Subject:
Manufacturing
Material Type:
Module
Provider:
Ohio Open Ed Collaborative
Tags:
Engineering, Manufacturing, Oet0102
Language:
English
Media Formats:
eBook

# Inventory Control

Inventory Control

Inventory Control at Jergens (video)

WIP (video)    WIP (Excel)

Importance of Inventory Management in Manufacturing Process Design

Manufacturing companies hold inventories of raw materials, components, and subassemblies to smooth production requirements and to prevent disruptions during the manufacturing processes in case of breakdowns, accidents, or shortage of raw materials.  The types of inventories that directly relate to the manufacturing processes are called work-in-process (WIP) inventories.  WIP inventories are work that is partially completed, or parts and components that are waiting to be assembled or waiting to be further processed.  For example, in a bakery, let’s assume that there is only one stove. The pastries are produced in batches and are sent to oven for baking. When the pastries arrive at the oven, if there is ongoing baking of the previous batch of pastries, then the current arrival of partially completed pastries have to wait and will be considered as WIP.   Or another example is the WIP created during the assembly of a car. The floor pan of an automobile moves slowly in an assembly line and at each work station, panels and braces are welded. In order to not to slow down or stop the floor pan line, the WIP inventory of panels and braces are stored at the station for the floor pans to arrive for the welding process.

WIP inventories make up a portion of the cost of goods (finished products) sold, and reducing the amount of time WIP spends in production will reduce overall manufacturing cost.

For example, if the Vitamix Company in Ohio spends $80,000 to operate its machines,$100,000 in manufacturing materials, and $100,000 in cost of labor, then the total manufacturing cost would be$280,000. If the total cost of goods (finished products) sold were to be $210,000, then the difference$280,000-$210,000=$70,000 would be the total value of WIP still in the system. The lower the WIP value in the system the better the manufacturing processes are.

# Product Mix and Make or Buy

Make In-House or Outsource (Make vs. Buy) Decision

Product Mix (video)

Manufacturing companies continuously consider the possibility of buying the products that they currently make in-house (called Outsourcing) or making the products that they currently buy from their suppliers. This choice is called Make or a Buy decision in the literature and there are advantages and disadvantages to each decision.

Typically, if the product is considered to provide the company a competitive advantage in the market, and if the product is hard to imitate by other companies, then companies prefer to make them in-house and secure the intellectual property.  Similarly, if the company feels that the suppliers do not have the capability/technology to produce the product, or if the cost of outsourcing is higher, or the suppliers are not trustworthy, then companies would prefer to make the products in-house.

On the other hand, manufacturing companies outsource the production of some of their products to reduce labor cost, to use their skilled expertise, to access to the new production technologies of the supplier in that area, to reduce the production turnaround time, and eventually generate more profit.  In the USA, during the last twenty years, because of the trade agreements with other countries, especially with China, most companies outsource parts, components and even services such as technical call centers.

Example: The Swagelok manufacturing company in Ohio is currently outsourcing a special type valve from a supplier at a price of $5 per unit. Swagelok can produce these valves internally if it economically makes sense. Next year they need to have 10,000 valves to meet the customer demand. If Swagelok produce the valves internally: The direct labor cost is$1/unit

Direct material cost is $2.50/unit Variable overhead cost is$0.50/ unit

Annual tooling cost is   $20,000. Based on the information given, we can calculate the cost of making the valves and compare that with the total purchasing cost. Total cost of making the 10,000 valves: Direct labor:$1.0x 10,000 =             $10,000 Direct materials:$2.50 x 10,000=      $25,000 Variable overhead:$0.50 x 10,000=          $5,000 Fixed annual tooling cost:$20,000

Total cost of making:                                   $60,000 Total cost of outsourcing:$5.00 x 10,000 = $50,000 Thus, it will cost$10,000 extra annually to make the valves.

Decision:  Swagelok should continue to outsource the valves from its supplier.

# Process Selection

Automation and Labor (video)

Process Selection - Organizational View

Manufacturing companies need to decide how to organize their facilities and processes to produce their products and achieve their long term goals and objectives of meeting their customers’ demand while being profitable.  When organizations introduce new products or when they are updating their existing processes to include new technology, they go through a process selection practice.  The process selection depends on two main process attributes:

• how much product variety the process can handle and
• how much production volume (quantity) the process capacity can support

For example, consider opening a new neighborhood bakery.  You need to decide what types of baked goods you will be making and the quantity of each type, every day, every month and every year.  The demand for bread is usually high, so you will have to choose a process that can handle a high volume (quantity) of white bread production (a relatively standard product). On the other hand, if you are making pastries then the decision regarding how many different types of pastries you will make and what type of process would fit better for low volume and high variety (different types) products.  Each process choice is a proper matching of the type of machinery, labor and the level of technology needed. Typically in a bakery you see a spectrum of different processes that enable the production of a wide variety of products, all the way from, standard white bread in thousands a day, to a specially ordered custom cake.  When the demand for a product is relatively high, then a more standard or automated process is being used, while for products that have high variety and low volume require general purpose machinery and labor which possesses a variety of skills.

