Acceptance sampling is an important field of statistical quality control that was popularized by Dodge

and Romig and originally applied by the U.S. military to the testing of bullets during World War II.

Dodge reasoned that a sample should be picked at random from the lot, and on the basis of information
that was yielded by the sample, a decision should be made regarding the disposition of the lot. In
general, the decision is either to accept or reject the lot. This process is called Lot Acceptance Sampling
or just Acceptance Sampling.

Acceptance sampling is "the middle of the road" approach between no inspection and 100%
inspection. There are two major classifications of acceptance plans: by attributes ("go, no-go")
and by variables. The attribute case is the most common for acceptance sampling, and will be
assumed for the rest of this section.
Important point -A point to remember is that the main purpose of acceptance sampling is to
decide whether or not the lot is likely to be acceptable, not to estimate the quality of the lot.
Scenarios leading to acceptance sampling -Acceptance sampling is employed when one or
several of the following hold:

 Testing is destructive
 The cost of 100% inspection is very high
 100% inspection takes too long
A lot acceptance sampling plan (LASP) is a sampling scheme and a set of rules for making
decisions. The decision, based on counting the number of defectives in a sample, can be to
accept the lot, reject the lot, or even, for multiple or sequential sampling schemes, to take another
sample and then repeat the decision process.
Types of acceptance plans to choose from -LASPs fall into the following categories:

 Single sampling plans:. One sample of items is selected at random from a lot and the
disposition of the lot is determined from the resulting information. These plans are
usually denoted as (n,c) plans for a sample size n, where the lot is rejected if there are
more than c defectives. These are the most common (and easiest) plans to use although
not the most efficient in terms of average number of samples needed.
 Double sampling plans: After the first sample is tested, there are three possibilities:
1. Accept the lot
2. Reject the lot
3. No decision

If the outcome is (3), and a second sample is taken, the procedure is to combine the
results of both samples and make a final decision based on that information.

 Multiple sampling plans: This is an extension of the double sampling plans where more
than two samples are needed to reach a conclusion. The advantage of multiple sampling
is smaller sample sizes.
 Sequential sampling plans: . This is the ultimate extension of multiple sampling where
items are selected from a lot one at a time and after inspection of each item a decision is
made to accept or reject the lot or select another unit.
 Skip lot sampling plans:. Skip lot sampling means that only a fraction of the submitted
lots are inspected.

Definitions of basic Acceptance Sampling terms -Deriving a plan, within one of the categories
listed above, is discussed in the pages that follow. All derivations depend on the properties you
want the plan to have. These are described using the following terms:

 Acceptable Quality Level (AQL): The AQL is a percent defective that is the base line
requirement for the quality of the producer's product. The producer would like to design a
sampling plan such that there is a high probability of accepting a lot that has a defect
level less than or equal to the AQL.
 Lot Tolerance Percent Defective (LTPD): The LTPD is a designated high defect level
that would be unacceptable to the consumer. The consumer would like the sampling plan
to have a low probability of accepting a lot with a defect level as high as the LTPD.
 Type I Error (Producer's Risk): This is the probability, for a given (n,c) sampling plan,
of rejecting a lot that has a defect level equal to the AQL. The producer suffers when this
occurs, because a lot with acceptable quality was rejected. The symbol is commonly
used for the Type I error and typical values for range from 0.2 to 0.01.
 Type II Error (Consumer's Risk): This is the probability, for a given (n,c) sampling
plan, of accepting a lot with a defect level equal to the LTPD. The consumer suffers when
 this occurs, because a lot with unacceptable quality was accepted. The symbol is
commonly used for the Type II error and typical values range from 0.2 to 0.01.
 Operating Characteristic (OC) Curve: This curve plots the probability of accepting the
lot (Y-axis) versus the lot fraction or percent defectives (X-axis). The OC curve is the
primary tool for displaying and investigating the properties of a LASP.
 Average Outgoing Quality (AOQ): A common procedure, when sampling and testing is
non-destructive, is to 100% inspect rejected lots and replace all defectives with good
units. In this case, all rejected lots are made perfect and the only defects left are those in
lots that were accepted. AOQ's refer to the long term defect level for this combined LASP
and 100% inspection of rejected lots process. If all lots come in with a defect level of
exactly p, and the OC curve for the chosen (n,c) LASP indicates a probability pa of
accepting such a lot, over the long run the AOQ can easily be shown to be:

where N is the lot size.

 Average Outgoing Quality Level (AOQL): A plot of the AOQ (Y-axis) versus the
incoming lot p (X-axis) will start at 0 for p = 0, and return to 0 for p = 1 (where every lot
is 100% inspected and rectified). In between, it will rise to a maximum. This maximum,
which is the worst possible long term AOQ, is called the AOQL.
 Average Total Inspection (ATI): When rejected lots are 100% inspected, it is easy to
calculate the ATI if lots come consistently with a defect level of p. For a LASP (n,c) with
a probability pa of accepting a lot with defect level p, we have

ATI = n + (1 - pa) (N - n)

where N is the lot size.

 Average Sample Number (ASN): For a single sampling LASP (n,c) we know each and
every lot has a sample of size n taken and inspected or tested. For double, multiple and
sequential LASP's, the amount of sampling varies depending on the number of defects
observed. For any given double, multiple or sequential plan, a long term ASN can be
calculated assuming all lots come in with a defect level of p. A plot of the ASN, versus
the incoming defect level p, describes the sampling efficiency of a given LASP scheme.

The final choice is a tradeoff decision -Making a final choice between single or multiple
sampling plans that have acceptable properties is a matter of deciding whether the average
sampling savings gained by the various multiple sampling plans justifies the additional
complexity of these plans and the uncertainty of not knowing how much sampling and inspection
will be done on a day-by-day basis.
UNIT 3

Lean management is an important part of lean thinking. As we implement lean in any organization the
traditional way of managing does not guarantee right focus nor help sustaining lean initiatives. If no
action is taken to change the way we manage process, people and products we are likely to see failure
of lean implementations. Many people on lean journey fail to apply lean in a holistic manner. Usually
they start with applying tools without proper guidance and leadership the company cannot move to the
next level. Thus a management system that specifically meets the needs of a transforming organization
is very much essential.

What is lean Management?

Lean is all about customer focus. Value is defined by the customer and we develop and maintain
processes to provide this value. Processes are run by people. Only support and proper leadership and
guidance you can drive your people to continuously improve the processes that add value to the
customer. The management system that helps you to achieve this is a Lean Management system. Lean
Management system uses various tools to connect the purpose (Providing value to customer) to the
process and people. Some of the lean management tools which are commonly used are Leader standard
work, visual control boards, and daily accountability.
The tools itself are not effective unless used with right mindset. There is a lot of work needed to be done
at individual level for the mangers to become lean managers. To start with lean management we have to
start developing managers in to “Lean Managers”. What are you doing to become a lean manager?
 Lean manufacturing,
lean enterprise, or lean production, often simply, "Lean," is a production practice that
considers the expenditure of resources for any goal other than the creation of value for the end
customer to be wasteful, and thus a target for elimination. Working from the perspective of the
customer who consumes a product or service, "value" is defined as any action or process that a
customer would be willing to pay for.

Essentially, lean is centered on preserving value with less work. Lean manufacturing is a
management philosophy derived mostly from the Toyota Production System (TPS) (hence the
term Toyotism is also prevalent) and identified as "Lean" only in the 1990s.[1][2] TPS is renowned
for its focus on reduction of the original Toyota seven wastes to improve overall customer value,
but there are varying perspectives on how this is best achieved. The steady growth of Toyota,
from a small company to the world's largest automaker,[3] has focused attention on how it has
achieved this success.
Lean management is usually fully realized in the final state of lean transformation. If you are
trying to implement tools of lean management and do not have a culture that support lean
thinking, your success may be very limited. What are some of the cultural enablers that help you
build the foundation for lean transformation and ultimately lead to lean management?

