1

Chapter 14

Aggregate Sales and Operations Planning

 2

OBJECTIVES
• Sales and Operations Planning

• The Aggregate Operations Plan

• Examples: Chase and Level strategies

 3

Process planning
Long
range Strategic capacity planning
Forecast-
Intermediate ing &
demand Sales and operations (aggregate) planning
range
manage-
ment Sales plan Aggregate operations plan
Manufacturing Services
Master scheduling

Material requirements planning

Weekly workforce and

Order scheduling customer scheduling
Short
range Daily workforce and customer scheduling
 4

Sales and Operations Planning Activities

• Long-range planning
– Greater than one year planning horizon
– Usually performed in annual increments

• Medium-range planning
– Six to eighteen months
– Usually with weekly, monthly or quarterly increments

• Short-range planning
– One day to less than six months
– Usually with weekly or daily increments
 5

The Aggregate Operations Plan

• Main purpose: Specify the optimal combination of
– production rate (units completed per unit of
time)
– workforce level (number of workers)
– inventory on hand (inventory carried from
previous period)
• Product group or broad category (Aggregation)
• This planning is done over an intermediate-range
planning period of 3 to18 months
 6

Balancing Aggregate Demand

and Aggregate Production Capacity
10000
Suppose
Supposethethefigure
figureto
tothe
the
10000
8000
right represents forecast
right represents forecast 8000 7000
demand
demandin inunits
units 5500
6000
6000
4500
4000

Now
Now suppose
suppose this
this lower
lower 2000
figure
figure represents
represents the the 0
aggregate capacity of the
aggregate capacity of the Jan Feb Mar Apr May Jun
company
companyto tomeet
meetdemand
demand
10000 9000
8000
8000
What
What wewe want
want toto do
do isis 6000
6000

balance out the 4500 4000

balance out the 4000
production rate, 4000
production rate,
workforce levels,
workforce levels, and and 2000
inventory
inventory to
to make
make these
these 0
figures
figuresmatch
matchup up Jan Feb Mar Apr May Jun
 7

Required Inputs to the Production Planning System

Competitors’ Raw material Market
behavior availability demand
External
to firm
External Economic
capacity Planning
for conditions
production

Current Current Inventory Activities Internal

physical workforce levels required to firm
capacity for
production
 8

Key Strategies for Meeting Demand

 Variables of Aggregate Planning Strategies:
• Size of Workforce
• Utilization of Workers
• Inventory size
 9

Cont…

Pure Strategies
• Chase
• Level
Mixed Strategies
• Some combination of the two
• Subcontracting
• Overtime/Under time
 10

Cont…

 Ultimate Objective is to minimize Total Cost

 Total cost includes labor cost (wages plus
hiring and firing cost) and Inventory Cost
(Carrying cost, Stock out cost, Material
Purchase cost)
 11

Chase Strategy
 Chase Strategy = matching production with
market demand by changing level of
Inventory and Workforce

 Variable/s: No. of workers

 Constant: Utilization of Workers, Size of
Inventory
 12

Steps to Calculate Total Cost

1) Objective is, market demand per month =
production per month
2) Total no. of working hrs per month = No. of days per
month* no. of working hrs per day
3) Units manufactured per day per worker
4) Total Units manufactured per day
5) Total no. of workers given and required
 13

Cont…

6) labor cost = no. of workers* no. of days in a month*

Rs. Paid Per day
7) Hiring cost = no. of workers hired * cost
8) Firing cost = no. of workers fired * cost
9) Material purchase cost = units purchased* unit cost
10) Inventory carrying cost = total no. of units * carrying
cost per unit per month
 Aggregate Planning Examples: Unit Demand and Cost Data 14

Suppose
Supposewewehave
havethethefollowing
followingunit
unit
demand
demandand
andcost
costinformation:
information:

Demand/mo Jan Feb Mar Apr May Jun

4500 5500 7000 10000 8000 6000

Materials Rs5/unit
Holding costs Rs1/unit per mo.
Marginal cost of stock out Rs1.25/unit per mo.
Hiring and training cost Rs200/worker
Layoff costs Rs250/worker
Labor hours required .15 hrs/unit
Straight time labor cost Rs8/hour
Beginning inventory 250 units
Productive hours/worker/day 7.25
Paid straight hrs/day 8
 15
Cut-and-Try Example: Determining
Straight Labor Costs and Output

Given
Giventhe
thedemand
demandand
andcost
costinformation
informationbelow,
below,what
what
are
arethe
theaggregate
aggregatehours/worker/month,
hours/worker/month,units/worker,
units/worker,and
anddollars/worker
dollars/worker??

