) Month

Demand

600

750

1000

850

750

700

Production

775

Inventory

225

250

–50

–25

$1125 $1250

$125

$250

Inventory cost

The total inventory cost is $2750 The total hiring cost is $1100 The total extra cost of the level plan is $2750 + $1100 = $3850 There are several qualitative issues that can and should be discussed here. Three of the more important ones may be: -

There are two months when shortages appear. There is no indication how customers will react. For example, if the customers are willing to wait for one to two months, then certainly there will at least be some loss of good will. There is a high probability that customers would not be willing to wait if they could obtain the product from a competitor (given that water pumps are a common product, this is highly likely). In that case a real financial cost is the loss of profit from those lost sales, and potentially some permanent loss of those disappointed customers. At a minimum, there is likely to be some cost in filling the backorders. 15 .

As indicated in the case, such shortages also require sales people to make additional visits to customers to calm their anger. Such visits might cost some real dollars and also create some anger and discouragement within the sales staff. There is an assumption that the newly hired 11 people will be able to produce a full production (25 pumps per month) immediately. Most production jobs entail a learning curve, implying the production of 775 total pumps in month 1 may be overly optimistic.

2. The chase plan is also fairly easy to develop. To create it, the assumption is made that the target inventory of 25 can be accomplished in the first month. To obtain the number of people needed each month, the demand for that month is divided by 25 (the number of pumps one worker can make in one month). The only exception is the first month, when we assume that 25 units of demand can be taken from inventory to get to the target level immediately. Month

Demand

600

750

1000

850

750

700

People needed

People +/–

–6

–4

–2

Inventory

$300

$700

$1000

$600 $400

$200

Hire/layoff cost

The total hire/layoff cost for the six months is $3200. The inventory cost for each month is 25($5) = $125. For the full six month the cost for inventory is $750. The total cost for the chase strategy, then, is $3950. That is only slightly higher than the level strategy ($100). As with the level strategy, however, there are qualitative issues that should be discussed. Included should be the following: -

From a customer perspective, this approach is clearly better than the level plan that represents at least two month of inventory shortages. One might argue (and in a real situation even calculate) that this approach is financially better, in that the potential cost of lost profitability was not included in the level schedule analysis. The largest qualitative cost in this chase plan is the constant movement of people in and out of production. This ignores several potential “hidden” costs, including: o o

The learning curve impact of the new people. The analysis assumes a new person can produce at the same rate as an experienced one. This is seldom the case The issue of employee loyalty. The production people will likely get the impression (rightly so) that the company has little or no loyalty to the feelings and needs of the workers. In that case, it would likely that the employees will also have little feeling of loyalty. That can not only impact morale, but also productivity improvement efforts. A little recognized issue is the impact of employee “guilt”. In some cases, employees who escape a layoff will feel guilty. While often relieved that they kept their job, they will sometimes express the feeling of “why did I survive—I feel guilty that I have my job while some of my friends on the production line lost their jobs.” 16 .

3. The following represents a hybrid plan. It has a level schedule for the first three months (until the demand grows to the point where shortages would occur), then has a level schedule for the next two months, then starts to reduce employees as the lower demand part of the cycle again starts. Month

Demand

600

750

1000

850

750

700

People needed

People +/–

–2

–1

Production

800

750

725

Inventory

250

300

100

Hire/layoff cost

$1200

$200

$100

Inventory cost

$1250

$1500

$500

$125

The total cost of this plan (inventory plus hire/layoff costs) is $4875. From this purely financial analysis of these two extra costs this plan would not be preferable. If, however, all the qualitative costs discussed above (and their potential associated financial implications) are to be considered, this approach may be preferable and selected. Specifically, it has a reasonably small impact on layoffs and also prevents shortages that could impact customers. 4. There is only one hybrid approach presented. This question presents a great opportunity for students to present their own plans and discuss the pros and cons of each. A good discussion here can leave students with a much stronger perspective of the issues and advantages of developing good production plans.

CASE STUDY 2.2 TEACHING NOTES Williams 3D Printers

This case has an advantage in that it can be used for discussing the strategic issues often surrounding the development of longer-term S&OP planning where additional capacity is possibly needed, but if students are not at a level where that is appropriate then the case can be more simply used as a discussion of some of the options available for a company in this situation to use, and some of the pros and cons of each. You may find that even for students not familiar with strategic thinking that some may move in that direction based on their experience and basic logic. The environment described and the issues facing the company are fairly common for a startup organization in a rapidly growing market typical in the introduction phase of a product life cycle. You may wish to point out that often in such a market many small companies trying to enter the market is typical, but over time most will fail, either because of an inferior design, a lack of flexibility to understand the market, or the inability to find ways to grow in the market. As successful companies in the market grow, they are able to gain from the advantages of growth, including economies of scale. You may wish to point out that since the entire market is growing at this point that individual companies may experience growth without experiencing a lot of 17 .

competitive pressure. This is because growth can occur without actually growing market share (assuming the company grows at the same rate the market grows). Later in the life cycle when the market growth slows considerably the competition between survivors will tend to increase as the only way they can obtain growth is through taking market share from another company. How much of a discussion of this you feel appropriate should be based on the background of the students. You can also refer them to the first few pages of chapter 15 where the product life cycle is briefly discussed. The case can be discussed without this life cycle discussion, focusing primarily on the key issue of dealing with longer range sales and operations planning (S&OP) in this kind of environment. It certainly can bring out many of the tradeoffs inherent with the development of any S&OP process that almost any company has to go through, although in this case inventory does not seem to be a major problem (again somewhat typical in what appears to be a make-to-order environment). The key tradeoffs here appear to lie within the concepts of how to best manage rapidly growing sales forecasts. Specifically, they need to plan for longer-range resources and how to pay for them. Certainly, one alternative is for them to maintain their current size and only take orders that they can produce within their existing facility and staffing. Some students may wish to take that option, and could justify it by stating that it would allow the facility to only take orders with the highest possible profit margin. Given that the design for each order is apparently not standard, then the price is likely not standard either. If they do negotiate price, it gives them the option of taking or not taking a particular order. Some companies in this type of market will elect to take this approach, and it can work as the market matures if the company can successfully identify and defend a specific niche where they can provide good products and service. It is not clear that this would be the preferred approach here, and certainly it would appear that the Sales and Marketing manager, at least, would need to be convinced. Also, if they stay small as the market matures, they may face other problems—the design of a product tends to become more standard as the market matures, and also price becomes more sensitive. This type of discussion may be too advanced for your students, but asking them to consider what has happened in recent years to product with which they may be familiar may help—consider “smart” televisions, cell phones, and almost any other electronic device. If the growth option is taken, then Paula’s concerns need to be addressed. The decision to grow the business needs to include a good plan as to how. As Paula points out, growth in the production area may need to appear something like a “step function”, where large “chunks” of production capacity are added. Smoothing out added production capacity would seem to be difficult here, although it should be pointed out (and some students may suggest) that sometimes a smoothed addition of capacity can be obtained by subcontracting the work. If the discussion goes in this direction, student should be aware that in those cases it is more difficult for the company to control the work, especially in terms of quality, but also cost and delivery. Still, this may be a very attractive alternative for some student. If they decide to grow internally with the “chunks” of capacity, they need to address that likely at first, they would have an excess of capacity since the sales are less likely to grow in matching “chunks” of orders. Options possibly exist, however. One would be to offer other companies some of the added capacity for short term subcontracting work. Another would be to build some inventory of more standard parts of the printers. The inventory option would mean even more added cost up front, but could allow them to postpone the next needed “chunk” of capacity assuming the market continues to grow. If the students are at a level where discussion of this option evolves into some strategic points, you may wish to point out that addition of capacity in this early life cycle market often should lead the growth of demand. While that option tends to cost more in the short term, products in this type of market tend to be much more sensitive to delivery than they are to price, and the excess capacity (especially in a product with lots of design 18 .

options) can help make delivery reliability, and they also tend to provide good margins (not being particularly price sensitive). On the other hand, facilities producing products in a more mature market tend to allow the addition of capacity to lag demand growth, preferring to use techniques such as working overtime and subcontracting as much as possible before turning to acquiring more capacity. The main point against adding a “chunk” of capacity is cost and the impact on profitability. Certainly, the concerns of the financial manager need to be considered, and it would be an important decision if the company wishes to forgo a profitability position for some time in the future to pay for the added capacity. Some students may point out that this may make them much more profitable in the future as they can serve more of the market. While that can be true, you need to point out that if growth continues the company is likely to face a similar issue about adding even more capacity sometime in the future. Students should be made aware that these kinds of decisions must be made considering the overall strategy of the firm. They should be able to understand that even if you elect to forgo any detailed discussion around the life cycle and its characteristics.

MULTIPLE CHOICE QUESTIONS 1.

The ability of manufacturing to produce goods and services is called: a. scheduling b. production planning c. capacity d. routing e. none of the above

Priority in production planning relates to: a. what should come first b. how much of what is needed and when c. capacity d. an objective of the firm e. none of the above

Which of the following is an input to the production plan? a. strategic business plan b. financial plan c. market plan d. engineering plan e. all of the above are inputs

Which of the following plans has the longest planning horizon and the least level of detail? a. Strategic business plan b. Production plan c. Master production schedule d. All of the above have the same level of detail e. None of the above

19 .

In terms of INCREASING level of detail, which is the best sequence of activities? I.

Material requirements planning

II. Master production scheduling III. Production planning a. I, II, and III b. I, III, and II c. II, III, and I d. II, I, and III e. III, II, and I 6.

Over the time span of the production plan, which of the following can usually be varied to change capacity? a. Work force b. Inventories c. Plant and equipment d. All of the above e. a and b above

Which of the following is a characteristic of a production plan? a. Time horizons are five years b. The production plan is for individual items c. The only objective is to have an efficient plant d. All of the above are characteristics of a production plan e. None of the above is characteristic of a production plan

Determining the need for labor, machines, physical resources to meet the production objectives of the firm is called: a. production control b. production planning c. capacity planning d. all of the above e. none of the above

The function of setting the limits or levels of manufacturing operations based on the market plan and resource availability is called: a. production planning b. production activity level c. capacity planning d. all of the above e. none of the above

10.

A statement of a schedule of requirements for individual end items is called: a. a master production schedule b. a material requirements plan 20 .

c. a production plan d. a capacity plan e. none of the above 11.

Which of the following statements is most appropriate regarding production planning? a. A high level of detail is not needed b. A translation must be made from product demand to capacity demand c. Product groups based on similarity of manufacturing process should be used in planning d. All of the above are true e. None of the above is true

12.

Which of the following statements is best about sales and operations planning? a. It provides a means of updating the material requirements plan b. It includes only the marketing and production plans c. It is usually updated on a monthly basis d. It has no effect on inventory levels

13.

Which of the following are characteristics of an ERP system? I.

It incorporates the plans of marketing, production and finance

II. It is a fully integrated planning and control system III. It has feedback from the bottom up a. I only b. II only c. III only d. I, II, and III 14.

For the purposes of production planning, product groups should be established on the basis of: a. market segments b. similarity of manufacturing process c. the availability of materials d. the availability of machinery e. all of the above

15.

Which of the following is a basic strategy in developing a production plan? a. Hybrid strategy b. Production leveling c. Chase strategy d. a and b above e. b and c above

21 .

16.

A production planning strategy which turns away extra demand is called: a. production leveling b. demand matching c. hybrid strategy d. all of the above e. none of the above

17.

Which basic production planning strategy will build inventory and avoid the costs of excess capacity? a. Demand matching (chase) b. Production leveling c. Subcontracting d. all the above e. none of the above

18.

Which basic production planning strategy avoids hiring and layoff costs and the costs of excess capacity? a. Demand matching b. Operation smoothing c. Subcontracting d. all the above e. none of the above

19.

If the opening inventory is 100 units, the sales are 500 units and the ending inventory is 200 units, then manufacturing must produce: a. 300 units b. 400 units c. 500 units d. 600 units e. none of the above

20.

Over a 10-week period the cumulative sales are forecast at 10,000 units, the opening inventory is 200 units and the closing inventory is to be 100 units. What should be the weekly planned production for level production? a. 990 b. 1000 c. 1010 d. 1030 e. none of the above

21.

Firms will generally make-to-stock when: a. demand is unpredictable b. there are many product options c. delivery lead times are long 22 .

d. all of the above e. none of the above 22.

Firms will generally make-to-order when: a. products are produced to customer specifications b. there are many product options c. product is expensive to make and store d. all of the above e. none of the above

23.

Which of the following information is needed to develop a make-to-stock production plan? I.

Forecast by time period for the production plan

II. Opening inventory III. Opening backlog of customer orders IV. Desired ending inventory a. I, II, and III b. I, II, and IV c. 1, III, and IV d. II, III, and IV e. none of the above 24.

If the old backlog was 200 units, the forecast for the next period is 500 units, and production for the next period is 600 units, what will be the backlog at the end of the next period? a. 100 units b. 200 units c. 300 units d. 700 units e. 800 units

25.

____________ is concerned with long-term planning of manufacturing activity: a. Sales and operations planning b. Master production scheduling c. MRP d. Production activity control e. Master planning

26.

Which of the following is NOT a rule of Sales and Operations Planning? a. Product Groups need not be decided b. Planning units of measure need to be decided c. A planning horizon must include new product development time d. Performance review periods to be compared should be decided

23 .

27.

Which of the following is a complete closed loop planning system that develops plans for all materials and operations? a. Capacity requirements planning b. Enterprise resource planning c. Supply chain management d. Material requirements planning

28.

When developing a production plan during the Sales and Operations Planning process sometimes the actual planned production is less than the expected market demand. Which of the following reasons is the most logical explanation for that condition? a.

Increased competitive pressure

b. Transportation problems c. Restricted warehouse space d. Availability of resources e. Governmental pressure 29.

Which level of personnel are generally responsible for developing the Sales and Operation Plan? a. First line supervisors b. Departmental managers c. Engineering staff d. Marketing and sales personnel e. Executive level staff

30.

Enterprise Resource Planning (ERP) is often difficult to implement for all the following reasons EXCEPT: a. Inaccurate data b. Poor training programs c. Poor software availability d. Integration across functions e. Top manager commitments

31.

Which of the following production planning strategies typically produces the smallest amount of inventory holding cost? a. Chase b. Level c. Hybrid d. Level with subcontracting e. Chase with subcontracting

32.

Which of the following represents the primary purpose of developing a Sales and Operations Plan? a. To evaluate and improve the forecasting method b. To plan production orders and timing c. To establish meaningful sales tactics 24 .

d. To plan resource needs and timing e. To develop and refine financial statements Answers

10 a

11 d

12 c

13 d

14 b

15 e

16 e

17 b

18 c

19 d

20 a

21 e

22 d

23 b

24 a

25 a

26 a

27 b

28 d

29 e

30 c

31 a

32 d

25 .

CHAPTER 3: MASTER SCHEDULING ANSWERS TO PROBLEMS 3.1 Week

Forecast sales

Projected available

MPS

100

3.2 Week

Forecast sales

200

300

200

150

100

400

200

Projected available

250

MPS

200

3.3 Production Plan Quarter

Total

Forecast sales

220

300

200

920

250

150

200

Quarter

Total

Forecast sales

120

180

100

120

520

120

200

Projected available

270

Production plan Mailbox A. Lot size: 200

Projected available MPS scheduled

120

26 .

Mailbox B. Lot size: 200 Quarter

Total

Forecast sales

100

120

100

400

250

130

150

Projected available

150

MPS scheduled

200

400

3.4 Production plan Week

Total

Forecast

3000

3500

4000

14000

3000

3500

4000

Week

Total

Forecast

2000

2500

2000

8500

1500

3000

1000

3000

2000

4000

Week

Total

Forecast

1000

1500

2000

5500

1500

500

3000

1000

Projected available

2000

Production plan Model A.

Projected available

1500

MPS

4000

Model B.

Projected available MPS

500

2000

4000

27 .

3.5 Master production schedule Week

Product A

205

Product B

205

Product C

205

Total production

205

Week

Product A

280

210

140

125

Product B

185

350

460

340

Product C

205

360

310

260

210

160

Total inventory

545

590

635

680

670

625

Week

Total

Model A

162

135

108

189

24.3

618.3

Model B

57.6

112

166.4

160

592.00

Total hours

219

247

274.4

285

184.3

1210.30

Inventory

3.6

b. The total hours required (1210.3) is within the total hours available (5 × 250 = 1250) but the demand for week 3 exceeds available hours for that week. If possible, schedule some of the work from Week 3 into Week 1 and 2 or possibly schedule some overtime. 3.7 Week

Customer orders

MPS ATP

100

28 .

3.8 Week

Customer orders

MPS

ATP

6 3

3.9 Week

Customer orders

MPS

ATP

3.10 Week

Forecast sales

MPS ATP

100

3.11 On hand: 60 units Week

Customer orders

MPS

100

Week

Customer orders

ATP 3.12 On hand: 50 units

MPS ATP

100

29 .

3.13 Week

Customer orders

MPS

100

ATP

Possible action is to promise delivery of 10 in week 5 and the balance in week 6. The ATP for week 1 would become 0, for week 3, 0 and for week 6, 15. You should not change or add any MPS order unless you first establish if you are inside or outside the planning time fence. 3.14 Week

Forecast

Customer orders

100

155

Projected available balance

140

MPS

200

3.15 Week

Forecast

Customer orders

Projected available balance MPS

100

30 .

100

3.16 Period

Forecast

Customer orders

PAB

MPS ATP

3.17 a.

Week

Forecast

70 70

Demand

51 34

Projected 110 Available

109 39

119

129

139

Available to Promise

122

MPS

150

143

150

b. 21 units in week three - Can provide from current inventory on hand 37 units in week five - Can provide from week 4 120 units in week seven - Can provide from weeks 1, 2, 4, and 6 3.18 a. Period

Forecast

Customer Orders

31 .

Projected Avail.

168 128

Avail. To Promise

100

120

196

200

MPS

198 148 108

198

158

b. We only have an ATP of 100 in period 2, so we can fill the order c. We still only have 102 available, but can fill the request in Period 6. d. The planning time fence is 10 weeks so we don't have enough time to complete all components in 9 weeks only additional costs are involved to expedite. e. An order for 200 units should be added to the MPS to meet demand. Week 10 is outside the planning time fence so adding an MPS should not present a problem

CASE STUDY 3.1 TEACHING NOTES Acme Water Pumps

The following is a master schedule using the case data. It is important to note that the projected balance ignores the forecast data for the first three weeks (because the demand time fence is 3 weeks), and from that point on the balance is computed from the larger of customer orders or forecast. Period

Forecast

120

110

100

110

100

110

Cust. orders

105

Proj. Balance (25)

220

123

250

152

257

147

267

167

MPS

300

ATP

209

287

The order request for week 5 of 45 units should be no problem, as the ATP for week 58 covers it nicely. At this point it might be helpful to teach students about ATP by challenging them with additional questions about future orders. For example, What if the new customer order is for 70 in week 5? Still no problem. You could promise the 58 produced in week 4 and the additional 12 from the 30 ATP in week 1. Key point here—it is not important for the customer to know when the item is produced, only when they get it (an exception is an item with a short shelf life). What if the new customer order is for 100 in week 5? Now the issue is more complex. You could promise 88 (58 in week 4, 30 from week 1). For the rest of the request, there are three options:

32 .

1. You could ask the customer if you could give them 88 in week 5 and the rest in week 7. 2. If that option does not work for them, you could work with sales to ask if the other customer orders could accept some of their pumps at a later time, so you could split the shipment of their orders. 3. If that does not work, you need to check if you have the material and capacity to increase production by 12 units sometime during the next 5 weeks. If none of those options work, the only alternative is to tell the customer that you can only deliver 88 for them in week 5.

CASE STUDY 3.2 TEACHING NOTES The MasterChip Electronics Company

Sally is confronted with a relatively common environment. Her product line is competitive, somewhat delivery time sensitive, variable in demand patterns (volume and timing), optionoriented, and made with components that have fairly short life cycles. The union contract is certainly a constraint, but she should be able to manage around it more effectively. The measurement system focused on efficiency and utilization is also clearly a problem. This customer environment is one with variable orders in terms of size and options, and clearly the customers are sensitive to delivery reliability, especially when planned for something like a planned promotion. One could make the argument that at least part of the solution would be to “educate” the customers to provide more of their own planning information to MasterChip. That could very well help Sally’s own planning, but that should be viewed as a long-term approach at best. Essentially this environment sounds like at least an assemble-to-order (ATO) environment, a quite possibly a make-to-order environment for at least some of the products, and should be managed accordingly. First, it appears that Sally is relying on mostly short-term capacity planning (really reaction rather than planning) by using weekly layoffs and callbacks. The problems that causes in this environment are clear—excess capacity in parts of the facility and capacity shortages with lots of late orders in another part of the facility. Given that the demand patterns are somewhat erratic, you could assume that these capacity shortages and excesses have a tendency to move from area to area over time. She could avoid a lot of this if she had more flexible worker (where she could move them from one area to another), but this would require a change in the union contract and also a comprehensive training program to give workers more transferable skills. She also would be helped if she could change worker hours with more flexibility than weekly. That, too, could be an issue for their next union contract negotiation. That implies it may be very difficult to do and certainly will not help in the short term. Additionally, one could argue that the issues she faces with short-term capacity is really symptomatic of other parts of the planning system. The major problem here is the company does not appear to do any effective longer-range planning, as would be accomplished with a well-run Sales and Operations Planning (S&OP) process and a well-managed master scheduling program. As it appears now, the sales force seems to take any order they can get with little regard for how well that order fits into a managerial agreed to long-range S&OP. Students should be made to realize that with an effective S&OP, where the timing, cost, and quantity of resources are taken into account, the “target” sales for a period may not represent the unconstrained forecast demand for sales, but instead be representative of the sales the company should obtain to best maximize profits. Taking any order that comes along and blindly quoting a standard lead time clearly should not be done, especially in this type of volatile assemble-to-order environment. 33 .

Because of the ATO environment, the master schedules should likely be developed at the option level. This will allow two very important activities to be done for the company. First, the overall capacity can be managed at the rough-cut level to fit within the constraints established in the S&OP. Secondly, the master schedule can be established with available-to-promise (ATP) logic. This can be very powerful in this environment, especially if the sales force is trained what to look for in the ATP logic. A quick look, for example, in the situation described in the case, should have told the sales manager that he could promise at most 200 of the A77 units in the standard lead time, but also could tell him when the rest of the order could be shipped—and this could be done without having to check with anyone from production. The final assembly schedule would be developed from the actual customer order based on the options selected, but if the S&OP is managed effectively and a rough-cut capacity plan developed from the master scheduling activity the chance of any major mismatch in capacity should be minimized. This case can be used for three different types of student groups. If the students are still at a fairly basic level in their understanding of planning systems, it can easily be used just to emphasize the value of S&OP and ATP logic, as well as the need for longer-range capacity planning and how this is done in S&OP and master scheduling. If the case is to be used with more advanced students, it could serve as an effective “launch” into discussion of two-level master planning, and “super planning” bills of material. Finally, the case can be used to initiate discussions about operations strategy (if appropriate for the level of students), using the understanding of the environment to influence almost every aspect of the organization, including measurement systems (clearly a problem here) to planning systems, to priorities the organization should be putting on various aspects of union agreements if they exist, as they do in this case.

CASE STUDY 3.3 TEACHING NOTES Macarry’s Bicycle Company

This case works well to allow students an opportunity to practice their skills on developing master schedules and also to practice using them to effectively promise orders. You may notice that without specifically stating so, this case is a typical approach using two-level master schedules with essentially a “super bill” approach that is often used in such an assemble-to-order environment. In this case that approach was not specifically mentioned, but at the conclusion of the discussion in the case you may wish to take the opportunity to introduce the generic concepts of super bills, two level master planning, and even option overplanning to your students. You will likely note that while the planning time fence is defined as 20 weeks, but there is no defined demand time fence and the master schedules are developed assuming no demand time fence exists. Once the initial discussion of the questions in the case has been completed, you may wish to ask your student how, if at all would their solutions change if you set a demand time fence. They will likely gain good insight on the use of the time fence if you set a couple of different time fences for discussion—say one time at 2 weeks and then at 5 weeks. If this option is taken it may be instructive to have the students summarize the pros and cons of using demand time fences. The completed master schedules: Common parts (Frame, etc.) Existing inventory 40 Week

Forecast

34 .

Cust. Orders

Projected Inven.

184

129

137

134

184

104

Master Prod. Sch.

200

ATP

120

180

18 speed gear option Existing inventory 25 Week

Forecast

Cust. Orders

Projected Inven.

138

113

120

108

Master Prod. Sch.

150

ATP

100

150

Straight handle bars Existing inventory 20 Week

Forecast

Cust. Orders

Projected Inven.

Master Prod. Sch. ATP

Head and tail light set Existing inventory 5 Week

Forecast

Cust. Orders

Projected Inven.

35 .

Master Prod. Sch.

ATP

The solutions to the order inquiries: a) A customer is asking about an order of 32 of the bicycles for week 3. All 32 are to be 18 speed, 12 are to have straight handle bars, and 14 are to have the light set. While the order has no problem from the standpoint of the frame and common parts, only 27 of the 18 speed are available for week three and only 11 of the light set are available. There are enough handle bars for the order. The customer should be told that they can have 27 of their complete order for week 3 (the major constraint is the 18 speed, where they are 5 short—they are only 3 short of the light set). The remaining 5 bicycles can be delivered for week 5, when the next MPS is scheduled for the 18 speed. The light sets will be available in week 4, but the last 5 of the order needs to wait for the 18 speed option. Of course, in this and in any similar situation the sales people always have the opportunity here to attempt to convince the customer to accept a different option in order to get their order complete in week 3 b) A customer is asking about an order of 60 of the bicycles for week 6. 50 of them are to be 18 speed, 12 are to have straight handle bars, and 5 to have the light set. While there are plenty of frames and common parts (while only 45 are in ATP for week 5 and all can be used, the remaining 15 can be taken from the ATP in week 1). This situation is a good opportunity to emphasize to students that in the type of environment where items have long “shelf life” the customer often doesn’t tend to care when the item is made—only when they can have it. The 18 speed option is also no problem, for the same reasoning. The same is true for the handle bars and light set. The customer should be told “sure, no problem”. c) A customer is asking about an order of 20 of the bicycles for week 2. All are to be 18 speed, all are to have straight handle bars, and all are to have the light set. Again, there is no problem with the frames and common parts, the handle bars, and the 18 speed. The problem is the light set. Only 11 can be delivered with the light set in week 2, with 7 more delivered in week 4 and the last 2 in week 6. d) A customer is asking about an order of 110 of the bicycles in week 7. 60 are to be 18 speed, 22 are to be straight handle bars, and 15 are to have the light set. There are only 99 frames and common parts available by week 7. The remaining will need to be promised in week 8. The 18 speed option is not a problem, the straight handle bars are not a problem, and the light sets are not a problem. The customer should be promised 99 in week 7 and the remaining 11 in week 8. At this point in the discussion you may find some students still confused. If that is the case you may wish to create a few hypothetical orders of your own and have them come up with solutions. 3. Suppose Macarry Bicycle managers discover that a major competitor has had to shut down their production for the next three months due to a major fire. The Macarry managers fully expect that many of the competitor’s customers will turn to Macarry Bicycles to fill their orders during this critical time for them. In fact, one of the competitor’s customers has already asked about an order of 250 of the models for delivery in week 5. What actions should Macarry take in this case—be specific as possible. 36 .

Students need to realize that there are important reasons why planning time fences exist. They may be quick to realize that this represents an opportunity to get lots of unexpected orders, but to take those orders without the ability to deliver them threatens to alienate lot of potential new customers as well as existing ones. They will be tempted to add lots of MPS orders within the time fence. This presents the opportunity to discuss why adherence to the planning time fences is so important. Point out that they might be able to evaluate component inventories and existing capacity and possibly squeeze a few more added to production, but by no means should they assume that because they can put a number in the master schedule that it will really happen. Certainly, they have more freedom outside the planning time fence, but still the impact on component suppliers and internal production capacity still needs to be evaluated before adding lots of new production requirements immediately outside the planning time fence. You may also wish to initiate a strategic discussion—for example, with their existing ATP orders should they take orders from one of these potential new customers before they consider the needs of their regular customers? The danger is, of course, that as soon as the competitor recovers from the fire their old customers may return to the competitor as a supplier. In the meantime, if Macarry Bicycles has alienated their regular customers by failing to be able to cover their regular orders they may find that some of those regular customers may also leave them.

MULTIPLE CHOICE QUESTIONS 1.

The information needed to develop a master production schedule will be got from: a. the production plan b. the forecast of individual end items c. inventory levels for individual end items d. all of the above e. none of the above

The MPS is a vital link the production planning system because it: I.

keeps priorities valid

II. forms the basis for determining the capacity needed III. is input to the material requirements plan IV. is input to the production plan a. I, II, III, and IV b. I, II, and III c. I, II, and IV d. II, III, and IV e. I, III, and IV 3.

The MPS: a. facilitates order promising b. works with individual end products c. is an agreed-upon plan between production and marketing d. all of the above e. none of the above 37 .

The functions of a master production schedule are to: I.

plan material components

II. plan capacity requirements III. keep priorities valid a. I, II, and III b. I and II only c. I and III only d. II and III only e. none of the above is a function of the MPS 5.

Which of the following are objectives of an MPS? I.

Maintain the desired level of customer service

II. Keep the sales department happy III. Make the best use of material, labor and equipment IV. Maintain inventory investment as required a. I only b. I and II only c. I, II, and III only d. I, III, and IV only e. II, III, and IV only 6.

The process of checking the MPS against available capacity is called: a. capacity planning b. shop-floor control c. rough-cut capacity planning d. capacity control e. process checking

In an assemble-to-order company, at which level should master scheduling take place? a. the component/subassembly level b. the end item level c. the raw material/component level d. it does not matter, any level will do e. none of the above levels

The final assembly schedule (FAS): a. schedules customer orders as they are received based on components planned in the MPS b. is used with make-to-order products c. is used with make-to-stock products d. a and b above e. none of the above 38 .

Which of the following statements is best regarding the master production schedule? a. It is an agreed-upon plan between marketing and manufacturing b. If it is poorly done, we can expect past-due schedules and unreliable delivery promises c. It is a plan for specific end items that manufacturing expects to make over some period in the future d. All of the above are true e. None of the above is true

10.

The portion of inventory or production not committed to customer orders is called: a. free stock b. available to promise c. excess production d. waste e. excess capacity

11.

If there are customer orders the projected available is based on: a. forecast demand b. customer orders c. the greater of forecast demand and customer orders d. the opinion of the planner

12.

Which of the following is (are) true about time fences in a master production schedule system? I.

Changes far out in the planning horizon can be made with little or no cost to manufacturing

II. In the "frozen zone," capacity and materials are committed to specific order III. Changes in the near future on the planning horizon are less costly to make than changes far out a. I and II only b. II and III only c. I and III only d. I, II, and III e. none of the above 13.

Which of the following is NOT an input to the master production schedule? a. Sales forecast for items b. Current inventory status c. Final assembly schedule d. Customer orders e. Production plan

39 .

14.

The MPS is constrained by: I.

the availability of material.

II. available capacity. III. inventory policies. IV. production plan. a. all of the above b. I, II, III only c. I and II only d. II and III only e. none of the above 15.

Given the following data, complete the table. There are 30 on hand. Order quantity is 60 units. Week

Forecast

Projected available Scheduled receipts a. the projected available in week 3 is 40 b. the projected available in week 4 is 30 c. there is a scheduled receipt in week 4 d. a and b are true e. b and c are true 16.

Given the following table, calculate the ATP. There are 50 units on hand. Week

Customer orders

Scheduled receipts

ATP a. the ATP in week one is 10 b. the ATP in week one is 30 c. the ATP in week one is 5 d. the ATP in week two is 10 e. the ATP in week three is 35

40 .

17.

The time span for which plans are made is called the: a. time fence b. planning horizon c. time bucket d. forecast period e. none of the above

18.

The final assembly schedule is used: a. in a make-to-stock environment b. in a make-to-order environment c. in a assemble-to-order environment d. in any of the above e. in none of the above

19.

The PAB is calculated in which way for periods after the demand time fence? a. PAB = prior period PAM or on-hand balance + MPS – customer orders b. PAB = prior period PAB or on-hand balance + MPS + customer orders c. PAB = prior period PAB or on-hand balance + MPS – customer orders d. PAB = prior period PAB + MPS – greater of customer orders or forecast e. PAB = prior period PAB + MPS + greater of customer orders or forecast

20.

Which of the following is the term applied to a master schedule for a purchased item? a. Supplier scheduling b. Master scheduling c. Material scheduling d. Purchase order

21.

Which of the following is a contract between manufacturing and marketing? a. Production plan b. Master schedule c. Forecast d. Customer order

22.

Master scheduling is a balancing act between which of the following? a. Forecasts and orders b. Inventory and customer service c. Supply and demand d. Forecast and inventory

23.

Which of the following modules follows the Sales and Operations Plan? a. Business planning b. Production planning c. Master scheduling d. Material requirements planning 41 .

24.

Sales forecasting and resource capacity planning are two components of which of the following? a. Master scheduling b. Sales and operations planning c. Production Plan d. Master production schedule

25.

On a master schedule developed for a make-to-order product, what is typically being scheduled on the master production schedule (MPS) line? a. Raw material b. Resources c. Subassemblies d. Finished products e. Critical workforce needs

26.

26. Which of the following represents the minimal time horizon for a planning time fence in a master schedule? a. The timing of the furthest out actual customer order b. The cumulative lead time of the product c. The final assembly lead time of the product d. The longest lead time of all the raw material e. The cumulative setup time for all equipment used to make the product

Answers

42 .

CHAPTER 4: MATERIAL REQUIREMENTS PLANNING ANSWERS TO PROBLEMS 4.1 Each X requires 2 As. Each A requires 2 Cs. Therefore, each X requires 4 Cs.

50 Xs require

Each Y requires 2 C

100 Ys require 200 Cs.

Total Cs. required

200 Cs. 400

4.2

Number of Gs required. Each A requires 2 Bs Each B requires 2 Es

4 Es for each A

Each E requires 4 Gs

16 Gs for each A

Each C requires 3 Gs

12 Gs for each A

Total Gs required

28 Gs for each A

Each A requires 4 Cs.