Process Types

In the Operations Management literature, the basic processes are grouped into five categories:

Job Shop

Batch

Repetitive

Continuous

Project

Each of these production processes requires a different level of capital and labor intensity and offers different levels of process flexibility. Capital intense processes use more machines, thus require higher levels of investment, and are needed for high volume standard products.  Labor intense processes, on the other hand, are more flexible, and require the use of skilled labor. In fact, most of the stages in the process is handled by labor.  The output quantity is usually low, and the product is usually customized.  The bigger part of the cost of the process is usually due to the training of the workers.  There are also hybrid processes that are a combination of the characteristics of the process types listed above.

Manufacturing managers need to match the process capabilities with the product requirements for the right process selection decision.  Once installed, any change in processes is costly, since it impacts the company’s supply chain, technology infrastructure, and the facility layout.  The following sections explain each process, as well as the advantages and disadvantages.

Job Shop

A Job Shop is a process type for the production of customized, low volume products that require a unique sequencing of stages.  Good examples of job shops are Amish woodworking shops, a custom cake bakery or a machine shop.  Typically, general purpose machines are used in job shop processes since the customized goods require customized process sequencing.   Job shop processes are usually used for making a wide variety products.  However, because of the labor skill requirements and low volume production, the cost per unit is high, and cost estimation is difficult. It also creates high levels of work-in-process (WIP) inventories since left over components from one production run are not necessarily needed for the next scheduled job.

Batch

Batch processes are used when the demand for products are of moderate volume, not as low as what a job shop handles, nor as high as what an automated system produces.  The equipment is not as general purpose and flexible, and the skill requirements of labor are not as high as for job shops.  For example, in a bakery, bagels would be produced in batches since the demand for bagels in a day is not as high as white bread.  These types of processes are good for producing semi-standard products where some flexibility is needed for adding or changing product types, labor skills is moderate, and cost of production per unit is moderate.

Repetitive

Repetitive processes are used when the demand for a standard product is high.  Products that are being used in mainstream markets such as tooth brushes and television sets are good examples of products that need repetitive processes.  They need automated equipment that has very low flexibility, but can perform jobs very quickly.  Labor skills are very specialized, such as knowing how to program an automated machinery.  In repetitive processes the product is discrete and moves in the system one at a time.  Computer chips are produced in thousands of units an hour using repetitive processes.  Typically cost per unit of production is low, and because demand can be better estimated the work-in-process inventory levels are low.

Continuous

Continuous processes are used for producing products such as chemicals, liquid soap, and petroleum, where the output is extremely standardized and high volume.  The product is non-discrete and “flows” in the process.  The equipment used in the process has no flexibility.  Although the initial cost of building a continuous process is very expensive, the unit production cost is very low.  The work-in-process inventory level is also very low, since only a few (or one) type of standard product is being produced.  Labor skill is specialized, usually for programming the specialized machinery.  It is very costly to change the production process, or the product type, so unless the product is at its saturation stage of life cycle companies hesitate to build continuous processes.

Projects

Typically, when manufacturing companies develop new product prototypes they use unique resources and unique sets of activities with a specific starting and ending date. These processes are called projects.  The cost of implementing a project can be very high since project activities are non-routine and one time occurrences. Project team members who implement the project are temporarily assigned to the project and will return their functional areas after the project is completed.  Thus the skill requirements and the cost of labor varies depending on the complexity of the scope of the project.  Building a space shuttle is a very expensive and unique project with very expensive labor force using special purpose equipment being used.

Production and Inventory Strategies that correspond to Process Choice

When manufacturing companies decide the type of process to use, they also need to consider how well the process matches with the company’s production and inventory strategies.  Some companies start production only after the customer orders are received, while others produce products and hold them in warehouses, anticipating that the demand will occur. There are three production and inventory strategies that should be coordinated with process choice:

Make-to-order

Assemble-to-order

Make-to-stock

Make-to-Order (MTO) Strategy

Manufacturing companies follow Make-to-order strategy if they have job shop or batch processes.  With this strategy, the production process does not start until a confirmed order is received.  For example, an Amish woodworking shop will only order the wood and produce the furniture after a customer places an order.  The shop meets the unique needs of the customer and once the product is produced it will be shipped directly to the customer.  That is, in make-to-order strategies products will not be made with the intention of being kept in inventories.  The finish good inventory levels in a make-to-order strategy is usually zero.   MTO strategy is also called pull strategy since the demand triggers the manufacturing and pulls the product from the system.

