Assignment – 1
For
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Operations
& Material Management
Section A
Write short notes
on any four of the following
1.
Concept of Productivity and
Wastivity
2.
Aggregate Planning
3.
MRP Process
4.
Concept of Process Capability
5.
Production Layout Design
Section B
(Attempt any three)
1.
Describe the various POM
Models.
2.
“The operation of many
manufacturing cells can be coordinated by a central computer with the aid of a
material handling system.” Explain
3.
What are the factors for
Selection of Material Handling System and Material Handling Equipments?
4.
Discuss the major statistical measures
for “Central Tendency”.
Section C
(Attempt all questions. Every question carries 10 marks)
Read the case “McDonald's, a
guide to the benefits of JIT” and answer the following questions.
McDonald's, a guide to the benefits of JIT
Just-in-Time (JIT) inventory is the
big thing right now in operations. This,
along with lean operations and six-sigma are the buzz words being talked most
about. But what exactly is the deal with
JIT operations?
First of all, JIT is a form of
providing supplies for customers, as the name suggests, just in time. For example, Dell, whom I wrote about, has
become famous for its JIT model which involves not even being in possession of
the raw materials needed to fulfill an order until that order is placed and yet
they are still capable of filling orders in a short period of time.
McDonald's is another example of a
JIT system wherein McDonald's doesn't begin to cook (well, I should probably
say reheat and assemble what may or may not be actual food) its orders until a
customer has placed a specific order.
What used to be the case was McDonald's
would pre-cook a batch of hamburgers and let them sit under heat lamps. They would keep them for as long as possible
and eventually discard what couldn't be sold.
The only way to get a fresh hamburger under the old system was to make a
special order. Now, due to more
sophisticated burger-making technology (including a record-breaking bun
toaster), McDonald's is able to make food fast enough to wait until it's been
ordered.
What both of these firms do is they
provide a customer with their order as fast as possible while having the
finished product sitting in inventory for as short as possible.
What are the benefits for McDonald's?
The major benefits for McDonald's are
better food at a lower cost.
Let's stop here for a second to drive
home a very important point: Whenever you can implement something that allows
you to raise quality AND lower costs, you should definitely look into
implementing that practice. Unless
illegal, immoral, socially irresponsible, or likely to drive down demand (which
is unlikely considering quality is being improved), you are probably going to
want to implement this practice. Back to
McDonald's.
McDonald's has found something that
allows them to improve quality and lower costs.
Let's take a look at how it does both.
Improved Quality
I think benefits of a better tasting
burger should be fairly apparent. Unless
of course you prefer aged burgers, the fresher burger is going to be higher
quality if made fresh just for you.
The less obvious benefit is the
higher quality customer service that arises from the JIT burger assembly. When McDonald's waits for you to order the
burger, they do a few things to improve customer service. First of all, when you place a special order,
it doesn't send McDonald's into a panic that causes huge delays.
Now that McDonald's is in the
practice of waiting until you order a burger until they make it, they don't
freak out when they have to make a special order fresh just for you. This higher quality customer service is subject
to McDonald's ability to actually produce faster. Without this ability, McDonald's ordering
costs would be sky-high because the costs associated with ordering would be the
loss of customers tired of ordering fast food that really isn't fast.
Second, JIT allows McDonald's to adapt
to demand a little bit better.
Seemingly, lower inventory levels would cause McDonald's bigger problems
in a higher demand because they wouldn't have their safety stock. However, because they can produce burgers in
a record time, they don't have to worry about their pre-made burger inventories
running out in the middle of an exceptionally busy shift.
Lower Costs
The holding costs for burger parts
(beef, cheese, buns, whatever other garbage they put on their burgers) are
fairly high because of their spoilage costs.
Frozen ground beef that's good today might not be so good in a few
months. Once cooked, the same ground
beef's spoilage rate shoots through the roof.
Instead of having a shelf life of months or weeks, the burger needs to
be sold within 15 minutes or so. The
holding costs go from roughly 20% per week to 100% per hour.
In other words, under McDonald's old
system, they produced at a level that gave them high inventories so that food
would be available fast, which is the main benefit of fast food. Unfortunately, food that was unsold after a
short period of time was scrapped. Food
that was sold was forced to be sold at a higher price in order to absorb the
scrap costs of unsold food. Ultimately
this meant higher costs for McDonald's.
