1. LESSON 3 Lot Sizing and Buffering
29 August 2014

2. Lesson Objectives
Upon completion of this lesson, you should be able to:
Analyze various lot sizing techniques
Explain how buffering mitigates four categories of uncertainty
Differentiate the role of safety stock and safety lead time
Interpret the relationship between set-up time and cyclic inventory levels
Given a scenario, propose techniques to reduce changeover time

3. Lesson Topics This lesson will cover the following topics:
Lot-Sizing Techniques
Buffering
Safety Stock
Cyclic Inventory and Set-up Time
Reducing Changeover Time

4. What’s In It For Me?
Gain insight into models used by contractors to handle:
Inventory orders from suppliers
Optimize different
inventory use across
a common machine

5. Lesson Introduction
How do companies determine the quantity of materials to requisition across multiple orders and product lines?

6. Lot-Sizing Techniques
Lesson Topics:
Lot-Sizing Techniques
Buffering
Safety Stock
Cyclic Inventory and Set-up Time
Reducing Changeover Time

7. Lot-Sizing Techniques
Inventory Lot Sizing:
Used to minimize cost
Cost of holding
Cost of procurement setup and/or ordering
Techniques start out with idealized models, such as having stable and known demand.
From there – we tweak.
Limited value for unstable Master Planning Schedule (MPS)
Tend to be sub-optimal as they only consider one item at a time

8. Types of Lot-Sizing Techniques
Common Lot-Sizing Techniques
Lot-for-Lot (LFL)
Economic Order Quantity (EOQ)
Periodic Order Quantity (POQ)

9. Data Required for Lot Sizing
Demand
Net Requirements Data
Cost Data
Order / Setup Cost (Cs)
Inventory Carrying (Holding) Cost (Ch)

10. Example: Data for Lot Sizing
Table 1: Each unit of Z uses one A and two Bs
Table 3: Cost Data
Item
On Hand
(units)
Lead Time
(weeks)
Scheduled Receipts Z 50
N/A
None A 1
20 in week 1 B
100 2
50 in week 2
Item Cs Ch Z $3 A
$300 $1 B
$200
Item Z has no lead time because Z is manufactured and not ordered
Cs = setup or order cost (each time an order is placed)
Ch = periodic carrying (holding) cost rate ($/unit/period)
Week 1 2 3 4 5 6
Quantity 40 20
100 50
Table 2: Demand Data – MPS for Z

11. Lot-for-Lot (LFL)
Lot size matches the net requirements in each period:
No excess inventory is carried
May lead to:
Too many orders based on financial concerns
Irregular-sized orders
Uneconomical orders – ex: Less than truckload amounts, or less than a supplier’s desired minimum purchase amount
Week 1 2 3 4 5 6
Quantity 40 20
100 50
Demand Data – MPS for Z

12. Economic Order Quantity (EOQ)
EOQ lot size is calculated as follows:
EOQ = 2𝐶s𝐷 𝐶ℎ
Item D Cs Ch
EOQ Z $3 A
350
$300 $1
458 B
700
$200
529
Optimal order quantity may increase lot size
Increases average inventory on hand
May reduce frequency of orders
Assumes demand is constant, reoccurring, and known
Cs = setup or order cost (each time an order is placed)
Ch = periodic carrying cost rate ($/unit/period)
D = Annual demand

13. What if demand changes over time?
Conundrum
What if demand changes over time?

14. Periodic Order Quantity (POQ)
POQ is calculated as follows:
POQ = 𝐸𝑂𝑄 𝑑 = 2𝐶s𝐷 𝐶ℎ 𝑑
Cs = setup or order cost (each time an order is placed)
Ch = periodic carrying cost rate ($/unit/period)
d = average periodic demand(days, weeks, etc.)
Week 1 2 3 4 5 6
Quantity 40 20
100 50
Demand Data – MPS for Z
Optimize cost data to figure out a periodic order frequency
Periodic order quantity varies with each order because it sums the net requirements over a set number of periods (number of periods based on the periodic order frequency)

15. Question and Answer
This type of Lot Sizing technique matches the net requirements in each period so that the orders produced are the exact amount needed
Lot-for-Lot (LFL)
Economic Order Quantity (EOQ)
Periodic Order Quantity (POQ)
Lean Manufacturing

16. Question and Answer
Which lot-sizing technique is used to compute minimum costs for an optimal order quantity when demand is assumed to be constant, reoccurring, and known?
Just in Time (JIT) system
Lean Manufacturing
Economic Order Quantity (EOQ)
Periodic Order Quantity (POQ)

17. Question and Answer
Which lot sizing technique is used to calculate an optimal time between orders based on cost concerns?
Economic Order Quantity (EOQ)
Lean Manufacturing
Lot-for-Lot (LFL)
Periodic Order Quantity (POQ)

18. Buffering Lesson Topics: Lot-Sizing Techniques Buffering Safety Stock
Cyclic Inventory and Set-up Time
Reducing Changeover Time