 Leaders should show humility and respect their subordinates and peers.
 Senior leadership should be willing to accept lean as a philosophy and not just another
project for cost cutting
 Managers be trained and committed to solving problems
 People in the organization should feel secure about their job
 Daily informal/formal feedback should be facilitated at team and individual level to align
the performance
 Suggestion system for all employees to provide feedback and ideas for improvement
 All information required to make decision or track performance should be shared with
people who need it
 People need to be empowered to make decisions and solve their problems
 Training should not be done only once but should be conducted on regular basis
 Senior leaders needs to be trained for mentoring young and future leaders
 People need to be trained to use visual controls
 Leaders need to be trained to use Gemba walks as mentoring / training tool and also as a
tool to find waste and problems related with flow of materials and information

Lean management derives its values from 2-key principles of lean; Respect for People and
Continuous Improvement.

Continuous Improvement:
A lean manager is focused on solving problems incrementally. Each solution is an experiment
which helps in the learning process and paving the path to the next level.Small improvements
followed by time of stability and then again a small improvement , is a cycle that is preffered in a
lean environment . this form of small changes are easier to manage without much disruption to
the suppoorting proceses like material supply to the line.

Respect to People :

As easy as it seems this by far has been the most difficult things to understand . It has often been
described as an important quality that any lean manager should posses . A lean manager respects
people by giving them the authority to solve their problems .This way lean manager uses the
knowledge of the people who actually add value to the process and also able to get buy in by
engaging all the employees . This does not mean that a lean manager completely disconnects
himself from problem solving. He guide his people to solve their problems by asking the right
questions ,till they find the root cause.

A Lean Manager is a person who has trained himself at lean thinking by practicing the principles
of lean manufacturing. He has developed the right mindset which is essential for the developing
and sustaining the lean initiatives of the company. The Lean Manager is the key for the Lean
Management to evolve organically within the organization. Here is a list of Qualities that I think
any Lean Manager should have:

1. Lean Manager is a problem solver; he always tries to solve the problem in scientific way
2. He does not like to sit at his desk but when the problem arises he goes the source
(Gemba) and finds the root cause by asking questions
3. A lean manager does not randomly use tools; he chooses the right tool for the means of
solving a problem on gemba
4. A lean manager always shows respect to all people
5. A Lean manager is not a treat lean as a project, but as something to be practiced daily in
search of perfection.
6. Lean Manager is not afraid of failure, he treats each solution as an experiment to learn
more and get one more step closer to the ideal state
7. Lean Manager always questions the status quo, he tries to rethink problems and learn by
practicing
8. Lean Manger uses Socratic Method to stimulate lean thinking in others

THEORY OF CONSTRAINTS:
Theory of Constraints (TOC) is a technique which tunes the planning to the bottlenecks. The course covers the
TOC philosophy and the concepts of TOC, which can be condensed into 10 rules. The participants will experience
the drum-buffer-rope - principle during the bottleneck game. The goal of this game is to optimize the output of a
production line. This interactive exercise shows that management of your buffers guarantees a smooth flow of
material and controls the work-in-process.

The theory of constraints (TOC) is a management paradigm that views any manageable system
as being limited in achieving more of its goals by a very small number of constraints. There is
always at least one constraint, and TOC uses a focusing process to identify the constraint and
restructure the rest of the organization around it.
 TOC adopts the common idiom "a chain is no stronger than its weakest link". This means that
processes, organizations, etc., are vulnerable because the weakest person or part can always
damage or break them or at least adversely affect the outcome.

A constraint is anything that prevents the system from achieving more of its goal. There are
many ways that constraints can show up, but a core principle within TOC is that there are not
tens or hundreds of constraints. There is at least one but at most only a few in any given system.
Constraints can be internal or external to the system. An internal constraint is in evidence when
the market demands more from the system than it can deliver. If this is the case, then the focus of
the organization should be on discovering that constraint and following the five focusing steps to
open it up (and potentially remove it). An external constraint exists when the system can produce
more than the market will bear. If this is the case, then the organization should focus on
mechanisms to create more demand for its products or services.

Types of (internal) constraints

 Equipment: The way equipment is currently used limits the ability of the system to
produce more salable goods/services.
 People: Lack of skilled people limits the system. Mental models held by people can cause
behaviour that becomes a constraint.
 Policy: A written or unwritten policy prevents the system from making more.

The concept of the constraint in Theory of Constraints is analogous to but differs from the
constraint that shows up in mathematical optimization. In TOC, the constraint is used as a
focusing mechanism for management of the system. In optimization, the constraint is written into
the mathematical expressions to limit the scope of the solution (X can be no greater than 5).

The Theory of Constraints states that constraints determine the performance of a system. A constraint is
anything that prevents a system from achieving a higher performance relative to its goal. A system is any
collection of interconnected parts sharing a common goal. The Theory of Constraints was first applied to
business systems.

The theory of constraints is an important tool for improving process flows. The implications of the theory are far

reaching in terms of understanding bottlenecks to a process and better managing these bottlenecks to create an

efficient process flow.

The theory of constraints is an important tool for operations managers to manage bottlenecks and improve process

flows. Made famous by Eliyahu M. Goldratt in his book The Goal, the implications of the theory are far reaching in

terms of understanding bottlenecks to a process and better managing these bottlenecks to create an efficient process
 flow. Simply put the theory states, “the throughput of any system is determined by one constraint (bottleneck).” Thus

to increase the throughput, one must focus on identifying and improving the bottleneck or constraint.

Goldratt in another book, Theory of Constraints, outlines a five-step process to applying the theory:

1. Identify the process’ constraints

2. Decide how best to exploit the process constraints

3. Subordinate everything else to the above decisions

4. Evaluate the process constraint

5. Remove the constraint and re-evaluate the process

Synchronous manufacturing embodies various concepts related to focussing and synchronising

production control around bottleneck resources. These concepts are more commonly known as Theory
Of Constraints (TOC), bottleneck management, or the goal system. The main focus of synchronous
manufacturing is efficient utilisation of those resources that are most constraining and prevent additional
production.

Synchronous manufacturing coordinates the production process, improves workflows, thereby, reducing
operating costs, inventory, and lead times. As a "pull-type" system, synchronous manufacturing offers
several advantages in a repetitive manufacturing operation, such as for automobiles, computers,
consumer products, or integrated circuits (ICs).
For instance, the IC fabrication processes involves many steps with long cycle times. This makes them
vulnerable to production-rate variations, which in turn generates inventory waves or bubbles even in a
"balanced" operation. Synchronous manufacturing helps to reduce such unexpected inventory- and
operating-expense fluctuations. It also carries the benefits of higher throughputs and better customer
service

Definition of Synchronous Manufacturing

Synchronous manufacturing is a manufacturing management philosophy that includes a consistent set of principles,
procedures, and techniques, where every action is evaluated in term of the global goal of the system.

Synchronous manufacturing uses TOC as a way to incorporate forward scheduling. It focuses on critical resources so
that time-wise forward scheduling is done. Non-bottleneck or non-critical resources are used to resolve critical
constraint. Process-batch size and transfer-batch size are charged in synchronous manufacturing to reduce lead time
and WIP. A backward scheduling technique, such as MRP, cannot perform this task. Synchronous manufacturing is a
relatively newer approach, which uses forward scheduling to manage the production/manufacturing system. Just-in-
time (JIT)-based system of kanban-approach and Drum-buffer-rope (DBR)-based system of TOC-approach are the
two common types of forward scheduling approaches. MRP, on the other hand, is a backward scheduling approach.

In synchronous manufacturing, production occurs in different production centers; some centers have constraints that limit the rate
of production and some centers do not. Both types of centers must focus on using raw materials to produce goods that are nearly
ready for shipment to customers, with the production schedule closely following the level of customer orders. The manufacturer
saves money on the cost of transporting raw materials to production centers and by preventing the storage of raw materials near
production centers that aren't required for satisfying actual customer orders.
This concept of ‘synchronous manufacturing’ was started in 1984. It has been
defined as: an all-encompassing manufacturing management philosophy that
includes a consistent set of principles, procedures, and techniques where every
action is evaluated in terms of the common global goal of the organisation.