Demand/mo Jan Feb Mar Apr May Jun 7.25x22

4500 5500 7000 10000 8000 6000

Productive hours/worker/day 7.25

Paid straight hrs/day 8 7.25/0.15=48.33 &
48.33x22=1063.33
22x8hrsxRs8=
Rs1408 Jan Feb Mar Apr May Jun
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1063.33 918.33 1015 1015 1063.33 966.67
Rs/worker 1,408 1,216 1,344 1,344 1,408 1,280
 16

Chase Strategy
(Hiring & Firing to meet demand)
Lets
Letsassume
assumeour
ourcurrent
currentworkforce
workforceis
is77workers.
workers.
Jan
Days/mo 22
Hrs/worker/mo 159.5 First, calculate net requirements for
Units/worker 1,063.33 production, or 4500-250=4250 units
Rs/worker 1,408

Then, calculate number of workers

Jan needed to produce the net
Demand 4,500 requirements, or
Beg. inv. 250
4250/1063.33=3.997 or 4 workers
Net req. 4,250
Req. workers 3.997
Finally, determine the number of
Hired
workers to hire/fire. In this case we
Fired 3
Workforce 4
only need 4 workers, we have 7, so
Ending inventory 0 3 can be fired.
 17

Below
Beloware
arethe
thecomplete
completecalculations
calculationsfor
forthe
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
monthplanning
planninghorizon
horizon
Jan Feb Mar Apr May Jun
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1,063 918 1,015 1,015 1,063 967
Rs/worker 1,408 1,216 1,344 1,344 1,408 1,280

Jan Feb Mar Apr May Jun

Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
Workforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0
 18

Below are the complete calculations for the remaining months in

the six month planning horizon with the other costs included
Jan Feb Mar Apr May Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
Workforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0

Jan Feb Mar Apr May Jun Costs

Material 21,250.00 27,500.00 35,000.00 50,000.00 40,000.00 30,000.00 203,750.00
Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62
Hiring cost 400.00 200.00 600.00 1,200.00
Firing cost 750.00 500.00 250.00 1,500.00

260,408.62
 19

Level Strategy
• Variable: Size of Inventory
• Constant: No. of workers, Utilization of
workers
 20

Level Workforce Strategy (Surplus and Shortage

Allowed)
Lets
Letstake
takethe
thesame
sameproblem
problemasas
before
beforebut
butthis
thistime
timeuse
usethe
the
Level
LevelWorkforce
Workforcestrategy
strategy J an
This
Demand 4,500
Thistime
timewe
wewill
willseek
seektotouse
use
aaworkforce
workforcelevel
levelof
of66workers
workers Beg. inv. 250
Net req. 4,250
Workers 6
Production 6,380
Ending inventory 2,130
Surplus 2,130
Shortage
 21

Below
Below are
arethe
thecomplete
completecalculations
calculationsfor
for the
theremaining
remaining
months
monthsininthe
thesix
sixmonth
monthplanning
planninghorizon
horizon

Jan Feb Mar Apr May Jun

Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250 2,130 2,140 1,230 -2,680 -1,300
Net req. 4,250 3,370 4,860 8,770 10,680 7,300
Workers 6 6 6 6 6 6
Production 6,380 5,510 6,090 6,090 6,380 5,800
Ending inventory 2,130 2,140 1,230 -2,680 -1,300 -1,500
Surplus 2,130 2,140 1,230
Shortage 2,680 1,300 1,500

Note,
Note, ifif we
we recalculate
recalculate this
this sheet
sheet with
with 77 workers
workers
we
we would
would havehave aa surplus
surplus
 22

