Operations and Supply Chain Management - C720 (WGU) Graded 100%

1 Operations and Supply Chain Management - C720 (WGU) Exam Elaborations Graded 100% Operations - The process used to acquire inputs, such as people, capital, and material, and transform them into outputs, such as products and services. Operations Manager - They allocate resources. Capital - Facilities and equipment Competitive Advantage - Developing capabilities that customers value, can be sustained over the long-term, and competitors find difficult to replicate. Inseparability - The process of separating production from consumption; cannot be done for services because they are produced and consumed simultaneously. Technology - The application of knowledge, tools, processes, and procedures to solve problems. Product Design - The characteristics, features, and performance of the product; how the product functions; does not fundamentally change the product. Example: changing Coca-Cola's beverage containers from glass to aluminum. 2 Product Technology - The application of knowledge to improve the product. Process - How to accomplish a task. Process Design - How a product is made; can fundamentally alter the nature of the product. Example: changing the taste of Coca-Cola. Process Technology - The application of knowledge to improve a process. Cross-Functionality - When individuals with different expertise work towards a common goal; this is an essential business process. Concurrent Engineering - Completing product design and process design simultaneously. Functional Areas - Subsystems within an organization, such as marketing, finance, and accounting, that are linked together by a common organizational goal. Strategy - Consists of the organizational goals and the methods of implementing the goals; every element of the SWOT analysis should be considered when developing strategies. Key Policies - Main goals of an organization. 3 Organizational Structure - The formal relationships among different functional areas that aids in communication. Relative Advantage - Where one entity has an advantage over another; will often trade their specialized products for those that they do not produce; companies with a relative advantage are able to produce products at a lower cost than their competitors. North American Free Trade Agreement (NAFTA) - A free trade agreement between the United State, Mexico, and Canada to reduce tariffs and other trade restrictions. General Agreement on Tariffs and Trade (GATT) - A trade agreement designed to reduce tariffs and other trade restrictions. Sustainability - Balancing the interconnected obligations to economic viability, society, and the environment (the triple bottom line). What is the percentage of businesses that operate within the service sector? - 88 percent Supporting Goods - Supplies and equipment that aid in the development of products and services. Market Share - The percentage of sales in a particular market. 4 VIRAL - Value, Inimitable, rare, aptitude, and lifespan. SWOT Analysis - Analyzing the internal (strengths and weaknesses) and external (opportunities and threats) environments. Requirements for developing competitive advantage - SWOT, business process, competitive capabilities, and customer requirements. Learning Curve - Continuously improving a product to make it better and cheaper. Synergy - Teamwork where the whole is greater than the sum of its parts. Key Processes - Strategy development, product development, system development, and order fulfillment. System - The process of producing goods and system. Matching - Matching strengths to opportunities. Converting - Converting weaknesses or threats into strengths or opportunities. Productivity - Output / Input; the goal is achieving more output given the amount of inputs, thus saving money and reducing production costs. 5 The First Revolution - Starting in the late 1800s, increases in manufacturing productivity reduced the need for physical labor and enabled a shift towards service-based jobs. The Second Revolution - Productivity and efficiency improvements in manufacturing freed resources for the rapid expansion of the service industry. The Third Revolution - Also known as the post-industrial era, this revolution began in the 1950s with the development of computers. This technology has allowed fewer people to do more work. Reliability - The ability to perform dependably and accurately. Assurance - Knowledge and courtesy of employees and their ability to convey trust and confidence. Process Redesign - The complete overhaul of a process to improve performance. Percent Change in Productivity - [(New Productivity - Old Productivity)/Old Productivity] * 100 Quality (internal) - How quality is defined by the business; often measured as the amount of a desired attribute; objective. 6 Quality (external) - How quality is defined by the customer and the product's fitness for use; meets customer's needs and expectations; subjective. Questions for Customers when Improving Products - Ask what they value (not just what they want), how do they work, what makes them happy, and feedback on specific product attributes. Costs of Quality - Failure costs, appraisal costs, and prevention costs. Failure Costs - Costs accrued by the organization or customer as the result of a failure of the product. Appraisal Costs - Investments in measuring quality and assessing customer satisfaction. Prevention Costs - Investments designed to prevent defects from occurring. Poka-yoke - Mistake proofing; an approach to prevent defects, such as color-coding parts so that customers assemble the product correctly. Design for Manufacture and Assembly (DFMA) - Products should be designed so that they are simple and inexpensive to produce. Design for Operations (DFO) - Services should be simple and inexpensive. 