A set of seven ‘principles’ are associated with synchronous manufacturing:

1. Do not focus on balance idle capacities; focus on synchronizing the production

flow.
2. The marginal value of time at a bottleneck resource is equal to the throughput
rate of the products processed by the bottleneck.
3. The marginal value of time at a non-bottleneck resource is negligible.
4. The level of tilization of a non-bottleneck resource is controlled by other
constraints within the system.
5. Resources must be utilized, not simply activated.
6. A transfer batch may not, and many times should not, be equal to the process
batch.
7. A process batch should be variable both along its route and over time.

According to synchronous manufacturing principles 2 and 3, the return on

improvements at a bottleneck resource is very high. But the return on
improvement made at non-bottlenecks is marginal at best. The synchronous
manufacturing philosophy required managers to focus on those areas
of operations where there exist potential global improvements.
Material Requirement Planning ( MRP-I )

It is a part of production operation system. Management has to develop a lot of

strategies for production plan. In early 1960’s a material acquisition plan was first
introduced known as Material Requirement Plan ( MRP-I ). MRP-2 is latest all-
round development of that plan.

A brief history of MRP –1

Material requirement planning is a computerized production scheduling system

which takes the forward schedule of final product requirements (the master
production schedule) and translates it progressively into the numbers of sub-
assemblies, components and raw materials required at each stage of the
manufacturing cycle.

It is a management information system providing a basis for production decisions

when what is manufactured has a composite structure and when lead items are
important features. Obviously, the ability of the system to deliver what is required
in the correct place at the correct time will be dependent on the quality of
information which is put into the computer model.

Aims of material requirement planning:

1. Determine for final products namely, what should be produced and at what
time.
2. Ascertaining the required units of production of sub-assemblies.
3. Determining the requirement for materials based on an up-to-date bill of
materials file (BOM).
4. Computing inventories, WIP, batch sizes and manufacturing and packaging
lead times.
5. Controlling inventory by ordering bought-in components and raw materials in
relation to the orders received or forecast rather than the more usual practice of
ordering from stock-level indicators.
Benefits : Detailed forecast of the inventory position is highlighted period by
period.

What is MRP-II (Material requirements planning)?

A material requirements planning (MRP) system is a computer based inventory

information system which is used to plan and control raw material and
component parts inventories.

Pre-requisites for successful operation of MRP:

1. Strict adherence to the schedule : The successful operation of MRP system

requires a strict adherence to the latest production and purchasing schedules.
Workers must be educated to understand the importance of schedule adherence,
and controls should be in place to ensure this adherence.
2. Accurate data base : Data accuracy is vital to the system. If a plan is based on
inaccurate data it may be impossible to adhere to the schedule. For example, if
the bill of materials file is not updated to reflect any changes in product
composition it will be impossible to adhere to the schedule.

MRP II is the extension of MRP I

When the scope of MRP-1 is developed further which includes

1. Planning of raw material
2. planning of component & sub- assemblies
3. Compute the other resources e.g. machine or labour capacity
4. to create a full integrated plan for management

then it is known as Manufacturing resources planning ( MRP-II)

MRP II (also written MRP-2 ) adds the MRP schedule into a capacity planning
system and then builds the information into a production schedule. It is also seen
as a link between strategic planning and manufacturing control. The sequence of
events is as follows :

A manufacturing, plan is developed based upon inputs from purchasing &

production. Adjustments may be necessary to allow for production rates.
Possible inventory levels in seasonal trades & the size of the workforce. The
manufacturing plan leads into a detailed master production schedule which is
akin to the original philosophy of MRP already outlined.

If correctly applied, MRPII provides a common data base for the different function
units such as manufacturing, purchasing and finance within a firm.

What are needed to operate MRP successfully?

A material requirements planning (MRP) system is a computer based inventory

information system which is used to plan and control raw material and
component parts inventories. Like all computer-based information system, MRP
systems can be divided into following:
i) Pre-requisite information
ii) System input
iii) System processing,
iv) System output.

Material Requirements Planning:

MRP calculates and maintains an optimum manufacturing plan based on master

production schedules, sales forecasts, inventory status, open orders and bills of
material. If properly implemented, it will reduce cash flow and increase
profitability. MRP will provide you with the ability to be pro-active rather than re-
active in the management of your inventory levels and material flow.

Implementing or improving Material Requirements Planning can provide the

following benefits for your company:

Reduced Inventory Levels

Reduced Component Shortages

Improved Shipping Performance

Improved Customer Service

Improved Productivity

Simplified and Accurate Scheduling

Reduced Purchasing Cost

Improve Production Schedules

Reduced Manufacturing Cost

Reduced Lead Times

Less Scrap and Rework

Higher Production Quality

Improved Communication

Improved Plant Efficiency

Reduced Freight Cost

Reduction in Excess Inventory

Reduced Overtime

Improved Supply Schedules

Improved Calculation of Material Requirements

Improved Competitive Position

The consultants at Inventory Solutions can provide an un-biased review of your
operations and make suggestions on how you can improve your process. If you want
the productivity improvements that MRP can deliver, contact Inventory Solutions
today.

MRP uses the following elements to plan optimal inventory levels, purchases,
production schedules and more:

Master Production Schedule (MPS)

Bill of Materials (BOM)

Quantity on Hand (QOH)

Part Lead Times

Sales Order Quantities / Due Dates

Scrap Rate

Purchase Order Quantities / Due Dates

Lot Sizing policies for All Parts

Safety Stock Requirements

Success of an operation department of any organization is dependent upon an efficient

production plan. One of the key essential of a production plan is material and manufacturing
planning system. Material requirement planning plays a pivotal role in assembly-line production.
Material requirement planning is a system based approach, which organizes all required
production material.

Material requirement planning is an information system for production planning based on

inventory management. The basic components of material planning are:

 Material planning provides information that all the required raw material and products are
available for production.
 Material planning ensures that inventory level are maintained at its minimum levels. But also
ensures that material and product are available whenever production is scheduled, therefore,
helping in matching demand and supply.
 Material planning provides information of production planning and scheduling but also provides
information around dispatch and stocking.
Objective of Material Requirement Planning

Material requirement planning is processed which production planning and inventory control
system, and its three objectives are as follows:

 Primary objective is to ensure that material and components are available for production, and
final products are ready for dispatch.
 Another primary objective is not only to maintain minimum inventory but also ensure right
quantity of material is available at the right time to produce right quantity of final products.
 Another primary objective is to ensure planning of all manufacturing processes, this scheduling
of different job works as to minimize or remove any kind of idle time for machine and workers.

Advantages and Disadvantages of Material Resource Planning

As with every system based process, material resource planning also has its advantages and
disadvantages, and they are as follows:

Advantages of Material Resource Planning

 It helps in maintain minimum inventory levels.

 With minimum inventory levels, material planning also reduces associated costs.
 Material tracking becomes easy and ensures that economic order quantity is achieved for all lot
orders.
 Material planning smoothens capacity utilization and allocates correct time to products as per
demand forecast.

Disadvantages of Material Resource Planning

 Material planning is highly dependent on inputs it receives from other systems or department. If
input information is not correct than output for material planning will also be incorrect.
 Material planning requires maintenance of robust database with all information pertaining
inventory records, production schedule, etc. without which output again would be incorrect.
 Material planning system requires proper training for end users, as to get maximum out of the
system.
 Material resource planning system requires substantial investment of time and capital.

