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Introduction to Material Management



1.1 Introduction

  • Wealth is measured by the output of goods and services produced in a given time.

  • Goods are physical objects and services are the performance of some useful function.

  • A production function is needed to transform resources into useful goods.

  • At each stage in the development of the final product, value is added, thus creating more wealth.

  • To get the most value out of our resources, we design production processes that make products most efficiently.

  • Once the processes exist, we need to manage the operation so it produces goods most economically.

  • Managing the operation means planning for and controlling the resources used in the process: labor, capital and material.

  • The major way in which management plans and controls is through the flow of materials; the right materials in the right quantities and at the right time.

1.2 Operating Environment

  • The most important factors affecting the environment in which we operate are Government, Economy, Competition, Customers and Quality.

  • Government regulation of business affects the way business is conducted.

  • Economic conditions influence demand for products or services and availability of inputs.

  • Companies face global competition. Transporting materials is less costly today. Global communications are fast, effective and inexpensive.

  • Customers expect more from suppliers. Customer selection criteria include a fair price, quality products and services, reduction in delivery lead-time, better pre and post sales service, and product and volume and flexibility.

  • Quality must meet or exceed customer expectations.


  • Order Qualifier - Minimum requirements that a supplier must meet to be a viable competitor

  • Order Winners - Competitive Characteristics that persuade a customer to choose a particular product or service

  • Delivery Lead Time - Time from the receipt of an order to the delivery of the product. (From the customer perspective may include order prep time)

Manufacturing Strategies (Four Lead Time Strategies)

Pull Strategy (The Customer Pulls his needs)

  • Engineer-To-Order ETO

    Designed to customer specification

    Products whose customer specifications require unique engineering design or significant customization. Each customer order requires a cost estimate, and special pricing. These orders generally result in a unique set of components, bills of material, and production routings

  • Make-To-Order MTO

    Standard design, produced only upon order

    A manufacturing process strategy where the trigger to begin manufacture of a product is an actual customer order or release, rather than a market forecast. For Make-to-Order products, more than 20% of the value-added takes place after the receipt of the order or release, and all necessary design and process documentation is available at time of order receipt.

Pull / Push Strategy

  • Assemble-To-Order ATO

    Subassemblies produced, assembled upon order

    " A production environment where a product or service can be made after receipt of a customer's order. The end item finished product is generally a combination of standard components and custom designed components that meet the unique needs of a specific customer. Where options or accessories are pre-stocked prior to customer orders, the term assemble-to-order is frequently used."


Push Strategy (the Company pushes its products to the markets)

  • Make-To-Stock MTS :

    Finished product made prior to order

    "Make to Stock - A production environment where end item products are usually finished before receipt of a customer order. Customer orders are generally filled from finished goods inventories, and production orders are used to replenish finished goods inventories"

Operation Decision Making

Manufacturing Strategy and Lead Time



1.3 The Supply Chain Concept

  • The supply chain system contains three Basic Elements:

    • Supply,

    • Production

    • Distribution

  • Supply chain includes all activities and processes to supply a product or service to a final customer.

  • Any number of companies can be linked in the supply chain. Sometimes called the Value Chain.

  • The total chain can have any number of supplier/customer relationships.

  • The chain includes intermediaries such as wholesalers, warehouses, and retailers

  • Product or services usually flow from supplier to customer and design and demand information usually flow from customer to supplier

Traditional SC

  • Traditionally, management focused on internal operating issues, constraints and parameters. Suppliers were considered adversaries.

  • Conflicts in traditional systems often appear because differing departments maximize departmental objectives without considering the impact to other parts of the system.

Growth of  SC concept

  • The first major change evolved through the explosive growth of Just-in-Time (JIT) concepts. Suppliers were viewed as partners

  • The growth of the supply chain concept continues to be influenced by

    • The explosive growth in computer capability,

    • Software applications (Enterprise Resource Planning) and the ability to link companies electronically (Internet),

    • Growth in global competition,

    • Growth in Technology leads to dramatic reduction in product life cycles and the resulting design flexibility and ability to effectively communicate changes to suppliers and distributors.

The current SC concept

  • Emphasis was on trust in the relationship, i.e. elimination of receiving inspection, reduction in administrative paperwork replaced with the exchange of electronic data, mutual analysis of cost reductions and shared benefits, and shared product design.

  • To result an Optimal Performance, the supply chain of activities, from raw material to final customer, should be managed as an extension of the partnership. This implies three critical issues: flow of materials, flow of information electronically and fund transfers. More recently, the new trend is to manage the recovery, recycling and reuse of material.

  • The need for SC Integration:

    • To manage a supply chain, try to efficiently plan material and information flows to maximize cost efficiency, effectiveness, delivery, and flexibility.

    • This requires systems integration and reevaluating performance measures. To maximize profit, set objectives that provide better customer service, lowest production costs, lowest inventory investment, and lowest distribution cost.

    • Stress the need to supply customers with what they want when they want it and to keep inventories at a minimum

1.4 What Is Materials Management?

  • The problem is to balance conflicting objectives to minimize the total of all the costs involved (maximize the use of the firm’s resources) and maximize customer consistent with the goals of the organization.

  • This requires some type of Integrated Materials Management or Logistics Organization responsible for supply, production and distribution. The name we are giving this function is Materials Management.

  • Reducing cost contributes directly to profit. Increasing sales increases direct costs of labor and materials so profit does not increase directly.

Manufacturing Planning and Control MPC

is responsible for the planning and control of the flow of materials through the manufacturing process and the primary

  • MPC activities are:

  1. Production Planning includes:

    • Forecasting,

    • Master planning MPS

    • Material Requirements Planning MRP

    • Capacity Planning

  2. Implementation and control (Production Activity Control) PAC

  3. Inventory management

    Provide buffer against the differences in demand rates and production rates

  • There are Five Basic Inputs to the manufacturing planning and control system MPC:

    • Product Description (engineering drawings, specifications and bill of material BOM),

    • Process specifications,

    • Standard time needed to perform operations,

    • Available facilities, and

    • Quantities Required (independent demand).

Physical Supply / Distribution

Includes all activities involved in transporting goods, from the supplier to the beginning of the production process, and from the end of the production process to the customer, including:

  • Transportation,

  • distribution inventory,

  • warehousing,

  • packaging,

  • materials handling, and

  • order entry.

Material Management Objectives

  • Maximize service and minimize cost. The objective is to be able to deliver what customers want, when and where they want it, and do so at minimum cost.

  • To achieve this objective, materials management must make trade-offs between the level of customer service and the cost of providing that service.

  • As a rule, costs rise as the service level increases, and materials management must find that combination of inputs to maximize service and minimize cost.

Material Management can do much to improve a company's profit

P/L Statement

P/L After a 10% reduction in materials and 5% in direct labor

60% increase in profit

To get the same increase by increasing sales

Profit = Sales- (Direct Material+ Direct Labor + 200,000)

160,000 = Sales - 0.5 Sales - 0.2 Sales - 200,000

360,000= 0.3 Sales

Sales = 360000/ 0.3 = $ 1,200,000

Direct Material = 1,200,000 x 0.5 = $ 600,000

Direct Labor = 1,200,000 x 0.2 = $ 240,000


2.1 Introduction

  • A good planning system must answer four questions of priority and capacity:

    • What are we going to make? 

    • What does it take to make it? 

    • What do we have? 

    • What do we need?

  • Priority

    As established by the marketplace, relates to what products are needed, how many are needed, and when they are needed.

  • Capacity

    is the capability of manufacturing to produce goods and services (deliverables).  It depends on company resources and the availability of material from suppliers.

2.2 Manufacturing Planning and Control System

  • The Five major levels in the manufacturing planning and control system are:

    1. Strategic Business Plan

    2. Production Plan (sales and operations plan) SOP

    3. Master Production Schedule MPS

    4. Material Requirements Plan MRP

    5. Purchasing and Production Activity Control PAC

  • Each level varies in

    • Purpose

    • Time span (planning horizon)

    • Level of detail

    • Planning cycle (Frequency).

  • At each level, three questions must be answered:

    • What are the priorities --- how much of what is to be produced and when?

    • What is the available capacity --- what resources do we have?

    • How can differences between priorities and capacity be resolved?

Strategic Business Plan

  • It is senior management’s statement of the broad direction of the firm, major goals and objectives the company expects to achieve over the next two to ten years or more.

  • It is based on long-range forecasts and provides a framework that sets the goals and objectives for further planning by marketing, finance, engineering and production/operations. The level of detail is not high.

  • It is concerned with general market and production requirements. It is often stated in dollars rather than units.

Production Plan (PP)

  • Given the objectives set by the strategic business plan, production management is concerned with the  following:

    • The quantities of each product group or family that must be produced in each period,

    • The desired inventory levels,

    • The resources of equipment, labor, and material needed in each period

    • The availability of the resources needed.

  • For effective planning, there must be a balance between priority and capacity.

  • The planning horizon is usually six to 18 months and is reviewed perhaps each month or quarter.

Master Production Schedule (MPS)

  • MPS breaks down the production plan to show, for each period, the quantity of each end item to be made.

  • Inputs to the MPS are

    • The production plan,

    • the forecast for individual end items,

    • sales orders,

    • inventories, and

    • existing capacity.

  • The level of detail for the MPS is higher than for the production plan.

  • The planning horizon usually extends from three to 18 months but primarily depends on the purchasing and manufacturing lead times.

  • Master scheduling describes the process of developing a master production schedule;

  • The term master production schedule is the end result of the process.

  • Plans are reviewed and changed weekly or monthly.

Material Requirements Plan (MRP)

  • MRP is a plan for the production and purchase of the components and/or services used in making the items in the MPS.

  • The MRP establishes when the components and services are needed to make each end item.

  • The level of detail is high.

  • The planning horizon is similar to MPS, extending from 3 to 18 months.

Purchasing and Production Activity Control (PAC)

  • PAC represents the implementation and control phase (execution phase).

  • Purchasing is responsible for establishing and controlling the flow of raw materials into the factory.

  • PAC is responsible for planning and controlling the flow of work through the factory.

  • The planning horizon is very short

  • The level of detail is high.

Capacity Management

  • At each level in the manufacturing planning and control system, the priority plan must be tested against the available resources and capacity of the manufacturing system.

  • The basic process is one of calculating the capacity needed to manufacture the priority plan and of finding methods to make that capacity available.

  • If the capacity cannot be made available when needed then the plans must be changed.


2.3 Sales and Operations Planning (SOP)

  • SOP is a process for continually revising the strategic business plan and coordinating plans of the various departments.

  • SOP is a cross-functional business plan that involves sales and marketing, product development, operations, and senior management.

  • Operations represents supply, marketing represents demand.

  • The SOP is the forum in which the production plan is developed and a dynamic process in which the company plans are updated on a regular basis, at least monthly.

  • SOP ha several benefits:

    • Means of updating Strategic business plan

    • Means of managing change rather than reacting to change

    • Ensure that various department plans are realistic, coordinated and support the business plan

    • Better management of production, inventory and backlog

2.4 Manufacturing Resource Planning (MRP II)

  • MRP II is a master game plan for all departments in the company and works from the top down with feedback from the bottom up

  • This fully integrated planning and control system is called a manufacturing resource planning, or MRP II, system.

  • The phrase “MRP II” is used to distinguish the “manufacturing resource plan” (MRP II) from the “materials requirement plan” (MRP).

2.5 Enterprise Resource Planning (ERP)

  • Enterprise Resource Planning (ERP) – is an accounting oriented information system for identifying and planning the enterprise---wide resources needed to make, ship, and account for customer orders.

  • ERP encompasses the total company and MRP II is manufacturing.

2.6 Making the Production Plan

  • Based on the market plan and available resources, the production plan sets the limits or levels of manufacturing activity for some time in the future.

  • The production plan sets the general levels of production and inventories over the planning horizon.

  • Its prime purpose is to establish production rates that will accomplish the objective of the strategic business plan, including inventory levels, backlogs (unfilled customer orders), market demand, customer service, low-cost plant operation, labor relations, and so on.

  • The plan must extend far enough in the future to plan for the labor, equipment, facilities, and material needed to accomplish it.

Establishing Product Groups

  • For planning purposes, a common unit or small number of product groups based on similarity of manufacturing processes is what is needed.

  • Manufacturing is concerned more with the demand for the specific kinds of capacity needed to make the products than with the demand for the product.

  • Capacity is the ability to produce goods and services.

  • It means having the resources available to satisfy demand.

  • Capacity can be expressed as the time available or as the number of units or dollars produced in a given period.

  • The demand for goods must be translated into the demand for capacity.

  • This requires identifying product groups, or families, of individual products based on the similarity of manufacturing process.

  • Usually the following can be varied to adjust capacity:

    • People can be hired and laid off, overtime and short time can be worked, and shifts can be added or removed.

    • Inventory can be built up in slack periods and sold or consumed during high demand.

    • Work can be subcontracted or extra equipment leased.

    Manufacturing management is responsible for determining the least-cost alternative consistent with the goals and objectives of the business.

Basic Strategies

  • Three or four basic strategies can be used in developing a production plan:

    • Chase (demand matching) strategy – producing the amount demanded at any given time  Inventory levels remain stable while production varies to meet demand.