7 Statistical Process Control (SPC) - The use of statistical methods to determine when a process that produces goods is getting close to producing too many defects. W. Edwards Deming - The most influential individual within the specialty of quality; After World War II, he went to Japan to help rebuild their economy, and he was heralded for his influence. He went on to lecture in the United States in the 1980s; he developed his 14 Points for the Transformation of Management. Deming's 14 Points for the Transformation of Management - The system, not employees, cause defects; management is responsible for changing the system, and they must take responsibility instead of blaming employees; Deming also stressed the use of Statistical Process Control (SPC) and encouraged training in its use. Other highlights include creating purpose, reduce fear, provide training and leadership, break down barriers between departments, and eliminate slogans, work standards, and quotas. Joseph M. Juran - He defined quality as "fitness for use", from the customer's perspective; he emphasized the need for continuous improvement and stressed that quality must be built on quality planning, quality control, and quality improvement. Quality Planning - The development of products that appeal to the changing wants and needs of customers. Quality Control - Ensure that the product fits the customer's perception of fitness for use. 8 Quality Improvement - Leadership ought to lead efforts to eliminate waste and errors. Philip Crosby - Wrote Quality is Free; he emphasized the complete elimination of failures to save money, as most firms underestimate their failure costs and should evaluate all costs of quality; "Do it right the first time". Genichi Taguchi - He helped develop Japan's telephone system post-World War II. He designed experiments to extract more data from each test. He argues for "robust design", designs that guarantee high quality despite variations, such as employee errors, that may occur during the processes that produce the product; quality must, therefore, be built into the product. Kaoru Ishikawa - He developed the Ishikawa/Fishbone diagram and quality circles. Ishikawa/Fishbone Diagram - Helps establish cause-and-effect by identifying factors that contribute to outcomes or problems; the factors are categories as People, Machines, Methods, Measurements, Materials, and Environment and include intentional and unintentional consequences and influence quality performance. Quality Circles - A team from all levels who meet to discuss, analyze, and eliminate quality issues using Deming's 14 points; a senior manager overseas their progress and approves their changes. 9 Total Quality Management (TQM) - An organization-wide philosophy that calls for 1) focusing on the customer, 2) quality function deployment, 3) responsibility for quality, 4) team problem-solving, 5) employee training, and 6) fact-based management. Voice of the Customer - Describes what customers want and what they like and dislike; can get to know customers, hold focus groups, and request improvement suggestions; the business can also use their knowledge of how the customer would benefit from a new technology that they are not familiar with to create a future need on behalf of the customer. Quality Function Deployment (QFD) - Relating customer needs and expectations to specific design characteristics through a series of grids or matrices. House of Quality - The matrix used in Quality Function Deployment (QFD); lists customer needs (WHATs), design characteristics related to these needs (HOWs), the nature of the relationship between each customer's need and design characteristic (WHAT versus HOW), the reasons for WHATs (WHYs), and performance comparisons on design characteristics against competitors (HOW MUCH). Quality Control Department - Where quality control obligations traditionally fell; now, it is up to everyone to ensure quality. Standardization - Developing a preset procedure. 10 Documentation - The act of putting a procedure into writing. ISO : An international quality standard. Plan-Do-Check-Act Cycle/Deming Wheel/Shewhart Cycle - A cycle of continuous improvement that is repeated indefinitely. Planning involves using appropriate tools to identify problems or improvement opportunities. Doing involves acting upon the plan. Checking involves analyzing the actions performed to ensure that goals were achieved. Acting involves standardizing and documenting the changes, communicating changes to other, and determining why goals were not achieved. Seven Tools of Statistical Process Control (SPC) - Fishbone diagrams, check sheets, control charts, histograms, Pareto charts, scatter diagrams, and control charts (classified as flow/run charts). Check Sheets - Used to record data points in real-time at the site where the data is generated; raw data is collected without interpretation and then depicted using a different statistical tool. Histogram/Box Chart - Shows the frequency of data observations within a preset range of values. Scatter Plot - Displays data as a relationship between two variables; correlations can be drawn based upon the data. The controlled variable is the independent variable. 