Material Resource Planning – Inter dependency of Business Function

Material planning not only benefits operation department but is also beneficial to the other
department of organization. They are as follows:

 Material planning is useful in determining cash flow requirement based on material

requirements and final dispatch schedules.
 It helps procurement team in scheduling purchase of necessary material.
 It helps the sales team in determining delivery dates for final products.
Implementation of Material Resource Planning

Implementation and success of material resource planning dependent on following factors:

 Acceptability of by top management about advantages and benefits

 Proper training and participation of all workers and personnel
 Precision and accuracy of input data for accurate and reliable results

MRP will plan production so that the right materials are at the right place at the
right time. MRP determines the latest possible time to product goods, buy
materials and add manufacturing value. Proper Material Requirements Planning can
keep cash in the firm and still fulfill all production demands. It is the single most
powerful tool in guiding inventory planning, purchase management and production
control. MRP is easy to operate and adds dramatically to profits.

Material requirements planning (MRP) is a production planning and inventory control system
used to manage manufacturing processes. Most MRP systems are software-based, while it is
possible to conduct MRP by hand as well.

An MRP system is intended to simultaneously meet three objectives:

 Ensure materials are available for production and products are available for delivery to
customers.
 Maintain the lowest possible level of inventory.
 Plan manufacturing activities, delivery schedules and purchasing activities.

Contents

 1 History
 2 The scope of MRP in manufacturing
 3 Problems with MRP systems
 4 Solutions to data integrity issues
 5 See also
 6 References
 7 External links

History

Prior to MRP and before computers dominated the industry, reorder-point/reorder-quantity

(ROP/ROQ) type methods like EOQ had been used in manufacturing and inventory
management. In the 1960s, Joseph Orlicky studied the TOYOTA Manufacturing Program and
developed Material Requirements Planning (MRP), and Oliver Wight and George Plossl then
developed MRP into manufacturing resource planning (MRP II).[1]. Orlicky's book is entitled The
New Way of Life in Production and Inventory Management (1975). By 1975, MRP was
implemented in 150 companies. This number had grown to about 8,000 by 1981. In the 1980s,
Joe Orlicky's MRP evolved into Oliver Wight's manufacturing resource planning (MRP II) which
brings master scheduling, rough-cut capacity planning, capacity requirements planning and
other concepts to classical MRP. By 1989, about one third of the software industry was MRP II
software sold to American industry ($1.2 billion worth of software).[2]

The scope of MRP in manufacturing

The basic function of MRP system includes inventory control, bill of material processing and
elementary scheduling. MRP helps organizations to maintain low inventory levels. It is used to
plan manufacturing, purchasing and delivering activities.

"Manufacturing organizations, whatever their products, face the same daily practical problem -
that customers want products to be available in a shorter time than it takes to make them. This
means that some level of planning is required."

Companies need to control the types and quantities of materials they purchase, plan which
products are to be produced and in what quantities and ensure that they are able to meet
current and future customer demand, all at the lowest possible cost. Making a bad decision in
any of these areas will make the company lose money. A few examples are given below:

 If a company purchases insufficient quantities of an item used in manufacturing (or the wrong
item) it may be unable to meet contract obligations to supply products on time.

Data requirements to operate material requirement planning system:

1. The master Production schedule: This schedule specifies the quantity of each
finished unit of products to be produced, and the time at which each unit will be
required.
2. The Bill of material file: The bill of material file specifies the sub-assemblies,
components and materials required for each finished good.
3. The inventory file: This file maintains details of items in hand for each sub-
assemblies, components and materials required for each finished goods.
4. The routing file: This file specifies the sequence of operations required to
manufacture components, sub-assemblies and finished goods.
5. The master parts file: This file contains information on the production time of
subassemblies and components produced internally and lead times for externally
acquired items.
Kanban control
A lean manufacturing system is one that meets high throughput or service demands
with very little inventory. Despite its significant success, kanban control is not a
perfect mechanism to control a lean system. Kanban control uses the levels of buffer
inventories in the system to regulate production. When a buffer reaches its preset
maximum level, the upstream machine is told to stop producing that part type.

This is often implemented by circulating cards, the kanbans, between a machine and
the downstream buffer. The machine must have a card before it can start an operation.
It can then pick raw materials out of its upstream (or input) buffer, perform the
operation, attach the card to the finished part, and put it in the downstream (or output)
buffer. The number of cards circulating determines the buffer size, since once all
cards are attached to parts in the buffer, no more parts can be made. When the
machine picks up raw materials to perform an operation, it also detaches the card that
was attached to the material. The card is then circulated back upstream to signal the
next upstream machine to do another operation. This way, a demand for a unit of
finished goods percolates up the supply chain.

Kanban control. Movement of parts shown in blue, circulation of kanban in red. Machines are shown as circles and
buffers as triangles. The last buffer is the finished goods (FG) inventory.

Kanban control ensures that parts are not made except in response to a demand. The
analogy is to a supermarket: Only the goods that have been sold are restocked on the
shelves. However, it has a major drawback: It uses the parts themselves as carriers of
information. A machine is told to stop production when its output buffer is full. This
requires that a number of parts sit in the buffer without serving any apparent purpose
but to block the upstream machine.

That's not quite right, though. The parts waiting in a buffer do serve a purpose: They
act as a buffer inventory, partially decoupling the operation of downstream machines
from any interruptions of upstream production. If a machine fails, the machine
downstream of it can continue production by consuming the parts that are already in
the buffer. With luck, the upstream machine will be repaired before the buffer is
empty, and the failure will not affect the downstream machine (or the customer on the
downstream end of the chain).

But we can do this in a better way.

CONWIP control
CONWIP stands for Constant Work-In-Process, and designates a control strategy that
limits the total number of parts allowed into the system at the same time. Once the
parts are released, they are processed as quickly as possible until they wind up in the
last buffer as finished goods. One way to view this is that the system is enveloped in
a single kanban cell: Once the consumer removes a part from the finished goods
inventory, the first machine in the chain is authorized to load another part.

CONWIP control. Movement of parts shown in blue, circulation of release authorizations in green.

This leads to subtly different behavior from a kanban control. First of all, like kanban,
the CONWIP system only responds to actual demands that have occurred, so it is still
a ``pull'' type system. But unlike kanban, the resting state of the system has all buffers
empty, except finished goods, which is full. This occurs because any part released to
the system will move to finished goods. New parts will not be released if the finished
goods buffer is full. The inventory in finished goods is now available to serve the
customer, and there is no internal inventory to collect dust.

But what about the buffer inventories and the decoupling against failures? Something
subtle called ``part/hole duality'' is happening. It is true that inventory in a buffer
protects the downstream portion of the line against the consequences of failures
upstream. But it does not protect the upstream portion of the line against failures
downstream. If a buffer is full, and the machine downstream of it fails, a kanban line
will stop production upstream of the failure, no matter how many raging customers
line up at the end. When the failed machine is repaired, it will suddenly impose an
increased workload on the upstream portion of the system, since it needs to catch up
with the demand.

The mostly empty buffers in a CONWIP line contain valuable (but cheap) empty
space. This space is used to decouple the upstream portion of the line against failures
downstream. If the last machine in the line fails, the customers will be served from the
finished goods buffer, while new parts will be released to the line as usual and
proceed to the buffer in front of the failed machine. There they wait for the repair.
When the machine is repaired, it has a sufficiently large number of parts in its input
buffer to catch up with demand and replenish the finished goods buffer.
Empty buffer space acts to decouple the machines also in a kanban line. But there, the
control policy is to fill up the buffers whenever possible. And this is possible most of
the time, unless the demand rate is greater than the system capacity.

Something remarkable just happened: We separated the flow of parts and information.
Then we got a control policy that allows the same throughput and service levels as
kanban, but at lower inventories. Intuitively, the advantage over kanban will be larger
for systems with more stages (since there will be more internal buffers), and for
systems with more process variability (since that requires larger buffer inventories to
achieve the same throughput).

As an added bonus, the CONWIP control is even simpler to implement than kanban,
since just one set of cards is circulating.

But we can do even better than this.

