Appendix 3: Appendix 3: Perfect Pizza 1994 volume planning
2. Perform all of the exercises which Peter set for himself. Do you think he should now fully understand MRP?
Exercise 1
Appendices A and B show the single level bills of material and the indented bill of material respectively.
Exercise 2
Appendix C (MS Excel) shows the materials requirement planning calculations. From these it is obvious that Psycho Sports is faced with some serious problems. Assuming that the demand and lead times are accurate, the company will not be able to meet the production requirement.
The rubber face, wooden inner and foam panel will all have to be delayed because the items will not be available at the required time. In each of these cases the available inventory shows negative numbers. This failure to supply would affect the entire production schedule since the remainder of the operations depend on this Level 2 activity. The whole process would have to
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be delayed until the items were available. This would result in Psycho Sports not being able to meet the initial demand for the table tennis bat.
This problem could be solved by rush ordering these necessary items from the suppliers. Even though this would likely increase costs, Psycho Sports would then be able to meet the forecast demand. The company could also attempt to find new suppliers who would be willing to provide the same materials quicker. This is a very attractive option since it could lead to improved delivery in the future, but will not help future supplier relationships with the original supplier. The company could also wait for its supplier to deliver as scheduled, and then try to rush production;
however, this could possibly lead to lower quality and lower worker morale if the workers were unconvinced of the need to increase the production rate and work overtime, for example.
Exercise 3
Appendix D (MS Excel) works through the materials requirement planning records with a one- week safety lead time.
Exercise 4
Allowing for a one-week safety lead time would have a dramatic effect on the average available inventory. Under such a system the available inventory would increase from a value of around
£3500 to well over £5900, a 70% increase. See the right hand columns of the Excel spreadsheets in Appendices C and D for a detailed analysis of these effects on available inventory.
Exercise 5
To decrease inventory, one could focus on raw materials, finished goods, work in process or any of their combinations.
Raw materials: To decrease inventory of raw materials we would have to decrease the order quantities to fit our requirements. Currently, Psycho Sports is only ordering in set quantities, but this has led to high inventory levels. If these order quantities were lowered to reflect a system closer to JIT, then available inventory could be considerably reduced. Lower order quantities, however, could cause various other problems. Order costs would increase since more orders would need to be made. Also, the company may not receive any price discounts on smaller orders from the suppliers. The costs of stock-outs must also be taken into account since the risk of such events could be higher with lower levels of inventory. These potential problems could be overcome by the development of closer supplier relationships.
Finished goods: To decrease inventory, Psycho Sports could produce at a level more matched to demand quantities. Currently, the company is only producing in batches of 500 and this lack of flexibility leads to high storage and inventory costs. By adopting a more flexible production schedule, Psycho Sports could dramatically decrease inventory. Again, this approach will also have negative implications. First, reducing the quantity in production batches may decrease machine and worker productivity, and there is also a greater risk of stock-outs that could lead to customer dissatisfaction.
Work in process: Inventory could also be reduced by decreasing the amount of time that materials spend in work in process. Psycho Sports could accomplish this by gaining a better understanding of its machine production capacity, and then adopting JIT methods along with a Kanban control system. Each of these would vastly decrease unnecessary work in progress.
It is difficult to recommend a specific course of action to reduce inventory with the limited information available, in this case. However, it is certain that Psycho Sports will most likely have to focus on more than one type of inventory. To begin with, the company should put most of their attention on their finished goods. This section accounts for nearly half of the available inventory and it is under their direct control. Slight reductions in this inventory will have significant effects on the company as a whole. Also, Psycho Sports should look to decrease the order quantities required by their suppliers to decrease raw materials inventory. Any action cited above that is taken, however, must be closely monitored since they all have associated negative aspects (described in the preceding text). Psycho Sports must make sure that they are not solving a problem by causing a bigger one. The costs of reducing inventory (especially in an uncertain market) may be greater than the benefits.
Exercise 6
The exercise would have highlighted the lumpy nature of the schedules produced by the MRP system. Smoother schedules could be created by producing the same quantities each week, and arranging supplies accordingly – some of the elements of JIT outlined in the preceding text.
Production may be smoothened by combining the MRP system with some of the principles of OPT (optimized production technology). The MRP system has several limitations, one of which is that lead times and batch sizes are fixed for simplicity. In reality, however, this is not the case, and companies could exercise considerable flexibility in varying these parameters. Also, unexpected events (such as breakdowns) may change the whole production priorities. The OPT system takes into account these needs and potential bottlenecks to determine schedules. In this case, for example, it is obvious that the bat cannot be assembled until the subassemblies are complete. Attention must be focused on bottlenecks to ensure that these operations are given priority (e.g. for maintenance) since the entire production output revolves around them. Quite simply, the two systems, MRP and OPT, working together could vastly smoothen production.
After completing these exercises, Peter should have a very good understanding of the Psycho Sports production system. More importantly, however, he will have a better understanding of the complexity involved with such a system. The issues and problems he uncovered while working through these exercises will prove to be valuable lessons. So, even if Peter does not understand the process completely, these exercises will certainly have increased his appreciation of the value of a properly working MRP system.
Appendix A: Single level bills of material Part Number: 5654
Description: High resolution bat Level: 0
Level Part number Description Quantity
1 0499 Handle assembly 1
1 7754 Shaft 1
1 0955 Connector 1
1 9110 Nail 4
1 8744 Rivet 4
1 0772 Face assembly 1
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Part Number: 0499
Description: Handle assembly Level: 1
Level Part number Description Quantity
2 1821 Handle 1
2 9110 Nail 2
Part Number: 0772
Description: Face assembly Level: 1
Level Part number Description Quantity
2 6511 Rubber face 2
2 2547 Wooden inner 1
2 0955 Foam panel 2
Appendix B: Indented bill of materials for complete product
Level Part Number Description Quantity
0 5654 High resolution bat 1
. 1 0499 Handle assembly 1
. . 2 1821 Handle 1
. . 2 9110 Nail 2
. 1 7754 Shaft 1
. 1 0955 Connector 1
. 1 9110 Nail 4
. 1 8744 Rivet 4
. 1 0772 Face assembly 1
. . 2 6511 Rubber face 2
. . 2 2547 Wooden inner 1
. . 2 0955 Foam panel 2
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Model answers to short cases
The life and times of a chicken salad sandwich Part II