4.3 Week

Part A

Planned order receipt

Lead time: 1 week

Planned order release

160

Part B

Planned order receipt

160

Lead time: 1 week

Planned order release

Part C

Planned order receipt

Lead time: 1 week

Planned order release

5 160

160 160 160

43 .

Part D

Planned order receipt

Lead time: 2 week

Planned order release

Part E

Planned order receipt

Lead time: 1 weeks

Planned order release

160 160 160 160

4.4 Week

Gross requirements

Projected available

Net requirements

Planned order receipt

Planned order release 4.5 Week Part A

Part B

100

Projected available

Net requirements

100

Planned order receipt

100

Planned order release

100

Gross requirements

300 50

Net requirements

250

Planned order receipt

250

Planned order release

250

Gross requirements

100

Projected available

100

Net requirements

100

Planned order receipt Part D

Gross requirements

Projected available

Part C

Planned order release

100

Gross requirements

950

Projected available

Net requirements

950

Planned order receipt

950

Planned order release

950

44 .

Part E

Gross requirements

250

Projected available

Net requirements

250

Planned order receipt

250

Planned order release Part F

Gross requirements

100

Projected available

100

Net requirements

100

Planned order receipt

100

Planned order release 4.6 Week

Gross requirements

100

Projected available

Net requirements

Scheduled receipts

Planned order receipt

Planned order release 4.7 Week

Gross requirements

Scheduled receipts

Projected available

Net requirements

Planned order receipt Planned order release 4.8 Week Part H

Gross requirements

Scheduled receipts

Projected available

1 week

Net requirements

Planned order release

45 .

Lead time

Planned order receipt

Part I

Gross requirements

100

180

Scheduled receipts

120

Lead time

Projected available

160

2 weeks

Net requirements

160

Planned order receipt Planned order release Part J

Gross requirements

320

Scheduled receipts Lead time

Projected available

1 week

Net requirements

400

Planned order receipt Planned order release Part K

Gross requirements

480

Scheduled receipts Lead time

Projected available

1 week

Net requirements

300

180

180 180

Planned order receipt Planned order release 4.9 Part Y

Week

Lead time 2 weeks

Lot Size: 60 Gross requirements

Scheduled receipts

Projected available 45

25 35

Net requirements

Planned order receipt Planned order release

Part Z

Week

Lead time 1 week

Lot Size: 130 Gross requirements

120

Scheduled receipts

20 46 .

Projected available

130

Net requirements

100 130

Planned order receipt Planned order release 4.10 Week Part A

Gross requirements

100

Scheduled receipts Lead time:

Projected available

1 week

Net requirements

0 100

Planned order receipt

100 100

Planned order release Part B

Gross requirements

200

Scheduled receipts Lead time:

Projected available

1 week

Net requirements

100

0 100

Planned order receipt

100

Planned order release Part C

Gross requirements

Lead time:

Scheduled receipts

1 week

Projected available

100 0

Net requirements

100

Planned order receipt

100

Planned order release Part D

Gross requirements Scheduled receipts

300

Lead time:

Projected available

1 week

Net requirements

300

Planned order receipt

300

Planned order release Part E

Gross requirements Scheduled receipts

100

Lead time:

Projected available

1 week

Net requirements

100

Planned order receipt

100 100

Planned order release

47 .

Part F

Gross requirements Scheduled receipts

Lead time:

Projected available

1 week

Net requirements

100 200

100

Planned order receipt Planned order release 4.11 Week Part X

Gross requirements Scheduled receipts

Lead time:

Projected available

1 week

Net requirements

Lot size:20

Planned order receipt

10 3 20

15 8 12 20

Planned order release Part Y

Gross requirements Scheduled receipts

Lead time:

Projected available

2 weeks

Net requirements

Lot size: 50

Planned order receipt

60 5 15

Planned order release Part Z

Gross requirements Scheduled receipts

Lead time:

Projected available

2 weeks

Net requirements

Lot size:

Planned order receipt

lot-for-lot

Planned order release

Part W

Gross requirements

0 40

0 0

40 40

Scheduled receipts Lead time:

Projected available

1 week

Net requirements

Lot size: 400

Planned order receipt

400

350 350 50 400

Planned order release 4.12

Item

Low-level code

48 .

350

4.13

Item

Low-level code

4.14 Low-

Week

Level

code Part A

Gross requirements Scheduled receipts

Lead time:

Projected available Net requirements

1 week

Planned order receipt

Lot-forlot

Planned order release

Part F

Gross requirements

Scheduled receipts 0

Projected available Net requirements

1 week

Planned order receipt

120

Lot-forlot

Planned order release

Part B Lead time: 1

2 weeks Lot size: 300

Part C 1

120

Lead time:

120

Gross requirements 50

Scheduled receipts

Projected available 200

150

Gross requirements

100

120

160

Scheduled receipts

120 20

100

160

100

160

Net requirements

200

Planned order receipt Planned order release

Lead time:

Projected available

2 weeks

Planned order receipt

Net requirements 100 49 .

Lot-forlot

Planned order release

160

Part D

Gross requirements Scheduled receipts

100

Lead time:

Projected available

300

Net requirements

200

2 weeks

Planned order receipt

240

100

140

200 300

Lot size: 300

Planned order release

300

Part E

Gross requirements

100

Scheduled receipts 2

160

Lead time:

Projected available

3 weeks

Planned order receipt

Lot size: 500

Planned order release

400

Net requirements

160

300

140

The low-level code for part D is 2. There is a planned order release of 300 for part D in week 1. There are no planned order releases for part E. There is a planned order release of 100 for Part C in week 1 and 140 in week 2. 4.15 Low-

Week

Level

20 20

80 80

code Part A

Gross requirements Scheduled receipts

Lead time:

Projected available Net requirements

1 week

Planned order receipt

Lot-forlot

Planned order release

50 .

Part B

Gross requirements Scheduled receipts

300

Lead time:

Net requirements

1 week

Planned order receipt

Lot-forlot

Planned order release

Part C

Gross requirements

230

Lead time:

Projected available

Net requirements

2 weeks

Planned order receipt

Lot-forlot

Planned order release

Part D

Gross requirements

140

220

Scheduled receipts

200

Lead time:

Projected available

140

Net requirements

140

1 week

Planned order receipt

Lot-forlot

Planned order release

Part E

Gross requirements

Scheduled receipts 2

210

Projected available

Scheduled receipts 1

Lead time:

Projected available

Net requirements

1 week

Planned order receipt

Lot-forlot

Planned order release

4.16 Low-

Week

level

code Part A 0

Lead time: 1 week Lot-for-lot

Gross requirements Scheduled receipts

100 100

Projected available

100

Net requirements

100

Planned order receipt 51 .

Planned order release

Gross requirements Part B 0

Net requirements

1 week

Planned order receipt

Lead time: Lot-for-lot Part D Lead time: 1 week Lot-for-lot Part E Lead time: 1 week Lot size: 500 Part F

Lead time:

1 week

Part C

Scheduled receipts Projected available

Lot-for-lot

Lead time: 1 week Lot-for-lot

Planned order release Gross requirements

100

200

Scheduled receipts

100

Projected available

200

Net requirements

200

Planned order receipt

Planned order release Gross requirements

100

Scheduled receipts

100

Projected available

100

Net requirements

100

Planned order receipt Planned order release Gross requirements Scheduled receipts

400 500

Projected available

500

Net requirements

400

Planned order receipt

500

Planned order release Gross requirements

200

Projected available

200

Net requirements

200

Planned order receipt

Scheduled receipts

Planned order release

52 .

200

4.17 Initial MRP Week

Gross requirements

125

100

Scheduled receipts PAB

200 100

5 60

200

125

Week

Gross requirements

125

150

165

125

Net requirements Planned order receipt Planned order release Revised MRP

Scheduled receipts PAB

125

200

200 100

−25

Net requirements

115

Planned order receipt Planned order release Possible actions include expediting the scheduled receipt in week 4 to week 3. 4.18 Initial MRP Week

Gross requirements

Scheduled receipts

100

Projected available

Net requirements

Planned order receipt

100

Planned order release

100

MRP record at the end of week one Week

Gross requirements

110

Scheduled receipts Projected available

100 50

Net requirements

Planned order receipt

100

Planned order release

100

53 .

100

4.19 System unit

Lead time = 1 week Minimum order quantity = 500 Week

Gross Requirements

2500

3000

2000

Scheduled Receipts

Proj. ending inv. 0

Net Requirements

2500

3000

2000

Planned Receipts

2500

3000

2000

2500

3000

2000

Planned Order Releases Speakers

Lead time = 1 week Minimum order quantity = 5000 Week

Gross Requirements

5000

6000

4000

Scheduled Receipts

5000

Proj. ending inv. 0

5000

Net Requirements

6000

4000

Planned Receipts

6000

4000

Planned Order Releases

6000

4000

Gross Requirements

2500

3000

2000

Scheduled Receipts

9000

6000

3000

CD-ROM Drives

Lead time = 4 weeks Minimum order quantity = 5000 Week

Proj. ending inv.

54 .

11,500 Net Requirements

Planned Receipts

Planned Order Releases

5000

4.20 Gear and rotor plate assembly

Lead time = 1 week Minimum order quantity = 2500 Week

Gross Requirements

2000

Scheduled Receipts

Proj. Available 1000

1000

1500

2000

Net Requirements

1000

500

Planned Receipts

2500

Planned Order Releases Wheels

Lead time = 1 week Minimum order quantity = 1 Week

Gross Requirements

4000

Scheduled Receipts

Proj. Available 0

Net Requirements

4000

Planned Receipts

4000

Planned Order Releases

4000

Cotter Pins

Lead time = 3 weeks Minimum order quantity = 15,000

55 .

Week

Gross Requirements

2500

2000

2500

2000

Scheduled Receipts

6500

4500

1500

2000

13500

11350

Net Requirements

500

Planned Receipts

15000

Proj. Available 9,000

Planned Order Releases

CASE STUDY 4.1 TEACHING NOTES Apix Polybob Introduction

This is a relatively basic case used to discuss the issues of managing dependent demand inventory, specifically using the concepts of MRP. The case starts with a discussion surrounding the problems using EOQ with reorder points. Not only is the reorder point inappropriate for dependent demand inventory in most cases, but they actually seem proud that the inventory accuracy levels are “at least 80%”. Most people familiar with materials management will recognize that an 80% level is hardly acceptable for effective planning. Most of the rest of the first part of the case deals with a description of some of the typical symptoms that one would expect when dealing with the kind of conditions developed in the case. While these symptoms should not be the major focal point of the case, they should be discussed. Many students will gain insight by being challenged to explain why the symptoms described are likely to occur in such an environment. At this point the MRP calculations can be brought out. The MRP solution is presented at the end of this note. One of the first issues that should be mentioned is how the relatively “regular” production levels end up in quite “lumpy” demand for lower level components, brought on by lot sizing as the demand cascades down the bill of materials. In other cases, the ability of MRP to look ahead can show many other points that student can (or should) notice. For example, the scheduled receipt for item F is not needed in week one, and can be de-expedited. Case Discussion Questions

The first two questions have been mentioned. Others include: 3. MRP assumes an accurate database and also is (by itself) capacity insensitive. These issues should be pointed out to students (in case they fail to bring them out) as critical points that must be considered. In other words, the MRP solution will likely provide little benefit with only an 80% inventory accuracy, and will do little to prevent sales from over-promising orders unless the system is coupled with a good master schedule and capacity planning approach. 4. If there were only 250 of item E on hand instead of the 400 listed, the gross requirement could not be met for week 2. This would cascade up to the final product (a good opportunity to discuss the concept of pegging). Where MRP could help is in at least two ways. First, it could point out the potential problem with enough time to potentially expedite the delivery of parts, thereby possibly preventing a problem condition. If, on the other hand, expediting is impossible, the nature of the shortage 56 .

can be calculated and customers notified with hopefully enough time to plan around the expected shortage. 5. One of the great values of MRP is the “look-ahead” capability, and this question addresses that capability. Often the phase-in of a new design will occur when the impact on existing inventory is at a minimum. A look at the MRP shows that perhaps the best time for the new design phase-in would be after week 10, when the inventory of the old part is very low. Some students may argue that the best time would be the order for week 2. That is not an incorrect conclusion, and gives the opportunity to discuss the pros and cons of phasing out small versus large amounts of old inventory designs. 6. This is a rather “open-ended” question that will allow students to be creative in their analysis. Some items they may come up with are changes in the labor force, vacation planning, promotions, and planning for equipment maintenance. 7. While students may come up with actual numbers for this question (based on several assumptions), the primary purpose for the question is to generate thinking about the financial implications of the differences between the two approaches. What can clearly be shown is that for many of the items there would be serious shortages using the reorder point. In some cases (item E, for example), the reorder point would generate order before they are actually needed, increasing inventory holding costs. The part shortages will clearly produce expediting activity, and generate some of the symptoms discussed in the case as well. Item ____B___ Lead time ____1___ Lot size ___80____ On Hand __10_____ Period

Gross Requirements

11 50

Scheduled Receipts Projected Available 10

Planned Order Releases

Item ___C____ Lead time ____1___ Lot size ___150___ On Hand ___40____ Period

Gross Requirements

100

120

100

Scheduled Receipts Projected Available 40 Planned Order Releases

150

90 150

57 .

140

20 150

50 150

100

Item ____D___ Lead time ____2___ Lot size ___200___ On Hand ___180___ Period

Gross Requirements

150

Scheduled Receipts Projected Available 180

180

Planned Order Releases

200

130

180

200

Item ____E___ Lead time ___2____ Lot size ___400___ On Hand ___400___ Period

Gross Requirements

390

8 390

390

Scheduled Receipts Projected Available 400

400

Planned Order Releases

400

Item ___F____ Lead time ___2____ Lot size ___500___ On Hand ___50____ Period

Gross Requirements

380

Scheduled Receipts

500

Projected Available 50

550

Planned Order Releases

170

380

170

500

290

8 380

290

410

380

410

500

CASE STUDY 4.2 TEACHING NOTES Benzie Products Company

This case is a fairly comprehensive case surrounding many of the major issues in developing and managing MRP for a company. Certainly, the student first has to create a master schedule and an MRP explosion from that master schedule. The questions dealing with an additional order and then the scrapping of 20 of one of the components forces them to use pegging to be able to manage the information and customer communication from the MRP data. Finally, the case provides an opportunity to think about and discuss the issues of safety stock. You may also wish to discuss the impacts of lot sizing, especially since both components C and D have rather large and potentially expensive inventories left in week 10, just when the demand for the Product X is entering a very low demand season. 58 .

First, here are the completed master schedule and MRP grids as requested in the first two assignment questions. First, product X: Week

Forecast

Customer orders

Projected Avail. 27

Master Production Schedule Avail. To Promise

The MRP grids: A

Week Gross Requirements

Scheduled Receipts

Projected Avail. 0

Planned Order Release

Week

Gross Requirements

100

Scheduled Receipts Projected Avail. 2

Planned Order Release

100

Week

Gross Requirements

200

100

2 100

4 60 200

Scheduled Receipts

59 .

7 60 200

Projected Avail. 212

Planned Order Release

250

Week

202

2 192 242 242 242 242

250 250

Gross Requirements

Scheduled Receipts Projected Avail. 63 Planned Order Release

100

The rest of the questions:

Question 3. The customer wants three more units in week 4. There are no available to promise until week 5, but it still might be possible to accommodate them if there is existing inventory of the components—recall the case said there was available capacity and the lead time for product X is only two weeks. If the student looks at component A they should see that with 10 available units in inventory for week 2 (when product X would need to be started because of the 2 week lead time), meaning that component A would be no problem. Component B is a problem in that there are only two units available in week 2. The student may be tempted to place another planned order release for product B in week one (since it is only a one week lead time), but they would then cause a problem for component C that is used to make B. Fortunately, there are 12 units of C that are not needed, so you could possibly make up to six additional units of B, more than enough to use for the additional order of product X. The main issue that should be discussed here is if the lot size for component B of 100 is a minimum lot size or a fixed lot size (packaging issues or some machining constraints, for example). The case does not say, but students should come to the conclusion that if the lot size for B is a minimum then they should be able to make more of the B’s for use in the X. The same argument must be made for Product X as well—is the lot size a minimum or fixed. If the lot sizes are minimums, then the customer order can be accommodated. If not, then the Company should promise the additional quantity for week 5 and not week 4. Question 4. The scrapping of 20 units of component C causes no problem for making component A since the first planned order for A isn’t until week 3 and there is already a planned order for C to cover that need. The problem is component B. The production for B (planned release in week 1) was to be covered from the 212 inventory of component C. Now with twenty of component C scrapped, there is only 192 good component C left—which is only enough to make 96 component B. The planned order for B was for 100, and all but 2 of those 100 were needed (there were 2 units in inventory). The need for 100 units will be 2 units short, implying that one less Product X can be made for the scheduled production of 50 units in week 2. Clearly one customer will not get one of their product X on time. The company should be contacting customers and finding out which one could work with getting the last of their order in week 5. Generally, that should be done by contacting customers in the week 4 bucket and working backward as necessary. If students are tempted to want to deal with it by creating an additional master production schedule quantity, you should be prepared to discuss the problems associated with that—the generation of 60 .

“system nervousness” as the added quantity works through the bill of materials. You might even want to show them what happens in this case should they choose to add a master schedule quantity. The major conclusion from this discussion is the importance of understanding how to peg upwards in case of a problem, and using the knowledge to enhance customer communication. Also important is the issue of schedule stability. Question 5. The discussion of safety stock should point out three major issues. First is the obvious trade-off of having extra stock “just in case” versus the cost of holding that stock. Secondly, since all the components in the bill of materials below product X are dependent demand, that demand should be perfectly calculated given the master production schedule for Product X. That means safety stock should generally NOT be used in dependent demand items to deal with uncertain customer demand. Safety stock in the master schedule is used for uncertain customer demand. The safety stock in MRP dependent demand should primarily be used for uncertainty in supply—inaccurate data bases, late supplier deliveries, quality problems, machine breakdown, etc. The exception to that would be if some demand for a typical dependent demand item has some additional independent demand—service parts, repair parts, etc. If one wishes to reduce or eliminate the safety stock in the MRP dependent demand items, they should look to those causes—quality, supplier problems, data inaccuracy, etc. and not uncertain demand. The third issue is the fact that safety stock requirements can “pollute priorities”. For example, look at the MRP for component B. Suppose there were a safety stock requirement of 10 units. Since the available number is only 2 units, the safety stock requirement would generate the planned release of another lot of 100. That means that instead of having 2 units in inventory going into the low demand season for product X there would be 102 units, clearly at a cost that the company does not want. In addition, to paraphrase what Oliver Wight (a pioneer in the MRP field) once said “Whenever you make something you don’t really need, it is almost always at the expense of something you do really need”. This means, of course, that people will clearly see that they were asked to produce a lot of 100 component B that are just going to sit in inventory, when they could have used their capacity to produce something that could be sold instead.

MULTIPLE CHOICE QUESTIONS 1.

In the diagram below the independent demand item is:

a. X b. 1 c. 2 d. 3 e. 4 2.

_______ is a set of priority planning techniques for planning component items below the _________. a. Material requirements planning; end item level b. Master production scheduling; the market plan c. Production planning; end item level 61 .

d. All of the above e. None of the above 3.

The objectives of material requirements planning are to: a. issue orders to purchasing and manufacturing b. keep priorities current c. determine requirements d. all of the above e. b and c above

Which of the following is (are) elements in an MRP system? a. The computer b. Bills of material c. Inventory records d. All of the above e. None of the above

A set of priority planning techniques for planning component items below the end item level is called: a. master scheduling b. material requirements planning c. capacity planning d. production control e. none of the above

A major input to an MRP system is: a. the production plan b. the capacity plan c. shop-floor activity planning and control d. the master schedule e. none of the above

The document that shows the component parts and the number of parts needed to make one of an assembly or subassembly is called: a. a route sheet b. a material requirements plan c. a bill of material d. a material requisition e. none of the above

A product tree shows: a. the parts that go into making a product b. the subassemblies used in making the product c. the sequence in which parts go together 62 .

d. all of the above e. none of the above 9.

Which of the following statements is best? a. A part number identifies one part only b. A part has one and only one part number c. The same part on different bills of material will have the same part number d. All of the above are true e. None of the above is true

10.

Which of the following statements is best?

a. Item A is the parent of item B b. Item D is on level 3 c. Item A is a parent of item D d. All of the above are true e. None of the above is true 11.

A multi-level bill of material: I.

reflects the way the product will be manufactured.

II. is produced by the engineering department. III. is a parts list only and does not contain subassemblies. a. I only b. II only c. III only d. I and II only e. I, II, and III 12.

A bill of material whose purpose is to simplify forecasting, master production scheduling and material requirements planning is called: a. a summarized parts list b. where-used bill c. planning bill d. structured bill e. multi-purpose bill

13.

Which of the following statements is best? a. A where-used report is the same as a pegging report b. A where-used report shows all the components that go into assembly 63 .

c. A pegging report shows all the parents for a component d. A where-used report shows only those parents for which there is an existing requirement e. Pegging reports show only the parents for which there are requirements 14.

The ability to relate the demand for an item shown on an MRP record back to the particular parent causing the demand is called: a. where-used b. relating c. pegging d. any one of the above e. none of the above

15.

The lead time for each item is 1 week. If an order for 50 of A is to be delivered in week 5, in what week will there be a planned order RELEASE for item B?

a. 5 b. 4 c. 3 d. 2 e. 1 16.

Which statement is correct? a. Planned order releases show when the order is needed b. When an order is released, it becomes a planned order c. Scheduled receipts show when goods were put into inventory d. All of the above are correct e. None of the above is correct

17.

Which statement is correct? a. A product tree shows the parts that go into making a product b. A part has one and only one part number c. Net requirements = gross requirements – on-hand inventory – scheduled receipts d. All of the above are correct e. None of the above is correct

18.

In material requirements planning the process of placing the exploded requirements in the proper time periods, based on the assembly lead times involved, is known as: a. exploding b. offsetting 64 .

c. netting d. all of the above e. none of the above 19.

Which statement is best? a. The planned order release of the parent generates the gross requirement of the component b. The planned order release of the parent becomes the net requirement of the component c. The planned order release of the component becomes the order receipt of the parent d. All of the above are true e. None of the above is true

20.

Which of the following statements is best about released orders? a. A scheduled receipt is a released order b. An open order is a released order c. A planned order release is a not a released order d. All of the above are true e. None of the above are true

21.

Which of the following is NOT true of an MRP record? a. The current time is the beginning of the first period b. The number of periods in the record is called the planning horizon c. An item is considered to be available at the end of the time bucket in which it is required d. The projected on-hand balance is for the end of the period e. The immediate or most current period is called the action bucket

22.

In the following product trees the low-level code of item D is:

a. 0 b. 1 c. 2 d. 3 e. 4 23.

Which of the following statements is best? a. Every item has more than one low-level code b. Net requirements = gross requirements + on-hand + scheduled receipts 65 .

c. Each part has at least one part number, depending on where it is used d. All of the above are true e. None of the above is true 24.

Given the following product tree, the parent of B is:

a. A b. B c. C d. D e. E 25.

Given the following parents and components, how many Bs are required to make an X? Quantities are shown in brackets. Parent

Component

A(2)

B(2)

B(1)

D(1)

a. 1 b. 2 c. 3 d. 4 e. 5 26.

Which of the following are controlled by the materials planner? a. Firm planned orders b. Planned orders c. Released orders d. Exception messages e. All of the above

27.

66 .

The lead time for each item is 2 weeks. If an order for 100 of A is to be delivered in week 6, in what week will there be a planned order RELEASE for item B? a. 5 b. 4 c. 3 d. 2 e. 1 Use the following MRP record and your calculations to answer the following two questions. The component has an order quantity of 100, a safety stock of ten, and a lead time of one period. Complete the following MRP record. Week

Gross requirements

Scheduled receipts

100

Projected available 30 Net requirements Planned order receipt Planned order release 28.

Complete the above MRP record. Which of the following statements is correct? a. A planned order for 50 should be released in period two b. The projected available in period three is 55 c. The projected available in period three is five d. The net requirement in period two is 20 e. The net requirement in period three is ten

29.

The net requirement in period three is: a. 0 b. 5 c. 10 d. 15

30.

Which of the following statements is best regarding part numbering systems? a. Significant part numbering systems are difficult to maintain b. It is easier to remember numbers than letters c. A random number is an identifier not a descriptor d. All of the above are true

67 .

31.

Which of the following is elapsed time from recognition of a need until the time that need is satisfied? a. Production time b. Lead time c. Cycle time d. Schedule

32.

Which of the following comes directly from external customers? a. Dependent demand b. Independent demand c. Bill of materials d. Order quantity

33.

Service parts experience which of the following types of demand? a. Independent b. Dependent c. Independent and Dependent d. None of the above

34.

In material requirements planning, the process of placing the exploded requirements in the proper time periods, based on the assembly lead times involved, is known as: a. scheduling b. offsetting c. netting d. all of the above e. none of the above

35.

A bill of material for an item must change: a. when a component changes b. when there is a change in the use of the item c. when the item is used in another parent d. never e. if the item is fully interchangeable

36.

Three inputs to the MRP process are: a. production activity control, purchasing, and the production plan b. inventory status, the master production schedule, and the product structure c. the master production schedule, inventory status, and the capacity requirements plan d. the product structure, production activity control, and inventory status e. the product structure, production activity control, and the master production schedule

68 .

37.

Which of the following statements is true? I.

Firm planned orders are planned orders frozen by the planner

II. Released orders are planned orders that have been released by the computer III. The planner should not release an order unless satisfied the order can be carried out a. I and II only b. I and III only c. II and III only d. I, II, and III e. none of the statements is true 38.

Given the following product tree, how many product structure relationships are there? a. 1 b. 2 c. 3 d. 4 e. 5

39.

40.

In the product structure diagram below item X has _______________ demand and item 2 has _______________ demand.

a. dependent, dependent b. dependent, independent c. independent, independent d. independent, dependent e. none of the above answers are correct The following two questions use the information in this MRP record. The lead time is 3 weeks. Week

Gross requirements

69 .

Scheduled receipts Projected available

100 40

Net requirements Planned order receipt Planned order release 41.

100

The projected available to be shown in week three is:

a. 0 b. 75 c. 125 d. 175 e. none of the above 42.

The net requirement for week four is: a. 25 b. 50 c. 75 d. 200 e. any of the above

43.

The beginning projected available is: a. 10 b. 40 c. 60 d. 100 e. cannot be determined from the data

44.

Which of the following statements is best? a. The same part on different bills of material has different part numbers b. A part number identifies one part only c. A significant part numbering system should always be used d. All of the above are true e. None of the above are true

45.

What happens to a planned order in MRP for a purchased part once it is released by the planner? a. It becomes a planned order for the period in which delivery is expected b. It becomes a scheduled receipt in the period in which delivery is expected 70 .

c. It becomes a scheduled receipt in the same time period in which it was planned d. It disappears from MRP and is only recorded in the purchasing system e. It becomes a firm planned order in the same time period in which it was planned Answers

10 a

11 a

12 c

13 e

14 c

19 a

20 d

21 c

22 c

23 e

28 b

29 d

30 d

31 b

32 b

37 b

38 e

39 c

40 d

41 a

71 .

CHAPTER 5: CAPACITY MANAGEMENT ANSWERS TO PROBLEMS 5.1 Weekly available time = 3 × 16 × 5 = 240 hours 5.2 Hours actually worked = 240 × .80 = 192 5.3 Rated capacity = 240 × .80 × 1.20 = 230.4 standard hours 5.4 Rated capacity = 7 × 16 × 5 × .7 × 1.10 = 431.2 standard hours 5.5 Rated capacity = 4 × 8 × 5 × .8 × 0.9 = 115.2 standard hours 5.6 Demonstrated capacity =

50 + 48 + 44 + 52 = 48.5 hours per week 4

5.7 Measured capacity = 1050 ÷ 11 = 95.5 hours per week 5.8 Utilization = 72 ÷ 80 = 90% Efficiency = 75 ÷ 72 = 104.2% 5.9 Time available = 3 × 40 × 4 = 480 hours Utilization = 360 ÷ 480 = 75% Efficiency = 470 ÷ 360 = 130.6% Demonstrated Capacity = 470 ÷ 4 = 117.5 standard hours per week 5.10 Available hours = 5 × 16 × 5 × 50 = 20,000 Hours actually worked = 16,000 Standard hours produced = 15,400 Utilization = 16,000 ÷ 20,000 = 80% Efficiency = 15,400 ÷ 16,000 = 96.3% Demonstrated (measured) capacity = 15,400 ÷ 50 = 308 standard hours 5.11 Time required = 1.1 + 0.3 × 200 = 61.1 standard hours Actual hours =

61.1 standard hours = = 72.74 hours 1.2 ×.70 efficiency utilization ( )( )

5.12 Time required = 2.0 + (0.3 × 500) = 152 standard hours Actual hours =

152 = 162.56 hours 1.1×.85

5.13 Order quality

Setup time (hours)

Run time

Total time

(hours/piece)

(hours)

Release orders 120

300

1.00

0.10

31.00

340

200

2.50

0.30

62.50

Planned orders 560

300

3.00

0.25

78.00

72 .

780

500

2.00

0.15

Total time (standard hours)

77.00 248.50

5.14 Order quality

Setup time (hours)

Run time

Total time

(hours/piece)

(hours)

Release orders 125

200

0.5

0.1

20.5

345

0.75

0.07

5.65

Planned orders 565

2.00

0.25

22.00

785

1.50

0.14

5.4

Total time (standard hours)

53.55

5.15 Open orders for parts

Planned orders for parts

Week

123

456

Lead report Week Released load

Planned load

123

456

123

456

Total load 5.16 Week

Total

Released load

160

155

100

485

Planned load

150

Total load

160

155

170

150

635

Rated capacity

150

600

(over)/under

–10

−5

−20

−35

73 .

5.17 Operation number

Work center

Operation time (days)

Queue time (days)

Arrival date

Finish date

111

126

131

130

134

142

155

145

147

Stores

150

5.18 Operation number

Work center

Operation time (days)

Queue time (days)

Arrival date

Finish date

110

174

177

120

181

186

130

193

197

Stores

200

CASE STUDY 5.1 TEACHING NOTES Wescott Products

This case offers the opportunity for a student to examine the issues surrounding Master Scheduling, rough-cut capacity planning the issues of lot sizing, and even the relationship between “bucket” scheduling and detailed scheduling of actual production. The environment is an assemble-to-order environment, so the instructor has an opportunity to discuss the potential use of available-to-promise (ATP), although the case can clearly be approached without ATP. First, even though there is little data on manufacturing other than the one assembly area, it is a very logical to assume the assembly is the bottleneck, given the statement that there appeared to be plenty of subassemblies and components (paragraph 3 of the case). Secondly, it must be noted that there is more to the situation here than just master scheduling. Some of the critical issues are noted: •

Assembly is not only a bottleneck, but with the difficulty in getting new workers and in assigning overtime it is highly unlikely that capacity can be increased for quite some time. This clearly drives one to consider using the existing capacity more carefully.

•

Orders were generally within ten percent of the forecast, yet that is clearly not the case in the first week. Students may challenge the statement made in the case about forecast accuracy, but the condition in week one is a perfect opportunity to discuss 74 .

the concept of overloading. Many companies that fail to manage capacity effectively will “front load” missed orders from the past into the current time period, making it almost impossible to accomplish. •

The Sales and Marketing manager is being measured at least partially on new sales, and he is apparently being successful. This may not be a good business approach in the present circumstance, however. Part of the problem may be the quoting of a standard lead time of one week. Jason would then check for material availability and to see if the equipment was running. Note the lack of a capacity check. The focus on new sales should be examined in favor of customer delivery, at least in the short term, and certainly until the present problem is resolved. Standard lead times can be used, but should be evaluated in light of the situation. A preferable approach may be order promising on the basis of the master schedule.

•

There is little indication as to how the lot sizes for production were established, but that too should be examined. The setup times should also be scrutinized, as they not only take up precious capacity, but also drive the lot sizes larger.

•

It should be clear that they cannot possibly run a lot of all five products every week. With two workers on a 40-hour week, they have 4800 minutes of production capacity with 480 minutes (four hours times two workers) maximum overtime—and that assumes perfect efficiency and 100% utilization. Compare that available capacity of 5280 hours with the capacity to run a lot of each type, and the result is clear: Model A 3.7(150) = 555 + 90 min. setup = 645 minutes Model B 5.1(100) = 510 + 40 min. setup = 550 minutes Model C 4.3(120) = 516 + 60 min. setup = 576 minutes Model D 8.4(350) = 2940 + 200 min. setup = 3140 minutes Model E 11.2(400) = 4480 + 120 min. setup = 4600 minutes Total 9511 minutes

•

Model E has an inventory of 153. This indicates that was most likely the last model run the previous week. It is not clear why those were not designated for the 223 orders for the current week, but it may have to do with Jason scheduling only one week in advance. We can assume, however, that those in inventory can easily be designated for 153 of the 223 orders. It should be noted, however, that even though they can “easily add any subassembly options”, there is still somewhat of a capacity implication to do so. While the exact impact on capacity is not clear from the case, we must assume that 100% utilization of the existing resources for new orders is not possible. The same situation is also true of the other items where inventory exists at the end of last week (Models A and D).

•

If we assume the 153 items in inventory for Model E can be used to satisfy some of the customer orders for Model E in week one, there should be plenty of capacity even not including the small inventory of Models A and D. The total run time to build just the customer orders for Model A through D is 3083.1. Adding setup times for those models uses 3473.1, still easily within the available capacity. The real “killer”, then, appear to be the lot sizes that force run quantities in excess of customer demand each week.