  • Production leveling – continually producing an amount equal to the average demand. Companies calculate their total demand over the time span of the plan and, on the average, produce enough to meet it. Production leveling means the company will use its resources at a level rate and produce the same amount each day it is operating. The advantage is that it results in a smooth level of operation that avoids the costs of changing production levels. The disadvantage is that inventory build up during periods of low demand

  • Subcontracting – means producing at the level of minimum demand and meeting any additional demand through subcontracting. Costs associated with excess capacity are avoided, and because production is leveled, there are no costs associated with changing production levels. The main disadvantage is that the cost of purchasing may be greater than if the item were made in the plant

  • Hybrid strategy – is a combination of the other three strategies. Production management is responsible for finding the combination of strategies that minimizes the sum of all costs involved, providing the level of service required, and meeting the objectives of the finance and marketing plans.

  • The objective in developing a production plan is to minimize the costs of carrying inventory, changing production levels, and stocking out (not supplying the customer what is wanted when it is wanted). The information needed to make a production plan is as follows: forecast by period for the planning horizon, opening inventory, desired ending inventory, and any past-due customer orders (back orders).

Developing a Make-to-Stock Production Plan

  •  Products are made and put into inventory before an order is received. Sale and delivery are made from inventory.

  • Make to stock when

    • demand is fairly constant and predictable,

    •  there are few product options,

    • delivery times demanded by the marketplace are much shorter than the time needed to make the product, and

    • product has a long shelf life.

  • Level production plan

    The general procedure for developing a plan for level production is total the forecast demand for the planning horizon, determine the opening inventory and the desired ending inventory,

    • calculate the total production required

    • (Total Production = total forecast + back orders + ending inventory – opening inventory), calculate the production required each period by dividing the total production by the number of periods, and calculate the ending inventory for each period.

Example on Level production plan

  • Opening Inventory = 100

  • Required End Inventory = 80

  • Equal Number of working days/month

  • No Back orders

  • Forecast as in the table below

  • Inventory carrying cost = $5 per unit


  • Production per period

  • Ending Inventory per period

  • Total Carrying cost


Total Production Required = 600 + 80 -100 = 580 Unit

Production/ period = 580 / 5 = 116 Unit / month

Ending Inventory after each period = Opening Inventory + Production - Demand

Ending Inventory after the first period = 100 + 116 - 110 = 106 Unit

Ending Inventory after the second period = 106 + 116 - 120 = 102 Unit

Total Carrying cost = (106+102 +88 +84 +80) x 5 = $2300


Period 1 2 3 4 5 Total
Forecast 110 120 130 120 120 600
Production 116 116 116 116 116 580
Ending Inventory 100 106 102 88 84 80 460
Invent Carrying Cost 530 510 440 420 400 2300
  • Chase strategy

    Example on Chase production plan

  • Opening Inventory = 100

  • Required End Inventory = 80

  • Production level in the period before the first period = 100

  • Cost of changing production level= $20 per unit

2. Chase              
Period 1 2 3 4 5 Total
Demand 110 120 130 120 120 600
Production 100 90 120 130 120 120 580
Change in Production 10 30 10 10 0 60
Ending Inventory 100 80 80 80 80 80 400
Invent Carrying Cost 400 400 400 400 400 2000
Change in Production Cost 200 600 200 200 0 1200
Total Cost 600 1000 600 600 400 3200


The required production at a period = Demand - (Inventory the period before- required Inventory this period)

The required production in the first period = 100 - (100- 80) = 90 Unit

Developing a Make-to-Order Production Plan

  • Wait until an order is received from a customer before starting to make the goods. Make to order environment has backlog of unfilled customer orders instead of an inventory of finished goods.

  • The backlog will be for delivery in the future and does not represent orders that are late or past due.

  • Firms make to order when:

    • goods are produced to customer specification,

    • the customer is willing to wait while the order is being made,

    • the product is expensive to make and to store, and

    • several product options are offered.

Assemble to order

  • Where several product options exist and where the customer is not willing to wait until the product is made, manufacturers produce and stock standard component parts.

  • When an order is received, they assemble the component parts from inventory.

  • Since the components are stocked, the firm needs only time to assemble before delivering the product.

  • Assemble to order is a subset of make to order.

To make a production plan, one will need

  • a forecast by period for the planning horizon,

  • an opening backlog of customer orders and

  • desired ending backlog.

To develop a level production plan,

  • total forecast demand for the planning horizon,

  • determine the opening backlog and the desired ending backlog,

  • Calculate total production required

  • Total production = total forecast + opening backlog – ending backlog),

  • calculate the production required each period, and

  • spread the existing backlog over the planning horizon according to due date per period.

  • Example

  • Opening Backlog = 100

  • Expected Demand = 100 per Week

  • Required Ending Backlog = 80


Total production = Total forecast + Opening backlog – Ending backlog)

Total Production Required = 500+ 100 - 80 = 520

Weekly production = 520 / 5 = 104

Projected backlog = Old backlog + Forecast - Production

Projected backlog week 1 = 100 + 100 - 104 = 96

Projected backlog week 1 = 96 + 100 - 104 = 92


Period 1 2 3 4 5 Total
Forecast 100 100 100 100 100 500
Planned Production 104 104 104 104 104 520
Projected Backlog 100 96 92 88 84 80 440

Resource Planning

  •  Once the preliminary production plan is established, it must be compared to the existing resources of the company.

  • If enough capacity to meet the production plan cannot be made available, the plan must be changed.

  • Resource bill shows the quantity of critical resources (materials, labor, and “bottleneck” operations) needed to make one average unit of the product group.


a. Introduction

  • Master production schedule MPS is the next step in MPC the manufacturing planning and control process

  • MPS is a means of  Communication, a Link  or Contract between Marketing and Manufacturing.

    • The MPS report includes an ATP Available to Promise figure to enable realistic, achievable delivery promises to be made to customers.

    • It is a plan of what is to be produced and when

    • It is an agreed upon plan between marketing and manufacturing.

    • The MPS is a Priority Plan for Manufacturing.

    • It is not meant to be rigid. It is the basis to make changes that are consistent with the demands of the marketplace and the capacity of manufacturing.

  • It breaks down the PP into the Requirements for Individual End Items, in each family, by date and quantity.

  • The sum of all Family MPS items must equal the agreed SOP Sales and Operations Plan for that Family over each planning period (normally a month or 4 week period).

  •  MPS application usually depends on production environment (MTS, ATO, and MTO)

  • The MPS drives the Material Requirements Plan MRP

    Items planned at the MPS level are exploded by MRP to produce the detail material and capacity requirements.

  • As a schedule of items to be built, the MPS and BOM Bills Of Material determine what components are needed from manufacturing and purchasing.

b. Definitions

“The MPS is a line on the master schedule grid (MPS Matrix) that reflects the anticipated build schedule for those items assigned to the master scheduler.

The master scheduler maintains this schedule, and in turn, it becomes a set of planning numbers that drives MRP Material Requirements Planning.

It represents what the company plans to produce expressed in specific configurations, quantities, and dates.

The MPS is not a sales item forecast that represents a statement of demand.

The MPS must take into account the forecast, the production plan, and other important considerations such as backlog, availability of material, availability of capacity, and management policies and goals.” (APICS)

c. MPS Objectives

  • MPS  Objective is to Balance the Demand (Priorities) set by the marketplace with the availability of materials, labor, and equipment (Capacity) of manufacturing.

  • The Objective in developing an MPS are:

    • to Maintain the desired level of Customer Service by

      • maintaining finished-goods Inventory Levels or

      • by Scheduling to meet customer delivery requirements,

    • to make the best use of material, labor, and equipment, and

    • to maintain inventory investment at the required levels.

  • Constraints  the plan must be within the capacity of manufacturing, and be within the guidelines of the production plan.

d. Purpose of MPS

  •  Development of Master Production Schedule (MPS)

  • Projects inventory/backlog levels

  • Drives detailed scheduling & planning

  •  Order promising

  • Assists in assigning job priorities on facility floor

e. Inputs for MPS

The Information Needed to develop an MPS is provided by:

  • The Production Plan PP,

  • Forecasts for individual end items,

  • Actual Orders received from customers and for stock replenishment,

  • Inventory Levels for individual end items, and

  • Capacity Restraints


  • Inventory Level and Targets (for MTS)

  • Backlog Levels and Targets (for ATO)

  • Time Fence policies

  • Interplant and intra-plant orders

  • Service parts orders and forecasts

  • Distribution Requirements

  • Planning Bills Of Materials BOM

  • Actual production and supply levels

f. Outputs

  • Master Production Schedule MPS

  • Project Inventory levels PAB (for MTS)

  • Projected Backlog levels (for ATO)

  •  Future availability of products ATP

  •  Information for promising future customer orders

Relationship to Production Plan

  • See examples on pages 46 through 49.

  • The three steps in preparing an MPS are to develop a preliminary MPS, to check the preliminary MPS against available capacity, and to resolve differences between the preliminary MPS and capacity availability (rough-cut capacity planning). (see example on page 50)

  • Rough-cut capacity planning checks whether critical resources (bottleneck operations, labor, and critical materials) are available to support the preliminary master production schedules. The process is similar to resource requirements planning used in the production planning process, except we now work with a product and not a family or products. The resource bill is for a single product (figure 3.2).

  • If available capacity is greater than the required capacity, the MPS is workable. If not, methods of increasing capacity have to be investigated (overtime, additional workers, routing through alternate work centers, or subcontracting). If not, revise the MPS.

  • MPS is judged by three criteria: resource use, customer service, and cost. Does it make the best use of resources? Will due dates be met and will delivery performance be acceptable? Is the plan economical, or will excess costs be incurred for overtime, subcontracting, expediting, or transportation?

  • The MPS should represent as efficiently as possible what manufacturing will make. If too many items are included, it will lead to difficulties in forecasting and managing the MPS. In each of the manufacturing environments --- make to stock, make to order, and assemble to order --- master scheduling should take place where the smallest number of product options exists (see figure 3.3).

  • The last step, assembly to customer order, is generally planned using a final assembly schedule. It is used when there are many options and difficult to forecast which combination the customers will want.

  • The planning horizon is the time span which covers a period at least equal to the time required to accomplish the plan (see figure 3.5). The planning horizon is usually longer because the longer the horizon, the greater the visibility and the better management’s ability to avoid future problems or to take advantage of special circumstances. As a minimum, the planning horizon for a final assembly schedule must include time to assemble a customer’s order. It does not need to include the time necessary to manufacture the components. That time will be included in the planning horizon of the MPS.

Production Planning, Master Scheduling, and Sales

  •  The production plan reconciles total forecast demand with available resources.

  • The MPS is built from forecasts and actual demands for individual end items. It reconciles demand with the production plan and with available resources to produce a plan that manufacturing can fulfill. The MPS is a plan for what production can and will do.

  • In a make-to-stock environment, customer orders are satisfied from inventory. However, in make-to-order or assemble-to-order environments, demand is satisfied from productive capacity. Sales and distribution need to know what is available to satisfy customer demand. As orders are received, they “consume” the available inventory or capacity. Any part of the plan that is not consumed by actual customer orders is available to promise to customers.

  • Available to promise (ATP) is that portion of a firm’s inventory and planned production that is not already committed and is available to the customer (see examples on 57, 58 & 59). The ATP is calculated by adding scheduled receipts to the beginning inventory and subtracting actual orders scheduled before the next scheduled receipt.

  • A scheduled receipt is an order that has been issued either to manufacturing or to a supplier. If customer orders are greater than the scheduled receipts, then the previous ATP is reduced by the amount needed.

  • Projected available balance (PAB) is calculated based on the larger of actual customer orders and the forecast. The PAB is calculated in one of two ways, depending on whether the period is before or after the demand time fence. For periods before the demand time fence:

    PAB = prior period PAB or on-hand balance + MPS – customer orders

    For periods after the demand time fence, forecast will influence the PAB so it is calculated using the greater of the forecast or customer orders.

    PAB = prior period PAB + MPS – greater of customer orders or forecast

    The demand time fence is the number of periods, beginning with period 1, in which changes are not excepted due to excessive cost caused by schedule disruption.

  • The planning horizon must be at least as long as the cumulative lead-time for the product structure. The cost of making a change increases and the company’s flexibility decreases as production gets closer to the delivery time. Far off changes can be made with minimal cost or disruption to manufacturing, but the nearer to delivery date, the more disruptive and costly changes will be.

  • Changes to the MPS will occur due to customer order cancellation or change, changing capacity, supplier problems, and excessive process scrap.

  • Changes to production schedules can result in cost increases due to rerouting, rescheduling, extra setups, expediting, and buildup of WIP inventory; decreased customer service; and loss of credibility for the MPS and the planning process. Changes to the MPS must be managed and decisions made with full knowledge of the costs involved.

  • Frozen zone – capacity and materials are committed to specific orders, changes result in excessive costs, and so senior management approval is required to make changes. The extent of the frozen zone is defined by the demand time fence.

  • Slushy zone – capacity and materials are committed to less extent. Sales and manufacturing negotiate changes. The extent of the slushy zone is defined by the planning time fence.

  • Liquid zone – Any change can be made to the MPS as long as it is within the limits set by the production plan.


  • Material requirements planning (MRP) establishes a schedule (priority plan) showing the components required at each level of the assembly and, based on lead times, calculates the time when these components will be needed.

  • The two types of demand are independent and dependent. Independent demand is not related to the demand for any other product. Master production schedule items are independent demand items. Since independent demand is not related to the demand for any other assembly or product, it must be forecast. Dependent demand is directly related to the demand for higher level assemblies or products and can be calculated. MRP is designed to do this calculation.

  • An item can have both dependent and independent demand. A service or replacement part may have both.

  • Dependency can be both horizontal and vertical as illustrated in figure 4.1, Product Tree. Planners are concerned with horizontal dependency when a part is delayed or there is a shortage and other parts will have to be rescheduled.

