Body of Knowledge
APICS Operations Management Body of Knowledge
First Edition – 2008
Proof Edition C – Version 2.0 (Jan 26, 2008)
Proof Edition C – Version 1.0 (Jan 16, 2008)
Proof Edition B – Version 1.0 (Jan 14, 2008)
Stock No. XXXX
Copyright 2008 by APICS The Association for Operations Management
International Standard Book Number: X-XXXXX-XXX-X
All rights reserved. No part of this publication covered by the copyright herein may be reproduced or copied in any form or by any means – graphic, electronic, or mechanical, including photocopying, taping, or information storage and retrieval systems – without written permission of the publisher.
APICS The Association for Operations Management
Operations Management Body of Knowledge
Table of Contents
APICS Professional Staff
Fran Scher, Eliza Auckerman
2007 APICS Body of Knowledge Committee
Alan Dunn, Daniel Castle, Gary Langenwalter, Karen Eboch, Jim Greathouse, Mary Moravec, Peter Stonebraker
W. Stonebraker, Ph.D.
F. Robert Jacobs
Preston W. Blevins, Brian Dreckshage, Howard Forman, Martin Gartner, Richard Graff, Anne Haberkorn, Richard C. (Rick) Leach, William R Leedale, Daniel S. Marrone, Ph.D., John S. Newlyn, Patrick Penfield, R. Dan Reid, Joe F. Schriever, Donald H Sheldon, Stephen Shiffer, Joe Walden, Joni White, Timothy Wilson, Jim Greathouse, Roly White
Robert Jacobs, Daniel Castle
Peter Stonebraker, Karen Eboch
1.1. Purpose of the Operations Management Body of Knowledge (OMBOK) – The Operations Management Body of Knowledge provides an outline of the areas needed to successfully manage the processes for producing and delivering common products or services. The descriptions give an overview of each area and when taken together define a generally accepted view of the scope of Operations Management as a field of study. Being a dynamic field, the OMBOK describes current common perceptions of Operations Management and will evolve over time to reflect changing perceptions and new approaches as they come into common use.
1.1.1. Scope of Operations Management – Operations Management is focused on the systematic direction and control of the processes in the sourcing, producing and delivering of products and services. It is oriented towards a holistic or systems view of those processes that have a major impact on the costs associated with operating the firm. Further, the orientation is toward topics that relate to managing these processes and assumes that technical aspects, especially details that relate to engineering, may be handled by specialists. The concepts apply to the complete chain of activities for producing and delivering products and services including those that cross business and geographical boundaries. Although not a focus of this document, these concepts are also applicable to non-operations areas such as Marketing, Finance and Information Technology.
1.1.2. Taxonomy of Major Proven Concepts and Tools – The OMBOK includes only the basic concepts and tools that are in common use globally. Concepts and tools that are just entering common usage may be listed as “emerging topics” (see Section 9) in the framework . Additionally, there are many other significant concepts, tools and techniques that are used in specific industries or areas, but are not “global,” and thus may be noted tangentially.
1.1.3. A Systems View of the Components of Operations Management – Producing a product or delivering a service involves a complex series of transformation processes. Operations Management is concerned with managing all of these individual processes in a coordinated manner. In general the management decisions involve long-range strategic, intermediate-term tactical, and short-term operational and control decisions. The OMBOK strategic topics typically relate to the focus of upper-level operations executives while the intermediate- and short-term operations decisions relate to mid- and entry-level line and staff functions within the firm.
1.2. Operations Management (OM) Framework – The OMBOK is organized by a high-level framework that represents the areas of concern for the typical Operations executive. This framework is a convenient way to view the scope of the area but it is not necessarily intended as an outline for Operations Management courses, certification exams or other educational uses. Educational pedagogy dictates that the topics be covered in many different ways depending on specific objectives.
1.2.1. Level of Operations Management Coverage in OMBOK – The OMBOK is intended to be a high-level document to codify the elements of Operations Management. It is not intended to be a list of recommended best practices or to be a “how to do it” training document. The structure allows for greater depth of coverage in areas of greater relevance to Operations Managers. Further, the OMBOK builds upon the foundational information found in the APICS Dictionary and in various other pre-existing Bodies of Knowledge addressing sub-sections of the OMBOK. In some cases, the OMBOK may directly reference and subsume these more detailed information sources.
1.2.2. OMBOK Update Schedule and Process – The OMBOK is maintained and improved through the APICS Body of Knowledge (BOK) Committee. This committee administers the process of regularly polling many subject matter experts across industries, functions, and geographies to identify emerging areas for inclusion in the OMBOK as well as to identify OMBOK areas of reduced relevance to be considered for reduced emphasis or removal from the OMBOK. Where appropriate, the BOK Committee may designate sub-groups or other professional societies to lead in the maintenance and improvement of sub-sections of the OMBOK. The OMBOK is recognized as a scope of information, rather than as a specific document.
Rationale for Operations Management Certification
Programs – From its beginning in 1957, APICS was intended to provide the means
by which its members could demonstrate that theirs was a profession fully on a
par with engineering, accountancy, or other functional callings. In the late
1960s, a Curricula and Certification Council was appointed to identify the body
of knowledge (BOK) that represented production and inventory management. This
body did not aspire to establish a licensing credential, but they were
determined to demonstrate the deeply specialized expertise required to carry
out various materials management functions.
The initial effort was long before computers were used in the typical workplace, so that many of the competencies identified required significant understanding of complicated mathematical operations and their application to the daily management of operations.
Within a few years, examinations were being administered on a regular schedule around the world, and the “Certified in Production and Inventory Management” (CPIM) credential (earned by successfully passing four examinations) gradually did gain for its designees the recognition and respect of their peers in other manufacturing professions. Two additional certification programs followed: “Certified in Integrated Resource Management” (CIRM) in 1991, and “Certified Supply Chain Professional” (CSCP) in 2006. For each of these programs, a body of knowledge related to, but separate from, the CPIM BOK, was identified and developed.
For certified individuals in all three programs, their credentials demonstrate their commitment to acquiring current industry knowledge and continual improvement.
188.8.131.52. Certified in Production and Inventory Management (CPIM) – The first two certification examinations developed were on the topics of inventory management and forecasting, closely followed by shop floor control and material requirements planning (MRP). Over time additional diverse modules were created and integrated. The current CPIM structure provides an integration and flow to include the entry level exam on the Basics of Supply Chain Management, three pillars of knowledge entitled Master Planning of Resources, Detailed Scheduling and Planning, and Execution and Control of Operations, and the capstone exam on Strategic Management of Resources.
184.108.40.206. Certified in Integrated Resource Management (CIRM) – The CIRM program was developed to identify a number of key functions that together made up a business enterprise, and to further examine the way these functions interacted, particularly when enterprise-wide activity required them to collaborate on a project. Contrary to the frequently perceived functional silos, cross functional teams were often launched for new product introduction, expansion of an enterprise into a global marketplace, the decline and withdrawal of a major product, or other significant purposes. The CIRM materials explored the internal drivers and issues of each function and how those issues might conflict with other functional needs and interests, and suggested ways in which a project manager or team leader might deal with the resulting territorial disputes. Sometimes mistakenly touted as a competitor or equivalent of an MBA, CIRM actually focused on business strategies and problem-solving for middle managers working with diverse teams made up of cross-functional representatives.
Certified Supply Chain Professional (CSCP) – The CSCP program was developed to assist
candidates in internalizing their connection to the “supplier’s supplier” and
the “customer’s customer.” Rather than existing as a discrete entity, the
enterprise was viewed as a link in a supply chain that crossed organizations
and, in some cases, oceans and continents. This expanded picture of a company’s
place in the broad scheme of things required global thinking on the part of
managers struggling with offshore outsourcing and international distribution
networks. The supply chain is a fragile, dynamic entity and managing its various
links requires a broad understanding of its unique constraints. Procurement,
manufacturing, and logistics, among others, are woven together by technology.
Speed-to-market is enabled by the real-time exchange of information among
widely separated partners. Demystifying these complex relationships was the
goal of the CSCP educational program.
While the CSCP program is still in its infancy, a number of companies with robust supply chains are recognizing its value. By its nature, its continued growth will drive it into the international arena very quickly.
Certification Processes, including Maintenance – APICS
certifications originally were achieved through individual study of the core
principles of operations management. Outlines of the principles and techniques
that a qualified certification candidate was expected to understand were
prepared by subject matter experts annually. From its first quantification, the
APICS body of knowledge was a dynamic entity. Not only did the original
curriculum outlines expand into new areas, but emerging technologies were
monitored for viability and eventually broadened into curricula of their own.
As industry best practices changed, the existing production and inventory
management (P&IM) body of knowledge was adapted to reflect them.
Certification candidates prepare for their examinations in many ways. Experience plays a significant factor, and what was once entirely a self-study regimen has been updated to include classroom instruction, Internet courses, and self-led groups.
Each program has a separate structure: The CPIM credential currently requires five examinations although over its lifetime the requirement has varied from four tests to seven. The CIRM program required four examinations of core principles followed by a fifth, capstone examination assimilating the core principles into an organized strategic vision. The CSCP credential requires an initial eligibility application and is awarded by passing a single examination.
Both the CPIM and CSCP certifications incorporate a maintenance cycle. After five years, certified individuals are required to demonstrate their continued growth within the profession by such activities as attending educational events and classes, teaching topics within the body of knowledge, or contributing to the development of the BOK through support of APICS’ mission.
The APICS certification programs represent the culmination of the body of knowledge and serve to keep it robust.
1.4.1. Across Business Functional Sectors – Components of Operations Management are applicable to almost every type of enterprise from manufacturing to service organizations. Types of businesses that rely on the processes and control brought to the business by Operations Management include, among others:
· Banks and financial organizations
· Retailers and Distributors
· Schools and Universities
· Health Care and Hospitals
· Government agencies
1.4.2. Global Boundaries – In the global economy, Operations Management responsibilities have become “borderless” as they touch on processes that span the supply chain and reach around the world. Global sourcing requires global and collaborative planning, and the extended supply chain requires global logistics planning and execution. Knowledge of another country’s laws, customs and business practices is growing in importance in the Operations Management body of knowledge.
1.4.3. Current Issues in Operations Management – The following issues are among those being addressed by progressive Operations Management professionals today.
220.127.116.11. Globalization – Globalization understood from the economic, financial, accounting, human resources, marketing, cultural, and other perspectives has brought new challenges to Operations Management as corporations extend their supply chains beyond their national borders and deal with suppliers and customers around the world.
18.104.22.168. Information Technology – Information technology is changing rapidly and providing new and better ways to facilitate the planning and control of a corporation’s activities. Continual development in technology is bringing tighter connections in the supply chain, fostering collaboration between partners, improving the ability to plan and schedule, and increasing productivity within the corporation and within its supply chains.
22.214.171.124. Time-Based Competition – The ability to deliver products and services to the market quicker than your competitors has become a competitive advantage in markets where low price and high quality have ceased to be market differentiators.
126.96.36.199. Innovative Business Models – As market conditions continue to shift and evolve, some corporations are changing their business models to gain competitive advantage. Examples of changing business models often include dramatically changing the physical or financial flows associated with delivering products and services, often enabled by emerging technologies. Examples of new business models enabled by the rise of the Internet include Amazon (direct sales to consumers), eBay (connection of willing buyers directly to willing sellers), and Dell (dramatic reduction of owned inventory in a build-to-order environment). Operations Management professionals need to understand these changes and their applicability in various markets.
188.8.131.52. Sustainability – Sustainability occurs when a corporation’s process, products and services are aligned in a way that is socially, economically and environmentally responsible. Operations Management can make a major contribution to a corporation’s objective to be a good corporate citizen by controlling the inputs, outputs and technologies used in the transformation process.
184.108.40.206. Collaborative Work – Outsourcing and elongated supply chains (supply chains that include multiple partners over long distances) necessitate more collaboration between partners. This collaboration is enhanced by technology that connects the partners and shares needed information in real time.
220.127.116.11. Organizational Development (OD) – Innovation and collaboration with supply chain partners requires corporations to identify and align both internal and external organizational processes. By understanding the reasons for resistance to change, OD proactively guides the transformation needed to enhance alignment or fit within the organization and throughout the multiple stages of the supply chain.
2.1. Operations Strategy – The focus of operations strategy in a business organization is to understand and achieve the ability to consistently deliver products and/or services to meet the needs of the customer and overall business plans. This typically includes objectives in the areas of quality, cost, flexibility, and speed. The operations strategy links directly to the overall business strategy especially as it relates to meeting customer needs and the market direction of procurement, conversion and delivery of services and products.
2.1.1. Transformation Processes – The processes or required steps and resulting deliverables to convert raw materials to desired products in a manufacturing environment and/or the processes to convert access to equipment, knowledge, data and skills into customer services in a service environment. The transformation processes are often associated with or identified as the ‘value-added activities’ by a step or entity in the supply chain.
· Manufacturing transformation – includes myriad possibilities, from converting wood into pencils to conversion of iron ore and plastics resin to capital equipment.
· Service transformation – includes a wide range of possibilities from knowledge and data transformed into financial services that a bank might offer to equipment and skills converted to plumbing services done at a customer’s home by a plumbing business.
18.104.22.168. Raw Material Creation / Extraction – The process of transforming raw material into a usable resource. For example, iron ore which is of little usable value before it is mined and processed, is converted into steel with a transformational process. Having access to needed raw materials is paramount to operational success and business sustainability.
22.214.171.124. Physical – process of altering the tangible shape or configuration of a material such as in metal stamping, fabric cutting and sewing, or chef prep for a gourmet meal.
126.96.36.199. Location – Delivering goods or services to convenient proximity for a variety of customers. For example, bank ATM machines, or the delivery of packages to an office location.
188.8.131.52. Storage – Provides a transformation of time by holding goods or service until needed, such as storage centers, or remote server space for backing up digital data.
184.108.40.206. Informational – involves the transmitting and sharing of useful information often derived from multiple data sources such as news feeds from global wire services to provide brief highlights.
220.127.116.11. Types of Products – Operations is involved with and covers all possible categories of products and services. Transformation happens in all of the possible scenarios.
18.104.22.168.1. Services – Intangibles such as knowledge and information created through the use of tools and techniques which are transferred into customer services.
22.214.171.124.2. Electronic – Transformation of knowledge can be accomplished remotely through Internet access. Examples include medical diagnosis, repairs to computer software over the web and transferring information such as order configuration possibilities to potential customers.
126.96.36.199.3. Goods – Tangible items such as physical manufacturing raw materials into saleable products. For an example, trees are converted to pulp which is converted to paper which is converted to cardboard.
2.1.2. Competitive Priorities (Focus) – Operational competitive priorities are often devised to create competitive advantage. These priorities are normally driven from business plan objectives and customer preferences that relate to the selection of products and services. Typically the top drivers include:
· High quality
· Low cost
· High customer service through convenience, speed, or flexibility.
2.1.3. Order Winner / Qualifiers – Order winners and order qualifiers are product or service highlights seen as valuable in the eyes of the customer.
· Order qualifiers – screening criteria that permits a firm’s products or services to even be considered as possible candidates for purchase.
· Order winner – unique characteristic or combination of characteristics which result in creating a competitive advantage and actually obtaining or “winning” the order from the customer.
2.1.4. Activity-System Maps – This is a diagram which shows how a company’s strategy is delivered through a set of tailored activities. This type of map is useful in understanding how well the activities that make up the major operational processes of the firm align with operational priorities. Competitive advantage comes from the way a firm’s activities fit and reinforce one another.
2.1.5. Operations Strategic Fit / Alignment with Corporate Strategy & Supply Chain – Execution of operations strategy is critical to the successful execution of the intention of business goals. The business plan is typically focused on financial objectives, market and product objectives, technology and growth. Operations must support these goals with processes that align with operational priorities such as speed, flexibility, cost and quality. Typically trade-offs must be considered, for example speed of delivery versus cost.
2.1.6. Economies of Scale / Scope – Larger companies can take advantage of economies of scale due to the ability to spread significant investments in resources (plants and equipment) over larger volumes of finished goods and services to lower the incremental portion of cost over higher volume production. When higher volumes are not necessarily the same items but share common resources, creating in combination creates economies of scope. For example, larger organizations can often have more negotiating clout with their suppliers. Third party logistics organizations often have better success negotiating freight costs due to their size than smaller manufacturers can alone.
2.1.7. Understanding Constraints – Eli Goldratt in the 1980s brought the manufacturing world’s attention to the Theory of Constraints. Constraint management is about understanding the weakest link in the process flow, typically the link with the least capacity or bottleneck operation. This relates to both internal processes as well as the supply chain. From a strategy standpoint constraints can often impact the ability to reach customer service goals, pricing targets, and quality expectations.
2.1.8. Sustainability, Ethics and Social Responsibility – Business requires trust and integrity between partners in the supply chain.
188.8.131.52. Sustainability relates to the degree of concern for the environment including use of renewable resources and minimization of waste that is damaging to the environment.
Ethics relates to alignment with both legal and moral
codes of conduct in all activities of the firm. This area can be particularly
challenging in a global company, in that legal and moral codes may differ significantly
across cultures and geographies. In some cases there may be prescribed
processes to help ensure ethical dealings, such as those embodied in the
Sarbanes-Oxley act of 2002 enforced in the
184.108.40.206. Social Responsibility relates to both the areas of Sustainability and Ethics as they relate to the communities in which the organization does business, and extends further into the ways in which the organization may support its communities, including how the organization may encourage its workers to participate in the support of the community.
2.1.9. Operations Metrics – Operations metrics are a quantitative indicator for process change, showing improving, maintaining, or declining process performance. There are 2 levels of measures within the operations functions: 1) top level key performance indicators (KPIs), that like a barometer that tells if a “storm” is coming, indicates if a process is starting to go out of control, and 2) diagnostic measures used for problem solving, process improvement and data analysis. These metrics tend to be introduced and stopped as need dictates. KPIs often drive diagnostic measure needs.