•

The case is not clear as to how he is ordering components, but indications are that this is being done in less than a structured method. The two indications that can be used to assume that are the high inventory levels (3.5 turns) and the fact that he is only scheduling a master schedule one week at a time. He is probably not using MRP 75 .

logic, although this condition does present an opportunity to discuss with students alternatives he might consider to improve the situation. The large amount of component inventory leading to 3.5 turns probably indicates they are using some sort of reorder with very large safety stocks and quite possibly large lots. Informally-run planning systems typically will have large inventory levels, since the company typically does not know what they need and keep large inventories “just in case”. Until Jason is able to investigate (and potentially solve) the lot sizing problem, he needs to carefully manage the capacity he has. In the long term he also should be looking at a forecast much longer than the ten weeks given. If we assume the overall demand is growing (“rapid growth”, as the case states), we can assume we will reach a crisis in capacity again fairly soon in assembly. The forecast for the ten week period shows no growth, implying it is either suspect in accuracy or perhaps in a cyclical “flat” period of demand. In either case, Jason clearly needs to investigate when he will need to add capacity and start to develop a strategy to do so. Shifting to an order promising approach using ATP is certainly one solution, and may be the only viable one until the present circumstance is reversed. This does imply that in the short term a few orders will be late and that they also may need to take no more new orders for short delivery on certain models in the short term. The advantage in promising and delivering accurately to customers is the trade-off, and in the longer term he can more effectively have a chance to meet forecast.: MODEL A Week

Forecast

Customer Orders

Projected Available 10

107

122

137

Available To Promise

124

148

Master Production Schedule

150

MODEL B Week

Forecast

Customer Orders

Projected Available

–6

Available To Promise

100

Master Production Schedule MODEL C Week

Forecast

76 .

Customer Orders

Projected Available

108

Available To Promise

119

120

Master Production Schedule

120

MODEL D Week

Forecast

180

Customer Orders

277

190

178

132

Projected Available 22

255

245

235

225

215

Available To Promise

100

124

287

334

348

Master Production Schedule

350

Week

Forecast

200

Customer Orders

223

174

185

109

Projected Available 153

–70

130

330

130

330

130

330

130

330

130

Available To Promise

156

106

290

386

400

MODEL E

Master Production Schedule

Calculation explanation: All projected available calculated from the larger of customer order or forecast. ATP calculation is non-cumulative, having to accommodate customer orders only until the next MPS. For model E the 2nd week ATP assumes customer orders missed in week one will be taken from the MPS of week 2 in addition to the week 2 customer orders. The same is true for the week 3 ATP in model B, and the ATP for week 4 in model D. Explanation

In general, the first 5 weeks have splitting of lots between weeks in order to catch up with the overloaded condition. Even though the lots are blocked into the master schedules, the sequencing of those jobs and splitting them between weeks becomes critical in the “catch up” mode. You might want to also take this opportunity to discuss with students how some assumptions in these numbers can cause additional problems. The assumptions made in these calculations are, for example, that the facility will operate at 100 percent efficiency, and that the time standards on which the run times and setup times are based are correct. Week 1: Note that this plan calls for running Models A through D in week one. Since that will use 4911 minutes (including setup time) of the 5280 maximum available (with overtime), it is 77 .

doubtful that much more can be done. We can assume that the 369 minutes remaining will be easily used up in adding options to existing inventory, even if (doubtfully) they achieve 100% efficiency and utilization. Note that this implies that seventy orders for model E cannot be met in week one. Customers should be notified immediately. Week 2: model E can be run, taking 4600 minutes. Model D also needs to be run, but the full lot cannot be run. If we assume the setup can be saved over the weekend, we have enough run time to make 57 assemblies (after the 200 minute setup). The remaining 293 assemblies can be run immediately in week 3. This is a perfect example of where the lack of detail in a master schedule using weekly blocks can be deceiving. It appears all customer orders will be met, but by starting the lot in week 2 and finishing in week 3 there will only be 152 of the customer orders met (95 left from week one and 57 made in week 2). Customers for the remaining 38 week two order will have to be notified that their order will be ready early in week 3. Note there will be a shortage of inventory for model B, but model D was selected because not running it would have produced a much larger shortage. Only six of the model B customers will have late deliveries. Week 3: The rest of the week 2 model D lot will take 2461.2 minutes. Lots of model B and C also need to be run. That will leave 1692.8 minutes to start the next needed lot of model E. After setup, that leaves time to complete 140 assemblies. Luckily, with the inventory left after the week 2 run of model E, the 140 assemblies will be adequate to cover all week three customer orders for model E. Week 4: The rest of the lot for model E needs to be run, taking 2912 minutes. Model A also needs to be run. That will leave 1723 minutes to start a needed lot of model D. After setup, they should be able to run 181 assemblies of model D, an adequate number to satisfy week 4 customers for model D. Week 5: The rest of the model D lot needs to be run, taking 1419.6 minutes. Models C and B also need to be run. That will leave enough time (2542.4 minutes after setup) to run 227 assemblies of a needed lot of model E. Those will easily satisfy customer orders for model E in week 5. Week 6: The rest of the lot of model E needs to be finished, taking 1937.6 minutes at the beginning of the week. Model D also needs to be run. The facility has finally caught up. No other models have to be run, meaning no overtime will be needed for the first time. In fact there will be 196.4 minutes left in regular time—time to start the setup reduction analysis. Week 7: Both model E and A need to be run, once again requiring overtime (total time needed is 5245 minutes). Week 8: Model B, C, and D need to be run, but again this implies an overtime-free week. Week 9: Again, no overtime. Only model E needs to be run. Week 10: Technically, only models C and D need to be run, but anticipation of week 11 with a probably need to run models A, B, and E, it might make sense to run a lot of model A early. The inventory is very low and it will need to be run early in week 11. As can be seen in this scheduling scenario, there is little room for flexibility. The facility is just too capacity-constrained in the assembly area. The business should stand a good chance of keeping out of trouble with customers, however, if while they attempt to solve the capacity problem and the flexibility problem associated with lot sizes they use the ATP logic to promise customer orders.

78 .

MULTIPLE CHOICE QUESTIONS 1.

__________ is responsible for determining the capacity required and with methods of making the capacity available. a. Production planning b. Master production scheduling c. Production activity control d. Capacity planning e. Material requirements planning

__________ is responsible for capacity planning at the master production schedule level and _____ at the material requirements planning level: I.

Resource planning

II. Rough-cut capacity planning III. Capacity requirements planning a. I and II b. I and III c. II and III d. none of the above 3.

Available capacity in production planning is: a. the amount of inventory that can be held in a warehouse b. the quantity of work that can be performed in a given period of time c. a measure of the ability of a plant to consume raw materials d. all of the above e. none of the above

________ are generated by the priority planning system and involve the translation of the priorities, generally given in units of product or some common unit, into hours of work required at each work center in each time period. a. Capacity requirements b. Capacity bills c. Work center reports d. all of the above e. none of the above

Rated capacity is calculated taking into account work center ________ and ________ . I.

historical data

II. utilization III. efficiency

79 .

a. I and II b. I and III c. II and III d. none of the above 6.

A work center consists of 2 machines working 8 hours a day and 5 days a week. Historically, utilization has been 80% and the efficiency 90%. The effective capacity, to the nearest hour, would be: a. 80 hours b. 40 hours c. 30 hours d. 50 hours e. 58 hours

The available capacity will be influenced by: I.

product specification.

II. product mix. III. work effort. IV. units of measurement

I, II, and III only

I, II, and IV only

II, III, and IV only

III only

IV only

The percentage of time the work center is active compared to the available time is called: a. efficiency b. effectiveness c. utilization d. Murphy's factor e. up-time

The ratio of standard hours of work produced to hours actually worked is called: a. efficiency b. effectiveness c. utilization d. Murphy's factor e. up-time

10.

(Available time) × (utilization) × (efficiency) is called: a. effectiveness b. useful capacity c. demonstrated capacity 80 .

d. rated capacity e. work time 11.

Which of the following is NOT an input needed in capacity requirements planning? a. Open shop orders b. Planned order releases c. Routings d. Time standards e. Rough-cut capacity

12.

Information on the standard times for an operation will be found in: a. the work center file b. the routing file c. the master file d. the product file e. the production file

13.

Which of the following is the best statement? a. Open shop orders appear as scheduled receipts in the MRP b. Information on queue and wait time can be obtained from the work center file c. The Gregorian calendar is suitable for production planning d. a and b are true e. b and c are true

14.

A ________ shows the capacity required at each work center based on planned and released orders for each time period of the plan. a. work center profile b. load profile c. scheduled order profile d. work-to-be-done report e. work center file

15.

One hundred units of part A are to be processed on a work center. The setup time is 2 hours and the run time per piece is 10 minutes. The total standard time will be: a. 2 hours 10 minutes b. 3 hours 40 minutes c. 10 minutes d. 1000 minutes e. 1120 minutes

16.

In the short run, capacity can be altered by any of the following EXCEPT: a. scheduling overtime b. selecting alternate routings c. reallocating the work force 81 .

d. purchasing new equipment e. subcontracting out 17.

A report that shows the future capacity requirements based on released and planned orders for each time period of the plan is called: a. load report b. capacity report c. order report d. dispatch list e. none of the above

18.

Over the previous three weeks a work center produced 36, 43, and 35 standard hours of work. What is the measured capacity? a. 114 standard hours b. 36 standard hours c. 38 standard hours d. 43 standard hours e. Cannot be determined with this data

19.

A work center was available for work 80 hours, produced 74 standard hours of work and actually worked 67 hours. What is the efficiency of the work center? a. 92.5% b. 110.4% c. 108.1% d. 119.4%

20.

In one week a work center produced 130 standard hours of work. The actual hours worked was 114. The efficiency is: a. 80.8% b. 87.7% c. 92.3% d. 114.0%

21.

Determining the need for labor, machines, and resources to meet the production objectives of the firm is called: a. production control b. sales and operations planning c. capacity planning d. all of the above

22.

(Available time) × (utilization) × (efficiency) is called: a. effectiveness b. useful capacity c. demonstrated capacity

82 .

d. rated capacity e. work time 23.

In one week a work center produces 130 standard hours of work. The hours scheduled are 120, and 105 hours are actually worked. The utilization is: a. 80.8% b. 87.5% c. 92.3% d. 108.3% e. 123.8%

24.

Which of the following best describes the approach to capacity planning in a lean production environment? a.

It is not very important because product designs in a lean environment tend to be standardized

b. It is not very important because equipment and personnel in a lean environment tend to be very flexible c. It is very important because the inventory in a lean production environment tends to be much less d. It is very important because the equipment setup times in a lean environment tend to be much larger 25.

Detailed capacity planning is often considered as not particularly important in a lean production environment for which of the following reasons? a. Product throughput times tend to be longer, allowing for better development of rough-cut capacity planning b. Product throughput times tend to be shorter, negating the need or even the possibility of developing a detailed plan c. Smaller inventories in a lean production environment implies there is both more flexibility and excessive capacity available d. MRP systems are almost never used in an MRP environment, implying a significant lack of data needed for detailed capacity planning

Answers

83 .

CHAPTER 6: PRODUCTION ACTIVITY CONTROL ANSWERS TO PROBLEMS 6.1 Required capacity = 3.5 + 0.233 × 600 = 143.3 standard hours 6.2 Queue at work center A = 20 × 60 = 1200 minutes Work center A operation time = 40 + 100 × 4 = 440 minutes Wait time = 300 minutes Move time from A to B = 30 minutes Queue at work center B = 30 × 60 = 1800 minutes Work center B operation time = 50 + 100 × 5 = 550 minutes Wait time = 300 minutes Move time from B to stores = 180 minutes Total manufacturing lead time = 4800 minutes = 80 hours 6.3 (100 × 4 +100 × 5) ÷ 4800 = 18.75% Note that setup time is not included as actual running time 6.4 Queue at work center A = 40 × 60 = 2400 minutes Work center A operation time = 45 + 50 × 4 = 245 minutes Wait time at A = 480 minutes Move time from A to B = 60 minutes Queue at work center B = 30 × 60 = 1800 minutes Work center B operation time = 30 + 50 × 5 = 280 minutes Wait time at B = 420 minutes Move time from B to stores = 120 minutes Total manufacturing lead time = 5805

minutes

= 96 hours and 45 minutes 6.5 (245 + 280) ÷ 5805 = 9.04% 6.6

84 .

6.7

6.8 Q = 100 units SUA = 50 minutes Q1 = 60 units RunA = 9 minutes per piece Q2 = 40 units SUB = 30 minutes RunB = 6 minutes per piece Transit time = 20 minutes a. MLT for A =50 + 9 × 100 = 950 minutes Transit time = 20 minutes MLT for B =30 + 6 × 100 = 630 minutes Total MLT = 1600 minutes b. MLT for A (Q1) =50 + 9 × 60 = 590 minutes Transit time = 20 MLT for B (Q) =30 + 6 × 100 = 630 Total MLT = 1240 minutes Saving in MLT by overlapping = 1600 – 1240 = 360 minutes Instructor’s note. Ask the students to prove that Q2 will arrive at operation B shortly before Q1 runs out. 6.9 MLT before overlapping. Work center 10: 50 + 200 × 5 = 1050 minutes Transit time = 30minutes Work center 20: 90 + 200 × 8 = 1690 minutes Total MLT = 2770 minutes = 46.2 hours MLT after overlapping. Work center 10: 50 + 75 × 5 = 425 minutes Transit time = 30 minutes Work center 20: 90 + 200 × 8 = 1690 minutes 85 .

Total MLT = 2145 minutes = 35.8 hours and 35 minutes Saving in MLT = 10.4 hours 6.10 a. MLT = 50 + 9 × 100 = 950 minutes b. MLT = 50 + 9 × 50 = 500 minutes c. Saving in lead time = 450 minutes 6.11 MLT = 50 + 50 + 50 × 9 = 550 minutes Reduction in MLT = 400 minutes 6.12 MLT before splitting = 4×60 + 100 × 4 = 640 minutes MLT after splitting = 4×60 + 50 × 4 = 440 minutes 6.13 240 + 240 + (50 × 4) = 680 minutes Lead time increases by 40 minutes. MLT increases. 6.14 Period

Total

Planned input

148

Actual input

137

Cumulative variance

−2

−7

−12

−11

Planned output

160

Actual output

151

Cumulative variance

−2

−7

−9

Planned backlog

Actual backlog

Period

Total

Planned input

390

Actual input

408

Cumulative variance

6.15

86 .

Planned output

400

Actual output

410

Cumulative variance

Planned backlog

Actual backlog

Process Arrival

Due

Operation

time

date

due

6.16 Job

date

(days)

date

Sequencing rule FCFS

EDD

ODD

SPT

123

142

132

124

144

133

131

140

129

132

146

135

Jobs A & B will be on time, and Job C will be late. 6.17

Job

Work center 10

Work center 20

Start day

Stop day

Start day

Stop day

6.18 Critical Ratio Order

Due date

Actual time remaining Lead time remaining

Lead time

Actual time

remaining remaining A

1.36

87 .

0.84

100

1.18

Sequence to run in: B, C, A.

CASE STUDY 6.1 TEACHING NOTES Johnston Products Introduction

This case is a rather simple case, yet can be used very effectively to stress some very important capacity planning issues in a practical situation. Many students should be expected to pick up on most of the concepts here (although they may be surprised by some), but the context of the case in an actual production environment can be used to reinforce these very important capacity considerations. Quantitative Analysis

The quantitative analysis here is quite simple. The total capacity required for each batch is the run time plus setup time (although some students may forget the setup time). The total time required at standard is estimated to be: PRODUCT

Batch Size

Standard Assembly Time in minutes (per item)

Batch Run Time (including setup) in minutes

A174

50 * 17 = 850 + 15 = 865

G820

100

900 + 15 =915

H221

19.5

975 +15 =990

B327

200

11.7

2340 + 15 = 2355

C803

100

21.2

2120 + 15 = 2135

P932

300

14.1

4230 + 15 = 4245

F732

200

15.8

3160 + 15 = 3175

J513

150

17.3

2595 + 15 = 2610

L683

150

12.8

1920 + 15 = 1935

TOTAL TIME = 19225 min. = 320.42 hours Qualitative Analysis

As can be readily seen the total time needed is just over the 320 hours needed. Students may be tempted to say that with the learning curve concept and the fact that the standards are over 4 years old, the reality should be that the schedule is totally feasible. There are several issues in the case that represent capacity problems, however:

88 .

•

The workers have a very high turnover, and they also use several temporary workers. That implies that many of the workers are very new to the equipment, which also means they are very early in their own individual learning curves. If the standards were developed using more experienced workers, many of these new workers could be taking longer that the standards would imply, even with the standards being 4 years old.

•

With the old equipment needed frequent maintenance and subject to breakdown, the case states that each machine would often require about three hours of maintenance a week. Under the assumption that at least some of this would be done during the shift when production was being run, that could imply a loss of about 24 hours (for all eight machines).

•

Engineering changes often represent problems with run time, especially if those changes involved the equipment. Often a major engineering change can cause a “reset” of the learning curve, even for an experienced worker.

•

In an effort to “catch up” with production that is behind schedule, the master schedule would often be front-loaded. This is a fairly common practice in facilities where master schedules are not well managed. Such practices can have an adverse impact on efficiency due to split lots (caused by expediting activities) and material shortages (caused by schedule changes).

Given all these issues, it should not be too surprising to most that the conditions described in the opening of the case are occurring on a regular basis. There are several things that should be considered to get the situation under control. They include: •

Expected time for regular maintenance must be planned in the capacity plan just as if it were production time. Given that the equipment is old, some allowance should also be given for the possibility of unscheduled breakdowns. In the long run, a cost/benefit analysis should be done concerning the replacement of the old equipment. Ordinarily, some may suggest automating to the point where workers are no longer needed. It should be pointed out that such a move might not be possible given the high volume of engineering changes.

•

As long as they have such high worker turnover, they should re-evaluate the standards and set them for an average new worker. In the long run, they should evaluate the costs and benefits of raising worker pay and developing an environment where experienced workers will want to stay with the company.

•

Once standards are re-evaluated and reset as necessary, they should conduct an analysis of the financial tradeoffs between the cost of planning for buffer capacity versus the cost of poor customer service and the expediting activity that is currently occurring. Often companies find they are better off in many ways by allowing for some buffer capacity and then using a well-developed master schedule to order promise each order based on the current load and the capacity available. That is often preferable to quoting a standard lead-time.

89 .

CASE STUDY 6.2 TEACHING NOTES Craft Printing Introduction

This is a fairly basic case dealing with the interaction between detailed scheduling and capacity. It is not intended to be used to provide a complex treatment of scheduling, but instead is intended to provide an illustration of how scheduling in a job shop environment can dramatically impact both capacity utilization and delivery. Even though it is not intended to provide an optimal solution, it can have a powerful impact on student realization of the importance of scheduling and sequencing of operations. It can also help students understand simple scheduling rules and the development and potential use of Gantt charts. Quantitative Analysis

The critical ratio rule is fairly easy to implement here. The ratio used is (time remaining)/(work remaining). For example, to get the critical ratio for job A, the time remaining is 16 hours (the job is due at the end of the day Tuesday), and the work remaining is 12 hours. The critical ratio is, therefore, 16/12 or 1.33. The rest of the ratios are given below: Job

Ratio

1.33

1.45

3.2

3.5

2.9

1.9

That implies the order for the jobs is A, C, H, B, G, D, E (reverting to first come, first serve to break the tie between D and E), and F. Using the method described in the case question, a Gantt chart should look like the following:

90 .

The problem that John has becomes quite clear in the chart. Even though he thinks he has 8 hours “slack”, those hours are quickly used up by operations that have to wait for jobs as they are finished on earlier operations. In fact, only two of the eight jobs will be on time. The jobs and their lateness are given in the following chart: Job

Hours Late

On time

4 hours

1 hour

5 hours

14 hours

2 hours

On time

The value of this chart and accompanying analysis should show students in a rather dramatic fashion that good capacity planning requires not merely a look at the hours, but is also heavily dependent on other factors—in this case on job sequence when jobs must share resources. Students should be challenged to come up with alternative solutions. For example, some may suggest that instead of loading the most important job work center by work center, they should try loading work center one with all jobs in order of priority, then work center two, and so on. Another approach may be to have more flexible workers, allowing a worker in a slack operation to help other operations to reduce the run time (assuming that is possible). Probably one of the more attractive solutions is to have a software solution that will quickly load a proposed job into the operation and, based on what the current load is, develop a reasonable order promise time. Students may come up with others, and should be encouraged to develop their ideas to see if their solution is preferable to the one given. In any case, they should get two important messages from this case. First they should understand the importance of considering all factors that affect load, utilization, and efficiency. Secondly, they should see that there are many approaches to loading an operation, and that the methods used do make (or can make) a considerable difference. In any 91 .

case, they should understand that sequencing and loading an operation is a critical responsibility and should not be taken lightly.

CASE STUDY 6.3 TEACHING NOTES Melrose Products

This case allows the students an opportunity to examine and discuss the pros, cons, and approaches to job design. It starts with a grumbling, “old school” supervisor who believes he really knows what will work and also believes he understands modern approaches and business imperatives. Many students will probably express that they do not like Jim, but this is an opportunity to challenge them with details. One question that seems to evoke some good discussion in some classes is “Why don’t you like Jim? He appears to be responsible and has been successful in getting the job done. Isn’t that what’s really important in a company like this?” This question can sometimes get the students easily and quickly involved in one critical aspect of the case. That is, what are the fundamental differences between the older-style, rigid structure of job design and the newer trend toward self-directed work teams with more flexibility and autonomy for the worker? You can also use this discussion to quickly move the discussion toward the impacts, pros, and cons of both approaches, and thereby leading the discussion toward an examination of the type of work and business environment that may call for the use of each of these approaches. Because of this linkage toward business imperatives, this case should be done after a discussion of fundamental approaches to operations strategy, or can alternatively be used to begin or supplement that discussion. Quantitative Solution

The quantitative analysis part of this case is quite simple, and basically allows the student to clearly see the relationship between standard time development and the impact on standard cost. This analysis can be used as the start of a discussion about the development and use of product cost data, as well as some of the alternative approaches to developing that cost data. The following table shows the full cost calculation: Task

Standard Time (min.)

Labor cost/min.

Labor cost/task

7.5

$0.28

$1.80

2.3

$0.22

$0.506

4.7

$0.28

$1.316

5.1

$0.29

$1.479

17.8

$0.26

$4.628

19.1

$0.18

$3.438

8.4

$0.25

$2.10

TOTAL

64.9

TOTAL:

$15.267

With a total labor cost of $15.27, the overhead can be calculated as $35.11 (230% of $15.27). The total cost is, therefore, $59.73 (when overhead, labor, and materials are all added). Several students will want to add in the supervisor cost of $24 per hour into the product cost. This is generally not done, as the cost of management is normally included in the overhead cost. The 92 .

reason the hourly supervisor cost is given is so students can use the figure to counterbalance the loss of efficiency if a self-directed team is used. Without a supervisor, they can be $24 per hour less efficient and still not have a negative impact on the product cost. There appear to be three employees currently at Melrose working on the K-line. This calculation can be estimated by the following: The standard time for all seven tasks is 64.9 minutes. If we assume there are probably seven productive hours per eight hour shift (given 15 minutes for a morning break, 15 minutes for an afternoon break, and 30 minutes for lunch), we can assume one worker can make an average of 6.47 per shift (7/64.9 = 6.47). Since there are an average of twenty made per shift, that would be about three workers (20/6.47 = 3.09). Qualitative Discussions

There are several models that can be discussed regarding how to develop self-directed work teams. It can be quite productive to let students “brainstorm”, and then examine the pros and cons of their approaches in some level of detail. The purpose of this brainstorming session is to allow students to see the many alternatives and also to realize that each approach has its risks and potential problems. An example of one approach is to eliminate the supervisor (at $24/hour) and add one direct worker (at approximately $15 per hour, given that the direct labor cost for one of the K-line products is $15.27, and takes just over an hour (64.9 minutes). Given that the workers now have the responsibilities previously assumed by the supervisor, it should be expected that the productivity per worker would probably decrease (under the typical productivity measurement approaches). You should note, however, that with one extra worker they should be able to produce approximately the same number of products per shift and reduce total costs by $9 per hour ($24 – $15). The total productivity of the four-person team under those assumptions would, therefore, be greater than the old approach that still uses four people. At this point it is usually helpful to illustrate the importance of measurement systems and cost analysis. A more traditionally focused manager may, for example, think the solution is terrible because of the traditional impact on individual labor productivity and/or labor efficiency. A discussion on the concepts of system versus individual measures may be appropriate and beneficial here. In addition to the earlier discussion about their feeling concerning Jim, the students should be challenged about what the primary responsibilities of a supervisor are, and therefore how these responsibilities can effectively be placed in the hand of the workers. This should very quickly lead to a discussion of the types of environments where they may or may not make sense. For example, in environments with high volume, standard products that are cost sensitive one will typically find low-skilled workers (much of the skill work being done by automation). The student can be challenged to discuss what kind of skills are needed by supervisors in this type of environment and whether it makes sense to try to develop teams instead (in most cases, it won’t make much sense). On the other hand, have them conduct the same exercise in an environment with highly skilled (and often highly motivated) workers. They should eventually see that not all environment have the same supervisory requirements and, therefore, the idea of teams is not appropriate without a complete analysis of the major role of supervisors in the environment. Some students (especially in undergraduate classes) will probably call for firing Jim. That is the easy way out that may seem appealing on the surface. Before that approach is accepted, however, it is helpful to point out the high level of institutional and product knowledge that many long-time employees carry with them. Sometimes that informal knowledge is invaluable to the company. If we assume that Jim quite likely has such knowledge and may be an extremely valuable employee in the right circumstances, the discussion can be channeled toward developing a hypothetical role for Jim in the organization that will effectively utilize his institutional knowledge without undermining the initiatives started by Cindy. 93 .

MULTIPLE CHOICE QUESTIONS 1.

________ is concerned with very short-term detailed planning of the flow of orders through manufacturing: a. Production planning b. Master production scheduling c. MRP d. Production activity control e. Master planning

Planning the flow of work requires production activity control to: I.

be sure the material needed is available

II. be sure the tooling needed is available III. schedule the start and stop dates at each work center IV. advise the plant supervisor of future orders a. all of the above b. I, II, and III c. I, II, and IV d. II, III, and IV e. I, III, and IV 3.

The activities of production activity control can be classified as: I.

planning

II. implementation III. control IV. process control a. I, II, and III b. I, II, and IV c. II, III, and IV d. I, III, and IV e. all of the above 4.

Work authorization can be classified under the function of: a. planning b. scheduling c. implementation d. load leveling e. control

Which of the following are characteristics of intermittent manufacturing? I.

Work centers are arranged according to the routing

II. Work centers are dedicated to producing a limited range of similar products

94 .

III. Work flow through the shop is not constant IV. Throughput times are generally high a. I and II b. I and III c. I and IV d. II and III e. III and IV 6.

Which of the following files is used by PAC for planning? I.

Shop order master file

II. Shop order detail file III. Item master file IV. Routing file a. all of the above b. I and II c. I and III d. II and III e. III and IV 7.

Which of the following files will contain information on manufacturing lead time and quantity on hand? a. Item master b. Bill of material c. Work center file d. Shop order detail file e. Industrial engineer’s file

The ____ shows the total standard time required to produce one end product in each work center required for its manufacture: a. work center bill b. routing file c. capacity bill d. bill of material e. none of the above

Which file contains information on the efficiency and utilization of a work center? a. Efficiency file b. Utilization file c. Routing file d. Work center file e. Either a or b

95 .

10.

A shop order for 1000 pieces is to be processed on work station 123. The setup time is 4 hours and the run time per piece is .08 hours. What is the required capacity on this work center in standard hours? a. 4.08 b. 0.08 c. 80 d. 84 e. 4000

11.

All of the following are elements of manufacturing lead time EXCEPT: a. design time b. setup time c. run time d. wait time e. move time

12.

Which of the following statements is best? a. The largest element of manufacturing lead time is queue b. The larger the load, the longer the queue c. If queue is reduced, the lead time and work in process will be reduced d. All of the above are true e. None of the above is true

13.

A scheduling system in which the last operation on a routing is scheduled first and for completion on the due date is called: a. forward scheduling b. backward scheduling c. infinite scheduling d. finite scheduling e. none of the above

14.

A scheduling system that assumes the required capacity will always be available is called: a. forward scheduling b. backward scheduling c. infinite scheduling d. finite scheduling e. none of the above

15.

Which of the following statements is best? a. Implementation is achieved by issuing a shop order to manufacturing b. Engineering drawings, bills of material and routings may be included in a shop packet c. The dispatch list is the instrument of priority control 96 .

d. All of the above are true e. None of the above is true 16.

Which of the following are methods of reducing manufacturing lead time? I.

Subcontracting

II. Forward scheduling III. Operation overlapping IV. Operation splitting a. all of the above b. I and II c. II and III d. II and III e. III and IV 17.

Operation overlapping means: a. the same job running on two machines at the same time b. using alternate routings c. moving work to the next operation as a group of pieces is completed d. running two or more jobs at the same time e. locating work centers close together to reduce materials handling

18.

Which of the following statements is best? a. A bottleneck (capacity constraint resource) will control the throughput of all products processed by it b. A time buffer should be established before a CCR c. Work centers feeding a CCR should work at full capacity d. a and b are true e. b and c are true

19.

Which of the following statements is true? I.

Throughput is the total volume of production passing through a facility

II. Throughput is controlled by the total capacity of a system III. Work centers feeding bottlenecks should be 100% utilized a. I only b. I and II only c. II and III only d. II only e. III only 20.

Which of the following statements is best? a. Using a non-bottleneck 100% of the time produces 100% utilization b. Time saved at a non-bottleneck saves nothing 97 .

c. The capacity of a system depends on the capacity of the bottleneck d. a and b only e. b and c only 21.

Which of the following is NOT a principle of managing bottlenecks? a. A time buffer should be established after each bottleneck b. The rate of material fed to a bottleneck should be controlled c. Do anything to increase the capacity of a bottleneck d. Use alternate routings e. Change the schedule

22.

If the previous backlog was 20 units, the planned input was 25 units and the planned output was 30 units the planned backlog would be: a. 5 units b. 10 units c. 15 units d. 20 units e. 25 units

23.

The following information is to be used in this and the next question. For the last week a work center had a planned input of 40 standard hours and an actual input of 36 standard hours. The planned output was 40, the actual output 42 standard hours and the beginning backlog was 30 hours. The cumulative input variance was: a. 0 b. –2 c. +2 d. –4 e. +4

24.

The planned backlog was: a. 30 b. 36 c. 40 d. 42 e. 66

25.

Which of the following dispatching rules ignore due dates? a. First come, first served b. Earliest operation due date c. Shortest processing time d. a and b above both ignore due dates e. a and c above both ignore due dates

98 .

26.

Given the following information, which sequence will the orders be run in? ORDER

CRITICAL RATIO

1.5

1.0

0.7

a. ABC b. BCA c. ACB d. CBA e. BAC 27.

If today is manufacturing day 100 and an order has a due date of 120 and a lead time remaining of 25 days, the critical ratio would be: a. 0.8 b. 1.2 c. 1.25 d. 0.25 e. 0.2

28.

In a drum-buffer-rope scheduling system, the "drum" represents which of the following? a. A drum of jobs to be selected b. The master schedule for the operation c. A safety stock of material d. The constraint against too much being loaded into the master schedule

29.

Which of the following is concerned with very short-term detailed planning of the flow of orders through manufacturing? a. Sales and operations planning b. Master production scheduling c. Material requirements planning d. Production activity control

30.

A scheduling system that assumes the required capacity will NOT always be available is called: a. forward scheduling b. backward scheduling c. infinite scheduling d. finite scheduling

31.

An order for 100 of a product is processed on work center 123. The setup time is 60 minutes and the run time is 5 minutes per piece. If the order is run on two machines in the work center, and the setups are made simultaneously, the elapsed time will be: a. 560 minutes b. 500 minutes 99 .

c. 250 minutes d. 310 minutes 32.

The selection and sequencing of available jobs to be run at individual work stations and the assignment of these jobs to workers is called: a. dispatching b. scheduling c. priority management d. production control

33.

Given the following data, which job(s) will be late if the shortest process time sequencing rule is used? Today is day 100. Job

Process

Due

Time

Date

104

106

109

a. all jobs will be on time b. A and B will be late c. A and C will be late d. B and C will be late 34.

Operation overlapping means: a. the same job running on two machines at the same time b. using alternate routings c. moving work to the next operation as a group of pieces is completed d. running two or more jobs at the same time on the same machine e. locating work centers close together to reduce materials handling

35.

Priority rules should be which of the following? I.

Simple to use

II. Clear to users so they can understand them III. Followed without question IV. Consistent with the objectives of the planning system a. all the above b. I, II, and III only c. I, II, and IV only d. II, III, and IV only e. none of the above

100 .

Answers

10 d

11 a

12 d

13 b

14 c

16 e

17 c

18 d

19 a

20 e

21 a

22 c

23 e

25 e

26 d

27 a

28 b

29 d

30 d

31 d

32 a

34 e

35 a

101 .

CHAPTER 7: FUNDAMENTALS OF SUPPLY CHAIN MANAGEMENT ANSWERS TO PROBLEMS 7.1 The first supplier has a risk level of 8 (4 × 2) The second supplier has a risk level of 12 (3 × 4) The third supplier has a risk level of 5 (5 × 1) Question 1 – the highest priority should be the second supplier Question 2 – Since nothing can likely be done to ease the political conflict, the best response would likely be to evaluate and develop sources of supply in other, less risky country settings. In the meantime the inventory levels of the impacted supplies should be grown (if possible) to hedge against problems until new suppliers are developed (or until the political conflict is resolved) Question 3 – The quality risk might have been avoided with better selection or development of suppliers with proven and measurable high quality levels. The same came be said about selecting suppliers in countries with questionable political environments.