Hybrid control

Sometimes, if the system is very heavily utilized or there is a bottleneck in the line,
the buffers towards the upstream end of a CONWIP line will have quite high levels.
On the other hand, kanban control was designed to prevent individual buffer levels
from exceeding designated limits.

Therefore, we construct a hybrid control policy where the CONWIP control is

supplemented with secondary kanban cells. These detect problems in the line, and
block release of parts to the line if they cannot be processed further. We do not need a
separate kanban cell to block the last machine, since any material that has gotten this
far surely will reach the finished goods buffer if the machine can do an operation. The
resulting control policy acts mostly like CONWIP, but at decreased inventories when
trouble occurs.

Hybrid CONWIP/kanban control. Movement of parts shown in blue, circulation of kanban in red, and release
authorizations in green.

Note how similar this is to a kanban control: We circulate cards between the machines
and buffers. The sizes of the buffers are determined by the number of cards in
circulation. The only difference is that cards detached from finished goods are passed
to the first machine instead of the last. From there, they follow the parts back to the
finished goods buffer.

How big is the improvement?

In our simulation studies, we have seen service improvements of more than 40%
(average backlog) combined with inventory decreases of about 25%, compared with
the best possible kanban control of the line. This was a 10-machine line running at
about 80% utilization, where the parameters were chosen such that 75% of the
demand was served from stock in both cases. The advantage over kanban grows with
the length of the process, the degree of process variability, and the service level target.
The advantage of the hybrid policy over CONWIP grows with the system utilization.

Service level vs inventory for various parameter choices. Kanban in red, CONWIP/kanban hybrid in green.

This figure is generated from simulations of several hundred parameter configurations

for each of the policies. For each choice of buffer sizes and inventory limits (when
applicable), the system was simulated for two years, and the resulting service and
inventory levels were recorded. The service level or fill rate is the fraction of demand
for finished goods that is served from stock. The inventory is all material in the line
and in the finished goods buffer. In this plot, leanness is indicated by high service
levels at low inventories, i.e., by points towards the lower right corner. Note that for
any target service level, many parameter choices for the hybrid policy achieve the
target with less inventory than the best kanban policy.

For example, to achieve 98% fill rate in the six-machine line where these data are
taken from, the best kanban policy has 66.6 units of inventory, and the best hybrid
policy just 49.2. This is a 26% difference.

Kanban (かんばん(看板)?) (literally signboard or billboard) is a scheduling system for lean and
just-in-time (JIT) production.[2] Kanban is a system to control the logistical chain from a
production point of view, and is not an inventory control system. Kanban was developed by
Taiichi Ohno, at Toyota, to find a system to improve and maintain a high level of production.
Kanban is one method through which JIT is achieved.[3]

Kanban became an effective tool in support of running a production system as a whole, and it
proved to be an excellent way for promoting improvement. Problem areas were highlighted by
reducing the number of kanban in circulation.[4

Kanban Production Control System

Kanban: Card or other device that communicates demand for work or materials from the preceding
station.
Kanban is the Japanese word meaning "signal" or "visible record".
Paperless production control system.
Authority to pull, or produce comes from a downstream process.
Kanbans also govern the assembly or Parts' movement authorization
Kanban Formula
We can mathematically construct the Kanban Formula, If we designate the following alphabets
N = Total number of containers ( Or Kanban Cards)
D = Planned usage rate of using work center
T = Average waiting time for replenishment of parts plus average production time for a container of parts
 Kanbans maintain inventory levels; a signal is sent to produce
and deliver a new shipment as material is consumed. These
signals are tracked through the replenishment cycle and bring
extraordinary visibility to suppliers and buyers.[1]

Purpose Logistic control system

Implemented at Toyota

Date implemented 1953

 v
 t
 e

This article describes the 8 types of Kanban system available and what you need to do to choose,
design, implement, and operate Kanban systems, size buffer stocks (the number of Kanbans),
choose containers and signalling mechanisms. It shows the need to integrate the system with your
planning systems. It includes the impact on people, accounting, materials handling systems and
some important do's and don'ts. This type of system belongs to a category of materials management
systems called "pull" systems. (See Materials Management & Stock Control.)

Links on the left to related training and (for topics highlighted in red) further reading
Types of Kanban Systems
You may previously have thought that there was only one, or maybe two types of Kanban system! In
fact there are 6 main types, (plus two significant variants), (excluding 2 bin & 3 bin systems) and
here they are:

One card systems

In the above diagram:

A signal is sent back from the consuming process to supplying process (or supplier). This is a signal:

a. To send some more (a transfer batch), via a buffer stock.

b. To produce some more (a process batch), at the supplying work centre.

NB. Empty containers acting as a signal are a potential hazard as any empty container is a signal to
fill it. Also occasionally containers have been known to go missing! Usually, for these reasons, the
signal is separated from the container.

Input / Output Control Kanban (Two variants)

Sometimes called the ConWip (constant work in process) system, this type imposes input / output
control, where the signal travels directly from the end of a line or section to the preceding section or
raw material stores. In this case the supply chain is treated as one unit rather than a series of linked
operations. So, as one transfer batch is completed (output) another is launched on the first operation
(input), thus ensuring that work in process cannot build up. However there are some special
considerations required in the operation of the system, to avoid hidden capacity problems, which are
not so clearly visible when this method is used.

We have used adaptations of this system to manage workflow and capacity rather than materials in
a number of environments including job shop & clerical / technical process environments.
Kanban Accumulator

In this method Kanban signals are allowed to accumulate at the supplying work centre until the
production batch size is reached.

In this case buffers can be depleted or exhausted depending on the accumulation rules. Also
because buffers can be exhausted, slightly higher mixes can be accommodated.

Dual Card System (2 Card System) (Two variants)

First used by Toyota, there are in fact now two types of two card system. The first method separates
the replenishment (send some) signal, which is produced from the Kanban system, from the
"produce" signal, which is produced by a scheduling system such as MRP. The purpose of each of
the cards is as follows:

 The scheduling system says which job is next.

 The Kanban says make it now. (I need some.)

The second variant of this method generates the second card (after authorisation) as a result of one
or more replenishment requests in a similar way to Kanban accumulators above.

These methods can deal with higher mixes. They can also deal with larger batch sizes, caused by
long changeovers, where scheduling is necessary, although you should be trying to reduce batch
sizes (See Previous Technique: T019 Avoiding set ups and Reducing Changeover Times). In this
case the buffer is depleted, and can be exhausted. In addition a longer planning system such as
MRP1 (See "Levels of Planning & Control") is also necessary to that the system is durable. Kanban
systems operate at level 3 in this model.

Variable Quantity (fixed frequency) System

In some situations it is more convenient to replenish items used, by fixed frequency deliveries (or
collections), rather than respond to fixed quantity replenishment requests. This method forms the
basis of supplier "top up at point of use" systems, where a supplier visiting your point of use will top
up stocks to a predefined maximum level. We have also used this method as the mechanism to
drive "replacement systems" for maintaining stocks of critical spares items or maintaining "van stock"
for on-the-road service engineers. (See Previous Techniques T015: Replacement Systems).

Also it is often better from a capacity viewpoint to use level scheduling techniques, (see Previous
Best Practice B005: Level Scheduling) to smooth demand, particularly in one-to-many supply chains
(see below). (Also see Principle 4, of Lean Supply Chains: 13 Principles)

POLCA System

("Quick Response Manufacturing" Rajan Suri)

This is mentioned for completeness only and is said to be prescribed for high-mix, variable-route,
situations. However at this point, in our opinion, it is worth considering other simplification techniques
(see "Organisational Redesign"), or as a last resort, the use of scheduling tools (See "Advanced
Planning & Scheduling").
Attributes of Kanban Systems
Some champions of Kanban Systems suggest that the system is universally applicable and has no
disadvantages. This is not true! There are some circumstances where they can be positively
harmful. Also if they are not designed and managed correctly, disastrous! We have rescued several,
and in two cases the system was responsible for accumulation of serious customer backlogs! The
system does have advantages and disadvantages and some of these are:

Advantages

 Low fixed stock (number of Kanbans in system)

 Low lead-time
 Quality problems visible
 Highly stable

Disadvantages

 Inflexible (transfer batch fixed, except with "Variable Quantity Systems" above)
 Can cause stoppages (often viewed as an opportunity to solve a problem)
 Highly stable! (But you may need to change due to changes in demand for example, or it
may be an unstable environment). Pull systems do not plan. They react!

