Operational

Efficiencya   Performance
Business Process

JIT, MRP,TOC
 Pull System
Just In Time ( JIT)
In a pull system, nothing is produced until it is needed,
either ultimately by the customer or by the next
production process.
JIT  system,  materials  go  directly  into  produc3on  without  being  
inspected.  The  assump3on  is  that  the  vendor  has  already  performed  
all  necessary  inspec3ons.  The  minimiza3on  of  inventory  reduces  the  
number  of  suppliers,  storage  costs,  transac3on  costs,  etc.    
 
Back  flush  cos3ng  eliminates  the  tradi3onal  sequen3al  tracking  of  
costs.  Instead,  entries  to  inventory  may  be  delayed  un3l  as  late  as  the  
end  of  the  period.    
 
For  example,  all  product  costs  ma  y  be  charged  ini3ally  to  cost  of  
sales,  and  costs  may  be  flushed  back  to  the  inventory  accounts  only  at  
the  end  of  the  period.  Thus,  the  detail  of  cost  accoun3ng  is  decreased  
•  The  objec3ve  of  JIT  is  to  reduce  carrying  costs  by  elimina9ng  inventories  and  
increasing  the  deliveries  made  by  suppliers.  Ideally,  shipments  of  raw  materials  
are  received  just  in  3me  to  be  incorporated  into  the  manufacturing  process.    

•  The  focus  of  quality  control  under  JIT  is  the  preven3on  of  quality  problems.  
Quality  control  is  shi$ed  to  the  supplier.  JIT  companies  typically  do  not  inspect  
incoming  goods;  the  assump3on  is  that  receipts  are  of  perfect  quality.    

•  Suppliers  are  limited  to  those  who  guarantee  perfect  quality  and  prompt  delivery.  
The  Benefits  of  JIT  system  for  raw  materials:  

Non  value-­‐adding  ac3vi3es  are  those  that  do  not  add  to  
customer  value  or  sa3sfy  an  organiza3onal  need.  Inventory  ac3vi3es  are  
inherently  non  value-­‐adding.  Thus,  a  system,  such  as  JIT,  that  promotes  
lean  produc,on  and  reduces  inventory  and  its  aHendant  procedures  
(storage,  handling,  etc.)  also  reduces  non  value-­‐adding  ac3vi3es.  
Cells  
Plant  layout  in  a  JIT-­‐lean  produc3on  environment  is  not  
arranged  by  func3onal  department  or  process  but  by  
manufacturing  cells  (work  cells).    
 
Cells  are  sets  of  machines,  oMen  group  in  semicircles,  that  
produce  a  given  product  or  product  type.  
Inventory as a Waste
•  Requires  more  storage  space  
•  Requires  tracking  and  coun3ng  
•  Increases  movement  ac3vity  
•  Hides  yield,  scrap,  and  rework  problems  
•  Increases  risk  of  loss  from  theM,  damage,  obsolescence  

11  
Personnel and Organizational Elements
•  Workers  as  assets  
•  Cross-­‐trained  workers  
•  Greater  responsibility  at  lower  levels  
•  Leaders  as  facilitators,  not  order  givers  

12  
Kanban Cards
Production Kanban Card
Part number to produce: M471-36 Part description: Valve Housing

Lot size needed: 40 Container type: RED crate

Card number: 4 of 5 Completed storage location: NW53D

From work center: 22 To work center: 35

Materials required:
Material no. 744B Storage location: NW48C
Part no. B238-5 Storage location: NW47B
JIT
•  Pull  System  
•  Lean  Manufacturing  
•  Few  carefully  selected  suppliers  
•  Cells  
•  Kanban  
•  Elimina3on  of  Waste  

14  
 MRP  

MRP  is  a  push  system,  that  is,  the  demand  for  raw  materials  is  
driven  by  the  forecasted  demand  for  the  final  product,  which  
can  be  programmed  into  the  computer.  This  is  in  contrast  with  
just-­‐in-­‐3me  manufacturing,  which  is  a  pull  system,  meaning  
items  are  pulled  through  produc3on  by  current  demand,  not  
pushed  through  by  an3cipated  demand.  
 Benefits  of  MRP    
The  benefits  of  MRP  are  
 
•  Reduced  idle  3me,  
•  Lower  setup  costs,    
•  Lower  inventory  carrying  costs,  and  
•  Increased  flexibility  in  responding  to  market  changes.  