Assemble-to-Order (ATO) Strategy

This strategy is similar to MTO strategy except here a variety of subassemblies and components are assembled after the customer orders are received.  This strategy allows customization of high volume products in repetitive manufacturing processes.  There can be higher levels of components and subassemblies as work in process inventory but the final configuration of these parts are realized only after the customer places an order.  This strategy lowers the cost of customization, and meets a wide variety of customer demand in a relatively short period of time.  For example, Dell uses this strategy to assemble personal computers according to customer specifications and be able to deliver them within a week.

Make-to-Stock (MTS) Strategy

This strategy is commonly followed by companies that have continuous and repetitive processes.  The MTS strategy is the opposite of the MTO strategy, where high volume standard products are produced and stocked ahead of time based on demand forecasting.  The manufacturing company uses forecasting techniques to better predict the number of products that they will sell in a planning period and use this plan to stock their inventories.  Clearly, if the forecasting is not accurate the company might be either out of stock or left with excess inventories.  Manufacturing companies such as Proctor and Gamble use MTS strategy when producing staple products, or products such as diapers where the product reached its saturation point in the market.  Diapers are manufactured following MTS and via repetitive processes with the anticipation of customer demand.  Chemicals, electronic components are other examples of products commonly produced using MTS strategy.

Summary: The following table summarizes the characteristics of each process choice. Managers should consider each of these factors when deciding the best process to use that matches with their organizational design.

 Process/Characteristics Job Shop Batch Repetitive Continuous Projects Inventory Strategy MTO MTO MTS/ATO MTS MTO Production Volume Very low Low High Very high One Product Type Variety Moderate Standard Standard Unique Type of Equipment General purpose/Flexible Semi-general purpose/Flexible Special purpose/Automation Special purpose/Automation General purpose Cost per Unit High Moderate Low Low High Capital Intensity Low Moderate high high Low/Moderate Labor Intensity High Moderate Low Low High/Moderate Product Life Cycle Introduction Growth Saturation Saturation Introduction

# Just In Time and Lean

Just-in-Time (JIT) and Lean Systems

Working With Suppliers (video)

Automation and Labor (video)

JIT is an inventory management system that was initiated by Toyota Production System in the1980s which focuses on the coordination of the production activities on the shop floor in such a way that the parts and components arrive to the work station exactly at the time they are needed for assembly, not before.  This approach aims to reduce the WIP inventories during the production process, and thus, reduces cost of production.  The JIT approach is suitable for repetitive manufacturing systems such as automobile assembly plants.  At every work station, there are typically idle materials, parts and components waiting to be assembled to the automobile body.  They occupy space, and might need extra equipment to be moved around.  With JIT systems, parts and components arrive from the supplier’s facility within a few hours before they are needed for assembly.  In order for this system to work well, the company has to estimate or forecast the demand accurately, and need to have a special relationship with its suppliers.  Many times suppliers are required to make frequent shipments of small quantities to the assembly plants, may be three or four shipments a day, which might require suppliers to locate close to the assembly plants.  This forces suppliers to make a large investment, which is why many suppliers expect long term commitments and contracts from the assembly plants.

The significant reduction of inventory levels in the 1980s created an awareness for reducing waste at every level of manufacturing processes in 1990s.  The focus on waste reduction and continuous improvement is called Lean manufacturing.  The Lean systems are run based on five principles:

Provide more value for customers with fewer resources. Reduce waste at every level of manufacturing and provide the same service and same quality product while  using less resources.

Focus only on processes that add value.  Eliminate the manufacturing steps that do not add value. For example, unnecessary movement of the materials between the work stations is considered waste and should be eliminated.  Materials should be at the right place and at the right time for the optimal cost of manufacturing. The unnecessary transportation within the facility not only causes an increase in production cost but also an increased risk of damage.

Eliminate waste and create flow. The WIP inventories are considered waste in the system.  They are used as buffers between the stations to reduce the impact of production problems. As production processes are improved while using the JIT approached, the WIP inventories are reduced and the smooth flow of materials can be achieved.

Nothing is made until the customer demands it (pull system).  Basing the production quantity on forecasts typically creates inventories, since forecasts are only predictions of future demand based on past performance.  On the other hand, the pull systems, where production occurs only after the customer orders are received, eliminate the built up of inventories by satisfying the existing customer demand.

Strive for perfection.  This concept was also adopted from Japanese manufacturing systems where the management emphasizes continuous improvement of processes and defect elimination (called Kaizen).