For McDonald's, the benefits of JIT
are fairly clear. For Dell, it was the
same way. So what is it that both of
these firms have in common, and ultimately, when is JIT a good system to
implement?
Why JIT
Economic Order Quantity Savings
A large benefit of JIT is that it
reduces the total cost of ordering and holding inventory. Let's quickly recap three firms that have
achieved this and how they did so.
Dell and McDonald's
High holding costs are the nature of
the computer and fast food industries.
JIT system allowed them to exploit the savings that were realized by
holding less inventory.
Wal-Mart
Instead of having particularly large
holding costs, Wal-Mart recognized that they were in a position to make
ordering costs very small. Because of
their importance to their suppliers, along with their software made affordable
through economies of scale, Wal-Mart has made ordering a very small percent of
their overall costs. By lowering
ordering costs, Wal-Mart has made ordering small batches with greater frequency
a profitable reality.
High holding costs and low ordering
costs are the factors that drive JIT.
Generally, it's the ability to lower ordering costs that make it a
feasible solution. McDonald's and Dell
were both slaves to the high holding costs.
It was just the nature of their industry. The solution for them was that while they
couldn't lower holding costs, they could lower ordering costs. Wal-Mart didn't even have particularly high
holding costs, but they realized it would be profitable to lower ordering costs
which led to high holding costs as a ratio of holding costs to ordering costs.
What McDonald's, Wal-Mart, and Dell
have in common is very high holding costs in comparison to their ordering
costs. Ultimately, this, coupled with
the ability to lower safety stock, is when JIT is effective. EOQ determines how much you should order and
there are two factors that drive economic order quantities down: low ordering
costs and high holding costs. Depending
on the product and the industry, one or both of these qualities may exist in
your operations. If they do, JIT may be
right for you. Without the ability to
make ordering costs low as a percentage of holding costs then there is no need
for JIT. In fact, the increased
frequency in ordering will result in cost increases.
Safety Stock Reductions
The other aspect of JIT is the
drastic reduction in safety stock. My
previous article on safety stock discussed the two reasons safety stock
exists: variability in demand and variability
in lead times from suppliers (in McDonald's case, the supplier is the internal
production process).
It is because of this variability
that safety stock exists in the first place.
What JIT does is tries to reduce the lead times and variation in lead
times in order to help reduce safety stock.
Let's revisit the safety stock formula to figure out why this is:
Safety Stock: {Z*SQRT(Avg. Lead Time*Standard Deviation of
Demand^2 + Avg. Demand*Standard Deviation of Lead Time^2}
The first term is Lead Time*Standard
Deviation of Demand^2. This is the
inventory needed to account for fluctuations in demand during the lead
time. If lead time is shorter, which JIT
tries to accomplish, then this part of the safety stock is smaller, this
lowering safety stock inventory.
Wal-Mart and Dell accomplished this
by using better software and communication with their suppliers. McDonald's accomplished this by creating a
system that allowed a faster burger production (remember, McDonald's lead times
are internal).
The second term is Avg.
Demand*Standard Deviation of Lead Time^2.
This is the inventory needed to fill demand because of lead time
variance. If lead time has no variance
or is reduced then this term can be eliminated or at least reduced. Again, this is what JIT try to accomplish.
Wal-Mart accomplishes this by
demanding it, Dell by working with suppliers, and McDonald's by standardizing
production.
In order to accomplish the tasks of
shortening lead times and reducing their variances, a considerable amount of
work needs to be done with suppliers/internal operations. For some firms this is worth the trouble, for
others, it is not.
Conclusively, there are two major
parts to JIT inventory operations: lowering the ratio between ordering costs
and holding costs and shortening lead times.
What results is a firm with such high holding costs that ordering very
small batches very frequently is the most profitable solution. This eliminates average inventory above the
safety stock level. Then, if lead times
and lead time variability can be decreased, safety stock can be decreased. The result is inventory coming in as it needs
to come in. In other words, it comes in
just-in-time.
Questions:
1.
What are the benefits for
McDonald's in terms of Just in Time Inventory?
2.
Pen down your views on Just in
Time Inventory.
3.
Research on few more companies
using JIT in their business.
4.
Give few points of similarities
and differentiation among Wal-Mart, Dell and McDonald in context with Just in
Time Inventory.
5.
Discuss the benefits of JIT.
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