  • Material requirements planning has two major objectives: determine requirements and keep priorities current. The material requirements plan’s objective is to determine components are needed to meet the master production schedule and, based on lead-time, to calculate the periods when the components must be available. It must determine what to order, how much to order, when to order, and when to schedule delivery. The demand for, and supply of, components change daily. It must be able to add and delete, expedite, delay, and change orders

  • The master production schedule drives the material requirements plan. The MRP is a priority plan for the components needed to make the products in the MPS. The plan is valid only if capacity is available when needed to make the components, and the plan must be checked against available capacity. Material requirements planning drives, or is input to, production activity control (PAC) and purchasing. MRP plans the release and receipt dates for orders. PAC and purchasing must plan and control the performance of the orders to meet the due dates.

  • The three inputs to the MRP system are the master production schedule, the inventory records and the bills of material. There are two kinds of inventory records needed. The first is called planning factors and includes information such as order quantities, lead times, safety stock, and scrap which do not change frequently. The second kind of information necessary is on the status of each item: how much is available, how much is allocated, and how much is available for future demand. These are maintained in an inventory record file or item master file.

Bills of Material

  • The bill of material is a listing of all the subassemblies, intermediates, parts and raw materials that go into making the parent assembly showing the quantities of each required to make an assembly. It does not show the steps or process used to make the parent or the components (routing). The bill of material shows all the parts required to make one of the items. Each part or item has only one part number and the part number is unique to that part. A part is defined by its form, fit or function.

  • Product Tree – see figure 4.4

  • Single and Multilevel bills – see figures 4.4 & 4.5. One convention used with multilevel bills of material is that the last items on the tree are all purchased items. Each level in the bill of material is assigned a number starting with zero at the top and working down.

  • An assembly is considered a parent, and the items that comprise it are called its components.

  • A multiple bill is used when companies usually make more than one product, and the same components are often used in several products.

  • A single-level bill of material contains only the parent and its immediate components. The computer stores information describing the product structure as a single-level bill. A series of single-level bills is needed to completely define a product. These can be chained together to form a multilevel, or indented, bill. There are several advantages to using single-level bills including the following: duplication of records is avoided, the number of records and, in computer systems, the file size is reduced by avoiding duplication or records, and maintaining bills of material is simplified.

  • In an indented bill of material, the components of the parent table are listed flush left and their components are indented (see figure 4.8).

  • Summarized parts list is a BOM listing all the parts needed to make one complete assembly (see figure 4.3).

  • Planning bills are an artificial grouping of components for planning purposes. They are used to simplify forecasting, master production scheduling, and material requirements planning. They do not represent buildable products but an average product (see figure 4.9).

  • A listing of all the parents in which a component is used is called a where-used report. Where-used reports give the parents for a component whereas the bill gives the components for a parent. A pegging report is similar to a where-used report. The pegging report shows only those parents for whom there is an existing requirement.

  • The bill of material is one of the most widely used documents in a manufacturing company. Some of those uses are: product definition, engineering change control, service parts, planning, order entry, manufacturing and costing. Maintaining bills of material and their accuracy is extremely important.

Material Requirements Planning Process

  • Lead-time is the span of time needed to perform a process. In manufacturing it includes time for order preparation, queuing, processing, moving, receiving, and inspecting.

  • Exploding is the process of multiplying the requirements by the usage quantity and recording the appropriate requirements throughout the product tree.

  • Offsetting is the process of placing the exploded requirements in their proper periods based on lead-time.

  • Planned order is a suggested order quantity, release date, and due date created by the planning system’s logic when it encounters net requirements in processing MRP.

  • Planned order receipt is the quantity planned to be received at a future date as a result of a planned order release. Planned order receipts differ from scheduled receipts in that they have not been released.

  • Planned order release is derived from planned order receipts by taking the planned receipt quantity and offsetting by the appropriate lead-time.

  • Net requirements = gross requirements – available inventory

  • The planned order release of the parent becomes the gross requirement of the component.

  • Planned order releases are just planned; they have not been released. It is the responsibility of the planner to release planned orders. Releasing an order means that authorization is given to purchasing to buy the necessary material or to manufacturing to make the component. When the authorization to purchase or manufacture is released, the planned order receipt is canceled, and a scheduled receipt is created in its place. Scheduled receipts are orders placed on manufacturing or on a vendor and represent a commitment to make or buy. When a manufacturing order is released the computer will allocate the required quantities of a parent’s components to that order. This does not mean the components are withdrawn from inventory but that the projected available quantity is reduced. The allocated quantity of components is still in inventory but they are not available for other orders.

  • Scheduled receipts on the MRP record are open orders on factory or a vendor and are the responsibility of purchasing and or production activity control. When the goods are received into inventory and available for use, the order is closed out, and the scheduled receipt disappears to become part of the on-hand inventory.

  • The calculation for net requirements can now be modified to include scheduled receipts. Net requirements = gross requirements – scheduled receipts – available inventory

  • Review and understand figure 4.15 and the six points listed on pages 90 & 91.

  • The MRP priority plan must be checked against available capacity. At the MRP planning level, the process is called capacity requirements planning (CRP). If the capacity is available, the plan can proceed. If not, either capacity has to be made available or the priority plans changed.

  • A component may reside on more than one level in a bill of material. If this is the case, it is necessary to make sure that all gross requirements for that component have been recorded before netting takes place. The process of collecting the gross requirements and netting can be simplified by using low-level codes. The low-level code is the lowest level on which a part resides in all bills of material. Low-level codes are determined by starting at the lowest level of a bill of material and, working up, recording the level against the part. Review example 4.17 and the procedure for calculating the net requirements on pages 92 & 93. The low-level codes are used to determine when a part is eligible for netting and exploding. In this way, each part is netted and exploded only once. The same procedure used for a single bill of material can be used when multiple products are being manufactured. All bills must be netted and exploded level by level as was done for a single bill.

  • Scrap is usually stated as a scrap allowance

In-depth MRP Explanation ( See also

MRP Exploding, netting and offsetting

The following information comes from Basics of Supply Chain Management by Larry Frendenall of Clemson University. It helps to begin with the BOM to understand the connection it has with MRP planning “ A bill of materials…… (BOM) highest item is the end item that is scheduled by the MPS. This end item is always placed at the top of the BOM in what is designated as level 0 . The BOM is basically the list of ingredients to manufacture the end item. It is read in descending order beginning with level 0. To make 1 A , we need 2 B’s and 1 C ( notice the numbers given in the brackets next to the letter inside the circle ) . As we read down the BOM we often use the terminology of parent – child. In the BOM an item which is composed of one or more components is referred to as the parent of those components. The components are , of course , referred to as the children. In this BOM both B and C are children are children of the A. B is itself a parent of D and E who are its children. To make 1 B , we need to have 1 D and 2 Es. Finally , to make each E we need to have 3 Fs. C, D and F do not have any children in this BOM , because they are purchased outside of the firm. That does not mean that they are simple parts. For example , C could be a master cylinder for a brake assembly that we purchase from someone else.”

MRP Logic

MRP planning starts with the end item as given in the MPS, and determines when that item must be started to be completed on time. That date is then used to as the order due date for the next level in the BOM. The logic works backwards until it reaches the end of the BOM. This is illustrated with a Gantt chart in Figure 2.

The Gantt chart shows that before one step in the process can begin, other steps need to be done completely. For example , before A can begin , both B and C have to be completed and waiting in the shop. The Gantt chart also shows that for A to be completed on time, F has to be in stock and ready now, because there is no time left in the schedule for delays.

The construction of the materials requirements plan is illustrated in Figure 3 for end item A. Note the 100 of item A are required in period 5 and there is none on hand right now and none is scheduled to be received , so the Projected On Hand in period 1 is 0. Since there is no Gross Requirements for A until period 5 , the Projected On Hand stays at 0 until then , when it becomes a negative 100 or (100). To have enough A in period 5 , we need to have a Planned Order Receipt for A in period 5 . Since item A has a 1 week lead time this means that we need to have a Planned Order Release in period 4. So, we schedule 100 to be released in period 4.

 As shown in Figure 4 , this MRP explosion continues down through the BOM until it releases and quantity needed for each item in the BOM are calculated. It is very important to note that the MRP explosion is hierarchical. This means that everything on level 1 is calculated before anything is calculated for level 2. etc. So , in Figure 4 the gross requirements for B and C are calculated before the requirements for lower level items such as D. Since 2 Bs are needed for each A , there is a gross requirement for 200 B in period 4. Following the logic described for A , this results in a gross requirement for 200 B in period 3. In a similar manner we calculate the gross requirement for C in period 4 , which is 100 , since we only need 1 C for each A. The gross requirement for D is based on the planned order release of its parent B. So , the gross requirement for D in period 3 is 200. Since there are 100 D in stock , the planned order release for D is just 100 in period 2 . In a similar manner we calculate the gross requirements for item E , based on the planned order releases of its parent B. E had a scheduled receipt of 100 in period 2 , which was subtracted from the gross requirements of 200 in period 3. This combined with the planned receipt of 100 in period 3 combined to give a planned on-hand of 0 items of E in inventory in period 3. As shown in the BOM , E is the parent of F, so  E’s planned order release becomes the gross requirements of F. F has a gross requirement of 300 in period 2 , since 3 F are required for every E. Since 200 F are on hand and 100 more will be received in period 2 , there is no net requirement for F in period 2. 

Using the Material Requirements Plan

  • The basic responsibilities of a planner are to:

    (1) Launch (release) orders to purchasing or manufacturing.

    (2) Reschedule due dates of open (existing) orders as required.

    (3) Reconcile errors and try to find their cause.

    (4) Solve critical material shortages by expediting or re-planning.

    (5) Coordinate with other planners, master production schedulers, production activity control, and purchasing to resolve problems.

  • The material planner works with three types of orders: planned, released, and firm.

  • Planned orders are automatically scheduled and controlled by the computer. As gross requirements, projected available inventory, and scheduled receipts change, the computer recalculates the timing and quantities of planned order releases. The MRP program recommends to the planner the release of an order when the order enters the action bucket but does not release the order.

  • Releasing, or launching, a planned order is the responsibility of the planner. When released, the order becomes an open order to the factory or to purchasing and appears on the MRP record as a scheduled receipt. It is then under the control of the planner, who may expedite, delay, or even cancel the order.

  • The computer-based MRP system automatically recalculates planned orders as the gross requirements change. At times, the planner may prefer to hold a planned order firm against changes in quantity and timer despite what the computer calculates. This might be necessary because of future availability or material or capacity or special demands on the system. The planner can tell the computer that the order is not to be changed unless the planner advises the computer to do so. The order is “firmed” or frozen against the logic of the computer. One method of reducing system nervousness is firm planned orders.

  • MRP does print action or exception messages suggesting that the planner should act and what kind of action might be appropriate. Transaction messages mean that the MRP software must be told of all actions taken that will influence the MRP records, such as receiving orders, releasing orders, etc.

  • Planners receive feedback from many sources and must evaluate this feedback and take corrective action if necessary.

  • Priority refers to maintaining the correct due dates by constantly evaluating the true due-date need for released orders and, if necessary, expediting or de-expediting.


  • Without the resources to achieve the priority plan, the plan will be unworkable. Capacity management is concerned with supplying the necessary resources.

Definition of Capacity

  • Capacity is the amount of work that can be done in a specified time period. It is the capability of a worker, machine, work center, plan, or organization to produce output per period of time. Capacity is a rate of doing work, not the quantity of work done.

  • Capacity available is the capacity of a system or resource to produce a quantity of output in a given time period. Capacity required is the capacity of a system or resource needed to produce a desired output in a given time period. Load is the amount of released and planned work assigned to a facility for a particular timer period. It is the sum of all the required capacities (see figure 5.1).

  • Capacity management is responsible for determining the capacity needed to achieve the priority plans as well as providing, monitoring, and controlling that capacity so the priority plan can be met. It is the function of establishing, measuring, monitoring, and adjusting limits or levels of capacity in order to execute all manufacturing schedules. Capacity planning is the process of determining the resources required to meet the priority plan and the methods needed to make that capacity available. Capacity control is the process of monitoring production output, comparing it with capacity plans, and taking corrective action when needed.

Capacity Planning

  • Capacity planning involves calculating the capacity needed to achieve the priority plan and finding ways of making that capacity available. Priority plans are usually stated in some standard unit of output. If there is no common unit, capacity must be stated as the hours available. The priority plan must then be translated into hours of work required and compared to the hours available. The process of capacity planning is as follows:

    1. Determine the capacity available at each work center in each time period.

    2. Determine the load at each work center in each time period.

    • Translate the priority plan into hours of work required at each work center in each time period.

    • Sum up the capacities required for each item on each work center to determine the load on each work center in each time period.

  1. Resolve differences between available capacity and required capacity. If possible, available capacity should be adjusted to match the load. Otherwise, the priority plans must be changed to match the available capacity.

  • Resource planning involves long-range capacity resource requirements and is directly linked to production planning. Resource planning involves changes in manpower, capital equipment, product design, or other facilities that take a long time to acquire and eliminate.

  • Rough-cut capacity planning takes capacity planning to the next level of detail. The master production schedule is the primary information source. The purpose of rough-cut capacity planning is to check the feasibility of the MPS, provide warnings of any bottlenecks, ensure utilization of work centers, and advise vendors of capacity requirements.

  • Figure 5.2 shows the relationship between the different levels of priority planning and capacity planning.

Capacity Requirements Planning (CRP)

  • It is the process of determining in detail the amount of labor and machine resources needed to achieve the required production. Planned orders from the MRP and open shop orders (scheduled receipts) are converted into demand for time in each work center in each time period. This process takes into consideration the lead times for operations and offsets the operations at work centers accordingly.