The  three  basic  goals  of  MRP  are  

 
 The  Right Part In  The  Right Quantity At  The  Right Time.  
 X  
A(2)   B(5)  
C(1)   D(3)   E(2)  
Starr  has  just  received  an  order  for  100  units  of  X,  the  finished  
product.  The  company  has  20  units  of  X,  1  00  units  of  B,  and  50  
units  of  E  in  inventory.  How  many  units  of  E  must  Starr  purchase  
in  order  to  fill  the  order?  
Throughput  cos9ng  

Throughput  cos3ng,  some3mes  called  super  variable  cos3ng,  recognizes  

only  direct  materials  costs  as  being  truly  variable  and  thus  relevant  to  
the  calcula3on  of  throughput  margin  (throughput  contribu?on).    
 
All  other  manufacturing  costs  are  ignored  because  they  are  considered  
fixed  in  the  short  turn.    
Theory  of  constraints  (TOC)  analysis  describes  three  basic  
measurements:  
 
•   Throughput  contribu3on  (Sales  –  Direct  Materials),  

•   Investments  (raw  materials;  work-­‐in-­‐process;  finished  goods;  R&D  

costs;  and  property,  plant,  and  equipment),  and  

•   Opera3ng  costs  (all  costs  except  direct  materials).  

TOC  
A  basic  principle  of  TOC  analysis  is  that  short-­‐term  profit  
maximiza3on  requires  maximizing  the  contribu3on  margin  
through  the  constraint,  called  the  throughput  margin  or  
throughput  contribu3on  
Drum-­‐Buffer-­‐Rope  (DBR)  System.    

Produc3on  flow  through  a  constraint  is  managed  using  the  drum-­‐buffer-­‐rope  

(DBR)  system.    
 
•  The  drum  (i.e.,  the  beat  to  which  a  produc3on  process  marches)  is  the  
boHleneck  opera3on.  The  constraint  sets  the  pace  for  the  en3re  process.    

•  The  buffer  is  a  minimal  amount  of  work-­‐in-­‐process  input  to  the  drum  that  is  
maintained  to  ensure  that  it  is  always  in  opera3on.    

•  The  rope  is  the  sequence  of  ac3vi3es  preceding  and  including  the  boHleneck  
opera3on  that  must  be  coordinated  to  avoid  inventory  buildup.  
The  steps  in  a  TOC    
The  steps  in  a  TOC  analysis  are  
 
(1) Iden3fy  the  constraint,  
(2)  Determine  the  most  profitable  product  mix  given  the  constraint,    
(3)  Maximize  the  flow  through  the  constraint,    
(4)  Increase  capacity  at  the  constraint,  and    
(5)  Redesign  the  manufacturing  process  for  greater  flexibility  and        
           speed.  
 Details   Product  A   Product  B   Product  C  
Sales   $125   $320   $450  
Variable  Cost   (75)   (180)   (270)  
Contribu9on   50   140   180  
Rank   3   2   1  
 Details   Product  A   Product  B   Product  C  
Sales   $125   $320   $450  
Variable  Cost   (75)   (180)   (270)  
Contribu9on   50   140   180  
Rank   3   2   1  

Machine  Hour   2  Hours  Per  Unit   7  Hours  Per  Unit   15  Hours  Per  Unit  
 
 
 Details   Product  A   Product  B   Product  C  
Sales   $125   $320   $450  
Variable  Cost   (75)   (180)   (270)  
Contribu9on   50   140   180  
Rank   3   2   1  

