OPSM TEST II

• Using containers that can be reconnected to truck trailers or moved to
• ships for further shipping.

• Tracks are very inflexible routes.
• Most effective for transporting heavy loads over long distances.
• Low cost, high volume.
• Improving flexibility.
•      Intermodal service 
•      Double stacking 
•      Road-Railers

• Stacking two containers together for
• transporting higher volumes at lower cost.

• Railroads
• Trucking
• Package Carriers
• Water
• Air
• Intermodal
• Pipelines

• Using truck trailers with steel wheels for rail
• travel and rubber tires for road travel.

• Combines rail and trucking.
• Offers low cost.
• Improved flexibility by combining the benefits of trucking with the benefits of rail.

• Most frequently use.
• Very flexible. 
• Most effective for very frequent, small loads, and JIT deliveries.
• Part of TQM supplier-customer relationship.
• Single sourcing reduces number of trucking firms serving a company, but may increase the number of trips required.

• UPS.
• Fedex. 
• U. S. Postal Service. 
• Transportation of small packages to end-users.

• Very expensive.
• Quick and reliable. 
• Useful for very small and lightweight items.
• Rapidly growing segment of transportation industry.
• Lightweight, small items.
• Often combined with trucking operations.

Vessels that float on water

Inexpensive, but slow.

Used for heavy/large items, raw materials, and bulk.

One of the oldest means of transport.

Low-cost, high-volume, slow.

Standardized shipping containers improve service.

Combined with trucking & rail for complete systems.

Combining several modes of transportation.

Often truck-rail-truck or truck-water-rail/truck.

Used for transporting liquids, oil...

Slurry lines carry materials like coal

Pipeline construction is high.(high capital costs)

Operating cost is low.

Used to transport across difficult terrain or through extreme climates.

shippers and carriers brought together on the Web

y = f(t); demand is a function of time (alone).

Statistical technique.

Uses historical data accumulated over a period of time.

Assume that what has occurred in the past will continue to occur in the future.

Popular methods used for short-range forecasting.

Simple Moving Average

Weighted Moving Average

Exponential Smoothing

Adjusted exponential smoothing (not shown in this lecture)

Linear trend line with t (time) as predictor

a linear line: y = a + bx.

“A straight line can be drawn through a scatter plot of data such that errors or distances from each data point to the line are minimized.”

A linear trend line method is used when data shows a general upward or downward movement on a graph of demand (or other forecasted value) plotted over time.

A straight line can be drawn a scatter plot of data such that the errors or distances from each data point to the line are minimized.

• Used to derive equations
• for a- and b-coefficients minimizes the error between the mathematical line
• representing the data and the actual data.

• Use columns of data for
• which the terms used in the a- and b-coefficient formulas have been computed.

A seasonal pattern is a repetitive increase and decrease in demand.

One simple way to forecast using a seasonal adjustment is to use a seasonal factor in combination with a linear trend line.

• y = f(x1, x2, . . . xn);
• Demand is a function of relevant predictors. 

• Types include:
•    Simple linear regression -- uses single
• predictor; uses least squares method
•    Multiple regression -- uses multiple
• predictors.
•    Seasonal Adjustments

Mean absolute deviation (MAD) is an average of the difference between the forecast and actual demand.

The absolute value of the difference is computed because an error is an error, regardless of if it is positive or negative.

The mean absolute percent deviation (MAPD)

Measures the absolute error as a percentage of demand rather than per period.

• Useful when comparing two forecasts with dramatically different demand values and to
• get a good idea of the magnitude of error.

• It is computed by dividing the MAD by the total demand for the periods used in the
• forecast. 

MAD, MAPD and ERROR: are Ways of measuring forecast error.

Calculated by computing the difference between the forecast and actual demand without taking the absolute value.

Adds negative and positive errors directly.

Purpose: determine if a forecast consistently over-predicts or under-predicts actual demand.

