Production Management IEOR 4000 Prof. Guillermo Gallego 9/19/2018

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 9/19/2018

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 9/19/2018

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 9/19/2018

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. 9/19/2018

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. 9/19/2018

Evaluation Assignments: 15% Midterm: 40% Final: 45% 9/19/2018

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 9/19/2018

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 9/19/2018

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) 9/19/2018

The Principles of Scientific Management by Frederic Taylor 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 9/19/2018

Also known as Operations Research 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 9/19/2018

Recent Trends Plant Automation Just-in-Time Reengineering Supply Chain Initiatives EDI, ECR, VMI Sharing Demand Information Demand Lead Times Changing the Givens 9/19/2018

Operations Systems Job Shops Repetitive Manufacturing 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 9/19/2018

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. 9/19/2018

Impact of Inventories Firm level: Macro 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. 9/19/2018

Inventory Classification Functional: Cycle stock Congestion stock Safety stock Anticipation inventories Pipeline inventories (WIP) Time Input, WIP, In-transit, Output. 9/19/2018

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. 9/19/2018

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. 9/19/2018

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 9/19/2018

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 9/19/2018