220.127.116.11. Balanced Scorecard –The Balanced Scorecard theory drives action from strategy by developing specific areas of focus and feedback. Operations controls the flow of inputs and outputs of an organization and is involved in the scorecard through its impact on financial, customer, and internal business processes. More specifically:
– Revenue growth and mix – From a strategic point of view, operations management has a major piece of the growth equation through capacity considerations and new product or service introduction.
– Cost reduction / productivity – Operations often owns the biggest share of cost reduction in the business. Cost of sales (COS), made up of material, labor and overhead, typically represents a very large component of cost in the organization.
– Asset utilization and investment strategy – Operations typically controls the major capital investments including plant, equipment and inventory.
18.104.22.168. Benchmarking – Benchmarking is the act of comparing one operation or process with another. This can be done against similar operations but can be especially effective if done against best-in-class operations regardless of the market. For example, benchmarking quality in a tool manufacturer against aerospace standards or new product introduction against the electronics market.
22.214.171.124. Best Practices – This is a technique, method, process, activity or other item related to conducting business that is most effective at delivering a particular outcome. By seeking out relevant best practices and driving improvements against these examples gains can typically be driven more quickly.
2.2.1. Building Strategic Partnerships – One effective way to reduce costs and improve service in the supply chain is to develop strategic partnerships. Such alliances should be selectively entered into based on the overall strategic plan of the firm, and are typically limited to suppliers of strategically important goods or services. These partnerships are based on trust and rely on very predictable communication streams and management systems. Rules of engagement between the parties normally include :
· How schedules are communicated
· How engineering changes are executed seamlessly
· How often deliveries are expected
· How often demand expectations are forwarded or otherwise available to the supply chain
· How suppliers are involved with the product development process at the customer’s site
· What securities are offered in terms of longer contract expectations
· What the options and features are and what the lead-time expectations are for these
· Other communication requirements needed by either party
2.2.2. Insource / Outsource (Make-Buy) – Outsourcing decisions are generally made to improve service or cost for the supply chain and involve selecting an outside firm to provide a good or service that is currently done internally. Normally the decision happens when resources better suited for the particular task in question exist; typically the task(s) selected for outsourcing are not core competencies of the firm or the supply chain link making the analysis. Firms choosing to outsource various functions must be prepared to continue to provide management oversight of the outsourced activity. Functions once outsourced are often extremely challenging to subsequently insource. A primary reason for this is that whatever internal competencies had existed initially are lost when the function is outsourced, and rebuilding those competencies to allow later insourcing may not be easily or economically achieved. In high performance organizations, make/buy decisions are made based on total cost (or benefit) comparisons. Costs and/or benefits included in the equation:
· Cost of producing the product or service
· Quality assurance of the potential supplier being assessed
· Cost of transportation
· Costs of ordering which can range from a simple pull signal to bulk orders in more complex systems
· Costs of time in delivery of the service or product (such as transportation time for the part or service agent)
· Flexibility benefits the supplier can offer, especially where the supplier may be able to trade off capacity or products between multiple customers (such as a freight forwarder who uses truck space to ship product from more than one customer)
· Lost of proprietary processes or other ‘trade secrets’
· Competitive considerations is the supplier has a relationship with your company’s competitors
126.96.36.199. Use of Third / Fourth Party Providers (Logistics) – One of the most frequent areas of outsourcing in recent years is the use of third party logistics (3PL) providers. This is normally the act of subcontracting traditional traffic operations, but more comprehensive services are provided in some instances. Just like any sourcing decision, this choice is based on the same cost/benefit analysis as any sourcing decision (see section 2.2.2). In many such decisions, economies of scale are brought to bear in the 3PL’s ability to negotiate with freight companies. Increasing skill and knowledge requirements driven from global shipping and receiving transactions have many businesses subcontracting these duties to meet this knowledge requirement in a cost-effective manner.
2.2.3. Drivers of Supply Chain Performance – The drivers for performance of the supply chain are no different than the performance drivers for the end member of the supply chain (the customer / consumer) – quality, speed, delivery fidelity, flexibility, and cost. Some specifics are:
· Facilities – Supply chain performance is often affected by the design of facilities and location of same. Having facilities in close proximity can allow for special flexibility as well as ease of communication. Network optimization studies can be performed to design an optimized network of manufacturing sites, service sites, and distribution centers to deliver the lowest cost network with optimal inventory and capacity levels.
· Inventory – Inventory can improve supply chain flexibility by acting as a buffer to decouple supply from demand when appropriate. The closer to raw materials or farther upstream in the supply chain that inventory can be efficiently and effectively pooled, the more flexible this inventory can be. This pooling, known as risk pooling, allows for the variability of demand to be aggregated thus dampening the effects of such variability. Once the materials have been converted to the next level in the BOM (bill of material) they are less flexible. Some inventory in the supply chain, especially toward the downstream end or end consumer of the chain can add substantial flexibility to the end user especially if lead-times are long.
· Transportation – Various transportation decisions can make major differences in both benefits and costs. While air freight is fast it is also expensive. Cross-ocean on-water freight can be economical but add weeks to the cumulative lead-time. Speed and flexibility are becoming a bigger influence in a total cost analysis given the global competitive nature of markets. IT solutions in the form of TMS (Transportation Management Systems) can produce optimal or near optimal solutions to routing, loading, scheduling and can automate such tasks as manifesting.
· Information – Another major influence on supply chain effectiveness is the ease at which information is shared up and down the chain. Many supply chains are beginning collaborative planning efforts where suppliers and customers are making joint decisions regarding costs and service risks. Information elements can include demand, new product plans, product design changes, consolidation of freight allowing combined “milk runs”, etc.
· Sourcing – Sourcing decisions are important within the supply chain and rely on standards and policies to be maintained. Changes in product several levels down can show up as problems at the end-user level. Changes for critical products and components need to be communicated and even sometimes approved by other players further down the chain.
· Pricing – Pricing is perhaps the most important strategic decision. How pricing is set, high, low, or in the middle, sends a strong message to all members of the supply chain, competitors, customers, suppliers and potential new entrants. Pricing must be set in concert with the firm’s overarching strategy of being a differentiator, cost (price) leader or niche player.
2.2.4. Synchronization – With respect to the supply chain synchronization means the simultaneousness and speed of movement of information, funds, and goods or services through the supply network. A highly synchronized supply is a high velocity supply chain. Scheduling the supply chain effectively requires a clear demand signal that reaches the extremities of the chain. Knowing when product are needed and where the inventory buffers will be held in the supply chain and understanding what the flexibility requirements and rules of engagement are greatly increases the overall performance of the supply chain. This flow and pace is enhanced by the free sharing of information and data.
2.2.5. Integration of Suppliers, Internal Supply Chains, and Customer Systems – The integration of supply chain elements is the essence of the effectiveness of the supply network. Collaborative planning or sharing of information and data is critical to synchronized and efficient flow of material to the end user of the supply chain. Some concepts and commonly used acronyms used with supply chain management include:
· Supplier Relationship Management (SRM) – the focus on collaborative planning goals and processes between the customer and their suppliers.
· Internet Supply Chain Management – with the introduction of the Internet into everyday commerce comes the need for coordination of this commerce. Complex networks have developed that require free flowing data streams. A major online book store is an example where many book suppliers are networked to create a virtual book store with almost unlimited resources on line. Stock balances and availability are widely visible through the network.
· Customer Relationship Management (CRM) – CRM is about understanding the customer and making sure that process design, in support of that customer, is appropriate and that communication streams are frequent and free-flowing. Handshake management is often used in the description of CRM and refers to well understood and defined expectations and accountability for those expectations. Communication is a major focus to develop an improved understanding of the customer. If the market need is short lead-time, the process design should meet that need. If service reliability and access is the driver, process design should reliably deliver same. Often this focus leads to helping customers want improvements to the product or service that they did not know they wanted prior to the introduction.
2.2.6. Breadth of Activities (Designing, Planning, Controlling) – The activities within supply chain management are diverse and numerous for designing, planning and controlling. In many respects these activities correspond with the activities of one business, but on a scale that takes in the needs and capabilities of several businesses within a supply network with the goal of enabling the entire supply network to function as a single virtual entity.
188.8.131.52. Demand Management / Sales and Operations Planning (Master Planning of Resources Model) – While forecasting is never perfect it can be an enabler for lower cost as it either becomes more accurate, or begins to be predictable with respect to errors. In high performance supply chain management collaborative efforts in the forecasting (demand management) and top management sales and operation planning (S&OP) processes are effective in creating the agreements necessary to better understand and manage risk as it relates to both cost and customer service.
2.2.7. Reverse Logistics – Many supply chains have a need to take inventory back to the source. Examples are companies processing warranty or re-manufacturers that require cores returned for reconditioning. The explosive growth of e-commerce which experiences many product returns is another example. In these companies reverse logistics are exercised. Many times inbound freight can be coordinated with the outbound thus saving transportation costs. Other times considerations are taken such as consolidation at collection points. Sustainability needs are playing an ever increasing role in driving the growth of reverse logistics as firms are driven, sometimes by legislation, to collect and properly recycle goods they have sold.
2.2.8. Product Sustainability –Product sustainability is the ability to produce and distribute product over time without running out of resources and in a manner that minimizes the impact on the environment.
Regulatory Compliance – All business must be aware of
governmental regulations and necessary compliance. Examples of regulations in
2.2.10. Global Considerations – As trade is open to more global sources and customers, more considerations are needed to cover the wide array of possibilities in customer requirements. While technology can be very similar, cultural differences can necessitate a wide range of product differentiation, such as currency exchange rates, product shape, size and material make-up or local laws governing security. Supply chain considerations must include these end-user requirements.
184.108.40.206. Postponement Strategies and Methods – In many supply chain streams the postponement of option inclusion is an effective strategy to minimize inventory risk that is committed to configurations without planned demand.
220.127.116.11. Mass Customization – Many markets today are moving rapidly toward mass customization. Often considered a subset of postponement, mass customization refers to the configuring of materials or services to meet a specific customer’s desire and typically serves as a market differentiator or competitive advantage. As items reach global markets, flexibility increases in importance as characteristics such as color preference or electrical currency systems vary.
2.3.1. Corporate Strategy & The Business Plan – The Business Plan in any business is arguably the most important document and directional tool for a business. The Business Plan is normally made up of three layers.
· The Strategic Plan – this plan typically goes out 3-5 years. It is typically reviewed at least annually, sometimes quarterly depending on market conditions.
· The Annual Operating Plan (AOP) – this plan is the financial direction for the company normally going at least 12 months out. This is normally the link to the top management Sales and Operations Planning process. There are normally a list of assumptions that are documented and support the logic of the AOP. It is typically fixed or ‘locked’ for measurement purposes but often undergoes quarterly updates.
· Business Imperatives – This list of objectives takes the Strategic Plan and the AOP and creates specific goals and priorities to ensure the AOP happens as planned if at all possible. To be most effective this short list of objectives must happen in the next 12 months. Management agrees to support this effort with capital and other needed resources. When done effectively, this process can limit resources spent on lower priority organizational objectives.
Operations and Enterprise Economics –
18.104.22.168. Value Creation – Value creation is taking raw materials or knowledge and converting it into a product or service that has more value to the customer than the original material or data. Value is created using transformational processes (see 2.1.1).
22.214.171.124. Financial Accounting – Profit is the most significant measure of business success. Financial accounting is the scorekeeping process of determining the success or failure rate of a business. With information collected real time in many cases, data are compiled and summaries distributed typically on a monthly basis although some organizations are doing it more frequently.
– Income / Expense – Income is the difference between revenue and expenses. Revenue refers to the gross currency value coming in from the sales of goods and services and expenses are all the costs of doing business.
o Cost of Goods Sold – Cost of goods sold or otherwise known as Cost of Sales is made up of 3 elements: direct labor, direct material, and overhead. Overhead is made up of indirect expenses from support materials and activities such as process engineering, materials management, and production wearable items.
o Gross Margin – Gross margin is the balance after cost of goods sold is subtracted from revenue.
– Balance Sheet – The balance sheet is a statement of financial position, which is based on the basic accounting equation of assets equal liabilities plus owners’ equity.
o Return on Assets – A financial measure comparing wealth created from a project or investment as compared to the assets required to make that wealth or return.
o Inventory Turns – The inventory turns calculation is one popular measurement of inventory management. It is a comparison calculation between existing inventory and the expected annual usage. It can be calculated on a specific stockkeeping unit (SKU) by volume but is more frequently done at the aggregate inventory level calculated on the basis of value. Inventory is normally an asset on the balance sheet. Some companies use the inverse of inventory turns resulting in an indication of the amount of time it would take the current inventory to run out, which is often expressed as days or weeks of supply or “days inventory forward.”
o Capital Asset Management – Capital assets include large ticket items such as land, machinery, buildings and other equipment. Capital Asset Management is the planning and control of the utilization of these assets. This can lead to the sales of unused assets or marketing plans to increase demand for other assets which would improve utilization.
– Cash Management – Cash is the life blood of an operation. It allows employees as well as raw material and service providers to be paid. Managing the cash is making sure the cash flow coming in is equal to or more than the cash flow going out. This adjustment leverage can come from holding payment on accounts payable to delaying purchases. It can also be adjusted with revenue impact activities such as discounts for quick payment of invoices or discounting to generate quick sales or collection of accounts receivable.
126.96.36.199. Break-Even Analysis – Break-even analysis is the comparison of revenues and expenses, both fixed and variable costs, in order to identify the volume where revenues cover all expenses. When comparing the costs associated with different production methods, such as manual versus automation, the volume where the cost is the same is referred to as the point of indifference. Break-even analysis finds the break-even point, which is the volume at which revenues exceed total costs.
188.8.131.52. Best Operating Level (BOL) – This is the level of capacity for which the process was designed and thus the volume of output at which average unit cost is minimized. Full theoretical capacity is often not sustainable for long periods. The BOL can be a complex trade-off between the allocation of fixed overhead costs and the cost of overtime, equipment wear, defect rates, and other costs (See Section 2.1.6 on Economies of Scale and Scope).
184.108.40.206. Cost Accounting – The process of keeping track of all costs of building products, labor, material, overhead and variances is known as cost accounting.
– Activity-Based Costing – Activity Based Costing (ABC) is cost accounting using actual costs rather than standard costs with variances. ABC requires touch points throughout the process to pick up actual costs as they happen.
– Cost Analysis and Control (FIFO, LIFO, etc.) – Cost analysis and control is done within cost accounting to assure the best overall financial results. Consideration of how operations management decisions regarding the location and valuation of products as services may affect financial interests such as taxes and tariffs helps to ensure the best financial benefit for the firm. There is also sufficient decision-making freedom in accounting practices that the impact of purely financial decisions, such as the method for valuing inventory or depreciating capital, should be understood to help ensure decisions benefit the firm.
220.127.116.11. Profitability – Organization profits result after all costs are subtracted from all revenue.
2.3.3. Marketing – Marketing’s responsibility is to affect customer behavior and growth of the business. There are only two ways to grow a business – get new customers or get existing customers to buy more. Marketing is involved in both these areas. They affect customer behavior through promotions, pricing, distribution channels and product design and are strongly involved in new product and service innovation.
2.3.4. Human Resources – The department within a business responsible for the human component of company assets. High potential employees can reach higher levels of value to the company through investments in human capital. This includes: skills, knowledge and availability.
· Training – An important role of the HR department as human resources are provided the “how to’s” of job tasks. Training explains how to do the transactions or processes properly.
· Education – The “why” and the “what” of learning where training is the “how to” of learning. In inventory accuracy classes, for example, education would describe why it is worth the effort to have accurate inventory balances. Training explains how to do the transactions properly.
· Development – The goal of investments in human capital is employee development. Investments in education and training result in employees that are more prepared to problem solve, lead projects and people, and generally bring value to the company. Development gets employees ready for their next position and is critical to succession planning for the firm’s sustainability and long-term employee loyalty.
2.3.5. Organizational Development and Managing Change – Organizational development is carrying out a strategy to build high levels of effectiveness of an organization through proper accountability, improved levels of skill and knowledge and strong communication of corporate objectives. Change agents aid in overcoming resistance to new methods and assisting in implementation to facilitate organizational growth.
· Dimensions of Change – As markets, technology, cultures and customer expectation changes, so does the business. Change happens on many levels and includes employee expectations, management roles, technology improvements and customer expectations. Change happens earlier in the cycle when leaders recognize the need faster.
· Drivers and Obstacles – Drivers are forces that lead people to change such as a financial crisis, a champion who will lead others to change more quickly than it might happen on its own, technology that changes a market toward different designs in products, and laws such as ecological supporting legislation. Obstacles to change are always present. These include cultural norms, a lack of training, a lack of leadership, and more physical obstacles such as a lack of resources.
– Overcoming Resistance – Overcoming resistance is often a function of communication and education. If a good idea is not accepted it is generally because people do not understand it to be a good idea. Getting employees involved early in the planning of the new state can be very helpful in overcoming resistance.
– Human Behavior and Motivation – Humans are interested in identifying their personal gain or loss as it pertains to requested or required actions. The level, direction, and persistence of effort people are willing to expend is related to the perceived rewards and punishments from their actions. The value of a consequence is based on the need the individual is trying to fulfill and can range from money for food to personal growth and development. Therefore, people are more likely to be motivated to solve problems when they are rewarded for trying – and those rewards do not have to be financial. Sometimes the best motivators are recognition, personal growth and satisfaction.
2.4.1. Life Cycle Planning – The concept and practice in firms providing goods and/or services to plan strategically for the phases of a product’s or service’s life. After several Research and Development related stages including product conceptualization and technical demonstration, the stages which operations are concerned with are: Introduction, Growth, Maturity, and Decline. Introduction is the initial launch of the new good or service. Growth is the increase in customer base as the item gains acceptance and is typically where the break-even point is reached. Maturity is a stabilizing of volume and increased competition often resulting in the need for lowering costs and price. Decline is the drop and eventual end of sales as the good or service is no longer demanded. Each stage requires a strategic alignment of the firms’ resources to support the marketing and delivery of the product or service.