Where appropriate

The technique can be applied to any pair of resources, or pairs in a series of resources (including
clerical operations), where one feeds the other. It is important to choose suitable pairs. However you
also need to be careful to select the appropriate Kanban system for your situation. Some systems
are more appropriate to particular situations. In particular the mix, variability, and numbers of
resources in the supply chain network (e.g. one-to-many, many-to-many, many-to-one) are key. Also
there needs to be a method of handling small orders or prototypes (not difficult if thought about at
the start). (See Previous Readers Question Q019: When is Kanban not Appropriate? Do I need extra
equipment?). There are also some prerequisites which you need to consider such as having a
planning process which is integrated with the Kanban system. (See " Participative Sales & Operations
Planning"). If this is not done the system will eventually fail!

Note:

Just because your end product or service is not suitable, it is possible that some aspect or segment
of your business may be suitable. It is quite possible and sensible to segment control systems to suit
the needs of different parts of a business. The skill is in selecting suitable segmentation strategies.
But we have seen a number of examples of the "one size fits all" philosophy being positively
damaging!

Kanban systems are one type of control system out of many, which may be appropriate for you. You
can use our expert system to determine which you need, by completing our confidential free
questionnaire in " What Control Systems do I need?". (This service is not available to consultants.)
Kanban System Design
Kanbans and Capacity

If the Kanban system is incorrectly designed it can significantly reduce output, by causing the
system to stop unnecessarily even though there is still unsatisfied customer demand! (See the
question at the end of the article on "Lean Manufacturing".) This can be avoided in a number of ways.

Kanban systems if overloaded will simply not be able to service replenishment requests.

Supply Chain Design

Before attempting Kanban implementation in anything but the simplest situation the supply chain
must be defined. Unless a fixed method comprising of stable relationships between supplying
resources and consuming resources can be defined, there is no basis for a replenishment system
based on Kanban. The first mistake made by early Business Process Reengineering (BPR) / cellular
manufacturing exercises was to assume that the successive operations had to be physically
relocated. They do not! Indeed in some circumstances it is counterproductive, and certainly an
expensive exercise which is hard to justify and difficult, if not impossible, to implement in some
circumstances. (See Previous Readers Question Q019: When is Kanban not appropriate? Do I need
extra equipment?). However in a FMCG manufacturing plant implementation, a sophisticated
overhead moving gantry system was replaced with work trolleys, a classic case of removing
complexity. This was made possible by aligning the processes first so that materials movement was
reduced. I.e. The need for transport & thereby the need for sophisticated materials handing was
removed.

The process of designing the supply chain follows the principles of BPR (see " Organisational
Redesign"), but it is generally not a simple task.

Positioning of buffers

Buffers can either be:

 Held at the supplying workstation

 Held centrally
 Held at the consuming work station

Economies of scale, numbers of supplying and receiving work centres, or simply available space,
may need to be considered here.

Buffer sizing (Number of Kanbans in the system)

There are two schools of thought on Kanban buffer design:

1. To over-specify the buffers and remove Kanbans one at a time (in operation) to identify
system constraints which need to be overcome.
 2. To design the buffers to accommodate known constraints, and the observed statistical
variation in supply and / or demand caused by variables whilst working on them.

We subscribe to the latter approach having seen significant operational difficulties arising out of the
former. One example was a new production line with only limited inter-operation space.
Unfortunately the process capability was initially very poor resulting in large queues of work waiting
for rework. The resultant chaos was an island of machines surrounded by a sea of WIP. Also if you
remove one Kanban too many you can stop output unnecessarily.

In another case we were implementing a Kanban system in a bicycle manufacturing company. We

trained the shop floor supervisors in the technique one afternoon. The following day a supervisor
came up to us and said "We have implemented that Kanban System you told us about yesterday,
but there is a problem. Will you come to help us?" Amazed and intrigued by this statement we went
to the section where the cycle frames were being welded. Each welding booth was in line for
successive welding operations, with a chalk-mark square on the floor between each booth, which if
empty was intended to signify that another frame was required by the downstream operation. The
WIP present the previous week had gone and everyone was working very hard. "So what is the
problem" I asked? "Well", replied the supervisor, "when the first operator puts the frame in the empty
square the second operator burns his hand when he picks it up." This was a sobering lesson in
correct buffer sizing. The solution in this case was to have two frames in the square, to allow each to
cool before the next operation.

A further popular misconception is that you only have to calculate the number of Kanbans at the
outset of implementing your system. This is false! Kanban populations must be regularly reviewed
and adjusted in all but the most stable situations.

Buffers and Bottlenecks

Bottlenecks have a significant effect on Kanban system design. In particular the position of the
bottleneck in the supply chain is important to buffer size calculations.

Buffer Size Calculations

The buffer sizing calculation is governed by provisions for:

1. Variables still remaining in the system such as:

 Demand changes
 Lead-time (see below)
 Breakdowns
 Preventative maintenance
 Absenteeism
 Quality problems (rework etc.)

And the risk of changes occurring at the same time, or in quick succession.

2. The mix

Higher mixes, if buffers are to be maintained, require higher buffers (to last while the item is not
being supplied). The calculation is dependent on batch sizes, set up times, and the mix, but can be
minimised by employing the techniques described in " Organisational Redesign", and selecting the
appropriate Kanban system, or the use of a combination of Kanban systems.

3. Transport time

This is the time from production of a batch at the supplying resource to the arrival at the consuming
resource.

You cannot operate "Just in Time" if your supplier is in Japan, and you are in the UK, or in Northern
India if your factory is in the South in the monsoon season. This consideration on a smaller scale
applies to all movements, but in particular applies to inter-site movement and other difficult transport
situations.

4. Container fill-time

Small is beautiful as far as containers are concerned in Kanban systems. However it still may take
some time to fill a container before supplying the consuming resource, for which time there needs to
be a buffer.

5. Signal time

Slow signals require bigger buffers. However "electronic Kanbans" provided by some ERP software
providers are rarely required except for inter-site transfers and even then they are hard to justify over
fax, email, or other methods.

6. Automated materials handling systems

When calculating automated materials handling storage capacities & traffic rates managed by
Kanban systems, further considerations are necessary, which we will not go into further here.

Supplied as part of our training course M01 Designing, Implementing and Operating Kanban Systems is a
Microsoft Excel® Kanban calculator template, which you can use to help you to calculate the number
of Kanbans required.

Container sizes (transfer batch sizes)

This is largely a question of convenience. Again, small is beautiful for containers in Kanban systems.
However there is a trade off between small containers and traffic generated by the number of
containers.

Prioritisation

It may be necessary to prioritise the work of the supplying resource(s), since they may receive
replenishment signals from more than one consuming resource simultaneously. Prioritisation is
possible using a Traffic Light (RAG) system. (See Previous Technique T036: Traffic Light (RAG)
systems)
Signalling mechanisms

Almost every signalling mechanism devised by mankind has been used to signal a replenishment
request. Ones we have used include: Coloured lamps, cards, "lego", "sticklebricks", faxes, electronic
automated materials handling equipment, empty containers, chalk squares on the floor, in trays,
magnetic blocks, coloured labels on a rack, rings on a peg, voice, EDI, kitting trolleys, work trolleys,
kitting trays, potato hoppers, re-usable packaging, shipping containers and articulated trailers.

The considerations in this decision include distance, speed, volume and complexity of the signals.