Large positive values indicate under-prediction.

dividing the cumulative error by the number of forecast periods used.

fees for importinggood s

government aid to make a particular country's goods cheaper in the market

• A limited or fixed number or amount of people
• or things, in particular.

• line straight up or
• down

• long term symmetric
• up-and-down

Repeating pattern that may not be symmetrical when comparing upswings to downswings.

• See how well the model fits the data by calculating error or other evaluation
• techniques; continuous monitoring for accuracy.

• Aggregate production planning (APP) determines the resource capacity a
• firm will need to meet its demand over an intermediate time horizon -- six to
• twelve months in the future.

The term aggregate is used because the plans are developed for product lines or product families, rather than individual parts.

• Aggregate planning provides a plan for allocating resources, like labor and materials for production, and space and time for
• services.

Matches market demand to company resources.

Plans production 6 months to 12 months in advance,

Expresses demand, resources, and capacity in general terms.

Develops a strategy for economically meeting demand.

Establishes a company-wide game plan for allocating resources.

Use inventory to absorb fluctuations in demand (level production).

Hire and fire workers to match demand (chase demand).

Maintain resources for high demand levels.

Increase or decrease working hours (over and under-time).

Subcontract work to other firms

Use part-time workers

Provide the service or product at a later time period (backordering).

Establishes the overall level of productive resources,

• Affects lead time, responsiveness, cost, and
• competitiveness,

Determines when and how much to increase capacity.

Volume and certainty of anticipated demand

Strategic objectives for growth

Costs of expansion and operation

Capacity-Lead Strategy

Capacity-Lag Strategy

Average Capacity Strategy

Capacity is expanded in anticipation of demand growth.

• This aggressive strategy is used to lure customers from competitors who are
• capacity-constrained or to gain a foothold in a rapidly expanding market.

Capacity is increased after an increase in demand has been documented. 

This conservative strategy produces a higher return on investment but may lose customers in the process.

It is used in industries with standard products and cost-based or weak competition.

The strategy assumes that lost customers will return from competitors after capacity has expanded.

Capacity is expanded to coincide with average expected demand.

This is a moderate strategy in which managers are certain they will be able to sell at least some portion of the additional output.

• Incremental - less risky, but more costly. Often the initial facility should be built with future expansion in mind. This strategy
• means including options in the facility that may never be used.

One-step expansion - risky, but finished in one step, less hassle.

Outsourcing - suppliers absorb risk, but purchaser loses some control and may be growing a new competitor.

Using only one of the techniques for meeting demand

• Level production - produce at constant rate and use inventory as needed to meet demand.
• Chase demand - change workforce levels so that production matches demand.
• Maintaining resources for high demand levels
• - ensures high levels of customer service.
• Overtime and under-time - common when demand fluctuations are not extreme.
• Subcontracting - useful if supplier meets quality and time requirements
• Part-time workers - feasible for unskilled jobs or if labor pool exists.
• Backordering - only works if customer is willing to wait for product/services.

combining several of the strategies below:

• Level production - produce at constant rate and use inventory as needed to meet demand.
• Chase demand - change workforce levels so that production matches demand.
• Maintaining resources for high demand levels- ensures high levels of customer service.
• Overtime and under-time - common when demand fluctuations are not extreme.
• Subcontracting - useful if supplier meets quality and time requirements
• Part-time workers - feasible for unskilled jobs or if labor pool exists.
• Backordering - only works if customer is willing to wait for product/services.

Produce an average amount throughout the production period.

Creating inventory in low-demand periods.

Using inventory in high-demand periods.

Inventory tends to vary dramatically.

Number of workers and materials used is fairly constant.

Produces an amount equal to the demand at any given time.

Tends to have little or no inventory.

Requires a high variance in the number of workers and materials used.

Two ways to manage demand more effectively are:

• Shifting demand into other periods through
• Incentives
• Sales promotions
• Advertising campaigns
• Price differentials
•    >Example: Phone companies try to utilize
• telecommunications equipment more effectively by charging lower rates during
• weekends and at night, when calls are at their lowest.

