45. BOTTLENECKS RULE OK VICTORIA J. MABIN AND DAVID WHITAKER APPLIED MATHEMATICS DIVISION DSIR, WELLINGTON, N.Z.

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1 45. BOTTLENECKS RULE OK VCTORA J. MABN AND DAVD WHTAKER APPLED MATHEMATCS DVSON DSR, WELLNGTON, N.Z. Summary The paper discusses and contrasts contemporary methods of organising production and inventory(mrp, JT and OPT). 1 ntroduction The objective of manufacturing control systems have traditionally been to minimise the costs of manufacture ie minimise the unit cost. n statistical inventory control(sc) three major costs have been identified:- Stockholding cost- interest and management charges on inventory directly proportional to units of inventory. Reorder cost or set up cost- Costs incurred which arc not directly proportional to the units ordered or produced eg. cleaning a machine for the next production run Shortage cost- a cost incurred for running out of an item. Usually directly proportional to the number of items. There has been a tendency to accept that all three costs are fixed for a given system and the EBQ(economic batch quantity) is derived from minimising the total annual cost made up of these three costs. The appropriate reorder points and safety stocks are determined simultaneously. The fact that the EBQ was defended by Tate[l] illustrates its unacceptability in some quarters(sce the comments in response to Tate by Burbridge, Duckworth and Eilon [2]). n recent years the Japanese have initiated new manufacturing control systems, Just in Time( JT)[3], which do not accept the rigidity of the old approach. n particular set up times and costs can be reduced by continual improvements which leads to flexible manufacturing systems where the set up cost is no longer prevalent

2 46. in the analysis. With a neglegible set up cost then the EBQ becomes the unit of production itself. n addition, further advantages accrue. Work in process(wp) falls, production and inventory control on the shop floor becomes less complex through the use of simple manual systems(japanese Kanban) which enhance or replace the slow and complex MRP systems. Less time is spent in searching out lost inventory etc.(see Hewlett-Packard case study[4]). Critics have stated that the Japanese approach stems from a culture which may not be appropriate to Western and New Zealand values. However, it is recognised that the old methods, MRP and MRP, have failed to utilise the advantages of JT and this has resulted in an sraeli system[5], OPT(Optimised Production Technology), taking root in some large USA and UK companies. t has been described as a compromise between the Japanese(JT) and USA(MRP) systems, allowing for more product variety than the Japanese system. The OPT computer software is clouded in secrecy and is reported to cost from $US0.5m to $US2.0m. The software is a complete package which not only does the materials planning but the scheduling using a system of priorities based on capacity and bottlenecks. Even though the cost of the software would seem to prohibit it from most NZ companies, the OPT philosophy, like the JT philosophy, makes it worth considering for the advantages which may result, reduced WP, improved throughput etc. At this point, before looking at OPT in more detail, it is worth noting that the objective of the OPT philosophy is To make money now and in the future. This can be translated to maximising production throughput to meet sales and in contrast to SC, it is claimed that the system does not consider cost in any way[6]. 2 Optimised Production Technology(OPT) OPT states that the real goal of the manufacturing organisation is not to keep machines busy, employ workers, provide good customer service, produce high quality goods or be at the leading edge of technology- it is to make money. When any of the other motives become the primary goal, the organisation tends to overinvest in the wrong things. Making money can be translated into maximising profit, return on investment and cash flow. This in turn translates into shopfloor objectives of raising throughput, lowering inventory and operating expenses simultaneously. Throughput is defined as the rate at which the system generates MONEY through SALES; nventory is all the money that the system has invested in purchasing things it has to sell; Operating expenses is all the money the system spends in order to turn NVENTORY into THROUGHPUT. OPT divides production processes into bottleneck and non-bottleneck processes. A bottleneck process governs the throughput and is a process where improvements have monetary benefits. OPT has nine scheduling rules and these are given in Table 1, along with the rules that most conventional approaches use.

3 47. 3 How Does OPT Match Up? The comparison of MRP, JT and OPT is summarised in Table 2. While MRP and SC are both valuable tools, if used properly, they fail by taking the status quo as given, rather than actively seeking to change factors that make major impacts on the costs and efficiencies of the organisation. This is where JT and OPT play their part: they both stress the need for a process of ongoing inprovement. With JT this is usually a prerequisite -eg developing close relationships with suppliers in order to gain supply reliability. With OPT, the identification of bottlenecks creates opportunities to increase total production in a simple and direct way, by increasing bottleneck capacities. n addition the OPT approach offers improvements and new insights into controlling and planning manufacturing processes. The OPT philosophy is widely applicable, simple and flexible to implement. t can be applied at virtually any level of technical sophistication - from merely applying the philosophy to the way we think about manufacturing, to a computer-aided scheduling system. The benefits that can be attained from using OPT include reduced inventories, increased throughputs, greater control, reduced lead times and better quality control. References 1 Tate, T B, n Defence of the EBQ, ORQ 15,No.4(1964) pp Burbridge,J L, Duckworth, W E and Eilon, S, Comments pp , ORQ 16, No.1(1965) 3 Schonberger R J, Japanese Manufacturing Techniques, Free Press, Fuller,F T, There s Just Not Much Work in Anything, Second Ellis R Ott Conference on Quality Management and Applied Statistics in ndustry, Goldratt, E M and Cox, J, The Goal- A Process o f Ongoing mprovement, Revised Edition, North River Press, New York, Jacobs, F R, The OPT Scheduling System: A Review of a New Scheduling System, Production and nventory Control, 3rd Quarter, 1983.