Sanity checking

When the design is mathematically complete it needs to be sanity checked. This can be done in
varying degrees of sophistication from simply asking what could go wrong in this situation, through to
sophisticated computer simulations, (which we have been generally able to avoid).

Implementation
Ring Fencing

It is possible to implement Kanban in a part of your process (first) perhaps as a pilot scheme. In
which case you will need to buffer your Kanban system upstream & downstream from the (as yet)
volatile remainder of your environment.

Priming the System

It is no good implementing from an unbalanced state. It is unlikely to recover. The system must be
primed. On the other hand you may be overstocked, and need to segregate or drain out surplus
stock. There are serious capacity considerations here! If your system is to retain its credibility it
cannot be allowed to fail. So take the time to get the correct buffers in position.

People
Culture

Further information on culture and culture change can be found at "Focused Improvement Systems",
"Culture Development Methods,", and Malpractice M004: "Creating the wrong culture".

Kanban systems are one of the simplest systems to operate but they do require a change of mindset
on behalf of the operator. Namely it is no longer acceptable to produce unwanted inventory or to
leave the work at your workplace rather than where it is needed next. These simple rules are
actually really difficult to implement. But once understood and in particular when the benefits of pull
systems over push systems are understood, they can become a way of life. Ignoring the human
aspects of Kanban systems operation will doom your implementation to failure!

The operator previously was used to operating in a sea of work in process and as such, he or she
believed there was plenty of work about. The initial view of the workplace following implementation
is that it is empty. This can be very disconcerting to the operator, who now thinks that there is no
work about and is anticipating that redundancy notices will shortly appear!

To overcome these problems education of all operators by something like our "M22 Kanban & Lean
Enterprise Simulation Game" is essential and this must be a simulation to which your operators can
readily relate. We feel the most powerful method of conveying this message is by allowing operators
to discover for themselves the benefits of Pull systems in an environment which is relevant to their
own, (mimicking your products and processes).

Incentives

Individual "piecework" type incentive systems are bad news for Kanban operation since they
encourage activity rather than useful activity. These individual incentives can only be removed if the
culture is sufficiently developed to overcome the issues that arise by removing them. (See
Organisational Redesign, and Culture Development Methods.

Productivity measures
If you measure productivity by measuring activity you are heading for some difficulties since
unneeded activity leads to unwanted stock and work in process. Again our Kanban & Lean
Enterprise Simulation Game graphically demonstrates that "working smarter" is much more
important. (See Previous Malpractice M006: "Hitting The Numbers".)

Accounting for value-added in short lead-time, low Work in

Process (WIP) systems
It is a legal requirement to value stock at either its current value or net realisable value (if
obsolescent). If WIP however is small and manufacturing lead-times are short, WIP accounting and
WIP tracking can be reduced. Perhaps one of our most difficult and recurring implementation
problems has been to persuade accountants to simplify their methods of productivity measurement
and inventory valuation, so that shop floor data capture could be reduced!

If you collect "profit" in stock "added value", you will make a "loss" in your first Kanban year, because
WIP is usually dramatically reduced. Our view is that you only make a profit when you sell
something. Until then it is a liability! However you can usually persuade your accountant to
accept this loss by telling them how much cash will be released, and including them in the Kanban &
Lean Enterprise Simulation Game.
Operating Kanban Systems
The general health of a Kanban system can be measured using "eyeball control". If there is an
accumulation of unfulfilled Kanban signals, or no unfulfilled Kanban signals, you are heading for a
crisis. Both of these situations indicate a supply chain problem. However the system can only
operate within its design capacity. A forward looking planning system is still required.

Common misunderstandings are that:

 It is often (wrongly) assumed that implementing control systems is a one-off exercise. It is

not!
 Kanban systems are complete within themselves. They are not!

Measures of Performance (MOPs)

Like all systems the Kanban system should be measured. Because stock is fixed (the number of
Kanbans in the system), the main measurement is due date compliance, (see Previous Best
Practice B045: "OTIF Measuring On-time Delivery"). However other measures will indicate the health
of your system before it collapses, such as unfulfilled or filled Kanbans. Also it is critical to measure
performance at the correct level. (See Focused Improvement Systems.)

Levels of Planning and Control

Significant complexity arises out of:

 Confusing the roles of different levels of planning and control

 Confusing planning with control
 Choosing an inappropriate planning and / or control system

Systems such as MRP1, plan the materials. The Kanban system is one type of system from a
choice of many, which controls the materials plan (and can control the capacity plan). (See Materials
Management & Stock Control).

Kanban Interaction with Planning Systems

The Kanban system must be synchronised with the planning system, and the roles of the planning
and Kanban systems defined, such that if they do conflict, the correct one is used (& the processes
realigned). (See Materials Management & Stock Control)

Periodic Strategic Reviews

Finally, fluctuating or exceptional demand will kill your Kanban system stone dead unless you can
see it coming. (See "Managing Demand"). So you need to document your design parameters so that
you recognise when your environment has subsequently exceeded the design, to trigger a strategic
review. Participative Sales & Operations Planning should be designed to trigger this review.

The second big mistake of early BPR exercises was to assume that they were permanent. They are
not! Things change! We have seen Kanban systems die because they could not respond to
change!

Aggregate (Production) Planning

Production planning is the means by which we prepare our production quantities for the medium
term (generally one year). Aggregate planning refers to the fact that the production planning is
usually carried out across product lines. The main difficulty is that demands vary from month to
month. We want to keep production as stable as possible yet maintain no inventory and
experience no shortages. We must balance the costs of production, overtime, subcontracting,
inventory, shortages and changes in production levels. In some case aggregate planning problems
might require the use of the transportation or linear programming modules.

The Model.

Production planning problems are characterized by a demand schedule, a corresponding

production schedule and various costs. In addition, we have the following considerations.

Shortage handling. In production planning there are two models for handling shortages. In one
model shortages are backordered. That is, demands can accumulate and be met in later periods.
In another model the shortages become lost sales. That is, if you can not satisfy the demand in
the period in which it is requested the demand disappears. This option is above the data table.

Initial Inventory. Often times we have a starting inventory from the end of the previous month

Costs

Production costs - regular time, overtime and subcontracting. These are the per unit production
costs depending on when and how the unit is made.

Inventory (Holding) cost. This is the amount charged for holding one unit for one period. The
total holding cost is charged against the ending inventory. Be careful because while most
textbooks charge against the ending inventory some textbooks charge against average inventory
during the period.

Shortage cost. This is the amount charged for each unit that is short in a given period. It is
assumed that the shortages are backlogged and satisfied as soon as stock becomes available in a
future month or are lost sales as indicated by the option box above the data table. Shortage costs
are charged against end-of-month levels.

Cost to increase production. This is the cost due to having changes in the production schedule. It
is given on a per unit basis. The cost for increasing production entails hiring costs. It is charged
only against regular time production changes. If the initial production level is 0 then there will be
no charge for increasing production in the first period.

Cost to decrease production. This is similar to the cost of increasing production and is also given
on a per unit basis. However, this is the cost for reducing production. It is charged only against
regular time production changes.

Advantages and Disadvantages of Aggregate Production Planning

by Walter Johnson, Demand Media

Economic planners use economic models and forecasting research to organize a firm's life to respond to the inevitable changes of
the broader economy. Production planning does this in response to changes in demand. Changing a company's production
schedule on a moments notice can be expensive and lead to insecurity and uncertainty. Planning for changes in demand months
in advance ensures that the change of production schedules can occur with little effort. Aggregate production planning is a
general approach to altering a company's production schedule to respond to forecasted changes in demand.

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Resource Allocation

Aggregate production planning is really about the allocation of resources. Assuming that a plan is basically accurate, a production
plan, usually stretching no more than a year into the future, will ensure the smooth transition of production capacity as demand
changes over time. The significance of this is that once employees are habituated to these changes, they will alter their own
schedules and work habits to reflect changes in demand. This means that the costs of changing work schedules will be
minimized, increasing efficiency.