11 Pareto Chart - A bar chart that reflects data values in a descending order. Control Chart - A graphical depiction of process outputs where the raw data is plotted in real-time within upper control limits (UCL) and lower control limits (LCL); this allows one to determine if a process is stable or trending towards instability and take corrective action before variations result in non-conforming products (see Page 30 for example). Run Chart - Another form of a control chart for processes that have common features, a common scale, or a central tendency; an optimal line is drawn horizontally across the chart to gauge the central tendency (see Page 30 for example). Six Sigma - Relates to the firm's ability to produce error-free products; uses six standard deviations rather than three, which translates to 3.4 defects per 1 million units (99.99966% error-free). Uses the DMAIC (Define, Measure, Analyze, Improve, and Control) process; uses quantitative and qualitative techniques. Project Charter - Used in the Six Sigma "define" stage to include all aspects of a project to ensure optimal success, including the project scope, problem statement, time frame, boundaries, and team members. DMAIC - The "define, measure, analyze, improve, and control" process of Six Sigma. Value Stream Mapping - Provides an overview of an entire process. 12 SIPOC Chart - Defines the supplier-input-process-output-customer relationships in a process. Failure Modes and Effects Analysis (FMEA) - Used to identify potential causes of defects, errors, breakdowns, or failures. Measurement System Analysis - Determines the accuracy and repeatability of the measurement methods and devices used to control variation in the process. Design of Experiments (DOE) - Real-time solving of problems within complex systems with many different factors that are difficult to isolate. Kaizen Teams - A team that can make rapid changes using ideas from those involved in the process. 5S Methodology - Sort, straighten, shine, standardize, and sustain; used to create visual control of the workplace. DMADV/Design for Six Sigma (DFSS) - Define, measure, analyze, design, and verify; this method is like Six Sigma, but it is used specifically for new products and processes. Black Belts/Green Belts - When using Six Sigma, these specialists are developed within an organization who are experts in specific methods. 13 Problem Statement - A concise verbal statement of the problem, based upon the organization's expectations. Supply Chain - Products throughout their development cycle, from raw material through the final consumer product. Focal Firm - The organization that directs the flow of information, and has the most influence and control, across the supply chain; Apple doesn't manufacturer, but the product design and marketing-focused firm is focal because it's brand dominants the market; also, the companies that own the oil fields and refineries are the focal firms because they control the key resource in the supply chain. Vertical Integration - Owning multiple assets in a supply chain. Tier # Suppliers - A manufacturer purchases components from tier 1 suppliers. When they produce these components, they may purchase components from tier 2 suppliers, and so on. Logistics - Managing the movement of materials, components, and information along the supply chain. Supply Chain Management - Taking actions to have all members of the supply chain coordinate their activities and share information. 14 Reverse Logistics - The process of returning defective products and efforts to reuse and recycle materials. Insourced - When goods are provided from within the organization. Outsourced - When goods are obtained from outside suppliers. Backward Vertical Integration - Owning its suppliers. Forward Vertical Integration - Owning distribution systems and retail outlets. Agile Supply Chains - Fast and reliable supply chains that can transmit information reliably, accurately, and quickly from the marketplace to supply chain members; can create flexible and responsive production processes that allow product differentiation. Lean Supply Chains - Supply chains that can keep costs down and minimize inventory; perfect for functional items with long life cycles, stable demand, and minimal innovation that produce low profit margins; by keeping inventory low, it increases the chances of bottlenecks related to supply shortages. Vendor Managed Inventory (VMI) - When the vendor/supplier coordinates its own inventory replenishment by receiving daily point-of-sale (POS) data from retail stores. 15 Just-in-Time II (JIT II) - Having outside suppliers work inside the firm and handle all purchases for the business, as they are more knowledgeable of the supplies, inventory levels, and future production plans. Supply Chain Operations Reference (SCOR) Model - A model developed by the Supply Chain Council (SCC) to divide all supply chain activities into five groups: plan, source, make (how a product will be made, in what quantities, and where), deliver (through each supply chain stage), and return (such as warranty costs, repairs, customer satisfaction, disposal, etc.); SCOR is used as a framework in development supply chain performance management systems. Cash-to-Cash Cycle - The time between when a company owes money to suppliers when it receives money from customers. Days of Supply (DoS) - Finished Goods Inventory / Average Sales per Day; when there are more sales, DoS will decrease, and vice versa. Virtual Corporation - Companies that exist as an administrative shell that outsources all other functions. Primary Constraints in a System - Market (demand), process (throughput), and product (supply). Constraint - When a resource's capacity to less than or equal to demand for that resource. 