2.4.2. Design for Manufacturing – Sometimes referred to as Design for Manufacturability, this is the practice of designing products including the setting of tolerances and the specification of materials in such a manner that the processes and equipment that will be required in the manufacture of those products is simplified. The goal is typically to create a product design that meets all of the customer or consumers’ requirements and is the least costly to manufacture.
· Component Commonality – The practice of using the same components in various end items as a method of simplifying the design process, containing costs, simplifying the procurement of such common components, reducing variability in both storage of the component and manufacture of the end item.
· Modularity / Robustness – Modularity is related to component commonality in that a standardized or common module is used to complete a variety of end items with the goals of cost containment and simplification. Modularity can also increase flexibility with respect to the ability of the firm to offer somewhat custom configured end items. Conversely the use of modular construction can have a limiting effect on the total range of customization that can be offered. Robustness is the ability of a design or service offering to withstand external detrimental forces yet still deliver the desired functionality, or to deviate from the desired functionality in a minimal fashion. For example, many products are designed to accept minor variations in electrical current; however, computers and other more sensitive equipment often require a surge protector.
· Global Standardization – The practices by firms who take a global as opposed to a multi-national strategy to standardize products, components, practices, and service offerings. Such standardization takes the form of designing and altering products, parts, processes, and procedures to establish and use standard specifications and reduce the total numbers of parts and materials used and products, models, or grades produced.
2.4.3. Concurrent Engineering – The practice of involving all relevant parties such as marketing, research and development, product and process design engineering, manufacturing, distribution, and field service in the entirety of new product design and introduction. This is often accomplished by cross-functional teams made up of individuals from the relevant functions who are involved throughout the entire design process and may extend beyond organizational boundaries to include supply chain partners in the design phase. The opposite practice is sequential engineering.
Computer Assisted Design / Computer Assisted
Manufacturing (CAD /
2.4.5. Group Technology – Group technology is the process of categorizing design shapes and processes to streamline the production and design process. Used in the 1980’s to help with design simplification, group technology is still an important part of data organization and used as a background management system within computer aided design.
2.4.6. Quality Function Deployment – QFD is a methodology that shows relationships and dependencies on quality areas, product capabilities, and product qualities as understood within the voice of the customer. The complexity of achieving each specific characteristic is also considered. The House of Quality is normally used for the management of QFD.
18.104.22.168. House of Quality – A multi-stage structured process that relates customer-defined attributes to the product technical features, to the necessary parts and components, to the processes to build those parts and components, and ultimately to a control process to monitor and assure that the process is performing on specification.
2.4.7. Sustainability – the ability to manufacture or deliver a product or service without running out of resources and while having minimal impact on the environment.
Learning Curves – A phenomenon first observed in the
early 1900s when it was noticed that the labor content of large manufacturing
projects, such as aircraft, declined steadily as the cumulative production
increased. After study it was found that this decline in labor content was
indeed predictable and related to a doubling of production. In fact, the curve
takes the form of an exponential decay curve.
When planning for changes in capacity, it is prudent to plan for ramp-ups or ramp-downs. There are stress points in all organizations at which adjustments to certain levels of magnitude are not immediate and automatic. For example, when adding a new product line it would be normal for at least a short interval of less than peak capacity as workers get used to the new product and pace. This would be equally true of service organizations as they get used to new services. Learning curves are variable and can be minimized through investments in training, education, testing and practice prior to full implementation.
2.6. Project Management (Strategic Uses of Project Management) – Project management is the management system that enables business imperatives and strategic goals to be accomplished. If growth is a goal, for example, projects are developed to introduce new factors effecting customer behavior. Project management is the methodology in which goals are assigned resource and plans are developed and monitored to achieve these goals.
3.1. Agility and Efficiency – Agility refers to the ability of a firm to manufacture and deliver a broad range of high-quality products and services with short lead time and varying volumes that provide enhanced value to customers. Efficiency refers to the ability to do this at low cost. Typically there is a trade-off between such factors as cost and speed of delivery. For example, a firm’s ability to efficiently deliver a broad range of products at low cost depends on the relative certainty associated with supply and demand. The stable supply base and relative certainty of demand associated with commodity type products allows a very efficient supply chain. At the other extreme, firms that produce innovative products with short life cycles and the latest technologies need a more agile supply chain.
3.2. Synchronization – Bullwhip Minimization – In simple terms, supply chain management is simply balancing or synchronizing supply with demand. Lead time and demand variability make this a difficult task. The bullwhip effect is the phenomenon of variability magnification as we move from the customer to the producer in the supply chain. The effect indicates a lack of synchronization among supply chain members where, for example, a small change in consumer sales ripples backward in the form of magnified oscillations upstream, resembling the result of a flick of a bullwhip handle. Because the supply patterns do not match the demand patterns, inventory accumulates at various stages, and shortages and delays occur at others. Collaboration/communication between the supply chain members is one way to minimize the impact.
3.3. Risk Management – In the context of supply chain management, risk management involves dealing with uncertainty in supply, transformation, delivery and actual customer demand. The uncertainties can be the result of such factors as yields, timing, pricing and catastrophic events. Risk management starts with a realistic analysis of the risks and results in a strategy that will minimize the financial impact of these uncertainties. These strategies may involve duel sourcing, buffering, forward buying and other tactics. Contingency and recovery planning may be an important part of the strategy particularly when the probability risks are very low.
3.4. Distribution – the activities associated with the movement of material, usually one firm’s finished goods or service parts, from the manufacturer (or distributor) to the downstream customer. These activities include transportation, warehousing, inventory control, material handling, order administration, site and location analysis, packaging, information systems, and communications networks.
3.4.1. Modes of transportation – The method of shipment is a critical decision that must be made when distributing product. The basic modes of transportation are defined as highway, rail, water, pipeline, and air. Each method implies a trade-off of costs and benefits which must be considered such as freight charge versus time to move.
3.4.2. Channels of Distribution – Channels of Distribution refers to any series of firms or individuals that participate in the flow of goods and services from the raw material supplier and producer to the final user or consumer. The terminology is used to reflect the intermediate companies/steps in the distribution process. For example items could be sold directly from the manufacturer to consumer, or they could be sold though a wholesaler, distributor, or retailer to reach the end user.
Cross docking, break bulk and packaging (unitization) –
Cross docking is a distribution technique where items are brought into a
distribution center for immediate dispatch out. Instead of being received and
put away, these items are loaded into the distribution centers sorting system,
or are taken directly to shipping for sorting and dispatch there. This may or
may not require the vendor to perform some additional value added step in their
process, such as hanging garments on hangers, packaging the item for easy
sortation or adding a pricing or other kind of label to the item.
Break bulk handling is dividing truckloads of homogeneous items into smaller, more appropriate quantities for use. In trucking this is simply loading many shipments into a truck destined for a specific location and at that location the freight is “broken” to other trucks destined for additional locations until it arrives at the local destination where it is “broken” to a local delivery truck.
Unitization packaging is the consolidation of several units into larger units for fewer handlings such as items placed in boxes loaded and wrapped as a pallet. In terms of distribution, unitization will cost more because of the additional packaging, but this cost can be offset by the savings from shipping one large unit vs. many smaller units.
3.5.1. Warehouse Layout – Warehouses are often configured so as to have formal storage locations that identify the row, rack section, level and shelf location, typically with an alpha numeric location bar code or label. For example, the location label “B3A4” can be used to identify Row B, pallet section 3, shelf A and shelf location 4.
Fixed / Random storage locations – This refers to
whether items are permanently assigned to a location or the assignments are
made dynamically as space is freed. Often some combination of both methods is
Fixed locations are often appropriate for high volume picking. Fixing locations, along with logical location slotting (locating high turn items closest to packing and shipping) allows a warehouse to be configured to reduce picking and put away times, by saving travel distance.
Random locations are appropriate where travel distances are not an important consideration and when overall utilization of warehouse space is important. Random locations are often used for high variety storage. Computers often manage the process.
3.5.2. Material Movement – Material movement inside the warehouse is governed primarily by the type of product that you have – its configuration (cube size and weight) and storage and shipping configurations. Material movement equipment includes:
· Fork lifts to move and lift pallets of materials into and out of storage units.
· Pallet jacks to move pallets of materials short distances; loading and unloading trucks and case picking onto pallets.
· Pick carts to hand pick single items and small case picks.
· Conveyors to move cases or single items from place to place within a warehouse, from pick locations to a packing area. Items can be placed into totes or boxes to facilitate movement on the conveyor. The conveyor can also be used for put case stock away.
· Automatic material handling systems apply technology (warehouse management systems and bar code scanners) to conveyor systems in order to move and sort items within a warehouse. When picking is complete the system will direct the items to the correct packing station or loading dock.
3.6. Logistics – In an industrial context, logistics is the art and science of obtaining, producing, and distribution material and product in the proper place and proper quantities. In a military context its meaning can also include the movement of personnel as well as the design and development, acquisition, storage, movement, distribution, maintenance, evacuation, and disposition of materiel.
3.6.1. Design Options – The design process consists of translating a set of functional requirements into an operational product, process, or service. Included in the design options are the design of the distribution network, the design of the product itself, design of the production or distribution facility and also includes the concepts of design for manufacture and assembly and design for the environment. Several of these design options could affect the logistics of the system, including product size, package configuration, product variety, and product perishability.
22.214.171.124. Direct Shipment Network – In a direct shipment network suppliers establish a system of shipping directly from the supplier to the end-user customer without additional intermediary stages in the distribution system.
126.96.36.199. Direct Shipment with Milk-Runs – A milk-run is a regular route for pickup of mixed loads from several suppliers. A combined or consolidated delivery from multiple suppliers is often used with milk runs. For Example, instead of each of five suppliers sending a truckload per week to meet the weekly needs of the customer, one truck visits each of the suppliers on a daily basis before delivering to the customer’s plant. The direct shipment using a milk run consolidates multiple vendors’ deliveries into one direct shipment to the customer thus allowing the customer to process one truckload vice multiple less than truck load shipments daily.
188.8.131.52. Tailored Network – A tailored network is part of the larger distribution network. The tailored network is designed in conjunction with the needs of the customer to provide the right quantity of products, in the right condition, to the right location and at the time as dictated by the customer. A tailored network often involves a variation of the above models.
3.6.2. Qualitative Techniques – Qualitative techniques are used when quantifiable data is not available or when measures for different criteria relevant to the logistics decisions are used. A typical problem would be the location of a plant or a warehouse. A common approach is where each criterion is evaluated based on a common point scale and criteria are combined using weights which indicate the importance of each criterion.
3.6.3. Quantitative Techniques – Quantitative techniques allow the direct consideration of cost in evaluating logistics system designs. Trade-offs often involve transportation related costs, inventory investment, and costs related to acquiring and managing the facilities. Quantitative techniques are also useful for such logistics related problems as the design of routes and scheduling of vehicles.
184.108.40.206. Transportation Models – A transportation model finds the optimal allocation of sources of supply (typically plants) to meet the demand at destinations in the network (typically warehouses). For each combination or source and destination a per unit cost (or profit) is available. Solutions are evaluated using the sum-product of volume times the cost (or profit). These problems can be solved using common spreadsheets.
220.127.116.11. Network Optimization – A logistics network is the interconnection of the facilities, transportation assets, and nodes that allow for the efficient distribution of products between the suppliers, the manufacturing facility, the distribution centers, warehouses, and the customers. Optimization is the process of achieving the best possible solutions to a problem in terms of a specified objective function. Optimizing the logistics network is the process of achieving the best possible network to move the materials/products from the supplier through the manufacturing process and to the end user.
18.104.22.168. Vehicle Routing – Vehicle routing is a subset of the logistics network optimization process. The goal of the routing process is to get the most efficient use of all vehicle assets within the network. Vehicle routing is usually accomplished using computer models that contain all of the customer and supplier nodes within the network with the output of the model being routes and assignments that minimize the total distance traveled. The routing model may also produce vehicle scheduling to optimize the use of the vehicles and provide continuity of service to customers.
3.6.4. Shipment Planning – Shipment planning consists of load planning, transportation planning and route planning. The goal of shipment planning is to maximize freight loads while minimizing freight costs. Shipment planning is used to integrate movement demands with vehicle resources.
22.214.171.124. Load Planning – The process of determining what should be in a load and how the load should be organized to maximize the weight and cube of the load. When considering the load it is important to consider the items in the load as the load may cube out the shipping mode before maxing out the weight. Load planning also includes how to build a mixed commodity pallet for shipment and load sequencing based on multiple delivery stops.
126.96.36.199. Transportation Planning – Transportation planning is used to coordinate the transportation assets of the company with the demand for shipments or between the company and Third Party Logistics Providers.
188.8.131.52. Route Planning – Route planning is necessary to ensure efficient use of transportation resources while meeting the needs of the customer. The routes must be coordinated with the customers if the shipper is using a time definite delivery guarantee. The goal of route planning is to minimize transportation costs through the use of load distance analysis while balancing truck load and multiple stops created by less than truck load deliveries.
3.6.5. Capacity – In logistics and distribution, the capacity of the network includes the carrying ability of the transportation choices. The number of trucks in the system, both available and required, and the capacity of the distribution system to load these trucks and deliver on time to the customer is the constraint on the system. Distribution networks must balance the capacity and the customer demands to remain efficient and effective.
3.7. International Regulations – International regulations greatly impact decision making in the distribution system. These regulations include customs regulations on what can and cannot enter a country; trade tariffs and duties on imported goods; security regulations such as those contained in the 2007 SAFE Ports Act; and trade agreements such as NAFTA and the trade agreements of the European Union. International regulations may impact or enhance the competitiveness of a country or protect a country’s distribution and manufacturing systems.
Free Trade Zones – Free Trade Zone is the international
term for what is known in the
3.8. Strategic Sourcing – A comprehensive approach for locating and sourcing key material suppliers, which often includes the business process of analyzing total-spending-for material spend categories. There is a focus on the long-term relationships with trading partners who can help the purchaser meet profitability and customer satisfaction goals. From an IT applications perspective, strategic sourcing includes automation of request for quote (RFQ), request for proposal (RFP), electronic auctioning, business to business (B2B), and contract management processes.
3.8.1. Purchasing Cycle – The purchasing cycle is the length of time from when a need for an item is determined until the item is sourced, purchased, and delivered. The purchasing cycle consists of need identification, supplier selection, price determination/negotiation, preparing the purchase order, conducting follow ups and status checks on the purchases, the acceptance and receipt of the items, and the payment of the invoices. Included in the supplier selection is the development of standards for order qualifiers and order winners.
184.108.40.206. Supplier Selection –the process of selecting the right source for a commodity or service is a critical function of the purchasing or acquisition department. For most commonly used items the purchasing office maintains a listing of approved qualified suppliers. The purchasing office must find and then conduct a decision analysis for items that are new or for which there no longer is a qualified supplier. Part of the maintenance of the supplier database includes preparing reviews and scorecards for suppliers. Decision analysis models are also available for use in analyzing potential suppliers as an important aspect of supplier selection is to decide on the right mix of suppliers and how the orders will be allocated to these suppliers. Supplier selection may be limited to a sole source for some critical or proprietary components.
220.127.116.11. Processes and Models –Multiple criteria decision making models are used when there is more than one critical decision criteria. A multiple criteria decision making model may consider a number of factors to include price, quality, delivery standards, and past performance evaluations. A successful model may include trade off analysis between the established criteria. The Analytical Hierarchy Procedure (AHP) is a useful model to assist in supplier selection decisions.
3.8.2. Global Partners – Global and extended supply chains create the need for international partners, especially in developing markets. The global partner may be a supplier of raw materials or components, an intermediary, a customs broker, or a retailing partner. Specific country laws and regulations may dictate how a global partner may enter the marketplace. Partnering usually is an indication of a long term commitment based on mutual trust and a shared vision.
3.8.3. Supplier Relationship Management (SRM) – A comprehensive approach to managing an enterprise’s interactions with the organizations that supply the goods and services the enterprise uses. The goal of SRM is to streamline and make more effective the processes between an enterprise and its suppliers. SRM is often associated with automating procure-to-pay business processes, evaluating supplier performance, exchanging information with suppliers and include supplier certification. An e-procurement system often comes under the umbrella of a supplier relationship management family or applications.
18.104.22.168. Third Party Logistics (3PL) / Partnering –when a third party provides product delivery services and offers additional supply chain expertise. A third party logistics company is a company that manages all or part of another company’s product delivery operations. This partnering between a manufacturer or supplier and a third party logistics provider is a result of a trade off analysis on cost and quality of service and usually is the result of a review of the manufacturer or supplier’s core competency and the admission that another company can provide the same or better service for less cost.
22.214.171.124. Supplier Scorecard – Supplier scorecards are useful in certifying quality suppliers and in negotiating prices on purchase orders. The purpose of a supplier scorecard is to evaluate the quality of the products of the supplier, the timeliness of deliveries, the delivery cycle times, number of returns or defective products, and customer complaints among other variables. The supplier scorecard ties the companies short and long term goals to the supplier’s performance and allows the company to rank suppliers, which may impact the allocation of orders. The scorecard is developed between the customer and the supplier using an agreed upon set of measures.
126.96.36.199. Co-Design and Execution – Co-Design and Execution includes the customers and suppliers in the design of the distribution system in order to meet the needs of the customer, simplify the delivery system, and take advantage of throughput from the supplier to the customer. In the production environment the process engages the suppliers and customers in designing the product or service thereby gaining input and support from all facets of the supply chain.
188.8.131.52. Collaborative Planning, Forecasting, and Replenishment (CPFR) –A collaborative process whereby supply chain trading partners can jointly plan key supply chain activities from production and delivery of raw materials to production and delivery of final products to end customers. Collaboration encompasses business planning, sales forecasting, and all operation required to replenish raw materials and finished goods. CPFR refers to the process philosophy to facilitate collaborative communications and is considered a standard, endorsed by the Voluntary Inter-industry Commerce Standards.
