Lean systems accomplish waste reduction by improving process productivity, reducing inventory, improving quality, and increasing worker involvement. The waste reduction accomplished by lean systems has a direct impact on costs, so it should not be a surprise that it enhances profitability through cost reduction. Improved response time, greater flexibility, and improved quality all add value for customers and increasing sales. For our case organization, Laleli Olive Oil, several lean techniques are used to solve the problems that facing by the company.
Quality Management
As a prerequisite to leanness, a commitment to quality is necessary in all aspect of the business. High levels of quality reduce the amount of inventory needed, and service quality results in on-time delivery. When Laleli Olive Oil applies quality management in its operations system, it will influence the workforce because it changes the way workers do their jobs. It gives them responsibility for ensuring quality and empowers them to make improvements that eliminate waste. It also provides them with tools that help improve quality.
Besides that, by applying quality management in operations system, Laleli Olive Oil will able to reduce the amount of capacity wasted on defective products. Quality management affects facilities because quality extends to housekeeping and facility maintenance. The facility, like any other resource, must be maintained with utmost care, or that lack of care will eventually affect quality.
Matching Production to Demand (Takt Time)
Takt time is how often a company must produce a product in order to meet its demand. It is calculated by dividing the time available by the number of units the customers is demanding:
Takt Time = Hour of Available Capacity / Demand
By calculating the takt time, Laleli Olive Oil is able to produce the amount of products that needed by the customers so that there will have enough products to provide to the customers.
Kanban
Kanban systems are used to link the production rate to the demand rate so that the end result is production of only what is needed when it is needed. By applying kanban systems, Laleli Olive Oil can utilize small buffers of inventory between work centers, departments, and manufacturing plants. The unique characteristic about each inventory buffer is that it has a maximum size determined by management. When the maximum size of a particular inventory buffer is reached, no more inventories can be added. The signal is incorporated in the system through a simple, visible mean of detecting when the buffer is full or not.
By applying kanban systems in the operations management, Laleli Olive Oil can also link together work centers that are not physically adjacent to each other. There are many scenarios where work centers or suppliers provide parts but are a long distance away. The distance need not diminish the applicability of kanban as a means of authorizing deliveries of components parts and raw materials. When work centers are not located next to each other, the signal is posted when a buffer is not at its maximum level. When a container of components is produced, the kanban is attached to it and delivered to where it needed. Controlling the number of kanban cards in the system has exactly the same effects as controlling the number of containers.
Because the number of containers or kanbans determines the amount of inventory in the system by authorizing production, the decision as to how many containers or kanbans is important. Laleli Olive Oil must considers the fact that the container not only must spend time being filled, but also may spend time being transferred from one work center to another and may spend time in queue waiting to be filled by a work centers that also processes other parts.
The formula of computing the appropriate number of kanban is:
k = D + S / C
k = number of kanbans or containers
D = average demand during the replenishment lead time
S = safety stock
C = number of units per container
Small-Batch Production
Small-batch production is the primary means of matching production rate to demand rate. The ability to produce a small quantity of parts or products and then switch over equipment to produce a small batch of another part or product enables Laleli Olive Oil to match the demand rate in relatively small time increments. Producing in more frequent but smaller batches drives the average inventory level of Laleli Olive Oil down.
The formula for determining the batch size is:
Batch size =
D = demand during the planning horizon
HA = hours of available capacity
HR = hours of required capacity
T = time it takes to perform a changeover
Fixed-quantity Reorder Point Model (ROP)
In a fixed-quantity, variable-interval system, the order quantity is the same each time an order is placed. In a reorder point model, an order is placed whenever the level of inventory drops to a predetermined point. Laleli Olive Oil can determine what the reorder point should be by applying this model in their operations system. The inventory on hand of Laleli Olive Oil when the order is placed will be sufficient to meet demand during the replenishment lead time, where the demand during the replenishment lead time can be forecast. By applying fixed-quantity reorder point model in their systems, Laleli Olive Oil is able to order enough inventories to produce their products to meet customers’ needs.
The formula for the fixed-quantity reorder point is:
ROP = ¯dLT + σLTZ
¯dLT = average demand during the replenishment lead time
σLT = standard deviation of demand during the replenishment lead time
Z = number of standard deviations above the average demand during the replenishment lead
time required for the desired service level
Economic Order Quantity Model (EOQ)
The reorder point system tells us when an order should be released, but the order quantity still needs to be determined. Besides of using fixed-quantity reorder point, Laleli Olive Oil can use economic order quantity model (EOQ) to identify the order quantity that will minimize the costs associated with the order size. By applying economic order quantity technique in their operations system, Laleli Olive Oil can reduce their total cost of their products and thus increase their long-term organization profit.
The formula for the economic order quantity is:
EOQ² = 2DS / H
The total cost equation for EOQ is:
Total Cost = S(D/Q) + H(Q/2) + DP
S = cost per order
D = annual demand
Q = order quantity
H = carrying cost
P = price per unit
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