July 1996 € Volume 6 € Number 7

Which is the Critical Choice?

Why should you limit your manufacturing planning and control system choices to 40-year-old ideas?

By Gerhard Plenert, Ph.D., CPIM

Until World War II, manufacturing planning and control system generated their schedules assuming that there was only one resource that could be managed: inventory. The system used was economic order quantity (EOQ). Since then, we have expanded our understanding of production to realize that there are actually more resources that need to be dealt with, so we modified our model to include three resources: materials (inventory), labor, and machinery. Using this three-resource model of manufacturing, several production planning and control systems were quickly developed, all at about the same time. The one we are most familiar with is MRP (material requirements planning). This system measures and controls labor efficiency, using routings and industrial engineering standards to make sure that each employee is performing as he (or she) should. To make sure labor kept busy, plenty of materials and machinery were scheduled. In other words, labor efficiency was optimized at the expense of materials and machinery efficiency.

A second system also sprung up after World War II. This system was developed in Japan where factories had to be smaller because of the land limitations, and capital was also tighter after the war. This second system is called JIT (Just-in-Time). In JIT, materials movement is critical. The capital didn't exist to allow work-in-process inventories to be stored, nor did the small plant sizes allow it. The result is a system that keeps materials moving at the expense of both labor efficiency (employees are not always busy) and machine efficiency (machines are not always running).

The third system was developed in Israel. It is called OPT (optimized production technology) and has been renamed the theory of constraints (TOC). In this environment we search for the most critically constrained resource in a factory, which is normally a machine, and call it a bottleneck. The idea is that if we drive this critical resource to its maximum, we drive the plant to its maximum. The result is an environment where efficiency in the bottleneck is achieved, but at the cost of materials and labor efficiency which is used to support the efficiency of the bottleneck machine.

Which of the three systems -- MRP, JIT or OPT -- is best? It depends! It depends on which of the three mentioned resources-materials, labor or machinery-is most critical to your plant. To determine this, look at the value-added components of the manufacturing process and find out which resource is in fact the most critical. Very seldom is it labor, yet MRP is still the most popular of the three systems.

What if your value-added analysis discovers that none of these three resources is in fact the most critical? For example, energy can be as much as 80 percent of the value-added cost component of manufacturing. What do we do then? Do we just ignore this fact and spend all our time trying to control the cost components of the three resources that we do have systems for? For example, should we maintain our MRP systems and control labor which makes up less than 10 percent of the value-added cost component of our products? If the answer is no, then the question we must ask is: "Why are you still using labor-based MRP?"

There are about 30 manufacturing resources that can be critical depending on the manufacturing process and the product produced. There are also methods available to control these resources. For example, we mentioned that energy is such a resource. We can use the MRP software package, eliminate the labor-based routings, and add a bill of energy that details the energy steps of the manufacturing process. By controlling, planning and reporting back energy usage rather than labor, we can develop a production planning system that will optimize energy efficiency.

Manufacturing management is moving into a new age, an age where the management of only three resources is not enough. Today's manufacturing managers quickly realize that overhead is the largest value-added component of the manufacturing process, and they want to get control of it. To acquire this control will require new manufacturing systems, or new combinations of existing systems. Some of these new systems are already available, but many others, undoubtedly, have yet to be developed.

Gerhard Plenert, director of the Productivity and Quality Research Group at Brigham Young University, has recently published three new books: World Class Manager, International Management and Production and The Plant Operations Handbook (an APICS series book). These all discuss the concepts mentioned in this article in much more detail.

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