3.8.4. Risk Management – Risk is a measure of uncertainty of an operation that includes the probability and severity of a loss from an activity. The perception of risk varies from person to person and company to company. A risk management program includes risk assessment and risk mitigation procedures. Extended supply chains are inherently vulnerable to a variety of disruptions. Risk assessment includes looking at the risks that may interrupt the supply chain or distribution network. This includes identifying the risks and assessing the potential hazards as a result of the risk. Risk Management includes putting programs in place to manage risk, mitigate the effects of the risk or eliminate the risk completely.
184.108.40.206. Sourcing – The process of identifying a company to provide a specified good or service, often associated with purchasing.
– Single Sourcing – Single sourcing is a method whereby a purchased part is supplied by only one supplier. Traditional manufacturers usually have at least two suppliers for each component part they purchase to ensure continuity of supply and to foster price competition between the suppliers. A JIT manufacturer will frequently have only one supplier for a purchased part so that closer relationships can be established with a smaller number of suppliers. The disadvantage of a single source supplier is the chance of the source of supply going out of business or not being able to meet surges in demands.
– Dual or Multiple Sourcing – A method of sourcing requirements by using a few suppliers for the same products or services. The advantage of multiple sourcing to a company is the flexibility and redundancy of support from multiple suppliers coupled with the ability to use multiple sources to meet demand surges.
– Sole Source – The situation where the supply of a product is available from only one organization. Usually technical barriers such as patents preclude other suppliers from offering the product.
3.9. Customer Relationship Management (CRM) – A marketing philosophy based on putting the customer first. The collection and analysis of information designed for sales and marketing decision to understand and support existing and potential customer needs. It includes account management, catalog and order entry, payment processing, credits, and adjustments. The following are elements of a CRM philosophy.
· Delivery and Design. An effective design process links the delivery and service characteristics with customer needs. The design process ensures that the customer needs are met in the simplest and most cost effective manner. The delivery process is not a one size fits all process and must be designed and customized to meet customer needs and expectations with the fewest number of revisions to the process.
· Contract and Customer Management. A successful CRM system will include a robust contract management activity to ensure that contracts are sufficient to meet the needs of the company while ensuring that they are written with effective and efficient customer support in mind. Although the purpose of the company is to make a profit, without effective customer support producing loyal customers, the company will not remain profitable in the long run.
– Contract Management. Contract management and administration is important in holding suppliers and customers accountable for meeting the specifications or statements of work in a contract. Contract management includes developing specific statements of work or product specifications, finding sources of supply/service, negotiating with suppliers/vendors, evaluating contract performance against agreed upon contract performance metrics, and evaluating contract/product quality. Also included in the contract management function is the evaluation of contract responsiveness, negotiating contract modifications or changes and ensuring that the contractor is paid for the products or services provided.
– Customer Management. Companies can affect the buying, purchasing, and contracting activities of the customer. The goal of customer management is to develop and keep loyal customers and is usually accomplished through customer loyalty programs. These programs reward the loyal customers for their business while enabling the company to gather information on the buying habits and preferences of the customer, thus assisting the company in product offerings or product promotions. The foundation of customer management is the realization that keeping customers satisfied and loyal is critical to company profitability. Metrics from the customer’s perspective such as on time delivery , the perception of quality, the percentage of complaints and shortened customer wait times are important to measuring customer satisfaction and developing loyal customers.
3.10.1. Total Cost of Ownership (TCO) – The sum of all the costs associated with every activity of the supply stream, TCO offers to the supply chain manager an understanding that unit acquisition cost is often a very small portion of the total cost of ownership. In a broader operations management sense, the concept of TCO refers to the total system cost to deliver to the end user customer.
3.10.2. Value Stream Mapping – The Value Stream consists of all of the activities or processes necessary to deliver a product or service to the customer. Value Stream Mapping is a flow-charting technique used to identify the key elements and activities in the process, including the information flows. In value stream mapping, each activity is identified as either a “Value-” or “Non-Value-” adding activity.” Lean operations management seeks to minimize and eliminate “non-value-adding” activities from the process.
Principles of Lean Management – Lean management is
closely related to the concepts of the Toyota Production System (TPS), and is
applied across the entire enterprise, not just production, with broad
application in service industries as well. Lean management involves the
systematic identification and elimination of waste throughout the value stream.
In the TPS, waste is identified by the Japanese word “Muda”.
The key points distinguishing Lean from other management concepts is the broad identification of waste to include time and inventory. By considering time and inventory as forms of waste to be eliminated, lean managements tends to evolve quickly into continuous flows, utilizing little or no work-in-process inventory, ultimately developing into “one-piece” flow of the product or service.
There are seven categories of waste:
– (1) overproduction – excess or too early
– (2) waiting – queuing delays
– (3) transportation – unneeded movements
– (4) processing – poor process design
– (5) motion – activities that do not add value
– (6) inventory – stock that is sitting is accumulating cost without necessarily providing value
– (7) defective units – scrap or rework.”
3.10.4. Visual Management – one of the lean techniques used to eliminate waste is to thoroughly clean and simplify the work environment in such a way as to make the activity conducted there instantly and visibly obvious. In addition to simplifying and standardizing the workplace, visual management also involves the sharing of information about the performance and status of the workplace in easily-understandable ways and the status of operations in the workplace should be visibly obvious; e.g. tools missing, inventory low, product out of place.
3.10.5. 5 S’s: Sort, Set in Order, Shine, Standardize, Sustain – Five terms beginning with "S" utilized to create a workplace suitable for lean production. Sort means to separate needed items from unneeded ones and remove the latter. Set in order or simplify means to neatly arrange items for use. Shine or scrub means clean up the work area. Standardize means to sort, simplify and scrub daily. Sustain means to always follow the first four Ss. Sometimes referred to by the Japanese equivalents: seiri, seiton, seiso, seiketsu and shitsuke.
Changeover (Flexibility) – An early insight of lean was realizing that setup
costs were a key element and constraint to eliminating waste in any value
stream. Therefore a key activity in any lean management system is to reduce or
entirely eliminate the cost of changing from one product or service to another.
3.10.7. Kaizen (Continuous Improvement) – The Japanese term for continuous improvement by everyone, everyday. Kaizen has a deeper meaning to practitioners of lean management: it is the “zen-like” pursuit of an ideal state of zero waste; Kaizen permeates the organization at all levels, resulting in constant, continual striving for small, incremental, improvements toward an ideal state that may never be reached, but is to be sought after always and forever.
3.10.8. Zero inventory – (synonymous with Just-in-Time) In Lean Management systems, this is the ideal state to be sought in eliminating the waste, or “Muda” of inventory. In an ideal lean system, one piece of a product or service is moved through the value stream to be completed and delivered exactly when the end customer demands it.
4.1. Process Mapping – A form of documentation used to show the details of a process. Depending of the objective for the map, the level of detail will vary. The process map can take many forms including: flowchart, relationship map, cross-functional map, and supplier, input, process, output, customer (SIPOC) diagram.
4.2. Manufacturing Process Environments – Manufacturers must design their processes to conform to the nature and needs of their customer base, as well as the design characteristics of their products. If the products manufactured and the market served by the manufacturer are standardized commodities, the manufacturing processes and equipment might typically be geared for high-volume, repetitive, lowest-cost production. If, on the other hand, the served market demands custom-made products or a lot of variety and product differentiation the manufacturing processes would be designed around those demands. A manufacturer of cruise ships certainly has a very different manufacturing process than does a manufacturer of breakfast cereal.
4.2.1. Product / Process Matrix – Process selection refers to the strategic decision of selecting which kind of production processes to use to produce a product or provide a service. The formats by which a facility is arranged are defined by the general pattern of work flow. There are five basic structures, the project, job shop (workcenter), manufacturing cell, assembly line and continuous process. The relationship between layout structures is often depicted on a product-process matrix that has two major dimensions. The first dimension relates to the volume of product produced. This refers to the volume of a particular product or group of standardized products. The second dimension is standardization and refers to variations in the product. These variations are measured in terms of geometric differences, material differences, and so on. In general, it is desirable to design facilities that match volume and product standardization characteristics. For example, if we produce nonstandard products at relatively low volume a project or workcenter layout should be appropriate. A highly standardized product (commodity) produced at high volume should be produced using and assembly line or continuous process.
4.2.2. Make-to-Stock (MTS) – A production environment where products can be and usually are finished before receipt of a customer order. Customer orders are typically filled from existing stocks, and production orders are used to replenish those stocks. Make-to-Stock environments have the advantage of de-coupling manufacturing from the event of the customer ordering the product. This theoretically permits customer orders to be filled immediately from a readily-available stock of pre-made products. It also theoretically permits the manufacturer to organize production in ways to minimize costly change-overs or other disruptions. There are risks associated with placing finished goods into inventory without having a firm customer order or and established need. These risks tend to limit make-to-stock environments to simple, low-variety, or commodity products where demand can be readily forecasted.
4.2.3. Assemble-to-Order (ATO) – A production environment where a good or service can be assembled after receipt of a customer's order. The key components (bulk, semifinished, intermediate, subassembly, fabricated, purchased, packing, and so on) used in the assembly or finishing process are planned and usually stocked in anticipation of a customer order. Receipt of an order initiates assembly of the customized product. This strategy is useful where a large number of end products (based on the selection of options and accessories) can be assembled from common components. Syn: finish-to-order. Where products are too complex, or customer demand is unpredictable, manufacturers may choose to hold subassemblies or products in a semi-finished state. The final assembly operation is held until a firm customer order is received. This environment theoretically cannot deliver products to the customers as quickly as can make-to-stock environments, since there is some time required to complete the final assembly. Also, there are still risks associated with making and holding goods and components in an unfinished state.
4.2.4. Make-to-Order (MTO) – A production environment where a good or service can be made after receipt of a customer’s order. The final product is usually a combination of standard items and items custom-designed to meet the special needs of the customer. Make-to-order environments are prevalent where the customers are prepared to wait for their order fulfillment in order to get a product with unique features. These tend to be more customized or highly-engineered products. This is analogous to the difference between a fast-food restaurant, and a full-service chain restaurant. Make-to-order environments theoretically are slower to fulfill the customers demand than are make-to-stock and assemble-to-order environments, because time is required to make the products “from scratch.” There is less business risk involved in building something where a firm customer order is in-hand.
4.2.5. Engineer-to-Order (ETO) – Products whose customer specifications require unique engineering design, significant customization, or new purchased materials. Each customer order results in a unique set of part numbers, bills of material, and routings. These environments are theoretically the slowest of all to fulfill the customers demand, because time is required not only to build the product, but to custom-design it to the customers unique requirements.
4.2.6. Process Design – Manufacturers have many choices about the design and configuration of manufacturing processes to align with the demands of the market and product designs. Certain elements of any manufacturing process are dictated by the product and the technology. For example, if heat-treating is required, the workpiece must be raised to a certain temperature, in a certain atmospheric environment, and cooled in a certain way. There are only certain ways this can physically be accomplished. Other elements of any manufacturing process are much more open and flexible.
220.127.116.11. Assembly Line Design – This is where work processes are arranged according to the progressive steps by which the product is made. Discrete parts are made by moving from workstation to workstation at a controlled rate, following the sequence needed to build the product.
18.104.22.168. Cell Design – Cells are similar in nature to assembly lines, except that cells are typically smaller than traditional assembly lines, and dedicated to a specific product, a group of similar products, or a specific customer. Cells are often configured in a “U” shape to facilitate communication among the workers in the cell. “L” and “S” shapes are also common. Cells are typically scheduled to produce “as needed” in response to current customer demand.
22.214.171.124. Job Shops (workcenters) – Job shops typically organize their production in “technology groups” as opposed to assembly lines or cells, for example, in the case of a machine shop, similar machines or technologies would be grouped together; lathes would be in one area, grinders in another, mills in yet another. Products move from one group of machines to another as required by their specific design features and production requirements. Job shops theoretically have the lowest investment in equipment as general purpose equipment is used.
126.96.36.199. Hybrid Systems – Many manufacturers use some combination of the above process designs, as dictated by the manufacturing environment, product design, and customer or market demands.
4.2.7. Focused Factories – A plant established to focus the entire manufacturing system on a limited, concise, manageable set of products, technologies, volumes, and markets precisely defined by the company’s competitive strategy, technology, and economics. A focused factory theoretically achieves the lowest possible cost, and best possible customer service, because of the elimination of waste from market disruptions and change-overs. The entire management team and workforce of a focused factory are dedicated to satisfying the needs of its specific customer base or market niche.
4.2.8. Mass Customization – Mass Customization is the creation of a high-volume product with large variety so that a customer may specify his or her exact model out of a large volume of possible end items while manufacturing cost is low because of the large volume. An example is a personal computer order in which the customer may specify processor speed, memory size, hard disk size and speed, removable storage device characteristics, and many other options when PCs are assembled on one line and at low cost. It theoretically combines all of the cost advantages of mass production, with the market advantages of high-variety, custom-made products. This is a very difficult process to achieve, because it requires very close cooperation between the product designers and those developing and operating the manufacturing process. It also demands a very close relationship and deep understanding of the customer base.
4.2.9. Capacity / Flow Analysis (Bottlenecks) – When one operation runs slower than the others, however slight the difference, such that this operation determines the output of the entire process it is termed a bottleneck. Capacity / Flow analysis seeks to identify and manage the bottleneck operation. [see section 2.1.7 on the Theory of Constraints]
4.2.10. Time Measurement and Standards – The field of Industrial Engineering, based on the work in the early 20th century by Frederick Taylor has developed methods to study work and movement in a scientific way. The purpose of the techniques is to develop time standards for production activities. These standards are used in design of manufacturing processes to estimate manpower requirements for any given cell or assembly line design, balance the work on such lines, and measure the productivity and output of the people working there.
4.3. Service Processes – Services are defined in terms of interactions between the service provider and the customer. Service interactions range from face-to-face to written correspondence. An additional characteristic of the degree of standardization which varies from standardization to the point of automation to a requirement of considerable skill on the part of the provider to meet the need of the customer.
4.3.1. Classification of Services – Services can be classified according to the degree of customer contact with the technical core. The underlying premise is that the operating efficiency of a service is limited by the amount of customer contact. The amount of direct contact between the service provider and the service customer is thus a primary consideration in classifying the service. Production efficiency actually decreases with greater contact between the service provider and the customer, due to the higher level of customization.
188.8.131.52. High contact: “Pure Service” is defined by a high level of contact between service providers and customers, such as might be found in health centers, hotels, public transportation, retail establishments, and schools. A high level of contact limits other activities the service provider can perform and tends to indicate a greater degree of customization of the service delivered to an individual customer.
184.108.40.206. Medium contact: “Mixed Service” is characterized by limited direct contact with customers. This level of contact is exemplified by branch offices of financial institutions or real estate firms, repair shops, or moving companies. Reducing the degree of direct contact allows the service provider to perform other tasks, some of which may involve other customers. Service customization is typically reduced as direct contact is reduced.
220.127.116.11. Low contact: “Quasimanufacturing” is recognized by the low level of direct contact with customers, as in mail order services, research laboratories, and the home offices of financial institutions or real estate firms. Service is delivered with very little direct contact with the customer. In this situation, the work is more standardized, with less customization of the workflow, regardless of the fact that a customer’s order may be completely unique, as in an online catalog order.
18.104.22.168. Consumer Self Service – Certain services can be standardized to the point that a customer can provide the service for himself. Self-serve typically occurs only with services that can be standardized to the point that no direct service provider involvement is necessary. Back-office activities are not eliminated, but may also be automated, as with financial transactions that are automated through every phase. Most such services are, to a greater degree, automated or supported by automation such as automated teller machines used by financial institutions, gasoline filling stations using pay-at-the-pump, and self check-out at retail stores using bar code readers and credit/debit card payment.
22.214.171.124. Manufacturing Support Services – In the following we categorize services that are most relevant to the support of manufacturing operations.
126.96.36.199.1. Professional services – normally include engineering, accounting, medical, legal, etc. In production environments, engineering services are used to design products and production facilities. Cost accounting becomes important in price setting and maintaining operating margins. Legal services manage patents, copyrights, and contract development. These are generally considered to be support services in that they are not directly involved in production activities … unless they are in an organization where their specialties are the primary service offered.
188.8.131.52.2. Trade services – those typically connected with construction and maintenance. Most also have unions associated with them. Trades such as electricians, plumbers, welders, machinists, and carpenters are specific in nature. Union groups such as autoworkers or communications workers may actually encompass several trades in forming bargaining units of related trades.
184.108.40.206.3. Delivery services – include set-up and make-ready work. These initial tasks ensure that products are operating correctly and are ready for turn-over to customers. Setting operating parameters, adjusting equipment, or any other work necessary to get equipment into production falls into this category.
220.127.116.11.4. Warranty work – occurs when a product fails. Warranty work can be done as field maintenance or may require the item to be shipped to a depot for the work. In some cases, maintenance may be performed remotely as the failed item is connected to diagnostic equipment via telecommunications.
18.104.22.168.5. Maintenance services – occur throughout the production cycle and keeps equipment working. Maintenance services may be performed as warranty work, may be required to be performed on a specific schedule and by qualified individuals to retain warranty protections, may be performed by in-house staff, or may be outsourced. Maintenance services are critical to the availability of production systems. Maintenance is performed at three levels.
– Corrective maintenance repairs equipment after a break-down occurs. Also referred to as break-fix maintenance, the time required to complete corrective maintenance services directly impact the availability of equipment after a failure. This maintenance service is critical when a run-to-failure operating philosophy is used.
Preventive maintenance includes normal
lubrication, replacement of worn parts, and adjustments. Preventive maintenance
forestalls equipment failure. Normal preventive maintenance inspections (
– Predictive maintenance anticipates failures and takes timely action to avoid those failures. Techniques such as testing trace metals in the oil of jet engines pinpoint potential failures and allow operators to foresee problems before they occur, thus averting corrective maintenance. Predicting failures allows maintenance planners to schedule equipment outages, including parts and labor, to avoid unscheduled downtime by preventing failures from occurring.