16 Bottleneck - The most limiting constraint on the system, whereby requiring the longest time or slowest rate. Process Bottleneck - Occurs when the production process's capacity, flexibility, or activities is its own biggest limitation. Physical Bottleneck - Caused by under-investment, under-utilization, weather, road construction, physical location, or geographical limits. Product Bottleneck - When there are insufficient materials to make a product. Throughout - The rate of flow; the process that allows the supply chain to flow. Supplier Development - The practice of helping suppliers improve their production capabilities. Strategic Alliances - A partnership with mutual benefits that can be realized through supply chain collaboration so that there is more time to focus on core competencies. Cross-Docking - The logistical practice of unloading materials from one truck and loading them into another vehicle with minimal storage in between. Third-Party Logistics (3PL) - Outsourcing logistics to third-parties. 17 Radio-Frequency Identification - Using electromagnetic fields to identify and track tags attached to objects. Capacity - A measure of an organization's ability to provide customers with goods in the amount requested and in a timely manner, given current resources; the maximum sustainable rate of production. Capacity Planning - Planning an organization's ability to deliver at capacity; significant capital is usually involved to build facilities and purchase equipment; require careful consideration of long-term objectives, current demand, and long-term demand. Product Mix - Different products produced on the same equipment. System Capacity - The ability of an organization to produce a sufficient number of goods to meet customer demands. Department - A portion of the production system. Product Layout - A process that is characterized by high demand for the same or similar products; for example, the process of continuously producing paper along the supply chain; this system often measures output as the number of items produced per day. 18 Process Layout - A process that is characterized by the production of many different products with the same equipment and low volume for each product; an example is a car repair shop that offer a variety of services; this system often measures output as completed orders per day. Design Capacity - The maximum achievable output of a process under ideal conditions for a short period of time. Effective Capacity - The maximum achievable output given the product mix, equipment changeovers, and downtime. Capacity Utilization - Actual Output / Design Capacity; used to measure how much capacity is actually being used on an average basis. Actual Output - The effective capacity minus additional factors that reduce production, such as a fuel stop. Efficiency - Actual Output / Effective Capacity; used to measure how much effective capacity is being used to achieve output. Eliyahu Goldratt - An Israeli physicist who developed the Theory of Constraints (TOC). Theory of Constraints (TOC) - A five-step process that helps a firm optimal throughput by identifying and fixing bottlenecks; includes 1) finding constraints, 2) exploit the constraints (get 19 at 100% capacity), 3) subordinate everything else to decision (communicate to everyone), 4) elevate the constraint (how to increase capacity), and 5) repeat (find a different bottleneck, for continuous improvement). Throughput - The state where output is as close to the system capacity as possible. Facility Location - The placement of a facility with regards to a company's customers, suppliers, and other facilities; should be a long-term, strategic investment. Regional Facility Strategy - Requires that each production facility has a defined marketing area that produces a complete line of products for that area; used when customer convenience is important, or when transportation costs are high. Product Facility Strategy - One facility is responsible for producing one product or product line and shipping it throughout the world; good for expensive, small, specialized products that require many resources to produce. Variable Costs - Costs which change and can be adjusted as business conditions change. Total Costs - (Variable Costs per Unit)*(The Number of Units Produced) + Fixed Costs Time Value of Money - One dollar received today is worth more than one dollar received at some future point, such as through investment. 20 Process Selection - Determining the most appropriate method of completing a task; volume, cost, and profit are three critical elements when selecting a process. Volume - Applying the appropriate mix of technology to leverage the organization's workforce. Leverage - Making a workforce more productive using better tools. Line Flow Processes - Low variety operations; have high fixed costs and low variable costs. Continuous Flow - Where low-variety units are mixed and flow together in a high-volume continuous stream, such as oil refining or processing checks; the main scheduling dilemma stems from knowing the best time to switch from making one product to another. Assembly Line - The assembly of low-variety discrete products, such as washing machines, at high volume; each output is trackable. Batch Flow - A process that aggregates similar products together to generate sufficient volume for efficient use; transition/changeover time is required between batches; an example is the manufacturing of pain medications. 