19. Materials Requirements Planning (MRP) Uncertainties
Sources of Uncertainty
Timing
Quantity
Demand
Requirements shift from one period to another
Requirements for more or less than planned
Supply
Raw material orders not received when due
Raw material orders received for more or less than planned
-or-
Losses in raw material quantities due to quality problems

20. Buffering Mitigates performance risks from uncertainties
Role increases as:
Fluctuation in demand increases
Level of uncertainty increases
Limited value for unstable MPS

21. Buffering Techniques Safety Stocks Safety Lead Time
Hold in inventory more than required
Release P.O.’s (order releases) early, ahead of contracted lead time requirements
Quantity buffer
(demand or supply uncertainty )
Timing buffer
Preferred when uncertainty is quantity related
Preferred when uncertainty is timing related

22. Other Buffering Mechanisms
Techniques to reduce or buffer uncertainty:
Freeze the MPS close to
production time
Increase forecast
accuracy
Use priority systems
Improve quality
Work with vendors

23. What are two buffering techniques?
Question and Answer
What are two buffering techniques?
Total Quality Management (TQM) & Drum-Buffer-Rope (DBR)
Economic Order Quantity (EOQ) & Periodic Order Quantity (POQ)
Customer Relationship Management & Modeling
Safety Stock & Safety Lead Time

24. Question and Answer Which of the following is a buffering technique?
Priority system for moving parts through a shop
Expenditure system for determining the cost of inventory
Periodic inventory system for accounting of raw materials

25. Safety Stock Lesson Topics: Lot-Sizing Techniques Buffering
Cyclic Inventory and Set-up Time
Reducing Changeover Time

26. Safety Stock Inventory without safety stock Quantity Reorder Point
High Inventory
Low Inventory
Time
Quantity
Reorder Point

27. Safety Stock Provides protection for uncertainty
Defines a minimum level of inventory
Safety Stock (SS) protects factory from uncertainty in supplier lead times and customer demand
SS Level
High Inventory
Low Inventory
Reorder Point

28. Safety Stock (cont.) Safety stock should be set to accommodate:
Unplanned orders
Deviations from the master schedule
Delays in receiving material from suppliers
have some quantity available for production
Mismatch between physical inventory and computer records

29. Safety Lead Time
Because of unforeseen events, it may take more time than the planned lead time to manufacture or procure an item

30. Question and Answer
If this event occurs, the MRP system should generate orders sufficient enough to maintain the specified level of safety stock and desired inventory.
Inventory is depleting sporadically
Inventory reaches maximum capacity
Inventory will consume part or all of the safety stock before next receipt
Inventory reaches equilibrium

31. Question and Answer
Which of the following is not a reason for adding safety lead time to a schedule?
To give vendors as much time as they want to deliver their goods
To provide a buffer for unforeseen events
A vendor has a record of being late

32. Cyclic Inventory and Setup Time
Lesson Topics:
Lot-Sizing Techniques
Buffering
Safety Stock
Cyclic Inventory and Set-up Time
Reducing Changeover Time

33. Cyclic Inventory and Setup Time
The relationship between cyclic inventory and setup time is an area where firms can identify and reduce waste

34. Shared Resources
Manufacturing firms share resources within their organizations
Ex: The stamping press is a shared resource in a company

35. Shared Resources (cont.)
Each day, the dies of the stamping press are changed over to manufacture different parts
Removable dies are changed over daily

36. Example: Cougar Armored Fighting Vehicle
Stamping Press
Cyclic Inventory
Stamping Press Production Cycle
Mon
Left door
Tues
Right door
Wed
Rear door
Thu
V-shaped hull
Fri
30 minutes to set up machine

37. Example: Cougar Armored Fighting Vehicle (cont.)
All products are needed simultaneously
All products are consumed continuously as the vehicles are being assembled
Stamping Press Production Cycle
Mon
Left door
Tues
Right door
Wed
Rear door
Thu
V-shaped hull
Fri

38. Minor Changeover Within a Family Major Changeover Between Families
Product Wheel
Used when multiple products are made on a single line or on a single piece of equipment (minimizes setup time)
Product Family A
Product Family C
Product Family D A C B
Product Family B
IDLE
Minor Changeover Within a Family
B-1
B-2
B-3
B-4
Major Changeover Between Families

39. What causes cyclic inventory to occur?
Question and Answer
What causes cyclic inventory to occur?
Excessive inventory
Safety stock
Safety lead time
Multiple items requiring the same resource

40. Question and Answer
What tool is used to sequence product cycles with manufacturing resources?
Product wheel
Production schedule
Ishikawa diagram
Comparative matrix

41. Reducing Changeover Time
Lesson Topics:
Lot-Sizing Techniques
Buffering
Safety Stock
Cyclic Inventory and Set-up Time
Reducing Changeover Time

42. Reducing Changeover Time
Changeover time is:
Wasteful
Non-value added activity
Requires a firm’s asset to be unproductive
Wasteful Activity in Lean Production:
“An activity that consumes resources but adds no value”