  • The inputs needed for a CRP are open shop orders, planned order releases, routings, time standards, lead times, and work center capacities contained in the computer files.

  • A routing is the path that work follows from work center to work center as it is completed. A routing file should exist for every component manufactured and contains the operations to be performed, the sequence of operations, the work centers to be used, the possible alternate work centers, the tooling needed at each operation, and standard times (setup and run times) per piece.

  • A work center file contains information on the capacity and move, wait, and queue times associated with the center. The move time is the time normally taken to move material from one workstation to another. The wait time is the time a job is at a work center after completion and before being moved. The queue time is the time a job waits at a work center before being handled. Lead-time is the sum of queue, setup, run, wait, and move times.

  • Another piece of information needed is the number of working days available. Understand shop calendar in figure 5.4.

Capacity Required (Load)

  • Determining the capacity required is a two-step process. First, determine the time needed for each order at each work center; then, sum up the capacity required for individual orders to obtain the load. The time needed for each order is the sum of the setup time and the run time. The run time is equal to the run time per piece multiplied by the number of pieces in the order (see examples page 127 & 128).

  • The load on a work center is the sum of the required times for all the planned and actual orders to be run on the work center in a specified period. The steps in calculating load are as follows (see example page 129):

    1. Determine the standard hours of operation time for each planned and released order for each work center by time period.

    2. Add all the standard hours together for each work center in each period. The result is the total required capacity (load) on that work center for each timer period of the plan.

  • The work center load report shows future capacity requirements based on released and planned orders for each time period of the plan. The term overcapacity means that the work center is overloaded and the term under capacity means the work center is under loaded (see figures 5.5 & 5.6).

Scheduling Orders

  • Scheduling is defined as a timetable for planned occurrences. Back scheduling is the process of starting with the due date and, using the lead times, working back to find the start date for each operation. The process is as follows (see example page 131 & figures 5.8 & 5.9):

    1. For each work order, calculate the capacity required (time) at each work center.\

    2. Starting with the due date, schedule back to get the completion and start dates for each operation.

Making the Plan

  • Compare the load to the available capacity to see if there are imbalances and if so, to find possible solutions. There are two ways of balancing capacity available and load: alter the load, or change the capacity available. Altering the load means shifting orders ahead or back so the load is leveled. In the short run, capacity can be adjusted. Some ways that this may be done are schedule overtime or under time, adjust the level of the workforce by hiring or laying off workers, shift workforce from under loaded to overloaded work centers, use alternate routings to shift some load to another work center, and subcontract work when more capacity is needed or bring in previously subcontracted work to increase required capacity.


  • Production activity control (PAC) is responsible for executing the master production schedule and the material requirements plan. At the same time, it must make good use of labor and machines, minimize work-in-process inventory, and maintain customer service.

  • The material requirements plan authorizes PAC: to release work orders to the shop for manufacturing, to take control of work orders and make sure they are completed on time, to be responsible for the immediate detailed planning of the flow of orders through manufacturing, and to manage day-to-day activity and provide the necessary support. The activities of the PAC system can be classified into planning, implementation, and control functions.

  • The flow of work through each work center must be planned. PAC must ensure that the required resources are available to manufacture the components as needed and develop a load profile for each work center to ensure the timely completion of orders by the scheduled date.

  • Next we implement the plan. PAC will gather the information needed by the shop floor to make the product and release orders to the shop floor as authorized by the material requirements plan (dispatching).

  • Monitor the process and determine the necessary corrective action. PAC will rank the shop orders in desired priority sequence by work center and establish a dispatch list, track actual performance to plan and take corrective action by replanning, rescheduling, or adjusting capacity to meet delivery.

  • Understand the characteristics and differences between flow, intermittent and project manufacturing (see pages 143 and 144).

Data Requirements

  • To plan the processing of materials through manufacturing, PAC must have the following information: What and how much to produce. When parts are needed so the completion date can be met. What operations are required to make the product and how long the operations will take. What the available capacities of the various work centers are.

  • PAC must have data, usually stored in databases, to drive the information systems. These database files are of two types, planning and control.

  • The four planning files needed are the item master file, product structure file (bill of material file), routing file and work center file. The item master file contains all of the pertinent data related to each part number. The product structure or BOM file contains single-level BOM’s listing components and quantities needed to assemble a parent. It forms a basis for a “pick list”. A routing exists for each part number and consists of a series of operations and instructions required to make the item. The work center master file collects relevant data on a work center.

  • The two control files are the shop order master file and the shop order detail file. Each active manufacturing order has a record in the shop order master file to monitor production performance for each shop order. The shop order detail file contains the performance record for each operation.

Order Preparation

  • Once authorization to process an order has been received, PAC is responsible for planning and preparing its release to the shop floor. The order should be reviewed to be sure that the necessary resources are available. Material and capacity availability must be checked. Checking capacity availability is a two-step process. First, the order must be scheduled to see when the capacity is needed, and second, the load on work centers must be checked in that period


  • The objective of scheduling is to meet delivery dates and to make the best use of manufacturing resources. It involves establishing start and finish dates for each operation required to complete an item. To develop a reliable schedule, the planner must have information on routing, required and available capacity, competing jobs, and manufacturing lead times at each work center involved.

  • Manufacturing lead-time is the time normally required to produce an item in a typical lot quantity and consists of five elements (see pages 148 & 149 and figure 6.3). The largest of the five elements is queue time. PAC is responsible for managing the queue by regulating the flow of work into and out of work centers. PAC must manage both the input of orders to the production process and the available capacity to control queue and work-in-process.

  • Cycle time (throughput time) is the length of time from when material enters a production facility or operation until it exits.

  • Forward scheduling assumes that material procurement and operation scheduling for a component start when the order is received, whatever the due date, and that operations are scheduled forward from this date. The result is completion before the due date, which usually results in a buildup of inventory (see figures 6.4 & 6.6).

  • Backward scheduling (figures 6.4 & 6.6) schedules the last operation on the routing first and is scheduled for completion at the due date. Previous operations are scheduled back from the last operation.

  • Infinite loading assumes infinite capacity will be available (figures 6.4 & 6.5).

  • Finite loading assumes there is a defined limit to available capacity at any workstation (figures 6.6 & 6.7).

  • In operation overlapping, the next operation is allowed to begin before the entire lot is completed on the previous operation. This reduces the total manufacturing lead times because the second operation starts before the first operation finishes all the parts in the order. Increased costs are possible from move costs and the impact of queue and lead-time for other orders.

  • Operation splitting is the process of splitting orders into two or more lots and run simultaneously on two or more machines.

Load Leveling

  • The load profile for a work center is constructed by calculating the standard hours of operation for each order in each time period and adding them together by time period (figure 6.10).

Scheduling Bottlenecks

  • Bottlenecks are overloaded workstations where the required capacity is greater than the available capacity. It is a facility, function, department, or resource whose capacity is equal to or less than the demand placed upon it.

  • Throughput is the total volume of production passing through a facility. Bottlenecks control the throughput of all products.

  • Since bottlenecks control throughput, please review the principles on page 156 and how to manage bottlenecks on page 157.

Theory of Constraints and Drum-Buffer-Rope

  • The fundamental concept behind Theory of Constraints, developed by Eliyahu M. Goldratt, is that every operation producing a product or service is a series of linked processes. Each process has a specific capacity to produce the given defined output for the operation, and that in virtually every case, there is one process that limits or constrains (bottleneck) the throughput from the entire operation. Focus on balancing the flow through the shop. The time lost at a no constraint is a mirage, and transfer batches do not have to be the same size as process batches.

  • Once constraint has been identified, there is a five-step process that is recommended to help improve the performance of the operation. The five steps are: (1) identify the constraint, (2) exploit the constraint, (3) subordinate everything to the constraint, (4) elevate the constraint, (5) once the constraint is a constraint no longer, find the new one and repeat the steps.

  • The scheduling system for Theory of Constraints is described as Drum-Buffer-Rope. The drum of the system refers to the “drumbeat” or pace of production. It represents the master schedule for the operation, which is focused around the pace of throughput as defined by the constraint. Since it is so important that the constraint never be “starved” for needed inventory, a “time” buffer is often established in front of the constraint. It is called a time buffer because it represents the amount of time that the inventory in the buffer protects the constraint from disruption. The analogy is that the rope “pulls” production to the constraint for necessary processing. The primary focus of the scheduling system is on effective management of the organization’s constraint to throughput and sales.

  • Orders that do not have all of the necessary resources, tooling, material, and capacity, should not be released because they only cause excess work-in-process inventory and may interrupt work on orders that can be completed (see figure 6.11).

  • A shop packet accompanies a shop order release to manufacturing. This packet may include the shop order, engineering drawings, bills of material, routing sheets, materials issue tickets or pick list, tool requisitions, job tickets for each operation to be performed, and move tickets that authorize movement of work between operations.

  • Once work orders have been issued to manufacturing, their progress has to be controlled. To control progress, performance has to be measured and compared to what is planned. If what is actually happening (what is measured) varies significantly from what was planned, either the plans have to be changed or corrective action must be taken to bring performance back to plan.

  • PAC must balance the flow of work to and from different work centers. This is to ensure queue, work-in-process, and lead times are controlled. The input/output control system is designed to balance the input rate in hours with the output rate. The input rate is controlled by the release of orders to the shop floor. The output rate is controlled by increasing or decreasing the capacity of a work center (see figure 6.12).

  • To control input and output, a plan must be devised along with a method for comparing what actually occurs against what was planned. This information is shown on an input/output report (see figure 6.13). Cumulative variance is the difference between the total planned for a given period and the actual total for that period (Cumulative variance = previous cumulative variance + actual – planned). Planned and actual inputs monitor the flow of work coming to the work center. Planned and actual outputs monitor the performance of the work center. Planned and actual backlogs monitor the queue and lead-time performance.

  • Operation sequencing is a technique for short-term planning of actual jobs to be run in each work center based on capacity and priorities. Control of priorities is exercised through dispatching. Dispatching is the function of selecting and sequencing available jobs to be run at individual work centers. The dispatch list is the instrument of priority control. It’s a listing by operation of all the jobs available to be run at a work center with the job listed in priority sequence.

  • The ranking of jobs for the dispatch list is created through the application of priority rules. Some commonly used rules are: (1) first come, first served (FCFS), (2) earliest job due date (EDD), (3) earliest operation due date (ODD), (4) shortest process time (SPT), and (5) critical ratio (CR = (due date – present date) / lead time remaining) (see definitions on page 166 and examples on pages 166 & 167).


  • Purchasing is the process of buying. Obtaining the right material, in the right quantities, with the right delivery (time and place), from the right source, and at the right price are all purchasing functions.

  • Manufacturing planning and control (MPC) must decide when to order which raw materials so that marketplace demands can be satisfied. Purchasing is then responsible for placing the orders and for ensuring that the goods arrive on time. Purchasing has the majority responsibility for locating suitable sources of supply and for negotiating prices.

  • On the average, manufacturing firms spend about 50% of each sales dollar in the purchase of raw materials, components, and supplies. This gives the purchasing function tremendous potential to increase profits through the negotiation of better pricing or services from suppliers (see example page 177).

  • The objectives of purchasing can be divided into four categories: (1) Obtaining goods and services of the required quantity and quality. (2) Obtaining goods and services at the lowest total cost, not price. (3) Ensuring the best possible service and prompt delivery by the supplier. (4) Developing and maintaining good supplier relations and developing potential suppliers.

  • To satisfy these objectives, certain basic functions must be performed: (1) Determining purchasing specifications; right quality, quantity, and delivery (time and place). (2) Selecting supplier (right source). (3) Negotiating terms and conditions of purchase (right total cost). (4) Issuing and administration of purchase orders.

  • The purchasing cycle consists of the following steps: (1) Receiving and analyzing purchase requisitions. (2) Finding potential suppliers and selecting the right supplier. (3) Determining the right price. (4) Issuing the purchase orders. (5) Following-up to assure delivery dates are met. (6) Receiving and accepting goods. (7) Approving supplier’s invoice for payment. (See explanations of each step on pages 178, 179 & 180.)

Establishing Specifications

  • Three broad categories must be considered when specifications are being developed: (1) Quantity requirements – Market demand first determines the quantities needed, but the challenge is to satisfy the functional needs at a better price. (2) Price requirements – The price specification represents the economic value that the buyer puts on the item (i.e. the amount the individual is willing to pay). (3) Functional requirements – Are concerned with the end application of the item and what the item is expected to do. Functional specifications are intimately tied to the quality of a product or service.

  • An item has the required quality if it satisfies the needs of the user. There are four phases to providing user satisfaction: (1) Quality and product planning. (2) Quality and product design. (3) Quality and manufacturing. (4) Quality and use.

  • Functional specifications ultimately are the ones that drive the others. If the product does not perform adequately for the price, it will not sell.

Functional Specification Description

  •  Functional specification can be described in the following ways or by a combination of them: (1) By brand. (2) By specification of physical and chemical characteristics, material and method of manufacture, and performance. (3) By engineering drawings. (4) Miscellaneous. (See pages 182, 183 & 184 for explanation.)

  • Two major sources of specifications: (1) Buyer specifications – are usually expensive and time consuming to develop. Use only when there is not suitable specification available or unless the volume of work makes it economical to do so. (2) Standard specifications – have been developed by governmental and nongovernmental agencies.

Selecting Suppliers

  • A good supplier is one that has the technology to make the product to the required quality, has the capacity to make the quantities needed, and can run the business well enough to make a profit and still sell a product competitively.