4.3.2. Service System Design Matrix – The relationships between production efficiency and sales opportunities can be defined in a matrix that considers the degree of customer – service provider contact. The greater the direct contact between customer and service provider, the greater the sales opportunity, but the lower the production efficiency, as noted above. Conversely, when the service provider and customer have very little direct contact, sales opportunities are reduced but production efficiency increases. The level of contact is described in this matrix in terms of increasing contact, from mail contact to phone contact to face-to-face contact. Since production efficiency is defined as the number of customers served in a time period, the amount of time spent in face-to-face contact versus the time spent handling a mail order reduces the number of customers or orders that can be serviced.
4.3.3. Analyzing Services – Service Blueprints – Service blueprints are an analysis method that allows service designers to identify tasks and processes involved in the service delivery system, isolate potential failure points in the system, establish time frames for the service delivery, and set standards for each step that can be quantified for measurement. Service blueprints also identify any physical evidence of the service and customer actions. In the process of developing service blueprints, attention is given to where service providers are relative to the customer. Blueprints recognize front room (direct) customer contact actions and backroom (indirect) customer contact actions, and distinguish support processes necessary to the customer service, such as baggage conveyer systems in airports and reservation systems in hotels.
4.3.4. Queuing – How long a customer waits in line can be described mathematically in queuing models. Variables such as the rate at which customers enter the service system, the number of lines open, the average time taken for each customer by a service provider, and probability factors can be used with queuing theory in mathematical models to determine expected wait times for each customer under different assumptions. The intent of these queuing models is to anticipate and avoid waits so long that customers abandon the wait and turn to other service providers. A dynamic example of a queuing model is the way lines are opened and closed at a grocery store based on the average number of people waiting in the lines at any given time.
4.3.5. Service Quality – For service, the assessment of quality is typically made during delivery. Each customer contact is referred to as a moment of truth which is an opportunity to satisfy or dissatisfy the customer. The customer’s satisfaction is defined by comparing the perception of quality received with expectation of service desired. The service quality dimensions include reliability, responsiveness, timeliness, courtesy, assurance (trust and confidence), empathy, and other tangible qualities (like appearance of the facility, personnel, etc). Standard techniques for analyzing and controlling quality such as capability analysis, control charts, histograms and fishbone diagrams are applicable to service processes.
22.214.171.124. Service Guarantee – A service guarantee can define the meaning of service by setting quality standards.
4.4. Quality – In an operational context, quality has two major components: (1) quality of conformance or the quality defined by the absence of defects, and (2) quality of design or the quality measured by the degree of customer satisfaction with a product’s characteristics and features.
4.4.1. Cost of Quality – The overall costs associated with prevention activities and the improvement of quality throughout the firm before, during, and after production of a product. These costs fall into four recognized categories: internal failures, external failures, appraisal costs, and prevention costs.
4.4.2. Principal Theorists –
W. Edwards Deming – born in
126.96.36.199. Kaoru Ishikawa – A Japanese philosopher and professor who in 1950 developed the Cause-and-effect diagram (also called the fishbone diagram and Ishikawa diagram). This diagram starts with the end result, “the effect” and attempts to trace back the reasons the causes of quality problems.
Joseph M. Juran – Along with W. Edwards Deming, Juran
introduced statistical quality control (SQC) techniques in
4.4.3. Quality Management
188.8.131.52. Total Quality Management (TQM) – An approach to improving quality, and ultimately, customer satisfaction. Based on the participation of all members of the organization, the term was first used to describe Japanese-style management approaches to quality management. The methods of implementing this approach are found in the works of Armand Feigenbaum, Philip Crosby, W. Edwards Deming, Joseph M. Juran, and Kaoru Ishikawa, as well as others. The overall goals of TQM are: lower cost, higher revenues, delighted customer, and empowered employees.
184.108.40.206. Six Sigma – A methodology that emphasizes reducing process variability and product deficiencies in order to improve product quality and customer satisfaction. At a “six sigma” level of performance, only 3.4 defects occur for every one million opportunities assuming the process is operating within 1.5 standard deviations of the center of the process specification.
220.127.116.11.1. Quality Improvement Tools – Kaoru Ishikawa, a principal theorist for quality improvement, professed that as much as 95 percent of all quality-related problems in the factory can be solved with seven fundamental quality tools: flowcharts, Pareto charts, cause-and-effect diagrams, control charts, check sheets, scatter diagrams, and histograms.
Continuous Improvement – An ongoing effort to expose
and eliminate root causes of problems, leading to small-step improvements over
In Six Sigma, the improvement process has five stages (DMAIC):
o Define the nature of the problem.
o Measure the existing performance and record data and facts that offer information to determine the root causes of the problem.
o Analyze the information to determine the root causes of the problem.
o Improve the process by implementing solutions to the problem.
o Control the process until the solutions become ingrained.
18.104.22.168.3. Business Process Reengineering (BPR) – The fundamental rethinking and radical redesign of business processes to achieve dramatic organizational improvements in such critical measures of performance as cost, quality, service, and speed. BPR results in the elimination of non-value added steps. Sometimes these results are also achieved through automation.
22.214.171.124. Statistical Techniques – The purpose of statistical techniques is to study and understand variation in processes and population, interactions among the variables in processes and populations, and operational definitions (to ultimately take action to reduce variation in a process or population.
126.96.36.199.1. The Normal Distribution – A particular statistical distribution, also named the “Gaussian Distribution” after its discoverer, Carl Friedrich Gauss (1777-1855), where most of the observations fall fairly close to the mean (measure of central tendency), and a standard deviation (measure of dispersion) from the mean. Observations are as equally likely to be greater or less than the mean as dispersion is symmetrical. When graphed, the normal distribution takes the form of a bell-shaped curve.
188.8.131.52.2. Process Capability – Refers to the ability of the process to produce parts that conform to (engineering) specifications. Process capability relates to the inherent variability of a process that is in a state of statistical control and its relationship to the design tolerances. Measures of process capability have the following notations: Cp and Cpk. The first measure relates to the process considering both sides of the mean. The second measure relates to one side of the mean or the other side of the mean, but not both.
184.108.40.206.3. Statistical Process Control (SPC) – The application of statistical techniques to control quality. Often the term statistical process control is used interchangeably or as the main subset of statistical quality control.
220.127.116.11.3.1. Variable vs. Attribute – Variables data can assume any of a given set of values arises from the measurement of a characteristic of a product, service, or process to the computation of a numerical value from two or more measurements of variable data. Examples of variable data are heights and weights. Attribute data arise from the classification of items, such as products or services, into categories; counts of the number of items in a given category or the proportion in a given category; or counts of the number of occurrences per unity. Examples of attribute data are go/no-go information and genders – males and females.
18.104.22.168.3.2. Chart Types – A graphical comparison of process performance data with predetermined computed control limits. The process performance data usually consist of groups of measurements selected in regular sequence of production that preserve the order. The primary use of control charts is to detect assignable causes of variation in the process as opposed to random variations. The control chart is one of the seven tools of quality. The different types of control charts include: c, I, MR, np, p, R, s, U, and mean.
22.214.171.124.4. Average Outgoing Quality (AOQ) Level – The expected average quality level of outgoing product for a given value of incoming product quality.
126.96.36.199. Benchmarking and Best Practices – Benchmarking is the continuous process of measuring the company’s products, services, costs, and practices. Two types of benchmarking exist – competitive, a comparison against your industry best, and process, a comparison of a process to the best-in-class. Best practices, through the benchmarking process, identify opportunities to improve effectiveness. The process of comparing an actual result to a best practice may be applied to resources, activities, or cost objects.
4.4.4. ISO Registration
188.8.131.52. ISO 9000 / 14000 – ISO 9000 is a set of five individual but related international standards on quality management and quality assurance developed to help companies effectively document the elements to be implemented to maintain an efficient quality system. The standards were issued by a Belgian-based international organization, the English version of this organization’s name is International Organization of Standardization The standards issued by ISO have been adopted by more than 100 nations and are supported by most national standards organizations. ISO 14000 refers to a series of generic environmental standards under the development by ISO. These environmental-related standards provide structure and systems for managing environmental compliance with legislative and regulatory requirements and affect every aspect of a company’s environmental operations.
4.4.5. Managing Suppliers with Scorecards and Certification – This process monitors and evaluates key suppliers on cost, quality, engineering, purchasing, and so on, based on an agreed set of measurements. Scorecards are used to record, analyze, and report suppler evaluations. Supplier certification is a verification that a supplier operates, maintains, improves, and documents effective procedures that relate to the customer’s requirements. Such requirements can include cost, quality, delivery, flexibility, maintenance, safety, ISO certification, and environmental standards. Supplier certification promotes the concept of “quality assurance.”
5.1. Enterprise Resources Planning / Information Technology is a business model framework for planning all of the resources of a business, starting with the strategic planning and linking through to the execution. Process disciplines are integral to successful ERP process predictability and management systems can provide accountability. ERP systems are the information technology tools for which some of these process links can become automated, information shared across functional areas, and business transactions efficiently processed. These systems also support the efficient organization of data for use in decision making and analysis and are typically organized around modules that support functional areas such as finance, marketing, human resources, operations, purchasing, and logistics. A common database is used across these modules to allow real-time sharing of data.
5.1.1. Inventory: Dependent vs. Independent Demand – Inventory is listed as an asset on a firm’s Balance Sheet and consists of those stocks of items or resources used to maintain production, supporting activities, and customer service. Inventory is typically categorized based on its flow through the production cycle as raw materials (RM), work-in-process (WIP), or finished goods (FG). Maintenance, repair, and operating supplies (MRO) are also inventoried to support the function of the firm. In terms of planning and forecasting, inventory is distinguished based on the source of its demand as either independent or dependent. Independent demand items are requested directly from the customer and must be forecasted. Dependent demand items can be derived or calculated based on their relationship to independent items, usually noted through higher levels in the bill of material.
5.1.2. Purpose of Inventory – Inventory’s primary purpose is to meet demand in support of production or the end user/customer. Traditionally, inventory was perceived to be necessity low cost method to ensure appropriate customer service, Inventory is now viewed as an expensive asset to be carefully managed and controlled.
184.108.40.206. Pipeline – Inventory in the transportation network which includes inventory shipped from a supplier but not as yet received by the customer. Therefore, the overall logistic network design impacts the amount of pipeline inventory.
220.127.116.11. Cycle – Cycle stock is typically the most active component; and is based on lot sizing rules as stocks are received and depleted.
18.104.22.168. Anticipation – There are times, outside of normal conditions when it is necessary to carry additional inventories to cover projected trends of increased demand due to forecasted events such as sales promotion programs, seasonal fluctuations, plant shutdowns, and vacations. Additional inventories may also be carried in advance of a significant supplier price increase or possibility of a labor disruption.
22.214.171.124. Decoupling – Used to separate or decouple inventory from the supply and the use of the material, this inventory is often collected between operations so that fluctuations in the production rate of the supplying operations do not strain or use rates of the next operation. Safety stock also allows for decoupling by holding extra inventory to be used as a cushion or protection against uncertainty in demand or in the replenishment lead time.
126.96.36.199. Obsolescence – A critical condition in inventory management is keeping inventory in a current up-to-date or usable condition. Typically inventory that becomes obsolete will end up being a write-off against profits on the profit & loss statement. Obsolescence can occur due to spoilage as in food item sell by dating, , or the loss of usefulness or worth of a product as a result of the introduction of better or more economical products , methods, or facilities.
5.1.3. Inventory Types – The term inventory is a broad classification and in the service industry could involve be classifications of worker skills, positions, or repair equipment. It can also refer to the equipment, fixtures, buildings, and materials used in production.
188.8.131.52. Raw Materials –base materials that need value and/or labor added to convert this material into useable parts. Currently generally accepted accounting principles view raw materials as purchased items or extracted materials that are converted via the manufacturing process into components and products.
184.108.40.206. Work-in-Process (WIP) – A good or goods in various stages of completion throughout the plant, including all material from raw material that has been released for initial processing up to completely processed material waiting final inspection and acceptance as finished goods inventory. It is when some ‘value-added’ process has been applied to a raw material.
220.127.116.11. Finished Goods – Those items on which all manufacturing or service operations have been completed. These products are available for delivery to the customer.
18.104.22.168. Distribution – Inventory located in the distribution system separate from manufacturing inventory and held in warehouses or in-transit.
22.214.171.124. Maintenance, Repair, and Operating Supplies (MRO) – Items used in support of general operations and maintenance such as spare parts, and consumables used in the manufacturing process and supporting operations. This inventory is typically considered very minor, in terms of dollars and quantities, but, in continuous process and flow industries, the amount of material in the MRO maybe equal to or greater than the dollar amounts in production inventory. A failure to have a spare part or even basic office supplies can be harmful to the profitability of a firm.
126.96.36.199. Service Parts – Those modules, kits, components, and elements that are planned to be used without modification to replace an original part. Frequently the service parts are part of the Distribution Inventory. Some firms, like Automotive Original Equipment Manufacturers (OEM’s) are required by law to provide replacement inventory for vehicles many years after the vehicles have been sold.
5.1.4. Push vs. Pull (Push – Pull Boundary)
188.8.131.52. Push System –In production, the production of items at times required by a given scheduled plan in advance of actual customer need. Push systems are also implied by the issuing of material according to a given schedule or issuing material to a job (work) order at its start time.
184.108.40.206. Pull System – In production, the production of items only as demanded (Kan Ban) for use or to replace those taken for use. In material control, the withdrawal of inventory as demanded by the using operations. Kanban or pull signals for materials allow actual demand and usage to initiate the flow of materials.
220.127.116.11. Push – Pull Boundary. In some firms both systems are used within the same facility and the boundary is that point or place where one system takes over from the other. The Pull System will take over at some point in production, from the Push System.
5.1.5. Customer Order Decoupling Point (Hedging Strategies) – A production and inventory strategy to maximize the efficiencies of level-loading through out a particular period, such as a year. Instead of linking the schedule to customer orders, orders are scheduled so that the amount of work to be done in sequential time periods tends to be distributed evenly and is achievable within capacity constraints.
5.1.6. Lean Concepts –A philosophy that emphasizes the minimization of the amount all the resources (including time) used in the various activities of the enterprise. It involves identifying and eliminating non-value-adding activities in design, production, supply chain management, and dealing with customers. Lean producers employ teams of multiskilled workers at all levels of the organization and use highly flexible, increasingly automated machines to produce volumes of products in potentially enormous variety. It contains a set of principles and practices to reduce cost through the relentless removal of waste and through the simplification of all manufacturing and support processes. Lean concepts may challenge the thinking around the traditional purposes of inventory, in that inventory itself is considered to be a waste.
5.2. Master Planning – A group of business processes that includes demand management, sales and operations planning, and master production scheduling. Each level involves forecasting demand, and determining a method of meeting this demand given capacity constraints. When linked with Capacity Requirements Planning and Material Requirements Planning they comprise an integrated system called MRP II (Manufacturing Resource Planning). When further linked with financial, project management and other common enterprise processes, they comprise an integrated system called ERP (Enterprise Resources Planning).
5.3. Demand Management – is the function of recognizing all demands for goods and services to support the marketplace and involves prioritizing demand when supply is lacking. Proper demand management facilitates the planning and use of resources for profitable business results.
18.104.22.168. Planning Horizon – is the amount of time a plan extends into the future and is dictated by the tactical and strategic degree of uncertainty. The tactical horizon is based on the cumulative lead time plus time for lot sizing low-level components. The strategic horizon is based on the time needed to adjust capacity. A greater the degree of uncertainty requires a longer planning horizon.
22.214.171.124. Forecasting – is the ability to predict or project future events such as sales and requires the circumstances that surround the decision making process to be recorded. The circumstances can be mitigated by past sales demand patterns, general economic conditions, competitors’ actions, market research, product mix, plus pricing and promotional activities. Forecasts can also be at the strategic, tactical or operational levels.
126.96.36.199.1. Types of Forecasts in the Firm – Forecasts can be grouped into various methods, such as subjective, causal and time series models. The subjective method are referred to as qualitative techniques, while the causal and time series methods apply to the quantitative models which are statistical in nature.
188.8.131.52.1.1. Quantitative – Qualitative – Quantitative methods fall into two major categories: time-series models which use past demand to predict the future, and causal models where demand is related to some underlying factor or factors in the environment.
184.108.40.206.1.2. Level (Economic – Demand) – Basic economics help explain how the market reacts to supply and demand patterns. Since supply and demand react independently to market forces, forecasting attempts to determine the equilibrium point where the amount of supply equals demand.
220.127.116.11.2. Forecasting Process – is the business function that attempts to predict demand and use of products and services so they can be acquired in the appropriate quantities in advance. The process can transform historical demand data into future projections, be a subjective prediction of the future, or a combination of the two.
18.104.22.168.3. Pyramid Forecasting (Rationalizing High and Low Level Forecasts) – is a technique that enables management to review and adjust forecasts made at an aggregate level and to keep lower level forecasts in balance. The process begins with the aggregation of item forecasts by product group. Management establishes a new forecast for the forecast group. The value is then forced down to individual item forecasts so that they are consistent with the aggregate plan.
Forecasting Models –numerous models are used to predict
future demand, such as regression analysis, time series,
22.214.171.124.4.1. Base-line Methods – is the percentage of a company’s demand that is derived from continuing contracts and/or existing customers.
126.96.36.199.4.2. Time Series (Exponential Smoothing) – time series is a technique that projects historical data patterns into the future by looking at the previous forecast and some portion of the past forecast errors. A time series may contain seasonal, cyclical, trend, and random components. Exponential smoothing is a type of weighted moving average forecasting technique in which past observations are geometrically discounted according to their age. The heaviest weight is typically assigned to the most recent data. A smoothing constant is applied to the differences between the most recent forecast and the critical sales data, thus avoiding the necessity of carrying historical sales data. Alternatives to exponential smoothing include moving average and weighted moving average models.