• Offering product or services with counter-cyclical demand patterns -- create demand for idle resources.
•    >Kawasaki USA produces motorcycles before their highest sales period in spring and summer and snowmobiles before winter.

Two basic types of demand are considered in inventory management. Each type requires different management systems and ordering philosophies.

• Dependent Demand
• Independent Demand
• Carry Cost
• Order Cost
• Shortage or Stockout Cost

• Items used to produce final products; demand for these items "depends" on the demand for the final product. They are the components and parts that make up the finished
• goods.

Items demanded by external customers. These are the finished goods that eventually feed the demand for dependent demand goods.

The cost of holding an item inventory. As the number of orders per year decreases, the annual inventory carrying cost increases because a higher volume of items must be purchased each time.

• (Is it a good idea for a restaurant to order refrigerated food products
• just once a year?)

Financing, interest on loans to purchase inventory, and loss of positive cash flow.

• Direct storage costs, like rent, heating, cooling, lighting, security, refrigeration,
• record keeping, and internal transportation.

Depreciation and obsolescence.

Product deterioration and spoilage, breakage, and pilferage.

Summing all the individual costs just mentioned and assigning them on a per-unit basis per time period, such as $10 per unit per year.

Summing all the individual costs just mentioned and assigning them on a percentage basis, such as 30% of the item cost. It is estimated that carrying costs range from 10% to 40% of the value of a manufactured item.

• The cost of replenishing inventory. As the number of orders per year increases, the annual ordering cost increases. (Is it a
• good idea to order a single pencil each time someone in the company needs
• one?)

• Types of ordering costs:
• >Requisition and purchase orders.
• >Transportation and shipping from the supplier.
• >Receiving and inspection.
• >Handling and storage.
• >Accounting and auditing costs.

• Method of calculating ordering cost.
• Usually the above costs are summed and applied on a "per order" basis.

Temporary or permanent loss of sales when demand cannot be met because of insufficient inventory.

In previous calculations we made, we determined how much to order, the number of orders to place annually, and the number of days between orders.

We can also calculate when an order should be placed based on how much inventory is left in stock.

As inventory is used, the quantity is depleted to a level known as the reorder point. 

• An order must be placed at this point
• so that inventory will not run out before the next order arrives. The equation for reorder point is:

R = dL

• Example: an order is placed when the inventory level reaches the reorder point.
• During the lead time, the remaining inventory in stock will be depleted at a constant demand rate, such that the new order quantity will arrive at exactly the same moment as the inventory level reaches zero.
• Demand and lead time are less certain.
• Inventory dips past zero (a stockout - "negative" inventory, meaning the company ran out before the next order came in). This can be a very serious and costly situation for a company, particularly if production is halted because of the shortage. 

As a hedge against stockouts when demand is uncertain, a safety stock of inventory is frequently added to the expected demand during lead time.  

NOTE:  Safety stock is not added to EOQ (the amount of inventory ordered).  It is added to the re-order point, meaning an order is placed sooner than it would be if demand was certain.

The amount of safety stock needed is determined by the service level desired by the company.

The service level is the probability that the amount of inventory on hand during the lead time is sufficient to meet expected demand -- that is, the probability that a stockout will not occur.

A service level of 90% means that there is a .90 probability that demand will be met during lead time.

• An order
• is placed in just enough time to have a new order quantity, Q, come in just as
• the older order quantity, Q, reaches 0. These are the other assumptions:

• Demand is known with certainty and is relatively constant over time.
• No shortages are allowed.
• Lead time for the receipt of orders is constant.
• The order quantity is received all at once.

• Composed of inventory carrying cost and inventory ordering cost. When a small quantity of items is purchased in each order, the ordering costs will be high. When a large quantity is purchased, the number of orders will be low, so the annual ordering
• cost will be low.  