  • Three types of sourcing: sole, multiple, and single. Sole sourcing implies that only one supplier is available. Multiple sourcing is the use of more than one supplier for an item. Single sourcing is a planned decision by the organization to select one supplier for an item when several sources are available. It is intended to produce a long-term partnership.

  • Factors in selecting suppliers: technical ability, manufacturing capability, reliability, after-sales service, supplier location, other soft considerations and price.

  • Some factors in evaluating potential suppliers are quantitative and other factors are qualitative.

Price Determination

  • Prices have an upper limit, determined by the market place, and what buyers are willing to pay is based on their perception of demand, supply, and their needs. The lower limit is set by the seller and is determined by the costs of manufacturing and selling the product and profit expectation.

  • Fixed costs are costs incurred no matter the volume of sales. Variable costs are those directly associated with the amount produced or sold. Break-even point is when the revenue equals total cost and profit is zero. When the volume is less than the break-even point, a loss in incurred; when the volume is greater, a profit is realized (see figure 7.2).

  • Through negotiation, the buyer and seller try to resolve conditions of purchase to the mutual benefit of both parties. One important factor in the approach to negotiation is the type of product: commodities, standard products, items of small value and made-to-order items.

Impact of Material Requirements Planning on Purchasing

  • Purchasing can be separated into two types of activities: procurement, and supplier scheduling and follow-up. Procurement includes the functions of establishing specifications, selecting suppliers, price determination, and negotiation. Supplier scheduling and follow-up is concerned with the release of orders to suppliers, working with suppliers to schedule delivery, and follow-up. The goals of supplier scheduling are the same as those of production and activity control: to execute the master production schedule and the material requirements plan, ensure good use of resources, minimize work-in-process inventory, and to maintain the desired level of customer service.

  • Planner/Buyer concept (see pages 191 & 192).

  • Usually a MRP system generates frequent orders for relatively small quantities. It is costly and inefficient to issue a new purchase order for every weekly requirement. The alternative is to develop a long-term contract with a supplier and to authorize releases against the contract. Often the supplier is given a copy of the MRP so they are aware of future demands. The buyer then issues a release against the schedule. Contract buying assures the suppliers a given amount of business and commits them to allocating that amount of their capacity to the customer.

  • Electronic data interchange (EDI) enables customers and suppliers to electronically exchange transaction information such as purchase orders, invoices, and MRP information.

  • Internet, intranet and extranet (page 193).


  • Forecasting is a prelude to planning, an estimate of what conditions will exist over some future period.

Demand Management

  • The prime purpose of an organization is to serve the customer. Marketing focuses on meeting customer needs, but operations, through materials management, must provide the resources. The coordination of plans by these two parties is demand management. Demand management is the function of recognizing and managing all demands for products, including forecasting, order processing, making delivery promises (available-to-promise), and interfacing between manufacturing planning and control and the marketplace.

Demand Forecasting

  • Forecasts are made for the strategic business plan, the production plan, and the master production schedule.

Characteristics of Demand

  • The difference between “demand” and “sales” is that sales implies what is actually sold whereas demand shows the need for the item. Sometimes demand cannot be satisfied, and sales will be less than demand.

  • The pattern shows that actual demand varies from period to period. The four reasons for this are trend, seasonality, random variation, and cycle (see page 198 & 199).

  • The shape of demand patterns for some products or services change over time, others do not. Those that retain the same general shape are called stable and those that do not are called dynamic. The more stable the demand, the easier it is to forecast.

Principles of Forecasting

  • Forecasts have four major characteristics or principles: (1) Forecasts are usually wrong. Errors are inevitable and must be expected. (2) Every forecast should include an estimate of error. (3) Forecasts are more accurate for families or groups. (4) Forecasts are more accurate for nearer time periods. Anything that can be done to reduce lead-time will improve forecast accuracy.

Forecasting Techniques

  • Forecasts have four major characteristics or principles: (1) Forecasts are usually wrong. Errors are inevitable and must be expected. (2) Every forecast should include an estimate of error. (3) Forecasts are more accurate for families or groups. (4) Forecasts are more accurate for nearer time periods. Anything that can be done to reduce lead-time will improve forecast accuracy.

Some Important Intrinsic Techniques

  • Usually methods that average out history are better because they dampen out some effects of random variation. It is best to forecast the average demand rather than second-guess what the effect of random fluctuation will be. A forecast of average demand should be made, and the estimate of error applied to it.

  • See moving average pages 204 & 205. The point is that a moving average always lags a trend, and the more periods included in the average, the greater the lag will be. On the other hand, if there is no trend but actual demand fluctuates considerably due to random variation, a moving average based on a few periods reacts to the fluctuation rather than forecasts the average. Moving averages are best used for forecasting products with stable demand when there is little trend or seasonality.

  • A common forecasting technique, called exponential smoothing, gives the same results as a moving average but without the need to retain as much data and with easier calculations. The forecast can be based on the prior old calculated forecast and the new data (see pages 206 & 207).

  • The weight given to the latest actual demand is called a smoothing constant and is represented by the Greek letter alpha ( ). It is always expressed as a decimal from 0 to 1.0. The formula is: New forecast = ( )(latest demand) + (1- )(previous forecast).


  • Many products have a seasonal or periodic demand pattern. The seasonal index is an estimate of how much the demand during the season will be above or below the average demand for the product.

Seasonal Index = Period Average Demand / Average Demand for all Periods

  • The average demand for all periods is a value that averages out seasonality. This is called the deseasonalized demand. Seasonal Index = Period Average Demand / Deseasonalized Demand

Tracking the Forecast

  • Tracking the forecast is the process of comparing actual demand with the forecast. Forecast error is the difference between actual and forecast demand. Error can occur in two ways: bias and random variation. Bias exists when the cumulative actual demand varies from the cumulative forecast. Bias is a systematic error in which the actual demand is consistently above or below the forecast demand.

  • Forecast error must be measured before it can be used to revise the forecast or to help in planning. One way to measure the variability is to calculate the total error ignoring the plus and minus signs and take the average. This is called mean absolute deviation (MAD): mean implies an average, absolute means without reference to plus and minus, and deviation refers to the error (read normal distribution and uses of MAD on pages 216 & 217):

    MAD = Sum of Absolute Deviations / Number of Observations


  • All businesses and institutions require inventories. As inventories are used, their value is converted into cash, which improves cash flow and return on investment. There is a cost for carrying inventories, which increases operating costs and decreases profits.

  • Aggregate inventory management involves: flow and kinds of inventory needed, supply and demand patterns, functions that inventories perform, objectives of inventory management and costs associated with inventories. Inventory is not only managed at the aggregate level but also at the item level. Decision rules about inventory include: (1) which individual inventory items are most important, (2) how individual items are to be controlled, (3) how much to order at one time, and (4) when to place an order.

Inventory and the Flow of Material

  • One often-used inventory classification is related to the flow of materials into, through, and out of a manufacturing organization. Raw materials are purchased items received which have not entered the production process. Work-in-process (WIP) is raw materials that have entered the manufacturing process and are being worked on or waiting to be worked on. Finished goods are the finished products of the production process that are ready to be sold as completed items. Distribution inventories are finished goods located in the distribution system. Maintenance, repair, and operational supplies (MRO) are items used in production that do not become part of the product.

Functions of Inventories

  • In batch manufacturing, the basic purpose of inventories is to decouple supply and demand. Inventory serves as a buffer between: supply and demand, customer demand and finished goods, finished goods and component availability, requirements for an operation and the output from the preceding operation, and parts and materials to begin production and the suppliers of materials.

  • Anticipation inventories are built up in anticipation of future demand. Safety stock is held to cover random unpredictable fluctuations in supply and demand or lead-time. Its purpose is to prevent disruptions in manufacturing or deliveries to customers. Safety stock is also called buffer stock or reserve stock. Items purchased or manufactured in quantities greater than needed immediately create lot-size inventories, sometimes called cycle stock. It is the portion of inventory that depletes gradually as customers’ orders come in and is replenished cyclically when suppliers’ orders are received. Transportation inventories exist because of the time needed to move goods from one location to another such as from plant to a distribution center or a customer. They are sometimes called pipeline or movement inventories. Hedge inventory is purchased to minimize the market fluctuations of raw materials traded on the worldwide market. MRO items are used to support general operations and maintenance, but which do not become directly part of a product.

Objectives of Inventory Management

  • A firm wishing to maximize profit will have at least the following objectives: maximum customer service, low-cost plant operation, and minimum inventory investment. Inventories help to maximize customer service by protecting against uncertainty. If inventory is carried, there has to be a benefit that exceeds the costs of carrying that inventory. Someone once said that the only good reason for carrying inventory beyond current needs is if it costs less to carry it than not.

  • Inventories help make a manufacturing operation more productive in four ways: (1) Inventories allow operations with different rates of production of operate separately and more economically. (2) By leveling production, manufacturing can continually produce an amount equal to the average demand. (3) Inventories allow manufacturing to run longer production runs. (4) Inventories allow manufacturing to purchase in larger quantities, which results in lower ordering costs per unit and quantity discounts (see pages 233 thru 235).

  • Costs used for inventory management decisions: item cost (landed price), carrying costs, ordering costs, stockout costs, and capacity-associated costs (pages 236 – 238).

Financial Statements and Inventory

  • An asset is something that has value and is expected to benefit the future operation of the business. Liabilities are obligations or amounts owed by a company. Owner’s equity is the difference between assets and liabilities. The accounting equation: Assets = liabilities + Owner’s equity

  • The balance sheet is usually shown with the assets on the left side and liabilities and owner’s equity on the right side. Capital is the amount of money the owners have invested in the company. Retained earnings are increased by the revenue a company makes and decreased by the expenses incurred.

  • Income (profit) – The primary purpose of a business is to increase the owner’s equity by making a profit.

Income = revenue – expenses

  • Revenue comes from the sale of goods or services and often is made as a promise to pay at a later date, called an account receivable.

  • Expenses are the costs incurred in the process of making revenue, usually categorized into cost of goods sold and general and administrative expenses. Cost of goods sold are the costs incurred to make the product. General and administrative expenses include all other costs in running a business.

  • Income Statement (see page 241 and the example)

  • When inventory is purchased as raw material, it is recorded as an asset. When it enters production, it is recorded as work-in-process inventory (WIP) and, as it is processed, its value increases by the amount of direct labor applied to it and the overhead attributed to its processing. The material is said to absorb overhead. When the goods are ready for sale, they do not become revenue until they are sold.

  • Businesses develop financial statements showing the cash flows into and out of the business. Any shortfall of cash must be provided for, perhaps by borrowing. This type of analysis is called cash flow analysis.

  • From a financial point of view, inventory is an asset and represents money that is tied up and cannot be used for other purposes. Inventory has a carrying cost – the costs of capital, storage, and risk. Two measures that quantify inventory investment and relate to sales are the inventory turns ratio and days of supply ( Examples on pages 243 & 244):

Inventory = annual cost of goods sold / average inventory in dollars

Days of supply = inventory on hand / average daily usage

  • Control of inventory is exercised by controlling individual items called stock-keeping units (SKU’s). ABC inventory classification system answers which items are important and how they are controlled. Classifying items according to their importance can be based on annual dollar usage. The ABC principle is based on Pareto’s law. A items – About 20% of the items account for about 80% of the dollar usage. B items – About 20% of the items account for about 15% of the dollar usage. The balance (50%) are 5% of the dollar usage.

  • See steps in making an ABC analysis on page245 and the example on pages 246 and 247.

  • Using the ABC approach, there are two general rules to follow: (1) Have plenty of low-value items. (2) Use the money and control effort saved to reduce the inventory of high-value items.

  1. items: high priority and tight control

  2. items: medium priority and normal controls

  3. items: lowest priority and simplest controls


  • Management must establish decision rules to answer: How much should be ordered at one time and when should an order be placed?

  • Control is exercised through individual items in a particular inventory called stock-keeping units (SKU’s).

  • A lot or batch is defined as a quantity produced together and sharing the same production costs and specifications.

  • The following are common decision rules for determining what lot size to order at one time: (1) The Lot-for-lot rule says to order exactly what is needed. The order quantity changes whenever requirements change. Since items are ordered only as needed, this system creates no unusual lot-size inventory. Because of this, it is the best method for planning “A” items and is also used in a just-in-time environment. (2) Fixed-order quantity rules specify the number of units to be ordered each time an order is placed for an individual item or SKU. The advantage to this rule is that it is easily understood. The disadvantage is that it does not minimize the costs involved. A variation on the fixed-order quantity system is the min-max system. In this system, an order is placed when the quantity available falls below the order point. The quantity ordered is the difference between the actual quantity available at the time of order and the maximum. (3) In the period-order quantity system, rather than ordering a fixed quantity, we order enough to satisfy future demand for a given period of time.

Economic-Order Quantity (EOQ)

  • The cost of ordering and the cost of carrying inventory both depend on the quantity ordered. The ordering decision rules will minimize the sum of these two costs. The best known system is the economic–order quantity (EOQ). The assumptions on which the EOQ is based are: (1) Demand is relatively constant and is known. (2) The item is produced or purchased in lots or batches and not continuously. (3) Order preparation costs and inventory-carrying costs are constant and known. (4) Replacement occurs all at once. There are many situations where the assumptions are not valid and the EOQ concept is of no use.

