Chapter 18 of Business Dynamics
The Manufacturing Supply Chain This chapter adapts the stock management structure of the previous chapter to represent the supply chain in manufacturing firms
The stock management structure… Is broken up into An order fulfillment structure A production starts structure A demand forecasting component
Overview Production Model
Key management decisions are made by Order Fulfillment Production Scheduling
Three Balancing Loops Stockout loop regulates shipments as inventory varies Inventory and WIP Control Loops adjust production starts to move the levels of inventory and WIP toward their desired levels
In this initial model there are… No capacity constraints (from either labor or capital) No stocks of materials
Production Structure
Production Rate = DELAY3(Production Start Rate, Manufacturing Cycle time)
Terms Manufacturing Cycle Time—the average transit time for all items aggregated together in the model Manufacturing delay is being modeled as a fourth-order material (flow) delay
An Order Fulfillment Structure
Table for Order Fulfillment From Fig. 18-3
Desired Shipment Rate = Customer Order Rate
Order Fulfillment Ratio = Table for Order Fulfillment(Maximum Shipment Rate/Desired Shipment Rate)
Minimum Order Processing Time = 6 Is a constant
Maximum Shipment Rate = Inventory/Minimum Order Processinig Time
Safety Stock coverage = 6 Is a constant
Time to Average Order Rate = 6 Is a constant
Desired Inventory coverage =
Minimum Order Processing Time = 6 Is a constant
Desired Inventory = whatever
Adjustment for Inventory = Difference between desired inventory and actual inventory, all divided by the Inventory Adjustment Time
Inventory Adjustment Time = 6 Is a constant
A production starts structure
Manufacturing Cycle time = 6 Is a constant
Desired WIP = Manufacturing Cycle Time * Desired Production This is an implementation of Little’s Law
WIP Adjustment Time = 6 Is a constant
Adjustment for WIP = Guess: f(Desired WIP, WIP Adjustment time, Work in Process Inventory)
Desired Production = MAX(0, Expected Order Rate + Adjustment for Inventory)
Desired Production Start Rate = Adjustment for WIP + Desired Production
Production Start Rate = MAX(0, Desired Production Start Rate)
A demand forecasting component This structure simply smoothes the customer order rate, much like exponential smoothing would do to provide a realistic model of the forecasting process used in many firms
The demand forecasting structure What is the equation for Change in Exp Orders?
Typical constants Minimum order processing time = 2 wks Safety Stock Coverage = 2 wks Manufacturing Cycle Time = 8 wks Inventory Adjustment Time = 8 wks WIP Adjustment Time = 2 wks
Initial Stocks for Equilibrium Initial Inventory = Desired Inventory\ Initial WIP = Desired WIP Initial Expected Order Rate = Customer Order Rate These are all the initial conditions needed to create an initial equilibrium
Behavior—Inventory Inventory drops below desired inventory
Behavior—The Rates
What the rate BOT charts tell us Amplification of the customer order rates by the production starts rate is unavoidable This is what causes the bull whip effect in supply chains, especially when suppliers are linked to the manufacturer by JIT Kanban or signaling systems There is a phase lag between receipt of the order and its fulfillment There is no significant oscillation
What about backlogs? Boeing, like not other manufacturer, carries backlogs stretching out years. Boeing is a make to order manufacturer Consideration of backlogs modifies the order fulfillment structure
The backlog structure
Backlog equations What is the equation for backlog? The equation for delivery delay is formulated from one of the most important principles in Operations Management—Little’s Law: Delivery delay = backlog/order fulfillment rate Desired Shipment Rate = Backlog/Target Delivery Delay
More Backlog Equations Order fulfillment rate = shipment rate These are, however, totally different entities Shipment rate is a physical flow Order fulfillment rate is an information accounting that reduces the amount of backlog within the computer’s database
Materials Inventory
The final single supplier model