21 Job Shop - A general and flexible facility that has much higher unit costs but cater to individual customer demands; produces low quantities of any given item, but large amounts of quantity overall; low fixed costs and high unit-variable costs. Project - All costs are variable; often a "fixed position", such as a building or computer hardware; flexible and require expert teams to implement. Flexible Manufacturing Systems (FMS) - Allow the production of low-cost products that need varying customer requirements; relies upon group technology to build a family of parts. Group Technology - A set of methods that allow firms to classify parts based on size, shape, use, material, and production method. Family of Parts - A collection of parts with similar characteristics. Mass Customization - Producing products at low cost, high volumes, and high flexibility; meets the various needs of customers. Economies of Scale - Reducing costs from increasing production for a single product type using existing resources. Economies of Scope - Reducing costs by producing more types of products. 22 Forecasting - An attempt to predict the future by using past experience to gain insights into the future with mathematical models. Forecasting Error - The difference between what actually happens and what is predicted. Forecasting Process - Consists of determining forecast objectives, developing a model using historical data, applying the model, consider real-world constraints on the model, and revising and evaluating the forecast using human judgement. Independent Demand - Demand that is not controlled by the company, such as finished products. Dependent Demand - Demand generated by a company's production process, such as components for a computer that a company is producing. Master Schedule - Indicates which items and how many of each item to produce. Bill of Materials (BOM) - Lists the needed materials and quantities of materials; it also provides information on how the materials come together; like a recipe. Delphi Technique - Deciding based upon input from a panel of experts who deliver their input via surveys. 23 Build-Up Method - Adding together estimates from each element from an organization, from the bottom to the top; for example, sales representatives at the bottom of the organization can be asked for their estimates of the revenue that they generate; this data is then passed on to the next-higher level of the organization, and revised and refined during this process. Test Market - When a new product in placed in an area that is representative of the overall market to measure its success; an expensive approach that usually reports accurate findings. Regression Analysis - used to predict both cross-sectional and time series data. Cross-Sectional Data - Collected by observing many subjects at the same point in time or without regard to differences in time. Time Series Data - A series of values of a quantity obtained at successive times, often with equal intervals between them. Simple Moving Average - An average that smooths out peaks in the data to provide a more reasonable prediction; calculated by taking the sum of each of the data points and dividing them by the number of data points; used to forecast future data. Weighted Moving Average - An average that assigns different weights to each period; calculated by taking each value, multiplying them by their respective weights, and then summing each result. 24 Exponential Smoothing - A procedure for continually revising an estimate to include more recent data. Each data point is calculated separately, and each low and high weight is also shown separately. The overall formula is F = A(X) + [(1 - A) * (X)], where the "A" represents the low and high weights and "X" represents the previous data point. This calculation is performed twice for each period, once for the low and once for the high weight. Propensity for Error - How much error is inherent in a model? Calculated by using the mean squared error (MSE) or mean absolute deviation (MAD). Mean Squared Error (MSE) - The average of all the squared errors; square each of the error rates (the difference between the actual and the predicted results), add them together, and divide by the number of periods. Mean Absolute Deviation (MAD) - Similar to mean squared error (MSE), excepted instead of squaring each of the error rates, one should simply drop the minus signs from the negative values, add them all together, and then divide by the number of periods. Medium-Range Forecasts - Forecasts that range from six to 18 months; used in the aggregate plan. Long-Range Operations Planning - A plan that usually lasts for around five years that addresses facilities, resources, and building. 