  • Average lot size inventory = order quantity / 2

  • Number of orders per year = annual demand / order quantity

  • The relevant costs are annual cost of placing orders and annual cost of carrying inventory. As the order quantity increases, the average inventory and annual cost of carrying inventory increase, but the number of orders per year and the ordering cost decrease. The trick is to find the particular order quantity in which the total cost of carrying inventory and the cost of ordering will be a minimum.

  • A = annual usage in units, S = ordering cost in dollars per order, i = annual carrying cost rate as a decimal of a percentage, c = unit cost in dollars, Q = order quantity in units

Annual ordering cost = number of orders x costs per order = (A / Q) x S

Annual carrying cost = average inventory x cost of carrying one unit for one year

= average inventory x unit cost x carrying cost = (Q / 2) x c x I

Total annual costs = annual ordering costs + annual carrying costs

= (A / Q) x S + (Q / 2) x c x I

Ideally, the total cost will be a minimum. For any situation in which the annual demand (A), the cost of ordering (S), and the cost of carrying inventory (i) are given, the total cost will depend upon the order quantity (Q). (See pages 257 through 261, example problems on pages 258 and 259 and figures 10.1, 2 & 3.

  • Important facts: (1) There is an order quantity in which the sum of the ordering costs and carrying costs is a minimum. (2) This EOQ occurs when the cost or ordering equals the cost of carrying. (3) The total cost varies little for a wide range of lot sizes about the EOQ. It is usually difficult to determine accurately the cost of carrying inventory and cost of ordering. Since the total cost is relatively flat around the EOQ, it is not critical to have exact values. Good approximations are sufficient. Parts are often ordered in convenient packages such as pallet loads, cases, or dozens, and it is adequate to pick the closest package quantity to the EOQ.

  • The previous section showed that the EOQ occurred at an order quantity in which the ordering costs equal the carrying costs. If these two costs are equal, the following formula can be derived:

EOQ = square root of (2AS / ic)

  • The EOQ will increase as the annual demand (A) and the cost of ordering (S) increase, and it will decrease as the cost of carrying inventory (i) and the unit cost (c) increase. The annual demand (A) is a condition of the marketplace and is beyond the control of manufacturing. The cost of carrying inventory (i) is determined by the product itself and the cost of money to the company and is beyond the control of manufacturing. The unit cost (c) is either the purchase cost of the SKU or the cost of manufacturing the item. Both costs should be as low as possible. As the unit cost decreases, the EOQ increases. The cost of ordering (S) is either the cost of placing a purchase order or the cost of placing a manufacturing order. Anything that can be done to reduce these costs reduces the EOQ. Just-in-time manufacturing emphasizes reduction of setup time.

Variations of the EOQ Model

  • The EOQ can be calculated in monetary units rather than physical units. The same EOQ formula given in the preceding can be used, but the annual usage changes from units to dollars. A = annual usage in dollars, S = ordering costs in dollars. EOQ = square root of (2A S / i) (See example on page 263.)

Quantity Discounts

  •  Suppliers often give a discount on orders over a certain size. This can be done because larger orders reduce the supplier’s costs; to get larger orders, they are willing to offer volume discounts. The buyer must decide whether to accept the discount, and in doing so, must consider the relevant costs: purchase, ordering and carrying costs. (See example on pages 263 & 264.)

Period-Order Quantity (POQ)

  • The economic-order quantity attempts to minimize the total cost of ordering and carrying inventory and is based on the assumption that demand is uniform. Often demand is not uniform, particularly in material requirements planning, and using the EOQ does not produce a minimum cost. The period-order quantity lot- size rule is based on the same theory as the economic-order quantity. It uses the EOQ formula to calculate an economic time between orders. This is calculated by dividing the EOQ by the demand rate. This produces a time interval for which orders are placed. Instead of ordering the same quantity (EOQ), orders are placed to satisfy requirements for the calculated time interval. The number of orders placed in a year is the same as for an economic-order quantity, but the amount ordered each time varies. Thus, the ordering cost is the same but, because the order quantities are determined by the actual demand, the carrying cost is reduced. The calculation is approximate. Precision is not important. (See examples on pages 267 & 268.)

Period-order quantity = EOQ / average weekly usage

  • Practical considerations when using the EOQ: Lumpy demand – The EOQ assume that demand and replenishment occurs all at once. When this is not true, the EOQ will not produce the best results. It is better to use the period-order quantity. Anticipation inventory – It is better to plan a buildup of inventory based on capacity and future demand. Minimum order – This minimum may be based on the total order rather than on individual items. Transportation inventory – A full load costs less per ton to ship than a part load. This is similar to the price break given by suppliers for larger quantities. Multiples – Sometimes, order size is constrained by package size.


  • If stock is not reordered soon enough, there will be a stockout and a potential loss in customer service. Stock ordered earlier than needed will create extra inventory. The problem then is how to balance the costs of carrying extra inventory against the costs of a stockout.

  • Three basic reorder systems used to determine when to order are (first two are for independent demand and the third is for dependent demand items):

  1. Order point system – When the quantity of an item on hand in inventory falls to a predetermined level, called an order point, an order is placed for a precalculated quantity based on economic-order-quantity concepts. Using this system, an order must be placed when there is enough stock on hand to satisfy demand from the time the order is placed until the new stock arrives. If it is necessary to provide some protection against stockout, safety stock can be added. The item is ordered when the quantity on hand falls to a level equal to the demand during the lead-time plus the safety stock. Note that the demand during the lead-time is important. OP = DDLT + SS (see pages 277 & 278)

  2. Periodic review system – Using the periodic review system, the quantity on hand of a particular item is determined at specified, fixed-time intervals, and an order is placed. The quantity on hand plus the quantity ordered must equal the sum of the demand during the lead-time plus the demand during the review period plus the safety stock (target level or maximum-level inventory).

T = D(R+L) + SS

  1. Material requirements planning – previously reviewed in chapter 4.

Determining Safety Stock

  • Safety stock is intended to protect against uncertainty in supply and demand. Uncertainty may occur in two ways: quantity uncertainty and timing uncertainty. Quantity uncertainty occurs when the amount of supply or demand varies. Timing uncertainty occurs when the time of receipt of supply or demand differs from that expected.

  • There are two ways to protect against uncertainty: safety stock or safety lead time ( see page 279)

  • The pattern of demand distribution about the average will differ for different products and markets. Some method is needed to describe the distribution – its shape, center, and spread. A smooth natural curve shows predictability.

  • The most common predictable pattern is a normal curve. The normal distribution has most of the values clustered near a central point with progressively fewer results occurring away from the center. It is symmetrical about this central point in that it spreads out evenly on both sides.

  • The average or mean value is at the high point of the curve. It is the central tendency of the distribution. (See formula on page 282 and example on page 282 & 283.)

  • The variation, or dispersion, of actual demands about the average refers to how closely the individual values cluster around the mean or average.

  • The standard deviation is a statistical value that measures how closely the individual values cluster about the average. (See standard deviation calculation on page 283 and example on page 284.)

  • The actual demand will be within +/- 1, 2 & 3 sigma of the forecast average approximately 68%, 98% & 99.88% of the time respectively. (See page 284.)

  • One property of the normal curve is that it is symmetrical about the average. This means that half the time the actual demand is less than the average and half the time it is greater. Safety stocks are needed to cover only those periods in which the demand during the lead-time is greater that the average.

  • Service level is a statement of the percentage of time there is no stockout.

Determining When the Order Point is Reached

  • In the two-bin system, a quantity of an item equal to the order point quantity is set aside and not touched until all the main stock is used up. When this stock needs to be used, the production control or purchasing department is notified and a replenishment order is placed. The two-bin system is a simple way of keeping control of C items. Because they are of low value, it is best to spend the minimum amount of time and money controlling them. When it is out of stock, a C item becomes an A item.

  • A perpetual inventory record is a continual account of inventory transactions as they occur. At any instant, it holds an up-to-date record of transactions. At a minimum, it contains the balance on hand, but it may also contain the quantity on order but not received, the quantity allocated but not issued, and the available balance.

  • See page 291 for the difference between permanent and variable information in the inventory record.

Distribution Inventory

  • Distribution inventory includes all the finished goods held anywhere in the distribution system. The objectives of distribution inventory management are to provide the required level of customer service, to minimize the costs of transportation and handling, and to be able to interact with the factory to minimize scheduling problems. The distribution system is the factory’s customer, and the way the distribution system interfaces with the factory has a significant effect on the efficiency of factory operations. Although the demand from customers may be relatively uniform, the demand on central supply is not, because it is dependent on when the distribution centers place replenishment orders. In turn, the demand on the factory depends on when central supply places orders.

  • Distribution inventory management systems can be classified into decentralized, centralized, and distribution requirements planning

  1. In a decentralized system, each distribution center first determines what it needs and when, and then places orders on central supply. The advantage of the decentralized system is that each center can operate on its own and thus reduce communication and coordination expense. The disadvantage is the lack of coordination and the effect this may have on inventories, customer service, and factory schedules.

  2. In a centralized system, all forecasting and order decisions are made centrally. Stock is pushed out into the system from central supply. Distribution centers have no say about what they receive. Different ordering systems can be used, but generally an attempt is made to replace the stock that has been sold and to provide for special situations such as seasonality or sales promotions. These systems attempt to balance the available inventory with the needs of each distribution center. The advantage of these systems is the coordination between factory, central supply, and distribution center needs. The disadvantage is the inability to react to local demand, thus lowering the level of service.

  3. Distribution requirements planning is a system that forecasts when the various demands will be made by the system on central supply. This gives central supply and the factory the opportunity to plan for the goods that will actually be needed and when. It is able both to respond to customer demand and coordinate planning and control. The system translates the logic of material requirements planning to the distribution system. Planned order releases from the various distribution centers become the input to the material plan of central supply. The planned order releases from central supply become the forecast of demand for the factory master production schedule. (See example on pages 297 & 298.

Warehousing Management

  • In a factory, “stores” in warehouses perform the same functions as warehouses and contain raw materials, work-in-process inventory, finished goods, supplies, and possibly repair parts. The objective of a warehouse is to minimize cost and maximize customer service.

  • The costs of operating a warehouse can be broken down into capital and operating costs. Capital costs are those of space and materials handling equipment. The major operating cost is labor, and the measure of labor productivity is the number of units that an operator can move in a day.

  • The efficient operation of the warehouse depends upon how well the processing activities are performed. These activities include receive goods, identify the goods, dispatch goods to storage, hold goods, pick goods, marshal the shipment, dispatch the shipment, and operate an information system (see page 309).

  • To maximize productivity and minimize cost, warehouse management must work to maximize space utilization and to use labor and equipment effectively. The effective use of warehouses is influenced by cube utilization and accessibility, stock location, order picking and assembly, and packaging (see pages 310 through 315).

Physical Control and Security

  • What is needed is a system that makes it difficult for people to make mistakes or be dishonest. Several elements that help are a good part numbering system, a simple, well-documented transaction system, item identification, quantify verification, transaction recording, and physically execute the transaction.

  • Inventory must be kept in a safe, secure place with limited general access.

Inventory Record Accuracy

  • The usefulness of inventory record is directly related to its accuracy. Based on the inventory record, a company determines net requirements for an item, releases orders based on material availability, and performs inventory analysis. If the records are not accurate, there will be shortages of material, disrupted schedules, late deliveries, lost sales, low productivity, and excess inventory.

  • Three pieces of information must be accurate: part description / number, quantity, and location. Accurate inventory records enable firms to operate an effective materials management system, maintain satisfactory customer service, operate effectively and efficiently, and analyze inventory. Inaccurate inventory records will result in lost sales, shortages and disrupted schedules, excess inventory, low productivity, poor delivery performance, and excessive expediting. Poor inventory record accuracy can be caused by many things, but they all result from poor record-keeping systems and poorly trained personnel.

  • Tolerance is the amount of permissible variation between an inventory record and a physical count. Tolerances are set on individual items based on value, critical nature of the item, availability, lead time, ability to stop production, safety problems, or the difficulty of getting precise measurements

  • There are two basic methods of checking the accuracy of inventory records: periodic counts of all items and cyclic counts of specified items. It is important to audit record accuracy, but it is more important to audit the system to find the causes of record inaccuracy and eliminate them. Cycle counting does this; periodic audits tend not to. The primary purpose of a periodic inventory is to satisfy the financial auditors that the inventory records represent the value of the inventory (see page321). Cycle counting is a system of counting inventory continually throughout the year. Physical inventory counts are scheduled so that each item is counted on a predetermined schedule.

  • The number of times an item is counted in a year is called its count frequency. For an item, the count frequency should increase as the value of the item and number of transactions increase. Three common methods to determine frequency are the ABC method, zone method, and location audit method (see pages 322 and 323).

  • Cycle counts can be scheduled at regular intervals or on special occasions. Some selection criteria for when to count are: when an order is placed, when an order is received, when the inventory record reaches zero, when a specified number of transactions have occurred, or when an error occurs.


  • Physical distribution is the movement of materials from the producer to the consumer. This movement of materials is divided into two functions: Physical supply is the movement and storage of goods from suppliers to manufacturing. Physical distribution is the movement and storage of finished goods from the end of production to the customer. The particular path in which the goods move – through distribution centers, wholesalers, and retailers – is called the channel of distribution.

  • A channel of distribution is one or more companies or individuals who participate in the flow of goods and/or services from the producer to the final user or consumer. The transaction channel is concerned with the transfer of ownership. Its function is to negotiate, sell, and contract. The distribution channel is concerned with the transfer or delivery of the goods or services.

  • To extend markets requires a well-run distribution system. Distribution adds place value and time value by placing goods in markets where they are available to the consumer at the time the consumer wants them. The specific way in which materials move depends upon many factors, some of which are the channels of distribution that the firm is using, the types of markets served, the characteristics of the product, and the type of transportation available to move the material.