Below
Below are
are the
the complete
complete calculations
calculations for
forthe
the remaining
remaining
months
months in
in the
the six
six month
month planning
planning horizon
horizon with
with the
the
other
othercosts
costs included
included
Jan Feb Mar Apr May Jun
4,500 5,500 7,000 10,000 8,000 6,000 Note,
Note, total
total
250 2,130 10 -910 -3,910 -1,620
4,250 3,370 4,860 8,770 10,680 7,300
costs
costsunder
under
6 6 6 6 6 6 this
thisstrategy
strategy
6,380 5,510 6,090 6,090 6,380 5,800 are
areless
lessthan
than
2,130 2,140 1,230 -2,680 -1,300 -1,500
2,130 2,140 1,230
Chase
Chaseat at
2,680 1,300 1,500 Rs260.408.62
Rs260.408.62
Jan Feb Mar Apr May Jun
8,448.00 7,296.00 8,064.00 8,064.00 8,448.00 7,680.00 48,000.00 Labor
31,900.00 27,550.00 30,450.00 30,450.00 31,900.00 29,000.00 181,250.00 Materi
2,130.00 2,140.00 1,230.00 5,500.00 Storag
3,350.00 1,625.00 1,875.00 6,850.00 Stocko

241,600.00
 23

End of Chapter 14
 24

Chapter 15

Inventory Control
 25

OBJECTIVES
• Inventory System Defined
• Inventory Costs
• Independent vs. Dependent Demand
• Single-Period Inventory Model
• Multi-Period Inventory Models: Basic Fixed-Order
Quantity Models
• Multi-Period Inventory Models: Basic Fixed-Time Period
Model
• Miscellaneous Systems and Issues
 26

Inventory System
• Inventory is the stock of any item or resource used in
an organization and can include: raw materials,
finished products, component parts, supplies, and
work-in-process
• An inventory system is the set of policies and controls
that monitor levels of inventory and determines what
levels should be maintained, when stock should be
replenished, and how large orders should be
 27

Purposes of Inventory
1. To maintain independence of operations

2. To meet variation in product demand

[Link] allow flexibility in production scheduling

4. To provide a safeguard for variation in raw material

delivery time

5. To take advantage of economic purchase-order size

 28

Inventory Costs
• Holding (or carrying) costs
– Costs for storage, handling, insurance, etc
• Setup (or production change) costs
– Costs for arranging specific equipment setups etc
• Ordering costs
– Costs of someone placing an order etc
• Shortage costs
– Costs of canceling an order etc
 29

Independent vs. Dependent Demand

Independent Demand (Demand for the final end-
product or demand not related to other items)

Finished
product Dependent
Demand
(Derived demand
items for
component
E(1)
parts,
subassemblies,
raw materials,
etc)
Component parts
 30

Inventory Systems
• Single-Period Inventory Model
– One time purchasing decision (Example: vendor selling
t-shirts at a football game)
– Seeks to balance the costs of inventory overstock and
under stock
• Multi-Period Inventory Models
– Fixed-Order Quantity Models
• Event triggered (Example: running out of stock)
– Fixed-Time Period Models
• Time triggered (Example: Monthly sales call by
sales representative)
 31

Single-Period Inventory Model

This
Thismodel
modelstates
statesthat
thatwe
we
Cu should
shouldcontinue
the
thesize
continueto
sizeof
ofthe
toincrease
increase
theinventory
inventoryso
P long
longasasthe
theprobability
probabilityof
of
so

Co  C u selling
sellingthe
equal
equalto
thelast
toor
lastunit
unitadded
orgreater
addedisis
greaterthan
thanthe
the
ratio
ratioof:
of:Cu/Co+Cu
Cu/Co+Cu
Where :
Co Cost per unit of demand over estimated
Cu Cost per unit of demand under estimated
P Probability that the unit will be sold
 32

Linear Interpolation
 33

Single Period Model Example

• Our college basketball team is playing in a tournament

game this weekend. Based on our past experience we
sell on average 2,400 shirts with a standard deviation of
350. We make Rs100 on every shirt we sell at the
game, but lose Rs50 on every shirt not sold. How many
shirts should we make for the game?
Cu = Rs100 and Co = Rs50; P ≤ 100 / (100 + 50) = .667

Z.667 = .432 (use NORMSDIST(.667) or Appendix E)

therefore we need 2,400 + .432(350) = 2,551 shirts
 34

Multi-Period Models:
Fixed-Order Quantity Model Model
Assumptions (Part 1)

• Demand for the product is constant and uniform

throughout the period

• Lead time (time from ordering to receipt) is

constant

• Price per unit of product is constant

 35

Multi-Period Models:
Fixed-Order Quantity Model Assumptions (Part 2)

• Inventory holding cost is based on average

inventory

• Ordering or setup costs are constant

• All demands for the product will be satisfied

(No back orders are allowed)
 36

Basic Fixed-Order Quantity Model and Reorder

Point Behavior
1. You receive an order quantity Q. 4. The cycle then repeats.