25 Medium-Range Operations Planning - A plan that develops ways to utilizes resources to meet demand; usually span from six to 18 months. Aggregate Planning - The combination of individual end items into groups or families of parts for planning purposes; for example, an appliance manufacturer may begin medium-range planning by determining production rates for each product family, such as fridges, stoves, and dishwashers. Master Production Schedule - Based on the aggregate plan, this schedule provides more detail, such as identifying the cubic feet, energy efficiency, and layout of a fridge model; determines the exact product mix that a company will use; disaggregates the aggregate plan; for example, whereas the iPod may be the basis for the aggregate plan, the 5th Generation iPod Touch in Gray and Silver is reflected in the master production schedule. Planning Horizon - The length of time a company uses as the basis for developing a plan, forecast, or schedule. Should be long enough to account for lead times of all products and their component parts, plus additional buffer time. Time Bucket - A short period of time in which demand and requirements are grouped for master scheduling and material requirements planning. Iteration - Revision/improvement 26 Available-to-Promise - Inventory that has not yet been sold. Take the on-hand inventory and subtract it from the customer orders booked. Trials - Multiple versions of the master production schedule (MPS). Rolling Through Time - The process of continuously updating master production schedules. Freezing the Master Schedule - Preventing changes to the master product schedule (MPS) to avoid disruption. Time Fences - Act as boundaries between periods in the planning horizon; corresponds to the cumulative lead time to make a product; events outside of the time fence are not captured in the master schedule. Material Requirements Planning (MRP) - The process of managing inventory for dependent demand items; the three most important data requirements of MRP are the master production schedule (MPS), the bill of materials (BOM), and inventory records. Cycle Counting - A way to reconcile inventory records and correct errors; a physical count of the inventory is made at least once per replenishment cycle. Replenishment cycle - The period between orders to replenish inventory. 27 Exploding the BOM - Producing a material requirements planning (MRP) table for each item in a bill of materials (BOM); the BOM is exploded each time a company runs an MRP table. Planned Order Release - The quantity that should be ordered, based upon an insufficient quantity reported in the master production planning (MRP) table. Shop Order - Authorizes production to make certain components. Purchase Order - Authorization for a vendor to supply materials. Daily Dispatch List - Gives the order of priority for jobs to be completed. Material Requirements Planning (MRP) II - Has a broader focus on the tools of production planning and tracking; improves MRP such as introducing automating planning/tracking with digital tools; extends the value stream beyond when the material is received so that it covers the entire manufacturing and shipping processes; includes finance, human resources, and shipping. Enterprise Resource Planning (ERP) - An enterprise-wide view of data-driven productivity; it began with material requirements planning (MRP) to focus on materials, followed by the entire manufacturing system (MRP II), and then, finally, an enterprise-wide scope (ERP). Sequencing Rules - Guidelines for the order in which of a set of procedures should take place. 28 Peak Demand - Occurs as the result of a planned event, such as a release date; a pro of planning for peak demand is that one can guarantee that capacity is available during peak demand, but a con is that capacity is often underutilized during non-peak times, whereby wasting money; sufficient capacity is available at all time to ensure that capacity is available during peak demand. Chase Demand - The process of varying the workforce and using overtime to adjust production rates to match demand; this strategy requires a flexible workforce. Uneven Demand - When demand is not even throughout the day. Reservation Strategy - Allows organization to determine advance demand while also limiting access to this service. Airports and restaurants often do this. Consumer Participation - Requiring customers to exert effort during transactions, such as pumping one's own gas or serving themselves at a buffet; this process saves money. Adjustable Capacity - The ability the use a portion of facilities or employees at any given time, such as closing off a section of a restaurant when demand is low so that some wait staff can prepare for peak demand. Capacity Requirements Planning (CRP) - Used to determine capacity. 29 Make-to-Order Company - A company that only provides goods that are ordered. Made-to-Stock Company - A company that produces for inventory and future demand. Assembly-Line Balancing - Having the optimal number of appropriate workstations and the appropriate amount of work per station so that idle time is low, preferably zero. Run-Out Time - Current Inventory / Usage Rate; used to calculate how long it will take for a company to run out of a product at current usage rates. Safety Stock - A level of inventory to protect against unexpected demand or supplier delays as to keep overall production levels constant. Work-in-Process (WIP) - Partly-finished parts or components. Pipeline Inventory - Inventory from the time it leaves the warehouse until it is delivered to the customer. Perpetual Inventory System - An inventory system that continuously monitors inventory levels, such as using barcode scanners at grocery stores. An advantage is that the company will always have a good inventory count. The disadvantage is the cost to maintain such a system. 