CASE STUDY 7.1 TEACHING NOTES Supply Chain “Mini Cases”

The primary purpose of these mini cases is for students to put real situations in a context of issues and problems with real supply chains, especially in non-normal environmental conditions. In many of these situations there is no clear “correct” solution, but the students should gain insights and perspectives from considering alternative approaches together with associated costs and benefits. That is intended to be the major learning opportunity. In most cases the discussion can be started with a simple question “You are a supply chain manager faced with the issue described—what would you do?” Many students will likely generate somewhat simplistic solutions, but then a common follow-up question is “Why did you select that approach—and be as specific as possible?” Use the opportunity to challenge them with possible costs and benefits, and in some cases challenge them with a solution that might not be feasible. As they continue to discuss and attempt to provide approaches, use the discussion as appropriate to reinforce the concepts and characteristics of good supply chain management. CASE 7.1—As a good starting point, the first mini case (a real example) is fairly easy to both explain and find a solution for. Since it happened prior to the development of the modern supply chain concept, it is a good example of the lack of real-time informational links and close information flow and sharing. Use the opportunity to emphasize the importance of designing modern approaches to sharing data and information in real-time within a supply chain. As for a solution, what actually happened was once the problem was clearly understood the chip producers took control. Essentially, they told all their customers that all orders beyond a certain time were cancelled, then each customer was asked to go into their planning systems and determine their real needs over the next couple of months. The producers could then determine what the priority and quantities of orders to satisfy the customers as best they could. They reduced the lead time requirement back to the original six weeks, and stability returned. Essentially, they “forced”

102 .

information sharing into the environment, unlike most effective modern supply chains that have such linkages built into their design. CASE 7.2—The second mini case can be used to explain how this situation can generate a clear “bullwhip” effect in the supply chain, and can be uses to ask students to describe why that is so. Follow-up discussion can focus on how to react in this specific case, and also how in general to eliminate or at least minimize the impact of bullwhip effect situations. The students should be prompted to use as many supply chain concepts as possible (and appropriate) to both deal with the situation and how to return the supply chain to stability. This is also a good opportunity to discuss supply chain risks and how to manage those risks. They should also possibly be prompted to discuss the costs and benefits of each of the solutions they may generate and based on those discussions they might offer their own preference (with justifications). CASE 7.3—This case is again based on a real situation which can potentially generate some lively discussions with respect to the approach they might take if they were the supply manager. The case discussion most likely would require two major issues. The first is to deal with the immediate demand. This discussion might be a good opportunity to highlight the text discussion concerning supply chain agility. The students should be encouraged to be as specific as possible as to how they might go into “expedite” mode, and should also be expected to discuss the potential costs and risks involved with trying to cover the greatly increased demand in a short period of time.

The second major issue is the administration’s call for an abandonment of the current lean approach to supply orders. This is a great opportunity to discuss supply chain risk, the possible approaches to deal with those risks, and the cost/benefit analysis they might use to make a good decision. The students should be prompted to discuss if they would include all supplies or not, and if not, what criteria would they use to make the decision. This is also an opportunity to include a further discussion of the concept and use of threatcasting and risk management as discussed in the chapter. In any case, the student should clearly understand that dealing with this issue should not be attempted until the more immediate problem of a significantly increased (but likely temporary) demand is addressed.

MULTIPLE CHOICE QUESTIONS 1.

Which of the following approaches to better manage production is most commonly credited with being the “catalyst” to the development of the modern supply chain concepts? a. Enterprise Resource Planning (ERP) b. Sales and Operation Planning (S&OP) c. Production Activity Control (PAC) d. Just In Time production (JIT)

Which of the following activities are typically included in managing a supply chain? I.

Procurement

II. Warehousing III. Physical Distribution

103 .

a. I and II only b. I and III only c. II and III only d. I, II, and III 3.

If an organization designs a product for global distribution but production of the final design is postposed in order to meet the needs of a particular local market, which of the following terms is often used to describe it? a. Crossdocking b. Glocalization c. Supply chain agility d. Risk mitigation

If an organization develops a system to evaluate and determine the needs of their customers and then work to align their activities around the needs of the customers, it is commonly known by which of the following? a. Total Sales Analysis b. Enterprise Resource Management (ERP) c. Customer Relationship Management (CRM) d. Collaborative Planning, Forecasting, and Replenishment (CPFR)

Which of the following terms is used to describe what happens when lot sizing and poor communication linkages in the supply chain cause large upheavals in the raw material demand in the supply chain? a. The bullwhip effect b. Capacity disruption effect c. Erratic logistic effect d. The supply disruption effect

A system of linking final retail sales back through the supply chain all the way to production and transportation is frequently called which of the following? a. A supply linkage program b. A quick response program c. Collaborative planning, forecasting and replenishment d. Enterprise resource planning

An approach that utilizes data and information from several sources to analyze future potential problems or disruptions in the supply chain is frequently called which of the following a. future forecasting b. intrinsic forecasting c. economic modeling d. threatcasting

104 .

An organization attempts to minimize the impact of a risk event. Which of the following terms is generally used to describe that attempt? a. Risk avoidance b. Risk prevention c. Risk mitigation d. Risk acceptance

Organizations will often develop programs to reduce waste, produce reusable outputs and minimize resource use. Which of the following term best describes that approach? a. Economic utilization b. Sustainability c. Resource planning d. Capacity management

10.

Which of the waste activities is generally the most environmentally “friendly” and therefore is generally placed at the top of the waste hierarchy pyramid? a. Recover b. Recycle c. Reuse d. Reduce

11.

The United Nations Global Compact generally addresses principles recommended for use in which of the following areas? a. Approaches for safe internet use b. Environmental impacts c. Social responsibility d. Cross-country financial stability

12.

Which of the following life cycle stages tends to promote the use of long-term contract between partners in the supply chain? a. Introduction b. Growth c. Maturity d. Decline

13.

Which of the following terms is used to describe a growing list of records in the supply chain that tend to be linked and stored using cryptography? a. Cloud computing b. Automated storage and retrieval systems c. The Internet of Things (IoT) d. Blockchain

105 .

14.

Which of the following descriptions best describes supply chain event management? a. Using supplier relationship management to evaluate and forecast future needs throughout the supply chain b. Establishing a data base that gathers and classifies shortages or late deliveries throughout the supply chain c. A software that monitors activity in the supply chain to trigger alerts when something unexpected occurs d. An approach to consolidate and standardize quality approach between supply chain partners

Answers

2. d

9. b

10. d

11. c

12. c

13.

14. c

106 .

CHAPTER 8: PURCHASING ANSWERS TO PROBLEMS 8.1 Profit would increase from 10% of sales to 12% of sales. This would represent a 20% increase in profits. 8.2 Factor

Weight

Suppliers

Rating of Supplier

Ranking of Suppliers

Function

Cost

Technical

Credit terms

109

130

RANKING 8.3 Fixed cost = $50,000 Variable cost = $5.00 per unit Unit (average) cost =

50,000 + 5.00 = $5.50 100,000

Price looks high with a profit of $4.50 per unit and there should be some room to negotiate.

CASE STUDY 8.1 TEACHING NOTES Let’s Party Exercise 1

1. This exercise can be used for either a supplier selection or a classroom exercise of selecting a location for a year-end class party. If you want the students to work independently, please see the suggestions under Exercise 2. There are two schools of thought in applying weights and ratings. Weights are the importance of the factors selected. Ratings represent how well each supplier rates on each particular factor. One method allows any weight or rating to be used and the other method restricts the weights. Restrictions can allow only numbers from 1 to 10 for each weight and for each rate and not allow the same number to be used twice. Use your own judgment on this. If there are ten factors in the list then it is reasonable to allow the same weighting one or twice. Try to use different ratings for each location unless there is no difference in say, price. Potential factors for a year-end party could include the following:

107 .

Location

Live Band

Ambience

Parking

Cover Charge

Dancing

Price of Food

Age Restrictions

Cleanliness

Variety of Food

Privacy

Security

Quality of Food

Room Charge

Student Run Facility

Music

Bus Service

Date of Availability

Seating

Smoking

Hours of Operation

Price of Drinks

Service

Stage Area

This exercise is recommended for selecting a supplier of goods or services in an industrial setting. It not only gives good results but, also ensures the input from any sources and the consideration of all factors. When selecting a supplier of industrial goods, the following factors could be considered: Price

Technical Support

Communications

Quality

Financial Strength

Warranties

Policy on Returned Goods

Local Supplier

Cost of Reduction Sharing

Payment Terms

ISO 9000

JIT Methods

Delivery

ISO 14000

Lead Time

Reliability of Service

Minimum Order Size

Location

2. When making the selection based on the weighted-point method it does not always point to a clear winner. The method should, at least remove the bottom two-thirds of the suppliers. In the case of selecting a class party location it should narrow the choices down to at least the top two locations. If the group can agree and there is a clear winner then the method was successful. 3. Often, when performing this analysis and a final score is calculated, people want to go back and change some of the weights. This is a desirable outcome. People now realize the consequences of putting too much value on say, price. They also realize the views and values of other members of the group. This works equally well in both the classroom and industry. Exercise 2

When performing this exercise in the classroom it is important that everyone has an opportunity to contribute to: the factors chosen, the weights and the ratings used. Try to encourage all members to give some input. The exercise can also be done in groups of 3 to 6 students with each student group preparing their own charts. To allow each group the chance to make a presentation it is more interesting to assign different problems to each group. Some suggestions that work well with students could include: a tropical vacation, spring break, a new car, where to live while going to school, pizza (or the local favorite), a movie/show/concert, where to go shopping, where to buy socks/groceries, etc. Summarize the results of each exercise and make sure that the students know how the weights and factors work. In most cases students will want to go back and change some of the rating or 108 .

weights. This is an excellent outcome. The students now realize that some things they feel are of high importance such as price) often have overwhelming consequences. Finally, ask if members of the class feel that they had an opportunity to take part in the decision and if they feel more in agreement then at the start of the exercise. Weighted-Point Supplier Selection

Locations

Factors

Weight

Rating

Score

Rating

Score

Rating

Score

Rating

Score

Rating

Score

Total

CASE STUDY 8.2 TEACHING NOTES The Connery Company

This case is designed to be used as a “launching pad” for a comprehensive discussion of the responsibilities and alternative approaches for purchasing—specifically to emphasize the value of purchasing as a strategically critical business function, and not merely a clerical position. There are a few numbers in the case that can clearly be used to start the discussion. Specifically, •

Dividing the annual cost of goods sold by the inventory value from the balance sheet yields 6.3 inventory turns. As a single number representing just under two months’ worth of inventory, it doesn’t mean a whole lot. It takes on great significance, however, when you realize there are two months’ worth of inventory for a product that takes less than four hours to process! Even building in lots of queue time, a week’s worth of inventory might be 109 .

adequate. The financial impact of that can be clearly shown with the financial information given: •

•

If the inventory is dropped to one week (52 turns), the value will drop from $2,352,117 to $285,195. Inventory holding cost will therefore drop from $493,945 per year down to $59,880 – representing a savings of $434,064, or almost 3% (2.9%) of sales (cost of goods sold). As the product is becoming price sensitive, 3% saving is highly significant.

There appears to be a very large number of suppliers (2872) for only 72 designs. This represents an average of less than $3000 per supplier per year ($8,517,323/2872). This may not only impact transportation cost adversely, but such a small value of purchasing per supplier is not likely to allow Connery much “clout” with negotiations. Suppliers are not likely to be especially cooperative to develop quality, delivery, and mutual value analysis programs with Connery with such a small value of purchased items. There are some key points in the case that should be noted as a basis for discussion:

•

In the past, their close-to-monopoly position in the market allowed for good profitability with little effort, because they could pass along costs in the form of price increases. That situation has turned around (as should be expected), and they are now in a competitive market with the product moving toward maturity (if not close to a commodity product position). While they still have some brand recognition and at least somewhat of a positive advantage with their learning curve, they need to act for the future. Juan was using standard prices from supplier catalogs, and not worrying about transportation costs. While he recognized some quality problems with some suppliers, he apparently did not pay much attention to the inventory implications of buffer inventory needs surrounding quality and delivery concerns.

Approach:

Once the discussion of the analysis sets the stage, the case can be used as a basis for discussion of purchasing, especially in the type of environment described. Jaun needs to start building a case for the actions he inevitably will need to take. Some of the data and information he needs to gather includes: •

•

The performance history of each major supplier, including quality, delivery (cost, delivery speed, and delivery reliability), price, and any other aspects deemed important (for example, willingness to conduct mutual value analysis activity and cooperation on any engineering change activity). The number of suppliers for each product. These suppliers should then be compared, product by product, toward what eventually may become an effort to move toward single sources of supply. This is a good opportunity to move the discussion toward the pros and cons of single versus multiple sources of supply and the criteria used to make such a decision. The design stability of each purchased item. This implies frequency of design changes and the extent of change. This is necessary for the negotiation of stability.

Based on this and other data available, Juan should begin selecting suppliers for discussions on developing closer and longer-term relationships. Criteria should include (but not necessarily limited to) delivery, quality, cost, and mutual value analysis where appropriate. Business cases should be developed for each selection. For example, in some cases a higher cost supplier may be chosen as a single source, but a financial case based on reduced quality cost, delivery cost, or inventory cost can often (and should often) be built. In general, the discussion should focus on how Juan needs to become a purchasing professional and no longer view the position as being primarily clerical.

110 .

CASE STUDY 8.3 TEACHING NOTES Keltox Fabrication

As stated, this case is a simplified description of a real situation. I can be used as the basis for a comprehensive discussion about establishing relationship with suppliers, including issues of negotiation, trust, and cooperation between a company and a supplier. It can also be used to discuss the issues, advantages, and risks of having a single source of supply, especially given the pressures companies have of using single sources as they move toward implementing lean production principles. Students are likely to come up with several plans and some should be selected for discussion in a class setting (if possible) to allow students to think carefully about many issues regarding supplier selection and management of the supplier base. Even after the discussion, they are almost always curious about “what really happened?” The following is a summary and simplified conclusion to the real story: Even though some in the company wanted to “trick” the supplier and gradually increase the order size so that Keltox could build an inventory to use after they took their tooling back and new suppliers were adjusting to the new work, John decided against that for two reasons. First, there was a real risk that the supplier would figure out that Keltox was trying to get rid of them as a supplier. If they guessed such a thing, there was a real risk that the performance would get even worse and also they might try to prevent or slow down the process of Keltox getting into the supplier facility to recover their tooling. More importantly, trying to “trick” the supplier was just dishonest. John wanted Keltox to have a reputation as a fair and honest customer to their current and potential future suppliers, and he speculated that the word of one dishonest action would quickly spread to other suppliers. Instead, John opted to be direct and honest with the supplier and discuss the problem (something the supplier probably should have initiated with Keltox when they became aware of their possible new customer). The supplier said they still had not yet been approved for being the supplier for the new potential customer, and were also uncertain as to when or even if that approval would happen. After some serious discussion and negotiations, this was the final plan: •

•

The supplier would add a shift (and overtime if necessary) to ensure that Keltox would get all their regular orders with good quality components. Added to the regular orders were additional safety orders to allow Keltox to build an inventory of the components in case the supplier won the new customer orders and no longer had the capacity to service Keltox. There were clearly extra costs involved—both inventory holding cost for the extra safety inventory as well as supplier costs for adding capacity (the extra shift and/or overtime). The two companies agreed to split the costs. The supplier knew it was their new customer issue that caused the problem, and Keltox knew that even though the extra inventory cost (holding and a slight item cost increase) was preferred to the unknown and potentially very large cost in failing to meet shipment requirements from their customers. The supplier agreed to keep Keltox informed as to the status of their potential work with getting approved from their new customer. If they did not get approved, Keltox agreed to keep the supplier as long as the deliveries to Keltox were reliable with good quality components. If the supplier did win the approval of their new customer, the supplier agreed to ship the tooling to Keltox on whatever schedule Keltox wanted. The schedule was based on when Keltox calculated that the safety level of each component was at a sufficient level to cover a new supplier being ready to assume delivery of a sufficient quantity of quality components using the Keltox tooling. 111 .

•

As time progressed, the supplier did win approval from the new large customer, meaning the plan for phasing in new Keltox suppliers was implemented and was largely successful, allowing for the new suppliers to be phased in and Keltox customers continuing to get most of their orders on time and with good quality.

MULTIPLE CHOICE QUESTIONS 1.

Which of the following is an objective of purchasing? I.

Obtain goods and services of the required specification and quality

II. Obtain goods and services at the lowest cost III. Be sure the best possible service and delivery are provided by the supplier a. I only b. II only c. III only d. IV only e. all are objectives of purchasing. 2.

Which of the following is NOT a step in the purchasing cycle? a. receipt and analysis of purchase requisition b. selection of vendor c. make up the specification for the product d. issue a purchase order e. receive and accept the goods.

Purchasing departments usually have the responsibility and authority to: a. legally commit the company to a contract b. satisfy the needs of the user department c. determine price and source d. all of the above e. none of the above.

______ originates with the department or person who will be the ultimate user: a. A purchase requisition b. A purchase order c. Vendor selection d. Any of the above e. None of the above.

The decision on what is the “best buy” involves consideration of: a. functional requirements b. price c. quantity required d. all of the above e. none of the above 112 .

____________ is concerned with the end use of the item and what it is expected to do: a. Quantity required b. Functional specification c. Production department d. All of the above e. None of the above

Which of the following is NOT a phase in providing user satisfaction? I.

Quality and production planning

II. Quality and product design III. Quality and manufacturing IV. Quality and use a. all the above are phases in providing user satisfaction b. I only c. II only d. III only e. IV only 8.

Functional specifications set out: a. how the product is to work b. the purpose for which the product is required c. all those aspects or characteristics of a product that are determined by its final use d. none of the above

From the buyer’s point of view the best quality is: a. the most expensive b. the least expensive c. that which is best adapted to a particular use d. that which technically does the best job e. none of the above

10.

Which of the following statements is best in describing quality by specification? a. Standard specifications are set by government and non-government agencies b. Specifications are usually more costly to develop than using a brand c. Specifications tend to ensure more equitable competition d. All of the above are true e. None of the above are true

11.

Which of the following applies to standard products? a. Their prices are comparatively stable b. They are quoted on the basis of list price less discounts

113 .

c. They are purchased ONLY after firm quotations d. Only a and b above apply e. All of the above apply 12.

Products should be specified by brand because: a. price levels of brand items are low b. the number of potential suppliers is restricted c. it is difficult to develop accurate specifications for an item d. all of the above e. a and b above

13.

In which of the following situations would a company probably specify by brand? a. When buying small quantities b. When the item to be bought is patented c. When the item to be bought is made to an industry standard d. a and b above e. b and c above

14.

Which of the following is FALSE regarding description of a product by specification? a. Allows purchase from a number of sources b. Developing specifications is an inexpensive process c. The minimum specifications set by the buyer are likely to become the maximum furnished by the supplier d. All the above e. b and c above

15.

Which of the following is an advantage of specifying by company-developed specification? a. The cost of establishing specifications is low b. It is always possible to draw up specifications for any product c. Unless a performance specification is used, the buyer takes responsibility for performance d. All of the above are advantages e. None of the above is an advantage

16.

Which of the following is the most important responsibility of a purchasing officer? a. Getting the best price b. Getting the best quality c. Selecting the best source d. Ensuring goods are delivered on time e. None of the above

17.

Which of the following is NOT a factor to consider when selecting a supplier? a. Technical ability b. Manufacturing capability 114 .

c. Reliability d. Price e. Political affiliation 18.

Buyers should realize that when they make a continuing purchase they buy more than the vendor’s product. They also buy the supplier’s: a. managerial capabilities b. procurement capabilities c. production capabilities d. technical capabilities e. all the above

19.

Which of the following will help a purchasing officer select potential sources of supply? a. Trade journals b. Purchasing department’s own records c. Advertising d. All the above e. None of the above

20.

Supplier goodwill is necessary because: a. the buyer can expect price concessions b. the buyer can expect presents from the vendor c. the buyer and vendor depend upon each other for communication and problem solving d. all of the above e. none of the above

21.

When using the “ranking method” of evaluating suppliers: a. each supplier is ranked for overall suitability b. important factors are selected and assigned a “weight” c. suppliers are rated against each factor d. weight and rating of each supplier is multiplied for each factor and the total taken as the ranking of the supplier e. all the above are used

22.

Which of the following is (are) a qualification(s) of a good supplier? a. Has adequate plant and facilities b. Has a sound financial position c. Has reasonable prices d. All the above are qualifications of a good supplier e. None of the above is a qualification of a good supplier

23.

Vendors’ costs are important to a purchasing agent because: a. they help in estimating a fair price b. they help in negotiating a fair price 115 .

c. cost determines market price d. a vendor is entitled to a profit just because he is in business e. a and b above 24.

Special items will generally be purchased on the basis of a quotation. The purchasing agent will select on the basis of: a. the lowest price b. the most reliable bidder c. the preference of the department that will use the item d. consideration of all the above e. none of the above

25.

In comparing prices, which of the following factors should be considered? a. Base price b. F.O.B. point c. Installation and tooling costs d. All the above should be considered e. None of the above should be considered

26.

A fair price is: a. the lowest price b. the lowest price that ensures a constant supply of the quality and allows the seller to make a profit c. a competitive price d. all the above e. b and c above

27.

Which of the following is a function of supplier scheduling and follow-up? a. Selecting suppliers b. Establishing specifications c. Releasing orders d. Price determination e. Negotiation

28.

Which of the following statements is true about planner/buyers? I.

Planner/buyers handle more components than planners do

II. Planner/buyers issue material releases to suppliers III. Planner/buyers establish supplier delivery priorities IV. Planner/buyers negotiate prices with suppliers a. I and II only b. II and III only c. III and IV only d. I, II, and III only e. II, III, and IV only 116 .

29.

Which of the following statements is true? a. In contract buying, price and delivery are negotiated each time an order is released b. Contract buying assures suppliers they have a given amount of business and commits them to allocating that amount of their capacity to the customer c. Contract buying is useful for short term purchases d. EDI does not eliminate much of the paper work associated with buying e. None of the above is true

30.

Intranet stands for which of the following? a. A net that includes all who are connected to it b. An external net that can be used by all people c. An internal net normally used within the boundaries of the company d. An net shared by two or more companies e. None of the above

31.

Which of the following is not an objective of the Purchasing Department? a. Ensuring the best possible service and prompt delivery by the supplier b. Developing good supplier relations c. Issuing a regular quantity of purchase orders d. Selecting products that reduce the impact on the environment e. Obtaining goods and services at the lowest cost

32.

If the fixed cost to produce an item is $500, labor is $2.00 per unit and materials are $2.50 per unit; then the unit cost for an order of 1,000 would be: a. $6.50 b. $5,000 c. $5.00 d. $504.50 e. more information is needed to solve this problem

33.

A price that is competitive and allows the seller to make a profit is considered to be a price that is: a. optimal b. fair c. an incentive d. the final price e. the lowest price

34.

Which of the 3R’s has the most positive impact on the environment? a. Reduce b. Reuse c. Recycle d. All of the above have equal impact

117 .

35.

Which of the following departments is most likely to be familiar with knowledge of waste products, the legislation governing their handling and other uses in the company. a. Purchasing b. Maintenance c. Engineering d. Direct Customer Sales e. Human Resources

36.

A Purchasing Agent, wishing to dispose of waste plastic from one of their processes should first contact: a. plant Maintenance b. a buyer of waste materials c. local Government regulators d. the supplier e. the customer who buys the products

37.

After the supplier’s invoice is received which document(s) are needed to approve payment? a. The approved budget and the purchase order b. The purchase order and the receiving report c. The purchase order and the invoice d. The bill of lading and the receiving report e. Approval can be made from the purchase order

38.

Verifying shipments for quantity and having no damage is the responsibility of: a. the quality department b. the purchasing department c. accounts payable d. the receiving department e. the shipping department

39.

Which of the following represents the best example of environmentally responsible purchasing? a. Standardizing product designs to reduce waste in supplier production processes b. Using multiple warehouses of supplier material, thereby reducing fuel usage to transport to those warehouses c. Working with suppliers to reduce packing materials or developing reusable packaging materials d. Developing measurement systems for supplier to use to shut down equipment when not directly used for production

40.

Which of the following is the best example of a purchasing practice that might be considered unethical? a. Giving preference to suppliers that are also customers b. Using single source suppliers for all information technology systems 118 .

c. Working with a customer to establish locating some supplier inventory in the customer’s warehouse d. Using private contract carriers for transportation of supplier inventory Answers

119 .

CHAPTER 9: FORECASTING ANSWERS TO PROBLEMS 9.1 Forecast for month 4 =

255 + 219 + 231 = 235 3

Forecast for month 5 =

219 + 231 + 228 = 226 3

9.2 Month

Actual demand

Forecast

9.3 Month

Actual demand

102

105

100

106

100

105

100

102

Forecast

120 .

9.4 Forecast for February = (.14)(136) + (.86)(122) = 123.96 = 124 9.5 Forecast = (.2)(83) + (.8)(100) = 96.6 = 97 9.6 Month

Actual demand

Forecast demand

260

250

230

248

225

244

245

240

250

241

243

9.7 Month

Actual demand

102

105

100

106

101

105

101

Forecast

The two forecasts for month 11 are the same (both are 99). 9.8 Week

Actual demand

Forecast

103

100

112

101

121 .

113

104

120

106

128

110

131

115

140

119

142

124

129

9.9 Seasonal index = 140 ÷ 175 = .80 9.10 Average quarterly demand = 300 Forecast for first quarter = 300 × 0.8 = 240 9.11 Average month’s demand = 1800 ÷ 12 = 150 January seasonal index = 70 ÷ 150 = 0.47 January forecast = 0.47 × 2000 ÷ 12 = 78 9.12 Month

Average demand

Seasonal index

January

0.28

February

0.46

March

0.78

April

110

1.01

May

125

1.15

June

245

2.25

July

255

2.34

August

135

1.24

September

100

0.92

October

0.83

November

0.46

December

0.28

Total

1305

9.13 Month January

Seasonal index

Forecast

0.28

47 122 .

February

0.46

March

0.78

130

April

1.01

168

May

1.15

192

June

2.25

375

July

2.34

390

August

1.24

207

September

0.92

153

October

0.83

138

November

0.46

December

0.28

9.14 Deseasonalized April demand = 1480 ÷ 2.5 = 592 units 9.15 Quarter

Actual Seasonal Depersonalized demand index demand

130

0.62

210

170

1.04

163

375

1.82

206

0.52

173

Total

765

9.16 a. Deseasonalized last month’s demand = 180 ÷ 1.2 = 150 b. Deseasonalized forecast for next month = alpha (last period’s deseasonalized demand) + (1 – alpha) (last period’s deseasonalized forecast) = .3 (150) + (1 – 0.3) (100) = 115 c. Forecast of seasonal demand = 0.8 × 115 = 92 9.17

Month

Forecast Average Seasonal Demand Past Index Next Demand Year

December

300

1.14

342.

January

400

1.52

456

February

220

0.83

249 123 .

March

130

0.50

150

Total

1050

Period

Forecast

Actual demand

Absolute deviation

110

107

110

122

110

Total

550

9.18

MAD = 14.4 9.19 Period

Forecast

Actual demand

Absolute deviation

100

106

105

110

115

135

120

105

125

118

Total

675

644

MAD = 13.8 9.20 Period Forecast Actual Deviation

Cumulative Tracking deviation signal

100

110

0.67

105

−15

−5

−0.33

110

−25

−30

−2.00

115

110

−5

−35

−2.33

120

105

−15

−50

−3.33

125

−30

− 80

−5.33

124 .

Period 6. Yes. From period 2 on, all tracking signals are negative and increasingly so. This indicates demand is falling short of forecast.

CASE STUDY 9.1 TEACHING NOTES Northcutt Bicycles: The Forecasting Problem Introduction

Northcutt Bicycles is a relatively basic forecasting situation. While the major thrust of the case is a quantitative analysis of the demand data in the case, it also provides an opportunity to discuss with students the issues of applying forecasting solutions in a growing company, and in particular how the quantitative analysis of the forecasting data can be used in conjunction with the qualitative issues of the actual company situation. As with other cases involving small but growing companies, Northcutt is faced with the possible need to formalize their approaches to business if they are to continue with successful growth. Quantitative Analysis

The first thing students should do in the case is plot the data to obtain a “picture” of the situation, as is indicated by the first case analysis question. The basic plot is attached to this note. Students should readily see that the data shows clear seasonality (as should be expected from the type of product), and also shows a clear upward overall growth trend. This is important for them to note, as any effective forecasting approach should include capturing both trend and seasonality components. In the second question, some students may use as one of their methods a “collapse” of the data into quarterly rather than monthly data points (as suggested by case question 4). If so, you can use this opportunity to discuss that while such an approach may provide “better” forecasts (in that the average MAD or MSE may be smaller), the method will also result in a loss of detail. You can use this opportunity to discuss the trade-offs involved and the type of conditions where such a collapse of data may or may not be appropriate. Included with this note are two examples of approaches used. The first is a simulation using Winter’s Model, which is a smoothing model incorporating both trend and seasonality smoothing constants. The simulation was set up to search for the best smoothing constants, starting at 0.01. The criterion for selection was the smallest MAD. In this case the simulation selected an alpha of 0.23093, a beta of 0.01036, and a gamma of 0.41165. The resulting MAD was 194.84. Using this model, the forecast for the next four months (rounded) was: 755 1101 1041 1217 Students may want to know why only four months was asked for. If so, this question is a good opportunity to discuss with them the assumptions of time-series models and how the accuracy of such models falls off when used for long-term forecasts. The second model used was simple regression. Regression captures trend very well, but seasonality must be dealt with separately. At least three approaches can be used here. One is to use multiple regression with dummy variables. The second is to compute seasonality multipliers, apply them to the data (to “de-seasonalize” it), then reapply the multipliers after the forecast is 125 .

made. The third approach (used here) is to regress each month separately. The forecasts using this method were: 789 1480 1207 1250 It is noteworthy that the February forecast is so much larger using the regression. Looking at the raw data shows that the demand in February is growing with a larger trend (in fact the regression shows a trend growth of 231 units per year for February. In contrast, the trend for January is 69.3, March is 130.3, and April is 81.1. Students should be expected to be able to discuss the differences in the models, how those differences come about, and what should they do about it if this was their company. They should also be capable of discussing (and not just showing) methodologies to determine which method was “best.” Typical approaches use computation of MAD or MSE. Qualitative Issues

The last three case questions address some of the qualitative issues in the case. The first of these addresses the inclusion of the qualitative knowledge into forecasts. While the time series analysis of the data help provide patterns of demand, there are still many issues that cannot be captured. They include, of course, issues of competitive moves, economic factors, advertising and promotional activities, and so forth. Clearly Jan’s knowledge of these qualitative issues can and should be used in combination with the quantitative analysis to provide the best overall forecast for the business. The last two questions address the issue of the size and the general management approaches that the business size suggests. Some might suggest the business is too large to continue running it as it has been run in the past. That may in fact be true, but the best solution is seldom to shrink. Instead she should look to formalize approaches to manage the growth and size. She needs to not only incorporate the forecast methodology into the business, but also needs to develop approaches to capacity and inventories that will best serve both her customers and the needs of her business. The alternatives can be discussed in general at this point in the case, but can then be addressed more explicitly if you wish to “revisit” S&OP concepts.

CASE STUDY 9.2 TEACHING NOTES Hatcher Gear Company

To start with, students might be interested to know that this case is based on a real situation. The numbers and conditions are somewhat simplified to make a “mini” case, and the names and even the product have been changed. This case has two possibly interesting discussion points that can be used. First is how this situation should never exist if the company was using Sales and Operations Planning (S&OP), and using it appropriately. The students may wish to discuss how proper S&OP would have prevented the dilemma, and use this example to review the approach to S&OP. With all the proper executive-level people in the S&OP meetings, the demand forecast given by the Director of Sales and Marketing should have been discussed, and the final demand number used to order the steel would have been agreed to by all, including the general manager. In other words, Jaya should have never been placed into such a difficult situation. These are essentially the points that should be made in the solution for the second case question. 126 .

The second discussion point clearly deals with the forecasting problem and the dilemma in which Jaya was placed (the first assignment question). Experience has shown that many students who do not analyze the problem completely would “split the difference” and select a number in the middle between the past average demand (fairly steady at about 10,000 gears per year) and the new forecast of 16,000—in other words, they will say to order enough steel for 13,000 gears. These students should be challenged if they think that is really the best solution—try to see if other students agree or not, and often some good discussion should evolve. The forecasting approach here is clearly qualitative forecasting, and in most companies it is the sales and marketing people who are generally more aware of the market and the customers, and should therefore be a critical source in making a qualitative forecast. Student should be asked why Jaya called Phil and asked him all those questions. Clearly those are the questions that Phil should have been dealing with to make the forecast, and given that he clearly seemed to know the answers then one must ask why he came up with the forecast of 16,000 when clearly for the past several years the sales showed nowhere near that number. Students should discuss this to realize that when using qualitative forecasting methods that human emotions often “get in the way”. Some sales people, for example, may purposely set a low number when they forecast in order to potentially make themselves look good when the number is exceeded. Also they may have had a very poor sales period recently and are therefore overly pessimistic. Clearly the opposite can happen—a very successful recent sales period can make them overly optimistic about the market. This could be what has happened in this case. Also artificially inflated forecast numbers can come about as a result of the sales people using the forecast as a “target”—some lofty goal they wish to obtain. In this case one or perhaps even both of these last two situations might have happened. Jaya, on the other hand, cannot afford to be impacted this way. It should be recognized by the students that what Jaya was doing when she asked all those questions about customers was, in fact, conducting the type of qualitative forecasting that Phil should have been using. The answers that Phil gave, together with a simple analysis of the demand from the past six years, should make a strong case for ordering little more than enough steel for about 10,000 gears. Since customer service is so important and timing is such a problem, Jaya may wish to err somewhat on the side of safety stock. Since the largest demand over the past six years was 10,145, Jaya may decide on ordering enough for perhaps 10,300, but likely no more than enough for 10,500. Any more safety stock than that may produce inventory holding costs that could be problematic. More sophisticated students should be able to point out that the past demand data given would allow for a basic statistical analysis to be undertaken, providing both a mean and standard deviation. Even though the concept of safety stock is developed later in the text (Chapter 12), you may wish to introduce it here and use the material in Chapter 12 to reinforce the concepts. The mean of the demand data is 9962, and the standard deviation is 151. Given that, and with a target customer service level of 97 percent, two standard deviations of safety stock would suggest buying enough steel for 10,264 gears. Students may wish to know that in the real situation, the real “Jaya” ordered enough steel for 10,400, even though she knew that might be a bit high given the facts she had. She then spent a nervous year until at the end she realized that the real demand came in at just a few gears over 10,000 gears—but slightly less than 10,400. Also in the real situation, the real “Jays” made a recommendation for a more comprehensive approach to planning in the future (basically a Sales and Operations Planning approach), but few (including the General Manager and the Director of Sales and Marketing) in the Company thought it was worth the trouble. Shortly after her recommendation for comprehensive planning was rejected, Jaya became discouraged and concerned that the situation in the case could become a regular problem. She left the Company for a new position.

