Production Management IEOR 4000

1. Production ManagementIEOR 4000 Prof. Guillermo Gallego

2. Self Introduction • Professor and Chairman of Industrial Engineering & Operations Research Dept. • Research interest in Supply Chain Management and Revenue Management • Published over fifty papers • Visiting professor at Stanford GSB 1997-1997 • Visiting scientist at IBM 1999-2003 • Senior editor for MSOM and POM. • Consultant for Lucent Technologies

3. Topics to Be Covered • Today: History of Operations Management, Production systems, Recent trends. • Deterministic models: • EOQ, EPQ, JRP, ELSP, APP, MRP, JIT • Forecasting: • MA, ES, MMFE. • Stochastic models: • Newsvendor model. • Serial Systems: Supply chain models. • Distribution and Assembly Systems

4. Benefits to Be Obtained • Understand production and inventory systems. • Understand basic tradeoffs between • Holding costs versus fixed costs. • Holding costs versus service levels. • Efficiency versus variety • Learn about • Production/inventory management techniques • Forecasting • Risk and sensitivity analysis • Supply chain design issues

5. Intended Audience • A required course for MS degree in IE and MS in OR. • Students entering the fields of industrial engineering or supply chain management. • Students interested in learning how to develop models. • Production and general managers wishing to understand models behind decision support systems.

6. Prerequisites • Working knowledge of calculus. • A good course in probability and statistics. This can be taken concurrently. • A deterministic models course (linear programming). This can be taken concurrently. • Knowledge of Excel or equivalent spreadsheet program. • Willing to work hard.

7. Evaluation • Assignments: 15% • Midterm: 40% • Final: 45%

8. Today’s Lecture • Motivation • History of Operations Management • Recent Trends in Inventory Management Types of Manufacturing Systems • Strategic and Hierarchical Planning • Inventory Classification • Relevant Costs • Performance Measures

9. Motivation • Operations is concerned with the transformation of inputs into goods and services • Primary business function together with marketing and finance • It involves the greatest portion of the company's employees and capital assets. • Activities include • plant management, product development, process engineering, facility layout, production and capacity planning, quality control, inventory control, product distribution

10. History of Operations Management • Life before organized production • The industrial revolution • Invention of the steam engine. • Specialization of labor • Interchangeable parts • Assembly line (Ford) • Product variety (GM)

11. Scientific Method • The Principles of Scientific Management by Frederic Taylor • Experiment with methods to find best way to perform a job • Improve efficiency results in: • Lower costs to companies • Higher wages for laborers • Better and less expensive products for consumers

12. Management Science • Also known as Operations Research • Use of models, mathematics and statistics to solve business problems • Objectives, Decision Variables, Constraints • Initially lack of data and computing power and management skepticism • ERP systems and better trained management opens possibilities

13. Recent Trends • Plant Automation • Just-in-Time • Reengineering • Supply Chain Initiatives • EDI, ECR, VMI • Sharing Demand Information • Demand Lead Times • Changing the Givens

14. Operations Systems • Job Shops • Low volume high variety • Custom made goods • Repetitive Manufacturing • High volume low variety • Televisions, roller skates • Batch Manufacturing • Medium volume and variety • Hand tools, drills • Processes and Projects • Refineries, ship manufacturing • Non Manufacturing

15. Strategic and Hierarchical Planning • Strategic Planning • Product line, location, size and number of plants and warehouses • Tactical Planning • Size of workforce, rate of production, distribution of goods • Operational Control • Assignment of work to stations, short term inventory control issues.

16. Impact of Inventories • Firm level: • One third of the current assets • 2.5 years of after-tax profits • Potential to increase profits and reduce costs • Macro level: • Accumulation at peak of cycle • Downscale production, slash prices, some firms do not survive • Low inventories at bottom of cycle • Increase production, hire people, additional increase in demands, higher prices, etc.

17. Inventory Classification • Functional: • Cycle stock • Congestion stock • Safety stock • Anticipation inventories • Pipeline inventories (WIP) • Time • Input, WIP, In-transit, Output.

18. Classification by Value • Sort by annual dollar volume • Most firms: • 20% SKUs account for 80% usage • 30% SKUS account for 15% usage • 50% SKUS account for 5% usage • ABC analysis treats high dollar volume parts differently.

19. Characteristics of Inventory Systems • Demand: • Constant versus variable • Known or unknown • Lead Times: Constant versus random • Review Times: Periodic versus continuous review • Excess Demand: Lost versus backlogged • Changing Inventory: Perishable, obsolescence • Structure of System: Assembly, distribution, etc.

20. Relevant Costs • Procurement costs: fixed and variable • Holding costs: Warehousing, insurance, opportunity cost • Stockout or penalty costs • Cost of changing the production rate: hiring, firing, overtime • System control costs

21. Performance Measures • Probability of not stocking out during lead time • Fill rate: Proportion of demands that are met directly from stock • Average number of backorders • Turnover ratio: Ratio of throughput to average inventory