30 Order Point - The least-acceptable level of inventory; ordered are often performed automatically based upon this data point. Periodic Review System - Used when a company does not know their inventory level or if the supplier will only deliver at a specific interval during their order window. Ad advantage is that this system is low-cost. The downside is the inability to determine exact inventory balances without a physical count, whereby necessitating safety stocks. Stock-Out - When the inventory runs out. ABC Analysis - Used to determine which inventory items should receive the highest level of control, through multiplying the dollar value of each item by its annual usage. Items are ranked by dollar usage, from highest to lowest. Following the Pareto Principle, the first 20% of the items are assigned to Class A, characterized as having close control and monitoring through a perpetual inventory system. Class B items comprise the next 30%, and they deserve less attention. Class C items are the last 50% of stocked items, characterized by lowest dollar usage and can be monitored loosely through a periodic review system. Pareto Principle - The principle that only 20% of all items account for 80% of total dollar usage. Economic Order Quantity (EOQ) - A model that determines the per-order quantity at which annual variable costs for holding and ordering inventory are minimized; whenever ordering costs 31 go up, holding costs go down, and vice-versa, so EOQ selects the point where both intersect on a graph; the model calculates whole inventory items that arrive complete. Ordering Cost - The cost of ordering components or changing over equipment to produce it in-house (set-up costs). Holding/Carrying Costs - The costs of holding inventory; includes costs for storage space and losses incurred due to damage or obsolescence. Economic Order Quantity (EOQ) Assumptions - 1) Constant known demand, 2) Cost per unit is not dependent on order quantity, 3) Entire order delivered at once, and 4) ordering and carrying costs are known and independent. Lead Time - The time it takes for an order to reach a supplier's office, to fill the order, and to ship the order. Order Point (Formula) - Daily Demand (units/day) * Lead Time (days) + Safety Stock Service Level - The percentage of replenishment orders that are received before a stock-out occurs; considers the probability of a stock-out vs the costs of inventory to find the right percentage. 32 Standard Deviation - Measures how far numbers spread apart. For example, if the average inventory is 10 units, and the inventory tends to run between six and 14 units, the standard deviation is four. Economic Production Quantity (EPQ) - A model that helps companies control the cost of ordering, receiving, and holding inventory; this model allows for incomplete inventory to arrive, thus proving useful for businesses that produce their own parts; also known as Production Order Quantity. Review Interval (Formula) - Economic Order Quantity (EOQ) / D Order-Up-To Level (Formula and definition) - M = D(R + L); A formula used to calculate how much to increase inventory to a level sufficient to cover anticipated demand before the next order is received. Just-in-Time (JIT) - Characterized by maximizing efficiency and eliminating waste; encompasses standardized processes with single-piece flow, allowing variety; focus on a smooth, even flow of high-volume production; often used synonymously with "lean systems"; minimizes work-in-process (WIP) inventory; transition to general-use machines; move workers closer together so they can hand-off material throughout the process; make blanket purchases; uses a pull system; often has shorter planning horizons with small batch sizes and less scheduling; low inventories help spot inefficiencies. 33 Toyota Production System (TPS) - Toyota's version of Just-in-Time (JIT) and lean systems. Push System - Moves materials through the process based upon a schedule. Pull System - Moves materials through the process as needed. Kanban - The Japanese word for "card" that is used to signal the need for more materials or parts at downstream operations; developed by Toyota; used in pull systems. Conveyance Kanban (C-Kanban) - An authorization to move a container of parts or materials; nothing can move without it. Single-Card Kanban System - Inventory at a work center can only be replenished when a container is emptied, whereby preventing the hoarding of extra parts. Production Kanban (P-Kanban) - Used to authorize the production of parts. Dual-Card Kanban System - Combines Conveyance Kanban (C-Kanban) and Production Kanban (P-Kanban); allows greater control over production and inventory. Total Preventive Maintenance (TPM) - Preventing defecting parks or equipment failure in the process; also known as total productive maintenance; relies on preventive maintenance, the 34 allocation of time for maintenance, and operator responsibility for maintenance (as opposed to departmental responsibility). Level Assembly Schedule - The number of units of each end product produced at a time is as small as possible, and the total production of each matches average demand during the scheduling horizon. For example, if the scheduling horizon is 20 days, and the demand during that period is expected to be 300 units, a level schedule work require 15 units (300/20) be produced per day. Makes demand for each part fairly uniform throughout the day. Cycle Time (Definition and Formula) - Work Time per Day / Units Required per Day; a measure of how often a product is made.