127 .

MULTIPLE CHOICE QUESTIONS 1.

Which of the following statements is best statement about forecasting? I.

It must be done by all who wish to meet the demands of the future

II. Companies who make-to-order to NOT have to forecast a. I and II only b. I only c. II only d. neither I nor II 2.

Which of the following is NOT a component of a demand pattern? a. Trend b. Standard deviation c. Seasonal variation d. Random variation e. All of the above are components of a demand pattern

Given this product tree which item(s) should be forecast?

a. only A b. A, B and C c. D and E d. B, C, D, and E e. all items should be forecast 4.

Which of the following is the best statement about the general principles of forecasting? a. Forecasts are more accurate for larger groups of items b. Forecasts are more accurate for nearer periods of time c. Every forecast should include an estimate of error d. All of the above are general principles of forecasting e. None of the above is a general principle of forecasting

Which of the following statements is best? a. Dependent demand items should be forecast b. A forecast for sales next week will not be as accurate as for a year from now c. Forecasts for families of products should be built up from individual product forecasts d. All of the above are true e. None of the above is true 128 .

Which of the following statements is best? a. If we wish to forecast demand, then past sales must be used for the forecast b. Forecasts made in dollars for total sales should be used for manufacturing c. Forecasts should be made for all items, models, and options manufactured d. All of the above are true e. None of the above is true

A firm manufactures a line of vacuum cleaners composed of standard, custom and deluxe models. All are essentially the same except for the options and add-ons. What should they forecast? a. The total of all models b. Each model c. Each model and add the forecasts together d. All of the above e. None of the above

Which of the following is NOT true? a. Number of orders shipped is a good measure of demand for an item b. Circumstances relating to historical data should be recorded c. Demand for different groups should be recorded separately d. None of the above is true

Which of the following statements is best regarding forecasting techniques? a. Qualitative techniques are based on judgment b. Techniques that use external economic indicators are classified as extrinsic c. Intrinsic techniques use historical data d. All of the above are true e. None of the above is true

10.

What important assumption is made about statistical (quantitative) forecasting methods? a. The past is a valid indicator of the future b. Demand trend is seldom linear c. Seasonal variations are small d. Random variations are small e. All of the above

11.

Which of the following methods can be used to forecast the demand for a NEW product? a. Equation fitting b. Moving averages c. Qualitative techniques d. All of the above e. None of the above

129 .

12.

A forecasting technique that takes the average demand for some past number of periods is called: a. trend time analysis b. moving average c. exponential smoothing d. none of the above e. all of the above

13.

Demand over the past three months has been 700, 750, and 900. Using a three-month moving average, what is the forecast for month four? a. 700 b. 750 c. 900 d. 783 e. 822

14.

The old forecast was for 200 units and last month’s sales were 225 units. If α (alpha) is 0.2 what is the forecast for next month? a. 200 b. 225 c. 212½ d. 205 e. 210

15.

Select the one best answer from the following: a. Demand fluctuations that depend on the time of the year, week or day are called seasonality b. The seasonal index is an estimate of how much the demand during the season will be above or below the average demand c. Seasonality ALWAYS occurs in summer, winter, spring and fall d. a and b are true e. b and c are true

16.

If the average quarterly demand is 200 units and the first quarter demand is 350 units, what is the seasonal index for the quarter? a. .57 b. 200 c. 350 d. 1.75 e. none of the above

17.

Select the one best answer from the following: a. Deseasonalized data should be used for forecasting b. Seasonalize the base forecast to predict actual demand for future periods 130 .

c. Actual sales should only be compared on a month-to-month basis d. a and b are best e. b and c are best 18.

If the February demand for a product is 5,000 units and the seasonal index for February is 0.75, what is the deseasonalized February demand? a. 3,750 b. 6,667 c. 8,750 d. 10,000 e. 15,000

19.

Forecast error will be caused by: a. random variation from the average demand b. errors in forecasting average demand c. differences in lead times d. a and b above e. none of the above

20.

Select the one best answer from the following: a. the mean absolute deviation can be used as a measure of forecast error b. usually forecast error is distributed normally about the average demand c. in a normal distribution the error will be within 1 MAD of the average about 60% of the time d. all the above are true e. none of the above is true

21.

Select the one best answer from the following: a. forecasts do not need to be tracked b. forecast error does not need to be measured c. when actual demand exceeds a reasonable error, it should be investigated to discover the cause of the error d. all the above are true e. none of the above is true

22.

Forecasts are far more accurate for which of the following? a. Short term b. Individual items c. Product families d. End use components

23.

Which of the following is good for short-range forecasts, can detect trends, but lags the trend? a. Exponential smoothing b. Stable forecasting 131 .

c. Forecast smoothing d. Moving average 24.

Which of the following is NOT a source of demand? a. Internal customers b. External customers c. Stockholders d. Spare parts

Answers

16 d

10 a

11 c

12 b

13 d

14 d

19 d

20 d

21 c

22 b

23 a

132 .

17 d

18 a

CHAPTER 10: INVENTORY FUNDAMENTALS ANSWERS TO PROBLEMS 10.1 Average annual inventory in transit =

11 × 10,000 = 301.4 units 365

10.2 Average annual reduction in inventory in transit =

3 × $2,500,000 = $20,547.95 365

10.3 Annual carrying cost = (.12 + .07 + .08)($1,000,000) = $270,000 10.4 Annual carrying cost = (0.1 + 0.23 + 0.55)($12,000) = $10,560 10.5 Average ordering cost =

$90,000 + $22 = $32 9,000

Annual ordering cost = $32 × 9,000 = $288,000 10.6 Annual ordering cost = $75,000 + $30 × 6,000 = $255,000 Annual carrying cost = (.08 + .09 + .10)($250,000) = $67,500 10.7 Quarter 1

Quarter 2

Quarter 3

Quarter 4

Total $

Sales

1000

2000

3000

2000

8000

Production

2000

Ending inventory

1000

Average inventory

500

1000

500

Inventory cost

1500

3000

1500

Quarter 1

Quarter 2

Quarter 3

Quarter 4

Total $

Forecast demand

5000

7000

8500

9500

30000

Production

7500

30000

Ending inventory

2500

3000

2000

Average inventory

1250

2750

2500

1000

Inventory cost

7500

16500

15000

6000

0 6000

10.8

Annual cost of carrying safety stock = $6 × 4 × 100 = $2,400

133 .

45000

10.9 Quarter 1

Quarter 2

Quarter 3

Quarter 4

Total $

Forecast demand

3000

4000

6500

20000

Production

5000

20000

Ending inventory

2000

3000

1500

Average inventory

1000

2500

2250

750

Inventory cost

3000

7500

6750

2250

19500

10.10 Owners’ equity = assets – liabilities = $2,000,000 – $1,600,000 = $400,000 10.11 Assets = liabilities + owners’ equity = $4,000,000 + $1,300,000 = $5,300,000 10.12 Revenue

$3,000,000

Direct labor

$700,000

Direct material

$900,000

Factory overhead

$800,000

= $2,400,000

Gross margin

= $600,000

General and administrative expense

= $350,000

Net income

= $250,000

10.13 Profit would increase by $200,000 10.14 a. Turns ratio =

annual cost of goods sold $12,000,000 = = 5.3 average inventory $2,500,000

b. Average inventory =

annual cost of goods sold $12,000,000 = = $1,200,000 tuns 10

Reduction in inventory = $2,500,000 − $1,200,000 = $1,300,000 c. Annual savings = 20% × $1,300,000 = $210,000 10.15 a. Turns ratio =

$30,000,000 =6 $5,000,000

b. Average inventory =

$30,000,000 = $3,000,000 10

c. Reduction in inventory = $5,000,000 – $3,000,000 = $2,000,000 Annual savings = 25% × $2,000,000 = $500,000

134 .

10.16 Average daily usage = 7200 ÷ 240 = 30 units Days of supply = 900 ÷ 30 = 30 days 10.17 Annual unit usage

Unit cost $

Annual $ usage

21000

$21,000

5000

$40

$200,000

1600

$4,800

12000

$12,000

1000

$100

$100,000

$50

$2,500

800

$1,600

10000

$30,000

4000

$4,000

5000

$5,000

Part number

Total

$380,900

Part number

Annual $ usage

Cumulative Cumulative Cumulative Class $ usage % $ usage % of items

$200,000

52.51

$100,000

$300,000

78.76

$30,000

$330,000

86.64

$21,000

$351,000

92.15

$12,000

$363,000

95.30

$5,000

$368,000

96.61

$4,800

$372,800

97.87

$4,000

$376,800

98.92

$2,500

$379,300

99.58

$1,600

$380,900

100.00

100

135 .

10.18 Part number

Annual unit usage

Unit cost $

Annual $ usage

200

$10

$2,000

17000

$68,000

60000

$360,000

15000

$15

$225,000

1500

$10

$15,000

120

$50

$6,000

25000

$50,000

700

$2,100

25000

$25,000

7500

$7,500

Total

$760,600

Part number

Annual $ usage

Cumulative Cumulative Cumulative Class $ usage % $ usage % of items

$360,000

47.96

$225,000

$585,000

77.94

$68,000

$653,000

85.85

$50,000

$703, 000

92.42

$25,000

$728,000

95.71

$15,000

$743,000

97.68

$7,500

$750,500

98.67

$6,000

$756,500

99.46

$2,100

$758,600

99.73

$2,000

$760,600

100.00

100

136 .

10.19 Cumulative %

Cumulative % of Items

Description

Qty Used/Year

Value

Dollar Usage

Pct of Total

of Dollar Value

B99

8,000

$23.00

$184,00 0

34.7%

12.5%

V94

5,500

$19.00

$104,50 0

19.7%

54.4%

25.0%

Y12

1,100

$62.00

$68,200

12.9%

67.3%

37.5%

H64

1,200

$41.00

$49,200

9.3%

76.6%

50.0%

C34

4,000

$12.00

$48,000

9.1%

85.6%

62.5%

R74

1,440

$33.00

$47,520

9.0%

94.6%

75.0%

P77

400

$72.00

$28,800

5.4%

100.0%

87.5%

0.0%

100.0%

$530,22 0 M22 should be handled as either an “A” or “B” item. The key would be its importance to the item - the difficult to obtain and long-lead time lend themselves to “A” status - but the price may keep it to “B” status - how important is it?

CASE STUDY 10.1 TEACHING NOTES Randy Smith, Inventory Control Manager

This case has several applications and uses for discussion about inventory, but the first thing most students should focus on is the potential for analysis using ABC. First we can obtain the average annual usage in dollars, giving: Part Number

Part unit value in $

Quantity currently in inventory

Average annual usage

Annual usage in $

1234

$2.50

300

3000

$7,500.00

1235

$0.20

550

900

$180.00

1236

$15.00

400

1000

$15,000.00

1237

$0.75

7900

$5,925.00

1238

$7.60

180

2800

$21,280.00

1239

$4.40

5000

$22,000.00

137 .

Class

1240

$1.80

200

1800

$3,240.00

1241

$0.05

1200

$60.00

1242

$17.20

950

2000

$34,400.00

1243

$9.00

160

4500

$40,500.00

1244

$3.20

430

8000

$25,600.00

1245

$0.30

500

10000

$3,000.00

1246

$1.10

7500

$8,250.00

1247

$8.10

2100

$17,010.00

1248

$5.00

390

4000

$20,000.00

1249

$0.90

830

6500

$5,850.00

1250

$6.00

700

3100

$18,600.00

1251

$2.20

6000

$13,200.00

1252

$1.20

480

4500

$5,400.00

1253

$5.90

230

900

$5,310.00

This table can then be sorted according to the last column, giving:

Annual usage in $

Part Number

$40,500.00

1243

$34,400.00

1242

$25,600.00

1244

$22,000.00

1239

$21,280.00

1238

$20,000.00

1248

$18,600.00

1250

$17,010.00

1247

$15,000.00

1236

$13,200.00

1251

$8,250.00

1246

$7,500.00

1234

138 .

$5,925.00

1237

$5,850.00

1249

$5,400.00

1252

$5,310.00

1253

$3,240.00

1240

$3,000.00

1245

$180.00

1235

$60.00

1241

This table shows a fairly clear “cut off” point for the “A” items—parts 1242 and 1243. The cutoff point between the “B” and “C” items is a bit less clear—providing an opportunity to allow the students to discuss the tradeoffs between having more items classified as “B” or not. Including more items provides more control, but also tends to cost more money to obtain that control. It also allows discussion that the classification of “A”, “B”, and “C” is clearly somewhat subjective. Once that discussion is complete, the case provides several other areas for discussion: •

Part 1236 is a good example of anticipation inventory

•

Part 1241 is a good example of why some parts may need to be artificially classified at a higher level. The part clearly is a “C” item from the table above, but the erratic supply history and long lead time suggests it be “upgraded” to a “B” or even an “A”.

•

Part 1242 shows both some anticipation and some transportation issues

•

Part 1246 is another example of a part that might be “upgraded” in its classification—this time because of the quality history.

•

Part 1248 can actually be used to help transition into the third question in the case (other information needed). This example brings into question the accuracy of the data itself. How accurate are the quantities? How accurate are the locations in the records? What methods are used to monitor and maintain the record accuracy?

•

Part 1253 can provide more discussion about the records and their accuracy. Why were items that were shown to have unacceptable quality kept with good items, and not clearly indicated on the inventory records?

The remainder of the discussion about the policy should also include some discussion as to how they want to (or if they want to) indicate “special” cases, such as anticipation inventory, returned stock, items awaiting transportation, and so forth. While not essential to the case, the discussion points in the case can be used to launch into approaches to cycle counting and other control approaches for inventory.

139 .

MULTIPLE CHOICE QUESTIONS 1.

Which of the following statements is best about inventory management? a. Inventories and production can be managed separately b. Inventory is not important at the production planning level c. Inventories are usually insignificant on the balance sheet d. All the above are true e. None of the above is true

___________ are materials that have entered the production process and ___________ are materials that are used in the production process but do not become part of the product. I.

Raw materials

II. Work in process III. Finished goods IV. Maintenance, repair and operational supplies a. I and II b. II and III c. III and IV d. I and III e. II and IV 3.

Inventories that are built up in advance of a peak selling season, a promotion program or a plant shut-down are known as: a. lot-size inventories b. transportation inventories c. safety stocks d. anticipation inventories e. none of the above

Transportation inventories can be reduced by: a. reducing transportation time b. reducing order quantities c. increasing order quantities d. reducing the order point e. none of the above

Items that are purchased or manufactured in quantities greater than needed immediately create ________ inventories: a. anticipation b. lot size c. hedge

140 .

d. any of the above e. none of the above 6.

Select the one best of the following statements: a. inventories allow manufacturing to level out production and to satisfy peak demand b. inventories allow manufacturing to reduce production runs, reducing unit cost c. inventories allow manufacturers to operate different work centers at the same output d. all the above are true e. none of the above is true

Which of the following company objectives are in conflict? I.

Maximize customer service

II. Low-cost plant operation III. Minimum inventory investment a. I, II, and III b. I and II only c. I and III only d. II and III only e. none of the above 8.

In managing inventory, the problem is to balance the inventory investment with: I.

Customer service

II. Costs associated with changing production levels III. Costs of placing orders IV. Transportation costs a. II and III only b. III and IV c. I, II, and III only d. II, III, and IV only e. I, II, III, and IV 9.

Which of the following costs are relevant to inventory management decisions? a. Carrying costs b. Ordering costs c. Capacity-related costs d. All the above e. None of the above

10.

Which of the following is NOT a cost of carrying inventory? a. Capital costs b. Storage costs c. Purchase cost

141 .

d. All the above e. None of the above 11.

Which of the following are considered ordering costs? I.

Production control costs

II. Lost capacity costs III. Risk costs a. I, II, and III b. I and II c. I and III d. II and III e. none of the above 12.

Which of the following statements is NOT true? a. The annual cost of ordering depends on the number of orders per year b. The annual cost of ordering can be reduced by ordering less at any one time c. The annual cost of carrying inventory can be decreased by ordering less at one time d. All the above are true e. None of the above is true

13.

Which of the following costs would NOT be included in the cost of placing an order? a. Setup costs b. Costs of placing a purchase order c. Back-order costs d. All the above e. None of the above

14.

Which of the following would NOT be included in calculating inventory carrying costs? a. Capital costs b. Ordering costs c. Obsolescence costs d. All the above e. None of the above

15.

Which of the following equations is correct? a. Assets = liabilities + revenue b. Profit = revenue + owners’ equity c. Liabilities = assets – owners’ equity d. Revenue = accounts receivable – liabilities

16.

If the annual cost of goods sold is $10,000,000 and the average inventory is $2,000,000, what is the turns ratio? a. $8,000,000 b. 5 142 .

c. 0.2 d. 20% e. cannot be calculated from the information given 17.

If there are 20 working days in a month, the monthly usage is 660 units, and there are 100 units on hand, approximately how many days’ supply are there? a. 3 b. 5 c. 7 d. 33

18.

Which of the following statements is most accurate? a. About 20% of the items will usually account for about 80% of the total value b. ‘A’ class items should have the tightest possible control c. The general rule using the ABC approach is to have plenty of everything in stock d. a and b only are true e. None of the above is true

19.

Of the following statements, which are true? I.

‘A’ items usually account for about 70%−80% of the total usage value

II. About 50% of the items usually account for 50% of the value III. ‘C’ items should be given the top priority in inventory management a. I and II only b. II and III only c. I and III only d. III only e. I only 20.

Which of the following statements is best? a. Two items with the same part number but in two different inventories would be one stock keeping unit (SKU) b. Two white shirts of different sizes in the same inventory would be one SKU c. Two items with the same part number in the same inventory would be one SKU d. All the above are true e. None of the above is true

21.

Delivery of goods from a supplier is in transit for 14 days. If the annual demand is 2600 units, what is the average annual inventory in transit? a. 99.7 units b. 100 units c. 1.97 units d. Cannot be determined from the data given

143 .

22.

A company carries an average annual inventory of $1,000,000. If the cost of capital is 10%, storage costs are 8%, and risk costs are 7%, what does it cost per year to carry this inventory? a. $100,000 b. $80,000 c. $70,000 d. $250,000 e. cannot be determined from the data given

23.

Which of the following would not be considered work-in-process inventory? I.

Finished goods in the stockroom

II. Processed material waiting for inspection III. Raw materials not issued IV. Components in queue ahead of a milling machine a. I and II b. I and III c. I and IV d. II and III 24.

Which of the following are reasons for keeping inventory? I.

To allow for goods in transit

II. To build up stock for seasonal demand III. To reduce production costs IV. To guard against uncertainty in supply and demand a. I, II, and III only b. II, III, and IV only c. II and IV only d. all the above are valid reasons 25.

Given the following information, calculate the inventory turns. Sales

= $200,000,000

Cost of sales

= $160,000,000

Average inventory = $40,000,000 Carrying cost

= 12%

a. 0.20 b. 0.25 c. 4.0 d. 5.0

144 .

26.

All of the following are reasons to keep inventory EXCEPT: a. Allow flexibility in production scheduling b. Couple supply with demand c. Meet fluctuations in product demand d. Provide a safeguard against delivery time variations

Answers

10 c

11 b

17 a

18 d

19 e

25 c

26 b

12 b

13 c

20 c

21 a

145 .

CHAPTER 11 : ORDER QUANTITIES ANSWERS TO PROBLEMS 11.1 and 11.2 Order quantity (units)

11.3

(10.1)

(10.2)

500

1200

Average inventory

order quantity 2

250

600

Orders per year

annual demand order quantity

10.4

4.3

Inventory carrying cost

Q × c ×I 2

$500

$1200

Annual ordering cost

A ×S Q

$520

217

Total annual cost

c. + d.

$1020

$1217

= 500,000 units

= $35

= $9.00

= 24%

EOQ =

Number of orders per year =

Cost of ordering =

500,000 × 35 AS = $4348 = 4025 Q

Cost of carrying =

Qic 4025 × .24 × 9 = = $4347 2 2

2(500,000)(35) = 4025.4 0.24(9) A 500,000 = = 124 4025 Q

Total Cost =

$8695

146 .

11.4

$800,000

$32

20%

EOQ =

Number of orders per year =

Cost of ordering =

AS 800,000 × 32 = $1600 = Q 16,000

Cost of carrying =

Qic $16,000 × .2 = = $1600 2 2

2 AS 2(5800,000)(32) = = $16,000 i 0.2 A 800,000 = = 50 Q 16,000

Total Cost = $3200 11.5

Results are not the same.

20,000 units

$90

23%

EOQ =

2 × 20,000 × 90 = 1022 Dollar cost = 1022($15.00) = $15,330 0.23 × 15

11.6 No discount Unit price

Discount

$10.00

$9.70

Lot size (dollars)

$5, 480.00

$9,700.00

Average inventory

$2,740.00

$4,850.00

18.25

Purchase cost (dollars)

$100,000.00

$97,000.00

Carrying cost (dollars) 20%

$548.00

$970.00

Ordering cost—$30 per order

$547.45

$300.00

$101,095.45

$98,270.00

Number of orders per year

Total cost (dollars) Savings (dollars)

$2,825.45

A = 10,000 C = $10 S = $30 I = 20% 147 .

$15.00

EOQ = 11.7

2 AS 2(10,000)30 = = 548 2(10) ic

A = 500,000 units = $4,500,000 S = $35 C = $9.00 i = 24%

EOQ = 4025 units Discounted order quantity = 6000 units or $54,000 × .98 = $52,920 Discount on $40,000 order = 2% No discount Unit price

Discount

$9.00

$8.82

Lot size (dollars)

$36,225.00

$52,920.00

Average inventory

$18,112.50

$26460.00

124

Number of orders per year Purchase cost (dollars)

$4,500,000.00 $4,410,000.00

Carrying cost (dollars) 24%

$4,347.00

$6350.40

Ordering cost—$35 per order

$4,340.00

$2,905.00

Total cost (dollars)

$4,508,687.00 $4,419,255.40

Savings (dollars)

$89,431.60

11.8 A = 10,000 or $40,000 S = $50 i = 25% c = $4.00 Discount of 2% with orders over 2,000 units. No discount

With discount

Unit price

$4.00

$3.92

Lot size (dollars)

$4,000

$8,000

Average inventory

$2,000

$4,000

$40,000

$39,200

Number of orders per year Purchase cost (dollars 148 .

Carrying cost (dollars)

$500

$1,000

Ordering cost $50 / order

$500

$250

$41,000

$40,450

Total cost (dollars) Savings (dollars)

$550

11.9 Annual Demand

Item

New Lot Size = K√AD

√AD

2500

250

900

150

121

11.10 Annual Demand

Item

Orders per Year

√AD

$14,400

120

$4,900

$1,600

Totals

$20,900

230

K = 230 ÷ 15 = 15.33 11.11 Item

Annual Usage

Present Lot Size

√AD

New Lot Size

New Orders per year

= K√AD

N = AD /Q

$22,500

$3,750.00

150

$2,308.50

9.82

$7,569

$1261.50

$1,338.93

5.56

$1,600

$266.67

$615.60

2.62

Totals

$31,325

$5,278.17

277

$4,263.03

18.00

Average inventory

Present orders per year

$2,639.09

277 = 15.39 18 149 .

$2131.52

11.12 Item

Annual Usage

Present orders per year

Present

√AD

New Lot Size

Lot Size

= K√AD

New Orders per year N = AD /Q

$12,100

$3,025.00

110

$1,732.50

6.98

$8,100

$2,025.00

$1,417.50

5.71

$3,600

$900.00

$945.00

3.81

$1,600

$400.00

$630.00

2.54

$225

$56.25

$236.25

.95

$25,625

$6,406.25

315

$4,961.25

19.99

Totals

Average inventory

$3,203.13

$2,480.63

K = 315 ÷ 20 = 15.75 11.13 EOQ = 700 units Usage = 2600 units per year = 2600 ÷ 52 = 50 units per week Period order quantity = 800 ÷ 44 = 14 11.14 Weekly average demand = 630 ÷ 8 weeks = 78.75 per week POQ = 250 ÷ 78.75 = 3.17 rounded to 3 Week

Total

Net requirements

100

630

Planned order receipts

275

255

100

Planned order period 1 = 275 units Planned order period 5 = 255 units Planned order period 8 = 100 11.15 EOQ = 200 units Week

Total

Net

600

150 .

requirements Planned order receipt

200

Ending inventory

130

200 55

195

200 155

200

145

100

970

Weekly average demand = 600 ÷ 10 = 60 units per week POQ = 200÷60 = 3.3 → 3 weeks Week

Total

Net requirements

600

Planned order receipt

205

Ending inventory

135

180 60

140

135 80

80 20

11.16 A = 240 × 52 = 12.480 per year S = $600 i = .20 c = $42 Demand rate = 240 per week Production rate = 500 per week EOQ = SQRT((2 × 12480 × 600)/(.20 × 42 × (1 – 240/500))) =1,852 units

CASE STUDY 11.1 TEACHING NOTES Jack’s Hardware

1. First we need to calculate the EOQ for the data given: EOQ =

2DS ic

For Item A: EOQ =

2(1000)(15) = 244 0.18(2.80)

EOQ =

2(750)(22.5) = 123 0.18(12.50)

For Item B:

2. The average weekly usage for A = 1000/52 = 19.2 or 19 units The average weekly usage for B = 750/52 = 14.4 or 14 units 151 .

500

POQ = EOQ/(average weekly usage) For item A, POQ = 244/19 = 12.8 or 13 weeks, with a “critical inventory level” of 22 For item B, POQ = 123/14 = 8.78 or 9 weeks, with a “critical inventory level” of 16 3. And 4. Item A using current lot size of 100 Week

1 0

1 1

1 3

1 4

1 5

1 6

1 7

1 9

2 0

Dema nd

2 4

2 1

1 1

2 6

1 8

1 4

2 1

2 8

1 9

2 3

1 2

2 9

1 7

2 2

1 3

7 6

6 3

Plan. Recpt. End Invent .

10 0 6

10 0 7 0

5 9

5 1

2 5

10 0 6 3

4 2

1 4

10 0

10 7

8 8

6 5

5 3

2 4

Current inventory = 30 Average inventory level over 20 weeks = 1086/20 = 54.3 Inventory cost = 54.3(2.80)(.18) = $27.37 Order cost = 1000/100 = 10 orders per year = $150 Total = $177.37 Item A using EOQ of 244 1

2 4

15 21 11 8

1 0

1 1

1 2

1 3

1 4

15 16 17 18 19 20

26 18 30 14 2 1

2 8

1 9

2 3

12 29 17 9

W k De m Pl. Re c.

24 4 6

In v.

22 13

24 4

23 21 20 19 16 15 12 10 8 5 4 3 5 9 1 1 7 6

5 8

5 1

Current inventory = 30 Average inventory level over 20 weeks = 2786/20 = 139.3 Inventory cost = 139.3(2.80)(.18) = $70.21 Order cost = 1000/244 is 4.1 orders/year or 4.1(15) or $61.50 Total = $131.71

152 .

3 2

24 21 19 18 16 15 1 2 5 6 4 1

Item A using a POQ of 13 weeks W k

De m

2 4

15 21 11 8

Pl. Re c. In v

1 0

1 1

1 2

1 3

1 4

15 16 17 18 19 20

26 18 30 14 2 1

2 8

1 9

2 3

12 29 17 9

26 0 6

22 13

24 7

24 22 21 20 17 16 13 11 9 5 4 3 5 9 1 1 7 6

6 8

6 1

4 2

1 9

25 22 20 19 17 16 4 5 8 9 7 4

Current inventory = 30 Average inventory level over 20 weeks = 2994/20 = 149.7 Inventory cost = 149.7(2.80)(0.18) = $75.45 Order cost (with one order every 13 weeks) is 4 orders/year or $60 Total $135.45 Item B using current lot size of 60 Week

1 0

1 1

1 2

1 3

1 4

1 5

1 6

1 7

1 8

1 9

2 0

Deman d

1 2

1 7

2 0

1 8

1 2

1 6

1 3

1 9

2 2

1 0

1 1

1 6

1 3

1 9

Plan. Recpt. End Invento ry

6 0 1 3

6 0

6 4

4 7

2 7

6 3

6 0 5 1

3 5

3 1

1 8

1 3

5 4

6 0 3 2

2 4

1 4

6 3

4 7

3 4

2 6

Current inventory = 25 Average inventory level over 20 weeks = 672/20 = 33.6 Inventory cost = 33.6(12.50)(0.18) = $75.60 Order cost: 750/60 = 12.5 orders per year 12.5(22.50) = $281.25 Total = $356.85 Item B with EOQ of 123 Week

1 0

1 1

1 3

1 4

1 5

1 6

1 7

1 8

1 9

2 0

Deman d

1 2

2 0

1 8

1 2

1 6

1 3

2 2

1 0

1 1

1 6

1 3

1 9

Plan. Recpt.

12 3

12 3 153 .

End Invent ory

1 3

12 7

11 0

9 0

7 2

6 6

5 4

3 8

3 4

2 1

1 6

12 0

9 8

9 0

8 0

6 9

5 3

4 0

3 2

1 3

Current inventory = 25 Average inventory level over 20 weeks = 1236/20 = 61.8 Inventory cost = 61.8(12.50)(0.18) = $139.05 Order cost: 750/123 = 6.1 orders per year 6.1(22.50) = $137.25 Total = $276.30 Item B with a POQ of 9 weeks Week

1 0

1 3

1 4

1 5

1 6

1 7

1 8

1 9

Deman 1 d 2

2 0

1 8

1 2

1 6

1 3

2 2

1 0

1 1

1 6

1 3

Plan. Recpt.

12 6

End Invent ory

1 3

11 7

12 8 10 0

8 0

6 2

5 6

4 4

2 8

2 4

1 1

13 4

11 2 11 5

9 3

8 5

7 5

6 4

4 8

3 5

2 7

Current inventory = 25 Average inventory level over 20 weeks = 1304/20 = 65.2 Inventory cost = 65.2(12.50)(0.18) = $146.70 Order cost: 52weeks/9 week POQ = average of 5.8 orders per year. 5.8(22.50) = $130.50 Total = $277.20 You might want to ask the students why the inventory cost and order cost are so different from each other for Item A. Hopefully they will notice that the EOQ formula is based on the assumption that usage is fairly uniform, which is violated to some extent in both cases. Also there are “rounding errors”. 5. There are certainly “rounding errors”, but probably the largest reason is the formula the student devised to minimize stockouts given the fact that for POQ the inventory values would not be monitored until after the review period. You may wish to point out that the “tradeoff” is the time and effort saved by not having to constantly monitor inventory levels. The small extra cost using POQ may be very well worth it overall. The students may want to include in their final recommendation a plan to capture those possible cost savings before selecting a final approach. 6. Using the EOQ for Item A, compared with the current order size of 100: $177.37 – $131.71 = $45.66 Using the EOQ for Item B, compared with the current order size of 60: $356.85 – $276.30 = $80.55 If those two items are about 4% of the similar items value, then the possible savings of using EOQ may be approximately (80.55 + 45.66)/0.04 = $3155.25. It clearly appears that implementing EOQ would provide substantial savings. 154 .

7. Students may not think of this approach, but this environment may be a perfect place to use the old “two bin” system. Specifically, a box of each item equal to the “critical inventory value” (reorder point) can be kept with the inventory of each item. The rule is simple—inventory is to be taken from the location but NOT the separate box until they run out of inventory except in the box. They can then use the inventory in the box to fill the order, but by using the box inventory it needs to trigger a reorder. This helps save the need to constantly monitor inventory levels. This is especially useful when the demand is somewhat erratic, as it is in this case.

MULTIPLE CHOICE QUESTIONS 1.

Which of the following are NOT assumptions on which the economic order quantity (EOQ) is based? a. Demand is relatively constant and known b. The item is produced continuously c. Order preparation costs, inventory carrying costs and lead times are constant and known d. Replacement occurs all at once e. All of the above are true assumptions

In developing the standard economic order quantity formula the following assumption(s) is (are) made: a. demand for the item is relatively uniform b. replenishment is in lots or batches that arrive at once c. lead time is constant d. all of the above are assumed e. none of the above is assumed

In determining the economic order quantity (EOQ) the following costs are considered: a. costs of a stockout and ordering costs b. costs of a stockout and inventory holding costs c. ordering costs and inventory carrying costs d. ordering costs and costs of changing production levels e. inventory holding costs and costs of changing production levels

If the order quantity is increased the annual cost of carrying inventory will: a. increase b. decrease c. remain the same d. not be affected e. none of the above

Assuming the cost per order is constant, increasing the order quantity will cause annual ordering costs to: a. decrease b. increase 155 .

c. remain the same d. increase at a decreasing rate e. cannot be determined 6.

In the simple EOQ model annual inventory carrying costs and annual ordering costs vary: a. according to the time of year b. with seasonally adjusted demand c. with the order quantity d. do not vary in any way e. in an unknown manner

While working a simple EOQ problem, you notice that, with a certain lot size, the annual ordering cost is exactly the same value as the annual inventory carrying cost. Which of the following is true? a. The lot size is the economic order quantity b. Total cost is at its maximum c. The annual carrying cost will decrease if the order quantity is increased d. All of the above e. None of the above; the phenomenon is merely a coincidence

A firm uses $20,000 of an item per year. The carrying cost is 25%, the cost of ordering is $10 and the order quantity is $1,000. The annual total cost of carrying plus ordering would be: a. $2,500 b. $5,000 c. $100 d. $325 e. none of the above

For a particular item the usage is 2000 units per year, the ordering cost is $10, the inventory carrying cost is 20% and the unit cost is $5. The economic order quantity is: a. 20 units b. 200 units c. 2000 units d. 400 units e. 4000 units

10.

If the economic order quantity is to be calculated in DOLLARS, then: a. the annual demand must be stated in dollars b. ordering costs MUST be stated on a per UNIT basis c. carrying costs are stated in dollars per unit d. all the above are true e. none of the above is true

156 .

11.

A supplier offers a quantity discount. Which of the following will influence the decision to accept the discount or not? a. Purchase cost b. Cost of carrying inventory c. Cost of placing one order d. All of the above are relevant e. None of the above is relevant

12.