188.8.131.52.4.3. Trend – is the general upward or downward movement of demand over time.
184.108.40.206.4.4. Seasonality – is a repetitive pattern of demand predictable over time with some periods considerably higher than others.
220.127.116.11.4.5. Regression Models –a statistical technique used for determining the best mathematical expression describing the functional relationship between one dependent response and one or more independent variables.
18.104.22.168.4.6. Focus Forecasting – is a system that allows the user to simulate the effectiveness of numerous forecasting techniques, enabling selection of the most effective method.
22.214.171.124.5. Error Measurement – Error is the difference between actual demand and the forecast.
126.96.36.199.5.1. Bias – is a consistent error in either a high or low direction. A forecast is biased if the current forecast errors are either greater or less than zero.
188.8.131.52.5.2. Standard Deviation – is a measurement of dispersion of data or of a variable. The standard deviation is computing by finding the differences between the average and actual observations, squaring each difference, adding the squared differences, dividing by n- 1 and taking the square root of the results.
184.108.40.206.5.3. Mean Absolute Deviation – is the average of the absolute values of the deviation of observed values from forecast values. MAD is the arithmetic mean of past absolute errors.
220.127.116.11.5.4. Mean Absolute Percent Error – is a measure of statistical variation in a forecast. It is computed by taking the MAD and dividing by the average demand and then multiplying by 100 to get the mean absolute percentage error.
18.104.22.168.5.5. Tracking Signals – is the ratio of the cumulative algebraic sum of the deviation between the forecast and the actual values to the mean absolute deviation. It is used to signal when the forecast model might be biased.
22.214.171.124.6. Special Situations – Impact the forecast accuracy by creating unique circumstances that impact demand.
126.96.36.199.6.1. Promotions / De-promotions – are products that are subject to wide fluctuations in sales because it is usually sold at a reduced price or with some other sales incentive.
188.8.131.52.6.2. Cannibalization – is a demand reduction in a product due to the introduction of a new or similar product.
184.108.40.206.6.3. Substitution (customer & supplier) – is the use of a different product or component that was not originally specified on the order but serves the same purpose. The use of this different product or component impacts demand history.
220.127.116.11.7. Data Warehouses – are a repository of data that has been specially prepared to support decision-making applications. Quantitative and qualitative data should be collected for future forecasting needs.
5.4. Sales and Operations Planning (S&OP) – develops a mid range plan based on input from top management to operations. The plan becomes the basis for identifying key resources to achieve the firm’s strategic objectives and goals. All subsequent material and labor resources decisions are based on this plan. This plan becomes the basis for the Master Production Schedule (MPS).
18.104.22.168. Business Planning – The process of constructing the business plan which identifies the business organization, strategy, and financial tactical details. It becomes a statement of long-range strategy and revenue, cost, and profit objectives usually accompanied by budgets, a projected balance sheet, and a cash flow statement. It’s stated in terms of dollars and grouped by product families and is an input to the S&OP process.
22.214.171.124.1. Marketing – is the design, pricing, promotion, and distribution of goods to create transactions with businesses and consumers and a functional contributor to the S&OP process.
126.96.36.199.2. Operations – is the process of transforming raw materials into finished goods and services. It is constrained by capacity and targeted for achieving the strategic and tactical plans.
188.8.131.52.3. Finance Integration – is the process of analyzing the S&OP inventory and financial plan to determine if they are integrated with the corporate strategic goals and objectives and financially and economically sound.
184.108.40.206. Sources / Output Process Participants – the participant include members from the various functional areas from operations, finance, HR, purchasing, materials, transportation, engineering, and quality.
220.127.116.11. The Sales and Operations Planning Process – is a process to develop tactical plans that provide management the ability to strategically direct its business to achieve competitive advantage on a continuous basis by integrating customer-focused marketing plans for new and existing products with the management of the supply chain. The process brings together all the plans for the business into one integrated set of plans agreed to by the various functional areas. It is performed at least once a month and is reviewed by management at an aggregate level.
18.104.22.168.1. Aggregate Planning Strategies –the strategy for how manufacturing will meet customer demand by setting production levels, inventory levels and backlog. Companies can use a chase, level or hybrid production planning methods.
22.214.171.124.1.1. Chase – match the production rate to the order rate by hiring and firing workers. Typically a mix of permanent and temporary workers would be used with this strategy.
126.96.36.199.1.2. Level – maintain a stable workforce working at a constant output rate. Shortages and surpluses are absorbed by fluctuating inventory levels, order backlogs, and lost sales.
188.8.131.52.1.3. Hybrid – is a production planning method that combines the aspects of both chase and level production planning methods. Overtime, undertime and flexible work schedules might be used with a hybrid strategy.
184.108.40.206.2. Management of Supply & Demand – is accounting for demand variability by providing adequate supply capacity and demand flexibility to produce at a rate that matches strategic objectives and goals.
220.127.116.11.2.1. Managing Capacity (labor, facilities, subcontracting) – is reviewed at the four levels: resource planning, Rough-Cut Capacity Planning (RCCP), Capacity Requirements Planning (CRP) and input / output control. At each level capacity is established, measured, monitored and adjusted in order to execute all operation schedules to achieve the plan. If not sufficient, then capacity or load must be modified. At the Sales and Operations Planning (S&OP) level these adjustments can be made by hiring, subcontracting, or accepting stockouts. Each tactic has benefits and costs in acquiring the resources needed.
18.104.22.168.2.2. Managing Inventory (modularity, build inventories of high/stable demand products) – is the function of determining the desired inventory levels as it pertains to strategic objectives.
22.214.171.124.2.3. Managing Demand (promotions, margins, stealing share, forward buying) – is the technique to recognize and impact demand sources. It involves prioritizing demand when supply is lacking and to monitor pricing, promotional and product distribution to determine its impact on the marketplace.
126.96.36.199.3. Disaggregating the Plan
188.8.131.52.3.1. Relationship to Master Production Schedule – is the process of breaking apart the production plan from a monthly family and group projection to a weekly item product projection used in the master production scheduling process.
184.108.40.206.3.2. Relationship to Available-to-Promise (ATP) – the disaggregated plan provides the weekly projected MPS quantities to communicate with manufacturing and is used to determine items available to sale that are used in the ATP calculation.
220.127.116.11. Bill of Material (BOM) Structuring – A bill of material is the document that specifies the components needed to produce a good or service. It may list parts, raw materials, subassemblies, and intermediates that are required by a parent assembly. A BOM specifies the quantity required to make one item, shows a unit of measure and phase-in / phase-out dating. A BOM may also be called a formula, parts list, and recipe or ingredient list. Other forms of BOM’s exist and are used in the MPS and MRP modules. This include planning, modular, super, phantom, kitting, pseudo, bill of distribution, bill of labor, bill of resources and a costed bill of material.
18.104.22.168.1. Traditional Bills – are listings of all the subassemblies, intermediates, parts, and raw materials that go into a parent assembly showing the quantity of each required to make an assembly.
22.214.171.124.2. Planning Bills – are artificial groupings of items in a bill of material format used to facilitate master scheduling and material planning for an unbuildable product. It may include the historical average of demand expressed as a percentage of total demand for all options within a feature of a product family.
126.96.36.199.2.1. Modular Bills of Materials – Planning bills that are arranged by product modules or product options and helps to facilitate material planning.
188.8.131.52.3. Add / Delete Bills – The process by which new parts or components are added, changed or deleted to a bill of material. The process is initiated by an engineering change notice which specified the effective date to add, change or delete a component part or quantity.
184.108.40.206.4. Phantom Bills –A coding and structuring technique used primarily for transient subassemblies. It represents an item that may not actually exist physically but represents an accounting unit.
220.127.116.11.5. Kitting Parts – A listing of related parts or components that can be mixed and matched into a bundled kit. The kitting bill of material also allows for easy assessment of material availability before order picking against a shop order or customer order.
18.104.22.168.6. Engineering Change Management – A process that manages design changes released by the engineering department to modify or correct a bill of material. Management participates through an Engineering Change Review Committee which determines the effective date and disposition of existing material.
22.214.171.124. Master Schedule – The master production schedule (MPS) is a format that includes time periods, the forecast, customer orders, projected available balances, available-to-promise, and the master production schedule. The MPS is a relatively short term schedule for meeting demand.
126.96.36.199.1. Projected Available Balance (Inventory) – is the inventory balance projected into the future. It is the running sum of on-hand inventory minus requirements plus scheduled receipts and planned orders.
188.8.131.52.2. Available-to-Promise (ATP) – is the uncommitted portion of a company’s inventory and planned production maintained in the master schedule to support customer-order promising. Numerous methods of ATP calculation exist.
184.108.40.206.3. Capable-to-Match (CTM) – is the process of committing orders against available capacity as well as inventory. This process may involve multiple manufacturing or distribution sites. CTM is used to determine when a new or unscheduled customer order can be delivered.
220.127.116.11.4. Execution – is the process of disaggregating the higher level SO&P family or group level into the MPS item level. The family or group quantity monthly total is broken apart to individual items in a weekly quantity. A modular or planning bill of material if often exploded to facilitate master scheduling.
18.104.22.168. Capacity (Rough Cut) – the process of converting the MPS into requirements for key resources, often including labor, machinery, warehouse space, suppliers’ capabilities, and in some cases money. Comparison to available or demonstrated capacity is usually done for each key resource.
22.214.171.124.1. Bill of Resources – a listing of the required capacity and key resources needed to manufacture one unit of a selected item or family. Resource and rough cut capacity planning both use this bill to calculate the approximate capacity requirement of the master production schedule.
126.96.36.199.2. Capacity Planning – the process of determining the amount of capacity required to produce in the future. Rough cut capacity planning will validate if the MPS can be achieved.
188.8.131.52.2.1. Utilization – Capacity plans are often done in terms of Utilization, the percentage of available time that the capacity resource will be in use for its intended purpose.
184.108.40.206.2.2. Efficiency – While a capacity resource may be engaged in its intended purpose, it may not be contributing to that purpose in the best possible way – an attribute that is measured by Efficiency. For instance, a person may get high Utilization from an automobile by driving it constantly – without taking time out for maintenance. However, without maintenance the automobile will deteriorate and become slower and more wasteful of fuel, making it less efficient in performing its intended purpose of low cost, rapid transportation.
5.5. Material Requirements Planning (MRP) – is a set of techniques that uses bill of material data, inventory data, and the MPS to calculate requirements for materials. It makes recommendations to release replenishment orders for material.
220.127.116.11. Data Requirements (Upstream and Downstream Integration) – MRP calculates requirements based on higher level requirements defined in the S&OP and MPS process. This results in increased communication and coordination between all internal and external parties to identify and achieve resource requirements based on established plans.
18.104.22.168. Explosion – also called “requirement explosion” is the process of calculating the demand for the components of a parent item by multiplying the parent item requirements by the component usage quantity specified in the bill of material.
22.214.171.124. Pegging – is the capability to identify for a given item the sources of its gross requirements and/or allocations. Pegging can be thought of as active where-used information.
126.96.36.199.1. Fixed Order – is a lot sizing techniques that always cause planned or actual orders to be generated for a predetermined fixed quantity.
188.8.131.52. Production Activity Control– is the function of routing and dispatching the work to be accomplished through the production facility and of performing supplier control. PAC encompasses the principles, approaches, and techniques needed to schedule, control, measure, and evaluate the effectiveness of production operations.
184.108.40.206.1. Short Interval Scheduling – a method to minimize the queue, move and wait times at a work center by monitoring the order quantity. It attempts to minimize batch size through detailed operation time analysis to reduce production time.
220.127.116.11. MRP / Just-in-Time (JIT) Integration
18.104.22.168.1. JIT planning – JIT planning with MRP requires a special approach where components and parts are planned based on production rates to generate some visibility of future requirements. Actual execution would be controlled using Kanban or similar “pull” systems.
22.214.171.124.2. Back flushing inventory – is a method where component parts, material, and subassemblies are deducted from the inventory on hand by exploding the bill of material and multiplying the quantities of each required by the number of assemblies produced. Back flushing reduces the amount of data capturing and processing but requires system integrity, accurate reporting of completed items, accurate measures of yield, and special reporting of unusual situations. This is particularly appropriate for JIT environments where “pull” systems are be used.
5.6. Distribution Requirements Planning (DRP) – is the function of determining the need to replenish inventory at branch warehouses. A time phased order point approach is used where the planned orders at the branch warehouse level are exploded via MRP logic to become gross requirements on the supplying source. The extension of DRP into the planning of the key resources contained in a distribution system is called DRP II.
Distribution Inventories / Independent Demand – Distribution
inventories, including finished goods and spare parts, involve items that customers
may order. These inventories reside either in a warehouse or are in transit on
their way to customers. Management of distribution inventory is important to
supply chain management due to the global sourcing of parts and products. As
more global sourcing is employed the transportation lead times increase and
consequently inventory levels increase as well. Independent demand is demand
that comes directly from the customer. In contrast, dependent demand is demand
that comes from a higher level in the bill of material. Independent demand is
most typically forecasted in contrast to dependent demand which is calculated.
Independent demand drives the need for distribution inventory because customers want inventory on demand rather than waiting for inventory to be produced and shipped throughout the entire supply chain. Independent demand is primarily associated with the end user demand of a supply chain; however, there are numerous applications where independent demand techniques and models are used in manufacturing. These include seasonal ordering, as an ordering convention with MRP, or any other more variable demand process.
5.7. Inventory Management (Cycle Stock and Safety Stock) – Inventory analysis techniques enable a business to manage the tradeoff between having too much inventory on hand versus not having enough inventory on hand. In general, inventory levels being held for independent demand can be estimated by knowing how often inventory is replenished and how much safety stock is being held. Cycle stock is the average amount of inventory being held due to the periodic replenishment of inventory. Safety stock is the amount of extra inventory held to reduce the risk of stockout.
126.96.36.199. Turns and Days of Supply – Measures that communicate how quickly inventory moves through either a business or a supply chain. These measurements help to manage inventory balances from period to period and help assess the impact inventory has on the financial statements as well as customer service levels.
188.8.131.52. Cash-to-Cash Cycle Time – Measured in terms of days, this metric captures just how long the company or a supply chain takes to recover the expenses incurred when they buy material, pay labor, or incur overhead.
184.108.40.206. Types of Inventory – Distribution inventories are usually spare parts and finished goods located in the distribution system (e.g., warehouses, in-transit between warehouses and the customer). Distribution inventory is separate from manufacturing inventory, and frequently the inventory will have material that is no longer current to manufacturing. (See Section 5.1.3)
220.127.116.11. Push vs. Pull Systems (Push-Pull Boundary) – Push refers to when inventory is sent to the next echelon based on a schedule that has been generated to meet forecast demand. Pull refers to sending inventory in direct response to actual demand at the next echelon. The push-pull boundary is the echelon or stage where inventory is “pushed” to this point and “pulled” beyond this point. (See Section 18.104.22.168)
5.7.2. Inventory Models – When the shipments are made through the distribution architecture, the inventory should be replenished. This is especially true for make-to-stock situations. Several models are available to help determine how much inventory should be brought in to restock the product or parts that were shipped out.
22.214.171.124. Single Period Ordering – Single period ordering is when an item is unique and only purchased a single time (for example the number of units of a daily newspaper or annual holiday season ordering). This method balances the trade off associated with not ordering enough and incurring the loss in profit, and ordering too much and incurring the cost of producing and disposing of the product.
126.96.36.199. Economic Order Quantity (EOQ) – EOQ is a formula-driven lot sizing method that balances the tradeoff between carrying costs and ordering costs. Limitations to EOQ make this method most useful for repetitive parts when demand is stable. Although some believe is that EOQ is no longer used, many companies still to this day rely on it to help them with determining how much to buy. Companies may also use this method to check their current lot sizing methods to determine if they are balancing the tradeoff between carrying costs and ordering costs. There are numerous variations of the EOQ model.
188.8.131.52. Replenishment Model – Distribution inventories and independent demand environments utilize different types of replenishment models from dependent demand situations.
184.108.40.206.1. Reorder Point (ROP) – For each independent demand item a reorder point is calculated. When inventory levels for the item fall to the reorder point a signal is sent to replenish inventory in a fixed quality amount. The ROP is equal to the expected demand during lead time plus safety stock to cover demand in excess of what is expected.
220.127.116.11.2. Periodic Review – When inventory is ordered at a fixed interval of time (for example each week). This is desirable when vendors make routine visits to customers and take orders for their complete line of products, or when buyers want to combine orders to save transportation costs. The order quantity is determined by subtracting the current inventory position from a “max” quantity that is calculated to protect against stockouts during the review period and the lead time.
18.104.22.168.3. Safety Calculations (Service vs. Fill Rate) – Safety stock in a distribution environment for independent demand items most often is used to guard against fluctuations in customer demand. Safety stock calculations can use statistics to manage the risk of stock out. A “service” criterion measures risk as the probability of not stocking out during the order cycle. The “fill rate” criterion measures risk as a function of the expected percentage of demand met.
Normal Distribution – The normal distribution can be
used to characterize independent demand. This distribution is also referred to
22.214.171.124. Quantity Discounts and Price Breaks, Promotions – The purchasing decision is often influenced by quantity discounts, price breaks and other promotional offerings. Specialized techniques help to analyze these decisions by considering tradeoffs between the actual costs associated with purchasing and transporting the item, inventory carrying costs and fixed ordering costs.
126.96.36.199. Low Volume Items – Special techniques and distributions may be used for low volume items since the normal distribution may not be applicable. An example of this exists anytime a customer orders a single piece of inventory when the normal shipment fills a container Such as sales. Distribution for low volume items may set up a method to consolidate all samples for a particular sales associate at the distribution center. Alternatively, the samples may be shipped direct to the sales associate from the manufacturing site. Normal distribution methods of filling a container and shipping it from distribution will not work when shipping low volume items.