Number
of units
on hand Q Q Q

R
L L
2. Your start using
them up over time. 3. When you reach down to a
Time level of inventory of R, you
R = Reorder point place your next Q sized order.
Q = Economic order quantity
L = Lead time
 37

Cost Minimization Goal

By
Byadding
addingthe
theitem,
item,holding,
holding,andandordering
orderingcosts
costs
together,
together,we
wedetermine
determinethethetotal
totalcost
costcurve,
curve,which
whichinin
turn
turnis
isused
usedtotofind
findthe
theQQopt inventory order point that
opt inventory order point that
minimizes
minimizestotal
totalcosts
costs

Total Cost
C
O
S
T Holding
Costs
Annual Cost of
Items (DC)

Ordering Costs

QOPT
Order Quantity (Q)
 38

Basic Fixed-Order Quantity (EOQ) Model TC=Total

TC=Totalannual
annual
cost
Formula cost
DD=Demand
=Demand
Total Annual Annual Annual CC=Cost
=Costperperunit
unit
Annual = Purchase + Ordering + Holding QQ=Order
=Orderquantity
quantity
Cost Cost Cost Cost SS=Cost
=Costofofplacing
placing
an
anorder
orderororsetup
setup
cost
cost
RR=Reorder
=Reorderpoint
point
LL=Lead
=Leadtime
time
H=Annual
H=Annualholding
holding
D Q and
andstorage
storagecost
cost
TC = DC + S + H per
perunit
unitof
ofinventory
inventory

Q 2
 39

Deriving the EOQ

Using
Usingcalculus,
calculus,we
wetake
takethe
thefirst
firstderivative
derivativeof ofthe
the
total
totalcost
costfunction
functionwith
withrespect
respecttotoQ,
Q,and
andsetsetthe
the
derivative
derivative(slope)
(slope)equal
equalto
tozero,
zero,solving
solvingforforthe
the
optimized
optimized(cost
(costminimized)
minimized)value
valueof
ofQQopt
opt

2DS 2(Annual D em and)(Order or Setup Cost)

Q OPT = =
H Annual Holding Cost
_
We
Wealso
alsoneed
needaa R eorder point, R = d L
reorder
reorderpoint
point to
to _
tell
tell us
uswhen
whento
to d = average daily demand (constant)
place
placean anorder
order L = Lead time (constant)
 40

EOQ Example (1) Problem Data

Given
Giventhe
theinformation
informationbelow,
below, what
what are
arethe
theEOQ
EOQ and
and
reorder
reorderpoint?
point?

Annual Demand = 1,000 units

Days per year considered in average
daily demand = 365
Cost to place an order = Rs10
Holding cost per unit per year = Rs2.50
Lead time = 7 days
Cost per unit = Rs15
 41

EOQ Example (1) Solution

2DS 2(1,000 )(10)
Q OPT = = = 89.443 units or 90 units
H 2.50

1,000 units / year

d = = 2.74 units / day
365 days / year

_
Reorder point, R = d L = 2.74units / day (7days) = 19.18 or 20 units

In
Insummary,
summary,youyouplace
placeananoptimal
optimalorder
orderof
of9090units.
units. In
In
the
thecourse
courseof
ofusing
usingthe
theunits
unitsto
tomeet
meetdemand,
demand,when
when
you
youonly
onlyhave
have2020units
unitsleft,
left,place
placethe
thenext
nextorder
orderof
of90
90
units.
units.
 42

EOQ Example (2) Problem Data

Determine
Determine thethe economic
economic order
order quantity
quantity
and
and the
the reorder
reorder point
point given
given the
the following…
following…

Annual Demand = 10,000 units

Days per year considered in average daily
demand = 365
Cost to place an order = Rs10
Holding cost per unit per year = 10% of cost
per unit
Lead time = 10 days
Cost per unit = Rs15
 43