If a purchase discount is taken: I.

there is a saving in purchase cost

II. ordering costs are reduced III. carrying costs are increased IV. there is not necessarily a net saving a. all the above are true b. 2 and 3 are true c. 3 and 4 are true d. 2 and 4 are true e. 3 and 4 are true 13.

For a certain group of items, the cost of carrying inventory and the cost of placing orders is not exactly known but is about the same for all the items. The company has calculated K = 20 for these items. If one item has an annual demand (A) = $10,000 the NEW order quantity should be: a. $2,000 b. $10,000 c. $20,000 d. $50,000 e. none of the above

14.

Which of the following statements is correct? a. You must know the ordering cost to use the EOQ concept b. Quantity discounts will not change the total inventory costs of the item c. Inventory levels can be lowered by raising the order quantity d. If stock is not received all at once into inventory then EOQ formula can be modified and used e. None of the above is correct

15.

The EOQ for an item is 5500 units and the annual demand is 78,000 units. What is the period order quantity? a. 14.18 b. 0.27 c. 3.67 d. 4 e. Cannot be determined from the given data 157 .

16.

Which of the following statements are true? I.

The EOQ should be used with lumpy demand

II. Transportation cost should be included in the cost of ordering III. Anticipation inventory should be built based on capacity and future demand a. I and II only b. I and III only c. II and III only d. all the above e. none of the above 17.

Using the POQ method of ordering, calculate the total cost of carrying and ordering inventory for the 6 week period shown. Use a POQ = 3 weeks for your answer.

Week

Net requirements

Planned order receipts Ending inventory Cost to place an order = $100.00 Cost to carry inventory = $1.00 per unit per week Annual demand = 1,500 units Cost per unit = $200.00 Opening inventory = 0 units a. $140 b. $280 c. $340 d. $400 e. None of the above 18.

Quantity discounts cause companies to: a. order sooner b. order less at a time c. increase their inventory d. increase ordering costs e. always save money

19.

The period order quantity is equal to: a. annual demand divided by EOQ b. EOQ divided by average period demand c. the carrying cost up to but not exceeding the ordering cost d. the sum of the carrying costs divided by cost per unit e. the part period cost times average inventory 158 .

20.

Which of the following is NOT true regarding period order quantity method (POQ) of lot sizing? a. The order quantity is constant b. The time interval of inventory coverage is constant c. POQ is derived directly from the EOQ d. POQ is better suited to lumpy demand than EOQ e. POQ and EOQ will try to order the same number of times per year

21.

K the constant used for lot sizing is calculated as the: a. order point minus safety stock b. sum of the square roots of demand divided by the number of orders per year c. standard deviation of the demand divided by the square root of demand d. annual demand divided by the order quantity e. the reciprocal of order quantity times the economic order quantity

22.

The period order quantity: a. can only be applied to continuous demand b. orders a constant amount for a set number of periods c. works like a quantity discount d. is based on the same assumptions as the EOQ model e. orders the same quantity each period

23.

Which of the following techniques balances the cost of ordering with the cost of carrying inventory? a. EOQ b. POQ c. The constant K d. All of the above

24.

The letter ‘K’ used in lot sizing makes the order quantities. a. Order the big items more often and the low volume items less often b. Increase the average inventory c. Decrease the average inventory by gradually ordering more often d. Maintains the current inventory level while decreasing the number of orders e. Balances the safety stock of items with demand

25.

Quantity discounts: a. make buyers order more than is economical b. decrease the annual carrying costs but increase the ordering cos c. can be a good decision if the total annual costs are reduced d. always advantage the seller at a cost to the buyer e. persuade the buyer to buy more often

159 .

Answers

10 a

11 d

12 a

13 a

14 d

16 c

19 b

20 a

21 b

22 d

23 d

25 c

160 .

17 c

18 c

CHAPTER 12: INDEPENDENT DEMAND ORDERING SYSTEMS ANSWERS TO PROBLEMS 12.1 Average inventory =

1600 + 100 = 900 units 2

Order point = 4 × 150 + 100 = 700 units 12.2 Average inventory =

10 × 80 + 200 = 600 units 2

Order point = 7 × 90 + 200 = 830 units 12.3

Period

Actual Deviation Deviation demand squared

500

600

100

10000

425

−75

5625

500

600

100

10000

525

625

375

−125

15625

450

−50

2500

550

2500

475

−25

625

Total

5000

47500

Average demand = 500 units Sum of the squares of deviations = 47500 Average square deviation = 47500 ÷ 10 = 4750 Sigma =

4750 = 68.92 units

161 .

12.4 Period Actual Deviation Deviation demand squared 1

1700

−300

90000

2100

100

10000

1900

−100

10000

2200

200

40000

2000

1800

−200

40000

2100

100

10000

2300

300

90000

2100

100

10000

1800

−200

40000

Total

20000

340000

Average demand = 2000 units Sum of the squares of deviations = 340,000 Average of the squares of the deviation = 340,000 ÷ 10 = 34,000 Sigma =

34,000 = 184.39 units

12.5

Safety stock

= zero

Order point

= DDLT + SS = 250 + 0 = 250 units

12.6 12.7

b. Safety stock

= 1.04 × 130 = 135 units

Order point

= 135 + 250 = 385 units

Safety factors taken from Figure 12.5 Service Level

Safety Factor

Safety Change in Stock Safety Stock

0.67

0.84

1.04

1.28

102

1.65

132

99.99

4.00

320

188

162 .

12.7

Orders per year = 10,000 ÷ 750 = 13.33 Service level = 12.33 ÷ 13.33 × 100 = 92.5% Safety stock = 1.42 × 150 = 213 units

Hint: Use the average of the SF for 90% and 94% i.e. 1.28 and 1.56 Average inventory = 750 ÷ 2 + 213 = 588 units Order point = 12.8

10,000 × 3 + 213 = 790 units 52

Orders per year =

210 × 52 = 12.133 900

Service level = 11.133 ÷ 12.133 x 100 = 92% Safety factor 92% (halfway between 90% and 94% Safety factor = (1.28 + 1.56)/2 = 1.42 Safety stock = 1.42 × 175 = 249 units Average inventory =

900 + 249 = 699 units 2

Order point = 210× 3 + 249 = 879 units 12.9

Orders per year =

600 × 52 = 12.5 2500

Service level = 11.5 ÷ 12.5 = 92% Safety stock = 1.42 × 100 = 142 units Hint use the average of the safety factor for 90% and 94% Average inventory =

2500 + 142 = 1392 units 2

Order point = 600 × 4 + 142 = 2542 units 12.10 SIGMA (LTI) = SIGMA (FI) = 100

LTI FI

3 L

= 173 units 12.11 New Interval Old Interval

Safety stock (new) = Safety stock (old) = 200

5 3

= 258 units

163 .

12.12 SIGMA (LTI) = SIGMA (FI) =140

LTI FI

3 = 242,5 units 1

12.13 New safety stock = 240

5 = 190 units 8

New safety stock = 500

5 = 559 units 4

12.14

12.15 Week

Actual Deviation Deviation Demand squared

2100

100

10000

1600

–400

160000

2700

700

490000

1400

–600

360000

1800

–200

40000

2400

400

160000

2100

100

10000

1600

–400

160000

2100

100

10000

2200

200

40000

Totals

20000

1440000

a. Average squared deviation = 1,440,000 ÷ 10 = 144,000 Sigma = 144,000 = 379.5 units

2 1 = 537 units

b. Sigma for lead time interval = 379.5 c. Order per year =

100,000 = 10 10,000

c. Service level = 9/10 = 90%

164 .

d. Safety factor = 1.28 d

Safety stock = 1.28 × 537 = 687 units

e. Order point = (100,000/52)× 2+ 687 = 4,533 units 12.16

Sigma = 537 units Service =

20 – 1 = 95% 20

Safety factor = 1.65 Safety stock required = 1.65 × 537 = 886 units Change in safety stock = 807 – 626 = 199 units Cost of increased service level = 199 × $10.00 = $1,990 12.17

Number of orders per year =

10,000 = 40 250

Number of orders without stockout = 0.9 × 40 = 36 Number of stocks per year = 4 12.18 Distribution center A Transit time: 2 weeks Order quantity: 100 units Week

Forecast

110

In transit Projected available

100 75

Planned order release Distribution center B

100

Transit time: 1 week Order quantity: 200 units

Week

Forecast

120

110

115

100

105

In transit

200 20

105

100

Projected available Planned order release

130

200

165 .

200

Central supply Lead time: 2 weeks Order quantity: 500 units Week

Forecast

100

200

100

200

300

100

300

Scheduled receipts Projected available

400

Planned order release

500

12.19 Distribution center A Transit time: 2 weeks Order quantity: 500 units Week

Forecast

300

200

150

275

300

In transit

500 200

275

475

500

Projected available

200

400

Planned order release Distribution center B

Transit time: 2 weeks Order quantity: 200 units

Week

Forecast

100

150

100

125

175

Planned order release

200

Central supply

Lead time: 1 week 4

In transit Projected available

150

Order quantity: 600 units Week

Forecast

200

700

500

200

100

200

600

Scheduled receipts Projected available Planned order release

400

166 .

12.20

D = 300 units per week L = 1 week R = 2 weeks SS = 2 × 300 = 600 units a.

Target level (T) = D(R + L) + SS = 300(2 + 1) + 600 = 1,500 units

b. Q = T – (on hand) = 1,500 – 600 = 900 units 12.21 D = 20 cases per day L = 3 days R = 5 days SS = 2 × 20 = 40 cases Target level (T) = D(R + L) + SS = 20(5 + 3) + 40 = 200 cases Order = 200 – 90 = 110 cases 12.22 Item

Annual

Target

On-Hand

Order

Demand

Level

Nut – 6mm

500

Nut – 8 mm

750

Bolt – 6 mm

300

Bolt – 8 mm

100

Screw #8 – 30 mm

250

Screw #8 – 40 mm

200

Washer – 8 mm

600

Washer – 10 mm

100

Pin - Split

400

On-Hand

Order

Quantity

12.23 Item

Annual

Target

Demand

Level

Nut – 6mm

500

Nut – 8 mm

750

Bolt – 6 mm

300

167 .

Quantity

Bolt – 8 mm

100

Screw #8 – 30 mm

250

Screw #8 – 40 mm

200

Washer – 8 mm

600

Washer – 10 mm

100

Pin - Split

400

CASE STUDY 12.1 TEACHING NOTES Carl’s Computers

This case allows the students to perform some fairly standard inventory analysis using Economic Order Quality approaches. In addition, the student is given the opportunity to analyze some inventory control problems. This provides an opportunity for the instructor to develop a fairly comprehensive discussion about the approaches, alternatives, and pros and cons of various inventory control needs. The first issue the student should deal with is the quantitative analysis of the two sample parts. All the data in the following tables are taken directly from the case: A233

Part Number

P656

32 per week

Part Usage

120 per week

Weekly Standard Deviation

1 week

Lead Time

2 weeks

$18

Part Cost

$35

$16

Order Cost

Present Order Quantity

350

23%($4.14 for $18)

Holding Cost

23%($8.05 for $35)

98%(z = 2.05)

Desired Customer Service

98%(z = 2.05)

Several issues can be noted qualitatively from this table, but should be confirmed quantitatively. For example, with part A233 it can be noted that there is a high probability for stockouts, given that the weekly usage plus only one standard deviation of the usage exceeds the order quantity. Even with a lead-time of only one week, the part must surely cause frequent stockout conditions. The other part (P656) probably doesn’t cause as many stockout conditions, but must be costing a lot of extra money. There is a much smaller variation of demand, yet their order quantity is very large (almost three weeks usage) given the small variation in demand and the very small order cost. What makes it a potential financial problem is the fairly high item cost, with the holding cost representing 23% per year. There will probably be some stockout problems here, but for a different reason. Since they are using one-week’s usage as a reorder point, the two-week lead time with this part should pose problems even though the variation in demand is relatively small. 168 .

The EOQ calculations confirm most of the qualitative observations. First, for part A233:

EOQ =

2 DS H

2(52 )(32 )16 0.23(18)

= 113 .4

Or rounded to 113. This contrasts with the other usual order quantity 64. The reorder point (ROP) for A233 is calculated as

ROP = dL + zσ d 32(1) + 2.05(47) = 128.35 Or rounded to 129. This confirms the qualitative suspicion about stockouts. The reorder point they are currently using is a week’s worth of average use, which for this part is 32. They should be ordering when the level gets to 129, primarily because of the large variation in demand. Since they often will only have one-fourth of what they should have when they reorder, there is little chance that they are able to maintain the customer service level they desire. This does not represent large annual savings in inventory or holding cost. Using part of the total cost equation, the total of ordering and inventory cost for both order quantities can be determined:

TC =

Q D 64 (32)(52) H+ S= (.023)(18) + = $548.48 2 Q 2 64

For the old order quantity. For the economic quantity, the calculation is:

TC =

113 (32)(52) (0.23)(18) + 16 = $469.52 2 113

This represents savings of only $78.96 per year. What it does NOT show is the very large potential shortage cost, as discussed above. The same calculations can be applied to part P656. First, the EOQ:

EOQ =

2(52)(120)2 = 55.68 0.23(35)

Or rounded to 56 units. The ROP calculation is slightly different, as the lead time is two weeks and the standard deviation of demand is given as one a week standard deviation. The safety stock part of the ROP calculation therefore needs to be multiplied by the square root of the multiplier for the lead time:

ROP = 2(120) + 2(2.05)(14) = 280.59 Or rounded to 281. The total cost (holding plus order) for the old order quantity is given as:

TC =

(52)(120) 350 (0.23)(35) + (2) = $1444.4 2 350

For the new EOQ, the same calculation yields:

TC =

56 (52)(120) (0.23)(35) + (2) = $448.26 2 56

169 .

This represents a savings of $996.15 per year. If this kind of savings is possible for numerous of the parts in Carl’s inventory, the potential savings is substantial indeed. Price Break The EOQ for the new price is below the quantity needed (200) to get the price break:

EOQ =

2(52)(32) = 120.28 0.23(16)

In spite of this, the total cost (including item costs) should be calculated to determine if ordering the minimum amount to get the price break is still better than to order the EOQ and not obtaining the price break. For the EOQ,

TC = DC +

Q D H + S = 18(52)(32) + 548.48 = $30,500.48 2 Q

If you were to take the price break and order 200:

TC = 16(52)(32) +

200 (52)(32) (0.23)(16) + 16 = $27,125.12 2 200

As this represents a substantial saving ($3375.36 per year), it is clear that the price break should be taken even though it does not represent and EOQ. Qualitative Issues:

There are several symptoms that can be used to lead a discussion toward both the real problems in the case and also lead to potential solutions. Some of the symptoms that most students should be able to draw from the case include: 1. They apparently do not have a good process in place to coordinate design changes (a frequent and necessary part of the business) into the inventory planning and control system. This has led to friction with the engineering staff and extra expense due to obsolete inventory. 2. The suppliers appear to be cooperative for the most part, but are apparently getting “mixed messages” as to what is really important for Carl’s. No company or supplier should be expected to be great at all aspects, but most suppliers with effective managers and systems can adapt to meet the needs of important customers, assuming those needs are fairly clear. In the case of Carl’s, they are being pushed for rapid delivery with low prices, yet are being subjected to great uncertainty in both product design and changes in order timing and quantity. Rapid delivery in the face of uncertain order is typically met by using buffer inventory (finished goods) in the supplier facility, yet how can they do that with the risk of a design change making the inventory obsolete? Clearly that implies extra cost, either in the form of inventory, systems designed for rapid and flexible delivery, or obsolete inventory write-offs, yet how can the supplier absorb the extra costs when they are also being pressured for lower prices? 3. The information from the Chief Financial Officer is a clear symptom that the problem is out of control. The rapid and large growth in inventory well beyond the corresponding growth in sales is bad enough by itself, but when combined with massive cost of order expediting, it clearly illustrates a major problem. The major culprit is most likely the very low inventory accuracy level of less than 30%. It should be noted that there is a “vicious circle” at work here. The poor inventory 170 .

accuracy has caused the field service technicians to develop an “informal” system to ensure they have a chance to do their jobs. This includes keeping their own private stock and then replenishing it when it gets low. This practice tends to produce very erratic demand, which is contrary to a basic assumption of a reorder point system. The technicians are also a part of the problem, in that they fail to use the transaction system properly. The poor inventory is not helped in that there is an indication that the only reconciliation activity appears to be an annual physical inventory. This problem presents an opportunity to discuss in detail the approaches to and the advantages of a comprehensive cycle count program with the goal of correcting and maintaining the integrity of the transaction system, and therefore the inventory records themselves. Solution:

The solution posed by students can be many and varied, but they all should have at least three major elements: 1. The first element is to formalize the system and get the inventory accuracy up. They need to secure the inventory and not allow unrestricted access, such as was indicated by field service technicians “grabbing parts”. Inventory specialists in a secure environment must control all transactions. 2. To make sure all users have trust and faith in the formal system, the transaction system and associated inventory records need to be constantly checked and corrected. A formal cycle count system clearly is in order. 3. The inventory system needs to become part of the overall planning activity, including purchasing and design.

MULTIPLE CHOICE QUESTIONS 1.

Which of the following are basic systems for determining when to order INDEPENDENT demand items? I.

Order point system

II. Periodic review system III. Material Requirements Planning a. I only b. II only c. I and II d. I and III e. II and III 2.

Which of the following statements is best? a. Order point = DDLT + SS b. Average inventory = Q ÷ 2 + SS c. Safety stock is always needed d. a and b are true e. d and c are true

171 .

When using the order point system which of the following is true? a. Order quantities are usually fixed b. The order point depends upon the demand during the lead time plus safety stock c. Time intervals between orders are constant d. a and b above e. b and c above

Which of the following statements is true about safety stock? a. It must always be carried b. It depends only on the amount of demand c. It depends on the required service level d. All the above are true e. None of the above is true

Select the description which most closely fits the term ORDER POINT: a. the time it takes to replenish an item in inventory b. extra inventory of an item carried to protect against variations in demand during lead time c. a listing of components required to manufacture a product d. the time when an order should be placed e. none of the above

Select the description which most closely fits the term SAFETY STOCK: a. the time it takes to replenish an item in inventory b. extra inventory of an item carried to protect against variations in demand during lead time c. a listing of components required to manufacture a product d. the time when an order should be placed e. none of the above

Select the description which most closely fits the term LEAD TIME: a. the time it takes to replenish an item in inventory b. extra inventory of an item carried to protect against variations in demand during lead time c. a listing of components required to manufacture a product d. the time when an order should be placed e. none of the above

Among other things the amount of safety stock carried will depend upon: a. the frequency of reorder b. the service level desired c. variability of demand during the lead time d. all the above e. a and b above 172 .

Which of the following statements is best? a. Safety stock depends on the service level desired b. Safety stock depends on the length of the lead time c. Safety stock depends on the variation of demand during the lead time d. All of the above are correct e. None of the above is correct

10.

If the standard deviation of demand is 100 units and the average demand is 1000 units, then we can be 95% confident that actual sales will be 1000 units plus or minus about: a. 100 units b. 150 units c. 200 units d. 300 units e. 400 units

11.

Which of the following statements is best? a. Most demand patterns tend to be stable and predictable b. The most common predictable pattern is called a normal distribution c. The normal curve can be described by its average (mean) and the variation of actual demand about the average d. All the above are true e. Only and b are true

12.

If the sum of the absolute deviations of demand was 500 for 10 periods, MAD would be: a. 5 b. 500 c. 50 d. 0.02 e. none of the above

13.

Management states that they will tolerate one stockout every year for a specific item. If 10 orders are placed for the item each year the service level desired is: a. 80% b. 85% c. 90% d. 95% e. none of the above

14.

The average demand for an item is 1000 per month. The mean absolute deviation of monthly demand is 300 units. The MAD for yearly sales will be approximately: a. 3600 units b. 12,000 units c. 1040 units

173 .

d. 3464 units e. none of the above 15.

Given that the lead time is 1 week and the sigma is 100 units, if the lead time changes to 2 weeks then the sigma would change to about: a. 200 units b. 180 units c. 160 units d. 140 units e. 120 units

16.

Management is willing to tolerate one stockout every 2 years for a specific item. If 10 orders are placed for the item each year the service level desired is: a. 80% b. 85% c. 90% d. 95% e. none of the above

17.

Which of the following is the best statement? a. Stockouts do not cost money because customers are willing to wait b. The cost of a stockout will vary depending on the market served, the customer, and competition c. Stockouts can occur at any time in the inventory cycle d. Stockouts do not depend on the frequency of reorder e. All the above statements are true

18.

Which of the following systems are used to determine when the order point is reached? I.

Two-bin system.

II. Perpetual inventory system. III. Periodic inventory system. IV. Safety stock system. a. all are used to tell when the order point is reached b. I and II are used c. I, II, and III are used d. I and III are used e. II and III are used 19.

____________ is an inventory record system that keeps a continuous account of transactions as they occur: a. Perpetual inventory system b. Periodic inventory system c. Two-bin system

174 .

d. Safety stock system e. All the above keep a continuous account 20.

The demand placed on a factory or a central warehouse by distribution centers is considered: a. dependent b. independent c. uniform d. all of the above e. none of the above

21.

An order system in which the order quantity is allowed to vary and the order cycle is fixed is called the: a. periodic review system b. two-bin system c. reorder point system d. red-tag system e. none of the above

22.

If the lead time is 1 week, the review period 4 weeks, the average demand 100 units per week and the safety stock is 50 units, the target level will be: a. 150 units b. 200 units c. 250 units d. 300 units e. 550 units

23.

Using the periodic review system, the target level is: a. forecast demand during lead time b. forecast demand during the review period c. the sum of a and b d. the sum of a and b plus the safety stock e. none of the above

24.

If the lead time is 1 week, the review period 1 week, the average demand 100 units per week and the safety stock is 50 units, the target level will be: a. 150 units b. 200 units c. 250 units d. 300 units e. none of the above

25.

Which of the following is correct? a. Order quantities are fixed in the periodic review system b. The two-bin system is an example of the order point system 175 .

c. The safety stock does not depend upon the frequency of reorder d. All of the above are true e. None of the above is true 26.

Which of the following statements is true? I.

In a pull system central supply determines what is needed by the distribution centers

II. In a push system all decisions are made by the distribution centers III. An advantage of a pull system is central coordination a. I and II only b. II and III only c. I and III only d. all the above e. none of the above 27.

Which of the following are objectives of distribution inventory management? I.

To provide the required level of customer service

II. To minimize the costs of transportation and handling III. To always have enough of everything on hand so there are no stockouts IV. To be able to interact with the factory so as to minimize scheduling problems a. all the above are objectives b. I, II, and III c. I, II, and IV d. I, III, and IV e. II, III, and IV 28.

The distribution inventory management system which forecasts when the various demands will be made by the system on central supply is called: a. pull system b. push system c. distribution requirements planning d. inventory replenishment e. order point system

29.

If the on hand inventory is 40 units, the safety stock 20 units and the target level is 120 units then an order should be placed for: a. 100 units b. 80 units c. 60 units d. 40 units e. 20 units

176 .

30.

For a given item the lead time is 1 week, the on hand inventory is 50 units, demand is 20 units per week, safety stock is set at 3 weeks supply and the item is ordered every 2 weeks. The order quantity should be: a. 70 units b. 60 units c. 50 units d. 40 units e. 120 units

31.

A company that keeps no safety stock can expect an average service level of a. 0% b. 15% c. 50% d. 85% e. Safety stock does not affect the service level.

32.

A company that has regular replenishments of small value items such as a grocery store would use the _____________ system. a. Order Point b. Materials Requirements Planning c. Push d. Kanban e. Periodic Review

33.

Management has carefully measured the standard deviation of the demand of a product and plans to use this to calculate the level of safety stock. If they keep one Standard Deviation of safety stock then the expected service level should be approximately: a. 15% b. 35% c. 85% d. 90% e. 100%

34.

Lead time for a given item is 3 weeks and sales have been recorded in 1 week intervals. If the Standard Deviation for the sales interval is 25 then the Standard Deviation for the lead time should be approximately: a. 25 b. 43 c. 75 d. 14 e. 8

177 .

35.

For a given item controlled by a periodic review system the target level is 100 units. If there are 40 units on the shelf and the lead time is 2 weeks then the order quantity should be: a. 140 units b. 120 units c. 85 units d. 60 units e. 40 units

36.

A product has a standard deviation of demand of 15. The safety stock for a service level of 98% would be approximately: a. 15 b. 26 c. 31 d. 8 e. 14.7

Use the following information to answer the next two questions Distribution Center A Transit time: 1week Order Quantity 200 units Week

Gross Requirements

150

125

100

150

In Transit

200

Projected Available 75 Planned Order Release 37.

There will be a planned order release(s) in weeks: a. 2 and 3 b. 1 and 2 c. 1 and 3 d. 1, 2 and 3 e. intransit inventory will cover all the orders.

38.

What will be the projected available for periods 2, 3 and 4? a. 200, 75, 175 b. 125, 0, 100 c. 75, 175, 25 d. 0, 75, 175 e. 125, 0, 75 178 .

39.

Demand on Central Supply tends to be: a. smoothed out with planned orders. b. continuous c. monotonous d. lower than the Distribution Centers e. lumpy

40.

The Gross Requirements on Central Supply are: a. the sum of the planned order releases from the Distribution Centers b. taken from the Distribution Centers and offset by the lead time c. the sum of the Gross Requirements for the Distribution Centers d. the sum of the gross requirements for the DC’s offset by the lead time. e. the same as the Intransit Inventory

Answers

179 .

CHAPTER 13: PHYSICAL INVENTORY AND WAREHOUSE MANAGEMENT ANSWERS TO PROBLEMS 13.1

5000 ÷ 30 = 167 pallets Pallet positions = 167 ÷ 3 = 55.67  56

13.2

Number of pallets needed = 6600 ÷ 20 = 330 pallets Number of pallet positions = 330 ÷ 4 = 82.5  83

13.3

Number of pallets positions per row = 200 × 12 ÷ 42 = 57.14  57 Number of pallets = 57 × 4 × 2 = 456 pallets

13.4

Pallet positions per row = 60 × 12 ÷ 42 = 17.14  17 Pallets in 4 rows = 17 × 3 × 4 = 204

13.5 SKU

Pallets

Positions Required

Total

Pallet positions needed = 21

In 21 pallet positions there is room for 63 pallets Cube utilization = 54 ÷ 63 × 100% = 86%

If racking is used they would require 54 ÷ 3 = 18 pallet positions

13.6 SKU

Pallets

Positions Required

Total

217

57 180 .

In 57 pallet positions there is room for 228 pallets Cube utilization = 217 ÷ 228 = 95.2%

Pallet positions needed = 217 ÷ 4 = 54.25 → 55

13.7 a. Part number

Shelf count

Inventory record

Difference

% % Within Difference Tolerance tolerance?

650

635

2.31

±3

1205

0.00

±0

1350

1500

–150

–11.11

±5

–3

–3.90

±5

–2

–5.26

±3

Total

3320

3460

A, B, and D, are within tolerance. b.

Accuracy by item = 3 / 5 × 100% = 60%

13.8 a. Part number

Shelf count

Inventory record

Difference

% % Within Difference Tolerance tolerance?

-5

–6.67

±3

120

0.00

±0

1435

1500

–65

–4.53

±5

–1

–1.33

±5

2.94

±2

Total

1738

1842

Accuracy by item = 2 / 5 × 100% = 40%

181 .

13.9 Count frequency per year

1100

13200

54.3

1650

6600

27.2

2250

4500

18.5

Total counts

24300

Workdays per year

250

Classification

Number of counts per year

% of Total

Number of items

Counts

Counts per Day

Counts per day

97.2

Number of items

Count frequency per year

Number of counts per year

Counts

1700

40,800

64.4

163.2

3000

12,000

18.9

5300

10,600

16.7

42.4

Total counts

63,400

Workdays per year

250

Counts per day

253.6

13.10 Classification

% of Total

Counts per Day

253.6

Due to rounding the total counts for some items may be off. A decision could be made to always round up the counts per day.

CASE STUDY 13.1 TEACHING NOTES Lesscost Warehouse

This case is a fairly straightforward look at inventory management set in a retail warehouse. The case has no quantitative analysis to allow the student to focus their attention on the qualitative issues, but the need for some quantitative analysis is not overlooked. The second case question addresses the need for data analysis, and puts the student in the position to discuss what data they would need and how they would use it. The case can be extended in coverage if you have some anticipated data sets available as the case is discussed. A good classroom exercise is then to give the data to the student (once they have identified it as necessary) and then have them analyze and use it.

182 .

Problem Analysis

Probably the number one issue is the accuracy of the inventory records, both in terms of count and location. The fact that they use a “home base” approach with overflow areas lends itself to a good discussion of the approaches to location and the types of environments where it should be employed. The retail environment described in the case, for example, probably should not use home base. Home base location assumes a relatively stable environment in terms of design (part numbers) as well as quantity. In the environment of style changes and quantity issues (due to seasonality and promotions) a home base can only work effectively with a very large (and inefficient) use of space, or a continual reallocation of existing locations. There are also some apparent problems with communications, planning, and relationships with both suppliers and the retail store. Suppliers, for example, are being pressured for price while being “jerked around” for schedules. The suppliers probably view the warehouse as a poor customer that should be tolerated to a point, but it can be fairly easily seen why they are not anxious to be overly cooperative with the warehouse. It also appears that even people within the warehouse have their responsibilities defined in isolation. They have either been discouraged from establishing more effective communication or may not know how to do it. Overriding all this is the apparent poor attitude of Hank. The “mutual boss” must have had either some loyalty to Hank or else he valued his experience to some degree, since he kept Hank in the basic position of general supervisor. It also is apparent that the boss did not have the confidence in Hank to solve the current inventory problems and therefore wanted to reduce his area of responsibility. Amy will clearly have to find ways to not only work with Hank, but also to “win him over.” This problem is one that will allow discussion about job design and relationships. Amy must try to change his attitude without undermining his ego or position in the eyes of the warehouse workers. Suggested Approach

One of the good things about this case is that it lends itself to taking the discussion with students in several directions. Regardless of direction, however, it appears that the most critical issue that must first be addressed is to obtain and maintain accurate inventory records, both with response to count and location. It is encouraging that they have a cycle count program, but it should be examined for its approach. To be specific, the following steps are recommended: 1. Review the cycle count program for corrections and completeness. Make any changes to ensure the program is effective and adequately staffed. 2. Change the location system from “home base” to “zone random.” In the zone random system, each category of good has a general zone in which it is location, but the specific location within that zone is random. The random location allows for efficient use of space as styles and quantities change, but since all goods from the category are in the same zone, cycle counting or locations of mismarked goods are relatively easily done. 3. Once the location changes have been made, a physical inventory should be scheduled. Even though such a massive count program is seldom more than about 90% accurate, it should quickly improve the current “no more than 50% accurate.” The cycle count program then should not only continue to improve the accuracy, but should also start to improve the transaction system (which is, of course, the major goal of cycle counting.) Once these changes are made, the communication channels should be examined and improved. The accuracy level problem should be addressed first, however, not only to convince the parties involved that there are real changes in the works, but also to provide a basis for communicating 183 .

accurate data. Establishing new communication channels and then transmitting poor data will only create skeptics. The following communication channels should be examined (students will often have several approaches here. This is a good opportunity for extensive student discussion):

•

One of the first communication areas that should be examined is the internal one between workers in the warehouse. This may be informal, but could also be computer-based. Regardless of form, it is clear that the people interviewed in the case need more information as to what is happening and why.

•

Since the retail store already has a computer system, it should be little extra effort to have the warehouse linked into it. With information on inventory levels, rates of sales, and any expected changes (such as promotions), they should be able to plan more effectively and anticipate needs. There should be few surprises that need quick response if the warehouse plans effectively. A central software system fed by wearable technology from the workforce could be considered to enable all decision makers with “real–time” information.

•

Once the warehouse has its own “act together” (and only then), they will be in the position to start working with suppliers to develop partnerships and communication channels. With advanced planning they should be in a position to share the information with appropriate suppliers. Suppliers can be brought into discussion regarding lot sizes, package sizes, lead times, and delivery mode in addition to cost (and therefore price) control.

Data analysis approach—some of the data that students may suggest be collected include:

•

An audit of the inventory record accuracy—both location and count

•

An analysis of the demand from the store, and the actual shipments in response— both in timing and count

•

An analysis of the reasons given for stockout problems

•

The number of incidents where packaging causes a problem in delivery to the store

•

A supplier-by-supplier analysis of delivery history, including timing, count, and quality

Finally, there is the problem of Hank to deal with. Some students might suggest he be fired, but by doing so, the warehouse would be losing a lot of experience and also may risk alienating other workers who may be friends with Hank. If he doesn’t “come around,” termination may be the only recourse, but it should be viewed as the last recourse. A better plan would be to understand his skill areas and utilize those skills with specific improvement projects. If he sees that he is valued and being given important projects to manage, it is possible that he will turn out to be an effective manager. His current attitude may, in fact, have been learned by experiencing nothing but poor warehouse management in the past. Unfortunately since Amy is at the same job level as Hank, so her only approach to accomplish this is to work with their mutual boss. Once she has accomplished getting control of the inventory and supplier information linkages, the chances are good that the mutual boss will be open to discussion on the issues to help convert Hank into an effective manager. It might even happen that Hank will notice the success Amy has and provide her with much more respect as to her capabilities.

184 .

MULTIPLE CHOICE QUESTIONS 1.

Which of the following statements are true about warehouse operation? I.

The major operating cost is labor

II. Labor productivity depends on warehouse layout III. Capital costs are those of transport and space a. all the above b. I and II only c. I and III only d. II and III only e. I only. 2.

The operating costs of a warehouse will depend on: I.

the type of material handling equipment used

II. the stock location system used III. the warehouse layout a. all the above b. I and II only c. I and III only d. II and III only e. I only. 3.

Which of the following is NOT a warehouse activity? a. Receiving b. Identifying c. Dispatching d. Order picking e. Transportation.