ABC Inventory Control – The premise behind ABC
inventory control is that when resources are limited it may be useful to focus
on the most important items. The yearly cost of an item is a common criterion
used. Criteria other than annual cost can be used in ABC inventory control. These
include: annual usage, revenue generated, usage by priority customers, etc.
Typically about 20% of the items will make up 80% of the yearly cost and become
A items. Another 30% of the items will make up 15% of the cost and become B
items. C items will make up 50% of the number of items and consume only the
remaining 5% of the cost. The A items are carefully managed and ordered
frequently to minimize investment, less time and resources are devoted to the B
items, and a very low amount of time and resources are dedicated to the C
ABC Inventory control is often used in cycle counting. The A items are counted often, such as once a month. The B items are counted less often, such as once a calendar quarter. The C items may be counted even less often, such as once a year. Criteria other than annual cost can be used in ABC inventory control. These include: annual usage, revenue generated, usage by priority customers, etc.
188.8.131.52. Inventory Accuracy – Critical for optimal operation of production and automated systems, high inventory accuracies are mandatory. Therefore, the inventory physically located in distribution must be reflected accurately in the system. Due to the automation and integration of ERP systems, inventory is linked to other functions within a company like tracking dollars in accounting for inventory receipts and shipments. Implementations of systems like ERP demand inventory accuracies as high as 99%.
Auditing / Cycle Counting – Distribution inventories
must be accurate for two basic reasons. One reason is to satisfy accounting and
Sarbanes Oxley reporting requirements in publicly traded companies. The other
reason is to maintain high inventory accuracies for operational reasons.
Some companies choose to audit their inventories. A count is taken of a particular item and compared to a system balance. If an inaccuracy is found, the system is adjusted.
Cycle counting takes the audit concept one step further. Cycle counting will follow the auditing procedure described previously; however, the cycle counting process will also search for a root cause for that inaccuracy. Once resolved, inventory accuracy is increased because the problem will not reoccur for that item and other items that are affected by the improvement.
Cycle counting is cyclical in nature. In order to eliminate physical inventories in a distribution environment, the financial obligations must be met. Working with Finance, some companies will implement a cycle counting schedule similar to the one described in the ABC section. This type of counting schedule works best when the inventory is physically residing in fixed locations.
Many distribution inventories are randomly stored, meaning the inventories are not in fixed locations but instead are “mixed with” other stock keeping units within the warehouse. ABC cycle counting schedules are inefficient in this type of arrangement because the counters will have high travel times finding the entire inventory belonging to a particular item. The cycle counting schedule in this type of environment is set up by location instead. As an example, the cycle counter will sweep through the warehouse a few times a year.
Lean distribution environments are working towards eliminating cycle counting as well as the annual physical inventory as inventory levels are minimized. If operations continue to show high inventory accuracy levels without cycle counting some companies have been able to eliminate cycle counting entirely.
184.108.40.206. Costing of Multi-Echelon, Multi-Channel Service
– Multi-Echelon – Each node in a supply chain must be profitable for the supply chain to survive. Distribution decisions involving other members of the supply chain should be made jointly so that one piece of the supply chain does not negatively affect the profit situation at another piece of the supply chain.
– Multi-Channel – Enterprises may use multiple channels of distribution. The costing of multiple channels from raw material to distribution of the final product should be analyzed. Some companies find that one channel may not be profitable. This happened to some small retailers who offered their products both in retail locations and through e-business portals.
– Multi-Echelon / Multi-Channel – The combination of these environments requires careful costing analysis so that all supply chain partners remain profitable.
220.127.116.11. Pooling Inventory for Variance Reduction – In a multiple-warehouse distribution architecture, decisions must be made as to where items will be warehoused. It may not be necessary to stock all items at all warehouses. Pooling strategies are used when items have highly variable demand in certain warehouses. If the inventory can be pooled or consolidated in a centralized warehouse rather than being stocked in all warehouses, the variability of customer demand will be reduced. The trade off to consider when utilizing this strategy is the longer delivery lead times and/or increased expediting and shipping costs.
18.104.22.168. Postponement (Local Assembly) – Postponement strategies delay the assembly or finishing process at some point in the supply chain until the customer order is received. An example of this is the way orders for computers are filled and shipped. When an order is received the components are retrieved and assembled instead of building the computer ahead of time. Building computers ahead of time assumes that the customer will be ordering the computer exactly how it is made, when in reality many customers want customized versions of the standard product.
Vendor Managed Inventory (VMI) – Downstream supply chain customers choose
to partner with their suppliers. VMI partnerships involve where the inventory is
stored (either at the supplier site or the customer site) and when the billing
for the inventory will take place (upon shipment to the customer or upon use of
the part). The advantage to the supply chain is that transactions are often
automated and redundancies in paperwork are reduced.
Distribution Centers are affected by VMI when they store inventory involved in the program. The distribution function will need to determine how to separate the product from the same product available for other customers, and often gets involved in the transactions surrounding the storage and movement of this inventory. In some cases, a customer representative may be located at the supplier’s site to help manage the activity or vice versa as in the retail market.
5.7.4. Collaborative Planning, Forecasting & Replenishment (CPFR) – CPFR is a supply chain strategy in which members of the supply chain work towards best practices in planning the flow of production from the first link in the chain to the last link in the chain. CPFR for distribution inventories may involve the planning for such activities as: replenishment, vendor managed inventory, forecasting, assortment optimization, retail store clustering, presentation stock, etc.
Routing – The
routing file contains a record for each manufactured part and identifies the
sequential operations and work centers required to make the manufactured part,
the setup and run standard time, plus any required tooling. Work-center key
items include key descriptive data, calculation requirements, shop calendar and
utilization and efficiency factors.
Manufacturing Calendar is used in inventory and production planning functions that consecutively number only the working days so that the component and work order scheduling may be done based on the actual number of workdays available.
6.2. Standards (Time Measurement) – is the established norm of productivity defined in terms of units of output per set time (unit/hour) or standard time (minutes per unit). This norm is then used to measure against actual results.
6.3. Finite / Infinite Scheduling / Forward-Backward Scheduling Techniques – Various scheduling techniques are used to determine how to define and control capacity and load. Finite scheduling is assigning no more work to a work center than the work center can be expected to execute in a given time period. Infinite scheduling is the calculation of the capacity required at work centers in the time periods required regardless of the capacity available to perform this work. Forward scheduling begins the process at the planned release date (or the current date) and moves forward in time to determine the anticipated completion date. Backward scheduling begins at the customer planned receipt date and moves backward in time to determine the anticipated start date.
6.4. Master Production Schedule (MPS) / Final Assembly Schedule (FAS) – the master production schedule is a line on the master schedule grid that reflects the anticipated build schedule of those items assigned to the master schedule. It represents what the company plans to produce expressed in a specific configuration, quantities and dates. (See Section 22.214.171.124)
6.5. Dispatching – the selection and sequencing of available jobs to be run at an individual work station and assignment of those jobs to workers. It can also be loading and scheduling of trucks to meet shipment objectives.
6.5.1. Priority Rules – the logic used to assign priorities to jobs at a work center. Some commonly used rules include: First come, first served, earliest job due date, earliest operation due date, and shortest processing time. Term also called dispatching rules.
6.5.2. Critical Ratio – is a dispatching tool that calculates a priority index number by dividing the time remaining to the due date by the expected elapsed time to finish the job.
6.5.4. Kanbans – are a method of Just-in-Time production that uses standard containers or lot sizes with a single card attached to it. It is a pull system in which work centers signal with a card that they wish to withdraw parts from feeding operations or suppliers and therefore indicates needs to replenish or produce more.
6.6. Queuing and Simulation – queuing is time waiting. In queuing theory various models are used that deal with waiting line problems, for example, problems for which customer or units arrive at some service facility at which waiting lines or queues may build. Other similar terms include: queuing analysis and waiting line theory. Simulation is the technique of using representative or artificial data to reproduce in a model various conditions that are likely to occur in the actual performance of a system. It is frequently used to test the behavior of a system under different operation policies.
6.7. Theory of Constraints (TOC) – focuses on four key concepts: constraint, drum, buffer and the rope. Management of the of the constraint is critical to the process, the pace of the line operation is set by the speed of the constraint, an inventory buffer is placed before the constraint to protect the pace, inventory is pulled through the line based on customer order input to minimizes inventory and speeds up the entire production process. (See Section 2.1.7)
6.8. Service Scheduling (Days On / Days Off) – is scheduling by number of employees and shifts to maintain a capacity level that achieves customer satisfaction. Employee mix, shift schedules and employee assignment must be identified and controlled. Also, schedules must plan to meet unexpected demand variations.
6.9. Advanced Planning Systems (APS) – is a technique that deals with analysis and planning of logistics and manufacturing during short, intermediate, and long term periods. It describes any computer program that uses advanced mathematical algorithms or logic to perform optimization or simulation on finite capacity. These techniques simultaneously consider a range of constraints and business rules to provide real-time planning and scheduling, decision support, Available To Promise (ATP), and Configure to Order (CTO) capabilities.
6.10. Production Activity Control (PAC) – is the function of routing and dispatching the work to be accomplished through the production facility and of performing supplier control. PAC encompasses the principles, approaches, and techniques needed to schedule, control, measure, and evaluate the effectiveness of production operations. (See Section 126.96.36.199)
6.10.1. Short Interval Scheduling – is a method to minimize the queue, move and wait times at a work center by monitoring the order quantity. It attempts to minimize batch size through detailed operation time analysis to reduce production time. (See Section 188.8.131.52.1)
6.10.2. Input / Output Control – is a technique for capacity control where planned and actual inputs and planned and actual outputs of a work center are monitored. (See Section 6.5.3)
6.11. Manufacturing Execution Systems Management – are programs or systems that participate in shop floor control, including programmed logic controllers and process control computers for direct and supervisory control of manufacturing equipment; process information in systems that gather historical performance information, then generate reports; graphical displays; and alarms that inform operations personnel what is going on in the plant currently and a very short history into the past.
6.11.1. Tracking – is the ability to trace the movement of material, labor, work orders from issuance through work order movement.
184.108.40.206. Component Traceability – is the registering and tracking of parts, processes, and material used in production, by lot or serial number.
220.127.116.11. Productivity – is the overall measure of the ability to produce a good or a service. It is the actual output of production compared to the actual input of resource. Productivity is a relative measure across time or against common entities.
18.104.22.168. Product Integrity – is producing a product that meets its stated specification, delivering the product on time and working with customers to resolve any questions or issues.
22.214.171.124. Accountability – is being answerable for, but not necessarily personally charged with, doing the work. Accountability cannot be delegated, but it can be changed.
7. Project Management – the use of skills and knowledge in coordinating the organizing, planning, scheduling, directing, controlling, monitoring, and evaluating of prescribed activities to ensure that the stated objectives of a project, manufactured good, or service are achieved.
7.1. Project Organization and Leadership – projects stem from a unique one time need, problem, and/or condition such as building a new facility or a new device to measure an extremely large or extremely small object. For organizations to meet these special needs and circumstances, ad hoc committees, taskforces, and teams are established. These organizational groups are often in existence for a temporary period of time – usually only until the project is completed. Project team leaders are typically those individuals highly motivated for results under conditions where uncertainty and risks are involved. These leaders must be focused on keeping the project teams on track toward agreed upon goals, within resource constraints typically f time and money.
7.2. Planning Processes – Planning is crucial in turns of the potential success of the project. The plan is a summary or detailed document that has been approved by upper management allowing the project to proceed. The plan documents assumptions the approved budget and schedule, and facilitates communication. The planning processes include multiple phases. The process starts with the project concept phase. At this phase, a broad definition of the project is discussed. Next comes the detailed definition phase where specific parameters – what, who, how much, when, and how – are discussed. After this comes the activities and targets phase where specific goals, milestones, and cost targets are established. Next comes the performance phase where actual activities are implemented. The last phase is actually an ongoing state for the organization and is referred to as the post-completion phase. The organization’s project at this point may be at or near completion. Goal outcome assessments and other metrics are needed by decision makers to track the level of success of the project. At this point, changes in the project plan, or project itself are implemented. In some instances, the project evolves into an ongoing task during this post-completion phase.
7.2.1. Gantt chart – represents the activities of the project with start times and completion times on the horizontal axis. It is a simple presentation that is able to give an overview of project status at a glance. However, it does not show the interaction of the project activities.
7.2.2. Network Diagrams – A graphical representation of the precedence linkages of tasks in a project, generally made up of nodes and arrows. Network diagrams may be either Activity-on-Node (AON) or Activity-on-Arrow. The most common is Activity-on-Node in which the arrows linking the nodes are only an indication of relationship rather than time.
7.2.3. Critical Path Method (CPM) – A network planning technique for the analysis of a project’s completion time used for planning and controlling the activities in a project. By showing each of the activities and their associated discrete times, the critical path, which identifies those elements that actually constrain the total time for the project, can be determined, as well as an overall project completion time.
7.2.4. Program Evaluation and Review Technique (PERT) (Probabilistic Scheduling) – In project management, a network analysis technique in which each activity is assigned a pessimistic, most likely, and optimistic estimate of its duration. The critical path method is then applied using a weighted average of these times for each node. PERT computes a standard deviation of the estimate of project duration.
7.2.5. Crashing – In project management, it refers to the adding of resources to critical path or near-critical path activities on a project to shorten project duration after analyzing the project to identify the most cost-effective course of action. When a project is fully “crashed,” a determination has been made that the reallocation of resources towards the critical path will have no further effect on shortening the overall project time. Crashing may stop before all possible activities have been altered based on the cost trade-off of the added expense to shorten the activity versus the opportunity cost of still having resources committed.
7.2.6. Resource-Constrained Scheduling – Also referred to as resource-limited scheduling, the scheduling of activities so that predetermined resource availability pools are not exceeded. Activities are started as soon as the resources required are available, with respect to logical constraints. When not enough of a resource exists to do all tasks on a given day, a priority decision is made. Project finish may be delayed, if necessary, to alter schedules constrained by resource usage.
7.2.7. Critical Path – Numerous specific items are associated with the mechanics of project management, including nodes arrows, slack, critical and non-critical paths. Perhaps the most important terms are critical paths and critical chains. The critical path is the longest sequence of activities from start to completion of a project. The critical chain is a similar concept but includes resource constraints.
7.3. Project Metrics – The final measurement and evaluation of a project is based on project metrics. Metrics are determined – selected, established, and set for assessing – in the early, if not the beginning, phase of the project. The duration of a project, earliest completion time, number of critical paths, and project slack are common project metrics. Financial budgets and ratios are used to analyze and assess the ongoing and/or final value of the project. Customer, user, and practitioner surveys are used for measuring and evaluating projects.
Electronic Data Interchange (EDI) – EDI is a way of
communicating with customers and suppliers. In
8.1.3. Automated Identification – Used to define and distinguish inventories by creating unique identifiers, this is normally used in connection with Data Capture. Automatic Identification and Data Capture (AIDC) is a set of technologies that collect data about objects and then these data to a computer without human intervention.
Product Codes – To aid transactions of goods across the
supply chain, machine readable product codes are affixed to the product or
package. Because these codes must be both understandable and unique in their
use across complex supply chains, collaborative organizations have arisen to
assign and control product codes and their associated databases. While product
codes have evolved for specialized use in industries (such as health care) and
organizations (such as libraries), the most widely recognized codes are the UPC
and the EAN. The Universal Product Code (UPC) is used in the
126.96.36.199. Radio Frequency Identification (RFID) – RFID is a wireless AIDC (Automatic Identification and Data Capture) technology that is uses to track and manage items. RFID is a system that involves electronic tags containing data encoded onto an integrated circuit. A device or reader sends an electromagnetic signal to the tag. The tag transmits its code when a signal is received from a reader. There are three types of RFID tags (also called transponders).
– Passive tags: not equipped with a battery. They are activated by a reader.
– Active tags: equipped with a battery that amplifies the signal transmitted back to the reader.
– Semi-passive tags (sometimes called battery-assisted passive tags or BAP): equipped with a battery which energizes built in sensors.
188.8.131.52. Bar Codes – A bar code is a representation of information in a machine readable format it is normally dark ink on a light background to create high and low reflectance making it easy to read. Barcodes are widely used to implement an Automatic Identification and Data Capture (AIDC) system that improves the speed and accuracy of data entry.
184.108.40.206. Geographic Information System (GIS) / Global Positioning System (GPS) – A geographic information system (GIS), also known as a geographical information system, is a system for capturing, storing, analyzing and managing data and associated attributes which are spatially referenced to the Earth. GIS is used in operations for resource management, asset management and logistics. When used in conjunction with the Global Positioning System (GPS), it can be used to see where fleets are located for better use for consolidation and possible backhauling or, to see where various shipments are located in route.
Flexible Manufacturing – A flexible manufacturing system (FMS) is a manufacturing process that
can respond quickly and easily to changes, whether they are predicted or
unpredicted. This flexibility is generally considered to fall into two
categories: machine and routing. Machine flexibility
covers the system's ability to be changed to produce new product types, and
ability to change the order of operations executed on a part. Routing
flexibility consists of the ability to use multiple machines
to perform the same operation on a part, as well as the system's ability to
absorb large-scale changes, such as in volume, capacity, or capability.
Most FMS systems comprised of three main systems. The work machines which are often automated Computer Numeric Control (CNC) machines are connected by a material handling system to optimize parts flow and the central control computer which controls material movements and machine flow. The main advantage of FMS is its high flexibility in managing manufacturing resources like time and effort in order to manufacture a new or a low-volume product. The best application of a FMS is in small batch and high variety product lines.
8.2.2. The advantages of FMS includes fast response to changing customer needs, short preparation time for new or prototype products, low costs for low volume, high variety product lines, high productivity due to fast changeover times, flexibility enables high machine utilization, and fast detection of quality problems at lower cost. Mass Customization – Mass customization, in marketing, manufacturing, and management, is the use of flexible computer-aided manufacturing systems, speedy information flow and responsive processes to produce custom output. Those systems combine the low unit costs of mass production processes with the flexibility of individual customization.