EOQ Example (2) Solution

2DS 2(10,000 )(10)
Q OPT = = = 365.148 units, or 366 units
H 1.50

10,000 units / year

d= = 27.397 units / day
365 days / year

_
R = d L = 27.397 units / day (10 days) = 273.97 or 274 units

Place
Placean
anorder
order for
for366
366units.
units. When
Whenin inthe
thecourse
courseofof
using
usingthe
theinventory
inventoryyou
youare
areleft
left with
withonly
only274
274units,
units,
place
placethe
thenext
nextorder
order of
of 366
366units.
units.
 44

EOQ with Safety Stock

SS = ZσL
σL = √ L(σ d)2
 45

Fixed-Time Period Model with Safety Stock

Formula
qq==Average
Averagedemand
demand++Safety
Safetystock
stock––Inventory
Inventorycurrently
currentlyon
onhand
hand

q = d(T + L) + Z  T + L - I

Where :
q = quantitiy to be ordered
T = the number of days between reviews
L = lead time in days
d = forecast average daily demand
z = the number of standard deviationsfor a specified service probability
 T + L = standard deviation of demand over the review and lead time
I = current inventory level (includes items on order)
 46

Multi-Period Models: Fixed-Time Period Model:

Determining the Value of sT+L

T+ L

  
2
 T+ L = di
i 1

Since each day is independent and  d is constant,

 T+ L = (T + L) d 2

• The standard deviation of a sequence of

random events equals the square root of the
sum of the variances
 47

Example of the Fixed-Time Period Model

Given
Given the
the information
information below,
below, how
how many
many units
units
should
should be
be ordered?
ordered?
Average daily demand for a product is
20 units. The review period is 30 days,
and lead time is 10 days. Management
has set a policy of satisfying 96 percent
of demand from items in stock. At the
beginning of the review period there are
200 units in inventory. The daily
demand standard deviation is 4 units.
 48

Example of the Fixed-Time Period Model:

Solution (Part 1)
 T+ L = 2
(T + L) d = 30 + 10 4  = 25.298
2

So, we have a probability of 0.96, which is given by a z = 1.75

 49

Example of the Fixed-Time Period Model:

Solution (Part 2)
q = d(T + L) + Z  T + L - I

q = 20(30 + 10) + (1.75)(25. 298) - 200

q = 800  44.272 - 200 = 644.272, or 645 units

So, to satisfy 96 percent of the demand,

you should place an order of 645 units at
this review period
 50

Price-Break Model Formula

Based on the same assumptions as the EOQ model,
the price-break model has a similar Qopt formula:

2DS 2(Annual Demand)(Order or Setup Cost)

Q OPT = =
iC Annual Holding Cost

i = percentage of unit cost attributed to carrying inventory

C = cost per unit

Since “C” changes for each price-break, the formula

above will have to be used with each price-break cost
value
 51

Price-Break Example Problem Data

(Part 1)
AAcompany
company hashas aa chance
chance to to reduce
reduce their
theirinventory
inventory
ordering
ordering costs
costs by
by placing
placing larger
largerquantity
quantity orders
orders using
using
the
the price-break
price-break order
orderquantity
quantity schedule
schedule below.
below. What
What
should
should their
theiroptimal
optimal order
orderquantity
quantity be
be ifif this
this company
company
purchases
purchases this
this single
single inventory
inventory item
item with
with an an e-mail
e-mail
ordering
ordering cost
cost of
of Rs4,
Rs4, aa carrying
carrying cost
cost rate
rate of of 2%
2% ofof the
the
inventory
inventory cost
cost of
of the
the item,
item, and
and an
an annual
annual demanddemand of of
10,000
10,000 units?
units?
Order Quantity(units) Price/unit(Rs)
0 to 2,499 Rs1.20
2,500 to 3,999 1.00
4,000 or more .98
 52

Price-Break Example Solution (Part 2)

First, plug data into formula for each price-break value of “C”
Annual Demand (D)= 10,000 units Carrying cost % of total cost (i)= 2%
Cost to place an order (S)= Rs4 Cost per unit (C) = $1.20, $1.00, $0.98