Machine  Hour   2  Hours  Per  Unit   7  Hours  Per  Unit   15  Hours  Per  Unit  
 
50/2     140/7     180/15  
Contribu9on  Per  Machine  Hr.  
=  $25   =  $20    =  $12  
   
 Details   Product  A   Product  B   Product  C  
Sales   $125   $320   $450  
Variable  Cost   (75)   (180)   (270)  
Contribu9on   50   140   180  
Rank   3   2   1  

Machine  Hour   2  Hours  Per  Unit   7  Hours  Per  Unit   15  Hours  Per  Unit  
 
50/2     140/7     180/15  
Contribu9on  Per  Machine  Hr.  
=  $25   =  $20    =  $12  
   
Rank   1   2   3  
What is throughput time in Theory of
Constraints?
Throughput  Time
Throughput  9me,  or  cycle  9me,  is  the  9me  that  elapses  
between  the  receipt  of  a  customer  order  and  the  shipment  of  
the  order.  
 
Throughput  is  a  rate  
 
 It  is  the  rate  at  which  units  can  be  produced  and  shipped.  For  
example,  if  it  takes  2  days  to  produce  and  ship  100  units,  then  
the  per  day  rate  is  50  units  per  day.  
The  5  steps  to  manage  constraint  opera3ons  through  the  
use  of  TOC  analysis  are:  
 
1) Iden3fy  the  constraints.  
2) Determine  the  most  profitable  product  mix  given  the  
constraint.  
3) Maximize  the  flow  through  the  constraint  
4) Add  capacity  to  the  constraint  
5) Redesign  the  manufacturing  process  for  flexibility  and  fast  
cycle  3me  
Throughput  contribu9on  
Throughput  contribu9on  is  the  rate  at  which  
contribu9on  dollars  are  being  earned.      
 
Throughput  contribu9on    is  the  revenue  earned  form  the  
sale  of  units  minus  the  totally  variable  costs  only  (such  
as  direct  material)  for  those  units  produced  during  a  
given  period  of  9me.  
In  TOC  term  inventory  costs  are  limited  to  costs  that  are  
strictly  variable,  called  “super-­‐variable,”  and  these  are  usually  
only  direct  materials.  
 
The value chain included all of the activities that go into the production
of the product that add value to the finished good. By analyzing this, the
company can determine what they can do to add more value to the
product, and also what does not add vale and can be eliminated. The
steps in the value-chain are:

1)Research and development,

2) Design of products, services or processes,
3) production,
4) Marketing
5) Distribution, and
6) Customer service
 1)Research and development,
2) Design of products, services or processes,

3) production,

4) Marketing
5) Distribution, and
6) Customer service
Business Process Reengineering
Business process reengineering means restructuring of a process or
procedures that is brought about by rapidly changing technology and
today’s competitive economy. In applying the concept of process
reengineering, management starts with a clean sheet of paper and
redesigns processes to accomplish its objectives. Operations that have
become obsolete are discarded.

For instance, instead of simply using computers to automate an

outdated process, technological advantages bring opportunities to
fundamentally change the process itself.
Benchmarking  
Benchmarking is the company’s process of using the standards set by
other companies as a target or model of its own operations. (this is also
called best practices). It is the process of continuously trying to
emulate (imitate) the best companies in the world. By striving to met
the standards of the best companies, an organization may be able to
create a competitive advantage through achievements of a higher
standard than its competitors.

The company used as the benchmark does not necessarily need to be

in the same industry as the company that is trying to improve.
 Activity- based management
Ac3vity-­‐  based  management  is  divided  into  opera9onal  ABM  and  strategic  ABM.  
1)  Opera9onal  ABM  uses  ABC  data  to  improve  efficiency.  The  goal  is  for  ac3vi3es  that  
add  value  to  the  product  to  be  iden3fied  and  improved,  while  ac3vi3es  that  do  not  
add  value  are  reduced  in  order  to  cut  costs  without  reducing  the  value  of  the  product  
or  service.  