43. Pit Crew Changeover
Manufacturers goal is similar to a race car pit crew
Optimize (minimize) setup time
Pit crews practice reducing changeover by tenths of a second

44. Single Minute Exchange of Dies
Single Minute Exchange of Dies’ (SMED) goal is to reduce machine set-up time
Developed by Dr. Shigeo Shingo of Toyota
Reduced Toyota’s changeover time:
Many of the practices that Dr. Shingo used have revolutionized today’s manufacturing
4 hours ½ hours minutes

45. Change dies (or parts) out in less than 10 minutes
SMED Concept
Reduce to a single digit!
Results in smaller production batch sizes
Produce only what is demanded by the customer
Change dies (or parts) out in less than 10 minutes

46. SMED Steps for Reducing Changeover Time
Step 1: Document the changeover steps
Describe all tasks being performed in sequence
Classify the task as either internal or external
Internal activities:
Activities performed while the asset is idle
External activities:
Activities performed before or after changeover while the asset is operating

47. Example: Document the Changeover Steps
Description
Time
Cumulative Time
Internal or External 1
Look for and put on gloves
0:02:21 E 2
Disconnect minor hoses
0:01:00
0:03:21 3
Disconnect major hoses (includes looking for a wrench)
0:02:30
0:05:51 4
Retrieve set-up cart
0:00:25
0:06:16 5
Raise bottom ram
0:00:23
0:06:39 I 6
Disconnect top mold, removing bolts from front
0:00:54
0:07:33 7
Reattach bolts – front and back
0:00:57
0:08:30 8
Lower tooling
0:00:27
0:08:57 9
Take magnet off
0:00:19
0:09:16

48. SMED Steps for Reducing Changeover Time (cont.)
Step 2: Determine which internal changeover activities can be made into external changeover activities
Ask:
“Can this task be done prior to idling the machine/work center?”

49. SMED Steps for Reducing Changeover Time (cont.)
Step 3: Transform as many internal activities to external activities as possible
Examples of internal activities transformed to external activities:
Getting tools
Moving the next die to the press
Moving the next material to be processed to the press
Warming up molds

50. Example: Transformed External Activities
Step
Description
Time
Cumulative Time 1
Disconnect minor hoses and fasteners between base and shell
0:01:00 2
Connect shell to hoist and load onto jitney
0:02:00 3
Put shell away and return with jitney
0:04:00 4
Connect base to hoist and load onto jitney
0:05:00 5
Put base away
0:07:00 6
Load new base onto jitney
0:08:00 7
Upload base in front of press
0:09:00 8
Retrieve shell with jitney and load onto base
0:11:00 9
Attach shell to base
0:12:00 10
Connect hoses
0:13:00

51. SMED Steps for Reducing Changeover Time (cont.)
Step 4: Reduce internal changeover time
Streamline all internal activities
Eliminate redundancies
Brainstorm ideas

52. Example: Reduced Internal Changeover Time
Step
Description
Time
Cumulative Time 1
Disconnect hoses
0:00:20 2
Raise bottom ram
0:00:23
0:00:43 3
Disconnect top mold, remove pins
0:01:03 4
Lower tooling
0:00:27
0:01:30 14
Ram in
0:00:10
0:07:48 15
Connect hoses
0:07:58 16
Turn steam on
0:00:15
0:08:13 17
Raise ram to accelerate heating
0:08:33 18
Hook up thermal couple lead
0:08:43
Internal steps
reduced further

53. SMED Steps for Reducing Changeover Time (cont.)
Step 5. Reduce external changeover time
Reduce the number of workers that can feasibly and safely perform the external task
Only do what is required for the setup

54. Spaghetti Diagram Before SMED reduction After SMED reduction
Operator travelled 3,215 feet
98 minutes from last piece to first piece
Operator travelled 375 feet
14.9 minutes from last piece to first piece

55. Shadow Boards
Manufacturer’s SMED reduction also included a shadow board

56. Other Quick Changeover Ideas
Rolling tool carts
Color-coded items
Scribe markings
Push-button bolts
Half-turn screws

57. Question and Answer
This changeover technique uses five steps to reduce waste and redundancy in machine setup:
Strategic method of external reduction
Stamping press
Single minute exchange of dies
Spaghetti diagram

58. Question and Answer
This time-saving organizational method can assist employees in performing quick changeover of parts on a machine:
Product Wheel
Shadow Board
Large Parts
Kanban cards

59. Summary Having completed this lesson, you should now be able to:
Analyze various lot-sizing techniques
Explain how buffering mitigates four categories of uncertainty
Differentiate the role of safety stock and safety lead time
Interpret the relationship between set-up time and cyclic inventory levels
Given a scenario, propose techniques to reduce changeover time

60. Summary (cont.) Your can now:
Look for peculiarities in how a Prime procures parts from suppliers for a contract,
Understand basic inventory lot sizing methods, and
Watch a shared resource perform over time and understand various ways its setup could be optimized.