Next, determine if the computed Qopt values are feasible or not

Interval from 0 to 2499, the 2DS 2(10,000)( 4)

Qopt value is feasible Q OPT = = = 1,826 units
iC 0.02(1.20)
Interval from 2500-3999, the 2DS 2(10,000)( 4)
Qopt value is not feasible Q OPT = = = 2,000 units
iC 0.02(1.00)
Interval from 4000 & more, the 2DS 2(10,000)( 4)
Qopt value is not feasible Q OPT = = = 2,020 units
iC 0.02(0.98)
 53

Price-Break Example Solution (Part 3)

Since
Sincethe
thefeasible
feasiblesolution
solutionoccurred
occurredin inthe
thefirst
first price-
price-
break,
break, ititmeans
meansthat
that all
all the
theother
other true
trueQQopt values occur
opt values occur
at
at the
thebeginnings
beginningsof of each
eachprice-break
price-breakinterval.
interval. Why?
Why?

Because
Becausethe
thetotal
total annual
annual cost
cost function
functionis
is
Total aa“u”
“u”shaped
shapedfunction
function
annual
costs So
Sothe
thecandidates
candidates
for
forthe
theprice-
price-
breaks
breaksare
are1826,
1826,
2500,
2500, and
and4000
4000
units
units
0 1826 2500 4000 Order Quantity
 54

Price-Break Example Solution (Part 4)

Next, we plug the true Qopt values into the total cost
annual cost function to determine the total cost under
each price-break
D Q
TC = DC + S+ iC
Q 2
TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20)
TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20)
==Rs12,043.82
Rs12,043.82
TC(2500-3999)=
TC(2500-3999)=Rs10,041
Rs10,041
TC(4000&more)=
TC(4000&more)=Rs9849.20
Rs9849.20

Finally, we select the least costly Qopt, which is this

problem occurs in the 4000 & more interval. In
summary, our optimal order quantity is 4000 units
 55

Miscellaneous Systems:
Optional Replenishment System
Maximum Inventory Level, M

q=M-I

Actual Inventory Level, I

M
I

Q = minimum acceptable order quantity

If q > Q, order q, otherwise do not order any.

 56

Miscellaneous Systems:
Bin Systems
Two-Bin System

Order One Bin of

Inventory
Full Empty
One-Bin System

Order Enough to
Refill Bin
Periodic Check
 57

ABC Classification System

• Items kept in inventory are not of equal
importance in terms of:
– Rupees invested
6
% of
– profit potential 0
Rs 3
0
A
– sales or usage volume Value 0 B
% 3 C
– stock-out penalties of 0
6
Use 0

So, identify inventory items based on percentage of total

dollar value, where “A” items are roughly top 15 %, “B”
items as next 35 %, and the lower 65% are the “C” items
 58

Inventory Accuracy and Cycle Counting

• Inventory accuracy refers to how well the

inventory records agree with physical
count
• Cycle Counting is a physical inventory-
taking technique in which inventory is
counted on a frequent basis rather than
once or twice a year
 59

End of Chapter 15
 60

MATERIAL HANDLING

• Principles

• Equipments
 61

Material Handling
• Material handling is the function of
moving the right material to the right
place in the right time, in the right
amount, in sequence, and in the right
condition to minimize production cost.

– The cost of MH estimates 20-25% of total

manufacturing labor cost in the United States
[The Material Handling Industry of America (MHIA)]
 62

Goals of Material Handling

• The primary goal is to reduce unit costs of
production
• Maintain or improve product quality, reduce damage of materials
• Promote safety and improve working conditions
• Promote productivity
– material should flow in a straight line
– use gravity! It is free power
– move more material at one time
– mechanize material handling
– automate material handling
 63

Goals of Material Handling

• Promote increased use of facilities

• Reduce tare weight (dead weight)

• Control inventory
 64

Principles of Material Handling

[Link] Planning Principle
– Large-scale material handling projects usually
require a team approach.
– Material handling planning considers every
move, every storage need, and any delay in
order to minimize production costs.
– The plan should reflect the strategic
objectives of the organization as well as the
more immediate needs.
 65

1. PLANNING PRINCIPLE

Definition: A plan is a prescribed course

of action that is defined in advance of
implementation. In its simplest form a
material handing plan defines the
material (what) and the moves (when and
where); together they define the method
(how and who).
 66