2)  Strategic   ABM   uses   ABC   data   to   make   strategic   decisions   about   what   products   or  
services   to   offer   and   what   ac3vi3es   to   use   to   provide   those   products   and   services.  
Because  ABC  costs  can  also  be  traced  to  individual  customers,  strategic  ABM  can  be  
also  to  do  customer  profitability  analysis  in  order  to  iden3fy  which  customers  are  the  
most  profitable  so  the  company  can  focus  more  on  them  and  on  serving  their  needs.  
Kaizen
The term kaizen is a Japanese word that means
“improvement.” As used in business, it implies
“continuous improvement,” or slow but constant
incremental improvements being made in all areas of
business operations. Small-scale improvements are
considered to be less risky than a major overhaul of a
system or process. The slow accumulation of small
developments in quality and efficiency can, over time,
lead to very high quality and very low costs.
 Outsourcing
"  Outsourcing  is  contrac3ng  with  another  company  or  person  to  do  a  par3cular  
func3on.  Almost  every  organiza3on  outsources  in  some  way.  Typically,  the  
func3on  being  outsourced  is  considered  non-­‐core  to  the  business.  

 An  insurance  company,  for  example,  might  outsource  its  janitorial  and  
landscaping  opera3ons  to  firms  that  specialize  in  those  types  of  work  since  they  
are  not  related  to  insurance  or  strategic  to  the  business.  The  outside  firms  that  
are  providing  the  outsourcing  services  are  third-­‐party  providers,  or  as  they  are  
more  commonly  called,  service  providers.  
 Outsourcing
•  Decision  to  purchase  product/service  from  outside  supplier  
•  Make  Vs  Buy  analysis  
•  Contract  manufacturing  
   
Allows  to  concentrate  on  core  business  
 Reasons to Outsource
•  Reduced  costs  
•  Access  to  new  technology  
•  Reliable  service  
•  Avoidance  of  risk  of  obsolescence  
Problems With Outsourcing
Ø Loss  of  Control  
Ø Increased  cash  ou`low  
Ø Confiden9ality  and  security    
Ø Selec9on  of  supplier    
Ø Too  dependent  on  service  provider    
Ø Loss  of  staff  or  moral  problems  
Ø Time  consuming    
Ø Provider  may  not  understand  business  environment  
Ø Provider  slow  to  react  to  changes  in  strategy  
Outsourcing: advantages and
disadvantages
Advantages   Disadvantages  
Focus  on  strategic  revenue  genera3ng  ac3vi3es   May  cost  more  
 

Outside  exper3se  improves  efficiency  and   Loss  of  in  house  exper3se  and  can  reduce  process  
effec3veness   control  

Access  to  current  technology  at  low  cost  and  no   May  reduce  quality  control,  may  lead  to  less  
risk  of  obsolescence   flexibility  

Reduce  expenses  without  incurring  fixed  and   May  result  in  less  personalized  service  
variable  OH  

May  improve  quality  and  3meliness  of  products/ Can  result  in  knowledge-­‐give-­‐away,  create  privacy  /
services   confiden3al  issues.  
Costs of Quality
§  Prevention

§  Appraisal: Prediction Cost of Attaining Quality

Audit
§  Appraisal: Detection
§  Failure: Internal
Cost of Poor Quality
§  Failure: External
Quality Costs
Components  

$  
Conformance   Non-­‐Conformance  
$   $  
Total Quality Cost
       I  want  my    
 money          
             back!  

