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Production Management

IEOR 4000

Prof. Guillermo Gallego

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Self Introduction

• Professor and Chairman of Industrial Engineering & Operations Research Dept.

• Research interest in Supply Chain Management and Revenue Management

• Published over fifty papers

• Visiting professor at Stanford GSB 1997-1997

• Visiting scientist at IBM 1999-2003

• Senior editor for MSOM and POM.

• Consultant for Lucent Technologies

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Topics to Be Covered

• Today: History of Operations Management, Production systems, Recent trends.

• Deterministic models:– EOQ, EPQ, JRP, ELSP, APP, MRP, JIT

• Forecasting:– MA, ES, MMFE.

• Stochastic models:– Newsvendor model.– Serial Systems: Supply chain models.– Distribution and Assembly Systems

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Benefits to Be Obtained

• Understand production and inventory systems.• Understand basic tradeoffs between

– Holding costs versus fixed costs.– Holding costs versus service levels.– Efficiency versus variety

• Learn about– Production/inventory management techniques– Forecasting– Risk and sensitivity analysis– Supply chain design issues

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Intended Audience

• A required course for MS degree in IE and MS in OR.

• Students entering the fields of industrial engineering or supply chain management.

• Students interested in learning how to develop models.

• Production and general managers wishing to understand models behind decision support systems.

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Prerequisites

• Working knowledge of calculus.• A good course in probability and statistics. This

can be taken concurrently.• A deterministic models course (linear

programming). This can be taken concurrently.• Knowledge of Excel or equivalent spreadsheet

program.• Willing to work hard.

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Evaluation

• Assignments: 15%

• Midterm: 40%

• Final: 45%

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Today’s Lecture

• Motivation• History of Operations Management• Recent Trends in Inventory Management Types

of Manufacturing Systems• Strategic and Hierarchical Planning• Inventory Classification• Relevant Costs• Performance Measures

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Motivation

• Operations is concerned with the transformation of inputs into goods and services

• Primary business function together with marketing and finance

• It involves the greatest portion of the company's employees and capital assets.

• Activities include– plant management, product development, process

engineering, facility layout, production and capacity planning, quality control, inventory control, product distribution

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History of Operations Management

• Life before organized production

• The industrial revolution– Invention of the steam engine.– Specialization of labor– Interchangeable parts– Assembly line (Ford)– Product variety (GM)

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Scientific Method

• The Principles of Scientific Management by Frederic Taylor

• Experiment with methods to find best way to perform a job– Improve efficiency results in:

• Lower costs to companies

• Higher wages for laborers

• Better and less expensive products for consumers

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Management Science

• Also known as Operations Research• Use of models, mathematics and statistics

to solve business problems– Objectives, Decision Variables, Constraints

• Initially lack of data and computing power and management skepticism

• ERP systems and better trained management opens possibilities

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Recent Trends

• Plant Automation• Just-in-Time• Reengineering• Supply Chain Initiatives

– EDI, ECR, VMI

• Sharing Demand Information• Demand Lead Times• Changing the Givens

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Operations Systems

• Job Shops– Low volume high variety– Custom made goods

• Repetitive Manufacturing– High volume low variety– Televisions, roller skates

• Batch Manufacturing– Medium volume and variety– Hand tools, drills

• Processes and Projects– Refineries, ship manufacturing

• Non Manufacturing

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Strategic and Hierarchical Planning

• Strategic Planning– Product line, location, size and number of plants and

warehouses

• Tactical Planning– Size of workforce, rate of production, distribution of

goods

• Operational Control– Assignment of work to stations, short term inventory

control issues.

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Impact of Inventories

• Firm level:– One third of the current assets– 2.5 years of after-tax profits– Potential to increase profits and reduce costs

• Macro level:– Accumulation at peak of cycle

• Downscale production, slash prices, some firms do not survive

– Low inventories at bottom of cycle• Increase production, hire people, additional increase in

demands, higher prices, etc.

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Inventory Classification

• Functional:– Cycle stock– Congestion stock– Safety stock– Anticipation inventories– Pipeline inventories (WIP)

• Time– Input, WIP, In-transit, Output.

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Classification by Value

• Sort by annual dollar volume

• Most firms:– 20% SKUs account for 80% usage– 30% SKUS account for 15% usage– 50% SKUS account for 5% usage

• ABC analysis treats high dollar volume parts differently.

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Characteristics of Inventory Systems

• Demand:– Constant versus variable– Known or unknown

• Lead Times: Constant versus random• Review Times: Periodic versus continuous

review• Excess Demand: Lost versus backlogged• Changing Inventory: Perishable, obsolescence• Structure of System: Assembly, distribution, etc.

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Relevant Costs

• Procurement costs: fixed and variable

• Holding costs: Warehousing, insurance, opportunity cost

• Stockout or penalty costs

• Cost of changing the production rate: hiring, firing, overtime

• System control costs

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Performance Measures

• Probability of not stocking out during lead time

• Fill rate: Proportion of demands that are met directly from stock

• Average number of backorders

• Turnover ratio: Ratio of throughput to average inventory