Which of the following statements is best? a. The complexity of a warehouse operation will depend on the number of SKUs handled, the quantities of each SKU and the number of orders received and filled b. Most of the activity in a warehouse is material handling c. Warehouse management is NOT concerned with space utilization and effective use of labor and equipment d. a and b are true e. b and c are true

Which of the following statements is best? a. Inventory is stored only on the floor b. A pallet position is a position where pallets are stored c. Accessibility means being able to get at the goods with a minimum amount of work 185 .

d. There is always a tradeoff between accessibility and cube utilization e. None of the above statements is true 6.

If items were stacked against a wall as shown, the cube utilization would be:

a. 100 percent b. 80 percent c. 20 percent d. cannot be determined from the data given e. none of the above. 7.

In a floating location system: I.

goods are stored wherever there is appropriate space for them

II. the same SKU may be stored in several locations at the same time III. an accurate and up-to-date information system is required IV. the system is appropriate for all warehouses a. all the above b. I, II, and III c. I, II, and IV d. II, III, and IV e. none of the above is true. 8.

Which of the following statements is best? a. Among other things, warehousing labor productivity will depend on warehouse layout b. All warehouses need to keep accurate records of where each item is located c. The space required in a warehouse will depend on the amount of labor used d. All of the above are true e. None of the above is true.

Which of the following is a principle of merchandise location in the warehouse? a. Group functionally related items together b. Group physically similar items together c. Group fast-moving items together d. All of the above e. None of the above.

10.

Which of the following is NOT a method of order picking? a. Area system b. Floating location system 186 .

c. Zone system d. Multi-order system e. All the above are methods of order picking. 11.

Which of the following is NOT an advantage of point-of-use storage? a. Materials are readily accessible to users b. Material handling is reduced or eliminated c. Central storage costs are reduced d. Inventory record accuracy is easier to maintain e. Material is accessible at all times.

12.

Among other things a good physical control and security of inventory will depend on: I.

a good part-numbering system

II. a well-trained work force III. free access to stock a. I and II b. I and III c. II and III d. I only e. II only 13.

Which of the following is the best statement? a. A transaction occurs ONLY when goods are received or issued b. The steps in a transaction system are: identify the goods, verify quantity, record the transaction, and physically execute the transaction c. Inventory is a tangible asset that is easy to lose track of unless properly controlled d. a and b are true e. b and c are true

14.

Which of the following statements are true about inventory accuracy? I.

Inventory accuracy is essential for planning

II. It is important to find the cause of record error III. Periodic audits of inventory will find the cause of record error a. all the above b. I and II c. I and III d. II and III e. none of the above 15.

Which of the following are causes of inventory record errors? I.

Unauthorized withdrawals of material

II. Unsecured stockroom III. Audit capability 187 .

a. all the above b. I and II only c. I and III only d. II and III only e. I only 16.

Which of the following statements is best? I.

It is not always practical to expect 100% inventory accuracy on all items

II. Variance is the amount of variation between an inventory record and a physical count III. Tolerance is the amount of permissible variation between an inventory record and a physical count a. all the above b. I and II only c. I and III only d. II and III only e. I only 17.

The three factors in good preparation for a physical inventory are: I.

housekeeping

II. identification III. verification IV. training a. I, II, and III b. I, II, and IV c. II, III, and IV d. I, III, and IV 18.

Which of the following techniques can be used to select items for cycle counting? a. Count all items once a year b. Count only “A” and “B” items c. Base the frequency of count on annual dollar usage d. Count all items the same number of times a year e. Make a random audit of the items

19.

Which of the following are true when cycle counting inventory? I.

Inventory should be audited for count and location

II. Cycle counts can be scheduled at regular intervals or special times III. A good time to cycle count an item is when an order is placed a. all the above b. I and II only c. I and III only d. II and III only e. I only. 188 .

20.

Which of the following are advantages of cycle counting? I.

Timely detection and correction of problems

II. Reduction of loss of production III. Making use of spare labor a. all the above b. I and II only c. I and III only d. II and III only e. I only. 21.

Which of the following is NOT a basic stock location system? a. Group functionally related items together b. Locate all stock for fast access c. Group fast-moving items together d. Group physically similar items together e. Locate working stock and reserve stock separately

22.

In a cycle counting system: a. all items are counted each month b. item counts are determined by their ABC classification c. the purpose is to correct inventory imbalances d. count the A items first, then B’s then C’s e. counts are done at the end of the business year

23.

In a cycle counting system A items are usually: I.

expensive items

II. items which often experience imbalances III. difficult to get items a. I only b. I and II only c. I and III d. III only e. all of the above 24.

Cycle counting uses which of the following methods? a. ABC method b. Zone method c. Location audit method d. a and b only e. All of the above

189 .

25.

A simple method of determining when an item should be cycle counted is: a. count when the item is ordered b. count each time the item is picked c. count each item once per month d. count items which have been in storage for a given period of time e. count items which don’t appear to be used often

26.

The most important reason for cycle counting is to: a. correct inventory balances b. train warehouse staff in location methods c. correct inventory valuation d. find and correct errors e. keep stock in correct rotation

27.

Which of the following is NOT an objective of a warehouse operation? a. Provide timely customer service b. Minimize cube utilization c. Keep track of item location and quantity d. Provide communication links with customers e. Minimize warehouse effort

28.

In a warehouse operation, which of the following is usually the largest capital cost? a. Labor b. Space c. Materials handling equipment d. Damage and loss of goods e. Management overhead

29.

What type of storage system is best suited for a Just in Time environment? a. Zone method b. Floating location c. Central storage d. Point-of-use storage e. Bulk location storage

30.

In which order picking and assembly method is the order picker NOT confined to one location? a. Multi-order system b. Zone system c. Floating system d. Area system e. Mobile system

190 .

31.

After picking the order and prior to shipment the goods are: a. sorted. b. put away c. marshaled d. added to inventory e. dis-aggregated

32.

Which of the following descriptions best represents the major purpose of cycle counting? a. To update inventory record quantities and locations b. To establish the financial value of the inventory c. To evaluate and fix process problems leading to inaccuracy d. To establish which in-process inventory to use first in production

33.

The Internet of Things (IoT) can be useful in a warehouse setting for which of the following reasons? a. To provide truck locations and delivery estimates b. To update ERP records for suppliers c. To establish real-time product cost estimates d. To establish order promise dates for customers

34.

Which of the following descriptions represents a typical use of cross-docking in a warehouse? a. To minimize material handling for fragile items b. To reduce the need for disposable packaging c. To establish accurate cost estimates for transportation d. To break down deliveries and repackage by customer order

Answers

191 .

CHAPTER 14: PHYSICAL DISTRIBUTION ANSWERS TO PROBLEMS

14.1 Rail

Truck

Transportation cost

$400

$700

In-transit inventory cost 15 days × $36 =

$540

Total cost

$940

14.2

Sea

Air

Transportation cost

$2700

$7500

Inventory carrying cost

4200

200

Total cost

$6900

$7700

4 days × 36 =

$144 $844

It appears cheaper to ship by sea. However, they should take the shorter lead time into account. It means that they can get a more accurate forecast of what their actual assembly needs will be and will be able to respond to demand quicker. Inventory at the assembly plant should be reduced and there should be fewer disruptions to production. Also machine tools tend to have a number of options and the faster delivery time may avoid the customer changing their mind. 14.3

Line-haul cost = $13.00 × 200 = $2,600 Line-haul cost per cwt. = $2,600 ÷ 300 = $8.67 per cwt Line-haul cost per cwt. = $2,600 ÷ 400 = $6.50 per cwt Saving per cwt. =

14.4

$2.17

Line-haul cost = $4.50 per mile × 1,600 miles = $7,200 Line-haul cost per unit = $7,200 ÷ 350 units = $20.57

14.5

Line-haul cost per unit = $7200 ÷ 550 units = $13.09

14.6

Truck would be able to carry 10 × 2,000 = 20,000 pounds. Present line-haul cost = $600 / 2,000 = $0.30/pound Proposed line-haul cost = $600 / 20,000 = $0..03/pound

14.7

TL Calgary to market = $15.00 per unit Inventory-carrying cost = $5.00 per unit LTL cartage = $7.00 per unit Total cost = $27.00 per unit Annual saving = ($30 – $27) × 200,000 = $600,000

14.8

Plant to customer LTL direct = $40/cwt. Plant to customer via warehouse: Plant to warehouse TL = $20/cwt. Warehouse costs = $5/cwt. Warehouse to customer = $10/cwt. 192 .

Total cost =

$35/cwt.

Savings per cwt. = $5/cwt. Annual saving = $5 × 100,000 = $500,000 14.9

Let x be the distance from central supply to the market boundary. LDCCS = 75 + 2x LDCDC = (75 + 60 + 4) + 2(400 – x)

Costs of LDCCS and LDCDC are equal at the boundary 75 + 2x = 139 + 800 – 2x x = 216 LDC at the market boundary = $75 + $2 × 216 = $507 14.10 From warehouse: Plant to warehouse cost = $20.00/cwt Warehouse to customer LTL = $7.00/cwt. Inventory carrying cost = $5.00/cwt. Total cost = $32.00/cwt. Direct from plant cost = $35.000/cwt. It’s cheaper to supply this market from the warehouse rather than from central supply because the cost per cwt. is $3 less per cwt. 14.11 a.

Cost per cwt. shipping direct: LTL direct = $0.70 + $.30 × 120 = $36.70

Cost of shipping via the warehouse: TL to warehouse = $0.4 + $0.15 × 145 = $21.70 Warehouse costs = = 0.30 LTL city B to city A = $0.70 + $0.30 × 40 = 12.70 $34.70

The fixed cost concerns loading, handling and paperwork which is independent of distance traveled. See also Figure 13.3 and section in text on total transportation costs.

CASE STUDY 14.1 TEACHING NOTES Metal Specialties, Inc.

This case is ideally suited to a spreadsheet exercise which will allow the student to analyze the data at different volumes. Students will need to make some assumptions when entering data such as a minimum shipping time of 2 days for rail or the approximate cost of a truck. The data shown is for an annual shipping volume of 16,000 cwt. Ordering Cost

$40

Inventory Carrying Cost 20% Cost of Steel/cwt

$300

Cost of Capital

8% 193 .

Transportation Inv Cost 10% EOQ = SQRT((2*16,000*40)/(.2*300)) = 146.1 cwt

assume one day for a 200 mile trip

Transportation Inventory = 16,000*1/365 Metal Specialties Inc

Annual Volume cwt

16,000

Ordering Cost

$40

Inventory Carrying Cost

20%

Cost of steel/cwt

$300

Cost of Capital

Transportation Inv Cost

10%

Load distance

200

Costs

Heavy Metal Transport Weight Shipped

Midland Railway $/cwt/mi

<150 cwt

$4.00

150 – 199 cwt

$3.80

200 – 249

$3.60

250 – 400 cwt

$3.40

Transit time (days)

$/cwt/mi

$3.25

Minimum load (cwt) Maximum load (cwt)

Annual Cost Summary

200 400

400

HMT

Rail

Load per trip (cwt)

150

200

250

400

Transportation Cost

$85,333

$60,800

$46,080

$27,200

$26,000

Inventory Carrying Cost

$4,500

$6,000

$7,500

$12,000

194 .

Ordering Cost

$4,267

$3,200

$2,560

$1,600

Transportation Inv Cost

$1,315

$2,630

Total

$95,565

$71,515

$57,705

$42,515

$42,630

Private

Load per trip (cwt)

150

200

250

400

Transportation Cost

$93,867

$70,400

$56,320

$35,200

Inventory Carrying Cost

$4,500

$6,000

$7,500

$12,000

Ordering Cost

$4,267

$3,200

$2,560

$1,600

Operating Cost

$42,000

Transportation Inv Cost

$1,315

$146,098

$123,115

$109,945

$92,515

Operating Cost

Private

Annual Operating Cost

$30,000

Capital Cost

$150,000

Line Haul Cost / mile

$2.20

Distance (miles)

400

Transit

1day 400

Annual Cost Summary

Total

Note that private ownership of a truck is always above the costs of a third party. The calculations used a distance traveled of 400 miles for the round trip. If a regular schedule could be established and a back haul arranged costs could be reduced substantially. Also a privately owned truck would be idle most of the time for this amount to be shipped. Even at the lowest weight shipped of 150 cwt (15,000 lbs) the truck would only have to make two trips per week. Students should identify these costs and opportunities and include them in their decision.

CASE STUDY 14.2 TEACHING NOTES Rictok Fabrication Products Delivery Problem

This case is intended to provide students with a perspective of some of the detailed analysis and qualitative issues involved with selecting appropriate transportation and storage issues confronting supply chain managers. From that perspective it can be a good case for a class discussion. The case has some basic data that students can use to gather some perspective of the financial analysis that is needed to make intelligent decisions. Analysis of that data should give the student a good perspective on the fact that making a good decision in this case has the 195 .

potential for significant impacts on costs as well as qualitative issues. At some point it may be worthwhile to point out why brokers are often used by companies to provide potential options in these types of situations. Examples of some of the type of quantitative and qualitative analysis that can be done follows (along with some of the questions that still would need analysis if they were really faced with having to do solve this type of problem in a real situation):

•

Given the description of the pallets, it appears that each pallet can contain 100 parts (ten boxes per tier, two parts in each box, 5 tiers high). An assumption for the situation would be that shipments would occur in full pallets. Based on the typical usage from the customer (220 parts per week, each pallet represents just under ½ a week’s need for the customer. If shipments are made every two weeks, two pallets would not be enough inventory and three pallets would be too much, so clearly the delivery quantity would have to be negotiated in order to prevent splitting pallets. Reasonable offer would be to deliver three pallets for one delivery, then two pallets for the next delivery.

•

Inventory holding costs about $391 per pallet per year (value of component $23, 100 parts per pallet, 17% holding cost per year. It appears at this point that the company has very large setup requirements implying very large production order sizes. Eventually some student should recognize this area is a great opportunity for improvement, but for now we assume it is a given fact. Given that, the company clearly will incur this holding cost no matter where they hold the inventory as long as the customer now will only accept two weeks’ worth of inventory—meaning that even if they utilize rental space in a public warehouse RFP still owns the inventory. In addition to the holding cost, the public warehouse costs about $19 per pallet size per month in rental. If they can stack the pallets three high in a truck (4.1 feet high pallet in a 13.5 feet high truck trailer) that still means an average of over $6 per month per pallet in rental cost. Then there is also the addition cost of a short-distance LTL delivery from the public warehouse to the customer site every two weeks. There are no costs given, but clearly those handling and transportation costs will not be trivial. Those costs will be somewhat offset by the savings (about 50%) by using full truck loads to ship to the public warehouse.

•

There are several qualitative issues also surrounding the decision between keeping the inventory in the RFP warehouse versus the public warehouse. They would avoid the extra rental cost and the LTL delivery and would also have more control over their inventory. The RFP warehouse option also implies far less additional handling of the pallets, potentially significantly decreasing the risk of damage. In addition, they would have the inventory readily available to them in the situation where they need to recall the inventory back to production if necessary for a design rework, which according to the case is an ongoing issue. If the parts were in a distant public warehouse, there are all the transportation costs to return them to RFP. On the other hand, keeping the inventory in the RFP warehouse and using LTL delivery puts them at a very high risk factor of missing deliveries. Truck breakdowns or accidents and possible weather delays were fairly small risks under their current delivery mode, but those risks would increase significantly under a scenario of delivering only 2 to 3 pallets every two weeks. Given the public warehouse option, the inventory would be quite close to the customer, greatly reducing those risks. It would be difficult to definitively gather the specific costs for those areas, but the company could possibly make some estimates that might help with the decisions.

196 .

•

There is very little information in the case about using rail, but clearly the cost of delivery to the rail line, delivery from the rail terminal to the public warehouse, and the additional risks of damage need to be taken into account.

Students will likely conclude many different “solutions”, but given the data in the case it is difficult to come up with one “correct” solution. That is not the point of this case, however. What the student should gain from this case is some extent of the qualitative and quantitative aspect of making intelligent transportation decisions. They should, after thinking about the issues in this case, come away with a significantly improved perspective of what is involved and why it is such an important issue for companies to deal with.

MULTIPLE CHOICE QUESTIONS 1.

Which of the following statements is best regarding distribution channels? a. There are only two members in any distribution channel b. The transaction channel is concerned with transfer of ownership c. The distribution channel is concerned with the transfer of goods d. all the above are true e. b and c only are true

The particular way materials move will depend upon: a. the channels of distribution the firm is using b. types of markets served c. characteristics of the product d. all of the above e. none of the above

Which of the following activities is NOT considered a function of physical distribution? a. Transportation b. Production control c. Distribution inventory maintenance d. Warehousing e. Order processing

The two criteria for establishing a particular physical distribution system are: a. cost of the system and service level desired b. service level and cost of carrying inventory c. cost of transportation and cost of warehousing d. cost of transportation and materials handling e. cost of warehousing and cost of inventory

Which of the following statements is best? a. The objective of distribution management is to provide the required level of service at least cost b. There will be cost trade-off between the various activities in physical distribution c. Distribution can operate separately from marketing and production 197 .

d. a and b are true e. b and c are true 6.

Which of the following statements is best? a. Physical distribution provides a bridge between marketing and production b. Physical distribution contributes towards creating demand c. Replenishment orders to replace field warehouse stocks will not affect production d. a and b are true e. b and c are true

Which of the following are elements in the cost of carriage? I.

Ways

II. Vehicles III. Terminals a. I, II, and III b. II and III c. I and II d. I and III e. none of the above 8.

Which of the following statements is true? a. Railways are best at moving small volumes of bulky goods over short distances b. Road transport is the least flexible of all the modes c. Air cargo should be used for fast service over short distances d. All of the above are true e. None of the above is true

A shipper moving expensive goods of small size from Boston to Seattle would likely use: a. air b. motor c. rail d. water e. none of the above

10.

Considering the service desired and the relative cost of the item, which of the following would you most likely ship by truck? a. Regular shipments of cut flowers b. Regular shipments of iron ore c. Regular shipments of grain d. a and b above e. b and c above

198 .

11.

Which of the following is true? a. Because of high capital cost, rail must have a large volume of traffic to justify the expense b. Water transport requires low rates of energy per ton mile moved c. Operating costs per ton mile tend to be low for trucks d. a and b above e. b and c above

12.

Of the five modes of transportation, which one requires the lowest capital investment? a. Air b. Motor c. Rail d. Water e. Pipeline

13.

Which mode would provide the fastest service capability? a. Air b. Motor c. Rail d. Water

14.

Which of the following statements is FALSE? a. Pipeline capital costs are high in comparison with other modes b. Air cargo is generally used for low value bulky items c. Truck transport is suitable for distribution of small volume goods to a dispersed market d. Water transport is slower than rail e. Rail transport is more suited to bulky low value items than road transport

15.

Which of the following is true? a. The service capability of mode depends only on transit time b. Air transport is the most expensive mode c. Reliability of service and area covered are not important in selecting a mode d. All of the above e. b and c above

16.

Which mode would provide the slowest service capability? a. Air b. Motor c. Rail d. Water

199 .

17.

A contract carrier provides: a. a service available to the general public b. a scheduled service c. published rates d. all of the above e. none of the above

18.

In which case(s) would you use common carriers instead of contract carriers? a. Regular delivery by a food chain to its stores b. Shipment to customers by a mail order house c. Regular shipment of paper from a mill to its warehouse d. a and b above e. a and c above

19.

Which of the following types of transportation will provide the best service capability? a. Common b. Contract c. Private d. All of the above are equal e. None of the above

20.

In which case(s) would you use contract carriers instead of common carriers? a. Regular delivery by a food chain to its stores b. Shipment to customers by a mail order house c. Regular shipment of paper from a mill to its warehouse d. a and b above e. a and c above

21.

Which mode of transportation would cost the MOST per ton mile? a. Air b. Motor (truck) c. Rail d. Water

22.

Which mode of transportation would cost the LEAST per ton mile? a. Air b. Motor (truck) c. Rail d. Water

23.

Which of the following are elements in transportation cost? a. Line haul b. Pickup and delivery c. Terminal handling 200 .

d. All of the above e. None of the above 24.

Which of the following is correct? a. Consolidating shipments reduces billing and collecting costs b. Line-haul cost per hundredweight can be reduced by increasing the weight shipped c. Shipping costs will be higher with common carriers than contract carriers d. All of the above e. None of the above

25.

A shipper wishing to reduce transportation costs will: a. ship only in small quantities b. ship to LTL lots c. use trucks for all his shipments d. all of the above e. none of the above

26.

Consolidating shipments will reduce which of the following costs? a. Pickup and delivery b. Terminal handling c. Billing and collecting d. All of the above e. None of the above

27.

TOTAL line-haul costs will vary directly with: a. the distance moved b. the weight moved c. the density of the goods d. a and b above e. b and c above

28.

The rate charged by a carrier will vary with: I.

the value of the goods

II. the density of the goods III. the color of the goods a. all the above b. I and II only c. I and III only d. II and III only e. I only

201 .

29.

To decrease shipping costs a shipper will: I.

increase the weight shipped

II. consolidate shipments III. use a common carrier rather than contract carrier a. all the above b. I and II only c. I and III only d. II and III only e. I only 30.

Which of the following statements is true? a. Goods are stored in a distribution warehouse for long periods of time b. A depository for documents is an example of a security warehouse c. Warehouses improve customer service d. a and b e. b and c

31.

Which of the following is NOT an important role of distribution centers? a. Transportation consolidation b. In-transit inventory c. Product mixing d. Break-bulk storage e. Customer service

32.

The market boundary is: a. a location beyond which a source cannot supply b. the line between two or more supply sources where the laid-down cost is the same c. an agreed-upon boundary beyond which competition will not sell d. the extent of a market area e. a legal limitation placed on the delivery of goods

33.

Which of the following is a basic role of packaging in distribution? I.

identify the product

II. contain and protect the product III. contribute to physical distribution efficiency IV. be an important part of the marketing program a. all the above b. I, II, and III only c. I, II, and IV only d. II, III, and IV only e. none of the above

202 .

34.

The consolidation of several units into larger units for fewer handlings is called: a. unitization b. consolidation c. cube utilization d. packaging e. materials handling

35.

Which of the following statements is true regarding materials handling in distribution systems? I.

One objective of materials handling is to increase cube utilization

II. Materials handling can increase the service level III. Gasoline powered industrial trucks are used indoors a. all the above b. I and II only c. I and III only d. II and III only e. I only 36.

Which of the following statements is best? a. Materials handling costs are relatively constant as warehouses are added but after a point will start to rise b. Inventory costs remain constant as the number of warehouses increase c. Packaging costs increase as the number of warehouses increase d. a and b are true e. a and c are true

37.

As more warehouses are added to a physical distribution system we can expect the cost of: a. TL and CL shipments to increase b. LCL and LTL shipments to decrease c. total transportation costs to decrease d. all of the above e. a and b above

38.

Which of the following is best? a. As more warehouses are added to a system, TL and CL shipment costs increase b. Pickup and delivery costs are reduced by consolidation c. Water transportation requires less energy per ton mile moved than any other mode d. All of the above are best e. None of the above is best

203 .

39.

Which of the following statements is true regarding goods in a reverse logistics system? a. Volumes are equal to the forward logistics system b. They travel through the same terminals as the forward logistics system c. The goods tend to be small in quantity d. Little product information is required e. All of the above are true

40.

Reverse logistics: a. calculates total delivery cost from customer to producer b. is the return of goods c. is easily automated d. is always done by a company’s carrier selection e. is best applied to small diverse markets

41.

Which management area does NOT normally have transportation responsibility? a. Logistics b. Purchasing c. Manufacturing d. Marketing e. All of the above normally have responsibility for transportation

42.

The distances in today’s supply chains produce: a. higher costs b. longer transit times c. higher costs and more disruptions d. all of the above

43.

Transportation efficiencies promote: a. competition b. decreased capacity c. KPIs d. slower services e. longer distances

44.

The LTL costs a product moving through a supply chain are $1 per mile and there is a warehouse 200 miles from Central supply. Truckload costs to the ware house are $50 and the warehouse handling and storage costs are $10. The cost to ship the product to the warehouse $50. The market boundary for this supply chain is: a. 260 miles b. 130 miles c. 125 miles d. 100 miles e. 50 miles

204 .

45.

Which of the following costs is NOT included in the total laid down cost of a product shipped through a regional warehouse? a. Product cost b. Warehouse cost c. TL to warehouse d. Warehousing cost e. Market boundary cost

46.

Fourth -party logistics (4PL) provides for all the activities of 3PL plus which of the following activities? a. Managing the full logistics operation for the customer b. Developing tracking software for all transportation c. Handling financial payments from customers to suppliers d. Scheduling supplier production based on customer needs

Answers

205 .

CHAPTER 15: PRODUCTS AND PROCESSES ANSWERS TO PROBLEMS 15.1

15.2

Volume (units)

Fixed cost

Variable cost

Total cost

Unit cost

$200.00

$10.00

100

$1,200.00

$12.00

$200.00

$7.00

1000

$7,200.00

$7.20

$50.00

$15.00

$800.00

$16.00

$800.00

$2.00

2000

$4800.00

$2.40

$500.00

$20.00

500

$10,500.00

$21.00

a. Fixed cost = $200.00 b. Variable cost = 5 ÷ 60 × $36.00 = $3.00 c. Total cost = $200.00 + $3.00 × 600 = $2000.00 Units cost = $2000 ÷ 600 = $3.33 d. Total cost = $200.00 + $3.00 × 1200 = $3800.00 Unit cost = $3200 ÷ 1200 = $3.17

15.3

Heat treat in-house Fixed cost

Purchase services

$29,000.00

$0.00

$10.00

$18.00

Variable cost a. CEP where: FCA + VCAx =

$29,000 + $10x = 0 + $18.00x $8x = $29,000 X = 3625 CEP is at 3625 units. b. 3,000 units is less than the CEP. Therefore purchase the services. 5,000 units is above the CEP. Therefore heat treat in-house. c. Unit cost for 3000 units = 0 + $18.00 = $18.00 Unit cost for 5,000 units = (29,000 + 5,000 × $10.00) ÷ 5000 = $15.80 15.4

Corner store:

Fixed cost

$0.00,

Cross Towne

Fixed cost

$4.20, variable cost = $0.89 per pound

$0.00 + $1.03x

$4.20 + $0.89x

$0.14x

$4.20

30 pounds

CEP:

variable cost = $1.03 per pound

It is worth the trip if you buy 30 pounds of bananas. However, if Cross Towne has other bargains it might be worthwhile for fewer bananas. 206 .

15.5 Buy

Process A

Process B

Setup

$40.00

$135.00

Tooling

$15.00

$20.00

Labor/unit

$4.30

$4.10

Material/unit

$2.00

Purchase cost

$7.20

Total cost

$2,880.00

$2,575.00

$2,595.00

Unit cost

$7.20

$6.44

$6.49

Use Process A. Unit cost = $6.44 15.6

CEP buying/semi.

$0 + $2.00x

= $5,000 + $1.30x

$0.70x

= $5,000

x b.

CEP semi/auto

= 7,142.8 units

$5,000 + $1.30x = $15,000 + $0.60x $0.70x

= $10,000

x c.

5,000 units: Buy

ii.

6,000 units: Buy

= 14,285.7 units

iii. 8,000 units: Semiautomatic iv. 10,000 units: Semiautomatic d.

20,000 units: Automatic

Unit cost

$2.00

ii.

Unit cost

$2.00

iii. Unit cost

($5,000 + $1.30 × 8,000) ÷ 8,000

= $1.925

iv. Unit cost

($5,000 + $1.30 × 10,000) ÷ 10,000

= $1.80

($15,000 + $0.60 × 25,000) ÷ 25,000 = $1.20

Unit cost

15.7 Reason

Number

Cumulative percent

Percent

Wrong selection

62,000.00

42.8

Wrong size

50,000.00

34.5

77.2

Order canceled

15,000.00

10.3

87.6

Wrong address

3,000.00

2.1

89.7

207 .

Other Total

15,000.00

10.3

145,000.00

100.00

15.8 Part

Number $

Percent

Cumulative percent

$11,200

53.8

$6,540

31.4

82.5

$1,440

6.9

92.1

$920

4.4

96.5

$710

3.4

100.00

Total

$18,940

100.0

15.9 The rate R is 30 units per hour, or 0.5 units per minute. With a throughput time of 40 minutes: I = RT I = 0.5(40) = 20 units in inventory 15.12 I = RT = (2 products per minute)x(30 minutes) = 60 products in process inventory 15.13 4 minutes per person means a rate of ¼ (0.25) persons per minute. I = RT 12 people = (0.25 people per minute) x T T = 48 minutes

CASE STUDY 15.1 TEACHING NOTES Cheryl Franklin, Production Manager

This case is a fairly simple look at the need for coordinated and concurrent product and process design. Most students will come to that conclusion. What makes this a bit more complex is that the solution needs to address both the current problem and the longer term approach. The long term approach point to the need for concurrent product and process design. It was a mistake to create demand for a product when clearly the design issues for the process, if not the product itself, had been settled. It is understandable for marketing’s push, however, given the nature of the competition described (the need for rapid market response and the short life cycles). The long term solution, then, should focus on the process of design in a generic sense. Concurrent design teams, for example, should be standardized and their work included in the strategic plan as well as sales and operations plans. This may help coordinate product launches, advertising campaigns, engineering activities, and operational resources. 208 .

In the short term, there may be little that can be done about the design problems given the potential short life cycles for toys. Perhaps the best they can hope for is to re-evaluate the glue choice, since a more satisfactory glue may be rapidly selected. In addition, they may want to add at least one more resource (inspector) in the quality are since that is clearly the spot in the process where the required cycle time for the product is currently not being met.

MULTIPLE CHOICE QUESTIONS 1.

The process of making something less complex or less difficult is called: a. standardization b. simplification c. specialization d. any of the above e. none of the above

Which of the following statements regarding standardization is true? I.

All products made to a given specification will be interchangeable

II. A range of standard specifications can be established so that the range covers the majority of uses for the item III. Standardization results in a larger variety of parts a. I and II only b. II and III only c. I and III only d. I, II, and III e. none of the above 3.

The establishment of a common size for electric light sockets is an example of: a. simplification b. diversification c. standardization d. product focus e. none of the above

The concentration of effort in a given field of endeavor is called: a. simplification b. concentration c. standardization d. all the above e. none of the above

Specialization increases output and decreases costs by: a. enabling labor to develop speed and dexterity b. reducing setup time for each part c. allowing a company to make a wide variety of different products 209 .

d. a and b above only e. none of the above 6.

Which of the following is an advantage of product specialization? a. It allows a large variety of finished goods to be made b. It lets the firm pay only for the skills required c. It allows labor to develop speed and dexterity d. All the above e. b and c above

Standardization can reduce costs by: a. reducing inventories b. increasing lot sizes c. allowing the use of general-purpose equipment d. all the above e. a and b only

Which of the following statements is true? I.

Serving similar customers with similar demand characteristics is an example of

II. A company specializing in assembling cars is an example of process focus III. A focused factory specializes in a wide product mix a. I only b. I and II only c. I and III only d. II and III only e. all the above 9.

Which of the following is an objective of product design? a. To design a product that will function as expected in the marketplace b. To design a product for minimum processing cost c. To design a product that will have minimum design costs d. All the above e. a and b only

10.

Tolerance is: a. an allowable deviation from the desired result b. specified by process designers c. another word for variation d. none of the above e. a and b above

11.

Which of the following are advantages of simultaneous engineering? I.

Time to market is reduced

II. Avoids the need for marketing and design to work together 210 .

III. Less communication is necessary a. I only b. I and II only c. I and III only d. II and III only e. all the above 12.

Which of the following statements is/are true? a. Product design is a major factor in determining the cost of a product b. Product design is a major factor in the quality of a product c. Product design is a trial-and-error process d. a and b only e. All the above

13.

General-purpose equipment: a. is designed for maximum flexibility b. is used extensively in intermittent manufacturing c. is designed and used to produce one or a few specific parts d. both a and b are true e. none of the above are true

14.

Which of the following is a characteristic of special-purpose machinery? a. It can perform a variety of operations on a variety of work pieces b. Capital costs are low compared to general purpose machinery c. It generally produces better quality than general purpose machinery d. All the above e. None of the above

15.

In designing a process, which of the following needs to be considered? a. the volume to be produced b. the degree of customer involvement c. the desired quality level d. all the above e. none of the above

16.

Which of the following statements is true about flow manufacturing? I.

Work stations are located in the sequence needed to make the product

II. Work flows at a relatively constant rate III. They can produce a wide variety of different products IV. There is little buildup of inventory a. all the above b. I, II, and III are true c. I, II, and IV are true 211 .

d. II, III, and IV are true e. I, III, and IV are true 17.

Which of the following statements is best regarding intermittent manufacturing? I.

Goods are produced in lots or batches

II. General purpose machinery is mostly used III. Each work station must be flexible a. none of the above are true b. I, II, and III are true c. I, II, and IV are true d. II, III, and IV are true e. I, III, and IV are true 18.

In a particular process, the fixed costs are calculated at $40,000 and the variable costs at $1.50 per unit. If 10,000 units are to be produced, what is the average cost per unit? a. $1.50 b. $2.00 c. $4.00 d. $5.50 e. None of the above

19.

Which of the following are reasons a firm would buy a product rather than make it in its factory? a. Secrecy of design b. Utilizing idle workforce c. Providing known and competitive prices d. All the above e. a and b only

20.

Which of the following is/are characteristic(s) of line-flow manufacturing? a. Requires less work-in-process inventory than intermittent manufacturing b. Is suitable for high-volume items c. Makes extensive use of special-purpose machinery d. All the above e. None of the above

21.

What is the Cost Equalization Point for the two processes shown? Process A

Process B

Fixed cost

$30.00

$120.00

Variable cost

$3.00

$2.00

a. $90.00 b. 90 units c. 100 units 212 .

d. 120 units e. none of the above 22.

Intermittent manufacturing: a. is particularly suited to the production of low-volume items b. processes items in lots or batch c. generally uses general purpose machinery d. all the above e. none of the above

23.

The cost equalization point: a. is used to show the potential profit of a process b. shows the lot size where costs are minimized c. is used to select the lowest cost of two or more alternative processes d. is the point where unit cost of a process are at a minimum e. uses all the above

24.