Internal External
Prevention Appraisal
Failure Failure

$
Cost of Quality (COQ)
 Examples of Prevention Expense
§  Quality  Planning   §  Purchase  Cost  Targets  
§  Training  and  Educa3on   §  Process  Capability    
§  Process  Defini3on  
§  Studies  
§  Customer  Surveys  
§  Preven3ve  Maintenance        
§  Preproduc3on  Reviews  
§  Technical  Manuals  
§  Supplier  Qualifica3on  
§  Detailed  Product  Engineering   §  Job  Descrip3ons  
§  Early  Approval  of  Product     §  Housekeeping  
§  Specifica3ons   §  Zero-­‐Defect  Program  
 Examples of Appraisal Expense
§  Test   §  Supplier  Cer3fica3on  
§  Inspec3on  
§  Employee  Surveys  
§  Process  Controls  
§  Train  QA  Personnel   §  Security  Checks  
§  Product  Audits   §  Safety  Checks  
§  Quality  Systems  Audits  
§  Reviews:  
§  Customer  Sa3sfac3on   –  Opera3ng  Expenditures  
§  Surveys  and  Audits   –  Product  Costs  
§  Prototype  Inspec3on   –  Financial  Reports  
–  Capital  Expenditures  
§  Accumula3ng  Cost  Data  
 Examples of Internal Failure Costs
§  Substandard  Product   §  Supplier  Problems  
–  Scrap  and  rework  
§  Scrap  or  Rework   –  Late  deliveries  
§  Re-­‐inspec3on   –  Excess  inventory  

§  Redesign/Engineering  Change   §  Equipment  Down3me    

§  Process  Modifica3ons   §  Accidents,  Injuries  
§  Payroll  Errors   §  Absenteeism  
§  All  Expedi3ng  Costs   §  Unused  Reports  
§  Off-­‐Spec/Waiver   §  Missed  Schedule  Cost  
§  Abandoned  Programs   §  Lost  Sales  (any  cause)  
 Examples of External Failure Costs
§  Product  Recall   §  Lawsuits  
§  Handling  Complaints   §  Reports  
§  Customer  Service   –  Sales  and  service  
Caused  by  Errors   –  Returns  and  allowances  
–  Failure  
§  Products  Returned  
§  Analysis  of  Returns  
§  Evalua3on  of  Field  Stock  
§  Late  Payments  and  
Bad  Debts  
Lost Sales Because of Customer Dissatisfaction!
Conformance Costs Of Quality
The  Costs  of  Conformance  are  the  costs  that  are  incurred  to  prevent  
and   assess   quality   internally   to   insure   that   no   defec3ve   products   are  
produced.  There  are  tow  types  of  conformance  costs:  
 
1) Preven9on   Costs   are   the   costs   that   are   incurred   in   order   to  
prevent  a  defect  from  occurring  in  the  first  place,  and  
 
2)   Appraisal   Costs   are   the   costs   that   are   incurred   in   order   to  
determine  if  an  individual  unit  is  defec3ve.  These  are  the  costs  of  
tes3ng,  inspec3on  and  internal  quality  programs.  
Nonconformance Costs Of Quality
Nonconformance  costs  are  the  costs  that  are  incurred  aMer  a  defec3ve  product  
has   already   been   produced.   The   costs   of   nonconformance   can   be   broken   down  
into  two  types:  
 
1)  Internal  failure  occurs  when  we  detect  the  problem  before  shipment  and  the  
costs  associated  with  this  are  rework,  scrap,  tooling  and  down9me,  and  
 
2)  External  failure  happens  when  we  do  not  detect  the  defect  un3l  the  product  is  
already   with   the   customer.   The   costs   of   this   are   warranty   costs,   product  
liability  costs  and  the  loss  of  customer  goodwill.  Environmental  costs  are  also  
external  failure  costs.  
 
Total Quality Management (TQM)
Total Quality Management (TQM) is a methodology or process that has had a
tremendous influence on the nature of business in the past couple of decades. The
basic premise of TQM is that quality improvement is a way of increasing revenues and
decreasing costs. As such, a company should continuously strive for improvement in
performing this job and producing this product correctly the first time.

At the root of TQM is the definition of what quality is. Quality can mean
different things to different people. For a customer it is a product that meets
expectations and performs as it is supposed to for a reasonable price. For a production
manger it is a product that is within the required specification. When a company is
considering quality, it must be certain to include all of these different perspectives of
quality from all of the involved parties.