4 Table 1: Comparison of OPT and Conventional Scheduling Rules CONVENTONAL 1. Balance capacity, then try to maintain flow. SCHEDULNG HEURSTCS OPT 1. Balance flow not capaicity. 2. Level of utilization of any worker is determined by his own potential. 3. Utilization and activation of w orkers are the same. 4. A n hour lost at a bottleneck is just an hour lost at that resource. 5. A n hour saved at a non bottleneck is an hour saved at that resource. 6. Bottlenecks temporarily limit throughput but have little impact on inventories. 7. Splitting and overlapping of batches should be discouraged. 8. The process batch should be constant in time and along its route. 9. Schedules should be determined by sequentially: Predetermining the batch size. Calculating lead time. A ssign in g priorities, setting schedules according to lead time. Adjusting the schedules according to apparent capacity constraints by repeating the above 3 steps. 2. Level of utilization of a nonbottleneck is not determined by its ow n potential but by some other constraint in the system. 3. Activation and utilization of a resource are not synonymous. 4. A n hour lost at a bottleneck is an hour lost for the total system. 5. A n hour saved at a non-bottleneck is just a miroge. 6. Bottlenecks govern both throughput and inventories. 7. The transfer batch may not and m any times should not be equal to the process batch. 8. The process batch should be variable not fixed. 9. Schedules should be established by looking at all of the constraints simultaneously. Lead times are the result of a schedule and can't be predetermined. M O T T O The only way to reach a global optimum is by insuring local optimums. M O TTO The sum of the local optimums is not equal to the global optimum. Source: "Principles into Practice with OPT" Engineers' Digest, May 1986, p p

5 49. Table 2 Comparison of main features of MRP/MRP, JT and OPT MRP/MRP JT OPT Obj.s Minimise total stockholding cost Minimise inventory To make money now and and maximise simpl- in the future- icity maximise net profit, RO, cash flow. Schedule MRP schedules in 2 stages-as if ample resources available then CRP. Demand push. Simple Kanban card OPT software schedules Demand pull 1 with priorities for bottlenecks in one stage. Bottleneck driven Materials System is set up to highlight material requirements- when and how much No computer system OPT software gives own needed in pure JT,as MRP system,which high-1 demand pulls in lights bottlenecks.opt materials JT. MRP may run alongside a often there in NZ for 1 standard MRP B and C items Batch size Data Tend to be large and based upon EOQ s. Batch size fixed through system, but transfer batch may differ in practice Accurate record for all processes.stock checks routine to maintain accuracy. Very small, ideally Variable batch sizes 1 the unit of production Process batch large on bottlenecks, smaller 1 on non-bottlenecks. Transfer batch variable No large stocks. Accurate for bottle- deally with JT inv- neck processes. Less 1 entory, no need for a so on others. computer system. Suppliers Tendency to accept status quo. No emphasis on improvement. Close relationship No emphasis on essential. Both in improvement. terms of distance and relationship. Production process Tendency to accept status quo with MRP coping with problems ndividual bonuses prevalent. Process efficiency in. Emphasis on continual Continual improvement improvement in set-up at bottlenecks. Worker times, quality etc. cooperation important Worker cooperation is ndividual bonuses a important(qc s). n o. ndividual bonuses out Flexibility Long lead times. Response to demand slow. Short lead times. Medium lead times. Quick response to Response time in demand. between MRP and JT

6 Table 2 (cont d) Comparison of main features of MRP/MRP, JT and OPT Cost Remarks MRP/MRP JT 1 OPT 1 Software in the 1 $100,000 range. 1 Cost of operation 1 high. 1 gnores costs of 1 confusion from high 1 inventory which 1 predominates. No software, difficult 1 to implement, however 1 cheap to run. 1 1 OPT software in the $US0.5m to $US2.0m 1 range. However philos-l ophy easy to implement 1 Running costs medium. 1 1 Will this work in a 1 Tries to take the goodl NZ environment? 1 of JT and MRP to work 1 Distant suppliers etc. 1 in Western culture