Physical Control and Security

  • The objective of distribution management is to design and operate a distribution system that attains the required level of customer service and does so at least cost. To reach this objective, all activities involved in the movement and storage of goods must be organized into an integrated system.

  • In a distribution system, six interrelated activities affect customer service and cost of providing it: Transportation, Distribution inventory, Warehouses (distribution centers), Materials handling, Protective packaging and Order processing and communication (See pages 332 and 333).

  • The objective of distribution management is to provide the required level of customer service at the least total system cost. Management must treat the system as a whole and understand the relationships among the activities.

  • See example problem on page 333 and the cost tradeoff and total cost principles discussed on page 334.


  • The “marketing mix” is made up of product, promotion, price, and place, and the latter is created by physical distribution. Marketing is responsible for transferring ownership. Physical distribution is responsible for giving the customer possession of the goods and does so by operating distribution centers, transportation systems, inventories, and order processing systems. Physical distribution contributes to creating demand. Prompt delivery, product availability, and accurate order filling are important competitive tools in promoting a firm’s products. The distribution system is a cost, so its efficiency and effectiveness influence the company’s ability to price competitively. All of these affect company profits.

  • Physical supply establishes the flow of material into the production process. The service level must usually be very high because the cost of interrupted production schedules caused by raw material shortage is usually enormous. Cost and availability or transportation for raw materials to the factory and the movement of finished goods to the marketplace are important factors in factory site selection. Unless a firm is delivering finished goods directly to a customer, demand on the factory is created by the distribution center orders and not directly by the final customer. This can have severe implications on the demand pattern and the efficiency at the factory.


  • The carriers of transportation can be divided into five basic modes: Rail, Road (including trucks, buses, and automobiles), Air, Water (including ocean going, inland, and coastal ships), and Pipeline. Each mode has different cost and service characteristics (see pages 335 through 338).

  • To provide transportation service, any carrier, whatever mode, must have certain basic physical elements, ways, terminals, and vehicles. Ways are the paths over which the carrier operates. Terminals are places where carriers load and unload goods to and from vehicles and make connections between local pickup and delivery service and line-haul service. Vehicles of various types are used in all modes except pipelines. They serve as carrying and power units to move the goods over the ways (see page 336).

  • Carriers are legally classified as public (for hire) or private (not for hire). In the latter, individuals or firms own or lease their vehicles and use them to move their own goods. Public transport, on the other hand, is in the business of hauling for others for pay. All modes of transport have public and for-hire carriers. For-hire carriers are subject to economic regulation by federal, state, or municipal governments. Economic regulation has centered on three areas: regulation of rates, control of routes and service levels, and control of market entry and exit. Private carriers are not subject to economic regulation but, like public carriers, are regulated in such matters as public safety, license fees, and taxes. A for-hire carrier may carry goods for the public as a common carrier or under contract to a specified shipper as a contract carrier. (see pages 338 and 339).

Transportation Cost Elements

  • The four basic cost elements in transportation are line haul, pickup and delivery, terminal handling, and billing and collecting. See Line-Haul Costs discussion and example on pages 340 and 341. The other three are on pages 342 and 343. The total cost of transportation consists of line-haul, pickup and delivery, terminal handling, and billing and collecting costs. To reduce shipping costs, decrease line-haul costs by increasing the weight shipped, decrease pickup and delivery cost by reducing the number of pickups, decrease terminal-handling costs by decreasing the number of parcels by consolidating shipments, and decrease billing and collecting costs by consolidating shipments.

  • The fate charged by a carrier will also vary with the commodity shipped and will depend upon the value, density, perishability, and packaging (see pages 343 and 344).


  • The service functions warehouses perform can be classified into two kinds: (1) The general warehouse where goods are stored for long periods and where the prime purpose is to protect goods until they are needed. (2) The distribution warehouse has a dynamic purpose of movement and mixing. The emphasis is on movement and handling rather than storage. The size of the warehouse is not so much its physical size as it is the throughput, or volume of traffic handled. Items should be warehoused only if there is an offsetting benefit gained from storing them.

  • Warehouses serve three important roles: transportation consolidation, product mixing, and service (see pages 345 and 346).

  • Any distribution system should try to provide the highest service level (the number of orders delivered in a specified time) at the lowest possible cost. See example problem on page 347.

  • The market boundary is the line between two or more supply sources where the laid-down cost is the same. Laid-down cost (LDC) is the delivered cost of a product to a particular geographic point. See the formulas and examples on pages 348 and 349.


  • The basic role of packaging in any industrial organization is to carry the goods safely through a distribution system to the customer. The package must do the following: identify the product, contain and protect the product and contribute to physical distribution efficiency. There are usually at least three levels of packaging required in a distribution system, primary package, shipping container, and unit load.

  • Unitization is the consolidation of several units into large units, called unit loads, so there is less handling. A unit load is a load made up of a number of items, or bulky material, arranged or constrained so the mass can be picked up or moved as a single unit too large for manual handling. The most common unit-load is the pallet. To get the highest cube utilization in the capacity of pallets, trucks or other vehicles, and warehouses, there should be some relationship between the dimensions of the product, the primary package, the shipping cartons, the pallet, the truck, and the warehouse space.


  • The effect and efficiency of operations management, Just-in-Time manufacturing, and total quality management all depend on the way products are designed and the processes selected. The way products are designed determines the processes that are available to make them. The product design and the process determine the quality and cost of the product. Quality and cost determine the profitability of the company.

Need for New Products

  • Products have a limited life span. A product passes through several stages, known as the product life cycle (see figure 14.1 and review phases on page 361).

Product Development Principles

  • There are two conflicting factors to be considered in establishing the range of products to supply. If the product line is too narrow, customers may be lost. If the product line is too wide, customers may be satisfied, but operating costs will increase because of the lack of specialization. A balance can be obtained with good programs of product simplification, product standardization, and product specialization (see pages 362 through 364).

  • Simplification is the process of making something easier to do or make. The emphasis is to remove unnecessary products and variations.

  • In product design, a standard is a carefully established specification covering the product’s material, configuration, measurements, and so on. Thus, all products made to a given specification will be alike and interchangeable. If the designs of assemblies are standardization so various models or products are assembled in the same way, then mass production is possible. Modularization uses standardized parts for flexibility and variety. By standardizing on component parts, a manufacturer can make a variety of finished goods.

  • Specialization is a concentration of effort in a particular area or occupation. In product specialization, a firm may produce and market only one or a limited range of similar products. This leads to process and labor specialization, which increases productivity and decreases costs. Specialization is sometimes called focus and can be based either on product and market or on process.

  • Product and market focus can be based on characteristics such as customer grouping (serving similar customers), demand characteristics (volume), or degree of customization. Process focus is based on the similarity of process.

  • Focused factories specialize in a narrow product mix for a niche market and are thought to produce more effectively and economically than more complex factories. Repetition and concentration in one area allows the workforce and management to gain the advantages of specialization. Specialization has the disadvantage of inflexibility. Reducing part variety will create savings in raw material, work-in-process, and finished goods inventory. It will allow longer production runs, improve quality because there are fewer parts, and improve opportunities for automation and mechanization. Such a program contributes significantly to reducing cost.

Product Specification and Design

  • Products must be designed to be functional and capable of low-cost processing. Functional means the product will be designed to perform as specified in the marketplace. The product must be designed so it can be made at least cost. Usually, many different designs will satisfy functional and appearance specifications. The job then is to pick the design that will minimize manufacturing cost. Poor design can add cost to processing.

  • To design products for low-cost manufacture requires close coordination between product design and process design, which is called simultaneous engineering. Many organizations use a team with representatives from product design, process design, quality assurance, production planning and inventory control, purchasing, marketing, field service, and others, to concurrently develop the design for the product and the process. Several advantages to this approach are the reduction in time to market, reduction in cost, improved quality, and lower total system cost.

Process Design

  • Operations management is responsible for producing the products and services the customer wants, when wanted, with the required quality, at minimum cost and maximum effectiveness and productivity. Processes are the means by which operations management reaches those objectives. A process is a method of doing something, generally involving a number of steps or operations. Process design is the developing and designing of the steps. Figure 14.3 illustrates the hierarchy of processes, nesting. Small processes are linked to form a larger process.

Factors Influencing Process Design

  • Five basic factors must be considered when designing a process: (1) Product design and quality level - The product’s design determines the basic processes needed to convert the raw materials and components into the finished product. The desired quality level affects the process design, because the process must be capable of achieving that quality level and doing it repeatedly. (2) Demand patterns and flexibility needed – If there is a variation in demand for a product, the process and personnel must be flexible enough to respond to these changes quickly. (3) Quantity/capacity considerations – Both product and process design depend on the quantity needed. (4) Customer involvement – Process design will depend on which manufacturing strategy is chosen, engineer-to-order, make-to-order, assemble-to-order, and make-to-stock. (5) Make or buy decision – A manufacturer has the alternative of making parts in-house or of buying them from an outside supplier. A decision has to be made about which items to make and which to buy. See reasons on page 369

Processing Equipment

  • General-purpose machinery can be used for a variety of operations or can work on a variety of products within its machine classification. Usually less costly, more flexible, slower, and lower quality. Special-purpose machinery is designed to perform specific operations on one work piece or a small number of similar work pieces. Usually more costly, less flexible, produce parts more quickly with higher quality.

Process Systems

  • Based on material flow, processes can be organized in three ways: Flow, Intermittent, and Project (fixed position). Read pages 370 through 372 and understand the differences. Look for definitions of flow processing, repetitive and continuous manufacturing, intermittent manufacturing, and Project, or fixed position manufacturing.

Selecting the Process

  • Generally, the larger the volume (quantity) to be produced, the greater the opportunity to use special-purpose processes. The more special purpose an operation, the faster it will produce. Capital costs are called fixed costs and the production, or run, costs are called variable costs. See the formulas for Total Cost and Unit Cost on page 373 and review the example problem.

  • Cost equalization point (CEP) is the volume for which the total cost (and unit cost) of using one method is the same as another. If the volume is less than the CEP, the method with the lower fixed cost will cost less. If the volume is greater then the CEP, the method with the greater fixed cost will cost less. Review concept and examples for CEP on pages 374, 375 and 376.

Continuous Process Improvement (CPI)

  • Continuous process improvement is a low-cost method of designing or improving work methods to maximize productivity. The aim is to increase productivity by better use of existing resources. Continuous process improvement is concerned with removing work content, not with spending money on better and faster machines. Peter Drucker has said “efficiency is doing things right; effectiveness is doing the right things.” CPI aims to do the right things and to do them efficiently. Everyone in the workforce must be given the opportunity to improve the processes they work with.

  • The CPI system is based on the scientific method and the six steps are as follows: (1) Select the process to be studied. (2) Record the existing method to collect the necessary data in a useful form. (3) Analyze the recorded data to generate alternative improved methods. (4) Evaluate the alternative to develop the best method of doing the work. (5) Install the method as standard practice by training the operator. (6) Maintain the new method.

  • See pages 376 through page 388. Key points are:

  1. The important feature in observation is a questioning attitude.

  2. In selecting jobs or operations for method improvement, there are two major considerations: economic and human.

  3. Pareto analysis can be used to select problems with the greatest economic impact. It separates the “vital few” from the “trivial many.”

  4. Cause-and-effect diagram (sometimes called a fishbone or an Ishikawa diagram)

  5. Properly defining the process. Recording helps us consider all elements of the problem in a logical sequence and makes sure we do consider all the steps in the process. The record of the present method also provides the basis for both the critical examination and the development of an improved method.

  6. Operations process chart and process flow diagram

  7. Finding the root cause ask what, why, when, how, where and who. Ask the why question five times.

  8. When developing possible solutions, eliminate, combine, rearrange the sequence, and simplify.

  • Understand job design, job enlargement, job enrichment, and job rotation on pages 387 and 388.

Just-In-Time Philosophy

  • Just-in-Time manufacturing is the elimination of all waste and continuous improvement of productivity. Waste means anything other than the minimum amount of equipment, parts, space, material, and workers’ time absolutely necessary to add value to the product. The long-term result of eliminating waste is a cost-efficient, quality-oriented, fast-response organization that is responsive to customer needs. Such an organization has a huge competitive advantage in the marketplace.

  • Value satisfies the actual and perceived needs of the customer and does it at a price the customer can afford and considers reasonable. Another word for this is quality. Quality is meeting and exceeding customers’ expectations.

  • Adding value to a product does not mean adding cost. Users are not concerned with the manufacturer’s cost but only with the price they must pay and the value they receive. Many activities increase cost without adding value and, as much as possible, these activities should be eliminated.


  • Anything in the product cycle that does not add value to the product is waste. Waste making starts with the policies set by management in responding to the needs of the marketplace. Management is responsible for establishing policies for the market segments the company wishes to serve and for deciding how broad or specialized the product line is to be. The greater the diversity of products, the more complex the manufacturing process becomes, and the more difficult it is to plan and control. Standardization reduces the planning and control effort needed, the number of items required, and the inventory that has to be carried. The “ideal” product is one that meets or exceeds customer expectations, makes the best use of material, and can be manufactured with a minimum of waste. As well as satisfying the customer, the product’s design determines both the basic manufacturing processes that have to be used and the cost and quality of the product. The product should be designed so it can be made by the most productive process with the smallest number of operations, motions, and parts and includes all of the features that are important to the customer.