Some purposes of continuous process improvement are: a. the reduction of worker fatigue and effort without reduction of levels of output b. the improvement of production processes and procedure c. the improvement of factory, department, and work-station layout to improve work flows d. improvement of levels of worker safety e. all the above

25.

In selecting a project for method study, which of the following factors should be considered? a. Human b. Economic c. Marketing d. All the above e. a and b only

26.

Which of the following steps in method study ensures all elements of a job are studied? a. Install b. Select c. Record d. Examine e. None of the above

27.

A disadvantage of intermittent manufacturing is: a. high inventories are required b. high flexibility is required

213 .

c. no flexibility exists d. work place utilization is minimized Answers

214 .

CHAPTER 16: LEAN PRODUCTION ANSWERS TO PROBLEMS 16.1

a. New EOQ = $30,000 √ 10/5 = $42,426 b. Total average inventory before = 10 × c. Total average inventory after = 5 ×

16.2

$30,000 = $150,000 2

$42, 426 = $106,065 2

Reduction in average inventory = $150,000 – $106,065 = $43,935 Reduction in carrying cost = 0.18 × $43,935 = $7,903

16.3

a. Annual demand =2400 units Carrying Cost = $20 per unit/year Setup Cost = $100/setup Run Cost = $3.00/unit After setup reduction, the setup cost = $20/setup

EOQ =

2 AS ic

2(2400)(100) = 155 20

b. S = $20 2(2400)20 = 69 20

EOQ =

c. Total cost = Setup cost + carrying cost + run cost Before:

After: 16.4

Setup

Carrying

$100.00 $20.00

Run

Total Cost

Unit Cost

$1550.00 $465.00

$2115.00

$13.65

$690.00

$917.000

$13.29

$207.00

A: 500/100 = 5 B: 400/100 = 4 C: 300/100 = 3 12 Since there is no common denominator for 5, 4 and 3, the minimum sequence will be 12 as follows: ABC, ABC,

ABC,

ABA.

Week

Model A

800

16.5

215 .

Model B

600

Model C

200

Total

1600

16.6a. Available capacity for each department = (8hrs-1hr) / day × five days = 35 hrs per week

Let X = the number of benches produced Capacity in number of benches for the cut and sand department 2 * 5 min * X + 2 * X = 35 * 60 minutes per hour X

= 175 benches per week

Capacity in number of benches for the assembly and paint department (8 + 5 minutes) * X

= 35 * 60 minutes per hour

= 161.5 benches per week

Maximum capacity per week is 161.5 benches. 16.6b. Hours per week cut and sand = 5 hrs (setup) +161.5 * (2 * 5 + 2) / 60 = 37 hours 18 minutes Hours per week assembly and paint = 5 hrs (setup) + 161.5 * 13/60 = 35 hrs per week 16.6c

The assembly and paint employee has almost one hour per day of excess capacity. If he could use this time to help setup and teardown the cut and sand department then the overall capacity would increase.

16.7

Available capacity

= 80 hours per week

Let x

= number of W’s to produce

TimeB + TimeC

= 80 hours

2 + 0.12x + 2 + 0.18 (2x)

= 80 hours

.48x

= 76

= 166

Produce 166 W’s a week. 16.8

Available capacity

= 120 hours per week

Let x

= number of Ss to produce

TimeT + TimeU

= 120 hours

7 + 0.1(3x) + 8 + 0.2 (2x) = 120 hours .7x

= 105

= 150

Produce 150 S’s a week. Or: 3 x 150 = 450 T’s and 2 x 150 = 300 U’s per week

CASE STUDY 16.1 TEACHING NOTES Maxnef Manufacturing

This case was purposely developed with no opportunity for quantitative analysis. The primary purpose is to allow students to discuss and understand the comprehensive, integrative approach that must be taken for a successful Lean Production or JIT implementation—with no quantitative 216 .

analysis to distract them. As is often the case, many companies “jump on the bandwagon” toward any attractive new approach without really understanding how it really works or how it will impact their operations. The company was making many of the classic implementation mistakes—and it should be noted that there are still many companies making similar mistakes. It is recognized that there are differences between JIT and Lean Production, but many of the concepts and implementation approaches are shared, and this case should provide a look at some of the mistakes and provide an opportunity to discuss them. In addition, it might be worthwhile to allow students to discuss what is really different about a Lean Production implementation versus JIT. What students need to do in this case is to pick out the classic symptoms of mistakes being made, and use these to develop a comprehensive and integrated approach. This case has generated lots of fruitful discussion when used in the past, and several students report that it helps them understand the comprehensive nature of JIT and Lean Production much more effectively. Included here is a summary of some of the key issues, taken from the discussions in the case (in the order they appeared in the case):

•

Purchase orders are costing a lot more in total, indicating they failed to work with supplier to decrease the order costs prior to reducing supplier order size.

•

Similarly, the transportation costs are going up. Students should recognize this is to be expected with JIT. The only way it can be justified is if the total JIT implementation causes an overall reduction in TOTAL SYSTEM cost.

•

Schedule changes are a real problem and therefore increasing expediting costs. Students should be ready to discuss the importance of schedule stability in a JIT or Lean environment, as well as some of the techniques used to obtain relatively stable schedules. Where schedules cannot be stabilized, students should be in a position to question the wisdom of a full JIT implementation.

•

Suppliers are keeping extra finished goods inventory to deal with the uncertainty. In the past this was (and sometimes still is) a common practice when companies did a poor job of implementing a comprehensive JIT program. Students should be able to discuss the concept of the impact on the total supply chain resulting from this practice, and should therefore question this approach as a wise one.

•

Related to the expected increase in transportation costs are the additional impact on shipping, receiving, and truck bays. As with general transportation, some of these costs may be expected to increase, given the trade-off for overall system cost reductions.

•

They (Sofia, in particular) mention the inefficiency of the big downtime for setups with the smaller lot sizes. It appears they did little or nothing to deal with setup times before starting JIT. Students should recognize this as a big mistake.

•

It also appears they did little (or are doing little) in the way of preventive maintenance. Equipment downtime is a problem that students should also be expected to discuss as an impact, as well as another area where some costs can increase in order to achieve total system cost reductions.

•

Workers are being paid on a piece rate, and supervisors are being evaluated on productivity and efficiency (calculated in the traditional way). The underlying implication is to maximize output, which can be counter to the objectives of a JIT program. This point provides a great opportunity to discuss alternative approaches to evaluating and compensating both direct laborers and supervisory personnel.

217 .

•

There is mention of a significant number of engineering design changes. Since JIT using Kanban is a reactive system, engineering changes can be a real problem. If these changes are necessary (in other words, do not represent a poor initial design activity), then students should discuss alternatives to handle engineering design changes in a Kanban system—or question whether Kanban should even be used. This also presents the opportunity to discuss the use of an MRP system to help plan production, while the Kanban system is used to execute the plan.

•

Quality is also causing them some problems. They apparently still have problems with rejects and scrap. Students should discuss the important role of a comprehensive quality (such as a Six Sigma or a Total Quality) program as a major part of a good Lean or JIT implementation.

•

The program is obviously adversely affecting customers. Students should discuss how the program should either benefit customer (better quality, lower costs, better delivery) or at worst have no noticeable impact on the customers.

As mentioned, while each of these points can be discussed individually, at that point students should be challenged to put them together into a comprehensive program for implementation. This should be prioritized and time-phased. The later part of the assignment question brings up another issue you may wish to discuss— namely, are there environments for which JIT may not be appropriate? At this point students should not only be able to answer that question with a yes, but also should be able to discuss representative environments for which it may be true.

CASE STUDY 16.2 TEACHING NOTES Catskill Metal Products

This case allows the opportunity to both recognize the pros and cons and implications of a pure pull system as well as a pure push system, and assuming they are both understood the student should be able to use parts of each into a hybrid system that will address the problem presented in Catskill Metal Products Students may come up with several different alternatives, and each should be viewed as an opportunity to discuss the pros and cons to ensure that students really end up with a good understanding of the various approaches and implications implied by push and pull systems. You may wish to add to the basic assignment to have the students do some “pro and con” brainstorming with respect to their solutions prior to and class discussion. Here is one reasonable hybrid approach as an example: It is probably not a good idea to completely disrupt a pull Lean Production environment merely because there is a change in the demand environment. The only issue that appears to be causing the problem is a sudden and perhaps growing demand for some design flexibility, as demonstrated by the need for design changes. As indicated in the case text, a pure pull system does not deal well with change or uncertainty since it tends to be almost totally reactive. As long as the demand stays relatively stable in both volume and overall design the pull system is a great way to produce (assuming that it was implemented correctly, as was implied in the case). What needs to be developed is a way to deal with the design change imperative while leaving the rest of the system as intact as possible. Dealing with the design changes requires thinking about both the suppliers and the internal production system. 218 .

Dealing first with the internal production, there is an implicit assumption that they still have some sort of MRP-type of system in place, especially since many pure pull systems still have great use for MRP logic for planning capacity, master scheduling, planning equipment maintenance, and sometimes for dealing with long lead-time supplier components. That system can be utilized to handle the problem. Specifically, once a new design is completed by engineering, the new design can be implemented into a future bill of materials with a new part number. Lead time to produce the first production run for the new design can then be estimated (taking into account production run times, supplier lead times if new or changed design supplier parts are implied, as well as any change in tooling or other machine setup issues). The look-ahead feature of MRP can then be used to determine when to inject the new design Kanbans into the system and when to remove the old design Kanbans from the system. The MRP system can also be used to determine when the last of the old design will be used so that Kanbans can be withdrawn from the system to minimize obsolete inventory (assuming the customers will be willing to take the old design until the new one is up and running). This same approach can be done with suppliers, although there may need to be negotiations with suppliers on product cost, assuming that design change pressures on them will not be cost free. If the relationship with the suppliers is particularly strong, those suppliers may be willing to assist with the design for the purchased components. A valid question that can be used here is a simple “Who knows more about how a certain part is made and can be made better than someone who makes it every day?” Also important is to stress to the suppliers that as designs stabilize, Catskill and the supplier should be continually aware of the need to improve processes. If Catskill has implemented cost shaving sharing (where the two companies work to reduce costs and then both share in the savings), the suppliers will quite likely be very willing to work together. If students aren’t aware of how that could work, a simple example may help: Suppose a part supplied by a supplier currently costs $10.00. Now, by working together on process improvement, they are able to remove $0.40 from the cost. Sharing may mean that the company now pays $9.80 for the part (a $0.20 cost reduction). The part is now costing the supplier $9.60 to make (the $0.40 total cost reduction) but since they now sell it to the company for $9.80 they make an additional $0.20 profit. They both “win”.

MULTIPLE CHOICE QUESTIONS 1.

Which of the following statements is best regarding JIT? I.

It is a philosophy that relates to the way in which a manufacturing company organizes and operates its business

II. It is a set of techniques to make manufacturing more productive III. It is concerned with adding value to the product a. all the above b. I and II only c. I and III only d. II and III only e. I only

219 .

Which of the following statements is true? I.

Value starts in the marketplace

II. Cost and value are the same thing III. Counting and storing add value to the product a. I and II b. I and III c. II and III d. I only e. III only 3.

If a company standardizes on the components that are used in different models it will: a. reduce waste b. reduce the variety of options offered to the customer c. reduce the length of production runs d. require the use of general-purpose machinery

The ideal product is one that: I.

meets or exceeds the needs of the customer

II. makes the best use of material III. can be manufactured at least cost a. all the above b. I and II only c. II and III only d. I only 5.

Overproduction causes waste by: a. consuming unneeded raw materials and labor b. creating excess inventory c. causing confusion and hiding problems d. a and b e. all the above

Which of the following are advantages of reducing inventory? I.

Engineering changes can be made sooner

II. Quality can be improved III. Less space is needed in manufacturing IV. Lead time will be shorter a. all the above b. I, II, and III only c. I, II, and IV only d. II, III, and IV only e. III and IV only 220 .

Which of the following is NOT an advantage of work cells? a. Queue and lead time are reduced b. Production activity control is simplified c. Need for floor space is reduced d. Immediate feedback e. Maximum machine utilization

Which of the following contribute to machine flexibility? a. Small general-purpose machinery b. Mobility of machines c. Automated high-capacity machines d. a and b above e. b and c above

Reduced setup has which of the following advantages? I.

Reduced lot sizes

II. Reduce lead time and queue III. Improved quality a. all the above b. I and II only c. I and III only d. II and III only e. I only 10.

Which of the following statements is best about quality? I.

Quality can be inspected into a product

II. Poor quality has no effect on work flow III. The process must be capable of producing the required quality consistently IV. Machinery must be maintained in excellent condition a. all the above b. I and II only c. II and III only d. III and IV only e. I and IV only 11.

Which of the following concepts is needed to achieve uninterrupted material flow? a. Uniform plant loading b. Pull system c. Valid schedules d. All the above are needed e. a and b only are needed

221 .

12.

Linearity in a JIT environment means: a. produce small lot sizes b. plan level schedules c. each day achieve the plan, no more or less d. eliminate all idle time e. statistical process control

13.

The buyer expects that a supplier will provide each of the following EXCEPT: a. the quality needed at all times b. information on competitors c. frequent deliveries d. improved quality and cost

14.

Employee involvement in a JIT environment means: I.

operators must take responsibility for improving the process

II. management must take more of a leadership role III. staff must be trainers and assist line people a. all the above b. I and II only c. I and III only d. II and III only e. none of the above 15.

Which of the following statements is best? I.

JIT and manufacturing planning and control cannot work together

II. The JIT philosophy simplifies and reduces manufacturing planning and control problems III. JIT requires a very good planning and control system a. all the above are true b. I and II c. I and III d. II and III e. none of the above 16.

JIT will influence master production scheduling by: a. reducing time fences and making the MPS more responsive to customer demand b. making it possible to use daily time buckets c. making the MPS more unstable d. a and b only e. b and c only

222 .

17.

JIT practices will change the material requirements planning process by: a. reducing the number of levels in the bill of material b. making the bill of material more complex c. increasing the need for offsetting d. increasing the need for netting e. eliminating the need for MRP

18.

Which of the following is a benefit to the purchaser in supplier partnerships? a. Frequent deliveries on a just-in-time basis b. Better quality c. Improved performance and cost d. All the above e. a and b above only

19.

A pull system is developed to provide which of the following? a. An alternative to a classic MRP system b. To provide only what is needed and when it is needed c. Can only be used when demand is constant and known d. Can only be used when demand is unknown e. None of the above

20.

The primary purpose for establishing small-group improvement activities among production employees is: a. direct labor efficiency improvement b. improved scheduling c. morale improvement d. product improvement e. work methods improvement

21.

Bills of material used for MRP planning in a JIT environment are likely to have which of the following characteristics? a. Fewer “phantom” or “blow-through” assemblies b. Increased complexity with regard to options c. Weekly time buckets d. No need for where-used references e. Fewer levels in product structures

22.

Each of the following contributes to machine flexibility EXCEPT: a. ease of maintenance b. mobility c. variable speed d. multipurpose e. quick setup 223 .

23.

The principle of cellular manufacturing is also known as: a. work cell layout b. clustered flow c. functional organization d. pull systems e. continuous flow

24.

Which of the following represents the best reason for using hybrid systems in a lean production environment? a. They utilize the best benefits from ERP and traditional “pull” production systems b. They can capture production costs earlier in the production process c. They can minimize production of scrap or other quality problems d. They can allow for maximum standardization of work rules in the process

Answers

224 .

CHAPTER 17: TOTAL QUALITY MANAGEMENT ANSWERS TO PROBLEMS 17.1

Number of standard deviations within tolerance = .001 ÷ .00033 = 3.03 Sigma is approximately 3. Therefore approximately 99.7% of shafts will be within tolerance.

17.2

Number of standard deviations within tolerance = .0004 ÷ .00033 = 1.2 Sigma is approximately 1. Therefore approximately 68.3% of shafts will be within tolerance.

17.3

CP =

USL – LSL 5.06 – 4.94 = = 1.18 6σ 6(0.017)

The CP is greater than one but less than 1.33; therefore the process is marginally capable. 17.4

CP =

(USL – LSL) 6 × .02

(.06 – ( − .06 ) ) = 1.0 6 × .02

The CP is equal to one and the process is marginally capable 17.5

CP =

USL – LSL .765 – .735 = = 0.71 6σ 6(.007)

The CP is less than one and the process is not capable 17.6

CP =

USL – LSL .765 – .735 = 1.43 6σ 6(.0035)

The CP is greater than 1.33 and the process is capable 17.7

a. Process centered on 0.75 Cpk = =

( USL – Mean ) 3σ

( Mean – LSL ) 3σ

765 – .75 .75 – .735 or 3 × .0035 3 × .0035

= 1.43 or 1.43 Since Cpk is greater than 1.33, the process is capable. b. Process centered on 0.74 Cpk =

.765 – .74 74 – .735 = 2.38 or = 48 3 × .0035 3 × .0035

Since the lower Cpk is the lesser of the upper and lower Cpk’s and is less than 1, the process is not capable. Note that as a quick test the Cp is equal to the average of the upper Cpk and the lower Cpk

225 .

17.8

Cpk =

10.1 – 9.95 9.95 – 9.9 = 2.5 or = = .83 3 × .02 3 × .02

Since the lower Cpk is less than 1, the process is not capable. a.

Cpk =

10.1 – 9.98 9.98 – 9.9 = 2 or = = 1.33 3 × .02 3 × .02

Since the lower Cpk is greater than 1.33, the process is capable. b.

Cpk =

10.1 – 10.04 10.04 – 9.9 = 1 or = = 2.33 3 × .02 3 × .02

Since the lower Cpk is between 1 and 1.33, the process is marginally capable.. 17.9

For this question students will have unique answers. You can refer to Figure 16.16. Their answers should show where improvements are needed and the interaction of features. 16.10 The standard deviation of the measures is 0.866 Cp =

24.5 − 23.5 = 0.192 less than 1, therefore not capable 6(.866)

CASE STUDY 17.1 TEACHING NOTES Accent Oak Furniture Company

1. There are many problems reported in the installation department’s monthly report. The purpose of Pareto Analysis is to sort the information and identify the significant problems and perhaps gain some insight into their causes. The data should be sorted by crew and by type of comment. The significant problem that should be revealed is the fit of the spindles with the banister. One of the crews will certainly have a higher incidence of over-budget jobs and the students should investigate this to see if there is any significance to the data. Since some crews are busier than others, it may be of benefit to remove this factor by analyzing percent over budget rather than just dollar amount over budget. Also Pareto Analysis should be performed in percent but, you may find that percent of percent over-budget is confusing to some. This assignment can be done by hand with a calculator but only requires rudimentary spreadsheet skills to perform the analysis and plot the information. Figure Sol 17-1 Pareto Analysis by Crew Total

Actual

Amount

% of

Cumulative %

Crew#

Budget

Amount

Over Budget

3790

5528

1738

29.0%

6260

7843

1583

26.4%

55.5%

5800

7240

1440

24.0%

79.5%

3750

4397

647

10.8%

90.3%

226 .

5400

5981

581

Total

25000

30989

5989

9.7%

100.0%

Analysis of the amount over budget actually reveals a typo in the chart for the amount reported for ‘Actual’ for Split Spindles. It should read $865 and not $1,854. This is shown in the error in the total amount which, with the error included now totals $30,989. The amount shown in the text ($1,854) is used in all the calculations. This job at 114% over budget should catch the eye of someone analyzing the data. Figure Sol 17-1 Pareto Analysis by Crew

Pareto Analysis by Crew does not show a significant cause of the problems since all the crews are fairly close to each other. The three highest ranking over budget crews are within five percent of each other. Table Sol 17-2 Pareto Analysis by Type of Comment

Only overcharged jobs are analyzed

Type of

Total

Actual

Amount

% Over

Cumulative %

Defect

Budget

Amount

Over Budget

Budget

Over Budget

Loose Spindles

10345

12908

2563

41.3%

Split Spindles

850

1854

1004

16.2%

57.4%

Loose Bannister

2250

3200

950

15.3%

72.7%

Spindle Shims

1800

2254

454

7.3%

80.0%

Drawing Problems

1200

1650

450

7.2%

87.3%

227 .

Cracked Handrail

975

1320

345

5.6%

92.8%

Customer Changes

4300

4527

227

3.7%

96.5%

Rough Handrail

980

1200

220

3.5%

100.0%

22700

28913

6213

Total

Note that fit problems between the banister and the spindles accounted for 80 percent of the defects. (loose and split spindles, loose banister and spindles shims). This leads to the next analysis, spindle and hole dimensions. 2. Histograms for the spindle and the hole dimensions show a bimodal distribution for the spindles. When the plot of spindle dimensions is compared with the hole dimensions there appears to be a misalignment of the size of the holes and the dimensions of the spindles but this is a technical question best raised by the operators and designers. The bimodal distribution for the spindles is no-doubt caused by the two machine operation and it is assumed that if one machine’s output fits correctly, then the other machine’s output does not. The variation in the size of the spindles needs to be reduced. The graphs below are not grouped and the frequency of each size is plotted individually. Grouping the data would produce similar results but could add confusion to this simply demonstration.

228 .

3. Ms. Guzman’s memos to the two team leaders (lead hands) in both the spindle and the banister departments should suggest that the two of them get together and discuss the settings for their machines. At first glance it looks like they should decide which machine is giving the most desirable output and adjust the other machine accordingly. Ideally the spindles should be turned on one machine which will keep the variation lower. Correcting the problem using one machine or two will involve checking machine settings and training the operators. Ms. Guzman’s memo to Jamari Smythe should be brief and summarize the problem. He should also indicate the timing of improvements, action plans for sorting the current inventory and perhaps the financial impact of the changes. Other general observations are:    

The spindle machines are working within specification but slightly on the low side. The use of a go-nogo gauge doesn’t seem to be giving them sufficient control. Crew reporting could give more specifics. The range of the spindle specification seems quite large compared to the distribution of the size of the holes and should be reviewed. The technique of forcing a tapered spindle into a straight hole is quite forgiving (robust) in practice and widely popular with early furniture makers.

MULTIPLE CHOICE QUESTIONS 1.

Which of the following statements is best? a. The basic quality level of a product is specified by senior management b. Manufacturing is responsible for meeting at least the minimum specifications of the product c. The product designer builds the quality level into the product by design and specification d. All the above are true e. a and b are true

229 .

Which of the following is NOT a basic concept of total quality management? a. Customer focus b. Competitive supplier bidding c. Continuous process improvement d. Performance measures e. Involvement of the total workforce

Which of the following statements regarding TQM is true? I.

TQM is organization wide and everyone’s responsibility

II. Customer focus is not a requirement of TQM III. Only junior management is involved in TQM a. I only b. II only c. III only d. I and II only e. all the above 4.

Giving people the authority to make decisions and take action in their work areas is called which of the following? a. Teamwork b. Organizational skills c. Empowerment d. Any of the above e. None of the above

Which of the following statements is best regarding performance measures? I.

They are not necessary for performance improvement

II. They should be appropriate and useful III. They should be simple and easy for users to understand a. I and II only b. I and III only c. II and III only d. all the above 6.

The cost of failure to control quality includes which of the following? a. Scrap, rework and spoilage b. Warranty charges c. Returned materials d. All the above e. None of the above

230 .

The costs of controlling quality include which of the following? a. Prevention and appraisal costs b. Prevention and process control costs c. Appraisal and process control costs d. Any of the above e. None of the above

Which of the following is/are included in the cost of preventing poor quality? a. Operator training b. Final inspection c. Warranty charges d. All the above are included in the costs of preventing poor quality e. None of the above is included in the costs of preventing poor quality

Which of the following statements is true regarding process variation? I.

All variation is due to chance

II. Chance variation is inherent in the process III. Assignable variation is due to a specific cause a. I and II only b. I and III only c. II and III only d. I only e. II only 10.

Chance variation in a process can be caused by which of the following? a. People b. Machinery c. Materials d. All the above e. None of the above

11.

Which of the following can be used to describe the spread of the pattern of variability? a. Arithmetic mean b. Average c. Range d. Upper control limit e. None of the above

12.

Which of the following statements is true if the standard deviation of a process is .02 and the average is 1? a. about 68.3% of the output will be within 1± .02 b. the specification limits are ± .02 c. the upper control limit is 1.02 231 .

d. all the above are true e. none of the above is true 13.

The permissible limits of deviation from perfection is called which of the following? a. Spread b. Tolerance c. Control limits d. Process capability

14.

Which of the following statements is true? I.

The capability of a process is related to the product specification limits

II. Quality does not depend on the process used III. Defects can only be produced by a shift in the mean a. I only b. I and III only c. I and III only d. all the above e. none of the above 15.

Which of the following statements is best if a process has a capability index (Cp) of 0.83? a. The process is capable b. The process is not capable c. Cannot tell whether the process is capable or not from the information d. The product specifications are adequate

16.

Which of the following statements is best if a process has a Cpk of between 1 and 1.33? a. The process is not capable b. The process is marginal c. The process is capable d. None of the above is true

17.

The purpose of process control is to: a. make sure the process does not stop b. self-correct the process c. to show when there is a high probability of an assignable cause for defect d. to help designers develop the steps to automate a process e. all the above

18.

Which of the following statements is true regarding control charts? I.

Specification limits are the same as control limits

II. If there is no assignable cause of variation the process is in control III. A shift in the mean or average will show up on the X portion of the X and R chart

232 .

a. I and II only b. I and III only c. II and III only d. all the above e. none of the above 19.

Which of the following statements is true regarding sample inspection? a. Acceptance sampling requires 100% inspection b. One reason to sample inspect is because of human error c. The sample should be taken from the last parts produced because there is less chance of error d. There is no risk to either the consumer or producer

20.

Which of the following statements is correct regarding acceptance sampling? a. Sample inspection is 100% accurate b. The consumer’s risk is that a lot with less than the acceptable number of defects will be accepted c. The producer’s risk is that a batch with more than the acceptable number of defects will be rejected d. The cost of the sampling plan must be balanced against the consumer’s risk and the producer’s risk e. Lots are accepted when the consumer’s risk equals the producer’s risk

21.

Under which of the following conditions is acceptance sampling appropriate? a. Testing of the product is destructive b. Time is available for 100% inspection c. The sample can be taken from the top of the batch d. The batch to be sampled is small e. Sampling is a natural part of the process

22.

Which of the following statements is true concerning ISO 9000 standards? I.

They are intended to prevent nonconformities during all stages of inspection

II. There is only one ISO 9000 standard and it only applies to manufacturing III. ISO 9000 requires third party registration a. I only b. II only c. III only d. I and II only e. all of the above 23.

ISO 9000:2000 is designed as: a. a complete set of documentation to run any business b. a process approach to management c. a 12 step process 233 .

d. a method of sampling to prevent defects in any process e. a set of technical standards to establish inspection limits 24.

Which of the following statements is true concerning benchmarking? a. It seeks improvement by analyzing the internal process b. It studies only organizations in the same industry c. It studies the “best in class” organizations d. It is a process for determining performance measures for the shop floor

25.

A House of Quality is used to: a. Organize a company into departments focusing on quality b. Structure the engineering team c. Translate customer needs into design specifications d. Calculate specifications for desired cost reductions e. Calculate capability of a process to meet customer specifications

26.

The voice of the customer is: a. The response heard from market promotions b. An expression for customer wants c. The communication method used for network marketing d. A measure of capability of a process

27.

QFD is an acronym for: a. Quality Function Deployment b. Quality For Design c. Quality Forms Development d. Quality through Frequent Delivery e. Queen For a Day

28.

Six Sigma is a strategy designed to: a. reduce defects b. measure the capability of the quality function c. calculate productivity d. increase the total output of processes e. none of the above

29.

Six Sigma: a. is only applicable if a process is repetitive b. is an offshoot of the 5-S program c. is an award sponsored by the Malcolm Baldridge Foundation d. is about more than measurement of parts production e. a and b above only

234 .

30.

The Top Six Sigma project managers are known as: a. Black Belts b. White Hats c. Best-In-Class d. World Class e. Biero

31.

The specification for the cut length of a board is 12 inches ± .5 inches. A sample of boards showed an average length of 11.8 inches and a standard deviation of .1 inches. The Cp for this process is: a. 5 b. 2 c. 2.33 d. 1.67 e. 1

32.

A process has been sampled and it is found to have a Cpk on the upper side of 2.4 and a Cpk on the lower side of 1.4. The Cp for this process would be: a. 2 b. 1.9 c. 3.8 d. 4.8 e. The value of the process mean is needed to solve this problem

33.

The specification for the cut length of a board is 12 inches ± .5 inches. A sample of boards showed an average length of 11.8 inches and a standard deviation of .1 inches. The Cpk for this process is: a. 7 b. 3 c. 2.33 d. 1 e. .42

34.

Which of the following quality processes is part of QFD? a. House of quality b. Statistical Process Control c. Lean d. ISO:9000:2010 e. Quality for delivery

35.

Which of the common quality decision making techniques compares products to the competition? a. Fishbone diagrams b. Six Sigma 235 .

c. Quality Function Deployment d. Statistical Process Control e. Product sampling inspection Answers

236 .

An important note on the end-of-chapter questions: While it is possible to use these questions for an assignment for students to answer, they are primarily designed for students to use as self-study. If the student can answer a question after studying the chapter, then the topic of the question was likely understood and retained from the book, a lecture, or both. If not, it is suggested that the student return to that topic in the chapter and review. You may wish to emphasize that answers to these questions may be important both in understanding further material in later chapters as well as topics for possible course or certification exam questions. In either case, the information given in this Instructor’s manual will, for most of these questions, provide the specific page(s) on which the answer can easily be found, as the answer to the question in most cases comes directly from the indicated page(s) in the book. For the few questions for which a specific answer cannot be easily found directly in the book, specific suggested answers will be given. Some questions are more “openended” or application-based, in that they will ask for “opinions” or “examples”. In those cases, answers will likely vary from student to student, and are evaluated at the discretion of the instructor. These can also be used to generate discussion among the participants, as some of the answers may be dependent on the type of industry or business.

Chapter 1 1. Page 1

2. Page 1

3. Pages 1,2

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4. Page 2 8. Page 6

19. The primary strategies are make-to-stock and assemble-to-order. The make-tostock approach typically produces the fastest delivery lead time, while the assemble-toorder allows better flexibility to produce more to customer preference 20. Answers may vary

Chapter 2 1. Page 16

2. Page 16

3a. Pages 18,19

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3d. Page 21

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24. Page 24 (“open-ended” portions of responses will vary) 25. Pages 19, 24

(“open-ended” portions of responses will vary)

26. Page 19 (“open-ended” portions of responses will vary) 27. Page 19 (“open-ended” portions of responses will vary) 28. Page 19 29. Page 27

30. Pages 22,23

Chapter 3 1. Page 45

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16. Both the make-to-order and the assemble-to-order environments. In both those environments only components and subassemblies tend to be generated in the MPS, and therefore they need a FAS to compile everything into the final customer required configuration. 17. Page 58

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24. “Open-ended” question - responses will vary

25. Pages 90,91

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29. Page 82 30. Possible problems are many, including planning too much, too little, obtaining wrong components, component shortages, timing problems 31. To prepare for change, components impacted will need to be planned (bills of material, item masters, etc.) The components that will become obsolete need to be run through MRP to determine when they will be run out of inventory, establishing the timing for the new replacement component (if necessary, some of the old components may need to be scrapped – if the change is for a safety need, for example). The replacement part numbers need to be numbered differently, of course.

Chapter 5 1. Pages 113, 114

2. Page 114

3. Page 114

5. Pages 115, 116

6. Pages 115,116

8. Pages 116, 117

9 a,b. MRP

9 c. Page 118

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4. Pages 114,115

7. Page 116 9 d. Routing

19. Page 125

20. Most production environments experience constant pressures and changes – processing times, schedule changes, equipment breakdown, and so forth. Feedback on such changes and activities are needed to properly adjust the schedules as needed for maximum effectiveness. 21. Pages 119, 120

22. Page 120

23. Page 126

Chapter 6 1. Page 134

2. Page 135

3. Page136,137

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10. Page 140

24. Critical ratio = 1.2, ahead of schedule

25. Answers may vary

26. Page 157

27. a. late 27. b. due immediately

27. c. behind schedule

27. d. ahead of schedule

29. Page 157

30. Answers may vary

11. Page 141

28. Answers may vary

31. Page 149

Chapter 7 1. Page 169 3. Pages 170-172

2. Page 169 – answers to second part will vary 4. Pages 172, 173

5. Page 173

6. Page 175 – complete answers subjective, may vary 7. Page 175 – complete answers subjective, may vary 8. Page 174, answers on example organizations and demonstrated agility will vary 9. Page 175

10. Pages 176

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Chapter 8 1. Page 191

2. Page 191

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19. Answers will vary

2. Page 214

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5. Pages 216-218

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Chapter 9 1. Pages 214,215 4. Page 216

13. Page 227 16. Pages 229, 230

14. Page 227

12. Page 224

15. Page 229

17. Page 231,232

18. Page 232,233

19. Page 233 20. It means that the individual forecast quantities are frequently far different that the actual demand, but that over the time period calculated the overall average forecast is the same as the average demand

Chapter 10 1. Page 245

2. Page 245

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18. Pages 258,259 21. Page 258

14. Pages 253,254 17. Pages 256,257

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20. Answers will vary

Chapter 11 1. Page 269

2. Page 269

3. Page 258, 269

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13. Answers will vary

Chapter 12 1. Pages 71,288

2. Pages 288, 289

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19. Answers will vary

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Chapter 13 1. Page 316

2. Page 317, specific answers will vary

3. Page 318

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20. Page 330 – specific answers may vary 22. Page 329

19. Page 330 21. Page 330

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2. Page 341

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25. Page 321

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Chapter 14 1. Page 340

4. Page 342 - Individual answers may vary 5. Page 342 – Individual answers may vary 6. Page 343 9. Page 344, 346

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36. Individual answers will vary

Chapter 15 1. Page 373

2. Pages 374,375

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9. Pages 377,378 12. Page 379

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38. Page 396 Answers to the second part may vary 39. Page 394

40. Answers will vary

Chapter 16 1. Page 406

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40. Page 416,417 41. Specific answers will vary. This question was designed to “force” consideration of the overall goals of Lean production in the context of various planning and specifically control systems. The answers may vary, but the answer to the “why or why not” question should indicate the extent of learning with respect to the various options.

Chapter 17 1. Page 440

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