220.127.116.11. Postponement is a technique that can be used with some products where the product is built to a certain stage and unique components are added when the customer order is received (e.g. adding color panels to standard dishwashers, or adding customer-specific labels and packaging when orders are received). The idea is to build a generic product and delay differentiation until as late in the production and/or distribution process as possible. (See Section 18.104.22.168)
8.2.3. Single Minute Exchange of Dies / Quick Changeover (See Section 3.10.6)
8.3.1. Automated Service Systems – customer self-service is typically supported by automated systems. Automated systems depend on some form of input device (sensors, bar code readers, magnetic strip readers, voice-to-data translators, etc.) to capture data, a processing system (software or firmware logic systems and simple processors to super computers), and some communication network connecting the input device to the processor. Networks can be hardwired, wireless, or both. Examples of automated service systems include credit card readers, self-serve blood pressure readers, and POS systems.
Point of Sale (
22.214.171.124. Voice-Activated Service Systems – Financial, insurance, and utility companies appear to be leaders in using voice-activated systems to capture and translate customer data before the customer is finally connected with a person who will already have the customer’s service record available. The voice translation (input device) creates a data transaction that queries the customer relationship system database to find the customer’s data. This data can be returned to the customer via a text-to-voice translator or by a customer service representative.
8.3.2. Remote Sensing Systems of sensors can be used to monitor the performance of production systems, capturing data such as heat and pressure in steam systems, flue gas emission in smokestacks, and rotation speeds (cycles per second) and voltages in electric generators. Sensors can monitor flow rates in petro-chemical plants, gas and water distribution networks, and heating and air conditioning systems. Remote sensing is normally used when direct monitoring is impractical, expensive or unreliable.
9. Emerging Operations Technologies – Emerging operations technologies are changing the way business operations are conducted. The rate of change continues to increase and create new opportunities while simultaneously creating threats to the existing operational methodologies.
9.1. Web Collaboration – E-Business – As a result of the nearly universal access to Internet technology the business world has changed. The speed, simplicity, and low cost of entry into the Internet marketplace have had and will continue to have an impact how businesses and individuals interact.
9.1.1. Business-to-Business Commerce (B2B) –Business being conducted over the Internet between businesses. The implication is that this connectivity will cause businesses to transform themselves via supply chain management to become virtual organizations, reducing costs, improving quality, reducing delivery lead time, and improving due-date performance.
9.1.2. Business-to-Consumer Sales (B2C) – Business being conducted between businesses and final consumers largely over the Internet. It includes traditional brick and mortar businesses that also offer products online and businesses that trade exclusively electronically.
Warehouse Management Systems – A
warehouse management system (WMS) is a software application that is used to
manage the flow of materials into, through and out of storage facilities. A
typical WMS has the ability to provide detailed direction for the receiving,
storing, bin selecting, picking and shipping tasks required in all warehousing
By shifting some of the decision making away from independent human operators to a centralized planning system measurable benefits may be achieved. These planning systems support warehouse workers through standardized processes, instructions, rules and parameters established during the system implementation project.
9.2.1. Automated Order Picking – There are three types of order picking – manual, semi-automated and fully automated methods.
· Manual picking involves a human item picker going to the part bin and retrieving the item.
· Semi-automated systems bring the item to the picker. Horizontal and vertical carousels are used extensively in this approach.
· Automated order picking is a method for picking product without direct human interaction. The picker is eliminated from any direct hands-on activity in this method.
9.2.2. Automated Storage and Retrieval – An automated storage/retrieval system (AS/RS) is a high-density rack inventory storage system with vehicles automatically loading and unloading the racks. An AS/RS is best suited to where machines can be used to put away and retrieve materials and free up workers to perform other perhaps less dangerous tasks. The capital costs required to purchase and maintain an AS/RS limits its application to only high volume operations.
· Asynchronous collaboration occurs when two or more collaborators are working on the activity at different times. Asynchronous collaboration techniques or processes include document storage and retrieval, electronic voting activities, wiki repositories, e-mail, and threaded discussion.
· Synchronous collaboration includes activities where two or more collaborators are sharing, viewing or manipulating the same content at the same time. Synchronous collaboration techniques or processes include presentation sharing or webinar, application sharing, and instant messaging.
Rapid Prototyping – Rapid
prototyping is the transformation of product designs into physical prototypes.
Rapid prototyping relies on techniques such as cross-functional teams, data
sharing, and advanced computer and communication technology (e.g., CAD,
Decision Making (facilitating) Tools – Methodologies
and or techniques used to gather data, organize it for analysis, and transform
it into information to support decision making. Some decision making tools
utilize computer based technologies to gather, organize and manipulate data.
Many decision making tools provide the insights needed to establish relevant performance metrics or Key Performance Indicators (KPIs).
Data quality has a direct impact on the usefulness of many of the decision making (facilitating) tools listed below. The data they utilize must be accurate and collected in a timely fashion.
The following decision making tools are relevant to both collaborative supply-chain participant-partners and individual organizations:
· Quality Function Deployment (QFD) – Voice of the Customer (VOC)
· Data Mining
· Competitive Benchmarking
· The Supply-Chain Operations Reference model (SCOR)
· Sales Forecasting:
– Focus (Forecasting)
· Business Intelligence (BI)
· Decision Support Systems (DSS)
– Decision Matrix
The following are tools for the individual organization:
· Lean Based Tools:
– Spaghetti Diagramming
– Value Stream Mapping
– Check Sheets
– Pareto Analysis / Chart
– Cause and Effect Diagrams
– Control Chart
– Nominal Group Technique
· Design of Experiments (DOE)
· Balanced Score Card
· Financial – Accounting
– Cost of Goods Sold
· Activity Based Costing
· Return on Investment (ROI) analysis
Performance Metrics (Performance Measurement System) –
A system for collecting, measuring, and comparing a measure to a standard for a
specific criterion for an operation, item, good, service, business, etc. A
performance measurement system consists of a criterion, a standard, and a
The most common form of performance measurement is Key Performance Indicators (KPIs) – Key Performance Indicators (KPIs) are metrics used to quantify objectives to reflect strategic performance of an organization. KPIs are frequently used to "value" difficult to measure activities such as the benefits of leadership development, engagement, service, and satisfaction. KPIs are typically tied to an organization's strategy (as exemplified through techniques such as the Balanced Scorecard).
10.1.2.1. Methods of establishing Key Performance Indicators (KPIs)
10.1.2.1.1. The top-down approach, linking to the “parent” business driver:
– Critical Success Factors
– Key Performance Indicators (KPIs)
10.1.2.1.1.1. Metric nomenclature
– Metric – Name
– Metric description – What
– Measurement procedure – How
– Measurement frequency – How often
– Thresholds estimation – How calculated
– Current thresholds – Current considered normal
– Target value – Best possible value of the metric
– Units – Units of measure to be used
10.1.2.1.1.2. SMART – Criteria used to establish KPIs. A KPI must be:
10.1.2.1.1.3. Competitive Benchmarking – An option often used to establish the objectives in the “top down” approach to establishing KPIs. Benchmarking involves a comparison of a firm’s performance on an important measure to the performance of other firms. It might also include a comparison of the actual processes that are used.
10.1.2.1.1.4. Balanced Scorecard – the ultimate “big picture” organizational performance measure and inter-departmental (and trading partner) integrator that balances the objectives of Operations Management with the other disciplines in an organization. A list of financial and operational measurements used to evaluate organizational or supply chain performance. The dimensions of the balanced scorecard might include customer perspective, business process perspective, financial perspective, and innovation and learning perspectives. It formally connects overall objectives, strategies, and measurements. Each dimension has goals and measurements.
10.1.2.1.2. Other important measures:
– Balance Sheet –A financial statement showing the resources owned, the debts owed, and the owner’s share of a company at a given point in time.
– Carbon Footprint –A measure of the impact human activities have on the environment in terms of the amount of green house gases produced, measured in units of carbon dioxide. It is meant to be useful for individuals and organizations to conceptualize their impact in contributing to global warming. A conceptual tool in response to carbon footprints are carbon offsets, or the mitigation of carbon emissions through the development of alternative projects such as solar or wind energy or reforestation.
3PL: Third Party Logistics, 9
5 S, 25
7 Wastes, 25
ABC (Costing): Activity Based Costing, 13
ABC (Inventory): Cycle Counting, 45
AHP: Analytical Hierarchy Procedure, 22
AIDC: Automatic Identification and Data Capture, 51, 52
AOP: Annual Operating Plan, 12
ATP, 40; Available-to-Promise, 41
B2B, 21; Business-to-Business Commerce, 54
B2C: Business-to-Consumer Commerce, 54
BOL: Best Operating Level, 13
CIRM: Certified in Integrated Resource Management, 2
CPFR: Collaborative Planning, Forecasting, and Replenishment, 23, 47
CPIM: Certified in Production and Inventory Management, 2
CPM: Critical Path Method, 50
CRM: Customer Relationship Management, 23
CSCP: Certified Supply Chain Professional, 3
DRP: Distribution Requirements Planning, 43, 51
EOQ, 25; Economic Order Quantity, 44
ERP, 36, 45, 51; Enterprise Resources Planing, 34
FAS: Final Assembly Schedule, 47
FTZ: Free Trade Zone, 21
GAAP: Generally Accepted Accounting Practices, 11
ISO: Standards, 33
KPI, 55; Key Performance Indicator, 56
MPS, 38, 40, 42, 47; Master Production Schedule, 41
MRP: Material Requirements Planning, 2, 36, 40, 42, 43
PERT: Program Evaluation and Review Technique, 50
QFD: Quality Function Deployment, 16
RCCP, 39; Rough Cut Capacity Planning, 41
SMART: Criteria for Objectives, 56
SMED: Single Minute Exchange of Dies, 25
SPC, 51; Statistical Process Control, 33
SRM: Supplier Relationship Management, 22
TCO: Total Cost of Ownership, 24
TMS: Transportation Management System, 10
TOC, 7, 28; Theory of Constraints, 48
VMI: Vendor Managed Inventory, 47
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Back-up Information (Not part of the OMBOK Document)
Place to note Linkages to The CPIM Exam Content Manual
Basics of Supply Chain Management
Effective for January 1, 2008–December 31, 2008, Exams.
I. Business Wide Concepts
This section of the outline covers basic business wide concepts, including the various production environments used for the transformation process and financial fundamentals.
Also in this section, three of the more common companywide management approaches (ERP, JIT/Lean, and Quality Systems) are individually presented, together with their interrelationships.
A. Organization Fundamentals: The basic concept of a supply chain includes all activities and processes used to provide a product or service to the ultimate customer. It also includes internal organization dynamics, such as the traditional conflicts between functional areas.
1. Elements of the supply chain
f. service and support
2. Internal organizational dynamics
B. Operating Environments: Environments are the individual market and manufacturing factors that combine to determine the specific operating conditions.
1. Definition and impact of
a. customer expectations
b. cumulative lead time
d. product life cycle
e. product design
2. Process choices
3. Production environment
c. assemble- or package-to-order
C. Financial Fundamentals: Basic financial statements define the financial reporting common to most businesses. Underlying costs and analysis terms provide further understanding of statement information and often serve as the basis for management decisions.
a. balance sheet
b. income statement
c. cash flow statement
a. cost of goods sold
b. general and administrative
c. fixed and variable costs
a. cash flow
d. inventory turns
2. Key principles and characteristics
a. top-management planning tool
b. integrated planning structure
c. cross-functional integration
d. closed loop (feedback)
e. what-if simulations
f. financial data
E. Just-in-Time (JIT/Lean): JIT and Lean can be understood as philosophies embodying certain objectives and as sets of manufacturing techniques described by specific characteristics.
2. Key principles and characteristics
a. flow manufacturing
b. process flexibility
c. quality at the source
d. continuous improvement
e. supplier partnerships
f. employee involvement
g. total productive maintenance
h. pull systems
i. work cells
j. elimination of waste
3. Concepts of waste and value-added activity
F. Quality Systems: Quality systems focus on customer needs including a specific set of tools to improve products, services, and production processes through the use of such techniques as employee empowerment.
2. Key principles and characteristics
a. problem-solving tools
b. costs of quality
c. customer focus
d. employee empowerment
e. process improvement
G. Impact of Environment on System Design and Deployment: The production environment can be significantly improved by JIT/Lean and Quality Systems. This in turn simplifies ERP system operation and improves business performance.
1. JIT/Lean using ERP
2. Quality Systems impact
Reference: 1; 3 (chapters 1, 2, 14-16); 4
II. Demand Planning
This section covers demand planning, including a basic understanding of markets and customer expectations, the definition of value, and a fundamental overview of demand forecasting.
A. Marketplace-Driven: Customer needs and alternative competitive sources determine the type of product demand experienced by supplying firms.
3. Economy and regulatory policy
B. Customer Expectations and Definition of Value: A firm must determine the primary characteristics of products and services that are attractive to customers. This understanding can then be exploited through appropriate market plans and production processes.
1. Order winners/qualifiers
c. pre-sale and post-sale service
2. Marketing strategy
C. Customer Relationships Management: To develop effective customer relationships, ongoing interaction and communication with customers is essential with both product design and production deliveries.
1. Expanding product/service offerings
2. Design assistance
D. Demand Management: Demand management is the recognition of demand, either as forecast or actual customer orders. Forecasting is complex, but it involves a variety of standard terms. Once recognized, demand is met through a combination of inventories and the master production schedule. Distribution requirements planning (DRP) improves demand management by directly linking distribution system demand to central demand.
1. Sources of demand
2. Forecast management
a. characteristics of demand
b. principles of forecasting
d. forecast error measurement and response
Reference: 3 (chapters 8, 9)
III. Transformation of Demand into Supply
This section includes the design, management, and control of the transformation process itself.
The first part of this section includes the design of products, processes, and information systems used for planning.
The rest of the section includes fundamentals of planning systems, execution controls, and performance measures.
A. Design: Design affects product and process, the resulting framework of planning system parameters, and the requirement for data appropriate in source, content, and accuracy.
1. Manufacturing feasibility
a. new product design and introduction
b. process choices
c. process flexibility
2. Planning parameters
a. manufacturing and purchasing lead time
b. order quantity/lot size/batch
c. safety stock and/or capacity
3. Data sources and data accuracy
a. bills of material/formulas/recipes
b. planning bill of material
c. item master (material master)
e. work center/flow line
4. Functional responsibilities
B. Capacity Management: The fundamentals of capacity management include the required resources, the various methods of measuring capacity, the levels and stages of planning capacity, and the impact of bottlenecks and constraints.
2. Measuring capacity
3. Capacity planning
C. Planning (purposes, inputs, and outputs): The purpose and structure of the planning process are the basic inputs, data sources, and necessary outputs. Functional trade-offs are resolved in effective higher-level planning. Other plans at all levels must remain consistent with one another and with the overall plan.
1. Strategic planning and business planning
2. Sales and operations (S &OP) planning/production planning
3. Master scheduling and rough-cut capacity planning (RCCP)
4. Material requirements planning (MRP) and capacity requirements planning (CRP)
5. Final assembly scheduling (FAS)
D. Execution and Control: Fundamental definitions and structures of execution and control techniques are widely known. Understanding them requires a thorough comprehension of scheduling and work-in-process techniques and how they interrelate to meet the master production schedule. Customer service activities and quality assurance further affect execution and control.
1. Customer service
a. order processing
b. order promising
2. Linkages to the master schedule
3. Scheduling techniques
a. capacity control
b. priority control
c. production reporting
5. Quality assurance
a. measuring quality
b. process variation
c. process control
E. Performance Measurements: There are several types of key performance indicators , each with specific reasons for their use. Some are strategic in nature, while others are operational or tactical in nature. It is important to have an appropriate mixture of both types for an effective evaluation of organizational performance.
Reference: 1; 3 (chapters 2-6)
This section is devoted to supply issues. These include the concepts of inventory, purchasing, and physical distribution.
A. Inventory: Inventory can be described by its various categories and functions and whether it meets dependent or independent demand. There are several approaches to inventory management, order system interrelationships, and inventory cost analysis.
a. raw materials
c. finished goods
d. service parts
e. maintenance, repair, and operating supplies (MRO)
b. cycle/lot size
d. safety stock
3. Dependent versus independent demand systems
a. ABC analysis
b. tracking inventory
c. cycle counting
d. record accuracy
e. physical inventory
5. Order systems
6. Cost analysis
b. economic order quantity (EOQ) – [OMBOK 126.96.36.199]
c. safety stock level versus customer service
B. Purchasing: There are several important components of purchasing, especially regarding suppliers and order management, and ultimately including receiving and invoice payment.
1. Receiving and analyzing notification of need
b. MRP output
2. Selecting suppliers
a. source (single/multiple)
b. supplier partnering
c. vendor-managed inventory
3. Supplier agreements
4. Order management
b. monitoring and controlling open orders
c. receiving and accepting orders
d. approving invoices for payment
5. Monitoring supplier performance
C. Physical Distribution System: The components of a physical distribution system should be recognized, as well as the interfaces with production, marketing, and finance.
3. Distribution inventory
4. Interfaces with production, marketing, and finance
Reference: 1; 3 (chapters 7, 10-13); 4
1. APICS CPIM Basics of Supply Chain Management Reprints, 2006.
2. APICS Dictionary, 12th ed., 2008.
W.M., Lean Manufacturing: Tools,
Techniques, and How to Use Them,
Master Planning of Resources
Effective for January 1, 2008–December 31, 2008, Exams.
I. Demand Management
This section addresses the interrelationship of strategic and business planning with the management of demand. The three primary aspects of demand management (forecasting, order servicing/customer relationship management, and distribution planning) are addressed. Exam questions covering this area will include elements related to the following:
A. General Concepts and Purposes: Successful planning requires an understanding of how components, concepts, and linkages of the strategic plan, the business plan, and the master planning of resources interact. Knowledge in this area encompasses:
1. The planning hierarchy