  • Toyota identified seven important sources of waste in manufacturing. The first four relate to the design of the manufacturing system and the last three to the operations and management of the system: 1) the process 2) methods 3) movement 4) product defects 5) waiting time 6) overproduction 7) inventory (see explanations on page 399 & 400). To remain competitive, a manufacturing organization must produce better products at lower cost while responding quickly to the marketplace.

Just-In-Time Environment

  • Group products together into product families. Products will be in the same family if they use common workflow or routing, materials, tooling, setup procedures, and cycle times. Workstations can then be set up in miniature flow lines or work cells. The work centers required to make this family can be laid out according to the steps to make that family. Parts can now pass one by one, or in very small lots, from one workstation to the next (cellular manufacturing). Work cells permit high-variety, low-volume manufacturing to be repetitive.

  • Process flexibility is desirable so the company can react swiftly to changes in the volume and mix of their products. To achieve this, operators and machinery must be flexible. See machine flexibility, quick changeover, and operator flexibility on pages 402, 403 and 404.

  • Total Quality Management (TQM) – Quality is important for two reasons. If quality is not present in what is supplied to the customer and the product is defective, the customer will be dissatisfied. If a process produces scrap, it creates disrupted schedules that delay supplying the customer, increases the cost of the product. Manufacturing must ensure that the process is capable of producing the required quality consistently and with as close to zero defects as possible. The benefits of a good quality program are less scrap, less rework, less inventory, better on-time production, timely deliveries, and more satisfied customers.

  • Ultimately, the user is the company’s customer, but the user is also the next operation in the process. Quality at any one work center should meet or exceed the expectations of the next step in the process. Quality at the source means doing it right the first time and, if something does go wrong, stopping the process and fixing it.

  • Total productive maintenance is “preventive maintenance plus continuing efforts to adapt, modify, and refine equipment to increase flexibility, reduce material handling, and promote continuous flow.”

  • Several conditions are needed to achieve uninterrupted flow of materials: uniform plant loading, a pull system, valid schedules, and linearity. Uniform plant loading means that the work done at each workstation should take about the same time. In repetitive manufacturing this is called balancing the line, which means that the time taken to perform tasks at each workstation on the line is the same or very nearly so. The result will be no bottlenecks and no buildup of work-in-process inventory.

  • The pull system starts at the end of the line and pulls product from the preceding operation as needed. The preceding operation does not produce anything unless a signal is sent from the following operation to do so. The system for signaling demand depends on the physical layout and conditions in the plant. The most well known system is the Kanban system. The details vary, but it is basically a two-bin, fixed-order-quantity, order-point system (see page 406).

  • There should be a valid schedule. The schedule sets the flow of materials coming into the factory and the flow of work through manufacturing. To maintain an even flow, the schedule must be level. In other words, the same amount should be produced each day. Mixed-model scheduling means that some of everything is made each day in the proportions to meet demand. If demand shifts between models, the assembly line can respond daily.

  • The emphasis in JIT is on achieving the plan – no more, no less. The concept is called linearity and is usually reached by scheduling to less than full capacity.

  • Continuous Process Improvement was discussed in chapter 14.

  • See pages 408 and 409 for an explanation of supplier partnerships.

  • A successful JIT environment can be achieved only with the cooperation and involvement of everyone in the organization (total employee involvement). Operators must take responsibility for improving processes, controlling equipment, correcting deviations, and becoming vehicles for continuous improvement. Employees must be flexible in the tasks they do. In a JIT environment, more emphasis is placed on the leadership role. Managers and supervisors must become coaches and trainers, develop the capability of employees, and provide coordination and leadership for improvements.

Manufacturing Planning and Control in a JIT Environment

  • The major effect that JIT has on forecasting is shortened lead-time. If lead times are short enough that production rates can be matched to sales rates, forecasting for the master production schedule becomes less important.

  • The JIT system emphasizes relationships with suppliers. One purpose of production planning is to arrange for long lead-time purchases. The JIT process has the potential for reducing those lead times.

  • Impact of JIT on master scheduling see pages 412 and 413.

  • Impact of JIT on material requirements planning see page 413.

  • Impact of JIT on capacity management see page 413.

  • Impact of JIT on inventory management see page 414.

  • MRP is a push system, meaning that the material needs are calculated ahead of time and pushed out to the production systems as a production order. The pull system underlying concept is not to preplan and generate schedules, but to react to the final customer order and produce only what is needed to satisfy demand and them only when it is needed.

  • If it is a purchased item, the major effort is to work with suppliers to reduce the cost and time of purchase order and delivery.

  • How Kanban systems work? See pages 418 through 422.

Which to Choose – MRP (ERP), Kanban, or Theory of Constraints?

  • Because of the forward-looking nature of MRP, it can be very effective in an environment with a great deal of variability and uncertainty. MRP’s major disadvantage is that it is highly data dependent, both accurate and timely.

  • JIT and Kanban work best in a highly stable and predictable environment. They are not as effective in highly volatile environments.

  • Theory of Constraints (TOC) works best when the constraint can be identified and will be a constraint long enough to be managed effectively. TOC is not as effective in a less stable environment where the constraint changes and not easily identified.

  • Hybrid systems like Kanban and MRP are successful when MRP is used for advanced planning and Kanban is used as an execution system. JIT and TOC can be use together where TOC prioritizes the areas of improvement based on knowing the constraints and the JIT continuous improvement efforts follow that lead.

What is Quality?

  • Quality means user satisfaction: that goods or services satisfy the needs and expectations of the user. To achieve quality according to this definition, we must consider quality and product policy, product design, manufacturing, and final use of the product.

  • Product planning involves decisions about the products and services that a firm will market. The basic quality level of a product is thus specified by management according to its understanding of the wants and needs of the market segment. A product or service is a combination of tangible and intangible characteristics that a company hopes the customer will accept and be willing to pay a price for.

  • A firm’s studies of the marketplace should yield a general specification of the product, outlining the expected performance, appearance, price, and volume. Product designers must then build into the product the quality level described in the general specification.

  • Quality in manufacturing means that, at a minimum, all production must be within specification limits and the less variation from the nominal the better the quality.

  • To the user, quality depends on an expectation of how the product should perform. This is sometimes expressed as “fitness for use.” Customers do not care why a product is defective, but they care if it is defective.

  • Quality has a number of dimensions:

  • Performance implies that the product or service is ready for the customer’s use at the time of sale. The phrase “fitness for use” – that the product does what it is supposed to do – is often used to describe this. Three dimensions to performance are important: reliability, durability, and maintainability. Reliability means consistency of performance. Durability refers to the ability of a product to continue to function even when subjected to hard wear and frequent use. Maintainability refers to being able to return a product to operating condition after it has failed.

  • Features secondary characteristics – little extras.

  • Conformance means meeting established standards or specifications.

  • Warranty is an organization’s public promise to back up its products with a guarantee of customer satisfaction.

  • Service is an intangible generally made up of a number of things such as availability, speed of service, courtesy, and competence of personnel.

  • Aesthetics means pleasing to the senses; i.e. finish or appearance of a product.

  • Perceived quality is based on the premise that total customer satisfaction is based on the complete experience with an organization, not just the product.

  • Price is what customers pay for value in what they buy. Value is the sum of the benefits the customer receives and can be more than the product itself.

Total Quality Management (TQM)

  • TQM “is based on the participation of all members of an organization in improving processes, products, services, and the culture they work in.” The objective of TQM is to provide a quality product to customers at a lower price. By increasing quality and decreasing price, profit and growth will increase, which will increase job security and employment.

  • The six basic concepts in TQM are (further explanations are found on pages 431 through 434):

  • A committed and involved management. TQM is a continuous process that must become part of the organization’s culture.

  • Focus on the customer. This means listening to the customer so goods and services meet customer needs at a low cost. It means improving design and processes to reduce defects and cost.

  • Involvement of the total workforce. Total quality management is the responsibility of everyone in the organization.

  • Continuous process improvement (covered in chapter 14). Processes can and must be improved to reduce cost and increase quality.

  • Supplier partnering rather than adversarial relationship.

  • Performance measures to measure the results.

Quality Cost Concepts

  • Quality costs fall into two broad categories: the cost of failure to control quality and the cost of controlling quality.

  • The costs of failing to control quality are the costs of producing material that does not meet specifications and they can be broken down into:

  • Internal failure costs are the costs of correcting problems that occur while the goods are still in the production facility.

  • External failure costs are the costs of correcting problems after goods or services have been delivered to the customer.

  • The costs of controlling quality can be broken down into:

  • Prevention costs are the costs of avoiding trouble by doing the job right the first time.

  • Appraisal costs are the costs associated with checking and auditing quality.

  • Investment in prevention will improve productivity by reducing the cost of failure and appraisal. Investing in prevention will increase total costs in the short run, but in the long run prevention will eliminate the causes of failure and reduce total quality costs.

Variation as a Way of Life

  • Variability exists in everything.

  • In any manufacturing process, we can expect to find a certain amount of chance variation that is inherent in the process. The causes of the chance variation are broken into six categories: people, machine, material, method, environment, and measurement. There is no way to alter chance variation except to change the process. If the process produces too many defects, then it must be changed.

  • Assignable variation has a specific reason for these causes of variation.

  • As long as only chance variation exists, the system is said to be in statistical control. If there is an assignable cause for variation, the process is not in control. The objective of statistical process control is to detect the presence of assignable causes of variation. SPC, then, has two objectives:

  • To help select processes capable of producing the required quality with minimum defects.

  • To monitor a process to be sure it continues to produce the required quality and no assignable cause for variation exists.

  • The output of every process has a unique pattern that can be described by its shape, center, and spread. The bell-shaped curve is called a normal curve and is commonly encountered in manufacturing processes that are running under controlled conditions. The center of the distribution can be calculated as outlined on page 438. To evaluate a process, we must know not only what the center is, but also something about the spread or variation. This can be measured using either of two methods, range or standard deviation, and can be calculated as outlined on page 438 and 439.

Process Capability

  • Tolerances are the limits of deviation from perfection and are established by the product design engineers to meet a particular design function. In statistical process control, the lower specification limit (LSL) is the minimum acceptable level of output. Similarly, the upper specification limit (USL) is defined as the maximum acceptable level of output. Both the USL and LSL are related to the product specification and are independent of any process.

  • Besides spread, there is another way a process can produce defects. If there is a shift in the mean (average), defects will be produced. In summary:

  • The capability of the process is not related to the product specification tolerance.

  • A process must be selected that can meet the specifications.

  • Processes can produce defects in two ways, by having too big a spread (sigma) or by a shift in the mean (average).

  • See pages 441, 442 and 443.

Process Control

  • Process control attempts to prevent the production of excessive defects by showing when the probability is high there is an assignable cause for variation.

  • See Control charts, X bar and R charts and control limits on pages 444, 445, and 446.

Sample Inspection

  • Statistical process control monitors the process and detects when the process goes out of control, thus minimizing the production of defective parts. Traditional inspection inspects the batch of parts after they are made, and on the basis of the inspection, accepts or rejects the batch. 100% inspection means testing every unit in the lot. In cases in which the cost of failure is exceptionally high, 100% inspection is vital. Acceptance sampling consists of taking a sample of a batch of product and using it to estimate the overall quality of the batch.

  • There are four reasons for using sample inspection:

  • Testing the product is destructive.

  • There is not enough time to give 100% inspection to a batch of product.

  • It is too expensive to test the entire batch.

  • Human error is estimated to be as high as 3% when performing long-term repetitive testing.

  • The use of statistical sampling depends on the following conditions:

  • All items must be produced under similar or identical conditions.

  • A random sample of the lot must be taken.

  • The lot to be sampled should be a homogeneous mixture.

  • The batches to be inspected should be large.

  • Sampling plans are designed to provide some assurance of the quality of goods while taking costs into consideration. Lots are defined as good if they contain no more than a specified level of defects, called the acceptable quality level (AQL). A plan is designed to have a minimum allowable number or percent defective in the sample in order to accept the lot. Above this level of defects, the lot will be rejected.

  • The probability of accepting a bad lot is called the consumer’s risk. The probability of rejecting a good lot is called the producer’s risk. The objective is to balance the consumer’s risk and the producer’s risk against the cost of the sampling plan.

ISO 9000

  • The International Organization for Standardization (ISO) developed a series of five standards for quality systems that have become universally accepted and a requirement for doing business. The standards are intended to prevent nonconformities during all stages of business functions. A third party, called a registrar, assesses the adequacy of the supplier’s quality system. In simple terms, the standards require the supplier to say what it is doing to ensure quality, do what it says, and prove it has done so by documentation.

  • ISO 9000 consists of five standards and explains the basic quality concepts, defines key terms, and provides guidelines for selecting, using, and modifying ISO 9001, 9002, and 9003. ISO 9004 provides guidance in implementing a quality system. ISO 9001 provides a model for quality assurance in design, production, installation and servicing. ISO 9002 provides a model for quality assurance in production and installation. ISO 9003 provides a model for quality assurance in final inspection. See the ISO elements listed is Table 16.1 on pages 451 and 452.


  • Benchmarking is a systematic method by which organizations can compare their performance in a particular process to that of a “best in class” organization. Bench marking looks outward to what competitors and excellent performers outside the industry are doing.

  • The steps in benchmarking are:

  • Select the process to benchmark.

  • Identify an organization that is “best-in-class” in performing the process you want to study.

  • Study the benchmarked organization.

  • Analyze the date. What are the differences between your process and the benchmark organization? There are two aspects to this. One is comparing the processes and the other is measuring the performance of those processes according to some standard. The measurement of performance requires some unit of measure, referred to as the metrics.


  • The TQM concepts are compatible with the use of JIT and MRPII practices.