2. SYSTEM PRINCIPLE

Definition: A system is a collection of

interacting and/or interdependent
entities that form a unified whole.
 67

2. The systems principle:

MH and storage activities should be fully
integrated to form a coordinated, operational
system that spans receiving, inspection, storage,
production, assembly, …, shipping, and the
handling of returns.
– Information flow and physical material flow should
be integrated and treated as concurrent activities.
– Methods should be provided for easily identifying
materials and products, for determining their
location and status within facilities and within the
supply chain.
 68

3. Simplification or Work principle

– simplify handling by reducing, eliminating, or
combining unnecessary movement and/or
equipment.
– Four questions to ask to simplify any job:
• Can this job be eliminated?
• If we can’t eliminate, can we combine movements to reduce cost?
(unit load concept)
• If we can’t eliminate or combine, can we rearrange the operations to
reduce the travel distance?
• If we can’t do any of the above, can we simplify?
 69

3. WORK PRINCIPLE

Definition: The measure of work is

material handling flow (volume, weight
or count per unit of time) multiplied by
the distance moved.

W.D = Force*Displacement
 70

4. Gravity principle
– Utilize gravity to move material whenever
practical.
5. Space utilization principle
– The better we use our building cube, the less
space we need to buy or rent.
– Racks, mezzanines, and overhead conveyors are
a few examples that promote this goal.
 71

[Link] load principle

– Unit loads should be appropriately sized and
configured at each stage of the supply chain.
– The most common unit load is the pallet
• cardboard pallets
• plastic pallets
• wooden pallets
• steel skids
 72

[Link] principle
– MH operations should be mechanized and/or
automated where feasible to improve
operational efficiency, increase responsiveness,
improve consistency and predictability,
decrease operating costs.

9. Equipment selection principle

– Why? What? Where? When? How? Who?
– If we answer these questions about each
move, the solution will become evident.
 73

10. The standardization principle

– standardize handling methods as well as types and
sizes of handling equipment
– too many sizes and brands of equipment results in
higher operational cost.
– A fewer sizes of carton will simplify the storage.
 74

11. The dead weight principle

– Try to reduce the ratio of equipment weight to product weight.
Don’t buy equipment that is bigger than necessary.
– Reduce tare weight and save money.

12. The maintenance principle

– Plan for preventive maintenance and scheduled repairs of all
handling equipment.
– Pallets and storage facilities need repair too.

13. The capacity principle

– use handling equipment to help achieve desired production
capacity
– i.e. material handling equipment can help to maximize
production equipment utilization.
 75

14. ERGONOMIC PRINCIPLE

Human capabilities and limitations must

be recognized and respected in the
design of material handling tasks and
equipment to ensure safe and effective
operations.
 76

14. ERGONOMIC PRINCIPLE

Definition: Ergonomics is the science that

seeks to adapt work or working
conditions to suit the abilities of the
worker.
 77

15. ENVIRONMENTAL PRINCIPLE

Environmental impact and energy

consumption should be considered as
criteria when designing or selecting
alternative equipment and material
handling systems.
 78

ENVIRONMENTAL PRINCIPLE

Definition: Environmental consciousness

stems from a desire not to waste natural
resources and to predict and eliminate
the possible negative effects of our daily
actions on the environment.
 79

16. LIFE CYCLE COST PRINCIPLE

A thorough economic analysis should

account for the entire life cycle of all
material handling equipment and
resulting systems.
 80

LIFE CYCLE COST PRINCIPLE

Definition: Life cycle costs include all

cash flows that will occur between the
time the first dollar is spent to plan or
procure a new piece of equipment, or to
put in place a new method, until that
method and/or equipment is totally
replaced.
 81

Overview of Material Handling Equipment

• Material handling equipment includes:
– Transport Equipment: industrial trucks,
Automated Guided vehicles (AGVs),
monorails, conveyors, cranes and hoists.
– Storage Systems: bulk storage, rack systems,
shelving and bins, drawer storage,
automated storage systems.
– Unitizing Equipment: palletizers
– Identification and Tracking systems
 82

automated storage systems.