We can also solve for Q by noting that the minimum total cost occurs at the point where carrying cost equals ordering cost.

Qopt = (2C_oD / C_c)^1/2

occurs at the point where carrying cost equals ordering cost, and total minimum inventory cost is defined as:

TC_min = (C_oD / Q_opt) + (C_c Q_opt / 2)

Annual inventory cost is minimized at the order quantity where carrying cost exactly equals ordering cost.

The EOQ represents the optimal order quantity that minimizes inventory cost.

The EOQ tells how much to order.

The number of orders for the year is represented by D/Q. Dividing the year by the number of orders tells when to order (based on the constant demand rate assumed in the model).

The EOQ can be adapted for use in production problems. Qopt corresponds to production lot size and Co corresponds to set-up cost.

Another important aspect of the inventory control system is the degree of monitoring necessary.

Because demand volume and the value of items varies, inventory can be classified according to its value to determine how much control is applied.

• Class A Items
• Class B Items
• Class C Items

Class A items require very tight inventory control (more accurate forecasting, better record-keeping, lower inventory levels), whereas C-items tend to have less control.

• Class A items are 5-15% of the items
• by quantity, but 70-80% of the $-value of the times (automobile chassis)

• Class B items are 30% of the items by
• quantity, but 15% of the $-value of the times (steering wheels and storage consoles).

• Class C items are 50-60% of the items
• by quantity, but 5-10% of the $-value of the times (pins and fasteners).

Capacity Requirements Planning is a computerized system that projects load from the material plan onto the capacity of the system and identifies underloads and overloads.

It is then up to the MRP planner to level the load -- smooth out the resource requirement so that capacity constraints are not violated. CRP produces a load profile, which compares released orders and planned orders with work center capacity.

calculated as follows:

Capacity = (No. of machines or workers) X (No. of shifts) X (utilization) X (efficiency)

The percentage of available working time that a worker actually works or a machine actually runs.

Scheduled maintenance, lunch breaks, and setup time are examples of activities that reduce actual working time.

• Refers to how well a machine or worker performs compared to a standard
• output level.

Is the standard hours of work (or equivalent units of production) assigned to a production facility.

% = Load / capacity

Centers loaded above 100% will not be able to complete the scheduled work without some adjustment in capacity or reduction in load.

Remedies for underloads:

• *Acquire more work.
• *Pull work ahead that is scheduled for later time periods.
• *Reduce normal capacity.

Remedies for overloads:

• *Eliminate unnecessary requirements
• *Reroute jobs to alternative machines or work centers
• *Split lots between two or more machines
• *Increase normal capacity
• *Subcontract
• *Increase the efficiency of the operation
• *Push work back to later time periods
• *Revise master schedule

capacity problems,


solves the problems.

Planned orders from the planned order release row of the MRP matrix. These might be work orders for in-house production, or purchase orders for purchased products.

Can also recommend changes in previous plans or existing schedules. These action notices, or rescheduling notices, are issued for items that are no longer needed as soon as planned, or for quantities that may have changed.

• Expedited parts are marked for completion in less than their average lead time (rush
• orders).

Responsible for scheduling the production of all items beneath the end item level (level 0).

Recommends the release of work orders and purchase orders, and issues rescheduling notices when necessary.

Process begins with a matrix like the one shown in the Table below. We'll make the calculations directly on the matrix to illustrate the calculations; a computer makes these calculations automatically in the MRP system.

MRP is driven by Master production schedule.

Create the information that feeds the MRP system. 

Used to create a master production schedule.

shows a schedule and breakdown of all finished products to be produced.

• The MRP system also needs engineering information in the form of a product structure file and inventory information in the form
• of an inventory master file to determine which parts go into each finished product.

MRP uses all this information to produce its outputs: work orders, purchase orders, and rescheduling notices.

Work orders are used to initiate the production of parts in-house, while purchase orders are used to buy parts from vendors.