Overproduction Risk

This kind of planning reduces the risk of overproduction. During periods of demand slump, overproduction can waste resources,
depress prices and oversaturate the market. It might also tax the ability of a firm to store and maintain the productions that have
been produced with nowhere to go. Aggregate production planning reduces production at times of weak demand. This means that
money will be saved when production is curtailed, since the firm will not have to pay for labor that, because of weak demand, has
no purpose.
Data and Bias

Like with all plans, they are only as good as the people who make them. Planners often have biases, prejudices and habituation
that derive from their experience and education. These, if unchecked, can lead to a plan that misreads economic indicators or
relies on faulty data like economic forecasting models. A production plan cannot take shocks into consideration, such as a spike
in oil prices, Federal Reserve policies, interest rate hikes or changes in consumer confidence. As the name suggests, these plans
can only deal with “aggregates” or averages that are only a partially successful tool to predict fluctuations in demand.

Labor and Uncertainty

Labor remains one of the most serious problems of aggregate production planning. For example, a company plans to increase
overtime hours and hire part-time workers for peak demand seasons. It will then cut hours and give unpaid furloughs during poor
demand seasons. This implies that workers, especially long-term ones, will become increasingly dissatisfied and cynical about
company policy and will not work up to capacity. Even more, well-qualified workers will choose other companies because of the
constant insecurity of such a production policy. As most aggregate models forecast alternations in labor conditions, this can cause
problems among full-time workers. It introduces insecurities and uncertainty into the workplace.

Aggregate production planning refers to the process of deciding the overall quantities of
products to be manufactured or produced in a plant or other manufacturing facility during
a medium term planning period such as a month, or a quarter. The aggregate plan output
consist of the total quantities of each product or a group of product to be manufactured in
the plan period of going into details of scheduling of different manufacturing activities
required to achieve the planned production levels. The aggregate production will also not
specify details such as the dates when material ordered against individual customer order
will be ready for delivery.

The aggregate production plan is prepared as a means of setting overall production

targets and as input for planning availability of other inputs and supporting activities to
meet the production targets.

The aggregate plans then form the basis of more detailed production, including such as
daily and weekly production schedules and customer delivery schedules. Such production
plan are further detailed out as machine loading schedules.

The production system design planning considers input requirements, conversion process and
output. After considering the forecast and long-term planning organization should undertake
capacity planning.

Capacity is defined as the ability to achieve, store or produce. For an organization, capacity
would be the ability of a given system to produce output within the specific time period. In
operations, management capacity is referred as an amount of the input resources available to
produce relative output over period of time.

In general, terms capacity is referred as maximum production capacity, which can be attained
within a normal working schedule.

Capacity planning is essential to be determining optimum utilization of resource and plays an

important role decision-making process, for example, extension of existing operations,
modification to product lines, starting new products, etc.
Strategic Capacity Planning

A technique used to identify and measure overall capacity of production is referred to as strategic
capacity planning. Strategic capacity planning is utilized for capital intensive resource like plant,
machinery, labor, etc.

Strategic capacity planning is essential as it helps the organization in meeting the future
requirements of the organization. Planning ensures that operating cost are maintained at a
minimum possible level without affecting the quality. It ensures the organization remain
competitive and can achieve the long-term growth plan.

Capacity Planning Classification

Capacity planning based on the timeline is classified into three main categories long range,
medium range and short range.

Long Term Capacity: Long range capacity of an organization is dependent on various other
capacities like design capacity, production capacity, sustainable capacity and effective capacity.
Design capacity is the maximum output possible as indicated by equipment manufacturer under
ideal working condition.

Production capacity is the maximum output possible from equipment under normal working
condition or day.

Sustainable capacity is the maximum production level achievable in realistic work condition and
considering normal machine breakdown, maintenance, etc.

Effective capacity is the optimum production level under pre-defined job and work-schedules,
normal machine breakdown, maintenance, etc.

Medium Term Capacity: The strategic capacity planning undertaken by organization for 2 to 3
years of a time frame is referred to as medium term capacity planning.

Short Term Capacity: The strategic planning undertaken by organization for a daily weekly or
quarterly time frame is referred to as short term capacity planning.

Goal of Capacity Planning

The ultimate goal of capacity planning is to meet the current and future level of the requirement
at a minimal wastage. The three types of capacity planning based on goal are lead capacity
planning, lag strategy planning and match strategy planning.

Factors Affecting Capacity Planning

Effective capacity planning is dependent upon factors like production facility (layout, design,
and location), product line or matrix, production technology, human capital (job design,
compensation), operational structure (scheduling, quality assurance) and external structure (
policy, safety regulations)

Forecasting v/s Capacity Planning

There would be a scenario where capacity planning done on a basis of forecasting may not
exactly match. For example, there could be a scenario where demand is more than production
capacity; in this situation, a company needs to fulfill its requirement by buying from outside. If
demand is equal to production capacity; company is in a position to use its production capacity to
the fullest. If the demand is less than the production capacity, company can choose to reduce the
production or share it output with other manufacturers.

An organization can finalize its business plans on the recommendation of demand forecast. Once
business plans are ready, an organization can do backward working from the final sales unit to
raw materials required. Thus annual and quarterly plans are broken down into labor, raw
material, working capital, etc. requirements over a medium-range period (6 months to 18
months). This process of working out production requirements for a medium range is called
aggregate planning.

Factors Affecting Aggregate Planning

Aggregate planning is an operational activity critical to the organization as it looks to

balance long-term strategic planning with short term production success. Following factors
are critical before an aggregate planning process can actually start;

 A complete information is required about available production facility and raw materials.
 A solid demand forecast covering the medium-range period
 Financial planning surrounding the production cost which includes raw material, labor, inventory
planning, etc.
 Organization policy around labor management, quality management, etc.

For aggregate planning to be a success, following inputs are required;

 An aggregate demand forecast for the relevant period

 Evaluation of all the available means to manage capacity planning like sub-contracting,
outsourcing, etc.
 Existing operational status of workforce (number, skill set, etc.), inventory level and production
efficiency

Aggregate planning will ensure that organization can plan for workforce level, inventory level
and production rate in line with its strategic goal and objective.
Aggregate planning as an Operational Tool

Aggregate planning helps achieve balance between operation goal, financial goal and overall
strategic objective of the organization. It serves as a platform to manage capacity and demand
planning.

In a scenario where demand is not matching the capacity, an organization can try to balance both
by pricing, promotion, order management and new demand creation.

In scenario where capacity is not matching demand, an organization can try to balance the both
by various alternatives such as.

 Laying off/hiring excess/inadequate excess/inadequate excess/inadequate workforce until

demand decrease/increase.
 Including overtime as part of scheduling there by creating additional capacity.
 Hiring a temporary workforce for a fix period or outsourcing activity to a sub-contrator.

Importance of Aggregate Planning

Aggregate planning plays an important part in achieving long-term objectives of the

organization. Aggregate planning helps in:

 Achieving financial goals by reducing overall variable cost and improving the bottom line
 Maximum utilization of the available production facility
 Provide customer delight by matching demand and reducing wait time for customers
 Reduce investment in inventory stocking
 Able to meet scheduling goals there by creating a happy and satisfied work force

Aggregate Planning Strategies

There are three types of aggregate planning strategies available for organization to choose from.
They are as follows.

1. Level Strategy

As the name suggests, level strategy looks to maintain a steady production rate and
workforce level. In this strategy, organization requires a robust forecast demand as to
increase or decrease production in anticipation of lower or higher customer demand.
Advantage of level strategy is steady workforce. Disadvantage of level strategy is high
inventory and increase back logs.

2. Chase Strategy

As the name suggests, chase strategy looks to dynamically match demand with
production. Advantage of chase strategy is lower inventory levels and back logs.
Disadvantage is lower productivity, quality and depressed work force.
3. Hybrid Strategy

As the name suggests, hybrid strategy looks to balance between level strategy and chase
strategy.