 83

Wooden Pallets
 84

Forklift lifting another forklift

 85

Truck Types
Lift Trucks have come a
long way since first
being introduced in the
early part of the 20th
century as can be seen in
this early photo of an
Ellwell-Parker "Tiering
Tructor".

Their original purpose, the efficient movement of

materials, however has not changed.
 86

STANDARD FORKLIFT
3,000 - 8,000 lb. Capacity

2.0 Liter or 2.5 or 2.7 Liter industrial engines

Gas / LPG / Diesel / Electric Power (with battery)
 87

Truck Types
2- Narrow aisle reach truck…

Reach trucks are

designed for racking
areas only and do not
work for loading trucks
or quickly moving loads
over distances.

Other Names of reach trucks are: Stand-up reach,

Straddle reach , Double-deep reach
 88

Truck Types
2- Reach truck…
• Narrow aisle truck
designed
specifically for
racked pallet
storage.
• Double-deep
version (shown)
loads pallets 2-
deep in special
double-deep
racking.
 89

WALKIE TRUCKS
 90

Order Selector Truck…

• Vehicle is designed
specifically for hand
loading less-than-
pallet load
quantities into and
out of selective
rack.
 91

Conveyor Systems

• Conveyor systems have been a mainstay of

material handling for over 100 years.
 92

Gravity Skate Wheel Conveyor

• Gravity flow skate wheel
conveyor is a low cost
option for conveying
lightweight cartons or
trays.
• Used extensively in
shipping/receiving and
assembly areas, skate
wheel conveyors reduce
manual material handling of
lightweight items over short
distances.
 93

Gravity Roller Conveyor

• Application for
gravity roller
conveyor is similar
to that of gravity
skate wheel.
• Its cost is a little
higher and it is more
effective where
heavier items are
being handled.
 94

Automated Belt Conveyor

• Automated belt
conveyer has similar
applications to gravity
roller and skate
wheel.

• Single units can be

incorporated into
gravity conveyor
systems to create a
simple low cost semi-
automated system.
 95

Flexible Conveyor

• Used extensively in
shipping/receiving
operations for package
handling, flexible
conveyor is usually
anchored at one end to
fixed gravity or
automated conveyor
allowing the other end
to be expanded and
flexed into trailers for
loading and unloading.
 96

Horizontal Carousel
• Horizontal Carousels
are used in high-
volume small-parts
picking operations.
• Generally, an
operator will run 2 to
4 carousels at a time
avoiding the need for
the operator to wait
while one unit is
turning.
 97

Vertical Carousels
• Vertical Carousels
consist of a series of
horizontal trays on a
vertical carousel.

• Vertical carousels are

most effective when
floor space is at a
minimum and there is
ample overhead
clearance.
 98

Automated Storage and Retrieval

System (ASRS)
• A system of
rows of rack,
each row has a
dedicated
retrieval unit
that moves
vertically and
horizontally
along the rack
picking and
putting away
loads.
 99

Automated Storage and Retrieval

System (ASRS)…
• ASRS systems are available in

– Mini-load types which

store and transfer
product on some type of
tray or in bins and

– Unit-load types (shown)

which transfer and store
pallet loads.
 100

Automated Guided Vehicle (AGV)

• Vehicles that can be

programmed to
automatically drive to
designated points and
perform preprogrammed
functions.

• Guidance system may

consist of a wire embedded
in the floor, special tape,
laser and optical system.
 101

Automated Guided Vehicle…

• This is another
version of an AGV
that has added
functionality to raise
and lower the pallet
to different heights.
 102

Towline (AGV) system

Towline system
is designed for
movement of
materials and
products over
paths.
 103

Elevating Docks
Elevating docks are used
where a raised dock is not
available.

They operate via an

electric pump and a
hydraulic lift cylinder.
 104

Dock Seals
• Dock seals come in a
variety of
configurations and are
used to prevent air,
dirt, insects, birds, and
rain/snow from
entering the building
while loading and
unloading trucks.
 105

Considerations in Material
Handling System Design
1. Material Characteristics
Category Measures
Physical state Solid, liquid, or gas
Size Volume; length, width, height
Weight Weight per piece, weight per unit volume
Shape Long and flat, round, square, etc.
Condition Hot, cold, wet, etc.
Safety risk and risk of Explosive, flammable, toxic; fragile, etc.
damage